Myers Industries, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company manufactures reusable plastic material-handling products and operates a tire-service equipment and supplies distribution business. Results are unaudited; comparisons are with the same 2014 periods unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales from continuing operations | $141.7 million | $162.1 million | $462.3 million | $465.4 million |
| Gross profit / margin | $41.7 million / 29.4% | $40.0 million / 24.7% | $138.0 million / 29.9% | $124.6 million / 26.8% |
| Operating income (loss) | $2.6 million | $(2.7) million | $29.0 million | $17.5 million |
| Income (loss) from continuing operations | $0.6 million | $(3.6) million | $14.2 million | $7.5 million |
| Net income (loss), including discontinued operations | $0.3 million | $(2.7) million | $17.0 million | $3.7 million |
| Net interest expense | $1.7 million | $2.6 million | $6.9 million | $5.9 million |
Quarterly diluted earnings per share were $0.01, versus a loss of $0.09. Nine-month diluted earnings per share were $0.54, versus $0.11. Nine-month 2015 net income included $2.8 million from discontinued operations, including a $3.8 million after-tax gain on the Lawn and Garden sale; continuing operations are a better indicator of ongoing results.
Continuing-operations revenue fell 12.6% in Q3. Management attributed the decline to approximately $11.9 million of lower volume, $0.9 million of unfavorable pricing, and $7.6 million of unfavorable currency translation. Material Handling sales fell 17.6%, principally from weakness in agriculture, lower pricing, and currency effects; Distribution sales declined 1.4%. For the first nine months, revenue declined 0.7% despite $52.8 million of Scepter sales included in the comparison; excluding Scepter, lower volume and currency were significant headwinds.
Gross margin improved in both periods, primarily from lower raw-material costs and cost-saving initiatives; nine-month margin also benefited from Scepter. Lower volume, unfavorable pricing, and product mix partly offset these benefits. Q3 SG&A declined 8.2% to $39.1 million, while nine-month SG&A rose 1.8% to $109.0 million.
Cash flow, debt, and liquidity
- For the first nine months, continuing-operations operating cash flow was $7.1 million, compared with a $2.8 million use in 2014. Total operating cash flow, including discontinued operations, was a $4.2 million use, versus a $16.9 million use.
- Investing activities provided $51.7 million overall, including $69.8 million in proceeds from the Lawn and Garden sale. Continuing-operations capital expenditures were $17.7 million, versus $10.9 million.
- Financing activities used $46.5 million, including $16.2 million of net credit-facility repayments, $12.6 million of dividends, and $18.6 million of share repurchases. Cash ended the period at $5.2 million, up from $4.7 million at year-end 2014.
- Debt was $214.7 million at September 30, down from $236.4 million at December 31, 2014. The $300 million revolving facility had $180.4 million available, plus $4.3 million of outstanding letters of credit.
- The company reported compliance with debt covenants: interest coverage was 7.52 versus a 3.00 minimum, and leverage was 2.77 versus a 3.25 maximum. Management said operating cash flow and available borrowing capacity should meet expected needs into the foreseeable future.
Outlook, risks, and unusual items
- Management expected full-year 2015 capital expenditures of approximately $25–30 million, mainly for growth and productivity projects. The filing provides no specific revenue or earnings guidance.
- Q3 included a $1.1 million out-of-period stock-compensation adjustment ($0.7 million after tax); management concluded it was not material to previously reported 2015 interim periods. Q3 SG&A also included a $1.3 million environmental reserve charge. In Q2, the company reversed a $3.0 million Orbis-related accrual after an appellate ruling found Buckhorn not liable; Orbis’s rehearing and appeal opportunities had expired.
- In September, the EPA identified Buckhorn as a potentially responsible party at the New Idria Mercury Mine site and claimed approximately $1.6 million in past costs. The company added $1.3 million to its reserve, bringing the accrued balance to $2.3 million. It expects to challenge the past-cost claim and has not accrued remediation costs because the scope and final remediation plan cannot yet be estimated.
- Disclosure controls were deemed ineffective because of two material weaknesses in Brazilian operations: inventory controls and the financial-statement close process, including management oversight. The company was pursuing remediation and planned to address the deficiencies during 2015.
- Foreign-currency translation reduced nine-month other comprehensive income by $32.7 million. The company estimated that a 1% rise in market interest rates would add about $1.1 million to annual interest expense. It also cited exposure to plastic-resin costs and adverse economic conditions.
- The Lawn and Garden business was sold on February 17, 2015 for $110 million, subject to working-capital adjustments; consideration included $90 million cash and $20 million in five-year notes bearing 6% interest. The notes’ carrying value was $18.0 million at September 30.
Most important facts to verify
- Whether the improvement in continuing-operations margins and earnings can persist despite agricultural-market weakness, lower volumes, pricing pressure, and currency headwinds.
- The collectability and terms of the Lawn and Garden notes, and the final working-capital adjustments to the sale proceeds.
- The eventual EPA remediation scope, liability, and allocation among potentially responsible parties, beyond the $2.3 million currently accrued.
- Progress and evidence of remediation of the Brazilian inventory and financial-close control material weaknesses.
- Whether cash generation, covenant headroom, and revolving-facility availability remain adequate alongside planned capital spending, dividends, and repurchases.