A. SCHULMAN, INC. 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, 2007
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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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o
Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o No þ
As of February 28, 2007, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was approximately $521,088,000 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 27,940,539 Shares of Common Stock, $1.00
Par Value, at October 23, 2007.
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 2007
Annual Meeting of Stockholders
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III
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A. Schulman, Inc. (the Company) was organized
as an Ohio corporation in 1928 and changed its state of
incorporation to Delaware in 1969.
The Company is engaged in the sale of plastic resins in various
forms, which are used as raw materials by its customers. To
identify reportable segments, the Company considered its
operating structure and the types of information subject to
regular review by its President and Chief Executive Officer, who
is the Chief Operating Decision Maker. On this basis, the
Company operates primarily in two geographic segments, North
America and Europe, including Asia (Europe).
BUSINESS ACTIVITIES
The Company combines basic resins purchased from plastic resin
producers and, through mixing and extrusion processes,
introduces additives that provide color, stabilizers, flame
retardants or other enhancements that may be required by a
customer. These compounds are formulated in the Companys
laboratories and technical centers and are manufactured in the
Companys 17 plastics compounding plants in its North
American and European segments. Customers for the Companys
plastic compounds include manufacturers, custom molders,
processors and extruders of a wide variety of plastic products
and parts. The Company generally produces compounds on the basis
of customer commitments and expectations.
The Companys products are sold to manufacturers and
suppliers in various markets such as packaging, automotive,
consumer products, electrical/electronics, office equipment and
agriculture. The compounds produced by the Company in these
various markets are used in a variety of consumer and commercial
products.
The Company also functions as a merchant, buying prime and
off-grade plastic resins and reselling these commodities,
without further processing, to a variety of users. The plastic
resins generally are purchased from major producers. In addition
to prime resins, the Company purchases supplies of off-grade
plastic resins resulting from overruns, changes in
customers specifications and failure to meet rigid prime
specifications. Historically, these materials have been in
continuous supply, generally in proportion to the total industry
production of plastic resins. The Company also acts as a
distributor for several major resin producers.
In fiscal 2006, the Company introduced its new
Invision®
sheet product and formed A. Schulman Invision, Inc., a wholly
owned subsidiary.
Invision®
is a revolutionary product based on cutting-edge technology that
is expected to provide high growth opportunities in many markets
around the world.
Invision®
is a multi-layered, extruded sheet product that reduces costs
and simplifies the manufacturing process for the Companys
customers, while providing a higher-performing and more
environmentally friendly alternative to existing plastic and
film materials that are painted or colored. The Company expects
Invision®
to appeal to customers in a variety of markets, both automotive
and non-automotive. The Company is focusing on automotive
applications to capitalize on the Companys market presence
and recognized capabilities. The initial production line was
completed in fiscal 2007 at the Companys Sharon Center
facility and began shipping some of its first full orders in the
last quarter of the fiscal year. In addition, the Company has
purchased land and is constructing a dedicated
Invision®
plant site in Findlay, Ohio. While
Invision®
did not produce operating income in fiscal 2007, the Company
believes this is a very large market that could have significant
sales and earnings in the years ahead.
During fiscal 2007, the Company announced multiple phases of a
restructuring plan to restore its North American segment to
profitability. The initiatives targeted reducing expenses and
improving efficiencies at all locations in the North American
segment. The Company has already started to realize some of the
cost savings as a result of the initiatives put in place,
although weakness in the marketplace has masked some of those
savings.
During the fourth quarter of fiscal 2007, the Company acquired
the Delta Plast Group, a European color masterbatch manufacturer
with operations in Sweden and Belgium. 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 results of operations and
financial position for the acquired companies are included in
the consolidated financial statements of the Company. The
acquisition is expected to expand the Companys offerings
of color masterbatches in the European segment. The earnings
from the acquisition had a minimal effect on consolidated
earnings for fiscal 2007.
3
The Companys manufacturing in each of its geographic
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:
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Polybatch®,
which is an additive or color concentrate used for modifying
various plastic resins and which provides various physical
properties required by customers;
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Papermatch®,
which is a plastic alternative to paper used for packaging,
menus, maps and other products.
Papermatch®
is printable and resistant to tearing, moisture and chemicals;
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Aqua-Sol®,
which is a polymer that is biodegradable and dissolves in water,
making it more environmentally friendly for uses such as medical
packaging, labels, barrier and embroidery films, and other
applications; and
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Polyblak®,
which is a line of black concentrates that are resistant to
weather and sunlight and are used in the production of plastic
pipe, black film and other black plastic items. This line of
products is manufactured by third parties for the Company.
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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:
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Polyflam®,
which is a flame retardant compound used in applications such as
telephone systems, terminal blocks, parts for color televisions,
electrical components and housings for household appliances and
outdoor products.
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Schulamid®,
which is a nylon compound that can be unfilled, reinforced or
impact-modified.
Schulamid®
is used in applications that require good impact strength and
resistance to high temperatures and chemicals. Typical
applications include under-the-hood automotive components and
various building and consumer products.
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Formion®,
which is a specialized compound that has good impact strength,
is resistant to abrasion and has performance characteristics
that do not decrease in low temperatures.
Formion®
is sold principally to the transportation industry for use in
bumper blocks and protective rub strips.
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Polypur®,
which is a reinforced and alloyed thermoplastic polyurethane
that has impact resistance and molding properties for automotive
applications such as exterior side moldings, grilles, body side
moldings and other painted parts.
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Clarix®,
which is a thermoplastic ionomer resin offering scratch
resistance, barrier properties, chemical resistance and superior
clarity.
Clarix®
is ideal for many diverse applications including packaging,
automotive paintless parts, textile and metal coatings, footwear
components, sporting goods and polymer modifiers.
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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
4
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:
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Polytrope®,
which is a thermoplastic elastomer that has high resiliency and
good impact resistance. Presently, the principal market for this
product is the domestic automotive industry and typical
applications include valance panels, body side moldings, grilles
and bumper rub strips. Parts molded from
Polytrope®
weigh less than equivalent metal parts, are impact-resistant and
may be painted to match adjoining exterior body parts.
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Polyfort®,
which is a reinforced polypropylene compound for applications
that require stiffness and resistance to heat distortion, such
as coffee makers, interior trim and under-the-hood products for
automobiles.
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Schulink®,
which is a crosslink polyethylene-based compound, is used in
rotational molding applications requiring high strength and
chemical resistance, such as industrial doors and commercial
waste containers.
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Invision®,
which is a thermoplastic elastomer, is a PVC alternative that
can be injection molded, blow molded or extruded. It is a
polyolefin compound with properties similar to PVC. It can be
used in automotive interiors, trim for furniture, appliances and
industrial components.
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Polyaxis®,
which is a polyethylene resin compound used for rotationally
molded applications such as canoes, kayaks and agricultural
tanks.
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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 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 approximate amount and percentage of net consolidated sales
for each of the Companys product families for the three
fiscal years ended August 31, 2007 are as follows:
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2007
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2006
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2005
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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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627,268
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35
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$
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579,825
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36
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$
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501,159
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35
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Polyolefins
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543,870
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30
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495,163
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31
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424,066
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30
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Engineered compounds
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426,382
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24
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393,312
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24
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377,008
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26
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Polyvinyl chloride (PVC)
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64,658
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4
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64,174
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4
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54,952
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4
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Tolling
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21,450
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1
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16,482
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1
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16,117
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1
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Other
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103,428
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6
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67,430
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4
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59,894
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4
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$
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1,787,056
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100
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$
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1,616,386
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100
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$
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1,433,196
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100
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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.
5
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 subsidiary located in St.
Thomas, Ontario, Canada, manufactures engineered and various
other plastic compounds. This subsidiary also acts as a
distributor for major resin producers for injection molding.
This subsidiarys products are used primarily for
automotive applications.
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 other subsidiaries of the Company 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.
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. 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 GmbH, 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.
6
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, was
acquired in fiscal 2007. This subsidiary produces specialized
color masterbatches. Deltaplast NV, a subsidiary located in
Opglabbeek, Belgium, was also acquired in fiscal 2007 and also
produces color masterbatches.
A. Schulman Plastik Sanayi Ve Ticaret, a subsidiary located
in Istanbul, Turkey, was established in fiscal 2007. This
subsidiary is primarily a distributor of plastic resins in the
Turkish market.
JOINT VENTURES
The Company, through its wholly-owned subsidiary ASI Investments
Holding Co., 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.
The Company, through its wholly-owned subsidiary A. Schulman
International, Inc., 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, 2007, the Company had 980 employees
in its North American segment and 1,491 employees in its
European segment. Approximately 80% of the Companys hourly
production employees are represented by various unions under
collective bargaining agreements. None of these agreements which
are expiring next year represent a significant portion of these
employees.
The Company has laboratory facilities at a majority of its
plants staffed by 292 technical personnel. The Companys
plastic compounding business is, to a degree, dependent on its
ability to hire and retain qualified technical personnel. These
personnel are involved in activities relating to the testing and
sampling of material for conformity with product specifications
and the development of new compounds. The Company has generally
been successful in hiring or retaining such personnel.
RESEARCH AND
DEVELOPMENT
A large part of the Companys technical activities relate
to the continuous refinement of compounds for specific
applications of customers. 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, $5.5 million and
$4.8 million in fiscal years 2007, 2006 and 2005,
respectively. The increase in these activities is primarily
related to the new
Invision®
sheet product and to support new consumer packaging and
automotive applications.
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
7
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, 2007, 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
principal types of plastic resins used in the manufacture of the
Companys proprietary plastic compounds are polypropylene,
PVC (polyvinyl chloride), polyethylene, polystyrene, nylon, ABS
(acrylonitrile butadiene styrene) 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 Company is generally not subject to unusual 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
assure 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 generally allows its customers to return
merchandise for failure to meet pre-agreed quality standards or
specifications; however, the Company employs quality assurance
practices that minimize customer returns.
COMPETITION
The Companys business is highly competitive. The Company
competes with producers of basic plastic resins, many of which
also operate compounding plants, as well as other independent
plastic compounders. The producers of basic plastic resins
generally are large producers of petroleum and chemicals, which
are much larger than the Company and have greater financial
resources. Some of these producers compete with the Company
principally in such competitors own respective local
market areas, while other producers compete with the Company on
a global basis.
The Company also competes with other merchants and distributors
of plastic resins and other products. 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.
8
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.
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, such as our
Invision®
product line. The development and commercialization of new
products, including
Invision®,
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 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.
Our sales,
profitability, operating results and cash flows are sensitive to
global economic conditions and cyclicality, and could be
adversely affected during economic downturns.
General economic conditions 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
political instability or hostilities in oil-producing countries
and supply
9
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 raw materials, 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 raw materials, products 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 raw materials, finished products and
wastes. We may incur substantial costs, including fines,
damages, criminal or civil sanctions, remediation costs, or
experience interruptions in our operations for violations of
these laws.
Also, national and state environmental statutes impose strict,
and under some circumstances, joint and several liability for
the cost of investigations and remedial actions on any company
that generated the waste, arranged for disposal of the waste,
transported the waste to the disposal site or selected the
disposal site, as well as on the owners and operators of these
sites. Any or all of the responsible parties may be required to
bear all of the costs of clean up, regardless of fault or
legality of the waste disposal or ownership of the site, and may
also be subject to liability for natural resource damages. It is
possible that we will 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.
10
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.
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 a substantial portion of our business outside of the
United States. We and our joint ventures currently have
12 manufacturing facilities located outside the United
States, including facilities and offices located in Mexico,
Canada, Belgium, France, Germany, Poland, Hungary, Indonesia,
Italy, Spain, Switzerland, China, Luxembourg, Sweden, Turkey,
South Korea, Czech Republic, Denmark and the United Kingdom. We
expect sales from international markets to continue to represent
a significant portion of our net sales. Accordingly, our
business is subject to risks related to the differing legal,
political, social and regulatory requirements and economic
conditions of many jurisdictions. Risks inherent in
international operations include the following:
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fluctuations in exchange rates may affect product demand and may
adversely affect the profitability in U.S. dollars of
products and services we provide in international markets where
payment for our products and services is made in the local
currency;
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intellectual property rights may be more difficult to enforce;
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foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, or adopt other restrictions on
foreign trade or investment, including currency exchange
controls;
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unexpected adverse changes in foreign laws or regulatory
requirements may occur;
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11
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agreements may be difficult to enforce and receivables difficult
to collect;
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compliance with a variety of foreign laws and regulations may be
burdensome;
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unexpected adverse changes in export duties, quotas and tariffs
and difficulties in obtaining export licenses;
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general economic conditions in the countries in which we operate
could have an adverse effect on our earnings from operations in
those countries;
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foreign operations may experience staffing difficulties and
labor disputes;
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foreign governments may nationalize private enterprises;
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our business and profitability in a particular country could be
affected by political or economic repercussions on a domestic,
country specific or global level from terrorist activities and
the response to such activities; and
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unanticipated events, such as geopolitical changes, could result
in a write-down of our investment in the affected joint venture
in Indonesia.
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Our success as a global business will depend, in part, upon our
ability to succeed in differing legal, regulatory, economic,
social and political conditions by developing, implementing and
maintaining policies and strategies that are effective in each
location where we and our joint ventures do business.
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 or delays in achieving or achievement of less than
the anticipated financial benefit from initiatives related to
cost reductions and improving efficiencies.
We have implemented significant restructuring which are expected
to reduce costs and improve efficiencies. If these initiatives
are not as successful as planned, the result could negatively
impact our results of operations or financial condition.
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 valuable patents, trade secrets and know-how,
domain names, trademarks and trade names, including certain
marks that are material to our business, which are identified
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.
12
Although our
pension and postretirement plans are currently funded in
accordance with applicable laws, 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 or insurance
coverage could also have a negative impact on our financial
condition. Such threats or events could also result in
operational disruption, including difficulty in obtaining raw
materials, difficulty in delivering products to customers, or
general delay and inefficiencies in our supply chain.
Additionally, our manufacturing facilities, both within the
United States and those located abroad, may become direct
targets or indirect casualties of terrorist attacks, leading to
severe damage including loss of life and loss of property.
Increased
indebtedness could restrict growth and adversely affect our
financial health.
As of August 31, 2007, our debt on a consolidated basis was
approximately $126.3 million. We are more heavily leveraged
than in the past and an increase in the level of indebtedness
could have significant consequences. For example, it could:
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limit our ability to satisfy current debt obligations;
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increase interest expense due to the change in interest rates
and increase in debt levels;
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require us to dedicate a significant portion of cash flow to
repay principal and pay interest on the debt, reducing the
amount of funds that would be available to finance operations
and other business activities;
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impair our ability to obtain financing in the future for working
capital, capital expenditures, research and development, or
acquisitions;
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13
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make us vulnerable to economic downturns or adverse developments
in our business or markets; and
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place us at a competitive disadvantage compared to competitors
with less debt.
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We expect to pay expenses and to pay principal and interest on
current and future debt from cash provided by operating
activities. Therefore, our ability to meet these payment
obligations will depend on future financial performance which is
subject in part to numerous economic, business and financial
factors beyond our control. If our cash flow and capital
resources are insufficient to fund our increased debt, we may be
forced to reduce or delay expansion plans and capital
expenditures, limit payment of dividends, sell material assets
or operations, obtain additional capital or restructure our debt.
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
the acquisitions may not perform as expected.
During fiscal 2007, we made an acquisition intended to
complement or expand our business, and may continue to do so in
the future. 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.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
14
The Company operates seven plants in North America, eight in
Europe and two in Asia. The following table indicates the
location of each plastics compounding plant, the approximate
annual plastics compounding capacity and approximate floor area,
including warehouse and office space and the geographic segment
that is principally supported by such plants:
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Approximate
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Approximate
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Approximate
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Floor Area
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Location
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Capacity (sq.
ft.)(3)
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Capacity
(lbs.)(1)
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(Square
Feet)
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(In
thousands)
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Bellevue, Ohio
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88,000
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(2)
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160
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Sharon Center, Ohio, Color Technology Center
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14,000
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113
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Sharon Center, Ohio, A. Schulman Invision, Inc.
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15,000
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(3)
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32
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Nashville, Tennessee
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34,000
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138
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San Luis Potosi, Mexico
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83,000
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187
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St. Thomas, Ontario, Canada
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74,000
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141
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Orange, Texas
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135,000
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182
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Total North American Segment
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15,000
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428,000
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953
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Bornem, Belgium
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147,000
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455
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Crumlin Gwent, South Wales
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77,000
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106
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Givet, France
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222,000
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219
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Nowa Biala, Poland
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2,000
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50
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Guangdong Province, China
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37,000
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112
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Kerpen, Germany
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154,000
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484
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Astorp, Sweden
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9,000
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27
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Opglabbeek, Belgium
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5,000
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17
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East Java, Indonesia (Joint Venture)
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29,000
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136
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Gorla Maggiore, Italy
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41,000
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115
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Total European Segment
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723,000
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1,721
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Total
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15,000
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1,151,000
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2,674
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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.
(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) 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 was completed in the fourth quarter of fiscal
2007.
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 49 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 in its North American and European segments.
The Company also owns a 158,000 square foot facility in
Akron, Ohio that, until December 31, 2000, was a
manufacturing operation. The facility is now used for
warehousing, logistics, product sampling and product development.
15
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 facility, which has a net book value of
approximately $1.5 million at August 31, 2007, is
currently designated as an asset held-for-sale and is included
in property, plant and equipment in the Companys
Consolidated Balance Sheets.
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ITEM 3.
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LEGAL
PROCEEDINGS
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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.
During fiscal 2006, a railroad company filed suit against the
Company seeking compensatory damages and reimbursement of
environmental costs to investigate and remediate property
located near its Bellevue, Ohio facility. In fiscal 2007, the
Company and the railroad company agreed to a settlement that the
Company would pay the railroad company a settlement of
approximately $64,000. The Company paid this settlement in
fiscal 2007 and was released from liability for current and
future right of way investigations on this property.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended August 31, 2007.
EXECUTIVE
OFFICERS OF THE COMPANY
The age (as of October 15, 2007), business experience
during the past five years and offices presently 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.
Terry L. Haines: Age 61; President and
Chief Executive Officer of the Company since January 1991.
Paul F. DeSantis: Age 43; Chief Financial
Officer and Treasurer of the Company since April 2006; joined
the Company as Vice President of Finance in January 2006; prior
to that time, he was with Scotts Miracle-Gro where he held
various financial roles since 1997 before becoming Vice
President and Corporate Treasurer of the Company in 2003.
Alain C. Adam: Age 58; Vice
President Global Automotive Market Development of
the Company since March 2006; prior to that time Vice
President International Automotive Operations since
September 1, 1999.
Barry A. Rhodes: Age 47; Executive Vice
President and Chief Operating Officer of North America since
March 2006; prior to that time Vice President North
American Sales and Marketing since October 2001.
Ronald G. Andres: Age 57; Vice President
and General Manager Engineered Compounds since June
2007, prior to that time, Vice President North
American Operations since March 2006; prior to that time, Vice
President North American Manufacturing since
October 20, 1999.
Gary J. Elek: Age 55; Vice President and
Controller for North America since March 2006; prior to that
Corporate Controller since February 2004; prior to that time,
Executive Vice President, Corporate Development of FirstMerit
Corporation from 1997 to 2004.
John M. Myles: Age 63; retired Vice
President Research and Development since
October 28, 2003, prior to that time, Vice
President North American Purchasing since October
1997. He retired from the Company on August 31, 2007.
16
|
|
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 15, 2007, there were 562 holders of record of the
Companys Common Stock. This figure does not include
beneficial owners who hold shares in nominee name. The closing
stock price on October 15, 2007 was $20.78.
The quarterly high and low closing stock prices for fiscal 2007
and 2006 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
Common Stock
Price Range
|
|
High -
Low
|
|
|
High -
Low
|
|
|
1st Quarter
|
|
$
|
25.04 - 22.49
|
|
|
$
|
20.95 - 16.77
|
|
2nd Quarter
|
|
$
|
23.03 - 19.90
|
|
|
$
|
25.80 - 20.80
|
|
3rd Quarter
|
|
$
|
24.26 - 20.31
|
|
|
$
|
25.14 - 22.80
|
|
4th Quarter
|
|
$
|
25.95 - 19.82
|
|
|
$
|
24.46 - 21.17
|
|
The quarterly cash dividends declared for fiscal 2007 and 2006
are presented in the table below.
|
|
|
|
|
|
|
|
|
Cash Dividends
Per Share
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
1st Quarter
|
|
$
|
0.145
|
|
|
$
|
0.145
|
|
2nd Quarter
|
|
|
0.145
|
|
|
|
0.145
|
|
3rd Quarter
|
|
|
0.145
|
|
|
|
0.145
|
|
4th Quarter
|
|
|
0.145
|
|
|
|
0.145
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.580
|
|
|
$
|
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 approximately
$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. It
is anticipated that the Company will complete the Repurchase
Program through open market repurchases from time to time. The
number of shares to be repurchased and the timing of repurchases
will depend upon the prevailing market prices and any other
considerations that may, in the opinion of the Board of
Directors or management, affect the advisability of repurchasing
shares. The Repurchase Program replaced the Companys prior
repurchase authorization, under which approximately
1.7 million shares had remained authorized for repurchase.
The Companys purchases of its common stock under the
Repurchase Program during the fourth quarter of fiscal 2007 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
of
|
|
|
Maximum Number
of
|
|
|
|
|
|
|
Average Price
Paid
|
|
|
Shares Purchased
as
|
|
|
Shares that may
yet be
|
|
|
|
Total Number
of
|
|
|
per Share
(Excluding
|
|
|
Part of a
Publicly
|
|
|
Purchased under
the
|
|
|
|
Shares
Repurchased
|
|
|
Commissions)
|
|
|
Announced
Plan
|
|
|
Plan
|
|
|
Beginning shares available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,979,653
|
|
June 1-30, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
3,979,653
|
|
July 1-31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
3,979,653
|
|
August 1-31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
3,979,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
3,979,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2007(1)
|
|
|
2006(1)
|
|
|
2005(1)
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands,
except share and per share data)
|
|
|
Net sales
|
|
$
|
1,787,056
|
|
|
$
|
1,616,386
|
|
|
$
|
1,433,196
|
|
|
$
|
1,239,091
|
|
|
$
|
1,100,457
|
|
Cost of sales
|
|
|
1,574,234
|
|
|
|
1,396,440
|
|
|
|
1,240,557
|
|
|
|
1,055,608
|
|
|
|
940,152
|
|
Other costs, expenses, etc.
|
|
|
169,686
|
|
|
|
163,001
|
|
|
|
145,697
|
|
|
|
131,084
|
|
|
|
124,775
|
|
Interest and other income
|
|
|
(4,138
|
)
|
|
|
(5,202
|
)
|
|
|
(2,394
|
)
|
|
|
(2,252
|
)
|
|
|
(2,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,739,782
|
|
|
|
1,554,239
|
|
|
|
1,383,860
|
|
|
|
1,184,440
|
|
|
|
1,062,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
47,274
|
|
|
|
62,147
|
|
|
|
49,336
|
|
|
|
54,651
|
|
|
|
37,597
|
|
Provision for U.S. and foreign income taxes
|
|
|
24,655
|
|
|
|
29,485
|
|
|
|
17,243
|
|
|
|
26,745
|
|
|
|
21,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,619
|
|
|
$
|
32,662
|
|
|
$
|
32,093
|
|
|
$
|
27,906
|
|
|
$
|
15,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
874,115
|
|
|
$
|
843,245
|
|
|
$
|
784,362
|
|
|
$
|
724,096
|
|
|
$
|
643,872
|
|
Long-term debt
|
|
$
|
123,080
|
|
|
$
|
120,730
|
|
|
$
|
63,158
|
|
|
$
|
49,679
|
|
|
$
|
68,698
|
|
Total stockholders equity
|
|
$
|
427,013
|
|
|
$
|
403,492
|
|
|
$
|
462,103
|
|
|
$
|
435,237
|
|
|
$
|
382,821
|
|
Average number of common shares outstanding, net of treasury
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,032,348
|
|
|
|
29,961,580
|
|
|
|
30,619,780
|
|
|
|
30,128,117
|
|
|
|
29,496,281
|
|
Diluted
|
|
|
27,369,408
|
|
|
|
30,394,210
|
|
|
|
31,049,790
|
|
|
|
30,575,057
|
|
|
|
29,845,497
|
|
Diluted earnings per common share
|
|
$
|
0.82
|
|
|
$
|
1.07
|
|
|
$
|
1.03
|
|
|
$
|
0.91
|
|
|
$
|
0.53
|
|
Cash dividends per common share
|
|
$
|
0.58
|
|
|
$
|
0.58
|
|
|
$
|
0.57
|
|
|
$
|
0.54
|
|
|
$
|
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 2,500 employees
and 17 plants in countries in North America, Europe and Asia.
The Company operates within two segments, North America and
Europe (which includes Asia). Both segments also include
distributors which service some of the largest chemical
companies in the world.
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. Recently, the Company introduced its new
Invision®
sheet product.
Invision®
is a revolutionary product based on cutting-edge technology that
is expected to provide high growth opportunities in many markets
around the world. This business had a successful
start-up of
the initial production line at Sharon Center, Ohio in fiscal
2007 and began shipping some of its first full orders. The
Company is constructing a dedicated facility to manufacture the
Invision®
product.
During fiscal 2007, the Company acquired the Delta Plast Group,
a European color masterbatch manufacturer with operations in
Sweden and Belgium. The acquisition will expand the
Companys European segment color masterbatch capabilities
and allow the Company to better meet customers needs. The
earnings from the acquisition had a minimal effect on
consolidated earnings for fiscal 2007.
During fiscal 2007, the Company announced multiple phases of a
restructuring plan to restore its North American segment to
profitability. The initiatives targeted reducing expenses and
improving efficiencies at all locations in the North American
segment. The Company has already started to realize some of the
cost savings as a result of the initiatives put in place,
although weakness in the marketplace has masked some of those
savings.
Net income for the 2007 fiscal year was $22.6 million, or
$0.82 per diluted share, compared to last years net income
of $32.7 million, or $1.07 per diluted share. The
translation effect of foreign currencies, primarily the euro,
increased net income by $3.8 million or $0.14 per diluted
share.
18
The Company had record sales performance but declined in its
gross margin in fiscal 2007. The following significant and
unusual items occurred that impacted net income in fiscal 2007:
|
|
|
|
|
Other income of $1.5 million (before and after-tax) related
to the proceeds from an insurance settlement for a hurricane
claim;
|
|
|
|
Charges of $0.6 million ($1.0 million before-tax)
related to the Companys evaluation of a possible
acquisition target;
|
|
|
|
Income of $1.4 million ($2.4 million before-tax) for
the Companys change in its estimate for customer claims
reserves;
|
|
|
|
Tax charges of $1.3 million to reduce its German deferred
tax asset as a result of a statutory tax rate decline; and
|
|
|
|
Charges of $2.1 million (before and after-tax) related to
the North American restructuring.
|
A detailed discussion of the Companys fiscal 2007
performance is included in the Results of Operations section.
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, which are North America and Europe, including Asia
(Europe), 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
|
|
|
477,081
|
|
|
|
493,644
|
|
|
|
(16,563
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
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 the year due to the increase
in European tonnage of 5.5%. North American tonnage was flat
compared to fiscal 2006 primarily due to a weakness in the
marketplace in the first half of the fiscal year. The increase
in European tonnage was a result of the increased 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
|
|
|
16
|
|
|
|
17
|
|
Other
|
|
|
47
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
For the North America segment, 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 recently with the Company
observing a decline in automotive production of the major
Detroit-based automobile manufacturers during this period. For
the
19
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
are 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
|
|
|
41,756
|
|
|
|
56,120
|
|
|
|
(14,364
|
)
|
|
|
(25.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
212,822
|
|
|
$
|
219,946
|
|
|
$
|
(7,124
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit %
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
13.1
|
%
|
|
|
14.6
|
%
|
|
|
|
|
|
|
|
|
North America
|
|
|
8.8
|
%
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
11.9
|
%
|
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
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 were not able to be fully passed 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 North America
decreased for the year ended August 31, 2007. North America
also experienced a decline in production, combined with
successful efforts to reduce inventory, which negatively
impacted the capacity utilization at the North American
manufacturing facilities primarily in the first half of the
year. The gross profit decreases were the result of a change in
product mix, increased raw materials costs that the Company was
not able to fully pass on through increased selling prices and
increased logistics costs on a lower volume of sales. Also
contributing to the margin shortfall was additional expense of
$2.6 million for the year ended August 31, 2007
related to the Companys investment in the new
Invision®
product line as compared to last year. Finally, the North
American gross profit was negatively impacted by
20
accelerated depreciation of approximately $1.1 million for
the year ended August 31, 2007. This accelerated
depreciation related to the Companys announced
restructuring plan. During fiscal 2007, the North American
segment experienced sequential improvement in gross profit each
quarter since the first quarter of fiscal 2007. The
Companys restructuring savings plans have contributed to
these results.
A comparison of capacity utilization levels is as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Europe
|
|
|
93
|
%
|
|
|
94
|
%
|
North America
|
|
|
84
|
%
|
|
|
83
|
%
|
Worldwide
|
|
|
90
|
%
|
|
|
90
|
%
|
Capacity utilization for North America and Europe 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. The Company
has plans to remove capacity from its Orange, Texas plant to
balance capacity with demand. 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,
have negatively effected capacity utilization. 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
|
|
$
|
10,745
|
|
|
|
7.2
|
%
|
Effect of foreign currency translation
|
|
|
6,383
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
Total change in selling, general and administrative expenses,
excluding the effect of foreign currency translation
|
|
$
|
4,362
|
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
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 $3.4 million, or
2.2%, for the year ended August 31, 2007. The remaining
$3.4 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 North American selling,
general and administrative expenses of approximately
$0.5 million. This was primarily a result of the
Companys North American restructuring and efforts to
control the levels of selling, general and administrative
expenses despite 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
applications of customers. 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.
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
21
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.
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.
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. It is anticipated that amounts not covered by insurance
will not have a material impact on future 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 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. The two manufacturing lines at the
Orange, Texas plant are anticipated to continue production into
the first quarter of fiscal 2008 while the Orange, Texas
warehouse was closed during the third quarter of fiscal 2007. In
connection with this plan, the Company reduced its workforce by
65 positions.
In February 2007, the Company announced the second phase of its
North America restructuring plan which implements several
initiatives that will improve the Companys operations and
profitability in North America.
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 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.
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
|
|
|
Accrual
Balance
|
|
|
|
Charges
|
|
|
Paid Fiscal
2007
|
|
|
August 31,
2007
|
|
|
|
(In
thousands)
|
|
|
Employee related costs
|
|
$
|
980
|
|
|
$
|
(906
|
)
|
|
$
|
74
|
|
Other costs
|
|
|
68
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
1,048
|
|
|
$
|
(974
|
)
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation, included in North America cost of
sales in 2007
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
The employee related costs include severance payments and
medical insurance for employees whose positions have been
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 will 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.
Income (loss) before interest, restructuring, loss on
extinguishment of debt and taxes is not a measure of performance
calculated in accordance with accounting principles generally
accepted in the United States of America. Management of the
Company believes that income (loss) before interest,
restructuring, loss on extinguishment of debt and taxes is a
useful financial measure because it provides management and
investors with an additional means of evaluating the
Companys operating performance. The following table
reconciles segment income (loss) before interest, restructuring,
loss on extinguishment of debt and taxes to income before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Difference
|
|
|
|
(In
thousands)
|
|
|
Europe
|
|
$
|
73,266
|
|
|
$
|
79,126
|
|
|
$
|
(5,860
|
)
|
North America
|
|
|
(19,132
|
)
|
|
|
(9,069
|
)
|
|
|
(10,063
|
)
|
Restructuring expense North America
|
|
|
(1,048
|
)
|
|
|
|
|
|
|
(1,048
|
)
|
Interest expense, net
|
|
|
(5,812
|
)
|
|
|
(2,924
|
)
|
|
|
(2,888
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
(4,986
|
)
|
|
|
4,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
47,274
|
|
|
$
|
62,147
|
|
|
$
|
(14,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European income before interest, restructuring, loss on
extinguishment of debt and taxes 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, income before
interest, restructuring, loss on extinguishment of debt and
taxes declined $14.0 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.
North American income before interest, restructuring, loss on
extinguishment of debt and taxes for the year ended
August 31, 2007 decreased because of a significant decline
in gross profit margins. The North American gross profit
includes approximately $1.1 million of accelerated
depreciation related to the North American restructuring. The
significant decline in gross profit was partially offset by a
decline in selling, general and administrative expenses of
$0.5 million 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
|
|
|
|
(In thousands,
except for %s)
|
|
|
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
|
)
|
Losses with no tax benefit
|
|
|
8,854
|
|
|
|
18.7
|
|
|
|
5,997
|
|
|
|
9.6
|
|
Provision for repatriated earnings
|
|
|
|
|
|
|
|
|
|
|
2,243
|
|
|
|
3.6
|
|
Loss on extinguishment of debt no tax benefit
|
|
|
|
|
|
|
|
|
|
|
1,745
|
|
|
|
2.8
|
|
Ongoing tax audits
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
RESULTS OF
OPERATIONS
2006
Net income for the 2006 fiscal year was $32.7 million, or
$1.07 per diluted share, compared to fiscal 2005 net income
of $32.1 million, or $1.03 per diluted share. Net income in
fiscal 2006 increased slightly as compared to the prior year and
earnings per diluted share increased due to the reduced number
of common shares outstanding as a result of the Companys
share repurchase program that was implemented in fiscal 2006 and
the purchase of the Companys common shares through a
self-tender offer. The translation effect of foreign currencies,
primarily the euro, decreased net income by $1.6 million or
$0.05 per diluted share.
The Company improved its gross margin in fiscal 2006; however
the following significant and unusual items occurred that
impacted net income by approximately $7.3 million:
|
|
|
|
|
Charge related to the extinguishment of debt of approximately
$5.0 million;
|
|
|
|
Charges of approximately $1.2 million related to ongoing
tax audits;
|
|
|
|
Income from a life insurance settlement of approximately
$0.5 million;
|
|
|
|
Tax charge of approximately $2.2 million related to the
repatriation of dividends from Europe; and
|
|
|
|
Income of approximately $0.6 million resulting from
compensation received from the cancellation by suppliers of
certain European distribution agreements.
|
Net income also included approximately $4.5 million of
expense related to the Companys adoption of Statement of
Financial Accounting Standards (SFAS) 123R, Share-Based Payment
(SFAS 123R), in fiscal 2006. There were no
charges related to SFAS 123R in fiscal year 2005.
Net consolidated sales for fiscal 2006 were $1.616 billion,
an increase of 12.8% over sales of $1.433 billion in fiscal
2005. A comparison of net consolidated sales by business
segments, which are North America and Europe, including Asia
(Europe), is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
Sales
|
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands,
except for %s)
|
|
|
|
|
|
North America
|
|
$
|
493,644
|
|
|
$
|
439,441
|
|
|
$
|
54,203
|
|
|
|
12.3
|
|
Europe
|
|
|
1,122,742
|
|
|
|
993,755
|
|
|
|
128,987
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,616,386
|
|
|
$
|
1,433,196
|
|
|
$
|
183,190
|
|
|
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the percentage change in 2006 net
consolidated sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Tonnage
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Price/product mix
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation effect
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increase in sales
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide tonnage was up 9.1% for the year as European tonnage
was up 14.8% offsetting a North American tonnage decrease of
2.1%. The increase in European tonnage was a result of the
improved European economic environment while North American
tonnage declined slightly due to competition and weakness in the
marketplace. The translation effect of foreign currencies,
primarily the euro, decreased net consolidated sales by
approximately $29.2 million or 2.0% in fiscal 2006.
24
The two largest markets served by the Company are the packaging
and automotive markets. The approximate percentage of net
consolidated sales by market for 2006 compared to 2005 is as
follows:
|
|
|
|
|
|
|
|
|
Market
|
|
2006
|
|
|
2005
|
|
|
Packaging
|
|
|
36
|
%
|
|
|
37
|
%
|
Automotive
|
|
|
17
|
|
|
|
18
|
|
Other
|
|
|
47
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Other markets include appliances, construction, medical,
consumer products, electrical/electronics, office equipment and
agriculture.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Product
Family
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands,
except for %s)
|
|
|
Color and additive concentrates
|
|
$
|
579,825
|
|
|
|
36
|
|
|
$
|
501,159
|
|
|
|
35
|
|
Polyolefins
|
|
|
495,163
|
|
|
|
31
|
|
|
|
424,066
|
|
|
|
30
|
|
Engineered compounds
|
|
|
393,312
|
|
|
|
24
|
|
|
|
377,008
|
|
|
|
26
|
|
Polyvinyl chloride (PVC)
|
|
|
64,174
|
|
|
|
4
|
|
|
|
54,952
|
|
|
|
4
|
|
Tolling
|
|
|
16,482
|
|
|
|
1
|
|
|
|
16,117
|
|
|
|
1
|
|
Other
|
|
|
67,430
|
|
|
|
4
|
|
|
|
59,894
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,616,386
|
|
|
|
100
|
|
|
$
|
1,433,196
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A comparison of gross profit dollars and percentages by business
segment for 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
Gross Profit
$
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands,
except for %s)
|
|
|
Europe
|
|
$
|
163,826
|
|
|
$
|
146,357
|
|
|
$
|
17,469
|
|
|
|
11.9
|
|
North America
|
|
|
56,120
|
|
|
|
46,282
|
|
|
|
9,838
|
|
|
|
21.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
219,946
|
|
|
$
|
192,639
|
|
|
$
|
27,307
|
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit %
|
|
|
2006
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
14.6
|
%
|
|
|
14.7
|
%
|
|
|
|
|
|
|
|
|
North America
|
|
|
11.4
|
%
|
|
|
10.5
|
%
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
13.6
|
%
|
|
|
13.4
|
%
|
|
|
|
|
|
|
|
|
Gross profit margin increased twenty basis points on a year to
year comparison to 13.6% in fiscal 2006 from 13.4% in
fiscal 2005.
The increase of $17.5 million in gross profit dollars in
Europe in fiscal 2006 was primarily driven by the increased
tonnage as the gross profit percentage remained relatively flat
as compared to fiscal 2005. North America also showed a
significant increase in gross profit in fiscal 2006 as gross
profits were up $9.8 million or 21.3% from fiscal 2005.
This improvement in gross profit was the result of favorable
pricing and changes in product mix. Overall, the Company enjoyed
an increase in gross profit per pound in fiscal 2006, most
notably in North America.
A comparison of capacity utilization levels is as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Europe
|
|
|
94
|
%
|
|
|
83
|
%
|
North America
|
|
|
83
|
%
|
|
|
87
|
%
|
Worldwide
|
|
|
90
|
%
|
|
|
85
|
%
|
25
Worldwide capacity utilization increased by 5%. The increase in
European capacity utilization was the result of stronger
customer demand and product mix. In order to meet this increased
demand, some of Europes manufacturing facilities
temporarily added additional production shifts above the normal
production schedule during the second half of fiscal 2006. North
American capacity utilization decreased slightly from 2005 as a
result of continuing softening demand, the shutdown of the
largest production line at the Companys Texas facility due
to a mechanical issue and a two-week shutdown at the same Texas
facility because of Hurricane Rita.
A comparison of operating income (loss) by business segment for
the years 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Difference
|
|
|
|
(In
thousands)
|
|
|
Europe
|
|
$
|
79,126
|
|
|
$
|
62,777
|
|
|
$
|
16,349
|
|
North America
|
|
|
(9,069
|
)
|
|
|
(11,000
|
)
|
|
|
1,931
|
|
Restructuring expense North America
|
|
|
|
|
|
|
(182
|
)
|
|
|
182
|
|
Interest expense, net
|
|
|
(2,924
|
)
|
|
|
(2,259
|
)
|
|
|
(665
|
)
|
Loss on extinguishment of debt
|
|
|
(4,986
|
)
|
|
|
|
|
|
|
(4,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
62,147
|
|
|
$
|
49,336
|
|
|
$
|
12,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase of $16.3 million in European operating income
was primarily the result of the higher level of sales driven by
the $17.5 million or 11.9% increase in gross profit and
14.8% increase in tonnage from the prior year. European
operating expenses in fiscal 2006 remained relatively flat with
fiscal 2005 although the translation effect of foreign
currencies decreased operating expenses by $2.4 million.
Operating income in North America in fiscal 2006 improved
$1.9 million from the prior year, primarily because of
favorable pricing and product mix which increased gross profit
from the prior year. This increase was offset by an increase in
operating expenses as explained in the next paragraph.
Total Company selling, general and administrative expenses were
$148.5 million for fiscal 2006, up $10.7 million or
7.7% compared with fiscal 2005s total of
$137.8 million. The translation effect of foreign
currencies had a favorable impact, decreasing these expenses by
$2.1 million in 2006. Increases in these expenses, of which
the majority are in North America, included stock-based
compensation expense related to the Companys adoption of
SFAS 123R in fiscal 2006 of $4.5 million, costs
associated with the Companys CFO transition, incentive
compensation which was driven by the Companys increasing
common stock price, legal and professional fees, medical
insurance and various IT related projects. SFAS 123R
accounted for approximately half of the increase in selling,
general and administrative expenses.
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. All
periods presented prior to September 1, 2005 were accounted
for in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and
followed a nominal vesting period approach.
The adoption of SFAS 123R reduced income before taxes for
year ended August 31, 2006 by approximately
$4.5 million ($0.15 per basic and diluted share). These
expenses are included in selling, general and administrative
expenses in the accompanying consolidated statement of income.
The first quarter of fiscal 2006 included approximately
$1.0 million of charges related to the accelerated vesting
of retirement eligible employees under the non-substantive
vesting period approach applied to new grants after adoption.
The expense recorded did not impact income 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. In
addition, Unearned Stock Grant Compensation of $3.2 million
was reclassified to Other Capital in Stockholders Equity
upon adoption of SFAS 123R.
A large part of the Companys technical activities relate
to the continuous refinement of compounds for specific
applications of customers. 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 $5.5 million in fiscal 2006 and approximately
$4.8 million in fiscal 2005. The increase in these
activities is primarily related to the new
Invision®
sheet product.
26
Interest expense was $6.2 million in fiscal 2006 compared
to $3.7 million in fiscal 2005. The increase of
$2.5 million was the result of an increased level of
borrowings required for the Companys common stock tender
offer and open market common stock repurchase plans which were
implemented in fiscal 2006.
Foreign currency transaction losses represent changes in the
value of currencies in major areas where the Company operates.
During fiscal 2006 the Company incurred foreign currency
transaction losses of approximately $2.1 million compared
to approximately $2.8 million in fiscal 2005. The
strengthening of the Canadian dollar accounted for
$1.3 million of this loss in fiscal 2006.
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.
Other income in fiscal 2006 was approximately $1.9 million,
which 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. Other income of $0.9 million in 2005
included approximately $0.8 million of income related to
gain on the sale of an office in Europe.
In connection with the Companys new financing
arrangements, as discussed hereafter in the Liquidity and
Capital Resources section, the Company prepaid its
$50.0 million private placement 7.27% senior notes and
terminated its $100.0 million revolving credit arrangement.
The Company recorded a loss on extinguishment of debt of
approximately $5.0 million which was comprised of the
following:
|
|
|
|
|
|
|
Amount
|
|
|
|
(In
thousands)
|
|
|
Make-whole provision for prepayment of 7.27% senior notes
|
|
$
|
3,335
|
|
Interest rate swap termination fee
|
|
|
1,456
|
|
Write-off of deferred loan fees related to extinguished debt
|
|
|
398
|
|
Write-off of deferred interest from 7.27% senior notes
|
|
|
(218
|
)
|
Revolving credit agreement termination fees
|
|
|
15
|
|
|
|
|
|
|
|
|
$
|
4,986
|
|
|
|
|
|
|
A reconciliation of the statutory U.S. federal income tax
rate with the effective tax rates of 47.4% in 2006 and 35.0% in
2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
(In thousands,
except for %s)
|
|
|
Statutory U.S. tax rate
|
|
$
|
21,752
|
|
|
|
35.0
|
%
|
|
$
|
17,268
|
|
|
|
35.0
|
%
|
Amount of foreign income taxes less than U.S. taxes at statutory
rate
|
|
|
(4,043
|
)
|
|
|
(6.5
|
)
|
|
|
(2,009
|
)
|
|
|
(4.1
|
)
|
Losses with no tax benefit
|
|
|
5,997
|
|
|
|
9.6
|
|
|
|
5,904
|
|
|
|
12.0
|
|
Mexico valuation allowance on net asset tax
|
|
|
|
|
|
|
|
|
|
|
(3,270
|
)
|
|
|
(6.6
|
)
|
Settlement of tax claim in Canada
|
|
|
|
|
|
|
|
|
|
|
(1,104
|
)
|
|
|
(2.2
|
)
|
Provision for repatriated earnings
|
|
|
2,243
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt no tax benefit
|
|
|
1,745
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
Ongoing tax audits
|
|
|
1,152
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
639
|
|
|
|
1.0
|
|
|
|
454
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,485
|
|
|
|
47.4
|
%
|
|
$
|
17,243
|
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In October 2005, the Company reached an agreement with a group
of investors led by Barington Capital Group, L.P. (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
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
27
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 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 in
the 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.
CRITICAL
ACCOUNTING POLICIES
The Company has identified critical accounting policies that, as
a result of the judgments, uncertainties, and the operations
involved, could result in material changes to its financial
condition or results of operations under different conditions or
using different assumptions. The Companys most critical
accounting policies relate to the allowance for doubtful
accounts, inventory reserve, restructuring charges, purchase
accounting and goodwill, long-lived assets, income taxes,
pension and other postretirement benefits and stock-based
compensation.
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
Management records an allowance for doubtful accounts receivable
based on the current and projected credit quality of the
Companys customers, historical experience, customer
payment history, expected trends and other factors that affect
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.
28
RESTRUCTURING
CHARGES
Restructuring charges are recorded in accordance with
SFAS 146, Accounting for Costs Associated with Exit or
Disposal Activities. Liabilities for costs associated with an
exit or disposal activity are recognized when the liability is
incurred. Fair value is the basis for the measurement of any
asset write-downs that are recorded in accordance with
SFAS 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.
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, or at least annually. 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.
INCOME
TAXES
The Companys provision for income taxes involves a
significant amount of judgment by management. This provision is
impacted by the income and tax rates of the countries where the
Company operates. A change in the geographical source of the
Companys income can have a significant effect on the tax
rate. No taxes are provided on earnings which are permanently
reinvested.
Various taxing authorities periodically audit the Companys
tax returns. These audits may include questions regarding the
Companys tax filing positions, including the timing and
amount of deductions and the allocation of income to various tax
jurisdictions. In evaluating the exposures connected with these
various tax filing positions the Company records tax liabilities
for probable exposures. 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
statement of income.
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 would 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.
29
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. The
cumulative difference between actual experience and assumed
experience is included in accumulated other comprehensive
income. These gains or losses are recognized in expense over the
average future working lifetime of employees to the extent that
the cumulative experience exceeds 10% of the greater of the
Projected Benefit Obligation (or Accumulated Postretirement
Benefit Obligation) and assets. Additionally, the current
accounting principles defer the amount of any plan changes.
These amounts are included in accumulated other comprehensive
income and then recognized in expense over the average future
working lifetime of the affected group. With the adoption at
August 31, 2007 of SFAS 158, Employers
Accounting for Defined Benefit Pension and Postretirement Plans,
the full unfunded liability of all the Companys defined
benefit pension and other postretirement benefit plans were
included on the Companys consolidated balance sheet at
August 31, 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 5.5% for fiscal 2007. For the other
postretirement benefit plan, the rate is 6.25% 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
2007.
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, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on
|
|
|
Impact on
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
|
|
|
2007
|
|
|
2007
|
|
|
|
Impact on
|
|
|
Projected
Benefit
|
|
|
Projected
Benefit
|
|
|
|
2007
|
|
|
Obligation for
|
|
|
Obligation for
|
|
Change in
Assumption
|
|
Benefits
Expense
|
|
|
Pension
Plans
|
|
|
Postretirement
Plans
|
|
|
|
(In
thousands)
|
|
|
25 basis point decrease in discount rate
|
|
$
|
373
|
|
|
$
|
3,395
|
|
|
$
|
755
|
|
25 basis point increase in discount rate
|
|
$
|
(417
|
)
|
|
$
|
(3,305
|
)
|
|
$
|
(714
|
)
|
25 basis point decrease in expected long-term rate of
return on assets
|
|
$
|
34
|
|
|
$
|
|
|
|
$
|
|
|
25 basis point increase in expected long-term rate of
return on assets
|
|
$
|
(34
|
)
|
|
$
|
|
|
|
$
|
|
|
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
30
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.
The Company grants certain types of restricted stock grants
which involved 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,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
|
(In millions,
except for %s)
|
|
|
Cash and cash equivalents
|
|
$
|
43.0
|
|
|
$
|
50.7
|
|
|
|
(15.2
|
)%
|
Working capital, excluding cash
|
|
|
375.5
|
|
|
|
353.1
|
|
|
|
6.3
|
|
Long-term debt
|
|
|
123.1
|
|
|
|
120.7
|
|
|
|
2.0
|
|
Stockholders equity
|
|
|
427.0
|
|
|
|
403.5
|
|
|
|
5.8
|
|
As of August 31, 2007, the current ratio was 2.9 to 1 and
working capital, excluding cash, was $375.5 million. Net
cash provided from operations was $64.8 million in 2007
compared with $19.0 million in 2006. The improvement from
last year was due primarily to a substantial reduction of
inventory driven by efforts to reduce inventory across the
Company. Cash used in investing activities was
$38.0 million in 2007 compared with $26.7 million in
2006. The $11.3 million increase was mainly due to a
business acquisition in 2007. Cash used in financing activities
decreased $8.4 million due primarily to the decrease in the
Companys purchases of its common stock. In addition, in
fiscal 2006, the Company refinanced its debt which involved
borrowing from a new credit facility to prepay its outstanding
senior notes.
The Companys cash and cash equivalents were
$43.0 million at August 31, 2007, a decrease of
$7.6 million from August 31, 2006. The decrease is
primarily due to an increase in working capital, excluding cash.
The increase in working capital, excluding cash, is due
primarily to the increase in European accounts receivable, which
is offset by a significant decrease in inventory.
Accounts receivable increased in 2007 by $44.8 million, or
16.4%. The translation effect of foreign currencies, primarily
the euro, accounted for $14.2 million of the increase in
accounts receivable. Excluding the translation effect, the
increase in accounts receivable was $30.6 million, or
11.2%. The increase in accounts receivable, excluding the
translation effect, was the result of higher sales and increased
days sales in accounts receivable from 58 days to
62 days, which is driven by the mix of customers.
31
Inventory decreased in 2007 by $23.0 million or 8.1%. The
translation effect of foreign currencies increased inventory by
$11.5 million, therefore, inventory decreased
$34.5 million excluding the translation effect. The
Companys days sales in inventory improved from
73 days to 60 days. This change is driven by efforts
to reduce inventory across the Company.
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 Swedish
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 is expected to expand the Companys offerings
of color masterbatches 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 includes a potential
deferred payment that could be paid over a three year period
which is based on certain terms in the purchase agreement. The
purchase price allocation included in the accompanying
consolidated financial statements for this acquisition is
subject to normal course working capital adjustments and may be
adjusted as these adjustments have not been agreed upon. 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. The results of operations and
financial position for the acquired companies are included in
the consolidated financial statements of the Company. The
earnings from the acquired companies had a minimal effect on
consolidated earnings for fiscal 2007.
Capital expenditures for the year ended August 31, 2007
were $29.4 million compared with $29.2 million last
year. The major components of the capital expenditures included
machinery and equipment at the Companys France and Belgium
plants. In addition, approximately $9.0 million of the
capital expenditures for the Company were related to the new A.
Schulman Invision, Inc. company, including the first full
production line and the start of construction on the first
Invision®
product dedicated plant. The Company anticipates approximately
$40 million to $50 million in capital expenditures in
fiscal 2008, which includes some spending related to the
construction of a new plant in the North American segment. The
new plant is intended to release some capacity in the
Companys Mexican facility for additional Mexican and South
American sales.
On February 28, 2006 the Company completed a refinancing in
which it replaced a $100.0 million credit facility with a
new $260.0 million credit facility (Credit
Facility). The Credit Facility consists of
$260.0 million of revolving credit lines 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 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 August 31, 2007,
there were no covenant violations under 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. As of August 31, 2007 there was
$23.6 million outstanding under the Credit Facility.
During fiscal 2006, the Company used proceeds from the Credit
Facility to prepay its $50.0 million in 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.
Deferred interest related to proceeds deferred in 1999 when the
Company completed an interest rate lock effectively reducing the
annual interest rate from 7.27% to 7.14% over the life of the
notes. 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
|
|
|
|
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
$68.6 million at August 31, 2007.
|
32
At August 31, 2007, the fair market value of the Euro Notes
is approximately 47.0 million, which approximates
$64.1 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 August 31, 2007, there
were no covenant violations under 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.
The proceeds from the Euro Notes, available cash, and borrowings
on the Credit Facility were used to fund the $143.8 million
repatriation from Europe completed in March 2006. The Company
used these repatriated proceeds to fund the self-tender offer
which cost approximately $50.2 million including
$0.5 million in fees directly related to the tender offer.
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, 2007 and 2006. There were no
borrowings at August 31, 2007 and $8.5 million
outstanding at August 31, 2006 under these lines of credit.
The Company had approximately $46.9 million and
$58.0 million of uncollateralized short-term foreign lines
of credit available to its subsidiaries at August 31, 2007
and August 31, 2006, respectively. There was
$2.8 million and $2.5 million outstanding under these
lines of credit at August 31, 2007 and 2006, respectively.
The Company has approximately $1.3 million in capital lease
obligations, of which $0.4 million is current. The current
portion of capital lease obligations was $18,000 in fiscal 2006.
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
$66.7 million at August 31, 2007. 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
Consolidated Statements of Income. The Company estimates that a
10% change in foreign exchange rates at August 31, 2007
would have changed the fair value of the contracts by
approximately $1.3 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.
33
A summary of the Companys future obligations subsequent to
August 31, 2007 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More than
5 Years
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
|
Short Term Debt
|
|
$
|
2,762
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,762
|
|
Long Term debt
|
|
|
|
|
|
|
|
|
|
|
23,617
|
|
|
|
98,572
|
|
|
|
122,189
|
|
Capital Lease Obligations
|
|
|
411
|
|
|
|
863
|
|
|
|
27
|
|
|
|
|
|
|
|
1,301
|
|
Operating Lease Obligations
|
|
|
3,619
|
|
|
|
4,732
|
|
|
|
2,779
|
|
|
|
175
|
|
|
|
11,305
|
|
Purchase Obligations(a)
|
|
|
79,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,946
|
|
Pension Obligations
|
|
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,100
|
|
Postretirement Benefit Obligations
|
|
|
733
|
|
|
|
1,672
|
|
|
|
1,965
|
|
|
|
6,489
|
|
|
|
10,859
|
|
Deferred Compensation Obligations
|
|
|
575
|
|
|
|
5,177
|
|
|
|
2,696
|
|
|
|
1,785
|
|
|
|
10,233
|
|
Interest Expense
|
|
|
6,963
|
|
|
|
13,926
|
|
|
|
10,757
|
|
|
|
10,402
|
|
|
|
42,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
98,109
|
|
|
$
|
26,370
|
|
|
$
|
41,841
|
|
|
$
|
117,423
|
|
|
$
|
283,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Purchase obligations include purchase orders for inventory. |
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 $11.3 million at August 31, 2007.
The Companys outstanding commercial commitments at
August 31, 2007 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.
The Company does not have any off-balance sheet arrangements.
During the year ended August 31, 2007, the Company paid
cash dividends aggregating to $0.58 per share. The total amount
of these dividends was $16.1 million. Cash flow has been
sufficient to fund the payment of these dividends. 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
the year ended August 31, 2007 but is not included in the
$0.58 cash dividends per share.
For the year ended August 31, 2007, the Company issued
742,528 common shares upon the exercise of employee stock
options and 228,250 common shares were issued to employees under
the restricted stock plan. The total amount received from the
exercise of the stock options was $13.9 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. It
is anticipated that the Company will complete the Repurchase
Program through open market repurchases from time to time. The
number of shares to be repurchased and the timing of repurchases
will depend upon the prevailing market prices and any other
considerations that may, in the opinion of the Board of
Directors or management, affect the advisability of repurchasing
shares. 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. Under the Repurchase
Program the Company has approximately 4.0 million shares
still available to be repurchased.
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, 2007 increased this account by
$16.2 million. Based on past performance and current
expectations, Management believes the Companys cash and
cash equivalents, investments, and
34
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.
NEW ACCOUNTING
PRONOUNCEMENTS
In July 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. FIN 48 clarifies
the accounting for uncertain income tax positions that are
recognized in a companys financial statements. 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. Under the interpretation, the
financial statements will reflect expected future tax
consequences of such positions presuming the taxing
authorities full knowledge of the position and all
relevant facts, but without considering time values. The Company
adopted FIN 48 on September 1, 2007. Tax positions
taken in prior years are being evaluated under FIN 48 and
the Company anticipates it will increase the opening balance of
retained earnings as of September 1, 2007 by up to
$2.5 million for tax benefits not previously recognized
under historical practice.
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 Company is required
to adopt SFAS 157 in fiscal year 2009. The Company is
currently evaluating the impact, if any, of SFAS 157 on its
financial position, results of operations and cash flows.
On September 29, 2006, the FASB issued FASB Statement
No. 158, (SFAS 158), Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans. SFAS 158 requires companies to recognize the funded
status of defined benefit pension and other postretirement plans
as a net asset or liability in its financial statements. In
addition, disclosure requirements related to such plans are
affected by SFAS 158. As required by SFAS 158, the
Company used a prospective approach in its adoption of
SFAS 158. As of August 31, 2007, the Company
recognized the funded status of its defined benefit pension and
postretirement benefit plans. The adoption of SFAS 158
resulted in a decrease of $5.4 million on a pre-tax basis
and a decrease of $2.8 million on an after-tax basis to the
Companys accumulated other comprehensive income. The
adoption of SFAS 158 did not impact the Companys
compliance with its debt covenants of its borrowing
arrangements, cash position or results of operations.
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 is
currently evaluating the impact, if any, of SFAS 159 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;
|
35
|
|
|
|
|
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; and
|
|
|
|
The performance of the North American automotive market.
|
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, 2007, the Company had
$23.6 million borrowed against its Revolving Facility.
Borrowing costs may fluctuate depending upon the volatility of
LIBOR and amounts borrowed.
36
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
A. SCHULMAN,
INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
37
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, 2007 and 2006, and
the results of their operations and their cash flows for each of
the three years in the period ended August 31, 2007 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, 2007, 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 defined benefit pension and other postretirement plans as of
August 31, 2007 (Note 7) and stock-based
compensation as of September 1, 2005 (Note 9).
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 30, 2007
38
A. SCHULMAN,
INC.
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands
except share and per share data)
|
|
|
Net sales
|
|
$
|
1,787,056
|
|
|
$
|
1,616,386
|
|
|
$
|
1,433,196
|
|
Cost of sales
|
|
|
1,574,234
|
|
|
|
1,396,440
|
|
|
|
1,240,557
|
|
Selling, general and administrative expenses
|
|
|
159,274
|
|
|
|
148,529
|
|
|
|
137,848
|
|
Interest expense
|
|
|
8,118
|
|
|
|
6,234
|
|
|
|
3,704
|
|
Foreign currency transaction losses
|
|
|
219
|
|
|
|
2,136
|
|
|
|
2,824
|
|
Minority interest
|
|
|
1,027
|
|
|
|
1,116
|
|
|
|
1,139
|
|
Interest income
|
|
|
(2,306
|
)
|
|
|
(3,310
|
)
|
|
|
(1,446
|
)
|
Other income
|
|
|
(1,832
|
)
|
|
|
(1,892
|
)
|
|
|
(948
|
)
|
Restructuring expense North America
|
|
|
1,048
|
|
|
|
|
|
|
|
182
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
4,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,739,782
|
|
|
|
1,554,239
|
|
|
|
1,383,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
47,274
|
|
|
|
62,147
|
|
|
|
49,336
|
|
Provision for U.S. and foreign income taxes
|
|
|
24,655
|
|
|
|
29,485
|
|
|
|
17,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,619
|
|
|
$
|
32,662
|
|
|
$
|
32,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,032,348
|
|
|
|
29,961,580
|
|
|
|
30,619,780
|
|
Diluted
|
|
|
27,369,408
|
|
|
|
30,394,210
|
|
|
|
31,049,790
|
|
Earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.83
|
|
|
$
|
1.09
|
|
|
$
|
1.05
|
|
Diluted
|
|
$
|
0.82
|
|
|
$
|
1.07
|
|
|
$
|
1.03
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
39
A. SCHULMAN,
INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands
except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,045
|
|
|
$
|
50,662
|
|
Accounts receivable, less allowance for doubtful accounts of
$9,056 in 2007 and $9,409 in 2006
|
|
|
317,774
|
|
|
|
272,929
|
|
Inventories, average cost or market, whichever is lower
|
|
|
263,047
|
|
|
|
286,079
|
|
Prepaid expenses and other current assets
|
|
|
16,163
|
|
|
|
17,678
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
640,029
|
|
|
|
627,348
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance
|
|
|
2,231
|
|
|
|
1,800
|
|
Deferred charges and other assets
|
|
|
21,784
|
|
|
|
20,444
|
|
Goodwill
|
|
|
9,350
|
|
|
|
5,392
|
|
Intangible assets
|
|
|
174
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,539
|
|
|
|
29,018
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
16,768
|
|
|
|
15,778
|
|
Buildings and leasehold improvements
|
|
|
145,952
|
|
|
|
136,526
|
|
Machinery and equipment
|
|
|
352,044
|
|
|
|
317,499
|
|
Furniture and fixtures
|
|
|
38,955
|
|
|
|
35,918
|
|
Construction in progress
|
|
|
13,035
|
|
|
|
11,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566,754
|
|
|
|
516,800
|
|
Accumulated depreciation and investment grants of $1,322 in 2007
and $1,119 in 2006
|
|
|
366,207
|
|
|
|
329,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,547
|
|
|
|
186,879
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
874,115
|
|
|
$
|
843,245
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
2,762
|
|
|
$
|
10,976
|
|
Accounts payable
|
|
|
141,838
|
|
|
|
135,930
|
|
U.S. and foreign income taxes payable
|
|
|
11,544
|
|
|
|
14,708
|
|
Accrued payrolls, taxes and related benefits
|
|
|
32,249
|
|
|
|
30,866
|
|
Other accrued liabilities
|
|
|
33,112
|
|
|
|
31,081
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
221,505
|
|
|
|
223,561
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
123,080
|
|
|
|
120,730
|
|
Other long-term liabilities
|
|
|
91,316
|
|
|
|
82,482
|
|
Deferred income taxes
|
|
|
5,640
|
|
|
|
7,196
|
|
Minority interest
|
|
|
5,561
|
|
|
|
5,784
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, 5% cumulative, $100 par value, authorized,
issued and outstanding - 10,564 shares in 2007 and 2006
|
|
|
1,057
|
|
|
|
1,057
|
|
Special stock, 1,000,000 shares authorized, none outstanding
|
|
|
|
|
|
|
|
|
Common stock, $1 par value, authorized
75,000,000 shares, issued
41,784,640 shares in 2007 and 40,707,018 shares in 2006
|
|
|
41,785
|
|
|
|
40,707
|
|
Other capital
|
|
|
103,828
|
|
|
|
86,894
|
|
Accumulated other comprehensive income
|
|
|
50,092
|
|
|
|
32,893
|
|
Retained earnings
|
|
|
509,415
|
|
|
|
502,998
|
|
Treasury stock, at cost, 14,113,977 shares in 2007 and
13,343,711 shares in 2006
|
|
|
(279,164
|
)
|
|
|
(261,057
|
)
|
|
|
|
|
|
|
|
|
|
Common stockholders equity
|
|
|
425,956
|
|
|
|
402,435
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
427,013
|
|
|
|
403,492
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
874,115
|
|
|
$
|
843,245
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
40
A. SCHULMAN,
INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Other
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
Stock Grant
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income
(Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Compensation
|
|
|
Equity
|
|
|
|
(In thousands
except per share data)
|
|
|
Balance at August 31, 2004
|
|
$
|
1,057
|
|
|
$
|
39,633
|
|
|
$
|
69,812
|
|
|
$
|
18,643
|
|
|
$
|
473,540
|
|
|
$
|
(164,231
|
)
|
|
$
|
(3,217
|
)
|
|
$
|
435,237
|
|
Comprehensive income for 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment (net of tax of $1,056)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,002
|
|
Cash dividends paid or accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $5 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
Common stock, $0.57 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,582
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,582
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,001
|
)
|
|
|
|
|
|
|
(1,001
|
)
|
Stock options exercised
|
|
|
|
|
|
|
302
|
|
|
|
3,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,092
|
|
Issue of restricted stock
|
|
|
|
|
|
|
54
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant of restricted stock
|
|
|
|
|
|
|
|
|
|
|
1,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,981
|
)
|
|
|
|
|
Forfeiture of restricted stock
|
|
|
|
|
|
|
|
|
|
|
(893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
893
|
|
|
|
|
|
Non-cash stock based compensation
|
|
|
|
|
|
|
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,071
|
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Issue of restricted stock
|
|
|
|
|
|
|
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
|
|
Issue of restricted stock
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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.
41
A. SCHULMAN,
INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Provided from (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,619
|
|
|
$
|
32,662
|
|
|
$
|
32,093
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided from (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
25,802
|
|
|
|
24,912
|
|
|
|
25,082
|
|
Deferred tax provision
|
|
|
(1,865
|
)
|
|
|
1,552
|
|
|
|
(3,632
|
)
|
Pension and other deferred compensation
|
|
|
11,347
|
|
|
|
11,019
|
|
|
|
11,891
|
|
Postretirement benefit obligation
|
|
|
(2,837
|
)
|
|
|
3,339
|
|
|
|
2,623
|
|
Minority interest in net income of subsidiaries
|
|
|
1,027
|
|
|
|
1,116
|
|
|
|
1,139
|
|
Restructuring charges, including accelerated depreciation of
$1,071 in fiscal 2007
|
|
|
2,119
|
|
|
|
|
|
|
|
182
|
|
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
|
|
|
(29,088
|
)
|
|
|
(41,193
|
)
|
|
|
(17,643
|
)
|
Inventories
|
|
|
37,942
|
|
|
|
(45,815
|
)
|
|
|
4,069
|
|
Accounts payable
|
|
|
(3,018
|
)
|
|
|
30,752
|
|
|
|
5,019
|
|
Restructuring payments
|
|
|
(974
|
)
|
|
|
|
|
|
|
(598
|
)
|
Income taxes
|
|
|
(2,006
|
)
|
|
|
(1,433
|
)
|
|
|
(4,051
|
)
|
Accrued payrolls and other accrued liabilities
|
|
|
789
|
|
|
|
6,154
|
|
|
|
2,091
|
|
Changes in other assets and other long-term liabilities
|
|
|
2,222
|
|
|
|
(4,830
|
)
|
|
|
(2,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) operating activities
|
|
|
64,829
|
|
|
|
18,995
|
|
|
|
55,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided from (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant and equipment
|
|
|
(29,379
|
)
|
|
|
(29,239
|
)
|
|
|
(26,944
|
)
|
Disposals of property, plant and equipment
|
|
|
1,352
|
|
|
|
2,548
|
|
|
|
681
|
|
Business acquisitions, net of cash acquired
|
|
|
(11,277
|
)
|
|
|
|
|
|
|
|
|
Proceeds of insurance settlements
|
|
|
1,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(38,009
|
)
|
|
|
(26,691
|
)
|
|
|
(26,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided from (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
(16,202
|
)
|
|
|
(17,662
|
)
|
|
|
(17,635
|
)
|
Increase (decrease) in notes payable
|
|
|
(9,372
|
)
|
|
|
9,426
|
|
|
|
1,479
|
|
Borrowings on revolving credit facilities
|
|
|
63,076
|
|
|
|
131,318
|
|
|
|
24,000
|
|
Repayments on revolving credit facilities
|
|
|
(66,871
|
)
|
|
|
(118,989
|
)
|
|
|
(10,536
|
)
|
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
|
|
|
(1,250
|
)
|
|
|
(600
|
)
|
|
|
(900
|
)
|
Exercise of stock options
|
|
|
13,916
|
|
|
|
9,800
|
|
|
|
4,092
|
|
Purchases of treasury stock
|
|
|
(18,107
|
)
|
|
|
(95,825
|
)
|
|
|
(1,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) financing activities
|
|
|
(34,810
|
)
|
|
|
(43,229
|
)
|
|
|
(501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
373
|
|
|
|
(742
|
)
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(7,617
|
)
|
|
|
(51,667
|
)
|
|
|
29,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
50,662
|
|
|
|
102,329
|
|
|
|
72,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
43,045
|
|
|
$
|
50,662
|
|
|
$
|
102,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
7,829
|
|
|
$
|
4,941
|
|
|
$
|
3,818
|
|
Income Taxes
|
|
$
|
31,230
|
|
|
$
|
33,175
|
|
|
$
|
32,524
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
42
A. SCHULMAN,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
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.
The Company is engaged in the sale of plastic resins in various
forms, which are used as raw materials by its customers. To
identify reportable segments, the Company considered its
operating structure and the types of information subject to
regular review by its President and Chief Executive Officer, who
is the Chief Operating Decision Maker. On this basis, the
Company operates primarily in two geographic segments, North
America and Europe, including Asia (Europe).
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.
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 $11.0 million at
August 31, 2007 and $13.7 million at August 31,
2006. Investments with maturities between three and twelve
months are considered to be short-term investments. Investments
are placed with numerous financial institutions which management
believes to have acceptable credit ratings. 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 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.
43
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. 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. The Company completed its annual impairment test of
goodwill as of February 28, 2007 which resulted in no
impairment loss recognized. During fiscal 2007, 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, or at least annually. 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. The Company completed its annual impairment
test of long-lived assets which resulted in no impairment loss
recognized. The Company owns a building in Orange, Texas which
has a net book value of approximately $1.5 million at
August 31, 2007 and is currently designated as an asset
held-for-sale. This building is included in property, plant and
equipment in the Companys Consolidated Balance Sheets.
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.
44
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
FOREIGN CURRENCY
TRANSLATION
The financial position and results of operations of the
Companys foreign subsidiaries are 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 2007
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 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. All periods presented prior to
September 1, 2005 were accounted for using the intrinsic
value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees,
and followed a nominal vesting period approach.
NEW ACCOUNTING
PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (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. FIN 48 clarifies
the accounting for uncertain income tax positions that are
recognized in a companys financial statements. FIN 48
prescribes a comprehensive model for how a company should
recognize, measure, present and disclose in its financial
statements
45
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
uncertain tax positions that the company has taken or expects to
take on a tax return. Under the interpretation, the financial
statements will reflect expected future tax consequences of such
positions presuming the taxing authorities full knowledge
of the position and all relevant facts, but without considering
time values. The Company adopted FIN 48 on
September 1, 2007. Tax positions taken in prior years are
being evaluated under FIN 48 and the Company anticipates it
will increase the opening balance of retained earnings as of
September 1, 2007 by up to $2.5 million for tax
benefits not previously recognized under historical practice.
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 Company is required
to adopt SFAS 157 in fiscal year 2009. The Company is
currently evaluating the impact, if any, of SFAS 157 on its
financial position, results of operations and cash flows.
On September 29, 2006, the FASB issued FASB Statement
No. 158, (SFAS 158), Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans. SFAS 158 requires companies to recognize the funded
status of defined benefit pension and other postretirement plans
as a net asset or liability in its financial statements. In
addition, disclosure requirements related to such plans are
affected by SFAS 158. As required by SFAS 158, the
Company used a prospective approach in its adoption of
SFAS 158. As of August 31, 2007, the Company
recognized the funded status of its defined benefit pension and
postretirement benefit plans. The adoption of SFAS 158
resulted in a decrease of $5.4 million on a pre-tax basis
and a decrease of $2.8 million on an after-tax basis to the
Companys accumulated other comprehensive income. The
adoption of SFAS 158 did not impact the Companys
compliance with its debt covenants of its borrowing
arrangements, cash position or results of operations.
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 is
currently evaluating the impact, if any, of SFAS 159 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, 2007 and 2006
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
Beginning balance
|
|
$
|
9,409
|
|
|
$
|
8,227
|
|
Provision
|
|
|
2,019
|
|
|
|
2,453
|
|
Write-offs, net of recoveries
|
|
|
(2,713
|
)
|
|
|
(1,458
|
)
|
Translation effect
|
|
|
341
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
9,056
|
|
|
$
|
9,409
|
|
|
|
|
|
|
|
|
|
|
|
|
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
reduce the
46
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fair value of a reporting unit
below its carrying value. No impairment was required to be
recorded as a result of the annual impairment review as of
February 28, 2007. During fiscal 2007, the Company did not
identify any other events that required an impairment test.
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.
See Note 17 for further discussion on the business
acquisition.
The carrying amount of goodwill for the European segment was
$8.4 million at August 31, 2007 and $4.4 million
at August 31, 2006. The carrying amount of goodwill for the
North American segment was $1.0 million at August 31,
2007 and 2006.
The changes in the Companys carrying value of goodwill
during the years ended August 31, 2007 and 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
North
America
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
|
Balance as of August 31, 2005
|
|
$
|
4,324
|
|
|
$
|
964
|
|
|
$
|
5,288
|
|
Translation effect
|
|
|
104
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets were $0.2 million and $1.4 million
at August 31, 2007 and 2006, respectively. The decrease in
intangible assets is primarily related to the adoption of
SFAS 158 in fiscal 2007.
|
|
NOTE 4
|
LONG-TERM DEBT AND
CREDIT ARRANGEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
Notes payable, due within one year
|
|
$
|
2,762
|
|
|
$
|
10,976
|
|
Revolving credit loan, LIBOR, due 2011
|
|
|
23,617
|
|
|
|
26,218
|
|
Euro notes, 4.485%, due 2016
|
|
|
68,572
|
|
|
|
64,490
|
|
Senior notes, LIBOR plus 80 bps, due 2013
|
|
|
30,000
|
|
|
|
30,000
|
|
Capital lease obligations
|
|
|
1,301
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,252
|
|
|
$
|
131,724
|
|
|
|
|
|
|
|
|
|
|
On February 28, 2006, the Company completed a refinancing
in which it replaced a $100.0 million credit facility with
a new $260.0 million credit facility (Credit
Facility). The Credit Facility consists of
$260.0 million of revolving credit lines 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 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. As of August 31, 2007 there was
$23.6 million outstanding under the Credit Facility.
During fiscal 2006, the Company used proceeds from the Credit
Facility to prepay its $50.0 million in 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
47
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
termination fee of $1.5 million and the write-off of
related deferred debt costs and deferred interest. Deferred
interest related to proceeds deferred in 1999 when the Company
completed an interest rate lock effectively reducing the annual
interest rate from 7.27% to 7.14% over the life of the notes. 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
|
|
|
|
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
$68.6 million at August 31, 2007.
|
At August 31, 2007, the fair market value of the Euro Notes
is approximately 47.0 million, which approximates
$64.1 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.
The proceeds from the Euro Notes, available cash, and borrowings
on the Credit Facility were used to fund the $143.8 million
repatriation from Europe completed in March 2006. During fiscal
2006, the Company used these repatriated proceeds to fund the
self-tender offer which cost approximately $50.2 million
including $0.5 million in fees directly related to the
tender offer.
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, 2007 and 2006. There were no
borrowings at August 31, 2007 and $8.5 million
outstanding at August 31, 2006 under these lines of credit.
The Company had approximately $46.9 million and
$58.0 million of uncollateralized short-term foreign lines
of credit available to its subsidiaries at August 31, 2007
and August 31, 2006, respectively. There was
$2.8 million and $2.5 million outstanding under these
lines of credit at August 31, 2007 and 2006, respectively.
The Company has approximately $1.3 million in capital lease
obligations, of which $0.4 million is current. The current
portion of capital lease obligations was $18,000 in fiscal 2006.
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, 2007 are as follows:
|
|
|
|
|
|
|
(In
thousands)
|
|
|
Fiscal 2008
|
|
$
|
3,173
|
|
2009
|
|
|
677
|
|
2010
|
|
|
186
|
|
2011
|
|
|
23,640
|
|
2012
|
|
|
4
|
|
2013 and thereafter
|
|
|
98,572
|
|
|
|
|
|
|
Total
|
|
$
|
126,252
|
|
|
|
|
|
|
48
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 5
|
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
recognized on the foreign currency transaction line in the
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, 2007 and
August 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Contract
|
|
|
Fair
|
|
|
Contract
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
|
Buy Currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
$
|
5,828
|
|
|
$
|
5,854
|
|
|
$
|
5,140
|
|
|
$
|
5,115
|
|
U.S. dollar
|
|
|
3,060
|
|
|
|
3,079
|
|
|
|
171
|
|
|
|
171
|
|
British pound
|
|
|
3,267
|
|
|
|
3,255
|
|
|
|
1,961
|
|
|
|
2,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,155
|
|
|
$
|
12,188
|
|
|
$
|
7,272
|
|
|
$
|
7,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell Currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
British pound
|
|
$
|
1,433
|
|
|
$
|
1,435
|
|
|
$
|
1,608
|
|
|
$
|
1,632
|
|
U.S. dollar
|
|
|
|
|
|
|
|
|
|
|
149
|
|
|
|
149
|
|
Hungarian forint
|
|
|
3,303
|
|
|
|
3,194
|
|
|
|
|
|
|
|
|
|
Euro
|
|
|
10,080
|
|
|
|
10,067
|
|
|
|
25,624
|
|
|
|
25,638
|
|
Canadian dollar
|
|
|
17,241
|
|
|
|
17,289
|
|
|
|
|
|
|
|
|
|
Swiss franc
|
|
|
2,181
|
|
|
|
2,184
|
|
|
|
1,075
|
|
|
|
1,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,238
|
|
|
$
|
34,169
|
|
|
$
|
28,456
|
|
|
$
|
28,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Income (loss) before taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
U.S
|
|
$
|
(25,298
|
)
|
|
$
|
(22,120
|
)
|
|
$
|
(16,868
|
)
|
Foreign
|
|
|
72,572
|
|
|
|
84,267
|
|
|
|
66,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,274
|
|
|
$
|
62,147
|
|
|
$
|
49,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S
|
|
$
|
107
|
|
|
$
|
83
|
|
|
$
|
419
|
|
Foreign
|
|
|
26,413
|
|
|
|
27,850
|
|
|
|
20,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,520
|
|
|
|
27,933
|
|
|
|
20,875
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S
|
|
|
31
|
|
|
|
28
|
|
|
|
36
|
|
Foreign
|
|
|
(1,896
|
)
|
|
|
1,524
|
|
|
|
(3,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,865
|
)
|
|
|
1,552
|
|
|
|
(3,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,655
|
|
|
$
|
29,485
|
|
|
$
|
17,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory U.S. federal income tax
rate with the effective tax rates of 52.2% in 2007, 47.4% in
2006, and 35.0% in 2005, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
(In thousands,
except for %s)
|
|
|
Statutory U.S. tax rate
|
|
$
|
16,546
|
|
|
|
35.0
|
%
|
|
$
|
21,752
|
|
|
|
35.0
|
%
|
|
$
|
17,268
|
|
|
|
35.0
|
%
|
Amount of foreign income taxes less than U.S. taxes at statutory
rate
|
|
|
(2,951
|
)
|
|
|
(6.2
|
)
|
|
|
(4,043
|
)
|
|
|
(6.5
|
)
|
|
|
(2,009
|
)
|
|
|
(4.1
|
)
|
Losses with no tax benefit
|
|
|
8,854
|
|
|
|
18.7
|
|
|
|
5,997
|
|
|
|
9.6
|
|
|
|
5,904
|
|
|
|
12.0
|
|
Mexico valuation allowance on net asset tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,270
|
)
|
|
|
(6.6
|
)
|
Settlement of tax claim in Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,104
|
)
|
|
|
(2.2
|
)
|
Provision for repatriated earnings
|
|
|
|
|
|
|
|
|
|
|
2,243
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt no tax benefit
|
|
|
|
|
|
|
|
|
|
|
1,745
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
Ongoing tax audits
|
|
|
|
|
|
|
|
|
|
|
1,152
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
Reduction of German tax rate
|
|
|
1,335
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
871
|
|
|
|
1.9
|
|
|
|
639
|
|
|
|
1.0
|
|
|
|
454
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,655
|
|
|
|
52.2
|
%
|
|
$
|
29,485
|
|
|
|
47.4
|
%
|
|
$
|
17,243
|
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets and (liabilities) consist of the following
at August 31, 2007 and August 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
Pensions
|
|
$
|
6,352
|
|
|
$
|
8,015
|
|
Inventory reserves
|
|
|
802
|
|
|
|
317
|
|
Bad debt reserves
|
|
|
2,051
|
|
|
|
1,577
|
|
Accruals
|
|
|
2,190
|
|
|
|
3,018
|
|
Postretirement benefits other than pensions
|
|
|
9,626
|
|
|
|
8,115
|
|
Depreciation
|
|
|
1,970
|
|
|
|
2,119
|
|
Foreign tax credit carryforwards
|
|
|
30,227
|
|
|
|
22,670
|
|
Alternative minimum tax carryforwards
|
|
|
6,835
|
|
|
|
6,834
|
|
Other
|
|
|
8,024
|
|
|
|
7,638
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
68,077
|
|
|
|
60,303
|
|
Valuation allowance
|
|
|
(51,251
|
)
|
|
|
(44,602
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
16,826
|
|
|
|
15,701
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(9,312
|
)
|
|
|
(10,557
|
)
|
Inventory
|
|
|
(375
|
)
|
|
|
(718
|
)
|
Other
|
|
|
(328
|
)
|
|
|
(799
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(10,015
|
)
|
|
|
(12,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,811
|
|
|
$
|
3,627
|
|
|
|
|
|
|
|
|
|
|
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 $32 million in foreign tax credit
carryforwards that will expire in periods from 2010 to 2017. The
expiration periods reflect the extension of the carryforward
period granted by the American Jobs Creation Act of 2004 signed
into law on October 22, 2004.
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.
The tax effect of temporary differences included in prepaids was
$3.9 million and $4.2 million at August 31, 2007
and 2006, respectively. Deferred charges included
$8.9 million and $8.2 million from the tax effect of
temporary differences at August 31, 2007 and 2006,
respectively. The tax effect of temporary differences included
in other accrued liabilities was $0.4 million and
$1.6 million at August 31, 2007 and 2006, respectively.
Tax legislation passed in Germany in August 2007 is expected to
reduce the German tax rate by an estimated nine percentage
points, which will benefit the Company starting in fiscal 2008.
However, the legislation resulted in a one time tax charge of
$1.3 million in the fourth quarter of fiscal 2007 in order
to reduce the Companys deferred tax assets in Germany
using the revised tax rate.
In October 2007, significant tax legislation was passed in
Mexico, which will generally be effective starting
January 1, 2008. Of particular importance is the laws
introduction of a flat tax, which will apply to taxpaying
entities along with Mexicos regular income tax. The
Company is currently evaluating the recently passed legislation
to determine the impact the legislation will have on its
financial condition.
Additional tax legislation was passed in China and the United
Kingdom during the Companys fiscal year 2007. The China
tax legislation represents a comprehensive overhaul of the
Chinese income tax system and goes into effect on
January 1, 2008.
51
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The United Kingdom legislation goes into effect April 1,
2008 and includes a 2% reduction in the corporate income tax
rate. Neither the China nor the United Kingdom tax legislation
is expected to have a material effect on the Companys
current financial condition.
In July 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. FIN 48 clarifies
the accounting for uncertain income tax positions that are
recognized in a companys financial statements. 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. Under the interpretation, the
financial statements will reflect expected future tax
consequences of such positions presuming the taxing
authorities full knowledge of the position and all
relevant facts, but without considering time values. The Company
adopted FIN 48 on September 1, 2007. Tax positions taken in
prior years are being evaluated under FIN 48 and the
Company anticipates it will increase the opening balance of
retained earnings as of September 1, 2007 by up to
$2.5 million for tax benefits not previously recognized
under historical practice.
At August 31, 2007, no taxes have been provided on the
undistributed earnings of certain foreign subsidiaries amounting
to $269.5 million because the Company intends to
permanently reinvest these earnings.
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 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 $1.5 million and
$1.1 million at August 31, 2007 and 2006,
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. Also, 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. The measurement date for all plans is
August 31.
As discussed in Note 1, the Company adopted the provisions
of SFAS 158 as of August 31, 2007. The effect of the
adoption of SFAS 158 has been reflected in the consolidated
financial statements as of August 31, 2007. The incremental
effect of adopting SFAS 158 has been disclosed as part of
this footnote.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of the plan obligations and assets, and the recorded
liability at August 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
Benefit obligation at beginning of year
|
|
$
|
(79,115
|
)
|
|
$
|
(68,361
|
)
|
|
$
|
(29,897
|
)
|
|
$
|
(32,110
|
)
|
Service cost
|
|
|
(2,735
|
)
|
|
|
(2,558
|
)
|
|
|
(1,306
|
)
|
|
|
(1,997
|
)
|
Interest cost
|
|
|
(3,758
|
)
|
|
|
(3,092
|
)
|
|
|
(1,509
|
)
|
|
|
(1,666
|
)
|
Participant contributions
|
|
|
(275
|
)
|
|
|
(276
|
)
|
|
|
(70
|
)
|
|
|
(52
|
)
|
Actuarial gain (loss)
|
|
|
4,861
|
|
|
|
(3,607
|
)
|
|
|
2,725
|
|
|
|
5,136
|
|
Benefits paid
|
|
|
3,263
|
|
|
|
1,953
|
|
|
|
1,069
|
|
|
|
792
|
|
Plan amendments
|
|
|
|
|
|
|
|
|
|
|
3,854
|
|
|
|
|
|
Curtailment gain
|
|
|
|
|
|
|
|
|
|
|
4,841
|
|
|
|
|
|
Translation adjustment
|
|
|
(4,666
|
)
|
|
|
(3,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
(82,425
|
)
|
|
$
|
(79,115
|
)
|
|
$
|
(20,293
|
)
|
|
$
|
(29,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
14,044
|
|
|
$
|
10,938
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on assets
|
|
|
968
|
|
|
|
1,442
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
2,815
|
|
|
|
2,601
|
|
|
|
999
|
|
|
|
740
|
|
Participant contributions
|
|
|
275
|
|
|
|
276
|
|
|
|
70
|
|
|
|
52
|
|
Benefits paid
|
|
|
(3,263
|
)
|
|
|
(1,953
|
)
|
|
|
(1,069
|
)
|
|
|
(792
|
)
|
Translation adjustment
|
|
|
851
|
|
|
|
740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
15,690
|
|
|
$
|
14,044
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underfunded
|
|
$
|
(66,735
|
)
|
|
$
|
(65,071
|
)
|
|
$
|
(20,293
|
)
|
|
$
|
(29,897
|
)
|
Unamortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability
|
|
|
76
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
|
11,513
|
|
|
|
16,986
|
|
|
|
92
|
|
|
|
7,791
|
|
Prior year service cost (credit)
|
|
|
2,055
|
|
|
|
2,497
|
|
|
|
(4,640
|
)
|
|
|
(1,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(53,091
|
)
|
|
$
|
(45,478
|
)
|
|
$
|
(24,841
|
)
|
|
$
|
(23,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset
|
|
$
|
|
|
|
$
|
1,382
|
|
|
$
|
|
|
|
$
|
|
|
Deferred tax asset
|
|
|
3,791
|
|
|
|
3,525
|
|
|
|
|
|
|
|
|
|
Accrued payrolls, taxes and related benefits
|
|
|
(1,800
|
)
|
|
|
(2,800
|
)
|
|
|
(733
|
)
|
|
|
(788
|
)
|
Other long-term liabilities
|
|
|
(64,935
|
)
|
|
|
(53,894
|
)
|
|
|
(19,560
|
)
|
|
|
(22,397
|
)
|
Accumulated other comprehensive income
|
|
|
9,853
|
|
|
|
6,309
|
|
|
|
(4,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(53,091
|
)
|
|
$
|
(45,478
|
)
|
|
$
|
(24,841
|
)
|
|
$
|
(23,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated Other Comprehensive Income,
net of tax, as of August 31, 2007 include:
|
|
|
|
|
|
|
Amount
|
|
|
|
(In
thousands)
|
|
|
Prior service credit
|
|
$
|
2,585
|
|
Actuarial gain
|
|
|
(11,604
|
)
|
Net transition obligation
|
|
|
(77
|
)
|
|
|
|
|
|
Gross amount
|
|
|
(9,096
|
)
|
Less income tax effect
|
|
|
3,791
|
|
|
|
|
|
|
Net amount
|
|
$
|
(5,305
|
)
|
|
|
|
|
|
53
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of net periodic benefit cost of the years ended
August 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Service cost
|
|
$
|
2,735
|
|
|
$
|
2,558
|
|
|
$
|
2,124
|
|
|
$
|
1,306
|
|
|
$
|
1,997
|
|
|
$
|
1,586
|
|
Interest cost
|
|
|
3,758
|
|
|
|
3,092
|
|
|
|
3,229
|
|
|
|
1,509
|
|
|
|
1,666
|
|
|
|
1,520
|
|
Expected return on plan assets
|
|
|
(1,057
|
)
|
|
|
(865
|
)
|
|
|
(719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transition obligation
|
|
|
38
|
|
|
|
32
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
497
|
|
|
|
467
|
|
|
|
494
|
|
|
|
(293
|
)
|
|
|
(102
|
)
|
|
|
(102
|
)
|
Deferred asset gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
568
|
|
|
|
379
|
|
Recognized net actuarial loss
|
|
|
585
|
|
|
|
443
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,556
|
|
|
$
|
5,727
|
|
|
$
|
5,224
|
|
|
$
|
2,656
|
|
|
$
|
4,129
|
|
|
$
|
3,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the pension plan
with accumulated benefit obligations in excess of plan assets
were $82.4 million, $72.5 million and
$15.7 million, respectively, as of August 31, 2007,
and $79.1 million, $70.1 million and
$14.0 million, respectively, as of August 31, 2006.
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
was approximately $3,000, $17,000 and $6,000 in 2007, 2006 and
2005, respectively. The total expense for defined contribution
plans was approximately $3.8 million, $3.8 million and
$3.6 million in 2007, 2006 and 2005, respectively.
Actuarial assumptions used in the calculation of the recorded
liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average assumptions as of August 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate on pension plans
|
|
|
5.5
|
%
|
|
|
4.7
|
%
|
|
|
4.5
|
%
|
Discount rate on postretirement obligation
|
|
|
6.25
|
%
|
|
|
6.00
|
%
|
|
|
5.25
|
%
|
Return on pension plan assets
|
|
|
7.8
|
%
|
|
|
7.7
|
%
|
|
|
7.7
|
%
|
Rate of compensation increase
|
|
|
2.5
|
%
|
|
|
2.4
|
%
|
|
|
3.4
|
%
|
Pre-Age 65
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected health care cost trend rate
|
|
|
9.0
|
%
|
|
|
8.0
|
%
|
|
|
9.0
|
%
|
Ultimate health care rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year ultimate health care trend rate is achieved
|
|
|
2011
|
|
|
|
2009
|
|
|
|
2009
|
|
Post-Age 65
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected health care cost trend rate
|
|
|
9.0
|
%
|
|
|
10.0
|
%
|
|
|
11.0
|
%
|
Ultimate health care rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year ultimate health care trend rate is achieved
|
|
|
2011
|
|
|
|
2011
|
|
|
|
2011
|
|
The Company, in consultation with its actuaries, annually
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
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.
54
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, 2007:
|
|
|
|
|
|
|
|
|
|
|
One-Percentage-
|
|
|
One-Percentage-
|
|
|
|
Point
Increase
|
|
|
Point
Decrease
|
|
|
|
(In
thousands)
|
|
|
Effect on total of service and interest cost components
|
|
$
|
663
|
|
|
$
|
(504
|
)
|
Effect on postretirement obligation
|
|
$
|
2,838
|
|
|
$
|
(2,315
|
)
|
The Companys pension plan weighted-average asset
allocation at August 31, 2007 and 2006, and target
allocation, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets
|
|
|
|
|
|
|
at
August 31,
|
|
|
Target
|
|
Asset
Category
|
|
2007
|
|
|
2006
|
|
|
Allocation
|
|
|
Equity securities
|
|
|
70.9
|
%
|
|
|
73.2
|
%
|
|
|
70.0
|
%
|
Debt securities
|
|
|
17.9
|
%
|
|
|
17.3
|
%
|
|
|
15.0
|
%
|
Guaranteed investment certificates
|
|
|
7.3
|
%
|
|
|
6.4
|
%
|
|
|
10.0
|
%
|
Cash
|
|
|
3.9
|
%
|
|
|
3.1
|
%
|
|
|
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
$3.1 million for its pension obligations and approximately
$0.7 million to its other postretirement plan in 2008. 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)
|
|
|
2008
|
|
$
|
2,412
|
|
|
$
|
821
|
|
|
$
|
88
|
|
|
$
|
733
|
|
2009
|
|
|
3,418
|
|
|
|
903
|
|
|
|
100
|
|
|
|
803
|
|
2010
|
|
|
2,858
|
|
|
|
981
|
|
|
|
112
|
|
|
|
869
|
|
2011
|
|
|
2,962
|
|
|
|
1,068
|
|
|
|
120
|
|
|
|
948
|
|
2012
|
|
|
4,214
|
|
|
|
1,147
|
|
|
|
130
|
|
|
|
1,017
|
|
Years 2013 - 2017
|
|
|
20,452
|
|
|
|
7,341
|
|
|
|
852
|
|
|
|
6,489
|
|
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, 2007 and 2006. In connection with these
agreements, the Company owns and is the beneficiary of life
insurance policies amounting to $2.0 million.
55
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
|
|
|
Total
|
|
|
|
|
|
|
Additional
|
|
|
Losses and
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Minimum
|
|
|
Prior Service
|
|
|
Other
|
|
|
|
Currency
|
|
|
Pension
Liability
|
|
|
Costs
|
|
|
Comprehensive
|
|
|
|
Translation
Gain
|
|
|
Adjustment
|
|
|
(Credits),
Net
|
|
|
Income
|
|
|
|
(In
thousands)
|
|
|
Balance as of August 31, 2005
|
|
$
|
32,372
|
|
|
$
|
(5,820
|
)
|
|
$
|
|
|
|
$
|
26,552
|
|
Current period change
|
|
|
6,830
|
|
|
|
(489
|
)
|
|
|
|
|
|
|
6,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains are not tax effected as such
gains are considered permanently reinvested. Minimum pension
liability adjustments 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,
2007, there were approximately 3.1 million shares available
for grant pursuant to the Companys 2006 Incentive Plan.
On September 1, 2005, the Company adopted Statement of
Financial Accounting Standards No. 123 (Revised 2004),
(SFAS 123R), Share-Based Payment, which
requires the Company to measure all employee stock-based
compensation awards using a fair value method and record the
related expense in the financial statements. The Company elected
to use the modified prospective transition method. The modified
prospective transition method requires that compensation cost be
recognized in the financial statements for all awards granted
after the date of adoption as well as for existing awards for
which the requisite service has not been rendered as of the date
of adoption and requires that prior periods not be restated. All
periods presented prior to September 1, 2005 were accounted
for in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and
followed a nominal vesting period approach.
The adoption of SFAS 123R reduced income before taxes for
years ended August 31, 2007 and 2006 by approximately
$1.9 million and $4.5 million, respectively. These
expenses are included in selling, general and administrative
expenses in the accompanying consolidated statement 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 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.
56
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the effect on net income and
earnings per share had the fair value based method been applied
to measure compensation cost for prior periods presented:
|
|
|
|
|
|
|
2005
|
|
|
|
(In thousands,
except per
|
|
|
|
share
data)
|
|
|
Net income, as reported
|
|
$
|
32,093
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of tax
|
|
|
1,408
|
|
Deduct: Total stock-based employee compensation expense
determined under the fair value method, net of tax where
applicable
|
|
|
(5,228
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
28,273
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic: as reported
|
|
$
|
1.05
|
|
as
adjusted
|
|
$
|
0.92
|
|
Diluted: as reported
|
|
$
|
1.03
|
|
as
adjusted
|
|
$
|
0.91
|
|
The total stock-based employee compensation expense for the year
ended August 31, 2005 was calculated using the nominal
vesting period approach.
The weighted-average fair value of stock option awards was $7.94
for the January 2006 grant, $6.20 for the October 2005 grant,
and $5.93 for fiscal 2005 grants. The Company did not grant
stock options in fiscal 2007. These values were estimated at the
date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
2006
|
|
|
2005
|
|
|
Expected life of award (years)
|
|
|
5.5
|
|
|
|
4.0
|
|
Risk-free interest rate
|
|
|
4.3
|
%
|
|
|
3.0
|
%
|
Expected volatility of stock
|
|
|
40.0
|
%
|
|
|
43.0
|
%
|
Expected dividend yield of stock
|
|
|
3.0
|
%
|
|
|
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.
57
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Outstanding
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
Shares Under
|
|
|
Weighted-Average
|
|
|
Shares Under
|
|
|
Weighted-Average
|
|
|
Shares Under
|
|
|
Weighted-Average
|
|
|
|
Option
|
|
|
Exercise
Price
|
|
|
Option
|
|
|
Exercise
Price
|
|
|
Option
|
|
|
Exercise
Price
|
|
|
Outstanding at beginning of year
|
|
|
1,568,276
|
|
|
$
|
18.93
|
|
|
|
1,672,362
|
|
|
$
|
17.09
|
|
|
|
1,530,392
|
|
|
$
|
15.38
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
572,750
|
|
|
|
19.78
|
|
|
|
529,650
|
|
|
|
19.85
|
|
Exercised
|
|
|
(742,528
|
)
|
|
|
18.74
|
|
|
|
(650,667
|
)
|
|
|
15.06
|
|
|
|
(301,823
|
)
|
|
|
13.56
|
|
Forfeited and expired
|
|
|
(12,038
|
)
|
|
|
19.36
|
|
|
|
(26,169
|
)
|
|
|
15.93
|
|
|
|
(85,857
|
)
|
|
|
15.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
813,710
|
|
|
|
19.10
|
|
|
|
1,568,276
|
|
|
|
18.93
|
|
|
|
1,672,362
|
|
|
|
17.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
394,915
|
|
|
|
18.23
|
|
|
|
474,836
|
|
|
|
17.67
|
|
|
|
555,733
|
|
|
|
14.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007, 2006, and 2005 was
approximately $2.9 million, $4.6 million, and
$1.6 million, respectively. The intrinsic value for stock
options exercisable at August 31, 2007 was
$1.4 million with a remaining term for options exercisable
of 5.7 years. For stock options outstanding at
August 31, 2007, exercise prices range from $11.62 to
$24.69. The weighted average remaining contractual life for
options outstanding at August 31, 2007 was 7 years.
Stock options vested and expected to vest at August 31,
2007 were 798,893 with a remaining contractual term of
0.8 years and a weighted-average exercise price of $19.08.
The aggregate intrinsic value of stock options vested and
expected to vest was $2.1 million.
Total unrecognized compensation cost, including forfeitures,
related to nonvested share-based compensation arrangements at
August 31, 2007 was approximately $6.0 million. This
cost is expected to be recognized over a weighted-average period
of approximately 1.5 years.
During the year ended August 31, 2007, the Company granted
restricted stock awards for 228,250 shares. Included in the
grant are awards for approximately 138,000 shares for which
the restrictions will lapse based on market performance
criteria. The weighted-average grant date fair value of the
performance awards based on market conditions was $20.55 per
share. The valuation for these awards which vest based on market
performance criteria was based upon the Monte Carlo simulation,
which is a binomial model that appropriately represents the
characteristics of these grants. Restrictions on the ultimate
number of shares underlying performance awards that will lapse,
if any, will be dependant 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. Restrictions on the remaining
shares underlying the restricted stock awards will lapse evenly
over a three year period and are valued at the fair market value
on the date of grant.
The fair value of the market performance based awards granted
during the year ended August 31, 2007 was estimated using a
binomial model with the following weighted-average assumptions:
|
|
|
|
|
Weighted-Average
Assumptions
|
|
|
|
|
Dividend yield
|
|
|
2.63
|
%
|
Expected volatility
|
|
|
26.00
|
%
|
Risk-free interest rate
|
|
|
4.45
|
%
|
Correlation
|
|
|
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
58
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Restricted stock awards under the 2002 Equity Incentive Plan
vest over four years following the date of grant. Restricted
stock awards under the 2006 Incentive Plan can vest over various
periods. The restricted stock grants outstanding under the 2006
Incentive Plan have vesting periods of three years following the
date of grant. Some of these awards can have vesting
restrictions as set at the grant date. Approximately 138,000 of
the outstanding awards as August 31, 2007 are performance
awards with vesting periods based on market conditions 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, 2006
|
|
|
362,900
|
|
|
$
|
18.05
|
|
Granted
|
|
|
228,250
|
|
|
|
21.15
|
|
Released
|
|
|
(107,544
|
)
|
|
|
15.22
|
|
Forfeited
|
|
|
(15,306
|
)
|
|
|
19.23
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2007
|
|
|
468,300
|
|
|
|
20.17
|
|
|
|
|
|
|
|
|
|
|
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
$2.2 million in fiscal 2007, $1.5 million in fiscal
2006 and $1.1 million in fiscal 2005.
During fiscal 2007, the Company granted 108,550 restricted stock
units. Each restricted stock unit is equivalent to one share of
A. Schulman, Inc. stock on the vesting date. The 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. The Company has recorded approximately $0.9 million,
$0.9 million and $0.3 million of expense related to
restricted stock units for the years ended August 31, 2007,
2006 and 2005, respectively. At August 31, 2007, the
Company had approximately 245,000 restricted stock units
outstanding.
|
|
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.
59
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,032,348
|
|
|
|
29,961,580
|
|
|
|
30,619,780
|
|
Incremental shares from stock options
|
|
|
149,649
|
|
|
|
174,674
|
|
|
|
237,977
|
|
Incremental shares from restricted stock
|
|
|
187,411
|
|
|
|
257,956
|
|
|
|
192,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
27,369,408
|
|
|
|
30,394,210
|
|
|
|
31,049,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal years 2007, 2006, and 2005, there were approximately
65,000, 1.0 million and 1.1 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Net income
|
|
$
|
22,619
|
|
|
$
|
32,662
|
|
|
$
|
32,093
|
|
Less: Preferred stock dividends
|
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock
|
|
$
|
22,566
|
|
|
$
|
32,609
|
|
|
$
|
32,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
60
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases certain equipment, buildings, transportation
vehicles and computer equipment. Total rental expense was
$6.7 million in 2007, $6.0 million in 2006 and
$5.8 million in 2005. 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,
|
|
|
|
|
2008
|
|
$
|
3,619
|
|
2009
|
|
|
2,432
|
|
2010
|
|
|
2,300
|
|
2011
|
|
|
1,153
|
|
2012
|
|
|
1,626
|
|
2013 and thereafter
|
|
|
175
|
|
|
|
|
|
|
|
|
$
|
11,305
|
|
|
|
|
|
|
|
|
NOTE 13
|
SEGMENT INFORMATION
|
The Company is engaged in the sale of plastic resins in various
forms, which are used as raw materials by its customers. To
identify reportable segments, the Company considered its
operating structure and the types of information subject to
regular review by its President and Chief Executive Officer, who
is the Chief Operating Decision Maker. On this basis, the
Company operates primarily in two geographic segments, North
America and Europe, including Asia (Europe).
The North American segment includes operations conducted in the
United States, Canada, and Mexico. The Companys European
segment includes operations conducted in Belgium, France,
Germany, Poland, Hungary, Indonesia, Italy, Spain, Switzerland,
China, Luxembourg, Denmark, Sweden, Turkey, South Korea, Czech
Republic and the United Kingdom. The accounting policies of each
business segment are consistent with those described in the
Summary of Significant Accounting Policies.
Operating income includes all items except for interest expense,
interest income, restructuring expense, loss on extinguishment
of debt and taxes. Corporate expenses have been allocated
between the North American and European segments. Assets of
geographic segments represent those assets identified with the
operation of each segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
|
August 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers
|
|
$
|
477,081
|
|
|
$
|
1,309,975
|
|
|
$
|
|
|
|
$
|
1,787,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit*
|
|
$
|
41,756
|
|
|
$
|
171,066
|
|
|
$
|
|
|
|
$
|
212,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(19,132
|
)
|
|
$
|
73,266
|
|
|
$
|
|
|
|
$
|
54,134
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
(5,812
|
)
|
|
|
(5,812
|
)
|
Restructuring expense North America
|
|
|
|
|
|
|
|
|
|
|
(1,048
|
)
|
|
|
(1,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
(19,132
|
)
|
|
$
|
73,266
|
|
|
$
|
(6,860
|
)
|
|
$
|
47,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
287,481
|
|
|
$
|
586,634
|
|
|
$
|
|
|
|
$
|
874,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
$
|
10,416
|
|
|
$
|
15,386
|
|
|
$
|
|
|
|
$
|
25,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
17,140
|
|
|
$
|
12,239
|
|
|
$
|
|
|
|
$
|
29,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
|
August 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers
|
|
$
|
493,644
|
|
|
$
|
1,122,742
|
|
|
$
|
|
|
|
$
|
1,616,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
56,120
|
|
|
$
|
163,826
|
|
|
$
|
|
|
|
$
|
219,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(9,069
|
)
|
|
$
|
79,126
|
|
|
$
|
|
|
|
$
|
70,057
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
(2,924
|
)
|
|
|
(2,924
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(4,986
|
)
|
|
|
(4,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
(9,069
|
)
|
|
$
|
79,126
|
|
|
$
|
(7,910
|
)
|
|
$
|
62,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
305,998
|
|
|
$
|
537,247
|
|
|
$
|
|
|
|
$
|
843,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
$
|
10,460
|
|
|
$
|
14,452
|
|
|
$
|
|
|
|
$
|
24,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
18,441
|
|
|
$
|
10,798
|
|
|
$
|
|
|
|
$
|
29,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers
|
|
$
|
439,441
|
|
|
$
|
993,755
|
|
|
$
|
|
|
|
$
|
1,433,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
46,282
|
|
|
$
|
146,357
|
|
|
$
|
|
|
|
$
|
192,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(11,000
|
)
|
|
$
|
62,777
|
|
|
$
|
|
|
|
$
|
51,777
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
(2,259
|
)
|
|
|
(2,259
|
)
|
Restructuring expense North America
|
|
|
|
|
|
|
|
|
|
|
(182
|
)
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
(11,000
|
)
|
|
$
|
62,777
|
|
|
$
|
(2,441
|
)
|
|
$
|
49,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
273,746
|
|
|
$
|
510,616
|
|
|
$
|
|
|
|
$
|
784,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
$
|
10,833
|
|
|
$
|
14,249
|
|
|
$
|
|
|
|
$
|
25,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
13,491
|
|
|
$
|
13,453
|
|
|
$
|
|
|
|
$
|
26,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Gross profit for North America for the year ended
August 31, 2007 includes approximately $1.1 million of
accelerated depreciation related to the North America
restructuring as discussed in Note 16. |
Below is a summary of sales by point of origin and assets by
location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
347,232
|
|
|
$
|
366,836
|
|
|
$
|
320,698
|
|
Germany
|
|
|
608,536
|
|
|
|
510,100
|
|
|
|
456,765
|
|
Other International
|
|
|
831,288
|
|
|
|
739,450
|
|
|
|
655,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,787,056
|
|
|
$
|
1,616,386
|
|
|
$
|
1,433,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Lived Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
71,593
|
|
|
$
|
66,491
|
|
|
$
|
57,523
|
|
Germany
|
|
|
30,350
|
|
|
|
31,781
|
|
|
|
32,246
|
|
Other International
|
|
|
98,604
|
|
|
|
88,607
|
|
|
|
91,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,547
|
|
|
$
|
186,879
|
|
|
$
|
181,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The majority of the Companys sales for the years ended
August 31, 2007, 2006 and 2005 can be classified into five
primary product families. The approximate amount and percentage
of consolidated sales for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Product
Family
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands,
except for %s)
|
|
|
Color and additive concentrates
|
|
$
|
627,268
|
|
|
|
35
|
|
|
$
|
579,825
|
|
|
|
36
|
|
|
$
|
501,159
|
|
|
|
35
|
|
Polyolefins
|
|
|
543,870
|
|
|
|
30
|
|
|
|
495,163
|
|
|
|
31
|
|
|
|
424,066
|
|
|
|
30
|
|
Engineered compounds
|
|
|
426,382
|
|
|
|
24
|
|
|
|
393,312
|
|
|
|
24
|
|
|
|
377,008
|
|
|
|
26
|
|
Polyvinyl chloride (PVC)
|
|
|
64,658
|
|
|
|
4
|
|
|
|
64,174
|
|
|
|
4
|
|
|
|
54,952
|
|
|
|
4
|
|
Tolling
|
|
|
21,450
|
|
|
|
1
|
|
|
|
16,482
|
|
|
|
1
|
|
|
|
16,117
|
|
|
|
1
|
|
Other
|
|
|
103,428
|
|
|
|
6
|
|
|
|
67,430
|
|
|
|
4
|
|
|
|
59,894
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,787,056
|
|
|
|
100
|
|
|
$
|
1,616,386
|
|
|
|
100
|
|
|
$
|
1,433,196
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
During fiscal 2006, a railroad company filed suit against the
Company seeking compensatory damages and reimbursement of
environmental costs to investigate and remediate property
located near its Bellevue, Ohio facility. In fiscal 2007, the
Company and the railroad company agreed to a settlement that the
Company would pay the railroad company a settlement of
approximately $64,000. The Company paid this settlement in
fiscal 2007 and was released from liability for current and
future right of way investigations on this property.
|
|
NOTE 15
|
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 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 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. It
is anticipated that the Company will complete the Repurchase
Program through open market repurchases from time to time. The
number of shares to be repurchased and the timing of repurchases
will depend upon the prevailing market prices and any other
considerations that may, in the opinion of the Board of
Directors or management, affect the advisability of repurchasing
shares. 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 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.
Under the Repurchase Program the Company has approximately
4.0 million shares still available to be repurchased.
63
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 16
|
NORTH AMERICAN
RESTRUCTURING
|
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. The two manufacturing lines at the
Orange, Texas plant are anticipated to continue production into
the first quarter of fiscal 2008 while the Orange, Texas
warehouse was closed during the third quarter of fiscal 2007. In
connection with this plan, the Company reduced its workforce by
65 positions.
In February 2007, the Company announced the second phase of its
North America restructuring plan which implements several
initiatives that will 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.
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
|
|
|
Accrual
Balance
|
|
|
|
Charges
|
|
|
Paid Fiscal
2007
|
|
|
August 31,
2007
|
|
|
|
(In
thousands)
|
|
|
Employee related costs
|
|
$
|
980
|
|
|
$
|
(906
|
)
|
|
$
|
74
|
|
Other costs
|
|
|
68
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
1,048
|
|
|
$
|
(974
|
)
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation, included in North America cost of
sales in 2007
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The employee related costs include severance payments and
medical insurance for employees whose positions have been
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 will 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.
During fiscal 2004, in order to balance capacity with demand,
the Company closed two manufacturing lines at its Nashville,
Tennessee plant. As a result, the Company recorded pre-tax
charges of $0.2 million and $1.8 million for the years
ended August 31, 2005 and 2004, respectively. There were no
charges related to this plan during the years ended
August 31, 2006 and 2007.
64
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The charges were primarily non-cash and are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
Balance
|
|
|
|
|
|
|
|
|
Accrual
Balance
|
|
|
|
Original
|
|
|
Paid Fiscal
|
|
|
August 31,
|
|
|
2005
|
|
|
Paid Fiscal
|
|
|
August 31,
|
|
|
|
Charge
|
|
|
2004
|
|
|
2004
|
|
|
Charges
|
|
|
2005
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Employee related costs
|
|
$
|
350
|
|
|
$
|
|
|
|
$
|
350
|
|
|
$
|
(34
|
)
|
|
$
|
(316
|
)
|
|
$
|
|
|
Other costs
|
|
|
66
|
|
|
|
|
|
|
|
66
|
|
|
|
216
|
|
|
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
416
|
|
|
$
|
|
|
|
$
|
416
|
|
|
$
|
182
|
|
|
$
|
(598
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation, included in North America cost of
sales in 2004
|
|
|
1,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges for 2005 represent additional equipment
removal costs pertaining to the 2004 Nashville restructuring.
The employee related costs included severance payments and
medical insurance for 30 employees at the Nashville
facility. The other costs included equipment removal and other
exit costs that were incurred as of August 31, 2005. The
accelerated depreciation represents a change in estimate for the
reduced life on equipment totaling $1.4 million. At
August 31, 2005, the restructuring was complete, therefore
no further cash out-flows were required by the Company.
|
|
NOTE 17
|
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 Swedish
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 is expected to expand the Companys offerings
of color masterbatches 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 includes a potential
deferred payment that could be paid over a three year period
which is based on certain terms in the purchase agreement. The
purchase price allocation included in the accompanying
consolidated financial statements for this acquisition is
subject to normal course working capital adjustments and may be
adjusted as these adjustments have not been agreed upon. 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. The results of operations and
financial position for the acquired companies are included in
the consolidated financial statements of the Company. The
earnings from the acquired companies had a minimal effect on
consolidated earnings for fiscal 2007.
|
|
NOTE 18
|
RESEARCH AND
DEVELOPMENT
|
A large part of the Companys technical activities relate
to the continuous refinement of compounds for specific
applications of customers. 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, $5.5 million and
$4.8 million in fiscal years 2007, 2006 and 2005,
respectively. The increase in these activities is primarily
related to the new
Invision®
sheet product and to support new consumer packaging and
automotive applications.
65
A. SCHULMAN,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 19
|
QUARTERLY FINANCIAL
HIGHLIGHTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
|
Year
Ended
|
|
|
|
Nov. 30,
|
|
|
Feb. 28,
|
|
|
May 31,
|
|
|
Aug. 31,
|
|
|
Aug. 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007(b)
|
|
|
2007(c)
|
|
|
2007
|
|
|
|
(In thousands,
except per share data)
|
|
|
Net Sales
|
|
$
|
442,728
|
|
|
$
|
412,767
|
|
|
$
|
466,955
|
|
|
$
|
464,606
|
|
|
$
|
1,787,056
|
|
Gross Profit
|
|
|
49,540
|
|
|
|
48,159
|
|
|
|
59,379
|
|
|
|
55,744
|
|
|
|
212,822
|
|
Net Income(a)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
|
Year
Ended
|
|
|
|
Nov. 30,
|
|
|
Feb. 28,
|
|
|
May 31,
|
|
|
Aug. 31,
|
|
|
Aug. 31,
|
|
|
|
2005
|
|
|
2006(e)
|
|
|
2006(f)
|
|
|
2006
|
|
|
2006
|
|
|
Net Sales
|
|
$
|
396,525
|
|
|
$
|
371,219
|
|
|
$
|
427,313
|
|
|
$
|
421,329
|
|
|
$
|
1,616,386
|
|
Gross Profit
|
|
|
60,036
|
|
|
|
50,574
|
|
|
|
57,422
|
|
|
|
51,914
|
|
|
|
219,946
|
|
Net Income(d)
|
|
|
12,309
|
|
|
|
3,940
|
|
|
|
8,920
|
|
|
|
7,493
|
|
|
|
32,662
|
|
Basic and Diluted Earnings Per Share of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.40
|
|
|
$
|
0.12
|
|
|
$
|
0.30
|
|
|
$
|
0.27
|
|
|
$
|
1.09
|
|
Diluted
|
|
$
|
0.40
|
|
|
$
|
0.12
|
|
|
$
|
0.29
|
|
|
$
|
0.26
|
|
|
$
|
1.07
|
|
|
|
|
(a) |
|
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. |
|
(b) |
|
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. |
|
(c) |
|
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. |
|
(d) |
|
Net income for the quarter ended November 30, 2005 included
a tax charge of $3,070 in anticipation of the estimated dividend
repatriation from Europe. Net income for the quarter ended
February 28, 2006 increased as a result of a reduction in
that estimate of $827. |
|
(e) |
|
Net income for the quarter ended February 28, 2006 included
charges related to the extinguishment of debt in the amount of
$4,986, and income from the cancellation of certain distribution
agreements in Europe of $600, net of tax. |
|
(f) |
|
Net income for the quarter ended May 31, 2006 included a
charge of $760 for tax contingencies and income from life
insurance proceeds of $494. |
66
|
|
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, 2007.
Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
August 31, 2007 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated
in their report included herein.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
67
|
|
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 2007 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 the Proxy Statement under the captions Executive
Officers of the Corporation and 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.
|
|
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 located as set forth in the index on page 37 of this
report.
(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.
68
(3) Exhibits:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
3(a)
|
|
|
Amended and Restated Articles of Incorporation of the Company
(for purposes of Commission reporting compliance only)
(incorporated by reference to Exhibit 3.1 to the Companys
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 Form 10-Q for fiscal
quarter ended May 31, 2007).
|
|
4(a)
|
|
|
Rights Agreement dated as of January 26, 2006, between the
Company and National City Bank, as Rights Agent, which includes
as Exhibit B thereto the Form of Rights Certificate
(incorporated by reference to Exhibit 1 to the Companys
Registration Statement on Form 8-A, dated January 26, 2006).
|
|
10(a)*
|
|
|
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 Form 10-K for fiscal year ended
August 31, 1992).
|
|
10(b)*
|
|
|
Amendment to A. Schulman, Inc. 1992 Non-Employee Directors
Stock Option Plan (incorporated by reference to Exhibit 10.10 to
the Companys Form 10-Q for the fiscal quarter ended
February 29, 1996).
|
|
10(c)*
|
|
|
Second Amendment to A. Schulman, Inc. 1992 Non-Employee
Directors Stock Option Plan (incorporated by reference to
Exhibit 10(e) to the Companys Form 10-K for the fiscal
year ended August 31, 1998).
|
|
10(d)*
|
|
|
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(e)*
|
|
|
Fourth Amendment to A. Schulman, Inc. 1992 Non-Employee
Directors Stock Option Plan (incorporated by reference to
Exhibit 4.1 to the Companys Form 10-Q for the fiscal
quarter ended November 30, 2000).
|
|
10(f)*
|
|
|
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(g)*
|
|
|
Non-Qualified Profit Sharing Plan (incorporated by reference to
Exhibit 10(d) to the Companys Form 10-K for the fiscal
year ended August 31, 1995).
|
|
10(h)*
|
|
|
Amendment to A. Schulman, Inc. Nonqualified Profit Sharing Plan
(incorporated by reference to Exhibit 10.8 to the Companys
Form 10-Q for the fiscal quarter ended February 29, 1996).
|
|
10(i)*
|
|
|
Supplemental Executive Retirement Plan of the Company, effective
January 1, 2004 (incorporated by reference to Exhibit 10(n) to
the Companys Form 10-K for the fiscal year ended August
31, 2004).
|
|
10(j)*
|
|
|
Employment Agreement between the Company and Terry L. Haines
dated January 31, 1996 (incorporated by reference to Exhibit
10.3 to the Companys Form 10-Q for fiscal quarter ended
February 29, 1996).
|
|
10(k)*
|
|
|
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 Form 10-K for the fiscal
year ended August 31, 1999).
|
|
10(l)*
|
|
|
Agreement between the Company and Terry L. Haines dated as of
March 21, 1991 (incorporated by reference to Exhibit 10(m) to
the Companys Form 10-K for fiscal year ended August 31,
1992).
|
|
10(m)*
|
|
|
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(n)*
|
|
|
Employment Agreement between the Company and Barry A. Rhodes
dated January 10, 2002 (incorporated by reference to Exhibit
10.1 to the Companys form 10-Q for the fiscal quarter
ended February 28, 2002).
|
|
10(o)*
|
|
|
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(p)*
|
|
|
Transition Agreement between the Company and Robert A. Stefanko
(incorporated by reference to the Companys Current Report
on Form 8-K dated April 17, 2006).
|
|
10(q)*
|
|
|
A. Schulman, Inc. 2006 Incentive Plan (incorporated by reference
to Exhibit 10.2 to the Companys 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 Time-Based) (incorporated by reference to
Exhibit 10.1 to the Companys Form 10-Q for the fiscal
quarter ended May 31, 2007).
|
|
10(s)*
|
|
|
A. Schulman, Inc. 2006 Incentive Plan Form of Restricted Stock
Agreement (Employee Performance-Based) (incorporated by
reference to Exhibit 10.2 to the Companys Form 10-Q for
the fiscal quarter ended May 31, 2007).
|
|
10(t)*
|
|
|
A. Schulman, Inc. 2006 Incentive Plan Form of Restricted Unit
Agreement (incorporated by reference to Exhibit 10.3 to the
Companys Form 10-Q for the fiscal quarter ended May 31,
2007).
|
|
10(u)*
|
|
|
A. Schulman, Inc. 2006 Incentive Plan Form of Restricted Stock
Agreement (Non-employee Directors) (incorporated by reference to
Exhibit 10.4 to the Companys Form 10-Q for the fiscal
quarter ended May 31, 2007).
|
|
10(v)*
|
|
|
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 Form 10-Q for
the fiscal quarter ended May 31, 2007).
|
69
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
10(w)
|
|
|
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(x)
|
|
|
Note Purchase Agreement, dated as of March 1, 2006, by and
between A. Schulman Europe GmbH, A. Schulman, Inc. and the
Purchasers and Guarantors named therein (incorporated by
reference to Exhibit 99.2 to the Companys current Report
on Form 8-K dated February 28, 2006).
|
|
10(y)
|
|
|
ISDA (International Swap Dealers Association, Inc.) Master
Agreement by and between KeyBank National Association and the
Company dated January 13, 2004 (incorporated by reference to
Exhibit 10(ff) to the Companys Form 10-K for the fiscal
year ended August 31, 2004).
|
|
10(z)
|
|
|
Agreement dated October 21, 2005 among the Company, Barington
Capital Group, L.P. and others (incorporated by reference to
Exhibit 99.2 to the Companys Current Report on Form 8-K
dated October 21, 2005)
|
|
10(aa)
|
|
|
Agreement dated October 25, 2006 among the Company, Barington
Capital Group, L.P. and others (incorporated by reference to
Exhibit 99.2 to the Companys Current Report on Form 8-K
dated October 25, 2006).
|
|
10(bb)*
|
|
|
Non-Employee Directors Compensation (incorporated by reference
to Exhibit 10(gg) to the Companys Form 10-K for the fiscal
year ended August 31, 2006).
|
|
10(cc)*
|
|
|
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(dd)
|
|
|
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(ee)*
|
|
|
The Companys 2007 Bonus Plan (incorporated by reference to
the Companys Current Report on Form 8-K dated October 16,
2006).
|
|
10(ff)*
|
|
|
The Companys 2008 Bonus Plan (incorporated by reference to
the Companys Current Report on Form 8-K dated October 17,
2007).
|
|
10(gg)
|
|
|
Agreement dated October 21, 2005 among the Company, Barington
Capital Group, L.P. and others (incorporated by reference to
Exhibit 99.2 to the Companys Report on Form 8-K dated
October 24, 2005)
|
|
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
70
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
Dated: October 31, 2007
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.
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Signature
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Title
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Date
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/s/ Terry
L. Haines
Terry
L. Haines
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Director and Principal Executive Officer
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October 31, 2007
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/s/ Paul
F. DeSantis
Paul
F. DeSantis
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Principal Financial Officer and Principal Accounting Officer
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October 31, 2007
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David
G. Birney*
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Director
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Howard
R. Curd*
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Director
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Joseph
M. Gingo*
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Director
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Willard
R. Holland*
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Director
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James
A. Karman*
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Director
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James
S. Marlen*
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Director
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Michael
A. McManus, Jr.*
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Director
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Peggy
Miller*
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Director
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James
A. Mitarotonda*
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Director
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71
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Signature
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Title
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Date
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Ernest
J. Novak, Jr.*
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Director
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John
B. Yasinsky*
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Director
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*By:
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/s/ Terry
L. Haines
Terry
L. Haines
Attorney-in-Fact
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October 31, 2007
*Powers of attorney authorizing Terry L. Haines 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.
72
A. SCHULMAN,
INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE F-1
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Balance at
Beginning
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Charges to Cost
and
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Translation
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Balance at 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, 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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Year ended August 31, 2005
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$
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9,268
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$
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1,363
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$
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(2,599
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)
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$
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195
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$
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8,227
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Inventory Reserve
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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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Year ended August 31, 2005
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$
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10,522
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$
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5,803
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$
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(5,246
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)
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$
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156
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$
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11,235
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Valuation allowance deferred tax assets
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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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Year ended August 31, 2005
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$
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39,789
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$
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2,656
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$
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$
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$
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42,445
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73