# MYERS INDUSTRIES INC (MYE) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MYERS INDUSTRIES INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/69488/000095017024025847/mye-20231231.htm
Accession: 0000950170-24-025847
Filing date: 2024-03-05
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/MYE/
All MD&A years: /company/MYE/mda/
Previous year: /company/MYE/mda/fy2022/ (FY 2022)
Next year: /company/MYE/mda/fy2024/ (FY 2024)

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, 2023 compared with the year ended December 31, 2022 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, the Israel-Hamas war and the COVID-19 pandemic, which have also increased volatility in global commodity markets, including oil (a component of many plastic resins), energy and agricultural commodities. 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: 2023 Compared with 2022

Net Sales:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Net sales for the year ended December 31, 2023 were $813.1 million, a decrease of $86.5 million or 9.6% compared to the prior year. Net sales decreased due to lower overall volume/mix of $99.9 million, following high volume of certain products focused on outdoor activities, which were especially strong due to a surge in COVID-19 induced consumer discretionary spending in the prior period. Net sales also decreased due to lower pricing of $8.2 million and the effect of unfavorable currency translation of $1.5 million. The decrease in net sales was partially offset by $23.1 million of incremental sales from the acquisition of Mohawk on May 31, 2022, included in the Distribution Segment. Mohawk's annual sales were approximately $65 million at the time of the acquisition. The Company continues to pursue further pricing initiatives, and beginning in February 2023, the Company began to implement a series of additional pricing increases across a majority of its portfolio of products within its Distribution segment.

Net sales in the Material Handling Segment decreased $92.4 million or 14.3% for the year ended December 31, 2023 compared to the prior year. Net sales decreased due to lower volume/mix of $74.5 million, lower pricing of $16.4 million and the effect of unfavorable currency translation of $1.5 million.

Net sales in the Distribution Segment increased $5.9 million or 2.3% in the year ended December 31, 2023 compared to the prior year, primarily due to higher pricing of $8.2 million and $23.1 million of incremental sales from the acquisition of Mohawk on May 31, 2022. The increase in net sales was partially offset by lower volume/mix of $25.4 million.

Cost of Sales & Gross Profit:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(dollars in thousands)","","2023","","","2022","","","Change","","","% Change"],["Cost of sales","","$","553,981","","","$","616,181","","","$","(62,200",")","","","(10.1",")%"],["Gross profit","","$","259,086","","","$","283,366","","","$","(24,280",")","","","(8.6",")%"],["Gross profit as a percentage of sales","","","31.9","%","","","31.5","%"]]
[[/GREPCENT_TABLE]]

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Gross profit decreased $24.3 million, or 8.6%, for the year ended December 31, 2023 compared to the prior year due to lower volume/mix and lower pricing as described under Net Sales above and increased labor and productivity costs partially offset by lower material costs and the benefits of the acquisition of Mohawk on May 31, 2022. Gross margin expanded to 31.9% for the year ended December 31, 2023 compared to 31.5% for the same period in 2022.

Selling, General and Administrative Expenses:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(dollars in thousands)","","2023","","","2022","","","Change","","","% Change"],["SG&A expenses","","$","186,876","","","$","199,489","","","$","(12,613",")","","","(6.3",")%"],["SG&A expenses as a percentage of sales","","","23.0","%","","","22.2","%"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2023 were $186.9 million, a decrease of $12.6 million or 6.3% compared to the prior year. Decreases in SG&A expenses in 2023 were primarily due to $11.4 million of lower incentive compensation, $3.8 million of lower variable selling expenses, $0.4 million of lower legal and professional fees and $3.3 million of lower facility costs. The decrease to SG&A expenses was partially offset by $5.0 million of incremental SG&A from the acquisition of Mohawk on May 31, 2022 and $1.9 million of higher salaries and benefits. SG&A expenses also increased as compared to prior year due to higher expenses incurred on restructuring actions of $2.5 million, described in Note 6 to the consolidated financial statements and higher expenses incurred on due diligence and consulting related to the Signature acquisition of $2.1 million, described in Note 15 to the consolidated financial statements. Additionally, as described in Note 9 to the consolidated financial statements, the Company reached a settlement agreement with one of its insurers, for $10.0 million, which resulted in a $6.7 million net reduction to legal costs within SG&A for the year ended December 31, 2023. Environmental matters described in Note 9 to the consolidated financial statements resulted in a net $3.2 million expense in the year ended December 31, 2023, which compared to $1.4 million of charges in the year ended December 31, 2022.

Net Interest Expense:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(dollars in thousands)","","2023","","","2022","","","Change","","","% Change"],["Net interest expense","","$","6,349","","","$","5,731","","","$","618","","","","10.8","%"],["Average outstanding borrowings, net","","$","90,500","","","$","112,318","","","$","(21,818",")","","","(19.4",")%"],["Weighted-average borrowing rate","","","6.86","%","","","4.87","%"]]
[[/GREPCENT_TABLE]]

Net interest expense for the year ended December 31, 2023 was $6.3 million compared to $5.7 million during 2022. The higher net interest expense was due to a higher weighted-average borrowing rate in the current year, partly offset by lower average outstanding borrowings in the current year.

Income Taxes:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(dollars in thousands)","","2023","","","2022"],["Income before income taxes","","$","66,056","","","$","78,210"],["Income tax expense","","$","17,189","","","$","17,943"],["Effective tax rate","","","26.0","%","","","22.9","%"]]
[[/GREPCENT_TABLE]]

The effective tax rate was 26.0% for the year ended December 31, 2023 compared to 22.9% in the prior year. The increase in the effective tax rate was primarily the result of the recognition of a previously unrecognized tax benefit in the prior year.

Acquisition of Signature Systems - Subsequent Event

On February 8, 2024, the Company acquired Signature Systems as described in Note 15 to the consolidated financial statements for $350 million plus customary working capital and other adjustments in an all-cash transaction, funded through an amendment and restatement of Myers’ existing loan agreement discussed below. Signature Systems is a manufacturer and distributor of composite matting ground protection for industrial applications, stadium turf protection and temporary event flooring. In 2023, Signature System’s revenue was approximately $110 million. Signature will be included in the Material Handling segment.

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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, 2023, the Company had $30.3 million of cash, $224.3 million available under the Loan Agreement and outstanding debt with face value of $67.2 million, including the finance lease liability of $9.2 million. At December 31, 2023, 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.

In January 2024, the Company repaid $26.0 million of Senior Unsecured Notes upon maturity using cash on hand and availability under the Loan Agreement. On February 8, 2024, as described below and in Note 15 to the consolidated financial statements, the Company acquired Signature Systems for $350 million plus customary working capital and other adjustments. The Signature Systems acquisition was financed by amending and restating the Loan Agreement to include a 5-year $400 million term loan facility ("Term Loan A"). In connection with the amendment to the Loan Agreement, the Company prepaid the remaining $12.0 million face value of Senior Unsecured Notes, which were due January 15, 2026, using availability under the revolving credit facility. The $250 million borrowing limit under senior revolving credit facility of the Loan Agreement was unchanged. The amendment and restatement of the Loan Agreement is described further below.

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 $86.2 million and $72.6 million for the years ended December 31, 2023 and 2022, respectively. The increase was primarily due to lower working capital driven by decreases in trade accounts receivable and increases in accounts payable for the year ended December 31, 2023.

Investing Activities

Net cash used by investing activities was $22.8 million for the year ended December 31, 2023 compared to cash used of $50.4 million for the year ended December 31, 2022. 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. Capital expenditures were $22.9 million and $24.3 million for the years ended December 31, 2023 and 2022.

Financing Activities

Net cash used by financing activities was $56.5 million for the year ended December 31, 2023 compared to cash used of $16.3 million for the year ended December 31, 2022. Net borrowings (repayments) on the credit facility for the year ended December 31, 2023 and December 31, 2022 were $(36.0) million and $3.0 million, respectively. Fees paid for the amendment and extension of the Loan Agreement in September 2022 totaled $0.9 million. Net proceeds from the issuance of common stock in connection with incentive stock option exercises were $2.3 million and $2.3 million in 2023 and 2022, respectively. Cash paid for tax withholdings on vesting of stock compensation totaled $2.1 million and $0.5 million in 2023 and 2022, respectively, which increased primarily due to improved vesting of long-term performance-based awards in the current year. The Company also used cash to pay dividends of $20.2 million and $19.8 million in 2023 and 2022, respectively.

Credit Sources - as of December 31, 2023

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 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.

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As of December 31, 2023, $224.3 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. Borrowings under the Loan Agreement bear interest at the Term SOFR, RFR, EURIBOR and CDOR-based borrowing rates.

At December 31, 2023, $38 million face value of Senior Unsecured Notes were outstanding. The series of notes range in face value from $11.0 million to $15.0 million, with interest rates ranging from 5.25% to 5.45%, payable semiannually. The $11.0 million note and $15.0 million note of these Senior Unsecured Notes matured and on January 12, 2024 the Company repaid these notes using cash on hand and borrowings under the Loan Agreement. The remaining $12.0 million of the Senior Unsecured Notes mature on January 15, 2026.

As of December 31, 2023, 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, 2023 are shown in the following table:

[[GREPCENT_TABLE]]
[["","","Required Level","","Actual Level"],["Interest Coverage Ratio","","3.00 to 1 (minimum)","","","16.17"],["Leverage Ratio","","3.25 to 1 (maximum)","","","0.70"]]
[[/GREPCENT_TABLE]]

Credit Sources - subsequent events

Repayment and termination of Senior Unsecured Notes

On January 12, 2024, the Company repaid $26.0 million of Senior Unsecured Notes upon maturity using cash on hand and availability under the Loan Agreement. On February 6, 2024, in connection with the subsequent amendment and restatement to the Loan Agreement described below, the Company prepaid the remaining $12.0 million face value of Senior Unsecured Notes, which were due January 15, 2026, using availability under the revolving credit facility under the Loan Agreement. After giving effect to the payment in full of all outstanding Senior Unsecured Notes under the Note Purchase Agreement, the Note Purchase Agreement has been terminated.

First Amendment to Loan Agreement

On February 8, 2024, the Company entered into Amendment No. 1 to the Seventh Amended and Restated Loan Agreement (“Amendment No. 1”), which amended the Seventh Amended and Restated Loan Agreement (the "Loan Agreement” – see also Note 10) dated September 29, 2022 (collectively, the “Amended Loan Agreement”). Amendment No. 1, among other things, permits the acquisition of Signature Systems and provides for a new 5-year $400 million term loan facility (“Term Loan A”). Term Loan A will amortize in quarterly installment payments in aggregate annual amounts equal to $20 million in years 1 and 2 and $40 million in years 3 through 5. Term Loan A may be voluntarily prepaid at any time, in whole or in part, without penalty or premium, however, all amounts repaid or prepaid in respect of Term Loan A may not be reborrowed.

Amendment No. 1 did not change the existing revolving credit facility’s maturity date or $250 million borrowing limit, which includes a letter of credit subfacility and swingline subfacility. In connection with Amendment No. 1, the Company incurred deferred financing fees of approximately $9 million.

The Amended Loan Agreement is on substantially the same terms as the Loan Agreement, except Amendment No. 1 has amended, among other items, (i) to permit the Signature Systems acquisition, (ii) to modify the maximum leverage ratio to not exceed (x) 4.00 to 1:00 on a “net” basis for an initial “net” leverage ratio holiday period for the immediate fiscal quarter end after the Signature Systems acquisition is consummated and for the three immediately following fiscal quarter ends thereafter and (y) 3.25 to 1.00 on a “net” basis after such “net” leverage ratio holiday period (subject to additional “net” leverage ratio holiday periods at the election of the Company for such periods that are more fully described in the Amended Loan Agreement), (iii) to modify certain negative covenants (including the restricted payment covenant) so that the applicable incurrence tests for such negative covenants is now based on the new “net” leverage ratio level, (iv) to increase the applicable margins for the loans under the Amended Loan Agreement to range between 1.775% to 2.35% for Term SOFR, RFR, SONIA, EURIBOR and CORRA based loans and between 0.775% and 1.35% for base rate loans, in each case based from time to time on the determination of the Company’s then net leverage ratio, (v) to replace the Canadian Dealer Offered Rate (CDOR) as the applicable reference rate with respect to loans denominated in Canadian Dollars to the Canadian Overnight Repo Rate Average (CORRA), and (vi) to amend the scope of collateral securing the obligations under the Amended Loan Agreement to be an “all asset” lien (subject to customary provisions of excluded collateral not subject to the liens).

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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, 2023.

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.

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.

Goodwill – The Company performs its goodwill impairment test annually as of October 1 and in the interim only when impairment indicators are present. The Company may elect to perform a qualitative assessment to determine if it is more-likely-than-not that the fair values of our reporting units were greater than their carrying amounts, indicating no impairment. This qualitative assessment requires significant judgment, including a review of our most recent long-range projections, analysis of operating results versus the prior year, changes in market values, changes in discount rates and changes in terminal growth rate assumptions. If a qualitative assessment cannot be used, then we perform a quantitative assessment.

A quantitative assessment requires the Company to estimate the fair value of the reporting unit (Level 3 measurement), which the Company does using a combination of a discounted cash flow analysis and market-based approach. Estimating fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, long term growth rates and the amount and timing of expected future cash flows. The cash flows employed in the discounted cash flow analyses are based on the most recent budget and long-term forecast. The discount rates used in the discounted cash flow analyses are intended to reflect the risks inherent in the future cash flows of the respective reporting units. The market-based approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies and recent comparable transactions. The fair value of the reporting unit is then compared to the carrying value, and any excess carrying value of the reporting unit above the fair value would indicate impairment.

As described in Note 4 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, our most recent annual impairment testing as of October 1, 2023 consisted of a qualitative assessment for five of our six reporting units, with the exception being the Rotational Molding reporting unit for which a quantitative assessment was performed. None of the analyses indicated impairment. With respect to the quantitative analysis of the Rotational Molding reporting unit, the most sensitive assumptions were the long-term growth rate and the weighted average cost of capital used to discount its projected cash flows. Reasonable changes in these assumptions would not indicate impairment. We assessed a 100-basis point decrease in the assumed long-term growth rate and a

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100-basis point increase in the weighted average cost of capital for the Company’s Rotational Molding reporting unit, and neither indicated impairment.

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, 2022 Compared to Year Ended December 31, 2021

For a comparison of the Company’s results of operations for the fiscal years ended December 31, 2022 and December 31, 2021, 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, 2022, filed with the SEC on March 3, 2023.