Myers Industries, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $197.3 | $190.3 | $577.2 | $563.1 |
| Gross profit / margin | $52.7 / 26.7% | $47.8 / 25.1% | $158.1 / 27.4% | $146.4 / 26.0% |
| Operating income | $9.8 | $7.3 | $36.9 | $28.3 |
| Net income | $5.8 | $7.2 | $21.4 | $18.6 |
| Diluted EPS | $0.17 | $0.21 | $0.63 | $0.53 |
| Cash from operating activities | Not separately stated for quarter | $23.3 | $40.2 |
Q3 sales rose 4%, while operating income increased about 35%; gross margin expanded 1.6 percentage points. Q3 net income fell about 20%, mainly reflecting the prior-year quarter’s substantial tax benefit: Q3 2011 reported a $1.2 million tax benefit, including about $3.8 million of favorable tax adjustments, versus $2.8 million tax expense in Q3 2012. For the first nine months, sales grew 3%, operating income rose about 30%, and net income increased about 15%. The 2011 nine-month effective tax rate was also reduced by the favorable tax adjustments; 2012’s nine-month rate was 36.1% versus 24.6%.
Segments and drivers
- Q3: Material Handling sales increased 6% to $76.2 million, including $9.0 million from acquired Novel; Engineered Products increased 21% to $35.7 million. Distribution fell 8% to $45.1 million; Lawn and Garden was down 1% to $45.3 million.
- Nine months: Engineered Products sales rose 31% to $111.6 million. Material Handling declined 2%, Lawn and Garden 5%, and Distribution 3%. Management cited weak demand, customer order deferrals, and unfavorable currency translation in affected segments.
- Management attributed margin improvement to productivity, lower manufacturing costs, raw-material substitution savings, and pricing initiatives. Q3 SG&A rose 6% to $43.0 million; nine-month SG&A rose 3% to $121.2 million.
Cash, debt, and liquidity
- Nine-month operating cash flow was $23.3 million, down $16.9 million year over year. Management attributed the decrease primarily to higher working-capital use, including $18.6 million for inventory, partly related to seasonality and deferred Material Handling sales.
- Capital expenditures were $15.2 million for the first nine months; full-year spending was expected to be approximately $27–$30 million. Dividends paid were $7.6 million.
- Cash was $6.5 million at September 30. Total debt was approximately $96.7 million, versus $74.0 million at December 31, 2011. The $180 million credit agreement had $113.2 million available; the company reported compliance with debt covenants.
- Actual covenant ratios were 10.93x interest coverage against a 2.25x minimum and 1.26x leverage against a 3.25x maximum. Management expected operating cash flow and available credit to fund anticipated needs, including investment, dividends, working capital, and debt service.
Acquisitions, outlook, and risks
- In July, Myers acquired Brazil-based Plasticos Novel do Nordeste for approximately $31.0 million in total consideration, including about $26.0 million of assumed debt and $0.9 million of contingent consideration. Novel contributed $9.0 million of Q3 and nine-month sales from the acquisition date; its preliminary purchase-price allocation included $8.8 million of goodwill.
- On October 1, 2012, after quarter-end, Myers acquired Jamco Products for $15.0 million, subject to closing adjustments. It will be included in Material Handling; purchase-price allocation had begun.
- No specific revenue or earnings guidance was provided. Management’s stated capital-spending expectation was $27–$30 million for 2012.
- Risks highlighted include demand weakness and order timing, seasonal inventory needs, foreign-currency movements, floating-rate debt, and plastic-resin or other commodity cost increases. A 1 percentage-point rise in interest rates was estimated to increase annual interest expense by about $0.6 million; the company had no interest-rate hedges and no foreign-currency contracts outstanding at quarter-end.
- Restructuring costs were $2.2 million for the first nine months, partly offset by facility-sale gains. Approximately $5.7 million of property was classified as held for sale. The filing also describes ordinary-course litigation, including a workplace-fatality lawsuit; management said outcomes were not expected to materially affect the company but noted uncertainty.
Key facts for investors to verify
- Whether deferred Material Handling orders and weaker demand in Distribution and Lawn and Garden recovered as expected.
- Novel’s integration, acquired debt, earnout exposure, and final purchase-price allocation; and Jamco’s final cost and integration results.
- Whether working capital normalized and cash generation supported planned capital spending, dividends, and debt obligations.
- Effects of tax adjustments, restructuring and held-for-sale assets, commodity and currency movements, and unresolved legal contingencies.