Business context and reporting period
Myers Industries, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. The company manufactures reusable material-handling and other plastic products and distributes tire-service equipment and supplies. Following a 2014 segment realignment, continuing operations comprised Material Handling and Distribution; Lawn and Garden and WEK were reported as discontinued operations.
In July 2014, Myers acquired Scepter for $156.6 million. The company completed the sale of WEK in June 2014 and sold Lawn and Garden on February 17, 2015, for $110 million, subject to working-capital adjustment ($90 million cash and a $20 million five-year note).
Financial performance and condition
Amounts below are in millions of dollars except per-share data. Continuing-operations results exclude discontinued businesses.
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $623.6 | $584.7 |
| Gross profit / margin | $161.3 / 25.9% | $169.6 / 29.0% |
| Operating income | $22.6 | $44.3 |
| Continuing-operations net income | $9.0 | $26.4 |
| Discontinued-operations income (loss), net of tax | $(17.6) | $(0.4) |
| Net income (loss) | $(8.7) | $26.0 |
| Diluted EPS, continuing operations / total | $0.27 / $(0.27) | $0.77 / $0.76 |
| Operating cash flow, continuing operations | $51.8 | $74.9 |
| Capital expenditures | $24.2 | $20.7 |
| Cash at year-end | $4.7 | $6.5 |
| Debt, net of deferred financing costs | $236.4 | $44.3 |
Gross margin was 25.9%; operating margin was approximately 3.6%, and continuing-operations net margin approximately 1.4%. Continuing-operations operating cash flow less capital expenditures was approximately $27.6 million. Current assets were $285.4 million and current liabilities $153.8 million, for working capital of $131.6 million and a current ratio of approximately 1.86. The company reported $158.6 million of available revolving-credit capacity and was compliant with debt covenants at year-end.
Material changes versus prior period
- Sales rose 7%, primarily reflecting $39.4 million of Scepter sales after its acquisition and improved pricing. Material Handling sales increased 14% to $432.1 million; Distribution sales fell 6% to $191.9 million.
- Despite higher sales, gross profit declined $8.3 million and gross margin fell 3.1 percentage points. Management cited weaker agricultural and food-processing demand, challenging Brazilian conditions, raw-material costs averaging about 9% higher, Scepter inventory fair-value charges of $2.3 million, and restructuring and unusual costs.
- Operating income fell by about half, while net interest expense increased 89% to $8.5 million as debt rose to fund Scepter and other financing needs.
- Discontinued operations recorded an $18.9 million Lawn and Garden impairment. This drove the reported full-year net loss despite positive income from continuing operations.
- Cash from continuing operations decreased $23.2 million. The company spent $54.9 million repurchasing 2.7 million shares and paid $15.7 million in dividends, versus $8.1 million and $9.1 million, respectively, in 2013.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified 2015 earnings or sales guidance. Management stated that operating cash flows and available credit should meet expected requirements, including capital spending, dividends, debt service, working capital and the share-repurchase program.
- Key risks include volatile resin and other input costs, competition and pricing pressure, economic weakness (notably in Brazil), foreign-exchange exposure, manufacturing or supply disruptions, and access to credit. A one-percentage-point increase in interest rates was estimated to add about $1.3 million to annual interest expense.
- Material control weakness: management and the auditor concluded internal control over financial reporting was ineffective at December 31, 2014, due to material weaknesses in Brazilian inventory controls and the financial-statement close process, including management oversight. Disclosure controls were also deemed ineffective. Management planned remediation during 2015; the auditor issued an adverse opinion on internal controls, but an unqualified opinion on the financial statements. Scepter, representing 27% of year-end assets, was excluded from the control assessment.
- Fourth-quarter continuing results included $3.2 million of after-tax out-of-period charges, approximately $1.8 million relating to periods before 2014, associated primarily with Brazilian inventory and fixed assets. Management stated these adjustments were not material to previously reported periods.
- Myers accrued $3.0 million for an appealed patent-license judgment involving Orbis; potential exposure was described as up to $3.1 million plus interest. It also had an environmental reserve initially recorded at $1.9 million for the New Idria mine investigation, with approximately $0.8 million incurred; further remediation costs were not estimable. Potential Guadalupe River watershed liability was also not estimable.
- Goodwill impairment was not recorded, but Novel and Jamco fair values exceeded carrying values by only about 10% and 20%, respectively, leaving potential exposure if performance weakens. Other unusual 2014 costs included Scepter transaction expenses of $3.6 million and restructuring charges.
Important facts for investors to verify
- Progress and independent validation of remediation of the Brazilian inventory and close-process material weaknesses, including whether any further adjustments are required.
- Post-acquisition Scepter profitability and integration costs, and whether the acquisition supports earnings and cash generation sufficient to service the substantially higher debt.
- Completion and cash proceeds of the Lawn and Garden sale, including the working-capital adjustment and collection of the $20 million note.
- Exposure and resolution of the Orbis judgment, New Idria mine proceedings and Guadalupe River watershed matter.
- Performance of Novel and Jamco relative to goodwill assumptions, and the effect of raw-material costs, demand and currency movements on margins.