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USAP > SEC Filings for USAP > Form 10-Q on 2-Aug-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


2-Aug-2013

Quarterly Report


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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates forward looking statements within the meaning of the Private Securities Reform Act of 1995, which involves risks and uncertainties. The following information should be read in conjunction with the unaudited consolidated financial information and the notes thereto included in this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward looking statements. Actual events or results may differ materially due to competitive factors and other factors referred to in Part 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012, our other filings with the Securities and Exchange Commission and elsewhere in this Quarterly Report. These factors may cause our actual results to differ materially from any forward looking statement. These forward looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate, and management's beliefs and assumptions. In addition, other written or oral statements that constitute forward looking statements may be made by us or on our behalf. Words such as "expect," "anticipate," "intend," "plan," "believe," "could," "estimate," "may," "target," "project," or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict.

Business Overview

We manufacture and market semi-finished and finished specialty steel products, including stainless steel, nickel alloys, 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 markets. 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.

During the second quarter and first six months of 2013, we have experienced a lower demand for our products as shipments are being negatively impacted by our customers continuing to destock their inventory levels while lower raw material prices, such as nickel, as well as shorter industry lead times, are also causing our customers to delay orders. As such, our tons shipped in the second quarter of 2013 declined by approximately 36% from the second quarter of last year and by 33% during the first six months of 2013 compared to the same prior year period. In addition, second quarter tons shipped were 11% lower than the first quarter of 2013. We are managing through this slower period by flexing our production schedules, which helps to lower our overall operating costs, enacting tighter expense control over costs and focusing our efforts on reducing our inventory levels without sacrificing our ability to meet future customer orders. We recognized an 8% increase in vacuum induction melted ("VIM") tons shipped during the second quarter of 2013 compared to the same prior year period. Also, certain plant costs associated with North Jackson that were incurred in the last half of 2012 and the beginning of 2013 are no longer being incurred, which has contributed to our overall gross margin increasing by 14% from the first quarter of 2013. We are continuing to execute on our strategic plan to produce higher margin premium alloys, launched two years ago when we purchased the North Jackson facility. In furtherance of our plan, we obtained the required Nadcap heat treat accreditation for the balance of our facilities in the second quarter of 2013. This was essential for us to achieve our next objective of winning approvals of our processes and products from leading original equipment manufacturers in the aerospace, power generation and oil and gas industries.

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. Our CODM sets performance goals, assesses performance and makes decisions about resource allocations on a consolidated basis. As a result of these factors, as well as the nature of the financial information available which is reviewed by the CODM, we commenced reporting as one reportable segment beginning with the three months ended March 31, 2013.


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Results of Operations

Three months ended June 30, 2013 as compared to the three months ended June 30,
2012



                                                       Three months ended
(in thousands, except per shipped ton                       June 30,                     Dollar / ton            Percentage
information)                                         2013               2012               variance               variance
Net sales:
Stainless steel                                    $  32,193          $ 52,286          $      (20,093 )               (38.4 )%
Tool steel                                             5,118             6,565                  (1,447 )               (22.0 )
High-strength low alloy steel                          3,865             5,841                  (1,976 )               (33.8 )
High-temperature alloy steel                             805             1,728                    (923 )               (53.4 )
Conversion services and other sales                      906             1,446                    (540 )               (37.3 )


Total net sales                                       42,887            67,866                 (24,979 )               (36.8 )
Cost of products sold:
Material cost of products sold                        22,477            33,759                 (11,282 )               (33.4 )
Operating cost of products sold                       11,645            19,639                  (7,994 )               (40.7 )
Depreciation expense                                   3,457             2,898                     559                  19.3


Total cost of products sold                           37,579            56,296                 (18,717 )               (33.2 )

Gross margin                                           5,308            11,570                  (6,262 )               (54.1 )
Gross margin as a percentage of net sales               12.4 %            17.0 %                   N/A                   N/A
Selling, general and administrative expenses           4,513             4,145                     368                   8.9
Severance expenses                                       356               118                     238                 201.7


Operating income                                   $     439          $  7,307          $       (6,868 )               (94.0 )


Tons shipped                                           8,559            13,277                  (4,718 )               (35.5 )


Sales dollars per shipped ton                      $   5,011          $  5,112          $         (101 )                (2.0 )%

Market Segment Information



                                           Three months ended
                                                June 30,                 Dollar           Percentage
(in thousands)                             2013            2012         variance           variance
Net sales:
Service centers                         $   29,103       $ 41,804       $ (12,701 )             (30.4 )%
Forgers                                      4,433          9,149          (4,716 )             (51.5 )
Rerollers                                    5,578         10,426          (4,848 )             (46.5 )
Original equipment manufacturers             2,867          5,041          (2,174 )             (43.1 )
Conversion services and other sales            906          1,446            (540 )             (37.3 )


Total net sales                         $   42,887       $ 67,866       $ (24,979 )             (36.8 )%


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Melt Type Information



                                               Three months ended
                                                    June 30,               Dollar          Percentage
(in thousands)                                 2013           2012        variance          variance
Net sales:
Specialty alloys                            $   40,097      $ 64,668      $ (24,571 )            (38.0 )%
Premium alloys (A)                               1,884         1,752            132                7.5
Conversion services and other sales                906         1,446           (540 )            (37.3 )


Total net sales                             $   42,887      $ 67,866      $ (24,979 )            (36.8 )%

(A) Premium alloys represents all VIM produced products.

We do not sell the majority of our products directly to end markets. The end market information in this Quarterly Report is our estimate based upon our customers and the grade of material sold that they will in-turn sell to the ultimate end market customer.

End Market Information



                                               Three months ended
                                                    June 30,               Dollar          Percentage
(in thousands)                                 2013           2012        variance          variance
Net sales:
Aerospace                                   $   24,990      $ 33,721      $  (8,731 )            (25.9 )%
Heavy equipment                                  5,518         6,565         (1,047 )            (15.9 )
Oil & gas                                        4,484        14,133         (9,649 )            (68.3 )
Power generation                                 4,531         8,188         (3,657 )            (44.7 )
General industrial, conversion services
and other sales                                  3,364         5,259         (1,895 )            (36.0 )


Total net sales                             $   42,887      $ 67,866      $ (24,979 )            (36.8 )%

Net sales:

Net sales for the three months ended June 30, 2013 decreased $25.0 million, or 36.8%, as compared to the similar period in 2012. The decrease reflects a 35.5% decrease in consolidated shipments, for the quarter ended June 30, 2013. Our dollars per shipped ton decreased slightly by 2.0% between periods presented. Sales of premium alloys increased from 2.6% of total sales for the second quarter of 2012 to 4.4% for the second quarter of 2013. Our premium alloys products typically yield a higher cost per pound than our other products and primarily originate in our North Jackson VIM furnace. Shipments of oil and gas products, aerospace products, power generation products, heavy equipment products and general industrial products & conversion services decreased 65%, 15% 38%, 13%, and 54%, respectively, for the quarter ended June 30, 2013, compared to the prior year second quarter. We believe that the decrease in our sales for the second quarter of 2013 is primarily a result of inventory adjustments being made by our customers as well as declining raw material prices and shortened lead times that we believe are encouraging our customers to delay orders.

Cost of products sold and gross margin:

Our cost of products sold, as a percentage of sales, was 87.6% and 83.0% for the quarters ended June 30, 2013 and 2012, respectively. This increase is primarily due to increased depreciation expense as a percentage of sales incurred in the current quarter as compared to the prior year second quarter. On a percentage of sales basis, depreciation expense increased from 4.3% for the quarter ended June 30, 2012 to 8.1% in the current quarter. This increase is a result of the significant amount of fixed assets that have been placed in service over the last two years, primarily at our North Jackson facility, coupled with the aforementioned reduction in sales.

Our gross margin decline in the current quarter is primarily the result of the 36.8% decrease in net sales and the increase in our depreciation expense when compared to the second quarter of 2012.

Selling, general and administrative expenses:

Our total selling, general and administrative ("SG&A") expenses consist primarily of employee costs, which include salaries, payroll taxes and benefit related costs, legal and accounting services, stock compensation and insurance costs. Our SG&A expenses increased by $0.6 million for the three months ended June 30, 2013 as compared to the similar period in 2012. The increase in SG&A expense in the current quarter is a result of $0.2 million of additional severance expense and increased variable compensation costs when compared to the prior year second quarter. We incurred $0.4 million of severance expense during the quarter ended June 30, 2013 from the departure of a senior executive. SG&A expense for the second quarter of 2012 benefited from the reversal of


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approximately $0.2 million of variable compensation costs. There was no similar reversal in the second quarter of 2013. SG&A expenses as a percentage of net sales increased from 6.3% for the quarters ended June 30, 2012 to 11.4% for the second quarter of 2013. This increase on a percentage of sales basis is primarily due to maintaining comparable SG&A expenses between periods despite the aforementioned 36.8% decrease in sales in order to stay on schedule with our strategic plan.

Interest expense:

Interest expense increased from $0.6 million for the three months ended June 30, 2012 to $0.8 million in the same period of 2013. This increase is primarily due to higher interest rates incurred on our debt in 2013 when compared to 2012. Our interest rates are determined by a LIBOR-based rate plus an applicable margin based upon achieving covenant levels.

Income tax (benefit) provision:

Our effective tax rate for the quarters ended June 30, 2013 and 2012 was 231.7% and 33.0%, respectively. Our effective tax rate for the quarter ended June 30, 2013 reflects a benefit from a reduced state apportionment factor based upon year-to-date sales. We recognized approximately $0.3 million of income tax benefit in the current quarter as a result of this change in state apportionment factor. Our estimated annual effective tax rate on ordinary income for 2013 is 117.5%.

Net income:

Our net income decreased from $4.5 million or $0.62 per diluted share for the quarter ended June 30, 2012 to $0.5 million or $0.06 per diluted share for the second quarter of 2013 for the reasons stated above.


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Six months ended June 30, 2013 as compared to the six months ended June 30, 2012

                                                Six months ended
                                                    June 30,               Dollar / ton        Percentage
(in thousands, except per shipped ton
information)                                   2013          2012            variance           variance
Net sales:
Stainless steel                              $ 67,670      $ 112,412      $      (44,742 )           (39.8 )%
Tool steel                                     10,102         10,870                (768 )            (7.1 )
High-strength low alloy steel                  10,458         12,079              (1,621 )           (13.4 )
High-temperature alloy steel                    2,075          4,169              (2,094 )           (50.2 )
Conversion services and other sales             1,717          2,950              (1,233 )           (41.8 )


Total net sales                                92,022        142,480             (50,458 )           (35.4 )
Cost of products sold:
Material cost of products sold                 49,180         71,028             (21,848 )           (30.8 )
Operating cost of products sold                25,736         39,930             (14,194 )           (35.5 )
Depreciation expense                            7,152          5,677               1,475              26.0


Total cost of products sold                    82,068        116,635             (34,567 )           (29.6 )


Gross margin                                    9,954         25,845             (15,891 )           (61.5 )

Gross margin as a percentage of net sales        10.8 %         18.1 %               N/A               N/A

Selling, general and administrative
expenses                                        8,992          8,728                 264               3.0
Severance expenses                                356            118                 238             201.7


Operating income                             $    606      $  16,999      $      (16,393 )           (96.4 )


Tons shipped                                   18,185         27,311              (9,126 )           (33.4 )


Sales dollars per shipped ton                $  5,060      $   5,217      $         (157 )            (3.0 )%

Market Segment Information



                                                 Six months ended
                                                     June 30,               Dollar          Percentage
(in thousands)                                  2013          2012         variance          variance
Net sales:
Service centers                               $ 61,612      $  83,460      $ (21,848 )            (26.2 )%
Forgers                                         11,062         22,868        (11,806 )            (51.6 )
Rerollers                                       11,080         21,422        (10,342 )            (48.3 )
Original equipment manufacturers                 6,551         11,780         (5,229 )            (44.4 )
Conversion services and other sales              1,717          2,950         (1,233 )            (41.8 )


Total net sales                               $ 92,022      $ 142,480      $ (50,458 )            (35.4 )%


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Melt Type Information



                                               Six months ended
                                                   June 30,               Dollar          Percentage
(in thousands)                                2013          2012         variance          variance
Net sales:
Specialty alloys                            $ 86,219      $ 134,165      $ (47,946 )            (35.7 )%
Premium alloys                                 4,086          5,365         (1,279 )            (23.8 )
Conversion services and other sales            1,717          2,950         (1,233 )            (41.8 )


Total net sales                             $ 92,022      $ 142,480      $ (50,458 )            (35.4 )%

We do not sell the majority of our products directly to end markets. The end market information in this Quarterly Report is our estimate based upon our customers and the grade of material sold that they will in-turn sell to the ultimate end market customer.

End Market Information



                                               Six months ended
                                                   June 30,               Dollar          Percentage
(in thousands)                                2013          2012         variance          variance
Net sales:
Aerospace                                   $ 50,725      $  70,892      $ (20,167 )            (28.4 )%
Heavy equipment                               11,034         10,870            164                1.5
Oil & gas                                     10,776         29,692        (18,916 )            (63.7 )
Power generation                              10,290         19,384         (9,094 )            (46.9 )
General industrial, conversion services
and other sales                                9,197         11,642         (2,445 )            (21.0 )


Total net sales                             $ 92,022      $ 142,480      $ (50,458 )            (35.4 )%

Net sales:

Net sales for the six months ended June 30, 2013 decreased $50.5 million or 35.4% as compared to the similar period in 2012. The decrease reflects a 33.4% decrease, for the six months ended June 30, 2013, in consolidated shipments, combined with a change in product mix. Decreased shipments of aerospace products, oil and gas products, power generation products and general industrial products & conversion services of 24%, 64%, 45% and 33%, respectively, were partially offset by an increase in heavy equipment products shipments of 13%, as compared to the six months ended June 30, 2012.

Cost of products sold and gross margin:

Cost of products sold, as a percentage of net sales, was 89.2% and 81.9% for the six months ended June 30, 2013 and 2012, respectively. The increase in cost of products sold is primarily due to increased depreciation expense as a percentage of sales incurred in the six months ended June 30, 2013 when compared to the same prior year period. Depreciation expense as a percentage of sales increased from 4.0% for the six months ended June 30, 2012 to 7.8% for the first half of 2013. This increase is a result of the significant amount of fixed assets that have been placed in service over the last two years, primarily at our North Jackson facility, coupled with the aforementioned decline in sales.

Our gross margin decline in the six months ended June 30, 2013 is primarily the result of the 35.4% decrease in net sales and the increase in our depreciation expense.

Selling, general and administrative expenses:

Our total SG&A expense increased by $0.5 million for the six months ended June 30, 2013 as compared to the similar period in 2012. The increase in severance comprised approximately half of this increase. We incurred $0.4 million of severance expense during the six months ended June 30, 2013 from the departure of a senior executive. There were no other individually significant increases or decreases in our SG&A expense. SG&A expenses as a percentage of net sales increased from 6.2% for the six months ended June 30, 2012 to 10.2% for the current comparable period. This increase on a percentage of sales basis is primarily due to maintaining comparable SG&A expenses between periods despite the aforementioned 35.4% decrease in sales in order to stay on schedule with our strategic plan.


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Interest expense:

Interest expense increased from $1.3 million for the six months ended June 30, 2012 to $1.5 million in the same period of 2013. This increase is primarily due to higher interest rates incurred on our debt in 2013 when compared to 2012. Our interest rates are determined by the LIBOR rate plus an applicable margin based upon achieving covenant levels.

Income tax (benefit) provision:

Our effective tax rates for the six months ended June 30, 2013 and 2012 were 160.4% and 31.4%, respectively. Our effective tax rate for the six months ended June 30, 2013 reflects a benefit from a reduced state apportionment factor based upon year-to-date sales. Our effective tax rate for the six months ended June 30, 2013, also includes a net discrete tax benefit of $0.4 million for research and development tax credits. The effective tax rate for the six months ended June 30, 2012 was positively affected by a net discrete tax benefit of $0.6 million for state income taxes and research and development tax credits, partially offset by a net operating loss carryback. Our estimated annual effective tax rate on ordinary income for 2013 is 117.5%.

Net income:

Our net income decreased from $10.8 million or $1.48 per diluted share for the six months ended June 30, 2012 to $0.5 million or $0.06 per diluted share for the first half of 2013 for the reasons stated above.

Liquidity and Capital Resources

We have financed our operating activities primarily through cash provided by operations and borrowings under our credit facilities. Working capital decreased $16.5 million to $113.4 million at June 30, 2013 compared to $129.9 million at December 31, 2012. The decrease in working capital is primarily the result of a reduction in our current deferred income taxes. Our current deferred income taxes decreased by $13.2 million, primarily as a result of moving a portion of our net operating loss carryforwards that had been recorded as current at December 31, 2012 to long-term in 2013. Net accounts receivable decreased $0.5 million, mainly as a result of decreased sales for the quarter ended June 30, 2013 in comparison to the quarter ended December 31, 2012. Our accounts payable balance increased by $3.5 million from our prior year-end, primarily as a result of the timing of vendor purchases and their ensuing payments. Our backlog was $49.2 million at June 30, 2013 as compared to $46.6 million at March 31, 2013 and $51.7 million at December 31, 2012.

Cash received from sales of $47.8 million and $72.2 million for the three months ended June 30, 2013 and 2012, respectively, represent the primary source of cash from operations. The primary uses of cash for the quarter ended June 30, 2013 were raw material purchases of $16.0 million, employment costs of $11.9 million, capital expenditures of $3.8 million and utilities of $3.1 million. For the same period in 2012, primary uses of cash were raw material purchases of $33.6 million, employment costs of $14.2 million, capital expenditures of $11.2 million and utilities of $3.2 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.

Cash received from sales of $92.0 million and $136.1 million for the six months ended June 30, 2013 and 2012, respectively, represent the primary source of cash from operations. The primary uses of cash for the six months ended June 30, 2013 were raw material purchases of $26.6 million, employment costs of $25.8 million, capital expenditures of $6.1 million and utilities of $6.1 million. For the same period in 2012, primary uses of cash were raw material purchases of $64.9 million, employment costs of $30.6 million, capital expenditures of $16.2 million and utilities of $6.8 million. During the six months ended June 30, 2012, we received a federal tax refund of $4.5 million.

Cash used for raw material purchases and employment costs decreased for both the quarter and six months ended June 30, 2013 in comparison to the comparable period in 2012 primarily due to having a lower backlog of orders at the beginning of 2013 of $51.7 million compared with $102.6 million at the beginning of 2012, which led to the decrease in the quantity of purchased materials and employment costs.


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