UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC. 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 endedDecember 31, 2021 , our other filings with theSecurities 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.
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 service centers, forgers, rerollers, and original equipment manufacturers. Our customers further process our products for use in a variety of industries, including the aerospace, power generation, oil and gas, heavy equipment and general industrial markets. We also perform conversion services on materials supplied by customers. Sales in the first quarter of 2022 were$47.6 million , an increase of$4.3 million , or 10.0%, from the fourth quarter of 2021. During this period, sales to our largest end market, aerospace, increased$4.4 million , or 16.9%, driven by increasing aerospace supply chain demand. Sales increased in all our end markets compared to the fourth quarter of 2021, except for heavy equipment. Total company backlog, before surcharges, at the end of the first quarter was$201.8 million , an increase of$67.3 million , or 50.0%, compared to the end of 2021. This is the result of record order-entry in the first quarter as demand for our products continues to increase despite our price increases and lengthening lead times. During the quarter, our sales of premium alloy products, which we define as all vacuum induction melt products, totaled$8.9 million and comprised 18.8% of total sales. This percentage of sales was an increase sequentially, but a decrease from 20.4% of sales in the first quarter of 2021. Our premium alloy products are primarily sold to the aerospace end market. Our gross margin for the first quarter was$4.1 million , or 8.5% of net sales, and included a$1.1 million benefit related to a grant received from the Aviation Manufacturing Jobs Protection ("AMJP") Program. The gross margin percentage is an increase from negative 0.7% of net sales in the first quarter of 2021, but a decrease from 8.7% of net sales in the fourth quarter of 2021. The sequential decrease in gross margin was primarily caused by supply chain challenges and operational difficulties at the beginning of 2022, including trucking delays and interruptions in service, parts and supplies availability. This impact was worsened by continuing labor shortages and rapidly rising costs that were not fully offset by price increases. We have since enacted prices targeted to offset these higher costs. These negative impacts were partly offset by rising product margins on our premium alloy products sold during the quarter.
COVID-19 Pandemic
While the Company's four plants have continued to operate throughout the
pandemic, COVID-19 related challenges negatively impacted the efficiency of our
operations. These challenges continued in the first quarter and may continue
throughout 2022. These factors may have additional significant impacts on the
Company's backlog, end markets, overall operations, cash flows and financial
results.
The scope and nature of these impacts, most of which are beyond the Company's
control, continue to evolve, and the outcome is uncertain. The ultimate extent
of the effects of the COVID-19 pandemic on the Company, and the end markets we
serve, remains highly uncertain and will depend on future developments and, as
such, effects could exist for an extended period, even after the pandemic may
end.
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--------------------------------------------------------------------------------Results of Operations
Three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 : Three months ended March 31, (in thousands, except shipped ton information) 2022 2021 Dollar / Percentage Percentage of Percentage of ton variance Amount net sales Amount net sales variance Net sales$ 47,562 100.0$ 37,038 100.0$ 10,524 28.4 Cost of products sold 43,509 91.5 37,286 100.7 6,223 16.7 Gross margin 4,053 8.5 (248) (0.7) 4,301 NM Selling, general and administrative expenses 5,049 10.6 5,231 14.1 (182) (3.5) Operating loss (996) (2.1) (5,479) (14.8) 4,483 81.8 Interest expense 653 1.4 494 1.3 159 32.2 Deferred financing amortization 56 0.1 56 0.2 - - Other expense, net 13 - 16 - (3) (18.8) Loss before income taxes (1,718) (3.6) (6,045) (16.3) 4,327 71.6 Income taxes (103) (0.2) (1,516) (4.1) 1,413 93.2 Net loss$ (1,615) (3.4) %$ (4,529) (12.2) %$ 2,914 64.3 Tons shipped 6,829 7,048 (219) (3.1) Sales dollars per shipped ton$ 6,965 $ 5,255 $ 1,710 32.5 % Market Segment Information Three months ended March 31, (in thousands) 2022 2021 Percentage of Percentage of Dollar Percentage Amount net sales Amount net sales variance variance Net sales: Service centers$ 33,253 69.9 %$ 25,844 69.8 %$ 7,409 28.7 % Original equipment manufacturers 4,704 9.9 4,795 12.9 (91) (1.9) Rerollers 4,508 9.5 3,793 10.2 715 18.9 Forgers 4,688 9.9 2,212 6.0 2,476 111.9 Conversion services and other 409 0.8 394 1.1 15 3.8 Total net sales$ 47,562 100.0 %$ 37,038 100.0 %$ 10,524 28.4 % 14
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Melt Type Information
Three months ended March 31,
(in thousands) 2022 2021
Percentage of Percentage of Dollar Percentage
Amount net sales Amount net sales variance variance
Net sales:
Specialty alloys $ 38,220 80.4 % $ 29,091 78.5 % $ 9,129 31.4 %
Premium alloys (A) 8,933 18.8 7,553 20.4 1,380 18.3
Conversion services and other 409 0.8 394 1.1 15 3.8
Total net sales $ 47,562 100.0 % $ 37,038 100.0 % $ 10,524 28.4 %
(A) Premium alloys represent all vacuum induction melted (VIM) products.
The majority of our products are sold to service centers rather than the
ultimate end market customers. The end market information in this Quarterly
Report is our estimate based upon our knowledge of our customers and the grade
of material sold to them, which they will in-turn sell to the ultimate end
market customer.
End Market Information
Three months ended March 31,
(in thousands) 2022 2021
Percentage of Percentage of Dollar Percentage
Amount net sales Amount net sales variance variance
Net sales:
Aerospace $ 30,102 63.3 % $ 22,227 60.0 % $ 7,875 35.4 %
Power generation 1,297 2.7 1,199 3.2 98 8.2
Oil & gas 4,352 9.2 3,066 8.3 1,286 41.9
Heavy equipment 8,074 17.0 8,080 21.8 (6) (0.1)
General industrial, conversion
services and other 3,737 7.8 2,466 6.7 1,271 51.5
Total net sales $ 47,562 100.0 % $ 37,038 100.0 % $ 10,524 28.4 %
Net sales:
Net sales for the three months ended March 31, 2022 increased $10.5 million , or
28.4%, compared to the same period in the prior year. This was driven by a
strong pricing environment as reflected by the increase in average sales dollars
per shipped ton. The higher average sales price includes an increase in premium
alloy net sales, increased base and surcharge pricing, and a shift in mix from
semi-finished products to more finished products.
Gross margin:
As a percent of sales, our gross margin for the three months endedMarch 31, 2022 was 8.5% compared to a negative 0.7% for the three months endedMarch 31, 2021 . The increase primarily reflects higher activity levels and better absorption compared to the prior year first quarter. Further, the current quarter includes approximately$1.1 million in benefit from our AMJP (as defined below) grant awarded during the period.
Selling, general and administrative expenses:
Our selling, general and administrative ("SG&A") expenses consist primarily of
employee costs, which include salaries, payroll taxes and benefit related costs,
professional services, stock compensation and insurance costs. SG&A expenses
decreased by $0.2 million for the three months ended March 31, 2022 compared to
the same period in the prior year.
Interest expense and other financing costs:
Interest expense totaled approximately$0.7 million in the first quarter of 2022 compared to$0.5 million in the first quarter of 2021. The increase reflects higher debt levels and the impact of higher variable interest rates paid on our revolving credit facility debt.
Income tax benefit:
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 includes tax on ordinary income provided
at the most recent estimated annual effective tax rate ("ETR"), increased or
decreased for the tax effect of discrete items.
For the three months ended March 31, 2022 and 2021, our estimated annual
effective tax rates applied to ordinary income were 10.6% and 25.8%,
respectively. The difference between the federal statutory rate of 21.0% and the
projected annual ETR in both years is primarily due to research and development
credits. The 2022 and 2021 estimated annual effective tax rates differ primarily
due to a forecast of income tax expense in 2022 compared to an income tax
benefit in 2021.
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Discrete items during the three months ended March 31, 2022 totaled
approximately $0.1 million of expense related to share-based compensation items,
and the ETR for the quarter was 6.0%. Discrete items for the first quarter of
the prior year were not significant and the ETR was 25.1%.
Net loss:
For the three months ended
Liquidity and Capital Resources
Historically, we have financed our operations through cash provided by operating
activities and borrowings on our credit facilities. At
We believe that our cash flows from continuing operations, as well as available borrowings under our credit facility are adequate to satisfy our working capital, capital expenditure requirements, and other contractual obligations for the foreseeable future, including at least the next 12 months.
Net cash used in (provided by) operating activities:
During the three months endedMarch 31, 2022 , net cash of$4.0 million was used in operating activities. Our net loss, after adjustments for non-cash expenses, generated$3.5 million . We used$5.9 million of cash from managed working capital, which we define as net accounts receivable, plus inventory, minus accounts payable, minus other current liabilities. Accounts receivable increased$7.2 million due to higher sales. Inventory also grew in support of our record backlog and used$7.4 million in cash. An increase in accounts payable provided$7.9 million in cash, partially offsetting the increased inventory and accounts receivable. We also used$0.9 million of cash from other assets and liabilities. InFebruary 2022 , the Company entered into an agreement with theDepartment of Transportation ("DOT") under the Aviation Manufacturing Jobs Protection ("AMJP") Program for a grant of up to$3.6 million , and received the first installment of$1.8 million . The Company expects to receive additional funds from the DOT after completion of the service period upon final confirmation from the DOT of the Company's compliance with the terms of the agreement. The receipt of the full award is primarily conditioned upon the Company committing to not furlough or lay off a defined group of employees during the six-month period of performance betweenFebruary 2022 andAugust 2022 . The grant benefit will be recognized over the six-month performance period as a reduction to cost of sales. During the quarter endedMarch 31, 2022 , the Company recognized approximately$1.1 million as a reduction in cost of sales with the remaining balance of the initial installment presented in Other current liabilities on the Consolidated Balance Sheet as ofMarch 31, 2022 . During the three months endedMarch 31, 2022 , net cash of$1.6 million was generated from operating activities. Our net loss, after adjustments for non-cash expenses, used$0.9 million . We generated$1.1 million of cash from managed working capital, which we define as net accounts receivable, plus inventory, minus accounts payable, minus other current liabilities. Accounts receivable increased$2.6 million due to higher sales, while inventory increased$0.6 million . Accounts payable increased$6.1 million due to increased production activity compared to the end of 2021, and other current liabilities decreased$1.9 million . We also generated$1.5 million of cash from other assets and liabilities.
Net cash used in investing activities:
During the three months endedMarch 31, 2022 , we used$2.5 million of cash for capital expenditures, compared to$2.7 million for the same period in the prior year. 2022 capital spending is expected to approximate$20.0 million .
Net cash provided by financing activities:
Net cash provided by financing activities was$6.7 million for the three months endedMarch 31, 2022 , compared to$1.3 million for the same period in the prior year. The increase was due to higher working capital requirements due to inventory and accounts receivable growth.
Raw materials
The cost of raw materials represents approximately 40% of the cost of products sold in the first three months of 2022 and 2021. The major raw materials used in our operations include nickel, molybdenum, vanadium, chrome, iron and carbon scrap. Additionally, our Bridgeville facility uses graphite electrodes as a consumable supply in the melting process. The average price of substantially all our major raw materials, including iron, nickel, molybdenum, vanadium, and chrome, increased in 2021 and throughMarch 31, 2022 . We maintain sales price surcharge to mitigate the risk of substantial raw material cost fluctuations. The market values for these raw materials and others continue to fluctuate based on supply and demand, market disruptions and other factors. Over time, our surcharge will effectively offset changes in raw material costs; however, during a period of rising or falling prices the timing will cause variation between reporting periods.
Credit Facility
OnMarch 17, 2021 , we entered into the Second Amended and Restated Revolving Credit, Term Loan and Security Agreement (the "Credit Agreement"), withPNC Bank, National Association , as administrative agent and co-collateral agent (the "Agent"),Bank of America, N.A ., as co-collateral agent ("Bank of America "), the Lenders (as defined in the Credit Agreement) party thereto from time to time andPNC Capital Markets LLC , as sole lead arranger and sole bookrunner. The Credit Agreement replaces our Prior Credit Agreement, and provides for a senior secured revolving credit facility in an aggregate principal amount not to exceed$105.0 million ("Revolving Credit Facility") and a senior secured term loan facility ("Term Loan") in the amount of$15.0 million (together with the Revolving Credit Facility, the "Facilities").
The Company was in compliance with all the applicable financial covenants on
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The Facilities, which expire on
Availability under the Credit Agreement is based on eligible accounts receivable and inventory. The Company must maintain undrawn availability under the Credit Agreement of at least$11.0 million . That requirement can be overcome if the Company maintains a fixed charge coverage ratio of not less than 1.10 to 1.0 measured on a rolling two quarter basis and calculated in accordance with the terms of the Credit Agreement.
The Company is required to pay a commitment fee of 0.25% based on the daily unused portion of the Revolving Credit Facility.
With respect to the Term Loan, the Company pays quarterly installments of the principal of approximately$0.5 million , plus accrued and unpaid interest, on the first day of each fiscal quarter beginning afterJune 30, 2021 . To the extent not previously paid, the Term Loan will become due and payable in full on the Expiration Date. Amounts outstanding under the Facilities, at the Company's option, bear interest at either a base rate or a LIBOR based rate, in either case calculated in accordance with the terms of the Credit Agreement. Interest under the Credit Agreement is payable monthly. We elected to use the LIBOR based rate for the majority of the debt outstanding under the Facilities for the three months endedMarch 31, 2022 , which ranged between 2.79% and 2.96% for our Revolving Credit Facility and was 3.24% for the Term Loan. We incurred$0.5 million in additional financing costs in conjunction with the execution of the Credit Agreement, which were recorded to the Consolidated Balance Sheet atMarch 31, 2021 and will be amortized to interest expense over the life of the Credit Agreement. AtMarch 31, 2022 , we had total Credit Agreement related net deferred financing costs of approximately$0.8 million . For the three months endedMarch 31, 2022 , we amortized$0.1 million of those deferred financing costs.
Paycheck Protection Program Term Note
OnApril 16, 2020 , the Company entered into a promissory note, datedApril 15, 2020 , with PNC Bank, evidencing an unsecured loan with a principal amount of$10.0 million made to the Company pursuant to the Paycheck Protection Program (the "PPP Term Note") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The PPP Term Note is guaranteed by theUnited States Small Business Administration . The proceeds could be used to maintain payroll or make certain covered interest payments, lease payments and utility payments. Under the terms of the CARES Act, the Company was eligible for forgiveness for all or a portion of loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of payroll costs and any payments of certain covered interest, lease and utility payments. The PPP Term Note incurred interest at a fixed annual rate of 1.00%, with the first six months deferred. According to the terms of the PPP Term Note, the Company would begin to make 18 equal monthly payments of principal and interest on any unforgiven portion of the Note inNovember 2020 with the final payment due inApril 2022 . The Company did not make any principal or interest payments related to the PPP Term Note.
The Company applied for forgiveness of the PPP Term Note during the third
quarter of 2020. In
Notes
In connection with the acquisition of the
OnJanuary 21, 2016 , the Company entered into Amended and Restated Notes in the aggregate principal amount of$20.0 million (the "Notes"), each in favor ofGorbert Inc. ("Holder"). The Company's obligations under the Notes were collateralized by a second lien on the same assets of the Company that collateralize the obligations of the Company under the Facilities. The Holder had the right to elect at any time on or prior toAugust 17, 2017 to convert all or any portion of the outstanding principal amount of the Notes. The Notes were originally scheduled to mature onMarch 17, 2019 . In 2019, the Company extended the maturity date toMarch 17, 2020 in accordance with the terms of the Notes. In 2020, the Company extended the maturity date toMarch 17, 2021 in accordance with the terms of the Notes. The Company made partial principal payments on the notes upon extension, and an aggregate principal amount of$15.0 million remained outstanding at the 2021 maturity date. OnMarch 17, 2021 , the Company paid the remaining principal balance and all applicable interest to settle the notes obligation. The Notes had an applicable interest at a rate of 6.0% per year fromAugust 17, 2017 until the time they were paid off. All accrued and unpaid interest was payable quarterly in arrears onSeptember 18 ,December 18 ,March 18 andJune 18 of each year. 17 --------------------------------------------------------------------------------
Leases
The Company periodically enters into leases in its normal course of business. Operating lease liabilities and right-of-use assets are recorded to the Consolidated Balance Sheets at the present value of minimum lease payments. The assets are included in Other long-term assets in the Consolidated Balance Sheets and are amortized over the respective terms, which are five years or less. The long-term component of the lease liability is recorded in Other long-term liabilities, net and the current component is included in Other current liabilities. The right-of-use assets and lease liabilities for finance leases are recorded at the present value of minimum lease payments. The assets are included in Property, plant and equipment, net on the Consolidated Balance Sheets and are depreciated over the respective lease terms. The long-term component of the lease liability is included in Long-term debt and the current component is included in Current portion of long-term debt.
The Company entered into one new lease agreement accounted for as an operating during the first quarter of 2022 and did not enter into any finance lease agreements during the quarter.
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