Myers Industries - 10-Q quarterly report FY

 

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o.

     Indicate by check mark whether the registrant is a large accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ.

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

Table of Contents

See notes to unaudited condensed consolidated financial statements.

See notes to unaudited condensed consolidated financial statements.

     Statement of Accounting Policy

          The accompanying financial statements include the accounts of Myers Industries, Inc. and subsidiaries (collectively, the “Company”), and have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures are adequate to make the information not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s latest annual report on Form 10-K.

          In the opinion of the Company, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2007, and the results of operations and cash flows for the three months ended March 31, 2007 and 2006. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results of operations that will occur for the year ending December 31, 2007.

          Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2007 presentation.

     Acquisitions

On January 9, 2007, the Company acquired all the shares of ITML Horticultural Products, Inc., an Ontario corporation (“ITML”). ITML designs, manufactures and sells plastic containers and related products for professional floriculture / horticulture grower markets across North America, utilizing injection molding, blow molding, and thermoforming processes. Additionally, ITML utilizes extensive technology and expertise for resin reprocessing and recycling for use in its products. The acquired business had fiscal 2006 annual sales of approximately $169.5 million. The total purchase price was approximately $115 million, which includes the assumption of approximately $64 million debt outstanding as of the acquisition date. In addition, the acquisition allows for additional purchase consideration to be paid contingent upon the results of the Company’s Lawn and Garden results in 2008, specifically the achievement of earnings before interest taxes, depreciation and amortization compared to targeted amounts.

On March 8, 2007, the Company acquired select equipment, molds and inventory related to the Xytec and Combo product lines of Schoeller Arca Systems Inc., a subsidiary of Schoeller Arca Systems N.V., in the United States, Canada and Mexico (“SAS”). These product lines include collapsible bulk containers used for diverse shipping and handling applications in markets from manufacturing to food to liquid transport. The acquired business had 2006 annual sales of approximately $50 million. The total purchase price was approximately $41.6 million, some of which has been allocated to intangible assets including patents, customer relations and technology with lives ranging from six to ten years.

The results for both ITML and SAS product lines are included in the consolidated results of operations from the date of acquisition. ITML is included in the Company‘s Lawn and Garden segment and the SAS product lines are included in the Material Handling — North America segment. The final purchase price will be allocated to the assets acquired and liabilities assumed based upon their estimated fair values when appraisals, other studies and additional information become available. The preliminary allocation of the purchase price and the estimated goodwill and other intangibles are as follows:

The results of ITML operations are included in the Company’s consolidated results of operations from the date of acquisition and are reported in the Company’s lawn and garden segment. The following unaudited pro forma information presents a summary of consolidated results of operations for the Company including ITML as if the acquisition had occurred January 1, 2006.

These unaudited pro forma results have been prepared for comparative purposes only and may not be indicative of results of operations which actually would have occurred had the acquisition taken place on January 1, 2006, or future results.

     Discontinued Operations

          In the third quarter of 2006, the Company’s Board of Directors approved the plan for divestiture of the Company’s Material Handling — Europe business segment. On October 20, 2006, the Company entered into a definitive agreement to sell these businesses and the sale was completed on February 1, 2007 with net proceeds of approximately $68.1 million received.

          In accordance with U.S. generally accepted accounting principles, the operating results related to these businesses have been included in discontinued operations in the Company’s condensed statements of consolidated income for all periods presented, and the net assets related to these businesses have been presented as discontinued operations in the condensed statement of consolidated financial position as of December 31, 2006.

          These discontinued operations generated sales of $15.0 million and $39.2 million and net income of $17.8 million and $787,000 for the three months ended March 31, 2007 and 2006, respectively. Included in net income for the three months ended March 31, 2007 was a gain of $17.8 million from the sale of these businesses.

     Subsequent Event

          On April 24, 2007, Myers Industries, Inc., entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MYEH Corporation, a Delaware corporation (the “Parent”) and MYEH Acquisition Corporation, an Ohio corporation (“MergerCo”). Under the terms of the Merger Agreement, MergerCo will be merged with and into the Company, with the Company continuing as the surviving corporation and becoming a wholly-owned subsidiary of Parent (the “Merger”). Parent is owned by private equity funds sponsored by Goldman, Sachs & Co.

          Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock of the Company (other than shares owned by the Company or any of its subsidiaries, or by any shareholders who properly exercise appraisal rights under Ohio law) will be cancelled and converted into the right to receive $22.50 in cash, without interest. The Merger Agreement contains a “go shop” provision pursuant to which the Company has the right to solicit and engage in discussions and negotiations with respect to competing proposals through June 8, 2007, in accordance with specific procedures set forth in the Merger Agreement.

          The Merger Agreement contains termination rights for both the Company and Parent. In particular, the Company may terminate the Merger Agreement if the Board determines in good faith that it has received a superior proposal and otherwise complies with certain terms of the Merger Agreement. Upon termination of the Merger Agreement under specified circumstances, the Company could be required to either reimburse Parent for up to $10 million of actual documented expenses incurred in connection with the transaction or pay Parent a termination fee of $25 million (net of any Parent expenses previously paid by the Company). In certain other circumstances, Parent could be required to pay the Company a “reverse” termination fee of $25 million, which would increase to $35 million in limited circumstances. The reverse termination fee payable by Parent to the Company is guaranteed by certain private equity funds sponsored by Goldman, Sachs & Co.

          Consummation of the Merger is subject to various conditions including the approval of the Merger by the Company’s shareholders, expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, and other customary closing conditions.

     Goodwill

          The change in goodwill for the three months ended March 31, 2007 is as follows:

     Net Income Per Share

          Net income per share, as shown on the Condensed Statement of Consolidated Income, is determined on the basis of the weighted average number of common shares outstanding during the period as follows:

     Stock Compensation

          In 1999, the Company and its shareholders adopted the 1999 Stock Plan allowing the Board of Directors to grant key employees and Directors options to purchase common stock of the Company at the closing market price on the date of grant. In April 2006, the shareholders approved an amendment to the Plan which provides that, in addition to stock options, grants of restricted stock, stock appreciation rights and other forms of equity compensation consistent with the Plan may be made. Annual grants may not exceed two percent of the total shares of outstanding common stock. In general, options granted and outstanding vest over three to five years and expire ten years from the date of grant. At March 31, 2007, there were 703,661 shares available for future grant under the plan.

          Stock compensation expense under SFAS 123R reduced income before taxes approximately $329,000 and $108,000 for the three months ended March 31, 2007 and 2006, respectively. These expenses are included in selling and administrative expenses in the accompanying Condensed Statement of Consolidated Income. Total unrecognized compensation cost related to non-vested share based compensation arrangements at March 31, 2007 was approximately $3.4 million, which will be recognized over the next four years.

The following table summarizes the stock option activity for the period ended March 31, 2007:

          In addition, during 2006, the Company issued 61,000 shares of restricted stock with a total compensation value of $1,038,000 which is being recognized over the related four year vesting period. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The total intrinsic value of the options exercised during the three months ended March 31, 2007 and 2006 was approximately $345,000 and $1.2 million, respectively.

     Income Taxes

          On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48”). FIN 48 prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition for uncertain tax positions. As of the adoption date, the Company recognized a $302,000 increase in the liability for unrecognized tax benefits and a reduction in retained earnings.

The Company’s total balance of unrecognized tax benefits as of January 1, 2007 was $1,755,000. Included in this balance are $1,317,000 of unrecognized tax benefits that if recognized would reduce the Company’s effective tax rate. The Company recognizes accrued amounts of interest and penalties related to its uncertain tax positions as part of its income tax expense within its consolidated statement of operations. The amount of accrued interest expense included as a liability within the Company’s consolidated balance sheet as of January 1, 2007 was $187,000.

The Company does not expect any significant changes to its unrecognized tax benefit balance over the next twelve months.

Since its adoption on January 1, 2007, no material changes have occurred in the period ended March 31, 2007.

As of March 31, 2007, the Company and its significant subsidiaries are subject to examination for years after 2002 in Canada, Denmark, United States and certain major states within the United States. The Company is also subject to examinations after 2003 in France, United Kingdom and remaining major states within the United States.

     Recent Pronouncements

          In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, rather it applies under existing accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Myers Industries Inc. is currently evaluating the impact of adoption of SFAS No. 157 on the consolidated financial statements.

          The FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” in the first quarter 2007. The statement allows entities to value financial instruments and certain other items at fair value. The statement provides guidance over the election of the fair value option, including the timing of the election and specific items eligible for the fair value accounting. Changes in fair values would be recorded in earnings. The statement is effective for fiscal years beginning after November 15, 2007. The Company is evaluating the timing, method and potential impact of the adoption of this statement, if any, on its consolidated financial statements.

     Supplemental Disclosure of Cash Flow Information

          The Company made cash payments for interest of $1,417,000 and $2,262,000 for the three months ended March 31, 2007 and 2006, respectively. Cash payments for income taxes were $655,000 and $1,973,000 for the three months ended March 31, 2007 and 2006, respectively.

     Comprehensive Income

          An unaudited summary of comprehensive income for the three months ended March 31, 2007 and 2006 was as follows:

     Retirement Plans

          For the Company’s two defined benefit pension plans included in continuing operations, the net periodic benefit cost for the three months ended March 31, 2007 and 2006 was as follows:

     Segment Information

          The Company’s business units have separate management teams and offer different products and services. Using the criteria of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, these business units have been aggregated into four reportable business segments. These include three manufacturing segments encompassing a diverse mix of plastic and rubber products: 1) Material Handling — North America, 2) Automotive and Custom, and 3) Lawn and Garden. The fourth segment is Distribution of tire, wheel, and undervehicle service products. The aggregation of operating business segments is based on management by the chief operating decision maker for the segment as well as similarities of products, production processes, distribution methods and economic characteristics.

          Operating income for each business segment is based on net sales less cost of products sold, and the related selling, administrative and general expenses. In computing business segment operating income, general corporate overhead expenses and interest expenses are not included.

     For the quarter ended March 31, 2007, net sales from continuing operations were $246.5 million, an increase of 20 percent from the $205.7 million reported in 2006 as the Company had strong sales in its Lawn and Garden and Material Handling — North America segments, offset by a decrease in sales in the Distribution and Automotive and Custom segments. Income from continuing operations for the first quarter of 2007 was $14.7 million, an increase of 47% from the $10.0 million recorded in the first quarter of 2006 while income from continuing operations per common share was $0.42 compared to $.29 from the first quarter of 2006. During the first quarter of 2007, the Company completed the sale of its European Material Handling businesses (discontinued operations), which resulted in a gain of $17.8 million as reported from discontinued operations, net of tax. Total net income for the first quarter of 2007, including discontinued operations, was $32.5 million, or $0.93 per basic and diluted common share compared to $10.8 million or $.31 per share in the prior year.

     During the three months ended March 31, 2007, the Company experienced increased sales in its Material Handling — North America and Lawn and Garden segments. The sales increase in the Lawn and Garden segment was primarily driven by the contributions from ITML, representing $44.2 million. The increase in sales for the Material Handling — North America was driven by a strong demand combined with a favorable sales mix of higher value container systems. These increases offset declining sales in the Distribution and Automotive and Custom segments. The sales decline in the Distribution segment resulted from soft demand for replacement passenger and truck tires, while retread markets were soft due in part to escalating fuel prices. Automotive and Custom sales were negatively impacted by the slowdown in the automotive and heavy truck markets combined with the effect of reduced housing starts on the waterworks market. Gross margins improved from 26.3 percent for the three months ended March 31, 2006 compared to 29.9 percent for the same period in 2007. Gross margin improvement was primarily driven by improved pricing combined with slightly lower raw material costs compared to the prior year.

     Selling and administrative expenses for the quarter ended March 31, 2007 increased $12.4 million or 36.1 percent compared with the prior year quarter. The largest impact to this increase was the inclusion of ITML which represented $6.0 million of the increase for the three months ended March 31, 2007. As a percentage of sales, selling and administrative expenses increased from 16.7 percent to 19.0 percent for the first quarter. This increase was primarily related to higher selling expenses, including freight; compensation and benefits; and professional fees.

     Net interest expense for the quarter ended March 31, 2007 was $3.6 million, a decrease of 9 percent compared to $3.9 million in the prior year. The decrease in current year expense reflects a combination of lower interest rates and lower average borrowing levels.

     The Company’s income tax rate as a percent of pretax income from continuing operations for the quarter ended March 31, 2007 remained relatively consistent to the same period in 2006, as it increased from 36.5 percent to 37.0 percent.

     Sales in the Distribution Segment for the quarter ended March 31, 2007 were $46.4 million, which is comparatively flat, versus $46.5 million for the first quarter of 2006. This sales performance was due primarily to slowness throughout many of the segment’s markets reflecting lower sales of replacement passenger and truck tires, and soft retread tire markets due to escalating fuel prices.

     Income before taxes in the Distribution Segment was $4.5 million for the first quarter of 2007, a decrease of 6 percent as compared to $4.8 million in the first quarter of 2006. The key factors influencing profitability in this segment were increased operating expenses associated with initial costs of productivity initiatives and compensation, as well as higher selling expenses.

In the North American Material Handling Segment, net sales for the first quarter of 2007 were $66.5 million, an increase of 7 percent as compared to $62.0 million in the first quarter of 2006. Contributions from the SAS asset purchase did not have a material impact on net sales for the quarter. Net sales benefited from strong demand in many of the segment’s niche markets, including agriculture, and a favorable sales mix of higher value container systems with customers. Income before taxes in the North American Material Handling Segment was $14.9 million for the first quarter of 2007, an increase of 77 percent as compared to $8.4 million in the first quarter of 2006. Contributions from the SAS asset purchase did not have a material impact for the quarter. The key factors influencing first quarter profitability include improved product mix and selling prices combined with lower raw material costs.

In the Lawn and Garden Segment, net sales for the first quarter of 2007 were $93.9 million, an increase of 82 percent as compared to $51.5 million in the first quarter of 2006. Contributions from the acquisition of ITML increased net sales by $44.8 million. Sales performance was relatively flat compared to the first quarter of 2006, however reversed the sales decline experienced in the second half of 2006. The market will continue to re-balance itself this year, and the Company is in a strong position to deploy its resources to meet the industry’s growth needs. Income before taxes in the Lawn and Garden Segment was $10.8 million in the first quarter of 2007, an increase of 59 percent compared to $6.8 million in the prior year. Contributions from the acquisition of ITML increased income before taxes by approximately $3.5 million. The primary factors influencing first quarter profitability include favorable product sales mix; pricing initiatives to manage raw material costs; and gains from cost controls and productivity improvements initiated in the prior year.

In the Automotive and Custom Segment, net sales for the first quarter of 2007 were $45.2 million, a decrease of 13 percent as compared to $51.9 million in the first quarter of 2006. Targeting of strategic, niche-market customers with a higher-value product mix could not offset effects from the slowdown in automotive and heavy truck markets, and the effect of reduced housing starts on the waterworks market. Income before taxes in the Automotive and Custom Segment was $2.7 million for the first quarter of 2007, a decrease of 29 percent as compared to $3.8 million in the first quarter of 2006. Profitability in the first quarter of 2007 was impacted by strategic selling initiatives, which reduced volumes, as well as costs associated with streamlining.

     Cash provided from operating activities of continuing operations was $9.2 million for the three months ended March 31, 2007 compared with $5.3 million in the prior year. The increase of $3.9 million in cash provided by operating activities was primarily due to the increase of $4.7 million in income from continuing operations. Depreciation and other non cash expenses were $9.3 million in the current year compared with $7.3 million in 2006 while cash used for working capital was $13.2 million in the three months ended March 31, 2007 compared to $12.0 million in the prior year. The decrease in cash provided by working capital reflects an increase of $7.9 million in cash provided by inventories as current year inventories are lower primarily due to seasonal requirements, particularly related to the Company’s Lawn and Garden segment. Offsetting the increase in working capital provided by inventories was a reduction of $10.9 million in cash used for accounts receivable as the Company accounts receivables increased during the current period. This increase was primarily related to the acquisition of ITML and the seasonal business in the Company’s Lawn and Garden segment. In addition, in 2007 the Company had cash provided of $1.8 million for prepaid expenses, primarily related to costs incurred in 2006 in connection with the acquisition of ITML which was completed during the current period. Total debt at March 31, 2007 was $266.7 million, an increase of $65.2 million from $201.5 million at December 31, 2006. At March 31, 2007, the Company had working capital of $200.1 million and a current ratio of 2.7, which represents an improvement compared to the prior yearend of 2.3.

     Capital expenditures for the three months ended March 31, 2007 were $1.6 million and are expected to be in the range of $15 million for the year. Cash flows from operations and funds available under the Credit Agreement will provide the Company’s primary source of financing. As of March 31, 2007, the Company had approximately $94 million available under the terms of the Credit Agreement. Management believes that cash flows from operations and available credit facilities will be sufficient to meet expected business requirements including capital expenditures, dividends, working capital and debt service.

          The Company has financing arrangements that require interest payments based on floating interest rates. As such, the Company’s financial results are subject to changes in the market rate of interest. Our objective in managing the exposure to interest rate changes is to limit the volatility and impact of rate changes on earnings while maintaining the lowest overall borrowing cost. 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. Accordingly, based on current debt levels at March 31, 2007, if market rates increase one percent, the Company’s interest expense would increase approximately $1.6 million.

          Some of the Company’s subsidiaries operate in foreign countries and, as such, their financial results are subject to the variability that arises from exchange rate movements. The Company believes that foreign currency exchange rate fluctuations do not represent a significant market risk due to the nature of the foreign countries in which we operate, primarily Canada, as well as the size of those operations relative to the total Company.

          The Company uses certain commodities, primarily plastic resins, in its manufacturing processes. As such, the cost of operations is subject to fluctuation as the market for these commodities changes. The Company monitors this risk but currently has no derivative contracts to hedge this risk, however, the Company also has no significant obligations to purchase fixed quantities of such commodities in future periods.

          The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’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. In designing and evaluation the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

          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 at a reasonable assurance level as of the end of the period covered by this report.

          There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

          (a) Exhibits

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Exhibit Index