Myers Industries, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The unaudited filing was signed May 2, 2016. Myers operates Material Handling and Distribution segments; its Lawn and Garden business was sold in February 2015.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $151.2 million | $156.3 million |
| Gross profit / margin | $48.2 million / 31.9% | $45.8 million / 29.3% |
| Operating income | $1.1 million | $6.7 million |
| Continuing operations, net | Loss of $3.3 million | Income of $2.6 million |
| Net income (loss) | Loss of $3.4 million | Income of $5.2 million |
| Diluted EPS | $(0.11) | $0.16 |
| Operating cash flow | $(11.3) million | $(27.7) million |
| Capital expenditures | $7.1 million | $4.7 million |
Sales fell 3%, reflecting $3.5 million of lower pricing and $3.2 million of unfavorable foreign currency translation, partly offset by about $1.6 million of higher volume. Material Handling sales declined 3% to $109.0 million; Distribution sales declined 4% to $42.2 million. Gross margin improved mainly because of lower plastic resin costs and higher Material Handling volume, partly offset by pricing pressure.
An estimated, non-cash $8.5 million impairment charge related to the Novel reporting unit in Brazil included $5.7 million of goodwill impairment. Operating income also reflected lower segment results: Material Handling operating income was $7.4 million versus $13.4 million, and Distribution was $2.5 million versus $3.5 million. The impairment analysis was preliminary and expected to be finalized in Q2; the charge could change.
Income tax expense was $2.4 million despite a $0.9 million pretax loss. Management attributed the unusual effective tax rate mainly to losses in jurisdictions where tax benefits were not currently recognized, including Brazil impairment charges. Q1 2015 included $2.6 million of income from discontinued operations, including a $3.8 million after-tax gain on the Lawn and Garden sale; Q1 2016 discontinued operations recorded a $57,000 loss.
Cash, debt and liquidity
- Cash was $5.6 million and restricted cash $8.6 million at March 31, 2016. Operating cash use from continuing operations was $11.3 million; working-capital outflows included $6.8 million from receivables, $4.8 million from inventory and $13.7 million from accounts payable and accrued expenses.
- Total debt, net of deferred financing costs, was $218.5 million, up from $191.9 million at December 31, 2015. The company had $175.7 million available under its $300 million revolving facility, net of letters of credit.
- Myers reported compliance with debt covenants: interest coverage was 8.02 versus a 3.00 minimum, and leverage was 2.78 versus a 3.25 maximum.
- Cash dividends paid were $4.1 million; dividends declared were $0.14 per share. The company made no share repurchases in Q1.
Outlook, risks and other matters
- No full-year revenue or earnings guidance was provided. Management expected 2016 capital expenditures of approximately $17 million to $22 million, primarily for growth and productivity projects, and said operating cash flow plus available borrowing should fund expected business needs into the foreseeable future.
- A significant customer’s announced near-term capital-spending reduction drove lower Novel forecasts and the impairment review. Management cited continued exposure to resin-cost increases, economic conditions, foreign exchange and floating-rate debt; a 1% rise in market rates was estimated to increase annual interest expense by about $1.2 million.
- Environmental matters include the New Idria Mercury Mine: the company had $1.9 million accrued for investigation/feasibility work and past EPA costs, but had not accrued remediation costs because they could not be estimated. A Guadalupe River project estimate rose from $1.6 million to a preliminary $3.3 million–$4.4 million; the company could not estimate any additional liability beyond its $0.5 million accrual.
- In a separate patent-related dispute, a counterclaim sought $1.5 million plus unspecified interest and attorneys’ fees; the company said it believed it had sound defenses. Management cautioned that unfavorable rulings in legal matters could materially affect results in the period of a ruling.
- Disclosure controls were deemed ineffective because of a material weakness in Material Handling inventory valuation controls, including review of the LIFO reserve and capitalization of variances. Management was implementing remediation and expected completion before year-end 2016; remediation was not yet complete.
Most important facts for investors to verify
- Final Novel impairment measurement and subsequent customer demand and forecast assumptions.
- Whether inventory-control remediation is completed and tested by the stated year-end target.
- Updated cost estimates and potential exposure for the environmental matters, especially Guadalupe River and New Idria.
- Debt, covenant headroom, cash generation and the effect of interest-rate or resin-cost changes.
- Whether the $17 million–$22 million capital-spending expectation and dividend remain supportable as operating conditions develop.