Myers Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months ended September 30, 2016. Financial statements are unaudited. Unless stated otherwise, amounts are in millions of dollars.
Business context and financial results
Myers operates Material Handling, which manufactures reusable plastic products and containers, and Distribution, which sells tire-service and automotive-undervehicle repair equipment and supplies. The Lawn and Garden business was sold in February 2015 and is reported as discontinued operations.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $132.7 | $141.7 | $428.0 | $462.3 |
| Gross profit | $35.9 | $41.7 | $128.6 | $138.0 |
| Gross margin | 27.1% | 29.4% | 30.1% | 29.9% |
| Operating income | $3.0 | $2.6 | $15.3 | $29.0 |
| Income from continuing operations | $0.4 | $0.6 | $2.8 | $14.2 |
| Net income | $0.4 | $0.3 | $2.5 | $17.0 |
| Diluted earnings per share | $0.01 | $0.01 | $0.08 | $0.54 |
Material changes and management commentary
- Q3 sales fell 6%; lower volume contributed approximately $8.3 million and lower indexed pricing $0.8 million, partly offset by $0.5 million of favorable currency translation. Material Handling sales declined 3%, and Distribution sales declined 13%.
- For the first nine months, sales fell 7%, reflecting lower volume of approximately $23.6 million, lower indexed pricing of $6.1 million, and unfavorable currency translation of $4.3 million. Both segments reported lower sales.
- Q3 gross margin declined 2.3 percentage points, attributed to lower volume, higher manufacturing costs, and unfavorable Material Handling mix. Nine-month margin rose 0.2 points, mainly due to lower plastic resin input costs, partly offset by lower pricing and volume.
- Q3 SG&A declined 16% to $32.9 million, mainly reflecting lower compensation and employee-related costs. Nine-month SG&A declined 5% to $103.5 million, but increased as a share of sales to 24.2% from 23.6%.
- Nine-month operating income included $9.9 million of non-cash impairment charges, primarily related to the Novel reporting unit in Brazil after a significant customer reduced near-term capital spending. The impairment included $8.5 million recorded in Q1 and $1.3 million primarily related to a Material Handling product-line exit in Q2.
- Nine-month 2015 results included $2.8 million of discontinued-operations income, including a $3.8 million after-tax gain on the Lawn and Garden sale. In 2016, discontinued operations recorded a $0.3 million loss.
Cash flow, debt and liquidity
- Cash from operating activities of continuing operations was $18.6 million for the first nine months, versus $7.1 million in 2015. The improvement was attributed primarily to working-capital cash flows.
- Continuing-operations investing cash outflow was $15.3 million, compared with $52.3 million of inflow in 2015, when the company received sale proceeds for Lawn and Garden. 2016 capital expenditures were $11.5 million; full-year capital expenditures were expected to be approximately $12–$14 million.
- Financing cash outflow was $5.9 million, including $12.1 million of dividends; net credit-facility borrowings were $4.4 million. The company made no share repurchases during the first nine months of 2016.
- Cash was $5.5 million at September 30, 2016; restricted cash was $8.6 million. Total assets were $395.4 million and shareholders’ equity was $98.8 million.
- Debt carrying value was $197.9 million, net of deferred financing costs, versus $191.9 million at December 31, 2015. The $300 million revolving facility had $196.3 million available, after accounting for $4.5 million of letters of credit. The company reported compliance with debt covenants: interest coverage was 8.58 against a 3.00 minimum, and leverage was 2.90 against a 3.25 maximum.
- Management said operating cash flow and available borrowing capacity should be sufficient for expected business needs, including capital expenditures, dividends, working capital, and debt service. A 1 percentage-point rise in market interest rates would increase annual interest expense by approximately $1.0 million at current debt levels.
Outlook, risks and unusual items
- No earnings or revenue guidance was provided. The filing cautions that interim results are not necessarily indicative of full-year results.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2016 because of a material weakness in Material Handling inventory valuation controls, including review controls over the LIFO reserve and capitalization of variances. Remediation was in progress, with completion expected before December 31, 2016; it was not yet considered complete.
- Environmental matters include a $2.6 million reserve for the New Idria Mine investigation/feasibility study and past-cost claims. The company said it had not accrued remediation costs for that site because the ultimate liability could not be estimated before the remediation strategy is determined. For the New Almaden Mine project, the reserve was $1.6 million after an additional Q3 expense; project work was expected to begin in 2017.
- The buyer of Lawn and Garden asserted indemnification claims of approximately $10 million, which the company considers without merit and intends to contest. The approximately $8.6 million sale-proceeds escrow, originally due to settle in August 2016, remains extended pending resolution of the claims.
- The company recorded a $0.2 million reduction in SG&A from a third-quarter settlement of patent-related claims. It also reported a $1.0 million annual interest-cost sensitivity to a 1 percentage-point rate increase and noted exposure to foreign exchange and plastic-resin costs.
Most important facts for investors to verify
- Whether the inventory-control material weakness was remediated and tested after the filing date.
- Whether sales and gross-margin trends in both segments improved, particularly in food and beverage markets and Distribution equipment sales.
- Whether the Novel impairment assumptions remain supportable and whether further impairment or operating deterioration occurs.
- Resolution and cash impact of the Lawn and Garden indemnification claims and release of the escrow.
- Changes to environmental reserves or remediation obligations at New Idria and New Almaden.
- Debt, covenant headroom, cash generation, and the company’s ability to sustain dividends and planned capital spending.