MYERS INDUSTRIES, INC. 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 inDecember 2017 , and the Lawn and Garden business, which was sold inFebruary 2015 , are classified as discontinued operations in all periods presented. The Company designs, manufactures, and markets a variety of plastic and rubber products. Our 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. Our 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.
Results of Operations: 2019 Compared with 2018
Net Sales : (dollars in millions) Year Ended December 31, Segment 2019 2018 Change % Change Material Handling$ 356.4 $ 417.2 $ (60.8 ) (15 )% Distribution 159.4 149.6 9.8 7 % Inter-company elimination (0.1 ) (0.1 ) - Total net sales$ 515.7 $ 566.7 $ (51.0 ) (9 )% Net sales for the year endedDecember 31, 2019 were$515.7 million , a decrease of$51.0 million or 9% compared to the prior year. Net sales were negatively impacted by lower volume of$58.3 million and the effect of unfavorable currency translation of$1.0 million , and were partially offset by higher pricing of approximately$1.1 million and$7.2 million of incremental sales due to the Tuffy acquisition onAugust 26, 2019 . Tuffy's annual sales are approximately$20 million . Net sales in the Material Handling Segment decreased$60.8 million or 15% for the year endedDecember 31, 2019 compared to the prior year. The decrease in net sales was due to lower volume of$60.6 million and the effect of unfavorable foreign currency translation of$1.0 million , partially offset by higher pricing of approximately$0.8 million . Volume was lower primarily due to declines in the food and beverage market and the vehicle market (mainly in the recreational vehicle market). Net sales in the Distribution Segment increased$9.8 million or 7% in the year endedDecember 31, 2019 compared to the prior year as a result of higher volume of$2.3 million ,$7.2 million of incremental sales due to the Tuffy acquisition and higher pricing of$0.3 million .
Cost of Sales & Gross Profit:
Year Ended December 31,
(dollars in millions) 2019 2018 Change % Change
Cost of sales $ 344.4 $ 387.4 $ (43.0 ) (11 )%
Gross profit $ 171.3 $ 179.3 $ (8.0 ) (4 )%
Gross profit as a percentage of sales 33.2 % 31.6 %
Gross profit margin increased to 33.2% for the year ended December 31, 2019
compared to 31.6% for the same period in 2018, primarily due to lower commodity
raw material costs and improved productivity in the Material Handling Segment.
This was partially offset by the $3.5 million charge in the Material Handling
Segment for estimated replacement costs of certain defective boxes as discussed
in Note 9 to the consolidated financial statements. Gross profit margin in the
Distribution Segment was consistent for the years ended December 31, 2019 and
2018.
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Selling, General and Administrative Expenses:
Year Ended December 31,
(dollars in millions) 2019 2018 Change % Change
SG&A expenses $ 133.1 $ 139.3 $ (6.2 ) (4 )%
SG&A expenses as a percentage of sales 25.8 % 24.6 %
Selling, general and administrative ("SG&A") expenses for the year ended
December 31, 2019 were $133.1 million , a decrease of $6.2 million or 4% compared
to the prior year. SG&A expenses in 2019 were primarily impacted by lower
compensation and benefit costs of $6.4 million , which includes lower incentive
compensation within Material Handling and Corporate and savings from the
Distribution Transformation Plan described below. SG&A expenses were also lower
in 2019 due to lower freight costs of $1.3 million and the reversal of $2.0
million of stock compensation expense related to the forfeiture of stock awards
due to the resignation of the CEO in October 2019 . These costs were partially
offset by higher environmental costs in 2019 of $3.8 million as discussed in
Note 12 to the consolidated financial statements.
Restructuring:
As discussed in Note 8 to the consolidated financial statements, the Company has implemented various restructuring programs.
The Ameri-Kart Plan to consolidate manufacturing operations was announced during the first quarter of 2019 and is expected to be substantially completed in the second half of 2020. In connection with this plan, the Company plans to commence a new facility lease as described in Note 16 to the consolidated financial statements. No costs were incurred during 2019 related to the Ameri-Kart Plan, and remaining expected costs are$1.1 million . As previously announced, the Company expects annualized benefits of approximately$1.5 million upon completion. The Distribution Transformation Plan was announced during the first quarter of 2019 and was substantially completed by the end of 2019. The Company incurred$0.9 million of restructuring costs in connection with the Distribution Transformation Plan in 2019. As previously announced, the Company expects annualized benefits of$5 to$7 million after 2019.
The Material Handling Plan was initiated in the first quarter of 2017 and is
completed. No costs were incurred during 2019 compared to
Impairment Charges:
During 2019, the Company recognized an impairment charge of
Other Expenses:
During the year endedDecember 31, 2018 , the Company recorded a provision for expected loss of$23.0 million as a result of the uncertainty regarding the ability to collect on the promissory notes receivable and corresponding accrued interest from the sale of the Lawn and Garden business, now namedHC Companies, Inc. ("HC"), as discussed in Note 6 to the consolidated financial statements. The Company also recorded a charge during 2018 of$10.3 million related to the Company's estimate of its potential obligation under the lease guarantee on one of HC's facilities, as discussed in Note 12 to the consolidated financial statements. OnJanuary 6, 2020 the Company sold to HC the fully-reserved promissory notes and related accrued interest receivable from HC in exchange for$1.2 million and the release from the lease guarantee, which extended to 2025 and had annual rent of approximately$2 million . AtDecember 31, 2019 , the carrying value of the lease guarantee was$10.7 million . The$11.9 million pre-tax gain from the sale of the notes and release of the lease guarantee liability is expected to be included in the Company's first quarter 2020 results. 21 --------------------------------------------------------------------------------
Net Interest Expense:
Year Ended December 31,
(dollars in millions) 2019 2018 Change % Change
Net interest expense $ 4.1 $ 4.9 $ (0.8 ) (16 )%
Average outstanding borrowings, net $ 78.0 $ 107.1 $ (29.1 ) (27 )%
Weighted-average borrowing rate 6.27 % 5.75 %
Net interest expense for the year ended
Income Taxes:
Year Ended December 31,
(dollars in millions) 2019 2018Income from continuing operations before income taxes $ 33.2
$ 1.4 Income tax expense $ 9.0 $ 3.0 Effective tax rate 27.0 % 218.7 % The effective tax rate was 27.0% for the year endedDecember 31, 2019 compared to 218.7% in the prior year. The unusually high rate in 2018 was the result of a lower tax rate on the$33.3 million of charges in Other Expenses than the rate on other pre-tax earnings. Additionally, the 2018 tax rate was impacted by non-deductible expense (primarily compensation-related), additional tax expense of$0.6 million related to an uncertain tax position associated with theU.S. Tax Cuts and Jobs Act ("Tax Act"), and additional tax expense of$0.6 million associated with the unremitted earnings of certain foreign subsidiaries which are no longer deemed to be permanently reinvested.
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). AtDecember 31, 2019 , the Company had$75.5 million of cash,$194.2 million available under the Loan Agreement and outstanding debt with face value of$78.0 million . 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 from continuing operations was$47.0 million and$60.4 million for the years endedDecember 31, 2019 and 2018, respectively. The decrease in cash provided by continuing operations of$13.4 million during the year endedDecember 31, 2019 compared to 2018 was primarily due to changes in working capital of$14.7 million , which was primarily driven by lower sales volume and a higher variable compensation payout in 2019. Net cash provided by operating activities from discontinued operations in 2019 and 2018 primarily related to the receipt of the tax benefit from the worthless stock deduction related to the Brazil Business as described in Note 6 to the consolidated financial statements. Net cash provided by operating activities from discontinued operations in 2018 also included the payment of expenses related to the sale of the Brazil Business and the payment of the settlement with the L&G Buyer. Investing Activities InAugust 2019 , the Company paid$18.0 million to acquire Tuffy as discussed in Note 3 to the consolidated financial statements. The preliminary estimated working capital adjustment of$0.7 million has not been paid as ofDecember 31, 2019 . Capital expenditures were$10.3 million and$5.1 million for the years endedDecember 31, 2019 and 2018, respectively. Higher capital spending in 2019 was due to additional investments that were made for new manufacturing equipment focused on growth and productivity improvements. Proceeds from the sale of fixed assets were$7.5 million in 2019, substantially all of which was derived from the sale of two buildings, as discussed in Note 4 to the consolidated financial statements. Proceeds from the sale of fixed assets were$2.6 million in 2018, which were primarily due to the sale and leaseback of the distribution center inPomona, California , as discussed in Note 16 to the consolidated financial statements. 22 --------------------------------------------------------------------------------
Financing Activities
The Company received net proceeds of$79.5 million from the public offering of common stock in 2018. Net repayments on the Loan Agreement (defined below) were$74.6 million for the year endedDecember 31, 2018 . There were no net repayments or borrowings on the credit facility in 2019. The Company paid dividends of$19.3 million and$17.9 million in 2019 and 2018, respectively. Other proceeds from the issuance of common stock relate primarily to exercises of stock options issued under the stock incentive plans as described in Note 10 to the consolidated financial statements.
Credit Sources
InMarch 2017 , the Company entered into a Fifth Amended and Restated Loan Agreement (the "Loan Agreement"). The Loan Agreement amended the pre-existing senior revolving credit facility's borrowing limit to$200 million , inclusive of letters of credit, and extended the maturity date fromDecember 2018 toMarch 2022 . 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. The Company also has outstanding Senior Unsecured Notes totaling$78 million with a group of investors pursuant to a note purchase agreement. The series of four notes range in face value from$11 million to$40 million , with interest rates ranging from 4.67% to 5.45%, payable semiannually, and maturing betweenJanuary 15, 2021 and 2026. See Note 13 to the consolidated financial statements. Total debt outstanding atDecember 31, 2019 was$77.2 million , net of deferred financing costs of$0.8 million , compared with$76.8 million atDecember 31, 2018 . The Company's Loan Agreement provides available borrowing up to$200 million , reduced for letters of credit issued. As ofDecember 31, 2019 , there was$194.2 million available under our Loan Agreement. As ofDecember 31, 2019 , the Company had$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 described in Note 12 to the consolidated financial statements. As ofDecember 31, 2019 , the Company was in compliance with all 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 endedDecember 31, 2019 are shown in the following table: Required Level Actual Level Interest Coverage Ratio 3.00 to 1 (minimum) 14.26 Leverage Ratio 3.25 to 1 (maximum) 1.20 Contractual Obligations
The following summarizes the Company's estimated future cash outflows from financial contracts and commitments reflecting our current debt structure:
Less than 2-3 4-5
1 Year Years Years Thereafter Total
(Amounts in Thousands)
Principal payments on debt $ - $ 40,000 $ 26,000 $ 12,000 $ 78,000
Interest 3,895 4,132 2,738 681 11,446
Lease payments 2,304 2,528 1,355 621 6,808
Retirement obligations and
other benefits 601 727 618 626 2,572
$ 6,800 $ 47,387 $ 30,711 $ 13,928 $ 98,826
Uncertain tax position liabilities are excluded from the contractual obligations
table because a reasonably reliable estimate of the period of cash settlement
with the respective tax authority cannot be made. As described in Note 16 to the
consolidated financial statements, the Company entered into an agreement where a
new manufacturing and distribution facility in Bristol, Indiana will be
constructed, and when it is substantially complete, the Company will lease that
new facility. The total expected future minimum lease payments during the
initial term of the lease are approximately $13.5 million and are excluded from
the contractual obligations table because the lease agreement has not yet
commenced.
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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 inthe 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 report), the amount of assets, liabilities, revenue and expenses reported are affected by estimates and judgments that are necessary to comply withU.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 12 to the consolidated financial statements. 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 14 to the consolidated financial statements, the Company made judgements for tax positions in connection with itsDecember 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 doBrazil 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. The Company also recorded tax benefits within its discontinued operations of approximately$14.3 million through 2018 that were generated as a result of a worthless stock deduction for the Novel do Nordeste business included in this divestiture. Although management believes that the worthless stock deduction is valid, there can be no assurance that theIRS will not challenge it and, if challenged, that the Company will prevail.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have, or are reasonable to have, a current or future effect on financial condition, changes in financial condition, revenues of operations, liquidity, capital expenditures or capital resources that are material.
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 under Item 8 of this report.
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