Myers Industries, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and results
Myers operates Material Handling, which manufactures reusable plastic products and containers, and Distribution, which sells tire-service and automotive repair equipment and supplies. Q3 growth came from Material Handling; Distribution sales declined. Nine-month consolidated sales were essentially unchanged from 2016.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $144.1 | $132.7 | $428.1 | $428.0 |
| Gross profit | $40.7 | $35.9 | $122.0 | $128.6 |
| Gross margin | 28.3% | 27.1% | 28.5% | 30.1% |
| Operating income | $7.1 | $3.0 | $20.0 | $15.3 |
| Net income | $3.3 | $0.4 | $8.4 | $2.5 |
| Diluted EPS | $0.11 | $0.01 | $0.28 | $0.08 |
| Net interest expense | $1.8 | $2.0 | $5.5 | $6.1 |
Financial position, cash flow and debt
- At September 30, cash was $4.5 million and restricted cash was $8.7 million. Current assets were $153.3 million and current liabilities $98.3 million.
- Debt was $159.8 million before $1.8 million of unamortized financing costs ($158.0 million net), down from $190.7 million gross at December 31, 2016. The company reported $135.8 million available under its $200 million revolving facility, with $4.4 million of letters of credit outstanding.
- Debt covenant compliance was reported. Actual interest coverage was 7.03 against a 3.00 minimum; leverage was 2.58 against a 3.50 maximum.
- Nine-month operating cash flow was $36.1 million, versus $18.6 million in 2016. Management attributed the improvement to working capital, particularly the year-over-year swing in accounts payable and accrued expenses. Accounts receivable used $12.8 million of cash.
- Investing activities provided $2.9 million, including $8.1 million in asset-sale proceeds; capital expenditures were $5.1 million. Financing activities used $42.4 million, including $31.4 million of net credit-facility repayments and $12.2 million of dividends paid.
Material changes and management commentary
- Q3 sales rose 9%, driven by higher volume ($9.5 million), pricing ($1.2 million), and favorable currency translation ($0.7 million). Material Handling sales increased 16%, while Distribution sales fell 7%.
- For the first nine months, Material Handling sales grew 4% and Distribution sales declined 8%; total sales were flat. Management cited lower Distribution volume across product lines and regions.
- Q3 gross margin improved year over year on mix and pricing, partly offset by restructuring costs and higher raw-material costs. Nine-month gross margin declined, reflecting higher raw-material costs, operating inefficiencies, and $7.0 million of restructuring charges.
- Q3 SG&A rose 12%, with management citing $3.9 million of higher incentive compensation. Nine-month SG&A rose 2%, primarily due to higher severance, compensation and benefits, and legal and professional fees.
- The Material Handling restructuring plan incurred $7.1 million of charges through September, with approximately $0.8 million of additional plan costs expected in the remainder of 2017. The company reported $4.1 million of year-to-date asset-disposal gains related to the Bluffton facility closure. Management expected the plan to be substantially complete by year-end and forecast approximately $10 million in annual savings, with some savings beginning in Q3.
Outlook, risks and unusual items
- Management expected 2017 capital expenditures of approximately $7–$9 million and believed operating cash flow plus borrowing availability would cover anticipated business needs, capital spending, dividends, working capital and debt service.
- In October 2017, a noteholder tendered $22 million of senior unsecured notes; the company repurchased them on October 31 and recorded a roughly $1.9 million debt-extinguishment loss in Q4.
- Interest-rate sensitivity: a 1% increase in market rates was estimated to raise annual interest expense by approximately $0.6 million. The company had no interest-rate hedges and no foreign-currency contracts outstanding at quarter-end; it also had no derivative hedges for plastic-resin commodity exposure.
- Environmental reserves included $2.7 million for the New Idria mine and $1.5 million for the New Almaden mine. Field work for both projects was expected to begin in 2018; estimates may change as information develops.
- A buyer of the former Lawn and Garden business asserted indemnification claims of approximately $10 million. Approximately $8.6 million of sale proceeds remained in escrow pending resolution. The company considered the claims without merit but disclosed that an unfavorable outcome could materially affect results or financial position.
- Other items include a $0.5 million impairment charge for a Scarborough, Ontario building held for sale, and a $0.4 million Q3 LIFO reserve adjustment for higher commodity costs. The company stated its disclosure controls were effective at September 30, 2017.
Important facts for investors to verify
- Whether the restructuring achieves the forecast $10 million of annual savings, and whether remaining actions and costs are completed as planned.
- Whether Distribution sales and volume stabilize, and whether Material Handling growth and margins are sustained despite raw-material costs and operating inefficiencies.
- Working-capital cash-flow trends, particularly receivables and payables, and the sustainability of operating cash generation.
- Debt levels, borrowing rates, covenant headroom, and the effect of the $22 million note repurchase and Q4 extinguishment loss.
- Developments in the environmental matters and Lawn and Garden indemnification claims, including reserve adequacy and escrow resolution.