Myers Industries, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated results. The company reports Material Handling and Distribution segments.
Financial performance
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2014 period.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales, continuing operations | $164.3 | $152.8 | $320.7 | $303.3 |
| Gross profit | $50.6 | $42.5 | $96.3 | $84.6 |
| Gross margin | 30.8% | 27.8% | 30.0% | 27.9% |
| Operating income | $19.7 | $11.3 | $26.5 | $20.2 |
| Income from continuing operations | $10.9 | $6.3 | $13.5 | $11.1 |
| Net income, including discontinued operations | $11.4 | $5.7 | $16.7 | $6.4 |
| Diluted EPS, continuing operations | $0.35 | $0.19 | $0.43 | $0.33 |
| Diluted EPS, total | $0.37 | $0.17 | $0.53 | $0.19 |
- Sales drivers: Q2 sales rose 7.6%, including $28.6 million from Scepter, acquired in July 2014. The increase was partly offset by lower volumes of about $12.2 million, unfavorable pricing of $0.9 million, and foreign currency effects of $4.0 million. For the first half, Scepter added $52.8 million; lower volumes of about $31.2 million and unfavorable currency effects of $5.9 million offset part of the increase.
- Segment trends: Q2 Material Handling sales increased 12.4% to $115.8 million, substantially reflecting Scepter; excluding Scepter, sales were pressured by weaker agricultural, industrial, recreational vehicle, and marine markets. Distribution sales decreased 2.4% to $48.6 million. First-half segment sales were $228.1 million for Material Handling and $92.7 million for Distribution.
- Profitability: Gross margin improved primarily from Scepter, partly offset by lower volume, unfavorable pricing in Q2, and product mix. Q2 SG&A declined 1.3% to $30.8 million, partly due to reversal of a $3.0 million Orbis legal reserve. First-half SG&A rose 8.5% to $69.9 million, including Scepter costs.
- Cash flow: First-half operating cash flow was negative $14.6 million, versus negative $21.0 million in 2014; continuing operations used $3.0 million. Working capital was a major use of cash. Investing activities provided $59.9 million, including $69.8 million of proceeds from the Lawn and Garden sale; capital expenditures were $9.4 million. Financing activities used $45.7 million, including $31.5 million of net credit-facility repayments, $8.4 million of dividends, and $6.6 million of share repurchases. Cash ended at $3.9 million, down from $4.7 million at year-end.
- Debt and liquidity: Debt, net of deferred financing fees, was $201.4 million at June 30, down from $236.4 million at December 31, 2014. The company reported $193.7 million available under its $300 million revolving facility, with $4.3 million of letters of credit. It was in compliance with debt covenants; actual interest coverage was 7.41 versus a 3.00 minimum, and leverage was 2.62 versus a 3.25 maximum.
- Other balance-sheet items: Total assets were $466.3 million versus $564.8 million at year-end, primarily reflecting the Lawn and Garden disposal. Shareholders’ equity was $129.9 million. First-half foreign currency translation reduced comprehensive income by $20.9 million.
Material changes and significant items
- The company sold its Lawn and Garden business on February 17, 2015 for $110 million, subject to working-capital adjustments: $90 million cash, $20 million in five-year notes bearing 6% interest, and amounts held in escrow. The notes’ fair value was $17.9 million at June 30. A $3.8 million after-tax gain was recorded in first-half discontinued operations.
- Discontinued operations generated $0.5 million of Q2 income and $3.1 million of first-half income, compared with a Q2 loss of $0.6 million and first-half loss of $4.7 million in 2014. The 2014 period included Lawn and Garden restructuring-related losses.
- The July 2, 2015 appellate reversal of the Orbis judgment removed Buckhorn’s liability; the company reversed its $3.0 million reserve in Q2. Orbis sought rehearing, and the outcome remained subject to further proceedings.
- Interest expense increased to $2.5 million in Q2 and $5.2 million in the first half, principally due to higher average debt following the Scepter acquisition. Q2 average borrowing rate was 4.61% versus 4.05%.
Outlook, risks, and controls
- Management expected full-year capital expenditures of approximately $30 million, largely for growth and productivity projects, and believed operating cash flow plus available borrowing would fund expected needs into the foreseeable future. No earnings or revenue guidance was provided.
- Management cited weakness in agricultural, industrial, recreational vehicle, and marine end markets; foreign exchange exposure; and potential increases in plastic resin and other input costs. A 1% rise in market interest rates was estimated to increase annual interest expense by about $1.1 million. The company had no interest-rate hedges and no foreign-currency contracts in place at June 30.
- Environmental contingencies include potential responsibility relating to the New Idria Mercury Mine; further remediation costs were not estimable. A possible claim concerning the Guadalupe River Watershed was also not estimable. The company had a $1.9 million New Idria reserve, of which approximately $0.9 million had been paid.
- Disclosure controls were deemed ineffective as of June 30 because of two material weaknesses in Brazilian operations: inventory controls and the financial statement close process, including management oversight. Management planned remediation during 2015.
Most important facts for investors to verify
- Whether underlying Material Handling demand and volume trends improve, separate from Scepter’s contribution.
- Cash conversion and working-capital needs, given negative first-half operating cash flow and low ending cash.
- Debt reduction, covenant headroom, and interest-rate exposure as the company funds capital spending and shareholder returns.
- Final outcomes and potential financial exposure from the Orbis rehearing and environmental matters.
- Progress in remediating Brazilian internal-control material weaknesses and the effect of the Lawn and Garden sale notes and escrow balances.