MYE

Business Context and Reporting Period

Company: Myers Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: Myers Industries operates four reportable segments: Lawn and Garden, Material Handling, Distribution, and Engineered Products (formerly Automotive and Custom). The company manufactures plastic and rubber products and distributes tire and wheel service products.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2% year-over-year, driven by higher unit volumes in most segments and favorable foreign currency translation, which offset competitive pricing pressures.
• Margin Compression: Gross profit margin declined significantly from 30.4% to 24.0%. This was primarily caused by a 40% to 95% increase in plastic resin costs and lower selling prices due to market competition.
• Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 17% to $34.4 million, reflecting the benefits of restructuring programs and cost control initiatives. This contrasts with Q1 2009, which included $5.0 million in restructuring charges.
• Segment Performance:
  • Lawn & Garden: Sales down 9% due to lower prices and volume declines.
  • Engineered Products: Sales up 24% due to increased demand in recreational vehicle, marine, and automotive markets.
  • Material Handling: Sales up 4% driven by higher selling prices.
  • Distribution: Sales up 7% due to higher unit volumes of tire service supplies.
• Restructuring & Impairment: Q1 2010 included $0.8 million in restructuring expenses and a $0.7 million gain from the sale of a closed facility. Q1 2009 included $1.3 million in impairment charges and $5.0 million in restructuring costs.

Outlook, Risks, and Management Commentary

• Liquidity: The company maintains a $250 million credit facility with approximately $232 million available as of March 31, 2010. Management expects cash flows and available borrowing to be sufficient for operations, capital expenditures, and dividends.
• Capital Expenditures: Q1 2010 capex was $5.2 million; full-year 2010 capex is expected to range between $20 million and $25 million.
• Debt Covenants: The company is in compliance with all debt covenants. The interest coverage ratio is 3.9 (minimum 2.5) and the leverage ratio is 1.9 (maximum 3.5).
• Market Risks:
  • Commodity Prices: Significant exposure to plastic resin costs; no derivative contracts currently in place to hedge this risk.
  • Interest Rates: Exposure to floating rates; a 1% increase in rates would increase annual interest expense by approximately $0.2 million.
  • Foreign Exchange: Operations in Canada and Brazil create exposure, though the company utilizes a program to limit this exposure.
• Legal Contingencies:
  • Environmental: The company is identified in a California planning document regarding mercury in the Guadalupe River Watershed. While a claim is reasonably possible, the cost cannot be estimated at this time.
  • Workplace Incident: A fatal workplace injury occurred in October 2009; the company believes it has adequate insurance coverage.

Investor Verification Checklist

• Verify the sustainability of the 24% sales growth in the Engineered Products segment given the cyclical nature of the recreational vehicle and automotive markets.
• Monitor the trajectory of plastic resin costs and the company's ability to pass these costs on to customers to restore gross margins.
• Review the status of the California Regional Water Quality Control Board (RWQCB) proceedings regarding the Guadalupe River Watershed for potential future remediation costs.
• Confirm the company's ability to maintain debt covenant compliance as working capital needs fluctuate seasonally.
• Assess the impact of the $9.5 million cash outflow from operations, driven largely by inventory buildup, on future liquidity requirements.