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, 1998
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
--- ---
The number of shares outstanding of the registrant's classes of common stock
as of October 30, 1998:
Title of Class Shares Outstanding
Common Stock, $0.001 par value 6,315,450
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
This Quarterly Report on Form 10-Q contains historical information and
forward-looking statements. Forward-looking statements 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 from the discussions of future performance included herein. 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.
INDEX 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 7
PART II. OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K 10
SIGNATURES 11
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-Months For the Nine-Months
Ended September 30 Ended September 30
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 15,977 $ 22,081 $ 59,489 $ 61,661
Cost of products sold 13,141 17,539 48,940 49,012
Selling and administrative
expenses 1,149 1,223 3,625 3,665
-------- -------- -------- --------
Operating income 1,687 3,319 6,924 8,984
Other income (expenses), net (129) (61) (54) (77)
-------- -------- -------- --------
Income before taxes 1,558 3,258 6,870 8,907
Income taxes 576 1,205 2,542 3,296
-------- -------- -------- --------
Net Income $ 982 $ 2,053 $ 4,328 $ 5,611
======== ======== ======== ========
Earnings per common share
Basic $ 0.16 $ 0.33 $ 0.69 $ 0.89
======== ======== ======== ========
Diluted $ 0.16 $ 0.32 $ 0.68 $ 0.88
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
2
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
September 30, 1998 December 31, 1997
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 175 $ 177
Accounts receivable (less
allowance for doubtful accounts
of $343 and $298) 11,966 14,503
Inventory 17,009 15,471
Prepaid income tax 1,410 674
Other prepaid expenses 256 220
------ -------
Total current assets 30,816 31,045
Property, plant and equipment, net 34,867 24,887
Other assets 262 219
------ -------
Total assets $65,945 $ 56,151
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 5,756 $ 8,001
Current portion of long-term debt 415 338
Accrued employment costs 1,363 1,704
Other current liabilities 95 916
------ --------
Total current liabilities 7,629 10,959
Long-term debt 12,870 5,441
Deferred taxes 3,108 1,983
------- -------
Total liabilities 23,607 18,383
------- -------
Commitments and contingencies -- --
Stockholders' equity
Senior Preferred Stock, par value $.001
per share; liquidation value $100 per
share; 2,000,000 shares authorized and
0 shares issued and outstanding -- --
Common Stock, par value $.001 per share;
10,000,000 shares authorized;
6,315,450 and 6,290,823 shares issued
and outstanding 6 6
Additional paid-in capital 25,758 25,516
Retained earnings 16,574 12,246
------ ------
Total stockholders' equity 42,338 37,768
------ -------
Total liabilities and stockholders'
equity $65,945 $56,151
====== =======
The accompanying notes are an integral part of these financial statements.
3
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the Nine-Months Ended
SEPTEMBER 30
-------------------------
1998 1997
Cash flow from operating activities:
Net income $ 4,328 $ 5,611
Adjustments to reconcile to net cash used by operating activities:
Depreciation and amortization 1,049 786
Deferred taxes 1,125 242
Changes in assets and liabilities:
Accounts receivable, net 2,537 (6,212)
Inventory (1,538) (5,389)
Prepaid income tax (736) --
Trade accounts payable (2,245) 3,418
Accrued employment costs (341) 280
Other, net (770) 557
------- -------
Net cash provided by (used in) operating activities 3,409 (707)
------- -------
Cash flow from investing activities:
Capital expenditures (11,083) (4,928)
-------- -------
Net cash used in investing activities (11,083) (4,928)
-------- -------
Cash flow from financing activities:
Borrowings from long-term debt 9,346 500
Proceeds from issuance of Common Stock 215 26
Net borrowing under revolving line of credit (1,562) 1,585
Long-term debt payments (278) (212)
Deferred financing costs (49) (12)
-------- -------
Net cash provided by financing activities 7,672 1,887
-------- -------
Net decrease in cash and cash equivalents (2) (3,748)
Cash and cash equivalents at beginning of period 177 4,219
-------- -------
Cash and cash equivalents at end of period $175 $471
======== =======
Supplemental disclosure of cash flow information:
Interest paid $492 $151
Income taxes paid $2,485 $2,762
The accompanying notes are an integral part of these financial statements
4
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1) Universal Stainless & Alloy Products, Inc. (the "Company"), was
incorporated in 1994 for the principal purpose of acquiring substantially
all of the idled equipment and related assets located at the Bridgeville,
Pennsylvania, production facility of Armco, Inc. in August 1994.
The accompanying unaudited, consolidated condensed financial statements of
operations for the three- and nine-month periods ended September 30, 1998
and 1997, balance sheets as of September 30, 1998 and December 31, 1997,
and statements of cash flows for the nine-month periods ended September
30, 1998 and 1997 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, 1997. 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 results of operations and of cash flows for the
periods ended September 30, 1998 and 1997, and are not necessarily
indicative of the results to be expected for the full year.
2) Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which requires companies to disclose information regarding comprehensive
income and its components. Comprehensive income is defined as a change in
equity resulting from nonowner sources. The Company does not have any
material adjustments to net income in order to derive comprehensive
income; accordingly, comprehensive income has not been presented in the
accompanying consolidated condensed financial statements.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related
Information." The new standard requires that all public business
enterprises report information about operating segments, as well as
specifies revised guidelines for determining an entity's operating
segments and the type and level of financial information to be disclosed.
The new standard, which is effective for the fiscal year ending December
31, 1998, may result in additional financial disclosure but will not have
a financial impact on the Company.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued a Statement of
Position (SOP), "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." The SOP requires capitalization of
qualifying costs relating to development or obtaining internal-use
software. Capitalization begins following the conceptual formulation
stage of development. Costs of externally purchased materials and
services and payroll and payroll related costs of employees directly
associated with, and who devote significant time to, the project should
also be capitalized while overhead and training costs would be expensed
as incurred. Costs associated with significant enhancements and routine
maintenance of existing software should be expensed as incurred in
accordance with SFAS 86. Management is presently considering what impact,
if any, this statement will have on the Company's existing accounting
policy with respect to software costs.
5
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-Months Ended For the Nine-Months Ended
Ended September 30 September 30
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Weighted average number of
shares of Common Stock
outstanding 6,315,450 6,287,290 6,307,387 6,284,932
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 0 192,535 68,237 101,482
--------- --------- ---------- ---------
Weighted average number of
shares of Common Stock
outstanding, as adjusted 6,315,450 6,479,825 6,375,624 6,386,414
========= ========= ========= =========
4) The major classes of inventory are as follows (dollars in thousands):
SEPTEMBER 30, 1998 DECEMBER 31, 1997
Raw materials and supplies $ 3,080 $ 2,869
Semi-finished steel products 11,328 10,569
Operating materials 2,601 2,033
------------ ------------
Total inventory $ 17,009 $ 15,471
============ ============
5) Property, plant and equipment consists of the following (dollars in
thousands):
SEPTEMBER 30, 1998 DECEMBER 31, 1997
Land and land improvements $ 869 $ 832
Buildings 2,508 1,699
Machinery and equipment 31,122 21,418
Construction in progress 3,168 2,726
------------ ------------
37,667 26,675
Accumulated depreciation (2,800) (1,788)
------------ ------------
Property, plant and
equipment, net $34,867 $24,887
============ ============
6) The Company has reviewed the status of its environmental contingencies and
believes there are no significant changes from that disclosed in Form 10-K
for the year ended December 31, 1997.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales by product line and cost of products sold for the three- and
nine-month periods ended September 30, 1998 and 1997 were as follows (dollars in
thousands):
For the Three-Months For the Nine-Months
Ended Ended
September 30 September 30
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales
Stainless steel $12,393 $16,140 $44,085 $46,507
Tool steel 1,292 3,051 5,985 7,426
High temperature alloy steel 631 1,074 3,276 2,216
Conversion services 784 1,213 3,324 3,503
Other 877 603 2,819 2,009
------- ------- ------- -------
Total net sales $15,977 $22,081 $59,489 $61,661
------- ------- ------- -------
Cost of products sold
Raw materials 5,717 8,925 22,669 25,113
Other 7,424 8,614 26,271 23,899
------- ------- ------- -------
Total cost of products sold 13,141 17,539 48,940 49,012
------- ------- ------- -------
Selling and administrative
expenses 1,149 1,223 3,625 3,665
------- ------- ------- -------
Operating income $ 1,687 $ 3,319 $ 6,924 $ 8,984
======= ======= ======= =======
THREE -AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE
SIMILAR PERIODS IN 1997
The decrease in net sales for the three- and nine-month periods ended September
30, 1998 as compared to the similar periods in 1997 reflects decreased shipments
of stainless steel reroll products and tool steel products which were partially
offset by initial shipments of product from the bar mill. The decline in net
sales was primarily influenced by the decrease in foreign steel consumption due
to the economic crisis in Asia and the flood of lower-priced import products.
Cost of products sold, as a percentage of net sales, was 82.2% and 79.4% for the
three-month periods ended September 30, 1998 and 1997, respectively, and was
82.3% and 79.5% for the nine-month periods ended September 30, 1998 and 1997,
respectively. The increase is primarily attributed to lower selling prices in
response to the increased levels of imports. Selling and administrative expenses
remained relatively constant between 1997 and 1998.
Other income (expense), net was $(129,000) and $(61,000) for the three-month
periods ended September 30, 1998 and 1997, respectively. The change is primarily
due to interest expense associated with an increase in average borrowings under
the Company's revolving line of credit to fund working capital needs and the
costs associated with the dismantling of unused buildings at the Company's
Bridgeville Facility. Other income (expense), net was $(54,000) and $(77,000)
for the nine-month periods ended September 30, 1998 and 1997, respectively. The
change is primarily due to a $200,000 government grant related to the Company's
expansion of its Bridgeville operations which was partially offset by an
increase in interest expense and the costs associated with the dismantling of
unused buildings at the Company's Bridgeville Facility.
The effective income tax rate utilized in the three- and nine-month periods
ended September 30, 1998 and 1997 was 37.0%.
7
FINANCIAL CONDITION
The Company has financed its 1998 operating activities to date through cash
flows from operations, borrowings and cash on hand at the beginning of the
period. The ratio of current assets to current liabilities increased from 2.8:1
at December 31, 1997 to 4.0:1 at September 30, 1998. The percentage of debt to
capitalization increased from 13% at December 31, 1997 to 24% at September 30,
1998 primarily due to the funding of capital expenditures from the $15.0 million
term loan from PNC Bank during 1998.
Accounts receivable, net decreased by $2.5 million for the nine-month period
ended September 30, 1998 as compared to an increase of $6.2 million for the
nine-month period ended September 30, 1997. Trade accounts payable decreased
$2.2 million for the nine-month period ended September 30, 1998 as compared to
an increase of $3.4 million for the nine-month period ended September 30, 1997.
These decreases can primarily be attributed to the decline in shipments of
specialty steel products. Inventory increased by $1.5 million for the nine-month
period ended September 30, 1998 as compared to an increase of $5.4 million for
the nine-month period ended September 30, 1997. The 1998 inventory increase can
primarily be attributed to the startup of the bar mill partially offset by lower
inventory levels associated with the remaining product lines of the Company and
lower raw material costs.
The Company's capital expenditures approximated $11.0 million for the nine-month
period ended September 30, 1998, which primarily related to the construction of
a round bar finishing facility located at the Bridgeville Facility. At September
30, 1998, the Company had outstanding purchase commitments in addition to the
expenditures incurred to date of approximately $2.4 million.
In October 1998, the Company announced plans to initiate a stock repurchase
program. Under the program, the Company may repurchase, from time to time, up to
315,000 shares, or approximately 5%, of the Company's common stock in open
market transactions at market prices.
The Company anticipates that it will continue to fund its 1998 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.
In October 1998, the Company announced that it signed a letter of intent to
acquire the assets of AL Tech Specialty Steel Corporation which is headquartered
in Dunkirk, New York. AL Tech is a producer of finished specialty steel products
including bar, rod and wire. The transaction is valued at approximately $38
million, of which approximately $24 million is related to the acquisition of
accounts receivable and inventory. Funding for the transaction will consist of a
note approximating $17 million, assumed liabilities of $8 to $10 million, and
cash between $11 and $13 million. The transaction is subject to a number of
conditions, including the completion of due diligence procedures, the execution
of a definitive purchase agreement, successful negotiation of utility and USWA
labor contracts, Hart-Scott-Rodino review, final approval by the Boards of
Directors of both Universal Stainless and AL Tech, and the approval of AL Tech's
plan of reorganization by the United States Bankruptcy Court for the Western
District of New York. The Company has executed a commitment letter with PNC Bank
to fund the cash portion of the transaction and increase the revolving line of
credit to fund the working capital needs of AL Tech after the transaction is
completed. There can be no assurance that all of the conditions to completing
the proposed transaction can be satisfactorily resolved. In the event that the
proposed transaction is not completed, all costs associated with the Company's
efforts to complete the transaction would be expensed immediately and could
adversely affect the Company's results of operations.
In November 1998, the Company entered into a supply contract agreement with
Talley Metals, a subsidiary of Carpenter Technologies, Inc., which covers a
period of at least 18 months. Under the terms of the agreement, the Company will
supply Talley Metals with an average of 1,750 tons of stainless reroll billet
products per month. The value of the contract on a monthly basis will depend on
product mix and key raw material prices.
8
OUTLOOK
Pricing pressure from imports and demand for the Company's products is expected
to generate financial results in the 1998 fourth quarter which are lower than
those reported in the 1998 third quarter. The Company believes that the
completion of the new bar finishing facility and an increase in orders from the
power generation and aerospace markets should improve the Company's operating
results in 1999.
YEAR 2000
The Year 2000 problem arises because many computer systems and programs were
designed to handle only a two-digit year. Thus, these systems and programs will
not properly recognize a year that begins with "20" instead of the familiar
"19." If not corrected, these computer systems and applications could fail or
create erroneous results.
Since inception in August 1994, the Company has been engaged in a program to
modernize and replace substantially all of its computerized production control
and management information systems. Although not the primary purpose of the
program, the new systems have been designed to avoid any Year 2000 problems that
might otherwise arise. The Company is currently evaluating the Year 2000
compliance status of all of its other critical equipment, including equipment
with known embedded chips.
The Company has also commenced a program to determine the Year 2000 compliance
of all major vendors and customers whose system failures potentially could have
a significant impact on the Company's operations. The Company has sent
comprehensive questionnaires in an attempt to identify any problem areas.
The Company expects to complete its Year 2000 compliance evaluation of all
critical equipment and its inquiry of suppliers and others as to their own Year
2000 compliance by the end of 1998. The Company has not developed any
contingency plans in the event of a Year 2000 failure, but would intend to do so
if a specific problem is identified through the procedures described above.
The costs associated with the Year 2000 issue are expensed as they are incurred
and have not been material to date. The Company estimates the total cost to the
Company of completing any required modifications, upgrades, or replacements of
our systems will not have a material adverse effect on the Company's financial
condition or results of operations.
The failure to correct a material Year 2000 problem could result in a disruption
to certain normal business activities or operations. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. Although no matters have come to the attention of
management at this time, there can be no assurance that the Company will
successfully avoid any Year 2000 problems.
9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
b. The Company filed no reports on Form 8-K for the quarter ended
September 30, 1998.
10
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 12, 1998 /s/ Clarence M. McAninch
-- --------------------------------------
Clarence M. McAninch
President and Chief Executive Officer
Date: November 12, 1998 /s/ Richard M. Ubinger
-- -------------------------------------
Richard M. Ubinger
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
11
5
0000931584
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
1,000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
175
0
12,309
(343)
16,806
30,816
37,667
(2,800)
65,945
7,629
12,870
0
0
6
42,338
65,945
61,661
61,661
48,940
48,940
3,625
45
0
6,870
2,542
4,328
0
0
0
4,328
.69
.68
