Myers Industries, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing is an annual report, not a standalone fourth-quarter report. Myers manufactures polymer products and distributes tire-service equipment and supplies through its Material Handling and Distribution segments. The Lawn and Garden business was sold in February 2015 and is reported as discontinued operations.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $558.1 million | $601.5 million |
| Gross profit / margin | $164.6 million / 29.5% | $178.3 million / 29.6% |
| Operating income | $16.2 million | $30.9 million |
| Income from continuing operations | $1.5 million | $14.1 million |
| Net income | $1.1 million | $17.8 million |
| Diluted EPS | $0.03 | $0.57 |
| Operating cash flow, continuing operations | $33.7 million | $49.4 million |
| Capital expenditures | $12.5 million | $23.7 million |
- Sales fell 7% year over year. Material Handling sales decreased 6% to $387.5 million; Distribution sales decreased 9% to $170.7 million.
- Sales declines reflected lower volume (about $30.7 million), lower indexed pricing ($9.5 million) and unfavorable currency translation (about $3.2 million). Segment pressures included weaker food and beverage demand, lower tire-service equipment and retread sales, and temporary sales territory gaps after a Distribution sales-force initiative.
- Gross margin was nearly flat: lower pricing and volume were largely offset by lower plastic-resin costs. SG&A decreased 6% to $138.6 million, but increased as a share of sales to 24.8% from 24.5%.
- Operating income included $9.9 million of non-cash impairment charges, primarily for Novel in Brazil following a major customer’s announced reduction in near-term capital spending. Income tax expense was $6.5 million; the effective rate was 80.9%, elevated by impairment-related losses in jurisdictions where tax benefits were not recognized.
- Cash from continuing operations declined $15.6 million, primarily due to increased cash used for working capital, including a $27.3 million outflow from accounts payable and accrued expenses. Cash and restricted cash were $16.5 million; working capital was $61.8 million.
- Debt was $189.5 million, net of deferred financing costs, versus $191.9 million a year earlier. The company reported $204.9 million available under its then-existing revolving facility and compliance with debt covenants. Actual leverage ratio was 2.88 against a 3.25 maximum; interest coverage was 8.30 against a 3.00 minimum.
- Dividends were $0.54 per share, unchanged from 2015; cash dividends paid were $16.2 million. No shares were repurchased in 2016.
Material changes, outlook and risks
- Compared with 2015, sales, operating income, continuing-operations income, EPS and operating cash flow all declined. FY2015 results included a $4.7 million after-tax gain on the Lawn and Garden sale; FY2016 discontinued operations recorded a $0.5 million loss.
- In March 2017, the company announced a restructuring plan expected to incur about $10 million of 2017 charges and produce approximately $10 million of annualized savings once completed. Actions were expected to be substantially complete by year-end 2017; actual timing and costs may differ.
- Also in March 2017, Myers replaced its $300 million revolving facility with a $200 million facility extending to March 2022. The company said operating cash flow and borrowing availability should fund expected needs, including capital expenditures, dividends, working capital and debt service.
- Environmental contingencies include a $2.5 million reserve for the New Idria Mercury Mine and a $1.5 million reserve for New Almaden; remediation costs for New Idria were not accrued because they could not be reliably estimated. The company also faces approximately $10 million in asserted Lawn and Garden indemnification claims; $8.6 million of sale proceeds remains in escrow pending resolution. Management disputes the claims.
- Key disclosed risks include volatile resin and rubber costs, competitive and cyclical markets, foreign exchange and Brazil exposure, production interruptions, acquisition and restructuring execution, debt covenant and refinancing risks, product liability, environmental regulation and litigation. A 1% increase in market interest rates was estimated to add about $1.0 million to annual interest expense at year-end debt levels.
- Management reported effective disclosure controls and internal control over financial reporting at year-end. A 2015 material weakness involving inventory valuation controls was addressed through process, review-control and training improvements during 2016. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the 2017 restructuring achieves the stated savings, and the final charges and implementation schedule.
- Trends in segment volume, pricing and margins—particularly Novel’s customer exposure and Distribution’s sales-force recovery.
- Cash conversion and working-capital improvement, given the decline in operating cash flow and large accounts-payable outflow.
- Resolution and possible additional costs of the New Idria and New Almaden matters, and the Lawn and Garden indemnification claims and escrow.
- Debt capacity, covenant headroom and borrowing costs under the replacement $200 million credit facility.