Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2009
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 |
For the transition period from _____ to _____.
Commission File No. 0-7459
A. SCHULMAN, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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34-0514850 |
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(State or Other Jurisdiction
of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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3550 West Market Street, Akron, Ohio
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44333 |
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(Address of Principal Executive Offices)
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(ZIP Code) |
Registrants telephone number, including area code: (330) 666-3751
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of accelerated filer, large
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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
Number of shares of common stock, $1.00 par value, outstanding as of June 30, 2009
26,068,463
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1
Consolidated Financial Statements
A. SCHULMAN, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands except per share data)
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Three months ended May 31, |
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Nine months ended May 31, |
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2009 |
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2008 |
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2009 |
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2008 |
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Unaudited |
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Unaudited |
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Net sales |
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$ |
297,699 |
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$ |
511,767 |
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$ |
958,792 |
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$ |
1,488,152 |
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Cost of sales |
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251,962 |
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451,906 |
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843,568 |
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1,317,314 |
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Selling, general and administrative expenses |
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32,888 |
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40,496 |
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105,392 |
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126,202 |
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Minority interest |
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291 |
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245 |
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141 |
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621 |
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Interest expense |
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1,192 |
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2,311 |
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3,587 |
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5,930 |
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Interest income |
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(530 |
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(494 |
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(1,961 |
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(1,397 |
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Foreign currency transaction (gains) losses |
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2,430 |
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984 |
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(6,218 |
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1,580 |
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Other (income) expense |
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(1,218 |
) |
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253 |
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(2,231 |
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252 |
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Curtailment gain |
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(2,313 |
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(2,609 |
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(2,313 |
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Goodwill impairment |
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964 |
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Asset impairment |
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283 |
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3,601 |
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2,462 |
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8,820 |
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Restructuring expense |
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981 |
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3,685 |
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6,230 |
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6,307 |
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288,279 |
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500,674 |
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948,361 |
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1,464,280 |
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Income before taxes |
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9,420 |
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11,093 |
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10,431 |
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23,872 |
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Provision for U.S. and foreign income taxes |
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1,971 |
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3,961 |
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5,324 |
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10,491 |
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Net income |
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7,449 |
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7,132 |
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5,107 |
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13,381 |
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Less: Preferred stock dividends |
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(13 |
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(13 |
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(40 |
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(40 |
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Net income applicable to common stock |
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$ |
7,436 |
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$ |
7,119 |
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$ |
5,067 |
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$ |
13,341 |
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Weighted-average number of shares outstanding: |
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Basic |
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25,789 |
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26,398 |
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25,783 |
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27,048 |
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Diluted |
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25,939 |
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26,665 |
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25,962 |
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27,299 |
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Earnings per share of common stock: |
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Basic |
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$ |
0.29 |
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$ |
0.26 |
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$ |
0.20 |
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$ |
0.49 |
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Diluted |
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$ |
0.29 |
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$ |
0.26 |
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$ |
0.20 |
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$ |
0.49 |
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The accompanying notes are an integral part of the consolidated financial statements.
- 2 -
A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEETS
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May 31, |
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August 31, |
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2009 |
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2008 |
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Unaudited |
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(In thousands except share data) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
202,517 |
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$ |
97,728 |
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Accounts receivable, less allowance for doubtful accounts of $9,232 at
May 31, 2009 and $8,316 at August 31, 2008 |
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208,709 |
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320,926 |
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Inventories, average cost or market, whichever is lower |
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127,373 |
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224,964 |
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Prepaid expenses and other current assets |
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18,341 |
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18,499 |
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Total current assets |
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556,940 |
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662,117 |
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Other assets: |
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Cash surrender value of life insurance |
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3,109 |
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2,665 |
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Deferred charges and other assets |
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20,795 |
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23,017 |
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Goodwill |
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11,208 |
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10,679 |
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Intangible assets |
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164 |
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195 |
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35,276 |
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36,556 |
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Property, plant and equipment, at cost: |
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Land and improvements |
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16,098 |
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17,026 |
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Buildings and leasehold improvements |
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148,182 |
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156,465 |
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Machinery and equipment |
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352,278 |
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346,999 |
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Furniture and fixtures |
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39,132 |
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41,272 |
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Construction in progress |
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4,668 |
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9,726 |
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560,358 |
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571,488 |
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Accumulated depreciation and investment grants of $1,017 at May 31, 2009 and
$1,123 at August 31, 2008 |
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378,059 |
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379,740 |
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Net property, plant and equipment |
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182,299 |
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191,748 |
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$ |
774,515 |
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$ |
890,421 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Notes payable |
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$ |
2,672 |
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$ |
9,540 |
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Accounts payable |
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124,723 |
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174,226 |
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U.S. and foreign income taxes payable |
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9,461 |
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3,212 |
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Accrued payrolls, taxes and related benefits |
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29,857 |
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37,686 |
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Other accrued liabilities |
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31,474 |
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34,566 |
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Total current liabilities |
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198,187 |
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259,230 |
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Long-term debt |
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101,306 |
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104,298 |
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Other long-term liabilities |
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83,524 |
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88,235 |
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Deferred income taxes |
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5,190 |
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5,544 |
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Minority interest |
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4,694 |
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5,533 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock, 5% cumulative, $100 par value, authorized, issued and outstanding -
10,564 shares at May 31, 2009 and August 31, 2008 |
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1,057 |
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1,057 |
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Special stock, 1,000,000 shares authorized, none outstanding |
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Common stock $1 par value, authorized - 75,000,000 shares, issued -
42,270,354 shares at May 31, 2009 and 42,231,341 shares at August 31, 2008 |
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42,270 |
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42,231 |
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Other capital |
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114,097 |
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112,105 |
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Accumulated other comprehensive income |
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40,299 |
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79,903 |
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Retained earnings |
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506,703 |
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513,451 |
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Treasury stock, at cost, 16,207,011 shares at May 31, 2009 and
16,095,491 shares at August 31, 2008 |
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(322,812 |
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(321,166 |
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Common stockholders equity |
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380,557 |
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426,524 |
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Total stockholders equity |
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381,614 |
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427,581 |
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$ |
774,515 |
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$ |
890,421 |
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The accompanying notes are an integral part of the consolidated financial statements.
- 3 -
A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine months ended May 31, |
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2009 |
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2008 |
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Unaudited |
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(In thousands) |
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Provided from (used in) operating activities: |
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Net income |
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$ |
5,107 |
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$ |
13,381 |
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Adjustments to reconcile net income to net cash
provided from (used in) operating activities: |
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Depreciation and amortization |
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17,926 |
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21,047 |
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Deferred tax provision |
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(307 |
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(1,255 |
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Pension and other deferred compensation |
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777 |
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4,966 |
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Postretirement benefit obligation |
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146 |
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2,145 |
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Net losses on asset sales |
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162 |
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334 |
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Minority interest in net income of subsidiaries |
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141 |
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621 |
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Restructuring charges, including $1,185 and $0 of accelerated
depreciation in fiscal 2009 and 2008, respectively |
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7,415 |
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6,307 |
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Curtailment gain |
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(2,609 |
) |
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(2,313 |
) |
Goodwill impairment |
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|
964 |
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Asset impairment |
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2,462 |
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8,820 |
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Changes in assets and liabilities: |
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Accounts receivable |
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85,259 |
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1,991 |
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Inventories |
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82,381 |
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7,933 |
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Accounts payable |
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(38,229 |
) |
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7,002 |
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Restructuring payments |
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(3,849 |
) |
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(2,266 |
) |
Income taxes |
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4,768 |
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(8,427 |
) |
Accrued payrolls and other accrued liabilities |
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(9,153 |
) |
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3,250 |
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Changes in other assets and other long-term liabilities |
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(1,772 |
) |
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2,046 |
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Net cash provided from operating activities |
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150,625 |
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66,546 |
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Provided from (used in) investing activities: |
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Expenditures for property, plant and equipment |
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(21,951 |
) |
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(18,648 |
) |
Proceeds from the sale of assets |
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744 |
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3,341 |
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Net cash used in investing activities |
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(21,207 |
) |
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(15,307 |
) |
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Provided from (used in) financing activities: |
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Cash dividends paid |
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(11,855 |
) |
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(12,114 |
) |
Net decrease in notes payable |
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(7,156 |
) |
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|
(787 |
) |
Borrowings on revolving credit facilities |
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19,000 |
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|
104,032 |
|
Repayments on revolving credit facilities |
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(19,000 |
) |
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(74,139 |
) |
Cash distributions to minority shareholders |
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(980 |
) |
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|
(600 |
) |
Common stock issued |
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(34 |
) |
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|
1,830 |
|
Purchase of treasury stock |
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(1,646 |
) |
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(30,580 |
) |
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Net cash used in financing activities |
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(21,671 |
) |
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(12,358 |
) |
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Effect of exchange rate changes on cash |
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(2,958 |
) |
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|
1,935 |
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Net increase in cash and cash equivalents |
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|
104,789 |
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|
40,816 |
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Cash and cash equivalents at beginning of period |
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97,728 |
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|
43,045 |
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Cash and cash equivalents at end of period |
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$ |
202,517 |
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$ |
83,861 |
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The accompanying notes are an integral part of the consolidated financial statements.
- 4 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The interim financial statements included reflect all adjustments, which are, in the opinion
of management, necessary for a fair presentation of the results of the interim period
presented. All such adjustments are of a normal recurring nature.
The year-end balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in the United
States of America.
The results of operations for the nine months ended May 31, 2009 are not necessarily
indicative of the results expected for the year ending August 31, 2009.
To identify reportable segments, A. Schulman, Inc. (the Company) considers its operating
structure and the types of information subject to regular review by its President and Chief
Executive Officer (CEO), who is the Chief Operating Decision Maker (CODM). Effective
September 1, 2008, the Company named a general manager of Asia and a general manager of
Europe. This change separated the responsibilities that were previously combined under the
general manager of Europe, which then included Asia. Based on the Companys new management
structure and an evaluation of how the CODM reviews performance and allocates resources, the
Company redefined its European segment to separate the Asian operations from the European
operations beginning in the first quarter of fiscal 2009. Prior periods have been restated
to reflect the current presentation. The Companys segments are Europe, North America
Masterbatch (NAMB) (previously, referred to as North America Polybatch or NAPB), North
America Engineered Plastics (NAEP), North America Distribution Services (NADS), Asia and
A. Schulman Invision, Inc. (Invision). The segments are discussed further in footnote 11.
The accounting policies for the periods presented are the same as described in Note 1
Summary of Significant Accounting Policies to the consolidated financial statements
contained in the Companys Annual Report on Form 10-K for the fiscal year ended August 31,
2008, except for new accounting pronouncements which includes the adoption of Financial
Accounting Standards Board (FASB) Statement No. 157, (SFAS 157), Fair Value Measurement
and FASB Statement No. 159, (SFAS 159), The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115. The adoption of
SFAS 157 and SFAS 159 is discussed in footnote 8.
Certain items previously reported in specific financial statement captions have been
reclassified to conform to the fiscal 2009 presentation.
(2) |
|
CASH AND CASH EQUIVALENTS |
All highly liquid investments purchased with an original maturity of three months or less
are considered to be cash equivalents. Such investments amounted to $142.5 million at May
31, 2009 and $44.0 million at August 31, 2008. The Companys cash equivalents and
investments are diversified with numerous financial institutions which management believes
to have acceptable credit ratings. These investments are primarily money-market funds and
short-term time deposits. The money-market funds are primarily AAA rated by third parties.
Management continues to monitor the placement of its cash given the current credit market.
The recorded amount of these investments approximates fair value. Investments with
maturities between three and twelve months are considered to be short-term investments. As
of May 31, 2009 and August 31, 2008, the Company did not hold any short-term investments.
- 5 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with FASB Statement No. 142 (SFAS 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 fair value of a reporting unit below its carrying
value.
The Company completed its annual goodwill impairment review as of February 28, 2009, which
is all related to the Europe segment, and no impairment charges were necessary. In addition,
the Company is not aware of any triggers which would require a goodwill impairment test as
of May 31, 2009. Although the Company redefined its Europe segment to separate the Asia
operations from the Europe operations beginning in fiscal 2009, this did not impact the
reporting units for goodwill testing. The fair value used in the analysis was based on
average earnings before interest, taxes, depreciation and amortization and cash flow
multiples. The Company has been consistent with its method of estimating fair value when an
indication of fair value from a buyer or similar specific transactions is not available.
During the second quarter of fiscal 2008, as a result of the Companys announcement in
February 2008 to pursue a sale of its Orange, Texas facility, the Company noted a trigger
event to test for impairment of goodwill in the NAEP segment. The analysis of goodwill in
the NAEP segment related to the tolling reporting unit resulted in an impairment charge of
approximately $1.0 million in the second quarter of fiscal 2008. The fair value was based
on estimated future cash flows including potential sale proceeds.
During fiscal 2007, the Company acquired the Delta Plast Group, a European color masterbatch
manufacturer with operations in Sweden and Belgium. In connection with the acquisition, the
Company recorded approximately $3.8 million of goodwill. The purchase price also included a
potential deferred payment that could be paid over a three-year period based on certain
terms in the purchase agreement. The Company recorded approximately $1.0 million in the
second quarter of fiscal 2009 related to the second deferred payment related to this
purchase agreement and an additional $0.3 million in the third quarter of fiscal 2009, which
increased goodwill by the same amounts. The total amount of approximately $1.3 million was
paid in the third quarter of fiscal 2009.
The carrying amount of goodwill for the European segment was $11.2 million at May 31, 2009
and $10.7 million at August 31, 2008.
The changes in the Companys carrying value of goodwill during the nine months ended May 31,
2009 are as follows:
|
|
|
|
|
|
|
Europe |
|
|
|
(In thousands) |
|
Balance as of August 31, 2008 |
|
$ |
10,679 |
|
|
|
|
|
|
Deferred payment related to business acquisition in
fiscal 2007 |
|
|
1,343 |
|
Translation effect |
|
|
(814 |
) |
|
|
|
|
Balance as of May 31, 2009 |
|
$ |
11,208 |
|
|
|
|
|
- 6 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) |
|
PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS |
The components of the Companys net periodic benefit cost (income) for defined benefit
pension plans and other postretirement benefits are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
Nine months ended May 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Net periodic pension cost (income) recognized
included the following components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
429 |
|
|
$ |
640 |
|
|
$ |
1,289 |
|
|
$ |
1,860 |
|
Interest cost |
|
|
1,105 |
|
|
|
1,190 |
|
|
|
3,325 |
|
|
|
3,516 |
|
Expected return on plan assets |
|
|
(230 |
) |
|
|
(312 |
) |
|
|
(708 |
) |
|
|
(944 |
) |
Net actuarial loss and net amortization of
prior service cost and transition obligation |
|
|
79 |
|
|
|
196 |
|
|
|
244 |
|
|
|
590 |
|
Curtailment gain |
|
|
|
|
|
|
(2,200 |
) |
|
|
|
|
|
|
(2,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (income) |
|
$ |
1,383 |
|
|
$ |
(486 |
) |
|
$ |
4,150 |
|
|
$ |
2,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit cost (income) included
the following components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
14 |
|
|
$ |
26 |
|
|
$ |
41 |
|
|
$ |
359 |
|
Interest cost |
|
|
222 |
|
|
|
227 |
|
|
|
668 |
|
|
|
850 |
|
Net amortization of prior service
cost (credit) and unrecognized loss |
|
|
(212 |
) |
|
|
(203 |
) |
|
|
(637 |
) |
|
|
(444 |
) |
Curtailment gain |
|
|
|
|
|
|
(113 |
) |
|
|
(2,609 |
) |
|
|
(113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (income) |
|
$ |
24 |
|
|
$ |
(63 |
) |
|
$ |
(2,537 |
) |
|
$ |
652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of fiscal 2009, the Company recorded a curtailment gain of $2.6
million as a result of a significant reduction in the expected years of future service,
primarily due to the U.S. restructuring plan for NAEP that was announced in December 2008.
During the third quarter of fiscal 2008, the Company recorded curtailment gains of $2.3
million as a result of a significant reduction in the expected years of future service
primarily due to the sale of the Orange, Texas facility and a change in the executive
management. The restructurings are further discussed in footnote 13.
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.
- 7 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) |
|
STATEMENTS OF STOCKHOLDERS EQUITY |
A summary of the stockholders equity section for the nine months ended May 31, 2009 and
2008 is as follows:
(In thousands except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Preferred |
|
|
Common |
|
|
|
|
|
|
comprehensive |
|
|
Retained |
|
|
Treasury |
|
|
stockholders |
|
|
|
stock |
|
|
stock |
|
|
Other capital |
|
|
income (loss) |
|
|
earnings |
|
|
stock |
|
|
equity |
|
Balance at September 1, 2008 |
|
$ |
1,057 |
|
|
$ |
42,231 |
|
|
$ |
112,105 |
|
|
$ |
79,903 |
|
|
$ |
513,451 |
|
|
$ |
(321,166 |
) |
|
$ |
427,581 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,107 |
|
|
|
|
|
|
|
|
|
Foreign currency translation loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of negative plan
amendment related to curtailment of
postretirement benefit plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized transition
obligations, actuarial losses and prior
service costs (credits) (net of tax of $96) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,497 |
) |
Cash dividends paid or accrued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $3.75 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
(40 |
) |
Common stock, $0.45 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,815 |
) |
|
|
|
|
|
|
(11,815 |
) |
Stock options exercised |
|
|
|
|
|
|
9 |
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158 |
|
Restricted stock issued, net of forfeitures |
|
|
|
|
|
|
43 |
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of common stock to cover
tax withholdings |
|
|
|
|
|
|
(13 |
) |
|
|
(179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(192 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,646 |
) |
|
|
(1,646 |
) |
Non-cash stock based compensation |
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
Amortization of restricted stock |
|
|
|
|
|
|
|
|
|
|
2,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2009 |
|
$ |
1,057 |
|
|
$ |
42,270 |
|
|
$ |
114,097 |
|
|
$ |
40,299 |
|
|
$ |
506,703 |
|
|
$ |
(322,812 |
) |
|
$ |
381,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 1, 2007 |
|
$ |
1,057 |
|
|
$ |
41,785 |
|
|
$ |
103,828 |
|
|
$ |
50,092 |
|
|
$ |
509,415 |
|
|
$ |
(279,164 |
) |
|
$ |
427,013 |
|
Impact due to adoption of FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,078 |
|
|
|
|
|
|
|
2,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance at September 1, 2007 |
|
$ |
1,057 |
|
|
$ |
41,785 |
|
|
$ |
103,828 |
|
|
$ |
50,092 |
|
|
$ |
511,493 |
|
|
$ |
(279,164 |
) |
|
$ |
429,091 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,381 |
|
|
|
|
|
|
|
|
|
Foreign currency translation gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized transition
obligations, actuarial losses and prior
service costs (credits) (net of tax of $83) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,190 |
|
Cash dividends paid or accrued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $3.75 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
(40 |
) |
Common stock, $0.44 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,074 |
) |
|
|
|
|
|
|
(12,074 |
) |
Stock options exercised |
|
|
|
|
|
|
101 |
|
|
|
1,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,924 |
|
Restricted stock issued, net of forfeitures |
|
|
|
|
|
|
239 |
|
|
|
(239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of common stock to cover
tax withholdings |
|
|
|
|
|
|
(5 |
) |
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,580 |
) |
|
|
(30,580 |
) |
Non-cash stock based compensation |
|
|
|
|
|
|
|
|
|
|
601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601 |
|
Amortization of restricted stock |
|
|
|
|
|
|
|
|
|
|
3,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2008 |
|
$ |
1,057 |
|
|
$ |
42,120 |
|
|
$ |
108,932 |
|
|
$ |
96,901 |
|
|
$ |
512,760 |
|
|
$ |
(309,744 |
) |
|
$ |
452,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 8 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) |
|
ACCUMULATED OTHER COMPREHENSIVE INCOME |
The components of Accumulated Other Comprehensive Income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency |
|
|
Unrecognized losses and |
|
|
Total accumulated |
|
|
|
translation |
|
|
prior service costs |
|
|
other comprehensive |
|
|
|
gain (loss) |
|
|
(credits), net |
|
|
income |
|
|
|
(In thousands) |
|
Balance as of August 31, 2008 |
|
$ |
76,112 |
|
|
$ |
3,791 |
|
|
$ |
79,903 |
|
Current period change |
|
|
(36,258 |
) |
|
|
(3,346 |
) |
|
|
(39,604 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2009 |
|
$ |
39,854 |
|
|
$ |
445 |
|
|
$ |
40,299 |
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains do not have a tax effect, as such gains are considered
permanently reinvested. The decline in the accumulated other comprehensive income account is
primarily due to the significant decline in the value of the Euro and other currencies
against the U.S. dollar. Accumulated other comprehensive income adjustments related to
pensions and other postretirement benefit plans are recorded net of tax using the applicable
effective tax rate. The decline in this portion of accumulated other comprehensive income
during the nine months ended May 31, 2009 is primarily due to the recognition of a $3.0
million curtailment related to the U.S. postretirement benefit plan.
(8) |
|
FAIR VALUE MEASUREMENT |
On September 15, 2006, the FASB issued SFAS 157, which addresses standardizing the
measurement of fair value for companies who are required to use a fair value measure 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 Companys adoption of the required portions of
SFAS 157 as of September 1, 2008 did not have a material impact on the Companys financial
position, results of operations and cash flows. In February 2008, the FASB issued Staff
Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No.157, which delayed the
required adoption of portions of SFAS 157 related to nonfinancial assets and nonfinancial
liabilities, except for items recognized or disclosed at fair value on a recurring basis.
Accordingly, the Company will adopt the provisions of SFAS 157 related to nonfinancial
assets and nonfinancial liabilities recognized or disclosed at fair value on a nonrecurring
basis in fiscal 2010. The Company is currently evaluating the impact, if any, of the
adoption of this portion of SFAS 157 on its financial position, results of operations and
cash flows.
SFAS 157 establishes a fair value hierarchy to prioritize the inputs used in valuation
techniques into three levels as follows:
|
|
|
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical
assets or liabilities in active markets; |
|
|
|
Level 2: Inputs other than quoted prices included in Level 1 that are observable
for the asset or liability either directly or indirectly; and |
|
|
|
Level 3: Unobservable inputs which reflect an entitys own assumptions. |
- 9 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about the Companys assets and liabilities recorded
at fair value as of May 31, 2009 in the Companys consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in |
|
|
Significant other |
|
|
Significant |
|
|
|
|
|
|
|
active markets for |
|
|
observable |
|
|
unobservable |
|
|
|
Total measured at |
|
|
identical assets |
|
|
inputs |
|
|
inputs |
|
|
|
fair value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
(In thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
142,466 |
|
|
$ |
142,466 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
142,466 |
|
|
$ |
142,466 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
250 |
|
|
$ |
|
|
|
$ |
250 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair
value |
|
$ |
250 |
|
|
$ |
|
|
|
$ |
250 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of cash equivalents, by their nature, is determined utilizing Level 1 inputs.
The Company measures the fair value of its forward foreign exchange contracts using Level 2
inputs through observable market transactions in active markets provided by banks. The
forward foreign exchange contracts are entered into with creditworthy multinational banks.
The following information presents the supplemental fair value information about long-term
fixed-rate debt at May 31, 2009. The Companys long-term fixed-rate debt was issued in
euros.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2009 |
|
|
August 31, 2008 |
|
|
|
(In millions of $) |
|
|
(In millions of ) |
|
|
(In millions of $) |
|
|
(In millions of ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of long-term fixed-rate debt |
|
$ |
71.2 |
|
|
|
50.3 |
|
|
$ |
73.8 |
|
|
|
50.3 |
|
Fair value of long-term fixed-rate debt |
|
$ |
56.6 |
|
|
|
40.0 |
|
|
$ |
63.7 |
|
|
|
43.4 |
|
The fair value was calculated using discounted future cash flows. The decline in fair value
compared with August 31, 2008 is primarily related to an increase in market interest rates,
particularly the credit spread component, for new issues of companies with similar credit
profiles.
In February 2007, the FASB issued SFAS 159 which 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
did not elect the fair value option for any of its existing financial instruments other than
those already measured at fair value. Therefore, the Companys adoption of SFAS 159 as of
September 1, 2008 did not have an impact on the Companys financial position, results of
operations and cash flows.
(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 shares of common
stock 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 shares of common stock on the date of the
grant. All
options become exercisable at the rate of 33 1/3% 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.
- 10 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 7, 2006, the Company adopted the 2006 Incentive Plan, which provides for the
grant of incentive stock options, nonqualified stock options, whole shares, restricted stock
awards, restricted stock units, stock appreciation rights, performance shares, performance
units, cash-based awards, dividend equivalents and performance-based awards. Upon adoption
of the 2006 Incentive Plan, all remaining shares eligible for award under the 2002 Equity
Incentive Plan were added to the 2006 Incentive Plan and no further awards could be made
from the 2002 Equity Incentive Plan. It has been the Companys practice to issue new shares
of common stock upon stock option exercise and other equity grants. On May 31, 2009, there
were approximately 2.2 million shares available for grant pursuant to the Companys 2006
Incentive Plan.
A summary of stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
Outstanding |
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
shares under |
|
|
Weighted-average |
|
|
shares under |
|
|
Weighted-average |
|
|
|
option |
|
|
exercise price |
|
|
option |
|
|
exercise price |
|
Outstanding at beginning of period |
|
|
567,247 |
|
|
$ |
19.12 |
|
|
|
813,710 |
|
|
$ |
19.10 |
|
Granted |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Exercised |
|
|
(9,234 |
) |
|
$ |
16.56 |
|
|
|
(101,352 |
) |
|
$ |
18.99 |
|
Forfeited and expired |
|
|
(40,172 |
) |
|
$ |
18.85 |
|
|
|
(20,839 |
) |
|
$ |
19.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
517,841 |
|
|
$ |
19.17 |
|
|
|
691,519 |
|
|
$ |
19.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of the period |
|
|
517,841 |
|
|
$ |
19.17 |
|
|
|
610,128 |
|
|
$ |
18.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
stock options exercised during the nine months ended May 31, 2009 was insignificant due to
the small number of options exercised. The total intrinsic value of stock options exercised
during the nine months ended May 31, 2008 was approximately $0.2 million. The intrinsic
value for stock options exercisable at May 31, 2009 was $0.1 million with a remaining term
for options exercisable of approximately 3.9 years. For stock options outstanding at May 31,
2009, exercise prices range from $11.62 to $24.69. The weighted average remaining
contractual life for options outstanding at May 31, 2009 was approximately 3.9 years. All
517,841 outstanding and exercisable stock options are fully vested as of May 31, 2009.
There were no grants of stock options during the first nine months of fiscal 2009 or fiscal
2008.
Restricted stock awards under the 2002 Equity Incentive Plan vest over four years following
the date of grant. Restricted stock awards under the 2006 Incentive Plan can vest over
various periods. The restricted stock grants outstanding under the 2006 Incentive Plan have
service vesting periods of three years following the date of grant. The following table
summarizes the outstanding time-based restricted stock awards and weighted-average fair
market value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
|
Outstanding restricted |
|
|
fair market value |
|
|
|
stock awards |
|
|
(per share) |
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2008 |
|
|
232,757 |
|
|
$ |
20.81 |
|
Granted |
|
|
62,111 |
|
|
$ |
16.65 |
|
Vested |
|
|
(95,900 |
) |
|
$ |
20.38 |
|
Forfeited |
|
|
(14,856 |
) |
|
$ |
21.18 |
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2009 |
|
|
184,112 |
|
|
$ |
19.60 |
|
|
|
|
|
|
|
|
|
The Company did not grant any time-based restricted stock awards during the third quarter of
fiscal 2009 or fiscal 2008. During the nine months ended May 31, 2009 and 2008, the Company
granted 62,111 and 99,150 shares of time-based restricted stock, respectively. Restrictions
on these shares underlying the restricted stock awards will lapse ratably over a three-year
period and were valued at the fair market value on the date of grant.
- 11 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also grants awards with market performance vesting criteria under the 2006
Incentive Plan. In the table below, the Company summarizes all performance-based awards,
which include performance-based restricted stock awards and performance shares (Performance
Shares).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
|
Outstanding |
|
|
fair market value |
|
|
|
performance-based awards |
|
|
(per share) |
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2008 |
|
|
286,256 |
|
|
$ |
15.50 |
|
Granted |
|
|
236,475 |
|
|
$ |
9.66 |
|
Vested |
|
|
|
|
|
$ |
|
|
Forfeited |
|
|
(10,750 |
) |
|
$ |
15.89 |
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2009 |
|
|
511,981 |
|
|
$ |
12.80 |
|
|
|
|
|
|
|
|
|
Performance Shares are awards for which the vesting will occur based on both service and
market performance criteria and do not have voting rights. Included in the outstanding
performance-based awards at May 31, 2009 are 245,594 Performance Shares that earn dividends
throughout the vesting period and approximately 181,917 Performance Shares that do not earn
dividends. Also included in the balance are 84,470 shares of performance-based restricted
stock awards from the fiscal 2007 grant with vesting based on both service and market
performance criteria. The performance-based restricted stock awards have voting rights and
earn dividends. At the vesting date of these performance-based restricted stock awards in
April 2010, approximately 42,235 additional shares could be issued if certain market
conditions are met which are not included in the table. The additional shares do not earn
dividends and do not have voting rights.
The Company did not grant any Performance Shares during the third quarters of fiscal 2009 or
fiscal 2008. During the nine months ended May 31, 2009 and 2008, the Company granted 236,475
and 203,725 Performance Shares, respectively. Included in the fiscal 2009 grant are
approximately 118,000 Performance Shares that earn dividends throughout the vesting period
and approximately 118,000 Performance Shares that do not earn dividends. The
weighted-average grant date fair value of the Performance Shares based on market conditions
granted during the nine months ended May 31, 2009 was $9.66 per share.
The valuation for the awards included in the performance-based awards table above are based
upon a Monte Carlo simulation, which is a lattice valuation model that represents the
characteristics of these grants. Vesting of the ultimate number of shares underlying
performance-based awards, if any, will be dependent upon the Companys total shareholder
return in relation to the total shareholder return of a select group of peer companies over
a three-year period. The probability of meeting the market criteria was considered when
calculating the estimated fair market value on the date of grant using a Monte Carlo
simulation. These awards were accounted for as awards with market conditions in accordance
with FASB Statement No. 123(R), Share-Based Payment.
The fair value of the Performance Shares granted during the nine months ended May 31, 2009
was estimated using a Monte Carlo simulation with the following weighted-average
assumptions:
|
|
|
|
|
|
|
Nine months ended |
|
Weighted-average Assumption |
|
May 31, 2009 |
|
Dividend yield |
|
|
3.60 |
% |
Expected volatility |
|
|
36.00 |
% |
Risk-free interest rate |
|
|
1.09 |
% |
Correlation |
|
|
52.00 |
% |
Total unrecognized compensation cost, including a provision for forfeitures, related to
nonvested share-based compensation arrangements at May 31, 2009 was approximately $5.0
million. This cost is expected to be recognized over a weighted-average period of
approximately two years.
- 12 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of fiscal 2009, the Company granted 27,500 stock-settled restricted
stock units which were fully vested as of the grant date. There are no service requirements
for vesting for this grant. These restricted stock units will be settled in shares of the
Companys common stock, on a one-to-one basis, no later than 60 days after the third
anniversary of the award grant date. These awards do earn dividends during the restriction
period; however, they do not have voting rights until released from restriction. These
awards are treated as equity awards and have a grant date fair value based on the award
grant date of $13.61. The Company did not grant any restricted stock units during the third
quarter of fiscal 2008.
The Company had approximately 277,000 and 311,000 cash-settled restricted stock units
outstanding with various vesting periods and criteria at May 31, 2009 and 2008,
respectively. The Company granted approximately 60,000 and 114,000 cash-settled restricted
stock units during the nine months ended May 31, 2009 and 2008, respectively. Each
cash-settled restricted stock unit is equivalent to one share of the Companys common stock
on the vesting date. Certain cash-settled restricted stock units earn dividends during the
vesting period. Cash-settled restricted stock units are settled only in cash at the vesting
date and therefore are treated as a liability award. The Company records a liability for
these restricted stock units in an amount equal to the total of (a) the mark-to-market
adjustment of the units vested to date, and (b) accrued dividends on the units. As a result
of these mark-to-market adjustments, these restricted stock units introduce volatility into
the Companys consolidated income statements.
During the nine months ended May 31, 2009, the Company granted approximately $2.4 million
cash-based awards which are treated as liability awards. These awards were granted to
foreign employees. Such awards include approximately $0.5 million which have service
vesting periods of three years following the date of grant and the remaining $1.9 million is
performance-based. The performance-based awards are based on the same market conditions
utilized for the Performance Shares. The Company records a liability for these cash-based
awards equal to the amount of the award vested to date and adjusts the performance-based
awards based on expected payout.
The following table summarizes the impact to the Companys consolidated income statements
from stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
Nine months ended May 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Stock options |
|
$ |
|
|
|
$ |
173 |
|
|
$ |
16 |
|
|
$ |
600 |
|
Restricted stock awards and
Performance-based awards |
|
|
496 |
|
|
|
973 |
|
|
|
2,049 |
|
|
|
3,007 |
|
Cash-settled restricted stock units |
|
|
419 |
|
|
|
1,006 |
|
|
|
(486 |
) |
|
|
1,766 |
|
Cash-based awards |
|
|
58 |
|
|
|
|
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
973 |
|
|
$ |
2,152 |
|
|
$ |
1,697 |
|
|
$ |
5,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended May 31, 2009, the Company experienced a significant decline in
restricted stock unit expense due to the decline in the Companys common stock price, which
occurred primarily in the first quarter of fiscal 2009. The decline in restricted stock
award and performance-based award expense is partially related to lower stock price for the
fiscal 2009 grant and the Company increased its estimated forfeiture rate used for
restricted stock and performance-based awards expense as a result of the fiscal 2008 and
fiscal 2009 restructurings. The change in the estimate forfeiture rate resulted in an
adjustment of approximately $0.8 million of income in the third quarter of fiscal 2009.
Basic earnings per share is computed by dividing income available to common shareholders by
the weighted-average number of shares of common stock 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.
- 13 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 table presents the number of incremental
weighted-average shares used in computing diluted per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
Nine months ended May 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
25,789 |
|
|
|
26,398 |
|
|
|
25,783 |
|
|
|
27,048 |
|
Incremental shares from stock options |
|
|
1 |
|
|
|
72 |
|
|
|
8 |
|
|
|
66 |
|
Incremental shares from restricted stock |
|
|
149 |
|
|
|
195 |
|
|
|
171 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
25,939 |
|
|
|
26,665 |
|
|
|
25,962 |
|
|
|
27,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended May 31, 2009, there were approximately 0.5 million,
equivalent shares related to stock options and restricted stock that were excluded from
diluted weighted-average shares outstanding because inclusion would have been anti-dilutive.
For the three and nine months ended May 31, 2008, there were approximately 0.1 million,
equivalent shares related to stock options and restricted stock that were excluded from
diluted weighted-average shares outstanding because inclusion would have been anti-dilutive.
To identify reportable segments, the Company considers its operating structure and the types
of information subject to regular review by its President and CEO, who is the CODM.
Globally, the Company operates primarily in three lines of business: engineered plastics,
masterbatch and distribution services. In North America, each of these lines of business
has a general manager who reports directly to the Companys CEO. Also, in North America the
Company operates a specialty sheet line of business called Invision which has its own
general manager who also reports to the CEO. Effective September 1, 2008, the Company named
a general manager of Asia and a general manager of Europe. This change separated the
responsibilities that were previously combined under the general manager of Europe, which
then included Asia. Based on the Companys new management structure and an evaluation of how
the CODM reviews performance and allocates resources, the Company redefined its European
segment to separate the Asian operations from the European operations beginning in the first
quarter of fiscal 2009. Prior periods have been restated to reflect the current
presentation. The Companys Europe and Asia segments have managers for each line of
business, who report to general managers of the respective segments, who then report to the
CEO. Currently, the Companys CEO does not directly manage the business line level when
reviewing performance and allocating resources for the Europe and Asia segments. The
Companys segments are Europe, NAMB, NAEP, NADS, Asia and Invision.
Certain portions of the Companys North America operations are not managed separately and
are included in All Other North America. The Company also includes in All Other North
America any administrative costs that are not directly related or allocated to a North
America business unit such as North America information technology, human resources,
accounting and purchasing. The North America administrative costs are directly related to
the four North America segments.
The CODM uses net sales to unaffiliated customers, gross profit and operating income in
order to make decisions, assess performance and allocate resources to each segment.
Operating income does not include interest income or expense, other income or expense,
restructuring expense, asset impairments, goodwill impairments, curtailment gains or foreign
currency transaction gains or losses. In some cases, the Company may choose to exclude from
a segments results certain non-recurring items as determined by management. These items are
included in the Corporate and Other section in the table below. Corporate expenses include
the compensation of certain personnel, certain audit expenses, board of directors related
costs, certain insurance costs and other miscellaneous legal and professional fees.
- 14 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below the Company presents net sales, gross profit and operating income by segment. Also
included is a reconciliation of operating income by segment to consolidated income before
taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
Nine months ended May 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Net sales to unaffiliated customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
220,337 |
|
|
$ |
379,163 |
|
|
$ |
699,829 |
|
|
$ |
1,089,547 |
|
NAMB |
|
|
26,922 |
|
|
|
33,202 |
|
|
|
78,212 |
|
|
|
100,078 |
|
NAEP |
|
|
26,137 |
|
|
|
52,009 |
|
|
|
95,783 |
|
|
|
164,665 |
|
NADS |
|
|
11,443 |
|
|
|
34,050 |
|
|
|
53,798 |
|
|
|
97,652 |
|
Asia |
|
|
12,805 |
|
|
|
13,244 |
|
|
|
30,987 |
|
|
|
35,900 |
|
Invision |
|
|
55 |
|
|
|
99 |
|
|
|
183 |
|
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales to unaffiliated customers |
|
$ |
297,699 |
|
|
$ |
511,767 |
|
|
$ |
958,792 |
|
|
$ |
1,488,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
38,634 |
|
|
$ |
50,808 |
|
|
$ |
99,582 |
|
|
$ |
143,230 |
|
NAMB |
|
|
2,167 |
|
|
|
2,299 |
|
|
|
4,687 |
|
|
|
9,988 |
|
NAEP |
|
|
1,540 |
|
|
|
3,340 |
|
|
|
4,869 |
|
|
|
10,610 |
|
NADS |
|
|
1,634 |
|
|
|
2,902 |
|
|
|
4,779 |
|
|
|
7,126 |
|
Asia |
|
|
2,558 |
|
|
|
1,657 |
|
|
|
3,891 |
|
|
|
3,796 |
|
Invision |
|
|
(796 |
) |
|
|
(1,145 |
) |
|
|
(2,584 |
) |
|
|
(3,912 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment gross profit |
|
$ |
45,737 |
|
|
$ |
59,861 |
|
|
$ |
115,224 |
|
|
$ |
170,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
16,544 |
|
|
$ |
25,355 |
|
|
$ |
35,371 |
|
|
$ |
71,647 |
|
NAMB |
|
|
1,026 |
|
|
|
623 |
|
|
|
883 |
|
|
|
4,929 |
|
NAEP |
|
|
(724 |
) |
|
|
(1,262 |
) |
|
|
(4,904 |
) |
|
|
(4,796 |
) |
NADS |
|
|
1,027 |
|
|
|
1,750 |
|
|
|
1,965 |
|
|
|
3,737 |
|
Asia |
|
|
1,511 |
|
|
|
587 |
|
|
|
1,068 |
|
|
|
754 |
|
Invision |
|
|
(823 |
) |
|
|
(1,611 |
) |
|
|
(2,870 |
) |
|
|
(5,306 |
) |
All other North America |
|
|
(2,534 |
) |
|
|
(2,582 |
) |
|
|
(8,243 |
) |
|
|
(11,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income |
|
$ |
16,027 |
|
|
$ |
22,860 |
|
|
$ |
23,270 |
|
|
$ |
59,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other |
|
|
(3,469 |
) |
|
|
(3,740 |
) |
|
|
(13,579 |
) |
|
|
(15,916 |
) |
Interest expense, net |
|
|
(662 |
) |
|
|
(1,817 |
) |
|
|
(1,626 |
) |
|
|
(4,533 |
) |
Foreign currency transaction gains (losses) |
|
|
(2,430 |
) |
|
|
(984 |
) |
|
|
6,218 |
|
|
|
(1,580 |
) |
Other income (expense) |
|
|
1,218 |
|
|
|
(253 |
) |
|
|
2,231 |
|
|
|
(252 |
) |
Curtailment gain |
|
|
|
|
|
|
2,313 |
|
|
|
2,609 |
|
|
|
2,313 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(964 |
) |
Asset impairment |
|
|
(283 |
) |
|
|
(3,601 |
) |
|
|
(2,462 |
) |
|
|
(8,820 |
) |
Restructuring expense |
|
|
(981 |
) |
|
|
(3,685 |
) |
|
|
(6,230 |
) |
|
|
(6,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
$ |
9,420 |
|
|
$ |
11,093 |
|
|
$ |
10,431 |
|
|
$ |
23,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 15 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The majority of the Companys sales for the three and nine months ended May 31, 2009 and
2008 can be classified into five primary product families. The amount and percentage of
consolidated sales for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Product Family |
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
(In thousands, except for %s) |
|
Color and additive concentrates |
|
$ |
145,065 |
|
|
|
49 |
% |
|
$ |
186,782 |
|
|
|
36 |
% |
Polyolefins |
|
|
70,846 |
|
|
|
24 |
|
|
|
169,392 |
|
|
|
33 |
|
Engineered compounds |
|
|
60,350 |
|
|
|
20 |
|
|
|
108,915 |
|
|
|
21 |
|
Polyvinyl chloride (PVC) |
|
|
7,967 |
|
|
|
3 |
|
|
|
15,373 |
|
|
|
3 |
|
Tolling |
|
|
4,081 |
|
|
|
1 |
|
|
|
4,003 |
|
|
|
1 |
|
Other |
|
|
9,390 |
|
|
|
3 |
|
|
|
27,302 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
297,699 |
|
|
|
100 |
% |
|
$ |
511,767 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
Product Family |
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
(In thousands, except for %s) |
|
Color and additive concentrates |
|
$ |
413,442 |
|
|
|
43 |
% |
|
$ |
532,778 |
|
|
|
36 |
% |
Polyolefins |
|
|
270,513 |
|
|
|
28 |
|
|
|
492,766 |
|
|
|
33 |
|
Engineered compounds |
|
|
199,352 |
|
|
|
21 |
|
|
|
317,601 |
|
|
|
21 |
|
Polyvinyl chloride (PVC) |
|
|
28,814 |
|
|
|
3 |
|
|
|
43,994 |
|
|
|
3 |
|
Tolling |
|
|
10,543 |
|
|
|
1 |
|
|
|
16,178 |
|
|
|
1 |
|
Other |
|
|
36,128 |
|
|
|
4 |
|
|
|
84,835 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
958,792 |
|
|
|
100 |
% |
|
$ |
1,488,152 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2009, the Companys gross unrecognized tax benefits totaled $2.8 million. If
recognized, approximately $0.8 million of the total unrecognized tax benefits would
favorably affect the Companys effective tax rate. The Company reports interest and
penalties related to income tax matters in income tax expense. At May 31, 2009, the Company
had $0.5 million of accrued interest and penalties on unrecognized tax benefits.
The Company is open to potential income tax examinations in the U.S. from fiscal 2007 onward
and generally from fiscal 2002 onward for most foreign jurisdictions. Additionally, the
expiration of certain statutes of limitation in foreign jurisdictions during the third
quarter of fiscal 2009 resulted in a tax benefit of approximately $1.2 million related to
the reversal of tax and interest primarily accrued during the second half of fiscal 2006.
The amount of unrecognized tax benefits is expected to change in the next 12 months;
however, the change is not expected to have a significant impact on the financial position
of the Company.
- 16 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the statutory U.S. federal income tax rate of 35% with the effective tax
rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
(In thousands except for %s) |
|
Statutory U.S. tax rate |
|
$ |
3,297 |
|
|
|
35.0 |
% |
|
$ |
3,883 |
|
|
|
35.0 |
% |
Amount of foreign taxes at less
than U.S.
statutory tax rate |
|
|
(3,086 |
) |
|
|
(32.8 |
) |
|
|
(2,992 |
) |
|
|
(27.0 |
) |
U.S. losses with no tax benefit |
|
|
2,985 |
|
|
|
31.7 |
|
|
|
2,655 |
|
|
|
23.9 |
|
U.S. restructuring and other U.S.
unusual
charges with no tax benefit |
|
|
41 |
|
|
|
0.4 |
|
|
|
933 |
|
|
|
8.4 |
|
Establishment (resolution) of
uncertain tax
positions |
|
|
(1,268 |
) |
|
|
(13.5 |
) |
|
|
(624 |
) |
|
|
(5.6 |
) |
Other |
|
|
2 |
|
|
|
0.1 |
|
|
|
106 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
$ |
1,971 |
|
|
|
20.9 |
% |
|
$ |
3,961 |
|
|
|
35.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Nine months ended |
|
|
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
(In thousands except for %s) |
|
Statutory U.S. tax rate |
|
$ |
3,651 |
|
|
|
35.0 |
% |
|
$ |
8,355 |
|
|
|
35.0 |
% |
Amount of foreign taxes at less
than U.S.
statutory tax rate |
|
|
(9,138 |
) |
|
|
(87.6 |
) |
|
|
(9,859 |
) |
|
|
(41.3 |
) |
U.S. losses with no tax benefit |
|
|
11,302 |
|
|
|
108.3 |
|
|
|
8,581 |
|
|
|
35.9 |
|
U.S. restructuring and other U.S.
unusual
charges with no tax benefit |
|
|
584 |
|
|
|
5.6 |
|
|
|
4,094 |
|
|
|
17.1 |
|
Establishment (resolution) of
uncertain tax
positions |
|
|
(1,170 |
) |
|
|
(11.2 |
) |
|
|
(1,083 |
) |
|
|
(4.5 |
) |
Other |
|
|
95 |
|
|
|
0.9 |
|
|
|
403 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
$ |
5,324 |
|
|
|
51.0 |
% |
|
$ |
10,491 |
|
|
|
43.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate of 20.9% for the three months ended May 31, 2009 is less than the
U.S. statutory rate of 35.0% primarily because of the Companys overall foreign rate being
less than the U.S. statutory rate and the resolution of uncertain tax positions. These
favorable effects on the Companys tax rate were partially offset by no tax benefits being
recognized for U.S. losses from continuing operations and other U.S. charges. As compared
with the effective rate of 35.7% for the three months ended May 31, 2008, the current
quarters effective rate is driven by a decrease in the overall foreign rate, the resolution
of uncertain tax positions and a decrease in other U.S. charges with no tax benefit.
The effective tax rate of 51.0% for the nine months ended May 31, 2009 is greater than the
U.S. statutory rate of 35.0% primarily because no tax benefits were recognized for U.S.
losses from continuing operations and other U.S. charges. This unfavorable effect on the
Companys tax rate was partially offset because of the Companys overall foreign rate being
less than the U.S. statutory rate and the resolution of uncertain tax positions. As
compared with the effective rate of 43.9% for the nine months ended May 31, 2008, the
current periods effective rate is driven by the reduction in worldwide pre-tax income,
which significantly increased the tax rate impact of the U.S. losses with no tax benefit.
(13) |
|
RESTRUCTURING OF OPERATIONS |
Fiscal 2009 Plan
During fiscal 2009, the Company announced various plans to realign its domestic and
international operations to strengthen the Companys performance and financial position. The
realignment was primarily completed by the end of the third quarter, but will continue into
the fourth quarter of fiscal 2009 as needed. The Company initiated these proactive actions
to address the current global economic conditions and improve the Companys competitive
position. The actions include a reduction in capacity and reduced headcount within cost of
sales and selling, general and administrative expenses. In addition, the Company is in the
process of eliminating
certain positions related to the previously announced consolidation of back-office
operations to the Europe Shared Service Center located in Belgium. The implementation of the
Europe Shared Service Center will continue into early fiscal 2010.
- 17 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company reduced its workforce by approximately 170 positions worldwide during the first
nine months of fiscal 2009. The Companys major European locations implemented a short
work schedule when necessary primarily in the second quarter of fiscal 2009.
In the NAEP segment, the Company reduced production capacity by temporarily idling one
manufacturing line, in addition to permanently shutting down one line at the plant in
Bellevue, Ohio. The Company reduced shifts from seven to five days at its Nashville,
Tennessee plant.
In addition to the NAEP headcount reductions, the actions taken in fiscal 2009 reduced its
Akron-based North American administrative staff by six full-time employees and three
contract positions. These actions took place primarily in the second quarter of fiscal 2009
and were completed by the end of the third quarter of fiscal 2009.
The following table summarizes the charges related to the fiscal 2009 initiatives by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract termination |
|
|
Accelerated |
|
|
|
|
|
|
Employee- |
|
|
and other related |
|
|
depreciation included |
|
|
|
|
|
|
related costs |
|
|
restructuring costs |
|
|
in cost of sales |
|
|
Total |
|
|
|
(In millions) |
|
Three months ended May 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
0.6 |
|
|
$ |
0.2 |
|
|
$ |
|
|
|
$ |
0.8 |
|
NAMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAEP |
|
|
0.2 |
|
|
|
|
|
|
|
0.7 |
|
|
|
0.9 |
|
All other North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring related charges
for the fiscal 2009 actions |
|
$ |
0.8 |
|
|
$ |
0.2 |
|
|
$ |
0.7 |
|
|
$ |
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended May 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
2.7 |
|
|
$ |
0.3 |
|
|
$ |
|
|
|
$ |
3.0 |
|
NAMB |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
NAEP |
|
|
2.4 |
|
|
|
0.6 |
|
|
|
1.2 |
|
|
|
4.2 |
|
All other North America |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring related charges
for the fiscal 2009 actions |
|
$ |
5.3 |
|
|
$ |
0.9 |
|
|
$ |
1.2 |
|
|
$ |
7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2009, approximately $2.7 million remains accrued for employee-related costs, which
include estimated severance payments and medical insurance, related to the fiscal 2009
initiatives. The Company anticipates the majority of the accrued balance for restructuring
charges to be paid throughout fiscal 2009 and the remaining to be paid in fiscal 2010. The
Company expects additional charges related to these initiatives to range from approximately
$1.5 million to $2.5 million to be realized primarily during the fourth quarter of fiscal
2009.
In July 2009, the Company has initiated further plans to reduce capacity and headcount at
certain international locations. These plans are expected to result in the reduction of
approximately 10 to 20 positions and reduce working hours for remaining workers as
appropriate. As a result of these plans, the Company expects to incur before-tax costs of
approximately $1.0 million to $2.3 million, including:
|
|
|
approximately $0.5 million to $1.0 million of cash outlays for employee
termination costs; |
|
|
|
approximately $0.1 million to $0.3 million of non-cash costs related to
estimated employee retirement benefits; and |
|
|
|
approximately $0.4 million to $1.0 million of non-cash charges related to fixed
assets at the impacted locations. |
- 18 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These plans are expected to be completed primarily in the fourth quarter of fiscal 2009 and
into early fiscal 2010.
Fiscal 2008 Plan
In January 2008, the Company announced two steps in its continuing effort to improve the
profitability of its North American operations. The Company announced it would shut down its
manufacturing facility in St. Thomas, Ontario, Canada and would pursue a sale of its
manufacturing facility in Orange, Texas. All the restructuring costs related to the sale of
the Orange, Texas and the St. Thomas, Ontario, Canada facilities are related to the NAEP
reportable segment.
The St. Thomas, Ontario, Canada facility primarily produced engineered plastics for the
automotive market, with a capacity of approximately 74 million pounds per year and employed
approximately 120 individuals. The facility was shutdown at the end of June 2008. The
Company continues to finalize closing procedures into fiscal 2009.
The Orange, Texas facility primarily provided North American third-party tolling services in
which the Company processed customer-owned materials for a fee. Total annual capacity at the
Orange, Texas facility was approximately 135 million pounds and employed approximately 100
employees. The Company completed the sale of this facility in March 2008 for total
consideration of $3.7 million.
The Company recorded charges related to the fiscal 2008 initiatives of approximately $0.2
million for employee-related costs and $0.1 million for contract termination and other
related restructuring costs during the nine months ended May 31, 2009. These charges
recorded in fiscal 2009 are related to the NAEP segment. Approximately $0.2 million remains
accrued for employee-related costs at May 31, 2009 related to the fiscal 2008 initiatives,
which the Company anticipates the majority of the accrued balance for restructuring charges
to be paid throughout fiscal 2009. During the nine months ended May 31, 2008, the Company
recorded approximately $6.1 million in employee-related costs, which include estimated
severance payments and medical insurance for approximately 135 employees, whose positions
were eliminated at the Orange, Texas and St. Thomas, Ontario, Canada facilities.
The following table summarizes the liabilities as of May 31, 2009 related to the announced
restructuring plans in fiscal 2008 and fiscal 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual balance |
|
|
Fiscal 2009 |
|
|
Fiscal 2009 |
|
|
Accrual balance |
|
|
|
August 31, 2008 |
|
|
charges |
|
|
paid |
|
|
May 31, 2009 |
|
|
|
(In thousands) |
|
Employee related
costs |
|
$ |
507 |
|
|
$ |
5,225 |
|
|
$ |
(2,920 |
) |
|
$ |
2,812 |
|
Other costs |
|
|
|
|
|
|
1,005 |
|
|
|
(929 |
) |
|
|
76 |
|
Translation effect |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
$ |
485 |
|
|
$ |
6,230 |
|
|
$ |
(3,849 |
) |
|
$ |
2,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 Plan
During fiscal 2007, the Company announced multiple phases of a restructuring plan to restore
its NAEP segment to profitability. The Company recorded minimal charges in fiscal 2008
related to the fiscal 2007 initiatives as the plan was primarily completed in fiscal 2007.
The total charge for this plan was approximately $2.1 million recorded primarily in fiscal
2007.
The Company recorded approximately $0.3 million and $2.5 million in asset impairments during
the three and nine months ended May 31, 2009, respectively. The impairments were related to
properties which are considered held for sale including the St. Thomas, Ontario, Canada
facility and the Orange, Texas warehouse. The Company recorded approximately $3.6 million
and $8.8 million in asset impairments during the three and nine months ended May 31, 2008,
respectively, related to the restructuring plans initiated in the second quarter of fiscal
2008 for the St. Thomas, Ontario, Canada and the Orange, Texas facilities.
- 19 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) |
|
ACCOUNTING PRONOUNCEMENTS |
In December 2007, the FASB issued FASB Statement No. 141(R), Business Combinations (SFAS
141R). SFAS 141R replaces FASB Statement No. 141 and provides greater consistency in the
accounting and financial reporting of business combinations. SFAS 141R requires the
acquiring entity in a business combination to recognize all assets acquired and liabilities
assumed in the transaction and any non-controlling interest in the acquiree at the
acquisition date, measured at the fair value as of that date. This includes the measurement
of the acquirer shares issued in consideration for a business combination, the recognition
of contingent consideration, the accounting for pre-acquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of acquisition-related
transaction costs and the recognition of changes in the acquirers income tax valuation
allowance and deferred taxes. SFAS 141R is effective for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. Early adoption is not permitted. The Company is required to
adopt SFAS 141R in fiscal year 2010. The Company is assessing the impact that SFAS 141R may
have on its financial position, results of operations and cash flows.
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160). SFAS 160
clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated financial
statements. SFAS 160 is effective for the Company for the fiscal year 2010, with early
adoption being prohibited. The Company is assessing the impact that SFAS 160 may have on its
financial position, results of operations and cash flows.
In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events (SFAS 165). SFAS
165 is intended to establish general standards of accounting for and disclosures of events
that occur after the balance sheet date but before financial statements are issued or are
available to be issued. SFAS 165 requires disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, and is effective for interim and
annual periods ending after June 15, 2009. The Company is required to adopt SFAS 165 for its
year ended August 31, 2009 and does not expect an impact on its financial position, results
of operations, cash flows and disclosures upon adoption.
(16) |
|
SHARE REPURCHASE PROGRAM |
The Company has approximately 2.9 million shares authorized by the Board of Directors to be
repurchased under the Companys current share repurchase program. The Company did not
repurchase any shares of its common stock during the third quarter of fiscal 2009. During
the nine months ended May 31, 2009, the Company repurchased approximately 0.1 million shares
of its common stock at an average price of $14.77 per share. The Company repurchased
approximately 1.5 million shares of its common stock during the nine months ended May 31,
2008 at an average price of $20.53.
On June 29, 2009, the Company announced that its board of directors has approved a plan to
cease the operation of its InvisionÒ sheet production line at its Sharon
Center, Ohio manufacturing facility, by the end of the fourth quarter of fiscal year 2009. A
total of four positions will be eliminated as a result of this announcement. The Company
will continue to offer Invision resins, technologies and services to sheet and thermoforming
customers through its North American Engineered Plastics business, but will no longer
manufacture Invision sheet. A core group will be maintained to support sheet color matching,
new product development, process development, and licensing for the ongoing portion of the
business. The Company expects to record non-cash charges of approximately $6.0 million to
$8.0 million associated with the production equipment for the Invision sheet business and
less than $0.1 million in cash charges for termination benefits and other employee costs in
the fourth quarter of fiscal 2009.
- 20 -
Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview of the Business and Recent Developments
A. Schulman, Inc. (the Company, we, our, ours and us) is a leading international
supplier of high-performance plastic compounds and resins headquartered in Akron, Ohio. The
Companys customers span a wide range of markets including consumer products, industrial,
automotive and packaging. The Company has approximately 2,000 employees and 16 plants in countries
in North America, Europe and Asia.
The Company sells 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 limited amount of tolling service to customers through its Europe
operations.
To identify reportable segments, the Company considers its operating structure and the types of
information subject to regular review by its President and Chief Executive Officer (CEO), who is
the Chief Operating Decision Maker (CODM). Globally, the Company operates primarily in three
lines of business: engineered plastics, masterbatch and distribution services. In North America,
each of these lines of business has a general manager who reports directly to the Companys CEO.
Also, in North America the Company operates in a specialty sheet line of business called Invision
which has its own general manager who also reports to the CEO. The Companys European segment has
managers of each line of business, who report to a general manager of Europe who reports to the
CEO. Effective September 1, 2008, the Company named a general manager of Asia and a general manager
of Europe. This change separated the responsibilities that were previously combined under the
general manager of Europe, which then included Asia. Based on the Companys new management
structure and an evaluation of how the CODM reviews performance and allocates resources, the
Company redefined its European segment to separate the Asian operations from the European
operations beginning in the first quarter of fiscal 2009. Prior periods have been restated to
reflect the current presentation. The segments are Europe, North America Masterbatch (NAMB)
(previously, referred to as North America Polybatch or NAPB), North America Engineered Plastics
(NAEP), North America Distribution Services (NADS), Asia and A. Schulman Invision, Inc.
(Invision).
On June 29, 2009, the Company announced that its board of directors has approved a plan to cease
the operation of its InvisionÒ sheet production line at its Sharon Center, Ohio
manufacturing facility, by the end of the fourth quarter of fiscal year 2009. A total of four
positions will be eliminated as a result of this announcement. The Company will continue to offer
Invision resins, technologies and services to sheet and thermoforming customers through its North
American Engineered Plastics business, but will no longer manufacture Invision sheet. A core group
will be maintained to support sheet color matching, new product development, process development,
and licensing for the ongoing portion of the business.
The Company expects to record non-cash charges of approximately $6.0 million to $8.0 million
associated with the production equipment for the Invision sheet business and less than $0.1 million
in cash charges for termination benefits and other employee costs in the fourth quarter of fiscal
2009. Annual savings are expected to be approximately $2.0 million to $3.0 million beginning in
fiscal 2010.
During fiscal 2009, the Company announced actions to restructure its operations and eliminate costs
throughout the Company. These actions are part of the Companys ongoing strategic plan to realign
its resources, control costs and improve efficiency to profitably serve key growth markets. These
actions include a reduction in capacity and reduced headcount in cost of sales and selling, general
and administrative expenses. The Company has taken these proactive actions to address the current
global economic conditions and improve the Companys competitive position. The Company recorded
restructuring charges of $1.0 million and $6.2 million for the three and nine months ended May 31,
2009, respectively, which are primarily related to the actions taken in fiscal 2009. Related to the
announcements, management has initiated actions that are expected to be substantially complete by
the end of fiscal 2009. See the Results of Operations section of this Managements Discussion and
Analysis and Results of Operations for additional discussion.
- 21 -
Results of Operations
Net sales for the three months and nine months ended May 31, 2009 declined significantly as
compared with last years same periods sales. The decline in sales, excluding the translation
effect, was primarily a result of the deterioration of the global markets and demand. The Company
noted some improvement in volume and profitability in the third quarter of fiscal 2009 compared
with the second quarter of fiscal 2009. In addition, the effect of the strategic decisions made in
fiscal 2008 to reduce exposure to some unprofitable markets, such as North American automotive and
North American tolling, through plant closures and capacity reductions in North America reduced
sales.
A comparison of consolidated sales by segment for the three and nine months ended May 31, 2009 and
2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase |
|
|
|
|
|
|
|
|
|
|
% Due to |
|
|
|
Three months ended May 31, |
|
|
(decrease) |
|
|
% Due to |
|
|
% Due to |
|
|
price/ product |
|
Sales |
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
tonnage |
|
|
translation |
|
|
mix |
|
|
|
(In thousands, except for %s) |
|
Europe |
|
$ |
220,337 |
|
|
$ |
379,163 |
|
|
$ |
(158,826 |
) |
|
|
-41.9 |
% |
|
|
-20.8 |
% |
|
|
-10.9 |
% |
|
|
-10.2 |
% |
NAMB |
|
|
26,922 |
|
|
|
33,202 |
|
|
|
(6,280 |
) |
|
|
-18.9 |
% |
|
|
-20.4 |
% |
|
|
-14.6 |
% |
|
|
16.1 |
% |
NAEP |
|
|
26,137 |
|
|
|
52,009 |
|
|
|
(25,872 |
) |
|
|
-49.7 |
% |
|
|
-54.5 |
% |
|
|
-3.3 |
% |
|
|
8.1 |
% |
NADS |
|
|
11,443 |
|
|
|
34,050 |
|
|
|
(22,607 |
) |
|
|
-66.4 |
% |
|
|
-57.4 |
% |
|
|
-0.1 |
% |
|
|
-8.9 |
% |
Asia |
|
|
12,805 |
|
|
|
13,244 |
|
|
|
(439 |
) |
|
|
-3.3 |
% |
|
|
1.3 |
% |
|
|
1.4 |
% |
|
|
-6.0 |
% |
Invision |
|
|
55 |
|
|
|
99 |
|
|
|
(44 |
) |
|
|
-44.4 |
% |
|
NM |
|
|
NM |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
297,699 |
|
|
$ |
511,767 |
|
|
$ |
(214,068 |
) |
|
|
-41.8 |
% |
|
|
-26.9 |
% |
|
|
-9.3 |
% |
|
|
-5.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase |
|
|
|
|
|
|
|
|
|
|
% Due to |
|
|
|
Nine months ended May 31, |
|
|
(decrease) |
|
|
% Due to |
|
|
% Due to |
|
|
price/ product |
|
Sales |
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
tonnage |
|
|
translation |
|
|
mix |
|
|
|
(In thousands, except for %s) |
|
Europe |
|
$ |
699,829 |
|
|
$ |
1,089,547 |
|
|
$ |
(389,718 |
) |
|
|
-35.8 |
% |
|
|
-21.8 |
% |
|
|
-8.2 |
% |
|
|
-5.8 |
% |
NAMB |
|
|
78,212 |
|
|
|
100,078 |
|
|
|
(21,866 |
) |
|
|
-21.8 |
% |
|
|
-26.8 |
% |
|
|
-10.7 |
% |
|
|
15.7 |
% |
NAEP |
|
|
95,783 |
|
|
|
164,665 |
|
|
|
(68,882 |
) |
|
|
-41.8 |
% |
|
|
-56.4 |
% |
|
|
-3.0 |
% |
|
|
17.6 |
% |
NADS |
|
|
53,798 |
|
|
|
97,652 |
|
|
|
(43,854 |
) |
|
|
-44.9 |
% |
|
|
-41.7 |
% |
|
|
-0.3 |
% |
|
|
-2.9 |
% |
Asia |
|
|
30,987 |
|
|
|
35,900 |
|
|
|
(4,913 |
) |
|
|
-13.7 |
% |
|
|
-19.5 |
% |
|
|
1.9 |
% |
|
|
3.9 |
% |
Invision |
|
|
183 |
|
|
|
310 |
|
|
|
(127 |
) |
|
|
-41.0 |
% |
|
NM |
|
|
NM |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
958,792 |
|
|
$ |
1,488,152 |
|
|
$ |
(529,360 |
) |
|
|
-35.6 |
% |
|
|
-28.1 |
% |
|
|
-7.1 |
% |
|
|
-0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM=Not meaningful.
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 the three and nine months ended May 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
Nine months ended May 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Packaging |
|
|
46 |
% |
|
|
37 |
% |
|
|
43 |
% |
|
|
37 |
% |
Automotive |
|
|
12 |
% |
|
|
15 |
% |
|
|
12 |
% |
|
|
15 |
% |
Other |
|
|
42 |
% |
|
|
48 |
% |
|
|
45 |
% |
|
|
48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys sales to the automotive market continue to decline as a percent of total sales
reflecting managements objective to reduce its exposure to this market as well as a significant
market decline.
- 22 -
The majority of the Companys sales for the three and nine months ended May 31, 2009 and 2008 can
be classified into five primary product families. The amount and percentage of consolidated sales
for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Product Family |
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
(In thousands, except for %s) |
|
Color and additive concentrates |
|
$ |
145,065 |
|
|
|
49 |
% |
|
$ |
186,782 |
|
|
|
36 |
% |
Polyolefins |
|
|
70,846 |
|
|
|
24 |
|
|
|
169,392 |
|
|
|
33 |
|
Engineered compounds |
|
|
60,350 |
|
|
|
20 |
|
|
|
108,915 |
|
|
|
21 |
|
Polyvinyl chloride (PVC) |
|
|
7,967 |
|
|
|
3 |
|
|
|
15,373 |
|
|
|
3 |
|
Tolling |
|
|
4,081 |
|
|
|
1 |
|
|
|
4,003 |
|
|
|
1 |
|
Other |
|
|
9,390 |
|
|
|
3 |
|
|
|
27,302 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
297,699 |
|
|
|
100 |
% |
|
$ |
511,767 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
Product Family |
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
(In thousands, except for %s) |
|
Color and additive
concentrates |
|
$ |
413,442 |
|
|
|
43 |
% |
|
$ |
532,778 |
|
|
|
36 |
% |
Polyolefins |
|
|
270,513 |
|
|
|
28 |
|
|
|
492,766 |
|
|
|
33 |
|
Engineered compounds |
|
|
199,352 |
|
|
|
21 |
|
|
|
317,601 |
|
|
|
21 |
|
Polyvinyl chloride (PVC) |
|
|
28,814 |
|
|
|
3 |
|
|
|
43,994 |
|
|
|
3 |
|
Tolling |
|
|
10,543 |
|
|
|
1 |
|
|
|
16,178 |
|
|
|
1 |
|
Other |
|
|
36,128 |
|
|
|
4 |
|
|
|
84,835 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
958,792 |
|
|
|
100 |
% |
|
$ |
1,488,152 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
A comparison of gross profit dollars and percentages by segment for the three and nine months ended
May 31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
Increase (decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(In thousands, except for %s) |
|
Gross profit $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
38,634 |
|
|
$ |
50,808 |
|
|
$ |
(12,174 |
) |
|
|
(24.0 |
)% |
NAMB |
|
|
2,167 |
|
|
|
2,299 |
|
|
|
(132 |
) |
|
|
(5.7 |
) |
NAEP |
|
|
1,540 |
|
|
|
3,340 |
|
|
|
(1,800 |
) |
|
|
(53.9 |
) |
NADS |
|
|
1,634 |
|
|
|
2,902 |
|
|
|
(1,268 |
) |
|
|
(43.7 |
) |
Asia |
|
|
2,558 |
|
|
|
1,657 |
|
|
|
901 |
|
|
|
54.4 |
|
Invision |
|
|
(796 |
) |
|
|
(1,145 |
) |
|
|
349 |
|
|
|
30.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
45,737 |
|
|
$ |
59,861 |
|
|
$ |
(14,124 |
) |
|
|
(23.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
17.5 |
% |
|
|
13.4 |
% |
|
|
|
|
|
|
|
|
NAMB |
|
|
8.0 |
% |
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
NAEP |
|
|
5.9 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
NADS |
|
|
14.3 |
% |
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
Asia |
|
|
20.0 |
% |
|
|
12.5 |
% |
|
|
|
|
|
|
|
|
Invision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
15.4 |
% |
|
|
11.7 |
% |
|
|
|
|
|
|
|
|
- 23 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended May 31, |
|
|
Increase (decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(In thousands, except for %s) |
|
Gross profit $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
99,582 |
|
|
$ |
143,230 |
|
|
$ |
(43,648 |
) |
|
|
(30.5 |
)% |
NAMB |
|
|
4,687 |
|
|
|
9,988 |
|
|
|
(5,301 |
) |
|
|
(53.1 |
) |
NAEP |
|
|
4,869 |
|
|
|
10,610 |
|
|
|
(5,741 |
) |
|
|
(54.1 |
) |
NADS |
|
|
4,779 |
|
|
|
7,126 |
|
|
|
(2,347 |
) |
|
|
(32.9 |
) |
Asia |
|
|
3,891 |
|
|
|
3,796 |
|
|
|
95 |
|
|
|
2.5 |
|
Invision |
|
|
(2,584 |
) |
|
|
(3,912 |
) |
|
|
1,328 |
|
|
|
33.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
115,224 |
|
|
$ |
170,838 |
|
|
$ |
(55,614 |
) |
|
|
(32.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
14.2 |
% |
|
|
13.1 |
% |
|
|
|
|
|
|
|
|
NAMB |
|
|
6.0 |
% |
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
NAEP |
|
|
5.1 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
NADS |
|
|
8.9 |
% |
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
Asia |
|
|
12.6 |
% |
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
Invision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
12.0 |
% |
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
The gross profit percentages for Europe for the three months ended May 31, 2009 increased to 17.5%
compared with 13.4% for the same period in the prior year. For the nine months ended May 31, 2009,
the gross profit percentage was 14.2% compared with 13.1% for the same period prior year. The
Company was able to maintain gross profit percentage in the Europe
segment in the third quarter of fiscal 2009 primarily through
favorable product mix and cost reduction programs.
The Company was also encouraged by these results considering they were achieved during a period of
significant decline in demand. In addition, European gross profits were negatively impacted by
foreign currency translation losses of $6.3 million and $12.0 million for the three and nine months
ended May 31, 2009, respectively. The Company implemented measures to reduce fixed manufacturing
costs by temporarily reducing capacity and headcount during the second quarter of fiscal 2009 and
scheduling some manufacturing facilities on a four-day work week as necessary.
The gross profit dollars for the NAMB business have declined $0.1 million and $5.3 million, or 5.7%
and 53.1%, for the three and nine months ended May 31, 2009, respectively, compared with the same
periods last year. The decrease in gross profit dollars for NAMB is primarily the result of demand
declines. In addition, the effect of foreign currency translation losses decreased NAMB gross
profit by $1.0 million and $1.9 million for the three and nine months ended May 31, 2009,
respectively. For the three months ended May 31, 2009, the NAMB gross profit percentage increased
to 8.0% compared with 6.9% for the same period in the prior year. The gross profit percentage for
the nine-month period ended May 31, 2009 declined to 6.0% from 10.0% for the same period in the
prior year. The Company was not able to reduce fixed costs as quickly as the decline in demand,
which negatively impacted the gross profit primarily in the second quarter of fiscal 2009. The
gross profit for NAMB also includes approximately $0.9 million for the nine months ended May 31,
2009 of start-up costs without sales related to the Companys new masterbatch facility in Akron,
Ohio primarily in the first six months of fiscal 2009.
- 24 -
The gross profit dollars for the NAEP business have declined $1.8 million and $5.7 million, or
53.9% and 54.1%, for the three and nine months ended May 31, 2009, respectively, compared with the
same periods last year. A portion of this decline was planned as a result of the restructuring
announced in fiscal 2008 which included the shutdown the St. Thomas, Ontario, Canada facility and
the sale of the Orange, Texas facility. The decline in gross profit dollars and percentages for
NAEP are primarily related to significant declines in demand as well as the planned tonnage
declines. The lower demand resulted in the inability to absorb the majority of the overhead costs.
In order to offset the effects of weakening markets, in December 2008, the Company announced
further restructuring efforts that plan to reduce capacity and headcount in this segment. These
restructuring plans included the closing of a production line in this segment which resulted in
$0.7 million and $1.2 million for the three and nine months ended May 31, 2009, respectively, of
accelerated depreciation which is included in cost of sales. This contributed to the decline in
gross profit for NAEP.
The gross profit dollars for the NADS business have declined $1.3 million and $2.3 million, or
43.7% and 32.9%, for the three and nine months ended May 31, 2009, respectively, compared with the
same periods last year. The NADS segment gross profit dollars declined, however, it was able to
increase margins in the weak market primarily as a result of
favorable product mix.
The Companys Asia segment gross profit dollars increased 54.4% and 2.5% for the three and nine
months ended May 31, 2009, respectively. The increase in gross profit dollars and percentage is
primarily a result of reduced manufacturing costs and improved supply chain management. The Asia
segment sells primarily to the packaging market.
The Invision gross profit loss is due to the start-up nature of this business line. The Company
reduced spending on Invision as it refocused the business to non-automotive markets and considered
strategic alternatives for the segment.
A comparison of capacity utilization levels for the three months ended May 31, 2009 and 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
Nine months ended May 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Europe |
|
|
81 |
% |
|
|
88 |
% |
|
|
73 |
% |
|
|
92 |
% |
NAMB |
|
|
55 |
% |
|
|
94 |
% |
|
|
62 |
% |
|
|
102 |
% |
NAEP |
|
|
50 |
% |
|
|
75 |
% |
|
|
61 |
% |
|
|
75 |
% |
Asia |
|
|
73 |
% |
|
|
73 |
% |
|
|
54 |
% |
|
|
67 |
% |
Worldwide |
|
|
73 |
% |
|
|
85 |
% |
|
|
69 |
% |
|
|
87 |
% |
Europe capacity utilization declined for the three and nine months ended May 31, 2009, compared
with the same periods in the prior year primarily as a result of the significant global economic
slowdown and the Companys working capital initiatives to reduce inventory. The volumes were
especially low during the second quarter of fiscal 2009 as some customers shutdown plants for
extended periods of time.
The capacity utilization for NAMB declined significantly for the three and nine months ended May
31, 2009 compared with the same periods in the prior year due to the weak North America
marketplace. In addition, the start-up of the Akron, Ohio plant in the second quarter of fiscal
2009 and efforts to reduce inventory have impacted the utilization of the plants. Capacity
utilization for the NAEP segment decreased for the quarter and year-to-date period as a result of
the weak marketplace. However, the restructuring efforts announced in fiscal 2008 and fiscal 2009
to close the Companys St. Thomas, Ontario, Canada facility, the sale of the Companys Orange,
Texas facility and a line shutdown in the Bellevue, Ohio facility helped mitigate the decline. As a
result of the reductions, capacity in the North America segments declined from approximately 293.3
million pounds for the nine months ended May 31, 2008 to approximately 167.6 million pounds for the
nine months ended May 31, 2009.
The Companys Asia segment is experiencing lower capacity utilization for the year-to-date period
as a result of the weakened global markets and the initiatives to reduce inventory.
The Companys overall worldwide utilization declined compared with the prior year due to a dramatic
decrease in demand resulting from the challenging marketplace. Worldwide capacity utilization of
73% for the third quarter of fiscal 2009 was an improvement from the second quarter of fiscal 2009
utilization of 59% as the Company has realized some increase in demand. The capacity utilization
figures exclude production for the Invision product as this business was in a start-up phase.
Capacity utilization is calculated by dividing actual production pounds by practical capacity at
each plant.
- 25 -
The changes in selling, general and administrative expenses for the third quarter of fiscal 2009
compared with the same period in the prior year are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, 2009 |
|
|
|
$ Increase (decrease) |
|
|
% Increase (decrease) |
|
|
|
(In thousands, except for %s) |
|
Total change in selling, general and
administrative expenses |
|
$ |
(7,608 |
) |
|
|
(18.8 |
)% |
Less the effect of foreign currency translation |
|
|
(4,102 |
) |
|
|
(10.1 |
) |
|
|
|
|
|
|
|
Total change in selling, general and administrative
expenses, excluding the effect of foreign
currency translation |
|
$ |
(3,506 |
) |
|
|
(8.7 |
)% |
|
|
|
|
|
|
|
Selling, general and administrative expenses for the three months ended May 31, 2009 declined $3.5
million, excluding the effect of foreign currency exchange, compared with the same period last
fiscal year. This was partially attributable to a decline of $1.2 million in stock-based
compensation costs, primarily driven by a decline in the Companys common stock price and a change
in the estimated forfeiture rate. The decline was also attributable to a reduction of the Companys
qualified retirement plan costs as well as various cost cutting measures initiated in fiscal 2008
and 2009 including headcount reductions, a reduction in the retiree health care coverage and
changes in the employee health care programs. These cost saving initiatives were partially offset
by $1.4 million of incremental costs related to the consolidation of back-office operations to the
Companys shared service center in Europe.
The changes in selling, general and administrative expenses for the nine months ended May 31, 2009
compared with the same period in the prior year are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended May 31, 2009 |
|
|
|
$ Increase (decrease) |
|
|
% Increase (decrease) |
|
|
|
(In thousands, except for %s) |
|
Total change in selling, general and
administrative expenses |
|
$ |
(20,810 |
) |
|
|
(16.5 |
)% |
Less the effect of foreign currency translation |
|
|
(8,965 |
) |
|
|
(7.1 |
) |
|
|
|
|
|
|
|
Total change in selling, general and
administrative
expenses, excluding the effect of foreign
currency translation |
|
$ |
(11,845 |
) |
|
|
(9.4 |
)% |
|
|
|
|
|
|
|
Selling, general and administrative expenses for the nine months ended May 31, 2009 declined $11.8
million, excluding the effect of foreign currency exchange, compared with the same period last
fiscal year. The nine month ended May 31, 2008 included CEO transition costs of $3.6 million.
Excluding the CEO transition costs from fiscal 2008 and the effect of foreign currency translation,
selling, general and administrative expenses declined $8.2 million. Similar to the three month
period discussed above, this was partially attributable to the decline in stock-based compensation
costs of $3.7 million, primarily driven by a decline in the Companys common stock price, and cost
cutting measures initiated in fiscal 2008 and fiscal 2009 including headcount reductions, the
elimination of the Company airplane, a reduction in the retiree health care coverage and changes in
the employee health care programs. Costs are generally lower as a result of restructuring
activities that have taken place over the past year which were offset by approximately $3.0 million
of incremental costs related to the consolidation of back-office operations to the Companys shared
service center in Europe and $3.2 million of incremental consulting costs related to strategic
planning.
Minority interest represents a 30% equity position of Mitsubishi Chemical MKV Company in a
partnership with the Company and a 35% equity position of P.T. Prima Polycon Indah in an Indonesian
joint venture with the Company.
Interest expense declined by approximately $1.1 million and $2.3 million, respectively, for the
three and nine months ended May 31, 2009, respectively, as compared with the same period last year,
due to lower borrowing rates and overall lower debt levels.
- 26 -
Foreign currency transaction gains or losses represent changes in the value of currencies in major
areas where the Company operates. The Company experienced $2.4 million in foreign currency
transaction losses and $6.2 million in foreign currency transaction gains for the three and nine
months ended May 31, 2009, respectively. The nine-month period includes gains of $1.9 million and
$3.8 million related to the changes in the value of the U.S. dollar compared to the Canadian dollar
and Mexican peso, respectively. The Company experienced foreign currency transaction losses of $1.0
million and $1.6 million for the three and nine months ended May 31, 2008, respectively. Generally,
the foreign currency transaction gains or losses relate to the changes in the value of the U.S.
dollar compared with the Canadian dollar and the Mexican peso and changes between the Euro and
other non-Euro European currencies. From time to time, the Company enters into forward foreign
exchange contracts to reduce the impact of changes in foreign exchange rates on the consolidated
income statements. These contracts reduce exposure to currency movements affecting existing foreign
currency denominated assets and liabilities resulting primarily from trade receivables and
payables. Any gains or losses associated with these contracts, as well as the offsetting gains or
losses from the underlying assets or liabilities, are recognized on the foreign currency
transaction line in the consolidated income statements. Primarily during the first quarter of
fiscal 2009, while the U.S. dollar was strengthening, the Company was not completely hedged. The
majority of the gains in fiscal 2009 were realized during the first quarter of fiscal 2009 and the
Company has since taken actions that it believes will reduce this volatility.
Other income for the three and nine months ended May 31, 2009 includes approximately $1.0 million
and $1.8 million, respectively, of income from the cancellation of a European supplier distribution
agreement.
Restructurings
Fiscal 2009 Plan
During fiscal 2009, the Company announced various plans to realign its domestic and international
operations to strengthen the Companys performance and financial position. The realignment was
primarily completed by the end of the third quarter, but will continue into the fourth quarter of
fiscal 2009 as needed. The Company initiated these proactive actions to address the current global
economic conditions and improve the Companys competitive position. The actions include a reduction
in capacity and reduced headcount within cost of sales and selling, general and administrative
expenses. In addition, the Company is in the process of eliminating certain positions related to
the previously announced consolidation of back-office operations to the Europe Shared Service
Center located in Belgium. The implementation of the Europe Shared Service Center will continue
into early fiscal 2010.
The Company reduced its workforce by approximately 170 positions worldwide during the first nine
months of fiscal 2009. The Companys major European locations implemented a short work schedule
when necessary primarily in the second quarter of fiscal 2009.
In the NAEP segment, the Company reduced production capacity by temporarily idling one
manufacturing line, in addition to permanently shutting down one line at the plant in Bellevue,
Ohio. The Company reduced shifts from seven to five days at its Nashville, Tennessee plant.
In addition to the NAEP headcount reductions, the actions taken in fiscal 2009 reduced its
Akron-based North American administrative staff by six full-time employees and three contract
positions. These actions took place primarily in the second quarter of fiscal 2009 and were
completed by the end of the third quarter of fiscal 2009.
- 27 -
The following table summarizes the charges related to the fiscal 2009 initiatives by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract termination |
|
|
Accelerated |
|
|
|
|
|
|
Employee- |
|
|
and other related |
|
|
depreciation included |
|
|
|
|
|
|
related costs |
|
|
restructuring costs |
|
|
in cost of sales |
|
|
Total |
|
|
|
(In millions) |
|
Three months ended May 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
0.6 |
|
|
$ |
0.2 |
|
|
$ |
|
|
|
$ |
0.8 |
|
NAMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAEP |
|
|
0.2 |
|
|
|
|
|
|
|
0.7 |
|
|
|
0.9 |
|
All other North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring related charges
for the fiscal 2009 actions |
|
$ |
0.8 |
|
|
$ |
0.2 |
|
|
$ |
0.7 |
|
|
$ |
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended May 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
2.7 |
|
|
$ |
0.3 |
|
|
$ |
|
|
|
$ |
3.0 |
|
NAMB |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
NAEP |
|
|
2.4 |
|
|
|
0.6 |
|
|
|
1.2 |
|
|
|
4.2 |
|
All other North America |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring related charges
for the fiscal 2009 actions |
|
$ |
5.3 |
|
|
$ |
0.9 |
|
|
$ |
1.2 |
|
|
$ |
7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2009, approximately $2.7 million remains accrued for employee-related costs, which
include estimated severance payments and medical insurance, related to the fiscal 2009 initiatives.
The Company anticipates the majority of the accrued balance for restructuring charges to be paid
throughout fiscal 2009 and the remaining to be paid in fiscal 2010. The Company expects additional
charges related to these initiatives to range from approximately $1.5 million to $2.5 million to be
realized primarily during the fourth quarter of fiscal 2009. These charges approximate the
estimated remaining cash outlay for these plans. The Company expects to reduce annual costs by
approximately $8.5 million to $11.5 million as a result of the fiscal 2009 actions.
In July 2009, the Company has initiated further plans to reduce capacity and headcount at certain
international locations. These plans are expected to result in the reduction of approximately 10 to
20 positions and reduce working hours for remaining workers as appropriate. As a result of these
plans, the Company expects to incur before-tax costs of approximately $1.0 million to $2.3 million,
including:
|
|
approximately $0.5 million to $1.0 million of cash outlays for employee termination costs; |
|
|
approximately $0.1 million to $0.3 million of non-cash costs related to estimated employee
retirement benefits; and |
|
|
approximately $0.4 million to $1.0 million of non-cash charges related to fixed assets at
the impacted locations. |
These plans are expected to be completed primarily in the fourth quarter of fiscal 2009 and into
early fiscal 2010. These plans are expected to result in annual pre-tax savings of approximately
$0.6 million to $0.8 million beginning in fiscal 2010.
Fiscal 2008 Plan
In January 2008, the Company announced two steps in its continuing effort to improve the
profitability of its North American operations. The Company announced it would shut down its
manufacturing facility in St. Thomas, Ontario, Canada and would pursue a sale of its manufacturing
facility in Orange, Texas. All the restructuring costs related to the sale of the Orange, Texas and
the St. Thomas, Ontario, Canada facilities are related to the NAEP reportable segment.
The St. Thomas, Ontario, Canada facility primarily produced engineered plastics for the automotive
market, with a capacity of approximately 74 million pounds per year and employed approximately 120
individuals. The facility was shutdown at the end of June 2008. The Company continues to finalize
closing procedures into fiscal 2009.
The Orange, Texas facility primarily provided North American third-party tolling services in which
the Company processed customer-owned materials for a fee. Total annual capacity at the Orange,
Texas facility was approximately 135 million pounds and employed approximately 100 employees. The
Company completed the sale of this facility in March 2008 for total consideration of $3.7 million.
- 28 -
The Company recorded charges related to the fiscal 2008 initiatives of approximately $0.2 million
for employee-related costs and $0.1 million for contract termination and other related
restructuring costs during the nine months ended May 31, 2009. These charges recorded in fiscal
2009 are related to the NAEP segment. Approximately $0.2 million remains accrued for
employee-related costs at May 31, 2009 related to the fiscal 2008 initiatives, which the Company
anticipates the majority of the accrued balance for restructuring charges to be paid throughout
fiscal 2009. During the nine months ended May 31, 2008, the Company recorded approximately $6.1
million in employee-related costs, which include estimated severance payments and medical insurance
for approximately 135 employees, whose positions were eliminated at the Orange, Texas and St.
Thomas, Ontario, Canada facilities.
The following table summarizes the liabilities as of May 31, 2009 related to the announced
restructuring plans in fiscal 2008 and fiscal 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual Balance |
|
|
Fiscal 2009 |
|
|
Fiscal 2009 |
|
|
Accrual Balance |
|
|
|
August 31, 2008 |
|
|
Charges |
|
|
Paid |
|
|
May 31, 2009 |
|
|
|
(In thousands) |
|
Employee related
costs |
|
$ |
507 |
|
|
$ |
5,225 |
|
|
$ |
(2,920 |
) |
|
$ |
2,812 |
|
Other costs |
|
|
|
|
|
|
1,005 |
|
|
|
(929 |
) |
|
|
76 |
|
Translation effect |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
$ |
485 |
|
|
$ |
6,230 |
|
|
$ |
(3,849 |
) |
|
$ |
2,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 Plan
During fiscal 2007, the Company announced multiple phases of a restructuring plan to restore its
NAEP segment to profitability. The Company recorded minimal charges in fiscal 2008 related to the
fiscal 2007 initiatives as the plan was primarily completed in fiscal 2007. The total charge for
this plan was approximately $2.1 million recorded primarily in fiscal 2007.
Certain portions of the Companys North America operations are not managed separately and are
included in All Other North America. The Company also includes in All Other North America any
administrative costs that are not directly related or allocated to a North America business unit
such as North America information technology, human resources, accounting and purchasing. The
North America administrative costs are directly related to the four North America segments.
The CODM uses net sales to unaffiliated customers, gross profit and operating income in order to
make decisions, assess performance and allocate resources to each segment. Operating income does
not include interest income or expense, other income or expense, restructuring expense, asset
impairments, goodwill impairments, curtailment gains or foreign currency transaction gains or
losses. In some cases, the Company may choose to exclude from a segments results certain
non-recurring items as determined by management. These items are included in the Corporate and
Other section in the table below. Corporate expenses include the compensation of certain personnel,
certain audit expenses, board of directors related costs, certain insurance costs and other
miscellaneous legal and professional fees.
- 29 -
A reconciliation of operating income by segment to consolidated income before taxes is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
Nine months ended May 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Europe |
|
$ |
16,544 |
|
|
$ |
25,355 |
|
|
$ |
35,371 |
|
|
$ |
71,647 |
|
NAMB |
|
|
1,026 |
|
|
|
623 |
|
|
|
883 |
|
|
|
4,929 |
|
NAEP |
|
|
(724 |
) |
|
|
(1,262 |
) |
|
|
(4,904 |
) |
|
|
(4,796 |
) |
NADS |
|
|
1,027 |
|
|
|
1,750 |
|
|
|
1,965 |
|
|
|
3,737 |
|
Asia |
|
|
1,511 |
|
|
|
587 |
|
|
|
1,068 |
|
|
|
754 |
|
Invision |
|
|
(823 |
) |
|
|
(1,611 |
) |
|
|
(2,870 |
) |
|
|
(5,306 |
) |
All other North America |
|
|
(2,534 |
) |
|
|
(2,582 |
) |
|
|
(8,243 |
) |
|
|
(11,034 |
) |
Corporate and other |
|
|
(3,469 |
) |
|
|
(3,740 |
) |
|
|
(13,579 |
) |
|
|
(15,916 |
) |
Interest expense, net |
|
|
(662 |
) |
|
|
(1,817 |
) |
|
|
(1,626 |
) |
|
|
(4,533 |
) |
Foreign currency transaction gains (losses) |
|
|
(2,430 |
) |
|
|
(984 |
) |
|
|
6,218 |
|
|
|
(1,580 |
) |
Other income (expense) |
|
|
1,218 |
|
|
|
(253 |
) |
|
|
2,231 |
|
|
|
(252 |
) |
Curtailment gain |
|
|
|
|
|
|
2,313 |
|
|
|
2,609 |
|
|
|
2,313 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(964 |
) |
Asset impairment |
|
|
(283 |
) |
|
|
(3,601 |
) |
|
|
(2,462 |
) |
|
|
(8,820 |
) |
Restructuring expense |
|
|
(981 |
) |
|
|
(3,685 |
) |
|
|
(6,230 |
) |
|
|
(6,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
$ |
9,420 |
|
|
$ |
11,093 |
|
|
$ |
10,431 |
|
|
$ |
23,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European operating income decreased approximately $8.8 million or 34.8%, for the three months ended
May 31, 2009 and decreased approximately $36.3 million or 50.6%, for the nine months ended May 31,
2009 compared with the same periods in the prior year. The decrease was primarily due to the
recessionary global marketplace, which significantly reduced demand and resulted in a decline in
gross profit. The Europe segment selling, general and administrative costs were approximately flat
compared with prior year for both the three and nine months ended May 31, 2009 excluding the
translation effect of foreign currencies. The selling, general and administrative costs for the
nine months ended May 31, 2009 include approximately $3.0 million of incremental costs related to
the consolidation of back-office operations to the Companys shared service center in Europe which
were offset by a decline of $1.8 million in stock-based compensation costs. In March 2009, the
Company announced plans to further realign its international operations and selling, general and
administrative costs through headcount reductions and capacity reductions. These actions are
expected to be completed throughout the fourth quarter of fiscal 2009 and partially into fiscal
2010.
Operating income for NAMB increased approximately $0.4 million and decreased approximately $4.0
million for the three and nine months ended May 31, 2009, respectively, compared with the same
periods in the prior year. The decline for the nine-month period was primarily a result of the
decline in gross profit due to a decline in demand. The gross profit decline for the quarter was
more than offset by a decrease in selling, general and administrative costs. The decrease in
selling, general and administrative costs was primarily due to a decline of $0.3 million and $0.4
million for the three and nine months ended May 31, 2009, respectively, in stock-based compensation
costs and a reduction in the Companys qualified retirement plan costs compared with the same
periods last year. In addition, lower selling, general and administrative costs resulted from
actions taken in fiscal 2009, to realign the Companys international operations, which include some
operations in the NAMB segment, through headcount reductions and shortened work weeks as necessary.
These actions were substantially complete by the end of the third quarter of fiscal 2009 for the
NAMB segment.
The operating loss for the NAEP segment, which is the segment most exposed to the automotive
market, decreased by $0.5 million and increased by $0.1 million for the three and nine months ended
May 31, 2009, respectively, compared with the same periods in the prior year. The operating losses
were primarily a result of a significant decline in demand. The decline of selling, general and
administrative costs for the NAEP segment helped offset the gross profit decrease. The decrease in
selling, general and administrative costs was primarily due to a decline of $0.6 million and $0.8
million for the three and nine months ended May 31, 2009, respectively, in stock-based compensation
costs and a reduction in the Companys qualified retirement plan costs compared with the same
periods last year. Unprecedented declines in demand resulted in additional planned capacity
reductions that were announced in December 2008.
- 30 -
The decline in the operating income for NADS for the three and nine months ended May 31, 2009 was
due to the decline in gross profit dollars as a result of the decline in demand. The declines in
gross profits were partially offset by lower selling, general and administrative costs compared
with prior year. The decrease in selling, general and administrative costs was primarily due to a
decline in stock-based compensation costs and a reduction in the Companys qualified retirement
plan costs compared with the same periods last year.
The Asia segment experienced increases in operating income for both the three months and nine
months ended May 31, 2009. The increase was a result of improved gross profit from reduced
manufacturing costs and improved supply chain management.
The costs associated with All Other North America include a decline of $0.6 million and $1.0
million for the three and nine months ended May 31, 2009, respectively, in stock-based compensation
costs and a reduction in the Companys qualified retirement plan costs compared with the same
periods last year.
The Company recorded approximately $0.3 million and $2.5 million in asset impairments during the
three and nine months ended May 31, 2009, respectively. The impairments were related to properties
which are considered held for sale including the St. Thomas, Ontario, Canada facility and the
Orange, Texas warehouse. The Company recorded approximately $3.6 million and $8.8 million in asset
impairments during the three and nine months ended May 31, 2008, respectively, related to the
restructuring plans initiated in the second quarter of fiscal 2008 for the St. Thomas, Ontario,
Canada and the Orange, Texas facilities.
A reconciliation of the statutory U.S. federal income tax rate of 35% with the effective tax rate
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
(In thousands except for %s) |
|
Statutory U.S. tax rate |
|
$ |
3,297 |
|
|
|
35.0 |
% |
|
$ |
3,883 |
|
|
|
35.0 |
% |
Amount of foreign taxes at less
than U.S. statutory tax rate |
|
|
(3,086 |
) |
|
|
(32.8 |
) |
|
|
(2,992 |
) |
|
|
(27.0 |
) |
U.S. losses with no tax benefit |
|
|
2,985 |
|
|
|
31.7 |
|
|
|
2,655 |
|
|
|
23.9 |
|
U.S. restructuring and other U.S.
unusual charges with no tax
benefit |
|
|
41 |
|
|
|
0.4 |
|
|
|
933 |
|
|
|
8.4 |
|
Establishment (resolution) of
uncertain tax positions |
|
|
(1,268 |
) |
|
|
(13.5 |
) |
|
|
(624 |
) |
|
|
(5.6 |
) |
Other |
|
|
2 |
|
|
|
0.1 |
|
|
|
106 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
$ |
1,971 |
|
|
|
20.9 |
% |
|
$ |
3,961 |
|
|
|
35.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Nine months ended |
|
|
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
|
|
|
|
(In thousands except for %s) |
|
|
|
|
|
Statutory U.S. tax rate |
|
$ |
3,651 |
|
|
|
35.0 |
% |
|
$ |
8,355 |
|
|
|
35.0 |
% |
Amount of foreign taxes at less
than U.S. statutory tax rate |
|
|
(9,138 |
) |
|
|
(87.6 |
) |
|
|
(9,859 |
) |
|
|
(41.3 |
) |
U.S. losses with no tax benefit |
|
|
11,302 |
|
|
|
108.3 |
|
|
|
8,581 |
|
|
|
35.9 |
|
U.S. restructuring and other U.S.
unusual charges with no tax
benefit |
|
|
584 |
|
|
|
5.6 |
|
|
|
4,094 |
|
|
|
17.1 |
|
Establishment (resolution) of
uncertain tax positions |
|
|
(1,170 |
) |
|
|
(11.2 |
) |
|
|
(1,083 |
) |
|
|
(4.5 |
) |
Other |
|
|
95 |
|
|
|
0.9 |
|
|
|
403 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
$ |
5,324 |
|
|
|
51.0 |
% |
|
$ |
10,491 |
|
|
|
43.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
- 31 -
The effective tax rate of 20.9% for the three months ended May 31, 2009 is less than the U.S.
statutory rate of 35.0% primarily because of the Companys overall foreign rate being less than the
U.S. statutory rate and the resolution of uncertain tax positions. These favorable effects on the
Companys tax rate were partially offset by no tax benefits being recognized for U.S. losses from
continuing operations and other U.S. charges. As compared with the effective rate of 35.7% for the
three months ended May 31, 2008, the current quarters effective rate is driven by a decrease in
the overall foreign rate, the resolution of uncertain tax positions and a decrease in other U.S.
charges with no tax benefit.
The effective tax rate of 51.0% for the nine months ended May 31, 2009 is greater than the U.S.
statutory rate of 35.0% primarily because no tax benefits were recognized for U.S. losses from
continuing operations and other U.S. charges. This unfavorable effect on the Companys tax rate
was partially offset because of the Companys overall foreign rate being less than the U.S.
statutory rate and the resolution of uncertain tax positions. As compared with the effective rate
of 43.9% for the nine months ended May 31, 2008, the current periods effective rate is driven by
the reduction in worldwide pre-tax income, which significantly increased the tax rate impact of the
U.S. losses with no tax benefit.
The translation effect of foreign currencies, primarily the Euro, decreased net income by $2.7
million and $5.8 million for the three and nine months ended May 31, 2009, respectively.
The Company uses the following non-GAAP financial measures of net income excluding unusual items
and net income per diluted share excluding unusual items. These financial measures are used by
management to monitor and evaluate the ongoing performance of the Company and to allocate
resources. The Company believes that the additional measures are useful to investors for financial
analysis. However, non-GAAP measures are not in accordance with, nor are they a substitute for,
GAAP measures. The table below reconciles net income excluding unusual items and net income per
diluted share excluding unusual items to net income and net income per diluted share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
Diluted EPS |
|
Net income and earnings per share reconciliation |
|
Income (loss) |
|
|
impact |
|
|
Income (loss) |
|
|
impact |
|
|
|
(In thousands except per share data) |
|
Net income applicable to common stock |
|
$ |
7,436 |
|
|
$ |
0.29 |
|
|
$ |
7,119 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments, net of tax, per diluted share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expense |
|
|
704 |
|
|
|
0.03 |
|
|
|
3,000 |
|
|
|
0.11 |
|
Accelerated depreciation, included in cost of sales |
|
|
711 |
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
Asset impairment |
|
|
188 |
|
|
|
0.01 |
|
|
|
3,560 |
|
|
|
0.14 |
|
Curtailment gain |
|
|
|
|
|
|
|
|
|
|
(2,313 |
) |
|
|
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock before unusual
items |
|
$ |
9,039 |
|
|
$ |
0.36 |
|
|
$ |
11,366 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding -
Diluted |
|
|
|
|
|
|
25,939 |
|
|
|
|
|
|
|
26,665 |
|
- 32 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Nine months ended |
|
|
|
May 31, 2009 |
|
|
May 31, 2008 |
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
Diluted EPS |
|
Net income and earnings per share reconciliation |
|
Income (loss) |
|
|
impact |
|
|
Income (loss) |
|
|
impact |
|
|
|
|
|
|
|
(In thousands except per share data) |
|
|
|
|
|
Net income applicable to common stock |
|
$ |
5,067 |
|
|
$ |
0.20 |
|
|
$ |
13,341 |
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments, net of tax, per diluted share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expense |
|
|
5,214 |
|
|
|
0.20 |
|
|
|
5,031 |
|
|
|
0.18 |
|
Accelerated depreciation, included in cost of sales |
|
|
1,185 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
Asset impairment |
|
|
2,051 |
|
|
|
0.08 |
|
|
|
7,930 |
|
|
|
0.29 |
|
Curtailment gain |
|
|
(2,609 |
) |
|
|
(0.10 |
) |
|
|
(2,313 |
) |
|
|
(0.08 |
) |
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
964 |
|
|
|
0.04 |
|
Termination of lease for an airplane |
|
|
|
|
|
|
|
|
|
|
640 |
|
|
|
0.02 |
|
CEO transition costs |
|
|
|
|
|
|
|
|
|
|
3,582 |
|
|
|
0.13 |
|
Other employee termination costs |
|
|
97 |
|
|
|
|
|
|
|
806 |
|
|
|
0.03 |
|
Insurance claim settlement adjustment |
|
|
|
|
|
|
|
|
|
|
368 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock before unusual
items |
|
$ |
11,005 |
|
|
$ |
0.43 |
|
|
$ |
30,349 |
|
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding -
Diluted |
|
|
|
|
|
|
25,962 |
|
|
|
|
|
|
|
27,299 |
|
Liquidity and Capital Resources
The major source of cash inflows is generally net income. The primary uses of cash other than for
operations are generally cash dividends, common share repurchases and capital expenditures.
Presently, the Company anticipates that cash flow from operations and availability under credit
arrangements will be sufficient to meet its short and long-term operational requirements.
The Company has further improved its liquidity position in the third quarter of fiscal 2009. Net
cash provided from operations was $150.6 million and $66.5 million for the nine months ended May
31, 2009 and 2008, respectively. The increase from last year was due to a decline in inventory and
accounts receivable, compared with the increases in these areas in the prior year, primarily driven
by lower sales and the Companys efforts to reduce working capital.
The Companys approximate working capital days are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2009 |
|
|
August 31, 2008 |
|
|
May 31, 2008 |
|
Days in receivables |
|
|
63 |
|
|
|
58 |
|
|
|
62 |
|
Days in inventory |
|
|
47 |
|
|
|
48 |
|
|
|
58 |
|
Days in payables |
|
|
41 |
|
|
|
34 |
|
|
|
31 |
|
Total working capital
days |
|
|
70 |
|
|
|
72 |
|
|
|
89 |
|
- 33 -
The following table summarizes certain key balances on the Companys balance sheet and related
metrics.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2009 |
|
|
August 31, 2008 |
|
|
May 31, 2008 |
|
|
|
(In millions, except for %s) |
|
Cash and cash equivalents |
|
$ |
202.5 |
|
|
$ |
97.7 |
|
|
$ |
83.9 |
|
Working capital, excluding cash |
|
$ |
156.2 |
|
|
$ |
305.2 |
|
|
$ |
404.6 |
|
Long-term debt |
|
$ |
101.3 |
|
|
$ |
104.3 |
|
|
$ |
165.3 |
|
Total debt |
|
$ |
104.0 |
|
|
$ |
113.8 |
|
|
$ |
167.9 |
|
Net debt (net cash)* |
|
$ |
(98.5 |
) |
|
$ |
16.1 |
|
|
$ |
84.0 |
|
Stockholders equity |
|
$ |
381.6 |
|
|
$ |
427.6 |
|
|
$ |
452.0 |
|
|
|
|
* |
|
Total debt less cash and cash equivalents. |
The Companys cash and cash equivalents increased approximately $104.8 million from August 31,
2008. Working capital, excluding cash, decreased $149.0 million from August 31, 2008. The primary
reason for the decrease in working capital was the decrease in accounts receivable of $112.2
million and the decrease in inventory of $97.6 million. The translation effect of foreign
currencies, primarily the Euro, decreased accounts receivable by $19.7 million and decreased
inventory by $8.6 million. Excluding the impact of translation of foreign currencies, inventory
decreased approximately $89.0 million, or 39.6%, and accounts receivable decreased $92.5 million,
or 28.9%. The decreases are also attributable to the Companys long-term working capital reduction
program. Accounts payable also decreased $49.5 million due primarily to the translation effect of
foreign currencies of $8.6 million and the decrease in demand offset by improved purchasing
management.
Capital expenditures for the nine months ended May 31, 2009 were $22.0 million compared with $18.6
million for the same period last year. The major component of the capital expenditures included
additions related to the new Akron, Ohio plant and adding a new smaller line in the Nashville,
Tennessee plant that is replacing an older inefficient line. In addition, a portion of the
expenditures were from moving a smaller capacity line from a facility in the U.S. to the Companys
Mexico facility to allow for smaller run sizes in the Mexico facility.
The Company has a $260.0 million credit facility (Credit Facility) which consists of 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 May 31, 2009, the Company was not in violation of any of its
covenants relating to the Credit Facility.
Interest rates on the Credit Facility are based on LIBOR or EURIBOR (depending on the borrowing
currency) plus a spread determined by the Companys total leverage ratio. The Company also pays a
facility fee on the commitments whether used or unused. The Credit Facility allows for a provision
that provides a portion of the funds available as a short-term swing-line loan. The swing-line loan
interest rate varies based on a mutually agreed upon rate between the bank and the Company. At May
31, 2009, there were no borrowings on the Credit Facility.
The Company has senior guaranteed notes outstanding (Senior Notes) in the private placement
market consisting of the following:
|
|
|
$30.0 million of Senior Notes in the United States, maturing on March 1, 2013, with a
variable interest rate of LIBOR plus 80 bps (Dollar Notes). Although there are no plans
to do so, the Company may, at its option, prepay all or part of the Dollar Notes. |
|
|
|
|
50.3 million of Senior Notes in Germany, maturing on March 1, 2016, with a fixed
interest rate of 4.485% (Euro Notes). The Euro Notes approximate $71.2 million at May 31,
2009. The fair market value of the Euro Notes is approximately 40.0 million at May 31,
2009, which approximates $56.6 million. |
- 34 -
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
May 31, 2009, the Company was not in violation of any of its covenants relating to the Senior
Notes.
Both the Credit Facility and the Senior Notes are supported by up to 65% of the capital stock of
certain of the Companys directly owned foreign subsidiaries.
The Company has an $8.5 million uncollateralized short-term line of credit from a domestic bank at
May 31, 2009. As of May 31, 2009, there were no borrowings outstanding under this line of credit.
The Company had approximately $42.2 million of uncollateralized short-term foreign lines of credit
available to its subsidiaries at May 31, 2009. There was approximately $2.7 million outstanding
under these lines of credit at May 31, 2009.
Below summarizes the Companys available funds as of May 31, 2009 and August 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
As of May 31, |
|
|
As of August 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In millions) |
|
Total gross available funds from credit lines and notes |
|
|
|
|
|
|
|
|
Credit Facility |
|
$ |
260.0 |
|
|
$ |
260.0 |
|
Uncollateralized short-term lines of credit U.S. |
|
$ |
8.5 |
|
|
$ |
8.5 |
|
Uncollateralized short-term lines of credit Foreign |
|
$ |
42.2 |
|
|
$ |
51.0 |
|
Borrowings outstanding |
|
|
|
|
|
|
|
|
Credit Facility |
|
|
|
|
|
|
7.0 |
|
Uncollateralized short-term lines of credit U.S. |
|
|
|
|
|
|
|
|
Uncollateralized short-term lines of credit Foreign |
|
|
2.7 |
|
|
|
2.5 |
|
Total net available funds from credit lines and notes |
|
|
|
|
|
|
|
|
Credit Facility |
|
$ |
260.0 |
|
|
$ |
253.0 |
|
Uncollateralized short-term lines of credit U.S. |
|
$ |
8.5 |
|
|
$ |
8.5 |
|
Uncollateralized short-term lines of credit Foreign |
|
$ |
39.5 |
|
|
$ |
48.5 |
|
The Company adopted the required portions of FASB Statement No. 157, (SFAS 157), Fair Value
Measurement, as of September 1, 2008. The adoption did not have a material impact on the Companys
financial position, results of operations and cash flows. In accordance with FASB Staff Position
(FSP) No. FAS 157-2, Effective Date of FASB Statement No.157, the Company delayed the adoption of
portions of SFAS 157 related to nonfinancial assets and nonfinancial liabilities, except for items
recognized or disclosed at fair value on a recurring basis. Accordingly, the Company will adopt the
provisions of SFAS 157 related to nonfinancial assets and nonfinancial liabilities recognized or
disclosed at fair value on a nonrecurring basis in fiscal 2010. The Company is currently evaluating
the impact, if any, of the adoption of this portion of SFAS 157 on its financial position, results
of operations and cash flows.
SFAS 157 establishes a fair value hierarchy to prioritize the inputs used in valuation techniques
into three levels as follows:
|
|
|
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets; |
|
|
|
|
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the
asset or liability either directly or indirectly; and |
|
|
|
|
Level 3: Unobservable inputs which reflect an entitys own assumptions. |
The fair value of cash equivalents, by their nature, is determined utilizing Level 1 inputs. The
Company measures the fair value of the forward foreign exchange contracts using Level 2 inputs
through observable market transactions in active markets provided by banks. The forward foreign
exchange contracts are entered into with creditworthy multinational banks.
- 35 -
The Company adopted FASB Statement No. 159, (SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115. However, the
Company did not elect the fair value option for any of its existing financial instruments other
than those already measured at fair value. Therefore, the Companys adoption of SFAS 159 as of
September 1, 2008 did not have a material impact on the Companys financial position, results of
operations and cash flows.
During the nine months ended May 31, 2009, the Company has declared and paid quarterly cash
dividends totaling $0.45 per common share. The total amount of these dividends was $11.8 million.
Cash has been sufficient to fund the payment of these dividends. On June 25, 2009, the Companys
Board of Directors declared a regular cash dividend of $0.15 per common share payable August 3,
2009 to stockholders of record on July 20, 2009.
The Company did not repurchase any shares of its common stock during the third quarter of fiscal
2009. During the nine months ended May 31, 2009, the Company repurchased approximately 0.1
million shares of its common stock at an average price of $14.77 per share. The Company repurchased
approximately 1.5 million shares of its common stock during the nine months ended May 31, 2008 at
an average price of $20.53 per share. The Company may continue repurchasing common stock under the
Companys current repurchase program through open market repurchases from time to time, subject to
market conditions, capital considerations of the Company and compliance with applicable laws. As of
May 31, 2009, approximately 2.9 million shares remain available to be repurchased under the
Companys repurchase program.
The assets and liabilities of the Companys foreign subsidiaries are translated into U.S. dollars
using current exchange rates. Income statement items are translated at average exchange rates
prevailing during the period. The resulting translation adjustments are recorded in the Accumulated
Other Comprehensive Income (Loss) account in stockholders equity. The change in the value of the
U.S. dollar during the nine months ended May 31, 2009 decreased this account by $36.3 million.
Contractual Obligations
As of May 31, 2009, there were no material changes to the Companys future contractual obligations
as previously reported in the Companys 2008 Annual Report on Form 10-K (the 2008 Form 10-K).
Operating lease information is provided in Footnote 12 to the Consolidated Financial Statements in
the Companys 2008 Form 10-K as there has been no significant changes.
The Companys outstanding commercial commitments at May 31, 2009 are not material to the Companys
financial position, liquidity or results of operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements as of May 31, 2009.
Critical Accounting Policies
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, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. Management bases its estimates on historical experience and
other factors it believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from those estimates.
- 36 -
New Accounting Pronouncements
In December 2007, the FASB issued FASB Statement No. 141(R), Business Combinations (SFAS 141R).
SFAS 141R replaces FASB Statement No. 141 and provides greater consistency in the accounting and
financial reporting of business combinations. SFAS 141R requires the acquiring entity in a business
combination to recognize all assets acquired and liabilities assumed in the transaction and any
non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of
that date. This includes the measurement of the acquirer shares issued in
consideration for a business combination, the recognition of contingent consideration, the
accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized
in-process research and development, the accounting for acquisition-related restructuring cost
accruals, the treatment of acquisition-related transaction costs and the recognition of changes in
the acquirers income tax valuation allowance and deferred taxes. SFAS 141R is effective for
business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted.
The Company is required to adopt SFAS 141R in fiscal year 2010. The Company is assessing the impact
that SFAS 141R may have on its financial position, results of operations and cash flows.
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 (SFAS 160). SFAS 160 clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements. SFAS 160 is effective for
the Company for the fiscal year 2010, with early adoption being prohibited. The Company is
assessing the impact that SFAS 160 may have on its financial position, results of operations and
cash flows.
In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events (SFAS 165). SFAS 165 is
intended to establish general standards of accounting for and disclosures of events that occur
after the balance sheet date but before financial statements are issued or are available to be
issued. SFAS 165 requires disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date, and is effective for interim and annual periods ending after
June 15, 2009. The Company is required to adopt SFAS 165 for its year ended August 31, 2009 and
does not expect an impact on its financial position, results of operations, cash flows and
disclosures upon adoption.
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 are disclosed in this
Quarterly Report on Form 10-Q and the Companys 2008 Form 10-K, include, but are not limited to,
the following:
|
|
Worldwide and regional economic, business and political conditions, including continuing
economic uncertainties in some or all of the Companys major product markets; |
|
|
|
Fluctuations in the value of currencies in major areas where the Company operates,
including the U.S. dollar, Euro, U.K. pound sterling, Canadian dollar, Mexican peso, Chinese
yuan and Indonesian rupiah; |
|
|
|
Fluctuations in the prices of sources of energy or plastic resins and other raw materials; |
|
|
|
Changes in customer demand and requirements; |
|
|
|
Escalation in the cost of providing employee health care; |
|
|
|
Outcome of any legal claims known or unknown; |
|
|
|
Performance of the global automotive market; |
|
|
|
Global financial market turbulence; and |
|
|
|
Global or regional economic slowdown or recession. |
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.
- 37 -
Item 3 Quantitative and Qualitative Disclosure 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 principal 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 exchange contracts to reduce its exposure to fluctuations in
related foreign currencies. These contracts are with major financial institutions and the
counterparty 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 Credit 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
May 31, 2009, the Company had no borrowings against its Credit Facility. Borrowing costs may
fluctuate depending upon the volatility of LIBOR and amounts borrowed.
Item 4 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.
- 38 -
PART II OTHER INFORMATION
Items 1, 3, 4 and 5 are not applicable or the answer to such items is negative; therefore, the
items have been omitted and no reference is required in this Report.
Item 1A Risk Factors
There are certain risks and uncertainties in our business that could cause our actual results to
differ materially from those anticipated. In ITEM 1A. RISK FACTORS of Part I of the Companys
2008 Form 10-K, we included a detailed discussion of our risk factors. The following information
updates certain of our risk factors and should be read in conjunction with the risk factors
disclosed in the 2008 Form 10-K. These risk factors should be read carefully in connection with
evaluating our business and in connection with the forward-looking statements contained in this
Quarterly Report on Form 10-Q. Any of the risks described below or in the 2008 Form 10-K could
materially adversely affect our business, financial condition or future results and the actual
outcome of matters as to which forward-looking statements are made. These are not the only risks
we face. Additional risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial condition and/or
operating results.
Our sales, profitability, operating results and cash flows are sensitive to the turbulent global
economic conditions, financial markets and cyclicality, and could be adversely affected during
economic downturns or financial market instability.
The business of most of our customers, particularly our industrial, automotive, construction and
electronics customers, can be cyclical in nature and sensitive to changes in general economic
conditions. Financial deterioration in our customers 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. The global economic crisis, especially in North America and Europe, has included, among
other things, significant reductions in available capital and liquidity from banks and other
providers of credit, substantial reductions and fluctuations in equity and currency values
worldwide, and concerns that the worldwide economy may enter into a prolonged recessionary period,
each of which may materially adversely affect our customers access to capital. A limit on our
customers access to capital could inhibit their willingness or ability to purchase our products or
affect their ability to pay for products that they have already purchased from us. In addition,
downturns in our customers industries, even during periods of strong general economic conditions,
could adversely affect our sales, profitability, operating results and cash flows.
Although no one customer currently makes up a significant portion of our sales, we are exposed to
industries such as automotive, appliances and construction. Bankruptcies by major original
equipment manufacturers (OEM) for the automotive market could have a cascading effect on a group of
our customers who supply to OEMs, directly affecting their ability to pay.
Similar to our customers situation, the turbulent global economic conditions may materially
adversely affect our suppliers access to capital and liquidity with which they maintain their
inventories, production levels and product quality, causing them to raise prices or lower
production levels. An increase in prices could adversely affect our profitability, operating
results and cash flows.
The future of the current global financial crisis is difficult to forecast and mitigate, and
therefore our operating results for a particular period are difficult to predict. Any of the
foregoing effects could have a material adverse effect on our business, results of operations and
financial condition.
The inability to achieve, delays in achieving or achievement of less than the anticipated financial
benefit from initiatives related to cost reductions and improving efficiencies could adversely
affect our profitability.
We have announced multiple major plans and initiatives since January 2008 that are expected to
reduce costs and improve efficiencies. We could be unable to achieve, or may be delayed in
achieving, all the benefits from initiatives because of limited resources or uncontrollable
economic conditions. If these initiatives are not as successful as planned,
the result could negatively impact our results of operations or financial condition. Additionally,
even if we achieve these goals, we may not receive the expected benefits of the initiatives, or the
costs of implementing these initiatives could exceed the related benefits.
- 39 -
Increased indebtedness could restrict growth and adversely affect our financial health.
As of May 31, 2009, our debt on a consolidated basis was approximately $104.0 million. An increase
in the level of indebtedness could have significant consequences. For example, it could:
|
|
|
limit our ability to satisfy current debt obligations; |
|
|
|
|
increase interest expense due to the change in interest rates and increase in debt
levels; |
|
|
|
|
require us to dedicate a significant portion of cash flow to repay principal and pay
interest on the debt, reducing the amount of funds that would be available to finance
operations and other business activities; |
|
|
|
|
impair our ability to obtain financing in the future for working capital, capital
expenditures, research and development, or acquisitions; |
|
|
|
|
make us vulnerable to economic downturns or adverse developments in our business or
markets; and |
|
|
|
|
place us at a competitive disadvantage compared to competitors with less debt. |
We expect to pay expenses and to pay principal and interest on current and future debt from cash
provided by operating activities. Therefore, our ability to meet these payment obligations will
depend on future financial performance, which is subject in part to numerous economic, business and
financial factors beyond our control. If our cash flow and capital resources are insufficient to
fund our increased debt, we may be forced to reduce or delay expansion plans and capital
expenditures, limit payment of dividends, sell material assets or operations, obtain additional
capital or restructure our debt.
The negative global credit market conditions may significantly affect our access to capital, cost
of capital and ability to meet liquidity needs.
Unstable conditions of the credit markets or sustained poor financial performance may adversely
impact our ability to access credit already arranged and the availability and cost of credit to us
in the future. A volatile credit market may limit our ability to replace maturing credit facilities
and access the capital necessary to grow and maintain our business. Accordingly, we may be forced
into credit agreements that have terms that we do not prefer, which could require us to pay
unattractive interest rates or limit our ability to use credit for share repurchases or payment of
dividends. This could increase our interest expense, decrease our profitability and significantly
reduce our financial flexibility. There can be no assurances that government responses to the
disruptions in the financial markets will stabilize the markets or increase liquidity and the
availability of credit. Longer term disruptions in the capital and credit markets as a result of
uncertainty, changing or increased regulation, reduced alternatives or failures of significant
financial institutions could adversely affect our access to liquidity needed for our business. Any
disruption could require us to take measures to conserve cash until the markets stabilize or until
alternative credit arrangements or other funding for our business needs can be arranged. Such
measures could include deferring, eliminating or reducing capital expenditures, dividends, future
share repurchases or other discretionary uses of cash. Overall, our results of operations,
financial condition and cash flows could be materially adversely affected by disruptions in the
credit markets.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On April 25, 2006, the Company announced that its Board of Directors authorized the repurchase of
up to 6.75 million shares of its outstanding common stock (the Repurchase Program), representing
approximately 23.3% of the Companys outstanding shares at the authorization date. The Repurchase
Program replaced the Companys prior repurchase authorization, under which approximately 1.7
million shares had remained authorized for repurchase. On November 16, 2007, as a part of an
agreement reached with the Barington Group, the Board agreed to increase to five million the number
of shares authorized to be repurchased under the Repurchase Program. The Company repurchased two
million shares under the program in the fiscal year ended August 31, 2008. It is anticipated that
the Company will complete the remainder of 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.
- 40 -
The Companys purchases of its common stock under the Repurchase Program during the third quarter
of fiscal 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of shares |
|
|
Maximum number of |
|
|
|
Total number of |
|
|
Average price |
|
|
purchased as part of a |
|
|
shares that may yet be |
|
|
|
shares repurchased |
|
|
paid per share |
|
|
publicly announced plan |
|
|
purchased under the plan |
|
Beginning
shares available |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,906,966 |
|
March 1-31, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
2,906,966 |
|
April 1-30, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
2,906,966 |
|
May 1-31, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
2,906,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
2,906,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 6 Exhibits
(a) Exhibits
|
|
|
|
|
Exhibit Number |
|
Exhibit |
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation of the Company (for purposes of
Commission reporting compliance only) (incorporated by reference to Exhibit 3.1
to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended
November 30, 2008). |
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated Bylaws of the Company (for purposes of Commission reporting
compliance only) (incorporated by reference to Exhibit 3.2 to the Companys
Quarterly Report on Form 10-Q for fiscal quarter ended May 31, 2007). |
|
|
|
|
|
|
10.1 |
|
|
Second Amendment to 2007 Agreement by and between the Company and the Barington
Group, dated June 1, 2009. (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed with the Commission on June 4, 2009). |
|
|
|
|
|
|
10.2 |
|
|
Form of Restricted Stock Unit Agreement (Non-Employee Directors) (filed herewith). |
|
|
|
|
|
|
31.1 |
|
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
|
|
|
31.2 |
|
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
|
|
|
32 |
|
|
Certifications of Principal Executive and Principal Financial Officers pursuant
to 18 U.S.C. 1350. |
- 41 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Date: July 2, 2009 |
A. Schulman, Inc. (Registrant)
|
|
|
/s/ Paul F. DeSantis
|
|
|
Paul F. DeSantis, Chief Financial Officer, Vice President and Treasurer of A. Schulman, Inc. |
|
|
(Signing on behalf of Registrant as a
duly authorized officer of Registrant and signing as the Principal
Financial Officer of Registrant) |
|
- 42 -
EXHIBIT INDEX
|
|
|
|
|
Exhibit Number |
|
Exhibit |
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation of the Company (for purposes of
Commission reporting compliance only) (incorporated by reference to Exhibit 3.1
to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended
November 30, 2008). |
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated Bylaws of the Company (for purposes of Commission reporting
compliance only) (incorporated by reference to Exhibit 3.2 to the Companys
Quarterly Report on Form 10-Q for fiscal quarter ended May 31, 2007). |
|
|
|
|
|
|
10.1 |
|
|
Second Amendment to 2007 Agreement by and between the Company and the Barington
Group, dated June 1, 2009. (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed with the Commission on June 4, 2009). |
|
|
|
|
|
|
10.2 |
|
|
Form of Restricted Stock Unit Agreement (Non-Employee Directors) (filed herewith). |
|
|
|
|
|
|
31.1 |
|
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
|
|
|
31.2 |
|
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
|
|
|
32 |
|
|
Certifications of Principal Executive and Principal Financial Officers pursuant
to 18 U.S.C. 1350. |
- 43 -