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) |
For the three months ended | ||||||||
November 30, | ||||||||
2006 | 2005 | |||||||
Unaudited | ||||||||
(In thousands except per share data) | ||||||||
Net Sales |
$ | 442,728 | $ | 396,525 | ||||
Cost of sales |
393,188 | 336,489 | ||||||
Selling, general and administrative expenses |
40,248 | 36,290 | ||||||
Interest expense |
1,831 | 1,027 | ||||||
Foreign currency transaction (gains) losses |
(514 | ) | 260 | |||||
Minority interest |
233 | 350 | ||||||
Interest income |
(361 | ) | (584 | ) | ||||
Other (income) expense |
25 | (218 | ) | |||||
Restructuring expense - North America |
118 | | ||||||
434,768 | 373,614 | |||||||
Income before Taxes |
7,960 | 22,911 | ||||||
Provision for U.S. and Foreign Income Taxes |
5,589 | 10,602 | ||||||
Net Income |
2,371 | 12,309 | ||||||
Less: Preferred stock dividends |
(13 | ) | (13 | ) | ||||
Net Income Applicable to Common Stock |
$ | 2,358 | $ | 12,296 | ||||
Weighted-average Number of Shares Outstanding: |
||||||||
Basic |
26,879 | 30,744 | ||||||
Diluted |
27,311 | 31,097 | ||||||
Earnings per Share of Common Stock: |
||||||||
Basic |
$ | 0.09 | $ | 0.40 | ||||
Diluted |
$ | 0.09 | $ | 0.40 | ||||
- 2 -
November 30, | August 31, | |||||||
2006 | 2006 | |||||||
Unaudited | ||||||||
(In thousands except share data) | ||||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 63,000 | $ | 50,662 | ||||
Accounts receivable, less allowance for doubtful accounts of $10,126 at November 30, 2006
and $9,409 at August 31, 2006 |
286,196 | 272,929 | ||||||
Inventories, average cost or market, whichever is lower |
270,945 | 286,079 | ||||||
Prepaid expenses and other current assets |
18,335 | 17,678 | ||||||
Total Current Assets |
638,476 | 627,348 | ||||||
Other Assets: |
||||||||
Cash surrender value of life insurance |
1,797 | 1,800 | ||||||
Deferred charges |
20,234 | 20,444 | ||||||
Goodwill |
5,487 | 5,392 | ||||||
Intangible assets |
1,606 | 1,382 | ||||||
29,124 | 29,018 | |||||||
Property, Plant and Equipment, at cost: |
||||||||
Land and improvements |
16,048 | 15,778 | ||||||
Buildings and leasehold improvements |
139,412 | 136,526 | ||||||
Machinery and equipment |
323,540 | 317,499 | ||||||
Furniture and fixtures |
37,265 | 35,918 | ||||||
Construction in progress |
13,587 | 11,079 | ||||||
529,852 | 516,800 | |||||||
Accumulated depreciation and investment grants of $1,128 at November 30, 2006 and
$1,119 at August 31, 2006 |
341,219 | 329,921 | ||||||
188,633 | 186,879 | |||||||
$ | 856,233 | $ | 843,245 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Notes payable |
$ | 2,516 | $ | 10,976 | ||||
Accounts payable |
129,840 | 135,930 | ||||||
U.S. and foreign income taxes payable |
12,782 | 14,708 | ||||||
Accrued payrolls, taxes and related benefits |
30,544 | 30,866 | ||||||
Other accrued liabilities |
37,512 | 31,081 | ||||||
Total Current Liabilities |
213,194 | 223,561 | ||||||
Long-term Debt |
148,466 | 120,730 | ||||||
Other Long-term Liabilities |
85,484 | 82,482 | ||||||
Deferred Income Taxes |
6,587 | 7,196 | ||||||
Minority Interest |
5,717 | 5,784 | ||||||
Commitments and Contingencies |
| | ||||||
Stockholders Equity: |
||||||||
Preferred stock, 5% cumulative, $100 par value, authorized, issued and outstanding -
10,564 shares at November 30, 2006 and August 31, 2006 |
1,057 | 1,057 | ||||||
Special stock, 1,000,000 shares authorized, none outstanding |
| | ||||||
Common Stock $1 par value, authorized -75,000,000 shares, issued -
41,049,279 shares at November 30, 2006 and 40,707,018 shares at August 31, 2006 |
41,049 | 40,707 | ||||||
Other capital |
92,576 | 86,894 | ||||||
Accumulated other comprehensive income |
39,819 | 32,893 | ||||||
Retained earnings |
501,448 | 502,998 | ||||||
Treasury stock, at cost, 14,113,977 shares at November 30, 2006 and
13,343,711 shares at August 31, 2006 |
(279,164 | ) | (261,057 | ) | ||||
Common Stockholders Equity |
395,728 | 402,435 | ||||||
Total Stockholders Equity |
396,785 | 403,492 | ||||||
$ | 856,233 | $ | 843,245 | |||||
- 3 -
For the three months ended | ||||||||
November 30, | ||||||||
2006 | 2005 | |||||||
Unaudited | ||||||||
(In thousands) | ||||||||
Provided from (used in) operating activities: |
||||||||
Net income |
$ | 2,371 | $ | 12,309 | ||||
Adjustments to reconcile net income to net cash provided from (used in)
operating activities: |
||||||||
Depreciation and amortization |
6,460 | 5,983 | ||||||
Non-current deferred taxes |
(897 | ) | (312 | ) | ||||
Pension and other deferred compensation |
1,594 | 3,166 | ||||||
Postretirement benefit obligation |
840 | 857 | ||||||
Minority interest in net income of subsidiaries |
233 | 350 | ||||||
Restructuring charges |
115 | | ||||||
Changes in working capital: |
||||||||
Accounts receivable |
(5,973 | ) | (32,786 | ) | ||||
Inventories |
21,379 | (8,969 | ) | |||||
Prepaid expenses |
(642 | ) | 81 | |||||
Accounts payable |
(8,980 | ) | 16,606 | |||||
Income taxes |
(1,988 | ) | 6,720 | |||||
Accrued payrolls and other accrued liabilities |
4,574 | 6,345 | ||||||
Changes in other assets and other long-term liabilities |
546 | 2,499 | ||||||
Net cash provided from (used in) operating activities |
19,632 | 12,849 | ||||||
Provided from (used in) investing activities: |
||||||||
Expenditures for property, plant and equipment |
(5,333 | ) | (6,557 | ) | ||||
Disposals of property, plant and equipment |
33 | 88 | ||||||
Net cash used in investing activities |
(5,300 | ) | (6,469 | ) | ||||
Provided from (used in) financing activities: |
||||||||
Cash dividends paid |
(3,921 | ) | (4,524 | ) | ||||
Increase (decrease) in notes payable |
(8,505 | ) | 928 | |||||
Borrowings on revolving credit facilities |
40,813 | | ||||||
Repayments on revolving credit facilities |
(16,785 | ) | (14,477 | ) | ||||
Cash distributions to minority shareholders |
(300 | ) | (300 | ) | ||||
Exercise of stock options |
4,789 | 978 | ||||||
Purchase of treasury stock |
(18,107 | ) | | |||||
Net cash used in financing activities |
(2,016 | ) | (17,395 | ) | ||||
Effect of exchange rate changes on cash |
22 | (2,093 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
12,338 | (13,108 | ) | |||||
Cash and cash equivalents at beginning of period |
50,662 | 102,329 | ||||||
Cash and cash equivalents at end of period |
$ | 63,000 | $ | 89,221 | ||||
- 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, 2006 are not necessarily indicative of the results expected for the year ended August 31, 2007. | ||
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, 2006. | ||
(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. On November 30, 2006, 1,733,637 shares were available for grants of non-qualified stock options pursuant to the Companys 2002 Equity 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. The 2006 Incentive Plan allows for 3,483,637 shares available for grant however any awards that were issued under the Companys 2002 Equity Incentive Plan and are forfeited would become eligible for issuance under the 2006 Incentive Plan. This Plan terminates the shares available for grant under the Companys 2002 Equity Incentive Plan. It has been the Companys practice to issue new common shares upon stock option exercise. | ||
There have been no grants during the first quarter of fiscal 2007. | ||
A summary of stock options is as follows: |
Three months ended November 30, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Outstanding | Outstanding | |||||||||||||||
shares under | Weighted-average | shares under | Weighted-average | |||||||||||||
option | exercise price | option | exercise price | |||||||||||||
Outstanding at beginning of period |
1,568,276 | $ | 18.93 | 1,672,362 | $ | 17.09 | ||||||||||
Granted |
| | 512,750 | 19.20 | ||||||||||||
Exercised |
(257,711 | ) | 18.58 | (65,711 | ) | 14.90 | ||||||||||
Forfeited and expired |
(3,201 | ) | 19.22 | (9,502 | ) | 19.15 | ||||||||||
Outstanding at end of period |
1,307,364 | 19.00 | 2,109,899 | 17.66 | ||||||||||||
Exercisable at the end of the period |
839,229 | 18.39 | 1,054,104 | 16.17 | ||||||||||||
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, 2006 and 2005 was approximately $1.4 million and $.3 million, respectively. The intrinsic value for stock options exercisable at November 30, 2006 was $4.6 million with a remaining term for options exercisable of 7.5 years. For stock options outstanding at November 30, 2006, exercise prices range from $11.62 to $24.69. The weighted average remaining contractual life for options outstanding at November 30, 2006 was approximately 8 years. Stock options vested and expected to vest at November 30, 2006 were |
- 5 -
1,269,039 with a remaining contractual term of 0.4 years and a weighted-average exercise price of $18.99. The aggregate intrinsic value of stock options vested and expected to vest was $6.3 million. | ||
Total unrecognized compensation cost, including forfeitures, related to nonvested share-based compensation arrangements at November 30, 2006 was approximately $4.1 million. This cost is expected to be recognized over a weighted-average period of approximately 1.4 years. | ||
The total fair value of options vested during the three months ended November 30, 2006 and 2005 was approximately $3.6 million and $3.2 million, respectively. | ||
Restricted stock awards under the 2002 Equity Incentive Plan vest over four years following the date of grant. The following table summarizes the outstanding restricted stock awards and weighted-average fair market value: |
Outstanding | Weighted-Average | |||||||
Restricted Stock | Fair Market Value | |||||||
Awards | (per share) | |||||||
Outstanding at August 31, 2006 |
362,900 | $ | 18.05 | |||||
Granted |
| | ||||||
Released |
(84,550 | ) | 14.53 | |||||
Forfeited |
(7,750 | ) | 19.05 | |||||
Outstanding at November 30,
2006 |
270,600 | 19.12 | ||||||
(3) | All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. Such investments amounted to $29.3 million at November 30, 2006 and $13.7 million at August 31, 2006. |
- 6 -
(4) | A summary of the stockholders equity section for the three months ended November 30, 2006 and 2005 is as follows: |
Accumulated Other | Total | |||||||||||||||||||||||||||
Preferred | Common | Comprehensive | Retained | Treasury | Stockholders | |||||||||||||||||||||||
Stock | Stock | Other Capital | Income (loss) | Earnings | Stock | Equity | ||||||||||||||||||||||
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 |
| | | 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 | |||||||||||||||||||||
Issue of restricted stock |
| 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 | |||||||||||||
Accumulated Other | Unearned Stock | Total | ||||||||||||||||||||||||||||||
Preferred | Common | Other | Comprehensive | Retained | Treasury | Grant | Stockholders | |||||||||||||||||||||||||
Stock | Stock | Capital | Income (loss) | Earnings | Stock | Compensation | Equity | |||||||||||||||||||||||||
Balance at September 1, 2005 |
$ | 1,057 | $ | 39,989 | $ | 74,973 | $ | 26,552 | $ | 487,998 | $ | (165,232 | ) | $ | (3,234 | ) | $ | 462,103 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | | | 12,309 | | | |||||||||||||||||||||||||
Foreign currency
translation gain (loss) |
| | | (11,516 | ) | | | | ||||||||||||||||||||||||
Total comprehensive income |
793 | |||||||||||||||||||||||||||||||
Cash dividends paid or accrued: |
||||||||||||||||||||||||||||||||
Preferred stock, $1.25 per share |
| | | | (13 | ) | | | (13 | ) | ||||||||||||||||||||||
Common stock, $.145 per share |
| | | | (4,511 | ) | | | (4,511 | ) | ||||||||||||||||||||||
Stock options exercised |
| 65 | 913 | | | | | 978 | ||||||||||||||||||||||||
Reclassification due to
adoption of SFAS 123R |
| | (3,234 | ) | | | | 3,234 | | |||||||||||||||||||||||
Non-cash stock based
compensation |
| | 1,765 | | | | | 1,765 | ||||||||||||||||||||||||
Amortization of
restricted stock |
| | 398 | | | | | 398 | ||||||||||||||||||||||||
Balance at November 30, 2005 |
$ | 1,057 | $ | 40,054 | $ | 74,815 | $ | 15,036 | $ | 495,783 | $ | (165,232 | ) | $ | | $ | 461,513 | |||||||||||||||
- 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 then shared 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, | |||||||||
2006 | 2005 | ||||||||
(in thousands) | |||||||||
Weighted-average shares outstanding: |
|||||||||
Basic |
26,879 | 30,744 | |||||||
Incremental shares from stock options |
220 | 148 | |||||||
Incremental shares from restricted stock |
212 | 205 | |||||||
Diluted |
27,311 | 31,097 | |||||||
For the three months ended November 30, 2006 and 2005, there were approximately 0.1 million and 1.3 million, respectively, of equivalent shares related to stock options that were excluded from diluted weighted-average shares outstanding because inclusion would have been anti-dilutive. | ||
(6) | The components of Accumulated Other Comprehensive Income (Loss) are as follows: |
November 30, | August 31, | |||||||
2006 | 2006 | |||||||
(in thousands) | ||||||||
Foreign currency translation gain |
$ | 46,128 | $ | 39,202 | ||||
Minimum pension liability |
(6,309 | ) | (6,309 | ) | ||||
$ | 39,819 | $ | 32,893 | |||||
Foreign currency translation gains are not tax effected as such gains are considered permanently reinvested. Minimum pension liability adjustments are recorded net of tax using the applicable effective tax rate. | ||
(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. On this basis, the Company operates in two geographic segments, North America and Europe, including Asia (Europe). A reconciliation of segment income to consolidated income (loss) before taxes is presented below: |
- 8 -
(in thousands) | ||||||||||||||||
North | ||||||||||||||||
America | Europe | Other | Consolidated | |||||||||||||
Three months ended November 30, 2006 |
||||||||||||||||
Sales to unaffiliated customers |
$ | 118,294 | $ | 324,434 | $ | | $ | 442,728 | ||||||||
Gross profit |
$ | 8,067 | $ | 41,473 | $ | | $ | 49,540 | ||||||||
Income (loss) before interest,
restructuring and taxes |
$ | (7,718 | ) | $ | 17,266 | $ | | $ | 9,548 | |||||||
Interest expense, net |
$ | | $ | | $ | (1,470 | ) | $ | (1,470 | ) | ||||||
Restructuring expense - North America |
$ | (118 | ) | $ | | $ | | $ | (118 | ) | ||||||
Income (loss) before taxes |
$ | (7,836 | ) | $ | 17,266 | $ | (1,470 | ) | $ | 7,960 | ||||||
Three months ended November 30, 2005 |
||||||||||||||||
Sales to unaffiliated customers |
$ | 125,426 | $ | 271,099 | $ | | $ | 396,525 | ||||||||
Gross profit |
$ | 17,229 | $ | 42,807 | $ | | $ | 60,036 | ||||||||
Income before interest and taxes |
$ | 867 | $ | 22,487 | $ | | $ | 23,354 | ||||||||
Interest expense, net |
$ | | $ | | $ | (443 | ) | $ | (443 | ) | ||||||
Income (loss) before taxes |
$ | 867 | $ | 22,487 | $ | (443 | ) | $ | 22,911 | |||||||
For the three months ended November 30, | ||||||||||||||||
Product Family | 2006 | 2005 | ||||||||||||||
(in thousands, except for %s) | ||||||||||||||||
Color and additive concentrates |
$ | 157,490 | 35 | % | $ | 133,950 | 34 | % | ||||||||
Polyolefins |
135,933 | 31 | 123,356 | 31 | ||||||||||||
Engineered compounds |
108,284 | 24 | 100,759 | 25 | ||||||||||||
Polyvinyl chloride (PVC) |
16,010 | 4 | 15,875 | 4 | ||||||||||||
Tolling |
4,538 | 1 | 3,351 | 1 | ||||||||||||
Other |
20,473 | 5 | 19,234 | 5 | ||||||||||||
$ | 442,728 | 100 | % | $ | 396,525 | 100 | % | |||||||||
(8) | 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, | ||||||||
2006 | 2005 | |||||||
Statutory U.S. tax rate |
35.0 | % | 35.0 | % | ||||
Domestic losses with no benefit |
45.2 | 3.4 | ||||||
Dividends repatriated from Europe |
| 13.4 | ||||||
Amount of foreign taxes at less
than statutory U.S. tax rate |
(11.8 | ) | (5.7 | ) | ||||
Other |
1.8 | 0.2 | ||||||
70.2 | % | 46.3 | % | |||||
- 9 -
(9) | In October 2006, in order to balance capacity with demand, reduce costs and improve efficiencies in the North American segment, the Company approved a plan to close two of its manufacturing lines at its Orange, Texas plant, close a warehouse also located in Orange, Texas and reduce the workforce at its Bellevue, Ohio plant. The Orange, Texas warehouse is anticipated to close during the second quarter of fiscal 2007, while the manufacturing lines at the Orange, Texas plant are anticipated to continue production through the third quarter of fiscal 2007. As a result, the Company recorded pre-tax charges of $.4 million for the three months ended November 30, 2006. | |
These charges were primarily non-cash and are summarized below: |
(in thousands) | ||||||||||||
Accrual balance | ||||||||||||
Original Charge | Paid fiscal 2007 | 11/30/06 | ||||||||||
Employee related costs |
$ | 114 | $ | | $ | 114 | ||||||
Other costs |
4 | (4 | ) | | ||||||||
Restructuring |
118 | $ | (4 | ) | $ | 114 | ||||||
Accelerated depreciation, included in North America
cost of sales in 2007 |
253 | |||||||||||
$ | 371 | |||||||||||
The employee related costs included severance payments and medical insurance for 18 employees at facilities in Ohio and Texas. The accelerated depreciation represents a change in estimate for the reduced life on equipment totaling $.3 million. At November 30, 2006, the Company estimated it will incur additional charges of $.5 million for employee related costs and additional depreciation of $.9 million in fiscal 2007. | ||
(10) | The components of the Companys net periodic benefit cost for defined benefit pension plans and other postretirement benefits are shown below. | |
Net periodic pension cost recognized included the following components: |
Three Months Ended November 30, | ||||||||
2006 | 2005 | |||||||
(in thousands) | ||||||||
Service cost |
$ | 602 | $ | 571 | ||||
Interest cost |
905 | 749 | ||||||
Expected return on plan assets |
(257 | ) | (212 | ) | ||||
Net actuarial loss and net amortization of prior service
cost and transition obligation |
250 | 217 | ||||||
Net periodic benefit cost |
$ | 1,500 | $ | 1,325 | ||||
- 10 -
Postretirement benefit cost included the following components: |
Three Months Ended November 30, | ||||||||
2006 | 2005 | |||||||
(In thousands) | ||||||||
Service cost |
$ | 460 | $ | 499 | ||||
Interest cost |
441 | 417 | ||||||
Net amortization of prior service cost and unrecognized loss |
40 | 117 | ||||||
Net periodic benefit cost |
$ | 941 | $ | 1,033 | ||||
(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. | |
During fiscal 2006, a railroad company filed suit against the Company seeking compensatory damages and reimbursement of environmental costs to investigate and remediate property located near its Bellevue, Ohio facility. The Company subsequently filed an answer to this complaint and both parties are now conducting discovery. Management of the Company, in consultation with legal counsel, is of the opinion that a valid cause of action does not exist. The Company will continue to pursue resolution of this matter. The Company has not recorded a reserve relating to this matter. The ultimate outcome of this matter 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. While repair work continues and operations have returned to normal, the financial impact from this hurricane is still being assessed. The claim for this hurricane has been filed with the insurance carriers, but the ultimate amount of any gain or loss related to this claim has not yet been determined. It is anticipated that amounts not covered by insurance will not have a material adverse effect on the Companys financial condition, results of operations or cash flows. | |
(13) | In October 2006, the Company reached an agreement with the Barington Group, which as of the date of the agreement owned in the aggregate 2,816,536 shares, or approximately 10.5% of the Companys common stock (the 2006 Agreement). Under the terms of the 2006 Agreement, the Barington Group withdrew a notice of its intent to nominate certain persons for election as directors at the 2006 annual meeting, agreed to dismiss a lawsuit it had filed against the Company in Delaware seeking to enforce its rights as a stockholder to inspect and copy certain books, records and documents of the Company, and agreed to abide by certain standstill provisions until the Companys 2007 annual meeting. The Company has made several commitments under the 2006 Agreement, including agreeing to redeem any rights issued to the Companys stockholders under the Shareholder Rights Plan, and to cause the Rights Plan to be terminated and of no further force or effect. The Company agreed, among other things, to nominate James S. Marlen, Ernest J. Novak, Jr. (each current directors of the Company), Howard R. Curd and Michael A. McManus, Jr. on the Boards slate of nominees for election as Class II directors of the Company at the 2006 annual meeting. On December 7, 2006, the Companys stockholders approved election of the above nominees to the Companys Board of Directors. | |
(14) | 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. Under the interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities full knowledge of the position and all relevant facts, but without considering time values. The adoption of FIN 48 is required by the |
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Company in fiscal year 2008. The Company is currently evaluating the impact, if any, of FIN 48 on its financial position, results of operations and cash flows. | ||
(15) | On September 15, 2006 the FASB issued FASB Statement No. 157, (SFAS 157), Fair Value Measurement. SFAS 157 addresses standardizing the measurement of fair value for companies who are required to use a fair value measure of recognition for recognition or disclosure purposes. The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure date. The Company is required to adopt SFAS 157 for fiscal year 2009. The Company is currently evaluating the impact, if any, of SFAS 157 on its financial position, results of operations and cash flows. | |
(16) | On September 29, 2006 the FASB issued FASB Statement No. 158, (SFAS 158), Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS 158 requires companies to recognize the funded status of defined benefit pension and other postretirement plans as a net asset or liability in its financial statements. In addition, disclosure requirements related to such plans are affected by SFAS 158. As required by SFAS 158, the Company will use a prospective approach in its adoption of SFAS 158. The Company will begin recognition of the funded status of its defined benefit postretirement plans and include the required disclosures under the provisions of SFAS 158 at the end of fiscal year 2007. If the Company had adopted SFAS 158 at November 30, 2006, the Companys liabilities would have increased by approximately $26.0 million and accumulated other comprehensive income would have decreased by approximately $26.0 million, excluding any tax effect. The adoption of SFAS 158 is not expected to impact the Companys debt covenants or cash position. Additionally, the Company does not expect the adoption of SFAS 158 to significantly affect the results of operations. |
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Increase (decrease) | ||||
Tonnage |
4.0 | % | ||
Price and product mix |
2.5 | |||
Translation effect |
5.2 | |||
11.7 | % | |||
(in thousands, except for %s) | ||||||||||||||||
Three months ended November 30, | Increase (decrease) | |||||||||||||||
Sales | 2006 | 2005 | $ | % | ||||||||||||
Europe |
$ | 324,434 | $ | 271,099 | $ | 53,335 | 19.7 | % | ||||||||
North America |
118,294 | 125,426 | (7,132 | ) | -5.7 | % | ||||||||||
$ | 442,728 | $ | 396,525 | $ | 46,203 | 11.7 | % | |||||||||
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For the three months ended November 30, | ||||||||||||||||
Product Family | 2006 | 2005 | ||||||||||||||
(in thousands, except %s) | ||||||||||||||||
Color and additive concentrates |
$ | 157,490 | 35 | % | $ | 133,950 | 34 | % | ||||||||
Polyolefins |
135,933 | 31 | 123,356 | 31 | ||||||||||||
Engineered compounds |
108,284 | 24 | 100,759 | 25 | ||||||||||||
Polyvinyl chloride (PVC) |
16,010 | 4 | 15,875 | 4 | ||||||||||||
Tolling |
4,538 | 1 | 3,351 | 1 | ||||||||||||
Other |
20,473 | 5 | 19,234 | 5 | ||||||||||||
$ | 442,728 | 100 | % | $ | 396,525 | 100 | % | |||||||||
(in thousands, except for %s) | ||||||||||||||||
For the three months ended November 30, | Increase (decrease) | |||||||||||||||
2006 | 2005 | $ | % | |||||||||||||
Gross profit $ |
||||||||||||||||
Europe |
$ | 41,473 | $ | 42,807 | $ | (1,334 | ) | (3.1 | ) | |||||||
North America |
8,067 | 17,229 | (9,162 | ) | (53.2 | ) | ||||||||||
Consolidated |
$ | 49,540 | $ | 60,036 | $ | (10,496 | ) | (17.5 | ) | |||||||
Gross profit % |
||||||||||||||||
Europe |
12.8 | 15.8 | ||||||||||||||
North America |
6.8 | 13.7 | ||||||||||||||
Consolidated |
11.2 | 15.1 |
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For the three months ended November 30, | ||||||||
2006 | 2005 | |||||||
Europe |
105 | % | 99 | % | ||||
North America |
79 | % | 86 | % | ||||
Worldwide |
95 | % | 94 | % |
(in thousands) | ||||||||||||
Accrual balance | ||||||||||||
Original Charge | Paid fiscal 2007 | 11/30/06 | ||||||||||
Employee related costs |
$ | 114 | $ | | $ | 114 | ||||||
Other costs |
4 | (4 | ) | | ||||||||
Restructuring |
118 | $ | (4 | ) | $ | 114 | ||||||
Accelerated depreciation, included in North America
cost of sales in 2007 |
253 | |||||||||||
$ | 371 | |||||||||||
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For the three months ended November 30, | Favorable | |||||||||||
2006 | 2005 | (Unfavorable) | ||||||||||
(in thousands) | ||||||||||||
Europe |
$ | 17,266 | $ | 22,487 | $ | (5,221 | ) | |||||
North America |
(7,718 | ) | 867 | (8,585 | ) | |||||||
Restructuring, North America |
(118 | ) | | (118 | ) | |||||||
Interest expense, net |
(1,470 | ) | (443 | ) | (1,027 | ) | ||||||
Income before taxes |
$ | 7,960 | $ | 22,911 | $ | (14,951 | ) | |||||
Three months ended | ||||||||
November 30, | ||||||||
2006 | 2005 | |||||||
Statutory U.S. tax rate |
35.0 | % | 35.0 | % | ||||
Domestic losses with no benefit |
45.2 | 3.4 | ||||||
Dividends repatriated from Europe |
| 13.4 | ||||||
Amount of foreign taxes at less
than statutory U.S. tax rate |
(11.8 | ) | (5.7 | ) | ||||
Other |
1.8 | 0.2 | ||||||
70.2 | % | 46.3 | % | |||||
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November 30, | August 31, | |||||||||||
2006 | 2006 | % Change | ||||||||||
(in millions, except for %s) | ||||||||||||
Cash and Cash Equivalents |
$ | 63.0 | $ | 50.7 | 24.3 | % | ||||||
Working Capital, excluding cash |
362.3 | 353.0 | 2.6 | |||||||||
Long-Term Debt |
148.5 | 120.7 | 23.0 | |||||||||
Stockholders Equity |
396.8 | 403.5 | (1.7 | ) |
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| $30.0 million of Senior Notes in the United States, maturing on March 1, 2013, with a variable interest rate of LIBOR plus 80 bps. | ||
| 50.3 million of Senior Notes in Germany, maturing on March 1, 2016, with a fixed interest rate of 4.485% (Euro Notes). The Euro Notes approximate $66.7 million at November 30, 2006. |
(in thousands) | ||||||||||||||||||||
Less than 1 | ||||||||||||||||||||
Total | year | 1-3 years | 3-5 years | After 5 years | ||||||||||||||||
Short-term Debt |
$ | 2,516 | $ | 2,516 | $ | | $ | | $ | | ||||||||||
Long-term Debt |
$ | 148,466 | $ | | $ | 18 | $ | 51,784 | $ | 96,664 | ||||||||||
$ | 150,982 | $ | 2,516 | $ | 18 | $ | 51,784 | $ | 96,664 | |||||||||||
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Maximum number of | ||||||||||||||||
Average price paid | Total number of shares | shares that may yet be | ||||||||||||||
Total number of | per share (excluding | purchased as part of a | purchased under the | |||||||||||||
shares repurchased | commissions) | publicly announced plan | plan | |||||||||||||
Beginning shares
available |
4,749,919 | |||||||||||||||
September 1-30, 2006 |
520,414 | $ | 23.56 | 520,414 | 4,229,505 | |||||||||||
October 1-31, 2006 |
249,852 | $ | 23.26 | 249,852 | 3,979,653 | |||||||||||
November 1-30, 2006 |
| $ | | | 3,979,653 | |||||||||||
Total |
770,266 | $ | 23.46 | 770,266 | 3,979,653 | |||||||||||
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| 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. |
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(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). This authorized share amount in the Repurchase Program equated to approximately 23.3% of the Companys outstanding shares at the authorization date. It is anticipated that the Company will complete the Repurchase Program through open market repurchases from time to time. The number of shares to be repurchased and the timing of repurchases will depend upon the prevailing market prices and any other considerations that may, in the opinion of the Board of Directors or management, affect the advisability of repurchasing shares. The Repurchase Program replaced the Companys prior repurchase authorization, under which approximately 1.7 million shares had remained authorized for repurchase. The Companys purchases of its common stock under the Repurchase Program during the first quarter of fiscal 2007 were as follows: |
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 |
4,749,919 | |||||||||||||||
September 1-30, 2006 |
520,414 | $ | 23.56 | 520,414 | 4,229,505 | |||||||||||
October 1-31, 2006 |
249,852 | $ | 23.26 | 249,852 | 3,979,653 | |||||||||||
November 1-30, 2006 |
| $ | | | 3,979,653 | |||||||||||
Total |
770,266 | $ | 23.46 | 770,266 | 3,979,653 | |||||||||||
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(1) | Election of Class II Directors: |
Broker | ||||||||||||
Director Name | Shares Voted | Votes Withheld | Non-Votes | |||||||||
Howard R. Curd |
22,759,848 | 340,386 | 0 | |||||||||
James S. Marlen |
22,646,662 | 453,572 | 0 | |||||||||
Michael A. McManus, Jr. |
17,265,298 | 5,834,936 | 0 | |||||||||
Ernest J. Novak, Jr. |
22,753,548 | 346,686 | 0 |
(2) | Approval of the Companys 2006 Incentive Plan: |
Broker | ||||||||||||
Votes For | Votes Against | Abstentions | Non-Votes | |||||||||
16,589,257 |
1,387,877 | 898,009 | 2,791,554 |
(3) | Ratification of the selection of PricewaterhouseCoopers LLP as registered independent public accountants of the Company for the fiscal year ending August 31, 2007: |
Broker | ||||||||||||
Votes For | Votes Against | Abstentions | Non-Votes | |||||||||
22,768,775 |
321,473 | 9,987 | 0 |
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 October 25, 2006) | |
10.2
|
A. Schulman, Inc. 2006 Incentive Plan (filed herewith) | |
10.3
|
Advisory Agreement between the Company and Dr. Paul Craig Roberts (incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form 8-K, dated November 7, 2006). | |
10.4
|
A. Schulman, Inc. Directors Deferred Units Plan (incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K, dated October 16, 2006.) | |
10.5
|
Form of Indemnification Agreement between the Company and its executive officers and directors (incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form 8-K, dated October 16, 2006.) | |
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 |
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Date: January 5, 2007
|
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) |
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