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USAP > SEC Filings for USAP > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for UNIVERSAL STAINLESS & ALLOY PRODUCTS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for UNIVERSAL STAINLESS & ALLOY PRODUCTS INC


10-May-2013

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 rerollers, forgers, service centers, 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 general industrial products. 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 three months ended March 31, 2013 of $40,000, or $0.01 per diluted share, compared with net income of $6.3 million, or $0.86 per diluted share, for the first quarter of 2012.

Our net sales decreased from a record $74.6 million for the three months ended March 31, 2012 to $49.1 million for the current quarter. This $25.5 million, or 34%, decrease is largely due to decreased volume recognized in the current quarter. Tons shipped decreased by 31% in the current quarter when compared to the prior year first quarter.

Our backlog decreased from $51.7 million at December 31, 2012 to $46.6 million at March 31, 2013. This 10% reduction is primarily a result of our sales for the first quarter of 2013 exceeding our order entry activity.

Our cost of products sold decreased from $60.3 million for the first quarter of 2012 to $44.5 million in the current quarter. This $15.8 million, or 26%, decrease is due to the aforementioned 34% decrease in net sales.

Selling and administrative ("S&A") expenses decreased slightly from $4.6 million in the first quarter of 2012 to $4.5 million in the current quarter. However, primarily as a result of the reduction in sales during the current quarter when compared to the prior year first quarter, our S&A expense as a percentage of net sales increased from 6% for the quarter ended March 31, 2012 to 9% for the current quarter.

Our effective tax rate (benefit) for the three months ended March 31, 2013 and 2012 was (108.1)% and 30.2%, respectively. The effective tax rate for the first quarter of 2013 includes a discrete tax benefit of $0.4 million for research and development tax credits. The effective tax rate for the first quarter of 2012 includes a discrete tax benefit of $0.4 million for certain state tax benefits recognized in the quarter. Excluding the discrete tax benefit, our estimated annual effective tax rate on ordinary income for 2013 is 33.7%.

As a result of the North Jackson acquisition, our operating facilities have become more integrated, resulting in our chief operating decision maker ("CODM") viewing the Company as one unit. During the quarter ended March 31, 2013, our CODM, set performance goals, assessed performance and made decisions about resource allocations on a consolidated basis. As a result of these factors, as well as the nature of the financial information available and reviewed by the CODM, we commenced reporting to one reportable segment beginning with the three months ended March 31, 2013.


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Results of Operations

Three months ended March 31, 2013 as compared to the three months ended
March 31, 2012

An analysis of our operations for the three months ended March 31, 2013 and 2012
is as follows:



                                                    Three months ended
                                                         March 31,
            (in thousands)                           2013          2012
            Net sales:
            Stainless steel                       $   35,477     $ 60,126
            Tool steel                                 4,984        4,305
            High-strength low alloy steel              6,593        6,238
            High-temperature alloy steel               1,270        2,441
            Conversion services                          740        1,467
            Other sales                                   71           37


            Total net sales                           49,135       74,614
            Material cost of sales                    25,815       37,269
            Operation cost of sales                   18,674       23,070
            Selling and administrative expenses        4,479        4,583


            Operating income                      $      167     $  9,692


            Tons Shipped                               9,626       14,034

Market Segment Information



                                                   Three months ended
                                                        March 31,
              (in thousands)                        2013          2012
              Net sales:
              Service centers                    $   32,509     $ 41,656
              Forgers                                 6,629       13,719
              Rerollers                               5,502       10,996
              Original equipment manufacturers        3,684        6,739
              Conversion services                       740        1,467
              Other sales                                71           37


              Total net sales                    $   49,135     $ 74,614


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Melt Type Information



                                            Three months ended
                                                 March 31,
                    (in thousands)           2013          2012
                    Net sales:
                    Specialty alloys      $   46,122     $ 69,497
                    Premium alloys (A)         2,202        3,613
                    Conversion services          740        1,467
                    Other sales                   71           37


                    Total net sales       $   49,135     $ 74,614

(A) Premium alloys include all vacuum induction melted (VIM) produced products.

Net sales for the three months ended March 31, 2013 decreased $25.5 million, or 34%, as compared to the similar period in 2012. The decrease reflects a 31% decrease in consolidated shipments. Our shipments of oil and gas products, aerospace products, power generation products and conversion services decreased by 62%, 32%, 50% and 46%, respectively, in the quarter ended March 31, 2013 over the first quarter of 2012. These decreases were partially offset by increases in first quarter 2013 shipments of heavy equipment and general industrial products of 56% and 62%, respectively, when compared to the same period in 2012. We believe that the decrease in our sales during the first quarter of 2013 is largely a result of inventory adjustments being made by our customers.

Cost of products sold, as a percentage of net sales, was 91% and 81% for the three months ended March 31, 2013 and 2012, respectively. Our operations costs, which include certain infrastructure costs such as overhead and depreciation, increased on a percentage of sales basis from 31% for the quarter ended March 31, 2012 to 38% 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. Our operation costs for the current quarter were further negatively impacted by additional costs incurred during the period for refining our manufacturing processes on new products and achieving industry and customer approvals. Additionally, our material costs as a percentage of sales, increased slightly from 50% for the quarter ended March 31, 2012 to 53% for the current quarter.

S&A expenses decreased by $0.1 million in the three months ended March 31, 2013 as compared to the similar period in 2012. On a percentage of sales basis however, our S&A expenses increased from 6% during the first quarter of 2012 to 9% in the current quarter. The increase on a percentage of sales basis is a result of maintaining comparable S&A expenses between periods with the aforementioned 34% reduction in sales.

Liquidity and Capital Resources

We have financed our operating activities through cash on hand at the beginning of the period, cash provided by operations and cash provided through our credit facilities. Working capital decreased $12.6 million to $117.3 million at March 31, 2013 from $129.9 million at December 31, 2012. Our accounts payable balance increased $10.0 million, as a result of increased production during the current quarter when compared to the quarter ended December 31, 2012. Our accounts receivable balance increased $5.0 million as a result of the 4% increase in sales for the three months ended March 31, 2013 in comparison to the three months ended December 31, 2012.

Cash received from sales of $44.2 million and $63.9 million represent the primary source of cash from operations for the three months ended March 31, 2013 and 2012, respectively. The primary uses of cash for the quarter ended March 31, 2013 were raw material purchases of $10.2 million, employment costs of $9.3 million, capital expenditures of $2.4 million and utilities of $3.0 million. For the same period in 2012, the primary uses of cash were raw material purchases of $31.3 million, employment costs of $16.3 million, capital expenditures of $5.0 million and utilities of $3.6 million. Our other uses of cash, the largest of which is cash for production supplies, plant maintenance, outside conversion services, insurance, taxes and freight, typically increase or decrease in relation to production volume. During the quarter ended March 31, 2012, we received a federal tax refund of $4.5 million.


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We continuously monitor market price fluctuations of key raw materials. The following table reflects the average market values per pound for selected months during the last 16-month period.

                               March       December       March       December
                               2013          2012         2012          2011

               Nickel         $  7.59     $     7.90     $  8.49     $     8.23
               Chrome         $  1.03     $     0.98     $  1.18     $     1.10
               Molybdenum     $ 10.99     $    11.38     $ 14.20     $    13.42
               Carbon scrap   $  0.18     $     0.17     $  0.21     $     0.21

Sources: Nickel is the daily average LME Cash Settlement Price; Chrome and Molybdenum is the final monthly average as published by Ryan's Notes; Carbon is the consumer price for #1 Industrial Bundles in the Pittsburgh, PA area as reported in American Metal Market

The market values for these raw materials continue to fluctuate based on supply and demand, market disruptions, and other factors. We maintain sales price surcharge mechanisms on certain of our products, 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 our raw material costs.

The average costs per pound of nickel, chrome, molybdenum, and carbon scrap for the first quarter of 2013 were $7.85, $1.02, $11.39, and $0.17, respectively. Average costs per pound of nickel, chrome, molybdenum, and carbon scrap for the same period in 2012 were $8.92, $1.15, $14.23, and $0.22, respectively.

While the material surcharge mechanism is designed to offset modest fluctuations in raw material prices, it cannot immediately absorb significant spikes in raw material prices. There can be no assurance that the raw material surcharge mechanism will completely offset immediate changes in our raw material costs. A significant decline in raw material prices within a short period of time could have a material adverse effect on our financial results.

We had capital expenditures for the quarter ended March 31, 2013 totaling $3.6 million, of which $1.2 million were included in accounts payable, compared to $9.7 million of capital expenditures, with $4.7 million in accounts payable, for the same period in 2012. The most significant capital expenditures incurred during the periods presented related to the North Jackson build out, which totaled $2.3 million and $7.4 million during the quarters ended March 31, 2013 and 2012, respectively.

On August 18, 2011, we entered into a Credit Agreement (the "Credit Agreement") which provides for a senior secured revolving credit facility (the "Revolver") and a senior secured term loan facility (the "Term Loan" and together with the Revolver, the "Facilities"). On March 19, 2012, we entered into the First Amendment to Credit Agreement and on March 29, 2013, we entered into the Second Amendment to Credit Agreement (together with the Credit Agreement and the First Amendment to Credit Agreement, the "Amended Credit Agreement"). The Amended Credit Agreement provides for a $105.0 million Revolver and a $20.0 million Term Loan. PNC Bank, National Association serves as Administrative Agent with respect to the Facilities. The First Amendment to Credit Agreement extended the expiration date from August 2016 to March 2017, provided additional availability under the Facilities and reduced fees and interest rates. The Second Amendment to Credit Agreement provides additional flexibility under the Credit Agreement's covenants. The Facilities are collateralized by substantially all of the assets of the Company and its subsidiaries, except that no real property other than North Jackson is collateral under the Facilities. Universal Stainless & Alloy Products, Inc., Dunkirk Specialty Steel, LLC and North Jackson Specialty Steel, LLC are co-borrowers under the Facilities. The co-borrowers' obligations under the Facilities have been guaranteed by USAP Holdings, Inc.

At any time prior to August 18, 2015, we may make up to two requests to increase the maximum aggregate principal amount of borrowings under the Revolver by at least $10.0 million, with the maximum aggregate principal amount of borrowings under the Revolver not to exceed $130.0 million in any event. We are required to pay a commitment fee of 0.25% based on the daily unused portion of the Revolver. The Revolver also provides for up to $7.0 million of swing loans so long as the sum of the outstanding swing loans and the outstanding borrowings under the Revolver does not exceed $105.0 million under the Revolver at any given time. The Term Loan is payable in quarterly installments in the principal amount of $750,000 beginning on July 1, 2013, with the balance of the Term Loan payable in full on March 19, 2017.

Amounts outstanding under the Facilities other than swing loans under the Revolver, at our option, will bear interest at either a base rate or a LIBOR-based rate (the "LIBOR Option"), in either case calculated in accordance with the terms of the Amended Credit Agreement. We elected to use the LIBOR Option during the three months ended March 31, 2013, which was 2.2% at March 31, 2013. Interest on the Facilities is payable monthly.

The Amended Credit Agreement requires that we maintain a leverage ratio not exceeding a ratio decreasing from 3.75 to 1.00 to 2.75 to 1.00 during the term of the Facilities. Additionally, we are required to maintain a fixed charge coverage ratio not less than a ratio increasing from 1.10 to 1.00 to 1.20 to 1.00, during the term of the Facilities. At March 31, 2013, we were obligated to maintain a


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leverage ratio of not exceeding 3.75 to 1.00 and a fixed charge coverage ratio not less than 1.10 to 1.00. We were in compliance with all covenants contained in the Amended Credit Agreement at March 31, 2013.

In connection with the North Jackson acquisition on August 18, 2011, we issued $20.0 million in convertible notes (the "Notes") to the sellers of the North Jackson facility as partial consideration of the acquisition. The Notes are subordinated obligations and rank junior to the Facilities. The Notes bear interest at a fixed rate of 4.0% per annum, payable in cash semi-annually in arrears on each June 18 and December 18, beginning on December 18, 2011. Unless earlier converted, the Notes mature and the unpaid principal balance is due on August 17, 2017. The Notes and any accrued and unpaid interest are convertible into shares of our Common Stock at the option of the holder at an initial conversion price of $47.1675 per share of Common Stock. The conversion price associated with the Notes may be adjusted in certain circumstances. We may prepay any outstanding Notes, in whole or in part, after August 17, 2014 during a fiscal quarter if our share price is greater than 140% of the current conversion price for at least 20 of the trading days in the 30 consecutive trading day period ending on the last trading day of the immediately preceding quarter.

We expect to meet all of our short-term liquidity requirements resulting from operations and current capital investment plans with internally generated funds and borrowings under the Revolver. At March 31, 2013, we had $40.3 million in availability under the Revolver.

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