Myers Industries, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. Myers operates Material Handling and Distribution segments.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $142.3 million | $144.1 million | $284.0 million | $295.3 million |
| Gross profit | $39.3 million | $44.5 million | $81.3 million | $92.7 million |
| Gross margin | 27.6% | 30.9% | 28.6% | 31.4% |
| Operating income | $5.6 million | $11.2 million | $12.9 million | $12.3 million |
| Income from continuing operations | $2.0 million | $5.7 million | $5.1 million | $2.3 million |
| Net income | $2.0 million | $5.5 million | $5.1 million | $2.1 million |
| Diluted EPS | $0.07 | $0.18 | $0.17 | $0.07 |
- Q2 sales fell 1% year over year; Material Handling sales rose 2%, while Distribution declined 9%. For the first half, sales fell 4%, with both segments down.
- Gross margin contraction reflected Material Handling restructuring costs, higher commodity prices and operational inefficiencies. Q2 restructuring costs were approximately $4.0 million; first-half costs were $5.1 million.
- Q2 effective tax rate was 47.0% versus 37.6%; first-half rate was 44.0% versus 71.4%. The filing attributes differences principally to income mix by jurisdiction and losses where tax benefits were not recognized.
Cash flow, debt and liquidity
- First-half operating cash flow was $23.6 million, versus cash use of $3.1 million in 2016, primarily reflecting a $30.7 million improvement in working-capital cash flows, including accounts payable and accrued expenses.
- Capital expenditures were $2.3 million in the first half; full-year 2017 capital expenditures were expected to be approximately $10–12 million. Investing cash use was $0.4 million.
- Debt, net of deferred financing costs, was $170.1 million at June 30, down from $189.5 million at year-end. Cash was $4.7 million and restricted cash $8.6 million. The company repaid $18.9 million net on its credit facility during the first half.
- The amended revolving facility is $200 million, runs through March 2022, and had $123.6 million available at June 30. The company reported compliance with covenants: actual leverage ratio 2.89 versus a 3.75 maximum, and interest coverage 6.91 versus a 3.00 minimum.
- Management believed operating cash flow and available borrowing capacity would meet expected requirements, including capital expenditures, dividends, working capital and debt service. Dividends declared were $0.27 per share for the first half.
Outlook, changes and risks
- A Material Handling restructuring plan is expected to be substantially complete by year-end 2017. Total restructuring costs are estimated at $8.7 million, with about $3.6 million expected in the second half; additional associated costs of about $0.5 million were also expected. Management expects approximately $10 million in annual savings, with some benefit beginning in Q3 2017.
- The Bluffton, Indiana facility and related equipment were classified as held for sale. A preliminary agreement was expected to produce an approximately $2.6 million gain in Q3 2017; this was an expectation, not a completed sale as of the filing.
- Distribution faced soft demand, export weakness and lower equipment spending; a milder winter adversely affected first-half demand. Material Handling cited weaker agricultural sales in the first half. The company also identified exposure to plastic-resin costs and foreign exchange movements.
- A 1 percentage-point rise in market interest rates was estimated to increase annual interest expense by approximately $0.7 million. The company had no interest-rate swaps in place.
- Environmental reserves were $2.4 million for New Idria Mine and $1.5 million for New Almaden Mine; estimates may change as investigations and project work proceed. Separately, a buyer’s indemnification claims relating to the 2015 Lawn and Garden sale alleged about $10 million in losses. Approximately $8.6 million of sale proceeds remained in escrow pending resolution. Management believed the claims lacked merit and did not expect a material adverse outcome, but acknowledged an unfavorable ruling could have a material impact.
- Q2 2017 included a $0.5 million impairment on a Scarborough, Ontario building held for sale. First-half 2016 included $9.9 million of impairment charges, primarily related to the Novel reporting unit.
Key facts for investors to verify
- Whether restructuring savings are realized as planned and whether remaining costs and the Bluffton sale gain match management’s estimates.
- Whether Distribution demand and Material Handling margins recover, particularly given commodity costs and operational inefficiencies.
- Progress and potential changes in the New Idria and New Almaden environmental matters, and the outcome of the Lawn and Garden indemnification claims and escrow.
- Debt covenant headroom, floating-rate exposure, and cash conversion given the first-half working-capital contribution.