A. SCHULMAN, INC. 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended
August 31, 2006
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period
from
to .
|
Commission file
no. 0-7459
A. SCHULMAN, INC.
(Exact Name of Registrant as Specified in its Charter)
|
|
|
Delaware
|
|
34-0514850
|
(State or Other Jurisdiction
|
|
(I.R.S. Employer
|
of Incorporation or Organization)
|
|
Identification No.)
|
3550 West
Market Street,
|
|
44333
|
Akron,
Ohio
|
|
(ZIP Code)
|
(Address of Principal Executive
Offices)
|
|
|
Registrants telephone number, including area code:
(330) 666-3751
Securities Registered Pursuant to Section 12(b) of the
Act:
|
|
|
Title
of Each Class
|
|
Name
of Each Exchange on Which Registered
|
Common Stock, $1.00 Par Value
|
|
The NASDAQ Stock Market LLC
|
Special Stock Purchase Rights
|
|
The NASDAQ Stock Market LLC
|
Securities Registered Pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of February 28, 2006, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $687,000,051 based on the closing sale price as
reported on the Nasdaq National Market System.
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date 26,842,722 Shares of Common Stock,
$1.00 Par Value, at October 31, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
|
|
|
|
|
Part of
Form 10-K
|
Document
|
|
In Which
Incorporated
|
|
Portions of the registrants
Notice of Proxy Statement for the 2006 Annual Meeting of
Stockholders
|
|
III
|
The Report of the Compensation Committee on Executive
Compensation, the Report of the Audit Committee and the
Performance Graph contained in the registrants Notice of
Annual Meeting and Proxy Statement for the 2006 Annual Meeting
of Stockholders shall not be deemed incorporated by reference
herein.
PART I
A. Schulman, Inc. (the Company) was organized as an
Ohio corporation in 1928 and changed its state of incorporation
to Delaware in 1969.
The Company is engaged in the sale of plastic resins in various
forms, which are used as raw materials by its customers. To
identify reportable segments, the Company considered its
operating structure and the types of information subject to
regular review by its President and Chief Executive Officer, who
is the Chief Operating Decision Maker. On this basis, the
Company operates primarily in two geographic segments, North
America and Europe, including Asia (Europe).
BUSINESS ACTIVITIES
The Company combines basic resins purchased from plastic resin
producers and, through mixing and extrusion processes,
introduces additives that provide color, stabilizers, flame
retardants or other enhancements that may be required by a
customer. These compounds are formulated in the Companys
laboratories and technical centers and are manufactured in the
Companys 15 plastics compounding plants in North America,
Europe and Asia. Customers for the Companys plastic
compounds include manufacturers, custom molders and extruders of
a wide variety of plastic products and parts. The Company
generally produces compounds on the basis of customer
commitments and expectations. When necessary, compounds are
produced for future delivery and are stored in Company or public
warehouses.
The Companys plastic compounds are sold to manufacturers
and suppliers in various markets such as packaging, automotive,
consumer products, electrical/electronics, office equipment and
agriculture. These compounds are used in the packaging industry
for such products as plastic bags and labels and packaging
materials for food, soap, fragrances, flowers, gardening
supplies and various household necessities; in the automotive
industry for such products as grilles, body side moldings,
bumper protective strips, window seals, valance panels, bumper
guards, air ducts, steering wheels, fan shrouds and other
interior and exterior components; in the consumer products
industry for such items as writing instruments, shelving, soft
drink coolers, video tape cassettes, batteries, outdoor
furniture, lawn sprinklers, artificial turf, skateboards, toys,
games and plastic parts for various household appliances; in the
electrical/electronics industry for such products as outdoor
lighting, parts for telephones, connector blocks, transformers
and capacitor housings; in the office equipment industry for
such products as cases and housings for computers, trim for arms
of office chairs, folders and binders, stack trays and panels
and drawers for copying machines; and in the agriculture
industry for such products as greenhouse coverings and
protective film for plants and agricultural mulch.
The Company also acts as a merchant, buying prime and off-grade
plastic resins and reselling these commodities, without further
processing, to a variety of users. The plastic resins generally
are purchased from major producers. Prime resins purchased from
these producers are usually sold to small and medium-sized
customers. In addition to prime resins, the Company purchases
supplies of resins resulting from overruns, changes in
customers specifications and failure to meet rigid prime
specifications. Historically, these materials have been in
continuous supply, generally in proportion to the total industry
production of plastic resins.
The Company, through its European operations, acts as a
distributor for several major resin producers that include BASF,
ExxonMobil Chemical, Total Petrochemicals, Solvay, GE Plastics
and Vestolit GmbH. The Company also acts as a North American
distributor of ExxonMobil Chemical polyethylene used for
injection and rotational molding.
In September 2005, the Company introduced its new
Invision®
sheet product and formed A. Schulman Invision, Inc., a wholly
owned subsidiary.
Invision®
is a revolutionary product based on cutting-edge technology that
is expected to provide high growth opportunities in many markets
around the world.
Invision®
is a multi-layered, extruded sheet product that reduces costs
and simplifies the manufacturing process for the Companys
customers, while providing a higher-performing and more
environmentally friendly alternative to existing plastic and
film materials that are painted or colored. The Company expects
Invision®
to appeal to customers in a variety of markets, both automotive
and non-automotive. Initially, the Company will focus on
automotive applications to capitalize on the Companys
market presence and recognized capabilities. Samples from the
Companys pilot line have been tested by several potential
customers and the Company has received positive feedback based
on the initial results of these tests. The initial production
line in the Companys Sharon Center facility is nearing
completion and is scheduled for
start-up in
January 2007 with the ability to produce saleable product
expected
3
shortly thereafter. In addition, the Company has purchased land
for a greenfield plant site in Findlay, Ohio for construction of
a dedicated
Invision®
facility. While
Invision®
did not produce operating income in fiscal 2006, the Company
believes this is a very large market that could have significant
sales in the years ahead.
The Companys manufacturing in each of its geographic
business segments can be classified into five major product
families: color and additive concentrates; engineered compounds;
polyolefins; polyvinyl chloride (PVC); and tolling.
COLOR AND
ADDITIVE CONCENTRATES
The Companys concentrate business consists of the
compounding of resins that provide plastic with specific color
and/or
physical properties, such as conductivity, flexibility,
viscosity and textures. A color concentrate is a clear or
natural plastic resin into which a substantial amount of color
pigment is incorporated or dispersed. The Company manufactures
its concentrates using its formulae and purchased natural
resins. These concentrates are sold to manufacturers of plastic
products, such as film for packaging, household goods, toys,
automotive parts, mechanical goods and other plastic items.
The Companys concentrates are sold under various trade
names, including the following:
|
|
|
|
|
Polybatch®,
which is an additive or color concentrate used for modifying
various plastic resins and which provides various physical
properties required by customers;
|
|
|
|
Papermatch®,
which is a plastic alternative to paper used for packaging,
menus, maps and other products.
Papermatch®
is printable and resistant to tearing, moisture and chemicals;
|
|
|
|
Aqua-Sol®,
which is a polymer that is biodegradable and dissolves in water,
making it more environmentally friendly for uses such as medical
packaging, labels, barrier and embroidery films, and other
applications; and
|
|
|
|
Polyblak®,
which is a line of black concentrates that are resistant to
weather and sunlight and are used in the production of plastic
pipe, black film and other black plastic items. This line of
products is manufactured by third parties for the Company.
|
ENGINEERED
COMPOUNDS
The Companys engineered compounds are products designed to
have and maintain characteristics such as chemical resistance,
electrical conductivity, heat resistance
and/or high
strength-to-weight
ratios. The engineered compounds manufactured by the Company
include the following:
|
|
|
|
|
Polyflam®,
which is a flame retardant compound used in applications such as
telephone systems, terminal blocks, parts for color televisions,
electrical components and housings for household appliances and
outdoor products.
|
|
|
|
Schulamid®,
which is a nylon compound that can be unfilled, reinforced or
impact-modified.
Schulamid®
is used in applications that require good impact strength and
resistance to high temperatures and chemicals. Typical
applications include
under-the-hood
automotive components and various building and consumer products.
|
|
|
|
Formion®,
which is a specialized compound that has good impact strength,
is resistant to abrasion and has performance characteristics
that do not decrease in low temperatures.
Formion®
is sold principally to the transportation industry for use in
bumper blocks and protective rub strips.
|
|
|
|
Polypur®,
which is a reinforced and alloyed thermoplastic polyurethane
that has impact resistance and molding properties for automotive
applications such as exterior side moldings, grilles, body side
moldings and other painted parts.
|
|
|
|
Clarix®,
which is a thermoplastic ionomer resin offering scratch
resistance, barrier properties, chemical resistance and superior
clarity.
Clarix®
is ideal for many diverse applications including packaging,
automotive paintless parts, textile and metal coatings, footwear
components, sporting goods and polymer modifiers.
|
POLYOLEFINS
The Companys polyolefin business consists of numerous
polypropylene and polyethylene resins and compounds. Polyolefins
are used for interior trim, fascias and bumper covers in
automotive applications; for toys, small appliances,
4
sporting goods, and agricultural and watercraft products in
roto-molding applications; and for office supplies in
industrial/commercial applications. The polyolefin products
manufactured by the Company include the following:
|
|
|
|
|
Polytrope®,
which is a thermoplastic elastomer that has high resiliency and
good impact resistance. Presently, the principal market for this
product is the domestic automotive industry and typical
applications include valance panels, body side moldings, grilles
and bumper rub strips. Parts molded from
Polytrope®
weigh less than equivalent metal parts, are impact-resistant and
may be painted to match adjoining exterior body parts.
|
|
|
|
Polyfort®,
which is a reinforced polypropylene compound for applications
that require stiffness and resistance to heat distortion, such
as coffee makers, binders for computer printouts, interior trim
and
under-the-hood
products for automobiles.
|
|
|
|
Schulink®,
which is a crosslink polyethylene-based compound, is used in
rotational molding applications requiring high strength and
chemical resistance, such as industrial doors and commercial
waste containers.
|
|
|
|
Invision®,
a thermoplastic elastomer, is a PVC alternative that can be
injection molded, blow molded or extruded. It is a polyolefin
compound with properties similar to PVC. It can be used in
automotive interiors, trim for furniture, appliances and
industrial components.
|
|
|
|
Polyaxis®,
a polyethylene resin compound used for rotationally molded
applications such as canoes, kayaks, agricultural tanks, etc.
|
POLYVINYL
CHLORIDE
The Companys PVC business is transacted under the name
Polyvin®
and involves the formulation of compounds and elastomers to
introduce a variety of product attributes, including
weatherability, consistency, ease of processing, material
flexibility, and high-gloss or low-gloss finish. The
Companys thermoplastic PVC compounds are available in blow
molding, injection molding and extrusion grades for application
in the manufacture of automotive, furniture, architectural and
consumer products. The Companys
Sunprene®
compound serves as a replacement for rubber and other
thermoplastic elastomers in automotive applications.
TOLLING
The Company provides tolling services as a fee for processing of
material provided and owned by customers. On some occasions, the
Company is required to provide certain amounts of its materials,
such as additives or packaging. These materials are charged to
the customer as an addition to the tolling fees. The Company
recognizes revenues from tolling services and related materials
when such services are performed. The only amounts recorded as
revenue related to tolling are the processing fees and the
charges related to materials provided by the Company.
The approximate amount and percentage of net consolidated sales
for each of the Companys product families for the three
fiscal years ended August 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Product
Family
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands,
except for %s)
|
|
|
Color and additive concentrates
|
|
$
|
579,825
|
|
|
|
36
|
|
|
$
|
501,159
|
|
|
|
35
|
|
|
$
|
444,483
|
|
|
|
36
|
|
Polyolefins
|
|
|
495,163
|
|
|
|
31
|
|
|
|
424,066
|
|
|
|
30
|
|
|
|
338,278
|
|
|
|
27
|
|
Engineered compounds
|
|
|
393,312
|
|
|
|
24
|
|
|
|
377,008
|
|
|
|
26
|
|
|
|
333,630
|
|
|
|
27
|
|
Polyvinyl chloride (PVC)
|
|
|
64,174
|
|
|
|
4
|
|
|
|
54,952
|
|
|
|
4
|
|
|
|
57,018
|
|
|
|
5
|
|
Tolling
|
|
|
16,482
|
|
|
|
1
|
|
|
|
16,117
|
|
|
|
1
|
|
|
|
13,380
|
|
|
|
1
|
|
Other
|
|
|
67,430
|
|
|
|
4
|
|
|
|
59,894
|
|
|
|
4
|
|
|
|
52,302
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,616,386
|
|
|
|
100
|
|
|
$
|
1,433,196
|
|
|
|
100
|
|
|
$
|
1,239,091
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information regarding the amount of sales, operating income and
identifiable assets attributable to each of the Companys
geographic business segments for the last three years is set
forth in the Notes to Consolidated Financial Statements of the
Company appearing in ITEM 8 of this Report.
5
The Companys principal subsidiaries are as follows:
A. Schulman Plastics, BVBA, a Belgian subsidiary located in
Bornem, Belgium, manufactures color and additive concentrates
and compounds. These products principally are sold in Germany,
France, the Benelux countries, Italy and Asia.
A. Schulman International Services N.V., a Belgian subsidiary
located in Bornem, Belgium, provides financing and
administrative services to the Companys European
operations.
A. Schulman, Inc., Limited, a United Kingdom subsidiary located
in South Wales, United Kingdom, primarily manufactures color and
additive plastic concentrates, which are sold in the United
Kingdom and to various A. Schulman European locations.
A. Schulman GmbH, a German subsidiary located in Sindorf,
Germany, manufactures engineered and flame-retardant plastic
compounds. In addition, this subsidiary purchases and sells
prime and off-grade plastic resins from major European
producers. This subsidiary also distributes plastic resins and
compounds for companies, including Vestolit GmbH, ExxonMobil
Chemical, GE Plastics and Solvay.
A. Schulman Canada Ltd., a Canadian subsidiary located in St.
Thomas, Ontario, manufactures engineered and various other
plastic compounds, acts as a merchant of prime and off-grade
plastic resins and distributes for companies, including
ExxonMobil Chemical polyethylene for injection molding. Its
principal sales office is located in Mississauga, Ontario,
Canada.
A. Schulman AG, a Swiss subsidiary located in Zurich,
Switzerland, sells plastic compounds and concentrates
manufactured by other European subsidiaries of the Company and
also acts as a merchant of plastic resins.
A. Schulman, S.A., a French subsidiary, has sales offices in
France and is a distributor in France for Total Petrochemicals.
A. Schulman, S.A. also acts as a merchant of plastic resins and
sells compounds manufactured by the Companys subsidiaries
in Bornem, Belgium, Sindorf, Germany and Givet, France.
Diffusion Plastique is a Paris-based subsidiary that is a
distributor for BASF of certain plastic materials in France.
A. Schulman Plastics, S.A., another French subsidiary, is
located in Givet, France. This subsidiary produces plastic
concentrates for the Companys European market.
Through its Mexican subsidiary, A. Schulman de Mexico, S.A. de
C.V., the Company manufactures concentrates for the packaging
industry and compounds for the automotive, construction,
appliance and consumer products markets. This subsidiary has
sales offices in Mexico.
A. Schulman Polska Sp. z o.o., is a subsidiary located in
Warsaw, Poland. The subsidiary sells products manufactured by
other subsidiaries of the Company and acts as distributor and
merchant of plastic resins and compounds in Poland.
A. Schulman Plastics SpA is a subsidiary located in Italy. This
subsidiary manufactures and sells engineered compounds and
concentrates to the Italian market. It sells products
manufactured by A. Schulman Plastics, BVBA, A. Schulman
Plastics, S.A., A. Schulman Gmbh and A. Schulman, Inc., Limited
and acts as a merchant of plastic resins in Italy.
A. Schulman Plastics S.L., a Spanish subsidiary, is primarily a
distributor of plastic resins to the Spanish market through its
offices located in Barcelona and Valencia, Spain. This
subsidiary also engages in merchant activities in Spain and
sells certain products manufactured by A. Schulman Gmbh, and A.
Schulman Plastics, BVBA.
A. Schulman Hungary Kft., a Hungarian subsidiary, sells
engineered compounds manufactured by A. Schulman GmbH and
concentrates manufactured by A. Schulman Plastics, BVBA, A.
Schulman Plastics, S.A., and A. Schulman, Inc., Limited. It also
acts as a merchant of plastic resins in Hungary.
A. Schulman Plastics (Dongguan) Ltd., a subsidiary in China,
manufactures concentrates for sale in the local Chinese markets.
This subsidiary produces material for customers in the film and
packaging markets.
A. Schulman Europe GmbH, a subsidiary with offices in Wurselen,
Germany provides support in the areas of sales, procurement,
logistics and financing for the European operations.
6
A. Schulman S.ár.l. et Cie SCS, A. Schulman S.ár.l.
and A. Schulman Holdings S.ár.l. are Luxembourg
subsidiaries that provide financing and other corporate services
for the European group.
A. Schulman Invision, Inc. is a subsidiary located in Sharon
Center, Ohio formed in fiscal 2006. The subsidiary manufactures
Invision®,
a multi-layered, extruded sheet product for sale in both the
automotive and non-automotive markets.
JOINT VENTURES
The Company, through its wholly-owned subsidiary ASI Investments
Holding Co., owns a 70% partnership interest in The Sunprene
Company, which manufactures a line of PVC thermoplastic
elastomers and compounds primarily for the North American
automotive market. The other partner is an indirect wholly-owned
subsidiary of Mitsubishi Chemical MKV Co., one of the largest
chemical companies in Japan. This partnership has two
manufacturing lines at the Companys Bellevue, Ohio
facility. The Companys partner provides technical and
manufacturing expertise.
The Company, through its wholly-owned subsidiary A. Schulman
International, Inc., owns a 65% interest in PT. A. Schulman
Plastics, Indonesia, an Indonesian joint venture. This joint
venture has a manufacturing facility with two production lines
in Surabaya, Indonesia. P.T. Prima Polycon Indah owns the
remaining 35% interest in this joint venture.
EMPLOYEE INFORMATION
As of August 31, 2006, the Company had 1,042 employees in
North America and 1,438 employees in its European operations.
Approximately 80% of the Companys hourly production
employees are represented by various unions under collective
bargaining agreements.
The Company has laboratory facilities at a majority of its
plants staffed by 313 technical personnel. The Companys
plastic compounding business is, to a degree, dependent on its
ability to hire and retain qualified technical personnel. These
personnel are involved in activities relating to the testing and
sampling of material for conformity with product specifications
and the development of new compounds. The Company has generally
been successful in hiring or retaining such personnel.
RESEARCH AND
DEVELOPMENT
A large part of the Companys technical activities relate
to the continuous refinement of compounds for specific
applications of customers. Research activities relating to the
development of new products and the improvement of existing
products are important to the Company. These activities are
conducted at the Companys various technical centers and
laboratories. Research and development expenditures were
approximately $4.7 million in fiscal 2006 and approximately
$3.8 million in fiscal 2005. The increase in these
activities is primarily related to the new
Invision®
sheet product.
COMPLIANCE WITH
ENVIRONMENTAL REGULATIONS
The Companys operations on and ownership of real property
are subject to extensive environmental, health and safety laws
and regulations at the national, state and local governmental
levels. The nature of the Companys business exposes it to
risks of liability under these laws and regulations due to the
production, storage, transportation, recycling or disposal
and/or sale
of materials that can cause contamination or personal injury if
they are released into the environment or workplace.
Environmental laws may have a significant effect on the costs of
these activities involving raw materials, finished products and
wastes. The Company may incur substantial costs, including
fines, damages, criminal or civil sanctions, remediation costs,
or experience interruptions in its operations for violations of
these laws.
Also, national and state environmental statutes impose strict,
and under some circumstances, joint and several liability for
the cost of investigations and remedial actions on any company
that generated the waste, arranged for disposal of the waste,
transported the waste to the disposal site or selected the
disposal site, as well as on the owners and operators of these
sites. Any or all of the responsible parties may be required to
bear all of the costs of clean up, regardless of fault or
legality of the waste disposal or ownership of the site, and may
also be subject to liability for natural resource damages. It is
possible that the Company could be identified as a potential
responsible party at more sites in the future, which could
result in the Company being assessed substantial investigation
or clean up costs.
7
Management believes that compliance with national, state and
local provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the
environment, does not currently have a material effect upon the
capital expenditures, earnings or competitive position of the
Company.
DEPENDENCE ON
CUSTOMERS
During the year ended August 31, 2006, the Companys
five largest customers accounted in the aggregate for less than
10% of total sales. In managements opinion, the Company is
not dependent upon any single customer and the loss of any one
customer would not have a materially adverse effect on the
Companys business other than, potentially, on a temporary
basis.
AVAILABILITY OF RAW
MATERIALS
The raw materials required by the Company are readily available
from major plastic resin producers or other suppliers. The
principal types of plastic resins used in the manufacture of the
Companys proprietary plastic compounds are polypropylene,
PVC (polyvinyl chloride), polyethylene, polystyrene, nylon, ABS
(acrylonitrile butadiene styrene) and polyurethane. For
additional information on the availability of raw materials, see
ITEM 1A. RISK FACTORS in this Report.
WORKING CAPITAL
PRACTICES
The Company, along with other companies in its industry, is
generally not subject to unusual working capital practices. The
nature of the Companys business does not require
significant amounts of inventories to be held to meet rapid
delivery requirements of its products or services or assure the
Company of a continuous allotment of goods from suppliers. The
Companys manufacturing processes are generally performed
with a short turnaround time. The Company does not generally
offer extended payment terms to its customers. The Company
generally allows its customers to return merchandise for failure
to meet pre-agreed quality standards or specifications; however,
the Company employs quality assurance practices that minimize
customer returns.
COMPETITION
The Companys business is highly competitive. The Company
competes with producers of basic plastic resins, many of which
also operate compounding plants, as well as other independent
plastic compounders. The producers of basic plastic resins
generally are large producers of petroleum and chemicals, which
are much larger than the Company and have greater financial
resources. Some of these producers compete with the Company
principally in such competitors own respective local
market areas, while other producers compete with the Company on
a global basis.
The Company also competes with other merchants and distributors
of plastic resins and other products. No accurate information is
available to the Company as to the extent of its
competitors sales and earnings in respect of these
activities, but management believes that the Company has only a
small fraction of the total market.
The principal methods of competition in plastics manufacturing
are innovation, price, availability of inventory, quality and
service. The principal methods of competition in respect of
merchant and distribution activities are price and service.
Management believes it has strong financial capabilities,
excellent supplier relationships and the ability to provide
quality plastic compounds at competitive prices.
TRADEMARKS AND TRADE
NAMES
The Company uses various trademarks and trade names in its
business. These trademarks and trade names protect names of
certain of the Companys products and are significant to
the extent they provide a certain amount of goodwill and name
recognition in the industry. The Company also holds patents in
various parts of the world for certain of its products. These
trademarks, trade names and patents, including those which are
pending, contribute to profitability, however the Company does
not consider its business to be dependent on such trademarks and
trade names, except in the case of its new
Invision®
product line.
8
AVAILABLE INFORMATION
The Companys annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
and current reports on
Form 8-K,
together with any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities and
Exchange Act of 1934, will be made available free of charge on
the Companys web site, www.aschulman.com, as soon as
reasonably practicable after they are electronically filed with
or furnished to the Securities and Exchange Commission.
The following are certain risk factors that could affect our
business, results of operations, cash flows and financial
condition. These risk factors should be considered in connection
with evaluating the forward-looking statements contained in this
Annual Report on
Form 10-K
because these factors could cause our actual results or
financial condition to differ materially from those projected in
forward-looking statements. Before you invest in us, you should
know that making such an investment involves some risks,
including the risks we describe below. The risks that are
discussed below are not the only ones we face. If any of the
following risks occur, our business, results of operations, cash
flows or financial condition could be negatively affected.
If we fail to
develop and commercialize new products, our business operations
would be adversely affected.
A significant portion of our anticipated growth is dependent
upon the successful development and commercialization of new
products, such as our
Invision®
product line. The development and commercialization of new
products, including
Invision®,
requires significant investments in research and development,
production, and marketing costs. The successful production and
commercialization of these products is uncertain as is the
acceptance of the new products in the marketplace. If we fail to
successfully develop and commercialize new products, or if
customers decline to purchase the new products, we will not be
able to recover our development investment and the growth
prospects for our products will be adversely affected.
If we are
unable to retain key personnel or attract new skilled personnel,
it could have an adverse effect on our business.
The unanticipated departure of any key member of our management
team could have an adverse effect on our business. In addition,
because of the specialized and technical nature of our business,
our future performance is dependent on the continued service of,
and on our ability to attract and retain, qualified management,
scientific, technical, marketing and support personnel.
Competition for such personnel is intense, and we may be unable
to continue to attract or retain such personnel.
Our sales,
profitability, operating results and cash flows are sensitive to
global economic conditions and cyclicality, and could be
adversely affected during economic downturns.
General economic conditions and business conditions of our
customers industries affect demand for our products. The
business of most of our customers, particularly our industrial,
automotive, construction and electronics customers, can be
cyclical in nature and sensitive to changes in general economic
conditions. Political instability may lead to financial and
economic instability, which could lead to deterioration in
general global economic conditions. Downturns in the businesses
that use our products will adversely affect our sales.
Historically, downturns in general economic conditions have
resulted in diminished product demand, excess manufacturing
capacity and lower average selling prices, and we may experience
similar problems in the future. In addition, downturns in our
customers industries, even during periods of strong
general economic conditions, could adversely affect our sales,
profitability, operating results and cash flows.
Price
increases in raw materials and energy costs could adversely
affect operating results and financial condition.
We purchase various plastic resins to produce our proprietary
plastic compounds. These resins, derived from petroleum or
natural gas, have been subject to periods of rapid and
significant movements in price. These fluctuations in price may
be caused or aggravated by a number of factors, including
political instability or hostilities in oil-producing countries
and supply and demand changes. We may not be able to pass on
increases in the prices of raw materials and energy to our
customers. As a result, higher petroleum or natural gas costs
could lead to declining margins, operating results and financial
conditions.
9
A major
failure of our information systems could harm our
business.
We depend upon integrated information systems to process orders,
respond to customer inquiries, manage inventory, purchase, sell
and ship goods on a timely basis, maintain cost-efficient
operations, prepare financial information and reports, and
operate our website. We may experience operating problems with
our information systems as a result of system failures, viruses,
computer hackers or other causes. Any significant
disruption or slowdown of our systems could cause orders to be
lost or delayed and could damage our reputation with our
customers or cause our customers to cancel orders, which could
adversely affect our results of operations.
Our
manufacturing operations are subject to hazards and other risks
associated with polymer production and the related storage and
transportation of raw materials, products and
wastes.
Our manufacturing operations are subject to the possible hazards
and risks associated with polymer production and the related
storage and transportation of raw materials, products and
wastes, including explosions, fires, inclement weather, natural
disasters, mechanical failure, unscheduled downtime,
transportation interruptions, remediation, chemical spills,
discharges or releases of toxic or hazardous substances or gases
and other risks. These hazards can cause personal injury and
loss of life, severe damage to, or destruction of, property and
equipment and environmental contamination. In addition, the
occurrence of material operating problems at our facilities due
to any of these hazards may diminish our ability to meet our
output goals. Accordingly, these hazards, and their consequences
could have a material adverse effect on our operations as a
whole, including our results of operations and cash flows, both
during and after the period of operational difficulties.
Extensive
environmental, health and safety laws and regulations impact our
operations and assets, and compliance, or lack of compliance,
with these regulations could adversely affect our results of
operations.
Our operations on and ownership of real property are subject to
extensive environmental, health and safety laws and regulations
at the national, state and local governmental levels. The nature
of our business exposes us to risks of liability under these
laws and regulations due to the production, storage,
transportation, recycling or disposal
and/or sale
of materials that can cause contamination or personal injury if
they are released into the environment or workplace.
Environmental laws may have a significant effect on the costs of
these activities involving raw materials, finished products and
wastes. We may incur substantial costs, including fines,
damages, criminal or civil sanctions, remediation costs, or
experience interruptions in our operations for violations of
these laws.
Also, national and state environmental statutes impose strict,
and under some circumstances, joint and several liability for
the cost of investigations and remedial actions on any company
that generated the waste, arranged for disposal of the waste,
transported the waste to the disposal site or selected the
disposal site, as well as on the owners and operators of these
sites. Any or all of the responsible parties may be required to
bear all of the costs of clean up, regardless of fault or
legality of the waste disposal or ownership of the site, and may
also be subject to liability for natural resource damages. It is
possible that we will be identified as a potentially responsible
party at more sites in the future, which could result in our
being assessed substantial investigation or clean up costs.
Accruals for estimated costs, including, among other things, the
ranges associated with our accruals for future environmental
compliance and remediation may be too low or we may not be able
to quantify the potential costs. We may be subject to additional
environmental liabilities or potential liabilities that have not
been identified. We expect that we will continue to be subject
to increasingly stringent environmental, health and safety laws
and regulations. We believe that compliance with these laws and
regulations may, but does not currently, require significant
capital expenditures and operating costs, which could adversely
affect our results of operations or financial condition.
We face
competition from other polymer companies, which could adversely
affect our sales and financial condition.
We operate in a highly competitive marketplace, competing
against a number of domestic and foreign polymer producers.
Competition is based on several key criteria, including product
performance and quality, product price, product availability and
security of supply, responsiveness of product development in
cooperation with customers and customer service. Some of our
competitors are larger than we are and may have greater
financial resources. These competitors may also be able to
maintain significantly greater operating and financial
flexibility than we do. As a result, these competitors may be
better able to withstand changes in conditions within our
industry, changes in the prices of raw materials and energy and
in
10
general economic conditions. Additionally, competitors
pricing decisions could compel us to decrease our prices, which
could affect our margins and profitability adversely. Our
ability to maintain or increase our profitability is, and will
continue to be, dependent upon our ability to offset decreases
in the prices and margins of our products by improving
production efficiency and volume, shifting to higher margin
products and improving existing products through innovation and
research and development. If we are unable to do so or to
otherwise maintain our competitive position, we could lose
market share to our competitors.
We expect that our competitors will continue to develop and
introduce new and enhanced products, which could cause a decline
in the market acceptance of our products. In addition, our
competitors could cause a reduction in the selling prices of
some of our products as a result of intensified price
competition. Competitive pressures can also result in the loss
of major customers. An inability to compete successfully could
have an adverse effect on our results of operations, financial
condition and cash flows. We may also experience increased
competition from companies that offer products based on
alternative technologies and processes that may be more
competitive or better in price or performance, causing us to
lose customers and result in a decline in our sales volume and
earnings.
We may incur
significant charges in the event we close all or part of a
manufacturing plant or facility.
We periodically assess our manufacturing operations in order to
manufacture and distribute our products in the most efficient
manner. Based on our assessments, we may make capital
improvements to modernize certain units, move manufacturing or
distribution capabilities from one plant or facility to another
plant or facility, discontinue manufacturing or distributing
certain products or close all or part of a manufacturing plant
or facility. We also have shared services agreements at several
of our plants and if such agreements are terminated or revised,
we would assess and potentially adjust our manufacturing
operations. The closure of all or part of a manufacturing plant
or facility could result in future charges which could be
significant.
Our
substantial international operations subject us to risks of
doing business in foreign countries, which could adversely
affect our business, financial condition and results of
operations.
We conduct a substantial portion of our business outside of the
United States. We and our joint ventures currently have ten
manufacturing facilities located outside the United States,
including facilities and offices located in Mexico, Canada,
Belgium, France, Germany, Poland, Hungary, Indonesia, Italy,
Spain, Switzerland, China, Luxembourg, Denmark and the United
Kingdom. We expect sales from international markets to continue
to represent a significant portion of our net sales.
Accordingly, our business is subject to risks related to the
differing legal, political, social and regulatory requirements
and economic conditions of many jurisdictions. Risks inherent in
international operations include the following:
|
|
|
|
|
fluctuations in exchange rates may affect product demand and may
adversely affect the profitability in U.S. dollars of
products and services we provide in international markets where
payment for our products and services is made in the local
currency;
|
|
|
|
intellectual property rights may be more difficult to enforce;
|
|
|
|
foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, or adopt other restrictions on
foreign trade or investment, including currency exchange
controls;
|
|
|
|
unexpected adverse changes in foreign laws or regulatory
requirements may occur;
|
|
|
|
agreements may be difficult to enforce and receivables difficult
to collect;
|
|
|
|
compliance with a variety of foreign laws and regulations may be
burdensome;
|
|
|
|
unexpected adverse changes in export duties, quotas and tariffs
and difficulties in obtaining export licenses;
|
|
|
|
general economic conditions in the countries in which we operate
could have an adverse effect on our earnings from operations in
those countries;
|
|
|
|
foreign operations may experience staffing difficulties and
labor disputes;
|
|
|
|
foreign governments may nationalize private enterprises;
|
11
|
|
|
|
|
our business and profitability in a particular country could be
affected by political or economic repercussions on a domestic,
country specific or global level from terrorist activities and
the response to such activities; and
|
|
|
|
unanticipated events, such as geopolitical changes, could result
in a write-down of our investment in the affected joint venture
in Indonesia.
|
Our success as a global business will depend, in part, upon our
ability to succeed in differing legal, regulatory, economic,
social and political conditions by developing, implementing and
maintaining policies and strategies that are effective in each
location where we and our joint ventures do business.
Other
increases in operating costs could affect our
profitability.
Scheduled or unscheduled maintenance programs could cause
significant production outages, higher costs
and/or
reduced production capacity at our equity affiliates and
suppliers due to the industry in which they operate. The
inability to achieve or the delay in achieving the anticipated
financial benefits from our cost reduction initiatives and
employee productivity goals could also affect our future
profitability.
Our business
depends upon good relations with our employees.
We may experience difficulties in maintaining appropriate
relations with unions and employees in certain locations. About
80% of our hourly employees at our operations are represented by
labor unions. In addition, problems or changes affecting
employees in certain locations may affect relations with our
employees at other locations. The risk of labor disputes, work
stoppages or other disruptions in production could adversely
affect us. If we cannot successfully negotiate or renegotiate
collective bargaining agreements or if the negotiations take an
excessive amount of time, there may be a heightened risk of a
prolonged work stoppage. Any work stoppage could have a material
adverse effect on the productivity and profitability of a
manufacturing facility or on our operations as a whole.
Our business
and financial condition could be adversely affected if we are
unable to protect our material trademarks and other proprietary
information.
We have numerous valuable patents, trade secrets and know-how,
domain names, trademarks and trade names, including certain
marks that are material to our business, which are identified
under Item 1 of this Report. Despite our efforts to protect
our trademarks and other proprietary rights from unauthorized
use or disclosure, other parties, including our former employees
or consultants, may attempt to disclose, obtain or use our
proprietary information or marks without our authorization.
Unauthorized use of our trademarks, or unauthorized use or
disclosure of our other intellectual property, could negatively
impact our business and financial condition.
Although our
pension and postretirement plans are currently adequately
funded, events could occur that would require us to make
significant contributions to the plans and reduce the cash
available for our business.
We have several defined benefit pension and postretirement plans
around the world, including in the United States, covering most
of our employees. We are required to make cash contributions to
our pension plans to the extent necessary to comply with minimum
funding requirements imposed by the various countries
benefit and tax laws. The amount of any such required
contributions will be determined annually based on an actuarial
valuation of the plans as performed by the plans actuaries
and as required by law. The amount we may elect or be required
to contribute to our pension plans in the future may increase
significantly. Specifically, if year-end accumulated obligations
exceed assets, we may elect to make a voluntary contribution,
over and above the minimum required, in order to avoid charges
to our balance sheet and consequent reductions to
shareholders equity. These contributions could be
substantial and would reduce the cash available for our business.
Increasing
cost of employee healthcare may decrease our
profitability.
The cost of providing healthcare coverage for our employees is
continually increasing. If healthcare costs continue to rise at
a rapid pace, the Company may not be able to or willing to pass
on those costs to employees. Therefore, if we are unable to
offset continued rising healthcare costs through improved
operating efficiencies and reduced expenditures, the increased
costs of employee healthcare may result in declining margins and
operating results.
12
Changes in tax
laws could have an adverse impact on our earnings.
Changes to tax laws, rules and regulations, including changes in
the interpretation or implementation of tax laws, rules and
regulations by the Internal Revenue Service or other domestic or
foreign governmental bodies, could affect us in substantial and
unpredictable ways. Such changes could subject us to additional
compliance costs and tax liabilities which could have an adverse
impact on our earnings.
Specific acts
of terrorism may disrupt operations and cause increased costs
and liabilities.
The threat of terrorist attacks or actual terrorist events in
the United States or abroad could affect us in unpredictable
ways. Terrorist threats or events could create political or
economic instability, affecting our business in general. The
increased costs related to heightened security or insurance
coverage could also have a negative impact on our financial
condition. Such threats or events could also result in
operational disruption, including difficulty in obtaining raw
materials, difficulty in delivering products to customers, or
general delay and inefficiencies in our supply chain.
Additionally, our manufacturing facilities, both within the
United States and those located abroad, may become direct
targets or indirect casualties of terrorist attacks, leading to
severe damage including loss of life and loss of property.
Increased
indebtedness could restrict growth and adversely affect our
financial health.
As of August 31, 2006, our debt on a consolidated basis was
approximately $131.7 million. We are more heavily leveraged
than in the past and an increase in the level of indebtedness
could have significant consequences. For example, it could:
|
|
|
|
|
limit our ability to satisfy current debt obligations;
|
|
|
|
increase interest expense due to the change in interest rates
and increase in debt levels;
|
|
|
|
require us to dedicate a significant portion of cash flow to
repay principal and pay interest on the debt, reducing the
amount of funds that would be available to finance operations
and other business activities;
|
|
|
|
impair our ability to obtain financing in the future for working
capital, capital expenditures, research and development, or
acquisitions;
|
|
|
|
make us vulnerable to economic downturns or adverse developments
in our business or markets; and
|
|
|
|
place us at a competitive disadvantage compared to competitors
with less debt.
|
We expect to pay expenses and to pay principal and interest on
current and future debt from cash provided by operating
activities. Therefore, our ability to meet these payment
obligations will depend on future financial performance which is
subject in part to numerous economic, business and financial
factors beyond our control. If our cash flow and capital
resources are insufficient to fund our increased debt, we may be
forced to reduce or delay expansion plans and capital
expenditures, limit payment of dividends, sell material assets
or operations, obtain additional capital or restructure our debt.
Litigation
from customers, employees or others could adversely affect our
financial condition.
From time to time, we may be subject to claims or legal action
from customers, employees
and/or
others. Whether these claims and legal action are founded or
unfounded, if these claims and legal actions are not resolved in
our favor, they may result in significant financial liability
and/or
adversely affect market perception of the Company and our
products. Any financial liability or reputation damage could
have a material adverse effect on our business. This, in turn,
could have a material adverse effect on our financial condition
and results of operations.
We are
dependent upon good relationships with our various suppliers,
vendors and distributors.
We rely upon good relationships with a number of different
suppliers, vendors and distributors. If our relationships with
these parties were to deteriorate or if a number of these
parties should elect to discontinue doing business with us, our
business operations could be adversely affected.
13
|
|
ITEM 1B.
|
UNRESOLVED STAFF
COMMENTS
|
None.
The Company owns and operates seven plants in North America, six
in Europe and two in Asia. The following table indicates the
location of each plastics compounding plant, the approximate
annual plastics compounding capacity and approximate floor area,
including warehouse and office space and the geographic segment
that is principally supported by such plant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
Floor
|
|
|
|
Approximate
|
|
|
Approximate
|
|
|
Area
|
|
Location
|
|
Capacity
(sq. ft.)(4)
|
|
|
Capacity
(lbs.)(1)
|
|
|
(Square
Feet)
|
|
|
|
(In
thousands)
|
|
|
Bellevue, Ohio
|
|
|
|
|
|
|
88,000
|
(2)
|
|
|
160
|
|
Sharon Center, Ohio, Speciality
Compounding Division
|
|
|
|
|
|
|
14,000
|
|
|
|
113
|
(3)
|
Sharon Center, Ohio, A. Schulman
Invision, Inc.
|
|
|
3,600
|
(4)
|
|
|
|
|
|
|
32
|
|
Nashville, Tennessee
|
|
|
|
|
|
|
34,000
|
|
|
|
138
|
|
San Luis Potosi, Mexico
|
|
|
|
|
|
|
83,000
|
|
|
|
187
|
|
St. Thomas, Ontario, Canada
|
|
|
|
|
|
|
74,000
|
|
|
|
141
|
|
Orange, Texas
|
|
|
|
|
|
|
135,000
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North American
Segment
|
|
|
3,600
|
|
|
|
428,000
|
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bornem, Belgium
|
|
|
|
|
|
|
141,000
|
|
|
|
455
|
|
Crumlin Gwent, South Wales
|
|
|
|
|
|
|
80,000
|
|
|
|
106
|
|
Givet, France
|
|
|
|
|
|
|
216,000
|
|
|
|
191
|
|
Plock, Poland
|
|
|
|
|
|
|
1,000
|
|
|
|
50
|
|
Dongguan, China
|
|
|
|
|
|
|
37,000
|
|
|
|
110
|
|
Kerpen, Germany
|
|
|
|
|
|
|
134,000
|
|
|
|
484
|
|
Surabaya, Indonesia (Joint Venture)
|
|
|
|
|
|
|
29,000
|
|
|
|
136
|
|
Milan, Italy
|
|
|
|
|
|
|
41,000
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total European Segment
|
|
|
|
|
|
|
679,000
|
|
|
|
1,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,600
|
|
|
|
1,107,000
|
|
|
|
2,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company considers each of the foregoing facilities to be in
good condition and suitable for its purposes.
|
|
|
(1) |
|
The approximate annual plastics compounding capacity set forth
in this table is an estimate and is based upon several factors,
including the daily and shift operating schedules that are
customary in the area where each facility is located. Another
factor is the approximate historical mix of specific types of
plastic compounds manufactured at each plant. A plant operating
at full capacity will produce a greater or lesser quantity (in
pounds) depending upon the specific plastic compound then being
manufactured. The annual poundage of plastic compounds
manufactured does not, in itself, reflect the extent of
utilization of the Companys plants or the profitability of
the plastic compounds produced. |
|
(2) |
|
Includes capacity of approximately 20 million pounds from
two manufacturing lines owned by The Sunprene Company, a
partnership in which the Company has a 70% partnership interest. |
|
(3) |
|
Includes approximately 14,500 square feet of space
comprising the Companys Color Technology Center. |
|
(4) |
|
Includes a pilot line for the new
Invision®
sheet product which is measured by the square foot. This is not
currently included in the Companys calculation of capacity
utilization as it is a pilot line. The initial production line
in the Companys Sharon Center facility is nearing
completion and is scheduled for
start-up in
January 2007 with the ability to produce saleable product
expected shortly thereafter. |
Public warehouses are used wherever needed to store the
Companys products conveniently for shipment to customers.
The number of public warehouses in use varies from time to time.
Currently, usage approximates 16 in North America and 67 in
Europe. The Company believes an adequate supply of suitable
public warehouse facilities is available to it.
14
The Company owns its corporate headquarters, which is located in
Akron, Ohio and which contains approximately 48,000 square
feet of office space. The Company leases sales offices in
various locations in North America, Europe and Asia.
The Company also owns a 158,000 square foot facility in
Akron, Ohio that, until December 31, 2000, was a
manufacturing operation. The facility is now used for
warehousing, logistics, product sampling and product development.
The Company also owns a 145,000 square foot facility in
Orange, Texas, that, until August 31, 2003, was a
manufacturing facility. The facility is now used for warehousing
and logistics.
|
|
ITEM 3.
|
LEGAL PROCEEDINGS
|
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.
|
|
ITEM 4.
|
SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended August 31, 2006.
EXECUTIVE
OFFICERS OF THE COMPANY
The age (as of October 9, 2006), business experience during
the past five years and offices presently held by each of the
Companys Executive Officers are reported below. The
Companys By-Laws provide that officers shall hold office
until their successors are elected and qualified.
Terry L. Haines: Age 60; President and Chief Executive
Officer of the Company since January 1991.
Paul F. DeSantis: Age 42; Chief Financial Officer and
Treasurer of the Company since April 2006; joined the Company as
Vice President of Finance in January 2006; prior to that time,
he was with Scotts Miracle-Gro where he held various
financial roles since 1997 before becoming Vice President and
Corporate Treasurer of the Company in 2003.
Alain C. Adam: Age 57; Vice President Global
Automotive Market Development of the Company since March 2006;
prior to that time Vice President International
Automotive Operations since September 1, 1999.
Barry A. Rhodes: Age 46; Executive Vice President and Chief
Operating Officer of North America since March 2006; prior to
that time Vice President North American Sales and
Marketing since October 2001.
John M. Myles: Age 62; Vice President Research
and Development since October 28, 2003; prior to that time,
Vice President North American Purchasing since
October 1997.
Ronald G. Andres: Age 56; Vice President North
American Operations since March 2006; prior to that time, Vice
President North American Manufacturing since
October 20, 1999.
Gary J. Elek: Age 54; Vice President and Controller for
North America since March 2006; prior to that Corporate
Controller since February 2004; prior to that time, Executive
Vice President, Corporate Development of FirstMerit Corporation
from 1997 to 2004.
15
PART II
|
|
ITEM 5.
|
MARKET FOR THE
COMPANYS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
|
The Companys Common Stock is traded on The NASDAQ Stock
Market LLC under the symbol SHLM. At
October 31, 2006, there were 545 holders of record of the
Companys Common Stock. This figure does not include
beneficial owners who hold shares in nominee name. The closing
stock price on October 31, 2006 was $24.21.
The quarterly high and low closing stock prices for fiscal 2006
and 2005 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
Common Stock
Price Range
|
|
High -
Low
|
|
|
High -
Low
|
|
|
1st Quarter
|
|
$
|
20.95 - 16.77
|
|
|
$
|
22.71 - 18.86
|
|
2nd Quarter
|
|
$
|
25.80 - 20.80
|
|
|
$
|
22.20 - 17.48
|
|
3rd Quarter
|
|
$
|
25.14 - 22.80
|
|
|
$
|
18.75 - 15.92
|
|
4th Quarter
|
|
$
|
24.46 - 21.17
|
|
|
$
|
19.49 - 16.23
|
|
The quarterly cash dividends declared for fiscal 2006 and 2005
are presented in the table below.
|
|
|
|
|
|
|
|
|
Cash Dividends
Per share
|
|
Fiscal
2006
|
|
|
Fiscal
2005
|
|
|
1st Quarter
|
|
$
|
0.145
|
|
|
$
|
0.135
|
|
2nd Quarter
|
|
|
0.145
|
|
|
|
0.145
|
|
3rd Quarter
|
|
|
0.145
|
|
|
|
0.145
|
|
4th Quarter
|
|
|
0.145
|
|
|
|
0.145
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.580
|
|
|
$
|
0.570
|
|
|
|
|
|
|
|
|
|
|
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 fourth quarter of fiscal 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
Average Price
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid per
|
|
|
Total Number
of
|
|
|
Shares that
may
|
|
|
|
Total Number
|
|
|
Share
|
|
|
Shares
Purchased
|
|
|
yet be
|
|
|
|
of Shares
|
|
|
(Excluding
|
|
|
as Part of a
Publicly
|
|
|
Purchased
|
|
|
|
Repurchased
|
|
|
Commissions)
|
|
|
Announced
Plan
|
|
|
Under the
Plan
|
|
|
Beginning shares
available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,336,635
|
|
June 1-30, 2006
|
|
|
41,390
|
|
|
$
|
23.96
|
|
|
|
41,390
|
|
|
|
6,295,245
|
|
July 1-31, 2006
|
|
|
627,905
|
|
|
$
|
22.45
|
|
|
|
627,905
|
|
|
|
5,667,340
|
|
August 1-31, 2006
|
|
|
917,421
|
|
|
$
|
22.48
|
|
|
|
917,421
|
|
|
|
4,749,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,586,716
|
|
|
$
|
22.51
|
|
|
|
1,586,716
|
|
|
|
4,749,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
ITEM 6.
|
SELECTED FINANCIAL
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2006(1)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands,
except share and per share data)
|
|
|
Net sales
|
|
$
|
1,616,386
|
|
|
$
|
1,433,196
|
|
|
$
|
1,239,091
|
|
|
$
|
1,100,457
|
|
|
$
|
966,593
|
|
Cost of sales
|
|
|
1,396,440
|
|
|
|
1,240,557
|
|
|
|
1,055,608
|
|
|
|
940,152
|
|
|
|
806,260
|
|
Other costs, expenses, etc.
|
|
|
163,001
|
|
|
|
145,697
|
|
|
|
131,084
|
|
|
|
124,775
|
|
|
|
104,931
|
|
Interest and other income
|
|
|
(5,202
|
)
|
|
|
(2,394
|
)
|
|
|
(2,252
|
)
|
|
|
(2,067
|
)
|
|
|
(2,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,554,239
|
|
|
|
1,383,860
|
|
|
|
1,184,440
|
|
|
|
1,062,860
|
|
|
|
909,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
62,147
|
|
|
|
49,336
|
|
|
|
54,651
|
|
|
|
37,597
|
|
|
|
57,581
|
|
Provision for U.S. and foreign
income taxes
|
|
|
29,485
|
|
|
|
17,243
|
|
|
|
26,745
|
|
|
|
21,643
|
|
|
|
25,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,662
|
|
|
$
|
32,093
|
|
|
$
|
27,906
|
|
|
$
|
15,954
|
|
|
$
|
32,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
843,245
|
|
|
$
|
784,362
|
|
|
$
|
724,096
|
|
|
$
|
643,872
|
|
|
$
|
612,332
|
|
Long-term debt
|
|
$
|
120,730
|
|
|
$
|
63,158
|
|
|
$
|
49,679
|
|
|
$
|
68,698
|
|
|
$
|
81,038
|
|
Total stockholders equity
|
|
$
|
403,492
|
|
|
$
|
462,103
|
|
|
$
|
435,237
|
|
|
$
|
382,821
|
|
|
$
|
356,361
|
|
Average number of common shares
outstanding, net of treasury shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,961,580
|
|
|
|
30,619,780
|
|
|
|
30,128,117
|
|
|
|
29,496,281
|
|
|
|
29,296,435
|
|
Diluted
|
|
|
30,394,210
|
|
|
|
31,049,790
|
|
|
|
30,575,057
|
|
|
|
29,845,497
|
|
|
|
29,667,037
|
|
Diluted earnings per common share
|
|
$
|
1.07
|
|
|
$
|
1.03
|
|
|
$
|
0.91
|
|
|
$
|
0.53
|
|
|
$
|
1.08
|
|
Cash dividends per common share
|
|
$
|
0.58
|
|
|
$
|
0.57
|
|
|
$
|
0.54
|
|
|
$
|
0.54
|
|
|
$
|
0.54
|
|
|
|
|
(1) |
|
The adoption of SFAS 123R reduced net income by approximately
$4.5 million in fiscal 2006 |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
RESULTS OF
OPERATIONS
2006
Net income for the 2006 fiscal year was $32.7 million, or
$1.07 per diluted share, compared to last years net
income of $32.1 million, or $1.03 per diluted share. Net
income in fiscal 2006 increased slightly as compared to the
prior year and earnings per diluted share increased due to the
reduced number of common shares outstanding as a result of the
Companys share repurchase program that was implemented in
fiscal 2006 and the purchase of the Companys common shares
through a self-tender offer. The translation effect of foreign
currencies, primarily the euro, decreased net income by
$1.6 million or $0.05 per diluted share.
The Company had record sales performance and improved its gross
margin in fiscal 2006; however the following significant and
unusual items occurred that impacted net income by approximately
$7.3 million:
|
|
|
|
|
Charge related to the extinguishment of debt of approximately
$5.0 million;
|
|
|
|
Charges of approximately $1.2 related to ongoing tax audits;
|
|
|
|
Income from a life insurance settlement of approximately
$0.5 million;
|
|
|
|
Tax charge of approximately $2.2 million related to the
repatriation of dividends from Europe; and
|
|
|
|
Income of approximately $0.6 million resulting from
compensation received from the cancellation by suppliers of
certain European distribution agreements.
|
Net income also included approximately $4.5 million of
expense related to the Companys adoption of SFAS 123R
in fiscal 2006. There were no charges related to SFAS 123R
in fiscal year 2005.
17
Net consolidated sales for fiscal 2006 were $1.616 billion,
an increase of 12.8% over sales of $1.433 billion in fiscal
2005. A comparison of net consolidated sales by business
segments, which are North America and Europe, including Asia
(Europe), is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
Sales
|
|
2006
|
|
|
2005
|
|
|
Amount
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
North America
|
|
$
|
493,644
|
|
|
$
|
439,441
|
|
|
$
|
54,203
|
|
|
|
12.3
|
|
Europe
|
|
|
1,122,742
|
|
|
|
993,755
|
|
|
|
128,987
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,616,386
|
|
|
$
|
1,433,196
|
|
|
$
|
183,190
|
|
|
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the percentage change in 2006 net
consolidated sales are as follows:
|
|
|
|
|
|
|
Increase
|
|
|
|
(Decrease)
|
|
|
Tonnage
|
|
|
9.1
|
%
|
Price/mix
|
|
|
5.7
|
|
Translation effect
|
|
|
(2.0
|
)
|
|
|
|
|
|
Percentage increase in sales
|
|
|
12.8
|
%
|
|
|
|
|
|
Worldwide tonnage was up 9.1% for the year as European tonnage
was up 14.8% offsetting a North American tonnage decrease of
2.1%. The increase in European tonnage was a result of the
improved European economic environment while North American
tonnage declined slightly due to competition and weakness in the
marketplace. The translation effect of foreign currencies,
primarily the euro, decreased net consolidated sales by
approximately $29.2 million or 2.0% in fiscal 2006.
The two largest markets served by the Company are the packaging
and automotive markets. The approximate percentage of net
consolidated sales by market for 2006 compared to 2005 is as
follows:
|
|
|
|
|
|
|
|
|
Market
|
|
2006
|
|
|
2005
|
|
|
Packaging
|
|
|
36
|
%
|
|
|
37
|
%
|
Automotive
|
|
|
17
|
|
|
|
18
|
|
Other
|
|
|
47
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Other markets include appliances, construction, medical,
consumer products, electrical/electronics, office equipment and
agriculture.
The majority of the Companys consolidated sales can be
classified into five primary product families. The approximate
amount and percentage of consolidated sales for these product
families compared to the previous year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Product
Family
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands,
except for %s)
|
|
|
Color and additive concentrates
|
|
$
|
579,825
|
|
|
|
36
|
|
|
$
|
501,159
|
|
|
|
35
|
|
Polyolefins
|
|
|
495,163
|
|
|
|
31
|
|
|
|
424,066
|
|
|
|
30
|
|
Engineered compounds
|
|
|
393,312
|
|
|
|
24
|
|
|
|
377,008
|
|
|
|
26
|
|
Polyvinyl chloride (PVC)
|
|
|
64,174
|
|
|
|
4
|
|
|
|
54,952
|
|
|
|
4
|
|
Tolling
|
|
|
16,482
|
|
|
|
1
|
|
|
|
16,117
|
|
|
|
1
|
|
Other
|
|
|
67,430
|
|
|
|
4
|
|
|
|
59,894
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,616,386
|
|
|
|
100
|
|
|
$
|
1,433,196
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
A comparison of gross profit dollars and percentages by business
segment for 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
Gross profit
$
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
Europe
|
|
$
|
163,826
|
|
|
$
|
146,357
|
|
|
$
|
17,469
|
|
|
|
11.9
|
|
North America
|
|
|
56,120
|
|
|
|
46,282
|
|
|
|
9,838
|
|
|
|
21.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
219,946
|
|
|
$
|
192,639
|
|
|
$
|
27,307
|
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
%
|
|
2006
|
|
|
2005
|
|
|
Europe
|
|
|
14.6%
|
|
|
|
14.7%
|
|
North America
|
|
|
11.4%
|
|
|
|
10.5%
|
|
Consolidated
|
|
|
13.6%
|
|
|
|
13.4%
|
|
Gross profit margin increased twenty basis points on a year to
year comparison to 13.6% in fiscal 2006 from 13.4% in fiscal
2005.
The increase of $17.5 million in gross profit dollars in
Europe in fiscal 2006 was primarily driven by the increased
tonnage as the gross profit percentage remained relatively flat
as compared to fiscal 2005. North America also showed a
significant increase in gross profit in fiscal 2006 as gross
profits were up $9.8 million or 21.3% from fiscal 2005.
This improvement in gross profit was the result of favorable
pricing and changes in product mix. Overall, the Company enjoyed
an increase in gross profit per pound in fiscal 2006, most
notably in North America.
A comparison of capacity utilization levels is as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Europe
|
|
|
94%
|
|
|
|
83%
|
|
North America
|
|
|
83%
|
|
|
|
87%
|
|
Worldwide
|
|
|
90%
|
|
|
|
85%
|
|
Worldwide capacity utilization increased by 5%. The increase in
European capacity utilization was the result of stronger
customer demand and product mix. In order to meet this increased
demand, some of Europes manufacturing facilities
temporarily added additional production shifts above the normal
production schedule during the second half of fiscal 2006. North
American capacity utilization decreased slightly from 2005 as a
result of continuing softening demand, the shutdown of the
largest production line at the Companys Texas facility due
to a mechanical issue and a two-week shutdown at the same Texas
facility because of Hurricane Rita.
A comparison of operating income (loss) by business segment for
the years 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Difference
|
|
|
|
(In
thousands)
|
|
|
Europe
|
|
$
|
79,126
|
|
|
$
|
62,777
|
|
|
$
|
16,349
|
|
North America
|
|
|
(9,069
|
)
|
|
|
(11,000
|
)
|
|
|
1,931
|
|
Restructuring, North America
|
|
|
|
|
|
|
(182
|
)
|
|
|
182
|
|
Interest expense, net
|
|
|
(2,924
|
)
|
|
|
(2,259
|
)
|
|
|
(665
|
)
|
Loss on extinguishment of debt
|
|
|
(4,986
|
)
|
|
|
|
|
|
|
(4,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
62,147
|
|
|
$
|
49,336
|
|
|
$
|
12,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase of $16.3 million in European operating income
was primarily the result of the higher level of sales driven by
the $17.5 million or 11.9% increase in gross profit and
14.8% increase in tonnage from the prior year. European
operating expenses in fiscal 2006 remained relatively flat with
fiscal 2005 although the translation effect of foreign
currencies decreased operating expenses by $2.4 million.
Operating income in North America in fiscal 2006 improved
$1.9 million from the prior year, primarily because of
favorable pricing and product mix which increased gross profit
from the prior year. This increase was offset by an increase in
operating expenses as explained in the next paragraph.
Total Company selling, general and administrative expenses were
$148.5 million for fiscal 2006, up $10.7 million or
7.7% compared with fiscal 2005s total of
$137.8 million. The translation effect of foreign
currencies had a favorable impact,
19
decreasing these expenses by $2.1 million in 2006.
Increases in these expenses, of which the majority are in North
America, included stock-based compensation expense related to
the Companys adoption of Statement of Financial Accounting
Standards (SFAS), SFAS 123R in fiscal 2006 of
$4.5 million, costs associated with the Companys CFO
transition, incentive compensation which was driven by the
Companys increasing common stock price, legal and
professional fees, medical insurance and various IT related
projects. SFAS 123R accounted for approximately half of the
increase in selling, general and administrative expenses.
On September 1, 2005, the Company adopted SFAS 123R,
Share-Based Payment, which requires the Company to measure all
employee stock-based compensation awards using a fair value
method and record the related expense in the financial
statements. The Company elected to use the modified prospective
transition method. The modified prospective transition method
requires that compensation cost be recognized in the financial
statements for all awards granted after the date of adoption as
well as for existing awards for which the requisite service has
not been rendered as of the date of adoption and requires that
prior periods not be restated. All periods presented prior to
September 1, 2005 were accounted for in accordance with
Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and followed a nominal vesting period
approach.
The adoption of SFAS 123R reduced income before taxes for
year ended August 31, 2006 by approximately
$4.5 million ($0.15 per basic and diluted share).
These expenses are included in selling, general and
administrative expenses in the accompanying consolidated
statement of income. The first quarter of fiscal 2006 included
approximately $1.0 million of charges related to the
accelerated vesting of retirement eligible employees under the
non-substantive vesting period approach applied to new grants
after adoption. The expense recorded did not impact income tax
expense since the Companys deferred tax assets are fully
reserved by a valuation allowance. There was no impact to the
statement of cash flows related to the adoption of
SFAS 123R. In addition, Unearned Stock Grant Compensation
of $3.2 million was reclassified to Other Capital in
Stockholders Equity upon adoption of SFAS 123R.
A large part of the Companys technical activities relate
to the continuous refinement of compounds for specific
applications of customers. Research activities relating to the
development of new products and the improvement of existing
products are important to the Company. These activities are
conducted at the Companys various technical centers and
laboratories. Research and development expenditures were
approximately $4.7 million in fiscal 2006 and approximately
$3.8 million in fiscal 2005. The increase in these
activities is primarily related to the new
Invision®
sheet product.
Interest expense was $6.2 million in fiscal 2006 compared
to $3.7 million in fiscal 2005. The increase of
$2.5 million was the result of an increased level of
borrowings required for the Companys common stock tender
offer and open market common stock repurchase plans which were
implemented in fiscal 2006.
Foreign currency transaction losses represent changes in the
value of currencies in major areas where the Company operates.
During fiscal 2006 the Company incurred foreign currency
transaction losses of approximately $2.1 million compared
to approximately $2.8 million in fiscal 2005. The
strengthening of the Canadian dollar accounted for
$1.3 million of this loss in fiscal 2006.
Minority interest represents a 30% equity position of Mitsubishi
Chemical MKV Company in a partnership with the Company and a 35%
equity position of P.T. Prima Polycon Indah in an
Indonesian joint venture with the Company.
Other income in fiscal 2006 was approximately $1.9 million,
which included income of $0.8 million from the cancellation
by suppliers of certain distribution arrangements in Europe and
the receipt of a life insurance settlement of approximately
$0.5 million. Other income of $0.9 million in 2005
included approximately $0.8 million of income related to
gain on the sale of an office in Europe.
In connection with the Companys new financing
arrangements, as discussed hereafter in the Liquidity and
Capital Resources section, the Company prepaid its
$50.0 million private placement 7.27% senior notes and
terminated its
20
$100.0 million revolving credit arrangement. The Company
recorded a loss on extinguishment of debt of approximately
$5.0 million which was comprised of the following:
|
|
|
|
|
|
|
Amount
|
|
|
|
(In
thousands)
|
|
|
Make-whole provision for prepayment
of 7.27% senior notes
|
|
$
|
3,335
|
|
Interest rate swap termination fee
|
|
|
1,456
|
|
Write-off of deferred loan fees
related to extinguished debt
|
|
|
398
|
|
Write-off of deferred interest from
7.27% senior notes
|
|
|
(218
|
)
|
Revolving credit agreement
termination fees
|
|
|
15
|
|
|
|
|
|
|
|
|
$
|
4,986
|
|
|
|
|
|
|
A reconciliation of the statutory U.S. federal income tax
rate with the effective tax rates of 47.4% in 2006 and 35.0% in
2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
(In thousands,
except for %s)
|
|
|
Statutory U.S. tax rate
|
|
$
|
21,752
|
|
|
|
35.0
|
%
|
|
$
|
17,268
|
|
|
|
35.0
|
%
|
Amount of foreign income taxes less
than U.S. taxes at statutory rate
|
|
|
(4,043
|
)
|
|
|
(6.5
|
)
|
|
|
(2,009
|
)
|
|
|
(4.1
|
)
|
Losses with no tax benefit
|
|
|
5,997
|
|
|
|
9.6
|
|
|
|
5,904
|
|
|
|
12.0
|
|
Mexico valuation allowance on net
asset tax
|
|
|
|
|
|
|
|
|
|
|
(3,270
|
)
|
|
|
(6.6
|
)
|
Settlement of tax claim in Canada
|
|
|
|
|
|
|
|
|
|
|
(1,104
|
)
|
|
|
(2.2
|
)
|
Provision for repatriated earnings
|
|
|
2,243
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of
debt no tax benefit
|
|
|
1,745
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
Ongoing tax audits
|
|
|
1,152
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
639
|
|
|
|
1.0
|
|
|
|
454
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,485
|
|
|
|
47.4
|
%
|
|
$
|
17,243
|
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 impact on future earnings.
In September 2005, the Company introduced its new
Invision®
sheet product and formed A. Schulman Invision, Inc., a wholly
owned subsidiary.
Invision®
is a revolutionary product based on cutting-edge technology that
is expected to provide high growth opportunities in many markets
around the world.
Invision®
is a multi-layered, extruded sheet product that reduces costs
and simplifies the manufacturing process for the Companys
customers, while providing a higher-performing and more
environmentally friendly alternative to existing plastic and
film materials that are painted or colored. The Company expects
Invision®
to appeal to customers in a variety of markets, both automotive
and non-automotive. Initially, the Company will focus on
automotive applications to capitalize on the Companys
market presence and recognized capabilities. Samples from the
Companys pilot line have been tested by several potential
customers and the Company has received positive feedback based
on the initial results of these tests. The initial production
line in the Companys Sharon Center facility is nearing
completion and is scheduled for
start-up in
January 2007 with the ability to produce saleable product
expected shortly thereafter. In addition, the Company has
purchased land for a greenfield plant site in Findlay, Ohio for
construction of a dedicated
Invision®
facility. While
Invision®
did not produce operating income in fiscal 2006, the Company
believes this is a very large market that could have significant
sales in the years ahead.
In October 2006, in order to balance capacity with demand,
reduce costs and improve efficiencies in North America, the
Company announced its intentions 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. As a result, the Company expects to
record a charge during fiscal 2007 in an estimated range of
$1.0 million to $3.0 million. The Company expects the
charge to include
21
costs such as severance payments, medical insurance, accelerated
depreciation, equipment removal costs, other exit costs and the
impact on its postretirement obligation due to the reduction in
the workforce.
In October 2005, the Company reached an agreement with a group
of investors led by Barington Capital Group, L.P. (the
Barington Group) which then had an ownership
position of approximately 8.7% of the Companys outstanding
stock (the 2005 Agreement). Under the terms of the
agreement, among other things, the Barington Group withdrew its
notice of intent to nominate persons for election as directors
at the Companys 2005 Annual Meeting and agreed to abide by
certain standstill provisions until the Companys 2007
Annual Meeting (the Standstill Period), while the
Company, through its Board of Directors, expanded the size of
the Board from 10 to 12 and appointed James A. Mitarotonda, a
member of the Barington Group, to serve as a director until the
2007 Annual Meeting. The Company also agreed to initiate and
consummate a self-tender offer by April 30, 2006.
On February 21, 2006 the Company announced that its Board
of Directors approved a modified Dutch auction self-tender offer
for up to 8.75 million shares of its common stock, at a
price between $21.00 and $24.00 per share. The Company
commenced the self-tender offer on March 1, 2006 and it
expired on April 11, 2006. On April 25, 2006 the
Company announced the final results of the self-tender offer
where the Company accepted for purchase 2,071,585 shares at
a price of $24.00 per share for a total of approximately
$49.7 million. The Company also incurred costs in
connection with the self-tender of $0.5 million in legal
and professional fees.
On May 30, 2006, the Barington Group filed Amendment
No. 9 to its
Schedule 13-D
disclosing certain changes, among group members and in the
aggregate, of the beneficial ownership of the Companys
common stock. The Barington Group disclosed its positions that
completion of the self-tender offer by the Company without
repurchasing 8,750,000 shares of common stock constituted a
failure of the Company to fulfill its obligations under the 2005
Agreement and therefore the Standstill Period terminated after
the close of business on April 30, 2006. Among other
things, termination of the Standstill Period would eliminate
certain restrictions on the ability of Barington Group members
to purchase additional shares of common stock of the Company and
to solicit proxies in connection with the Companys 2006
Annual Meeting.
In October 2006, the Company reached another agreement with the
Barington Group, which as of the date of the agreement owned in
the aggregate 2,816,536 shares, or approximately 10.5% of
the Companys common stock (the 2006
Agreement). Under the terms of the 2006 Agreement, the
Barington Group withdrew a notice of its intent to nominate
certain persons for election as directors at the 2006 annual
meeting, agreed to dismiss a lawsuit it had filed against the
Company in Delaware seeking to enforce its rights as a
stockholder to inspect and copy certain books, records and
documents of the Company, and agreed to abide by certain
standstill provisions until the Companys 2007 annual
meeting. The Company agreed, among other things, to nominate
James S. Marlen, Ernest J. Novak, Jr. (each current
directors of the Company), Howard R. Curd and Michael A.
McManus, Jr. on the Boards slate of nominees for
election as Class II directors of the Company at the 2006
annual meeting. The 2006 Agreement also superseded the 2005
Agreement, except with respect to Sections 5(d), 6(a) and 9
of the 2005 Agreement.
The foregoing descriptions of certain of the terms of the 2005
Agreement and the 2006 Agreement are qualified in their entirety
by reference to the full text of the agreements, each of which
are attached as Exhibit 99.2 to the
Forms 8-K
filed by the Company on October 24, 2005 and
October 26, 2006.
During fiscal 2006 the Company made significant progress toward
improving its North American business. The Company is currently
working on several initiatives that management believes will add
significant value in the next few years which include sales
price optimization, purchase price reductions, inventory
reductions, continued freight cost reductions, manufacturing
conversion cost reductions and production process refinement.
The Company is focused and dedicated to continuous improvement
in the challenging and competitive business climate in which it
operates. As fiscal 2006 came to a close, gross margins in North
America continued to improve despite strong competition and
weakness in the marketplace. Heading into fiscal 2007, demand
has weakened in North America primarily in the automotive
industry. On a longer-term basis, the prospects of
Invision®
remain significant as the Company proceeds with the
commercialization of this new technology.
22
2005
Net income for the 2005 fiscal year was $32.1 million or
$1.03 per diluted share, an increase of 15% over fiscal
2004s net income of $27.9 million or $0.91 per
diluted share. The translation effect of foreign currencies,
primarily the euro, increased net income by $2.7 million or
$0.09 per share.
The primary reason for the increase in fiscal 2005 net
income was a reduction in the effective tax rate to 35.0% in
2005 from 48.9% in 2004. The tax rate was lower due to
$3.3 million or $0.11 per share of tax benefits from
tax reserves no longer required due to a change in Mexican tax
laws as of January 1, 2005. The change in Mexican tax law
impacted the timing of recognizing inventory purchases in cost
of sales. The change had an immediate effect of increasing
Mexican taxable income and thus allowing the Company to utilize
tax credits previously paid on a net asset tax. The tax credits
had a full valuation allowance previously recorded thus the
change in tax law allowed the Company to remove the valuation
allowance on the net asset tax credits resulting in an income
tax benefit. In addition, the Company received a favorable
settlement of a transfer pricing audit assessment in Canada of
$1.1 million or $.03 per share. The Company had
recorded a tax reserve related to anticipated transfer pricing
adjustments between the U.S. and Canada. During February 2005
the Company received notification from the Canadian tax
authorities that they were formally withdrawing the proposed
assessment for transfer pricing. Accordingly, the tax reserve
was no longer considered necessary and was reversed. In
addition, there was a reduction in losses in the United States
where no tax benefits are currently recognized.
Net income for fiscal 2005 also included a net gain of
$0.5 million or $0.02 per share from the sale of an
office in Europe and $1.0 million or $0.03 per share from
the refinement in assumptions relating to freight in North
America. Enhancements to the Companys information system
provided new information for estimating freight liabilities for
outbound customer shipments. The estimating of freight
liabilities is required due to the lag in time between the
incurrence of freight expenses and the eventual receipt and
validation of the freight vendors invoices. As a result of
the new information, the Company revised its estimate and
recorded a favorable adjustment which decreased cost of sales
and increased net income. Net income for fiscal 2004 included
restructuring charges of $2.1 million or $0.07 per
share, an impairment charge for goodwill of $1.8 million or
$0.06 per share and a charge of $1.4 million or
$0.05 per share for a valuation allowance on tax assets not
recoverable.
Net consolidated sales for 2005 were $1.433 billion, an
increase of 15.7% over sales of $1.239 billion for the
comparable period in 2004. A comparison of net consolidated
sales by business segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
Sales
|
|
2005
|
|
|
2004
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands,
except for %s)
|
|
|
North America
|
|
$
|
439,441
|
|
|
$
|
410,179
|
|
|
$
|
29,262
|
|
|
|
7.1
|
|
Europe
|
|
|
993,755
|
|
|
|
828,912
|
|
|
|
164,843
|
|
|
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,433,196
|
|
|
$
|
1,239,091
|
|
|
$
|
194,105
|
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The translation effect of foreign currencies, primarily the
euro, increased consolidated sales by $59.9 million in
2005. The components of the percentage change in 2005
consolidated sales are as follows:
|
|
|
|
|
|
|
Increase
|
|
|
Price/Mix
|
|
|
10.4
|
%
|
Translation effect
|
|
|
4.8
|
|
Tonnage
|
|
|
0.5
|
|
|
|
|
|
|
Percentage increase in sales
|
|
|
15.7
|
%
|
|
|
|
|
|
Worldwide tonnage was up 0.5% for the year, European tonnage was
up 4.8% while North American volume decreased 7.2%. The increase
in Europe was primarily attributable to the manufacturing and
merchant activities. In North America, tonnage declined for
manufacturing and the sale of commodity products.
23
The two largest markets served by the Company are the packaging
and automotive markets. The approximate percentage of
consolidated sales by market for 2005 compared to 2004 is as
follows:
|
|
|
|
|
|
|
|
|
Market
|
|
2005
|
|
|
2004
|
|
|
Packaging
|
|
|
37
|
%
|
|
|
36
|
%
|
Automotive
|
|
|
18
|
|
|
|
22
|
|
Other
|
|
|
45
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Sales to the automotive market declined due to pricing, margin
pressure and efforts by the industry to reduce unit inventory.
Other markets include appliances, construction, medical,
consumer products, electrical/electronics, office equipment and
agriculture.
The majority of the Companys consolidated sales can be
classified into five primary product families. The approximate
amount and percentage of consolidated sales for these product
families compared to the previous year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
Product
Family
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands,
except for %s)
|
|
|
Color and additive concentrates
|
|
$
|
501,159
|
|
|
|
35
|
|
|
$
|
444,483
|
|
|
|
36
|
|
Polyolefins
|
|
|
424,066
|
|
|
|
30
|
|
|
|
338,278
|
|
|
|
27
|
|
Engineered compounds
|
|
|
377,008
|
|
|
|
26
|
|
|
|
333,630
|
|
|
|
27
|
|
Polyvinyl chloride (PVC)
|
|
|
54,952
|
|
|
|
4
|
|
|
|
57,018
|
|
|
|
5
|
|
Tolling
|
|
|
16,117
|
|
|
|
1
|
|
|
|
13,380
|
|
|
|
1
|
|
Other
|
|
|
59,894
|
|
|
|
4
|
|
|
|
52,302
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,433,196
|
|
|
|
100
|
|
|
$
|
1,239,091
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A comparison of gross profit dollars and percentages by business
segment for 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
Gross profit
$
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
|
(In thousands,
except for %s)
|
|
|
Europe
|
|
$
|
146,357
|
|
|
$
|
139,577
|
|
|
$
|
6,780
|
|
|
|
4.9
|
|
North America
|
|
|
46,282
|
|
|
|
43,906
|
|
|
|
2,376
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
192,639
|
|
|
$
|
183,483
|
|
|
$
|
9,156
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
%
|
|
2005
|
|
|
2004
|
|
|
Europe
|
|
|
14.7%
|
|
|
|
16.8%
|
|
North America
|
|
|
10.5%
|
|
|
|
10.7%
|
|
Consolidated
|
|
|
13.4%
|
|
|
|
14.8%
|
|
The gross profit margin was 13.4% in fiscal 2005 compared with
14.8% in fiscal 2004. The decline in margin was the result of
higher raw material costs due to increased energy prices and the
lag in passing on such increases in the form of higher selling
prices. The reduction in margin had an adverse effect of
approximately $17.0 million on pre-tax income.
Gross profit dollars in Europe were up from 2004 primarily due
to the positive impact of the euro, which increased margins by
$8.1 million in fiscal 2005. The decline in the European
gross profit percentage was due to rising raw material prices
and the lag in passing on cost increases in the form of higher
sales prices.
North American gross profit in 2005 increased $2.4 million
or 5.4% from 2004. Gross profit in 2005 includes a
$1.0 million refinement in assumptions relating to freight,
as discussed previously. In addition, gross profit in 2004 was
reduced by $1.4 million for restructuring charges in
Nashville pertaining to accelerated depreciation on disposed
equipment.
24
A comparison of capacity utilization levels is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Europe
|
|
|
83%
|
|
|
|
89%
|
|
North America
|
|
|
87%
|
|
|
|
87%
|
|
Worldwide
|
|
|
85%
|
|
|
|
88%
|
|
Capacity utilization decreased by 3% worldwide. The decrease in
European capacity utilization was due primarily to the
production capacity added for a new facility in China. The China
plant, which has an estimated annual production capacity of
approximately 35 million pounds, utilized only 20% of its
capacity in 2005, its first year of production. North American
capacity utilization was flat in 2005.
A comparison of operating income (loss) by business segment for
the years 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Difference
|
|
|
|
(In
thousands)
|
|
|
Europe
|
|
$
|
62,777
|
|
|
$
|
67,013
|
|
|
$
|
(4,236
|
)
|
North America
|
|
|
(11,000
|
)
|
|
|
(7,455
|
)
|
|
|
(3,545
|
)
|
Restructuring, North America
|
|
|
(182
|
)
|
|
|
(731
|
)
|
|
|
549
|
|
Interest expense, net
|
|
|
(2,259
|
)
|
|
|
(2,356
|
)
|
|
|
97
|
|
Goodwill impairment, North America
|
|
|
|
|
|
|
(1,820
|
)
|
|
|
1,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
49,336
|
|
|
$
|
54,651
|
|
|
$
|
(5,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease of $4.2 million in European income was
primarily the result of higher operating expenses of
$11.8 million, including increased costs of
$2.5 million related to compliance with Sarbanes-Oxley
requirements. In addition, the translation effect of foreign
currencies increased operating expenses by $4.4 million.
The balance of the increase consisted of $0.4 million for a
major trade show, increased costs for compensation and other
expenses required to support a higher level of sales. The
increase in expenses offset higher gross profit from an increase
in sales. Income in North America declined $3.5 million,
primarily because of higher Sarbanes-Oxley compliance expenses
of $1.3 million and the adverse effects of currency
transaction losses. These transaction losses include
$2.0 million related to the Canadian dollar.
Selling, general and administrative expenses were
$137.8 million for 2005, up $15.5 million or 12.7%
compared with 2004. The translation effect of foreign currencies
increased these expenses by $4.6 million for 2005.
Sarbanes-Oxley compliance expenses increased $3.8 million
and expenses for compensation and benefits were up
$2.9 million from the 2004 fiscal year. Various other
expenses increased $4.2 million.
Interest expense decreased $0.5 million in 2005 due to an
interest-rate swap of $25 million, and a reduction of
average borrowings. Interest income increased $0.4 million
due to a higher level of investments.
Foreign currency transaction losses represent changes in the
value of currencies in major areas where the Company operates.
During 2005 the Company incurred foreign currency transaction
losses of approximately $2.0 million in Canada as a result
of the strengthening of the Canadian dollar.
Minority interest represents a 30% equity position of Mitsubishi
Chemical MKV Company in a partnership with the Company and a 35%
equity position of P.T. Prima Polycon Indah in an
Indonesian joint venture with the Company.
During fiscal 2004, in order to balance capacity with demand,
the Company closed two manufacturing lines at its Nashville,
Tennessee plant. As a result, the Company recorded pre-tax
charges of $0.2 million and $1.8 million for the years
ended August 31, 2005 and 2004, respectively. At
August 31, 2005, the restructuring was complete, therefore
no further cash out-flows were required by the Company.
One of the Companys major facilities in Texas was down for
a two-week period in September 2005 and a warehouse in Texas
also incurred damage from Hurricane Rita. See the update on this
hurricane damage in the 2006 section of Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
In September 2005 the Company introduced its new
Invision®
sheet product and formed A. Schulman Invision, Inc., a wholly
owned subsidiary. See the update on
Invision®
in the 2006 section of Managements Discussion and Analysis
of Financial Condition and Results of Operations.
25
In October 2005 the Company reached an agreement with a group of
investors led by Barington Capital Group, L.P. which had an
ownership position of approximately 8.7% of the Companys
outstanding stock. See the update on this agreement in the 2006
section of Managements Discussion and Analysis of
Financial Condition and Results of Operations.
CRITICAL
ACCOUNTING POLICIES
The Company has identified critical accounting policies that, as
a result of the judgments, uncertainties, and the operations
involved, could result in material changes to its financial
condition or results of operations under different conditions or
using different assumptions. The Companys most critical
accounting policies relate to the allowance for doubtful
accounts, inventory reserves, restructuring costs, goodwill,
long-lived assets, provisions for income taxes, pension and
other postretirement benefits and stock-based compensation.
Management records an allowance for doubtful accounts receivable
based on the current and projected credit quality of the
Companys customers, historical experience, customer
payment history, expected trends and other factors that affect
collectibility. Changes in these factors or changes in economic
circumstances could result in changes to the allowance for
doubtful accounts.
Management establishes an inventory reserve based on historical
experience and amounts expected to be realized for slow-moving
and obsolete inventory. The Company monitors its slow-moving and
obsolete inventory on a quarterly basis and makes adjustments as
considered necessary. The proceeds from the sale or dispositions
of these inventories may differ from the net recorded amount.
Restructuring charges are recorded in accordance with,
SFAS 146, Accounting for Costs Associated with Exit or
Disposal Activities. Liabilities for costs associated with an
exit or disposal activity are recognized when the liability is
incurred. Fair value is the basis for the measurement of any
asset write-downs that are reflected as accelerated depreciation
in cost of sales.
Goodwill is not amortized. The Company conducts a formal
impairment test of goodwill at the reporting unit level on an
annual basis and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying value.
Long-lived assets, except goodwill and indefinite-lived
intangible assets, are reviewed for impairment when
circumstances indicate the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to
future net cash flows estimated by the Company to be generated
by such assets.
The Companys quarterly provision for income taxes involves
a significant amount of judgment by management. Quarterly, the
provision for income taxes is based upon actual year to date
results plus an estimate of pretax income for the remainder of
the year. This provision is impacted by the income and tax rates
of the countries where the Company operates. A change in the
geographical source of the Companys income can have a
significant effect on the tax rate. No taxes are provided on
earnings which are permanently reinvested.
The Company has not recognized any tax benefits from losses in
the United States.
Various taxing authorities periodically audit the Companys
tax returns. These audits may include questions regarding the
Companys tax filing positions, including the timing and
amount of deductions and the allocation of income to various tax
jurisdictions. In evaluating the exposures connected with these
various tax filing positions the Company records tax liabilities
for probable exposures. A significant period of time may elapse
before a particular matter, for which the Company has recorded a
tax liability, is audited and fully resolved.
The establishment of the Companys tax liabilities relies
on the judgment of management to estimate the exposures
associated with its various filing positions. Although
management believes those estimates and judgments are
reasonable, actual results could differ, resulting in gains or
losses that may be material to the Companys consolidated
statement of income.
To the extent that the Company prevails in matters for which tax
liabilities have been recorded, or are required to pay amounts
in excess of these tax liabilities, the Companys effective
tax rate in any given financial statement period could be
materially affected. An unfavorable tax settlement could result
in an increase in the Companys effective tax rate in the
26
financial statement period of resolution. A favorable tax
settlement would be recognized as a reduction in the
Companys effective tax rate in the financial statement
period of resolution.
The Company records a valuation allowance to reduce its deferred
tax assets if it is more likely than not that some portion or
all of the deferred tax assets will not be realized. In
accordance with the provisions of SFAS 109 Accounting for
Income Taxes, all available evidence, both positive and
negative, is considered to determine whether a valuation
allowance is needed. Evidence, such as the results of operations
for the current and preceding years, is given more weight than
projections of future income, which is inherently uncertain. The
Companys losses in the U.S. in recent periods provide
sufficient negative evidence to require a full valuation
allowance against its net deferred tax assets in the
U.S. The Company intends to maintain a valuation allowance
against its net deferred tax assets in the U.S. until
sufficient positive evidence exists to support realization of
such assets.
Defined pension plans and other postretirement benefit plans are
a significant cost of doing business that represents obligations
that will be ultimately settled far into the future and
therefore subject to estimation. Pension and postretirement
benefit accounting is intended to reflect the recognition of
future benefit costs over the employees approximate period
of employment based on the terms of the plans and the investment
and funding decisions made by the Company. While management
believes the Companys assumptions are appropriate,
significant differences in the Companys actual experience
or significant changes in the Companys assumptions,
including the discount rate used and the expected long-term rate
of return on plan assets, may materially affect the
Companys pension and postretirement obligations and future
expenses.
The Company has several postretirement benefit plans worldwide.
These plans consist primarily of defined benefit and defined
contribution pension plans, but also include other
postretirement benefit plans. For financial statements prepared
in conformity with accounting principles generally accepted in
the United States of America, many assumptions are required to
be made in order to value the plans liabilities on a
projected and accumulated basis, as well as to determine the
annual expense for the plans. The assumptions chosen take into
account historical experience, the current economic environment
and managements best judgment regarding future experience.
Assumptions include the discount rate, the expected long-term
rate of return on assets, future salary increases, health care
escalation rates, cost of living increases, turnover, retirement
ages and mortality. The cumulative difference between actual
experience and assumed experience is deferred under current
accounting principles. These gains or losses are recognized in
expense over the average future working lifetime of employees to
the extent that the cumulative experience exceeds 10% of the
greater of the Projected Benefit Obligation (or Accumulated
Postretirement Benefit Obligation) and assets. Additionally, the
current accounting principles defer the amount of any plan
changes. These amounts are then recognized in expense over the
average future working lifetime of the affected group. In
accordance with SFAS 158, Employers Accounting for
Defined Benefit Pension and Postretirement Plans, the full
unfunded liability will be recognized on the Companys
balance sheet in fiscal 2007. The deferred items will be charged
to accumulated other comprehensive income and will be amortized
through expense in the same manner as before.
For the majority of the Companys pension plans, the
Company consults with various actuaries annually when reviewing
and selecting the discount rates to be used. The discount rates
used by the Company are based on yields of various corporate
bond indices with varying maturity dates. The discount rates are
also reviewed in comparison with current benchmark indices,
economic market conditions and the movement in the benchmark
yield since the previous fiscal year. The liability
weighted-average discount rate for the defined benefit pension
plans is 4.7% for fiscal 2006. For the other postretirement
benefit plan, the rate is 6.0% and is obtained from the
Citigroup Pension Liability Index and Discount Curve. This rate
represents the higher interest rates generally available in the
United States, which is the Companys only country with
other postretirement benefit liabilities. Another assumption
that affects the Companys pension expense is the expected
return on assets. The weighted-average expected return on assets
assumption is 7.7% for fiscal 2006.
27
The following table illustrates the sensitivity to a change in
the assumed discount rate and expected long-term rate of return
on assets for the Companys pension plans and other
postretirement plans as of August 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on
|
|
|
Impact on
|
|
|
|
|
|
|
August 31,
2006
|
|
|
August 31,
2006
|
|
|
|
Impact on
|
|
|
Projected
Benefit
|
|
|
Projected
Benefit
|
|
Change in
|
|
2006
|
|
|
Obligation for
|
|
|
Obligation for
|
|
Assumption
|
|
Benefits
Expense
|
|
|
Pension
Plans
|
|
|
Postretirement
Plans
|
|
|
|
(In
thousands)
|
|
|
25 basis point decrease in
discount rate
|
|
$
|
436
|
|
|
$
|
3,418
|
|
|
$
|
1,368
|
|
25 basis point increase in
discount rate
|
|
$
|
(425
|
)
|
|
$
|
(3,269
|
)
|
|
$
|
(1,308
|
)
|
25 basis point decrease in
expected long-term rate of return on assets
|
|
$
|
28
|
|
|
$
|
|
|
|
$
|
|
|
25 basis point increase in
expected long-term rate of return on assets
|
|
$
|
(28
|
)
|
|
$
|
|
|
|
$
|
|
|
Stock-based compensation requires the use of a valuation model.
The Company currently uses a Black-Scholes option pricing model
to calculate the fair value of its stock options. The
Black-Scholes model requires assumptions based on
managements judgment regarding, among others, the
volatility of the Companys stock, the expected forfeiture
rate, the expected life of the stock award and the
Companys dividend yield. The Company primarily uses
historical data to determine the assumptions to be used in the
Black-Scholes model and has no reason to believe that future
data is likely to differ from historical data. However, changes
in the assumptions to reflect future stock price volatility,
future dividend payments and future stock award exercise
experience may result in a material change to the fair value
calculation of share-based awards. While management believes the
Companys assumptions are appropriate, significant
differences in the Companys actual experience or
significant changes in the Companys assumptions, including
the volatility of the Companys stock, the expected
forfeiture rate, the expected life of the stock award and the
dividend yield, may materially affect the Companys future
stock-based compensation expense.
LIQUIDITY AND
CAPITAL RESOURCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
%
Change
|
|
|
|
(In millions,
except for %s)
|
|
|
Cash and cash equivalents
|
|
$
|
50.7
|
|
|
$
|
102.3
|
|
|
|
(50.4
|
)%
|
Working capital, excluding cash
|
|
|
353.1
|
|
|
|
303.4
|
|
|
|
16.4
|
|
Long-term debt
|
|
|
120.7
|
|
|
|
63.2
|
|
|
|
91.0
|
|
Stockholders equity
|
|
|
403.5
|
|
|
|
462.1
|
|
|
|
(12.7
|
)
|
As of August 31, 2006, the current ratio was 2.8 to 1 and
working capital, excluding cash, was $353.1 million. Net
cash provided from operations was $19.0 million in 2006
compared with $55.6 million in 2005. Cash used in financing
activities increased $42.7 million, mainly due to the
Companys purchases of its common stock pursuant to the
Repurchase Program, as discussed later in this section, and
through the self-tender offer.
The Companys cash and cash equivalents were
$50.7 million at August 31, 2006, a decrease of
$51.6 million, or 50.4% from August 31, 2005. The
decrease is primarily due to the purchases of treasury stock and
an increase in working capital, excluding cash. The increase in
working capital, excluding cash, is due primarily to the
increase in accounts receivable and inventories which supported
the Companys significant growth in sales in fiscal 2006.
Accounts receivable increased in 2006 by $47.4 million. The
translation effect of foreign currencies, primarily the euro,
accounted for $6.2 million of the increase in accounts
receivable. Excluding the translation effect, the increase in
accounts receivable was the result of higher sales, which
increased 22.1% in the fourth quarter and 12.8% for the year
compared to the same periods in the prior year. Days sales in
accounts receivable improved from 59 days to 58 days.
Inventory increased in 2006 by $52.7 million or 22.6%.
While this represents a significant increase from the prior
year, the stronger sales volume has resulted in the Company days
sales in inventory to remain relatively flat with the prior
year. The translation effect of foreign currencies also
accounted for $5.6 million or 10.7% of the increase in
inventory.
The Company increased total long-term debt by $57.5 million
or 91.0% during 2006. Total long-term debt was
$120.7 million as of August 31, 2006. The increase is
related to the financing actions discussed below.
28
Capital expenditures for the year ended August 31, 2006
were $29.2 million compared with $26.9 million last
year. The major components of the capital expenditures included
the pilot line and other components for the new
Invision®
product line which totaled $7.8 million, land for the
future site of
Invision®
of approximately $1.0 million, a new line for the
manufacturing facility in China of approximately
$2.2 million, a new packaging line for the manufacturing
facility in Germany of approximately $2.5 million, an
upgrade to a production line for the manufacturing facility in
Mexico of approximately $1.0 million and an expansion of
the laboratory in the United Kingdom facility for about
$0.5 million. The Companys Board of Directors
approved $32.0 million for capital expenditures for A.
Schulman Invision, Inc. of which approximately
$15.0 million has been spent through fiscal year 2006.
On February 28, 2006 the Company completed a refinancing in
which it replaced a $100.0 million credit facility with a
new $260.0 million credit facility (Credit
Facility). The Credit Facility consists of
$260.0 million of revolving credit lines of which the
U.S. dollar equivalent of $160.0 million is available
to certain of the Companys foreign subsidiaries for
borrowings in euros or other currencies. The Credit Facility,
which matures on February 28, 2011, contains certain
covenants that, among other things, limit the Companys
ability to incur indebtedness and enter into certain
transactions beyond specified limits. The Company must also
maintain a minimum interest coverage ratio and may not exceed a
maximum net debt leverage ratio. As of August 31, 2006,
there were no covenant violations under the Credit Facility.
Interest rates on the Credit Facility are based on LIBOR or
EURIBOR (depending on the borrowing currency) plus a spread
determined by the Companys total leverage ratio. The
Company also pays a facility fee on the commitments whether used
or unused. As of August 31, 2006 there was
$26.2 million outstanding under the Credit Facility.
The Company used proceeds from the Credit Facility to prepay its
$50.0 million in 7.27% senior notes which were due in
2009. In conjunction with the prepayment of these notes the
Company recorded a loss on extinguishment of debt of
approximately $5.0 million, which included a make-whole
provision of approximately $3.3 million, interest rate swap
termination fee of $1.5 million and the write-off of
related deferred debt costs and deferred interest. Deferred
interest related to proceeds deferred in 1999 when the Company
completed an interest rate lock effectively reducing the annual
interest rate from 7.27% to 7.14% over the life of the notes. In
connection with the prepayment of debt and termination of this
interest rate lock, the remaining balance of these deferred
proceeds of $0.2 million was written off.
On March 1, 2006, the Company issued senior guaranteed
notes (Senior Notes) in the private placement market
consisting of the following:
|
|
|
|
|
$30.0 million of Senior Notes in the United States,
maturing on March 1, 2013, with a variable interest rate of
LIBOR plus 80 bps
|
|
|
|
50.3 million of Senior Notes in Germany, maturing on
March 1, 2016, with a fixed interest rate of 4.485%
(Euro Notes). The Euro Notes approximate
$64.5 million at August 31, 2006.
|
The Senior Notes are guaranteed by the Companys
wholly-owned domestic subsidiaries and contain covenants
substantially identical to those in the $260.0 million
revolving credit facility. As of August 31, 2006, there
were no covenant violations under the Senior Notes.
Both the Credit Facility and the Senior Notes are supported by
up to 65% of the capital stock of certain of the Companys
directly owned foreign subsidiaries.
The proceeds from the Euro Notes, available cash, and borrowings
on the Credit Facility were used to fund the $143.8 million
repatriation from Europe completed in March 2006. The Company
used these repatriated proceeds to fund the self-tender offer
which cost approximately $50.2 million including
$0.5 million in fees directly related to the tender offer.
29
In connection with the Companys agreement to initiate a
self-tender offer, which required new debt and repatriation from
foreign subsidiaries, the Company incurred $11.5 million,
which is summarized as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(In
millions)
|
|
|
Debt extinguishment costs
|
|
$
|
5.0
|
|
Incremental tax on repatriation of
dividends from foreign subsidiaries
|
|
|
2.2
|
|
Deferred costs related to new
financing agreements
|
|
|
2.6
|
|
Forward exchange contracts loss on
repatriation of dividends
|
|
|
1.2
|
|
Fees directly related to self
tender offer
|
|
|
0.5
|
|
|
|
|
|
|
|
|
$
|
11.5
|
|
|
|
|
|
|
Charges of $2.6 million related to the issuance of the
Senior Notes and the Credit Facility have been deferred as of
August 31, 2006 and are being amortized over the
contractual lives of the Senior Notes and the Credit Facility,
respectively.
The Company had approximately $8.5 million and
$17.0 million of uncollateralized short-term lines of
credit from various domestic banks at August 31, 2006 and
2005, respectively. There was $8.5 million outstanding at
August 31, 2006 and no borrowings under these lines of
credit at August 31, 2005.
The Company had approximately $58.0 million and
$55.0 million of uncollateralized short-term foreign lines
of credit available to its subsidiaries at August 31, 2006
and August 31, 2005, respectively. There was
$2.5 million outstanding under these lines of credit at
August 31, 2006 and no borrowings at August 31, 2005.
The Company leases certain items under capital leases. The
European segment leased certain land and buildings with an
amount due on this capital lease at August 31, 2005 of
approximately $0.4 million. The European and North American
segments had no significant capital leases outstanding at
August 31, 2006.
The Companys unfunded pension liability is approximately
$65.0 million at August 31, 2006. This amount is
primarily due to an unfunded plan of $50.3 million
maintained by the Companys German subsidiary. Under this
plan, no separate vehicle is required to accumulate assets to
provide for the payment of benefits. The benefits are paid
directly by the Company to the participants. It is anticipated
that the German subsidiary will generate sufficient funds from
operations to pay these benefits in the future.
The Company enters into forward foreign exchange contracts as a
hedge against amounts due or payable in foreign currencies.
These contracts limit the Companys exposure to
fluctuations in foreign currency exchange rates. Any gains or
losses associated with these contracts as well as the offsetting
gains or losses from the underlying assets or liabilities hedged
are recognized on the foreign currency transaction line in the
Consolidated Statement of Income. The Company estimates that a
10% change in foreign exchange rates at August 31, 2006
would have changed the fair value of the contracts by
approximately $3.6 million. Changes in the fair value of
forward exchange contracts are substantially offset by changes
in the fair value of the hedged positions. The Company does not
hold or issue financial instruments for trading purposes or
utilize any other types of derivative instruments.
30
A summary of the Companys future obligations subsequent to
August 31, 2006 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
|
|
|
1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
|
Short Term Debt
|
|
$
|
10,976
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,976
|
|
Long Term Debt
|
|
|
|
|
|
|
|
|
|
|
26,218
|
|
|
|
94,490
|
|
|
|
120,708
|
|
Capital Lease Obligations
|
|
|
18
|
|
|
|
20
|
|
|
|
2
|
|
|
|
|
|
|
|
40
|
|
Operating Lease Obligations
|
|
|
4,355
|
|
|
|
5,020
|
|
|
|
2,350
|
|
|
|
248
|
|
|
|
11,973
|
|
Purchase Obligations(a)
|
|
|
60,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,816
|
|
Pension Obligations(b)
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,800
|
|
Postretirement Benefit Obligations
|
|
|
787
|
|
|
|
1,811
|
|
|
|
2,151
|
|
|
|
7,400
|
|
|
|
12,149
|
|
Deferred Compensation Obligations
|
|
|
1,077
|
|
|
|
412
|
|
|
|
272
|
|
|
|
2,073
|
|
|
|
3,834
|
|
Interest Expense
|
|
|
7,095
|
|
|
|
13,157
|
|
|
|
12,772
|
|
|
|
15,842
|
|
|
|
48,866
|
|
Guarantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,924
|
|
|
$
|
20,420
|
|
|
$
|
43,765
|
|
|
$
|
120,053
|
|
|
$
|
272,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Purchase obligations include inventory. |
|
(b) |
|
Although the Company expects to make payments beyond this point,
the Company cannot accurately estimate or determine the amount
of such payments. |
Operating lease information is provided in the Notes to the
Consolidated Financial Statements appearing in Item 8 of
this Report. The aggregate future minimum rental commitment for
non-cancelable leases, excluding obligations for taxes,
insurance, etc. was $12.0 million at August 31, 2006.
The Companys outstanding commercial commitments at
August 31, 2006 are not material to the Companys
financial position, liquidity or results of operations except as
discussed in the Notes to the Consolidated Financial Statements
appearing in ITEM 8 of this Report.
The Company does not have any off-balance sheet arrangements.
During the year ended August 31, 2006, the Company paid
cash dividends aggregating to $0.58 per share. The total
amount of these dividends was $17.6 million. Cash flow has
been sufficient to fund the payment of these dividends.
For the year ended August 31, 2006, the Company issued
650,667 common shares upon the exercise of employee stock
options and 78,950 common shares were issued to employees under
the restricted stock plan. The total amount received from the
exercise of these options was $9.8 million.
On April 25, 2006, the Company announced that its Board of
Directors authorized the repurchase of up to 6.75 million
shares of its outstanding common stock (the Repurchase
Program). 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. During the year ended
August 31, 2006, the Company repurchased 2,000,081 common
shares under the new program at an average cost of
$22.76 per share, excluding commissions. Under the current
plan the Company has approximately 4.7 million shares still
available to be repurchased. During fiscal 2006, the Company
purchased approximately 4.1 million shares of its common
stock at an average price of $23.39 excluding transaction fees
through the Repurchase Program and self-tender offer.
The assets and liabilities of the Companys foreign
subsidiaries are translated into U.S. dollars using current
exchange rates. Income statement items are translated at average
exchange rates prevailing during the period. The resulting
translation adjustments are recorded in the accumulated
other comprehensive income account in stockholders
equity. The continued weakness of the U.S. dollar during
the year ended August 31, 2006 increased this account by
$6.8 million.
31
Based on past performance and current expectations, Management
believes the Companys cash and cash equivalents,
investments, and cash generated from operations will satisfy the
Companys working capital needs, capital expenditures,
contractual obligations and other liquidity requirements
associated with operations through at least the next
12 months. Additional common stock repurchases would
generally be funded through incremental borrowing.
NEW ACCOUNTING
PRONOUNCEMENTS
In March 2005, the FASB issued FASB Interpretation No. 47,
(FIN 47), Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement
No. 143, Accounting for Asset Retirement Obligations.
FIN 47 requires that the fair value of a liability for an
asset retirement obligation (ARO) be recognized in the period in
which it is incurred and the settlement date is estimable, and
is capitalized as part of the carrying amount of the related
tangible long-lived asset. The liability is recorded at fair
value and the capitalized cost is depreciated over the remaining
useful life of the related asset. The Company performed a
thorough examination of asset categories during the quarter
ended August 31, 2006. The Company is legally obligated by
various country, state or local regulations to incur costs to
retire certain of its assets. A liability is recorded for these
obligations in the period in which sufficient information
regarding timing and method of settlement become available to
make a reasonable estimate of the liabilitys fair value.
The Company has identified certain other AROs for which
information regarding the timing and method of potential
settlement is not available as of August 31, 2006, and
therefore, the Company is not able to reasonably estimate the
fair value of these liabilities at this time. The Company
continues to monitor these conditional obligations, as well as
any new ones that may develop, and will record reserves
associated with them when and to the extent that more detailed
information becomes available concerning applicable retirement
costs. The adoption of FIN 47 by the Company in the quarter
ended August 31, 2006 did not have a material impact on the
Companys financial position, results of operations or cash
flows.
In July 2006, the FASB issued FASB interpretation No. 48,
(FIN 48), Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 clarifies
the accounting for uncertain income tax positions that are
recognized in a companys financial statements. FIN 48
prescribes a comprehensive model for how a company should
recognize, measure, present and disclose in its financial
statements uncertain tax positions that the company has taken or
expects to take on a tax return. Under the interpretation, the
financial statements will reflect expected future tax
consequences of such positions presuming the taxing
authorities full knowledge of the position and all
relevant facts, but without considering time values. The
adoption of FIN 48 is required by the 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.
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.
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 their 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 the August 31, 2006 balance sheet would have
experienced an increase in the Companys liabilities 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 effect the
results of operations.
On September 13, 2006 the Securities and Exchange
Commission issued Staff Accounting Bulleting No. 108,
(SAB 108), Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements. When a misstatement in a financial
statement is identified, SAB 108 requires management to
assess whether or not the misstatement is material to the
affected financial statements. In performing this analysis,
management must consider
32
materiality from both a quantitative perspective and a
qualitative perspective. The analysis of materiality is an area
that requires a great deal of professional judgment and
SAB 108 requires that this analysis begin with the basic
quantification of the misstatement. The Company is required to
adopt SAB 108 for fiscal 2007. The adoption of SAB 108
is not expected to impact the Companys financial position,
results of operations or cash flows.
CAUTIONARY
STATEMENTS
Certain statements in this report may constitute forward-looking
statements within the meaning of the Federal securities laws.
These statements can be identified by the fact that they do not
relate strictly to historic or current facts. They use such
words as anticipate, estimate,
expect, project, intend,
plan, believe, and other words and terms
of similar meaning in connection with any discussion of future
operating or financial performance. These forward-looking
statements are based on currently available information, but are
subject to a variety of uncertainties, unknown risks and other
factors concerning the Companys operations and business
environment, which are difficult to predict and are beyond the
control of the Company. Important factors that could cause
actual results to differ materially from those suggested by
these forward-looking statements, and that could adversely
affect the Companys future financial performance, include,
but are not limited to, the following:
|
|
|
|
|
Worldwide and regional economic, business and political
conditions, including continuing economic uncertainties in some
or all of the Companys major product markets;
|
|
|
|
Fluctuations in the value of currencies in major areas where the
Company operates, including the U.S. dollar, euro, U.K.
pound sterling, Canadian dollar, Mexican peso, Chinese yuan and
Indonesian rupiah;
|
|
|
|
Fluctuations in the prices of sources of energy or plastic
resins and other raw materials;
|
|
|
|
Changes in customer demand and requirements;
|
|
|
|
Escalation in the cost of providing employee health care;
|
|
|
|
The outcome of any legal claims known or unknown; and
|
|
|
|
The performance of the North American automotive market.
|
Additional risk factors are set forth in ITEM 1A of this
Report. The risks and uncertainties identified above are not the
only risks the Company faces. Additional risks and uncertainties
not presently known to the Company or that it believes to be
immaterial also may adversely affect the Company. Should any
known or unknown risks or uncertainties develop into actual
events, or underlying assumptions prove inaccurate, these
developments could have material adverse effects on the
Companys business, financial condition and results of
operations.
|
|
ITEM 7A.
|
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The Company conducts business on a multinational basis in a
variety of foreign currencies. The Companys exposure to
market risk for changes in foreign currency exchange rates
arises from anticipated transactions from international trade
and repatriation of foreign earnings. The Companys
principle foreign currency exposures relate to the euro, U. K.
pound sterling, Canadian dollar, Mexican peso, Chinese yuan, and
Indonesian rupiah.
The Company enters into forward exchange contracts to reduce its
exposure to fluctuations in related foreign currencies. These
contracts are with major financial institutions and the risk of
loss is considered remote. The total value of open contracts and
any risk to the Company as a result of these arrangements is not
material to the Companys financial position, liquidity or
results of operations.
The Companys exposure to market risk from changes in
interest rates relates primarily to its debt obligations.
Interest on the Revolving Facility is based on the London
Inter-Bank Offered Rate (LIBOR) for U.S. dollar borrowings
and the Euro Interbank Offered Rate (EURIBOR) for euro
borrowings. At August 31, 2006, the Company had
$26.2 million borrowed against its Revolving Facility.
Borrowing costs may fluctuate depending upon the volatility of
LIBOR and amounts borrowed.
33
|
|
ITEM 8.
|
FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
|
A. SCHULMAN,
INC.
Index to
Consolidated Financial Statements
34
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of A. Schulman, Inc.
We have completed integrated audits of A. Schulman, Inc.s
2006 and 2005 consolidated financial statements and of its
internal control over financial reporting as of August 31,
2006, and an audit of its 2004 consolidated financial statements
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based
on our audits, are presented below.
CONSOLIDATED
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of A. Schulman,
Inc. and its subsidiaries at August 31, 2006 and 2005, and
the results of their operations and their cash flows for each of
the three years in the period ended August 31, 2006 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 9 to the consolidated financial
statements, the Company changed the manner in which it accounts
for stock-based compensation in fiscal 2006.
INTERNAL CONTROL
OVER FINANCIAL REPORTING
Also, in our opinion, managements assessment, included in
the accompanying Managements Report on Internal Control
Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial
reporting as of August 31, 2006 based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of August 31, 2006, based on criteria
established in Internal Control Integrated
Framework issued by the COSO. The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded
35
as necessary to permit preparation
of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
November 2, 2006
36
A. Schulman,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands
except share
|
|
|
|
and per share
data)
|
|
|
Net Sales
|
|
$
|
1,616,386
|
|
|
$
|
1,433,196
|
|
|
$
|
1,239,091
|
|
Cost of sales
|
|
|
1,396,440
|
|
|
|
1,240,557
|
|
|
|
1,055,608
|
|
Selling, general and administrative
expenses
|
|
|
148,529
|
|
|
|
137,848
|
|
|
|
122,305
|
|
Interest expense
|
|
|
6,234
|
|
|
|
3,704
|
|
|
|
4,156
|
|
Foreign currency transaction losses
|
|
|
2,136
|
|
|
|
2,824
|
|
|
|
694
|
|
Minority interest
|
|
|
1,116
|
|
|
|
1,139
|
|
|
|
1,378
|
|
Interest income
|
|
|
(3,310
|
)
|
|
|
(1,446
|
)
|
|
|
(1,800
|
)
|
Other income
|
|
|
(1,892
|
)
|
|
|
(948
|
)
|
|
|
(452
|
)
|
Loss on extinguishment of debt
|
|
|
4,986
|
|
|
|
|
|
|
|
|
|
Restructuring expense
North America
|
|
|
|
|
|
|
182
|
|
|
|
731
|
|
Goodwill impairment
North America
|
|
|
|
|
|
|
|
|
|
|
1,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,554,239
|
|
|
|
1,383,860
|
|
|
|
1,184,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Taxes
|
|
|
62,147
|
|
|
|
49,336
|
|
|
|
54,651
|
|
Provision for U.S. and Foreign
Income Taxes
|
|
|
29,485
|
|
|
|
17,243
|
|
|
|
26,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
32,662
|
|
|
$
|
32,093
|
|
|
$
|
27,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average Number of
Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,961,580
|
|
|
|
30,619,780
|
|
|
|
30,128,117
|
|
Diluted
|
|
|
30,394,210
|
|
|
|
31,049,790
|
|
|
|
30,575,057
|
|
Earnings per Share of Common
Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.09
|
|
|
$
|
1.05
|
|
|
$
|
0.93
|
|
Diluted
|
|
$
|
1.07
|
|
|
$
|
1.03
|
|
|
$
|
0.91
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
37
A. Schulman,
Inc.
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands
except share data)
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
50,662
|
|
|
$
|
102,329
|
|
Accounts receivable, less allowance
for doubtful accounts of $9,409 in 2006 and $8,227 in 2005
|
|
|
272,929
|
|
|
|
225,442
|
|
Inventories, average cost or
market, whichever is lower
|
|
|
286,079
|
|
|
|
233,348
|
|
Prepaid expenses and other current
assets
|
|
|
17,678
|
|
|
|
16,848
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
627,348
|
|
|
|
577,967
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Cash surrender value of life
insurance
|
|
|
1,800
|
|
|
|
1,454
|
|
Deferred charges
|
|
|
20,444
|
|
|
|
17,316
|
|
Goodwill
|
|
|
5,392
|
|
|
|
5,288
|
|
Intangible assets
|
|
|
1,382
|
|
|
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,018
|
|
|
|
25,084
|
|
|
|
|
|
|
|
|
|
|
Property, Plant, and Equipment,
at cost:
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
15,778
|
|
|
|
13,667
|
|
Buildings and leasehold improvements
|
|
|
136,526
|
|
|
|
128,884
|
|
Machinery and equipment
|
|
|
317,499
|
|
|
|
292,419
|
|
Furniture and fixtures
|
|
|
35,918
|
|
|
|
35,556
|
|
Construction in progress
|
|
|
11,079
|
|
|
|
13,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
516,800
|
|
|
|
483,892
|
|
Accumulated depreciation and
investment grants of $1,119 in 2006 and $1,187 in 2005
|
|
|
329,921
|
|
|
|
302,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,879
|
|
|
|
181,311
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
843,245
|
|
|
$
|
784,362
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
10,976
|
|
|
$
|
1,507
|
|
Accounts payable
|
|
|
135,930
|
|
|
|
102,059
|
|
U.S. and foreign income taxes
payable
|
|
|
14,708
|
|
|
|
14,788
|
|
Accrued payrolls, taxes, and
related benefits
|
|
|
30,866
|
|
|
|
27,193
|
|
Other accrued liabilities
|
|
|
31,081
|
|
|
|
26,708
|
|
|
|
|
|
|
|
|
|
|
Total Current
Liabilities
|
|
|
223,561
|
|
|
|
172,255
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt
|
|
|
120,730
|
|
|
|
63,158
|
|
Other Long-term
Liabilities
|
|
|
82,482
|
|
|
|
73,713
|
|
Deferred Income Taxes
|
|
|
7,196
|
|
|
|
7,865
|
|
Minority Interest
|
|
|
5,784
|
|
|
|
5,268
|
|
Commitments and
Contingencies
|
|
|
|
|
|
|
|
|
Stockholders
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, 5% cumulative,
$100 par value, authorized, issued and
outstanding 10,564 shares in 2006 and 2005
|
|
|
1,057
|
|
|
|
1,057
|
|
Special stock,
1,000,000 shares authorized, none outstanding
|
|
|
|
|
|
|
|
|
Common stock, $1 par value,
authorized 75,000,000 shares,
issued 40,707,018 shares in 2006 and
39,988,555 shares in 2005
|
|
|
40,707
|
|
|
|
39,989
|
|
Other capital
|
|
|
86,894
|
|
|
|
74,973
|
|
Accumulated other comprehensive
income
|
|
|
32,893
|
|
|
|
26,552
|
|
Retained earnings
|
|
|
502,998
|
|
|
|
487,998
|
|
Treasury stock, at cost,
13,343,711 shares in 2006 and 9,272,045 shares in 2005
|
|
|
(261,057
|
)
|
|
|
(165,232
|
)
|
Unearned stock grant compensation
|
|
|
|
|
|
|
(3,234
|
)
|
|
|
|
|
|
|
|
|
|
Common Stockholders
Equity
|
|
|
402,435
|
|
|
|
461,046
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders
Equity
|
|
|
403,492
|
|
|
|
462,103
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
843,245
|
|
|
$
|
784,362
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
38
A. Schulman,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Other
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
Grant
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income
(Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Compensation
|
|
|
Equity
|
|
|
|
(In thousands
except per share data)
|
|
Balance at August 31,
2003
|
|
$
|
1,057
|
|
|
$
|
38,781
|
|
|
$
|
56,035
|
|
|
$
|
(8,365
|
)
|
|
$
|
462,104
|
|
|
$
|
(164,231
|
)
|
|
$
|
(2,560
|
)
|
|
$
|
382,821
|
|
Comprehensive income for 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
adjustment (net of tax of $446)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,914
|
|
Cash dividends paid or accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $5 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
Common stock, $.54 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,417
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,417
|
)
|
Stock options exercised
|
|
|
|
|
|
|
813
|
|
|
|
10,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,705
|
|
Issue of restricted stock
|
|
|
|
|
|
|
39
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant of restricted stock
|
|
|
|
|
|
|
|
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,080
|
)
|
|
|
|
|
Non-cash stock based compensation
|
|
|
|
|
|
|
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
844
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,423
|
|
|
|
1,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31,
2004
|
|
|
1,057
|
|
|
|
39,633
|
|
|
|
69,812
|
|
|
|
18,643
|
|
|
|
473,540
|
|
|
|
(164,231
|
)
|
|
|
(3,217
|
)
|
|
|
435,237
|
|
Comprehensive income for 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
adjustment (net of tax of $1,056)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,002
|
|
Cash dividends paid or accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $5 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
Common stock, $.57 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,582
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,582
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,001
|
)
|
|
|
|
|
|
|
(1,001
|
)
|
Stock options exercised
|
|
|
|
|
|
|
302
|
|
|
|
3,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,092
|
|
Issue of restricted stock
|
|
|
|
|
|
|
54
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant of restricted stock
|
|
|
|
|
|
|
|
|
|
|
1,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,981
|
)
|
|
|
|
|
Forfeiture of restricted stock
|
|
|
|
|
|
|
|
|
|
|
(893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
893
|
|
|
|
|
|
Non-cash stock based compensation
|
|
|
|
|
|
|
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,071
|
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31,
2005
|
|
|
1,057
|
|
|
|
39,989
|
|
|
|
74,973
|
|
|
|
26,552
|
|
|
|
487,998
|
|
|
|
(165,232
|
)
|
|
|
(3,234
|
)
|
|
|
462,103
|
|
Comprehensive income for 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
adjustment (net of tax of $214)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,003
|
|
Cash dividends paid or accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $5 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
Common stock, $.58 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,609
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,609
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,825
|
)
|
|
|
|
|
|
|
(95,825
|
)
|
Stock options exercised
|
|
|
|
|
|
|
650
|
|
|
|
9,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,800
|
|
Issue of restricted stock
|
|
|
|
|
|
|
68
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock based compensation
|
|
|
|
|
|
|
|
|
|
|
4,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,525
|
|
Reclassification due to adoption of
SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
(3,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,234
|
|
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
1,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31,
2006
|
|
$
|
1,057
|
|
|
$
|
40,707
|
|
|
$
|
86,894
|
|
|
$
|
32,893
|
|
|
$
|
502,998
|
|
|
$
|
(261,057
|
)
|
|
$
|
|
|
|
$
|
403,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
39
A. Schulman,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In
thousands)
|
|
Provided from (used in)
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,662
|
|
|
$
|
32,093
|
|
|
$
|
27,906
|
|
Adjustments to reconcile net income
to net cash provided from (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
24,912
|
|
|
|
25,082
|
|
|
|
25,870
|
|
Non-current deferred taxes
|
|
|
(1,968
|
)
|
|
|
(978
|
)
|
|
|
926
|
|
Pension and other deferred
compensation
|
|
|
11,019
|
|
|
|
11,891
|
|
|
|
7,917
|
|
Postretirement benefit obligation
|
|
|
3,339
|
|
|
|
2,623
|
|
|
|
893
|
|
Minority interest in net income of
subsidiaries
|
|
|
1,116
|
|
|
|
1,139
|
|
|
|
1,378
|
|
Non-cash items related to loss on
extinguishment of debt
|
|
|
180
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
1,353
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
1,820
|
|
Changes in working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(41,193
|
)
|
|
|
(17,643
|
)
|
|
|
(13,797
|
)
|
Inventories
|
|
|
(45,815
|
)
|
|
|
4,069
|
|
|
|
(25,699
|
)
|
Prepaid expenses
|
|
|
(207
|
)
|
|
|
(244
|
)
|
|
|
49
|
|
Accounts payable
|
|
|
30,752
|
|
|
|
5,019
|
|
|
|
24,699
|
|
Income taxes
|
|
|
(1,433
|
)
|
|
|
(4,051
|
)
|
|
|
2,690
|
|
Accrued payrolls and other accrued
liabilities
|
|
|
6,154
|
|
|
|
1,675
|
|
|
|
2,503
|
|
Proceeds from life insurance
benefits
|
|
|
580
|
|
|
|
|
|
|
|
|
|
Changes in other assets and other
long-term liabilities
|
|
|
(1,103
|
)
|
|
|
(5,032
|
)
|
|
|
(4,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from operating
activities
|
|
|
18,995
|
|
|
|
55,643
|
|
|
|
53,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided from (used in)
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant
and equipment
|
|
|
(29,239
|
)
|
|
|
(26,944
|
)
|
|
|
(22,287
|
)
|
Disposals of property, plant and
equipment
|
|
|
2,548
|
|
|
|
681
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(26,691
|
)
|
|
|
(26,263
|
)
|
|
|
(22,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided from (used in)
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
(17,662
|
)
|
|
|
(17,635
|
)
|
|
|
(16,470
|
)
|
Increase (decrease) in notes payable
|
|
|
9,426
|
|
|
|
1,479
|
|
|
|
(27
|
)
|
Borrowings on revolving credit
facilities
|
|
|
131,318
|
|
|
|
24,000
|
|
|
|
26,000
|
|
Repayments on revolving credit
facilities
|
|
|
(118,989
|
)
|
|
|
(10,536
|
)
|
|
|
(45,092
|
)
|
Proceeds from issuance of 4.485%
and floating rate senior notes
|
|
|
91,943
|
|
|
|
|
|
|
|
|
|
Prepayments of 7.27% senior
notes
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
(2,640
|
)
|
|
|
|
|
|
|
|
|
Cash distributions to minority
shareholders
|
|
|
(600
|
)
|
|
|
(900
|
)
|
|
|
(1,830
|
)
|
Exercise of stock options
|
|
|
9,800
|
|
|
|
4,092
|
|
|
|
11,705
|
|
Purchases of treasury stock
|
|
|
(95,825
|
)
|
|
|
(1,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in)
financing activities
|
|
|
(43,229
|
)
|
|
|
(501
|
)
|
|
|
(25,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
(742
|
)
|
|
|
552
|
|
|
|
4,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(51,667
|
)
|
|
|
29,431
|
|
|
|
10,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
beginning of year
|
|
|
102,329
|
|
|
|
72,898
|
|
|
|
62,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
50,662
|
|
|
$
|
102,329
|
|
|
$
|
72,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year
for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,941
|
|
|
$
|
3,818
|
|
|
$
|
4,042
|
|
Income Taxes
|
|
$
|
33,175
|
|
|
$
|
32,524
|
|
|
$
|
26,060
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
40
A. Schulman,
Inc.
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF
CONSOLIDATION
The consolidated financial statements include the accounts of A.
Schulman, Inc. (the Company) and its domestic and
foreign subsidiaries in which a controlling interest is
maintained. All significant intercompany transactions have been
eliminated.
The Company is engaged in the sale of plastic resins in various
forms, which are used as raw materials by its customers. To
identify reportable segments, the Company considered its
operating structure and the types of information subject to
regular review by its President and Chief Executive Officer, who
is the Chief Operating Decision Maker. On this basis, the
Company operates primarily in two geographic segments, North
America and Europe, including Asia (Europe).
Minority interest represents a 30% equity position of Mitsubishi
Chemical MKV Co. in a partnership with the Company and a 35%
equity position of P.T. Prima Polycon Indah in an
Indonesian joint venture with the Company.
USE OF
ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
CASH EQUIVALENTS
AND SHORT-TERM INVESTMENTS
All highly liquid investments purchased with a maturity of three
months or less are considered to be cash equivalents. Such
investments amounted to $13.7 million at August 31,
2006 and $22.2 million at August 31, 2005. Investments
with maturities between three and twelve months are considered
to be short-term investments. Investments are placed with
numerous financial institutions which management believes to
have acceptable credit ratings. The recorded amount of these
investments approximates fair value.
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. Management records an allowance for
doubtful accounts receivable based on the current and projected
credit quality of the Companys customers, historical
experience, customer payment history, expected trends and other
factors that affect collectibility. Changes in these factors or
changes in economic circumstances could result in changes to the
allowance for doubtful accounts. The Company reviews its
allowance for doubtful accounts on a periodic basis. Trade
accounts receivables are charged off against the allowance for
doubtful accounts when the Company determines it is probable the
account receivable will not be collected. Trade accounts
receivables, less allowance for doubtful accounts, reflect the
net realizable value of receivables, and approximate fair value.
The Company does not have any off-balance sheet exposure related
to its customers.
REVENUE
RECOGNITION
The Companys accounting policy regarding revenue
recognition is to recognize revenue when products are shipped to
unaffiliated customers and both title and the risks and rewards
of ownership are transferred.
The Company provides tolling services as a fee for processing of
material provided and owned by customers. On some occasions, the
Company is required to provide certain amounts of its materials,
such as additives or packaging. These materials are charged to
the customer as an addition to the tolling fees. The Company
recognizes revenues from tolling services and related materials
when such services are performed. The only amounts recorded as
revenue related to tolling are the processing fees and the
charges related to materials provided by the Company.
41
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
DEPRECIATION
It is the Companys policy to depreciate the cost of
property, plant and equipment over the estimated useful lives of
the assets, or for leasehold improvements over the applicable
lease term, using the straight-line method. The estimated useful
lives used in the computation of depreciation are as follows:
|
|
|
Buildings and leasehold improvements
|
|
7 to 40 years
|
Machinery and equipment
|
|
5 to 10 years
|
Computer equipment
|
|
3 to 5 years
|
Furniture and fixtures
|
|
5 to 10 years
|
The cost of property sold or otherwise disposed of is eliminated
from the property accounts and the related reserve accounts.
Gains or losses are recognized as appropriate when sales of
property occur.
Maintenance and repair costs are charged against income. The
cost of renewals and betterments is capitalized in the property
accounts.
INVENTORIES
The Company and its subsidiaries do not distinguish between raw
materials and finished goods because numerous products that can
be sold as finished goods are also used as raw materials in the
production of other inventory items.
GOODWILL
The Company does not amortize goodwill. However, the Company
conducts a formal impairment test of goodwill at the reporting
unit level on an annual basis and between annual tests if an
event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying
value. The Company completed its annual impairment test of
goodwill as of February 28, 2006 which resulted in no
impairment loss being recognized.
LONG-LIVED
ASSETS
Long-lived assets, except goodwill and indefinite-lived
intangible assets, are reviewed for impairment when
circumstances indicate the carrying value of an asset may not be
recoverable, or at least annually. Recoverability of assets to
be held and used is measured by a comparison of the carrying
amount of the asset to future net cash flows estimated by the
Company to be generated by such assets. If such assets are
considered to be impaired, the impairment to be recognized is
the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are
recorded at the lower of carrying value or estimated net
realizable value. The Company completed its annual impairment
test of long-lived assets which resulted in no impairment loss
being recognized.
INCOME
TAXES
Income taxes are recognized during the period in which
transactions enter into the determination of financial statement
income. Accordingly, deferred taxes are provided for temporary
differences between the book and tax bases of assets and
liabilities. A valuation allowance is established when it is
more likely than not that all or a portion of a deferred tax
asset will not be realized. No taxes are provided on earnings
which are permanently reinvested.
RETIREMENT
PLANS
The Company has several defined benefit and defined contribution
plans covering certain employees in the U.S. and in foreign
countries. For certain plans in the U.S., pension funding is
based on an amount paid to trust funds at an agreed rate for
each hour for which employees are paid. Generally, the defined
benefit plans accrue the current and prior service costs
annually and funding is not required for all plans.
42
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
The Company also has deferred profit sharing plans for its North
American salaried employees for which contributions are
determined at the discretion of the Board of Directors.
FOREIGN CURRENCY
TRANSLATION
The financial position and results of operations of the
Companys foreign subsidiaries are measured using local
currency as the functional currency. Assets and liabilities of
these subsidiaries are translated at the exchange rate in effect
at each reporting period end. Income statement accounts are
translated at the average rate of exchange prevailing during the
year. Accumulated other comprehensive income in
stockholders equity includes translation adjustments
arising from the use of different exchange rates from period to
period.
RECLASSIFICATION
Certain items previously reported in specific financial
statement captions have been reclassified to conform to the 2006
presentation.
DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES
The Company accounts for derivatives under Statement of
Financial Accounting Standard (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities
(SFAS 133) as amended and interpreted.
SFAS 133 requires all derivatives, whether designated in
hedging relationships or not, to be recorded on the balance
sheet at fair value. The forward exchange contracts were
adjusted to their fair market value through the income
statement. Gains or losses on forward contracts that hedge
specific transactions are recognized in the consolidated
statement of income offsetting the underlying foreign currency
gains or losses. In 2004 the Company entered into an
interest-rate swap agreement which was designated as a fair
value hedge in accordance with SFAS 133. This interest-rate
swap was terminated during 2006 in connection with the
prepayment of the senior notes, as discussed in Note 4.
STOCK-BASED
COMPENSATION
On September 1, 2005, the Company adopted
SFAS No. 123 (Revised 2004),
(SFAS 123R), Share-Based Payment, which
requires the Company to measure all employee stock-based
compensation awards using a fair value method and record the
related expense in the consolidated financial statements. The
Company elected to use the modified prospective transition
method. The modified prospective transition method requires that
compensation cost be recognized in the consolidated financial
statements for all awards granted after the date of adoption as
well as for existing awards for which the requisite service has
not been rendered as of the date of adoption and requires that
prior periods not be restated. All periods presented prior to
September 1, 2005 were accounted for using the intrinsic
value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees,
and followed a nominal vesting period approach.
NEW ACCOUNTING
PRONOUNCEMENTS
In March 2005, the FASB issued FASB Interpretation No. 47,
(FIN 47), Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement
No. 143, Accounting for Asset Retirement Obligations.
FIN 47 requires that the fair value of a liability for an
asset retirement obligation (ARO) be recognized in the period in
which it is incurred and the settlement date is estimable, and
is capitalized as part of the carrying amount of the related
tangible long-lived asset. The liability is recorded at fair
value and the capitalized cost is depreciated over the remaining
useful life of the related asset. The Company performed a
thorough examination of asset categories during the quarter
ended August 31, 2006. The Company is legally obligated by
various country, state or local regulations to incur costs to
retire certain of its assets. A liability is recorded for these
obligations in the period in which sufficient information
regarding timing and method of settlement become available to
make a reasonable estimate of the liabilitys fair value.
The Company has identified certain other AROs for which
information regarding the timing and method of potential
settlement is not available as of August 31, 2006, and
therefore, the Company is not able to reasonably estimate the
fair value of these liabilities at this time. The Company
continues to monitor
43
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
these conditional obligations, as well as any new ones that may
develop, and will record reserves associated with them when and
to the extent that more detailed information becomes available
concerning applicable retirement costs. The adoption of
FIN 47 by the Company in the quarter ended August 31,
2006 did not have a material impact on the Companys
financial position, results of operations or cash flows.
In July 2006, the FASB issued FASB interpretation No. 48,
(FIN 48), Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 clarifies
the accounting for uncertain income tax positions that are
recognized in a companys financial statements. FIN 48
prescribes a comprehensive model for how a company should
recognize, measure, present and disclose in its financial
statements uncertain tax positions that the company has taken or
expects to take on a tax return. Under the interpretation, the
financial statements will reflect expected future tax
consequences of such positions presuming the taxing
authorities full knowledge of the position and all
relevant facts, but without considering time values. The
adoption of FIN 48 is required by the 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.
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.
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 their 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 the August 31, 2006 balance sheet would have
experienced an increase in the Companys liabilities 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 effect the
results of operations.
On September 13, 2006 the Securities and Exchange
Commission issued Staff Accounting Bulleting No. 108,
(SAB 108), Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements. When a misstatement in a financial
statement is identified, SAB 108 requires management to
assess whether or not the misstatement is material to the
affected financial statements. In performing this analysis,
management must consider materiality from both a quantitative
perspective and a qualitative perspective. The analysis of
materiality is an area that requires a great deal of
professional judgment and SAB 108 requires that this
analysis begin with the basic quantification of the
misstatement. The Company is required to adopt SAB 108 for
fiscal 2007. The adoption of SAB 108 is not expected to
impact the Companys financial position, results of
operations or cash flows.
44
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
NOTE 2
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The changes in the Companys allowance for doubtful
accounts during the years ended August 31, 2006 and 2005
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Beginning balance
|
|
$
|
8,227
|
|
|
$
|
9,268
|
|
Provision
|
|
|
2,453
|
|
|
|
1,363
|
|
Write-offs, net of recoveries
|
|
|
(1,458
|
)
|
|
|
(2,599
|
)
|
Translation effect
|
|
|
187
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
9,409
|
|
|
$
|
8,227
|
|
|
|
|
|
|
|
|
|
|
NOTE 3
GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, the Company is required to review goodwill
and indefinite-lived intangible assets at least annually for
impairment. Goodwill impairment is tested at the reporting unit
level on an annual basis and between annual tests if an event
occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying
value. No impairment was required to be recorded as a result of
the annual impairment review as of February 28, 2006.
In connection with the restructuring in North America, goodwill
related to the Nashville, Tennessee plant was tested for
impairment during the fourth quarter of fiscal 2004. This
restructuring included the closing of two production lines in
order to reduce production capacity at the plant. In connection
with this action, the Company deemed it necessary to conduct an
impairment test. As a result of closing these two production
lines, the sales and cash flow forecast for this plant was
revised and the Company estimated the fair market value of the
plant using an earnings multiple valuation method. The results
of this valuation indicated that the carrying value of the
plants net assets exceeded their market value. The Company
then compared the recorded value of the goodwill with the
implied fair market value of the goodwill and determined that an
impairment loss had been incurred. The Company recorded a
goodwill impairment loss of $1.8 million in the fourth
quarter of fiscal 2004, which represented the total recorded
value of the goodwill for the Nashville plant.
Accumulated amortization for intangibles was $1.3 million,
$1.2 million and $1.0 million at August 31, 2006,
2005 and 2004, respectively. Intangible assets that are subject
to amortization were fully amortized as of November 30,
2005.
The carrying amount of goodwill for the European segment was
$4.4 million at August 31, 2006 and $4.3 million
at August 31, 2005. The carrying amount of goodwill for the
North American segment was $1.0 million at August 31,
2006 and 2005.
The changes in the Companys carrying value of goodwill
during the years ended August 31, 2006 and 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
North
America
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
|
Balance as of August 31, 2004
|
|
$
|
4,289
|
|
|
$
|
964
|
|
|
$
|
5,253
|
|
Translation effect
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2005
|
|
|
4,324
|
|
|
|
964
|
|
|
|
5,288
|
|
Translation effect
|
|
|
104
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2006
|
|
$
|
4,428
|
|
|
$
|
964
|
|
|
$
|
5,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
NOTE 4
LONG-TERM DEBT AND CREDIT ARRANGEMENTS
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Notes Payable, due within one
year
|
|
$
|
10,976
|
|
|
$
|
1,507
|
|
Revolving credit loan, 3.95% in
2005, due 2009
|
|
|
|
|
|
|
14,000
|
|
Revolving credit loan, LIBOR, due
2011
|
|
|
26,218
|
|
|
|
|
|
Senior notes, 7.27%, net of
interest-rate swap, due 2009
|
|
|
|
|
|
|
49,129
|
|
Euro notes, 4.485%, due 2016
|
|
|
64,490
|
|
|
|
|
|
Senior notes, LIBOR plus
80 bps, due 2013
|
|
|
30,000
|
|
|
|
|
|
Capital lease obligations
|
|
|
40
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
131,724
|
|
|
$
|
65,035
|
|
|
|
|
|
|
|
|
|
|
On February 28, 2006 the Company completed a refinancing in
which it replaced a $100.0 million credit facility with a
new $260.0 million credit facility (Credit
Facility). The Credit Facility consists of
$260.0 million of revolving credit lines of which the
U.S. dollar equivalent of $160.0 million is available
to certain of the Companys foreign subsidiaries for
borrowings in euros or other currencies. The Credit Facility,
which matures on February 28, 2011, contains certain
covenants that, among other things, limit the Companys
ability to incur indebtedness and enter into certain
transactions beyond specified limits. The Company must also
maintain a minimum interest coverage ratio and may not exceed a
maximum net debt leverage ratio.
Interest rates on the Credit Facility are based on LIBOR or
EURIBOR (depending on the borrowing currency) plus a spread
determined by the Companys total leverage ratio. The
Company also pays a facility fee on the commitments whether used
or unused. As of August 31, 2006 there was
$26.2 million outstanding under the Credit Facility.
The Company used proceeds from the Credit Facility to prepay its
$50.0 million in 7.27% senior notes which were due in
2009. In conjunction with the prepayment of these notes the
Company recorded a loss on extinguishment of debt of
approximately $5.0 million, which included a make-whole
provision of approximately $3.3 million, interest rate swap
termination fee of $1.5 million and the write-off of
related deferred debt costs and deferred interest. Deferred
interest related to proceeds deferred in 1999 when the Company
completed an interest rate lock effectively reducing the annual
interest rate from 7.27% to 7.14% over the life of the notes. In
connection with the prepayment of debt and termination of this
interest rate lock, the remaining balance of these deferred
proceeds of $0.2 million was written off.
On March 1, 2006, the Company issued senior guaranteed
notes (Senior Notes) in the private placement market
consisting of the following:
|
|
|
|
|
$30.0 million of Senior Notes in the United States,
maturing on March 1, 2013, with a variable interest rate of
LIBOR plus 80 bps
|
|
|
|
50.3 million of Senior Notes in Germany, maturing on
March 1, 2016, with a fixed interest rate of 4.485%
(Euro Notes). The Euro Notes approximate
$64.5 million at August 31, 2006.
|
The Senior Notes are guaranteed by the Companys
wholly-owned domestic subsidiaries and contain covenants
substantially identical to those in the $260.0 million
revolving credit facility.
Both the Credit Facility and the Senior Notes are supported by
up to 65% of the capital stock of certain of the Companys
directly owned foreign subsidiaries.
The proceeds from the Euro Notes, available cash, and borrowings
on the Credit Facility were used to fund the $143.8 million
repatriation from Europe completed in March 2006. The Company
used these repatriated proceeds to fund the self-tender offer
which cost approximately $50.2 million including
$0.5 million in fees directly related to the tender offer.
Charges of $2.6 million related to the issuance of the
Senior Notes and the Credit Facility have been deferred as of
August 31, 2006 and are being amortized over the
contractual lives of the Senior Notes and the Credit Facility,
respectively.
46
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
The Company had approximately $8.5 million and
$17.0 million of uncollateralized short-term lines of
credit from various domestic banks at August 31, 2006 and
2005, respectively. There was $8.5 million outstanding at
August 31, 2006 and no borrowings at August 31, 2005
under these lines of credit.
The Company had approximately $58.0 million and
$55.0 million of uncollateralized short-term foreign lines
of credit available to its subsidiaries at August 31, 2006
and August 31, 2005, respectively. There was
$2.5 million outstanding under these lines of credit at
August 31, 2006 and no borrowings at August 31, 2005.
The Company leases certain items under capital leases. The
European segment leased certain land and buildings with an
amount due on this capital lease at August 31, 2005 of
approximately $0.4 million. The European and North American
segments had no significant capital leases outstanding at
August 31, 2006.
Aggregate maturities of debt including capital lease obligations
subsequent to August 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
Fiscal
|
|
|
2007
|
|
$
|
10,994
|
|
|
|
|
|
2008
|
|
|
14
|
|
|
|
|
|
2009
|
|
|
6
|
|
|
|
|
|
2010
|
|
|
2
|
|
|
|
|
|
2011
|
|
|
26,218
|
|
|
|
|
|
2012 and thereafter
|
|
|
94,490
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,724
|
|
|
|
|
|
|
NOTE 5
FOREIGN CURRENCY FORWARD CONTRACTS
The Company enters into forward foreign exchange contracts to
reduce its exposure for amounts due or payable in foreign
currencies. These contracts limit the Companys exposure to
fluctuations in foreign currency exchange rates. Any gains or
losses associated with these contracts as well as the offsetting
gains or losses from the underlying assets or liabilities are
recognized on the foreign currency transaction losses line in
the Consolidated Statement of Income. The Company does not hold
or issue foreign exchange contracts for trading purposes. The
following table presents a summary of foreign exchange contracts
outstanding as of August 31, 2006 and August 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Contract
|
|
|
Fair
|
|
|
Contract
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
|
Buy Currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
$
|
5,140
|
|
|
$
|
5,115
|
|
|
$
|
3,271
|
|
|
$
|
3,242
|
|
U.S. dollar
|
|
|
171
|
|
|
|
171
|
|
|
|
145
|
|
|
|
145
|
|
British pound
|
|
|
1,961
|
|
|
|
2,001
|
|
|
|
1,260
|
|
|
|
1,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,272
|
|
|
$
|
7,287
|
|
|
$
|
4,676
|
|
|
$
|
4,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell Currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
British pound
|
|
$
|
1,608
|
|
|
$
|
1,632
|
|
|
$
|
2,300
|
|
|
$
|
2,295
|
|
U.S. dollar
|
|
|
149
|
|
|
|
149
|
|
|
|
4,014
|
|
|
|
4,045
|
|
Hungarian forint
|
|
|
|
|
|
|
|
|
|
|
3,219
|
|
|
|
3,257
|
|
Euro
|
|
|
25,624
|
|
|
|
25,638
|
|
|
|
38,405
|
|
|
|
38,245
|
|
Swiss franc
|
|
|
1,075
|
|
|
|
1,074
|
|
|
|
1,015
|
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,456
|
|
|
$
|
28,493
|
|
|
$
|
48,953
|
|
|
$
|
48,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of foreign exchange contracts was estimated by
obtaining quotes from banks. Foreign exchange contracts are
entered into with several financial institutions that management
believes have acceptable credit ratings and generally have
maturities of less than twelve months.
47
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
NOTE 6
INCOME TAXES
Income (loss) before taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
U.S.
|
|
$
|
(22,120
|
)
|
|
$
|
(16,868
|
)
|
|
$
|
(20,555
|
)
|
Foreign
|
|
|
84,267
|
|
|
|
66,204
|
|
|
|
75,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,147
|
|
|
$
|
49,336
|
|
|
$
|
54,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The U.S. includes a loss on debt extinguishment of
$5.0 million and $4.2 million of expenses related to
SFAS 123R in 2006. The U.S. includes restructuring charges
of $0.2 million and $2.1 million in 2005 and 2004,
respectively. In addition, fiscal 2004 includes impairment
charges of $1.8 million.
The provisions for U.S. and foreign income taxes consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
83
|
|
|
$
|
419
|
|
|
$
|
1,267
|
|
Foreign
|
|
|
27,850
|
|
|
|
20,456
|
|
|
|
23,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,933
|
|
|
|
20,875
|
|
|
|
24,773
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
28
|
|
|
|
36
|
|
|
|
(48
|
)
|
Foreign
|
|
|
1,524
|
|
|
|
(3,668
|
)
|
|
|
2,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,552
|
|
|
|
(3,632
|
)
|
|
|
1,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,485
|
|
|
$
|
17,243
|
|
|
$
|
26,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory U.S. federal income tax
rate with the effective tax rates of 47.4% in 2006, 35.0% in
2005, and 48.9% in 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
(In thousands,
except for %s)
|
|
|
Statutory U.S. tax rate
|
|
$
|
21,752
|
|
|
|
35.0
|
%
|
|
$
|
17,268
|
|
|
|
35.0
|
%
|
|
$
|
19,128
|
|
|
|
35.0
|
%
|
Amount of foreign income taxes less
than U.S. taxes at statutory rate
|
|
|
(4,043
|
)
|
|
|
(6.5
|
)
|
|
|
(2,009
|
)
|
|
|
(4.1
|
)
|
|
|
(2,245
|
)
|
|
|
(4.2
|
)
|
Losses with no tax benefit
|
|
|
5,997
|
|
|
|
9.6
|
|
|
|
5,904
|
|
|
|
12.0
|
|
|
|
8,398
|
|
|
|
15.4
|
|
Mexico valuation allowance on net
asset tax
|
|
|
|
|
|
|
|
|
|
|
(3,270
|
)
|
|
|
(6.6
|
)
|
|
|
1,401
|
|
|
|
2.6
|
|
Settlement of tax claim in Canada
|
|
|
|
|
|
|
|
|
|
|
(1,104
|
)
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
Provision for repatriated earnings
|
|
|
2,243
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of
debt no tax benefit
|
|
|
1,745
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ongoing tax audits
|
|
|
1,152
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
639
|
|
|
|
1.0
|
|
|
|
454
|
|
|
|
0.9
|
|
|
|
63
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,485
|
|
|
|
47.4
|
%
|
|
$
|
17,243
|
|
|
|
35.0
|
%
|
|
$
|
26,745
|
|
|
|
48.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
Deferred tax assets and (liabilities) consist of the following
at August 31, 2006 and August 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Pensions
|
|
$
|
8,015
|
|
|
$
|
7,084
|
|
Inventory reserves
|
|
|
317
|
|
|
|
862
|
|
Bad debt reserves
|
|
|
1,577
|
|
|
|
1,598
|
|
Accruals
|
|
|
3,018
|
|
|
|
3,361
|
|
Postretirement benefits other than
pensions
|
|
|
8,115
|
|
|
|
6,928
|
|
Depreciation
|
|
|
2,119
|
|
|
|
1,925
|
|
Foreign tax credit carryforwards
|
|
|
22,670
|
|
|
|
23,211
|
|
Alternative minimum tax
carryforwards
|
|
|
6,834
|
|
|
|
6,814
|
|
Net assets tax carryforwards
|
|
|
|
|
|
|
524
|
|
Other
|
|
|
7,638
|
|
|
|
7,007
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
60,303
|
|
|
|
59,314
|
|
Valuation allowance
|
|
|
(44,602
|
)
|
|
|
(42,445
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
15,701
|
|
|
|
16,869
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(10,557
|
)
|
|
|
(11,759
|
)
|
Inventory
|
|
|
(718
|
)
|
|
|
|
|
Other
|
|
|
(799
|
)
|
|
|
(1,736
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(12,074
|
)
|
|
|
(13,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,627
|
|
|
$
|
3,374
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance covers benefits which are not likely to
be utilized for foreign tax credit carryforwards and other
deferred tax assets in the United States. The Company has
$24.2 million in foreign tax credit carryforwards that will
expire in periods from 2010 to 2016. The expiration periods
reflect the extension of the carryforward period granted by the
American Jobs Creation Act of 2004 signed into law on
October 22, 2004.
The tax effect of temporary differences included in prepaids was
$4.2 million and $5.1 million at August 31, 2006
and 2005 respectively. Deferred charges included
$8.2 million and $6.9 million from the tax effect of
temporary differences at August 31, 2006 and 2005
respectively. The tax effect of temporary differences included
in other accrued liabilities was $1.6 million and
$0.8 million at August 31, 2006 and 2005 respectively.
During fiscal 2006, the Company revised its earnings
repatriation plan for certain European subsidiaries and
recognized an income tax provision of $2.2 million for
taxes incurred related to the repatriation of these earnings. At
August 31, 2006, no taxes have been provided on the
undistributed earnings of certain foreign subsidiaries amounting
to $264.2 million because the Company intends to reinvest
these earnings.
NOTE 7
PENSIONS
The Company has defined benefit pension plans and other
postretirement benefit plans, primarily health care and life
insurance. Benefits for the defined benefit plans are based
primarily on years of service and qualifying compensation during
the final years of employment. A supplemental non-qualified,
non-funded pension plan for certain officers was adopted as of
January 1, 2004. Charges to earnings are provided to meet
the projected benefit obligation. The pension cost for this plan
is based on substantially the same actuarial methods and
economic assumptions as those used for the defined benefit
pension plan. In connection with this plan, the Company owns and
is the beneficiary of life insurance policies that cover the
estimated total cost of this plan. The cash surrender value of
this insurance was $1.1 million and $0.8 million at
August 31, 2006 and 2005, respectively. Postretirement
health care and life insurance benefits are provided to certain
domestic employees if they reach retirement age while working
for the Company. Effective January 1, 2004, the Company
amended the plan to require co-payments and participant
contribution. The measurement date for all plans is
August 31.
49
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
Components of the plan obligations and assets, and the recorded
liability at August 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
(68,361
|
)
|
|
$
|
(56,500
|
)
|
|
$
|
(32,110
|
)
|
|
$
|
(25,713
|
)
|
Service cost
|
|
|
(2,558
|
)
|
|
|
(2,124
|
)
|
|
|
(1,997
|
)
|
|
|
(1,586
|
)
|
Interest cost
|
|
|
(3,092
|
)
|
|
|
(3,229
|
)
|
|
|
(1,666
|
)
|
|
|
(1,520
|
)
|
Participant contributions
|
|
|
(276
|
)
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
Actuarial gain (loss)
|
|
|
(3,607
|
)
|
|
|
(7,613
|
)
|
|
|
5,136
|
|
|
|
(4,063
|
)
|
Benefits paid
|
|
|
1,953
|
|
|
|
1,477
|
|
|
|
740
|
|
|
|
772
|
|
Translation adjustment
|
|
|
(3,174
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
(79,115
|
)
|
|
$
|
(68,361
|
)
|
|
$
|
(29,897
|
)
|
|
$
|
(32,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
10,938
|
|
|
$
|
8,631
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on assets
|
|
|
1,442
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
2,601
|
|
|
|
1,810
|
|
|
|
740
|
|
|
|
772
|
|
Participant contributions
|
|
|
276
|
|
|
|
200
|
|
|
|
52
|
|
|
|
57
|
|
Benefits paid
|
|
|
(1,953
|
)
|
|
|
(1,469
|
)
|
|
|
(792
|
)
|
|
|
(829
|
)
|
Translation adjustment
|
|
|
740
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of
year
|
|
$
|
14,044
|
|
|
$
|
10,938
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underfunded
|
|
$
|
(65,071
|
)
|
|
$
|
(57,423
|
)
|
|
$
|
(29,897
|
)
|
|
$
|
(32,110
|
)
|
Unamortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability
|
|
|
110
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
|
16,986
|
|
|
|
15,329
|
|
|
|
7,791
|
|
|
|
13,496
|
|
Prior year service cost (credit)
|
|
|
2,497
|
|
|
|
2,964
|
|
|
|
(1,079
|
)
|
|
|
(1,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(45,478
|
)
|
|
$
|
(38,988
|
)
|
|
$
|
(23,185
|
)
|
|
$
|
(19,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the statement
of financial position consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset
|
|
$
|
1,382
|
|
|
$
|
1,006
|
|
|
$
|
|
|
|
$
|
|
|
Deferred tax asset
|
|
|
3,525
|
|
|
|
3,311
|
|
|
|
|
|
|
|
|
|
Accrued payrolls, taxes and related
benefits
|
|
|
(2,800
|
)
|
|
|
(2,100
|
)
|
|
|
(788
|
)
|
|
|
(737
|
)
|
Other long-term liabilities
|
|
|
(53,894
|
)
|
|
|
(47,025
|
)
|
|
|
(22,397
|
)
|
|
|
(19,058
|
)
|
Accumulated other comprehensive
income
|
|
|
6,309
|
|
|
|
5,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(45,478
|
)
|
|
$
|
(38,988
|
)
|
|
$
|
(23,185
|
)
|
|
$
|
(19,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net periodic benefit cost of the years ended
August 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
Service cost
|
|
$
|
2,558
|
|
|
$
|
2,124
|
|
|
$
|
1,930
|
|
|
$
|
1,997
|
|
|
$
|
1,586
|
|
|
$
|
1,050
|
|
Interest cost
|
|
|
3,092
|
|
|
|
3,229
|
|
|
|
2,751
|
|
|
|
1,666
|
|
|
|
1,520
|
|
|
|
1,291
|
|
Expected return on plan assets
|
|
|
(865
|
)
|
|
|
(719
|
)
|
|
|
(530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transition
obligation
|
|
|
32
|
|
|
|
33
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
467
|
|
|
|
494
|
|
|
|
297
|
|
|
|
(102
|
)
|
|
|
(102
|
)
|
|
|
(102
|
)
|
Effect of amendment
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred asset gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
568
|
|
|
|
379
|
|
|
|
207
|
|
Recognized net actuarial loss
|
|
|
443
|
|
|
|
63
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,727
|
|
|
$
|
5,224
|
|
|
$
|
4,895
|
|
|
$
|
4,129
|
|
|
$
|
3,383
|
|
|
$
|
2,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the pension plan
with accumulated benefit obligations in excess of plan assets
were $79.1 million, $70.1 million and
$14.0 million, respectively, as of August 31, 2006,
and $68.4 million, $61.2 million and
$10.9 million, respectively, as of August 31, 2005.
The under funded position is primarily related to the
Companys German pension plan, where funding is not
required.
The total pension contributions for multi-employer pension plans
was $17,000 in 2006, $6,000 in 2005, and $31,000 in 2004. The
total cost for defined contribution plans was $3.8 million
in 2006, $3.6 million in 2005 and $3.7 million in 2004.
Actuarial assumptions used in the calculation of the recorded
liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average
assumptions as of August 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate on pension plans
|
|
|
4.7
|
%
|
|
|
4.5
|
%
|
|
|
5.6
|
%
|
Discount rate on postretirement
obligation
|
|
|
6.00
|
%
|
|
|
5.25
|
%
|
|
|
6.00
|
%
|
Return on pension plan assets
|
|
|
7.7
|
%
|
|
|
7.7
|
%
|
|
|
6.9
|
%
|
Rate of compensation increase
|
|
|
2.4
|
%
|
|
|
3.4
|
%
|
|
|
2.8
|
%
|
Pre-Age 65
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected health care cost trend
rate
|
|
|
8.0
|
%
|
|
|
9.0
|
%
|
|
|
10.0
|
%
|
Ultimate health care rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year ultimate health care trend
rate is achieved
|
|
|
2009
|
|
|
|
2009
|
|
|
|
2009
|
|
Post-Age 65
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected health care cost trend
rate
|
|
|
10.0
|
%
|
|
|
11.0
|
%
|
|
|
12.0
|
%
|
Ultimate health care rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year ultimate health care trend
rate is achieved
|
|
|
2011
|
|
|
|
2011
|
|
|
|
2011
|
|
The Company in consultation with its actuaries reviews and
selects the discount rate to be used in connection with its
postretirement obligation annually. When selecting the discount
rate the Company uses a model that considers the Companys
demographics of the participants and the resulting expected
benefit payment stream over the participants lifetime.
The Company, in consultation with various actuaries, annually
reviews and selects the discount rates to be used in connection
with its defined benefit pension plans. The discount rates used
by the Company are based on yields of various corporate bond
indices with varying maturity dates. The discount rates are also
reviewed in comparison with current benchmark indices, economic
market conditions and the movement in the benchmark yield since
the previous fiscal year.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plan. A
one-percentage point change in assumed health care cost trend
rates would have the following effects at August 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
One-Percentage-
|
|
|
One-Percentage-
|
|
|
|
Point
Increase
|
|
|
Point
Decrease
|
|
|
|
(In
thousands)
|
|
|
Effect on total of service and
interest cost components
|
|
$
|
857
|
|
|
$
|
(682
|
)
|
Effect on postretirement obligation
|
|
$
|
5,708
|
|
|
$
|
(4,443
|
)
|
The Companys pension plan weighted-average asset
allocation at August 31, 2006 and 2005, and target
allocation, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at
August 31,
|
|
|
Target
|
|
Asset
Category
|
|
2006
|
|
|
2005
|
|
|
Allocation
|
|
|
Equity securities
|
|
|
73.2
|
%
|
|
|
69.5
|
%
|
|
|
70.0
|
%
|
Debt securities
|
|
|
17.3
|
%
|
|
|
16.0
|
%
|
|
|
15.0
|
%
|
Guaranteed investment certificates
|
|
|
6.4
|
%
|
|
|
9.4
|
%
|
|
|
10.0
|
%
|
Cash
|
|
|
3.1
|
%
|
|
|
5.1
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
The Companys principal objective is to ensure that
sufficient funds are available to provide benefits as and when
required under the terms of the plans. The Company utilizes
investments that provide benefits and maximizes the long-term
investment performance of the plans without taking on undue risk
while complying with various legal funding requirements. The
Company through its investment advisors has developed detailed
asset and liability models to aid in implementing optimal asset
allocation strategies. Equity securities are invested in equity
indexed funds, which minimizes concentration risk while offering
market returns. The debt securities are invested in a long-term
bond indexed fund which provides a stable low risk return. The
guaranteed investment certificates allow the Company to closely
match a portion of the liability to the expected payout of
benefit with little risk.
The Company, in consultation with its actuaries, analyzes
current market trends, the current plan performance and expected
market performance of both the equity and bond markets to arrive
at the expected return on each asset category over the long term.
The Company expects to contribute approximately
$2.8 million for its pension obligations and approximately
$0.8 million to its other postretirement plan in 2007. The
benefit payments, which reflect expected future service, offset
by the expected Medicare Prescription Drug subsidies, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Postretirement Benefits
|
|
|
|
Pension
|
|
|
Gross
|
|
|
Medicare
|
|
|
Net
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Reimbursement
|
|
|
Benefits
|
|
|
|
(In
thousands)
|
|
|
2007
|
|
$
|
3,003
|
|
|
$
|
869
|
|
|
$
|
82
|
|
|
$
|
787
|
|
2008
|
|
|
2,141
|
|
|
|
956
|
|
|
|
93
|
|
|
|
863
|
|
2009
|
|
|
3,192
|
|
|
|
1,053
|
|
|
|
105
|
|
|
|
948
|
|
2010
|
|
|
2,544
|
|
|
|
1,155
|
|
|
|
116
|
|
|
|
1,039
|
|
2011
|
|
|
2,669
|
|
|
|
1,237
|
|
|
|
125
|
|
|
|
1,112
|
|
Years 2012 - 2016
|
|
|
18,309
|
|
|
|
8,203
|
|
|
|
803
|
|
|
|
7,400
|
|
The Company has agreements with two individuals that upon
retirement, or death or disability prior to retirement, it shall
make ten payments of $0.1 million each to the two employees
or their beneficiaries for a ten-year period and is 100% vested.
The liability required for these agreements was fully accrued
and is included in other long-term liabilities as of
August 31, 2006 and 2005. In connection with these
agreements, the Company owns and is the beneficiary of life
insurance policies amounting to $2.0 million.
NOTE 8
ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of Accumulated Other Comprehensive Income are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
Foreign currency translation gain
|
|
$
|
39,202
|
|
|
$
|
32,372
|
|
Minimum pension liability
|
|
|
(6,309
|
)
|
|
|
(5,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,893
|
|
|
$
|
26,552
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains are not tax effected as such
gains are considered permanently reinvested. Minimum pension
liability adjustments are recorded net of tax using the
applicable effective tax rate.
NOTE 9
INCENTIVE STOCK PLANS
Effective in December 1991, the Company adopted the 1991 Stock
Incentive Plan. The 1991 Plan provided for the grant of
incentive stock options, nonqualified stock options and
restricted stock awards. The option price for incentive stock
options was the fair market value of the common shares on the
date of grant. In the case of nonqualified stock options, the
Company granted options at fair market value on the date of
grant. However, the Plan provided that the option price may not
be less than 50% of the fair market value of the common shares
on the date of grant. Stock options may be exercised as
52
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
determined by the Company, but in no event prior to six months
following the date of grant or after the 10th anniversary
date of grant. Effective in October 1992, the Company adopted
the 1992 Non-Employee Directors Stock Option Plan to
provide for the grant of nonqualified stock options and
restricted stock awards. The option price was the fair market
value of the common shares on the first business day immediately
preceding the date of grant. All options become exercisable at
the rate of 25% per year, commencing on the first
anniversary of the date of grant of the option. Each option
expired five years from the date of grant. Both the 1991 and
1992 Plans have expired and no further shares are available for
issuance.
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 August 31, 2006, 1,722,686 shares are
available for grants of non-qualified stock options pursuant to
the Companys 2002 Equity Incentive Plan. It has been the
Companys practice to issue new common shares upon stock
option exercise.
On September 1, 2005, the Company adopted Statement of
Financial Accounting Standards No. 123 (Revised 2004),
(SFAS 123R), Share-Based Payment, which
requires the Company to measure all employee stock-based
compensation awards using a fair value method and record the
related expense in the financial statements. The Company elected
to use the modified prospective transition method. The modified
prospective transition method requires that compensation cost be
recognized in the financial statements for all awards granted
after the date of adoption as well as for existing awards for
which the requisite service has not been rendered as of the date
of adoption and requires that prior periods not be restated. All
periods presented prior to September 1, 2005 were accounted
for in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and
followed a nominal vesting period approach.
The adoption of SFAS 123R reduced income before taxes for
year ended August 31, 2006 by approximately
$4.5 million ($0.15 per basic and diluted share).
These expenses are included in selling, general and
administrative expenses in the accompanying consolidated
statement of income. The first quarter of fiscal 2006 included
approximately $1.0 million of charges related to the
accelerated vesting of retirement eligible employees under the
non-substantive vesting period approach applied to new grants
after adoption. The expense recorded did not impact income tax
expense since the Companys deferred tax assets are fully
reserved by a valuation allowance. There was no impact to the
statement of cash flows related to the adoption of
SFAS 123R. In addition, Unearned Stock Grant Compensation
of $3.2 million was reclassified to Other Capital in
stockholders equity upon adoption of SFAS 123R.
The following table illustrates the effect on net income and
earnings per share had the fair value based method been applied
to measure compensation cost for prior periods presented:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands,
except per
|
|
|
|
share
data)
|
|
|
Net income, as reported
|
|
$
|
32,093
|
|
|
$
|
27,906
|
|
Add: Stock-based employee
compensation expense included in reported net income, net of tax
|
|
|
1,408
|
|
|
|
2,267
|
|
Deduct: Total stock-based employee
compensation expense determined under the fair value method, net
of tax where applicable
|
|
|
(5,228
|
)
|
|
|
(3,180
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
28,273
|
|
|
$
|
26,993
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic: as reported
|
|
$
|
1.05
|
|
|
$
|
0.93
|
|
as
adjusted
|
|
$
|
0.92
|
|
|
$
|
0.90
|
|
Diluted: as reported
|
|
$
|
1.03
|
|
|
$
|
0.91
|
|
as
adjusted
|
|
$
|
0.91
|
|
|
$
|
0.88
|
|
The total stock-based employee compensation expense for the
years ended August 31, 2005 and 2004 was calculated using
the nominal vesting period approach.
53
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
The weighted-average fair value of stock-based awards was $7.94
for the January 2006 grant, $6.20 for the October 2005 grant,
$5.93 for fiscal 2005 grants and $5.97 for fiscal 2004 grants.
These values were estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Expected life of award (years)
|
|
|
5.5
|
|
|
|
4.0
|
|
|
|
4.0
|
|
Risk-free interest rate
|
|
|
4.3
|
%
|
|
|
3.0
|
%
|
|
|
4.3
|
%
|
Expected volatility of stock
|
|
|
40.0
|
%
|
|
|
43.0
|
%
|
|
|
47.0
|
%
|
Expected dividend yield of stock
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
The expected lives of the awards are based on historical
exercise patterns and the terms of the options. The risk-free
interest rate is based on zero coupon treasury bond rates
corresponding to the expected life of the awards. The expected
volatility assumption was derived by referring to changes in the
Companys historical common stock prices over the same
timeframe as the expected life of the awards. The expected
dividend yield of common stock is based on the Companys
historical dividend yield. The Company has no reason to believe
that future stock volatility or the expected dividend yield is
likely to differ from historical patterns.
A summary of stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Outstanding
|
|
|
Weighted-
|
|
|
Outstanding
|
|
|
Weighted-
|
|
|
Outstanding
|
|
|
Weighted-
|
|
|
|
Shares
|
|
|
Average
|
|
|
Shares
|
|
|
Average
|
|
|
Shares
|
|
|
Average
|
|
|
|
Under
Option
|
|
|
Exercise
Price
|
|
|
Under
Option
|
|
|
Exercise
Price
|
|
|
Under
Option
|
|
|
Exercise
Price
|
|
|
Outstanding at beginning of year
|
|
|
1,672,362
|
|
|
$
|
17.09
|
|
|
|
1,530,392
|
|
|
$
|
15.38
|
|
|
|
1,911,150
|
|
|
$
|
14.05
|
|
Granted
|
|
|
572,750
|
|
|
|
19.78
|
|
|
|
529,650
|
|
|
|
19.85
|
|
|
|
645,600
|
|
|
|
18.02
|
|
Exercised
|
|
|
(650,667
|
)
|
|
|
15.06
|
|
|
|
(301,823
|
)
|
|
|
13.56
|
|
|
|
(812,690
|
)
|
|
|
14.41
|
|
Forfeited and expired
|
|
|
(26,169
|
)
|
|
|
15.93
|
|
|
|
(85,857
|
)
|
|
|
15.98
|
|
|
|
(213,668
|
)
|
|
|
15.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,568,276
|
|
|
|
18.93
|
|
|
|
1,672,362
|
|
|
|
17.09
|
|
|
|
1,530,392
|
|
|
|
15.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
474,836
|
|
|
|
17.67
|
|
|
|
555,733
|
|
|
|
14.99
|
|
|
|
352,069
|
|
|
|
12.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of a stock option is the amount by which the
market value of the underlying stock exceeds the exercise price
of the option. The total intrinsic value of options exercised
during the years ended August 31, 2006, 2005 and 2004 was
approximately $4.6 million, $1.6 million and
$3.9 million, respectively. The intrinsic value for stock
options exercisable at August 31, 2006 was
$2.8 million with a remaining term for options exercisable
of 7.1 years. For stock options outstanding at
August 31, 2006, exercise prices range from $11.62 to
$24.69. The weighted average remaining contractual life for
options outstanding at August 31, 2006 was 8 years.
Stock options vested and expected to vest at August 31,
2006 were 1,550,463 with a remaining contractual term of
0.6 years and a weighted-average exercise price of $18.92.
The aggregate intrinsic value of stock options vested and
expected to vest was $7.3 million.
Total unrecognized compensation cost, including forfeitures,
related to nonvested share-based compensation arrangements at
August 31, 2006 was approximately $5.4 million. This
cost is expected to be recognized over a weighted-average period
of approximately 1.2 years.
The total fair value of options vested during the years ended
August 31, 2006, 2005 and 2004 was approximately
$3.6 million, $3.0 million and $1.7 million,
respectively.
54
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
Restricted stock awards under the 2002 Equity Incentive Plan
vest over four years following the date of grant. Restricted
stock awards issued previous to this Plan vest over five years
following the date of grant. The following table summarizes the
outstanding restricted stock awards and weighted-average fair
market value:
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
Restricted
|
|
|
Weighted-Average
|
|
|
|
Stock
Awards
|
|
|
Fair Market
Value
|
|
|
|
|
|
|
(Per
share)
|
|
|
Outstanding at August 31, 2005
|
|
|
357,350
|
|
|
$
|
16.53
|
|
Granted
|
|
|
78,950
|
|
|
|
20.71
|
|
Released
|
|
|
(67,796
|
)
|
|
|
13.11
|
|
Forfeited
|
|
|
(5,604
|
)
|
|
|
17.79
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2006
|
|
|
362,900
|
|
|
|
18.05
|
|
|
|
|
|
|
|
|
|
|
Unearned compensation for grants under the 1991 Plan
representing the fair market value of the shares at the date of
grant is charged to income over the five-year vesting period.
Unearned compensation for grants under the 2002 Plan
representing the fair market value of the shares at the date of
grant is charged to income over the four-year vesting period.
Compensation expense for restricted stock was $1.5 million
in 2006 $1.1 million in 2005 and $1.4 million in 2004.
In October 2005, the FASB issued FASB Staff Position
(FSP)
No. 123R-2
(FSP 123R-2), Practical Accommodation to the
Application of Grant Date as Defined in FASB Statement
No. 123R, to provide guidance on determining the grant date
for an award as defined in SFAS 123R. FSP 123R-2 stipulates
that assuming all other criteria in the grant date definition
are met, a mutual understanding of the key terms and conditions
of an award to an individual employee is presumed to exist upon
the awards approval in accordance with the relevant
corporate governance requirements, provided that the key terms
and conditions of an award (a) cannot be negotiated by the
recipient with the employer because the award is a unilateral
grant, and (b) are expected to be communicated to an
individual recipient within a relatively short time period from
the date of approval. The Company has applied the principles set
forth in FSP 123R-2 upon its adoption of SFAS 123R on
September 1, 2005.
In November 2005, the FASB issued FSP
No. 123R-3
(FSP 123R-3), Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards to
provide an alternative transition election related to accounting
for the tax effects of share-based payment awards to employees
to the guidance provided in Paragraph 81 of SFAS 123R.
The guidance in FSP 123R-3 was effective on November 11,
2005. An entity may take up to one year from the later of its
initial adoption of SFAS 123R or the effective date of FSP
123R-3 to evaluate its available transition alternatives and
make its one-time election. Until and unless an entity elects
the transition method described in FSP 123R-3, the entity should
follow the transition method described in Paragraph 81 of
SFAS 123R. SFAS 123R requires an entity to calculate
the pool of excess tax benefits available to absorb tax
deficiencies recognized subsequent to adopting
Statement 123R (termed the APIC Pool). The
Company is using the transition method as described in
Paragraph 81 of SFAS 123R.
NOTE 10
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income
available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if
common stock equivalents were exercised and then shared in the
earnings of the Company.
55
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
The difference between basic and diluted weighted-average common
shares results from the assumed exercise of outstanding stock
options and grants of restricted stock, calculated using the
treasury stock method. The following presents the number of
incremental weighted-average shares used in computing diluted
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,961,580
|
|
|
|
30,619,780
|
|
|
|
30,128,117
|
|
Incremental shares from stock
options
|
|
|
174,674
|
|
|
|
237,977
|
|
|
|
282,931
|
|
Incremental shares from restricted
stock
|
|
|
257,956
|
|
|
|
192,033
|
|
|
|
164,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
30,394,210
|
|
|
|
31,049,790
|
|
|
|
30,575,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal years 2006, 2005, and 2004, there were approximately
1.0 million, 1.1 million and 1.4 million,
respectively, of 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.
The following presents the computation of adjusted net income
used in computing net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
Net income
|
|
$
|
32,662
|
|
|
$
|
32,093
|
|
|
$
|
27,906
|
|
Less: Preferred stock dividends
|
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
stock
|
|
$
|
32,609
|
|
|
$
|
32,040
|
|
|
$
|
27,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11
CAPITAL STOCK AND STOCKHOLDER RIGHTS PLAN
The Board of Directors approved 1,000,000 shares of special
stock with special designations, preferences and relative,
participating, optional or other special rights, and
qualifications, limitations or restrictions as determined by the
Board of Directors.
On January 26, 2006, the Board of Directors adopted a
Shareholder Rights Plan and, on February 9, 2006,
distributed Rights to each record holder of the Companys
Common Stock on that date. Each Right is attached to each share
of Common Stock and entitles the registered holder to purchase
from the Company a unit consisting of one one-thousandth of a
share of Series A Junior Participating Special Stock, a
series of the Special Stock, at a Purchase Price of
$85.00 per unit (the Purchase Price), subject
to adjustment.
Initially, the Rights are to be attached to all Common Stock
certificates representing shares then outstanding, and no
separate Rights certificate will be distributed. The Rights will
separate from the Common Stock and will be distributed (the
Distribution Date) upon the earlier of
(i) 10 days following a public announcement that a
person or group of affiliated or associated persons (an
Acquiring Person) has acquired, or obtained the
right to acquire, beneficial ownership of 20% or more of the
outstanding shares of Common Stock (the Stock Acquisition
Date) or (ii) 10 business days following the
commencement of a tender offer or exchange offer that would
result in a person or group beneficially owning 20% or more of
such outstanding shares of Common Stock. The Rights are not
exercisable until the Distribution Date and will expire at the
close of business on February 9, 2012, unless earlier
redeemed by the Company. Until a Right is exercised, the holder
will have no rights as a stockholder of the Company, including,
without limitation, the right to vote or to receive dividends.
If an Acquiring Person becomes the beneficial owner of 20% or
more of the then outstanding shares of Common Stock, each holder
of a Right will thereafter have the right to receive, upon
exercise, Common Stock (or, in certain circumstances, cash,
property or other securities of the Company), having a value
equal to two times the Exercise Price of the Right. The Exercise
Price is the Purchase Price times the number of shares of Common
Stock associated with each Right (initially, one).
Notwithstanding any of the foregoing, following the occurrence
of any of the events set forth in this paragraph (the
Flip-In
56
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
Events), all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person will be null and void.
If following the Stock Acquisition Date, (i) the Company
engages in a merger or business combination transaction in which
the Company is not the surviving corporation; (ii) the
Company engages in a merger or business combination transaction
in which the Company is the surviving corporation and the Common
Stock of the Company is changed or exchanged; or (iii) 50%
or more of the Companys assets or earning power is sold or
transferred, each holder of a Right (except Rights which have
previously been voided as set forth above) shall thereafter have
the right to receive, upon exercise of the Right, Common Stock
of the acquiring company having a value equal to two times the
Exercise Price of the Right.
The Purchase Price payable, and the number of Units of Special
Stock or other securities or property issuable upon exercise of
the Rights are subject to adjustment from time to time to
prevent dilution. At any time until 10 days following the
Stock Acquisition Date, the Company may redeem the Rights in
whole, but not in part, at a price of $0.01 per Right.
Immediately upon the action of the Board of Directors ordering
redemption of the Rights, the Rights will terminate and the only
right of the holders of Rights will be to receive the $0.01
redemption price.
See Note 18 for information on subsequent event.
NOTE 12
LEASES
The Company leases certain equipment, buildings, transportation
vehicles and computer equipment. Total rental expense was
$6.0 million in 2006, $5.8 million in 2005, and
$5.4 million in 2004. The future minimum rental commitments
for operating non-cancelable leases excluding obligations for
taxes, insurance, etc. are as follows:
|
|
|
|
|
|
|
Minimum
Rental
|
|
|
|
(In
thousands)
|
|
|
Year ended August 31,
|
|
|
|
|
2007
|
|
$
|
4,355
|
|
2008
|
|
|
3,014
|
|
2009
|
|
|
2,006
|
|
2010
|
|
|
1,294
|
|
2011
|
|
|
1,056
|
|
2012 and thereafter
|
|
|
248
|
|
|
|
|
|
|
|
|
$
|
11,973
|
|
|
|
|
|
|
NOTE 13
SEGMENT INFORMATION
The Company is engaged in the sale of plastic resins in various
forms, which are used as raw materials by its customers. To
identify reportable segments, the Company considered its
operating structure and the types of information subject to
regular review by its President and Chief Executive Officer, who
is the Chief Operating Decision Maker. On this basis, the
Company operates primarily in two geographic segments, North
America and Europe, including Asia (Europe).
The North American segment includes operations conducted in the
United States, Canada, and Mexico. The Companys European
segment includes operations conducted in Belgium, France,
Germany, Poland, Hungary, Indonesia, Italy, Spain, Switzerland,
China, Luxembourg, Denmark and the United Kingdom. The
accounting policies of each business segment are consistent with
those described in the Summary of Significant Accounting
Policies.
Operating income includes all items except for interest expense,
interest income, restructuring, loss on extinguishment of debt,
goodwill impairment and taxes. Corporate expenses have been
allocated between the North American and European segments.
Assets of geographic segments represent those assets identified
with the operation of each segment.
57
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Other
|
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
|
August 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers
|
|
$
|
493,644
|
|
|
$
|
1,122,742
|
|
|
$
|
|
|
|
$
|
1,616,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
56,120
|
|
|
$
|
163,826
|
|
|
$
|
|
|
|
$
|
219,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(9,069
|
)
|
|
$
|
79,126
|
|
|
$
|
|
|
|
$
|
70,057
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
(2,924
|
)
|
|
|
(2,924
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(4,986
|
)
|
|
|
(4,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
(9,069
|
)
|
|
$
|
79,126
|
|
|
$
|
(7,910
|
)
|
|
$
|
62,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
305,998
|
|
|
$
|
536,539
|
|
|
$
|
|
|
|
$
|
842,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
10,460
|
|
|
$
|
14,452
|
|
|
$
|
|
|
|
$
|
24,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
18,441
|
|
|
$
|
10,798
|
|
|
$
|
|
|
|
$
|
29,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers
|
|
$
|
439,441
|
|
|
$
|
993,755
|
|
|
$
|
|
|
|
$
|
1,433,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
46,282
|
|
|
$
|
146,357
|
|
|
$
|
|
|
|
$
|
192,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(11,000
|
)
|
|
$
|
62,777
|
|
|
$
|
|
|
|
$
|
51,777
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
(2,259
|
)
|
|
|
(2,259
|
)
|
Restructuring expense
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
(11,182
|
)
|
|
$
|
62,777
|
|
|
$
|
(2,259
|
)
|
|
$
|
49,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
273,746
|
|
|
$
|
510,616
|
|
|
$
|
|
|
|
$
|
784,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
10,833
|
|
|
$
|
14,249
|
|
|
$
|
|
|
|
$
|
25,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
13,491
|
|
|
$
|
13,453
|
|
|
$
|
|
|
|
$
|
26,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers
|
|
$
|
410,179
|
|
|
$
|
828,912
|
|
|
$
|
|
|
|
$
|
1,239,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
43,906
|
|
|
$
|
139,577
|
|
|
$
|
|
|
|
$
|
183,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(7,455
|
)
|
|
$
|
67,013
|
|
|
$
|
|
|
|
$
|
59,558
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
(2,356
|
)
|
|
|
(2,356
|
)
|
Restructuring expense
|
|
|
(731
|
)
|
|
|
|
|
|
|
|
|
|
|
(731
|
)
|
Goodwill impairment
|
|
|
(1,820
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
(10,006
|
)
|
|
$
|
67,013
|
|
|
$
|
(2,356
|
)
|
|
$
|
54,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
281,860
|
|
|
$
|
442,236
|
|
|
$
|
|
|
|
$
|
724,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
11,701
|
|
|
$
|
14,169
|
|
|
$
|
|
|
|
$
|
25,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
7,109
|
|
|
$
|
15,178
|
|
|
$
|
|
|
|
$
|
22,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
Below is a summary of sales by point of origin and assets by
location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In
thousands)
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
366,836
|
|
|
$
|
320,698
|
|
|
$
|
301,474
|
|
Germany
|
|
|
510,100
|
|
|
|
456,765
|
|
|
|
372,900
|
|
Other International
|
|
|
739,450
|
|
|
|
655,733
|
|
|
|
564,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,616,386
|
|
|
$
|
1,433,196
|
|
|
$
|
1,239,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Lived Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
66,491
|
|
|
$
|
57,523
|
|
|
$
|
53,650
|
|
International
|
|
|
120,388
|
|
|
|
123,788
|
|
|
|
123,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
186,879
|
|
|
$
|
181,311
|
|
|
$
|
176,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the Companys sales for the years ended
August 31, 2006, 2005 and 2004 can be classified into five
primary product families. The approximate amount and percentage
of consolidated sales for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands,
except for %s)
|
|
Product Family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Color and additive concentrates
|
|
$
|
579,825
|
|
|
|
36
|
|
|
$
|
501,159
|
|
|
|
35
|
|
|
$
|
444,483
|
|
|
|
36
|
|
Polyolefins
|
|
|
495,163
|
|
|
|
31
|
|
|
|
424,066
|
|
|
|
30
|
|
|
|
338,278
|
|
|
|
27
|
|
Engineered compounds
|
|
|
393,312
|
|
|
|
24
|
|
|
|
377,008
|
|
|
|
26
|
|
|
|
333,630
|
|
|
|
27
|
|
Polyvinyl chloride (PVC)
|
|
|
64,174
|
|
|
|
4
|
|
|
|
54,952
|
|
|
|
4
|
|
|
|
57,018
|
|
|
|
5
|
|
Tolling
|
|
|
16,482
|
|
|
|
1
|
|
|
|
16,117
|
|
|
|
1
|
|
|
|
13,380
|
|
|
|
1
|
|
Other
|
|
|
67,430
|
|
|
|
4
|
|
|
|
59,894
|
|
|
|
4
|
|
|
|
52,302
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,616,386
|
|
|
|
100
|
|
|
$
|
1,433,196
|
|
|
|
100
|
|
|
$
|
1,239,091
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 14
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 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.
NOTE 15
TENDER OFFER AND SHARE REPURCHASE PROGRAM
On February 21, 2006 the Company announced that its Board
of Directors approved a modified Dutch auction self-tender offer
for up to 8.75 million shares of its common stock, at a
price between $21.00 and $24.00 per share. The Company
commenced the self-tender offer on March 1, 2006 and it
expired on April 11, 2006. On April 25, 2006 the
Company announced the final results of the self-tender offer
where the Company accepted for purchase 2,071,585 shares at
a price of $24.00 per share for a total of approximately
$49.7 million. The Company also incurred costs in
connection with the self-tender of $0.5 million in legal
and professional fees.
59
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
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. During the year ended
August 31, 2006, the Company repurchased 2,000,081 common
shares under the new program at an average cost of
$22.76 per share, excluding commissions. Under the current
plan the Company has approximately 4.7 million shares still
available to be repurchased. During fiscal 2006, the Company
purchased approximately 4.1 million shares of its common
stock at an average price of $23.39 excluding transaction fees
through the Repurchase Program and self-tender offer.
NOTE 16
NORTH AMERICAN RESTRUCTURING
During fiscal 2004, in order to balance capacity with demand,
the Company closed two manufacturing lines at its Nashville,
Tennessee plant. As a result, the Company recorded pre-tax
charges of $0.2 million and $1.8 million for the years
ended August 31, 2005 and 2004, respectively. There were no
charges related to this plan during the year ended
August 31, 2006.
The charges were primarily non-cash and are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
|
|
|
|
|
|
|
|
|
Accrual
|
|
|
|
Original
|
|
|
Paid Fiscal
|
|
|
Balance
|
|
|
2005
|
|
|
Paid Fiscal
|
|
|
Balance
|
|
|
|
Charge
|
|
|
2004
|
|
|
8/31/04
|
|
|
Charges
|
|
|
2005
|
|
|
8/31/05
|
|
|
|
(In
thousands)
|
|
|
Employee related costs
|
|
$
|
350
|
|
|
$
|
|
|
|
$
|
350
|
|
|
$
|
(34
|
)
|
|
$
|
(316
|
)
|
|
$
|
|
|
Other costs
|
|
|
66
|
|
|
|
|
|
|
|
66
|
|
|
|
216
|
|
|
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
416
|
|
|
$
|
|
|
|
$
|
416
|
|
|
$
|
182
|
|
|
$
|
(598
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation, included
in North America cost of sales in 2004
|
|
|
1,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges for 2005 represent additional equipment
removal costs pertaining to the 2004 Nashville restructuring.
The employee related costs included severance payments and
medical insurance for 30 employees at the Nashville facility.
The other costs included equipment removal and other exit costs
that were incurred as of August 31, 2005. The accelerated
depreciation represents a change in estimate for the reduced
life on equipment totaling $1.4 million. At August 31,
2005, the restructuring was complete, therefore no further cash
out-flows were required by the Company.
During fiscal 2003, the Company implemented a restructuring
program in its North American operations. The purpose of the
program was to improve cost efficiencies and profitability. A
large part of this plan included the termination of
manufacturing at its plant in Orange, Texas. The Company
completed its 2003 restructuring plan at August 31, 2003.
As a result, the Company recorded a pre-tax charge of
$8.6 million, net of a curtailment gain of
$0.3 million, for the year ended August 31, 2003. The
Company also incurred restructuring expense totaling
$0.3 million related primarily to the disposal of
additional equipment and to work pertaining to the closing of
the Texas facility during fiscal 2004.
60
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
The charges for this restructuring were primarily non-cash and
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid Fiscal
|
|
|
|
|
|
Accrual
|
|
|
|
|
|
Accrual
|
|
|
|
Original
|
|
|
2003 and
|
|
|
2004
|
|
|
Balance
|
|
|
Paid Fiscal
|
|
|
Balance
|
|
|
|
Charge
|
|
|
2004
|
|
|
Charges
|
|
|
8/31/04
|
|
|
2005
|
|
|
8/31/05
|
|
|
|
(In
thousands)
|
|
|
Employee related costs
|
|
$
|
1,972
|
|
|
$
|
(1,969
|
)
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
Other costs
|
|
|
4,265
|
|
|
|
(4,580
|
)
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
6,237
|
|
|
$
|
(6,549
|
)
|
|
$
|
(315
|
)
|
|
$
|
3
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation, included
in North America cost of sales in 2004
|
|
|
2,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The employee related costs included severance payments and
medical insurance, net of a curtailment gain of
$0.3 million, for 35 salaried and 97 hourly employees
primarily at facilities in Ohio and Texas. The curtailment gain
represents the gain realized from a reduction of the
post-retirement obligation due to a reduction in the workforce.
The other costs include a $1.3 million write-down of the
Texas manufacturing facility, the fair market value of which was
determined from an independent third party appraisal, a
$2.3 million write-off and disposal of manufacturing
equipment and other assets related to dropped product lines and
other exit costs. The accelerated depreciation represents a
change in estimate for the reduced life on equipment at the
Texas manufacturing facility totaling $2.4 million. The
restructuring was complete at August 31, 2005 therefore no
further cash out-flows were required by the Company.
See Note 18 for information on subsequent event.
NOTE 17
PURCHASE COMMITMENTS
In 2002, the Company entered into a long-term supply agreement
with a producer of thermoplastic polyurethane (TPU). During
fiscal 2004, per the terms of the agreement, the Company served
notice of termination of the supply agreement. As a result of
further discussions with the producer, the Company reinstated
the terms of the agreement for minimum usage requirements. The
Company has been purchasing and the producer has been supplying
TPU pursuant to the agreement. This agreement will expire during
fiscal 2007 after which the Company will have no further
obligation related to purchases from this supplier.
In 2005, the Company entered into a purchase agreement with one
of its suppliers which required the Company to purchase material
based on then current market prices. Under this agreement,
monthly purchases were made at the existing market prices at the
time of purchase. During fiscal 2006, the Company renegotiated
this contract with the supplier to adjust the required amount of
purchases as well as the contract term. Under the new terms, the
renegotiated agreement is no longer long-term in nature as no
purchases are required by the Company after fiscal 2007.
NOTE 18
SUBSEQUENT EVENTS
In October 2006, the Company reached another agreement with the
Barington Group, which as of the date of the agreement owned in
the aggregate 2,816,536 shares, or approximately 10.5% of
the Companys common stock (the 2006
Agreement). Under the terms of the 2006 Agreement, the
Barington Group withdrew a notice of its intent to nominate
certain persons for election as directors at the 2006 annual
meeting, agreed to dismiss a lawsuit it had filed against the
Company in Delaware seeking to enforce its rights as a
stockholder to inspect and copy certain books, records and
documents of the Company, and agreed to abide by certain
standstill provisions until the Companys 2007 annual
meeting. The Company 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, on or prior to the 2006 Annual Meeting of
Stockholders. 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.
61
A. Schulman,
Inc.
Notes to Consolidated Financial
Statements (Continued)
on the Boards slate of nominees for election as
Class II directors of the Company at the 2006 annual
meeting. The 2006 Agreement also superseded the 2005 Agreement,
except with respect to Sections 5(d), 6(a) and 9 of the
2005 Agreement.
In October 2006, in order to balance capacity with demand,
reduce costs and improve efficiencies in North America, the
Company announced its intentions 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. As a result, the Company expects to
record a charge during fiscal 2007 in an estimated range of
$1.0 million to $3.0 million. The Company expects the
charge to include costs such as severance payments, medical
insurance, accelerated depreciation, equipment removal costs,
other exit costs and the impact on its postretirement obligation
due to the reduction in the workforce.
NOTE 19
QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
|
Year
Ended
|
|
|
|
Nov. 30,
|
|
|
Feb. 28,
|
|
|
May 31,
|
|
|
Aug. 31,
|
|
|
Aug. 31,
|
|
|
|
2005
|
|
|
2006(c)
|
|
|
2006(d)
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands,
except per share data)
|
|
|
Net Sales
|
|
$
|
396,525
|
|
|
$
|
371,219
|
|
|
$
|
427,313
|
|
|
$
|
421,329
|
|
|
$
|
1,616,386
|
|
Gross Profit
|
|
|
60,036
|
|
|
|
50,574
|
|
|
|
57,422
|
|
|
|
51,914
|
|
|
|
219,946
|
|
Net Income (a)(b)
|
|
|
12,309
|
|
|
|
3,940
|
|
|
|
8,920
|
|
|
|
7,493
|
|
|
|
32,662
|
|
Basic and Diluted Earnings Per
Share of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.40
|
|
|
$
|
0.12
|
|
|
$
|
0.30
|
|
|
$
|
0.27
|
|
|
$
|
1.09
|
|
Diluted
|
|
$
|
0.40
|
|
|
$
|
0.12
|
|
|
$
|
0.29
|
|
|
$
|
0.26
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
|
Year
Ended
|
|
|
|
Nov. 30,
|
|
|
Feb. 28,
|
|
|
May 31,
|
|
|
Aug. 31,
|
|
|
Aug. 31,
|
|
|
|
2004
|
|
|
2005(f)
|
|
|
2005(g)
|
|
|
2005
|
|
|
2005
|
|
|
Net Sales
|
|
$
|
363,142
|
|
|
$
|
350,042
|
|
|
$
|
374,948
|
|
|
$
|
345,064
|
|
|
$
|
1,433,196
|
|
Gross Profit
|
|
|
53,636
|
|
|
|
47,281
|
|
|
|
47,449
|
|
|
|
44,273
|
|
|
|
192,639
|
|
Net Income (e)
|
|
|
7,015
|
|
|
|
11,210
|
|
|
|
7,407
|
|
|
|
6,461
|
|
|
|
32,093
|
|
Basic and Diluted Earnings Per
Share of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
0.36
|
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
1.05
|
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.36
|
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
1.03
|
|
|
|
|
(a) |
|
Net income for the quarters ended November 30, 2005,
February 28, 2006, May 31, 2006 and August 31,
2006 included charges related to the implementation of
SFAS 123R of $1,765, $852, $1,000 and $900, respectively. |
|
(b) |
|
Net income for the quarter ended November 30, 2005 included
a tax charge of $3,070 in anticipation of the estimated dividend
repatriation from Europe. Net income for the quarter ended
February 28, 2006 increased as a result of a reduction in
that estimate of $827. |
|
(c) |
|
Net income for the quarter ended February 28, 2006 included
charges related to the extinguishment of debt in the amount of
$4,986, and income from the cancellation of certain distribution
agreements in Europe of $600, net of tax. |
|
(d) |
|
Net income for the quarter ended May 31, 2006 included a
charge of $760 for tax contingencies and income from life
insurance proceeds of $494. |
|
(e) |
|
Net income for the quarters ended November 30, 2004 and
February 28, 2005 included charges of $204 and $12,
respectively, for costs relating to North America restructuring
and the May 31, 2005 quarter included a credit of $34 for
costs relating to North America restructuring. |
|
(f) |
|
Net income for the quarter ended February 28, 2005 included
$4,370 of tax benefits from tax reserves no longer required due
to a change in Mexican tax laws effective December, 2004 and the
favorable settlement of a tax claim in Canada. |
|
(g) |
|
Net income for the quarter ended May 31, 2005 included
income of $962 from a change in estimate relating to freight in
North America. Net income for the quarter ended May 31,
2005 also included a gain of $497 on the sale of an office in
Europe. |
62
|
|
ITEM 9.
|
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
|
None.
|
|
ITEM 9A.
|
CONTROLS AND
PROCEDURES
|
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed
in the Companys reports under the Securities Exchange Act
of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the
Commissions rules and forms and that such information is
accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
The Company carries out a variety of on-going procedures, under
the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer
and Chief Financial Officer, to evaluate the effectiveness of
the design and operation of the Companys disclosure
controls and procedures. Based on the foregoing, the
Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures were effective at a reasonable assurance level as
of the end of the period covered by this report.
There has been no change in the Companys internal controls
over financial reporting during the Companys most recent
fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Companys internal
controls over financial reporting.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in Exchange Act
Rule 13a-15(f).
The Companys internal control over financial reporting is
a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management,
including the chief executive officer and chief financial
officer, the Company conducted an evaluation of the
effectiveness of the Companys internal control over
financial reporting based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management has concluded
that the internal control over financial reporting was effective
as of August 31, 2006.
Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
August 31, 2006 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated
in their report included herein.
63
ITEM 9B. OTHER
INFORMATION
None.
PART III
|
|
ITEM 10.
|
DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT
|
The Board of Directors has adopted a Code of Conduct, available
on the Companys website at www.aschulman.com for the
Companys employees, officers and directors. To further
assure compliance, the Company maintains a worldwide hotline
that allows employees to report confidentially any complaints
about accounting, internal accounting controls or auditing
matters, or detected violations of its Code of Conduct.
The Board of Directors has a separately-designated audit
committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934,
as amended. The Board of Directors has determined that Ernest J.
Novak, Jr. is an audit committee financial
expert as defined in regulations adopted by the Securities
and Exchange Commission. Mr. Novak is independent under The
NASDAQ Stock Market LLC standards.
The information required in response to this Item in respect of
Directors is set forth under the captions Election of
Directors and Section 16(a) Beneficial
Ownership Compliance in the Companys proxy statement
for its 2006 Annual Meeting (the Proxy Statement)
for which information is incorporated herein by reference. The
information required by this Item in respect of Executive
Officers is set forth in the Proxy Statement under the caption
Section 16(a) Beneficial Ownership Compliance in the
Proxy Statement and is incorporated herein by reference. The
information required in response to this Item in respect of
changes to the procedures by which security holders may
recommend nominees to the Board of Directors is set forth under
the caption Corporate Governance Board
Committees Nominating and Corporate Governance
Committee in the Proxy Statement and is incorporated
herein by reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information in response to this Item is set forth under the
caption Compensation of Executive Officers in the
Proxy Statement for which information is incorporated herein by
reference.
|
|
ITEM 12.
|
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
Information in response to this Item is set forth under the
caption Security Ownership of Management and Certain
Beneficial Owners in the Proxy Statement for which
information is incorporated herein by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
Information in response to this Item is set forth under the
caption Certain Relationships and Related
Transactions in the Proxy Statement which information is
incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL ACCOUNTANT
FEES AND SERVICES
|
The information for this Item is included under the caption
Ratification of Selection of Independent Registered Public
Accountants in the Proxy Statement for which information
is incorporated herein by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as a part of this
report:
(1) Financial Statements
The consolidated financial statements files as part of this
Form 10-K
are located as set forth in the index on page 34 of this
report.
64
(2) Financial Statement Schedules:
|
|
|
|
|
Valuation and Qualifying Accounts
|
|
|
F-1
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
(3) Exhibits:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
3(a)
|
|
|
Amended and Restated Articles of
Incorporation of the Company (for purposes of Commission
reporting compliance only) (incorporated by reference to
Exhibit 3.1 to the Companys
Form 10-Q
for fiscal quarter ended February 28, 2006).
|
|
3(b)
|
|
|
Amended and Restated Bylaws of the
Company (for purposes of Commission reporting compliance only)
(incorporated by reference to Exhibit 3.2 to the
Companys
Form 10-Q
for fiscal quarter ended February 28, 2006).
|
|
4(a)
|
|
|
Rights Agreement dated as of
January 26, 2006, between the Company and National City
Bank, as Rights Agent, which includes as Exhibit B thereto
the Form of Rights Certificate (incorporated by reference to
Exhibit 1 to the Companys Registration Statement on
Form 8-A,
dated January 26, 2006).
|
|
10(a)*
|
|
|
A. Schulman, Inc. 1991 Stock
Incentive Plan (incorporated by reference to Exhibit 10(b)
to the Companys
Form 10-K
for fiscal year ended August 31, 1991).
|
|
10(b)*
|
|
|
Amendment to A. Schulman, Inc. 1991
Stock Incentive Plan (incorporated by reference to
Exhibit 10.9 to the Companys
Form 10-Q
for the fiscal quarter ended February 29, 1996).
|
|
10(c)*
|
|
|
Second Amendment to A. Schulman,
Inc. 1991 Stock Incentive Plan (incorporated by reference to
Exhibit 4(k) to the Companys Registration Statement
on
Form S-8,
dated December 20, 1999, Registration
No. 333-93093).
|
|
10(d)*
|
|
|
Third Amendment to A. Schulman,
Inc. 1991 Stock Incentive Plan (incorporated by reference to
Exhibit 4(l) to the Companys Registration Statement
on
Form S-8,
dated December 20, 1999, Registration
No. 333-93093).
|
|
10(e)*
|
|
|
A. Schulman, Inc. 1992 Non-Employee
Directors Stock Option Plan (incorporated by reference to
Exhibit A to the Companys Proxy Statement dated
November 12, 1992 filed as Exhibit 28 to the
Companys
Form 10-K
for fiscal year ended August 31, 1992).
|
|
10(f)*
|
|
|
Amendment to A. Schulman, Inc. 1992
Non-Employee Directors Stock Option Plan (incorporated by
reference to Exhibit 10.10 to the Companys
Form 10-Q
for the fiscal quarter ended February 29, 1996).
|
|
10(g)*
|
|
|
Second Amendment to A. Schulman,
Inc. 1992 Non-Employee Directors Stock Option Plan
(incorporated by reference to Exhibit 10(e) to the
Companys
Form 10-K
for the fiscal year ended August 31, 1998).
|
|
10(h)*
|
|
|
Third Amendment to A. Schulman,
Inc. 1992 Non-Employee Directors Stock Option Plan (incorporated
by reference to Exhibit 4(p) to the Companys
Registration Statement on
Form S-8,
dated December 20, 1999, Registration
No. 333-93093).
|
|
10(i)*
|
|
|
Fourth Amendment to A. Schulman,
Inc. 1992 Non-Employee Directors Stock Option Plan (incorporated
by reference to Exhibit 4.1 to the Companys
Form 10-Q
for the fiscal quarter ended November 30, 2000).
|
|
10(j)*
|
|
|
A. Schulman, Inc. 2002 Equity
Incentive Plan (incorporated by reference to Exhibit 4(l)
to the Companys Registration Statement on
Form S-8,
dated January 24, 2003, Registration
No. 333-102718).
|
|
10(k)*
|
|
|
Non-Qualified Profit Sharing Plan
(incorporated by reference to Exhibit 10(d) to the
Companys
Form 10-K
for the fiscal year ended August 31, 1995).
|
|
10(l)*
|
|
|
Amendment to A. Schulman, Inc.
Nonqualified Profit Sharing Plan (incorporated by reference to
Exhibit 10.8 to the Companys
Form 10-Q
for the fiscal quarter ended February 29, 1996).
|
|
10(m)*
|
|
|
Supplemental Executive Retirement
Plan of the Company, effective January 1, 2004
(incorporated by reference to Exhibit 10(n) to the
Companys
Form 10-K
for the fiscal year ended August 31, 2004).
|
|
10(n)*
|
|
|
Employment Agreement between the
Company and Terry L. Haines dated January 31, 1996
(incorporated by reference to Exhibit 10.3 to the
Companys
Form 10-Q
for fiscal quarter ended February 29, 1996).
|
|
10(o)*
|
|
|
Employment Agreement between the
Company and Alain C. Adam dated December 9, 1999
(incorporated by reference to Exhibit 10.1 to the
Companys
Form 10-Q
for fiscal quarter ended February 29, 2000).
|
|
10(p)*
|
|
|
Employment Agreement between the
Company and John M. Myles dated as of July 8, 1998
(incorporated by reference to Exhibit 10(p) to the
Companys
Form 10-K
for fiscal year ended August 31, 1998).
|
|
10(q)*
|
|
|
Employment Agreement between the
Company and Ronald G. Andres dated as of October 20, 1999
(incorporated by reference to Exhibit 10(o) to the
Companys
Form 10-K
for the fiscal year ended August 31, 1999).
|
|
10(r)*
|
|
|
Agreement between the Company and
Terry L. Haines dated as of March 21, 1991 (incorporated by
reference to Exhibit 10(m) to the Companys
Form 10-K
for fiscal year ended August 31, 1992).
|
|
10(s)*
|
|
|
Form of Amendment to Deferred
Compensation Agreements between the Company and Terry L. Haines
(incorporated by reference to Exhibit 10.1 to the
Companys
Form 10-Q
for the fiscal quarter ended February 29, 1996).
|
|
10(t)*
|
|
|
Employment Agreement between the
Company and Barry A. Rhodes dated January 10, 2002
(incorporated by reference to Exhibit 10.1 to the
Companys
Form 10-Q
for the fiscal quarter ended February 28, 2002).
|
|
10(u)*
|
|
|
Employment Agreement between the
Company and Paul F. DeSantis, dated January 4, 2006
(incorporated by reference to the Companys Current Report
on
Form 8-K,
dated January 4, 2006).
|
|
10(v)*
|
|
|
Transition Agreement between the
Company and Robert A. Stefanko (incorporated by reference to the
Companys Current Report on
Form 8-K
dated April 17, 2006).
|
|
10(w)*
|
|
|
A. Schulman, Inc. 2002 Equity
Incentive Plan Stock Option Award Agreement (Employee Form)
(incorporated by reference to Exhibit 10.1 to the
Companys Report on
Form 8-K
dated October 18, 2004).
|
65
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
|
|
|
10(x)*
|
|
|
A. Schulman, Inc. 2002 Equity
Incentive Plan Restricted Stock Award Agreement (Employee Form)
(incorporated by reference to Exhibit 10.2 to the
Companys Report on
Form 8-K
dated October 18, 2004).
|
|
10(y)*
|
|
|
A. Schulman, Inc. 2002 Equity
Incentive Plan Stock Option Award Agreement (Director Form)
(incorporated by reference to Exhibit 10.3 to the
Companys Report on
Form 8-K
dated October 18, 2004).
|
|
10(z)*
|
|
|
A. Schulman, Inc. 2002 Equity
Incentive Plan Restricted Stock Award Agreement (Director Form)
(incorporated by reference to Exhibit 10.4 to the
Companys Report on
Form 8-K
dated October 18, 2004).
|
|
10(aa)
|
|
|
A. Schulman, Inc. 2002 Equity
Incentive Plan Restricted Stock Unit Award Agreement
(incorporated by reference to Exhibit 10.1 to the
Companys Report on
Form 8-K
dated May 12, 2005).
|
|
10(bb)
|
|
|
Credit Agreement, dated as of
February 28, 2006, among A. Schulman, Inc., A. Schulman
Europe GmbH, A. Schulman Plastics, S.A., and A. Schulman
International Services NV, with JPMorgan Chase Bank, N.A., as
administrative agent, J.P. Morgan Europe Limited, as
European agent, J.P. Morgan Securities Inc., as Sole Bookrunner
and Sole Lead Arranger and the lenders party to the Credit
Agreement (incorporated by reference to Exhibit 99.1 to the
Companys Current Report on
Form 8-K
dated February 28, 2006).
|
|
10(cc)
|
|
|
Note Purchase Agreement, dated
as of March 1, 2006, by and between A. Schulman Europe
GmbH, A. Schulman, Inc. and the Purchasers and Guarantors named
therein (incorporated by reference to Exhibit 99.2 to the
Companys current Report on
Form 8-K
dated February 28, 2006).
|
|
10(dd)
|
|
|
ISDA (International Swap Dealers
Association, Inc.) Master Agreement by and between KeyBank
National Association and the Company dated January 13, 2004
(incorporated by reference to Exhibit 10(ff) to the
Companys
Form 10-K
for the fiscal year ended August 31, 2004).
|
|
10(ee)
|
|
|
Agreement dated October 21,
2005 among the Company, Barington Capital Group, L.P. and others
(incorporated by reference to Exhibit 99.2 to the
Companys Current Report on
Form 8-K
dated October 21, 2005).
|
|
10(ff)
|
|
|
Agreement dated October 25,
2006 among the Company, Barington Capital Group, L.P. and others
(incorporated by reference to Exhibit 99.2 to the
Companys Current Report on
Form 8-K
dated October 25, 2006).
|
|
10(gg)*
|
|
|
Non-Employee Directors Compensation
(filed herewith)
|
|
10(hh)*
|
|
|
The Companys Directors
Deferred Units Plan, as amended and restated effective
October 17, 2006 (incorporated by reference to the
Companys Current Report on
Form 8-K
dated October 16, 2006).
|
|
10(ii)
|
|
|
Form of Indemnification Agreement
for all Executive Officers and Directors of the Company
(incorporated by reference to Exhibit 99.2 to the
Companys Current Report on
Form 8-K
dated October 16, 2006).
|
|
10(jj)*
|
|
|
The Companys 2007 Bonus Plan
(incorporated by reference to the Companys Current Report
on
Form 8-K
dated October 16, 2006).
|
|
11
|
|
|
Computation of Basic and Diluted
Earnings Per Common Share (filed herewith).
|
|
21
|
|
|
Subsidiaries of the Company (filed
herewith).
|
|
23
|
|
|
Consent of Independent Registered
Public Accounting Firm (filed herewith).
|
|
24
|
|
|
Powers of Attorney (filed herewith).
|
|
31
|
|
|
Certifications of Principal
Executive and Principal Financial Officers pursuant to
Rule 13a-14(a)/15d-14(a)
(filed herewith).
|
|
32
|
|
|
Certifications of Principal
Executive and Principal Financial Officers pursuant to
18 U.S.C. 1350 (filed herewith).
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement required
to be filed as an Exhibit hereto. |
|
(b) |
|
Exhibits. |
|
|
|
See subparagraph (a)(3) above |
|
(c) |
|
Financial Statement Schedules. |
|
|
|
See subparagraph (a)(2) above |
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
A. SCHULMAN, INC.
Paul F. DeSantis
Chief Financial Officer
Dated: November 3, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Company and in the capacities and on the date
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Terry
L. Haines
Terry
L. Haines
|
|
Director and Principal Executive
Officer
|
|
November 3, 2006
|
|
|
|
|
|
/s/ Paul
F. DeSantis
Paul
F. DeSantis
|
|
Principal Financial Officer and
Principal Accounting Officer
|
|
November 3, 2006
|
|
|
|
|
|
*
David
G. Birney
|
|
Director
|
|
|
|
|
|
|
|
*
Joseph
M. Gingo
|
|
Director
|
|
|
|
|
|
|
|
*
Willard
R. Holland
|
|
Director
|
|
|
|
|
|
|
|
*
James
A. Karman
|
|
Director
|
|
|
|
|
|
|
|
*
James
S. Marlen
|
|
Director
|
|
|
|
|
|
|
|
*
Peggy
Miller
|
|
Director
|
|
|
|
|
|
|
|
James
A. Mitarotonda
|
|
Director
|
|
|
|
|
|
|
|
*
Ernest
J. Novak, Jr.
|
|
Director
|
|
|
|
|
|
|
|
*
Paul
Craig Roberts
|
|
Director
|
|
|
67
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
*
John
B. Yasinsky
|
|
Director
|
|
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Terry
L. Haines
Terry
L. Haines
Attorney-in-Fact
|
|
|
|
|
November 3, 2006
|
|
|
* |
|
Powers of attorney authorizing Terry L. Haines to sign this
Annual Report on
Form 10-K
on behalf of certain Directors of the Company are being filed
with the Securities and Exchange Commission herewith. |
68
A. SCHULMAN,
INC.
VALUATION AND QUALIFYING ACCOUNTS
Schedule F-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charges to
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
beginning
|
|
|
cost and
|
|
|
Net
|
|
|
Translation
|
|
|
|
|
|
close of
|
|
|
|
of
period
|
|
|
expenses
|
|
|
Write-offs
|
|
|
Adjustment
|
|
|
Other
|
|
|
period
|
|
|
|
(In
thousands)
|
|
|
Reserve for doubtful
accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31, 2006
|
|
$
|
8,227
|
|
|
$
|
2,453
|
|
|
$
|
(1,458
|
)
|
|
$
|
187
|
|
|
$
|
|
|
|
$
|
9,409
|
|
Year ended August 31, 2005
|
|
$
|
9,268
|
|
|
$
|
1,363
|
|
|
$
|
(2,599
|
)
|
|
$
|
195
|
|
|
$
|
|
|
|
$
|
8,227
|
|
Year ended August 31, 2004
|
|
$
|
8,814
|
|
|
$
|
2,402
|
|
|
$
|
(2,345
|
)
|
|
$
|
397
|
|
|
$
|
|
|
|
$
|
9,268
|
|
Inventory Reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31, 2006
|
|
$
|
11,235
|
|
|
$
|
1,801
|
|
|
$
|
(4,659
|
)
|
|
$
|
161
|
|
|
$
|
|
|
|
$
|
8,538
|
|
Year ended August 31, 2005
|
|
$
|
10,522
|
|
|
$
|
5,803
|
|
|
$
|
(5,246
|
)
|
|
$
|
156
|
|
|
$
|
|
|
|
$
|
11,235
|
|
Year ended August 31, 2004
|
|
$
|
7,954
|
|
|
$
|
7,035
|
|
|
$
|
(5,092
|
)
|
|
$
|
625
|
|
|
$
|
|
|
|
$
|
10,522
|
|
Valuation allowance
deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31, 2006
|
|
$
|
42,445
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,157
|
|
|
$
|
44,602
|
|
Year ended August 31, 2005
|
|
$
|
39,789
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,656
|
|
|
$
|
42,445
|
|
Year ended August 31, 2004
|
|
$
|
33,763
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,026
|
|
|
$
|
39,789
|
|
70