Myers Industries, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Results are unaudited; dollar amounts below are in millions unless noted. Myers Industries reports four segments: Material Handling, Lawn and Garden, Distribution, and Engineered Products.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $208.8 | $215.0 |
| Gross profit / margin | $50.0 / 24.0% | $58.3 / 27.1% |
| Operating income | $2.6 | $13.2 |
| Net income | $0.7 | $7.9 |
| Diluted EPS | $0.02 | $0.23 |
| Net cash used in operations | $60.7 | $6.5 |
| Capital expenditures | $4.7 | $4.5 |
Net interest expense was $1.6 million, up from $1.1 million; the average borrowing rate was 5.58% versus 4.57%. The effective tax rate was 35.9%, compared with 35.1%. Dividends declared were $0.13 per share, versus $0.09.
Liquidity and debt
At March 31, cash was $5.7 million, current assets $265.8 million, and current liabilities $110.6 million. Long-term debt, net of financing fees, was $116.7 million, compared with $44.3 million at December 31, 2013. Management reported net debt of approximately $111.0 million, versus $37.8 million at year-end. The increase chiefly reflected $89.0 million of proceeds received on senior notes, partly offset by $16.7 million of net repayments on the revolving credit facility.
The company reported $177.9 million available under its $200 million loan agreement and was in compliance with debt covenants. Actual interest coverage was 18.19 against a 3.00 minimum; leverage was 1.33 against a 3.25 maximum. Operating cash use was primarily associated with working-capital movements, including payment timing, higher receivables and inventory.
Material changes and management commentary
- Sales fell 3%. Material Handling sales increased 13% to $90.6 million, while Lawn and Garden declined 18% to $49.8 million; Distribution declined 7% to $39.7 million and Engineered Products declined 12% to $32.7 million.
- Management attributed lower sales mainly to poor weather, transportation constraints, and lower volumes in several segments; unfavorable foreign currency translation also weighed on sales. Material Handling growth, mainly in food processing and agriculture, partly offset declines elsewhere.
- Gross margin contracted to 24.0%, reflecting higher resin costs—polypropylene and polyethylene averaged approximately 12% higher year over year—lower sales, and restructuring-related costs. SG&A rose 5% to $47.4 million, including higher freight and logistics costs and restructuring expenses.
- Lawn and Garden recorded a pretax segment loss of $7.0 million, compared with $2.3 million income a year earlier. Material Handling pretax segment income rose to $10.9 million from $9.7 million.
Outlook, restructuring, and risks
- Management expects 2014 capital expenditures of approximately $35–$40 million, mostly for growth and productivity projects, and believes operating cash flow and borrowing availability will meet foreseeable needs, including capital spending, dividends, debt service, strategic initiatives, working capital, and repurchases.
- The Lawn and Garden plant-closure plan is expected to cost approximately $15 million in total, including $3 million of noncash costs; $12.2 million had been incurred through March 31. Actions were expected to continue through Q2 2014. The Canadian Distribution branch closure plan was expected to cost approximately $1 million, with actions also expected to continue through Q2.
- Restructuring charges in Q1 totaled $4.1 million. The filing also cites $5.7 million of incremental restructuring and related charges versus the prior-year quarter, including unabsorbed overhead in Lawn and Garden.
- Risks include exposure to higher plastic-resin costs, floating-rate debt (a 1 percentage-point rate increase was estimated to add about $0.2 million of annual interest expense), foreign-exchange movements, and transportation constraints. The company had no foreign-currency contracts in place at quarter-end.
- Environmental matters include the New Idria Mercury Mine, for which the company had recorded a $1.9 million reserve and incurred approximately $0.6 million of payments; further remediation costs were not estimable. Potential liability related to the Guadalupe River Watershed was also not estimable. Management said current information did not indicate a material adverse effect, while noting unfavorable outcomes could have a material impact.
Key facts for investors to verify
- Whether the planned Lawn and Garden restructuring delivers expected savings and is completed on schedule, given the quarter’s segment loss and operational start-up issues.
- Whether working capital normalizes after the $60.7 million operating cash outflow and whether receivables and inventory convert to cash as expected.
- How the new $100 million senior-note financing affects interest expense, debt levels, and covenant headroom as operating results change.
- Whether weather, freight availability, resin costs, and foreign currency continue to affect sales and margins.
- Developments in the environmental proceedings and any change to the existing reserve or the currently unestimable exposure.