Myers Industries, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Figures are unaudited; dollar amounts are in millions unless noted. Comparatives reflect adjusted segment and discontinued-operations presentation.
Business context
Myers manufactures and distributes plastic products and equipment through its Material Handling and Distribution segments. On July 2, 2014, it acquired Scepter for approximately $157.8 million, expanding its portable fuel, water, marine and storage products. The company sold WEK in June and classified its Lawn and Garden segment as held for sale and discontinued operations; management anticipated completing that segment’s sale by the end of Q2 2015.
Financial results
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales, continuing operations | $162.1 | $141.4 | $465.4 | $440.0 |
| Gross profit | $40.0 | $42.5 | $124.6 | $129.6 |
| Gross margin | 24.7% | 30.1% | 26.8% | 29.5% |
| Operating income (loss) | $(2.7) | $12.3 | $17.5 | $35.0 |
| Continuing-operations income (loss) | $(3.6) | $6.9 | $7.5 | $20.1 |
| Net income (loss), including discontinued operations | $(2.7) | $6.5 | $3.7 | $22.7 |
| Diluted EPS, continuing operations | $(0.11) | $0.20 | $0.23 | $0.59 |
Revenue and margins: Q3 sales rose 14.6%, primarily from $21.6 million of Scepter sales and improved pricing; lower volume and unfavorable currency partially offset growth. Material Handling sales increased 25.0% in Q3, while Distribution sales fell 3.4%. Nine-month sales rose 5.8%. Gross margin declined as resin costs rose, product mix and volume weakened, logistics costs increased, and Scepter’s inventory fair-value step-up added $2.3 million to cost of sales. Polypropylene and polyethylene costs averaged about 6% higher in Q3 and 10% higher for the nine-month period year over year.
Earnings and unusual costs: Q3 SG&A increased 40.9% to $42.6 million, including $6.4 million from Scepter, approximately $3.0 million in acquisition transaction costs, and a $3.0 million reserve for a patent-litigation judgment. Nine-month SG&A rose 13.2% to $107.1 million. Scepter contributed $21.6 million of sales and a $5.2 million operating loss from acquisition date through quarter-end. Q3 net interest expense rose to $2.6 million from $1.1 million. The Q3 continuing-operations tax benefit was $1.7 million; the effective rate was 31.9%.
Cash flow, financial position and liquidity
- Operating cash flow: Continuing operations used $2.8 million in the first nine months, versus providing $29.3 million a year earlier; discontinued operations used $14.1 million, versus providing $17.5 million. Total operating cash flow was negative $16.9 million. Management cited lower earnings and working-capital use, including higher inventory and payment timing.
- Investing and financing: Continuing-operations investing used $168.1 million, including $157.8 million for Scepter; capital expenditures were $10.9 million. Financing provided $174.1 million, including new borrowings, offset in part by $48.3 million of share repurchases and $11.6 million of dividends. Cash ended the period at $8.4 million.
- Debt and liquidity: Long-term debt, net of financing costs, was $276.9 million, versus $44.3 million at year-end 2013; debt net of cash and financing costs was approximately $268.5 million. The revolving facility was increased to $300 million through December 2018, with $117.8 million available after letters of credit at September 30. The company reported compliance with debt covenants: interest coverage of 14.03 versus a 3.00 minimum, and leverage of 2.83 versus a 3.25 maximum.
- Balance sheet: Total assets were $629.9 million and shareholders’ equity was $176.0 million at September 30, compared with $469.5 million and $235.5 million, respectively, at December 31, 2013. Current assets included $140.8 million of assets held for sale.
Outlook, risks and other developments
- Management expected full-year capital expenditures of $20–$25 million, primarily for growth and productivity projects. It said operating cash flow and available borrowing were expected to meet foreseeable business needs; no earnings or revenue guidance was provided.
- The Scepter purchase-price allocation remained preliminary and may be adjusted. The company said integration of Scepter into its systems and control environment was expected to be completed in 2015; ERP implementation was being phased through 2014 and 2015.
- Raw-material and resin price increases, foreign-exchange movements, and floating-rate debt are key exposures. Management estimated that a 1 percentage-point rise in interest rates would add approximately $1.8 million to annual interest expense at period-end debt levels. No interest-rate hedges were in place.
- In the Orbis patent-license litigation, the company recorded the full unpaid $3.1 million judgment despite disputing Buckhorn’s responsibility and pursuing an appeal and claims against other parties. Environmental matters include a $1.9 million reserve for the New Idria mine investigation, of which approximately $0.7 million had been paid; additional remediation costs could not yet be estimated. Management said other watershed cleanup exposure could not be estimated and noted that an unfavorable outcome could be material.
- The Lawn and Garden segment had incurred approximately $14 million in restructuring charges through September 30; its restructuring actions were complete. The segment’s estimated fair value less costs to sell exceeded carrying value at quarter-end, so no impairment was recorded.
Important facts for investors to verify
- Whether Scepter’s operating performance and integration progress improve after the initial reported operating loss and acquisition-related charges.
- Final Scepter purchase accounting, including acquired intangible values, goodwill, and any subsequent measurement-period adjustments.
- Progress and realized proceeds from the planned Lawn and Garden divestiture, and its effect on continuing operations and liquidity.
- Working-capital trends, cash conversion, debt levels, covenant headroom, and capacity under the revolving facility.
- Developments in the Orbis litigation appeal and the scope and cost of environmental investigations or remediation.