UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

Commission File No. 0-7459

 

A. SCHULMAN, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Registrant’s telephone number, including area code: (330) 666-3751

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark 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 registrant’s 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.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

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, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $586,000,000 based on the closing sale price as reported on the NASDAQ Global Select Market.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date 31,487,229 Shares of Common Stock, $1.00 Par Value, at October 15, 2010.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

TABLE OF CONTENTS

 

 

 

A. Schulman, Inc. (the “Company,” “A. Schulman,” “we,” “our,” “ours” and “us”) was organized as an Ohio corporation in 1928 and changed its state of incorporation to Delaware in 1969.

 

Founded in 1928 by Alex Schulman, the Akron, Ohio based company began as a processor of rubber compounds. During those early days, when Akron, Ohio was known as the rubber capital of the world, Mr. Schulman saw opportunity in taking existing rubber products and compounding new formulations to meet under-served market needs. As the newly emerging science of polymers began to make market strides in the early 1950s, A. Schulman was there to advance the possibilities of the technology, leveraging its compounding expertise into developing solutions to meet exact customer application requirements. The Company later expanded into Europe, Latin America and Asia, establishing manufacturing plants, technology centers and sales offices in numerous countries. In 1972 the Company went public. Today, A. Schulman is recognized as one of the leading global plastics compounders.

 

The Company has at least five unique competitive advantages:

 

 

The Company leverages these five unique competitive advantages to develop and maintain strong customer relationships and drive continued profitable growth.

 

Each of the Company’s lines of business has a successful presence in the global market place, providing tailored solutions for customers. The result is a product portfolio that is strongly positioned in the industry allowing the Company to bring new and enhanced products to the market faster and more consistently. With first-class research and development centers strategically positioned around the globe, A. Schulman has the ability to act fast against market needs. Producing and supplying product is also imperative. The Company’s collaboration between development and production is especially important to the Company, as well as its customers, as quick and quality turnaround is critical. The Company’s 36 manufacturing facilities are geographically positioned, allowing the Company to quickly service target markets and customers. The Company generally produces compounds on the basis of customer commitments and expectations. Of course, proximity means little without quality. A. Schulman has a long and proud history of consistently supplying products of the highest standards, which is evidenced by the Company’s numerous certifications and accreditations.

 

Information regarding the amount of sales, operating income and identifiable assets attributable to each of the Company’s 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.

BUSINESS SEGMENTS

 

The Company considers its operating structure and the types of information subject to regular review by its President and Chief Executive Officer (“CEO”), who is the Chief Operating Decision Maker (“CODM”), to identify reportable segments.

 

During fiscal 2010, the Company completed the purchase of McCann Color, Inc. (“McCann Color”), a producer of high-quality color concentrates, based in North Canton, Ohio. The business provides specially formulated color concentrates to match precise customer specifications. Its products are used in end markets such as packaging, lawn and garden, furniture, consumer products and appliances. The operations serve customers from its 48,000-square-foot, expandable North Canton facility, which was built in 1998 exclusively to manufacture color concentrates. The facility complements the Company’s existing North American masterbatch manufacturing and product development facilities in Akron, Ohio, San Luis Potosi, Mexico, and La Porte, Texas.

 

Also during fiscal 2010, the Company acquired ICO, Inc. (“ICO”), a global manufacturing company of specialty resins and concentrates, and provider of specialty polymer services, including size reduction, compounding and other related services. The acquisition of ICO presents the Company with an opportunity to expand its presence substantially, especially in the global rotomolding and U.S. masterbatch markets. ICO’s business is complementary to the Company’s business across markets, product lines and geographies. The acquisition of ICO’s operations increases the Company’s presence in the U.S. masterbatch market, gains plants in the high-growth market of Brazil and expands the Company’s Asia Pacific presence with the addition of several ICO facilities in that region. In Europe, the acquisition allows the Company to add rotomold compounding and size reduction to the Company’s capabilities. It also enables growth in countries where the Company currently has a limited presence, such as France, Italy and Holland, as well as further leveraging facilities serving high-growth markets such as Poland, Hungary and Sweden.

 

As a result of the April 30, 2010 acquisition of ICO, the Company updated its reportable segments to reflect the Company’s current reporting structure. The Company now has six reportable segments based on the regions in which they operate and the products and services they provide. The six reportable segments are Europe, Middle East and Africa (“EMEA”), North America Masterbatch (“NAMB”), North America Engineered Plastics (“NAEP”), North America Rotomolding (“NARM”), Asia Pacific (“APAC”) and Bayshore. The following table describes the components of the Company’s pre- and post-merger and ICO’s former reportable segments which make up the current reportable segments:

 

 

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

 

The CODM uses net sales to unaffiliated customers, gross profit and operating income before certain items in order to make decisions, assess performance and allocate resources to each segment. Operating income before certain items does not include interest income or expense, other income or expense, foreign currency transaction gains or losses and other certain items such as restructuring related expenses, asset write-downs, costs related to business acquisitions, inventory step-up, CEO transition costs, termination of a lease for an airplane and an insurance claim settlement adjustment. Certain portions of the Company’s North American operations are not managed separately and are included in

All Other North America. The Company includes in All Other North America any administrative costs that are not directly related or allocated to a North America business unit such as North American information technology, human resources, accounting and purchasing. The North American administrative costs are directly related to the four North American segments. Corporate expenses include the compensation of certain personnel, certain audit expenses, board of directors related costs, certain insurance costs and other miscellaneous legal and professional fees.

 

Globally, the Company operates primarily in four lines of business: (1) masterbatch, (2) engineered plastics, (3) rotomolding and (4) distribution. In North America, there is a general manager of each of these lines of business, each of whom reports directly to the Company’s CEO. The Company’s EMEA and APAC segments have managers of each line of business, who report to a general manager who reports to the CEO. Currently, the Company’s CEO does not directly manage the business line level when reviewing performance and allocating resources for the EMEA and APAC segments.

 

The Company has described the lines of business listed above through which the Company offers its products and services to its customers. In addition to compounded products, in each line of business, the Company offers tolling services/producer services, where the Company processes material provided and owned by customers. While providing these services, the Company may provide certain amounts of its materials, such as additives.

 

Masterbatch

 

Masterbatches (also referred to as “concentrates”) are often the key ingredient in a successful application formula. These highly concentrated compounds are introduced at the point-of-process to provide a material solution that meets several combinations of performance and aesthetic requirements.

 

The Company first began supplying masterbatch through its technology center in Bornem, Belgium in the early 1960s. By the end of the decade, the Company’s presence in this area had grown to the Americas, primarily in Mexico, and later in Asia. The acquisitions of ICO and McCann Color in fiscal 2010 allow the Company to expand product offerings in the high-quality, custom color and the commodity masterbatch markets, provide capacity, flexibility and efficiency to advance growth in targeted markets, and reduce dependence on the automotive market. The Company’s manufacturing and research facilities are strategically located globally to ensure that orders are shipped within specification and on time.

 

From performance to aesthetic requirements or combinations thereof, the masterbatch product portfolio is designed to offer better solutions faster, and includes:

 

 

Additive solutions are available to achieve many enhanced performance properties, including (but not limited to): antibacterial, UV, anti-static, barrier, foaming agents, antioxidants, slip, process aids, release agents, antiblocking, and optical brighteners. In addition, the Company’s products are also designed with efficiency in mind, allowing parts to be produced faster, while maintaining the highest performance levels. The Company’s offering of colorant solutions is also expansive, including a wide spectrum of standard and high-chroma colors, as well as special effects including (but not limited to): metallics, pearlescents (shimmer), thermochromic (heat sensitive), photochromic (light sensitive), fluorescent, phosphorescent (glow-in-the-dark) and interference (color shift) technologies.

 

Film and packaging applications continue to be a primary focus for these products. For over 20 years, A. Schulman has been providing solutions for agriculture films, offering additives that provide UV control, barrier (optimal heat and light transmittance), and anti-fog solutions among others. The Company’s film additives are internationally renowned for their performance and cost benefits, and are commonly used

in biaxially oriented films which are critical for the packaging of snack foods, candy, tobacco products, and lamination film. The Company’s color concentrates excel in this market as well, where they are a trusted source for the world’s largest consumer product companies, providing aesthetic solutions for a wide range of bottles, caps and closures.

 

The Company’s masterbatch product offerings play a key role in commercializing solutions that have a reduced impact on the environment. The Company’s line of bio-degradation promoting additives assists in the molecular breakdown of films allowing them to be bioassimilated. The Company continues to advance pigment and additive loadings, which reduce the amount of total polymer required in the manufacturing process. Micro- and nano-particle technologies continue to make advancements. These particles, when used as pigments, fillers and additives, result in greater dispersion and a reduction in the amount of total polymer used in end application.

 

Engineered Plastics

 

A. Schulman has been a supplier of engineered plastics for more than 50 years. The Company’s engineered plastics products typically comprise 100% of material used by our customers in their end products. The Company began formulating a variety of olefinic and non-olefinic compounds in the early 1950s, meeting the needs of a newly forming industry. Today, A. Schulman is a leader in multi-component blends that include polyolefins, nylons, polyesters, elastomers, ionomers, acrylonitrile butadiene styrene (“ABS”), polyvinyl chloride (“PVC”) and highly customized cross-linked resins. Engineered plastics are commonly defined by their unique performance characteristics by combining base polymer resin with various fillers, additives and pigments, which result in a compound tailored to meet stringent customer requirements. A. Schulman’s products are often developed to replace other polymeric materials or non-polymers such as metal.

 

The engineered plastics business line uses its state-of-the-art technology centers to drive technology and innovation. The primary research and development centers are in Sindorf, Germany and Akron, Ohio. The centers are keenly focused on developing niche solutions that meet the needs of existing and developing markets alike.

 

The result of this innovation forms a pipeline of products being produced in A. Schulman facilities around the world. The Company’s offers an extensive portfolio based on a variety of polymers within the engineered plastics line of business, allowing customers to tailor solutions that meet their exact performance needs. The following products focus on the ability to develop enhanced polymer solutions:

 

 

The Company’s engineered plastics business supplies several markets and applications. Consumer and industrial applications are target growth areas, with durable goods markets such as industrial packaging, appliances, electrical, tools, recreational and lawn/garden leading the way. The Company supplies materials to every major vehicle segment and across all of the largest manufacturers. In recent years, the Company has tempered its exposure to the North American automotive market as necessary.

Key growth segments for this market are European and Asian manufacturers, who recently gained market share. In North America, the Company is seeing growth and construction of new facilities by Asian and European automotive manufacturers.

 

Rotomolding

 

The Company has begun to commonly refer to its rotomolding business as a specialty powders business, which now includes rotomolding powders, non-roto molding powders, size reduction and custom blending capabilities. For purposes of this Form 10-K, the Company will maintain the rotomolding designation.

 

The acquisition of ICO significantly increased the Company’s capacity to supply customers in the rotational molding or “rotomolding” market. Rotational molding produces plastic products by melting specified plastic powder in molds that are heated in an oven while being rotated. The melting resin adheres to the hot mold and evenly coats the mold’s surface. This process offers design advantages over other molding processes, such as injection molding, especially for the production of larger, hollow products, because assembly of multiple parts is unnecessary, consistent wall thickness in the finished product can be maintained, tooling is less expensive, and molds do not need to be designed to withstand the high pressures inherent in other forms of molding. Rotomolding includes compounded resin powders for rotationally-molded products, such as gas and water tanks, kayaks, playground slides, and other large applications.

 

Size reduction, or grinding, is a major component of the Company’s rotomolding business and is a process whereby polymer resins produced by chemical manufacturers in pellet form are reduced to a specified powder size and form, depending on the customer’s requirements. The majority of the Company’s size reduction services involve ambient grinding, a mechanical attrition milling process suitable for products which do not require ultrafine particle size and are not highly heat sensitive. The Company also provides jet milling services used for products requiring very fine particle size such as additives for printing ink, adhesives, waxes and cosmetics. Jet milling uses high velocity compressed air to reduce materials to sizes between 0.5 and 150 microns. For materials with specific thermal characteristics (such as heat sensitive materials), the Company provides cryogenic milling services, which use liquid nitrogen to chill materials to extremely low temperatures.

 

Rotomolding includes a broad product portfolio of base resins, custom colors, and proprietary cross-linked polyethylene formulations.

 

 

Distribution

 

As a distributor, the Company works with leading global polymer producers. A. Schulman’s role is to service a market segment that is either not easily accessible to the producer, or does not fit into the producer’s core customer segment or size. As a merchant, A. Schulman buys, repackages into A. Schulman labeled packaging, and re-sells producer grade polymers to its own customer segment, providing sales, marketing and technical services where required.

 

A. Schulman leverages its global supply relationships to fill customer needs around the world through a variety of olefinic and non-olefinic resins and provides producer grade offerings to the markets and customers that it serves. This leverage also helps support the customers of the engineered plastics

and masterbatch lines of business by both keeping costs down through higher purchasing volume and providing convenient access to bulk resin supplies to these customers.

 

The Company’s distribution offering includes polymers for all processing types, including injection molding, blow molding, thermoforming and extrusion. Offering various compliant grades, the Company has products to meet the most stringent of needs. The Company offers both prime and wide-spec grades, allowing customers to maximize their cost-to-performance ratio. Most grades can be supplied in carton, bulk truck and rail car quantities, thus helping customers manage inventory levels. The Company’s products are supplied into every major market segment, including automotive, building and construction, lawn and garden, film and packaging, and household and consumer goods.

 

Joint Ventures

 

ASI Investments Holding Co. is a wholly-owned subsidiary which 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 Company’s Bellevue, Ohio facility. The Company’s partner provides technical and manufacturing expertise.

 

A. Schulman International, Inc. is a wholly-owned subsidiary which 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, 2010, the Company had approximately 2,900 employees. Approximately 50% of all of the Company’s employees are represented by various unions under collective bargaining agreements.

 

Research and Development

 

The research and development of new products and the improvement of existing products are important to the Company to continuously improve its product offerings. The Company has a team of individuals with varied backgrounds to lead a “New Product Engine” initiative to put an aggressive global focus on the Company’s research and development activities. The Company conducts these activities at its various technical centers and laboratories. Research and development expenditures were approximately $2.0 million, $3.6 million and $5.9 million in fiscal years 2010, 2009 and 2008, respectively. The Company continues to invest in research and development activities as management believes it is important to the future of the Company.

 

Compliance with Environmental Regulations

 

The Company’s operations and its 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 Company’s 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 various sites in the future, which could result in the Company being assessed substantial investigation or clean-up costs.

 

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, financial position, earnings or competitive position of the Company.

 

Dependence on Customers

 

During the year ended August 31, 2010, the Company’s five largest customers accounted in the aggregate for less than 10% of total sales. In management’s 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 Company’s business.

 

Availability of Raw Materials

 

The raw materials required by the Company are usually available from major plastic resin producers or other suppliers. The Company does 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. The principal types of plastic resins used in the manufacture of the Company’s proprietary plastic compounds are polypropylene, PVC, polyethylene, polystyrene, nylon, ABS and polyurethane. For additional information on the availability of raw materials, see ITEM 1A, RISK FACTORS, Shortages or price increases of raw materials and energy costs could adversely affect operating results and financial condition, in this Report.

 

Working Capital Practices

 

The nature of the Company’s business does not require significant amounts of inventories to be held to meet rapid delivery requirements of its products or services or ensure the Company of a continuous allotment of goods from suppliers. The Company’s manufacturing processes are generally performed with a short turnaround time. The Company does not generally offer extended payment terms to its customers. The Company employs quality assurance practices that minimize customer returns; however, the Company generally allows its customers to return merchandise for failure to meet pre-agreed quality standards or specifications.

 

Competition

 

The Company’s 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. Limited 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 for merchant and distribution activities are price, availability of inventory 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 Company’s 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. During fiscal 2010, the Company recorded $12.5 million of intangibles for trademarks as part of the ICO acquisition, which the Company will amortize over their estimated useful lives.

 

International Operations

 

The Company has facilities and/or offices located in Australia, Belgium, Brazil, China, Czech Republic, France, Germany, Hungary, Indonesia, Italy, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Poland, Slovakia, South Korea, Spain, Sweden, Switzerland, Turkey and the United Kingdom. Financial information related to our geographic areas for the three year period ended August 31, 2010 appears in Note 13 to the Consolidated Financial Statements, Segment Information, and is incorporated herein by reference. For a discussion of risks attendant to the Company’s foreign operations, see ITEM 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Executive Officers of the Company

 

The age, business experience during the past five years and offices held by each of the Company’s Executive Officers are reported below. The Company’s By-Laws provide that officers shall hold office until their successors are elected and qualified.

 

Joseph M. Gingo:  Age 65; President and Chief Executive Officer of the Company since January 2008. Previously, Mr. Gingo served as Executive Vice President, Quality Systems and Chief Technical Officer for The Goodyear Tire & Rubber Company since 2003. Prior to that, Mr. Gingo held numerous leadership roles in both technology and business positions in his 41 year tenure at The Goodyear Tire & Rubber Company.

 

Paul F. DeSantis:  Age 46; Chief Financial Officer and Treasurer of the Company since April 2006. Mr. DeSantis joined the Company as Vice President of Finance in January 2006; prior to that time, he was with Scott’s Miracle-Gro where he held various financial roles since 1997 before becoming Vice President and Corporate Treasurer of Scott’s Miracle-Gro in 2003.

 

Paul R. Boulier:  Age 57; Vice President and Chief Marketing Officer of the Company since October 2008. Mr. Boulier previously served as the Vice President, Marketing and Sales at Core Molding Technologies for one year and previous to that he was with Avery Dennison where he held various roles.

 

Gary A. Miller:  Age 64; Vice President Global Supply Chain and Chief Procurement Officer of the Company since April 2008. Since 1992, Mr. Miller served as Vice President and Chief Procurement Officer for The Goodyear Tire & Rubber Company.

 

David C. Minc:  Age 61; Vice President, Chief Legal Officer and Secretary of the Company since May 2008. Previously, Mr. Minc served as General Counsel, Americas, for Flexsys America L.P. since 1996.

 

Bernard Rzepka:  Age 50; General Manager and Chief Operating Officer — EMEA of the Company since September 1, 2008. Previously, Mr. Rzepka served as the Business Unit Manger of the Europe masterbatch line of business since February 2008. Prior to that time, Mr. Rzepka served as the Associate General Manager — Europe from 2007 to 2008. Prior to that, he served as the Managing Director of Germany from 2004 to 2007. Prior to that, Mr. Rzepka served as the head of the engineered plastics line

of business in Europe from 2003 to 2004. He has been with the Company since 1993, serving in a variety of technology and commercial management positions.

 

Kim L. Whiteman:  Age 53; Vice President, Global Human Resources of the Company since June 2009. Previously, Mr. Whiteman held various roles at The Goodyear Tire and Rubber Company since 1979.

 

Gustavo Perez:  Age 46; General Manager and Chief Operating Officer of the Americas since August 2010. Since 2008, Mr. Perez has been General Manager, Masterbatch for the Company’s North America operations. Previously, he was General Manager of Mexico and prior to that position, he was Associate General Manager since 2000. He joined A. Schulman in 1995 as a Finance Manager of the Mexican subsidiary.

 

Available Information

 

The Company’s 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 Company’s 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.

 

Our sales, profitability, operating results and cash flows are sensitive to the turbulent global economic conditions, financial markets and cyclicality, and could be adversely affected during economic downturns or financial market instability.

 

The business of most of our customers can be cyclical in nature and sensitive to changes in general economic conditions. Financial deterioration in our customers will adversely affect our sales and profitability. Historically, downturns in general economic conditions have resulted in diminished product demand, excess manufacturing capacity and lower average selling prices, and we may experience similar problems in the future. The recent global economic crisis, especially in North America and Europe, has caused, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and fluctuations in equity and currency values worldwide, and concerns that the worldwide economy may enter into a prolonged recessionary period, each of which may materially adversely affect our customers’ access to capital. A limit on our customers’ access to capital could inhibit their willingness or ability to purchase our products or affect their ability to pay for products that they have already purchased from us. In addition, downturns in our customers’ industries, even during periods of strong general economic conditions, could adversely affect our sales, profitability, operating results and cash flows.

 

Although no one customer currently makes up a significant portion of our sales, we are exposed to industries such as automotive, appliances and construction. Bankruptcies by major original equipment manufacturers (OEM) for the automotive market could have a cascading effect on a group of our customers who supply to OEMs, directly affecting their ability to pay.

 

Similar to our customers’ situation, the turbulent global economic conditions may materially adversely affect our suppliers’ access to capital and liquidity with which they maintain their

inventories, production levels and product quality, causing them to raise prices or lower production levels. An increase in prices could adversely affect our profitability, operating results and cash flows.

 

The future of the current global financial turmoil is difficult to forecast and mitigate, and therefore our operating results for a particular period are difficult to predict. Any of the foregoing effects could have a material adverse effect on our business, results of operations and financial condition.

 

The inability to achieve, delays in achieving or achievement of less than the anticipated financial benefit from initiatives related to cost reductions and improving efficiencies could adversely affect our profitability.

 

We have announced multiple major plans and initiatives that are expected to reduce costs and improve efficiencies. We could be unable to achieve, or may be delayed in achieving, all the benefits from such initiatives because of limited resources or uncontrollable economic conditions. If these initiatives are not as successful as planned, the result could negatively impact our results of operations or financial condition. Additionally, even if we achieve these goals, we may not receive the expected benefits of the initiatives, or the costs of implementing these initiatives could exceed the related benefits.

 

An unanticipated increase in demand may result in the inability to meet customer needs and loss of sales.

 

If we experience an unforeseen increase in demand, we may have difficulties meeting our supply obligations to our customers due to limited capacity or delays from our suppliers. We may lose sales as a result of not meeting the demands of our customers in the timeline required and our results of operations may be adversely affected. We may be required to change suppliers or may need to outsource our operations where possible and, if so, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with our high quality standards and with all applicable regulations and guidelines.

 

The negative global credit market conditions may significantly affect our access to capital, cost of capital and ability to meet liquidity needs.

 

Unstable conditions in the credit markets or sustained poor financial performance may adversely impact our ability to access credit already arranged and the availability and cost of credit to us in the future. A volatile credit market may limit our ability to replace maturing credit facilities and access the capital necessary to grow and maintain our business. Accordingly, we may be forced into credit agreements that have terms that we do not prefer, which could require us to pay unattractive interest rates or limit our ability to use credit for share repurchases or payment of dividends. This could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility. There can be no assurances that government responses to disruptions in the financial markets will stabilize markets or increase liquidity and the availability of credit. Long term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until markets stabilize or until alternative credit arrangements or other funding sources can be arranged. Such measures could include deferring, eliminating or reducing capital expenditures, dividends, future share repurchases or other discretionary uses of cash. Overall, our results of operations, financial condition and cash flows could be materially adversely affected by disruptions in the credit markets.

 

If we fail to develop and commercialize new products, our business operations would be adversely affected.

 

One driver of our anticipated growth is dependent upon the successful development and commercialization of new products. The development and commercialization of new products 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 or employee base 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.

 

Shortages or price increases of 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 short supply as well as rapid and significant movements in price. These fluctuations in supply and price may be caused or aggravated by a number of factors, including inclement weather, political instability or hostilities in oil-producing countries, other force majeure events affecting the production facilities of our suppliers, and more general supply and demand changes. We may not be able to obtain sufficient raw materials or pass on increases in the prices of raw materials and energy to our customers. Such shortages or higher petroleum or natural gas costs could lead to declining margins, operating results and financial conditions.

 

A major failure of our information systems could harm our business.

 

We depend upon several regionally 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 inventories, products and wastes.

 

Our manufacturing operations are subject to the potential hazards and risks associated with polymer production and the related storage and transportation of inventories 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 inventory 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 could be identified as a potentially responsible party at various sites in the future, which could result in 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 general economic conditions. Additionally, competitors’ pricing decisions could compel us to decrease our prices, which could adversely affect our margins and profitability. 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 more than 85% of our business outside of the United States. We and our joint ventures currently have 36 manufacturing facilities located outside the United States. We have facilities and offices located in Australia, Belgium, Brazil, China, Czech Republic, France, Germany, Hungary, Indonesia, Italy, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Poland, Slovakia, South Korea, Spain, Sweden, Switzerland, Turkey 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:

 

 

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.

 

Although the majority of our international business operations are currently in regions where the risk level and established legal systems are similar to that in the United States, our international business also includes projects in countries where governmental corruption has been known to exist. We emphasize compliance with the law and have policies in place, procedures and certain ongoing training of employees with regard to business ethics and key legal requirements such as the U.S. Foreign Corrupt Practices Act (“FCPA”); however, there can be no assurances that our employees will adhere to our code of business conduct, other Company policies or the FCPA. Additionally, in such high risk

regions, our competitors who may not be subject to U.S. laws and regulations, such as the FCPA, can gain competitive advantages over us by securing business awards, licenses or other preferential treatment in those jurisdictions using methods that U.S. law and regulations prohibit us from using. We may be subject to competitive disadvantages to the extent that our competitors are able to secure business, licenses or other preferential treatment by making payments to government officials and others in positions of influence. If we fail to enforce our policies and procedures properly or maintain internal accounting practices to accurately record our international transactions, we may be subject to regulatory sanctions. Violations of these laws could result in significant monetary or criminal penalties for potential violations of the FCPA or other laws or regulations which, in turn, could negatively affect our results of operations, damage our reputation and, therefore, our ability to 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 suppliers due to the industry in which they operate. These events 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 50% of our employees 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 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 patents, trade secrets and know-how, domain names, trademarks and trade names, which are discussed under ITEM 1 of this Annual 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 currently meet all applicable minimum funding requirements, 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 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 Company’s outside 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. 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.

 

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. Recently, several proposals to reform U.S. tax laws to effectively increase the U.S. taxation of income with respect to foreign operations have been announced. Whether any such initiatives will win Congressional or executive approval and become law is presently unknown; however, if any such initiatives were to become law and apply to our international operations, then there could be a material impact on our financial condition and results of operations.

 

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 could also have a negative impact on our financial condition. We insure our properties for acts of terrorism. 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, 2010, our debt on a consolidated basis was approximately $154.7 million. An increase in the level of indebtedness could have significant consequences. For example, it could:

 

 

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 actions 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, which, 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.

 

We may experience difficulties in integrating acquired businesses, or acquisitions may not otherwise perform as expected.

 

We may acquire other businesses intended to complement or expand our business. The successful integration of these acquisitions will depend on our ability to integrate the assets and personnel acquired. We may encounter obstacles when incorporating the acquired operations with our operations and management. The acquired operations may not otherwise perform or provide the results expected when we first entered into the transaction. We may not achieve anticipated results in developing new geographic or product markets. If such acquisitions are not integrated successfully or they do not perform as well as anticipated, our results of operations and financial condition could be adversely affected.

 

We may fail to realize all of the anticipated benefits of acquisitions, which could reduce our anticipated profitability.

 

We expect that our acquisitions will result in certain synergies, business opportunities and growth prospects. We, however, may not realize these expected synergies, business opportunities and growth prospects. Integrating operations is complex and requires significant efforts and expenses on the part of both ourselves and the acquisitions. Personnel may voluntarily or involuntarily exit the Company because of the acquisitions. Our management may have its attention diverted while trying to integrate the acquired companies. We may experience increased competition that limits our ability to expand our business. We may not be able to capitalize on expected business opportunities including successfully developing new geographic or product markets or retaining acquired current customers. Our assumptions underlying estimates of expected cost savings may be inaccurate or general industry and business conditions may deteriorate. In addition, our growth and operating strategies for acquired businesses may be different from the strategies that the acquired companies pursued. If these factors limit our ability to integrate or operate the acquired companies successfully or on a timely basis, our expectations of future results of operations, including certain cost savings and synergies expected to result from acquisitions, may not be met.

 

We may be required to adopt International Financial Reporting Standards (IFRS), or other accounting or financial reporting standards, the ultimate adoption of such standards could negatively impact our business, financial condition or results of operations.

 

Although not yet required, we could be required to adopt IFRS or other accounting or financial reporting standards different than accounting principles generally accepted in the United States of America for our accounting and reporting standards. The implementation and adoption of new standards could favorably or unfavorably impact our business, financial condition or results of operations.

An impairment of goodwill would negatively impact the Company’s financial results.

 

The acquisitions of ICO and McCann Color increased the Company’s goodwill by $73.1 million. At least annually, the Company performs an impairment test for goodwill. Under current accounting guidance, if the carrying value of goodwill exceeds the estimated fair value, impairment is deemed to have occurred and the carrying value of goodwill is written down to fair value with a charge against earnings. Accordingly, any determination requiring the write-off of a significant portion of goodwill could negatively impact the Company’s results of operations.

 

The Company may not have adequate or cost-effective liquidity or capital resources.

 

The Company requires cash or committed liquidity facilities for general corporate purposes, such as funding its ongoing working capital, acquisition, and capital expenditure needs, as well as to make interest payments on and to refinance indebtedness. As of August 31, 2010, the Company had cash and cash equivalents of $122.8 million. In addition, the Company currently has access to committed credit lines of $297.2 million, with $234.0 million available as of August 31, 2010. The Company’s ability to satisfy its cash needs depends on its ability to generate cash from operations and to access the financial markets, both of which are subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond its control.

 

The Company may, in the future, need to access the financial markets to satisfy its cash needs. The Company’s ability to obtain external financing is affected by various factors including general financial market conditions and the Company’s debt ratings. While, thus far, uncertainties in global credit markets have not significantly affected the Company’s access to capital, future financing could be difficult or more expensive. Further, any increase in the Company’s level of debt, change in status of its debt from unsecured to secured debt, or deterioration of its operating results may impact the Company’s ability to obtain favorable financing terms. Any tightening of credit availability could impair the Company’s ability to obtain additional financing or renew existing credit facilities on acceptable terms. Under the terms of any external financing, the Company may incur higher than expected financing expenses and become subject to additional restrictions and covenants. The Company’s lack of access to cost-effective capital resources, an increase in the Company’s financing costs, or a breach of debt instrument covenants could have a material adverse effect on the Company’s business.

 

We may be exposed to certain regulatory risks related to climate change.

 

Various governments have either introduced or are contemplating legislative and regulatory change in response to the potential impacts of climate change including legislation that, if enacted, would limit and reduce greenhouse gas emissions through a “cap and trade” system of allowances and credits, among other provisions. Additionally, some of our operations are within other jurisdictions that have, or are developing, regulatory regimes governing greenhouse gas emissions including European Union, Brazil and China. The outcome of new legislation in the U.S. and other jurisdictions in which we operate may result in new or additional regulation, additional charges to fund energy efficiency activities or other regulatory actions. These effects may adversely impact our financial condition or results of operations.

 

None.

 

The following table indicates the location of each of the Company’s plastics compounding plants, the approximate annual plastics compounding capacity and approximate floor area, including warehouse and office space and the segment that is principally supported by such plants as of August 31, 2010. The following locations are owned or leased by the Company.

 

The Company considers each of the foregoing facilities to be in good condition and suitable for its purposes. Approximate annual capacity amounts may fluctuate as a result of capital expenditures to increase capacity, a shutdown of certain equipment to reduce capacity or permanent changes in mix which could increase or decrease capacity.

 

 

Public warehouses are used wherever needed to store the Company’s products to best service the needs of customers. The number of public warehouses in use varies from time to time. Currently, usage approximates 53 warehouses for the Company worldwide. The Company believes an adequate supply of suitable public warehouse facilities is available to it.

 

The Company owns its corporate headquarters, which is located in Akron, Ohio and contains approximately 48,000 square feet of office space. The Company leases sales offices in various locations globally and administrative offices in Houston, Texas and Londerzeel, Belgium.

 

As of August 31, 2010, the Company’s Findlay, Ohio and Sharon Center, Ohio facilities and certain equipment related to Invision are considered held for sale. The net book value of these assets held for sale after impairment is approximately $5.5 million which is included in the property, plant and equipment line item in the Company’s consolidated balance sheet as of August 31, 2010 due to the immaterial amount. Of the assets held for sale, only Invision is included in discontinued operations on the Company’s consolidated statements of operations.

 

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

 

 

 

The Company’s Common Stock is traded on the NASDAQ Global Select Market under the symbol “SHLM.” At October 15, 2010, there were 615 holders of record of the Company’s Common Stock. This figure does not include beneficial owners who hold shares in nominee name. The closing stock price on October 15, 2010 was $21.14.

 

The quarterly high and low closing stock prices for fiscal 2010 and 2009 are presented in the table below.

 

 

The quarterly cash dividends declared for fiscal 2010 and 2009 are presented in the table below.

 

 

During fiscal 2008, the Board of Directors agreed to increase to five million the remaining number of shares authorized for repurchase under the Company’s 2006 share repurchase program, under which the Board of Directors had previously authorized the repurchase of up to 6.75 million shares of common stock. At the time of the increase to five million shares, approximately 4.0 million shares remained authorized for repurchase.

 

The Company’s purchases of its common stock under the 2008 repurchase program during the fourth quarter of fiscal 2010 were as follows:

 

 

 

 

OVERVIEW OF THE BUSINESS AND RECENT DEVELOPMENTS

 

A. Schulman, Inc. (the “Company”, “we”, “our”, “ours” and “us”) is a leading international supplier of high-performance plastic compounds and resins headquartered in Akron, Ohio. The Company’s customers span a wide range of markets including consumer products, industrial, automotive and packaging. The Company’s segments are Europe, Middle East and Africa (“EMEA”), North America Masterbatch (“NAMB”), North America Engineered Plastics (“NAEP”), North America Rotomolding (“NARM”), Asia Pacific (“APAC) and Bayshore. The Company has approximately 2,900 employees and 36 plants in countries in Europe, North America, Asia, South America and Australia. Globally, the Company operates primarily in four lines of business: (1) masterbatch, (2) engineered plastics, (3) rotomolding and (4) distribution. The Company also offers tolling services to customers through its North America, EMEA and Bayshore operations.

 

On October 26, 2009, the Company announced plans to establish a masterbatch facility in western India to better serve its customers in that region, which the Company regards as a key geographic growth market. The facility initially will consist of one production line and will manufacture the Company’s masterbatch products which serve the packaging, appliance and consumer products markets. The facility’s capacity is projected to be approximately 12 million pounds per year.

 

On March 1, 2010, the Company completed the purchase of McCann Color, Inc. (“McCann Color”), a producer of high-quality color concentrates, based in North Canton, Ohio, for $8.8 million in cash. The business provides specially formulated color concentrates to match precise customer specifications. Its products are used in end markets such as packaging, lawn and garden, furniture, consumer products and appliances. The operations serve customers from its 48,000-square-foot, expandable North Canton facility, which was built in 1998 exclusively to manufacture color concentrates. The facility complements the Company’s existing North American masterbatch manufacturing and product development facilities in Akron, Ohio, San Luis Potosi, Mexico, and La Porte, Texas. The Company expects to show an annual operating income improvement of $2 million to $3 million related to these actions, of which approximately $0.9 million was realized in fiscal 2010 and the remaining will be realized in fiscal 2011. The Company recorded $1.3 million of pretax restructuring charges and $5.4 million of pretax asset impairment charges during the year ended August 31, 2010 for the closure of the Company’s Polybatch Color Center in Sharon Center, Ohio.

 

On April 30, 2010, the Company acquired ICO, Inc. (“ICO”) through a merger by and among the Company, ICO and Wildcat Spider, LLC, a wholly-owned subsidiary of the Company, and which is now known as ICO-Schulman, LLC, pursuant to the terms of the December 2, 2009 Agreement and Plan of Merger (“Merger Agreement”). Under the terms of the Merger Agreement, each share of ICO common stock outstanding immediately prior to the merger was converted into the right to receive a pro rata portion of the total consideration of $105.0 million in cash and 5.1 million shares of the Company’s common stock. All unvested options and shares of restricted stock of ICO fully vested prior to the merger were exchanged for cash equal to their “in the money” value, which reduced the cash pool available to ICO’s stockholders.

 

ICO’s operations include global manufacturing of specialty resins and concentrates, and providing of specialty polymer services, including size reduction, compounding and other related services. The acquisition of ICO presents the Company with an opportunity to expand its presence substantially, especially in the global rotomolding and U.S. masterbatch markets. ICO’s business is complementary to the Company’s business across markets, product lines and geographies. The acquisition of ICO’s operations increases the Company’s presence in the U.S. masterbatch market, gains plants in the high-growth market of Brazil and expands the Company’s Asia presence with the addition of several ICO facilities in that region. In Europe, the acquisition allows the Company to add rotomolding compounds and size reduction to the Company’s capabilities. It also enables growth in countries

where the Company currently has a limited presence, such as France, Italy and Holland, as well as further leveraging facilities serving high-growth markets such as Poland, Hungary and Sweden.

 

On October 15, 2010, the Company entered into an agreement to purchase 100% of the capital stock of Mash Indústria e Comércio de Compostos Plásticos, Ltda. (“Mash”), a masterbatch additive producer and engineered plastics compounder based in Sao Paulo, Brazil. Mash participates in various market segments including film and packaging, automotive and appliances. Combined with the Company’s core competencies in both masterbatch and engineered plastics compounding, Mash will contribute specialized additives and plastic materials to meet growing demand in the South American region. The transaction is expected to close on November 3, 2010 pending customary closing procedures. Under the terms of the agreement, the Company agreed to purchase Mash for a total amount of 27.6 million Brazilian reais, or approximately $16.6 million, of which 24.8 million Brazilian reais, or approximately $14.6 million will be due at closing on November 3, 2010. The remainder of the purchase price will be payable on or about November 3, 2013, in accordance with an escrow arrangement which subjects payment to volume earn-out and contingent liability provisions.

 

RESULTS OF OPERATIONS 2010

 

Net sales for the year ended August 31, 2010, excluding the impact of the ICO acquisition, were $1,456.3 million, an increase of $177.0 million or 13.8% compared with the prior year. The increase in net sales compared with the prior year was primarily a result of increased tonnage, increased selling prices per unit, and a result of increased sales of higher-priced products. The translation effect of foreign currencies, primarily the euro, increased sales by 0.6% or $7.7 million for the year ended August 31, 2010. The Company experienced an increase in customer demand evidenced by a tonnage increase of 3.0%. The increased tonnage sold in the EMEA, NAMB and APAC segments in fiscal 2010 compared with fiscal 2009 was offset by decreases in the NAEP and NARM segments. The Company sold approximately 1,348.0 million pounds and 1,309.0 million pounds of product, excluding ICO, for the year ended August 31, 2010 and 2009, respectively. Pounds sold related to ICO were approximately 239.4 million for fiscal year 2010 since it was acquired on April 30, 2010. A comparison of consolidated sales by segment for the year ended August 31, 2010 and 2009 are as follows:

 

The largest market served by the Company is the packaging market. Other markets include automotive, appliances, construction, medical, consumer products, electrical/electronics, office equipment and agriculture. The approximate percentage of net consolidated sales by market for the year ended August 31, 2010 as compared with the same period last year are as follows:

 

 

The North America segments include sales to customers in the packaging market which accounted for approximately 28% and 32% for the years ended August 31, 2010 and 2009, respectively. North America sales to the automotive market amounted to 25% and 28% for the years ended August 31, 2010 and 2009, respectively. For the EMEA segment, sales to customers in the packaging market accounted for approximately 41% and 45% for the years ended August 31, 2010 and 2009, respectively. The Company’s APAC segment include sales to customers in the packaging market which accounted for approximately 60% and 86% for the years ended August 31, 2010 and 2009, respectively.

 

The majority of the Company’s sales for the years ended August 31, 2010 and 2009 can be classified into four primary product families. The amount and percentage of consolidated sales for these product families are as follows:

 

 

A reconciliation and comparison of gross profit dollars by segment for the years ended August 31, 2010 and 2009 is as follows:

 

A comparison of gross profit percentages by segment for the years ended August 31, 2010 and 2009 is as follows:

 

 

Overall, gross profit dollars included approximately $19.5 million due to ICO for the year ended August 31, 2010. Gross profits for ICO for the fiscal 2010 periods were negatively affected by purchase accounting adjustments for increased depreciation expense due to increased asset values. Accordingly, the gross profits for ICO for fiscal year 2010 include approximately $1.1 million of additional depreciation expense.

 

The gross profit dollars for EMEA for the year ended August 31, 2010, excluding ICO operations, increased by $29.6 million, or 21.0%, to $170.8 million. For the year ended August 31, 2010, the gross profit percentage, excluding ICO, was 15.7% compared with 15.1% for the same period prior year. The Company was able to increase its gross profit dollars in the EMEA segment compared with the prior year primarily through volume increases, favorable product mix and the realization of cost-reduction initiatives, including leveraging the Company’s global purchasing position, implemented in fiscal 2009. The initiatives implemented in fiscal 2009 favorably impacted the EMEA capacity utilization, increasing to 95%, excluding ICO operations, for the year ended August 31, 2010 compared with 75% for the same period last year. The translation effect of foreign currencies impacted EMEA gross profits favorably by $0.9 million for the year ended August 31, 2010. The gross profit per pound for EMEA, excluding ICO, increased 15.7% from fiscal 2009 to fiscal 2010.

 

The gross profit dollars for the NAMB business, excluding ICO operations, have increased $7.6 million for the year ended August 31, 2010 compared with last year. The increase was the result of volume increases reflecting improvement in customer demand as compared with the prior year. The acquisition of McCann Color also had a favorable impact on NAMB gross profit. In addition, fiscal 2009 gross profit for NAMB includes approximately $0.9 million for the year ended August 31, 2009, of startup costs without sales related to the Company’s new masterbatch facility in Akron, Ohio. The gross profit per pound for NAMB, excluding ICO, increased 80.7% from fiscal 2009 to fiscal 2010. Foreign currency translation increased gross profit by 2.6% for the year ended August 31, 2010.

 

The gross profit dollars for the NAEP business increased by $6.4 million for the year ended August 31, 2010 compared with last year. The gross profit per pound for NAEP increased 83.1% from fiscal 2009 to fiscal 2010. The increase in gross profit dollars and percentages for NAEP are primarily the result of improved utilization of the NAEP facilities due to efforts to right-size this segment as well as the focus on higher value-added products. These initiatives improved the segment’s cost structure enabling NAEP to increase gross profit dollars and percentages despite volume decreases for the year ended August 31, 2010 due to continued weak economic conditions. Customer demand for NAEP products was positively affected in the first quarter of fiscal 2010 by temporary initiatives enacted by the government of the United States to stimulate sales activity in the automotive industry during the quarter.

 

The gross profit dollars for the NARM business, excluding ICO operations, decreased by $0.9 million for the year ended August 31, 2010 compared with last year. The legacy NARM business was immediately integrated with the ICO Polymers North America business, and as a result a large portion of the legacy NARM business results for the final four months of the fiscal year are included in the ICO related results.

The NARM combined gross profit, including ICO, increased approximately $4.6 million, primarily as a result of the merger.

 

Overall, gross profit for the North American businesses, including NAMB, NAEP and NARM but excluding the acquired ICO businesses, increased $13.1 million for the year ended August 31, 2010 compared with the prior year.

 

The Company’s APAC segment gross profit dollars, excluding ICO operations, increased $3.3 million for the year ended August 31, 2010. Gross profit percentage, excluding ICO, was 14.9% for the year ended August 31, 2010. The increase in gross profit dollars, excluding ICO, in fiscal 2010 is attributable to higher margins due to a favorable product mix and improved capacity utilization. Gross profit for the year ended August 31, 2010 was the result of increased customer demand in the Asian marketplace, which resulted in a capacity utilization improvement of 24 percentage points for the year ended August 31, 2010 compared with the prior year, excluding ICO. Gross profit in the APAC segment was also positively impacted by reduced manufacturing costs and increased use of locally sourced raw materials. The gross profit per pound for APAC increased 9.4% from fiscal 2009 to fiscal 2010. Fiscal 2009 gross profits for this segment were favorably impacted by certain inventory adjustments as it sold older inventory stocks.

 

The Company’s practical capacity is not based on a theoretical 24-hour, seven-day operation; rather, it is determined as the production level at which the manufacturing facilities can operate with an acceptable degree of efficiency, taking into consideration factors such as longer term customer demand, permanent staffing levels, operating shifts, holidays, scheduled maintenance and mix of product. Capacity utilization is calculated by dividing actual production pounds by practical capacity at each plant. A comparison of capacity utilization levels is as follows:

 

 

EMEA capacity utilization increased primarily as a result of increased levels of customer demand during the year compared with the same period last year and as a result of the Company’s fiscal 2009 initiative to right-size the capacity in this segment. The capacity utilization for NAMB increased as compared to prior year due to relative improvements in the North American market place as well as a result of the Akron, Ohio plant, which became fully operational and started producing in the third quarter of fiscal 2009. Capacity utilization for the NAEP segment increased from fiscal 2009 as a result of increased customer demand for fiscal 2010 compared to last year as well as reductions in capacity to allow the Company to focus on higher value-added products. The Company’s APAC segment experienced significantly higher capacity utilization as a result of a rebound in the local Asian markets. Overall worldwide utilization increased compared with the prior year reflecting an improved marketplace and successful capacity right-sizing actions taken during the second and third quarters of fiscal 2009. Capacity utilization for the ICO rotomolding operations acquired is generally lower than the Company’s legacy operations.

The changes in selling, general and administrative expenses are summarized as follows:

 

 

Selling, general and administrative expenses for the year ended August 31, 2010 increased $16.3 million, excluding the effect of foreign currency exchange and ICO operations, compared with the same period last fiscal year. The increase was due to $6.8 million of acquisition related costs, a $1.1 million increase in bad debt expense primarily in EMEA due to a certain customer’s financial difficulties and a $4.4 million increase in accrued incentive compensation expense as a result of improved operating results. The increase was also a result of increased compensation costs of approximately $6.6 million due to slightly increased headcount and normal annual salary adjustments. In addition, selling, general and administrative expenses were impacted by an increase of $0.3 million in stock-based compensation expense primarily as a result of mark-to-market adjustments of restricted stock units as a result of increases in the Company’s stock price. These increases were offset by declines in professional services related to the start-up of the Company’s shared service center in Europe which became fully operational in fiscal 2010.

 

Selling, general and administrative expenses include stock-based compensation expense arising from equity awards to employees under the Company’s incentive plans. Total stock-based compensation expense was $4.7 million and $4.4 million for the years ended August 31, 2010 and 2009, respectively. Compensation expense for cash-settled equity awards, including changes in fair value, was $0.7 million and $1.5 million for the years ended August 31, 2010 and 2009, respectively. A significant portion of the Company’s equity awards are cash-settled, which include restricted stock units and performance based cash awards, and therefore, the value of such awards outstanding must be remeasured at fair value each reporting date based on changes in the price of the Company’s common stock and is recorded in the Company’s consolidated statements of operations. The increase in stock-based compensation for the year ended August 31, 2010 primarily reflects an increase in the fair value of outstanding cash settled equity awards, which was attributable to an increase in the price of the Company’s common stock during the year ended August 31, 2010.

 

The CODM uses net sales to unaffiliated customers, gross profit and operating income in order to make decisions, assess performance and allocate resources to each segment. Certain portions of the Company’s North American operations are not managed separately and are included in All Other North America. The Company includes in All Other North America any administrative costs that are not directly related or allocated to a North America business unit such as North American information technology, human resources, accounting and purchasing. The North American administrative costs are directly related to the four North American segments. Operating income before certain items does not include corporate expenses interest income or expense, other income or expense, foreign currency transaction gains or losses and other certain items such as restructuring related expenses, asset write-downs, costs related to business acquisitions, inventory step-up, CEO transition costs, termination of a lease for an airplane and an insurance claim settlement adjustment. Corporate expenses include the compensation of certain personnel, certain audit expenses, board of directors related costs, certain insurance costs and other miscellaneous legal and professional fees.

A reconciliation of operating income (loss) by segment to consolidated income from continuing operations before taxes is presented below:

 

 

EMEA operating income, excluding the impact of the acquired ICO operations, increased $17.8 million for the year ended August 31, 2010. The increase was primarily due to the improvement in gross profit in the EMEA segment primarily through increased volume, favorable product mix and the realization of cost-reduction initiatives implemented in the second quarter of fiscal 2009. The increases in gross profit of $29.6 million for year ended August 31, 2010 was partially offset by increases in selling, general and administrative expenses of $10.4 million for the corresponding period, excluding the impact of foreign currency and ICO operations. As noted earlier, the increase in selling, general and administrative expense was primarily due to increases in bad debt expense, employee incentive compensation and stock-based compensation expense. EMEA operating income was favorably impacted by foreign currency translation gains of $0.4 million for the year ended August 31, 2010.

 

Operating income for NAMB, excluding the acquired ICO operations, increased $8.0 million for the year ended August 31, 2010 compared with the prior year. The increase was primarily a result of an increase of $7.6 million in gross profit and a decrease of $0.4 million in selling, general and administrative costs.

 

NAEP segment operating income was $5.2 million for the year ended August 31, 2010 compared with an operating loss of $4.6 million for the year ended August 31, 2009. The improvement was primarily the result of increases in gross profit of $6.4 million and a decrease of selling, general and administrative costs of $3.4 million for the year ended August 31, 2010. The decrease in selling, general and administrative costs reflect the fiscal 2009 restructuring initiatives which realigned the NAEP sales, marketing and technical customer service teams and enabled them to more effectively focus its customer support on core markets.

 

Operating income for NARM increased to $5.3 million for the year ended August 31, 2010 compared to $3.1 million for the same period in fiscal 2009. The increase in operating income is primarily due to the ICO acquisition. As mentioned previously, the ICO North America Rotomolding business was immediately integrated into the Company’s NARM business.

The APAC segment had operating income of $3.2 million, excluding the impact of ICO, for the year ended August 31, 2010 compared with operating income of $2.8 million in the prior year. The increase in operating income for the period was primarily the result of improvement in gross profit due to increased customer demand as discussed previously offset by increased selling, general and administrative costs, excluding ICO operations, of $2.9 million for the year ended August 31, 2010.

 

Corporate and other includes expenses for compensation of certain personnel, certain audit expenses, board of directors related costs, certain insurance costs and other miscellaneous legal and professional fees. Excluding the impact of ICO operations, Corporate and other expenses increased $0.6 million for the year ended August 31, 2010 as compared to the prior year. These increases were due to increases in employee incentive compensation and stock-based compensation expense partially offset by decreases in consulting costs recorded in fiscal 2009 for consolidation of back-office operations and strategic alternatives which were not incurred in fiscal 2010.

 

ICO’s operations subsequent to the acquisition date contributed $134.2 million in sales, $19.5 million of gross profit and $4.8 million in operating income to the Company’s consolidated statements of operations for the year ended August 31, 2010. Operating income for ICO from April 30, 2010 to August 31, 2010 includes pretax depreciation and amortization costs of approximately $5.7 million. This amount includes approximately $3.4 million of additional costs due to the increased value of fixed assets and intangibles. Pounds sold related to ICO were approximately 239.4 million for fiscal year 2010.

 

Operating income (loss) for the North America segments including discontinued operations is presented below:

 

 

The combined operating income for the North American businesses, including NAMB, NAEP, NARM, All other North America and discontinued operations but excluding the impact of ICO, was $6.9 million for the year ended August 31, 2010 compared with operating losses of $13.6 million for the year ended August 31, 2009, an improvement of $20.5 million. This significant improvement was the result of the cost-reduction initiatives implemented in the second quarter of fiscal 2009 and the Company’s focus on value-added products.

 

Interest expense increased $0.2 million for the year ended August 31, 2010, as compared with the same period in the prior year due to increases in the Company’s outstanding debt balance partially offset by lower borrowing rates.

 

The decrease in interest income for the year ended August 31, 2010 as compared to the prior year was due primarily to lower average balances for the Company’s cash and cash equivalent accounts as the Company used available liquidity to finance the acquisitions of ICO and McCann Color.

 

Foreign currency transaction gains or losses represent changes in the value of currencies in major areas where the Company operates. The Company experienced foreign currency transaction losses of $0.9 million during the year ended August 31, 2010 and foreign currency transaction gains of $5.6 million for the year ended August 31, 2009. Generally, the foreign currency transaction gains or losses relate to the changes in the value of the U.S. dollar compared with the Australian dollar, the Canadian dollar and the Mexican peso and changes between the euro and other non-euro European currencies. The Company

enters into forward foreign exchange contracts to reduce the impact of changes in foreign exchange rates on the consolidated statements of operations. These contracts reduce exposure to currency movements affecting existing foreign currency denominated assets and liabilities resulting primarily from trade receivables and payables. Any gains or losses associated with these contracts, as well as the offsetting gains or losses from the underlying assets or liabilities, are recognized on the foreign currency transaction line in the consolidated statements of operations.

 

Other income for the years ended August 31, 2010 and 2009 was $2.4 million and $1.8 million, respectively. Other income includes $1.0 million and $1.8 million of income from the cancellation of certain European supplier distribution agreements for the years ended August 31, 2010 and 2009, respectively.

 

ASI United Kingdom Restructuring Plan

 

On August 31, 2010, management announced restructuring plans for its operations at its Crumlin, South Wales (U.K.) plant. The plans include moving part of the plant’s capacity to two other, larger plants in Europe, and a production line will be shut down. As a result, the Company will reduce headcount at this location by approximately 30. The Company will continue to enhance the capabilities of the Crumlin plant to produce smaller lots of colors and other specialty compounds for the local market. The Company recorded approximately $0.4 million in pretax restructuring costs for employee-related costs. The Company anticipates approximately $0.2 million in accelerated depreciation to be recorded over the next few quarters.

 

ICO New Zealand Restructuring Plan

 

In March 2010, ICO management decided to close its operations at its plant in New Zealand. Production ceased as of March 31, 2010, which involved a reduction in workforce of 15. Since May 1, 2010, the Company recorded approximately $0.3 million related to a lease termination fee and other restructuring charges related to the New Zealand restructuring plan. All costs incurred were settled during the fiscal year and no accrual remains for this plan as of August 31, 2010. The closure of the New Zealand operations was completed during the fourth quarter of fiscal 2010; therefore, the Company does not expect to incur any further charges.

 

ICO Merger Restructuring Plan

 

In conjunction with the merger with ICO, the Company reduced the workforce in the Houston, Texas office by 17. ICO had preexisting arrangements regarding change-in-control payments and severance pay which were based on pre-merger service. The Company assumed $2.1 million in liabilities as a result of the merger related to these agreements, of which $2.0 million was paid by the Company during fiscal 2010. On August 31, 2010, the Company announced the exit of two senior managers in Europe in connection with the Company’s ongoing integration of ICO operations. The Company recorded approximately $1.7 million primarily in pretax employee-related costs during fiscal 2010 related to the integration of ICO. The Company has approximately $0.5 million remaining accrued for the ICO merger plan as of August 31, 2010, to be paid over the first three quarters of fiscal 2011. The Company expects minimal remaining charges to be incurred into late fiscal 2011.

 

NAMB Fiscal 2010 Restructuring Plan

 

On March 1, 2010, the Company announced the closure of its Polybatch Color Center located in Sharon Center, Ohio, which is a plant in the NAMB segment. The Company recorded pretax restructuring expenses of $1.3 million during fiscal 2010 primarily for employee-related costs associated with the closure. As of August 31, 2010, approximately $0.6 million remains accrued which the Company expects to pay during the first quarter of fiscal 2011. The Company ceased production at the Polybatch Color Center on August 31, 2010. The Company expects additional charges of less than $0.3 million related to this initiative, before income tax, to be recognized primarily during early fiscal 2011 as it completes the shutdown procedures.

Fiscal 2009 Restructuring Plan

 

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

 

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

 

The Company recorded approximately $0.6 million for employee-related costs and $0.6 million for contract termination and other restructuring costs related to the fiscal 2009 initiatives during fiscal 2010. Accelerated depreciation included in cost of sales of $0.1 million was also recorded during fiscal 2010. Nearly all restructuring charges recorded for the fiscal 2009 Plan during fiscal 2010 were related to the EMEA segment; however, minimal charges were also recorded related to the NAEP segment.

 

The costs associated with the fiscal 2009 initiatives were primarily recorded in fiscal 2009; therefore, the following table was included to summarize the fiscal 2009 charges by segment for these initiatives:

 

 

As of August 31, 2010, approximately $0.3 million remains accrued for employee-related costs, including estimated severance payments and medical insurance, and contract termination costs related to the fiscal 2009 initiatives. The Company anticipates the majority of the remaining accrued balance for restructuring charges will be paid during the first half of fiscal 2011.

 

The Company charges related to the plans initiated in fiscal 2009 to reduce capacity and headcount at certain international locations were substantially complete as of the end of fiscal 2010.

 

Fiscal 2008 Restructuring Plan

 

In January 2008, the Company announced two steps in its continuing effort to improve the profitability of its North American operations. The Company announced it would shut down its manufacturing facility in St. Thomas, Ontario, Canada and would pursue a sale of its manufacturing

facility in Orange, Texas. All the restructuring costs related to the sale of the Orange, Texas and the St. Thomas, Ontario, Canada facilities are related to the NAEP segment.

 

The Orange, Texas facility primarily provided North American third-party tolling services in which the Company processed customer-owned materials for a fee. Total annual capacity at the Orange, Texas facility was approximately 135 million pounds and employed approximately 100 employees. The Company completed the sale of this facility in March 2008 for total consideration of $3.7 million.

 

The St. Thomas, Ontario, Canada facility primarily produced engineered plastics for the automotive market, with a capacity of approximately 74 million pounds per year and employed approximately 120 individuals. The facility was shutdown at the end of June 2008 and the Company finalized closing procedures in fiscal 2010.

 

The Company recorded approximately $0.2 million of employee-related charges related to the fiscal 2008 initiatives during fiscal 2010. Approximately $0.4 million remains accrued for employee-related costs as of August 31, 2010 related to the fiscal 2008 initiatives. The Company recorded approximately $0.2 million for employee-related costs and $0.1 million for contract termination and other restructuring costs during fiscal 2009. During the year ended August 31, 2008, the Company recorded approximately $6.4 million in employee-related costs, which include estimated severance payments and medical insurance for approximately 135 employees, whose positions were eliminated at the Orange, Texas and St. Thomas, Ontario, Canada facilities.

 

The following table summarizes the liabilities as of August 31, 2010 related to the Company’s restructuring plans.

 

 

The Company recorded approximately $5.7 million and $2.6 million in asset impairments during the years ended August 31, 2010 and 2009, respectively, excluding impairments recorded in discontinued operations.

 

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

 

During fiscal 2010, the Company recorded approximately $5.4 million of asset impairment charges related to assets held and used associated with the closure of the Company’s Polybatch Color Center located in Sharon Center, Ohio. The impaired assets include real estate and certain machinery and equipment. The fair value of the real estate, which includes land, building and related improvements, was determined as the estimated sales value of the assets less the costs to sell and was determined using Level 3 inputs based on information provided by a third-party real estate valuation source. The fair value of the machinery and equipment, which will be sold or disposed of after the Company ceases production, was determined using Level 3 inputs based on projected cash flows from operations and estimated salvage value.

 

The Company’s $2.6 million in impairments for fiscal 2009 in continuing operations were primarily related to properties which were considered held for sale including the St. Thomas, Ontario, Canada

facility and the Orange, Texas warehouse. The asset impairments in fiscal 2009 were based on third party appraisals. The Company recorded $10.3 million of asset impairments for the year ended August 31, 2009 for certain Invision assets included in discontinued operations.

 

As of August 31, 2010, the Company’s facilities in Findlay, Ohio and Sharon Center, Ohio, and certain equipment related to Invision are considered held for sale. The net book value of these assets held for sale after impairment is approximately $5.5 million which is included in the property, plant and equipment line item in the Company’s consolidated balance sheet as of August 31, 2010 due to the immaterial amount. Of the assets held for sale, only Invision is included in discontinued operations on the Company’s consolidated statements of operations.

 

During the fourth quarter of fiscal 2010, the Company recorded a curtailment loss of $0.3 million as a result of a significant reduction in the expected years of future service, primarily due to the European restructuring plan which includes the planned elimination of certain positions in the Company’s Crumlin, South Wales subsidiary. During the second quarter of fiscal 2009, the Company recorded a curtailment gain of $2.6 million as a result of a significant reduction in the expected years of future service, primarily due to the U.S. restructuring plan for the NAEP segment that was announced in December 2008. During the fourth quarter of fiscal 2009, the Company recorded a curtailment gain of $0.2 million as a result of a significant reduction in the expected years of future service, primarily due to the European restructuring plan which included the elimination of certain positions in the Company’s Paris, France subsidiary as a result of the consolidation of back-office operations to the Company’s European shared service center.

 

A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates of (11.1)% in 2010 and 37.5% in 2009 is as follows:

 

 

In recent years, the Company’s U.S. operations have generated federal tax net operating losses, before considering dividend income from foreign subsidiaries. Such net operating losses are offset against the foreign dividend income, which would otherwise generate U.S. taxable income. The dividend income from foreign subsidiaries also generates foreign tax credits, which either partially offset the tax on any U.S. taxable income remaining after the offset of the net operating losses, or are carried forward. For the current year, the U.S. tax liability associated with foreign dividends could not entirely be offset by foreign tax credits due to certain historical tax attributes of ICO. The net effect of foreign dividends received from foreign countries is to place the Company into a position in which it does not generate net operating loss carryforwards for its U.S. operating losses.

 

The Company recorded a deferred tax liability for the U.S. tax impact on projected fiscal 2011 distributions expected to be paid out of prior year earnings from certain subsidiaries. It is expected that the U.S. tax liability on the distributions can be fully offset by foreign tax credit carryforwards for

which a full valuation allowance was previously recorded. It is now more-likely-than-not that these foreign tax credits carryforwards, equal to the deferred tax liability recorded for the U.S. tax impact of the distributions, will be realized, resulting in a reduction of the U.S. valuation allowance.

 

The Company established a valuation allowance against the deferred tax assets of its Italian entity during fiscal 2010 due to the recent losses in that jurisdiction, resulting in a tax charge of approximately $1.7 million to record a valuation allowance against the deferred tax assets that were recorded as of the beginning of the year. Additionally, no tax benefits were recognized for additional deferred tax assets generated during the year. The Company will continue to maintain a valuation allowance against these deferred tax assets until it is more-likely than not that the Company will realize a benefit through the reduction of future tax liabilities.

 

The Company recorded a tax benefit of approximately $22.2 million during fiscal 2010 for the reversal of valuation allowance in the U.S. relating to the ICO acquisition. Previously, the Company had a full valuation allowance against the U.S. deferred tax assets because it was not more-likely-than-not that they would be realized. Certain U.S. deferred tax assets that existed prior to the acquisition can now be realized as a result of future reversals of the deferred tax liabilities of ICO. It is now more-likely-than-not that certain deferred tax assets will be realized, therefore, a significant reduction in the U.S. valuation allowance was recorded resulting in a $22.2 million non-cash tax benefit.

 

Discontinued operations reflect the operating results for the former Invision segment of the Company’s business. During fiscal 2010, the Company completed the closing of its Invision sheet manufacturing operation at its Sharon Center, Ohio manufacturing facility.

 

Noncontrolling interests represent 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.

The Company uses the following non-GAAP financial measure of net income before certain items and net income per diluted share before certain items. These financial measures are used by management to monitor and evaluate the ongoing performance of the Company and to allocate resources. They believe that the additional measures are useful to investors for financial analysis. However, non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures. The table below reconciles net income before certain items and net income per diluted share before certain items to net income (loss) and net income (loss) per diluted share.