FORM 10-K
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, 2008
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OR
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o
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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
(State or Other Jurisdiction
of Incorporation or Organization)
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34-0514850
(I.R.S. Employer
Identification No.)
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3550 West Market Street,
Akron, Ohio
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44333
(ZIP Code)
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(Address of Principal Executive Offices)
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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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Special Stock Purchase Rights
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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 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 29, 2008, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was approximately $494,000,000 based on the closing
sale price as reported on the NASDAQ National Market System.
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date 26,132,897 Shares of Common Stock, $1.00
Par Value, at October 20, 2008.
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 2008
Annual Meeting of Stockholders
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III
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TABLE OF
CONTENTS
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PART I
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ITEM 1.
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BUSINESS
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3
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ITEM 1A.
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RISK FACTORS
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11
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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17
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ITEM 2.
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PROPERTIES
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ITEM 3.
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LEGAL PROCEEDINGS
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18
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ITEM 4.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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18
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PART II
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ITEM 5.
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MARKET FOR THE COMPANYS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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20
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ITEM 6.
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SELECTED FINANCIAL DATA
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21
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ITEM 7.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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21
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ITEM 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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47
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ITEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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48
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ITEM 9.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
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84
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ITEM 9A.
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CONTROLS AND PROCEDURES
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84
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ITEM 9B.
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OTHER INFORMATION
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84
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PART III
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ITEM 10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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85
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ITEM 11.
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EXECUTIVE COMPENSATION
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85
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ITEM 12.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
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85
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ITEM 13.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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85
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ITEM 14.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
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85
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PART IV
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ITEM 15.
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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86
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SIGNATURES
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89
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2
PART I
ITEM 1.
BUSINESS
A. Schulman, Inc. (the Company or A.
Schulman) 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 and Latin America,
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 four 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 16 manufacturing facilities across the globe
allowing it to be an ideal partner for key global customers.
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The Company has a history of product innovation and development
driven by its customer relationships and global technology
centers.
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The Company leverages these four unique competitive advantages
to develop and maintain strong customer relationships and drive
continued profitable growth.
BUSINESS
SEGMENTS
To identify reportable 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). Globally, the Company operates primarily in
three lines of business: engineered plastics, masterbatch and
distribution services. In North America, there is a general
manager of each of these lines of business each of who report
directly to the Companys CEO. Also, in North America the
Company operates in a specialty sheet line of business called
Invision®
which has its own general manager who also reports to the CEO.
The Companys European segment has managers of each line of
business, who report to a general manager of Europe who reports
to the CEO. Currently, the Companys CEO reviews
performance and allocates resources for the European segment as
a whole not at the business line level and therefore no changes
have been made to the European segment. The reportable segments
are Europe (which includes Asia), North America Polybatch
(NAPB) (which comprises the masterbatch line of
business), North America Distribution Services
(NADS), North America Engineered Plastics
(NAEP) and Invision.
The Companys European segment, which includes the Asia
operations, is the largest segment for the Company. The segment
is managed by the General Manager of Europe and Asia however
within the European General Managers responsibilities
include managers of each line of business for engineered
plastics, masterbatch and distribution services. The
Companys masterbatch business is anchored by the global
research and development center in Bornem, Belgium while the
engineered plastics line of business is anchored by the
Companys technology center in Sindorf, Germany. In fiscal
2009, effective September 1, 2008, the Companys
European management structure changed to include a General
Manager Europe and a General Manager
Asia both who report to the Companys CEO effective with
this change.
The North America Polybatch segment, which services the
masterbatch market, includes color and additive concentrates
which improve the appearance and performance of resins targeted
at the film and packaging markets. The North America
Distribution Services segment provides bulk and packaged plastic
materials used in a variety of
3
applications. The North America Engineered Plastics segment
includes multi-component blends of ionomers, urethanes and
nylons, generally for the durable goods market, formulated to
meet customers specific performance requirements,
regardless of the base resin. Invision includes solely the A.
Schulman Invision, Inc. legal entity which provides a new sheet
product. This business is in a
start-up
phase as the Company is exploring potential market
opportunities. As a result of the redefined segments, certain
portions of the Companys North American operations which
are not managed separately are included in All Other North
America. The Company also 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. Prior periods have
been restated to reflect the current presentation.
The Company historically identified and presented two
geographical operating segments, North America and Europe, which
includes Asia, based on how the CODM regularly reviewed
information and allocated resources. Prior periods have been
restated to reflect the current presentation.
Below the Company has described the lines of business listed
above.
Engineered
Plastics
A. Schulman has been a supplier of engineered plastics for
more than 50 years. 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, elastomers, ionomers and ABS (acrylonitrile
butadiene styrene). Engineered plastics are commonly defined by
their unique performance characteristics by taking base polymer
resin and combining it 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. They are keenly focused on developing niche
solutions that meet the needs of existing and developing markets
alike. An example of a recent innovation is the highly
successful line of thermoplastics elastomers (TPEs)
and vulcanizates (TPVs), which provide enhanced
aesthetic and performance characteristics for a host of end
market applications.
Clarix®,
a new class of ionomer thermoplastic resins, can be used to
improve sealing, adhesion, flexibility, toughness or blend
compatibility properties, thereby helping to provide solutions
to demanding application requirements.
The result of this innovation forms a pipeline of products being
produced in A. Schulman facilities around the world. In the past
year, the Company has streamlined its manufacturing position in
North America by closing a facility in Canada and selling its
operations in Orange, Texas, while it is beginning to see volume
increases in its Chinese facility.
The Companys offers an extensive portfolio based in 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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4
Engineered plastics supplies into several markets and
applications. Consumer and industrial applications are target
growth areas, with markets such as building/construction,
appliance/electrical and lawn/garden leading the way. The
automotive market, while still playing an important role for the
Company, supplies materials into every major vehicle segment and
across all of the largest manufacturers. Key growth segments for
this market are European and Asian manufacturers, who continue
to gain market share. In North America, the Company is seeing
growth and construction of new facilities by Asian and European
automotive manufacturers.
Masterbatch
Masterbatch (or concentrates as they are also referred to) is
often the key ingredient to a successful application recipe.
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.
Close synergy between development and production is especially
key in this area to its customers as well as A. Schulman, as
quick and quality turnaround is critical. A. Schulman has
manufacturing facilities strategically located globally to
ensure that orders are shipped on-spec and on time. The Company
is enhancing its manufacturing capability by opening a new
masterbatch facility in Akron, Ohio in fiscal 2009.
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 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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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 in
the packaging of snack foods, candy, potato chips, 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.
As management looks to the future, the 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. A.
Schulman continues to advance pigment and additive loadings,
which reduce the amount of total polymer required in the
manufacturing process. Micro- and nano-particle technology
continues 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.
5
Distribution
Services
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 provide producer grade offerings to
the markets and customers that it serves. This leverage also
helps support the customers of the engineered plastics 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: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.
Each of these 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 unique to 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 16 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.
Invision
Invision is an example of the Companys commitment to
innovation and meeting the needs of the future today. The
Company leverages competencies of polymers, compounding and
processing, as this new technology moves the Company forward in
offering fully customized sheet solutions. Based at a
state-of-the-art technology and manufacturing center located in
Sharon Center, Ohio, the Companys research and development
and production teams work closely to tailor offerings that meet
the most demanding of needs.
The current offerings provide a range of superior sheet
solutions, the origins of which is the Companys paintless
film technology. This patent-pending ionomer based sheet is an
innovative approach to high gloss, Class A
decorative surfaces. Unlike paint and paint film, Invision sheet
prevents the material from chipping and cracking at extremely
low temperatures. Utilizing a proprietary layering system,
Invision is able to maintain product quality and color integrity
throughout high stretch areas in the thermoforming and molding
processes, as well as commercial conditions such as
environmental exposure, abrasion and impact.
Invision has recently introduced two new additions to the
Companys portfolio which expand on the original concept.
The first is a patent-pending modified polypropylene-capped TPO
sheet possessing high durability. The other is a mono-layered
TPO sheet. Both products offer significant customer benefits in
thermoforming applications including higher melt strength and
improved stiffness, resulting in greater processing flexibility,
fewer rejects, more efficient part production times and thinner
parts at comparable performance levels.
Process flexibility is also key in meeting market demands.
Invision sheet is suitable for various manufacturing processes
including thermoforming, compression molding, injection and blow
molding and profile extrusion. Invision sheet products are
suitable for a variety of applications including auto, marine,
RV, sport and recreation, lawn and garden, and even consumer
products. As management looks to the future for this exciting
new technology, the Company will continue to expand its product
line, allowing the Company to provide solutions across a wide
range of market demands.
6
During fiscal 2008, the Company has refocused the business to
non-automotive markets. Management continues to be committed to
the Invision business while seeking a potential joint venture
partner or other strategic arrangement which will help
accelerate the market development process.
Information regarding the amount of sales, operating income and
identifiable assets attributable to each of the Companys
geographic 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.
Product
Families
The Companys manufacturing in each of its business
segments can be classified into five major product families:
color and additive concentrates; engineered compounds;
polyolefins; polyvinyl chloride (PVC); and tolling.
Color and Additive Concentrates: The Companys
color and additive concentrates business consists of the
compounding of resins that provide plastic with specific color
and/or
physical properties, such as conductivity, flexibility,
viscosity and textures. A color concentrate is a clear or
natural plastic resin into which a substantial amount of color
pigment is incorporated or dispersed. The Company manufactures
its concentrates using its formulae and purchased natural
resins. These concentrates are sold to manufacturers of plastic
products, such as film for packaging, household goods, toys,
automotive parts, mechanical goods and other plastic items. The
Companys concentrates are sold under various trade names,
including the following:
Polybatch®,
Papermatch®,
Aqua-Sol®,
and
Polyblak®.
Engineered Compounds: The Companys engineered
compounds are products designed to have and maintain
characteristics such as chemical resistance, electrical
conductivity, heat resistance
and/or high
strength-to-weight ratios. The engineered compounds manufactured
by the Company include the following:
Polyflam®,
Schulamid®,
Formion®,
Polypur®
and
Clarix®.
Polyolefins: The Companys polyolefin business
consists of numerous polypropylene and polyethylene resins and
compounds. Polyolefins are used for interior trim, fascias and
bumper covers in automotive applications; for toys, small
appliances, sporting goods, and agricultural and watercraft
products in roto-molding applications; and for office supplies
in industrial/commercial applications. The polyolefin products
manufactured by the Company include the following:
Polytrope®,
Polyfort®,
Schulink®,
Invision®
and
Polyaxis®.
Polyvinyl Chloride: The Companys PVC business,
under the name
Polyvin®,
involves the formulation of compounds and elastomers to
introduce a variety of product attributes, including
weatherability, consistency, ease of processing, material
flexibility, and high-gloss or low-gloss finish. The
Companys thermoplastic PVC compounds are available in blow
molding, injection molding and extrusion grades for application
in the manufacture of automotive, furniture, architectural and
consumer products. The Companys
Sunprene®
compound serves as a replacement for rubber and other
thermoplastic elastomers in automotive applications. The
Companys PVC business is mainly supported by The Sunprene
Company, in which the Company owns a 70% partnership interest.
The partnership is discussed below in Joint Ventures.
Tolling: The Company provides tolling services,
primarily in Europe, as a fee for processing of material
provided and owned by customers. On some occasions, the Company
is required to provide certain amounts of its materials, such as
additives or packaging. 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. The
Company recently exited the North American tolling business.
7
The approximate amount and percentage of net consolidated sales
for each of the Companys product families for the three
fiscal years ended August 31, 2008 are as follows:
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2008
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2007
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2006
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Product Family
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Amount
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%
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Amount
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%
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Amount
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%
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(In thousands, except for %s)
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Color and additive concentrates
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$
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714,770
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36
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$
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627,268
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35
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$
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579,825
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|
36
|
|
Polyolefins
|
|
|
664,249
|
|
|
|
34
|
|
|
|
543,870
|
|
|
|
30
|
|
|
|
495,163
|
|
|
|
31
|
|
Engineered compounds
|
|
|
418,744
|
|
|
|
21
|
|
|
|
426,382
|
|
|
|
24
|
|
|
|
393,312
|
|
|
|
24
|
|
Polyvinyl chloride (PVC)
|
|
|
59,174
|
|
|
|
3
|
|
|
|
64,658
|
|
|
|
4
|
|
|
|
64,174
|
|
|
|
4
|
|
Tolling
|
|
|
19,466
|
|
|
|
1
|
|
|
|
21,450
|
|
|
|
1
|
|
|
|
16,482
|
|
|
|
1
|
|
Other
|
|
|
107,608
|
|
|
|
5
|
|
|
|
103,428
|
|
|
|
6
|
|
|
|
67,430
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,984,011
|
|
|
|
100
|
|
|
$
|
1,787,056
|
|
|
|
100
|
|
|
$
|
1,616,386
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Subsidiaries
The Companys principal subsidiaries are as follows:
A. Schulman Plastics, BVBA, a subsidiary located in Bornem,
Belgium, manufactures color and additive concentrates and
compounds. These products principally are sold in Germany,
France, the Benelux countries, Italy and Asia.
A. Schulman International Services N.V., another subsidiary
located in Bornem, Belgium, provides financing and
administrative services to the Companys European
operations.
A. Schulman, Inc., Limited, a subsidiary located in
Crumlin, South Wales (U.K.), primarily manufactures color and
additive plastic concentrates, which are sold in the United
Kingdom and to various A. Schulman European locations.
A. Schulman GmbH, a subsidiary located in Kerpen, Germany,
manufactures engineered and flame-retardant plastic compounds.
In addition, this subsidiary purchases and sells prime and
off-grade plastic resins from major European producers. This
subsidiary also distributes plastic resins and compounds for
companies, including several large resin producers.
A. Schulman Canada Ltd., a Canadian subsidiary which had
operations in St. Thomas, Ontario, Canada, closed the St.
Thomas, Ontario plant in June 2008. The Company will continue to
sell to the Canadian marketplace through this subsidiary as a
distributor for major resin producers for injection molding.
A. Schulman AG, a subsidiary located in Zurich,
Switzerland, sells plastic compounds and concentrates
manufactured by other European subsidiaries of the Company and
also acts as a merchant of plastic resins.
A. Schulman, S.A.S., a French subsidiary, has sales offices
in Paris, France and is a distributor in France for Total
Petrochemicals and other large suppliers. A. Schulman, S.A.S.
also acts as a merchant of plastic resins and sells compounds
manufactured by the Companys subsidiaries in Belgium,
Germany and France.
A. Schulman Plastics, S.A.S., another French subsidiary, is
located in Givet, France. This subsidiary produces plastic
concentrates for the Companys European market.
A. Schulman de Mexico, S.A. de C.V., a subsidiary located
in San Luis Potosi, Mexico, manufactures concentrates for
the packaging industry and compounds for the automotive,
construction, appliance and consumer products markets. This
subsidiary has sales offices in Monterrey and Mexico City,
Mexico.
A. Schulman Polska Sp. z o.o., is a subsidiary located in
Poland with offices in Warsaw, Poland and Prague, Czech
Republic. In addition, this subsidiary has a plant in Nowa
Biala, Poland. The subsidiary primarily sells products
manufactured by the Companys subsidiaries and acts as a
distributor and merchant of plastic resins and compounds in
Poland.
A. Schulman Plastics SpA is a subsidiary located in Gorla
Maggiore, Italy. This subsidiary manufactures and sells
engineered compounds and concentrates to the Italian market. It
sells products manufactured by A. Schulman Plastics, BVBA, A.
Schulman Plastics, S.A.S., A. Schulman GmbH and A. Schulman,
Inc., Limited and acts as a merchant of plastic resins in Italy.
8
A. Schulman Plastics S.L., a subsidiary located in
Barcelona, Spain, is primarily a distributor of plastic resins
to the Spanish market. This subsidiary also engages in merchant
activities in Spain and sells certain products manufactured by
A. Schulman GmbH, and A. Schulman Plastics, BVBA.
A. Schulman Hungary Kft., a subsidiary located in Budapest,
Hungary, sells engineered compounds manufactured by A. Schulman
GmbH and concentrates manufactured by A. Schulman Plastics,
BVBA, A. Schulman Plastics, S.A.S., and A. Schulman, Inc.,
Limited. This subsidiary has a small manufacturing facility to
serve the Hungary marketplace. It also acts as a merchant of
plastic resins in Hungary.
A. Schulman Plastics (Dongguan) Ltd., a subsidiary located
in Guangdong Province, China, manufactures concentrates for sale
in the local Chinese markets. This subsidiary produces material
for customers in the packaging markets and for the
Companys engineered compounds product family.
A. Schulman Europe & Co. KG, a subsidiary with
offices in Wurselen, Germany provides support in the areas of
sales, procurement, logistics and financing for the European
operations.
A. Schulman S.ár.l. et Cie SCS, A. Schulman
S.ár.l. and A. Schulman Holdings S.ár.l. are
Luxembourg subsidiaries that provide financing and other
corporate services for the European group.
A. Schulman Invision, Inc. is a subsidiary located in
Sharon Center, Ohio. The subsidiary manufactures
Invision®,
a multi-layered, extruded sheet product for sale in both the
automotive and non-automotive markets.
Deltaplast AB, a subsidiary located in Astrop, Sweden, which
produces specialized color masterbatch. Deltaplast BVBA, a
subsidiary located in Opglabbeek, Belgium, also produces color
masterbatch.
A. Schulman Plastik Sanayi Ve Ticaret, a subsidiary located
in Istanbul, Turkey, is primarily a distributor of plastic
resins in the Turkish market.
A. Schulman Plastics s.r.o., a subsidiary located in
Bratislava, Slovakia, is a distributor of plastic resins
primarily in the Czech Republic and Slovakia.
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, 2008, the Company had approximately
2,200 employees. Approximately 80% of the Companys
hourly production employees are represented by various unions
under collective bargaining agreements.
Research and
Development
A large part of the Companys technical activities relate
to the continuous refinement of compounds for specific customer
applications. Activities relating to the research and
development of new products and the improvement of existing
products are important to the Company. These activities are
conducted at the Companys various technical centers and
laboratories. Research and development expenditures were
approximately $5.9 million, $7.8 million and
$5.5 million in fiscal years 2008, 2007 and 2006,
respectively. These activities are primarily related to the new
Invision
9
sheet product and to support new consumer packaging and
automotive applications. 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 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 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 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, 2008, 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 readily 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 (polyvinyl chloride),
polyethylene, polystyrene, nylon, ABS and polyurethane. For
additional information on the availability of raw materials, see
ITEM 1A. RISK FACTORS, Price increases in 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
10
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. No accurate 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 in respect of
merchant and distribution activities are price, availability of
inventory and service. Management believes it has strong
financial 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, however the Company does
not consider its business to be dependent on such trademarks and
trade names, except in the case of its new
Invision®
product line.
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.
If we fail to
develop and commercialize new products, our business operations
would be adversely affected.
A significant portion 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 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.
11
Our sales,
profitability, operating results and cash flows are sensitive to
global economic conditions, financial markets and cyclicality,
and could be adversely affected during economic downturns or
financial market instability.
General economic conditions, financial market stability and
business conditions of our customers industries affect
demand for our products. The business of most of our customers,
particularly our industrial, automotive, construction and
electronics customers, can be cyclical in nature and sensitive
to changes in general economic conditions. Political instability
may lead to financial and economic instability, which could lead
to deterioration in general global economic conditions.
Downturns in the businesses that use our products will adversely
affect our sales. 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. 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.
Price
increases in 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 rapid and
significant movements in price. These fluctuations in price may
be caused or aggravated by a number of factors, including
inclement weather, political instability or hostilities in
oil-producing countries and supply and demand changes. We may
not be able to pass on increases in the prices of raw materials
and energy to our customers. As a result, 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 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 possible 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,
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
12
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 affect our margins and profitability adversely. 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 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.
13
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 75% of our business outside of the United
States. We and our joint ventures currently have
12 manufacturing facilities located outside the United
States. We have facilities and offices located in Mexico,
Belgium, France, Germany, Poland, Hungary, Indonesia, Italy,
Spain, Switzerland, China, Luxembourg, Sweden, Turkey,
South Korea, Czech Republic, Denmark, Slovakia 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:
|
|
|
|
|
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;
|
|
|
|
intellectual property rights may be more difficult to enforce;
|
|
|
|
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;
|
|
|
|
unexpected adverse changes in foreign laws or regulatory
requirements may occur;
|
|
|
|
agreements may be difficult to enforce and receivables difficult
to collect;
|
|
|
|
compliance with a variety of foreign laws and regulations may be
burdensome;
|
|
|
|
unexpected adverse changes may occur in export duties, quotas
and tariffs and difficulties in obtaining export licenses;
|
|
|
|
general economic conditions in the countries in which we operate
could have an adverse effect on our earnings from operations in
those countries;
|
|
|
|
foreign operations may experience staffing difficulties and
labor disputes;
|
|
|
|
foreign governments may nationalize private enterprises;
|
|
|
|
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
|
|
|
|
unanticipated events, such as geopolitical changes, could result
in a write-down of our investment in the affected joint venture
in Indonesia.
|
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.
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 equity affiliates and
suppliers due to the industry in which they operate. These
events could also affect our future profitability.
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 experienced a change in personnel in the CEO position.
Our CEO has announced major plans and initiatives which are
expected to reduce costs and improve efficiencies. We could be
unable to achieve all the benefits from initiatives because of
limited resources. If these initiatives are not as successful as
planned, the result could negatively impact our results of
operations or financial condition.
14
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
80% of our hourly employees at our operations 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 the 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 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
plans 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, in
order to avoid charges to our balance sheet and consequent
reductions to shareholders equity. 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 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.
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, however, we do not have
expanded coverage related to such attacks. Should we choose to
pursue such coverage, possible additional costs for this
coverage could have a negative impact on our financial condition
and results of operations. 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
15
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, 2008, our debt on a consolidated basis was
approximately $114.3 million. An increase in the level of
indebtedness could have significant consequences. For example,
it could:
|
|
|
|
|
limit our ability to satisfy current debt obligations;
|
|
|
|
increase interest expense due to the change in interest rates
and increase in debt levels;
|
|
|
|
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;
|
|
|
|
impair our ability to obtain financing in the future for working
capital, capital expenditures, research and development, or
acquisitions;
|
|
|
|
make us vulnerable to economic downturns or adverse developments
in our business or markets; and
|
|
|
|
place us at a competitive disadvantage compared to competitors
with less debt.
|
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.
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. This, 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 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 perform or provide the results
expected when we first entered into the transaction. If the
acquisitions are not integrated successfully or they do not
perform as well as anticipated, this could adversely affect our
results of operations and financial condition.
We may not be
able to successfully market the joint venture or sale of the
Companys Invision business
During fiscal 2008, we announced plans to reduce spending on
Invision as we refocused the business to non-automotive markets
and look for a strategic partner or buyer for the business. If
we are unsuccessful in this effort, we could potentially be
required to record impairment or other charges related to this
segment of our business.
16
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.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The following table indicates the location of each of the
Companys plastics compounding plant, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
Approximate
|
|
|
Approximate
|
|
|
Floor Area
|
|
Location
|
|
Capacity (sq. ft.)
|
|
|
Capacity (lbs.)(1)
|
|
|
(Square Feet)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Bellevue, Ohio
|
|
|
|
|
|
|
86,500
|
(2)
|
|
|
160
|
|
Nashville, Tennessee
|
|
|
|
|
|
|
34,000
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North America Engineered Plastics segment
|
|
|
|
|
|
|
120,500
|
(3)
|
|
|
298
|
|
Sharon Center, Ohio, Polybatch Color Center
|
|
|
|
|
|
|
14,000
|
|
|
|
113
|
|
San Luis Potosi, Mexico
|
|
|
|
|
|
|
83,000
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North America Polybatch segment
|
|
|
|
|
|
|
97,000
|
|
|
|
300
|
|
Sharon Center, Ohio, total Invision segment
|
|
|
15,000
|
(4)
|
|
|
|
|
|
|
32
|
|
Bornem, Belgium
|
|
|
|
|
|
|
147,000
|
|
|
|
455
|
|
Opglabbeek, Belgium
|
|
|
|
|
|
|
5,500
|
|
|
|
17
|
|
Guangdong Province, China
|
|
|
|
|
|
|
37,000
|
|
|
|
112
|
|
Givet, France
|
|
|
|
|
|
|
243,000
|
|
|
|
222
|
|
Kerpen, Germany
|
|
|
|
|
|
|
154,500
|
|
|
|
484
|
|
Budapest, Hungary
|
|
|
|
|
|
|
500
|
|
|
|
7
|
|
East Java, Indonesia (Joint Venture)
|
|
|
|
|
|
|
27,500
|
|
|
|
136
|
|
Gorla Maggiore, Italy
|
|
|
|
|
|
|
41,500
|
|
|
|
115
|
|
Nowa Biala, Poland
|
|
|
|
|
|
|
2,000
|
|
|
|
49
|
|
Crumlin Gwent, South Wales, United Kingdom
|
|
|
|
|
|
|
77,000
|
|
|
|
106
|
|
Astorp, Sweden
|
|
|
|
|
|
|
9,000
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total European Segment
|
|
|
|
|
|
|
744,500
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,000
|
|
|
|
962,000
|
|
|
|
2,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company considers each of the foregoing facilities to be in
good condition and suitable for its purposes.
(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.
17
(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.
(3) The North America Engineered Plastics segment included
the St. Thomas, Ontario, Canada plant, which was shutdown in
June 2008, and the Orange, Texas plant that was sold in March
2008. The capacity for these plants for fiscal 2008 was
approximately 135 million pounds for the timeframe that
they were operational in fiscal 2008. The remaining net book
value of the building, land and related improvements are
considered held for sale as of August 31, 2008.
(4) Includes the first production line for the new
Invision®
sheet product which is measured by the square foot. This is not
currently included in the Companys calculation of capacity
utilization as it is still in a
start-up
phase.
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 55 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 which contains approximately 48,000 square
feet of office space. The Company leases sales offices in
various locations globally.
The Company also owns a 158,000 square foot facility in
Akron, Ohio that, until December 31, 2000, was a
manufacturing operation. The facility was then used for
warehousing, logistics, product sampling and product
development. During fiscal 2008, the Company announced that this
location would be the site for a new North America Polybatch
plant. Production is expected to begin at this plant in fiscal
2009.
The Company also owns a 145,000 square foot facility in
Orange, Texas, that, until August 31, 2003, was a
manufacturing facility. The facility was previously used for
warehousing and logistics, but was closed in fiscal 2007 and was
placed for sale.
The Company owns a facility in Findlay, Ohio which is currently
designated as held for sale. This facility along with the
Orange, Texas former warehouse and the St. Thomas, Ontario,
Canada facility are all considered held for sale as of
August 31, 2008. Collectively, these locations have a net
book value of approximately $10.5 million at
August 31, 2008, which is included in property, plant and
equipment in the Companys consolidated balance sheets.
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.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended August 31, 2008.
EXECUTIVE
OFFICERS OF THE COMPANY
The following information is set forth pursuant to Item 401
(b) of
Regulation S-K.
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 63; 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 44; 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
18
where he held various financial roles since 1997 before becoming
Vice President and Corporate Treasurer of the Company in 2003.
Walter Belderbos: Age 50; European Chief
Financial Officer since July 2007. Mr. Belderbos previously
served as the European Finance and IT Director since September
1989 when he joined the Company.
Gary A. Miller: Age 62; 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 59; Vice President,
General Counsel 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 48; General Manager
and Chief Operating Officer Europe 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 of business in Europe from 2003 to
2004. He has been with A. Schulman, Inc. for 15 years,
serving in a variety of technology and commercial management
positions.
Jack Taylor: Age 62; General Manager and
Chief Operating Officer Asia of the Company since
September 1, 2008. Previously, Mr. Taylor served as
the General Manager Europe and Asia from 2003 to
2008. He has been an employee of A. Schulman for 30 years
and has held a number of management positions.
19
PART II
|
|
ITEM 5.
|
MARKET
FOR THE COMPANYS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
The Companys Common Stock is traded on the NASDAQ Stock
Market LLC under the symbol SHLM. At
October 20, 2008, there were 551 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 20, 2008 was $15.36.
The quarterly high and low closing stock prices for fiscal 2008
and 2007 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
Common Stock Price Range
|
|
High - Low
|
|
|
High - Low
|
|
|
1st Quarter
|
|
$
|
23.92 - 19.53
|
|
|
$
|
25.04 - 22.49
|
|
2nd Quarter
|
|
$
|
22.78 - 19.03
|
|
|
$
|
23.03 - 19.90
|
|
3rd Quarter
|
|
$
|
22.59 - 19.75
|
|
|
$
|
24.26 - 20.31
|
|
4th Quarter
|
|
$
|
24.41 - 21.32
|
|
|
$
|
25.95 - 19.82
|
|
The quarterly cash dividends declared for fiscal 2008 and 2007
are presented in the table below.
|
|
|
|
|
|
|
|
|
Cash Dividends Per Share
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
|
1st Quarter
|
|
$
|
0.145
|
|
|
$
|
0.145
|
|
2nd Quarter
|
|
|
0.145
|
|
|
|
0.145
|
|
3rd Quarter
|
|
|
0.150
|
|
|
|
0.145
|
|
4th Quarter
|
|
|
0.150
|
|
|
|
0.145
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.590
|
|
|
$
|
0.580
|
|
|
|
|
|
|
|
|
|
|
The Company paid $0.01 per common share on February 1,
2007, to shareholders of record on January 19, 2007, in
redemption of the special stock purchase rights previously
issued to the Companys shareholders pursuant to the Rights
Agreement dated as of January 26, 2006 between the Company
and National City Bank as Rights Agent, thereby redeeming in
full and canceling all such rights and terminating the Rights
Agreement. The amount of this redemption was $0.3 million,
which is included in the total amount of dividends paid during
fiscal 2007, but is not included in the $0.58 cash dividends per
share.
On April 25, 2006, the Company announced that its Board of
Directors authorized the repurchase of up to 6.75 million
shares of its outstanding common stock (the Repurchase
Program) representing approximately 23.3% of the
Companys outstanding shares at the authorization date. The
Repurchase Program replaced the Companys prior repurchase
authorization, under which approximately 1.7 million shares
had remained authorized for repurchase.
During fiscal 2008, as part of an agreement reached with the
Barington Capital Group, L.P. (the Barington Group)
the Board of Directors agreed to increase to five million the
number of shares authorized to be repurchased under the
Companys current share repurchase program and to
repurchase 2.0 million shares prior to August 31, 2008
(the 2008 Repurchase Program). The Company completed
its 2.0 million share repurchase commitment during the
fourth quarter of fiscal 2008.
20
The Companys purchases of its common stock under the 2008
Repurchase Program during the fourth quarter of fiscal 2008 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Paid
|
|
|
Total Number of
|
|
|
Maximum Number of
|
|
|
|
Total Number
|
|
|
Per Share
|
|
|
Shares Purchased as
|
|
|
Shares that may
|
|
|
|
of Shares
|
|
|
(Excluding
|
|
|
Part of a Publicly
|
|
|
yet be Purchased
|
|
|
|
Repurchased
|
|
|
Commissions)
|
|
|
Announced Plan
|
|
|
under the Plan
|
|
|
Beginning shares available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,510,363
|
|
June 1-30, 2008
|
|
|
164,833
|
|
|
$
|
23.65
|
|
|
|
164,833
|
|
|
|
3,345,530
|
|
July 1-31, 2008
|
|
|
182,600
|
|
|
$
|
22.76
|
|
|
|
182,600
|
|
|
|
3,162,930
|
|
August 1-31, 2008
|
|
|
144,444
|
|
|
$
|
23.31
|
|
|
|
144,444
|
|
|
|
3,018,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
491,877
|
|
|
$
|
23.22
|
|
|
|
491,877
|
|
|
|
3,018,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6.
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2006(1)
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Net sales
|
|
$
|
1,984,011
|
|
|
$
|
1,787,056
|
|
|
$
|
1,616,386
|
|
|
$
|
1,433,196
|
|
|
$
|
1,239,091
|
|
Cost of sales
|
|
|
1,747,657
|
|
|
|
1,577,108
|
|
|
|
1,399,451
|
|
|
|
1,240,557
|
|
|
|
1,055,608
|
|
Other costs, expenses, etc.
|
|
|
202,765
|
|
|
|
166,812
|
|
|
|
159,990
|
|
|
|
145,697
|
|
|
|
131,084
|
|
Interest and other income
|
|
|
(2,404
|
)
|
|
|
(4,138
|
)
|
|
|
(5,202
|
)
|
|
|
(2,394
|
)
|
|
|
(2,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,948,018
|
|
|
|
1,739,782
|
|
|
|
1,554,239
|
|
|
|
1,383,860
|
|
|
|
1,184,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
35,993
|
|
|
|
47,274
|
|
|
|
62,147
|
|
|
|
49,336
|
|
|
|
54,651
|
|
Provision for U.S. and foreign income taxes
|
|
|
17,944
|
|
|
|
24,655
|
|
|
|
29,485
|
|
|
|
17,243
|
|
|
|
26,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,049
|
|
|
$
|
22,619
|
|
|
$
|
32,662
|
|
|
$
|
32,093
|
|
|
$
|
27,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
890,421
|
|
|
$
|
874,115
|
|
|
$
|
843,245
|
|
|
$
|
784,362
|
|
|
$
|
724,096
|
|
Long-term debt
|
|
$
|
104,298
|
|
|
$
|
123,080
|
|
|
$
|
120,730
|
|
|
$
|
63,158
|
|
|
$
|
49,679
|
|
Total stockholders equity
|
|
$
|
427,581
|
|
|
$
|
427,013
|
|
|
$
|
403,492
|
|
|
$
|
462,103
|
|
|
$
|
435,237
|
|
Average number of common shares outstanding, net of treasury
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,794,923
|
|
|
|
27,032,348
|
|
|
|
29,961,580
|
|
|
|
30,619,780
|
|
|
|
30,128,117
|
|
Diluted
|
|
|
27,097,896
|
|
|
|
27,369,408
|
|
|
|
30,394,210
|
|
|
|
31,049,790
|
|
|
|
30,575,057
|
|
Diluted earnings per common share
|
|
$
|
0.66
|
|
|
$
|
0.82
|
|
|
$
|
1.07
|
|
|
$
|
1.03
|
|
|
$
|
0.91
|
|
Cash dividends per common share
|
|
$
|
0.59
|
|
|
$
|
0.58
|
|
|
$
|
0.58
|
|
|
$
|
0.57
|
|
|
$
|
0.54
|
|
|
|
|
(1) |
|
See Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
OVERVIEW OF THE
BUSINESS AND RECENT DEVELOPMENTS
A. Schulman, Inc. 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 Company has approximately 2,200 employees
and 16 plants in countries in North America, Europe and Asia. As
a result of changes in North American management in the latter
part of fiscal 2008 and an assessment of how the Companys
performance is reviewed and resources are allocated by the CODM,
the Company redefined its North America segment to align with
the Companys North American business units during the
third quarter
21
of fiscal 2008. The segments are Europe, which includes Asia,
North America Polybatch (NAPB), North America
Engineered Plastics (NAEP), North America
Distribution Services (NADS) and Invision.
The Company offers such products as color and additive
concentrates, polyolefins, engineered compounds and polyvinyl
chloride (PVC) used in packaging, durable goods and commodity
products. The Company also offers a tolling service to customers
from its European operations. Recently, the Company introduced
its new
Invision®
sheet product which is a replacement for painted plastic.
Joseph M. Gingo was appointed as President and CEO effective
January 1, 2008. On March 21, 2008, the Companys
former Chairman, President and CEO, Terry L. Haines, retired
from the Company. The Company recorded expenses of approximately
$3.6 million in connection with the CEO transition during
the second quarter of fiscal 2008, which includes costs for both
Mr. Gingo and Mr. Haines. On February 26, 2008,
the Company announced that its Board of Directors appointed
Mr. Gingo as Chairman of the Board.
In January 2008, Mr. Gingo announced a
100-day plan
to improve profitability and drive growth. This plan focused on
six primary areas:
|
|
|
|
|
More efficient and effective utilization of the Companys
North American manufacturing facilities;
|
|
|
|
Enhanced focus on value-added products;
|
|
|
|
Re-assessment of the Companys North American automotive
business;
|
|
|
|
Suspension of capital expenditures for Invision until a
marketing strategy has been refined;
|
|
|
|
Identification of additional efficiencies in the sales and
administrative structure of European and North American
operations; and
|
|
|
|
Ensuring the best leadership team is in place to execute the
strategy.
|
The Company has further articulated additional long-term
initiatives including:
|
|
|
|
|
A global working capital initiative to get the Companys
working capital at competitive levels over the next three to
four years;
|
|
|
|
An initiative to revamp the Companys global purchasing
processes and realize significant savings;
|
|
|
|
A revitalization of the Companys product development
process to ensure a pipeline full of higher margin
products; and
|
|
|
|
A continuous improvement process to ensure cost reductions
continue globally.
|
In February 2008, the Company announced the planned closure of
the St. Thomas, Ontario, Canada plant and the approval to sell
the Orange, Texas manufacturing facility. The Company plans to
achieve more efficient and effective utilization through the
consolidation of production and exit of low-margin businesses
which no longer meet the Companys strategy of focusing on
higher margin value-added products. The details of the
announcement and sale are discussed further in the Results of
Operations section of this Managements Discussion and
Analysis and Results of Operations. The Company completed the
sale of the Orange, Texas facility in March 2008 to Alloy
Polymers, Inc. for total consideration of $3.7 million.
The Company announced on November 16, 2007 that it reached
an agreement with a group of investors led by the Barington
Group on matters relating to the Companys 2007 Annual
Meeting of Stockholders which occurred on January 10, 2008.
The Company agreed to form a special committee of the Board, to
include Mr. James Mitarotonda, director, along with other
directors, to consider all strategic alternatives available to
the Company to maximize stockholder value, including, without
limitation, a strategic acquisition, merger or sale of the
Company. The Board also agreed to increase to five million the
number of shares authorized to be repurchased under the
Companys current share repurchase program and to
repurchase 2.0 million shares by the end of fiscal 2008,
subject to market conditions, materially relevant capital
considerations of the Company and compliance with applicable
laws. During the year ended August 31, 2008, the Company
repurchased approximately 2.0 million shares of common
stock at an average price of $21.20 per share.
22
During fiscal 2008, the Company has reduced spending on the
Invision business as it refocuses the business to non-automotive
markets. Management continues to be committed to the Invision
business while seeking a potential joint venture partner or
other strategic arrangement which can help accelerate the market
development process.
A detailed discussion of the Companys fiscal 2008
performance is included in the Results of Operations section.
RESULTS OF
OPERATIONS 2008
Net consolidated sales for fiscal 2008 were $2.0 billion,
an increase of $197.0 million or 11.0% over fiscal
2007s net sales of $1.8 billion. The translation
effect of foreign currencies, primarily the euro, increased net
consolidated sales by approximately $175.8 million, or
9.8%, in fiscal 2008.
A comparison of consolidated net sales by segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
% Due to
|
|
|
% Due to
|
|
|
% Due to
|
|
Sales
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
%
|
|
|
Tonnage
|
|
|
Translation
|
|
|
Price/Product Mix
|
|
|
Europe
|
|
$
|
1,504,401
|
|
|
$
|
1,309,975
|
|
|
$
|
194,426
|
|
|
|
14.8
|
|
|
|
(0.3
|
)
|
|
|
12.9
|
|
|
|
2.2
|
|
NAPB
|
|
|
168,679
|
|
|
|
158,278
|
|
|
|
10,401
|
|
|
|
6.6
|
|
|
|
3.9
|
|
|
|
2.3
|
|
|
|
0.4
|
|
NADS
|
|
|
131,811
|
|
|
|
128,496
|
|
|
|
3,315
|
|
|
|
2.6
|
|
|
|
(8.9
|
)
|
|
|
0.6
|
|
|
|
10.9
|
|
NAEP
|
|
|
178,704
|
|
|
|
190,143
|
|
|
|
(11,439
|
)
|
|
|
(6.0
|
)
|
|
|
(24.6
|
)
|
|
|
1.0
|
|
|
|
17.6
|
|
Invision
|
|
|
416
|
|
|
|
164
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,984,011
|
|
|
$
|
1,787,056
|
|
|
$
|
196,955
|
|
|
|
11.0
|
|
|
|
(3.9
|
)
|
|
|
9.8
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe sales tonnage decreases were more than offset by price
and mix as it exited some lower margin business as well as
announced price increases.
The NAPB segment sales experienced an increase in volume,
primarily during the early part of the year. Pricing increases
were announced later in the year for this segment as well as the
NAEP segment.
The Company sold its Orange, Texas facility in March 2008 and
shutdown the Canada facility in June 2008. Both facilities were
part of the NAEP segment. These actions decreased sales through
decreased tonnage for this segment in fiscal 2008 as compared to
the prior year. In addition, weaker markets and the elimination
of lower-margin products drove lower sales in the NAEP segment.
The NADS sales increased through increased prices and exiting
lower margin business.
The two largest markets served by the Company are the packaging
and automotive markets. Other markets include appliances,
construction, medical, consumer products,
electrical/electronics, office equipment and agriculture. The
approximate percentage of net consolidated sales by market for
2008 compared to 2007 is as follows:
|
|
|
|
|
|
|
|
|
Market
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
|
Packaging
|
|
|
38
|
%
|
|
|
37
|
%
|
Automotive
|
|
|
15
|
|
|
|
17
|
|
Other
|
|
|
47
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The North America segments include sales to customers in the
automotive market accounting for 33% for the year ended
August 31, 2008 and 38% for the year ended August 31,
2007. The U.S. automotive market is a special challenge for
the Company. The automotive market accounts for approximately
61% of the NAEP business. As the U.S. automotive market
continues to be under severe stress, the Company is actively
looking to expand into other non-automotive markets. For the
Europe segment, sales to customers in the packaging market
accounted for 42% for the years ended August 31, 2008 and
2007.
23
The majority of the Companys consolidated sales can be
classified into five primary product families. The approximate
amount and percentage of consolidated sales for these product
families compared to the previous year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Product Family
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands, except for %s)
|
|
|
Color and additive concentrates
|
|
$
|
714,770
|
|
|
|
36
|
|
|
$
|
627,268
|
|
|
|
35
|
|
Polyolefins
|
|
|
664,249
|
|
|
|
34
|
|
|
|
543,870
|
|
|
|
30
|
|
Engineered compounds
|
|
|
418,744
|
|
|
|
21
|
|
|
|
426,382
|
|
|
|
24
|
|
Polyvinyl chloride (PVC)
|
|
|
59,174
|
|
|
|
3
|
|
|
|
64,658
|
|
|
|
4
|
|
Tolling
|
|
|
19,466
|
|
|
|
1
|
|
|
|
21,450
|
|
|
|
1
|
|
Other
|
|
|
107,608
|
|
|
|
5
|
|
|
|
103,428
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,984,011
|
|
|
|
100
|
|
|
$
|
1,787,056
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A comparison of gross profit dollars and percentages by business
segment for 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Gross profit $
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except for %s)
|
|
|
Europe
|
|
$
|
204,976
|
|
|
$
|
171,066
|
|
|
$
|
33,910
|
|
|
|
19.8
|
|
North America Polybatch
|
|
|
14,770
|
|
|
|
17,936
|
|
|
|
(3,166
|
)
|
|
|
(17.7
|
)
|
North America Distribution Services
|
|
|
10,013
|
|
|
|
10,431
|
|
|
|
(418
|
)
|
|
|
(4.0
|
)
|
North America Engineered Plastics
|
|
|
11,307
|
|
|
|
15,131
|
|
|
|
(3,824
|
)
|
|
|
(25.3
|
)
|
Invision
|
|
|
(4,712
|
)
|
|
|
(4,616
|
)
|
|
|
(96
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
236,354
|
|
|
$
|
209,948
|
|
|
$
|
26,406
|
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit%
|
|
2008
|
|
|
2007
|
|
|
Europe
|
|
|
13.6
|
%
|
|
|
13.1
|
%
|
North America Polybatch
|
|
|
8.8
|
%
|
|
|
11.3
|
%
|
North America Distribution Services
|
|
|
7.6
|
%
|
|
|
8.1
|
%
|
North America Engineered Plastics
|
|
|
6.3
|
%
|
|
|
8.0
|
%
|
Invision
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
11.9
|
%
|
|
|
11.7
|
%
|
The gross profit dollars increased for Europe for the year ended
August 31, 2008 primarily due to the foreign currency
translation effect which had a positive impact on gross profit
of $23.1 million followed by favorable pricing and mix.
Excluding the impact of foreign currency translation, gross
profit for Europe increased $10.8 million. In fiscal 2007,
the Company recorded a favorable adjustment related to a change
in the estimate for its European customer claims reserve, which
increased European sales $2.4 million for the year ended
August 31, 2007, without an impact on cost of sales.
Therefore, excluding the impact of foreign currency translation,
gross profit increased $13.2 million for the year ended
August 31, 2008. The European gross profit percentage
increased for the year ended August 31, 2008. Contributions
to the increase in gross profit dollars and percentage include
increased selling prices and a better mix of product. Europe
gross profit for fiscal year 2008 was negatively impacted by
approximately $1.5 million for employee termination costs.
The gross profits for the NAPB business have declined to
$14.8 million for the year ended August 31, 2008 from
$17.9 million in the prior year. The decrease in gross
profits is partially a result of increases in raw material
costs, which were not completely offset by increases in pricing.
In fiscal 2008, the Company announced two price increases of up
to 20% for the NAPB business. In addition, certain restructuring
efforts have been put in place primarily during the fourth
quarter of fiscal 2008 to more efficiently utilize capacity and
resources and reduce expenses. The Company has announced the
opening of a North America Polybatch plant in the Companys
Akron, Ohio warehouse location which will
24
allow the Company to better serve the U.S. markets more
efficiently with local production capacity. This will also free
up capacity in the Mexican plant to allow the Company to more
efficiently serve the South American markets.
Gross profits for the NADS business have declined to
$10.0 million in fiscal 2008 from $10.4 million last
year, as increases in pricing helped to somewhat mitigate the
sales tonnage decline.
Gross profits for the NAEP business have declined to
$11.3 million for the year ended August 31, 2008 from
$15.1 million in the prior year. The decline was primarily
related to volume decreases in the broad business, particularly
in automotive, as well as increases in raw material costs which
have not been completely offset by increases in pricing. In
fiscal 2008, the Company announced two price increases of up to
20% for the NAEP business. The fiscal 2007 gross profits
for NAEP include accelerated depreciation related to the
Companys fiscal 2007 restructuring plan of approximately
$1.1 million, which negatively impacted gross profit. In
order to offset the effects of the weakening North American
markets, the Company accelerated the Canadian plant closure to
June 30, 2008. The Companys closure of its St.
Thomas, Ontario, Canada facility and the sale of the Orange,
Texas facility are expected to provide benefits for the NAEP
segment beginning in fiscal 2009.
The Invision gross profit loss is due to the
start-up
nature of the line. The Company has reduced spending on Invision
as it refocuses the business to non-automotive markets and also
considers strategic alternatives for the segment.
A comparison of capacity utilization levels is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Europe
|
|
|
87
|
%
|
|
|
93
|
%
|
North America Polybatch
|
|
|
101
|
%
|
|
|
100
|
%
|
North America Engineered Plastics
|
|
|
75
|
%
|
|
|
79
|
%
|
Worldwide
|
|
|
85
|
%
|
|
|
90
|
%
|
Europe capacity utilization declined primarily as a result of
working capital initiatives to reduce inventory as well as some
softening in the European markets. Additionally, the Company
consciously reduced some of its lower margin business in the
European segment.
Capacity utilization for the NAEP segment declined as a result
of further weakness primarily in the domestic automotive market
as compared to the prior year. As a result of the closure of the
St. Thomas, Ontario, Canada facility the Company will move a
limited amount of capacity to other North America facilities.
Overall worldwide utilization declined compared to the prior
year reflecting the challenging marketplace facing the Company
as well as efforts to reduce inventory. Pounds in inventory have
declined almost 25% since August 31, 2007. The capacity
utilization figures exclude production for the Invision product
as this business is in a
start-up
phase. Capacity utilization is calculated by dividing actual
production pounds by practical capacity at each plant.
The changes in selling, general and administrative expenses are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended August 31, 2008
|
|
|
|
$ Increase
|
|
|
% Increase
|
|
|
|
(In thousands, except for %s)
|
|
|
Total change in selling, general and administrative expenses
|
|
$
|
21,075
|
|
|
|
13.5
|
%
|
Effect of foreign currency translation
|
|
|
12,225
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
Total change in selling, general and administrative expenses,
excluding the effect of foreign currency translation
|
|
$
|
8,850
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses for fiscal 2008
include $0.6 million in costs associated with the
termination of the lease of an airplane and CEO transition costs
of $3.6 million. The Company also incurred approximately
$0.7 million of fees in fiscal 2008 related to a proxy
contest and $1.8 million of consulting costs relating to
the development of a strategic plan, both which were not
incurred in the previous year. Excluding these items, selling,
general and administrative expenses as a percent of sales
declined to approximately 8.6%, compared to 8.8% in fiscal 2007.
The increase excluding these items and the foreign currency
translation effect of $12.2 million, was $2.2 million,
or 1.4%, all of
25
which occurred in Europe. All Other North America costs declined
11.5% from fiscal 2007. Also included in fiscal 2008 selling,
general and administrative expenses is additional bad debt
expense as a result of customer bankruptcies.
A large part of the Companys technical activities relate
to the continuous refinement of compounds for specific customer
applications. Activities relating to the research and
development of new products and the improvement of existing
products are important to the Company. These activities are
conducted at the Companys various technical centers and
laboratories. Research and development expenditures were
approximately $5.9 million and $7.8 million in fiscal
years 2008 and 2007, respectively. These activities are
primarily related to the new
Invision®
sheet product and to support new consumer packaging and
automotive applications. The Company continues to invest in
research and development activities as management believes it is
important to the future of the Company.
Minority interest 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 $7.8 million and $8.1 million for
the years ended August 31, 2008 and 2007, respectively.
This slight decrease of $0.3 million is primarily related
to the lower borrowing levels 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 a $1.1 million foreign
currency transaction loss for the year ended August 31,
2008 as compared with a foreign currency transaction loss of
$0.2 million for the year ended August 31, 2007. 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 income. 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 income.
During fiscal 2008, the Company recorded curtailment gains of
$4.0 million. The curtailment gains included
$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. In addition, 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.
Impairment
related charges
As a result of the announcement to pursue a sale of the
Companys Orange, Texas facility, management deemed that a
trigger to evaluate goodwill in North America had occurred. The
goodwill in North America related only to the tolling reporting
unit of which the Orange, Texas facility was the only facility.
The tolling reporting unit is included in the Companys
North America Engineered Plastics segment. The reporting units
for purposes of goodwill did not change as a result of the
change in reportable segments made in the third quarter of
fiscal 2008. In accordance with Financial Accounting Standards
Board (FASB) Statement No. 142, Goodwill and
Other Intangible Assets (SFAS 142), the
Companys analysis indicated an impairment of goodwill
related to this tolling reporting unit which resulted in a
charge of approximately $1.0 million recorded during the
second quarter of fiscal 2008.
The Company also evaluated the inventory and property, plant and
equipment of the Orange, Texas and St. Thomas, Ontario, Canada
facilities, as a result of the announcement to shut down the
Companys manufacturing facility in St. Thomas, Ontario,
Canada and to pursue a sale of the Companys Orange, Texas
facility. The Company recorded an impairment related to the
long-lived assets of the Orange facility during the second
quarter of 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 Companys
consolidated statement of income. The impairment of the assets
for the Orange, Texas facility is related to the North American
Engineered Plastics reportable segment. All assets were sold
during March 2008.
26
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 is included in the asset impairment
line item in the Companys consolidated statement of
income. The impairment of the assets for the Canadian facility
is related to the North American Engineered Plastics reportable
segment.
As part of new CEO Joe Gingos
100-day plan
to improve profitability and drive growth, the Company announced
on January 3, 2008 that it would suspend further capital
expenditures on Invision until the marketing strategy had been
refined. The Company has considered use of the Findlay, Ohio
facility for other purposes, however, as of August 31, 2008
the Company considered all assets associated with this property
as held for sale. The Company recorded an impairment of its
Findlay, Ohio facility of $6.3 million during fiscal 2008
which is included in the asset impairment line item in the
consolidated statement of income. The Findlay facility
impairment was based on the estimated fair market value of the
property which was determined using independent third party
appraisals. The impairment recorded for the Findlay, Ohio
facility is related to the Invision reportable segment.
As of August 31, 2008, the land, building and related
improvements of the St. Thomas, Ontario, Canada facility, the
Findlay, Ohio facility and a building the Company owns in
Orange, Texas are considered to be held for sale. The net book
value of these assets held for sale after impairment is
approximately $10.5 million which is included in the
property, plant and equipment line item in the Companys
consolidated balance sheet as of August 31, 2008.
Restructuring
related charges
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. Production related to low-margin
business at the St. Thomas facility was discontinued and the
remaining higher margin business is primarily being absorbed by
the Companys Nashville, Tennessee and Bellevue, Ohio
manufacturing facilities. The facility was shutdown at the end
of June 2008. The Company continues to move equipment and
finalize closing procedures into early fiscal 2009.
The Orange, Texas facility provided primarily North American
third-party tolling services in which the Company processed
customer-owned materials for a fee. The Company decided to exit
the North American tolling business to concentrate on higher
value-added products. 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 to Alloy Polymers, Inc. for total
consideration of $3.7 million. The Company recorded a loss
on the sale of the Orange, Texas facility of approximately
$0.3 million in the third quarter of fiscal 2008 which is
included in other income in the Companys consolidated
statement of income. In connection with this sale, the Company
entered into a tolling agreement with Alloy Polymers, Inc. to
have specified minimum quantities of products tolled over a
period of four years.
During fiscal 2008, the Company recorded approximately
$6.8 million in employee related costs which included
estimated severance payments and medical insurance for
approximately 170 employees whose positions have been or
will be eliminated throughout the North American operations and
administrative support. All the restructuring costs related to
the sale of the Orange, Texas and the St. Thomas, Ontario,
Canada facilities are related to the North America Engineered
Plastics reportable segment. In the third quarter of fiscal 2008
in continuation of its initiatives, the Company announced it has
changed its organizational reporting structure related to its
North America operations. This change also resulted in the
elimination of approximately 21 positions at the Sharon Center,
Ohio plant which is included in the North America Polybatch
segment. Costs not specifically connected to these events are
related to All Other North America.
At August 31, 2008, the Company estimated it will incur
additional charges for employee related costs, contract
termination costs and other related costs of approximately $0.5
to $0.7 million related to these fiscal 2008 initiatives of
the Company. The Company anticipates the majority of the accrued
balance for restructuring charges to be paid during the first
quarter of fiscal 2009. Due to the global economic slowdown
subsequent to August 31, 2008, the Company anticipates
additional cost reductions in fiscal 2009 although no plans have
been detailed.
During fiscal 2007, the Company announced multiple phases of a
restructuring plan to restore its North American segment to
profitability. In November 2006, in order to balance capacity
with demand, reduce costs and improve efficiencies in the North
American segment, the Company announced a plan to close two of
its manufacturing lines at its
27
Orange, Texas plant, close a warehouse also located in Orange,
Texas and reduce the workforce at its Bellevue, Ohio plant. Due
to unanticipated customer demand on certain lines, the two
manufacturing lines at the Orange, Texas plant continued
production through the sale of the facility in March 2008. The
Orange, Texas warehouse was closed during the third quarter of
fiscal 2007. The warehouse and related assets were considered
held for sale and are included in the Companys
consolidated balance sheet in property, plant and equipment and
therefore the Company ceased depreciation on those assets. In
connection with this plan, the Company reduced its workforce by
65 positions at various facilities including the Bellevue, Ohio
plant.
In February 2007, the Company announced the second phase of its
restructuring plan which implemented several initiatives to
improve the Companys operations and profitability in North
America. This restructuring plan includes savings from the
following initiatives:
|
|
|
|
|
Reduction in the Companys North American workforce by
approximately 30 positions, primarily in the sales and
administrative functions,
|
|
|
|
Reduction in the Companys United States retiree healthcare
coverage plan,
|
|
|
|
Greater cost sharing of employee and retiree medical plan costs,
|
|
|
|
Broad discretionary selling, general and administrative cost
reductions,
|
|
|
|
Savings from improved purchasing processes, and
|
|
|
|
Improved logistics efficiencies.
|
As a result of the initiatives announced in fiscal 2007, the
Company recorded approximately $1.1 million of accelerated
depreciation for the year ended August 31, 2007, which
represents a change in estimate for the reduced life of
equipment. The employee related costs include severance payments
and medical insurance for employees whose positions were
eliminated in North America. The Company recorded minimal
charges in fiscal 2008 related to the fiscal 2007 initiatives.
At August 31, 2008, the Company believes the charges
related to this restructuring plan are complete and it will not
incur additional cash out-flows related to the announced
initiatives in 2007. The total charge for this plan was
approximately $2.1 million recorded primarily in fiscal
2007.
In connection with the announced plans in fiscal 2007 and fiscal
2008, the Company recorded the following restructuring charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual Balance
|
|
|
|
|
|
|
|
|
Accrual Balance
|
|
|
|
Fiscal 2007
|
|
|
Paid Fiscal
|
|
|
August 31,
|
|
|
Fiscal 2008
|
|
|
Paid Fiscal
|
|
|
August 31,
|
|
|
|
Charges
|
|
|
2007
|
|
|
2007
|
|
|
Charges
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Employee related costs
|
|
$
|
980
|
|
|
$
|
(906
|
)
|
|
$
|
74
|
|
|
$
|
6,383
|
|
|
$
|
(5,950
|
)
|
|
$
|
507
|
|
Other costs
|
|
|
68
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
434
|
|
|
|
(434
|
)
|
|
|
|
|
Translation effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
1,048
|
|
|
$
|
(974
|
)
|
|
$
|
74
|
|
|
$
|
6,817
|
|
|
$
|
(6,384
|
)
|
|
$
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation, included in NAEP cost of sales in 2007
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 does not include interest income or expense, other income
or expense, restructuring expense or foreign currency
transaction gains or losses. In some cases, the Company may
choose to exclude from a segments results certain
non-recurring 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.
28
A reconciliation of operating income (loss) by segment to
consolidated income before taxes is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Difference
|
|
|
|
(In thousands)
|
|
|
Europe
|
|
$
|
96,612
|
|
|
$
|
78,788
|
|
|
$
|
17,824
|
|
North America Polybatch
|
|
|
6,697
|
|
|
|
10,187
|
|
|
|
(3,490
|
)
|
North America Distribution Services
|
|
|
5,288
|
|
|
|
5,309
|
|
|
|
(21
|
)
|
North America Engineered Plastics
|
|
|
(8,055
|
)
|
|
|
(4,786
|
)
|
|
|
(3,269
|
)
|
Invision
|
|
|
(6,376
|
)
|
|
|
(5,738
|
)
|
|
|
(638
|
)
|
All Other North America
|
|
|
(15,061
|
)
|
|
|
(17,023
|
)
|
|
|
1,962
|
|
Corporate and other
|
|
|
(21,098
|
)
|
|
|
(14,216
|
)
|
|
|
(6,882
|
)
|
Interest expense, net
|
|
|
(5,476
|
)
|
|
|
(5,812
|
)
|
|
|
336
|
|
Foreign currency transaction losses
|
|
|
(1,133
|
)
|
|
|
(219
|
)
|
|
|
(914
|
)
|
Other income
|
|
|
66
|
|
|
|
1,832
|
|
|
|
(1,766
|
)
|
Curtailment gains
|
|
|
4,009
|
|
|
|
|
|
|
|
4,009
|
|
Goodwill impairment
|
|
|
(964
|
)
|
|
|
|
|
|
|
(964
|
)
|
Asset impairment
|
|
|
(11,699
|
)
|
|
|
|
|
|
|
(11,699
|
)
|
Restructuring expense
|
|
|
(6,817
|
)
|
|
|
(1,048
|
)
|
|
|
(5,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
35,993
|
|
|
$
|
47,274
|
|
|
$
|
(11,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European operating income increased approximately
$17.8 million, or 22.6% for the year ended August 31,
2008 compared to prior year primarily due to the favorable
translation effect of foreign currencies on European operating
income of $11.3 million. The remaining increase of
$6.5 million is primarily a result of the increase in gross
profit of $10.8 million discussed previously, which
excludes the translation effect of foreign currencies, offset by
increased European selling, general and administrative costs. In
the previous year, the Company recorded a favorable adjustment
related to a change in the estimate for its European customer
claims reserve, which increased European sales $2.4 million
for the year ended August 31, 2007, without an impact on
cost of sales.
The decline in operating income for NAPB for fiscal 2008 as
compared to prior year was primarily due to the decline in gross
profit of $3.2 million, discussed previously, and the
selling, general and administrative costs directly related to
NAPB which have increased slightly compared to the prior year.
NADS operating income was flat for fiscal 2008 as compared to
fiscal 2007 despite a decline in gross profit of
$0.4 million, discussed previously, due to decreased direct
NADS selling, general and administrative costs.
The NAEP operating loss increased $3.3 million compared to
prior year primarily due to the decline in gross profit, as
discussed previously. The decline in gross profit was partially
offset by savings in selling, general and administrative costs
related directly to NAEP resulting from Company initiatives. The
Companys announced closure of its St. Thomas, Ontario,
Canada facility and the sale of the Orange, Texas facility are
expected to provide benefits for the NAEP segment beginning in
fiscal 2009.
29
A reconciliation of the statutory U.S. federal income tax
rate with the effective tax rates of 49.9% in 2008 and 52.2% in
2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
(In thousands, except for %s)
|
|
|
Statutory U.S. tax rate
|
|
$
|
12,598
|
|
|
|
35.0
|
%
|
|
$
|
16,546
|
|
|
|
35.0
|
%
|
Amount of foreign income taxes less than U.S. taxes at statutory
rate
|
|
|
(12,457
|
)
|
|
|
(34.6
|
)
|
|
|
(2,951
|
)
|
|
|
(6.2
|
)
|
U.S. losses with no tax benefit
|
|
|
12,880
|
|
|
|
35.8
|
|
|
|
8,705
|
|
|
|
18.4
|
|
U.S. restructuring and other U.S. unusual charges with no benefit
|
|
|
4,777
|
|
|
|
13.3
|
|
|
|
149
|
|
|
|
0.3
|
|
Provision for repatriated earnings
|
|
|
1,054
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
Establishment (resolution) of uncertain tax positions
|
|
|
(1,363
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
Reduction of German tax rate
|
|
|
|
|
|
|
|
|
|
|
1,335
|
|
|
|
2.8
|
|
Other, net
|
|
|
455
|
|
|
|
1.3
|
|
|
|
871
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,944
|
|
|
|
49.9
|
%
|
|
$
|
24,655
|
|
|
|
52.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate of 49.9% for the year ended
August 31, 2008 is greater than the U.S. statutory
rate of 35% primarily because no tax benefits were recognized
for U.S. losses from continuing operations, charges
incurred for the sale of the Orange, Texas plant, employee
termination costs, lease termination costs, CEO transition
costs, and the impairment of the Findlay, Ohio facility. This
unfavorable effect on the Companys effective tax rate was
partially offset by the overall foreign tax rate being less than
the U.S. statutory rate. As compared to the effective rate
of 52.2% for the 12 months ended August 31, 2007, the
current years effective tax rate is driven by increases in
the U.S. pre-tax loss from operations and other
U.S. charges for which no tax benefit was recognized. This
unfavorable impact on the rate is partially offset by an
increase in foreign pre-tax income in lower rate jurisdictions,
recently implemented tax planning strategies, recently enacted
tax legislation in Germany which reduced the German statutory
rate by approximately 10 percentage points, and the
resolution of uncertain tax positions.
The Company uses the following non-GAAP financial measure of net
income excluding unusual items and net income per diluted share
excluding unusual 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 excluding unusual items and net income per
diluted share excluding unusual items to net income and net
income per diluted share.
30
Net Income and Earnings Per Share Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
August 31, 2008
|
|
|
August 31, 2007
|
|
|
|
Income
|
|
|
Diluted EPS
|
|
|
Income
|
|
|
Diluted EPS
|
|
|
|
(loss)
|
|
|
Impact
|
|
|
(loss)
|
|
|
Impact
|
|
|
|
(In thousands except share data)
|
|
|
Net income applicable to common stock
|
|
$
|
17,996
|
|
|
$
|
0.66
|
|
|
$
|
22,566
|
|
|
$
|
0.82
|
|
Adjustments, net of tax, per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance claim settlement adjustment
|
|
|
368
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Asset impairment
|
|
|
10,815
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
964
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Termination of lease for an airplane
|
|
|
640
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
CEO transition costs
|
|
|
3,582
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
Other employee termination costs
|
|
|
1,245
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
Curtailment gains
|
|
|
(4,009
|
)
|
|
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
Restructuring expense
|
|
|
5,524
|
|
|
|
0.20
|
|
|
|
1,048
|
|
|
|
0.04
|
|
Accelerated depreciation
|
|
|
|
|
|
|
|
|
|
|
1,071
|
|
|
|
0.04
|
|
Legal fees related to potential European acquisition
|
|
|
|
|
|
|
|
|
|
|
628
|
|
|
|
0.02
|
|
Proceeds from an insurance settlement for a hurricane claim
|
|
|
|
|
|
|
|
|
|
|
(1,500
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock before unusual items
|
|
$
|
37,125
|
|
|
$
|
1.36
|
|
|
$
|
23,813
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding Diluted
|
|
|
|
|
|
|
27,098
|
|
|
|
|
|
|
|
27,369
|
|
RESULTS OF
OPERATIONS 2007
Net consolidated sales for fiscal 2007 were $1.8 billion,
an increase of 10.6% over sales of $1.6 billion in fiscal
2006. A comparison of net consolidated sales by business
segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Sales
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands, except for%s)
|
|
|
Europe
|
|
$
|
1,309,975
|
|
|
$
|
1,122,742
|
|
|
$
|
187,233
|
|
|
|
16.7
|
|
North America Polybatch
|
|
|
158,278
|
|
|
|
155,111
|
|
|
|
3,167
|
|
|
|
2.0
|
|
North America Distribution Services
|
|
|
128,496
|
|
|
|
140,823
|
|
|
|
(12,327
|
)
|
|
|
(8.8
|
)
|
North America Engineered Plastics
|
|
|
190,143
|
|
|
|
197,704
|
|
|
|
(7,561
|
)
|
|
|
(3.8
|
)
|
Invision
|
|
|
164
|
|
|
|
6
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,787,056
|
|
|
$
|
1,616,386
|
|
|
$
|
170,670
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the percentage change in 2007 net
consolidated sales are as follows:
|
|
|
|
|
|
|
Increase
|
|
|
Tonnage
|
|
|
4.1
|
%
|
Price/product mix
|
|
|
0.7
|
|
Translation effect
|
|
|
5.8
|
|
|
|
|
|
|
Percentage increase in sales
|
|
|
10.6
|
%
|
|
|
|
|
|
Worldwide tonnage was up 4.1% for fiscal 2007 due to the
increase in European tonnage of 5.5%. NAEP tonnage increased
4.8% and NAPB tonnage increased 1.5% while NADS tonnage declined
5.3% in fiscal 2007 primarily due to weakness in the marketplace
in the first half of the fiscal year. The increase in European
tonnage was a result of increased
31
sales in higher volume, lower margin products. The translation
effect of foreign currencies, primarily the euro, increased net
consolidated sales by approximately $93.2 million in fiscal
2007.
The two largest markets served by the Company are the packaging
and automotive markets. Other markets include appliances,
construction, medical, consumer products,
electrical/electronics, office equipment and agriculture. The
approximate percentage of net consolidated sales by market for
2007 compared to 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
Market
|
|
2007
|
|
|
2006
|
|
|
Packaging
|
|
|
37
|
%
|
|
|
36
|
%
|
Automotive
|
|
|
17
|
|
|
|
17
|
|
Other
|
|
|
46
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The North America segments sales to customers in the automotive
market accounted for 35% for the years ended August 31,
2007 and 2006. The U.S. automotive market has been under
tremendous stress with the Company observing a decline in
automotive production from the major Detroit-based automobile
manufacturers during this period. For the Europe segment, sales
to customers in the packaging market accounted for 42% and 44%
for the years ended August 31, 2007 and 2006, respectively.
The majority of the Companys consolidated sales can be
classified into five primary product families. The approximate
amount and percentage of consolidated sales for these product
families compared to the previous year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Product Family
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands, except for %s)
|
|
|
Color and additive concentrates
|
|
$
|
627,268
|
|
|
|
35
|
|
|
$
|
579,825
|
|
|
|
36
|
|
Polyolefins
|
|
|
543,870
|
|
|
|
30
|
|
|
|
495,163
|
|
|
|
31
|
|
Engineered compounds
|
|
|
426,382
|
|
|
|
24
|
|
|
|
393,312
|
|
|
|
24
|
|
Polyvinyl chloride (PVC)
|
|
|
64,658
|
|
|
|
4
|
|
|
|
64,174
|
|
|
|
4
|
|
Tolling
|
|
|
21,450
|
|
|
|
1
|
|
|
|
16,482
|
|
|
|
1
|
|
Other
|
|
|
103,428
|
|
|
|
6
|
|
|
|
67,430
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,787,056
|
|
|
|
100
|
|
|
$
|
1,616,386
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of fiscal 2007, the Company determined
that its anticipated customer claims for products sold in Europe
were expected to be more favorable than originally anticipated.
Accordingly, the Company changed its estimate for these reserves
and recorded an adjustment which resulted in an increase in
sales and pre-tax income of $2.4 million ($1.4 million
in net income) for the year ended August 31, 2007.
A comparison of gross profit dollars and percentages by business
segment for 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
Gross Profit $
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands, except for %s)
|
|
|
Europe
|
|
$
|
171,066
|
|
|
$
|
163,826
|
|
|
$
|
7,240
|
|
|
|
4.4
|
|
North America Polybatch
|
|
|
17,936
|
|
|
|
18,518
|
|
|
|
(582
|
)
|
|
|
(3.1
|
)
|
North America Distribution Services
|
|
|
10,431
|
|
|
|
13,522
|
|
|
|
(3,091
|
)
|
|
|
(22.9
|
)
|
North America Engineered Plastics
|
|
|
15,131
|
|
|
|
23,062
|
|
|
|
(7,931
|
)
|
|
|
(34.4
|
)
|
Invision
|
|
|
(4,616
|
)
|
|
|
(1,993
|
)
|
|
|
(2,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
209,948
|
|
|
$
|
216,935
|
|
|
$
|
(6,987
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
Gross Profit %
|
|
2007
|
|
|
2006
|
|
|
Europe
|
|
|
13.1
|
%
|
|
|
14.6
|
%
|
North America Polybatch
|
|
|
11.3
|
%
|
|
|
11.9
|
%
|
North America Distribution Services
|
|
|
8.1
|
%
|
|
|
9.6
|
%
|
North America Engineered Plastics
|
|
|
8.0
|
%
|
|
|
11.7
|
%
|
Invision
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
11.7
|
%
|
|
|
13.4
|
%
|
The gross profit dollars increased for Europe for the year ended
August 31, 2007. The foreign currency translation effect
had a positive impact on gross profit of $12.1 million for
fiscal 2007. The Company recorded a favorable adjustment related
to a change in the estimate for its European customer claims
reserve, which increased European sales $2.4 million for
the year ended August 31, 2007, without an impact on cost
of sales. Therefore, excluding the impact of foreign currency
translation and the $2.4 million claims reserve adjustment,
gross profit was down $7.3 million for the year ended
August 31, 2007. The European gross profit percentage
decreased for the year ended August 31, 2007. The decline
of gross profit and the gross profit percentage was due
primarily to the following factors:
|
|
|
|
|
Higher raw material costs which the Company was not able to
fully pass on through increased selling prices due to
competitive price pressures, and
|
|
|
|
Decrease of production at the Companys European
manufacturing facilities, combined with successful efforts to
reduce inventory negatively impacted the capacity utilization at
these facilities.
|
Gross profit and gross profit percentages for NAPB, NAEP, and
NADS decreased for the year ended August 31, 2007. The
NADS, NAPB and NAEP gross profit decreases were the result of a
change in product mix and increased raw materials costs that the
Company was not able to fully pass on through increased selling
prices. NADS experienced increased logistics costs on a lower
volume of sales. The NAEP gross profit was negatively impacted
by accelerated depreciation of approximately $1.1 million
for the year ended August 31, 2007. This accelerated
depreciation related to the Companys announced
restructuring plan.
A comparison of capacity utilization levels is as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Europe
|
|
|
93
|
%
|
|
|
94
|
%
|
North America Polybatch
|
|
|
100
|
%
|
|
|
99
|
%
|
North America Engineered Plastics
|
|
|
79
|
%
|
|
|
79
|
%
|
Worldwide
|
|
|
90
|
%
|
|
|
90
|
%
|
Capacity utilization for all the segments remained relatively
flat as compared to the prior year. Overall, the weakening
markets primarily in the first half of fiscal year 2007 and the
Companys efforts to reduce its inventory levels forced
utilization levels to remain the same. In Europe, a change in
demand, product mix and an increase in capacity at its France
facility, combined with successful efforts to reduce inventory
levels, negatively affected capacity utilization. The capacity
utilization figures exclude the production for the Invision
product as this business is in a
start-up
phase. Capacity utilization is calculated by dividing actual
production pounds by practical capacity at each plant.
The changes in selling, general and administrative expenses are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended August 31, 2007
|
|
|
|
$ Increase
|
|
|
% Increase
|
|
|
|
(In thousands,
|
|
|
|
except for %s)
|
|
|
Total change in selling, general and administrative expenses
|
|
$
|
10,882
|
|
|
|
7.5
|
%
|
Effect of foreign currency translation
|
|
|
6,383
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
Total change in selling, general and administrative expenses,
excluding the effect of foreign currency translation
|
|
$
|
4,499
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
33
Excluding the effect of foreign currency translation and
$1.0 million of costs related to the Companys
evaluation of a possible acquisition target, selling, general
and administrative expenses increased $3.5 million, or
2.4%, for the year ended August 31, 2007. The remaining
$3.5 million increase is primarily due to the
Companys European segment, which had an increase of
$3.8 million in selling, general and administrative
expenses. This increase relates to increased services, which
includes legal and professional costs and business process
consultants, and increased compensation. The European increase
was partially offset by a decline in All Other North America
expenses of approximately $2.4 million. This was primarily
a result of the Companys North American restructuring and
efforts to control the levels of selling, general and
administrative expenses. The savings in All Other North America
were slightly offset by the increase in these expenses from
Invision of $1.0 million.
A large part of the Companys technical activities relate
to the continuous refinement of compounds for specific customer
applications. Activities relating to the research and
development of new products and the improvement of existing
products are important to the Company. These activities are
conducted at the Companys various technical centers and
laboratories. Research and development expenditures were
approximately $7.8 million and $5.5 million in fiscal
years 2007 and 2006, respectively. The increase in these
activities is primarily related to the new
Invision®
sheet product and to support new consumer packaging and
automotive applications.
Interest expense increased $1.9 million for the year ended
August 31, 2007 as compared to the same period last year.
The increase was a result of the full year effect of higher
levels of borrowing due to the share repurchases completed in
fiscal 2006 and early fiscal 2007, as well as higher interest
rates.
Minority interest 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.
Foreign currency transaction gains or losses represent changes
in the value of currencies in major areas where the Company
operates. The Company experienced a $0.2 million foreign
currency transaction loss for the year ended August 31,
2007 as compared with a foreign currency transaction loss of
$2.1 million for the same period last year. The loss in
fiscal 2006 primarily relates to changes in the value of the
U.S. dollar compared with the Canadian dollar. The loss in
fiscal 2007 primarily relates to the changes in the value of the
U.S. dollar compared with the euro. During fiscal 2007, the
Company entered into forward foreign exchange contracts in North
America to reduce the impact of changes in foreign exchange
rates on the consolidated statement of income. 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 Income.
One of the Companys major facilities in Texas was closed
for a two-week period in September 2005 because of Hurricane
Rita. In addition, a warehouse in Texas also incurred damage
from Hurricane Rita. The claim for this hurricane was filed with
the insurance carriers, but the final recovery amount had not
been finalized as of August 31, 2007. The Company received
a $1.5 million payment in partial settlement of the claim
during the fourth quarter of fiscal 2007. This amount was
recorded in other income in the consolidated statement of
income. Amounts not covered by insurance did not have a material
impact on earnings.
Other income in fiscal 2007 was $1.8 million, which
included $1.5 million of insurance proceeds for a claim
related to hurricane damage as noted above. In fiscal 2006,
other income of $1.9 million included income of
$0.8 million from the cancellation by suppliers of certain
distribution arrangements in Europe and the receipt of a life
insurance settlement of approximately $0.5 million.
During fiscal 2007, the Company announced multiple phases of a
restructuring plan to restore its North American segments to
profitability. In November 2006, in order to balance capacity
with demand, reduce costs and improve efficiencies in the North
American Engineered Plastics segment, the Company announced a
plan to close two of its manufacturing lines at its Orange,
Texas plant and reduce the workforce at its Bellevue, Ohio
plant. In addition, the Company announced its intention to close
a warehouse also located in Orange, Texas which was included in
the NADS segment. This warehouse was closed in the third quarter
of fiscal 2007. The manufacturing lines at the Orange, Texas
plant continued production through the sale of this facility in
March 2008 as unanticipated customer demand on certain lines
delayed closure of these lines. In connection with this plan,
the Company reduced its workforce by 65 positions.
34
In February 2007, the Company announced the second phase of its
restructuring plan which implements several initiatives that
will improve the Companys operations and profitability in
the North America segments as well as reduce All Other North
America administrative costs.
These plans are expected to deliver annual savings of
approximately $18 million. These estimated savings are
coming from the following initiatives:
|
|
|
|
|
Reduction in the Companys workforce by approximately 30
positions, primarily in the sales and administrative functions,
|
|
|
|
Reduction in the Companys United States retiree healthcare
coverage plan,
|
|
|
|
Greater cost sharing of employee and retiree medical plan costs,
|
|
|
|
Broad discretionary selling, general and administrative cost
reductions,
|
|
|
|
Savings from improved purchasing processes, and
|
|
|
|
Improved logistics efficiencies.
|
In connection with this restructuring plan, the Company recorded
pre-tax charges of $2.1 million for the year ended
August 31, 2007. These charges are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual Balance
|
|
|
|
Fiscal 2007
|
|
|
Paid Fiscal
|
|
|
August 31,
|
|
|
|
Charges
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Employee related costs
|
|
$
|
980
|
|
|
$
|
(906
|
)
|
|
$
|
74
|
|
Other costs
|
|
|
68
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
1,048
|
|
|
$
|
(974
|
)
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation, included in NAEP cost of sales in 2007
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The employee related costs include severance payments and
medical insurance for employees whose positions were eliminated
in North America. The Company recorded approximately
$1.1 million of accelerated depreciation for the year ended
August 31, 2007 which represents a change in estimate for
the reduced life of equipment. At August 31, 2007, the
Company estimated it would incur minimal additional charges for
employee related costs which are not expected to impact the
total charge of $2.1 million. The Company anticipates the
remaining accrued balance for restructuring charges to be paid
over the first seven months of fiscal 2008.
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 does not include interest income or expense, other income
or expense, restructuring expense or foreign currency
transaction gains or losses. In some cases, the Company may
choose to exclude from a segments results certain
non-recurring 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.
35
A reconciliation of operating income (loss) by segment to
consolidated income before taxes is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Difference
|
|
|
|
(In thousands)
|
|
|
Europe
|
|
$
|
78,788
|
|
|
$
|
82,665
|
|
|
$
|
(3,877
|
)
|
North America Polybatch
|
|
|
10,187
|
|
|
|
9,965
|
|
|
|
222
|
|
North America Distribution Services
|
|
|
5,309
|
|
|
|
8,172
|
|
|
|
(2,863
|
)
|
North America Engineered Plastics
|
|
|
(4,786
|
)
|
|
|
6,274
|
|
|
|
(11,060
|
)
|
Invision
|
|
|
(5,738
|
)
|
|
|
(2,775
|
)
|
|
|
(2,963
|
)
|
All Other North America
|
|
|
(17,023
|
)
|
|
|
(19,415
|
)
|
|
|
2,392
|
|
Corporate and other
|
|
|
(14,216
|
)
|
|
|
(14,585
|
)
|
|
|
369
|
|
Restructuring expense
|
|
|
(1,048
|
)
|
|
|
|
|
|
|
(1,048
|
)
|
Interest expense, net
|
|
|
(5,812
|
)
|
|
|
(2,924
|
)
|
|
|
(2,888
|
)
|
Foreign currency transaction losses
|
|
|
(219
|
)
|
|
|
(2,136
|
)
|
|
|
1,917
|
|
Other income
|
|
|
1,832
|
|
|
|
1,892
|
|
|
|
(60
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
(4,986
|
)
|
|
|
4,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
47,274
|
|
|
$
|
62,147
|
|
|
$
|
(14,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European operating income decreased for the year ended
August 31, 2007, which includes the positive translation
effect of foreign currencies of $5.7 million. Excluding the
impact of translation of foreign currencies and the
$2.4 million for the claims reserve, Europe operating
income declined $12.0 million. This decline was due
primarily to the decrease in gross profit of $7.3 million,
which excludes the positive translation effect of foreign
currencies of $12.1 million and the adjustment to the
claims reserve. Excluding the translation effect of foreign
currencies, the remaining decrease relates to a decrease in
other income and an increase of approximately $4.8 million
in selling, general and administrative expenses. The increase in
selling, general and administrative expenses was due to the
increase in services driven primarily by $1.0 million of
legal and professional costs related to the evaluation of a
possible acquisition target.
NAPB operating income for the year ended August 31, 2007
increased slightly due to savings in selling, general and
administrative expense directly related to that segment as a
result of restructuring efforts. The NAEP operating loss is
primarily a result of the $7.9 million decline in gross
profit, as discussed previously, in addition to an increase in
directly related selling, general and administrative costs. The
operating income for NADS declined as a result of a
$3.0 million decline in gross profit which was partially
offset by a decline in selling, general and administrative
expenses for the year ended August 31, 2007 due primarily
to the Companys North American restructuring.
A reconciliation of the statutory U.S. federal income tax
rate with the effective tax rates of 52.2% in 2007 and 47.4% in
2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
Statutory U.S. tax rate
|
|
$
|
16,546
|
|
|
|
35.0
|
%
|
|
$
|
21,752
|
|
|
|
35.0
|
%
|
Amount of foreign income taxes less than U.S. taxes at statutory
rate
|
|
|
(2,951
|
)
|
|
|
(6.2
|
)
|
|
|
(4,043
|
)
|
|
|
(6.5
|
)
|
U.S. losses with no tax benefit
|
|
|
8,705
|
|
|
|
18.4
|
|
|
|
5,593
|
|
|
|
9.0
|
|
U.S. restructuring and other U.S. unusual charges with no benefit
|
|
|
149
|
|
|
|
0.3
|
|
|
|
404
|
|
|
|
0.6
|
|
Provision for repatriated earnings
|
|
|
|
|
|
|
|
|
|
|
2,243
|
|
|
|
3.6
|
|
Loss on extinguishment of debt no tax benefit
|
|
|
|
|
|
|
|
|
|
|
1,745
|
|
|
|
2.8
|
|
Establishment (resolution) of uncertain tax positions
|
|
|
|
|
|
|
|
|
|
|
1,152
|
|
|
|
1.9
|
|
Reduction of German tax rate
|
|
|
1,335
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
871
|
|
|
|
1.9
|
|
|
|
639
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,655
|
|
|
|
52.2
|
%
|
|
$
|
29,485
|
|
|
|
47.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
The Company uses the following non-GAAP financial measure of net
income excluding unusual items and net income per diluted share
excluding unusual 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 excluding unusual items and net income per
diluted share excluding unusual items to net income and net
income per diluted share.
Net Income and Earnings Per Share Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2007
|
|
|
Year Ended August 31, 2006
|
|
|
|
Income
|
|
|
Diluted EPS
|
|
|
Income
|
|
|
Diluted EPS
|
|
|
|
(loss)
|
|
|
Impact
|
|
|
(loss)
|
|
|
Impact
|
|
|
|
(In thousands except share data)
|
|
|
Net income applicable to common stock
|
|
$
|
22,566
|
|
|
$
|
0.82
|
|
|
$
|
32,609
|
|
|
$
|
1.07
|
|
Adjustments, net of tax, per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for repatriated funds for share buyback
|
|
|
|
|
|
|
|
|
|
|
2,243
|
|
|
|
0.07
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
4,986
|
|
|
|
0.16
|
|
Foreign exchange loss on repatriation of cash
|
|
|
|
|
|
|
|
|
|
|
1,153
|
|
|
|
0.04
|
|
Restructuring expense
|
|
|
1,048
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
|
1,071
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Legal fees related to potential European acquisition
|
|
|
628
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
Proceeds from an insurance settlement for a hurricane claim
|
|
|
(1,500
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock before unusual items
|
|
$
|
23,813
|
|
|
$
|
0.87
|
|
|
$
|
40,991
|
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding Diluted
|
|
|
|
|
|
|
27,369
|
|
|
|
|
|
|
|
30,394
|
|
In connection with the Companys financing arrangements,
the Company prepaid its $50.0 million private placement
7.27% senior notes and terminated its $100.0 million
revolving credit arrangement in fiscal 2006 in order to complete
a self-tender offer to purchase its common stock as discussed
below. Related to the financing and self-tender offer, the
Company recorded a loss on extinguishment of debt of
approximately $5.0 million, tax expense of
$2.2 million to repatriate the funds from Europe and
approximately $1.2 million of expense in foreign currency
transaction losses on the repatriation of the funds.
In October 2005, the Company reached an agreement with a group
of investors led by the Barington Group, which then had an
ownership position of approximately 8.7% of the Companys
outstanding stock (the 2005 Agreement). Under the
terms of the 2005 agreement, among other things, the Barington
Group withdrew its notice of intent to nominate persons for
election as directors at the Companys 2005 Annual Meeting
and agreed to abide by certain standstill provisions until the
Companys 2007 Annual Meeting (the Standstill
Period), while the Company, through its Board of
Directors, expanded the size of the Board from 10 to 12 and
appointed James A. Mitarotonda, a member of the Barington Group,
to serve as a director until the 2007 Annual Meeting. The
Company also agreed to initiate and consummate a self-tender
offer by April 30, 2006.
On February 21, 2006, the Company announced that its Board
of Directors approved a modified Dutch auction self-tender offer
for up to 8.75 million shares of its common stock, at a
price between $21.00 and $24.00 per share. The Company commenced
the self-tender offer on March 1, 2006 and it expired on
April 11, 2006. On April 25, 2006, the Company
announced the final results of the self-tender offer where the
Company accepted for purchase 2,071,585 shares at a price
of $24.00 per share for a total of approximately
$49.7 million. The Company also incurred costs in
connection with the self-tender of $0.5 million in legal
and professional fees.
On May 30, 2006, the Barington Group filed Amendment
No. 9 to its
Schedule 13-D
disclosing certain changes, among group members and in the
aggregate, of the beneficial ownership of the Companys
common stock. The Barington Group disclosed its positions that
completion of the self-tender offer by the Company without
repurchasing
37
8,750,000 shares of common stock constituted a failure of
the Company to fulfill its obligations under the 2005 Agreement
and therefore the Standstill Period terminated after the close
of business on April 30, 2006. Among other things,
termination of the Standstill Period would eliminate certain
restrictions on the ability of Barington Group members to
purchase additional shares of common stock of the Company and to
solicit proxies in connection with the Companys 2006
annual meeting.
In October 2006, the Company reached another agreement with the
Barington Group, which as of the date of the agreement owned an
aggregate 2,816,536 shares, or approximately 10.5% of the
Companys common stock (the 2006 Agreement).
Under the terms of the 2006 Agreement, the Barington Group
withdrew a notice of its intent to nominate certain persons for
election as directors at the 2006 annual meeting, agreed to
dismiss a lawsuit it had filed against the Company in Delaware
seeking to enforce its rights as a stockholder to inspect and
copy certain books, records and documents of the Company, and
agreed to abide by certain standstill provisions until the
Companys 2007 annual meeting. The Company agreed, among
other things, to nominate James S. Marlen, Ernest J.
Novak, Jr. (each current directors of the Company), Howard
R. Curd and Michael A. McManus, Jr. on the Boards
slate of nominees for election as Class II directors of the
Company at the 2006 annual meeting. The 2006 Agreement also
superseded the 2005 Agreement, except with respect to
Sections 5(d), 6(a) and 9 of the 2005 Agreement.
The foregoing descriptions of certain of the terms of the 2005
Agreement and the 2006 Agreement are qualified in their entirety
by reference to the full text of the agreements, each of which
are attached as Exhibit 99.2 to the
Forms 8-K
filed by the Company on October 24, 2005 and
October 26, 2006.
In November 2007, the Company reached an agreement with a group
of investors lead by the Barington Group, in order to avoid a
proxy solicitation contest at the 2007 Annual Meeting of
Stockholders (the 2007 Agreement). Under the terms
of the 2007 Agreement, the Company agreed, amongst other things:
(1) to announce the retirement of Terry L. Haines, the
Companys then President and CEO, by March 31, 2008;
(2) to nominate an independent director, recommended by the
Barington Group, for election as director at the 2007 Annual
Meeting; (3) to authorize an increase in the number of
shares of the Companys common stock that could be
repurchased by the Company to five million and use its
reasonable best efforts to repurchase at least two million
shares by August 31, 2008; and (4) to have the Board
of Directors form a special committee to explore all strategic
alternatives to maximize and improve shareholder value,
including, without limitation, a strategic acquisition, merger
or sale of the Company. Additionally, pursuant to the 2007
Agreement, the Barington Group agreed, amongst other things:
(1) to withdraw its notice of intent to nominate certain
persons for election as directors at the 2007 Annual Meeting and
to withdraw its demand for copies of certain books and records;
and (2) to vote all shares of the Companys common
stock it was entitled to vote in favor of the Boards slate
of nominees for election at the 2007 Annual Meeting.
The foregoing description of certain of the terms of the 2007
Agreement are qualified in their entirety by reference to the
full text of such agreement, which is attached as
Exhibit 99.1 to the
Form 8-K
filed by the Company on November 20, 2007.
The Companys Special Committee of the Board, whose voting
members are all independent directors, has been actively
reviewing strategic alternatives for the Company. UBS, the
Companys financial advisor retained for this purpose,
identified potential partners for a strategic transaction and
reached the point that a tentative offer to purchase the Company
was made over the summer of fiscal 2008. However, the Special
Committee concluded the offer was inadequate. Although the Board
left the door open for an improved offer, the other party
declined that opportunity. The Special Committee will continue
to pursue all strategic options, including a possible sale or
merger of the Company, potential acquisitions by the Company,
and continued execution of the Companys strategic plan.
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.
38
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
collectibility. 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 monitors its slow-moving and
obsolete inventory on a quarterly basis 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
Restructuring charges are recorded in accordance with FASB
Statement No. 112, Employers Accounting for
Postemployment Benefits, an amendment of FASB Statements
No. 5 and 43, (SFAS 112) or FASB Statement
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (SFAS 146), as applicable.
Employee related restructuring charges are recorded in
accordance with SFAS 112 if the benefits are based on an
existing benefit arrangement and are recorded in accordance with
SFAS 146 if the benefits are based on a one-time
termination benefit arrangement. All other costs associated with
an exit or disposal activity are recognized when the liability
is incurred in accordance with SFAS 146.
PURCHASE
ACCOUNTING AND GOODWILL
Business acquisitions 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. Goodwill is not
amortized. 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.
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 in accordance with FASB
Statement No. 144, Accounting for Impairment or Disposal of
Long-lived Assets (SFAS 144). Estimated
remaining useful lives are the basis for the measurement of any
adjustments that are reflected as accelerated depreciation in
cost of sales in accordance with SFAS 144.
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.
In June 2006, the FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109, Accounting for Income Taxes, which is
effective for fiscal years beginning after December 15,
2006. FIN 48 prescribes a comprehensive model for how a
company should recognize, measure,
39
present, and disclose in its financial statements uncertain tax
positions that the company has taken or expects to take on a tax
return. The Company adopted FIN 48 on September 1,
2007 resulting in an increase to the opening balance of retained
earnings of $2.1 million for unrecognized tax benefits not
previously recognized under historical practice.
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. In
accordance with the provisions of SFAS 109,
Accounting for Income Taxes, 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 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. Based
on FASB Statement No. 158, Employers Accounting for
Defined Benefit Pension and Postretirement Plans
(SFAS 158), the full unfunded liability has to
be recognized on the balance sheet. The cumulative difference
between actual experience and assumed experience is included in
accumulated other comprehensive income. 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 and then recognized in expense
40
over the average future working lifetime of the affected plan.
With the adoption at August 31, 2007 of SFAS 158, the
full unfunded liability of all the Companys defined
benefit pension and other postretirement benefit plans were
included on the Companys consolidated balance sheets at
August 31, 2008 and 2007.
For the majority of the Companys pension plans, the
Company consults with various actuaries 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 6.3% for fiscal 2008. For the other
postretirement benefit plan, the rate is 7.0% 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 7.8% for fiscal
2008.
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
guaranteed investment certificates 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 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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on
|
|
|
Impact on
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
|
|
|
2008
|
|
|
2008
|
|
|
|
Impact on
|
|
|
Projected
|
|
|
Projected
|
|
|
|
2008
|
|
|
Benefit
|
|
|
Benefit
|
|
|
|
Benefits
|
|
|
Obligation for
|
|
|
Obligation for
|
|
Change in Assumption
|
|
Expense
|
|
|
Pension Plans
|
|
|
Postretirement Plans
|
|
|
|
(In thousands)
|
|
|
25 basis point decrease in discount rate
|
|
$
|
290
|
|
|
$
|
3,134
|
|
|
$
|
312
|
|
25 basis point increase in discount rate
|
|
$
|
(251
|
)
|
|
$
|
(2,949
|
)
|
|
$
|
(300
|
)
|
25 basis point decrease in expected long-term rate of
return on assets
|
|
$
|
40
|
|
|
$
|
|
|
|
$
|
|
|
25 basis point increase in expected long-term rate of
return on assets
|
|
$
|
(40
|
)
|
|
$
|
|
|
|
$
|
|
|
STOCK-BASED
COMPENSATION
Stock-based compensation requires the use of a valuation model.
The Company currently uses a Black-Scholes option pricing model
to calculate the fair value of its stock options. The
Black-Scholes model requires assumptions based on
managements judgment regarding, among others, the
volatility of the Companys stock, the expected forfeiture
rate, the expected life of the stock award and the
Companys dividend yield. The Company primarily uses
historical data to determine the assumptions to be used in the
Black-Scholes model 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 and future stock award exercise
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 and the
dividend yield, may materially affect the Companys future
stock-based compensation expense.
41
The Company grants certain types of equity grants which involve
market conditions for determining vesting. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(In millions, except for %s)
|
|
|
Cash and cash equivalents
|
|
$
|
97.7
|
|
|
$
|
43.0
|
|
|
|
127.2
|
%
|
Working capital, excluding cash
|
|
|
305.2
|
|
|
|
375.5
|
|
|
|
(18.7
|
)
|
Long-term debt
|
|
|
104.3
|
|
|
|
123.1
|
|
|
|
(15.3
|
)
|
Stockholders equity
|
|
|
427.6
|
|
|
|
427.0
|
|
|
|
0.1
|
|
As of August 31, 2008, the current ratio was 2.6 to 1 and
working capital, excluding cash, was $305.2 million. The
decline in working capital was a result of the Companys
long-term working capital reduction program. Net cash provided
from operations was $155.8 million in 2008 compared with
$64.8 million in 2007. The improvement from last year was
due to a substantial reduction of inventory and better
management of accounts payable driven by a Company-wide
initiative to reduce overall working capital. Cash used in
investing activities was $22.4 million in 2008 compared
with $38.0 million in 2007. The $15.6 million decrease
was mainly due to a business acquisition completed in fiscal
2007. Cash used in financing activities increased
$39.9 million due primarily to the Companys purchases
of approximately 2.0 million shares of its common stock.
The Companys cash and cash equivalents were
$97.7 million at August 31, 2008, an increase of
$54.7 million from August 31, 2007. The increase is
primarily due to this initiative to reduce overall working
capital, excluding cash. The Company has made efforts to
diversify the institutions which hold its cash in light of the
current financial market situation.
Accounts receivable increased slightly in 2008 by
$3.2 million, or 1%, however the translation effect of
foreign currencies, primarily the euro, accounted for an
increase of $19.1 million in accounts receivable. Excluding
the translation effect, accounts receivable declined
approximately $15.9 million, or 5.0%.Days in accounts
receivable decreased to 58 days at August 31, 2008 from
62 days at August 31, 2007, which is driven by the mix
of customers and efforts to reduce days outstanding through
various means including enhanced collection efforts.
Inventory decreased approximately $38.1 million in 2008 or
14.5%. The translation effect of foreign currencies increased
inventory by $12.2 million, therefore, inventory decreased
$50.3 million excluding the translation effect. The
Companys days sales in inventory improved from
60 days at August 31, 2007 to 48 days at
August 31, 2008. This improvement is driven by efforts to
reduce inventory across the Company.
Accounts payable increased $32.4 million from
August 31, 2007, however the translation effect of foreign
currencies, primarily the euro accounted for $8.6 million
of the increase. Days payable increased from 30 days at
August 31, 2007 to 34 days at August 31, 2008. As
a result of leveraging the Companys global buying
position, the Company was able to renegotiate terms which were
more consistent with the Companys accounts receivables
terms.
42
Capital expenditures for the year ended August 31, 2008
were $26.1 million compared with $29.4 million last
year. The major components of the capital expenditures included
machinery and equipment at the Companys Belgium plant and
in the United States related to the new Akron, Ohio plant for
North America Polybatch. The Company anticipates approximately
$25 million to $35 million in capital expenditures in
fiscal 2009 which include continued investment related to the
preparation of the North America Polybatch plant.
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, 2008, the Company was not in violation of any of
its covenants relating to the Credit Facility.
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.
At August 31, 2008, there was $7.0 million outstanding
on the credit facility which is considered short-term. There
were no short-term borrowings at August 31, 2007. This
amount is included in notes payable in the Companys
consolidated balance sheets. As of August 31, 2008 there
were no long-term borrowings under the Credit Facility. The
Company had long-term borrowings of $23.6 million at
August 31, 2007 under the Credit Facility.
During fiscal 2006, the Company used proceeds from the Credit
Facility to prepay its $50.0 million 7.27% senior
notes which were due in 2009. In conjunction with the prepayment
of these notes the Company recorded a loss on extinguishment of
debt of approximately $5.0 million, which included a
make-whole provision of approximately $3.3 million,
interest rate swap termination fee of $1.5 million and the
write-off of related deferred debt costs and deferred interest.
The deferred interest was related to proceeds deferred in 1999
when the Company completed an interest rate lock. In connection
with the prepayment of debt and termination of this interest
rate lock, the remaining balance of these deferred proceeds of
$0.2 million was written off.
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
$73.8 million at August 31, 2008. The fair market
value of the Euro Notes is approximately 43.4 million
at August 31, 2008, which approximates $63.7 million.
|
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,
2008, the Company was not in violation of any of its covenants
relating to the Senior Notes.
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.
Charges of $2.6 million related to the issuance of the
Senior Notes and the Credit Facility in fiscal 2006 were
deferred and are being amortized over the contractual lives of
the Senior Notes and the Credit Facility, respectively.
The Company had approximately $8.5 million of
uncollateralized short-term lines of credit from various
domestic banks at August 31, 2008 and 2007. There were no
borrowings at August 31, 2008 and 2007 under these lines of
credit.
43
The Company had approximately $51.0 million and
$46.9 million of uncollateralized short-term foreign lines
of credit available to its subsidiaries at August 31, 2008
and August 31, 2007, respectively. There was approximately
$2.5 million and $2.8 million outstanding under these
lines of credit at August 31, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Total gross available funds from credit lines and notes
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
$
|
260.0
|
|
|
$
|
260.0
|
|
Uncollateralized short-term lines of credit
U.S.
|
|
$
|
8.5
|
|
|
$
|
8.5
|
|
Uncollateralized short-term lines of credit Foreign
|
|
$
|
51.0
|
|
|
$
|
46.9
|
|
Borrowings outstanding
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
|
7.0
|
|
|
|
23.6
|
|
Uncollateralized short-term lines of credit
U.S.
|
|
|
|
|
|
|
|
|
Uncollateralized short-term lines of credit Foreign
|
|
|
2.5
|
|
|
|
2.8
|
|
Total net available funds from credit lines and notes
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
$
|
253.0
|
|
|
$
|
236.4
|
|
Uncollateralized short-term lines of credit
U.S.
|
|
$
|
8.5
|
|
|
$
|
8.5
|
|
Uncollateralized short-term lines of credit Foreign
|
|
$
|
48.5
|
|
|
$
|
44.1
|
|
The Company has approximately $0.9 million in capital lease
obligations, of which $0.4 million is current. The current
portion of capital lease obligations was $0.4 million in
fiscal 2007. The Companys current portion of capital lease
obligations is included in other accrued liabilities on the
Companys consolidated balance sheets.
The Companys unfunded pension liability is approximately
$64.1 million at August 31, 2008. This amount is
primarily due to an unfunded plan of $50.5 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.
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 foreign currency exchange rates. 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
Companys consolidated statements of income. The Company
estimates that a 10% change in foreign exchange rates at
August 31, 2008 would have changed the fair value of the
contracts by approximately $0.9 million. Changes in the
fair value of forward foreign exchange contracts are
substantially offset by changes in the fair value of the hedged
positions. The Company does not hold or issue financial
instruments for trading purposes or utilize any other types of
derivative instruments.
During the year ended August 31, 2008, the Company paid
cash dividends aggregating to $0.59 per share. The total amount
of these dividends was $16.0 million. Cash flow has been
sufficient to fund the payment of these dividends.
For the year ended August 31, 2008, the Company issued
approximately 206,000 common shares upon the exercise of
employee stock options and approximately 245,000 common shares
were issued to employees under the restricted stock plan. The
total amount received from the exercise of the stock options was
$3.9 million.
On April 25, 2006, the Company announced that its Board of
Directors authorized the repurchase of up to 6.75 million
shares of its outstanding common stock (the Repurchase
Program) representing approximately 23.3% of the
Companys outstanding shares at the authorization date. The
Repurchase Program replaced the Companys prior repurchase
authorization, under which approximately 1.7 million shares
had remained authorized for repurchase. During fiscal 2007, the
Company purchased 770,266 shares of its common stock under
the Repurchase Program at an average price of $23.46 excluding
commissions.
As a part of an agreement reached with the Barington Group
during fiscal 2008, the Board has agreed to increase to five
million the number of shares authorized to be repurchased under
the Companys current share repurchase program (2008
Repurchase Program). The Company announced its intent to
repurchase at least 2.0 million shares under the 2008
Repurchase Program in the fiscal year ended August 31,
2008, subject to market conditions, materially relevant capital
44
considerations of the Company and compliance with applicable
laws. During fiscal 2008, the Company repurchased approximately
2.0 million shares of common stock at an average price of
$21.20 per share leaving approximately 3.0 million shares
available to be repurchased, if the Company chooses to do so,
under the 2008 Repurchase Program.
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 account in stockholders
equity. The continued weakness of the U.S. dollar during
the year ended August 31, 2008 increased this account by
$20.7 million. Based on past performance and current
expectations, Management believes the Companys cash and
cash equivalents, investments, and cash generated from
operations will satisfy the Companys working capital
needs, capital expenditures, contractual obligations and other
liquidity requirements associated with operations through at
least the next 12 months. Additional common stock
repurchases would generally be funded through incremental
borrowing.
A summary of the Companys future obligations subsequent to
August 31, 2008 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Short Term Debt
|
|
$
|
9,540
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,540
|
|
Long Term Debt
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
73,847
|
|
|
|
103,847
|
|
Capital Lease Obligations
|
|
|
444
|
|
|
|
446
|
|
|
|
4
|
|
|
|
|
|
|
|
894
|
|
Operating Lease Obligations
|
|
|
3,010
|
|
|
|
4,147
|
|
|
|
1,854
|
|
|
|
92
|
|
|
|
9,103
|
|
Purchase Obligations(a)
|
|
|
74,990
|
|
|
|
20,441
|
|
|
|
7,425
|
|
|
|
|
|
|
|
102,856
|
|
Pension Obligations
|
|
|
3,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,600
|
|
Postretirement Benefit Obligations
|
|
|
880
|
|
|
|
1,898
|
|
|
|
2,102
|
|
|
|
5,708
|
|
|
|
10,588
|
|
Deferred Compensation Obligations
|
|
|
2,837
|
|
|
|
6,301
|
|
|
|
400
|
|
|
|
775
|
|
|
|
10,313
|
|
Uncertain tax positions(b)
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
627
|
|
Interest payments
|
|
|
5,554
|
|
|
|
10,347
|
|
|
|
8,594
|
|
|
|
8,406
|
|
|
|
32,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,482
|
|
|
$
|
43,580
|
|
|
$
|
50,379
|
|
|
$
|
88,828
|
|
|
$
|
284,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Purchase obligations include purchase contracts and purchase
orders for inventory. |
|
|
|
(b) |
|
Due to the uncertainty of the timing and amount of future cash
payments for uncertain tax positions, FIN 48 liabilities
are only shown above if the amount can be reasonably estimated. |
Operating lease information is provided in the Notes to the
Consolidated Financial Statements appearing in Item 8 of
this Report. The aggregate future minimum rental commitment for
non-cancelable leases, excluding obligations for taxes,
insurance, etc. was $9.1 million at August 31, 2008.
The Companys outstanding commercial commitments at
August 31, 2008 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
On September 15, 2006 the FASB issued FASB Statement
No. 157, (SFAS 157), Fair Value
Measurement. SFAS 157 addresses standardizing the
measurement of fair value for companies who are required to use
a fair value measure of recognition for recognition or
disclosure purposes. The FASB defines fair value 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 adoption of certain
portions of FAS 157 has been deferred to later years,
although the Company is required to adopt part of SFAS 157
in fiscal year 2009. The Company does not expect the
implementation of SFAS 157 in fiscal 2009 related to financial
assets and financial liabilities to have a material impact on
the Companys financial position, results of operations and
cash flows. The remaining portions of SFAS 157 which relate to
nonfinancial assets and nonfinancial
45
liabilities will be adopted in fiscal 2010. The Company is
currently evaluating the impact, if any, of this portion of
SFAS 157 on its financial position, results of operations
and cash flows.
In February 2007, the FASB issued FASB Statement No. 159,
(SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities Including an
Amendment of FASB Statement No. 115. SFAS 159 permits
companies to choose, at specified election dates, to measure
many financial instruments and certain other items at fair value
that are not currently measured at fair value. Unrealized gains
and losses on items for which the fair value option has been
elected would be reported in earnings at each subsequent
reporting date. Upfront costs and fees related to items for
which the fair value option is elected shall be recognized in
earnings as incurred and not deferred. The Company is required
to adopt SFAS 159 in fiscal year 2009. The Company does not
expect the implementation of SFAS 159 in fiscal 2009 to
have a material impact on its financial position, results of
operations and cash flows.
In December 2007, the FASB issued FASB Statement
No. 141(R), Business Combinations
(SFAS 141R). SFAS 141R replaces FASB
Statement No. 141 and provides greater consistency in the
accounting and financial reporting of business combinations.
SFAS 141R requires the acquiring entity in a business
combination to recognize all assets acquired and liabilities
assumed in the transaction and any non-controlling 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. SFAS 141R is
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 is not permitted. The Company is required to adopt
SFAS 141R in fiscal year 2010. The Company will assess the
impact that SFAS 141R may have on its financial position,
results of operations and cash flows.
In December 2007, the FASB issued FASB Statement No. 160,
Noncontrolling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51 (SFAS 160).
SFAS 160 clarifies 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. SFAS 160 is effective for the Company for the
fiscal year 2010, with early adoption being prohibited. The
Company will assess the impact that SFAS 160 may have on
its financial position, results of operations and cash flows.
CAUTIONARY
STATEMENTS
Certain statements in this report may constitute forward-looking
statements within the meaning of the Federal securities laws.
These statements can be identified by the fact that they do not
relate strictly to historic or current facts. They use 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. These forward-looking
statements are based on currently available information, but are
subject to a variety of uncertainties, unknown risks and other
factors concerning the Companys operations and business
environment, which are difficult to predict and are beyond the
control of the Company. 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;
|
|
|
|
Fluctuations in the value of currencies in major areas where the
Company operates, including the U.S. dollar, euro, U.K.
pound sterling, Canadian dollar, Mexican peso, Chinese yuan and
Indonesian rupiah;
|
|
|
|
Fluctuations in the prices of sources of energy or plastic
resins and other raw materials;
|
|
|
|
Changes in customer demand and requirements;
|
|
|
|
Escalation in the cost of providing employee health care;
|
|
|
|
The outcome of any legal claims known or unknown;
|
46
|
|
|
|
|
The performance of the North American automotive market;
|
|
|
|
The global financial market turbulence; and
|
|
|
|
The global or regional economic slowdown or recession.
|
Additional risk factors are set forth in ITEM 1A of this
Report. The risks and uncertainties identified above are not the
only risks the Company faces. Additional 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
|
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
principle foreign currency exposures relate to the euro, U. K.
pound sterling, Canadian dollar, Mexican peso, Chinese yuan, and
Indonesian rupiah.
The Company enters into forward foreign 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 Companys exposure to market risk from changes in
interest rates relates primarily to its debt obligations.
Interest on the Revolving Facility is based on the London
Inter-Bank Offered Rate (LIBOR) for U.S. dollar borrowings
and the Euro Interbank Offered Rate (EURIBOR) for euro
borrowings. At August 31, 2008, the Company had no
long-term borrowings against its Revolving Facility. Borrowing
costs may fluctuate depending upon the volatility of LIBOR and
amounts borrowed.
47
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
A. SCHULMAN,
INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
48
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, 2008 and 2007, and
the results of their operations and their cash flows for each of
the three years in the period ended August 31, 2008 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, 2008, 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 the notes to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertainty in income taxes as of September 1, 2007
(Note 1) and defined benefit pension and other
postretirement plans as of August 31, 2007 (Note 7).
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.
PricewaterhouseCoopers LLP
Cleveland, Ohio
October 29, 2008
49
A. SCHULMAN,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands except share and per share data)
|
|
|
Net sales
|
|
$
|
1,984,011
|
|
|
$
|
1,787,056
|
|
|
$
|
1,616,386
|
|
Cost of sales
|
|
|
1,747,657
|
|
|
|
1,577,108
|
|
|
|
1,399,451
|
|
Selling, general and administrative expenses
|
|
|
177,475
|
|
|
|
156,400
|
|
|
|
145,518
|
|
Minority interest
|
|
|
872
|
|
|
|
1,027
|
|
|
|
1,116
|
|
Interest expense
|
|
|
7,814
|
|
|
|
8,118
|
|
|
|
6,234
|
|
Interest income
|
|
|
(2,338
|
)
|
|
|
(2,306
|
)
|
|
|
(3,310
|
)
|
Foreign currency transaction losses
|
|
|
1,133
|
|
|
|
219
|
|
|
|
2,136
|
|
Other income
|
|
|
(66
|
)
|
|
|
(1,832
|
)
|
|
|
(1,892
|
)
|
Curtailment gains
|
|
|
(4,009
|
)
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
964
|
|
|
|
|
|
|
|
|
|
Asset impairment
|
|
|
11,699
|
|
|
|
|
|
|
|
|
|
Restructuring expense
|
|
|
6,817
|
|
|
|
1,048
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
4,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,948,018
|
|
|
|
1,739,782
|
|
|
|
1,554,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
35,993
|
|
|
|
47,274
|
|
|
|
62,147
|
|
Provision for U.S. and foreign income taxes
|
|
|
17,944
|
|
|
|
24,655
|
|
|
|
29,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,049
|
|
|
$
|
22,619
|
|
|
$
|
32,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,794,923
|
|
|
|
27,032,348
|
|
|
|
29,961,580
|
|
Diluted
|
|
|
27,097,896
|
|
|
|
27,369,408
|
|
|
|
30,394,210
|
|
Earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.67
|
|
|
$
|
0.83
|
|
|
$
|
1.09
|
|
Diluted
|
|
$
|
0.66
|
|
|
$
|
0.82
|
|
|
$
|
1.07
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
50
A. SCHULMAN,
INC.
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
97,728
|
|
|
$
|
43,045
|
|
Accounts receivable, less allowance for doubtful accounts of
$8,316 in 2008 and $9,056 in 2007
|
|
|
320,926
|
|
|
|
317,774
|
|
Inventories, average cost or market, whichever is lower
|
|
|
224,964
|
|
|
|
263,047
|
|
Prepaid expenses and other current assets
|
|
|
18,499
|
|
|
|
16,163
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
662,117
|
|
|
|
640,029
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance
|
|
|
2,665
|
|
|
|
2,231
|
|
Deferred charges and other assets
|
|
|
23,017
|
|
|
|
21,784
|
|
Goodwill
|
|
|
10,679
|
|
|
|
9,350
|
|
Intangible assets
|
|
|
195
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,556
|
|
|
|
33,539
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
17,026
|
|
|
|
16,768
|
|
Buildings and leasehold improvements
|
|
|
156,465
|
|
|
|
145,952
|
|
Machinery and equipment
|
|
|
346,999
|
|
|
|
352,044
|
|
Furniture and fixtures
|
|
|
41,272
|
|
|
|
38,955
|
|
Construction in progress
|
|
|
9,726
|
|
|
|
13,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
571,488
|
|
|
|
566,754
|
|
Accumulated depreciation and investment grants of $1,123 in 2008
and $1,322 in 2007
|
|
|
379,740
|
|
|
|
366,207
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
191,748
|
|
|
|
200,547
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
890,421
|
|
|
$
|
874,115
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
9,540
|
|
|
$
|
2,762
|
|
Accounts payable
|
|
|
174,226
|
|
|
|
141,838
|
|
U.S. and foreign income taxes payable
|
|
|
3,212
|
|
|
|
11,544
|
|
Accrued payrolls, taxes and related benefits
|
|
|
37,686
|
|
|
|
32,249
|
|
Other accrued liabilities
|
|
|
34,566
|
|
|
|
33,112
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
259,230
|
|
|
|
221,505
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
104,298
|
|
|
|
123,080
|
|
Other long-term liabilities
|
|
|
88,235
|
|
|
|
91,316
|
|
Deferred income taxes
|
|
|
5,544
|
|
|
|
5,640
|
|
Minority interest
|
|
|
5,533
|
|
|
|
5,561
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, 5% cumulative, $100 par value, authorized,
issued and outstanding - 10,564 shares in 2008 and 2007
|
|
|
1,057
|
|
|
|
1,057
|
|
Special stock, 1,000,000 shares authorized, none outstanding
|
|
|
|
|
|
|
|
|
Common stock, $1 par value, authorized
75,000,000 shares, issued
42,231,341 shares in 2008 and 41,784,640 shares in 2007
|
|
|
42,231
|
|
|
|
41,785
|
|
Other capital
|
|
|
112,105
|
|
|
|
103,828
|
|
Accumulated other comprehensive income
|
|
|
79,903
|
|
|
|
50,092
|
|
Retained earnings
|
|
|
513,451
|
|
|
|
509,415
|
|
Treasury stock, at cost, 16,095,491 shares in 2008 and
14,113,977 shares in 2007
|
|
|
(321,166
|
)
|
|
|
(279,164
|
)
|
|
|
|
|
|
|
|
|
|
Common stockholders equity
|
|
|
426,524
|
|
|
|
425,956
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
427,581
|
|
|
|
427,013
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
890,421
|
|
|
$
|
874,115
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
51
A. SCHULMAN,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
Unearned Stock
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Other
|
|
|
Income
|
|
|
Retained
|
|
|
Treasury
|
|
|
Grant
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Compensation
|
|
|
Equity
|
|
|
|
(In thousands except per share data)
|
|
|
Balance at August 31, 2005
|
|
$
|
1,057
|
|
|
$
|
39,989
|
|
|
$
|
74,973
|
|
|
$
|
26,552
|
|
|
$
|
487,998
|
|
|
$
|
(165,232
|
)
|
|
$
|
(3,234
|
)
|
|
$
|
462,103
|
|
Comprehensive income for 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment (net of tax of $214)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,003
|
|
Cash dividends paid or accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $5 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
Common stock, $0.58 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,609
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,609
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,825
|
)
|
|
|
|
|
|
|
(95,825
|
)
|
Stock options exercised
|
|
|
|
|
|
|
650
|
|
|
|
9,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,800
|
|
Restricted stock issued, net of forfeitures
|
|
|
|
|
|
|
68
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock based compensation
|
|
|
|
|
|
|
|
|
|
|
4,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,525
|
|
Reclassification due to adoption of SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
(3,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,234
|
|
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
1,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2006
|
|
|
1,057
|
|
|
|
40,707
|
|
|
|
86,894
|
|
|
|
32,893
|
|
|
|
502,998
|
|
|
|
(261,057
|
)
|
|
|
|
|
|
|
403,492
|
|
Comprehensive income for 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment (net of tax of $263)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,620
|
|
Adjustment to initially apply SFAS 158 (net of tax of
$2,585)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,802
|
)
|
Cash dividends paid or accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $5 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
Common stock, $0.58 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,149
|
)*
|
|
|
|
|
|
|
|
|
|
|
(16,149
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,107
|
)
|
|
|
|
|
|
|
(18,107
|
)
|
Stock options exercised
|
|
|
|
|
|
|
743
|
|
|
|
13,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,916
|
|
Restricted stock issued, net of forfeitures
|
|
|
|
|
|
|
335
|
|
|
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock based compensation
|
|
|
|
|
|
|
|
|
|
|
1,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,851
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
2,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2007
|
|
|
1,057
|
|
|
|
41,785
|
|
|
|
103,828
|
|
|
|
50,092
|
|
|
|
509,415
|
|
|
|
(279,164
|
)
|
|
|
|
|
|
|
427,013
|
|
Impact due to adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,078
|
|
|
|
|
|
|
|
|
|
|
|
2,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance at September 1, 2007
|
|
|
1,057
|
|
|
|
41,785
|
|
|
|
103,828
|
|
|
|
50,092
|
|
|
|
511,493
|
|
|
|
(279,164
|
)
|
|
|
|
|
|
|
429,091
|
|
Comprehensive income for 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,860
|
|
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
|
)
|
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
|
|
|
$
|
513,451
|
|
|
$
|
(321,166
|
)
|
|
$
|
|
|
|
$
|
427,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes approximately $0.3 million related to the
redemption of the special stock purchase rights which were paid
at a price of $0.01 per share for shareholders of record on
January 19, 2007. This $0.01 is not included in the $0.58
per share for common stock dividends. |
The accompanying notes are an integral part of the consolidated
financial statements.
52
A. SCHULMAN,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Provided from (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,049
|
|
|
$
|
22,619
|
|
|
$
|
32,662
|
|
Adjustments to reconcile net income to net cash provided from
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
27,721
|
|
|
|
25,802
|
|
|
|
24,912
|
|
Deferred tax provision
|
|
|
(2,597
|
)
|
|
|
(1,865
|
)
|
|
|
1,552
|
|
Pension and other deferred compensation
|
|
|
3,259
|
|
|
|
11,347
|
|
|
|
11,019
|
|
Postretirement benefit obligation
|
|
|
2,839
|
|
|
|
(2,837
|
)
|
|
|
3,339
|
|
Net losses on asset sales
|
|
|
318
|
|
|
|
68
|
|
|
|
150
|
|
Minority interest in net income of subsidiaries
|
|
|
872
|
|
|
|
1,027
|
|
|
|
1,116
|
|
Restructuring charges, including accelerated depreciation of
$1,071 in fiscal 2007
|
|
|
6,817
|
|
|
|
2,119
|
|
|
|
|
|
Goodwill impairment
|
|
|
964
|
|
|
|
|
|
|
|
|
|
Asset impairment
|
|
|
11,699
|
|
|
|
|
|
|
|
|
|
Curtailment gains
|
|
|
(4,009
|
)
|
|
|
|
|
|
|
|
|
Proceeds of insurance settlements
|
|
|
|
|
|
|
750
|
|
|
|
|
|
Proceeds from life insurance benefits
|
|
|
|
|
|
|
|
|
|
|
580
|
|
Non-cash items related to loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
180
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
16,614
|
|
|
|
(29,088
|
)
|
|
|
(41,193
|
)
|
Inventories
|
|
|
54,682
|
|
|
|
37,942
|
|
|
|
(45,815
|
)
|
Accounts payable
|
|
|
25,838
|
|
|
|
(3,018
|
)
|
|
|
30,752
|
|
Restructuring payments
|
|
|
(6,384
|
)
|
|
|
(974
|
)
|
|
|
|
|
Income taxes
|
|
|
(5,247
|
)
|
|
|
(2,006
|
)
|
|
|
(1,433
|
)
|
Accrued payrolls and other accrued liabilities
|
|
|
1,704
|
|
|
|
789
|
|
|
|
6,154
|
|
Changes in other assets and other long-term liabilities
|
|
|
2,646
|
|
|
|
2,222
|
|
|
|
(4,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from operating activities
|
|
|
155,785
|
|
|
|
64,897
|
|
|
|
19,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided from (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant and equipment
|
|
|
(26,070
|
)
|
|
|
(29,379
|
)
|
|
|
(29,239
|
)
|
Proceeds from the sale of assets
|
|
|
3,700
|
|
|
|
1,284
|
|
|
|
2,398
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(11,277
|
)
|
|
|
|
|
Proceeds of insurance settlements
|
|
|
|
|
|
|
1,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(22,370
|
)
|
|
|
(38,077
|
)
|
|
|
(26,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided from (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
(16,091
|
)
|
|
|
(16,202
|
)
|
|
|
(17,662
|
)
|
Increase (decrease) in notes payable
|
|
|
5,997
|
|
|
|
(9,372
|
)
|
|
|
9,426
|
|
Borrowings on revolving credit facilities
|
|
|
119,557
|
|
|
|
63,076
|
|
|
|
131,318
|
|
Repayments on revolving credit facilities
|
|
|
(145,112
|
)
|
|
|
(66,871
|
)
|
|
|
(118,989
|
)
|
Proceeds from issuance of 4.485% and floating rate senior notes
|
|
|
|
|
|
|
|
|
|
|
91,943
|
|
Prepayments of 7.27% senior notes
|
|
|
|
|
|
|
|
|
|
|
(50,000
|
)
|
Payment of debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(2,640
|
)
|
Cash distributions to minority shareholders
|
|
|
(900
|
)
|
|
|
(1,250
|
)
|
|
|
(600
|
)
|
Common stock issued
|
|
|
3,828
|
|
|
|
13,916
|
|
|
|
9,800
|
|
Purchases of treasury stock
|
|
|
(42,002
|
)
|
|
|
(18,107
|
)
|
|
|
(95,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(74,723
|
)
|
|
|
(34,810
|
)
|
|
|
(43,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(4,009
|
)
|
|
|
373
|
|
|
|
(742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
54,683
|
|
|
|
(7,617
|
)
|
|
|
(51,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
43,045
|
|
|
|
50,662
|
|
|
|
102,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
97,728
|
|
|
$
|
43,045
|
|
|
$
|
50,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
7,531
|
|
|
$
|
7,829
|
|
|
$
|
4,941
|
|
Income Taxes
|
|
$
|
27,405
|
|
|
$
|
31,230
|
|
|
$
|
33,175
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
53
A. SCHULMAN,
INC.
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
Consolidation
The consolidated financial statements include the accounts of A.
Schulman, Inc. (the Company) and its domestic and
foreign subsidiaries in which a controlling interest is
maintained. All significant intercompany transactions have been
eliminated.
To identify reportable 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). Globally, the Company operates primarily in
three lines of business: engineered plastics, masterbatch and
distribution services. In North America, there is a general
manager of each of these lines of business each of who report
directly to the Companys CEO. Also, in North America the
Company operates in a specialty sheet line of business called
Invision which has its own general manager who also
reports to the CEO. The Companys European segment has
managers of each line of business, who report to a general
manager of Europe who reports to the CEO. Currently, the
Companys CEO reviews performance and allocates resources
for the European segment as a whole not at the business line
level and therefore no changes have been made to the European
segment. The reportable segments are Europe (which includes
Asia), North America Polybatch (NAPB) (which
comprises the masterbatch line of business), North America
Distribution Services (NADS), North America
Engineered Plastics (NAEP) and Invision.
The Companys European segment, which includes the Asia
operations, is the largest segment for the Company. The segment
is managed by the General Manager of Europe and Asia however
within the European General Managers responsibilities
include managers of each line of business for engineered
plastics, masterbatch and distribution services. The
Companys masterbatch business is anchored by the global
research and development center in Bornem, Belgium while the
engineered plastics line of business is anchored by the
Companys technology center in Sindorf, Germany. The
General Manager of Europe and Asia reports directly to the CEO.
The North America Polybatch segment includes color and additive
concentrates which improve the appearance and performance of
resins targeted at the film and packaging markets. The North
America Distribution Services segment provides bulk and packaged
plastic materials used in a variety of applications. The North
America Engineered Plastics segment includes multi-component
blends of ionomers, urethanes and nylons, generally for the
durable goods market, formulated to meet customers
specific performance requirements, regardless of the base resin.
Invision includes solely the A. Schulman Invision, Inc. legal
entity which provides a new sheet product. This business is in a
start-up
phase as the Company is exploring potential market
opportunities. As a result of the redefined segments, certain
portions of the Companys North American operations which
are not managed separately are included in All Other North
America. The Company also 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. Prior periods have
been restated to reflect the current presentation.
The Company historically identified and presented two
geographical operating segments, North America and Europe, which
includes Asia, based on how the CODM regularly reviewed
information and allocated resources. Prior periods have been
restated to reflect the current presentation.
Minority interest 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 financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
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.
54
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $44.0 million at
August 31, 2008 and $11.0 million at August 31,
2007. Investments with maturities between three and twelve
months are considered to be short-term investments. 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. Management continues to monitor
the placement of its cash given the current credit market. The
recorded amount of these investments approximates fair value.
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, historical
experience, customer payment history, expected trends and other
factors that affect collectibility. 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 primarily in Europe as a
fee for processing of material provided and owned by customers.
On some occasions, the Company is required to provide certain
amounts of its materials, such as additives or packaging. 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.
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. 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 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.
55
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Management establishes an inventory reserve based on historical
experience and amounts expected to be realized for slow-moving
and obsolete inventory.
Goodwill
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. As a result of the Companys announcement in
February 2008 to pursue a sale of its Orange, Texas facility,
the Company noted a trigger event to test for impairment of
goodwill in the North America Engineered Plastics segment. The
analysis of goodwill in the North America Engineered Plastics
segment related to the tolling reporting unit resulted in an
impairment charge of approximately $1.0 million in fiscal
2008. The Company also completed its annual impairment review as
of February 29, 2008 of the remaining goodwill which is
related to the European segment and noted no impairment. During
fiscal 2008, the Company did not identify any other events that
required an impairment test.
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. 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. As a result of
the Companys announcements to pursue a sale of its Orange,
Texas and Findlay, Ohio facilities and close the St. Thomas,
Ontario, Canada facility, the Company recorded impairment
charges of approximately $11.7 million in fiscal 2008. At
August 31, 2008, the Company had approximately
$10.5 million of assets held for sale related to the St.
Thomas, Ontario, Canada and Findlay, Ohio facilities and a
building in Orange, Texas. These assets are included in the
property, plant and equipment line item in the Companys
consolidated balance sheet. The Company noted no other
impairments in fiscal 2008 in relation to its impairment tests
of long-lived assets.
Income
Taxes
Income taxes are recognized during the period in which
transactions enter into the determination of financial statement
income. Accordingly, deferred taxes are provided for temporary
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.
On September 1, 2007, the Company adopted Financial
Accounting Standards Board (FASB) interpretation No. 48,
(FIN 48), Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes
a comprehensive model for how a company should recognize,
measure, present and disclose in its financial statements
uncertain tax positions that the company has taken or expects to
take on a tax return. FIN 48 requires the Company to
recognize a financial statement benefit for a position taken or
expected to be taken in a tax return when it is
more-likely-than-not that the position will be sustained.
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 trust funds 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.
The Company also has retirement plans for its North American
salaried employees for which contributions are determined at the
discretion of the Board of Directors.
56
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During 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.
Also during fiscal 2008, the Company announced 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.
The Company maintains a 401(k) plan for U.S. employees.
Generally, the plan allows eligible employees to contribute a
portion of their base compensation, with the Company currently
contributing 3% of the employees base compensation
regardless of the employees contributions.
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 in stockholders equity includes translation
adjustments arising from the use of different exchange rates
from period to period.
Reclassification
Certain items previously reported in specific financial
statement captions have been reclassified to conform to the 2008
presentation.
Derivative
Instruments and Hedging Activities
The Company accounts for derivatives under Statement of
Financial Accounting Standard (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS 133) as amended and interpreted.
SFAS 133 requires all derivatives, whether designated in
hedging relationships or not, to be recorded on the balance
sheet at fair value. The forward foreign exchange contracts were
adjusted to their fair market value through the income
statement. Gains or losses on forward contracts that hedge
specific transactions are recognized in the consolidated
statement of income offsetting the underlying foreign currency
gains or losses. Currently, the Company does not designate any
of these contracts as hedges. In 2004, the Company entered into
an interest-rate swap agreement which was designated as a fair
value hedge in accordance with SFAS 133. This interest-rate
swap was terminated during fiscal 2006 in connection with the
prepayment of the senior notes, as discussed in Note 4.
Stock-based
Compensation
On September 1, 2005, the Company adopted
SFAS No. 123 (Revised 2004),
(SFAS 123R), Share-Based Payment, which
requires the Company to measure all employee stock-based
compensation awards using a fair value method and record the
related expense in the consolidated financial statements. The
Company elected to use the modified prospective transition
method. The modified prospective transition method requires that
compensation cost be recognized in the consolidated financial
statements for all awards granted after the date of adoption as
well as for existing awards for which the requisite service has
not been rendered as of the date of adoption and requires that
prior periods not be restated.
New Accounting
Pronouncements
On September 15, 2006 the FASB issued FASB Statement
No. 157, (SFAS 157), Fair Value
Measurement. SFAS 157 addresses standardizing the
measurement of fair value for companies who are required to use
a fair value measure of recognition for recognition or
disclosure purposes. The FASB defines fair value 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 adoption of certain
portions of FAS 157 has been deferred to later years,
although the Company is required to adopt part of SFAS 157
in fiscal year 2009. The Company does not expect the
implementation of SFAS 157 in fiscal 2009 related to financial
assets and financial liabilities to have a material impact on
the Companys financial position, results of
57
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
operations and cash flows. The remaining portions of SFAS 157
which relate to nonfinancial assets and nonfinancial liabilities
will be adopted in fiscal 2010. The Company is currently
evaluating the impact, if any, of this portion of SFAS 157
on its financial position, results of operations and cash flows.
In February 2007, the FASB issued FASB Statement No. 159,
(SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities Including an
Amendment of FASB Statement No. 115. SFAS 159 permits
companies to choose, at specified election dates, to measure
many financial instruments and certain other items at fair value
that are not currently measured at fair value. Unrealized gains
and losses on items for which the fair value option has been
elected would be reported in earnings at each subsequent
reporting date. Upfront costs and fees related to items for
which the fair value option is elected shall be recognized in
earnings as incurred and not deferred. The Company is required
to adopt SFAS 159 in fiscal year 2009. The Company does not
expect the implementation of SFAS 159 in fiscal 2009 to
have a material impact on its financial position, results of
operations and cash flows.
In December 2007, the FASB issued FASB Statement
No. 141(R), Business Combinations
(SFAS 141R). SFAS 141R replaces FASB
Statement No. 141 and provides greater consistency in the
accounting and financial reporting of business combinations.
SFAS 141R requires the acquiring entity in a business
combination to recognize all assets acquired and liabilities
assumed in the transaction and any non-controlling 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. SFAS 141R is
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 is not permitted. The Company is required to adopt
SFAS 141R in fiscal year 2010. The Company will assess the
impact that SFAS 141R may have on its financial position,
results of operations and cash flows.
In December 2007, the FASB issued FASB Statement No. 160,
Noncontrolling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51 (SFAS 160).
SFAS 160 clarifies 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. SFAS 160 is effective for the Company for the
fiscal year 2010, with early adoption being prohibited. The
Company will assess the impact that SFAS 160 may have on
its financial position, results of operations and cash flows.
NOTE 2
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The changes in the Companys allowance for doubtful
accounts during the years ended August 31, 2008 and 2007
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
9,056
|
|
|
$
|
9,409
|
|
Provision
|
|
|
3,116
|
|
|
|
2,019
|
|
Write-offs, net of recoveries
|
|
|
(4,181
|
)
|
|
|
(2,713
|
)
|
Translation effect
|
|
|
325
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
8,316
|
|
|
$
|
9,056
|
|
|
|
|
|
|
|
|
|
|
NOTE 3
GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, the Company is required to review goodwill
and indefinite-lived intangible assets at least 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
58
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
reduce the fair value of a reporting unit below its carrying
value. Although the Company changed the reportable segments for
disclosure during the third quarter of fiscal 2008, the
reporting units used for the testing of goodwill did not change.
As a result of the Companys announcement in February 2008
to pursue a sale of its Orange, Texas facility, the Company
noted a trigger event to test for impairment of goodwill in the
North America Engineered Plastics segment. The analysis of
goodwill in the North America Engineered Plastics segment
related to the tolling reporting unit resulted in an impairment
charge of approximately $1.0 million in fiscal 2008. The
fair value was based on estimated future cash flows including
potential sale proceeds. The Company also completed its annual
impairment review as of February 29, 2008 of the remaining
goodwill which is related to the European segment and noted no
impairment. As of August 31, 2008, all remaining goodwill
relates to the Europe segment. The Company did not change the
European segment as the management of that segment remained
consistent and did not require a change. The fair value used in
the analysis was based on average earnings before interest,
taxes, depreciation and amortization and cash flow multiples.
The Company has been consistent with their method of estimating
fair value where an indication of fair value from a buyer or
similar specific transactions is not available.
During fiscal 2007, the Company acquired the Delta Plast Group,
a European color masterbatch manufacturer with operations in
Sweden and Belgium. In connection with the acquisition, the
Company recorded approximately $3.8 million of goodwill.
The purchase price also included a potential deferred payment
that could be paid over a three year period based on certain
terms in the purchase agreement. During fiscal 2008, the Company
paid the first deferred payment related to this purchase
agreement of approximately $1.6 million, which increased
goodwill by the same amount. In addition, during the fourth
quarter of fiscal 2008, the Company made a $0.1 million
final purchase price accounting adjustment related to the Delta
Plast Group acquisition, which increased goodwill. See
Note 16 for further discussion on the business acquisition.
The carrying amount of goodwill for the European segment was
$10.7 million at August 31, 2008 and $8.4 million
at August 31, 2007. The carrying amount of goodwill for the
NAEP segment was $0 at August 31, 2008 and
$1.0 million at August 31, 2007.
The changes in the Companys carrying value of goodwill
during the years ended August 31, 2008 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
NAEP
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance as of August 31, 2006
|
|
$
|
4,428
|
|
|
$
|
964
|
|
|
$
|
5,392
|
|
Goodwill recognized from business acquisition
|
|
|
3,780
|
|
|
|
|
|
|
|
3,780
|
|
Translation effect
|
|
|
178
|
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2007
|
|
|
8,386
|
|
|
|
964
|
|
|
|
9,350
|
|
Goodwill impairment
|
|
|
|
|
|
|
(964
|
)
|
|
|
(964
|
)
|
Deferred payment and purchase price adjustment related to
business acquisition in fiscal 2007
|
|
|
1,676
|
|
|
|
|
|
|
|
1,676
|
|
Translation effect
|
|
|
617
|
|
|
|
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2008
|
|
$
|
10,679
|
|
|
$
|
|
|
|
$
|
10,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets were $0.2 million at August 31, 2008
and 2007.
59
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4
LONG-TERM DEBT AND CREDIT ARRANGEMENTS
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Notes payable, due within one year
|
|
$
|
2,540
|
|
|
$
|
2,762
|
|
Revolving credit loan, due within one year
|
|
|
7,000
|
|
|
|
|
|
Revolving credit loan, LIBOR, due 2011
|
|
|
|
|
|
|
23,617
|
|
Euro notes, 4.485%, due 2016
|
|
|
73,847
|
|
|
|
68,572
|
|
Senior notes, LIBOR plus 80 bps, due 2013
|
|
|
30,000
|
|
|
|
30,000
|
|
Capital lease obligations
|
|
|
894
|
|
|
|
1,301
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
114,281
|
|
|
$
|
126,252
|
|
|
|
|
|
|
|
|
|
|
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.
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.
At August 31, 2008, there was $7.0 million outstanding
on the credit facility which is considered short-term. There
were no short-term borrowings at August 31, 2007. This
amount is included in notes payable in the Companys
consolidated balance sheets. As of August 31, 2008 there
were no long-term borrowings under the Credit Facility. The
Company had long-term borrowings of $23.6 million at
August 31, 2007 under the Credit Facility.
During fiscal 2006, the Company used proceeds from the Credit
Facility to prepay its $50.0 million 7.27% senior
notes which were due in 2009. In conjunction with the prepayment
of these notes the Company recorded a loss on extinguishment of
debt of approximately $5.0 million, which included a
make-whole provision of approximately $3.3 million,
interest rate swap termination fee of $1.5 million and the
write-off of related deferred debt costs and deferred interest.
The deferred interest was related to proceeds deferred in 1999
when the Company completed an interest rate lock. In connection
with the prepayment of debt and termination of this interest
rate lock, the remaining balance of these deferred proceeds of
$0.2 million was written off.
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
$73.8 million at August 31, 2008. The fair market
value of the Euro Notes is approximately 43.4 million
at August 31, 2008, which approximates $63.7 million.
|
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.
60
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Charges of $2.6 million related to the issuance of the
Senior Notes and the Credit Facility in fiscal 2006 were
deferred and are being amortized over the contractual lives of
the Senior Notes and the Credit Facility, respectively.
The Company had approximately $8.5 million of
uncollateralized short-term lines of credit available from
various domestic banks at August 31, 2008 and 2007. There
were no borrowings at August 31, 2008 and 2007 under these
lines of credit.
The Company had approximately $51.0 million and
$46.9 million of uncollateralized short-term foreign lines
of credit available to its subsidiaries at August 31, 2008
and August 31, 2007, respectively. There was approximately
$2.5 million and $2.8 million outstanding under these
lines of credit at August 31, 2008 and 2007, respectively.
The Companys short-term debt of $9.5 million as of
August 31, 2008 had a weighted average interest rate of
approximately 7.7% and approximately 5.8% for the
$2.8 million outstanding as of August 31, 2007.
The Company has approximately $0.9 million in capital lease
obligations, of which $0.4 million is current. The current
portion of capital lease obligations was $0.4 million in
fiscal 2007. The Companys current portion of capital lease
obligations is included in other accrued liabilities on the
Companys consolidated balance sheets.
Aggregate maturities of debt including capital lease obligations
subsequent to August 31, 2008 are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Fiscal 2009
|
|
$
|
9,984
|
|
2010
|
|
|
422
|
|
2011
|
|
|
24
|
|
2012
|
|
|
4
|
|
2013
|
|
|
30,000
|
|
2014 and thereafter
|
|
|
73,847
|
|
|
|
|
|
|
Total
|
|
$
|
114,281
|
|
|
|
|
|
|
61
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5
FORWARD FOREIGN EXCHANGE CONTRACTS
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 foreign currency exchange rates. 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 income. The Company
does not hold or issue forward foreign exchange contracts for
trading purposes. The following table presents a summary of
forward foreign exchange contracts outstanding as of
August 31, 2008 and August 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Contract
|
|
|
Fair
|
|
|
Contract
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Buy Currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
$
|
6,387
|
|
|
$
|
6,490
|
|
|
$
|
5,828
|
|
|
$
|
5,854
|
|
U.S. dollar
|
|
|
1,544
|
|
|
|
1,535
|
|
|
|
3,060
|
|
|
|
3,079
|
|
Hungarian forint
|
|
|
1,081
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
British pound
|
|
|
789
|
|
|
|
800
|
|
|
|
3,267
|
|
|
|
3,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,801
|
|
|
$
|
9,905
|
|
|
$
|
12,155
|
|
|
$
|
12,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell Currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
British pound
|
|
$
|
483
|
|
|
$
|
480
|
|
|
$
|
1,433
|
|
|
$
|
1,435
|
|
U.S. dollar
|
|
|
10,299
|
|
|
|
10,434
|
|
|
|
|
|
|
|
|
|
Hungarian forint
|
|
|
3,768
|
|
|
|
3,694
|
|
|
|
3,303
|
|
|
|
3,194
|
|
Euro
|
|
|
|
|
|
|
|
|
|
|
10,080
|
|
|
|
10,067
|
|
Canadian dollar
|
|
|
|
|
|
|
|
|
|
|
17,241
|
|
|
|
17,289
|
|
Swiss franc
|
|
|
3,964
|
|
|
|
3,976
|
|
|
|
2,181
|
|
|
|
2,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,514
|
|
|
$
|
18,584
|
|
|
$
|
34,238
|
|
|
$
|
34,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 no hedging
designation.
NOTE 6
INCOME TAXES
Income (loss) before taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
U.S.
|
|
$
|
(50,451
|
)
|
|
$
|
(25,298
|
)
|
|
$
|
(22,120
|
)
|
Foreign
|
|
|
86,444
|
|
|
|
72,572
|
|
|
|
84,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,993
|
|
|
$
|
47,274
|
|
|
$
|
62,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
133
|
|
|
$
|
107
|
|
|
$
|
83
|
|
Foreign
|
|
|
20,408
|
|
|
|
26,413
|
|
|
|
27,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,541
|
|
|
|
26,520
|
|
|
|
27,933
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
(145
|
)
|
|
|
31
|
|
|
|
28
|
|
Foreign
|
|
|
(2,452
|
)
|
|
|
(1,896
|
)
|
|
|
1,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,597
|
)
|
|
|
(1,865
|
)
|
|
|
1,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,944
|
|
|
$
|
24,655
|
|
|
$
|
29,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory U.S. federal income tax
rate with the effective tax rates of 49.9% in 2008, 52.2% in
2007, and 47.4% in 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
(In thousands, except for % s)
|
|
|
|
|
|
|
|
|
Statutory U.S. tax rate
|
|
$
|
12,598
|
|
|
|
35.0
|
%
|
|
$
|
16,546
|
|
|
|
35.0
|
%
|
|
$
|
21,752
|
|
|
|
35.0
|
%
|
Amount of foreign income taxes less than U.S. taxes at statutory
rate
|
|
|
(12,457
|
)
|
|
|
(34.6
|
)
|
|
|
(2,951
|
)
|
|
|
(6.2
|
)
|
|
|
(4,043
|
)
|
|
|
(6.5
|
)
|
U.S. losses with no tax benefit
|
|
|
12,880
|
|
|
|
35.8
|
|
|
|
8,705
|
|
|
|
18.4
|
|
|
|
5,593
|
|
|
|
9.0
|
|
U.S. restructuring and other U.S. unusual charges with no benefit
|
|
|
4,777
|
|
|
|
13.3
|
|
|
|
149
|
|
|
|
0.3
|
|
|
|
404
|
|
|
|
0.6
|
|
Provision for repatriated earnings
|
|
|
1,054
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
2,243
|
|
|
|
3.6
|
|
Loss on extinguishment of debt - no tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,745
|
|
|
|
2.8
|
|
Establishment (resolution) of uncertain tax positions
|
|
|
(1,363
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
1,152
|
|
|
|
1.9
|
|
Reduction of German tax rate
|
|
|
|
|
|
|
|
|
|
|
1,335
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
455
|
|
|
|
1.3
|
|
|
|
871
|
|
|
|
1.9
|
|
|
|
639
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,944
|
|
|
|
49.9
|
%
|
|
$
|
24,655
|
|
|
|
52.2
|
%
|
|
$
|
29,485
|
|
|
|
47.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Deferred tax assets and (liabilities) consist of the following
at August 31, 2008 and August 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Pensions
|
|
$
|
4,302
|
|
|
$
|
6,352
|
|
Inventory reserves
|
|
|
870
|
|
|
|
802
|
|
Bad debt reserves
|
|
|
2,115
|
|
|
|
2,051
|
|
Accruals
|
|
|
2,660
|
|
|
|
2,190
|
|
Postretirement benefits other than pensions
|
|
|
7,194
|
|
|
|
9,626
|
|
Depreciation
|
|
|
4,610
|
|
|
|
1,970
|
|
Foreign tax credit carryforwards
|
|
|
36,295
|
|
|
|
30,227
|
|
Alternative minimum tax carryforwards
|
|
|
6,835
|
|
|
|
6,835
|
|
Other
|
|
|
12,640
|
|
|
|
8,024
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
77,521
|
|
|
|
68,077
|
|
Valuation allowance
|
|
|
(60,426
|
)
|
|
|
(51,251
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
17,095
|
|
|
|
16,826
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(5,684
|
)
|
|
|
(9,312
|
)
|
Inventory
|
|
|
|
|
|
|
(375
|
)
|
Other
|
|
|
(4,835
|
)
|
|
|
(328
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(10,519
|
)
|
|
|
(10,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,576
|
|
|
$
|
6,811
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance covers benefits which are not likely to
be utilized for foreign tax credit carryforwards and other
deferred tax assets in the United States.
The Company has $38 million in foreign tax credit
carryforwards that will expire in periods from 2010 to 2018. The
amount of foreign tax credit carryforwards shown in the table
above has been reduced by unrealized stock compensation
attributes of approximately $2.0 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 offset the tax on any U.S. taxable
income remaining after the offset of the net operating losses,
or are carried forward. Therefore, 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 tax effect of temporary differences included in prepaids was
$4.9 million and $3.9 million at August 31, 2008
and 2007, respectively. Deferred charges included
$8.6 million and $8.9 million from the tax effect of
temporary differences at August 31, 2008 and 2007,
respectively. The tax effect of temporary differences included
in other accrued liabilities was $1.4 million and
$0.4 million at August 31, 2008 and 2007, respectively.
In October 2007, significant tax legislation was passed in
Mexico, which was generally effective starting January 1,
2008. Of particular importance is the laws introduction of
a flat tax, which applies to taxpaying entities along with
Mexicos regular income tax. The new legislation did not
have a material effect on the Company as the Company is
projecting to continue being an income tax payer in Mexico. The
Company will continue to monitor this situation in the future.
The Company adopted FIN 48 on September 1, 2007, as
required. As a result of the implementation, the Company
recognized an increase in the opening balance of retained
earnings of $2.1 million for unrecognized tax benefits not
previously recognized under historical practice.
64
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of August 31, 2008, the Companys gross
unrecognized tax benefits totaled $3.8 million. If
recognized, approximately $2.0 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, 2008, the Company had
$0.8 million of accrued interest and penalties on
unrecognized tax benefits.
The Company has recently been selected for an income tax
examination in the U.S. for fiscal 2006, which is scheduled
to begin in November 2008. In the U.S. the Company is open
to income tax examinations from fiscal 2005 onward and generally
from fiscal year 2001 onward for most foreign jurisdictions.
Specifically, in Belgium the Company is currently under
examination for fiscal years 2006 and 2007 with the statute on
all prior years closed. The Company is currently under
examination in Germany for fiscal years 2000 through 2004.
During fiscal 2008, the expiration of certain statues 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 for under FIN 48.
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.
Reconciliation of Unrecognized Tax Benefits:
|
|
|
|
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at September 1, 2007
|
|
$
|
5,392
|
|
Decreases related to prior year tax positions
|
|
|
(600
|
)
|
Increases related to current year tax positions
|
|
|
148
|
|
Settlements
|
|
|
(984
|
)
|
Laspse of statute of limitations
|
|
|
(660
|
)
|
Foreign currency impact
|
|
|
485
|
|
|
|
|
|
|
Balance at August 31, 2008
|
|
$
|
3,781
|
|
|
|
|
|
|
During the year, the Company revised its earnings repatriation
plan for its Canadian subsidiary and recognized an income tax
provision of approximately $1.0 million for withholding
taxes on the repatriation of these retained earnings to the
U.S. At August 31, 2008, no taxes have been provided
on the undistributed earnings of certain foreign subsidiaries
amounting to $254.7 million because the Company intends to
permanently reinvest these earnings.
NOTE 7
PENSIONS
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. 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 $1.9 million and
$1.5 million at August 31, 2008 and 2007,
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. The measurement date for
all plans is August 31.
65
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Components of the plan obligations and assets, and the recorded
liability at August 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Benefit obligation at beginning of year
|
|
$
|
(80,969
|
)
|
|
$
|
(77,792
|
)
|
|
$
|
(20,293
|
)
|
|
$
|
(29,897
|
)
|
Service cost
|
|
|
(2,492
|
)
|
|
|
(2,486
|
)
|
|
|
(385
|
)
|
|
|
(1,306
|
)
|
Interest cost
|
|
|
(4,640
|
)
|
|
|
(3,728
|
)
|
|
|
(1,077
|
)
|
|
|
(1,509
|
)
|
Participant contributions
|
|
|
(284
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
(70
|
)
|
Actuarial gain (loss)
|
|
|
8,262
|
|
|
|
4,864
|
|
|
|
39
|
|
|
|
2,725
|
|
Benefits paid
|
|
|
2,548
|
|
|
|
3,030
|
|
|
|
790
|
|
|
|
1,069
|
|
Plan amendments
|
|
|
(96
|
)
|
|
|
|
|
|
|
4,661
|
|
|
|
3,854
|
|
Curtailment gain
|
|
|
1,398
|
|
|
|
|
|
|
|
3,104
|
|
|
|
4,841
|
|
Translation adjustment
|
|
|
(1,949
|
)
|
|
|
(4,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
(78,222
|
)
|
|
$
|
(80,969
|
)
|
|
$
|
(13,161
|
)
|
|
$
|
(20,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
15,690
|
|
|
$
|
14,044
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on assets
|
|
|
(1,441
|
)
|
|
|
968
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
3,359
|
|
|
|
2,582
|
|
|
|
790
|
|
|
|
999
|
|
Participant contributions
|
|
|
284
|
|
|
|
275
|
|
|
|
|
|
|
|
70
|
|
Benefits paid
|
|
|
(2,548
|
)
|
|
|
(3,030
|
)
|
|
|
(790
|
)
|
|
|
(1,069
|
)
|
Translation adjustment
|
|
|
(1,235
|
)
|
|
|
851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
14,109
|
|
|
$
|
15,690
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underfunded
|
|
$
|
(64,113
|
)
|
|
$
|
(65,279
|
)
|
|
$
|
(13,161
|
)
|
|
$
|
(20,293
|
)
|
Unamortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability
|
|
|
42
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
|
|
5,027
|
|
|
|
11,513
|
|
|
|
53
|
|
|
|
92
|
|
Net prior year service cost (credit)
|
|
|
893
|
|
|
|
2,055
|
|
|
|
(7,862
|
)
|
|
|
(4,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(58,151
|
)
|
|
$
|
(51,635
|
)
|
|
$
|
(20,970
|
)
|
|
$
|
(24,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$
|
1,944
|
|
|
$
|
3,791
|
|
|
$
|
|
|
|
$
|
|
|
Accrued payrolls, taxes and related benefits
|
|
|
(2,092
|
)
|
|
|
(1,759
|
)
|
|
|
(880
|
)
|
|
|
(733
|
)
|
Other long-term liabilities
|
|
|
(62,021
|
)
|
|
|
(63,520
|
)
|
|
|
(12,281
|
)
|
|
|
(19,560
|
)
|
Accumulated other comprehensive income
|
|
|
4,018
|
|
|
|
9,853
|
|
|
|
(7,809
|
)
|
|
|
(4,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(58,151
|
)
|
|
$
|
(51,635
|
)
|
|
$
|
(20,970
|
)
|
|
$
|
(24,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Amounts recognized in Accumulated Other Comprehensive Income,
net of tax, as of August 31, 2008 and 2007 include:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Prior service credit
|
|
$
|
6,969
|
|
|
$
|
2,585
|
|
Actuarial loss
|
|
|
(5,080
|
)
|
|
|
(11,604
|
)
|
Net transition obligation
|
|
|
(42
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
Gross amount
|
|
|
1,847
|
|
|
|
(9,096
|
)
|
Less income tax effect
|
|
|
1,944
|
|
|
|
3,791
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
3,791
|
|
|
$
|
(5,305
|
)
|
|
|
|
|
|
|
|
|
|
The components of net periodic benefit cost of the years ended
August 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
2,492
|
|
|
$
|
2,486
|
|
|
$
|
2,558
|
|
|
$
|
385
|
|
|
$
|
1,306
|
|
|
$
|
1,997
|
|
Interest cost
|
|
|
4,640
|
|
|
|
3,728
|
|
|
|
3,092
|
|
|
|
1,077
|
|
|
|
1,509
|
|
|
|
1,666
|
|
Expected return on plan assets
|
|
|
(1,250
|
)
|
|
|
(1,057
|
)
|
|
|
(865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transition obligation
|
|
|
42
|
|
|
|
38
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
279
|
|
|
|
497
|
|
|
|
467
|
|
|
|
(647
|
)
|
|
|
(293
|
)
|
|
|
(102
|
)
|
Deferred asset gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
568
|
|
Recognized gains due to plan curtailments
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,895
|
)
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss
|
|
|
189
|
|
|
|
582
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,278
|
|
|
$
|
6,274
|
|
|
$
|
5,727
|
|
|
$
|
(3,080
|
)
|
|
$
|
2,656
|
|
|
$
|
4,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the pension plans
with accumulated benefit obligations in excess of plan assets
were $78.2 million, $69.8 million and
$14.1 million, respectively, as of August 31, 2008,
and $80.9 million, $71.0 million and
$15.7 million, respectively, as of August 31, 2007.
The under funded position is primarily related to the
Companys German and United Kingdom pension plans, where
funding is not required.
The total pension contributions for multi-employer pension plans
were approximately $0, $3,000 and $17,000 in 2008, 2007 and
2006, respectively. The total expense for defined contribution
plans was approximately $3.3 million, $4.1 million and
$3.8 million in 2008, 2007 and 2006, respectively.
67
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Actuarial assumptions used in the calculation of the recorded
liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions as of August 31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate on pension plans
|
|
|
6.3
|
%
|
|
|
5.5
|
%
|
|
|
4.7
|
%
|
Discount rate on postretirement obligation
|
|
|
7.00
|
%
|
|
|
6.25
|
%
|
|
|
6.00
|
%
|
Return on pension plan assets
|
|
|
7.8
|
%
|
|
|
7.8
|
%
|
|
|
7.7
|
%
|
Rate of compensation increase
|
|
|
2.5
|
%
|
|
|
2.5
|
%
|
|
|
2.4
|
%
|
Pre-Age 65
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected health care cost trend rate
|
|
|
8.5
|
%
|
|
|
9.0
|
%
|
|
|
8.0
|
%
|
Ultimate health care rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year ultimate health care trend rate is achieved
|
|
|
2015
|
|
|
|
2011
|
|
|
|
2009
|
|
Post-Age 65
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected health care cost trend rate
|
|
|
8.5
|
%
|
|
|
9.0
|
%
|
|
|
10.0
|
%
|
Ultimate health care rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year ultimate health care trend rate is achieved
|
|
|
2015
|
|
|
|
2011
|
|
|
|
2011
|
|
The Company adopted the provisions of SFAS No. 158,
(SFAS 158), Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, and the
effect of the adoption of SFAS 158 has been reflected in
the consolidated financial statements as of August 31, 2007.
The following table summarizes the incremental effect of
adopting SFAS 158 on individual line items in the
consolidated balance sheet as of August 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
|
|
|
After
|
|
|
|
Adoption of
|
|
|
|
|
|
Adoption of
|
|
|
|
SFAS 158
|
|
|
Adjustments
|
|
|
SFAS 158
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Deferred charges and other assets
|
|
$
|
19,199
|
|
|
$
|
2,585
|
|
|
$
|
21,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
1,444
|
|
|
|
(1,270
|
)
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
872,800
|
|
|
|
1,315
|
|
|
|
874,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued payrolls, taxes and related benefits
|
|
|
33,549
|
|
|
|
(1,300
|
)
|
|
|
32,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
85,831
|
|
|
|
5,485
|
|
|
|
91,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
55,397
|
|
|
|
(5,305
|
)
|
|
|
50,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
432,318
|
|
|
|
(5,305
|
)
|
|
|
427,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
68
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, 2008:
|
|
|
|
|
|
|
|
|
|
|
One-
|
|
|
One-
|
|
|
|
Percentage-
|
|
|
Percentage-
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
|
(In thousands)
|
|
|
Effect on total of service and interest cost components
|
|
$
|
235
|
|
|
$
|
(189
|
)
|
Effect on postretirement obligation
|
|
$
|
1,253
|
|
|
$
|
(1,092
|
)
|
The Companys pension plan weighted-average asset
allocation at August 31, 2008 and 2007, and target
allocation, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets
|
|
|
|
|
|
|
at August 31,
|
|
|
Target
|
|
Asset Category
|
|
2008
|
|
|
2007
|
|
|
Allocation
|
|
|
Equity secuities
|
|
|
65.6
|
%
|
|
|
70.9
|
%
|
|
|
70.0
|
%
|
Debt securities
|
|
|
17.0
|
%
|
|
|
17.9
|
%
|
|
|
15.0
|
%
|
Guaranteed investment certificates
|
|
|
11.3
|
%
|
|
|
7.3
|
%
|
|
|
10.0
|
%
|
Cash
|
|
|
6.1
|
%
|
|
|
3.9
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
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. 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
guaranteed investment certificates 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 Company expects to contribute approximately
$3.6 million for its pension obligations and approximately
$0.9 million to its other postretirement plan in 2009. 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)
|
|
|
|
|
|
2009
|
|
$
|
3,426
|
|
|
$
|
973
|
|
|
$
|
93
|
|
|
$
|
880
|
|
2010
|
|
|
2,960
|
|
|
|
1,023
|
|
|
|
102
|
|
|
|
921
|
|
2011
|
|
|
3,052
|
|
|
|
1,086
|
|
|
|
109
|
|
|
|
977
|
|
2012
|
|
|
4,215
|
|
|
|
1,158
|
|
|
|
115
|
|
|
|
1,043
|
|
2013
|
|
|
3,528
|
|
|
|
1,184
|
|
|
|
125
|
|
|
|
1,059
|
|
Years 2014 2018
|
|
|
21,666
|
|
|
|
6,410
|
|
|
|
702
|
|
|
|
5,708
|
|
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 employees
or their beneficiaries for a ten-year period and are 100%
vested. The liability required for these agreements was fully
accrued and is included in other long-term liabilities as of
August 31, 2008 and 2007. In connection with these
agreements, the Company owns and is the beneficiary of life
insurance policies amounting to $2.0 million.
69
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8
ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of Accumulated Other Comprehensive Income are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Additional
|
|
|
Unrecognized
|
|
|
Accumulated
|
|
|
|
|
|
|
Minimum
|
|
|
Losses and Prior
|
|
|
Other
|
|
|
|
Foreign Currency
|
|
|
Pension Liability
|
|
|
Service Costs
|
|
|
Comprehensive
|
|
|
|
Translation Gain
|
|
|
Adjustment
|
|
|
(Credits), Net
|
|
|
Income
|
|
|
|
(In thousands)
|
|
|
Balance as of August 31, 2006
|
|
$
|
39,202
|
|
|
$
|
(6,309
|
)
|
|
$
|
|
|
|
$
|
32,893
|
|
Current period change
|
|
|
16,195
|
|
|
|
3,806
|
|
|
|
|
|
|
|
20,001
|
|
Adoption of SFAS 158
|
|
|
|
|
|
|
2,503
|
|
|
|
(5,305
|
)
|
|
|
(2,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains do not have a tax effect as
such gains are considered permanently reinvested. Accumulated
other comprehensive income adjustments related to pensions and
other postretirement benefit plans are recorded net of tax using
the applicable effective tax rate.
NOTE 9
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. In
accordance with the 2006 Incentive Plan, the shares available
for grant under the Companys 2002 Equity Incentive Plan
were terminated upon adoption of the 2006 Incentive Plan.
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. The
time-based nonqualified stock options become exercisable at the
rate of 33% per year, commencing on the first anniversary date
of the grant. It has been the Companys practice to issue
new common shares upon stock option exercise. On August 31,
2008, there were approximately 2.8 million shares available
for grant pursuant to the Companys 2006 Incentive Plan.
On September 1, 2005, the Company adopted SFAS 123R,
which requires the Company to measure all employee stock-based
compensation awards using a fair value method and record the
related expense in the financial statements. The Company elected
to use the modified prospective transition method. The modified
prospective transition method requires that compensation cost be
recognized in the financial statements for all awards granted
after the date of adoption as well as for existing awards for
which the requisite service has not been rendered as of the date
of adoption and requires that prior periods not be restated.
The Company recorded stock option expense for the years ended
August 31, 2008, 2007 and 2006 of approximately
$0.8 million, $1.9 million and $4.5 million,
respectively, which is included in selling, general and
administrative expenses in the accompanying consolidated
statements of income. The first quarter of fiscal 2006 included
approximately $1.0 million of charges related to the
accelerated vesting period of retirement eligible employees
under the non-substantive vesting period approach applied to new
grants after adoption. The expense recorded did not impact
income
70
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
tax expense since the Companys deferred tax assets are
fully reserved by a valuation allowance. There was no impact to
the statement of cash flows related to the adoption of
SFAS 123R.
The weighted-average fair value of stock option awards was $7.94
for the January 2006 grant and $6.20 for the October 2005 grant.
The Company did not grant stock options in fiscal 2007 or fiscal
2008. These values were estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
Fiscal
|
|
|
|
2006
|
|
|
Expected life of award (years)
|
|
|
5.5
|
|
Risk-free interest rate
|
|
|
4.3
|
%
|
Expected volatility of stock
|
|
|
40.0
|
%
|
Expected dividend yield of stock
|
|
|
3.0
|
%
|
The expected lives of the awards are based on historical
exercise patterns and the terms of the options. The risk-free
interest rate is based on zero coupon treasury bond rates
corresponding to the expected life of the awards. The expected
volatility assumption was derived by referring to changes in the
Companys historical common stock prices over the same
timeframe as 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 or the expected dividend yield is
likely to differ from historical patterns.
A summary of stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Outstanding
|
|
|
Weighted-
|
|
|
Outstanding
|
|
|
Weighted-
|
|
|
Outstanding
|
|
|
Weighted-
|
|
|
|
Shares Under
|
|
|
Average Exercise
|
|
|
Shares Under
|
|
|
Average
|
|
|
Shares Under
|
|
|
Average
|
|
|
|
Option
|
|
|
Price
|
|
|
Option
|
|
|
Exercise Price
|
|
|
Option
|
|
|
Exercise Price
|
|
|
Outstanding at beginning of year
|
|
|
813,710
|
|
|
$
|
19.10
|
|
|
|
1,568,276
|
|
|
$
|
18.93
|
|
|
|
1,672,362
|
|
|
$
|
17.09
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
572,750
|
|
|
|
19.78
|
|
Exercised
|
|
|
(206,290
|
)
|
|
|
19.01
|
|
|
|
(742,528
|
)
|
|
|
18.74
|
|
|
|
(650,667
|
)
|
|
|
15.06
|
|
Forfeited and expired
|
|
|
(40,173
|
)
|
|
|
19.37
|
|
|
|
(12,038
|
)
|
|
|
19.36
|
|
|
|
(26,169
|
)
|
|
|
15.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
567,247
|
|
|
|
19.12
|
|
|
|
813,710
|
|
|
|
19.10
|
|
|
|
1,568,276
|
|
|
|
18.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
492,523
|
|
|
|
18.88
|
|
|
|
394,915
|
|
|
|
18.23
|
|
|
|
474,836
|
|
|
|
17.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 years ended August 31, 2008, 2007 and 2006 was
approximately $0.5 million, $2.9 million and
$4.6 million, respectively. The intrinsic value for stock
options exercisable at August 31, 2008 was
$1.5 million with a remaining term for options exercisable
of 4.3 years. For stock options outstanding at
August 31, 2008, exercise prices range from $11.62 to
$24.69. The weighted average remaining contractual life for
options outstanding at August 31, 2008 was 4.7 years.
Stock options vested and expected to vest at August 31,
2008 were 566,926 with a remaining contractual term of
4.7 years and a weighted-average exercise price of $19.12.
The aggregate intrinsic value of stock options vested and
expected to vest was $1.6 million at August 31, 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
71
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
outstanding under the 2006 Incentive Plan have service vesting
periods of three years following the date of grant. The
following table summarizes the outstanding restricted stock
awards and weighted-average fair market value:
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Weighted-Average
|
|
|
|
Restricted Stock
|
|
|
Fair Market Value
|
|
|
|
Awards
|
|
|
(per share)
|
|
|
Outstanding at August 31, 2007
|
|
|
330,775
|
|
|
$
|
20.01
|
|
Granted
|
|
|
111,650
|
|
|
|
20.66
|
|
Vested
|
|
|
(151,322
|
)
|
|
|
19.12
|
|
Forfeited
|
|
|
(58,346
|
)
|
|
|
20.34
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2008
|
|
|
232,757
|
|
|
|
20.81
|
|
|
|
|
|
|
|
|
|
|
During the year ended August 31, 2008, the Company granted
111,650 time-based restricted shares. 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 Company granted time-based
restricted stock awards for 90,375 shares during the year
ended August 31, 2007.
The Company also grants awards with market performance vesting
criteria. In the table below, the Company summarizes all
performance-based awards, which include performance-based
restricted stock awards and Performance Shares. Performance
share awards (Performance Shares) are awards for
which the vesting will occur based on both service and market
performance criteria and do not have voting rights.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Performance-Based
|
|
|
Fair Market Value
|
|
|
|
|
|
|
Awards
|
|
|
(per share)
|
|
|
|
|
|
Outstanding at August 31, 2007
|
|
|
137,525
|
|
|
$
|
20.55
|
|
|
|
|
|
Granted
|
|
|
222,475
|
|
|
|
13.23
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(73,744
|
)
|
|
|
18.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2008
|
|
|
286,256
|
|
|
|
15.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended August 31, 2008, the Company granted
222,475 performance-based awards. Included in the fiscal 2008
grants are approximately 148,317 Performance Shares that earn
dividends throughout the vesting period and approximately 74,158
Performance Shares that do not earn dividends. The
weighted-average grant date fair value of the Performance Shares
with market conditions granted in February 2008 was $13.13 per
share and $14.35 for those granted in July 2008. The valuation
for these awards granted during fiscal 2008 which vest based on
market performance criteria was based upon the Monte Carlo
simulation, which is a binomial model that represents the
characteristics of these grants. Vesting of the ultimate number
of shares underlying performance awards, if any, will be
dependent upon the Companys total shareholder return in
relation to the total shareholder return of a select group of
peer companies over a three-year period. These awards were
accounted for as awards with market conditions in accordance
with SFAS 123R.
The Company granted performance-based awards for
137,875 shares during fiscal 2007. As of August 31,
2008, approximately 88,470 awards of the outstanding
performance-based awards in the table above are
performance-based restricted stock awards from the fiscal 2007
grant with vesting based on both service and market performance
criteria. The performance-based restricted stock awards have
voting rights and earn dividends. The weighted-average grant
date fair value of the Performance Shares with market conditions
granted in April 2007 was $20.55 per share. At the vesting date
of these performance-based restricted stock awards,
approximately 44,235 additional shares could be issued and
released if certain market conditions are met which are not
included in the table. The additional shares do not earn
dividends and do not have voting rights. 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 as explained below.
72
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The fair value of the Performance Shares awards granted during
the year ended August 31, 2008 was estimated using a Monte
Carlo simulation binomial model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
|
Dividend yield
|
|
|
2.84
|
%
|
|
|
2.63
|
%
|
Expected volatility
|
|
|
30.00
|
%
|
|
|
26.00
|
%
|
Risk-free interest rate
|
|
|
1.97
|
%
|
|
|
4.45
|
%
|
Correlation
|
|
|
32.00
|
%
|
|
|
30.00
|
%
|
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 A. Schulmans 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 forfeitures,
related to nonvested share-based compensation arrangements at
August 31, 2008 was approximately $6.1 million. This
cost is expected to be recognized over a weighted-average period
of approximately 1.7 years.
Unearned compensation for grants under the 2002 Equity Incentive
Plan representing the fair market value of the shares at the
date of grant is charged to income over the four-year vesting
period. Unearned compensation for grants under the 2006
Incentive Plan representing the fair market value of the shares
at the date of grant or the associated fair value based on a
binomial valuation is charged to income over the applicable
vesting period. Compensation expense for restricted stock was
$4.2 million in fiscal 2008, $2.2 million in fiscal
2007 and $1.5 million in fiscal 2006.
At August 31, 2008, the Company had approximately 318,000
restricted stock units outstanding with various vesting periods
and criteria. At August 31, 2007, the Company had
approximately 245,000 restricted stock units outstanding. Each
restricted stock unit is equivalent to one share of A. Schulman,
Inc. stock on the vesting date. The Company granted
approximately 114,000 restricted stock units during the year
ended August 31, 2008. The Company granted approximately
108,000 restricted stock units during the year ended
August 31, 2007. Certain restricted stock units earn
dividends during the vesting period. 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. As a result
of these mark-to-market adjustments, these restricted stock
units introduce volatility into the Companys consolidated
income statements. The Company has recorded approximately
$2.8 million, $0.9 million and $0.9 million of
expense related to restricted stock units for the years ended
August 31, 2008, 2007 and 2006, respectively.
NOTE 10
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income
available to common shareholders 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.
73
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
treasury stock method. The following presents the number of
incremental weighted-average shares used in computing diluted
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,794,923
|
|
|
|
27,032,348
|
|
|
|
29,961,580
|
|
Incremental shares from stock options
|
|
|
77,689
|
|
|
|
149,649
|
|
|
|
174,674
|
|
Incremental shares from restricted stock
|
|
|
225,284
|
|
|
|
187,411
|
|
|
|
257,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
27,097,896
|
|
|
|
27,369,408
|
|
|
|
30,394,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal years 2008, 2007, and 2006, there were approximately
63,000, 65,000 and 1.0 million, 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 following presents the computation of adjusted net income
used in computing net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
18,049
|
|
|
$
|
22,619
|
|
|
$
|
32,662
|
|
Less: Preferred stock dividends
|
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock
|
|
$
|
17,996
|
|
|
$
|
22,566
|
|
|
$
|
32,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11
CAPITAL STOCK AND STOCKHOLDER RIGHTS PLAN
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.
On January 26, 2006, the Board of Directors adopted a
Shareholder Rights Plan and, on February 9, 2006,
distributed Rights to each record holder of the Companys
Common Stock on that date. Each Right was attached to each share
of Common Stock and entitled the registered holder to purchase
from the Company a unit consisting of one one-thousandth of a
share of Series A Junior Participating Special Stock, a
series of the Special Stock, at a Purchase Price of $85.00 per
unit (the Purchase Price), subject to adjustment.
The Company paid $0.01 per common share on February 1,
2007, to shareholders of record on January 19, 2007, in
redemption of the special stock purchase rights previously
issued to the Companys shareholders pursuant to the Rights
Agreement dated as of January 26, 2006 between the Company
and National City Bank as Rights Agent, thereby redeeming in
full and canceling all such rights and terminating the Rights
Agreement. The amount of this redemption was $0.3 million,
which is included in the total amount of dividends paid during
fiscal 2007.
74
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12
LEASES
The Company leases certain equipment, buildings, transportation
vehicles and computer equipment. Total rental expense was
$7.7 million in 2008, $6.7 million in 2007 and
$6.0 million in 2006. The future minimum rental commitments
for operating non-cancelable leases excluding obligations for
taxes, insurance, etc. are as follows:
|
|
|
|
|
|
|
Minimum Rental
|
|
|
|
(In thousands)
|
|
|
Year ended August 31,
|
|
|
|
|
2009
|
|
$
|
3,010
|
|
2010
|
|
|
2,465
|
|
2011
|
|
|
1,682
|
|
2012
|
|
|
1,646
|
|
2013
|
|
|
208
|
|
2014 and thereafter
|
|
|
92
|
|
|
|
|
|
|
|
|
$
|
9,103
|
|
|
|
|
|
|
NOTE 13
SEGMENT INFORMATION
To identify reportable 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). Globally, the Company operates primarily in
three lines of business: engineered plastics, masterbatch and
distribution services. In North America, there is a general
manager of each of these lines of business each of who report
directly to the Companys CEO. Also, in North America the
Company operates in a specialty sheet line of business called
Invision which has its own general manager who also
reports to the CEO. The Companys European segment has
managers of each line of business, who report to a general
manager of Europe who reports to the CEO. Currently, the
Companys CEO reviews performance and allocates resources
for the European segment as a whole not at the business line
level and therefore no changes have been made to the European
segment. The reportable segments are Europe (which includes
Asia), North America Polybatch (NAPB) (which
comprises the masterbatch line of business), North America
Distribution Services (NADS), North America
Engineered Plastics (NAEP) and Invision.
The Companys European segment, which includes the Asia
operations, is the largest segment for the Company. The segment
is managed by the General Manager of Europe and Asia however
within the European General Managers responsibilities
include managers of each line of business for engineered
plastics, masterbatch and distribution services. The
Companys masterbatch business is anchored by the global
research and development center in Bornem, Belgium while the
engineered plastics line of business is anchored by the
Companys technology center in Sindorf, Germany. The
General Manager of Europe and Asia reports directly to the CEO.
The North America Polybatch segment includes color and additive
concentrates which improve the appearance and performance of
resins targeted at the film and packaging markets. The North
America Distribution Services segment provides bulk and packaged
plastic materials used in a variety of applications. The North
America Engineered Plastics segment includes multi-component
blends of ionomers, urethanes and nylons, generally for the
durable goods market, formulated to meet customers
specific performance requirements, regardless of the base resin.
Invision includes solely the A. Schulman Invision, Inc. legal
entity which provides a new sheet product. This business is in a
start-up
phase as the Company is exploring potential market
opportunities. As a result of the redefined segments, certain
portions of the Companys North American operations which
are not managed separately are included in All Other North
America. The Company also 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. Prior periods have
been restated to reflect the current presentation.
75
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company historically identified and presented two
geographical operating segments, North America and Europe, which
includes Asia, based on how the CODM regularly reviewed
information and allocated resources. Prior periods have been
restated to reflect the current presentation.
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 does not include interest income or expense, other income
or expense, restructuring expense or foreign currency
transaction gains or losses. In some cases, the Company may
choose to exclude from a segments results certain
non-recurring 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.
A reconciliation of operating income (loss) by segment to
consolidated income before taxes is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net sales to unaffiliated customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
1,504,401
|
|
|
$
|
1,309,975
|
|
|
$
|
1,122,742
|
|
North America Polybatch
|
|
|
168,679
|
|
|
|
158,278
|
|
|
|
155,111
|
|
North America Distribution Services
|
|
|
131,811
|
|
|
|
128,496
|
|
|
|
140,823
|
|
North America Engineered Plastics
|
|
|
178,704
|
|
|
|
190,143
|
|
|
|
197,704
|
|
Invision
|
|
|
416
|
|
|
|
164
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,984,011
|
|
|
$
|
1,787,056
|
|
|
$
|
1,616,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
204,976
|
|
|
$
|
171,066
|
|
|
$
|
163,826
|
|
North America Polybatch
|
|
|
14,770
|
|
|
|
17,936
|
|
|
|
18,518
|
|
North America Distribution Services
|
|
|
10,013
|
|
|
|
10,431
|
|
|
|
13,522
|
|
North America Engineered Plastics
|
|
|
11,307
|
|
|
|
15,131
|
|
|
|
23,062
|
|
Invision
|
|
|
(4,712
|
)
|
|
|
(4,616
|
)
|
|
|
(1,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment gross profit
|
|
$
|
236,354
|
|
|
$
|
209,948
|
|
|
$
|
216,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Segment operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
96,612
|
|
|
$
|
78,788
|
|
|
$
|
82,665
|
|
North America Polybatch
|
|
|
6,697
|
|
|
|
10,187
|
|
|
|
9,965
|
|
North America Distribution Services
|
|
|
5,288
|
|
|
|
5,309
|
|
|
|
8,172
|
|
North America Engineered Plastics
|
|
|
(8,055
|
)
|
|
|
(4,786
|
)
|
|
|
6,274
|
|
Invision
|
|
|
(6,376
|
)
|
|
|
(5,738
|
)
|
|
|
(2,775
|
)
|
All Other North America
|
|
|
(15,061
|
)
|
|
|
(17,023
|
)
|
|
|
(19,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
79,105
|
|
|
$
|
66,737
|
|
|
$
|
84,886
|
|
Corporate and other
|
|
|
(21,098
|
)
|
|
|
(14,216
|
)
|
|
|
(14,585
|
)
|
Interest expense, net
|
|
|
(5,476
|
)
|
|
|
(5,812
|
)
|
|
|
(2,924
|
)
|
Foreign currency transaction losses
|
|
|
(1,133
|
)
|
|
|
(219
|
)
|
|
|
(2,136
|
)
|
Other income
|
|
|
66
|
|
|
|
1,832
|
|
|
|
1,892
|
|
Curtailment gains
|
|
|
4,009
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
(964
|
)
|
|
|
|
|
|
|
|
|
Asset impairment
|
|
|
(11,699
|
)
|
|
|
|
|
|
|
|
|
Restructuring expense
|
|
|
(6,817
|
)
|
|
|
(1,048
|
)
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(4,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
35,993
|
|
|
$
|
47,274
|
|
|
$
|
62,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
628,952
|
|
|
$
|
586,634
|
|
|
$
|
537,247
|
|
North America Polybatch
|
|
|
87,398
|
|
|
|
89,890
|
|
|
|
100,268
|
|
North America Distribution Services
|
|
|
34,773
|
|
|
|
34,512
|
|
|
|
39,070
|
|
North America Engineered Plastics
|
|
|
78,650
|
|
|
|
107,736
|
|
|
|
117,066
|
|
Invision
|
|
|
24,476
|
|
|
|
23,737
|
|
|
|
15,557
|
|
All Other North America
|
|
|
36,172
|
|
|
|
31,606
|
|
|
|
34,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets
|
|
$
|
890,421
|
|
|
$
|
874,115
|
|
|
$
|
843,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
17,700
|
|
|
$
|
15,386
|
|
|
$
|
14,452
|
|
North America Polybatch
|
|
|
3,236
|
|
|
|
3,606
|
|
|
|
3,926
|
|
North America Distribution Services
|
|
|
243
|
|
|
|
271
|
|
|
|
295
|
|
North America Engineered Plastics
|
|
|
4,498
|
|
|
|
5,013
|
|
|
|
5,457
|
|
Invision
|
|
|
1,626
|
|
|
|
1,061
|
|
|
|
275
|
|
All Other North America
|
|
|
418
|
|
|
|
465
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization expense
|
|
$
|
27,721
|
|
|
$
|
25,802
|
|
|
$
|
24,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
9,021
|
|
|
$
|
12,239
|
|
|
$
|
10,798
|
|
North America Polybatch
|
|
|
5,798
|
|
|
|
5,580
|
|
|
|
2,349
|
|
North America Distribution Services
|
|
|
82
|
|
|
|
86
|
|
|
|
20
|
|
North America Engineered Plastics
|
|
|
2,194
|
|
|
|
2,292
|
|
|
|
538
|
|
Invision
|
|
|
8,787
|
|
|
|
8,986
|
|
|
|
15,488
|
|
All Other North America
|
|
|
188
|
|
|
|
196
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
26,070
|
|
|
$
|
29,379
|
|
|
$
|
29,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below is a summary of sales by point of origin and assets by
location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
334,682
|
|
|
$
|
347,232
|
|
|
$
|
366,836
|
|
Germany
|
|
|
675,778
|
|
|
|
608,536
|
|
|
|
510,100
|
|
Other International
|
|
|
973,551
|
|
|
|
831,288
|
|
|
|
739,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,984,011
|
|
|
$
|
1,787,056
|
|
|
$
|
1,616,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Lived Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
67,086
|
|
|
$
|
71,593
|
|
|
$
|
66,491
|
|
Germany
|
|
|
29,548
|
|
|
|
30,350
|
|
|
|
31,781
|
|
Other International
|
|
|
95,114
|
|
|
|
98,604
|
|
|
|
88,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
191,748
|
|
|
$
|
200,547
|
|
|
$
|
186,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the Companys sales for the years ended
August 31, 2008, 2007 and 2006 can be classified into five
primary product families. The approximate amount and percentage
of consolidated sales for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Product Family
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands, except for % s)
|
|
|
Color and additive concentrates
|
|
$
|
714,770
|
|
|
|
36
|
|
|
$
|
627,268
|
|
|
|
35
|
|
|
$
|
579,825
|
|
|
|
36
|
|
Polyolefins
|
|
|
664,249
|
|
|
|
34
|
|
|
|
543,870
|
|
|
|
30
|
|
|
|
495,163
|
|
|
|
31
|
|
Engineered compounds
|
|
|
418,744
|
|
|
|
21
|
|
|
|
426,382
|
|
|
|
24
|
|
|
|
393,312
|
|
|
|
24
|
|
Polyvinyl chloride (PVC)
|
|
|
59,174
|
|
|
|
3
|
|
|
|
64,658
|
|
|
|
4
|
|
|
|
64,174
|
|
|
|
4
|
|
Tolling
|
|
|
19,466
|
|
|
|
1
|
|
|
|
21,450
|
|
|
|
1
|
|
|
|
16,482
|
|
|
|
1
|
|
Other
|
|
|
107,608
|
|
|
|
5
|
|
|
|
103,428
|
|
|
|
6
|
|
|
|
67,430
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,984,011
|
|
|
|
100
|
|
|
$
|
1,787,056
|
|
|
|
100
|
|
|
$
|
1,616,386
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 14
TENDER OFFER AND SHARE REPURCHASE PROGRAM
On February 21, 2006, the Company announced that its Board
of Directors approved a modified Dutch auction self-tender offer
for up to 8.75 million shares of its common stock, at a
price between $21.00 and $24.00 per share. The Company commenced
the self-tender offer on March 1, 2006 and it expired on
April 11, 2006. On April 25, 2006 the Company
announced the final results of the self-tender offer where the
Company accepted for purchase
78
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2,071,585 shares at a price of $24.00 per share for a total
of approximately $49.7 million. The Company also incurred
costs in connection with the self-tender of $0.5 million in
legal and professional fees in fiscal 2006.
On April 25, 2006, the Company announced that its Board of
Directors authorized the repurchase of up to 6.75 million
shares of its outstanding common stock (the Repurchase
Program) representing approximately 23.3% of the
Companys outstanding shares at the authorization date. The
Repurchase Program replaced the Companys prior repurchase
authorization, under which approximately 1.7 million shares
had remained authorized for repurchase. During fiscal 2006, the
Company purchased approximately 2.0 million common shares
under the Repurchase Program at an average cost of $22.76 per
share, excluding commissions. During fiscal 2006, the Company
purchased approximately 4.1 million shares of its common
stock at an average price of $23.39, excluding transaction fees,
through the Repurchase Program and self-tender offer. During
fiscal 2007, the Company purchased 0.8 million shares of
its common stock under the Repurchase Program at an average
price of $23.46 excluding commissions.
As a part of an agreement reached with the Barington Group
during fiscal 2008, the Board has agreed to increase to five
million the number of shares authorized to be repurchased under
the Companys current share repurchase program (the
2008 Repurchase Program). During fiscal 2008, the
Company purchased approximately 2.0 million shares of its
common stock under the 2008 Repurchase Program at an average
price of $21.20. Under the 2008 Repurchase Program, the Company
has approximately 3.0 million shares still available to be
repurchased.
NOTE 15
NORTH AMERICAN RESTRUCTURING
In January 2008, the Companys new CEO, Joseph Gingo,
announced a
100-day plan
which included many initiatives to improve profitability and
drive growth. In February 2008, the Company announced two
significant capacity reduction initiatives 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.
Impairment
related charges
As a result of the announcement in February 2008, as noted
above, 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 the second quarter of 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 income. The
impairment of the assets for the Orange, Texas facility is
related to the North American Engineered Plastics reportable
segment. All assets were sold during March 2008.
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 is included in the asset impairment
line item in the Companys consolidated statement of
income. The impairment of the assets for the Canadian facility
is related to the North American Engineered Plastics reportable
segment.
As part of new CEO Joe Gingos
100-day plan
to improve profitability and drive growth, the Company announced
on January 3, 2008 that it would suspend further capital
expenditures on Invision until the marketing strategy had been
refined. The Company has considered use of the Findlay, Ohio
facility for other purposes, however, as of August 31, 2008
the Company considered all assets associated with this property
as held for sale. The Company recorded an impairment of its
Findlay, Ohio facility of $6.3 million during fiscal 2008
which is included in the asset impairment line item in the
Companys consolidated statement of income. The Findlay
facility impairment was based on the estimated fair market value
of the property which was determined using independent third
party appraisals. The impairment recorded for the Findlay, Ohio
facility is related to the Invision reportable segment.
79
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of August 31, 2008, the land, building and related
improvements of the St. Thomas, Ontario, Canada facility, the
Findlay, Ohio facility and a building the Company owns in
Orange, Texas are considered to be held for sale. The net book
value of these assets held for sale after impairment is
approximately $10.5 million which is included in the
property, plant and equipment line item in the Companys
consolidated balance sheet as of August 31, 2008.
Restructuring
related charges
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. Production related to low-margin
business at the St. Thomas facility was discontinued and the
remaining higher margin business is primarily being absorbed by
the Companys Nashville, Tennessee and Bellevue, Ohio
manufacturing facilities. The facility was shutdown at the end
of June 2008. The Company continues to move equipment and
finalize closing procedures into early fiscal 2009.
The Orange, Texas facility provided primarily North American
third-party tolling services in which the Company processed
customer-owned materials for a fee. The Company decided to exit
the North American tolling business to concentrate on higher
value-added products. 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 to Alloy Polymers, Inc. for total
consideration of $3.7 million. The Company recorded a loss
on the sale of the Orange, Texas facility of approximately
$0.3 million in the third quarter of fiscal 2008 which is
included in other income in the consolidated statement of
income. In connection with this sale, the Company entered into a
tolling agreement with Alloy Polymers, Inc. to have specified
minimum quantities of products tolled over a period of four
years.
During fiscal 2008, the Company recorded approximately
$6.8 million in employee related costs which include
estimated severance payments and medical insurance for
approximately 170 employees whose positions have been or
will be eliminated throughout the North American operations and
administrative support. All the restructuring costs related to
the sale of the Orange, Texas and the St. Thomas, Ontario,
Canada facilities are related to the North America Engineered
Plastics reportable segment. In the third quarter of fiscal 2008
in continuation of its initiatives, the Company announced it has
changed its organizational reporting structure related to its
North America operations. This change also resulted in the
elimination of approximately 21 positions at the Sharon Center,
Ohio plant which is included in the North America Polybatch
segment. Costs not specifically connected to these events are
related to All Other North America.
At August 31, 2008, the Company estimated it will incur
additional charges for employee related costs, contract
termination costs and other related costs of approximately $0.5
to $0.7 million related to these fiscal 2008 initiatives of
the Company. The Company anticipates the majority of the accrued
balance for restructuring charges to be paid during the first
quarter of fiscal 2009.
During fiscal 2007, the Company announced multiple phases of a
restructuring plan to restore its North American segment to
profitability. In November 2006, in order to balance capacity
with demand, reduce costs and improve efficiencies in the North
American segment, the Company announced a plan to close two of
its manufacturing lines at its Orange, Texas plant, close a
warehouse also located in Orange, Texas and reduce the workforce
at its Bellevue, Ohio plant. Due to unanticipated customer
demand on certain lines, the two manufacturing lines at the
Orange, Texas plant continued production through the sale of the
facility in March 2008. The Orange, Texas warehouse was closed
during the third quarter of fiscal 2007. The warehouse and
related assets were considered held for sale and are included in
the Companys consolidated balance sheet in property, plant
and equipment and therefore the Company ceased depreciation on
those assets. In connection with this plan, the Company reduced
its workforce by 65 positions at various facilities including
the Bellevue, Ohio plant.
80
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In February 2007, the Company announced the second phase of its
restructuring plan which implemented several initiatives to
improve the Companys operations and profitability in North
America. This restructuring plan includes savings from the
following initiatives:
|
|
|
|
|
Reduction in the Companys North American workforce by
approximately 30 positions, primarily in the sales and
administrative functions,
|
|
|
|
Reduction in the Companys United States retiree healthcare
coverage plan,
|
|
|
|
Greater cost sharing of employee and retiree medical plan costs,
|
|
|
|
Broad discretionary selling, general and administrative cost
reductions,
|
|
|
|
Savings from improved purchasing processes, and
|
|
|
|
Improved logistics efficiencies.
|
As a result of the initiatives announced in fiscal 2007, the
Company recorded approximately $1.1 million of accelerated
depreciation for the year ended August 31, 2007, which
represents a change in estimate for the reduced life of
equipment. The employee related costs include severance payments
and medical insurance for employees whose positions were
eliminated in North America. The Company recorded minimal
charges in fiscal 2008 related to the fiscal 2007 initiatives.
At August 31, 2008, the Company believes the charges
related to this restructuring plan are complete and it will not
incur additional cash out-flows related to the announced
initiatives in 2007. The total charge for this plan was
approximately $2.1 million recorded primarily in fiscal
2007.
In connection with the announced plans in fiscal 2007 and fiscal
2008, the Company recorded the following restructuring charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Paid Fiscal
|
|
|
Accrual Balance
|
|
|
Fiscal 2008
|
|
|
Paid Fiscal
|
|
|
Accrual Balance
|
|
|
|
Charges
|
|
|
2007
|
|
|
August 31, 2007
|
|
|
Charges
|
|
|
2008
|
|
|
August 31, 2008
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Employee related costs
|
|
$
|
980
|
|
|
$
|
(906
|
)
|
|
$
|
74
|
|
|
$
|
6,383
|
|
|
$
|
(5,950
|
)
|
|
$
|
507
|
|
Other costs
|
|
|
68
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
434
|
|
|
|
(434
|
)
|
|
|
|
|
Translation effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
1,048
|
|
|
$
|
(974
|
)
|
|
$
|
74
|
|
|
$
|
6,817
|
|
|
$
|
(6,384
|
)
|
|
$
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation, included in NAEP cost of sales
in 2007
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 16
BUSINESS ACQUISITIONS
On June 21, 2007, the Company acquired the Delta Plast
Group, a European color masterbatch manufacturer with operations
in Sweden and Belgium. The acquisition included the purchase of
100% of the common shares of the Belgian operations of Delta
Plast and certain assets and liabilities of the Sweden
operations. The Company organized the two operational locations
as two separate wholly owned subsidiaries of A. Schulman
Plastics, BVBA in its European segment, Deltaplast NV for the
Belgium company and Deltaplast AB for the Sweden operations. The
acquisition expands the Companys offerings of color
masterbatch in its European segment. In connection with this
acquisition, the Company paid approximately 81.3 million
Swedish Krona (approximately $11.8 million at the
acquisition date) which was paid primarily in cash. The purchase
price also included a potential deferred payment that could be
paid over a three year period which is based on certain terms in
the purchase agreement. The initial purchase price allocation
included in the accompanying
81
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
fiscal 2007 consolidated financial statements for this
acquisition was subject to normal course working capital
adjustments and was adjusted subsequently as finalized. The
total cost included direct acquisition costs. Goodwill
recognized in connection with this acquisition amounted to
approximately $3.8 million as of August 31, 2007, of
which approximately $2.6 million is expected to be fully
deductible for tax purposes. During fiscal 2008, the Company
paid the first deferred payment related to this purchase
agreement of approximately $1.6 million, which increased
goodwill by the same amount. In addition, the Company recorded
final purchase price accounting adjustments related to the
acquisitions of $0.1 million during fiscal 2008. The
goodwill for these subsidiaries at August 31, 2008 was
approximately $5.9 million. See footnote 3 for further
discussion regarding the goodwill of the Delta Plast Group. The
results of operations and financial position for the acquired
companies are included in the consolidated financial statements
of the Company for fiscal 2007 and 2008.
NOTE 17
RESEARCH AND DEVELOPMENT
A large part of the Companys technical activities relate
to the continuous refinement of compounds for specific customer
applications. Activities relating to the research and
development of new products and the improvement of existing
products are important to the Company. These activities are
conducted at the Companys various technical centers and
laboratories. Research and development expenditures were
approximately $5.9 million, $7.8 million and
$5.5 million in fiscal years 2008, 2007 and 2006,
respectively. These activities are primarily related to the
Invision®
sheet product and to support new consumer packaging and
automotive 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. 29,
|
|
|
May 31,
|
|
|
Aug. 31,
|
|
|
Aug. 31,
|
|
|
|
2007(a)
|
|
|
2008(b)
|
|
|
2008(c)
|
|
|
2008(d)
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Net Sales
|
|
$
|
496,575
|
|
|
$
|
479,811
|
|
|
$
|
511,767
|
|
|
$
|
495,858
|
|
|
$
|
1,984,011
|
|
Gross Profit
|
|
|
57,171
|
|
|
|
57,037
|
|
|
|
61,584
|
|
|
|
60,562
|
|
|
|
236,354
|
|
Net Income (Loss)
|
|
|
10,025
|
|
|
|
(3,774
|
)
|
|
|
7,132
|
|
|
|
4,666
|
|
|
|
18,049
|
|
Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.26
|
|
|
$
|
0.18
|
|
|
$
|
0.67
|
|
Diluted
|
|
$
|
0.36
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.26
|
|
|
$
|
0.17
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Year Ended
|
|
|
|
Nov. 30,
|
|
|
Feb. 28,
|
|
|
May 31,
|
|
|
Aug. 31,
|
|
|
Aug. 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007(f)
|
|
|
2007(g)
|
|
|
2007
|
|
|
Net Sales
|
|
$
|
442,728
|
|
|
$
|
412,767
|
|
|
$
|
466,955
|
|
|
$
|
464,606
|
|
|
$
|
1,787,056
|
|
Gross Profit
|
|
|
48,831
|
|
|
|
47,434
|
|
|
|
58,679
|
|
|
|
55,004
|
|
|
|
209,948
|
|
Net Income(e)
|
|
|
2,371
|
|
|
|
1,640
|
|
|
|
10,121
|
|
|
|
8,487
|
|
|
|
22,619
|
|
Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
0.06
|
|
|
$
|
0.37
|
|
|
$
|
0.31
|
|
|
$
|
0.83
|
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
0.06
|
|
|
$
|
0.37
|
|
|
$
|
0.30
|
|
|
$
|
0.82
|
|
82
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
(a) |
|
Net income for the quarter ended November 30, 2007 included
costs of $674 ($1,007 pre-tax) related to the European employee
termination costs and a charge of $368 related to the final
settlement of an insurance claim related to Hurricane Rita. |
|
(b) |
|
Net loss for the quarter ended February 29, 2008 included
charges of $4,370 for impairments related to assets in St.
Thomas, Ontario, Canada and Orange, Texas, costs of $3,582
related to the CEO transition, costs of $2,025 related to North
America restructuring, a charge of $964 for goodwill impairment
related to the tolling reporting unit and a charge of $640
related to the termination of the lease of an airplane. |
|
(c) |
|
Net income for the quarter ended May 31, 2008 included
costs of $3,560 for impairments related primarily to assets in
Findlay, Ohio, costs of $3,000 related to North America
restructuring, and a curtailment gain of $2,313 related to the
reduction in the expected years of future service related
primarily to a reduction in the U.S. workforce. |
|
(d) |
|
Net income for the quarter ended August 31, 2008 included a
charge of $2,900 for impairment related to assets in Findlay,
Ohio, and a curtailment gain of $1,696 related to the
elimination of life insurance for certain future and current
U.S. retirees. |
|
(e) |
|
Net income for the quarters ended November 30, 2006,
February 28, 2007, May 31, 2007 and August 31,
2007 included charges of $371, $1,506, $165 and $77,
respectively, for costs and accelerated depreciation related to
the North America restructuring. |
|
(f) |
|
Net income for the quarter ended May 31, 2007 included
income of $1,440 ($2,400 before-tax) from a change in estimate
relating to customer claims in Europe. |
|
(g) |
|
Net income for the quarter ended August 31, 2007 included a
benefit of $1,500 (before and after-tax) in insurance proceeds
received from claims made as a result of Hurricane Rita, and a
tax charge of $1,335 to reduce the Companys German
deferred tax asset as a result of a statutory rate decline. |
83
|
|
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, 2008.
Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
August 31, 2008 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated
in their report included herein.
ITEM 9B.
OTHER INFORMATION
None.
84
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 2008 Annual Meeting (the Proxy Statement) under
the captions Election of Directors and
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 Nominating and Corporation Governance
Committee 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 Compensation Committee Interlocks and
Insider Participation in the Proxy Statement for which
information 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 ownership
of securities is set forth under the caption Security
Ownership of Management and Certain Beneficial Owners in
the Proxy Statement and 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 Certain Relationship and
Related Transactions for which information is incorporated
herein by reference. 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 for which
information is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information for this Item is included under the caption
Ratification of Selection of Independent Registered Public
Accountants in the Proxy Statement for which information
is incorporated herein by reference.
85
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
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 Income for the three years ended
August 31, 2008
|
|
50
|
Consolidated Balance Sheets at August 31, 2008 and 2007
|
|
51
|
Consolidated Statements of Stockholders Equity for the
three years ended August 31, 2008
|
|
52
|
Consolidated Statements of Cash Flows for the three years ended
August 31, 2008
|
|
53
|
Notes to Consolidated Financial Statements
|
|
54
|
(2) Financial Statement Schedules:
|
|
|
Valuation and Qualifying Accounts
|
|
F-1
|
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:
|
|
|
|
|
|
3(a)
|
|
|
Amended and Restated Certificate of Incorporation of the Company
(for purposes of Commission reporting compliance only)
(incorporated by reference to Exhibit 3.1 to the Companys
Quarterly Report on
Form 10-Q
for fiscal quarter ended May 31, 2007).
|
|
3(b)
|
|
|
Amended and Restated Bylaws of the Company (for purposes of
Commission reporting compliance only) (incorporated by reference
to Exhibit 3.2 to the Companys Quarterly Report on
Form 10-Q
for fiscal quarter ended May 31, 2007).
|
|
10(a)
|
|
|
ISDA (International Swap Dealers Association, Inc.) Master
Agreement among A. Schulman, Inc. and KeyBank National
Association, dated January 13, 2004 (incorporated by reference
to Exhibit 10(ff) to the Companys Annual Report on Form
10-K for the fiscal year ended August 31, 2004).
|
|
10(b)
|
|
|
Credit Agreement, dated as of February 28, 2006, among A.
Schulman, Inc., 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
(incorporated by reference to Exhibit 99.1 to the Companys
Current Report on Form 8-K dated February 28, 2006).
|
|
10(c)
|
|
|
Note Purchase Agreement among A. Schulman Europe GmbH, A.
Schulman, Inc. and the Purchasers and Guarantors named therein,
dated March 1, 2006, (incorporated by reference to Exhibit 99.2
to the Companys Current Report on Form 8-K dated February
28, 2006).
|
|
10(d)
|
*
|
|
A. Schulman, Inc. 1992 Non-Employee Directors Stock Option
Plan (incorporated by reference to Exhibit A to the
Companys Proxy Statement dated November 12, 1992, filed as
Exhibit 28 to the Companys Annual Report on Form 10-K for
the fiscal year ended August 31, 1992).
|
|
10(e)
|
*
|
|
Non-Qualified Profit Sharing Plan (incorporated by reference to
Exhibit 10(d) to the Companys Annual Report on Form 10-K
for the fiscal year ended August 31, 1995).
|
|
10(f)
|
*
|
|
Amendment to A. Schulman, Inc. Nonqualified Profit Sharing Plan
(incorporated by reference to Exhibit 10.8 to the Companys
Quarterly Report on Form 10-Q for the fiscal quarter ended
February 29, 1996).
|
|
10(g)
|
*
|
|
Amendment to A. Schulman, Inc. 1992 Non-Employee Directors
Stock Option Plan (incorporated by reference to Exhibit 10.10 to
the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended February 29, 1996).
|
|
10(h)
|
*
|
|
Second Amendment to A. Schulman, Inc. 1992 Non-Employee
Directors Stock Option Plan (incorporated by reference to
Exhibit 10(e) to the Companys Annual Report on Form 10-K
for the fiscal year ended August 31, 1998).
|
|
10(i)
|
*
|
|
Third Amendment to A. Schulman, Inc. 1992 Non-Employee Directors
Stock Option Plan (incorporated by reference to Exhibit 4(p) to
the Companys Registration Statement on Form S-8, dated
December 20, 1999, Registration No. 333-93093).
|
|
10(j)
|
*
|
|
Fourth Amendment to A. Schulman, Inc. 1992 Non-Employee
Directors Stock Option Plan (incorporated by reference to
Exhibit 4.1 to the Companys Quarterly Report on Form 10-Q
for the fiscal quarter ended November 30, 2000).
|
86
|
|
|
|
|
|
10(k)
|
*
|
|
A. Schulman, Inc. 2002 Equity Incentive Plan (incorporated by
reference to Exhibit 4(l) to the Companys Registration
Statement on Form S-8, dated January 24, 2003, Registration No.
333-102718).
|
|
10(l)
|
*
|
|
Supplemental Executive Retirement Plan of the Company, effective
January 1, 2004 (incorporated by reference to Exhibit 10(n) to
the Companys Annual Report on Form 10-K for the fiscal
year ended August 31, 2004).
|
|
10(m)
|
*
|
|
Non-Employee Directors Compensation (incorporated by reference
to Exhibit 10(gg) to the Companys Annual Report on Form
10-K for the fiscal year ended August 31, 2006).
|
|
10(n)
|
*
|
|
The Companys Directors Deferred Units Plan, as amended and
restated effective October 17, 2006 (incorporated by reference
to the Companys Current Report on Form 8-K dated October
16, 2006).
|
|
10(o)
|
|
|
Form of Indemnification Agreement for all Executive Officers and
Directors of the Company (incorporated by reference to Exhibit
99.2 to the Companys Current Report on Form 8-K dated
October 16, 2006).
|
|
10(p)
|
*
|
|
The Companys 2007 Bonus Plan (incorporated by reference to
the Companys Current Report on Form 8-K dated October 16,
2006).
|
|
10(q)
|
*
|
|
A. Schulman, Inc. 2006 Incentive Plan (incorporated by reference
to Exhibit 10.2 to the Companys Quarterly Report on Form
10-Q for the fiscal quarter ended November 30, 2006).
|
|
10(r)
|
*
|
|
A. Schulman, Inc. 2006 Incentive Plan Form of Restricted Stock
Agreement (Employee Performance-Based) (incorporated by
reference to Exhibit 10.2 to the Companys Quarterly Report
on Form 10-Q for the fiscal quarter ended May 31, 2007).
|
|
10(s)
|
*
|
|
A. Schulman, Inc. 2006 Incentive Plan Form of Restricted Stock
Unit Agreement (Non-employee Directors) (incorporated by
reference to Exhibit 10.5 to the Companys Quarterly Report
on Form 10-Q for the fiscal quarter ended May 31, 2007).
|
|
10(t)
|
*
|
|
The Companys 2008 Bonus Plan (incorporated by reference to
the Companys Current Report on Form 8-K dated October 17,
2007).
|
|
10(u)
|
*
|
|
A. Schulman, Inc. 2006 Incentive Plan Form of Restricted Stock
Agreement (Employee Time-Based) (incorporated by reference to
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q
for the fiscal quarter ended February 29, 2008).
|
|
10(v)
|
*
|
|
A. Schulman, Inc. 2006 Incentive Plan Form of Performance Share
Agreement (incorporated by reference to Exhibit 10.4 to the
Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended February 29, 2008).
|
|
10(w)
|
*
|
|
A. Schulman, Inc. 2006 Incentive Plan Form of Restricted Stock
Agreement (Non-employee Directors) (incorporated by reference to
Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q
for the fiscal quarter ended February 29, 2008).
|
|
10(x)
|
*
|
|
A. Schulman, Inc. 2006 Incentive Plan Form of Restricted Stock
Unit Agreement (Employees in Mexico, Canada and Europe)
(incorporated by reference to Exhibit 10.6 to the Companys
Quarterly Report on
Form 10-Q
for the fiscal quarter ended February 29, 2008.)
|
|
10(y)
|
*
|
|
A. Schulman, Inc. 2006 Incentive Plan Form of Performance
Restricted Stock Unit Agreement (CEO) (incorporated by reference
to Exhibit 10.7 to the Companys Quarterly Report on Form
10-Q for the fiscal quarter ended February 29, 2008).
|
|
10(z)
|
*
|
|
Agreement between the Company and Terry L. Haines, dated as of
March 21, 1991 (incorporated by reference to Exhibit 10(m) to
the Companys Annual Report on Form 10-K for fiscal year
ended August 31, 1992).
|
|
10(aa)
|
*
|
|
Employment Agreement between the Company and Terry L. Haines,
dated January 31, 1996 (incorporated by reference to Exhibit
10.3 to the Companys Quarterly Report on Form 10-Q for the
fiscal quarter ended February 29, 1996).
|
|
10(bb)
|
*
|
|
Form of Amendment to Deferred Compensation Agreements between
the Company and Terry L. Haines (incorporated by reference to
Exhibit 10.1 to the Companys Form 10-Q for the fiscal
quarter ended February 29, 1996).
|
|
10(cc)
|
*
|
|
Employment Agreement between the Company and Ronald G. Andres,
dated as of October 20, 1999 (incorporated by reference to
Exhibit 10(o) to the Companys Annual Report on Form 10-K
for the fiscal year ended August 31, 1999).
|
|
10(dd)
|
*
|
|
Employment Agreement between the Company and Barry A. Rhodes,
dated January 10, 2002 (incorporated by reference to Exhibit
10.1 to the Companys Quarterly Report on Form 10-Q for the
fiscal quarter ended February 28, 2002).
|
|
10(ee)
|
*
|
|
Employment Agreement between the Company and Jack B. Taylor,
dated May 28, 2003 (filed herewith).
|
|
10(ff)
|
*
|
|
Agreement between the Company and Walter Belderbos, dated
November 30, 2005 (filed herewith).
|
|
10(gg)
|
*
|
|
Employment Agreement between the Company and Paul F. DeSantis,
dated January 4, 2006 (incorporated by reference to the
Companys Current Report on Form 8-K, dated January 4,
2006).
|
|
10(hh)
|
*
|
|
Agreement between the Company and Bernard Rzepka, dated January
19, 2006 (filed herewith).
|
87
|
|
|
|
|
|
10(ii)
|
*
|
|
Transition Agreement between the Company and Robert A. Stefanko,
dated April 17, 2006 (incorporated by reference to the
Companys Current Report on Form 8-K dated April 17, 2006).
|
|
10(jj)
|
*
|
|
Employment Agreement between the Company and Joseph M. Gingo,
dated December 17, 2007 (incorporated by reference to Exhibit
99.1 to the Companys Current Report on Form 8-K dated
December 18, 2007).
|
|
10(kk)
|
*
|
|
Transition Agreement between the Company and Terry L. Haines,
dated March 14, 2008 (incorporated by reference to Exhibit 99.1
to the Companys Current Report on Form 8-K dated March 20,
2008).
|
|
10(ll)
|
*
|
|
Separation Agreement between the Company and Barry A. Rhodes,
dated April 8, 2008 (incorporated by reference to Exhibit 99.1
to the Companys Current Report on Form 8-K dated April 9,
2008).
|
|
10(mm)
|
*
|
|
Change-in-Control Agreement between the Company and Gary A.
Miller, dated April 21, 2008 (filed herewith).
|
|
10(nn)
|
*
|
|
Change-in-Control Agreement between the Company and David C.
Minc, dated May 19, 2008 (filed herewith).
|
|
10(oo)
|
*
|
|
Amendment to the Employment Agreement between the Company and
Jack B. Taylor, dated August 31, 2008 (filed herewith).
|
|
10(pp)
|
|
|
Agreement among the Company, Barington Capital Group, L.P. and
others, dated October 21, 2005 (incorporated by reference to
Exhibit 99.2 to the Companys Current Report on Form 8-K
dated October 21, 2005).
|
|
10(qq)
|
|
|
Agreement among the Company, Barington Capital Group, L.P. and
others, dated October 25, 2006 (incorporated by reference to
Exhibit 99.2 to the Companys Current Report on Form 8-K
dated October 25, 2006).
|
|
10(rr)
|
|
|
Agreement among the Company, Barington Capital Group, L.P. and
others, dated November 15, 2007 (incorporated by reference to
Exhibit 99.1 to the Companys Current Report on Form 8-K
dated November 21, 2007).
|
|
10(ss)
|
|
|
First Amendment to the November 15, 2007 Agreement among the
Company, Barington Capital Group, L.P. and others, dated October
10, 2008 (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K dated October 10,
2008).
|
|
11
|
|
|
Computation of Basic and Diluted Earnings Per Common Share
(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. |
(b) Exhibits.
See subparagraph (a)(3) above
(c) Financial Statement Schedules.
See subparagraph (a)(2) above
88
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 30, 2008
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 30, 2008
|
|
|
|
|
|
/s/ Paul
F. DeSantis
Paul
F. DeSantis
|
|
Principal Financial Officer and Principal Accounting Officer
|
|
October 30, 2008
|
|
|
|
|
|
David
G. Birney*
|
|
Director
|
|
|
|
|
|
|
|
Michael
Caporale, Jr.*
|
|
Director
|
|
|
|
|
|
|
|
Howard
R. Curd*
|
|
Director
|
|
|
|
|
|
|
|
Willard
R. Holland*
|
|
Director
|
|
|
|
|
|
|
|
James
S. Marlen*
|
|
Director
|
|
|
|
|
|
|
|
Michael
A. McManus, Jr.*
|
|
Director
|
|
|
|
|
|
|
|
Lee
D. Meyer*
|
|
Director
|
|
|
|
|
|
|
|
Peggy
Miller*
|
|
Director
|
|
|
|
|
|
|
|
James
A. Mitarotonda*
|
|
Director
|
|
|
89
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
Ernest
J. Novak, Jr.*
|
|
Director
|
|
|
|
|
|
|
|
Stanley
W. Silverman*
|
|
Director
|
|
|
|
|
|
|
|
John
B. Yasinsky*
|
|
Director
|
|
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Joseph
M. Gingo
Joseph
M. Gingo
Attorney-in-Fact
|
|
|
|
|
October 30, 2008
|
|
|
* |
|
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. |
90
A. SCHULMAN,
INC.
VALUATION AND QUALIFYING ACCOUNTS
Schedule F-1
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Balance at
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Charges to
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Balance at
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Beginning
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Cost and
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Translation
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Close of
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of Period
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Expenses
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Net Write-Offs
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Adjustment
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Period
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(In thousands)
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Reserve for doubtful accounts
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Year ended August 31, 2008
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$
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9,056
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$
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3,116
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$
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(4,181
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)
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$
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325
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$
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8,316
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Year ended August 31, 2007
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$
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9,409
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$
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2,019
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$
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(2,713
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)
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$
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341
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$
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9,056
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Year ended August 31, 2006
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$
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8,227
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$
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2,453
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$
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(1,458
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)
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$
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187
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$
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9,409
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Inventory Reserve
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Year ended August 31, 2008
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$
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8,237
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$
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(760
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)
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$
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(822
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)
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$
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388
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$
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7,043
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Year ended August 31, 2007
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$
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8,538
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$
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385
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$
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(948
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)
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$
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262
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$
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8,237
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Year ended August 31, 2006
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$
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11,235
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$
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1,801
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$
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(4,659
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)
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$
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161
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$
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8,538
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Valuation allowance deferred tax assets
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Year ended August 31, 2008
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$
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51,251
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$
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9,175
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$
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$
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$
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60,426
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Year ended August 31, 2007
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$
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44,602
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$
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6,649
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$
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$
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$
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51,251
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Year ended August 31, 2006
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$
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42,445
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$
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2,157
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$
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$
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$
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44,602
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91