Myers Industries, Inc. — Q2 2013 Form 10-Q
Business context and period: The company reports four operating segments: Material Handling, Lawn and Garden, Distribution, and Engineered Products. This unaudited filing covers the quarter and six months ended June 30, 2013; comparisons are with the same 2012 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $204.0 | $181.1 | $419.0 | $379.9 |
| Gross profit | $55.8 | $47.4 | $114.1 | $105.4 |
| Gross margin | 27.3% | 26.2% | 27.2% | 27.7% |
| Operating income | $13.1 | $10.0 | $26.4 | $27.1 |
| Net income | $8.3 | $5.7 | $16.2 | $15.6 |
| Diluted earnings per share | $0.25 | $0.17 | $0.48 | $0.46 |
| Net interest expense | $1.1 | $1.1 | $2.2 | $2.1 |
Q2 sales grew 13%, while first-half sales rose 10%. Q2 gross margin improved 1.1 percentage points, attributed to productivity and material-cost savings. First-half gross margin declined 0.5 percentage points as unfavorable product mix more than offset productivity improvements. SG&A increased 14% in Q2 and 12% for the first half, reaching $42.7 million and $87.7 million, respectively.
Cash flow and liquidity: First-half operating cash flow was $30.1 million, versus $7.9 million in 2012; working capital used $9.4 million, compared with $24.6 million used in the prior-year period. Capital expenditures were $10.2 million. Cash at June 30 was $22.3 million, and total debt was $96.0 million, leaving net debt of $73.7 million. The company had $114.1 million available under its $180 million credit agreement and reported compliance with debt covenants. Interest coverage was 11.08 against a 2.25 minimum; leverage was 1.14 against a 3.25 maximum.
Capital uses included $4.0 million of share repurchases and $3.0 million of cash dividends during the first half. The declared dividend was $0.09 per share for Q2 and $0.18 per share for the first half. Management expected full-year capital expenditures of approximately $30–$35 million.
Material changes and segment performance
- Material Handling: Q2 sales increased 39% to $83.8 million; first-half sales rose 31% to $163.8 million. Growth included $15.5 million of Q2 sales and $27.6 million of first-half sales from the 2012 Novel and Jamco acquisitions, plus higher volume. Q2 segment income before tax increased to $11.0 million; first-half segment income fell to $20.7 million from $22.4 million.
- Lawn and Garden: Q2 sales decreased 4% to $40.9 million, mainly due to lower big-box retailer demand. First-half sales were approximately flat at $101.3 million.
- Distribution: Q2 sales increased 4% to $45.9 million; first-half sales increased 2% to $88.5 million, supported by new products and equipment-market gains.
- Engineered Products: Q2 sales decreased 3% to $37.6 million; first-half sales decreased 2% to $74.6 million. Lower custom and automotive-related volume partly offset stronger recreational vehicle and marine demand.
Q2 net income benefited in part from a lower effective tax rate of 30.8%, versus 36.7% a year earlier; the first-half rates were 33.0% and 37.4%. The 2013 rate included an approximately $0.6 million benefit from reversal of prior-year state valuation allowances, as well as foreign-rate and tax-incentive benefits. First-half operating income declined despite higher revenue, while net income rose modestly.
Outlook, risks, contingencies, and unusual items
- Restructuring announced after quarter-end: On July 18, 2013, the company announced plans to close Lawn and Garden plants in Brantford, Ontario, and Waco, Texas, and reopen its Sparks, Nevada facility. It expects approximately $15 million in charges, including $3 million of noncash costs, and approximately $8 million in annual operating-profit improvement. Some benefits were expected in Q4 2013, with most expected during 2014. The Sparks facility had been classified as held for sale at June 30 and is to be reclassified as property, plant, and equipment.
- Debt maturity: $35 million of senior notes due December 2013 was classified as long-term because the company intended to refinance it and cited available capacity under its revolving credit facility.
- Environmental contingency: The company may be a potentially responsible party concerning the New Idria Mercury Mine Superfund site. A $1.9 million expense was recognized in 2011; approximately $0.5 million had been charged against the reserve by June 30, 2013. Further remediation costs are unknown, and the EPA may seek recovery of interim removal costs. Management said the outcome of legal matters was not expected to have a material adverse effect, while noting unfavorable outcomes could have a material impact.
- Market risks: Floating-rate debt is unhedged; a 1 percentage-point interest-rate increase was estimated to add approximately $1.0 million of annual interest expense. The company also faces foreign-exchange and plastic-resin cost exposure; it had no foreign-currency contracts in place at June 30 and no derivative hedges for commodity costs.
- Other items: First-half foreign-currency translation reduced other comprehensive income by $5.8 million. Restructuring charges were $1.5 million in the first half, versus $1.1 million in 2012. Management stated operating cash flow and available borrowing were expected to cover foreseeable business needs, including capital spending, dividends, debt service, and the stock-repurchase program.
Important facts for investors to verify
- Whether the announced Lawn and Garden restructuring achieves its estimated $15 million charge and approximately $8 million annual savings, and on the expected timeline.
- How the company refinances or repays the $35 million senior notes due December 2013 and whether covenant headroom remains adequate.
- Whether revenue and earnings growth persists without the contribution from Novel and Jamco, and whether first-half margin pressure from product mix continues.
- Developments in the New Idria Mine investigation, potential cost allocation among responsible parties, and any insurance recovery.
- Exposure to interest rates, foreign exchange, and plastic-resin prices, as well as progress and control implications of the phased ERP implementation.