MYERS INDUSTRIES INC (MYE) FY 2022 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 Company designs, manufactures, and markets a variety of plastic, metal and rubber products. The Material Handling Segment manufactures a broad selection of plastic reusable containers, pallets, small parts bins, bulk shipping containers, storage and organization products, OEM parts, custom plastic products, consumer fuel containers and tanks for water, fuel and waste handling. Products in the Material Handling Segment are primarily injection molded, rotationally molded or blow molded. 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, 2022 compared with the year ended December 31, 2021 are discussed below. The current economic environment includes heightened risks from inflation, interest rates, volatile commodity costs, supply chain disruptions and labor availability stemming from the broader economic effects of the international geopolitical climate, including the conflict between Russia and Ukraine, and the COVID-19 pandemic. Russia’s invasion of Ukraine in the first quarter of 2022 has increased volatility in global commodity markets, including oil (a component of many plastic resins), energy and agricultural commodities. While many of the public safety measures in response to the COVID-19 pandemic have been lifted or relaxed, it is possible that new or previously lifted measures could be implemented in the future. Some of our businesses have been and may continue to be affected by these broader economic effects, including customer demand for our products, supply chain disruptions, labor availability and inflation. 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: 2022 Compared with 2021

Net Sales:

Net sales for the year ended December 31, 2022 were $899.5 million, an increase of $138.1 million or 18.1% compared to the prior year. Net sales increased due to higher pricing of $95.8 million. Net sales also increased due to $63.8 million of incremental sales from the acquisitions of Mohawk on May 31, 2022, included in the Distribution Segment, and Trilogy on July 30, 2021, included in the Material Handling Segment. Mohawk's annual sales were approximately $65 million and Trilogy’s annual sales were approximately $35 million at the times of their acquisitions. Partially offsetting the increases to net sales was lower overall volume/mix of $19.7 million and the effect of unfavorable currency translation of $1.8 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 and other production costs.

Net sales in the Material Handling Segment increased $83.6 million or 14.8% for the year ended December 31, 2022 compared to the prior year. Net sales increased due to higher pricing of $78.7 million and due to $24.0 million of incremental sales from the acquisition of Trilogy on July 30, 2021. Partially offsetting the increases to net sales was lower volume/mix of $17.3 million and the effect of unfavorable currency translation of $1.8 million.

Net sales in the Distribution Segment increased $54.5 million or 27.6% in the year ended December 31, 2022 compared to the prior year, primarily due to higher pricing of $17.1 million and due to $39.8 million of incremental sales from the acquisition of Mohawk on May 31, 2022 offset by lower volume/mix of $2.4 million.

Cost of Sales & Gross Profit:

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Gross profit increased $71.9 million, or 34.0%, for the year ended December 31, 2022 compared to the prior year due to increased contribution from higher pricing and the acquisitions of Mohawk on May 31, 2022 and Trilogy on July 30, 2021 and $3.0 million of lower raw material costs, partly offset by lower volume/mix as described under Net Sales above, $5.9 million due to cost inflation and $0.8 million from the effect of unfavorable currency translation. As a result, gross profit margin increased to 31.5% for the year ended December 31, 2022 compared to 27.8% for the same period in 2021.

Selling, General and Administrative Expenses:

Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2022 were $199.5 million, an increase of $36.0 million or 22.0% compared to the prior year. Increases in SG&A expenses in 2022 were primarily due to $10.7 million of incremental SG&A from the acquisitions of Mohawk on May 31, 2022 and Trilogy on July 30, 2021, $3.8 million of higher salaries and benefits and $12.1 million of higher incentive compensation and commissions. SG&A expenses also increased $3.8 million due to higher variable selling expenses, $3.1 million due to higher facility costs and $1.8 million due to higher legal and professional fees. Environmental matters described in Note 9 to the consolidated financials resulted in a net $1.4 million expense in the year ended December 31, 2022, including the probable insurance recovery of previously recorded charges, which compared to $0.7 million of charges in the year ended December 31, 2021.

Gain on Disposal of Fixed Assets:

During the year ended December 31, 2022, gains on disposal of fixed assets totaled $0.7 million. During the year ended December 31, 2021, gains on disposal of fixed assets totaled $1.4 million, primarily related to the sale and leaseback of a facility as discussed in Note 6 to the consolidated financial statements.

Other (Income) Expenses:

During the year ended December 31, 2022, a $0.6 million pre-tax impairment loss was recorded to fully impair an investment in a Distribution segment joint venture that was formed in 2013 to distribute tools, supplies and equipment to the auto aftermarket in India. See further discussion in Note 1 to the consolidated financial statements.

During the year ended December 31, 2020, the company recognized an $11.9 million pre-tax gain related to the release from a lease guarantee from HC Companies, Inc. in conjunction with a 2015 sale of its Lawn and Garden business as discussed in Note 1 to the consolidated financial statements.

Net Interest Expense:

Net interest expense for the year ended December 31, 2022 was $5.7 million compared to $4.2 million during 2021. The higher net interest expense was due to higher average outstanding borrowings in the current year, mainly related to the acquisition of Mohawk, and a higher weighted-average borrowing rate in the current year.

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Income Taxes:

The effective tax rate was 22.9% for the year ended December 31, 2022 compared to 25.6% in the prior year. The decrease in the effective tax rate was primarily the result of the recognition of a previously unrecognized tax benefit and a reduction in state income taxes due to income being earned in lower taxed jurisdictions.

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, 2022, the Company had $23.1 million of cash, $188.3 million available under the Loan Agreement and outstanding debt with face value of $103.4 million, including the finance lease liability of $9.4 million. Our primary contractual obligations relate to our debt and lease arrangements as described in Notes 10 and 13 to the consolidated financial statements. Based on this liquidity and borrowing capacity, the Company believes it is well-positioned to manage through the working capital demands and heightened uncertainty in the current macroeconomic environment. The Company believes that cash on hand, cash flows from operations and available capacity under its 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 was $72.6 million and $44.9 million for the years ended December 31, 2022 and 2021, respectively. The increase was primarily due to higher net income for the year ended December 31, 2022.

Investing Activities

Net cash used by investing activities was $50.4 million for the year ended December 31, 2022 compared to cash used of $50.3 million for the year ended December 31, 2021. In 2022, the Company paid $27.6 million to acquire Mohawk as discussed in Note 3 to the consolidated financial statements. The Company also received in 2022 proceeds of $1.5 million from the sale of fixed assets. In 2021, the Company paid $34.5 million to acquire Trilogy and also settled a 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. The Company also received in 2021 proceeds from the sale of a facility of $2.8 million as discussed in Note 6 to the consolidated financial statements. Capital expenditures were $24.3 million and $17.9 million for the years ended December 31, 2022 and 2021. Capital expenditures in 2022 included $1.4 million to purchase the manufacturing assets of a rotational molding facility in Decatur, Georgia.

Financing Activities

Net cash used by financing activities was $16.3 million for the year ended December 31, 2022 compared to cash used of $5.2 million for the year ended December 31, 2021. Net borrowings on the credit facility for the year ended December 31, 2022 and December 31, 2021 were $3.0 million and $53.0 million, respectively. In 2021, 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). Fees paid for the amendment and extension of the Loan Agreement in September 2022 and March 2021 totaled $0.9 million and $1.1 million, respectively. Net proceeds from the issuance of common stock in connection with incentive stock option exercises were $2.3 million and $3.8 million in 2022 and 2021, respectively. The Company also used cash to pay dividends of $19.8 million and $19.6 million in 2022 and 2021, respectively.

Credit Sources

On September 29, 2022, the Company entered into a Seventh Amended and Restated Loan Agreement (the “Seventh Amendment”), which amended the Sixth Amended and Restated Loan Agreement (the "Sixth Amendment"), dated March 12, 2021. The Seventh Amendment, among other things, extended the maturity date to September 2027 from March 2024. There was no change to the credit facility's borrowing limit of $250 million.

In March 2021, the Company entered into the Sixth Amendment, which amended the Fifth Amended and Restated Loan Agreement (collectively with the Sixth and Seventh Amendments, the “Loan Agreement”) dated March 2017. The Sixth Amendment increased the

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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, 2022, $188.3 million was available under the Loan Agreement, after borrowings and $5.7 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 9 to the consolidated financial statements. Borrowings under the Loan Agreement bear interest at the Term SOFR, RFR, EURIBOR and CDOR-based borrowing rates.

At December 31, 2022, $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 10, $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, 2022, 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, 2022 are shown in the following table:

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have, or are reasonably expected to have, a material current or future effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources at December 31, 2022.

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, including environmental matters. 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 9 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.

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,

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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, 2021 Compared to Year Ended December 31, 2020

For a comparison of the Company’s results of operations for the fiscal years ended December 31, 2021 and December 31, 2020, 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, 2021, filed with the SEC on March 10, 2022.