Myers Industries, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The company manufactures reusable plastic material-handling products and distributes tire-service and automotive repair equipment and supplies. During Q2, it realigned reporting segments to Material Handling and Distribution; prior-period figures were recast for the new segments and discontinued-operations presentation.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Continuing-operations net sales | $152.8 million | $153.6 million | $303.3 million | $298.6 million |
| Gross profit / margin | $42.5 million / 27.8% | $45.0 million / 29.3% | $84.6 million / 27.9% | $87.1 million / 29.2% |
| Operating income | $11.3 million | $12.6 million | $20.2 million | $22.7 million |
| Continuing-operations income | $6.3 million | $7.4 million | $11.1 million | $13.2 million |
| Net income | $5.7 million | $8.3 million | $6.4 million | $16.2 million |
| Diluted EPS | $0.17 | $0.25 | $0.19 | $0.48 |
Q2 continuing sales fell 0.5%; first-half sales rose 1.6%. Q2 sales benefited from $5.3 million of pricing but were pressured by lower volume and unfavorable currency translation. Resin costs were about 13% higher year over year in Q2 and 12% higher for the first half. Pricing helped offset raw-material inflation, but higher Distribution logistics costs weighed on Q2 gross margin.
Q2 SG&A was $31.2 million, down 3.7% year over year; first-half SG&A was $64.4 million, essentially flat. Q2 net interest expense increased to $1.7 million from $1.1 million, reflecting higher average debt and borrowing rates. The effective tax rate was 34.2% in Q2 and 34.5% for the first half, below the respective prior-year rates.
Segments and material changes
- Material Handling: Q2 sales rose 2.5% to $103.0 million, supported by pricing; Brazil volume and currency headwinds partly offset the increase. First-half sales grew 7.5% to $209.7 million, on stronger food-processing and agriculture demand and pricing.
- Distribution: Q2 sales declined 6.4% to $49.8 million; first-half sales declined 9.6% to $93.7 million. The filing cites Canadian branch closures, lower custom sales and logistical issues.
- Discontinued operations: Q2 recorded a $0.6 million net loss, versus $0.9 million income a year earlier; the first-half loss was $4.7 million, versus $3.0 million income. Lawn and Garden weakness, restructuring, and lower sales drove the decline. The Q2 result includes a $2.4 million after-tax gain on the WEK sale, offset by operating losses.
Cash, debt and liquidity
- For the first half, operating cash flow was negative $21.0 million, including negative $6.8 million from continuing operations and negative $14.2 million from discontinued operations. Working-capital investment, including receivables and inventory, and payment timing were principal uses of cash.
- Capital expenditures were $7.0 million for continuing operations in the first half. Management expected full-year capital expenditures of approximately $30 million, mostly for growth and productivity projects.
- Cash at June 30 was $35.8 million. Long-term debt, net of deferred fees, was $137.7 million; management reported debt net of cash and deferred fees of approximately $101.9 million. The company had $256.9 million available under its expanded $300 million revolving facility, net of letters of credit.
- The company issued $89 million of senior notes in the first half and used $44.4 million to repurchase 2.13 million shares. It declared dividends of $0.26 per share for the first half.
- The company reported compliance with debt covenants at June 30: interest coverage of 15.49 versus a 3.00 minimum, and leverage of 1.65 versus a 3.25 maximum. Management stated operating cash flow and available borrowing were expected to meet foreseeable needs.
Outlook, significant events and risks
- The Board began a process to sell the Lawn and Garden Segment, with completion anticipated within twelve months. Its assets and liabilities were classified as held for sale; the filing reported estimated fair value less costs to sell above carrying value, with no write-down recorded.
- WEK was sold on June 20 for approximately $19.9 million, including a working-capital adjustment; approximately $1.0 million of proceeds was held in escrow. The company recorded an approximately $2.4 million after-tax gain.
- On July 2, 2014, after quarter-end, the company completed acquisitions of Scepter-related businesses and assets for approximately $157 million in cash. Results were expected to be included in Material Handling.
- Restructuring charges included approximately $0.8 million for the closure of Canadian Distribution branches. Lawn and Garden had incurred approximately $13 million under its restructuring plan through June 30; those actions were substantially complete.
- Contingencies include an existing $1.9 million reserve for the New Idria mine investigation, with further remediation costs not estimable, and a possible $0–$3.1 million plus interest exposure related to an Orbis legal-fee award; Buckhorn disputed responsibility and had not accrued an expense. The filing also describes a possible, unquantifiable watershed cleanup obligation.
- Risks include resin-price increases, foreign-exchange movements and floating-rate debt. Management estimated a 1 percentage-point rise in market rates would increase annual interest expense by approximately $0.4 million. No foreign-currency contracts were in place at June 30. Management said disclosure controls were effective; ERP implementation was continuing through 2014 and 2015.
- No specific revenue or earnings guidance was provided. The company was evaluating the effects of new accounting standards on discontinued operations and revenue recognition.
Important facts for investors to verify
- Progress, terms and proceeds of the planned Lawn and Garden divestiture, and the segment’s operating performance while held for sale.
- Funding and balance-sheet effects of the $157 million post-quarter acquisition, including any subsequent borrowing or covenant impacts.
- Whether working capital converts back to cash and whether gross margins recover as pricing and resin costs evolve.
- Developments in the New Idria and watershed environmental matters and the Orbis legal-fee dispute.
- Execution of the $30 million capital-expenditure plan, ERP implementation and any further share repurchases or dividends.