Cost of sales

Selling, general and administrative expenses

Interest expense

Interest income

Foreign currency transaction (gains) losses

Other (income) expense

Curtailment gain

Asset impairment

Restructuring expense

 

 

 

 

Income (loss) from discontinued operations, net of tax of $0

 

Noncontrolling interests

 

Preferred stock dividends

 

 

 

Basic

Diluted

 

Income (loss) from continuing operations

Income (loss) from discontinued operations

 

Net income (loss) attributable to common stockholders

 

 

Income (loss) from continuing operations

Income (loss) from discontinued operations

 

Net income (loss) attributable to common stockholders

 

Cash and cash equivalents

Accounts receivable, less allowance for doubtful accounts of $15,678 at February 28, 2010 and $10,279 at August 31, 2009

Inventories, average cost or market, whichever is lower

Prepaid expenses and other current assets

 

 

 

Cash surrender value of life insurance

Deferred charges and other assets

Goodwill

Intangible assets

 

 

 

 

Land and improvements

Buildings and leasehold improvements

Machinery and equipment

Furniture and fixtures

Construction in progress

 

 

Accumulated depreciation and investment grants of $863 at February 28, 2010 and $988 at August 31, 2009

 

 

 

 

Revolver and notes payable

Accounts payable

U.S. and foreign income taxes payable

Accrued payrolls, taxes and related benefits

Other accrued liabilities

 

 

 

Preferred stock, 5% cumulative, $100 par value, authorized, issued and outstanding - 15 shares at February 28, 2010 and August 31, 2009

Common stock $1 par value, authorized -75,000,000 shares, issued - 42,435,098 shares at February 28, 2010 and 42,295,492 shares at August 31, 2009

Other capital

Accumulated other comprehensive income

Retained earnings

Treasury stock, at cost, 16,207,011 shares at February 28, 2010 and August 31, 2009

 

Noncontrolling interests

 

 

 

Net income (loss)

Adjustments to reconcile net income to net cash

provided from (used in) operating activities:

Depreciation and amortization, including $69 and $474 of accelerated depreciation related to restructuring in fiscal 2010 and 2009, respectively

Deferred tax provision

Pension and other deferred compensation

Postretirement benefit obligation

Net (gains) losses on asset sales

Curtailment gain

Asset impairment

Changes in assets and liabilities:

Accounts receivable

Inventories

Accounts payable

Restructuring accrual

Income taxes

Accrued payrolls and other accrued liabilities

Changes in other assets and other long-term liabilities

 

Net cash provided from operating activities

 

 

Expenditures for property, plant and equipment

Proceeds from the sale of assets

 

Net cash used in investing activities

 

 

Cash dividends paid

Increase (decrease) in notes payable

Borrowings on revolving credit facilities

Repayments on revolving credit facilities

Common stock issued, net

Purchase of treasury stock

 

Net cash used in financing activities

 

Effect of exchange rate changes on cash

 

 

 

 

GENERAL

The interim consolidated financial statements included for A. Schulman, Inc. (the “Company”) 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 consolidated 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 (“U.S. GAAP”).

The results of operations for the three and six months ended February 28, 2010 are not necessarily indicative of the results expected for the year ending August 31, 2010.

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 Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2009, except for the adoption of new accounting pronouncements related to business combinations, noncontrolling interests and the codification of authoritative U.S. GAAP. The adoption of these accounting pronouncements are discussed in Note 16.

The Company evaluated subsequent events for the six months ended February 28, 2010. Subsequent events requiring recognition and disclosure are described in Note 18.

Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2010 presentation.

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 $61.9 million at February 28, 2010 and $130.0 million at August 31, 2009. The Company’s 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 February 28, 2010 and August 31, 2009, the Company did not hold any short-term investments.

ICO ACQUISITION

On December 2, 2009, the Company announced that it had signed the Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, ICO Inc. (“ICO”) and Wildcat Spider, LLC, a wholly-owned subsidiary of the Company, to acquire all of ICO’s outstanding shares of common stock and equity interests, including ICO stock options, pending approval of the transaction by ICO shareholders. The Company has received the necessary regulatory approvals. Under the terms of the Merger Agreement, the total consideration to be paid to ICO shareholders is comprised of $105.0 million in cash and 5.1 million shares of A. Schulman common stock. The Merger Agreement was filed as an exhibit to the Company’s Form 8-K dated December 3, 2009. In the event that ICO shareholders approve of the Merger Agreement and the merger closes, ICO shareholders will own approximately 16% of the combined company. The transaction is not subject to a financing contingency. The Company intends to pay the cash portion of the purchase price out of its available liquidity.

GOODWILL

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 impairment review of goodwill as of February 28, 2010, which is related to the Europe segment and noted no impairment. The fair value used in the analysis was estimated using a market approach based on average earnings before interest, taxes, depreciation and amortization and cash flow multiples, which contains significant unobservable inputs. 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.

The carrying amount of goodwill for the European segment was $11.3 million at February 28, 2010 and $11.6 million at August 31, 2009. The change in the Company’s carrying value of goodwill of $0.3 million during the six months ended February 28, 2010 was the result of foreign currency translation.

DISCONTINUED OPERATIONS

During fiscal 2010, the Company completed the closing of the Invision manufacturing operation at its Sharon Center, Ohio manufacturing facility. The operating results of Invision were previously included in the Company’s former Invision segment. The Company reflected the results of this segment as discontinued operations for all of the periods presented. The remaining assets of Invision, including a facility in Findlay, Ohio, which was a dedicated building for the Invision business, and machinery and equipment at the Sharon Center, Ohio facility are considered held for sale as of February 28, 2010. These assets are included in the Company’s consolidated balance sheet in property, plant and equipment. The Company recorded minimal charges during the final shutdown of the equipment and facility in fiscal 2010.

The following summarizes the results for discontinued operations for the three and six months ended February 28, 2010 and 2009. The income (loss) from discontinued operations does not include any income tax effect as the Company was not in a taxable position due to its continued U.S. losses and a full valuation allowance.

Net sales

 

Income (loss) from operations

Other income (expense)

 

Income (loss) from discontinued operations

 

PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS

The components of the Company’s net periodic benefit cost (income) for defined benefit pension plans and other postretirement benefits are shown below.

Net periodic pension cost (income) recognized included the following components:

Service cost

Interest cost

Expected return on plan assets

Net actuarial loss and net amortization of prior service cost and transition obligation

 

Net periodic benefit cost

 

 

Postretirement benefit cost (income) included the following components:

Service cost

Interest cost

Net amortization of prior service cost (credit) and unrecognized loss

Curtailment gain

 

Net periodic benefit cost

 

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. This restructuring is further discussed in Note 15.

CONTINGENCIES

The Company is engaged in various legal proceedings arising in the ordinary course of business. The ultimate outcome of these proceedings is not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

A summary of the stockholders’ equity section for the six months ended February 28, 2010 is as follows:

Balance at September 1, 2009

Comprehensive income (loss):

Net income

Foreign currency translation gain (loss)

Amortization of unrecognized transition obligations, actuarial losses and prior service costs (credits), net

Total comprehensive income (loss)

Cash dividends paid or accrued:

Common stock, $0.30 per share

Stock options exercised

Restricted stock issued, net of forfeitures

Redemption of common stock to cover tax withholdings

Amortization of restricted stock

 

Balance at February 28, 2010

 

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) for the three and six months ended February 28, 2010 and 2009 was as follows:

Comprehensive income (loss):

Net income (loss)

Foreign currency translation gain (loss)

Recognition of negative plan amendment related to curtailment of postretirement benefit plan

Amortization of unrecognized transition obligations, actuarial losses and prior services costs (credits), net

 

Total comprehensive income (loss)

Comprehensive (income) loss attributable to noncontrolling interests

 

Comprehensive income (loss) attributable to A. Schulman, Inc.

 

The assets and liabilities of the Company’s 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 gains or losses are recorded as other comprehensive income (loss) and accumulated in the Company’s stockholders’ equity. Foreign currency translation losses totaled $26.3 million and $13.4 million for the three and six months ended February 28, 2010, respectively, and were due to the decreases in the value of the Euro and other currencies against the U.S. dollar. Foreign currency translation gains or losses do not have a tax effect, as such gains or losses are considered permanently reinvested. Other comprehensive income adjustments related to pensions and other postretirement benefit plans are recorded net of tax using the applicable effective tax rate.

FAIR VALUE MEASUREMENT

Fair value is defined 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 Financial Accounting Standards Board (“FASB”) provides accounting rules that establish 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 entity’s own assumptions.

On September 1, 2009, the Company adopted FASB accounting rules relating to fair value measurement of non-financial assets and liabilities that are not recognized or disclosed at fair value in the consolidated financial statements on a recurring basis.

The following table presents information about the Company’s assets and liabilities recorded at fair value as of February 28, 2010 in the Company’s consolidated balance sheet:

Assets:

Cash equivalents

 

Total assets at fair value

 

 

Liabilities:

Derivative liabilities

 

Total liabilities at fair value

 

The fair value of cash equivalents, by their nature, is determined utilizing Level 1 inputs. The Company measures the fair value of forward foreign exchange contracts using Level 2 inputs through observable market transactions in active markets provided by banks.

The Company enters into forward foreign exchange contracts to reduce its exposure for amounts due or payable in foreign currencies. These contracts limit the Company’s exposure to fluctuations in foreign currency exchange rates. The total contract value of forward foreign exchange contracts outstanding as of February 28, 2010 was $8.6 million. Any gains or losses associated with these contracts as well as the offsetting gains or losses from the underlying assets or liabilities are included in the foreign currency transaction line in the Company’s consolidated statements of operations. The Company does not hold or issue forward foreign exchange contracts for trading purposes. There were no foreign currency contracts designated as hedging instruments at February 28, 2010. The forward foreign exchange contracts are entered into with creditworthy multinational banks. The fair value of the Company’s forward foreign exchange contracts was $0.1 million as of February 28, 2010 and as of August 31, 2009 and was recognized in other accrued liabilities.

The following information presents the supplemental fair value information about long-term fixed-rate debt at February 28, 2010. The Company’s long-term fixed-rate debt was issued in euros.

Carrying value of long-term fixed-rate debt

Fair value of long-term fixed-rate debt

The fair value was calculated using discounted future cash flows. The increase in fair value is primarily related to the decrease in quoted market interest rates.

A long-lived asset held for sale was written down to its estimated fair value of $1.1 million resulting in an impairment charge of $0.3 million, which was included in earnings for the second quarter of 2010. The asset’s estimated fair value is determined as the estimated sales value of the asset less associated costs to sell the asset and was determined based on Level 3 inputs obtained from a third-party purchase offer.

Assets held and used associated with the closure of the Company’s Polybatch Color Center located in Sharon Center, Ohio, with a carrying value of $11.3 million, were written down to their fair value of $6.3 million, resulting in impairment charges of $5.0 million. The impaired assets include real estate and certain machinery and equipment. The fair value of the real estate, which includes land, building and related improvements, is determined as the estimated sales value of the assets less the costs to sell and was determined using Level 3 inputs based on information provided by a third-party real estate valuation source. The fair value of the machinery and equipment, which will be sold as scrap when the Company ceases production, was determined using Level 3 inputs based on projected cash flows from operations and estimated salvage value.

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% 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.

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 Company’s practice to issue new shares of common stock upon stock option exercise and other equity grants. On February 28, 2010, there were approximately 0.8 million shares available for grant pursuant to the Company’s 2006 Incentive Plan.

A summary of stock options is as follows:

Outstanding at August 31, 2009

Granted

Exercised

Forfeited and expired

 

Outstanding at February 28, 2010

 

Exercisable at February 28, 2010

 

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 six months ended February 28, 2010 was $0.1 million. The Company received cash totaling $0.7 million from the exercise of options for the six months ended February 28, 2010. The intrinsic value for stock options exercisable at February 28, 2010 was $0.6 million with a remaining term for options exercisable of approximately 3.2 years. For stock options outstanding at February 28, 2010, exercise prices range from $11.62 to $24.69. The weighted-average remaining contractual life for options outstanding at February 28, 2010 was approximately 3.2 years. All 438,086 outstanding and exercisable stock options are fully vested at February 28, 2010. There were no grants of stock options during the six months ended February 28, 2010 and 2009.

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:

Outstanding at August 31, 2009

Granted

Vested

Forfeited

 

Outstanding at February 28, 2010

 

During the six months ended February 28, 2010 and 2009, the Company granted 83,176 and 62,111 time-based restricted shares, 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.

The Company also grants awards with market and performance vesting conditions. In the table below, the Company summarizes all awards which include market-based and performance-based restricted stock awards and performance shares (“Performance Shares”).

Outstanding at August 31, 2009

Granted

Vested

Forfeited

 

Outstanding at February 28, 2010

 

The Company granted 272,568 and 236,475 Performance Shares during the six months ended February 28, 2010 and 2009, respectively. Performance Shares are awards for which the vesting will occur based on market or performance conditions and do not have voting rights. Included in the outstanding performance-based awards at February 28, 2010 are 383,978 Performance Shares which earn dividends throughout the vesting period and approximately 321,551 Performance Shares which do not earn dividends. Also included in the balance are 83,720 awards 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 41,860 additional shares could be issued which are not included in the table if certain market conditions are met. The additional shares do not earn dividends and do not have voting rights.

The performance-based awards in the table above include 652,965 shares which are valued based upon a Monte Carlo simulation, which is a 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 Company’s total stockholder return in relation to the total stockholder 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, which are recognized over the service period, regardless of whether the market conditions are achieved and the awards ultimately vest. The fair value of the remaining 136,284 Performance Shares in the table above is based on the closing price of the Company’s common stock on the date of the grant.

The fair value of the Performance Shares granted during the six months ended February 28, 2010 using a Monte Carlo simulation used the following weighted-average assumptions:

Dividend yield

Expected volatility

Risk-free interest rate

Correlation

Total unrecognized compensation cost, including a provision for forfeitures, related to nonvested share-based compensation arrangements at February 28, 2010 was approximately $9.9 million. This cost is expected to be recognized over a weighted-average period of approximately 1.8 years.

As of February 28, 2010, the Company had 25,000 stock-settled restricted stock units outstanding 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 Company’s 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 per award. There were no grants of stock-settled restricted stock units during the six months ended February 28, 2010 or 2009.

The Company had approximately 184,000 and 287,000 cash-settled restricted stock units outstanding with various vesting periods and criteria at February 28, 2010 and 2009, respectively. The Company granted approximately 60,000 cash-settled restricted stock units during both the six months ended February 28, 2010 and 2009. The cash-settled restricted stock units outstanding have either time-based vesting or performance-based vesting, similar to the Company’s restricted stock awards and Performance Shares. Each cash-settled restricted stock unit is equivalent to one share of the Company’s 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. In addition, the liability is adjusted for the estimated payout factor for the performance-based cash-settled restricted stock units. As a result of these mark-to-market adjustments, these restricted stock units introduce volatility into the Company’s consolidated statements of operations.

The Company had approximately $3.9 million cash-based awards, which are treated as liability awards, outstanding at February 28, 2010. These awards were granted to foreign employees. Such awards include approximately $0.7 million which have service vesting periods of three years following the date of grant and the remaining $3.2 million is performance-based. The performance-based awards are based on the same 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.

In January 2010, the Company granted non-employee directors 35,000 shares of unrestricted common stock. The Company recorded compensation expense for this grant of approximately $0.8 million for the three and six months ended February 28, 2010.

The following table summarizes the impact to the Company’s consolidated statements of operations from stock-based compensation, which is primarily included in selling, general and administrative expenses in the accompanying consolidated statements of operations:

Stock options

Restricted stock awards, unrestricted stock awards and performance-based awards

Cash-settled restricted stock units

Cash-based awards

 

Total stock-based compensation

 

EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common stockholders 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.

The difference between basic and diluted weighted-average shares of common stock 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:

Weighted-average shares outstanding:

Basic

Incremental shares from stock options

Incremental shares from restricted stock

 

Diluted

 

For the three months ended February 28, 2010 and 2009, respectively, there were approximately 0.7 million and 0.2 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. Additionally, there were approximately 0.1 million and 0.2 million equivalent shares related to stock options and restricted stock that were excluded from diluted weighted-average shares outstanding for the six months ended February 28, 2010 and 2009, respectively, because inclusion would have been anti-dilutive.

SEGMENT INFORMATION

The Company’s segments are Europe, North America Masterbatch (“NAMB”), North America Engineered Plastics (“NAEP”), North America Distribution Services (“NADS”) (which includes rotomolding) and Asia. 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: (1) engineered plastics, (2) masterbatch and (3) distribution services. In North America, there is a general manager of each of these lines of business each of who report directly to the Company’s CEO. The Company’s European and Asian segments have managers of each line of business, who report to a general manager who reports to the CEO. Currently, the Company’s CEO does not directly manage the business line level when reviewing performance and allocating resources for the Europe and Asia segments.

During fiscal 2010, the Company completed the closing of its Invision sheet manufacturing operation at its Sharon Center, Ohio manufacturing facility. This business comprised the former Invision segment of the Company’s business. The Company reflected the results of these operations as discontinued operations for all periods presented and are not included in the segment information.

The Company’s European segment is the largest segment for the Company. The segment is managed by the General Manager of Europe. Managers of each line of business for engineered plastics, masterbatch and distribution services in Europe report to the European General Manager. The Company has a global research and development center in Bornem, Belgium, which primarily focuses on the masterbatch business, and has a technology center in Sindorf, Germany, which primarily focuses on the engineered plastics business.

The North America Masterbatch segment includes color and additive concentrates which improve the appearance and performance of resins targeted at the film and packaging markets. The North America Engineered Plastics segment includes multi-component blends of ionomers, urethanes and nylons, generally for the durable goods market, formulated to meet customer’s specific performance requirements, regardless of the base resin. The North America Distribution Services segment provides bulk and packaged plastic materials used in a variety of applications and supports the North America Masterbatch and North America Engineered Plastics segments. The Company includes in All Other North America any administrative costs that are not directly related or allocated to a North America segment such costs as North American information technology, human resources, accounting and purchasing. The North American administrative costs are directly related to the three North American segments.

The Company’s Asia segment is managed by the General Manager of Asia. This segment primarily provides masterbatch applications in the packaging market. The operations for the Asia segment are currently located in China and Indonesia.

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 impairment, curtailment gain or foreign currency transaction gains or losses. In some cases, the Company may choose to exclude from a segment’s 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.

Below the Company presents net sales to unaffiliated customers, gross profit and operating income by segment. Also included is a reconciliation of operating income (loss) by segment to consolidated income (loss) from continuing operations before taxes.

Europe

NAMB

NAEP

NADS

Asia

 

Total net sales to unaffiliated customers

 

 

Europe

NAMB

NAEP

NADS

Asia

 

Total segment gross profit

 

 

Europe

NAMB

NAEP

NADS

Asia

All other North America

 

Total segment operating income (loss)

 

Corporate and other

Interest expense, net

Foreign currency transaction gains (losses)

Other income (expense)

Curtailment gain

Asset impairment

Restructuring expense

 

Income (loss) from continuing operations before taxes

 

The majority of the Company’s sales for the three and six months ended February 28, 2010 and 2009 can be classified into five primary product families. The amount and percentage of consolidated sales for these product families are as follows:

Color and additive concentrates

Polyolefins

Engineered compounds

Polyvinyl chloride (PVC)

Tolling

Other

 

 

 

Color and additive concentrates

Polyolefins

Engineered compounds

Polyvinyl chloride (PVC)

Tolling

Other

 

 

 

INCOME TAXES

At February 28, 2010, the Company’s gross unrecognized tax benefits totaled $1.4 million. If recognized, approximately $0.5 million of the total unrecognized tax benefits would favorably affect the Company’s effective tax rate. The Company reports interest and penalties related to income tax matters in income tax expense. At February 28, 2010, the Company had $0.4 million of accrued interest and penalties on unrecognized tax benefits.

The Company is open to potential income tax examinations in the U.S. and Belgium from fiscal 2007 onward. The Company is open to potential examinations in Germany from fiscal 2005 onward and generally from fiscal 2003 onward for most foreign jurisdictions.

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.

The loss from discontinued operations does not include any income tax effect as the Company was not in a taxable position due to its continued U.S. losses and a full valuation allowance.

A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates for the three months ended February 28, 2010 and 2009 is as follows:

Statutory U.S. tax rate

Amount of foreign taxes at less than U.S. statutory tax rate

U.S. and foreign losses with no tax benefit

U.S. restructuring and other U.S. unusual charges with no benefit

Italy valuation allowance

Establishment (resolution) of uncertain tax positions

Other

 

Total income tax expense (benefit)

 

A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates for the six months ended February 28, 2010 and 2009 is as follows:

Statutory U.S. tax rate

Amount of foreign taxes at less than U.S. statutory tax rate

U.S. and foreign losses with no tax benefit

U.S. restructuring and other U.S. unusual charges with no benefit

Italy valuation allowance

Establishment (resolution) of uncertain tax positions

Other

 

Total income tax expense

 

The effective tax rate for the three months ended February 28, 2010 is less than the U.S. statutory rate primarily because no tax benefits were recognized for U.S. and certain foreign losses from continuing operations and other U.S. charges. These unfavorable effects on the Company’s effective tax rate were partially offset by the Company’s overall foreign rate being less than the U.S. statutory rate. As compared with the effective tax rate for the three months ended February 28, 2009, the current quarter’s effective tax rate is driven by an increase in the effective tax rate impact of U.S. and certain foreign losses from continuing operations and other U.S. charges with no tax benefit.

The effective tax rate for the six months ended February 28, 2010 is greater than the U.S. statutory rate primarily because no tax benefits were recognized for U.S. and certain foreign losses from continuing operations and other U.S. charges. These unfavorable effects on the Company’s effective tax rate were partially offset by the Company’s overall foreign rate being less than the U.S. statutory rate. As compared with the effective tax rate for the six months ended February 28, 2009, the current period’s effective tax rate is driven by a decrease in the effective tax rate impact of U.S. and certain foreign losses from continuing operations and other U.S. charges with no tax benefit.

During the quarter, the Company established a valuation allowance against the deferred tax assets of its Italian entity due to the recent losses in that jurisdiction. The impact of recording the valuation allowance was approximately $2.3 million of additional tax expense. The Company will continue to maintain a valuation allowance against these deferred tax assets until it is more-likely than not that the Company will realize a benefit through the reduction of future tax liabilities.

RESTRUCTURING OF OPERATIONS

On March 1, 2010, the Company announced the closure of the Company’s Polybatch Color Center located in Sharon Center, Ohio. The Company recorded estimated restructuring expenses related to the closure of $0.8 million which was included in the Company’s statement of operations for the three and six months ended February 28, 2010. The Company expects additional charges related to this initiative to range from approximately $0.5 million to $1.0 million, before income tax, to be recognized primarily during the remainder of fiscal 2010 and early fiscal 2011.

During fiscal 2009, the Company announced various plans to realign its domestic and international operations to strengthen the Company’s performance and financial position. The Company initiated these proactive actions to address the then weak global economic conditions and improve the Company’s competitive position. The actions included a reduction in capacity and workforce reductions in manufacturing, selling and administrative positions throughout Europe and North America. In addition, in fiscal 2010, the Company completed the previously announced consolidation of its back-office operations in Europe, which include finance and accounting functions, to a shared service center located in Belgium.

The Company reduced its workforce by approximately 190 positions worldwide during fiscal 2009, primarily as a result of the actions taken in early fiscal 2009 to realign the Company’s operations and back-office functions. In addition, to further manage costs during a period of significant declines in demand primarily in the second quarter of fiscal 2009, the Company’s major European locations implemented a “short work” schedule when necessary and the NAEP segment reduced shifts from seven to five days at its Nashville, Tennessee plant. Also in the NAEP segment, the Company reduced production capacity by temporarily idling one manufacturing line, while permanently shutting down another line at its plant in Bellevue, Ohio. The Company also completed the majority of the right-sizing and redesign of its Italian plant, which resulted in less than $0.1 million of accelerated depreciation on certain fixed assets during the first quarter of fiscal 2010.

The Company recorded approximately $0.3 million for employee-related costs and $0.1 million for contract termination and other restructuring costs during the three months ended February 28, 2010. The Company recorded approximately $0.5 million for employee-related costs and $0.3 million for contract termination and other restructuring costs related to the fiscal 2009 initiatives during the six months ended February 28, 2010. Accelerated depreciation included in cost of sales of $0.1 million was also recorded for the six months ended February 28, 2010. Nearly all restructuring charges recorded for the Fiscal 2009 Plan during the three and six months ended February 28, 2010 were related to the Europe segment; however, minimal charges were also recorded related the NAEP segment.

At February 28, 2010, approximately $1.3 million remains accrued for employee-related costs, including estimated severance payments and medical insurance, and contract termination costs related to the fiscal 2009 initiatives. The Company anticipates the remaining accrued balance for restructuring charges will be paid throughout fiscal 2010.

The Company expects additional charges to continue into fiscal 2010 related to the plans initiated in fiscal 2009 to reduce capacity and headcount at certain international locations. These plans are expected to be completed primarily in fiscal 2010. In total, the Company expects charges related to these initiatives, and other remaining 2009 initiatives to range from approximately $2.0 million to $3.0 million, before income tax, to be recognized primarily during the remainder of fiscal 2010 or early fiscal 2011.

In January 2008, the Company announced actions in its continuing effort to improve the profitability of its North American operations which included the shut down of its manufacturing facility in St. Thomas, Ontario, Canada. 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 and the Company finalized closing procedures

in fiscal 2010. The Company recorded minimal charges related to the fiscal 2008 initiatives during the six months ended February 28, 2010. Approximately $0.2 million remains accrued for employee-related costs at February 28, 2010 related to the fiscal 2008 initiatives. The Company recorded approximately $0.2 million for employee-related costs and $0.1 million for contract termination and other restructuring costs during the six months ended February 28, 2009. The charges recorded in fiscal 2010 and 2009 were related to the NAEP segment.

The following table summarizes the liabilities as of February 28, 2010 related to the Company’s restructuring plans. This includes a $2.4 million withdrawal liability related to fiscal 2004 and 2007 restructuring plans, which the Company expects to pay during the remainder of fiscal 2010.

Employee-related costs

Other costs

Translation effect

 

Restructuring charges

 

ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued new accounting rules related to business combinations. The new accounting rules require 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 acquirer’s income tax valuation allowance and deferred taxes. These accounting rules are 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 was not permitted. The Company adopted the new accounting rules related to business combinations, effective September 1, 2009, and recorded $1.4 million and $3.7 million during the three and six months ended February 28, 2010, respectively, of transaction costs for the proposed acquisition of ICO, Inc. (“ICO”) and the subsequent acquisition of McCann Color, Inc. See Note 3 — ICO Acquisition and Note 18 — Subsequent Events.

In December 2007, the FASB issued new accounting rules on noncontrolling interests. The new accounting rules clarify 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. The implementation of new accounting rules related to noncontrolling interests, effective September 1, 2009, did not have a material impact on the Company’s financial position, results of operations and cash flows but did change the consolidated financial statement presentation related to noncontrolling interests. The presentation requirement was reflected in the consolidated financial statements and accompanying notes and has been applied retrospectively for all periods presented.

In June 2009, the FASB issued new accounting rules that establish the Accounting Standards Codification (“Codification”) as the source of authoritative Generally Accepted Accounting Principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Subsequent to the issuance of these accounting rules, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. All guidance contained in the Codification carries an equal level of authority. The GAAP hierarchy was modified to include only two levels of GAAP: authoritative and nonauthoritative. All nongrandfathered non-SEC accounting literature not included in the Codification are nonauthoritative. These new accounting rules are effective for interim or annual financial periods ending after September 15, 2009. The Company’s adoption of these new accounting rules, effective September 1, 2009, impacted the references in its consolidated financial statements to technical accounting literature.

In January 2010, the FASB issued amended accounting rules to require disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also require more detailed disclosure about the activity within Level 3 fair value measurements. The changes are effective for annual and interim reporting periods beginning after December 15, 2009, except for requirements related to Level 3 disclosures, which are effective for annual and interim reporting periods beginning after December 15, 2010. This guidance requires new disclosures only, and is not expected to impact the Company’s consolidated financial statements.

SHARE REPURCHASE PROGRAM

The Company has approximately 2.9 million shares authorized by the Board of Directors to be repurchased under the Company’s current share repurchase program. The Company did not repurchase any shares of its common stock during the six months ended February 28, 2010. During the six months ended February 28, 2009, the Company repurchased 111,520 shares of common stock at an average price of $14.77 per share.

SUBSEQUENT EVENTS

On March 1, 2010, the Company announced the purchase of McCann Color, Inc. (“McCann Color”), a producer of high-quality color concentrates, based in North Canton, Ohio, for less than $10 million in cash. McCann Color provides specially formulated color concentrates to match precise customer specifications. Other products and services include UV absorbers, dry color, toll compounding and blending, and flame retardant compounds. Its products are used in end markets such as packaging, lawn and garden, furniture, consumer products and appliances. McCann Color serves customers from its 48,000-square-foot, expandable North Canton facility, which was built in 1998 exclusively to manufacture color concentrates. The facility will complement the Company’s existing masterbatch manufacturing and product development facilities in Akron, Ohio, and San Luis Potosi, Mexico.

On March 1, 2010, the Company also announced the closure of the Company’s Polybatch Color Center located in Sharon Center, Ohio and will consolidate production to the McCann Color facility in North Canton. The closure and consolidation of production are expected to be completed by the end of the Company’s current fiscal year, August 31, 2010. The closure is considered a recognized subsequent event; therefore, estimated restructuring expenses of $0.8 million were accrued as of February 28, 2010 and impairment charges of $5.0 million related to the Polybatch Color Center assets were recorded in earnings for the three and six months ended February 28, 2010. Additional information regarding restructuring expenses and asset impairments related to this action is in Note 10 and Note 15.

Europe

NAMB

NAEP