U.S. markets closed
  • S&P 500

    3,811.15
    -18.19 (-0.48%)
     
  • Dow 30

    30,932.37
    -469.64 (-1.50%)
     
  • Nasdaq

    13,192.35
    +72.92 (+0.56%)
     
  • Russell 2000

    2,201.05
    +0.88 (+0.04%)
     
  • Crude Oil

    61.66
    -1.87 (-2.94%)
     
  • Gold

    1,733.00
    -42.40 (-2.39%)
     
  • Silver

    26.70
    -0.98 (-3.56%)
     
  • EUR/USD

    1.2088
    -0.0099 (-0.81%)
     
  • 10-Yr Bond

    1.4600
    -0.0580 (-3.82%)
     
  • GBP/USD

    1.3922
    -0.0091 (-0.65%)
     
  • USD/JPY

    106.5500
    +0.3200 (+0.30%)
     
  • BTC-USD

    47,221.23
    -480.60 (-1.01%)
     
  • CMC Crypto 200

    912.88
    -20.25 (-2.17%)
     
  • FTSE 100

    6,483.43
    -168.53 (-2.53%)
     
  • Nikkei 225

    28,966.01
    -1,202.26 (-3.99%)
     

Edited Transcript of USAP earnings conference call or presentation 22-Apr-20 2:00pm GMT

·37 min read
  • Oops!
    Something went wrong.
    Please try again later.

Q1 2020 Universal Stainless & Alloy Products Inc Earnings Call BRIDGEVILLE Apr 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Universal Stainless & Alloy Products Inc earnings conference call or presentation Wednesday, April 22, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Christopher M. Zimmer Universal Stainless & Alloy Products, Inc. - Chief Commercial Officer & Executive VP * Christopher Thomas Scanlon Universal Stainless & Alloy Products, Inc. - VP of Finance, CFO & Treasurer * Dennis M. Oates Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO ================================================================================ Conference Call Participants ================================================================================ * John Eric Deysher Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager * Philip Ross Gibbs KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst * Tyler Lange Kenyon Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst * June Filingeri ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Universal Stainless First Quarter 2020 Conference Call and Webcast. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) It is now my pleasure to introduce June Filingeri. Please go ahead. -------------------------------------------------------------------------------- June Filingeri, [2] -------------------------------------------------------------------------------- Thank you. Good morning. This is June Filingeri of Comm-Partners. And I also would like to welcome you to the Universal Stainless Conference Call and Webcast. We are here to discuss the company's first quarter 2020 results reported this morning. With us from management are Denny Oates, Chairman, President and Chief Executive Officer; Chris Zimmer, Executive Vice President and Chief Commercial Officer; John Arminas, Vice President of Administration and General Counsel; and Chris Scanlon, Vice President, Finance, Chief Financial Officer and Treasurer. Before I turn the call over to management, let me quickly review procedures. After management has made formal remarks, we will take your questions. The conference operator, Andrew, will instruct you on procedures at that time. Also, please note that in this morning's call, management will make forward-looking statements under the Private Securities Litigation Reform Act of 1995, I would like to remind you of the risks related to these statements which are more fully described in today's press release and in the company's filings with the Securities and Exchange Commission. With these formalities out of the way, I would now like to turn the call over to Denny Oates. Denny, we are ready to begin. -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Thanks, June. Good morning, everyone. Thanks for joining us today. It goes without saying that the coronavirus pandemic has caused substantial dislocation in major global economies as well as in our end markets, not to mention disrupting the lives of countless individuals throughout the world, sometimes tragically. That's why I want to begin by thanking each person on the Universal team for their dedication and hard work throughout this difficult and unsettling time. Their health and well-being remain our top priority, and we have implemented all CDC measures to safeguard them. From a business perspective, the effects of the pandemic developed over the past several months compounding impact of the already existing 737 MAX issues and collapsing oil prices. Customers generally report surprisingly good first quarter sales with growing requests for pushouts, cancellations, along with operational disruptions as organizations adapt to a changing workplace. We are seeing much the same. Our shops remain generally busy, working on a $110 million backlog before surcharges. However, we have experienced a reduction in bookings, numerous pushout requests, and a little over $6 million in cancellations through today on longer lead time products, which have not entered production. We are working closely with our customers to meet their needs as the entire supply chain adjusts to this changing environment. At the same time, we are executing plans to increase liquidity, reduce costs and better serve our customers. With that as context, let's start with a review of our top line performance in the first quarter, including some of the bright spots. Net sales of $58.5 million were up 6% from the fourth quarter of 2019, although 3% lower than the first quarter a year ago. The sequential growth was driven by 13% higher aerospace sales and 30% higher tool steel plate sales as tool steel continues to recover from a challenging 2019. The aerospace growth offset 25% sequentially lower power generation sales, mainly due to seasonal factors. And a 30% drop in oil and gas sales, where demand has plummeted along with oil prices. This started with a Russia and Saudi dispute on production levels and substantially worsened due to the pandemic driven shutdown in major economies. Oil storage facilities are basically full, leading to the unprecedented events earlier this week with oil for the May contract moving into negative territory. Sales of premium alloys in the first quarter totaled $7.7 million or 13% of sales, which is up 4% from $7.4 million in the 2019 4th quarter, but 18% lower than the first quarter of 2019. First quarter gross profit was a disappointing $4.9 million and 8.4% of sales, despite a 6% increase in sales. The quarter includes several items of note. Secondary sales reduced margins 0.4%, but will generate $1 million in cash during the second quarter. Accounting revenue recognition adjustments reduced gross profit margins by another 0.4%. This is a noncash charge of $300,000. Our Titusville operation is positioned for another record year. But our inability to get testing done at a third-party lab due to virus-related staff availability reduced margins 1.7%. Amortization of major maintenance and a rapid decrease in high fixed cost melting operations drove negative absorption, reducing margins by 1.1%. Air melt output was reduced from January to March by 25% while vacuum induction melting fell 12%. It is challenging to isolate the direct financial impact of COVID-19 on our first quarter results. That said, we've identified $2 million in sales, which carry a 12% margin, which were delayed. Most of which were international sales, which did not reach their destination in time to be recognized in the first quarter. Additionally, the combination of lost production, added over time, interrupted outside services, temporary vendor shutdowns and additional spending on sanitation services and supplies reduced gross profit by $400,000 or 0.6%. Although tool steel surcharges have stabilized, surcharges for other stainless and specialty alloys split in the range of 6% to 8% during the quarter. We expect further surcharge erosion as we move through the second quarter. Lastly, as a general comment, overall product mix can be characterized as less profitable during the first quarter with more semi-finished billet and less conversion and cold-rolled products. A couple of words about commodity pricing. Nickel prices declined to $5.39 at the end of March, the lowest level since January 2019 and a 14% reduction during the quarter. Other commodities were mixed during the quarter with moly slipping from $9.53 a pound to $9.09 a pound, while vanadium and iron scrap rose modestly. As a result, we expect to see further reductions in surcharges in the second quarter, with weaknesses on most complexes, especially scrap where markets are unsettled by weak generation and an uncertain demand. SG&A of $5.9 million includes the increase in business insurance discussed on the last call, a onetime acceleration in stock option expense due to retirement, higher legal expenses and certain employee benefits. A lower gross margin, combined with higher SG&A led to a loss for the first quarter of $1.4 million or $0.16 per diluted share. Total debt increased from the fourth quarter and totaled $76.3 million at the end of March. Chris will provide further detail on our balance sheet and cash flows in his financial report. Not to steal his thunder, I also want to report that on April 15, we secured a $10 million loan under the Payroll Protection Program, which adds to our liquidity position and provides additional financial flexibility during these difficult times. We ended the first quarter with a backlog before surcharges of $110.7 million versus $119.1 million at year-end 2019. The backlog reflects increases in plate products and billet with the reduction coming in large and small bar products. Premium melted products in the backlog increased sequentially, totaling $31.5 million versus $29.7 million at December 31, 2019. Meanwhile, order entry for the first quarter was down 8.2% sequentially on a dollar basis, but up 10.1% in pounds, reflecting the shifting mix. Order cancellations were $3 million in the first quarter alone. Thus far, in April, order entry is tracking below first quarter levels with a higher rate of cancellations. Let's turn to operations. Our 4 facilities continued to operate throughout the quarter. We moved swiftly to begin addressing the increasing severity of the pandemic and its impact on business conditions. We've been down this road before in 2015 and '16 and in 2008 and '09. Specifically, we are reducing schedules. Air melting and vacuum melting were reduced, as I said, by 25% and 12%, respectively, between January and March. We're adjusting discretionary spending down. We're working with vendors to defer, and in some cases, cancel incoming operating supplies and maintenance items. We're eliminating virtually all travel and related expenses. We're revisiting our major maintenance plans. And we've reduced capital spending plans to $2 million on average during each [remaining] (added by company after the call) quarter of 2020, with a goal of bringing annual spending in at $10 million for the year. Our goal here is to flex spending and plant activity in line with market changes while still maintaining productivity, a safe work environment and servicing our customers. A couple of positive notes, the new bar cell in Dunkirk generated savings of approximately $2.5 million on an annualized basis. Additionally, the advanced phase array inspection system started up with -- which will add further savings to the bar cell as compared to prior nondestructive testing processes. Our strategic investments in additional vacuum arc remelt furnace and an 18-ton crucible to support premium products growth are proceeding. The equipment will be received and installed in the first quarter of 2021. Let me turn to our end markets for a moment, beginning with aerospace. Our aerospace sales totaled $42.4 million or 73% of sales in the first quarter of 2020. This is up 13% from sales of $38 million or 68.2% of sales in the fourth quarter of 2019 and nearly matched the $42.6 million of sales in the first quarter of 2019 when they represented 70.7% of sales. On our last call, I noted the uncertainty caused by the 737 MAX situation that included Boeing's production halt and the ongoing delays in returning the aircraft to service. Those problems continue and have since been severely exacerbated by the drop-off in global air travel resulting from the coronavirus pandemic, which is hitting airlines along with airline manufacturer order books and production plans. The international Air Transport Association is now forecasting that because of COVID-19, full year 2020 airline passenger revenues will drop by $314 billion and -- a 55% decline compared to 2019. They also estimate that airlines could burn through $61 billion in cash reserves in the second quarter alone. For their part, U.S. airlines are struggling for cash flow to pay workers and maintain aircraft and have decided to avail themselves of the treasury's assistance through the CARES Act, leaving open the question of their appetite for new airplanes. The effect of these market pressures on the deliveries and order books of airplane manufacturers can be readily seen. Boeing reported the cancellation of 150 airplane orders in March, all for the 737 MAX. Boeing realized 31 new orders in March. Their commercial deliveries in the first quarter of 2020 totaled 50 airplanes. Currently, Boeing has approximately 5,000 commercial airplanes in its backlog. And in a welcome bit of positive news, Boeing announced that it is resuming production in Washington State this week on the 747, 767, the 777 and the 787 jet programs. Airbus reported that they booked 290 net commercial aircraft orders and delivered 122 aircraft in the first quarter. But also noted that 60 of the aircraft they produced during the quarter remain undelivered due to COVID-19. Airbus simultaneously announced that it would reduce its average production rates by approximately 1/3. At the end of March, Airbus had a reported backlog of 7,650 airplanes. A major area of strength in aerospace is defense. As DOD spending has remained strong, Universal's participation in the defense sector of the aerospace market has grown over the years, reflecting our expanding premium alloys, which are used throughout military aircraft. There is no doubt that on balance, these are very challenging times for the aerospace market. Our customers are assessing their demand, their inventory levels and volumes on order with the mills. We are working closely with them to respond rapidly to changes in market conditions. The heavy equipment market became our second largest market in the first quarter of 2020 due to the further recovery of our tool steel plate sales. First quarter heavy equipment sales totaled $6.1 million or 10.5% of sales, an increase of 29% from $4.8 million or 9% of sales in the fourth quarter of 2019. I noted on the last call that our tool steel order entry was strong going into the first quarter, with customer inventories in better balance versus the first half of 2019. That trend has continued through the first quarter, and we entered the second quarter with a very solid backlog. The oil and gas end market was our third largest end market in the first quarter of 2020, with sales of $4.4 million or 7.5% of sales, down 30% from the fourth quarter of 2019 and 18% lower than the 2019 first quarter. In its monthly report, OPEC said the following, and I quote, "The oil market is currently undergoing historic shock that is abrupt extreme and at a global scale." Meanwhile, Schlumberger pointed to the double black swan event in the unprecedented global health and economic crisis due to the coronavirus pandemic and the battle for market share between Saudi Arabia and Russia. They see it resulting in the most challenging environment for the industry in many decades, while further noting that customer spending and drilling activity in North America declined as oil prices slipped early in the quarter before falling abruptly in March. From the vantage point of the supply chain, we have seen other shocks over the years and have always found our way to recovery. Right now, we expect oil and gas market demand to trend downward for the remainder of the year. Power generation market sales were $2.2 million or 4% of sales in the first quarter of 2020, down 25% from the $2.9 million in the fourth quarter of 2019, and 11% lower than the first quarter of 2019. As noted in the past, our power generation sales are currently tied to maintenance spending, which is seasonally weaker in the first quarter and is being further impacted by the virus-caused lockdowns and mild winter weather. The general industrial market sales in the first quarter of 2020 represented 4% of sales at $2.4 million, which was level with the fourth quarter of 2019 and up 10% from the 2019 first quarter. As a reminder, our general industrial category includes sales to semiconductor, infrastructure and general manufacturing markets. Following a hard hit in 2019, the semiconductor industry association recently reported year-to-year results for February, that included increases of 14% in the Americas and 5.5% in China. Even though that does not reflect the impact of the coronavirus in the U.S., we are continuing to see solid semiconductor demand and our backlog is up 25% year-over-year. Before I turn the call over to Chris for his financial review, let me provide a quick snapshot of where we see things today and a general outlook for the rest of the year. There is no doubt that our industry is highly stressed and uncertainty runs high. Customers tell us that they are still trying to make sense of conditions. Even so, they are taking a conservative approach to their ordering, buying when they have demand, but not much on speculation. All in all, with our backlog going into the second quarter and with the caveat that this is as of today, we expect sales to approach the first quarter level, while the third quarter may be more challenging. As to profitability, we expect the main headwinds to come from lower activity levels as well as the cost resulting from the day-to-day disruptions, distractions and inefficiencies from contending with the coronavirus. We plan to adjust working capital based upon demand trends and our capital spending, as I indicated earlier, will be reduced to the $6 million range over the next 3 quarters. To mitigate these effects and remain in a strong position for the eventual recovery, we are focused on liquidity and on aggressively reducing costs wherever possible. In other words, we are executing a proactive operating strategy, very similar in principle to past cyclical downturns. That concludes my review. Chris, take us through the financial report, please. -------------------------------------------------------------------------------- Christopher Thomas Scanlon, Universal Stainless & Alloy Products, Inc. - VP of Finance, CFO & Treasurer [4] -------------------------------------------------------------------------------- Okay. Thank you, Denny, and good morning, everyone. Let's get started with the income statement. As Denny noted earlier, first quarter 2020 sales of $58.5 million were up 6% or $3.3 million from the 2019 fourth quarter but down 2.9% compared with the 2019 first quarter. First quarter 2020 gross margin totaled $4.9 million or 8.4% of sales, down from 10.6% of sales in the 2019 4th quarter and 12.2% of sales in the 2019 1st quarter. Our Q1 gross margin was unfavorably impacted by items Denny previously discussed, which include less profitable mix with more semi-finished billet and less conversion and cold-rolled product. Selling, general and administrative costs in the first quarter totaled $5.9 million or 10.1% of sales, an increase of $655,000 compared with the 2019 4th quarter and $940,000 compared to the 2019 1st quarter. First quarter SG&A includes a onetime stock compensation expense of $120,000 associated with the accelerated vesting of certain employee equity grants, which is not expected to recur. Increased legal expenses also contributed to the change from the prior year quarters. First quarter 2020 SG&A also includes increased property and business insurance-related costs totaling $300,000 compared to the 2019 1st quarter. The company's first quarter 2020 income tax benefit totaled $520,000 compared with a tax benefit of $560,000 in the fourth quarter of 2019, and an income tax expense of $250,000 in the first quarter of 2019. The 2020 1st quarter tax benefit reflects the federal statutory rate of 21% and the benefit of research and development tax credits. Net income in the first quarter was a loss of $1.4 million or $0.16 per diluted share. Fourth quarter 2019 net income totaled $200,000 or $0.02 per diluted share and 2019 1st quarter net income totaled $1.2 million or $0.14 per diluted share. Our first quarter EBITDA totaled $4 million. Q1 EBITDA as adjusted for noncash share compensation, totaled $4.5 million. First quarter EBITDA declined $1.5 million from the fourth quarter 2019 total of $5.5 million and by $3 million from the first quarter 2019 total of $7 million. The EBITDA and adjusted EBITDA calculations are provided in the tables to the press release. First quarter cash flow used in operations was $7.8 million, compared to our fourth quarter cash flow provided by operations, which totaled $4.7 million and first quarter 2019 use of cash flow from operations of $17.8 million. Related to the balance sheet, managed working capital totaled $153.5 million, an increase by $11.4 million compared with the fourth quarter of 2019. Accounts receivable increased by $1 million and inventory decreased by approximately $625,000, while accounts payable decreased by $11 million, partially due to a reduction in melt activity. The composition of our accounts receivable remains sound, and at this point in time, we have not seen any changes in customer payment activity. First quarter 2020 backlog totaled $110.7 million and is down $8.4 million or 7% from the 2019 4th quarter, while pounds were down by 2.8%. Year-over-year, first quarter 2020 backlog decreased $19.3 million or 14.9% compared to the 2019 1st quarter. Capital expenditures in the first quarter were $4 million, flat with the 2019 4th quarter and $1.5 million lower than 2019 1st quarter. 2020 capital expenditures are expected to total $10 million. The company's total debt at March 31, 2020, was $76.3 million, an increase of $11.9 million from the prior quarter. Our debt is primarily comprised of our PNC bank revolving credit facility, which totaled $53.8 million, and our PNC term loan, which totaled $7.9 million. Our notes, which were issued in connection with the acquisition of our North Jackson facility in 2011, totaled $15 million at March 31 and are included in current debt as these notes are due and payable in March 2021. Additionally, in the current first quarter, we made a $2 million principal payment on the notes pursuant to the terms of the agreement. Also, as of March 31, we maintained remaining revolver borrowing availability of $41.7 million. I want to summarize our Paycheck Protection Program funding next as we received $10 million of PPP funds on April 17. These funds have enhanced the company's financial flexibility and strengthened our liquidity position. Per the terms of the Paycheck Protection Program, we will use these funds for eligible employee payroll costs and utility expenses during the 8 weeks to be measured under the Payroll Protection Program period. This 8 week measurement period began on April 17 and will run through June 11. Following the conclusion of the 8-week measurement period, we will apply for forgiveness of this loan in accordance with the terms of the program. Forgiven funds under the program will be excluded from taxable income for federal income tax purposes. At this point, we do not have an estimate on the amount of PP funds, if any, that may not be forgiven. The $10 million PPP loan will be treated as a term note with PNC Bank. To the extent there are any amounts not forgiven under this term note, interest will accrue at a fixed annual rate of 1%, with the first 6 months of principal and interest payments deferred. Beginning November of 2020, the company will make 18 equal monthly payments of principal and interest with the final payment due in April of 2022. Specific to the COVID-19 pandemic, the company expects the effects of the pandemic and the related responses to negatively impact its results of operations, cash flows and financial position. However, due to the uncertainty related to the duration and severity of the economic and operational impacts of COVID-19, we cannot reasonably estimate the related impacts at this time. This concludes the financial update. And Denny, I'll hand the call back to you. -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [5] -------------------------------------------------------------------------------- Thanks, Chris. Before I wrap up, I would like to mention the recent retirement of Paul McGrath, who, most of you know, recently served as Vice President, Administration, General Counsel and Secretary for Universal. During his 25 years at Universal, Paul wore many hats and played a key role in our company's growth and operational improvements. We are all very grateful for Paul's many years of dedicated service to Universal and wish him all the best in his retirement years. I'm equally pleased to report that he has been succeeded by John Arminas. John joined Universal in 2013 and has provided valuable legal support in a broad range of issues critical to Universal's success. John's appointment is well deserved, and we are all pleased he has taken on these expanded responsibilities. So let me summarize Chris' report and my report. The first quarter of 2020 was marked by substantial dislocation in global economies and in our end markets due to the coronavirus pandemic, falling oil prices and ongoing issues in aerospace associated with the 737 MAX. Even so, our net sales increased 6% from the 2019 4th quarter, driven mainly by aerospace and tool steel. Gross margins were disappointing. Operational issues outlined and associated with adapting to the coronavirus workplace and sharp production cuts in melting, coupled with a generally less profitable shipment mix, were largely responsible. We secured a $10 million loan through the Payroll Protection Program to enhance our liquidity position. We have entered the second quarter with a backlog of $110.7 million, but in a highly stressed industry where uncertainty is running high. Our customers are taking a conservative approach to their ordering as they balance the dire headlines of today with their perspective gained from prior downturns and their desired positioning for the eventual recovery. Universal also has deep experience in facing difficult industry conditions. To mitigate the current challenges, we are focusing on cash and liquidity as well as on the bottom line by aggressively managing costs and activity levels. This is the same strategy that we executed in the past to successfully navigate previous challenging times. Clearly, we have some heavy lifting to do over the next few quarters, but I remain very confident we have the right plan, a great team of employees, and the support of our stakeholders necessary to power through this current situation and position Universal for further growth and success in the inevitable upturn. Let me close by once again sincerely thanking our team for their ongoing commitment and hard work. They're central to our recovery and to our future growth. Operator, we're ready for questions, please? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Certainly. (Operator Instructions) And our first question comes from the line of Phil Gibbs with KeyBanc Capital Markets. -------------------------------------------------------------------------------- Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [2] -------------------------------------------------------------------------------- Denny and Chris, okay. The SG&A run rate in Q1 was elevated due to some items, as you noted. What should we expect that to be moving ahead? Is it going to be closer to $5 million a quarter given the lower levels of business activity and the cost rationalization? -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Yes, you'll see it come down to that level, if not lower. -------------------------------------------------------------------------------- Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [4] -------------------------------------------------------------------------------- Okay. And Chris, can you go over just the liquidity at the end of Q1, kind of what you had? We obviously know the cash, but sometimes there's blocks on the revolver, so just curious in terms of what you said the liquidity was and then we get the other $10 million from the government actions? -------------------------------------------------------------------------------- Christopher Thomas Scanlon, Universal Stainless & Alloy Products, Inc. - VP of Finance, CFO & Treasurer [5] -------------------------------------------------------------------------------- Sure. So with us having an asset based line, the borrowing capability that we have is driven by accounts receivable and inventory. The ceiling that we had for borrowing per the agreement is $110 million. The basis at the end of the first quarter of inventory and accounts receivable totaled a gross combined availability of $96 million. We ended the quarter with $53.8 million borrowed on our revolver, which gave us remaining loan availability at the end of the first quarter of $41.7 million. -------------------------------------------------------------------------------- Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [6] -------------------------------------------------------------------------------- Got it. So $41.7 million, so call it $42 million of liquidity. The -- I think there's just, general -- I mean you did a great job explaining it to the best you could. I think there's a great deal of confusion with regards to a lot of these small business loans that companies are able to take. Should we think about the $10 million as just another form of -- in the short term, it's going to be low cost debt, and then you'll have to repay that $10 million, to your point in installments to 2022. Is that the way that we should look at it? Or is some of this stuff doesn't have to be paid back? -------------------------------------------------------------------------------- Christopher Thomas Scanlon, Universal Stainless & Alloy Products, Inc. - VP of Finance, CFO & Treasurer [7] -------------------------------------------------------------------------------- Sure. I'll go over that for you, Phil. So first things first, we're going to use these funds for eligible employee payroll and utility expenses, and that's going to be used during the 8 weeks that I referred to as a measurement period. So that 8 week window starts April 17, and it runs through the middle of June. Just specific within the makeup of the use of that $10 million, we can use 25% of those loan proceeds for utility costs. The remainder of those proceeds relate to payroll costs. Once that measurement period is complete, we will apply for forgiveness of the loan, and that's going to be based on the amount of spending against the loan. There's a couple of factors that influence the forgiveness. They're both employee related, specific to headcount during the 8 week period, as well as earnings of employees during the 8 week period. Once those two forgiveness calculations are done, we'll have an end result of what we would still owe. What we would still owe following forgiveness would have a runout of approximately 18 months. -------------------------------------------------------------------------------- Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [8] -------------------------------------------------------------------------------- Okay. So essentially then over this 2 month period, if you got $10 million and you used it -- you used, call it, $7 million on the utilities and the payroll, what you have left over, the $3 million, you'd run that out through 2022. So you're essentially not -- you're paying back a fraction of the $10 million I guess? Is that the way to think about it? -------------------------------------------------------------------------------- Christopher Thomas Scanlon, Universal Stainless & Alloy Products, Inc. - VP of Finance, CFO & Treasurer [9] -------------------------------------------------------------------------------- Correct. Yes. We would pay back the unforgiven amount of the loan. The first 6 months of principal and interest are deferred. The remaining would be paid out through the remaining 18 months after the 6-month forgiveness period at a 1% interest rate. -------------------------------------------------------------------------------- Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [10] -------------------------------------------------------------------------------- Okay. That's helpful. Denny, you gave your best view of sales guidance at this point right now. The second quarter probably will be a quarter where you take another leg down, I would imagine in just air melt utilization. So does that overhead absorption that's going to continue to impact you for the next couple of quarters, I would imagine? -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [11] -------------------------------------------------------------------------------- As far as the sales goes, I think the sales will be very close to the first quarter based upon everything we know at this point in time. As far as activity levels, we have ratcheted activity levels down to what we see coming in, so you'll see some further reductions. The entire quarter will be basically around where we were at March, if not a little bit lower. So it's going to be a trade-off. We are going to be reducing fixed costs, at the same time, reducing activity levels. Candidly, it's very difficult to do that in sync on a dollar-for-dollar basis. So there probably will be some additional absorption kick out during the second quarter. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- And our next question comes from the line of Tyler Kenyon with Cowen. -------------------------------------------------------------------------------- Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [13] -------------------------------------------------------------------------------- Denny and Chris, so I wanted to start just on the backlog. Denny, is there any way to characterize where that stands at present? -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [14] -------------------------------------------------------------------------------- It was $110.7 million at the end of the first quarter. When you say present, you mean as of today? -------------------------------------------------------------------------------- Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [15] -------------------------------------------------------------------------------- Right. -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [16] -------------------------------------------------------------------------------- Like this very minute? It's about $107 million this morning. -------------------------------------------------------------------------------- Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [17] -------------------------------------------------------------------------------- Okay. And then on the cost-cutting initiatives that you're pursuing, any color you could provide around those? I mean, any way to think about the proportion that's fixed relative to variable? -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [18] -------------------------------------------------------------------------------- I don't know how to answer that in terms of -- if you look at the individual costs, we're looking at reducing. Most of it is variable cost, okay? We're taking activity levels down in some of the high cost facilities. So you're going to see reductions in things like power, labor, operating supplies that I mentioned, all variable type costs. At the same time, as we move through the quarter, remember, we're still operating at a fairly decent clip, even though we took the front end of the operation down somewhat during the first quarter. So as we take the facility down, we will be working on fixed cost as well. So there's an element of fixed cost reduction in the second quarter. I can't really give you a quantification of that yet, other than to say we're going to be working on that very diligently as we move through the quarter. But understand, it's a process here. It's not -- everything's falling off a cliff. We still have a sizable backlog. We're still fairly busy in the shop. And we need all the supporting cast of characters to get pull that product out the door, and we'll see how things play out over the course of the second quarter in terms of incoming business levels. -------------------------------------------------------------------------------- Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [19] -------------------------------------------------------------------------------- Okay. Got it. Appreciate that. And Chris, one for you. Just appreciate all the detail on the term note under the Paycheck Protection Program, and I'm curious if there are any other opportunities for you within the existing CARES Act, tax deferrals, et cetera, that you may be able to take advantage of? And does your -- does utilizing the Paycheck Protection Program itself prohibit you from pursuing perhaps additional relief? -------------------------------------------------------------------------------- Christopher Thomas Scanlon, Universal Stainless & Alloy Products, Inc. - VP of Finance, CFO & Treasurer [20] -------------------------------------------------------------------------------- Yes. So first things first, you're allowed to have FICA payroll tax relief or you can participate in the PPP program. We participated in the PPP program so the 6.2 payroll tax relief that has been talked about over the past few weeks, we will not be able to participate in that. Separately, we are aware of the expanded main Street availability discussion and information that came out approximately 2 weeks ago. We will pursue that to the extent we can. We're always in review and conversation with the banks of opportunities that are presented to us. Separately, there was Federal income tax AMT Relief that was provided, that will create approximately $230,000 of income tax cash in the door in the second quarter pursuant to some of the changes associated with the CARES Act and related regulations. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of John Deysher with Pinnacle. -------------------------------------------------------------------------------- John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [22] -------------------------------------------------------------------------------- I was just curious, Denny, on the bright spot you highlighted of DOD. We know Aerospace was about 72% of sales in the quarter. How does that break down between commercial and DOD? Or how do you see -- what percentage of sales might DOD be going forward? -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [23] -------------------------------------------------------------------------------- So it's a difficult number to pinpoint because we sell roughly the same percent, about 70% through distribution. We don't have a clear line of visibility to give you a precise number. But I would say 10% to 15% of sales would be defense related. And that level of defense sales has increased over the last 3 to 5 years as we brought more premium melted products to market through our North Jackson investments. -------------------------------------------------------------------------------- John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [24] -------------------------------------------------------------------------------- Okay. So you expect 10% to 15% going forward as well? -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [25] -------------------------------------------------------------------------------- Yes. Defense spending has held up relatively well. In fact, we booked some business in the last month, it goes right out through the first quarter of 2021. -------------------------------------------------------------------------------- John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [26] -------------------------------------------------------------------------------- Okay. Excellent. Chris, one for you back to the PPP. For the amount of loans that are forgiven, how does that flow through the financials? Does it go through the income statement or balance sheet only? Or how does the amount of loan forgiveness actually flow? -------------------------------------------------------------------------------- Christopher Thomas Scanlon, Universal Stainless & Alloy Products, Inc. - VP of Finance, CFO & Treasurer [27] -------------------------------------------------------------------------------- So upon forgiveness of the loan, we will recognize for book purposes, other income of the amount of the loans forgiven. For income tax purposes at the federal level, that is not a taxable income event. -------------------------------------------------------------------------------- John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [28] -------------------------------------------------------------------------------- Okay. So it's going to be a separate line item, it's not going to be embedded in another line item? -------------------------------------------------------------------------------- Christopher Thomas Scanlon, Universal Stainless & Alloy Products, Inc. - VP of Finance, CFO & Treasurer [29] -------------------------------------------------------------------------------- Correct. Due to materiality, it will be on its own line item or it will be baked within Other, which traditionally doesn't have a lot of activity within it for Universal. -------------------------------------------------------------------------------- John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [30] -------------------------------------------------------------------------------- Okay. Got you. And then finally, SG&A, you said was up about $900,000 quarter-over-quarter. How much was legal up? How much of the $900,000 was an increase in legal? And what was the increase in legal for? -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [31] -------------------------------------------------------------------------------- It's up about $150,000 was the legal increase, and that was for general governance type legal work. -------------------------------------------------------------------------------- John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [32] -------------------------------------------------------------------------------- Routine stuff? -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [33] -------------------------------------------------------------------------------- Routine governance work, yes. It's not normal. I wouldn't expect it to continue at that level. -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [34] -------------------------------------------------------------------------------- Not routine in the sense that it happens every month. -------------------------------------------------------------------------------- John Eric Deysher, Bertolet Capital Trust - Pinnacle Value Fund - Portfolio Manager [35] -------------------------------------------------------------------------------- Okay. I understand. So SG&A going forward will -- you gave us a number, I can't remember what that number was approximately SG&A. -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [36] -------------------------------------------------------------------------------- It's in the range of $5 million, down from $5.9 million. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from from Phil Gibbs with KeyBanc Capital Markets. -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [38] -------------------------------------------------------------------------------- Was there something else? -------------------------------------------------------------------------------- Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [39] -------------------------------------------------------------------------------- Yes. Yes. Maybe a couple there. Maybe one, maybe seven, I don't know. Now the deferrals that you mentioned in Q1 are -- excuse me, the cancellations, I think you mentioned $6 million of cancellations. I would imagine most of that came in the back end of the quarter. Any color in terms of where the cancellations are coming from in terms of what -- is it OE airframe business, engine business? Is it Boeing? Is it Airbus? Is it widespread? And then kind of what you're seeing now -- reiterate maybe what you're seeing because I think you followed up a little bit on that? -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [40] -------------------------------------------------------------------------------- So the numbers were $6.3 million year-to-date and about $3 million of that occurred in the first quarter. And most of that was in the March. I don't have the number off the top of my head. It's mostly distributors, it's mostly commercial. I'll let Chris Zimmer answer in a little more detail. He's been the one handling this firsthand. Chris? -------------------------------------------------------------------------------- Christopher M. Zimmer, Universal Stainless & Alloy Products, Inc. - Chief Commercial Officer & Executive VP [41] -------------------------------------------------------------------------------- Yes. To Denny's point, it's hard to have visibility through distribution. But when we look at the grades that we're seeing, customers coming back to us with adjustments to their order book on. They generally lend themselves to structural types of components in commercial aircraft. We have seen some adjustments on the engine side as well, too. But the majority of that is through distribution, and it's for commercial aerospace applications. -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [42] -------------------------------------------------------------------------------- The other thing I was to keep in mind, Chris, or Phil, is we tried to cover a lot here this morning, but the premium melted backlog is actually up at the end of the first quarter from what was a record level of these. So we're basically still at a record level of premium melted products in our backlog. -------------------------------------------------------------------------------- Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [43] -------------------------------------------------------------------------------- The backlog number, basically, the way to think about it is the backlog would have been $3 million and change higher at the end of the first quarter had you not had cancellations? Is that fair? -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [44] -------------------------------------------------------------------------------- Yes. Yes. -------------------------------------------------------------------------------- Philip Ross Gibbs, KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst [45] -------------------------------------------------------------------------------- Okay. And this is some longer dated -- well, we thought it would have been longer-dated stuff, I think because you said some of the backlog runs 6 to 12 months out? -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [46] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- (Operator Instructions) And I'm showing no further questions at this time. So with that, I'll turn the call back over to Mr. Oates for closing remarks. -------------------------------------------------------------------------------- Dennis M. Oates, Universal Stainless & Alloy Products, Inc. - Chairman, President & CEO [48] -------------------------------------------------------------------------------- Thanks, Andrew. Once again, thank you for joining us this morning. We wish you and your family good health at this challenging time. We deeply appreciate your ongoing support and interest in Universal and look forward to updating you on our next call in July. Be well, and have a great day. Thanks. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.