To our Stockholders,
In a year that turned increasingly challenging, Universal achieved net sales for 2019 of $243.0 million, just 5%
below record 2018 sales of $255.9 million. Our 2019 sales included record aerospace market sales of
$170.4 million, an increase of 14.5% from 2018. In total, aerospace sales represented 70.1% of 2019 sales versus
58.2% of sales in the prior year.
The record aerospace sales partially overcame a decline in tool steel demand for much of 2019, as customers
readjusted inventories following record buying in 2018 amidst trade war fears. Sales to our oil & gas and general
industrial end markets - the latter includes the hard-hit semiconductor sector - were also lower than 2018 levels, while
sales to the power generation end market increased on higher maintenance activity. In a positive turn, our tool steel
sales began to recover in the final quarter of 2019 as did our sales to the oil & gas and general industrial end markets.
Our gross margin for 2019 was 11.4% of sales versus 14.8% of sales in 2018. Several factors negatively
impacted the 2019 gross margin, including reduced shipment volume and a less profitable product mix.
Additionally, misalignment of surcharges versus materials cost had a negative effect on margins in the first three
quarters of the year. The most impactful event in 2019 was a fire at our hydraulic forge in our North Jackson
facility in June along with related equipment issues that lowered production levels especially in the third quarter.
It is a tribute to the dedication and hard work of our team that we were able to recover from this challenge by the
end of the third quarter. In fact, we achieved record production volume at our hydraulic forge in the fourth
quarter leading to significant productivity gains and lower costs.
Additional achievements that contributed positively to our profitability in 2019 include the commissioning and
ramp-up of a new $10 million mid-size bar cell in our Dunkirk facility. As the ramp-up continues, we are realizing
further efficiency gains. At the same time, we posted continued melt cost reduction in our vacuum induction melt
shop in North Jackson in the second half of 2019, while our Bridgeville air melt operations consistently improved
output during 2019. These favorable melt activities continued into the first quarter of 2020.
As a result of this combination of positive and negative factors, our net income in 2019 totaled $4.3 million, or
$0.48 per diluted share, compared with $10.7 million, or $1.28 per diluted share, in 2018.
We entered 2020 with strong backlog of $119.1 million, including record premium alloy backlog. As of this
writing, however, Universal along with our industry is confronted by very serious challenges to our end markets
and to the world economy overall. These include the Boeing 737-MAX production freeze along with deepening
problems and delays in returning the aircraft to service, as well as the precipitous drop in oil prices. Looming
over all these is the recently-declared novel coronavirus pandemic that is disrupting life as we have become
accustom, while the overall effect to the economy and industry is yet to be determined.
Clearly, the scope of these challenges is beyond definition at this time. However, over the years Universal has
risen to confront and overcome serious difficulties and we are facing these with the full energy of our team and
with a deep commitment to move forward as we remain close to our customers.
Fortunately, we have a seasoned, dedicated team in place to do so, as well as a talented Board of Directors,
whose counsel will continue to be crucial to guiding our future. I am deeply grateful to all of them and to you,
our stockholders, for your continued support.
Sincerely,
Dennis Oates
Chairman, President and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
OR
(cid:4) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the Fiscal Year Ended December 31, 2019
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
Trading Symbol
USAP
Name of Each 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 every Interactive Data file required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See
the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☐
☐
☐
Accelerated filer
Smaller reporting company
☒
☒
If an emerging growth company DOCUMENTS INCORPORATED BY REFERENCE Part III of this Form 10-K incorporates by reference portions of the Company’s
definitive Proxy Statement for the 2019 Annual Meeting of Stockholders.
, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. (cid:31)
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, 2019, based on the closing price of $16.00 per share on that date, was approximately
$136,407,000. 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 10, 2020, there were 8,788,512 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 2019
Annual Meeting of Stockholders.
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
1
5
10
10
10
10
11
13
14
23
24
47
47
47
48
48
48
49
49
50
53
i
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 & Alloy Products, Inc.
and its wholly-owned subsidiaries (collectively, “we,” “us,” “our,” or the “Company”), 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 Stainless & Alloy Products, Inc., 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 and original equipment manufacturers (“OEMs”). 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 business
segment.
We produce a wide variety of specialty steel grades using several manufacturing processes including vacuum induction
melting (“VIM”), vacuum-arc remelting (“VAR”), elecro-slag remelting (“ESR”) and argon oxygen decarburization
(“AOD”). 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 and rod. 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, 2019, 2018 and 2017, approximately 70% of our net sales were derived from stainless steel
products.
1
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 elements 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, vanadium 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 AND SUPPLIES
2019
2018
2017
$
$
177,934 $
34,164
22,303
4,337
4,269
243,007 $
174,743 $
23,829
40,308
11,467
5,580
255,927 $
139,603
15,693
32,279
12,435
2,633
202,643
We depend on the delivery of key raw materials for our day-to-day melting operations. These key raw materials are carbon
and stainless scrap metal and alloys, primarily consisting of nickel, chrome, molybdenum, vanadium 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 primarily originate in North America, Australia, 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 2019 and 2018, and approximately
35% of the cost of products sold in 2017. 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. The average price
of several of our major raw materials, including molybdenum, vanadium, and carbon scrap, decreased in 2019 compared to
the prior year. The average price of nickel increased in 2019 compared to the prior year. 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 apply a raw material surcharge in our pricing mechanism to align our pricing with fluctuations in commodity costs. Short
lead time orders embed the surcharge into the price at the time of order entry. Longer lead time orders apply the raw material
surcharge in effect at the time of shipment to better align the selling price with commodity costs. Surcharges are published on
our website, and can fluctuate by month in line with commodity cost changes. Over time, our surcharge will effectively offset
changes in raw material costs; however, during a period of rising or falling prices the timing will cause variation between
reporting periods.
2
Our operations at our Bridgeville and North Jackson facilities also require consumable operating supplies other than raw
materials. Our Bridgeville facility uses graphite electrodes in the melting process, which are sourced from various suppliers
both domestically and overseas. The price of these electrodes significantly increased during 2018 and through the third
quarter of 2019, resulting in increased cost on the products sold during 2019.
CUSTOMERS
Our largest customer in 2019, Reliance Steel & Aluminum Co. (“Reliance”), accounted for approximately 27%, 18% and
17% of our net sales for the years ended December 31, 2019, 2018 and 2017, respectively. The increase in 2019 is primarily
due to Reliance’s acquisition of another one of our customers at the end of 2019.
Our next largest customer in 2019 was Outokumpu Stainless Bar, LLC, which accounted for approximately 11% of our net
sales. No other customer accounted for more than 10% of our net sales during 2019, 2018 or 2017.
International sales approximated 7% of annual net sales in 2019, 8% in 2018, and 9% in 2017.
BACKLOG
Our backlog of orders (excluding surcharges) on hand as of December 31, 2019 was approximately $119.1 million compared
to approximately $126.2 million at December 31, 2018. We expect substantially all of the backlog orders as of December 31,
2019 to be filled during 2020. 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.
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, 2019, 2018 and 2017, we had 795,
781, and 703 employees, respectively, of which 611, 607, and 564, 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. The following collective bargaining
agreements are currently in place:
Facility
Bridgeville
North Jackson
Dunkirk
Titusville
Commencement Date
September 2018
July 2018
November 2017
October 2015
Expiration Date
August 2023
June 2024
October 2022
September 2020
We believe a critical component of our collective bargaining agreements is the inclusion of a profit sharing plan.
3
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
North Jackson, Dunkirk and Titusville facilities, based on service. Prior to the collective bargaining agreement reached with
North Jackson hourly employees in 2018, contributions were based upon the employee’s age and wage rate for hourly
employees at the North Jackson facility.
We make periodic contributions for the salaried employees at all locations based upon their service and their individual
contribution to the 401(k) retirement plan. Prior to the North Jackson collective bargaining agreement, we made periodic
contributions based upon the employee’s age, annual salary, and their individual contributions for salaried employees at the
North Jackson facility.
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, 2019, we have issued 251,367 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 19, 2020, certain information with respect to the executive officers of the
Company:
Name (Age)
Dennis M. Oates (67)
Christopher M. Zimmer (46)
Graham McIntosh, Ph.D. (57)
Paul A. McGrath (68)
Christopher T. Scanlon (44)
Alyssa H. Snider (41)
Executive
Officer Since
2008
2010
2015
1996
2018
2018
Position
Chairman, President and Chief Executive Officer
Executive Vice President and Chief Commercial Officer
Executive Vice President and Chief Technology Officer
Vice President of Administration, General Counsel and Secretary
Vice President of Finance, Chief Financial Officer and Treasurer
Vice President and Chief Human Resources Officer
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.
4
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.
Graham McIntosh, Ph.D. has been Executive Vice President and Chief Technology Officer since May 2018. Dr. McIntosh
also served as the Company’s Vice President and Chief Technology Officer from November 2013 until May 2018. 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.
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.
Christopher T. Scanlon has been Vice President of Finance, Chief Financial Officer and Treasurer since April 2018. Mr.
Scanlon previously served as Controller and Chief Accounting Officer for L.B. Foster Company, a leading manufacturer and
distributor of products and services for transportation and energy infrastructure, where he joined in 2012. Mr. Scanlon also
served as Division Controller for Education Management Corporation from 2009 to 2012, and held positions of increasing
responsibilities with Bayer Corporation, the U.S. operations of the German-based Bayer AG, and Respironics, Inc.
Alyssa H. Snider has been Vice President and Chief Human Resource Officer since November 2018. Ms. Snider previously
served as Americas HR Talent Strategy Advisor, Manufacturing for Shell Oil Company, a global group of energy and
petrochemical companies, which she joined in June 2002. She held positions of increasing responsibility including HR
Analyst and Business Partner, HR Manager of Capital Projects in the U.S. and Organizational Effectiveness Consultant.
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
Our common stock is listed on the NASDAQ Global Select Market under the “USAP” ticker symbol. 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. 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 is derived from a limited number of customers.
Our five largest customers in the aggregate accounted for approximately 54% of our net sales for the year ended December
31, 2019, 43% of our net sales for the year ended 2018 and 41% for the year ended 2017. The accounts receivable balance
from these five customers comprised approximately 42% of total accounts receivable at December 31, 2019. 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.
5
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. A 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.
The demand for our products may be cyclical.
Demand for our products from our customers can be cyclical in nature and sensitive to various factors, including demand,
production schedules and other conditions in each of our end markets, fluctuations in inventory levels throughout the supply
chain, and general macroeconomic conditions. A significant adverse change in demand for any reason could have a material
adverse effect on our results of operations.
A substantial amount of our sales is derived from the aerospace industry.
Approximately 70% of our sales and 55% of our tons shipped represented products sold to customers in the aerospace market
in 2019. 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.
The aerospace industry is currently projected to experience long-term growth; however a prolonged downturn in the industry
would adversely affect the demand for our 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. The recent and continued market
uncertainty regarding the production schedule and ultimate return to service of the Boeing 737 MAX aircraft could adversely
impact our results.
Our business may be harmed by failure to develop, commercialize, market and sell new applications and new products.
We believe that our alloys and metallurgical manufacturing expertise provide us with a competitive advantage over other
high-performance alloy producers. Our ability to maintain this competitive advantage depends on our ability to continue to
offer products that have equal or better performance characteristics than competing products at competitive prices. Our future
growth will depend, in part, on our ability to address the increasingly demanding needs of our customers by enhancing the
properties of our existing alloys, by timely developing new applications for our existing products, and by timely developing,
commercializing, marketing and selling new products. If we are not successful in these efforts, or if our new products and
product enhancements do not adequately meet the requirements of the marketplace and achieve market acceptance, our
business could be adversely affected.
Our business requires continuing efforts to obtain new customer approvals on existing products and applications, which is a
stringent, difficult process subject to each customer’s varying approval methodology and preferences. If we are not successful
in these efforts, our business could be adversely affected.
We are dependent on the availability and price of raw materials and operating supplies.
We purchase carbon and stainless scrap metal and alloy additives, principally nickel, chrome, vanadium, 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.
6
Our production processes require consumable operating supplies, such as electrodes, which have increased in price
significantly compared to prior years. Significant volatility in the price of our consumable operating supplies could adversely
affect our financial results.
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 and our suppliers, which in
turn is affected by global economic and market factors, including health epidemics, impacting the industries and markets that
we participate in. 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.
Existing free trade laws and regulations, such as the North American Free Trade Agreement and its anticipated successor
agreement, the United States-Mexico-Canada Agreement, which is still subject to legislative approval, provide certain
beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and
other requirements. Changes in laws or policies governing the terms of foreign trade, and in particularly increased trade
restrictions, tariffs or taxes on imports from countries where we sell products or purchase materials could have a material
adverse effect on our business and financial results. Given the uncertainty regarding the scope and duration of current,
proposed, or future imposed tariffs, we can provide no assurance that any strategies we implement to mitigate the impact of
such tariffs on the Company will be successful.
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. Attraction
and retention of qualified personnel remains challenging as the labor market remains tight.
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, 2019, we had 611 employees, out of a total of 795, who were covered under collective bargaining
agreements with the USW expiring at various dates in 2020 to 2024. 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, including 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,
such as the fire at our North Jackson, OH forge during 2019, there can be no assurance that our operations would not be
substantially curtailed, which may have a negative effect on our financial results.
7
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. A
significant increase in interest rates or disruption in the global financial markets may affect our ability to obtain financing or
to refinance existing debt on acceptable terms, if at all, and could increase the cost of our borrowings.
Our credit agreement uses the London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the interest rate
on a substantial portion of our debt. LIBOR is the subject of recent national, international and other regulatory guidance and
proposals for reform. Reforms may cause LIBOR to perform differently than in the past or cause its discontinuance. Further
developments and the resulting consequences cannot be entirely predicted, but could include an increase in our interest
expense.
Our ability to satisfy our debt obligations 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 $110.0 million
senior secured revolving credit facility and a $10.0 million senior secured term loan facility, also requires us to comply with
certain covenants. 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, 2019, we were in compliance with the covenants in our credit agreement.
We believe that our international sales and purchases 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, including effects of the United Kingdom’s withdrawal from membership in the European
Union (referred to as “Brexit”). We could be significantly impacted by these 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).
International sales approximated 7% of annual net sales in 2019, 8% in 2018 and 9% in 2017, an immaterial portion of which
is denominated in foreign currencies.
If we are unable to protect our information technology infrastructure against service interruptions, data corruption,
cyber-based attacks or network security breaches, 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 the inability to continue to receive software updates and contractual
vendor support, 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 European Union and other countries where we do business have implemented and may consider further 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.
8
Our business subjects us to risk of litigation claims, as a routine matter, and this risk increases the potential for a loss that
might not be covered by insurance.
Litigation claims may relate to the conduct of our business, including claims relating to product liability, commercial
disputes, employment actions, employee benefits, compliance with domestic and federal laws and personal injury. Due to the
uncertainties of litigation, we might not prevail on claims made against us in the lawsuits that we currently face, and
additional claims may be made against us in the future. The outcome of litigation cannot be predicted with certainty, and
some of these lawsuits, claims or proceedings may be determined adversely to us. The resolution in any reporting period of
one or more of these matters could have a material adverse effect on our business.
Costs related to our participation in a multi-employer pension plan could increase significantly.
We participate in the Steelworkers Pension Trust (the “Trust”), a multi-employer defined-benefit pension plan. We make
contributions to the Trust with respect to all hourly and salaried employees associated with our Bridgeville facility. Our
contributions to the Trust are based on hours worked at a fixed rate for each hourly employee, as determined by the collective
bargaining agreement, which expires in August 2023, and a fixed monthly contribution on behalf of each covered salaried
employee. The trustees of the Trust have provided us with the latest data available for the Trust year ended December 31,
2018. As of that date, the Trust is not fully funded. Our contribution rates could increase if the Trust is required to adopt a
funding improvement plan or a rehabilitation plan as a result of funding deficiencies in excess of specified levels, which may
be due to poor performance of Trust investments or other factors, or as a result of future wage and benefit agreements. In
addition, if we choose to stop participating in the Trust, our contributions to the Trust decline or the Trust is terminated, we
may be required to pay the Trust an amount based on the underfunded status of the Trust, referred to as a withdrawal liability.
In the event that our contribution rates increase or if we must pay withdrawal liability because we stop participating in the
Trust, our contributions decline or the Trust is terminated, our future results of operations and cash flows may be negatively
impacted to a material extent.
Our business is subject to stringent environmental, health and safety regulations which may result in significant liabilities
and/or costs to maintain compliance.
Our operations and properties are subject to extensive and varied federal, state, local and international laws and regulations
relating to public health, the environment, pollution, and occupational safety and health. We have used, and currently use and
manufacture, substances that are considered hazardous or toxic under worker safety and health laws and regulations. We take
measures to control or eliminate the continuing risk associated with the environmental, health and safety issues, however we
could incur substantial fines and civil or criminal sanctions, cleanup costs, compliance investments and third-party property
or injury claims as a result of violations, or non-compliance related to these regulations affecting our facilities and operations.
9
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 our
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
Information regarding the Company’s legal proceedings and other commitments and contingencies is set forth in Part II,
Item 8, Financial Statements and Supplementary Data, Note 14, which is incorporated by reference into this Item 3.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
10
PART II
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
At December 31, 2019, a total of 8,788,512 shares of common stock, par value $0.001 per share, were issued and held by 97
holders of record. There were 294,279 shares of the issued common stock held in treasury at December 31, 2019.
On May 25, 2018, the Company completed an underwritten, public offering involving the issuance and sale by the Company
of 1,224,490 shares of common stock at a public offering price of $24.50 per share. In addition, the Company granted the
underwriters a 30-day option to purchase up to an additional 183,673 shares of common stock. On June 1, 2018, the
underwriters exercised the option in full, and an additional 183,673 shares of common stock were issued and sold on June 5,
2018. The public offering resulted in gross proceeds to the Company of approximately $34.5 million, or $32.2 million net of
the underwriting discount and other offering fees and expenses. We used the net proceeds from the public offering to repay
amounts outstanding under the Company’s revolving credit facility.
PERFORMANCE GRAPH
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, 2014
and 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 an indication of
future performance.
11
Comparison of 5-Year Cumulative Total Shareholder Return among Universal Stainless & Alloy Products, Inc., the
NASDAQ Composite Index and a Peer Group
Comparison of 5 Year Cumulative Total Return
Assumes Inital Investment of $100
December 2019
250.00
200.00
150.00
100.00
50.00
0.00
2014
2015
2016
2017
2018
2019
Universal Stainless & Alloy Products, Inc.
NASDAQ Composite Index
Peer Group
Company/Peer/Market
Universal Stainless & Alloy Products, Inc.
Peer Group
NASDAQ Composite Index
2014
2015
2016
2017
2018
2019
$ 100.00 $ 36.94 $ 53.72 $ 85.17 $ 64.45 $ 59.24
$ 100.00 $ 51.05 $ 67.49 $ 91.50 $ 76.39 $ 89.91
$ 100.00 $ 106.96 $ 116.45 $ 150.96 $ 146.67 $ 200.50
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.
12
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 income (loss)
Net income (loss)
Financial position at year-end:
Cash
Working capital
Property, plant and equipment, net
Total assets 1
Long-term debt 1
Stockholders’ equity
Common share data:
2019
2018
2017
2016
2015
$ 243,007 $ 255,927 $ 202,643 $ 154,434 $ 180,660
- $ 20,268
$
(3,969) $ (30,079)
$
(5,347) $ (20,672)
$
- $
7,291 $ 16,070 $
4,275 $ 10,662 $
- $
4,237 $
7,610 $
- $
170 $
207 $
3,696 $
$
112
$ 141,342 $ 115,654 $ 101,316 $ 84,397 $ 85,006
$ 176,061 $ 177,844 $ 174,444 $ 182,398 $ 193,505
$ 368,399 $ 353,320 $ 321,231 $ 296,045 $ 297,302
$ 60,411 $ 42,839 $ 75,006 $ 67,998 $ 72,884
$ 243,136 $ 237,011 $ 191,668 $ 181,220 $ 184,977
75 $
Net income (loss) per common share - Basic 2
Net income (loss) per common share -Diluted 2
$
$
0.49 $
0.48 $
1.31 $
1.28 $
1.05 $
1.03 $
(0.74) $
(0.74) $
(2.92)
(2.92)
1
2
Total assets and Long-term debt have been adjusted for certain prior periods to reflect the reclassification of deferred
financing costs from Other long-term assets to a reduction of debt, consistent with the current period presentation due
to the adoption of ASC 2015-3, “Simplifying the Presentation of Debt Issuance Costs”.
Includes approximately 1.2 million shares issued on May 25, 2018 and 0.2 million shares issued on June 1, 2018 in
conjunction with the Company’s underwritten, public offering of common stock. The public offering’s impact on the
weighted average number of shares for the year ended December 31, 2018 is approximately 0.8 million shares.
13
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.
Overview
We manufacture and market semi-finished and finished specialty steel products, including stainless steel, nickel alloys, tool
steel and certain other alloyed steels. Our manufacturing process involves melting, remelting, heat treating, hot and cold
rolling, forging, machining and cold drawing of semi-finished and finished specialty steels. Our products are sold to service
centers, forgers, rerollers and original equipment manufacturers. Our customers further process our products for use in a
variety of industries, including the aerospace, power generation, oil and gas, heavy equipment and general industrial
markets. We also perform conversion services on materials supplied by customers.
Our aerospace end market continued to strengthen throughout 2019 and reached $170.4 million and more than 70% of our
total net sales, both of which were new records for the company. Aerospace will continue to be a major driver of our future
results, and our aerospace backlog remains healthy going into 2020. Sales into the power generation end market were also up
in 2019 compared with 2018, while sales into our other end markets declined compared with 2018. The largest decline was in
the heavy equipment end market, which primarily includes our tool steel sales. 2018 was a record year for tool steel sales,
and order entry has been strong in the beginning of 2020. We expect tool steel sales to increase in 2020 compared to 2019
levels.
Total Company backlog at the end of 2019 was $119.1 million, a decrease of 6% compared to $126.2 million at the end of
2018.
Our 2019 gross margin was 11.4% of net sales, a decline from 14.8% of net sales in 2018. This was due to higher operations
costs in the cost of products sold during 2019, lower surcharge revenue from falling raw material indices, and a less favorable
product mix, primarily, lower premium alloy and tool steel sales. The increased operations cost was in part due to a fire at our
North Jackson facility at the end of the second quarter.
We expect to see margin improvement in 2020 as misalignment between surcharges and material prices lessens, strong
production at the North Jackson forge continues following the 2019 fire, and we continue to see incremental operating
efficiency benefit from investments in our operations, including our new mid-size bar cell unit at our Dunkirk facility.
Selling, general and administrative (“SG&A”) expenses decreased by $1.4 million in 2019. The decrease in SG&A was
driven by lower employee related costs, including incentive compensation.
Overall, our operating income in 2019 was $7.3 million, compared to $16.1 million in 2018, reflecting the decrease in sales
and gross margin.
During 2019, we used $4.4 million of cash in our operations, primarily due to higher inventory levels. We used $17.4 million
of cash on capital expenditures, a portion of which was related to payments for a mid-size bar cell unit at our Dunkirk
facility.
Our financing activities provided net cash of $17.8 million, which primarily included net borrowings under our revolving
credit facility, partially offset by principal payments on our term loan and scheduled payments of finance leases.
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.
14
Results of Operations
2019 Results Compared to 2018
For the years ended December 31,
(dollars in thousands, except per
shipped ton information)
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
Operating income
Interest expense
Deferred financing amortization
Other (income), net
Income before income taxes
(Benefit) provision for income taxes
Net income
Tons shipped
Sales dollars per shipped ton
Market Segment Information:
For the years ended December 31,
(dollars in thousands)
Net sales:
Service centers
Original equipment manufacturers
Rerollers
Forgers
Conversion services and other sales
Total net sales
Melt Type Information:
For the years ended December 31,
(dollars in thousands)
Net sales:
Specialty alloys
Premium alloys
Conversion services and other sales
Total net sales
2019
2018
Amount
Percentage
of net sales Amount
Percentage
of net sales
Dollar / ton
variance
Percentage
variance
$ 177,934
34,164
22,303
4,337
4,269
73.2 % $ 174,743
23,829
14.0
40,308
9.2
11,467
1.8
5,580
1.8
243,007 100.0
88.6
215,369
11.4
27,638
68.3 % $
9.3
15.7
4.5
2.2
255,927 100.0
85.2
218,111
14.8
37,816
3,191
10,335
(18,005)
(7,130)
(1,311)
(12,920)
(2,742)
(10,178)
1.8 %
43.4
(44.7)
(62.2)
(23.5)
(5.0)
(1.3)
(26.9)
20,347
7,291
3,765
227
(474)
3,773
(502)
4,275
$
41,462
5,861
$
21,746
8.4
16,070
3.0
4,047
1.5
255
0.1
(829)
(0.2)
12,597
1.6
(0.2)
1,935
1.8 % $ 10,662
44,554
$
5,744
8.5
6.3
1.6
0.1
(0.3)
4.9
0.8
4.2 % $
$
(1,399)
(8,779)
(282)
(28)
355
(8,824)
(2,437)
(6,387)
(3,092)
117
(6.4)
(54.6)
(7.0)
(11.0)
42.8
(70.0)
(125.9)
(59.9) %
(6.9) %
2.0 %
2019
2018
Amount
Percentage
of net sales Amount
Percentage
of net sales
Dollar
variance
Percentage
variance
$ 166,327
24,731
27,236
20,444
4,269
70.4 % $ (13,838)
4,149
8.0
(2,101)
11.5
181
7.9
(1,311)
2.2
$ 243,007 100.0 % $ 255,927 100.0 % $ (12,920)
68.4 % $ 180,165
20,582
10.2
29,337
11.2
20,263
8.4
5,580
1.8
(7.7) %
20.2
(7.2)
0.9
(23.5)
(5.0) %
2019
2018
Amount
Percentage
of net sales Amount
Percentage
of net sales
Dollar
variance
Percentage
variance
$ 201,120
37,618
4,269
81.7 % $ (8,083)
(3,526)
16.1
(1,311)
2.2
$ 243,007 100.0 % $ 255,927 100.0 % $ (12,920)
82.7 % $ 209,203
41,144
15.5
5,580
1.8
(3.9) %
(8.6)
(23.5)
(5.0) %
15
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, which they will in-turn sell to the ultimate end market customer.
End Market Information:
For the years ended December 31,
(dollars in thousands)
Net sales:
Aerospace
Power generation
Oil and gas
Heavy equipment
General industrial, conversion services
and other sales
Total net sales
Net sales:
2019
2018
Amount
Percentage
of net sales Amount
Percentage
of net sales
Dollar
variance
Percentage
variance
$ 170,445
11,530
25,023
22,725
70.1 % $ 148,850
9,278
4.7
31,493
10.3
41,623
9.4
58.2 % $ 21,595
2,251
3.6
(6,470)
12.3
(18,899)
16.3
13,285
(11,398)
$ 243,007 100.0 % $ 255,927 100.0 % $ (12,920)
24,683
5.5
9.6
14.5 %
24.3
(20.5)
(45.4)
(46.2)
(5.0) %
Net sales for the year ended December 31, 2019 decreased $12.9 million, or 5.0%, compared to 2018. The decrease in our
sales reflects approximately a 7% decrease in consolidated tons shipped, partially offset by a 2% increase in sales dollars per
shipped ton. The decrease in our shipped tons was due to lower tool steel shipments. The increase in sales dollars per shipped
ton was driven by higher aerospace end market sales, partially offset by lower surcharges.
Gross margin:
Our gross margin, as a percentage of net sales, was 11.4% in 2019, compared to 14.8% in 2018. The decrease in gross
margin is a result of misalignment of melt costs and surcharges for the majority of the year, and increased cost of operations
on material sold. The increased operations cost was in part due to a fire at our North Jackson facility at the end of the second
quarter, and in part due to product mix.
Selling, general and administrative expenses:
Our SG&A expenses consist primarily of employee costs including salaries, incentive compensation, payroll taxes and
benefit related costs, legal and accounting services, share compensation and insurance costs. Our SG&A expenses decreased
by $1.4 million for the year ended December 31, 2019 compared to 2018. The decrease is driven by lower employee related
costs, primarily lower incentive compensation accruals. As a percentage of sales, our SG&A expenses were 8.4% in 2019
compared to 8.5% in 2018.
Interest expense and deferred financing amortization:
Our interest costs on our debt was $3.8 million in 2019 compared with $4.0 million in 2018. Although our total debt at
December 31, 2019 increased compared to December 31, 2018, average debt for 2019 was below 2018 by approximately
$2.0 million. In addition, variable interest rates charged on our Credit Agreement debt decreased during 2019. These two
factors result in the $0.3 million decrease in interest expense. The interest rate on our variable rate debt is determined by a
LIBOR-based rate plus an applicable margin based upon achieving certain ratios.
Other income:
Other income was $0.5 million in 2019 compared to $0.8 million in 2018. The 2019 other income includes insurance
proceeds of $0.4 million received in the third quarter related to a fire that occurred at our Dunkirk facility in 2017. The prior
year other income includes a favorable legal settlement of $0.7 million received in the second quarter of 2018.
16
(Benefit) provision from income taxes:
The 2019 income tax benefit is $0.5 million, compared to a provision for income taxes in 2018 of $1.9 million. The
difference is due primarily to lower pretax income and higher research and development tax credits in 2019 compared to the
prior year. The significant components of the current year tax provision include the Federal statutory rate of 21%, offset by
the benefit of research and development tax credits.
Net income:
We had net income of $4.3 million for the year ended December 31, 2019, compared to $10.7 million for 2018. The decrease
is due to the decrease in our net sales and our gross margin during the current year.
2018 Results Compared to 2017
For the years ended December 31,
(dollars in thousands, except per
shipped ton information)
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
Operating income
Interest expense
Deferred financing amortization
Other (income), net
Income before income taxes
Provision (benefit) for income taxes
Net income
Tons shipped
Sales dollars per shipped ton
Market Segment Information:
For the years ended December 31,
(dollars in thousands)
Net sales:
2018
2017
Amount
Percentage
of net sales
Amount
Percentage
of net sales
Dollar / ton
variance
Percentage
variance
$ 174,743
23,829
40,308
11,467
5,580
255,927
218,111
37,816
68.3 % $ 139,603
15,693
9.3
32,279
15.7
12,435
4.5
2.2
2,633
202,643
100.0
179,609
85.2
23,034
14.8
69.0 % $ 35,140
25.2 %
8,136
51.8
7.7
8,029
24.9
15.9
(968)
6.1
(7.8)
2,947 111.9
1.3
26.3
100.0
21.4
88.6
64.2
11.4
53,284
38,502
14,782
21,746
16,070
4,047
255
(829)
12,597
1,935
$ 10,662
44,554
5,744
$
8.5
6.3
1.6
0.1
(0.3)
4.9
0.8
4.2 % $
18,797
4,237
4,022
255
(49)
9
(7,601)
7,610
39,246
5,163
$
9.3
2.1
2.0
0.1
-
0.1
(3.8)
3.8 % $
2,949
11,833
25
-
(780)
12,588
15.7
NM
0.6
-
NM
NM
(9,536) (125.5)
3,052
5,308
581
(40.1) %
13.5 %
11.3 %
$
2018
2017
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
Total net sales
$ 180,165
20,263
29,337
20,582
5,580
$ 255,927
70.4 % $ 140,259
18,442
7.9
23,675
11.5
17,634
8.0
2,633
2.2
100.0 % $ 202,643
69.2 % $ 39,906
28.5 %
1,821
9.9
9.1
5,662
23.9
11.7
2,948
8.7
16.7
2,947 111.9
1.3
100.0 % $ 53,284
26.3 %
17
Melt Type Information:
For the years ended December 31,
(dollars in thousands)
Net sales:
2018
2017
Amount
Percentage
of net sales
Amount
Percentage
of net sales
Dollar
variance
Percentage
variance
Specialty alloys
Premium alloys
Conversion services and other sales
Total net sales
$ 209,203
41,144
5,580
$ 255,927
81.7 % $ 172,715
27,295
16.1
2,633
2.2
100.0 % $ 202,643
85.2 % $ 36,488
21.1 %
13,849
13.5
50.7
2,947 111.9
1.3
100.0 % $ 53,284
26.3 %
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, which they will in-turn sell to the ultimate end market customer.
End Market Information:
For the years ended December 31,
(dollars in thousands)
Net sales:
Aerospace
Power generation
Oil and gas
Heavy equipment
General industrial, conversion services
and other sales
Total net sales
Net sales:
2018
2017
Amount
Percentage
of net sales
Amount
Percentage
of net sales
Dollar
variance
Percentage
variance
$ 148,850
9,278
31,493
41,623
58.2 % $ 111,795
16,592
3.6
19,069
12.3
33,876
16.3
55.2 % $ 37,055
(7,314)
8.2
12,424
9.4
7,747
16.7
33.1 %
(44.1)
65.2
22.9
24,683
$ 255,927
9.6
21,311
100.0 % $ 202,643
10.5
3,372
100.0 % $ 53,284
15.8
26.3 %
Net sales for the year ended December 31, 2018 increased $53.3 million, or 26.3%, compared to 2017. The increase in our
sales reflects a 13.5% increase in consolidated tons shipped, as demand for our products increased as a result of strengthening
market conditions throughout 2018, and a 11.3% increase in sales dollars per shipped ton. The increase in sales dollars per
shipped ton was driven by improved product mix, increased surcharges, and base price increases implemented during the
year.
Our product sales to all of our end markets except Power Generation increased as shown in the above table. Our premium
alloy sales reached a record level of $41.1 million, or 16.1% of total sales, for the year ended December 31, 2018, compared
to $27.3 million, or 13.5% of total sales, for the year ended December 31, 2017. Our premium alloy sales are primarily for
the aerospace end market.
Gross margin:
Our gross margin, as a percentage of net sales, increased to 14.8% in 2018 from 11.4% in 2017. The increase in gross margin
is a result of better alignment of melt costs and surcharges for the majority of the current year, and the realization of
manufacturing and productivity savings. Gross margin in 2018 was adversely impacted toward the end of the year by the
misalignment of customer surcharges and melt costs.
Selling, general and administrative expenses:
Our SG&A expenses consist primarily of employee costs including salaries, incentive compensation, payroll taxes and
benefit related costs, legal and accounting services, share compensation and insurance costs. Our SG&A expenses increased
by $2.9 million for the year ended December 31, 2018 compared to 2017. The increase is driven by higher employee related
costs, including incentive compensation, consistent with increased business activity during the year. As a percentage of sales,
our SG&A expenses were 8.5% in 2018 compared to 9.3% in 2017.
18
Interest expense and deferred financing amortization:
Our interest costs on our debt was $4.0 million for the years ended December 31, 2018 and 2017. Although our debt levels
were substantially reduced for the second half of the 2018, the variable interest rates charged on our Credit Agreement debt
increased steadily throughout the year. The interest rate on our variable rate debt is determined by a LIBOR-based rate plus
an applicable margin based upon achieving certain ratios.
Other income:
Other income was $0.8 million in 2018 compared to less than $0.1 million in 2017. This increase is due to a favorable legal
settlement of $0.7 million received in the second quarter of 2018.
Provision (benefit) from income taxes:
The 2018 income tax provision is $1.9 million, compared to an income tax benefit of $7.6 million for 2017. The significant
components of the 2018 tax provision include the Federal statutory rate of 21%, offset by the benefit of research and
development tax credits. The 2017 tax benefit reflects a one-time adjustment due to the tax rate reduction enacted through the
Tax Cuts and Jobs Act in 2017 and a corresponding revaluation of our deferred taxes.
Net income:
We had net income of $10.7 million the year ended December 31, 2018, which reflected the increased demand for our
products and successful execution of 2018 business plans. This compares to $7.6 million for 2017, all of which was generated
by the one-time tax benefit discussed above.
Liquidity and Capital Resources
Historically, we have financed our operations through cash provided by operating activities and borrowings on our credit
facilities.
During 2018, we completed an underwritten, public offering involving the issuance and sale of approximately 1.4 million
shares of common stock which resulted in net proceeds of $32.2 million. We used the net proceeds from the public offering
to repay amounts outstanding under the Company’s credit facility. We also entered into a new Credit Agreement and a
qualified NMTC financing program in 2018, as further described in Notes 5 and 7, respectively, to our consolidated financial
statements included in Item 8, “Financial Statements and Supplementary Data.” No similar financing activities occurred
during 2019.
Net cash provided by operating activities
During 2019, we used cash from operating activities of $4.4 million. Net income adjusted for non-cash expenses generated
$24.3 million of cash. Our managed working capital, defined as net accounts receivable plus net inventory minus accounts
payable, used $19.4 million of cash. Inventories increased by $15.0 million to support strong demand for our aerospace end
market products. Accounts receivable increased by $3.0 million due to the timing of sales and collections activity. Accounts
payable decreased by $1.4 million and Accrued employment costs decreased by $3.5 million. All other operating activities
used $5.8 million of cash in 2019, primarily driven by a decrease in deferred revenue and an increase in prepaid expense.
During 2018, we generated net cash from operating activities of $16.6 million. Our managed working capital, defined as net
accounts receivable plus net inventory minus accounts payable, used $22.7 million of cash. Inventories increased by $20.4
million to support increased demand and increased business activity. Accounts receivable increased by $7.6 million due to
increased sales in the fourth quarter of 2018 compared to the fourth quarter of the prior year. Accounts payable increased by
$5.3 million due to increased business activity levels and timing of payments. Net income adjusted for non-cash expenses
generated $32.8 million and all other operating activities generated $6.5 million of cash in 2018.
Net cash used in investing activities
Our capital spending was $17.4 million during 2019 and $15.4 million during 2018. The current year capital spending
includes $3.8 million to finalize our new mid-size bar finishing unit at our Dunkirk, NY facility.
Net cash used in financing activities
During 2019, financing activities provided $17.8 million in cash, which was used to finance our capital spending and
working capital growth.
19
During 2018, financing activities provided $2.7 million in cash. We generated $32.2 million of cash through net proceeds
from the equity offering, which we used to repay amounts outstanding under the Company’s credit facility. We decreased
borrowings under our Credit Agreement (as defined below), our outstanding notes issued in connection with the acquisition
of the North Jackson facility (collectively, the “Notes”) and capital leases by $32.2 million in the aggregate, and entered into
the new Credit Agreement during the year. Financing activities were also impacted by borrowings related to the mid-size bar
cell capital project at our Dunkirk, NY facility. These borrowings were made in conjunction with utilization of the NMTC
financing program and higher working capital levels.
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.
Raw materials and supplies
The cost of raw materials represents approximately 40% of the cost of products sold in 2019. The major raw materials used in
our operations include nickel, molybdenum, vanadium, chrome and carbon scrap. The average price per pound of nickel
increased 6% in 2019 compared to 2018, to $6.30. The average monthly price per pound of our other major raw materials
steadily decreased during 2019. The average price per pound of molybdenum in 2019 was $11.46 (4% lower than 2018),
vanadium was $21.40 (45% lower), chrome was $1.02 (26% lower), and carbon scrap was $0.14 (26% lower).
We maintain sales price surcharge mechanisms to mitigate the risk of substantial raw material cost fluctuations. The market
values for these raw materials and others continue to fluctuate based on supply and demand, market disruptions and other
factors. Over time, our surcharge mechanisms will effectively offset changes in raw material costs; however, during a period
of rising or falling prices the timing will cause variation between reporting periods.
Additionally, our Bridgeville facility uses graphite electrodes as a consumable supply in the melting process. The average
price per pound for these electrodes steadily increased during 2018 and through the third quarter of 2019.
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 August 3, 2018, we entered into the First Amended and Restated Revolving Credit, Term Loan and Security Agreement
(“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 amended the prior Revolving Credit, Term Loan and Security Agreement (“Prior Agreement”), and provides for a
senior secured revolving credit facility not to exceed $110.0 million (“Revolving Credit Facility”) and a senior secured term
loan facility (“Term Loan”) in the amount of $10.0 million (together with the Revolving Credit Facility, the “Facilities”).
The Facilities, which expire on August 3, 2023 (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
Company’s real property in North Jackson, Ohio.
Availability under the Credit Agreement is based on eligible accounts receivable and inventory. Further, the Company must
maintain undrawn availability under the Credit Agreement of at least an amount equal to payments due on the notes issued in
connection with the acquisition of the North Jackson facility, as defined in the Credit Agreement, plus 12.5% of the
maximum borrowing amount of $110.0 million (“Minimum Liquidity”). At December 31, 2019, the amount of payments due
on the notes relevant to the Minimum Liquidity calculation was $2 million. This requirement exists until the Notes are paid in
full, refinanced or extended.
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 is required to pay quarterly principal installments of approximately $0.4
million, plus accrued and unpaid interest, on the first day of each fiscal quarter beginning on September 30, 2018. To the
extent not previously paid, the Term Loan will become due and payable in full on the Expiration Date.
20
Amounts outstanding under the Facilities, at the Company’s option, will bear interest at either a base rate or a LIBOR based
rate, in either case calculated in accordance with the terms of the Credit Agreement. Interest under the Credit Agreement is
payable monthly. We elected to use the LIBOR based rate for the majority of our debt outstanding under the Facilities during
2018. At December 31, 2019, the LIBOR based rate was 3.45% on our Revolving Credit Facility and 3.95% for the Term
Loan.
The Credit Agreement contains customary affirmative and negative covenants. If a triggering event occurs as defined in the
Credit Agreement, the Company must maintain a fixed charge coverage ratio of not less than 1.10 to 1.0 measured on a
rolling four quarter basis and calculated in accordance with the terms of the Credit Agreement.
At December 31, 2019 and 2018, we had net Credit Agreement related deferred financing costs of approximately $0.7
million and $0.9 million, respectively. For the years ended December 31, 2019 and 2018, we amortized $0.2 million and $0.3
million of those deferred financing costs, respectively. We did not incur any additional deferred financing costs to the
Consolidated Balance Sheet during 2019. For the year ended December 31, 2018, we recorded $0.4 million of additional
Credit Agreement related deferred financing costs to the Consolidated Balance Sheet.
Notes
In connection with the acquisition of the North Jackson facility in 2011, we issued $20.0 million in Notes to the sellers of the
facility as partial consideration in the transaction.
On January 21, 2016, the Company entered into Amended and Restated Notes in the aggregate principal amount of $20.0
million, each in favor of Gorbert Inc. (“Holder”). The Company’s obligations under the 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 Holder had
the right to elect at any time on or prior to August 17, 2017 to convert all or any portion of the outstanding principal amount
of the Notes. The Holder’s conversion rights expired and are no longer subject to exercise.
The Notes were originally scheduled to mature on March 17, 2019. On March 30, 2018, the Company provided notification
of its intent to extend the maturity date to March 17, 2020 in accordance with the terms of the Notes. Upon the Company’s
extension of the maturity date of the Notes to March 17, 2020, principal payments in the aggregate of $2.0 million were made
in March 2019.
On March 18, 2019, the Company provided notification of its intent to extend the maturity date to March 17, 2021 in
accordance with the terms of the Notes. Extending the maturity date of the Notes to March 17, 2021 would require a principal
payment in the aggregate amount of $2.0 million to be made in March 2020. In conjunction with the intended extension of
the maturity date of the Notes, $2.0 million has been classified within current portion of long-term debt.
In accordance with the terms of the Notes, the Notes have borne interest at a rate of 6.0% per year since August 17, 2017. All
accrued and unpaid interest is payable quarterly in arrears on each September 18, December 18, March 18 and June 18.
Leases
The Company periodically enters into leases in its normal course of business. We adopted the guidance effective in Leases
(Topic 842) on January 1, 2019. As a result of adopting the guidance, the Company recorded lease liabilities and right-of-use
assets related to its operating leases to the consolidated balance sheet at the present value of minimum lease payments. The
assets are included in Other long-term assets in the consolidated balance sheet at December 31, 2019 and are amortized over
the respective terms, which are five years or less. The long-term component of the lease liability is recorded in Other long-
term liabilities, net and the current component is included in Other current liabilities. During the twelve months ended
December 31, 2019, the Company entered into four new lease agreements accounted for as operating leases.
The accounting for finance leases did not change. The right-of-use assets and lease liabilities for finance leases are recorded
at the present value of minimum lease payments. The assets are included in Property, plant and equipment, net on the
consolidated balance sheets and are depreciated over the respective lease terms. The long-term component of the lease
liability is included in Long-term debt and the current component is included in Current portion of long-term debt. During the
twelve months ended December 31, 2019 and 2018, the Company did not enter into any material new lease agreements
accounted for as a finance lease.
Share-Based Activity
We granted stock options and issued shares of our common stock to officers, employees, and non-employee directors during
2019, 2018 and 2017 through our incentive compensation plans. Refer to Note 12 to our consolidated financial statements
included in Item 8, “Financial Statements and Supplementary Data” for further information.
21
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, 2019.
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 Estimates
The Company’s revenues are primarily composed of sales of products. Revenue from the sale of products is recognized
when the Company satisfies its performance obligation under a contract by transferring control of the promised product to its
customer, which in most cases coincides with shipment of the related product. Certain sales qualify for over-time revenue
recognition. Sales of certain specified product grades and shapes, and sales from conversion services, are recognized over-
time. The Company’s identification of and accounting for these sales is discussed further in Note 2 to our consolidated
financial statements included in Item 8, “Financial Statements and Supplementary Data.”
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 net realizable value. 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 or fair value at acquisition 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
necessary as of December 31, 2019, 2018 or 2017.
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 several assumptions. Management believes each
assumption used in the valuation is reasonable because it considers the experience of the plan and reasonable expectations.
Management estimates volatility 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.
22
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 2019, we had $47.7 million of floating rate debt outstanding with an interest rates between 3.45% and
3.95%. 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 annual pre-tax results by approximately $0.5
million.
23
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, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Balance Sheets at December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedules
Schedule II – Valuation and Qualifying Accounts
Page
25
26
28
29
30
31
32
33
50
24
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, 2019, our internal control over financial reporting is effective.
The effectiveness of internal control over financial reporting as of December 31, 2019 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/ Christopher T. Scanlon
Christopher T. Scanlon
Vice President of Finance, Chief Financial Officer and Treasurer
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Universal Stainless & Alloy Products, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Universal Stainless & Alloy Products, Inc. (the
“Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive
income, cash flows, and shareholders’ equity for each of the three years in the period ended December 31, 2019, and the
related notes and schedules (collectively referred to as the “consolidated financial statements”). We also have audited the
Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
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, 2019 and 2018, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2019, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated
Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, 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 appearing under Item 8.
Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal
control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in
all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
26
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ Schneider Downs & Co., Inc.
Schneider Downs & Co., Inc.
We have served as the Company’s auditor since 2003.
Pittsburgh, Pennsylvania
February 19, 2020
27
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
Operating income
Interest expense and other financing costs
Other (income), net
Income before income taxes
(Benefit) provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Weighted average shares of common stock outstanding:
Basic
Diluted
2019
2018
2017
$
$
$
$
243,007 $
215,369
27,638
20,347
7,291
3,992
(474)
3,773
(502)
4,275 $
0.49 $
0.48 $
255,927 $
218,111
37,816
21,746
16,070
4,302
(829)
12,597
1,935
10,662 $
1.31 $
1.28 $
202,643
179,609
23,034
18,797
4,237
4,277
(49)
9
(7,601)
7,610
1.05
1.03
8,778,753
8,873,719
8,132,632
8,347,692
7,225,697
7,374,805
The accompanying notes are an integral part of these consolidated financial statements.
28
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
(dollars in thousands)
Net income
Other comprehensive income (loss), net of tax:
2019
2018
2017
$
4,275 $ 10,662 $
7,610
(Loss) reclassified into retained earnings from adoption of ASU 2018-02
Unrealized (loss) gain on foreign currency contracts, net of tax
(21)
(11)
-
94
-
(114)
Comprehensive income
$
4,243 $ 10,756 $
7,496
The accompanying notes are an integral part of these consolidated financial statements.
29
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 $295)
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 14)
Stockholders’ equity:
2019
2018
$
$
$
170 $
35,595
147,402
8,300
191,467
176,061
871
368,399 $
40,912 $
4,449
3,934
830
50,125
60,411
10,962
3,765
125,263
3,696
32,618
134,738
3,756
174,808
177,844
668
353,320
44,379
7,939
3,907
2,929
59,154
42,839
11,481
2,835
116,309
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; 9,093,715
and 9,045,345 shares issued, respectively
Additional paid-in capital
Accumulated other comprehensive (loss) income
Retained earnings
Treasury stock, at cost; 294,279 and 292,855 common shares held, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
-
-
9
94,982
(31)
150,487
(2,311)
243,136
368,399 $
9
93,100
1
146,191
(2,290)
237,011
353,320
$
The accompanying notes are an integral part of these consolidated financial statements.
30
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(dollars in thousands)
Operating Activities:
Net income
Adjustments for non-cash items:
Depreciation and amortization
Deferred income tax
Share-based compensation expense
Changes in assets and liabilities:
Accounts receivable, net
Inventory, net
Accounts payable
Accrued employment costs
Income taxes
Other, net
Net cash (used in) provided by operating activities
Investing Activities:
Capital expenditures
Proceeds from sale of property, plant and equipment
Net cash used in investing activities
Financing Activities:
Borrowings under revolving credit facility
Payments on revolving credit facility
Proceeds under New Markets Tax Credit financing, net
Payments on term loan facility, finance leases, and notes
Payments of financing costs
Proceeds from public offering, net of cash expenses
Proceeds from the exercise of stock options
Net cash provided by financing activities
Net (decrease) increase in cash and restricted cash
Cash and restricted cash at beginning of period
Cash and restricted cash at end of period
Supplemental Disclosure of Cash Flow Information:
Interest paid
Income taxes paid (refunded), net
2019
2018
2017
$
4,275
$
10,662
$
7,610
19,133
(517)
1,390
(2,977)
(14,965)
(1,412)
(3,490)
84
(5,930)
(4,409)
(17,354)
-
(17,354)
174,907
(153,632)
-
(3,904)
-
-
471
17,842
(3,921)
4,091
170
18,918
1,850
1,442
(7,628)
(20,373)
5,293
3,865
(246)
2,824
16,607
(15,388)
10
(15,378)
368,910
(388,728)
2,835
(12,364)
(1,109)
32,246
865
2,655
3,884
207
$
4,091
$
18,823
(7,593)
1,564
(5,567)
(27,378)
14,178
272
77
(881)
1,105
(7,996)
70
(7,926)
350,314
(338,836)
-
(5,078)
-
-
553
6,953
132
75
207
3,670
69
$
$
4,183
102
$
$
4,027
(85)
$
$
$
The following table reconciles cash and restricted cash above to the Consolidated Balance Sheets
For the years ended December 31,
Cash
Restricted cash included in other long-term assets
Total cash and restricted cash
2019
2018
2017
$
$
170
-
170
$
$
3,696
395
4,091
$
$
207
-
207
The accompanying notes are an integral part of these consolidated financial statements.
31
UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(dollars in thousands)
Balance at December 31, 2016
Common stock issuance under
Employee Stock Purchase Plan
Exercise of stock options
Share-based compensation
Net loss on derivative instruments
Retroactive adoption of ASU 2016-09
Net income
Balance at December 31, 2017
Common stock issuance under
Employee Stock Purchase Plan
Exercise of stock options
Public offering
Share-based compensation
Capital investment
Net gain on derivative instruments
Net income
Balance at December 31, 2018
Common stock issuance under
Employee Stock Purchase Plan
Exercise of stock options
Share-based compensation
Net loss on derivative instruments
Adoption of ASU 2018-02
Net income
Balance at December 31, 2019
Common
shares
outstanding
Additional
Accumulated
other
Common paid-in Retained comprehensive Treasury Treasury
earnings income (loss) shares stock
stock capital
7,215,299 $
8 $ 56,397 $ 127,084 $
21 292,855 $ (2,290)
16,185
22,125
4,178
-
-
-
7,257,787
7,922
50,770
1,408,163
27,848
-
-
-
8,752,490
-
-
-
-
-
-
8
-
-
1
-
-
-
-
9
-
226
-
327
-
1,564
-
-
-
835
- 7,610
58,514 135,529
-
-
-
(114)
-
-
-
-
-
-
-
-
(93) 292,855 (2,290)
-
-
-
-
-
-
-
-
149
716
32,246
1,442
33
-
-
- 10,662
93,100 146,191
-
-
-
-
-
-
-
-
-
-
-
-
94
-
-
-
1 292,855 (2,290)
31,376
5,325
10,245
-
-
-
8,799,436 $
-
418
-
53
-
1,411
-
-
21
-
- 4,275
-
-
-
-
-
-
9 $ 94,982 $ 150,487 $
-
-
-
-
- 1,424
-
-
-
-
-
(21)
-
-
-
(31) 294,279 $ (2,311)
(11)
(21)
-
The accompanying notes are an integral part of these consolidated financial statements.
32
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 and variable interest entities (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
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 necessary, require letters of credit, guarantees or cash collateral. During 2019, we had one customer which accounted
for approximately 27% of our total net sales and 9% of our total accounts receivable balance, and a second customer which
accounted for approximately 11% of our total net sales and 17% of our total accounts receivable. During 2018, we had one
customer which accounted for approximately 18% of our total net sales and 6% of our total accounts receivable balance.
During 2017, we had one customer that accounted for approximately 17% of our total net sales and 3% 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 7% of 2019 total net sales, 8% of 2018 total net sales, and 9%
of 2017 total net sales. 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. There was no bad debt expense recorded for the years ended December 31, 2019 and 2018. Bad
debt expense, net of recoveries, was $0.2 million for the year ended December 31, 2017.
Inventories. Inventories are stated at the lower of cost or net realizable value 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, 2019 was an increase of $0.2
million. The net change for the year ended December 31, 2018 was an increase of $0.4 million, and the net change for the
year ended December 31, 2017 was an increase of $0.7 million.
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, 2019, 2018 and 2017, we amortized these operating materials in the
amount of $2.3 million, $2.3 million and $2.1 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 12 to 36 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, 2019, 2018 and
2017 was $19.7 million, $18.3 million and $18.8 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,
2019, 2018 and 2017 was $16.7 million, $16.4 million and $16.5 million, respectively, of which $16.1 million, $15.9 million
and $16.2 million, respectively, was included as a component of cost of products sold while the remainder was included in
selling, general and administrative expense.
33
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 necessary as of December 31, 2019, 2018
and 2017.
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, 2019, 2018 and 2017 was $0.2 million, $0.3 million and $0.3 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. During 2018, the
Company recorded $0.7 million of additional deferred financing costs related to the New Markets Tax Credits financing
effective March 9, 2018, and $0.4 million of additional deferred financing costs related to the First Amended and Restated
Revolving Credit, Term Loan and Security Agreement (“Credit Agreement”) effective August 3, 2018. At December 31,
2019 and 2018, we had $1.4 million and $1.6 million, respectively, of unamortized deferred financing costs included on our
consolidated balance sheets as a reduction of debt.
Revenue Recognition. The Company’s revenues are primarily composed of sales of products. Revenue from the sale of
products is recognized when the Company satisfies its performance obligations under a contract by transferring control of the
promised product to its customer (“point-in-time”). Sales of certain specified product grades and shapes, and sales from
conversion services, are recognized over-time. These sales qualify for over-time revenue recognition as the Company does
not produce an asset with alternative use when completing its performance obligations with regard to these items, and
maintains an enforceable right to payment in the event of contract termination. Over-time recognition is a change from prior
accounting, which was point-in-time for the specified products and service completion for conversion services.
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.
Income Taxes. Deferred income taxes are provided for net operating losses, 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, 2019,
2018 and 2017.
We recognize excess tax benefits as a result of the exercise of employee stock options within the consolidated statements of
operations.
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 Income per Common Share. Net income per common share is computed by dividing net 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 by the weighted-average number of common shares outstanding plus all dilutive potential common shares
outstanding during the period. Potentially dilutive impacts of shares issuable under our outstanding notes issued in
connection with the acquisition of the North Jackson facility (collectively, the “Notes”) were excluded from the calculations
in 2017 as their inclusion would have been antidilutive. The conversion option expired in 2017 and is not applicable in 2018
or 2019.
34
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 8 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.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-
02 “Leases (Topic 842),” which amends existing accounting standards for leases. The ASU requires lessees to recognize
most leases on their balance sheet as a lease liability with a corresponding right-of-use asset. 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 lease accounting. The Company adopted the ASU effective January 1, 2019. The adoption
resulted in the recognition of current and noncurrent lease liabilities and corresponding right-of-use assets on the balance
sheet, which did not have a material impact on the consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income,” that permits
companies the option to reclassify stranded tax effects caused by the 2017 U.S. Tax Cuts and Jobs Act from accumulated
other comprehensive income to retained earnings. Consequently, the amendments eliminate the stranded tax effects resulting
from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users.
However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act,
the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing
operations is not affected. The Company adopted the ASU effective January 1, 2019 and recorded the reclassification to
retained earnings as of the effective date of the adoption. The adoption did not have a material impact on the consolidated
financial statements.
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 2018, the FASB issued ASU 2018-13, “Disclosure Framework–Changes to the Disclosure Requirements for Fair
Value Measurement,” which will modify the disclosure requirements on fair value measurements in Topic 820, Fair Value
Measurement, including the removal of certain disclosure requirements. The amendments in the ASU are effective for all
entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is
permitted upon issuance of the ASU. An entity is permitted to early adopt any removed or modified disclosures upon
issuance of the ASU and delay adoption of the additional disclosures until the effective date. We will adopt this guidance
effective January 1, 2020, and we do not believe adoption of the guidance will have a material effect on our consolidated
financial statements.
Note 2: Revenue Recognition
The Company’s revenues are primarily comprised of sales of products. Revenue is recognized when the Company satisfies its
performance obligation under the contract by transferring the promised product to its customer that obtains control of the
product. A performance obligation is a promise in a contract to transfer a distinct product to a customer. Most of the
Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately
identifiable from other promises in the contract and, therefore, not distinct.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products.
As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales and other taxes are
excluded from revenues. Invoiced shipping and handling costs are included in revenue. Payment terms vary depending upon
various considerations, including credit worthiness and prior payment history.
35
The Company’s revenue is primarily from products transferred to customers at a point in time. The Company recognizes
revenue at the point in time in which the customer obtains control of the product, which is generally when product title passes
to the customer upon shipment.
We have determined that there are certain customer agreements involving production of specified product grades and shapes
that require revenue to be recognized over time, in advance of shipment, due to there being no alternative use for these grades
and shapes without significant economic loss. Also, the Company maintains an enforceable right to payment including a
normal profit margin from the customer in the event of contract termination. Contract assets related to services performed,
not yet billed of $2.2 million and $1.0 million are included in Accounts Receivable in the Consolidated Balance Sheets at
December 31, 2019 and December 31, 2018, respectively.
The Company has elected the following practical expedients allowed under ASU 2014-09:
•
•
Shipping activities are not considered to be separate performance obligations.
Performance obligations are satisfied within one year from a given reporting date, consequently we omit disclosure
of the transaction price apportioned to remaining performance obligations on open orders.
The following summarizes our revenue by melt type:
Net sales:
Specialty alloys
Premium alloys (A)
Conversion services and other sales
Total net sales
Twelve Months Ended
December 31,
2019
2018
$
201,120
37,618
4,269
$
243,007
$
209,203
41,144
5,580
255,927
(A) Premium alloys represent all vacuum induction melted (VIM) products.
Note 3: 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 4: 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
36
2019
2018
9,815
127,713
13,090
150,618
(3,216)
147,402
$
$
2019
2018
7,847
50,974
281,008
9,441
349,270
(173,209)
176,061
$
$
9,555
115,627
12,515
137,697
(2,959)
134,738
7,543
50,607
269,034
7,184
334,368
(156,524)
177,844
$
$
$
$
Note 5: Long-Term Debt
Long-term debt consists of the following:
December 31,
(dollars in thousands)
Term loan
Revolving credit facility
Notes
Finance leases
Less: current portion of long-term debt
Less: deferred financing costs
Long-term debt
Credit Facility
2019
2018
$
$
8,215
39,480
17,000
1,026
65,721
(3,934)
(1,376)
$
60,411
$
9,643
18,204
19,000
1,502
48,349
(3,907)
(1,603)
42,839
On August 3, 2018, we entered into 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 amended the prior Revolving Credit, Term Loan and Security Agreement (“Prior
Agreement”), and provides for a senior secured revolving credit facility not to exceed $110.0 million (“Revolving Credit
Facility”) and a senior secured term loan facility (“Term Loan”) in the amount of $10.0 million (together with the Revolving
Credit Facility, the “Facilities”). The Company was in compliance with all applicable covenants prior to the August 3, 2018
amendment to the Credit Agreement and through December 31, 2019 and 2018.
The Facilities, which expire on August 3, 2023 (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
Company’s real property in North Jackson, Ohio.
Availability under the Credit Agreement is based on eligible accounts receivable and inventory. Further, the Company must
maintain undrawn availability under the Credit Agreement of at least an amount equal to payments due on the notes issued in
connection with the acquisition of the North Jackson facility, as defined in the Credit Agreement, plus 12.5% of the
maximum borrowing amount of $110.0 million “(Minimum Liquidity”). At December 31, 2019, the amount of payments due
on the notes relevant to the Minimum Liquidity calculation was $2.0 million. This requirement exists until the Notes are paid
in full, refinanced or extended.
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 must pay quarterly installments of the principal of approximately $0.4 million,
plus accrued and unpaid interest, on the first day of each fiscal quarter beginning on September 30, 2018. 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 or a LIBOR based
rate, in either case calculated in accordance with the terms of the Credit Agreement. Interest under the Credit Agreement is
payable monthly. We elected to use the LIBOR based rate for the majority of the debt outstanding under the Facilities during
2019. At December 31, 2019, the LIBOR based rate was 3.45% on our Revolving Credit Facility and 3.95% for the Term
Loan.
The Credit Agreement contains customary affirmative and negative covenants. If a triggering event occurs as defined in the
Credit Agreement, the Company must maintain a fixed charge coverage ratio of not less than 1.10 to 1.0 measured on a
rolling four quarter basis and calculated in accordance with the terms of the Credit Agreement.
$6.7 million was drawn on the Revolving Credit Facility to fund cash restricted for use related to the New Markets Tax
Credit (“NMTC”) Financing Transaction. NMTC related restricted cash receipts totaling approximately $8.0 million in 2018
and $0.4 million in 2019 were applied to the Company’s Revolving Credit Facility, described in Note 7.
37
At December 31, 2019 and 2018, we had net Credit Agreement related deferred financing costs of approximately $0.7
million and $0.9 million, respectively. For the years ended December 31, 2019 and 2018, we amortized $0.2 million and $0.3
million of those deferred financing costs, respectively. We did not record any additional deferred financing costs to the
Consolidated Balance Sheet during 2019. For the year ended December 31, 2018, we recorded $0.4 million of additional
Credit Agreement related deferred financing costs to the Consolidated Balance Sheet.
The aggregate annual principal payments due under our Credit Agreement at December 31, 2019, are as follows:
(dollars in thousands)
2020
2021
2022
2023
Notes
$
$
1,429
1,429
1,429
43,408
47,695
In connection with the acquisition of the North Jackson facility in 2011, we issued $20.0 million in Notes to the sellers of the
facility as partial consideration in the transaction.
On January 21, 2016, the Company entered into Amended and Restated Notes in the aggregate principal amount of $20.0
million, each in favor of Gorbert Inc. (“Holder”). The Company’s obligations under the 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 Holder had
the right to elect at any time on or prior to August 17, 2017 to convert all or any portion of the outstanding principal amount
of the Notes. The Holder’s conversion rights expired and are no longer subject to exercise.
The Notes were originally scheduled to mature on March 17, 2019. On March 30, 2018, the Company provided notification
of its intent to extend the maturity date to March 17, 2020 in accordance with the terms of the Notes. Upon the Company’s
extension of the maturity date of the Notes to March 17, 2020, principal payments in the aggregate of $2.0 million were made
in March 2019.
On March 18, 2019, the Company provided notification of its intent to extend the maturity date to March 17, 2021 in
accordance with the terms of the Notes. Extending the maturity date of the Notes to March 17, 2021 would require a principal
payment in the aggregate amount of $2.0 million to be made in March 2020. In conjunction with the intended extension of
the maturity date of the Notes, $2.0 million has been classified within current portion of long-term debt.
In accordance with the terms of the Notes, the Notes have borne interest at a rate of 6.0% per year since August 17, 2017. All
accrued and unpaid interest is payable quarterly in arrears on each September 18, December 18, March 18 and June 18.
Note 6: Leases
The Company periodically enters into leases in its normal course of business. At December 31, 2019, the leases in effect
were primarily related to mobile and other production equipment. The term of our leases is generally 60 months or less, and
the leases do not have significant restrictions, covenants, or other nonstandard terms.
We adopted the guidance effective in Leases (Topic 842) on January 1, 2019. Adoption of this guidance did not change the
balance sheet recognition of our finance leases or the income statement recognition of our finance or operating leases. As a
result of adopting the guidance, the Company recorded lease liabilities and right-of-use assets related to its operating leases.
The impact at adoption was immaterial to the Company’s consolidated financial statements.
Right-of-use assets and lease liabilities are recorded at the present value of minimum lease payments. For our operating
leases, the assets are included in Other long-term assets on the consolidated balance sheet at December 31, 2019 and are
amortized within operating income over the respective lease terms. The long-term component of the lease liability is included
in Other long-term liabilities, net, and the current component is included in Other current liabilities. During the twelve
months ended December 31, 2019, the Company entered into four new lease agreements accounted for as operating leases.
For our finance leases, the assets are included in Property, plant and equipment, net on the consolidated balance sheets and
are depreciated over the respective lease terms which range from three to five years. The long-term component of the lease
liability is included in Long-term debt and the current component is included in Current portion of long-term debt. The
Company did not enter into any material new lease agreements accounted for as a finance lease during the twelve months
ended December 31, 2019.
38
As of December 31, 2019, future minimum lease payments applicable to operating and finance leases were as follows:
2020
2021
2022
2023
2024
Total minimum lease payments
Less amounts representing interest
Present value of minimum lease payments
Less current obligations
Total long-term lease obligations, net
Weighted-average remaining lease term
Operating Leases
Finance Leases
$
$
$
$
212 $
192
181
87
11
683 $
(41)
642 $
(208)
434 $
583
471
56
15
-
1,125
(99)
1,026
(507)
519
4 years
2 years
Right-of-use assets recorded to the consolidated balance sheet at December 31, 2019 were $0.6 million for operating leases
and $0.8 million for finance leases. For the twelve months ended December 31, 2019, the amortization of finance lease assets
was $0.5 million and was included in cost of products sold in the Consolidated Statements of Operations.
The Company elected the practical expedient allowed under Leases (Topic 842) to exclude leases with a term of 12 months
or less from the calculation of our lease liabilities and right-of-use assets.
In determining the lease liability and corresponding right-of-use asset for each lease, the Company calculated the present
value of future lease payments using the interest rate implicit in the lease, when available, or the Company’s incremental
borrowing rate. The incremental borrowing rate was determined with reference to the interest rate applicable under our senior
secured revolving credit facility discussed in Note 5, as this facility is collateralized by a first lien on substantially all of the
assets of the Company and its term is similar to the term of our leases.
Note 7: New Markets Tax Credit Financing Transaction
On March 9, 2018, the Company entered into a New Markets Tax Credit financing program with PNC New Markets
Investment Partners, LLC and Boston Community Capital, Inc. related to a new mid-size bar cell capital project at the
Company’s Dunkirk, NY facility. PNC New Markets Investment Partners, LLC made a capital contribution and the
Company made a loan to Dunkirk Investment Fund, LLC (“Investment Fund”) under the qualified NMTC program. Through
this financing transaction, the Company secured low interest financing and the potential for other future benefits related to its
mid-size bar cell capital project.
In connection with the financing transaction, the Company loaned $6.7 million aggregate principal amount (“Leverage
Loan”) due in March 2048 to the Investment Fund. Additionally, PNC New Markets Investment Partners, LLC contributed
$3.5 million to the Investment Fund, and as such, PNC New Markets Investment Partners, LLC is entitled to substantially all
tax and other benefits derived from the NMTC. The Investment Fund then contributed the proceeds to a community
development entity (“CDE”). The CDE then loaned the funds, on similar terms, as the Leverage Loan to Dunkirk Specialty
Steel, LLC, a wholly-owned subsidiary of the Company. The CDE loan proceeds are restricted for use on the mid-size bar
cell capital project.
The NMTC is subject to 100 percent recapture for a period of seven years as provided in the Internal Revenue Code. The
Company is required to comply with various regulations and contractual provisions that apply to the NMTC arrangement.
Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, require
the Company to indemnify PNC New Markets Investment Partners, LLC for any loss or recapture of NMTCs related to the
financing until the Company’s obligation to deliver tax benefits is relieved. The Company does not anticipate any credit
recaptures will be required in connection with this arrangement.
As of December 31, 2019 and 2018, the Company recorded $2.8 million within Other long-term liabilities related to this
transaction, which represents the funds contributed to the Investment Fund by PNC New Markets Investment Partners, LLC.
39
This transaction also includes a put/call provision whereby the Company may be obligated or entitled to repurchase PNC
New Markets Investment Partners, LLC’s interest in the Investment Fund. The Company believes that PNC New Markets
Investment Partners, LLC will exercise the put option in March 2025, at the end of the recapture period, resulting in a gain of
$2.8 million at that time. The value attributed to the put/call is immaterial.
Direct costs incurred in structuring this financing transaction totaled $0.7 million. These costs were deferred and will be
amortized over the term of the loans.
The Company has determined that the Investment Fund and CDE are each a VIE, and that it is the primary beneficiary of
each VIE. This conclusion was reached based on the following:
•
•
•
•
The ongoing activities of the VIE, collecting and remitting interest and fees, and NMTC compliance were all
considered in the initial design and are not expected to significantly affect economic performance throughout the life
of the VIE;
Contractual arrangements obligate the Company to comply with NMTC rules and regulations and provide various
other guarantees to the Investment Fund and CDE;
PNC New Markets Investment Partners, LLC lacks a material interest in the underlying economics of the project;
and
The Company is obligated to absorb losses of the VIE.
Because the Company is the primary beneficiary of each VIE, these entities have been included in the Company’s
Consolidated Financial Statements.
Note 8: 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, 2019
and 2018 due to their short-term nature (Level 1). The fair value of the Term Loan and Revolver at December 31, 2019 and
2018 approximated the carrying amount as the interest rate is based upon floating short-term interest rates (Level 2). The fair
value of the Notes was approximately $16.9 million at December 31, 2019 and $18.8 million at December 31, 2018 (Level
2).
Note 9: 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, the Company enters 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 was $4.9 million at December 31, 2019 and $7.4 million at December 31, 2018. The
contracts had a related unrealized loss recorded in accumulated other comprehensive income at December 31, 2019 of less
than $0.1 million, and a related unrealized gain of less than $0.1 million at December 31, 2018.
40
Note 10: Income Taxes
The income tax benefit attributable to continuing operations during the years ended December 31, 2019, 2018 and 2017 is as
follows:
Components of the benefit from income taxes are as follows:
For the years ended December 31,
(dollars in thousands)
Current (benefit) provision
Federal
State
Deferred (benefit) provision
Federal
State
Benefit related to a change in enacted tax law
(Benefit) provision for income taxes
2019
2018
2017
$
$
(7) $
22
(279)
(238)
-
(502) $
(1) $
86
2,100
(250)
-
1,935 $
(28)
21
114
568
(8,276)
(7,601)
The income tax (benefit) provision reconciled to taxes computed at the statutory federal rate is as follows:
For the years ended December 31,
Tax provision at statutory tax rate
State income taxes, net of federal impact
Research and development tax credit
Valuation allowance, net of federal impact
Impact of changes in enacted tax law
Adjustments to deferred taxes
Other, net
(Benefit) provision for income taxes
2019
2018
2017
$
$
792 $
38
(1,233)
(193)
-
41
53
(502) $
2,645 $
74
(874)
(167)
-
277
(20)
1,935 $
3
3
(425)
475
(8,276)
506
113
(7,601)
We continue to record a full valuation allowance against our New York deferred tax assets due to the zero percent state
income tax rate for qualified manufacturers. We continue to record a partial valuation allowance against our Pennsylvania net
operating loss deferred tax asset due to annual usage limitations. We have determined that federal and other state deferred tax
assets are expected to be realized and have not recorded any additional valuation allowances.
41
We recognized the tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) in the year ended December 31, 2017 and
recorded $8.3 million in tax benefits, which relates almost entirely to the remeasurement of deferred tax liabilities to
the reduced 21% corporate income tax rate.
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
2019
2018
$
$
$
$
$
7,659
970
2,029
166
333
7
11,164
21,312
814
22,126
10,962
$
$
$
$
$
8,331
787
1,909
239
836
5
12,107
22,951
637
23,588
11,481
We file a U.S. federal income tax return and various state income tax returns. For federal income tax purposes, we had $8.6
million and $18.7 million of net operating loss carryforwards at December 31, 2019 and 2018, 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 $5.2 million and $4.0 million as of December 31, 2019 and 2018, respectively. The research and
development credit carryforwards begin to expire in 2030.
We have state net operating loss carryforwards of $8.8 million at December 31, 2019 and 2018, and the related valuation
allowances were $2.8 million and $5.2 million at December 31, 2019 and 2018, respectively. We have state credit
carryforwards of $0.2 million at December 31, 2019 and 2018. 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 2015. We are subject to examination by most state tax jurisdictions for tax years after 2015.
Note 11: Net Income (Loss) Per Common Share
The computation of basic and diluted net income (loss) per common share for the years ended December 31, 2019, 2018 and
2017 is as follows:
For the years ended December 31,
(dollars in thousands, except per share amounts)
Numerator:
Net income
2019
2018
2017
$
4,275 $
10,662 $
7,610
Denominator:
Weighted average number of shares of common stock outstanding
Weighted average effect of dilutive share-based compensation
Diluted weighted average number of shares of common stock outstanding
8,778,753 8,132,632 7,225,697
94,966 215,060 149,108
8,873,719 8,347,692 7,374,805
Net income per common share:
Basic earnings per share
Diluted earnings per share
$
$
0.49 $
0.48 $
1.31 $
1.28 $
1.05
1.03
42
On May 25, 2018, the Company completed an underwritten, public offering involving the issuance and sale by the Company
of 1,224,490 shares of common stock at a public offering price of $24.50 per share. In addition, the Company granted the
underwriters a 30-day option to purchase up to an additional 183,673 shares of common stock. On June 1, 2018, the
underwriters exercised the option in full, and an additional 183,673 shares of common stock were issued and sold on June 5,
2018. The public offering resulted in gross proceeds to the Company of approximately $34.5 million, or $32.2 million net of
the underwriting discount and other offering fees and expenses. We used the net proceeds from the public offering to repay
amounts outstanding under the Company’s revolving credit facility. The public offering’s impact on the weighted average
number of shares for the year ended December 31, 2018 was 0.8 million shares.
There were 593,975, 323,250, and 590,350 options to purchase shares of common stock, at an average price of $26.91,
$32.36, and $30.63 for the years ended December 31, 2019, 2018 and 2017, respectively, that were not included in the
computation of diluted net income per common share because their respective exercise prices were greater than the average
market price of our common stock.
An adjustment for interest expense on convertible notes was excluded from the income per share calculation for the years
ended December 31, 2017 as it would have been antidilutive.
The calculations of diluted earnings per share for the year ended December 31, 2017 exclude 268,351 shares for the assumed
conversion of the Notes as inclusion would have been antidilutive.
Note 12: Share-Based Compensation
At December 31, 2019, we had the following share-based compensation plans:
Universal Stainless & Alloy Products, Inc. 2017 Equity Incentive Plan
We maintain the Universal Stainless & Alloy Products, Inc. 2017 Equity Incentive Plan (the “2017 Plan”), which was
approved by our stockholders in May 2017. The 2017 Plan permits the issuance of stock options, restricted stock, restricted
stock units, other share-based awards and performance awards to officers, employees, non-employee directors, and
consultants and advisors to the Company. At inception, there were 568,357 shares authorized for issuance under the 2017
Plan.
When adopted, the 2017 Plan replaced the Omnibus Incentive Plan (“OIP”). Any awards outstanding under the OIP will
remain subject to and be paid under the OIP. No new awards will be granted under the OIP. Any shares subject to
outstanding awards under the OIP that cease to be subject to such awards after the adoption of the 2017 Plan will increase the
shares authorized under the 2017 Plan. At December 31, 2019, there were 473,351 shares available for grant under the 2017
Plan.
Omnibus Incentive Plan
We maintain the OIP which was approved by our stockholders in May 2012. The OIP permitted the issuance of stock
options, restricted stock, restricted stock units and other share-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 were
expected to contribute to our future growth and success. With the adoption of the 2017 Plan, no shares of common
stock were available for grant at December 31, 2019 under OIP.
Stock Options
The price for options granted under the both the 2017 Plan and 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 both the 2017 Plan and 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.
43
A summary of stock option activity as of and for the year ended December 31, 2019 is presented below:
Non-vested stock
options outstanding
Weighted-
average
grant-date
fair value
Number
of shares
263,783 $
112,550
-
(103,697)
(19,900)
252,736 $
9.04
6.71
-
8.05
8.60
8.45
Stock options
outstanding
Weighted-
average
exercise
price
Weighted-
average
contractual
term (years)
Number
of shares
862,025 $
112,550
(5,325)
-
(72,450)
896,800 $
644,064 $
22.56
14.56
10.10
-
17.99
22.01
23.75
5.8
4.5
Outstanding at December 31, 2018
Stock options granted
Stock options exercised
Stock options vested
Stock options forfeited
Outstanding at December 31, 2019
Exercisable at December 31, 2019
Proceeds from stock option exercises totaled $0.1 million, $0.7 million and $0.3 million for the years ended December 31,
2019, 2018 and 2017, respectively. Shares issued in connection with stock option exercises are issued from available
authorized shares.
Based upon the closing stock price of $14.90 at December 31, 2019, the aggregate intrinsic value of outstanding and
exercisable stock options was $0.8 million and $0.6 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, 2019 was less than $0.1 million, and was $0.6 million for
the year ended December 31, 2018.
The total fair value of stock option awards vested during the years ended December 31, 2019, 2018 and 2017 was $0.8
million, $0.8 million and $1.2 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 $0.8 million, $0.8 million and $1.2 million for the years
ended December 31, 2019, 2018 and 2017, 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 $1.9 million at December 31, 2019, and the weighted-average period over which this
unrecognized expense was expected to be recognized was 2.8 years.
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, 2019, 2018 and 2017 was $6.71, $10.33 and $9.60, 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
2019
1.41% to 2.56%
2018
2.63% to 3.10%
2017
1.92% to 2.29%
0.0%
0.0%
0.0%
47% to 52%
45% to 52%
45% to 53%
49.4%
49.1%
47.4%
4.6 to 6.5 years
4.7 to 6.8 years
5.6 to 7.5 years
44
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
A summary of restricted stock activity for the years ended December 31, 2019 and 2018 is presented below:
Balance, December 31, 2017
Restricted stock granted in February
Restricted stock granted in May
Restricted stock vested in May
Restricted stock granted in November
Restricted stock vested in December
Balance, December 31, 2018
Restricted stock granted in May
Restricted stock vested in May
Restricted stock granted in November
Weighted-
average
grant-date
fair value
$
Number
of shares
82,280
9,530
5,136
(2,260)
10,666
(25,000)
80,352
6,368
(4,528)
18,000
Balance, December 31, 2019
100,192
$
15.45
26.23
24.20
18.00
19.46
14.75
17.97
12.88
20.56
14.39
16.89
Share-based compensation expense related to restricted stock totaled $0.4 million, $0.5 million, and $0.4 million for the years
ended December 31, 2019, 2018 and 2017, respectively.
During the years ended December 31, 2019 and 2018, we granted 24,368 and 25,332 time-based restricted stock units,
respectively, to certain employees and directors. The restricted stock units typically vest over four years for employees and
three years for directors. 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.
As of December 31, 2019, total unrecognized compensation cost related to non-vested time-based restricted stock units was
$0.9 million. That cost is expected to be recognized over a weighted-average period of 1.9 years.
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, 2019, we have issued 251,367 shares of
common stock since the Plan’s inception.
45
Note 13: 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 North Jackson, Titusville and Dunkirk hourly employees. Prior to the North Jackson initial collective
bargaining agreement, periodic contributions to the 401(k) plan were based on age for hourly employees at the North Jackson
facility. We make periodic contributions for the salaried employees at all locations based upon their service and their
individual contribution to the 401(k) plan.
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, 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 ended December 31, 2018. 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
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
23-6648508 / 499
Pension
fund
Trust
PPA zone status
2018
2019
Green
Green
Funding plan Company contributions to the Trust
pending /
implemented 2019
(dollars in thousands)
2018
2017
773
Surcharge
imposed
No
No
$
945 $
880 $
The total expense of all retirement plans for the years ended December 31, 2019, 2018 and 2017 was $2.1 million, $2.1
million and $1.8 million, respectively. No other post-retirement benefit plans exist.
Note 14: Commitments and Contingencies
From time to time, various lawsuits and claims have been or may be asserted against us relating to the conduct of our
business, including routine litigation relating to commercial and employment matters. The ultimate cost and outcome of any
litigation or claim cannot be predicted with certainty. Management believes, based on information presently available, that
the likelihood that the ultimate outcome of any such pending matter will have a material adverse effect on our financial
condition, or liquidity or a material impact 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.
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, 2019, our total
purchase obligations were approximately $21.7 million, of which approximately $15.9 million will be due in 2020.
46
Note 15: Selected Quarterly Financial Data (unaudited)
First quarter
Second quarter
Third quarter
Fourth quarter
(dollars in thousands, except per share amounts)
2019 Data:
Net sales
Gross margin
Operating income
Provision (benefit) for income taxes
Net income
Net income per common share
Basic
Diluted
2018 Data:
Net sales
Gross margin
Operating income
Provision (benefit) for income taxes
Net income
Net income per common share:
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
$
$
$
$
60,271 $
7,370 $
2,404 $
248 $
1,222 $
70,997 $
9,106 $
3,502 $
384 $
2,086 $
56,568 $
5,308 $
783 $
(577) $
767 $
0.14 $
0.14 $
0.24 $
0.24 $
0.09 $
0.09 $
63,737 $
9,272 $
4,065 $
777 $
2,125 $
66,071 $
11,695 $
5,846 $
1,139 $
4,038 $
69,056 $
10,425 $
5,294 $
460 $
3,916 $
0.29 $
0.28 $
0.52 $
0.50 $
0.45 $
0.44 $
55,171
5,854
602
(557)
200
0.02
0.02
57,063
6,424
865
(441)
583
0.07
0.07
Net income 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.
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
ITEM 9A.
Our management, including our Chairman, President and Chief Executive Officer and our 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 our 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, 2019, 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.
47
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 2019 Annual Meeting of
Stockholders (the “Proxy Statement”) to be sent to stockholders in connection with our 2019 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 2019 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 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, 2019 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)
896,800 $
-
896,800 $
22.01
-
22.01
521,984
-
521,984
(A) Includes 473,351 shares of common stock not issued under the Universal Stainless & Alloy Products, Inc. 2017
Equity Incentive Plan and 48,633 available under the 1996 Employee Stock Purchase Plan, as amended.
48
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.
49
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
For the Years Ended December 31, 2019, 2018 and 2017
(dollars in thousands)
Allowance for doubtful accounts:
Year ended December 31, 2019
Year ended December 31, 2018
Year ended December 31, 2017
Valuation allowance for deferred income taxes:
Year ended December 31, 2019
Year ended December 31, 2018
Year ended December 31, 2017
Balance at
beginning
of year
Charged to
costs and
expenses
Deductions/
net charge-
offs (A)
Balance at
end of year
$
$
295
456
309
2,298
2,465
1,553
-
-
159
-
-
912
- $
(161)
(12)
295
295
456
(193) $
(167)
-
2,105
2,298
2,465
(A) Credits to the allowance for doubtful accounts represent the write-off of bad debts net of recoveries. Credits to the
valuation allowance for deferred income taxes represent adjustments to existing valuation allowances.
50
3) Exhibits
EXHIBIT
NUMBER
3.1
DESCRIPTION
Amended and Restated Certificate of Incorporation, as
amended
3.2
Second Amended and Restated By-laws of the Company
Specimen Copy of Stock Certificate for shares of Common
Stock
Form of Amended and Restated Note, dated January 21,
2016
4.1
4.2
4.3
10.1
Description of Registrant’s Securities Registered Pursuant to
Section 12 of the Securities Exchange Act of 1934
Filed herewith.
Stockholders Agreement dated as of August 1, 1994, by and
among the Company and its existing stockholders
10.2
Omnibus Incentive Plan
10.3
10.4
10.5
10.6
10.7
10.8
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 5, 2015 between the
Company and Graham McIntosh
Employment Agreement dated April 2, 2018, between the
Company and Christopher T. Scanlon
Employment Agreement dated November 5, 2018, between
the Company and Alyssa H. Snider
10.9
Form of notice of grant of restricted stock award.
10.10
Form of non-statutory stock option agreement.
10.11
Form of incentive stock option agreement.
51
Incorporated herein by reference to Exhibit 3.1 to
the Annual Report on Form 10-K for the year
ended December 31, 2017.
Incorporated herein by reference to Exhibit 3.1 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
Incorporated herein by reference to Exhibit 10.1 to
the Annual Report on Form 10-K for the year
ended December 31, 2017.
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 10.2 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 March 31, 2018.*
Incorporated herein by reference to Exhibit 10.8 to
the Company’s Annual Report on Form 10-K for
the year ended December 31, 2018.*
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.*
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
EXHIBIT
NUMBER
DESCRIPTION
10.12
Form of non-statutory stock option agreement for eligible
directors.
10.13
First Amended and Restated Revolving Credit, Term Loan
and Security Agreement, dated as of August 3, 2018, 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, the lenders party
thereto from time to time and PNC Capital Markets LLC, as
sole lead arranger and sole bookrunner.
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 August 6,
2018.
10.14
Amendment to the Universal Stainless & Alloy Products,
Inc. Employee Stock Purchase Plan, dated as of May 12,
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.
10.15
Universal Stainless & Alloy Products, Inc. 2017 Equity
Incentive Plan.
Incorporated herein by reference to Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2017.*
10.16
10.17
10.18
Form of Non-Employee Director Stock Option Award
Agreement (Universal Stainless & Alloy Products, Inc. 2017
Equity Incentive Plan)
Incorporated herein by reference to Exhibit 10.3 to
the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2017.
Form of Non-Employee Director RSU Award Agreement
(Universal Stainless & Alloy Products, Inc. 2017 Equity
Incentive Plan)
Incorporated herein by reference to Exhibit 10.4 to
the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2017.
Form of Employee Stock Option Award Agreement
(Universal Stainless & Alloy Products, Inc. 2017 Equity
Incentive Plan)
Incorporated herein by reference to Exhibit 10.6 to
the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2017.
10.19
Form of Employee RSU Award Agreement (Universal
Stainless & Alloy Products, Inc. 2017 Equity Incentive Plan)
Incorporated herein by reference to Exhibit 10.7 to
the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2017.
10.20
Form of Retention Stock Option Award Agreement
(Universal Stainless & Alloy Products, Inc. 2017 Equity
Incentive Plan)
Incorporated herein by reference to Exhibit 10.5 to
the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2017.
10.21
Form of Retention RSU Award Agreement (Universal
Stainless & Alloy Products, Inc. 2017 Equity Incentive Plan)
Incorporated herein by reference to Exhibit 10.8 to
the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2017.
10.22
10.23
10.24
21.1
23.1
24.1
31.1
Amendment to the Employment Agreement dated December
21, 2007 between the Company and Dennis M. Oates
Filed herewith.
Amendment to the Employment Agreement dated February
21, 2008 between the Company and Paul A. McGrath
Filed herewith.
Amendment to the Employment Agreement dated April 21,
2008 between the Company and Christopher M. Zimmer
Filed herewith.
Subsidiaries of Registrant
Consent of Schneider Downs & Co., Inc.
Filed herewith.
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.
52
EXHIBIT
NUMBER
31.2
32.1
101
DESCRIPTION
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.
Filed herewith.
The following financial information from this Annual Report
on Form 10-K for the fiscal year ended December 31, 2018,
formatted in XBRL (Extensible Business Reporting
Language) and furnished electronically herewith: (i) the
Consolidated Balance Sheets as of December 31, 2018 and
2017 (ii) the Consolidated Statements of Operations for the
years ended December 31, 2018, 2017 and 2016; (iii) the
Consolidated Statements of Comprehensive Income; (iv) the
Consolidated Statements of Cash Flows for the years ended
December 31, 2018, 2017 and 2014; (v) the Consolidated
Statements of Shareholders’ Equity for the years ended
December 31, 2018, 2017 and 2016; 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.
53
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 19, 2020.
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
Chairman, President, Chief Executive Officer and
February 19, 2020
Dennis M. Oates
Director (Principal Executive)
/s/ Christopher T. Scanlon
Vice President of Finance, Chief Financial Officer and
February 19, 2020
Christopher T. Scanlon
Treasurer (Principal Financial and Accounting Officer)
/s/ Christopher L. Ayers
Director
Christopher L. Ayers
/s/ Judith L. Bacchus
Director
Judith L. Bacchus
/s/ M. David Kornblatt
Director
M. David Kornblatt
/s/ Udi Toledano
Director
Udi Toledano
February 19, 2020
February 19, 2020
February 19, 2020
February 19, 2020
54