Myers Industries, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited. Myers operates Material Handling and Distribution segments. The Lawn and Garden business was sold in February 2015 and is reported as discontinued operations.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $144.1 million | $164.3 million | $295.3 million | $320.7 million |
| Gross profit | $44.5 million | $50.6 million | $92.7 million | $96.3 million |
| Gross margin | 30.9% | 30.8% | 31.4% | 30.0% |
| Operating income | $11.2 million | $19.7 million | $12.3 million | $26.5 million |
| Net income | $5.5 million | $11.4 million | $2.1 million | $16.7 million |
| Diluted EPS | $0.18 | $0.37 | $0.07 | $0.53 |
| Net interest expense | $2.1 million | $2.5 million | $4.1 million | $5.2 million |
First-half operating cash flow was a use of $3.1 million, while capital expenditures were $10.6 million. Cash was $6.5 million at June 30, plus $8.6 million of restricted cash. Debt was $217.4 million, net of deferred financing costs, up from $191.9 million at year-end 2015. The company had $176.9 million available under its $300 million revolving facility, after accounting for letters of credit, and reported compliance with debt covenants. Actual interest coverage was 7.57 against a 3.00 minimum; leverage was 2.94 against a 3.25 maximum.
Changes and drivers
- Sales fell 12% in Q2 and 8% in the first half. Management attributed declines to lower volumes, lower indexed pricing, and unfavorable foreign-currency translation. Material Handling was affected particularly by weaker agricultural and food-and-beverage demand; Distribution cited lower equipment sales and its new sales model.
- Despite lower sales, gross margin improved year over year, primarily because of lower plastic-resin input costs. SG&A rose to 23.9% of first-half sales from 21.8%, while operating income declined materially.
- First-half results included $9.9 million of non-cash impairment charges, principally for the Novel reporting unit in Brazil after a major customer reduced planned capital spending; Q2 also included $1.3 million of impairment related mainly to a non-strategic product line. The first-half effective tax rate was 71.4%, with management citing losses in jurisdictions where tax benefits were not recognized, including Brazil.
- First-half discontinued-operations results were a $0.2 million loss versus $3.1 million income in 2015, which included a gain on the Lawn and Garden sale. The company paid approximately $4.0 million in a sale-related working-capital adjustment in Q1 2016.
Outlook, risks, and unusual items
- Management expected full-year capital expenditures of approximately $15–18 million, mostly for growth and productivity projects. It believed operating cash flow and borrowing availability would meet foreseeable needs, including capital spending, dividends, working capital, and debt service. No revenue or earnings guidance is provided in the filing.
- Environmental matters resulted in Q2 expense of $1.6 million. Accruals were $2.7 million for New Idria and $1.1 million for New Almaden. The company had not accrued New Idria remediation costs because the remediation strategy and liability could not yet be estimated; it noted that estimates may change.
- Claims related to the Lawn and Garden sale allege approximately $10 million of losses. Myers disputes the claims; approximately $8.6 million of sale proceeds held in escrow will remain there until the claims are resolved.
- Disclosure controls and procedures were deemed ineffective at June 30 because of a material weakness in Material Handling inventory valuation controls, including review of LIFO reserves and capitalization of variances. Remediation was underway; management expected completion before December 31, 2016, subject to successful operation and testing of controls.
- Floating-rate debt is unhedged; management estimated a one-percentage-point rate increase would add about $1.2 million to annual interest expense. The company also cited foreign-exchange and plastic-resin cost exposure.
Most important facts to verify
- Whether sales and operating performance stabilize in both segments, and whether the new Distribution sales model improves results.
- Novel’s customer outlook, impairment assumptions, and the potential for further asset impairments.
- Cash generation, rising borrowings, revolver availability, covenant headroom, and the company’s ability to sustain dividends and planned capital spending.
- Changes to environmental reserves and the eventual cost of New Idria remediation and New Almaden work.
- Resolution and timing of the Lawn and Garden indemnification claims and release of the escrowed proceeds.
- Whether inventory-control remediation is completed and the material weakness is effectively resolved.