Business Context and Reporting Period
Company: Myers Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Myers Industries operates four reportable segments: Lawn and Garden, Material Handling, Distribution, and Engineered Products. The company manufactures and distributes products for agriculture, automotive, and industrial markets.
Key Financial Metrics
| Metric (in thousands) | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Sales | $193,441 | $186,422 |
| Gross Profit | $52,025 | $44,912 |
| Gross Margin | 26.9% | 24.1% |
| Operating Income | $12,368 | $10,481 |
| Net Income | $6,719 | $5,530 |
| Diluted EPS | $0.19 | $0.16 |
| Cash from Operations | $(408) | $(9,500) |
| Total Debt | $90,829 | $83,835 |
| Cash and Equivalents | $7,053 | $8,789 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 4% ($7.0 million) driven by higher selling prices, increased volumes in most markets, and a $1.8 million positive foreign currency translation impact.
- Margin Expansion: Gross profit margin improved to 26.9% from 24.1%. This was achieved despite raw material costs rising (polypropylene +16%, HDPE +9%) due to price increases passed to customers and favorable sales mix.
- Segment Performance:
- Material Handling: Sales up 9% ($5.5M) due to strong demand for reusable bulk containers.
- Engineered Products: Sales up 14% ($3.5M) driven by recreational vehicle and marine markets.
- Lawn and Garden: Sales down 6% ($4.4M) due to conservative production by growers, partially offset by price increases.
- Expense Increases: SG&A expenses rose 15% ($5.3M) primarily due to higher freight charges ($1.9M), increased bad debt provisions ($1.2M), and a $0.3M impairment charge on a facility sale (compared to a gain in the prior year).
- Interest Expense: Decreased 33% to $1.2M due to lower borrowing levels and reduced average interest rates (4.98% vs 6.12%).
Guidance, Outlook, and Risks
- Capital Expenditures: Expected to be at the high end of the $20 million to $25 million forecasted range for the full year 2011.
- Liquidity: The company maintains a $180 million credit facility with $125.4 million available as of March 31, 2011. Management believes cash flows and borrowing capacity are sufficient for foreseeable needs.
- Debt Covenants: The company is in compliance with all covenants. Actual Interest Coverage Ratio is 4.94 (min 2.25) and Leverage Ratio is 1.46 (max 3.25).
- Legal Contingencies:
- French Tax Assessment: A 1.5 million euro assessment related to a 2007 divestiture is being appealed; no provision recorded as the company believes the claim is invalid.
- Environmental: Identified in a California planning document regarding mercury in the Guadalupe River Watershed. No reasonable estimate of remediation cost is currently available.
- Workplace Incident: A fatality occurred in 2009; a civil complaint was filed in 2011 against the equipment manufacturer and an employee, but not the company. The company believes insurance is adequate.
- Market Risks: Exposure to floating interest rates (1% increase would raise annual interest expense by ~$0.5M) and foreign currency fluctuations (net exposure $5M-$10M). No commodity hedges are in place for plastic resins.
Investor Verification Checklist
- Working Capital Trends: Verify the sustainability of the $18.4 million increase in accounts receivable and $8.0 million increase in inventory, which drove negative operating cash flow despite net income.
- Raw Material Costs: Monitor the ability to pass through continued increases in plastic resin costs to maintain gross margins.
- Segment Mix: Assess the impact of the 6% decline in the Lawn and Garden segment on future quarterly performance.
- Legal Exposure: Track the status of the French tax appeal and the California environmental planning document for potential future liabilities.
- Debt Utilization: Confirm the trend of increasing debt levels ($90.8M) against the $180M credit facility availability.