UNIVERSAL STAINLESS & ALLOY PRODUCTS INC - Quarter Report: 2010 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the Quarterly Period Ended September 30, 2010

OR

For the Transition Period from              to             

Commission File Number 000-25032

UNIVERSAL STAINLESS & ALLOY

PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

600 Mayer Street

Bridgeville, PA 15017

(Address of principal executive offices, including zip code)

(412) 257-7600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of November 1, 2010, there were 6,791,652 shares of the Registrant’s Common Stock issued and outstanding.

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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q contain forward-looking statements that reflect the current views of Universal Stainless & Alloy Products, Inc. (the “Company”) with respect to future events and financial performance. 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, effect of new accounting pronouncements and no material financial impact from litigation or contingencies are included in this Quarterly Report on Form 10-Q pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995.

The Company’s actual results may be affected by a wide range of factors including future compliance with Section 404 of the Sarbanes-Oxley Act of 2002; the concentrated nature of the Company’s customer base to date and the Company’s dependence on its significant customers; the receipt, pricing and timing of future customer orders; changes in product mix; the limited number of raw material and energy suppliers and significant fluctuations that may occur in raw material and energy prices; the Company’s reliance on the continuing operation of critical manufacturing equipment; risks associated with labor matters; the Company’s ongoing requirement for continued compliance with safety and environmental regulations; the ultimate outcome of the Company’s current and future litigation matters; and the impact of various economic, credit and market risk uncertainties. Many of these factors are not within the Company’s control and 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. 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. 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.

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Part I. FINANCIAL INFORMATION

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Information)

(Unaudited)

The accompanying notes are an integral part of these consolidated condensed financial statements.

UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated condensed financial statements.

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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in Thousands)

The accompanying notes are an integral part of these consolidated condensed financial statements.

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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW

(Dollars in Thousands)

(Unaudited)

The accompanying notes are an integral part of these consolidated condensed financial statements.

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UNIVERSAL STAINLESS & ALLOY PRODUCTS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of operations and statements of comprehensive income for the three- and nine-month periods ended September 30, 2010 and 2009, balance sheets as of September 30, 2010 and December 31, 2009, and statements of cash flows for the nine-month periods ended September 30, 2010 and 2009, have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Accordingly, these statements should be read in conjunction with the audited financial statements, and notes thereto, as of and for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited, consolidated condensed financial statements contain all adjustments, all of which were of a normal, recurring nature, necessary to present fairly, in all material respects, the consolidated financial position at September 30, 2010 and December 31, 2009 and the consolidated results of operations and of cash flows for the periods ended September 30, 2010 and 2009, and are not necessarily indicative of the results to be expected for the full year.

Certain prior year amounts have been reclassified to conform to the 2010 presentation.

Note 2 – Common Stock

The reconciliation of the weighted average number of shares of Common Stock outstanding utilized for the earnings per common share computations are as follows:

The Company had 35,129 common stock equivalents outstanding for the nine-month period ended September 30, 2009 which were not included in the common share computation for earnings (loss) per share as the common stock equivalents were anti-dilutive.

Note 3 – Inventory

The major classes of inventory are as follows:

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Note 4 – Property, Plant and Equipment

Property, plant and equipment consists of the following:

Note 5 – Long-Term Debt

In February 2009, the Company executed an unsecured credit agreement with PNC Bank which provides for a $12.0 million term loan (“Term Loan”) scheduled to mature on February 28, 2014 and a $15.0 million revolving credit facility with a term expiring on June 30, 2012. There was no balance outstanding under the revolver at September 30, 2010 or December 31, 2009. Quarterly Term Loan principal payments of $600,000 began in May 2010. Interest on both facilities is based on short-term market rates, which may be adjusted if the Company does not maintain certain financial ratios. PNC Bank also charges a commitment fee payable on the unused portion of the revolving credit facility of 0.25%, provided certain financial ratios are maintained. The Company is required to be in compliance with three financial covenants: a minimum leverage ratio, a minimum debt service ratio and minimum tangible net worth. The Company was in compliance with all such covenants at September 30, 2010.

The Company maintains two separate loan agreements with the Commonwealth of Pennsylvania’s Department of Commerce, aggregating to $600,000. A $200,000 15-year loan bears interest at 5% per annum with the term ending in 2011, and a $400,000 20-year loan bears interest at 6% per annum with the term ending in 2016. Dunkirk Specialty Steel issued two ten-year, 5% interest-bearing notes payable to the New York Job Development Authority for the combined amount of $3.0 million, which mature in 2012. The remaining unpaid balance of all government loans was $0.7 million at September 30, 2010 and $1.0 million at December 31, 2009.

Note 6 – Derivatives and Hedging Activities

To manage interest rate risk, the Company has entered into an interest rate swap that effectively converts the floating-rate Term Loan into a fixed-rate debt instrument. The interest rate swap agreement minimizes the impact of interest rate changes on the Company’s floating-rate debt and is designated and accounted for as a cash flow hedge. The effective portion of the change in the fair value of the interest rate swap is recorded in accumulated other comprehensive income (within stockholders’ equity). The Company utilizes the interest rate swap to maintain a fixed-rate of 4.515% on the Term Loan until its maturity on February 28, 2014. The notional amount of the interest rate swap decreases ratably over its term, as does the Term Loan, and was $10.8 million at September 30, 2010.

In July 2009, the Company entered into nickel futures contracts to minimize the price change impact of anticipated purchases of nickel over the life of a customer short-term supply agreement which was designated as and accounted for as a cash flow hedge. The effective portion of the change in the fair value of the nickel hedge agreements was recorded in accumulated other comprehensive income (loss). The last nickel hedge contract expired on March 31, 2010.

The location and amounts recorded in the Condensed Consolidated Balance Sheet for the derivative instrument are as follows:

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Note 7 – Fair Value Measurements

The Company adopted “Interim Disclosures about Fair Value of Financial Instruments” which defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. It also defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by the standard contains three levels as follows:

Level 1 — Unadjusted quoted prices available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The fair value hierarchy requires the use of observable market data when available. In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The interest rate swap is recorded at fair value based on Level 2 quoted LIBOR swap rates adjusted for credit and non-performance risk. The nickel futures contracts were recorded at fair value based on Level 2 quoted futures rates. Financial instruments include cash, accounts receivable, other current assets, accounts payable, short-term debt and other current liabilities. The carrying amounts of these financial instruments approximated fair value at September 30, 2010 and December 31, 2009 due to their short-term maturities. The fair value of the Term Loan approximates the carrying amount due to the interest rate being based on one-month floating Libor rates. The carrying value of $731,000 of long-term government debt instruments at September 30, 2010 had a weighted average maturity of 15 months and approximates fair value based on current borrowing rates available for financings with similar terms and maturities.

Note 8 – Commitments and Contingencies

From time to time, various lawsuits and claims have been or may be asserted against the Company relating to the conduct of our business, including routine litigation involving commercial and employment matters. The ultimate cost and outcome of any litigation or claim cannot be predicted with certainty. Management believes, based on information presently available, that the likelihood that the ultimate outcome of any such pending matter will have a material adverse effect on its financial condition, or liquidity or a material impact to the results of operations is remote, however the resolution of one or more of these matters may have a material adverse effect on the results of operations for the period in which the resolution occurs.

At September 30, 2010, the Company maintains reserves that it believes are adequate for outstanding product claims, workers compensation claims, and legal actions.

Note 9 – Income Taxes

The tax rate used for interim periods is the estimated annual effective tax rate, based on the current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur.

At June 30, 2009, the Company recorded a $742,000 negative tax adjustment primarily for the reconciliation of tax balances to 2008 federal and state income tax returns filed. Approximately $200,000 of this adjustment was the cumulative adjustment related to interim period recognition of fiscal year 2009 tax expense (benefit), as discussed in Accounting Standards Codification Topic 740, Income Taxes, 270 Interim Reporting, and reduced the estimated annual effective income tax rate utilized in the three-month period ended March 31, 2009 from 40.3% to 37.2% at June 30, 2009, which had no impact on the annual effective tax rate. In addition, the Company determined that $370,000 of this adjustment related to prior periods and was not considered material to any prior period or to 2009 that would require the restatement of prior period financial statements. The remaining $172,000 of adjustments consisted of $48,000 relating to 2009 tax provision-to-tax return adjustments to properly report state tax credits, and the remaining $124,000 related to other timing differences, primarily state bonus depreciation adjustments.

The provision for income taxes is based on the estimated income tax rate for the year ended December 31, 2010. The effective income tax (benefit) rate calculated based on ordinary operating income for the three and nine months ended September 30, 2010 was 34.0% as compared to tax rates of 38.7% and (26.5%) for the three and nine months ended September 30, 2009, respectively. The Company is expected to benefit from the Domestic Production Activities Deduction in the current tax year due to anticipated taxable income. No such deduction was available in the prior year due to a net operating loss. The 2009 federal net operating loss was carried back and applied to prior tax years; the state losses were carried forward. The December 31, 2009 state tax benefit included state net operating loss carryforwards of $281,000, expiring in 2029, currently expected to be utilized in 2010 and 2011. The Company had $1.9 million of state tax credit carryforwards at both September 30, 2010 and December 31, 2009, attributable to New York Empire Zone tax credits with no expiration date.

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Note 10 – Business Segments

The Company is comprised of two business segments: Universal Stainless & Alloy Products, which consists of the Bridgeville and Titusville facilities, and Dunkirk Specialty Steel, the Company’s wholly-owned subsidiary located in Dunkirk, New York. The Universal Stainless & Alloy Products manufacturing process involves melting, remelting, treating and hot and cold rolling of semi-finished and finished specialty steels. Dunkirk Specialty Steel’s manufacturing process involves hot rolling and finishing of specialty steel bar, rod and wire products. The segment data are as follows:

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Items Affecting Comparability of Results

The Company recorded net income for the three-month period ended September 30, 2010 of $4.1 million and net income for the nine-month period ended September 30, 2010 of $9.7 million. The 2010 three-month and nine-month results include a favorable inventory adjustment of $976,000 for additional metal recovered as a result of a capital project streamlining the scrap loading area, and a $647,000 increase in stock option compensation as a result of changes in estimated forfeiture rates and to fully expense vested options.

The Company recorded net income for the three-month period ended September 30, 2009 of $312,000 and a net loss for the nine-month period ended September 30, 2009 of $3.9 million. The 2009 nine-month results includes a $742,000 negative tax adjustment primarily for the reconciliation of tax balances at June 30, 2009 to the 2008 tax returns prepared during the three-month period ended June 30, 2009 and the following unusual charges (totaling $6.0 million pre-tax) recorded during the three-month period ended March 31, 2009, primarily due to the deepening recession and economic uncertainty:

Results of Operations

Universal Stainless & Alloy Products, Inc., headquartered in Bridgeville, Pa., manufactures and markets a broad line of semi-finished and finished specialty steels, including stainless steel, tool steel and certain other alloyed steels. The Company’s products are sold to rerollers, forgers, service centers, OEMs and wire redrawers.

An analysis of the Company’s operations for the three- and nine-month periods ended September 30, 2010 and 2009 is as follows:

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Three- and nine-month periods ended September 30, 2010 as compared to the similar periods in 2009

Net sales for the three- and nine-month periods ended September 30, 2010 increased $26.6 million and $39.6 million, respectively, as compared to the similar periods in 2009. The increase for the three- and nine-month periods ended September 30, 2010 is primarily due to the increase in consolidated tons shipped of 111% and 45%, respectively. The increase in shipments is attributed to improved economic conditions and market demand which continued to recover in the third quarter of 2010 as compared to 2009. During 2009, weaker economic conditions resulted in “destocking” in the service center industry to bring inventory levels in line with significantly lower end-user demand. The increase in sales due to increased shipment volume was $24.0 million and $36.7 million for the three- and nine-month periods ended September 30, 2010, respectively, as compared to the same periods in 2009.

Market Segment Information

Cost of products sold, as a percentage of net sales, was 80.1% and 89.3% for the three-month periods ended September 30, 2010 and 2009, respectively, and was 81.9% and 96.2% for the nine-month periods ended September 30, 2010 and 2009, respectively. The results for the nine-month periods ended September 30, 2010 and September 30, 2009 include a $976,000 favorable inventory adjustment in 2010, as described above, and $3.9 million of the 2009 unusual charges outlined above, representing 0.7% and 4.0% of net sales, respectively. The improved proportion of cost of sales to sales in 2010 is also attributable to fixed operating costs being spread over higher production volumes as a result of increased product orders. The third quarter 2010 gross margin of $10.3 million was 19.1% of sales compared to 10.7% in the 2009 third quarter. The third quarter 2010 included a favorable inventory adjustment of $976,000, as described above. Excluding this adjustment, our gross margin was 17.9% of sales for the quarter. For the first nine months of 2010, the gross margin of $24.9 million was 18.1% of sales compared to 3.8% for the same period of 2009.

Selling and administrative expenses increased by $1.7 million and $900,000 in the three-month period and nine-month periods ended September 30, 2010, respectively, as compared to the similar periods in 2009. The increase of $1.7 million in the three-month period ended September 30, 2010 is due to an increase in stock option compensation expense as a result of changes in estimated forfeiture rates and to fully expense vested options, and an increase in accrued incentive compensation. The increase in expense recorded in the nine-month period is primarily due to an increase in accrued incentive compensation and an increase in stock option compensation as a result of changes in estimated forfeiture rates and to fully expense vested options which was partially offset by $2.1 million of the unusual charges incurred in the 2009 first quarter, outlined above.

At June 30, 2009, the Company recorded a $742,000 negative tax adjustment primarily for the reconciliation of tax balances to 2008 federal and state income tax returns. Approximately $200,000 of this adjustment is the cumulative adjustment related to interim period recognition of fiscal year 2009 tax expense (benefit), as discussed in Accounting Standards Codification Topic 740, Income Taxes, 270 Interim Reporting, and reduced the effective income tax rate utilized in the three-month period ended March 31, 2009 from 40.3% to 37.2% at June 30, 2009, which had no impact to the annual effective tax rate. In addition, the Company has determined that $370,000 of this adjustment related to prior periods and was not considered material to any prior period or to 2009 that would require the restatement of prior period financial statements. The remaining $172,000 of adjustments consisted of $48,000 relating to 2009 tax provision-to-tax return adjustments to properly report state tax credits, and the remaining $124,000 related to other timing differences, primarily state bonus depreciation adjustments. The effective income tax (benefit) rate in the three- and nine-month periods ended September 30, 2010 was 34% as compared to a benefit of (37.2)% before discrete items for the three- and nine-month periods ended September 30, 2009.

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The provision for income taxes is based on the estimated income tax rate for the year ended December 31, 2010. The effective income tax rate calculated based on ordinary operating income for the three and nine months ended September 30, 2010 was 34.0% as compared to tax rates of 38.7% and (26.5%) for the three and nine months ended September 30, 2009, respectively. The Company is expected to benefit from the Domestic Production Activities Deduction in the current tax year due to anticipated taxable income. No such deduction was available in the prior year due to a net operating loss. The 2009 federal net operating loss was carried back and applied to prior tax years; the state losses were carried forward. The December 31, 2009 state tax benefit included state net operating loss carryforwards of $281,000, expiring in 2029, currently expected to be utilized in 2010 and 2011. The Company had $1.9 million of state tax credit carryforwards at both September 30, 2010 and December 31, 2009, attributable to New York Empire Zone tax credits with no expiration date.

Business Segment Results

An analysis of net sales and operating income for the reportable segments for the three- and nine-month periods ended September 30, 2010 and 2009 is as follows:

Universal Stainless & Alloy Products Segment

Net sales for the three- and nine-month periods ended September 30, 2010 for this segment, which consists of the Bridgeville and Titusville facilities, increased by $24.5 million, or 113.3%, in comparison to the three-month period ended September 30, 2009 and by $41.9 million, or 49.2%, in comparison to the similar 2009 nine-month period. Tons shipped increased 118.8% for the three-month period ended September 30, 2010 in comparison to the similar 2009 period. A 461% increase in service center plate shipments was accompanied by a 324% increase in reroller shipments, a 221% increase in service center long products shipments, and an 11% increase in forger shipments. Tons shipped increased 48.3% for the nine-month period ended September 30, 2010 in comparison to the similar 2009 period. The increase in shipments is attributed to improved economic conditions and market demand which continued to recover in the third quarter of 2010 as compared to 2009. During 2009, weaker economic conditions resulted in ‘destocking’ in the service center industry to bring inventory levels in line with significantly lower end-user demand.

Operating income for the three- and nine-month periods ended September 30, 2010 increased by $4.3 million and $16.0 million, respectively, as compared to the similar periods in 2009. The results for the nine-month periods ended September 30, 2010 and September 30, 2009 include a $976,000 favorable inventory adjustment in 2010, as described above, and $5.0 million of the 2009 unusual charges outlined above, representing 0.8% and 5.8% of net sales, respectively. Excluding the impact of the unusual charges, material costs, as a percentage of sales, increased to 51.4% and 48.5% for the three- and nine-month periods ended September 30, 2010, respectively, from 41.5% and 43.9% for the three- and nine-month periods ended September 30, 2009, respectively, as a result of higher material costs in the year 2010. Excluding the impact of the unusual charges, operation costs, as a percentage of sales, decreased to 35.4% and 36.7% for the three- and nine-month periods ended September 30, 2010, respectively, from 51.0% and 48.1% for the three- and nine-month periods ended September 30, 2009, respectively. The improved proportion of cost of sales to sales in 2010 is also attributable to fixed operating costs being spread over higher production volumes as a result of increased product orders.

Selling and administrative expenses increased by $1.2 million in the three-month period and were unchanged in the nine-month period ended September 30, 2010, respectively, as compared to the similar periods in 2009. The increase of $1.2 million in the three-month period ended September 30, 2010 is primarily due to an increase in accrued incentive compensation and an increase in stock option compensation in 2010 which was partially offset by $2.1 million of the unusual charges incurred in the 2009 first quarter, outlined above. The nine-month period was flat primarily due to an increase in accrued incentive compensation offset by the unusual charges incurred in the 2009 first quarter, outlined above.

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Dunkirk Specialty Steel Segment

Net sales for the three- and nine-month periods ended September 30, 2010 increased by $8.3 million, or 98.4%, in comparison to the three-month period ended September 30, 2009 and by $11.1 million, or 36.9%, in comparison to the similar 2009 nine-month period. Sales to service centers comprised 82.3% of external sales and 76.6% of 2010 external shipments. Service center sales increased by $7.2 million and $9.8 million for the three- and nine-month periods ending September 30, 2010, respectively, as compared to the similar 2009 periods. Dunkirk segment external customer tons shipped increased 70.9% and 26.6%, respectively for the three- and nine-month periods ending September 30, 2010, respectively, as compared to the similar 2009 periods.

Operating income increased by $956,000 for the three-month period ended September 30, 2010 as compared to September 30, 2009 and by $5.4 million for the nine-month period ended September 30, 2010 in comparison to the similar 2009 nine-month period. The results for the nine-month period ended September 30, 2009 include $1.0 million of the unusual charges outlined above, representing 3.2% of net sales. Excluding the impact of the unusual charges, material costs, as a percentage of sales, increased to 62.0% and decreased to 58.9% of sales for the three- and nine-month period ended September 30, 2010 in comparison to 53.3% and 62.9% for the similar 2009 periods. Excluding the impact of unusual charges, operation costs, as a percentage of sales, decreased to 22.3% and 26.1% for the three- and nine-month periods ended September 30, 2010, respectively, from 33.7% and 34.7% for the three- and nine-month periods ended September 30, 2009, respectively. This improvement was primarily due to fixed operating costs being spread over higher production volumes.

Selling and administrative expenses increased by $592,000 in the three-month period ended September 30, 2010 and by $898,000 in the nine-month period ended September 30, 2010 as compared to the similar periods in 2009. The increases are due to an increase in 2010 for accrued incentive compensation.

Liquidity and Capital Resources

The Company has financed its operating activities through cash on hand at the beginning of the period and cash provided by operations. Working capital increased $9.5 million to $107.1 million at September 30, 2010 compared to $97.6 million at December 31, 2009. Accounts receivable increased $12.7 million as a result of increased sales for the three-month period ended September 30, 2010 in comparison to the three-month period ended December 31, 2009. The $16.6 million increase in inventory at September 30, 2010 compared to December 31, 2009 is due primarily to a 53% increase in the volume of work-in-process inventory in response to the rise in the Company’s backlog. The backlog increased from $36 million at December 31, 2009 to $59 million at September 30, 2010, an increase of 63%. The raw material inventory increased 35% due to higher raw material purchase prices and a 5% increase in volume. The Company received a $4.1 million federal income tax refund in 2010 as a result of the 2009 federal net operating loss that was carried back and applied to prior tax years. Accounts payable increased $7.2 million, or 92%, related to the increase in production levels and raw material price increases. Accrued employment costs increased $3.9 as a result of increased profitability and production levels. The incentive compensation and profit sharing accruals increased $3.2 million and accrued wages increased $705,000 as compared to December 31, 2009.

The ratio of current assets to current liabilities decreased to 4.9:1 at September 30, 2010 from 8.8:1 at December 31, 2009. The debt to total capitalization ratio decreased from 8.3% at December 31, 2009 to 6.9% at September 30, 2010 due to $1.5 million in principal repayments and the increase in Stockholders’ Equity.

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Cash received from sales of $52.6 million and $125.2 million for the three- and nine-month periods ended September 30, 2010, respectively, and of $29.5 million and $113.9 million for the three- and nine-month periods ended September 30, 2009, respectively, represent the primary source of cash from operations. An analysis of the primary uses of cash is as follows: