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Universal Stainless Reports 2008 Second Quarter Results

Jul 24, 2008
Universal Stainless Reports 2008 Second Quarter Results

Universal Stainless Reports 2008 Second Quarter Results

Record Sales of $63.5 Million and Diluted EPS of $0.77 Exceed Forecast Backlog Rises 10 Percent to $97 Million

BRIDGEVILLE, Pa., July 24, 2008 -- Universal Stainless & Alloy Products, Inc. (Nasdaq:USAP) reported today that sales for the second quarter of 2008 were $63.5 million compared with $62.1 million reported in the second quarter of 2007. Net income for the second quarter of 2008 was $5.3 million, or $0.77 per diluted share, compared with $5.9 million, or $0.87 per diluted share, in the second quarter of 2007.

The results for the second quarter of 2008 exceeded the Company's forecast of sales in the range of $55 to $60 million and diluted EPS in the range of $0.70 to $0.75.

Net income for the second quarters of both 2008 and 2007 included net inventory charges before tax of $1.5 million ($0.15 per diluted share) and $1.0 million ($0.10 per diluted share), respectively, for increased reserves related to declines in nickel prices at the end of each quarter. Net income for the second quarter of 2007 also included the effect of a pre-tax charge of $800,000, equivalent to $0.08 per diluted share, related to a legal settlement

The Company's tax rate for the second quarter of 2008 was 33% compared to 35% in second quarter of 2007. The benefit of this rate change was equivalent to $0.02 per diluted share in the 2008 second quarter.

For the first six months of 2008, sales rose 2% to $120.3 million while net income was $10.0 million, or $1.47 per diluted share, compared with $12.6 million, or $1.87 per diluted share, in the same period of 2007.

Cash flow from operations was $4.7 million for the second quarter of 2008 and capital expenditures were $2.3 million. Inventories were $72.4 million, an increase of $6.9 million from the 2008 first quarter, as a result of increased order entry activity. This increase was substantially offset by an increase in accounts payable. Accounts receivable remained level sequentially due to improved collections.

President and CEO Dennis Oates commented: "The record sales we achieved in the second quarter led to better than forecasted EPS. Driving our results were higher sales to the power generation market combined with record sales to the petrochemical market and tool steel to service centers. In fact, our sales of tool steel rose 28% from the strong first quarter, mainly due to high demand for heavy equipment to support global infrastructure investments and major metal fabrication markets. While aerospace demand remains strong, our sales to the aerospace market were 6% below the first quarter of 2008 as service centers and their customers moved to the sidelines in anticipation of a further reduction in the cost of nickel. Based on their current inventory levels, we continue to expect service center order entry will begin to pick up in the second half of the year."

Mr. Oates continued: "We remained focused on improving customer service levels and our operational efficiency in the second quarter. The relocation of our bar finishing equipment to Dunkirk is underway, the new high temperature annealing equipment in Dunkirk is up and running with increased utilization expected, and the capital improvements to our melt shop are moving forward on schedule. We are also continuing to energize and strengthen our sales effort, which has contributed to the solid increase in our backlog. "

Mr. Oates concluded: "We plan to continue our progress in the third quarter as we work towards further accelerating our growth."

Segment Review

For the second quarter of 2008, the Universal Stainless & Alloy Products segment had sales of $53.1 million and operating income of $5.6 million, yielding an operating margin of 11%. This compares with sales of $55.1 million and operating income of $5.8 million, or 11% of sales, in the second quarter of 2007. The 2008 second quarter included a $1.2 million increase to its lower of cost or market reserve primarily related to the decline in nickel prices at the end of the quarter. The second quarter of 2007 also included an inventory adjustment as well as the pre-tax effect of a legal settlement aggregating $1.3 million. In the first quarter of 2008, sales were $48.2 million and operating income was $4.9 million, or 10% of sales.

Segment sales were down 4% from the second quarter of 2007 primarily due to an 8% decline in tons shipped partially offset by favorable shifts in the product mix. Specifically, higher shipments of tool steel plate to service centers partially offset lower shipments of semi-finished products to forgers and rerollers, including Dunkirk, and of bar products to service centers. The shift in product mix increased the second quarter 2008 operating margin, before the effect of the inventory adjustments, compared with the prior year second quarter.

Segment sales increased 10% over the first quarter of 2008 even though tons shipped declined 7%. This was due to increased shipments to forgers and of bar products and tool steel plate to service centers, offset by lower shipments to rerollers, including Dunkirk. The improved product mix led to the sequential improvement in the operating margin.

The Company noted that it is negotiating a new collective bargaining agreement that covers the hourly employees at its Bridgeville facility. The current agreement expires on August 31, 2008.

The Dunkirk Specialty Steel segment reported sales of $21.2 million and operating income of $2.1 million for the second quarter of 2008, resulting in an operating margin of 10%, which included a $259,000 increase to its lower of cost or market reserve and no FIFO benefit. That compares with sales of $21.3 million and operating income of $3.7 million, or 17% of sales, in the second quarter of 2007, which included an estimated FIFO benefit of $1.2 million offset by $492,000 of costs related to the inventory adjustment attributable to the segment. In the first quarter of 2008, sales were $20.1 million and operating income was $2.8 million, or 14% of sales, and included a FIFO charge of $157,000.

Dunkirk's sales declined 1% while tons shipped increased 4% compared with the second quarter of 2007. Higher shipments of rod and wire products to service centers and OEMs, and of finished bar products to OEMs, offset lower shipments of vacuum-arc remelted finished bar products to service centers. Selling prices and operating margins declined from the second quarter of 2007 due to product mix and the effect of lower nickel prices on surcharges assessed.

Dunkirk's sales rose 6% and tons shipped increased 4% over the first quarter of 2008 due to increased shipments in all categories, except rod and wire products to service centers. The operating margin was lower than in the 2008 first quarter mainly due to the effect of the inventory adjustment on the most recent period.

Business Outlook

The following statements are based on the Company's current expectations. These statements are forward-looking, and actual results may differ materially.

The Company estimates that sales for the third quarter of 2008 will range from $60 to $65 million and that diluted EPS will range from $0.78 to $0.83. This does not include any expense related to the relocation of the round bar finishing facility from Bridgeville to Dunkirk discussed below. In the third quarter of 2007, sales were $62.0 million and diluted EPS was $0.81. Results in the prior year third quarter included a charge of $1.4 million, equivalent to $0.14 per diluted share, for an increase to the Company's inventory reserve, mainly due to a continued decline in nickel prices in the quarter. This was offset by an estimated FIFO benefit of $1.5 million, equivalent to $0.15 per diluted share, at the Dunkirk segment.

The following factors were considered in developing the estimates for the third quarter of 2008:
 * The Company's total backlog at June 30, 2008 rose to $97 million
   from $88 million at March 31, 2008. The increased backlog is  
   primarily attributable to demand for the company's tool steel  
   plate and electro-slag remelted products.

 * Sales from the Dunkirk Specialty Steel segment are expected to 
   approximate $19 million in the third quarter of 2008, while  
   pounds shipped are expected to match the prior year period.  
   It is assumed that there will be no FIFO benefit or charge at   
   the Dunkirk operation.

 * The cost to relocate the round bar finishing facility from   
   Bridgeville to Dunkirk is $800,000, equivalent to $0.08 per  
   share. No costs were expensed during the 2008 second quarter.
   Management expects the relocation project to be complete and  
   all costs recognized by September 30.
Webcast

A simultaneous Webcast of the Company's conference call discussing the second quarter of 2008 and the third quarter outlook, scheduled at 10:00 a.m. (Eastern) today, will be available on the Company's website at www.univstainless.com, and thereafter archived on the website. A telephone replay of the conference call will be available beginning at 12:00 noon (Eastern) today and continuing through July 31st. It can be accessed by dialing 706-645-9291, passcode 54242860. This is a toll call.

About Universal Stainless & Alloy Products, Inc.

Universal Stainless & Alloy Products, Inc., headquartered in Bridgeville, Pa., manufactures and markets a broad line of semi-finished and finished specialty steels, including stainless steel, tool steel and certain other alloyed steels. The Company's products are sold to rerollers, forgers, service centers, original equipment manufacturers and wire redrawers. More information is available at www.univstainless.com.

Forward-Looking Information Safe Harbor

Except for historical information contained herein, the statements in this release are forward-looking statements that are made pursuant to the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements 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 receipt, pricing and timing of future customer orders, risks associated with significant fluctuations that may occur in raw material and energy prices, risks associated with the manufacturing process, labor and production yields, risks related to property, plant and equipment, and risks related to the ultimate outcome of the Company's current and future litigation and regulatory matters. Certain of these risks and other risks are described in the Company's filings with the Securities and Exchange Commission (SEC) over the last 12 months, copies of which are available from the SEC or may be obtained upon request from the Company.


                   UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
                           FINANCIAL HIGHLIGHTS
            (Dollars in thousands, except per share information)
                             (Unaudited)

                    CONSOLIDATED STATEMENT OF OPERATIONS

                            For the                     For the
                         Quarter Ended              Six-Months Ended
                            June 30,                    June 30,
                       2008           2007          2008        2007
                       ----           ----          ----        ----
     Net Sales
 Stainless steel    $   43,760   $   45,128    $   85,788  $    84,698
 Tool steel             11,659        6,444        20,766       13,541
 High-strength 
  low alloy steel        2,934        7,572         6,945       13,806
 High-temperature 
  alloy steel            3,344        2,355         4,490        5,100
 Conversion 
  services                 448          492           973          981
 Other                   1,337           65         1,365          169
                   -----------   ----------    ----------   ----------
     Total net 
      sales             63,482       62,056       120,327      118,295
 Cost of products
  sold                  53,018       49,442        99,797       92,462
 Selling and 
  administrative 
  expenses               2,634        3,407         5,709        5,961
                   -----------   ----------    ----------   ----------
     Operating 
      income             7,830        9,207        14,821       19,872
 Interest expense          (27)        (195)          (55)        (422)
 Other income               62            6           149           10
                   -----------   ----------    ----------   ----------
     Income 
      before 
      taxes              7,865        9,018        14,915       19,460
 Income tax 
  provision              2,595        3,156         4,922        6,811
                   -----------   ----------    ----------   ----------
     Net income    $     5,270   $    5,862         9,993       12,649
                   ===========   ==========    ==========   ==========

 Earnings per 
  share - Basic    $      0.79   $     0.88    $     1.49   $     1.91
                   ===========   ==========    ==========   ==========
 Earnings per 
  share - Diluted  $      0.77   $     0.87    $     1.47   $     1.87
                   ===========   ==========    ==========   ==========

 Weighted average
  shares of
  Common Stock 
  outstanding
     Basic           6,707,523    6,642,655     6,685,368    6,631,981
     Diluted         6,819,546    6,774,586     6,795,514    6,767,871


                              MARKET SEGMENT INFORMATION
                            For the                     For the
                         Quarter Ended              Six-Months Ended
                            June 30,                    June 30,
                       2008           2007          2008        2007
                       ----           ----          ----        ----
     Net Sales
 Service centers    $   33,850   $   32,598    $   63,084  $    61,703
 Forgers                11,142       13,744        20,160       26,318
 Rerollers               9,240        8,658        20,479       15,850
 Original 
  equipment 
  manufacturers          5,795        4,540        11,236        9,417
 Wire redrawers          1,692        2,015         3,061        3,913
 Conversion 
  services                 448          492           973          981
 Other                   1,315            9         1,334          113
                   -----------   ----------    ----------   ----------
     Total net 
      sales        $    63,482   $   62,056    $  120,327   $  118,295
                   ===========   ==========    ==========   ==========

 Tons shipped           11,423       11,327        23,190       22,484
                   ===========   ==========    ==========   ==========

 
                       BUSINESS SEGMENT RESULTS

 Universal Stainless & Alloy Products Segment

                             For the                   For the
                          Quarter Ended            Six-Months Ended
                             June 30,                  June 30,
                       2008         2007          2008        2007
                    ---------     --------     ---------    ---------
 Net Sales

 Stainless steel    $  28,901     $ 30,804     $  56,211    $  55,800
 Tool steel            11,278        6,111        19,702       12,270
 High-strength 
  low alloy steel       1,114        3,822         2,227        7,822
 High-temperature 
  alloy steel             929          916         1,498        2,146
 Conversion 
  services                296          325           653          652
 Other                  1,262           36         1,272          122
                    ---------     --------     ---------    ---------
                       43,780       42,014        81,563       78,812
 Intersegment           9,312       13,080        19,727       24,447
                    ---------     --------     ---------    ---------
     Total net 
      sales            53,092       55,094       101,290      103,259
 Material cost of 
  sales                28,654       29,684        51,993       50,915
 Operation cost of
  sales                16,936       17,033        34,726       35,050
 Selling and 
  administrative 
  expenses              1,869        2,571         4,007        4,289
                    ---------     --------     ---------    ---------
     Operating 
      income        $   5,633     $  5,806     $  10,564    $  13,005 
                    =========     ========     =========    =========


 Dunkirk Specialty Steel Segment

                            For the                   For the
                          Quarter Ended            Six-Months Ended
                             June 30,                  June 30,
                      2008         2007          2008        2007
                   ---------     --------     ---------    ---------
 Net Sales

 Stainless steel    $  14,859     $ 14,324     $  29,577    $  28,898
 Tool steel               381          333         1,064        1,271
 High-strength low
  alloy steel           1,820        3,750         4,718        5,984
 High-temperature 
  alloy steel           2,415        1,439         2,992        2,954
 Conversion 
  services                152          167           320          329
 Other                     75           29            93           47
                    ---------     --------     ---------    ---------
                       19,702       20,042        38,764       39,483
 Intersegment           1,474        1,279         2,462        2,278
                    ---------     --------     ---------    ---------
     Total net 
      sales            21,176       21,321        41,226       41,761
 Material cost of 
  sales                13,126       12,048        24,965       23,244
 Operation cost of 
  sales                 5,159        4,719         9,648        9,306
 Selling and 
  administrative 
  expenses                765          836         1,702        1,672
                    ---------     --------     ---------    ---------
     Operating 
      income        $   2,126     $  3,718     $   4,911    $   7,539
                    =========     ========     =========    =========


                        CONSOLIDATED BALANCE SHEET

                                      June 30,             Dec. 31,
                                        2008                 2007
                                     ---------            ---------
      Assets
 Cash                                $  13,067            $  10,648
 Accounts receivable, net               34,634               27,501
 Inventory                              72,399               65,572
 Other current assets                    5,581                5,537
                                     ---------            ---------
                                                                   
   Total current assets                125,681              109,258
 Property, plant & equipment, net       57,357               54,271
 Other assets                              920                  767
                                     ---------            ---------
                                                                   
   Total assets                      $ 183,958            $ 164,296
                                     =========            =========
                                                                   
   Liabilities and Stockholders' 
    Equity                            

 Trade accounts payable              $  20,819            $  13,983
 Outstanding checks in excess of 
  bank balance                           3,912                2,064
 Accrued employment costs                4,941                5,307
 Current portion of long-term debt         395                  383
 Other current liabilities               1,004                1,600
                                     ---------            ---------
                                                                   
   Total current liabilities            31,071               23,337
 Long-term debt                          1,247                1,453
 Deferred taxes                         10,399                9,904
                                     ---------            ---------
                                                                   
   Total liabilities                    42,717               34,694
 Stockholders' equity                  141,241              129,602
                                     ---------            ---------
                                                                   
   Total liabilities and                                           
    stockholders' equity             $ 183,958            $ 164,296
                                     =========            =========
                                                                   

                  CONSOLIDATED STATEMENT OF CASH FLOW DATA 
 
                    For the Six-month Period Ended June 30,

                                              2008             2007
                                            ---------       ----------
 Cash flows provided by operating 
  activities:
   Net income                               $   9,993        $  12,649
                                                         
   Adjustments to reconcile to net                       
    cash provided by operating                           
    activities:                                          
     Depreciation and amortization              2,008            1,822
     Deferred tax increase (decrease)             304             (318)
     Stock based compensation expense             413              208
     Tax benefits from share-based                       
      payment arrangements                       (511)            (982)
   Changes in assets and liabilities:                      
     Accounts receivable, net                  (7,133)          (5,849)
     Inventory                                 (6,827)          (9,558)
     Trade accounts payable                     6,836            5,182
     Accrued employment costs                    (366)             806
     Other, net                                   216              166
                                            ---------       ----------
 Cash flow provided by operating                         
  activities                                    4,933            4,126
                                            ---------       ----------
 Cash flow used in investing activities:                 
   Capital expenditures                        (5,401)          (2,906)
                                            ---------       ----------
 Cash flow used in investing activities        (5,401)          (2,906)
                                            ---------       ----------
 Cash flows used in financing activities:                
   Revolving credit net repayments                 --           (8,174)
   Long-term debt repayments                     (194)          (1,180)
   Net change in outstanding checks in                   
    excess of bank balance                      1,848            4,129
   Proceeds from issuance of common                      
    stock                                         722              975
   Tax benefits from share-based                         
    payment arrangements                          511              982
                                            ---------       ----------
 Cash flow provided by (used in)                         
  financing activities                          2,887           (3,268)
                                            ---------       ----------
   Net cash flow                            $   2,419       $   (2,048)
                                            =========       ==========
CONTACT: Universal Stainless & Alloy Products, Inc.
         Richard M. Ubinger, Vice President of Finance,
          Chief Financial Officer and Treasurer
         (412) 257-7606
         
         Comm-Partners LLC
         June Filingeri, President
         (203) 972-0186