Universal Stainless & Alloy Products (USAP) 10-Q 2003 Q3 Quarterly report

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, 2003

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 7, 2003, there were 6,289,485 shares outstanding of the Registrant’s Common Stock, $.001 par value per share.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

This Quarterly Report on Form 10-Q contains historical information and forward-looking statements. Statements looking forward are included in this Form 10-Q pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties that may cause the Company’s actual results in future periods to differ materially from forecasted results. Those risks include, among others, risks associated with the limited operating history of Dunkirk Specialty Steel, LLC, risks associated with the receipt, pricing and timing of future customer orders, risks related to the financial viability of customers, risks associated with the manufacturing process and production yields, and risks related to property, plant and equipment. In the context of forward-looking information provided in this Form 10-Q and in other reports, please refer to the discussion of risk factors as well as the other information detailed in the Company’s Annual Report on Form 10-K and other filings with the Securities and Exchange Commission during the past 12 months.

	DESCRIPTION	PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Condensed Statements of Operations	2
	Consolidated Condensed Balance Sheets	3
	Consolidated Condensed Statements of Cash Flows	4
	Notes to the Unaudited Consolidated Condensed Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13
Item 4.	Controls and Procedures	13
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	13
Item 6.	Exhibits and Reports on Form 8-K	14
SIGNATURES		15
CERTIFICATIONS

1

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Information)

(Unaudited)

	For the Three-month period ended September 30,						For the Nine-month period ended September 30,
	2003			2002			2003			2002
Net sales	$	18,625		$	15,919		$	50,162		$	54,937
Cost of products sold		17,296			14,180			47,917			46,999
Selling and administrative expenses		1,507			1,541			4,425			4,451
Operating income (loss)		(178	)		198			(2,180	)		3,487
Interest expense and other financing costs		(100	)		(116	)		(289	)		(344	)
Other income		24			39			74			101
Income (loss) before taxes		(254	)		121			(2,395	)		3,244
Income tax expense (benefit)		(133	)		(70	)		(1,251	)		1,070
Net income (loss)	$	(121	)	$	191		$	(1,144	)	$	2,174
Earnings (loss) per common share
Basic	$	(0.02	)	$	0.03		$	(0.18	)	$	0.35
Diluted	$	(0.02	)	$	0.03		$	(0.18	)	$	0.35

The accompanying notes are an integral part of these consolidated condensed financial statements.

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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)

	September 30, 2003			December 31, 2002
ASSETS
Current assets
Cash and cash equivalents	$	3,193		$	3,308
Accounts receivable (less allowance for doubtful accounts of $202 and $298, respectively)		13,717			11,550
Inventory		22,905			22,717
Other current assets		4,919			3,581
Total current assets		44,734			41,156
Property, plant and equipment, net		40,464			42,246
Other assets		812			642
Total assets	$	86,010		$	84,044
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Trade accounts payable	$	6,749		$	4,190
Outstanding checks in excess of bank balance		510			275
Current portion of long-term debt		1,958			1,971
Accrued employment costs		1,262			1,019
Other current liabilities		610			163
Total current liabilities		11,089			7,618
Long-term debt		6,082			7,502
Deferred taxes		9,157			8,123
Total liabilities		26,328			23,243
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; 6,559,385 and 6,554,538 shares issued, respectively		7			7
Additional paid-in capital		28,302			28,277
Retained earnings		33,004			34,148
Treasury Stock at cost; 269,900 common shares held		(1,631	)		(1,631	)
Total stockholders’ equity		59,682			60,801
Total liabilities and stockholders’ equity	$	86,010		$	84,044

The accompanying notes are an integral part of these consolidated condensed financial statements.

3

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	For the Nine-month period ended September 30,
	2003			2002
Cash flow from operating activities:
Net income (loss)	$	(1,144	)	$	2,174
Adjustments to reconcile to net cash and cash equivalents provided by operating activities:
Depreciation and amortization		2,319			2,412
Deferred taxes		670			379
Tax benefit from exercise of stock options		—			428
Changes in assets and liabilities:
Accounts receivable, net		(2,167	)		426
Inventory		(188	)		(2,973	)
Trade accounts payable		2,559			1,648
Accrued employment costs		243			(153	)
Refundable taxes		(930	)		—
Other, net		227			(1,850	)
Net cash provided by operating activities		1,589			2,491
Cash flows from investing activities:
Acquisition of assets and real property through purchase agreements		—			(1,283	)
Capital expenditures		(713	)		(3,877	)
Net cash used in investing activities		(713	)		(5,160	)
Cash flows from financing activities:
Proceeds from the exercise of stock options		—			1,852
Proceeds from issuance of Common Stock		25			23
Proceeds from deferred loan agreement		200			—
Repayments of long-term debt		(1,451	)		(1,381	)
Increase in outstanding checks in excess of bank balance		235			667
Net cash (used in) provided by financing activities		(991	)		1,161
Net (decrease) in cash and cash equivalents		(115	)		(1,508	)
Cash and cash equivalents at beginning of period		3,308			5,454
Cash and cash equivalents at end of period	$	3,193		$	3,946
Supplemental disclosure of cash flow information:
Interest paid	$	255		$	249
Income taxes paid	$	7		$	1,293

The accompanying notes are an integral part of these consolidated condensed financial statements.

4

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The accompanying unaudited consolidated condensed statements of operations for the three- and nine-month periods ended September 30, 2003 and 2002, balance sheets as of September 30, 2003 and December 31, 2002, and statements of cash flows for the nine-month periods ended September 30, 2003 and 2002 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, 2002. 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, 2003 and December 31, 2002 and the consolidated results of operations and of cash flows for the periods ended September 30, 2003 and 2002, 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 (loss) per common share computations are as follows:

	For the Three-month period ended September 30,		For the Nine-month period ended September 30,
	2003	2002	2003	2002
Weighted average number of shares of Common Stock outstanding	6,289,485	6,280,536	6,286,271	6,178,207
Effect of dilutive securities	—	16,359	—	42,702
Weighted average number of shares of Common Stock outstanding, as adjusted	6,289,485	6,296,895	6,286,271	6,220,909

The Company also had 9,206 and 3,794 common stock equivalents outstanding for the three- and nine-month periods ended, respectively, which were not included in the common share computations for earnings (loss) per share as the common stock equivalents are anti-dilutive.

Options to purchase 404,666 shares of common stock at a range from $7.10 to $15.60 per share were outstanding during the nine-month period ended 2003 but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares

Note 3 – Stock-Based Compensation Plans

The following table illustrates the effect on net income (loss) and earnings (loss) 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,
	2003			2002			2003			2002
Net Income (loss), as reported	$	(121	)	$	191		$	(1,144	)	$	2,174
Total stock-based compensation expense determined under fair-value based method, net of taxes		(21	)		(28	)		(65	)		(86	)
Pro forma net income (loss)	$	(142	)	$	163		$	(1,209	)	$	2,088
Earnings (loss) per common share:
Basic – as reported	$	(0.02	)	$	0.03		$	(0.18	)	$	0.35
Basic – pro forma	$	(0.02	)	$	0.03		$	(0.19	)	$	0.34
Diluted – as reported	$	(0.02	)	$	0.03		$	(0.18	)	$	0.35
Diluted – pro forma	$	(0.02	)	$	0.03		$	(0.19	)	$	0.34

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Note 4 – New Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS 143 was effective for the Company on January 1, 2003 and did not have a material impact on the Company’s results of operations or financial condition.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). This statement supersedes Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires the recognition of a liability for costs associated with an exit or disposal activity when incurred. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS 146 are effective for any exit and disposal activities initiated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 will be effective for any guarantees that are issued or modified after December 31, 2002. The provisions of FIN 45 are not expected to have a material impact on our results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123” (“SFAS 148”). This statement amends SFAS No. 123, “Accounting for Stock Based Compensation” to provide alternative methods of voluntary transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also requires disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The Company does not intend to change its current method of accounting for stock-based employee compensation unless required by the issuance of a new pronouncement. The Company has adopted the disclosure requirements of SFAS 148 as of December 31, 2002.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities (“VIE”) – an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for VIE’s created after January 31, 2003; for VIE’s in existence prior to January 31, 2003 it’s application is effective the first period ending after December 15, 2003 (as of December 31, 2003, for an entity with a calendar year-end or quarter-end of December 31). This statement was adopted during the first quarter of 2003 and did not impact the Company’s results of operations or financial condition.

In April 2003, the FASB issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging”. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”. This statement was adopted during the third quarter of 2003 and did not impact the Company’s results of operations or financial condition.

In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement was adopted during the third quarter of 2003 and did not impact the Company’s results of operations or financial condition.

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Note 5 – Inventory

The major classes of inventory are as follows (dollars in thousands):

	September 30, 2003		December 31, 2002
Raw materials and supplies	$	1,857	$	1,719
Semi-finished and finished steel products		18,743		18,588
Operating materials		2,305		2,410
Total inventory	$	22,905	$	22,717

Note 6 – Property, Plant and Equipment

Property, plant and equipment consists of the following (dollars in thousands):

	September 30, 2003			December 31, 2002
Land and land improvements	$	843		$	822
Buildings		5,987			5,987
Machinery and equipment		49,266			48,110
Construction in progress		306			980
		56,402			55,899
Accumulated depreciation		(15,938	)		(13,653	)
Property, plant and equipment, net	$	40,464		$	42,246

Property, plant and equipment includes a capital lease with Armco, which merged with and into AK Steel in 1999 (“Armco”), for the land and certain buildings and structures located in Bridgeville (the “Bridgeville Lease”). During the third quarter of 2003, the Company exercised its option to purchase all of the property permitted under the Bridgeville Lease for $1.

The ESR building, which houses the Company’s four electro-slag remelting furnaces and ancillary equipment, was not included in the option to purchase. The Company will continue to operate the equipment in the ESR building under the existing lease due to expire on August 15, 2004. The Company has expressed an interest to purchase or extend the current lease for the ESR building to AK Steel. In the event that the lease of the ESR building is not extended and the property is not purchased, the relocation of the ESR equipment would have an adverse material effect on the financial condition of the Company.

Effective January 1, 2003, the Company entered into a $200,000 Deferred Loan Agreement maturing on December 31, 2006 with the Dunkirk Local Development Corporation. No principal or interest payments will be required under the Deferred Loan Agreement provided that the Company hires 30 new employees and more than 50% of those jobs are made available to certain Dunkirk City residents. The Company believes that it will meet the conditions of the Deferred Loan 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.

Note 7 – Commitments and Contingencies

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.

Teledyne was recently 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. 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.

7

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 judgement 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. At this time, the Company is engaged in discovery and believes that USAIG is responsible for providing defense and damage coverage with regard to the Teledyne allegations. To date USAIG has provided for and continues to provide for a defense to the Teledyne claim. While the Company believes that insurance coverage is available for the defense and damages, if any, relating to the Teledyne claim, an unfavorable ruling in both the USAIG suit and the Teledyne claim could have a material adverse effect on the Company’s financial condition.

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. The Segment Data are as follows (dollars in thousands):

	For the Three-Month Period Ended September 30,						For the Nine-Month Period Ended September 30,
	2003			2002			2003			2002
Net sales:
Universal Stainless & Alloy Products	$	16,168		$	15,211		$	43,068		$	53,731
Dunkirk Specialty Steel		5,225			3,983			15,404			6,362
Intersegment		(2,768	)		(3,275	)		(8,310	)		(5,156	)
Consolidated net sales	$	18,625		$	15,919		$	50,162		$	54,937
Operating income (loss):
Universal Stainless & Alloy Products	$	554		$	489		$	(475	)	$	4,660
Dunkirk Specialty Steel		(732	)		(291	)		(1,705	)		(1,173	)
Total operating income (loss)	$	(178	)	$	198		$	(2,180	)	$	3,487
Interest expense and other financing costs:
Universal Stainless & Alloy Products	$	64		$	81		$	179		$	255
Dunkirk Specialty Steel		36			35			110			89
Total interest expense and other financing costs	$	100		$	116		$	289		$	344
Other income:
Universal Stainless & Alloy Products	$	15		$	27		$	55		$	78
Dunkirk Specialty Steel		9			12			19			23
Total other income	$	24		$	39		$	74		$	101

	September 30, 2003		December 31, 2002
Total assets:
Universal Stainless & Alloy Products	$	65,539	$	65,413
Dunkirk Specialty Steel		12,380		12,337
Corporate assets		8,091		6,294
Consolidated total assets	$	86,010	$	84,044

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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-month periods ended September 30, 2003 and 2002 are as follows (dollars in thousands):

	For the Three-Month Period Ended September 30,					For the Nine-Month Period Ended September 30,
	2003			2002		2003			2002
Net sales						��
Stainless steel	$	14,215		$	12,975	$	38,064		$	44,060
Tool steel		2,828			1,321		7,328			4,605
High-strength low alloy steel		619			660		1,958			3,124
High temperature alloy steel		608			536		1,750			1,725
Conversion services		247			352		845			1,181
Other		108			75		217			242
Total net sales		18,625			15,919		50,162			54,937
Cost of products sold		17,296			14,180		47,917			46,999
Selling and administrative expenses		1,507			1,541		4,425			4,451
Operating income (loss)	$	(178	)	$	198	$	(2,180	)	$	3,487

Three- and nine-month periods ended September 30, 2003 as compared to the similar periods in 2002

The increase in net sales for the three-month period ended September 30, 2003, as compared to the similar period in 2002, reflects increased sales of aerospace, power generation, petrochemical and tool steel products, partially offset by a decline in commodity products. The increases are primarily due to a strengthening economy, a weak dollar that made imports less attractive, and the Company’s ability to obtain new orders in a competitive market. The Company shipped approximately 9,600 tons and 8,600 tons for the three-month periods ended September 30, 2003 and 2002, respectively.

The decrease in net sales for the nine-month period ended September 30, 2003, as compared to the similar period in 2002, reflects lower sales of aerospace, power generation and commodity products, partially offset by increases in sales of petrochemical and tool steel products. The lower demand for aerospace and power generation products is a result of reduced demand for commercial aircraft for the airline industry as well as steam and gas turbines for the electric utility industry. The lower demand for commodity products for the three- and nine-month periods ended September 30, 2003, as compared to the similar periods in 2002 reflect the temporary benefit resulting from tariffs imposed by President Bush on certain imported specialty steel products in March 2002. The Company shipped approximately 25,700 tons and 29,600 tons for the nine-month periods ended September 30, 2003 and 2002, respectively.

Cost of products sold, as a percentage of net sales, was 92.9% and 89.1% for the three-month periods ended September 30, 2003 and 2002, respectively, and was 95.5% and 85.6% for the nine-month periods ended September 30, 2003 and 2002, respectively. During the three-month period ended September 30, 2003, the Company recorded a $537,000 write-down of finished and semi-finished inventory at its Bridgeville and Dunkirk operations, which will be used as scrap at its melt shop in Bridgeville. This write-down represents, as a percentage of net sales, 2.9% and 1.1% for the three- and nine-month periods ended September 30, 2003. The remaining increases are primarily due to higher raw material, labor and energy costs, as well as shifts in product mix and lower production volumes during the first six months of 2003. In addition, Dunkirk Specialty Steel, the Company’s wholly owned subsidiary that acquired the assets of Empire Specialty Steel on February 14, 2002 and became operational on March 14, 2002, has not generated sufficient order volumes to operate profitably since the completion of the acquisition.

Selling and administrative expenses decreased by $34,000 and $26,000, respectively, in the three-and nine-month periods ended September 30, 2003 as compared to September 30, 2002. The Bridgeville facility operated under a day-to-day extension of the collective bargaining agreement that was scheduled to terminate August 31, 2002. While the facility operated under the extension, management modified certain aspects of the facility’s normal operations

9

relating to production processes, security and maintenance to accommodate the situation. These modifications resulted in a $267,000 increase in selling and administrative expenses for the three-month period ended September 30, 2002. This one-time expense has been partially offset in 2003 by increases directly related to the increased business activity at Dunkirk Specialty Steel.

Interest expense and other financing costs decreased by $16,000 in the three-month period ended September 30, 2003 as compared to the three-month period ended September 30, 2002 and decreased by $55,000 in the nine-month period ended September 30, 2003 as compared to the nine-month period ended September 30, 2002. The decreases were primarily due to the continued reduction in long-term debt outstanding.

The effective income tax rate utilized in the nine-month periods ended September 30, 2003 and 2002 was 52.2% and 33%, respectively. The effective income tax rate utilized in the nine-month period ended September 30, 2003 reflects the anticipated effect of the Company’s permanent tax deductions against expected income levels in 2003.

Business Segment Results

An analysis of the net sales and operating income for the reportable segments for the three- and nine-month periods ended September 30, 2003 and 2002 is as follows (dollars in thousands):

	For the Three-Month Period Ended September 30,						For the Nine-Month Period Ended September 30,
	2003			2002			2003			2002
Net sales:
Universal Stainless & Alloy Products	$	16,168		$	15,211		$	43,068		$	53,731
Dunkirk Specialty Steel		5,225			3,983			15,404			6,362
Intersegment		(2,768	)		(3,275	)		(8,310	)		(5,156	)
Consolidated net sales	$	18,625		$	15,919		$	50,162		$	54,937
Operating income (loss):
Universal Stainless & Alloy Products	$	554		$	489		$	(475	)	$	4,660
Dunkirk Specialty Steel		(732	)		(291	)		(1,705	)		(1,173	)
Total operating income (loss)	$	(178	)	$	198		$	(2,180	)	$	3,487

Universal Stainless & Alloy Products Segment

Net sales for this segment, which consists of the Bridgeville and Titusville facilities, increased by $957,000 for the three-month period ended September 30, 2003, as compared to the similar period in 2002. This increase reflects higher sales of aerospace, power generation, petrochemical and tool steel products, partially offset by a decrease in sales of commodity products. Net sales decreased by $10.7 million for the nine-month period ended September 30, 2003, as compared to the similar period in 2002, primarily due to lower demand for aerospace, power generation and commodity products in the first half of 2003.

Operating income for the Universal Stainless & Alloy Products segment increased by $65,000 for the three-month period ended September 30, 2003, as compared to September 30, 2002. This increase is due primarily to increase production volumes and the $267,000 one-time charge to selling and administrative expenses recognized in the three-month period ended September 30, 2002. This improvement was partially offset by higher raw material, labor and energy costs as well as a $209,000 inventory write-down of finished and semi-finished inventory at its Bridgeville operation, which will be used as scrap at its melt shop in Bridgeville. Operating income for the segment decreased by $5.1 million for the nine-month period ended September 30, 2003, as compared to September 30, 2002. This decrease is due primarily to higher raw material, labor and energy costs, shift in product mix and lower production volumes at the Bridgeville and Titusville facilities.

Dunkirk Specialty Steel Segment

Net sales for the three- and nine-month periods ended September 30, 2003 for this segment increased by $1.2 and $9.0 million, respectively, in comparison to the same periods a year ago. These increases primarily reflect increased sales of bar, rod and wire products to an increasing customer base. The Dunkirk Specialty Steel segment has not generated sufficient order volume to operate profitably and has incurred operating losses in each quarter since the

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completion of the February 2002 acquisition. The loss for the three- and nine month periods ended September 30, 2003 was impacted by a $328,000 inventory write-down of finished and semi-finished inventory that will be used as scrap at the Company’s melt shop in Bridgeville.

Liquidity and Capital Resources

The Company has financed its operating activities through cash flows from operations and cash on hand at the beginning of the period. At September 30, 2003, working capital approximated $33.6 million, as compared to $33.5 million at December 31, 2002. The ratio of current assets to current liabilities decreased from 5.4:1 at December 31, 2002 to 4.0:1 at September 30, 2003. The debt to capitalization ratio was 11.9% at September 30, 2003 and 13.5% at December 31, 2002.

The Company’s capital expenditures for the three- and nine-month periods ended September 30, 2003 were $522,000 and $713,000, respectively. The Company will continue to limit its capital expenditures until current market conditions improve.

Effective January 1, 2003, the Company entered into a $200,000 Deferred Loan Agreement maturing on December 31, 2006 with the Dunkirk Local Development Corporation. No principal or interest payments will be required under the Deferred Loan Agreement provided that 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 meet the conditions of the Deferred Loan 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 funds generated from operations and borrowings and 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.

Effective September 29, 2003, the Company executed the Seventh Amendment to the Second Amended and Restated Credit Agreement with PNC Bank. The amendment replaced certain financial covenants with an asset-based funding formula that will permit the Company full access to its $6.5 million revolving line of credit through June 30, 2005. At September 30, 2003, the Company was in compliance with the financial covenants in effect.

There were no shares of Common Stock purchased by the Company during the nine-month period ended September 30, 2003. The Company is authorized to purchase an additional 45,100 shares of Common Stock as of September 30, 2003.

The Company anticipates that it will fund its 2003 working capital requirements, its capital expenditures and the stock repurchase program primarily from funds generated from operations and borrowings and the sale of Common Stock and the issuance of long-term debt. The Company’s long-term liquidity requirements, including capital expenditures, are expected to be financed by a combination of internally generated funds, borrowings and other sources of external financing if needed.

2003 Outlook

These are forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties that may cause the Company’s actual results to vary materially from those disclosed below.

The Company estimates that fourth quarter 2003 sales will range from $15 to $19 million and that diluted earnings per share will range from a net loss of $0.05 to breakeven. In the fourth quarter of 2002, sales were $15.9 million and the Company incurred a net loss per diluted share of $0.01. The fourth quarter 2002 results include other income of $310,000 or $0.03 per diluted share due to receipt of import duties related to the Continued Dumping and Subsidy Act of 2000. While the Company has applied for similar relief in 2003, it is unable to estimate the program’s impact on 2003 fourth quarter results at this time. The following factors were considered in developing these estimates:

• The Company’s total backlog approximated $18.3 million on September 30, 2003, as compared to $13.3 million at June 30, 2003.

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• Sales of non-commodity reroll products are expected to offset seasonal sales declines anticipated in other markets at the Universal Stainless and Alloy Products segment.

• Sales from the Dunkirk Specialty Steel segment are expected to approximate $5 million in the 2003 fourth quarter, based on its September 30, 2003 backlog of $3.3 million. Despite its growing customer base, Dunkirk’s sales are likely to remain at current levels because of expected lower sales to service centers. This is consistent with normal end-of-year buying patterns within the service center industry, Dunkirk’s main market.

New Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. SFAS 143 was effective for the Company on January 1, 2003 and did not have a material impact on the Company’s results of operations or financial condition.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). This statement supersedes Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS146 requires the recognition of a liability for costs associated with an exit or disposal activity when incurred. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS 146 will be effective for any exit and disposal activities initiated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 will be effective for any guarantees that are issued or modified after December 31, 2002. The provisions of FIN 45 are not expected to have a material impact on our results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123” (“SFAS 148”). This statement amends SFAS No. 123, “Accounting for Stock Based Compensation” to provide alternative methods of voluntary transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also requires disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The Company does not intend to change its current method of accounting for stock-based employee compensation unless required by the issuance of a new pronouncement. The Company has adopted the disclosure requirements of SFAS 148 as of December 31, 2002.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for VIE’s created after January 31, 2003; for VIE’s in existence prior to January 31, 2003 it’s application was effective beginning the third quarter of 2003. This statement was adopted during the first quarter of 2003 and did not impact the Company’s results of operations or financial condition.

In April 2003, the FASB issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging”. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”. This statement was adopted during the third quarter of 2003 and did not impact the Company’s results of operations or financial condition.

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In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement was adopted during the third quarter of 2003 and did not impact the Company’s results of operations or financial condition.

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, 2002, 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

The Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon their evaluation, management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed or submitted under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported in accordance with the rules and forms of the Securities and Exchange Commission. During the quarter ended September 30, 2003, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to their evaluation.

Part II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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. 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 judgement 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. At this time the Company is engaged in discovery and believes that USAIG is responsible for providing defense and damage coverage with regard to the Teledyne allegations. To date, USAIG has provided and continues to provide for a defense to the Teledyne claim. While the Company believes that insurance coverage is available for the defense and damages, if any, relating to the Teledyne claim, an unfavorable ruling in both the USAIG suit and the Teledyne claim could have a material adverse effect on the Company’s financial condition.

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Item 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

10.29	Seventh Amendment to Second Amended and Restated Credit Agreement, dated as of October 20, 2003, and effective as of September 29, 2003, between the Company and PNC Bank, National Association (filed herewith).
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbances-Oxley Act of 2002 (filed herewith).
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

b. Four Reports on Form 8-K were filed during the third quarter 2003.

1.) A Report on Form 8-K, under Item 9, was filed on July 23, 2003 which the Company announced the results for the second quarter 2003.

2.) Two reports on Form 8-K, under Item 4, were filed on September 10, 2003 which the Company and the Employee Stock Purchase Plan announced a change in independent accountants.

3.) A Report on Form 8-K, under Item 5, was filed on September 16, 2003 which the Company announced that it had increased its third quarter earnings estimates.

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SIGNATURES

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: November 7, 2003	/s/    C. M. MCANINCH
	Clarence. M. McAninch President and Chief Executive Officer (Principal Executive Officer)
Date: November 7, 2003	/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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