Myers Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited; amounts below are in U.S. dollars unless stated otherwise.
Business context
The company reports four segments: Lawn and Garden, Material Handling, Distribution, and Engineered Products. Results reflect higher selling prices and improved gross margins, partly offset by lower sales volume, particularly in Lawn and Garden and custom pallet sales in Material Handling.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $190.0 million | $187.0 million | $560.3 million | $549.4 million |
| Gross profit | $47.5 million | $41.5 million | $143.6 million | $120.3 million |
| Gross margin | 25.0% | 22.2% | 25.6% | 21.9% |
| Operating income | $7.3 million | $6.3 million | $28.3 million | $16.8 million |
| Income before taxes | $6.0 million | $4.6 million | $24.6 million | $11.4 million |
| Net income | $7.2 million | $3.2 million | $18.6 million | $7.7 million |
| Diluted EPS | $0.21 | $0.09 | $0.53 | $0.22 |
Q3 sales rose 2%; pricing contributed $18.9 million and foreign exchange $1.5 million, offset by a $17.4 million volume decline. For the nine months, sales rose 2%, with $33.9 million from pricing and $4.8 million from currency, partly offset by a $27.8 million volume decline. Higher resin costs were partly recovered through pricing; management also cited favorable Material Handling mix and productivity improvements.
SG&A increased 14% in Q3 to $40.2 million and 11% for the nine months to $115.3 million. SG&A was 21.2% of sales in Q3 and 20.6% year to date, versus 18.8% and 18.9%, respectively. Costs included higher employee-related expenses and professional fees; year-to-date items also included bad-debt provision, freight, facility impairment and other unusual charges.
Net interest expense declined to $1.3 million in Q3 and $3.7 million for the nine months, attributed to lower borrowings and interest rates. The Q3 tax benefit was $1.2 million, including approximately $3.8 million of net favorable tax adjustments, largely from expiration of the assessment statute on previously reserved tax benefits. The nine-month effective tax rate was 24.6%, versus 32.9%.
Cash flow, liquidity and debt
- Operating cash flow was $40.2 million for the nine months, versus $14.5 million a year earlier. Working capital used $11.9 million, mainly reflecting higher inventories and receivables.
- Investing cash outflow was $13.4 million, including $13.3 million of capital expenditures. Financing cash outflow was $29.0 million, including $18.8 million of share repurchases and $7.2 million of dividends. Cash declined to $2.9 million from $4.7 million at December 31, 2010.
- Total debt was approximately $80.2 million at September 30, 2011, down from $83.8 million at year-end 2010. The credit agreement permits borrowing up to $180 million; $44.0 million was drawn on the revolver. The company reported compliance with covenants: interest coverage of 7.77 against a 2.25 minimum and leverage of 1.12 against a 3.25 maximum.
- Management said operating cash flow and credit availability should meet expected needs, including capital spending, dividends, debt service and the repurchase program. Capital expenditures were expected to total $20–$25 million for 2011.
Material changes and segment trends
- Lawn and Garden: Sales fell 8% in Q3 and 7% year to date, reflecting weak growing-season demand and cautious customer buying. The segment recorded a Q3 pretax loss of $1.4 million, improved from a $2.5 million loss.
- Material Handling: Sales increased 4% in Q3 and 7% year to date. Stronger reusable-container demand and pricing partly offset lower custom pallet sales; year-to-date custom pallet sales declined $37.9 million. Nine-month segment pretax income rose to $27.5 million from $15.9 million.
- Distribution and Engineered Products: Sales increased 6% and 5%, respectively, in Q3, supported by pricing, new-product initiatives and demand in selected markets.
- In May 2011, the company authorized repurchases of up to 5 million shares. It repurchased 1,795,120 shares during Q3 for $18.8 million; 204,880 shares remained under the disclosed Rule 10b5-1 plan’s two-million-share authorization at September 30.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management cited expected 2011 capital spending of $20–$25 million and stated that cash flow and borrowing capacity should fund foreseeable requirements.
- The EPA added the New Idria Mercury Mine site to the Superfund National Priorities List, effective October 17, 2011. Myers recorded a $1.9 million Q3 expense for investigation and feasibility work. Further remediation costs are unknown and cannot currently be estimated; management noted significant uncertainty about contamination, cleanup scope, other responsible parties and insurance.
- A separate potential cleanup matter involving the Guadalupe River Watershed has no estimable cost; the company said it had not been contacted about cleanup efforts. Other ordinary-course legal matters were not expected by management to have a material adverse effect, though unfavorable outcomes could be material.
- Plastic resin prices were substantially higher year over year; further increases or adverse economic conditions could hurt results. Floating-rate debt exposes the company to rate changes; a one-percentage-point increase was estimated to add about $0.4 million in annual interest expense. Foreign currency movements are another exposure.
- On July 20, 2011, the company acquired tooling and intellectual property for a reusable cheese container for $5.7 million, including $1.1 million cash and $4.6 million contingent consideration. No related Q3 sales were recorded; purchase-price allocation remained preliminary.
- Restructuring and other unusual charges included the New Idria investigation, facility-related costs and asset write-offs. The filing also reports a $1.2 million net tax benefit for Q3 from favorable tax adjustments.
Important facts for investors to verify
- Future New Idria investigation and remediation costs, potential liability allocation among responsible parties, and insurance coverage.
- Whether pricing and productivity can continue to offset resin costs and lower volumes, especially in Lawn and Garden and custom pallets.
- Cash conversion and inventory levels, given $8.8 million of cash used by inventory growth during the first nine months.
- Remaining borrowing capacity and covenant headroom after share repurchases, dividends and planned capital expenditures.
- Whether the Q3 tax benefit and other favorable tax adjustments are nonrecurring, and the status of the remaining unrecognized tax benefits.
- Final valuation and contingent consideration for the cheese-container acquisition, and whether it generates expected sales.