Myers Industries, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Myers manufactures reusable plastic material-handling products and operates Material Handling and Distribution segments. Comparatives reflect discontinued-operations presentation and the 2014 segment realignment.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $156.3 million | $150.5 million |
| Gross profit / margin | $45.8 million / 29.3% | $42.1 million / 28.0% |
| SG&A | $39.0 million | $33.2 million |
| Operating income | $6.7 million | $8.9 million |
| Continuing-operations income | $2.6 million | $4.8 million |
| Net income | $5.2 million | $0.7 million |
| Net interest expense | $2.7 million | $1.6 million |
Sales grew 3.9%. Material Handling sales rose 5.2% to $112.3 million, while Distribution sales increased 0.5% to $44.1 million. Gross margin improved, primarily reflecting Scepter acquisition contributions and favorable pricing; lower volume and unfavorable product mix partly offset this. SG&A increased 17.5%, including $5.3 million of Scepter expenses. Excluding Scepter, SG&A was broadly flat. Continuing-operations earnings fell despite higher sales, as higher SG&A and interest more than offset gross-profit growth.
Net income included $2.6 million of income from discontinued operations, versus a $4.1 million loss a year earlier. Q1 2015 discontinued results included a $3.8 million gain on the sale of Lawn and Garden; the business’s operating loss through its February 17 sale partly offset the gain. Basic and diluted EPS were $0.16, including $0.08 from discontinued operations; continuing-operations EPS was $0.08.
Cash flow, balance sheet and liquidity
- Operating cash use was $27.7 million overall, comprising $17.9 million from continuing operations and $9.8 million from discontinued operations. Continuing-operations cash use improved from $40.1 million in Q1 2014, largely with lower working-capital cash use.
- Investing activities provided $64.6 million, including $69.8 million in cash proceeds from the Lawn and Garden sale; capital expenditures were $4.7 million. Financing activities used $37.8 million, including $27.7 million of net credit-facility repayments, $6.6 million of share repurchases and $4.2 million of dividends.
- Cash was $3.7 million at March 31, down from $4.7 million at year-end 2014. Debt was $204.7 million, down from $236.4 million; $190.4 million remained available under the $300 million revolving facility, with $4.3 million of letters of credit outstanding.
- Current assets were $176.3 million and current liabilities $115.8 million. Shareholders’ equity was $119.5 million. The quarter recorded a $23.0 million foreign-currency translation loss in other comprehensive income, including the translation adjustment associated with the Lawn and Garden disposal.
Material changes, outlook and risks
- Sales included $24.2 million from Scepter, acquired in July 2014. Excluding Scepter, management cited approximately $17.8 million of lower sales volume, mainly reflecting weakness in agricultural markets and the absence of prior-year food-processing sales; unfavorable currency translation reduced sales by $2.0 million. Improved pricing added $1.4 million.
- The Lawn and Garden business was sold February 17, 2015 for $110 million, subject to working-capital adjustment: $90 million cash and $20 million in five-year, 6% notes. The notes’ fair value was $17.9 million at quarter-end. The filing reports $69.8 million of sale proceeds received during the quarter.
- Management expected 2015 capital expenditures of $25–$30 million, mainly for growth and productivity projects, and said operating cash flow and available borrowing were expected to meet foreseeable requirements. No earnings or revenue guidance was provided.
- The company reported compliance with debt covenants. Actual interest coverage was 10.30 versus a 3.00 minimum; leverage was 2.35 versus a 3.25 maximum. A 1 percentage-point increase in market rates was estimated to add about $1.1 million to annual interest expense. The company had no interest-rate hedges and no foreign-currency contracts outstanding at quarter-end; resin-cost increases were also identified as a risk.
- Disclosure controls were deemed ineffective due to two material weaknesses in Brazilian operations: inventory controls and the financial-statement close process, including management oversight and monitoring. Management planned remediation during 2015.
- Contingencies include potential environmental responsibility relating to the New Idria mercury mine and Guadalupe River watershed, and an appealed patent-related judgment with potential Buckhorn exposure of up to $3.1 million plus interest. Management said outcomes were uncertain and unfavorable rulings could materially affect results in the period incurred.
Important facts for investors to verify
- Whether the Brazilian inventory and close-process control weaknesses were remediated and independently tested.
- Post-sale performance of the continuing businesses, particularly Material Handling volumes, pricing, and Scepter integration.
- Collection and terms of the Lawn and Garden promissory notes, escrow amounts, and final working-capital adjustment.
- Cash generation, debt reduction, and covenant headroom as the company funds capital spending, dividends, and repurchases.
- Developments in the mine-related environmental matters and the Orbis judgment appeal.