Myers Industries, Inc. — Q3 2013 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2013. Myers reports four segments: Material Handling, Lawn and Garden, Distribution, and Engineered Products. Comparisons are with the corresponding 2012 periods.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $194.9 million | $197.3 million | $613.9 million | $577.2 million |
| Gross profit / margin | $53.6 million / 27.5% | $52.7 million / 26.7% | $167.7 million / 27.3% | $158.1 million / 27.4% |
| Operating income | $12.1 million | $9.8 million | $38.4 million | $36.9 million |
| Net income | $6.5 million | $5.8 million | $22.7 million | $21.4 million |
| Diluted EPS | $0.19 | $0.17 | $0.67 | $0.63 |
Q3 sales declined about 1%, while net income rose about 12%. Nine-month sales increased about 6% and net income about 6%. Nine-month operating cash flow was $46.8 million versus $23.3 million. Capital expenditures were $20.0 million; management expected approximately $35 million for full-year 2013.
At September 30, cash was $7.0 million and long-term debt was $75.5 million, including $40.5 million under the credit agreement and $35.0 million of senior notes. Net debt was $68.5 million, compared with $88.9 million at December 31, 2012. The company reported $134.6 million available under its $180 million credit agreement and compliance with debt covenants. Shareholders’ equity was $240.3 million.
Changes and management commentary
- Q3 sales were pressured by lower volumes ($10.2 million) and unfavorable currency translation ($3.0 million), partly offset by pricing ($5.2 million) and Jamco sales ($5.6 million). Material Handling sales were nearly flat; Engineered Products sales fell 5%.
- For the nine-month period, acquisitions of Novel and Jamco contributed $33.1 million of sales; pricing and volume also contributed, partly offset by $4.0 million of unfavorable currency translation. Material Handling sales rose 19%, largely due to acquisitions. Lawn and Garden and Engineered Products sales declined.
- Q3 gross margin improved year over year, which management attributed to productivity and material-cost initiatives, despite restructuring and other unusual costs. Nine-month gross margin edged down as productivity gains were offset by product mix and approximately $2.0 million of additional restructuring and unusual costs.
- Q3 SG&A declined 3.3% to $41.6 million, but nine-month SG&A rose 6.7% to $129.3 million, including acquisition costs and higher IT consulting expense. Nine-month interest expense was $3.3 million, essentially unchanged.
- The effective tax rate was 40.8% in Q3 versus 32.4%; management cited unfavorable foreign tax-rate differences and state taxes, while the prior-year quarter included a benefit from lower uncertain-tax-position reserves. The nine-month rate was 35.4% versus 36.1%.
Outlook, financing, and risks
- In July, Lawn and Garden announced closure of plants in Brantford, Ontario, and Waco, Texas. Total charges were expected to be approximately $15 million, including $3 million of noncash costs; management expected approximately $8 million in annual operating-profit improvement, with most benefits during 2014. Q3 charges were $1.0 million. The company also reopened its Sparks, Nevada, facility and recorded a $1.3 million depreciation recapture in Q3.
- On October 22, 2013, after quarter-end, Myers agreed to privately place $100 million of notes at rates of 4.67%–5.45%, with maturities from 2021 to 2026. Proceeds were intended to support key businesses and repay existing debt, including $35 million of notes due December 2013 carrying a 6.81% rate.
- Management said operating cash flow and available credit should fund expected business needs, strategic initiatives, capital spending, dividends, debt service, and the share-repurchase program. No specific earnings or revenue guidance was provided.
- Market risks include floating-rate debt (a 1 percentage-point rate increase was estimated to raise annual interest expense by approximately $0.8 million), foreign-currency exposure, and plastic-resin cost volatility. No foreign-currency contracts were in place at quarter-end; the company had no resin-hedging derivatives.
- The company is a potentially responsible party in the New Idria Mercury Mine matter. It had recorded a $1.9 million reserve in 2011 and charged approximately $0.5 million of payments against it by September 30, 2013. Further remediation costs were not estimable; management noted that an adverse outcome could materially affect results in the period incurred.
Most important facts to verify
- Whether the planned 2014 restructuring savings materialize and whether total charges remain near the estimated $15 million.
- How much of nine-month revenue growth reflects acquired businesses versus underlying organic demand, pricing, and currency movements.
- Completion and use of the $100 million post-quarter note placement, including debt repayment and the effect on leverage and interest costs.
- Actual full-year capital expenditures compared with the approximately $35 million estimate, and the sustainability of operating cash flow.
- Developments in the New Idria remediation process and any revised estimate of the company’s potential liability.