Universal Stainless & Alloy Products Annual Report 2016

FY2016 Annual Report · Universal Stainless & Alloy Products

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To Our Stockholders:

I am pleased to provide you with this 2016 Annual Report and my assessment of our Company’s progress over the last year.

While we experienced some improvement to our results in 2016, following a very challenging 2015, the overall market
remained at levels well below historic norms, driven by the continued impact of the recent downturn of the oil and gas sector,
aerospace destocking, and general market uncertainly leading up to the presidential election.

The Universal team responded to the challenging industry conditions by working diligently to optimize our results through
focusing on new business development, cash generation, and the implementation of productivity initiatives.

In 2016, despite the softness in our aerospace end market, the team continued to deliver significant progress on our strategic
objective to grow premium alloys, through securing 28 new customer approvals, and adding five new products. In addition,
there were 11 new products in development at the end of 2016. The major industry certifications that our facilities have
achieved, and the 72 customer approvals of our new products over the past five years, including 28 in 2016 noted above, have
been critically important to positioning us for new market opportunities. We anticipate growth in 2017 premium alloys with
December 31, 2016 backlog for premium alloy products up 49% compared with December 31, 2015.

Gross margin recovered in 2016 to 8.8% of sales, compared with 5.3% in 2015. Driving the improvement in gross margin was
the stabilization of commodities, which resulted in improved alignment of commodity surcharges and melt costs by mid-2016,
as well as the benefit of operational productivity initiatives. However, lower activity levels in 2016, compared with historic
norms, continued to negatively impact gross margin.

Given the weak market conditions in 2016, a continued major priority for us was to maintain positive cash flow, further reduce
debt, fund essential capital expenditures, and position the business to respond quickly when business conditions improve.
Through tight management of working capital, we generated net cash from operations of $8.4 million and reduced total debt by
$3.3 million. Total debt has been reduced by over $20 million in the last six quarters.

In January of 2016, we entered into a new five-year, $95 million asset-based lending bank facility and amended the existing
convertible notes, including extending the maturity by up to 3.5 years, therefore enhancing our liquidity going forward.

Positive signals at the end of 2016 and the start of 2017 point to an improved business climate. Most notably, backlog as of
December 31, 2016 was up 14.5% compared with December 31, 2015 and order in-take in January 2017 was up 25% compared
with January 2016.

Our end markets are strong, with the macro aerospace climate positive given the continued growth in new aircraft deliveries,
and positive growth in passenger miles driving the after-market parts market. In addition, we expect that anticipated increases in
defense spending will drive further demand for specialty steel products.

In the balance of our markets we are seeing positive signals in the oil and gas space, although still at levels below 2014. In the
heavy equipment market, where demand for our tool steel is dominated by the auto industry, continued strength in auto sales,
and a high number of model changeovers, are driving positive tool steel demand. In addition, share gains on imported product is
also driving positive sales trends in tool steel. In power generation, we are focused on further expanding our share of the quick-
turn maintenance market while we anticipate future improved turbine build rates.

We are optimistic about the opportunities presented to us in 2017 and the team is keen to maximize growth in an improved
business environment.

I would like to thank our entire Universal team whose dedication and hard work enabled us to overcome many challenges in
2016 and position us for growth in 2017, our Board of Directors for the depth and constancy of their counsel, and our
stockholders, both long-standing and new, whose continued support has been so gratifying for all of us. Thank you.

Sincerely,

Dennis M. Oates
Chairman, President and CEO

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934
For the Fiscal Year Ended December 31, 2016

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

Commission File Number 000-25032

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of
incorporation or organization)

25-1724540
(IRS Employer
Identification No.)

600 MAYER STREET, BRIDGEVILLE, PA 15017
(Address of principal executive offices, including zip code)

(412) 257-7600
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, par value $0.001 per share

Name of exchange on which registered
The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: [None]

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer ☐

Accelerated filer

☒

☐ (Do not check if a smaller reporting company)

Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2016, based on the closing price of $10.90
per share on that date, was approximately $75,047,786. For the purposes of this disclosure only, the registrant has assumed that its directors
and executive officers, are the affiliates of the registrant. The registrant has made no determination that such persons are “affiliates” within
the meaning of Rule 405 under the Securities Act of 1933.
As of February 21, 2017, there were 7,508,154 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE Part III of this Form 10-K incorporates by reference portions of the Company’s
definitive Proxy Statement for the 2016 Annual Meeting of Stockholders.

Smaller reporting company

☐

INDEX

PART I

Item 1.

Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4. Mine Safety Disclosures

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities

Item 6.

Selected Financial Data

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

PART IV

Item 15. Exhibits and Financial Statement Schedules

Item 16. Form 10-K Summary

PART I

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The statements contained in this Annual Report on Form 10-K (“Form 10-K”) of Universal Stainless and Alloy
Products, Inc. (“Universal,” the “Company,” “us,” “our,” or “we”), including, but not limited to, the statements
contained in Item 1, “Business,” and Item 7, “Management's Discussion and Analysis of the Financial Condition
and Results of Operations,” along with statements contained in other reports that we have filed with the Securities
and Exchange Commission (the “SEC”), external documents and oral presentations, which are not historical facts
are considered to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Act of 1934, as amended. These statements which may be expressed
in a variety of ways, including the use of forward looking terminology such as “believe,” “expect,” “seek,” “intend,”
“may,” “will,” “should,” “could,” “potential,” “continue,” “estimate,” “plan,” or “anticipate,” or the negatives
thereof, other variations thereon or compatible terminology, relate to, among other things, 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, and the effect of new accounting
pronouncements. We do not undertake any obligation to publicly update any forward-looking statements.

These forward-looking statements, and any forward looking statements contained in other public disclosures of the
Company which make reference to the cautionary factors contained in this Form 10-K, are based on assumptions
that involve risks and uncertainties and are subject to change based on the considerations described below. We
discuss many of these risks and uncertainties in greater detail in Item 1A, “Risk Factors,” of this Form 10-K. These
and other risks and uncertainties may cause our actual results, performance or achievements to differ materially from
anticipated future results, performance or achievements expressed or implied by such forward-looking statements.

ITEM 1.

BUSINESS

Universal, which was incorporated in 1994, and its wholly-owned subsidiaries, manufacture and market semi-
finished and finished specialty steel products, including stainless steel, nickel alloys, tool steel and certain other
premium alloyed steels. Our manufacturing process involves melting, remelting, heat treating, hot and cold rolling,
forging, machining and cold drawing of semi-finished and finished specialty steels. Our products are sold to service
centers, forgers, rerollers, original equipment manufacturers (“OEMs”) and wire redrawers. Our customers further
process our products for use in a variety of industries, including the aerospace, power generation, oil and gas, heavy
equipment and general industrial markets. We also perform conversion services on materials supplied by customers.

We operate in four locations: Bridgeville and Titusville, Pennsylvania; Dunkirk, New York; and North Jackson,
Ohio. Our corporate headquarters is located at our Bridgeville location. We operate these four manufacturing
locations as one reportable business segment.

We produce a wide variety of specialty steel grades using several manufacturing processes including argon oxygen
decarburization (“AOD”), electro-slag remelted (“ESR”), vacuum induction melting (“VIM”) and vacuum-arc
remelted (“VAR”). At our Bridgeville and North Jackson facilities, we produce specialty steel products in the form
of semi-finished and finished long products (ingots, blooms, billets and bars). In addition, the Bridgeville facility
produces flat rolled products (slabs and plates). Semi-finished long products are primarily used by our Dunkirk
facility and certain customers to produce finished bar, rod, wire and plate products. Finished bar products that we
manufacture are primarily used by OEMs and by service center customers for distribution to a variety of end users.
We also produce customized shapes primarily for OEMs that are cold rolled from purchased coiled strip, flat bar or
extruded bar at our precision rolled products department, located at our Titusville facility.

INDUSTRY OVERVIEW

The specialty steel industry is a relatively small but distinct segment of the overall steel industry. Specialty steels
include stainless steels, nickel alloys, tool steels, electrical steels, high-temperature alloys, magnetic alloys and
electronic alloys. Specialty steels are made with a high alloy content, suitable for use in environments that demand
exceptional hardness, toughness, strength and resistance to heat, corrosion or abrasion, or combinations thereof.
Specialty steels generally must conform to more demanding customer specifications for consistency, straightness
and surface finish than carbon steels. For the years ended December 31, 2016, 2015 and 2014, more than 72% of
our net sales were derived from stainless steel products.

We primarily manufacture our products within the following product lines and, generally, in response to customer
orders:

Stainless Steel. Stainless steel, which represents the largest part of the specialty steel market, contains elements such
as nickel, chrome and molybdenum that give it the unique qualities of high strength, good wear characteristics,
natural attractiveness, ease of maintenance and resistance to corrosion and heat. Stainless steel is used, among other
applications, in the aerospace, oil and gas, power generation and automotive industries, as well as in the
manufacturing of equipment for food handling, health and medical, chemical processing and pollution control.

High-Strength Low Alloy Steel. High-strength low alloy steel is a relative term that refers to those steels that
maintain alloying elements that range in versatility. The alloy element of nickel, chrome and molybdenum in such
steels typically exceeds the alloy element of carbon steels but not that of high-temperature alloy steel. High-strength
low alloy steels are manufactured for use generally in the aerospace industry.

Tool Steel. Tool steels contain elements of nickel, chrome and molybdenum to produce specific hardness
characteristics that enable tool steels to form, cut, shape and shear other materials in the manufacturing process.
Heating and cooling at precise rates in the heat-treating process bring out these hardness characteristics. Tool steels
are utilized in the manufacturing of metals, plastics, paper and aluminum extrusions, pharmaceuticals, electronics
and optics.

High-Temperature Alloy Steel. These steels are designed to meet critical requirements of heat resistance and
structural integrity. They generally have very high nickel content relative to other types of specialty steels. High-
temperature alloy steels are manufactured for use generally in the aerospace industry.

Our net sales by principal product line were as follows:

For the years ended December 31,
(dollars in thousands)
Stainless steel
High-strength low alloy steel
Tool steel
High-temperature alloy steel
Conversion services and other sales
Total net sales

RAW MATERIALS

2016

2015

2014

112,118 $
13,180
19,179
6,057
3,900
154,434 $

135,945 $
16,045
16,197
7,557
4,916
180,660 $

159,799
16,853
16,680
6,295
5,933
205,560

We depend on the delivery of key raw materials for our day-to-day operations. These key raw materials are carbon
and stainless scrap metal and alloys, primarily consisting of nickel, chrome, molybdenum, and copper. Scrap metal
is primarily generated by industrial sources and is purchased through a number of scrap brokers and processors. We
also recycle scrap metal generated from our own production operations as a source of metal for our melt shops.
Alloys are generally purchased from domestic agents and originate in the United States, Australia, Canada, China,
Russia, South America and South Africa.

Our Bridgeville and North Jackson facilities currently supply semi-finished specialty steel products as starting
materials to our other operating facilities. Semi-finished specialty steel starting materials, which we cannot produce
at a competitive cost, are purchased from other suppliers. We generally purchase these starting materials from steel
strip coil suppliers, extruders, flat rolled producers and service centers. We believe that adequate supplies of starting
material will continue to be available.

The cost of raw materials represents approximately 40% of the cost of products sold in 2016 and approximately half
of the cost of products sold in 2015 and 2014. Raw material costs can be impacted by significant price changes.
Raw material prices vary based on numerous factors, including quality, and are subject to frequent market
fluctuations. Future raw material prices cannot be predicted with any degree of certainty. We do not maintain any
fixed-price long-term agreements with any of our raw material suppliers.

We maintain a sales price surcharge mechanism on certain of our products to match sales prices to raw material
price changes. For certain products, the surcharge is calculated at the time of order entry, based on current raw
material prices or prices at the time of shipment. For certain finished products, the surcharge is calculated based on
the monthly average raw material prices two months prior to the promised ship date.

CUSTOMERS

Our five largest customers in the aggregate accounted for approximately 42% of our net sales for the years ended
December 31, 2016 and 2015, and 46% of our net sales for the year ended December 31, 2014. Our largest
customer in 2016, Reliance Steel & Aluminum Co., accounted for approximately 20%, 16% and 18% of our net
sales for the years ended December 31, 2016, 2015 and 2014, respectively. No other customer accounted for more
than 10% of our net sales for the years ended December 31, 2016, 2015 and 2014. International sales approximated
9%, 9% and 7% of 2016, 2015 and 2014 total net sales, respectively.

BACKLOG

Our backlog of orders (excluding surcharges) on hand as of December 31, 2016 was approximately $43.8 million
compared to approximately $38.2 million at December 31, 2015. We believe that this 14.5% increase in our
backlog is largely a result of increased demand for our products due to improved business conditions in 2016 and an
improved market outlook in 2017. Our backlog may not be indicative of actual sales because certain surcharges are
not determinable until the order is shipped to the customer and, therefore, should not be used as a direct measure of
future revenue. However, we expect that our actual sales will be higher than the backlog once the actual surcharges
are determined.

COMPETITION

Competition in our markets is based upon product quality, delivery capability, customer service, customer approval
and price. Maintaining high standards of product quality, while responding quickly to customer needs and keeping
production costs at competitive levels, is essential to our ability to compete in these markets.

We believe that there are several companies that manufacture one or more similar specialty steel products that are
significant competitors. There are a few smaller producing companies and material converters that are also
considered to be competitors of ours.

High import penetration of specialty steel products, especially stainless and tool steels, also impacts the competitive
nature within the United States. Unfair pricing practices by foreign producers have resulted in high import
penetration into the U.S. markets in which we participate.

EMPLOYEE RELATIONS

We consider the maintenance of good relations with our employees to be important to the successful conduct of our
business. We have profit-sharing plans for certain salaried and hourly employees and for all of our employees
represented by United Steelworkers (the “USW”) and have equity ownership programs for all of our eligible
employees, in an effort to forge an alliance between our employees’ interests and those of our stockholders. At
December 31, 2016, 2015 and 2014, we had 645, 634, and 714 employees, respectively, of which 508, 449, and 501,
respectively, were USW members.

Collective Bargaining Agreements

Our Bridgeville, Titusville, Dunkirk and North Jackson facilities recognize the USW as the exclusive representative
for their hourly employees with respect to the terms and conditions of their employment. On March 4, 2016, the
USW was certified as the exclusive bargaining representative for the hourly employees of our North Jackson
facility. The Company and the USW are currently negotiating the initial collective bargaining agreement for the
North Jackson hourly employees. The following collective bargaining agreements are currently in place:

Facility
Dunkirk
Bridgeville
Titusville

Commencement Date
November 2012
September 2013
October 2015

Expiration Date
October 2017
August 2018
September 2020

We believe a critical component of our collective bargaining agreements is the inclusion of a profit sharing plan.

Employee Benefit Plans

We maintain a 401(k) retirement plan for our hourly and salaried employees. Pursuant to the 401(k) plan,
participants may elect to make pre-tax and after-tax contributions, subject to certain limitations imposed under the
Internal Revenue Code of 1986, as amended. In addition, we make periodic contributions to the 401(k) plan for the
hourly employees employed at the Dunkirk and Titusville facilities, based on service, and at the North Jackson
facility, based upon the employee’s age and wage rate. We make periodic contributions for the salaried employees
at all locations, except for North Jackson, based upon their service and their individual contribution to the 401(k)
retirement plan. For North Jackson salaried employees, we make periodic contributions based upon the employee’s
age, annual salary, and their individual contributions.

We participate in the Steelworkers Pension Trust (the “Trust”), a multi-employer defined-benefit pension plan that is
open to all hourly and salaried employees associated with the Bridgeville facility. We make 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.

We also provide group life and health insurance plans for our hourly and salary employees.

Employee Stock Purchase Plan

Under the 1996 Employee Stock Purchase Plan, as amended (the “Plan”), the Company is authorized to issue up to
300,000 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 our 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,
2016, we have issued 195,904 shares of common stock since the Plan’s inception.

ENVIRONMENTAL

We are subject to federal, state and local environmental laws and regulations (collectively, “Environmental Laws”),
including those governing discharges of pollutants into the air and water, and the generation, handling and disposal
of hazardous and non-hazardous substances. We monitor our compliance with applicable Environmental Laws and,
accordingly, believe that we are currently in compliance with all laws and regulations in all material respects. We
are subject periodically to environmental compliance reviews by various regulatory offices. We may be liable for the
remediation of contamination associated with generation, handling and disposal activities. Environmental costs
could be incurred, which may be significant, related to environmental compliance, at any time or from time to time
in the future.

EXECUTIVE OFFICERS

The following table sets forth, as of February 22, 2017, certain information with respect to the executive officers of
the Company:

Name (Age)

Executive Officer Since

Position

Dennis M. Oates (64)

Larry J. Pollock (52)

Christopher M. Zimmer (43)

Paul A. McGrath (65)

Graham McIntosh, Ph.D. (54)

Ross C. Wilkin (46)

2008

2015

2010

1996

2015

Chairman, President and Chief Executive Officer

Executive Vice President, Chief Manufacturing Officer

Executive Vice President and Chief Commercial Officer

Vice President of Administration, General Counsel
and Secretary

Vice President and Chief Technology Officer

Vice President of Finance, Chief Financial Officer
and Treasurer

Dennis M. Oates has been President and Chief Executive Officer of the Company since 2008. Mr. Oates was named
to the Company’s Board of Directors in 2007. Mr. Oates previously served as Senior Vice President of the Specialty
Alloys Operations of Carpenter Technology Corporation from 2003 to 2007. Mr. Oates also served as President and
Chief Executive Officer of TW Metals, Inc. from 1998 to 2003. In May 2010, the Board of Directors elected
Mr. Oates to the additional position of Chairman.

Larry J. Pollock has been Executive Vice President, Chief Manufacturing Officer since May 2015. Mr. Pollock
served as Director of Tube Manufacturing at TimkenSteel prior to joining the Company and General Manager at The
Timken Company from 2010 through 2014. Prior to joining Timken, Mr. Pollock was the General Manager at SPS
Technologies/PCC where he was responsible for the aerospace fasteners business unit. From 1987 to 2009, Mr.
Pollock held several positions at Pilkington/Nippon Sheet Glass Company.

Christopher M. Zimmer has been Executive Vice President and Chief Commercial Officer since July 2014. Mr.
Zimmer served as Vice President of Sales and Marketing from 2008 to July 2014. Mr. Zimmer previously served as
Vice President of Sales and Marketing for Schmoltz+Bickenbach USA from 1995 to 2008. He held positions of
increasing responsibility including inside sales, commercial manager—stainless bar, general manager—nickel alloy
products, and National Sales Manager.

Paul A. McGrath has been Vice President of Administration of the Company since 2007, General Counsel since
1995 and was appointed Secretary in 1996. Mr. McGrath served as Vice President of Operations from 2001 to 2006.
Previously, he was employed by Westinghouse Electric Corporation for approximately 24 years in various
management positions.

Graham McIntosh, Ph.D. has been Vice President and Chief Technology Officer since November 2013. Dr.
McIntosh previously served as Director of Global Technology Initiatives for Carpenter Technology Corporation
where he joined in 2008. Dr. McIntosh also served as Vice President of Technology and Director of Quality for
Firth Rixson Viking from 2001 to 2008, and also held several management and technical positions at Wyman-
Gordon Livingston from 1987-2001, where he began his career.

Ross C. Wilkin has been Vice President of Finance, Chief Financial Officer and Treasurer since August 2015.
Mr. Wilkin previously served as Chief Financial Officer of Dynamics Inc. From 2003 to 2014, Mr. Wilkin held
several financial positions at the H.J. Heinz Company, including VP CFO of Heinz Australia and New Zealand, and
Divisional Finance Director for Heinz North America. Prior to joining H.J. Heinz, Mr. Wilkin served as Finance
Director for the European Access division of Marconi plc. He began his finance career at KPMG in 1992.

PATENTS AND TRADEMARKS

We do not consider our business to be materially dependent on patent or trademark protection, and believe we own
or maintain effective licenses covering all the intellectual property used in our business. We benefit from our
proprietary rights relating to designs, engineering and manufacturing processes and procedures. We seek to protect
our proprietary information by use of confidentiality and non-competition agreements with certain employees.

AVAILABLE INFORMATION

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports, as well as proxy and information statements that we file with the SEC, are available
free of charge on our website at www.univstainless.com as soon as reasonably practicable after such reports are filed
with the SEC. The contents of our website are not part of this Form 10-K. Copies of these documents will be
available to any shareholder upon request. Requests should be directed in writing to Investor Relations at 600
Mayer Street, Bridgeville, PA 15017. You also may read and copy any materials we file with the SEC at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at
www.sec.gov that contains reports, proxy and information statements and other information regarding issuers, like
us, that file electronically with the SEC.

ITEM 1A.

RISK FACTORS

We wish to caution each reader of this Form 10-K to consider the following factors and other factors discussed
herein and in other past reports, including but not limited to prior year Form 10-K and Form 10-Q reports filed with
the SEC. Our business and results of operations could be materially affected by any of the following risks. The
factors discussed herein are not exhaustive. Therefore, the factors contained herein should be read together with
other reports that we file with the SEC from time to time, which may supplement, modify, supersede, or update the
factors listed in this document.

A substantial amount of our sales are derived from a limited number of customers.

Our five largest customers in the aggregate accounted for approximately 42% of our net sales for the years ended
December 31, 2016 and 2015, and 46% of our net sales for the year ended December 31, 2014. The accounts
receivable balance from these five customers comprised approximately 32% of total accounts receivable at
December 31, 2016. An adverse change in, or termination of, the relationship with one or more of our customers or
market segments could have a material adverse effect on our results of operations.

Our business is very competitive, and increased competition could reduce our sales.

We compete with domestic and foreign producers of specialty steel products. In addition, many of the finished
products sold by our customers are in direct competition with finished products manufactured by foreign sources,
which may affect the demand for those customers’ products. Any competitive factors that adversely affect the
market for finished products manufactured by us or our customers could indirectly adversely affect the demand for
our semi-finished products. Additionally, our products compete with products fashioned from alternative materials
such as aluminum, composites and plastics, the production of which includes domestic and foreign enterprises.
Competition in our field is intense and is expected to continue to be so in the foreseeable future. The majority of our
business is not covered under long term supply contracts. There can be no assurance that we will be able to compete
successfully in the future.

A substantial amount of our sales are derived from the aerospace industry.

Approximately 60% of our sales and 44% of our tons shipped represented products sold to customers in the
aerospace market in 2016. The aerospace market is historically cyclical due to both external and internal market
factors. These factors include general economic conditions, supply chain fluctuations, diminished credit availability,
airline profitability, demand for air travel, age of fleets, varying fuel and labor costs, price competition, new
technology development and international and domestic political conditions such as military conflict and the threat
of terrorism. The length and degree of cyclical fluctuation can be influenced by any one or a combination of these
factors and therefore are difficult to predict with certainty. While the aerospace industry is currently experiencing
growth, a downturn in the aerospace industry would adversely affect the demand for products and/or the prices at
which we are able to sell our products, and our results of operations, business and financial condition could be
materially adversely affected.

We are dependent on the availability and price of raw materials.

We purchase carbon and stainless scrap metal and alloy additives, principally nickel, chrome, molybdenum,
manganese and copper, for our 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. We maintain sales
price surcharges on certain of our products to help offset the impact of raw material price fluctuations.

We do not maintain long-term fixed-price supply agreements with any of our raw material suppliers. If our supply
of raw materials were interrupted, we might not be able to obtain sufficient quantities of raw materials, or obtain
sufficient quantities of such materials at satisfactory prices, which, in either case, could adversely affect our results
of operations. In addition, significant volatility in the price of our principal raw materials could adversely affect our
financial results and there can be no assurance that the raw material surcharge mechanism employed by us will
completely offset immediate changes in our raw material costs.

Our business requires substantial amounts of energy.

The manufacturing of specialty steel is an energy-intensive process and requires the ready availability of substantial
amounts of electricity and natural gas, for which we negotiate competitive supply agreements. While we believe
that our energy agreements allow us to compete effectively within the specialty steel industry, the potential for
increased costs exists during periods of high demand or supply disruptions. We have a sales price surcharge to help
offset the cost fluctuations.

We are subject to risks associated with global economic and market factors.

Our results of operations are affected directly by the level of business activity of our customers, which in turn is
affected by global economic and market factors impacting the industries and markets that we serve. We are
susceptible to macroeconomic downturns in the United States and abroad that may affect the general economic
climate, our performance and the demand of our customers. We may face significant challenges if conditions in the
financial markets deteriorate. There can be no assurance that global economic and market conditions will not
adversely impact our results of operations, cash flow or financial position in the future.

Our business depends largely on our ability to attract and retain key personnel.

We depend on the continued service, availability and ability to attract skilled personnel, including members of our
executive management team, other management positions, and metallurgists, along with maintenance and
production positions. Our inability to attract and retain such people may adversely impact our ability to fill existing
roles and support growth. Further, the loss of key personnel could adversely affect our ability to perform until
suitable replacements can be found.

Our business may be harmed by strikes or work stoppages.

At December 31, 2016, we had 456 employees out of a total of 645 who were covered under collective bargaining
agreements expiring at various dates in 2017 to 2020. On March 4, 2016, the USW was certified as the exclusive
bargaining representative for the hourly employees of our North Jackson facility. The Company and the Union are
currently negotiating the initial collective bargaining agreement for the North Jackson hourly employees. There can
be no assurance that we will be successful in timely concluding collective bargaining agreements with the USW to
succeed the agreements that expire, in which case, we may experience strikes or work stoppages that may have a
material adverse impact on our results of operations.

Our business may be harmed by failures on critical manufacturing equipment.

Our manufacturing processes are dependent upon certain critical pieces of specialty steel making equipment, such as
our 50-ton electric-arc furnace and AOD vessel, our ESR, VIM and VAR furnaces, our radial hydraulic forge and
our universal rolling mill. In the event a critical piece of equipment should become inoperative as a result of
unexpected equipment failure, there can be no assurance that our operations would not be substantially curtailed,
which may have a negative effect on our financial results.

Our business may be harmed if we are unable to meet our debt service requirements or the covenants in our
credit agreement or if interest rates increase.

We have debt upon which we are required to make scheduled interest and principal payments, and we may incur
additional debt in the future. A significant portion of our debt bears interest at variable rates that may increase in the
future. Our ability to satisfy our debt obligations, and our ability to refinance any of our indebtedness in the future if
we determine that doing so would be advisable, will depend upon our future operating performance, which will be
affected by prevailing economic conditions in the markets that we serve and financial, business and other factors,
many of which are beyond our control. If we are unable to generate sufficient cash to service our debt or if interest
rates increase, our results of operations and financial condition could be adversely affected. Our credit agreement,
which provides for a $65.0 million senior secured revolving credit facility and a $30.0 million senior secured term
loan facility, also requires us to comply with certain covenants. A failure to comply with the covenants contained in
the credit agreement could result in a default, which, if not waived by our lenders, could substantially increase our
borrowing costs and result in acceleration of our debt. As of December 31, 2016, we were in compliance with the
covenants in our credit agreement.

We believe that our international sales are associated with various risks.

We conduct business with suppliers and customers in foreign countries which exposes us to risks associated with
international business activities. We could be significantly impacted by those risks, which include the potential for
volatile economic and labor conditions, political instability, collecting accounts receivable and exchange rate
fluctuations (which may affect sales revenue to international customers and the margins on international sales when
converted into U.S. dollars).

If we are unable to protect our information technology infrastructure against service interruptions, data
corruption, cyber-based attacks or network security beaches, our operations could be disrupted.

We rely on information technology networks and systems to manage and support a variety of business activities,
including procurement and supply chain, engineering support, and manufacturing. Our information technology
systems, some of which are managed by third-parties, may be susceptible to damage, disruptions or shutdown due to
failures during the process of upgrading or replacing software, databases or components thereof, power outages,
hardware failures, computer viruses, attacks by computer hackers, telecommunications failures, user errors or
catastrophic events. In addition, security breaches could result in unauthorized disclosures of confidential
information. If our information technology systems suffer severe damage, disruption or shutdown and our business
continuity plans do not effectively resolve the issues in a timely manner, our manufacturing process could be
disrupted resulting in late deliveries or even no deliveries if there is a total shutdown.

Changes in tax rules and regulations, or interpretations thereof, may adversely affect our effective tax rates.

We are a U.S. based company with customers and suppliers in foreign countries. We import various raw materials
used in our production processes and we export goods to our foreign customers. The United States, the European
Commission, countries in the EU and other countries where we do business have been considering changes in
relevant tax, border tax, accounting and other laws, regulations and interpretations, that may unfavorably impact our
effective tax rate or result in other costs to us.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

We own our Bridgeville, Pennsylvania facility, which consists of approximately 760,000 square feet of floor space
and our executive offices on approximately 74 acres. The Bridgeville facility contains melting, remelting,
conditioning, rolling, annealing and various other processing equipment. Substantially all products shipped from the
Bridgeville facility are processed through its melt shop and universal rolling mill operations.

We own our North Jackson, Ohio facility, which consists of approximately 257,000 square feet of floor space on
approximately 110 acres. The North Jackson facility contains melting, remelting, forging, annealing and various
other processing operations. Our obligations under our credit agreement, which is more fully described under
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources,” are collateralized by a first lien on our real property in North Jackson, Ohio. Also, our
obligations under the convertible notes, also more fully described under Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” are collateralized by
a second lien on our North Jackson, Ohio real property.

We own our Dunkirk, New York facility, which consists of approximately 680,000 square feet of floor space on
approximately 81 acres. The Dunkirk facility processes semi-finished billet and bar stock through one or more of its
five rolling mills, a high temperature annealing facility and/or a round or shape bar finishing facility.

We own our Titusville, Pennsylvania facility, which consists of seven buildings on approximately 10 acres,
including two principal buildings of approximately 265,000 square feet in total area. The Titusville facility contains
five VAR furnaces and various rolling and finishing equipment.

Specialty steel production is a capital-intensive industry. We believe that our facilities and equipment are suitable
for our present manufacturing needs. We believe, however, that we will continue to require capital from time to
time to add new equipment and to repair or replace our existing equipment to remain competitive and to enable us to
manufacture quality products and provide delivery and other support service assurances to our customers.

ITEM 3.

LEGAL PROCEEDINGS

From time to time, various lawsuits and claims have been or may be asserted against us relating to the conduct of
our business, including routine litigation relating to commercial and employment matters. The ultimate cost and
outcome of any litigation or claim cannot be predicted with certainty. We believe, based on information presently
available, that the likelihood that the ultimate outcome of any such pending matter will have a material adverse
effect on our financial condition, or liquidity or a material impact to our results of operations is remote, although the
resolution of one or more of these matters may have a material adverse effect on our results of operations for the
period in which the resolution occurs.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

At December 31, 2016, a total of 7,508,154 shares of common stock, par value $0.001 per share, were issued and
held by approximately 112 holders of record. There were 292,855 shares of the issued common stock held in
treasury at December 31, 2016.

Certain holders of our common stock and the Company are party to a stockholder agreement. That agreement
maintains in effect certain registration rights granted to certain stockholders and provides to them two demand
registration rights exercisable at any time upon written request for the registration of shares of common stock having
an aggregate net offering price of at least $5.0 million.

PRICE RANGE OF COMMON STOCK

Our common stock is listed on the NASDAQ Global Select Market under the symbol “USAP.” The following table
sets forth the range of high and low sales prices per share of our common stock, for the periods indicated below:

First quarter
Second quarter
Third quarter
Fourth quarter

PERFORMANCE GRAPH

2016

2015

High

Low

High

Low

$
$
$
$

11.97 $
13.65 $
12.00 $
15.37 $

6.10 $
9.13 $
9.47 $
9.13 $

28.41 $
27.11 $
19.82 $
13.59 $

19.03
17.76
10.15
8.01

The performance graph below compares the cumulative total stockholder return on our common stock with the
cumulative total return on the equity securities of the NASDAQ Composite Index and a peer group selected by us.
The peer group consists of domestic specialty steel producers: Allegheny Technologies Incorporated; Materion
Corporation; Carpenter Technology Corporation; and Haynes International, Inc. The graph assumes an investment
of $100 on December 31, 2011 reinvestment of dividends, if any, on the date of dividend payment and the peer
group is weighted by each company’s market capitalization. The performance graph represents past performance
and should not be considered to be an indication of future performance.

Comparison of 5-Year Cumulative Total Shareholder Return among Universal Stainless & Alloy Products,
Inc., the NASDAQ Composite Index and a Peer Group

$250

$200

$150

$100

$50

2011

2012

2013

2014

2015

2016

Universal Stainless & Alloy Products Inc.

NASDAQ Composite-Total Returns

Peer Group

Company/Peer/Market
Universal Stainless & Alloy Products, Inc.
Peer Group
NASDAQ Composite Index

2011

2012

2013

2014

2015

2016

$ 100.00 $ 98.42 $ 96.52 $ 67.32 $ 24.87 $ 36.16
$ 100.00 $ 79.66 $ 95.55 $ 88.28 $ 45.06 $ 59.58
$ 100.00 $ 117.45 $ 164.57 $ 188.84 $ 201.98 $ 219.89

For the years ended December 31,

PREFERRED STOCK

Our Certificate of Incorporation provides that we may, by vote of our Board of Directors, issue up to 1,980,000
shares of preferred stock. The preferred stock may have rights, preferences, privileges and restrictions thereon,
including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or designation of such series, without
further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock. The issuance of preferred stock with
voting and conversion rights may adversely affect the voting power of the holders of common stock, including the
loss of voting control to others. We have no outstanding preferred stock and have no current plans to issue any of
the authorized preferred stock.

DIVIDENDS

We have never paid a cash dividend on our common stock. Our credit agreement does not permit the payment of
cash dividends on our common stock.

ITEM 6.

SELECTED FINANCIAL DATA

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

Net sales
Goodwill impairment
Operating (loss) income
Net (loss) income

Financial position at year-end:

Cash
Working capital
Property, plant and equipment, net
Total assets 1
Long-term debt1
Stockholders’ equity

Common share data:

2016

2015

2014

2013

2012

$ 154,434 $ 180,660 $ 205,560 $ 180,768 $ 250,990
$
-
(4,005) $ 23,403
$
(4,062) $ 14,617
$

- $
(3,969) $ (30,079) $ 10,900 $
4,050 $
(5,347) $ (20,672) $

- $ 20,268 $

- $

75 $

142 $

112 $

$
321
$ 84,397 $ 85,006 $ 98,069 $ 86,512 $ 106,607
$ 182,398 $ 193,505 $ 199,795 $ 203,590 $ 206,150
$ 296,045 $ 297,302 $ 353,489 $ 332,853 $ 351,601
$ 67,998 $ 72,884 $ 82,490 $ 84,767 $ 103,884
$ 181,220 $ 184,977 $ 203,630 $ 196,458 $ 197,713

307 $

Net (loss) income per common share - Basic
$
Net (loss) income per common share - Diluted $

(0.74) $
(0.74) $

(2.92) $
(2.92) $

0.58 $
0.57 $

(0.58) $
(0.58) $

2.13
2.02

Total assets and Long-term debt, for prior periods, have been adjusted to reflect the reclassification of deferred
financing costs from Other long-term assets to a reduction of debt to be consistent with the current period
presentation due to the adoption of ASC 2015-3, “Simplifying the Presentation of Debt Issuance Costs”.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following Management Discussion and Analysis (“MD&A”) is intended to help the reader understand the
consolidated results of operations and financial condition of Universal Stainless & Alloy Products, Inc. and its
wholly-owned subsidiaries (collectively, “we,” “us,” “our,” or the “Company”). This MD&A should be read in
conjunction with our consolidated financial statements and accompanying notes included in this Form 10-K. When
reviewing the discussion, you should keep in mind the substantial risks and uncertainties that characterize our
business. In particular, we encourage you to review the risk and uncertainties described under Item 1A “Risk
Factors,” of this Form 10-K. These risks and uncertainties could cause actual results to differ materially from those
forecasted in forward-looking statements or implied by past results and trends. Forward-looking statements are
statements that attempt to project or anticipate future developments in our business; we encourage you to review the
discussion of forward-looking statements under “Cautionary Statement for Purposes of the “Safe Harbor”
Provisions of the Private Securities Litigation Reform Act of 1995,” at the beginning of this report. These
statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated),
and we undertake no obligation to update or revise the statements in light of future developments. Unless otherwise
specified, any reference to a “year” is to the year ended December 31.

Business Overview

We manufacture and market semi-finished and finished specialty steel products, including stainless steel, nickel
alloys, tool steel and certain other alloyed steels. Our manufacturing process involves melting, remelting, heat
treating, hot and cold rolling, forging, machining and cold drawing of semi-finished and finished specialty steels.
Our products are sold to service centers, forgers, rerollers, original equipment manufacturers and wire redrawers.
Our customers further process our products for use in a variety of industries, including the aerospace, power
generation, oil and gas and general industrial markets. We also perform conversion services on materials supplied
by customers.

In the second half of 2016, we started to see improvements in our end markets. However, for full year 2016, all of
our end markets were down, compared with full year 2015, except for heavy equipment. Lower surcharges
negatively impacted all of our end markets. Aerospace was down in 2016 due to supply chain destocking, and oil
and gas was down due to the low price of oil, resulting in lower rig counts. Our overall net sales were $154.4
million, a decline of $26.2 million, or 14.5%, compared to 2015. Sales in the first half of 2016 were down 23.6%,
compared with the first half of 2015, while sales in the second half of 2016 were down only 1.7%, compared with
the second half of 2015, as commodity prices and demand stabilized during 2016. Backlog at the end of 2016,
before surcharges, was $43.8 million, an increase of approximately 14.5% compared to a backlog of $38.2 million at
the end of 2015. In 2016, we received 28 new customer approvals that are critical to our focus on the aerospace, oil
& gas and power generation end markets. In addition, we added five new products in 2016, with an additional 11
new products in the development process at the end of 2016. New product introductions are essential to move to a
higher value product mix. We continue to work on gaining other customer approvals to add more products, with a
focus on high value nickel alloy products.

For 2016, our gross margin was 8.8% of net sales, improved from 5.3% of net sales in 2015. Despite gross margin
in the first half of 2016 being negatively impacted by continued misalignment of customer surcharges and melt
costs, full year 2016 reflects significant improvement, compared with full year 2015. Operational productivity
enhancements, combined with improved alignment of customer surcharges and melt cost over the course of 2016,
drove the gross margin improvement. The second half of 2015 included charges of $4.7 million due to reduced mill
activity, employee severances and non-cash inventory write downs and $0.9 million related to losses incurred from a
supplier error. In the fourth quarter of 2016, gross margin was $3.1 million, or 9.1% of sales, compared to a
negative gross margin of $0.9 million, or negative 2.8% of sales, in the fourth quarter of 2015.

Selling, general and administrative (“SG&A”) expenses decreased by $1.9 million in 2016, compared to 2015. The
decrease in SG&A was driven by spending reductions across most categories of SG&A due to lower employee
costs, contract negotiations with suppliers, and reduced spending levels. In addition, in 2015 we incurred $0.5
million for the exit of a non-compete contract and employee severances. These savings in SG&A were partially
offset by $0.5 million additional variable compensation expense in 2016 compared to 2015.

Overall, our operating loss in 2016 was $4.0 million, compared to an operating loss of $30.1 million in 2015. The
2015 operating loss included a $20.3 million charge for the impairment of goodwill.

During 2016, we generated $8.4 million cash from operating activities, and incurred $4.4 million of capital spending
which was partially offset by proceeds of $1.6 million received for asset sales. Financing activities used $5.6
million primarily for net debt payments. Total debt was reduced by $3.6 million as the net payments of debt under
our credit facilities and convertible notes was partially offset by $2.0 million of additional debt from capital leases.

The overall demand environment is improving as we enter 2017 with service centers, forgers and re-rollers all
signaling improved outlooks now that the pressure for our customers to reduce year-end inventories has passed.
Despite customer destocking in aerospace and customer deferrals of deliveries into 2017 impacting us negatively in
the fourth quarter of 2016, we remain optimistic about near and long-term aerospace end market growth given the
multi-year backlog in airplane deliveries and sustained growth in passenger and air freight traffic. In addition, we
are optimistic about our other end markets as we expect strong automotive production and see stabilization of the oil
and gas end market as we enter 2017.

Our operating facilities are integrated, and therefore our chief operating decision maker (“CODM”) views the
Company as one business unit. Our CODM sets performance goals, assesses performance and makes decisions
about resource allocations on a consolidated basis. As a result of these factors, as well as the nature of the financial
information available which is reviewed by our CODM, we maintain one reportable segment.

Results of Operations

2016 Results as Compared to 2015

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

2016

2015

Amount

Percentage
of net sales Amount

Percentage
of net sales

Dollar / ton

variance

Percentage
variance

Net sales:

Stainless steel
High-strength low alloy steel
Tool steel
High-temperature alloy steel
Conversion services and other sales

Total net sales
Cost of products sold
Gross margin
Selling, general and administrative
expenses
Goodwill impairment
Operating loss
Interest expense
Deferred financing amortization
Other expense (income)
Loss before income taxes
Benefit from income taxes
Net loss
Tons shipped
Sales dollars per shipped ton

$ 112,118
13,180
19,179
6,057
3,900

72.7 % $ 135,945
16,045
8.5
16,197
12.4
7,557
3.9
4,916
2.5
154,434 100.0
91.2
140,921
8.8
13,513

75.2 % $ (23,827)
(2,865)
8.9
9.0
2,982
(1,500)
4.2
(1,016)
2.7
(26,226)
180,660 100.0
(30,144)
94.7
171,065
3,918
5.3
9,595

(17.5) %
(17.9)
18.4
(19.8)
(20.7)
(14.5)
(17.6)
40.8

(1,924)

10.7
11.2
(16.6)
1.3
0.3
(0.1)
23,943
(18.1)
8,618
(6.7)
(11.4) % $ 15,325
(1,016)
(655)

(9.9)
(20,268) (100.0)
86.8
26,110
57.4
1,335
449
79.3
383 250.3
73.0
71.0
74.1 %
(3.1) %
(11.7) %

17,482
-
(3,969)
3,659
1,015
230
(8,873)
(3,526)
$
(5,347)
31,372
4,923
$

19,406
11.3
20,268
-
(30,079)
(2.5)
2,324
2.4
566
0.7
(153)
0.1
(32,816)
(5.7)
(12,144)
(2.3)
(3.4) % $ (20,672)
32,388
5,578
$

Market Segment Information:

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

2016

2015

Net sales:

Amount

Percentage
of net sales Amount

Percentage
of net sales

Dollar
variance

Percentage
variance

Service centers
Forgers
Rerollers
Original equipment manufacturers
Conversion services and other sales

$ 108,582
13,441
12,481
16,030
3,900

67.0 % $ (12,508)
(1,702)
8.4
(5,367)
9.9
(5,633)
12.0
(1,016)
2.7
$ 154,434 100.0 % $ 180,660 100.0 % $ (26,226)

70.3 % $ 121,090
15,143
8.7
17,848
8.1
21,663
10.4
4,916
2.5

(10.3) %
(11.2)
(30.1)
(26.0)
(20.7)
(14.5) %

Total net sales

Melt Type Information:

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

2016

2015

Amount

Percentage
of net sales Amount

Percentage
of net sales

Dollar
variance

Percentage
variance

Net sales:

Specialty alloys
Premium alloys
Conversion services and other sales

Total net sales

$ 136,178
14,356
3,900

87.6 % $ (21,967)
(3,243)
9.7
(1,016)
2.7
$ 154,434 100.0 % $ 180,660 100.0 % $ (26,226)

88.2 % $ 158,145
17,599
9.3
4,916
2.5

(13.9) %
(18.4)
(20.7)
(14.5) %

The majority of our products are sold to service centers rather than the ultimate end market customers. The end
market information in this Annual Report is our estimate based upon our knowledge of our customers and the grade
of material sold to them, that they will in-turn sell to the ultimate end market customer.

End Market Information:

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

2016

2015

Amount

Percentage
of net sales Amount

Percentage
of net sales

Dollar
variance

Percentage
variance

Net sales:

Aerospace
Power generation
Oil and gas
Heavy equipment
General industrial, conversion
services and other sales

Total net sales

$ 91,979
14,175
12,392
20,109

59.6 % $ 108,791
19,212
9.2
17,094
8.0
15,961
13.0

60.2 % $ (16,812)
(5,037)
10.6
(4,702)
9.5
4,148
8.8

15,779

(3,823)
19,602
$ 154,434 100.0 % $ 180,660 100.0 % $ (26,226)

10.9

10.2

(15.5) %
(26.2)
(27.5)
26.0

(19.5)
(14.5) %

Net sales:

Net sales for the year ended December 31, 2016 decreased $26.2 million, or 14.5%, as compared to the same period
in 2015. The decrease in our sales primarily reflects a 3.1% decrease in consolidated tons shipped in 2016,
compared to 2015, as demand for our products decreased as a result of declining market conditions in the second
half of 2015 and 2016. In addition, an 11.7% decline in sales dollars per ton was primarily due to lower commodity
driven surcharges and product mix. Our product sales to all of our end markets, except heavy equipment, decreased
as noted in the above table. Our sales to the heavy equipment end market increased by $4.1 million, or 26%, in
2016, compared to 2015, primarily due to increased tool steel plate sales in the second half of 2016. Our premium
alloy sales were $14.4 million, or 9.3% of total sales, for the year ended December 31, 2016, compared to $17.6
million, or 9.7% of total sales, for the year ended December 31, 2015.

Gross margin:

Our gross margin, as a percentage of net sales, increased to 8.8% in 2016 from 5.3% for 2015. The increase in gross
margin is the result of the benefit of operational productivity enhancements, combined with significant improvement
in the alignment of customer surcharges and commodity input costs. In the year ended December 31, 2015, the
Company also incurred approximately $4.7 million of costs, in response to the sharp industry downturn including
costs to temporarily idle plants, non-cash inventory write downs, and costs for reducing the hourly and salary
workforce and approximately $0.9 million of costs associated with the unauthorized substitution by a vendor of a
critical supply part for the melting process.

Selling, general and administrative expenses:

Our SG&A expenses consist primarily of employee costs, which include salaries, payroll taxes and benefit related
costs, legal and accounting services, stock compensation and insurance costs. Our SG&A expenses decreased by
$1.9 million in the year ended December 31, 2016 as compared to the year ended December 31, 2015. This
decrease in SG&A was driven by spending reductions across most categories of SG&A due to lower employee
costs, contract negotiations with suppliers and reduced spending levels. In addition, in 2015 we incurred $0.5
million for the exit of a non-compete contract and employee severances. These savings in SG&A were partially
offset by $0.5 million additional variable compensation in 2016, compared to 2015.

Goodwill impairment:

Interest expense and deferred financing amortization:

Our interest costs on our debt increased to $3.7 million for the year ended December 31, 2016 from $2.3 million for
the year ended December 31, 2015. This increase is primarily due to higher interest rates incurred on our debt in
2016, as compared to 2015, partially offset by lower debt balances in 2016. The interest rate on our variable rate
debt is determined by a LIBOR-based rate plus an applicable margin based upon achieving certain ratios. Our
deferred financing costs are associated with our credit facility and convertible notes. Our deferred financing costs
increased to $1.0 million from $0.6 million for the years ended December 31, 2016 and 2015, respectively. The
increase in deferred financing costs is due to the write off of $0.8 million of deferred financing costs associated with
our prior credit agreement when we entered into our new credit agreement in January 2016, partially offset by
decreased amortization of deferred financing costs from our new credit agreement.

Other expense (income):

Other expense was approximately $0.2 million in 2016 compared to approximately $0.2 million of income for the
same period of 2015. This is due to an insurance recovery of approximately $0.2 million received in 2015 and
foreign currency losses in 2016.

Income tax (benefit):

Our effective tax rates for the years ended December 31, 2016 and 2015 were 39.7% and 37.0%, respectively. Our
overall effective tax rate for the year ended December 31, 2016, which reflects a pre-tax loss, also includes
approximately $0.4 million of current and prior year research and development (“R&D”) tax credits.

Net (loss) income:

We incurred a net loss of $5.3 million for the year ended December 31, 2016 compared to a net loss of $20.7 million
for the year ended December 31, 2015.

2015 Results as Compared to 2014

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

2015

2014

Net sales:

Amount

Percentage
of net sales

Amount

Percentage
of net sales

Dollar / ton

variance

Percentage
variance

Stainless steel
High-strength low alloy steel
Tool steel
High-temperature alloy steel
Conversion services and other sales

Total net sales
Cost of products sold
Gross margin
Selling, general and administrative
expenses
Goodwill impairment

77.7 % $ (23,854)
75.2 % $ 159,799
$ 135,945
(808)
8.2
16,853
8.9
16,045
(483)
8.1
16,680
9.0
16,197
1,262
3.1
6,295
4.2
7,557
5,933
4,916
(1,017)
2.9
2.7
(24,900)
205,560 100.0
180,660 100.0
84.4
173,538
94.7
171,065
(2,473)
(22,427)
15.6
32,022
5.3
9,595

(14.9) %
(4.8)
(2.9)
20.0
(17.1)
(12.1)
(1.4)
(70.0)

19,406
20,268

10.7
11.2

21,122
-

10.3
-

(1,716)

(8.1)
20,268 100.0

(30,079)
Operating (loss) income
2,324
Interest expense
566
Deferred financing amortization
(153)
Other (income) expense
(Loss) income before income taxes
(32,816)
(Benefit) provision for income taxes (12,144)
$ (20,672)
Net (loss) income
32,388
Tons shipped
$ 5,578
Sales dollars per shipped ton

10,900
(16.6)
3,035
1.3
644
0.3
22
(0.1)
7,199
(18.1)
(6.7)
3,149
(11.4) % $ 4,050

38,869
$ 5,289

Market Segment Information:

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

2015

2014

(40,979) (376.0)
(23.4)
(711)
(78)
(12.1)
(175) (795.5)
(40,015) (555.8)
(15,293) (485.6)

5.3
1.5
0.3
-
3.5
1.5
2.0 % $ (24,722) (610.4) %
(16.7) %
(6,481)
5.5 %
289

Amount

Percentage
of net sales

Amount

Percentage
of net sales

Dollar
variance

Percentage
variance

Net sales:

Service centers
Forgers
Rerollers
Original equipment manufacturers
Conversion services and other sales

$ 121,090
15,143
17,848
21,663
4,916

67.0 % $ 137,298
8.4
9.9
12.0
2.7

24,918
21,129
16,282
5,933

66.8 % $ (16,208)
(9,775)
12.1
(3,281)
10.3
5,381
7.9
(1,017)
2.9
100.0 % $ (24,900)

(11.8) %
(39.2)
(15.5)
33.0
(17.1)
(12.1) %

Total net sales

$ 180,660 100.0 % $ 205,560

Melt Type Information:

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

2015

2014

Amount

Percentage
of net sales

Amount

Percentage
of net sales

Dollar
variance

Percentage
variance

Net sales:

Specialty alloys
Premium alloys
Conversion services and other sales

$ 158,145
17,599
4,916

Total net sales

$ 180,660 100.0 % $ 205,560

87.6 % $ 185,811
9.7
2.7

13,816
5,933

90.4 % $ (27,666)
3,783
6.7
(1,017)
2.9
100.0 % $ (24,900)

(14.9) %
27.4
(17.1)
(12.1) %

End Market Information:

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

2015

2014

Amount

Percentage
of net sales

Amount

Percentage
of net sales

Dollar
variance

Percentage
variance

Net sales:

Aerospace
Power generation
Oil and gas
Heavy equipment
General industrial, conversion
services and other sales

$ 108,791
19,212
17,094
15,961

60.2 % $ 120,947
10.6
9.5
8.8

23,498
19,470
18,147

58.8 % $ (12,156)
(4,286)
11.4
(2,376)
9.6
(2,186)
8.8

(10.1) %
(18.2)
(12.2)
(12.0)

Total net sales

$ 180,660 100.0 % $ 205,560

19,602

10.9

23,498

11.4

(3,896)
100.0 % $ (24,900)

(16.6)
(12.1) %

Net sales:

Net sales for the year ended December 31, 2015 decreased $24.9 million, or 12.1%, as compared to the same period
in 2014. The decrease in our sales primarily reflects a 16.7% decrease in consolidated tons shipped in 2015,
compared to 2014, as demand for our products decreased as a result of declining market conditions in 2015
including customer destocking, declines in the oil and gas end market, and lower commodity driven surcharges.
Although sales dollars and tons shipped decreased in 2015, compared to 2014, sales dollars per shipped ton
increased by 5.5% primarily a result of more favorable product mix of our higher value-added products. Our
product sales to all of our end markets decreased as noted in the above table. During the year ended December 31,
2015, we recognized a $3.8 million, or a 27.4%, increase in premium alloy sales when compared to 2014. It is a
primary focus of ours to ship higher value-added products. Overall, our premium alloy sales, which are sold
primarily to the aerospace end market increased from 6.7% of total sales for the year ended December 31, 2014, to
9.7% of total sales during the year ended December 31, 2015.

Gross margin:

Our gross margin, as a percentage of net sales, decreased to 5.3%, in 2015, from 15.6% for 2014. The decrease in
gross margin is largely the result of the misalignment of sales surcharges, declining commodity prices, and lower
sales volumes. The Company also incurred approximately $4.7 million of costs, in the second half of 2015, in
response to the sharp industry downturn including costs to temporarily idle plants, non-cash inventory write downs,
and costs for reducing the hourly and salary workforce. In addition, the Company incurred approximately $0.9
million of costs associated with the unauthorized substitution by a vendor of a critical supply part for the melting
process.

Selling, general and administrative expenses:

Our SG&A expenses consist primarily of employee costs, which include salaries, payroll taxes and benefit related
costs, legal and accounting services, stock compensation and insurance costs. Our SG&A expenses decreased by
$1.7 million in the year ended December 31, 2015, as compared to the year ended December 31, 2014, primarily due
to decreased expenses of $2.0 million related to our variable incentive compensation plan as the result of our
decreased profitability in 2015 as compared to 2014. In addition, we incurred approximately $0.2 million of
severance costs for reductions in the salary workforce and a non-cash write off of $0.3 million for the exit of a non-
compete contract. The Company implemented cost savings programs in the second half of the year including
headcount reductions, unpaid leave, negotiating savings on existing contracts with suppliers and service providers
and reducing spending on SG&A.

Goodwill impairment:

We recorded a goodwill impairment in the third quarter of 2015. Due to a significant and sustained drop in our
share price and continued weak operating results driven by slower market conditions, the Company determined that
an interim goodwill impairment review was required in accordance with Accounting Standards Codification
(“ASC”) 350, “Intangibles – Goodwill and Other”. Based on the guidance in ASC 350, the Company performed the
two-step quantitative analysis. Under the first step, the Company determined that the carrying value exceeded the
fair value of the Company and, therefore, the second step of the analysis was performed. The fair value was
estimated using a combination of an income approach, which estimates fair value based on projected discounted
cash flows and a market approach, which estimates fair value using the recent stock price of the Company. The
income approach is supported by a Level 3 fair value measurement, which means that the valuation reflects the
Company’s own estimates of market participant assumptions. The market approach is supported by a Level 1 fair
value measurement which is the observable stock price of the Company. The income approach was weighted 30%,
and the market approach was weighted 70% in determining the fair value. This assessment resulted in the
recognition of a non-cash goodwill impairment charge of $20.3 million, which eliminated all goodwill from the
balance sheet at September 30, 2015. The after-tax impact of this charge was $13.1 million. As a result of the step
two analysis no other assets were deemed to be impaired at September 30, 2015. The Company reviewed long-lived
assets for impairment at December 31, 2015, and no impairment was noted.

Interest expense and deferred financing amortization:

Our interest costs on our debt in 2015 decreased to $2.3 million from $3.0 million for the same period of 2014. This
decrease is primarily due to lower interest rates incurred on our debt in 2015, as compared to 2014, as well as lower
debt balances in 2015. The interest rate on our variable rate debt was determined by a LIBOR-based rate plus an
applicable margin based upon achieving certain covenant levels. Our deferred financing costs are associated with
the issuance and subsequent amendments to our credit facility and convertible notes. During the years ended
December 31, 2015 and 2014, we recognized $0.6 million and $0.6 million, respectively, of deferred financing
amortization.

Other income:

Other (income) expense increased to approximately $0.2 million of income in 2015, an increase of approximately
$0.2 million from the same period of 2014. The increase is due to an insurance recovery of $0.2 million.

Income tax (benefit) provision:

Our effective tax rates for the years ended December 31, 2015 and 2014 were 37.0% and 43.7%, respectively. Our
overall effective tax rate for the year ended December 31, 2015, which reflects a pre-tax loss, also includes
approximately $0.5 million of current and prior year R&D tax credits. The effective tax rate in 2014 was negatively
impacted by net tax expenses of $0.6 million due to a change in the New York state tax rate to zero percent (0%) for
qualified New York manufacturers.

Net income:

We incurred a net loss of $20.7 million for the year ended December 31, 2015 compared to net income of $4.1
million for the year ended December 31, 2014. However, charges noted above related to goodwill impairment, idle
plant costs, supplier losses, non-cash inventory write-offs, employee severance and exit costs, and the exit of a non-
compete contract negatively impacted the 2015 net income by $17.0 million.

Liquidity and Capital Resources

Historically, we have financed our operating activities through cash provided by operations and cash provided
through our credit facilities.

Net cash provided by operating activities:

During 2016, we generated net cash from operating activities of $8.4 million. Our managed working capital,
defined as net accounts receivable plus net inventory minus accounts payable, used $3.8 million of cash from
operations. Inventories increased by $9.2 million primarily due to increased demand, accounts receivable increased
by $1.8 million due to increased sales in the fourth quarter of 2016, compared to the fourth quarter of 2015, and
accounts payable increased by $7.1 million due to increased activity levels in the fourth quarter of 2016, compared
to the fourth quarter of 2015. Net income adjusted for non-cash expenses generated $11.5 million and all other
operating activities generated $0.7 million of cash in 2016.

During 2015, we generated net cash from operating activities of $19.2 million. Our managed working capital
contributed $14.3 million of cash from operations. Net income, adjusted for non-cash expenses, generated
approximately $8.0 million of cash, in 2015, which was partially offset by reductions in other accruals, primarily
from the payout of 2014 variable incentive compensation in 2015. The decrease in managed working capital was
driven by efforts to reduce inventory levels as well as reductions in receivables due to reduced sales compared to the
same period in 2014.

Net cash used in investing activities:

During 2016, our capital spending, which is primarily discretionary in nature, was $4.4 million, compared to $9.6
million in 2015. We received $1.6 million from the sale of assets, including the reimbursement of $1.1 million of
previous capital expenditures for assets that we ultimately leased in the first quarter of 2016. In 2015, we received
proceeds of approximately $0.2 million from an insurance recovery related to a casualty loss of manufacturing
equipment.

Net cash used in financing activities:

During 2016, we used $5.6 million in cash from financing activities. We paid down $5.5 million in debt, incurred
$0.8 million of deferred financing costs associated with our new credit facility, and received $0.7 million in
proceeds from the issuance of common stock.

During 2015, we used $9.9 million in cash from our financing activities. We paid down $9.7 million of debt and
incurred approximately $0.6 million of deferred financing fees, which was partially offset by proceeds from the
issuance of stock from the exercise of stock options and the issuance of stock under our Employee Stock Purchase
Plan.

We believe that our cash flows from continuing operations, as well as available borrowings under our credit facility,
are adequate to satisfy our working capital, capital expenditure requirements, and other contractual obligations for
the foreseeable future, including at least the next 12 months.

The average costs per pound of nickel, chrome, molybdenum, and carbon scrap for the years ended December 31,
2016, 2015 and 2014 was as follows:

For the years ended December 31,
Nickel
Chrome
Molybdenum
Carbon scrap

2016

2015

2014

$
$
$
$

4.35
0.95
6.54
0.10

$
$
$
$

5.37
1.08
6.85
0.10

$
$
$
$

7.65
1.14
11.72
0.18

Sources: Nickel is the daily average LME Cash Settlement Price; Chrome and Molybdenum is the final monthly
average as published by CRU; Carbon is the consumer price for #1 Industrial Bundles in the Pittsburgh, PA area as
reported in American Metal Market.

We maintain sales price surcharge mechanisms on certain of our products, priced at time of order or shipment, to
mitigate the risk of substantial raw material cost fluctuations. The average cost of nickel, which has a major impact
on surcharges, has dropped to $4.35 in 2016 and had a negative impact on our gross margin in 2016. The market
values for these raw materials and others continue to fluctuate based on supply and demand, market disruptions and
other factors.

Capital Resources Including Off-Balance Sheet Arrangements.

We do not maintain off-balance sheet arrangements, nor do we participate in non-exchange traded contracts
requiring fair value accounting treatment, or material related-party transaction arrangements.

Credit Facility

On January 21, 2016, we entered into a new Revolving Credit, Term Loan and Security Agreement (the “Credit
Agreement”) with PNC Bank, National Association, as administrative agent and co-collateral agent, Bank of
America, N.A., as co-collateral agent, and PNC Capital Markets LLC, as sole lead arranger and sole bookrunner.
The Credit Agreement provides for a senior secured revolving credit facility not to exceed $65.0 million (the
“Revolving Credit Facility”) and a senior secured term loan facility (the “Term Loan”) in the amount of $30.0
million (together with the Revolving Credit Facility, the “Facilities”). The Credit Agreement also provides for a
letter of credit sub-facility not to exceed $10.0 million and a swing loan sub-facility not to exceed $6.5 million. The
Company may request to increase the maximum aggregate principal amount of borrowings under the Revolving
Credit Facility by $25.0 million prior to January 21, 2020. The Credit Agreement replaced the previous credit
agreement that was in place prior to January 21, 2016. The Company was in compliance with all applicable
financial covenants set forth in the previous credit agreement as of the date of its entrance into the Credit
Agreement.

The Facilities, which expire upon the earlier of (i) January 21, 2021 or (ii) the date that is 90 days prior to the
scheduled maturity date of the Convertible Notes (as defined below) (in either case, the “Expiration Date”), are
collateralized by a first lien in substantially all of the assets of the Company and its subsidiaries, except that no real
property is collateral under the Facilities other than the Company’s real property in North Jackson, Ohio.

Availability under the Revolving Credit Facility is based on eligible accounts receivable and inventory. The
Company is required to pay a commitment fee of 0.25% based on the daily unused portion of the Revolving Credit
Facility.

With respect to the Term Loan, the Company makes quarterly installment payments of principal of approximately
$1.1 million, plus accrued and unpaid interest, on the first day of each fiscal quarter. To the extent not previously
paid, the Term Loan will become due and payable in full on the Expiration Date.

Amounts outstanding under the Facilities, at the Company’s option, will bear interest at either a base rate plus a
margin, or a rate based on LIBOR plus a margin, in either case calculated in accordance with the terms of the Credit
Agreement. Interest under the Credit Agreement is payable monthly. We elected to use the LIBOR based rate for
the majority of the debt outstanding under the Facilities for the twelve months ended December 31, 2016, which was
3.87% on our Revolving Credit Facility and 4.37% for the Term Loan at December 31, 2016.

The Credit Agreement contains customary affirmative and negative covenants. As of December 31, 2016, and as of
the end of each fiscal quarter ending thereafter, the Company must maintain a fixed charge coverage ratio of not less
than 1.10 to 1.0, in each case measured on a rolling four-quarter basis calculated in accordance with the terms of the
Credit Agreement. We were in compliance with our covenants under the Credit Agreement at December 31, 2016
and under our previous credit agreement at December 31, 2015.

At December 31, 2016, we had deferred financing costs of approximately $1.0 million. For the twelve months
ended December 30, 2016, we paid deferred financing costs of $0.8 million related to the Credit Agreement, wrote
off $0.8 million of fees related to the previous credit agreement and amortized $0.2 million of deferred financing
costs.

We adopted ASU 2015-3 “Simplifying the Presentation of Debt Issuance Costs” in the first quarter of 2016. As a
result of this guidance, deferred debt issuance costs are recorded as a reduction of debt. The December 31, 2015
balance sheet reflects the reclassification of $1.3 million of deferred debt issuance costs from other long-term assets
to Long-term debt to be consistent with the presentation at December 31, 2016.

Pursuant to the terms of the Credit Agreement, the Company completed the issuance of 73,207 shares of the
Company’s common stock to certain directors and officers of the Company on February 2, 2016. The aggregate
purchase price of the stock was $0.5 million based on the average of the high and low reported trading prices for the
Company’s common stock on The NASDAQ Stock Market on February 1, 2016.

Convertible Notes

On January 21, 2016, the Company entered into Amended and Restated Convertible Notes (collectively, the
“Convertible Notes”) in the aggregate principal amount of $20.0 million, each in favor of Gorbert Inc. (the
“Holder”). The Convertible Notes amended and restated the Notes. The Company’s obligations under the
Convertible Notes are collateralized by a second lien on the same assets of the Company that collateralize the
obligations of the Company under the Facilities. The Convertible Notes mature on March 17, 2019, and the maturity
date may be extended, at the Company’s option, to March 17, 2020 and further to March 17, 2021. If the Company
elects to extend the maturity date of the Convertible Notes to March 17, 2020, principal payments in the aggregate
of $2.0 million will be required on March 17, 2019. If the Company elects to extend the maturity date of the
Convertible Notes further to March 17, 2021, principal payments in the aggregate of $2.0 million will be required on
March 17, 2020.

The Convertible Notes bore interest at a rate of 4.0% per year through and including August 17, 2016. The
Convertible Notes bear interest at a rate of 5.0% per year from August 18, 2016 through and including August 17,
2017 and a rate of 6.0% per year from and after August 18, 2017. Through and including June 18, 2017, all accrued
and unpaid interest is payable semi-annually in arrears on each June 18 and December 18. After June 18, 2017, all
accrued and unpaid interest is payable quarterly in arrears on each September 18, December 18, March 18 and
June 18.

The Holder may elect at any time on or prior to August 17, 2017 to convert all or any portion of the outstanding
principal amount of the Convertible Notes which is an integral multiple of $100,000. The Convertible Notes are
convertible into shares of common stock and, in certain circumstances, cash, securities and/or other assets. The
Convertible Notes are convertible based on an initial conversion rate of 21.2 shares of Common Stock per $1,000
principal amount of the Convertible Notes (equivalent to an initial conversion price of $47.1675 per share). The
conversion rate and the conversion price associated with the Convertible Notes may be adjusted in certain
circumstances. The Holder’s conversion rights will be void and no longer subject to exercise by the Holder
beginning on August 17, 2017.

In conjunction with the issuance of the Convertible Notes on January 21, 2016, we made principal prepayments on
the Convertible Notes totaling $1.0 million.

Capital Leases

On February 1, 2016 and March 1, 2016, the Company entered into capital leases for equipment. The capital assets
and obligations are recorded at the present value of minimum lease payments. The assets are included in Property,
plant and equipment, net on the Consolidated Balance Sheet and are depreciated over the five-year lease term. The
long-term component of the capital lease obligations is included in Long-term debt and the current component is
included in Current portion of long-term debt. These amounts have been excluded from the Consolidated Statement
of Cash Flows as they are non-cash. The net present value of the minimum lease payments, at inception, was $2.0
million.

Share-Based Activity. We issued 30,754, 33,175, and 60,880 shares of our common stock during the years ended
December 31, 2016, 2015 and 2014, respectively, through our two share-based compensation plans. In addition, in
2016 we issued 73,207 shares of the Company’s common stock to certain directors and officers of the Company,
pursuant to the terms of the Credit Agreement. In 2016, there were no stock options exercised under the Omnibus
Incentive Plan (“OIP”). In 2015, 17,500 stock options issued under the OIP were exercised for an aggregate
exercise price of $0.3 million. In 2014, 49,500 stock options issued under the OIP were exercised for an aggregate
exercise price of $0.8 million. The remaining shares were issued to participants in the Employee Stock Purchase
Plan. Additionally, during the year ended December 31, 2016, we granted 95,000 restricted stock units to certain
employees.

Contractual Obligations.

At December 31, 2016, we had the following contractual principal, interest and purchase obligations:

(dollars in thousands)
Long-term debt (A)
Purchase obligations - other (B)
Purchase obligations - capital expenditures (B)
Total contractual obligations

Payments due by period

Less than
1 year

1-3
years

Total

3-5
years

83,683 $
6,830
702
91,215 $

7,837 $
5,180
702
13,719 $

33,459 $
1,584
-
35,043 $

42,387
66
-
42,453

(A) Amounts include interest expense, which was estimated based upon the December 31, 2016 interest rate for

our debt and assumes that debt will not be repaid until its maturity. The 1-3 years period includes the maturity
of $19.0 million of Convertible Notes in 2019 which, at the discretion of the Company, may be extended until
2020 or 2021.

(B)

Purchase obligations include the value of all open purchase orders with established quantities and purchase
prices as well as minimum purchase commitments and operating leases.

CONTINGENT ITEMS

Product Claims. We are subject to various claims and legal actions that arise in the normal course of conducting
business. There were no material product claims outstanding at December 31, 2016.

Environmental Matters. We, as well as other steel companies, are subject to demanding environmental standards
imposed by federal, state and local environmental laws and regulations. We are not aware of any environmental
condition that currently exists at any of our facilities that are probable or reasonably possible of having a material
impact on our results of operations or liquidity.

We are aware of energy usage concerns relating to climate change; however, we are not aware of any pending
regulations that are expected to have a material impact on our results of operations or liquidity.

Legal Matters. From time to time, various lawsuits and claims have been or may be asserted against us relating to
the conduct of our business, including routine litigation relating to commercial and employment matters. The
ultimate cost and outcome of any litigation or claim cannot be predicted with certainty. Management believes,
based on information presently available, that the likelihood that the ultimate outcome of any such pending matter
will have a material adverse effect on its financial condition, or liquidity or a material impact to its results of
operations is remote, although the resolution of one or more of these matters may have a material adverse effect on
its results of operations for the period in which the resolution occurs.

CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

Critical Accounting Policies

Revenue from the sale of products is recognized when both risk of loss and title have transferred to the customer,
which in most cases coincides with shipment of the related products, and collection is reasonably assured. We
manufacture specialty steel products to customer purchase order specifications and in recognition of requirements
for product acceptance. Material certification forms are executed, indicating compliance with the customer purchase
orders, before the specialty steel products are packed and shipped to the customer.

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, which are not material, are accounted for
primarily as a reduction to gross sales after the matter has been researched and an acceptable resolution has been
reached.

In addition, management regularly monitors the ability to collect its unpaid sales invoices and the valuation of its
receivables. The allowance for doubtful accounts includes specific reserves for the value of outstanding invoices
issued to customers that are deemed potentially not collectible.

Inventories are stated at the lower of cost or market. The cost of inventory is principally determined by the weighted
average cost method for material and operation costs. An inventory reserve is provided for material on hand for
which management believes cost exceeds net realizable value. We reserve for slow-moving inventory and inventory
that is being evaluated under our quality control process. The reserves are based upon management’s expected
method of disposition.

Property, Plant and Equipment (“PP&E”) is stated at historical cost less accumulated depreciation. Depreciation is
computed by the straight-line method over the estimated useful lives of the assets for book purposes. Depreciation
for income tax purposes is computed using accelerated methods. Upon disposal, assets and related accumulated
depreciation are removed from the financial statements and differences between the net book value and proceeds
from disposal are generally included in cost of goods sold in the consolidated statement of operations. PP&E is
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. No
impairment reserve was deemed necessary as of December 31, 2016, 2015 and 2014.

Deferred income taxes are provided for temporary differences between amounts of assets and liabilities for financial
reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations. Our deferred
tax assets include net operating loss carry forwards that can be used to offset taxable income in future periods and
reduce income taxes payable in those future periods. These deferred tax assets will expire, if unused, at various
times through 2031. Deferred tax liabilities primarily relate to book / tax depreciation differences. 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 calculation for our share-based compensation expense involves a number of assumptions. Management
believes each assumption used in the valuation is reasonable because it takes into account the experience of the plan
and reasonable expectations. Management estimates volatility and forfeitures based on historical data, future
expectations and the expected term of the share-based compensation awards. The assumptions, however, involve
inherent uncertainties. As a result, if other assumptions had been used, share-based compensation expense could
have varied.

New Accounting Pronouncements

See information under the heading “Note 1: Significant Accounting Policies” within “Notes to Consolidated
Financial Statements” in Item 8, Financial Statements and Supplementary Data, in this Annual Report on Form 10-K
for details of recently issued accounting pronouncements and their expected impact on our consolidated financial
statements.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The majority of our customers and suppliers absorb fluctuations in foreign currency exchange rates. Prices for our
raw materials and natural gas requirements are subject to frequent market fluctuations, and profit margins may
decline in the event market prices increase. Selling price increases and surcharges are utilized to offset raw material
and natural gas market price increases.

Raw material prices vary based on numerous factors, including quality, and are subject to frequent market
fluctuations. Future raw material prices cannot be predicted with any degree of certainty. We do not maintain any
fixed-price long-term agreements with any of our raw material suppliers.

We maintain a sales price surcharge mechanism on certain of our products to help offset the impact of raw material
price fluctuations. For certain products, the surcharge is calculated at the time of order entry, based on current raw
material prices or prices at the time of shipment. For certain finished products, the surcharge is calculated based on
the monthly average raw material prices two months prior to the promised ship date. While the material surcharge
mechanism is designed to offset modest fluctuations in raw material prices, it cannot immediately absorb significant
spikes in raw material prices. A material change in raw material prices within a short period of time could have a
material effect on our financial results and there can be no assurance that the raw material surcharge mechanism will
completely offset immediate changes in our raw material costs.

At December 31, 2016, we had $52.8 million of floating rate debt outstanding with an interest rate between 3.87%
and 6.0%. Since the interest rate on floating rate debt changes with the short-term market rate of interest, we are
exposed to the risk that these interest rates may increase, raising our interest expense. A hypothetical 1.0% increase
or decrease in our floating rate debt interest rates would unfavorably or favorably impact our pre-tax results by $0.5
million.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Financial Statements

Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2016,

2015 and 2014

Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2016, 2015 and

2014

Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedules

Schedule II – Valuation and Qualifying Accounts

Page
27
28

31
32

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51
51

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rules 13a-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting
is designed to provide reasonable assurance to management and the board of directors regarding the preparation and
fair presentation of published financial statements. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation. We conducted
an assessment of the effectiveness of our internal control over financial reporting based on the criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission (2013 Framework). Based on our assessment, we believe that, as of December 31, 2016, our
internal control over financial reporting is effective.

The effectiveness of internal control over financial reporting as of December 31, 2016 has been audited by
Schneider Downs & Co. Inc., an independent registered public accounting firm which also audited our consolidated
financial statements. Schneider Downs’ attestation report on the consolidated financial statements and
management’s maintenance of effective internal control over financial reporting is included under the heading
“Report of Independent Registered Public Accounting Firm.”

/s/ Dennis M. Oates
Dennis M. Oates
Chairman, President and Chief Executive Officer

/s/ Ross C. Wilkin

Ross C. Wilkin
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, 2016 and 2015, and the related consolidated statements of operations,
comprehensive (loss) income, cash flows, and shareholders’ equity for each of the years in the three-year period ended
December 31, 2016. In addition, our audit included the consolidated financial statement schedule listed in the index at
Item 15 (2) (Schedule II). We also have audited the Company’s internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for these consolidated financial statements and financial statement schedule, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial statements, the consolidated financial statement
Schedule II, and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related consolidated financial statement schedule, when
considered in relation to the consolidated financial statements as a whole, presents fairly in all material respects, the
information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ Schneider Downs & Co., Inc.
Schneider Downs & Co., Inc.
Pittsburgh, Pennsylvania
February 22, 2017

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31,
(dollars in thousands, except per share information)
Net sales
Cost of products sold
Gross margin
Selling, general and administrative expenses
Goodwill impairment
Operating (loss) income
Interest expense and other financing costs
Other (income) expense
(Loss) income before income taxes
(Benefit) provision for income taxes
Net (loss) income
Basic
Diluted
Weighted average shares of common stock outstanding:

$
$
$

Basic
Diluted

2016

2015

2014

154,434 $
140,921
13,513
17,482
-
(3,969)
4,674
230
(8,873)
(3,526)
(5,347) $
(0.74) $
(0.74) $

180,660 $
171,065
9,595
19,406
20,268
(30,079)
2,890
(153)
(32,816)
(12,144)
(20,672) $
(2.92) $
(2.92) $

205,560
173,538
32,022
21,122
-
10,900
3,679
22
7,199
3,149
4,050
0.58
0.57

7,193,300
7,193,300

7,069,954
7,069,954

7,031,539
7,116,431

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

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended December 31,
(dollars in thousands)
Net (loss) income
Other comprehensive income, net of tax:

2016

2015

2014

(5,347) $

(20,672) $

4,050

Unrealized gain on foreign currency contracts , net of
tax

Comprehensive (loss) income

21
(5,326) $

(20,672) $

-
4,050

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

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED BALANCE SHEETS

December 31,
(dollars in thousands)
ASSETS
Current assets:

Cash
Accounts receivable (less allowance for doubtful accounts of $309 and $249,
respectively)
Inventory, net
Other current assets

Total current assets

Property, plant and equipment, net
Other long-term assets
Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Accounts payable
Accrued employment costs
Current portion of long-term debt
Other current liabilities

Total current liabilities

Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities

Commitments and contingencies (Note 10)
Stockholders’ equity:

2016

2015

75 $

112

19,437
91,342
2,729
113,583
182,398
64
296,045 $

19,906 $
3,803
4,579
898
29,186
67,998
17,629
12
114,825

17,683
83,373
2,584
103,752
193,505
45
297,302

11,850
3,256
3,000
640
18,746
72,884
20,666
29
112,325

Senior preferred stock, par value $0.001 per share; 1,980,000 shares
authorized; 0 shares issued and outstanding
Common stock, par value $0.001 per share; 20,000,000 shares authorized;
7,508,154 and 7,404,193 shares issued, respectively
Additional paid-in capital
Other comprehensive income
Retained earnings
Treasury stock, at cost; 292,855 common shares held, respectively

Total stockholders’ equity

Total liabilities and stockholders’ equity

8
56,397
21
127,084
(2,290)
181,220
296,045 $

7
54,829

132,431
(2,290)
184,977
297,302

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

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31,
(dollars in thousands)
Operating Activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:

Depreciation and amortization
Deferred income tax
Write-off of deferred financing costs
Share-based compensation expense, net
Net gain on asset disposals
Goodwill impairment

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

Net cash provided by operating activities
Investing Activities:
Capital expenditures
Proceeds from sale of property, plant and equipment
Proceeds from insurance recovery
Net cash used in investing activities
Financing Activities:

Borrowings under revolving credit facility
Payments on revolving credit facility
Borrowings under term loan facility
Payments on term loan facility, capital leases, and convertible notes
Proceeds from the issuance of common stock
Payment of deferred financing costs

Net cash used in financing activities
Net decrease in cash
Cash at beginning of period
Cash at end of period
Supplemental Disclosure of Cash Flow Information:

Interest paid
Income taxes paid (refunded), net

2016

2015

2014

(5,347) $ (20,672) $

4,050

18,533
(3,525)
768
1,405
(340)
-

18,608 17,476
2,935
(12,060)
-
-
2,082
1,865
-
-
-
20,268

(1,754)
(9,155)
7,096
547
200
(22)
8,406

(4,376)
1,571
-
(2,805)

11,374
(7,610)
15,929 (20,075)
(13,009) 10,721
2,581
(2,755)
514
(248)
215
(130)
19,170 12,889

(9,551) (11,173)
-
-
(9,333) (11,173)

-
218

241,152
(259,243)
30,000
(17,448)
651
(750)
(5,638)
(37)
112
75

73,515 103,785
(80,253) (103,706)
-
(3,000)
1,040
-
(1,881)
(165)
307
142

-
(3,000)
455
(584)
(9,867)
(30)
142
112 $

$
$

3,451
(201) $

$ 2,384 $
165 $

3,046
(318)

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

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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Significant Accounting Policies

Basis of Consolidation. The consolidated financial statements include the accounts of Universal Stainless & Alloy
Products, Inc. and its wholly-owned subsidiaries (collectively, “we,” “us,” “our,” or the “Company”). All
intercompany accounts and transactions have been eliminated in consolidation. We have no interests in any
unconsolidated entity.

Use of Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting
Principles (“GAAP”) 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.

Concentration of Credit Risk. We limit our credit risk on accounts receivable by performing ongoing credit
evaluations and, when deemed necessary, require letters of credit, guarantees or cash collateral. During 2016, we
had one customer which accounted for more than 20% of our total net sales and for 4% of our total accounts
receivable balance. During 2015, we had one customer that accounted for more than 16% of our total net sales and
for 7% of our total accounts receivable balance. During 2014, we had one customer that accounted for more than
18% of our total net sales and for 11% of our total accounts receivable balance.

Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are presented net of the allowance
for doubtful accounts on our consolidated balance sheets. We market our products to a diverse customer base,
primarily throughout the United States. International sales approximated 9%, 9% and 7% of 2016, 2015 and 2014
total net sales, respectively. The allowance for doubtful accounts includes specific reserves for the value of
outstanding invoices issued to customers that are deemed potentially not collectible. Receivables are charged-off to
the allowance when they are deemed to be uncollectible. Bad debt expense, net of recoveries for the years ended
December 31, 2016, 2015 and 2014 was $0.2 million, $0.2 million and $0.0 million, respectively.

Inventories. Inventories are stated at the lower of cost or market with cost principally determined by the weighted
average cost method. Such costs include the acquisition cost for raw materials and supplies, direct labor and applied
manufacturing overhead within the guidelines of normal plant capacity. We reserve for slow-moving inventory and
inventory that is being evaluated under our quality control process. The reserves are based upon management’s
expected method of disposition. The net change in inventory reserves for the year ended December 31, 2016 was an
increase of $0.5 million, primarily due to the aging of slow moving material. The net change in inventory reserves
for the years ended December 31, 2015 and 2014 was a $0.1 million decrease and a $0.6 million decrease,
respectively.

Included in inventory are operating materials consisting of forge dies and production molds and rolls that are
consumed over their useful lives. During the years ended December 31, 2016, 2015 and 2014, we amortized these
operating materials in the amount of $1.6 million, $1.8 million and $1.6 million, respectively. This expense is
recorded as a component of cost of products sold on the consolidated statements of operations and included as a part
of our total depreciation and amortization on the consolidated statements of cash flows.

Property, Plant and Equipment. Property, plant and equipment is recorded at cost or its fair value at acquisition
date. No depreciation is recognized on assets until they are placed in service. Assets which have been retired or
disposed of are removed from cost and accumulated depreciation accounts, with the gain or loss generally reflected
in cost of goods sold on the consolidated statements of operations.

Major equipment maintenance costs are capitalized as incurred and included in other current assets. These costs are
amortized to cost of products sold within a twelve to thirty-six month period. Other maintenance costs are expensed
as incurred. Costs of improvements and renewals are capitalized. Our maintenance expense for the years ended
December 31, 2016, 2015 and 2014 was $15.7 million, $16.9 million and $16.5 million, respectively, which is
included as a component of cost of products sold.

Depreciation is 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 10 and 39 years, and the estimated
useful lives of machinery and equipment are between five and 20 years. Our total depreciation expense for the years
ended December 31, 2016, 2015 and 2014 was $16.7 million, $15.8 million and $15.0 million, respectively, of
which $16.3 million, $15.4 million and $14.6 million, respectively, was included as a component of cost of products
sold while the remainder was included in selling, general and administrative expense.

Long-Lived Asset Impairment. Long-lived assets, including property, plant and equipment and intangible assets 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 the book value. Based
on management’s assessment of the carrying values of long-lived assets, no impairment reserve was deemed
necessary as of December 31, 2016, 2015 and 2014. Our intangible assets were fully amortized at December 31,
2015.

Deferred Financing Costs. Deferred financing costs are amortized up to the maturity date of the related financial
instrument using the straight-line method, which approximates the effective interest method. Deferred financing
cost amortization for the years ended December 31, 2016, 2015 and 2014 was $0.2 million, $0.6 million and $0.6
million, respectively, and is included as a component of interest expense and other financing costs on the
consolidated statements of operations and included as part of total depreciation and amortization on the consolidated
statements of cash flows. In the first quarter of 2016, the Company wrote off $0.8 million of deferred financing
costs related to the prior credit facility due to entering into the new Credit Agreement on January 21, 2016. These
costs are included as a component of interest expense and other financing costs on the consolidated statements of
operations and are broken out separately on the consolidated statement of cash flows. At December 31, 2016 and
2015, we had $1.0 million and $1.3 million, respectively, of unamortized deferred financing costs included on our
consolidated balance sheets as a reduction of debt.

Goodwill. Goodwill, which represents the excess of cost over net tangible and identifiable intangible assets of
acquired businesses, is stated at fair value. Goodwill is not amortized, but evaluated or tested annually for
impairment or more frequently if any event indicates that the carrying amount of goodwill may be impaired.

We recorded a goodwill impairment in the third quarter of 2015. Due to a significant and sustained drop in our
share price and continued weak operating results driven by slower market conditions, the Company determined that
an interim goodwill impairment review was required in accordance with Accounting Standards Codification
(“ASC”) 350, “Intangibles – Goodwill and Other”. Based on the guidance in ASC 350, the Company performed the
two-step quantitative analysis. Under the first step, the Company determined that the carrying value exceeded the
fair value of the Company and, therefore, the second step of the analysis was performed. The fair value was
estimated using a combination of an income approach, which estimates fair value based on projected discounted
cash flows and a market approach, which estimates fair value using the recent stock price of the Company. The
income approach is supported by a Level 3 fair value measurement, which means that the valuation reflects the
Company’s own estimates of market participant assumptions. The market approach is supported by a Level 1 fair
value measurement which is the observable stock price of the Company. The income approach was weighted 30%
and the market approach was weighted 70% in determining the fair value. This assessment resulted in the
recognition of a non-cash goodwill impairment charge of $20.3 million, which eliminated all goodwill from the
balance sheet at September 30, 2015.

Stockholders’ Equity. We have never paid a cash dividend on our common stock. Our Credit Agreement does not
permit the payment of cash dividends.

Revenue Recognition. Revenue from the sale of products is recognized when both risk of loss and title have
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, which are not
material, are accounted for primarily as a reduction to gross sales after the matter has been researched and an
acceptable resolution has been reached.

The following table presents net sales by product line:

For the years ended December 31,
(dollars in thousands)
Stainless steel
High-strength low alloy steel
Tool steel
High-temperature alloy steel
Conversion services and other sales
Total net sales

2016

2015

2014

112,118 $
13,180
19,179
6,057
3,900
154,434 $

135,945 $
16,045
16,197
7,557
4,916
180,660 $

159,799
16,853
16,680
6,295
5,933
205,560

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 consolidated financial
statements. We use 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 the asset will not be realized. Income tax penalties and interest are
included in the provision for income tax expense.

We evaluate the tax positions taken or expected to be taken in our tax returns. A tax position should only be
recognized in the financial statements if we determine that it is more-likely-than-not that the tax position will be
sustained upon examination by the tax authorities, based upon the technical merits of the position. For those tax
positions that should be recognized, the measurement of a tax position is determined as being the largest amount of
benefit that is greater than fifty percent likely of being realized upon ultimate settlement. We believe there are no
material uncertain tax positions at December 31, 2016, 2015 and 2014.

We use the with-and-without method to account for excess tax benefits recognized as a result of the exercise of
employee stock options. Under the with-and-without method, excess tax benefits related to share-based
compensation are not deemed to be realized until after the utilization of all other tax benefits available to us, which
are also subject to applicable limitations.

Share-based Compensation Plans. We recognize compensation expense based on the grant-date fair value of the
awards. The fair value of the stock option grants is estimated on the date of grant using the Black-Scholes option-
pricing model, and is recognized ratably over the service/vesting period of the award. The fair value of time-based
restricted stock grants and restricted stock units is calculated using the market value of the stock on the date of
issuance, and is recognized ratably over the service/vesting period of the award.

Net (Loss) Income per Common Share. Net (loss) income per common share is computed by dividing net (loss)
income by the weighted-average number of common shares outstanding during the period. Diluted net income per
common share is computed by dividing net income, adjusted to include interest expense (tax effected) for the
convertible notes by the weighted-average number of common shares outstanding plus all dilutive potential common
shares outstanding during the period. All shares that were issuable under our outstanding convertible notes were
considered outstanding for our diluted net income per common share computation, using the “if converted” method
of accounting from the date of issuance.

Treasury Stock. We account for treasury stock under the cost method and include such shares as a reduction of total
stockholders’ equity.

Financial Instruments. Financial instruments held by us include cash, accounts receivable, and accounts payable
and current and long-term debt. The carrying value of cash, accounts receivable and accounts payable is considered
to be representative of fair value because of the short maturity of these instruments. Refer to Note 5 for fair value
disclosures of our financial instruments.

Segment Reporting. Our operating facilities are integrated, and therefore our chief operating decision maker
(“CODM”) views the Company as one business unit. Our CODM sets performance goals, assesses performance and
makes decisions about resource allocations on a consolidated basis. As a result of these factors, as well as the nature
of the financial information available which is reviewed by our CODM, we maintain one reportable segment.

Reclassifications. Certain prior year amounts have been reclassified to conform to the 2016 presentation.

Recently Adopted Accounting Pronouncement

In the first quarter of 2016, we adopted Accounting Standards Update (“ASU”) 2015-3 “Simplifying the
presentation of Debt Issuance Costs”. As a result of this guidance, deferred debt issuance costs are recorded as a
reduction of debt. The December 31, 2015 balance sheet reflects the reclassification of $1.3 million of deferred debt
issuance costs from other long-term assets to long-term debt to be consistent with the presentation at December 31,
2016.

Recently Issued Accounting Pronouncements

The Company considers the applicability and impact of all ASUs. Recently issued ASUs not listed below were
assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated
financial statements.

In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15 “Classification of
Certain Cash Receipts and Cash Payments”. This ASU addresses how certain cash receipts and cash payments are
presented and classified in the statement of cash flows under Topic 230, “Statement of Cash Flows”, and other
Topics. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after
December 15, 2017. We do not expect the adoption of this guidance to have a material impact on the financial
statements.

In March 2016, the FASB issued ASU 2016-09 “Compensation-Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting”. The ASU includes multiple provisions intended to simplify various
aspects of the accounting for share-based payments. Excess tax benefits for share-based payments will be recorded
as a reduction of income taxes and reflected in operating cash flows upon the adoption of this ASU, eliminating
additional paid in capital pools. In addition, the guidance allows for a policy election to account for forfeitures as
they occur rather than on an estimated basis. This guidance is effective for annual and interim reporting periods
beginning after December 16, 2016 with early adoption permitted. We are currently evaluating the impact of this
guidance on our financial statements.

In February 2016, the FASB issued ASU 2016-2 “Leases (Topic 842)”. The ASU requires lessees to recognize most
leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB
retained a dual model, requiring leases to be classified as either operating or finance. The criteria for evaluating are
similar to those applied in current leases accounting. This guidance is effective for annual and interim reporting
periods beginning after December 15, 2018 with early adoption permitted. We do not expect the adoption of this
guidance to have a material impact on the financial statements due to having a limited number of operating leases.

In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory” to simplify the guidance
on the subsequent measurement of inventory, excluding inventory measured using last-in, first out or the retail
inventory method. Under the new standard, inventory should be at the lower of cost and net realizable value. The
new accounting guidance is effective for interim and annual periods beginning after December 15, 2016 with early
adoption permitted. We do not expect the adoption of this guidance will have a material impact on our financial
statements.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)”. This topic
converges the guidance within U.S. GAAP and International Financial Reporting Standards and supersedes
Accounting Standards Codification 605, Revenue Recognition. The new standard requires companies to recognize
revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the
company expects to be entitled in exchange for those goods or services. The new standard will also result in
enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed
comprehensively, and improve guidance for multiple-element arrangements. The new guidance is effective for
annual reporting periods beginning after December 15, 2017, including interim reporting periods within that
reporting period. We have completed a preliminary evaluation of this guidance and we do not expect it to have a
material impact on our financial statements. We will continue our evaluation of this ASU through the date of
adoption.

Note 2: Inventory

The major classes of inventory are as follows:

December 31,
(dollars in thousands)
Raw materials and starting stock
Semi-finished and finished steel products
Operating materials
Gross inventory
Inventory reserves
Total inventory, net

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
Gross property, plant and equipment
Accumulated depreciation
Property, plant and equipment, net

Note 4: Long-Term Debt

Long-term debt consists of the following:

December 31,
(dollars in thousands)
Term loan
Revolving credit facility
Convertible notes
Capital leases
Swing loan credit facility

Less: current portion of long-term debt
Less: deferred financing costs

Long-term debt

Credit Facility

2016

2015

5,769
77,510
9,893
93,172
(1,830)
91,342

6,235
69,907
8,543
84,685
(1,312)
83,373

2016

2015

7,377
49,445
245,694
3,610
306,126
(123,728)
182,398

7,377
47,712
236,991
8,580
300,660
(107,155)
193,505

2016

2015

26,273
26,546
19,000
1,763
-
73,582
(4,579)
(1,005)

12,500
44,350
20,000
-
287
77,137
(3,000)
(1,253)

67,998

72,884

Credit Facility by $25.0 million prior to January 21, 2020. The Credit Agreement replaced the previous credit
agreement that was in place prior to January 21, 2016. The Company was in compliance with all applicable
financial covenants set forth in the previous credit agreement as of the date of its entrance into the Credit
Agreement.

Amounts outstanding under the Facilities, at the Company’s option, will bear interest at either a base rate plus a
margin or a rate based on LIBOR plus a margin, in either case calculated in accordance with the terms of the Credit
Agreement. Interest under the Credit Agreement is payable monthly. We elected to use the LIBOR based rate for
the majority of the debt outstanding under the Facilities for the twelve months ended December 31, 2016, which was
3.87% on our Revolving Credit Facility and 4.37% for the Term Loan at December 31, 2016.

The Credit Agreement contains customary affirmative and negative covenants. As of December 31, 2016 and as of
the end of each fiscal quarter ending thereafter, the Company must maintain a fixed charge coverage ratio of not less
than 1.10 to 1.0, in each case measured on a rolling four-quarter basis calculated in accordance with the terms of the
Credit Agreement. We were in compliance with our covenants under the Credit Agreement at December 31, 2016
and under our previous credit agreement at December 31, 2015.

We adopted ASU 2015-3 “Simplifying the Presentation of Debt Issuance Costs” in the first quarter of 2016. As a
result of this guidance, deferred debt issuance costs are recorded as a reduction of debt. The December 31, 2015
balance sheet reflects the reclassification of $1.3 million of deferred debt issuance costs from Other long-term assets
to Long-term debt to be consistent with the presentation at December 31, 2016.

The aggregate annual principal payments due under our Credit Agreement at December 31, 2016, are as follows:

(dollars in thousands)
2017
2018
2019
2020
2021

4,286
4,286
4,286
4,286
35,675
52,819

Convertible Notes

In connection with the acquisition of the North Jackson facility, in August 2011, we issued $20.0 million in
convertible notes (the “Notes”) to the sellers of the North Jackson facility as partial consideration of the acquisition.
On January 21, 2016, the Company entered into Amended and Restated Convertible Notes (collectively, the
“Convertible Notes”) in the aggregate principal amount of $20.0 million, each in favor of Gorbert Inc. (the
“Holder”). The Convertible Notes amended and restated the Notes. The Company’s obligations under the
Convertible Notes are collateralized by a second lien on the same assets of the Company that collateralize the
obligations of the Company under the Facilities. The Convertible Notes mature on March 17, 2019, and the maturity
date may be extended, at the Company’s option, to March 17, 2020 and further to March 17, 2021. If the Company
elects to extend the maturity date of the Convertible Notes to March 17, 2020, principal payments in the aggregate
of $2.0 million will be required on March 17, 2019. If the Company elects to extend the maturity date of the
Convertible Notes further to March 17, 2021, principal payments in the aggregate of $2.0 million will be required on
March 17, 2020.

In conjunction with the issuance of the Convertible Notes on January 21, 2016, we made principal prepayments on
the Convertible Notes totaling $1.0 million.

Capital Leases

As of December 31, 2016, future minimum lease payments applicable to capital leases were as follows:

2017
2018
2019
2020
2021
Total minimum capital lease payments
Less amounts representing interest
Present value of net minimum capital lease payments
Less current obligation
Total long-term capital lease obligation

473
473
473
473
375
2,267
(504)
1,763
(293)
1,470

There were no capital lease obligations at December 31, 2015. For the twelve months ended December 31, 2016,
amortization of capital lease assets was $0.3 million. Capital lease amortization is included in cost of products sold
in the Consolidated Statement of Operations.

Note 5: Fair Value Measurements

The fair value hierarchy has three levels based on the inputs used to determine fair value, which are as follows:

Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the
measurement date.

Level 2 — Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted
prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted
prices that are observable for the asset or liability.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of
significant management judgment. These values are generally determined using pricing models for which the
assumptions utilize management’s estimates of market participant assumptions.

The fair value hierarchy requires the use of observable market data when available. In instances where the inputs
used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been
determined based on the lowest level input significant to the fair value measurement in its entirety. Our assessment
of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the
consideration of inputs specific to the asset or liability.

The carrying amounts of our cash, accounts receivable and accounts payable approximated fair value at
December 31, 2016 and 2015 due to their short-term nature (Level 1). The fair value of the Term Loan, Revolver
and swing loans at December 31, 2015 and 2014 approximated the carrying amount as the interest rate is based upon
floating short-term interest rates (Level 2). At December 31, 2016 and 2015, the fair value of our Notes was
approximately $18.4 million and $19.2 million, respectively (Level 2).

Note 6: Derivatives and Hedging

The Company invoices certain customers in foreign currencies. In order to mitigate the risks associated with
fluctuations in exchange rates with the US Dollar, during 2016, the Company entered into foreign exchange forward
contracts for a portion of these sales and has designated these contracts as cash flow hedges. The notional value of
these contracts at December 31, 2016 was $2.4 million and an unrealized gain of $21,000 was recorded in other
comprehensive income at December 31, 2016.

Note 7: Income Taxes

The income tax provision (benefit) attributable to continuing operations during the years ended December 31, 2016,
2015 and 2014 is as follows:

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

2016

2015

2014

8 $
5

(105) $
56

(3,501)
(38)
(3,526) $

(11,843)
(252)
(12,144) $

312
298

1,941
598
3,149

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

Federal
State

Deferred (benefit) provision

Federal
State

(Benefit) provision for income taxes

A reconciliation of the federal statutory tax rate and our effective tax rate is as follows:

For the years ended December 31,
Federal statutory tax rate
Research and development tax credit
Valuation allowance, state government grants, net of federal
impact
State income taxes, net of federal impact
Other, net
Effective income tax rate

2016

2015

2014

35.0 %
4.9

-
0.4
(0.6)
39.7 %

35.0 %
1.6

-
0.6
(0.2)
37.0 %

35.0 %
(2.9)

8.2
3.7
(0.3)
43.7 %

We continue to record a full valuation allowance against our New York deferred tax assets due to the zero percent
(0%) state income tax rate for qualified manufacturers. We have determined that federal and other state deferred tax
assets are expected to be realized and have not recorded any additional valuation allowances.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant
components of our net deferred taxes related to continuing operations are as follows:

December 31,
(dollars in thousands)
Noncurrent deferred income taxes:
Federal and state tax carryforwards

Inventory
Share-based compensation
Receivables
Accrued liabilities
Other
Total deferred tax assets

Deferred tax liabilities:

Property, plant and equipment
Other
Total deferred tax liabilities

Total noncurrent deferred income taxes

2016

2015

$
$

22,533
649
3,506
182
689
82
27,641

44,498
772
45,270
17,629

$
$

22,495
1,196
3,545
76
299
65
27,676

47,899
443
48,342
20,666

We file a U.S. federal income tax return and various state income tax returns. For federal income tax purposes, we
had $53.0 million and $54.2 million of net operating loss carryforwards at December 31, 2016 and 2015,
respectively. The net operating loss carryforwards begin to expire in 2031. In addition, we have credit
carryforwards associated with our research and development activities of $2.7 million and $2.3 million as of
December 31, 2016 and 2015, respectively. The research and development credit carryforwards being to expire in
2030. We also have $0.5 million in alternative minimum tax credit carryforwards for the years ended December 31,
2016 and 2015, respectively. The alternative minimum tax credit carryforwards can be carried forward indefinitely.

We have state net operating loss carryforwards of $9.2 million and $9.0 million and state credit carryforwards of
$0.3 million at December 31, 2016 and 2015, respectively. The state net operating loss carryforwards begin to
expire in 2031. The state credit carryforwards begin to expire in 2027.

We are routinely under audit by federal or state authorities. Our federal tax returns are subject to examination by the
IRS for tax years after 2012. We are subject to examination by most state tax jurisdictions for tax years after 2012.

Note 8: Net (Loss) Income Per Common Share

The computation of basic and diluted net (loss) income per common share for the years ended December 31, 2016,
2015 and 2014 is as follows:

For the years ended December 31,
(dollars in thousands, except per share amounts)
Numerator:
Net (loss) income
Adjustment for interest expense on convertible notes
Net (loss) income, as adjusted
Denominator:
Weighted average number of shares of common stock
outstanding
Weighted average effect of dilutive stock options
and other stock compensation
Weighted average effect of assumed conversion
of convertible notes
Weighted average number of shares of common stock
outstanding, as adjusted
Net (loss) income per common share:
Basic
Diluted

2016

2015

2014

(5,347) $
-
(5,347) $

(20,672) $
-
(20,672) $

4,050
-
4,050

7,193,300

7,069,954

7,031,539

84,892

7,193,300

7,069,954

7,116,431

$
$

(0.74) $
(0.74) $

(2.92) $
(2.92) $

0.58
0.57

An adjustment for interest expense on convertible notes was excluded from the income per share calculation for the
years ended December 31, 2016, 2015 and 2014 as a result of the convertible notes being antidilutive.

There were 844,000, 635,200 and 440,300 options to purchase shares of common stock, at an average price of
$27.13, $30.67 and $35.20 for the years ended December 31, 2016, 2015 and 2014, respectively, that were not
included in the computation of diluted net (loss) income per common share because their respective exercise prices
were greater than the average market price of our common stock. The calculation of diluted earnings per share for
the year ended December 31, 2016 excludes 408,459 shares, and the years ended December 31, 2015 and 2014
excludes 428,140 shares, for the assumed conversion of convertible notes as a result of the convertible notes being
antidilutive. In addition, the calculation of diluted earnings per share for the year ended December 31, 2016 and
2015 would have included 6,575 and 21,774 shares, respectively, for the assumed exercise of options and restricted
stock units under our share incentive plans except that we were in a net loss position and the impact would have
been antidilutive.

Note 9: Incentive Compensation Plans

At December 31, 2016, we had three incentive compensation plans that are described below:

Omnibus Incentive Plan

We maintain an Omnibus Incentive Plan (“OIP”) which was approved by our stockholders in May 2012. The OIP
permits the issuance of stock options, restricted stock, restricted stock units and other stock-based awards to non-
employee directors, other than those directors owning more than 5% of our outstanding common stock, consultants,
officers and other key employees who are expected to contribute to our future growth and success. An aggregate of
712,318 shares of common stock were authorized for issuance under the OIP, of which 162,657 were available for
grant at December 31, 2016.

Stock Options

The option price for options granted under the OIP 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 OIP will expire no later than ten years after the grant date.
Forfeited options may be reissued and are included in the amount available for grants.

A summary of stock option activity as of and for the year ended December 31, 2016 is presented below:

Non-vested stock
options outstanding

Weighted-
average
grant-date
fair value

Number
of shares

Stock options
outstanding
Weighted-
average
exercise
price

Weighted-
average
contractual
term (years)

Outstanding at December 31, 2015

Stock options granted
Stock options exercised
Stock options vested
Stock options forfeited

Outstanding at December 31, 2016
Exercisable at December 31, 2016

299,200 $
140,100
-
(99,775)
(12,250)
327,275 $

10.40
5.85
-
12.11
7.30
8.05

841,750 $
140,100
-
-
(47,250)
934,600 $
607,325 $

25.71
11.18
-
-
24.05
23.62
28.24

5.9
4.3

There were no stock option exercises in 2016. Proceeds from stock option exercises totaled $0.3 million and $0.8
million for the years ended December 31, 2015 and 2014, respectively. Shares issued in connection with stock
option exercises are issued from available authorized shares.

Based upon the closing stock price of $13.51 at December 31, 2016, the aggregate intrinsic value of outstanding and
exercisable stock options was $0.7 million and $0.1 million, respectively. Intrinsic value of stock options is
calculated as the amount by which the market price of our common stock exceeds the exercise price of the options.
The aggregate intrinsic value of stock options exercised for the years ended December 31, 2015 and 2014 was $0.1
million and $0.8 million, respectively. The total fair value of stock option awards vested during the years ended
December 31, 2016, 2015 and 2014 was $1.2 million, $1.0 million and $1.7 million, respectively.

Share-based compensation to employees and directors is recognized as compensation expense in the consolidated
statements of operations based on the stock options fair value on the measurement date, which is the date of the
grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the
requisite service periods. The compensation expense recognized and its related tax effects are included in additional
paid-in capital.

Share-based compensation expense related to stock options totaled $1.4 million, $1.5 million and $1.7 million for
the years ended December 31, 2016, 2015 and 2014, respectively. Share-based compensation expense is recognized
ratably over the requisite service period for all stock option awards. Unrecognized share-based compensation
expense related to non-vested stock option awards totaled $2.3 million at December 31, 2016. At such date, the
weighted-average period over which this unrecognized expense was expected to be recognized was 2.7 years. We
recognized no tax benefit for the exercise of stock options during the years ended December 31, 2016, 2015 and
2014.

The fair value of our stock options granted is estimated on the measurement date, which is the date of grant. We use
the Black-Scholes option-pricing model. Our determination of fair value of stock option awards on the date of grant
is affected by our stock price as well as assumptions regarding our expected stock price volatility over the term of
the awards, and actual and projected stock option exercise behaviors. The weighted-average grant-date fair value of
stock options granted during the years ended December 31, 2016, 2015 and 2014 was $5.85, $6.99 and $14.39,
respectively.

The assumptions used to determine the fair value of stock options granted are detailed in the table below:

Risk-free interest rate
Dividend yield
Expected market price volatility
Weighted-average expected market price volatility
Expected term

2016
1.42% to 2.39%

2015
1.77% to 2.19%

2014
1.79% to 2.13%

0.0%

51% to 53%

49% to 55%

49% to 57%

51.0%

52.6%

5.6 to 7.5 years

The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected life of
the stock options at the grant date. No dividend yield was assumed because we do not pay cash dividends on
common stock and currently have no plans to pay a dividend. Expected volatility is based on the long-term
historical volatility (estimated over a period equal to the expected term of the stock options) of our common stock.
In estimating the fair value of stock options under the Black-Scholes option-pricing model, separate groups of
employees that have similar historical exercise behavior are considered separately. The expected term of options
granted represents the period of time that options granted are expected to be outstanding.

Restricted Stock and Restricted Stock Units

During the year ended December 31, 2012, we granted 35,000 time-based shares of restricted common stock to
certain employees. The fair value of the non-vested time-based restricted common stock awards was calculated
using the market value of the stock on the date of issuance, which was $35.26. During the year ended December 31,
2013, 3,000 of these restricted shares were forfeited.

Share-based compensation expense related to restricted stock totaled $0.4 million, $0.3 million for the years ended
December 31, 2015 and 2014, respectively. As of December 31, 2015, all of the restricted shares had vested.

During the year ended December 31, 2016, we granted 95,000 time-based restricted stock units to certain
employees. The fair value of the non-vested time-based restricted common stock awards was calculated using the
market value of the stock on the date of issuance, which was $14.75.

As of December 31, 2016, total unrecognized compensation cost related to non-vested time-based restricted stock
units was $1.4 million. That cost is expected to be recognized over a weighted-average period of 3.3 years.

Employee Stock Purchase Plan

Cash Incentive Plans

We have a variable compensation plan covering certain key executives and senior management and profit-sharing
plans and a key performance plan that cover the remaining employees. The variable compensation plan aligns the
compensation of executive officers and senior management with the performance expectations of the Board of
Directors in order to motivate and reward them for the achievement of Company performance metrics. The profit-
sharing plans provide for the sharing of pre-tax profits in excess of specified amounts at our Bridgeville, Dunkirk
and Titusville facilities. The key performance plan provides a cash incentive for achieving certain performance
metrics at our North Jackson facility. For the years ended December 31, 2016, 2015 and 2014, we expensed $1.5
million, $1.0 million and $4.4 million, respectively, under these cash incentive plans of which $0.4,million $0.4
million and $1.8 million, respectively, was included as a component of cost of products sold while the remainder
was included in selling and administrative expense. At December 31, 2016 and 2015, we had liabilities of $1.2
million and $0.6 million, respectively, as a component of accrued employment costs on our consolidated balance
sheets related to these cash incentive plans.

Note 10: Retirement Plans

We have a defined contribution retirement plan (“401(k) plan”) that covers substantially all employees. Pursuant to
the 401(k) plan, participants may elect to make pre-tax and after-tax contributions, subject to certain limitations
imposed under the Internal Revenue Code of 1986, as amended. In addition, we make periodic contributions to the
401(k) plan based on service for the Titusville and Dunkirk hourly employees and age for North Jackson hourly
employees. We make periodic contributions for the salaried employees at all locations except for North Jackson
based upon their service and their individual contribution to the 401(k) plan. For North Jackson salaried employees,
we make periodic contributions based upon the employee’s age and their individual contributions.

We also participate in the Steelworkers Pension Trust (the “Trust”), a multi-employer defined-benefit pension plan
that is open to all hourly and salary employees associated with the Bridgeville facility. We make periodic
contributions to the Trust based on hours worked at a fixed rate for each hourly employee, as determined by the
collective bargaining agreement, which expires in August 2018 and a fixed monthly contribution on behalf of each
salary employee. The trustees of the Trust have provided us with the latest data available for the Trust year ending
December 31, 2015. As of that date, the Trust is not fully funded. We could be held liable to the Trust for our own
obligations, as well as those of other employers, due to our participation in the Trust. Contribution rates could
increase if the Trust is required to adopt a funding improvement plan or a rehabilitation plan, if the performance of
the Trust assets do not meet expectations, or as a result of future collectively-bargained wage and benefit
agreements. If we choose to stop participating in the Trust, we may be required to pay the Trust an amount based on
the underfunded status of the Trust, referred to as a withdrawal liability.

The Pension Protection Act (PPA) defines a zone status for each trust. Trusts in the green zone are at least 80%
funded, trusts in the yellow zone are at least 65% funded, and trusts in the red zone are generally less than 65%
funded. The Trust has utilized extended amortization provisions to amortize its losses from 2008. The Trust
recertified its zone status after using the extended amortization provisions as allowed by law. The Trust has not
implemented a funding improvement or rehabilitation plan, nor are such plans pending. Our contributions to the
Trust have not exceeded more than 5% of the total contributions to the Trust.

Trusts employer
identification
number /
plan number

Pension
fund
Trust

Funding plan Company contributions to the Trust

PPA zone status pending /
2016

2015

implemented 2016

(dollars in thousands)
2015

Surcharge
2014 imposed

23-6648508 / 499 Green Green

681 $

737 $

758

The total expense of all retirement plans for the years ended December 31, 2016, 2015 and 2014 was $1.6 million in
each period. No other post-retirement benefit plans exist.

Note 11: Commitments and Contingencies

From time to time, various lawsuits and claims have been or may be asserted against us relating to the conduct of
our business, including routine litigation relating to commercial and employment matters. The ultimate cost and
outcome of any litigation or claim cannot be predicted with certainty. Management believes, based on information
presently available, that the likelihood that the ultimate outcome of any such pending matter will have a material
adverse effect on its financial condition, or liquidity or a material impact to its results of operations is remote,
although the resolution of one or more of these matters may have a material adverse effect on our results of
operations for the period in which the resolution occurs.

We, as well as other steel companies, are subject to demanding environmental standards imposed by federal, state
and local environmental laws and regulations. We are not aware of any environmental condition that currently
exists at any of our facilities that would cause a material adverse effect on our financial condition, results of
operations or liquidity in a particular future quarter or year.

Our 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,
2016, our total purchase obligations were $7.5 million, of which $5.9 million will be due in 2017.

Note 12: Selected Quarterly Financial Data (unaudited)

First quarter

Second quarter

Third quarter

Fourth quarter

(dollars in thousands, except per share
amounts)
2016 Data:
Net sales
Gross margin
Operating (loss) income
Benefit from income taxes
Net loss

Net loss per common share:

Basic
Diluted
2015 Data:
Net sales
Gross margin
Goodwill impairment
Operating income (loss)
Provision (benefit) for income taxes
Net income (loss)

Net income (loss) per common share:

Basic
Diluted

$
$
$
$
$

$
$

$
$
$
$
$
$

$
$

39,594 $
1,341 $
(2,497) $
(1,920) $
(2,440) $

41,030 $
4,339 $
(252) $
(437) $
(802) $

39,651 $
4,734 $
230 $
(292) $
(520) $

(0.34) $
(0.34) $

(0.11) $
(0.11) $

(0.07) $
(0.07) $

55,983 $
5,710 $
- $
1,016 $
65 $
125 $

49,610 $
5,186 $
- $
225 $
(173) $
(356) $

43,371 $
(410) $
20,268 $
(25,896) $
(9,539) $
(17,045) $

0.02 $
0.02 $

(0.05) $
(0.05) $

(2.41) $
(2.41) $

34,159
3,099
(1,450)
(877)
(1,585)

(0.22)
(0.22)

31,696
(891)
-
(5,424)
(2,497)
(3,396)

(0.48)
(0.48)

Net income (loss) per common share amounts for each quarter is required to be computed independently. As a
result, their sum may not equal the total year earnings per share amounts.

Note 13: Subsequent Events

None

ITEM 9.

None.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

ITEM 9A.

CONTROLS AND PROCEDURES

Our management, including our Chairman, President and Chief Executive Officer and the Vice President of Finance,
Chief Financial Officer and Treasurer, performed an evaluation of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, our Chairman, President and Chief Executive Officer and the Vice President
of Finance, Chief Financial Officer and Treasurer concluded that, as of the end of the fiscal year covered by this
Annual Report on Form 10-K, our disclosure controls and procedures are effective. Management’s Report on our
internal control over financial reporting is included in Item 8 of this Annual Report on Form 10-K under the caption
“Management’s Report on Internal Control Over Financial Reporting” and is incorporated herein by reference. Our
independent registered public accounting firm has issued a report on management’s maintenance of effective
internal control over financial reporting and is set forth in Item 8 of this Annual Report on Form 10-K under the
caption “Report of Independent Registered Public Accounting Firm” and is incorporated herein by reference.

During the last fiscal quarter of the fiscal year ended December 31, 2016, there were no changes in our internal
control over financial reporting which have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information concerning the directors of the Company is set forth in the Proxy Statement for the 2016 Annual
Meeting of Stockholders (the “Proxy Statement”) to be sent to stockholders in connection with our 2016 Annual
Meeting of Stockholders, under the heading “Proposal No. 1—Election of Directors,” which information is
incorporated by reference. With the exception of the information specifically incorporated herein by reference, our
Proxy Statement is not to be deemed filed as part of this report for the purposes of this Item.

In addition to the information set forth under the caption “Executive Officers” in Part I of this report, the
information concerning our directors required by this item is incorporated and made part hereof by reference to the
material appearing under the heading “Nominees for Election as Directors” in our Proxy Statement, which will be
filed with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of the 2016 fiscal year.
Information concerning the Audit Committee and its “audit committee financial expert” required by this item is
incorporated and made part hereof by reference to the material appearing under the heading “Committees of the
Board of Directors” in the Proxy Statement. Information required by this item regarding compliance with
Section 16(a) of the Exchange Act is incorporated and made a part hereof by reference to the material appearing
under the heading “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
Information concerning the executive officers of the Company is contained in Part I of this Annual Report on Form
10-K under the caption “Executive Officers.”

We have adopted a Code of Business Conduct and Ethics that applies to all directors and employees, including its
principal executive officer and principal financial officer. A copy is available, free of charge, through our website at
http://www.univstainless.com. Information on our website is not part of this Annual Report on Form 10-K. We
intend to timely disclose any amendment of or waiver under the Code of Business Conduct and Ethics on our
website and will retain such information on our website as required by applicable SEC rules.

ITEM 11.

EXECUTIVE COMPENSATION

The information concerning executive compensation is set forth in the Proxy Statement under the heading
“Executive Compensation,” which information is incorporated by reference. With the exception of the information
specifically incorporated herein by reference, the Proxy Statement is not to be deemed filed as part of this report for
the purposes of this Item.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

The information concerning security ownership of certain beneficial owners and management is set forth in the
Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management,” which
information is incorporated by reference. With the exception of the information specifically incorporated herein by
reference, the Proxy Statement is not to be deemed filed as part of this report for the purposes of this Item.

Equity Compensation Plan Information:

Securities authorized for issuance under equity compensation plans at December 31, 2016 were as follows:

Plan Category

Equity compensation plans approved by
security holders

Equity compensation plans not approved
by security holders

Total

Number of shares
to be issued upon
exercise of
outstanding options

Weighted-average
exercise price of
outstanding options

Number of shares
remaining available for
future issuance under
equity compensation
plans (A)

934,600 $

23.62

266,753

934,600 $

23.62

266,753

(A)

Includes 162,657 shares of common stock not issued under the Omnibus Incentive Plan and 104,096 available
under the 1996 Employee Stock Purchase Plan, as amended.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

The information concerning certain relationships and related transactions, and director independence is set forth in
the Proxy Statement under the heading “The Board of Directors,” which information is incorporated by reference.
With the exception of the information specifically incorporated herein by reference, the Proxy Statement is not to be
deemed filed as part of this report for the purposes of this Item.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information concerning principal accountant fees and services is set forth in the Proxy Statement under the
heading “Principal Accountant Fees and Services,” which information is incorporated by reference. With the
exception of the information specifically incorporated herein by reference, the Proxy Statement is not to be deemed
filed as part of this report for the purposes of this Item.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this Form 10-K:

1) Financial Statements

The list of financial statements required by this item is set forth in Item 8, “Financial Statements and Supplementary
Data” and is incorporated herein by reference.

2) Consolidated Financial Statement Schedules

Schedule II – Valuation and Qualifying Accounts

Balance at Charged to Deductions/
beginning costs and net charge- Balance at
end of year

of year expenses offs (A)

163 $
239
18

- $
-
596

(103) $
(7)
(85)

309
249
17

(29) $
-
-

1,553
1,582
1,582

For the Years Ended December 31, 2016, 2015 and 2014
(dollars in thousands)
Allowance for doubtful accounts:
Year ended December 31, 2016
Year ended December 31, 2015
Year ended December 31, 2014

249 $
17
84

Valuation allowance for deferred income taxes:

Year ended December 31, 2016
Year ended December 31, 2015
Year ended December 31, 2014

1,582 $
1,582
986

(A) Represents write-off of bad debts net of recoveries

3) Exhibits

EXHIBIT
NUMBER DESCRIPTION

3.1

Amended and Restated Certificate of Incorporation

3.2

Certificate of Amendment of Restated Certificate of
Incorporation

Incorporated herein by reference to Exhibit 3.1
to Registration No. 33-85310.

Incorporated herein by reference to Exhibit 3.1
to the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2013.

3.3

Second Amended and Restated By-laws of the Company Incorporated herein by reference to Exhibit 3.1

4.1

Specimen Copy of Stock Certificate for shares of
Common Stock

4.2

Form of Convertible Note, dated January 21, 2016

to the Current Report on Form 8-K filed
December 15, 2014.

Incorporated herein by reference to Exhibit 4.1
to the Company’s Annual Report on Form 10-
K for the year ended December 31, 1998.

Incorporated herein by reference to Exhibit 4.1
to the Current Report on Form 8-K filed by
Universal Stainless & Alloy Products, Inc. on
January 25, 2016

10.1

Stockholders Agreement dated as of August 1, 1994, by
and among the Company and its existing stockholders

Incorporated herein by reference to Exhibit
10.1 to Registration No. 33-85310.

10.2

Omnibus Incentive Plan

10.3

10.4

10.5

10.6

Employment Agreement dated December 21, 2007
between the Company and Dennis M. Oates

Employment Agreement dated February 21, 2008
between the Company and Paul A. McGrath

Employment Agreement dated April 21, 2008 between
the Company and Christopher M. Zimmer

Employment Agreement dated August 4, 2015 between
the Company and Larry J. Pollock

10.7

Employment Agreement dated August 5, 2015 between
the Company and Graham McIntosh

10.8

Employment Agreement dated August 5, 2015 between
the Company and Ross C. Wilkin

10.9

Form of notice of grant of restricted stock award.

Incorporated herein by reference to Appendix
B of the Company’s Definitive Proxy
Statement dated April 25, 2012.*

Incorporated herein by reference to Exhibit
10.7 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2007.*

Incorporated herein by reference to Exhibit
10.4 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2007.*

Incorporated herein by reference to Exhibit
10.7 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2010.*

Incorporated herein by reference to Exhibit
10.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30,
2015.*

Incorporated herein by reference to Exhibit
10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30,
2015.*

Incorporated herein by reference to Exhibit
10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30,
2015.*

Incorporated herein by reference to Exhibit
10.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30,
2012.*

EXHIBIT
NUMBER DESCRIPTION

10.10

Form of non-statutory stock option agreement.

10.11

Form of incentive stock option agreement.

10.12

Form of non-statutory stock option agreement for
eligible directors.

10.13

Revolving Credit, Term Loan and Security Agreement,
dated as of January 21, 2016, by and among Universal
Stainless & Alloy Products, Inc., the other borrowers
party thereto, the guarantors party thereto from time to
time, PNC Bank, National Association, as administrative
agent and co-collateral agent, Bank of America, N.A., as
co-collateral agent, and PNC Capital Markets LLC, as
sole lead arranger and sole bookrunner.

10.14

Form of Stock Purchase Agreement

10.15

Amendment to the Universal Stainless & Alloy
Products, Inc. Employee Stock Purchase Plan, dated as
of May 12, 2016.

Incorporated herein by reference to Exhibit
10.12 to the Company’s Annual Report on
Form 10-K for the year ended December 31,
2014.*

Incorporated herein by reference to Exhibit
10.13 to the Company’s Annual Report on
Form 10-K for the year ended December 31,
2014.*

Incorporated herein by reference to Exhibit
10.14 to the Company’s Annual Report on
Form 10-K for the year ended December 31,
2014.*

Incorporated herein by reference to Exhibit
10.1 to the Current Report on Form 8-K filed
by Universal Stainless & Alloy Products, Inc.
on January 25, 2016.

Incorporated herein by reference to Exhibit
10.1 to the Current Report on Form 8-K filed
by Universal Stainless & Alloy Products, Inc.
on February 3, 2016.

Incorporated by reference to Exhibit 10.1 to the
Current report on Form 8-K filed by Universal
Stainless & Alloy Products, Inc. on May 13,
2016.

21.1

23.1

24.1

31.1

31.2

32.1

Subsidiaries of Registrant

Consent of Schneider Downs & Co., Inc.

Filed herewith.

Powers of Attorney

Included on the signature page herein.

Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002

Filed herewith.

Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002

Filed herewith.

Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Rule 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

Filed herewith.

EXHIBIT
NUMBER DESCRIPTION

101

The following financial information from this Annual
Report on Form 10-K for the fiscal year ended
December 31, 2016, formatted in XBRL (Extensible
Business Reporting Language) and furnished
electronically herewith: (i) the Consolidated Balance
Sheets as of December 31, 2016 and 2015 (ii) the
Consolidated Statements of Operations for the years
ended December 31, 2016, 2015 and 2014; (iii) the
Consolidated Statements of Comprehensive Income; (iv)
the Consolidated Statements of Cash Flows for the years
ended December 31, 2016, 2015 and 2014; (v) the
Consolidated Statements of Shareholders’ Equity for the
years ended December 31, 2015, 2014 and 2013; and
(vi) the Notes to Consolidated Financial Statements.

* -

Reflects management contract or compensatory plan or arrangement to be filed as an exhibit pursuant to Item
15(b) of this Annual Report on Form 10-K.

ITEM 16.

FORM 10-K SUMMARY

Not Applicable.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on
February 22, 2017.

SIGNATURES

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

By: /s/ Dennis M. Oates
Dennis M. Oates
Chairman, President and Chief Executive Officer

POWER OF ATTORNEY

Each of the officers and directors of Universal Stainless & Alloy Products, Inc., whose signature appears below in so
signing also makes, constitutes and appoints Dennis M. Oates and Paul A. McGrath, and each of them acting alone,
his true and lawful attorney-in-fact, with full power of substitution, for him in any and all capacities, to execute and
cause to be filed with the SEC any and all amendment or amendments to this Report on Form 10-K, with exhibits
thereto and other documents connected therewith and to perform any acts necessary to be done in order to file such
documents, and hereby ratifies and confirms all that said attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the dates indicated.

SIGNATURE

TITLE

DATE

/s/ Dennis M. Oates
Dennis M. Oates

Chairman, President, Chief Executive Officer and
Director (Principal Executive Officer)

February 22, 2017

/s/ Ross C. Wilkin
Ross C. Wilkin

Vice President of Finance, Chief Financial Officer and
Treasurer (Principal Financial and Accounting Officer)

February 22, 2017

/s/ Christopher L. Ayers
Christopher L. Ayers

Director

/s/ Douglas M. Dunn
Douglas M. Dunn

/s/ M. David Kornblatt
M. David Kornblatt

/s/ Udi Toledano
Udi Toledano

Director

February 22, 2017