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UNIVERSAL STAINLESS & ALLOY PRODUCTS INC (USAP)·Q4 2023 Earnings Summary

Executive Summary

  • Record quarter: Net sales rose to $79.8M, diluted EPS reached $0.27, and gross margin hit 16.4% (highest since Q2 2018), driven by richer premium alloy mix and higher base prices despite a $1.6M surcharge misalignment headwind .
  • Premium alloy momentum: Premium alloy sales were $21.1M (26.5% of sales), up 28% QoQ; aerospace sales reached $61.9M (77.6% of sales), +15% QoQ, with backlog at $318.2M and premium alloys ~36% of backlog .
  • Strategic capacity: Two VAR furnaces were qualified and released into production at North Jackson to accelerate premium alloy growth; multiple price increases over three years (latest on Feb 12) support margin expansion as misalignment is expected to lessen by end of Q2 2024 .
  • Financial discipline: Operating cash flow was $7.4M; total debt reduced to $85.6M (down $4.0M QoQ and $12.9M YoY); SG&A expected to normalize to ~$7.5M in Q1 2024; capex planned at $16–$18M for FY 2024 .
  • Estimates: Wall Street consensus via S&P Global was unavailable for USAP this quarter; comparisons to estimates cannot be provided.

What Went Well and What Went Wrong

What Went Well

  • “Record Q4 2023 Sales of $79.8 million…Record full year 2023 sales of $285.9 million” highlighting strong aerospace demand and premium alloy mix .
  • Gross margin improved to 16.4% (highest since Q2 2018), aided by richer product mix and higher selling prices, even with surcharge headwinds; EBITDA rose to $9.6M and adjusted EBITDA to $10.0M .
  • Strategic investments: “We have added two Vacuum-Arc Remelt (VAR) furnaces…qualified and released into production” to expand premium capacity and defense applications .

What Went Wrong

  • Surcharge misalignment: Q4 margin impacted by $1.6M raw material misalignment; management expects moderation by end of Q2 2024 .
  • SG&A elevated: Q4 SG&A increased due to employee-related and insurance costs; internal control material weaknesses disclosed (no restatement), with remediation underway .
  • End-market mix shift away from oil & gas/power gen constrained those segments; Q4 oil & gas down YoY (-32%) and power gen near 1% of sales as finishing capacity prioritized for aerospace .

Financial Results

MetricQ2 2023Q3 2023Q4 2023
Net Sales ($USD Millions)$69.0 $71.3 $79.8
Diluted EPS ($USD)$0.10 $0.20 $0.27
Gross Margin %14.3% 15.2% 16.4%
Operating Income ($USD Millions)$3.1 $4.4 $4.80
EBITDA ($USD Millions)$7.6 $9.2 $9.63
Adjusted EBITDA ($USD Millions)$7.9 $9.5 $9.96
Melt Type Net Sales ($USD Millions)Q4 2022Q4 2023
Specialty alloys$42.0 $57.49
Premium alloys$13.52 $21.11
Conversion/Other$0.68 $1.19
Total$56.20 $79.78
End Market Net Sales ($USD Millions)Q4 2022Q4 2023
Aerospace$40.05 $61.90
Power generation$1.04 $1.08
Oil & gas$5.26 $3.58
Heavy equipment$5.63 $6.41
General industrial, conversion & other$4.22 $6.82
Total$56.20 $79.78
Market Channel Net Sales ($USD Millions)Q4 2022Q4 2023
Service centers$41.38 $61.76
OEMs$4.36 $5.90
Rerollers$5.04 $2.94
Forgers$4.74 $8.00
Conversion & other$0.68 $1.19
Total$56.20 $79.78
KPIsQ3 2023Q4 2023
Tons shipped (units)—8,124
Tons shipped (Q4 2022 for reference)—6,500
Backlog (before surcharges) ($USD Millions)$344.8 (Sep 30, 2023) $318.2 (Dec 31, 2023)
Managed working capital ($USD Millions)$151.6 (Sep 30, 2023) $148.1 (Dec 31, 2023)
Total debt ($USD Millions)$89.5 (Sep 30, 2023) $85.6 (Dec 31, 2023)
Cash from operations ($USD Millions)$6.7 $7.4
Capital expenditures ($USD Millions)$2.7 $3.4

Note: Wall Street consensus estimates via S&P Global were unavailable; a Vs. Estimates column cannot be provided.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
CapexFY 2024“Similar levels” around ~$15M (Q3 call) $16–$18M Raised
SG&A ExpenseQ1 2024Not providedApprox. $7.5M New
Debt reductionQ1 2024 and FY 2024Expected debt paydown in H2 2023 and expand liquidity ~$3M reduction in Q1; accelerate in H2 on higher sales/margins Maintained/Expanded
Raw material surcharge misalignmentQ4 2023 → Q1–Q2 2024Q4 misalignment ~half of Q3 estimate Actual Q4 headwind $1.6M; Q1 similar to Q4; moderation in Q2 Timing updated
Premium alloy capacityEarly 2024VARs commissioning to begin Q1 2024 Two VARs qualified/released into production Achieved

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3)Current Period (Q4 2023)Trend
Premium alloys capacity & mixVIM/VAR ramp; premium sales up; two VARs targeted for Q1’24; premium mix 25–30% forward Two VARs released; premium sales $21.1M and 26.5% of sales; approvals/new orders accelerating Strengthening
Aerospace demand & OEM backlogsRobust demand; Boeing/Airbus rate increases; strong backlogs Aerospace $61.9M (+15% QoQ); Boeing/Airbus backlogs remain very large; supply chain “full pull” Robust/ongoing
Defense exposureGrowth opportunities, NATO spend and U.S. DoD programs 15–20% of aerospace sales to defense; rising participation Increasing
Surcharge misalignmentNegative misalignment Q2 ($0.5M) and Q3 ($1.8M) Q4 headwind $1.6M; expected to lessen by end of Q2 2024 Stabilizing then easing
SG&A/Cost structureElevated insurance/employee costs in Q2/Q3 Q4 SG&A $8.3M; guide ~$7.5M in Q1 2024 Normalizing
Semiconductor (General Industrial)Bullish on 2024; ramp in H2’23 Q4 general industrial $5.6M (+68% QoQ); outlook positive Improving
Heavy equipment/Auto & EVSolid in Q2/Q3; UAW strike caution Q4 $6.4M (down 28% QoQ); near-term caution, improving in H2’24 Near-term soft, H2 tailwind
Oil & gas / Power genTemporary shift to aerospace; softness in U.S. land Q4 oil & gas $3.6M (down YoY); power gen $1.1M; continue to prioritize aerospace Soft; capacity redirected
Working capital & debtInventory/DSO improvements; debt paydown Working capital $148.1M; debt $85.6M; expect limited WC growth, continued paydowns Improved; disciplined

Management Commentary

  • “The fourth quarter capped a year of increasing momentum…sales up 42%…gross margin…16.4%…despite $1.6 million raw material misalignment headwind.”
  • “Our strategic focus on higher margin premium and specialty alloys is gaining full traction…added two VAR furnaces…supports premium alloy growth…including defense.”
  • “The misalignment is expected to lessen by the end of the second quarter of 2024.”
  • CFO: “Material weaknesses in internal control…no restatement of numbers…financial statements present fairly…remediation actions started.”
  • CFO: “We expect our first quarter 2024 SG&A expense to approximate $7.5 million…capex about $16–$18 million in full year 2024…pay down debt each quarter in 2024.”

Q&A Highlights

  • Near-term trajectory: Management expects continued sequential top-line growth, margin expansion, and debt reduction into Q1 2024 .
  • Misalignment path: Q1 2024 misalignment similar to Q4; moderation in Q2 as inventory turns through ~6-month process .
  • Capacity and execution: Two new VARs operational; downstream investments and workforce stabilization to support premium ramp .
  • Working capital outlook: Sideways in 2024 given aerospace mix; tool steel strength in H2 should aid inventory turns .

Estimates Context

  • S&P Global/Capital IQ consensus estimates were unavailable for USAP this quarter due to mapping constraints; therefore, comparisons to Wall Street consensus cannot be presented. As a result, no estimate-based beats/misses are shown.

Key Takeaways for Investors

  • Margin trajectory remains favorable: gross margin improved to 16.4% on richer mix and price actions; surcharge headwinds should ease by end of Q2 2024, supporting further margin expansion .
  • Premium alloy growth inflecting: VAR capacity online with approvals/order entry accelerating; premium alloys already 26.5% of Q4 sales and ~36% of backlog .
  • Aerospace demand is durable: Record aerospace sales, strong Boeing/Airbus backlogs and defense tailwinds underpin multi-year growth visibility .
  • Cost normalization and cash generation: SG&A guided to ~$7.5M in Q1 2024; Q4 operating cash flow $7.4M; continued debt paydown expected each quarter in 2024 .
  • Mix-driven end-market allocation: Near-term softness in oil & gas/power gen and heavy equipment countered by prioritization of higher-margin aerospace and H2 improvement in tool steel demand .
  • Internal controls remediation underway: No restatements; focus on process/documentation enhancements—monitor remediation progress but no impact to reported numbers .
  • Tactical implication: Positioning for ongoing premium mix gains and easing surcharge headwinds suggests near-term earnings resilience; capacity activation is a potential catalyst for estimate revisions once consensus becomes available .