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MYERS INDUSTRIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Results of Operations During the second quarter of 2014, the Company realigned its reportable segments as a result of organizational changes to better align its resources to support its ongoing business strategy. The realignment is consistent with the manner in which our Chief Operating Decision Maker evaluates performance and makes resource allocation decisions. Historical segment information has been adjusted to reflect the effect of this change. Historical information also reflects discontinued operations presentation for businesses disposed of or meeting the held for sale criteria. Comparison of the Third Quarter of 2014 to the Third Quarter of 2013 Net Sales from Continuing Operations: (dollars in millions) Quarter Ended September 30, Segment 2014 2013 Change % Change Material Handling $ 112.3 $ 89.9 $ 22.4 25.0 % Distribution 49.9 51.7 (1.8 ) (3.4 %) Inter-company Sales (0.1 ) (0.1 ) - - % $ 162.1 $ 141.4 $ 20.7 14.6 % Net sales for the quarter ended September 30, 2014 were $162.1 million, an increase of $20.7 million or 14.6% compared to the same period in the prior year. Net sales increased $21.6 million due to the inclusion of Scepter Corporation and Scepter Manufacturing, LLC (collectively, "Scepter") acquired on July 2, 2014. The increase in net sales between periods was also impacted by improved pricing of $1.5 million to mitigate rising raw material costs. Net sales were negatively impact by lower sales volumes of $1.7 million primarily in our Distribution Segment and the effect of unfavorable foreign currency translation of $0.7 million. Net sales in the Material Handling Segment increased $22.4 million or 25.0% in the third quarter of 2014 compared to the same period in the prior year. Net sales increased $21.6 million due to the addition of Scepter from its acquisition in the third quarter of 2014. The increase in net sales between periods was also attributable to improved pricing of $1.8 million in order to help mitigate higher raw material costs. Excluding net sales related to Scepter, although third quarter 2014 sales volumes for the segment were just $0.2 million behind third quarter of 2013 volumes, sales in the agricultural markets were substantially down in the third quarter of 2014 versus the same period in 2013, as a result of weakened crop prices. Net sales for the 2014 quarter continued to be negatively impacted by the economic slowdown in Brazil and the effect of unfavorable currency translation of $0.8 million. Net sales in the Distribution Segment decreased $1.8 million or 3.4% in the third quarter of 2014 compared to the same period in the prior year. The decrease in net sales between periods was primarily the result of lower sales volume, due primarily to the closure of our Canadian branches that was completed in the first quarter of 2014. Cost of Sales & Gross Profit from Continuing Operations: (dollars in millions) Quarter Ended September 30, 2014 2013 Cost of sales $ 122.1 $ 98.9 Gross profit $ 40.0 $ 42.5 Gross profit as a percentage of net sales 24.7 % 30.1 % Gross profit decreased in the third quarter of 2014 compared to the same period in the prior year primarily due to lower sales volumes and the mix of products sold across both of our reportable segments. Gross profit margin decreased to 24.7% in the third quarter of 2014 compared to 30.1% in the third quarter of the prior year. Contributing to this reduction in gross margin was a $2.3 million inventory valuation adjustment recorded as a result of the acquisition of Scepter in July 2014. In addition, $0.3 million of expense was recorded in the third quarter of 2014 for restructuring and other unusual charges as compared to no charges recorded in the third quarter of 2013. Higher raw material costs that continued into the third quarter of 2014 were partially offset by improved pricing. In addition, higher logistics costs compared to the same period in 2013 negatively impacted gross profit margin. Continued higher raw material costs, primarily resins, were, on average, 6% higher for polypropylene and polyethylene for the three months ended September 30, 2014 compared to the same period in 2013. 23 -------------------------------------------------------------------------------- Selling, General and Administrative Expenses from Continuing Operations: (dollars in millions) Quarter Ended September 30, 2014 2013 Change % Change SG&A expenses $ 42.6 $ 30.3 $ 12.3 40.9 % SG&A expenses as a percentage of net sales 26.3 % 21.4 % Selling, general and administrative ("SG&A") expenses for the quarter ended September 30, 2014 were $42.6 million, an increase of $12.3 million or 40.9% compared to the third quarter in the prior year. An increase in SG&A of $6.4 million was due to the additional SG&A expenses of Scepter Group from the date of acquisition. In addition, SG&A expenses in the third quarter of 2014 included a reserve related to a patent infringement legal suit of $3.0 million and approximately $3.0 million in transactional costs incurred in connection with our acquisition of Scepter. Excluding the impact of Scepter, SG&A expenses were lower in the third quarter of 2014 compared to the same period in 2013 due to a decrease in selling and facility costs of approximately $0.3 million, as well as outside consulting costs of $0.4 million related to our information technology initiatives in the prior year. These decreases in SG&A between periods more than offset an increase in freight costs of $0.4 million. Restructuring and other related charges of $0.4 million, primarily severance, moving costs and lease cancellation expenses were included in SG&A for the quarter ended September 30, 2014. During the quarter ended September 30, 2013, the Company incurred less than $0.1 million of restructuring and other related charges. Shipping and handling costs, including freight, are classified primarily as SG&A expenses. Interest Expense from Continuing Operations: (dollars in millions) Quarter Ended September 30, 2014 2013 Change % Change Net interest expense $ 2.6 $ 1.1 $ 1.5 136.9 % Outstanding borrowings, net of deferred financing costs $ 276.9 $ 75.5 $ 201.4 Average borrowing rate 3.55 % 5.26 % Net interest expense in the third quarter of 2014 was $2.6 million compared to $1.1 million in the third quarter of 2013. The increase in net interest expense is due to the higher average debt balance partially offset by a decrease in the average borrowing rate during the third quarter of 2014 compared to the same period in the prior year. Income Taxes from Continuing Operations: (dollars in millions) Quarter Ended September 30, 2014 2013 (Loss) income from continuing operations before income taxes $ (5.3 ) $ 11.2 Income tax (benefit) expense $ (1.7 ) $ 4.3 Effective tax rate 31.9 % 38.5 % The effective tax rate was 31.9% for the quarter ended September 30, 2014 compared to 38.5% in the prior year quarter. The income tax benefit for the quarter ended September 30, 2014 was negatively impacted by $0.4 million of non-deductible expenses and $0.2 million of unrecognized tax benefits for foreign loss subsidiaries. Discontinued Operations: Income from discontinued operations, net of income taxes was $0.9 million for the quarter ended September 30, 2014 compared to a loss from discontinued operations, net of taxes of $0.4 million in the prior year quarter. Discontinued operations are comprised of the Lawn and Garden Segment and WEK Industries, Inc. ("WEK"). Net sales from discontinued operations decreased $8.5 million or 15.9% for the quarter ended September 30, 2014 compared to the quarter ended September 30, 2013. The decrease in net sales was due to lower sales volume of $9.2 million primarily attributable to the sale of WEK on June 20, 2014 and the negative impact from the effect of unfavorable currency translation of $0.3 million. The decrease in net sales was partially offset by improved pricing of $1.0 million to help mitigate higher raw material costs. 24 -------------------------------------------------------------------------------- Lower restructuring and other related charges of $0.6 million during the quarter ended September 30, 2014 compared to $2.4 million in the comparable prior year quarter positively impacted the Lawn and Garden Segment. Comparison of the Nine Months Ended September 30, 2014 to the Nine Months Ended September 30, 2013 Net Sales from Continuing Operations: (dollars in millions) Nine Months Ended September 30, Segment 2014 2013 Change % Change Material Handling $ 322.0 $ 285.0 $ 37.0 13.0 % Distribution 143.6 155.3 (11.7 ) (7.5 %) Inter-company Sales (0.2 ) (0.3 ) 0.1 - % $ 465.4 $ 440.0 $ 25.4 5.8 % Net sales for the nine months ended September 30, 2014 were $465.4 million, an increase of $25.4 million or 5.8% compared to the same period in the prior year. Net sales increased $21.6 million due to the inclusion of Scepter acquired on July 2, 2014. The increase in net sales between periods was also impacted by improved pricing of $8.2 million to offset rising raw material costs. Net sales were negatively impact by lower sales volumes of $0.2 million primarily in our Distribution Segment and the effect of unfavorable foreign currency translation of $4.2 million. Net sales in the Material Handling Segment increased $37.0 million or 13.0% for the nine months ended September 30, 2014 compared to the same period in the prior year. Net sales increased $21.6 million due to the acquisition of Scepter. The increase in net sales between periods was also impacted by higher sales volume of $11.0 million, driven by sales in the manufacturing and automotive end markets, as well as improved pricing of $8.7 million to help mitigate higher raw material costs. These increases were partially offset by unfavorable currency translation of $4.3 million. Net sales in the Distribution Segment decreased $11.7 million or 7.5% for the nine months ended September 30, 2014 compared to the same period in the prior year. The decrease in net sales between periods was primarily attributable to lower sales volume in custom sales, logistical issues and the Canadian branch closures that took place in the first half of 2014. Cost of Sales & Gross Profit from Continuing Operations: (dollars in millions) Nine Months Ended September 30, 2014 2013 Cost of sales $ 340.8 $ 310.4 Gross profit $ 124.6 $ 129.6 Gross profit as a percentage of net sales 26.8 % 29.5 % Gross profit margin decreased to 26.8% for the nine months ended September 30, 2014 compared to 29.5% in the prior year. Higher raw material costs during the nine months ended September 30, 2014 compared to the same period in 2013 negatively impacted gross profit. Raw material costs, primarily resins, were, on average, approximately 10% higher for polypropylene and polyethylene for the nine months ended September 30, 2014 compared to the same period in 2013. Also contributing to this reduction in gross margin was a $2.3 million inventory valuation adjustment recorded as a result of the acquisition of Scepter. Approximately $0.4 million of expense was recorded during the nine months ended September 30, 2014 for restructuring and other unusual charges as compared to $0.2 million recorded in the same period in 2013. Selling, General and Administrative Expenses from Continuing Operations: (dollars in millions) Nine Months Ended September 30, 2014 2013 Change % Change SG&A expenses $ 107.1 $ 94.6 $ 12.5 13.2 % SG&A expenses as a percentage of net sales 23.0 % 21.5 % SG&A expenses for the nine month period ended September 30, 2014 were $107.1 million, an increase of $12.5 million or 13.2% compared to the prior year. The increase in SG&A includes $6.4 million from the additional SG&A expenses of Scepter from the date of acquisition, establishment of a reserve related to a patent infringement legal suit of $3.0 million and approximately $3.6 million in transactional costs incurred in connection with our acquisition of Scepter during the nine months ended September 30, 25 -------------------------------------------------------------------------------- 2014. A decrease in outside consulting costs of $1.1 million, lower administrative costs related to facilities and other expenses of $0.8 million, and lower employee related costs of $0.4 million reduced SG&A year over year. Restructuring and other related charges of $2.0 million, primarily severance, facility closure related expenses, including impairment charges were recorded in SG&A in the first nine months of 2014 compared to $0.2 million for the same period in the prior year. Shipping and handling costs, including freight, are classified primarily as SG&A expenses. Interest Expense from Continuing Operations: (dollars in millions) Nine Months Ended September 30, 2014 2013 Change % Change Net interest expense $ 5.9 $ 3.3 $ 2.6 77.9 % Outstanding borrowings, net of deferred financing costs $ 276.9 $ 75.5 $ 201.4 Average borrowing rate 4.10 % 4.62 % Net interest expense for the nine months ended September 30, 2014 was $5.9 million compared to $3.3 million in the same period in the prior year. The increase in net interest expense is due to the higher average debt balance partially offset by a decrease in the average borrowing rate during the nine months ended September 30, 2014 compared to the same period in the prior year. The increase in outstanding borrowings at September 30, 2014 compared to September 30, 2013 was primarily due to the additional borrowings outstanding related to our senior unsecured notes and higher balance outstanding under our credit facility primarily to fund the Scepter acquisition. Income Taxes from Continuing Operations: (dollars in millions) Nine Months Ended September 30, 2014 2013 Income from continuing operations before income taxes $ 11.6 $ 31.7 Income tax expense $ 4.1 $ 11.6 Effective tax rate 35.6 % 36.7 % The effective tax rate was 35.6% for the nine months ended September 30, 2014 compared to 36.7% in the same period of the prior year. The lower effective tax rate is attributable to decreases in unrecognized tax benefits from expiring statutes of limitations in U.S. Federal and state jurisdictions. Discontinued Operations: Loss from discontinued operations, net of income taxes was $3.8 million for the nine months ended September 30, 2014 compared to income from discontinued operations of $2.6 million in the comparable prior year period. Discontinued operations are comprised of the Lawn and Garden Segment and WEK. Net sales from discontinued operations decreased $24.3 million or 14.0% for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The decrease in net sales was due to lower sales volume of $25.4 million attributable to the sale of WEK on June 20, 2014, weather conditions, transportation issues, operational start-up issues related to our rationalization plan and the negative impact from the effect of unfavorable currency translation of $1.6 million. The decrease in net sales was partially offset by improved pricing of $2.7 million to help mitigate higher raw material costs. Higher restructuring and other related charges of $10.7 million during the nine months ended September 30, 2014 compared to $4.2 million in the comparable prior period negatively impacted the Lawn and Garden Segment. Gain on sale of discontinued operations was $3.7 million, net of tax of $1.3 million, resulting in an after tax gain of $2.4 million related to the sale of WEK on June 20, 2014. 26--------------------------------------------------------------------------------Acquisition: On July 2, 2014, CA Acquisition Inc., now known as Scepter Canada Inc., and a wholly-owned subsidiary of Myers Industries, Inc., completed the purchase of substantially all of the assets and assumption of certain liabilities of Scepter Corporation and certain real property of SHI Properties Inc., both located in Scarborough, Ontario, Canada. Contemporaneously with the asset acquisition, Crown US Acquisition Company, now known as Scepter US Holding Company, and another wholly-owned subsidiary of Myers Industries, Inc., completed the purchase of all of the issued and outstanding membership interests of Eco One Leasing, LLC and Scepter Manufacturing, LLC, both located in Miami, Oklahoma. Eco One Leasing, LLC was subsequently merged into Scepter Manufacturing, LLC. The total purchase price for these acquisitions was approximately $157.8 million in cash, which includes an estimated working capital adjustment of $0.8 million subject to further adjustment based on the final working capital and other specified items. The acquisition of Scepter was funded from net proceeds from additional borrowings of approximately $135.3 million under the Fourth Amended and Restated Loan Agreement and cash on hand of $22.5 million. With the acquisition of Scepter, the Company becomes an industry leading producer of portable marine fuel containers, portable fuel and water containers and accessories, ammunition containers, storage totes and environmental bins for the marine, military, consumer and industrial markets. The acquisition of Scepter is consistent with the Company's business strategy and the products fit well with the Company's overall portfolio. The operating results of Scepter have been included in the Company's Material Handling Segment since the date of acquisition. Scepters assets and liabilities are recorded at fair value as of the date of acquisition using primarily level 3 fair value inputs. The Company accounted for the acquisition of Scepter using the acquisition method of accounting, which requires among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. As of September 30, 2014, the entire purchase price allocation is preliminary. The Company has received a preliminary third-party valuation of certain tangible and intangible assets of Scepter and, therefore, the values attributed to those acquired assets in the condensed consolidated financial statements are subject to adjustment. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional adjustments will be recorded during the measurement period. Liquidity and Capital Resources Cash used for operating activities from continuing operations was $2.8 million for the nine months ended September 30, 2014 compared to cash provided by operating activities from continuing operations of $29.3 million for the nine months ended September 30, 2013, due to the reduction in earnings and increases in working capital. The primary use of cash for operating activities from continuing operations for the nine months ended September 30, 2014 and 2013, was $37.8 million and $14.0 million, respectively, for working capital. The increase in cash used for continuing operations during the nine months ended September 30, 2014 was due to the timing of payments made on accounts payable and other liabilities. In addition, strong sales at the end of the third quarter of 2014 resulted in a higher accounts receivable balance at September 30, 2014 compared to the prior year. Contributing to a reduction in the use of funds for accounts receivable for the nine months ended September 30, 2014 compared to the same period in 2013 was the result of cash proceeds received from our accounts receivable factoring arrangement in Brazil, which commenced during the third quarter of 2014. Increased inventory in the third quarter of 2014 as compared to the prior year quarter also contributed to a use of cash from continuing operations. Depreciation and amortization costs from continuing operations were $22.0 million in the nine months ended September 30, 2014, compared to $17.7 million for the nine months ended September 30, 2013. The higher depreciation and amortization is attributable to the higher level of assets placed in service over the past several years and assets acquired in connection with the acquisition of Scepter. Cash used for operating activities from discontinued operations was $14.1 million for the nine months ended September 30, 2014 compared to cash provided by operating activities from discontinued operations of $17.5 million for the nine months ended September 30, 2013. The primary use of cash for operating activities from discontinued operations for the nine months ended September 30, 2014 was $14.6 million used for working capital compared to $2.0 million provided by working capital for the nine months ended September 30, 2013. Increased inventory in the third quarter of 2014 as compared to the prior year quarter and timing of payments made on accounts payable and other liabilities contributed to the use of cash from discontinued operations. Depreciation and amortization costs from discontinued operations were $6.5 million for the nine months ended September 30, 2014 compared to $10.9 million for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, the Company recorded a pre-tax gain on sale of WEK of approximately $3.7 million. Cash used for investing activities for continuing operations for the nine months ended September 30, 2014 were $168.1 million compared to $14.1 million for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, the Company paid approximately $157.8 million in connection with the acquisition of Scepter which is included in the Material Handling Segment. Capital expenditures related to continuing operations for the nine months ended September 30, 2014 were $10.9 million compared to $13.5 million for the same period in the prior year. Full year capital expenditures are expected to be between $20 and $25 million, the majority of which are expected to be allocated to growth and productivity projects. 27-------------------------------------------------------------------------------- Table of contents Cash provided by investing activities from discontinued operations for the nine months ended September 30, 2014 were $12.9 million compared to cash used by investing activities for discontinued operations of $5.6 million for the nine months ended September 30, 2013. Capital expenditures related to discontinued operations for the nine months ended September 30, 2014 were $6.1 million compared to $6.5 million for the same period in the prior year. During the nine months ended September 30, 2014, the Company received cash proceeds of $19.0 million relating to the sale of WEK on June 20, 2014. During the nine months ended September 30, 2013, the Company received approximately $0.9 million in cash proceeds from the sale of certain equipment. For the nine months ended September 30, 2014, the Company used cash of $48.3 million to repurchase 2,332,506 shares of its own stock under a share repurchase plan, compared to $5.3 million to repurchase 362,612 shares of its own stock for the nine months ended September 30, 2013. The Company used cash of $11.6 million representing payment of three quarterly dividends during the nine months ended September 30, 2014 compared to $6.0 million during the nine months ended September 30, 2013 for two quarterly dividends, due to timing. Debt, net of cash and unamortized deferred financing fees at September 30, 2014 were approximately $268.5 million compared to $37.8 million at December 31, 2013. The increase in debt between periods was due to cash proceeds of $89.0 million from our senior unsecured notes and net additional borrowings under our amended Loan Agreement primarily to fund the acquisition of Scepter during the nine month period ended September 30, 2014. As of September 30, 2014, the Company was in compliance with all its debt covenants. The most restrictive financial covenants for all of the Company's debt are an interest coverage ratio (defined as earnings before interest and taxes divided by interest expense), and a leverage ratio (defined as earnings before interest, taxes, depreciation and amortization, as adjusted, compared to total debt). The ratios as of and for the period ended September 30, 2014 are shown in the following table: Required Level Actual Level Interest Coverage Ratio 3.00 to 1 (minimum) 14.03 Leverage Ratio 3.25 to 1 (maximum) 2.83 The Company believes that cash flows from operations and available borrowing under its Loan Agreement will be sufficient to meet expected business requirements including strategic initiatives, capital expenditures, dividends, working capital, debt service and to fund the stock repurchase program into the foreseeable future. Recent Accounting Pronouncements Not Yet Adopted In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This guidance states that the disposal of a component of an entity is to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The pronouncement also requires additional disclosures regarding individually significant disposals of components that do not meet the criteria to be recognized as a discontinued operation as well as additional and expanded disclosures. The guidance is effective for the Company on January 1, 2015 and is to be applied prospectively. While early adoption is permitted, the Company plans to adopt this guidance on January 1, 2015. The Company is currently evaluating the impact the adoption of this guidance will have on its financial position, results of operations, cash flows and related disclosures. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for the Company on January 1, 2017. The Company is currently evaluating the impact the adoption of this guidance will have on its financial position, results of operations, cash flows and related disclosures. In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern. The new standard provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. Under ASU 2014-15, management will be required to perform interim and annual assessments of the Company's ability to continue as a going concern within one year of the date the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of this standard is not expected to have an impact on the Company's financial statement disclosures. 28-------------------------------------------------------------------------------- Table of contents |