Myers Industries, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Myers Industries manufactures reusable plastic products and tanks through its Material Handling segment and distributes tire-service and automotive-repair equipment and supplies through its Distribution segment. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $141.7 | $151.2 |
| Gross profit / margin | $42.0 / 29.6% | $48.2 / 31.9% |
| Operating income | $7.4 | $1.1 |
| Continuing-operations income (loss) | $3.1 | $(3.3) |
| Net income (loss) | $3.1 | $(3.4) |
| Diluted earnings (loss) per share | $0.10 | $(0.11) |
| Operating cash flow | $13.0 | $(11.3) |
| Capital expenditures | $0.5 | $7.1 |
| Cash / restricted cash at March 31 | $7.3 / $8.6 | — |
| Debt, net of deferred financing costs | $179.6 | $189.5 at Dec. 31, 2016 |
Revenue fell 6%, reflecting lower sales volume of approximately $10.3 million, partly offset by about $1.4 million of favorable currency translation. Material Handling sales declined 5% to $103.2 million, mainly from weaker agricultural demand; Distribution sales declined 9% to $38.6 million, with lower volume across product lines, including weaker northern-region demand after a milder winter and continued softness in equipment capital spending.
Gross margin declined 2.3 percentage points, which management attributed to lower volume, higher raw-material costs, and higher manufacturing and restructuring costs. SG&A fell 10% to $34.6 million, primarily due to lower severance, compensation, and other employee-related costs. Operating income improved year over year in part because Q1 2016 included an $8.5 million non-cash impairment charge related to the Novel reporting unit; no impairment charge was recorded in Q1 2017. The Q1 2017 effective tax rate was 41.9%, reflecting losses in jurisdictions where tax benefits were not recognized.
Cash, debt, and liquidity
Operating cash flow improved by $24.4 million year over year, with the company citing a $26.1 million improvement in working-capital cash flows, primarily from accounts payable and accrued expenses. Cash from investing activities was $0.6 million, including $1.1 million in proceeds from fixed-asset sales. Financing activities used $14.4 million, including $9.3 million of net credit-facility repayments and $4.1 million of dividends paid. The declared dividend was $0.14 per share.
In March, the company replaced its $300 million revolving facility with a $200 million facility and extended its maturity to March 2022. At March 31, $114.1 million was available under the facility, with $4.4 million of letters of credit issued. The company reported compliance with debt covenants; actual interest coverage was 7.44 against a 3.00 minimum, and leverage was 2.89 against a 3.75 maximum. It stated that operating cash flow and available borrowing should be sufficient for expected business needs, capital expenditures, dividends, working capital, and debt service.
Changes, outlook, risks, and unusual items
- Restructuring: Announced a Material Handling restructuring expected to incur approximately $10 million of 2017 charges, including implementation, employee-related, and non-cash costs. Actions are expected to be substantially complete by year-end 2017; management expects approximately $10 million of annualized savings upon completion. Timing and costs may differ from estimates. Q1 included $0.9 million of plant-closure-related restructuring and accelerated depreciation charges and a $0.8 million gain on asset dispositions.
- Capital spending: Full-year 2017 capital expenditures were expected to be approximately $10 million to $12 million.
- Interest-rate exposure: The company has floating-rate debt and no interest-rate swaps; a 1 percentage-point rate increase was estimated to raise annual interest expense by approximately $0.8 million. Average borrowing rates were 5.20% in Q1 2017 versus 4.50% in Q1 2016.
- Environmental matters: Reserves were $2.4 million for the New Idria Mine and $1.5 million for the New Almaden Mine. The company said estimates may change as investigations, negotiations, and remediation planning progress; it had not accrued New Idria remediation costs because the liability could not be estimated.
- Lawn and Garden sale claims: The buyer asserted indemnification claims of approximately $10 million, which the company considers without merit and intends to contest. Approximately $8.6 million of sale proceeds remains in escrow pending resolution. Management said the ultimate outcome was not expected to materially affect overall results based on current information, but noted an adverse ruling could have a material impact.
- Other: The company reported no Q1 share repurchases. It had no foreign-currency contracts in place at March 31. Resin-price increases and adverse economic conditions could affect results.
Important facts for investors to verify
- Whether the restructuring reaches its stated annualized savings target and stays within its expected cost and timing.
- Whether sales volumes and gross margins stabilize, particularly in agricultural markets and Distribution’s equipment lines.
- Debt-covenant headroom and the impact of floating interest rates as the facility’s leverage limit steps down over 2017.
- Developments in the environmental matters and the Lawn and Garden indemnification dispute, including potential changes to reserves or escrow availability.
- Whether planned capital expenditures and operating cash generation support the company’s liquidity and dividend commitments.