Business context and reporting period
Myers Industries, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2018. The company operates Material Handling and Distribution businesses. Results exclude the Brazil businesses, sold in December 2017, which are presented as discontinued operations.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $152.6 million | $136.6 million |
| Gross profit / margin | $47.1 million / 30.9% | $41.8 million / 30.6% |
| Operating income | $12.0 million | $8.1 million |
| Continuing-operations income | $7.8 million | $3.5 million |
| Net income, including discontinued operations | $6.8 million | $3.1 million |
| Diluted EPS | $0.22 | $0.10 |
| Operating cash flow, continuing operations | $12.8 million | $13.3 million |
SG&A was $35.5 million, or 23.3% of sales, versus $34.5 million, or 25.3%. Net interest expense was $1.6 million, down from $2.1 million. The effective tax rate fell to 25.3% from 42.2%, primarily reflecting the U.S. corporate tax-rate reduction under the Tax Act.
Liquidity, debt and cash flow
At March 31, 2018, cash was $3.0 million and restricted cash was $8.7 million. Current assets were $151.2 million and current liabilities $96.6 million. Debt was $145.9 million before $1.5 million of deferred financing costs ($144.4 million reported net), down from $152.6 million gross at December 31, 2017. The company had $127.7 million available under its $200 million revolving facility, net of letters of credit, and reported compliance with debt covenants. Its interest coverage ratio was 8.19 against a 3.00 minimum; leverage was 2.24 against a 3.25 maximum.
Cash provided by operating activities was $10.8 million including discontinued operations, versus $13.1 million a year earlier. Continuing-operations investing activities provided $1.1 million, including proceeds from asset sales; capital expenditures were $1.2 million. Financing activities used $10.8 million, including $6.7 million of net credit-facility repayments and $4.2 million of dividends. Cash, cash equivalents and restricted cash totaled $11.7 million at quarter-end.
Changes and management commentary
- Sales rose 12%, driven by approximately $11.3 million of volume growth, $4.3 million of higher pricing and $0.4 million of favorable currency effects. Material Handling sales rose 19% to $116.8 million; Distribution sales fell 7% to $35.8 million.
- Material Handling growth was led in part by food and beverage demand. Distribution weakness reflected salesforce turnover and coverage gaps, as well as the exit of a low-margin customer product line.
- Gross margin improved 0.3 percentage point, supported by pricing and restructuring savings, partly offset by unfavorable mix and higher raw-material costs. SG&A increased mainly due to compensation and freight costs.
- The Material Handling restructuring plan was substantially complete. Management expected approximately $10 million in annual savings, including $8 million in 2018. Full-year 2018 capital expenditures were expected to be approximately $10–$12 million. Management stated operating cash flow and available borrowing should meet expected business needs, including dividends and debt service.
Outlook, risks and unusual items
- The quarter included a $0.7 million gain from a Pomona, California distribution-center sale-leaseback; the remaining $1.3 million gain is to be recognized over the ten-year lease. The transaction generated $2.3 million of net proceeds.
- An agreement on material settlement terms for a Lawn and Garden sale indemnification dispute resulted in a $1.225 million pretax discontinued-operations charge. The company expected the remaining $7.4 million of escrow funds to be released in Q2 2018 after settlement and release of further obligations.
- Environmental reserves totaled $3.6 million for the New Idria Mine and $1.5 million for New Almaden. New Idria remediation costs were not accrued because the final remediation strategy and liability could not be estimated; the company expected to provide $2 million of financial assurance after executing the proposed EPA order. Reserves may require adjustment as matters develop.
- The company guaranteed up to $7 million under the Brazil buyer’s factoring arrangement through December 31, 2019; it recorded no liability, assessing the guarantee’s fair value as immaterial. A first lien on certain equipment applies upon default.
- A 1% increase in market interest rates was estimated to increase annual interest expense by about $0.7 million. The company had no interest-rate hedges and no foreign-currency contracts in place at quarter-end. Higher plastic-resin costs or adverse economic conditions could materially affect results.
Important facts for investors to verify
- Whether Material Handling growth and the planned restructuring savings are sustained, and whether higher input costs pressure margins.
- Whether Distribution sales recover after salesforce turnover and territory coverage issues.
- The timing and final terms of the Lawn and Garden settlement and escrow release.
- Developments in EPA negotiations, environmental cost estimates and the Brazil guarantee exposure.
- Debt covenant headroom, floating-rate exposure, and the company’s ability to fund planned capital spending and dividends from cash generation.