Universal Stainless & Alloy Products Annual Report 2004

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FY2004 Annual Report · Universal Stainless & Alloy Products

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[ 2004 annual report ]

Record
demand Capital

investment Employee

solutions

Universal Stainless & Alloy Products, Inc.

Universal Stainless & Alloy Products, Inc. manufactures

and markets semi-finished and finished specialty steel products,
including stainless steel, tool steel and certain other alloyed

steels. The Company’s manufacturing process involves melting,

remelting, treating and hot and cold rolling, machining and cold
drawing of semi-finished and finished specialty steels.
Our products are sold to rerollers, forgers, service centers,

original equipment manufacturers, and wire redrawers.

s
e
r
u
t
i

d
n
e
p
x
e

t
i

p
a
c

2002 – $4.2
2003 – $1.1
2004 – $3.6

in millions

s
e
e
y
o
p
m
e

s
r
e
m
o
t
s
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c

2002 – 393
2003 – 383
2004 – 463

2002 – 372
2003 – 399
2004 – 452

Universal Stainless & Alloy Products [ 2004 annual report ]

letter to our

stockholders

2004 was a year of strong recovery for
Universal Stainless. Our sales reached
$120.6 million, crossing the $100 million
mark for the first time, and nearly doubling
the $69.0 million we reported in 2003. Net
income rose to $7.1 million, or $1.13 per
diluted share, versus a net loss of $1.4 million
or $0.23 per diluted share in the prior year.

Our Dunkirk Specialty Steel operation broke through the
profitability barrier in the 2004 first quarter and by the fourth
quarter had achieved an operating margin of 12% on sales of
$10.5 million. Dunkirk’s total 2004 sales were $34.7 million
and operating income was $3.1 million, compared with sales
of $19.9 million and an operating loss of $2.1 million in 2003.

Improvement at our Universal Stainless & Alloy Products
segment was also substantial, with sales increasing from
$59.6 million to $108 million and operating income rising
to $7.5 million versus an operating loss of $249,000 in 2003.

The turnaround in our financial performance reflects both
significant world events that changed our marketplace in
2004 and actions we took to respond to the opportunities
and challenges presented.

What was different about 2004?

The U.S. economic recovery. The recovery took hold at the
beginning of 2004 and was a primary driver of our strengthening
markets throughout the year. In fact, sales to the aerospace,
power generation, petrochemical and tool steel markets grew
70%, 97%, 50% and 77%, respectively, versus 2003.

The emergence of China as a global force in creating
demand for steel and commodities. China’s effect on both
the industry and Universal Stainless was powerful. Its appetite
for steel to support its rapidly expanding economy was a
positive for all of us in the steel industry. Universal Stainless
benefited more directly from China’s increased need for new
power generation capacity. However, China’s enormous hunger
for raw materials played a central role in rising and volatile

C L A R E N C E M . “ M A C ” M c A N I N C H

P R E S I D E N T A N D C H I E F E X E C U T I V E O F F I C E R

commodity prices, a major challenge for our industry and for
Universal Stainless as well.

The weak U.S. dollar. We continued to face competition from
low-priced imports. However, the weak dollar made imports
less attractive in 2004, improving the competitive stance of
the U.S. steel industry and of Universal Stainless.

Reduced domestic specialty steel capacity. In 2003,
financially weak competitors undercut market prices in an
effort to survive. We have always maintained that such a
strategy never works. Some of those companies did not survive.
As a result, product pricing improved throughout 2004.

How did we respond?

Cost recovery was at the heart of our pricing strategy in
2004. In the face of an unprecedented rise in carbon scrap prices
and with steep increases in the other raw material, energy and

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

With the continued strength of the economy and favorable
outlook for our markets, we have entered 2005 with a high level
of optimism. We also began the new year with a record backlog
of $72 million, a reflection of the confidence our growing base
of customers has in our ability to respond to their needs. Our
focus on efficiency and cost reduction will continue as will our
vigilance in implementing price increases when warranted. We
will continue making capital investments that enable us to
respond to customer needs as well as to enter additional niche
markets, which capitalize on our distinguishing strengths.

At the foundation of our success in 2004 and our plan for 2005
is the guiding strategy that we have followed since our founding
in 1994:

Focus on niche markets as the primary source of profitable
growth

Maintain positive employee relations as the backbone of
efficient and productive operations

Lower costs and make strategic investments as the constant,
day-to-day means of maintaining a well-run company

Build stockholder value as the engine of ongoing success.

On behalf of our Board of Directors and employees, I would like
to thank you for your continued support of our Company and
our strategy.

Clarence M. (“Mac”) McAninch
President and Chief Executive Officer

transportation costs, we instituted a series of price increases for
all our products during 2004. Our pricing strategy consisted both
of surcharges linked to commodity price moves and of base price
increases to recover escalating costs to manufacture our products
as well as for reinvesting in our operations. While strong
market demand was requisite to our success, we also believe two
additional factors were key – the transparency of our pricing
policies and our delivery on the promise to reinvest.

Our pricing initiatives contributed to our sales growth in 2004,
and also helped us control gross margin erosion by tackling the
costs of raw materials we use in our products. Gross profit as a
percent of sales was 14.6% in 2004, still well below the 20.7%
we achieved in 2001, a year of record profitability for Universal
Stainless and a time when material costs were at traditional levels.

Capital investments were made quickly to respond to
customer need. The economic and market recoveries were
welcome developments in 2004, but the momentum of that
recovery posed challenges to Universal Stainless in our ability to
respond to our customers’ fast-rising need for our products. In
addition, our success in achieving a higher value-added product
mix also required more product processing steps, mainly more
annealing. We moved quickly to implement a $2 million capital
spending program at Bridgeville to increase production capacity
and relieve bottlenecks. We initiated the program in the second
quarter and completed it in the fourth quarter. Our investments
enabled us to ship increased tonnage from Bridgeville and also
helped our Titusville and Dunkirk facilities respond more quickly
to their customers’ needs.

Our employees made the difference. It took enormous effort
by our employees to get the new capital equipment up and
running in short order while they were also producing greater
quantities of higher-value products. Their success is noteworthy
and the effort did not stop there. We also focused on improving
processes in all our operations to enhance efficiency and yield.
A measure of the success of all these efforts is evident in the fact
that tons shipped company-wide increased 51% from the first
quarter to the fourth quarter of 2004.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Bridgeville
Manufactures semi-finished and finished
specialty steel products

Produces feedstock for Dunkirk

Dunkirk
Manufactures finished bar, rod and wire
specialty steel products

Produces feedstock for Titusville

3 O P E R AT I N G FA C I L I T I E S :
B R I D G E V I L L E , D U N K I R K , T I T U S V I L L E

Titusville
Manufactures special shape products

Remelts ingots for Bridgeville

operations review

Our Bridgeville and Titusville operations comprise the Universal Stainless & Alloy Products segment of our

Company. Bridgeville includes both a primary melt shop and electro-slag remelt refining operations. The

facility also treats and hot rolls semi-finished specialty steels and has a finishing capability for plate, round

bar and large flat bar. Titusville manufactures precision-rolled shape products, mainly those used in the

aerospace and power generation markets. Our five vacuum-arc remelt furnaces at Titusville are used in

the production of higher quality steels for more demanding applications.

Our other business segment is Dunkirk Specialty Steel, which makes finished bar, rod and wire products.

With the acquisition of Dunkirk in February 2002, we became a fully integrated producer of specialty

steels, capable of addressing over 90% of the specialty steel long product market.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

The increased market demand in 2004 required

us to improve production at all three of
our operations. We focused on resolving capacity constraints
through capital investment and making process improvements

to increase efficiency and yield. Our efforts included tightening
processing standards and eliminating unnecessary

production steps to increase quality.

We made a concerted effort to expand on our philosophy of

pursuing higher value-added products in 2004.

We focused on specialty grades that capitalize on our bottom-poured

ingot process. Emphasizing that attribute through downstream

K E I T H E N G L E K A

D I R E C T O R , T E C H N O L O G Y

operations review continued

Universal Stainless & Alloy Products Segment In 2004, the Universal Stainless & Alloy Products segment achieved record sales
of $108 million and saw its backlog climb to $67 million from $17 million. Accompanying the growth was a shift in sales mix to
higher value-added products, reflecting the success of our strategic effort since our inception. To respond to the surge in demand
and the increased processing required for the orders booked, we needed to increase the capacity and throughput at Bridgeville by
adding capital equipment as well as by tackling related material flow challenges.

The $2 million capital spending program we implemented was aimed at solving several throughput obstacles. We added two reheat
furnaces for the Universal Rolling Mill to increase our daily production capacity from approximately 500,000 to 700,000 pounds.
In addition, a total of six annealing furnaces were added for our ingot, billet and bar products. This was necessary because higher
value-added products require additional annealing. Four state-of-the-art saws were added to handle the additional production
volume and the increased testing requirements for the value-added products.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

PA U L M C G R AT H

V I C E P R E S I D E N T, O P E R AT I O N S

G E N E R A L C O U N S E L A N D S E C R E TA R Y

D U D L E Y M E R C H A N T

V I C E P R E S I D E N T O F

S A L E S A N D M A R K E T I N G

ingot process. Emphasizing that attribute through downstream
processing will give us the greatest return on investment.

Quality requirements are exceptionally high

in our niche markets, especially aerospace

and power generation. In 2004, we achieved ISO 17025

certification and expanded our lab capabilities at Dunkirk and

Bridgeville to better respond to customer requirements.

The capital program was accompanied by the addition of employees at Bridgeville, primarily to ramp-up production and increase
productivity in the melt shop. The new employees were given intensive training on our practices and procedures for handling this
critical first step in the manufacturing process.

The third part of our response was to focus on process improvements. We created new production metrics, reviewed data daily and
held weekly meetings to ensure that we were on target with our goals. We also continued to refine our i2 Factory Planner software
to help us better plan and monitor production levels. Scheduling material flow for optimal throughput and minimal downtime is
crucial both for increasing production and reducing costs.

Some of our most significant accomplishments in 2004 resulted from the collaboration between our Bridgeville and Dunkirk
employees. For example, after mutually assessing the cost and time required for Bridgeville to cut billets to short lengths, Dunkirk
changed its requirements and was able to accept the longer length billets Bridgeville typically produces and thereby increased
product flow. In addition, our employees worked together to develop melt shop solutions in Bridgeville for the production of
special grades of steel that Dunkirk identified as niche market opportunities.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

U N I V E R S A L S TA I N L E S S A N D A L L O Y P R O D U C T S P R O C E S S

feedstock preparation
Our ingot, billet and bloom feedstock
is prepared for rolling through our
conditioning and annealing operations.

>
>

rolling
Our feedstock is reheated to proper
rolling temperatures and processed
on our Universal Rolling Mill and bar
mill in Bridgeville, cold rolling mills in
Titusville and Bar & Rod Mill and
other bar mills in Dunkirk.

melt shop
Scrap is reduced to molten metal
and transferred to the Argon Oxygen
Decarburization (AOD) vessel for
refinement to meet the customer’s
chemistry specifications. Certain
customer specifications also require
electro-slag or vacuum-arc remelting.

operations review continued

We also upgraded the second Fenn mill in Titusville with new electronics and software, giving us two such mills for state-of-the-
art production of precision parts. The increased production capability resulting from the upgrade was another response to the
substantial growth in our company-wide power generation sales in 2004, which were twice those of 2003. While demand in the
U.S. is still mainly for maintenance and repair, new capacity is being added by emerging economies and our customers are
supplying many of the turbines going into new power plants all over the world.

Titusville has mainly served the power generation and aerospace markets. In 2005, we plan to seek more opportunities in those
markets with customers outside the U.S. as well as focus on precision-rolling applications in new niche markets such as food
service and textiles.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

finishing
Our products are processed through
our finishing facilities to meet our
customers’ final specifications.

product
Our products range from semi-
finished products, such as ingot,
billet and plate, to finished bar, rod,

wire and special shape products.

>
>

shipping and delivery
Once certified, the product is packaged
and released for shipment.

quality control
Our finished products are inspected
and certified to our customers’
specifications.

Dunkirk Specialty Steel Segment We set two major goals for Dunkirk in 2004. The first was to ramp-up sales to a level that
would absorb fixed costs and ensure solid profitability as well as respond to the needs of our customers. The second was to
implement cost reduction initiatives that would ensure our competitive position on products that we elect to pursue. Dunkirk’s
success is evident in their record sales of $32 million, fourth quarter operating margin of 12% and their backlog of $22 million at
year-end 2004.

To accomplish these goals, we focused on several process improvements. One initiative was to expand the capability of our Bar &
Rod Mill to produce up to 3-inch round bar, expanding our company-wide capacity to produce this size range of product.

Another process improvement was the project to accept longer length billets from Bridgeville. This was a challenge that required
the effort of many Dunkirk employees. By successfully developing the solution, we not only reduced time and cost at Bridgeville,
but we also ensured an improved supply of feedstock to Dunkirk.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

S K I P P E A K

P L A N T M A N A G E R ,

T I T U S V I L L E FA C I L I T Y

We are building on our strengths and unique
processing capability at Titusville and focusing on
new market opportunities. We now
have two, state-of-the-art Fenn mills to

expand our product capabilities.

The major challenge at Bridgeville was ramping-up
the facility to respond to growth and production levels

we had never seen before. We attacked the problem

by adding personnel, installing new equipment

B R U C E K R A M E R

D I R E C T O R ,

P U R C H A S I N G

operations review continued

While increasing internally produced feedstock was the right solution for bar manufacturing at Dunkirk, we determined that
purchasing certain grades of rod product from outside sources was the most economical and efficient way to increase throughput
at our underutilized wire mill in Dunkirk. As a result, we were able to profitably increase our wire sales by 55% from 2003 levels.

We also focused on refining production methods to increase manufacturing throughput and generate yield improvement. For
example, by adjusting our rolling procedures we were able to reduce the number of pass-through steps required to meet customer
specifications. This initiative also lowered the material costs as a percentage of sales, thereby improving profitability.

A new project underway is to develop niche market opportunities at Titusville that will permit us to use Dunkirk-made finished
bar product as feedstock. Process improvement and company-wide collaboration will continue to be important areas of emphasis
in 2005.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

L E E B U R K E T T

P L A N T M A N A G E R ,

B R I D G E V I L L E FA C I L I T Y

by adding personnel, installing new equipment
and getting it up and running quickly.

We saw unprecedented price increases in

all raw materials in 2004, kicked off by huge demand
from China coupled with significant increased

demand in the U.S. This situation required us to

constantly identify new sources of supply

to avoid shortages and meet our quality requirements.

Our financial strength enabled us to respond
immediately to the ramp-up in working capital

requirements and provides us the flexibility to

pursue future business opportunities.

R I C K U B I N G E R

V I C E P R E S I D E N T, F I N A N C E ,

C H I E F F I N A N C I A L O F F I C E R

A N D T R E A S U R E R

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

The niche markets we focus on at Dunkirk

lend themselves to innovative solutions in creating

the most effective manufacturing processes. The highest

reward lies in utilizing our employees’ wealth of

experience to satisfy customer needs.

D I C K P I N C O S K I

G E N E R A L M A N A G E R ,

D U N K I R K S P E C I A LT Y

S T E E L , L L C

2004Universal Stainless and Alloy Products, Inc.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

2004

financial review

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

Report of Management

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Operations

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

Five-Year Summary

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

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

Results of Operations

On February 8, 2002, the Company, through its wholly-owned subsidiary, Dunkirk Specialty Steel, LLC (“Dunkirk Specialty Steel”)
entered into a Property Asset Purchase Agreement and a Real Property Purchase Agreement (the “Purchase Agreements”) with the
New York Job Development Authority (the “JDA”) to acquire certain assets and real property formerly owned by Empire Specialty
Steel, Inc. at its idled production facility located in Dunkirk, New York. These transactions were completed on February 14, 2002 and
the facility became operational on March 14, 2002.

An analysis of the Company’s operations is as follows:

For the years ended December 31,

2004

2003

2002

Amount

(dollars in thousands)

Net Sales
Stainless steel
Tool steel
High-strength low alloy steel
High-temperature alloy steel
Conversion services
Other

Total net sales
Total cost of products sold
Selling and administrative expenses

94,530
17,075
3,682
2,468
2,386
501

120,642
102,972
7,401

78.4% $
14.2
3.0
2.0
2.0
0.4

100.0
85.4
6.1

52,546
9,673
2,869
2,482
1,079
340

68,989
65,534
5,837

76.2%
14.0
4.1
3.6
1.6
0.5

100.0
95.0
8.5

56,813
6,643
2,213
3,474
1,495
239

70,877
61,971
5,883

80.1%
9.4
3.1
4.9
2.1
0.4

100.0
87.4
8.3

Operating income (loss)

10,269

8.5% $

(2,382)

(3.5)% $

3,023

4.3%

Net sales by market segment are as follows:

For the years ended December 31,

2004

2003

2002

Amount

(dollars in thousands)

Service centers
Rerollers
Forgers
Original equipment manufacturers
Wire redrawers
Conversion services
Miscellaneous

52,261
30,200
22,008
8,349
5,008
2,386
430

43.3% $
25.0
18.2
6.9
4.2
2.0
0.4

29,150
20,240
9,773
5,124
3,328
1,079
295

42.3%
29.3
14.2
7.4
4.8
1.6
0.4

23,478
26,791
8,370
8,578
1,926
1,495
239

33.1%
37.8
11.8
12.1
2.7
2.1
0.4

Net sales

Tons shipped

$ 120,642

100.0% $

68,989

100.0%

70,877

100.0%

48,350

35,100

38,400

2004 Results as Compared to 2003 The increase in net sales in 2004 reflects increased shipments within each market segment as
well as the adoption of surcharge mechanisms for additional raw material components and base price increases implemented during
2004. Shipments of aerospace, power generation, petrochemical and tool steel products have increased substantially in comparison to
the prior year period due to improved economic conditions and greater demand for higher value-added niche products. The Company’s
business conditions were enhanced by the relatively weak U.S. dollar.

Cost of products sold, as a percent of net sales, decreased in 2004 as compared to 2003. This decrease is primarily due to the impact
of raw material surcharge and base price increases implemented in 2004, as well as higher production volumes, more than offsetting
higher raw material, labor, energy and other manufacturing costs. In addition, Dunkirk Specialty Steel generated sufficient production
volumes and implemented other cost reduction initiatives to operate profitably in 2004.

Selling and administrative expenses increased primarily due to higher employment costs and a $495,000 increase in bad debt expense.
A substantial portion of the 2004 bad debt expense is related to one customer who filed for Chapter 11 bankruptcy protection and to a
second financially distressed customer’s inability to pay its outstanding receivable balance at December 31, 2004.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Interest expense and other financing costs increased from $383,000 in 2003 to $422,000 in 2004. The increase was primarily due
to the Company funding the increase in working capital to support higher production volumes with a revolving line of credit.
This increase was partially offset by lower interest expense associated with existing term debt as the Company continued to fund its
scheduled payments.

Other income, net increased from $128,000 in 2003 to $1.1 million in 2004. The increase was primarily due to the receipt of
$1.1 million, net of expenses, under the Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”) in 2004. In 2003, the
Company received notice that it was awarded $604,000, of which $10,000 was received. The remaining payment was delayed pending
the outcome of a hearing before the U.S. Court of Appeals for the Federal Circuit in a lawsuit challenging the distribution method of
the import duties. The remaining payment, as well as the 2004 award of $507,000, was received and recognized as income in 2004, net
of expenses incurred.

The 2004 effective income tax rate was 35.0% compared to a 46.3% income tax benefit in 2003. The change in the effective income
tax rate is primarily attributable to the impact of recognizing a loss in 2003 against the tax credit benefits generated by the Company
from operating Dunkirk Specialty Steel within a New York State Empire Zone. The Company recognized $262,000 of these income
tax credits in 2004 in comparison to $185,000 in 2003.

2003 Results as Compared to 2002 The decrease in net sales in 2003 reflected reduced demand for commodity reroller and power
generation products, which was partially offset by increased demand for petrochemical, tool steel and aerospace products. During the
first half of 2002, demand for commodity reroller products had increased as a result of the Section 201 tariffs imposed by President
Bush in March 2002 on imported specialty steel products. This trend did not continue beyond that period. The decline in demand for
power generation products continued in 2003 primarily due to production cutbacks of power generation equipment initiated in 2002.
Increased demand for aerospace and petrochemical products was primarily due to the increased product capabilities resulting from
the acquisition of Dunkirk Specialty Steel in 2002. The increase in tool steel demand was primarily attributable to the Company
increasing its market share from a new customer obtained in 2002.

Cost of products sold, as a percentage of net sales, increased in 2003 as compared to 2002. This increase was primarily due to higher
raw material, labor and energy costs, as well as shifts in product mix and lower production volumes during the first six months of 2003.
In addition, Dunkirk Specialty Steel had not generated sufficient production volumes to operate profitably.

Selling and administrative expenses remained relatively constant between 2002 and 2003. Increased business insurance costs in
2003 were more than offset by a $267,000 one-time charge for production process, security and maintenance modifications enacted
while the Bridgeville facility operated under a day-to-day extension of its collective bargaining agreement from August 31, 2002 to
December 7, 2002.

Interest expense and other financing costs decreased from $455,000 in 2002 to $383,000 in 2003. The decrease was primarily due to
the Company continuing to fund the scheduled payments on existing debt without incurring additional debt.

Other income, net decreased from $457,000 in 2002 to $128,000 in 2003. The decrease was primarily due to the receipt of $310,000,
net of expenses, under the CDSOA in 2002. In 2003, the Company received notice that it was awarded $604,000, of which $10,000
was received. The remaining payment was delayed pending the outcome of a hearing before the U.S. Court of Appeals for the Federal
Circuit in a lawsuit challenging the distribution method of the import duties. The remaining payment was not recorded as income,
net of expenses incurred, until it was received in 2004.

The 2003 effective income tax rate was 46.3% compared to 30.8% in 2002. The increase in the effective income tax rate was primarily
attributable to the impact of recognizing a loss in 2003 against the tax credit benefits generated by the Company from operating
Dunkirk Specialty Steel within a New York State Empire Zone. The Company recognized $185,000 of these income tax credits in
2003 in comparison to $340,000 in 2002.

Business Segment Results

The Company is comprised of three operating locations and one corporate headquarters. For segment reporting, the Bridgeville and
Titusville facilities have been aggregated into one reportable segment, Universal Stainless & Alloy Products, because of the manage-
ment reporting structure in place. The Universal Stainless & Alloy Products manufacturing process involves melting, remelting,
treating and hot and cold rolling of semi-finished and finished specialty steels. A second reportable segment, Dunkirk Specialty Steel,
was created in 2002 as a result of the acquisition of certain assets and real property formerly owned by Empire Specialty Steel, Inc.
Dunkirk Specialty Steel’s manufacturing process involves hot rolling and finishing specialty steel bar, rod and wire products.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Universal Stainless & Alloy Products Segment An analysis of the segment’s operations is as follows:

For the years ended December 31,

2004

2003

2002

Amount

(dollars in thousands)

Net Sales
Stainless steel
Tool steel
High-temperature alloy steel
High-strength low alloy steel
Conversion services
Other

Intersegment

Total net sales
Material cost of sales
Operation cost of sales
Selling and administrative expenses

65,208
16,672
2,182
1,576
1,961
427

88,026
20,208

108,234
49,967
45,521
5,253

60.2% $
15.4
2.0
1.5
1.8
0.4

81.3
18.7

100.0
46.2
42.1
4.8

35,946
9,097
1,965
1,672
926
302

49,908
9,677

59,585
22,982
32,934
3,918

60.3%
15.3
3.3
2.8
1.6
0.5

83.8
16.2

100.0
38.6
55.2
6.6

48,193
6,568
3,237
1,922
1,400
220

61,540
8,580

70,120
30,084
30,466
4,557

68.7%
9.4
4.6
2.8
2.0
0.3

87.8
12.2

100.0
42.9
43.4
6.5

Operating income (loss)

7,493

6.9% $

(249)

(0.4)% $

5,013

7.2%

Net sales for the year ended December 31, 2004 increased $48.6 million, or 82%, in comparison to the year ended December 31, 2003
primarily due to a 41% increase in tons shipped in addition to the adoption of surcharge mechanisms for additional raw material
components and other price increases implemented during 2004. Operating income for the year ended December 31, 2004 increased
$7.7 million primarily due to the impact of surcharge and base price increases implemented in 2004, as well as higher production
volumes, more than offsetting higher raw material, labor, energy and other manufacturing costs.

Net sales for the year ended December 31, 2003 decreased $10.5 million, or 15%, in comparison to the year ended December 31, 2002
primarily due to a 47% and 32% decline in revenues associated with commodity reroll and power generation products, respectively.
These declines were partially offset by a 39% increase in tool steel product revenues. Operating income (loss) for the year ended
December 31, 2003 decreased $5.3 million primarily due to higher raw material, labor and energy costs, partially offset by an improved
product mix.

Dunkirk Specialty Steel Segment An analysis of the segment’s operations is as follows:

For the years ended December 31,

2004

2003

2002

Amount

(dollars in thousands)

Net Sales
Stainless steel
Tool steel
High-temperature alloy steel
High-strength low alloy steel
Conversion services
Other

Intersegment

Total net sales
Material cost of sales
Operation cost of sales
Selling and administrative expenses

29,322
403
286
2,106
425
74

32,616
2,107

34,723
17,834
11,653
2,148

84.4% $

1.2
0.8
6.1
1.2
0.2

93.9
6.1

100.0
51.4
33.5
6.2

16,600
576
517
1,197
153
38

19,081
794

19,875
11,080
9,009
1,919

83.5%
2.9
2.6
6.0
0.8
0.2

96.0
4.0

100.0
55.7
45.3
9.7

8,620
75
237
291
95
19

9,337
1,146

10,483
5,945
5,202
1,326

82.2%
0.7
2.3
2.8
0.9
0.2

89.1
10.9

100.0
56.7
49.6
12.7

Operating income (loss)

3,088

8.9% $

(2,133)

(10.7)% $

(1,990)

(19.0)%

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Net sales for the year ended December 31, 2004 increased $14.8 million, or 75%, in comparison to the year ended December 31, 2003
primarily due to a 42% increase in tons shipped in addition to the adoption of surcharge mechanisms for additional raw material
components and other price increases implemented during 2004. Operating income for the year ended December 31, 2004 increased
$5.2 million primarily due to the impact of surcharge and base price increases implemented in 2004, as well as higher production
volumes and other cost reduction initiatives, more than offsetting higher raw material, labor and energy costs.

Net sales for the year ended December 31, 2003 increased $9.4 million, or 90%, in comparison to the year ended December 31, 2002
primarily due to more than 100% increases in revenue associated with aerospace and petrochemical products. The operating loss for
the year ended December 31, 2003 increased $143,000 primarily due to a $947,000 increase in fixed manufacturing costs and selling
and administrative costs partially offset by higher direct margins attributable to cost reduction initiatives implemented in the
manufacturing process.

Liquidity and Capital Resources
The Company used cash for operations of $9.7 million in the year ended December 31, 2004 and generated cash from operations of
$3.8 million in the year ended December 31, 2003. Cash received from sales of $108.4 million and $68.4 million for the years ended
December 31, 2004 and 2003, respectively, represent the primary source of cash from operations. An analysis of the primary uses of
cash is as follows:

For the years ended December 31,

(dollars in thousands)

Raw material purchases
Employment costs
Utilities
Other

Total uses of cash

2004

2003

Amount

58,121
26,310
12,976
20,722

49.2% $
22.3
11.0
17.5

22,628
19,518
9,689
12,828

$ 118,129

100.0% $

64,663

35.0%
30.2
15.0
19.8

100.0%

Cash used in raw material purchases increased in 2004 in comparison to 2003 primarily due to higher quantities of product purchased
and significantly higher transaction prices. Increased employment costs are primarily due to higher production volumes and increased
payouts under the Company’s profit-sharing and other incentive compensation plans. Increased utility costs are primarily due to higher
consumption and rates charged for electricity and natural gas. In October 2004, the Company’s electricity costs at the Bridgeville
facility increased by approximately $200,000 per month due to a Public Utility Commission ruling that reduced the number of
off-peak power hours available to conduct its melting operations. The increase in other uses of cash is primarily attributable to paying
$1.5 million, net of refunds received, for federal and state income taxes in 2004 as compared to receiving $1.5 million of federal and
state income tax refunds in 2003, as well as purchases to support higher production volumes.

At December 31, 2004, working capital approximated $47.9 million, as compared to $33.4 million at December 31, 2003. Accounts
receivable represents $11.9 million of the increase, which relates to the growth in net sales. Inventory, net of non-debt current
liabilities, increased $7.8 million primarily due to increased production volumes and increased raw material costs incurred during the
year. The cost of raw materials contained within work-in-process inventory is approximately $7.0 million higher at December 31, 2004,
as compared to December 31, 2003, as a result of increased raw material transaction prices. The Company continuously monitors
market price fluctuations of its key raw materials. The following table reflects the average market value per pound for selected months
during the last two-year period.

Nickel
Chrome
Molybdenum
Carbon Scrap

December
2002
3.26
0.33
3.51
0.06

$
$
$
$

June
2003
4.03
0.45
5.63
0.06

December
2003
6.43
0.54
7.10
0.09

$
$
$
$

June
2004
6.14
0.73
15.71
0.11

$
$
$
$

December
2004
6.25
0.70
32.46
0.18

$
$
$
$

Increased demand from foreign (primarily China) and domestic sources caused raw material market values to rise significantly since
June 2003. In response, the Company began to calculate its nickel surcharge using an $0.18 per pound premium over the London
Metal Exchange (LME) prices on February 4, 2004, implemented an iron surcharge component on February 16, 2004, expanded the
use of surcharges to include tool steel products on May 1, 2004 and implemented a manganese surcharge component on June 1, 2004.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

The nickel surcharge premium per pound was increased from $0.18 to $0.23 on August 1, 2004. In addition, the Company has
experienced higher energy, transportation and manufacturing supply costs during 2004. In response, the Company has announced
several sales price increases during 2004 and 2005. There can be no assurance that these sales price increases will completely offset
the Company’s rising costs.

Capital Expenditures and Investments The Company’s capital expenditures were approximately $3.6 million and $1.2 million in
2004 and 2003, respectively. The capital expenditure increase in 2004 is primarily due to the addition of six annealing furnaces,
four saws and two reheat furnaces for the Universal Rolling Mill to support increased demand for product at the Company’s
Bridgeville facility.

In addition, the 2003 capital expenditures were partially offset by the Company entering into a $200,000 Deferred Loan Agreement
maturing on December 31, 2006 with the Dunkirk Local Development Corporation. No principal or interest payments will be
required under the Deferred Loan Agreement provided that the Company hires and retains 30 new employees through the Deferred
Loan Agreement maturation date, with more than 50% of those jobs made available to certain Dunkirk City residents. As of
December 31, 2004, the Company believes that it will meet the conditions of the Deferred Loan Agreement. Therefore, the
proceeds have been applied to reduce the acquisition cost of new equipment at the Company’s Dunkirk facility.

Capital expenditures are expected to approximate $8 million in 2005, based on current market conditions, and will be used for the
purchase of new equipment at the Bridgeville, Titusville and Dunkirk facilities. Commitments of additional capital expenditures may
occur if market conditions continue to improve.

Capital Resources Including Off-Balance Sheet Arrangements The Company does not maintain off-balance sheet arrangements
nor does it participate in non-exchange traded contracts requiring fair value accounting treatment or material related party
transaction arrangements.

PNC Credit Agreement The Company maintains a credit agreement with PNC Bank for a $15.0 million revolving credit facility
(“PNC Line”) with a term expiring on June 30, 2006. This credit agreement also includes a term loan (“PNC Term Loan”) scheduled
to mature on June 30, 2006. The credit agreement is collateralized by substantially all of the Company’s assets.

Interest on borrowings under the PNC Line and the PNC Term Loan is based on short-term market rates, which may be further
adjusted based upon the Company maintaining certain financial ratios. In addition, the Company pays a commitment fee of 0.5% per
annum on the unused portion of the PNC Line. As a condition of the PNC Line and the PNC Term Loan, the Company is required
to maintain certain levels of net worth, working capital and other financial ratios; to limit the amount of capital expenditures it may
incur without PNC Bank’s approval; and to restrict the payment of dividends.

In 2004, the Company executed the Eighth Amendment to the Second Amended and Restated Credit Agreement with PNC Bank.
The amendment increased the line of credit from $6.5 million to $15.0 million and reinstated certain financial covenants that were
temporarily replaced with an asset-based funding formula that permitted the Company full access to the PNC Line in 2003 and 2004.
As of December 31, 2004, the Company was in compliance with all financial ratios and restrictive covenants in effect. The Company
believes it will maintain compliance with the financial covenants in effect throughout 2005.

Government Financing Programs The Company maintains several separate loan agreements with the Commonwealth of
Pennsylvania’s Department of Commerce aggregating $600,000 with terms ending between the years 2011 and 2016. The loans
bear interest at rates ranging from 5% to 6% per annum. In 1996, the Company entered into a ten-year, 6% interest-bearing loan
agreement with the Redevelopment Authority of Allegheny County Economic Development Fund in the amount of $1,514,000.
As of December 31, 2004, the total principal balance of these government-financed debt instruments is $761,000.

On February 14, 2002, Dunkirk Specialty Steel issued two ten-year, 5% interest-bearing notes payable to the JDA (the “JDA Notes”)
for the combined amount of $3.0 million. No principal or interest payments were due under the notes during the first year. The notes
were recorded net of a $143,000 debt discount, of which $125,000 was amortized in 2002 and included as interest expense. The
balance was amortized and included as interest expense in 2003. As of December 31, 2004, the principal balance is $2.5 million.

Stock-Based Financing Activity The Company issued 36,806 and 9,768 shares of its Common Stock for the years ended December 31,
2004 and 2003, respectively, through its two stock-based compensation plans. In 2004, certain employees and a former member of the
Company’s Board of Directors exercised 27,749 stock options issued under the Stock Incentive Plan for $234,000 plus related tax
benefits of $51,000. The remaining shares were issued to employees participating in the Employee Stock Purchase Plan.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

On October 19, 1998, the Company initiated a stock repurchase program to repurchase up to 315,000 shares of its outstanding
Common Stock in open market transactions at market prices. The Company repurchased no shares of Common Stock during 2004,
2003 and 2002. The Company is authorized to repurchase 45,100 remaining shares of Common Stock under this program as of
December 31, 2004.

Short- and Long-Term Liquidity The Company expects to meet substantially all of its short-term liquidity requirements resulting from
operations and current capital investment plans with internally generated funds and borrowings under the PNC Credit Agreement.
At December 31, 2004, the Company had $241,000 in cash and $6.4 million available under the PNC Line. In addition, the ratio of
current assets to current liabilities at December 31, 2004 was 3.5:1 and the debt to total capitalization ratio was 17.5%.

The Company’s long-term liquidity depends upon its ability to obtain additional orders from its existing customers, attract new
customers and control costs. Additional sources of financing may be required to fund growth initiatives identified by the Company.

Contractual Obligations At December 31, 2004, the Company had the following contractual obligations:

(dollars in thousands)

Long-term debt
Capital lease obligations
Operating lease obligations
Purchase obligations

Total

14,892
47
138
8,963

Less than
1 Year

2,236
33
49
8,309

1-3
Years

10,584
14
66
654

Total contractual obligations

24,040

10,627

11,318

3-5
Years

936
–
23
–

959

More than
5 Years

1,136
–
–
–

1,136

Long-term debt includes the PNC Term Loan. The Company has fixed the rate of interest at 4.43% through December 12, 2005.
The table assumes the Company will maintain that interest rate until maturity. Long-term debt also includes the outstanding balance on
its PNC Line, currently due to expire on June 30, 2006. The table assumes the PNC Line will not be extended. Purchase obligations
include the value of all open purchase orders with established quantities and purchase prices as well as minimum purchase commitments.

Market Risk The Company does not use derivative financial instruments to reduce its financial risk. The Company’s customers and
suppliers absorb fluctuations in foreign currency exchange rates. In addition, the Company maintains some long-term, fixed cost supply
agreements for its major purchase requirements. Prices for the Company’s raw materials and natural gas requirements are subject to
frequent market fluctuations, and profit margins may decline in the event market values increase. Selling price increases and surcharges
are implemented to offset raw material and natural gas market price increases.

The Company is exposed to market risk from changes in interest rates related to its long-term debt. At December 31, 2004, $3.3 million
of the Company’s total long-term debt and capital lease obligations has fixed interest rates. The remaining $2.3 million represents the
PNC Term Loan outstanding balance that bears a variable interest rate.

Supply Contract The Company maintains a supply contract agreement with Talley Metals Technology, Inc., a subsidiary of Carpenter
Technology Corporation (“Talley Metals”). While the initial term of the agreement expired December 31, 2002, the agreement
continues to automatically renew with the placement of new orders each month and requires a 90-day written notice to terminate by
either party. In addition, Talley Metals is required under the agreement to purchase a minimum of 1,000 tons of stainless reroll billet
products each calendar month and average at least 1,250 tons per month during the last twelve-month period. The value of the
contract on a monthly basis will depend on product mix and key raw material prices. During 2002 and 2003, the Company waived
Talley Metals’ requirement to purchase the monthly minimum quantity of stainless reroll billets due to market conditions.

Import Protections On October 22, 2001, the U.S. International Trade Commission determined that imports of certain stainless steel
and alloy tool steel products were seriously injuring the domestic specialty steel industry. On March 5, 2002, President Bush imposed
tariffs on certain imported stainless steel rod, bar and wire products ranging from 6% to 15% over the next three years under Section 201
of the 1974 Trade Act. During the 2002 second quarter, the Company experienced a significant increase in demand for commodity
reroller products. This trend did not continue beyond the 2002 second quarter. President Bush ended the imposed tariffs on December 4, 2003.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

The assets purchased by Dunkirk Specialty Steel were previously owned and operated by AL Tech Specialty Steel, Inc. and Empire
Specialty Steel, Inc. During their ownership, both organizations participated in several anti-dumping lawsuits with other domestic
specialty steel producers. CDSOA provides for payment of import duties collected by the U.S. Treasury to domestic companies injured
by unfair foreign trade practices. In accordance with CDSOA, the Company filed claims to receive their appropriate share of the
import duties collected and received $310,000, net of expenses in 2002. In 2003, the Company received notice that it was awarded
$604,000, of which $10,000 was received. The remaining payment was delayed pending the outcome of a hearing before the
U.S. Court of Appeals for the Federal Circuit in a lawsuit challenging the distribution method of the import duties. The remaining
payment, as well as the 2004 award of $507,000, was received and recorded as income in 2004, net of expenses incurred.

The Company expects to benefit from CDSOA in future years unless the Act is repealed by Congress. The amount of future benefits is
dependent on the amount of import duties collected and the relationship of Dunkirk Specialty Steel’s claim in relation to claims filed
by other domestic specialty steel producers. On January 28, 2005, the Company received an additional $59,000 from the U.S. Treasury,
representing an increase in the total allocation of available funds awarded to the Company for 2004.

Bridgeville Lease Property, plant and equipment included a capital lease with Armco, which merged with and into AK Steel in 1999
(“Armco”), for the ESR building, which houses the Company’s four electro-slag remelting furnaces and ancillary equipment. On
February 2, 2005, the Company entered into a written agreement with AK Steel to purchase the ESR building and certain other parcels.
The Company will continue to operate the equipment in the ESR building under the existing lease which expires on March 8, 2006, until
the transaction is complete. In the event the ESR building is not purchased, or the lease is not extended beyond March 8, 2006, the
relocation of the ESR equipment would have an adverse material effect on the financial condition of the Company.

Contingent Items

Environmental Matters The Company, as well as other steel companies, is subject to demanding environmental standards imposed by
federal, state and local environmental laws and regulations. The Company is not aware of any environmental condition that currently
exists at any of its facilities that would cause a material adverse effect on the financial condition of the Company.

In connection with the Company’s June 2, 1995 agreement with Armco to purchase certain assets and a parcel of real property located
at Titusville, Armco agreed to indemnify the Company up to $3.0 million in the aggregate for liabilities under environmental laws arising
out of conditions on or under the Titusville property existing prior to June 2, 1995. Armco also agreed to indemnify the Company for
any liabilities arising out of environmental conditions existing off-site as of June 2, 1995, and that indemnification is not subject to the
$3.0 million limitation.

The Company has filed no claims against Armco since the inception of the acquisition agreement. In addition, management is not
aware of any financial difficulties being experienced by AK Steel, as successor to Armco, that would prevent its performance under the
acquisition agreement.

In connection with the acquisition of the Dunkirk facility, Dunkirk Specialty Steel entered into an order with the New York State
Department of Environmental Conservation (“NY DEC”) that precludes NY DEC from bringing any action against the Company. In
addition, the order releases the Company from any and all claims and liabilities arising from, or related to, the existing environmental
conditions at the Dunkirk facility. There can be no assurance that any other party will not assert any claims with respect to environ-
mental conditions at the Dunkirk facility, or that the Company will have the financial resources to discharge any liabilities if legally
compelled to do so.

Legal Matters On June 29, 2001, suit was filed against the Company in the Court of Common Pleas of Allegheny County, Pennsylvania
by Teledyne Technologies, Incorporated (“Teledyne”). The suit alleges that steel product manufactured by the Company was defective
and the Company was or should have been aware of the defects. Teledyne has alleged that the defective steel supplied by the Company
caused certain crankshafts sold by Teledyne for use in aircraft engines to be defective. As a result, Teledyne is claiming damages
relating to the recall, replacement and repair of aircraft engines.

In 2002, Teledyne was unsuccessful in its pursuit of a similar claim brought against another specialty steel producer who supplied the
same steel product. After in-depth investigation, it is the Company’s position that the suit is without merit and it intends to vigorously
defend that position. Additionally, the Company believes that it has insurance coverage that is available for this claim. At this time,
the Company is engaged in discovery and believes that the final disposition of this suit will not have a material adverse effect on the
financial condition and the results of operations of the Company.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

On April 7, 2003, United States Aviation Underwriters, Inc. (“USAU”), a New York corporation, as managers and on behalf of
United States Aircraft Insurance Group (“USAIG”), the Company’s Aircraft Products Liability insurance carrier, filed suit in the
Court of Common Pleas of Allegheny County, Pennsylvania asking the court for a declaratory judgment as to what actual liability and
obligations were applicable to USAIG relating to the insurance policy issued to the Company, and the allegations made by Teledyne.
The Company and USAU reached a settlement agreement as of May 1, 2004 regarding the allocation of certain potential costs associated
with the Teledyne claim and have agreed to jointly file a motion to have the declaratory suit dismissed. On July 27, 2004, the suit
brought by USAU was dismissed.

On January 28, 2005, the Company filed suit in the Court of Common Pleas of Allegheny County, Pennsylvania, asking the court for
a judgment demanding payment from a financially distressed customer for an outstanding receivable balance, together with pre- and
post-judgment interest, an award of the costs and expenses the Company has incurred in pursuing this action and such other relief as
the court deems proper. At December 31, 2004, the Company included the value of the outstanding receivable balance in its allowance
for doubtful accounts. In 2005, the Company received a partial payment of $110,000 from this customer and will pursue collecting the
remaining balance.

Critical Accounting Policies and New Accounting Pronouncements

Critical Accounting Policies Revenue recognition is the most critical accounting policy of the Company. The Company manufactures
specialty steel product in accordance with customer purchase orders that contain specific product requirements. Each purchase order
provides detailed information regarding the requirements for product acceptance. Executed material certification forms are completed
indicating the Company’s compliance with the customer purchase order before the specialty steel products are packaged and shipped
to the customer. Revenue is generally recognized at point of shipment because risk of loss and title has transferred. Revenue is also
recognized in certain situations in which products available for shipment are held at the Company’s facility beyond the stated
shipment date at the customer’s specific request.

In addition, management constantly monitors the ability to collect its unpaid sales invoices and the valuation of its inventory. The
allowance for doubtful accounts includes the value of outstanding invoices issued to customers currently operating under the protection
of the federal bankruptcy law and other amounts that are deemed potentially not collectible. An inventory reserve is provided for
material on hand for which management believes cost exceeds fair market value and for material on hand for more than one year not
assigned to a specific customer order.

Long-lived assets are reviewed for impairment annually by each operating facility. An impairment write-down will be recognized when-
ever events or changes in circumstances indicate that the carrying value may not be recoverable through estimated future undiscounted
cash flows. The Company has not recognized an impairment write-down on any of its assets held at December 31, 2004.

In addition, management assesses the need to record a valuation allowance to reduce deferred tax assets to the amount that is more
likely than not to be realized. The Company believes it will generate sufficient income in addition to taxable income generated from
the reversal of its temporary differences to utilize the deferred tax assets recorded at December 31, 2004.

New Accounting Pronouncements In November of 2004, the FASB issued Statement of Financial Accounting Standards No. 151,
“Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). The purpose of this statement is to clarify the accounting
of abnormal amounts of idle facility expense, freight, handling costs and waste material. ARB No. 43 stated that under some
circumstances these costs may be so abnormal that they are required to be treated as current period costs. SFAS 151 requires that these
costs be treated as current period costs regardless if they meet the criteria of “so abnormal.” In addition, the statement requires that
allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The
provision of this Statement shall be effective for inventory costs incurred during fiscal years beginning after December 31, 2004.
The early adoption of SFAS 151 did not have a material impact on the Company’s results of operations or financial position.

In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123-R”). This Statement replaces FASB Statement No. 123 and supercedes APB Opinion No. 25. SFAS 123-R eliminates the
ability to account for share-based compensation transactions using the intrinsic method currently used by the Company. SFAS 123-R
requires such transactions be accounted for using a fair-value-based method that would result in expense being recognized in the
Company’s financial statements. The Company will be required to adopt SFAS 123-R as of July 1, 2005 utilizing similar valuation
methodologies that generate the pro-forma disclosures included in this Annual Report.

Reclassifications Certain prior year amounts have been reclassified to conform to the 2004 presentation.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Future Outlook

The Company enters 2005 with a total backlog of approximately $72 million and expects demand for aerospace, power generation,
petrochemical and tool steel products to remain strong throughout the year. The Company also expects that its results will improve
in 2005 in conjunction with the pace of the domestic economy’s recovery, the market’s increasing acceptance of Dunkirk Specialty
Steel as a reliable supplier of quality specialty steel bar, rod and wire products, and the acceptance of sales price increases beyond raw
material surcharges.

Forward-Looking Information Safe Harbor

The Management’s Discussion and Analysis and other sections of this Annual Report contain forward-looking statements that reflect
the Company’s current views with respect to future events and financial performance. Statements looking forward in time, including
statements regarding future growth, cost savings, expanded production capacity, broader product lines, greater capacity to meet
customer quality reliability, price and delivery needs, enhanced competitive posture, effect of new accounting pronouncements and no
material financial impact from litigation or contingencies are included in this Annual Report pursuant to the “safe harbor” provision
of the Private Securities Litigation Reform Act of 1995.

The Company’s actual results will be affected by a wide range of factors including compliance with Section 404 of the Sarbanes-Oxley
Act of 2002; the concentrated nature of the Company’s customer base to date and the Company’s dependence on its significant
customers; the receipt, pricing and timing of future customer orders; changes in product mix; the limited number of raw material and
energy suppliers and significant fluctuations that may occur in raw material and energy prices; the Company’s reliance on certain
critical manufacturing equipment; the ability to acquire the ESR Building or the extension of the lease prior to the expiration of the
Armco Lease; the Company’s ongoing requirement for continued compliance with environmental laws; and the ultimate outcome of
the Company’s current and future litigation matters. Many of these factors are not within the Company’s control and involve known
and unknown risks and uncertainties that may cause the Company’s actual results in future periods to be materially different from any
future performance suggested herein. Any unfavorable change in the foregoing or other factors could have a material adverse effect
on the Company’s business, financial condition and results of operations.

Further, the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and
other factors beyond the Company’s control. For a discussion of these and other matters, refer to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2004 and other reports on file with the Securities and Exchange Commission.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Report of Management

To the Stockholders of Universal Stainless & Alloy Products, Inc.

The financial statements and related information contained in this report were prepared in conformity with accounting principles
generally accepted in the United States of America and, as such, include amounts based on management’s best judgments and
estimates. We maintain a system of policies, procedures and controls designed to provide reasonable assurance that transactions are
properly executed, recorded and included within the financial statements and that the Company’s assets are safeguarded from improper
or unauthorized use. The Audit Committee of the Board of Directors, composed of independent directors, meets regularly with
management and our independent accountants to discuss audit results and financial reporting matters. The independent accountants
have full access to the Audit Committee without our presence.

Clarence M. McAninch
President and Chief Executive Officer

February 22, 2005

Richard M. Ubinger
Vice President of Finance,
Chief Financial Officer and Treasurer

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Universal Stainless & Alloy Products, Inc.

We have audited the accompanying consolidated balance sheets of Universal Stainless & Alloy Products, Inc. and subsidiaries
(the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, and cash flows for the years
then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of Universal
Stainless & Alloy Products, Inc. for the year ended December 31, 2002 were audited by other auditors whose report dated
February 18, 2003 expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Universal Stainless & Alloy Products, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and
their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Schneider Downs & Co., Inc.
Pittsburgh, Pennsylvania

February 22, 2005

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Consolidated Statements of Operations

For the years ended December 31,
(dollars in thousands, except per share information)

Net sales
Cost of products sold
Selling and administrative expenses

Operating income (loss)
Interest expense and other financing costs
Other income, net

Income (loss) before taxes
Provision (benefit) for income taxes

Net income (loss)

Earnings (Loss) Per Common Share
Basic
Diluted

Weighted-average number of shares of

Common Stock outstanding

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

2004

2003

2002

$ 120,642
102,972
7,401

10,269
(422)
1,119

10,966
3,835

68,989
65,534
5,837

(2,382)
(383)
128

(2,637)
(1,220)

7,131

(1,417)

$
$

1.13
1.12

$
$

(0.23)
(0.23)

$
$

70,877
61,971
5,883

3,023
(455)
457

3,025
933

2,092

0.34
0.34

6,304,909

6,287,088

6,203,800

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Consolidated Balance Sheets

December 31,
(dollars in thousands)

Assets

Current Assets
Cash and cash equivalents
Accounts receivable (less allowance for
doubtful accounts of $557 and $163)

Inventory
Deferred taxes
Other current assets

Total current assets
Property, plant and equipment, net
Other assets

Total assets

Liabilities and Stockholders’ Equity

Current Liabilities
Trade accounts payable
Outstanding checks in excess of bank balance
Current portion of long-term debt
Accrued employment costs
Other current liabilities

Total current liabilities
Long-term debt
Deferred taxes

Total liabilities

Commitments and Contingencies

Stockholders’ Equity
Senior Preferred Stock, par value $0.001 per share;
1,980,000 shares authorized; 0 shares outstanding

Common Stock, par value $0.001 per share;

10,000,000 shares authorized;
6,601,112 and 6,564,306 shares issued

Additional paid-in capital
Retained earnings
Treasury Stock at cost;

269,900 common shares held

Total stockholders’ equity

2004

2003

241

4,735

24,562
38,318
1,436
1,982

66,539
40,716
585

12,690
22,281
1,222
3,063

43,991
40,176
758

$ 107,840

84,925

11,666
2,638
2,044
1,830
442

18,620
12,190
10,093

40,903

6,792
813
1,944
833
195

10,577
5,599
9,313

25,489

–

7
28,699
39,862

(1,631)

66,937

7
28,329
32,731

(1,631)

59,436

Total liabilities and stockholders’ equity

$ 107,840

84,925

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

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

2004

2003

2002

7,131

(1,417)

2,092

3,061
724
51

(11,872)
(16,037)
4,981
997
1,443
(196)

(9,717)

–
(3,586)

(3,586)

8,635
–
(1,944)
1,825
(26)
319

8,809

(4,494)
4,735

241

410
1,545

$
$

3,093
996
–

(1,140)
436
2,536
(186)
(729)
189

3,778

–
(1,193)

(1,193)

–
200
(1,948)
538
–
52

(1,158)

1,427
3,308

4,735

348
(1,453)

$
$

3,271
596
417

1,150
(859)
(407)
(543)
(990)
(903)

3,824

(1,283)
(4,194)

(5,477)

–
–
(1,831)
(582)
–
1,920

(493)

(2,146)
5,454

3,308

318
1,329

$
$

Consolidated Statements of Cash Flows

For the years ended December 31,
(dollars in thousands, except per share information)

Cash Flows from Operating Activities
Net income (loss)
Adjustments to reconcile to net cash and cash equivalents

provided by operating activities:
Depreciation and amortization
Deferred taxes
Tax benefit from exercise of stock options

Changes in assets and liabilities:
Accounts receivable, net
Inventory
Accounts payable
Accrued employment costs
Refundable income taxes paid
Other, net

Net cash (used in) provided by operating activities

Cash Flows from Investing Activities
Acquisition of assets and real property through

purchase agreements

Capital expenditures

Net cash used in investing activities

Cash Flows from Financing Activities
Net borrowings under revolving line of credit
Proceeds from deferred loan agreement
Long-term debt repayment
Increase (decrease) in outstanding checks in excess of bank balance
Deferred financing costs
Proceeds from issuance of Common Stock

Net cash provided by (used in) financing activities

Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental Disclosure of Cash Flow Information
Interest paid (net of amount capitalized)
Income taxes paid (refund)

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

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Notes to the Consolidated Financial Statements

Note 1: Significant Accounting Policies

Description of the Company Universal Stainless & Alloy Products, Inc. (the “Company”) manufactures and markets semi-finished
and finished specialty steel products, including stainless steel, tool steel and certain other alloyed steels. The Company’s manufacturing
process involves melting, remelting, treating and hot and cold rolling of semi-finished and finished specialty steels. The Company’s
products are sold to rerollers, forgers, service centers, original equipment manufacturers, which primarily include the power generation
and aerospace industries, and wire redrawers. The Company also performs conversion services on materials supplied by customers that
lack certain of the Company’s production facilities or that are subject to their own capacity constraints.

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements. The estimates and assumptions used in these consolidated financial statements are based on known information
available as of the balance sheet date. Actual results could differ from those estimates.

Basis of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
All intercompany accounts and transactions have been eliminated in consolidation. The Company has no interests in any unconsoli-
dated entity nor does it have any off-balance sheet financing arrangements other than operating leases.

Cash and Cash Equivalents Cash equivalents are stated at cost plus accrued interest, which approximates market value, and include
only securities having a maturity of three months or less at the time of purchase.

Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are cash
and cash equivalents and accounts receivable. The Company limits its credit risk associated with cash and cash equivalents by placing
its investments in high-grade short-term instruments. With respect to accounts receivable, the Company limits its credit risks by
performing ongoing credit evaluations and, when deemed necessary, requiring letters of credit, guarantees or collateral. The allowance
for doubtful accounts includes the value of outstanding invoices issued to customers currently operating under the protection of the
federal bankruptcy law and other amounts that are deemed potentially not collectible. Bad debt expense (income) for fiscal year 2004,
2003 and 2002 was $471,000, $(24,000) and $22,000, respectively.

Inventories Inventories are stated at the lower of cost or market with cost principally determined by the first-in, first-out (FIFO)
method. The average cost method is also utilized. Such costs include the acquisition cost for raw materials and supplies, direct labor
and applied manufacturing overhead within the guidelines of normal plant capacity. Provisions are made for slow-moving inventory
based upon management’s expected method of disposition.

The Company purchases scrap metal and alloy additives, principally nickel, chrome and molybdenum, for its melting operation.
A substantial portion of the alloy additives is available only from foreign sources, some of which are located in countries that may be
subject to unstable political and economic conditions. Those conditions might disrupt supplies or affect the prices of the raw materials
used by the Company. The Company maintains sales price surcharges to help offset the impact of raw material price fluctuations.

Included in inventory are operating materials consisting of production molds and rolls that will normally be consumed within one year.

Property, Plant and Equipment Property, plant and equipment are recorded at cost. Costs incurred in connection with the
construction or major rebuild of facilities, including interest directly related to the project, are capitalized as construction in progress.
No depreciation is recognized on these assets until placed in service. Maintenance and repairs are charged to expense as incurred,
and costs of improvements and renewals are capitalized. Major maintenance costs are expensed in the same annual period as incurred;
however, the estimated costs are expensed throughout the year on a pro rata basis. Maintenance expense for the fiscal year 2004, 2003
and 2002 was $9,203,000, $6,151,000 and $6,390,000, respectively.

Depreciation and amortization are computed using the straight-line method based on the estimated useful lives of the related assets.
The estimated useful lives of buildings and land improvements are between 5 and 25 years, and the estimated useful lives of machinery
and equipment are between 5 and 20 years. Direct costs incurred in the development and implementation of internal-use software are
capitalized and recorded within property, plant and equipment, and amortized on a straight-line basis over its anticipated useful life,
which generally does not exceed three years. Depreciation and amortization expense for fiscal year 2004, 2003 and 2002 was
$3,046,000, $3,063,000 and $3,130,000, respectively.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

The Company’s manufacturing processes are dependent upon certain pieces of specialty steel making equipment, such as the
Company’s electric arc furnace and universal rolling mill. In the event a critical piece of equipment should become inoperative as a
result of an unexpected equipment failure, there can be no assurance that the Company’s operations would not be substantially curtailed.

Long-Lived Asset Impairment Long-lived assets, including property, plant and equipment are evaluated for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in relation to the operating
performance and future undiscounted cash flows of the underlying assets. Adjustments are made if the sum of expected future cash
flows is less than book value. Based on management’s assessment of the carrying values of such long-lived assets, no impairment reserve
has been deemed necessary as of December 31, 2004 and 2003.

Revenue Recognition Revenue from the sale of products is recognized when both risk of loss and title has transferred to the customer,
which in most cases coincides with shipment of the related products, and collection is reasonably assured. Revenue from conversion
services is recognized when the performance of the service is complete. Invoiced shipping and handling costs are also accounted for
as revenue. Customer claims are accounted for primarily as a reduction to gross sales after the matter has been researched and an
acceptable resolution has been reached.

Income Taxes Deferred income taxes are provided for unused tax credits earned and the tax effect of temporary differences between
the tax basis of assets and liabilities and their reported amounts in the financial statements. The Company uses the liability method to
account for income taxes, which requires deferred taxes to be recorded at the statutory rate expected to be in effect when the taxes are
paid. Valuation allowances are provided for a deferred tax asset when it is more likely than not that such asset will not be realized.

Stock-Based Compensation Plans The Company accounts for stock-based employee and director compensation using the intrinsic
value method. No stock-based employee compensation cost is reflected in net income unless the exercise price of the options granted
does not equal market value of the underlying common stock on the date of grant. The tax effects of exercising stock options are added
to additional paid-in capital at the exercise date.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition
provisions of issued Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”
(“SFAS 123”), to stock-based employee compensation:

For the years ended December 31,
(dollars in thousands, except per share information)

Net income (loss), as reported
Total stock-based compensation expense determined

under fair-value-based method, net of taxes

Pro forma net income (loss)

Earnings (Loss) Per Share
Basic – as reported
Basic – pro forma

Diluted – as reported
Diluted – pro forma

2004

2003

2002

7,131

(1,417)

(179)

(118)

6,952

(1,535)

$
$

1.13
1.10

1.12
1.09

$
$

(0.23)
(0.24)

$
$

2,092

(129)

1,963

0.34
0.32

0.34
0.31

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants issued in 2004, 2003 and 2002, respectively: dividend yield of 0.0% for each year; interest
rate of 3.3%, 3.0% and 3.7%; expected volatility of 57.1%, 54.0% and 53.0%; and expected lives for options of five years.

Earnings Per Common Share Basic earnings per common share is computed by dividing net income by the weighted-average number
of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the
weighted-average number of common shares outstanding plus all dilutive potential common shares outstanding during the period.
Dilutive common shares are determined using the treasury stock method. Under the treasury stock method, exercise of options and
warrants is assumed at the beginning of the period when the average stock price during the period exceeds the exercise price of
outstanding options and warrants, and common shares are assumed issued. The assumed proceeds from the exercise of stock options
and warrants are used to purchase common stock at the average market price during the period. The incremental shares to be issued
are considered to be the dilutive potential common shares outstanding.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Reclassifications Certain prior year amounts have been reclassified to conform to the 2004 presentation.

Note 2: Inventory

The major classes of inventory are as follows:

December 31,
(dollars in thousands)

Raw materials and supplies
Semi-finished and finished steel products
Operating materials

Total inventory

Note 3: Property, Plant and Equipment

Property, plant and equipment consists of the following:

December 31,
(dollars in thousands)

Land and land improvements
Buildings
Machinery and equipment
Construction in progress

Accumulated depreciation

Property, plant and equipment, net

2004

2003

5,160
30,820
2,338

2,265
17,743
2,273

38,318

22,281

2004

2003

1,014
6,203
52,358
893

60,468
(19,752)

953
5,987
49,801
141

56,882
(16,706)

40,716

40,176

Property, plant and equipment included a capital lease with Armco, which merged with and into AK Steel in 1999 (“Armco”), for
the ESR building, which houses the Company’s four electro-slag remelting furnaces and ancillary equipment. On February 2, 2005, the
Company entered into a written agreement with AK Steel to purchase the ESR building and certain other parcels. The Company will
continue to operate the equipment in the ESR building under the existing lease which expires on March 8, 2006, until the transaction
is complete. In the event the ESR building is not purchased, or the lease is not extended beyond March 8, 2006, the relocation of the
ESR equipment would have an adverse material effect on the financial condition of the Company.

In 2003, the Company entered into a $200,000 Deferred Loan Agreement maturing on December 31, 2006 with the Dunkirk Local
Development Corporation. No principal or interest payments will be required under the Deferred Loan Agreement provided that
the Company hires and retains 30 new employees through the Deferred Loan Agreement maturation date, with more than 50% of
those jobs made available to certain Dunkirk City residents. As of December 31, 2004, the Company believes that it will meet the
conditions of the Deferred Loan Agreement, although it can make no assurances to that effect. Therefore, the proceeds have been
applied to reduce the acquisition cost of new equipment at the Company’s Dunkirk facility.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Note 4: Long-Term Debt and Other Financing

Long-term debt consists of the following:

December 31,
(dollars in thousands)

PNC Term Loan
Revolving credit facility
Government debt
Capital lease obligations

Less amounts due within one year

Total long-term debt

2004

2003

2,300
8,635
3,255
44

14,234
(2,044)

3,700
–
3,770
73

7,543
(1,944)

12,190

5,599

The Company maintains a credit agreement with PNC Bank for a $15.0 million revolving credit facility (“PNC Line”) with a term
expiring on June 30, 2006. This credit agreement also includes a term loan, which has fixed the rate of interest at 4.43% through
December 12, 2005, that is scheduled to mature on June 30, 2006 (“PNC Term Loan”). The credit agreement is collateralized by
substantially all of the Company’s assets.

The Company maintains several separate loan agreements with the Commonwealth of Pennsylvania’s Department of Commerce
aggregating $600,000 with terms ending between the years 2011 and 2016. The loans bear interest at rates ranging from 5% to 6% per
annum. In 1996, the Company entered into a ten-year, 6% interest-bearing loan agreement with the Redevelopment Authority of
Allegheny County Economic Development Fund in the amount of $1,514,000. As of December 31, 2004, the total principal balance
of government-financed debt is $761,000.

On February 14, 2002, Dunkirk Specialty Steel, LLC (“Dunkirk Specialty Steel”) issued two ten-year, 5% interest-bearing notes
payable to the New York Job Development Authority (the “JDA”) for the combined amount of $3.0 million (“JDA Notes”). No principal
or interest payments are due under the JDA Notes during the first year. The JDA Notes were recorded net of a $143,000 debt discount,
of which $125,000 was amortized in 2002 and included as interest expense. The balance was amortized and included as interest expense
in 2003. As of December 31, 2004, the principal balance is $2.5 million.

The Company leases certain equipment and vehicles. The aggregate annual principal payments due under the Company’s long-term
debt and minimum lease payments under capitalized and operating leases are as follows:

For the years ended December 31,
(dollars in thousands)

Long-term debt
Capital lease minimum payments
Operating lease minimum payments

2005

2006

2007

2008

2009

Thereafter Deductions

Total

$ 2,013
31
49

$ 9,976
13
36

$ 364
–
30

$ 383
–
23

$ 403
–
–

$ 1,051
–
–

–

$ 14,190
44
138

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Note 5: Income Taxes

Components of the provision (benefit) for income taxes are as follows:

For the years ended December 31,
(dollars in thousands)

Current Provision (Benefit)
Federal
State

Deferred Provision (Benefit)
Federal
State

2004

2003

2002

3,373
(262)

3,111

(2,217)
1

(2,216)

453
(116)

337

436
288

724

1,271
(275)

996

602
(6)

596

933

2002
34.0%
4.5
(7.2)
(0.5)

30.8%

Provision (benefit) for income taxes

3,835

(1,220)

A reconciliation of the federal statutory tax rate and the Company’s effective tax rate is as follows:

For the years ended December 31,
Federal statutory tax
State income taxes, net of federal tax impact
Government grants, net of federal tax impact
Other, net

Effective income tax rate

2004
34.0%
2.6
(1.5)
(0.1)

35.0%

2003
(34.0)%
(5.5)
(4.9)
(1.9)

(46.3)%

Dunkirk Specialty Steel operates in a New York State Empire Zone and is qualified to benefit from investments made and employees
hired at the Dunkirk, New York facility for up to fifteen years. The Company recognized tax credit benefits of $262,000 and $195,000
for fiscal year 2004 and 2003, respectively, of which $137,000 and $10,000 was applied against the respective year’s current tax provision.
The balance of the credits, which have no expiration date, will be applied against future tax liabilities for income apportioned to
New York State. The Company believes it will generate sufficient income in addition to taxable income generated from the reversal
of its temporary differences to utilize this tax credit.

Deferred taxes result from the following:

December 31,
(dollars in thousands)

Deferred Tax Assets
Receivables
Inventory
Accrued liabilities

Federal and state tax carryforwards

Deferred Tax Liabilities
Property, plant and equipment

2004

2003

261
947
228

1,436
412

1,848

10,093

70
1,010
142

1,222
570

1,792

9,313

Federal and state tax carryforwards as of December 31, 2004 include federal alternative minimum tax and New York Empire Zone
tax credits totaling $303,000 with no expiration date. The remaining balance relates to net operating loss carryforwards allocated to
certain states which expire within 5 to 20 years.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Note 6: Stockholders’ Equity

Common
Shares
Outstanding

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings

Treasury
Shares

Treasury
Stock

(dollars in thousands)

Balance at December 31, 2001
Common Stock issuance under

Employee Stock Purchase Plan

Exercise of Stock Options
Tax Benefit from Purchase of

Stock Options

Net income

Balance at December 31, 2002
Common Stock issuance under
Employee Stock Purchase Plan

Net loss

Balance at December 31, 2003
Common Stock issuance under
Employee Stock Purchase Plan

Exercise of Stock Options
Net income

6,347,172

7,366
200,000

6,554,538

9,768

6,564,306

9,057
27,749

25,941

32,056

269,900

(1,631)

44
1,875

417

28,277

28,329

85
285

2,092

34,148

(1,417)

32,731

7,131

269,900

(1,631)

269,900

(1,631)

Balance at December 31, 2004

6,601,112

28,699

39,862

269,900

(1,631)

On October 19, 1998, the Company initiated a stock repurchase program to repurchase up to 315,000 shares of its outstanding
Common Stock in open market transactions at market prices. The Company is authorized to repurchase 45,100 remaining shares of
Common Stock under this program as of December 31, 2004.

The Company has 1,980,000 authorized shares of Senior Preferred Stock. At December 31, 2004 and 2003, there were no shares
issued or outstanding.

Note 7: Basic and Diluted Earnings Per Share

The computation of basic and diluted earnings per share for the years ended December 31, 2004, 2003 and 2002 is performed as follows:

(dollars in thousands, except share and per share amounts)

2004

2003

Income

2002
Shares

7,131

6,304,909
74,670

(1,417)

6,287,088
–

2,092

6,203,800
32,048

Income (loss) available to
common Stockholders
Effect of dilutive securities

Income available to

common Stockholders plus
assumed conversion

7,131

6,379,579

(1,417)

6,287,088

Earnings (Loss) Per Common Share
Basic
Diluted

$
$

1.13
1.12

$
$

(0.23)
(0.23)

$
$

2,092

6,235,848

0.34
0.34

The Company had 10,536 common stock equivalents outstanding for fiscal 2003 that were not included in the common share
computations for earnings (loss) per share, as the common stock equivalents are anti-dilutive.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Note 8: Stock-Based Compensation Plans

At December 31, 2004, the Company has three incentive compensation plans that are described below:

Stock Incentive Plan
The Company maintains the Stock Incentive Plan that has been adopted and amended from time to time by the Company’s Board of
Directors, and approved by its stockholders. The Stock Incentive Plan permits the issuance of stock options to non-employee directors,
other than those directors owning more than 5% of the Company’s outstanding Common Stock, officers and other key employees of
the Company who are expected to contribute to the Company’s future growth and success. The Company may grant options up to a
maximum of 950,000 shares of Common Stock, of which 190,243 are available for grant at December 31, 2004. The option price is
equal to the fair market value of the Common Stock at the date of grant. Options granted to non-employee directors vest over a
three-year period, and options granted to employees vest over a four-year period. All options under the Stock Incentive Plan will
expire no later than ten years after the grant date.

A summary of the Stock Incentive Plan activity as of and for the years ended December 31, 2004, 2003 and 2002 is presented below:

Fixed Options
Outstanding at beginning of year
Granted
Exercised
Forfeited

Outstanding at end of year

Options exercisable at year-end
Weighted-average fair value of

options granted during the year

2004
Weighted-Average
Exercise
Price

482,999
92,000
(27,749)
(35,575)

511,675

362,925

8.99
11.15
8.44
8.95

9.14

9.04

427,999
56,500
–
(1,500)

482,999

379,160

2003
Weighted-Average
Exercise
Price

2002
Weighted-Average
Exercise
Price

9.38
5.91
–
7.10

8.99

2.93

617,500
25,000
(200,000)
(14,501)

427,999

331,996

9.36
10.31
9.40
9.86

9.38

5.09

The following table summarizes information about stock options outstanding at December 31, 2004:

Range of Exercise Prices
$ 5.12 to $ 7.35
$ 8.45 to $10.00
$10.25 to $15.60

Outstanding at end of year

Options Outstanding

Weighted-Average
Remaining
Contractual Life
6.8
4.6
4.6

Weighted-Average
Exercise
Price
6.49
8.93
11.73

$
$
$

Options Exercisable

Number
Exercisable
111,200
136,975
114,750

Weighted-Average
Exercise
Price
6.70
8.77
11.64

$
$
$

5.3

9.14

362,925

9.04

Number
Outstanding
162,375
169,500
179,800

511,675

Employee Stock Purchase Plan
Under the 1996 Employee Stock Purchase Plan (the “Stock Purchase Plan”), the Company is authorized to issue up to 90,000 shares
of Common Stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the plan, employees can
choose as of January 1 and July 1 of each year to have up to 10% of their total earnings withheld to purchase up to 100 shares of the
Company’s Common Stock each six-month period. The purchase price of the stock is 85% of the lower of its beginning-of-the-period
or end-of-the-period market prices. At December 31, 2004, the Company has issued 71,720 shares of Common Stock since the
plan’s inception.

Cash Incentive Plans
The Company has a management cash incentive plan covering certain key executives and employees and profit-sharing plans that
cover the remaining employees. The profit-sharing plans provide for the sharing of pre-tax profits in excess of specified amounts. For
the years ended December 31, 2004, 2003 and 2002, the Company expensed $1,965,000, $168,000 and $511,000, respectively, under
these plans.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Note 9: Retirement Plans

The Company has defined contribution retirement plans that cover substantially all employees. The Company accrues its
contributions to the hourly employee plan based on time worked while contributions to the salaried plan are accrued as a fixed
amount per month. Company contributions to both plans are funded periodically.

Effective January 6, 2003, the Company began to participate in the Steelworkers Pension Trust (“Trust”), a multi-employer defined
benefit pension plan that is open to all hourly and salaried employees associated with the Bridgeville facility. The Company makes
periodic contributions to the Trust based on hours worked at a fixed rate for each hourly employee and a fixed monthly contribution
on behalf of each salaried employee. The hourly employees may continue their contributions to the defined contribution retirement
plan even though the Company contributions ceased. The Company also makes a contribution to the defined contribution retirement
plan on behalf of each salaried employee participating in the Trust. The amount of the contribution will be dependent upon each
salaried employee’s contribution to the defined contribution retirement plan.

The total expense for the years ended December 31, 2004, 2003 and 2002 was $654,000, $512,000 and $418,000, respectively.

No other post-retirement benefit plans exist.

Note 10: Commitments and Contingencies

The Company, as well as other steel companies, is subject to demanding environmental standards imposed by federal, state and local
environmental laws and regulations. The Company is not aware of any environmental condition that currently exists at any of its
facilities that would cause a material adverse effect on the financial condition of the Company.

On June 29, 2001, suit was filed against the Company in the Court of Common Pleas of Allegheny County, Pennsylvania by Teledyne
Technologies, Incorporated (“Teledyne”). The suit alleges that steel product manufactured by the Company was defective and the
Company was or should have been aware of the defects. Teledyne has alleged that the defective steel supplied by the Company caused
certain crankshafts sold by Teledyne for use in aircraft engines to be defective. As a result, Teledyne is claiming damages relating to the
recall, replacement and repair of aircraft engines.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

On April 7, 2003, United States Aviation Underwriters, Inc. (“USAU”), a New York corporation, as managers and on behalf of
United States Aircraft Insurance Group (“USAIG”), the Company’s Aircraft Products Liability insurance carrier, filed suit in the
Court of Common Pleas of Allegheny County, Pennsylvania asking the court for a declaratory judgment as to what actual liability and
obligations were applicable to USAIG relating to the insurance policy issued to the Company, and the allegations made by Teledyne.
The Company and USAU reached a settlement agreement as of May 1, 2004 regarding the allocation of certain potential costs
associated with the Teledyne claim and have agreed to jointly file a motion to have the declaratory suit dismissed. On July 27, 2004,
the suit brought by USAU was dismissed.

On January 28, 2005, the Company filed suit in the Court of Common Pleas of Allegheny County, Pennsylvania, asking the court
for a judgment demanding payment from a financially distressed customer for an outstanding receivable balance, together with pre-
and post-judgment interest, an award of the costs and expenses the Company has incurred in pursuing this action and such other relief
as the court deems proper. At December 31, 2004, the Company included the value of the outstanding receivable balance in its
allowance for doubtful accounts. In 2005, the Company received a partial payment of $110,000 from this customer and will pursue
collecting the remaining balance.

The Company maintains a supply contract agreement with Talley Metals Technology, Inc., a subsidiary of Carpenter Technology
Corporation (“Talley Metals”). While the initial term of the agreement expired December 31, 2002, the agreement continues to
automatically renew with the placement of new orders each month and requires a 90-day written notice to terminate by either party.
In addition, Talley Metals is required under the agreement to purchase a minimum of 1,000 tons of stainless reroll billet products each
calendar month and average at least 1,250 tons per month during the last twelve-month period. The value of the contract on a
monthly basis will depend on product mix and key raw material prices. During 2002 and 2003, the Company waived Talley Metals’
requirement to purchase the monthly minimum quantity of stainless reroll billets due to market conditions.

The Company’s purchase obligations include the value of all open purchase orders with established quantities and purchase prices
as well as minimum purchase commitments, all made in the normal course of business. At December 31, 2004, the Company’s total
purchase obligations are $8,963,000, of which $8,309,000 and $654,000 will be due in years 2005 and 2006, respectively.

Note 11: Segment and Related Information

The Company is comprised of three operating locations and one corporate headquarters. For segment reporting, the Bridgeville and
Titusville facilities have been aggregated into one reportable segment, Universal Stainless & Alloy Products, because of the manage-
ment reporting structure in place. The Universal Stainless & Alloy Products manufacturing process involves melting, remelting,
treating and hot and cold rolling of semi-finished and finished specialty steels. A second reportable segment, Dunkirk Specialty Steel,
was created in 2002 with the acquisition of certain assets and real property formerly owned by Empire Specialty Steel, Inc. Dunkirk
Specialty Steel’s manufacturing process involves hot rolling and finishing specialty steel bar, rod and wire products.

The accounting policies of both reportable segments are the same as those described in the Summary of Significant Accounting
Policies. Sales between the segments are generally made at market-related prices. Corporate assets are primarily cash and cash
equivalents, prepaid expenses, deferred income taxes and property, plant and equipment.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

For the years ended December 31,
(dollars in thousands)

Net Sales
Universal Stainless & Alloy Products
Dunkirk Specialty Steel
Intersegment

Operating Income (Loss)
Universal Stainless & Alloy Products
Dunkirk Specialty Steel
Intersegment

Interest Expense and Other Financing Costs(a)
Universal Stainless & Alloy Products
Dunkirk Specialty Steel

Other Income, Net
Universal Stainless & Alloy Products
Dunkirk Specialty Steel

Depreciation and Amortization
Universal Stainless & Alloy Products
Dunkirk Specialty Steel

Capital Expenditures
Universal Stainless & Alloy Products
Dunkirk Specialty Steel
Corporate

2004

2003

2002

$ 108,234
34,723
(22,315)

$ 120,642

7,493
3,088
(312)

10,269

268
154

422

35
1,084

1,119

2,944
117

3,061

3,047
478
61

3,586

59,585
19,875
(10,471)

68,989

(249)
(2,133)
–

(2,382)

238
145

383

85
43

128

2,961
102

3,063

940
253
–

1,193

70,120
10,483
(9,726)

70,877

5,013
(1,990)
–

3,023

330
125

455

119
338

457

3,049
81

3,130

2,104
1,928
162

4,194

(a) Includes amortization of deferred financing costs and debt discount of $15,000, $30,000 and $141,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

December 31,
(dollars in thousands)

Assets
Universal Stainless & Alloy Products
Dunkirk Specialty Steel
Corporate

The following table presents net sales by product line:

For the years ended December 31,
(dollars in thousands)

Stainless steel
Tool steel
High-strength low alloy steel
High-temperature alloy steel
Conversion services
Other

Total net sales

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

2004

2003

86,375
18,418
3,047

65,025
11,128
8,772

$ 107,840

84,925

2004

2003

2002

94,530
17,075
3,682
2,468
2,386
501

52,546
9,673
2,869
2,482
1,079
340

56,813
6,643
2,213
3,474
1,495
239

$ 120,642

68,989

70,877

Net sales to the Company’s largest customer and its affiliates, which were generated primarily from the Bridgeville operation,
approximated 23%, 25% and 35% of total 2004, 2003 and 2002 sales, respectively. The accounts receivable balances from this
customer comprised approximately 13% and 24% of total accounts receivable at December 31, 2004 and 2003, respectively.

The Company derives less than 10% of its revenues from markets outside of the United States and the Company has no assets
located outside the United States.

Note 12: Acquisition

On February 8, 2002, Dunkirk Specialty Steel entered into a Personal Property Asset Purchase Agreement and a Real Property
Purchase Agreement (the “Purchase Agreements”) with the JDA to acquire certain assets and real property formerly owned by
Empire Specialty Steel, Inc., at its idled production facility located in Dunkirk, New York. These transactions were completed on
February 14, 2002 and the plant became operational on March 14, 2002. Pursuant to the Purchase Agreements, Dunkirk Specialty
Steel paid $1,283,000 in cash and issued the JDA Notes. The purchase price, including related acquisition costs and adjustments for
the discounted value of the JDA Notes, was $4,140,000. $3,958,000 was allocated to inventory and $182,000 was allocated to assets
held for sale.

Through December 31, 2004, the Company has sold certain assets for $31,000 and has invested $33,000 to prepare certain assets for
sale. While the specific identification of individual assets to be sold continues, management intends to sell an office building located
on the property. Based on available information, management believes the market value of the office building supports the recorded
asset value. Future costs will be expensed as incurred in accordance with SFAS 146.

The assets purchased by Dunkirk Specialty Steel were previously owned and operated by AL Tech Specialty Steel, Inc. and Empire
Specialty Steel, Inc. During their ownership, both organizations participated in several anti-dumping lawsuits with other domestic
specialty steel producers. The Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”) provides for payment of import duties
collected by the U.S. Treasury to domestic companies injured by unfair foreign trade practices. In accordance with CDSOA, the
Company filed claims to receive their appropriate share of the import duties collected. In 2002, the Company received $310,000,
net of expenses, which is included in other income. In 2003, the Company received notice that it was awarded $604,000, of which
$10,000 was received. The remaining payment was delayed pending the outcome of a hearing before the U.S. Court of Appeals for
the Federal Circuit in a lawsuit challenging the distribution method of the import duties. The remaining payment, as well as the 2004
award of $507,000, was received and recognized as income in 2004, net of expenses incurred. On January 28, 2005, the Company
received an additional $59,000 from the U.S. Treasury, representing an increase in the total allocation of available funds awarded
to the Company for 2004.

Note 13: Quarterly Financial Data (unaudited)

(dollars in thousands, except per share amounts)

2004 Data
Net sales
Gross profit
Operating income
Net income

Earnings per common share:

Basic
Diluted

2003 Data
Net sales
Gross profit
Operating (loss)
Net (loss)

(Loss) per common share:

Basic
Diluted

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$
$

21,307
1,963
435
277

0.04
0.04

14,700
20
(1,373)
(583)

(0.09)
(0.09)

$
$

29,026
4,495
2,548
1,566

0.25
0.25

16,837
896
(629)
(440)

(0.07)
(0.07)

$
$

33,297
5,596
3,723
2,745

0.44
0.43

18,625
1,329
(178)
(121)

(0.02)
(0.02)

$
$

37,012
5,616
3,563
2,593

0.41
0.40

18,827
1,210
(202)
(273)

(0.04)
(0.04)

Earnings per share amounts for each quarter are required to be computed independently. As a result, their sum may not equal the total
year earnings per share amounts.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Five-Year Summary

For the years ended December 31,
(dollars in thousands, except per share amounts)

Summary of Operations
Net sales
Operating income (loss)
Income (loss) before cumulative
effect of accounting change
Cumulative effect of accounting

change, net of tax

Net income (loss)

Pro Forma Summary of Operations(b)
Net sales
Operating income (loss)
Net income (loss)

Financial Position at Year-End
Working capital
Total assets
Total debt
Stockholders’ equity

Common Share Data
Basic earnings (loss) per share:

As reported
Pro forma under SAB 101(b)
Diluted earnings (loss) per share:

As reported
Pro forma under SAB 101(b)

Stockholders’ equity

Other Data
Cash flow (used in) provided by:

Operating activities
Investing activities
Financing activities

Capital expenditures
Depreciation and amortization
Return on stockholders’ equity
Debt to total capitalization
Employees
Customers

Average Shares Outstanding
(in thousands)

Basic
Diluted

2004

2003

2002

2001

2000(a)

$ 120,642
10,269

68,989
(2,382)

70,877
3,023

90,658
12,544

88,347
11,488

7,131

–
7,131

$ 120,642
10,269
7,131

47,918
107,840
14,234
66,937

1.13
1.13

1.12
1.12
10.57

(9,717)
(3,586)
8,809
3,586
3,061

11.3%
17.5
463
452

(1,417)

–
(1,417)

68,989
(2,382)
(1,417)

33,414
84,925
7,543
59,436

(0.23)
(0.23)

(0.23)
(0.23)
9.44

3,378
(1,193)
(1,158)
1,193
3,093

(2.3)%
11.3
383
399

2,092

–
2,092

70,877
3,023
2,092

33,538
84,044
9,473
60,801

0.34
0.34

0.34
0.34
9.67

3,824
(5,477)
(493)
4,194
3,271

3.7%

13.5
393
372

7,639

–
7,639

90,658
12,544
7,639

28,655
79,446
8,322
56,372

1.26
1.26

1.25
1.25
9.28

11,905
(5,253)
(2,307)
5,253
2,782

13.6%
12.9
304
288

6,610

(1,546)
5,064

88,347
11,488
6,610

23,558
73,747
10,007
48,767

0.83
1.09

0.83
1.09
8.03

6,285
(4,598)
(1,446)
4,598
2,466

10.4%
17.0
280
250

6,305
6,379

6,287
6,287

6,204
6,236

6,080
6,097

6,075
6,080

(a) Includes $12,462,000 of net sales and $9,988,000 of cost of sales associated with revenues recognized in 1999 but deferred until 2000 as a result of implementing Staff Accounting
Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101). The 2000 results of operations also include the impact of changing the Company’s Standard Terms
and Conditions to more closely reflect the substance of its sales transactions.

(b) Includes the effect of implementing SAB 101 as required under generally accepted accounting principles in 2000.

U N I V E R S A L S TA I N L E S S & A L L O Y P R O D U C T S , I N C . 2 0 0 4 A N N U A L R E P O R T

Directors, Officers and Management

DDiirreeccttoorrss

DDoouuggllaass MM.. DDuunnnn
Managing Partner
Dunn Associates

GGeeoorrggee FF.. KKeeaannee
President Emeritus
Common Fund Group

CCllaarreennccee MM.. MMccAAnniinncchh
President and Chief Executive Officer
Universal Stainless & Alloy Products, Inc.

UUddii TToolleeddaannoo
President
Millennium 3 Capital, Inc.

OOffffiicceerrss

CCllaarreennccee MM.. MMccAAnniinncchh
President and Chief Executive Officer

RRiicchhaarrdd MM.. UUbbiinnggeerr
Vice President of Finance, Chief Financial Officer

and Treasurer

PPaauull AA.. MMccGGrraatthh
Vice President of Operations, General Counsel

and Secretary

MMaannaaggeemmeenntt

DDuuddlleeyy JJ.. MMeerrcchhaanntt
Vice President of Sales and Marketing

MMiicchhaaeell JJ.. OObbiieeccuunnaass
Director, Employee Relations

BBrruuccee JJ.. KKrraammeerr
Director, Purchasing

KKeeiitthh AA.. EEnngglleekkaa
Director, Technology

RRiicchhaarrdd JJ.. PPiinnccoosskkii
General Manager, Dunkirk Specialty Steel, LLC

LLeeee FF.. BBuurrkkeetttt
Plant Manager, Bridgeville Facility

SSttaannlleeyy WW.. PPeeaakk
Plant Manager, Titusville Facility

DDeessiiggnn:: Mizrahi Design Associates, Inc.

PPhhoottooggrraapphhyy:: Mark Perrott

PPrriinntteerr:: Broudy Printing Inc.

CCoorrppoorraattee IInnffoorrmmaattiioonn

EExxeeccuuttiivvee OOffffiicceess
Universal Stainless & Alloy Products, Inc.
600 Mayer Street
Bridgeville, PA 15017
412-257-7600

AAnnnnuuaall MMeeeettiinngg
The Annual Meeting of Stockholders
will be held at 10 a.m. on Wednesday,
May 18, 2005, at the Southpointe Golf Club,
Canonsburg, PA.

PPrriiccee RRaannggee ooff CCoommmmoonn SSttoocckk
The Common Stock is listed on the Nasdaq National Market under
the symbol “USAP”. There were 160 stockholders of record as of
February 22, 2005. The following table sets forth the range of high
and low sale prices per share of Common Stock, for the periods
indicated below:

YYeeaarr 22000044

First quarter
Second quarter
Third quarter
Fourth quarter

YYeeaarr 22000033

First quarter
Second quarter
Third quarter
Fourth quarter

High

Low

$
$
$
$

12.40
11.98
14.25
15.50

6.44
6.60
8.14
11.73

$
$
$
$

8.70
9.86
10.94
12.08

4.92
4.40
5.86
7.62

The Company has never paid a cash dividend on its Common Stock
and currently has no plans to pay dividends in the foreseeable future.
The PNC Credit Agreement contains restrictions on the Company’s
ability to pay dividends on Common Stock.

SShhaarreehhoollddeerr IInnffoorrmmaattiioonn
Universal Stainless & Alloy Products, Inc.’s Annual Report on
Form 10-K and other reports filed with the Securities and Exchange
Commission can be obtained, without charge, through the
Company’s web site address below or at www.sec.gov, the web site
for the Securities and Exchange Commission, or by writing to the
Vice President of Finance at the Executive Offices.

TTrraannssffeerr AAggeenntt aanndd RReeggiissttrraarr
Continental Stock Transfer & Trust Company
2 Broadway
New York, NY 10004

WWeebb SSiittee AAddddrreessss
www.univstainless.com
www.dunkirkspecialtysteel.com

Universal Stainless & Alloy Products, Inc.

600 Mayer Street

phone

412.257.7600

Bridgeville, PA 15017

fax

412.257.7640