Myers Industries, Inc. — Q1 2012 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. The company reports four segments: Material Handling, Lawn and Garden, Distribution, and Engineered Products. Dollar amounts below are in millions unless noted otherwise.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $198.8 | $195.5 |
| Gross profit / gross margin | $58.0 / 29.2% | $54.1 / 27.7% |
| Operating income | $17.1 | $12.4 |
| Net interest expense | $1.1 | $1.2 |
| Income before taxes | $16.0 | $11.1 |
| Income tax expense / effective tax rate | $6.1 / 37.7% | $4.4 / 39.6% |
| Net income | $10.0 | $6.7 |
| Diluted earnings per share | $0.29 | $0.19 |
| Comprehensive income | $12.0 | $8.5 |
- Revenue rose 2%; gross profit increased about 7% and operating income about 38%. Management attributed improved margins primarily to operations-excellence cost reductions, favorable mix, and raw-material purchasing savings.
- Segment sales and pretax income: Material Handling $65.2 and $13.2 (sales down 1%; income up $2.9); Lawn and Garden $59.2 and $1.2 (sales down 12%; income down $2.7); Distribution $42.7 and $3.5 (sales up 3%); Engineered Products $37.2 and $4.6 (sales up 33%). Segment income figures are before corporate costs and interest.
- Operating cash flow was negative $6.4, versus negative $0.4 a year earlier; investing cash flow was negative $1.8 and financing cash flow positive $4.0. Cash declined $3.5 to $3.3. Operating cash use reflected seasonal working-capital needs, including inventory growth and payments of payables and accrued expenses.
- Capital expenditures were $3.1; management expected approximately $30 for full-year 2012. The company received $1.3 in proceeds from asset sales and paid $2.3 in dividends.
- At March 31, cash was $3.3, current assets $233.4, and current liabilities $103.0. Total debt was approximately $80.2, up from $74.0 at year-end; $129.0 remained available under the $180 million credit agreement. The filing reports covenant compliance, with actual interest coverage of 9.95 against a 2.25 minimum and leverage of 1.09 against a 3.25 maximum.
Material changes and management commentary
- Engineered Products’ sales rose 33%, mainly on stronger automotive, marine, and custom-market volumes. Lawn and Garden sales fell 12%, reflecting prior-year weak growing conditions, customer inventory buildup, and sales pulled into Q4 2011.
- Overall sales benefited from $2.4 of higher volume and $1.4 of improved pricing, partly offset by $0.5 of unfavorable currency translation. Higher employee-benefit and selling/administrative costs partly offset lower bad-debt expense; SG&A declined $0.8 year over year.
- Q1 restructuring charges were approximately $0.6, primarily for severance, consulting, and lease obligations. Approximately $5.7 of property and equipment remained classified as held for sale.
- The company recorded a $0.6 benefit from reversal of previously reserved tax benefits; the effect was essentially offset by tax expense related to a pension liability recognized in prior-period other comprehensive income.
- Management stated that operating cash flow and available credit should be sufficient for expected business needs, including strategic initiatives, capital spending, dividends, working capital, and debt service. This is management’s assessment, not a guarantee.
Risks, contingencies, and other disclosures
- Floating-rate debt is unhedged; management estimated a 1 percentage-point interest-rate increase would raise annual interest expense by approximately $0.4. The company also has exposure to plastic-resin costs and foreign-currency movements; no foreign-currency contracts were in place at quarter-end.
- The company is involved in ordinary-course legal proceedings. It also disclosed a fatal 2009 workplace incident and related lawsuit; the company was not named as a defendant in that complaint. Management could not determine whether the incident would create exposure, but believed insurance was adequate and did not expect current matters to materially harm consolidated results. Outcomes remain uncertain.
- The quarter’s results are not necessarily indicative of full-year results. Management provided a full-year capital-expenditure estimate, but no earnings or revenue guidance.
Investor facts to verify
- Whether Lawn and Garden demand and customer inventory levels recovered after the reported Q1 decline.
- Whether margin gains from cost initiatives and product mix continued, and whether employee-benefit and raw-material costs changed.
- Working-capital needs, cash conversion, and borrowing levels relative to the $129.0 of reported credit availability and debt covenants.
- Progress on disposing of the $5.7 of assets held for sale and any further restructuring costs.
- Developments in the disclosed legal matters, tax examinations, and unrecognized tax benefits.
- Whether full-year capital expenditures were consistent with the approximately $30 management estimate.