Myers Industries, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial figures are in millions unless otherwise noted. Myers operates Material Handling and Distribution businesses. Results exclude the Brazil businesses, sold in December 2017 and reported as discontinued operations.
Financial performance
- Q2 revenue: $140.6 million, up 4% year over year. Material Handling sales rose 7% to $103.1 million; Distribution sales fell 5% to $37.5 million.
- Q2 profitability: Gross profit was $48.0 million versus $38.3 million; gross margin expanded to 34.1% from 28.3%. Operating income was $13.1 million versus $6.0 million. Continuing-operations income was $8.6 million versus $2.5 million; net income was $8.6 million versus $2.0 million. Diluted EPS was $0.26 versus $0.07.
- First-half revenue and earnings: Revenue was $293.1 million, up 8%. Gross margin increased to 32.4% from 29.5%; operating income was $25.1 million versus $14.1 million. Net income was $15.5 million versus $5.1 million, and diluted EPS was $0.48 versus $0.17.
- Cash flow: First-half operating cash flow was $28.2 million, including $27.2 million from continuing operations, compared with $23.6 million total in 2017. Capital expenditures were $2.3 million. Cash was $38.9 million at June 30, compared with $2.5 million at year-end 2017.
- Debt and liquidity: Debt, net of deferred financing costs, was $78.7 million, down from $151.0 million at December 31, 2017. The company reported $193.5 million available under its $200 million revolving facility, after letters of credit. It was compliant with covenants; actual interest coverage was 9.10 versus a 3.00 minimum, and leverage was 1.21 versus a 3.25 maximum.
- Shareholders: A May public offering of 4.6 million shares generated $79.5 million net proceeds; some proceeds repaid debt. The quarterly dividend remained $0.14 per share.
Changes and drivers
- Revenue growth reflected higher volume, pricing, and favorable currency effects. Material Handling benefited particularly from demand in consumer, vehicle, and food-and-beverage markets. Distribution sales weakened because of salesforce turnover and territory coverage gaps; first-half results also reflected the exit of a low-margin product line.
- Margin improvement reflected pricing, restructuring savings, and comparison with prior-year restructuring costs. Higher raw-material costs and unfavorable sales mix partly offset these benefits. A $0.5 million LIFO inventory liquidation benefit reduced first-half cost of sales.
- Q2 net interest expense declined to $1.3 million from $1.9 million, mainly due to lower average borrowings, although the weighted-average borrowing rate rose to 5.82% from 4.87%.
- The effective tax rate fell to 27.0% in Q2 and 26.2% for the first half, versus 39.6% and 41.2%, respectively, primarily reflecting the Tax Act’s reduction of the federal corporate rate to 21%.
Outlook, risks, and unusual items
- Management expects approximately $10 million in annual savings from its substantially completed Material Handling restructuring plan, including $8 million expected in 2018. 2018 capital expenditures were forecast at approximately $10–$12 million. Management said operating cash flow and available credit should meet expected needs, including investment and selective acquisitions; no formal revenue or earnings guidance is provided in the filing.
- Plastic resin and other commodity-cost increases could pressure results; the company reported no derivative hedges for commodity exposure. A 1-percentage-point increase in market rates was estimated to add about $0.1 million to annual interest expense at current debt levels. Foreign exchange movements are another exposure.
- Environmental contingencies include a $3.4 million reserve for the New Idria mine and a $1.5 million reserve for New Almaden. New Idria remediation costs are not accrued because the ultimate liability cannot yet be estimated; the company expects to provide $2 million of financial assurance if the proposed investigation order is executed. Management cautions that adverse legal or environmental outcomes could have a material effect.
- The company remains guarantor, up to $7 million through December 31, 2019, for a factoring arrangement assumed by the buyer of the Brazil business; no liability was recorded and management considers fair value immaterial. It also received $7.4 million released from escrow following settlement of Lawn and Garden sale indemnification claims; a $1.225 million pretax charge was recorded in discontinued operations in Q1.
- A Pomona distribution-center sale-leaseback generated a $2.0 million gain; $0.7 million was recognized in Q1 and the remaining $1.3 million is to be recognized over the 10-year lease. Q2 impairment charges were $0.3 million for buildings held for sale.
Important facts for investors to verify
- Whether Material Handling growth and margin gains persist as raw-material costs and product mix change.
- Whether Distribution can address salesforce turnover and restore volume in affected territories.
- Actual realization and timing of the restructuring savings, and progress against the $10–$12 million capital-expenditure forecast.
- Use of the remaining equity-offering proceeds, debt levels, and compliance with credit covenants.
- Developments in environmental matters, the Brazil-business guaranty, and other legal contingencies.
- The effect of share issuance on per-share performance and whether the current dividend remains supportable.