Myers Industries, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone Q4 filing; quarterly figures are noted separately. Myers manufactures polymer and rubber products and distributes tire-service equipment and supplies. Continuing operations comprised Material Handling and Distribution; Lawn and Garden was sold in February 2015 and reported as discontinued operations.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $601.5 million | $623.6 million |
| Gross profit / margin | $178.3 million / 29.6% | $161.3 million / 25.9% |
| Operating income | $30.9 million | $22.6 million |
| Continuing-operations income | $14.1 million; $0.45 diluted EPS | $9.0 million; $0.27 diluted EPS |
| Net income (loss), including discontinued operations | $17.8 million; $0.57 diluted EPS | $(8.7) million; $(0.27) diluted EPS |
| Operating cash flow, continuing operations | $49.4 million | $51.8 million |
| Capital expenditures | $23.7 million | $24.2 million |
| Year-end debt, net of financing costs | $193.0 million | $236.4 million |
| Year-end current assets / liabilities | $154.3 million / $116.8 million | $285.4 million / $153.8 million |
Gross margin was 29.6%; operating margin was approximately 5.1%. Year-end cash was $7.3 million, with a further $8.6 million classified as restricted cash. The company had $202.2 million available under its $300 million revolving facility. Debt covenant ratios were compliant: interest coverage of 7.52 against a 3.00 minimum and leverage of 2.55 against a 3.25 maximum. The annual dividend declared was $0.54 per share.
In Q4 2015, sales were $139.2 million, gross profit was $40.3 million, continuing-operations loss was $0.1 million, and net income was $0.8 million.
Material changes versus FY 2014
- Sales declined $22.1 million, or 4%. Scepter contributed $52.8 million of incremental sales, but excluding Scepter, volumes fell about $51.2 million; unfavorable currency translation reduced sales by $18.4 million and lower pricing by $5.3 million.
- Material Handling sales fell 4%, largely reflecting agricultural-market weakness; Distribution sales fell 2%, including the effect of Canadian branch closures and weaker demand in some markets.
- Gross margin improved from 25.9% to 29.6%, mainly due to Scepter’s contribution and lower plastic-resin input costs, partly offset by lower volumes and unfavorable product mix.
- Continuing-operations income rose to $14.1 million from $9.0 million. FY 2015 included reversal of a $3.0 million Orbis litigation accrual; FY 2014 included Scepter acquisition costs and a $2.3 million inventory fair-value charge.
- Net income improved from a loss in 2014, principally because 2014 discontinued operations included an $18.9 million Lawn and Garden impairment. The 2015 discontinued-operations result included a $4.7 million after-tax gain on the Lawn and Garden sale.
- Continuing-operations operating cash flow decreased to $49.4 million, partly due to a $13.1 million cash use from accounts payable and accrued expenses. Debt fell by $43.4 million, with sale proceeds used in part for repayment. The company repurchased $30.0 million of shares in 2015.
Outlook, commentary, risks and unusual items
- The filing gives no numerical earnings or sales guidance. Management says operating cash flow and available borrowing are expected to cover foreseeable business needs, including capital spending, dividends, working capital, debt service and the share-repurchase program.
- Management’s strategy emphasizes profitable growth, product innovation, operational efficiency, customer relationships and selective acquisitions or divestitures. The filing identifies agricultural-market weakness, Brazil’s prolonged downturn, foreign-exchange movements, competition, and resin and other raw-material costs as risks.
- The EPA identified Buckhorn as a potentially responsible party concerning the New Idria Mercury Mine. The company reported a $2.0 million accrued balance at year-end, including a $1.3 million additional 2015 reserve, but has not accrued for remediation because the ultimate scope and cost cannot yet be estimated.
- The Federal Circuit reversed the Orbis judgment against Buckhorn; the company reversed its $3.0 million accrual in 2015. Buckhorn’s separate litigation against SAS and SASS B.V. remained pending, and recovery was uncertain.
- Ernst & Young issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Management and the auditor identified a material weakness in Material Handling inventory valuation controls; management planned further remediation during 2016. Disclosure controls were also deemed ineffective.
- Two goodwill reporting units, Novel and Jamco, had estimated fair values only about 10% and 20% above carrying value, respectively; no impairment was recorded, but future impairment is a risk.
- The CEO was appointed in December 2015. International sales were approximately 17% of continuing-operations sales, and the company reported a $27.6 million foreign-currency translation loss in other comprehensive income.
Important facts for investors to verify
- Whether the inventory-control material weakness was remediated and whether inventory valuation adjustments affect subsequent reported results.
- Developments in the EPA matter, including the eventual remediation plan, potential total exposure and adequacy of the $2.0 million accrual.
- Progress in Material Handling volumes and margins, particularly agricultural demand, Brazil, and the Novel and Jamco reporting units.
- Cash collection and credit quality of the $20 million Lawn and Garden promissory notes, plus settlement of the working-capital adjustment due to the buyer.
- Debt reduction, interest-rate exposure and capital allocation. The filing estimates a 1 percentage-point rate increase would add approximately $0.9 million in annual interest expense.