Myers Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018. Unless noted otherwise, amounts are in U.S. dollars; financial amounts below are in millions. The company operates Material Handling and Distribution segments. Brazil operations are presented as discontinued operations following their 2017 sale.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $135.2 | $135.1 | $428.3 | $406.9 |
| Gross profit / margin | $42.1 / 31.1% | $39.1 / 29.0% | $137.2 / 32.0% | $119.2 / 29.3% |
| Operating income (loss) | $(25.8) | $6.8 | $(0.7) | $20.9 |
| Net income (loss) | $(21.1) | $3.3 | $(5.7) | $8.4 |
| Diluted EPS | $(0.60) | $0.11 | $(0.17) | $0.28 |
- Sales and segments: Q3 sales were essentially flat. Material Handling sales rose 3% to $97.7 million, while Distribution declined 6% to $37.6 million. For the first nine months, Material Handling grew 10% to $317.6 million and Distribution fell 6% to $110.8 million.
- Margins and costs: Management attributed the higher gross margin primarily to pricing and restructuring savings, partly offset by higher raw-material costs and operating inefficiencies. Nine-month SG&A increased 3% to $104.4 million; it was 24.4% of sales, down from 25.0%.
- Cash flow: Nine-month cash from operating activities was $42.0 million, including $41.1 million from continuing operations, versus $36.1 million and $40.3 million, respectively, in 2017. Capital expenditures were $3.6 million. Cash and cash equivalents were $46.5 million at September 30, versus $2.5 million at year-end 2017; the cash-flow statement reports $11.2 million of beginning cash, cash equivalents and restricted cash.
- Debt and liquidity: Debt was $76.7 million, net of financing costs, versus $151.0 million at December 31, 2017. The company had no revolving-credit borrowings and reported $195.6 million available under its $200 million facility, after $4.4 million of letters of credit. It reported compliance with debt covenants; interest coverage was 10.41 against a 3.00 minimum and leverage was 1.17 against a 3.25 maximum.
- Equity and dividends: A May public offering of 4.6 million shares generated $79.5 million net proceeds, a portion of which repaid debt. Dividends declared were $0.14 per share in Q3 and $0.41 per share for the nine months.
Material changes and unusual items
- Q3 included $33.3 million of other expenses: a $23.0 million provision for expected losses on notes and accrued interest due from HC Companies, the buyer of the former Lawn and Garden business, and a $10.3 million charge for the company’s estimated obligation under an HC facility lease guarantee. These items drove the operating loss despite improved gross profit.
- The company’s notes receivable from HC had a carrying value of $19.1 million at quarter-end. HC requested an extension of the notes’ maturity while seeking to restructure its debt; Myers cited uncertainty about collection. The filing records the $23.0 million provision in continuing operations.
- The lease guarantee relates to a facility lease expiring in September 2025, with current annual rent of about $2 million and CPI increases. The recorded $10.3 million liability is an estimate of potential obligations, not a stated maximum exposure.
- The 2017 Material Handling restructuring plan was substantially complete. The company expected approximately $10 million in annual savings, including $8 million in 2018. It reported no restructuring costs in Q3 2018, compared with $2.1 million in Q3 2017.
- Nine-month results also include a $0.9 million after-tax discontinued-operations loss, including a settlement charge relating to the Lawn and Garden sale. In May, $7.4 million remaining in escrow from that sale was released to the company.
Outlook, risks and contingencies
- Management said operating cash flows and available credit were expected to meet business requirements, including capital expenditures, dividends, working capital, debt service and growth. It expected full-year 2018 capital expenditures of approximately $6–$8 million and cited selective acquisitions as a possible use of remaining offering proceeds. No revenue or earnings guidance was provided.
- Key operating risks include resin and other raw-material price increases, adverse economic conditions, foreign-currency movements, and weaker demand in certain markets. Q3 weakness included recreational vehicles in Material Handling and equipment and international sales in Distribution.
- Environmental matters include a $3.4 million reserve for the New Idria Mine and a $1.5 million reserve for New Almaden. The company anticipated providing $2 million of financial assurance for the New Idria investigation after the consent order is executed; ultimate remediation costs remain uncertain.
- The company reported effective disclosure controls as of September 30, 2018 and no material change in internal control over financial reporting during the period. It stated that it was in compliance with debt covenants.
Important facts for investors to verify
- Whether HC can repay the notes and accrued interest, and how the recorded provision compares with eventual recoveries.
- The potential duration and ultimate cost of the HC lease guarantee, including whether HC’s debt restructuring changes the risk.
- Whether the expected restructuring savings are being realized and whether higher resin costs or market weakness are pressuring margins.
- Whether environmental reserves and the planned New Idria financial assurance will need adjustment as investigation and remediation work proceeds.
- How management allocates remaining public-offering proceeds while maintaining liquidity, debt-covenant compliance and the dividend.