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 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 29, 2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $494,000,000 based on the closing sale price as reported on the NASDAQ National Market System.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date 26,132,897 Shares of Common Stock, $1.00 Par Value, at October 20, 2008.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

TABLE OF CONTENTS

 

 

A. Schulman, Inc. (the “Company” or “A. Schulman”) 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 and Latin America, 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 four unique competitive advantages:

 

 

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

 

BUSINESS SEGMENTS

 

To identify reportable segments, the Company considers its operating structure and the types of information subject to regular review by its President and Chief Executive Officer (“CEO”), who is the Chief Operating Decision Maker (“CODM”). Globally, the Company operates primarily in three lines of business: engineered plastics, masterbatch and distribution services. In North America, there is a general manager of each of these lines of business each of who report directly to the Company’s CEO. Also, in North America the Company operates in a specialty sheet line of business called “Invision^®” which has its own general manager who also reports to the CEO. The Company’s European segment has managers of each line of business, who report to a general manager of Europe who reports to the CEO. Currently, the Company’s CEO reviews performance and allocates resources for the European segment as a whole not at the business line level and therefore no changes have been made to the European segment. The reportable segments are Europe (which includes Asia), North America Polybatch (“NAPB”) (which comprises the masterbatch line of business), North America Distribution Services (“NADS”), North America Engineered Plastics (“NAEP”) and Invision.

 

The Company’s European segment, which includes the Asia operations, is the largest segment for the Company. The segment is managed by the General Manager of Europe and Asia however within the European General Manager’s responsibilities include managers of each line of business for engineered plastics, masterbatch and distribution services. The Company’s masterbatch business is anchored by the global research and development center in Bornem, Belgium while the engineered plastics line of business is anchored by the Company’s technology center in Sindorf, Germany. In fiscal 2009, effective September 1, 2008, the Company’s European management structure changed to include a General Manager — Europe and a General Manager — Asia both who report to the Company’s CEO effective with this change.

 

The North America Polybatch segment, which services the masterbatch market, includes color and additive concentrates which improve the appearance and performance of resins targeted at the film and packaging markets. The North America Distribution Services segment provides bulk and packaged plastic materials used in a variety of

applications. The North America Engineered Plastics segment includes multi-component blends of ionomers, urethanes and nylons, generally for the durable goods market, formulated to meet customer’s specific performance requirements, regardless of the base resin. Invision includes solely the A. Schulman Invision, Inc. legal entity which provides a new sheet product. This business is in a start-up phase as the Company is exploring potential market opportunities. As a result of the redefined segments, certain portions of the Company’s North American operations which are not managed separately are included in All Other North America. The Company also 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. Prior periods have been restated to reflect the current presentation.

 

The Company historically identified and presented two geographical operating segments, North America and Europe, which includes Asia, based on how the CODM regularly reviewed information and allocated resources. Prior periods have been restated to reflect the current presentation.

 

Below the Company has described the lines of business listed above.

 

Engineered Plastics

 

A. Schulman has been a supplier of engineered plastics for more than 50 years. 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, elastomers, ionomers and ABS (acrylonitrile butadiene styrene). Engineered plastics are commonly defined by their unique performance characteristics by taking base polymer resin and combining it 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. They are keenly focused on developing niche solutions that meet the needs of existing and developing markets alike. An example of a recent innovation is the highly successful line of thermoplastics elastomers (“TPEs”) and vulcanizates (“TPVs”), which provide enhanced aesthetic and performance characteristics for a host of end market applications. Clarix^®, a new class of ionomer thermoplastic resins, can be used to improve sealing, adhesion, flexibility, toughness or blend compatibility properties, thereby helping to provide solutions to demanding application requirements.

 

The result of this innovation forms a pipeline of products being produced in A. Schulman facilities around the world. In the past year, the Company has streamlined its manufacturing position in North America by closing a facility in Canada and selling its operations in Orange, Texas, while it is beginning to see volume increases in its Chinese facility.

 

The Company’s offers an extensive portfolio based in 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:

 

Engineered plastics supplies into several markets and applications. Consumer and industrial applications are target growth areas, with markets such as building/construction, appliance/electrical and lawn/garden leading the way. The automotive market, while still playing an important role for the Company, supplies materials into every major vehicle segment and across all of the largest manufacturers. Key growth segments for this market are European and Asian manufacturers, who continue to gain market share. In North America, the Company is seeing growth and construction of new facilities by Asian and European automotive manufacturers.

 

Masterbatch

 

Masterbatch (or concentrates as they are also referred to) is often the key ingredient to a successful application recipe. 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.

 

Close synergy between development and production is especially key in this area to its customers as well as A. Schulman, as quick and quality turnaround is critical. A. Schulman has manufacturing facilities strategically located globally to ensure that orders are shipped on-spec and on time. The Company is enhancing its manufacturing capability by opening a new masterbatch facility in Akron, Ohio in fiscal 2009.

 

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 the packaging of snack foods, candy, potato chips, 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.

 

As management looks to the future, the 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. A. Schulman continues to advance pigment and additive loadings, which reduce the amount of total polymer required in the manufacturing process. Micro- and nano-particle technology continues 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.

Distribution Services

 

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 provide 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: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.

 

Each of these 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 unique to 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 16 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.

 

Invision

 

Invision is an example of the Company’s commitment to innovation and meeting the needs of the future today. The Company leverages competencies of polymers, compounding and processing, as this new technology moves the Company forward in offering fully customized sheet solutions. Based at a state-of-the-art technology and manufacturing center located in Sharon Center, Ohio, the Company’s research and development and production teams work closely to tailor offerings that meet the most demanding of needs.

 

The current offerings provide a range of superior sheet solutions, the origins of which is the Company’s paintless film technology. This patent-pending ionomer based sheet is an innovative approach to high gloss, Class “A” decorative surfaces. Unlike paint and paint film, Invision sheet prevents the material from chipping and cracking at extremely low temperatures. Utilizing a proprietary layering system, Invision is able to maintain product quality and color integrity throughout high stretch areas in the thermoforming and molding processes, as well as commercial conditions such as environmental exposure, abrasion and impact.

 

Invision has recently introduced two new additions to the Company’s portfolio which expand on the original concept. The first is a patent-pending modified polypropylene-capped TPO sheet possessing high durability. The other is a mono-layered TPO sheet. Both products offer significant customer benefits in thermoforming applications including higher melt strength and improved stiffness, resulting in greater processing flexibility, fewer rejects, more efficient part production times and thinner parts at comparable performance levels.

 

Process flexibility is also key in meeting market demands. Invision sheet is suitable for various manufacturing processes including thermoforming, compression molding, injection and blow molding and profile extrusion. Invision sheet products are suitable for a variety of applications including auto, marine, RV, sport and recreation, lawn and garden, and even consumer products. As management looks to the future for this exciting new technology, the Company will continue to expand its product line, allowing the Company to provide solutions across a wide range of market demands.

During fiscal 2008, the Company has refocused the business to non-automotive markets. Management continues to be committed to the Invision business while seeking a potential joint venture partner or other strategic arrangement which will help accelerate the market development process.

 

Information regarding the amount of sales, operating income and identifiable assets attributable to each of the Company’s geographic business segments for the last three years is set forth in the Notes to Consolidated Financial Statements of the Company appearing in ITEM 8 of this Report.

 

Product Families

 

The Company’s manufacturing in each of its business segments can be classified into five major product families: color and additive concentrates; engineered compounds; polyolefins; polyvinyl chloride (PVC); and tolling.

 

Color and Additive Concentrates:  The Company’s color and additive concentrates business consists of the compounding of resins that provide plastic with specific color and/or physical properties, such as conductivity, flexibility, viscosity and textures. A color concentrate is a clear or natural plastic resin into which a substantial amount of color pigment is incorporated or dispersed. The Company manufactures its concentrates using its formulae and purchased natural resins. These concentrates are sold to manufacturers of plastic products, such as film for packaging, household goods, toys, automotive parts, mechanical goods and other plastic items. The Company’s concentrates are sold under various trade names, including the following: Polybatch^®, Papermatch^®, Aqua-Sol^®, and Polyblak^®.

 

Engineered Compounds:  The Company’s engineered compounds are products designed to have and maintain characteristics such as chemical resistance, electrical conductivity, heat resistance and/or high strength-to-weight ratios. The engineered compounds manufactured by the Company include the following: Polyflam^®, Schulamid^®, Formion^®, Polypur^® and Clarix^®.

 

Polyolefins:  The Company’s polyolefin business consists of numerous polypropylene and polyethylene resins and compounds. Polyolefins are used for interior trim, fascias and bumper covers in automotive applications; for toys, small appliances, sporting goods, and agricultural and watercraft products in roto-molding applications; and for office supplies in industrial/commercial applications. The polyolefin products manufactured by the Company include the following: Polytrope^®, Polyfort^®, Schulink^®, Invision^® and Polyaxis^®.

 

Polyvinyl Chloride:  The Company’s PVC business, under the name Polyvin^®, involves the formulation of compounds and elastomers to introduce a variety of product attributes, including weatherability, consistency, ease of processing, material flexibility, and high-gloss or low-gloss finish. The Company’s thermoplastic PVC compounds are available in blow molding, injection molding and extrusion grades for application in the manufacture of automotive, furniture, architectural and consumer products. The Company’s Sunprene^® compound serves as a replacement for rubber and other thermoplastic elastomers in automotive applications. The Company’s PVC business is mainly supported by The Sunprene Company, in which the Company owns a 70% partnership interest. The partnership is discussed below in Joint Ventures.

 

Tolling:  The Company provides tolling services, primarily in Europe, as a fee for processing of material provided and owned by customers. On some occasions, the Company is required to provide certain amounts of its materials, such as additives or packaging. These materials are charged to the customer as an addition to the tolling fees. The Company recognizes revenues from tolling services and related materials when such services are performed. The only amounts recorded as revenue related to tolling are the processing fees and the charges related to materials provided by the Company. The Company recently exited the North American tolling business.

The approximate amount and percentage of net consolidated sales for each of the Company’s product families for the three fiscal years ended August 31, 2008 are as follows:

 

 

Principal Subsidiaries

 

The Company’s principal subsidiaries are as follows:

 

A. Schulman Plastics, BVBA, a subsidiary located in Bornem, Belgium, manufactures color and additive concentrates and compounds. These products principally are sold in Germany, France, the Benelux countries, Italy and Asia.

 

A. Schulman International Services N.V., another subsidiary located in Bornem, Belgium, provides financing and administrative services to the Company’s European operations.

 

A. Schulman, Inc., Limited, a subsidiary located in Crumlin, South Wales (U.K.), primarily manufactures color and additive plastic concentrates, which are sold in the United Kingdom and to various A. Schulman European locations.

 

A. Schulman GmbH, a subsidiary located in Kerpen, Germany, manufactures engineered and flame-retardant plastic compounds. In addition, this subsidiary purchases and sells prime and off-grade plastic resins from major European producers. This subsidiary also distributes plastic resins and compounds for companies, including several large resin producers.

 

A. Schulman Canada Ltd., a Canadian subsidiary which had operations in St. Thomas, Ontario, Canada, closed the St. Thomas, Ontario plant in June 2008. The Company will continue to sell to the Canadian marketplace through this subsidiary as a distributor for major resin producers for injection molding.

 

A. Schulman AG, a subsidiary located in Zurich, Switzerland, sells plastic compounds and concentrates manufactured by other European subsidiaries of the Company and also acts as a merchant of plastic resins.

 

A. Schulman, S.A.S., a French subsidiary, has sales offices in Paris, France and is a distributor in France for Total Petrochemicals and other large suppliers. A. Schulman, S.A.S. also acts as a merchant of plastic resins and sells compounds manufactured by the Company’s subsidiaries in Belgium, Germany and France.

 

A. Schulman Plastics, S.A.S., another French subsidiary, is located in Givet, France. This subsidiary produces plastic concentrates for the Company’s European market.

 

A. Schulman de Mexico, S.A. de C.V., a subsidiary located in San Luis Potosi, Mexico, manufactures concentrates for the packaging industry and compounds for the automotive, construction, appliance and consumer products markets. This subsidiary has sales offices in Monterrey and Mexico City, Mexico.

 

A. Schulman Polska Sp. z o.o., is a subsidiary located in Poland with offices in Warsaw, Poland and Prague, Czech Republic. In addition, this subsidiary has a plant in Nowa Biala, Poland. The subsidiary primarily sells products manufactured by the Company’s subsidiaries and acts as a distributor and merchant of plastic resins and compounds in Poland.

 

A. Schulman Plastics SpA is a subsidiary located in Gorla Maggiore, Italy. This subsidiary manufactures and sells engineered compounds and concentrates to the Italian market. It sells products manufactured by A. Schulman Plastics, BVBA, A. Schulman Plastics, S.A.S., A. Schulman GmbH and A. Schulman, Inc., Limited and acts as a merchant of plastic resins in Italy.

A. Schulman Plastics S.L., a subsidiary located in Barcelona, Spain, is primarily a distributor of plastic resins to the Spanish market. This subsidiary also engages in merchant activities in Spain and sells certain products manufactured by A. Schulman GmbH, and A. Schulman Plastics, BVBA.

 

A. Schulman Hungary Kft., a subsidiary located in Budapest, Hungary, sells engineered compounds manufactured by A. Schulman GmbH and concentrates manufactured by A. Schulman Plastics, BVBA, A. Schulman Plastics, S.A.S., and A. Schulman, Inc., Limited. This subsidiary has a small manufacturing facility to serve the Hungary marketplace. It also acts as a merchant of plastic resins in Hungary.

 

A. Schulman Plastics (Dongguan) Ltd., a subsidiary located in Guangdong Province, China, manufactures concentrates for sale in the local Chinese markets. This subsidiary produces material for customers in the packaging markets and for the Company’s engineered compounds product family.

 

A. Schulman Europe & Co. KG, a subsidiary with offices in Wurselen, Germany provides support in the areas of sales, procurement, logistics and financing for the European operations.

 

A. Schulman S.ár.l. et Cie SCS, A. Schulman S.ár.l. and A. Schulman Holdings S.ár.l. are Luxembourg subsidiaries that provide financing and other corporate services for the European group.

 

A. Schulman Invision, Inc. is a subsidiary located in Sharon Center, Ohio. The subsidiary manufactures Invision^®, a multi-layered, extruded sheet product for sale in both the automotive and non-automotive markets.

 

Deltaplast AB, a subsidiary located in Astrop, Sweden, which produces specialized color masterbatch. Deltaplast BVBA, a subsidiary located in Opglabbeek, Belgium, also produces color masterbatch.

 

A. Schulman Plastik Sanayi Ve Ticaret, a subsidiary located in Istanbul, Turkey, is primarily a distributor of plastic resins in the Turkish market.

 

A. Schulman Plastics s.r.o., a subsidiary located in Bratislava, Slovakia, is a distributor of plastic resins primarily in the Czech Republic and Slovakia.

 

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, 2008, the Company had approximately 2,200 employees. Approximately 80% of the Company’s hourly production employees are represented by various unions under collective bargaining agreements.

 

Research and Development

 

A large part of the Company’s technical activities relate to the continuous refinement of compounds for specific customer applications. Activities relating to the research and development of new products and the improvement of existing products are important to the Company. These activities are conducted at the Company’s various technical centers and laboratories. Research and development expenditures were approximately $5.9 million, $7.8 million and $5.5 million in fiscal years 2008, 2007 and 2006, respectively. These activities are primarily related to the new Invision

sheet product and to support new consumer packaging and automotive applications. 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 on and ownership of real property are subject to extensive environmental, health and safety laws and regulations at the national, state and local governmental levels. The nature of the 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, 2008, 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 readily 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 (polyvinyl chloride), polyethylene, polystyrene, nylon, ABS and polyurethane. For additional information on the availability of raw materials, see ITEM 1A. RISK FACTORS, Price increases in 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. No accurate information is available to the Company as to the extent of its competitors’ sales and earnings in respect of these activities, but management believes that the Company has only a small fraction of the total market.

 

The principal methods of competition in plastics manufacturing are innovation, price, availability of inventory, quality and service. The principal methods of competition in respect of merchant and distribution activities are price, 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, however the Company does not consider its business to be dependent on such trademarks and trade names, except in the case of its new Invision^® product line.

 

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.

 

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

 

A significant portion of our anticipated growth is dependent upon the successful development and commercialization of new products. 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.

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

 

General economic conditions, financial market stability and business conditions of our customers’ industries affect demand for our products. The business of most of our customers, particularly our industrial, automotive, construction and electronics customers, can be cyclical in nature and sensitive to changes in general economic conditions. Political instability may lead to financial and economic instability, which could lead to deterioration in general global economic conditions. Downturns in the businesses that use our products will adversely affect our sales. Historically, downturns in general economic conditions have resulted in diminished product demand, excess manufacturing capacity and lower average selling prices, and we may experience similar problems in the future. In addition, downturns in our customers’ industries, even during periods of strong general economic conditions, could adversely affect our sales, profitability, operating results and cash flows.

 

Price increases in raw materials and energy costs could adversely affect operating results and financial condition.

 

We purchase various plastic resins to produce our proprietary plastic compounds. These resins, derived from petroleum or natural gas, have been subject to periods of rapid and significant movements in price. These fluctuations in price may be caused or aggravated by a number of factors, including inclement weather, political instability or hostilities in oil-producing countries and supply and demand changes. We may not be able to pass on increases in the prices of raw materials and energy to our customers. As a result, higher petroleum or natural gas costs could lead to declining margins, operating results and financial conditions.

 

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

 

We depend upon integrated information systems to process orders, respond to customer inquiries, manage inventory, purchase, sell and ship goods on a timely basis, maintain cost-efficient operations, prepare financial information and reports, and operate our website. We may experience operating problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes. Any significant disruption or slowdown of our systems could cause orders to be lost or delayed and could damage our reputation with our customers or cause our customers to cancel orders, which could adversely affect our results of operations.

 

Our manufacturing operations are subject to hazards and other risks associated with polymer production and the related storage and transportation of inventories, products and wastes.

 

Our manufacturing operations are subject to the possible hazards and risks associated with polymer production and the related storage and transportation of 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 affect our margins and profitability adversely. Our ability to maintain or increase our profitability is, and will continue to be, dependent upon our ability to offset decreases in the prices and margins of our products by improving production efficiency and volume, shifting to higher margin products and improving existing products through innovation and research and development. If we are unable to do so or to otherwise maintain our competitive position, we could lose market share to our competitors.

 

We expect that our competitors will continue to develop and introduce new and enhanced products, which could cause a decline in the market acceptance of our products. In addition, our competitors could cause a reduction in the selling prices of some of our products as a result of intensified price competition. Competitive pressures can also result in the loss of major customers. An inability to compete successfully could have an adverse effect on our results of operations, financial condition and cash flows. We may also experience increased competition from companies that offer products based on alternative technologies and processes that may be more competitive or better in price or performance, causing us to lose customers and result in a decline in our sales volume and earnings.

 

We may incur significant charges in the event we close all or part of a manufacturing plant or facility.

 

We periodically assess our manufacturing operations in order to manufacture and distribute our products in the most efficient manner. Based on our assessments, we may make capital improvements to modernize certain units, move manufacturing or distribution capabilities from one plant or facility to another plant or facility, discontinue manufacturing or distributing certain products or close all or part of a manufacturing plant or facility. We also have shared services agreements at several of our plants and if such agreements are terminated or revised, we would assess and potentially adjust our manufacturing operations. The closure of all or part of a manufacturing plant or facility could result in future charges which could be significant.

Our substantial international operations subject us to risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations.

 

We conduct more than 75% of our business outside of the United States. We and our joint ventures currently have 12 manufacturing facilities located outside the United States. We have facilities and offices located in Mexico, Belgium, France, Germany, Poland, Hungary, Indonesia, Italy, Spain, Switzerland, China, Luxembourg, Sweden, Turkey, South Korea, Czech Republic, Denmark, Slovakia 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.

 

Other increases in operating costs could affect our profitability.

 

Scheduled or unscheduled maintenance programs could cause significant production outages, higher costs and/or reduced production capacity at our equity affiliates and suppliers due to the industry in which they operate. These events could also affect our future profitability.

 

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 experienced a change in personnel in the CEO position. Our CEO has announced major plans and initiatives which are expected to reduce costs and improve efficiencies. We could be unable to achieve all the benefits from initiatives because of limited resources. If these initiatives are not as successful as planned, the result could negatively impact our results of operations or financial condition.

Our business depends upon good relations with our employees.

 

We may experience difficulties in maintaining appropriate relations with unions and employees in certain locations. About 80% of our hourly employees at our operations are represented by labor unions. In addition, problems or changes affecting employees in certain locations may affect relations with our employees at other locations. The risk of labor disputes, work stoppages or other disruptions in production could adversely affect us. If we cannot successfully negotiate or renegotiate collective bargaining agreements or if the negotiations take an excessive amount of time, there may be a heightened risk of a prolonged work stoppage. Any work stoppage could have a material adverse effect on the productivity and profitability of a manufacturing facility or on our operations as a whole.

 

Our business and financial condition could be adversely affected if we are unable to protect our material trademarks and other proprietary information.

 

We have numerous patents, trade secrets and know-how, domain names, trademarks and trade names, which are discussed under Item 1 of this Report. Despite our efforts to protect our trademarks and other proprietary rights from unauthorized use or disclosure, other parties, including our former employees or consultants, may attempt to disclose, obtain or use our proprietary information or marks without our authorization. Unauthorized use of our trademarks, or unauthorized use or disclosure of our other intellectual property, could negatively impact our business and financial condition.

 

Although our pension and postretirement plans 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 plans’ actuaries and as required by law. The amount we may elect or be required to contribute to our pension plans in the future may increase significantly. Specifically, if year-end accumulated obligations exceed assets, we may elect to make a voluntary contribution, over and above the minimum required, in order to avoid charges to our balance sheet and consequent reductions to shareholders’ equity. These contributions could be substantial and would reduce the cash available for our business.

 

Increasing cost of employee healthcare may decrease our profitability.

 

The cost of providing healthcare coverage for our employees is continually increasing. If healthcare costs continue to rise at a rapid pace, the Company may not be able to or willing to pass on those costs to employees. Therefore, if we are unable to offset continued rising healthcare costs through improved operating efficiencies and reduced expenditures, the increased costs of employee healthcare may result in declining margins and operating results.

 

Changes in tax laws could have an adverse impact on our earnings.

 

Changes to tax laws, rules and regulations, including changes in the interpretation or implementation of tax laws, rules and regulations by the Internal Revenue Service or other domestic or foreign governmental bodies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional compliance costs and tax liabilities which could have an adverse impact on our earnings.

 

Specific acts of terrorism may disrupt operations and cause increased costs and liabilities.

 

The threat of terrorist attacks or actual terrorist events in the United States or abroad could affect us in unpredictable ways. Terrorist threats or events could create political or economic instability, affecting our business in general. The increased costs related to heightened security could also have a negative impact on our financial condition. We insure our properties for acts of terrorism, however, we do not have expanded coverage related to such attacks. Should we choose to pursue such coverage, possible additional costs for this coverage could have a negative impact on our financial condition and results of operations. 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, 2008, our debt on a consolidated basis was approximately $114.3 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. This, in turn, could have a material adverse effect on our financial condition and results of operations.

 

We are dependent upon good relationships with our various suppliers, vendors and distributors.

 

We rely upon good relationships with a number of different suppliers, vendors and distributors. If our relationships with these parties were to deteriorate or if a number of these parties should elect to discontinue doing business with us, our business operations could be adversely affected.

 

We may experience difficulties in integrating acquired businesses, or acquisitions may not 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 perform or provide the results expected when we first entered into the transaction. If the acquisitions are not integrated successfully or they do not perform as well as anticipated, this could adversely affect our results of operations and financial condition.

 

We may not be able to successfully market the joint venture or sale of the Company’s Invision business

 

During fiscal 2008, we announced plans to reduce spending on Invision as we refocused the business to non-automotive markets and look for a strategic partner or buyer for the business. If we are unsuccessful in this effort, we could potentially be required to record impairment or other charges related to this segment of our business.

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.

 

None.

 

The following table indicates the location of each of the Company’s plastics compounding plant, 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:

 

 

The Company considers each of the foregoing facilities to be in good condition and suitable for its purposes.

 

(1) The approximate annual plastics compounding capacity set forth in this table is an estimate and is based upon several factors, including the daily and shift operating schedules that are customary in the area where each facility is located. Another factor is the approximate historical mix of specific types of plastic compounds manufactured at each plant. A plant operating at full capacity will produce a greater or lesser quantity (in pounds) depending upon the specific plastic compound then being manufactured. The annual poundage of plastic compounds manufactured does not, in itself, reflect the extent of utilization of the Company’s plants or the profitability of the plastic compounds produced.

(2) Includes capacity of approximately 20 million pounds from two manufacturing lines owned by The Sunprene Company, a partnership in which the Company has a 70% partnership interest.

 

(3) The North America Engineered Plastics segment included the St. Thomas, Ontario, Canada plant, which was shutdown in June 2008, and the Orange, Texas plant that was sold in March 2008. The capacity for these plants for fiscal 2008 was approximately 135 million pounds for the timeframe that they were operational in fiscal 2008. The remaining net book value of the building, land and related improvements are considered held for sale as of August 31, 2008.

 

(4) Includes the first production line for the new Invision^® sheet product which is measured by the square foot. This is not currently included in the Company’s calculation of capacity utilization as it is still in a start-up phase.

 

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 55 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 which contains approximately 48,000 square feet of office space. The Company leases sales offices in various locations globally.

 

The Company also owns a 158,000 square foot facility in Akron, Ohio that, until December 31, 2000, was a manufacturing operation. The facility was then used for warehousing, logistics, product sampling and product development. During fiscal 2008, the Company announced that this location would be the site for a new North America Polybatch plant. Production is expected to begin at this plant in fiscal 2009.

 

The Company also owns a 145,000 square foot facility in Orange, Texas, that, until August 31, 2003, was a manufacturing facility. The facility was previously used for warehousing and logistics, but was closed in fiscal 2007 and was placed for sale.

 

The Company owns a facility in Findlay, Ohio which is currently designated as held for sale. This facility along with the Orange, Texas former warehouse and the St. Thomas, Ontario, Canada facility are all considered held for sale as of August 31, 2008. Collectively, these locations have a net book value of approximately $10.5 million at August 31, 2008, which is included in property, plant and equipment in the Company’s consolidated balance sheets.

 

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.

 

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended August 31, 2008.

 

EXECUTIVE OFFICERS OF THE COMPANY

 

The following information is set forth pursuant to Item 401 (b) of Regulation S-K. 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 63; 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 44; 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 the Company in 2003.

 

Walter Belderbos:  Age 50; European Chief Financial Officer since July 2007. Mr. Belderbos previously served as the European Finance and IT Director since September 1989 when he joined the Company.

 

Gary A. Miller:  Age 62; 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 59; Vice President, General Counsel 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 48; General Manager and Chief Operating Officer — Europe 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 A. Schulman, Inc. for 15 years, serving in a variety of technology and commercial management positions.

 

Jack Taylor:  Age 62; General Manager and Chief Operating Officer — Asia of the Company since September 1, 2008. Previously, Mr. Taylor served as the General Manager — Europe and Asia from 2003 to 2008. He has been an employee of A. Schulman for 30 years and has held a number of management positions.

 

 

The Company’s Common Stock is traded on the NASDAQ Stock Market LLC under the symbol “SHLM.” At October 20, 2008, there were 551 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 20, 2008 was $15.36.

 

The quarterly high and low closing stock prices for fiscal 2008 and 2007 are presented in the table below.

 

 

The quarterly cash dividends declared for fiscal 2008 and 2007 are presented in the table below.

 

 

The Company paid $0.01 per common share on February 1, 2007, to shareholders of record on January 19, 2007, in redemption of the special stock purchase rights previously issued to the Company’s shareholders pursuant to the Rights Agreement dated as of January 26, 2006 between the Company and National City Bank as Rights Agent, thereby redeeming in full and canceling all such rights and terminating the Rights Agreement. The amount of this redemption was $0.3 million, which is included in the total amount of dividends paid during fiscal 2007, but is not included in the $0.58 cash dividends per share.

 

On April 25, 2006, the Company announced that its Board of Directors authorized the repurchase of up to 6.75 million shares of its outstanding common stock (the “Repurchase Program”) representing approximately 23.3% of the Company’s outstanding shares at the authorization date. The Repurchase Program replaced the Company’s prior repurchase authorization, under which approximately 1.7 million shares had remained authorized for repurchase.

 

During fiscal 2008, as part of an agreement reached with the Barington Capital Group, L.P. (the “Barington Group”) the Board of Directors agreed to increase to five million the number of shares authorized to be repurchased under the Company’s current share repurchase program and to repurchase 2.0 million shares prior to August 31, 2008 (the “2008 Repurchase Program”). The Company completed its 2.0 million share repurchase commitment during the fourth quarter of fiscal 2008.

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

 

 

 

 

 

 

OVERVIEW OF THE BUSINESS AND RECENT DEVELOPMENTS

 

A. Schulman, Inc. 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 has approximately 2,200 employees and 16 plants in countries in North America, Europe and Asia. As a result of changes in North American management in the latter part of fiscal 2008 and an assessment of how the Company’s performance is reviewed and resources are allocated by the CODM, the Company redefined its North America segment to align with the Company’s North American business units during the third quarter

of fiscal 2008. The segments are Europe, which includes Asia, North America Polybatch (“NAPB”), North America Engineered Plastics (“NAEP”), North America Distribution Services (“NADS”) and Invision.

 

The Company offers such products as color and additive concentrates, polyolefins, engineered compounds and polyvinyl chloride (PVC) used in packaging, durable goods and commodity products. The Company also offers a tolling service to customers from its European operations. Recently, the Company introduced its new Invision^® sheet product which is a replacement for painted plastic.

 

Joseph M. Gingo was appointed as President and CEO effective January 1, 2008. On March 21, 2008, the Company’s former Chairman, President and CEO, Terry L. Haines, retired from the Company. The Company recorded expenses of approximately $3.6 million in connection with the CEO transition during the second quarter of fiscal 2008, which includes costs for both Mr. Gingo and Mr. Haines. On February 26, 2008, the Company announced that its Board of Directors appointed Mr. Gingo as Chairman of the Board.

 

In January 2008, Mr. Gingo announced a 100-day plan to improve profitability and drive growth. This plan focused on six primary areas:

 

 

The Company has further articulated additional long-term initiatives including:

 

 

In February 2008, the Company announced the planned closure of the St. Thomas, Ontario, Canada plant and the approval to sell the Orange, Texas manufacturing facility. The Company plans to achieve more efficient and effective utilization through the consolidation of production and exit of low-margin businesses which no longer meet the Company’s strategy of focusing on higher margin value-added products. The details of the announcement and sale are discussed further in the Results of Operations section of this Management’s Discussion and Analysis and Results of Operations. The Company completed the sale of the Orange, Texas facility in March 2008 to Alloy Polymers, Inc. for total consideration of $3.7 million.

 

The Company announced on November 16, 2007 that it reached an agreement with a group of investors led by the Barington Group on matters relating to the Company’s 2007 Annual Meeting of Stockholders which occurred on January 10, 2008. The Company agreed to form a special committee of the Board, to include Mr. James Mitarotonda, director, along with other directors, to consider all strategic alternatives available to the Company to maximize stockholder value, including, without limitation, a strategic acquisition, merger or sale of the Company. The Board also agreed to increase to five million the number of shares authorized to be repurchased under the Company’s current share repurchase program and to repurchase 2.0 million shares by the end of fiscal 2008, subject to market conditions, materially relevant capital considerations of the Company and compliance with applicable laws. During the year ended August 31, 2008, the Company repurchased approximately 2.0 million shares of common stock at an average price of $21.20 per share.

During fiscal 2008, the Company has reduced spending on the Invision business as it refocuses the business to non-automotive markets. Management continues to be committed to the Invision business while seeking a potential joint venture partner or other strategic arrangement which can help accelerate the market development process.

 

A detailed discussion of the Company’s fiscal 2008 performance is included in the Results of Operations section.

 

RESULTS OF OPERATIONS 2008

 

Net consolidated sales for fiscal 2008 were $2.0 billion, an increase of $197.0 million or 11.0% over fiscal 2007’s net sales of $1.8 billion. The translation effect of foreign currencies, primarily the euro, increased net consolidated sales by approximately $175.8 million, or 9.8%, in fiscal 2008.

 

A comparison of consolidated net sales by segments is as follows:

 

 

Europe sales tonnage decreases were more than offset by price and mix as it exited some lower margin business as well as announced price increases.

 

The NAPB segment sales experienced an increase in volume, primarily during the early part of the year. Pricing increases were announced later in the year for this segment as well as the NAEP segment.

 

The Company sold its Orange, Texas facility in March 2008 and shutdown the Canada facility in June 2008. Both facilities were part of the NAEP segment. These actions decreased sales through decreased tonnage for this segment in fiscal 2008 as compared to the prior year. In addition, weaker markets and the elimination of lower-margin products drove lower sales in the NAEP segment.

 

The NADS sales increased through increased prices and exiting lower margin business.

 

The two largest markets served by the Company are the packaging and automotive markets. Other markets include appliances, construction, medical, consumer products, electrical/electronics, office equipment and agriculture. The approximate percentage of net consolidated sales by market for 2008 compared to 2007 is as follows:

 

 

The North America segments include sales to customers in the automotive market accounting for 33% for the year ended August 31, 2008 and 38% for the year ended August 31, 2007. The U.S. automotive market is a special challenge for the Company. The automotive market accounts for approximately 61% of the NAEP business. As the U.S. automotive market continues to be under severe stress, the Company is actively looking to expand into other non-automotive markets. For the Europe segment, sales to customers in the packaging market accounted for 42% for the years ended August 31, 2008 and 2007.

The majority of the Company’s consolidated sales can be classified into five primary product families. The approximate amount and percentage of consolidated sales for these product families compared to the previous year are as follows:

 

 

A comparison of gross profit dollars and percentages by business segment for 2008 and 2007 is as follows:

 

 

 

The gross profit dollars increased for Europe for the year ended August 31, 2008 primarily due to the foreign currency translation effect which had a positive impact on gross profit of $23.1 million followed by favorable pricing and mix. Excluding the impact of foreign currency translation, gross profit for Europe increased $10.8 million. In fiscal 2007, the Company recorded a favorable adjustment related to a change in the estimate for its European customer claims reserve, which increased European sales $2.4 million for the year ended August 31, 2007, without an impact on cost of sales. Therefore, excluding the impact of foreign currency translation, gross profit increased $13.2 million for the year ended August 31, 2008. The European gross profit percentage increased for the year ended August 31, 2008. Contributions to the increase in gross profit dollars and percentage include increased selling prices and a better mix of product. Europe gross profit for fiscal year 2008 was negatively impacted by approximately $1.5 million for employee termination costs.

 

The gross profits for the NAPB business have declined to $14.8 million for the year ended August 31, 2008 from $17.9 million in the prior year. The decrease in gross profits is partially a result of increases in raw material costs, which were not completely offset by increases in pricing. In fiscal 2008, the Company announced two price increases of up to 20% for the NAPB business. In addition, certain restructuring efforts have been put in place primarily during the fourth quarter of fiscal 2008 to more efficiently utilize capacity and resources and reduce expenses. The Company has announced the opening of a North America Polybatch plant in the Company’s Akron, Ohio warehouse location which will

allow the Company to better serve the U.S. markets more efficiently with local production capacity. This will also free up capacity in the Mexican plant to allow the Company to more efficiently serve the South American markets.

 

Gross profits for the NADS business have declined to $10.0 million in fiscal 2008 from $10.4 million last year, as increases in pricing helped to somewhat mitigate the sales tonnage decline.

 

Gross profits for the NAEP business have declined to $11.3 million for the year ended August 31, 2008 from $15.1 million in the prior year. The decline was primarily related to volume decreases in the broad business, particularly in automotive, as well as increases in raw material costs which have not been completely offset by increases in pricing. In fiscal 2008, the Company announced two price increases of up to 20% for the NAEP business. The fiscal 2007 gross profits for NAEP include accelerated depreciation related to the Company’s fiscal 2007 restructuring plan of approximately $1.1 million, which negatively impacted gross profit. In order to offset the effects of the weakening North American markets, the Company accelerated the Canadian plant closure to June 30, 2008. The Company’s closure of its St. Thomas, Ontario, Canada facility and the sale of the Orange, Texas facility are expected to provide benefits for the NAEP segment beginning in fiscal 2009.

 

The Invision gross profit loss is due to the start-up nature of the line. The Company has reduced spending on Invision as it refocuses the business to non-automotive markets and also considers strategic alternatives for the segment.

 

A comparison of capacity utilization levels is as follows:

 

 

Europe capacity utilization declined primarily as a result of working capital initiatives to reduce inventory as well as some softening in the European markets. Additionally, the Company consciously reduced some of its lower margin business in the European segment.

 

Capacity utilization for the NAEP segment declined as a result of further weakness primarily in the domestic automotive market as compared to the prior year. As a result of the closure of the St. Thomas, Ontario, Canada facility the Company will move a limited amount of capacity to other North America facilities.

 

Overall worldwide utilization declined compared to the prior year reflecting the challenging marketplace facing the Company as well as efforts to reduce inventory. Pounds in inventory have declined almost 25% since August 31, 2007. The capacity utilization figures exclude production for the Invision product as this business is in a start-up phase. Capacity utilization is calculated by dividing actual production pounds by practical capacity at each plant.

 

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

 

 

Selling, general and administrative expenses for fiscal 2008 include $0.6 million in costs associated with the termination of the lease of an airplane and CEO transition costs of $3.6 million. The Company also incurred approximately $0.7 million of fees in fiscal 2008 related to a proxy contest and $1.8 million of consulting costs relating to the development of a strategic plan, both which were not incurred in the previous year. Excluding these items, selling, general and administrative expenses as a percent of sales declined to approximately 8.6%, compared to 8.8% in fiscal 2007. The increase excluding these items and the foreign currency translation effect of $12.2 million, was $2.2 million, or 1.4%, all of

which occurred in Europe. All Other North America costs declined 11.5% from fiscal 2007. Also included in fiscal 2008 selling, general and administrative expenses is additional bad debt expense as a result of customer bankruptcies.

 

A large part of the Company’s technical activities relate to the continuous refinement of compounds for specific customer applications. Activities relating to the research and development of new products and the improvement of existing products are important to the Company. These activities are conducted at the Company’s various technical centers and laboratories. Research and development expenditures were approximately $5.9 million and $7.8 million in fiscal years 2008 and 2007, respectively. These activities are primarily related to the new Invision^® sheet product and to support new consumer packaging and automotive applications. The Company continues to invest in research and development activities as management believes it is important to the future of the Company.

 

Minority interest represents a 30% equity position of Mitsubishi Chemical MKV Company in a partnership with the Company and a 35% equity position of P.T. Prima Polycon Indah in an Indonesian joint venture with the Company.

 

Interest expense was $7.8 million and $8.1 million for the years ended August 31, 2008 and 2007, respectively. This slight decrease of $0.3 million is primarily related to the lower borrowing levels as compared to the prior year.

 

Foreign currency transaction gains or losses represent changes in the value of currencies in major areas where the Company operates. The Company experienced a $1.1 million foreign currency transaction loss for the year ended August 31, 2008 as compared with a foreign currency transaction loss of $0.2 million for the year ended August 31, 2007. The foreign currency transaction gains or losses primarily relate to the changes in the value of the U.S. dollar compared with the Canadian dollar, the Mexican peso and to a lesser extent the euro. The Company enters into forward foreign exchange contracts to reduce the impact of changes in foreign exchange rates on the consolidated statements of income. 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 income.

 

During fiscal 2008, the Company recorded curtailment gains of $4.0 million. The curtailment gains included $2.3 million related to its U.S. postretirement health care coverage plan as a result of a significant reduction in the expected years of future service primarily due to the sale of the Orange, Texas facility and a change in the executive management. In addition, the Company recorded a curtailment gain of $1.7 million as a result of the elimination of post retirement life insurance benefits under the U.S. postretirement health care coverage plan which eliminated the defined benefit for some or all of the future services of a significant number of plan participants.

 

Impairment related charges

 

As a result of the announcement to pursue a sale of the Company’s Orange, Texas facility, management deemed that a trigger to evaluate goodwill in North America had occurred. The goodwill in North America related only to the tolling reporting unit of which the Orange, Texas facility was the only facility. The tolling reporting unit is included in the Company’s North America Engineered Plastics segment. The reporting units for purposes of goodwill did not change as a result of the change in reportable segments made in the third quarter of fiscal 2008. In accordance with Financial Accounting Standards Board (“FASB”) Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), the Company’s analysis indicated an impairment of goodwill related to this tolling reporting unit which resulted in a charge of approximately $1.0 million recorded during the second quarter of fiscal 2008.

 

The Company also evaluated the inventory and property, plant and equipment of the Orange, Texas and St. Thomas, Ontario, Canada facilities, as a result of the announcement to shut down the Company’s manufacturing facility in St. Thomas, Ontario, Canada and to pursue a sale of the Company’s Orange, Texas facility. The Company recorded an impairment related to the long-lived assets of the Orange facility during the second quarter of fiscal 2008 of approximately $2.7 million. The Orange asset impairment was based on the estimated fair market value of the long-lived assets which was determined using the total consideration received for this facility and related assets when it was sold in March 2008. This charge is included in the asset impairment line item in the Company’s consolidated statement of income. The impairment of the assets for the Orange, Texas facility is related to the North American Engineered Plastics reportable segment. All assets were sold during March 2008.

In connection with the closure of the St. Thomas, Ontario, Canada facility, the analysis of the possible impairment of the property, plant and equipment resulted in an impairment charge of $2.7 million recorded during fiscal 2008. The Canada asset impairment was based on the estimated fair market value of the long-lived assets which was determined using the Company’s estimate of future undiscounted cash flows for these assets. This charge is included in the asset impairment line item in the Company’s consolidated statement of income. The impairment of the assets for the Canadian facility is related to the North American Engineered Plastics reportable segment.

 

As part of new CEO Joe Gingo’s 100-day plan to improve profitability and drive growth, the Company announced on January 3, 2008 that it would suspend further capital expenditures on Invision until the marketing strategy had been refined. The Company has considered use of the Findlay, Ohio facility for other purposes, however, as of August 31, 2008 the Company considered all assets associated with this property as held for sale. The Company recorded an impairment of its Findlay, Ohio facility of $6.3 million during fiscal 2008 which is included in the asset impairment line item in the consolidated statement of income. The Findlay facility impairment was based on the estimated fair market value of the property which was determined using independent third party appraisals. The impairment recorded for the Findlay, Ohio facility is related to the Invision reportable segment.

 

As of August 31, 2008, the land, building and related improvements of the St. Thomas, Ontario, Canada facility, the Findlay, Ohio facility and a building the Company owns in Orange, Texas are considered to be held for sale. The net book value of these assets held for sale after impairment is approximately $10.5 million which is included in the property, plant and equipment line item in the Company’s consolidated balance sheet as of August 31, 2008.

 

Restructuring related charges

 

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. Production related to low-margin business at the St. Thomas facility was discontinued and the remaining higher margin business is primarily being absorbed by the Company’s Nashville, Tennessee and Bellevue, Ohio manufacturing facilities. The facility was shutdown at the end of June 2008. The Company continues to move equipment and finalize closing procedures into early fiscal 2009.

 

The Orange, Texas facility provided primarily North American third-party tolling services in which the Company processed customer-owned materials for a fee. The Company decided to exit the North American tolling business to concentrate on higher value-added products. 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 to Alloy Polymers, Inc. for total consideration of $3.7 million. The Company recorded a loss on the sale of the Orange, Texas facility of approximately $0.3 million in the third quarter of fiscal 2008 which is included in other income in the Company’s consolidated statement of income. In connection with this sale, the Company entered into a tolling agreement with Alloy Polymers, Inc. to have specified minimum quantities of products tolled over a period of four years.

 

During fiscal 2008, the Company recorded approximately $6.8 million in employee related costs which included estimated severance payments and medical insurance for approximately 170 employees whose positions have been or will be eliminated throughout the North American operations and administrative support. All the restructuring costs related to the sale of the Orange, Texas and the St. Thomas, Ontario, Canada facilities are related to the North America Engineered Plastics reportable segment. In the third quarter of fiscal 2008 in continuation of its initiatives, the Company announced it has changed its organizational reporting structure related to its North America operations. This change also resulted in the elimination of approximately 21 positions at the Sharon Center, Ohio plant which is included in the North America Polybatch segment. Costs not specifically connected to these events are related to All Other North America.

 

At August 31, 2008, the Company estimated it will incur additional charges for employee related costs, contract termination costs and other related costs of approximately $0.5 to $0.7 million related to these fiscal 2008 initiatives of the Company. The Company anticipates the majority of the accrued balance for restructuring charges to be paid during the first quarter of fiscal 2009. Due to the global economic slowdown subsequent to August 31, 2008, the Company anticipates additional cost reductions in fiscal 2009 although no plans have been detailed.

 

During fiscal 2007, the Company announced multiple phases of a restructuring plan to restore its North American segment to profitability. In November 2006, in order to balance capacity with demand, reduce costs and improve efficiencies in the North American segment, the Company announced a plan to close two of its manufacturing lines at its

Orange, Texas plant, close a warehouse also located in Orange, Texas and reduce the workforce at its Bellevue, Ohio plant. Due to unanticipated customer demand on certain lines, the two manufacturing lines at the Orange, Texas plant continued production through the sale of the facility in March 2008. The Orange, Texas warehouse was closed during the third quarter of fiscal 2007. The warehouse and related assets were considered held for sale and are included in the Company’s consolidated balance sheet in property, plant and equipment and therefore the Company ceased depreciation on those assets. In connection with this plan, the Company reduced its workforce by 65 positions at various facilities including the Bellevue, Ohio plant.

 

In February 2007, the Company announced the second phase of its restructuring plan which implemented several initiatives to improve the Company’s operations and profitability in North America. This restructuring plan includes savings from the following initiatives:

 

 

As a result of the initiatives announced in fiscal 2007, the Company recorded approximately $1.1 million of accelerated depreciation for the year ended August 31, 2007, which represents a change in estimate for the reduced life of equipment. The employee related costs include severance payments and medical insurance for employees whose positions were eliminated in North America. The Company recorded minimal charges in fiscal 2008 related to the fiscal 2007 initiatives. At August 31, 2008, the Company believes the charges related to this restructuring plan are complete and it will not incur additional cash out-flows related to the announced initiatives in 2007. The total charge for this plan was approximately $2.1 million recorded primarily in fiscal 2007.

 

In connection with the announced plans in fiscal 2007 and fiscal 2008, the Company recorded the following restructuring charges.

 

 

The CODM uses net sales to unaffiliated customers, gross profit and operating income in order to make decisions, assess performance and allocate resources to each segment. Operating income does not include interest income or expense, other income or expense, restructuring expense or foreign currency transaction gains or losses. In some cases, the Company may choose to exclude from a segment’s results certain non-recurring items as determined by management. These items are included in the Corporate and Other section in the table below. Corporate expenses include the compensation of certain personnel, certain audit expenses, board of directors related costs, certain insurance costs and other miscellaneous legal and professional fees.

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

 

 

European operating income increased approximately $17.8 million, or 22.6% for the year ended August 31, 2008 compared to prior year primarily due to the favorable translation effect of foreign currencies on European operating income of $11.3 million. The remaining increase of $6.5 million is primarily a result of the increase in gross profit of $10.8 million discussed previously, which excludes the translation effect of foreign currencies, offset by increased European selling, general and administrative costs. In the previous year, the Company recorded a favorable adjustment related to a change in the estimate for its European customer claims reserve, which increased European sales $2.4 million for the year ended August 31, 2007, without an impact on cost of sales.

 

The decline in operating income for NAPB for fiscal 2008 as compared to prior year was primarily due to the decline in gross profit of $3.2 million, discussed previously, and the selling, general and administrative costs directly related to NAPB which have increased slightly compared to the prior year.

 

NADS operating income was flat for fiscal 2008 as compared to fiscal 2007 despite a decline in gross profit of $0.4 million, discussed previously, due to decreased direct NADS selling, general and administrative costs.

 

The NAEP operating loss increased $3.3 million compared to prior year primarily due to the decline in gross profit, as discussed previously. The decline in gross profit was partially offset by savings in selling, general and administrative costs related directly to NAEP resulting from Company initiatives. The Company’s announced closure of its St. Thomas, Ontario, Canada facility and the sale of the Orange, Texas facility are expected to provide benefits for the NAEP segment beginning in fiscal 2009.

A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates of 49.9% in 2008 and 52.2% in 2007 is as follows:

 

 

The effective tax rate of 49.9% for the year ended August 31, 2008 is greater than the U.S. statutory rate of 35% primarily because no tax benefits were recognized for U.S. losses from continuing operations, charges incurred for the sale of the Orange, Texas plant, employee termination costs, lease termination costs, CEO transition costs, and the impairment of the Findlay, Ohio facility. This unfavorable effect on the Company’s effective tax rate was partially offset by the overall foreign tax rate being less than the U.S. statutory rate. As compared to the effective rate of 52.2% for the 12 months ended August 31, 2007, the current year’s effective tax rate is driven by increases in the U.S. pre-tax loss from operations and other U.S. charges for which no tax benefit was recognized. This unfavorable impact on the rate is partially offset by an increase in foreign pre-tax income in lower rate jurisdictions, recently implemented tax planning strategies, recently enacted tax legislation in Germany which reduced the German statutory rate by approximately 10 percentage points, and the resolution of uncertain tax positions.

 

The Company uses the following non-GAAP financial measure of net income excluding unusual items and net income per diluted share excluding unusual 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 excluding unusual items and net income per diluted share excluding unusual items to net income and net income per diluted share.

Net Income and Earnings Per Share Reconciliation

 

 

RESULTS OF OPERATIONS 2007

 

Net consolidated sales for fiscal 2007 were $1.8 billion, an increase of 10.6% over sales of $1.6 billion in fiscal 2006. A comparison of net consolidated sales by business segments is as follows:

 

 

The components of the percentage change in 2007 net consolidated sales are as follows:

 

 

Worldwide tonnage was up 4.1% for fiscal 2007 due to the increase in European tonnage of 5.5%. NAEP tonnage increased 4.8% and NAPB tonnage increased 1.5% while NADS tonnage declined 5.3% in fiscal 2007 primarily due to weakness in the marketplace in the first half of the fiscal year. The increase in European tonnage was a result of increased

sales in higher volume, lower margin products. The translation effect of foreign currencies, primarily the euro, increased net consolidated sales by approximately $93.2 million in fiscal 2007.

 

The two largest markets served by the Company are the packaging and automotive markets. Other markets include appliances, construction, medical, consumer products, electrical/electronics, office equipment and agriculture. The approximate percentage of net consolidated sales by market for 2007 compared to 2006 is as follows:

 

 

The North America segments sales to customers in the automotive market accounted for 35% for the years ended August 31, 2007 and 2006. The U.S. automotive market has been under tremendous stress with the Company observing a decline in automotive production from the major Detroit-based automobile manufacturers during this period. For the Europe segment, sales to customers in the packaging market accounted for 42% and 44% for the years ended August 31, 2007 and 2006, respectively.

 

The majority of the Company’s consolidated sales can be classified into five primary product families. The approximate amount and percentage of consolidated sales for these product families compared to the previous year are as follows:

 

 

During the third quarter of fiscal 2007, the Company determined that its anticipated customer claims for products sold in Europe were expected to be more favorable than originally anticipated. Accordingly, the Company changed its estimate for these reserves and recorded an adjustment which resulted in an increase in sales and pre-tax income of $2.4 million ($1.4 million in net income) for the year ended August 31, 2007.

 

A comparison of gross profit dollars and percentages by business segment for 2007 and 2006 is as follows:

 

 

 

The gross profit dollars increased for Europe for the year ended August 31, 2007. The foreign currency translation effect had a positive impact on gross profit of $12.1 million for fiscal 2007. The Company recorded a favorable adjustment related to a change in the estimate for its European customer claims reserve, which increased European sales $2.4 million for the year ended August 31, 2007, without an impact on cost of sales. Therefore, excluding the impact of foreign currency translation and the $2.4 million claims reserve adjustment, gross profit was down $7.3 million for the year ended August 31, 2007. The European gross profit percentage decreased for the year ended August 31, 2007. The decline of gross profit and the gross profit percentage was due primarily to the following factors:

 

 

Gross profit and gross profit percentages for NAPB, NAEP, and NADS decreased for the year ended August 31, 2007. The NADS, NAPB and NAEP gross profit decreases were the result of a change in product mix and increased raw materials costs that the Company was not able to fully pass on through increased selling prices. NADS experienced increased logistics costs on a lower volume of sales. The NAEP gross profit was negatively impacted by accelerated depreciation of approximately $1.1 million for the year ended August 31, 2007. This accelerated depreciation related to the Company’s announced restructuring plan.

 

A comparison of capacity utilization levels is as follows:

 

 

Capacity utilization for all the segments remained relatively flat as compared to the prior year. Overall, the weakening markets primarily in the first half of fiscal year 2007 and the Company’s efforts to reduce its inventory levels forced utilization levels to remain the same. In Europe, a change in demand, product mix and an increase in capacity at its France facility, combined with successful efforts to reduce inventory levels, negatively affected capacity utilization. The capacity utilization figures exclude the production for the Invision product as this business is in a start-up phase. Capacity utilization is calculated by dividing actual production pounds by practical capacity at each plant.

 

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

 

Excluding the effect of foreign currency translation and $1.0 million of costs related to the Company’s evaluation of a possible acquisition target, selling, general and administrative expenses increased $3.5 million, or 2.4%, for the year ended August 31, 2007. The remaining $3.5 million increase is primarily due to the Company’s European segment, which had an increase of $3.8 million in selling, general and administrative expenses. This increase relates to increased services, which includes legal and professional costs and business process consultants, and increased compensation. The European increase was partially offset by a decline in All Other North America expenses of approximately $2.4 million. This was primarily a result of the Company’s North American restructuring and efforts to control the levels of selling, general and administrative expenses. The savings in All Other North America were slightly offset by the increase in these expenses from Invision of $1.0 million.

 

A large part of the Company’s technical activities relate to the continuous refinement of compounds for specific customer applications. Activities relating to the research and development of new products and the improvement of existing products are important to the Company. These activities are conducted at the Company’s various technical centers and laboratories. Research and development expenditures were approximately $7.8 million and $5.5 million in fiscal years 2007 and 2006, respectively. The increase in these activities is primarily related to the new Invision^® sheet product and to support new consumer packaging and automotive applications.

 

Interest expense increased $1.9 million for the year ended August 31, 2007 as compared to the same period last year. The increase was a result of the full year effect of higher levels of borrowing due to the share repurchases completed in fiscal 2006 and early fiscal 2007, as well as higher interest rates.

 

Minority interest represents a 30% equity position of Mitsubishi Chemical MKV Company in a partnership with the Company and a 35% equity position of P.T. Prima Polycon Indah in an Indonesian joint venture with the Company.

 

Foreign currency transaction gains or losses represent changes in the value of currencies in major areas where the Company operates. The Company experienced a $0.2 million foreign currency transaction loss for the year ended August 31, 2007 as compared with a foreign currency transaction loss of $2.1 million for the same period last year. The loss in fiscal 2006 primarily relates to changes in the value of the U.S. dollar compared with the Canadian dollar. The loss in fiscal 2007 primarily relates to the changes in the value of the U.S. dollar compared with the euro. During fiscal 2007, the Company entered into forward foreign exchange contracts in North America to reduce the impact of changes in foreign exchange rates on the consolidated statement of income. 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 Income.

 

One of the Company’s major facilities in Texas was closed for a two-week period in September 2005 because of Hurricane Rita. In addition, a warehouse in Texas also incurred damage from Hurricane Rita. The claim for this hurricane was filed with the insurance carriers, but the final recovery amount had not been finalized as of August 31, 2007. The Company received a $1.5 million payment in partial settlement of the claim during the fourth quarter of fiscal 2007. This amount was recorded in other income in the consolidated statement of income. Amounts not covered by insurance did not have a material impact on earnings.

 

Other income in fiscal 2007 was $1.8 million, which included $1.5 million of insurance proceeds for a claim related to hurricane damage as noted above. In fiscal 2006, other income of $1.9 million included income of $0.8 million from the cancellation by suppliers of certain distribution arrangements in Europe and the receipt of a life insurance settlement of approximately $0.5 million.

 

During fiscal 2007, the Company announced multiple phases of a restructuring plan to restore its North American segments to profitability. In November 2006, in order to balance capacity with demand, reduce costs and improve efficiencies in the North American Engineered Plastics segment, the Company announced a plan to close two of its manufacturing lines at its Orange, Texas plant and reduce the workforce at its Bellevue, Ohio plant. In addition, the Company announced its intention to close a warehouse also located in Orange, Texas which was included in the NADS segment. This warehouse was closed in the third quarter of fiscal 2007. The manufacturing lines at the Orange, Texas plant continued production through the sale of this facility in March 2008 as unanticipated customer demand on certain lines delayed closure of these lines. In connection with this plan, the Company reduced its workforce by 65 positions.

In February 2007, the Company announced the second phase of its restructuring plan which implements several initiatives that will improve the Company’s operations and profitability in the North America segments as well as reduce All Other North America administrative costs.

 

These plans are expected to deliver annual savings of approximately $18 million. These estimated savings are coming from the following initiatives:

 

 

In connection with this restructuring plan, the Company recorded pre-tax charges of $2.1 million for the year ended August 31, 2007. These charges are summarized below:

 

 

The employee related costs include severance payments and medical insurance for employees whose positions were eliminated in North America. The Company recorded approximately $1.1 million of accelerated depreciation for the year ended August 31, 2007 which represents a change in estimate for the reduced life of equipment. At August 31, 2007, the Company estimated it would incur minimal additional charges for employee related costs which are not expected to impact the total charge of $2.1 million. The Company anticipates the remaining accrued balance for restructuring charges to be paid over the first seven months of fiscal 2008.

 

The CODM uses net sales to unaffiliated customers, gross profit and operating income in order to make decisions, assess performance and allocate resources to each segment. Operating income does not include interest income or expense, other income or expense, restructuring expense or foreign currency transaction gains or losses. In some cases, the Company may choose to exclude from a segment’s results certain non-recurring items as determined by management. These items are included in the Corporate and Other section in the table below. Corporate expenses include the compensation of certain personnel, certain audit expenses, board of directors related costs, certain insurance costs and other miscellaneous legal and professional fees.

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

 

 

European operating income decreased for the year ended August 31, 2007, which includes the positive translation effect of foreign currencies of $5.7 million. Excluding the impact of translation of foreign currencies and the $2.4 million for the claims reserve, Europe operating income declined $12.0 million. This decline was due primarily to the decrease in gross profit of $7.3 million, which excludes the positive translation effect of foreign currencies of $12.1 million and the adjustment to the claims reserve. Excluding the translation effect of foreign currencies, the remaining decrease relates to a decrease in other income and an increase of approximately $4.8 million in selling, general and administrative expenses. The increase in selling, general and administrative expenses was due to the increase in services driven primarily by $1.0 million of legal and professional costs related to the evaluation of a possible acquisition target.

 

NAPB operating income for the year ended August 31, 2007 increased slightly due to savings in selling, general and administrative expense directly related to that segment as a result of restructuring efforts. The NAEP operating loss is primarily a result of the $7.9 million decline in gross profit, as discussed previously, in addition to an increase in directly related selling, general and administrative costs. The operating income for NADS declined as a result of a $3.0 million decline in gross profit which was partially offset by a decline in selling, general and administrative expenses for the year ended August 31, 2007 due primarily to the Company’s North American restructuring.

 

A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates of 52.2% in 2007 and 47.4% in 2006 is as follows: