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EX-31.2 - EX-31.2 - UNIVERSAL STAINLESS & ALLOY PRODUCTS INCusap-20150630xex312.htm
EX-10.1 - EX-10.1 - UNIVERSAL STAINLESS & ALLOY PRODUCTS INCusap-20150630ex101394fb5.htm
EX-10.2 - EX-10.2 - UNIVERSAL STAINLESS & ALLOY PRODUCTS INCusap-20150630ex10278bc59.htm
EX-10.3 - EX-10.3 - UNIVERSAL STAINLESS & ALLOY PRODUCTS INCusap-20150630ex103d0090f.htm
EX-31.1 - EX-31.1 - UNIVERSAL STAINLESS & ALLOY PRODUCTS INCusap-20150630xex311.htm
EX-32.1 - EX-32.1 - UNIVERSAL STAINLESS & ALLOY PRODUCTS INCusap-20150630xex321.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

  

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2015 

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 000-25032

 

Picture 1

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

 

 

DELAWARE

25-1724540

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

600 Mayer Street

Bridgeville, PA 15017

(Address of principal executive offices, including zip code)

(412) 257-7600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of July  27, 2015, there were 7,102,924 shares of the Registrant’s common stock outstanding.

 

 

 


 

Universal Stainless & Alloy Products, Inc.

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

DESCRIPTION

 

PAGE NO.

PART I.

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

1

 

Consolidated Statements of Operations

 

1

 

Consolidated Balance Sheets

 

2

 

Consolidated Statements of Cash Flow

 

3

 

Notes to the Unaudited Consolidated Financial Statements

 

4

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

9

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

17

Item 4.

Controls and Procedures

 

17

PART II.

OTHER INFORMATION

 

18

Item 1.

Legal Proceedings

 

18

Item 1A.

Risk Factors

 

18

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

18

Item 3.

Defaults Upon Senior Securities

 

18

Item 4.

Mine Safety Disclosures

 

18

Item 5.

Other Information

 

18

Item 6.

Exhibits

 

18

SIGNATURES 

 

 

18

 

 

 

 

i

 


 

Part I. FINANCIAL INFORMATION

Item 1.FINANCIAL STATEMENTS

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Information)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

Six months ended

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

49,610 

 

$

52,309 

 

$

105,593 

 

$

98,976 

Cost of products sold

 

 

44,424 

 

 

43,899 

 

 

94,697 

 

 

84,506 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

5,186 

 

 

8,410 

 

 

10,896 

 

 

14,470 

Selling, general and administrative expenses

 

 

4,961 

 

 

5,169 

 

 

9,655 

 

 

9,797 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

225 

 

 

3,241 

 

 

1,241 

 

 

4,673 

Interest expense and other financing costs

 

 

(765)

 

 

(1,042)

 

 

(1,547)

 

 

(1,905)

Other income (expense), net

 

 

11 

 

 

(1)

 

 

(33)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(529)

 

 

2,198 

 

 

(339)

 

 

2,771 

(Benefit) provision for income taxes

 

 

(173)

 

 

749 

 

 

(108)

 

 

1,821 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(356)

 

$

1,449 

 

$

(231)

 

$

950 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share - Basic

 

$

(0.05)

 

$

0.21 

 

$

(0.03)

 

$

0.14 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share - Diluted

 

$

(0.05)

 

$

0.20 

 

$

(0.03)

 

$

0.13 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,061,545 

 

 

7,031,041 

 

 

7,058,026 

 

 

7,022,983 

Diluted

 

 

7,061,545 

 

 

7,110,761 

 

 

7,058,026 

 

 

7,112,093 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

1


 

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

 CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

(Derived from

 

 

 

 

 

audited

 

 

(Unaudited)

 

statements)

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

420 

 

$

142 

Accounts receivable (less allowance for doubtful accounts of $3 and $17, respectively)

 

 

30,180 

 

 

29,057 

Inventory, net

 

 

99,021 

 

 

101,070 

Deferred income taxes

 

 

7,227 

 

 

9,683 

Other current assets

 

 

3,719 

 

 

2,681 

 

 

 

 

 

 

 

Total current assets

 

 

140,567 

 

 

142,633 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

197,923 

 

 

199,795 

Goodwill

 

 

20,268 

 

 

20,268 

Other long-term assets

 

 

1,409 

 

 

1,861 

 

 

 

 

 

 

 

Total assets

 

$

360,167 

 

$

364,557 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

19,178 

 

$

25,009 

Accrued employment costs

 

 

3,229 

 

 

6,011 

Current portion of long-term debt

 

 

3,000 

 

 

3,000 

Other current liabilities

 

 

593 

 

 

861 

 

 

 

 

 

 

 

Total current liabilities

 

 

26,000 

 

 

34,881 

 

 

 

 

 

 

 

Long-term debt

 

 

89,711 

 

 

83,875 

Deferred income taxes

 

 

39,650 

 

 

42,108 

Other long-term liabilities

 

 

58 

 

 

63 

 

 

 

 

 

 

 

Total liabilities

 

 

155,419 

 

 

160,927 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Senior preferred stock, par value $0.001 per share; 1,980,000 shares authorized; 0 shares issued and outstanding 

 

 

 -

 

 

 -

Common stock, par value $0.001 per share; 20,000,000 shares authorized; 7,395,779 and 7,371,018 shares issued, respectively

 

 

 

 

Additional paid-in capital

 

 

54,159 

 

 

52,810 

Retained earnings

 

 

152,872 

 

 

153,103 

Treasury stock, at cost; 292,855 common shares held

 

 

(2,290)

 

 

(2,290)

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

204,748 

 

 

203,630 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

360,167 

 

$

364,557 

 

 

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

 

2


 

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

 CONSOLIDATED STATEMENTS OF CASH FLOW

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

June 30,

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

Net (loss) income

 

$

(231)

 

$

950 

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

9,181 

 

 

8,723 

Deferred income tax 

 

 

(2)

 

 

1,347 

Share-based compensation expense

 

 

961 

 

 

1,032 

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,123)

 

 

(10,477)

Inventory, net

 

 

1,011 

 

 

(14,495)

Accounts payable

 

 

(5,831)

 

 

12,497 

Accrued employment costs

 

 

(2,782)

 

 

822 

Income taxes

 

 

(272)

 

 

433 

Other, net

 

 

(1,039)

 

 

(402)

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

 

(127)

 

 

430 

 

 

 

 

 

 

 

Investing Activity:

 

 

 

 

 

 

Capital expenditures

 

 

(5,819)

 

 

(3,472)

 

 

 

 

 

 

 

Net cash used in investing activity

 

 

(5,819)

 

 

(3,472)

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

63,848 

 

 

45,207 

Payments on revolving credit facility

 

 

(56,512)

 

 

(41,698)

Payments on term loan facility

 

 

(1,500)

 

 

(1,500)

Proceeds from the issuance of common stock

 

 

388 

 

 

891 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

6,224 

 

 

2,900 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

278 

 

 

(142)

Cash at beginning of period

 

 

142 

 

 

307 

 

 

 

 

 

 

 

Cash at end of period

 

$

420 

 

$

165 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

  

3


 

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1:  Nature of Business and Basis of Presentation

Universal Stainless & Alloy Products, Inc., and its wholly-owned subsidiaries (“Universal”, “we”, “our” or the “Company”), manufacture and market semi-finished and finished specialty steel products, including stainless steel, nickel alloys, tool steel and certain other alloyed steels. Our manufacturing process involves melting, remelting, heat treating, hot and cold rolling, forging, machining and cold drawing of semi-finished and finished specialty steels. Our products are sold to service centers, forgers, rerollers, original equipment manufacturers and wire redrawers. Our customers further process our products for use in a variety of industries, including the aerospace, power generation, oil and gas and heavy equipment manufacturing industries. We also perform conversion services on materials supplied by customers.

The accompanying unaudited consolidated statements include the accounts of Universal Stainless & Alloy Products, Inc. and its subsidiaries and are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reports and the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. GAAP have been condensed or omitted pursuant to such regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our most recently audited financial statements and the notes thereto included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission. In the opinion of management, the accompanying financial statements include all adjustments necessary to present a fair presentation of the consolidated financial statements for the periods shown. Interim results are not necessarily indicative of the operating results for the full fiscal year or any future period. The preparation of these financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results may differ from our estimates. The consolidated financial statements include our accounts and the accounts of our wholly–owned subsidiaries. All intercompany transactions and balances have been eliminated.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09 “Revenue from Contracts with Customers (Topic 606).”  This topic converges the guidance within U.S. GAAP and International Financial Reporting Standards and supersedes Accounting Standards Codification 605, Revenue Recognition.  The new standard requires companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services.  The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements.  The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and early application is not permitted.  We are currently evaluating the impact that this standard will have on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs."  ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The new guidance is effective for annual reporting periods beginning after December 15, 2015, including interim reporting periods within that reporting period, and early application is permitted.  We are currently evaluating the impact that this standard will have on our consolidated financial statements.

In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2015-11, “Simplifying the Measurement of Inventory” ("ASU 2015-11") to simplify the guidance on the subsequent measurement of inventory, excluding inventory measured using last-in, first out or the retail inventory method. Under the new standard, inventory should be at the lower of cost and net realizable value. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016 with early adoption permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2015-11 on the Company's consolidated financial statements.

 

4


 

Note 2:  Net (loss) income per Common Share

The following table sets forth the computation of basic and diluted net (loss) income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

June 30,

 

June 30,

 

 

 

 

 

 

 

(dollars in thousands, except per share amounts)

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(356)

 

$

1,449 

 

$

(231)

 

$

950 

Adjustment for interest expense on convertible notes (A)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income, as adjusted

 

$

(356)

 

$

1,449 

 

$

(231)

 

$

950 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding

 

 

7,061,545 

 

 

7,031,041 

 

 

7,058,026 

 

 

7,022,983 

Weighted average effect of dilutive stock options and other stock compensation

 

 

 -

 

 

79,720 

 

 

 -

 

 

89,110 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding, as adjusted 

 

 

7,061,545 

 

 

7,110,761 

 

 

7,058,026 

 

 

7,112,093 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share - Basic

 

$

(0.05)

 

$

0.21 

 

$

(0.03)

 

$

0.14 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per common share - Diluted

 

$

(0.05)

 

$

0.20 

 

$

(0.03)

 

$

0.13 

(A)   An adjustment for interest expense on convertible notes was excluded from the (loss) income per share calculation for the three and six months ended June 30, 2015 and 2014 as a result of the convertible notes being antidilutive.

We had options to purchase 587,550 and 352,800 shares of common stock outstanding at an average price of $32.96 and $36.23 for the three months ended June 30, 2015 and 2014, respectively, which were excluded in the computation of diluted net (loss) income per common share.  We had options to purchase 587,550 and 268,300 shares of common stock outstanding at an average price of $32.96 and $36.55 for the six months ended June 30, 2015 and 2014, respectively, which were excluded in the computation of diluted net (loss) income per common share. These outstanding options were not included in the computation of diluted net (loss) income per common share because their respective exercise prices were greater than the average market price of our common stock. The calculation of diluted earnings per share for the three and six months ended June 30, 2015 and 2014 excluded 428,888 and 428,177 shares, respectively, for the assumed conversion of convertible notes as a result of being antidilutive.  In addition, the calculation of dilutive earnings per share for the three and six months ended June 30, 2015 excluded 27,598 and 35,757 shares, respectively, for the assumed exercise of stock options and restricted stock under our stock share incentive plans, as a result of being in a net loss position.

5


 

Note 3:  Inventory

Our raw material and starting stock inventory is primarily comprised of ferrous and non-ferrous scrap metal and alloys such as nickel, chrome, molybdenum, cobalt and copper. Our semi-finished and finished steel products are work-in-process in various stages of production or are finished products waiting to be shipped to our customers.  Operating materials are primarily comprised of forge dies and production molds and rolls that are consumed over their useful lives. During the six months ended June 30, 2015 and 2014, we amortized these operating materials in the amount of $1,039,000 and $838,000, respectively.  This expense is recorded as a component of cost of products sold on the consolidated statements of operations and included as a part of our total depreciation and amortization on the consolidated statements of cash flows. Inventory is stated at the lower of cost or market with cost principally determined on a weighted average cost method. Such costs include the acquisition cost for raw materials and supplies, direct labor and applied manufacturing overhead. We assess market based upon actual and estimated transactions at or around the balance sheet date. Typically, we reserve for slow-moving inventory and inventory that is being evaluated under our quality control process. The reserves are based upon management’s expected method of disposition.  Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

(in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

Raw materials and starting stock

 

$

8,939 

 

$

8,943 

Semi-finished and finished steel products

 

 

81,971 

 

 

84,816 

Operating materials

 

 

8,960 

 

 

8,759 

 

 

 

 

 

 

 

Gross inventory

 

 

99,870 

 

 

102,518 

Inventory reserves

 

 

(849)

 

 

(1,448)

 

 

 

 

 

 

 

Total inventory, net

 

$

99,021 

 

$

101,070 

 

 

Note 4:  Goodwill

We test goodwill for impairment by either performing a qualitative evaluation or a two-step quantitative test, which involves comparing the estimated fair value of the associated reporting unit to its carrying value.  The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that fair value is less than its carrying amount.  Factors considered as part of the qualitative assessment include entity-specific, industry, market and general economic conditions.  We may elect to bypass this qualitative assessment and perform a two-step quantitative test.  We test for goodwill impairment using a combination of valuation techniques, which include consideration of a market-based approach (guideline company method) and an income approach (discounted cash flow method), in determining fair value in the annual impairment test of goodwill.  We believe that the combination of the valuation models provides a more appropriate valuation by taking into account different marketplace participant assumptions.  Both methods utilize market data in the derivation of a value estimate and are forward-looking in nature.  The guideline assessment of future performance and the discounted cash flow method utilize a market-derived rate of return to discount anticipated performance.

We conduct our annual impairment test during the fourth quarter of each year.  Other events and changes in circumstances may also require goodwill to be tested for impairment between annual measurement dates. While a decline in stock price and market capitalization is not specifically cited as a goodwill impairment indicator, a company’s stock price and market capitalization should be considered in determining whether it is more likely than not that the fair value of a reporting unit is less that its carrying value. Additionally, a significant decline in a company’s stock price may suggest that an adverse change in the business climate may have caused the fair value of the reporting unit to fall below its carrying value. The financial and credit market volatility directly impacts our fair value measurement through our stock price that we use to determine our market capitalization. During times of volatility, significant judgment must be applied to determine whether credit or stock price changes are a short-term swing or a longer-term trend. As of June 30, 2015, the Company has experienced what it believes to be a short-term downward trend of its stock price which is consistent with the highly cyclical nature of the specialty metals industry. We do not believe there have been any events or circumstances that would require us to perform an interim goodwill impairment review; however, a sustained decline in our market capitalization below its book value could lead us to determine, in a future period, that an interim goodwill impairment review is required and may result in a non-cash impairment charge which would have a negative impact on our results of operations.

 

 

6


 

 

Note 5:   Long-Term Debt 

Long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

(in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

Revolving credit facility

 

$

58,350 

 

$

51,350 

Convertible notes

 

 

20,000 

 

 

20,000 

Term loan

 

 

14,000 

 

 

15,500 

Swing loan credit facility

 

 

361 

 

 

25 

 

 

 

 

 

 

 

Total debt

 

 

92,711 

 

 

86,875 

Less: current portion of long-term debt

 

 

(3,000)

 

 

(3,000)

 

 

 

 

 

 

 

Long-term debt

 

$

89,711 

 

$

83,875 

Credit Facility

We have a Credit Agreement (as amended to date, the “Credit Agreement”) with a syndication of banks which provides for a $105.0 million senior secured revolving credit facility (the “Revolver”) and a $20.0 million senior secured term loan facility (the “Term Loan” and together with the Revolver, the “Facilities”) that expires in March 2017.  Under the Credit Agreement, our loan availability under the Revolver (“Borrowing Base”) is calculated monthly based upon our accounts receivable and inventory balances.  

We are required to pay a commitment fee of 0.25% based on the daily unused portion of the Revolver. The Revolver also provides for up to $7.0 million of swing loans so long as the sum of the outstanding swing loans and the outstanding borrowings under the Revolver do not exceed our Borrowing Base at any given time. The Term Loan is payable in quarterly installments in the principal amount of $750,000, which began on July 1, 2013, with the balance of the Term Loan payable in full on March 19, 2017.  

Amounts outstanding under the Facilities, at our option, will bear interest at either a base rate or a LIBOR-based rate (the “LIBOR Option”), in either case calculated in accordance with the terms of the Credit Agreement. We elected to use the LIBOR Option during the six months ended June  30, 2015, which was 1.94% at June  30, 2015.  Interest on the Facilities is payable monthly.  

We are required to maintain a leverage ratio not exceeding a ratio decreasing from 3.5 to 1.00 for the period June 30, 2015 to September 30, 2015,  3.25 to 1.00 at December 31, 2015 and 3.00 to 1.00 from March 31, 2016 through maturity.  We are required to maintain a fixed charge coverage ratio of 1.1 to 1.0 to maturity. We were in compliance with our covenants at June 30, 2015 and December 31, 2014.  

Convertible Notes

In connection with the acquisition of the North Jackson facility, in August 2011, we issued $20.0 million in convertible notes (the “Notes”) to the sellers of the North Jackson facility as partial consideration of the acquisition.  The Notes are subordinated obligations and rank junior to the Facilities.  The Notes bear interest at a fixed rate of 4.0% per annum, payable in cash semi-annually in arrears on each June 18 and December 18, beginning on December 18, 2011.  Unless earlier converted, the Notes mature and the unpaid principal balance is due on August 17, 2017.  The Notes and any accrued and unpaid interest are convertible into shares of our common stock at the option of the holder at an initial conversion price of $47.1675 per share of common stock.  The conversion price associated with the Notes may be adjusted in certain circumstances.  We may prepay any outstanding Notes, in whole or in part, during a fiscal quarter if our share price is greater than 140% of the then current conversion price for at least 20 of the trading days in the 30 consecutive trading day period ending on the last trading day of the immediately preceding quarter.

 

Note 6:   Fair Value Measurement

The fair value hierarchy has three levels based on the inputs used to determine fair value, which are as follows:

Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

7


 

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The carrying amounts of our cash, accounts receivable and accounts payable approximated fair value at June 30, 2015 and December 31, 2014 due to their short-term maturities (Level 1). The fair value of the Term Loan, Revolver and swing loans at June 30, 2015 and December 31, 2014 approximated the carrying amount as the interest rate is based upon floating short-term interest rates (Level 2).  At June 30, 2015 and December 31, 2014, the fair value of our Notes was approximately $20.5 million (Level 2).  

 

Note 7:   Commitments and Contingencies

From time to time, various lawsuits and claims have been or may be asserted against us 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 or a material impact on our results of operations is remote, although the resolution of one or more of these matters may have a material adverse effect on our results of operations for the period in which the resolution occurs.

 

Note 8:  Income Taxes

Management estimates the annual effective income tax rate quarterly, based on current annual forecasted results. Items unrelated to current year ordinary income are recognized entirely in the period identified as a discrete item of tax. The quarterly income tax provision is comprised of tax on ordinary income provided at the most recent estimated annual effective tax rate, increased or decreased for the tax effect of discrete items.

For the six months ended June 30, 2015 and 2014, our estimated annual effective tax rate applied to ordinary income was 29.0% and 34.4%, respectively. 

Including the effect of discrete items, our effective tax rate for the six months ended June 30, 2015 and 2014 was 31.7% and 65.7%, respectively and for the three months ended June 30, 3015 and 2014 was 32.5% and 34.1% respectively.  The effective tax rate for the three and six months ended June 30, 2014 was reflective of a net discrete tax expense of $869,000.  The $869,000 of discrete tax expense primarily includes tax expense of $596,000 associated with the New York state tax rate reduction to 0% for New York qualified manufacturers, and tax expense of $247,000 associated with a Pennsylvania tax settlement related to certain expenses which had been deducted for state income tax purposes during the 2005-2007 tax years.

 

8


 

ITEM  2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates forward looking statements within the meaning of the Private Securities Reform Act of 1995, which involves risks and uncertainties. The following information should be read in conjunction with the unaudited consolidated financial information and the notes thereto included in this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward looking statements. Actual events or results may differ materially due to competitive factors and other factors referred to in Part 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2014, our other filings with the Securities and Exchange Commission and elsewhere in this Quarterly Report. These factors may cause our actual results to differ materially from any forward looking statement. These forward looking statements are based on current expectations, estimates, forecasts, and projections about the industry and markets in which we operate, and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “project,” or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict.

Business Overview

We manufacture and market semi-finished and finished specialty steel products, including stainless steel, nickel alloys, tool steel and certain other alloyed steels. Our manufacturing process involves melting, remelting, heat treating, hot and cold rolling, forging, machining and cold drawing of semi-finished and finished specialty steels. Our products are sold to rerollers, forgers, service centers, original equipment manufacturers and wire redrawers. Our customers further process our products for use in a variety of industries, including the aerospace, power generation, oil and gas and general industrial markets. We also perform conversion services on materials supplied by customers.

 

Sales in the second quarter of 2015 were $49.6 million, a decrease of $6.4 million, or 11.4%, from the first quarter of 2015 and a decrease of $2.7 million, or 5.2%, from the second quarter of 2014. Sales were generally lower due to the reduction in surcharges caused by falling metal commodity prices and lower volume caused by customer inventory destocking related to the sharp decline in the exploration for oil and gas.  Sales in the second quarter 2015 declined compared to the first quarter of 2015 in most targeted end use markets with aerospace down 10%, power generation down 30.7% and oil and gas down 32.6%. Sales to the heavy equipment market increased 24.6% due to strong automotive production activity and general industrial, conversion services and other sales increased 27.2% as customers took advantage of our unique capabilities for hot rolling and forging.  Compared to the second quarter of 2014, sales to aerospace increased modestly by 0.6%, heavy equipment increased by 34.6%, power generation decreased 22.6%, oil and gas decreased 23.9% and general industrial, conversion services and other sales declined 5%. Through six months of 2015, sales of $105.6 million are $6.6 million, or 6.7%, greater than the comparable period of 2014 with all targeted end use markets except general industrial contributing positively.  The decline in metal commodity prices and the price of oil led to the slowing in sales during the second quarter. During the second quarter of 2015, our sales of premium alloy products, which we define as all vacuum induction, melt (“VIM”) products, represented $4.2 million, or 8.6%, of total net sales.  This compared to a record first quarter 2015 premium alloy sales of $5.0 million or 9.0%.  Premium alloy sales in the first half of 2015 totaled $9.3 million, or an increase of 33.5% over the first half of 2014.  Our premium alloy products are primarily sold to the aerospace end market.  Our backlog, before surcharges, at June 30, 2015 was $48.9 million, a decline of $9.6 million, or 16.4%, compared to March 31, 2015, and a decline of $12.2 million, or 20.0%, since December 31, 2014.  Prices for key commodities such as nickel, molybdenum and iron scrap have fallen rapidly during 2015 and the fourth quarter of 2014 creating a misalignment between surcharges in sales and the melt costs of products shipped during the first and second quarters of 2015.  In addition, the sudden drop in the price of a barrel of oil and related reduction in exploration activity has caused customers to destock their inventory positions across most end markets served by us. The combination of the misalignment of surcharges and melt costs, and the lower sales and production activity as customers destocked, led to gross profit margins of 10.5% in the second quarter 2015 and 10.2% in the first quarter of 2015, compared to 16.1% in the second quarter of 2014, 16.1% in the third quarter of 2014 and 16.8% in the fourth quarter of 2014. 

 

Selling, General and Administrative expenses were $5.0 million in the second quarter 2015 slightly below the $5.2 million in the second quarter 2014, but 6.4% greater than the $4.7 million reported in the first quarter 2015.  The increase compared to the first quarter was attributable to increased employment costs incurred as the development of the organization proceeds. With a lower backlog, uncertainty in the oil & gas market, continuing decreases in commodity prices like nickel and molybdenum and destocking trends among customers, we believe that our third quarter 2015 sales will be somewhat lower than the second quarter of 2015.  Given these current business conditions, we are taking steps to align spending with lower activity levels, reduce material costs and lower inventory during the third quarter.  At the same time, we will continue to work on gaining customer approvals for our higher value added premium melted products to expand our revenue base as we move into future periods.    

9


 

Results of Operations

Three months ended June 30, 2015 as compared to the three months ended June 30, 2014 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

 

 

(in thousands, except shipped ton information)

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

Percentage of net sales

 

 

Amount

 

Percentage of net sales

 

Dollar / ton variance

 

Percentage variance

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stainless steel 

 

$

36,955 

 

74.5 

%

 

$

42,045 

 

80.4 

%

 

$

(5,090)

 

(12.1)

%

High-strength low alloy steel

 

 

4,154 

 

8.4 

 

 

 

3,451 

 

6.6 

 

 

 

703 

 

20.4 

 

Tool steel

 

 

5,086 

 

10.3 

 

 

 

3,389 

 

6.5 

 

 

 

1,697 

 

50.1 

 

High-temperature alloy steel

 

 

2,051 

 

4.1 

 

 

 

1,795 

 

3.4 

 

 

 

256 

 

14.3 

 

Conversion services and other sales

 

 

1,364 

 

2.7 

 

 

 

1,629 

 

3.1 

 

 

 

(265)

 

(16.3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

 

49,610 

 

100.0 

 

 

 

52,309 

 

100.0 

 

 

 

(2,699)

 

(5.2)

 

Cost of products sold

 

 

44,424 

 

89.5 

 

 

 

43,899 

 

83.9 

 

 

 

525 

 

1.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

5,186 

 

10.5 

 

 

 

8,410 

 

16.1 

 

 

 

(3,224)

 

(38.3)

 

Selling, general and administrative expenses

 

 

4,961 

 

10.0 

 

 

 

5,169 

 

9.9 

 

 

 

(208)

 

(4.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

225 

 

0.5 

 

 

 

3,241 

 

6.2 

 

 

 

(3,016)

 

(93.1)

 

Interest expense

 

 

(605)

 

(1.2)

 

 

 

(882)

 

(1.7)

 

 

 

277 

 

(31.4)

 

Deferred financing amortization

 

 

(160)

 

(0.3)

 

 

 

(160)

 

(0.3)

 

 

 

 -

 

0.0 

 

Other income (expense), net

 

 

11 

 

 -

 

 

 

(1)

 

 -

 

 

 

12 

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(529)

 

(1.0)

 

 

 

2,198 

 

4.2 

 

 

 

(2,727)

 

(124.1)

 

(Benefit) provision for income taxes

 

 

(173)

 

(0.3)

 

 

 

749 

 

1.4 

 

 

 

(922)

 

(123.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(356)

 

(0.7)

%

 

$

1,449 

 

2.8 

%

 

$

(1,805)

 

124.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tons shipped

 

 

8,909 

 

 

 

 

 

9,921 

 

 

 

 

 

(1,012)

 

(10.2)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales dollars per shipped ton

 

$

5,569 

 

 

 

 

$

5,273 

 

 

 

 

$

296 

 

5.6 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NM – Not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market Segment Information

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

 

 

 

 

(in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

Percentage of net sales

 

Amount

 

Percentage of net sales

 

Dollar variance

 

Percentage variance

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service centers

 

$

34,393 

 

69.3 

%

 

$

34,971 

 

66.9 

%

 

$

(578)

 

(1.7)

%  

Original equipment manufacturers

 

 

5,790 

 

11.7 

 

 

 

4,002 

 

7.7 

 

 

 

1,788 

 

44.7 

 

Rerollers

 

 

4,162 

 

8.4 

 

 

 

4,627 

 

8.8 

 

 

 

(465)

 

(10.0)

 

Forgers

 

 

3,901 

 

7.9 

 

 

 

7,080 

 

13.5 

 

 

 

(3,179)

 

(44.9)

 

Conversion services and other sales

 

 

1,364 

 

2.7 

 

 

 

1,629 

 

3.1 

 

 

 

(265)

 

(16.3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net sales

 

$

49,610 

 

100.0 

%

 

$

52,309 

 

100.0 

%

 

$

(2,699)

 

(5.2)

%  

 

10


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Melt Type Information

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

 

 

(in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

Percentage of net sales

 

 

Amount

 

Percentage of net sales

 

Dollar variance

 

Percentage variance

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty alloys

 

$

44,001 

 

88.7 

%

 

$

46,424 

 

88.8 

%

 

$

(2,423)

 

(5.2)

%