MYE

Business Context and Reporting Period

Company: Myers Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Myers Industries operates four reportable segments: Lawn and Garden, Material Handling, Distribution, and Engineered Products. The company manufactures plastic and rubber products and distributes tire and under-vehicle service products.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 6% in Q2 2010 and 4% for the six-month period compared to 2009. The Engineered Products segment saw the strongest growth (40% in Q2, 32% YTD), driven by demand in recreational vehicle and marine markets. Conversely, the Lawn and Garden segment declined 4% YTD due to lower volumes and selling prices.
• Margin Compression: Gross profit margins declined significantly (from 25.0% to 19.3% in Q2; 27.8% to 21.8% YTD). This was primarily caused by raw material costs (plastic resins) rising 79% for polypropylene and 41% for high-density polyethylene, which could not be fully passed on to customers.
• Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 16% in Q2 and 17% YTD. This reduction was driven by the absence of significant restructuring and impairment charges that impacted the prior year ($6.0 million in Q2 2009 vs. $1.6 million in Q2 2010).
• Cash Flow Shift: Operating cash flow turned negative ($2.6 million used) for the six months ended June 30, 2010, compared to $29.7 million provided in the prior year. This was due to a $23.9 million use of working capital, specifically increases in accounts receivable and higher cash payments for taxes and compensation.

Outlook, Risks, and Management Commentary

• Capital Expenditures: Capital spending was $9.3 million for the first half of 2010. Management expects full-year capital expenditures to range between $20 million and $25 million.
• Liquidity and Debt: The company maintains a $250 million credit facility with approximately $235 million available as of June 30, 2010. The company is in compliance with all debt covenants, including an interest coverage ratio of 3.20 (minimum 2.5) and a leverage ratio of 2.07 (maximum 3.5).
• Restructuring: Ongoing restructuring programs continue to yield benefits through reduced overhead and facility closures. Approximately $7.6 million of property, plant, and equipment is classified as held for sale.
• Legal and Environmental Contingencies:
  • Mercury Cleanup: The company and a subsidiary were identified in a California planning document regarding mercury in the Guadalupe River Watershed. While a claim is reasonably possible, the company cannot currently estimate the cost or materiality of potential remediation.
  • Workplace Incident: A fatal workplace injury occurred in October 2009. No litigation is currently pending, and the company believes it has adequate insurance coverage.
• Market Risks: The company faces exposure to floating interest rates (a 1% increase would raise annual interest expense by ~$0.2 million) and foreign currency fluctuations, primarily related to Canadian operations. There are no active hedges for commodity prices.

Investor Verification Checklist

• Raw Material Pricing: Verify the sustainability of plastic resin price increases and the company's ability to implement price hikes to restore gross margins.
• Working Capital Trends: Monitor the reversal of the negative operating cash flow trend, specifically the management of accounts receivable and inventory levels.
• Segment Performance: Assess the durability of the sales recovery in the Engineered Products segment versus the continued weakness in the Lawn and Garden segment.
• Environmental Liability: Track developments regarding the California Regional Water Quality Control Board planning document to determine if a material provision for cleanup costs becomes necessary.
• Debt Covenants: Confirm continued compliance with the interest coverage and leverage ratios, particularly if operating income fluctuates due to input costs.