MYERS INDUSTRIES, INC. — Q1 2019 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2019. Myers operates Material Handling, which manufactures plastic products, and Distribution, which sells tire-service equipment and supplies. Brazil and Lawn and Garden are reported as discontinued operations.
Financial performance
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $139.1 | $152.6 |
| Gross profit / margin | $45.6 / 32.7% | $47.1 / 30.9% |
| Operating income | $10.2 | $12.0 |
| Continuing-operations income | $6.6 | $7.8 |
| Net income | $6.8 | $6.8 |
| Diluted EPS | $0.19 | $0.22 |
| Operating cash flow, continuing operations | $5.3 | $12.8 |
- Sales fell 9%, primarily from a $14.9 million volume decline and $0.6 million adverse currency impact, partly offset by $2.0 million of higher pricing. Material Handling sales declined 12% to $103.0 million, including weakness in food and beverage and vehicle markets; Distribution sales rose 1% to $36.2 million.
- Gross margin improved 1.8 percentage points, mainly from pricing, lower raw-material costs and productivity, partly offset by unfavorable mix. SG&A declined 3% to $34.5 million, though it rose as a share of sales to 24.8% from 23.3%.
- Net interest expense decreased to $1.0 million from $1.6 million, reflecting lower average borrowings. The effective tax rate increased to 27.6% from 25.3%.
- Cash and restricted cash was $67.3 million at March 31, up $8.4 million from year-end. Total operating cash flow was $12.6 million, including $7.3 million from discontinued operations, primarily a Brazil-related tax benefit receipt. Investing cash flow was $1.6 million, including $4.5 million of property-sale proceeds and $2.9 million of capital expenditures. Dividends paid were $4.9 million.
- Debt was $78.0 million face value of senior notes ($76.9 million net of deferred financing costs); no revolving-credit borrowings were outstanding. The $200 million facility had $194.0 million available after $6.0 million of letters of credit. The company reported covenant compliance, with actual interest coverage of 13.21 against a 3.00 minimum and leverage of 1.18 against a 3.25 maximum.
Material changes, outlook and risks
- Two restructuring programs were announced in March. The Distribution transformation incurred $0.9 million of Q1 charges; management expects $5–$7 million in annualized benefits after 2019. The Ameri-Kart consolidation is expected to cost about $0.9 million, eliminate up to 30 positions and yield about $1.5 million in annualized benefits after 2019. Both programs are expected to be substantially complete by year-end. The filing forecasts approximately $10 million of 2019 capital expenditures and says operating cash flow plus available credit should meet expected needs.
- A $0.9 million impairment charge was recorded on a closed Material Handling facility classified as held for sale. A building sale generated $4.5 million of proceeds. The Q1 2018 comparison included a $0.4 million disposal gain associated primarily with the Pomona sale-leaseback.
- ASC 842 lease accounting was adopted January 1, 2019, adding right-of-use assets and lease liabilities; at March 31 these were $5.5 million and $5.8 million, respectively. The filing says adoption did not materially affect results or cash flows.
- Material contingencies include a $10.5 million recorded liability for a lease guarantee related to the former Lawn and Garden business, environmental reserves of $4.5 million for the New Idria and New Almaden matters, and a $7 million guarantee of the Brazil buyer’s factoring obligations. The company has not accrued for potential New Idria remediation costs because the amount cannot yet be estimated. A patent-infringement lawsuit is unreserved; the company says it cannot predict the outcome or assess potential material impact.
- In April 2019, the company amended and extended to August 2022 notes owed by the former Lawn and Garden buyer; management said the amendment did not change its assessment of collection uncertainty. The company also received notice of an IRS audit of its 2017 federal tax return.
- Key risks cited include uncertain demand and market conditions, foreign-currency movements, and increases in plastic resin and other commodity costs; the company had no commodity-hedging derivatives at quarter-end. Management cautions that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Material Handling demand, particularly food and beverage and recreational vehicles, stabilizes and whether pricing and productivity sustain the gross-margin improvement.
- Whether restructuring costs, completion timing and projected annualized benefits are achieved.
- Cash-flow sustainability: continuing-operations operating cash flow fell sharply, while total cash generation included a discontinued-operations tax receipt and asset-sale proceeds.
- Recoverability of the former Lawn and Garden buyer’s notes and potential exposure under the associated lease guarantee.
- Potential changes in environmental liabilities, the New Idria remediation assessment, and the outcome or financial effects of pending litigation and tax examinations.