Universal Stainless Reports 1st Quarter Results
04/28/2008 - Universal Stainless & Alloy Products reports net income of $4.7 million on sales of $56.8 million for the first quarter of 2008.
Universal Stainless & Alloy Products, Inc. reported net income $4.7 million on sales of $56.8 million for the first quarter of 2008.
Net income of $4.7 million ($0.70 per diluted share) compares with net income of $6.8 million ($1.00 per diluted share) in the first quarter of 2007. Sales of $56.8 million were in line with sales of $56.2 million reported in the first quarter of 2007. Results exceeded the company's forecast for sales in the range of $50 to $55 million and diluted EPS in the range of $0.60 to $0.65.
Nickel costs were more stable in the first quarter compared to their high volatility in 2007, and were substantially lower than their level at March 31, 2007. The change in nickel costs reduced first-quarter gross margins for the company's Dunkirk segment by an estimated $157,000 (FIFO charge), equivalent to $0.02 per diluted share, compared with an increase (FIFO benefit) of $1.2 million, equivalent to $0.12 per diluted share, in the first quarter of 2007. The swing in the FIFO effect combined with a change in product mix reduced company-wide gross margins in the first quarter compared with the same period of 2007.
Management Comments—“Solid demand in our key markets combined with better than expected sales
of power generation and tool steel products enabled us to exceed our forecast for the first quarter of 2008,” commented President and CEO Dennis Oates. “In total, our sales to the power generation market rose an estimated 34% sequentially and 15% over the first quarter of 2007, while tool steel sales increased 25% over the fourth quarter of 2007 and 28% year-over-year.
“Our sales to the petrochemical market also improved sequentially, rising an estimated 30% from the 2007 fourth quarter, and matched the first quarter of 2007,” continued Oates. “Our sales to the aerospace market increased an estimated 5% from the fourth quarter of 2007, but were 15% lower than the first quarter a year ago. While aerospace demand remains very strong, our aerospace sales go through service centers and forgers, which continue to demonstrate conservative buying patterns and report pockets of excess inventory. We have not changed our view that service centers and forgers will, by necessity, return to more-normal buying levels in the second half of the year.”
Oates continued, “We made progress on several priorities in the first quarter. One of the highest was to add a Vice President of Sales and Marketing, and we were pleased to announce earlier this week that Chris Zimmer has joined our team. Our focus is to accelerate sales growth by further penetrating our domestic markets as well as expanding into international sales. We are now in conversations with potential partners and new customers in North America, South America, Europe, Russia and India. This is a long-term process, but we are pleased by the initial response and have several trial orders underway, including some for new products.
“Operational improvement is another area of high priority for us. We are progressing with the start-up of our new state-of-the-art high temperature annealing system in Dunkirk and remain on track to have it fully operational by the end of the current second quarter.
"In a further move to realize Dunkirk's potential and improve efficiency company-wide, we will relocate the round bar finishing operation in Bridgeville to Dunkirk, where it will replace inefficient multi-step equipment with advanced continuous-process capability. We expect to reduce the round bar production cycle in Dunkirk by as much as two weeks resulting in a payback that is less than one year. It also will enable Bridgeville to focus on its core competency, the manufacture of semi-finished products including tool steel plate."
Oates concluded, “We expect continued incremental improvement in our financial performance as reflected in our forecast for the second quarter of 2008. We expect our operational improvement to be more substantial as we continue to enhance our productivity and improve customer service levels. Our overall goal is to further accelerate our growth.”
Segment Results—The company’s Universal Stainless & Alloy Products segment reported sales of $48.2 million and operating income of $4.9 million, yielding an operating margin of 10%. This compares with sales of $48.2 million and operating income of $7.2 million, or 15% of sales, in the first quarter of 2007. In the fourth quarter of 2007, sales were $43.4 million and operating income was $3.2 million, or 7% of sales.
While segment sales matched those of the first quarter of 2007, pounds shipped increased 6% mainly due to higher shipments of billet product to reroll customers and of tool steel plate to service centers. These increases were offset by lower shipments of semi-finished products to forgers and of finished bar products to service centers. The shift in product mix resulted in the lower operating margin compared to the first quarter of 2007. Sales increased 11% over the fourth quarter of 2007, while pounds shipped rose 16%, due to increased shipments to all product and customer categories, with the exception of bar products to service centers, which were down 9% sequentially. The sequential improvement in operating margin was due to the higher shipment volume.
The Dunkirk Specialty Steel segment reported sales of $20.1 million and operating income of $2.8 million for the first quarter of 2008, resulting in an operating margin of 14%, which included the FIFO charge of $157,000. That compares with sales of $20.4 million and operating income of $3.8 million, or 19% of sales, in the first quarter of 2007, which included an estimated FIFO benefit of $1.2 million. In the fourth quarter of 2007, sales were $18.7 million and operating income was $2.2 million, or 12% of sales, and included a FIFO charge of $53,000.
Dunkirk's sales and pounds shipped were in line with the first quarter of 2007, with higher shipments to service centers offset by lower shipments of rod and wire products to redrawers. The decline in the operating margin from the first quarter of 2007 mainly reflected the change in the FIFO effect resulting from the impact of nickel price changes in the applicable periods. Dunkirk's sales rose 7% over the fourth quarter of 2007, while pounds shipped increased 11%. The increased shipments in all categories, except rod and wire products to redrawers, accounted for the sequential improvement in operating margin.
Business Outlook—The company estimates that sales for the second quarter of 2008 will range from $55 to $60 million, and that diluted EPS will range from $0.70 to $0.75. This compares with sales of $62.1 million and diluted EPS of $0.87, in the second quarter of 2007. Results in the prior-year second quarter included a FIFO benefit estimated at approximately $1.2 million ($0.12 per diluted share) offset by an $800,000 charge ($0.08 per diluted share) related to a legal settlement, and an inventory adjustment of $1.0 million ($0.11 per diluted share) related to the sharp drop in nickel prices at the end of the quarter.
The company based its estimates on a number of factors, including its total backlog at March 31, 2008, which rose to approximately $88 million, from $85 million at December 31, 2007. The increased backlog is primarily attributable to an order received for power generation applications from a non-U.S. customer destined for Europe. Additionally, sales from the Dunkirk Specialty Steel segment are expected to approximate $20 million in the second quarter of 2008. (It is assumed that there will be no FIFO benefit or charge at the Dunkirk operation.)
The company said the cost to relocate the round bar finishing facility from Bridgeville to Dunkirk will be $700,000 ($0.07 per share), which will be expensed in the current and third quarter of 2008. The company’s earnings forecast assumes that the relocation expense will approximate $200,000 ($0.02 per diluted share) in the second quarter of 2008.
Headquartered in Bridgeville, Pa., Universal Stainless & Alloy Products manufactures and markets a broad line of semi-finished and finished specialty steels, including stainless steel, tool steel and certain other alloyed steels. The company's products are sold to rerollers, forgers, service centers, original equipment manufacturers and wire redrawers.
