Myers Industries Inc: Form 10-Q for the period ended Sep 30, 2023

Forward-Looking Statements

This Quarterly Report on Form 10-Q and the information incorporated by reference contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including information regarding the Company’s financial outlook, future plans, objectives, business prospects and anticipated financial performance. Forward-looking statements can be identified by words such as “will,” “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” or variations of these words, or similar expressions. These forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on the Company’s current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, these statements inherently involve a wide range of inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. The Company’s actual actions, results, and financial condition may differ materially from what is expressed or implied by the forward-looking statements.

Specific factors that could cause such a difference on our business, financial position, results of operations and/or liquidity include, without limitation, raw material availability, increases in raw material costs, or other production costs; risks associated with our strategic growth initiatives or the failure to achieve the anticipated benefits of such initiatives; unanticipated downturn in business relationships with customers or their purchases; competitive pressures on sales and pricing; changes in the markets for the Company’s business segments; changes in trends and demands in the markets in which the Company competes; operational problems at our manufacturing facilities or unexpected failures at those facilities; future economic and financial conditions in the United States and around the world; inability of the Company to meet future capital requirements; claims, litigation and regulatory actions against the Company; changes in laws and regulations affecting the Company; impacts from the novel coronavirus (“COVID-19”) pandemic; and other risks and uncertainties detailed from time to time in the Company’s filings with the SEC, including without limitation, the risk factors disclosed in Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Given these factors, as well as other variables that may affect our operating results, readers should not rely on forward-looking statements, assume that past financial performance will be a reliable indicator of future performance, nor use historical trends to anticipate results or trends in future periods. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof. The Company expressly disclaims any obligation or intention to provide updates to the forward-looking statements and the estimates and assumptions associated with them.

Executive Overview

The Company conducts its business activities in two reportable 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 quarter and nine months ended September 30, 2023 are discussed below. The current economic environment includes heightened risks from inflation, interest rates, banking liquidity, 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 in addition to other geopolitical events has increased volatility in global commodity markets, including oil (a component of many plastic resins), energy and agricultural commodities. 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:

Comparison of the Quarter Ended September 30, 2023 to the Quarter Ended September 30, 2022

Net Sales:

(dollars in thousands)

Net sales for the quarter ended September 30, 2023 were $197.8 million, a decrease of $30.3 million or 13.3% compared to the quarter ended September 30, 2022. Net sales decreased due to lower volume/mix of $24.9 million, the effect of unfavorable currency translation of $0.3 million and lower pricing of $5.1 million. 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 $23.2 million or 14.9% for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022. Net sales decreased due to lower volume/mix $16.5 million, lower pricing $6.4 million and the effect of unfavorable currency translation of $0.3 million.

Net sales in the Distribution Segment decreased $7.1 million or 9.8% for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022, primarily due to lower volume of $8.4 million. The decrease in net sales was partially offset by higher pricing of $1.3 million.

Cost of Sales & Gross Profit:

(dollars in thousands)

Gross profit decreased $9.3 million, or 12.9%, for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022, due to lower volume/mix and pricing as described under Net Sales above and increased labor and productivity costs. Gross margin expanded to 31.5% for the quarter ended September 30, 2023 compared with 31.4% for the quarter ended September 30, 2022 as the benefits from lower material costs partially offset the decrease in gross profit for the quarter ended September 30, 2023.

Selling, General and Administrative Expenses:

(dollars in thousands)

Selling, general and administrative (“SG&A”) expenses for the quarter ended September 30, 2023 were $43.7 million, a decrease of 15.6% compared to the same period in the prior year. Decreases in SG&A expenses in the third quarter 2023 were primarily due to $5.3 million of lower incentive compensation, $1.2 million of lower facility costs and $0.9 million of lower variable selling expenses, partially offset by other professional fees and $0.3 million of higher salaries and benefits. Environmental matters, as described in Note 10 resulted in a net $0.1 million recovery for the quarter ended September 30, 2023, which compared to $1.5 million of charges for the quarter ended September 30, 2022.

Net Interest Expense:

(dollars in thousands)

Net interest expense for the quarter ended September 30, 2023 was $1.5 million, a decrease of $0.2 million, or 10.5%, compared with $1.7 million for the quarter ended September 30, 2022. The lower net interest expense was due to lower average outstanding borrowings in the current quarter, partially offset by a higher weighted-average borrowing rate.

Income Taxes:

(dollars in thousands)

The Company’s effective tax rate was 25.7% for the quarter ended September 30, 2023, compared to 24.8% for the quarter ended September 30, 2022. The increase in the effective tax rate was driven primarily by non-deductible expenses.

Comparison of the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022

Net Sales:

(dollars in thousands)

Net sales for the nine months ended September 30, 2023 were $622.0 million, a decrease of $64.7 million or 9.4% compared to the nine months ended September 30, 2022. Net sales decreased due to lower volume/mix of $83.1 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 the effect of unfavorable currency translation of $1.5 million and lower pricing of $3.2 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 $77.0 million or 15.2% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Net sales decreased due to lower volume/mix of $65.9 million, lower pricing of $9.6 million and the effect of unfavorable currency translation of $1.5 million.

Net sales in the Distribution Segment increased $12.3 million or 6.8% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to higher pricing of $6.4 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 $17.2 million.

Cost of Sales & Gross Profit:

(dollars in thousands)

Gross profit decreased $16.4 million, or 7.5%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, due to lower volume/mix as described under Net Sales above and increased labor and productivity costs. Gross margin expanded to 32.5% for the nine months ended September 30, 2023 compared with 31.8% for the nine months ended September 30, 2022 as the benefits from lower material costs and the acquisition of Mohawk on May 31, 2022 both partially offset the decrease in gross profit for the nine months ended September 30, 2023.

Selling, General and Administrative Expenses:

(dollars in thousands)

Selling, general and administrative (“SG&A”) expenses for the nine months ended September 30, 2023 were $148.1 million, a decrease of $3.9 million or 2.6% compared to the same period in the prior year. Decreases in SG&A expenses for the nine months ended September 30, 2023 were primarily due to $8.2 million of lower incentive compensation, $2.6 million of lower variable selling expenses and $2.3 million of lower facility costs. The decrease to SG&A expenses for the nine months ended September 30, 2023 was partially offset by $5.0 million of incremental SG&A from the acquisition of Mohawk on May 31, 2022, $1.9 million of higher salaries and benefits and $2.3 million of higher legal and other professional fees, primarily related to a success fees payable in conjunction with the favorable patent trial result, offset by insurance recoveries, as described in Note 10. Environmental matters, as described in Note 10 resulted in a net $2.2 million expense for the nine months ended September 30, 2023, which compared to $2.8 million of charges for the nine months ended September 30, 2022.

Net Interest Expense:

(dollars in thousands)

Net interest expense for the nine months ended September 30, 2023 was $5.0 million, an increase of $0.9 million, or 22.0%, compared with $4.1 million for the nine months ended September 30, 2022. The higher net interest expense was due to a higher weighted-average borrowing rate, partially offset by lower average outstanding borrowings for the nine months ended September 30, 2023.

Income Taxes:

(dollars in thousands)

The Company’s effective tax rate was 25.6% and 25.5% for the nine months ended September 30, 2023 and 2022, respectively. The increase in the effective tax rate was driven primarily by non-deductible expenses.

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 September 30, 2023, the Company had $24.8 million of cash, $222.3 million available under the Loan Agreement and outstanding debt of $69.3 million, including the finance lease liability of $9.3 million. Based on this liquidity and borrowing capacity, the Company believes it is well-positioned to manage through the working capital demands and the 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

Net cash provided by operating activities was $70.8 million for the nine months ended September 30, 2023, compared to $50.8 million in the same period in 2022. The increase was primarily due to lower working capital driven by decreases in accounts receivable.

Investing Activities

Net cash used by investing activities was $19.3 million for the nine months ended September 30, 2023 compared to cash used of $40.3 million for the same period in 2022. In 2022, the Company paid $24.3 million to acquire Mohawk, before working capital adjustments, as discussed in Note 3 and received proceeds of $1.5 million from the sale of fixed assets. Capital expenditures were $19.3 million and $17.6 million for the nine months ended September 30, 2023 and 2022, respectively. Full year 2023 capital expenditures are expected to be approximately $25 million to $30 million.

Financing Activities

Cash used by financing activities was $49.8 million for the nine months ended September 30, 2023 compared to cash used by financing activities of $7.4 million for the same period in 2022. Net repayments of the credit facility for the nine months ended September 30, 2023 were $34.0 million compared to net borrowings of $7.0 million in the nine months ended September 30, 2022. Net proceeds from the issuance of common stock in connection with incentive stock option exercises were $1.9 million and $2.1 million for the nine months ended September 30, 2023 and 2022, respectively. Cash paid for tax withholdings on vesting of stock compensation totaled $2.1 million and $0.5 million in the nine months ended September 30, 2023 and 2022 respectively, primarily due to improved vesting of performance-based awards in the current year. Fees paid for the amendment and extension of the Loan Agreement in September 2022 totaled $0.7 million. The Company also used cash to pay dividends of $15.3 million and $14.9 million for the nine months ended September 30, 2023 and 2022, 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 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 September 30, 2023, $222.3 million was available under the Loan Agreement, after borrowings and the Company had $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 September 30, 2023, $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 11, $26.0 million of the Senior Unsecured Notes mature on January 15, 2024 and $12.0 million mature on January 15, 2026.

As of September 30, 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 September 30, 2023 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 September 30, 2023.

Interest Rate Risk

The Company has certain financing arrangements that require interest payments based on floating interest rates, and to that extent, the Company’s financial results are subject to changes in the market rate of interest. Borrowings under the Loan Agreement bear interest at the Term SOFR, RFR, EURIBOR and CDOR-based borrowing rates. At present, the Company has not entered into any interest rate swaps or other derivative instruments to fix the interest rate on any portion of its financing arrangements with floating rates. Based on current debt levels at September 30, 2023, if market interest rates increase one percent, the Company’s annual variable interest expense would increase approximately $0.2 million.

Foreign Currency Exchange Risk

Certain of the Company’s subsidiaries operate in foreign countries and their financial results are subject to exchange rate movements. The Company has operations in Canada with foreign currency exposure, primarily due to U.S. dollar sales made from businesses in Canada to customers in the United States. The Company has a systematic program to limit its exposure to fluctuations in exchange rates related to certain assets and liabilities of its operations in Canada that are denominated in U.S. dollars. The net exposure is generally less than $1 million. The foreign currency contracts and arrangements created under this program are not designated as hedged items under ASC 815, Derivatives and Hedging, and accordingly, the changes in the fair value of the foreign currency arrangements, which have been immaterial, are recorded in the Condensed Consolidated Statements of Operations (Unaudited). The Company’s foreign currency arrangements are typically three months or less and are settled before the end of a reporting period. At September 30, 2023, the Company had no foreign currency arrangements or contracts in place.

Commodity Price Risk

The Company uses certain commodity raw materials, primarily plastic resins, and other commodities, such as natural gas, in its operations. The cost of operations can be affected by changes in the market for these commodities, particularly plastic resins. The Company currently has no derivative contracts to hedge changes in raw material pricing. The Company may from time to time enter into forward buy positions for certain utility costs, which were not material at September 30, 2023. Significant future increases in the cost of plastic resin or other adverse changes in the general economic environment could have a material adverse impact on the Company’s financial position, results of operations or cash flows.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

The Company carries out a variety of on-going procedures, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2023.

Changes in Internal Control Over Financial Reporting

During the nine months ended September 30, 2023, there have been no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.