Universal Stainless & Alloy Products' (USAP) CEO Dennis Oates on Q4 2015 Results - Earnings Call Transcript

| About: Universal Stainless (USAP)

Universal Stainless & Alloy Products, Inc. (NASDAQ:USAP)

Q4 2015 Earnings Conference Call

January 27, 2016 10:00 A.M. ET

Executives

June Filingeri - President, Comm-Partners LLC

Dennis M. Oates - Chairman of the Board, President, and CEO

Larry J. Pollock - EVP and Chief Manufacturing Officer

Christopher M. Zimmer - EVP and Chief Commercial Officer

Paul A. McGrath - VP, Administration, General Counsel and Secretary

Ross Cameron Wilkin - VP, Finance, CFO, and Treasurer

Analysts

Michael Gallo - C.L. King

Phil Gibbs - KeyBanc Capital Markets

Operator

Good day, ladies and gentlemen and welcome to the Universal Stainless Fourth Quarter 2015 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference Ms. June Filingeri. Ma'am, you may begin.

June Filingeri

Thank you, Lauren. Good morning, this is June Filingeri of Comm-Partners and I would also like to welcome you to the Universal Stainless call. We are here to discuss the company's fourth quarter 2015 results which were reported this morning.

With us from management are Denny Oates, Chairman, President and Chief Executive Officer; Larry Pollock, Executive Vice President and Chief Manufacturing Officer; Chris Zimmer, Executive Vice President and Chief Commercial Officer; Paul McGrath, Vice President of Administration and General Counsel; and Ross Wilkin, 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. Our conference operator Lauren 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 the formalities complete, I would now like to turn the call over to Denny Oates. Denny, we are ready to begin.

Dennis M. Oates

Thanks June. Good morning everyone. Thanks for joining us today. As we expected there was no let up in challenging industry conditions in the fourth quarter given the continued drop in commodity prices and deep cautiousness up and down the supply chain. Our major focus of forgers and service centers in the quarter was to continue to reduce our inventories by year-end. We saw it in our sales, our order book, our backlog, and across all of our end markets.

Our total sales in the fourth quarter amounted to $31.7 million which was down 27% sequentially and 40% from the fourth quarter of 2014. Because the first half of 2015 was stronger, our full year sales of 180.7 million were lower by a more moderate 12% from 2014. Shipments in 2015 was 65 million pounds or 17% below 2014 volume with a richer mix evident in 2015. Despite the significant challenges in 2015 we were able to make progress on our major strategic objective, our premium alloy sales increased 27% for the year.

Given the weak conditions in the fourth quarter we maintained our sharp focus on reducing cost, tightly managing working capital, and controlling capital spending. We executed numerous proactive steps including idling plant capacity, reducing inventory by another $5 million, improving productivity, continuing to work with our vendors and service providers to reduce costs, recording additional non-cash inventory charges, strategically consolidating our salary workforce and other overheads, implementing mandatory unpaid leave, and reducing Directors fees and expenses. None of which was pleasant but all of which was necessary to bridge these tough times until the improvement we expect in 2016.

Excluding the charges associated with these actions, we produced a positive albeit small gross margin of $1.2 million or 3.9% of sales. Even with the continued misalignment between material cost and surcharges coupled with sharply lower plant activity levels. That said we still incurred an operating loss in the fourth quarter and our net loss was $0.26 per share excluding all charges.

We achieved our objective to maintain positive cash flow which totaled $6.6 million for the quarter and we further reduced debt by $5.5 million. Added to our debt reduction in the third quarter we were able to reduce total debt by nearly $16 million or 17% in the last six months of 2015.

We also announced late last week that we entered into a new five year financing arrangements which has significantly improved our flexibility going forward and I believe underscores the confidence our lenders hold regarding Universal's future direction and prospects for future success as markets recover and commodity stabilize. Ross will lay out the details of our arrangement in his financial report.

It is worth circling back to the topic of commodity prices to provide more perspective on the quarter and the year. Nickel prices fell another 12% in the fourth quarter and were down 45% for the year. Likewise molybdenum was down 16% in the quarter and down 47% in 2015. The decline in iron scrap was even more dramatic as it fell 33% in the fourth quarter and plummeted 63% for the year. While shipped material cost also came down, their decline did not match the velocity in the decline of commodities and related surcharges which negatively impacted our gross margin.

The commodity price trends also helped explain why customers postponed placing orders for as long as possible. More recently there appears to be some stabilizing of commodity prices and increasing news regarding supply cutbacks. It is important to note that we do not need commodities to recover the 2015 levels for gross margins to return to more normal levels.

While that will be nice, a period of stability will unlock pent up demand in the marketplace and rebalance our cost price relationships yielding higher volumes and improved margins.

From an operational stand point our team made some hard earned progress in 2015 despite the challenging conditions. These included the continued development of the capabilities of our new forge and vacuum induction furnace which is critically important to our future growth. We improved productivity and reliability of our aero melt shop, rolling mills, and finishing processes. We revamped our maintenance practices with the support of a new CMMS system producing improved equipment reliability, faster cycle times, and enhanced delivery performance. We developed, introduced, and gained approval for 15 new products. Our commercial and technical teams are continuing to develop more new products for 2016 with 25 currently in the pipeline.

Despite the poor global business conditions and stronger dollar, our international sales grew 15% in 2015, marking a new company record of $17 million or 9.4% of sales. Significant progress in our evolving safety culture as evidenced by lowest OSHA recordable rate in history, this rate as you know is normalized for volume -- for lower volumes. Lastly we concluded a new five year collective bargaining agreement with our hourly employees at Titusville.

Turning to our end markets, starting with aerospace, our sales to the aerospace market were 52% of sales in the fourth quarter of 2015. Aerospace sales totaled 16.6 million in the fourth quarter, down 41% sequentially on 41% lower volume and 48% lower than the fourth quarter of 2014 on 49% lower volume. For the full year of 2015 our sales to aerospace decreased 10% on 12% lower volume. All in all it was a tough quarter for us in aerospace as it was hit hard by year-end destocking by forger and service center customers and lower activity levels.

GE reported that their commercial aviation equipment orders were down in the fourth quarter as they expected but their backlog at year-end was 29.5 billion which is up 11% and the LEAP launch remains on track for midyear. And the ongoing rivalry between Boeing and Airbus both reported record airplane deliveries in 2015 but Airbus led the new orders. The average backlog between the two is estimated at nine years of production. One analyst has noted that 76% of Boeing's backlog is for the 737 while 81% of the Airbus backlog is for the A320. Build rates on both those platforms are increasing. Production of the Boeing 737 has moved to 47 per month from 42 in 2015 and it is scheduled to move to 52 per month in 2018. The Airbus A320 build rate now stands at 42 per month and is expected to increase to 50 per month by early 2017.

Also in a positive column, passenger air traffic remained healthy as of November when it was up 6.7% year-to-date while industry load factors reached another record indicative of more wear and tear on airplanes. While acknowledging analyst concern about future book-to-build rates for the airplane manufacturers it is worth mentioning that a move lower in the book-to-build ratio has been anticipated for several years. I know further that it is production levels that drive sales for the mills and the current discussion in the supply channel they are trying to keep up with the growing build rates.

We enter 2016 with customer inventories and better balance and activity levels higher pointing to an improved first quarter. Very short in the lead times and uncertainty about commodity prices and global macro issues continues to limit customer commitments for major project buys and blanket orders.

The oil and gas market became our second largest market in the fourth quarter of 2015 with sales of $4.1 million representing 13% of sales compared with 6% of sales in the third quarter of 2015 and 9% of sales in the fourth quarter of 2014. Sales were up 47% from the third quarter of 2015 on 10% higher volume. But 13% lower than the fourth quarter of 2014 on 25% lower volume. Our full year 2015 oil and gas sales were down 12% on 8% lower volume.

There is not much to add to the discussion around oil prices and it is affecting oil producers, oil service companies, and E&P budgets. There were 1601 fewer rigs at the end of 2015 as compared to year-end 2014. Some of you noted that negative market sentiment intensified in the fourth quarter leading to a further drop in world oil prices which is 16 year low in January further pressuring E&P budgets. They expect activity weakness to extend through the first six months of 2016 but believe ultimately that supply will tighten a normal growth of demand, the weakening supply due to E&P cuts, and annual replacement needs.

This is all in contrast to the growth we achieved in oil and gas in the fourth quarter which can be attributed to two factors. First, internal changes we made early in the year to improve production of our oil and gas products, and secondly, the new products we've introduced. While we look forward to the eventual improvement in the overall market, we will continue our focused efforts to develop new customers and products for the oil and gas market.

Our power generation market sales of $3 million represented 9% of sales in the fourth quarter of 2015, which is in line with the 2015 third quarter and compared to the 11% of sales in the fourth quarter of 2014. Sales were down 21% sequentially on a 19% decrease in volume and down 49% from the fourth quarter of 2014 on 46% fewer pounds shipped. Full-year sales were down 18% on 23% lower volume.

Our power generation sales continued to get caught up in the general destocking momentum in the fourth quarter. While the new build market remains anemic at this point. That said, GE reported booking a total of 55 new orders for gas turbines versus 41 last year and won 21 orders for the new H-turbine bringing that backlog to 33 units. They also had 13% growth in power generation services in the quarter. GE’s acquisition of Alstom is also expected to be a positive for our customers as well as for us going forward. There has been some evidence of reshoring of some production that have been moved to China in recent years which is good news for our customers. At this point our main opportunity remains the maintenance market.

Heavy equipment sales were 9% of total sales in the 2015 fourth quarter, also in line with the third quarter of 2015 and compared to 11% of sales in the fourth quarter of 2014. Heavy equipment market sales were down 28% sequentially on 30% lower volume and down 50% from the fourth quarter of 2014 on 41% lower volume. Our full-year heavy equipment market sales were down 12% on flat volume.

We expect the customers to reduce their tool steel inventories at year end to reflect reductions in automotive production forecast for 2016. The magnitude of the cut back in tool steel was consistent with the cautiousness in the supply channel. We expect a solid year in automotive production and a gradual improvement in the plate business as we move through the year. Let me now turn the call over to Ross for our financial report. Ross.

Ross Cameron Wilkin

Thank you, Denny. As Denny noted we continued to see increased demand for our premium alloy products with the fourth quarter net sales of premium alloy products higher by 9.6% versus the fourth quarter of 2014 and up 27% for the full year. Despite these increases our overall fourth quarter net sales of $31.7 million were down 27% sequentially and down 40% from the fourth quarter of 2014. The decline in net sales reflects continued destocking by our customers in all of our end markets compliant with the impact of lower commodity driven surcharges. Our full year net sales of $181 million were down a more moderate 12% versus 2014, despite the more significant declines in the third and fourth quarters, reflecting relative top line strength in the first half of 2015.

Looking further, our gross margin on a reported basis, our gross margin for the fourth quarter was a negative $0.9 million or negative 2.8% of net sales. The reported gross margin was impacted by two pretax expenses including $1.9 million for costs associated with reduced mill output in the fourth quarter, and a $240,000 expense associated with non-cash inventory charges. Excluding these charges, the underlying gross margin for the fourth quarter was $1.2 million or 3.9% of net sales.

That said, our underlying gross margin of 3.9% continues to be significantly weighed down by both the ongoing misalignment of surcharges with melt costs as well as overall lower activity levels which were even lower than the third quarter. As a result, fourth quarter adjusted gross margin of 3.9% was less than the adjusted gross margin for the third quarter which totaled 7.1% of net sales, and the fourth quarter of 2014, which totaled 16.8% of net sales.

Driving the continued misalignment is the further decline in commodities which have been in decline for more than a year. Material costs are calculated at the time of melting, while surcharges are calculated with a two-month lag. Only 9% of our fourth quarter sales were actually melted in the fourth quarter, 36% in the third quarter, 33% in the second quarter, 12% in the first quarter and 10% in 2014 or earlier. We expect our material costs and surcharges to become better aligned by the second quarter of 2016 assuming commodity prices continued to stabilize.

To help offset surcharge misalignment and the impact of low volumes we have aggressively pursued all avenues to reduce our production costs with continued emphasis on optimizing our shutdown windows, minimizing labor costs, improving manufacturing, productivity, and securing better commercial arrangements with suppliers. As a result of these actions, total fixed and variable operation spending excluding material costs and depreciation was reduced by 30% in the fourth quarter versus the average of the first and second quarters of the year. We continue to look for ways to further reduce costs.

Looking at selling, general and administrative costs for the fourth quarter SG&A was $4.5 million, which includes a $225,000 charge associated with severance and exit costs of salaried employees exited during the fourth quarter. Excluding severance costs, underlying fourth quarter SG&A was $4.3 million compared to an adjusted SG&A of $5 million in the third quarter and $5.8 million in the fourth quarter of 2014. Reducing SG&A continues to be a focus area for us during this challenging window.

The operating loss for the fourth quarter was $5.4 million but excluding the idle plant and other charges noted separately earlier, our underlying operating loss of $3.1 million, reflecting primarily the impact of the surcharge misalignment and the reduced volumes. It continues to be the primary focus of the management team to return the business to profitability through cost reduction initiatives noted earlier as well as top line improvements and supported by the expected improvements and go forward surcharge alignment.

Our effective tax rate was 42.4% in the fourth quarter, reflecting the full year benefit of R&D tax legislation approved by Congress in the fourth quarter. For the full year, our effective tax rate was 37% compared with 43.7% in 2014. From a cash standpoint, once we received a refund for the tax installment made earlier in 2015, we will have paid no net cash taxes for 2015. In addition, given our -– that our NOLs have increased to an estimate of $56 million at the end of 2015, we are protected against paying cash taxes for a significant period of time going forward.

The net loss in the fourth quarter was $3.4 million or $0.48 per diluted share. However, excluding the charges noted earlier the net loss was $1.9 million or $0.26 per diluted share. For the full year, the net loss was $20.7 million or $2.92 per diluted share, however excluding the charges noted separately in the third and fourth quarters and excluding the third quarter goodwill impairment, the full year net loss was $3.7 million or $0.52 per diluted share.

Turning our attention to the balance sheet, during the fourth quarter our managed working capital defined as trade accounts receivable plus inventory minus accounts payable, was reduced by $8.7 million to $89.2 million. The key driver for the improvement in working capital was the reduction to both inventory as well as accounts receivable. Inventory was reduced by $5 million, reflecting a continued conscious effort to generate cash through lower mill output relative to shipment levels.

Capital expenditures in the fourth quarter were $1.2 million compared with $2.6 million in the third quarter and $5.1 million in the fourth quarter of 2014. We will continue to contain capital spending going forward, until there is a more sustained improvement in business conditions.

During the fourth quarter we generated $6.6 million of cash flow from operating activities, primarily through reduction of working capital, just noted, and this has been used to reduce debt and fund capital expenditures. Debt was reduced by $5.5 million in the fourth quarter for a total reduction of $15.6 million in the second half of 2015. Total debt was $77.1 million at year end.

Subsequent to year end we have completed our refinancing, putting in place a new five-year $95 million ABL bank facility and also extending the maturity of the $20 million convertible notes. The new bank facility is with PNC Bank and Bank of America and has a $65 million revolver collateralized by inventory and accounts receivable. It also has a $30 million term loan collateralized by the majority of fixed assets. There is a $25 million increase option that would enable us to increase the revolver to $90 million in the future subject to bank approval.

Bank interest rates for 2016 are anticipated to be about a 150 basis points higher than 2015, but are on change from the increase that would have come into effect under the old facility. New bank -- new covenants include a minimum EBITDA measure which will transition to a minimum fixed charge coverage ratio within the first year. As part of entering into the new agreement there will be a first quarter 2016 write off of up to $900,000 for unamortized differed financing costs associated with the old credit facility. It is worth noting that prior to signing the new agreement we remained in full compliance with all covenants under the old agreement.

Regarding the extension of the convertible notes, previously set to mature in August of 2017, the extension has pushed the final maturity date out to as late as March 2021 at the company’s discretion. In addition, the ability to extend it is also subject to the company making minimum principal payments, with the next principal payment of $2 million due in March 2019, which is over three years from now. Interest rates on the convertible notes will initially remain unchanged at 4%, rising to 5% in August of 2016 and lastly, rising to 6% in August 2017. The convertible mechanism will remain in place unchanged until August 2017. Subsequent to August 2017 the convertible option will terminate.

Finally, going forward, the convertible note holder has received silent second liens on all assets that the banks hold a first lien. It was our priority to put in place a new debt financing by the first quarter of 2016 and we're pleased to have had PNC and Bank of America on board to do so. That concludes my financial report. Denny, I’ll turn it back to you.

Dennis M. Oates

Okay, Ross, thank you. In summary then, the fourth quarter of 2015 continued to be extremely challenging as destocking accelerated up and down the metal supply chain. Customers were focused on meeting their year-end inventory reduction targets amidst the further decline in commodity prices and increasing nervousness about the implications of falling oil prices.

Transactional aerospace demand was hard hit. Customers now report being more comfortable with their inventory levels and looked to buy more to their sales need in 2016 as opposed to the destocking they did in 2015. Our team worked hard to overcome the substantial challenges they confronted throughout 2015 and were successful in the important objective of increasing our sales of premium alloys which grew 27% for the year.

In the face of difficult conditions in the fourth quarter, we continued to focus on cost reduction, positive cash flow generation and debt reduction, and we are successful in meeting all these objectives. We also met our additional objective of putting a new financing arrangement in place by the first quarter of 2016.

World stock markets have experienced extreme volatility since the beginning of the year and oil prices have continued to fall, both of which will contribute to continued uncertainty in our markets. However, we are also seeing some positive signs including a growing sense that the fourth quarter was the bottom of the metals commodity slide and we're starting to see early signs of stability.

For all its difficulties we made progress in 2015 and we will continue to execute our plan in 2016 to drive our future growth and continue transformation. I know the report’s been a little lengthy this time, we appreciate your attention, we are ready now to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Michael Gallo from C.L. King. Your line is open.

Michael Gallo

Good morning.

Dennis M. Oates

Hey, Mike, how are you?

Michael Gallo

Good. I've got a couple of questions if I may. Denny, obviously you’ve had this fee surcharge misalignment and I know metals prices have certainly nickel and iron scrap have been a moving target downward, but I guess as we started to think to about the first quarter should we think about that adjusted margin, that 3.9% is kind of what we should expect near term or would you expect that to bounce back at some -– well, to maybe even where it was in the third quarter or how should we think about the gross margins, assuming metals prices don’t change from where they are today near term?

Dennis M. Oates

The expectation you should see some modest increases in margin, and the reason for that would be as we look at things we see some stabilization in the commodity prices, and even at a minimum, I don’t know anybody that’s really forecasting significant double-digit reductions like we've seen in each of the last four quarters, which is really what's driven that compression in our gross profit margin. So my expectation is we’ll get some relief which will improve margins. I also would expect some higher activity levels in our plants, as we move through the quarter, which will also help that margin number.

Michael Gallo

Right, so it sounds like you should -– that we should expect to see it somewhat better in Q1 than Q4, is that the…?

Dennis M. Oates

Yes.

Michael Gallo

In terms of the revenues, I mean, I know it was pretty weak, not only shipment quarter in Q4 but also obviously on the order front. I know historically the prior quarter’s orders certainly correlate with the next quarter’s shipments, but should we expect to see the normal seasonal uptick that you get Q1 versus Q4 in terms of shipments or would you expect the revenue to look similar?

Dennis M. Oates

Couple of things I would say on that. I would look at the fourth quarter bookings and keep in mind that lead times are ridiculously short right now. So there's a lot of quick turn business that we can still book and get out the door in the first quarter. That said I suspect our first quarter sales will have a three in front of it, not a four. Our expectation as we go through each quarter of 2016 is you’ll see an improvement in sales as the stability leaks into the market, lead times start to go out, and we start to get back on a more even keel.

Michael Gallo

Alright, okay. So it sounds like it should be somewhat better. Your oil & gas business was, all things considered, held up quite well in 2015 and actually I think it was only down 13% year-over-year in Q4. Would you expect that just to be a much bigger headwind than really fall off substantially or you picked up some incremental customers or, I guess, how are you kind of bucking the broader trend which has been real pressure there?

Dennis M. Oates

Well in the last couple of conference calls I've mentioned the fact that the oil & gas business is very distressed right now, to say the least. But that I did not anticipate that our sales would fall at the same rate as the market itself, because we had some new products coming into the market and we also had some new relationships based upon those new products. And that’s basically what's happened and that’s the reason why you’re seeing kind of the odd increase in sales actually in the fourth quarter sequentially compared to the third in oil & gas products versus what's happening in the marketplace.

I'm not looking for any significant reduction in oil & gas revenues, those relationships as long as new products continue to go into the market. So as I look at it, it would be flat to modest improvement as we go through 2016 in oil & gas. We're not seeing any big recovery in the first half. I'm not optimistic you’ll see a big recovery in the market itself in the second half of 2016. Maybe you’ll see some gradual improvement in some of these new products and the relationships will continue to bear fruit as we go through the year.

Michael Gallo

Alright, that’s good to hear. Can we just take a minute on aerospace? Obviously, Boeing, talking about a reduction in deliveries in 2016, so I was wondering just aerospace in terms of inventory in the supply chain and then as we start to think about that, when we should start to see you think aerospace rebound?

Dennis M. Oates

As we look at aerospace you’ve got to consider the whole inventory thing that’s been going on, and really the entire year of 2015, the vast majority of our customers who deal in aerospace have been in a mode of reducing inventories. As you travel around –- as we travelled around in the fourth quarter, the general vibe coming from the marketplace is that people are comfortable with their current inventory levels, given what they anticipate in 2016. Some of them feel that they’re a little bit low on inventory actually. So our view of 2016 is you’ll see a gradual improvement in aerospace mill shipments and we’ll benefit from that. And how that will evolve will be based upon what you see in commodities as people get a sense that this stability that we've referenced a couple of times in nickel and some of the other commodities is for real and there's no further reductions anticipated. You’ll start to see some of that pent up demand unlocked, because some people do -– are running a little bit low on their inventories actually, but overall, much more comfortable than they were a year ago.

Michael Gallo

Okay, great, and then just final question for Ross. Obviously, you guys have done a good job of wringing some cash flow out of reductions of working capital. I think when I look at the accounts receivable down at -- in the $17 million, I don’t think we've seen that as low as that since probably the December quarter, I think 2009. So my question’s two-fold, I mean can that number stay down there or we've probably seen what you can take in terms out of receivables and also how much more do you think you can take out of inventory?

Ross Cameron Wilkin

Yes. In terms of receivables that does very much track with sales -– top line sales levels. So we will see that flex back up as our revenue goes up. And then so -– yes, it will track largely with underlying business activity. So I wouldn’t expect that necessarily to go any lower than it is at the moment. In terms of inventory levels, that again is dependent upon go forward business activities and we are modeling to see our inventories go back up modestly with the increased plant activity here going forward over the coming months, as we anticipate our plant activity to be equal to or greater than our shipment activity in the coming months as we move through 2016, given that the majority of our internal destocking has also occurred. In the last half of the year we produced much less than we shipped and so the wind down in inventory is probably materially completed.

Michael Gallo

Okay. So it sounds like working capital you think, overall would be relatively flat to up a little bit in 2016, is that fair?

Ross Cameron Wilkin

Exactly, and we will get some leverage off our accounts payable base or supplier base as we have some improved terms on that side. But as the business flexes out you’ll see inventory and accounts receivable go up with that, with offsetting accounts payable. So it won’t be a dramatic increase in working capital but it should be an upward trend.

Michael Gallo

Alright. Okay, thanks very much.

Operator

[Operator Instructions]. Our next question comes from Phil Gibbs from KeyBanc Capital. Your line is open.

Phil Gibbs

Hi, good morning Denny, good morning Ross.

Ross Cameron Wilkin

How you’re doing Phil?

Dennis M. Oates

Good morning.

Phil Gibbs

Doing well. The backlog at this point in time, Denny how is that shaping up in Q1? Have we seen any upside to that number or is it largely stayed status quo?

Dennis M. Oates

I would say if you look at what's happened over the past three weeks, and I'm going to throw the first week out because everybody comes back and figures out what's going on. I would characterize it as flat to modestly improved in terms of bookings. And our expectation for the quarter if you would see some modest improvement in bookings as we go through the quarter. But we have not -– I don’t want to leave you with the impression, we've seen a skyrocket in bookings with the turn of the New Year.

Phil Gibbs

Is that typical however, do you normally see bookings improve in January relative to December? I’m just trying to gauge whether or not it just could be more seasonality at this point.

Dennis M. Oates

Usually you see an improvement in our first quarter relative to fourth quarter. January usually gets off to a slow start as people kind of assess where they ended up the year from an inventory standpoint, get a read on the market and begin to place orders. So from a first quarter, yes, typically the first quarter is a little stronger than the fourth quarter from a booking standpoint. And remember the second quarter is usually -– and again, this is usual, this maybe an unusual year, is better than the first quarter. And the first half is seasonally generally better than the second half.

As I look at this year though Phil, I got to tell you, given where commodities are and the uncertainty revolving around commodity prices and whether they really have hit bottom and that kind of thing, this maybe one of those unusual years where I think the second half of the year has the potential to be stronger than the first half of the year and see steady improvements as we march through 2016.

Phil Gibbs

Okay. I appreciate that and with the dollar as strong as it has been in the last year, year and half, do you think that that has had an impact on things? I mean are you seeing any stronger than usual import incursions into the markets that you plan?

Dennis M. Oates

Not directly. Where we're seeing the impact of that is competitiveness from a pricing standpoint on international sales and we were very pleased, I was pleased to see the continued improvement in our international sales despite the fact that the dollar is stronger. But clearly competitively it makes pricing very difficult on the global market when the dollar is trending where it is. When you look at our direct impact, I would characterize it as a modest increase in imports. We -- our customers are seeing it as well so we can't lose sight of what I would call the indirect impact where our customers are being affected by the stronger dollar and increased competitiveness in their markets which flows back to us and that is a harder thing to quantify.

Phil Gibbs

Right, I agree with you on both of those things so I appreciate you pointing it out. International business for you is probably about 10% to 15%?

Dennis M. Oates

No. It was just under 10% of sales but it grew in 2015. So it kind of affected the overall trend. And that is a reflection on some of the new products and some of the contracts that we booked.

Phil Gibbs

Okay, terrific. And in terms of the surcharge impact on the misalignment to the gross margins from a percentage standpoint I think in my model with some of those exclusions you gave with the idling costs, I came up with 8% or so in terms of gross profit margins, any gauge on the misalignment against that number in terms of the raw material decline that you are seeing versus the surcharges, in terms of magnitude?

Dennis M. Oates

Let me toss that to Ross.

Ross Cameron Wilkin

Yes, the surcharge of misalignment is we calculated it to be closer to about 6% but it is in the range. And then also there is the impact of the overall lower activity levels which is in the vicinity of around 7%.

Phil Gibbs

You are saying that the 6% is on top of or is -- so you are saying more normalizes of 14%?

Ross Cameron Wilkin

Yes.

Phil Gibbs

Okay.

Dennis M. Oates

Those two big headwinds reflecting one, is the whole misalignment thing given the rapid decline in commodities that we talk about. The other thing not to lose sight of the fact is we are running at very low activity levels and that spits out a lot of fixed cost margin, the depreciation type things. So both of those numbers are additive.

Phil Gibbs

Okay. Perfect, and then lastly is more on the update kind of on the liquidity side, what do you expect Ross the cash interest, D&A, CAPEX, and where does your liquidity stand at this point?

Ross Cameron Wilkin

Yes, overall liquidity has improved as you can imagine under the new facility and it is in the lower teens overall, $13 million or $14 million day one of the new arrangement, so well above the minimum threshold. And in terms of the cash going forward for some of those items like interest, cash interest expense will be about 150 basis points higher than what we experienced last year and so overall cash interest will be around $2.8 million or thereabout $2.5 million to $2.8 million year end 2016.

Phil Gibbs

Okay, and then your depreciation and CAPEX?

Ross Cameron Wilkin

The CAPEX -- we expect CAPEX to be mid to high single-digits and some of that could be financed through leases or CAPEX is a bit of a flex item in terms of how we manage that, in terms of what actually hits CAPEX, or think about it in terms of probably $7 million number, something in that vicinity. And depreciation is going to continue running at about $16 million here in 2016. So, a fairly large disconnect in terms of depreciation versus CAPEX.

Phil Gibbs

But I think I am just looking here, I had a depreciation of 4.5 million in the fourth quarter, maybe that included some amortization adjustments. Are you looking at that as a number or is there…?

Ross Cameron Wilkin

Yes, the 4.5 million that would also include some amortization of moulds and dyes and things that we use internally. So, that is about -- including that is about $18 million of amortization in 2016.

Phil Gibbs

Perfect, thanks a lot for the thoughts. I will follow up with you guys later. Thanks so much.

Dennis M. Oates

Welcome.

Operator

[Operator Instructions]. And I am showing no further questions at this time. I would like to turn the call back over to Mr. Oates for closing remarks.

Dennis M. Oates

Okay, thanks again for joining us today and for your interest in Universal Stainless. Obviously there was no let up in challenging industry conditions in the fourth quarter and we took necessary actions to address those issues. Our focus all year was on meeting industry challenges, generating cash, and capturing opportunities as we look to on improving 2016. I want to publicly acknowledge all of our successes are due to the tireless efforts of our team and I greatly appreciate all those efforts and I look forward to updating you in April on our successes during the first quarter. Have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

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