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TMCNet:  MYERS INDUSTRIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[August 04, 2014]

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 reflects 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 Second Quarter of 2014 to the Second Quarter of 2013 Net Sales from Continuing Operations: (dollars in millions) Quarter Ended June 30, Segment 2014 2013 Change % Change Material Handling $ 103.0 $ 100.5 $ 2.5 2.5 % Distribution 49.8 53.2 (3.4 ) (6.4 %) Inter-company Sales - (0.1 ) 0.1 - % $ 152.8 $ 153.6 $ (0.8 ) (0.5 %) Net sales for the quarter ended June 30, 2014 were $152.8 million, a decrease of $0.8 million or 0.5% compared to the same period in the prior year. The slight decrease in net sales was driven by lower sales volumes in our Distribution and Material Handling segments of $5.0 million and the effect of unfavorable foreign currency translation of $1.1 million, which was partially offset by higher pricing of $5.3 million to offset rising raw material costs.

Net sales in the Material Handling Segment increased $2.5 million or 2.5% in the second quarter of 2014 compared to the same period in the prior year. The increase in net sales between periods was due to improved pricing of $5.5 million in the agriculture market to help mitigate higher raw material costs.

Sales were negatively impacted from lower sales volume of $1.8 million as a result of the economic slowdown in Brazil caused by the World Cup activities.

Net sales were also negatively impacted by the effects of unfavorable currency translation of $1.2 million.

Net sales in the Distribution Segment decreased $3.4 million or 6.4% in the second quarter of 2014 compared to the same period in the prior year. The decrease in net sales between periods was primarily attributable to lower sales volume, due primarily to the closure of our Canadian branches in the first quarter of 2014 and lower custom sales.

Cost of Sales & Gross Profit from Continuing Operations: (dollars in millions) Quarter Ended June 30, 2014 2013 Cost of sales $ 110.3 $ 108.6 Gross profit $ 42.5 $ 45.0 Gross profit as a percentage of net sales 27.8 % 29.3 % Gross profit decreased in the second quarter of 2014 compared to the same period in the prior year primarily due to lower sales. Gross profit margin decreased to 27.8% in the second quarter of 2014 compared to 29.3% in the second quarter of the prior year. Although improved pricing offset higher raw material costs in the second quarter of 2014 compared to the same period in 2013, higher logistics costs in our Distribution Segment negatively impacted gross profit margin. Raw material costs, primarily resins, were, on average, approximately 13% higher for polypropylene and polyethylene for the three months ended June 30, 2014 compared to the same period in 2013.

19-------------------------------------------------------------------------------- Selling, General and Administrative Expenses from Continuing Operations: (dollars in millions) Quarter Ended June 30, 2014 2013 Change % Change SG&A expenses $ 31.2 $ 32.4 $ (1.2 ) (3.7 %) SG&A expenses as a percentage of net sales 20.5 % 21.1 % Selling, general and administrative ("SG&A") expenses for the quarter ended June 30, 2014 were $31.2 million, a decrease of $1.2 million or 3.7% compared to the second quarter in the prior year. The decrease in SG&A was due to lower employee-related compensation and benefit costs of $1.5 million and lower outside consulting costs, primarily related to our information technology initiatives, of $1.7 million in the second quarter of 2014 compared to the same period in 2013. The decrease was partially offset by higher freight of approximately $0.5 million. Restructuring and other related charges of $1.5 million, primarily severance, moving costs, lease cancellation expenses and transaction related expenses were included in SG&A for the quarter ended June 30, 2014. During the quarter ended June 30, 2013, the Company did not incur any restructuring or 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 June 30, 2014 2013 Change % Change Net interest expense $ 1.7 $ 1.1 $ 0.6 54.5 % Outstanding borrowings, net of deferred financing costs $ 137.7 $ 96.0 $ 41.7 Average borrowing rate 4.49 % 4.17 % Net interest expense in the second quarter of 2014 was $1.7 million compared to $1.1 million in the second quarter of 2013. The increase in net interest expense is due to higher average debt balance and average borrowing rate during the second quarter of 2014 compared to the same period in the prior year.

Income Taxes from Continuing Operations: (dollars in millions) Quarter Ended June 30, 2014 2013 Income from continuing operations before income taxes $ 9.6 $ 11.5 Income tax expense $ 3.3 $ 4.1 Effective tax rate 34.2 % 35.6 % The effective tax rate was 34.2% for the quarter ended June 30, 2014 compared to 35.6% in the prior year quarter. The lower effective tax rate is attributable to lower state taxes and a favorable impact from valuation allowances for the quarter ended June 30, 2014.

Discontinued Operations: Loss from discontinued operations, net of income taxes was $0.6 million for the quarter ended June 30, 2014 compared to income from discontinued operations of $0.9 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 $4.0 million or 8.0% for the quarter ended June 30, 2014 compared to the quarter ended June 30, 2013. The decrease in net sales was due to lower sales volume of $4.1 million attributable to operational start-up issues related to our rationalization plan and the negative impact from the effect of unfavorable currency translation of $0.5 million. The decrease in net sales was partially offset by improved pricing of $0.6 million to help mitigate higher raw material costs.

Higher restructuring and other related charges of $3.2 million during the quarter ended June 30, 2014 compared to $1.4 million in the comparable prior year quarter negatively impacted the Lawn and Garden Segment.

20 -------------------------------------------------------------------------------- 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.

Comparison of the Six Months Ended June 30, 2014 to the Six Months Ended June 30, 2013 Net Sales from Continuing Operations: (dollars in millions) Six Months Ended June 30, Segment 2014 2013 Change % Change Material Handling $ 209.7 $ 195.1 $ 14.6 7.5 % Distribution 93.7 103.6 (9.9 ) (9.6 %) Inter-company Sales (0.1 ) (0.1 ) - - % $ 303.3 $ 298.6 $ 4.7 1.6 % Net sales for the six months ended June 30, 2014 were $303.3 million, an increase of $4.7 million or 1.6% compared to the same period in the prior year.

The increase in net sales was driven by stronger sales volumes in our Material Handling Segment offset by lower sales volumes in our Distribution Segment.

Improved pricing of $7.1 million and increased volume of $1.1 million were offset by the effect of unfavorable foreign currency translation of $3.5 million for the six months ended June 30, 2014 compared to the same period in the prior year.

Net sales in the Material Handling Segment increased $14.6 million or 7.5% for the six months ended June 30, 2014 compared to the same period in the prior year. The increase in net sales between periods was due to higher sales volume of $10.6 million, driven by sales in the food processing and agriculture end markets, as well as improved pricing of $7.4 million to help mitigate higher raw material costs. These increases were partially offset by unfavorable currency translation of $3.4 million.

Net sales in the Distribution Segment decreased $9.9 million or 9.6% for the six months ended June 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 quarter of 2014.

Cost of Sales & Gross Profit from Continuing Operations: (dollars in millions) Six Months Ended June 30, 2014 2013 Cost of sales $ 218.7 $ 211.5 Gross profit $ 84.6 $ 87.1 Gross profit as a percentage of net sales 27.9 % 29.2 % Gross profit margin decreased to 27.9% for the six months ended June 30, 2014 compared to 29.2% in the prior year. Higher raw material costs during the six months ended June 30, 2014 compared to the same period in 2013 negatively impacted gross profit. Raw material costs, primarily resins, were, on average, approximately 12% higher for polypropylene and polyethylene for the six months ended June 30, 2014 compared to the same period in 2013.

Selling, General and Administrative Expenses from Continuing Operations: (dollars in millions) Six Months Ended June 30, 2014 2013 Change % Change SG&A expenses $ 64.4 $ 64.4 $ - - % SG&A expenses as a percentage of net sales 21.2 % 21.6 % SG&A expenses for both the six month period ended June 30, 2014 and 2013 were $64.4 million. A decrease in outside consulting costs of approximately $2.6 million was offset by higher freight costs of $0.7 million and restructuring and other related charges of $2.0 million, primarily severance, facility closures and transaction related expenses which were recorded in SG&A in the first six months of 2014 compared to $0.1 million for the same period in the prior year.

Shipping and handling costs, including freight, are classified primarily as SG&A expenses.

21-------------------------------------------------------------------------------- Interest Expense from Continuing Operations: (dollars in millions) Six Months Ended June 30, 2014 2013 Change % Change Net interest expense $ 3.3 $ 2.2 $ 1.1 50.0 % Outstanding borrowings, net of deferred financing costs $ 137.7 $ 96.0 $ 41.7 Average borrowing rate 4.94 % 4.35 % Net interest expense for the six months ended June 30, 2014 was $3.3 million compared to $2.2 million compared to the same period in the prior year. The increase in net interest expense is due to higher average debt balance and average borrowing rate during the six months ended June 30, 2014 compared to the same period in the prior year. The increase in outstanding borrowings at June 30, 2014 compared to June 30, 2013 was primarily due to the additional borrowings outstanding relating to our senior unsecured notes offset by a lower balance outstanding under our credit facility.

Income Taxes from Continuing Operations: (dollars in millions) Six Months Ended June 30, 2014 2013 Income from continuing operations before income taxes $ 16.9 $ 20.5 Income tax expense $ 5.8 $ 7.3 Effective tax rate 34.5 % 35.7 % The effective tax rate was 34.5% for the six months ended June 30, 2014 compared to 35.7% in the same period of the prior year. The lower effective tax rate is attributable to lower state taxes and a favorable impact from valuation allowances for the six months ended June 30, 2014.

Discontinued Operations: Loss from discontinued operations, net of income taxes was $4.7 million for the six months ended June 30, 2014 compared to income from discontinued operations of $3.0 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 $15.8 million or 13.1% for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

The decrease in net sales was due to lower sales volume of $15.3 million attributable to weather conditions, transportation issues and operational start-up issues related to our rationalization plan and the negative impact from the effect of unfavorable currency translation of $2.4 million. The decrease in net sales was partially offset by improved pricing of $1.9 million to help mitigate higher raw material costs.

Higher restructuring and other related charges of $10.1 million during the six months ended June 30, 2014 compared to $1.8 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.

22-------------------------------------------------------------------------------- Table of contents Liquidity and Capital Resources Cash used for operating activities from continuing operations was $6.8 million for the six months ended June 30, 2014 compared to cash provided by operating activities from continuing operations of $13.6 million for the six months ended June 30, 2013. The primary use of cash for operating activities from continuing operations for the six months ended June 30, 2014 and 2013, was $31.8 million and $16.6 million, respectively, for working capital. The increase in cash used from continuing operations during the six months ended June 30, 2014 was due to the timing of payments made on accounts payable and other liabilities. Stronger sales at the end of the second quarter of 2014 resulted in a higher accounts receivable balance at June 30, 2014 compared to the prior year. Increased inventory in the second 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 $12.5 million in the six months ended June 30, 2014, compared to $11.8 million for the six months ended June 30, 2013. The higher depreciation and amortization is attributable to the higher level of assets placed in service over the past several years.

Cash used for operating activities from discontinued operations was $14.2 million for the six months ended June 30, 2014 compared to cash provided by operating activities from discontinued operations of $16.5 million for the six months ended June 30, 2013. The primary use of cash for operating activities from discontinued operations for the six months ended June 30, 2014 was $12.9 million used for working capital compared to $7.3 million provided by working capital for the six months ended June 30, 2013. Depreciation and amortization costs from discontinued operations were $6.5 million for the six months ended June 30, 2014 compared to $6.4 million for the six months ended June 30, 2013.

During the six months ended June 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 six months ended June 30, 2014 were $6.9 million compared to $7.9 million for the six months ended June 30, 2013. Capital expenditures from continuing operations for the six months ended June 30, 2014 were $7.0 million compared to $7.3 million for the same period in the prior year. Full year capital expenditures are expected to be approximately $30 million, the majority of which are expected to be allocated to growth and productivity projects. During the six months ended June 30, 2013, the Company purchased an equity interest in a non-consolidated subsidiary, included in the Distribution Segment, for approximately $0.6 million.

Cash provided by investing activities from discontinued operations for the six months ended June 30, 2014 were $14.5 million compared to cash used by investing activities for discontinued operations of $2.9 million for the six months ended June 30, 2013. Capital expenditures from discontinued operations for the six months ended June 30, 2014 were $4.5 million compared to $2.9 million for the same period in the prior year. During the six months ended June 30, 2014, the Company received cash proceeds of $19.0 million relating to the sale of WEK on June 20, 2014.

For the six months ended June 30, 2014, the Company used cash of $44.4 million to purchase 2,128,524 shares of its own stock under a share repurchase plan, of which 1,866,108 shares were purchased in the second quarter of 2014, compared to $3.3 million to purchase 237,783 shares of its own stock for the six months ended June 30, 2013. The Company used cash of $7.5 million to pay its fourth quarter 2013 and first quarter 2014 dividends during the six months ended June 30, 2014. During the six months ended June 30, 2013, the Company used cash of $3.0 million to pay its first quarter 2013 dividends declared. During 2012, the Company accelerated its fourth quarter dividend payment to reduce the tax impact for its shareholders which resulted in the payment in December 2012 rather than in 2013.

Debt, net of cash and unamortized deferred financing fees at June 30, 2014 was approximately $101.9 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 note purchase agreement and net additional borrowings under our amended Loan Agreement of $4.3 million during the six month period ended June 30, 2014.

As of June 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 June 30, 2014 are shown in the following table: Required Level Actual Level Interest Coverage Ratio 3.00 to 1 (minimum) 15.49 Leverage Ratio 3.25 to 1 (maximum) 1.65 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.

23-------------------------------------------------------------------------------- Table of contents 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.

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