Universal Stainless Reports 3rd Quarter Results
10/25/2007 - Universal Stainless & Alloy Products reports net income of $5.5 million on sales of $62.0 million for the third quarter, and net income of $18.1 million on sales of $180.3 million for the first nine months of 2007.
Universal Stainless & Alloy Products, Inc. reported net income of $5.5 million on sales of $62.0 million for the third quarter, and net income of $18.1 million on sales of $180.3 million for the first nine months of 2007.
Third Quarter Results—Net income of $5.5 million ($0.81 per diluted share) compares to net income of $5.7 million ($0.86 per diluted share) in the third quarter of 2006. Sales, $62.0 million, reflect a 13% increase compared with sales of $55.1 million in the third quarter of 2006.
Results included a $1.4-million charge ($0.14 per diluted share) for an increase to the company's LCM (Lower of Cost or Market) reserve, mainly due to a continued decline in nickel prices in the quarter. This was offset by an estimated FIFO (First-In First-Out inventory accounting method) benefit of $1.5 million ($0.15 per diluted share) at the Dunkirk segment. The estimated FIFO gain in the third quarter of 2006 was $0.5 million ($0.05 per diluted share).
The Company noted that it has adjusted its 2007 estimated annual income tax rate to 34.0% from 35.0% based on the federal and state income tax returns filed in September 2007. The cumulative effect of the estimated change in the annual income tax rate was equivalent to $0.04 per diluted share in the 2007 third quarter. The impact of this change in comparison to the 2006 third quarter was equivalent to $0.06 per diluted share. Net income for the 2006 third quarter has been adjusted for the retrospective application of an accounting pronouncement as detailed in the financial tables.
Sales for the third quarter of 2007 exceeded the Company's forecasted range of $52 million to $57 million and diluted EPS was within the expected range of $0.77 to $0.82.
Nine-Month Results—Net income of $18.1 million ($2.67 per diluted share) reflects a 27% increase compared to the same period of 2006. Sales, at $180.3 million, reflect a 22% increase compared to the first nine months of 2006.
Management Comments—"We are pleased with our performance in the third quarter, which included year-over-year sales growth to each of our end markets, with the exception of petrochemical, where sales rose sequentially,” commented Chairman and CEO Mac McAninch. “We are benefiting from the ongoing strength of our markets, the capital investments we have continued to make, and our expanded focus on operational improvement and customer satisfaction."
"Our progress in the third quarter was achieved despite industry crosscurrents created by the turbulence in the price of nickel and mixed economic indicators,” continued McAninch. “These conditions have led to restrained demand from service centers. Our fourth quarter forecast reflects these conditions, as well as the normal conservative order patterns at year-end.”
“As we look to 2008, we remain as positive as ever about the prospects within each of our end markets,” said McAninch. “We expect aerospace and power generation demand to remain very strong for the next several years. The high price of oil would appear to bode well for petrochemical demand and the heavy equipment market should continue to benefit from global growth. We plan to make further capital investments that will enable us to capitalize on our market opportunities, better serve our customers and drive our growth to new levels,” he concluded.
Segment Review—The Universal Stainless & Alloy Products segment had sales of $55.9 million in the third quarter, and operating income of $4.2 million, yielding an operating margin of 8%. This included a charge of $772,000 for the LCM reserve attributable to the segment.
These results compare to third-quarter-2006 sales of $47.2 million and operating income of $4.1 million (9% of sales); and second-quarter-2007 sales of $55.1 million and operating income of $5.8 million (11% of sales). This included $1.3 million of costs related to a legal settlement and a portion of an inventory adjustment mainly due to increased LCM reserves resulting from a sharp decline in nickel prices at the end of the second quarter.
The 19% increase in sales from the 2006 third quarter reflected a 30% increase in sales to forgers, a 25% increase in sales of tool steel plate to service centers, and an 82% increase in sales of special shapes to OEMs. It also included a 30% increase in shipments to the Dunkirk operation.
Results were also boosted by the new (seventh) vacuum-arc remelt (VAR) furnace, which became operational in January of 2007, and by surcharges because of higher nickel prices at the beginning of the quarter. Changes in the price of nickel affected operating margin comparisons with both the third quarter of 2006 and the second quarter of 2007. There was also a shift in product mix compared with the second quarter of 2007, with sales of reroll products up 18%, while sales of bar products to service centers were down 27%.
The Dunkirk Specialty Steel segment reported sales of $21.3 million and operating income of $3.0 million for the third quarter, resulting in an operating margin of 14%. The operating income included the LCM charge attributable to the segment totaling $635,000, which was more than offset by the estimated $1.5 million FIFO benefit from the timing of surcharges and the changing price of nickel.
These results compare to third-quarter-2006 sales of $19.8 million and operating income of $3.8 million (19% of sales), which included an estimated FIFO benefit of $0.5 million. In the second quarter of 2007, sales were also $21.3 million, while operating income was $3.7 million (17% of sales), and included $492,000 of costs related to the second-quarter inventory adjustment attributable to the segment offset by an estimated $1.2 million FIFO benefit.
Dunkirk's 7% increase in sales over the 2006 third quarter included a 27% increase in sales to service centers mainly of bar products, which more than offset lower sales of rod/wire products to redrawers.
The company noted that it is currently negotiating a new collective bargaining agreement that covers the hourly employees at its Dunkirk facility. The current agreement expires on October 31, 2007.
Outlook—Based on current expectations, the company estimates that fourth-quarter-2007 sales will range from $45 to $50 million and that diluted EPS will range from $0.60 to $0.65. This compares with sales of $55.8 million and adjusted diluted EPS of $0.94, in the fourth quarter of 2006.
The company said it based its projections on such factors as it $88-million total backlog at September 30, 2007 (as compared to the $103-million backlog at June 30, 2007). The company said the decreased backlog mainly reflects reduced order levels from service centers and the effect of lower nickel costs on sales prices.
The reduced order levels also led to lower inventory levels in the third quarter of 2007, which had the effect of increasing cash flow from operations to a record $15.4 million and free cash flow (cash from operations minus capital expenditures) to $11.8 million ($1.75 per diluted share).
In its projections, the company said it did not assume any FIFO benefit due to the decline in the market value of nickel. By comparison, the fourth-quarter-2006 FIFO benefit was approximately $1.1 million ($0.11 per diluted share).
The company is expecting sales from the Dunkirk Specialty Steel segment to approximate $19 million in the fourth quarter of 2007.
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 re-rollers, forgers, service centers, original equipment manufacturers and wire re-drawers.
