Business context and reporting period
Myers Industries, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2021. It operates through Material Handling, which manufactures plastic products, and Distribution, which sells tire-service and automotive-service equipment and supplies. Comparisons are with Q1 2020; the prior period was affected by the onset of COVID-19.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $174.4 million | $122.3 million |
| Gross profit / margin | $50.4 million / 28.9% | $42.5 million / 34.8% |
| Operating income | $10.9 million | $23.3 million |
| Net income | $7.3 million | $16.7 million |
| Diluted EPS | $0.20 | $0.47 |
| Operating cash flow | $6.6 million | $5.0 million |
Sales rose 43%. Material Handling sales increased 54% to $129.9 million; Distribution sales increased 17% to $44.6 million. Management attributed the consolidated sales increase mainly to $27.1 million of incremental Elkhart Plastics sales and $24.2 million of higher volume and mix.
Gross margin fell 5.9 percentage points, reflecting higher commodity raw-material costs, unfavorable mix, and higher manufacturing costs, partly offset by higher volume and the acquisition. SG&A increased 27% to $39.5 million, including $3.7 million of Elkhart-related costs, $3.1 million of higher incentive compensation, and $0.8 million of executive severance and related stock-compensation acceleration. Operating margin was approximately 6.2%, versus 19.1% in Q1 2020.
Q1 2020 included an $11.9 million pre-tax gain from selling fully reserved notes receivable and obtaining release from a lease guarantee. Excluding the effect of that unusual gain, the year-over-year decline in operating income is less pronounced; reported results are not directly comparable.
Cash flow, debt and liquidity
Operating cash flow was $6.6 million; capital expenditures were $5.2 million, implying approximately $1.4 million of operating cash flow after capital expenditures. Investing cash use was $6.5 million and financing cash use was $11.8 million. Cash declined by $11.6 million to $16.7 million during the quarter.
At March 31, 2021, the company reported $70.9 million of long-term debt, net of financing costs, and $10.3 million of finance-lease liabilities. Management cited total outstanding debt of $81.3 million including finance leases. It had $211.2 million available under its $250 million revolving credit facility and was in compliance with debt covenants. The facility was amended in March: its limit increased from $200 million, maturity extended to March 2024 from March 2022, and covenant flexibility increased. The $40 million note due in January 2021 was repaid using cash and revolving-credit borrowings.
Current assets were $190.7 million and current liabilities were $113.7 million. Management said cash, operating cash generation, and borrowing availability should be sufficient for expected working capital, capital expenditures, dividends, debt service, and growth needs.
Outlook, risks and notable items
- Management expects 2021 capital expenditures of approximately $15 million. It provided no specific earnings or revenue guidance.
- Two broad-based product price increases were announced in late February and March in response to rising raw-material costs; management expects them to support sales as implemented. Pricing may not fully offset cost inflation.
- COVID-19 effects and economic uncertainty remain risks, although most businesses continued operating as essential suppliers. Other cited risks include raw-material availability and prices, customer demand, competition, manufacturing disruptions, and execution of growth initiatives.
- The Ameri-Kart facility consolidation is expected to be substantially completed in 2021, with approximately $1.3 million of total restructuring costs anticipated. A 15-year finance lease for the new Bristol, Indiana facility commenced in March; construction was still ongoing. The planned sale-leaseback of the original Bristol facility had not closed at quarter-end.
- Environmental reserves totaled $7.3 million for the New Idria Mine and $1.5 million for New Almaden. New Idria remediation costs have not been accrued because the final remediation strategy and liability cannot yet be estimated; the company says insurance may cover some costs but has recognized no recovery.
- A patent-infringement and related claims lawsuit involving Scepter companies remained unresolved; no reserve was recorded because the outcome could not be determined. Management cautioned that an unfavorable ruling in legal matters could have a material effect.
- The company reported effective disclosure controls as of March 31, 2021. Its evaluation of internal controls did not include Elkhart Plastics, acquired in November 2020.
Important facts for investors to verify
- Whether announced price increases offset resin and other manufacturing-cost inflation, and how gross margins develop.
- How much sales growth reflects ongoing demand versus the Elkhart Plastics acquisition and comparison effects from COVID-19.
- Cash conversion and working-capital needs, including the effect of receivables and inventory growth.
- Debt levels, borrowing availability, covenant compliance, and the costs and obligations associated with the new credit facility and Bristol finance lease.
- Updates to New Idria and New Almaden environmental estimates, insurance recoveries, and the Scepter litigation.
- Progress, cost, and timing of the Ameri-Kart consolidation and the planned sale-leaseback.