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, 2020 , 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 third quarter of 2021 were$37.2 million , a decrease of$1.3 million , or 3.5%, from the second quarter. The decrease was primarily due to supply chain challenges and labor shortages which negatively impacted the timing of our shipments at the end of the current quarter. Compared to the second quarter, sales to our aerospace and oil & gas end markets increased, while sales to our other end markets decreased. Recovery in sales to commercial aerospace is expected to continue in the fourth quarter of 2021 and in 2022, which is supported by our recent order entry and growing backlog.Total Company backlog, before surcharges, at the end of the third quarter was$125.1 million , an increase of 26.5% over the second quarter level of$98.9 million . This is the third quarter in a row of double-digit sequential growth in our backlog after a low point at the end of 2020. Inventory was$135.6 million at the end of the third quarter, representing growth compared to last quarter and the same period in the prior year. The increase in inventory reflects higher raw material prices, robust raw material purchases to mitigate supply disruptions, and increased work in process to support backlog growth. During the quarter, our sales of premium alloy products, which we define as all vacuum induction melt products, totaled$5.9 million and comprised 16% of total sales, up about 1% sequentially. Our premium alloy products are primarily sold to the aerospace end market. Our gross margin for the third quarter was$2.3 million , or 6.2% of net sales, compared to$2.2 million , or 5.6% of net sales, for the second quarter. Gross margin in the third quarter of 2020 was a loss of$4.4 million , or a negative 11.8% of net sales. The third quarter 2021 gross margin included direct charges recorded to the Consolidated Statement of Operations as a result of lower activity levels caused by the COVID-19 pandemic. As lower activity levels at our production facilities continued,$1.5 million of fixed overhead costs were not absorbed into inventory and were charged directly to expense during the quarter.
COVID-19 Pandemic
While the Company's four plants have continued to operate throughout 2020 and
2021, COVID-19 related challenges negatively impacted the efficiency of our
operations. These challenges are expected to continue in the fourth quarter of
2021 and may continue thereafter. These factors may have additional significant
impacts on the Company's backlog, end markets, overall operations, cash flows
and financial results.
The scope and nature of these impacts, most of which are beyond the Company's
control, continue to evolve, and the outcome is uncertain. The ultimate extent
of the effects of the COVID-19 pandemic on the Company, and the end markets we
serve, remains highly uncertain and will depend on future developments and, as
such, effects could exist for an extended period, even after the pandemic may
end.
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Results of Operations
Three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 : Three months ended September 30, (in thousands, except shipped ton information) 2021 2020 Percentage of Percentage of Dollar / ton Percentage Amount net sales Amount net sales variance variance Net sales$ 37,169 100.0 %$ 37,434 100.0 %$ (265) (0.7) % Cost of products sold 34,862 93.8 41,861 111.8 (6,999) (16.7) Gross margin 2,307 6.2 (4,427) (11.8) 6,734 (152.1) Selling, general and administrative expenses 5,010 13.5 4,153 11.1 857 20.6 Operating loss (2,703) (7.3) (8,580) (22.9) 5,877 68.5 Interest expense 483 1.3 586 1.6 (103) (17.6) Deferred financing amortization 56 0.2 56 0.1 - - Gain on extinguishment of debt (10,000) (26.9) - - (10,000) 100.0 Other expense (income), net 9 - (288) (0.8) 297 (103.1) Income (loss) before income taxes 6,749 18.1 (8,934) (23.8) 15,683 175.5 Income taxes (1,141) (3.1) (1,934) (5.2) 793 41.0 Net income (loss)$ 7,890 21.2 %$ (7,000) (18.6) %$ 14,890 212.7 Tons shipped 6,144 6,046 98 1.6 Sales dollars per shipped ton$ 6,050 $ 6,192 $ (142) (2.3) % Market Segment Information Three months ended September 30, (in thousands) 2021 2020 Percentage of Percentage of Dollar Percentage Amount net sales Amount net sales variance variance Net sales: Service centers$ 26,333 70.8 %$ 25,983 69.4 %$ 350 1.3 % Original equipment manufacturers 3,336 9.0 4,405 11.8 (1,069) (24.3) Rerollers 4,722 12.7 3,173 8.5 1,549 48.8 Forgers 2,518 6.8 3,451 9.2 (933) (27.0) Conversion services and other 260 0.7 422 1.1 (162) (38.4) Total net sales$ 37,169 100.0 %$ 37,434 100.0 %$ (265) (0.7) % 14
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Melt Type Information
Three months ended September 30,
(in thousands) 2021 2020
Percentage of Percentage of Dollar Percentage
Amount net sales Amount net sales variance variance
Net sales:
Specialty alloys $ 30,973 83.3 % $ 27,847 74.4 % $ 3,126 11.2 %
Premium alloys (A) 5,936 16.0 9,165 24.5 (3,229) (35.2)
Conversion services and other 260 0.7 422 1.1 (162) (38.4)
Total net sales $ 37,169 100.0 % $ 37,434 100.0 % $ (265) (0.7) %
(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 September 30,
(in thousands) 2021 2020
Percentage of Percentage of Dollar Percentage
Amount net sales Amount net sales variance variance
Net sales:
Aerospace $ 22,253 59.9 % $ 25,138 67.2 % $ (2,885) (11.5) %
Power generation 847 2.3 1,590 4.2 (743) (46.7)
Oil & gas 4,041 10.9 2,755 7.4 1,286 46.7
Heavy equipment 7,614 20.5 4,662 12.5 2,952 63.3
General industrial, conversion
services and other 2,414 6.4 3,289 8.7 (875) (26.6)
Total net sales $ 37,169 100.0 % $ 37,434 100.0 % $ (265) (0.7) %
Net sales:
Net sales for the three months ended
Gross margin:
As a percent of net sales, our gross margin for the three months endedSeptember 30, 2021 was 6.2%, compared to negative 11.8% for the three months endedSeptember 30, 2020 . The increase is due to higher production activity and better absorption, as well as the benefit of operating efficiencies at our facilities within the cost of products sold during the period and higher surcharges in our sales price.
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
increased by $0.9 million for the three months ended September 30, 2021 compared
to the same period in the prior year. The increase reflects higher salary and
benefit related costs due to increased headcount, an increase in accruals for
incentive compensation, and increased employee relations spending.
Interest expense and other financing costs:
Interest expense totaled approximately$0.5 million in the third quarter of 2021 compared to$0.6 million in the third quarter of 2020. The decrease is primarily due to the benefit of lower interest rates on our debt, in part due to the payoff of theNorth Jackson facility seller notes in 2021.
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 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.
Our estimated annual effective tax rate applied to ordinary income at September
30, 2021 was 136.9%. The difference between the statutory rate and the projected
annual ETR is primarily due to the non-taxable gain on extinguishment of debt
recorded based on forgiveness of the PPP loan, as well
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as research and development credits. Our ETR for the third quarter of 2021 was
negative 16.9% due to the impact of the non-taxable gain on extinguishment of
debt.
Our estimated annual ETR applied to ordinary income at September 30, 2020 was
23.7%. The difference between the statutory rate and the projected annual ETR is
primarily due to research and development credits. Our ETR for the third quarter
of 2020 was 21.6%, which is lower than the projected annual ETR primarily due to
discrete expense for the expiration of stock options.
Net income (loss):
For the three months endedSeptember 30, 2021 , the Company recorded net income of$7.9 million , or$0.87 per diluted share, compared to a net loss of$7.0 million , or$0.79 per diluted share, for the three months endedSeptember 30, 2020 . Nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 : Nine months ended September 30, (in thousands, except shipped ton information) 2021 2020 Percentage of net Percentage of net Dollar / ton Percentage Amount sales Amount sales variance variance Total net sales$ 112,709 100.0 %$ 148,407 100.0 %$ (35,698 ) (24.1 ) % Cost of products sold 108,486 96.3 145,988 98.4 (37,502 ) (25.7 ) Gross margin 4,223 3.7 2,419 1.6 1,804 74.6 Selling, general and administrative expenses 15,392 13.7 15,458 10.4 (66 ) (0.4 ) Operating loss (11,169 ) (10.0 ) (13,039 ) (8.8 ) 1,870 (14.3 ) Interest expense 1,413 1.3 2,232 1.5 (819 ) (36.7 ) Deferred financing amortization 168 0.1 169 0.1 (1 ) (0.6 ) Gain on extinguishment of debt (10,000 ) (8.9 ) - - (10,000 ) 100.0 Other expense (income), net 32 - (302 ) (0.2 ) 334 (110.6 )
Income (loss) before income taxes (2,782 ) (2.5 )
(15,138 ) (10.2 ) 12,356 (81.6 ) Income taxes (3,650 ) (3.2 ) (3,396 ) (2.3 ) (254 ) 7.5 Net income (loss)$ 868 0.7 %$ (11,742 ) (7.9 ) %$ 12,610 107.4 Tons shipped 20,460 25,153 (4,693 ) (18.7 ) Sales dollars per shipped ton$ 5,509 $ 5,900 $ (391 ) (6.6 ) %
Market Segment Information
Nine months ended September 30,
(in thousands) 2021 2020
Percentage of net Percentage of net Dollar
Amount sales Amount sales variance Percentage variance
Net sales:
Service centers $ 80,185 71.1 % $ 103,877 70.0 % $ (23,692 ) (22.8 ) %
Original equipment manufacturers 10,916 9.7 16,624 11.2 (5,708 ) (34.3 )
Rerollers 13,629 12.1 13,612 9.2 17 0.1
Forgers 7,012 6.2 12,027 8.1 (5,015 ) (41.7 )
Conversion services and other sales 967 0.9 2,267 1.5 (1,300 ) (57.3 )
Total net sales $ 112,709 100.0 % $ 148,407 100.0 % $ (35,698 ) (24.1 ) %
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Melt Type Information
Nine months ended September 30,
(in thousands) 2021 2020
Percentage of net Percentage of net Dollar
Amount sales Amount sales variance Percentage variance
Net sales:
Specialty alloys $ 92,359 81.9 % $ 116,869 78.7 % $ (24,510 ) (21.0 ) %
Premium alloys (A) 19,383 17.2 29,271 19.7 (9,888 ) (33.8 )
Conversion services and other sales 967 0.9 2,267 1.6 (1,300 ) (57.3 )
Total net sales $ 112,709 100.0 % $ 148,407 100.0 % $ (35,698 ) (24.1 ) %
(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
Nine months ended September 30,
(in thousands) 2021 2020
Percentage of net Percentage of net Dollar
Amount sales Amount sales variance Percentage variance
Net sales:
Aerospace $ 65,798 58.4 % $ 104,686 70.5 % $ (38,888 ) (37.1 ) %
Power generation 3,453 3.1 5,923 4.0 (2,470 ) (41.7 )
Oil & gas 11,045 9.8 10,778 7.3 267 2.5
Heavy equipment 24,967 22.2 16,364 11.0 8,603 52.6
General industrial, conversion
services and other sales 7,446 6.5 10,656 7.2 (3,210 ) (30.1 )
Total net sales $ 112,709 100.0 % $ 148,407 100.0 % $ (35,698 ) (24.1 ) %
Net sales:
Net sales for the nine months ended September 30, 2021 decreased $35.7 million ,
or 24.1%, compared to the nine months ended September 30, 2020 . This reflects
decreases in consolidated shipment volume of 18.7% and average sales dollar per
shipped ton of 6.6%. The decrease in volume was caused by the economic impact of
the COVID-19 pandemic on our customers and end markets, and ultimately our order
levels for delivery in 2021. The decrease in sales dollars per shipped ton is
due to the lower mix of aerospace and premium alloy products as a percent of
sales, which was also driven by the overall economic impact of the pandemic on
the end markets we serve.
Gross margin:
Our gross margin, as a percent of sales, was 3.7% for the nine months ended
Selling, general and administrative expenses:
Our 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 were approximately flat for the nine months endedSeptember 30, 2021 compared to the same period in the prior year.
Interest expense and other financing costs:
Interest expense totaled approximately$1.4 million in the first nine months of 2021 compared to$2.2 million in the first nine months of 2020. The decrease reflects the benefit of lower interest rates as well as lower overall average debt levels. 17
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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 includes tax on ordinary income provided at the most recent estimated annual ETR, increased or decreased for the tax effect of discrete items. For the nine months endedSeptember 30, 2021 and 2020, our estimated annual ETR applied to ordinary income were 136.9% and 23.7%, respectively. The difference between the federal statutory rate of 21.0% and the projected annual ETR is primarily due to the non-taxable gain on extinguishment of debt recorded based on forgiveness of the PPP loan, as well as research and development credits. Discrete items during the nine months endedSeptember 30, 2021 and 2020 were not significant and were primarily related to expense recorded upon the expiration of stock options, and our ETR for the first nine months of each year was 131.2% and 22.4%, respectively. Net income (loss): For the nine months endedSeptember 30, 2021 , the Company recorded net income of$0.9 million , or$0.10 per diluted share, compared to a net loss of$11.7 million , or$1.33 per diluted share, for the nine months endedSeptember 30, 2020 .
Liquidity and Capital Resources
Historically, we have financed our operations through cash provided by operating activities and borrowings on our credit facilities. AtSeptember 30, 2021 , we maintained approximately$39 million of remaining availability under our revolving credit facility. 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. OnApril 16, 2020 , the Company entered into a promissory note, datedApril 15, 2020 , withPNC Bank, National Association ("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 PPP Term Note was guaranteed by theUnited States Small Business Administration . 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
Net cash (used in) provided by operating activities:
During the nine months endedSeptember 30, 2021 , net cash of$4.9 million was used in operating activities. Our net income, after adjustments for non-cash expenses, generated$2.5 million . We used$12.3 million of cash for managed working capital, which we define as net accounts receivable, plus inventory, minus accounts payable, minus other current liabilities. Accounts receivable increased due to higher sales in the 2021 third quarter compared to the 2020 fourth quarter, while inventory increased$25.5 million . The increase in inventory reflects higher raw material prices, robust raw material purchases to mitigate supply disruptions, and increased work in process to support backlog growth. Accounts payable increased$16.5 million , in line with the increased production activity compared to the end of 2020, and other current liabilities decreased$1.7 million . We also generated$3.2 million of cash from all other operating activities. During the nine months endedSeptember 30, 2020 , net cash provided by operating activities was$12.6 million . Our net loss, after adjustments for non-cash expenses, generated$0.7 million . We generated$9.4 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 decreased due to lower sales, and both inventory and accounts payable decreased due to lower melt activity levels and lower purchasing related to strategic spend reduction initiatives. Other current liabilities increased by$0.8 million . In addition, we generated$2.5 million of cash from other assets and liabilities, primarily due to cash received from insurance claims.
Net cash used in investing activities:
During the nine months endedSeptember 30, 2021 , we used$6.5 million of cash for capital expenditures, compared to$8.5 million for the same period in the prior year. Approximately half of the current year to date total is related to strategic projects to expand our melt and remelt capabilities related to premium products. These projects are scheduled for completion before the end of 2021, and total capital spending for 2021 is expected to approximate$11.0 million .
Net cash provided by (used in) financing activities:
Net cash provided by financing activities was$11.3 million for the nine months endedSeptember 30, 2021 , compared to a use of$4.2 million for the same period in the prior year. The increase was due to additional cash drawn on our revolving credit facility to fund working capital growth. Financing activities included the impacts of amending our credit agreement in the first quarter of 2021, which primarily includes proceeds of$8.6 million received from increasing our term loan principal balance to$15.0 million . The proceeds from the Term Loan (as defined below) and borrowings under our Revolving Credit Facility (as defined below) were used to pay the$15.0 million in notes that matured during the first quarter. Net cash used in financing activities was$4.2 million for the nine months endedSeptember 30, 2020 . This includes the proceeds from our$10.0 million PPP Term Note (as defined above) received during the second quarter. 18 --------------------------------------------------------------------------------
Raw materials
The cost of raw materials represents approximately 35% to 40% of the cost of products sold in the first nine months of 2021 and 2020. 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. We maintain a surcharge within our sales price 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,Bank of America, N.A ., as co-collateral agent, 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 the
date we entered into the Credit Agreement and through
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 endedSeptember 30, 2021 , which was approximately 2.60% on our Revolving Credit Facility and 3.10% 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 in the first quarter of 2021 and will be amortized to interest expense over the life of the Credit Agreement. AtSeptember 30, 2021 , we had total Credit Agreement related net deferred financing costs of approximately$0.9 million . For the nine months endedSeptember 30, 2021 , we amortized$0.1 million of those deferred financing costs.
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. 19
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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 sheet 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 agreement accounted for as an operating lease during the first quarter of 2021 and did not enter into any new agreements accounted for as an operating or finance lease agreements during the second or third quarters.
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