Synalloy Corporation (NASDAQ:SYNL), today announced net sales for the third quarter of 2016 of $34.3 million. This represents a decrease of $3.8 million or 10% when compared to net sales for the thirdquarter of 2015. Net sales for the first nine months of 2016 were $105.5 million, down $34.4 million or 25% from 2015.
For the third quarter of 2016 the Company recorded a net loss from continuing operations of $2.6 million, or $0.30 loss per share. This compares to net earnings from continuing operations of $1.4 million, or $0.16 per share for third quarter 2015. For the first nine months of 2016, the net loss from continuing operations totaled $5.6 million, or $0.64 loss per share. This compares to net earnings from continuing operations of $7.4 million, or $0.85 per share for the first nine months of 2015.
During the third quarter of 2016, the Company completed a sale-leaseback transaction whereby all of the Company’s operating real estate assets were sold to a third party and are being leased back by the Company. The Company received sales proceeds of $22.0 million, or approximately $4.2 million in excess of net book value of total assets sold. Pursuant to the applicable accounting standards, the Company was required to calculate the gain or loss associated with the transaction on a property by property basis. As a result, losses associated with three of the properties in this transaction, totaling $2.5 million, were charged against earnings during the third quarter and first nine months of 2016. Gains associated with the remaining three properties, totaling approximately $6.7 million, were deferred and will be amortized on the straight-line method over the initial lease term of 20 years.
The Company’s performance utilizing its two standard non-GAAP financial measures, Adjusted Net Income and Adjusted EBITDA, (as defined below), was as follows:
| • | Adjusted Net Loss for the third quarter of 2016 was $223,000, or $0.03 loss per share. This is compared to an Adjusted Net Income of $1.1 million, or $0.12 per share for the third quarter of 2015. For the first nine months of 2016, Adjusted Net Income was $0.03 million, or $0.00 per share, down 100% from Adjusted Net Income of $7.3 million, or $0.84 per share for the first nine months of 2015. |
| • | Adjusted EBITDA for the third quarter of 2016 decreased $2.4 million or 62% to $1.5 million, or 4.3% of sales. This compares to Adjusted EBITDA of $3.9 million, or 10.2% of sales for the third quarter of 2015. For the first nine months of 2016, Adjusted EBITDA was $6.3 million, or 6.0% of sales. This represents a decrease of $11.3 million or 64% when compared to 2015 results. |
“Our end markets have remained under pressure throughout 2016, testing our management team on multiple fronts,” said Craig Bram, President and CEO. “We were determined to strengthen our balance sheet during this difficult time, while continuing to invest in growth opportunities for our individual businesses. Following the sale leaseback transaction, we have substantially reduced the company’s net debt and expect to have less than $5 million at year-end. We will be well positioned to pursue acquisitions and high ROI projects as we move into 2017.”
Metals Segment
Metals Segment sales for the third quarter of 2016 totaled $22.3 million, a decrease of $0.8 million or 3% from the third quarter of 2015. Sales for the first nine months of 2016 were $68.3 million, a decrease of $24.2 million or 26% from 2015. Sales were affected during the third quarter and first nine months of 2016 by:
| a) | Sales in prior year periods reflected stronger order shipments across all markets in early 2015, before the precipitous decline in oil prices occurred. Low nickel prices also continued to weigh heavily on stainless steel pipe sales in 2016. In addition, average nickel prices were down 3% and 27% for the third quarter and first nine months of 2016, respectively, when compared to the same periods of the prior year. Those two impacts drove most of the comparable declines, as seamless heavy-wall carbon steel pipe and tube sales decreased 11.5% and 26.9% for the third quarter and first nine months of 2016, respectively, and stainless steel pipe sales declined 6.0% and 30.6% for the same comparison periods. |
| b) | Storage tank sales increased 14.6% for the third quarter of 2016 and decreased 7.0% for the first nine months of 2016 when compared to the same periods for the prior year. However, comparisons to the prior year are favorably affected in 2016 due to the late April, 2015 fire in the fiberglass tank production line that reduced second and third quarter 2015 volumes. |
The Metals Segment’s operating results from continuing operations decreased $2.7 million to a loss of $3.2 million for the third quarter of 2016 compared to a loss of $0.5 million for the third quarter of 2015. For the first nine months of 2016, operating income from continuing operations for the Metals Segment decreased $11.1 million to a loss of $5.7 million for 2016 compared to operating income of $5.4 million for 2015. Current year operating income was affected by the following factors:
| a) | A $2.5 million charge in the third quarter associated the book loss on three Metal Segment properties sold as part of the sale-leaseback transaction mentioned above. |
| b) | Lost contribution margin due to lower volumes across all segments as continued low oil and gas prices, as well as sustained lower levels of customer spending across all industrial classes, had an unfavorable effect on sales and profits for our storage tank and carbon pipe distribution facilities, as well as our stainless steel welded pipe markets. |
| c) | As a result of continued low nickel prices during 2016, the Company experienced inventory nickel margin compression of approximately $1.2 million and $5.4 million for the third quarter and first nine months of 2016, respectively. This compares to inventory nickel margin compression of approximately $1.7 million and $4.8 million, respectively, for the same periods of 2015. |
Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment in the third quarter of 2016 were $12.0 million, representing a $3.0 million or 20% decrease from the same quarter of 2015. Sales for the full-year 2016 were $37.2 million, a decrease of $10.2 million or22% from 2015. Sales were affected during the third quarter and first nine months of 2016 by:
- a) Lower sales due to in-sourcing of several products by customers who were able to absorb production due to weak demand for their other products, as well as delayed ramp-up of several new products due primarily to customer scheduling; and
- b) Lower selling prices per pound for oil based products. With the reduction in oil prices, the Segment’s raw material costs decreased, which resulted in lower passed through material value as part of the billed selling prices.
Operating income for the third quarters of 2016 and 2015 was $1.2 million and $1.6 million, respectively, a decrease of $0.4 million or 25.7%. For the first nine months, operating income was $3.7 million and $4.6 million for 2016 and 2015, respectively, a decrease of $0.9 million or 19.6%. The decrease in operating income for the quarter and first nine months was directly related to the lower sales levels.
Other Items
Unallocated corporate expenses for the third quarter of 2016 increased $0.6 million to $1.7 million (5.0% of sales) compared to $1.2 million (3.0% of sales) for the third quarter of 2015. For the first nine months, unallocated corporate expenses increased $1.0 million to $4.3 million (4.1% of sales) in 2016 up from $3.4 million (2.4% of sales) in 2015. The third quarter and nine month increases resulted primarily from higher professional fees and personnel costs, as well as approximately $0.3 million in implementation costs for the Company’s ERP upgrade.
Acquisition costs for 2015 mainly represent professional fees associated with the Specialty acquisition.
Interest expense was $0.3 million for the third quarters of 2016 and 2015. For the nine months, interest expense decreased to $0.8 million for 2016 compared to $1.0 million for 2015.
The change in fair value of the interest rate swap contracts decreased unallocated expenses for the third quarter of 2016 by $0.1 million and increased unallocated expenses by $0.2 million for the third quarter of 2015. For the first nine months of2016, unallocated expenses increased by $0.3 million for the change in fair value of the interest rate swap contracts, compared to an increase of $0.2 million for the same period of 2015. During the third quarter of 2016, the swap contract entered into on September 3, 2013 was settled leaving only the swap contract entered into on August 12, 2012 outstanding as of September 30, 2016.
During the third quarter 2015, the Company completed its revenue projections for Specialty Pipe & Tube (“Specialty”) in conjunction with its 2016 planning processes. As a result, the Company determined the projected revenues for 2016 would result in Specialty not meeting minimum earn-out levels for the second year calculation. Therefore, the contingent consideration liability was eliminated by recognizing a gain of approximately $2.4 million during the third quarter 2015. During March 2015, lower oil prices affected the demand for Palmer’s storage tank and separator products. It was evident from reviewing March and April financial results that the third year operating results for Palmer would not meet the minimum earn-out levels. As a result, a $2.5 million favorable adjustment was recorded in the first nine months of 2015 to eliminate the remaining balance of Palmer’s earn-out liability.
Other income of $0.1 million for the first nine months of 2015 represents life insurance proceeds received in excess of cash surrender value for a former officer of the Company.
The Metals Segment’s operating results from continuing operations decreased $2.7 million to a loss of $3.2 million for the third quarter of 2016 compared to a loss of $0.5 million for the third quarter of 2015. For the first nine months of 2016, operating income from continuing operations for the Metals Segment decreased $11.1 million to a loss of $5.7 million for 2016 compared to operating income of $5.4 million for 2015. Current year operating income was affected by the following factors:
| a) | A $2.5 million charge in the third quarter associated the book loss on three Metal Segment properties sold as part of the sale-leaseback transaction mentioned above. |
| b) | Lost contribution margin due to lower volumes across all segments as continued low oil and gas prices, as well as sustained lower levels of customer spending across all industrial classes, had an unfavorable effect on sales and profits for our storage tank and carbon pipe distribution facilities, as well as our stainless steel welded pipe markets. |
| c) | As a result of continued low nickel prices during 2016, the Company experienced inventory nickel margin compression of approximately $1.2 million and $5.4 million for the third quarter and first nine months of 2016, respectively. This compares to inventory nickel margin compression of approximately $1.7 million and $4.8 million, respectively, for the same periods of 2015. |
Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment in the third quarter of 2016 were $12.0 million, representing a $3.0 million or 20% decrease from the same quarter of 2015. Sales for the full-year 2016 were $37.2 million, a decrease of $10.2 million or22% from 2015. Sales were affected during the third quarter and first nine months of 2016 by:
- a) Lower sales due to in-sourcing of several products by customers who were able to absorb production due to weak demand for their other products, as well as delayed ramp-up of several new products due primarily to customer scheduling; and
- b) Lower selling prices per pound for oil based products. With the reduction in oil prices, the Segment’s raw material costs decreased, which resulted in lower passed through material value as part of the billed selling prices.
Operating income for the third quarters of 2016 and 2015 was $1.2 million and $1.6 million, respectively, a decrease of $0.4 million or 25.7%. For the first nine months, operating income was $3.7 million and $4.6 million for 2016 and 2015, respectively, a decrease of $0.9 million or 19.6%. The decrease in operating income for the quarter and first nine months was directly related to the lower sales levels.
Other Items
Unallocated corporate expenses for the third quarter of 2016 increased $0.6 million to $1.7 million (5.0% of sales) compared to $1.2 million (3.0% of sales) for the third quarter of 2015. For the first nine months, unallocated corporate expenses increased $1.0 million to $4.3 million (4.1% of sales) in 2016 up from $3.4 million (2.4% of sales) in 2015. The third quarter and nine month increases resulted primarily from higher professional fees and personnel costs, as well as approximately $0.3 million in implementation costs for the Company’s ERP upgrade.
Acquisition costs for 2015 mainly represent professional fees associated with the Specialty acquisition.
Interest expense was $0.3 million for the third quarters of 2016 and 2015. For the nine months, interest expense decreased to $0.8 million for 2016 compared to $1.0 million for 2015.
The change in fair value of the interest rate swap contracts decreased unallocated expenses for the third quarter of 2016 by $0.1 million and increased unallocated expenses by $0.2 million for the third quarter of 2015. For the first nine months of2016, unallocated expenses increased by $0.3 million for the change in fair value of the interest rate swap contracts, compared to an increase of $0.2 million for the same period of 2015. During the third quarter of 2016, the swap contract entered into on September 3, 2013 was settled leaving only the swap contract entered into on August 12, 2012 outstanding as of September 30, 2016.
During the third quarter 2015, the Company completed its revenue projections for Specialty Pipe & Tube (“Specialty”) in conjunction with its 2016 planning processes. As a result, the Company determined the projected revenues for 2016 would result in Specialty not meeting minimum earn-out levels for the second year calculation. Therefore, the contingent consideration liability was eliminated by recognizing a gain of approximately $2.4 million during the third quarter 2015. During March 2015, lower oil prices affected the demand for Palmer’s storage tank and separator products. It was evident from reviewing March and April financial results that the third year operating results for Palmer would not meet the minimum earn-out levels. As a result, a $2.5 million favorable adjustment was recorded in the first nine months of 2015 to eliminate the remaining balance of Palmer’s earn-out liability.
Other income of $0.1 million for the first nine months of 2015 represents life insurance proceeds received in excess of cash surrender value for a former officer of the Company.
Looking at the Metals Segment:
| • | Bookings for storage tanks in Q3 were up 34% over the average bookings of the prior four quarters. Investment in the Permian Basin continues to gain momentum as WTI prices approach $50 per barrel. |
| • | We have seen some recent project activity in the stainless steel pipe market. In October, with the expanded capabilities of our new heavy wall/quick turn press, we were able to secure an order for an LNG project. The total value of that order is approximately $4.7 million and will be delivered in the latter part of Q1 2017. |
| • | Nickel prices have been stable over the past six months and there appears to be a bias toward higher levels into 2017. |
| • | We have opened a sales office in Shanghai with an experienced representative and will be focusing on special alloy sales into Asia. |
For the Chemicals Segment:
| • | Capital improvements in recent years continue to help us drive higher margins, even with lower volumes. EBITDA margins year to date were 14.0%, up from 12.3% last year and less than 9% four years ago. |
| • | The pipeline of new products is estimated to drive volume increases in 2017 of just under 10% across the two facilities. |
Synalloy Corporation (Nasdaq: SYNL) is a growth oriented company that engages in a number of diverse business activities including the production of stainless steel pipe, fiberglass and steel storage tanks and specialty chemicals and the master distribution of seamless carbon pipe and tubing. For more information about Synalloy Corporation, please visit our web site at www.synalloy.com.
