þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 34-0514850 | |
(State or Other Jurisdiction | (I.R.S. Employer Identification No.) | |
of Incorporation or Organization) | ||
3550 West Market Street, Akron, Ohio | 44333 | |
(Address of Principal Executive Offices) | (ZIP Code) |
Three months ended | ||||||||
November 30, | ||||||||
2007 | 2006 | |||||||
Unaudited | ||||||||
(In thousands except per share data) | ||||||||
Net Sales |
$ | 496,575 | $ | 442,728 | ||||
Cost of sales |
439,404 | 393,188 | ||||||
Selling, general and administrative expenses |
40,889 | 40,248 | ||||||
Interest expense |
1,611 | 1,831 | ||||||
Foreign currency transaction (gains) losses |
133 | (514 | ) | |||||
Minority interest |
245 | 233 | ||||||
Interest income |
(482 | ) | (361 | ) | ||||
Other (income) expense |
332 | 25 | ||||||
Restructuring expense North America |
6 | 118 | ||||||
482,138 | 434,768 | |||||||
Income before taxes |
14,437 | 7,960 | ||||||
Provision for U.S. and foreign income taxes |
4,412 | 5,589 | ||||||
Net income |
10,025 | 2,371 | ||||||
Less: Preferred stock dividends |
(13 | ) | (13 | ) | ||||
Net income applicable to common stock |
$ | 10,012 | $ | 2,358 | ||||
Weighted-average number of shares outstanding: |
||||||||
Basic |
27,521 | 26,879 | ||||||
Diluted |
27,770 | 27,311 | ||||||
Earnings per share of common stock: |
||||||||
Basic |
$ | 0.36 | $ | 0.09 | ||||
Diluted |
$ | 0.36 | $ | 0.09 | ||||
-2-
November 30, | August 31, | |||||||
2007 | 2007 | |||||||
Unaudited | ||||||||
(In thousands except share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 41,776 | $ | 43,045 | ||||
Accounts receivable, less allowance for doubtful accounts of $9,672 at November 30,
2007
and $9,056 at August 31, 2007 |
348,547 | 317,774 | ||||||
Inventories, average cost or market, whichever is lower |
292,057 | 263,047 | ||||||
Prepaid expenses and other current assets |
17,837 | 16,163 | ||||||
Total current assets |
700,217 | 640,029 | ||||||
Other assets: |
||||||||
Cash surrender value of life insurance |
2,228 | 2,231 | ||||||
Deferred charges and other assets |
23,669 | 21,784 | ||||||
Goodwill |
9,848 | 9,350 | ||||||
Intangible assets |
178 | 174 | ||||||
35,923 | 33,539 | |||||||
Property, plant and equipment, at cost: |
||||||||
Land and improvements |
17,485 | 16,768 | ||||||
Buildings and leasehold improvements |
153,614 | 145,952 | ||||||
Machinery and equipment |
369,274 | 352,044 | ||||||
Furniture and fixtures |
41,884 | 38,955 | ||||||
Construction in progress |
16,160 | 13,035 | ||||||
598,417 | 566,754 | |||||||
Accumulated depreciation and investment grants of $1,248 at November 30, 2007 and
$1,322 at August 31, 2007 |
389,264 | 366,207 | ||||||
209,153 | 200,547 | |||||||
$ | 945,293 | $ | 874,115 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Notes payable |
$ | 1,748 | $ | 2,762 | ||||
Accounts payable |
161,072 | 141,838 | ||||||
U.S. and foreign income taxes payable |
3,703 | 11,544 | ||||||
Accrued payrolls, taxes and related benefits |
32,742 | 32,249 | ||||||
Other accrued liabilities |
41,286 | 33,112 | ||||||
Total current liabilities |
240,551 | 221,505 | ||||||
Long-term debt |
132,226 | 123,080 | ||||||
Other long-term liabilities |
104,571 | 91,316 | ||||||
Deferred income taxes |
5,672 | 5,640 | ||||||
Minority interest |
5,506 | 5,561 | ||||||
Commitments and contingencies |
| | ||||||
Stockholders equity: |
||||||||
Preferred stock, 5% cumulative, $100 par value, authorized, issued and outstanding
10,564 shares at November 30, 2007 and August 31, 2007 |
1,057 | 1,057 | ||||||
Special stock, 1,000,000 shares authorized, none outstanding |
| | ||||||
Common stock $1 par value, authorized 75,000,000 shares, issued
42,068,518 shares at November 30, 2007 and 41,784,640 shares at August 31, 2007 |
42,069 | 41,785 | ||||||
Other capital |
105,430 | 103,828 | ||||||
Accumulated other comprehensive income |
69,920 | 50,092 | ||||||
Retained earnings |
517,455 | 509,415 | ||||||
Treasury stock, at cost, 14,113,977 shares at November 30, 2007 and
August 31, 2007 |
(279,164 | ) | (279,164 | ) | ||||
Common stockholders equity |
455,710 | 425,956 | ||||||
Total stockholders equity |
456,767 | 427,013 | ||||||
$ | 945,293 | $ | 874,115 | |||||
-3-
Three months ended | ||||||||
November 30, | ||||||||
2007 | 2006 | |||||||
Unaudited | ||||||||
(In thousands) | ||||||||
Provided from (used in) operating activities: |
||||||||
Net income |
$ | 10,025 | $ | 2,371 | ||||
Adjustments to reconcile net income to net cash provided from (used in)
operating activites: |
||||||||
Depreciation and amortization |
7,079 | 6,207 | ||||||
Deferred tax provision |
85 | (765 | ) | |||||
Pension and other deferred compensation |
2,710 | 1,594 | ||||||
Postretirement benefit obligation |
304 | 840 | ||||||
Minority interest in net income of subsidiaries |
245 | 233 | ||||||
Restructuring charges, including $253 of accelerated depreciation in fiscal 2007 |
6 | 371 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(13,367 | ) | (5,973 | ) | ||||
Inventories |
(14,577 | ) | 21,379 | |||||
Accounts payable |
12,445 | (8,980 | ) | |||||
Restructuring payments |
(71 | ) | (4 | ) | ||||
Income taxes |
(873 | ) | (1,929 | ) | ||||
Accrued payrolls and other accrued liabilities |
3,377 | 4,460 | ||||||
Changes in other assets and other long-term liabilities |
1,397 | (172 | ) | |||||
Net cash provided from (used in) operating activities |
8,785 | 19,632 | ||||||
Provided from (used in) investing activities: |
||||||||
Expenditures for property, plant and equipment |
(8,157 | ) | (5,333 | ) | ||||
Disposals of property, plant and equipment |
138 | 33 | ||||||
Net cash used in investing activities |
(8,019 | ) | (5,300 | ) | ||||
Provided from (used in) financing activities: |
||||||||
Cash dividends paid |
(4,063 | ) | (3,921 | ) | ||||
Increase (decrease) in notes payable |
(1,229 | ) | (8,505 | ) | ||||
Borrowings on revolving credit facilities |
34,628 | 40,813 | ||||||
Repayments on revolving credit facilities |
(32,073 | ) | (16,785 | ) | ||||
Cash distributions to minority shareholders |
(300 | ) | (300 | ) | ||||
Exercise of stock options |
861 | 4,789 | ||||||
Purchase of treasury stock |
| (18,107 | ) | |||||
Net cash provided from (used in) financing activities |
(2,176 | ) | (2,016 | ) | ||||
Effect of exchange rate changes on cash |
141 | 22 | ||||||
Net increase (decrease) in cash and cash equivalents |
(1,269 | ) | 12,338 | |||||
Cash and cash equivalents at beginning of period |
43,045 | 50,662 | ||||||
Cash and cash equivalents at end of period |
$ | 41,776 | $ | 63,000 | ||||
-4-
(1) | The interim financial statements furnished 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 three months ended November 30, 2007 are not necessarily indicative of the results expected for the year ending August 31, 2008. | ||
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, 2007 except for new accounting pronouncements and income taxes which are described in the footnotes. | ||
Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2008 presentation. | ||
(2) | Effective in December 2002, the Company adopted the 2002 Equity Incentive Plan which provided for the grant of incentive stock options, nonqualified stock options, restricted stock awards and director deferred units for employees and non-employee directors. The option price of incentive stock options is the fair market value of the common shares on the date of the grant. In the case of nonqualified options, the Company grants options at 100% of the fair market value of the common shares on the date of the grant. All options become exercisable at the rate of 33% per year, commencing on the first anniversary date of the grant. Each option expires ten years from the date of the grant. Restricted stock awards under the 2002 Equity Incentive Plan vest ratably over four years following the date of grant. In accordance with the 2006 Incentive Plan, the shares available for grant under the Companys 2002 Equity Incentive Plan were terminated upon adoption of the 2006 Incentive Plan. | |
On December 7, 2006, the Company adopted the 2006 Incentive Plan which provides for the grant of incentive stock options, nonqualified stock options, whole shares, restricted stock awards, restricted stock units, stock appreciation rights, performance shares, performance units, cash-based awards, dividend equivalents and performance-based awards. The time-based nonqualified stock options become exercisable at the rate of 33% per year, commencing on the first anniversary date of the grant. It has been the Companys practice to issue new common shares upon stock option exercise. On November 30, 2007, there were approximately 3.0 million shares available for grant pursuant to the Companys 2006 Incentive Plan. There have been no grants during the three months ended November 30, 2007. | ||
A summary of stock options is as follows: |
Three months ended November 30, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Outstanding shares | Weighted-average | Outstanding shares | Weighted-average | |||||||||||||
under option | exercise price | under option | exercise price | |||||||||||||
Outstanding at beginning of period |
813,710 | $ | 19.10 | 1,568,276 | $ | 18.93 | ||||||||||
Granted |
| | | | ||||||||||||
Exercised |
(44,333 | ) | 19.43 | (257,711 | ) | 18.58 | ||||||||||
Forfeited and expired |
(667 | ) | 19.20 | (3,201 | ) | 19.22 | ||||||||||
Outstanding at end of period |
768,710 | 19.08 | 1,307,364 | 19.00 | ||||||||||||
Exercisable at the end of the period |
603,146 | 18.69 | 839,229 | 18.39 | ||||||||||||
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The total intrinsic value of options exercised during the three months ended November 30, 2007 and 2006 was approximately $0.1 million and $1.4 million, respectively. The intrinsic value for stock options exercisable at November 30, 2007 was $1.7 million with a remaining term for options |
-5-
exercisable of approximately 6 years. For stock options outstanding at November 30, 2007, exercise prices range from $11.63 to $24.69. The weighted average remaining contractual life for options outstanding at November 30, 2007 was approximately 7 years. Stock options vested and expected to vest at November 30, 2007 were approximately 762,000 with a remaining contractual term of approximately 7 years and a weighted-average exercise price of $19.07. The aggregate intrinsic value of stock options vested and expected to vest was $2.0 million at November 30, 2007. | ||
Restricted stock awards under the 2002 Equity Incentive Plan vest over four years following the date of grant. Restricted stock awards under the 2006 Incentive Plan can vest over various periods. The restricted stock grants outstanding under the 2006 Incentive Plan have vesting periods of three years following the date of grant. Some of these awards can have vesting restrictions as set at the grant date. Approximately 138,000 of the outstanding awards as of November 30, 2007 are performance awards with vesting periods based on market conditions. The following table summarizes the outstanding restricted stock awards and weighted-average fair market value: |
Outstanding | Weighted-Average | |||||||
Restricted Stock | Fair Market Value | |||||||
Awards | (per share) | |||||||
Outstanding at August 31, 2007 |
468,300 | $ | 20.17 | |||||
Granted |
| | ||||||
Released |
(77,945 | ) | 18.03 | |||||
Forfeited |
(1,205 | ) | 19.50 | |||||
Outstanding at November 30,
2007 |
389,150 | $ | 20.60 | |||||
Total unrecognized compensation cost, including a provision for forfeitures, related to nonvested share-based compensation arrangements at November 30, 2007 was approximately $5.0 million. This cost is expected to be recognized over a weighted-average period of approximately 1.6 years. | ||
At November 30, 2007, the Company had approximately 244,000 restricted stock units outstanding. Each restricted stock unit is equivalent to one share of A. Schulman, Inc. stock on the vesting date. There was no grant of restricted stock units during the three months ended November 30, 2007. The restricted stock units earn dividends during the vesting period. Restricted stock units are settled only in cash at the vesting date and therefore are treated as a liability award. The Company records a liability for these restricted stock units in an amount equal to the total of (a) the mark to market adjustment of the units vested to date, and (b) accrued dividends on the units. The Company has recorded approximately $0.4 million and $0.2 million of expense related to restricted stock units for the three months ended November 30, 2007 and 2006, respectively. | ||
(3) | All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Such investments amounted to $10.5 million at November 30, 2007 and $11.0 million at August 31, 2007. |
-6-
(4) | A summary of the stockholders equity section for the three months ended November 30, 2007 and 2006 is as follows: |
Accumulated | ||||||||||||||||||||||||||||
Other | Total | |||||||||||||||||||||||||||
Preferred | Common | Other | Comprehensive | Retained | Treasury | Stockholders | ||||||||||||||||||||||
Stock | Stock | Capital | Income (Loss) | Earnings | Stock | Equity | ||||||||||||||||||||||
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 |
| | | | 10,025 | | ||||||||||||||||||||||
Foreign currency translation
gain (loss) |
| | | 19,751 | | | ||||||||||||||||||||||
Amortization of unrecognized
transition
obligations, actuarial
losses and prior
service costs (credits), net |
| | | 77 | | | ||||||||||||||||||||||
Total comprehensive income |
29,853 | |||||||||||||||||||||||||||
Cash dividends paid or accrued: |
||||||||||||||||||||||||||||
Preferred stock, $1.25 per share |
| | | | (13 | ) | | (13 | ) | |||||||||||||||||||
Common stock, $.145 per share |
| | | | (4,050 | ) | | (4,050 | ) | |||||||||||||||||||
Stock options exercised |
| 44 | 817 | | | | 861 | |||||||||||||||||||||
Restricted stock issued |
| 240 | (240 | ) | | | | | ||||||||||||||||||||
Non-cash stock based
compensation |
| | 259 | | | | 259 | |||||||||||||||||||||
Amortization of restricted stock |
| | 766 | | | | 766 | |||||||||||||||||||||
Balance at November 30, 2007 |
$ | 1,057 | $ | 42,069 | $ | 105,430 | $ | 69,920 | $ | 517,455 | $ | (279,164 | ) | $ | 456,767 | |||||||||||||
Balance at September 1, 2006 |
$ | 1,057 | $ | 40,707 | $ | 86,894 | $ | 32,893 | $ | 502,998 | $ | (261,057 | ) | $ | 403,492 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
| | | | 2,371 | | ||||||||||||||||||||||
Foreign currency translation
gain (loss) |
| | | 6,926 | | | ||||||||||||||||||||||
Total comprehensive income |
9,297 | |||||||||||||||||||||||||||
Cash dividends paid or accrued: |
||||||||||||||||||||||||||||
Preferred stock, $1.25 per share |
| | | | (13 | ) | | (13 | ) | |||||||||||||||||||
Common stock, $.145 per share |
| | | | (3,908 | ) | | (3,908 | ) | |||||||||||||||||||
Stock options exercised |
| 258 | 4,531 | | | | 4,789 | |||||||||||||||||||||
Restricted stock issued |
| 84 | (84 | ) | | | | | ||||||||||||||||||||
Purchase of treasury stock |
| | | | | (18,107 | ) | (18,107 | ) | |||||||||||||||||||
Non-cash stock based
compensation |
| | 740 | | | | 740 | |||||||||||||||||||||
Amortization of restricted stock |
| | 495 | | | | 495 | |||||||||||||||||||||
Balance at November 30, 2006 |
$ | 1,057 | $ | 41,049 | $ | 92,576 | $ | 39,819 | $ | 501,448 | $ | (279,164 | ) | $ | 396,785 | |||||||||||||
-7-
(5) | Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common stock equivalents were exercised, and the impact of restricted stock and performance based awards expected to vest, which would then share in the earnings of the Company. | |
The difference between basic and diluted weighted-average common shares results from the assumed exercise of outstanding stock options and grants of restricted stock, calculated using the treasury stock method. The following presents the number of incremental weighted-average shares used in computing diluted per share amounts: |
Three Months Ended | ||||||||
November 30, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Weighted-average shares outstanding: |
||||||||
Basic |
27,521 | 26,879 | ||||||
Incremental shares from stock options |
73 | 220 | ||||||
Incremental shares from restricted stock |
176 | 212 | ||||||
Diluted |
27,770 | 27,311 | ||||||
For the three months ended November 30, 2007 and 2006, there were approximately 0.1 million equivalent shares related to stock options that were excluded from diluted weighted-average shares outstanding because inclusion would have been anti-dilutive. | ||
(6) | The components of Accumulated Other Comprehensive Income are as follows: |
Unrecognized transition | ||||||||||||
obligations, actuarial losses | ||||||||||||
and prior service | Total Accumulated | |||||||||||
Foreign Currency | costs (credits), | Other Comprehensive | ||||||||||
Translation Gain | net | Income | ||||||||||
Balance as of August 31, 2007 |
$ | 55,397 | $ | (5,305 | ) | $ | 50,092 | |||||
Current period change |
19,751 | 77 | 19,828 | |||||||||
Balance as of November 30,
2007 |
$ | 75,148 | $ | (5,228 | ) | $ | 69,920 | |||||
(7) | The Company is engaged in the sale of plastic resins in various forms, which are used as raw materials by its customers. To identify reportable segments, the Company considered its operating structure and the types of information subject to regular review by its President and Chief Executive Officer, who is the Chief Operating Decision Maker (CODM). On this basis, the Company operates in two geographic segments, North America and Europe, including Asia (Europe). During fiscal 2008, management began excluding corporate and other charges, such as foreign currency transaction gains or losses and other expenses which are not under full control of segment management. Management believes this will better reflect the actual operating performance of the two segments. Prior to fiscal 2008, the Company allocated certain corporate expenses to the operating segments. Prior periods were recast to reflect the current presentation. The CODM uses net sales to unaffiliated customers and operating income in order to make decisions and assess performance of each segment. Operating income does not include interest income or expense, other income or expense, restructuring expense or foreign currency transaction gains or losses. In some cases, the Company may choose to exclude from a segments results certain non-recurring items as determined by management. These items are included in the Corporate and Other section in the table below. Corporate expenses include the compensation of certain personnel, certain audit expenses, board of directors related costs, and other miscellaneous legal and professional fees. |
-8-
A reconciliation of operating income (loss) by segment to consolidated income (loss) before taxes is presented below: |
North | Corporate | |||||||||||||||
America | Europe | and Other | Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
Three months ended November 30, 2007 | ||||||||||||||||
Net sales to unaffiliated customers |
$ | 128,570 | $ | 368,005 | $ | | $ | 496,575 | ||||||||
Gross profit |
$ | 9,501 | $ | 47,670 | $ | | $ | 57,171 | ||||||||
Operating income (loss) |
$ | (3,160 | ) | $ | 22,578 | $ | (3,381 | ) | $ | 16,037 | ||||||
Interest expense, net |
| | (1,129 | ) | (1,129 | ) | ||||||||||
Foreign currency transaction gains (losses) |
| | (133 | ) | (133 | ) | ||||||||||
Other income (expense) |
| | (332 | ) | (332 | ) | ||||||||||
Restructuring expense North America |
| | (6 | ) | (6 | ) | ||||||||||
Income (loss) before taxes |
$ | (3,160 | ) | $ | 22,578 | $ | (4,981 | ) | $ | 14,437 | ||||||
Three months ended November 30, 2006 | ||||||||||||||||
Net sales to unaffiliated customers |
$ | 118,294 | $ | 324,434 | $ | | $ | 442,728 | ||||||||
Gross profit |
$ | 8,067 | $ | 41,473 | $ | | $ | 49,540 | ||||||||
Operating income (loss) |
$ | (6,236 | ) | $ | 18,816 | $ | (3,521 | ) | $ | 9,059 | ||||||
Interest expense, net |
| | (1,470 | ) | (1,470 | ) | ||||||||||
Foreign currency transaction gains (losses) |
| | 514 | 514 | ||||||||||||
Other income (expense) |
| | (25 | ) | (25 | ) | ||||||||||
Restructuring expense North America |
| | (118 | ) | (118 | ) | ||||||||||
Income (loss) before taxes |
$ | (6,236 | ) | $ | 18,816 | $ | (4,620 | ) | $ | 7,960 | ||||||
North America gross profit for the three months ended November 30, 2006 includes $0.3 million of accelerated depreciation expense related to the restructuring plan. North American gross profit includes $1.6 million and $0.9 million of expense related to the Invision® product for the three months ended November 30, 2007 and 2006, respectively. Europe gross profit for the three months ended November 30, 2007 was negatively impacted by $1.0 million for employee termination costs. Depreciation expense was $4.4 million and $2.7 million for Europe and North America, respectively, for the three months ended November 30, 2007. For the three months ended November 30, 2006, depreciation expense was $3.6 million and $2.6 million for Europe and North America, respectively. | ||
The majority of the Companys sales for the three months ended November 30, 2007 and November 30, 2006 can be classified into five primary product families. The approximate amount and percentage of consolidated sales for these product families are as follows: |
Three months ended November 30, | ||||||||||||||||
Product Family | 2007 | 2006 | ||||||||||||||
(In thousands, except for %s) | ||||||||||||||||
Color and additive concentrates |
$ | 178,955 | 36 | % | $ | 157,490 | 35 | % | ||||||||
Polyolefins |
160,312 | 32 | 135,933 | 31 | ||||||||||||
Engineered compounds |
106,814 | 22 | 108,284 | 24 | ||||||||||||
Polyvinyl chloride (PVC) |
14,698 | 3 | 16,010 | 4 | ||||||||||||
Tolling |
5,958 | 1 | 4,538 | 1 | ||||||||||||
Other |
29,838 | 6 | 20,473 | 5 | ||||||||||||
$ | 496,575 | 100 | % | $ | 442,728 | 100 | % | |||||||||
-9-
(8) | In July 2006, the Financial Accounting Standards Board (FASB) issued FASB interpretation No. 48, (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertain income tax positions that are recognized in a companys financial statements. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. FIN 48 requires a company to recognize a financial statement benefit for a position taken or expected to be taken in a tax return when it is more-likely-than-not that the position will be sustained. FIN 48 is effective for fiscal years beginning after December 15, 2006. | |
The Company adopted FIN 48 on September 1, 2007, as required. As a result of the implementation of FIN 48, the Company recognized an increase in the opening balance of retained earnings of $2.1 million for unrecognized tax benefits not previously recognized under historical practice. | ||
As of September 1, 2007, after the implementation of FIN 48, the Companys gross unrecognized tax benefits totaled $5.4 million. If recognized, approximately $2.9 million of the total unrecognized tax benefits would favorably affect the Companys effective tax rate if settled in the Companys favor. The Company elects to report interest and penalties related to income tax matters in income tax expense. At September 1, 2007, the Company had $1.3 million of accrued interest and penalties on unrecognized tax benefits. There has been no significant change in these amounts as of November 30, 2007. | ||
The Company is open to potential income tax examinations in the U.S. from fiscal 2004 and generally from fiscal years 2001 for most foreign jurisdictions. Specifically, in Belgium the Company is open for examination from 2005 onward. In addition, the Company is currently under examination in Germany for years 2000 through 2004. | ||
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. | ||
In October 2007, significant tax legislation was passed in Mexico, which was effective starting January 1, 2008. The new legislation did not have a material effect on the Companys current financial position, results of operations or cash flows. | ||
In December 2007, tax legislation was passed in Italy, which includes a reduction in the combined corporate and local income tax rate of approximately 6%. The Company is currently evaluating the recently passed legislation to determine the impact the legislation will have on its financial position, results of operations and cash flows. | ||
A reconciliation of the statutory U.S. federal income tax rate of 35% with the effective tax rate is as follows: |
Three months ended | ||||||||
November 30, | ||||||||
2007 | 2006 | |||||||
Statutory U.S. tax rate |
35.0 | % | 35.0 | % | ||||
Domestic losses with no benefit |
15.7 | 45.2 | ||||||
Amount of foreign taxes at less than statutory U.S. tax rate |
(21.8 | ) | (11.8 | ) | ||||
Other, net |
1.7 | 1.8 | ||||||
30.6 | % | 70.2 | % | |||||
The effective tax rate of 30.6% for the three months ended November 30, 2007 is less than the U.S. statutory rate of 35.0% as a result of the overall foreign rate being less than the U.S. statutory rate. As compared to the effective tax rate of 70.2% for the three months ended November 30, 2006, the decrease in the effective tax rate is driven by a decrease in the U.S. pre-tax loss, for which no benefit is recognized, an increase in foreign pre-tax income in lower rate jurisdictions, recently implemented tax planning strategies and recently enacted tax legislation in Germany, which reduced the German statutory rate by approximately 10 percentage points. |
-10-
(9) | During fiscal 2007, the Company announced multiple phases of a restructuring plan to restore its North American segment to profitability. In November 2006, in order to balance capacity with demand, reduce costs and improve efficiencies in the North American segment, the Company announced a plan to close two of its manufacturing lines at its Orange, Texas plant, close a warehouse also located in Orange, Texas and reduce the workforce at its Bellevue, Ohio plant. Due to unanticipated customer demand on certain lines, the two manufacturing lines at the Orange, Texas plant are expected to continue production into fiscal 2009. The Orange, Texas warehouse was closed during the third quarter of fiscal 2007. In connection with this plan, the Company reduced its workforce by 65 positions. | |
In February 2007, the Company announced the second phase of its North America restructuring plan which implements several initiatives that will improve the Companys operations and profitability in North America. | ||
This restructuring plan includes savings from the following initiatives: |
| Reduction in the Companys North American workforce by approximately 30 positions, primarily in the sales and administrative functions, | ||
| Reduction in the Companys United States retiree healthcare coverage plan, | ||
| Greater cost sharing of employee and retiree medical plan costs, | ||
| Broad discretionary selling, general and administrative cost reductions, | ||
| Savings from improved purchasing processes, and | ||
| Improved logistics efficiencies. |
In connection with this restructuring plan, the Company recorded minimal charges during fiscal 2008. These charges are summarized below: |
Accrual | Accrual | |||||||||||||||||||||||
Balance | Balance | |||||||||||||||||||||||
Fiscal 2007 | Paid Fiscal | August 31, | Fiscal 2008 | Paid Fiscal | November 30, | |||||||||||||||||||
Charges | 2007 | 2007 | Charges | 2008 | 2007 | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Employee related costs |
$ | 980 | $ | (906 | ) | $ | 74 | $ | 6 | $ | (71 | ) | $ | 9 | ||||||||||
Other costs |
68 | (68 | ) | | | | | |||||||||||||||||
Restructuring |
1,048 | $ | (974 | ) | $ | 74 | $ | 6 | $ | (71 | ) | $ | 9 | |||||||||||
Accelerated depreciation, included in North
America cost of sales in 2007 |
1,071 | |||||||||||||||||||||||
$ | 2,119 | |||||||||||||||||||||||
The employee related costs include severance payments and medical insurance for employees whose positions have been eliminated in North America. The Company recorded approximately $0.3 million of accelerated depreciation for the three months ended November 30, 2006 which represents a change in estimate for the reduced life of equipment. The Company did not record any charges in fiscal 2008 related to accelerated depreciation. At November 30, 2007, the Company estimated it will incur minimal additional charges for employee related costs which are not expected to impact the total charge of approximately $2.1 million. The Company anticipates the remaining accrued balance for restructuring charges to be paid during the second and third quarters of fiscal 2008. |
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(10) | The components of the Companys net periodic benefit cost for defined benefit pension plans and other postretirement benefits are shown below. |
Three Months Ended November 30, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Net periodic pension cost recognized included the following components: |
||||||||
Service cost |
$ | 603 | $ | 602 | ||||
Interest cost |
1,153 | 905 | ||||||
Expected return on plan assets |
(321 | ) | (257 | ) | ||||
Net actuarial loss and net amortization of prior service
cost and transition obligation |
198 | 250 | ||||||
Net periodic benefit cost |
$ | 1,633 | $ | 1,500 | ||||
Postretirement benefit cost included the following components: |
||||||||
Service cost |
$ | 167 | $ | 460 | ||||
Interest cost |
311 | 441 | ||||||
Net amortization of prior service (gain) cost and
unrecognized (gain) loss |
(121 | ) | 40 | |||||
Net periodic benefit cost |
$ | 357 | $ | 941 | ||||
(11) | 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. | |
(12) | One of the Companys major facilities in Texas was closed for a two-week period in September 2005 because of Hurricane Rita. In addition, a warehouse in Texas also incurred damage from Hurricane Rita. The claim for this hurricane was filed with the insurance carriers, and the final settlement amount was agreed upon in November 2007. The Company recorded a charge of approximately $0.4 million during the three months ended November 30, 2007 as a result of an adjustment to its claim receivable during the final settlement negotiations. This amount was recorded in other (income) expense in the Consolidated Statements of Income. The settlement amount was received during the second quarter of fiscal 2008. | |
(13) | On September 15, 2006 the FASB issued FASB Statement No. 157, (SFAS 157), Fair Value Measurement. SFAS 157 addresses standardizing the measurement of fair value for companies who are required to use a fair value measure of recognition for recognition or disclosure purposes. The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure date. The Company is required to begin to adopt SFAS 157 in fiscal year 2009 based on phased implementation. The Company is currently evaluating the impact, if any, of SFAS 157 on its financial position, results of operations and cash flows. | |
(14) | In February 2007, the FASB issued FASB Statement No. 159, (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115. SFAS 159 permits companies to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected would be reported in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. The Company is required to adopt SFAS 159 in fiscal year 2009. The Company is currently evaluating the impact, if any, of SFAS 159 on its financial position, results of operations and cash flows. |
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(15) | In December 2007, the FASB issued FASB Statement No. 141(R), Business Combinations (SFAS 141R). SFAS 141R replaces FASB Statement No. 141 and provides greater consistency in the accounting and financial reporting of business combinations. SFAS 141R requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction and any non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of that date. This includes the measurement of the acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirers income tax valuation allowance and deferred taxes. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted. The Company is required to adopt SFAS 141R in fiscal year 2010. The Company will assess the impact that SFAS 141R may have on its financial position, results of operations and cash flows. | |
(16) | In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160). SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for the Company for the fiscal year 2010, with early adoption being prohibited. The Company will assess the impact that SFAS 160 may have on its financial position, results of operations, debt covenants and cash flows. | |
(17) | The Company announced on November 16, 2007 that it reached an agreement with a group of investors led by Barington Capital Group, L.P. (the Barington Group) on matters relating to the Companys 2007 Annual Meeting of Stockholders. Under the terms of the agreement, the Barington Group has withdrawn its notice of intent to nominate persons for election as directors at the Companys 2007 Annual Meeting and has agreed to abide by certain standstill provisions until the Companys 2008 Annual Meeting. The Barington Group has agreed to support the Companys slate of directors for election at the 2007 Annual Meeting which includes an independent nominee recommended by the Barington Group and accepted by the Company. The Company has also agreed to form a special committee of the Board, to include Mr. James Mitarotonda, director, along with other directors, to consider all strategic alternatives available to the Company to maximize stockholder value, including, without limitation, a strategic acquisition, merger or sale of the Company. Finally, the Board has agreed to increase to five million the number of shares authorized to be repurchased under the Companys current share repurchase program. The Company intends to repurchase at least two million shares under the program in the fiscal year ending August 31, 2008, subject to market conditions, materially relevant capital considerations of the Company and compliance with applicable laws. |
-13-
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% Due to price/ | ||||||||||||||||||||||||||||
Three months ended November 30, | Total increase | % Due to tonnage | % Due to translation | product mix | ||||||||||||||||||||||||
Sales | 2007 | 2006 | $ | % | ||||||||||||||||||||||||
(In thousands, except for %s) | ||||||||||||||||||||||||||||
Europe |
$ | 368,005 | $ | 324,434 | $ | 43,571 | 13.4 | % | 1.0 | % | 10.8 | % | 1.6 | % | ||||||||||||||
North America |
128,570 | 118,294 | 10,276 | 8.7 | % | 8.6 | % | 1.0 | % | -0.9 | % | |||||||||||||||||
$ | 496,575 | $ | 442,728 | $ | 53,847 | 12.2 | % | 3.1 | % | 8.2 | % | 0.9 | % | |||||||||||||||
Three months ended November 30, | ||||||||||||||||
Product Family | 2007 | 2006 | ||||||||||||||
(In thousands, except %s) | ||||||||||||||||
Color and additive
concentrates |
$ | 178,955 | 36 | % | $ | 157,490 | 35 | % | ||||||||
Polyolefins |
160,312 | 32 | 135,933 | 31 | ||||||||||||
Engineered compounds |
106,814 | 22 | 108,284 | 24 | ||||||||||||
Polyvinyl chloride (PVC) |
14,698 | 3 | 16,010 | 4 | ||||||||||||
Tolling |
5,958 | 1 | 4,538 | 1 | ||||||||||||
Other |
29,838 | 6 | 20,473 | 5 | ||||||||||||
$ | 496,575 | 100 | % | $ | 442,728 | 100 | % | |||||||||
-15-
Three months ended November 30, | Increase (decrease) | |||||||||||||||
2007 | 2006 | $ | % | |||||||||||||
(In thousands, except for %s) | ||||||||||||||||
Gross profit $ | ||||||||||||||||
Europe |
$ | 47,670 | $ | 41,473 | $ | 6,197 | 14.9 | % | ||||||||
North America |
9,501 | 8,067 | 1,434 | 17.8 | % | |||||||||||
Consolidated |
$ | 57,171 | $ | 49,540 | $ | 7,631 | 15.4 | % | ||||||||
Gross profit % | ||||||||||||||||
Europe |
13.0 | 12.8 | ||||||||||||||
North America |
7.4 | 6.8 | ||||||||||||||
Consolidated |
11.5 | 11.2 |
Three months ended November 30, | ||||||||
2007 | 2006 | |||||||
Europe |
98 | % | 105 | % | ||||
North America |
89 | % | 79 | % | ||||
Worldwide |
95 | % | 95 | % |
-16-
Three month ended November 30, 2007 | ||||||||
$ Increase | % Increase | |||||||
(decrease) | (decrease) | |||||||
(In thousands, except for %s) | ||||||||
Total change in selling, general and
administrative expenses |
$ | 641 | 1.6 | % | ||||
Effect of foreign currency translation |
2,386 | 5.9 | ||||||
Total change in selling, general and
administrative
expenses, excluding the effect of foreign
currency translation |
$ | (1,745 | ) | (4.3) | % | |||
| Reduction in the Companys North American workforce by approximately 30 positions, primarily in the sales and administrative functions, |
| Reduction in the Companys United States retiree healthcare coverage plan, |
| Greater cost sharing of employee and retiree medical plan costs, |
| Broad discretionary selling, general and administrative cost reductions, |
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| Savings from improved purchasing processes, and |
| Improved logistics efficiencies. |
Accrual Balance | Accrual Balance | |||||||||||||||||||||||
Fiscal 2007 Charges | Paid Fiscal 2007 | August 31, 2007 | Fiscal 2008 Charges | Paid Fiscal 2008 | November 30, 2007 | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Employee related costs |
$ | 980 | $ | (906 | ) | $ | 74 | $ | 6 | $ | (71 | ) | $ | 9 | ||||||||||
Other costs |
68 | (68 | ) | | | | | |||||||||||||||||
Restructuring |
1,048 | $ | (974 | ) | $ | 74 | $ | 6 | $ | (71 | ) | $ | 9 | |||||||||||
Accelerated depreciation, included in
North America cost of sales in 2007 |
1,071 | |||||||||||||||||||||||
$ | 2,119 | |||||||||||||||||||||||
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North | Corporate | |||||||||||||||
America | Europe | and Other | Consolidated | |||||||||||||
(In thousands) | ||||||||||||||||
Three months ended November 30, 2007 |
||||||||||||||||
Operating income (loss) |
$ | (3,160 | ) | $ | 22,578 | $ | (3,381 | ) | $ | 16,037 | ||||||
Interest expense, net |
| | (1,129 | ) | (1,129 | ) | ||||||||||
Foreign currency transaction gains (losses) |
| | (133 | ) | (133 | ) | ||||||||||
Other income (expense) |
| | (332 | ) | (332 | ) | ||||||||||
Restructuring expense North America |
| | (6 | ) | (6 | ) | ||||||||||
Income (loss) before taxes |
$ | (3,160 | ) | $ | 22,578 | $ | (4,981 | ) | $ | 14,437 | ||||||
Three months ended November 30, 2006 |
||||||||||||||||
Operating income (loss) |
$ | (6,236 | ) | $ | 18,816 | $ | (3,521 | ) | $ | 9,059 | ||||||
Interest expense, net |
| | (1,470 | ) | (1,470 | ) | ||||||||||
Foreign currency transaction gains (losses) |
| | 514 | 514 | ||||||||||||
Other income (expense) |
| | (25 | ) | (25 | ) | ||||||||||
Restructuring expense North America |
| | (118 | ) | (118 | ) | ||||||||||
Income (loss) before taxes |
$ | (6,236 | ) | $ | 18,816 | $ | (4,620 | ) | $ | 7,960 | ||||||
-19-
Three months ended | ||||||||
November 30, | ||||||||
2007 | 2006 | |||||||
Statutory U.S. tax rate |
35.0 | % | 35.0 | % | ||||
Domestic losses with no benefit |
15.7 | 45.2 | ||||||
Amount of foreign taxes at
less than statutory U.S. tax
rate |
(21.8 | ) | (11.8 | ) | ||||
Other, net |
1.7 | 1.8 | ||||||
30.6 | % | 70.2 | % | |||||
November 30, | August 31, | |||||||||||
2007 | 2007 | % Change | ||||||||||
(In millions, except for %s) | ||||||||||||
Cash and cash equivalents |
$ | 41.8 | $ | 43.0 | (2.8) | % | ||||||
Working capital,
excluding cash |
417.9 | 375.5 | 11.3 | |||||||||
Long-term Debt |
132.2 | 123.1 | 7.4 | |||||||||
Stockholders equity |
456.8 | 427.0 | 7.0 |
-20-
| $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) | ||
| 50.3 million of Senior Notes in Germany, maturing on March 1, 2016, with a fixed interest rate of 4.485% (Euro Notes). The Euro Notes approximate $73.6 million at November 30, 2007. |
-21-
-22-
-23-
| Worldwide and regional economic, business and political conditions, including continuing economic uncertainties in some or all of the Companys major product markets; |
| Fluctuations in the value of currencies in major areas where the Company operates, including the U.S. dollar, euro, U.K. pound sterling, Canadian dollar, Mexican peso, Chinese yuan and Indonesian rupiah; |
| Fluctuations in the prices of sources of energy or plastic resins and other raw materials; |
| Changes in customer demand and requirements; |
| Escalation in the cost of providing employee health care; |
| The outcome of any legal claims known or unknown; and |
| The performance of the North American automotive market. |
-24-
(a) | Not applicable | |
(b) | Not applicable |
(c) | On April 25, 2006, the Company announced that its Board of Directors authorized the repurchase of up to 6.75 million shares of its outstanding common stock (the Repurchase Program), representing approximately 23.3% of the Companys outstanding shares at the authorization date. It is anticipated that the Company will complete the Repurchase Program through open market repurchases from time to time. The number of shares to be repurchased and the timing of repurchases will depend upon the prevailing market prices and any other considerations that may, in the opinion of the Board of Directors or management, affect the advisability of repurchasing shares. The Repurchase Program replaced the Companys prior repurchase authorization, under which approximately 1.7 million shares had remained authorized for repurchase. On November 16, 2007, as a part of an agreement reached with the Barington Group, the Board has agreed to increase to five million the number of shares authorized to be repurchased under the Companys current share repurchase program. The Company intends to repurchase at least two million shares under the program in the fiscal year ending August 31, 2008, subject to market conditions, materially relevant capital considerations of the Company and compliance with applicable laws. The Companys purchases of its common stock under the Repurchase Program during the first quarter of fiscal 2008 were as follows: |
-25-
Average price paid per | Total number of shares | Maximum number of | ||||||||||||||
Total number of shares | share (excluding | purchased as part of a | shares that may yet be | |||||||||||||
repurchased | commissions) | publicly announced plan | purchased under the plan | |||||||||||||
Beginning shares
available |
| 3,979,653 | ||||||||||||||
September 1-30, 2007 |
| | | 3,979,653 | ||||||||||||
October 1-31, 2007 |
| | | 3,979,653 | ||||||||||||
November 1-30, 2007 |
| | | 5,000,000 | ||||||||||||
Total |
| | | 5,000,000 | ||||||||||||
(a) | Exhibits |
Exhibit Number | Exhibit | |
10.1
|
Agreement by and among the Company and the Barington Group, (incorporated by reference to the Companys Current Report on Form 8-K, dated November 15, 2007). | |
10.2
|
Employment agreement by and between the Company and Joseph M. Gingo (incorporated by reference to the Company Current Report on Form 8-K, dated December 17, 2007). | |
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 |
-26-
Date: January 9, 2008 | A. Schulman, Inc. (Registrant) |
|||
/s/ Paul F. DeSantis | ||||
Paul F. DeSantis, Chief Financial Officer (Signing on behalf of Registrant as a duly authorized officer of Registrant and signing as the Principal Financial Officer of Registrant) |
||||
-27-