Myers Industries, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Myers operates two segments: Material Handling, which manufactures plastic and rubber products, and Distribution, which sells automotive service equipment and supplies.
Financial highlights
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $134.3m | $140.6m | $273.4m | $293.1m |
| Gross profit / margin | $46.9m / 35.0% | $48.0m / 34.1% | $92.5m / 33.8% | $95.1m / 32.4% |
| Operating income | $10.2m | $13.1m | $20.4m | $25.1m |
| Net income | $6.6m | $8.6m | $13.4m | $15.5m |
| Diluted EPS | $0.18 | $0.26 | $0.37 | $0.48 |
- Q2 sales fell 4%; six-month sales fell 7%. Material Handling sales declined 7% in Q2 and 10% year to date, while Distribution sales rose 2% in both periods.
- Management attributed the sales decline mainly to lower volumes: consumer and recreational vehicle markets in Q2, and food and beverage and vehicle markets for the six months. Pricing partly offset declines; unfavorable currency translation also reduced sales.
- Gross margin improved, primarily from higher pricing and lower raw-material costs, partly offset by unfavorable product mix. SG&A increased 7% in Q2 and 2% year to date; it included a $4.0m environmental-contingency charge.
- Net interest expense decreased to $1.0m in Q2 and $2.1m for the six months, mainly due to lower average borrowings. The effective tax rates were 27.9% and 27.7%, respectively.
Cash flow, debt and liquidity
- Six-month cash from operating activities was $23.5m including discontinued operations; continuing operations contributed $16.2m, down from $27.2m in the prior-year period. Management cited working-capital effects, including compensation timing, customer collections and lower subcontractor volume.
- Investing activities provided $3.1m, including $7.5m in property-sale proceeds, partly offset by $4.4m of capital expenditures. Cash and restricted cash ended June at $75.2m, up from $58.9m at year-end.
- Debt was $78.0m face value ($77.0m net of deferred financing costs). The company had no revolver borrowings, $5.8m of letters of credit, and $194.2m of borrowing availability. It reported compliance with debt covenants; actual interest coverage was 14.42x against a 3.00x minimum, and leverage was 1.18x against a 3.25x maximum.
- Management stated operating cash flow and available credit should be sufficient for expected needs, including capital expenditures, dividends, debt service and growth. 2019 capital expenditures were expected to be approximately $10m.
Outlook, material developments and risks
- No full-year revenue or earnings guidance is provided in the filing. Restructuring plans are expected to generate annualized benefits of about $1.5m from the Ameri-Kart consolidation and $5m–$7m from the Distribution transformation. Ameri-Kart actions were expected to be substantially complete in the first half of 2020; Distribution actions by year-end 2019.
- The company recorded $0.9m of first-half impairment charges, principally on a closed facility subsequently sold. Two buildings previously held for sale generated $7.4m of net proceeds in the first half.
- Environmental exposure is significant and uncertain. New Idria Mine reserves totaled $6.7m at June 30, following a $4.0m expense based on preliminary investigation-cost estimates; the work plan remained subject to EPA review and estimates may change. The company has not recognized potential insurance recoveries. New Almaden Mine reserves were $1.5m.
- A $10.6m liability remains for a lease guarantee tied to the former Lawn and Garden business; the lease runs through September 2025 and current annual rent is about $2m. Collection of amended notes from that buyer remains uncertain; maturity was extended to August 2022.
- A patent-infringement and related-claims lawsuit against Scepter was pending; the company could not predict the outcome and had recorded no reserve. The company also guarantees up to $7m under a factoring arrangement for the former Brazil business through December 31, 2019.
- Other disclosed risks include plastic-resin price increases, foreign-currency movements, litigation and environmental-cost uncertainty. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Material Handling volume weakness, particularly in food and beverage, consumer and recreational vehicles, continues, and whether Distribution growth offsets it.
- Progress toward the stated restructuring savings, timing of implementation and any further costs.
- Updates to New Idria investigation estimates, EPA-approved work plan, insurance recovery prospects and environmental reserves.
- HC Companies’ ability to meet obligations under the amended notes and guaranteed lease, and any developments in the Scepter patent litigation.
- Cash conversion and working-capital trends, alongside capital spending, dividend commitments and covenant headroom.