Business Context and Reporting Period
Company: Myers Industries, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Headquarters: Akron, Ohio
Myers Industries is a diversified manufacturer and distributor of polymer products and tire service equipment. The company operates through four segments: Lawn and Garden, Material Handling, Automotive and Custom, and Distribution. As of December 31, 2008, the company employed 3,652 people across 25 manufacturing facilities and 41 distribution branches in North, Central, and South America.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Net Sales | $867.8 million | $918.8 million |
| Gross Profit | $203.1 million | $235.7 million |
| Gross Margin | 23.4% | 25.7% |
| Operating Loss | $(35.5) million | $45.8 million |
| Net Loss (Continuing Ops) | $(46.2) million | $36.9 million |
| Net Loss (Total) | $(44.5) million | $54.7 million |
| Diluted EPS (Continuing Ops) | $(1.31) | $1.05 |
| Cash from Operations | $60.2 million | $99.1 million |
| Total Debt | $171.6 million | $170.9 million |
| Working Capital | $135.7 million | $119.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 6% to $867.8 million, driven by lower volumes across all segments due to the weak economy. Price increases of approximately $38 million were insufficient to offset volume losses.
- Significant Impairment Charges: The company recorded $70.1 million in impairment charges in Q4 2008. This included a $60.1 million goodwill impairment in the Automotive and Custom segment and $10.0 million in long-lived asset impairments in the Lawn and Garden segment.
- Margin Compression: Gross margin declined to 23.4% from 25.7%. This was primarily caused by raw material costs (plastic resins) rising over 20% year-over-year and reduced capacity utilization.
- Segment Performance:
- Lawn and Garden: Sales down 9% due to reduced consumer purchasing and housing construction.
- Material Handling: Sales down 2% due to volume declines in automotive and industrial sectors.
- Distribution: Sales down 8% due to lower tire replacement volumes and deferred capital purchases by customers.
- Automotive and Custom: Sales up 2% due to price increases and niche custom molding gains, though this segment incurred the bulk of the goodwill impairment.
- Dividends: Total dividends paid were $18.3 million, including a special dividend of $9.9 million related to the termination of a proposed merger agreement.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the 2008 loss to the severe economic contraction, significantly higher raw material costs, and the non-cash impairment charges. The company is executing a "Strategic Business Evolution" focused on cost control, consolidation of manufacturing facilities (including closing three Lawn and Garden facilities), and optimizing the supply chain.
Liquidity and Capital Resources: The company maintains a $250 million credit agreement with approximately $186 million available as of year-end. Management believes cash flows and available borrowing are sufficient to meet future requirements. The company was in compliance with all debt covenants, including an interest coverage ratio of 3.7 (required 2.5) and a leverage ratio of 2.2 (required max 3.5).
Risks and Contingencies:
- Raw Material Volatility: Continued fluctuations in plastic resin and rubber prices could materially affect profitability.
- Economic Sensitivity: The company is exposed to cyclical downturns in the automotive, housing, and general industrial markets.
- Environmental Liability: The company is identified in a planning document regarding mercury contamination in the Guadalupe River Watershed. While a claim is reasonably possible, the cost cannot be estimated at this time.
- Merger Termination: The proposed merger with GS Capital Partners was terminated in April 2008. The company received a $35 million termination fee in 2007, which impacted 2007 comparables.
Investor Verification Checklist
- Impairment Validity: Verify the assumptions used in the $60.1 million goodwill impairment for the Automotive and Custom segment, specifically regarding future cash flow projections in a downturn.
- Raw Material Hedging: Assess the company's ability to pass on raw material cost increases to customers given the competitive landscape.
- Restructuring Costs: Monitor the execution of the Lawn and Garden segment realignment and the associated $8.0 million in expected future charges for 2009.
- Debt Covenants: Confirm continued compliance with leverage and interest coverage ratios given the volatility in earnings.
- Environmental Exposure: Track developments regarding the California Regional Water Quality Control Board planning document for potential remediation costs.