MYERS INDUSTRIES INC (MYE) FY 2021 MD&A

ITEM 7. Management’s Discussion and Analysis of Results of Financial Condition and Operations

Executive Overview

The Company conducts its business activities in two distinct segments: The Material Handling Segment and the Distribution Segment. The Brazil Business, which was sold in December 2017, is classified as discontinued operations in all periods presented.

The Company designs, manufactures, and markets a variety of plastic and rubber products. The Material Handling Segment manufactures products that range from plastic reusable material handling containers and small parts storage bins to plastic OEM parts, custom plastic products, consumer fuel containers, military water containers as well as ammunition packaging and shipping containers. The Distribution Segment is engaged in the distribution of tools, equipment and supplies used for tire, wheel and under vehicle service on passenger, heavy truck and off-road vehicles, as well as the manufacturing of tire repair and retreading products.

The Company’s results of operations for the year ended December 31, 2021 compared with the year ended December 31, 2020 are discussed below. However, the Company’s past results of operations may not reflect its future operating trends. In March 2020, the COVID-19 pandemic began to affect the U.S. economy and has created additional uncertainty for the Company’s operations. Regulatory actions in response to COVID-19 have varied across jurisdictions and have at times included temporary closure of nonessential businesses. While the effects from the pandemic appear to have improved compared to 2020, the duration and extent of these measures put in place to slow the spread of COVID-19 remain unknown, including possible reimplementation of any measures that have been removed or relaxed. Through the date of this report, most of the Company’s businesses are considered essential because they supply food and agricultural, automotive, healthcare, industrial and consumer end markets. Accordingly, those businesses have continued to operate, other than temporary closures in March and April 2020 of certain manufacturing facilities in the Material Handling Segment and our Distribution business in Central America. Beyond the impact of these temporary closures, some of our businesses have been and may continue to be affected by the broader economic effects from COVID-19 and related regulatory actions, including customer demand for our products, supply chain disruptions and labor availability. The Company believes it is well-positioned to manage through this uncertainty as it has a strong balance sheet with sufficient liquidity and borrowing capacity as well as a diverse product offering and customer base.

Results of Operations: 2021 Compared with 2020

Net Sales:

Net sales for the year ended December 31, 2021 were $761.4 million, an increase of $251.1 million or 49.2% compared to the prior year. Net sales increased due to $122.2 million of incremental sales from acquisitions, Trilogy on July 30, 2021 and Elkhart Plastics on November 10, 2020, both in the Material Handling Segment. Trilogy’s annual sales were approximately $35 million and Elkhart Plastics’ historical annual sales were approximately $100 million. Net sales also increased due to higher volume/mix of $73.4 million, higher pricing of $52.8 million and the effect of favorable currency translation of $2.7 million. Beginning in February 2021, the Company began to implement a series of pricing increases across a majority of its portfolio of products in response to rapidly rising raw material costs. Comparisons to 2020 are also affected by the onset of the COVID-19 pandemic in March 2020.

Net sales in the Material Handling Segment increased $220.2 million or 64.0% for the year ended December 31, 2021 compared to the prior year. Net sales increased due to $122.2 million of incremental sales from acquisitions, Trilogy on July 30, 2021 and Elkhart Plastics on November 10, 2020. Net sales also increased due to higher volume/mix of $48.3 million across all markets, higher pricing of $47.0 million and the effect of favorable currency translation of $2.7 million.

Net sales in the Distribution Segment increased $30.9 million or 18.5% in the year ended December 31, 2021 compared to the prior year, due to higher volume/mix of $25.1 million and higher pricing of $5.8 million.

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Cost of Sales & Gross Profit:

Gross profit increased $39.5 million, or 22.9%, for the year ended December 31, 2021 compared to the prior year due to increased contribution from higher pricing and volume/mix as described under Net Sales above and the acquisitions of Trilogy on July 30, 2021 and Elkhart Plastics on November 10, 2020. Partially offsetting these contributions were higher raw material costs, including a $2.0 million incremental charge to increase the LIFO inventory reserve, and increased labor costs, which were not fully recovered by pricing actions and led to an unfavorable price-to-cost relationship. Gross profit margin declined to 27.8% for the year ended December 31, 2021 compared to 33.7% for the same period in 2020 as a result of the unfavorable price-to-cost relationship, higher labor and other manufacturing costs and an unfavorable sales mix.

As discussed in Note 8 to the consolidated financial statements, the Company has implemented restructuring programs. In the Material Handling Segment, the Ameri-Kart Plan involves consolidation of manufacturing facilities and is expected to be substantially completed in the first half of 2022. The Company incurred $0.9 million of restructuring charges during the year ended December 31, 2021 related to the Ameri-Kart Plan. No restructuring costs were incurred during the year ended December 31, 2020. As previously announced, the Company expects annualized benefits of approximately $1.5 million upon completion.

Selling, General and Administrative Expenses:

Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2021 were $163.5 million, an increase of $33.2 million or 25.5% compared to the prior year. Increases in SG&A expenses in 2021 were primarily due to $15.8 million of incremental SG&A from the acquisitions of Trilogy on July 30, 2021 and Elkhart Plastics on November 10, 2020, and $11.3 million of higher salaries, benefits, incentive compensation and commissions. SG&A expenses also increased due to $2.1 million of higher legal and professional fees and $1.7 million of higher freight.

Gain of Disposal of Fixed Assets:

During the year ended December 31, 2021, the Company recognized gains on disposal of fixed assets of $1.4 million primarily related to the sale and leaseback of a facility as discussed in Note 8 to the consolidated financial statements.

Other (Income) Expenses:

During the year ended December 31, 2020, the Company recorded a pre-tax gain of $11.9 million related to the sale to HC of the fully-reserved promissory notes and related accrued interest receivable in exchange for $1.2 million and the release from a lease guarantee with a carrying value of $10.7 million related to one of HC’s facilities as discussed in Note 6 to the consolidated financial statements.

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Net Interest Expense:

Net interest expense for the year ended December 31, 2021 was $4.2 million compared to $4.7 million during 2020. The lower net interest expense was due to the lower borrowing rate in the current year.

Income Taxes:

The effective tax rate was 25.6% for the year ended December 31, 2021 compared to 24.7% in the prior year. The increase in the effective tax rate was primarily the result of a higher foreign rate differential in 2021 from the GILTI tax and from the benefit recognized in 2020 for a previously unrecognized tax benefit due to a lapse in the related statute of limitations.

Financial Condition & Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash on hand, cash generated from operations and availability under the Loan Agreement (defined below). At December 31, 2021, the Company had $17.7 million of cash, $191.2 million available under the Loan Agreement and outstanding debt with face value of $100.9 million, including the finance lease liability of $9.9 million. Based on this liquidity and borrowing capacity, the Company believes it is well-positioned to manage through the working capital demands and uncertainty caused by COVID-19 and potential macroeconomic effects stemming from the current geopolitical climate. The Company believes that cash on hand, cash flows from operations and available capacity under its Amended Loan Agreement will be sufficient to meet expected business requirements including capital expenditures, dividends, working capital, debt service, and to fund future growth, including selective acquisitions.

Operating Activities

Cash provided by operating activities from continuing operations was $44.9 million and $46.5 million for the years ended December 31, 2021 and 2020, respectively. The decrease in cash provided by continuing operations of $1.6 million during the year ended December 31, 2021 compared to 2020 was primarily due to higher working capital driven by increases in accounts receivable and inventory.

Investing Activities

Net cash used by investing activities of continuing operations was $50.3 million for the year ended December 31, 2021 compared to cash used of $75.6 million for the year ended December 31, 2020. In 2021, the Company paid $34.5 million to acquire Trilogy and the working capital adjustment of $1.2 million related to the November 10, 2020 acquisition of Elkhart Plastics as discussed in Note 3 to the consolidated financial statements, and received proceeds from the sale of a facility of $2.8 million as discussed in Note 8 to the consolidated financial statements. In 2020, the Company paid $62.6 million to acquire Elkhart Plastics and a working capital adjustment of $0.7 million related to the 2019 acquisition of Tuffy as discussed in Note 3 to the consolidated financial statements, and received proceeds from the sale of notes receivable of $1.2 million as discussed in Note 6 to the consolidated financial statements. Capital expenditures were $17.9 million and $13.4 million for the years ended December 31, 2021 and 2020, respectively.

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Financing Activities

Net cash used by financing activities of continuing operations was $5.2 million for the year ended December 31, 2021 compared to cash used of $18.3 million or the year ended December 31, 2020. The Company repaid the $40.0 million Senior Unsecured Note that matured in January 2021 with a combination of cash and proceeds under the Loan Agreement (defined below). Net borrowings on the credit facility for the year ended December 31, 2021 were $53.0 million. Fees paid for the amendment and extension of the Loan Agreement in March 2021 totaled $1.1 million. Net proceeds from the issuance of common stock in connection with incentive stock option exercises were $3.8 million and $1.7 million in 2021 and 2020, respectively. The Company also used cash to pay dividends of $19.6 million and $19.4 million in 2021 and 2020, respectively.

In March 2021, a 15-year finance lease for a new manufacturing and distribution facility in Bristol, Indiana commenced. The Company has taken possession of the new Bristol facility and a portion of it is in service; however, construction remains in process as of December 31, 2021 to complete it for its full intended use. As further described in Note 8 to the consolidated financial statements, this lease agreement was in connection with a plan for consolidation of the Ameri-Kart rotational molding facilities within the Material Handling Segment. As of December 31, 2021, the balance of the finance lease liability is $9.9 million, of which $0.5 million is classified as current.

Credit Sources

In March 2021, the Company entered into a Sixth Amended and Restated Loan Agreement (the “Sixth Amendment”), which amended the Fifth Amended and Restated Loan Agreement (collectively, the “Loan Agreement”) dated March 2017. The Sixth Amendment increased the senior revolving credit facility’s borrowing limit to $250 million from $200 million, extended the maturity date to March 2024 from March 2022, and increased flexibility of the financial and other covenants and provisions.

As of December 31, 2021, $191.2 million was available under the Loan Agreement, after borrowings and $5.8 million of letters of credit issued related to insurance and other financing contracts in the ordinary course of business, including the $2 million provided to the EPA as discussed in Note 11 to the consolidated financial statements. Borrowings under the Loan Agreement bear interest at the LIBOR rate, prime rate, federal funds effective rate, the Canadian deposit offered rate, or the eurocurrency reference rate depending on the type of loan requested by the Company, in each case plus the applicable margin as set forth in the Loan Agreement.

At December 31, 2021, $38 million face value of Senior Unsecured Notes are outstanding. The series of notes range in face value from $11 million to $15 million, with interest rates ranging from 5.25% to 5.45%, payable semiannually. As described in Note 12, $26.0 million of the Senior Unsecured Notes mature on January 15, 2024 and $12.0 million mature on January 15, 2026.

As of December 31, 2021, the Company was in compliance with all of its debt covenants. The most restrictive financial covenants for all of the Company’s debt are an interest coverage ratio (defined as earnings before interest, taxes, depreciation and amortization, as adjusted, divided by interest expense) and a leverage ratio (defined as total debt divided by earnings before interest, taxes, depreciation and amortization, as adjusted). The ratios as of and for the period ended December 31, 2021 are:

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Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based on the accompanying consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). As indicated in the Summary of Significant Accounting Policies included in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, the amount of assets, liabilities, revenue and expenses reported are affected by estimates and judgments that are necessary to comply with U.S. GAAP. The Company bases its estimates on prior experience and other assumptions that they consider reasonable to their circumstances. The Company believes the following matters may involve a high degree of judgment and complexity.

Contingencies — In the ordinary course of business, the Company is involved in various legal proceedings and contingencies. When a loss arising from these matters is probable and can reasonably be estimated, the most likely amount of the estimated probable loss is recorded, or if a range of probable loss can be estimated and no amount within the range is a better estimate than any other amount, the minimum amount in the range is recorded. Disclosure of contingent losses is also provided when there is a reasonable possibility that the ultimate loss could exceed the recorded provision or if such probable loss cannot be reasonably estimated. As additional information becomes available, any potential liability related to these contingent matters is assessed and the estimates are revised, if necessary. The actual resolution of these contingencies may differ from these estimates, and it is possible that future earnings could be affected by changes in estimated outcomes of these contingencies. If a contingency were settled for an amount greater than our estimate, a future charge to income would result. Likewise, if a contingency were settled for an amount that is less than our estimate, a future credit to income would result. See disclosure of contingencies in Note 11 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

Income Taxes — In the ordinary course of business there is inherent uncertainty in quantifying certain income tax positions. The Company evaluates uncertain tax positions for all years subject to examination based upon management’s evaluations of the facts, circumstances and information available at the reporting date. Income tax positions must meet a more-likely-than-not recognition threshold at the reporting date to be recognized. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

As discussed further in Notes 6 and 13 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, the Company made judgements for tax positions in connection with its December 2017 divestiture of its Brazil Business. In connection with this divestiture, the Company incurred a capital loss of $9.5 million on its investment in the Myers do Brazil business and recorded a deferred tax asset of $2.0 million for this capital loss carryforward. A valuation allowance of $2.0 million is recorded against this deferred tax asset as the recovery of the asset is not more likely than not. In its 2017 U.S. Federal tax return, the Company recorded a tax benefit of approximately $14.3 million as a result of a worthless stock deduction related to the Company’s investment in the Brazil Business. Although management believes that the worthless stock deduction is valid, there can be no assurance that the 2017 IRS audit will not challenge it and, if challenged, that the Company will prevail.

Business Combinations – The Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed are recognized as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, revenue growth rates, discount rates, customer attrition rates, royalty rates, asset lives, contributory asset charges, and market multiples, among other items. The Company determines the fair values of intangible assets acquired generally in consultation with third-party valuation advisors. See disclosure of acquisitions in Note 3 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

Recent Accounting Pronouncements

Information regarding the recent accounting pronouncements is contained in the Summary of Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

For a comparison of the Company’s results of operations for the fiscal years ended December 31, 2020 and December 31, 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 11, 2021.

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