Universal Stainless(USAP) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Unaudited consolidated financial statements and explanatory notes for Universal Stainless & Alloy Products, Inc. for Q1 2022 and 2021 Item 1. Financial Statements Presents the unaudited consolidated financial statements and accompanying notes for Universal Stainless & Alloy Products, Inc. for the first quarter of 2022 and 2021 Consolidated Statements of Operations Details the company's revenues, costs, and net loss for the three months ended March 31, 2022 and 2021 Consolidated Statements of Operations (Three months ended March 31) | Metric (in Thousands) | 2022 | 2021 | | :-------------------- | :--- | :--- | | Net sales | $47,562 | $37,038 | | Cost of products sold | $43,509 | $37,286 | | Gross margin | $4,053 | $(248) | | Operating loss | $(996) | $(5,479) | | Net loss | $(1,615) | $(4,529) | | Net loss per common share - Basic | $(0.18) | $(0.51) | | Net loss per common share - Diluted | $(0.18) | $(0.51) | Consolidated Statements of Comprehensive Loss Presents the net loss and other comprehensive income/loss components for the three months ended March 31, 2022 and 2021 Consolidated Statements of Comprehensive Loss (Three months ended March 31) | Metric (in Thousands) | 2022 | 2021 | | :-------------------- | :--- | :--- | | Net loss | $(1,615) | $(4,529) | | Unrealized gain on derivatives | $135 | $15 | | Comprehensive loss | $(1,480) | $(4,514) | Consolidated Balance Sheets Outlines the company's assets, liabilities, and stockholders' equity as of March 31, 2022, and December 31, 2021 Consolidated Balance Sheets (as of March 31, 2022 and December 31, 2021) | Metric (in Thousands) | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | ASSETS | | | | Total current assets | $184,756 | $170,561 | | Total assets | $342,799 | $330,632 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | $38,253 | $31,638 | | Long-term debt, net | $73,585 | $66,852 | | Total liabilities | $117,549 | $104,311 | | Total stockholders' equity | $225,250 | $226,321 | | Total liabilities and stockholders' equity | $342,799 | $330,632 | Consolidated Statements of Cash Flow Summarizes cash flows from operating, investing, and financing activities for the three months ended March 31, 2022 and 2021 Consolidated Statements of Cash Flow (Three months ended March 31) | Metric (in Thousands) | 2022 | 2021 | | :-------------------- | :--- | :--- | | Net cash (used in) provided by operating activities | $(3,979) | $1,617 | | Net cash used in investing activity | $(2,520) | $(2,683) | | Net cash provided by financing activities | $6,660 | $1,325 | | Net increase in cash | $161 | $259 | | Cash at end of period | $279 | $423 | Consolidated Statements of Shareholders' Equity Details changes in common stock, additional paid-in capital, retained earnings, and comprehensive income for Q1 2022 and 2021 Consolidated Statements of Shareholders' Equity (Three months ended March 31, 2022) | Metric (in Thousands) | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | | :-------------------- | :----------- | :------------------------- | :---------------- | :-------------------------------------------- | | Balance at Dec 31, 2021 | $9 | $95,590 | $130,682 | $40 | | Share-based compensation | - | $409 | - | - | | Net gain on derivative instruments | - | - | - | $135 | | Net loss | - | - | $(1,615) | - | | Balance at Mar 31, 2022 | $9 | $95,999 | $129,067 | $175 | Consolidated Statements of Shareholders' Equity (Three months ended March 31, 2021) | Metric (in Thousands) | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | | :-------------------- | :----------- | :------------------------- | :---------------- | :-------------------------------------------- | | Balance at Dec 31, 2020 | $9 | $94,276 | $131,440 | $(45) | | Share-based compensation | - | $309 | - | - | | Net gain on derivative instruments | - | - | - | $15 | | Net loss | - | - | $(4,529) | - | | Balance at Mar 31, 2021 | $9 | $94,585 | $126,911 | $(30) | Notes to the Unaudited Consolidated Financial Statements Provides detailed explanations of accounting policies and specific financial items supporting the consolidated financial statements Note 1: Nature of Business and Basis of Presentation Describes the company's core business of manufacturing specialty steel products and the basis for financial statement preparation - The Company manufactures and markets semi-finished and finished specialty steel products, including stainless steel, nickel alloys, tool steel, and other alloyed steels, serving industries such as aerospace, power generation, oil and gas, heavy equipment, and general industrial manufacturing[24] - The financial statements are prepared in accordance with U.S. GAAP for interim financial reports, with certain information condensed or omitted as per SEC regulations[25] Note 2: Net loss per Common Share Explains the computation of basic and diluted net loss per common share, including factors affecting dilution Net Loss Per Common Share Computation (Three months ended March 31) | Metric (in Thousands, except per share amounts) | 2022 | 2021 | | :---------------------------------------------- | :--- | :--- | | Net loss | $(1,615) | $(4,529) | | Weighted average number of shares of common stock outstanding | 8,946,174 | 8,888,815 | | Diluted weighted average number of shares of common stock outstanding | 8,946,174 | 8,888,815 | | Net loss per common share - Basic | $(0.18) | $(0.51) | | Net loss per common share - Diluted | $(0.18) | $(0.51) | - Options to purchase 748,775 shares (2022) and 757,775 shares (2021) were excluded from diluted EPS calculation because their exercise prices exceeded the average market price of common stock, or due to the company being in a net loss position[30] Note 3: Revenue Recognition Details the company's policies for recognizing revenue from product sales and conversion services, including timing and melt type breakdown - Revenue is primarily from product sales, recognized when control is transferred to the customer, typically upon shipment, with certain customer agreements requiring revenue recognition over time for specified product grades and shapes with no alternative use[31][33][34] Net Sales by Melt Type (Three months ended March 31) | Melt Type (in Thousands) | 2022 | 2021 | | :----------------------- | :--- | :--- | | Specialty alloys | $38,220 | $29,091 | | Premium alloys (A) | $8,933 | $7,553 | | Conversion services and other sales | $409 | $394 | | Total net sales | $47,562 | $37,038 |
(A) Premium alloys represent all vacuum induction melted (VIM) products. Note 4: Inventory Outlines inventory valuation methods, composition, and significant adjustments related to activity levels - Inventory is valued at the lower of cost or net realizable value, with cost determined by the weighted average cost method, and raw materials include ferrous and non-ferrous scrap metal and alloys[37][39] - In Q1 2021, $2.6 million of fixed overhead costs were expensed directly due to low activity levels from the COVID-19 pandemic, with no such charge in Q1 2022[40] Inventory Composition (in Thousands) | Inventory Category | March 31, 2022 | December 31, 2021 | | :----------------- | :------------- | :---------------- | | Raw materials and starting stock | $14,340 | $12,263 | | Semi-finished and finished steel products | $126,508 | $122,396 | | Operating materials | $11,256 | $10,620 | | Gross inventory | $152,104 | $145,279 | | Inventory reserves | $(4,472) | $(4,595) | | Total inventory, net | $147,632 | $140,684 | Note 5: Leases Describes the company's lease agreements for equipment and presents future minimum lease payment obligations - The Company's leases are primarily for mobile and other production equipment, generally with terms of 60 months or less, and right-of-use assets and lease liabilities are recorded at the present value of minimum lease payments[41][42] Future Minimum Lease Payments (as of March 31, 2022, in Thousands) | Year | Operating Leases | Finance Leases | | :--- | :--------------- | :------------- | | 2022 | $251 | $211 | | 2023 | $243 | $242 | | 2024 | $147 | $225 | | 2025 | $35 | $112 | | 2026 | $14 | - | | Total minimum lease payments | $690 | $790 | | Less amounts representing interest | $(29) | $(75) | | Present value of minimum lease payments | $661 | $715 | | Less current obligations | $(310) | $(233) | | Total long-term lease obligations, net | $351 | $482 | Note 6: Long-Term Debt Details the composition of long-term debt, including credit facilities and the forgiveness of the PPP Term Note Long-Term Debt Composition (in Thousands) | Debt Type | March 31, 2022 | December 31, 2021 | | :------------------ | :------------- | :---------------- | | Revolving credit facility | $63,261 | $55,997 | | Term loan | $13,393 | $13,929 | | Finance leases | $715 | $783 | | Total debt | $77,369 | $70,709 | | Less: current portion of long-term debt | $(2,376) | $(2,392) | | Less: deferred financing costs | $(1,408) | $(1,465) | | Long-term debt, net | $73,585 | $66,852 | - The Company entered into a Second Amended and Restated Revolving Credit, Term Loan and Security Agreement on March 17, 2021, providing a $105.0 million revolving credit facility and a $15.0 million term loan, collateralized by substantially all company assets[47][48] - The Paycheck Protection Program (PPP) Term Note of $10.0 million was fully forgiven in July 2021, resulting in a gain on extinguishment of debt[56][121] Note 7: New Markets Tax Credit Financing Transaction Explains the company's participation in the NMTC program for capital projects and its role as primary beneficiary of related VIEs - The Company entered a New Markets Tax Credit (NMTC) financing program in March 2018 for a capital project at its Dunkirk, NY facility, securing low-interest financing and potential future benefits[61] - The Company is deemed the primary beneficiary of the Investment Fund and CDE variable interest entities (VIEs) due to its control over activities, contractual obligations, and obligation to absorb losses[67][26] - As of March 31, 2022, $2.8 million was recorded within Other long-term liabilities related to this transaction, representing funds contributed by PNC New Markets Investment Partners, LLC[64] Note 8: Fair Value Measurement Describes the fair value hierarchy used for financial instruments and the valuation of specific assets and liabilities - The fair value hierarchy categorizes inputs into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[68][69][70] - Cash, accounts receivable, and accounts payable approximated fair value due to short-term maturities (Level 1), while the Term Loan and Revolving Credit facility approximated carrying amount due to floating short-term interest rates (Level 2)[72] Note 9: Commitments and Contingencies Addresses potential impacts of lawsuits and claims on the company's financial condition and liquidity - The Company is subject to various lawsuits and claims in the normal course of business, and management believes the likelihood of a material adverse effect on financial condition or liquidity from pending matters is remote[73] Note 10: Income Taxes Discusses the estimated annual effective tax rates and factors contributing to differences from the federal statutory rate - The estimated annual effective tax rates for Q1 2022 and Q1 2021 were 10.6% and 25.8%, respectively, primarily differing from the federal statutory rate due to research and development credits and a forecast of income tax expense in 2022 versus a benefit in 2021[75] - The effective tax rate for Q1 2022 was 6.0%, including approximately $0.1 million of expense related to share-based compensation as discrete items[76] Note 11: Derivatives and Hedging Explains the company's use of foreign exchange forward contracts and interest rate swaps to manage market risks - The Company uses foreign exchange forward contracts to mitigate foreign currency risk on sales, with notional values of $2.2 million (March 31, 2022) and $2.5 million (December 31, 2021), designated as cash flow hedges[77] - A forward interest rate swap contract was entered in 2020 to fix interest rates on variable-rate debt, with a notional amount of $10 million at March 31, 2022, also designated as a cash flow hedge[78] Note 12: Subsequent Events Reports on a liquid metal spill at the Bridgeville facility and its potential operational and financial implications - Subsequent to the quarter-end, a liquid metal spill occurred at the Bridgeville electric arc melting facility, with no injuries, and melting operations are expected to resume in May 2022, though the full financial impact is currently unknown[79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes the company's financial performance, liquidity, and capital resources for Q1 2022, highlighting sales growth, margin improvement, and operational challenges Overview Provides a general description of the company's business, key performance indicators, and market trends for Q1 2022 - The Company manufactures and markets specialty steel products, including stainless steel, nickel alloys, and tool steel, for various industries such as aerospace, power generation, and oil & gas[81] Key Performance Indicators (Q1 2022 vs Q4 2021) | Metric | Q1 2022 (Millions) | Q4 2021 (Millions) | Change (Millions) | Change (%) | | :--------------- | :----------------- | :----------------- | :---------------- | :--------- | | Net sales | $47.6 | $43.3 | $4.3 | 10.0% | | Total backlog (before surcharges) | $201.8 | $134.5 | $67.3 | 50.0% | - Sales to the aerospace end market increased by $4.4 million (16.9%) in Q1 2022 compared to Q4 2021, driven by increasing demand[82] - Gross margin for Q1 2022 was 8.5% of net sales, including a $1.1 million benefit from the AMJP Program, an increase from negative 0.7% in Q1 2021 but a decrease from 8.7% in Q4 2021 due to supply chain issues, operational difficulties, labor shortages, and rising costs[85] COVID-19 Pandemic Discusses the ongoing impact of COVID-19 on operational efficiency, backlog, end markets, and financial results - COVID-19 related challenges continued to negatively impact operational efficiency in Q1 2022 and may persist throughout 2022, with uncertain long-term effects on backlog, end markets, operations, cash flows, and financial results[86][87] Results of Operations Presents a detailed analysis of the company's financial performance, including net sales, gross margin, and net loss for Q1 2022 versus Q1 2021 Consolidated Results of Operations (Three months ended March 31, in Thousands) | Metric | 2022 Amount | 2022 % of net sales | 2021 Amount | 2021 % of net sales | Dollar variance | Percentage 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 | | Loss before income taxes | $(1,718) | (3.6) | $(6,045) | (16.3) | $4,327 | 71.6 | | 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 Breaks down net sales by market segment, showing performance across service centers, OEMs, rerollers, and forgers Net Sales by Market Segment (Three months ended March 31, in Thousands) | Market Segment | 2022 Amount | 2022 % of net sales | 2021 Amount | 2021 % of net sales | Dollar variance | Percentage variance | | :----------------------- | :---------- | :------------------ | :---------- | :------------------ | :-------------- | :------------------ | | 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% | Melt Type Information Analyzes net sales by melt type, distinguishing between specialty alloys, premium alloys, and conversion services Net Sales by Melt Type (Three months ended March 31, in Thousands) | Melt Type | 2022 Amount | 2022 % of net sales | 2021 Amount | 2021 % of net sales | Dollar variance | Percentage variance | | :----------------------- | :---------- | :------------------ | :---------- | :------------------ | :-------------- | :------------------ | | 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. End Market Information Provides a breakdown of net sales by end market, including aerospace, power generation, oil & gas, and heavy equipment Net Sales by End Market (Three months ended March 31, in Thousands) | End Market | 2022 Amount | 2022 % of net sales | 2021 Amount | 2021 % of net sales | Dollar variance | Percentage variance | | :------------------------------- | :---------- | :------------------ | :---------- | :------------------ | :-------------- | :------------------ | | 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 Discusses the drivers behind the increase in net sales for Q1 2022, including pricing and product mix - Net sales increased by $10.5 million (28.4%) for Q1 2022 compared to Q1 2021, driven by a strong pricing environment, higher average sales dollars per shipped ton, increased premium alloy sales, and a shift towards more finished products[94] Gross margin Explains the improvement in gross margin for Q1 2022, attributing it to higher activity levels and AMJP grant benefits - Gross margin as a percentage of sales improved to 8.5% in Q1 2022 from negative 0.7% in Q1 2021, primarily due to higher activity levels, better absorption, and a $1.1 million benefit from the AMJP grant[95] Selling, general and administrative expenses Reports on the decrease in selling, general, and administrative expenses for Q1 2022 compared to the prior year - SG&A expenses decreased by $0.2 million in Q1 2022 compared to Q1 2021[96] Interest expense and other financing costs Details the increase in interest expense due to higher debt levels and variable interest rates in Q1 2022 - Interest expense increased to approximately $0.7 million in Q1 2022 from $0.5 million in Q1 2021, reflecting higher debt levels and increased variable interest rates on the revolving credit facility[97] Income tax benefit Explains the estimated annual effective tax rates and the factors influencing the tax position for Q1 2022 and 2021 - The estimated annual effective tax rates for Q1 2022 and Q1 2021 were 10.6% and 25.8%, respectively, with the difference primarily due to research and development credits and a shift from an income tax benefit in 2021 to an expense forecast in 2022[99] - The ETR for Q1 2022 was 6.0%, including approximately $0.1 million of expense from share-based compensation[100] Net loss Summarizes the significant improvement in net loss for Q1 2022 compared to Q1 2021 - The Company reported a net loss of $1.6 million ($0.18 per diluted share) in Q1 2022, a significant improvement from a net loss of $4.5 million ($0.51 per diluted share) in Q1 2021[101] Liquidity and Capital Resources Assesses the company's ability to meet short-term and long-term obligations, including cash flows, credit facilities, and capital expenditures - At March 31, 2022, the Company had approximately $25.3 million of remaining availability under its revolving credit facility[102] - Management believes current cash flows from operations and available credit are sufficient to meet working capital, capital expenditure, and other obligations for at least the next 12 months[103] Net cash used in (provided by) operating activities Analyzes the factors contributing to cash flow from operating activities, including working capital changes and grant receipts - Net cash used in operating activities was $4.0 million in Q1 2022, primarily due to a $5.9 million use of cash from managed working capital (increased accounts receivable and inventory) partially offset by an increase in accounts payable[104] - In Q1 2022, the Company received the first $1.8 million installment of a $3.6 million grant from the Aviation Manufacturing Jobs Protection (AMJP) Program, with the benefit recognized as a reduction to cost of sales[105] Net cash used in investing activities Details cash outflows for capital expenditures and projected spending for the year 2022 - Cash used for capital expenditures was $2.5 million in Q1 2022, with expected total capital spending for 2022 approximating $20.0 million[107] Net cash provided by financing activities Explains the increase in cash provided by financing activities, driven by working capital requirements - Net cash provided by financing activities increased to $6.7 million in Q1 2022 from $1.3 million in Q1 2021, driven by higher working capital requirements due to inventory and accounts receivable growth[108] Raw materials Discusses the impact of raw material costs on cost of products sold and the use of sales price surcharges to mitigate risk - Raw material costs constituted approximately 40% of the cost of products sold in Q1 2022 and Q1 2021, with average prices for major raw materials (nickel, molybdenum, vanadium, chrome, iron, carbon scrap) increasing through March 31, 2022[109] - The Company uses sales price surcharges to mitigate the risk of raw material cost fluctuations, which effectively offset changes over time, though timing differences can cause variations between reporting periods[110] Credit Facility Provides details on the company's revolving credit facility and term loan, including compliance with covenants and interest rates - The Company was in compliance with all applicable financial covenants under its Credit Agreement as of December 31, 2021, and March 31, 2022[112] - The Credit Agreement, expiring March 17, 2026, provides a $105.0 million revolving credit facility and a $15.0 million term loan, collateralized by substantially all company assets[111][113] - Interest on outstanding amounts under the facilities is payable monthly, with the Company electing a LIBOR-based rate for most debt in Q1 2022, ranging from 2.79% to 2.96% for the Revolving Credit Facility and 3.24% for the Term Loan[116] Paycheck Protection Program Term Note Reports on the full forgiveness of the $10.0 million PPP Term Note and the resulting gain on extinguishment of debt - The $10.0 million PPP Term Note, obtained in April 2020 under the CARES Act, was fully forgiven by the United States Small Business Administration in July 2021, resulting in a gain on extinguishment of debt[118][121] Notes Details the full settlement of the $20.0 million Amended and Restated Notes in March 2021 - The $20.0 million Amended and Restated Notes, originally issued in 2016 and extended multiple times, were fully settled on March 17, 2021, with the remaining principal balance and applicable interest paid off[123][124] Leases Describes new lease agreements and the accounting treatment for operating lease liabilities and right-of-use assets - The Company entered into one new operating lease agreement during Q1 2022 and no new finance lease agreements[128] - Operating lease liabilities and right-of-use assets are recorded at the present value of minimum lease payments and amortized over terms of five years or less[126] Item 3. Quantitative and Qualitative Disclosures About Market Risk Reports no significant changes in market risk from the prior annual report, with exceptions noted in MD&A - No significant changes in market risk from the disclosures in the Annual Report on Form 10-K for 2021, other than those discussed in Item 2 and Item 1A of this report[129] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures and the absence of material changes in internal control over financial reporting - The Company's disclosure controls and procedures were effective as of March 31, 2022[129] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2022[129] PART II. OTHER INFORMATION This section contains additional information not covered in Part I, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings Reports no material changes to legal proceedings from the prior annual report - No material changes in legal proceedings from the 2021 Annual Report on Form 10-K[131] Item 1A. Risk Factors Indicates no material changes to the risk factors previously disclosed in the annual report - No material changes in risk factors from the 2021 Annual Report on Form 10-K[132] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Confirms no unregistered sales of equity securities or use of proceeds to report for the period - None to report[133] Item 3. Defaults Upon Senior Securities States no defaults upon senior securities occurred during the reporting period - None to report[134] Item 4. Mine Safety Disclosures This disclosure item is not applicable to the company's operations - Not Applicable[135] Item 5. Other Information No additional information is required to be reported under this item - Not Applicable[136] Item 6. Exhibits Lists all exhibits filed with the Quarterly Report on Form 10-Q, including key agreements and certifications - Exhibits include Employment Agreement (10.1), CEO and CFO Certifications (31.1, 31.2, 32.1), and XBRL financial information (101, 104)[138] SIGNATURES Confirms the official signing of the report by the Chairman, President, CEO, and VP, CFO on April 20, 2022 - The report was signed by Dennis M. Oates (Chairman, President and CEO) and Steven V. DiTommaso (VP and CFO) on April 20, 2022[141]