Myers Industries, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise. The company operates Material Handling and Distribution segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $125.5 | $135.2 | $398.9 | $428.3 |
| Gross profit | $39.6 | $42.1 | $132.1 | $137.2 |
| Gross margin | 31.5% | 31.1% | 33.1% | 32.0% |
| Operating income (loss) | $8.1 | $(25.8) | $28.5 | $(0.7) |
| Net income (loss) | $5.2 | $(21.1) | $18.6 | $(5.7) |
| Diluted EPS | $0.15 | $(0.60) | $0.52 | $(0.17) |
- Sales declined 7% in both comparisons. Material Handling sales fell 14% in Q3 and 11% year to date, primarily on lower volume. Distribution sales rose 10% in Q3 and 5% year to date, including $2.4 million of Tuffy acquisition sales in each period.
- Gross margin improved, primarily from lower commodity costs; the improvement was partly offset by a $3.5 million charge for defective boxes and, year to date, unfavorable product mix.
- Q3 2018 results included $23.0 million for expected losses on Lawn and Garden notes and a $10.3 million lease-guarantee charge. These unusual prior-year charges explain much of the swing to operating and net income in 2019.
- SG&A was $31.5 million in Q3, down 8%, but was 25.1% of sales versus 25.4%. Nine-month SG&A fell 2% to $102.8 million, while rising to 25.8% of sales from 24.4%; current-year costs included environmental expense and restructuring.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $46.8 million, including $39.5 million from continuing operations versus $41.1 million in 2018. The company attributed the continuing-operations decrease mainly to working-capital changes, including higher variable compensation payments.
- Investing cash use was $16.2 million, including $18.0 million paid for Tuffy and $5.7 million of capital expenditures, partly offset by $7.5 million of asset-sale proceeds. Full-year 2019 capital expenditures were expected to be about $10 million.
- Cash increased to $74.8 million from $58.9 million at year-end 2018. Total assets were $357.3 million and shareholders’ equity was $163.8 million at September 30.
- Debt was $77.1 million net of deferred financing costs ($78.0 million face value of notes); the company had no revolving-credit borrowings. It reported $194.2 million available under its $200 million facility, after $5.8 million of letters of credit. Net cash was approximately $2.3 million using reported cash and net debt.
- The company reported compliance with debt covenants: interest coverage of 14.55 against a 3.00 minimum, and leverage of 1.18 against a 3.25 maximum. Nine-month dividends paid were $14.5 million; the declared quarterly dividend was $0.14 per share.
Outlook, management commentary and significant risks
- No quantified company-wide earnings or revenue guidance was provided. Management said operating cash flow and available borrowing capacity should cover expected business needs, including capital expenditures, dividends, debt service and growth.
- The Distribution Transformation Plan was expected to finish by year-end 2019, with annualized benefits of $5–$7 million after 2019. The Ameri-Kart consolidation was expected to be substantially complete in the first half of 2020, with approximately $1.5 million in annualized benefits. Expected plan costs were about $0.9 million for each initiative.
- Tuffy was acquired on August 26 for a preliminary net cost of $18.6 million, funded with cash; purchase accounting remained preliminary. Tuffy’s annual sales were approximately $20 million.
- A manufacturing defect affected certain Material Handling boxes. Estimated replacement costs were $3.5–$4.0 million; $3.5 million was recorded in Q3, with $2.3 million accrued at quarter-end.
- Environmental matters include the New Idria Mine, for which the company had a $6.7 million reserve for investigation and feasibility-study costs. It stated that it had not accrued remediation costs because the final strategy could not yet be estimated. The company provided a $2.0 million letter of credit and said insurance recovery was possible but not recognized. A separate New Almaden reserve was $1.5 million.
- The company remained guarantor of a former Lawn and Garden facility lease through September 2025; the recorded liability was $10.6 million. It also disclosed a patent-infringement lawsuit for which it had recorded no reserve and could not predict the outcome.
- After quarter-end, the CEO resigned effective October 25, 2019. The filing said unvested awards would be forfeited and $2.3 million of previously recognized compensation expense reversed in Q4; no severance was due.
- Management identified exposure to foreign exchange, interest-rate and plastic-resin price changes. There were no floating-rate borrowings or foreign-currency contracts outstanding at September 30; the company had no commodity hedges.
Important facts for investors to verify
- Whether Material Handling demand and sales stabilize after declines in food and beverage, industrial and recreational-vehicle markets.
- Final defective-box replacement costs and whether further product or customer impacts emerge.
- Progress and realized savings from the Distribution and Ameri-Kart restructuring plans, including remaining costs and timing.
- Final Tuffy working-capital adjustment and purchase-price allocation, and the acquired business’s contribution to results.
- Changes in New Idria and New Almaden estimates, potential insurance recoveries, and exposure under the former Lawn and Garden lease guarantee.
- Confirmation of the expected Q4 compensation reversal following the CEO’s departure and any resulting effects on reported SG&A.