UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Quarterly Period Ended |
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
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
(Address of principal executive offices, including zip code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
| | | The The |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | | ☑ |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of October 21, 2024, there were
Universal Stainless & Alloy Products, Inc.
| DESCRIPTION |
PAGE NO. |
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| PART I. |
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| Item 1. |
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| Condensed Consolidated Statements of Comprehensive Income (Unaudited) |
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| Condensed Consolidated Statements of Shareholders' Equity (Unaudited) |
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| Notes to the Unaudited Condensed Consolidated Financial Statements |
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| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. |
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| Item 4. |
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| PART II. |
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| Item 1. |
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| Item 1A. |
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| Item 2. |
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| Item 3. |
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| Item 4. |
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| Item 5. |
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| Item 6. |
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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Information)
(Unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of products sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Operating income | ||||||||||||||||
| Interest expense and other financing costs | ||||||||||||||||
| Other (income) expense, net | ( | ) | ( | ) | ||||||||||||
| Income before income taxes | ||||||||||||||||
| Income taxes | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Net income per common share - Basic | $ | $ | $ | $ | ||||||||||||
| Net income per common share - Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average shares of common stock outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
| Three months ended |
Nine months ended |
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| September 30, |
September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss), net of tax |
||||||||||||||||
| Unrealized (loss) gain on derivatives |
( |
) | ( |
) | ( |
) | ||||||||||
| Comprehensive income |
$ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Information)
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | * | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable (less expected credit losses of $ as of the end of the period) | ||||||||
| Inventory | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued employment costs | ||||||||
| Current portion of long-term debt | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net | ||||||||
| Deferred income taxes | ||||||||
| Other long-term liabilities, net | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Stockholders’ equity: | ||||||||
| Senior preferred stock, par value $ per share; shares authorized; shares issued and outstanding | ||||||||
| Common stock, par value $ per share; shares authorized; and shares issued, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
* Derived from audited financial statements
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in Thousands)
(Unaudited)
| Nine months ended |
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| September 30, |
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| 2024 |
2023 |
|||||||
| Operating Activities: |
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| Net income |
$ | $ | ||||||
| Adjustments for non-cash items: |
||||||||
| Depreciation and amortization |
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| New Markets Tax Credit gain, net |
( |
) | ||||||
| Deferred income tax |
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| Share-based compensation expense |
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| Changes in assets and liabilities: |
||||||||
| Accounts receivable, net |
( |
) | ( |
) | ||||
| Inventory, net |
( |
) | ||||||
| Accounts payable |
( |
) | ||||||
| Accrued employment costs |
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| Other, net |
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| Net cash provided by operating activities |
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| Investing Activity: |
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| Payments for property, plant and equipment |
( |
) | ( |
) | ||||
| Net cash used in investing activity |
( |
) | ( |
) | ||||
| Financing Activities: |
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| Net repayment of borrowings under revolving credit facility |
( |
) | ( |
) | ||||
| Proceeds from stock issued under share-based plans |
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| Repayments of term loan facility and finance leases |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Net decrease in cash |
( |
) | ( |
) | ||||
| Cash at beginning of period |
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| Cash at end of period |
$ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in Thousands)
(Unaudited)
| Accumulated |
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| Common |
Additional |
other |
Total |
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| shares |
Common |
paid-in |
Retained |
comprehensive |
shareholders' |
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| outstanding |
stock |
capital |
earnings |
(loss) income |
equity |
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| For the nine months ended September 30, 2024 |
||||||||||||||||||||||||
| Balance at December 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Exercise of stock options |
||||||||||||||||||||||||
| Share-based compensation |
- | |||||||||||||||||||||||
| Other comprehensive income, net of tax |
- | |||||||||||||||||||||||
| Net income |
- | |||||||||||||||||||||||
| Balance at March 31, 2024 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Employee Stock Purchase Plan |
||||||||||||||||||||||||
| Exercise of stock options |
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| Share-based compensation |
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| Other comprehensive income, net of tax |
- | |||||||||||||||||||||||
| Net income |
- | |||||||||||||||||||||||
| Balance at June 30, 2024 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Exercise of stock options |
||||||||||||||||||||||||
| Share-based compensation |
||||||||||||||||||||||||
| Other comprehensive loss, net of tax |
- | ( |
) | ( |
) | |||||||||||||||||||
| Net income |
- | |||||||||||||||||||||||
| Balance at September 30, 2024 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| For the nine months ended September 30, 2023 |
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| Balance at December 31, 2022 |
$ | $ | $ | $ | $ | |||||||||||||||||||
| Share-based compensation |
||||||||||||||||||||||||
| Other comprehensive loss, net of tax |
- | ( |
) | ( |
) | |||||||||||||||||||
| Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
| Balance at March 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Employee Stock Purchase Plan |
||||||||||||||||||||||||
| Exercise of stock options |
||||||||||||||||||||||||
| Share-based compensation |
||||||||||||||||||||||||
| Other comprehensive loss, net of tax |
- | ( |
) | ( |
) | |||||||||||||||||||
| Net income |
- | |||||||||||||||||||||||
| Balance at June 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Exercise of stock options |
||||||||||||||||||||||||
| Share-based compensation |
- | |||||||||||||||||||||||
| Other comprehensive income, net of tax |
- | |||||||||||||||||||||||
| Net income |
- | |||||||||||||||||||||||
| Balance at September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Nature of Business and Basis of Presentation
Universal Stainless & Alloy Products, Inc., and its wholly-owned subsidiaries (collectively, “Universal,” “we,” “us,” “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, heavy equipment, and general industrial manufacturing industries. We also perform conversion services on materials supplied by customers.
The accompanying unaudited condensed 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. Although the December 31, 2023 condensed consolidated balance sheet data was derived from the audited consolidated financial statements, it does not include all disclosures required by U.S. GAAP. However, we believe that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with our most recently audited consolidated 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 condensed consolidated financial statements include all adjustments necessary to present a fair presentation of the condensed 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 condensed consolidated 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. We also consolidate, regardless of our ownership percentage, variable interest entities (each a “VIE”) for which we are deemed to have a controlling financial interest. All intercompany transactions and balances have been eliminated.
When we obtain an economic interest in an entity, we evaluate the entity to determine if the entity is a VIE and if we are deemed to be a primary beneficiary. As a part of our evaluation, we are required to qualitatively assess if we are the primary beneficiary of the VIE based on whether we hold the power to direct those matters that most significantly impacted the activities of the VIE and the obligation to absorb losses or the right to receive the benefits of the VIE that could potentially be significant. Refer to Note 7, New Markets Tax Credit Financing Transaction, for a description of the VIEs included in our condensed consolidated financial statements.
On October 17, 2024 the Company announced that it entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") and Guarantee by Aperam S.A. in favor of Universal (the "Guarantee Agreement"), pursuant to which the Company will be acquired by Aperam S.A., a leader in stainless steel, specialty steel solutions and recycling headquartered in Luxembourg. This transaction was unanimously approved by the boards of directors of both companies and is expected to close in the first quarter of 2025, subject to satisfaction of customary closing conditions, including receipt of regulatory approval and adoption of the Merger Agreement by a majority of all outstanding share of Universal common stock held by Universal stockholders at a Special Meeting to be scheduled in due course. Costs incurred related to the transaction were expensed as incurred, and the Consolidated Statement of Operations for the three months ended September 30, 2024 included $
Recently Adopted Accounting Pronouncements
None.
Recently Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2023-09, “Segment Reporting—Improvements to Reportable Segment Disclosures,” which updates segment reporting guidance including establishing a requirement for a public entity to disclose its significant segment expense categories and amounts for each reportable segment, among other updates. The amendments in the ASU and are effective for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company plans to adopt the ASU on or before the effective date, and does not expect the ASU to have a material impact on our consolidated financial statements or disclosures.
The Company considers the applicability and impact of all Accounting Standards Updates ("ASUs"). Recently issued ASUs not listed were assessed and were determined not applicable, or are expected to have minimal impact on our condensed consolidated financial statements.
Note 2: Net Income Per Common Share
The following table sets forth the computation of basic and diluted net income per common share:
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (dollars in thousands, except per share amounts) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Numerator: | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| Weighted average number of shares of common stock outstanding | ||||||||||||||||
| Weighted average effect of dilutive share-based compensation | ||||||||||||||||
| Diluted weighted average number of shares of common stock outstanding | ||||||||||||||||
| Net income per common share: | ||||||||||||||||
| Net income per common share - Basic | $ | $ | $ | $ | ||||||||||||
| Net income per common share - Diluted | $ | $ | $ | $ | ||||||||||||
The weighted average effect of dilutive share-based compensation was determined using the treasury stock method in all periods, and includes
The three month period ended September 30, 2023 included
There were options outstanding to purchase
Note 3: Revenue Recognition
The Company’s revenues primarily include sales of products. Revenue is recognized when the Company satisfies its performance obligation under the contract by transferring the promised product to its customer that obtains control of the product. A performance obligation is a promise in a contract to transfer a distinct product to a customer. Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales and other taxes are excluded from revenues. Invoiced shipping and handling costs are included in revenue.
The Company’s revenue is primarily from products transferred to customers at a point in time. The Company recognizes revenue at the point in time in which the customer obtains control of the product, which is generally when product title passes to the customer upon shipment.
We have determined that there are certain customer agreements involving production of specified product grades and shapes that require over-time revenue recognition, in advance of shipment, as there is no alternative use for the product without significant economic loss, and the Company maintains an enforceable right to payment including a normal profit margin from the customer in the event of contract termination. The revenue is measured based on inputs expended in proportion to the total inputs the entity expects to expend to completely satisfy the performance obligation. The Company had revenue subject to over-time recognition of $
The timing of revenue recognition, customer billings, and cash collections resulted in contract assets related to services performed and not yet billed of $
We expect to satisfy all performance obligations related to revenue recognized in advance of shipment at September 30, 2024 within the next 12 months.
The Company has elected the following practical expedients allowed under Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers ("ASC 606"):
| ● | Shipping of products is not considered a separate performance obligation. |
| ● | Performance obligations are satisfied within one year from a given reporting date; consequently, we omit disclosure of the transaction price apportioned to remaining performance obligations on open orders. |
The following summarizes our revenue by melt type:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Net sales: | ||||||||||||||||
| Specialty alloys | $ | $ | $ | $ | ||||||||||||
| Premium alloys (A) | ||||||||||||||||
| Conversion services and other sales | ||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||
| (A) | Premium alloys represent all vacuum induction melted (VIM) products. |
Note 4: Inventory
Our raw material and starting stock inventory primarily includes ferrous and non-ferrous scrap metal and alloys such as nickel, chromium, molybdenum, cobalt, vanadium and copper. Our semi-finished and finished steel products are work-in-process in various stages of production or are finished products awaiting shipment to our customers.
Operating materials primarily include forge dies, production molds and machine rolls that are consumed over their useful lives. During the nine months ended September 30, 2024 and 2023, we amortized these operating materials in the amount of $
Inventory is stated at the lower of cost or net realizable value 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.
Inventory consisted of the following:
| September 30, | December 31, | |||||||
| (in thousands) | 2024 | 2023 | ||||||
| Raw materials and starting stock | $ | $ | ||||||
| Semi-finished and finished steel products | ||||||||
| Operating materials | ||||||||
| Gross inventory | ||||||||
| Inventory reserves | ( | ) | ( | ) | ||||
| Total inventory | $ | $ | ||||||
Note 5: Leases
The Company periodically enters into leases in its normal course of business. At September 30, 2024 and December 31, 2023, the leases in effect were primarily related to mobile equipment and other production equipment. The term of our leases is generally
Right-of-use assets and lease liabilities are recorded at the present value of minimum lease payments. For our operating leases, the assets are included in Other long-term assets on the condensed consolidated balance sheets and are amortized within operating income over the respective lease terms. The long-term component of the lease liability is included in Other long-term liabilities, net, and the current component is included in Other current liabilities. For our finance leases, the assets are included in Property, plant and equipment, net on the condensed consolidated balance sheets and are depreciated as a component of cost of goods sold over the respective lease terms, which range from to years. 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 new operating lease agreement during the first nine months of 2024 and new finance lease agreement during the first nine months of 2023.
As of September 30, 2024, future minimum lease payments applicable to operating and finance leases were as follows:
| (in thousands) | Operating Leases | Finance Leases | ||||||
| Remainder of 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Total minimum lease payments | ||||||||
| Less amounts representing interest | ( | ) | ( | ) | ||||
| Present value of minimum lease payments | ||||||||
| Less current obligations | ( | ) | ( | ) | ||||
| Total long-term lease obligations, net | $ | $ | ||||||
| Weighted-average remaining lease term (in years) | ||||||||
Right-of-use assets recorded to the condensed consolidated balance sheet at September 30, 2024, net of accumulated amortization, were $
The unamortized portion of the $
The Company applies the practical expedient allowed under ASC 842 to exclude leases with a term of 12 months or less from the calculation of our lease liabilities and right-of-use assets.
In determining the lease liability and corresponding right-of-use asset for each lease, the Company calculated the present value of future lease payments using the interest rate implicit in the lease, when available, or the Company’s incremental borrowing rate. The incremental borrowing rate was determined with reference to the interest rate applicable under revolving credit facility discussed in Note 6, Long-Term Debt, as this facility is collateralized by a first lien on substantially all of the assets of the Company and its term is similar to the term of our leases.
Note 6: Long-Term Debt
Long-term debt consisted of the following:
| September 30, | December 31, | |||||||
| (in thousands) | 2024 | 2023 | ||||||
| Revolving credit facility | $ | $ | ||||||
| Term loan | ||||||||
| Sale and leaseback financing liability | ||||||||
| Finance leases | ||||||||
| Total debt | ||||||||
| Less: current portion of long-term debt | ( | ) | ( | ) | ||||
| Less: deferred financing costs | ( | ) | ( | ) | ||||
| Long-term debt, net | $ | $ | ||||||
Credit Facility
On March 17, 2021, we entered into the Second Amended and Restated Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”), with PNC 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 and PNC Capital Markets LLC, as sole lead arranger and sole bookrunner. The Credit Agreement provides for a senior secured revolving credit facility in an aggregate principal amount not to exceed $
At September 30, 2024, we had total Credit Agreement related net deferred financing costs of approximately $
The Credit Agreement requires the Company to maintain compliance with all the applicable financial covenants throughout the term of the Credit Agreement. As of September 30, 2024, we are in compliance with all applicable financial covenants.
The Facilities, which expire on March 17, 2026 (the ‘Expiration Date”), are collateralized by a first lien on substantially all of the assets of the Company and its subsidiaries, except that no real property is collateral under the Facilities other than Company’s real property in North Jackson, Ohio.
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 $
The Company is required to pay a commitment fee of
With respect to the Term Loan, the Company pays quarterly installments of the principal of approximately $
Amounts outstanding under the Facilities, at the Company’s option, bear interest at the current SOFR rate plus a spread, calculated in accordance with the terms of the Credit Agreement. Interest under the Credit Agreement is payable monthly. We elected to use the SOFR based rate for the majority of the debt outstanding under the Facilities for the nine months ended September 30, 2024, which approximated
Note 7: New Markets Tax Credit Financing Transaction
On March 9, 2018, the Company entered into a qualified New Markets Tax Credit (“NMTC”) financing program with PNC New Markets Investment Partners, LLC and Boston Community Capital, Inc. related to a new mid-size bar cell capital project at the Company’s Dunkirk, NY facility. PNC New Markets Investment Partners, LLC made a capital contribution and the Company made a loan to Dunkirk Investment Fund, LLC (“Investment Fund”) under the qualified NMTC program. Through this financing transaction, the Company secured low interest financing and the potential for other future benefits related to its mid-size bar cell capital project.
In connection with the NMTC financing program, the Company loaned $
The NMTC is subject to
Direct costs incurred in structuring this financing transaction totaled $
As of December 31, 2023, the Company recorded $
From inception of the NMTC until the exercise of the put option on September 30, 2024, the Company determined that the Investment Fund and CDE are each a VIE, and that it is the primary beneficiary of each VIE. This conclusion was reached based on the following:
| ● | The ongoing activities of the VIE, collecting and remitting interest and fees, and NMTC compliance were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the VIE; |
| ● | Contractual arrangements obligate the Company to comply with NMTC rules and regulations and provide various other guarantees to the Investment Fund and CDE; |
| ● | PNC New Markets Investment Partners, LLC lacks a material interest in the underlying economics of the project; and |
| ● | The Company is obligated to absorb losses of the VIE. |
Upon exercise of the put option, the Company gained control of both the Investment Fund and CDE and they ceased to be VIEs. Because the Company was the primary beneficiary of each entity, and as of September 30, 2024 controls each entity, the entities have been included in the Company’s condensed consolidated financial statements in all periods and there is no change in consolidated financial statement presentation.
Note 8: 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.
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 fair value of the Term Loan and Revolving Credit Facility at September 30, 2024 and December 31, 2023 approximated the carrying amount, as the interest rate is based upon observable market interest rates (Level 2). The fair values of our foreign currency forward contracts and interest rate swap were determined using observable market swap rates (Level 2) and are discussed further in Note 11 .
Note 9: 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 10: Income Taxes
Management estimates the annual effective income tax rate quarterly based on forecasted full year 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 nine months ended September 30, 2024 and 2023, our estimated annual effective tax rates applied to ordinary income were
Discrete items during the nine months ended September 30, 2024 and 2023 were related to share-based compensation items and totaled approximately $
Discrete items during the three months ended September 30, 2024 were approximately $
Note 11: Derivatives and Hedging
The Company invoices certain customers in foreign currencies. In order to mitigate the risks associated with fluctuations in exchange rates with the U.S. Dollar, the Company entered into foreign exchange forward contracts to mitigate the foreign currency risk related to a portion of these sales, and has designated these contracts as cash flow hedges.
The notional value of contracts was $
The Company recorded an unrealized loss in accumulated other comprehensive income (loss) of approximately $
The Company entered into a forward interest rate swap contract during 2020 to fix the interest rate on a portion of its variable-rate debt from January 1, 2021 to June 30, 2023. The interest rate swap was designated as a cash flow hedge. The notional amount of the contract was $
Note 12: Related Parties
None.
Note 13: Subsequent Events
On October 17, 2024 the Company announced that it entered into the Merger Agreement and the Guarantee Agreement, pursuant to which the Company will be acquired by Aperam S.A., a leader in stainless steel, specialty steel solutions and recycling headquartered in Luxembourg. The transaction was unanimously approved by the boards of directors of both companies and is expected to close in the first quarter of 2025, subject to satisfaction of customary closing conditions, including receipt of regulatory approval and adoption of the Merger Agreement by a majority of all outstanding shares of Universal common stock held by Universal stockholders at a Special Meeting to be scheduled in due course. Costs incurred related to the transaction were expensed as incurred, and the Consolidated Statements of Operations for the three months ended September 30, 2024 included $
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 condensed 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, 2023, 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.
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, energy, heavy equipment and general industrial markets. We also perform conversion services on material supplied by our customers.
On October 17, 2024, we announced that we entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") and Guarantee by Aperam S.A. in favor of Universal (the "Guarantee Agreement"), pursuant to which we will be acquired by Aperam S.A ("Aperam"), a leader in stainless steel, specialty steel solutions and recycling headquartered in Luxembourg. The transaction was unanimously approved by the boards of directors of both companies and is expected to close in the first quarter of 2025, subject to satisfaction of customary closing conditions, including receipt of regulatory approval and adoption of the Merger Agreement by a majority of all outstanding shares of Universal common stock held by Universal stockholders at a Special Meeting to be scheduled in due course.
Sales in the third quarter of 2024 were $87.3 million, which is the highest total in Company history, surpassing its record $82.8 million reported last quarter, and 22% higher than the third quarter 2023 total of $71.3 million. Our largest end market, aerospace, totaled $71.3 million, or 82% of total sales. Aerospace and defense applications continue to drive high demand for the Company's premium alloys and finished bar products. Total Company backlog at September 30, 2024, before surcharges applied at the time of shipment, was $260.1 million.
Sales of premium alloy products, which we define as all vacuum induction melt products, reached a record level of $23.7 million in the third quarter of 2024, compared to $20.7 million in the second quarter of 2024. We expect premium alloy sales to continue to grow for the foreseeable future.
Our gross margin for the third quarter of 2024 was $22.0 million, or 25.2% of net sales, compared with 25.4% in the second quarter of 2024 and 15.2% in the third quarter of 2023. Our gross margin change compared to last quarter is primarily driven by a fluctuation in product mix, while our sustained improvement compared to last year reflects the impact of our cost improvement initiatives, higher base prices, and greater mix of aerospace market sales. Operating income was $13.2 million and net income of $11.2 million for the quarter, or $1.12 per diluted share.
Results of Operations
Three months ended September 30, 2024 as compared to the three months ended September 30, 2023:
| Three months ended September 30, |
||||||||||||||||||||||||
| (in thousands) |
2024 |
2023 |
||||||||||||||||||||||
| Amount |
Percentage of net sales |
Amount |
Percentage of net sales |
Dollar variance |
Percentage variance |
|||||||||||||||||||
| Net sales |
$ | 87,250 | 100.0 | % |
$ | 71,283 | 100.0 | % |
$ | 15,967 | 22.4 | % | ||||||||||||
| Cost of products sold |
65,258 | 74.8 | 60,424 | 84.8 | 4,834 | 8.0 | ||||||||||||||||||
| Gross margin |
21,992 | 25.2 | 10,859 | 15.2 | 11,133 | 102.5 | ||||||||||||||||||
| Selling, general and administrative expenses |
8,967 | 10.3 | 6,449 | 9.0 | 2,518 | 39.0 | ||||||||||||||||||
| Operating income |
13,025 | 14.9 | 4,410 | 6.2 | 8,615 | 195.4 | ||||||||||||||||||
| Interest expense |
1,789 | 2.1 | 2,138 | 3.0 | (349 | ) | (16.3 | ) | ||||||||||||||||
| Other (income) expense, net |
(2,242 | ) | (2.6 | ) | 42 | 0.1 | (2,284 | ) | NM | |||||||||||||||
| Income before income taxes |
13,478 | 15.4 | 2,230 | 3.1 | 11,248 | NM | ||||||||||||||||||
| Income taxes |
2,426 | 2.8 | 300 | 0.4 | 2,126 | NM | ||||||||||||||||||
| Net income |
$ | 11,052 | 12.6 | % |
$ | 1,930 | 2.7 | % |
$ | 9,122 | 472.6 | |||||||||||||
| Tons shipped |
7,577 | 8,246 | (669 | ) | (8.1 | ) | ||||||||||||||||||
| Market Segment Information |
| Three months ended September 30, |
||||||||||||||||||||||||
| (in thousands) |
2024 |
2023 |
||||||||||||||||||||||
| Amount |
Percentage of net sales |
Amount |
Percentage of net sales |
Dollar variance |
Percentage variance |
|||||||||||||||||||
| Net sales: |
||||||||||||||||||||||||
| Service centers |
$ | 65,613 | 75.1 | % |
$ | 56,768 | 79.7 | % |
$ | 8,845 | 15.6 | % |
||||||||||||
| Original equipment manufacturers |
9,642 | 11.1 | 5,142 | 7.2 | 4,500 | 87.5 | ||||||||||||||||||
| Rerollers |
1,457 | 1.7 | 2,373 | 3.3 | (916 | ) | (38.6 | ) | ||||||||||||||||
| Forgers |
10,135 | 11.6 | 5,285 | 7.4 | 4,850 | 91.8 | ||||||||||||||||||
| Conversion services and other |
403 | 0.5 | 1,715 | 2.4 | (1,312 | ) | (76.5 | ) | ||||||||||||||||
| Total net sales |
$ | 87,250 | 100.0 | % |
$ | 71,283 | 100.0 | % |
$ | 15,967 | 22.4 | % |
||||||||||||
| Melt Type Information |
| Three months ended September 30, |
||||||||||||||||||||||||
| (in thousands) |
2024 |
2023 |
||||||||||||||||||||||
| Amount |
Percentage of net sales |
Amount |
Percentage of net sales |
Dollar variance |
Percentage variance |
|||||||||||||||||||
| Net sales: |
||||||||||||||||||||||||
| Specialty alloys |
$ | 63,165 | 72.4 | % |
$ | 53,092 | 74.5 | % |
$ | 10,073 | 19.0 | % |
||||||||||||
| Premium alloys (A) |
23,682 | 27.1 | 16,476 | 23.1 | 7,206 | 43.7 | ||||||||||||||||||
| Conversion services and other |
403 | 0.5 | 1,715 | 2.4 | (1,312 | ) | (76.5 | ) | ||||||||||||||||
| Total net sales |
$ | 87,250 | 100.0 | % |
$ | 71,283 | 100.0 | % |
$ | 15,967 | 22.4 | % |
||||||||||||
| (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 September 30, |
||||||||||||||||||||||||
| (in thousands) |
2024 |
2023 |
||||||||||||||||||||||
| Amount |
Percentage of net sales |
Amount |
Percentage of net sales |
Dollar variance |
Percentage variance |
|||||||||||||||||||
| Net sales: |
||||||||||||||||||||||||
| Aerospace |
$ | 71,355 | 81.7 | % |
$ | 53,978 | 75.8 | % |
$ | 17,377 | 32.2 | % |
||||||||||||
| Energy |
4,855 | 5.6 | 3,307 | 4.6 | 1,548 | 46.8 | ||||||||||||||||||
| Heavy equipment |
6,588 | 7.6 | 8,940 | 12.5 | (2,352 | ) | (26.3 | ) | ||||||||||||||||
| General industrial, conversion services and other |
4,452 | 5.1 | 5,058 | 7.1 | (606 | ) | (12.0 | ) | ||||||||||||||||
| Total net sales |
$ | 87,250 | 100.0 | % |
$ | 71,283 | 100.0 | % |
$ | 15,967 | 22.4 | % |
||||||||||||
Net sales:
Net sales for the three months ended September 30, 2024 increased $16.0 million, or 22.4%, compared to the same period in the prior year. This reflects higher base prices and a higher mix of finished bar, premium, and aerospace products. The increase in our base selling prices applies to substantially all our products, but is highest in our aerospace end market and driven by strong demand.
Gross margin:
As a percent of sales, our gross margin for the three months ended September 30, 2024 was 25.2% compared to 15.2% for the same period in the prior year. The increase includes higher base selling prices and cost improvements. The increase includes higher base selling prices, as our average net sales dollars per shipped ton increased 33% compared with the prior period, and cost reductions resulting from improvement projects and productivity gains.
Selling, general and administrative expenses:
Our selling, general and administrative (“SG&A”) expenses consist primarily of employee-related costs, which include salaries, payroll taxes and benefit related costs, insurance costs and professional services. SG&A expenses increased by $2.5 million for the three months ended September 30, 2024 compared to the same period in the prior year due to $0.6 million in nonrecurring transaction costs, higher insurance costs, and higher accounting and audit fees.
Interest expense and other financing costs:
Interest expense totaled approximately $1.8 million in the third quarter of 2024 compared to $2.1 million in the third quarter of 2023, driven by lower debt levels and lower market interest rates.
Other (income) expense, net:
Other (income) expense, net for the period ended September 30, 2024 includes a net gain of $2.2 million associated with the milestone reached under the Company's NMTC financing transaction.
Income taxes:
Management estimates the annual effective income tax rate quarterly based on forecasted full year 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.
Net income:
For the three months ended September 30, 2024, the Company earned net income of $11.1 million, or $1.11 per diluted share, compared to a net income of $1.9 million, or $0.20 per diluted share, for the three months ended September 30, 2023.
Nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023:
| Nine months ended September 30, |
||||||||||||||||||||||||
| (in thousands) |
2024 |
2023 |
||||||||||||||||||||||
| Amount |
Percentage of net sales |
Amount |
Percentage of net sales |
Dollar variance |
Percentage variance |
|||||||||||||||||||
| Net sales |
$ | 247,646 | 100.0 | % | $ | 206,163 | 100.0 | % | 41,483 | 20.1 | % | |||||||||||||
| Cost of products sold |
189,974 | 76.7 | 177,732 | 86.2 | 12,242 | 6.9 | ||||||||||||||||||
| Gross margin |
57,672 | 23.3 | 28,431 | 13.8 | 29,241 | 102.8 | ||||||||||||||||||
| Selling, general and administrative expenses |
24,540 | 9.9 | 19,479 | 9.4 | 5,061 | 26.0 | ||||||||||||||||||
| Operating income |
33,132 | 13.4 | 8,952 | 4.3 | 24,180 | 270.1 | ||||||||||||||||||
| Interest expense |
5,740 | 2.3 | 6,215 | 3.0 | (475 | ) | (7.6 | ) | ||||||||||||||||
| Other income, net |
(2,206 | ) | (0.9 | ) | 5 | - | (2,211 | ) | NM | |||||||||||||||
| Income before income taxes |
29,598 | 11.9 | 2,732 | 1.3 | 26,866 | NM | ||||||||||||||||||
| Income taxes |
5,544 | 2.2 | 419 | 0.2 | 5,125 | NM | ||||||||||||||||||
| Net income |
$ | 24,054 | 9.7 | % | $ | 2,313 | 1.1 | % | $ | 21,741 | NM | |||||||||||||
| Tons shipped |
22,601 | 23,934 | (1,333 | ) | (5.6 | ) | ||||||||||||||||||
| Market Segment Information |
| Nine months ended September 30, |
||||||||||||||||||||||||
| (in thousands) |
2024 |
2023 |
||||||||||||||||||||||
| Amount |
Percentage of net sales |
Amount |
Percentage of net sales |
Dollar variance |
Percentage variance |
|||||||||||||||||||
| Net sales: |
||||||||||||||||||||||||
| Service centers |
$ | 185,473 | 74.9 | % | $ | 159,928 | 77.6 | % | $ | 25,545 | 16.0 | % | ||||||||||||
| Original equipment manufacturers |
23,274 | 9.4 | 13,218 | 6.4 | 10,056 | 76.1 | ||||||||||||||||||
| Rerollers |
7,700 | 3.1 | 12,700 | 6.2 | (5,000 | ) | (39.4 | ) | ||||||||||||||||
| Forgers |
29,046 | 11.7 | 16,740 | 8.1 | 12,306 | 73.5 | ||||||||||||||||||
| Conversion services and other sales |
2,153 | 0.9 | 3,577 | 1.7 | (1,424 | ) | (39.8 | ) | ||||||||||||||||
| Total net sales |
$ | 247,646 | 100.0 | % | $ | 206,163 | 100.0 | % | $ | 41,483 | 20.1 | % | ||||||||||||
| Melt Type Information |
| Nine months ended September 30, |
||||||||||||||||||||||||
| (in thousands) |
2024 |
2023 |
||||||||||||||||||||||
| Amount |
Percentage of net sales |
Amount |
Percentage of net sales |
Dollar variance |
Percentage variance |
|||||||||||||||||||
| Net sales: |
||||||||||||||||||||||||
| Specialty alloys |
$ | 181,003 | 73.1 | % | $ | 155,588 | 75.5 | % | $ | 25,415 | 16.3 | % | ||||||||||||
| Premium alloys (A) |
64,490 | 26.0 | 46,998 | 22.8 | 17,492 | 37.2 | ||||||||||||||||||
| Conversion services and other sales |
2,153 | 0.9 | 3,577 | 1.7 | (1,424 | ) | (39.8 | ) | ||||||||||||||||
| Total net sales |
$ | 247,646 | 100.0 | % | $ | 206,163 | 100.0 | % | $ | 41,483 | 20.1 | % | ||||||||||||
| (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) |
2024 |
2023 |
||||||||||||||||||||||
| Amount |
Percentage of net sales |
Amount |
Percentage of net sales |
Dollar variance |
Percentage variance |
|||||||||||||||||||
| Net sales: |
||||||||||||||||||||||||
| Aerospace |
$ | 200,191 | 80.8 | % | $ | 154,198 | 74.8 | % | $ | 45,993 | 29.8 | % | ||||||||||||
| Energy |
16,011 | 6.5 | 13,529 | 6.6 | 2,482 | 18.3 | ||||||||||||||||||
| Heavy equipment |
17,638 | 7.1 | 24,799 | 12.0 | (7,161 | ) | (28.9 | ) | ||||||||||||||||
| General industrial, conversion services and other sales |
13,806 | 5.6 | 13,637 | 6.6 | 169 | 1.2 | ||||||||||||||||||
| Total net sales |
$ | 247,646 | 100.0 | % | $ | 206,163 | 100.0 | % | $ | 41,483 | 20.1 | % | ||||||||||||
Net sales:
Net sales for the nine months ended September 30, 2024 increased $41.5 million, or 20.1%, compared to the same period in the prior year. This reflects higher base prices and a higher mix of finished bar, aerospace and premium products. The increase in our base selling prices applies to substantially all our products, but is highest in our aerospace end market and driven by strong demand.
Gross margin:
As a percent of sales, our gross margin for the nine months ended September 30, 2024 was 23.3% compared to 13.8% for the same period in the prior year. The increase includes higher base selling prices, as our average net sales dollars per shipped ton increased 27% compared with the prior period, and cost reductions resulting from improvement projects and productivity gains.
Selling, general and administrative expenses:
Our selling, general and administrative (“SG&A”) expenses consist primarily of employee-related costs, which include salaries, payroll taxes and benefit related costs, insurance costs and professional services. SG&A expenses increased by $5.1 million for the nine months ended September 30, 2024 compared to the same period in the prior year due to higher insurance costs, accounting and audit fees, and $0.6 million in nonrecurring transaction costs. SG&A expenses were 9.9% and 9.4% of net sales in the nine months ended September 30, 2024 and 2023.
Interest expense and other financing costs:
Interest expense totaled approximately $5.7 million in the first nine months of 2024 compared to $6.2 million in the first nine months of 2023, driven by lower debt levels and lower market interest rates.
Other (income) expense, net:
Income taxes:
Management estimates the annual effective income tax rate quarterly based on forecasted full year 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.
Net income:
For the nine months ended September 30, 2024, the Company earned net income of $24.1 million, or $2.45 per diluted share, compared to $2.3 million, or $0.25 per diluted share, for the nine months ended September 30, 2023.
Liquidity and Capital Resources
Historically, we have financed our operations through cash provided by operating activities and borrowings on our credit facilities. At September 30, 2024, we maintained approximately $50.3 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.
During the nine months ended September 30, 2024, our operating activities generated $29.4 million of cash. Our net income, after adjustments for non-cash expenses, generated $43.1 million. We used $16.0 million to grow our managed working capital, which we define as net accounts receivable, plus inventory, minus accounts payable, and generated $2.4 million from other assets and liabilities.
During the nine months ended September 30, 2023, our operating activities generated $17.8 million of cash. This includes a use of $4.7 million to grow our managed working capital, which we define as net accounts receivable, plus inventory, minus accounts payable, minus other current liabilities. We generated $4.2 million from our other assets and liabilities.
Net cash used in investing activities:
During the nine months ended September 30, 2024, we used $14.4 million of cash for capital expenditures, compared to $9.7 million for the same period in the prior year.
Net cash used in financing activities:
We used $15.4 million of cash in financing activities for the nine months ended September 30, 2024, primarily to make $14.3 million in net payments on our revolving credit facility and $2.8 million in payments on our term loan and finance leases.
Raw materials
The cost of raw materials represents approximately 40% to 45% of the cost of products sold in the first nine months of 2024 and 2023. The major raw materials used in our operations include nickel, molybdenum, vanadium, chromium, iron and carbon scrap. We maintain a sales price surcharge within our product pricing to mitigate the risk of substantial raw material cost fluctuations. 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.
Leases
The Company periodically enters into leases in its normal course of business. At September 30, 2024 and December 31, 2023, the leases in effect were primarily related to mobile equipment and other production equipment. The term of our leases is generally 72 months or less, and the leases do not have significant restrictions, covenants, or other nonstandard terms.
Right-of-use assets and lease liabilities are recorded at the present value of minimum lease payments. For our operating leases, the assets are included in Other long-term assets on the condensed consolidated balance sheets and are amortized within operating income over the respective lease terms. The long-term component of the lease liability is included in Other long-term liabilities, net, and the current component is included in Other current liabilities. For our finance leases, the assets are included in Property, plant and equipment, net on the condensed consolidated balance sheets and are depreciated over the respective lease terms which range from three to six years. 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 operating lease during the nine months ended September 30, 2024.
Credit Facility
On March 17, 2021, we entered into the Second Amended and Restated Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”), with PNC 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 and PNC Capital Markets LLC, as sole lead arranger and sole bookrunner. The Credit Agreement 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”).
At September 30, 2024, we had total Credit Agreement related net deferred financing costs of approximately $0.4 million. For the nine months ended September 30, 2024 and 2023, we amortized approximately $0.2 million of deferred financing costs, and for the three months ended September 30, 2024 and 2023, we amortized approximately $0.1 million.
The Credit Agreement requires the Company to maintain compliance with all the applicable financial covenants throughout the term of the Credit Agreement. As of September 30, 2024, we are in compliance with all applicable financial covenants.
The Facilities, which expire on March 17, 2026 (the ‘Expiration Date”), are collateralized by a first lien on substantially all of the assets of the Company and its subsidiaries, except that no real property is collateral under the Facilities other than Company’s real property in North Jackson, Ohio.
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 until it maintains a fixed charge coverage ratio ("FCCR") of not less than 1.1 to 1.0 measured on a rolling two-quarter basis, calculated in accordance with the terms of the Credit Agreement. The Company achieved its second consecutive quarter of its FCCR greater than 1.1 for the period December 31, 2023 and has since maintained the ratio above the required level.
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 after June 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 the current SOFR rate plus a spread, calculated in accordance with the terms of the Credit Agreement. Interest under the Credit Agreement is payable monthly. We elected to use the SOFR based rate for the majority of the debt outstanding under the Facilities for the nine months ended September 30, 2024, which approximated 7.0% for commitments under our Revolving Credit Facility and 7.5% for the Term Loan.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has reviewed its market risk and believes there are no significant changes from that disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, except as provided in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Part II. Item 1A. “Risk Factors.”
Item 4. CONTROLS AND PROCEDURES
The Company’s management, including the Company’s President and Chief Executive Officer and its Vice President and Chief Financial Officer, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s President and Chief Executive Officer and its Vice President and Chief Financial Officer concluded that, as of the end of the fiscal period covered by this quarterly report, the Company’s disclosure controls and procedures are not effective due to material weaknesses discussed in the Form 10-K as of December 31, 2023 filed in March 2024.
Our management has taken actions to remediate the material weaknesses in internal control over financial reporting, which include but are not limited to:
- Enhancement of its risk assessment and scoping process;
- Expansion of the internal audit team and scope of services;
- Enhancement of the design and operation of internal control procedures;
- Expanded documentation and evidence retention during its financial reviews;
- Additional training to ensure a clear understanding of risk assessment, control execution, and monitoring activities throughout the organization; and
- Continuing to expand the available resources at the Company with experience designing and implementing control activities.
We are committed to these enhancements, and believe they will ultimately remediate the material weaknesses; however, material weaknesses are not considered remediated until the new controls have been operational for a period of time, are tested, and management concludes that these controls are operating effectively. This remediation process may require additional resources and will require time to fully implement and execute.
During the fiscal quarter ended September 30, 2024, there were no changes in the Company’s internal control over financial reporting which have materially affected, or are reasonably likely to materially affect, other than the remediation effort discussed above, the Company’s internal control over financial reporting.
There are no material changes from the legal proceedings disclosed in Item 3. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 could materially affect our business, financial conditions or future results. Those risk factors are not the only risks facing us. Additional risks and uncertainties not currently known or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. Except as set forth below, we believe that there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
Risks Related to the Pending Merger
The pendency of the transactions contemplated by the Merger Agreement could adversely affect our business, results of operations and financial condition.
The pendency of the transactions contemplated by the Merger Agreement, including the merger of the Company and a wholly owned indirect subsidiary of Aperam with the Company surviving as a wholly owned indirect subsidiary of Aperam (the “Merger”), could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, results of operations and financial condition, regardless of whether the proposed Merger is completed. In particular, we could potentially lose additional important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the Merger. We could also potentially lose additional customers or suppliers, and business relationships with new customers or supplier contracts could be delayed or decreased. In addition, we have allocated, and will continue to allocate, significant management resources towards the completion of the Merger, which could adversely affect our business and results of operations.
We are subject to restrictions on the conduct of our business prior to the consummation of the Merger as provided in the Merger Agreement, including, among other things, certain restrictions on our ability to acquire other businesses, sell or transfer our assets and amend our organizational documents. These restrictions could result in our inability to respond effectively to competitive pressures, industry developments and future opportunities, retain key employees and may otherwise harm our business, results of operations and financial condition.
Because of the risks associated with the Merger, we can provide no assurance that the Merger will close on the terms and conditions we currently anticipate.
Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger.
Before the Merger may be completed, various consents, approvals, waiver or non-objections must be obtained from certain governmental authorities. Satisfying the requirements of these governmental authorities may delay the date of completion of the Merger, or one or more of these approvals may not be obtained at all. In addition, these governmental authorities may include conditions or restrictions on the completion of the Merger, or require changes to the terms of the Merger.
The Merger Agreement and the transactions contemplated by the Merger Agreement are subject to approval by stockholders of the Company.
The Merger cannot be completed unless, among other conditions, the Merger Agreement is adopted by the Company’s stockholders by the affirmative vote of a majority of the outstanding shares of the Company’s common stock entitled to vote thereon (the “Requisite Company Vote”). If the Company’s stockholders do not adopt the Merger Agreement by the Requisite Company Vote, the Merger cannot be completed.
Failure to complete the Merger could negatively impact the stock price of the Company and future businesses and financial results of the Company.
The Merger Agreement is subject to a number of customary closing conditions, including the receipt of regulatory approvals and the Requisite Company Vote. Conditions to the closing of the Merger may not be fulfilled in a timely manner or at all and, accordingly, the Merger may be delayed or may not be completed. In addition, we and/or Aperam may elect to terminate the Merger Agreement under certain conditions. If the Merger is not completed, the ongoing businesses, financial condition and results of operation of the Company may be adversely affected and market prices of the Company’s common stock may decline significantly, particularly to the extent that the current market prices reflect a market assumption that the Merger will be consummated. If the consummation of the Merger is delayed, including by the receipt of a competing acquisition proposal, the Company’s business, financial condition and results of operations may be materially adversely affected.
In addition, the Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement, as well as the costs and expenses of filing, printing and mailing a proxy statement and all filing and other fees paid to the SEC and other regulatory agencies in connection with the Merger. If the Merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the Merger. Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the Merger, including the diversion of management’s attention from pursuing other opportunities and the constraints in the Merger Agreement on the ability to make significant changes to the Company’s ongoing business during the pendency of the Merger, could have a material adverse effect on the Company’s businesses, financial conditions and results of operations.
Additionally, the Company’s business may be adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. If the Merger Agreement is terminated and the Company’s board of directors seeks another merger or business combination, the Company’s stockholders cannot be certain that the Company will be able to find a party willing to engage in a transaction on more attractive terms than the proposed Merger.
The Merger Agreement limits the Company’s ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire the Company.
The Merger Agreement contains “no shop” covenants that restrict the Company’s ability to, directly or indirectly, among other things, initiate, solicit, knowingly encourage or knowingly facilitate, inquiries or proposals with respect to, or, subject to certain exceptions generally related to the exercise of fiduciary duties by the Company’s board of directors, engage in any negotiations concerning, or provide any confidential or non-public information or data relating to, any acquisition proposal. These provisions, which include a $14.8 million termination fee payable by the Company under certain circumstances, may discourage a potential third-party acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition.
Holders of Company common stock will not have any ownership or voting interest in the combined company after the consummation of the Merger and have no influence over management and the policies of the combined company.
Stockholders of the Company currently have the right to vote in the election of the board of directors and on other matters affecting the Company. Assuming the Merger is completed, the Company will become a wholly owned indirect subsidiary of Aperam, and each share of the Company’s common stock issued and outstanding immediately prior to the effectiveness of the Merger will be cancelled and converted into the right to receive the applicable merger consideration, subject to applicable tax withholdings, whereupon such shares will cease to exist and no longer be outstanding. Upon the effectiveness of the Merger, each holder of the Company’s common stock immediately prior to the effectiveness of the Merger will cease to have any rights with respect to such shares. Following the effectiveness of the Merger, the Company’s common stock will be delisted from the Nasdaq Global Select Market deregistered under the Securities and Exchange Act of 1934. Accordingly, holders of the Company’s common stock prior to the effectiveness of the Merger will have no ownership or voting interest in the combined company or any influence on the management and policies of the combined company.
Stockholder litigation could prevent or delay the completion of the Merger or otherwise negatively impact the business and operations of the Company.
Stockholders of Aperam or the Company may file lawsuits against Aperam, the Company and/or the directors and officers of either company in connection with the Merger. One of the conditions to the closing is that no governmental entity of competent jurisdiction shall have issued any order (whether temporary, preliminary or permanent) that has become final and non-appealable and that restrains, enjoins or otherwise prohibits the consummation of the Merger. If any plaintiff were successful in obtaining an injunction prohibiting Aperam or the Company from completing the Merger or any of the other transactions contemplated by the Merger Agreement, then such injunction may delay or prevent the effectiveness of the Merger and could result in significant costs to the Company, including any cost associated with the indemnification of directors and officers the Company. The Company may incur costs in connection with the defense or settlement of any stockholder lawsuits filed in connection with the Merger. Such litigation could have an adverse effect on the financial condition and results of operations of the Company and could prevent or delay the completion of the Merger.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
Applicable.
| Exhibit Number |
Exhibit |
|
| 2.1* | Agreement and Plan of Merger, dated as of October 16, 2024, by and among Universal Stainless & Alloy Products, Inc., Aperam US Holdco LLC, and Aperam US Absolute LLC. (Incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on October 17, 2024). | |
| 10.1 | Guarantee, dated as of October 16, 2024, by Aperam S.A. in favor of Universal Stainless & Alloy Products, Inc (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 17, 2024) | |
| 31.1 |
||
| 31.2 |
||
| 32.1 |
||
| 101 |
The following financial information from this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2024, formatted in Inline XBRL (Extensible Business Reporting Language) and filed electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss); (iv) the Condensed Consolidated Statements of Cash Flow; the Condensed Consolidated Statements of Shareholders’ Equity; and (v) the Notes to the Condensed Consolidated Financial Statements (filed herewith). |
|
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Exhibit 101 attachments). |
* The schedules and exhibits to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K under the Securities Act of 1933, as amended. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit, or any section thereof, to the SEC upon request.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: October 30, 2024 |
|
| /s/ Christopher M. Zimmer |
|
| Christopher M. Zimmer |
|
| President and Chief Executive Officer |
|
| (Principal Executive Officer) |
| Date: October 30, 2024 |
|
| /s/ Steven V. DiTommaso |
|
| Steven V. DiTommaso |
|
| Vice President and Chief Financial Officer |
|
| (Principal Financial and Accounting Officer) |
|