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Richard M. Ubinger
Phone: 412-257-7606
Fax: 412-257-7640
Via Federal Express and EDGAR
July 15, 2008
Mr. Terence O'Brien
Accounting Branch Chief
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E., MS 7010
Washington, D.C. 20549-7010
Re: Universal Stainless & Alloy Products, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2007
Filed March 7, 2008
Schedule 14A Filed on April 21, 2008
Form 10-Q for the Fiscal Quarter Ended March 31, 2008
File Number 0-25032
Dear Mr. O'Brien:
This letter sets forth the responses of Universal Stainless & Alloy
Products, Inc. (the "Company") to the comments of the Staff of the Division of
Corporation Finance of the Securities and Exchange Commission (the "SEC") dated
June 30, 2008, with respect to the above referenced filings by the Company. In
connection with our responses below, Universal Stainless & Alloy Products, Inc,
(the "Company") acknowledges that:
o The Company is responsible for the adequacy and accuracy of the disclosure
in the above-referenced filings;
o Staff comments or changes to disclosure in response to staff comments do
not foreclose the Commission from taking any action with respect to the
above-referenced filing; and
o The Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws
of the United States.
Form 10-K for the Fiscal Year Ended December 31, 2007
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Item 1. Business, page 3
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Customers, page 4
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600 Mayer Street, Bridgeville, PA 15017 phone 412.257.7600 fax 412.257.7640
web www.univstainless.com
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COMMENT NO. 1:
In future filings, please disclose the amount by which Talley Metals Technology,
Inc. missed its minimum purchase requirements.
RESPONSE:
In accordance with the Staff's comment, the Company will disclose in future
filings the amount by which Talley Metals Technology, Inc. missed its minimum
purchase requirements.
Backlog, page 5
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COMMENT NO. 2:
We note your statement that your backlog may not be indicative of actual sales.
In future filings, please disclose how much, if any, of your backlog is
considered firm. Please refer to Item 101(c)(viii) of Regulation S-K.
RESPONSE:
All of the backlog amounts currently disclosed are considered firm and
deliverable to the customer within one year. Finished product surcharges, which
may be a material component of the Company's actual sales for a period, are not
determinable until shipment and are not included in the Company's backlog. In
accordance with the Staff's comment, the Company will disclose in future filings
how much of the backlog amounts disclosed is considered firm.
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations, page 11
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Results of Operation, page 11
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COMMENT NO. 3:
We note your disclosures on pages 5 and 33 that you have provided Talley Metals
with a waiver of which you expect to continue to grant for their inability to
meet their minimum purchase requirements. Please include disclosure in future
filings to quantify the impact that Talley Metals Technology, Inc.'s inability
to meet their minimum purchase requirements has had on your net sales and
operating income. Otherwise, please confirm to us that the impact is immaterial.
RESPONSE:
The Company acknowledges the Staff's comment and confirms to the Staff that the
impact of Talley Metals' inability to meet their minimum purchase on the
Company's net sales and operating income is immaterial. If the impact were to
become material to the Company's financial results, additional disclosure would
be provided.
COMMENT NO. 4:
In future filings, please expand/revise your results of operations discussion
for each period presented to address the following items, at a minimum:
o Quantify the extent to which increases/decreases in volume and/or prices
attributed to the increase or decrease in net sales. Refer to Item
303(A)(3)(iii) of Regulation S-X. In addition, quantify the impact of other
factors you identify that contributed to fluctuations, as appropriate. For
example, you attribute the increase in operating income for fiscal year
2007 versus fiscal year 2006 for your Universal Stainless and Alloy
Products segment to (a) improved mix of products and (b) higher selling
prices, which were offset by (c) higher raw material, (d) higher labor, (e)
higher utilities, and (f) higher manufacturing supply costs without
quantifying any of these factors.
o Provide a more detailed analysis of the factors that impact the areas
comprising your income from continuing operations, including a complete
discussion of known trends or anticipated trends that are and/or may
continue to have an impact on net sales, cost of products sold as a
percentage of net sales, selling and administrative expenses as a
percentage of net sales, et cetera, including management's outlook as to
the future impact. Your discussion and analysis is to provide investors
with sufficient information to understand the historical trends and the
expectations for the future as seen through the eyes of management.
Examples include the following:
o An analysis of inventory that specifically discusses material charges
for lower of cost or market reserves and/or obsolescence charges.
o An analysis of the aerospace market, including the impact this market
is having on your net sales and operating income. In this regard, we
note your discussion on page 7 that a downturn in the aerospace
industry would adversely affect the demand for your products and/or
the prices at which you could sell your products to this market, which
represents 45% of your net sales. If other markets are also impacting
your net sales and operating income, similar discussions should also
be included.
o For the instances in which a material change in a line item is due to
a change in product mix sold or a change in higher value-added
products, explain what those products are and why the material
increase or decrease of these products had a significant impact to the
line item. Similarly, if you attribute a change in net sales to an
increase or decrease in shipments, explain why shipments have
increased or decreased. For example, you partly attribute the increase
in operating income for both of your reportable segments to improved
or more favorable product mix. Such a statement does not provide
investors with a sufficient amount of insight of your product mix to
evaluate how such a change differs from the previous period and how
such a change may remain constant or differ in the future. Similar
analyses should be provided for other areas as well, such as your
attributing the increase in cost of products sold as a percentage of
net sales to operation cost increases.
Please note that this is not meant to be an all-inclusive list of where your
MD&A could be improved. We encourage you to provide further analysis throughout
your discussion. Refer to Item 303 of Regulation S-K, Section 501 of the
Financial Reporting Codification, and SEC Interpretive Release No. 33-8350 dated
December 19, 2003 for additional guidance.
RESPONSE:
In accordance with the Staff's comment, the Company will expand/revise its
results of operations discussion for each period presented in future filings to,
at a minimum:
o quantify the extent to which increases/decreases in volume and/or
prices contributed to any material increase or decrease in the
Company's net sales;
o quantify the impact of other factors that the Company identifies as
having contributed materially to fluctuations, as appropriate; and
o provide a more detailed analysis of the factors that significantly
impact the areas comprising the Company's income from continuing
operations, including known or anticipated trends and management's
outlook as to the future impact.
Liquidity and Capital Resources, page 14
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COMMENT NO. 5:
We note that inventory is 40% of total sales and 60% of total current assets as
of December 31, 2007. As such, please include an analysis of inventory turnover
rates for each period presented along with an explanation of any material
variances. Refer to instruction 5 to Item 303(A) of Regulation S-K for guidance.
RESPONSE:
In accordance with the Staff's comment, the Company will include in future
filings an analysis of inventory turnover rates for each period presented, along
with an explanation of any material variances.
COMMENT NO. 6:
In future filings, please disclose your material financial ratios and covenants
(i.e., the minimum leverage ratio, minimum debt service ratio, and minimum
tangible net worth) for your line of credit with PNC Bank.
RESPONSE:
In accordance with the Staff's comment, the Company will disclose in future
filings its material financial ratios and covenants for its line of credit with
PNC Bank.
Report of Independent Registered Public Accounting Firm, page 20
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COMMENT NO. 7:
We note that Schneider Downs & Co., Inc.'s audit report does not specifically
opine on the Schedule II included in Item 15 of your December 31, 2007 Form
10-K. Please request Schneider Downs & Co., Inc. to revise its report in the
future to clarify and to confirm to us that the Schedule II when considered in
relation to the consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein in
conformity with accounting principles generally accepted in the United States of
America. Please also request Schneider Downs & Co., Inc. to include the Schedule
II in its opinion paragraph in the future. Refer to Article 5-04(c) of
Regulation S-X for guidance.
RESPONSE:
In accordance with the Staff's comment, the Company has requested of
Schneider Downs, & Co., Inc. ("SD&Co") and SD&Co has agreed, that in applicable
future filings by the Company, SD&Co will:
o revise its report to clarify and confirm that the Schedule II, when
considered in relation to the consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information
set forth therein in conformity with accounting principles generally
accepted in the United States of America; and
o include the Schedule II in its opinion paragraph.
Note 1: Significant Accounting Policies, page 24
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Revenue Recognition, page 25
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COMMENT NO. 8:
We note your statement, "[c]ustomer claims are accounted for primarily as a
reduction to gross sales after the matter has been researched and an acceptable
resolution has been reached." Based on this statement, it is unclear to us
whether you have customer acceptance obligations for which you should either be
accounting for under SFAS 48 or SFAS 5 in accordance with SAB Topic 13:A.3.b.
Please revise your disclosure to clearly explain what the customer claims
represent, your contractual obligations in terms of customer acceptance, and how
your accounting for these customer claims comply with the guidance in SAB Topic
13:A.3.b. Please provide us with the disclosure you intend to include in future
filings.
RESPONSE:
As disclosed within the Revenue Recognition accounting policy, the Company
manufactures specialty steel product in accordance with customer purchase orders
that contain product specifications. Each purchase order provides detailed
information regarding the requirements for product acceptance. Executed Material
Certification forms are completed to indicate the Company's compliance with the
customer purchase order before the specialty steel products
material, the customer may identify a defect requiring additional manufacturing
procedures. In certain situations, the Company will fund the resolution of the
customer's claim through a reduction in the invoice value. The aggregate value
of these claims, accounted for as a reduction to gross sales, is immaterial.
Since the aggregate value of these claims, accounted for as a reduction to
gross sales, is immaterial the Company will delete the last sentence in future
filings and will only disclose those material claims in accordance with the
Staff's comments to clearly explain (i) what the customer claims represent, (ii)
the Company's contractual obligations in terms of customer acceptance and (iii)
how its accounting for these customer claims comply with the guidance in SAB
Topic 13:A.3.b.
Below is a draft of the disclosure that the Company accordingly intends to
include in future filings, based upon information currently available to the
Company:
Revenue Recognition. Revenue from the sale of products is recognized when
both risk of loss and title have transferred to the customer, which in most
cases coincides with shipment of the related products, and collection is
reasonably assured. Revenue from conversion services is recognized when the
performance of the service is complete. Invoiced shipping and handling
costs are also accounted for as revenue. Revenue is also recognized in
certain situations in which products available for shipment are held at the
Company's facility beyond the stated shipment date at the customer's
specific request. The Company manufactures specialty steel product to
customer purchase order specifications and in recognition of requirements
for product acceptance. Material certification forms are executed,
indicating compliance with the customer purchase orders, before the
specialty steel products are packed and shipped to the customer.
Occasionally customers request that the packed products be held at the
Company's facility beyond the stated shipment date. In these situations,
the Company receives written confirmation of the request, and
acknowledgement that title has passed to the customer and that normal
payment terms apply. Such amounts included in revenue for the years ended
December 31, 2007, 2006 and 2005 were less than 1% of net sales.
Note 10: Commitments and Contingencies, page 33
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COMMENT NO. 9:
In future filings, please revise your disclosure to address the materiality of
environmental conditions to your results of operations and liquidity in addition
to your financial condition. If there are any environmental conditions that are
probable or reasonably possible of having a material impact to your results of
operations and/or liquidity, please address the need for disclosure of those
issues in accordance with paragraphs 9-10 of SFAS 5 and SAB Topic 5:Y.
RESPONSE:
In accordance with the Staff's comment, the Company will revise its
disclosure in future filings to address the materiality of environmental
conditions to its results of operations and liquidity, in addition to its
financial condition. In addition, the Company will provide disclosure of any
environmental condition with respect to which it is probable or reasonably
possible that the environmental condition will have a material impact on the
Company's results of operations and/or liquidity in accordance with paragraphs 9
and 10 of SFAS 5 and SAB Topic 5:Y.
COMMENT NO. 10:
We note your disclosure that you have established a reserve of $200,000 for
product claims related to three sales. Please revise your disclosure in future
filings, to provide additional detail regarding the nature of these product
claims. In addition, if material, please disclose the amount or range of
reasonably possible loss in excess of your accrual. Refer to paragraph 10 of
SFAS 5.
RESPONSE:
In accordance with the Staff's comment, the Company will revise its
disclosure in future filings to provide additional detail regarding the nature
of product claims as referenced in the Staff's comment. The product claims
specifically referred to in your comment have been resolved during the quarter
ended June 30, 2008 and will not result in a material adjustment to the current
period financial statements. In addition, if material, the Company will disclose
the amount of loss, or a range of reasonably possible losses, relating to such
claims in excess of its accrual.
Item 9A. Controls and Procedures, page 36
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COMMENT NO. 11:
We note your statement that your chief executive officer and your chief
financial officer have concluded that the disclosure controls and procedures are
effective in the timely identification of material information required to be
included in the Company's periodic filings with the SEC. Management's conclusion
regarding the disclosure controls and procedures does not appear to conform to
the definition contained in Exchange Act Rule 13a-15(e). In future filings,
please revise to provide a conclusion consistent with the language of the Rule.
RESPONSE:
In accordance with the Staff's comment, the Company will, in future
filings, revise its disclosure to provide a conclusion consistent with the
language of Exchange Act Rule 13a-15(e).
Schedule 14A Filed on April 21, 2008
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The Board of Directors, page 4
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Committees of the Board of Directors, page 4
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COMMENT NO. 12:
In future filings, please describe your policies and procedures for the review,
approval, or ratification of transactions required to be reported under Item
404(a) of Regulation S-K. We note that the policies and procedures are not in
writing; however, please disclose how such policies and procedures are
evidenced. Please refer to Item 404(b)(1)(i)-(iv) of Regulation S-K.
RESPONSE:
In accordance with the Staff's comment, the Company will describe in future
filings its policies and procedures for the review, approval or ratification of
transactions required to be reported under Item 404(a) of Regulation S-K. In
addition, the Company will disclose how such policies and procedures are
evidenced.
Compensation Discussion and Analysis, page 9
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COMMENT NO. 13:
We note that you do not set salaries based on a specific benchmark; however, you
state that the Compensation Committee references "competitive market practices"
and "market pay levels" for salaries and stock incentives. In future filings,
please clarify what you are comparing your compensation decisions to and state
how each element of compensation actually compares to the peer group companies.
RESPONSE:
In accordance with the Staff's comment, the Company will clarify to what it
is comparing its compensation decisions and will state how each element of
compensation actually compares to compensation paid by peer group companies that
are considered by the Compensation Committee.
COMMENT NO. 14:
The Compensation Discussion and Analysis should be sufficiently precise to
capture material differences in compensation policies with respect to
individually named executive officers. Refer to Section II.B.1 of Commission
Release No. 33-8732A. If policies or decisions relating to a named executive
officer are materially different than the other officers, in future filings
please disclose on an individualized basis.
RESPONSE:
In accordance with the Staff's comment, the Company will disclose in future
filings on an individualized basis any material differences between compensation
policies with respect to named executive officers.
COMMENT NO. 15:
To the extent your compensation programs are correlated with the achievement of
certain annual individual and corporate objectives, in future filings please
disclose the specific items of performance used to determine compensation, how
your incentive bonuses are specifically structured around such objectives and
milestones and whether any discretion can be or has been exercised with respect
to meeting such goals and objectives and to whom such discretion is applicable.
Please further discuss the level of difficulty in achieving such individual
objectives. Please see Items 402(b)(2)(v)-(vii) of Regulation S-K. To the extent
you believe that disclosure of the information would result in competitive harm
such that the information could be excluded under Instruction 4 to Item 402(b)
of Regulation S-K, please provide on a supplemental basis a detailed explanation
for such conclusion and discuss how difficult it would be for the named
executive officers or how likely it will be for you to achieve the undisclosed
target levels or other factors. General statements regarding the level of
difficulty, or ease associated with achieving performance goals, are not
sufficient.
RESPONSE:
In accordance with the Staff's comment, to the extent that the Company's
compensation programs are correlated with the achievement of certain annual
individual and corporate objectives, the Company will disclose in future filings
(i) the specific items of performance used to determine compensation, (ii) how
the Company's incentive bonuses are specifically structured around the
objectives and milestones, (iii) whether any discretion can be or has been
exercised with respect to meeting the goals and (iv) objectives and to whom such
discretion is applicable. The Company also will discuss further the level of
difficulty in achieving such individual objectives.
Executive Compensation, page 13
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Executive Severance Benefits and Potential Payments Upon Change
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of Control, page 16
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COMMENT NO. 16:
In future filings, please describe and explain how the appropriate payment and
benefit levels are determined under the various circumstances that trigger
payments or provision of benefits upon termination of a change in control.
Please disclose why you have chosen to pay various multiples of the components
of compensation as severance or change-in-control payments. Discuss how the
severance arrangements and your decisions regarding this element fit into your
overall compensation objectives and affect decisions regarding other elements.
See Items 402(b)(1)(v) and 402(j)(3) of Regulation S-K. RESPONSE:
In accordance with the Staff's comment, the Company will describe and
explain in future filings how the appropriate payment and benefit levels are
determined under the various circumstances that trigger payments or provision of
benefits upon termination of a change in control. The Company also will disclose
why it has chosen to pay various multiples of the components of compensation as
severance or change-in-control premiums. In addition, the Company will discuss
how the severance arrangements and its decisions regarding this element fit into
its overall compensation objectives and affect decisions regarding other
elements.
Form 10-Q for the Fiscal Quarter Ended March 31, 2008
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Note 6 - Commitments and Contingencies, page 7
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COMMENT NO. 17:
We note that management does not believe the various lawsuits and claims that
have been asserted will "likely" have a material adverse effect on your
financial condition or liquidity but may have a material adverse effect on your
operating results in the quarter a lawsuit or claim is resolved. In future
annual and quarterly filings, please address each of the following:
o The language you use to describe loss contingencies should be
consistent and clear regarding whether you believe that the described
contingency is remote, reasonably possible, or probable. Depending
upon that determination, all other appropriate disclosures should be
made. Refer to paragraph 8 of SFAS 5.
o If there are any lawsuits or claims that are probable or reasonably
possible of having a material impact to your results of operations,
please address the need for disclosure of those lawsuits or claims in
accordance with paragraphs 9-10 of SFAS 5. In this regard, we note
that you attributed the increase in selling and administrative
expenses to the legal fees from your defense of a contractor
litigation matter and to the recognition of a reserve for a product
claim matter for which you have not provided specific disclosures in
accordance with paragraphs 9 and 10 of SFAS 5 or SAB Topic 5:Y.
Please provide us with the disclosures you intend to use in future filings.
RESPONSE:
In accordance with the Staff's comment, in future annual and quarterly
filings, the Company will:
o describe material loss contingencies using language that is consistent
and clear regarding whether the Company believes that the described
contingency is remote, reasonably possible or probable and, depending
upon that determination, make all other appropriate disclosures; and
o address the need for disclosure of any lawsuit or claim with respect
to which it is probable or reasonably possible that the lawsuit or
claim will have a material impact on the Company's results of
operations in accordance with paragraphs 9 and 10 of SFAS 5.
Below is a draft of the disclosure that the Company accordingly intends to
include in future filings, based upon information currently available to the
Company:
Note 6 - Commitments and Contingencies
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From time to time, various lawsuits and claims have been or may be
asserted against the Company relating to the conduct of our business,
including routine litigation relating to commercial and employment
matters. The ultimate cost and outcome of any litigation or claim
cannot be predicted with certainty. Management believes, based on
information presently available, that the likelihood that the ultimate
outcome of any such pending matter will have a material adverse effect
on our financial condition or liquidity is remote.
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations, page 9
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Liquidity and Capital Resources, page 11
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COMMENT NO. 18:
We note that you attribute the increase in the accounts receivable balance from
December 31, 2007 to March 31, 2008 to the increase in net sales for the fourth
quarter of 2007 versus the first quarter of 2008. We further note that accounts
receivable increased 26% whereas net sales increased 14.5%. As such, it appears
as though there may be an additional cause for the increase in accounts
receivable. In future filings please, ensure your analysis of the changes in
accounts receivable and other working capital balances fully explains the
contributing factors. For example, for accounts receivable it may be useful to
investors for you to include the days sales outstanding along with analysis of
any material variations.
RESPONSE:
In accordance with the Staff's comment, the Company will ensure that its
analysis of changes in accounts receivable and other working capital balances
fully explains the contributing factors.
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The Company believes it has responded fully to your comments. On behalf of
Universal Stainless & Alloy Products, Inc., I thank you for you consideration of
our response. Should the Staff have further questions or comments or need any
further information or clarification, please call me at (412) 257-7606.
Sincerely,
/s/ Richard M. Ubinger
Richard M. Ubinger
Vice President of Finance,
Chief Financial Officer and Treasurer