UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2004March 31, 2005
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 0-25032
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE | 25-1724540 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
600 Mayer Street
Bridgeville, PA 15017
(Address of principal executive offices, including zip code)
(412) 257-7600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). YES ¨ NO x
As of November 5, 2004,April 30, 2005, there were 6,322,8906,363,780 shares outstanding of the Registrant’s Common Stock, $0.001 par value per share.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
This Quarterly Report on Form 10-Q contains historical information and forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. Statements looking forward in time, including statements regarding future growth, cost savings, expanded production capacity, broader product lines, greater capacity to meet customer quality, reliability, price and delivery needs, enhanced competitive posture, effect of new accounting pronouncements and no material financial impact from litigation or contingencies are included in this Form 10-Q pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995.
The Company’s actual results will be affected by a wide range of factors including compliance with Section 404 of the Sarbanes-Oxley Act of 2002; the concentrated nature of the Company’s customer base to date and the Company’s dependence on its significant customers; the receipt, pricing and timing of future customer orders; changes in product mix; the limited number of raw material and energy suppliers and significant fluctuations that may occur in raw material and energy prices; the Company’s reliance on certain critical manufacturing equipment; the ability to acquire the ESR Building prioror to extend the expiration of the Armco Lease;lease ; the Company’s ongoing requirement for continued compliance with environmental laws; and the ultimate outcome of the Company’s current and future litigation matters. Many of these factors are not within the Company’s control and involve known and unknown risks and uncertainties that may cause the Company’s actual results in future periods to be materially different from any future performance suggested herein. Any unfavorable change in the foregoing or other factors could have a material adverse effect on the Company’s business, financial condition and results of operations.
Further, the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company’s control.
PAGE NO. | ||||||
PART I. | FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements | |||||
02 | ||||||
03 | ||||||
04 | ||||||
Notes to the Unaudited Consolidated Condensed Financial Statements | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||
Item 4. | Controls and Procedures | |||||
PART II. | OTHER INFORMATION | |||||
Item 1. | Legal Proceedings | |||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 15 | ||||
Item 3. | Defaults Upon Senior Securities | 15 | ||||
Item 4. | Submission of Matters to a Vote of Security Holders | 15 | ||||
Item 5. | Other information | 15 | ||||
Item 6. | Exhibits | 15 | ||||
| 16 | |||||
CERTIFICATIONS | 17 |
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Information)
(Unaudited)
For the Three-month period ended | For the Nine-month period ended | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Net sales | $ | 33,297 | $ | 18,625 | $ | 83,630 | $ | 50,162 | ||||||||
Cost of products sold | 27,701 | 17,296 | 71,576 | 47,917 | ||||||||||||
Selling and administrative expenses | 1,873 | 1,507 | 5,348 | 4,425 | ||||||||||||
Operating income (loss) | 3,723 | (178 | ) | 6,706 | (2,180 | ) | ||||||||||
Interest expense | (108 | ) | (100 | ) | (302 | ) | (289 | ) | ||||||||
Other income | 566 | 24 | 577 | 74 | ||||||||||||
Income (loss) before taxes | 4,181 | (254 | ) | 6,981 | (2,395 | ) | ||||||||||
Income tax provision (benefit) | 1,436 | (133 | ) | 2,443 | (1,251 | ) | ||||||||||
Net income (loss) | $ | 2,745 | $ | (121 | ) | $ | 4,538 | $ | (1,144 | ) | ||||||
Earnings (loss) per share – Basic | $ | 0.44 | $ | (0.02 | ) | $ | 0.72 | $ | (0.18 | ) | ||||||
Earnings (loss) per share – Diluted | $ | 0.43 | $ | (0.02 | ) | $ | 0.71 | $ | (0.18 | ) | ||||||
Weighted average shares of Common Stock outstanding | ||||||||||||||||
Basic | 6,305,456 | 6,289,485 | 6,300,229 | 6,286,271 | ||||||||||||
Diluted | 6,400,188 | 6,289,485 | 6,363,656 | 6,286,271 |
For the Three-month period ended | ||||||||
2005 | 2004 | |||||||
Net sales | $ | 43,019 | $ | 21,307 | ||||
Cost of products sold | 36,410 | 19,344 | ||||||
Selling and administrative expenses | 1,907 | 1,528 | ||||||
Operating income | 4,702 | 435 | ||||||
Interest expense and other financing costs | (172 | ) | (88 | ) | ||||
Other income | 60 | 8 | ||||||
Income before taxes | 4,590 | 355 | ||||||
Income tax expense | 1,652 | 128 | ||||||
Net income | $ | 2,938 | $ | 227 | ||||
Earnings per common share: | ||||||||
Basic | $ | 0.46 | $ | 0.04 | ||||
Diluted | $ | 0.45 | $ | 0.04 | ||||
Weighted average shares of Common Stock outstanding: | ||||||||
Basic | 6,350,547 | 6,296,053 | ||||||
Diluted | 6,468,475 | 6,336,034 |
The accompanying notes are an integral part of these consolidated condensed financial statements.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
September 30, 2004 | December 31, 2003 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 549 | $ | 4,735 | ||||
Accounts receivable, (less allowance for doubtful accounts of $373 and $163, respectively) | 22,629 | 12,690 | ||||||
Inventory | 33,808 | 22,281 | ||||||
Deferred taxes | 1,125 | 1,222 | ||||||
Other current assets | 1,973 | 3,063 | ||||||
Total current assets | 60,084 | 43,991 | ||||||
Property, plant and equipment, net | 40,225 | 40,176 | ||||||
Other assets | 472 | 758 | ||||||
Total assets | $ | 100,781 | $ | 84,925 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Trade accounts payable | $ | 11,787 | $ | 6,792 | ||||
Outstanding checks in excess of bank balance | 939 | 813 | ||||||
Accrued employment costs | 2,818 | 833 | ||||||
Current portion of long-term debt | 1,931 | 1,944 | ||||||
Other current liabilities | 1,030 | 195 | ||||||
Total current liabilities | 18,505 | 10,577 | ||||||
Bank revolver | 4,597 | — | ||||||
Long-term debt | 4,150 | 5,599 | ||||||
Deferred taxes | 9,451 | 9,313 | ||||||
Total liabilities | 36,703 | 25,489 | ||||||
Commitments and contingencies | — | — | ||||||
Stockholders’ equity | ||||||||
Senior Preferred Stock, par value $0.001 per share; 1,980,000 shares authorized; 0 shares issued and outstanding | — | — | ||||||
Common Stock, par value $0.001 per share; 10,000,000 shares authorized; 6,575,791` and 6,564,306 shares issued | 7 | 7 | ||||||
Additional paid-in capital | 28,433 | 28,329 | ||||||
Retained earnings | 37,269 | 32,731 | ||||||
Treasury Stock at cost; 269,900 common shares held | (1,631 | ) | (1,631 | ) | ||||
Total stockholders’ equity | 64,078 | 59,436 | ||||||
Total liabilities and stockholders’ equity | $ | 100,781 | $ | 84,925 | ||||
March 31, 2005 | December 31, 2004 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 833 | $ | 241 | ||||
Accounts receivable, (less allowance for doubtful accounts of $414 and $557, respectively) | 29,352 | 24,562 | ||||||
Inventory | 43,722 | 38,318 | ||||||
Deferred taxes | 1,045 | 1,436 | ||||||
Other current assets | 1,482 | 1,982 | ||||||
Total current assets | 76,434 | 66,539 | ||||||
Property, plant and equipment, net | 40,195 | 40,716 | ||||||
Other assets | 578 | 585 | ||||||
Total assets | $ | 117,207 | $ | 107,840 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Trade accounts payable | $ | 16,210 | $ | 11,666 | ||||
Outstanding checks in excess of bank balance | 954 | 2,638 | ||||||
Accrued employment costs | 2,099 | 2,044 | ||||||
Current portion of long-term debt | 1,977 | 1,830 | ||||||
Other current liabilities | 2,023 | 442 | ||||||
Total current liabilities | 23,263 | 18,620 | ||||||
Bank revolver | 10,442 | 8,635 | ||||||
Long-term debt | 3,016 | 3,555 | ||||||
Deferred taxes | 10,232 | 10,093 | ||||||
Total liabilities | 46,953 | 40,903 | ||||||
Commitments and contingencies | — | — | ||||||
Stockholders’ equity | ||||||||
Senior Preferred Stock, par value $0.001 per share; 1,980,000 shares authorized; 0 shares issued and outstanding | — | — | ||||||
Common Stock, par value $0.001 per share; 10,000,000 shares authorized; 6,633,837 and 6,601,112 shares issued | 7 | 7 | ||||||
Additional paid-in capital | 29,081 | 28,699 | ||||||
Retained earnings | 42,800 | 39,862 | ||||||
Treasury Stock at cost; 270,057 and 269,900 common shares held | (1,634 | ) | (1,631 | ) | ||||
Total stockholders’ equity | 70,254 | 66,937 | ||||||
Total liabilities and stockholders’ equity | $ | 117,207 | $ | 107,840 | ||||
The accompanying notes are an integral part of these consolidated condensed financial statements.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the Nine-month period ended | For the Three-month period ended March 31, | |||||||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 4,538 | $ | (1,144 | ) | |||||||||||
Adjustments to reconcile to net cash (used in) provided by operating activities: | ||||||||||||||||
Cash flow from operating activities: | ||||||||||||||||
Net income | $ | 2,938 | $ | 227 | ||||||||||||
Adjustments to reconcile to net cash and cash equivalents | ||||||||||||||||
Provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 2,336 | 2,319 | 769 | 786 | ||||||||||||
Deferred taxes | 480 | 670 | 539 | 21 | ||||||||||||
Tax benefit from exercise of stock options | 8 | — | 115 | 3 | ||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable, net | (9,939 | ) | (2,167 | ) | (4,790 | ) | (2,535 | ) | ||||||||
Inventory | (11,527 | ) | (188 | ) | (5,404 | ) | (6,279 | ) | ||||||||
Trade accounts payable | 4,995 | 2,559 | 4,544 | 2,658 | ||||||||||||
Accrued employment costs | 1,985 | 243 | 147 | 703 | ||||||||||||
Refundable taxes | 1,405 | (930 | ) | |||||||||||||
Other, net | 553 | 227 | 2,415 | 427 | ||||||||||||
Net cash (used in) provided by operating activities | (5,166 | ) | 1,589 | |||||||||||||
Net cash provided by (used in) operating activities | 1,273 | (3,989 | ) | |||||||||||||
Cash flow from investing activities: | ||||||||||||||||
Capital expenditures | (2,377 | ) | (713 | ) | (584 | ) | (174 | ) | ||||||||
Net cash used in investing activities | (2,377 | ) | (713 | ) | (584 | ) | (174 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Cash flow from financing activities: | ||||||||||||||||
Net borrowings under revolving line of credit | 4,597 | — | 1,807 | 668 | ||||||||||||
Proceeds from deferred loan agreement | — | 200 | ||||||||||||||
Repayments of long-term debt | (1,462 | ) | (1,451 | ) | (484 | ) | (498 | ) | ||||||||
Increase in outstanding checks in excess of bank balance | 126 | 235 | ||||||||||||||
Proceeds from the issuance of common stock | 96 | 25 | ||||||||||||||
Net change in bank overdrafts | (1,684 | ) | (272 | ) | ||||||||||||
Proceeds from issuance of common stock | 264 | 42 | ||||||||||||||
Net cash provided by (used in) financing activities | 3,357 | (991 | ) | |||||||||||||
Net cash (used in) financing activities | (97 | ) | (60 | ) | ||||||||||||
Net decrease in cash and cash equivalents | (4,186 | ) | (115 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 592 | (4,223 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | 4,735 | 3,308 | 241 | 4,735 | ||||||||||||
Cash and cash equivalents at end of period | $ | 549 | $ | 3,193 | $ | 833 | $ | 512 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Interest paid | $ | 291 | $ | 255 | $ | 167 | $ | 87 | ||||||||
Income taxes (refunded) paid | $ | (87 | ) | $ | 7 | |||||||||||
Income taxes paid | $ | 594 | $ | 0 |
The accompanying notes are an integral part of these consolidated condensed financial statements.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements of operations for the three- and nine- monththree-month periods ended September 30,March 31, 2005 and 2004, and 2003, balance sheets as of September 30, 2004March 31, 2005 and December 31, 2003,2004, and statements of cash flows for the nine-monththree-month periods ended September 30,March 31, 2005 and 2004, and 2003, have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, these statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2003.2004. In the opinion of management, the accompanying unaudited, condensed consolidated financial statements contain all adjustments, all of which were of a normal recurring nature, necessary to present fairly, in all material respects, the consolidated financial position at September 30, 2004March 31, 2005 and December 31, 20032004 and the consolidated results of operations and of cash flows for the periods ended September 30,March 31, 2005 and 2004, and 2003, and are not necessarily indicative of the results to be expected for the full year.
Note 2 – Common Stock
The reconciliation of the weighted average number of shares of Common Stock outstanding utilized for the earnings per common share computations are as follows:
For the Three-month period ended | For the Nine-month period ended | |||||||
2004 | 2003 | 2004 | 2003 | |||||
Weighted average number of shares of Common Stock outstanding | 6,305,456 | 6,289,485 | 6,300,229 | 6,286,271 | ||||
Effect of dilutive securities | 94,732 | — | 63,427 | — | ||||
Weighted average number of shares of Common Stock outstanding, as adjusted | 6,400,188 | 6,289,485 | 6,363,656 | 6,286,271 | ||||
The Company had 9,206 and 3,794 common stock equivalents outstanding for the three- and nine-month periods ended September 30, 2003, respectively, which were not included in the common share computations for earnings (loss) per share as the common stock equivalents are anti-dilutive.
For the Three-month period ended March 31, | ||||
2005 | 2004 | |||
Weighted average number of shares of Common Stock outstanding | 6,350,547 | 6,296,053 | ||
Assuming exercise of stock options reduced by the number of shares which could have been purchased with the proceeds from the exercise of such stock options | 117,928 | 39,981 | ||
Weighted average number of shares of Common Stock outstanding, as adjusted | 6,468,475 | 6,336,034 | ||
Note 3 – Stock-Based Compensation Plans
The following table illustrates the effect on net income (loss) and earnings per share between the Company’s use of the intrinsic value method and the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee and director compensation (dollars, except per share amounts, in thousands):
For the Three-month period ended September 30, | For the Nine-month period ended September 30, | For the Three-month period ended March 31, | ||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | |||||||||||||||||||
Net income (loss), as reported | $ | 2,745 | $ | (121 | ) | $ | 4,538 | $ | (1,144 | ) | ||||||||||||||
Total stock-based compensation expense determined under fair-value based method, net of taxes | (45 | ) | (21 | ) | (131 | ) | (65 | ) | ||||||||||||||||
Net income, as reported | $ | 2,938 | $ | 227 | ||||||||||||||||||||
Total stock-based compensation expense determined Under fair-value based method, net of taxes | (44 | ) | (39 | ) | ||||||||||||||||||||
Pro forma net income (loss) | $ | 2,700 | $ | (142 | ) | $ | 4,407 | $ | (1,209 | ) | ||||||||||||||
Pro forma net income | $ | 2,894 | $ | 188 | ||||||||||||||||||||
Earnings (loss) per common share: | ||||||||||||||||||||||||
Earnings per common share: | ||||||||||||||||||||||||
Basic – as reported | $ | 0.44 | $ | (0.02 | ) | $ | 0.72 | $ | (0.18 | ) | $ | 0.46 | $ | 0.04 | ||||||||||
Basic – pro forma | $ | 0.43 | $ | (0.02 | ) | $ | 0.70 | $ | (0.19 | ) | $ | 0.46 | $ | 0.03 | ||||||||||
Diluted – as reported | $ | 0.43 | $ | (0.02 | ) | $ | 0.71 | $ | (0.18 | ) | $ | 0.45 | $ | 0.04 | ||||||||||
Diluted – pro forma | $ | 0.42 | $ | (0.02 | ) | $ | 0.69 | $ | (0.19 | ) | $ | 0.45 | $ | 0.03 | ||||||||||
Note 4 – NewRecent Accounting Pronouncements
No newIn November of 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). The purpose of this statement is to clarify the accounting pronouncements have been issuedof abnormal amounts of idle facility expense, freight, handling costs and waste material. ARB No. 43 stated that under some circumstances these costs may be so abnormal that they are required to be treated as current period costs. SFAS 151 requires that these costs be treated as current period costs regardless if they meet the criteria of “so abnormal.” In addition, the statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provision of this Statement shall be effective for inventory costs incurred during the nine-month period ended September 30, 2004 that wouldfiscal years beginning after December 31, 2004. The adoption of SFAS 151 did not have a material impact on the Company’s results of operations or financial statements. Further, there have been no changes inposition during the Companyfirst quarter 2005.
In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123-R”). This Statement replaces FASB Statement No. 123 and supercedes APB Opinion No. 25. SFAS 123-R eliminates the ability to account for share-based compensation transactions using the intrinsic method currently used by the Company. SFAS 123-R requires such transactions be accounted for using a fair-value-based method that would impact the accounting pronouncements disclosedresult in expense being recognized in the Company’s Annual Report on Form 10-Kfinancial statements. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 provides the SEC’s staff views regarding the valuation of share-based payment arrangements for public companies. In April 2005, the year ended December 31, 2003.SEC issued a press release that delays the adoption date of SFAS 123R to January 1, 2006. Therefore, the Company will adopt SFAS 123-R as of January 1, 2006 utilizing similar valuation methodologies that generate the pro-forma disclosures included in this quarterly report.
Note 5 - Inventory
The major classes of inventory are as follows (dollars in thousands):
September 30, 2004 | December 31, 2003 | March 31, 2005 | December 31, 2004 | |||||||||
Raw materials and supplies | $ | 4,242 | $ | 2,265 | $ | 5,762 | $ | 5,160 | ||||
Semi-finished and finished steel products | 27,147 | 17,743 | 35,583 | 30,820 | ||||||||
Operating materials | 2,419 | 2,273 | 2,377 | 2,338 | ||||||||
Total inventory | $ | 33,808 | $ | 22,281 | $ | 43,722 | $ | 38,318 | ||||
Note 6 - Property, Plant and Equipment
Property, plant and equipment consists of the following (dollars in thousands):
September 30, 2004 | December 31, 2003 | |||||||
Land and land improvements | $ | 1,014 | $ | 953 | ||||
Buildings | 6,203 | 5,987 | ||||||
Machinery and equipment | 51,583 | 49,801 | ||||||
Construction in progress | 459 | 141 | ||||||
59,259 | 56,882 | |||||||
Accumulated depreciation | (19,034 | ) | (16,706 | ) | ||||
Property, plant and equipment, net | $ | 40,225 | $ | 40,176 | ||||
Property, plant and equipment includes certain buildings and structures located in Bridgeville, PA that were previously leased from Armco, which merged with and into AK Steel in 1999 (“Armco”). In 2003, the Company exercised its option to purchase all of the property permitted under the capital lease with Armco for $1.
March 31, 2005 | December 31, 2004 | |||||||
Land and land improvements | $ | 1,014 | $ | 1,014 | ||||
Buildings | 6,203 | 6,203 | ||||||
Machinery and equipment | 52,462 | 52,358 | ||||||
Construction in progress | 832 | 893 | ||||||
60,511 | 60,468 | |||||||
Accumulated depreciation | (20,316 | ) | (19,752 | ) | ||||
Property, plant and equipment, net | $ | 40,195 | $ | 40,716 | ||||
The ESR building in Bridgeville, PA, which houses the Company’s four electro-slag remelting furnaces and ancillary equipment, in Bridgeville, was not included in the optionpurchase of the Bridgeville facility from AK Steel in 2003. On February 2, 2005, the Company entered into a written agreement with AK Steel to purchase.purchase the ESR building and certain other parcels. The Company will continue to operate the equipment in the ESR building under aan existing lease, with Armco thatwhich was extended to March 8, 2005. The Company has entered into negotiations with AK Steel to purchase the ESR building.2006. In the event the purchase of the ESR building is not purchased, orcompleted prior to the expiration of the lease, and the lease is not otherwise extended beyond March 8, 2005,2006, the relocation of the ESR equipment would have an adverse material effect on the financial condition of the Company.
In 2003, the Company entered into a $200,000 Deferred Loan Agreement maturing on December 31, 2006 with the City of Dunkirk, New York. No principal or interest payments will be required under the Deferred Loan Agreement provided the Company hires 30 new employees and more than 50% of those jobs are made available to certain Dunkirk City residents.
The Company believes it will meetincurred a write-off of $342,000 of fixed assets in the conditionsBridgeville facility, mainly for flat bar processing equipment. The write-off was a result of the Deferred Loan Agreement. Therefore,Company’s decision to move its small flat bar production to the proceeds have been applied to reduce the acquisition cost of new equipment at the Company’s Dunkirk facility.
Note 7 – Commitments and Contingencies
The Company, as well as other steel companies, is subject to demanding environmental standards imposed by federal, state and local environmental laws and regulations. The Company is not aware of any environmental condition that currently exists at any of its facilities that would cause a material adverse effect on the financial condition of the Company.
In connection with the Company’s June 2, 1995 agreement with Armco to purchase certain assets and a parcel of real property located in Titusville, Armco agreed to indemnify the Company up to $3,000,000 in the aggregate for liabilities under environmental laws arising out of conditions on or under the Titusville property existing prior to June 2,1995. Armco also agreed to indemnify the Company for any liabilities arising out of environmental conditions existing off-site as of June 2, 1995, and that indemnification is not subject to the $3,000,000 limitation.
The Company has filed no claims against Armco since the inception of the acquisition agreement. In addition, management is not aware of any financial difficulties being experienced by AK Steel, as successor to Armco, that would prevent its performance under the acquisition agreement.
In connection with the acquisition of the Dunkirk facility, Dunkirk Specialty Steel entered into an order with the New York State Department of Environmental Conservation (“NY DEC”) that precludes NY DEC from bringing any action against the Company relating to existing environmental conditions as of February 14, 2002. There can be no assurance that any other party will not assert any claims with respect to environmental conditions at the Dunkirk facility, or that the Company will have the financial resources to discharge any liabilities if legally compelled to do so.
On June 29, 2001, suit was filed against the Company in the Court of Common Pleas of Allegheny County, Pennsylvania by Teledyne Technologies, Incorporated (“Teledyne”). The suit alleges that steel product manufactured by the Company was defective and the Company was or should have been aware of the defects. Teledyne has alleged that the defective steel supplied by the Company caused certain crankshafts sold by Teledyne for use in aircraft engines to be defective. As a result, Teledyne is claiming damages relating to the recall, replacement and repair of aircraft engines.
In 2002, Teledyne was unsuccessful in its pursuit of a similar claim brought against another specialty steel producer who supplied the same steel product. After in-depth investigation, it is the Company’s position that the suit is without merit and it intends to vigorously defend that position. Additionally, the Company believes that it has insurance coverage that is available for this claim and has reached an agreement with United States Aviation Underwriters, Inc., (“USAU”) a New York corporation, as managers and on behalf of United States Aircraft Insurance Group (“USAIG”), the Company’s Aircraft Products Liability insurance carrier, regarding the allocation of certain potential costs associated with the Teledyne claim. At this time, the Company is engaged in discovery and believes that the final disposition of this suit will not have a material adverse effect on the financial condition and the results of operations of the Company.
On April 7, 2003, United States Aviation Underwriters, Inc. (“USAU”), a New York corporation, as managers and on behalf of United States Aircraft Insurance Group (“USAIG”), the Company’s Aircraft Products Liability insurance carrier, filed suit in the Court of Common Pleas of Allegheny County, Pennsylvania asking the court for a declaratory judgment as to what actual liability and obligations were applicable to USAIG relating to the insurance policy issued to the Company, and the allegations made by Teledyne. The Company and USAU reached a settlement agreement as of May 1, 2004 regarding the allocation of certain potential costs associated with the Teledyne claim and have agreed to jointly file a motion to have the declaratory suit dismissed. On July 27, 2004, the suit brought by USAU was dismissed.
The Company maintains a supply contract agreement with Talley Metals Technology, Inc. a subsidiary of Carpenter Technology Corporation (“Talley Metals”). While the initial term of the agreement expired December 31, 2002, the agreement continues to automatically renew with the placement of new orders each month and requires a 90-day notice to terminate. In addition, Talley Metals is required under the agreement to purchase a minimum of 1,000 tons of stainless reroll billet products each calendar month and average at least 1,250 tons per month during the last twelve-month period. The value of the contract on a monthly basis will depend on product mix and key raw material prices. Due to market conditions during 2003, the Company waived Talley Metals’ requirement to purchase the monthly minimum quantity of stainless reroll billets.
Note 8 - - Business Segments
The Company is comprised of two business segments: Universal Stainless & Alloy Products, which consists of the Bridgeville and Titusville facilities, and Dunkirk Specialty Steel, the Company’s wholly owned subsidiary located in Dunkirk, New York. The Universal Stainless & Alloy Products manufacturing process involves melting, remelting, treating and hot and cold rolling of semi-finished and finished specialty steels. Dunkirk Specialty Steel’s manufacturing process involves hot rolling and finishing of specialty steel bar, rod and wire products.wire. The segment dataSegment Data are as follows (dollars in thousands):
For the Three-month period ended | For the Nine-month period ended | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Net sales: | ||||||||||||||||
Universal Stainless & Alloy Products | $ | 31,199 | $ | 16,168 | $ | 75,526 | $ | 43,068 | ||||||||
Dunkirk Specialty Steel | 9,484 | 5,225 | 24,264 | 15,404 | ||||||||||||
Intersegment | (7,386 | ) | (2,768 | ) | (16,160 | ) | (8,310 | ) | ||||||||
Consolidated total | $ | 33,297 | $ | 18,625 | $ | 83,630 | $ | 50,162 | ||||||||
Operating income (loss): | ||||||||||||||||
Universal Stainless & Alloy Products | $ | 2,900 | $ | 554 | $ | 5,198 | $ | (475 | ) | |||||||
Dunkirk Specialty Steel | 1,163 | (732 | ) | 1,848 | (1,705 | ) | ||||||||||
Intersegment | (340 | ) | — | (340 | ) | — | ||||||||||
Consolidated total | $ | 3,723 | $ | (178 | ) | $ | 6,706 | $ | (2,180 | ) | ||||||
Interest expense and other financing costs: | ||||||||||||||||
Universal Stainless & Alloy Products | $ | 72 | $ | 64 | $ | 198 | $ | 179 | ||||||||
Dunkirk Specialty Steel | 36 | 36 | 104 | 110 | ||||||||||||
Consolidated total | $ | 108 | $ | 100 | $ | 302 | $ | 289 | ||||||||
Other income (expense) | ||||||||||||||||
Universal Stainless & Alloy Products | $ | 1 | $ | 15 | $ | 10 | $ | 55 | ||||||||
Dunkirk Specialty Steel | 565 | 9 | 567 | 19 | ||||||||||||
Consolidated total | $ | 566 | $ | 24 | $ | 577 | $ | 74 | ||||||||
September 30, 2004 | December 31, 2003 | |||||||||||||
Total assets: | ||||||||||||||
Universal Stainless & Alloy Products | $ | 80,488 | $ | 65,025 | ||||||||||
Dunkirk Specialty Steel | 17,558 | 11,128 | ||||||||||||
Corporate assets | 2,735 | 8,772 | ||||||||||||
$ | 100,781 | $ | 84,925 | For the Three-month period ended March 31, | ||||||||||
2005 | 2004 | |||||||||||||
Net sales: | ||||||||||||||
Universal Stainless & Alloy Products | $ | 38,425 | $ | 18,845 | ||||||||||
Dunkirk Specialty Steel | 13,667 | 6,745 | ||||||||||||
Intersegment | (9,073 | ) | (4,283 | ) | ||||||||||
Consolidated net sales | $ | 43,019 | $ | 21,307 | ||||||||||
Operating income: | ||||||||||||||
Universal Stainless & Alloy Products | $ | 2,679 | $ | 401 | ||||||||||
Dunkirk Specialty Steel | 1,863 | 34 | ||||||||||||
Intersegment | 160 | — | ||||||||||||
Total operating income | $ | 4,702 | $ | 435 | ||||||||||
Interest expense and other financing costs: | ||||||||||||||
Universal Stainless & Alloy Products | $ | 107 | $ | 54 | ||||||||||
Dunkirk Specialty Steel | 65 | 34 | ||||||||||||
Total interest expense and other financing costs | $ | 172 | $ | 88 | ||||||||||
Other income | ||||||||||||||
Universal Stainless & Alloy Products | $ | 3 | $ | 6 | ||||||||||
Dunkirk Specialty Steel | 57 | 2 | ||||||||||||
Total other income | $ | 60 | $ | 8 | ||||||||||
Dunkirk Specialty Steel’s other income for the three- and nine-month period ended September 30, 2004 included $565,000, net of expenses, related to the delayed receipt of the remaining 2003 import duties awarded the Company under the Continued Dumping and Subsidy Act of 2000 (CDSOA). A substantial portion of the Company’s $604,000 award was withheld at the end of 2003 pending the outcome of a lawsuit challenging the distribution method of the import duties. In September 2004, U.S. Customs notified the Company that a favorable court ruling in July 2004 permits the Company to collect the balance of its 2003 award and participate in future distributions. The Company received the balance of the funds due in October 2004.
March 31, 2005 | December 31, 2004 | |||||
Total assets: | ||||||
Universal Stainless & Alloy Products | $ | 91,893 | $ | 86,375 | ||
Dunkirk Specialty Steel | 21,991 | 18,418 | ||||
Corporate assets | 3,323 | 3,047 | ||||
Consolidated total assets | $ | 117,207 | $ | 107,840 | ||
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
An analysis of the Company’s operations for the three- and nine-monththree-month periods ended September 30,March 31, 2005 and 2004 and 2003 is as follows (dollars in thousands):
For the Three-month period ended | For the Nine-month period ended | For the Three-month period ended March 31, | ||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | |||||||||||||||
Net sales: | ||||||||||||||||||||
Net sales | ||||||||||||||||||||
Stainless steel | $ | 26,529 | $ | 14,215 | $ | 65,586 | $ | 38,064 | $ | 33,619 | $ | 16,168 | ||||||||
Tool steel | 4,277 | 2,828 | 11,185 | 7,328 | 6,017 | 3,166 | ||||||||||||||
High-strength low alloy steel | 1,160 | 619 | 3,085 | 1,958 | 1,122 | 861 | ||||||||||||||
High-temperature alloy steel | 473 | 608 | 1,795 | 1,750 | 1,025 | 709 | ||||||||||||||
Conversion services | 707 | 247 | 1,635 | 845 | 1,114 | 332 | ||||||||||||||
Other | 151 | 108 | 344 | 217 | 122 | 71 | ||||||||||||||
Total net sales | 33,297 | 18,625 | 83,630 | 50,162 | 43,019 | 21,307 | ||||||||||||||
Cost of products sold | 27,701 | 17,296 | 71,576 | 47,917 | 36,410 | 19,344 | ||||||||||||||
Selling and administrative expenses | 1,873 | 1,507 | 5,348 | 4,425 | 1,907 | 1,528 | ||||||||||||||
Operating income (loss) | $ | 3,723 | $ | (178 | ) | $ | 6,706 | $ | (2,180 | ) | ||||||||||
Operating income | $ | 4,702 | $ | 435 | ||||||||||||||||
Market Segment Information
For the Three-month period ended | For the Nine-month period ended | For the Three-month period ended March 31, | ||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | |||||||||||||
Net sales: | ||||||||||||||||||
Service centers | $ | 13,443 | $ | 7,478 | $ | 35,616 | $ | 22,333 | $ | 18,307 | $ | 9,906 | ||||||
Rerollers | 9,208 | 5,246 | 21,465 | 13,285 | 12,028 | 4,070 | ||||||||||||
Forgers | 6,232 | 3,052 | 15,181 | 7,054 | 6,263 | 3,816 | ||||||||||||
Original equipment manufacturers | 2,263 | 1,423 | 6,101 | 3,844 | ||||||||||||||
Wire redrawers | 1,307 | 1,095 | 3,346 | 2,615 | 2,872 | 1,196 | ||||||||||||
Original equipment manufactures | 2,324 | 1,934 | ||||||||||||||||
Conversion services | 707 | 247 | 1,635 | 845 | 1,114 | 332 | ||||||||||||
Miscellaneous | 137 | 84 | 286 | 186 | 111 | 53 | ||||||||||||
Total net sales | $ | 33,297 | $ | 18,625 | $ | 83,630 | $ | 50,162 | $ | 43,019 | $ | 21,307 | ||||||
Tons shipped | 13,470 | 9,600 | 34,667 | 25,658 | ||||||||||||||
Tons Shipped | 15,230 | 9,087 | ||||||||||||||||
Three- and nine-month periodsThree-month period ended September 30,March 31, 2005 as compared to the same period in 2004
The increase in net sales for the three-month period ended March 31, 2005 as compared to the similar period in 2003
Net sales for the three- and nine-month periods ended September 30, 2004 increased $14.7 million and $33.5 million, respectively, as compared to the similar periods in 2003. These increases are primarily due toreflects increased shipments within each market segment as well as the adoption of surcharge mechanisms for additional raw material components and otherbase price increases implemented during 2004. In addition, the 2004 financial results have benefited from greater demand of higher value-added niche products due to improved economic conditions.past 12 month period. Shipments of aerospace, power generation, petrochemical and tool steel products for the three- and nine-month periods ended September 30, 2004 have increased substantially in comparison to the same prior year periods.period due to improved economic conditions and greater demand for higher value-added niche products.
Cost of products sold, as a percentage of net sales, was 83.2%84.6% and 92.9%90.8% for the three-month periods ended September 30,March 31, 2005 and 2004, and 2003, respectively, and was 85.6% and 95.5% for the nine-month periods ended September 30, 2004 and 2003, respectively. The decreases aredecrease is primarily due to increasedthe impact of raw material surcharges and base price increases implemented in the past 12 months, as well as higher production volumes, improved mix of products shipped and higher selling prices, partially offset bymore than offsetting higher raw material, labor, utilityenergy and other manufacturing supply costs.
Selling and administrative expenses increased by $366,000 and $923,000 inexpense was $1.9 million for the three- and nine-month periods ended September 30,current quarter, an increase of $379,000 from the first quarter 2004 respectively, as compared to similar periods in 2003. These increases areamount of $1.5 million. The increase was primarily due to higher employment costs.the write-off of an office building at the Dunkirk Specialty Steel facility in the amount of $184,000. Attempts to sell the Dunkirk Building since February 2002 have not been successful. In addition, the Company increased its bad debt reserve by $176,000does not have any prospective buyers for the Dunkirk Building as a result of a customer filing for Chapter 11 bankruptcy protection duringMarch 31, 2005. The change in circumstances caused the three-month period ended September 30, 2004.Company’s management to reduce the value of the Dunkirk Building at this time.
Interest expense and other financing costs increased by $8,000 and $13,000from $88,000 for the three- and nine-month periods ended September 30, 2004 as compared to the similar periods in 2003. The increases were primarily due to an increased use of the revolving line of credit, partially offset by the continued reduction in long-term debt outstanding.
Other income for the three- and nine-month periods ended September 30, 2004 included $565,000, net of expenses, related to the delayed receipt of the remaining 2003 import duties awarded the Company under the Continued Dumping and Subsidy Act of 2000 (CDSOA). A substantial portion of the Company’s $604,000 award was withheld at the end of 2003 pending the outcome of a lawsuit challenging the distribution method of the import duties. In September 2004, U.S. Customs notified the Company that a favorable court ruling in July 2004 permits the Company to collect the balance of its 2003 award and participate in future distributions. The Company received the balance of the funds due in October 2004.
During the three-month period ended September 30,March 31, 2004 to $172,000 for the three-month period ended March 31, 2005 primarily due to the utilization of the Company’s estimated annualrevolving credit facility to fund working capital requirements occurring during the normal course of business over the past year.
The effective income tax rate decreased fromutilized in the three-month periods ended March 31, 2005 and 2004 was 36.0% and 36.1%, which was utilized through June 30, 2004, to 35.0%.respectively. The effective income rate utilized in the current period reflects the anticipated effect of the Company’s permanent tax deductions against expected income levels in 2004. The reduction increased net income by $70,000 for the three-month period ended September 30, 2004.2005.
Business Segment Results
An analysis of the net sales and operating income for the reportable segments for the three- and nine-monththree-month periods ended September 30,March 31, 2005 and 2004 and 2003 is as follows (dollars in thousands):
Universal Stainless & Alloy Products SegmentSegment:
For the Three-month period ended | For the Nine-month period ended | For the Three-month period ended March 31, | |||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | ||||||||||||||
Net sales: | |||||||||||||||||||
Net sales | |||||||||||||||||||
Stainless steel | $ | 18,373 | $ | 9,805 | $ | 45,469 | $ | 24,865 | $ | 21,777 | $ | 10,720 | |||||||
Tool steel | 4,155 | 2,744 | 10,902 | 6,924 | 5,907 | 3,080 | |||||||||||||
High-strength low alloy steel | 575 | 313 | 1,387 | 1,184 | 393 | 413 | |||||||||||||
High-temperature alloy steel | 451 | 438 | 1,526 | 1,463 | 1,025 | 549 | |||||||||||||
Conversion services | 632 | 208 | 1,356 | 716 | 951 | 249 | |||||||||||||
Other | 146 | 108 | 298 | 202 | 117 | 46 | |||||||||||||
24,332 | 13,616 | 60,938 | 35,354 | 30,170 | 15,057 | ||||||||||||||
Intersegment | 6,867 | 2,552 | 14,588 | 7,714 | 8,255 | 3,788 | |||||||||||||
Total net sales | 31,199 | 16,168 | 75,526 | 43,068 | 38,425 | 18,845 | |||||||||||||
Material cost of sales | 14,999 | 6,247 | 33,923 | 15,887 | 19,826 | 7,602 | |||||||||||||
Operation cost of sales | 11,990 | 8,362 | 32,733 | 24,733 | 14,779 | 9,811 | |||||||||||||
Selling and administrative expenses | 1,310 | 1,005 | 3,672 | 2,923 | 1,141 | 1,031 | |||||||||||||
Operating income (loss) | $ | 2,900 | $ | 554 | $ | 5,198 | $ | (475 | ) | ||||||||||
Operating income | $ | 2,679 | $ | 401 | |||||||||||||||
Net sales for the three- and nine-month periodsthree-month period ended September 30, 2004March 31, 2005 for this segment, which consists of the Bridgeville and Titusville facilities, increased by $15.0was $38.4 million, or 93%,$19.6 million more than the same period a year ago. The 104% net sales increase reflects substantial growth in comparison to the three-month period ended September 30, 2003all customer categories, both in tons shipped and $32.5 million, or 75%, in comparison to the similar 2003 nine-month period. These increases are primarily due to increased shipments within each market segment as well as the adoption of surcharge mechanisms for additional raw material components and otherbase price increases implemented during 2004. In addition, the 2004 financial results have benefited from greater demand of higher value-added niche products due to improved economic conditions. Shipments of aerospace, power generation, petrochemical and tool steel products for the three- and nine-month periods ended September 30, 2004 have increased substantially in comparison to the same prior year periods.
Operating income for the Universal Stainless & Alloy Products segment increased by $2.3 million for the three-month period ended September 30,from first quarter 2004 as compared to September 30, 2003 and increased by $5.7$2.7 million, for the nine-month period ended September 30, 2004. The increases areor 7.0% of net sales. This increase was primarily due to increased production volumes, improved mix of products shippedhigher sales volume and higher selling prices,base price increases, partially offset by higher raw material, labor, utility and other manufacturing supply costs.the write-off of $342,000 of fixed assets in Bridgeville mainly for flat bar processing equipment resulting from the Company’s decision to move all of its small flat bar production to the Dunkirk facility.
Dunkirk Specialty Steel SegmentSegment:
For the Three-month period ended | For the Nine-month period ended | For the Three-month period ended March 31, | ||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | |||||||||||||||
Net sales: | ||||||||||||||||||||
Net sales | ||||||||||||||||||||
Stainless steel | $ | 8,156 | $ | 4,410 | $ | 20,117 | $ | 13,199 | $ | 11,842 | $ | 5,448 | ||||||||
Tool steel | 122 | 84 | 283 | 404 | 110 | 86 | ||||||||||||||
High-strength low alloy steel | 585 | 306 | 1,698 | 774 | 729 | 448 | ||||||||||||||
High-temperature alloy steel | 22 | 170 | 269 | 287 | — | 160 | ||||||||||||||
Conversion services | 75 | 39 | 279 | 129 | 163 | 83 | ||||||||||||||
Other | 5 | — | 46 | 15 | 5 | 25 | ||||||||||||||
8,965 | 5,009 | 22,692 | 14,808 | 12,849 | 6,250 | |||||||||||||||
Intersegment | 519 | 216 | 1,572 | 596 | 818 | 495 | ||||||||||||||
Total net sales | 9,484 | 5,225 | 24,264 | 15,404 | 13,667 | 6,745 | ||||||||||||||
Material cost of sales | 4,716 | 3,170 | 12,095 | 8,723 | 7,114 | 3,477 | ||||||||||||||
Operation cost of sales | 3,042 | 2,285 | 8,645 | 6,884 | 3,924 | 2,737 | ||||||||||||||
Selling and administrative expenses | 563 | 502 | 1,676 | 1,502 | 766 | 497 | ||||||||||||||
Operating income (loss) | $ | 1,163 | $ | (732 | ) | $ | 1,848 | $ | (1,705 | ) | ||||||||||
Operating income | $ | 1,863 | $ | 34 | ||||||||||||||||
Net sales for the three- and nine-month periodsquarter ended September 30, 2004 for this segmentMarch 31, 2005 increased by $4.3$6.9 million, or 82%, in comparison to the three-month period ended September 30, 2003 and $8.9 million, or 58%, in comparison to103% from the similar 2003 nine-month period. These increases are primarily due to increased shipments within each marketperiod in 2004 as a result of greater sales across all markets, especially service centers and wire redrawers. The Dunkirk Specialty Steel segment as well as the adoption of surcharge mechanisms for additional raw material components and other price increases implemented during 2004. In addition, the 2004 financial results havesales also benefited from process improvements at the Titusville and Bridgeville facilities that created greater demandvolumes of higher value-added niche products due to improved economic conditions. Shipments of aerospace, power generation, and petrochemical products forreroll billet feedstock shipped during the three- and nine-month periods ended September 30, 2004 have increased substantially in comparison to the same prior year periods.current quarter.
OperatingThe Dunkirk Specialty Steel segment generated operating income increased byof $1.9 million, forwhich is 13.6% of net sales in the three-month period ended September 30, 2004 ascurrent quarter compared to September 30, 2003 and increased by $3.6 million for the nine-month period ended September 30,a nearly break-even first quarter 2004. The increases are primarily due to increased production volumes, improved mix of products shipped and higher selling prices,operating income achieved was partially offset by higher raw material, labor, utility and other manufacturing supply costs.the write-off of an office building that was part of the original purchase of the Dunkirk assets in February 2002. The asset value of $184,000 was written off once it was determined that there were no perspective buyers for the property. The building had been available for sale since the Company purchased Dunkirk Specialty Steel in early 2002.
Liquidity and Capital Resources
The Company has financed its operating activities during the three-month period ended March 31, 2005 through cash flows from operations and cash on hand at the beginning of the period, andalong with additional borrowings. At September 30, 2004,March 31, 2005, working capital approximated $41.6$53.2 million, as compared to $33.4$47.9 million at December 31, 2003.2004. The ratio of current assets to current liabilities decreased from 4.2:3.6:1 at December 31, 20032004 to 3.3:1 at September 30, 2004.March 31, 2005. The debt to total capitalization ratio was 14.3%is 18.1% at September 30, 2004March 31, 2005 and 11.3%17.5% at December 31, 2003.
Cash received from sales of $73.6$ 39.1 million and $48.5$ 18.5 million for the nine-month periods ended September 30, 2004 and 2003 representrepresents the primary source of cash from operations.operations for the three-month periods ended March 31, 2005 and March 31, 2004 respectively. An analysis of the primary uses of cash from operations is as follows:
For the Nine-month period ended | For the Three-month period ended March 31, | |||||||||||
2004 | 2003 | 2005 | 2004 | |||||||||
Raw material purchases | $ | 40,284 | $ | 17,005 | $ | 21,220 | $ | 11,664 | ||||
Employment costs | 17,994 | 14,337 | 8,014 | 5,754 | ||||||||
Utilities | 9,004 | 7,092 | 3,842 | 3,206 | ||||||||
Other | 11,488 | 8,488 | 6,837 | 1,712 | ||||||||
Total uses of cash from operations | $ | 78,770 | $ | 46,922 | ||||||||
Total uses of cash | $ | 39,913 | $ | 22,326 | ||||||||
Cash used to fundin raw material purchases employment costs and utilities increased duringin the nine-month period ended September 30, 20042005 first quarter in comparison to the similar year-agosame period in 2004 primarily due to increased saleshigher quantities of product purchased and significantly higher transaction prices. Increased employment costs are primarily due to higher production volumes and increased payouts under the Company’s profit
sharing and other incentive compensation plans. Increased utility costs are primarily due to higher consumption and rates charged for electricity and natural gas. In October 2004, the Company’s electricity costs at the Bridgeville facility increased by approximately $200,000 per month due to a Public Utility Commission ruling that reduced the number of off-peak power hours available to conduct its melting operations. The increase in other uses of cash, the majority of which is cash for outside conversion services, plant maintenance and production supplies, is directly attributable to support higher production volumes.
The Company continuously monitors market price fluctuations of its key raw materials. The following table reflects the average market value per pound for selected months impacting raw material costs forduring the nine-month periods ended September 30, 2003 and 2004.last two-year period.
December 2002 | September 2003 | December 2003 | September 2004 | Dec 2003 | March 2004 | Dec 2004 | March 2005 | |||||||||||||||||
Nickle | $ | 3.26 | $ | 4.52 | $ | 6.43 | $ | 6.02 | ||||||||||||||||
Nickel | $ | 6.43 | $ | 6.22 | $ | 6.25 | $ | 7.34 | ||||||||||||||||
Chrome | $ | 0.33 | $ | 0.47 | $ | 0.54 | $ | 0.68 | $ | 0.54 | $ | 0.70 | $ | 0.70 | $ | 0.75 | ||||||||
Molybdenum | $ | 3.51 | $ | 6.14 | $ | 7.10 | $ | 18.14 | $ | 7.10 | $ | 9.98 | $ | 32.46 | $ | 33.86 | ||||||||
Carbon Scrap | $ | 0.06 | $ | 0.08 | $ | 0.09 | $ | 0.17 | $ | 0.09 | $ | 0.13 | $ | 0.18 | $ | 0.11 |
The market values for these raw materials, most notably carbon scrap, have continuedCompany’s capital expenditures were approximately $584,000 and $174,000 in the first quarters 2005 and 2004, respectively. The capital expenditure level is anticipated to increase in 2004. throughout the remainder of 2005, although all capital improvements projects are evaluated independently and are based upon current market conditions and managements assessment of plant capacity and efficiency considerations.
The Company began to calculate its nickel surcharge using an $0.18 per pound premium over the London Metal Exchange (LME) prices on February 4, 2004, implemented an iron surcharge component on February 16, 2004, expanded the use of surcharges to include tool steel products on May 1, 2004 and implementeddoes not maintain off-balance sheet arrangements nor does it participate in non-exchange traded contracts requiring fair value accounting treatment or material related party transaction arrangements.
The Company maintains a manganese surcharge componentcredit agreement with PNC Bank for a $15.0 million revolving credit facility (“PNC Line”) with a term expiring on June 1, 2004.30, 2006. This credit agreement also includes a term loan (“PNC Term Loan”) scheduled to mature on June 30, 2006. The nickel surcharge premium per pound was increased from $0.18 to $0.23credit agreement is collateralized by substantially all of the Company’s assets. As of March 31, 2005, the Company had $5.4 million of its $15.0 million revolving line of credit with PNC Bank available for borrowing.
Interest on August 1, 2004.borrowings under the PNC Line and the PNC Term Loan is based on short-term market rates, which may be further adjusted, based upon the Company maintaining certain financial ratios. In addition, the Company has experienced higher energy, transportationpays a commitment fee of 0.5% per annum on the unused portion of the PNC Line. As a condition of the PNC Line and manufacturing supply costs during 2004. In response,the PNC Term Loan, the Company has announced several sales price increases during 2004. There can be no assurance that these sales price increases will completely offsetis required to maintain certain levels of net worth, working capital and other financial ratios to limit the Company’s rising costs.amount of capital expenditures it may incur without PNC Bank’s approval and to restrict the payment of dividends. The Company was in compliance with all financial ratios and restrictive covenants at March 31, 2005.
The Company had capital expenditures for the nine-month period ended September 30, 2004 of $2.4 million. These funds have been primarily used to purchase additional annealing furnaces, saws and a reheat furnace for the Company’s Universal Rolling mill located at its Bridgeville facility to meet the increased market demand for the Company’s products.
Effective January 1,In 2003, the Company entered into a $200,000 Deferred Loan Agreement maturing on December 31, 2006 with the City of Dunkirk New York.Local Development Corporation. No principal or interest payments will be required under the Deferred Loan Agreement provided that the Company hires and retains 30 new employees andthrough the Deferred Loan Agreement maturation date, with more than 50% of those jobs are made available to certain Dunkirk City residents. TheAs of March 31, 2005, the Company believes that it will meet the conditions of the Deferred Loan Agreement.Agreement, although it can make no assurances to that effect. Therefore, the proceeds have been applied to reduce the acquisition cost of new equipment at the Company’s Dunkirk facility.
The Company satisfies its capital requirements primarily through the sale of Common Stock and the issuance of long-term debt. The Company does not maintain off-balance sheet arrangements other than operating leases nor does it participate in non-exchange traded contracts requiring fair value accounting treatment or material related party transaction arrangements.
At September 28, 2004, the Company increased its revolving line of credit with PNC Bank from $6.5 million to $15 million to finance increased working capital requirements in response to the growing demand for the Company’s products and increased production capacity created as a result of its capital expenditures. At September 30, 2004 the Company had $10.4 million available for borrowings. The Company is in compliance with its covenants as of September 30, 2004.Critical Accounting Policies
Revenue recognition is the most critical accounting policy of the Company. The Company anticipatesmanufactures specialty steel product in accordance with customer purchase orders that contain specific product requirements. Each purchase order provides detailed information regarding the requirements for product acceptance. Executed material certification forms are completed indicating the Company’s compliance with the customer purchase order before the specialty steel products are packaged and shipped to the customer. Revenue is generally recognized at point of shipment because risk of loss and title has transferred. Revenue is also recognized in certain situations in which products available for shipment are held at the Company’s facility beyond the stated shipment date at the customer’s specific request. The impact on revenue was less than 1% in each period presented.
In addition, management constantly monitors the ability to collect its unpaid sales invoices and the valuation of its inventory. The allowance for doubtful accounts includes the value of outstanding invoices issued to customers currently operating under the protection of the federal bankruptcy law and other amounts that are deemed potentially not collectible. An inventory reserve is provided for material on hand for which management believes cost exceeds fair market value and for material on hand for more than one year not assigned to a specific customer order.
Long-lived assets are reviewed for impairment annually by each operating facility. An impairment write-down will be recognized whenever events or changes in circumstances indicate that the carrying value may not be recoverable through estimated future undiscounted cash flows. The Company incurred a write-off of an office building that was part of the original purchase of the Dunkirk assets in February 2002. The asset value of $184,000 was written off once it was determined that there were no perspective buyers for the property. The building had been available for sale since the Company purchased Dunkirk Specialty Steel in early 2002. Other than this transaction, the Company has not recognized an impairment write-down on any of its assets held at March 31, 2005.
In addition, management assesses the need to record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company believes it will fund its 2004 working capital requirements, its capital expenditures and the stock repurchase program primarily from fundsgenerate sufficient income in addition to taxable income generated from operations and borrowings. The Company’s long-term liquidity requirements, including capital expenditures, are expectedthe reversal of its temporary differences to be financed by a combination of internally generated funds, borrowings and other sources of external financing if needed.utilize the deferred tax assets recorded at March 31, 2005.
20042005 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 fourthsecond quarter 20042005 sales will range from $32$40 to $37$45 million and that its earnings per diluted shareEPS will range from $0.32$0.40 to $0.37 before$0.45. This compares with sales of $29.0 million and diluted EPS of $0.25 in the impact of any monies the Company may receive related to the CDSOA for the current year. In the fourthsecond quarter of 2003, sales were $18.8 million and the Company incurred a net loss per diluted share of $0.04.2004. The following factors were considered in developing these estimates:
New Accounting Pronouncements
No new accounting pronouncements have been issued during the three-month period ended September 30, 2004 that would have a material impact on the Company’s financial statements. Further the Company has reviewed the status of its accounting pronouncements and believes there are no significant changes from that disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, except as provided in this Form 10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has reviewed the status of its market risk and believes there are no significant changes from that disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003,2004, except as provided in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. CONTROLS AND PROCEDURES
AnThe Company’s management performed an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of ourCompany’s disclosure controls and procedures. Based on that evaluation, management, including the CEOCompany’s President and CFO,Chief Executive Officer and the Vice President of
Finance, Chief Financial Officer and Treasurer concluded that, ouras of the end of the fiscal year covered by this quarterly report, the Company’s disclosure controls and procedures wereare effective asin the timely identification of September 30, 2004 to ensure thatmaterial information required to be disclosedincluded in reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported in accordanceCompany’s periodic filings with the rules and forms of the Securities and Exchange Commission.SEC. During the quarter ended September 30, 2004,March 31, 2005, there werehave been no significant changes in ourthe Company’s internal controlscontrol over financial reporting identified in connection with the evaluation thereof, which have materially affected, or in other factors that could significantlyare reasonably likely to materially affect, the Company’s internal controls.control over financial reporting.
On June 29, 2001, suit was filed against the Company in the Court of Common Pleas of Allegheny County, Pennsylvania by Teledyne Technologies, Incorporated (“Teledyne”). The suit alleges that steel product manufactured by the Company was defective and the Company was or should have been aware of the defects. Teledyne has alleged that the defective steel supplied by the Company caused certain crankshafts sold by Teledyne for use in aircraft engines to be defective. As a result, Teledyne is claiming damages relating to the recall, replacement and repair of aircraft engines.
In 2002, Teledyne was unsuccessful in its pursuit of a similar claim brought against another specialty steel producer who supplied the same steel product. After in-depth investigation, it is the Company’s position that the suit is without merit and it intends to vigorously defend that position. Additionally, the Company believes that it has insurance coverage that is available for this claim and has reached an agreement with United States Aviation Underwriters, Inc., (“USAU”) a New York corporation, as managers and on behalf of United States Aircraft Insurance Group (“USAIG”), the Company’s Aircraft Products Liability insurance carrier, regarding the allocation of certain potential costs associated with the Teledyne claim. At this time, the Company is engaged in discovery and believes that the final disposition of this suit will not have a material adverse effect on the financial condition and the results of operations of the Company.
On April 7, 2003, United States Aviation Underwriters, Inc. (“USAU”), a New York corporation, as managers and on behalf of United States Aircraft Insurance Group (“USAIG”), the Company’s Aircraft Products Liability insurance carrier, filed suit in the Court of Common Pleas of Allegheny County, Pennsylvania asking the court for a declaratory judgment as to what actual liability and obligations were applicable to USAIG relating to the insurance policy issued to the Company, and the allocations made by Teledyne. The Company and USAU reached a settlement agreement as of May 1, 2004 regarding the allocation of certain potential costs associated with the Teledyne claim and have agreed to jointly file a motion to have the declaratory suit dismissed. On July 27, 2004, the suit brought by USAU was dismissed.Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
None.
31.1 | Certification of | |
31.2 | Certification of | |
32.1 | Certification of |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. | |||
Date: | |||
/s/ C. M. McAninch | |||
Clarence M. McAninch President and Chief Executive Officer (Principal Executive Officer) | |||
| |||
Date: May 12, 2005 | /s/ Richard M. Ubinger | ||
Richard M. Ubinger Vice President of Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
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