Business Context and Reporting Period
Myers Industries, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. It manufactures polymer and rubber products and distributes tire-service equipment and supplies through four segments: Material Handling, Lawn and Garden, Distribution, and Engineered Products. The filing also reports fourth-quarter results.
Financial Performance and Position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $791.2 million | $755.7 million |
| Gross profit / margin | $215.3 million / 27.2% | $198.3 million / 26.2% |
| Operating income | $51.9 million | $38.4 million |
| Net income | $30.0 million | $24.5 million |
| Diluted earnings per share | $0.88 | $0.71 |
| Cash from operations | $60.8 million | $64.2 million |
| Capital expenditures | $27.0 million | $21.9 million |
| Cash at year-end | $3.9 million | $6.8 million |
| Total debt at year-end | $92.8 million | $74.0 million |
| Working capital | $125.1 million | $107.8 million |
Current assets were $239.6 million and current liabilities $114.5 million at year-end. Operating and net margins were approximately 6.6% and 3.8%, respectively, versus 5.1% and 3.2% in 2011. The company had $116.1 million available under its $180 million credit agreement and reported compliance with debt covenants; its actual interest-coverage and leverage ratios were 11.46 and 1.14, respectively, against required limits of at least 2.25 and no more than 3.25.
Fourth-quarter 2012 sales were $214.0 million, compared with $192.5 million a year earlier; net income was $8.5 million versus $5.9 million, and diluted EPS was $0.25 versus $0.18.
Material Changes Versus Prior Period
- Annual sales increased 5%, led by Engineered Products (+22%) and Material Handling (+9%). Lawn and Garden sales fell 5%, and Distribution sales fell 4%.
- Management attributed sales growth to stronger volumes and $21.5 million of sales from acquisitions, partly offset by unfavorable currency translation and lower pricing. Gross margin improved by 1.0 percentage point, reflecting productivity gains, raw-material substitutions, and lower manufacturing costs.
- Operating cash flow declined $3.4 million, mainly due to working-capital use, including higher inventories and cash used for payables and accrued expenses.
- Debt increased by $18.8 million, principally to fund acquisitions. The company acquired Brazil-based Novel and U.S.-based Jamco, both added to Material Handling. The acquisitions contributed $21.5 million of reported 2012 revenue and $0.2 million of net income after acquisition; purchase-price allocations were preliminary for Jamco.
- Dividends declared per share rose to $0.32 from $0.28. The company spent $4.2 million on repurchases in 2012, versus $20.9 million in 2011.
Outlook, Commentary, Risks, and Unusual Items
The filing provides no specific 2013 financial guidance. Management said operating cash flow and available credit were expected to be sufficient for business needs, including capital expenditures, dividends, debt service, working capital, and the repurchase program. Planned capital investment included manufacturing, molding, and automated-handling technology. The distribution network was reorganized, and an enterprise resource planning implementation was expected to continue through 2013 and 2014.
- Key risks include volatile plastic-resin and rubber costs, competitive pressure and limits on passing cost increases through to customers, economic and weather-related demand variability, manufacturing interruptions, foreign-exchange exposure, and acquisition integration and execution.
- The company had $35 million of senior notes due in December 2013 and stated its intent and ability to refinance them through its credit facility. Floating-rate debt was unhedged; a 1-percentage-point rate increase was estimated to add about $0.6 million in annual interest expense.
- The New Idria Mercury Mine matter remains uncertain. The company recorded a $1.9 million expense in 2011 for investigation and feasibility work and had charged about $0.3 million of costs against the reserve by year-end 2012. Further remediation costs were not estimable; potential cost recovery by the EPA and a separate possible watershed cleanup claim remain risks.
- 2012 included $3.4 million of restructuring and other unusual SG&A charges, including severance, consulting, and lease costs. Acquisition transaction costs were about $0.9 million. There were no impairment charges in 2012; 2011 included $1.2 million of impairment charges.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management’s control assessment excluded Novel and Jamco, which together represented 19.9% of year-end net assets.
Important Facts for Investors to Verify
- Whether the acquired businesses meet earnings expectations and Jamco’s preliminary purchase-price allocation is finalized.
- Refinancing or repayment of the $35 million notes due in December 2013, covenant headroom, and the cost of borrowing.
- The eventual scope, allocation, and cost of New Idria remediation and any watershed-related liability.
- Whether inventory and other working-capital requirements normalize and operating cash flow supports planned investment and shareholder distributions.
- Whether Lawn and Garden demand recovers and the 2012 gains in Material Handling and Engineered Products persist.