EX-13 9 dex13.txt ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations During 2000, the Company adopted the provisions of the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The application of the SEC's guidance to the language contained in the Company's Standard Terms and Conditions of Sale existing at the time of adoption required the Company to defer revenue until cash was collected, even though risk of loss passed to the buyer at the time of shipment. This had the effect of deferring certain sale transactions previously recognized in 1999 into 2000. During the fourth quarter of 2000, the Company modified its Standard Terms and Conditions of Sale to more closely reflect the substance of its sale transactions, which resulted in revenue being recorded at the time of shipment rather than when cash was received. As a result, revenue and cost information in 2000 include amounts related to shipments made during the year as well as amounts deferred from 1999. In order to facilitate analysis of the Company's results of operations, amounts in the tables below summarize revenue and cost information based on shipments made by the Company in the respective years. Such amounts are then reconciled to reported amounts as necessary. An analysis of the Company's operations is as follows:
2001 2000 1999 Amount % Amount % Amount % ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) Net sales Stainless steel $76,908 84.8% $62,346 70.6% $55,255 82.9% Tool steel 4,503 5.0 6,960 7.9 6,055 9.1 High-strength low alloy steel 3,379 3.7 2,161 2.4 1,327 2.0 High-temperature alloy steel 2,471 2.7 1,754 2.0 2,124 3.2 Conversion services 3,054 3.4 2,309 2.6 1,807 2.7 Other 343 0.4 355 0.4 95 0.1 ------------------------------------------------------------------------------------------------------------------------------------ Net sales on shipments 90,658 100.0 75,885 85.9 66,663 100.0 Effect of accounting change -- -- 12,462 14.1 -- -- ------------------------------------------------------------------------------------------------------------------------------------ Total net sales 90,658 100.0 88,347 100.0 66,663 100.0 ------------------------------------------------------------------------------------------------------------------------------------ Cost of products sold Raw materials 25,791 28.5 26,290 29.7 24,732 37.1 Other 46,124 50.9 35,583 40.3 33,901 50.9 ------------------------------------------------------------------------------------------------------------------------------------ Total cost of products shipped 71,915 79.4 61,873 70.0 58,633 88.0 Effect of accounting change -- -- 9,988 11.3 -- -- ------------------------------------------------------------------------------------------------------------------------------------ Total cost of products sold 71,915 79.4 71,861 81.3 58,633 88.0 ------------------------------------------------------------------------------------------------------------------------------------ Selling and administrative expenses 6,199 6.8 4,998 5.7 4,299 6.4 Operating income from shipments 12,544 13.8 9,014 10.2 3,731 5.6 Effect of accounting change -- -- 2,474 2.8 -- -- ------------------------------------------------------------------------------------------------------------------------------------ Operating income $12,544 13.8% $11,488 13.0% $ 3,731 5.6% ------------------------------------------------------------------------------------------------------------------------------------
Net sales on shipments by market segment are as follows:
2001 2000 1999 Amount % Amount % Amount % ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) Rerollers $31,936 35.2% $33,549 44.2% $36,522 54.8% Service centers 19,178 21.2 16,137 21.3 11,130 16.7 Forgers 18,484 20.4 14,288 18.8 9,185 13.8 Original equipment manufacturers 17,714 19.5 9,321 12.3 7,761 11.6 Conversion services 3,054 3.4 2,309 3.0 1,807 2.7 Miscellaneous 292 0.3 281 0.4 258 0.4
------------------------------------------------------------------------------------------------------------------------------------ Total $90,658 100.0% $75,885 100.0% $66,663 100.0% ------------------------------------------------------------------------------------------------------------------------------------
2001 Results as Compared to 2000 The increase in net sales on shipments in 2001 reflects increased shipments within each market segment, except Reroller, partially offset by price decreases related to lower raw material costs. The Company shipped approximately 46,800 tons in 2001, compared to shipments of 41,800 tons in 2000. The increased sales were primarily due to increased shipments of power generation, aerospace and petrochemical products to the Company's reroller, forging, service center and OEM markets. These increases were partially offset by lower sales of commodity products to the reroller market and of tool steel products to the service center market, primarily due to imports and the recessionary economy experienced during 2001. Cost of products sold, as a percent of net sales, decreased in 2001 as compared to 2000. This decrease was primarily due to the impact of the change in the mix of products shipped and the improved operating results at the bar mill. Natural gas costs increased by approximately $1.3 million in 2001 in comparison to 2000 because of higher rates. Selling and administrative expenses increased by $1.2 million in 2001 as compared to 2000. This increase primarily reflects higher insurance and other costs associated with the revenue growth experienced during 2001. In addition, the Company recorded a $200,000 charge to demolish certain vacant buildings within the Bridgeville facility, a $190,000 obligation to its former Vice President of Operations and a $115,000 charge for the services of an investment banking firm previously engaged to evaluate various strategic alternatives to increase shareholder value. Interest expense and other financing costs decreased from $905,000 in 2000 to $576,000 in 2001 primarily due to the continued reduction of long-term debt outstanding and a reduction in interest rates on the PNC Term Loan. The 2001 effective income tax rate was 36.5% compared to 37.5% in 2000. The decrease in the effective income tax rate is primarily attributable to the application of the Extraterritorial Income Exclusion provisions for federal tax purposes and state tax credits made available to the Company during 2001. 2000 Results as Compared to 1999 The increase in net sales on shipments in 2000 reflects an improved sales mix of products and price increases to cover higher material and energy costs partially offset by lower shipment volumes. The Company shipped approximately 41,800 tons in 2000, compared to shipments of 44,800 tons in 1999. The improved sales mix was primarily due to increased shipments of power generation, aerospace and petrochemical products to the Company's reroller, forging and OEM market customers, and tool steel and bar mill products to the Company's service center customers. These increases were partially offset by the impact of lower sales of commodity products due to increased imports. Cost of products sold, as a percent of net sales, decreased in 2000 as compared to 1999. This decrease was primarily due to the impact of the change in the mix of products shipped, improved operating results at the bar mill and higher sales prices. Selling and administrative expenses increased by $699,000 in 2000 as compared to 1999. This increase reflects higher employment and insurance costs. Interest expense and other financing costs increased from $736,000 in 1999 to $905,000 in 2000 primarily due to a reduction in capitalized interest and higher interest rates on the PNC Term Loan. The 2000 effective income tax rate was 37.5% compared to 30.5% in 1999. The increase in the effective income tax rate is primarily attributable to the reduced impact of the Company's permanent state tax deductions resulting from higher income levels in 2000. Liquidity and Capital Resources The Company generated cash flow from operations in 2001 and 2000 of $11.9 million and $6.3 million, respectively. This increase is primarily due to the increase in net income and the impact of changes in deferred taxes, partially offset by an increase in working capital. At December 31, 2001, working capital approximated $28.7 million, as compared to $23.6 million at December 31, 2000. The ratio of current assets to current liabilities at December 31, 2001 and 2000, was 4.0:1 and 3.2:1, respectively. The debt to capitalization ratio was 13% at December 31, 2001, and 17% at December 31, 2000. The increase in working capital is primarily attributable to the increase in cash and cash equivalents generated from operations. Capital Expenditures and Investments The Company's capital expenditures were approximately $5.3 million and $4.6 million in 2001 and 2000, respectively, which primarily reflect the installation of a new electro-slag remelt furnace and building improvements at the Bridgeville facility. Capital expenditures not associated with the acquisition described below are expected to approximate $4.0 million in 2002 and will be used primarily to complete projects previously initiated and to upgrade or replace various pieces of equipment at the Bridgeville and Titusville facilities. These expenditures are expected to be funded substantially from internally generated funds and additional borrowings. The Company does not maintain off-balance sheet arrangements nor does it participate in non-exchange traded contracts requiring fair value accounting treatment or material related party transaction arrangements. PNC Credit Agreement On June 29, 2001 the Company entered into a third amendment to the second amended and restated credit agreement with PNC Bank which extended the term of the $6.5 million revolving credit facility ("PNC Line") to April 30, 2003. This credit agreement also includes a term loan ("PNC Term Loan") scheduled to mature in June 2006 and is collateralized by substantially all of the Company's assets. Interest on borrowings under the PNC Line and the PNC Term Loan is based on short-term market rates, which may be further adjusted based upon the Company maintaining certain financial ratios. As a condition of the PNC Line and the PNC Term Loan, the Company is required to maintain certain levels of net worth, working capital and other financial ratios; to limit the amount of capital expenditures it may incur without PNC Bank's approval; and to restrict the payment of dividends. As of December 31, 2001, the Company was in compliance with all financial ratios and restrictive covenants. Stock Repurchase Program On October 19, 1998, the Company initiated a stock repurchase program to repurchase up to 315,000 shares of its outstanding Common Stock in open market transactions at market prices. There were 12,000 shares of Common Stock repurchased by the Company during 2001. The Company is authorized to repurchase an additional 45,100 shares of Common Stock as of December 31, 2001. Supply Contract The Company maintains a supply contract agreement with Talley Metals Technology, Inc., a subsidiary of Carpenter Technology Corporation, which is currently effective through December 2002. Under terms of the agreement, the Company will supply Talley Metals with an average of 1,250 tons of stainless reroll billet products per month. The value of the contract on a monthly basis will depend on product mix and key raw material prices. Environmental Matters The Company, as well as other steel companies, is subject to demanding environmental standards imposed by federal, state and local environmental laws and regulations. In connection with the 1994 acquisition of the Bridgeville facility assets from Armco, which merged with and into AK Steel in 1999 ("Armco"), Armco agreed to retain responsibility for liabilities asserted against it under environmental laws with respect to environmental conditions existing at the Bridgeville facility prior to commencement of the long-term net lease of that facility on August 15, 1994, and to indemnify the Company up to $6.0 million in the aggregate over ten years. Such indemnification expires on August 15, 2004. In connection with the Company's June 2, 1995 agreement with Armco to purchase certain assets and a parcel of real property located at Titusville, Armco agreed to indemnify the Company up to $3.0 million in the aggregate for liabilities under environmental laws arising out of conditions on or under the Titusville property existing prior to June 2, 1995. Armco's obligation to indemnify the Company for any liabilities arising out of environmental conditions existing off-site as of June 2, 1995, is not subject to the $3.0 million limitation. Management is not aware of any financial difficulties being experienced by AK Steel, as successor to Armco, that would prevent its performance under the acquisition agreements. In addition, management is not aware of any environmental conditions or the incurrence of other liabilities at the Bridgeville or Titusville facilities, for which Armco has agreed to indemnify the Company, nor of any material environmental condition requiring remediation and affecting the Company. Critical Accounting Policies Revenue recognition is the most critical accounting policy of the Company. The Company manufactures specialty steel product in accordance with customer purchase orders that contain specific product requirements. Each purchase order provides detailed information regarding the requirements for product acceptance. Executed material certification forms are completed indicating the Company's compliance with the customer purchase order before the specialty steel products are packaged and shipped to the customer. Revenue is generally recognized at point of shipment because risk of loss and title have transferred. During 2001, revenue was recognized in certain situations in which products available for shipment are held at the Company's facility beyond the stated shipment date at the customer's specific request. In addition, management constantly monitors the ability to collect its unpaid sales invoices and the valuation of its inventory. The allowance for doubtful accounts includes the value of outstanding invoices issued to customers currently operating under the protection of the federal bankruptcy law and other amounts that are deemed potentially not collectable. An inventory reserve is provided for material on hand for which management believes cost exceeds fair market value and for certain material on hand not assigned to a specific customer order. New Accounting Pronouncements Financial Accounting Standards Board ("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998, and amended in June 1999 and in June 2000, pursuant to FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities: Deferral of the Effective Date of FASB Statement No. 133" and FASB Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities: an amendment of FASB No. 133", respectively. These statements require that an entity recognize certain derivative instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of these statements on January 1, 2001, did not impact the Company's results of operations or financial condition. In July 2001, the FASB issued Statement No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other Intangible Assets." In August 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." In October 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." These statements will be adopted in 2002 and are not expected to impact the Company's results of operations or financial condition. Short- and Long-Term Liquidity The Company expects to meet substantially all of its short-term liquidity requirements with internally generated funds and borrowings under the PNC Credit Agreement. At December 31, 2001, the Company had $5.5 million in cash and $6.5 million available under the PNC Line. The Company's long-term liquidity depends upon its ability to obtain additional orders from its customers, attract new customers and control costs during periods of low demand or pricing. At this time, management intends to closely monitor its discretionary spending until general economic conditions improve. Section 201 On October 22, 2001, the U.S. International Trade Commission ("ITC") determined that imports of certain stainless steel and alloy tool steel products are seriously injuring the domestic specialty steel industry. This determination allows the President of the United States, under Section 201 of the 1974 Trade Act, to restrict imports or impose tariffs on some or all of the products at issue. On March 5, 2002, the President imposed tariffs on certain imported stainless steel rod, bar and wire products ranging from 6% to 15% over the next three years. At this time, the Company is unable to determine the potential impact of the imposed remedy on the Company's future results of operations and liquidity requirements. Subsequent Event On February 14, 2002, the Company, through its wholly owned subsidiary, Dunkirk Speciality Steel, LLC ("Dunkirk Speciality Steel"), acquired from the New York Job Development Authority ("JDA") certain assets formerly owned by Empire Specialty Steel, Inc. ("Empire") at its idled production facility located in Dunkirk, New York (the "Dunkirk facility"). The assets acquired include the inventory; property plant and equipment; and selected intangible assets. The purchase price of $4.0 million will be funded with $1.0 million in cash, paid at closing, and ten-year, 5% interest bearing notes payable to the JDA in the amount of $3.0 million. No principal or interest payments are payable during the first year. The Company will not assume any liabilities of Empire. Capital expenditures are expected to approximate $6.0 million at the Dunkirk facility in 2002. General Actual results will be affected by a wide range of factors including the start-up of Dunkirk, New York production facility; the receipt, pricing and timing of future customer orders; changes in product mix; the concentrated nature of the Company's customer base to date and the Company's dependence on its significant customers; the Company's reliance on certain critical manufacturing equipment; the limited number of raw material and energy suppliers and significant fluctuations that may occur in raw material and energy prices; and the Company's ongoing requirement for continued compliance with environmental laws. Any unfavorable change in the foregoing or other factors could have a material adverse effect on the Company's business, financial condition and results of operations. Many of these factors are not within the Company's control, and there can be no assurances regarding the Company's future sales or earnings. For a discussion of these and other matters, refer to the Company's Annual Report on Form-10K for the year ended December 31, 2001 and other reports on file with the Securities and Exchange Commission. Report of independent accountants To the Board of Directors and Stockholders of Universal Stainless & Alloy Products, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and of cash flows present fairly, in all material respects, the financial position of Universal Stainless & Alloy Products, Inc., and its subsidiary (the Company) at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the financial statements, the Company adopted the provisions of the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," in 2000. /s/ PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania January 18, 2002, except for Note 12, which is as of February 14, 2002 Consolidated Statement of Operations
For the years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands, except per share information) Net sales $ 90,658 $ 88,347 $ 66,663 Cost of products sold 71,915 71,861 58,633 Selling and administrative expenses 6,199 4,998 4,299 ------------------------------------------------------------------------------------------------------------------------------------ Operating income 12,544 11,488 3,731 Interest expense and other financing costs (576) (905) (736) Other income (expense), net 57 (3) 30 ------------------------------------------------------------------------------------------------------------------------------------ Income before taxes and cumulative effect of accounting change 12,025 10,580 3,025 Provision for income taxes 4,386 3,970 922 ------------------------------------------------------------------------------------------------------------------------------------ Income before cumulative effect of accounting change 7,639 6,610 2,103 Cumulative effect of accounting change, net of tax -- (1,546) -- ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 7,639 $ 5,064 $ 2,103 ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE ------------------------------------------------------------------------------------------------------------------------------------ Basic Income before cumulative effect of accounting change $1.26 $1.09 $0.34 Cumulative effect of accounting change, net of tax -- (0.26) -- ------------------------------------------------------------------------------------------------------------------------------------ Net income $1.26 $0.83 $0.34 ------------------------------------------------------------------------------------------------------------------------------------ Diluted Income before cumulative effect of accounting change $1.25 $1.09 $0.34 Cumulative effect of accounting change, net of tax -- (0.26) -- ------------------------------------------------------------------------------------------------------------------------------------ Net income $1.25 $0.83 $0.34 ------------------------------------------------------------------------------------------------------------------------------------ Weighted average number of shares of Common Stock outstanding 6,080,045 6,074,701 6,110,911 ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Balance Sheets
December 31, 2001 2000 ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) ASSETS Current Assets Cash and cash equivalents $ 5,454 $ 1,109 Accounts receivable (less allowance for doubtful accounts of $434 and $192) 13,257 12,819 Inventory 17,900 18,788 Deferred taxes 1,022 958 Other current assets 460 389 ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 38,093 34,063 Property, plant and equipment, net 41,202 39,090 Other assets 151 594 ------------------------------------------------------------------------------------------------------------------------------------ Total assets $79,446 $73,747 ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Trade accounts payable $ 4,597 $ 5,624 Outstanding checks in excess of bank balance 857 1,445 Current portion of long-term debt 1,832 1,808 Accrued employment costs 1,562 1,297 Other current liabilities 590 331 ------------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 9,438 10,505 Long-term debt 6,490 8,199 Deferred taxes 7,146 6,276 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 23,074 24,980 ------------------------------------------------------------------------------------------------------------------------------------ Commitments and Contingencies Stockholders' Equity Senior Preferred Stock, par value $.001 per share; liquidation value $100 per share; 2,000,000 shares authorized; 0 shares issued and outstanding -- -- Common Stock, par value $.001 per share; 10,000,000 shares authorized; 6,347,172 and 6,339,128 shares issued 6 6 Additional paid-in capital 25,941 25,888 Retained earnings 32,056 24,417 Treasury Stock at cost; 269,900 and 257,900 common shares held (1,631) (1,544) ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 56,372 48,767 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $79,446 $73,747 ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statement of Cash Flows
For the years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) Cash flows from operating activities Net income $ 7,639 $ 5,064 $ 2,103 Adjustments to reconcile to net cash and cash equivalents provided by operating activities: Depreciation and amortization 2,782 2,466 2,101 Deferred taxes 1,087 1,509 354 Changes in assets and liabilities: Accounts receivable, net (438) (706) (3,270) Inventory 888 (3,058) 452 Accounts payable (1,027) 147 2,311 Accrued employment costs 265 570 (230) Other, net 709 293 1,146 ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 11,905 6,285 4,967 ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities Capital expenditures (5,253) (4,598) (3,366) ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (5,253) (4,598) (3,366) ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities Proceeds from long-term debt 136 -- -- Long-term debt repayment (1,821) (1,834) (1,117) Borrowings under revolving line of credit 8,893 14,107 22,310 Repayments under revolving line of credit (8,893) (14,107) (22,310) Increase (decrease) in outstanding checks in excess of bank balance (588) 338 (38) Proceeds from issuance of Common Stock 53 50 51 Purchase of Treasury Stock (87) -- (1,066) ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (2,307) (1,446) (2,170) ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash 4,345 241 (569) Cash and cash equivalents at beginning of period 1,109 868 1,437 ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 5,454 $ 1,109 $ 868 ------------------------------------------------------------------------------------------------------------------------------------ Supplemental disclosure of cash flow information Interest paid (net of amount capitalized) $ 605 $ 827 $ 774 Income taxes paid $ 3,144 $ 1,593 $ 388 ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Notes to the consolidated financial statements Note 1: Significant Accounting Policies Description of the Company Universal Stainless & Alloy Products, Inc. (the "Company") manufactures and markets semi-finished and finished specialty steel products, including stainless steel, tool steel and certain other alloyed steels. The Company's manufacturing process involves melting, remelting, treating and hot and cold rolling of semi-finished and finished specialty steels. The Company's products are sold to rerollers, forgers, service centers and original equipment manufacturers, which primarily include the power generation and aerospace industries. The Company also performs conversion services on materials supplied by customers that lack certain of the Company's production facilities or that are subject to their own capacity constraints. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basis of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents Cash equivalents are stated at cost plus accrued interest, which approximates market value. Cash equivalents include only securities having a maturity of three months or less at the time of purchase. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents and accounts receivable. The Company limits its credit risk associated with cash and cash equivalents by placing its investments in high-grade short-term instruments. With respect to accounts receivable, the Company limits their credit risks by performing ongoing credit evaluations and, when deemed necessary, requiring letters of credit, guarantees or collateral. Inventories Inventories are stated at the lower of cost or market with cost principally determined by the first-in, first-out (FIFO) method. The average cost method is also utilized. Such costs include the acquisition cost for raw materials and supplies, direct labor and applied manufacturing overhead. Provisions are made for slow moving inventory based upon management's expected method of disposition. Scrap metal together with alloy additives, principally nickel, chrome and molybdenum, currently account for more than 35% of the Company's total cost of products sold. A substantial portion of the alloy additives is available only from foreign sources, some of which are located in countries that may be subject to unstable political and economic conditions. Those conditions might disrupt supplies or affect the prices of the raw materials used by the Company. The Company maintains sales price surcharges to help offset the impact of raw material price fluctuations. Included in inventory are operating materials consisting of production molds and rolls that will normally be consumed within one year. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Costs incurred in connection with the construction or major rebuild of facilities, including interest directly related to the project, are capitalized as construction in progress. No depreciation is recognized on these assets until placed in service. Maintenance and repairs are charged to expense as incurred, and costs of improvements and renewals are capitalized. Major maintenance costs are expensed in the same annual period as incurred; however, the estimated costs are expensed throughout the year on a pro rata basis. Depreciation and amortization are computed using the straight-line method based on the estimated useful lives of the related assets. The estimated useful lives of plant and equipment range from three to twenty years. Depreciation expense for fiscal year 2001, 2000 and 1999 is $2,764,000 $2,448,000 and $2,083,000 respectively. The Company's manufacturing processes are dependent upon certain pieces of specialty steelmaking equipment, such as the Company's electric arc furnace and universal rolling mill. In the event a critical piece of equipment should become inoperative as a result of an unexpected equipment failure, there can be no assurance that the Company's operations would not be substantially curtailed. SFAS 121 Impairment Long-lived assets, including property, plant and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in relation to the operating performance and future undiscounted cash flows of the underlying assets. Adjustments are made if the sum of expected future cash flows is less than book value. Based on management's assessment of the carrying values of such long-lived assets, no impairment reserve has been deemed necessary as of December 31, 2001 and 2000. Capitalization of Software Costs Direct costs incurred in the development and implementation of internal-use software is capitalized and amortized on a straight-line basis over its anticipated useful life, which generally does not exceed three years. Revenue Recognition Revenue from the sale of products is recognized when both risk of loss and title has transferred to the customer, which in most cases coincides with shipment of the related products. Revenue from conversion services is recognized when the performance of the service is complete. Income Taxes Deferred income taxes are provided for the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The Company uses the liability method to account for income taxes, which requires deferred taxes to be recorded at the statutory rate expected to be in effect when the taxes are paid. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the asset will not be realized. Earnings Per Common Share Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding plus all dilutive potential common shares outstanding during the period. Dilutive common shares are determined using the treasury stock method. Under the treasury stock method, exercise of options and warrants are assumed at the beginning of the period when the average stock price during the period exceeds the exercise price of outstanding options and warrants and, common shares are assumed issued. The proceeds from exercise are assumed to be used to purchase common stock at the average market price during the period. The incremental shares to be issued are considered to be the dilutive potential common shares outstanding. Accounting Change In 2000, the Company changed its method of accounting for revenue recognition in accordance with the provisions of the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101, required to be adopted retroactive to January 1, 2000, outlined certain criteria that must be met to recognize revenue. As a result of the adoption of SAB 101, the Company determined that the application of the SEC's guidance to the language that existed in the Company's Standard Terms and Conditions of Sale required the Company to defer revenue recognition until cash was collected, even though risk of loss transferred to the buyer at time of shipment. This had the effect of deferring certain 1999 sale transactions aggregating $12,462,000 into 2000. The cumulative effect of this change in accounting principle was a charge of $1,546,000, net of tax benefits of $928,000. Pro forma earnings per share amounts for the year ended December 31, 1999, assuming SAB 101 had been applied retroactively, is as follows:
As Pro Reported Forma -------------------------------------------------------------------------------- Net income $2,103 $1,854 Basic earnings per share $0.34 $0.30 Diluted earnings per share $0.34 $0.30 --------------------------------------------------------------------------------
New Accounting Pronouncements Financial Accounting Standards Board ("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998, and amended in June 1999 and in June 2000, pursuant to FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities: Deferral of the Effective Date of FASB Statement No. 133" and FASB Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities: an amendment of FASB No. 133", respectively. These statements require that an entity recognize certain derivative instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of these statements on January 1, 2001, did not impact the Company's results of operations or financial condition. In July 2001, the FASB issued Statement No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other Intangible Assets." In August 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." In October 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." These statements will be adopted in 2002 and are not expected to impact the Company's results of operations or financial condition. Note 2: Inventory The major classes of inventories are as follows: December 31, 2001 2000 -------------------------------------------------------------------------------- (dollars in thousands) Raw materials and supplies $ 1,880 $ 1,695 Semi-finished and finished steel products 13,593 13,916 Operating materials 2,427 3,177 -------------------------------------------------------------------------------- Total inventory $17,900 $18,788 -------------------------------------------------------------------------------- Note 3: Property, Plant and Equipment Property, plant and equipment consists of the following: December 31, 2001 2000 -------------------------------------------------------------------------------- (dollars in thousands) Land and land improvements $ 822 $ 822 Buildings 4,701 3,889 Machinery and equipment 43,572 39,838 Construction in progress 2,641 2,311 -------------------------------------------------------------------------------- 51,736 46,860 Accumulated depreciation (10,534) (7,770) -------------------------------------------------------------------------------- Property, plant and equipment, net $ 41,202 $ 39,090 -------------------------------------------------------------------------------- Property, plant and equipment includes a capital lease with Armco, which merged with and into AK Steel in 1999 ("Armco"), for the land and certain buildings and structures located in Bridgeville (the "Bridgeville Lease"). The Bridgeville Lease is for a ten-year term which commenced on August 15, 1994, with three five-year options to renew on the same terms at the Company's discretion at a rental of $1 per year plus payment of real and personal property taxes and other charges associated with the property. The Company also has an option under the lease to buy substantially all of the leased premises for $1 at any time during the term of the Bridgeville Lease prior to August 15, 2015. Note 4: Long-Term Debt and Other Financing Long-term debt consists of the following: December 31, 2001 2000 -------------------------------------------------------------------------------- (dollars in thousands) PNC Term Loan $ 6,500 $ 7,900 Government debt 1,598 1,922 Capital lease obligations 224 185 -------------------------------------------------------------------------------- 8,322 10,007 Less amounts due within one year (1,832) (1,808) -------------------------------------------------------------------------------- Total long-term debt $ 6,490 $ 8,199 -------------------------------------------------------------------------------- On June 29, 2001, the Company entered into a third amendment to the second amended and restated credit agreement with PNC Bank which extended the term of the $6.5 million revolving credit facility ("PNC Line") to April 30, 2003. This credit agreement, which also includes a term loan ("PNC Term Loan") scheduled to mature in June 2006, is collateralized by substantially all of the Company's assets. Interest on borrowings under the PNC Line and the PNC Term Loan is based on short-term market rates, which may be further adjusted based upon the Company maintaining certain financial ratios. The PNC Term Loan currently bears interest at a rate equal to the Euro-dollar rate plus an interest rate spread not to exceed 175 basis points. As a condition of the PNC Line and the PNC Term Loan, the Company is required to maintain certain levels of net worth, working capital and other financial ratios; to limit the amount of capital expenditures it may incur without PNC Bank's approval; and to restrict the payment of dividends. The Company has entered into several separate loan agreements with the Commonwealth of Pennsylvania's Department of Commerce aggregating $1,600,000 with terms ranging from seven to twenty years. In 1996, the Company entered into a ten-year loan agreement with the Redevelopment Authority of Allegheny County Economic Development Fund in the amount of $1,514,000. The loans bear interest at rates ranging from 5% to 6% per annum. Scheduled maturities of long-term obligations for the next five years are as follows: ----------------------------------------------------- (dollars in thousands) 2002 1,832 2003 1,723 2004 1,662 2005 1,747 2006 1,042 Thereafter 316 ----------------------------------------------------- Note 5: Income Taxes Components of the provision for income taxes are as follows: For the years ended December 31, 2001 2000 1999 -------------------------------------------------------------------------------- (dollars in thousands) Current provision: Federal $3,160 $2,461 $ 512 State 139 -- 56 -------------------------------------------------------------------------------- 3,299 2,461 568 -------------------------------------------------------------------------------- Deferred provision (benefit): Federal 903 1,238 457 State 184 271 (103) -------------------------------------------------------------------------------- 1,087 1,509 354 -------------------------------------------------------------------------------- Provision for income taxes $4,386 $3,970 $ 922 -------------------------------------------------------------------------------- The income tax benefit resulting from recording the cumulative effect on prior years due to the change in revenue recognition policy was $928,000. A reconciliation of the federal statutory tax rate and the Company's effective tax rate is as follows: For the years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------ Federal statutory tax 34.0% 34.0% 34.0% State income taxes, net of federal benefit 2.3 3.3 (2.2) Other, net 0.2 0.2 (1.3) ------------------------------------------------------------------------------ Effective tax rate 36.5% 37.5% 30.5% ------------------------------------------------------------------------------ Deferred taxes result from the following: December 31, 2001 2000 ----------------------------------------------------- (dollars in thousands) Deferred tax assets: Receivables $ 187 $ 77 Inventory 600 736 Net operating loss carry forwards -- 281 Accrued liabilities 235 145 ----------------------------------------------------- $ 1,022 $ 1,239 ----------------------------------------------------- Deferred tax liabilities: Property, plant and equipment $ 7,146 $ 6,276 ----------------------------------------------------- Note 6: Stockholders' Equity
Common Additional Shares Common Paid-In Retained Treasury Treasury Outstanding Stock Capital Earnings Shares Stock ==================================================================================================================================== (dollars in thousands) Balance at December 31, 1998 6,320,036 $ 6 $25,787 $17,250 75,000 $ (478) Common Stock issuance under Employee Stock Purchase Plan 10,380 51 Purchase of Treasury stock 182,900 (1,066) Net income 2,103 ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1999 6,330,416 6 25,838 19,353 257,900 (1,544) Common Stock Issuance under Employee Stock Purchase Plan 8,712 50 Net income 5,064 ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 6,339,128 6 25,888 24,417 257,900 (1,544) Common Stock issuance under Employee Stock Purchase Plan 8,044 53 Purchase of Treasury stock 12,000 (87) Net income 7,639 ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2001 6,347,172 $ 6 $25,941 $32,056 269,900 $(1,631) ====================================================================================================================================
On October 19, 1998, the Company's Board of Directors authorized a stock repurchase program. Under the program, the Company may repurchase up to 315,000 shares, or approximately 5%, of the Company's Common Stock in open market transactions at market prices. At December 31, 2001, the Company is authorized to repurchase 45,100 additional shares of the Company's Common Stock. The Company has 2,000,000 authorized shares of Senior Preferred Stock. At December 31, 2001 and 2000, there were no shares issued or outstanding. Note 7: Basic and Diluted Earnings Per Share The computation of basic and diluted earnings per share for the years ended December 31, 2001, 2000 and 1999 is performed as follows:
2001 2000 1999 ---- ---- ---- Income Shares Income Shares Income Shares ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands, except share amounts and per share amounts) Income available to common Stockholders $ 7,639 6,080,045 $ 5,064 6,074,701 $ 2,103 6,110,911 Effect of dilutive securities 17,379 5,057 -- Income available to common Stockholders plus assumed conversion $ 7,639 6,097,424 $ 5,064 6,079,758 $ 2,103 6,110,911 Basic earnings per common share: Income before cumulative effect of accounting change $ 1.26 $ 1.09 $ 0.34 Net income $ 1.26 $ 0.83 $ 0.34 Diluted earnings per common share: Income before cumulative effect of accounting change $ 1.25 $ 1.09 $ 0.34 Net income $ 1.25 $ 0.83 $ 0.34 ------------------------------------------------------------------------------------------------------------------------------------
Note 8: Stock Compensation Plans At December 31, 2001, the Company has two stock-based compensation plans that are described below: Incentive Compensation Plan On September 23, 1994, the Company's Board of Directors adopted the Company's 1994 Stock Incentive Plan as amended (the "1994 Plan") for the purpose of issuing stock options to non-employee directors, other than those directors owning more than 5% of the Company's outstanding Common Stock, officers and other key employees of the Company who are expected to contribute to the Company's future growth and success. Under the 1994 Plan, the Company may grant options up to a maximum of 650,000 shares of Common Stock. Options granted to non-employee directors vest over a three-year period, and options granted to employees vest over a four-year period. All options under the 1994 Plan will expire no later than ten years after the grant date. A summary of the 1994 Plan activity as of and for the years ended December 31, 2001, 2000 and 1999 is presented below:
2001 2000 1999 Weighted-Avg. Weighted-Avg. Weighted-Avg. Shares Exercise Price Shares Exercise Price Shares Exercise Price ----------------------------------------------------------------------------------------------------------------------------------- Fixed options Outstanding at beginning of year 522,500 $9.58 482,500 $9.79 488,500 $10.10 Granted 100,000 8.22 40,000 7.13 40,000 6.06 Exercised -- -- -- -- -- -- Forfeited (5,000) 9.88 -- -- (46,000) 9.90 ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 617,500 $9.36 522,500 $9.58 482,500 $9.79 ----------------------------------------------------------------------------------------------------------------------------------- Options exercisable at year-end 472,746 414,287 364,165 ----------------------------------------------------------------------------------------------------------------------------------- Weighted-average fair value of options granted during the year $4.07 $3.63 $2.89 -----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 2001.
Options Outstanding Options Exercisable ------------------- ------------------- Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outsanding Contractual Life Exercise Price Exercisable Exercise Price ----------------------------------------------------------------------------------------------------------------------------------- $6.06 to $12.25 617,500 6.0 $9.36 472,746 $9.82 -----------------------------------------------------------------------------------------------------------------------------------
Employee Stock Purchase Plan Under the 1996 Employee Stock Purchase Plan, the Company is authorized to issue up to 90,000 shares of Common Stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the plan, employees can choose as of January 1 and July 1 of each year to have up to 10% of their total earnings withheld to purchase shares of the Company's Common Stock. 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, 2001, the Company has issued 45,539 shares of Common Stock since the plan's inception. The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan and its stock purchase plan. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value of the awards at the grant dates in accordance with Financial Accounting Standards Board Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
For the years ended December 31, 2001 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) Net income As reported $7,639 $5,064 $2,103 Pro forma $7,508 $4,714 $1,704 Basic earnings per share As reported $ 1.26 $ 0.83 $ 0.34 Pro forma $ 1.23 $ 0.78 $ 0.28 --------------------------------------------------------------------------------------------------------------------------------
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants issued in 2001, 2000 and 1999 respectively; dividend yield of 0.0% for each year; interest rate of 5.0%, 6.0% and 6.0%; expected volatility of 50.0%, 50.0%, and 45.0%; and expected lives for options of five years. Cash-Incentive Plans The Company has a management cash-incentive plan covering certain key executives and employees and profit-sharing plans that cover the remaining employees. The profit-sharing plans provide for the sharing of pre-tax profits in excess of specified amounts. For the years ended December 31, 2001, 2000 and 1999, the Company expensed $1,949,000, $1,328,000, and $445,000, respectively, under these plans. Note 9: Retirement Plans The Company has defined contribution retirement plans that cover substantially all employees. The Company accrues it's contributions to the hourly employee plan based on time worked while contributions to the salaried plan are accrued as a fixed amount per month. Company contributions to both plans are funded periodically. The total expense for the years ended December 31, 2001, 2000 and 1999 was $413,000, $320,000 and $284,000, respectively. No other post-retirement benefit plans exist. Note 10: Commitments and Contingencies The Company, as well as other steel companies, is subject to demanding environmental standards imposed by federal, state and local environmental laws and regulations. In connection with the 1994 acquisition of the Bridgeville facility assets from Armco, Armco agreed to retain responsibility for liabilities asserted against it under environmental laws with respect to environmental conditions existing at the Bridgeville facility prior to commencement of the Bridgeville Lease on August 15, 1994, and to indemnify the Company up to $6.0 million in the aggregate over ten years. Such indemnification expires on August 15, 2004. In connection with the Company's June 2, 1995, agreement with Armco to purchase certain assets and a parcel of real property located at Titusville, Armco agreed to indemnify the Company up to $3.0 million in the aggregate for liabilities under environmental laws arising out of conditions on or under the Titusville property existing prior to June 2, 1995. Armco's obligation to indemnify the Company for any liabilities arising out of environmental conditions existing off-site as of June 2, 1995, is not subject to the $3.0 million limitation. Management is not aware of any financial difficulties being experienced by AK Steel, as successor to Armco, that would prevent its performance under the acquisition agreements. In addition, management is not aware of any environmental conditions or the incurrence of other liabilities at the Bridgeville or Titusville facilities, for which Armco has agreed to indemnify the Company, nor of any material environmental condition requiring remediation and affecting the Company. The Company maintains insurance for both property damage and business interruption applicable to its production facilities, including the universal rolling mill. The Company maintains a supply contract agreement with Talley Metals Technology, Inc., a subsidiary of Carpenter Technology Corporation, which is currently effective through December 2002. Under terms of the agreement, the Company will supply Talley Metals with an average of 1,250 tons of stainless reroll billet products per month. The value of the contract on a monthly basis will depend on product mix and key raw material prices. Note 11: Segment And Related Information The Company is comprised of two operating locations, the Bridgeville facility and the Titusville facility, and one corporate headquarters. The nature of the products and services, production processes, customer type and distribution methods are generally similar for both operating locations. In addition, the assessment of performance and allocation of resources is performed by the chief operating decision-maker at the corporate level rather than by operating location. As such, the Company operates as a single segment. The following table presents net sales by product line:
2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Stainless steel $76,908 $62,346 $55,255 Tool Steel 4,503 6,960 6,055 High-strength low alloy steel 3,379 2,161 1,327 High-temperature alloy steel 2,471 1,754 2,124 Conversion services 3,054 2,309 1,807 Other 343 355 95 ----------------------------------------------------------------------------------------------------------------------------------- Net sales on shipments 90,658 75,885 66,663 Effect of accounting change -- 12,462 -- ----------------------------------------------------------------------------------------------------------------------------------- Total net sales $90,658 $88,347 $66,663 -----------------------------------------------------------------------------------------------------------------------------------
Net sales on shipments from the Company's largest customer and its affiliates, which were generated primarily from the Bridgeville operations, approximated 32%, 39% and 48% of total 2001, 2000 and 1999 sales, respectively. Net sales on shipments from the Company's second largest customer and its affiliates, which were generated from the Bridgeville and Titusville operations, approximated 12%, 6% and 6% of 2001, 2000 and 1999 net sales, respectively. The accounts receivable balances from these two customers comprised approximately 29% and 36% of total accounts receivable at December 31, 2001 and 2000, respectively. The Company derives less than 10% of its revenues from markets outside of the United States and the Company has no assets located outside the United States. Note 12: Subsequent Event Subsequent Event On February 14, 2002, the Company, through its wholly owned subsidiary, Dunkirk Speciality Steel, LLC ("Dunkirk Speciality Steel"), acquired from the New York Job Development Authority ("JDA") certain assets formerly owned by Empire Specialty Steel, Inc. ("Empire") at its idled production facility located in Dunkirk, New York (the "Dunkirk facility"). The assets acquired include the inventory; property plant and equipment; and selected intangible assets. The purchase price of $4.0 million will be funded with $1.0 million in cash, paid at closing, and ten-year, 5% interest bearing notes payable to the JDA in the amount of $3.0 million. No principal or interest payments are payable during the first year. The Company will not assume any liabilities of Empire. Capital expenditures are expected to approximate $6.0 million at the Dunkirk facility in 2002. Note 13: Quarterly Financial Data (unaudited) In 2000, the Company adopted the provisions of SAB 101 retroactive to January 1, 2000.
First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) 2001 Data Net sales $21,259 $24,233 $23,344 $21,822 Gross profit 4,138 5,026 5,152 4,427 Operating income 2,580 3,210 3,851 2,903 Net income 1,512 1,908 2,330 1,889 Earnings per common share: Basic $0.25 $0.31 $0.38 $0.31 Diluted $0.25 $0.31 $0.38 $0.31 ----------------------------------------------------------------------------------------------------------------------------------- 2000 Data Net sales $17,770 $18,522 $18,587 $33,468 (a) Gross profit 3,044 2,640 3,676 7,126 Operating income 1,941 1,207 2,406 5,934 Income before cumulative effect of accounting change 1,128 622 1,273 3,587 Cumulative effect of accounting change, net of tax (1,546) -- -- -- Net income (loss) ($418) $622 $1,273 $3,587 Earnings per common share: Basic Income before cumulative effect of accounting change $0.19 $0.10 $0.21 $0.59 Cumulative effect of accounting change, net of tax (0.26) -- -- -- ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) ($0.07) $0.10 $0.21 $0.59 ----------------------------------------------------------------------------------------------------------------------------------- Diluted Income before cumulative effect of accounting change $0.19 $0.10 $0.21 $0.59 Cumulative effect of accounting change, net of tax (0.26) -- -- -- ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) ($0.07) $0.10 $0.21 $0.59 ===================================================================================================================================
(a) During the fourth quarter of 2000, the Company modified its Standard Terms and Conditions of Sale to more closely reflect the substance of its sale transactions, which resulted in revenue being recorded at the time of shipment rather than when cash was received. Price range of common stock The Common Stock is listed on the Nasdaq National Market under the symbol "USAP." The following table sets forth the range of high and low sale prices per share of Common Stock, for the periods indicated below: High Low -------------------------------------------------------------------------------- Year 2001 First quarter $ 8.06 $7.00 Second quarter $10.40 $7.19 Third quarter $10.73 $6.84 Fourth quarter $ 8.49 $6.85 -------------------------------------------------------------------------------- Year 2000 First quarter $7.56 $5.69 Second quarter $7.75 $5.63 Third quarter $7.19 $6.38 Fourth quarter $8.25 $6.69 -------------------------------------------------------------------------------- The Company has never paid a cash dividend on its Common Stock and currently has no plans to pay dividends in the foreseeable future. The PNC Credit Agreement contains restrictions on the Company's ability to pay dividends on Common Stock. Forward-Looking Information Safe Harbor This Annual Report contains historical information and forward-looking statements. Statements looking forward in time, including statements regarding future growth, cost savings, expanded production capacity, broader product lines, greater capacity to meet customer quality reliability, price and delivery needs, enhanced competitive posture and effect of new accounting pronouncements are included in this Annual Report pursuant to the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from any future performance suggested herein. Further, the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company's control. In the context of the forward-looking information provided in this Annual Report, please refer to the discussions of risk factors detailed in, as well as the other information contained in, this Annual Report and the Company's filings with the Securities and Exchange Commission during the past 12 months. Five-Year Summary
For the Years Ended December 31, 2001 2000(a) 1999 1998 1997 ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) Summary of Operations Net sales $90,658 $ 88,347 $66,663 $72,595 $81,301 Operating income 12,544 11,488 3,731 7,566 11,574 Income before cumulative effect of accouting change -- 6,610 -- -- -- Cumulative effect of accounting change, net of tax -- (1,546) -- -- -- Net income $ 7,639 5,064 2,103 5,004 7,206 ----------------------------------------------------------------------------------------------------------------------------------- Pro Forma Summary of Operations (b) Net sales $90,658 $ 88,347 $63,330 $78,170 $76,229 Operating income 12,544 11,488 3,373 8,437 11,049 Net income $ 7,639 6,610 1,854 5,558 6,875 ----------------------------------------------------------------------------------------------------------------------------------- Financial Position at Year-End Working capital $28,655 $ 23,558 $20,800 $21,829 $20,086 Total assets 79,446 73,747 68,179 64,450 56,151 Total debt 8,322 10,007 11,841 12,958 5,779 Stockholders' equity 56,372 48,767 43,653 42,565 37,768 ----------------------------------------------------------------------------------------------------------------------------------- Common Share Data Basic earning per share: As reported $ 1.26 $ 0.83 $ 0.34 $ 0.79 $ 1.15 Pro Forma under SAB 101 (b) 1.26 1.09 0.30 0.88 1.09 Diluted earning per share: As reported 1.25 0.83 0.34 0.79 1.12 Pro Forma under SAB 101 (b) 1.25 1.09 0.30 0.87 1.07 Stockholders' equity 9.28 8.03 7.19 6.82 6.00 ----------------------------------------------------------------------------------------------------------------------------------- Other Data EBITDA (c) $15,365 $ 11,459 $ 5,844 $ 8,960 $12,741 Capital expenditures 5,253 4,598 3,366 12,146 8,145 Depreciation and amortization 2,782 2,466 2,101 1,516 1,109 Return on stockholders' equity 13.6% 10.4% 4.8% 11.8% 19.1% Debt to total capitalization 12.9 17.0 21.3 23.3 13.3 Employees 304 280 277 280 270 Customers 288 250 235 200 167 ----------------------------------------------------------------------------------------------------------------------------------- Average Shares Outstanding (in thousands) Basic 6,080 6,075 6,111 6,305 6,286 Diluted 6,097 6,080 6,111 6,355 6,417 -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes $12,462,000 of net sales and $9,988,000 of costs of sales associated with revenues recognized in 1999 but deferred until 2000 as a result of implementing Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The 2000 results of operations also include the impact of changing the Company's Standard Terms and Conditions to more closely reflect the substance of its sales transactions. (b) Includes the effect of implementing Staff Accounting Bulleting No. 101, "Revenue Recognition in Financial Statements" as required under generally accepted accounting principles in 2000. (c) Represents earnings before special charges, interest expense, income taxes and depreciation and amortization. Forward-Looking Information Safe Harbor This Annual Report contains historical information and forward-looking statements. Statements looking forward in time, including statements regarding future growth, cost savings, expanded production capacity, broader product lines, greater capacity to meet customer quality reliability, price and delivery needs, enhanced competitive posture and effect of new accounting pronouncements are included in this Annual Report pursuant to the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from any future performance suggested herein. Further, the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company's control. In the context of the forward-looking information provided in this Annual Report, please refer to the discussions of risk factors detailed in, as well as the other information contained in, this Annual Report and the Company's filings with the Securities and Exchange Commission during the past 12 months. Directors, Officers and Management Directors Douglas M. Dunn Dean of Graduate School of Industrial Administration Carnegie Mellon University George F. Keane President Emeritus Common Fund Group Clarence M. McAninch President and Chief Executive Officer Universal Stainless & Alloy Products, Inc. Udi Toledano President Millennium 3 Capital, Inc. D. Leonard Wise Former President and Chief Executive Officer Carolina Steel Corporation Officers Clarence M. McAninch President and Chief Executive Officer Richard M. Ubinger Vice President of Finance, Chief Financial Officer and Treasurer Paul A. McGrath Vice President of Operation, General Counsel and Secretary Management Michael J. Obiecunas Director, Employee Relations Bruce A. Kramer Director, Purchasing and Production Planning Keith A. Engleka Director, Technology David M. Blanchard Manager, PRP Division Corporate Information Executive Offices Universal Stainless & Alloy Products, Inc. 600 Mayer Street Bridgeville, PA 15017 412-257-7600 Annual Meeting The Annual Meeting of Stockholders will be held at 10 a.m. on Tuesday, May 21, 2002, at the Southpointe Golf Club, Canonsburg, PA. Stockholder Information Universal Stainless & Alloy Products, Inc.'s Annual Report, Form 10-K and other reports filed with the Securities and Exchange Commission can be obtained, without charge, by writing to the Vice President of Finance at the Executive Offices. Transfer Agent and Registrar Continental Stock Transfer & Trust Company 2 Broadway New York, NY 10004 Stock Listing NASDAQ Symbol: USAP Web Site Address www.univstainless.com