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 March 31, 2002
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 (IRS Employer
incorporation or organization) Identification No.)
600 Mayer Street
Bridgeville, PA 15017
(Address of principal executive offices, including zip code)
(412) 257-7600
(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 _________
------
As of April 30, 2002, there were 6,077,272 outstanding shares 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 acquisition of the Empire Specialty Steel assets and the successful
start-up 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 detailed in, as well as
the other information contained in, the Company's filings with the Securities
and Exchange Commission during the past 12 months.
DESCRIPTION PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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
March 31,
2002 2001
---- ----
Net sales $ 17,596 $ 21,259
Cost of products sold 14,245 17,121
Selling and administrative expenses 1,373 1,558
-------- --------
Operating income 1,978 2,580
Interest expense and other financing costs (110) (181)
Other income, net 31 20
-------- --------
Income before taxes 1,899 2,419
Income taxes 693 907
-------- --------
Net income $ 1,206 $ 1,512
======== ========
Earnings per common share
Basic $ 0.20 $ 0.25
======== ========
Diluted $ 0.20 $ 0.25
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
March 31, 2002 December 31, 2001
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 7,821 $ 5,454
Accounts receivable (less allowance for doubtful
accounts of $312 and $434) 12,067 13,257
Inventory 21,534 17,900
Other current assets 1,763 1,482
------- -------
Total current assets 43,185 38,093
Property, plant and equipment, net 40,804 41,202
Other assets 190 151
------- -------
Total assets $84,179 $79,446
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 5,224 $ 4,597
Outstanding checks in excess of bank balance 1,218 857
Current portion of long-term debt 1,835 1,832
Accrued employment costs 1,298 1,562
Other current liabilities 785 590
------- -------
Total current liabilities 10,360 9,438
Long-term debt 8,903 6,490
Deferred taxes 7,338 7,146
------- -------
Total liabilities 26,601 23,074
------- -------
Commitments and contingencies -- --
Stockholders' equity
Senior Preferred Stock, par value $.001 per share;
liquidation value $100 per share; 2,000,000
shares authorized; 0 shares issued and outstanding -- --
Common Stock, par value $.001 per share; 10,000,000
shares authorized; 6,347,172 shares issued 6 6
Additional paid-in capital 25,941 25,941
Retained earnings 33,262 32,056
Treasury Stock at cost; 269,900
common shares held (1,631) (1,631)
------- -------
Total stockholders' equity 57,578 56,372
------- -------
Total liabilities and stockholders' equity $84,179 $79,446
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the
Three-month period ended
March 31,
2002 2001
---- ----
Cash flow from operating activities:
Net income $ 1,206 $ 1,512
Adjustments to reconcile to net cash and cash equivalents provided
by operating activities:
Depreciation and amortization 772 641
Deferred taxes 272 215
Changes in assets and liabilities:
Accounts receivable, net 1,190 (1,794)
Inventory 328 (2,224)
Accounts payable 627 1,016
Accrued employment costs (264) 222
Other, net (43) 719
-------- --------
Net cash provided by operating activities 4,088 307
-------- --------
Cash flow from investing activities:
Acquisition of assets and real property through purchase agreements (1,271) --
Capital expenditures (352) (1,486)
-------- --------
Net cash used in investing activities (1,623) (1,486)
-------- --------
Cash flow from financing activities:
Proceeds from long-term debt -- 136
Long-term debt repayment (459) (458)
Borrowings under revolving line of credit -- 1,989
Repayments under revolving line of credit -- (1,403)
Increase (decrease) in outstanding checks in excess of bank balance 361 (78)
-------- --------
Net cash provided by (used in) financing activities (98) 186
-------- --------
Net increase (decrease) in cash and cash equivalents 2,367 (993)
Cash and cash equivalents at beginning of period 5,454 1,109
-------- --------
Cash and cash equivalents at end of period $ 7,821 $ 116
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 85 $ 211
Income taxes paid $ 91 $ 690
The accompanying notes are an integral part of these consolidated financial
statements.
4
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Basis of Presentation
- ---------------------
1) The accompanying unaudited consolidated condensed financial statements of
operations for the three-month periods ended March 31, 2002 and 2001,
balance sheets as of March 31, 2002 and December 31, 2001, and statements
of cash flows for the three-month periods ended March 31, 2002 and 2001,
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, 2001. 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 March 31, 2002 and December 31, 2001 and the consolidated
results of operations and of cash flows for the three- month periods ended
March 31, 2002 and 2001, and are not necessarily indicative of the results
to be expected for the full year.
Acquisition
- -----------
2) On February 8, 2002, the Company, through its wholly owned subsidiary,
Dunkirk Specialty Steel, LLC ("Dunkirk Specialty Steel"), entered into a
Personal Property Asset Purchase Agreement and a Real Property Purchase
Agreement (the "Purchase Agreements") with the New York Job Development
Authority (the "JDA") to acquire certain assets and real property formerly
owned by Empire Specialty Steel, Inc. at its idled production facility
located in Dunkirk, New York. These transactions were completed on February
14, 2002 and the plant became operational on March 14, 2002. Pursuant to
the Purchase Agreements, Dunkirk Specialty Steel paid $1.0 million in cash
and issued two ten-year, 5% interest bearing notes payable to the JDA for
the combined amount of $3.0 million. No principal or interest payments are
payable during the first year. The purchase price, including related
acquisition costs and adjustments for the discounted value of the JDA
notes, of $4,128,000 was allocated as follows (dollars in thousands):
Inventory $3,962
Assets Held for Sale 166
------
$4,128
======
Common Stock
- ------------
3) 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
March 31,
2002 2001
---- ----
Weighted average number of shares
of Common Stock outstanding 6,077,272 6,081,228
Assuming exercise of stock options and warrants reduced by
the number of shares which could have been purchased
with the proceeds from exercise of such stock options
and warrants 57,302 9,667
----------- -----------
Weighted average number of shares
of Common Stock outstanding,
as adjusted 6,134,574 6,090,895
=========== ===========
5
Inventory
- ---------
4) The major classes of inventory are as follows (dollars in thousands):
March 31, 2002 December 31, 2001
Raw materials and supplies $ 2,439 $ 1,880
Semi-finished and finished steel products 16,607 13,593
Operating materials 2,488 2,427
-------------------- ---------------------
Total inventory $ 21,534 $ 17,900
==================== =====================
Property, Plant and Equipment
- -----------------------------
5) Property, plant and equipment consists of the following (dollars in
thousands):
March 31, 2002 December 31, 2001
Land and land improvements $ 822 $ 822
Buildings 4,701 4,701
Machinery and equipment 43,584 43,572
Construction in progress 2,981 2,641
-------------------- ---------------------
52,088 51,736
Accumulated depreciation (11,284) (10,534)
-------------------- ---------------------
Property, plant and equipment, net $ 40,804 $ 41,202
==================== =====================
Environmental
- -------------
6) The Company has reviewed the status of its environmental contingencies 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, 2001.
Business Segments
- -----------------
7) Statement of Financial Accounting Standards (SFAS) 131, "Disclosures about
Segments of an Enterprise and Related Information", requires companies to
disclose segment information on the same basis as that used internally by
executive management to evaluate segment performance.
The Company is comprised of two business segments: Universal Stainless &
Alloy Products, Inc., which consists of the Bridgeville and Titusville
facilities and Dunkirk Specialty Steel, the Company's wholly owned
subsidiary located in Dunkirk, New York.
The Company manufactures and markets semi-finished and finished specialty
steel products, including stainless steel, tool steel and certain other
alloyed steels. Universal Stainless' 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.
Sales between the segments are generally made at market-related prices.
Other income, net, represents interest income. Corporate assets are
primarily cash and cash equivalents, prepaid insurance costs, investment in
Dunkirk Specialty Steel and corporate operating assets.
Segment Data (dollars in thousands):
6
For the Three-month period ended
March 31,
2002 2001
---- ----
Universal Stainless & Alloy Products, Inc. $ 17,638 $ 21,259
Dunkirk Specialty Steel 206 --
Intersegment (248) --
-------- --------
Consolidated net sales $ 17,596 $ 21,259
-------- --------
Operating income (loss)
Universal Stainless & Alloy Products, Inc. $ 2,493 $ 2,595
Dunkirk Specialty Steel (506) --
Corporate costs (9) (15)
-------- --------
Total operating income 1,978 2,580
-------- --------
Interest expense and other financing costs (110) (181)
-------- --------
Other income, net 31 20
-------- --------
Consolidated income before taxes $ 1,899 $ 2,419
======== ========
March 31, December 31,
2002 2001
---- ----
Total assets:
Universal Stainless & Alloy Products, Inc. $ 70,654 $ 73,225
Dunkirk Specialty Steel 4,390 --
Corporate assets 9,135 6,221
-------- ------------
Consolidated total assets $ 84,179 $ 79,446
======== ============
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
An analysis of the Company's operations for the three-month periods ended March
31, 2002 and 2001 is as follows (dollars in thousands):
For the Three-month period ended
March 31,
2002 2001
---- ----
Net sales
Stainless steel $13,460 $17,423
Tool steel 1,334 1,517
High-strength low alloy steel 574 609
High-temperature alloy steel 1,743 665
Conversion services 395 871
Other 90 174
------- -------
Total net sales $17,596 $21,259
------- -------
Cost of products sold 14,245 17,121
------- -------
Selling and administrative expenses 1,373 1,558
------- -------
Operating income $ 1,978 $ 2,580
======= =======
Three-month period ended March 31, 2002 as compared to the three-month period
ended March 31, 2001
The decrease in net sales for the three-month period ended March 31, 2002 as
compared to the similar period in 2001 reflects increased demand for service
center products including tool steel and high-temperature alloy steel, but lower
sales to rerollers and forgers due to the lingering effects of the slower
economy and competition from imports. The Company shipped approximately 8,300
tons during the three-month period ended March 31, 2002, compared to
approximately 11,000 tons during the three-month period ended March 31, 2001.
Cost of products sold, as a percentage of net sales, was 81.0% and 80.5% for the
three-month periods ended March 31, 2002 and 2001, respectively. This increase
is primarily due to start-up costs incurred relating to Dunkirk Specialty Steel,
the Company's wholly owned subsidiary which acquired the assets of Empire
Specialty Steel on February 14, 2002 and became operational March 14, 2002.
Selling and administrative expenses decreased by $185,000 from the year-ago
period primarily due to a $190,000 severance obligation to its former Vice
President of Operations during the three-month period ended March 31, 2001.
Interest expense and other financing costs decreased from $181,000 for the
three-month period ended March 31, 2001 to $110,000 for the three-month period
ended March 31, 2002 primarily due to a reduction in borrowings under the
revolving line of credit with PNC Bank and lower interest rates between the two
periods.
The effective income tax rate utilized in the three-month periods ended March
31, 2002 and 2001 was 36.5% and 37.5%, respectively. The effective income tax
rate utilized in the current period reflects the anticipated effect of the
Company's permanent tax deductions against expected income levels in 2002.
8
Business Segment Results
- ------------------------
An analysis of the net sales and operating income for the reportable segments
for the three-month periods ended March 31, 2002 and 2001 is as follows (dollars
in thousands):
For the Three-month period ended
March 31,
2002 2001
---- ----
Net sales
Universal Stainless & Alloy Products, Inc. $17,638 $21,259
Dunkirk Specialty Steel 206 --
Intersegment (248) --
------- -------
Consolidated net sales $17,596 $21,259
------- -------
Operating income
Universal Stainless & Alloy Products, Inc. $ 2,493 $ 2,595
Dunkirk Specialty Steel (506) --
Corporate costs (9) (15)
------- -------
Total operating income $ 1,978 $ 2,580
======= =======
Universal Stainless & Alloy Products, Inc. Segment
Net sales for the three-month period ended March 31, 2002 for this segment,
which aggregates the Bridgeville and Titusville facilities, were $3.6 million
lower than the same period a year ago. This decrease reflects increased demand
for service center products including tool steel, but lower sales to rerollers
and forgers due to the lingering effects of the slower economy and competition
from imports. Sales to the aerospace and power generation markets remained flat
to slightly better than last year.
Operating income for the Universal Stainless & Alloy Products, Inc. segment was
$102,000 lower than last year's $2.6 million. This decrease was due primarily to
lower shipment and production levels, offset by lower cost of products sold and
a $190,000 severance obligation to it's former Vice President of Operations
during the three-month period ended March 31, 2001.
Dunkirk Specialty Steel Segment
On February 8, 2002, the Company, through its wholly owned subsidiary, Dunkirk
Specialty Steel, entered into a Property Asset Purchase Agreement and a Real
Property Purchase Agreement (the "Purchase Agreements") with the JDA to acquire
certain assets and real property formerly owned by Empire Specialty Steel, Inc.
at its idled production facility located in Dunkirk, New York. These
transactions were completed on February 14, 2002. Dunkirk Specialty Steel
manufactures and markets finished bar, rod and wire specialty steel products.
The facility became operational on March 14, 2002.
Net sales for the three-month period ended March 31, 2002 for this segment were
$206,000. This reflects intersegment scrap sales of $172,000 and $34,000 in
external sales. The operating loss for the Dunkirk Specialty Steel segment was
$506,000 which primarily relates to the start-up costs incurred since February
14, 2002.
Financial Condition
- -------------------
The Company has financed its operating activities during the three-month period
ended March 31, 2002 through cash flows from operations and cash on hand at the
beginning of the period. At March 31, 2002, working capital approximated $32.8
million, as compared to $28.7 million at December 31, 2001. The ratio of current
assets to current liabilities increased from 4.0:1 at December 31, 2001 to 4.2:1
at March 31, 2002. The debt to capitalization ratio was 15.7% at March 31, 2002,
and 12.9% at December 31, 2001. The increase in the ratio of current assets to
current liabilities is primarily due to the acquisition of inventory formerly
owned by Empire Specialty Steel, Inc. from the JDA.
9
The Company's capital expenditures approximated $352,000 for the three-month
period ended March 31, 2002 which primarily related to the Bridgeville facility
and the Dunkirk facility. At March 31, 2002, the Company had outstanding
purchase commitments in addition to the expenditures incurred to date of
approximately $1.3 million. These expenditures are expected to be funded
substantially from internally generated funds and additional borrowings. The
Company expended $1.3 million in connection with the Personal Property Asset and
Real Property Purchase Agreements entered into with the JDA to acquire certain
assets and real property formerly owned by Empire Specialty Steel, Inc. As of
March 31, 2002, the Company had $6.5 million available for borrowings under a
revolving line of credit with PNC Bank.
There were no shares of Common Stock repurchased by the Company during the
three-month period ended March 31, 2002. The Company is authorized to repurchase
an additional 45,100 shares of Common Stock as of March 31, 2002.
The Company anticipates that it will fund its 2002 working capital requirements,
its capital expenditures and the stock repurchase program primarily from funds
generated from operations and borrowings. 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.
2002 Outlook
- ------------
The Company anticipates that its sales for the second quarter of 2002 will be
between $21 and $25 million, representing an improvement over the first quarter
of 2002. In the second quarter of 2001, sales were $24 million. Diluted earnings
per share for the second quarter of 2002 are currently projected to range from
$0.20 to $0.25, versus $0.31 in the prior year period. The following factors
were considered in developing these estimates:
... The Company's total backlog approximated $23 million on March 31, 2002, as
compared to $19 million on December 31, 2001.
... The Company expects strong growth in the sales of tool steel plate products
to the service center market due to an improving economy. Strong growth in
billet sales to the forging and reroll markets is also expected due to
improving demand in the industrial and service center markets, and the
beneficial effect of the tariffs imposed by President Bush on imported
stainless steel rod, bar and wire products. OEM products are expected to
match those of the 2002 first quarter, although power generation sales are
showing signs of weakening, while aerospace sales are improving somewhat.
... Sales from Dunkirk are expected to approximate $2 million in the second
quarter of 2002 producing an operating loss between $200,000 to $400,000,
equivalent to $0.02 to $0.04 per diluted share.
New Accounting Pronouncements
- -----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other
Intangible Assets". In August 2001, the FASB issued Statement No. 143,
"Accounting for Asset Retirement Obligations". In October 2001, the FASB issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". These statements were adopted during the first quarter 2002 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, 2001.
10
Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - none.
b. A Report on Form 8K was filed on February 15, 2002. The Report covered
a Press Release under item 5, Other Events, relating to the
acquisition of assets located at the Dunkirk facility. No financial
statements were filed with the Report.
11
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: May 10, 2002
/s/ C. M. McAninch
--------------- -------------------------------------------
Clarence M. McAninch
President, Chief Executive Officer and
Director
(Principal Executive Officer)
Date: May 10, 2002
/s/ Richard M. Ubinger
--------------- -------------------------------------------
Richard M. Ubinger
Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
12