MYERS INDUSTRIES INC - Quarter Report: 2006 September (Form 10-Q)

See notes to unaudited condensed consolidated financial statements.

See notes to unaudited condensed consolidated financial statements.

See notes to unaudited condensed consolidated financial statements.

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 September 30, 2006, and the results of operations and cash flows for the three months and nine months ended September 30, 2006 and 2005. The results of operations for the nine months ended September 30, 2006 are not necessarily indicative of the results of operations that will occur for the year ending December 31, 2006.

        Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2006 presentation.

     Subsequent Event

        On October 26, 2006, the Company entered into a Second Amended and Restated Loan Agreement (the Credit Agreement) which amends the Company's existing revolving credit facility. The new Credit Agreement increases the maximum available borrowing from $225 million to $250 million and extends the termination date from February 27, 2009 to October 26, 2011.

     Discontinued Operations

        In the third quarter of 2006, the Company's Board of Directors approved the 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 expects to complete the sale in the fourth quarter of 2006. The closing of the transaction is subject to customary European Union competition review and approval and other conditions of closing.

       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 September 30, 2006.

       These discontinued operations generated sales of $39.5 million and $37.0 million and net income of $1.8 million and $802,000 for the three months ended September 30, 2006 and 2005, respectively. These discontinued operations generated sales of $122.7 million and $126.4 million for the nine months ended September 30, 2006 and 2005, respectively. For the nine months ended September 30, 2006, these discontinued businesses had a net loss of $104.5 million, which included a goodwill impairment charge of $109.8 million, compared with net income of $4.4 million for the nine months ended September 30, 2005.

       Net assets related to discontinued operations at September 30, 2006 were $78.0 million and consisted of the following:

     Goodwill

        In the quarter ended June 30, 2006, a non-cash, non-tax deductible goodwill impairment charge of $109.8 million was recognized in the Company's Material Handling - Europe business segment. During the second quarter of 2006, the Company determined that the European businesses in its Material Handling - Europe business segment were not core to the Company's long term growth strategy and, accordingly, began evaluating the strategic options of these businesses. As a result of this evaluation and taking into consideration the economic factors and evolution of business conditions in Europe, it became necessary for the Company to perform an interim goodwill impairment test in accordance with Statement of Accounting Standards No. 142, "Goodwill and Other Intangible Assets." In performing this analysis, the fair value of the reporting unit was based on estimated proceeds from a potential sale and the implied fair value of goodwill was estimated by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value. As a result of this analysis, all of the recorded goodwill in the reporting unit was determined to be impaired and, accordingly, the Company recorded a $109.8 million impairment as of June 30, 2006, which is included in the results of discontinued operations in the accompanying condensed statements of consolidated income.

8
Part I - Financial Information

Myers Industries, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited

        The change in goodwill for the nine months ended September 30, 2006 is as follows:

     Net Income Per Share

        Net income (loss) 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 various types of stock based awards including stock options, restricted stock and stock appreciation rights. In general, options granted and outstanding vest over time and expire ten years from the date of grant. At September 30, 2006, there were 1,192,328 shares available for future grant under the Plan.

        On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), ("SFAS 123R"), Share-Based Payment, which requires the Company to measure all employee stock-based compensation awards using a fair value method and record the related expense in the financial statements. The Company elected to use the modified prospective transition method. The modified prospective transition method requires that compensation cost be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not

been rendered as of the date of adoption and requires that prior periods not be restated. All periods presented prior to January 1, 2006 were accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".

        In November 2005, the FASB issued FSP No. 123R-3 ("FSP 123R-3"), Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards to provide an alternative transition election related to accounting for the tax effects of share-based payment awards to employees to the guidance provided in Paragraph 81 of SFAS 123R. An entity may take up to one year from the initial adoption of SFAS 123R to evaluate its available transition alternatives and make its one-time election. Until and unless an entity elects the transition method described in FSP 123R-3, the entity should follow the transition method described in Paragraph 81 of SFAS 123R. SFAS 123R requires an entity to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adoption of Statement 123R (termed the "APIC Pool"). The Company is currently evaluating which transition method it will use for calculating its APIC Pool.

      The adoption of SFAS 123R reduced income before taxes approximately $301,000 for the nine months ended September 30, 2006 but did not materially impact income in the three months ended September 30, 2006. 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 September 30, 2006 was approximately $4.0 million, which will be recognized over the next four years.

        The following table illustrates the effect on income and income per share from continuing operations as if we had applied the fair value recognition provisions of SFAS No. 123R to stock-based employee compensation in prior periods presented.

        During 2006, the Company granted 382,800 options with an exercise price equal to the closing price of the Company's stock on the date of the grant. These options vest ratably over a three year period and expire ten years from the date of grant. The average fair value of the options granted was $5.95. This value was estimated at the date of grant using a Black Scholes option pricing model with the following weighted average assumptions:

        The risk free interest rate is based on zero coupon U.S. Treasury strips. The expected dividend yield is based on the Company's historical dividend yield. The expected lives of the awards are based on the historical exercise patterns and the term of the options. The expected volatility is derived from changes in the Company's historical common stock prices over a timeframe similar to the expected life of the awards.

The following table summarizes the stock option activity for the period ended September 30, 2006:

        In addition, during 2006, the Company issued 61,000 shares of restricted stock which has a 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 nine months ended September 30, 2006 and 2005 was approximately $1.6 million and $351,000, respectively.

     Inventory

        In November 2004, the FASB issued SFAS No. 151 ("SFAS 151"), Inventory Costs - an amendment of ARB No. 43, Chapter 4. SFAS 151 requires abnormal amounts of idle facility expense, freight, handling costs, spoilage to be recognized as current period charges. SFAS 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of SFAS 151 by the Company as of January 1, 2006, did not have a material effect on the Company's financial condition, results of operations or cash flows.

     Recent Pronouncements

        In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109." This Interpretation provides accounting guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return as well as additional disclosures related to these tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently assessing the effect of FIN No. 48 on its consolidated financial statements.

     Supplemental Disclosure of Cash Flow Information

        The Company made cash payments for interest of $2,771,000 and $2,357,000 for the three months ended September 30, 2006 and 2005, respectively. Cash payments for interest totaled $8,761,000 and $10,139,000 for the nine months ended September 30, 2006 and 2005, respectively. Cash payments for income taxes totaled $5,028,000 and $641,000 for the three months ended September 30, 2006 and 2005, respectively. Cash payments for income taxes were $17,707,000 and $9,444,000 for the nine months ended September 30, 2006 and 2005, respectively.

     Comprehensive Income

        An unaudited summary of comprehensive income for the three months and nine months ended September 30, 2006 and 2005 was as follows:

    Retirement Plans

        For the Company's two domestic defined benefit pension plans included in continuing operations, the net periodic benefit cost for the three months and nine months ended September 30, 2006 and 2005 was as follows:

     The Company previously disclosed in its financial statements for the year ended December 31, 2006, that it did not expect to make a contribution to its domestic defined benefit plans and, as of September 30, 2006, no contributions have been made.

     Contingencies

     In July 2004, the Company reported to four U.S. governmental agencies certain business practices which were believed to be in violation of certain laws. An independent investigation was conducted by our Audit Committee using outside legal counsel and the results of the investigation were provided to the agencies. The U.S. Department of Justice determined not to proceed against the Company or its employees. The Bureau of Industry and Security notified the Company that it had completed its investigation and decided not to refer the matter for criminal or administrative prosecution and closed the matter by issuing a warning letter. We are voluntarily working with the SEC and the Office of Foreign Asset Control to settle any enforcement issues arising from these matters, however, we cannot reasonably estimate the potential liability and, therefore, we have not recorded any provision for settlement. Management believes that any liability, although possible, will not have a material effect on our consolidated financial position, results of operations or cash flows.

     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 five reportable business segments. These include four manufacturing segments encompassing a diverse mix of plastic and rubber products: 1) Material Handling - North America, 2) Material Handling - Europe, 3) Automotive and Custom, and 4) Lawn and Garden. The fifth 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.