e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended August 31, 2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission File
No. 0-7459
A. SCHULMAN, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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34-0514850
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(State or Other Jurisdiction
of Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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3550 West Market Street,
Akron, Ohio
(Address of Principal Executive Offices)
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44333
(ZIP Code)
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Registrants telephone number, including area code:
(330) 666-3751
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $1.00 Par Value
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The NASDAQ Stock Market LLC
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Securities Registered Pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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 (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of February 28, 2010, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was approximately $586,000,000 based on the closing
sale price as reported on the NASDAQ Global Select Market.
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date 31,487,229 Shares of Common Stock,
$1.00 Par Value, at October 15, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
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Part of Form 10-K
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Document
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In Which Incorporated
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Portions of the registrants Proxy Statement for the 2010
Annual Meeting of
Stockholders
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III
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PART I
ITEM 1.
BUSINESS
A. Schulman, Inc. (the Company, A.
Schulman, we, our,
ours and us) was organized as an Ohio
corporation in 1928 and changed its state of incorporation to
Delaware in 1969.
Founded in 1928 by Alex Schulman, the Akron, Ohio based company
began as a processor of rubber compounds. During those early
days, when Akron, Ohio was known as the rubber capital of the
world, Mr. Schulman saw opportunity in taking existing
rubber products and compounding new formulations to meet
under-served market needs. As the newly emerging science of
polymers began to make market strides in the early 1950s, A.
Schulman was there to advance the possibilities of the
technology, leveraging its compounding expertise into developing
solutions to meet exact customer application requirements. The
Company later expanded into Europe, Latin America and Asia,
establishing manufacturing plants, technology centers and sales
offices in numerous countries. In 1972 the Company went public.
Today, A. Schulman is recognized as one of the leading global
plastics compounders.
The Company has at least five unique competitive advantages:
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The Companys sales and marketing teams partner with
customers to understand needs and provide tailored solutions
that maximize success through its extremely broad and
well-rounded product line.
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The Companys procurement teams are critical to its success
as its global purchasing power positions the Company to
formulate and sell products competitively.
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The Company has 36 manufacturing facilities worldwide allowing
it to be an ideal partner for key global customers.
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The Company has a solid reputation in product innovation and
development driven by its customer relationships and global
technology centers.
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The Companys strong financial position enables it to
effectively compete in the current economic environment.
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The Company leverages these five unique competitive advantages
to develop and maintain strong customer relationships and drive
continued profitable growth.
Each of the Companys lines of business has a successful
presence in the global market place, providing tailored
solutions for customers. The result is a product portfolio that
is strongly positioned in the industry allowing the Company to
bring new and enhanced products to the market faster and more
consistently. With first-class research and development centers
strategically positioned around the globe, A. Schulman has the
ability to act fast against market needs. Producing and
supplying product is also imperative. The Companys
collaboration between development and production is especially
important to the Company, as well as its customers, as quick and
quality turnaround is critical. The Companys 36
manufacturing facilities are geographically positioned, allowing
the Company to quickly service target markets and customers. The
Company generally produces compounds on the basis of customer
commitments and expectations. Of course, proximity means little
without quality. A. Schulman has a long and proud history of
consistently supplying products of the highest standards, which
is evidenced by the Companys numerous certifications and
accreditations.
Information regarding the amount of sales, operating income and
identifiable assets attributable to each of the Companys
business segments for the last three years is set forth in the
Notes to Consolidated Financial Statements of the Company
appearing in ITEM 8 of this Report.
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BUSINESS
SEGMENTS
The Company considers its operating structure and the types of
information subject to regular review by its President and Chief
Executive Officer (CEO), who is the Chief Operating
Decision Maker (CODM), to identify reportable
segments.
During fiscal 2010, the Company completed the purchase of McCann
Color, Inc. (McCann Color), a producer of
high-quality color concentrates, based in North Canton, Ohio.
The business provides specially formulated color concentrates to
match precise customer specifications. Its products are used in
end markets such as packaging, lawn and garden, furniture,
consumer products and appliances. The operations serve customers
from its 48,000-square-foot, expandable North Canton facility,
which was built in 1998 exclusively to manufacture color
concentrates. The facility complements the Companys
existing North American masterbatch manufacturing and product
development facilities in Akron, Ohio, San Luis Potosi,
Mexico, and La Porte, Texas.
Also during fiscal 2010, the Company acquired ICO, Inc.
(ICO), a global manufacturing company of specialty
resins and concentrates, and provider of specialty polymer
services, including size reduction, compounding and other
related services. The acquisition of ICO presents the Company
with an opportunity to expand its presence substantially,
especially in the global rotomolding and U.S. masterbatch
markets. ICOs business is complementary to the
Companys business across markets, product lines and
geographies. The acquisition of ICOs operations increases
the Companys presence in the U.S. masterbatch market,
gains plants in the high-growth market of Brazil and expands the
Companys Asia Pacific presence with the addition of
several ICO facilities in that region. In Europe, the
acquisition allows the Company to add rotomold compounding and
size reduction to the Companys capabilities. It also
enables growth in countries where the Company currently has a
limited presence, such as France, Italy and Holland, as well as
further leveraging facilities serving high-growth markets such
as Poland, Hungary and Sweden.
As a result of the April 30, 2010 acquisition of ICO, the
Company updated its reportable segments to reflect the
Companys current reporting structure. The Company now has
six reportable segments based on the regions in which they
operate and the products and services they provide. The six
reportable segments are Europe, Middle East and Africa
(EMEA), North America Masterbatch
(NAMB), North America Engineered Plastics
(NAEP), North America Rotomolding
(NARM), Asia Pacific (APAC) and
Bayshore. The following table describes the components of the
Companys pre- and post-merger and ICOs former
reportable segments which make up the current reportable
segments:
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Current A. Schulman, Inc.
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Former A. Schulman, Inc.
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Former ICO, Inc.
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EMEA
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Europe
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ICO Europe
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North America Masterbatch
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North America Masterbatch
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ICO Brazil
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North America Engineered Plastics
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North America Engineered Plastics
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North America Rotomolding
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North America Distribution Services
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ICO Polymers North America
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APAC
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Asia
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ICO Asia Pacific
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Bayshore
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Bayshore Industrial
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During fiscal 2010, the Company completed the closure of its
Invision sheet manufacturing operation at its Sharon Center,
Ohio manufacturing facility. This business comprised the former
Invision segment of the Companys business. The Company
reflected the results of these operations as discontinued
operations for all periods presented and are not included in the
segment information.
The CODM uses net sales to unaffiliated customers, gross profit
and operating income before certain items in order to make
decisions, assess performance and allocate resources to each
segment. Operating income before certain items does not include
interest income or expense, other income or expense, foreign
currency transaction gains or losses and other certain items
such as restructuring related expenses, asset write-downs, costs
related to business acquisitions, inventory
step-up, CEO
transition costs, termination of a lease for an airplane and an
insurance claim settlement adjustment. Certain portions of the
Companys North American operations are not managed
separately and are included in
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All Other North America. The Company includes in All Other North
America any administrative costs that are not directly related
or allocated to a North America business unit such as North
American information technology, human resources, accounting and
purchasing. The North American administrative costs are directly
related to the four North American segments. Corporate expenses
include the compensation of certain personnel, certain audit
expenses, board of directors related costs, certain insurance
costs and other miscellaneous legal and professional fees.
Globally, the Company operates primarily in four lines of
business: (1) masterbatch, (2) engineered plastics,
(3) rotomolding and (4) distribution. In North
America, there is a general manager of each of these lines of
business, each of whom reports directly to the Companys
CEO. The Companys EMEA and APAC segments have managers of
each line of business, who report to a general manager who
reports to the CEO. Currently, the Companys CEO does not
directly manage the business line level when reviewing
performance and allocating resources for the EMEA and APAC
segments.
The Company has described the lines of business listed above
through which the Company offers its products and services to
its customers. In addition to compounded products, in each line
of business, the Company offers tolling services/producer
services, where the Company processes material provided and
owned by customers. While providing these services, the Company
may provide certain amounts of its materials, such as additives.
Masterbatch
Masterbatches (also referred to as concentrates) are
often the key ingredient in a successful application formula.
These highly concentrated compounds are introduced at the
point-of-process
to provide a material solution that meets several combinations
of performance and aesthetic requirements.
The Company first began supplying masterbatch through its
technology center in Bornem, Belgium in the early 1960s. By the
end of the decade, the Companys presence in this area had
grown to the Americas, primarily in Mexico, and later in Asia.
The acquisitions of ICO and McCann Color in fiscal 2010 allow
the Company to expand product offerings in the high-quality,
custom color and the commodity masterbatch markets, provide
capacity, flexibility and efficiency to advance growth in
targeted markets, and reduce dependence on the automotive
market. The Companys manufacturing and research facilities
are strategically located globally to ensure that orders are
shipped within specification and on time.
From performance to aesthetic requirements or combinations
thereof, the masterbatch product portfolio is designed to offer
better solutions faster, and includes:
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Polybatch®
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Additive Compounds, as well as, Color and White Concentrates for
Film
and Molding
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Polyblak®
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Carbon Black Color Concentrates
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AquaSol®
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Water Soluble Compounds
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Papermatch®
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Masterbatch for the production of synthetic paper
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Icorene®
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Masterbatch Compound Powder Grinds
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Additive solutions are available to achieve many enhanced
performance properties, including (but not limited to):
antibacterial, UV, anti-static, barrier, foaming agents,
antioxidants, slip, process aids, release agents, antiblocking,
and optical brighteners. In addition, the Companys
products are also designed with efficiency in mind, allowing
parts to be produced faster, while maintaining the highest
performance levels. The Companys offering of colorant
solutions is also expansive, including a wide spectrum of
standard and high-chroma colors, as well as special effects
including (but not limited to): metallics, pearlescents
(shimmer), thermochromic (heat sensitive), photochromic (light
sensitive), fluorescent, phosphorescent
(glow-in-the-dark)
and interference (color shift) technologies.
Film and packaging applications continue to be a primary focus
for these products. For over 20 years, A. Schulman has been
providing solutions for agriculture films, offering additives
that provide UV control, barrier (optimal heat and light
transmittance), and anti-fog solutions among others. The
Companys film additives are internationally renowned for
their performance and cost benefits, and are commonly used
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in biaxially oriented films which are critical for the packaging
of snack foods, candy, tobacco products, and lamination film.
The Companys color concentrates excel in this market as
well, where they are a trusted source for the worlds
largest consumer product companies, providing aesthetic
solutions for a wide range of bottles, caps and closures.
The Companys masterbatch product offerings play a key role
in commercializing solutions that have a reduced impact on the
environment. The Companys line of bio-degradation
promoting additives assists in the molecular breakdown of films
allowing them to be bioassimilated. The Company continues to
advance pigment and additive loadings, which reduce the amount
of total polymer required in the manufacturing process. Micro-
and nano-particle technologies continue to make advancements.
These particles, when used as pigments, fillers and additives,
result in greater dispersion and a reduction in the amount of
total polymer used in end application.
Engineered
Plastics
A. Schulman has been a supplier of engineered plastics for
more than 50 years. The Companys engineered plastics
products typically comprise 100% of material used by our
customers in their end products. The Company began formulating a
variety of olefinic and non-olefinic compounds in the early
1950s, meeting the needs of a newly forming industry. Today, A.
Schulman is a leader in multi-component blends that include
polyolefins, nylons, polyesters, elastomers, ionomers,
acrylonitrile butadiene styrene (ABS), polyvinyl
chloride (PVC) and highly customized cross-linked
resins. Engineered plastics are commonly defined by their unique
performance characteristics by combining base polymer resin with
various fillers, additives and pigments, which result in a
compound tailored to meet stringent customer requirements. A.
Schulmans products are often developed to replace other
polymeric materials or
non-polymers
such as metal.
The engineered plastics business line uses its
state-of-the-art
technology centers to drive technology and innovation. The
primary research and development centers are in Sindorf, Germany
and Akron, Ohio. The centers are keenly focused on developing
niche solutions that meet the needs of existing and developing
markets alike.
The result of this innovation forms a pipeline of products being
produced in A. Schulman facilities around the world. The
Companys offers an extensive portfolio based on a variety
of polymers within the engineered plastics line of business,
allowing customers to tailor solutions that meet their exact
performance needs. The following products focus on the ability
to develop enhanced polymer solutions:
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Invision®
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Thermoplastic Elastomers and Vulcanizates
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Schulamid®
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Filled and Unfilled Nylon Compounds
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Schuladur®
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Filled and Unfilled PBT Compounds
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Schulablend
M/MK®
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Nylon/ABS Alloys
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Formion®
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Formulated Ionomer Compounds
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Clarix®
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Thermoplastic Ionomer Resins
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Polyflam®
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Flame-Retardant Thermoplastic Compounds and Concentrates
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Polyfort®
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Polypropylene, Polyethylene, EVA Compounds
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Polytrope®
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TPO (Thermoplastic Olefins)
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Polyvin®
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Flexible Thermoplastic PVC Compounds
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Vinika®
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High-Quality PVC Compounds
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Sunprene®
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PVC-Based Thermoplastic Elastomers
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Sunfrost®
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Low-Gloss PVC Thermoplastic Elastomers
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The Companys engineered plastics business supplies several
markets and applications. Consumer and industrial applications
are target growth areas, with durable goods markets such as
industrial packaging, appliances, electrical, tools,
recreational and lawn/garden leading the way. The Company
supplies materials to every major vehicle segment and across all
of the largest manufacturers. In recent years, the Company has
tempered its exposure to the North American automotive market as
necessary.
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Key growth segments for this market are European and Asian
manufacturers, who recently gained market share. In North
America, the Company is seeing growth and construction of new
facilities by Asian and European automotive manufacturers.
Rotomolding
The Company has begun to commonly refer to its rotomolding
business as a specialty powders business, which now includes
rotomolding powders, non-roto molding powders, size reduction
and custom blending capabilities. For purposes of this
Form 10-K,
the Company will maintain the rotomolding designation.
The acquisition of ICO significantly increased the
Companys capacity to supply customers in the rotational
molding or rotomolding market. Rotational molding
produces plastic products by melting specified plastic powder in
molds that are heated in an oven while being rotated. The
melting resin adheres to the hot mold and evenly coats the
molds surface. This process offers design advantages over
other molding processes, such as injection molding, especially
for the production of larger, hollow products, because assembly
of multiple parts is unnecessary, consistent wall thickness in
the finished product can be maintained, tooling is less
expensive, and molds do not need to be designed to withstand the
high pressures inherent in other forms of molding. Rotomolding
includes compounded resin powders for rotationally-molded
products, such as gas and water tanks, kayaks, playground
slides, and other large applications.
Size reduction, or grinding, is a major component of the
Companys rotomolding business and is a process whereby
polymer resins produced by chemical manufacturers in pellet form
are reduced to a specified powder size and form, depending on
the customers requirements. The majority of the
Companys size reduction services involve ambient grinding,
a mechanical attrition milling process suitable for products
which do not require ultrafine particle size and are not highly
heat sensitive. The Company also provides jet milling services
used for products requiring very fine particle size such as
additives for printing ink, adhesives, waxes and cosmetics. Jet
milling uses high velocity compressed air to reduce materials to
sizes between 0.5 and 150 microns. For materials with specific
thermal characteristics (such as heat sensitive materials), the
Company provides cryogenic milling services, which use liquid
nitrogen to chill materials to extremely low temperatures.
Rotomolding includes a broad product portfolio of base resins,
custom colors, and proprietary cross-linked polyethylene
formulations.
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Polyaxis®
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Compounds developed specifically for the rotational molding
process
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Schulink®
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Cross-linkable resin
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Superlineartm
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Material offers impact, stiffness and high heat-distortion
temperatures
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Icorene®
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Compound powders offered in custom colors and specialty effects
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Ecorenetm
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Environmentally friendly thermoplastic powders
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ICO-Finetm
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Ultra-fine thermoplastic powders
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Distribution
As a distributor, the Company works with leading global polymer
producers. A. Schulmans role is to service a market
segment that is either not easily accessible to the producer, or
does not fit into the producers core customer segment or
size. As a merchant, A. Schulman buys, repackages into A.
Schulman labeled packaging, and re-sells producer grade polymers
to its own customer segment, providing sales, marketing and
technical services where required.
A. Schulman leverages its global supply relationships to
fill customer needs around the world through a variety of
olefinic and non-olefinic resins and provides producer grade
offerings to the markets and customers that it serves. This
leverage also helps support the customers of the engineered
plastics
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and masterbatch lines of business by both keeping costs down
through higher purchasing volume and providing convenient access
to bulk resin supplies to these customers.
The Companys distribution offering includes polymers for
all processing types, including injection molding, blow molding,
thermoforming and extrusion. Offering various compliant grades,
the Company has products to meet the most stringent of needs.
The Company offers both prime and wide-spec grades, allowing
customers to maximize their
cost-to-performance
ratio. Most grades can be supplied in carton, bulk truck and
rail car quantities, thus helping customers manage inventory
levels. The Companys products are supplied into every
major market segment, including automotive, building and
construction, lawn and garden, film and packaging, and household
and consumer goods.
Joint
Ventures
ASI Investments Holding Co. is a wholly-owned subsidiary which
owns a 70% partnership interest in The Sunprene Company, which
manufactures a line of PVC thermoplastic elastomers and
compounds primarily for the North American automotive market.
The other partner is an indirect wholly-owned subsidiary of
Mitsubishi Chemical MKV Co., one of the largest chemical
companies in Japan. This partnership has two manufacturing lines
at the Companys Bellevue, Ohio facility. The
Companys partner provides technical and manufacturing
expertise.
A. Schulman International, Inc. is a wholly-owned
subsidiary which owns a 65% interest in
PT. A. Schulman Plastics, Indonesia, an Indonesian
joint venture. This joint venture has a manufacturing facility
with two production lines in Surabaya, Indonesia.
P.T. Prima Polycon Indah owns the remaining 35% interest in
this joint venture.
Employee
Information
As of August 31, 2010, the Company had approximately
2,900 employees. Approximately 50% of all of the
Companys employees are represented by various unions under
collective bargaining agreements.
Research and
Development
The research and development of new products and the improvement
of existing products are important to the Company to
continuously improve its product offerings. The Company has a
team of individuals with varied backgrounds to lead a New
Product Engine initiative to put an aggressive global
focus on the Companys research and development activities.
The Company conducts these activities at its various technical
centers and laboratories. Research and development expenditures
were approximately $2.0 million, $3.6 million and
$5.9 million in fiscal years 2010, 2009 and 2008,
respectively. The Company continues to invest in research and
development activities as management believes it is important to
the future of the Company.
Compliance with
Environmental Regulations
The Companys operations and its ownership of real property
are subject to extensive environmental, health and safety laws
and regulations at the national, state and local governmental
levels. The nature of the Companys business exposes it to
risks of liability under these laws and regulations due to the
production, storage, transportation, recycling or disposal
and/or sale
of materials that can cause contamination or personal injury if
they are released into the environment or workplace.
Environmental laws may have a significant effect on the costs of
these activities involving raw materials, finished products and
wastes. The Company may incur substantial costs, including
fines, damages, criminal or civil sanctions, remediation costs,
or experience interruptions in its operations for violations of
these laws.
Also, national and state environmental statutes impose strict,
and under some circumstances, joint and several liability for
the cost of investigations and remedial actions on any company
that generated the waste, arranged for disposal of the waste,
transported the waste to the disposal site or selected the
disposal site, as well as on the owners and operators of these
sites. Any or all of the responsible parties
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may be required to bear all of the costs of clean up, regardless
of fault or legality of the waste disposal or ownership of the
site, and may also be subject to liability for natural resource
damages. It is possible that the Company could be identified as
a potential responsible party at various sites in the future,
which could result in the Company being assessed substantial
investigation or
clean-up
costs.
Management believes that compliance with national, state and
local provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the
environment, does not currently have a material effect upon the
capital expenditures, financial position, earnings or
competitive position of the Company.
Dependence on
Customers
During the year ended August 31, 2010, the Companys
five largest customers accounted in the aggregate for less than
10% of total sales. In managements opinion, the Company is
not dependent upon any single customer and the loss of any one
customer would not have a materially adverse effect on the
Companys business.
Availability of
Raw Materials
The raw materials required by the Company are usually available
from major plastic resin producers or other suppliers. The
Company does not distinguish between raw materials and finished
goods because numerous products that can be sold as finished
goods are also used as raw materials in the production of other
inventory items. The principal types of plastic resins used in
the manufacture of the Companys proprietary plastic
compounds are polypropylene, PVC, polyethylene, polystyrene,
nylon, ABS and polyurethane. For additional information on the
availability of raw materials, see ITEM 1A, RISK FACTORS,
Shortages or price increases of raw materials and energy
costs could adversely affect operating results and financial
condition, in this Report.
Working Capital
Practices
The nature of the Companys business does not require
significant amounts of inventories to be held to meet rapid
delivery requirements of its products or services or ensure the
Company of a continuous allotment of goods from suppliers. The
Companys manufacturing processes are generally performed
with a short turnaround time. The Company does not generally
offer extended payment terms to its customers. The Company
employs quality assurance practices that minimize customer
returns; however, the Company generally allows its customers to
return merchandise for failure to meet pre-agreed quality
standards or specifications.
Competition
The Companys business is highly competitive. The Company
competes with producers of basic plastic resins, many of which
also operate compounding plants, as well as other independent
plastic compounders. The producers of basic plastic resins
generally are large producers of petroleum and chemicals, which
are much larger than the Company and have greater financial
resources. Some of these producers compete with the Company
principally in such competitors own respective local
market areas, while other producers compete with the Company on
a global basis.
The Company also competes with other merchants and distributors
of plastic resins and other products. Limited information is
available to the Company as to the extent of its
competitors sales and earnings in respect of these
activities, but management believes that the Company has only a
small fraction of the total market.
The principal methods of competition in plastics manufacturing
are innovation, price, availability of inventory, quality and
service. The principal methods of competition for merchant and
distribution activities are price, availability of inventory and
service. Management believes it has strong financial
9
capabilities, excellent supplier relationships and the ability
to provide quality plastic compounds at competitive prices.
Trademarks and
Trade Names
The Company uses various trademarks and trade names in its
business. These trademarks and trade names protect names of
certain of the Companys products and are significant to
the extent they provide a certain amount of goodwill and name
recognition in the industry. The Company also holds patents in
various parts of the world for certain of its products. These
trademarks, trade names and patents, including those which are
pending, contribute to profitability. During fiscal 2010, the
Company recorded $12.5 million of intangibles for
trademarks as part of the ICO acquisition, which the Company
will amortize over their estimated useful lives.
International
Operations
The Company has facilities
and/or
offices located in Australia, Belgium, Brazil, China, Czech
Republic, France, Germany, Hungary, Indonesia, Italy,
Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand,
Poland, Slovakia, South Korea, Spain, Sweden, Switzerland,
Turkey and the United Kingdom. Financial information related to
our geographic areas for the three year period ended
August 31, 2010 appears in Note 13 to the Consolidated
Financial Statements, Segment Information, and is incorporated
herein by reference. For a discussion of risks attendant to the
Companys foreign operations, see ITEM 7A,
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Executive
Officers of the Company
The age, business experience during the past five years and
offices held by each of the Companys Executive Officers
are reported below. The Companys By-Laws provide that
officers shall hold office until their successors are elected
and qualified.
Joseph M. Gingo: Age 65; President and Chief
Executive Officer of the Company since January 2008. Previously,
Mr. Gingo served as Executive Vice President, Quality
Systems and Chief Technical Officer for The Goodyear
Tire & Rubber Company since 2003. Prior to that,
Mr. Gingo held numerous leadership roles in both technology
and business positions in his 41 year tenure at The
Goodyear Tire & Rubber Company.
Paul F. DeSantis: Age 46; Chief Financial
Officer and Treasurer of the Company since April 2006.
Mr. DeSantis joined the Company as Vice President of
Finance in January 2006; prior to that time, he was with
Scotts Miracle-Gro where he held various financial roles
since 1997 before becoming Vice President and Corporate
Treasurer of Scotts Miracle-Gro in 2003.
Paul R. Boulier: Age 57; Vice President and
Chief Marketing Officer of the Company since October 2008.
Mr. Boulier previously served as the Vice President,
Marketing and Sales at Core Molding Technologies for one year
and previous to that he was with Avery Dennison where he held
various roles.
Gary A. Miller: Age 64; Vice President Global
Supply Chain and Chief Procurement Officer of the Company since
April 2008. Since 1992, Mr. Miller served as Vice President
and Chief Procurement Officer for The Goodyear Tire &
Rubber Company.
David C. Minc: Age 61; Vice President, Chief
Legal Officer and Secretary of the Company since May 2008.
Previously, Mr. Minc served as General Counsel, Americas,
for Flexsys America L.P. since 1996.
Bernard Rzepka: Age 50; General Manager and
Chief Operating Officer EMEA of the Company since
September 1, 2008. Previously, Mr. Rzepka served as
the Business Unit Manger of the Europe masterbatch line of
business since February 2008. Prior to that time,
Mr. Rzepka served as the Associate General
Manager Europe from 2007 to 2008. Prior to that, he
served as the Managing Director of Germany from 2004 to 2007.
Prior to that, Mr. Rzepka served as the head of the
engineered plastics line
10
of business in Europe from 2003 to 2004. He has been with the
Company since 1993, serving in a variety of technology and
commercial management positions.
Kim L. Whiteman: Age 53; Vice President, Global
Human Resources of the Company since June 2009. Previously,
Mr. Whiteman held various roles at The Goodyear Tire and
Rubber Company since 1979.
Gustavo Perez: Age 46; General Manager and Chief
Operating Officer of the Americas since August 2010. Since 2008,
Mr. Perez has been General Manager, Masterbatch for the
Companys North America operations. Previously, he was
General Manager of Mexico and prior to that position, he was
Associate General Manager since 2000. He joined A. Schulman in
1995 as a Finance Manager of the Mexican subsidiary.
Available
Information
The Companys Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
and Current Reports on
Form 8-K,
together with any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities and
Exchange Act of 1934, will be made available free of charge on
the Companys web site, www.aschulman.com, as soon as
reasonably practicable after they are electronically filed with
or furnished to the Securities and Exchange Commission.
ITEM 1A.
RISK FACTORS
The following are certain risk factors that could affect our
business, results of operations, cash flows and financial
condition. These risk factors should be considered in connection
with evaluating the forward-looking statements contained in this
Annual Report on
Form 10-K
because these factors could cause our actual results or
financial condition to differ materially from those projected in
forward-looking statements. Before you invest in us, you should
know that making such an investment involves some risks,
including the risks we describe below. The risks that are
discussed below are not the only ones we face. If any of the
following risks occur, our business, results of operations, cash
flows or financial condition could be negatively affected.
Our sales,
profitability, operating results and cash flows are sensitive to
the turbulent global economic conditions, financial markets and
cyclicality, and could be adversely affected during economic
downturns or financial market instability.
The business of most of our customers can be cyclical in nature
and sensitive to changes in general economic conditions.
Financial deterioration in our customers will adversely affect
our sales and profitability. Historically, downturns in general
economic conditions have resulted in diminished product demand,
excess manufacturing capacity and lower average selling prices,
and we may experience similar problems in the future. The recent
global economic crisis, especially in North America and Europe,
has caused, among other things, significant reductions in
available capital and liquidity from banks and other providers
of credit, substantial reductions and fluctuations in equity and
currency values worldwide, and concerns that the worldwide
economy may enter into a prolonged recessionary period, each of
which may materially adversely affect our customers access
to capital. A limit on our customers access to capital
could inhibit their willingness or ability to purchase our
products or affect their ability to pay for products that they
have already purchased from us. In addition, downturns in our
customers industries, even during periods of strong
general economic conditions, could adversely affect our sales,
profitability, operating results and cash flows.
Although no one customer currently makes up a significant
portion of our sales, we are exposed to industries such as
automotive, appliances and construction. Bankruptcies by major
original equipment manufacturers (OEM) for the automotive market
could have a cascading effect on a group of our customers who
supply to OEMs, directly affecting their ability to pay.
Similar to our customers situation, the turbulent global
economic conditions may materially adversely affect our
suppliers access to capital and liquidity with which they
maintain their
11
inventories, production levels and product quality, causing them
to raise prices or lower production levels. An increase in
prices could adversely affect our profitability, operating
results and cash flows.
The future of the current global financial turmoil is difficult
to forecast and mitigate, and therefore our operating results
for a particular period are difficult to predict. Any of the
foregoing effects could have a material adverse effect on our
business, results of operations and financial condition.
The inability
to achieve, delays in achieving or achievement of less than the
anticipated financial benefit from initiatives related to cost
reductions and improving efficiencies could adversely affect our
profitability.
We have announced multiple major plans and initiatives that are
expected to reduce costs and improve efficiencies. We could be
unable to achieve, or may be delayed in achieving, all the
benefits from such initiatives because of limited resources or
uncontrollable economic conditions. If these initiatives are not
as successful as planned, the result could negatively impact our
results of operations or financial condition. Additionally, even
if we achieve these goals, we may not receive the expected
benefits of the initiatives, or the costs of implementing these
initiatives could exceed the related benefits.
An
unanticipated increase in demand may result in the inability to
meet customer needs and loss of sales.
If we experience an unforeseen increase in demand, we may have
difficulties meeting our supply obligations to our customers due
to limited capacity or delays from our suppliers. We may lose
sales as a result of not meeting the demands of our customers in
the timeline required and our results of operations may be
adversely affected. We may be required to change suppliers or
may need to outsource our operations where possible and, if so,
we will be required to verify that the new manufacturer
maintains facilities and procedures that comply with our high
quality standards and with all applicable regulations and
guidelines.
The negative
global credit market conditions may significantly affect our
access to capital, cost of capital and ability to meet liquidity
needs.
Unstable conditions in the credit markets or sustained poor
financial performance may adversely impact our ability to access
credit already arranged and the availability and cost of credit
to us in the future. A volatile credit market may limit our
ability to replace maturing credit facilities and access the
capital necessary to grow and maintain our business.
Accordingly, we may be forced into credit agreements that have
terms that we do not prefer, which could require us to pay
unattractive interest rates or limit our ability to use credit
for share repurchases or payment of dividends. This could
increase our interest expense, decrease our profitability and
significantly reduce our financial flexibility. There can be no
assurances that government responses to disruptions in the
financial markets will stabilize markets or increase liquidity
and the availability of credit. Long term disruptions in the
capital and credit markets as a result of uncertainty, changing
or increased regulation, reduced alternatives or failures of
significant financial institutions could adversely affect our
access to liquidity needed for our business. Any disruption
could require us to take measures to conserve cash until markets
stabilize or until alternative credit arrangements or other
funding sources can be arranged. Such measures could include
deferring, eliminating or reducing capital expenditures,
dividends, future share repurchases or other discretionary uses
of cash. Overall, our results of operations, financial condition
and cash flows could be materially adversely affected by
disruptions in the credit markets.
If we fail to
develop and commercialize new products, our business operations
would be adversely affected.
One driver of our anticipated growth is dependent upon the
successful development and commercialization of new products.
The development and commercialization of new products requires
significant investments in research and development, production,
and marketing costs. The successful production and
commercialization of these products is uncertain as is the
acceptance of the
12
new products in the marketplace. If we fail to successfully
develop and commercialize new products, or if customers decline
to purchase the new products, we will not be able to recover our
development investment and the growth prospects for our products
will be adversely affected.
If we are
unable to retain key personnel or attract new skilled personnel,
it could have an adverse effect on our business.
The unanticipated departure of any key member of our management
team or employee base could have an adverse effect on our
business. In addition, because of the specialized and technical
nature of our business, our future performance is dependent on
the continued service of, and on our ability to attract and
retain, qualified management, scientific, technical, marketing
and support personnel. Competition for such personnel is
intense, and we may be unable to continue to attract or retain
such personnel.
Shortages or
price increases of raw materials and energy costs could
adversely affect operating results and financial
condition.
We purchase various plastic resins to produce our proprietary
plastic compounds. These resins, derived from petroleum or
natural gas, have been subject to periods of short supply as
well as rapid and significant movements in price. These
fluctuations in supply and price may be caused or aggravated by
a number of factors, including inclement weather, political
instability or hostilities in oil-producing countries, other
force majeure events affecting the production facilities of our
suppliers, and more general supply and demand changes. We may
not be able to obtain sufficient raw materials or pass on
increases in the prices of raw materials and energy to our
customers. Such shortages or higher petroleum or natural gas
costs could lead to declining margins, operating results and
financial conditions.
A major
failure of our information systems could harm our
business.
We depend upon several regionally integrated information systems
to process orders, respond to customer inquiries, manage
inventory, purchase, sell and ship goods on a timely basis,
maintain cost-efficient operations, prepare financial
information and reports, and operate our website. We may
experience operating problems with our information systems as a
result of system failures, viruses, computer hackers
or other causes. Any significant disruption or slowdown of our
systems could cause orders to be lost or delayed and could
damage our reputation with our customers or cause our customers
to cancel orders, which could adversely affect our results of
operations.
Our
manufacturing operations are subject to hazards and other risks
associated with polymer production and the related storage and
transportation of inventories, products and
wastes.
Our manufacturing operations are subject to the potential
hazards and risks associated with polymer production and the
related storage and transportation of inventories and wastes,
including explosions, fires, inclement weather, natural
disasters, mechanical failure, unscheduled downtime,
transportation interruptions, remediation, chemical spills,
discharges or releases of toxic or hazardous substances or gases
and other risks. These hazards can cause personal injury and
loss of life, severe damage to, or destruction of, property and
equipment and environmental contamination. In addition, the
occurrence of material operating problems at our facilities due
to any of these hazards may diminish our ability to meet our
output goals. Accordingly, these hazards, and their consequences
could have a material adverse effect on our operations as a
whole, including our results of operations and cash flows, both
during and after the period of operational difficulties.
Extensive
environmental, health and safety laws and regulations impact our
operations and assets, and compliance, or lack of compliance,
with these regulations could adversely affect our results of
operations.
Our operations on and ownership of real property are subject to
extensive environmental, health and safety laws and regulations
at the national, state and local governmental levels. The nature
of our business exposes us to risks of liability under these
laws and regulations due to the production, storage,
13
transportation, recycling or disposal
and/or sale
of materials that can cause contamination or personal injury if
they are released into the environment or workplace.
Environmental laws may have a significant effect on the costs of
these activities involving inventory and wastes. We may incur
substantial costs, including fines, damages, criminal or civil
sanctions, remediation costs, or experience interruptions in our
operations for violations of these laws.
Also, national and state environmental statutes impose strict,
and under some circumstances, joint and several liability for
the cost of investigations and remedial actions on any company
that generated the waste, arranged for disposal of the waste,
transported the waste to the disposal site or selected the
disposal site, as well as on the owners and operators of these
sites. Any or all of the responsible parties may be required to
bear all of the costs of clean up, regardless of fault or
legality of the waste disposal or ownership of the site, and may
also be subject to liability for natural resource damages. It is
possible that we could be identified as a potentially
responsible party at various sites in the future, which could
result in being assessed substantial investigation or
clean-up
costs.
Accruals for estimated costs, including, among other things, the
ranges associated with our accruals for future environmental
compliance and remediation may be too low or we may not be able
to quantify the potential costs. We may be subject to additional
environmental liabilities or potential liabilities that have not
been identified. We expect that we will continue to be subject
to increasingly stringent environmental, health and safety laws
and regulations. We believe that compliance with these laws and
regulations may, but does not currently, require significant
capital expenditures and operating costs, which could adversely
affect our results of operations or financial condition.
We face
competition from other polymer companies, which could adversely
affect our sales and financial condition.
We operate in a highly competitive marketplace, competing
against a number of domestic and foreign polymer producers.
Competition is based on several key criteria, including product
performance and quality, product price, product availability and
security of supply, responsiveness of product development in
cooperation with customers and customer service. Some of our
competitors are larger than we are and may have greater
financial resources. These competitors may also be able to
maintain significantly greater operating and financial
flexibility than we do. As a result, these competitors may be
better able to withstand changes in conditions within our
industry, changes in the prices of raw materials and energy and
in general economic conditions. Additionally, competitors
pricing decisions could compel us to decrease our prices, which
could adversely affect our margins and profitability. Our
ability to maintain or increase our profitability is, and will
continue to be, dependent upon our ability to offset decreases
in the prices and margins of our products by improving
production efficiency and volume, shifting to higher margin
products and improving existing products through innovation and
research and development. If we are unable to do so or to
otherwise maintain our competitive position, we could lose
market share to our competitors.
We expect that our competitors will continue to develop and
introduce new and enhanced products, which could cause a decline
in the market acceptance of our products. In addition, our
competitors could cause a reduction in the selling prices of
some of our products as a result of intensified price
competition. Competitive pressures can also result in the loss
of major customers. An inability to compete successfully could
have an adverse effect on our results of operations, financial
condition and cash flows. We may also experience increased
competition from companies that offer products based on
alternative technologies and processes that may be more
competitive or better in price or performance, causing us to
lose customers and result in a decline in our sales volume and
earnings.
We may incur
significant charges in the event we close all or part of a
manufacturing plant or facility.
We periodically assess our manufacturing operations in order to
manufacture and distribute our products in the most efficient
manner. Based on our assessments, we may make capital
improvements to modernize certain units, move manufacturing or
distribution capabilities from one plant or facility to
14
another plant or facility, discontinue manufacturing or
distributing certain products or close all or part of a
manufacturing plant or facility. We also have shared services
agreements at several of our plants and if such agreements are
terminated or revised, we would assess and potentially adjust
our manufacturing operations. The closure of all or part of a
manufacturing plant or facility could result in future charges
which could be significant.
Our
substantial international operations subject us to risks of
doing business in foreign countries, which could adversely
affect our business, financial condition and results of
operations.
We conduct more than 85% of our business outside of the United
States. We and our joint ventures currently have 36
manufacturing facilities located outside the United States. We
have facilities and offices located in Australia, Belgium,
Brazil, China, Czech Republic, France, Germany, Hungary,
Indonesia, Italy, Luxembourg, Malaysia, Mexico, the Netherlands,
New Zealand, Poland, Slovakia, South Korea, Spain, Sweden,
Switzerland, Turkey and the United Kingdom. We expect sales from
international markets to continue to represent a significant
portion of our net sales. Accordingly, our business is subject
to risks related to the differing legal, political, social and
regulatory requirements and economic conditions of many
jurisdictions. Risks inherent in international operations
include the following:
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fluctuations in exchange rates may affect product demand and may
adversely affect the profitability in U.S. dollars of
products and services we provide in international markets where
payment for our products and services is made in the local
currency;
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intellectual property rights may be more difficult to enforce;
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foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, or adopt other restrictions on
foreign trade or investment, including currency exchange
controls;
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unexpected adverse changes in foreign laws or regulatory
requirements may occur;
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agreements may be difficult to enforce and receivables difficult
to collect;
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compliance with a variety of foreign laws and regulations may be
burdensome;
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unexpected adverse changes may occur in export duties, quotas
and tariffs and difficulties in obtaining export licenses;
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general economic conditions in the countries in which we operate
could have an adverse effect on our earnings from operations in
those countries;
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foreign operations may experience staffing difficulties and
labor disputes;
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foreign governments may nationalize private enterprises;
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our business and profitability in a particular country could be
affected by political or economic repercussions on a domestic,
country specific or global level from terrorist activities and
the response to such activities; and
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unanticipated events, such as geopolitical changes, could result
in a write-down of our investment in the affected joint venture
in Indonesia.
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Our success as a global business will depend, in part, upon our
ability to succeed in differing legal, regulatory, economic,
social and political conditions by developing, implementing and
maintaining policies and strategies that are effective in each
location where we and our joint ventures do business.
Although the majority of our international business operations
are currently in regions where the risk level and established
legal systems are similar to that in the United States, our
international business also includes projects in countries where
governmental corruption has been known to exist. We emphasize
compliance with the law and have policies in place, procedures
and certain ongoing training of employees with regard to
business ethics and key legal requirements such as the
U.S. Foreign Corrupt Practices Act (FCPA);
however, there can be no assurances that our employees will
adhere to our code of business conduct, other Company policies
or the FCPA. Additionally, in such high risk
15
regions, our competitors who may not be subject to
U.S. laws and regulations, such as the FCPA, can gain
competitive advantages over us by securing business awards,
licenses or other preferential treatment in those jurisdictions
using methods that U.S. law and regulations prohibit us
from using. We may be subject to competitive disadvantages to
the extent that our competitors are able to secure business,
licenses or other preferential treatment by making payments to
government officials and others in positions of influence. If we
fail to enforce our policies and procedures properly or maintain
internal accounting practices to accurately record our
international transactions, we may be subject to regulatory
sanctions. Violations of these laws could result in significant
monetary or criminal penalties for potential violations of the
FCPA or other laws or regulations which, in turn, could
negatively affect our results of operations, damage our
reputation and, therefore, our ability to do business.
Other
increases in operating costs could affect our
profitability.
Scheduled or unscheduled maintenance programs could cause
significant production outages, higher costs
and/or
reduced production capacity at our suppliers due to the industry
in which they operate. These events could also affect our future
profitability.
Our business
depends upon good relations with our employees.
We may experience difficulties in maintaining appropriate
relations with unions and employees in certain locations. About
50% of our employees are represented by labor unions. In
addition, problems or changes affecting employees in certain
locations may affect relations with our employees at other
locations. The risk of labor disputes, work stoppages or other
disruptions in production could adversely affect us. If we
cannot successfully negotiate or renegotiate collective
bargaining agreements or if negotiations take an excessive
amount of time, there may be a heightened risk of a prolonged
work stoppage. Any work stoppage could have a material adverse
effect on the productivity and profitability of a manufacturing
facility or on our operations as a whole.
Our business
and financial condition could be adversely affected if we are
unable to protect our material trademarks and other proprietary
information.
We have numerous patents, trade secrets and know-how, domain
names, trademarks and trade names, which are discussed under
ITEM 1 of this Annual Report. Despite our efforts to
protect our trademarks and other proprietary rights from
unauthorized use or disclosure, other parties, including our
former employees or consultants, may attempt to disclose, obtain
or use our proprietary information or marks without our
authorization. Unauthorized use of our trademarks, or
unauthorized use or disclosure of our other intellectual
property, could negatively impact our business and financial
condition.
Although our
pension and postretirement plans currently meet all applicable
minimum funding requirements, events could occur that would
require us to make significant contributions to the plans and
reduce the cash available for our business.
We have several defined benefit pension and postretirement plans
around the world covering most of our employees. We are required
to make cash contributions to our pension plans to the extent
necessary to comply with minimum funding requirements imposed by
the various countries benefit and tax laws. The amount of
any such required contributions will be determined annually
based on an actuarial valuation of the plans as performed by the
Companys outside actuaries and as required by law. The
amount we may elect or be required to contribute to our pension
plans in the future may increase significantly. Specifically, if
year-end accumulated obligations exceed assets, we may elect to
make a voluntary contribution, over and above the minimum
required. These contributions could be substantial and would
reduce the cash available for our business.
Increasing
cost of employee healthcare may decrease our
profitability.
The cost of providing healthcare coverage for our employees is
continually increasing. If healthcare costs continue to rise at
a rapid pace, the Company may not be able to or willing to pass
on those costs to
16
employees. Therefore, if we are unable to offset continued
rising healthcare costs through improved operating efficiencies
and reduced expenditures, the increased costs of employee
healthcare may result in declining margins and operating results.
Changes in tax
laws could have an adverse impact on our earnings.
Changes to tax laws, rules and regulations, including changes in
the interpretation or implementation of tax laws, rules and
regulations by the Internal Revenue Service or other domestic or
foreign governmental bodies, could affect us in substantial and
unpredictable ways. Such changes could subject us to additional
compliance costs and tax liabilities which could have an adverse
impact on our earnings. Recently, several proposals to reform
U.S. tax laws to effectively increase the
U.S. taxation of income with respect to foreign operations
have been announced. Whether any such initiatives will win
Congressional or executive approval and become law is presently
unknown; however, if any such initiatives were to become law and
apply to our international operations, then there could be a
material impact on our financial condition and results of
operations.
Specific acts
of terrorism may disrupt operations and cause increased costs
and liabilities.
The threat of terrorist attacks or actual terrorist events in
the United States or abroad could affect us in unpredictable
ways. Terrorist threats or events could create political or
economic instability, affecting our business in general. The
increased costs related to heightened security could also have a
negative impact on our financial condition. We insure our
properties for acts of terrorism. Such threats or events could
also result in operational disruption, including difficulty in
obtaining raw materials, difficulty in delivering products to
customers, or general delay and inefficiencies in our supply
chain. Additionally, our manufacturing facilities, both within
the United States and those located abroad, may become direct
targets or indirect casualties of terrorist attacks, leading to
severe damage including loss of life and loss of property.
Increased
indebtedness could restrict growth and adversely affect our
financial health.
As of August 31, 2010, our debt on a consolidated basis was
approximately $154.7 million. An increase in the level of
indebtedness could have significant consequences. For example,
it could:
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limit our ability to satisfy current debt obligations;
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increase interest expense due to the change in interest rates
and increase in debt levels;
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require us to dedicate a significant portion of cash flow to
repay principal and pay interest on the debt, reducing the
amount of funds that would be available to finance operations
and other business activities;
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impair our ability to obtain financing in the future for working
capital, capital expenditures, research and development, or
acquisitions;
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make us vulnerable to economic downturns or adverse developments
in our business or markets; and
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place us at a competitive disadvantage compared to competitors
with less debt.
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We expect to pay expenses and to pay principal and interest on
current and future debt from cash provided by operating
activities. Therefore, our ability to meet these payment
obligations will depend on future financial performance, which
is subject in part to numerous economic, business and financial
factors beyond our control. If our cash flow and capital
resources are insufficient to fund our increased debt, we may be
forced to reduce or delay expansion plans and capital
expenditures, limit payment of dividends, sell material assets
or operations, obtain additional capital or restructure our debt.
17
Litigation
from customers, employees or others could adversely affect our
financial condition.
From time to time, we may be subject to claims or legal action
from customers, employees
and/or
others. Whether these claims and legal actions are founded or
unfounded, if these claims and legal actions are not resolved in
our favor, they may result in significant financial liability
and/or
adversely affect market perception of the Company and our
products. Any financial liability or reputation damage could
have a material adverse effect on our business, which, in turn,
could have a material adverse effect on our financial condition
and results of operations.
We are
dependent upon good relationships with our various suppliers,
vendors and distributors.
We rely upon good relationships with a number of different
suppliers, vendors and distributors. If our relationships with
these parties were to deteriorate or if a number of these
parties should elect to discontinue doing business with us, our
business operations could be adversely affected.
We may
experience difficulties in integrating acquired businesses, or
acquisitions may not otherwise perform as
expected.
We may acquire other businesses intended to complement or expand
our business. The successful integration of these acquisitions
will depend on our ability to integrate the assets and personnel
acquired. We may encounter obstacles when incorporating the
acquired operations with our operations and management. The
acquired operations may not otherwise perform or provide the
results expected when we first entered into the transaction. We
may not achieve anticipated results in developing new geographic
or product markets. If such acquisitions are not integrated
successfully or they do not perform as well as anticipated, our
results of operations and financial condition could be adversely
affected.
We may fail to
realize all of the anticipated benefits of acquisitions, which
could reduce our anticipated profitability.
We expect that our acquisitions will result in certain
synergies, business opportunities and growth prospects. We,
however, may not realize these expected synergies, business
opportunities and growth prospects. Integrating operations is
complex and requires significant efforts and expenses on the
part of both ourselves and the acquisitions. Personnel may
voluntarily or involuntarily exit the Company because of the
acquisitions. Our management may have its attention diverted
while trying to integrate the acquired companies. We may
experience increased competition that limits our ability to
expand our business. We may not be able to capitalize on
expected business opportunities including successfully
developing new geographic or product markets or retaining
acquired current customers. Our assumptions underlying estimates
of expected cost savings may be inaccurate or general industry
and business conditions may deteriorate. In addition, our growth
and operating strategies for acquired businesses may be
different from the strategies that the acquired companies
pursued. If these factors limit our ability to integrate or
operate the acquired companies successfully or on a timely
basis, our expectations of future results of operations,
including certain cost savings and synergies expected to result
from acquisitions, may not be met.
We may be
required to adopt International Financial Reporting Standards
(IFRS), or other accounting or financial reporting standards,
the ultimate adoption of such standards could negatively impact
our business, financial condition or results of
operations.
Although not yet required, we could be required to adopt IFRS or
other accounting or financial reporting standards different than
accounting principles generally accepted in the United States of
America for our accounting and reporting standards. The
implementation and adoption of new standards could favorably or
unfavorably impact our business, financial condition or results
of operations.
18
An impairment
of goodwill would negatively impact the Companys financial
results.
The acquisitions of ICO and McCann Color increased the
Companys goodwill by $73.1 million. At least
annually, the Company performs an impairment test for goodwill.
Under current accounting guidance, if the carrying value of
goodwill exceeds the estimated fair value, impairment is deemed
to have occurred and the carrying value of goodwill is written
down to fair value with a charge against earnings. Accordingly,
any determination requiring the write-off of a significant
portion of goodwill could negatively impact the Companys
results of operations.
The Company
may not have adequate or cost-effective liquidity or capital
resources.
The Company requires cash or committed liquidity facilities for
general corporate purposes, such as funding its ongoing working
capital, acquisition, and capital expenditure needs, as well as
to make interest payments on and to refinance indebtedness. As
of August 31, 2010, the Company had cash and cash
equivalents of $122.8 million. In addition, the Company
currently has access to committed credit lines of
$297.2 million, with $234.0 million available as of
August 31, 2010. The Companys ability to satisfy its
cash needs depends on its ability to generate cash from
operations and to access the financial markets, both of which
are subject to general economic, financial, competitive,
legislative, regulatory, and other factors that are beyond its
control.
The Company may, in the future, need to access the financial
markets to satisfy its cash needs. The Companys ability to
obtain external financing is affected by various factors
including general financial market conditions and the
Companys debt ratings. While, thus far, uncertainties in
global credit markets have not significantly affected the
Companys access to capital, future financing could be
difficult or more expensive. Further, any increase in the
Companys level of debt, change in status of its debt from
unsecured to secured debt, or deterioration of its operating
results may impact the Companys ability to obtain
favorable financing terms. Any tightening of credit availability
could impair the Companys ability to obtain additional
financing or renew existing credit facilities on acceptable
terms. Under the terms of any external financing, the Company
may incur higher than expected financing expenses and become
subject to additional restrictions and covenants. The
Companys lack of access to cost-effective capital
resources, an increase in the Companys financing costs, or
a breach of debt instrument covenants could have a material
adverse effect on the Companys business.
We may be
exposed to certain regulatory risks related to climate
change.
Various governments have either introduced or are contemplating
legislative and regulatory change in response to the potential
impacts of climate change including legislation that, if
enacted, would limit and reduce greenhouse gas emissions through
a cap and trade system of allowances and credits,
among other provisions. Additionally, some of our operations are
within other jurisdictions that have, or are developing,
regulatory regimes governing greenhouse gas emissions including
European Union, Brazil and China. The outcome of new legislation
in the U.S. and other jurisdictions in which we operate may
result in new or additional regulation, additional charges to
fund energy efficiency activities or other regulatory actions.
These effects may adversely impact our financial condition or
results of operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
19
ITEM 2.
PROPERTIES
The following table indicates the location of each of the
Companys plastics compounding plants, the approximate
annual plastics compounding capacity and approximate floor area,
including warehouse and office space and the segment that is
principally supported by such plants as of August 31, 2010.
The following locations are owned or leased by the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
Approximate
|
|
|
Floor Area
|
|
Location
|
|
Capacity (lbs.)(1)
|
|
|
(Square Feet)
|
|
|
|
(In thousands)
|
|
|
Akron, Ohio
|
|
|
15,500
|
|
|
|
105
|
|
North Canton, Ohio
|
|
|
5,000
|
|
|
|
48
|
|
Contagem, Belo Horizonte, Brazil
|
|
|
16,000
|
|
|
|
24
|
|
Americana, São Paulo, Brazil
|
|
|
8,000
|
|
|
|
19
|
|
Simoes Filhos, Bahia, Brazil
|
|
|
2,000
|
|
|
|
11
|
|
San Luis Potosi, Mexico
|
|
|
93,000
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
Total North America Masterbatch segment
|
|
|
139,500
|
|
|
|
394
|
|
Bellevue, Ohio
|
|
|
60,000
|
(2)
|
|
|
160
|
|
Nashville, Tennessee
|
|
|
41,500
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Total North America Engineered Plastics segment
|
|
|
101,500
|
|
|
|
298
|
|
China, Texas
|
|
|
90,000
|
|
|
|
108
|
|
East Chicago, Indiana
|
|
|
65,000
|
|
|
|
130
|
|
Fontana, California
|
|
|
40,000
|
|
|
|
44
|
|
Grand Junction, Tennessee
|
|
|
28,000
|
|
|
|
124
|
|
Allentown, Pennsylvania
|
|
|
29,000
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
Total North America Rotomolding Segment
|
|
|
252,000
|
|
|
|
534
|
|
Bornem, Belgium
|
|
|
147,000
|
|
|
|
455
|
|
Opglabbeek, Belgium
|
|
|
4,500
|
|
|
|
22
|
|
Givet, France
|
|
|
243,000
|
|
|
|
222
|
|
Beaucaire, France
|
|
|
51,000
|
|
|
|
76
|
|
Montereau, France
|
|
|
54,000
|
|
|
|
57
|
|
Oyonnax, France
|
|
|
4,000
|
|
|
|
28
|
|
Kerpen, Germany
|
|
|
154,500
|
|
|
|
543
|
|
Budapest, Hungary
|
|
|
500
|
|
|
|
26
|
|
Gorla Maggiore, Italy
|
|
|
7,000
|
|
|
|
115
|
|
Verolanuoava, Italy
|
|
|
70,500
|
|
|
|
135
|
|
s-Gravendeel, The Netherlands
|
|
|
99,000
|
|
|
|
168
|
|
Nowa Biala, Poland
|
|
|
1,300
|
|
|
|
49
|
|
Gainsborough, United Kingdom
|
|
|
160,000
|
|
|
|
103
|
|
Crumlin Gwent, South Wales, United Kingdom
|
|
|
65,000
|
|
|
|
106
|
|
Astorp, Sweden
|
|
|
9,000
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total EMEA Segment
|
|
|
1,070,300
|
|
|
|
2,132
|
|
Batu Pahat, Malaysia
|
|
|
34,500
|
|
|
|
62
|
|
Braeside, Australia
|
|
|
36,000
|
|
|
|
183
|
|
Brisbane, Australia
|
|
|
18,000
|
|
|
|
19
|
|
Guangdong Province, China
|
|
|
30,500
|
|
|
|
112
|
|
East Java, Indonesia (Joint Venture)
|
|
|
36,500
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
Total APAC Segment
|
|
|
155,500
|
|
|
|
512
|
|
La Porte, Texas
|
|
|
268,000
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Total Bayshore Segment
|
|
|
268,000
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,986,800
|
|
|
|
4,096
|
|
|
|
|
|
|
|
|
|
|
20
The Company considers each of the foregoing facilities to be in
good condition and suitable for its purposes. Approximate annual
capacity amounts may fluctuate as a result of capital
expenditures to increase capacity, a shutdown of certain
equipment to reduce capacity or permanent changes in mix which
could increase or decrease capacity.
|
|
(1)
|
The approximate annual plastics compounding capacity set forth
in this table is an estimate and is based upon several factors,
including the daily and shift operating schedules that are
customary in the area where each facility is located. Another
factor is the approximate historical mix of specific types of
plastic compounds manufactured at each plant. A plant operating
at full capacity will produce a greater or lesser quantity (in
pounds) depending upon the specific plastic compound then being
manufactured. The annual poundage of plastic compounds
manufactured does not, in itself, reflect the extent of
utilization of the Companys plants or the profitability of
the plastic compounds produced.
|
|
(2)
|
Includes capacity of approximately 20 million pounds from
two manufacturing lines owned by The Sunprene Company, a
partnership in which the Company has a 70% partnership interest.
|
Public warehouses are used wherever needed to store the
Companys products to best service the needs of customers.
The number of public warehouses in use varies from time to time.
Currently, usage approximates 53 warehouses for the Company
worldwide. The Company believes an adequate supply of suitable
public warehouse facilities is available to it.
The Company owns its corporate headquarters, which is located in
Akron, Ohio and contains approximately 48,000 square feet
of office space. The Company leases sales offices in various
locations globally and administrative offices in Houston, Texas
and Londerzeel, Belgium.
As of August 31, 2010, the Companys Findlay, Ohio and
Sharon Center, Ohio facilities and certain equipment related to
Invision are considered held for sale. The net book value of
these assets held for sale after impairment is approximately
$5.5 million which is included in the property, plant and
equipment line item in the Companys consolidated balance
sheet as of August 31, 2010 due to the immaterial amount.
Of the assets held for sale, only Invision is included in
discontinued operations on the Companys consolidated
statements of operations.
ITEM 3.
LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings arising in
the ordinary course of business. The ultimate outcome of these
proceedings is not expected to have a material adverse effect on
the Companys financial condition, results of operations or
cash flows.
ITEM 4.
(REMOVED AND RESERVED)
21
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
The Companys Common Stock is traded on the NASDAQ Global
Select Market under the symbol SHLM. At
October 15, 2010, there were 615 holders of record of the
Companys Common Stock. This figure does not include
beneficial owners who hold shares in nominee name. The closing
stock price on October 15, 2010 was $21.14.
The quarterly high and low closing stock prices for fiscal 2010
and 2009 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
|
Fiscal 2009
|
|
Common Stock Price Range
|
|
High - Low
|
|
|
High - Low
|
|
|
1st Quarter
|
|
$
|
21.13 - 16.32
|
|
|
$
|
24.10 - 12.02
|
|
2nd Quarter
|
|
$
|
23.98 - 16.42
|
|
|
$
|
18.16 - 12.65
|
|
3rd Quarter
|
|
$
|
26.89 - 21.33
|
|
|
$
|
15.69 - 12.08
|
|
4th Quarter
|
|
$
|
21.84 - 17.05
|
|
|
$
|
22.01 - 14.45
|
|
The quarterly cash dividends declared for fiscal 2010 and 2009
are presented in the table below.
|
|
|
|
|
|
|
|
|
Cash Dividends per Share
|
|
Fiscal 2010
|
|
|
Fiscal 2009
|
|
|
1st Quarter
|
|
$
|
0.150
|
|
|
$
|
0.150
|
|
2nd Quarter
|
|
|
0.150
|
|
|
|
0.150
|
|
3rd Quarter
|
|
|
0.150
|
|
|
|
0.150
|
|
4th Quarter
|
|
|
0.150
|
|
|
|
0.150
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.600
|
|
|
$
|
0.600
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2008, the Board of Directors agreed to increase to
five million the remaining number of shares authorized for
repurchase under the Companys 2006 share repurchase
program, under which the Board of Directors had previously
authorized the repurchase of up to 6.75 million shares of
common stock. At the time of the increase to five million
shares, approximately 4.0 million shares remained
authorized for repurchase.
The Companys purchases of its common stock under the 2008
repurchase program during the fourth quarter of fiscal 2010 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Maximum
|
|
|
|
|
|
|
Average
|
|
|
Purchased
|
|
|
Number of
|
|
|
|
|
|
|
Price Paid
|
|
|
as Part of a
|
|
|
Shares That
|
|
|
|
Total Number
|
|
|
per Share
|
|
|
Publicly
|
|
|
May Yet be
|
|
|
|
of Shares
|
|
|
(Excluding
|
|
|
Announced
|
|
|
Purchased
|
|
|
|
Repurchased
|
|
|
Commissions)
|
|
|
Plan
|
|
|
Under the Plan
|
|
|
Beginning shares available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,906,966
|
|
June 1-30, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
2,906,966
|
|
July 1-31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
2,906,966
|
|
August 1-31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
2,906,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
2,906,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010(1)
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Net sales
|
|
$
|
1,590,443
|
|
|
$
|
1,279,248
|
|
|
$
|
1,983,595
|
|
|
$
|
1,786,892
|
|
|
$
|
1,616,380
|
|
Cost of sales
|
|
|
1,357,575
|
|
|
|
1,109,211
|
|
|
|
1,749,065
|
|
|
|
1,578,213
|
|
|
|
1,397,453
|
|
Other costs and expenses
|
|
|
196,697
|
|
|
|
155,751
|
|
|
|
187,393
|
|
|
|
159,328
|
|
|
|
158,506
|
|
Interest and other income
|
|
|
(3,770
|
)
|
|
|
(4,174
|
)
|
|
|
(2,347
|
)
|
|
|
(4,138
|
)
|
|
|
(5,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,550,502
|
|
|
|
1,260,788
|
|
|
|
1,934,111
|
|
|
|
1,733,403
|
|
|
|
1,550,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
39,941
|
|
|
|
18,460
|
|
|
|
49,484
|
|
|
|
53,489
|
|
|
|
65,623
|
|
Provision (benefit) for U.S. and foreign income taxes
|
|
|
(4,419
|
)
|
|
|
6,931
|
|
|
|
17,944
|
|
|
|
24,655
|
|
|
|
29,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
44,360
|
|
|
|
11,529
|
|
|
|
31,540
|
|
|
|
28,834
|
|
|
|
36,138
|
|
Loss from discontinued operations, net of tax of $0
|
|
|
(239
|
)
|
|
|
(13,956
|
)
|
|
|
(12,619
|
)
|
|
|
(5,738
|
)
|
|
|
(2,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
44,121
|
|
|
|
(2,427
|
)
|
|
|
18,921
|
|
|
|
23,096
|
|
|
|
33,778
|
|
Noncontrolling interests
|
|
|
(221
|
)
|
|
|
(349
|
)
|
|
|
(872
|
)
|
|
|
(1,027
|
)
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to A. Schulman, Inc.
|
|
$
|
43,900
|
|
|
$
|
(2,776
|
)
|
|
$
|
18,049
|
|
|
$
|
22,069
|
|
|
$
|
32,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,071,325
|
|
|
$
|
797,489
|
|
|
$
|
890,421
|
|
|
$
|
874,115
|
|
|
$
|
843,245
|
|
Long-term debt
|
|
$
|
93,834
|
|
|
$
|
102,254
|
|
|
$
|
104,298
|
|
|
$
|
123,080
|
|
|
$
|
120,730
|
|
Total equity
|
|
$
|
493,150
|
|
|
$
|
370,971
|
|
|
$
|
430,764
|
|
|
$
|
430,224
|
|
|
$
|
407,476
|
|
Weighted-average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,746,220
|
|
|
|
25,790,421
|
|
|
|
26,794,923
|
|
|
|
27,032,348
|
|
|
|
29,961,580
|
|
Diluted
|
|
|
27,976,343
|
|
|
|
26,069,631
|
|
|
|
27,097,896
|
|
|
|
27,369,408
|
|
|
|
30,394,210
|
|
Earnings (losses) per share of common stock attributable to A.
Schulman, Inc. Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.59
|
|
|
$
|
0.43
|
|
|
$
|
1.14
|
|
|
$
|
1.04
|
|
|
$
|
1.17
|
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
(0.47
|
)
|
|
|
(0.21
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
1.58
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.67
|
|
|
$
|
0.83
|
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share of common stock attributable to A.
Schulman, Inc. Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.58
|
|
|
$
|
0.43
|
|
|
$
|
1.13
|
|
|
$
|
1.03
|
|
|
$
|
1.15
|
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
(0.47
|
)
|
|
|
(0.21
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
1.57
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.66
|
|
|
$
|
0.82
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
|
$
|
0.60
|
|
|
$
|
0.60
|
|
|
$
|
0.59
|
|
|
$
|
0.58
|
|
|
$
|
0.58
|
|
|
|
|
(1) |
|
See Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations |
23
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
OVERVIEW OF THE
BUSINESS AND RECENT DEVELOPMENTS
A. Schulman, Inc. (the Company, we,
our, ours and us) is a
leading international supplier of high-performance plastic
compounds and resins headquartered in Akron, Ohio. The
Companys customers span a wide range of markets including
consumer products, industrial, automotive and packaging. The
Companys segments are Europe, Middle East and Africa
(EMEA), North America Masterbatch
(NAMB), North America Engineered Plastics
(NAEP), North America Rotomolding
(NARM), Asia Pacific (APAC) and Bayshore. The
Company has approximately 2,900 employees and 36 plants in
countries in Europe, North America, Asia, South America and
Australia. Globally, the Company operates primarily in four
lines of business: (1) masterbatch, (2) engineered
plastics, (3) rotomolding and (4) distribution. The
Company also offers tolling services to customers through its
North America, EMEA and Bayshore operations.
On October 26, 2009, the Company announced plans to
establish a masterbatch facility in western India to better
serve its customers in that region, which the Company regards as
a key geographic growth market. The facility initially will
consist of one production line and will manufacture the
Companys masterbatch products which serve the packaging,
appliance and consumer products markets. The facilitys
capacity is projected to be approximately 12 million pounds
per year.
On March 1, 2010, the Company completed the purchase of
McCann Color, Inc. (McCann Color), a producer of
high-quality color concentrates, based in North Canton, Ohio,
for $8.8 million in cash. The business provides specially
formulated color concentrates to match precise customer
specifications. Its products are used in end markets such as
packaging, lawn and garden, furniture, consumer products and
appliances. The operations serve customers from its
48,000-square-foot, expandable North Canton facility, which was
built in 1998 exclusively to manufacture color concentrates. The
facility complements the Companys existing North American
masterbatch manufacturing and product development facilities in
Akron, Ohio, San Luis Potosi, Mexico, and La Porte,
Texas. The Company expects to show an annual operating income
improvement of $2 million to $3 million related to
these actions, of which approximately $0.9 million was
realized in fiscal 2010 and the remaining will be realized in
fiscal 2011. The Company recorded $1.3 million of pretax
restructuring charges and $5.4 million of pretax asset
impairment charges during the year ended August 31, 2010
for the closure of the Companys Polybatch Color Center in
Sharon Center, Ohio.
On April 30, 2010, the Company acquired ICO, Inc.
(ICO) through a merger by and among the Company, ICO
and Wildcat Spider, LLC, a wholly-owned subsidiary of the
Company, and which is now known as ICO-Schulman, LLC, pursuant
to the terms of the December 2, 2009 Agreement and Plan of
Merger (Merger Agreement). Under the terms of the
Merger Agreement, each share of ICO common stock outstanding
immediately prior to the merger was converted into the right to
receive a pro rata portion of the total consideration of
$105.0 million in cash and 5.1 million shares of the
Companys common stock. All unvested options and shares of
restricted stock of ICO fully vested prior to the merger were
exchanged for cash equal to their in the money
value, which reduced the cash pool available to ICOs
stockholders.
ICOs operations include global manufacturing of specialty
resins and concentrates, and providing of specialty polymer
services, including size reduction, compounding and other
related services. The acquisition of ICO presents the Company
with an opportunity to expand its presence substantially,
especially in the global rotomolding and U.S. masterbatch
markets. ICOs business is complementary to the
Companys business across markets, product lines and
geographies. The acquisition of ICOs operations increases
the Companys presence in the U.S. masterbatch market,
gains plants in the high-growth market of Brazil and expands the
Companys Asia presence with the addition of several ICO
facilities in that region. In Europe, the acquisition allows the
Company to add rotomolding compounds and size reduction to the
Companys capabilities. It also enables growth in countries
24
where the Company currently has a limited presence, such as
France, Italy and Holland, as well as further leveraging
facilities serving high-growth markets such as Poland, Hungary
and Sweden.
On October 15, 2010, the Company entered into an agreement
to purchase 100% of the capital stock of Mash Indústria e
Comércio de Compostos Plásticos, Ltda.
(Mash), a masterbatch additive producer and
engineered plastics compounder based in Sao Paulo, Brazil. Mash
participates in various market segments including film and
packaging, automotive and appliances. Combined with the
Companys core competencies in both masterbatch and
engineered plastics compounding, Mash will contribute
specialized additives and plastic materials to meet growing
demand in the South American region. The transaction is expected
to close on November 3, 2010 pending customary closing
procedures. Under the terms of the agreement, the Company agreed
to purchase Mash for a total amount of 27.6 million
Brazilian reais, or approximately $16.6 million, of which
24.8 million Brazilian reais, or approximately
$14.6 million will be due at closing on November 3,
2010. The remainder of the purchase price will be payable on or
about November 3, 2013, in accordance with an escrow
arrangement which subjects payment to volume earn-out and
contingent liability provisions.
RESULTS OF
OPERATIONS 2010
Net sales for the year ended August 31, 2010, excluding the
impact of the ICO acquisition, were $1,456.3 million, an
increase of $177.0 million or 13.8% compared with the prior
year. The increase in net sales compared with the prior year was
primarily a result of increased tonnage, increased selling
prices per unit, and a result of increased sales of
higher-priced products. The translation effect of foreign
currencies, primarily the euro, increased sales by 0.6% or
$7.7 million for the year ended August 31, 2010. The
Company experienced an increase in customer demand evidenced by
a tonnage increase of 3.0%. The increased tonnage sold in the
EMEA, NAMB and APAC segments in fiscal 2010 compared with fiscal
2009 was offset by decreases in the NAEP and NARM segments. The
Company sold approximately 1,348.0 million pounds and
1,309.0 million pounds of product, excluding ICO, for the
year ended August 31, 2010 and 2009, respectively. Pounds
sold related to ICO were approximately 239.4 million for
fiscal year 2010 since it was acquired on April 30, 2010. A
comparison of consolidated sales by segment for the year ended
August 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
Total Increase
|
|
|
% Due to
|
|
|
% Due to
|
|
|
% Due to
|
|
|
% Due to
|
|
Sales
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
ICO
|
|
|
Tonnage
|
|
|
Translation
|
|
|
Price/product Mix
|
|
|
|
(In thousands, except for %s)
|
|
|
EMEA
|
|
$
|
1,142,523
|
|
|
$
|
935,895
|
|
|
$
|
206,628
|
|
|
|
22.1
|
%
|
|
|
6.1
|
%
|
|
|
4.6
|
%
|
|
|
0.5
|
%
|
|
|
10.9
|
%
|
NAMB
|
|
|
132,276
|
|
|
|
108,474
|
|
|
|
23,802
|
|
|
|
21.9
|
%
|
|
|
7.5
|
%
|
|
|
6.2
|
%
|
|
|
1.1
|
%
|
|
|
7.1
|
%
|
NAEP
|
|
|
127,061
|
|
|
|
121,701
|
|
|
|
5,360
|
|
|
|
4.4
|
%
|
|
|
0.0
|
%
|
|
|
(5.7
|
)%
|
|
|
1.2
|
%
|
|
|
8.9
|
%
|
NARM
|
|
|
77,550
|
|
|
|
67,920
|
|
|
|
9,630
|
|
|
|
14.2
|
%
|
|
|
33.0
|
%
|
|
|
(25.3
|
)%
|
|
|
0.1
|
%
|
|
|
6.4
|
%
|
APAC
|
|
|
84,909
|
|
|
|
45,258
|
|
|
|
39,651
|
|
|
|
87.6
|
%
|
|
|
44.2
|
%
|
|
|
38.7
|
%
|
|
|
0.1
|
%
|
|
|
4.6
|
%
|
Bayshore
|
|
|
26,124
|
|
|
|
|
|
|
|
26,124
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,590,443
|
|
|
$
|
1,279,248
|
|
|
$
|
311,195
|
|
|
|
24.3
|
%
|
|
|
10.5
|
%
|
|
|
3.0
|
%
|
|
|
0.6
|
%
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
The largest market served by the Company is the packaging
market. Other markets include automotive, appliances,
construction, medical, consumer products,
electrical/electronics, office equipment and agriculture. The
approximate percentage of net consolidated sales by market for
the year ended August 31, 2010 as compared with the same
period last year are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Packaging
|
|
|
39
|
%
|
|
|
43
|
%
|
Automotive
|
|
|
12
|
%
|
|
|
12
|
%
|
Other
|
|
|
49
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The North America segments include sales to customers in the
packaging market which accounted for approximately 28% and 32%
for the years ended August 31, 2010 and 2009, respectively.
North America sales to the automotive market amounted to
25% and 28% for the years ended August 31, 2010 and 2009,
respectively. For the EMEA segment, sales to customers in the
packaging market accounted for approximately 41% and 45% for the
years ended August 31, 2010 and 2009, respectively. The
Companys APAC segment include sales to customers in the
packaging market which accounted for approximately 60% and 86%
for the years ended August 31, 2010 and 2009, respectively.
The majority of the Companys sales for the years ended
August 31, 2010 and 2009 can be classified into four
primary product families. The amount and percentage of
consolidated sales for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except for %s)
|
|
|
Masterbatch
|
|
$
|
676,977
|
|
|
|
43
|
%
|
|
$
|
574,641
|
|
|
|
45
|
%
|
Engineered Plastics
|
|
|
460,141
|
|
|
|
29
|
|
|
|
382,709
|
|
|
|
30
|
|
Rotomolding
|
|
|
129,122
|
|
|
|
8
|
|
|
|
30,312
|
|
|
|
2
|
|
Distribution
|
|
|
324,203
|
|
|
|
20
|
|
|
|
291,586
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,590,443
|
|
|
|
100
|
%
|
|
$
|
1,279,248
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation and comparison of gross profit dollars by
segment for the years ended August 31, 2010 and 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
Increase
|
|
Gross Profit $
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except for %s)
|
|
|
EMEA
|
|
$
|
177,010
|
|
|
$
|
141,137
|
|
|
$
|
35,873
|
|
|
|
25.4
|
%
|
NAMB
|
|
|
17,204
|
|
|
|
8,279
|
|
|
|
8,925
|
|
|
|
107.8
|
|
NAEP
|
|
|
15,272
|
|
|
|
8,849
|
|
|
|
6,423
|
|
|
|
72.6
|
|
NARM
|
|
|
11,267
|
|
|
|
6,670
|
|
|
|
4,597
|
|
|
|
68.9
|
|
APAC
|
|
|
11,656
|
|
|
|
6,372
|
|
|
|
5,284
|
|
|
|
82.9
|
|
Bayshore
|
|
|
4,470
|
|
|
|
|
|
|
|
4,470
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment gross profit
|
|
|
236,879
|
|
|
|
171,307
|
|
|
|
65,572
|
|
|
|
38.3
|
|
Asset write-downs
|
|
|
(69
|
)
|
|
|
(1,270
|
)
|
|
|
1,201
|
|
|
|
|
|
Inventory
step-up
|
|
|
(3,942
|
)
|
|
|
|
|
|
|
(3,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
232,868
|
|
|
$
|
170,037
|
|
|
$
|
62,831
|
|
|
|
37.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
A comparison of gross profit percentages by segment for the
years ended August 31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
Gross Profit %
|
|
2010
|
|
2009
|
|
EMEA
|
|
|
15.5
|
%
|
|
|
15.1
|
%
|
NAMB
|
|
|
13.0
|
%
|
|
|
7.6
|
%
|
NAEP
|
|
|
12.0
|
%
|
|
|
7.3
|
%
|
NARM
|
|
|
14.5
|
%
|
|
|
9.8
|
%
|
APAC
|
|
|
13.7
|
%
|
|
|
14.1
|
%
|
Bayshore
|
|
|
17.1
|
%
|
|
|
n/a
|
|
Consolidated
|
|
|
14.9
|
%
|
|
|
13.4
|
%
|
Overall, gross profit dollars included approximately
$19.5 million due to ICO for the year ended August 31,
2010. Gross profits for ICO for the fiscal 2010 periods were
negatively affected by purchase accounting adjustments for
increased depreciation expense due to increased asset values.
Accordingly, the gross profits for ICO for fiscal year 2010
include approximately $1.1 million of additional
depreciation expense.
The gross profit dollars for EMEA for the year ended
August 31, 2010, excluding ICO operations, increased by
$29.6 million, or 21.0%, to $170.8 million. For the
year ended August 31, 2010, the gross profit percentage,
excluding ICO, was 15.7% compared with 15.1% for the same period
prior year. The Company was able to increase its gross profit
dollars in the EMEA segment compared with the prior year
primarily through volume increases, favorable product mix and
the realization of cost-reduction initiatives, including
leveraging the Companys global purchasing position,
implemented in fiscal 2009. The initiatives implemented in
fiscal 2009 favorably impacted the EMEA capacity utilization,
increasing to 95%, excluding ICO operations, for the year ended
August 31, 2010 compared with 75% for the same period last
year. The translation effect of foreign currencies impacted EMEA
gross profits favorably by $0.9 million for the year ended
August 31, 2010. The gross profit per pound for EMEA,
excluding ICO, increased 15.7% from fiscal 2009 to fiscal 2010.
The gross profit dollars for the NAMB business, excluding ICO
operations, have increased $7.6 million for the year ended
August 31, 2010 compared with last year. The increase was
the result of volume increases reflecting improvement in
customer demand as compared with the prior year. The acquisition
of McCann Color also had a favorable impact on NAMB gross
profit. In addition, fiscal 2009 gross profit for NAMB
includes approximately $0.9 million for the year ended
August 31, 2009, of startup costs without sales related to
the Companys new masterbatch facility in Akron, Ohio. The
gross profit per pound for NAMB, excluding ICO, increased 80.7%
from fiscal 2009 to fiscal 2010. Foreign currency translation
increased gross profit by 2.6% for the year ended
August 31, 2010.
The gross profit dollars for the NAEP business increased by
$6.4 million for the year ended August 31, 2010
compared with last year. The gross profit per pound for NAEP
increased 83.1% from fiscal 2009 to fiscal 2010. The increase in
gross profit dollars and percentages for NAEP are primarily the
result of improved utilization of the NAEP facilities due to
efforts to right-size this segment as well as the focus on
higher value-added products. These initiatives improved the
segments cost structure enabling NAEP to increase gross
profit dollars and percentages despite volume decreases for the
year ended August 31, 2010 due to continued weak economic
conditions. Customer demand for NAEP products was positively
affected in the first quarter of fiscal 2010 by temporary
initiatives enacted by the government of the United States to
stimulate sales activity in the automotive industry during the
quarter.
The gross profit dollars for the NARM business, excluding ICO
operations, decreased by $0.9 million for the year ended
August 31, 2010 compared with last year. The legacy NARM
business was immediately integrated with the ICO Polymers North
America business, and as a result a large portion of the legacy
NARM business results for the final four months of the fiscal
year are included in the ICO related results.
27
The NARM combined gross profit, including ICO, increased
approximately $4.6 million, primarily as a result of the
merger.
Overall, gross profit for the North American businesses,
including NAMB, NAEP and NARM but excluding the acquired ICO
businesses, increased $13.1 million for the year ended
August 31, 2010 compared with the prior year.
The Companys APAC segment gross profit dollars, excluding
ICO operations, increased $3.3 million for the year ended
August 31, 2010. Gross profit percentage, excluding ICO,
was 14.9% for the year ended August 31, 2010. The increase
in gross profit dollars, excluding ICO, in fiscal 2010 is
attributable to higher margins due to a favorable product mix
and improved capacity utilization. Gross profit for the year
ended August 31, 2010 was the result of increased customer
demand in the Asian marketplace, which resulted in a capacity
utilization improvement of 24 percentage points for the
year ended August 31, 2010 compared with the prior year,
excluding ICO. Gross profit in the APAC segment was also
positively impacted by reduced manufacturing costs and increased
use of locally sourced raw materials. The gross profit per pound
for APAC increased 9.4% from fiscal 2009 to fiscal 2010. Fiscal
2009 gross profits for this segment were favorably impacted
by certain inventory adjustments as it sold older inventory
stocks.
The Companys practical capacity is not based on a
theoretical
24-hour,
seven-day
operation; rather, it is determined as the production level at
which the manufacturing facilities can operate with an
acceptable degree of efficiency, taking into consideration
factors such as longer term customer demand, permanent staffing
levels, operating shifts, holidays, scheduled maintenance and
mix of product. Capacity utilization is calculated by dividing
actual production pounds by practical capacity at each plant. A
comparison of capacity utilization levels is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
August 31,
|
|
|
2010
|
|
2009
|
|
EMEA
|
|
|
87
|
%
|
|
|
75
|
%
|
NAMB
|
|
|
74
|
%
|
|
|
67
|
%
|
NAEP
|
|
|
65
|
%
|
|
|
63
|
%
|
NARM
|
|
|
46
|
%
|
|
|
n/a
|
|
APAC
|
|
|
85
|
%
|
|
|
61
|
%
|
Bayshore
|
|
|
88
|
%
|
|
|
n/a
|
|
Worldwide
|
|
|
81
|
%
|
|
|
72
|
%
|
EMEA capacity utilization increased primarily as a result of
increased levels of customer demand during the year compared
with the same period last year and as a result of the
Companys fiscal 2009 initiative to right-size the capacity
in this segment. The capacity utilization for NAMB increased as
compared to prior year due to relative improvements in the North
American market place as well as a result of the Akron, Ohio
plant, which became fully operational and started producing in
the third quarter of fiscal 2009. Capacity utilization for the
NAEP segment increased from fiscal 2009 as a result of increased
customer demand for fiscal 2010 compared to last year as well as
reductions in capacity to allow the Company to focus on higher
value-added products. The Companys APAC segment
experienced significantly higher capacity utilization as a
result of a rebound in the local Asian markets. Overall
worldwide utilization increased compared with the prior year
reflecting an improved marketplace and successful capacity
right-sizing actions taken during the second and third quarters
of fiscal 2009. Capacity utilization for the ICO rotomolding
operations acquired is generally lower than the Companys
legacy operations.
28
The changes in selling, general and administrative expenses are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
$ Increase
|
|
|
% Increase
|
|
|
|
(In thousands, except
|
|
|
|
for %s)
|
|
|
Total change in selling, general and administrative expenses
|
|
$
|
31,678
|
|
|
|
21.4
|
%
|
Effect of foreign currency translation
|
|
|
643
|
|
|
|
|
|
Less the effect of ICO operations
|
|
|
14,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in selling, general and administrative expenses,
excluding the effect of foreign currency translation and ICO
operations
|
|
$
|
16,255
|
|
|
|
11.0
|
%
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses for the year ended
August 31, 2010 increased $16.3 million, excluding the
effect of foreign currency exchange and ICO operations, compared
with the same period last fiscal year. The increase was due to
$6.8 million of acquisition related costs, a
$1.1 million increase in bad debt expense primarily in EMEA
due to a certain customers financial difficulties and a
$4.4 million increase in accrued incentive compensation
expense as a result of improved operating results. The increase
was also a result of increased compensation costs of
approximately $6.6 million due to slightly increased
headcount and normal annual salary adjustments. In addition,
selling, general and administrative expenses were impacted by an
increase of $0.3 million in stock-based compensation
expense primarily as a result of
mark-to-market
adjustments of restricted stock units as a result of increases
in the Companys stock price. These increases were offset
by declines in professional services related to the start-up of
the Companys shared service center in Europe which became
fully operational in fiscal 2010.
Selling, general and administrative expenses include stock-based
compensation expense arising from equity awards to employees
under the Companys incentive plans. Total stock-based
compensation expense was $4.7 million and $4.4 million
for the years ended August 31, 2010 and 2009, respectively.
Compensation expense for cash-settled equity awards, including
changes in fair value, was $0.7 million and
$1.5 million for the years ended August 31, 2010 and
2009, respectively. A significant portion of the Companys
equity awards are cash-settled, which include restricted stock
units and performance based cash awards, and therefore, the
value of such awards outstanding must be remeasured at fair
value each reporting date based on changes in the price of the
Companys common stock and is recorded in the
Companys consolidated statements of operations. The
increase in stock-based compensation for the year ended
August 31, 2010 primarily reflects an increase in the fair
value of outstanding cash settled equity awards, which was
attributable to an increase in the price of the Companys
common stock during the year ended August 31, 2010.
The CODM uses net sales to unaffiliated customers, gross profit
and operating income in order to make decisions, assess
performance and allocate resources to each segment. Certain
portions of the Companys North American operations are not
managed separately and are included in All Other
North America. The Company includes in All Other North
America any administrative costs that are not directly related
or allocated to a North America business unit such as North
American information technology, human resources, accounting and
purchasing. The North American administrative costs are directly
related to the four North American segments. Operating income
before certain items does not include corporate expenses
interest income or expense, other income or expense, foreign
currency transaction gains or losses and other certain items
such as restructuring related expenses, asset write-downs, costs
related to business acquisitions, inventory
step-up, CEO
transition costs, termination of a lease for an airplane and an
insurance claim settlement adjustment. Corporate expenses
include the compensation of certain personnel, certain audit
expenses, board of directors related costs, certain insurance
costs and other miscellaneous legal and professional fees.
29
A reconciliation of operating income (loss) by segment to
consolidated income from continuing operations before taxes is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
Increase
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
EMEA
|
|
$
|
69,393
|
|
|
$
|
50,169
|
|
|
$
|
19,224
|
|
NAMB
|
|
|
11,232
|
|
|
|
2,809
|
|
|
|
8,423
|
|
NAEP
|
|
|
5,202
|
|
|
|
(4,641
|
)
|
|
|
9,843
|
|
NARM
|
|
|
5,260
|
|
|
|
3,082
|
|
|
|
2,178
|
|
APAC
|
|
|
2,981
|
|
|
|
2,807
|
|
|
|
174
|
|
Bayshore
|
|
|
1,990
|
|
|
|
|
|
|
|
1,990
|
|
All other North America
|
|
|
(11,648
|
)
|
|
|
(11,265
|
)
|
|
|
(383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
84,410
|
|
|
|
42,961
|
|
|
|
41,449
|
|
Corporate and other
|
|
|
(20,538
|
)
|
|
|
(18,438
|
)
|
|
|
(2,100
|
)
|
Interest expense, net
|
|
|
(3,665
|
)
|
|
|
(2,437
|
)
|
|
|
(1,228
|
)
|
Foreign currency transaction gains (losses)
|
|
|
(874
|
)
|
|
|
5,645
|
|
|
|
(6,519
|
)
|
Other income (expense)
|
|
|
2,469
|
|
|
|
1,826
|
|
|
|
643
|
|
Asset write-downs
|
|
|
(5,737
|
)
|
|
|
(3,878
|
)
|
|
|
(1,859
|
)
|
Costs related to acquisitions
|
|
|
(6,814
|
)
|
|
|
|
|
|
|
(6,814
|
)
|
Restructuring related
|
|
|
(5,368
|
)
|
|
|
(7,219
|
)
|
|
|
1,851
|
|
Inventory
step-up
|
|
|
(3,942
|
)
|
|
|
|
|
|
|
(3,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
$
|
39,941
|
|
|
$
|
18,460
|
|
|
$
|
21,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA operating income, excluding the impact of the acquired ICO
operations, increased $17.8 million for the year ended
August 31, 2010. The increase was primarily due to the
improvement in gross profit in the EMEA segment primarily
through increased volume, favorable product mix and the
realization of cost-reduction initiatives implemented in the
second quarter of fiscal 2009. The increases in gross profit of
$29.6 million for year ended August 31, 2010 was
partially offset by increases in selling, general and
administrative expenses of $10.4 million for the
corresponding period, excluding the impact of foreign currency
and ICO operations. As noted earlier, the increase in selling,
general and administrative expense was primarily due to
increases in bad debt expense, employee incentive compensation
and stock-based compensation expense. EMEA operating income was
favorably impacted by foreign currency translation gains of
$0.4 million for the year ended August 31, 2010.
Operating income for NAMB, excluding the acquired ICO
operations, increased $8.0 million for the year ended
August 31, 2010 compared with the prior year. The increase
was primarily a result of an increase of $7.6 million in
gross profit and a decrease of $0.4 million in selling,
general and administrative costs.
NAEP segment operating income was $5.2 million for the year
ended August 31, 2010 compared with an operating loss of
$4.6 million for the year ended August 31, 2009. The
improvement was primarily the result of increases in gross
profit of $6.4 million and a decrease of selling, general
and administrative costs of $3.4 million for the year ended
August 31, 2010. The decrease in selling, general and
administrative costs reflect the fiscal 2009 restructuring
initiatives which realigned the NAEP sales, marketing and
technical customer service teams and enabled them to more
effectively focus its customer support on core markets.
Operating income for NARM increased to $5.3 million for the
year ended August 31, 2010 compared to $3.1 million
for the same period in fiscal 2009. The increase in operating
income is primarily due to the ICO acquisition. As mentioned
previously, the ICO North America Rotomolding business was
immediately integrated into the Companys NARM business.
30
The APAC segment had operating income of $3.2 million,
excluding the impact of ICO, for the year ended August 31,
2010 compared with operating income of $2.8 million in the
prior year. The increase in operating income for the period was
primarily the result of improvement in gross profit due to
increased customer demand as discussed previously offset by
increased selling, general and administrative costs, excluding
ICO operations, of $2.9 million for the year ended
August 31, 2010.
Corporate and other includes expenses for compensation of
certain personnel, certain audit expenses, board of directors
related costs, certain insurance costs and other miscellaneous
legal and professional fees. Excluding the impact of ICO
operations, Corporate and other expenses increased
$0.6 million for the year ended August 31, 2010 as
compared to the prior year. These increases were due to
increases in employee incentive compensation and stock-based
compensation expense partially offset by decreases in consulting
costs recorded in fiscal 2009 for consolidation of back-office
operations and strategic alternatives which were not incurred in
fiscal 2010.
ICOs operations subsequent to the acquisition date
contributed $134.2 million in sales, $19.5 million of
gross profit and $4.8 million in operating income to the
Companys consolidated statements of operations for the
year ended August 31, 2010. Operating income for ICO from
April 30, 2010 to August 31, 2010 includes pretax
depreciation and amortization costs of approximately
$5.7 million. This amount includes approximately
$3.4 million of additional costs due to the increased value
of fixed assets and intangibles. Pounds sold related to ICO were
approximately 239.4 million for fiscal year 2010.
Operating income (loss) for the North America segments including
discontinued operations is presented below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
NAMB
|
|
$
|
11,232
|
|
|
$
|
2,809
|
|
NAEP
|
|
|
5,202
|
|
|
|
(4,641
|
)
|
NARM
|
|
|
5,260
|
|
|
|
3,082
|
|
Bayshore
|
|
|
1,990
|
|
|
|
|
|
All other North America
|
|
|
(11,648
|
)
|
|
|
(11,265
|
)
|
Discontinued operations
|
|
|
(1
|
)
|
|
|
(3,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,035
|
|
|
$
|
(13,634
|
)
|
|
|
|
|
|
|
|
|
|
The combined operating income for the North American businesses,
including NAMB, NAEP, NARM, All other North America and
discontinued operations but excluding the impact of ICO, was
$6.9 million for the year ended August 31, 2010
compared with operating losses of $13.6 million for the
year ended August 31, 2009, an improvement of
$20.5 million. This significant improvement was the result
of the cost-reduction initiatives implemented in the second
quarter of fiscal 2009 and the Companys focus on
value-added products.
Interest expense increased $0.2 million for the year ended
August 31, 2010, as compared with the same period in the
prior year due to increases in the Companys outstanding
debt balance partially offset by lower borrowing rates.
The decrease in interest income for the year ended
August 31, 2010 as compared to the prior year was due
primarily to lower average balances for the Companys cash
and cash equivalent accounts as the Company used available
liquidity to finance the acquisitions of ICO and McCann Color.
Foreign currency transaction gains or losses represent changes
in the value of currencies in major areas where the Company
operates. The Company experienced foreign currency transaction
losses of $0.9 million during the year ended
August 31, 2010 and foreign currency transaction gains of
$5.6 million for the year ended August 31, 2009.
Generally, the foreign currency transaction gains or losses
relate to the changes in the value of the U.S. dollar
compared with the Australian dollar, the Canadian dollar and the
Mexican peso and changes between the euro and other non-euro
European currencies. The Company
31
enters into forward foreign exchange contracts to reduce the
impact of changes in foreign exchange rates on the consolidated
statements of operations. These contracts reduce exposure to
currency movements affecting existing foreign currency
denominated assets and liabilities resulting primarily from
trade receivables and payables. Any gains or losses associated
with these contracts, as well as the offsetting gains or losses
from the underlying assets or liabilities, are recognized on the
foreign currency transaction line in the consolidated statements
of operations.
Other income for the years ended August 31, 2010 and 2009
was $2.4 million and $1.8 million, respectively. Other
income includes $1.0 million and $1.8 million of
income from the cancellation of certain European supplier
distribution agreements for the years ended August 31, 2010
and 2009, respectively.
ASI United
Kingdom Restructuring Plan
On August 31, 2010, management announced restructuring
plans for its operations at its Crumlin, South Wales (U.K.)
plant. The plans include moving part of the plants
capacity to two other, larger plants in Europe, and a production
line will be shut down. As a result, the Company will reduce
headcount at this location by approximately 30. The Company will
continue to enhance the capabilities of the Crumlin plant to
produce smaller lots of colors and other specialty compounds for
the local market. The Company recorded approximately
$0.4 million in pretax restructuring costs for
employee-related costs. The Company anticipates approximately
$0.2 million in accelerated depreciation to be recorded
over the next few quarters.
ICO New Zealand
Restructuring Plan
In March 2010, ICO management decided to close its operations at
its plant in New Zealand. Production ceased as of March 31,
2010, which involved a reduction in workforce of 15. Since
May 1, 2010, the Company recorded approximately
$0.3 million related to a lease termination fee and other
restructuring charges related to the New Zealand restructuring
plan. All costs incurred were settled during the fiscal year and
no accrual remains for this plan as of August 31, 2010. The
closure of the New Zealand operations was completed during
the fourth quarter of fiscal 2010; therefore, the Company does
not expect to incur any further charges.
ICO Merger
Restructuring Plan
In conjunction with the merger with ICO, the Company reduced the
workforce in the Houston, Texas office by 17. ICO had
preexisting arrangements regarding
change-in-control
payments and severance pay which were based on pre-merger
service. The Company assumed $2.1 million in liabilities as
a result of the merger related to these agreements, of which
$2.0 million was paid by the Company during fiscal 2010. On
August 31, 2010, the Company announced the exit of two
senior managers in Europe in connection with the Companys
ongoing integration of ICO operations. The Company recorded
approximately $1.7 million primarily in pretax
employee-related costs during fiscal 2010 related to the
integration of ICO. The Company has approximately
$0.5 million remaining accrued for the ICO merger plan as
of August 31, 2010, to be paid over the first three
quarters of fiscal 2011. The Company expects minimal remaining
charges to be incurred into late fiscal 2011.
NAMB Fiscal 2010
Restructuring Plan
On March 1, 2010, the Company announced the closure of its
Polybatch Color Center located in Sharon Center, Ohio, which is
a plant in the NAMB segment. The Company recorded pretax
restructuring expenses of $1.3 million during fiscal 2010
primarily for employee-related costs associated with the
closure. As of August 31, 2010, approximately
$0.6 million remains accrued which the Company expects to
pay during the first quarter of fiscal 2011. The Company ceased
production at the Polybatch Color Center on August 31,
2010. The Company expects additional charges of less than
$0.3 million related to this initiative, before income tax,
to be recognized primarily during early fiscal 2011 as it
completes the shutdown procedures.
32
Fiscal 2009
Restructuring Plan
During fiscal 2009, the Company announced various plans to
realign its domestic and international operations to strengthen
the Companys performance and financial position. The
Company initiated these proactive actions to address the then
weak global economic conditions and improve the Companys
competitive position. The actions included a reduction in
capacity and workforce reductions in manufacturing, selling and
administrative positions throughout Europe and
North America. In addition, in fiscal 2010, the Company
completed the previously announced consolidation of its
back-office operations in Europe, which include finance and
accounting functions, to a shared service center located in
Belgium.
The Company reduced its workforce by approximately 190 positions
worldwide during fiscal 2009, primarily as a result of the
actions taken in early fiscal 2009 to realign the Companys
operations and back-office functions. In addition, to further
manage costs during a period of significant declines in demand
primarily in the second quarter of fiscal 2009, the
Companys major European locations implemented a
short work schedule when necessary and the NAEP
segment reduced shifts from seven to five days at its Nashville,
Tennessee plant. Also in the NAEP segment, the Company reduced
production capacity by temporarily idling one manufacturing
line, while permanently shutting down another line at its plant
in Bellevue, Ohio. The Company completed the right-sizing and
redesign of its Italian plant, which resulted in less than
$0.1 million of accelerated depreciation on certain fixed
assets during the first quarter of fiscal 2010.
The Company recorded approximately $0.6 million for
employee-related costs and $0.6 million for contract
termination and other restructuring costs related to the fiscal
2009 initiatives during fiscal 2010. Accelerated depreciation
included in cost of sales of $0.1 million was also recorded
during fiscal 2010. Nearly all restructuring charges recorded
for the fiscal 2009 Plan during fiscal 2010 were related to the
EMEA segment; however, minimal charges were also recorded
related to the NAEP segment.
The costs associated with the fiscal 2009 initiatives were
primarily recorded in fiscal 2009; therefore, the following
table was included to summarize the fiscal 2009 charges by
segment for these initiatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other
|
|
|
Accelerated
|
|
|
|
|
|
|
|
|
|
Related
|
|
|
Depreciation
|
|
|
|
|
|
|
Employee-
|
|
|
Restructuring
|
|
|
Included in
|
|
|
|
|
Fiscal 2009 Charges
|
|
Related Costs
|
|
|
Costs
|
|
|
Cost of Sales
|
|
|
Total
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
3.3
|
|
|
$
|
0.7
|
|
|
$
|
0.1
|
|
|
$
|
4.1
|
|
NAMB
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
NAEP
|
|
|
2.4
|
|
|
|
1.7
|
|
|
|
1.2
|
|
|
|
5.3
|
|
All other North America
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring related charges for the fiscal 2009 actions
|
|
$
|
5.9
|
|
|
$
|
2.4
|
|
|
$
|
1.3
|
|
|
$
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2010, approximately $0.3 million
remains accrued for employee-related costs, including estimated
severance payments and medical insurance, and contract
termination costs related to the fiscal 2009 initiatives. The
Company anticipates the majority of the remaining accrued
balance for restructuring charges will be paid during the first
half of fiscal 2011.
The Company charges related to the plans initiated in fiscal
2009 to reduce capacity and headcount at certain international
locations were substantially complete as of the end of fiscal
2010.
Fiscal 2008
Restructuring Plan
In January 2008, the Company announced two steps in its
continuing effort to improve the profitability of its North
American operations. The Company announced it would shut down
its manufacturing facility in St. Thomas, Ontario, Canada and
would pursue a sale of its manufacturing
33
facility in Orange, Texas. All the restructuring costs related
to the sale of the Orange, Texas and the St. Thomas,
Ontario, Canada facilities are related to the NAEP segment.
The Orange, Texas facility primarily provided North American
third-party tolling services in which the Company processed
customer-owned materials for a fee. Total annual capacity at the
Orange, Texas facility was approximately 135 million pounds
and employed approximately 100 employees. The Company
completed the sale of this facility in March 2008 for total
consideration of $3.7 million.
The St. Thomas, Ontario, Canada facility primarily produced
engineered plastics for the automotive market, with a capacity
of approximately 74 million pounds per year and employed
approximately 120 individuals. The facility was shutdown at
the end of June 2008 and the Company finalized closing
procedures in fiscal 2010.
The Company recorded approximately $0.2 million of
employee-related charges related to the fiscal 2008 initiatives
during fiscal 2010. Approximately $0.4 million remains
accrued for employee-related costs as of August 31, 2010
related to the fiscal 2008 initiatives. The Company recorded
approximately $0.2 million for employee-related costs and
$0.1 million for contract termination and other
restructuring costs during fiscal 2009. During the year ended
August 31, 2008, the Company recorded approximately
$6.4 million in employee-related costs, which include
estimated severance payments and medical insurance for
approximately 135 employees, whose positions were
eliminated at the Orange, Texas and St. Thomas, Ontario, Canada
facilities.
The following table summarizes the liabilities as of
August 31, 2010 related to the Companys restructuring
plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
|
|
|
|
|
|
|
|
|
Accrual
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
August 31,
|
|
|
Fiscal 2009
|
|
|
Fiscal 2009
|
|
|
August 31,
|
|
|
Acquired ICO
|
|
|
Fiscal 2010
|
|
|
Fiscal 2010
|
|
|
August 31,
|
|
|
|
2008
|
|
|
Charges
|
|
|
Paid
|
|
|
2009
|
|
|
Accrual
|
|
|
Charges
|
|
|
Paid
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-related costs
|
|
$
|
2,857
|
|
|
$
|
6,012
|
|
|
$
|
(4,421
|
)
|
|
$
|
4,448
|
|
|
$
|
2,060
|
|
|
$
|
4,024
|
|
|
$
|
(6,168
|
)
|
|
$
|
4,364
|
|
Other costs
|
|
|
|
|
|
|
2,653
|
|
|
|
(2,263
|
)
|
|
|
390
|
|
|
|
|
|
|
|
1,030
|
|
|
|
(3,506
|
)
|
|
|
(2,086
|
)
|
Translation effect
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
$
|
2,835
|
|
|
$
|
8,665
|
|
|
$
|
(6,684
|
)
|
|
$
|
4,880
|
|
|
$
|
2,060
|
|
|
$
|
5,054
|
|
|
$
|
(9,674
|
)
|
|
$
|
2,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded approximately $5.7 million and
$2.6 million in asset impairments during the years ended
August 31, 2010 and 2009, respectively, excluding
impairments recorded in discontinued operations.
In fiscal 2010, a long-lived asset held for sale was written
down to its estimated fair value of $1.1 million resulting
in an asset impairment charge of $0.3 million. The
assets estimated fair value was determined as the
estimated sales value of the asset less associated costs to sell
the asset and was determined based on Level 3 inputs
obtained from a third-party purchase offer.
During fiscal 2010, the Company recorded approximately
$5.4 million of asset impairment charges related to assets
held and used associated with the closure of the Companys
Polybatch Color Center located in Sharon Center, Ohio. The
impaired assets include real estate and certain machinery and
equipment. The fair value of the real estate, which includes
land, building and related improvements, was determined as the
estimated sales value of the assets less the costs to sell and
was determined using Level 3 inputs based on information
provided by a third-party real estate valuation source. The fair
value of the machinery and equipment, which will be sold or
disposed of after the Company ceases production, was determined
using Level 3 inputs based on projected cash flows from
operations and estimated salvage value.
The Companys $2.6 million in impairments for fiscal
2009 in continuing operations were primarily related to
properties which were considered held for sale including the St.
Thomas, Ontario, Canada
34
facility and the Orange, Texas warehouse. The asset impairments
in fiscal 2009 were based on third party appraisals. The Company
recorded $10.3 million of asset impairments for the year
ended August 31, 2009 for certain Invision assets included
in discontinued operations.
As of August 31, 2010, the Companys facilities in
Findlay, Ohio and Sharon Center, Ohio, and certain equipment
related to Invision are considered held for sale. The net book
value of these assets held for sale after impairment is
approximately $5.5 million which is included in the
property, plant and equipment line item in the Companys
consolidated balance sheet as of August 31, 2010 due to the
immaterial amount. Of the assets held for sale, only Invision is
included in discontinued operations on the Companys
consolidated statements of operations.
During the fourth quarter of fiscal 2010, the Company recorded a
curtailment loss of $0.3 million as a result of a
significant reduction in the expected years of future service,
primarily due to the European restructuring plan which includes
the planned elimination of certain positions in the
Companys Crumlin, South Wales subsidiary. During the
second quarter of fiscal 2009, the Company recorded a
curtailment gain of $2.6 million as a result of a
significant reduction in the expected years of future service,
primarily due to the U.S. restructuring plan for the NAEP
segment that was announced in December 2008. During the fourth
quarter of fiscal 2009, the Company recorded a curtailment gain
of $0.2 million as a result of a significant reduction in
the expected years of future service, primarily due to the
European restructuring plan which included the elimination of
certain positions in the Companys Paris, France subsidiary
as a result of the consolidation of back-office operations to
the Companys European shared service center.
A reconciliation of the statutory U.S. federal income tax
rate with the effective tax rates of (11.1)% in 2010 and 37.5%
in 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
(In thousands, except for %s)
|
|
|
Statutory U.S. tax rate
|
|
$
|
13,979
|
|
|
|
35.0
|
%
|
|
$
|
6,461
|
|
|
|
35.0
|
%
|
Amount of taxes at less than U.S. statutory tax rate
|
|
|
(16,190
|
)
|
|
|
(40.5
|
)
|
|
|
(12,258
|
)
|
|
|
(66.4
|
)
|
U.S. and foreign losses with no tax benefit
|
|
|
9,551
|
|
|
|
23.9
|
|
|
|
13,135
|
|
|
|
71.1
|
|
U.S. restructuring and other U.S. unusual charges with no benefit
|
|
|
4,820
|
|
|
|
12.1
|
|
|
|
1,003
|
|
|
|
5.5
|
|
Italy valuation allowance
|
|
|
1,715
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
Establishment (resolution) of uncertain tax positions
|
|
|
33
|
|
|
|
0.1
|
|
|
|
(1,584
|
)
|
|
|
(8.6
|
)
|
ICO historical tax attributes
|
|
|
3,250
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
U.S. valuation allowance reversal
|
|
|
(22,156
|
)
|
|
|
(55.5
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
579
|
|
|
|
1.4
|
|
|
|
174
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,419
|
)
|
|
|
(11.1
|
)%
|
|
$
|
6,931
|
|
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In recent years, the Companys U.S. operations have
generated federal tax net operating losses, before considering
dividend income from foreign subsidiaries. Such net operating
losses are offset against the foreign dividend income, which
would otherwise generate U.S. taxable income. The dividend
income from foreign subsidiaries also generates foreign tax
credits, which either partially offset the tax on any
U.S. taxable income remaining after the offset of the net
operating losses, or are carried forward. For the current year,
the U.S. tax liability associated with foreign dividends could
not entirely be offset by foreign tax credits due to certain
historical tax attributes of ICO. The net effect of foreign
dividends received from foreign countries is to place the
Company into a position in which it does not generate net
operating loss carryforwards for its U.S. operating losses.
The Company recorded a deferred tax liability for the
U.S. tax impact on projected fiscal 2011 distributions
expected to be paid out of prior year earnings from certain
subsidiaries. It is expected that the U.S. tax liability on
the distributions can be fully offset by foreign tax credit
carryforwards for
35
which a full valuation allowance was previously recorded. It is
now more-likely-than-not that these foreign tax credits
carryforwards, equal to the deferred tax liability recorded for
the U.S. tax impact of the distributions, will be realized,
resulting in a reduction of the U.S. valuation allowance.
The Company established a valuation allowance against the
deferred tax assets of its Italian entity during fiscal 2010 due
to the recent losses in that jurisdiction, resulting in a tax
charge of approximately $1.7 million to record a valuation
allowance against the deferred tax assets that were recorded as
of the beginning of the year. Additionally, no tax benefits were
recognized for additional deferred tax assets generated during
the year. The Company will continue to maintain a valuation
allowance against these deferred tax assets until it is
more-likely than not that the Company will realize a benefit
through the reduction of future tax liabilities.
The Company recorded a tax benefit of approximately
$22.2 million during fiscal 2010 for the reversal of
valuation allowance in the U.S. relating to the ICO
acquisition. Previously, the Company had a full valuation
allowance against the U.S. deferred tax assets because it
was not more-likely-than-not that they would be realized.
Certain U.S. deferred tax assets that existed prior to the
acquisition can now be realized as a result of future reversals
of the deferred tax liabilities of ICO. It is now
more-likely-than-not that certain deferred tax assets will be
realized, therefore, a significant reduction in the
U.S. valuation allowance was recorded resulting in a
$22.2 million non-cash tax benefit.
Discontinued operations reflect the operating results for the
former Invision segment of the Companys business. During
fiscal 2010, the Company completed the closing of its Invision
sheet manufacturing operation at its Sharon Center, Ohio
manufacturing facility.
Noncontrolling interests represent a 30% equity position of
Mitsubishi Chemical MKV Company in a partnership with the
Company and a 35% equity position of P.T. Prima Polycon
Indah in an Indonesian joint venture with the Company.
36
The Company uses the following non-GAAP financial measure of net
income before certain items and net income per diluted share
before certain items. These financial measures are used by
management to monitor and evaluate the ongoing performance of
the Company and to allocate resources. They believe that the
additional measures are useful to investors for financial
analysis. However, non-GAAP measures are not in accordance with,
nor are they a substitute for, GAAP measures. The table below
reconciles net income before certain items and net income per
diluted share before certain items to net income (loss) and net
income (loss) per diluted share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Costs
|
|
|
|
|
|
|
|
|
Tax
|
|
|
Before
|
|
|
|
As
|
|
|
Write-
|
|
|
Related to
|
|
|
Restructuring
|
|
|
Inventory
|
|
|
Benefits
|
|
|
Certain
|
|
Year Ended August 31, 2010
|
|
Reported
|
|
|
Downs
|
|
|
Acquisitions
|
|
|
Related
|
|
|
Step-Up
|
|
|
(Charges)
|
|
|
Items
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
1,590,443
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,590,443
|
|
Cost of sales
|
|
|
1,357,575
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,942
|
)
|
|
|
|
|
|
|
1,353,564
|
|
Selling, general and administrative expenses
|
|
|
179,821
|
|
|
|
|
|
|
|
(6,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,007
|
|
Interest expense, net
|
|
|
3,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,665
|
|
Foreign currency transaction (gains) losses
|
|
|
874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
874
|
|
Other (income) expense
|
|
|
(2,425
|
)
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,469
|
)
|
Restructuring expense
|
|
|
5,054
|
|
|
|
|
|
|
|
|
|
|
|
(5,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment
|
|
|
5,668
|
|
|
|
(5,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment loss
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,550,502
|
|
|
|
(5,737
|
)
|
|
|
(6,814
|
)
|
|
|
(5,368
|
)
|
|
|
(3,942
|
)
|
|
|
|
|
|
|
1,528,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
39,941
|
|
|
|
5,737
|
|
|
|
6,814
|
|
|
|
5,368
|
|
|
|
3,942
|
|
|
|
|
|
|
|
61,802
|
|
Provision for (benefit from) U.S. and foreign income taxes
|
|
|
(4,419
|
)
|
|
|
127
|
|
|
|
6
|
|
|
|
1,198
|
|
|
|
1,036
|
|
|
|
15,448
|
|
|
|
13,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
44,360
|
|
|
|
5,610
|
|
|
|
6,808
|
|
|
|
4,170
|
|
|
|
2,906
|
|
|
|
(15,448
|
)
|
|
|
48,406
|
|
Income (loss) from discontinued operations, net of tax of $0
|
|
|
(239
|
)
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
44,121
|
|
|
|
5,847
|
|
|
|
6,808
|
|
|
|
4,170
|
|
|
|
2,906
|
|
|
|
(15,448
|
)
|
|
|
48,404
|
|
Noncontrolling interests
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to A. Schulman, Inc.
|
|
|
43,900
|
|
|
|
5,847
|
|
|
|
6,808
|
|
|
|
4,170
|
|
|
|
2,906
|
|
|
|
(15,448
|
)
|
|
|
48,183
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to A. Schulman, Inc. common
stockholders
|
|
$
|
43,900
|
|
|
$
|
5,847
|
|
|
$
|
6,808
|
|
|
$
|
4,170
|
|
|
$
|
2,906
|
|
|
$
|
(15,448
|
)
|
|
$
|
48,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS impact
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding -diluted
|
|
|
27,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,976
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Costs
|
|
|
|
|
|
|
|
|
Tax
|
|
|
Before
|
|
|
|
As
|
|
|
Write-
|
|
|
Related to
|
|
|
Restructuring
|
|
|
Inventory
|
|
|
Benefits
|
|
|
Certain
|
|
Year Ended August 31, 2009
|
|
Reported
|
|
|
Downs
|
|
|
Acquisitions
|
|
|
Related
|
|
|
Step-Up
|
|
|
(Charges)
|
|
|
Items
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
1,279,248
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,279,248
|
|
Cost of sales
|
|
|
1,109,211
|
|
|
|
(1,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,107,941
|
|
Selling, general and administrative expenses
|
|
|
148,143
|
|
|
|
|
|
|
|
|
|
|
|
(1,359
|
)
|
|
|
|
|
|
|
|
|
|
|
146,784
|
|
Interest expense, net
|
|
|
2,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,437
|
|
Foreign currency transaction (gains) losses
|
|
|
(5,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,645
|
)
|
Other (income) expense
|
|
|
(1,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,826
|
)
|
Restructuring expense
|
|
|
8,665
|
|
|
|
|
|
|
|
|
|
|
|
(8,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment
|
|
|
2,608
|
|
|
|
(2,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain
|
|
|
(2,805
|
)
|
|
|
|
|
|
|
|
|
|
|
2,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,260,788
|
|
|
|
(3,878
|
)
|
|
|
|
|
|
|
(7,219
|
)
|
|
|
|
|
|
|
|
|
|
|
1,249,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
18,460
|
|
|
|
3,878
|
|
|
|
|
|
|
|
7,219
|
|
|
|
|
|
|
|
|
|
|
|
29,557
|
|
Provision for U.S. and foreign income taxes
|
|
|
6,931
|
|
|
|
479
|
|
|
|
|
|
|
|
1,724
|
|
|
|
|
|
|
|
|
|
|
|
9,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
11,529
|
|
|
|
3,399
|
|
|
|
|
|
|
|
5,495
|
|
|
|
|
|
|
|
|
|
|
|
20,423
|
|
Income (loss) from discontinued operations, net of tax of $0
|
|
|
(13,956
|
)
|
|
|
10,317
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
(3,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,427
|
)
|
|
|
13,716
|
|
|
|
|
|
|
|
5,515
|
|
|
|
|
|
|
|
|
|
|
|
16,804
|
|
Noncontrolling interests
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to A. Schulman, Inc.
|
|
|
(2,776
|
)
|
|
|
13,716
|
|
|
|
|
|
|
|
5,515
|
|
|
|
|
|
|
|
|
|
|
|
16,455
|
|
Preferred stock dividends
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to A. Schulman, Inc. common
stockholders
|
|
$
|
(2,829
|
)
|
|
$
|
13,716
|
|
|
$
|
|
|
|
$
|
5,515
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS impact
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding -diluted
|
|
|
26,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,070
|
|
Net income attributable to the Companys stockholders was
$43.9 million for the year ended August 31, 2010
compared with a $2.8 million net loss for the year ended
August 31 2009, an improvement of $46.7 million. Net income
was favorably impacted by foreign currency translation of
$0.6 million for the year ended August 31, 2010. Net
income attributable to the Companys stockholders before
certain items was $48.2 million for the year ended
August 31, 2010 compared with $16.4 million for the
year ended August 31 2009, an improvement of $31.8 million.
Certain items including asset write-downs, restructuring related
costs and costs related to acquisitions were discussed
previously. Inventory
step-up as a
result of the purchase accounting requirement to fair value all
acquired assets, including inventory, was excluded as this
processed through the Companys cost of sales during fiscal
2010. Tax
38
benefits (charges) resulted primarily from $22.2 million of
a tax benefit recognized for the release of the valuation
allowance in the U.S. relating to the ICO acquisition
offset by additional expense of $3.5 million related to
establishment of a valuation allowance against deferred tax
assets in Italy.
RESULTS OF
OPERATIONS 2009
The year ended August 31, 2009 was a year of global
economic crisis which caused a significant decline in demand for
the Companys product and sales declined 35.5%. Overall
tonnage was down 26.6% driven by low demand primarily in the
second quarter of fiscal 2009.
A comparison of consolidated net sales by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Due to
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
% Due to
|
|
|
% Due to
|
|
|
price/product
|
|
Sales
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
%
|
|
|
tonnage
|
|
|
translation
|
|
|
mix
|
|
|
|
|
|
|
|
|
|
(In thousands, except for %s)
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
935,895
|
|
|
$
|
1,454,635
|
|
|
$
|
(518,740
|
)
|
|
|
(35.7
|
)%
|
|
|
(21.3
|
)%
|
|
|
(8.0
|
)%
|
|
|
(6.4
|
)%
|
NAMB
|
|
|
108,474
|
|
|
|
136,124
|
|
|
|
(27,650
|
)
|
|
|
(20.3
|
)%
|
|
|
(22.1
|
)%
|
|
|
(12.0
|
)%
|
|
|
13.8
|
%
|
NAEP
|
|
|
121,701
|
|
|
|
211,259
|
|
|
|
(89,558
|
)
|
|
|
(42.4
|
)%
|
|
|
(53.3
|
)%
|
|
|
(3.2
|
)%
|
|
|
14.1
|
%
|
NARM
|
|
|
67,920
|
|
|
|
131,811
|
|
|
|
(63,891
|
)
|
|
|
(48.5
|
)%
|
|
|
(42.1
|
)%
|
|
|
(0.2
|
)%
|
|
|
(6.2
|
)%
|
APAC
|
|
|
45,258
|
|
|
|
49,766
|
|
|
|
(4,508
|
)
|
|
|
(9.1
|
)%
|
|
|
(10.5
|
)%
|
|
|
1.7
|
%
|
|
|
(0.3
|
)%
|
Bayshore
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,279,248
|
|
|
$
|
1,983,595
|
|
|
$
|
(704,347
|
)
|
|
|
(35.5
|
)%
|
|
|
(26.6
|
)%
|
|
|
(7.0
|
)%
|
|
|
(1.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the difficult economic conditions experienced in fiscal
2009, management believes segment performance in each of the
quarters to be an important comparison between 2009 and 2008.
The individual segments all experienced a decline in sales over
fiscal 2008. The second quarter of fiscal 2009 was especially
low for the Company, as the economic downturn worsened. However,
the EMEA, APAC and NAMB segments were each able to start to
rebuild sales in the third and fourth quarters through
sequential improvement.
A portion of the NAEP decline was planned due to the
Companys fiscal 2008 actions to sell the Companys
Orange, Texas manufacturing business in March 2008 and to close
the Companys St. Thomas, Ontario, Canada manufacturing
facility in June 2008, both NAEP facilities. These actions were
a result of a strategic decision to reduce the Companys
exposure to certain unprofitable markets, such as
North American automotive and North American tolling, and
focus its effort on more profitable market opportunities.
The Companys NARM segment experienced lower sales as a
result of a decline in demand of large volume sales. However,
the NARM segment began to see some recovery in sales in the
fourth quarter of fiscal 2009.
The Companys APAC segment, while it experienced a 10.5%
decline in tonnage, was impacted to a lesser extent by the
global decline in demand compared to the other Company segments.
The APAC segment was able to exceed fourth quarter 2008 sales in
the fourth quarter of fiscal 2009.
The two largest markets served by the Company are the packaging
and automotive markets. Other markets include agriculture,
appliances, medical, consumer products, electrical/electronics
and office equipment. The approximate percentage of consolidated
net sales by market for 2009 compared to 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Packaging
|
|
|
43
|
%
|
|
|
38
|
%
|
Automotive
|
|
|
12
|
%
|
|
|
15
|
%
|
Other
|
|
|
45
|
%
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
39
The North America segments include sales to customers in the
automotive market amounting to approximately 28% and 33% for the
years ended August 31, 2009 and 2008, respectively. The
Company has strategically decreased its exposure to the
U.S. automotive market, as this market continues to be
under severe stress. For the EMEA segment, sales to customers in
the packaging market amounted to approximately 45% and 40% for
the years ended August 31, 2009 and 2008, respectively. The
Companys APAC segment had approximately 86% and 93% of its
sales from the packaging market for the years ended
August 31, 2009 and 2008, respectively.
The majority of the Companys sales for the year ended
August 31, 2009 and 2008 can be classified into four
primary product families. The amount and percentage of
consolidated sales for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except for %s)
|
|
|
Masterbatch
|
|
$
|
574,641
|
|
|
|
45
|
%
|
|
$
|
735,738
|
|
|
|
37
|
%
|
Engineered Plastics
|
|
|
382,709
|
|
|
|
30
|
|
|
|
615,672
|
|
|
|
31
|
|
Rotomolding
|
|
|
30,312
|
|
|
|
2
|
|
|
|
55,572
|
|
|
|
3
|
|
Distribution
|
|
|
291,586
|
|
|
|
23
|
|
|
|
576,613
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,279,248
|
|
|
|
100
|
%
|
|
$
|
1,983,595
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A comparison of gross profit dollars by segment for the years
ended August 31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
Increase (Decrease)
|
|
Gross Profit $
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except for %s)
|
|
|
EMEA
|
|
$
|
141,137
|
|
|
$
|
194,383
|
|
|
$
|
(53,246
|
)
|
|
|
(27.4
|
)%
|
NAMB
|
|
|
8,279
|
|
|
|
12,231
|
|
|
|
(3,952
|
)
|
|
|
(32.3
|
)
|
NAEP
|
|
|
8,849
|
|
|
|
13,846
|
|
|
|
(4,997
|
)
|
|
|
(36.1
|
)
|
NARM
|
|
|
6,670
|
|
|
|
10,013
|
|
|
|
(3,343
|
)
|
|
|
(33.4
|
)
|
APAC
|
|
|
6,372
|
|
|
|
5,530
|
|
|
|
842
|
|
|
|
15.2
|
|
Bayshore
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment gross profit
|
|
|
171,307
|
|
|
|
236,003
|
|
|
|
(64,696
|
)
|
|
|
(27.4
|
)%
|
Asset write-downs
|
|
|
(1,270
|
)
|
|
|
|
|
|
|
(1,270
|
)
|
|
|
|
|
Restructuring related
|
|
|
|
|
|
|
(1,473
|
)
|
|
|
1,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
170,037
|
|
|
$
|
234,530
|
|
|
$
|
(64,493
|
)
|
|
|
(27.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A comparison of gross profit percentages by segment for the
years ended August 31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
Gross Profit %
|
|
2009
|
|
2008
|
|
EMEA
|
|
|
15.1
|
%
|
|
|
13.4
|
%
|
NAMB
|
|
|
7.6
|
%
|
|
|
9.0
|
%
|
NAEP
|
|
|
7.3
|
%
|
|
|
6.6
|
%
|
NARM
|
|
|
9.8
|
%
|
|
|
7.6
|
%
|
APAC
|
|
|
14.1
|
%
|
|
|
11.1
|
%
|
Bayshore
|
|
|
n/a
|
|
|
|
n/a
|
|
Consolidated
|
|
|
13.4
|
%
|
|
|
11.9
|
%
|
The Company generally experienced sequential improvement in
gross profit dollars and percentages in its segments from second
quarter through the fourth quarter of fiscal 2009. The
Companys APAC segment declined only slightly in gross
profit dollars and percentages in the fourth quarter of fiscal
2009
40
compared to third quarter of fiscal 2009, but increased
significantly over fourth quarter of fiscal 2008. The
Companys NAMB segment gross profit increased 60% in the
fourth quarter of fiscal 2009 over the fourth quarter of fiscal
2008 as the effects of the Companys initiatives to reduce
costs were realized.
The gross profit percentages for EMEA for the year ended
August 31, 2009 increased to 15.1% compared with 13.4% in
the prior year. The Company was able to increase gross profit
percentage in the EMEA segment primarily through favorable
product mix and cost reduction programs initiated throughout
fiscal 2009. The Company was also encouraged by these results
considering they were achieved during a period of significant
decline in demand resulting in lower gross profits. In addition,
EMEA gross profits were negatively impacted by foreign currency
translation losses of $16.2 million for the year ended
August 31, 2009. The Company implemented measures to reduce
fixed manufacturing costs by temporarily reducing capacity and
headcount during the second quarter of fiscal 2009 and
scheduling some manufacturing facilities on a
four-day
work week as necessary.
The gross profit dollars for the NAMB business declined
$4.0 million for the year ended August 31, 2009
compared with the prior year. The decrease in gross profit
dollars for NAMB is primarily the result of demand declines. In
addition, the effect of foreign currency translation losses
decreased NAMB gross profit by $2.9 million in fiscal 2009.
The NAMB gross profit percentage declined to 7.6% for fiscal
2009 from 9.0% in the prior year. The Company was not able to
reduce manufacturing costs as quickly as the decline in demand,
which negatively impacted the gross profit primarily in the
second quarter of fiscal 2009. The gross profit for NAMB also
includes approximately $0.9 million of
start-up
costs for the year ended August 31, 2009 related to the
Companys new masterbatch facility in Akron, Ohio. These
costs were recognized primarily in the first six months of
fiscal 2009.
The gross profit dollars for the NAEP business have declined
$5.0 million, or 36.1%, for the year ended August 31,
2009, compared with fiscal 2008. A portion of this decline was
planned as a result of the restructuring announced in fiscal
2008 which included the shutdown of the St. Thomas, Ontario,
Canada facility and the sale of the Orange, Texas facility. The
decline in gross profit dollars for NAEP are primarily related
to significant declines in demand as well as the planned tonnage
declines. The lower demand resulted in the inability to absorb
the majority of overhead costs. The NAEP gross profit percentage
was 7.3% in fiscal 2009 and 6.6% in fiscal 2008. The Company was
encouraged that the NAEP segment was able to maintain gross
profit percentages during a significant decline in demand as
experienced in fiscal 2009. This was achieved through focusing
on higher-value-added products and improving utilization of the
NAEP facilities, primarily in the latter half of fiscal 2009. In
order to offset the effects of weakening markets, in December
2008, the Company announced further restructuring efforts that
reduced capacity and headcount in this segment.
The gross profit dollars for the NARM business have declined
$3.3 million, or 33.4%, for the year ended August 31,
2009 compared with last year. However, the NARM segment was able
to increase margins in the weak market primarily as a result of
favorable product mix.
The Companys APAC segment gross profit dollars increased
15.2% for the year ended August 31, 2009. The increase in
gross profit dollars and percentage is primarily a result of
reduced manufacturing costs and improved supply chain management.
41
The Companys practical capacity is not based on a
theoretical
24-hour,
seven-day
operation; rather, it is determined as the production level at
which the manufacturing facilities can operate with an
acceptable degree of efficiency, taking into consideration
factors such as longer term customer demand, permanent staffing
levels, operating shifts, holidays, scheduled maintenance and
mix of product. Capacity utilization is calculated by dividing
actual production pounds by practical capacity at each plant. A
comparison of capacity utilization levels is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
August 31,
|
|
|
2009
|
|
2008
|
|
EMEA
|
|
|
75
|
%
|
|
|
89
|
%
|
NAMB
|
|
|
67
|
%
|
|
|
101
|
%
|
NAEP
|
|
|
63
|
%
|
|
|
75
|
%
|
NARM
|
|
|
n/a
|
|
|
|
n/a
|
|
APAC
|
|
|
61
|
%
|
|
|
66
|
%
|
Bayshore
|
|
|
n/a
|
|
|
|
n/a
|
|
Worldwide
|
|
|
72
|
%
|
|
|
85
|
%
|
The Companys overall worldwide utilization declined
compared with the prior year due to a dramatic decrease in
demand resulting from the challenging marketplace. Worldwide
capacity utilization, although having suffered earlier in fiscal
2009, rebounded in the fourth quarter of fiscal 2009 to exceed
earlier fiscal 2009 quarters and the prior year fourth quarter
as the Company realized some increase in demand later in the
year. Each of the Companys segments experienced sequential
quarterly improvement in their capacity utilizations after the
second quarter of fiscal 2009. Capacity utilization is
calculated by dividing actual production pounds by practical
capacity at each plant.
EMEA capacity utilization declined for the 2009 fiscal year
compared with the prior year primarily as a result of the
significant global economic slowdown and the Companys
working capital initiatives to reduce inventory. The volumes
were especially low during the second quarter of fiscal 2009 as
some customers reduced production for extended periods of time.
The capacity utilization for EMEA increased in the fourth
quarter compared with earlier fiscal 2009 quarters and the prior
year fourth quarter as the Company experienced an increase in
demand.
The capacity utilization for NAMB declined significantly during
fiscal 2009 compared with the prior year due to the weak North
America marketplace. In addition, the
start-up of
the Akron, Ohio plant in the second quarter of fiscal 2009 and
efforts to reduce inventory impacted the utilization of the
plants for NAMB. Capacity utilization for the NAEP segment
decreased for fiscal 2009 compared with prior year as a result
of the weak marketplace. However, the restructuring efforts
announced in fiscal 2008 and fiscal 2009 to close the
Companys St. Thomas, Ontario, Canada facility, the sale of
the Companys Orange, Texas facility and a line shutdown in
the Bellevue, Ohio facility helped mitigate the decline. As a
result of the reductions, annual capacity in the North America
segments declined 134.4 million pounds. In addition, the
fourth quarter of fiscal 2009 showed improved capacity
utilization levels as compared with prior year fourth quarter
and earlier fiscal 2009 quarters.
The Companys APAC segment experienced lower capacity
utilization in the earlier quarters of fiscal 2009, as a result
of the weakened global markets and initiatives to reduce
inventory. However, the APAC segment significantly increased its
capacity utilization levels in the fourth quarter compared with
earlier fiscal 2009 quarters and the prior year fourth quarter
as a result of a slight rebound in the Asia economy.
42
The changes in selling, general and administrative expenses are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
August 31, 2009
|
|
|
|
$ Decrease
|
|
|
% Decrease
|
|
|
|
(In thousands, except
|
|
|
|
for %s)
|
|
|
Total change in selling, general and administrative expenses
|
|
$
|
(21,132
|
)
|
|
|
(12.5
|
)%
|
Effect of foreign currency translation
|
|
|
(12,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in selling, general and administrative expenses,
excluding the effect of foreign currency translation
|
|
$
|
(8,611
|
)
|
|
|
(5.1
|
)%
|
|
|
|
|
|
|
|
|
|
The Companys decline in selling, general and
administrative expenses was generally a result of the
restructuring initiatives put in place over fiscal years 2008
and 2009, primarily in the Companys North America
segments. The Companys EMEA segment selling, general and
administrative expenses for the year ended August 31, 2009
increased approximately $5.5 million, excluding the effect
of foreign currency translation, compared to the previous year.
This increase is primarily attributable to increased bad debt
expense of approximately $1.6 million due to certain
increased customer financial difficulties. The increase in EMEA
selling, general and administrative expenses also includes costs
to implement the Companys European shared service center
to consolidate back-office operations during fiscal 2009.
Noncontrolling interests represents a 30% equity position of
Mitsubishi Chemical MKV Company in a partnership with the
Company and a 35% equity position of P.T. Prima Polycon
Indah in an Indonesian joint venture with the Company.
Interest expense was $4.8 million and $7.8 million for
the years ended August 31, 2009 and 2008, respectively. The
decrease of $3.0 million is primarily related to the lower
borrowing levels and interest rates as compared to the prior
year.
Foreign currency transaction gains or losses represent changes
in the value of currencies in major areas where the Company
operates. The Company experienced $5.6 million in foreign
currency transaction gains for the year ended August 31,
2009 as compared with foreign currency transaction losses of
$1.1 million for the year ended August 31, 2008. The
foreign currency transaction gains or losses primarily relate to
the changes in the value of the U.S. dollar compared with
the Canadian dollar, the Mexican peso and to a lesser extent the
euro. The Company enters into forward foreign exchange contracts
to reduce the impact of changes in foreign exchange rates on the
consolidated statements of operations. These contracts reduce
exposure to currency movements affecting existing foreign
currency denominated assets and liabilities resulting primarily
from trade receivables and payables. Any gains or losses
associated with these contracts as well as the offsetting gains
or losses from the underlying assets or liabilities are
recognized on the foreign currency transaction line in the
consolidated statements of operations.
The CODM uses net sales to unaffiliated customers, gross profit
and operating income in order to make decisions, assess
performance and allocate resources to each segment. Operating
income before certain items does not include interest income or
expense, other income or expense, foreign currency transaction
gains or losses and other certain items such as restructuring
related expenses, asset write-downs, costs related to business
acquisitions, inventory
step-up, CEO
transition costs, termination of a lease for an airplane and an
insurance claim settlement adjustment. In some cases, the
Company may choose to exclude from a segments results
certain items as determined by management. These items are
included in the Corporate and Other section in the table below.
Corporate expenses include the compensation of certain
personnel, certain audit expenses, board of directors related
costs, certain insurance costs and other miscellaneous legal and
professional fees.
43
A reconciliation of operating income (loss) by segment to
consolidated income from continuing operations before taxes is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
(In thousands)
|
|
|
EMEA
|
|
$
|
50,169
|
|
|
$
|
96,579
|
|
|
$
|
(46,410
|
)
|
NAMB
|
|
|
2,809
|
|
|
|
5,507
|
|
|
|
(2,698
|
)
|
NAEP
|
|
|
(4,641
|
)
|
|
|
(6,587
|
)
|
|
|
1,946
|
|
NARM
|
|
|
3,082
|
|
|
|
5,288
|
|
|
|
(2,206
|
)
|
APAC
|
|
|
2,807
|
|
|
|
2,101
|
|
|
|
706
|
|
Bayshore
|
|
|
|
|
|
|
|
|
|
|
|
|
All other North America
|
|
|
(11,265
|
)
|
|
|
(15,061
|
)
|
|
|
3,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
42,961
|
|
|
|
87,827
|
|
|
|
(44,866
|
)
|
Corporate and other
|
|
|
(18,438
|
)
|
|
|
(16,663
|
)
|
|
|
(1,775
|
)
|
Interest expense, net
|
|
|
(2,437
|
)
|
|
|
(5,476
|
)
|
|
|
3,039
|
|
Foreign currency transaction gains (losses)
|
|
|
5,645
|
|
|
|
(1,133
|
)
|
|
|
6,778
|
|
Other income (expense)
|
|
|
1,826
|
|
|
|
413
|
|
|
|
1,413
|
|
Asset write-downs
|
|
|
(3,878
|
)
|
|
|
(6,363
|
)
|
|
|
2,485
|
|
Restructuring related
|
|
|
(7,219
|
)
|
|
|
(4,531
|
)
|
|
|
(2,688
|
)
|
CEO Transition Costs
|
|
|
|
|
|
|
(3,582
|
)
|
|
|
3,582
|
|
Termination of a lease for an airplane
|
|
|
|
|
|
|
(640
|
)
|
|
|
640
|
|
Insurance claim settlement adjustment
|
|
|
|
|
|
|
(368
|
)
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
$
|
18,460
|
|
|
$
|
49,484
|
|
|
$
|
(31,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA operating income decreased $46.4 million or 48.1%, for
the year ended August 31, 2009 compared with the prior
year. The decrease was primarily due to the recessionary global
marketplace, which significantly reduced demand and resulted in
a decline in gross profit. The EMEA segment selling, general and
administrative costs increased approximately $6.8 million
compared with prior year, excluding the translation effect of
foreign currencies. The EMEA selling, general and administrative
costs for fiscal 2009 include approximately $4.2 million of
incremental costs related to the consolidation of back-office
operations to the Companys European shared service center
which were offset by a decline of $1.2 million in
stock-based compensation costs. The EMEA selling, general and
administrative costs also include $1.6 million of
incremental bad debt expense. During fiscal 2009, the Company
reduced certain selling, general and administrative costs in its
international operations through headcount reductions and
capacity reductions. These actions are expected to be completed
primarily during the first half of fiscal 2010.
Operating income for NAMB decreased $2.7 million for the
year ended August 31, 2009, compared with the prior year.
The NAMB operating income was negatively impacted by the
translation effect of foreign currencies of $2.6 million.
The remaining decrease was primarily a result of the decline in
gross profit due to a decline in demand. The NAMB segment
decreased selling, general and administrative costs by
$0.8 million, excluding the translation effect of foreign
currencies. This decline was primarily a result of actions taken
in fiscal 2009 to realign the Companys international
operations, which include some operations in the NAMB segment,
through headcount reductions and shortened work weeks as
necessary.
The operating loss for the NAEP segment, which is the segment
most exposed to the automotive market, decreased by
$1.9 million for the year ended August 31, 2009
compared with the prior year. The operating losses were
primarily a result of a significant decline in demand; however,
the impact of this decline was lessened due to the
Companys restructuring initiatives in fiscal years 2008
and 2009. The
44
selling, general and administrative costs for the NAEP segment
declined $6.9 million, which offset the gross profit
decrease of $5.0 million. The decrease in selling, general
and administrative costs was primarily due to the closing of the
Companys St. Thomas, Ontario, Canada plant and the sale of
the Orange, Texas facility, both of which occurred in fiscal
2008. In addition, the decline included decreased stock-based
compensation costs and other employee compensation and benefits
compared with last year. Unprecedented declines in demand
resulted in additional planned capacity reductions that were
announced in December 2008.
The decline in the operating income for NARM in fiscal 2009 was
due to the decline in gross profit dollars as a result of the
decline in demand. The declines in gross profits were partially
offset by $1.1 million lower selling, general and
administrative costs compared with prior year. The decrease in
selling, general and administrative costs was primarily due to a
decline in stock-based compensation costs and a reduction in the
Companys qualified retirement plan costs compared with
last year.
The APAC segment experienced an increase in operating income for
the year ended August 31, 2009. The increase was a result
of improved gross profit from reduced manufacturing costs and
improved supply chain management.
The decline in the costs associated with All Other North America
of $3.8 million include a reduction in the Companys
qualified retirement plan costs and a decline of
$1.2 million in stock-based compensation costs compared
with last year.
FISCAL 2009
RESTRUCTURING PLAN
During fiscal 2009, the Company announced various plans to
realign its domestic and international operations to strengthen
the Companys performance and financial position. The
Company initiated these proactive actions to address the current
global economic conditions and improve the Companys
competitive position. The actions included a reduction in
capacity and workforce reductions in manufacturing, selling and
administrative positions throughout Europe and North America. In
addition, the Company is in the process of eliminating certain
positions related to the previously announced consolidation of
back-office operations to the Companys European shared
service center located in Belgium.
The Company reduced its workforce by approximately 190 positions
worldwide during fiscal 2009, primarily as a result of the
actions taken in early fiscal 2009 to realign the Companys
operations and back-office functions. In addition, to further
manage costs during a period of significant declines in demand
primarily in the second quarter of fiscal 2009, the
Companys major European locations implemented a
short work schedule when necessary and the NAEP
segment reduced shifts from seven to five days at its Nashville,
Tennessee plant. Also in the NAEP segment, the Company reduced
production capacity by temporarily idling one manufacturing
line, while permanently shutting down another line at its plant
in Bellevue, Ohio. This resulted in $1.2 million of
accelerated depreciation on certain fixed assets. The
Companys Italy plant also began a right-sizing and
redesign of the plant which also resulted in $0.1 million
of accelerated depreciation on certain fixed assets.
45
The following table summarizes the charges related to the fiscal
2009 initiatives by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
Accelerated
|
|
|
|
|
|
|
Employee-
|
|
|
Termination and
|
|
|
Depreciation
|
|
|
|
|
|
|
Related
|
|
|
Other Related
|
|
|
Included in
|
|
|
|
|
Fiscal 2009 charges
|
|
Costs
|
|
|
Restructuring Costs
|
|
|
Cost of Sales
|
|
|
Total
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
3.3
|
|
|
$
|
0.7
|
|
|
$
|
0.1
|
|
|
$
|
4.1
|
|
NAMB
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
NAEP
|
|
|
2.4
|
|
|
|
1.7
|
|
|
|
1.2
|
|
|
|
5.3
|
|
All other North America
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring related charges for the fiscal 2009 actions
|
|
$
|
5.9
|
|
|
$
|
2.4
|
|
|
$
|
1.3
|
|
|
$
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2009, approximately $2.3 million remains
accrued for employee-related costs, including estimated
severance payments and medical insurance and contract
termination costs related to the fiscal 2009 initiatives. The
Company anticipates the remaining accrued balance for
restructuring charges will be paid throughout fiscal 2010.
The Company expects additional charges to continue into fiscal
2010 related to the plans initiated in fiscal 2009. The
implementation of the Companys European shared service
center will continue into early fiscal 2010. In addition, in
July 2009 the Company initiated further plans to reduce capacity
and headcount at certain international locations. These plans
are expected to result in the reduction of approximately 10 to
20 positions and reduce working hours for remaining workers as
appropriate. As a result of these plans, the Company expects to
recognize before-tax costs of approximately $1.0 million to
$2.3 million, including employee termination costs,
estimated employee retirement benefits and accelerated
depreciation of fixed assets at the impacted locations. These
plans are expected to be completed primarily in fiscal 2010. In
total, the Company expects charges related to these initiatives,
and other remaining 2009 initiatives to range from approximately
$2.0 million to $3.0 million, before income tax, to be
recognized primarily during the first half of fiscal 2010.
FISCAL 2008
RESTRUCTURING PLAN
In January 2008, the Company announced two steps in its
continuing effort to improve the profitability of its North
American operations. The Company announced it would shut down
its manufacturing facility in St. Thomas, Ontario, Canada and
would pursue a sale of its manufacturing facility in Orange,
Texas. All the restructuring costs related to the sale of the
Orange, Texas and the St. Thomas, Ontario, Canada
facilities are related to the NAEP segment.
The St. Thomas, Ontario, Canada facility primarily produced
engineered plastics for the automotive market, with a capacity
of approximately 74 million pounds per year and employed
approximately 120 individuals. The facility was shutdown at the
end of June 2008. The Company continued to finalize closing
procedures into fiscal 2009.
The Orange, Texas facility primarily provided North American
third-party tolling services in which the Company processed
customer-owned materials for a fee. Total annual capacity at the
Orange, Texas facility was approximately 135 million pounds
and employed approximately 100 employees. The Company
completed the sale of this facility in March 2008 for total
consideration of $3.7 million.
The Company recorded charges related to the fiscal 2008
initiatives of approximately $0.2 million for
employee-related costs and $0.1 million for contract
termination and other related restructuring costs during the
year ended August 31, 2009. These charges recorded in
fiscal 2009 are related to the NAEP segment. Approximately
$0.2 million remains accrued for employee-related costs at
August 31, 2009 related to the fiscal 2008 initiatives,
which the Company anticipates the majority of the accrued
balance for restructuring charges to be paid throughout fiscal
2010. During the year ended August 31, 2008, the Company
recorded approximately $6.4 million in employee-related
costs, which include estimated
46
severance payments and medical insurance for approximately
135 employees, whose positions were eliminated at the
Orange, Texas and St. Thomas, Ontario, Canada facilities.
The following table summarizes the restructuring liabilities as
of August 31, 2009 related to the Companys
restructuring plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
|
|
|
|
|
|
|
|
|
Accrual
|
|
|
|
|
|
|
|
|
Accrual
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
August 31,
|
|
|
Fiscal 2008
|
|
|
Fiscal 2008
|
|
|
August 31,
|
|
|
Fiscal 2009
|
|
|
Fiscal 2009
|
|
|
August 31,
|
|
|
|
2007
|
|
|
Charges
|
|
|
Paid
|
|
|
2008
|
|
|
Charges
|
|
|
Paid
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Employee related costs
|
|
$
|
2,424
|
|
|
$
|
6,383
|
|
|
$
|
(5,950
|
)
|
|
$
|
2,857
|
|
|
$
|
6,012
|
|
|
$
|
(4,421
|
)
|
|
$
|
4,448
|
|
Other costs
|
|
|
|
|
|
|
434
|
|
|
|
(434
|
)
|
|
|
|
|
|
|
2,653
|
|
|
|
(2,263
|
)
|
|
|
390
|
|
Translation effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,424
|
|
|
$
|
6,817
|
|
|
$
|
(6,384
|
)
|
|
$
|
2,835
|
|
|
$
|
8,665
|
|
|
$
|
(6,684
|
)
|
|
$
|
4,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to pay between $6.9 million and
$7.9 million of restructuring related payments primarily in
the first half of fiscal 2010. This includes the remaining
accrual balance of $4.9 million from the table above, which
includes a $2.4 million withdrawal liability related to
fiscal 2004 and 2007 restructuring plans, and the expected
fiscal 2010 restructuring charges between $2.0 million to
$3.0 million related to the fiscal 2009 initiatives.
The Company recorded approximately $2.6 million and
$5.4 million in asset impairments during the years ended
August 31, 2009 and 2008, respectively, excluding
impairments recorded in discontinued operations. The
Companys $2.6 million in impairments for fiscal 2009
in continuing operations were primarily related to properties
which are considered held for sale including the St. Thomas,
Ontario, Canada facility and the Orange, Texas warehouse. The
asset impairments in fiscal 2009 were based on third party
appraisals. The Company recorded $10.3 million and
$6.3 million of asset impairments for the years ended
August 31, 2009 and 2008, respectively, for certain
Invision assets included in discontinued operations.
In connection with the closure of the St. Thomas, Ontario,
Canada facility, the Company evaluated the property, plant and
equipment of the St. Thomas, Ontario, Canada facility and
recorded an impairment charge of $2.7 million recorded
during fiscal 2008. The Canada asset impairment was based on the
estimated fair market value of the long-lived assets which was
determined using the Companys estimate of future
undiscounted cash flows for these assets. This charge is
included in the asset impairment line item in the Companys
consolidated statement of operations. The impairment of the
assets for the Canadian facility is related to the NAEP segment.
As a result of the restructuring initiatives in fiscal 2008, the
Company evaluated the inventory and property, plant and
equipment of the Orange, Texas facility and recorded an
impairment related to the long-lived assets of the Orange
facility during fiscal 2008 of approximately $2.7 million.
The Orange asset impairment was based on the estimated fair
market value of the long-lived assets which was determined using
the total consideration received for this facility and related
assets when it was sold in March 2008. This charge is included
in the asset impairment line item in the consolidated statements
of operations. The impairment of the assets for the Orange,
Texas facility is related to the NAEP segment.
As of August 31, 2009, the Companys Findlay, Ohio
facility, the St. Thomas, Ontario, Canada facility, the Orange,
Texas warehouse, and certain equipment related to Invision were
considered held for sale. The net book value of these assets
held for sale after impairment is approximately
$6.5 million which is included in the property, plant and
equipment line item in the Companys consolidated balance
sheet as of August 31, 2009. Of the assets held for sale,
only Invision is included in discontinued operations on the
Companys consolidated statements of operations.
During the second quarter of fiscal 2009, the Company recorded a
curtailment gain of $2.6 million as a result of a
significant reduction in the expected years of future service,
primarily due to the U.S. restructuring plan for the NAEP
segment that was announced in December 2008. During the
47
fourth quarter of fiscal 2009, the Company recorded a
curtailment gain of $0.2 million as a result of a
significant reduction in the expected years of future service,
primarily due to the European restructuring plan which included
the elimination of certain positions in the Companys
Paris, France subsidiary as a result of the consolidation of
back-office operations to the Companys European shared
service center.
Other income for fiscal 2009 includes $1.8 million of
income from the cancellation of a European supplier distribution
agreement.
A reconciliation of the statutory U.S. federal income tax
rate with the effective tax rates of 37.5% in 2009 and 36.3% in
2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
Statutory U.S. tax rate
|
|
$
|
6,461
|
|
|
|
35.0
|
%
|
|
$
|
17,320
|
|
|
|
35.0
|
%
|
Amount of taxes at less than U.S. statutory tax rate
|
|
|
(12,258
|
)
|
|
|
(66.4
|
)
|
|
|
(12,665
|
)
|
|
|
(25.6
|
)
|
U.S. and foreign losses with no tax benefit
|
|
|
13,135
|
|
|
|
71.1
|
|
|
|
10,571
|
|
|
|
21.4
|
|
U.S. restructuring and other U.S. unusual charges with no benefit
|
|
|
1,003
|
|
|
|
5.5
|
|
|
|
2,572
|
|
|
|
5.2
|
|
Provision for repatriated earnings
|
|
|
|
|
|
|
|
|
|
|
1,054
|
|
|
|
2.1
|
|
Establishment (resolution) of uncertain tax positions
|
|
|
(1,584
|
)
|
|
|
(8.6
|
)
|
|
|
(1,363
|
)
|
|
|
(2.7
|
)
|
Other
|
|
|
174
|
|
|
|
0.9
|
|
|
|
455
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,931
|
|
|
|
37.5
|
%
|
|
$
|
17,944
|
|
|
|
36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rates of 37.5% and 36.3% for the years ended
August 31, 2009 and 2008, respectively, were greater than
the U.S. statutory tax rate of 35% primarily because no tax
benefits were recognized for U.S. losses from continuing
operations. These unfavorable effects on the Companys
effective tax rates for both fiscal 2009 and fiscal 2008 were
partially offset by the overall foreign tax rate being less than
the U.S. statutory tax rate in both years.
48
The Company uses the following non-GAAP financial measure of net
income before certain items and net income per diluted share
before certain items. These financial measures are used by
management to monitor and evaluate the ongoing performance of
the Company and to allocate resources. They believe that the
additional measures are useful to investors for financial
analysis. However, non-GAAP measures are not in accordance with,
nor are they a substitute for, GAAP measures. The table below
reconciles net income before certain items and net income per
diluted share before certain items to net income (loss) and net
income (loss) per diluted share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEO
|
|
|
Airplane
|
|
|
Insurance
|
|
|
Before
|
|
|
|
As
|
|
|
Asset
|
|
|
Restructuring
|
|
|
Transition
|
|
|
Lease
|
|
|
Claim
|
|
|
Certain
|
|
Year Ended August 31, 2009
|
|
Reported
|
|
|
Write-Downs
|
|
|
Related
|
|
|
Charges
|
|
|
Termination
|
|
|
Adjustment
|
|
|
Items
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
1,279,248
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,279,248
|
|
Cost of sales
|
|
|
1,109,211
|
|
|
|
(1,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,107,941
|
|
Selling, general and administrative expenses
|
|
|
148,143
|
|
|
|
|
|
|
|
(1,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,784
|
|
Interest expense, net
|
|
|
2,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,437
|
|
Foreign currency transaction (gains) losses
|
|
|
(5,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,645
|
)
|
Other (income) expense
|
|
|
(1,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,826
|
)
|
Restructuring expense
|
|
|
8,665
|
|
|
|
|
|
|
|
(8,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment
|
|
|
2,608
|
|
|
|
(2,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain
|
|
|
(2,805
|
)
|
|
|
|
|
|
|
2,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,260,788
|
|
|
|
(3,878
|
)
|
|
|
(7,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,249,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
18,460
|
|
|
|
3,878
|
|
|
|
7,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,557
|
|
Provision for U.S. and foreign income taxes
|
|
|
6,931
|
|
|
|
479
|
|
|
|
1,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
11,529
|
|
|
|
3,399
|
|
|
|
5,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,423
|
|
Income (loss) from discontinued operations, net of tax of $0
|
|
|
(13,956
|
)
|
|
|
10,317
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,427
|
)
|
|
|
13,716
|
|
|
|
5,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,804
|
|
Noncontrolling interests
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to A. Schulman, Inc.
|
|
|
(2,776
|
)
|
|
|
13,716
|
|
|
|
5,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,455
|
|
Preferred stock dividends
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to A. Schulman, Inc. common
stockholders
|
|
$
|
(2,829
|
)
|
|
$
|
13,716
|
|
|
$
|
5,515
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS impact
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding -diluted
|
|
|
26,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,070
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEO
|
|
|
Airplane
|
|
|
Insurance
|
|
|
Before
|
|
|
|
As
|
|
|
Asset
|
|
|
Restructuring
|
|
|
Transition
|
|
|
Lease
|
|
|
Claim
|
|
|
Certain
|
|
Year Ended August 31, 2008
|
|
Reported
|
|
|
Write-Downs
|
|
|
Related
|
|
|
Charges
|
|
|
Termination
|
|
|
Adjustment
|
|
|
Items
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
1,983,595
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,983,595
|
|
Cost of sales
|
|
|
1,749,065
|
|
|
|
|
|
|
|
(1,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,747,592
|
|
Selling, general and administrative expenses
|
|
|
169,275
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
(3,546
|
)
|
|
|
(640
|
)
|
|
|
|
|
|
|
164,839
|
|
Interest expense, net
|
|
|
5,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,476
|
|
Foreign currency transaction (gains) losses
|
|
|
1,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,133
|
|
Other (income) expense
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
(368
|
)
|
|
|
(413
|
)
|
Restructuring expense
|
|
|
6,817
|
|
|
|
|
|
|
|
(6,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment
|
|
|
5,399
|
|
|
|
(5,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain
|
|
|
(4,009
|
)
|
|
|
|
|
|
|
4,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
964
|
|
|
|
(964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,934,111
|
|
|
|
(6,363
|
)
|
|
|
(4,531
|
)
|
|
|
(3,582
|
)
|
|
|
(640
|
)
|
|
|
(368
|
)
|
|
|
1,918,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
49,484
|
|
|
|
6,363
|
|
|
|
4,531
|
|
|
|
3,582
|
|
|
|
640
|
|
|
|
368
|
|
|
|
64,968
|
|
Provision for U.S. and foreign income taxes
|
|
|
17,944
|
|
|
|
884
|
|
|
|
1,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
31,540
|
|
|
|
5,479
|
|
|
|
2,760
|
|
|
|
3,582
|
|
|
|
640
|
|
|
|
368
|
|
|
|
44,369
|
|
Income (loss) from discontinued operations, net of tax of $0
|
|
|
(12,619
|
)
|
|
|
6,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
18,921
|
|
|
|
11,779
|
|
|
|
2,760
|
|
|
|
3,582
|
|
|
|
640
|
|
|
|
368
|
|
|
|
38,050
|
|
Noncontrolling interests
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to A. Schulman, Inc.
|
|
|
18,049
|
|
|
|
11,779
|
|
|
|
2,760
|
|
|
|
3,582
|
|
|
|
640
|
|
|
|
368
|
|
|
|
37,178
|
|
Preferred stock dividends
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to A. Schulman, Inc. common
stockholders
|
|
$
|
17,996
|
|
|
$
|
11,779
|
|
|
$
|
2,760
|
|
|
$
|
3,582
|
|
|
$
|
640
|
|
|
$
|
368
|
|
|
$
|
37,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS impact
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding -diluted
|
|
|
27,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,098
|
|
The Companys net loss attributable to the Companys
stockholders was $2.8 million for the year ended
August 31, 2009 compared with net income of
$18.0 million for the year ended August 31 2008, a decline
of $20.8 million. The translation effect of foreign
currencies, primarily the Euro and Mexican peso, decreased net
income by $7.3 million for the year ended August 31,
2009. Net income attributable to the Companys stockholders
before certain items was $16.4 million for the year ended
August 31 2009 compared with $37.1 million for the year
ended August 31 2008, a decline of $20.7 million. Certain
items including asset write-downs and restructuring related
costs were discussed previously. In addition, certain items in
fiscal 2008 related primarily to the transition of the
Companys CEO position.
50
CRITICAL
ACCOUNTING POLICIES
The Company has identified critical accounting policies that, as
a result of the judgments, uncertainties, and the operations
involved, could result in material changes to its financial
condition or results of operations under different conditions or
using different assumptions. The Companys most critical
accounting policies relate to the allowance for doubtful
accounts, inventory reserve, restructuring charges, purchase
accounting and goodwill, long-lived assets, income taxes,
pension and other postretirement benefits and stock-based
compensation.
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
Management records an allowance for doubtful accounts receivable
based on the current and projected credit quality of the
Companys customers, historical experience, customer
payment history, expected trends and other factors that affect
collectability. Changes in these factors or changes in economic
circumstances could result in changes to the allowance for
doubtful accounts.
INVENTORY
RESERVE
Management establishes an inventory reserve based on historical
experience and amounts expected to be realized for slow-moving
and obsolete inventory. The Company continuously monitors its
slow-moving and obsolete inventory and makes adjustments as
considered necessary. The proceeds from the sale or dispositions
of these inventories may differ from the net recorded amount.
RESTRUCTURING
CHARGES
The Companys policy is to recognize restructuring costs in
accordance with the Financial Accounting Standards Boards
(FASB) accounting rules related to exit or disposal
cost obligations and compensation and non-retirement
post-employment benefits. Detailed contemporaneous documentation
is maintained and updated to ensure that accruals are properly
supported. If management determines that there is a change in
estimate, the accruals are adjusted to reflect this change.
PURCHASE
ACCOUNTING AND GOODWILL
Business combinations are accounted for using the purchase
method of accounting. This method requires the Company to record
assets and liabilities of the business acquired at their
estimated fair market values as of the acquisition date. Any
excess of the cost of the acquisition over the fair value of the
net assets acquired is recorded as goodwill. The Company uses
valuation specialists to perform appraisals and assist in the
determination of the fair values of the assets acquired and
liabilities assumed. These valuations require management to make
estimates and assumptions that are critical in determining the
fair values of the assets and liabilities.
Subsequent to the change in accounting principle disclosed in
Note 1 in ITEM 8, FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA, the Company tests goodwill for impairment on
an annual basis during the fourth quarter for all reporting
units. If circumstances change significantly, the Company would
test for impairment during interim periods between annual tests.
Goodwill is assessed for impairment using fair value measurement
techniques. Specifically, goodwill impairment is determined
using a two-step process. Both the first step of determining the
fair value of a reporting unit and the second step of
determining the fair value of individual assets and liabilities
of a reporting unit (including unrecognized intangible assets)
are judgmental in nature and often involve the use of
significant estimates and assumptions. Fair values of reporting
units are established using comparable market multiples. When
appropriate, discounted cash flows are used to corroborate the
results of the comparable market multiples method. These
valuation methodologies use estimates and assumptions, which
include determination of appropriate market comparables,
projected future cash
51
flows (including timing), discount rate reflecting the risk
inherent in future cash flows, and perpetual growth rate.
LONG-LIVED
ASSETS
Long-lived assets, except goodwill and indefinite-lived
intangible assets, are reviewed for impairment when
circumstances indicate the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to
future net cash flows estimated by the Company to be generated
by such assets. Fair value is the basis for the measurement of
any asset write-downs that are recorded. Estimated remaining
useful lives are used in the measurement of any adjustments that
are reflected as accelerated depreciation in cost of sales.
INCOME
TAXES
The Companys provision for income taxes involves a
significant amount of judgment by management. This provision is
impacted by the income and tax rates of the countries where the
Company operates. A change in the geographical source of the
Companys income can have a significant effect on the tax
rate. No taxes are provided on earnings which are permanently
reinvested.
Various taxing authorities periodically audit the Companys
tax returns. These audits may include questions regarding the
Companys tax filing positions, including the timing and
amount of deductions and the allocation of income to various tax
jurisdictions. In evaluating the exposures associated with these
various tax filing positions, the Company records tax
liabilities for uncertain tax positions where the likelihood of
sustaining the position is not more-likely-than-not based on its
technical merits. A significant period of time may elapse before
a particular matter, for which the Company has recorded a tax
liability, is audited and fully resolved.
The establishment of the Companys tax liabilities relies
on the judgment of management to estimate the exposures
associated with its various filing positions. Although
management believes those estimates and judgments are
reasonable, actual results could differ, resulting in gains or
losses that may be material to the Companys consolidated
statements of operations.
To the extent that the Company prevails in matters for which tax
liabilities have been recorded, or are required to pay amounts
in excess of these tax liabilities, the Companys effective
tax rate in any given financial statement period could be
materially affected. An unfavorable tax settlement could result
in an increase in the Companys effective tax rate in the
financial statement period of resolution. A favorable tax
settlement could be recognized as a reduction in the
Companys effective tax rate in the financial statement
period of resolution.
The Company records a valuation allowance to reduce its deferred
tax assets if it is more likely than not that some portion or
all of the deferred tax assets will not be realized. All
available evidence, both positive and negative, is considered to
determine whether a valuation allowance is needed. Evidence,
such as the results of operations for the current and preceding
years, is given more weight than projections of future income,
which is inherently uncertain. The Companys losses in the
U.S. in recent periods provide sufficient negative evidence
to require a full valuation allowance against its net deferred
tax assets in the U.S. The Company intends to maintain a
valuation allowance against its net deferred tax assets in the
U.S. until sufficient positive evidence exists to support
realization of such assets.
PENSION AND OTHER
POSTRETIREMENT BENEFITS
Defined pension plans and other postretirement benefit plans are
a significant cost of doing business that represents obligations
that will be ultimately settled far into the future and
therefore subject to estimation. Pension and postretirement
benefit accounting is intended to reflect the recognition of
future benefit costs over the employees approximate period
of employment based on the terms of the plans and the investment
and funding decisions made by the Company. While management
believes the
52
Companys assumptions are appropriate, significant
differences in the Companys actual experience or
significant changes in the Companys assumptions, including
the discount rate used and the expected long-term rate of return
on plan assets, may materially affect the Companys pension
and postretirement obligations and future expenses.
The Company has several postretirement benefit plans worldwide.
These plans consist primarily of defined benefit and defined
contribution pension plans and other postretirement benefit
plans. For financial statements prepared in conformity with
accounting principles generally accepted in the
United States of America, many assumptions are required to
be made in order to value the plans liabilities on a
projected and accumulated basis, as well as to determine the
annual expense for the plans. The assumptions chosen take into
account historical experience, the current economic environment
and managements best judgment regarding future experience.
Assumptions include the discount rate, the expected long-term
rate of return on assets, future salary increases, health care
escalation rates, cost of living increases, turnover, retirement
ages and mortality. The FASB requires the full unfunded
liability to be recognized on the consolidated balance sheet.
The cumulative difference between actual experience and assumed
experience is included in accumulated other comprehensive income
(loss). For most of the plans, these gains or losses are
recognized in expense over the average future working lifetime
of employees to the extent that they exceed 10% of the greater
of the Projected Benefit Obligation (or Accumulated
Post-retirement Benefit Obligation for other postretirement
benefits) and assets. The effects of any plan changes are also
included as a component of accumulated other comprehensive
income (loss) and then recognized in expense over the average
future working lifetime of the affected plan.
For the majority of the Companys pension plans, the
Company consults with various actuaries at least annually when
reviewing and selecting the discount rates to be used. The
discount rates used by the Company are based on yields of
various corporate and governmental bond indices with varying
maturity dates. The discount rates are also reviewed in
comparison with current benchmark indices, economic market
conditions and the movement in the benchmark yield since the
previous fiscal year. The liability weighted-average discount
rate for the defined benefit pension plans is 4.0% for fiscal
2010, compared with 5.4% in fiscal 2009. For the other
postretirement benefit plan, the rate is 4.5% for fiscal 2010,
compared with 5.5% for fiscal 2009, and is obtained from the
Citigroup Pension Liability Index and Discount Curve. This rate
represents the higher interest rates generally available in the
United States, which is the Companys only country with
other postretirement benefit liabilities. Another assumption
that affects the Companys pension expense is the expected
long-term rate of return on assets. Some of the Companys
plans are funded. The weighted-average expected long-term rate
of return on assets assumption is 7.0% for fiscal 2010. In
consultation with its actuaries, the Company estimates its
pension expense to increase by approximately $1.8 million
in fiscal 2011 compared with fiscal 2010 primarily as a result
of the decreased weighted-average discount rate assumption.
The Companys principal objective is to ensure that
sufficient funds are available to provide benefits as and when
required under the terms of the plans. The Company utilizes
investments that provide benefits and maximizes the long-term
investment performance of the plans without taking on undue risk
while complying with various legal funding requirements. The
Company, through its investment advisors, has developed detailed
asset and liability models to aid in implementing optimal asset
allocation strategies. Equity securities are invested in equity
indexed funds, which minimizes concentration risk while offering
market returns. The debt securities are invested in a long-term
bond indexed fund which provides a stable low risk return. The
fixed insurance contracts allow the Company to closely match a
portion of the liability to the expected payout of benefit with
little risk. The Company, in consultation with its actuaries,
analyzes current market trends, the current plan performance and
expected market performance of both the equity and bond markets
to arrive at the expected return on each asset category over the
long term.
53
The following table illustrates the sensitivity to a change in
the assumed discount rate and expected long-term rate of return
on assets for the Companys pension plans and other
postretirement plans as of August 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on
|
|
|
Impact on
|
|
Impact on
|
|
August 31, 2010
|
|
|
August 31,
|
|
August 31, 2010
|
|
Projected Benefit
|
|
|
2010
|
|
Projected Benefit
|
|
Obligation for
|
|
|
Benefits
|
|
Obligation for
|
|
Postretirement
|
Change in Assumption
|
|
Expense
|
|
Pension Plans
|
|
Plans
|
|
|
(In thousands)
|
|
25 basis point decrease in discount rate
|
|
$
|
204
|
|
|
$
|
5,185
|
|
|
$
|
468
|
|
25 basis point increase in discount rate
|
|
$
|
(102
|
)
|
|
$
|
(4,950
|
)
|
|
$
|
(448
|
)
|
25 basis point decrease in expected long-term rate of
return on assets
|
|
$
|
39
|
|
|
$
|
|
|
|
$
|
|
|
25 basis point increase in expected long- term rate of
return on assets
|
|
$
|
(39
|
)
|
|
$
|
|
|
|
$
|
|
|
STOCK-BASED
COMPENSATION
The Company grants certain types of equity grants which involve
market conditions for determining vesting, which requires the
use of a valuation model. These awards vest based on total
shareholder return over a certain period compared to the
shareholder return of other peer companies. The concept of
modeling is used with such awards because observable market
prices for these types of awards are not available. The modeling
technique that is generally considered to most appropriately
value this type of award is the Monte Carlo simulation. These
models are considered to be a more refined estimate of fair
value for awards with market conditions than the Black-Scholes
model. The Monte Carlo simulation requires assumptions based on
managements judgment regarding, among others, the
volatility of the Companys stock, the expected forfeiture
rate, the correlation rate of the Companys stock price
compared to peer companies and the Companys dividend
yield. The Company uses historical data to determine the
assumptions to be used in the Monte Carlo simulation and has no
reason to believe that future data is likely to differ from
historical data. However, changes in the assumptions to reflect
future stock price volatility, future dividend payments, future
forfeitures and future correlation experience may result in a
material change to the fair value calculation of share-based
awards. While management believes the Companys assumptions
used are appropriate, significant differences in the
Companys actual experience or significant changes in the
Companys assumptions, including the volatility of the
Companys stock, the expected forfeiture rate, the expected
life of the stock award, the correlation rate and the dividend
yield, may materially affect the Companys future
stock-based compensation expense.
LIQUIDITY AND
CAPITAL RESOURCES
Net cash provided from operations was $4.4 million,
$181.5 million and $155.8 million for the years ended
August 31, 2010, 2009 and 2008, respectively. The decrease
from last year was due to an increase in accounts receivable and
inventory since August 31, 2009, resulting primarily from
increased sales in the fourth quarter compared with the fourth
quarter of fiscal 2009. Inventory also increased as general
business conditions improved. The working capital, excluding
cash, as of August 31, 2009 had decreased dramatically from
August 31, 2008 balances, which favorably impacted cash
flow from operations in fiscal 2009.
The Companys approximate working capital days are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
August 31, 2010
|
|
August 31, 2009
|
|
Days in receivables
|
|
|
53
|
|
|
|
58
|
|
Days in inventory
|
|
|
47
|
|
|
|
46
|
|
Days in payables
|
|
|
39
|
|
|
|
44
|
|
Total working capital days
|
|
|
61
|
|
|
|
60
|
|
54
The following table summarizes certain key balances on the
Companys consolidated balance sheet and related metrics.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
August 31,
|
|
|
|
|
|
|
2010
|
|
2009
|
|
$ change
|
|
% Change
|
|
|
(In millions, except for %s)
|
|
Cash and cash equivalents
|
|
$
|
122.8
|
|
|
$
|
228.7
|
|
|
$
|
(105.9
|
)
|
|
|
(46
|
)%
|
Working capital, excluding cash
|
|
$
|
169.4
|
|
|
$
|
133.1
|
|
|
$
|
36.3
|
|
|
|
27
|
%
|
Long-term debt
|
|
$
|
93.8
|
|
|
$
|
102.3
|
|
|
$
|
(8.5
|
)
|
|
|
(8
|
)%
|
Total debt
|
|
$
|
154.7
|
|
|
$
|
105.1
|
|
|
$
|
49.6
|
|
|
|
47
|
%
|
Net debt (net cash)*
|
|
$
|
31.9
|
|
|
$
|
(123.6
|
)
|
|
$
|
155.5
|
|
|
|
(126
|
)%
|
Total A. Schulman, Incs. Stockholders equity
|
|
$
|
488.0
|
|
|
$
|
366.1
|
|
|
$
|
121.9
|
|
|
|
33
|
%
|
* Total debt less cash and cash equivalents
The Companys cash and cash equivalents decreased
approximately $105.9 million from August 31, 2009. The
significant decrease in cash and cash equivalents during the
year was driven primarily by: the cash used for business
acquisitions of $99.2 million, net of cash acquired;
expenditures for capital projects of $19.0 million; the
repayment of ICO long-term debt and related costs of
$26.3 million; dividend payments of $16.8 million; and
increases in working capital and foreign currency translation
losses.
Working capital, excluding cash, was $169.4 million as of
August 31, 2010, an increase of $36.3 million from
August 31, 2009. The primary reason for the increase in
working capital was the increase in accounts receivable of
$76.5 million and the increase in inventory of
$75.7 million offset by an increase of $48.5 million
in accounts payable since August 31, 2009. The translation
effect of foreign currencies, primarily the euro, decreased
accounts receivable by $18.0 million and inventory by
$15.4 million. Excluding the impact of translation of
foreign currencies and ICO operations, accounts receivable
increased $24.8 million, or 12.0%, and inventory increased
$49.2 million, or 36.9%. The increase in accounts
receivables is due to increased sales as general business
conditions improved. The increase in inventory was the result of
improvements in general business conditions and increased raw
materials cost on a per pound basis. Accounts payable increased
$21.6 million, excluding the impact of foreign currency and
ICO operations, as the Company increased inventory purchases to
meet increased customer demand.
Capital expenditures for the year ended August 31, 2010
were $19.0 million compared with $24.8 million last
year. Fiscal 2010 capital expenditures relate primarily to
various projects in Europe. Fiscal 2009 included capital
expenditures for the completion of the new Akron, Ohio plant and
the addition of a new smaller line in the Nashville, Tennessee
plant which replaced an older inefficient line.
The Company has a credit facility that consists of
$260.0 million of revolving credit lines (Credit
Facility) of which the U.S. dollar equivalent of
$160.0 million is available to certain of the
Companys foreign subsidiaries for borrowings in euros or
other currencies. The Credit Facility, which was put in place on
February 28, 2006 and matures on February 28, 2011,
contains certain covenants that, among other things, limit the
Companys ability to incur indebtedness and enter into
certain transactions beyond specified limits. The Company must
also maintain a minimum interest coverage ratio and may not
exceed a maximum net debt leverage ratio. As of the year ended
August 31, 2010, the Company was not in violation of any of
its covenants relating to the Credit Facility. The Company was
well within compliance with these covenants and does not believe
a covenant violation is reasonably possible as of
August 31, 2010. The Company is currently in process of
re-financing its credit agreement.
Interest rates on the Credit Facility are based on LIBOR or
EURIBOR (depending on the borrowing currency) plus a spread
determined by the Companys total leverage ratio. The
Company also pays a facility fee on the commitments whether used
or unused. The Credit Facility allows for a provision which
provides a portion of the funds available as a short-term
swing-line loan. The swing-line loan interest rate varies based
on a mutually agreed upon rate between the bank and the Company.
There were no long- or
55
short-term borrowings at August 31, 2009. As of
August 31, 2010, the amount available under the credit
facility was reduced by outstanding letters of credit of
$2.4 million and borrowings of $53.5 million which is
included in short-term debt in the Companys consolidated
balance sheet due to the short-term maturity of the Credit
Facility as of August 31, 2010.
On March 1, 2006, the Company issued senior guaranteed
notes (Senior Notes) in the private placement market
consisting of the following:
|
|
|
|
|
$30.0 million of Senior Notes in the United States,
maturing on March 1, 2013, with a variable interest rate of
LIBOR plus 80 bps (Dollar Notes). Although
there are no plans to do so, the Company may, at its option,
prepay all or part of the Dollar Notes.
|
|
|
|
50.3 million of Senior Notes in Germany, maturing on
March 1, 2016, with a fixed interest rate of 4.485%
(Euro Notes). The Euro Notes approximate
$63.8 million at August 31, 2010.
|
The Senior Notes are guaranteed by the Companys
wholly-owned domestic subsidiaries and contain covenants
substantially identical to those in the $260.0 million
revolving credit facility. As of the year ended August 31,
2010, the Company was not in violation of any of its covenants
relating to the Senior Notes. The Company was well within
compliance with these covenants and does not believe a covenant
violation is reasonably possible as of August 31, 2010.
Both the Credit Facility and the Senior Notes are supported by
up to 65% of the capital stock of certain of the Companys
directly owned foreign subsidiaries.
The Company had approximately $37.2 million and
$41.3 million of uncollateralized short-term foreign lines
of credit available to its subsidiaries at August 31, 2010
and August 31, 2009, respectively. The Company had
approximately $7.3 million and $2.5 million
outstanding under these lines of credit at August 31, 2010
and 2009, respectively.
Below summarizes the Companys available funds as of
August 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions)
|
|
|
Credit Facility
|
|
$
|
260.0
|
|
|
$
|
260.0
|
|
Uncollateralized short-term lines of credit
U.S.
|
|
|
|
|
|
|
8.5
|
|
Uncollateralized short-term lines of credit Foreign
|
|
|
37.2
|
|
|
|
41.3
|
|
|
|
|
|
|
|
|
|
|
Total gross available funds from credit lines and notes
|
|
$
|
297.2
|
|
|
$
|
309.8
|
|
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
$
|
204.1
|
|
|
$
|
259.0
|
|
Uncollateralized short-term lines of credit
U.S.
|
|
|
|
|
|
|
8.5
|
|
Uncollateralized short-term lines of credit Foreign
|
|
|
29.9
|
|
|
|
38.8
|
|
|
|
|
|
|
|
|
|
|
Total net available funds from credit lines and notes
|
|
$
|
234.0
|
|
|
$
|
306.3
|
|
|
|
|
|
|
|
|
|
|
Total net available funds from credit lines and notes represents
the total gross available funds from credit lines and notes less
outstanding borrowings of $60.8 million and
$2.5 million as of August 31, 2010 and 2009,
respectively and issued letters of credit of $2.4 million
and $1.0 million as of August 31, 2010 and 2009,
respectively.
The Companys under funded pension liability is
approximately $90.3 million at August 31, 2010. This
amount is primarily due to an unfunded plan of
$70.0 million maintained by the Companys German
subsidiary. Under this plan, no separate vehicle is required to
accumulate assets to provide for the payment of benefits. The
benefits are paid directly by the Company to the participants.
It is anticipated that the German subsidiary will generate
sufficient funds from operations to pay these benefits in the
future.
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measure date. The
FASB provides accounting
56
rules that establishes a fair value hierarchy to prioritize the
inputs used in valuation techniques into three levels as follows:
|
|
|
|
|
Level 1: Observable inputs that reflect quoted
prices (unadjusted) for identical assets or liabilities in
active markets;
|
|
|
|
Level 2: Inputs other than quoted prices
included in Level 1 that are observable for the asset or
liability either directly or indirectly; and
|
|
|
|
Level 3: Unobservable inputs which reflect an
entitys own assumptions.
|
The fair value of cash equivalents, by their nature, is
determined utilizing Level 1 inputs. The Company measures
the fair value of forward foreign exchange contracts using
Level 2 inputs through observable market transactions in
active markets provided by banks. The forward foreign exchange
contracts are entered into with creditworthy multinational banks.
During the year ended August 31, 2010, the Company paid
cash dividends aggregating to $0.60 per share. The total amount
of these dividends was $16.8 million. Cash flow has been
sufficient to fund the payment of these dividends.
For the year ended August 31, 2010, the Company issued
approximately 214,000 common shares upon the exercise of
employee stock options and approximately 123,000 common shares
were issued to employees for restricted stock and performance
share awards. The total amount received from the issuance of
common stock was $0.9 million.
No shares were repurchased during the year ended August 31,
2010. During the year ended August 31, 2009, the Company
repurchased 111,520 shares of common stock, at an average
price of $14.77 per share. The Company may continue repurchasing
common stock under the Companys current repurchase program
through open market repurchases from time to time, subject to
market conditions, capital considerations of the Company and
compliance with applicable laws. Approximately 2.9 million
shares remain available to be repurchased under the
Companys repurchase program.
The Company has foreign currency exposures primarily related to
the euro, British pound sterling, Canadian dollar, Mexican peso,
Australian dollar, Indian rupee, Malaysian ringgit, Chinese
yuan, and Indonesian rupiah. The assets and liabilities of the
Companys foreign subsidiaries are translated into
U.S. dollars using current exchange rates. Income statement
items are translated at average exchange rates prevailing during
the period. The resulting translation adjustments are recorded
in the accumulated other comprehensive income (loss) account in
stockholders equity. A significant portion of the
Companys operations uses the euro as its functional
currency. The change in the value of the U.S. dollar during
the year ended August 31, 2010 decreased this account by
$27.9 million which was primarily the result of a 11.6%
decrease in the value of the euro since August 31, 2009 to
a spot rate of 1.268 euros to 1 U.S. dollar as of
August 31, 2010.
Cash flow from operations, borrowing capacity under the credit
facilities and current cash and cash equivalents are expected to
provide sufficient liquidity to maintain the Companys
current operations and capital expenditure requirements, pay
dividends, repurchase shares, pursue acquisitions and service
outstanding debt.
57
A summary of the Companys future obligations subsequent to
August 31, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Short-Term Debt
|
|
$
|
60,789
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
60,789
|
|
Long-Term Debt
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
|
|
63,826
|
|
|
|
93,826
|
|
Capital Lease Obligations
|
|
|
87
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
Operating Lease Obligations(b)
|
|
|
5,638
|
|
|
|
6,707
|
|
|
|
3,937
|
|
|
|
3,464
|
|
|
|
19,746
|
|
Purchase Obligations(a)
|
|
|
109,479
|
|
|
|
12,650
|
|
|
|
864
|
|
|
|
3
|
|
|
|
122,996
|
|
Pension Obligations
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
Postretirement Benefit Obligations
|
|
|
935
|
|
|
|
2,044
|
|
|
|
2,177
|
|
|
|
5,646
|
|
|
|
10,802
|
|
Deferred Compensation Obligations
|
|
|
1,680
|
|
|
|
3,082
|
|
|
|
2,893
|
|
|
|
13,121
|
|
|
|
20,776
|
|
Interest Payments(c)
|
|
|
6,680
|
|
|
|
12,281
|
|
|
|
5,725
|
|
|
|
1,193
|
|
|
|
25,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
189,288
|
|
|
$
|
66,772
|
|
|
$
|
15,596
|
|
|
$
|
87,253
|
|
|
$
|
358,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Purchase obligations include purchase contracts and purchase
orders for inventory. |
|
(b) |
|
Operating lease information is provided in the Notes to the
Consolidated Financial Statements appearing in ITEM 8 of
this Report. |
|
(c) |
|
Interest obligations on the Companys short and long-term
debt are included assuming the debt levels will be outstanding
for the entire period and assuming the interest rates in effect
at August 31, 2010. |
The Company had $2.6 million of gross unrecognized tax
benefits and $0.5 million of accrued interest and penalties
on unrecognized tax benefits as of August 31, 2010 for
which it could not reasonably estimate the timing and amount of
future payments; therefore, no amounts were included in the
Companys future obligations table. Additional information
on unrecognized tax benefits is provided in the Notes to the
Consolidated Financial Statements appearing in ITEM 8 of
this Report.
The Companys outstanding commercial commitments at
August 31, 2010 are not material to the Companys
financial position, liquidity or results of operations except as
discussed in the Notes to the Consolidated Financial Statements
appearing in ITEM 8 of this Report.
OFF-BALANCE SHEET
ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
NEW ACCOUNTING
PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board
(FASB) issued new accounting rules related to
business combinations. The new accounting rules require the
acquiring entity in a business combination to recognize all
assets acquired and liabilities assumed in the transaction and
any noncontrolling interest in the acquiree at the acquisition
date, measured at the fair value as of that date. This includes
the measurement of the acquirer shares issued in consideration
for a business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss
contingencies, the recognition of capitalized in-process
research and development, the accounting for acquisition-related
restructuring cost accruals, the treatment of acquisition
related transaction costs and the recognition of changes in the
acquirers income tax valuation allowance and deferred
taxes. These accounting rules are effective for business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. Early adoption was not permitted.
The Company adopted the new accounting rules related to business
combinations, effective September 1, 2009, and applied the
provisions to the acquisitions of ICO, Inc. and McCann Color,
Inc. Additionally, the Company recorded $6.8 million during
the year ended August 31, 2010 of transaction costs for
acquisitions.
In December 2007, the FASB issued new accounting rules on
noncontrolling interests. The new accounting rules clarify that
a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. The
58
implementation of new accounting rules related to noncontrolling
interests, effective September 1, 2009, did not have a
material impact on the Companys financial position,
results of operations and cash flows but did change the
consolidated financial statement presentation related to
noncontrolling interests. The presentation requirement was
reflected in the consolidated financial statements and
accompanying notes and has been applied retrospectively for all
periods presented.
In June 2009, the FASB issued new accounting rules that
establish the Accounting Standards Codification
(Codification) as the source of authoritative
Generally Accepted Accounting Principles (GAAP)
recognized by the FASB to be applied by nongovernmental
entities. Subsequent to the issuance of these accounting rules,
the FASB will not issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates. All
guidance contained in the Codification carries an equal level of
authority. The GAAP hierarchy was modified to include only two
levels of GAAP: authoritative and nonauthoritative. All
nongrandfathered non-SEC accounting literature not included in
the Codification are nonauthoritative. These new accounting
rules are effective for interim or annual financial periods
ending after September 15, 2009. The Companys
adoption of these new accounting rules, effective
September 1, 2009, impacted the references in its
consolidated financial statements to technical accounting
literature.
In January 2010, the FASB issued amended accounting rules to
require disclosure of transfers into and out of Level 1 and
Level 2 fair value measurements, and also require more
detailed disclosure about the activity within Level 3 fair
value measurements. The new rules also require a more detailed
level of disaggregation of the assets and liabilities being
measured as well as increased disclosures regarding inputs and
valuation techniques of the fair value measurements. The changes
are effective for annual and interim reporting periods beginning
after December 15, 2009, except for requirements related to
Level 3 disclosures, which are effective for annual and
interim reporting periods beginning after December 15,
2010. This guidance requires new disclosures only, and is not
expected to impact the Companys consolidated financial
statements.
CAUTIONARY
STATEMENTS
A number of the matters discussed in this document that are not
historical or current facts deal with potential future
circumstances and developments and may constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by the fact that
they do not relate strictly to historic or current facts and
relate to future events and expectations. Forward-looking
statements contain such words as anticipate,
estimate, expect, project,
intend, plan, believe, and
other words and terms of similar meaning in connection with any
discussion of future operating or financial performance.
Forward-looking statements are based on managements
current expectations and include known and unknown risks,
uncertainties and other factors, many of which management is
unable to predict or control, that may cause actual results,
performance or achievements to differ materially from those
expressed or implied in the forward-looking statements.
Important factors that could cause actual results to differ
materially from those suggested by these forward-looking
statements, and that could adversely affect the Companys
future financial performance, include, but are not limited to,
the following:
|
|
|
|
|
Worldwide and regional economic, business and political
conditions, including continuing economic uncertainties in some
or all of the Companys major product markets;
|
|
|
|
The effectiveness of the Companys efforts to improve
operating margins through sales growth, price increases,
productivity gains, and improved purchasing techniques;
|
|
|
|
Competitive factors, including intense price competition;
|
|
|
|
Fluctuations in the value of currencies in major areas where the
Company operates;
|
|
|
|
Volatility of prices and availability of the supply of energy
and raw materials that are critical to the manufacture of the
Companys products, particularly plastic resins derived
from oil and natural gas;
|
|
|
|
Changes in customer demand and requirements;
|
59
|
|
|
|
|
Effectiveness of the Company to achieve the level of cost
savings, productivity improvements, growth and other benefits
anticipated from acquisitions and restructuring initiatives;
|
|
|
|
Escalation in the cost of providing employee health care;
|
|
|
|
Uncertainties regarding the resolution of pending and future
litigation and other claims;
|
|
|
|
The performance of the North American auto market; and
|
|
|
|
Further adverse changes in economic or industry conditions,
including global supply and demand conditions and prices for
products.
|
The risks and uncertainties identified above are not the only
risks the Company faces. Additional risk factors that could
affect the Companys performance are set forth in
ITEM 1A of this Report. In addition, risks and
uncertainties not presently known to the Company or that it
believes to be immaterial also may adversely affect the Company.
Should any known or unknown risks or uncertainties develop into
actual events, or underlying assumptions prove inaccurate, these
developments could have material adverse effects on the
Companys business, financial condition and results of
operations.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
INTEREST RATE
RISK
The Companys exposure to market risk from changes in
interest rates relates primarily to variable rate debt
obligations which include the Revolving Facility, the
U.S. portion of outstanding senior guaranteed notes and
other floating rate debt. As of August 31, 2010, the
Company had approximately $87.5 million outstanding against
these facilities. Borrowing costs may fluctuate depending upon
the volatility of interest rates and amounts borrowed. There
would be an estimated $0.1 million impact on annual
interest expense from either a 10% increase or decrease in
market rates of interest on outstanding variable rate borrowings
as of August 31, 2010.
FOREIGN CURRENCY
EXCHANGE RISK
The Company conducts business on a multinational basis in a
variety of foreign currencies. The Companys exposure to
market risk for changes in foreign currency exchange rates
arises from anticipated transactions from international trade
and repatriation of foreign earnings. The Companys
principal foreign currency exposures relate to the euro, British
pound sterling, Canadian dollar, Mexican peso, Australian
dollar, Indian rupee, Malaysian ringgit, Chinese yuan, and
Indonesian rupiah.
The Company enters into forward exchange contracts to reduce its
exposure to fluctuations in related foreign currencies. These
contracts are with major financial institutions and the risk of
loss is considered remote. The total value of open contracts and
any risk to the Company as a result of these arrangements is not
material to the Companys financial position, liquidity or
results of operations. The potential change in fair value at
August 31, 2010 for such financial instruments from an
increase or decrease of 10% in quoted foreign currency exchange
rates would be approximately $2.0 million.
COMMODITY PRICE
RISK
The Company uses certain commodities, primarily plastic resins,
in its manufacturing processes. The cost of operations can be
affected as the market for these commodities changes. As the
price of resin increases or decreases, market prices for the
Companys products will also generally increase or
decrease. This will typically lead to higher or lower average
selling prices and will impact the Companys gross profit
and operating income. The impact on operating income is due to a
lag in matching the change in raw material cost of goods sold
and the change in product sales prices. The Company attempts to
minimize its exposure to resin price changes by monitoring and
carefully managing the quantity of its inventory on hand and
product sales prices.
60
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of A. Schulman, Inc.
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of A. Schulman,
Inc. and its subsidiaries at August 31, 2010 and 2009, and
the results of their operations and their cash flows for each of
the three years in the period ended August 31, 2010 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
August 31, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for these financial statements and financial statement schedule,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying Managements Report On Internal Control Over
Financial Reporting under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial
statement schedule, and on the Companys internal control
over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the timing of its annual
goodwill impairment test in 2010.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for the noncontrolling interests as of September 1, 2009
A companys internal control over financial reporting is a
process designed 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. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Managements Report on Internal Control
Over Financial Reporting appearing under Item 9A,
management has excluded ICO Inc. and its subsidiaries (ICO) and
McCann Color, Inc. (McCann) from its assessment of internal
control over financial reporting as of August 31, 2010,
because it was acquired by the Company in a purchase business
combination during 2010. We have also excluded ICO and McCann
from our audit of internal control over financial reporting. ICO
and McCanns total assets and total net sales represented
35% and 8%, respectively, of the related consolidated financial
statement amounts as of and for the year ended August 31,
2010.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
October 26, 2010
62
A. SCHULMAN,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Net sales
|
|
$
|
1,590,443
|
|
|
$
|
1,279,248
|
|
|
$
|
1,983,595
|
|
Cost of sales
|
|
|
1,357,575
|
|
|
|
1,109,211
|
|
|
|
1,749,065
|
|
Selling, general and administrative expenses
|
|
|
179,821
|
|
|
|
148,143
|
|
|
|
169,275
|
|
Interest expense
|
|
|
5,010
|
|
|
|
4,785
|
|
|
|
7,814
|
|
Interest income
|
|
|
(1,345
|
)
|
|
|
(2,348
|
)
|
|
|
(2,338
|
)
|
Foreign currency transaction (gains) losses
|
|
|
874
|
|
|
|
(5,645
|
)
|
|
|
1,133
|
|
Other income (expense)
|
|
|
(2,425
|
)
|
|
|
(1,826
|
)
|
|
|
(9
|
)
|
Restructuring expense
|
|
|
5,054
|
|
|
|
8,665
|
|
|
|
6,817
|
|
Asset impairment
|
|
|
5,668
|
|
|
|
2,608
|
|
|
|
5,399
|
|
Curtailment (gains) losses
|
|
|
270
|
|
|
|
(2,805
|
)
|
|
|
(4,009
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,550,502
|
|
|
|
1,260,788
|
|
|
|
1,934,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
39,941
|
|
|
|
18,460
|
|
|
|
49,484
|
|
Provision (benefit) for U.S. and foreign income taxes
|
|
|
(4,419
|
)
|
|
|
6,931
|
|
|
|
17,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
44,360
|
|
|
|
11,529
|
|
|
|
31,540
|
|
Loss from discontinued operations, net of tax of $0
|
|
|
(239
|
)
|
|
|
(13,956
|
)
|
|
|
(12,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
44,121
|
|
|
|
(2,427
|
)
|
|
|
18,921
|
|
Noncontrolling interests
|
|
|
(221
|
)
|
|
|
(349
|
)
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to A. Schulman, Inc.
|
|
|
43,900
|
|
|
|
(2,776
|
)
|
|
|
18,049
|
|
Preferred stock dividends
|
|
|
|
|
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to A. Schulman, Inc. common
stockholders
|
|
$
|
43,900
|
|
|
$
|
(2,829
|
)
|
|
$
|
17,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,746,220
|
|
|
|
25,790,421
|
|
|
|
26,794,923
|
|
Diluted
|
|
|
27,976,343
|
|
|
|
26,069,631
|
|
|
|
27,097,896
|
|
Earnings (losses) per share of common stock attributable to
A. Schulman, Inc. Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.59
|
|
|
$
|
0.43
|
|
|
$
|
1.14
|
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
1.58
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share of common stock attributable to
A. Schulman, Inc. Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.58
|
|
|
$
|
0.43
|
|
|
$
|
1.13
|
|
Loss from discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.54
|
)
|
|
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
1.57
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
63
A. SCHULMAN,
INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
122,754
|
|
|
$
|
228,674
|
|
Accounts receivable, net
|
|
|
282,953
|
|
|
|
206,450
|
|
Inventories, average cost or market, whichever is lower
|
|
|
209,228
|
|
|
|
133,536
|
|
Prepaid expenses and other current assets
|
|
|
29,128
|
|
|
|
20,779
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
644,063
|
|
|
|
589,439
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Deferred charges and other assets
|
|
|
31,883
|
|
|
|
26,816
|
|
Goodwill
|
|
|
84,064
|
|
|
|
11,577
|
|
Intangible assets
|
|
|
72,352
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188,299
|
|
|
|
38,610
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
30,891
|
|
|
|
16,236
|
|
Buildings and leasehold improvements
|
|
|
158,076
|
|
|
|
147,121
|
|
Machinery and equipment
|
|
|
357,270
|
|
|
|
345,653
|
|
Furniture and fixtures
|
|
|
37,078
|
|
|
|
39,581
|
|
Construction in progress
|
|
|
4,996
|
|
|
|
4,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
588,311
|
|
|
|
553,137
|
|
Accumulated depreciation and investment grants of $744 in 2010
and $988 in 2009
|
|
|
349,348
|
|
|
|
383,697
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
238,963
|
|
|
|
169,440
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,071,325
|
|
|
$
|
797,489
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
60,876
|
|
|
$
|
2,851
|
|
Accounts payable
|
|
|
195,977
|
|
|
|
147,476
|
|
U.S. and foreign income taxes payable
|
|
|
6,615
|
|
|
|
8,858
|
|
Accrued payrolls, taxes and related benefits
|
|
|
46,492
|
|
|
|
36,207
|
|
Other accrued liabilities
|
|
|
41,985
|
|
|
|
32,230
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
351,945
|
|
|
|
227,622
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
93,834
|
|
|
|
102,254
|
|
Pension plans
|
|
|
86,872
|
|
|
|
69,888
|
|
Other long-term liabilities
|
|
|
25,297
|
|
|
|
22,800
|
|
Deferred income taxes
|
|
|
20,227
|
|
|
|
3,954
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, 5% cumulative, $100 par value, authorized,
issued and outstanding - no shares in 2010 and 15 shares in
2009
|
|
|
|
|
|
|
2
|
|
Common stock, $1 par value, authorized
75,000,000 shares, issued
47,690,024 shares in 2010 and 42,295,492 shares in 2009
|
|
|
47,690
|
|
|
|
42,295
|
|
Other capital
|
|
|
249,734
|
|
|
|
115,358
|
|
Accumulated other comprehensive income (loss)
|
|
|
(6,278
|
)
|
|
|
38,714
|
|
Retained earnings
|
|
|
519,659
|
|
|
|
492,513
|
|
Treasury stock, at cost, 16,205,230 shares in 2010 and
16,207,011 shares in 2009
|
|
|
(322,777
|
)
|
|
|
(322,812
|
)
|
|
|
|
|
|
|
|
|
|
Total A. Schulman, Inc.s stockholders equity
|
|
|
488,028
|
|
|
|
366,070
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
5,122
|
|
|
|
4,901
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
493,150
|
|
|
|
370,971
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,071,325
|
|
|
$
|
797,489
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
64
A. SCHULMAN,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Other
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Interests
|
|
|
Equity
|
|
|
|
(In thousands, except per share data)
|
|
|
Balance at August 31, 2007
|
|
$
|
1,057
|
|
|
$
|
41,785
|
|
|
$
|
103,828
|
|
|
$
|
50,092
|
|
|
$
|
507,065
|
|
|
$
|
(279,164
|
)
|
|
$
|
5,561
|
|
|
$
|
430,224
|
|
Adjustment for adoption of accounting standard on uncertain tax
positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,078
|
|
|
|
|
|
|
|
|
|
|
|
2,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance at September 1, 2007
|
|
|
1,057
|
|
|
|
41,785
|
|
|
|
103,828
|
|
|
|
50,092
|
|
|
|
509,143
|
|
|
|
(279,164
|
)
|
|
|
5,561
|
|
|
|
432,302
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,049
|
|
|
|
|
|
|
|
872
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net actuarial losses (net of tax of $1,709)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in prior service costs (credit) (net of tax of $138)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrecognized transition obligations (net of tax of
$0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,732
|
|
Cash dividends paid or accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $5 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
Common stock, $0.59 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,038
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,038
|
)
|
Stock options exercised
|
|
|
|
|
|
|
206
|
|
|
|
3,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,922
|
|
Restricted stock issued, net of forfeitures
|
|
|
|
|
|
|
245
|
|
|
|
(245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of common stock to cover tax withholdings
|
|
|
|
|
|
|
(5
|
)
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,002
|
)
|
|
|
|
|
|
|
(42,002
|
)
|
Cash distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(900
|
)
|
|
|
(900
|
)
|
Non-cash stock based compensation
|
|
|
|
|
|
|
|
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
743
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
4,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2008
|
|
|
1,057
|
|
|
|
42,231
|
|
|
|
112,105
|
|
|
|
79,903
|
|
|
|
511,101
|
|
|
|
(321,166
|
)
|
|
|
5,533
|
|
|
|
430,764
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,776
|
)
|
|
|
|
|
|
|
349
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net actuarial losses (net of tax of $1,567)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in prior service costs (credit) (net of tax of $523)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrecognized transition obligations (net of tax of
$0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,616
|
)
|
Cash dividends paid or accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $5 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
Common stock, $0.60 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,759
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,759
|
)
|
Stock options exercised
|
|
|
|
|
|
|
34
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
586
|
|
Restricted stock issued, net of forfeitures
|
|
|
|
|
|
|
45
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of common stock to cover tax withholdings
|
|
|
|
|
|
|
(15
|
)
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(216
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,646
|
)
|
|
|
|
|
|
|
(1,646
|
)
|
Redemption of preferred stock
|
|
|
(1,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,055
|
)
|
Cash distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(981
|
)
|
|
|
(981
|
)
|
Non-cash stock based compensation
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
2,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2009
|
|
|
2
|
|
|
|
42,295
|
|
|
|
115,358
|
|
|
|
38,714
|
|
|
|
492,513
|
|
|
|
(322,812
|
)
|
|
|
4,901
|
|
|
|
370,971
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,900
|
|
|
|
|
|
|
|
221
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net actuarial losses (net of tax of $4,720)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in prior service costs (credit) (net of tax of $0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(871
|
)
|
Cash dividends paid or accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.60 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,754
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,754
|
)
|
Acquisition of ICO
|
|
|
|
|
|
|
5,100
|
|
|
|
127,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,651
|
|
Stock options exercised
|
|
|
|
|
|
|
214
|
|
|
|
3,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,010
|
|
Restricted stock issued, net of forfeitures
|
|
|
|
|
|
|
123
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of common stock to cover tax withholdings
|
|
|
|
|
|
|
(42
|
)
|
|
|
(914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(956
|
)
|
Issuance of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
Redemption of preferred stock
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Non-cash stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
4,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2010
|
|
$
|
|
|
|
$
|
47,690
|
|
|
$
|
249,734
|
|
|
$
|
(6,278
|
)
|
|
$
|
519,659
|
|
|
$
|
(322,777
|
)
|
|
$
|
5,122
|
|
|
$
|
493,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
65
A. SCHULMAN,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Provided from (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
44,121
|
|
|
$
|
(2,427
|
)
|
|
$
|
18,921
|
|
Adjustments to reconcile net income (loss) to net cash provided
from (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
27,449
|
|
|
|
24,958
|
|
|
|
27,721
|
|
Deferred tax provision
|
|
|
(25,742
|
)
|
|
|
(2,974
|
)
|
|
|
(2,597
|
)
|
Pension, postretirement benefits and other deferred compensation
|
|
|
10,739
|
|
|
|
4,728
|
|
|
|
6,098
|
|
Net losses on asset sales
|
|
|
96
|
|
|
|
740
|
|
|
|
318
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
964
|
|
Asset impairment
|
|
|
5,668
|
|
|
|
12,925
|
|
|
|
11,699
|
|
Curtailment (gains) losses
|
|
|
270
|
|
|
|
(2,805
|
)
|
|
|
(4,009
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(27,582
|
)
|
|
|
91,218
|
|
|
|
16,614
|
|
Inventories
|
|
|
(43,067
|
)
|
|
|
78,756
|
|
|
|
54,682
|
|
Accounts payable
|
|
|
21,621
|
|
|
|
(17,856
|
)
|
|
|
25,838
|
|
Restructuring accrual
|
|
|
(4,620
|
)
|
|
|
2,001
|
|
|
|
433
|
|
Income taxes
|
|
|
(4,639
|
)
|
|
|
3,720
|
|
|
|
(5,247
|
)
|
Accrued payrolls and other accrued liabilities
|
|
|
2,365
|
|
|
|
(1,582
|
)
|
|
|
1,704
|
|
Changes in other assets and other long-term liabilities
|
|
|
(2,236
|
)
|
|
|
(9,905
|
)
|
|
|
2,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from operating activities
|
|
|
4,443
|
|
|
|
181,497
|
|
|
|
155,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided from (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant and equipment
|
|
|
(18,977
|
)
|
|
|
(24,787
|
)
|
|
|
(26,070
|
)
|
Proceeds from the sale of assets
|
|
|
6,570
|
|
|
|
950
|
|
|
|
3,700
|
|
Business acquisitions, net of cash acquired
|
|
|
(99,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(111,630
|
)
|
|
|
(23,837
|
)
|
|
|
(22,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided from (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
(16,754
|
)
|
|
|
(15,812
|
)
|
|
|
(16,091
|
)
|
Increase (decrease) in notes payable
|
|
|
3,975
|
|
|
|
(7,343
|
)
|
|
|
5,997
|
|
Borrowings on revolving credit facilities
|
|
|
86,000
|
|
|
|
19,000
|
|
|
|
119,557
|
|
Repayments on revolving credit facilities
|
|
|
(32,500
|
)
|
|
|
(19,000
|
)
|
|
|
(145,112
|
)
|
Repayments on long-term debt
|
|
|
(25,951
|
)
|
|
|
|
|
|
|
|
|
Cash distributions to noncontrolling interests
|
|
|
|
|
|
|
(981
|
)
|
|
|
(900
|
)
|
Preferred stock redemption
|
|
|
(2
|
)
|
|
|
(1,055
|
)
|
|
|
|
|
Common stock issued, net
|
|
|
3,054
|
|
|
|
370
|
|
|
|
3,828
|
|
Releases (purchases) of treasury stock
|
|
|
35
|
|
|
|
(1,646
|
)
|
|
|
(42,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) financing activities
|
|
|
17,857
|
|
|
|
(26,467
|
)
|
|
|
(74,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(16,590
|
)
|
|
|
(247
|
)
|
|
|
(4,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(105,920
|
)
|
|
|
130,946
|
|
|
|
54,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
228,674
|
|
|
|
97,728
|
|
|
|
43,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
122,754
|
|
|
$
|
228,674
|
|
|
$
|
97,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,920
|
|
|
$
|
4,445
|
|
|
$
|
7,531
|
|
Income taxes
|
|
$
|
18,187
|
|
|
$
|
7,243
|
|
|
$
|
27,405
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
66
A. SCHULMAN,
INC.
NOTE 1
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BUSINESS
A. Schulman, Inc. (the Company) is a leading
international supplier of high-performance plastic compounds and
resins. These materials are used in a variety of consumer,
industrial, automotive and packaging applications. The Company
employs about 2,900 people and has 36 manufacturing
facilities in Europe, North America, South America, Asia and
Australia.
PRINCIPLES OF
CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its domestic and foreign subsidiaries in which a
controlling interest is maintained. All significant intercompany
transactions have been eliminated.
Noncontrolling interests represents a 30% equity position of
Mitsubishi Chemical MKV Co. in a partnership with the Company
and a 35% equity position of P.T. Prima Polycon Indah in an
Indonesian joint venture with the Company.
USE OF
ESTIMATES
The preparation of the accompanying consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions about future events that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. These estimates and the underlying assumptions
affect the amounts of assets and liabilities reported,
disclosures about contingent assets and liabilities, and
reported amounts of revenues and expenses. Such estimates
include the value of purchase consideration, valuation of
accounts receivables, inventories, goodwill, intangible assets,
other long-lived assets, legal contingencies, and assumptions
used in the calculation of income taxes, pension and other
postretirement benefits, among others. These estimates and
assumptions are based on managements best estimates and
judgment. Management evaluates its estimates and assumptions on
an ongoing basis using historical experience and other factors.
Management monitors any factors which may have an impact and
will adjust such estimates and assumptions when probable and
estimable. Changes in those estimates will be reflected in the
consolidated financial statements in future periods, as
applicable.
CHANGE IN
ACCOUNTING PRINCIPLE
Effective June 1, 2010, the Company changed its annual
testing date for evaluating goodwill and indefinite-lived
intangible asset impairment from the end of the second quarter,
February 28, to the beginning of the fourth quarter of the
fiscal year, June 1. The Company performs goodwill
impairment testing annually and more often if events or changes
in circumstances indicate it is more likely than not that its
carrying value exceeds its fair value. In fiscal 2010, the
Company performed the annual impairment testing of goodwill
using February 28 as the measurement date; however, this change
in accounting principle required the Company to again test
goodwill for impairment using June 1 to meet the annual testing
requirement prescribed in the accounting guidance. This
voluntary change in accounting principle is considered
preferable because it better aligns with the Companys
annual budgeting process and allows the most recent projected
financial information to be used in the reporting unit valuation
models. Based on the results of impairment tests performed in
fiscal years 2009 and 2008, the Company concluded there was no
impairment of the carrying value of the goodwill in
67
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the prior periods presented in the consolidated financial
statements. In the current year, the Company tested goodwill for
impairment as of February 28, 2010 and June 1, 2010,
and concluded there was no impairment of the carrying value of
the goodwill.
CASH EQUIVALENTS
AND SHORT-TERM INVESTMENTS
All highly liquid investments purchased with an original
maturity of three months or less are considered to be cash
equivalents. Such investments amounted to $18.4 million at
August 31, 2010 and $130.0 million at August 31,
2009. The Companys cash equivalents and investments are
diversified with numerous financial institutions which
management believes to have acceptable credit ratings. These
investments are primarily money-market funds and short-term time
deposits. The money-market funds are primarily AAA rated by
third parties. Management monitors the placement of its cash
given the current credit market. The recorded amount of these
investments approximates fair value. Investments with maturities
between three and twelve months are considered to be short-term
investments. As of August 31, 2010 and 2009, the Company
did not hold any short-term investments.
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. Management records an allowance for
doubtful accounts receivable based on the current and projected
credit quality of the Companys customers, experience,
customer payment history, expected trends and other factors that
affect collectability. Changes in these factors or changes in
economic circumstances could result in changes to the allowance
for doubtful accounts. The Company reviews its allowance for
doubtful accounts on a periodic basis. Trade accounts
receivables are charged off against the allowance for doubtful
accounts when the Company determines it is probable the account
receivable will not be collected. Trade accounts receivables,
less allowance for doubtful accounts, reflect the net realizable
value of receivables, and approximate fair value. The Company
does not have any off-balance sheet exposure related to its
customers.
REVENUE
RECOGNITION
The Companys accounting policy regarding revenue
recognition is to recognize revenue when products are shipped to
unaffiliated customers and both title and the risks and rewards
of ownership are transferred.
The Company provides tolling services as a fee for processing of
material provided and owned by customers. While providing these
services, the Company may provide certain amounts of its
materials, such as additives. These materials are charged to the
customer as an addition to the tolling fees. The Company
recognizes revenues from tolling services and related materials
when such services are performed. The only amounts recorded as
revenue related to tolling are the processing fees and the
charges related to materials provided by the Company.
PROPERTY, PLANT
AND EQUIPMENT AND DEPRECIATION
It is the Companys policy to depreciate the cost of
property, plant and equipment over the estimated useful lives of
the assets, or for leasehold improvements over the applicable
lease term, using the straight-line method. Depreciation is
included in the appropriate cost of goods sold or selling,
general
68
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and administrative expense caption on the consolidated
statements of operations. The estimated useful lives used in the
computation of depreciation are as follows:
|
|
|
|
|
Buildings and leasehold improvements
|
|
|
7 to 40 years
|
|
Machinery and equipment
|
|
|
5 to 10 years
|
|
Furniture and fixtures
|
|
|
5 to 10 years
|
|
The cost of property sold or otherwise disposed of is eliminated
from the property accounts and the related reserve accounts.
Gains or losses are recognized as appropriate when sales of
property occur.
Maintenance and repair costs are charged against income. The
cost of renewals and betterments is capitalized in the property
accounts.
INVENTORIES
The Company and its subsidiaries generally do not distinguish
between raw materials and finished goods because numerous
products that can be sold as finished goods are also used as raw
materials in the production of other inventory items. Management
establishes an inventory reserve based on historical experience
and amounts expected to be realized for slow-moving and obsolete
inventory.
GOODWILL AND
INTANGIBLE ASSETS
The Company does not amortize goodwill. However, the Company
conducts a formal impairment test of goodwill at the reporting
unit level on an annual basis and between annual tests if an
event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying
value. The Company completed its most recent annual goodwill
impairment review as of June 1, 2010 and no impairment
charges were necessary. In addition, the Company is not aware of
any triggers which would require a goodwill impairment test as
of August 31, 2010.
Other amortizable intangible assets, which consist primarily of
registered trademarks, customer related intangibles, and
developed technology, are amortized over their estimated useful
lives on either a straight line or double-declining basis. The
estimated useful lives for each major category of amortizable
intangible assets are:
|
|
|
|
|
Registered trademarks
|
|
|
5 to 20 years
|
|
Customer related intangibles
|
|
|
15 to 19 years
|
|
Developed technology
|
|
|
11 to 15 years
|
|
ASSET
IMPAIRMENTS
Long-lived assets, except goodwill and indefinite-lived
intangible assets, are reviewed for impairment when
circumstances indicate the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to
future net cash flows estimated by the Company to be generated
by such assets. If such assets are considered to be impaired,
the impairment to be recognized is the amount by which the
carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are recorded at the lower of
carrying value or estimated net realizable value. See
Note 15 for further discussion on the asset impairments.
INCOME
TAXES
The Company recognizes income taxes during the period in which
transactions enter into the determination of financial statement
income. Accordingly, deferred taxes are provided for temporary
69
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
differences between the book and tax bases of assets and
liabilities. A valuation allowance is established when it is
more likely than not that all or a portion of a deferred tax
asset will not be realized. No taxes are provided on earnings
which are permanently reinvested. Accruals for uncertain tax
positions are provided for in accordance with accounting rules
related to uncertainty in income taxes. The Company records
interest and penalties related to uncertain tax positions as a
component of income tax expense. See Note 7 for further
discussion on income taxes.
RETIREMENT
PLANS
The Company has several defined benefit and defined contribution
pension plans, covering certain employees in the U.S. and
in foreign countries. For certain plans in the U.S., pension
funding is based on an amount paid to funds held in trust at an
agreed rate for each hour for which employees are paid.
Generally, the defined benefit pension plans accrue the current
and prior service costs annually and funding is not required for
all plans.
FOREIGN CURRENCY
TRANSLATION
The financial position and results of operations of the
Companys foreign subsidiaries are generally measured using
local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the exchange
rate in effect at each reporting period end. Income statement
accounts are translated at the average rate of exchange
prevailing during the year. Accumulated other comprehensive
income (loss) in stockholders equity includes translation
adjustments arising from the use of different exchange rates
from period to period.
DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES
The Company accounts for its derivative instruments in
accordance with amended accounting rules regarding derivative
instruments and hedging activities which requires all
derivatives, whether designated in hedging relationships or not,
to be recorded on the consolidated balance sheet at fair value.
The forward foreign exchange contracts are adjusted to their
fair market value through the statement of operations. Gains or
losses on forward foreign exchange contracts that hedge specific
transactions are recognized in the consolidated statement of
operations offsetting the underlying foreign currency gains or
losses. Currently, the Company does not designate any of these
contracts as hedges.
STOCK-BASED
COMPENSATION
The Company accounts for stock-based compensation in accordance
with accounting rules for stock compensation, which require that
the fair value of share-based awards be estimated on the date of
grant using an option pricing model. The fair value of the award
is recognized as expense over the requisite service periods in
the accompanying Consolidated Statements of Operations. See
Note 10 for further discussion on stock-based compensation.
FAIR VALUE
MEASUREMENT
Fair value is defined as the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining the fair value measurements for assets and
liabilities required or permitted to be recorded at fair value,
the Company considers the principal or most advantageous market
in which it would transact and the Company considers assumptions
that market participants would use when
70
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance. See Note 6 for
further discussion on fair value measurement.
RECLASSIFICATION
Certain items previously reported in specific financial
statement captions have been reclassified to conform to the 2010
presentation.
NEW ACCOUNTING
PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board
(FASB) issued new accounting rules related to
business combinations. The new accounting rules require the
acquiring entity in a business combination to recognize all
assets acquired and liabilities assumed in the transaction and
any noncontrolling interest in the acquiree at the acquisition
date, measured at the fair value as of that date. This includes
the measurement of the acquirer shares issued in consideration
for a business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss
contingencies, the recognition of capitalized in-process
research and development, the accounting for acquisition-related
restructuring cost accruals, the treatment of acquisition
related transaction costs and the recognition of changes in the
acquirers income tax valuation allowance and deferred
taxes. These accounting rules are effective for business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. Early adoption was not permitted.
The Company adopted the new accounting rules related to business
combinations, effective September 1, 2009, and applied the
provisions to the acquisitions of ICO, Inc. and McCann Color,
Inc. Additionally, the Company recorded $6.8 million during
the year ended August 31, 2010 of transaction costs for
acquisitions. See Note 2 Business Acquisitions.
In December 2007, the FASB issued new accounting rules on
noncontrolling interests. The new accounting rules clarify that
a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. The
implementation of new accounting rules related to noncontrolling
interests, effective September 1, 2009, did not have a
material impact on the Companys financial position,
results of operations and cash flows but did change the
consolidated financial statement presentation related to
noncontrolling interests. The presentation requirement was
reflected in the consolidated financial statements and
accompanying notes and has been applied retrospectively for all
periods presented.
In June 2009, the FASB issued new accounting rules that
establish the Accounting Standards Codification
(Codification) as the source of authoritative
Generally Accepted Accounting Principles (GAAP)
recognized by the FASB to be applied by nongovernmental
entities. Subsequent to the issuance of these accounting rules,
the FASB will not issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates. All
guidance contained in the Codification carries an equal level of
authority. The GAAP hierarchy was modified to include only two
levels of GAAP: authoritative and nonauthoritative. All
nongrandfathered non-SEC accounting literature not included in
the Codification are nonauthoritative. These new accounting
rules are effective for interim or annual financial periods
ending after September 15, 2009. The Companys
adoption of these new accounting rules, effective
September 1, 2009, impacted the references in its
consolidated financial statements to technical accounting
literature.
In January 2010, the FASB issued amended accounting rules to
require disclosure of transfers into and out of Level 1 and
Level 2 fair value measurements, and also require more
detailed disclosure about the activity within Level 3 fair
value measurements. The new rules also require a more detailed
level of disaggregation of the assets and liabilities being
measured as well as increased disclosures regarding inputs and
valuation techniques of the fair value measurements. The changes
are effective for annual and
71
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interim reporting periods beginning after December 15,
2009, except for requirements related to Level 3
disclosures, which are effective for annual and interim
reporting periods beginning after December 15, 2010.
This guidance requires new disclosures only, and is not expected
to impact the Companys consolidated financial statements.
NOTE 2
BUSINESS ACQUISITIONS
MCCANN COLOR,
INC.
On March 1, 2010, the Company completed the purchase of
McCann Color, Inc. (McCann Color), a producer of
high-quality color concentrates, based in North Canton, Ohio,
for $8.8 million in cash. The business provides specially
formulated color concentrates to match precise customer
specifications. Its products are used in end markets such as
packaging, lawn and garden, furniture, consumer products and
appliances. The operations serve customers from its
48,000-square-foot, expandable North Canton facility, which was
built in 1998 exclusively to manufacture color concentrates. The
facility complements the Companys existing North American
masterbatch manufacturing and product development facilities in
Akron, Ohio, San Luis Potosi, Mexico, and La Porte,
Texas. The results of operations from the McCann Color
acquisition are included in the accompanying consolidated
financial statements for the period from the acquisition date,
March 1, 2010, and are reported in the North America
Masterbatch segment.
The acquisition was accounted for in accordance with the FASB
revised accounting standard for business combinations. The
accounting guidance for business combinations results in a new
basis of accounting reflecting the estimated fair values for
assets acquired and liabilities assumed. The transaction was
financed with available cash. Tangible assets acquired and
liabilities assumed were recorded at their estimated fair values
of $2.0 million and $0.5 million, respectively. The
estimated fair values of finite-lived intangible assets acquired
of $4.0 million related to intellectual property and
customer relationships are being amortized over their estimated
useful lives of 15 years. Goodwill of $3.4 million
represents the excess of cost over the estimated fair value of
net tangible and intangible assets acquired. The information
included herein has been prepared based on the allocation of the
purchase price using estimates of the fair value and useful
lives of assets acquired and liabilities assumed which were
determined with the assistance of independent valuations, quoted
market prices and estimates made by management.
ICO,
INC.
On April 30, 2010, the Company acquired ICO, Inc.
(ICO) through a merger by and among the Company, ICO
and Wildcat Spider, LLC, a wholly-owned subsidiary of the
Company, and which is now known as ICO-Schulman, LLC, pursuant
to the terms of the December 2, 2009 Agreement and Plan of
Merger (Merger Agreement). The results of ICOs
operations have been included in the consolidated financial
statements since the date of acquisition, April 30, 2010.
The acquisition of ICO presents the Company with an opportunity
to expand its presence substantially, especially in the global
rotomolding and U.S. masterbatch markets. ICOs
business is complementary to the Companys business across
markets, product lines and geographies. The acquisition of
ICOs operations increases the Companys presence in
the U.S. masterbatch market, gains plants in the
high-growth market of Brazil and expands the Companys
presence in Asia with the addition of several ICO facilities in
that region. In Europe, the acquisition allows the Company to
add rotomold compounding and size reduction to the
Companys capabilities. It also enables growth in countries
where the Company currently has a limited presence, such as
France, Italy and Holland, as well as leverages its existing
facilities serving high-growth markets such as Poland, Hungary
and Sweden.
72
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the terms of the Merger Agreement, each share of ICO
common stock outstanding immediately prior to the merger was
converted into the right to receive a pro rata portion of the
total consideration of $105.0 million in cash and
5.1 million shares of the Companys common stock. All
unvested stock options and shares of restricted stock of ICO
became fully vested immediately prior to the merger. Unexercised
stock options were exchanged for cash equal to their in
the money value, which reduced the cash pool available to
ICOs stockholders. The following table summarizes the
calculation of the estimated fair value of the total
consideration transferred (in thousands, except share price):
|
|
|
|
|
Estimated fair value of consideration transferred:
|
|
|
|
|
A. Schulman, Inc. common shares issued
|
|
|
5,100
|
|
Closing price per share of A. Schulman, Inc. common stock, as of
April 30, 2010
|
|
$
|
26.01
|
|
|
|
|
|
|
Consideration attributable to common stock
|
|
$
|
132,651
|
|
Cash paid, including cash paid to settle ICO, Inc.s
outstanding equity awards
|
|
$
|
105,000
|
|
|
|
|
|
|
Total consideration transferred
|
|
$
|
237,651
|
|
|
|
|
|
|
The merger was accounted for in accordance with the FASB revised
accounting standard for business combinations. The accounting
guidance for business combinations results in a new basis of
accounting reflecting the estimated fair values for assets
acquired and liabilities assumed. The information included
herein has been prepared based on the preliminary allocation of
the purchase price using estimates of the fair value and useful
lives of assets acquired and liabilities assumed which were
determined with the assistance of independent valuations, quoted
market prices and estimates made by management. The purchase
price allocations are subject to further adjustment until all
pertinent information regarding the property, plant and
equipment, intangible assets, other long-term assets, goodwill,
contingent consideration liabilities, long-term debt, other
long-term liabilities and deferred income tax assets and
liabilities acquired are fully evaluated by the Company and
independent valuations are complete.
73
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the preliminary estimated fair
value of the assets acquired and liabilities assumed at the date
of acquisition (in thousands):
|
|
|
|
|
Assets acquired and liabilities assumed:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,577
|
|
Accounts receivable
|
|
|
66,935
|
|
Inventories
|
|
|
46,462
|
|
Prepaid expenses and other current assets
|
|
|
10,660
|
|
Property, plant and equipment
|
|
|
97,976
|
|
Intangible assets
|
|
|
71,026
|
|
Other long-term assets
|
|
|
4,795
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
312,431
|
|
|
|
|
|
|
Current maturites of long-term debt and notes payable
|
|
$
|
12,776
|
|
Accounts payable
|
|
|
39,506
|
|
Other accrued liabilities
|
|
|
28,886
|
|
Long-term debt
|
|
|
14,494
|
|
Deferred income taxes
|
|
|
43,027
|
|
Pension plans
|
|
|
3,285
|
|
Other long-term liabilities
|
|
|
2,510
|
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
144,484
|
|
|
|
|
|
|
Net identifiable assets acquired
|
|
$
|
167,947
|
|
Goodwill
|
|
|
69,704
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
237,651
|
|
|
|
|
|
|
The Company preliminarily recorded acquired intangible assets of
$71.0 million. These intangible assets include customer
related intangibles of $48.4 million with estimated useful
lives of 19 years, developed technology of
$10.1 million with estimated useful lives of 11 years,
and trademarks and trade names of $12.5 million with
estimated useful lives ranging between 5 and 20 years.
Goodwill represents the excess of the purchase price over the
estimated fair values of the assets acquired and the liabilities
assumed in the acquisition. Goodwill largely consists of
expected synergies resulting from the acquisition. The Company
anticipates that the transaction will produce run-rate synergies
by the end of fiscal 2011, resulting from the consolidation and
centralization of global purchasing activities, tax benefits,
and elimination of duplicate corporate administrative costs.
Goodwill as of April 30, 2010 was provisionally allocated
by segment as follows (in thousands):
|
|
|
|
|
Europe, Middle East and Africa
|
|
$
|
17,177
|
|
North America Rotomolding
|
|
|
24,090
|
|
Bayshore
|
|
|
28,437
|
|
|
|
|
|
|
Total goodwill
|
|
$
|
69,704
|
|
|
|
|
|
|
None of the goodwill associated with this transaction will be
deductible for income tax purposes.
The estimated fair value of accounts receivables acquired was
$66.9 million with the gross contractual amount being
$70.3 million.
74
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net sales, loss from continuing operations before taxes and net
loss from the ICO acquired businesses included in the
Companys results since the April 30, 2010 acquisition
are as follows (in thousands):
|
|
|
|
|
|
|
April 30, 2010 to
|
|
|
August 31, 2010
|
|
Net sales
|
|
$
|
134,166
|
|
Loss from continuing operations before taxes
|
|
$
|
(2,030
|
)
|
Net loss attributable to A. Schulman, Inc. common stockholders
|
|
$
|
(1,163
|
)
|
The loss from continuing operations before taxes for ICO from
April 30, 2010 to August 31, 2010 includes pretax
depreciation and amortization costs of approximately
$9.6 million. This amount includes approximately
$3.4 million of additional costs due to the increased value
of fixed assets and intangibles, and approximately
$3.9 million of pretax amortization of purchase accounting
inventory
step-up
adjustments.
The following unaudited, pro forma information represents the
consolidated results of the Company as if the ICO acquisition
occurred at the beginning of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
August 31,
|
|
|
2010
|
|
2009
|
|
|
Unaudited
|
|
|
(In thousands, except per share data)
|
|
Net sales
|
|
$
|
1,828,339
|
|
|
$
|
1,581,941
|
|
Net income (loss) attributable to A. Schulman, Inc. common
stockholders
|
|
$
|
45,948
|
|
|
$
|
(11,485
|
)
|
Net income (loss) per share of common stock attributable to
common stockholders diluted
|
|
$
|
1.47
|
|
|
$
|
(0.37
|
)
|
The unaudited pro forma results reflect certain adjustments
related to the acquisition, such as increased depreciation and
amortization expense on assets acquired from ICO resulting from
the valuation of assets acquired, decreased interest expense due
to the repayment of debt and the impact of the issuance of the
Companys common stock used as consideration for the
purchase of ICO. The pro forma results do not include any
anticipated cost synergies or other effects of the planned
integration of ICO. Accordingly, such pro forma amounts are not
necessarily indicative of the results that actually would have
occurred had the acquisition been completed on the dates
indicated, nor are they indicative of the future operating
results of the combined company.
Previously, the Company had a full valuation allowance against
the U.S. deferred tax assets because it was not
more-likely-than-not that they would be realized. Certain
U.S. deferred tax assets that existed prior to the
acquisition can now be realized as a result of future reversals
of the deferred tax liabilities of ICO. As of August 31,
2010, the Company has concluded it is more-likely-than-not that
certain deferred tax assets will be realized, therefore, a
significant reduction in the U.S. valuation allowance was
recorded. The reduction in the valuation allowance resulted in a
non-cash tax benefit of approximately $22.2 million
included in the net income above.
75
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 3
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The changes in the Companys allowance for doubtful
accounts during the years ended August 31, 2010 and 2009
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
10,279
|
|
|
$
|
8,316
|
|
Provision
|
|
|
6,647
|
|
|
|
4,821
|
|
Write-offs, net of recoveries
|
|
|
(2,848
|
)
|
|
|
(2,604
|
)
|
Translation effect
|
|
|
(873
|
)
|
|
|
(254
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
13,205
|
|
|
$
|
10,279
|
|
|
|
|
|
|
|
|
|
|
NOTE 4
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company is required to review goodwill and indefinite-lived
intangible assets annually for impairment. Goodwill impairment
is tested at the reporting unit level on an annual basis and
between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a
reporting unit below its carrying value.
The Company completed its annual impairment review of goodwill
as of June 1, 2010 and noted no impairment. In addition,
the Company is not aware of any triggers which would require a
goodwill impairment test as of August 31, 2010. The fair
value used in the analysis was estimated using a market
approach, which contains significant unobservable inputs, based
on average earnings before interest, taxes, depreciation and
amortization and cash flow multiples. The Company has been
consistent with its method of estimating fair value when an
indication of fair value from a buyer or similar specific
transactions is not available.
The ICO and McCann Color acquisitions resulted in goodwill of
$69.7 million and $3.4 million, respectively. None of
the goodwill associated with these transactions will be
deductible for income tax purposes. See Note 2 for further
discussion on the business acquisitions. The changes in the
Companys carrying value of goodwill during the years ended
August 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe,
|
|
|
North
|
|
|
North
|
|
|
|
|
|
|
|
|
|
Middle East
|
|
|
America
|
|
|
America
|
|
|
|
|
|
|
|
|
|
and Africa
|
|
|
Rotomolding
|
|
|
Masterbatch
|
|
|
Bayshore
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance as of August 31, 2008
|
|
$
|
10,679
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,679
|
|
Deferred payment and purchase price adjustment related to
business acquisition in fiscal 2007
|
|
|
1,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,415
|
|
Translation effect
|
|
|
(517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2009
|
|
|
11,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,577
|
|
Acquisitions
|
|
|
17,177
|
|
|
|
24,090
|
|
|
|
3,407
|
|
|
|
28,437
|
|
|
|
73,111
|
|
Translation effect
|
|
|
(624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2010
|
|
$
|
28,130
|
|
|
$
|
24,090
|
|
|
$
|
3,407
|
|
|
$
|
28,437
|
|
|
$
|
84,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes intangible assets with
determinable useful lives by major category as of
August 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Customer related intangibles
|
|
$
|
50,035
|
|
|
$
|
(1,742
|
)
|
|
$
|
48,293
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Developed technology
|
|
|
14,018
|
|
|
|
(1,925
|
)
|
|
|
12,093
|
|
|
|
1,923
|
|
|
|
(1,706
|
)
|
|
|
217
|
|
Registered trademarks
|
|
|
12,271
|
|
|
|
(305
|
)
|
|
|
11,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets
|
|
$
|
76,324
|
|
|
$
|
(3,972
|
)
|
|
$
|
72,352
|
|
|
$
|
1,923
|
|
|
$
|
(1,706
|
)
|
|
$
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangible assets was $2.3 million
fiscal 2010. Amortization expense of intangible assets for
fiscal 2009 and 2008 was not significant. Estimated annual
amortization expense for the next five years will approximate
$6.9 million in fiscal 2011, $6.4 million in fiscal
2012, $6.0 million in fiscal 2013, $5.6 million in
fiscal 2014 and $5.2 million in fiscal 2015.
NOTE 5
LONG-TERM DEBT AND CREDIT ARRANGEMENTS
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revolving credit loan, LIBOR plus applicable spread, due 2011
|
|
$
|
53,500
|
|
|
$
|
|
|
Notes payable and other, due within one year
|
|
|
7,376
|
|
|
|
2,851
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
60,876
|
|
|
$
|
2,851
|
|
|
|
|
|
|
|
|
|
|
Euro notes, 4.485%, due 2016
|
|
$
|
63,826
|
|
|
$
|
72,161
|
|
Senior notes, LIBOR plus 80 bps, due 2013
|
|
|
30,000
|
|
|
|
30,000
|
|
Capital leases
|
|
|
8
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
93,834
|
|
|
$
|
102,254
|
|
|
|
|
|
|
|
|
|
|
The Company has a credit facility that consists of
$260.0 million of revolving credit lines (Credit
Facility) of which the U.S. dollar equivalent of
$160.0 million is available to certain of the
Companys foreign subsidiaries for borrowings in euros or
other currencies. The Credit Facility, which was put in place on
February 28, 2006 and matures on February 28, 2011,
contains certain covenants that, among other things, limit the
Companys ability to incur additional indebtedness and
enter into certain transactions beyond specified limits. The
Company must also maintain a minimum interest coverage ratio and
may not exceed a maximum net debt leverage ratio.
Interest rates on the Credit Facility are based on LIBOR or
EURIBOR (depending on the borrowing currency) plus a spread
determined by the Companys total leverage ratio. The
Company also pays a facility fee on the commitments whether used
or unused. The Credit Facility allows for a provision which
provides a portion of the funds available as a short-term
swing-line loan. The swing-line loan interest rate varies based
on a mutually agreed upon rate between the bank and the Company.
There were no long- or short-term borrowings at August 31,
2009. As of August 31, 2010, the amount available under the
Credit Facility was reduced by outstanding letters of credit of
$2.4 million and borrowings of $53.5 million which is
included in short-term debt in the Companys consolidated
balance sheet due to the short-term maturity of the Credit
Facility as of August 31, 2010.
77
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On March 1, 2006, the Company issued senior guaranteed
notes (Senior Notes) in the private placement market
consisting of the following:
|
|
|
|
|
$30.0 million of Senior Notes in the United States,
maturing on March 1, 2013, with a variable interest rate of
LIBOR plus 80 bps (Dollar Notes). Although
there are no plans to do so, the Company may, at its option,
prepay all or part of the Dollar Notes.
|
|
|
|
50.3 million of Senior Notes in Germany, maturing on
March 1, 2016, with a fixed interest rate of 4.485%
(Euro Notes). The Euro Notes approximate
$63.8 million at August 31, 2010.
|
The Senior Notes are guaranteed by the Companys
wholly-owned domestic subsidiaries and contain covenants
substantially identical to those in the $260.0 million
revolving Credit Facility.
Both the Credit Facility and the Senior Notes are supported by
up to 65% of the capital stock of certain of the Companys
directly owned foreign subsidiaries.
The Company had no uncollateralized short-term lines of credit
available from domestic banks at August 31, 2010. The
Company had approximately $8.5 million of uncollateralized
short-term lines of credit available from various domestic banks
at August 31, 2009. There were no borrowings under these
lines of credit in 2009.
The Company had approximately $37.2 million and
$41.3 million of uncollateralized short-term foreign lines
of credit available to its subsidiaries at August 31, 2010
and 2009, respectively. There was approximately
$7.3 million and $2.5 million outstanding under these
lines of credit at August 31, 2010 and 2009, respectively.
The Companys interest bearing short-term debt of
$57.5 million as of August 31, 2010 had a weighted
average interest rate of approximately 1.1% and approximately
4.9% for the $2.5 million outstanding as of August 31,
2009.
Below summarizes the Companys available funds as of
August 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions)
|
|
|
Credit Facility
|
|
$
|
260.0
|
|
|
$
|
260.0
|
|
Uncollateralized short-term lines of credit
U.S.
|
|
|
|
|
|
|
8.5
|
|
Uncollateralized short-term lines of credit Foreign
|
|
|
37.2
|
|
|
|
41.3
|
|
|
|
|
|
|
|
|
|
|
Total gross available funds from credit lines and notes
|
|
$
|
297.2
|
|
|
$
|
309.8
|
|
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
$
|
204.1
|
|
|
$
|
259.0
|
|
Uncollateralized short-term lines of credit
U.S.
|
|
|
|
|
|
|
8.5
|
|
Uncollateralized short-term lines of credit Foreign
|
|
|
29.9
|
|
|
|
38.8
|
|
|
|
|
|
|
|
|
|
|
Total net available funds from credit lines and notes
|
|
$
|
234.0
|
|
|
$
|
306.3
|
|
|
|
|
|
|
|
|
|
|
Total net available funds from credit lines and notes represents
the total gross available funds from credit lines and notes less
outstanding borrowings of $60.8 million and
$2.5 million as of August 31, 2010 and 2009,
respectively and issued letters of credit of $2.4 million
and $1.0 million as of August 31, 2010 and 2009,
respectively.
The Company has approximately $0.1 million in capital lease
obligations as of August 31, 2010, substantially all of
which are current. The current portion of capital lease
obligations was $0.3 million as of August 31, 2009.
The Companys current portion of capital lease obligations
is included in short-term debt on the Companys
consolidated balance sheets.
78
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Aggregate maturities of debt, including capital lease
obligations, subsequent to August 31, 2010 are as follows
(In thousands):
|
|
|
|
|
|
Fiscal 2011
|
|
$
|
60,876
|
|
2012
|
|
|
8
|
|
2013
|
|
|
30,000
|
|
2014
|
|
|
|
|
2015
|
|
|
|
|
2016 and thereafter
|
|
|
63,826
|
|
|
|
|
|
|
Total
|
|
$
|
154,710
|
|
|
|
|
|
|
NOTE 6
FAIR VALUE MEASURMENT
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The FASB provides accounting rules that establish a fair value
hierarchy to prioritize the inputs used in valuation techniques
into three levels as follows:
|
|
|
|
|
Level 1: Observable inputs that reflect quoted
prices (unadjusted) for identical assets or liabilities in
active markets;
|
|
|
|
Level 2: Inputs other than quoted prices
included in Level 1 that are observable for the asset or
liability either directly or indirectly; and
|
|
|
|
Level 3: Unobservable inputs which reflect an
entitys own assumptions.
|
On September 1, 2009, the Company adopted FASB accounting
rules relating to fair value measurement of non-financial assets
and liabilities that are not recognized or disclosed at fair
value in the consolidated financial statements on a recurring
basis.
The following table presents information about the
Companys assets and liabilities recorded at fair value as
of August 31, 2010 in the Companys consolidated
balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
Total
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Measured at
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
122,754
|
|
|
$
|
122,754
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
122,754
|
|
|
$
|
122,754
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
28
|
|
|
$
|
|
|
|
$
|
28
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
28
|
|
|
$
|
|
|
|
$
|
28
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of cash and cash equivalents, by their nature, is
determined utilizing Level 1 inputs. The Company measures
the fair value of forward foreign exchange contracts using
Level 2 inputs through observable market transactions in
active markets provided by banks.
The Company enters into forward foreign exchange contracts to
reduce its exposure for amounts due or payable in foreign
currencies. These contracts limit the Companys exposure to
fluctuations in
79
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
foreign currency exchange rates. The total contract value of
forward foreign exchange contracts outstanding as of
August 31, 2010 was $41.1 million. Any gains or losses
associated with these contracts as well as the offsetting gains
or losses from the underlying assets or liabilities are included
in the foreign currency transaction line in the Companys
consolidated statements of operations. The Company does not hold
or issue forward foreign exchange contracts for trading
purposes. There were no foreign currency contracts designated as
hedging instruments as of August 31, 2010. The forward
foreign exchange contracts are entered into with creditworthy
multinational banks. The fair value of the Companys
forward foreign exchange contracts was less than
$0.1 million as of August 31, 2010 and
$0.1 million as of August 31, 2009 and was recognized
in other accrued liabilities. The fair value of forward foreign
exchange contracts was estimated by obtaining quotes from banks.
Forward foreign exchange contracts are entered into with
substantial and creditworthy multinational banks. Generally
these contracts have maturities of less than twelve months and
have not been designated as hedging instruments as of
August 31, 2010.
The following information presents the supplemental fair value
information about long-term fixed-rate debt at August 31,
2010. The Companys long-term fixed-rate debt was issued in
Euros.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2010
|
|
August 31, 2009
|
|
|
(In millions of $)
|
|
(In millions of )
|
|
(In millions of $)
|
|
(In millions of )
|
|
Carrying value of long-term fixed-rate debt
|
|
$
|
63.8
|
|
|
|
50.3
|
|
|
$
|
72.2
|
|
|
|
50.3
|
|
Fair value of long-term fixed-rate debt
|
|
$
|
67.2
|
|
|
|
53.0
|
|
|
$
|
65.6
|
|
|
|
45.8
|
|
The fair value was calculated using discounted future cash
flows. The increase in fair value compared with August 31,
2009 is primarily related to a decrease in
yield-to-maturity,
caused by lower market interest rates, and a shorter average
life to maturity, offset partially by a weaker Euro.
NOTE 7
INCOME TAXES
Income (loss) before taxes from continuing operations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
U.S.
|
|
$
|
(34,178
|
)
|
|
$
|
(40,394
|
)
|
|
$
|
(37,554
|
)
|
Foreign
|
|
|
74,119
|
|
|
|
58,854
|
|
|
|
87,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,941
|
|
|
$
|
18,460
|
|
|
$
|
49,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loss from discontinued operations does not include any
income tax effect as the Company was not in a taxable position
due to its continued U.S. losses and a full valuation
allowance.
80
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provisions for U.S. and foreign income taxes consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
3,298
|
|
|
$
|
91
|
|
|
$
|
133
|
|
Foreign
|
|
|
14,325
|
|
|
|
9,814
|
|
|
|
20,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,623
|
|
|
|
9,905
|
|
|
|
20,541
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
(22,134
|
)
|
|
|
(483
|
)
|
|
|
(145
|
)
|
Foreign
|
|
|
92
|
|
|
|
(2,491
|
)
|
|
|
(2,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,042
|
)
|
|
|
(2,974
|
)
|
|
|
(2,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,419
|
)
|
|
$
|
6,931
|
|
|
$
|
17,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory U.S. federal income tax
rate with the effective tax rates of (11.1)% in 2010, 37.5% in
2009, and 36.3% in 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
(In thousands, except for %s)
|
|
|
Statutory U.S. tax rate
|
|
$
|
13,979
|
|
|
|
35.0
|
%
|
|
$
|
6,461
|
|
|
|
35.0
|
%
|
|
$
|
17,320
|
|
|
|
35.0
|
%
|
Amount of taxes at less than U.S. statutory tax rate
|
|
|
(16,190
|
)
|
|
|
(40.5
|
)
|
|
|
(12,258
|
)
|
|
|
(66.4
|
)
|
|
|
(12,665
|
)
|
|
|
(25.6
|
)
|
U.S. and foreign losses with no tax benefit
|
|
|
9,551
|
|
|
|
23.9
|
|
|
|
13,135
|
|
|
|
71.1
|
|
|
|
10,571
|
|
|
|
21.4
|
|
U.S. restructuring and other U.S. unusual charges with no benefit
|
|
|
4,820
|
|
|
|
12.1
|
|
|
|
1,003
|
|
|
|
5.5
|
|
|
|
2,572
|
|
|
|
5.2
|
|
Italy valuation allowance
|
|
|
1,715
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for repatriated earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,054
|
|
|
|
2.1
|
|
Establishment (resolution) of uncertain tax positions
|
|
|
33
|
|
|
|
0.1
|
|
|
|
(1,584
|
)
|
|
|
(8.6
|
)
|
|
|
(1,363
|
)
|
|
|
(2.7
|
)
|
ICO historical tax attributes
|
|
|
3,250
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. valuation allowance reversal
|
|
|
(22,156
|
)
|
|
|
(55.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
579
|
|
|
|
1.4
|
|
|
|
174
|
|
|
|
0.9
|
|
|
|
455
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,419
|
)
|
|
|
(11.1
|
)%
|
|
$
|
6,931
|
|
|
|
37.5
|
%
|
|
$
|
17,944
|
|
|
|
36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets and (liabilities) consist of the following
at August 31, 2010 and August 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Pensions
|
|
$
|
10,754
|
|
|
$
|
5,961
|
|
Inventory reserves
|
|
|
439
|
|
|
|
345
|
|
Bad debt reserves
|
|
|
3,066
|
|
|
|
1,681
|
|
Accruals
|
|
|
5,502
|
|
|
|
2,385
|
|
Postretirement benefits other than pensions
|
|
|
9,285
|
|
|
|
8,279
|
|
Depreciation
|
|
|
2,506
|
|
|
|
6,079
|
|
Net operating loss carryforwards
|
|
|
3,108
|
|
|
|
1,100
|
|
Foreign tax credit carryforwards
|
|
|
39,956
|
|
|
|
42,790
|
|
Alternative minimum tax carryforwards
|
|
|
3,919
|
|
|
|
6,392
|
|
Other
|
|
|
24,828
|
|
|
|
17,686
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
103,363
|
|
|
|
92,698
|
|
Valuation allowance
|
|
|
(52,685
|
)
|
|
|
(74,426
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
50,678
|
|
|
|
18,272
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(17,704
|
)
|
|
|
(5,663
|
)
|
Intangibles
|
|
|
(22,647
|
)
|
|
|
|
|
U.S. tax impact of foreign earnings
|
|
|
(7,692
|
)
|
|
|
|
|
Other
|
|
|
(2,126
|
)
|
|
|
(2,040
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(50,169
|
)
|
|
|
(7,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
509
|
|
|
$
|
10,569
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance covers benefits which are not likely to
be utilized for foreign tax credit carryforwards and other
deferred tax assets primarily in the United States, Italy,
Germany and Australia.
The Company has $42 million in foreign tax credit
carryforwards that will expire in periods from 2011 to 2020. The
amount of foreign tax credit carryforwards shown in the table
above has been reduced by unrealized stock compensation
attributes of approximately $2.1 million.
In recent years, the Companys U.S. operations have
generated federal tax net operating losses, before considering
dividend income from foreign subsidiaries. Such net operating
losses are offset against the foreign dividend income, which
would otherwise generate U.S. taxable income. The dividend
income from foreign subsidiaries also generates foreign tax
credits, which either partially offset the tax on any
U.S. taxable income remaining after the offset of the net
operating losses, or are carried forward. For the current year,
the U.S. tax liability associated with foreign dividends could
not entirely be offset by foreign tax credits due to certain
historical tax attributes of ICO. The net effect of foreign
dividends received from foreign countries is to place the
Company into a position in which it does not generate net
operating loss carryforwards for its U.S. operating losses.
The Company recorded a deferred tax liability for the
U.S. tax impact on projected fiscal 2011 distributions
expected to be paid out of prior year earnings from certain
subsidiaries. It is expected that the U.S. tax liability on
the distributions can be fully offset by foreign tax credit
carryforwards for which a full valuation allowance was
previously recorded. It is now more-likely-than-not that these
foreign tax credits carryforwards, equal to the deferred tax
liability recorded for the U.S. tax impact of the
distributions, will be realized, resulting in a reduction of the
U.S. valuation allowance.
82
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company established a valuation allowance against the
deferred tax assets of its Italian entity during fiscal 2010 due
to the recent losses in that jurisdiction resulting in a tax
charge of approximately $1.7 million to record a valuation
allowance against the deferred tax assets that were recorded as
of the beginning of the year. Additionally, no tax benefits were
recognized for additional deferred tax assets generated during
the year. The Company will continue to maintain a valuation
allowance against these deferred tax assets until it is
more-likely than not that the Company will realize a benefit
through the reduction of future tax liabilities.
The Company recorded a tax benefit of approximately
$22.2 million during fiscal 2010 for the reversal of
valuation allowance in the U.S. relating to the ICO
acquisition. Previously, the Company had a full valuation
allowance against the U.S. deferred tax assets because it
was not more-likely-than-not that they would be realized.
Certain U.S. deferred tax assets that existed prior to the
acquisition can now be realized as a result of future reversals
of the deferred tax liabilities of ICO. It is now
more-likely-than-not that certain deferred tax assets will be
realized, therefore, a significant reduction in the
U.S. valuation allowance was recorded resulting in a
$22.2 million non-cash tax benefit.
The tax effect of temporary differences included in prepaids was
$6.9 million and $4.2 million at August 31, 2010
and 2009, respectively. Deferred charges included
$14.8 million and $10.6 million from the tax effect of
temporary differences at August 31, 2010 and 2009,
respectively. The tax effect of temporary differences included
in other accrued liabilities was $0.9 million and
$0.3 million at August 31, 2010 and 2009, respectively.
As of August 31, 2010, the Companys gross
unrecognized tax benefits totaled $2.6 million. If
recognized, approximately $1.8 million of the total
unrecognized tax benefits would favorably affect the
Companys effective tax rate. The Company elects to report
interest and penalties related to income tax matters in income
tax expense. At August 31, 2010, the Company had
$0.5 million of accrued interest and penalties on
unrecognized tax benefits.
The Company is open to potential income tax examinations in
Germany from fiscal 2005 onward, in the U.S. from fiscal
2007 onward and in Belgium from fiscal 2008 onward. The Company
is open to potential examinations from fiscal 2004 onward for
most other foreign jurisdictions.
The unrecognized tax benefits increased by approximately
$1.4 million during the third quarter of fiscal 2010 due to
an uncertain tax position taken on a tax return filed during
that quarter. This item had no impact on tax expense during the
quarter because a tax benefit had never been recorded for this
uncertain tax position.
The expiration of the statute of limitations in various foreign
jurisdictions during fiscal 2009 resulted in tax benefits of
approximately $1.6 million related to the reversal of tax
and interest previously accrued.
During fiscal 2008, the expiration of certain statutes of
limitation in foreign jurisdictions and the completion of
certain transfer pricing documentation resulted in tax benefits
of approximately $1.7 million relating to the reversal of
tax and interest previously accrued.
The amount of unrecognized tax benefits is expected to change in
the next 12 months; however the change is not expected to
have a significant impact on the financial position of the
Company.
83
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reconciliation of Unrecognized Tax Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
1,549
|
|
|
$
|
3,781
|
|
|
$
|
5,392
|
|
Decreases related to prior year tax positions
|
|
|
(314
|
)
|
|
|
(1,322
|
)
|
|
|
(600
|
)
|
Increases related to prior year tax positions
|
|
|
1,534
|
|
|
|
26
|
|
|
|
|
|
Increases related to current year tax positions
|
|
|
250
|
|
|
|
650
|
|
|
|
148
|
|
Settlements
|
|
|
|
|
|
|
(74
|
)
|
|
|
(984
|
)
|
Lapse of statute of limitations
|
|
|
(167
|
)
|
|
|
(1,301
|
)
|
|
|
(660
|
)
|
Foreign currency impact
|
|
|
(238
|
)
|
|
|
(211
|
)
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,614
|
|
|
$
|
1,549
|
|
|
$
|
3,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2010, no taxes have been provided on the
undistributed earnings of certain foreign subsidiaries amounting
to $342.6 million because the Company intends to
permanently reinvest these earnings. Quantification of the
deferred tax liability associated with these undistributed
earnings is not practical.
NOTE 8
PENSION AND POSTRETIREMENT BENEFIT PLANS
The Company has defined benefit pension plans and other
postretirement benefit plans, primarily health care and life
insurance. Benefits for the defined benefit pension plans are
based primarily on years of service and qualifying compensation
during the final years of employment. The measurement date for
all plans is August 31.
A supplemental non-qualified, non-funded pension plan for
certain retired officers was adopted as of January 1, 2004.
Charges to earnings are provided to meet the projected benefit
obligation. The pension cost for this plan is based on
substantially the same actuarial methods and economic
assumptions as those used for the defined benefit pension plans.
In connection with this plan, the Company owns and is the
beneficiary of life insurance policies that cover the estimated
total cost of this plan. The cash surrender value of this
insurance was approximately $2.7 million and
$2.3 million at August 31, 2010 and 2009, respectively.
Postretirement health care and life insurance benefits are
provided to certain U.S. employees if they meet certain age
and length of service requirements while working for the
Company. Effective January 1, 2004, the Company amended the
plan to require co-payments and participant contribution.
Effective April 1, 2007, the Company amended the plan which
eliminated retiree health care benefits for certain employees
and increased retiree contributions for health care benefits.
Effective July 1, 2008, the Company amended the plan which
eliminated retiree life insurance benefits for all nonunion
employees and retirees.
84
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of the plan obligations and assets, and the recorded
liability at August 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
(86,004
|
)
|
|
$
|
(78,222
|
)
|
|
$
|
(14,344
|
)
|
|
$
|
(13,161
|
)
|
Service cost
|
|
|
(2,159
|
)
|
|
|
(1,742
|
)
|
|
|
(30
|
)
|
|
|
(42
|
)
|
Interest cost
|
|
|
(4,505
|
)
|
|
|
(4,429
|
)
|
|
|
(765
|
)
|
|
|
(847
|
)
|
Participant contributions
|
|
|
(215
|
)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
Actuarial gain (loss)
|
|
|
(23,876
|
)
|
|
|
(7,836
|
)
|
|
|
(2,882
|
)
|
|
|
(1,849
|
)
|
Benefits paid
|
|
|
3,454
|
|
|
|
3,044
|
|
|
|
823
|
|
|
|
1,042
|
|
Settlement gain
|
|
|
517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combinations
|
|
|
(10,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain
|
|
|
|
|
|
|
249
|
|
|
|
|
|
|
|
513
|
|
Plan amendments
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
Translation adjustment
|
|
|
10,303
|
|
|
|
3,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
(112,517
|
)
|
|
$
|
(86,004
|
)
|
|
$
|
(17,054
|
)
|
|
$
|
(14,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
13,317
|
|
|
$
|
14,109
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on assets
|
|
|
2,751
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
3,197
|
|
|
|
3,252
|
|
|
|
823
|
|
|
|
1,042
|
|
Participant contributions
|
|
|
215
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
Business combinations
|
|
|
7,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(3,454
|
)
|
|
|
(3,044
|
)
|
|
|
(823
|
)
|
|
|
(1,042
|
)
|
Translation adjustment
|
|
|
(1,169
|
)
|
|
|
(1,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
22,259
|
|
|
$
|
13,317
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underfunded
|
|
$
|
(90,258
|
)
|
|
$
|
(72,687
|
)
|
|
$
|
(17,054
|
)
|
|
$
|
(14,344
|
)
|
Unamortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
|
|
31,942
|
|
|
|
13,003
|
|
|
|
4,270
|
|
|
|
1,388
|
|
Net prior year service cost (credit)
|
|
|
396
|
|
|
|
756
|
|
|
|
(4,186
|
)
|
|
|
(4,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(57,920
|
)
|
|
$
|
(58,928
|
)
|
|
$
|
(16,970
|
)
|
|
$
|
(17,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$
|
8,754
|
|
|
$
|
4,034
|
|
|
$
|
|
|
|
$
|
|
|
Accrued payrolls, taxes and related benefits
|
|
|
(3,386
|
)
|
|
|
(2,858
|
)
|
|
|
(935
|
)
|
|
|
(880
|
)
|
Long-term liabilities
|
|
|
(86,872
|
)
|
|
|
(69,888
|
)
|
|
|
(16,119
|
)
|
|
|
(13,464
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
23,584
|
|
|
|
9,784
|
|
|
|
84
|
|
|
|
(3,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(57,920
|
)
|
|
$
|
(58,928
|
)
|
|
$
|
(16,970
|
)
|
|
$
|
(17,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated Other Comprehensive Income,
net of tax, as of August 31, 2010 and 2009 include:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Prior service credit
|
|
$
|
3,790
|
|
|
$
|
3,842
|
|
Actuarial loss
|
|
|
(36,212
|
)
|
|
|
(14,450
|
)
|
|
|
|
|
|
|
|
|
|
Gross amount
|
|
|
(32,422
|
)
|
|
|
(10,608
|
)
|
Less income tax effect
|
|
|
8,754
|
|
|
|
4,034
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
(23,668
|
)
|
|
$
|
(6,574
|
)
|
|
|
|
|
|
|
|
|
|
85
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of net periodic benefit cost of the years ended
August 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
2,159
|
|
|
$
|
1,742
|
|
|
$
|
2,492
|
|
|
$
|
30
|
|
|
$
|
42
|
|
|
$
|
385
|
|
Interest cost
|
|
|
4,505
|
|
|
|
4,429
|
|
|
|
4,640
|
|
|
|
765
|
|
|
|
847
|
|
|
|
1,077
|
|
Expected return on plan assets
|
|
|
(984
|
)
|
|
|
(957
|
)
|
|
|
(1,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transition obligation
|
|
|
|
|
|
|
39
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
48
|
|
|
|
48
|
|
|
|
279
|
|
|
|
(557
|
)
|
|
|
(654
|
)
|
|
|
(647
|
)
|
Recognized gains due to plan settlements
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized (gains) losses due to plan curtailments
|
|
|
267
|
|
|
|
(188
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
(2,609
|
)
|
|
|
(3,895
|
)
|
Recognized net actuarial loss
|
|
|
338
|
|
|
|
250
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,305
|
|
|
$
|
5,363
|
|
|
$
|
6,278
|
|
|
$
|
238
|
|
|
$
|
(2,374
|
)
|
|
$
|
(3,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of fiscal 2010, the Company recorded a
curtailment loss of $0.3 million as a result of a
significant reduction in the expected years of future service,
primarily due to the European restructuring plan which included
the elimination of certain positions in the Companys
Crumlin, South Wales subsidiary.
During the second quarter of fiscal 2009, the Company recorded a
curtailment gain of $2.6 million as a result of a
significant reduction in the expected years of future service,
primarily due to its North American restructuring plan that
was announced in December 2008. During the fourth quarter of
fiscal 2009, the Company recorded a curtailment gain of
$0.2 million as a result of a significant reduction in the
expected years of future service, primarily due to the European
restructuring plan which included the elimination of certain
positions in the Companys Paris, France subsidiary as a
result of the consolidation of back-office operations to the
European shared service center.
During the second quarter of fiscal 2008, the Company announced
that it planned to amend its U.S. postretirement health
care coverage plan by eliminating post-65 retiree coverage as of
March 24, 2008. During the second quarter of fiscal 2008,
the Company reduced its postretirement health care benefit
liability by approximately $5.0 million with a
corresponding increase in accumulated other comprehensive income
due to the negative plan amendment. During the third quarter of
fiscal 2008, the Company recorded curtailment gains of
$2.3 million related to its U.S. postretirement health
care coverage plan as a result of a significant reduction in the
expected years of future service primarily due to the sale of
the Orange, Texas facility and a change in the executive
management. During the fourth quarter of fiscal 2008, the
Company recorded a curtailment gain of $1.7 million as a
result of the elimination of post retirement life insurance
benefits under the U.S. postretirement health care coverage
plan which eliminated the defined benefit for some or all of the
future services of a significant number of plan participants.
This U.S. postretirement health care benefit liability is
included in accrued payrolls, taxes and related benefits and
other long-term liabilities on the Companys consolidated
balance sheet.
86
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Selected information regarding the Companys pension and
other postretirement benefit plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
(In thousands)
|
|
Pension Plans:
|
|
|
|
|
|
|
|
|
All plans:
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
100,823
|
|
|
$
|
77,536
|
|
Plans with projected benefit obligations in excess of plan
assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
112,236
|
|
|
$
|
85,926
|
|
Accumulated benefit obligation
|
|
$
|
100,567
|
|
|
$
|
77,462
|
|
Fair value of plan assets
|
|
$
|
21,846
|
|
|
$
|
13,181
|
|
Plans with projected benefit obligations less than plan assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
281
|
|
|
$
|
78
|
|
Accumulated benefit obligation
|
|
$
|
256
|
|
|
$
|
74
|
|
Fair value of plan assets
|
|
$
|
413
|
|
|
$
|
136
|
|
Other Postretirement Benefit Plans:
|
|
|
|
|
|
|
|
|
All plans:
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
17,053
|
|
|
$
|
14,344
|
|
Plans with projected benefit obligations in excess of plan
assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
17,053
|
|
|
$
|
14,344
|
|
Accumulated benefit obligation
|
|
$
|
17,053
|
|
|
$
|
14,344
|
|
Fair value of plan assets
|
|
$
|
|
|
|
$
|
|
|
The under funded position is primarily related to the
Companys German and United Kingdom pension plans. In
Germany, there are no statutory requirements for funding while
in the United Kingdom there are certain statutory minimum
funding requirements.
Actuarial assumptions used in the calculation of the recorded
liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Assumptions as of
August 31:
|
|
2010
|
|
2009
|
|
2008
|
|
Discount rate on pension plans
|
|
|
4.0
|
%
|
|
|
5.4
|
%
|
|
|
6.3
|
%
|
Discount rate on postretirement obligation
|
|
|
4.50
|
%
|
|
|
5.50
|
%
|
|
|
7.00
|
%
|
Rate of compensation increase
|
|
|
2.4
|
%
|
|
|
2.5
|
%
|
|
|
2.7
|
%
|
Actuarial assumptions used in the calculation of the recorded
benefit expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Assumptions as of
August 31:
|
|
2010
|
|
2009
|
|
2008
|
|
Discount rate on pension plans
|
|
|
5.4
|
%
|
|
|
6.3
|
%
|
|
|
5.5
|
%
|
Discount rate on postretirement obligation
|
|
|
5.50
|
%
|
|
|
7.00
|
%
|
|
|
6.25
|
%
|
Return on pension plan assets
|
|
|
7.0
|
%
|
|
|
7.7
|
%
|
|
|
7.8
|
%
|
Rate of compensation increase
|
|
|
2.5
|
%
|
|
|
2.7
|
%
|
|
|
2.5
|
%
|
Projected health care cost trend rate
|
|
|
8.0
|
%
|
|
|
8.5
|
%
|
|
|
9.0
|
%
|
Ultimate health care rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year ultimate health care trend rate is achieved
|
|
|
2016
|
|
|
|
2016
|
|
|
|
2015
|
|
The Company, in consultation with its actuaries, annually, or as
needed for interim remeasurements, reviews and selects the
discount rates to be used in connection with its defined benefit
pension plans. The discount rates used by the Company are based
on yields of various corporate bond indices with varying
maturity dates. For countries in which there are no deep
corporate bond markets, discount rates used by the Company are
based on yields of various government bond indices with varying
maturity dates. The
87
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
discount rates are also reviewed in comparison with current
benchmark indices, economic market conditions and the movement
in the benchmark yield since the previous fiscal year.
The Company, in consultation with its actuaries, annually, or as
needed for interim remeasurements, reviews and selects the
discount rate to be used in connection with its postretirement
obligation. When selecting the discount rate the Company uses a
model that considers the Companys demographics of the
participants and the resulting expected benefit payment stream
over the participants lifetime.
For fiscal 2011, the Company, in consultation with its
actuaries, has selected a weighted average discount rate of
4.0%, expected long-term return on plan assets of 5.8% and rate
of compensation increase of 2.4% for its defined benefit pension
plans. For its postretirement benefit plan, the Company has
selected a discount rate of 4.5% for fiscal 2011.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plan. A
one-percentage point change in assumed health care cost trend
rates would have the following effects at August 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
One-Percentage
|
|
One-Percentage
|
|
|
Point Increase
|
|
Point Decrease
|
|
|
(In thousands)
|
|
Effect on aggregate of service and interest cost components of
net periodic postretirement benefit cost
|
|
$
|
84
|
|
|
$
|
(73
|
)
|
Effect on accumulated postretirement benefit obligation
|
|
$
|
1,867
|
|
|
$
|
(1,604
|
)
|
The Companys pension plan weighted-average asset
allocation at August 31, 2010 and 2009, and target
allocation, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at
|
|
|
Target
|
|
|
|
August 31,
|
|
|
Allocation
|
|
Asset Category
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Equity secuities
|
|
|
42.2
|
%
|
|
|
66.8
|
%
|
|
|
40.0
|
%
|
|
|
70.0
|
%
|
Debt securities
|
|
|
12.7
|
%
|
|
|
17.8
|
%
|
|
|
15.0
|
%
|
|
|
15.0
|
%
|
Fixed insurance contracts
|
|
|
37.6
|
%
|
|
|
14.1
|
%
|
|
|
35.0
|
%
|
|
|
10.0
|
%
|
Cash
|
|
|
7.5
|
%
|
|
|
1.3
|
%
|
|
|
10.0
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys principal objective is to ensure that
sufficient funds are available to provide benefits as and when
required under the terms of the plans. The Company utilizes
investments that provide benefits and maximizes the long-term
investment performance of the plans without taking on undue risk
while complying with various legal funding requirements. The
Company, through its investment advisors, has developed detailed
asset and liability models to aid in implementing optimal asset
allocation strategies. The Equity securities are invested in
equity indexed funds, which minimizes concentration risk while
offering market returns. The debt securities are invested in a
long-term bond indexed fund which provides a stable low risk
return. The fixed insurance contracts allow the Company to
closely match a portion of the liability to the expected payout
of benefit with little risk. The Company, in consultation with
its actuaries, analyzes current market trends, the current plan
performance and expected market performance of both the equity
and bond markets to arrive at the expected return on each asset
category over the long term. The Companys plan assets
which are invested in equity and debt securities are valued
utilizing Level 1 inputs while plan assets invested in
fixed insurance contracts are valued utilizing Level 3
inputs which are unobservable and reflect the Companys own
assumptions. The Company believes there is not a significant
concentration of risk within its plan assets.
88
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair values of the Companys pension plan assets
classified as Level 1 at August 31, 2010, all of which
are for
Non-U.S. plans,
are as follows:
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Measurements
|
|
|
|
at August 31, 2010
|
|
|
|
(In thousands)
|
|
|
Equity securities
|
|
$
|
9,392
|
|
Debt securities
|
|
|
2,820
|
|
Cash
|
|
|
1,669
|
|
|
|
|
|
|
|
|
$
|
13,881
|
|
|
|
|
|
|
The change in fair value of the Companys pension plan
assets classified as Level 3 for the year ended
August 31, 2010, all of which are for Non-U.S. plans, is as
follows:
|
|
|
|
|
|
|
Fixed
|
|
|
Insurance
|
|
|
Contracts
|
|
|
(In thousands)
|
|
Balance as of September 1, 2009
|
|
$
|
80
|
|
Realized gains
|
|
|
1,497
|
|
Purchases, sales, issuances, and settlements net
|
|
|
57
|
|
Business acquisitions
|
|
|
7,056
|
|
Foreign currency translation
|
|
|
(312
|
)
|
|
|
|
|
|
Balance as of August 31, 2010
|
|
$
|
8,378
|
|
|
|
|
|
|
The Company expects to contribute approximately
$4.0 million for its pension obligations and approximately
$0.9 million to its other postretirement plan in 2011. The
benefit payments, which reflect expected future service, offset
by the expected Medicare Prescription Drug subsidies, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits
|
|
|
Pension
|
|
Gross
|
|
Medicare
|
|
Net
|
|
|
Benefits
|
|
Benefits
|
|
Reimbursement
|
|
Benefits
|
|
|
(In thousands)
|
|
2011
|
|
$
|
3,488
|
|
|
$
|
1,042
|
|
|
$
|
107
|
|
|
$
|
935
|
|
2012
|
|
|
3,117
|
|
|
|
1,121
|
|
|
|
112
|
|
|
|
1,009
|
|
2013
|
|
|
3,303
|
|
|
|
1,157
|
|
|
|
122
|
|
|
|
1,035
|
|
2014
|
|
|
3,639
|
|
|
|
1,203
|
|
|
|
129
|
|
|
|
1,074
|
|
2015
|
|
|
3,984
|
|
|
|
1,238
|
|
|
|
135
|
|
|
|
1,103
|
|
Years 2016 2020
|
|
|
22,009
|
|
|
|
6,375
|
|
|
|
729
|
|
|
|
5,646
|
|
The Company has agreements with two individuals that upon
retirement, death or disability prior to retirement, it shall
make ten payments of $0.1 million each to the two
individuals or their beneficiaries for a ten-year period and are
100% vested. The liability required for these agreements is
included in other long-term liabilities as of August 31,
2010 and 2009. In connection with these agreements, the Company
owns and is the beneficiary of life insurance policies amounting
to $2.0 million.
The Company maintains several defined contribution plans that
cover domestic and foreign employees. The plan in which each
employee is eligible to participate depends upon the subsidiary
for which the employee works. Certain plans have eligibility
requirements related to age and period of service with the
Company. Certain plans have salary deferral features that enable
participating employees to contribute up to a certain percentage
of their earnings, subject to statutory limits and
89
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
certain foreign plans require the Company to match employee
contributions in cash. Employee contributions to the
Companys U.S. 401(k) plans have matching features
whereas the Company will match a participants contribution
up to a pre-approved amount of the participants annual
salary. The total expense for defined contribution plans was
approximately $1.9 million, $1.9 million and
$3.3 million in 2010, 2009 and 2008, respectively.
|
|
NOTE 9
|
COMPREHENSIVE
INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
|
Comprehensive income (loss) for the years ended August 31,
2010, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
44,121
|
|
|
$
|
(2,427
|
)
|
|
$
|
18,921
|
|
Foreign currency translation gain (loss)
|
|
|
(27,898
|
)
|
|
|
(30,824
|
)
|
|
|
20,715
|
|
Unrecognized losses and prior service costs (credits), net
|
|
|
(17,094
|
)
|
|
|
(10,365
|
)
|
|
|
9,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
(871
|
)
|
|
|
(43,616
|
)
|
|
|
48,732
|
|
Comprehensive (income) loss attributable to noncontrolling
interests
|
|
|
(221
|
)
|
|
|
(349
|
)
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to
A. Schulman, Inc.
|
|
$
|
(1,092
|
)
|
|
$
|
(43,965
|
)
|
|
$
|
47,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of Accumulated Other Comprehensive Income (Loss)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
|
|
|
Total
|
|
|
|
|
|
|
Losses and
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Prior Service
|
|
|
Other
|
|
|
|
Currency
|
|
|
Costs
|
|
|
Comprehensive
|
|
|
|
Translation Gain (Loss)
|
|
|
(Credits), Net
|
|
|
Income (Loss)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance as of August 31, 2007
|
|
$
|
55,397
|
|
|
$
|
(5,305
|
)
|
|
$
|
50,092
|
|
Current period change
|
|
|
20,715
|
|
|
|
9,096
|
|
|
|
29,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2008
|
|
|
76,112
|
|
|
|
3,791
|
|
|
|
79,903
|
|
Current period change
|
|
|
(30,824
|
)
|
|
|
(10,365
|
)
|
|
|
(41,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2009
|
|
|
45,288
|
|
|
|
(6,574
|
)
|
|
|
38,714
|
|
Current period change
|
|
|
(27,898
|
)
|
|
|
(17,094
|
)
|
|
|
(44,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2010
|
|
$
|
17,390
|
|
|
$
|
(23,668
|
)
|
|
$
|
(6,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets and liabilities of the Companys foreign
subsidiaries are translated into U.S. dollars using current
exchange rates. Income statement items are translated at average
exchange rates prevailing during the period. The decrease in
this component of accumulated other comprehensive income (loss)
in 2010 was primarily due to the decline in the value of the
Euro and other currencies against the U.S. dollar. Foreign
currency translation gains or losses do not have a tax effect,
as such gains or losses are considered permanently reinvested.
Other comprehensive income (loss) adjustments related to
pensions and other postretirement benefit plans are recorded net
of tax using the applicable effective tax rate.
Accumulated other comprehensive income (loss) adjustments
related to pensions and other postretirement benefit plans are
recorded net of tax using the applicable effective tax rate. The
decrease in this component of accumulated other comprehensive
income (loss) in 2010 was primarily
90
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
due to an increase in unrecognized losses from a decrease in the
discount rates used when measuring the Companys pension
and other postretirement benefit plan liabilities.
NOTE 10
INCENTIVE STOCK PLANS
Effective in December 2002, the Company adopted the 2002 Equity
Incentive Plan, which provided for the grant of incentive stock
options, nonqualified stock options, restricted stock awards and
director deferred units for employees and non-employee
directors. The option price of incentive stock options is the
fair market value of the common shares on the date of the grant.
In the case of nonqualified options, the Company grants options
at 100% of the fair market value of the common shares on the
date of the grant. All options become exercisable at the rate of
33% per year, commencing on the first anniversary date of the
grant. Each option expires ten years from the date of the grant.
Restricted stock awards under the 2002 Equity Incentive Plan
vest ratably over four years following the date of grant.
On December 7, 2006, the Company adopted the 2006 Incentive
Plan, which provides for the grant of incentive stock options,
nonqualified stock options, whole shares, restricted stock
awards, restricted stock units, stock appreciation rights,
performance shares, performance units, cash-based awards,
dividend equivalents and performance-based awards. Upon adoption
of the 2006 Incentive Plan, all remaining shares eligible for
award under the 2002 Equity Incentive Plan were added to the
2006 Incentive Plan and no further awards could be made from the
2002 Equity Incentive Plan. It has been the Companys
practice to issue new common shares upon stock option exercise
and other equity grants. On August 31, 2010, there were
approximately 1.0 million shares available for grant
pursuant to the Companys 2006 Incentive Plan.
A summary of stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Weighted-
|
|
|
Shares
|
|
Average
|
|
|
Under
|
|
Exercise
|
|
|
Option
|
|
Price
|
|
Outstanding at August 31, 2009
|
|
|
492,455
|
|
|
$
|
19.25
|
|
Granted
|
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
(214,027
|
)
|
|
$
|
18.74
|
|
Forfeited and expired
|
|
|
(13,166
|
)
|
|
$
|
17.08
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2010
|
|
|
265,262
|
|
|
$
|
19.77
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 31, 2010
|
|
|
265,262
|
|
|
$
|
19.77
|
|
|
|
|
|
|
|
|
|
|
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 options exercised
during the year ended August 31, 2010 was approximately
$1.4 million. The total intrinsic value of stock options
exercised during the year ended August 31, 2009 was
insignificant due to the small number of options exercised. The
intrinsic value for stock options exercisable at August 31,
2010 was $0.1 million with a remaining term for options
exercisable of 4.1 years. For stock options outstanding at
August 31, 2010, exercise prices range from $11.62 to
$24.69. The weighted average remaining contractual life for
options outstanding at August 31, 2010 was 4.1 years.
All 265,262 outstanding and exercisable stock options are fully
vested as of August 31, 2010. The Company did not grant
stock options in fiscal years 2010, 2009 or 2008.
Restricted stock awards under the 2002 Equity Incentive Plan
vest over four years following the date of grant. Restricted
stock awards under the 2006 Incentive Plan can vest over various
periods. The restricted stock grants outstanding under the 2006
Incentive Plan have service vesting periods of three
91
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
years following the date of grant. The following table
summarizes the outstanding time-based restricted stock awards
and weighted-average fair market value:
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Weighted-Average
|
|
|
Restricted
|
|
Fair Market Value
|
|
|
Stock Awards
|
|
(per Share)
|
|
Outstanding at August 31, 2009
|
|
|
180,429
|
|
|
$
|
19.48
|
|
Granted
|
|
|
83,176
|
|
|
$
|
21.72
|
|
Vested
|
|
|
(109,672
|
)
|
|
$
|
20.36
|
|
Forfeited
|
|
|
(84
|
)
|
|
$
|
20.44
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2010
|
|
|
153,849
|
|
|
$
|
20.05
|
|
|
|
|
|
|
|
|
|
|
During the year ended August 31, 2010, the Company granted
83,176 time-based restricted shares with a weighted-average
grant date fair value of $21.72. Restrictions on these shares
underlying the restricted stock awards will lapse ratably over a
three-year period and were valued at the fair market value on
the date of grant. The weighted-average grant date fair value of
restricted stock awards granted during the years ended
August 31, 2009 and 2008 were $16.62 and $20.66,
respectively.
The Company also grants awards with market and performance
vesting conditions. In the table below, the Company summarizes
all awards which include market-based and performance-based
restricted stock awards and performance shares.
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Weighted-Average
|
|
|
Performance-Based
|
|
Fair Market Value
|
|
|
Awards
|
|
(per Share)
|
|
Outstanding at August 31, 2009
|
|
|
516,681
|
|
|
$
|
12.72
|
|
Granted
|
|
|
272,568
|
|
|
$
|
18.22
|
|
Vested
|
|
|
(83,720
|
)
|
|
$
|
20.55
|
|
Forfeited
|
|
|
(375
|
)
|
|
$
|
13.13
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2010
|
|
|
705,154
|
|
|
$
|
13.91
|
|
|
|
|
|
|
|
|
|
|
The Company granted 272,568 and 252,275 performance shares
during the years ended August 31, 2010 and 2009,
respectively. Performance shares are awards for which the
vesting will occur based on market or performance conditions and
do not have voting rights. Included in the outstanding
performance-based awards as of August 31, 2010 are 383,728
performance shares which earn dividends throughout the vesting
period and approximately 321,426 performance shares which do not
earn dividends. Performance-based restricted stock awards from
the fiscal 2007 grant totaling 83,720 which had vesting terms
based on both service and market performance criteria vested in
April 2010. At the vesting date, these performance-based
restricted stock awards did not meet certain market conditions
targets which would have required approximately 41,860
additional shares to be issued.
The performance-based awards in the table above include
568,870 shares which are valued based upon a Monte Carlo
simulation, which is a valuation model that represents the
characteristics of these grants. Vesting of the ultimate number
of shares underlying performance-based awards, if any, will be
dependent upon the Companys total stockholder return in
relation to the total stockholder return of a select group of
peer companies over a three-year period. The probability of
meeting the market criteria was considered when calculating the
estimated fair market value on the date of grant using a Monte
Carlo simulation. These awards were accounted for as awards with
market conditions, which are recognized over the service period,
regardless of whether the market conditions are achieved and the
awards ultimately vest. The fair value of the remaining 136,284
performance shares in the table above is based on the closing
price of the Companys common stock on the date of the
grant. In fiscal 2010, the Company granted 272,568 performance
shares with a weighted-average grant date fair value of $18.22.
The
92
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
weighted-average grant date fair value of the Performance Shares
with market conditions granted in January 2009 was $9.66 per
share and $9.36 for those granted in June 2009. The fiscal 2008
performance-based award grants had a weighted-average grant date
fair value of $13.23.
The fair values of the performance shares granted during fiscal
2010, fiscal 2009 and fiscal 2008 were estimated using a Monte
Carlo simulation model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions
|
|
Fiscal 2010
|
|
Fiscal 2009
|
|
Fiscal 2008
|
|
Dividend yield
|
|
|
2.68
|
%
|
|
|
3.60
|
%
|
|
|
2.84
|
%
|
Expected volatility
|
|
|
46.00
|
%
|
|
|
36.00
|
%
|
|
|
30.00
|
%
|
Risk-free interest rate
|
|
|
1.54
|
%
|
|
|
1.09
|
%
|
|
|
1.97
|
%
|
Correlation
|
|
|
59.00
|
%
|
|
|
52.00
|
%
|
|
|
32.00
|
%
|
The expected volatility assumption was calculated using a
historical range to correlate with the awards vesting
period. The Company used the weekly volatility for each company
in the peer group to determine a reasonable assumption for the
valuation. In using the Monte Carlo simulation method with this
type of grant, a correlation rate of the Companys stock
price and each of the peer companies is calculated. The Company
determined a correlation percentage based on all correlation
rates. The risk-free interest rate is based on zero coupon
treasury bond rates corresponding to the expected life of the
awards. The expected dividend yield of common stock is based on
the Companys historical dividend yield. The Company has no
reason to believe that future stock volatility, correlation or
the expected dividend yield is likely to differ from historical
patterns.
Total unrecognized compensation cost, including a provision for
forfeitures, related to nonvested share-based compensation
arrangements at August 31, 2010 was approximately
$7.4 million. This cost is expected to be recognized over a
weighted-average period of approximately 1.5 years.
As of August 31, 2010, the Company had 25,000 stock-settled
restricted stock units outstanding which were fully vested as of
the grant date. There are no service requirements for vesting
for this grant. These restricted stock units will be settled in
shares of the Companys common stock, on a
one-to-one
basis, no later than 60 days after the third anniversary of
the award grant date. These awards do earn dividends during the
restriction period; however, they do not have voting rights
until released from restriction. These awards are treated as
equity awards and have a grant date fair value based on the
award grant date of $13.61 per award. There were no grants of
stock-settled restricted stock units during the year ended
August 31, 2010. During the year ended August 31,
2009, the Company granted 27,500 stock-settled restricted stock
units which were fully vested as of the grant date.
The Company had approximately 174,000 and 242,000 cash-settled
restricted stock units outstanding with various vesting periods
and criteria at August 31, 2010 and 2009, respectively. The
Company granted approximately 60,000 cash-settled restricted
stock units during both the years ended August 31, 2010 and
2009. The cash-settled restricted stock units outstanding have
either time-based vesting or performance-based vesting, similar
to the Companys restricted stock awards and performance
shares. Each cash-settled restricted stock unit is equivalent to
one share of the Companys common stock on the vesting
date. Certain cash-settled restricted stock units earn dividends
during the vesting period. Cash-settled restricted stock units
are settled only in cash at the vesting date and therefore are
treated as a liability award. The Company records a liability
for these restricted stock units in an amount equal to the total
of (a) the
mark-to-market
adjustment of the units vested to date, and (b) accrued
dividends on the units. In addition, the liability is adjusted
for the estimated payout factor for the performance-based
cash-settled restricted stock units. As a result of these
mark-to-market
and performance related adjustments, these restricted stock
units introduce volatility into the Companys consolidated
statements of operations.
93
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company had approximately $3.9 million cash-based
awards, which are treated as liability awards, outstanding as of
August 31, 2010. These awards were granted to foreign
employees. Such awards include approximately $0.7 million
which have service vesting periods of three years following the
date of grant and the remaining $3.2 million is
performance-based. The performance-based awards are based on the
same conditions utilized for the performance shares. The Company
records a liability for these cash-based awards equal to the
amount of the award vested to date and adjusts the
performance-based awards based on expected payout.
The Company made cash payments of $2.5 million,
$1.8 million and $0.3 million for cash-settled
restricted stock units and cash-based awards during fiscal 2010,
fiscal 2009 and fiscal 2008, respectively.
During fiscal 2010, the Company granted non-employee directors
approximately 40,000 shares of unrestricted common stock.
The Company recorded compensation expense for these grants of
approximately $0.9 million for the year ended
August 31, 2010.
In fiscal 2010, the Companys board of directors and
stockholders approved adoption of an Employee Stock Purchase
Plan (ESPP) whereby employees may purchase Company
stock through a payroll deduction plan. Purchases are made from
the plan and credited to each participants account at the
end of each calendar quarter, the Investment Date.
The purchase price of the stock is 85% of the fair market value
on the Investment Date. The plan is compensatory and the 15%
discount is expensed ratably over the three month offering
period. All employees, including officers, are eligible to
participate in this plan. An employee whose stock ownership of
the Company exceeds five percent of the outstanding common stock
is not eligible to participate in this plan. The Company
recorded minimal expense related to the ESPP during fiscal 2010.
It is the Companys current practice to use treasury shares
for the share settlement on the Investment Date.
The following table summarizes the impact to the Companys
consolidated statements of operations from stock-based
compensation, which is primarily included in selling, general
and administrative expenses in the accompanying consolidated
statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Restricted stock awards and performance-based awards
|
|
$
|
4.1
|
|
|
$
|
2.9
|
|
|
$
|
4.2
|
|
Cash-settled restricted stock units
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
2.8
|
|
Cash-based awards
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
4.7
|
|
|
$
|
4.4
|
|
|
$
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income
available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if
common stock equivalents were exercised, and the impact of
restricted stock and performance-based awards expected to vest,
which would then share in the earnings of the Company.
The difference between basic and diluted weighted-average common
shares results from the assumed exercise of outstanding stock
options and grants of restricted stock, calculated using the
94
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
treasury stock method. The following presents the number of
incremental weighted-average shares used in computing diluted
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,746,220
|
|
|
|
25,790,421
|
|
|
|
26,794,923
|
|
Incremental shares from stock options
|
|
|
38,913
|
|
|
|
9,219
|
|
|
|
77,689
|
|
Incremental shares from restricted stock
|
|
|
191,210
|
|
|
|
269,991
|
|
|
|
225,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
27,976,343
|
|
|
|
26,069,631
|
|
|
|
27,097,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal years 2010, 2009, and 2008, there were approximately
60,000, 480,000 and 63,000, respectively, of equivalent shares
related to stock options that were excluded from diluted
weighted-average shares outstanding because inclusion would have
been anti-dilutive.
The Board of Directors approved 1,000,000 shares of special
stock with special designations, preferences and relative,
participating, optional or other special rights, and
qualifications, limitations or restrictions as determined by the
Board of Directors. As of August 31, 2010, no shares of
special stock are outstanding.
NOTE 12
LEASES
The Company leases certain equipment, buildings, transportation
vehicles and computer equipment. Total rental expense was
$7.4 million in 2010, $6.2 million in 2009 and
$7.7 million in 2008. The approximate future minimum rental
commitments for operating non-cancelable leases excluding
obligations for taxes and insurance are as follows:
|
|
|
|
|
|
|
Minimum Rental
|
|
Year Ended August 31,
|
|
Commitments
|
|
|
|
(In millions)
|
|
|
2011
|
|
$
|
5.6
|
|
2012
|
|
|
3.6
|
|
2013
|
|
|
3.1
|
|
2014
|
|
|
2.0
|
|
2015
|
|
|
2.0
|
|
2016 and thereafter
|
|
|
3.5
|
|
|
|
|
|
|
|
|
$
|
19.8
|
|
|
|
|
|
|
NOTE 13
SEGMENT INFORMATION
The Company considers its operating structure and the types of
information subject to regular review by its President and Chief
Executive Officer (CEO), who is the Chief Operating
Decision Maker (CODM), to identify reportable
segments.
As a result of the April 30, 2010 acquisition of ICO, the
Company updated its reportable segments to reflect the
Companys current reporting structure. The Company now has
six reportable segments based on the regions in which they
operate and the products and services they provide. The six
reportable segments are Europe, Middle East and Africa
(EMEA), North America Masterbatch
(NAMB), North America Engineered Plastics
(NAEP), North America Rotomolding
(NARM), Asia Pacific
95
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(APAC) and Bayshore. The following table describes
the components of the Companys pre- and post-merger and
ICOs former reportable segments which make up the current
reportable segments:
|
|
|
|
|
Current A. Schulman, Inc.
|
|
Former A. Schulman, Inc.
|
|
Former ICO, Inc.
|
|
EMEA
|
|
Europe
|
|
ICO Europe
|
North America Masterbatch
|
|
North America Masterbatch
|
|
ICO Brazil
|
North America Engineered Plastics
|
|
North America Engineered Plastics
|
|
|
North America Rotomolding
|
|
North America Distribution Services
|
|
ICO Polymers North America
|
APAC
|
|
Asia
|
|
ICO Asia Pacific
|
Bayshore
|
|
|
|
Bayshore Industrial
|
Globally, the Company operates primarily in four lines of
business: (1) masterbatch, (2) engineered plastics,
(3) rotomolding and (4) distribution. In North
America, there is a general manager of each of these lines of
business, each of whom reports directly to the Companys
CEO. The Companys EMEA and APAC segments have managers of
each line of business, who report to a general manager who
reports to the CEO. Currently, the Companys CEO does not
directly manage the business line level when reviewing
performance and allocating resources for the EMEA and APAC
segments.
During fiscal 2010, the Company completed the closure of its
Invision sheet manufacturing operation at its Sharon Center,
Ohio manufacturing facility. This business comprised the former
Invision segment of the Companys business. The Company
reflected the results of these operations as discontinued
operations for all periods presented and are not included in the
segment information.
Below the Company presents net sales to unaffiliated customers
by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
EMEA
|
|
$
|
1,142,523
|
|
|
$
|
935,895
|
|
|
$
|
1,454,635
|
|
NAMB
|
|
|
132,276
|
|
|
|
108,474
|
|
|
|
136,124
|
|
NAEP
|
|
|
127,061
|
|
|
|
121,701
|
|
|
|
211,259
|
|
NARM
|
|
|
77,550
|
|
|
|
67,920
|
|
|
|
131,811
|
|
APAC
|
|
|
84,909
|
|
|
|
45,258
|
|
|
|
49,766
|
|
Bayshore
|
|
|
26,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales to unaffiliated customers
|
|
$
|
1,590,443
|
|
|
$
|
1,279,248
|
|
|
$
|
1,983,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Below the Company presents gross profit by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
EMEA
|
|
$
|
177,010
|
|
|
$
|
141,137
|
|
|
$
|
194,383
|
|
NAMB
|
|
|
17,204
|
|
|
|
8,279
|
|
|
|
12,231
|
|
NAEP
|
|
|
15,272
|
|
|
|
8,849
|
|
|
|
13,846
|
|
NARM
|
|
|
11,267
|
|
|
|
6,670
|
|
|
|
10,013
|
|
APAC
|
|
|
11,656
|
|
|
|
6,372
|
|
|
|
5,530
|
|
Bayshore
|
|
|
4,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment gross profit
|
|
|
236,879
|
|
|
|
171,307
|
|
|
|
236,003
|
|
Asset write-downs
|
|
|
(69
|
)
|
|
|
(1,270
|
)
|
|
|
|
|
Restructuring related
|
|
|
|
|
|
|
|
|
|
|
(1,473
|
)
|
Inventory
step-up
|
|
|
(3,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
232,868
|
|
|
$
|
170,037
|
|
|
$
|
234,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The CODM uses net sales to unaffiliated customers, gross profit
and operating income in order to make decisions, assess
performance and allocate resources to each segment. Certain
portions of the Companys North American operations are not
managed separately and are included in All Other
North America. The Company includes in All Other North
America any administrative costs that are not directly related
or allocated to a North America business unit such as North
American information technology, human resources, accounting and
purchasing. The North American administrative costs are directly
related to the four North American segments. Operating income
before certain items does not include corporate expenses,
interest income or expense, other income or expense, foreign
currency transaction gains or losses and other certain items
such as restructuring related expenses, asset write-downs, costs
related to business acquisitions, inventory
step-up, CEO
transition costs, termination of a lease for an airplane and an
insurance claim settlement adjustment. Corporate expenses
include the compensation of certain personnel, certain audit
expenses, board of directors related costs, certain insurance
costs and other miscellaneous legal and professional fees.
97
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Below is a reconciliation of operating income before certain
items by segment to consolidated income from continuing
operations before taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Segment operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
69,393
|
|
|
$
|
50,169
|
|
|
$
|
96,579
|
|
NAMB
|
|
|
11,232
|
|
|
|
2,809
|
|
|
|
5,507
|
|
NAEP
|
|
|
5,202
|
|
|
|
(4,641
|
)
|
|
|
(6,587
|
)
|
NARM
|
|
|
5,260
|
|
|
|
3,082
|
|
|
|
5,288
|
|
APAC
|
|
|
2,981
|
|
|
|
2,807
|
|
|
|
2,101
|
|
Bayshore
|
|
|
1,990
|
|
|
|
|
|
|
|
|
|
All other North America
|
|
|
(11,648
|
)
|
|
|
(11,265
|
)
|
|
|
(15,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
84,410
|
|
|
|
42,961
|
|
|
|
87,827
|
|
Corporate and other
|
|
|
(20,538
|
)
|
|
|
(18,438
|
)
|
|
|
(16,663
|
)
|
Interest expense, net
|
|
|
(3,665
|
)
|
|
|
(2,437
|
)
|
|
|
(5,476
|
)
|
Foreign currency transaction gains (losses)
|
|
|
(874
|
)
|
|
|
5,645
|
|
|
|
(1,133
|
)
|
Other income (expense)
|
|
|
2,469
|
|
|
|
1,826
|
|
|
|
413
|
|
Asset write-downs
|
|
|
(5,737
|
)
|
|
|
(3,878
|
)
|
|
|
(6,363
|
)
|
Costs related to acquisitions
|
|
|
(6,814
|
)
|
|
|
|
|
|
|
|
|
Restructuring related
|
|
|
(5,368
|
)
|
|
|
(7,219
|
)
|
|
|
(4,531
|
)
|
Inventory
step-up
|
|
|
(3,942
|
)
|
|
|
|
|
|
|
|
|
CEO transition costs
|
|
|
|
|
|
|
|
|
|
|
(3,582
|
)
|
Termination of lease for an airplane
|
|
|
|
|
|
|
|
|
|
|
(640
|
)
|
Insurance claim settlement adjustment
|
|
|
|
|
|
|
|
|
|
|
(368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
$
|
39,941
|
|
|
$
|
18,460
|
|
|
$
|
49,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes identifiable assets by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
616,592
|
|
|
$
|
570,392
|
|
|
$
|
591,755
|
|
NAMB
|
|
|
82,221
|
|
|
|
73,022
|
|
|
|
87,398
|
|
NAEP
|
|
|
64,862
|
|
|
|
52,471
|
|
|
|
78,650
|
|
NARM
|
|
|
87,628
|
|
|
|
11,797
|
|
|
|
34,773
|
|
APAC
|
|
|
85,513
|
|
|
|
34,099
|
|
|
|
37,197
|
|
Bayshore
|
|
|
89,904
|
|
|
|
|
|
|
|
|
|
All other North America
|
|
|
44,605
|
|
|
|
55,708
|
|
|
|
60,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets
|
|
$
|
1,071,325
|
|
|
$
|
797,489
|
|
|
$
|
890,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables summarize depreciation and amortization and
capital expenditures by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
13,896
|
|
|
$
|
13,395
|
|
|
$
|
16,111
|
|
NAMB
|
|
|
3,593
|
|
|
|
2,834
|
|
|
|
3,236
|
|
NAEP
|
|
|
4,290
|
|
|
|
5,318
|
|
|
|
4,498
|
|
NARM
|
|
|
1,423
|
|
|
|
124
|
|
|
|
243
|
|
APAC
|
|
|
2,409
|
|
|
|
1,567
|
|
|
|
1,589
|
|
Bayshore
|
|
|
1,450
|
|
|
|
|
|
|
|
|
|
All other North America
|
|
|
388
|
|
|
|
301
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization expense from continuing
operations
|
|
$
|
27,449
|
|
|
$
|
23,539
|
|
|
$
|
26,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
10,927
|
|
|
$
|
7,197
|
|
|
$
|
8,652
|
|
NAMB
|
|
|
4,802
|
|
|
|
10,888
|
|
|
|
5,798
|
|
NAEP
|
|
|
604
|
|
|
|
5,400
|
|
|
|
2,194
|
|
NARM
|
|
|
1,412
|
|
|
|
97
|
|
|
|
82
|
|
APAC
|
|
|
925
|
|
|
|
831
|
|
|
|
369
|
|
Bayshore
|
|
|
244
|
|
|
|
|
|
|
|
|
|
All other North America
|
|
|
63
|
|
|
|
242
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures from continuing operations
|
|
$
|
18,977
|
|
|
$
|
24,655
|
|
|
$
|
17,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below is a summary of net sales by point of origin and assets by
location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
231,890
|
|
|
$
|
192,541
|
|
|
$
|
334,266
|
|
Germany
|
|
|
496,073
|
|
|
|
408,168
|
|
|
|
675,778
|
|
Other International
|
|
|
862,480
|
|
|
|
678,539
|
|
|
|
973,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,590,443
|
|
|
$
|
1,279,248
|
|
|
$
|
1,983,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Long Lived Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
89,345
|
|
|
$
|
60,050
|
|
|
$
|
67,086
|
|
Germany
|
|
|
24,876
|
|
|
|
26,359
|
|
|
|
29,548
|
|
Other International
|
|
|
124,742
|
|
|
|
83,031
|
|
|
|
95,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
238,963
|
|
|
$
|
169,440
|
|
|
$
|
191,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The majority of the Companys sales for the years ended
August 31, 2010, 2009 and 2008 can be classified into four
primary product families. The amount and percentage of
consolidated sales for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except for %s)
|
|
|
Masterbatch
|
|
$
|
676,977
|
|
|
|
43
|
%
|
|
$
|
574,641
|
|
|
|
45
|
%
|
|
$
|
735,738
|
|
|
|
37
|
%
|
Engineered Plastics
|
|
|
460,141
|
|
|
|
29
|
|
|
|
382,709
|
|
|
|
30
|
|
|
|
615,672
|
|
|
|
31
|
|
Rotomolding
|
|
|
129,122
|
|
|
|
8
|
|
|
|
30,312
|
|
|
|
2
|
|
|
|
55,572
|
|
|
|
3
|
|
Distribution
|
|
|
324,203
|
|
|
|
20
|
|
|
|
291,586
|
|
|
|
23
|
|
|
|
576,613
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,590,443
|
|
|
|
100
|
%
|
|
$
|
1,279,248
|
|
|
|
100
|
%
|
|
$
|
1,983,595
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 14
RESTRUCTURING
ASI UNITED
KINGDOM PLAN
On August 31, 2010, management announced restructuring
plans for its operations at its Crumlin, South Wales (U.K.)
plant. The plans include moving part of the plants
capacity to two other, larger plants in Europe, and several
production lines will be shut down. As a result, the Company
will reduce headcount at this location by approximately 30. The
Company will continue to enhance the capabilities of the Crumlin
plant to produce smaller lots of colors and other specialty
compounds for the local market. The Company recorded
approximately $0.4 million in pretax restructuring costs
for employee-related costs. The Company anticipates
approximately $0.2 million in accelerated depreciation to
be recorded over the next few quarters.
ICO NEW ZEALAND
PLAN
In March 2010, ICO management decided to close its operations at
its plant in New Zealand. Production ceased as of March 31,
2010, which involved a reduction in workforce of 15. Since
May 1, 2010, the Company recorded approximately
$0.3 million related to a lease termination fee and other
restructuring charges related to the New Zealand restructuring
plan. All costs incurred were settled during the fiscal year and
no accrual remains for this plan as of August 31, 2010. The
closure of the New Zealand operations was completed during
the fourth quarter of fiscal 2010; therefore, the Company does
not expect to incur any further charges.
ICO MERGER
PLAN
In conjunction with the merger with ICO, the Company reduced the
workforce in the Houston, Texas office by 17. ICO had
preexisting arrangements regarding
change-in-control
payments and severance pay which were based on pre-merger
service. The Company assumed $2.1 million in liabilities as
a result of the merger related to these agreements, of which
$2.0 million was paid by the Company during fiscal 2010. On
August 31, 2010, the Company announced the exit of two
senior managers in Europe in connection with the Companys
ongoing integration of ICO operations. The Company recorded
approximately $1.7 million primarily in pretax
employee-related costs during fiscal 2010 related to the
integration of the ICO merger. The Company has approximately
$0.5 million remaining accrued for the ICO merger plan as
of August 31, 2010, to be paid over the first three
quarters of fiscal 2011. The Company expects minimal remaining
charges to be incurred into late fiscal 2011.
100
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NAMB FISCAL 2010
PLAN
On March 1, 2010, the Company announced the closure of its
Polybatch Color Center located in Sharon Center, Ohio, which is
a plant in the NAMB segment. The Company recorded pretax
restructuring expenses of $1.3 million during fiscal 2010
primarily for employee-related costs associated with the
closure. As of August 31, 2010, approximately
$0.6 million remains accrued which the Company expects to
pay during the first quarter of fiscal 2011. The Company ceased
production at the Polybatch Color Center on August 31,
2010. The Company expects additional charges of less than
$0.3 million related to this initiative, before income tax,
to be recognized primarily during early fiscal 2011 as it
completes the shutdown procedures.
FISCAL 2009
PLAN
During fiscal 2009, the Company announced various plans to
realign its domestic and international operations to strengthen
the Companys performance and financial position. The
Company initiated these proactive actions to address the then
weak global economic conditions and improve the Companys
competitive position. The actions included a reduction in
capacity and workforce reductions in manufacturing, selling and
administrative positions throughout Europe and
North America. In addition, in fiscal 2010, the Company
completed the previously announced consolidation of its
back-office operations in Europe, which include finance and
accounting functions, to a shared service center located in
Belgium.
The Company reduced its workforce by approximately 190 positions
worldwide during fiscal 2009, primarily as a result of the
actions taken in early fiscal 2009 to realign the Companys
operations and back-office functions. In addition, to further
manage costs during a period of significant declines in demand
primarily in the second quarter of fiscal 2009, the
Companys major European locations implemented a
short work schedule when necessary and the NAEP
segment reduced shifts from seven to five days at its Nashville,
Tennessee plant. Also in the NAEP segment, the Company reduced
production capacity by temporarily idling one manufacturing
line, while permanently shutting down another line at its plant
in Bellevue, Ohio. The Company completed the right-sizing and
redesign of its Italian plant, which resulted in less than
$0.1 million of accelerated depreciation on certain fixed
assets during the first quarter of fiscal 2010.
The Company recorded approximately $0.6 million for
employee-related costs and $0.6 million for contract
termination and other restructuring costs related to the fiscal
2009 initiatives during fiscal 2010. Accelerated depreciation
included in cost of sales of $0.1 million was also recorded
during fiscal 2010. Nearly all restructuring charges recorded
for the fiscal 2009 Plan during fiscal 2010 were related to the
EMEA segment; however, minimal charges were also recorded
related to the NAEP segment.
101
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The costs associated with the fiscal 2009 initiatives were
primarily recorded in fiscal 2009; therefore, the following
table was included to summarize the fiscal 2009 charges by
segment for these initiatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
Accelerated
|
|
|
|
|
|
|
|
|
|
Termination and
|
|
|
Depreciation
|
|
|
|
|
|
|
Employee-
|
|
|
Other Related
|
|
|
Included in
|
|
|
|
|
Fiscal 2009 charges
|
|
Related Costs
|
|
|
Restructuring Costs
|
|
|
Cost of Sales
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
EMEA
|
|
$
|
3.3
|
|
|
$
|
0.7
|
|
|
$
|
0.1
|
|
|
$
|
4.1
|
|
NAMB
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
NAEP
|
|
|
2.4
|
|
|
|
1.7
|
|
|
|
1.2
|
|
|
|
5.3
|
|
All other North America
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring related charges for the fiscal 2009 actions
|
|
$
|
5.9
|
|
|
$
|
2.4
|
|
|
$
|
1.3
|
|
|
$
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2010, approximately $0.3 million
remains accrued for employee-related costs, including estimated
severance payments and medical insurance, and contract
termination costs related to the fiscal 2009 initiatives. The
Company anticipates the majority of the remaining accrued
balance for restructuring charges will be paid during the first
half of fiscal 2011.
The Company charges related to the plans initiated in fiscal
2009 to reduce capacity and headcount at certain international
locations were substantially complete as of the end of fiscal
2010.
FISCAL 2008
PLAN
In January 2008, the Company announced two steps in its
continuing effort to improve the profitability of its North
American operations. The Company announced it would shut down
its manufacturing facility in St. Thomas, Ontario, Canada and
would pursue a sale of its manufacturing facility in Orange,
Texas. All the restructuring costs related to the sale of the
Orange, Texas and the St. Thomas, Ontario, Canada
facilities are related to the NAEP segment.
The Orange, Texas facility primarily provided North American
third-party tolling services in which the Company processed
customer-owned materials for a fee. Total annual capacity at the
Orange, Texas facility was approximately 135 million pounds
and employed approximately 100 employees. The Company
completed the sale of this facility in March 2008 for total
consideration of $3.7 million.
The St. Thomas, Ontario, Canada facility primarily produced
engineered plastics for the automotive market, with a capacity
of approximately 74 million pounds per year and employed
approximately 120 individuals. The facility was shutdown at
the end of June 2008 and the Company finalized closing
procedures in fiscal 2010.
The Company recorded approximately $0.2 million of
employee-related charges related to the fiscal 2008 initiatives
during fiscal 2010. Approximately $0.4 million remains
accrued for employee-related costs as of August 31, 2010
related to the fiscal 2008 initiatives. The Company recorded
approximately $0.2 million for employee-related costs and
$0.1 million for contract termination and other
restructuring costs during fiscal 2009. During the year ended
August 31, 2008, the Company recorded approximately
$6.4 million in employee-related costs, which include
estimated severance payments and medical insurance for
approximately 135 employees, whose positions were
eliminated at the Orange, Texas and St. Thomas, Ontario, Canada
facilities.
102
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the liabilities as of
August 31, 2010 related to the Companys restructuring
plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
|
|
|
|
|
|
|
|
|
Accrual
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
August 31,
|
|
|
Fiscal 2009
|
|
|
Fiscal 2009
|
|
|
August 31,
|
|
|
Acquired
|
|
|
Fiscal 2010
|
|
|
Fiscal 2010
|
|
|
August 31,
|
|
|
|
2008
|
|
|
Charges
|
|
|
Paid
|
|
|
2009
|
|
|
ICO Accrual
|
|
|
Charges
|
|
|
Paid
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Employee-related costs
|
|
$
|
2,857
|
|
|
$
|
6,012
|
|
|
$
|
(4,421
|
)
|
|
$
|
4,448
|
|
|
$
|
2,060
|
|
|
$
|
4,024
|
|
|
$
|
(6,168
|
)
|
|
$
|
4,364
|
|
Other costs
|
|
|
|
|
|
|
2,653
|
|
|
|
(2,263
|
)
|
|
|
390
|
|
|
|
|
|
|
|
1,030
|
|
|
|
(3,506
|
)
|
|
|
(2,086
|
)
|
Translation effect
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
$
|
2,835
|
|
|
$
|
8,665
|
|
|
$
|
(6,684
|
)
|
|
$
|
4,880
|
|
|
$
|
2,060
|
|
|
$
|
5,054
|
|
|
$
|
(9,674
|
)
|
|
$
|
2,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15
ASSET IMPAIRMENTS
The Company recorded approximately $5.7 million,
$2.6 million and $5.4 million in asset impairments
during the years ended August 31, 2010, 2009 and 2008,
respectively, excluding impairments recorded in discontinued
operations.
In fiscal 2010, a long-lived asset held for sale was written
down to its estimated fair value of $1.1 million resulting
in an asset impairment charge of $0.3 million. The
assets estimated fair value was determined as the
estimated sales value of the asset less associated costs to sell
the asset and was determined based on Level 3 inputs
obtained from a third-party purchase offer.
During fiscal 2010, the Company recorded approximately
$5.4 million of asset impairment charges related to assets
held and used associated with the closure of the Companys
Polybatch Color Center located in Sharon Center, Ohio. The
impaired assets include real estate and certain machinery and
equipment. The fair value of the real estate, which includes
land, building and related improvements, was determined as the
estimated sales value of the assets less the costs to sell and
was determined using Level 3 inputs based on information
provided by a third-party real estate valuation source. The fair
value of the machinery and equipment, which will be sold or
disposed of after the Company ceases production, was determined
using Level 3 inputs based on projected cash flows from
operations and estimated salvage value.
The Companys asset impairments of $2.6 million in
fiscal 2009 continuing operations were primarily related to
properties which were considered held for sale including the St.
Thomas, Ontario, Canada facility and the Orange, Texas
warehouse. The asset impairments in fiscal 2009 were based on
third party appraisals. The Company also recorded
$10.3 million of asset impairments included in discontinued
operations in fiscal 2009 for certain Invision assets.
In connection with the closure of the St. Thomas, Ontario,
Canada facility, the analysis of the possible impairment of the
property, plant and equipment resulted in an impairment charge
of $2.7 million recorded during fiscal 2008. The Canada
asset impairment was based on the estimated fair market value of
the long-lived assets which was determined using the
Companys estimate of future undiscounted cash flows for
these assets. This charge was included in the asset impairment
line item in the Companys consolidated statements of
operations. The impairment of the assets for the Canadian
facility was related to the NAEP segment.
As a result of the restructuring initiatives in fiscal 2008, the
Company evaluated the inventory and property, plant and
equipment of the Orange, Texas facility and recorded an
impairment related to the long-lived assets of the Orange
facility during fiscal 2008 of approximately $2.7 million.
The Orange asset
103
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
impairment was based on the estimated fair market value of the
long-lived assets which was determined using the total
consideration received for this facility and related assets when
it was sold in March 2008. This charge was included in the asset
impairment line item in the consolidated statements of
operations. The impairment of the assets for the Orange, Texas
facility was related to the NAEP segment.
As of August 31, 2010, the Companys Findlay, Ohio and
Sharon Center, Ohio facilities and certain equipment are
considered held for sale. The net book value of these assets
held for sale after impairment is approximately
$5.5 million which is included in the property, plant and
equipment line item in the Companys consolidated balance
sheet as of August 31, 2010 due to the immaterial amount.
Of the assets held for sale, only Invision is included in
discontinued operations on the Companys consolidated
statements of operations.
NOTE 16
DISCONTINUED OPERATIONS
During fiscal 2010, the Company completed the closure of the
Invision manufacturing operation at its Sharon Center, Ohio
manufacturing facility. The operating results of Invision were
previously included in the Companys former Invision
segment. The Company reflected the results of this segment as
discontinued operations for all of the periods presented. The
remaining assets of Invision, including a facility in Findlay,
Ohio, which was a dedicated building for the Invision business,
and machinery and equipment at the Sharon Center, Ohio facility
are considered held for sale as of August 31, 2010. These
assets are included in the Companys balance sheet in
property, plant and equipment. The loss from discontinued
operations for the year ended August 31, 2010 includes a
loss on disposal of assets of approximately $0.6 million.
Included in the results of discontinued operations for the year
ended August 31, 2009 was approximately $10.3 million
of asset impairments for the Findlay, Ohio facility and certain
assets at the Sharon Center, Ohio facility. The asset
impairments were based on the estimated fair market value of the
long-lived assets which was determined through third party
appraisals. In addition, the Company recorded less than
$0.1 million of cash charges related to employee
termination costs. The results for the year ended
August 31, 2008 include an impairment of $6.3 million
related to the Findlay, Ohio facility. The Findlay, Ohio
facility impairment was based on the estimated fair market value
of the property which was determined using independent third
party appraisals. The Company expects minimal charges related to
the disposal of remaining assets in fiscal 2011.
The following summarizes the results for discontinued operations
for the years ended August 31, 2010, 2009 and 2008. The
loss from discontinued operations does not include any income
tax effect as the Company was not in a taxable position due to
its continued U.S. losses and a full valuation allowance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
24
|
|
|
$
|
217
|
|
|
$
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(1
|
)
|
|
$
|
(3,619
|
)
|
|
$
|
(6,376
|
)
|
Asset impairment
|
|
|
|
|
|
|
(10,317
|
)
|
|
|
(6,300
|
)
|
Restructuring expense
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
Other income (loss)
|
|
|
(238
|
)
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(239
|
)
|
|
$
|
(13,956
|
)
|
|
$
|
(12,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 17
RESEARCH AND DEVELOPMENT
The research and development of new products and the improvement
of existing products are important to the Company to
continuously improve its product offerings. The Company has a
team of individuals with varied backgrounds to lead a New
Product Engine initiative to put an aggressive global
focus on the Companys research and development activities.
The Company conducts these activities at its various technical
centers and laboratories. Research and development expenditures
were approximately
104
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$2.0 million, $3.6 million and $5.9 million in
fiscal years 2010, 2009 and 2008, respectively. These activities
are primarily related to support the Companys engineered
plastics, masterbatch and rotomolding applications. The Company
continues to invest in research and development activities as
management believes it is important to the future of the Company.
NOTE 18
CONTINGENCIES
The Company is engaged in various legal proceedings arising in
the ordinary course of business. The ultimate outcome of these
proceedings is not expected to have a material adverse effect on
the Companys financial condition, results of operations or
cash flows.
NOTE 19
QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Year Ended
|
|
|
|
Nov. 30,
|
|
|
Feb. 28,
|
|
|
May 31,
|
|
|
Aug. 31,
|
|
|
Aug. 31,
|
|
|
|
2009(b)
|
|
|
2010(c)
|
|
|
2010(d)
|
|
|
2010(e)
|
|
|
2010(a)
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
362,861
|
|
|
$
|
331,023
|
|
|
$
|
420,335
|
|
|
$
|
476,224
|
|
|
$
|
1,590,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
63,158
|
|
|
$
|
51,337
|
|
|
$
|
58,885
|
|
|
$
|
59,488
|
|
|
$
|
232,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
17,138
|
|
|
$
|
(6,819
|
)
|
|
$
|
25,925
|
|
|
$
|
8,116
|
|
|
$
|
44,360
|
|
Income (loss) from discontinued operations, net of tax of $0
|
|
|
(3
|
)
|
|
|
12
|
|
|
|
(23
|
)
|
|
|
(225
|
)
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
17,135
|
|
|
|
(6,807
|
)
|
|
|
25,902
|
|
|
|
7,891
|
|
|
|
44,121
|
|
Noncontrolling interests
|
|
|
(102
|
)
|
|
|
32
|
|
|
|
(141
|
)
|
|
|
(10
|
)
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to A. Schulman, Inc.
|
|
$
|
17,033
|
|
|
$
|
(6,775
|
)
|
|
$
|
25,761
|
|
|
$
|
7,881
|
|
|
$
|
43,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share of common stock attributable to A.
Schulman, Inc. Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.66
|
|
|
$
|
(0.26
|
)
|
|
$
|
0.92
|
|
|
$
|
0.26
|
|
|
$
|
1.59
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
0.66
|
|
|
$
|
(0.26
|
)
|
|
$
|
0.92
|
|
|
$
|
0.25
|
|
|
$
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share of common stock attributable to A.
Schulman, Inc. Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.65
|
|
|
$
|
(0.26
|
)
|
|
$
|
0.91
|
|
|
$
|
0.26
|
|
|
$
|
1.58
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
0.65
|
|
|
$
|
(0.26
|
)
|
|
$
|
0.91
|
|
|
$
|
0.25
|
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Due to the anti-dilutive impact of potentially dilutive shares
in periods which the Company recorded a net loss and an increase
in the share count as a result of shares issued in consideration
for a business combination, the sum of the four quarters does
not equal the earnings per share amount calculated for the year. |
|
(b) |
|
Net income for the quarter ended November 30, 2009 included
costs of $2.3 million related to business acquisitions. |
105
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(c) |
|
Net loss for the quarter ended February 28, 2010 included a
$2.3 million charge related to a tax valuation allowance,
costs of $1.4 million related to business acquisitions,
$1.1 million of restructuring related charges and
$5.2 million of asset write-downs. |
|
(d) |
|
Net income for the quarter ended May 31, 2010 included a
$16.7 million tax benefit directly related to the ICO
acquisition, $1.9 million of additional costs related to
the step-up
of inventory acquired from ICO, costs of $1.6 million
related to business acquisitions and $0.8 million of
restructuring related charges. |
|
(e) |
|
Net income for the quarter ended August 31, 2010 included a
net unfavorable impact for certain items of $3.3 million
including a $2.2 million tax benefit directly related to
the ICO acquisition, $1.8 million of restructuring related
charges, costs of $1.5 million related to business
acquisitions, $1.0 million of additional costs related to
the step-up
of inventory acquired from ICO and a $1.2 million charge
related to a tax valuation allowance, of which $0.8 million
was recorded in the fourth quarter of fiscal 2010 but relates to
the second quarter of fiscal 2010. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Year Ended
|
|
|
|
Nov. 30,
|
|
|
Feb. 28,
|
|
|
May 31,
|
|
|
Aug. 31,
|
|
|
Aug. 31,
|
|
|
|
2008(g)
|
|
|
2009(h)
|
|
|
2009(i)
|
|
|
2009(j)
|
|
|
2009(f)
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
388,317
|
|
|
$
|
272,648
|
|
|
$
|
297,644
|
|
|
$
|
320,639
|
|
|
$
|
1,279,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
42,001
|
|
|
$
|
29,273
|
|
|
$
|
46,533
|
|
|
$
|
52,230
|
|
|
$
|
170,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
9,397
|
|
|
$
|
(9,843
|
)
|
|
$
|
8,563
|
|
|
$
|
3,412
|
|
|
$
|
11,529
|
|
Loss from discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax of $0
|
|
|
(1,067
|
)
|
|
|
(980
|
)
|
|
|
(823
|
)
|
|
|
(11,086
|
)
|
|
|
(13,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
8,330
|
|
|
|
(10,823
|
)
|
|
|
7,740
|
|
|
|
(7,674
|
)
|
|
|
(2,427
|
)
|
Noncontrolling interests
|
|
|
(158
|
)
|
|
|
308
|
|
|
|
(291
|
)
|
|
|
(208
|
)
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to A. Schulman, Inc.
|
|
$
|
8,172
|
|
|
$
|
(10,515
|
)
|
|
$
|
7,449
|
|
|
$
|
(7,882
|
)
|
|
$
|
(2,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share of common stock attributable to A.
Schulman, Inc. Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.36
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.32
|
|
|
$
|
0.12
|
|
|
$
|
0.43
|
|
Loss from discontinued operations
|
|
|
(0.04
|
)
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
|
|
(0.43
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
0.32
|
|
|
$
|
(0.41
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.31
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share of common stock attributable to A.
Schulman, Inc. Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.35
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.32
|
|
|
$
|
0.12
|
|
|
$
|
0.43
|
|
Loss from discontinued operations
|
|
|
(0.04
|
)
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
|
|
(0.42
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
0.31
|
|
|
$
|
(0.41
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.30
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(f) |
|
Due to the anti-dilutive impact of potentially dilutive shares
in periods which the Company recorded a net loss, the sum of the
four quarters does not equal the earnings per share amount
calculated for the year. |
|
(g) |
|
Net income for the quarter ended November 30, 2008 included
costs of $0.3 million related to the European restructuring
and a charge of $0.1 million related to the North America
restructuring. |
|
(h) |
|
Net loss for the quarter ended February 28, 2009 included a
curtailment gain of $2.6 million due to a reduction in
future working years from the announced U.S. workforce
reduction, charges of $1.1 million related to the European
restructuring, $2.9 million and $0.5 million related
to the North America restructuring and accelerated depreciation,
respectively, and charges of $1.9 million for impairment
related to the facilities in Orange, Texas and St. Thomas,
Ontario, Canada. |
|
(i) |
|
Net income for the quarter ended May 31, 2009 included
costs of $0.6 million related to the European
restructuring, $0.1 million and $0.7 million related
to the North America restructuring and accelerated depreciation,
respectively, and a charge of $0.2 million for impairment
related to the facility in St. Thomas, Ontario, Canada. |
|
(j) |
|
Net loss for the quarter ended August 31, 2009 included
charges of $10.4 million for impairment related to assets
in Sharon Center, Ohio, Findlay, Ohio and Europe
($10.3 million of which is included in discontinued
operations), costs of $0.8 million related to the European
restructuring, costs of $1.2 million related to the North
America restructuring and charges of $0.9 million of other
employee termination costs in Europe. |
NOTE 20
SUBSEQUENT EVENT
On October 15, 2010, the Company entered into an agreement
to purchase 100% of the capital stock of Mash Indústria e
Comércio de Compostos Plásticos, Ltda.
(Mash), a masterbatch additive producer and
engineered plastics compounder based in Sao Paulo, Brazil. Mash
participates in various market segments including film and
packaging, automotive and appliances. Combined with the
Companys core competencies in both masterbatch and
engineered plastics compounding, Mash will contribute
specialized additives and plastic materials to meet growing
demand in the South American region. The transaction is expected
to close on November 3, 2010 pending customary closing
procedures. Under the terms of the agreement, the Company agreed
to purchase Mash for a total amount of 27.6 million
Brazilian reais, or approximately $16.6 million, of which
24.8 million Brazilian reais, or approximately
$14.6 million will be due at closing on November 3,
2010. The remainder of the purchase price will be payable on or
about November 3, 2013, in accordance with an escrow
arrangement which subjects payment to volume earn-out and
contingent liability provisions.
107
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed
in the Companys reports under the Securities Exchange Act
of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the
Commissions rules and forms and that such information is
accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
The Company carries out a variety of on-going procedures, under
the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer
and Chief Financial Officer, to evaluate the effectiveness of
the design and operation of the Companys disclosure
controls and procedures. Based on the foregoing, the
Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures were effective at a reasonable assurance level as
of the end of the period covered by this report.
There has been no change in the Companys internal controls
over financial reporting during the Companys most recent
fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Companys internal
controls over financial reporting.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in Exchange Act
Rule 13a-15(f).
The Companys internal control over financial reporting is
a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial
Officer, the Company conducted an evaluation of the
effectiveness of the Companys internal control over
financial reporting based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management has concluded
that the internal control over financial reporting was effective
as of August 31, 2010.
Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
August 31, 2010 excluded from the scope of its assessment
of internal control over financial reporting the operations and
related assets of ICO, Inc and its subsidiaries and McCann
Color, Inc., both which were acquired during fiscal year 2010.
SEC guidelines permit companies to omit an acquired
businesss internal controls over financial reporting from
its managements assessment during the first year of the
acquisition.
Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
August 31, 2010 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated
in their report included herein.
108
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required in response to this Item in respect of
directors is set forth in the Companys proxy statement for
its 2010 Annual Meeting (the Proxy Statement) under
the captions PROPOSAL ONE ELECTION OF
DIRECTORS and CORPORATE GOVERNANCE
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement. The information
required by this Item in respect of executive officers is set
forth in Part I of this Annual Report under the caption
Executive Officers of the Corporation and in the
Proxy Statement under the caption Section 16(a)
Beneficial Ownership Reporting Compliance. The information
required by this Item in respect to the Corporations Code
of Conduct is set forth in the Proxy Statement under the caption
CORPORATE GOVERNANCE Code of Conduct.
The information required in response to this Item in respect to
changes to the procedures by which security holders may
recommend nominees to the Board of Directors is set forth under
the caption CORPORATE GOVERNANCE Board
Committees Director Nominations in the Proxy
Statement. The information required in response to this Item in
respect to the Audit Committee and the Audit Committee financial
expert is set under the caption Corporate
Governance Board Committees Audit
Committee in the Proxy Statement. The referenced
information appearing in the indicated captions in the Proxy
Statement is incorporated herein by reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information in response to this Item in is set forth under the
captions COMPENSATION DISCUSSION AND ANALYSIS,
COMPENSATION TABLES, COMPENSATION COMMITTEE
REPORT and CORPORATE GOVERNANCE Board
Committees Compensation Committee Interlocks and
Insider Participation in the Proxy Statement. The
referenced information appearing in the indicated captions in
the Proxy Statement is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information in response to this Item in respect to the
beneficial ownership of securities is set forth under the
caption SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
BENEFICIAL OWNERS in the Proxy Statement. Information in
response to this Item in respect to securities authorized for
issuance under equity compensation plans is set forth under the
caption EQUITY COMPENSATION PLAN INFORMATION in the
Proxy Statement. The referenced information appearing in the
indicated captions in the Proxy Statement is incorporated herein
by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information in response to this Item in respect to certain
relationships and related transactions is set forth in the Proxy
Statement under the caption CORPORATE
GOVERNANCE Certain Relationships and Related
Transactions. Information in response to this Item in
respect to director independence is set forth in the Proxy
Statement under the caption Corporate
Governance Director Independence. The
referenced information appearing in the indicated captions in
the Proxy Statement is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information for this Item is included under the captions
Fees Incurred by Independent Registered Public Accounting
Firm and Pre-Approval of Fees in the Proxy
Statement. The referenced information appearing in the indicated
captions in the Proxy Statement is incorporated herein by
reference.
109
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as a part of this
Report:
(1) Financial Statements
The consolidated financial statements filed as part of this
Form 10-K
are as follows:
|
|
|
|
|
Consolidated Statements of Operations for the three years ended
August 31, 2010
|
|
|
63
|
|
Consolidated Balance Sheets at August 31, 2010 and 2009
|
|
|
64
|
|
Consolidated Statements of Stockholders Equity for the
three years ended August 31, 2010
|
|
|
65
|
|
Consolidated Statements of Cash Flows for the three years ended
August 31, 2010
|
|
|
66
|
|
Notes to Consolidated Financial Statements
|
|
|
67
|
|
(2) Financial Statement Schedules:
|
|
|
|
|
Valuation and Qualifying Accounts
|
|
|
114
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
(3) Exhibits:
|
|
|
2
|
|
Agreement and Plan of Merger, dated as of December 2, 2009,
by and between the Company, ICO, Inc. and ICO-Schuman, LLC fka
Wildcat Spider, LLC (incorporated by reference from
Exhibit 2.1 to the Companys Current Report on
Form 8-K
filed with the Commission on December 3, 2009).
|
3.1
|
|
Amended and Restated Certificate of Incorporation of the Company
(for purposes of Commission reporting compliance only)
(incorporated by reference from Exhibit 3(a) to the
Companys Annual Report on
Form 10-K
for the fiscal year ended August 31, 2009).
|
3.2
|
|
Amended and Restated By-laws of A. Schulman (incorporated by
reference from Exhibit 3.2 to the Companys Current
Report on
Form 8-K
filed with the Commission on October 19, 2009).
|
10.1*
|
|
A. Schulman 1992 Non-Employee Directors Stock Option Plan
(incorporated by reference from Exhibit 28 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended August 31, 1992).
|
10.2*
|
|
Amendment to the A. Schulman 1992 Non-Employee Directors
Stock Option Plan (incorporated by reference from
Exhibit 10.10 to the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended February 29, 1996).
|
10.3*
|
|
Second Amendment to the A. Schulman 1992 Non-Employee
Directors Stock Option Plan (incorporated by reference
from Exhibit 10(e) to the Companys Annual Report on
Form 10-K
for the fiscal year ended August 31, 1998).
|
10.4*
|
|
Third Amendment to the A. Schulman 1992 Non-Employee Directors
Stock Option Plan (incorporated by reference from
Exhibit 4(p) to the Companys Registration Statement
on
Form S-8,
dated December 20, 1999 (Registration
No. 333-93093)).
|
10.5*
|
|
Fourth Amendment to the A. Schulman 1992 Non-Employee Directors
Stock Option Plan (incorporated by reference from
Exhibit 4.1 to the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended November 30, 2000).
|
10.6*
|
|
A. Schulman 2002 Equity Incentive Plan (incorporated by
reference from Exhibit 4(l) to the Companys
Registration Statement on
Form S-8,
dated January 24, 2003 (Registration
No. 333-102718)).
|
10.7
|
|
ISDA (International Swap Dealers Association, Inc.) Master
Agreement by and between the Company and KeyBank National
Association, dated January 13, 2004 (incorporated by
reference from Exhibit 10(ff) to the Companys Annual
Report on
Form 10-K
for the fiscal year ended August 31, 2004).
|
10.8
|
|
Agreement by and among the Company, Barington Capital Group,
L.P. and others, dated October 21, 2005 (incorporated by
reference from Exhibit 99.2 to the Companys Current
Report on
Form 8-K
filed with the Commission on October 24, 2005).
|
110
|
|
|
10.9
|
|
Credit Agreement by and among the Company, A. Schulman Europe
GmbH, A. Schulman Plastics, S.A., and A. Schulman International
Services NV, with JPMorgan Chase Bank, N.A., as administrative
agent, J.P. Morgan Europe Limited, as European agent,
J.P. Morgan Securities Inc., as Sole Bookrunner and Sole
Lead Arranger and the lenders party to the Credit Agreement,
dated as of February 28, 2006 (incorporated by reference
from Exhibit 99.1 to the Companys Current Report on
Form 8-K
filed with the Commission on March 1, 2006).
|
10.10
|
|
Note Purchase Agreement by and among A. Schulman Europe GmbH, A.
Schulman and the Purchasers and Guarantors named therein, dated
March 1, 2006, (incorporated by reference from
Exhibit 99.2 to the Companys Current Report on
Form 8-K
filed with the Commission on March 1, 2006).
|
10.11*
|
|
Form of Indemnification Agreement for all Executive Officers and
Directors of A. Schulman (incorporated by reference from
Exhibit 99.2 to the Companys Current Report on
Form 8-K
filed with the Commission on October 20, 2006).
|
10.12*
|
|
A. Schulman 2006 Incentive Plan Form of Restricted Stock
Agreement (Employee Performance-Based) (incorporated by
reference from Exhibit 10.2 to the Companys Quarterly
Report on
Form 10-Q
for the fiscal quarter ended May 31, 2007).
|
10.13
|
|
Agreement by and among A. Schulman, Barington Capital Group,
L.P. and others, dated November 15, 2007 (incorporated by
reference from Exhibit 99.1 to the Companys Current
Report on
Form 8-K
filed with the Commission on November 21, 2007).
|
10.14*
|
|
Employment Agreement between A. Schulman and Joseph M. Gingo,
dated December 17, 2007 (incorporated by reference from
Exhibit 99.1 to the Companys Current Report on
Form 8-K
filed with the Commission on December 18, 2007).
|
10.15*
|
|
A. Schulman 2006 Incentive Plan Form of Restricted Stock
Agreement (Employee Time-Based) (incorporated by reference from
Exhibit 10.3 to the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended February 29, 2008).
|
10.16*
|
|
A. Schulman 2006 Incentive Plan Form of Performance Share
Agreement (incorporated by reference from Exhibit 10.4 to
the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended February 29, 2008).
|
10.17*
|
|
A. Schulman 2006 Incentive Plan Form of Restricted Stock Unit
Agreement (Employees in Mexico, Canada and Europe) (incorporated
by reference from Exhibit 10.6 to the Companys
Quarterly Report on
Form 10-Q
for the fiscal quarter ended February 29, 2008.)
|
10.18*
|
|
Employment Agreement by and between A. Schulman and Jack B.
Taylor, dated May 28, 2003 (incorporated by reference from
Exhibit 10(ee) to the Companys Annual Report on
Form 10-K
for the fiscal year ended August 31, 2008).
|
10.19*
|
|
Agreement by and between A. Schulman and Bernard Rzepka, dated
January 19, 2006 (incorporated by reference from
Exhibit 10(hh) to the Companys Annual Report on
Form 10-K
for the fiscal year ended August 31, 2008).
|
10.20*
|
|
Change-in-Control
Agreement by and between A. Schulman and Gary A. Miller, dated
April 21, 2008 (incorporated by reference from
Exhibit 10(mm) to the Companys Annual Report on
Form 10-K
for the fiscal year ended August 31, 2008).
|
10.21*
|
|
Change-in-Control
Agreement by and between A. Schulman and David C. Minc, dated
May 19, 2008 (incorporated by reference from
Exhibit 10(nn) to the Companys Annual Report on
Form 10-K
for the fiscal year ended August 31, 2008).
|
10.22*
|
|
Amendment to the Employment Agreement by and between A. Schulman
and Jack B. Taylor, dated August 31, 2008 (incorporated by
reference from Exhibit 10 (oo) to the Companys Annual
Report on
Form 10-K
for the fiscal year ended August 31, 2008).
|
10.23
|
|
First Amendment to the Agreement by and among A. Schulman,
Barington Capital Group, L.P. and others, dated October 10,
2008 (incorporated by reference from Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed with the Commission on October 10, 2008).
|
10.24*
|
|
A. Schulmans 2009 Bonus Plan (incorporated by reference
from the Companys Current Report on
Form 8-K
filed with the Commission on October 22, 2008).
|
10.25
|
|
Agreement by and among A. Schulman, Ramius LLC and others, dated
November 11, 2008 (incorporated by reference from
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed with the Commission on November 12, 2008).
|
10.26*
|
|
Advisory Agreement by and between A. Schulman and Dr. Peggy
G. Miller, dated November 7, 2008 (incorporated by
reference from Exhibit 10.2 to the Companys Current
Report on
Form 8-K
filed with the Commission on November 12, 2008).
|
111
|
|
|
10.27*
|
|
A. Schulman Second Amended and Restated Directors Deferred Units
Plan (incorporated by reference from Exhibit 10.6 to the
Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended November 30, 2008).
|
10.28*
|
|
First Amendment to Form of Indemnification Agreement for all
Executive Officers and Directors of A. Schulman (incorporated by
reference from Exhibit 10.7 to the Companys Quarterly
Report on
Form 10-Q
for the fiscal quarter ended November 30, 2008).
|
10.29*
|
|
A. Schulman Amended and Restated Nonqualified Profit Sharing
Plan (incorporated by reference from Exhibit 10.8 to the
Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended November 30, 2008).
|
10.30*
|
|
First Amendment to the A. Schulman 2002 Equity Incentive Plan
(incorporated by reference from Exhibit 10.9 to the
Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended November 30, 2008).
|
10.31*
|
|
A. Schulman Amended and Restated 2006 Incentive Plan
(incorporated by reference from Exhibit 10.10 to the
Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended November 30, 2008).
|
10.32*
|
|
First Amendment to the 2009 Cash Bonus Plan of A. Schulman, Inc.
(incorporated by reference from Exhibit 10.11 to the
Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended November 30, 2008).
|
10.33*
|
|
Amended and Restated A. Schulman, Inc. Supplemental Executive
Retirement Plan (incorporated by reference from
Exhibit 10.12 to the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended November 30, 2008).
|
10.34*
|
|
First Amendment to Employment Agreement of Joseph M. Gingo,
dated December 17, 2008 (incorporated by reference from
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed with the Commission on December 23, 2008).
|
10.35*
|
|
Amended and Restated Employment Agreement of Paul F. DeSantis,
dated December 17, 2008 (incorporated by reference from
Exhibit 10.2 to the Companys Current Report on
Form 8-K
filed with the Commission on December 23, 2008).
|
10.36*
|
|
Second Amendment to Employment Agreement of Joseph M. Gingo,
dated January 9, 2009 (incorporated by reference from
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed with the Commission on January 13, 2009).
|
10.37*
|
|
A. Schulman 2006 Incentive Plan Form of Performance Share Award
Agreement for Employees (incorporated by reference from
Exhibit 10.5 to the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended February 28, 2009).
|
10.38*
|
|
A. Schulman 2006 Incentive Plan Form of Time-Based and
Performance-Based Cash Award Agreement for Employees in Mexico,
Canada and Europe (incorporated by reference from
Exhibit 10.6 to the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended February 28, 2009).
|
10.39*
|
|
A. Schulman 2006 Incentive Plan Form of Restricted Stock Unit
Award Agreement (Gingo) (incorporated by reference from
Exhibit 10.7 to the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended February 28, 2009).
|
10.40*
|
|
Form of Restricted Stock Unit Agreement (Non-Employee Directors)
(incorporated by reference from Exhibit 10.2 to the
Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended May 31, 2009).
|
10.41
|
|
Second Amendment to the Agreement by and among A. Schulman,
Barington Capital Group, L.P. and others, dated June 1,
2009. (incorporated by reference from Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed with the Commission on June 4, 2009).
|
10.42*
|
|
Second Amendment to the Employment Agreement by and between A.
Schulman and Jack B. Taylor, dated August 31, 2009
(incorporated by reference from Exhibit 10 (vv) to the
Companys Annual Report on
Form 10-K
for the fiscal year ended August 31, 2009).
|
10.43*
|
|
The Companys 2010 Bonus Plan (incorporated by reference
from the Companys Current Report on
Form 8-K
filed with the Commission on October 30, 2009).
|
10.44*
|
|
Form of 2010 Time-Based Restricted Stock Award Agreement for
Employees (incorporated by reference from Exhibit 10.1 to
the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended May 31, 2010.)
|
10.45*
|
|
Form of 2010 Performance Share Award Agreement (ROIC) for
Employees (incorporated by reference from Exhibit 10.2 to
the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended May 31, 2010.)
|
112
|
|
|
10.46*
|
|
Form of 2010 Performance Share Award Agreement (TSR) for
Employees (incorporated by reference from Exhibit 10.3 to
the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended May 31, 2010.)
|
10.47*
|
|
Form of 2010 Time-Based and Performance-Based Cash Award
Agreement for Employees in Mexico, Canada and Europe
(incorporated by reference from Exhibit 10.4 to the
Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended May 31, 2010.)
|
10.48*
|
|
Form of 2010 Restricted Stock Unit Award Agreement (Gingo)
(incorporated by reference from Exhibit 10.5 to the
Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended May 31, 2010.)
|
10.49*
|
|
Form of 2010 Whole Share Award Agreement for Non-Employee
Directors (incorporated by reference from Exhibit 10.6 to
the Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended May 31, 2010.)
|
10.50*
|
|
Non-Employee Directors Compensation (filed herewith)
|
11
|
|
Statement re Computation of Per Share Earnings.**
|
18
|
|
Letter re Change in Accounting Principles (filed herewith).
|
21
|
|
Subsidiaries of the Company (filed herewith).
|
23
|
|
Consent of Independent Registered Public Accounting Firm (filed
herewith).
|
24
|
|
Powers of Attorney (filed herewith).
|
31
|
|
Certifications of Principal Executive and Principal Financial
Officers pursuant to
Rule 13a-14(a)/15d-14(a)
(filed herewith).
|
32
|
|
Certifications of Principal Executive and Principal Financial
Officers pursuant to 18 U.S.C. 1350 (filed herewith).
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement required
to be filed as an Exhibit hereto. |
|
** |
|
Information required to be presented in Exhibit 11 is
provided in Note 11 of the Notes to Consolidated Financial
Statements under Part II, ITEM 8 of this
Form 10-K
in accordance with accounting rules related to accounting for
earnings per share. |
(b) Exhibits.
See subparagraph (a)(3) above
(c) Financial Statement Schedules.
See subparagraph (a)(2) above
113
A. SCHULMAN,
INC.
VALUATION AND
QUALIFYING ACCOUNTS
SCHEDULE F-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charges to
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Cost and
|
|
|
Net
|
|
|
Acquired by
|
|
|
Translation
|
|
|
Close of
|
|
|
|
of Period
|
|
|
Expenses
|
|
|
Write-Offs
|
|
|
Purchase
|
|
|
Adjustment
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Reserve for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31, 2010
|
|
$
|
10,279
|
|
|
$
|
6,647
|
|
|
$
|
(2,848
|
)
|
|
$
|
|
|
|
$
|
(873
|
)
|
|
$
|
13,205
|
|
Year ended August 31, 2009
|
|
$
|
8,316
|
|
|
$
|
4,821
|
|
|
$
|
(2,604
|
)
|
|
$
|
|
|
|
$
|
(254
|
)
|
|
$
|
10,279
|
|
Year ended August 31, 2008
|
|
$
|
9,056
|
|
|
$
|
3,116
|
|
|
$
|
(4,181
|
)
|
|
$
|
|
|
|
$
|
325
|
|
|
$
|
8,316
|
|
Inventory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31, 2010
|
|
$
|
4,052
|
|
|
$
|
1,411
|
|
|
$
|
(315
|
)
|
|
$
|
|
|
|
$
|
(388
|
)
|
|
$
|
4,760
|
|
Year ended August 31, 2009
|
|
$
|
7,043
|
|
|
$
|
(2,723
|
)
|
|
$
|
(113
|
)
|
|
$
|
|
|
|
$
|
(155
|
)
|
|
$
|
4,052
|
|
Year ended August 31, 2008
|
|
$
|
8,237
|
|
|
$
|
(760
|
)
|
|
$
|
(822
|
)
|
|
$
|
|
|
|
$
|
388
|
|
|
$
|
7,043
|
|
Valuation allowance deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31, 2010
|
|
$
|
74,426
|
|
|
$
|
(22,680
|
)
|
|
$
|
|
|
|
$
|
939
|
|
|
$
|
|
|
|
$
|
52,685
|
|
Year ended August 31, 2009
|
|
$
|
60,426
|
|
|
$
|
14,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
74,426
|
|
Year ended August 31, 2008
|
|
$
|
51,251
|
|
|
$
|
9,175
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
60,426
|
|
114
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
A. SCHULMAN, INC.
Paul F. DeSantis
Chief Financial Officer, Vice President and
Treasurer of A. Schulman, Inc.
Dated: October 26, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Company and in the capacities and on the date
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Joseph
M. Gingo
Joseph
M. Gingo
|
|
Director and Principal Executive Officer
|
|
October 26, 2010
|
|
|
|
|
|
/s/ Paul
F. DeSantis
Paul
F. DeSantis
|
|
Principal Financial Officer and Principal Accounting Officer
|
|
October 26, 2010
|
|
|
|
|
|
Eugene R.
Allspach*
|
|
Director
|
|
|
|
|
|
|
|
Gregory T.
Barmore*
|
|
Director
|
|
|
|
|
|
|
|
David G.
Birney*
|
|
Director
|
|
|
|
|
|
|
|
Michael Caporale,
Jr.*
|
|
Director
|
|
|
|
|
|
|
|
Howard R.
Curd*
|
|
Director
|
|
|
|
|
|
|
|
Michael A.
McManus, Jr.*
|
|
Director
|
|
|
|
|
|
|
|
Lee D.
Meyer*
|
|
Director
|
|
|
|
|
|
|
|
James A.
Mitarotonda*
|
|
Director
|
|
|
|
|
|
|
|
Ernest J. Novak,
Jr.*
|
|
Director
|
|
|
115
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
Dr. Irvin D.
Reid*
|
|
Director
|
|
|
|
|
|
|
|
Stanley W.
Silverman*
|
|
Director
|
|
|
|
|
|
|
|
John B.
Yasinsky*
|
|
Director
|
|
|
Joseph M. Gingo
Attorney-in-Fact
October 26, 2010
|
|
|
* |
|
Powers of attorney authorizing Joseph M. Gingo to sign this
Annual Report on
Form 10-K
on behalf of certain Directors of the Company are being filed
with the Securities and Exchange Commission herewith. |
116