Myers Industries Inc: Form 10-Q for the period ended Mar 31, 2024

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; unforeseen events, including natural disasters, unusual or severe weather events and patterns, public health crises, geopolitical crises, and other catastrophic events; 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, 2023. 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, composite ground protection matting, consumer fuel containers and tanks for water, fuel and waste handling. Products in the Material Handling Segment are primarily injection molded, rotationally molded, blow molded or compression 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 ended March 31, 2024 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 Israel and Hamas. Such events have 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:

Comparison of the Quarter Ended March 31, 2024 to the Quarter Ended March 31, 2023

Net Sales:

(dollars in thousands)

Net sales for the quarter ended March 31, 2024 were $207.1 million, a decrease of $8.6 million or 4.0% compared to the quarter ended March 31, 2023. Net sales decreased due to lower volume/mix of $24.5 million and lower pricing of $3.4 million, partially offset by $19.3 million of incremental sales from the acquisition of Signature on February 8, 2024, included in the Material Handling Segment. Signature's annual sales were approximately $110 million at the time of the acquisition.

Net sales in the Material Handling Segment decreased $0.3 million or 0.2% for the quarter ended March 31, 2024 compared to the quarter ended March 31, 2023. Net sales decreased due to lower volume/mix of $15.8 million and lower pricing of $3.8 million, partially offset by $19.3 million of incremental sales from the acquisition of Signature on February 8, 2024.

Net sales in the Distribution Segment decreased $8.3 million or 13.1% for the quarter ended March 31, 2024 compared to the quarter ended March 31, 2023, primarily due to lower volume/mix of $8.7 million. The decrease in net sales was partially offset by higher pricing of $0.4 million.

Cost of Sales & Gross Profit:

(dollars in thousands)

Gross profit decreased $6.8 million, or 9.6%, for the quarter ended March 31, 2024 compared to the quarter ended March 31, 2023, due to lower volume/mix and pricing as described under Net Sales above, the impact from acquisition-related inventory step-up amortization of $3.1 million and increased labor and productivity costs, partially offset by lower material costs and the benefits of the acquisition of Signature on February 8, 2024. Gross margin was 31.0% for the quarter ended March 31, 2024 compared with 32.9% for the quarter ended March 31, 2023.

Selling, General and Administrative Expenses:

(dollars in thousands)

Selling, general and administrative (“SG&A”) expenses for the quarter ended March 31, 2024 were $53.5 million, an increase of $1.4 million or 2.6% compared to the same period in the prior year. The increases in SG&A expenses in the first quarter 2024 were primarily due to $4.6 million of incremental SG&A, including $1.7 million of intangible amortization, from the acquisition of Signature on February 8, 2024, $0.7 million of higher variable selling expenses, $0.3 million of higher facility costs and $0.2 million of higher commissions partially offset by $2.5 million of lower incentive compensation, $1.9 million of lower legal and professional fees, excluding acquisition costs and $1.2 million of lower salaries and benefits. Acquisition and integration costs included in SG&A expenses increased $3.2 million due to the Signature acquisition described in Note 3 and restructuring costs included in SG&A expenses decreased $0.4 million as described in Note 4. Additionally, the Company recognized a $0.7 million reduction to legal costs within SG&A for the quarter ended March 31, 2024 related to an insurance recovery of defense costs incurred on a legal matter, as described in Note 10. Environmental matters, as described in Note 10 resulted in a net $0.3 million recovery for the quarter ended March 31, 2024, which compared to $0.5 million of charges for the quarter ended March 31, 2023.

Net Interest Expense:

(dollars in thousands)

Net interest expense for the quarter ended March 31, 2024 was $6.1 million, an increase of $4.4 million, or 269.3%, compared with $1.6 million for the quarter ended March 31, 2023. The higher net interest expense was due to higher average outstanding borrowings as a result of the acquisition of Signature, which was funded through an amendment and restatement of Myers' existing loan agreement discussed below, and a higher weighted-average borrowing rate in the current quarter.

Income Taxes:

(dollars in thousands)

The Company’s effective tax rate was 27.0% for the quarter ended March 31, 2024, compared to 25.0% for the quarter ended March 31, 2023. The increase in the effective tax rate was driven by non-deductible expenses, including expenses related to the Signature acquisition.

Liquidity and Capital Resources:

The Company’s primary sources of liquidity are cash on hand, cash generated from operations and availability under the Amended Loan Agreement (defined below). At March 31, 2024, the Company had $32.7 million of cash, $235.4 million available under the Loan Agreement and outstanding debt of $409.7 million, including the finance lease liability of $9.1 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 Amended Loan Agreement will be sufficient to meet expected business requirements including capital expenditures, dividends, working capital, debt service, and to fund future growth.

Operating Activities

Net cash provided by operating activities was $20.3 million for the quarter ended March 31, 2024, compared to $25.8 million in the same period in 2023. The decrease was primarily due to lower net income in the current period partly offset by net improvements in working capital.

Investing Activities

Net cash used for investing activities was $354.5 million for the quarter ended March 31, 2024 compared to cash used of $9.2 million for the same period in 2023. In 2024, the Company paid $348.9 million to acquire Signature, net of cash acquired and subject to working capital adjustments, as discussed in Note 3. Capital expenditures were $5.7 million and $9.1 million for the quarter ended March 31, 2024 and 2023, respectively. Full year 2024 capital expenditures are expected to be approximately $35 million to $40 million.

Financing Activities

Cash provided by financing activities was $336.9 million for the quarter ended March 31, 2024 compared to cash used for financing activities of $11.5 million for the same period in 2023. In 2024, the Company received proceeds of $400 million under a new term loan facility, as described below and made repayments of $38.0 million of senior unsecured notes, including $26.0 million of senior unsecured notes that matured in January 2024 and the prepayment of $12.0 million of senior unsecured notes in conjunction with the amendment and restatement to the Loan Agreement described below. Net borrowings (repayments) of the Company's existing revolving credit facility were $(11.0) million and $(5.2) million for the quarters ended March 31, 2024 and 2023, respectively. Net proceeds from the issuance of common stock in connection with incentive stock option exercises were $2.4 million and $1.1 million for the quarter ended March 31, 2024 and 2023, respectively. Cash paid for tax withholdings on vesting of stock compensation totaled $1.9 million and $2.0 million in the quarter ended March 31, 2024 and 2023 respectively. Fees paid for the amendment and restatement to the Loan Agreement in February 2024 totaled $9.2 million. The Company also used cash to pay dividends of $5.3 million and $5.3 million for the quarter ended March 31, 2024 and 2023, respectively.

Credit Sources

Seventh Amendment to Loan Agreement

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.

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 first 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, all outstanding senior unsecured notes under the Note Purchase Agreement have been paid and the Note Purchase Agreement has been terminated. In conjunction with the termination the Company recognized a loss on debt extinguishment of $0.1 million, primarily representing the make-whole fees on the senior unsecured notes and the unamortized value of the original issuance discount.

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 11) dated September 29, 2022 (collectively, the “Amended Loan Agreement”). Amendment No. 1, among other things, permitted the acquisition of Signature Systems and provided a new 5-year $400 million term loan facility (“Term Loan A”). Term Loan A will amortize in eight quarterly installment payments of $5 million beginning June 30, 2024, quarterly installment payments of $10 million thereafter, and any remaining balance due upon maturity. 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 $9.2 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).

As of March 31, 2024, $235.4 million was available under the Amended Loan Agreement, after borrowings and the Company had $5.6 million of letters of credit issued related to insurance and other financing contracts in the ordinary course of business. Borrowings under the Amended Loan Agreement bear interest at the Term SOFR, RFR, SONIA, EURIBOR and CORRA-based borrowing rates.

As of March 31, 2024, 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 net leverage ratio (defined as total net debt divided by earnings before interest, taxes, depreciation and amortization, as adjusted). The ratios as of and for the period ended March 31, 2024 are shown in the following table:

Interest rate swap transaction - subsequent event

On May 2, 2024, the Company entered into an interest rate swap agreement to mitigate the variable interest rate risk of borrowings under the Amended Loan Agreement. The swap has a beginning notional value of $200.0 million, which reduces proportionately with scheduled Term Loan A amortization payments, and has a final maturity date of January 31, 2029. The swap is designated as a cash flow hedge and effectively results in a fixed rate of 4.606% plus the applicable margin for the hedged debt, as described in Note 11.

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 March 31, 2024.

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 Amended Loan Agreement bear interest at the Term SOFR, RFR, SONIA, EURIBOR and CORRA-based borrowing rates. At March 31, 2024, 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 March 31, 2024, if market interest rates increase one percent, the Company’s annual variable interest expense would increase approximately $4.1 million.

On May 2, 2024, the Company entered into an interest rate swap agreement to mitigate the variable interest rate risk on $200.0 million of its outstanding borrowings under the Amended Loan Agreement, which effectively results in a fixed rate debt as described above. If market interest rates decrease or increase 1%, the fair value of the interest rate swap would change by approximately $7.2 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 and the United Kingdom with foreign currency exposure, primarily due to U.S. dollar sales made from businesses in Canada and the United Kingdom 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 and the United Kingdom 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 March 31, 2024, 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 March 31, 2024. 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 March 31, 2024.

Changes in Internal Control Over Financial Reporting

On February 8, 2024, the Company acquired the stock of Signature Systems. As permitted by SEC rules and regulations, the scope of management’s evaluation of internal control over financial reporting as of March 31, 2024 did not include an evaluation of the internal control over financial reporting of Signature. However, we are extending our oversight and monitoring processes that support our review of internal control over financial reporting to include Signature’s operations.

Excluding the Signature acquisition, during the quarter ended March 31, 2024, 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.