SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the quarterly period ended | ||
OR | ||
[ ] | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the transition period from__________ to__________ |
Commission File Number 1-8524
Myers Industries, Inc.
(Exact name of registrant as specified in its charter)
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Ohio | 34-0778636 | |
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1293 South Main Street |
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(330) 253-5592
(Registrant's telephone number, including area code)
not applicable
(Former name, former address and former fiscal year, if changed since last report)
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 X No .
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No .
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X .
As of July 31September 30, 2005, the number of shares outstanding of the issuer's Common Stock was 34,732,402.34,765,560.
Table of Contents
1
-1-
Part I - Financial Information
Myers Industries, Inc.
Condensed Statements of Consolidated Financial Position
As of JuneSeptember 30, 2005 and December 31, 2004
Unaudited | Unaudited | |||||||||||||||
Assets | June 30, 2005 | December 31, 2004 | September 30, 2005 | December 31, 2004 | ||||||||||||
Current Assets | ||||||||||||||||
Cash | $15,241,246 | $8,018,623 | $22,132,302 | $8,018,623 | ||||||||||||
Accounts receivable-less allowances |
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Accounts receivable-less allowances |
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Inventories | ||||||||||||||||
Finished and in-process products | 72,277,345 | 82,022,726 | 74,428,572 | 82,022,726 | ||||||||||||
Raw materials and supplies | 32,885,916 | 38,339,728 | 32,987,772 | 38,339,728 | ||||||||||||
105,163,261 | 120,362,454 | 107,416,344 | 120,362,454 | |||||||||||||
Prepaid expenses | 5,793,488 | 4,622,637 | 3,123,796 | 4,622,637 | ||||||||||||
Total Current Assets | 271,366,316 | 284,072,177 | 277,092,745 | 284,072,177 | ||||||||||||
Other Assets | ||||||||||||||||
Goodwill | 265,884,011 | 279,576,020 | 265,240,005 | 279,576,020 | ||||||||||||
Patents and other intangible assets | 8,555,673 | 6,576,433 | ||||||||||||||
Intangible assets, net | 8,311,062 | 6,576,433 | ||||||||||||||
Other | 6,282,122 | 4,889,142 | 6,651,842 | 4,889,142 | ||||||||||||
280,721,806 | 291,041,595 | 280,202,909 | 291,041,595 | |||||||||||||
Property, Plant and Equipment, at Cost | ||||||||||||||||
Land | 8,656,130 | 9,190,588 | 8,758,173 | 9,190,588 | ||||||||||||
Buildings and leasehold improvements | 88,294,135 | 90,675,147 | 89,240,065 | 90,675,147 | ||||||||||||
Machinery and equipment | 405,500,265 | 409,188,994 | 398,246,667 | 409,188,994 | ||||||||||||
502,450,530 | 509,054,729 | 496,244,905 | 509,054,729 | |||||||||||||
Less allowances for depreciationand |
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196,995,179 | 210,488,790 | 193,880,840 | 210,488,790 | |||||||||||||
$749,083,301 | $785,602,562 | $751,176,494 | $785,602,562 |
See notes to unaudited condensed consolidated financial statements.
2-2-
Part I - Financial Information
Myers Industries, Inc.
Condensed Statements of Consolidated Financial Position
As of JuneSeptember 30, 2005 and December 31, 2004
Unaudited | Unaudited | |||||||||||||||
Liabilities and Shareholders' Equity | June 30, 2005 | December 31, 2004 | September 30, 2005 | December 31, 2004 | ||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable | $59,810,972 | $72,858,791 | $63,166,860 | $72,858,791 | ||||||||||||
Accrued expenses | ||||||||||||||||
Employee compensation | 29,769,873 | 34,126,487 | 30,573,379 | 34,126,487 | ||||||||||||
Taxes, other than income taxes | 3,964,609 | 2,640,474 | 3,116,900 | 2,640,474 | ||||||||||||
Accrued interest | 1,196,018 | 1,113,128 | 3,376,322 | 1,113,128 | ||||||||||||
Other | 17,158,607 | 23,405,957 | 21,493,341 | 23,405,957 | ||||||||||||
Current portion of long-term debt | 2,333,004 | 2,107,090 | 1,643,784 | 2,107,090 | ||||||||||||
Total Current Liabilities | 114,233,083 | 136,251,927 | 123,370,586 | 136,251,927 | ||||||||||||
Long-term Debt, less current portion | 270,765,788 | 275,252,278 | 261,312,125 | 275,252,278 | ||||||||||||
Deferred Income Taxes | 29,563,657 | 28,094,321 | 29,459,575 | 28,094,321 | ||||||||||||
Shareholders' Equity | ||||||||||||||||
Serial Preferred Shares |
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Common Shares, without par value |
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Common Shares, without par value |
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Additional paid-in capital | 266,849,736 | 266,257,630 | 267,369,470 | 266,257,630 | ||||||||||||
Accumulated other comprehensive |
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Retained income | 42,016,286 | 32,566,036 | 45,224,331 | 32,566,036 | ||||||||||||
334,520,773 | 346,004,036 | 337,034,208 | 346,004,036 | |||||||||||||
$749,083,301 | $785,602,562 | $751,176,494 | $785,602,562 |
See notes to unaudited condensed consolidated financial statements.
3-3-
Part I - Financial Information
Myers Industries, Inc.
Condensed Statements of Consolidated Income
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Unaudited | Unaudited | ||||||||||||||||||||
For The Three Months Ended | For The Nine Months Ended | ||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | ||||||||||||||
Net sales | $225,021,732 | $196,754,858 | $461,246,892 | $382,273,385 | $210,989,478 | $199,381,132 | $672,236,369 | $581,654,516 | |||||||||||||
Cost of sales | 166,379,493 | 138,158,853 | 338,777,814 | 262,619,428 | 153,657,574 | 145,285,967 | 492,435,389 | 407,905,394 | |||||||||||||
Gross profit | 58,642,239 | 58,596,005 | 122,469,078 | 119,653,957 | 57,331,904 | 54,095,165 | 179,800,980 | 173,749,122 | |||||||||||||
Operating expenses | 47,700,145 | 45,844,514 | 95,595,103 | 89,750,649 | |||||||||||||||||
Selling and administrative expenses | 45,276,129 | 46,344,995 | 140,871,231 | 136,095,643 | |||||||||||||||||
Gain on sale of warehouse | 0 | (1,524,598 | ) | 0 | (1,524,598) | ||||||||||||||||
Operating income | 10,942,094 | 12,751,491 | 26,873,975 | 29,903,308 | 12,055,775 | 9,274,768 | 38,929,749 | 39,178,077 | |||||||||||||
Interest expense, net | 3,899,158 | 3,032,366 | 7,734,724 | 6,176,012 | 3,860,451 | 3,397,660 | 11,595,175 | 9,573,672 | |||||||||||||
Income before income taxes | 7,042,936 | 9,719,125 | 19,139,251 | 23,727,296 | 8,195,324 | 5,877,108 | 27,334,574 | 29,604,405 | |||||||||||||
Income taxes | 1,893,000 | 3,616,000 | 6,220,000 | 8,768,000 | 3,249,000 | 2,057,000 | 9,469,000 | 10,825,000 | |||||||||||||
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Net income per Common Share* | $0.15 | $0.18 | $0.37 | $0.45 | |||||||||||||||||
Net income per Basic and Diluted Common Share |
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Dividends per Common Share* | $0.05 | $0.045 | $0.10 | $0.09 | |||||||||||||||||
Dividends per Common Share | $.05 | $.05 | $.15 | $.15 | |||||||||||||||||
Weighted average number of |
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Weighted average number of |
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*Adjusted for a 10 percent stock dividend paid August 2004.See notes to unaudited condensed consolidated financial statements.
4-4-
Part I - Financial Information
Myers Industries, Inc.
CondensedStatements of Consolidated Cash Flows
For the SixNine Months Ended JuneSeptember 30, 2005 and 2004
Unaudited | Unaudited | Unaudited | Unaudited | |||||||||||||
June 30, 2005 | June 30, 2004 | September 30, 2005 | September 30, 2004 | |||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||
Net income | $12,919,251 | $14,959,296 | $17,865,574 | $18,779,405 | ||||||||||||
Items not affecting use of cash | ||||||||||||||||
Depreciation | 17,959,984 | 18,312,955 | 26,986,565 | 28,172,576 | ||||||||||||
Amortization of other intangible assets | 1,061,316 | 1,114,431 | ||||||||||||||
Amortization of intangible assets | 1,497,407 | 1,445,620 | ||||||||||||||
Deferred taxes | 1,881,432 | 2,077,035 | 800,258 | 2,654,537 | ||||||||||||
Gain on sale of plant | 0 | (1,524,598 | ) | |||||||||||||
Cash flow provided by (used for) working capital | ||||||||||||||||
Accounts receivable | 269,661 | (7,652,242 | ) | 1,772,747 | (12,656,956 | ) | ||||||||||
Inventories | 12,463,498 | (3,578,207 | ) | 10,392,416 | (3,435,212 | ) | ||||||||||
Prepaid expenses | (1,284,089 | ) | 147,135 | 1,422,345 | 1,864,229 | |||||||||||
Accounts payable and accrued expenses | (17,759,770 | ) | 4,881,013 | (7,757,286 | ) | (3,616,148 | ) | |||||||||
Net cash provided by operating activities | 27,511,283 | 30,261,416 | 52,980,026 | 31,683,453 | ||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||
Acquisition of business, net of cash acquired | 0 | (34,918,395 | ) | |||||||||||||
Acquisition of businesses, net of cash acquired | 0 | (39,480,746 | ) | |||||||||||||
Proceeds from sale of plant | 0 | 2,522,179 | ||||||||||||||
Additions to property, plant and |
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Other | (1,361,695 | ) | 807,002 | (1,929,179 | ) | (413,400 | ) | |||||||||
Net cash used for investing activities | (11,850,135 | ) | (44,924,771 | ) | (18,640,354 | ) | (54,307,412 | ) | ||||||||
Cash Flows From Financing Activities | ||||||||||||||||
Net borrowing (repayment) of credit facility | (3,656,667 | ) | 28,224,857 | (14,496,363 | ) | 32,419,109 | ||||||||||
Deferred financing costs | (262,500 | ) | (1,539,235 | ) | (262,499 | ) | (1,527,611 | ) | ||||||||
Cash dividends paid | (3,469,001 | ) | (3,025,578 | ) | (5,207,279 | ) | (4,746,388 | ) | ||||||||
Proceeds from issuance of common stock | 633,437 | 1,028,156 | 1,129,430 | 1,695,509 | ||||||||||||
Net cash provided by (used for) financing activities | (6,754,731 | ) | 24,688,200 | (18,836,711 | ) | 27,840,619 | ||||||||||
Foreign Exchange Rate Effect on Cash | (1,683,794 | ) | (528,135 | ) | (1,389,282 | ) | 37,111 | |||||||||
Increase in Cash | 7,222,623 | 9,496,710 | 14,113,679 | 5,253,771 | ||||||||||||
Cash at January 1 | 8,018,623 | 5,666,997 | 8,018,623 | 5,666,997 | ||||||||||||
Cash at June 30 | $15,241,246 | $15,163,707 | ||||||||||||||
Cash at September 30 | $22,132,302 | $10,920,768 | ||||||||||||||
See notes to unaudited condensed consolidated financial statements.
5-5-
Part I - Financial Information
Myers Industries, Inc.
CondensedStatement of Consolidated Shareholders' Equity
For the SixNine Months Ended JuneSeptember 30, 2005
Unaudited
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December 31, 2004 | $21,090,960 | $266,257,630 | $26,089,410 | $32,566,036 | $21,090,960 | $266,257,630 | $26,089,410 | $32,566,036 | ||||||
Net income | 12,919,251 | 17,865,574 | ||||||||||||
Foreign currency |
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Foreign currency |
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Common Stock issued | 70,118 | 1,059,312 | ||||||||||||
Stock issued for acquisition | 2,844 | 52,528 | ||||||||||||
Dividends | (5,207,279 | ) | ||||||||||||
September 30, 2005 | $21,163,922 | $267,369,470 | $3,276,485 | $45,224,331 | ||||||||||
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Common Stock |
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Dividends | (3,469,001 | ) | ||||||||||||
June 30, 2005 | $21,132,291 | $266,849,736 | $4,522,460 | $42,016,286 | ||||||||||
See notes to unaudited condensed consolidated financial statements.
6
Part I - Financial Information
Myers Industries, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
Statement of Accounting Policy
The accompanying condensed consolidated financial statements include the accounts of Myers Industries, Inc. and subsidiaries (Company), and have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. 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 and Form 10-K/A.
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 ofJune September 30, 2005, and the results of operations and cash flows for the three months and sixnine months ended JuneSeptember 30, 2005 and 2004. The results of operations for the sixnine months ended JuneSeptember 30, 2005 are not necessarily indicative of the results of operations that will occur for the year ending December 31, 2005. The Company's gain on the sale of a warehouse of $1,524,598 originally recorded in the quarter ended September 30,2004 has been reclassified in order to be included in operating income. Certain other prior year amounts have been reclassified to conform with current presentation.
Contingencies
The U.S. Department of Justice ("DOJ") has notified the Company that it has determined not to proceed against the Company or its employees for those matters described in the Company's voluntary reporting and internal investigation.
On July 15, 2004, the Company announced that it had reported to the U.S. Department of Justice and the Securities and Exchange Commission ("SEC") certain international business practices that were believed to be in violation of U.S. and, possibly, foreign laws. The practices, which involved a limited number of customers, related to the invoicing of certain sales to foreign customers of the Company's distribution segment and sales made by foreign subsidiaries to prohibited customers in certain prohibited international jurisdictions. These business practices were discontinued and an independent investigation, which has been substantially completed, was conducted by outside counsel under the authority of the Audit Committee of the Company's Board of Directors. The results of the investigation have been provided to the DOJ and the SEC. Although the DOJ's decision is not binding, it is unlikely that the DOJ would take action at a later time.
The Company is still voluntarily working with the SEC, and the Office of Foreign Asset Control, U.S. Department of the Treasury ("OFAC") and the Bureau of Industry and Security, U.S. Department of Commerce ("BIS"), to complete the investigation with them. If the SEC, OFAC or OFACthe BIS determined that these incidents were unlawful, they could take action against the Company and/or some of its employees. We will seek to settle any enforcement issues arising from these matters, however, at this time we cannot reasonably estimate its potential liability and, therefore, as of JuneSeptember 30, 2005, and the date of this filing, the Company has not recorded any provision for any resulting settlements or potential fines or penalties. Such amounts could be material to the Company's financial statements. The Company believes that the practices in question have no effect on previously filed financial statements, and that the final findings from the investigation will not lead to any restatement of reported financial results.
7
Part I - Financial Information
Myers Industries, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
Acquisitions
On March 10, 2004, the Company acquired all of the shares of ATP Automotive, Inc. (ATP), a subsidiary of Applied Tech LLC. ATP and its operating subsidiaries Michigan Rubber Products (MRP) and WEK Industries (WEK) are manufacturers of molded rubber and plastic products for the automotive industry with manufacturing facilities in Michigan (MRP) and Ohio (WEK). The total purchase price was
7Part I - Financial InformationMyers Industries, Inc.Notes to Condensed Consolidated Financial StatementsUnaudited
approximately $61 million, which includes the assumption of $26 million of ATP debt outstanding as of the acquisition date. ATP compliments our existing product offering in our plastic and rubber original equipment and replacements parts market. The Company believes that the acquisition of ATP resulted in the recognition of goodwill because of its industry position and management strength along with providing the Company a number of operational efficiency opportunities in relation to other existing business units. The purchase price has been allocated to the assets acquired and liabilities assumed based upon their fair values as determined by appraisals, other studies and additional information as shown in the table below. The allocation to intangible assets represent customer relationships with assigned lives ranging from 7 to 10 years.
On July 7, 2004, the Company acquired the operations and assets of Productivity California, Inc. (Pro Cal), a leading manufacturer of plastic nursery containers and specialty printed containers for professional growers based in South Gate, California. The total acquisition cost was approximately $18.5 million - including approximately $3.8 million in cash and 1,054,9001,153,847 shares of the Company's common stock. In addition,As part of the purchase agreement, for a one-year period endingended July 7, 2005, the Company has agreed to issue additional shares of common stock in the event that shares issued in connection with the Pro Cal acquisition arewere sold at a price below the $12.73 per share value at issuance or if the value of shares originally issued iswas below $12.73 on the anniversary date. As ofPursuant to this agreement, the date of this filing noCompany issued 4,661 additional shares have been issued.of common stock in the quarter ended September 30, 2005. In connection with the acquisition the Company also assumedas sumed approximately $10$9.5 million of Pro Cal debt. Pro Cal is a natural expansion to t hethe Company's plastic horticultural product offering and its geographical location, unique manufacturing capabilities and strong growth rate contributed to a purchase price that exceeded the fair value of assets acquired resulting in goodwill. The purchase price has been allocated to the assets acquired and liabilities assumed based upon their fair values as determined by appraisals and additional information, as shown below. The allocation to intangible assets were primarily customer lists and technology with estimated lives of 8 years.
On September 24, 2004, the Company acquired certain assets of Premium Molding Inc. d/b/a Diakon Molding (Diakon), a manufacturer of plastic refuse collection containers and other blow molded products located in Reidsville, North Carolina. Diakon enables Myers to better serve certain customers in the Southeastern United States. The assets acquired including cash, accounts receivable, inventory, machinery and equipment and intangibles such as customer lists, license and intellectual property were purchased for approximately $4.4 million. In addition, the Company assumed certain liabilities of Diakon including trade payables and certain accrued liabilities related to the business operations.
8
Part I - Financial Information
Myers Industries, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
The final allocations of purchase price at September 30, 2005 for ATP, Pro Cal and Diakon are as follows:
(In thousands) | ATP | Pro Cal | Diakon | ATP | Pro Cal | Diakon | ||||||||||
Assets acquired: | ||||||||||||||||
Cash | $153 | $1,549 | $166 | $153 | $1,549 | $166 | ||||||||||
Accounts receivable | 9,996 | 3,375 | 1,397 | 9,996 | 3,375 | 1,397 | ||||||||||
Inventory | 3,878 | 4,535 | 1,037 | 3,878 | 4,535 | 1,037 | ||||||||||
Property, plant and equipment | 17,179 | 12,736 | 2,954 | 17,179 | 12,736 | 2,954 | ||||||||||
Other | 2,101 | 215 | 6 | 2,101 | 215 | 6 | ||||||||||
33,307 | 22,410 | 5,560 | 33,307 | 22,410 | 5,560 | |||||||||||
Liabilities assumed: | ||||||||||||||||
Debt | (26,045 | ) | (9,519 | ) | -0- | (26,045 | ) | (9,519 | ) | -0- | ||||||
Accounts payable and accruals | (8,644 | ) | (4,820 | ) | (2,127 | ) | (8,644 | ) | (4,820 | ) | (2,127 | ) | ||||
Deferred taxes | (4,041 | ) | (2,541 | ) | -0- | (4,041 | ) | (2,541 | ) | -0- | ||||||
(38,730 | ) | (16,880 | ) | (2,127 | ) | (38,730 | ) | (16,880 | ) | (2,127 | ) | |||||
Intangible assets | 5,867 | 2,900 | -0- | 5,867 | 2,900 | -0- | ||||||||||
Goodwill | 34,726 | 10,059 | 919 | 34,726 | 10,114 | 919 | ||||||||||
Total consideration in cash and stock | $35,170 | $18,489 | $4,352 | $35,170 | $18,544 | $4,352 |
The results of ATP's, Pro Cal's and Diakon's operations are included in the Company's consolidated results of operations from the dates of acquisition and are reported within the Company's Automotive and Custom Products and Lawn and Garden Products segments respectively. The following unaudited proforma information presents a summary of consolidated results of operations for the Company including ATP, Pro Cal and Diakon as if the acquisitions occurred January 1, 2004.
| Three Months Ended | Six Months Ended |
Net sales | $206,319 | $401,163 |
Net income | 6,691 | 16,438 |
Net income per share | .19 | .48 |
| Nine Months Ended |
Net sales | $613,036 |
Net income | 20,794 |
Net income per share | .60 |
These unaudited proforma results have been prepared for comparative purposes only and may not be indicative of results of operations which actually would have occurred had the acquisitions taken place on January 1, 2004 or future results.
9
Part I - Financial Information
Myers Industries, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
Goodwill
The change in goodwill for the sixnine months ended JuneSeptember 30, 2005 is as follows:
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| Balance at | Acquisitions | Foreign Currency | Balance at | Balance at | Acquisitions | Foreign Currency | Balance at | ||
Distribution of aftermarket repair products and services | $214 | $0 | $214 |
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Manufacturing of material |
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Manufacturing of automotive and custom products |
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Manufacturing of lawn and |
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Total | $279,576 | $(1,043) | $(12,649) | $265,884 | $279,576 | (988 | ) | (13,348 | ) | $265,240 |
The reduction in goodwill of $1,043,000$988,000 in the manufacturing of lawn and garden products segment resulted from finalization of purchase accounting in connection with the acquisition of Pro Cal.
Income Taxes
The American Jobs Creation Act of 2004 introduced a special on-time dividends received deduction on the repatriation of certain foreign earnings to an U.S. taxpayer, provided certain provisions are met. In the three month period ended September 30, 2005, the Company incurred additional income taxes of approximately $281,000 related to the repatriation of approximately $4.4 million in dividends from foreign subsidiaries. This was the primary reason for the increase in the effective tax rate from 35.0 percent for the third quarter ended September 30, 3004 to 39.6percent for the third ended September 30, 2005.
Net Income Per Basic and Diluted Common Share
Net income per share,basic and diluted Common Share, as shown on the Condensed StatementStatements of Consolidated Income, is determined on the basis of the weighted average number of common shares outstanding during the period, and forperiod. For all periods shown, basic and diluted earnings per share are consistent, as the effect of potentially dilutive shares, primarily stock options, is not significant to the computation of earnings per share.
Stock Compensation
The Company accounts for stock compensation arrangements using the intrinsic value in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with the intrinsic value method, the Company has not recognized any expense related to stock options, as options have only been granted with an exercise price equal to the market value of the shares at the date of the grant.
The alternative policy in Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
10
Part I - Financial Information
Myers Industries, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
Stock Based Compensation," provides that compensation expense be recognized based on the fair value of the options awarded, determined by an option pricing model.
On May 31, 2005, the Company granted options totaling 303,500 shares with an option price of $11.15 which was the same as the marketclosing price of the Company's stock on the date of the grant. There were no options granted in the third quarter of 2005. The options permit 20 percent of the shares granted to be exercised after six months, with additional vesting of 20 percent exercisable each year thereafter, with the options expiring ten years from the date of grant. In calculating the pro-forma fair value compensation expense the Company used a trinomial lattice option pricing model. Variables used in calculating
10Part I - Financial InformationMyers Industries, Inc.Notes to Condensed Consolidated Financial StatementsUnaudited
the compensation expense include a dividend yield of 1.79 percent, a risk free interest rate of 3.72 percent and a volatility measure of 26.5 percent for the first vesting period, 32.0 percent for the second vesting period and 37.5 percent thereafter. The following table illustrates the effect on net income and net income per share if we had applied thet he fair value recognition provisions of SFAS NoNo. 123 to stock-based employee compensation.
| Three Months Ended | Six Months Ended | |
Net income as reported | $5,150 | $12,919 | |
Stock option compensation as reported | 0 | 0 | |
Fair value of stock option compensation net of related tax benefits |
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Proforma net income | $4,615 | $12,384 | |
Net income per share: | |||
Basic and diluted as reported | $.15 | $.37 | |
Basic and diluted proforma | $.13 | $.36 |
| Nine Months Ended | |
Net income as reported | $17,866 | |
Stock option compensation as reported | 0 | |
Fair value of stock option compensation net of related tax benefits |
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Proforma net income | $17,331 | |
Net income per share: | ||
Basic and diluted as reported | $.51 | |
Basic and diluted proforma | .50 |
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised) "Share Based Payment" (SFAS No. 123R required that cost resulting from all share-based payment transactions be recognized in the financial statements and establishes a fair value measurement objective in determining the value of such cost). SFAS No. 123R will become effective for the Company beginning in the first quarter 2006. The Company is currently evaluating the impact of the SFAS No. 123R on its financial statements.
Supplemental Disclosure of Cash Flow Information
The Company made cash payments for interest expense of $5,567,000$2,357,000 and $4,627,000$2,219,000 for the three months ended JuneSeptember 30, 2005 and 2004, respectively. Cash payments for interest totaled $7,782,000$10,139,000 and $6,161,000$8,380,000 for the sixnine months ended JuneSeptember 30, 2005 and 2004, respectively. Cash payments for income taxes totaled $7,984,000$641,000 and $7,271,000$3,905,000 for the three months ended JuneSeptember 30, 2005 and 2004. Cash payments for income taxes were $8,803,000$9,444,000 and $8,018,000$11,922,000 for the sixnine months ended JuneSeptember 30, 2005 and 2004, respectively.
11
Part I - Financial Information
Myers Industries, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
Comprehensive Income
An unaudited summary of comprehensive income for the three months and sixnine months ended JuneSeptember 30, 2005 and 2004 was as follows:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(In thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||
Net income | $5,150 | $6,103 | $12,919 | $14,959 | ||||||||
Other comprehensive income: |
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Comprehensive (loss) income | $(7,558 | ) | $4,134 | $(8,648 | ) | $9,350 | ||||||
11Part I - Financial InformationMyers Industries, Inc.Notes to Condensed Consolidated Financial StatementsUnaudited
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(In thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||
Net income | $4,946 | $3,820 | $17,866 | $18,779 | ||||||||
Other comprehensive income: |
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Comprehensive (loss) income | $3,700 | $7,266 | $(4,947 | ) | $16,615 | |||||||
Credit Agreement
On June 30, 2005, the Company entered into an amendment of its revolving credit agreement (the Credit Agreement) with a group of banks. The amendment revises the covenant related to maintenance of a maximum leverage ratio, defined as total debt to earnings before interest, taxes, depreciation and amortization. In addition, the amendment increases the Company's limit on annual capital expenditures to $50 million. The Company is in compliance with all of the covenants of the Credit Agreement as amendedmillion
Retirement Plans
For the Company's two defined benefit pension plans, the net periodic benefit cost for the three months and sixnine months ended JuneSeptember 30, 2005 and 2004 was as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||||||
June 30, | June 30, | Three Months Ended | Nine Months Ended | ||||||||||||||||||
2005 | 2004 | 2005 | 2004 | September 30, | September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||||||||
Service cost | $58,087 | $60,078 | $116,174 | $120,156 | $37,548 | $60,078 | $153,722 | $180,234 | |||||||||||||
Interest cost | 88,261 | 83,443 | 176,522 | 166,886 | 86,990 | 83,443 | 263,512 | 250,329 | |||||||||||||
Expected return on assets | (100,540 | ) | (86,398 | ) | (201,080 | ) | (172,796 | ) | (97,702 | ) | (86,398 | ) | (298,782 | ) | (259,194 | ) | |||||
Amortization of prior service cost | 10,694 | 10,694 | 21,388 | 21,388 | 2,253 | 10,694 | 23,641 | 32,082 | |||||||||||||
Amortization of net loss | 18,103 | 16,884 | 36,206 | 33,768 | |||||||||||||||||
Amortization of a net loss | 23,669 | 16,884 | 59,875 | 50,652 | |||||||||||||||||
Curtailment loss | 144,128 | 0 | 144,128 | 0 | |||||||||||||||||
Net periodic pension cost | $74,605 | $84,701 | $149,210 | $169,402 | $196,886 | $84,701 | $346,096 | $254,103 |
The Company previously disclosed in its financial statements for the year ended December 31, 2004, that it did not expect to make any contributions to its defined benefit plans in 2005. As2005, however, as of JuneSeptember 30, 2005, no contributions of $205,000 have been made, however, themade. The Company now anticipates contributing $205,000does not anticipate making any additional payments to fund its defined benefit pension plans in 2005.
12
Part I - Financial Information
Myers Industries, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
Segment Information
In 2004, the Company changed its reportable business segments. The business segment information for the quarter and sixnine months ended JuneSeptember 30, 2004 has been restated to conform with the current year business segment presentation.
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 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,aftermarket repair products and undervehicle service products.services. The aggregation of operating 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 segment is based on net sales less cost of products sold, and the related
12Part I - Financial InformationMyers Industries, Inc.Notes to Condensed Consolidated Financial StatementsUnaudited
selling, administrative and generaladministrative expenses. In computing segment operating income, general corporate overhead expenses and interest expenses are not included.
Three Months Ended | Six Months Ended | |||||||||||
(In thousands) | June 30, | June 30, | ||||||||||
Net Sales | 2005 | 2004 | 2005 | 2004 | ||||||||
Distribution of aftermarket repair products and services |
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Manufacturing of material handling products - North America |
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Manufacturing of material handling products - Europe |
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Manufacturing of automotive and custom products |
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Manufacturing of lawn and garden products | 39,553 | 22,624 | 90,337 | 54,083 | ||||||||
Intra-segment elimination | (6,680 | ) | (6,740 | ) | (13,525 | ) | (13,691 | ) | ||||
Total | $225,022 | $196,755 | $461,247 | $382,273 | ||||||||
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
Income Before Income Taxes | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||
(In thousands) | September 30, | September 30, | ||||||||||||||||||||||
Net Sales | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||
Distribution of aftermarket repair products and services |
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Manufacturing of material handling products - North America |
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Manufacturing of material handling products - Europe |
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Manufacturing of automotive and custom products |
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Manufacturing of lawn and garden products | 2,051 | 1,663 | 8,795 | 7,375 | 34,536 | 27,656 | 124,873 | 81,739 | ||||||||||||||||
Corporate | (3,638 | ) | (3,423 | ) | (7,119 | ) | (6,963 | ) | ||||||||||||||||
Interest expense-net | (3,899 | ) | (3,032 | ) | (7,735 | ) | (6,176 | ) | ||||||||||||||||
Intra-segment elimination | (7,710 | ) | (7,178 | ) | (21,235 | ) | (20,869 | ) | ||||||||||||||||
Total | $7,043 | $9,719 | $19,139 | $23,727 | $210,989 | $199,381 | $672,236 | $581,655 |
13
Part I - Financial Information
Myers Industries, Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
Income Before Income Taxes | 2005 | 2004 | 2005 | 2004 | ||||||||
Distribution of aftermarket repair products and services |
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Manufacturing of material handling products - North America |
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Manufacturing of material handling products - Europe |
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Manufacturing of automotive and custom products |
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Manufacturing of lawn and garden products | 2,280 | 1,219 | 10,943 | 8,594 | ||||||||
Corporate | (3,924 | ) | (3,256 | ) | (10,910 | ) | (10,250 | ) | ||||
Interest expense-net | (3,860 | ) | (3,398 | ) | (11,595 | ) | (9,574 | ) | ||||
Total | $8,195 | $5,877 | $27,335 | $29,604 | ||||||||
14
Part I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ForNet sales of $210,989,478 for the third quarter ended JuneSeptember 30, 2005 the Company had netincreased 6 percent over last year's third quarter sales of $225.0 million,$199,381,132. The impact of foreign currency translations was favorable, but immaterial, contributing only $682,000. Net income of $4,946,323 was an increase of 1429 percent from the $196.8 million reported in the second quarter of 2004. Contributions from acquisitions made in 2004 increased sales by $15.1 million and favorable foreign currency translations also increased sales by $2.3 million. Excluding the impact of acquisitions and currency translations, total net sales for the quarter would have increased $10.9 million or 6 percent.$3,820,108last year. Net income for the third quarter of 2004 included a net gain of approximately $914,000 from the sale of a warehouse facility. Net income per share was $.14, an increase of 27 percent compared with $.11 in the third quarter of 2004. Foreign currency translation did not have a significant effect on net income for the quarter. The improvement in earnings for the third quarter of 2005 compared to the prior year reflects the impact of higher selling prices, better utilization of manufacturing capacity and the benefits from ongoing cost control in itiatives. These positive factors offset higher costs for plastic raw materials, which were approximately 10 percent higher, on average, compared to the third quarter of 2004.
For the nine months ended JuneSeptember 30, 2005, was $5.1 million,net sales were a decreaserecord $672,239,369, an increase of 16 percent from the $6.1 million reported in the prior year and net income per share of $0.15 was a decrease of 17 percent compared with $0.18 in the second quarter of 2004. The decline in net income was primarily the result of substantially higher cost for raw materials, particularly plastic resins which were approximately 27 percent higher, used in the Company's manufacturing business units. For the six months ended June 30, 2005, net sales were $461.2 million, an increase of 21 percent from the $382.3 million$581,654,516 reported for the first half ofsame period in 2004. Contributions from acquisitions made in 2004 increased total net sales by $39.0 million, andwhile the translation effect of foreign currencies, primarily the euro, increased sales by $5.1$5.8 million. Excluding the impact of acquisitions and foreign currency translations sales would have increased by $34.9 million or 9 percent for the six months. Net income for the sixnine months was $17,865,574 a decrease of 5 percent compared to $18,779,405 in 2004, and net income per share was $.51, a decrease of 9 percent compared to $.56 for the same period last year. Foreign currency translation did not have a significant effect on net income for the nine-month period. The decline in earnings for the nine months ended JuneSeptember 30, 2005 was $12.9 million or $0.37 per share compared with $15.0 million and $0.45 per share for the prior year. The decrease in net income in the current year was primarily the result of substantially higher costs for plastic raw materials which increased approximately 30 percent, on average, compared to the prior year nine month period. As a result of the increased raw material costs, gross profit expresse d as a percent of sales was reduced to 26.7 percent in the nine months ended September 30, 2005 compared with 29.9 percent in the prior year.
Total cost of sales increased $28.2 million inselling and administrative expenses for the quarter and $76.2 million in the six months ended JuneSeptember 30, 2005 reflecting the higher sales reported for each perioddecreased $1.1 million compared to the prior year. Gross profit,year quarter and, expressed as a percent of sales declinedwere reduced to 26.121.5 percent forin the current quarter and 26.6from 23.2 percent for the six months ended June 30, 2005 compared to 29.8 percent and 31.3 percent for the same periods in 2004. This reduction in gross profit margins was primarily due to higher raw material costs, particularly plastic resins, experienced bycurrent year selling and administrative expenses reflects the Company's manufacturing business units. Plastic resin prices were approximately 27 percent higher inpositive effects of ongoing cost control initiatives. For the quarternine-month period, current year selling and 39 percent higher for the six months ended June 30, 2005 compared with the prior year periods. Total operatingadministrative expenses increased $1.9$4.8 million or 4 percent for the quarter ended June 30, 2005 compared to the prior year. Acquired companies and the impact of foreign currency translations accounted for approximately $1.6 million dollars of this increase. Expressed as a percent of sales, operating expenses were reduced to 21.2 percent in the quarter ended June 30, 2005 compared to 23.3 percent in the prior year as cost control initiatives offset higher selling expenses related to increased sales. For the six months ended June 30, 2005 total operating expenses increased $5.8 million or 7 percent compared to the prior year period. Acquired companies and the impact of foreign currency translations accounted for approximately $5.2$3.7 million of this increase. Expressedincrease with additional increases in selling expenses related to the 16 percent increase in current year sales. However, selling and administrative expenses expressed as a percent of sales operating expenses were reduced to 20.721.0 percent for the sixnine months ended JuneSeptember 30, 2005 compared with 23.5from 23.4 percent forin 2004, reflecting the same period in 2004.benefit of cost control programs.
Net interest expense increased 2814 percent to $3.9 million for the quarter ended JuneSeptember 30, 2005, compared to $3.0$3.4 million in the prior year. For the sixnine months ended JuneSeptember 30, 2005, net interest expense increased 2521 percent to $7.7$11.6 million compared to $6.2$9.6 million in the prior year. The increases reflectincrease for the quarter ended September 30, 2005 reflects higher interest rates, which offset slightly lower average borrowing levels. The increase for the nine months ended September 30, 2005 reflects both higher interest rates and slightly higher average borrowing levels in 2005 resulting from the acquisitions made in 2004, and higher interest rates.levels.
Income taxes as a percent of income before taxes declined to 26.9 percent for the third quarter and 32.5 percent for the six months ended JuneSeptember 30, 2005, increased to 39.6 percent compared with 37.2to 35.0 percent forin 2004. The higher effective rate was primarily the quarter and 37.0 percentresult of additional income tax expense of approximately $281,000 related to repatriation of $4.4 million in dividends from foreign subsidiaries pursuant to the American Jobs Creation Act of 2004. For the nine
1415
Part I - Financial Information
months ended September 30, 2005, income taxes as a percent of income before taxes were 34.6 percent compared to 36.6 percent for the six months ended June 30,same period of 2004. The lower effective tax rates inrate for the 2005 arenine-month period was due to foreign tax rate differences, including the utilizationuse of foreign tax loss carry forwards for which valuation allowances were previously provided.provided and which more than offset the additional tax expense incurred on the dividend repatriation noted above.
Business Segment Results
SalesThird quarter 2005 net sales in the Distribution Segment were $49.3 million, an increase 13of 10 percent to $49.4 million compared to the secondthird quarter of 2004. A favorable sales mixSales of both equipment and consumable supplies and equipment continuedremained strong across the Company's markets.segment's markets, particularly to independent tire dealers as their customers serviced vehicles from summer driving and began preparations for the winter season. For the sixnine months, net sales in the segment increased 13were $140.8 million, an increase of 12 percent to $91.5 million compared to the same periodtime last year. Income before taxes increased 2332 percent to $5.3$5.5 million compared to last year's secondthird quarter, primarily due to higher sales volumes, increased salesselling prices, favorable product mix, and effectiveongoing cost controls. For the sixnine months, income before taxes increased 2225 percent to $9.0$14.5 million compared to last year.
SalesNet sales in the Material Handling - North America Segment, with plastic reusable containers and pallets serving industrial manufacturing, automotive, agriculture, and other end markets, posted an increase of 6 percent to $48.0 million compared to the second quarter of 2004. For the six months, sales increased 10 percent to $105.9 million compared to last year. Income before taxes declined 69 percent to $1.1 million compared to last year's second quarter due to the impact of higher raw material costs, which were partially offset by increased sales volumes, modest gains in selling prices, and lower operating expenses. For the six months, income before taxes was $6.1 million, a decline of 43 percent compared to the same period last year. Sales in the Material Handling - Europe Segment were $45.0 million, an increase of 5 percent from the comparable quarter of 2004. For the six months, sales were $89.4 million, an increase of 9 percent compared to a year earlier. Excluding favorable foreign currency translation, primarily the strength of the euro, sales in the segment increased $0.8 million or 2 percent for the quarter and $4.0 million or 5 percent for the six months. Income before taxes increased 242 percent to $2.8 million compared to last year's second quarter, benefiting from lower operating expenses and the acceptance of significant product price increases throughout end markets. For the six months, income before taxes was $3.6 million, an increase of 59 percent compared to the first half of last year. In the Automotive and Custom Segment, the Company serves a wide range of OEM automotive, heavy truck, recreational vehicle, tire repair, and other niche markets with a diverse mix of plastic and rubber products. In the second quarter, sales were $49.7$48.6 million, an increase of 1 percent compared to the secondthird quarter of 2004. For the six-month period,Net sales in the segmentthird quarter of 2005 were $97.7constrained by growing concerns in many industrial markets over an economic slowdown due to rising energy costs. For the nine months ended September 30, 2005, net sales were $154.5 million, an increase of 197 percent compared to a year earlier. Excluding the acquisition of Michigan Rubber Products and WEK, which occurred March 10, 2004, sales increased $5.1 million or 6 percent for the six months.last year. Income before taxes was $3.3$4.8 million, a decreasean increase of 4378 percent compared to last year's second quarter.third quarter due to higher selling prices and lower operating expenses. For the sixnine months, income before taxes was $6.5$10.9 million, a decreasedecline of 2918 percent compared to the same period last year. Included in the income before tax amounts of both the quarter and nine months ended September 30, 2004, was a $1.5 million pretax gain from the sale of a warehouse facility.
With products and markets similar to those of North America, third quarter net sales in the Material Handling- Europe Segment were $37.0 million, a decrease of 7 percent from the comparable quarter of 2004. The slowdowndecrease in sales and the decline in income for the secondthird quarter was primarilydue to the increased slowness in the European Union economy, particularly in the industrial markets. Foreign currency translation did not have a factorsignificant effect on sales for the quarter. For the nine months, net sales were $126.4 million, an increase of soft OEM automotive4 percent compared to a year earlier.Included in current year revenues was $3.4 million from favorable foreign currency translations. Income before taxes was $0.9 million, a decrease of 22 percent compared to last year's third quarter. The key factors influencing third quarter profitability in this segment were lower sales volumes, and higher raw material costs, both partially mitigated by higher sell ing prices and lower operating expenses. For the nine months, income before taxes was $4.5 million, an increase of 31 percent compared to the same nine-month period of 2004.
In the Automotive and Custom Segment third quarter net sales for the current year were $49.2 million, an increase of 7 percent compared to the third quarter of 2004 due to strong demand reflectingfrom recreational vehicle and heavy truck markets. For the sl owdownnine-month period, net sales in North American autothe segment were $147.0 million, an increase of 14 percent compared to a year earlier. Included in current year revenues was $10.1 million from the acquisitions of Michigan Rubber Products and passenger truck builds andWEK. Income before taxes was $2.5 million, a decrease of 24 percent compared to last year's third quarter. Key factors affecting third quarter profitability in this segment include higher rubber and plastic raw material costs. Incosts and the Lawn and Garden Segment,slower rate at which the Company produces plastic flowerpots, nursery containers, and decorative planters for grower, nursery, and retail markets. Second quarter sales were $39.6 million, 75 percent above the second quarter of 2004.is able to implement higher selling prices to various automotive OEMs to help offset those costs. For the six months, sales were $90.3 million, 67 percent above the same time last year. Excluding last year's acquisition of Pro Cal, which occurred July 7, 2004, sales in the segment increased $1.8 million or 8 percent for the quarter and $7.4 million or 14 percent for the six months. Income before taxes was $2.1 million, in the second quarter, an increase of 23 percent compared to last year's second quarter. For the sixnine months, income before taxes was $8.8$9.0 million, an increasea decrease of 1928 percent compared to the same period last year. Higher raw material costs impacted this segment in the second quarter and
1516
Part I - Financial Information
first half, but
In the Lawn and Garden Segment third quarter 2005 net sales were offset by$34.5 million, 25 percent above net sales for the third quarter of 2004 as a result of new product introductions and a continued strong seasonaldemand from all sectors in the horticultural market. For the nine months, net sales volumes andwere $124.9 million, 53 percent above net sales results for the same time last year. Included in current year revenues was $28.9 million from the acquisition of ProCal. Income before taxes was $2.3 million in the third quarter of 2005, an increase of 87 percent compared to last year's third quarter. For the nine months, income before taxes was $11.0 million, an increase of 27 percent compared to the same period last year. Key factors influencing this segment in the third quarter include higher selling prices.prices and increased unit volumes, which offset the higher costs for plastic raw materials.
Liquidity and Capital Resources
Cash provided by operating activities was $27.5$53.0 million for the sixnine months ended JuneSeptember 30, 2005, compared with $30.3$31.7 million for the same period in the prior year. The reductionincrease of $2.8$21.3 million in cash provided by operating activities for the current year was primarily due to the lower net income reported as the effects$5.8 million of non cash expenses andprovided by net working capital changes were approximatelyin the samecurrent year compared to cash used of $17.8 million in both years.the prior year period. During the sixnine months ended JuneSeptember 30, 2005, the Company used $6.3 million for working capital as $12.5$10.4 million was provided from the liquidation of inventories built up at the previous yearend to protect against future price increases as well reduction of seasonal inventories related to the Lawn and seasonal inventory reductions whichGarden Segment. In addition, $1.8 million was offsetprovided by $17.8 million in cash usedthe reduction of accounts receivable as the Company continued to reduce accounts payable and other accrued expenses.emphasize its working capital control programs. During the sixnine months ended JuneSeptember 30, 2005, total debt was reduced $4.3$14.4 million to $273.2$263.0 million however,compared to $277.4 million at Dece mber 31, 2004. Total debt as a percentage of total capitalization is 45at September 30, 2005 was unchanged at 44 percent, a slight increase compared to 44 perce nt at December 31, 2004.the same ratio as the prior yearend. At JuneSeptember 30, 2005, the Company had working capital of $157.1$153.7 million and a current ratio of 2.42.2 which represents a slight increase compared to December 31, 2004.
On June 30, 2005, the Company entered into an amendment of its revolving credit agreement (the Credit Agreement) with a group of banks. The amendment revised the covenant related to maintenance of a maximum leverage ratio, defined as total debt to earnings before interest, taxes, depreciation and amortization. In addition, the amendment increased the Company's limit on annual capital expenditures to $50 million. TheAs of September 30, 2005 the Company is in compliance with all of the covenants of the Credit Agreement as amended. At June 30, 2005, the Companyamended and had approximately $59$68 million available under the Credit Agreement.
Capital expenditures for the sixnine months ended JuneSeptember 30, 2005 were $10.5$16.7 million and are expected to be in the range of $20 to $25 million for the full year. 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 U.S. Department of Justice ("DOJ") has notified the Company that it has determined not to proceed against the Company or its employees for those matters described in the Company's voluntary reporting and internal investigation.
On July 15, 2004, the Company announced that it had reported to the U.S. Department of Justice and the Securities and Exchange Commission ("SEC") certain international business
17
Part I - Financial Information
practices that were believed to be in violation of U.S. and, possibly, foreign laws. The practices, which involved a limited number of customers, related to the invoicing of certain sales to foreign customers of the Company's distribution segment and sales made by foreign subsidiaries to prohibited customers in certain prohibited international jurisdictions. These business practices were discontinued and an independent investigation, which has been substantially completed, was conducted by outside counsel under the authority of the Audit Committee of the Company's Board of Directors. The results of the investigation have been provided to the DOJ and the SEC. Although the DOJ's decision is not binding, it is unlikely that the DOJ would take action at a later time.
The Company is still voluntarily working with the SEC, and the Office of Foreign Asset Control, U.S. Department of the Treasury ("OFAC")and the Bureau of Industry and Security, U.S. Department of Commerce ("BIS"), to complete the investigation with them. If the SEC, OFAC, or OFACthe BIS determined that these incidents were unlawful, they could take action against the Company and/or some of its employees. We will seek to settle any enforcement issues arising from these matters, however, at this time we cannot reasonably estimate its potential liability and, therefore, as of JuneSeptember 30, 2005, and the date of this filing, the Company has not recorded any provision for any resulting settlements or potential fines or penalties.
16Part I - Financial Information
Such amounts could be material to the Company's financial statements. The Company believes that the practices in question have no effect on previously filed financial statements, and that the final findings from the investigation will not lead to any restatement of reported financial results.
Critical Accounting Policies
The preparation of the financial statement information contained herein requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumption or conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Information with respect to the Company's critical accounting policies which the Company believes could have the most significant effect on the Company's reported results and require subjective or complex judgements by management is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Management believes that as of September 30, 2005, there have been no material changes to this information.
Recent Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs. An amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as current period charges in all circumstances. SFAS No. 151 will be effective for us beginning January 1, 2006. We do not expect the adoption of SFAS No. 151 to have a material effect on our financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS No. 123(R)
18
Part I - Financial Information
requires that public companies recognize expense in an amount equal to the fair value of the share-based payment. We will adopt SFAS No. 123 (R) beginning January 1, 2006. As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion No. 25's intrinsic value method and, as such, recognize no compensation expense for employee stock options. Accordingly, the adoption of SFAS No. 123 (R)'s fair value method will have an impact on our results of operation, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and diluted net income per share in the Stock Compensation Footnote to our Consolidated Financial Stat ements. SFAS No. 123 (R) also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow activity, rather than as an operating cash flow activity as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amounts of operating cash flows recognized in prior periods for such excess tax deductions have not been material to our cash flows.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
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.
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 and Western Europe, 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 purchase obligations to purchase fixed quantities of such commodities in future periods.
Item 4. Controls and Procedures
We maintaindisclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and
19
Part I - Financial Information
management was required to apply its judgement in evaluating the cost-benefit relationship of possible controls and procedures.
As ofAt the end of the period covered byin this report, management, under the supervision of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange ActAct. However, because management has not fully tested all of 1934, as amended. Based upon that evaluation,the changes related to internal controls on financial reporting in the current year, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, the disclosure controls and procedures were not effective at a level of reasonable assurance to ensure that the information required to be disclosed in the reports we filefiled and submitsubmitted under the Exchange Act is accumulated and communicated to management and is recorded, processed, summarized and reported in such filings as and when required.required..
We reported in our Annual Report on Form 10-K and Form 10-K/A certain material weaknesses in our internal controls over financial reporting related to business segment reporting, the financial statement close process and income tax accounting.
Financial Statement Close Process --- Management determined that it had insufficient controls over the
17Part I - Financial Information
process of determining and reporting business segment information in accordance with Financial
Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which constituted a material weakness in internal controls over financial reporting as of December 31, 2004. The Company has already corrected the material weakness and has restated its business segment information in its Annual Report on Form 10-K for the year ended December 31, 2004 and in this filing.
The Company also had additional control weaknesses over the financial statement close process which, although individually would not have constituted a material weakness, when combined, constitute a material weakness. These insufficient controls include: (I)(i) inadequate review related to the application of accounting policies and the presentation of disclosures in the notes to the financial statements: (ii) lack of controls over the non-routine and estimation processes on a quarterly basis, including review and supervision controls and insufficient supporting documentation of analyses underlying these processes; and (iii) inadequate review and supporting documentation over the recording of journal entries.
Income Tax Process --- The weaknesses in accounting for income taxes include insufficient controls over accounting for income taxes, including the determination of deferred income tax assets and liabilities, income taxes payable and the provision for income taxes. Specifically, the Company did not have effective controls to: (I)(i) identify and evaluate in a timely manner the tax implication of certain non-routine transactions: (ii) ensure appropriate preparation and review of the provision for income taxes and income taxes payable; (iii) determine the components of deferred income taxes and related assets and liabilities; and (iv) assess the need for valuation allowances on net deferred tax assets.
The Company has dedicated substantial resources to the review of its internal control processes and procedures. As a result of that review, the Company has taken steps toward remediation of the material weaknesses by: (i) creating and filling the position of Senior Compliance Manager; (ii) creating and filling four new positions of Director of Finance at individual operating units; (iii) establishing a Corporate Compliance Committee; (iv) increasing the size of the internal audit staff from three to five; (v) creating and filling the new position of European Internal Audit Manager and (vi) implementing procedures to strengthen the quarterly closing process.
As noted above, the Company has taken steps to remediate the material weaknesses. Based on those actions and the changes made in the Company's business segment reporting, management believes that the
20
Part I - Financial Information
weaknesses related to disclosure controls, which were deemed to be ineffective at December 31, 2004, have been remediated. However, because we have not fully tested all of the changes related to internal controls over financial reporting initiated in the current year, our Chief Executive Officer and Chief Financial Officer have concluded that the internal controls over financial reporting were not effective as of JuneSeptember 30, 2005.
Changes in Internal Control over Financial Reporting
Other than as described above, there have been no changes in the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
1821
Part II - Other Information
Myers Industries, Inc.
Item 1. Legal Proceedings
The U.S. Department of Justice ("DOJ") has notified the Company that it has determined not to proceed against the Company or its employees for those matters described in the Company's voluntary reporting and internal investigation.
On July 15, 2004, the Company announced that it had reported to the U.S. Department of Justice and the Securities and Exchange Commission ("SEC") certain international business practices that were believed to be in violation of U.S. and, possibly, foreign laws. The practices, which involved a limited number of customers, related to the invoicing of certain sales to foreign customers of the Company's distribution segment and sales made by foreign subsidiaries to prohibited customers in certain prohibited international jurisdictions. These business practices were discontinued and an independent investigation, which has been substantially completed, was conducted by outside counsel under the authority of the Audit Committee of the Company's Board of Directors. The results of the investigation have been provided to the DOJ and the SEC. Although the DOJ's decision is not binding, it is unlikely that the DOJ would take action at a later time.
The Company is still voluntarily working with the SEC, and the Office of Foreign Asset Control, U.S. Department of the Treasury ("OFAC") and the Bureau of Industry and Security, U.S. Department of Commerce ("BIS"), to complete the investigation with them. If the SEC, OFAC or OFACthe BIS determined that these incidents were unlawful, they could take action against the Company and/or some of its employees. We will seek to settle any enforcement issues arising from these matters, however, at this time we cannot reasonably estimate its potential liability and, therefore, as of JuneSeptember 30, 2005, and the date of this filing, the Company has not recorded any provision for any resulting settlements or potential fines or penalties. Such amounts could be material to the Company's financial statements. The Company believes that the practices in question have no effect on previously filed financial statements, and that the final findings from the investigation will not lead to any restatement of reported financial results.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders was held on April 20, 2005, and the following matters were voted on at that meeting. 1. At the meeting, eight Directors were elected. The results of this voting are as follows: Votes Withheld Keith A. Brown 30,264,004 2,163,666 Karl S. Hay 31,437,241 990,429 Richard P. Johnston 31,493,859 933,810 Michael Kane 31,512,624 915,046 Edward Kissel 31,542,646 885,023 Stephen E. Myers 32,364,909 62,760 Richard Osborne 31,511,366 916,304 Jon H. Outcalt 31,470,006 957,663
Name of Director
Votes for
Item 5. Other Information.
Item 6. Exhibits
(a) Exhibits
Exhibit Index
3(a) | Myers Industries, Inc. Amended and Restated Articles of Incorporation. Reference is made to Exhibit 3(a) to Form 10-K filed with the Commission on March 16, 2005. |
3(b) | Myers Industries, Inc. Amended and Restated Code of Regulations. Reference is made to Exhibit (3)(b) to Form 10-K filed with the Commission on March 26, 2003. |
10(a) | Myers Industries, Inc. Amended and Restated Employee Stock Purchase Plan. Reference is made to Exhibit 10(a) to Form 10-K filed with the Commission on March 30, 2001. |
10(b) | Form of Indemnification Agreement for Directors and Officers. Reference is made to Exhibit 10(b) to Form 10-K filed with the Commission on March 30, 2001.* |
10(c) | Myers Industries, Inc. Amended and Restated 1992 Stock Option Plan. Reference is made to Exhibit 10(c) to Form 10-K filed with the Commission on March 30, 2001.* |
10(d) | Myers Industries, Inc. Amended and Restated Dividend Reinvestment and Stock Purchase Plan. Reference is made to Exhibit 10(d) to Form 10-K filed with the Commission on March 19, 2004. |
10(e) | Myers Industries, Inc. 1997 Incentive Stock Plan. Reference is made to Exhibit 10.2 to Form S-8 (Registration Statement No. 333-90367) filed with the Commission on November 5, 1999.* |
10(f) | Myers Industries, Inc. Amended and Restated 1999 Incentive Stock Plan. Reference is made to Exhibit 10(f) to Form 10-Q filed with the Commission on May 6, 2003.* |
10(g) | Myers Industries, Inc. Executive Supplemental Retirement Plan. Reference is made to Exhibit (10)(g) to Form 10-K filed with the Commission on March 26, 2003.* |
10(h) | Employment Agreement between Myers Industries, Inc. and John C. Orr effective May 1, 2005. |
10(i) | Non-Disclosure and Non-Competition Agreement between Myers Industries, Inc. and John C. Orr dated July 18, 2000. Reference is made to Exhibit 10(j) to Form 10-Q filed with the Commission on May 6, 2003.* |
10(j) |
|
10(k) | Retirement and Separation Agreement between Myers Industries, Inc. and Stephen E. Myers effective May 1, 2005. Reference is made to Exhibit 10(k) to Form 10-Q filed with the Commission on August 10, 2005.* |
10(l) | Form of Stock Option Grant Agreement. Reference is made to Exhibit 10(r) to Form 10-K filed with the Commission on March 16, 2005. |
10(m) | Second Amendment to Amended and Restated Loan Agreement between Myers Industries, Inc. and JP Morgan Chase Bank, N.A., Agent dated as of June 30, 2005. Reference is made to Exhibit 10(n) to Form 8-K filed with the Commission on July 5, 2005. |
10(n) | First Amendment to Amended and Restated Loan Agreement between Myers Industries, Inc. and Banc One, NA, Agent, dated as of June 18, 2004. Reference is made to Exhibit 10(q) to Form 10-Q filed with the Commission on August 6, 2004. |
10(o) | Note Purchase Agreement between Myers Industries, Inc. and the Note Purchasers, dated December 12, 2003, regarding the issuance of (i) $65,000,000 of 6.08% Series 2003-A Senior Notes due December 12, 2010, and (ii) $35,000,000 of 6.81% Series 2003-A Senior Notes due December 12, 2013. Reference is made to Exhibit 10(o) to Form 10-K filed with the Commission on March 15, 2004. |
10(p) | Myers Industries, Inc. Non-Employee Board of Directors Compensation Arrangement. Reference is made to Exhibit 10(v) to Form 10-K filed with the Commission on March 16, 2005.* |
14(a) | Myers Industries, Inc. Code of Business Conduct and Ethics. Reference is made to Exhibit 14(a) to Form 10-K filed with the Commission on March 16, 2005. |
14(b) | Myers Industries, Inc. Code of Ethical Conduct for the Finance Officers and Finance Department Personnel. Reference is made to Exhibit 14(b) to Form 10-K filed with the Commission on March 16, 2005. |
21 | List of Direct and Indirect Subsidiaries, and Operating Divisions, of Myers Industries, Inc. |
31.1 | Certification of John C. Orr, President and Chief Executive Officer of Myers Industries, Inc, pursuant to Section 302 of the Sarbanes-Oxley Act of 2003. |
31.2 | Certification of Gregory J. Stodnick, Vice President-Finance (Chief Financial Officer) of Myers Industries, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2003. |
32 | Certifications of John C. Orr Myers, President and Chief Executive Officer, and Gregory J. Stodnick, Vice President--Finance (Chief Financial Officer), of Myers Industries, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
______________
* Indicates executive compensation plan or arrangement.
SIGNATURE | |||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this | |||||||||
MYERS INDUSTRIES, INC. | |||||||||
Date: | | By: | /s/ Gregory J. Stodnick | ||||||
Gregory J. Stodnick | |||||||||
Vice President-Finance and Chief | |||||||||
Financial Officer (Duly Authorized | |||||||||
Officer and Principal Financial | |||||||||
And Accounting Officer) |
Exhibit 31.1
Certification Per Section 302 of the Sarbanes-Oxley Act of 2003
I, John C. Orr, President and Chief Executive Officer of Myers Industries, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Myers Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: | /s/ John C. Orr | |
John C. Orr, President and Chief Executive Officer |
Exhibit 31.2
Certification Per Section 302 of the Sarbanes-Oxley Act of 2003
I, Gregory J. Stodnick, Vice President-Finance and Chief Financial Officer of Myers Industries, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Myers Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: | /s/ Gregory J. Stodnick | |
Gregory J Stodnick, Vice President-Finance and Chief Financial Officer |
Exhibit 32
CERTIFICATIONS
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Myers Industries, Inc. (the Company) on
Form 10-Q for the period ended JuneSeptember 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, John C. Orr, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, and to my knowledge:
(1) The Quarterly Report on Form 10-Q of the Company for the period ended
JuneSeptember 30, 2005 which this certification accompanies fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ John C. Orr | |||||
John C. Orr, President and Chief Executive Officer | |||||
Dated: |
In connection with the Quarterly Report of Myers Industries, Inc. (the Company) on
Form 10-Q for the period ended JuneSeptember 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Gregory J. Stodnick, Vice President-Finance
(Chief Financial Officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and to my knowledge:
(1) The Quarterly Report on Form 10-Q of the Company for the period ended
JuneSeptember 30, 2005which this certification accompanies fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Gregory J. Stodnick | |||||
Gregory J. Stodnick, Vice President-Finance and Chief Financial Officer | |||||
Dated: |