Business context and reporting period
Myers Industries, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company reports four segments: Lawn and Garden, Material Handling, Distribution, and Engineered Products. Amounts below are in U.S. dollars; financial-statement amounts are shown in millions unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $176.8 | $175.9 | $370.2 | $362.3 |
| Gross profit | $44.0 | $34.0 | $96.1 | $78.9 |
| Gross margin | 24.9% | 19.3% | 25.9% | 21.8% |
| Operating income (loss) | $8.7 | $(0.01) | $21.0 | $10.5 |
| Net income (loss) | $4.7 | $(1.1) | $11.4 | $4.4 |
| Diluted earnings per share | $0.13 | $(0.03) | $0.32 | $0.13 |
For the first half, operating cash flow was $8.8 million, versus cash used of $2.6 million a year earlier. Capital expenditures were $5.8 million. Cash was $6.9 million at June 30, compared with $4.7 million at December 31, 2010. Working-capital changes used $23.8 million of cash, including $9.2 million for inventories.
Total debt was approximately $90.7 million at June 30, up from $83.8 million at December 31, 2010. The $180 million credit facility had $54.5 million outstanding and approximately $125.5 million available. The company reported compliance with debt covenants: interest coverage was 6.99 against a 2.25 minimum, and leverage was 1.28 against a 3.25 maximum. Current assets were $228.3 million and current liabilities $95.3 million.
Material changes versus prior comparable periods
- Q2 sales rose 1%; first-half sales rose 2%. Higher pricing and currency effects were partly offset by lower sales volume.
- Gross margin expanded in both periods, which management attributed to pricing, favorable product mix, and productivity improvements, despite higher resin costs. Polypropylene prices were about 20% higher and HDPE about 15% higher year over year in Q2.
- Q2 earnings before tax improved to $7.5 million from a $1.9 million loss; first-half earnings before tax rose to $18.7 million from $6.8 million.
- Material Handling led segment growth: first-half sales increased 8% and segment pretax income more than doubled. Lawn and Garden first-half sales fell 7% amid weak demand and unfavorable spring weather. Distribution sales increased 6%; Engineered Products sales increased 3%.
- First-half SG&A increased $6.6 million to $75.0 million, reflecting higher freight, bad-debt provisions, and other selling costs. Net interest expense fell 35% to $2.4 million for the half, primarily due to lower borrowing levels and rates.
Outlook, commentary, risks, and unusual items
- Management expected full-year capital expenditures at the high end of a $20–$25 million range and said operating cash flow plus available credit should cover expected business needs, dividends, debt service, capital spending, working capital, and the repurchase program. No revenue or earnings guidance was provided.
- In May 2011, the company authorized repurchases of up to 5 million shares; it repurchased 371,779 shares for $3.7 million during Q2. First-half cash dividends paid were $4.7 million; declared dividends were $0.14 per share.
- Management cited weak economic conditions and poor spring weather as pressures on Lawn and Garden demand. Resin-cost increases, foreign-exchange movements, and floating-rate debt are additional exposures. A 1 percentage-point increase in market interest rates would add approximately $0.5 million to annual interest expense at current debt levels. No foreign-currency contracts were in place at June 30.
- Restructuring expenses were $1.2 million in the first half, including a $0.3 million write-down of an idle Lawn and Garden facility. Approximately $5.0 million of property and equipment was classified as held for sale.
- Potential tax indemnification related to the former European Material Handling business concerns a French tax assessment of 1.5 million euros; the company is contesting it and recorded no liability. The filing also reports $5.8 million of gross unrecognized tax benefits at December 31, 2010, with certain benefits, including $4.2 million related to the former business sale, expected to be recognized in Q3 2011.
- A possible environmental cleanup claim involving mercury in California’s Guadalupe River Watershed cannot yet be reasonably estimated; the company had not been contacted by the regulator. The company also disclosed litigation related to a fatal 2009 workplace incident; it could not determine potential exposure and cited insurance coverage. Management said other ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether pricing and productivity can continue to offset resin-cost inflation, and whether Lawn and Garden demand recovers after the weak first half.
- Inventory and receivables trends, given working-capital cash use and the increased provision for bad debts.
- Debt levels, covenant headroom, floating-rate sensitivity, and funding for planned capital expenditures and share repurchases.
- Outcome and potential financial impact of the French tax indemnity, unrecognized tax benefits, and California watershed matter.
- Whether the expected recognition of certain tax benefits in Q3 occurs as management anticipated.