Myers Industries, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are shown in millions.
Business context and results
Myers Industries manufactures and distributes products through four reportable segments: Material Handling, Lawn and Garden, Distribution, and Engineered Products. Q1 net sales rose 8.1% to $215.0 million, supported by acquisitions and higher volume.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $215.0 million | $198.8 million | +8% |
| Gross profit / margin | $58.3 million / 27.1% | $58.0 million / 29.2% | Margin down 2.1 percentage points |
| Operating income | $13.2 million | $17.1 million | Down 23% |
| Net income | $7.9 million | $10.0 million | Down 21% |
| Diluted EPS | $0.23 | $0.29 | Down $0.06 |
| Operating cash flow | $(6.5) million | $(6.4) million | Similar cash use |
Revenue, margins, and segment performance
- Material Handling sales increased 23% to $80.0 million, including approximately $12.0 million from the 2012 Novel and Jamco acquisitions and $5.7 million of higher volume. Segment income before taxes fell to $9.7 million from $13.2 million.
- Lawn and Garden sales rose 2% to $60.4 million; segment income before taxes increased to $2.3 million from $1.2 million.
- Distribution sales were approximately flat at $42.6 million; segment income before taxes declined to $2.8 million from $3.5 million.
- Engineered Products sales fell 1% to $37.0 million; segment income before taxes rose to $5.1 million from $4.6 million.
Consolidated gross profit was nearly flat despite higher sales. Management attributed the lower gross margin primarily to unfavorable product and customer mix. SG&A increased 10% to $45.1 million, reflecting $3.0 million of acquisition costs and $0.6 million of IT investment; the prior-year comparison also benefited from a $1.1 million bad-debt recovery. Net interest expense was $1.1 million in both periods. The effective tax rate declined to 35.1% from 37.7%, mainly due to foreign rate differentials and incentive tax credits.
Cash, debt, and liquidity
- Cash was $4.1 million at March 31, 2013. Operating activities used $6.5 million, investing activities used $4.4 million, and financing activities provided $10.6 million; cash increased $0.1 million during the quarter.
- Working capital absorbed cash, including $9.8 million from accounts receivable, $2.2 million from inventories, and $13.9 million from accounts payable and accrued expenses.
- Capital expenditures were $4.5 million in Q1; management expected full-year spending of approximately $30–$35 million.
- Total debt was $103.6 million, up from $92.8 million at year-end 2012; net debt was $99.5 million. The company had $106.3 million available under its $180 million credit agreement.
- The $35 million of senior notes due December 2013 was classified as long-term because the company intended to refinance it and cited available revolver capacity. The company reported compliance with debt covenants: interest coverage of 10.50 versus a 2.25 minimum, and leverage of 1.30 versus a 3.25 maximum.
- The company repurchased approximately 136,000 shares for $2.0 million. Dividends declared were $0.09 per share.
Outlook, risks, and notable items
- Management believed operating cash flows and available credit would be sufficient for expected business needs, including capital spending, dividends, debt service, working capital, strategic initiatives, and the repurchase program. The filing does not provide earnings or sales guidance.
- A 1 percentage-point rise in interest rates was estimated to increase annual interest expense by approximately $0.7 million. The company had no interest-rate hedges.
- Plastic resin and other commodity cost increases could materially affect results; the company reported no commodity hedges or significant fixed-quantity purchase commitments.
- Foreign exchange translation reduced Q1 2013 other comprehensive income by $0.9 million. The company reported no foreign-currency contracts outstanding at quarter-end.
- Restructuring charges were $0.7 million in Q1 2013, versus $0.6 million in Q1 2012. Approximately $5.7 million of property and equipment remained held for sale.
- The company is a potentially responsible party in the New Idria Mercury Mine matter. It had a $1.9 million reserve recorded in 2011, with approximately $0.4 million used through March 31, 2013; further remediation costs were unknown and not estimated. Management said the ultimate outcome was not expected to materially affect financial position or overall trends, but acknowledged possible material adverse effects from an unfavorable outcome.
- The company was implementing phased ERP systems, with a significant portion expected to be completed in 2013 and the remainder in 2014. Management reported disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether acquisition-driven sales growth translates into improved margins and earnings, particularly in Material Handling.
- Progress on refinancing the $35 million notes due December 2013 and continued access to the revolving credit facility.
- Working-capital trends and whether operating cash flow improves from its Q1 negative level.
- Actual full-year capital spending relative to the $30–$35 million expectation.
- Developments in the New Idria remediation study, potential cost allocation among responsible parties, and insurance coverage.
- Exposure to resin costs, floating interest rates, and foreign exchange movements.