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 , is classified as discontinued operations in all periods presented. The Company designs, manufactures, and markets a variety of plastic and rubber products. The 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. 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 endedDecember 31, 2020 are discussed below. However, the Company's past results of operations may not reflect its future operating trends. InMarch 2020 , the COVID-19 pandemic began to affect theU.S. economy and has created additional uncertainty for the Company's operations. Regulatory actions in response to COVID-19 have varied across jurisdictions and have included closure of nonessential businesses. The duration and extent of these measures is unknown, including possible reimplementation of any measures that have been removed or relaxed. Through the date of this report, most of the Company's businesses are considered essential because they supply food and agricultural, automotive, healthcare, industrial and consumer end markets. Accordingly, those businesses have continued to operate. Throughout the year, the Company has experienced temporary closures of certain facilities as a result of the pandemic, including certain manufacturing facilities in the Material Handling Segment and our Distribution business inCentral America , in parts of March andApril 2020 . Beyond the impact of these temporary closures, some of our businesses have been and may continue to be affected by the broader economic effects from COVID-19 and related regulatory actions, including customer demand for our products. 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: 2020 Compared with 2019
Net Sales : (dollars in thousands) Year Ended December 31, Segment 2020 2019 Change % Change Material Handling$ 343,884 $ 356,407 $ (12,523 ) (4 )% Distribution$ 166,544 $ 159,349 $ 7,195 5 % Inter-company elimination$ (59 ) $ (58 ) $ (1 ) Total net sales$ 510,369 $ 515,698 $ (5,329 ) (1 )% Net sales for the year endedDecember 31, 2020 were$510.4 million , a decrease of$5.3 million or 1% compared to the prior year. Net sales were negatively impacted by lower volume of$25.5 million , lower pricing of$4.2 million , and the effect of unfavorable currency translation of$0.3 million , which was primarily within the Material Handling Segment. These declines were partially offset by$11.8 million of incremental sales from theElkhart Plastics acquisition onNovember 10, 2020 and$12.9 million of incremental sales related to the Tuffy acquisition onAugust 26, 2019 .Elkhart Plastics' annual sales are approximately$100 million and Tuffy's annual sales are approximately$20 million . Net sales in the Material Handling Segment decreased$12.5 million or 4% for the year endedDecember 31, 2020 compared to the prior year. The decrease in net sales was due to lower volume of$19.8 million , lower pricing of$4.2 million , and the effect of unfavorable currency translation of$0.3 million . The lower volume was primarily due to declines in the vehicle market, food and beverage market and the industrial market and was partially offset by higher volume in the consumer market driven by higher levels of hurricane and wildfire activity. The lower volumes were primarily the result of the economic impacts of COVID-19 during the first half of the year. This decrease was partially offset by$11.8 million of incremental sales due to theElkhart Plastics acquisition onNovember 10, 2020 . Net sales in the Distribution Segment increased$7.2 million or 5% in the year endedDecember 31, 2020 compared to the prior year, primarily the result of$12.9 million of incremental sales due to theAugust 26, 2019 Tuffy acquisition partly offset by$5.7 million of lower volume, which occurred primarily as a result of the impacts of COVID-19 on travel patterns and other economic effects in the first half of the year. 21 --------------------------------------------------------------------------------
Cost of Sales & Gross Profit: Year Ended December 31, (dollars in thousands) 2020 2019 Change % Change Cost of sales$ 338,409 $ 344,386 $ (5,977 ) (2 )% Gross profit$ 171,960 $ 171,312 $ 648 0 % Gross profit as a percentage of sales 33.7 % 33.2 % Gross profit margin increased to 33.7% for the year endedDecember 31, 2020 compared to 33.2% for the same period in 2019, primarily due to lower commodity raw material costs offsetting the effect of lower volumes. Cost of sales in 2019 included a$3.5 million charge for estimated replacement costs of certain defective boxes as discussed in Note 9 to the consolidated financial statements. In the first quarter of 2021, the Company announced an 8 percent price increase in response to rapidly rising raw material costs, primarily resin. This is expected to primarily impact the Material Handling Segment.
Selling, General and Administrative Expenses:
Year Ended December 31, (dollars in thousands) 2020 2019 Change % Change SG&A expenses$ 130,331 $ 133,130 $ (2,799 ) (2 )% SG&A expenses as a percentage of sales 25.5 % 25.8 % Selling, general and administrative ("SG&A") expenses for the year endedDecember 31, 2020 were$130.3 million , a decrease of$2.8 million or 2% compared to the prior year. SG&A expenses in 2020 included a$2.4 million charge related to executive severance, of which$0.6 million related to stock compensation acceleration. SG&A expenses in 2019 included 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 2019 and$0.9 million of restructuring costs incurred in the prior year related to the implementation of the Distribution Transformation Plan that did not reoccur in 2020. Year-over-year comparisons were also affected by lower charges related to the environmental contingencies of$3.5 million discussed in Note 12, lower travel expenses of$2.3 million , lower freight of$1.3 million , lower depreciation and amortization of$2.9 million and savings from the Distribution Transformation Plan, that were partly offset by$2.0 million of incremental SG&A from theNovember 10, 2020 Elkhart Plastics acquisition and$2.4 million of incremental SG&A from theAugust 26, 2019 Tuffy acquisition. Restructuring:
As discussed in Note 8 to the consolidated financial statements, the Company has implemented various restructuring programs.
In the Material Handling Segment, the Ameri-Kart Plan involves consolidation of two manufacturing facilities into a single new manufacturing facility and is expected to be substantially completed in 2021. In connection with this plan, the Company plans to commence a new facility lease once construction of the new facility is substantially completed, as described in Note 16 to the consolidated financial statements. Although construction has commenced, no restructuring costs were incurred during the years endedDecember 31, 2020 or 2019 related to the Ameri-Kart Plan. 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. No costs were incurred during the year endedDecember 31, 2020 . Restructuring costs of$0.9 million were incurred during the year endedDecember 31, 2019 .
Impairment Charges:
During the first quarter of 2019, the Company recognized a$0.9 million impairment charge in connection with classifying a previously closed facility as held for sale, as discussed in Note 4 to the consolidated financial statements. The facility was sold in the second quarter of 2019.
Other (Income) Expenses:
During the year endedDecember 31, 2020 , the Company recorded a pre-tax gain of$11.9 million related to the sale to HC of the fully-reserved promissory notes and related accrued interest receivable in exchange for$1.2 million and the release from a lease guarantee with a carrying value of$10.7 million related to one of HC's facilities as discussed in Note 6 to the consolidated financial statements. 22 --------------------------------------------------------------------------------
Net Interest Expense: Year Ended December 31, (dollars in thousands) 2020 2019 Change % Change Net interest expense$ 4,688 $ 4,083 $ 605 15 %
Average outstanding borrowings, net
$ - 0 % Weighted-average borrowing rate 6.28 % 6.27 %
Net interest expense for the year ended
Income Taxes: Year Ended December 31, (dollars in thousands) 2020 2019 Income from continuing operations before income taxes$ 48,862 $ 33,183 Income tax expense$ 12,093 $ 8,968 Effective tax rate 24.7 % 27.0 % The effective tax rate was 24.7% for the year endedDecember 31, 2020 compared to 27.0% in the prior year. The decrease in the effective tax rate was primarily the result of lower non-deductible expenses and the reduction of an unrecognized tax benefit due to a lapse in the related statute of limitations.
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, 2020 , the Company had$28.3 million of cash,$194.2 million available under the Loan Agreement and outstanding debt with face value of$78.0 million . Based on this liquidity and borrowing capacity, the Company believes it is well-positioned to manage through the uncertainty caused by COVID-19. 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, including selective acquisitions.
Operating Activities
Cash provided by operating activities from continuing operations was$46.5 million and$47.0 million for the years endedDecember 31, 2020 and 2019, respectively. The decrease in cash provided by continuing operations of$0.5 million during the year endedDecember 31, 2020 compared to 2019 was primarily due to lower net sales in the first half of 2020, partly offset by higher volume of sales in the second half of 2020 due to hurricane and wildfire activity and its effects on working capital, particularly on increases in accounts receivable and inventory balances as ofDecember 31, 2020 . Net cash provided by operating activities of discontinued operations was$7.3 million in 2019 and resulted from the remaining receipt of the tax benefit from the worthless stock deduction related to the sale of the Brazil Business in 2017.
Investing Activities
Net cash used by investing activities of continuing operations was$75.6 million for the year endedDecember 31, 2020 compared to cash used of$20.8 million for the year endedDecember 31, 2019 . In 2020, the Company paid$62.6 million to acquireElkhart Plastics , paid the working capital adjustment of$0.7 million related to the 2019 acquisition of Tuffy and received proceeds from the sale of notes receivable of$1.2 million . In 2019, the Company paid$18.0 million to acquire Tuffy and received proceeds from the sale of fixed assets of$7.5 million , substantially all of which related to the sale of two buildings. Capital expenditures were$13.4 million and$10.3 million for the years endedDecember 31, 2020 and 2019, respectively. See Notes 3, 4 and 6 to the consolidated financial statements for further discussion of these items.
Financing Activities
The Company used cash to pay dividends of$19.4 million and$19.3 million in 2020 and 2019, 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. 23 --------------------------------------------------------------------------------
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 . As ofDecember 31, 2020 , the Company had$194.2 million available under the Loan Agreement after$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 discussed in Note 12 to the consolidated financial statements. Borrowings under the Loan Agreement bear interest at the LIBOR rate, prime rate, federal funds effective rate, the Canadian deposit offered rate, or the euro currency reference rate depending on the type of loan requested by the Company, plus the applicable margin as set forth in the Loan Agreement. AtDecember 31, 2020 ,$78 million face value of Senior Unsecured Notes are outstanding. 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. The$40 million note of these Senior Unsecured Notes maturedJanuary 15, 2021 . InJanuary 2021 , the Company repaid the$40 million note using cash on hand and borrowing under the Loan Agreement. See further detail in Note 13 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. As ofDecember 31, 2020 , 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 endedDecember 31, 2020 are: Required Level Actual Level Interest Coverage Ratio 3.00 to 1 (minimum) 15.38 Leverage Ratio 3.25 to 1 (maximum) 1.11
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 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 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 included in Item 8 of this Annual Report on Form 10-K. Income Taxes - In the ordinary course of business there is inherent uncertainty in quantifying certain income tax positions. The Company evaluates uncertain tax positions for all years subject to examination based upon management's evaluations of the facts, circumstances and information available at the reporting date. Income tax positions must meet a more-likely-than-not recognition threshold at the reporting date to be recognized. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. 24 -------------------------------------------------------------------------------- As discussed further in Notes 6 and 14 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, 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 the 2017IRS audit will not challenge it and, if challenged, that the Company will prevail. 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.
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. 25
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