Universal Stainless & Alloy Products Inc (USAP) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Stainless fourth-quarter 2015 conference call and webcast. (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.

Thank you, Lauren. Good morning. This is June Filingeri of Comm-Partners and I'd 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 Pollack, 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.

Thanks, June. Good morning, everyone. Thank you for joining us today.

As we expected, there was no letup in challenging industry conditions in the fourth quarter, given the continued drop in commodity prices and deep cautiousness up and down the supply chain. A major focus of forgers and service centers in the quarter was to continue to reduce their 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 of 65 million pounds were 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 salaried 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 costs 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 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 commodities stabilize. Ross will lay out the details of our arrangement in his financial report.

It's 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 costs 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 to 2015 levels for gross margins to return to more normal levels. While that would 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 standpoint, our team made some hard-earned progress in 2015 despite the challenging conditions. These include 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 air 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 the lowest OSHA recordable rate in history. This rate, as you know, is normalized 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 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.

In the ongoing rivalry between Boeing and Airbus, both reported record airplane deliveries in 2015, but Airbus led in 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 it is expected to increase to 50 per month by early 2017.

Also in the 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 analysts' concerns about future book-to-bill rates for the airframe manufacturers, it's worth mentioning that a move lower in the book-to-bill ratio has been anticipated for several years. I'd note further that as production levels that drive sales for the mills and the current discussion in the supply channel is how to keep up with the growing build rates.

We entered 2016 with customer inventories in better balance and activity levels higher, pointing to an improved first quarter. Very short mill 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's not much to add to the discussion of the rout in oil prices and its effect on oil producers, oil service companies, and E&P budgets. There were 1,601 fewer rigs at the end of 2015 as compared to year-end 2014. Schlumberger noted that negative market sentiment intensified in the fourth quarter, leading to the further drop in world oil prices, which hit a 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 with the 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 compares 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 newbuild 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 their new HA 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 re-shoring of some production that had 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 had expected customers to reduce their tool steel inventories at year-end to reflect reductions in automotive production forecasts for 2016. The magnitude of the cutback 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?

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, combined 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 topline strength in the first half of 2015. Looking further at 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 health 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 continue 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 cost and depreciation, is 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 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 idled 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 topline improvements and supported by the expected improvements in 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 receive a refund for the tax installment made earlier in 2015, we will have paid no net cash taxes for 2015. In addition, given that our NOLs have increased to an estimated $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 is 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 150 basis points higher than 2015, but are unchanged from the increase that would have come into effect under the old facility. 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 deferred 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 older agreement.

Regarding the extension of the convertible notes previously set to mature in August 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 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 noteholder 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 were 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.

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 look 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 were 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 continued transformation.

I know the report has been a little lengthy this time. We appreciate your attention. We are ready now to take your questions.

(Operator Instructions). Michael Gallo, CL King.

Good morning.

Hi, Mike, how are you?

Good. I've got a couple questions, if I may. Denny, obviously you've had the surcharge misalignment and I know metals prices of certainly nickel and iron scrap have been a moving target downward, but I guess as we start to think 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 -- to maybe even where it was in the third quarter, or how should we think about gross margins, assuming metals prices don't change from where they are today (multiple speakers)

The expectation is 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 will 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.

Right. So it sounds like you should -- we should expect to see it somewhat better in Q1 than Q4, is that the --

Yes.

In terms of the revenues, 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 you get Q1 versus Q4 in terms of shipments? Or would you expect the revenue to look similar?

A couple of things I would say on that. I would look at the fourth-quarter bookings and I would 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 3 in front of it, not a 4. Our expectation as we go through each quarter of 2016 is you will see 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.

So it sounds like you should be somewhat better. Your oil and 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 to be a much bigger headwind and really fall off substantially? Or have you picked up some incremental customers or, I guess, how are you kind of bucking the broader trend, which has been real pressure there?

In the last couple of conference calls, I had mentioned the fact that the oil and gas business is very distressed right now, to say the least, but 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've seen kind of the odd increase in sales, actually, in the fourth quarter sequentially, compared to the third, in oil and gas products versus what's happening in the marketplace.

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

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 and the supply chain, and then as we start to think about that, where we should start to see, you think, aerospace rebound?

As we look at aerospace, you got to consider the whole inventory thing that's been going on, and really, for 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 traveled 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 are a little bit low on inventory, actually.

So our view of 2016 is you will see a gradual improvement in aerospace mill shipments and we will 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 will start to see some of that pent-up demand unlock because some people are running a little bit low on their inventories, actually, but overall much more comfortable than they were a year ago.

Okay. Great. And then just final question for Ross, obviously you guys have done a good job wringing some cash flow out of reductions of working capital. I think when I look at the accounts receivable down 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 is twofold. Can that number stay down there? Or have we 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?

In terms of receivables, that does very much track with topline 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 because 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.

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

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 flex up, you will see inventory and accounts receivable go up with that, with an offset in accounts payable, so it won't be a dramatic increase in working capital, but it should be an upward trend.

All right. Okay. Thanks very much.

(Operator Instructions). Phil Gibbs, KeyBanc Capital.

Good morning, Denny. Good morning, Ross.

How are you doing, Phil?

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 has it largely stayed status quo?

I would say as 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 is 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.

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.

Usually you see an improvement in the first quarter relative to the 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 the first quarter, yes, typically the first quarter is a little stronger that the fourth quarter from a bookings standpoint.

Remember, the second quarter is usually -- and again, this is usual; this may be 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 given where commodities are and the uncertainty revolving around commodity prices and whether they really have hit bottom and that kind of thing, this may be 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 to see steady improvement as we march through 2016.

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

Not directly. Where we're seeing the impact of that is competitiveness from a pricing standpoint on international sales. So 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. But our customers are seeing it as well, so you 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's a harder thing to quantify.

Right. I agree with you on both of those things, so I appreciate you pointing that out. International business for you will probably, what, 10%, 15%?

It was (multiple speakers) -- it was just under 10% of sales, but it grew in 2015. So it kind of fought the overall trend, and that's a reflection of some of the new products and some of the contracts that we've booked.

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 either raw material declines that you've seen versus the surcharges in terms of magnitude?

Let me toss that to Ross.

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

You are saying that the 6% is on top of -- so you are saying more normalized is the 14% (multiple speakers)

Yes. There's two big headwinds we're fighting. 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 that we are running at very low activity levels and that spits out a lot of fixed costs, largely depreciation type things. So both of those numbers are additive.

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?

Yes. Overall, liquidity is improved, as you can imagine, under the new facility and it's 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 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 thereabouts, $2.5 million to $2.8 million, here in 2016.

Okay. And then your depreciation and CapEx?

Yes, CapEx, we expect CapEx to be mid to high single digits and some of that could be financed through leases, so CapEx is a bit of a flex item in terms of how we manage that in terms of what actually hits CapEx, so if you think about it in terms of probably a $7 million number or 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.

Okay. I think -- just looking here, I had about 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 --

Yes. The $4.5 million, that would also include some amortization of molds and dies and things that we use internally, so that's about -- including that, it's about $18 million of amortization in 2016.

Perfect. Thanks a lot for the thoughts. I'll follow up with you guys later. Thanks so much.

You're welcome, Phil.

(Operator Instructions). I'm showing no further questions at this time. I would like to turn the call back over to Mr. Oates for closing remarks.

Okay. Thanks, again, for joining us today and for your interest in Universal Stainless. Obviously, there was no letup 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 an 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.

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.