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UNIVERSAL STAINLESS & ALLOY PRODUCTS INC (USAP)·Q1 2024 Earnings Summary

Executive Summary

  • Q1 2024 delivered near-record sales of $77.6M, gross margin expanded to 18.9% (highest since Q1 2012), and diluted EPS rose to $0.43; backlog increased to $325.1M, underscoring sustained demand in aerospace and premium alloys .
  • Profitability inflected: operating income reached $7.3M (+51% q/q), EBITDA $12.2M (+27% q/q adj.), and operating cash flow $10.3M; management expects record quarterly sales and margin expansion through the rest of 2024 .
  • Strategic focus on premium alloys (VIM/VAR investments) and price increases drove mix and margin; raw material surcharge misalignment was a $1.3M headwind that management expects to moderate in Q2 and largely dissipate in H2 .
  • Capital allocation remains disciplined: capex $5.5M in Q1 (FY24 ≈ $18M), total debt reduced to $81.2M; interest spread reduced by 25 bps with potential further 25 bps in Q3, supporting lower interest expense going forward .

What Went Well and What Went Wrong

What Went Well

  • Gross margin reached 18.9% (12-year high) despite a $1.3M surcharge misalignment; CEO: “We achieved the highest profitability in 12 years… on near-record sales,” supported by robust aerospace demand and realized price increases .
  • Backlog rose to $325.1M with higher average selling price per pound; premium alloy sales were $20.1M (~26% of sales), validating strategy and customer approvals breadth .
  • Strong cash generation and deleveraging: $10.3M cash from operations; debt cut by $4.3M q/q; management plans free cash flow and debt reduction each quarter in 2024 .

What Went Wrong

  • Raw material/surcharge misalignment reduced margin by ~$1.3M in Q1; management flagged residual misalignment in Q2 (40–50% of Q1 impact) before easing in H2, an external cost headwind .
  • Heavy equipment sales softened q/q to $5.8M amid OEM inventory balancing and evolving EV/hybrid mix; management expects improvement in H2 with model changeovers supporting tool steel demand .
  • SG&A remains elevated versus prior year (Q1 $7.4M) due to higher insurance and audit/accounting costs; ongoing run-rate expected at $7.5–$8.0M/quarter in 2024 .

Financial Results

Sequential performance vs prior two quarters

MetricQ3 2023Q4 2023Q1 2024
Revenue ($USD Millions)$71.283 $79.780 $77.637
Gross Margin % of Sales15.2% 16.4% 18.9%
Operating Income ($USD Millions)$4.410 $4.804 $7.258
Diluted EPS ($USD)$0.20 $0.27 $0.43
EBITDA ($USD Millions)$8.991 $9.631 $12.184

Year-over-year: Q1 2024 vs Q1 2023

MetricQ1 2023Q1 2024
Revenue ($USD Millions)$65.865 $77.637
Gross Margin % of Sales11.7% 18.9%
Operating Income ($USD Millions)$1.449 $7.258
Diluted EPS ($USD)-$0.06 $0.43
EBITDA ($USD Millions)$6.459 $12.184

Segment and mix breakdown

CategoryQ1 2023 ($USD ‘000)Q1 2024 ($USD ‘000)
Aerospace$48,958 $60,208
Energy$5,838 $6,013
Heavy Equipment$6,931 $5,848
General Industrial, Conversion & Other$4,138 $5,568
Premium Alloys (VIM)$17,656 $20,093
Specialty Alloys$47,549 $56,255

KPIs and balance sheet/cash flow

KPIQ3 2023Q4 2023Q1 2024
Backlog ($USD Millions, before surcharges)$345.0 $318.2 $325.1
Operating Cash Flow ($USD Millions)$6.7 $7.4 $10.270
Capital Expenditures ($USD Millions)$2.7 $3.4 $5.462
Total Debt ($USD Millions)$89.5 $85.6 $81.2
Interest Expense ($USD Millions)$2.073 $2.134 $2.049
Cash ($USD Millions)$0.177 $0.394 $0.866

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
SG&A expenseQuarterly 2024Q1 2024 ≈ $7.5M $7.5–$8.0M per quarter in 2024 Slightly raised band
Capital ExpendituresFY 2024$16–$18M ≈ $18M Tightened to high end
Raw material misalignmentQ2 2024 / H2Ease by end of Q2 2024 Q2 impact ~40–50% of Q1; minimal in H2 if stability persists Refined timing/size
Interest spread above SOFR2024N/AReduced by 25 bps in late Q1; potential further 25 bps in Q3 if plan achieved New reduction
Effective tax rateFY 2024N/AEstimated annual ETR ~19.7% New disclosure
Sales outlookRemainder of 2024Sequential growth expected Expect record quarterly sales and rising profitability each quarter Strengthened tone
Debt reduction2024Pay down debt each quarter Continue quarterly debt reduction with positive FCF Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2023)Previous Mentions (Q4 2023)Current Period (Q1 2024)Trend
Aerospace demand (Boeing/Airbus build rates, backlog)Robust demand, supply chain in pull mode; Boeing/AB rates ramp 2025–26 Record aerospace sales; backlogs extend years Robust demand despite Boeing production issues; suppliers told to “keep your foot on the gas”; record sales expected ahead Strengthening
Premium alloys strategy & capacity (VIM/VAR)VAR commissioning to expand bar capacity; premium mix rising Two VARs released into production; premium alloy backlog share >⅓ Ordering second 18-ton VIM shell; continued investment and approvals driving richer mix Expanding
Raw material surcharge misalignmentQ3 negative misalignment ~$1.8M; easing expected Q4 misalignment ~$1.6M; ease by end Q2 Q1 misalignment ~$1.3M; ~40–50% carry into Q2; likely none in H2 Improving
Heavy equipment/automotiveStrong Q3; caution from strikes; expect H2 improvement Down q/q; expect improvement with model changeovers $5.8M sales; EV/hybrid mix shifts; expect H2 pickup Near-term soft, H2 upturn
Semiconductor/CHIPS Act (General Industrial)Optimism into 2024; ramp in H2 2023 Strengthening, double-digit growth projected Expect resumption of growth in Q2; AI-related demand supports Reaccelerating
Defense exposureGrowing participation; 15–20% of aerospace sales Defense focus and approvals growing Legislative tailwinds; defense spend can translate to added demand Positive
Internal controls/regulatoryN/ADisclosed material weaknesses in ICFR; remediation underway (no restatement) No incremental update in Q1 callStabilizing

Management Commentary

  • “We achieved the highest profitability in 12 years in the first quarter… Our performance was driven by robust aerospace demand and the continued realization of base price increases implemented over the past three years.” — Christopher M. Zimmer, CEO .
  • “We expect to achieve record sales quarterly for the balance of the year… supported by our backlog, which increased to $325 million from $318 million at year-end on continued strong order entry.” — Christopher M. Zimmer .
  • “Our adjusted EBITDA… was $12.6 million or 16.2% of sales, highest since Q1 2012… We plan to generate free cash flow each quarter and pay down debt each quarter in 2024.” — Steven V. DiTommaso, CFO .

Q&A Highlights

  • Boeing production impact: Management sees current slowdown as a window for supply chain catch-up; if issues persist beyond July, they will reassess, but no pushouts/cancellations seen to date .
  • Surcharge misalignment trajectory: Expect Q2 impact at ~40–50% of Q1; commodities stabilizing with slight upward bias; anticipate minimal misalignment in H2 .
  • Aftermarket/MRO dynamics: Airlines extending legacy fleets due to delivery delays, increasing maintenance demand; difficult to quantify mix vs new builds due to channel sales .
  • Sequential outlook: Clarified expectation of record sales and increased profitability each quarter for the remainder of 2024, underpinned by production ramp and modernization projects .

Estimates Context

  • Consensus (S&P Global) for USAP Q1 2024 EPS, revenue, and EBITDA was unavailable due to missing CIQ mapping in the SPGI dataset; therefore, we cannot assess beat/miss vs Wall Street estimates for Q1 2024 at this time [SpgiEstimatesError: Missing CIQ mapping for ticker 'USAP'].
  • Given thin coverage and mapping issues, investors should anchor near-term expectations on company backlog, aerospace demand commentary, and stated SG&A/capex run-rates .

Key Takeaways for Investors

  • Margin expansion story intact: mix shift to premium alloys, realized base price increases, and easing surcharge misalignment should support further gross margin and EBITDA gains in 2024 .
  • Demand visibility strong: rising backlog and OEM guidance (Boeing/Airbus) underpin confidence in record quarterly sales and sequential profitability through year-end—a potential positive catalyst for the stock narrative .
  • Cash generation and deleveraging: robust operating cash flow, disciplined capex (~$18M FY24), and quarterly debt reduction lower financial risk and interest expense into H2 .
  • End-market mix: near-term softness in heavy equipment offset by expected H2 uptick; semiconductor/AI-related demand and defense tailwinds diversify beyond commercial aerospace .
  • Execution risk: monitor Q2 surcharge misalignment moderation, production ramp and workforce stability, and remediation of Q4-disclosed internal control weaknesses (no restatement) .
  • Strategic capacity additions: VIM/VAR investments remove bottlenecks and expand premium alloy capabilities, enabling higher-margin growth and approvals with primes across commercial and defense .
  • Trading lens: Near-term catalysts include confirmation of sequential record sales/margins in Q2 and Q3, progress on interest spread reduction, and backlog resilience despite Boeing cadence—positive skew if execution aligns with guidance .