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Synalloy Reports Second Quarter Results, Provides Outlook

07/22/2013 - As it reported its second quarter earnings results, Synalloy Corp. said margins in the first half of the year were affected by foreign imports, especially reduced price pipe from from Malaysia, Vietnam and Thailand.

Synalloy Corp., a holding company owning subsidiaries that engage in a number of diverse business activities including the production of stainless steel pipe, fiberglass and steel storage tanks, specialty chemicals and fabrication of stainless and carbon steel piping systems, announced that the second quarter of 2013 produced net sales of US$56,273,000, up 20% compared to net sales of US$46,878,000 for the second quarter of 2012. Net income for the second quarter of 2013 was US$1,913,000 or US$0.30 per share, up 76% over net earnings of US$1,090,000, or US$0.17 per share for the same quarter in the prior year. For the first six months, net sales for 2013 were US$114,109,000, an increase of 21% from US$94,250,000 for the same period in the prior year. Net income was US$3,378,000 or US$0.53 per share for the first six months of 2013, up 39% over net income of US$2,427,000, or US$0.38 per share for the first six months of 2012.
Earnings before interest, change in fair value of interest rate swap, income taxes, depreciation and amortization (EBITDA), a non-GAAP measure of earnings, was US$4,017,000 in the second quarter of 2013, or US$0.62 per share. This was an increase of 67% over the second quarter of 2012 when EBITDA was US$2,400,000, or US$0.38 per share. For the first six months of 2013, EBITDA was US$7,765,000 or US$1.21 per share compared with US$5,218,000 or US$0.82 per share for 2012, which represents a year-over-year increase of 49%.
Metals Segment
Sales during the second quarter of 2013 totaled US$41,869,000, an increase of 21% from US$34,632,000 for the same quarter last year. Operating income was US$2,087,000 and US$1,460,000 for the second quarters of 2013 and 2012, respectively, an increase of US$627,000 or 43%. The company purchased 100% of the common stock of Palmer of Texas on 21 August 2012. Excluding Palmer's sales results, sales for the second quarter 2013 would have been 1% lower than the prior year. The sales decrease resulted from a 3% decrease in unit volumes partially offset by a 2% increase in average selling prices. In the second quarter, the Segment experienced commodity unit volumes increasing 11% while non-commodity unit volume decreased 22%. Selling prices for commodity pipe decreased approximately 15% while selling prices for non-commodity pipe increased approximately 31%. Shipments of carbon steel pipe associated with the Bechtel nuclear plant remained strong in the second quarter of 2013. The company classifies carbon steel pipe sales as non-commodity. Shipments of stainless steel pipe in the second quarter of 2013 were constrained as distributors continued to monitor nickel prices and kept their large re-stocking buys on hold, as surcharges decreased each month. The Segment remains focused on international sales efforts which show year-over-year growth. Special alloy bookings, backlog and shipments were strong in the second quarter of 2013. Fabrication bookings and sales have improved covering the full range of markets for pipe fabrication with power, chemicals, petro-chemicals and mining showing considerable improvement.
Sales for the first six months of 2013 increased 22% to US$86,529,000 and operating income for the first six months of 2013 was US$4,048,000, up 34% from net sales and operating income of US$70,654,000 and US$3,032,000, respectively, for the same period of 2012. Excluding Palmer's sales for the first six months of 2013, sales for the Metals Segment for 2013 approximated prior year levels. The 2% decrease in unit volumes was completely offset by a 2% increase in average selling prices.
Operating income, which increased US$627,000 for the second quarter of 2013 when compared to the same quarter of 2012, and increased US$1,016,000 for the first six months of 2013 when compared to the same period of the prior year, was impacted by the following factors:
a) Palmer was acquired 21 August 2012. Its second quarter and first six months results were included in the 2013 Metals Segment results while Palmer's results were not included during the same periods of the prior year since the company did not own their stock at that time. The company is very pleased with the performance of Palmer since the acquisition. The majority of the integration plan has been completed and the company believes it has an excellent management team in place at Palmer.
b) Associated with the acquisition of Palmer, an intangible asset of US$9,000,000 was recorded for the customer base acquired by the company. This asset is amortized on an accelerated basis which resulted in an amortization charge of US$383,000 in the second quarter and US$765,000 for the first six months of 2013. This additional amortization, net of taxes, reduced second quarter and first six months of 2013 earnings per share by US$0.04 per share and US$0.08 per share, respectively.
c) Margins were affected in the second quarter and first six months of 2013 by foreign imports. Stainless steel pipe received from Malaysia, Vietnam and Thailand are entering the country at significantly reduced prices. This factor forced the Segment to reduce prices accordingly to retain market share. The United States International Trade Commission (USITC) determined on 28 June 2013 that there is a reasonable indication that a U.S. industry is materially injured by reason of imports of welded stainless steel pressure pipe from these countries that are sold in the U.S. at less than fair value. All six Commissioners hearing the unfair trade case voted in favor of the company. Margins on stainless steel piping should improve in the third and fourth quarters as we await the preliminary ruling which is currently set for October, 2013.
d) Declining nickel prices resulted in inventory losses in the second quarter of this year of approximately US$824,000 compared to an inventory loss of US$1,303,000 in the second quarter of 2012. For the first six months of 2013 and 2012, inventory losses were US$1,389,000 and US$2,210,000, respectively. The impact to reported earnings was a favorable swing of approximately US$0.06 per share and US$0.09 per share for the second quarter and first six months of 2013.
e) The fabrication units operating margins improved during the second quarter of 2013 as a result of higher labor rate projects in our facilities.
Demand for manufactured pipe remains relatively strong, and the fabrication unit has begun to see an improvement in quote requests and orders. See the Outlook Section for further discussion.
Specialty Chemicals Segment
Sales for the Specialty Chemicals Segment in the second quarter of 2013 were US$14,404,000, which represented an 18% increase from US$12,246,000 when compared to the same quarter of 2012. Overall selling prices decreased 12% in the second quarter when compared to 2012 due in part to a significant increase in usage of a lower cost raw material that is reflected in the selling price. Pounds sold increased 33% during the second quarter when compared to the same period for 2012. With the increase in pounds sold and produced, the additional production volume had a favorable effect on fixed operating costs per pound of product produced, which decreased by 18% during the second quarter of 2013 when compared to the same period of 2012.   Operating income for the second quarter of 2013 and 2012 was US$1,596,000 and US$1,076,000, respectively, an increase of 48%. This increase resulted from the Segment increasing contract or tolling sales and strengthening sales to direct customers. The Segment continues to focus on changing the product mix to higher-priced/higher-margin products and controlling operating and support costs.
Specialty Chemicals Segment sales for the first six months of 2013 were US$27,580,000, up US$3,984,000 or 17% from US$23,596,000 for the same period of 2012. Operating income for the first six months of 2013 for the Specialty Chemicals Segment was US$2,889,000 compared to US$2,205,000 for the first six months of 2012, an increase of 31%. The additional Ashland defoamer sales which began in the third quarter of 2012 contributed to the increase in operating results for this segment.
Outlook
The Metals Segment's business is highly dependent on its customers' capital expenditures. We are seeing improvements in this area with increased quoting activity, new project startups and "on hold" projects being released for completion. The Bechtel nuclear job was strong in the second quarter of 2013. Sales are expected to remain strong throughout the third quarter of 2013 with the project being completed in the fourth quarter. The Metals Segment is experiencing a strong level of inquiries, especially from the chemical industry. Profit margins on the new project activity are better than we experienced in the fourth quarter 2012 and first quarter 2013. Stainless steel surcharges, which affect our cost of raw materials, declined steadily from March to September 2012 (in the range of 26%). In the fourth quarter 2012, they were basically steady. For the first quarter of 2013, they increased in the range of 10%, but have declined since April by 18%. The declining nickel prices continue to hold back sales as distributors are waiting for the prices to level out before placing large restocking orders. Our inventory gains and losses are determined by a number of factors including sales mix and the holding period of particular products. As a consequence, there may not be a direct correlation between the direction of stainless steel surcharges and inventory profits or losses at a particular point in time. Our experience has been that over the course of a business cycle, this volatility has tended towards zero. We believe we are the largest and most capable domestic producer of non-commodity stainless steel pipe and an effective producer of commodity stainless steel pipe which should serve us well in the long run. Our market position remains strong in the commodity pipe market and we are experiencing an upswing in special alloy demand. International quoting activity for our stainless steel pipe remains strong, especially for Canadian oil sands projects. Quoting activity has increased in Europe, Middle East and Asia which follows our marketing development strategies. We also continue to be optimistic about the fabrication business over the long term. Management anticipates continued strong sales of fiberglass and steel tanks as the oil drilling boom continues in the Permian Basin and Eagle Ford Shale areas of Texas. During the remainder of 2013, we will continue to focus on gaining production efficiencies and eliminating bottlenecks at Palmer to increase tank production.
The pipe fabrication backlog has increased in 2013 as the volume of quote activity has strengthened with many projects utilizing special alloy pipe. Approximately 64% of fabrication's current backlog comes from chemical projects and an additional 24% is from water / wastewater projects. Total fabrication backlog was US$25,621,000 at 29 June 2013, US$19,254,000 at 29 December 2012 and US$20,027,000 at 30 June 2012.
Specialty Chemicals Segment's sales are expected to continue to show improvement into the third quarter of 2013 when compared to the prior year. Sales of the defoamer product line for applications in the water and paint industries achieved targeted levels in the third quarter of 2012 and therefore the large year-over-year sales increases that the Segment experienced over the past several quarters will tighten. The company still expects sales levels to continue to improve throughout the remainder of 2013 as the result of aggressive product pricing, increased growth in sales to direct customers and identifying new sales opportunities for product offerings that have available production capacity. Management expects operating margins to hold steady at current levels in spite of the anticipation of raw material price increases over the next quarter.