Business context and reporting period
Myers Industries, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The company manufactures polymer products and distributes tire-service equipment, tools, and supplies. Its two continuing segments are Material Handling and Distribution. The Brazil business, sold in December 2017, and the Lawn and Garden business, sold in 2015, are reported as discontinued operations.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $566.7 million | $547.0 million |
| Gross profit / margin | $179.3 million / 31.6% | $157.5 million / 28.8% |
| Operating income | $6.3 million | $24.9 million |
| Continuing operations income (loss) | $(1.6) million | $10.8 million |
| Net income (loss) | $(3.3) million | $(9.9) million |
| Continuing-operations operating cash flow | $60.4 million | $49.1 million |
| Cash and working capital at year-end | $58.9 million / $85.4 million | $2.5 million cash / $51.4 million working capital |
| Long-term debt, net of financing costs | $76.8 million | $151.0 million |
Sales rose 4%; Material Handling sales increased 7% to $417.2 million, while Distribution sales declined 4% to $149.6 million. Higher pricing contributed $17.2 million to sales growth. Capital expenditures were $5.1 million, and dividends paid were $17.9 million; the declared dividend remained $0.54 per share.
Cash from operations improved year over year. The company raised $79.5 million net through a May 2018 common-stock offering and used part of the proceeds to repay debt. At year-end, it had no borrowings under its $200 million revolving credit facility and reported $195.6 million available, before a further $2 million letter of credit issued in January 2019. The company reported compliance with debt covenants; its actual interest coverage ratio was 11.60 against a 3.00 minimum, and leverage was 1.15 against a 3.25 maximum.
Material changes versus the prior period
- Gross margin increased 2.8 percentage points, reflecting higher pricing and restructuring savings, partly offset by higher raw-material costs and unfavorable sales mix.
- Operating income fell substantially despite higher sales and gross profit. Results included $33.3 million of 2018 other expenses: a $23.0 million provision for expected loss on notes and accrued interest related to the former Lawn and Garden business, and a $10.3 million charge for a lease guarantee related to that business.
- Net interest expense decreased to $4.9 million from $7.3 million, principally due to lower average borrowings. The 2017 comparison included a $1.9 million loss on debt extinguishment.
- The effective tax rate on continuing operations was 218.7%, versus 31.0% in 2017, largely because the large 2018 charges received a lower tax benefit than other pretax earnings, with additional effects from nondeductible expenses and tax positions.
- Quarterly results were volatile: third-quarter 2018 continuing-operations loss was $21.1 million, followed by fourth-quarter continuing-operations income of $3.1 million. Fourth-quarter net income was $2.3 million.
Outlook, risks, contingencies and unusual items
The filing provides no quantified earnings or sales guidance. Management stated that cash from operations and available borrowing were expected to meet business needs, including capital expenditures, dividends, debt service, working capital, and growth. It described growth priorities including new products, niche-market expansion, productivity improvements, and selective acquisitions.
- Former Lawn and Garden business: The company recorded a $23.0 million expected-loss provision on notes and accrued interest after HC requested a maturity extension while restructuring its debt. It also recorded a $10.3 million charge for a lease guarantee; the year-end liability was $10.4 million. These estimates and recovery prospects warrant attention.
- Environmental matters: Year-end reserves included $3.4 million for the New Idria mine and $1.5 million for New Almaden. The ultimate New Idria remediation cost was not estimable and was not accrued; the required investigation and feasibility study was expected to take about three years. A $2 million letter of credit and $0.2 million EPA oversight prepayment were provided in January 2019.
- Litigation and guarantees: Scepter faced a patent, contract, and trade-dress lawsuit concerning gasoline containers; no reserve was recorded and the outcome could not be assessed. The company also guaranteed up to $7 million under a Brazil-business factoring arrangement through December 31, 2019, with no liability recorded.
- Operating risks: The company cited exposure to resin and rubber price increases, competition, economic cyclicality, manufacturing interruptions, foreign currency movements, cybersecurity, product liability, and environmental or plastics regulation. Raw-material price changes may not be fully offset by pricing.
- Other notable items: The Material Handling restructuring plan was completed. The company issued 4.6 million shares in its public offering. A Wadsworth, Ohio distribution center was sold in March 2019 for approximately $4.5 million.
Important facts for investors to verify
- Review the recoverability, timing, and accounting assumptions for the former Lawn and Garden notes and the $10.4 million lease-guarantee liability.
- Track the New Idria RI/FS, potential remediation exposure beyond recorded reserves, and developments in the New Almaden project.
- Monitor the Scepter patent litigation and the Brazil factoring guarantee through its expiration.
- Assess whether Material Handling growth and pricing can offset Distribution’s volume decline and higher input costs.
- Consider the 2018 share issuance and continuing $0.54 annual dividend alongside future cash needs and debt obligations.
The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also reported effective disclosure controls and internal control over financial reporting as of December 31, 2018.