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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[X] |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
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OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended September 30, 2003 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
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OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-10068
ICO, INC .
(Exact name of registrant as specified in its charter)
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TEXAS |
76-0566682 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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5333 Westheimer, Suite 600 |
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Houston, Texas |
77056 |
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(Address of principal executive offices) |
(Zip Code) |
Registrant's telephone number (713) 351-4100
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, no par value
Preferred Stock, no par value
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 and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes ___ No x
The aggregate market value of common equity held by nonaffiliates of the Registrant
as of March 31, 2003 was $24,004,120.
The number of shares outstanding of the registrant's Common Stock
as of December 12, 2003: Common Stock, no par value-25,257,471
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the definitive proxy statement for the Registrant’s 2004Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K. Such definitive proxy statement or the information to be so incorporated will be filed with the Securities and Exchange Commission not later than 120 days subsequent to September 30, 2003. |
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ICO, INC.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page |
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PART I |
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Item 1. |
Business............................................................................................................................................................................... |
1 |
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Item 2. |
Properties............................................................................................................................................................................ |
6 |
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Item 3. |
Legal Proceedings................................................................................................................................................................ |
7 |
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Item 4. |
Submission of Matters to a Vote of Security Holders (no response required)............................................................. ........... |
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PART II |
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Item 5. |
Market for the Registrant’s Common Stock and Related Stockholder Matters....................................................................... |
9 |
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Item 6. |
Selected Financial Data........................................................................................................................................................ |
10 |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations...................................................... |
11 |
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Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk................................................................................................. |
24 |
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Item 8. |
Financial Statements and Supplementary Data...................................................................................................................... |
26 |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................................... |
26 |
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Item 9A. |
Controls and Procedures..................................................................................................................................................... |
26 |
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PART III |
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Item 10. |
Directors and Executive Officers of the Registrant................................................................................................................. |
27 |
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Item 11. |
Executive Compensation....................................................................................................................................................... |
27 |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management....................................................................................... |
27 |
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Item 13. |
Certain Relationships and Related Transactions...................................................................................................................... |
27 |
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Item 14. |
Principal Accounting Fees and Services................................................................................................................................. |
27 |
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PART IV |
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Item 15. |
Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................................................................ |
28 |
P A R T I
(all currency figures in thousands, except per share data)
Item 1. Business
General
ICO, Inc. and its subsidiaries ("the Company") manufacture specialty resins and concentrates and provide specialized polymers processing services. The specialty resins manufactured by the Company are typically produced into a powder form. Concentrates produced by the Company generally are mixed by customers with polymer resins to give finished products desired characteristics, such as protection from ultraviolet light. The Company also provides toll processing services including ambient grinding, jet milling, compounding, and ancillary services for polymer resins produced in pellet form as well as other materials. These products and services are provided through our 20 operating facilities located in 10 countries in the United States, Europe, Australasia and South America. The Company’s
customers include major chemical companies, polymer production affiliates of major oil exploration and production companies, and manufacturers of plastic products.
The Company was incorporated in 1978 under the laws of the state of Texas. During fiscal 1998, the Company was reorganized into a holding company structure with new ICO, Inc., a Texas corporation, serving as the holding company. During fiscal years 2003 and 2002, the Company completed the sale of its oilfield services business ("Oilfield Services"). References to the "Company" include ICO, Inc., its subsidiaries and predecessors unless the context indicates otherwise.
Manufacturing Capabilities
The Company’s manufacturing capabilities include size reduction, compounding and related services. These services are an intermediate step between the production of polymer resins and the manufacture of a wide variety of products such as toys, water tanks, paint, garbage bags, plastic film or other polymer products. The Company’s manufacturing processes are used both to produce powders for sale by the Company and for its toll processing services.
Size reduction. Size reduction is a grinding process whereby polymer resins produced by chemical manufacturers in pellet form are reduced to a powder form. The majority of the Company’s size reduction services involve ambient grinding, a mechanical attrition milling process suitable for products which do not require ultrafine particle size and are not highly heat sensitive. The Company also provides jet milling services used for products requiring very fine particle size such as additives for printing ink, adhesives, waxes and cosmetics. Jet milling uses high velocity compressed air to reduce materials to sizes between 0.5 and 150 microns. For materials with special thermal cha
racteristics (such as heat sensitive materials), the Company provides cryogenic milling services, which use liquid nitrogen to chill materials to extremely low temperatures.
The Company primarily processes polyethylene. Other materials processed include polyester, polypropylene, nylon, fluorocarbons, cellulose acetates, vinyls, phenolics, polyurethane, acrylics, epoxies, waxes and others.
Compounding. Compounding is an extrusion process whereby plastics and other additives are melt blended together to form an alloy resin. Often times the Company compounds material in conjunction with providing size reduction services (typically using an ambient grinding process). For example, the Company serves many customers by purchasing natural colored resin, compounding certain additives into the resin, and then grinding the resulting pellet into a powder form. The additives compounded into the base resins are determined by the end products to be manufactured by the customer. Com
pounding is performed within substantially all of the Company’s facilities.
Manufacturing concentrates is a specialized form of compounding. Bayshore Industrial, Inc., the Company’s largest concentrate manufacturing operation, is located in La Porte, Texas. Bayshore produces concentrates for the plastic film industry. The Company also has a smaller concentrate manufacturing operation, located in Oyonnax, France, which provides high quality color matching and color compounding services for the injection molding industry. The Company’s concentrate manufacturing operations involve the formulation and production of highly concentrated compounds of additives that are then combined (by the Company or by others) with polymer resins to produce materials having specifically desired characteristics, such as anti-blocking (to prevent plastic film or sheets from stick
ing together), flame-retardance, color, ultraviolet stabilization, impact and tear resistance, or adhesion. The Company's concentrates are produced to the detailed specifications of customers. These customers are typically resin producers or companies that produce plastic films. The concentrate manufacturing process requires the combination of up to 25 different additives or fillers in precise proportions. To be approved as the manufacturer of such concentrates, the Company must satisfy rigorous qualification procedures imposed by customers on a product-by-product basis. The Company works closely with its concentrate customers to research, develop and test the formulations necessary to create the desired characteristics of the concentrates to be produced. Such concentrates are produced in batches which may range from as little as five pounds for a lab sample to as large as four million pounds.
Other Manufacturing Services. The Company also offers its customers ancillary polymer processing services in connection with size reduction and compounding services. These ancillary services include dry blending and mixing of plastics and other additives, granulating, packaging and warehousing.
Facilities. The Company operates seven facilities in the United States, seven in Europe (located in The Netherlands, England, Italy, France and Sweden), three in Australasia (located in New Zealand, Australia and Malaysia, which are sometimes referred to collectively herein as the "Pacific Region Operations"), and one in Brazil. Almost all of these operations provide toll processing services, sell products into their markets and are able to compound materials.
Products and Services
Product Sales. The powders produced by the Company in its manufacturing operations are most often used to manufacture household items (such as toys, household furniture and trash receptacles), automobile parts, agricultural products (such as fertilizer and water tanks), paint and metal and fabric coatings. Currently, the largest powder sales markets of the Company include Western Europe, Australia, New Zealand, Malaysia, the United States and Brazil. The Company also sells its powders in Africa and the Middle East. The Company generally procures the raw materials for its own
account and adds value using its own formulations and processes to produce powders. The Company usually performs both size reduction and compounding to produce its finished products.
The Company’s concentrate products are primarily used by third parties to produce plastic films. These products are mostly sold throughout North America. The Company’s small operation in Oyonnax, France provides high quality color concentrates to the injection molding industry in France.
Toll Processing Services. Toll processing services involve processing customer-owned raw materials, rather than Company-owned raw materials. These toll processing services include size reduction, compounding and related services such as granulating and blending.
Customers and Pricing
The primary customers of the Company's polymers processing business segment are large producers of polymers (which include major chemical companies and polymers production affiliates of major oil production companies) and end users such as rotational molders. Worldwide sales to one polymers processing customer (Dow Chemical Company and its subsidiaries) accounted for 11% and 18% for fiscal years 2002 and 2001, respectively. No single customer accounted for more than 10% of worldwide sales during fiscal year 2003. The Company has long-term contract arrangements with many polymers processing customers whereby it has agreed to process or manufacture certain polymer products for a single or multi-year term at an agreed-upon fee structure.
The rotational molding industry is one of the Company’s most important target markets. The Company provides a significant portion of its size reduction toll processing services to customers that are either rotational molders or that supply the rotational molding industry. Additionally, many of the polymer powders manufactured by the Company are supplied to the rotational molding industry. Rotational molding produces plastic products by melting pre-measured plastic powder in molds which are heated in an oven while being rotated. The melting resin sticks to the hot mold and evenly coats the mold’s surface. This process offers design advantages over other molding processes, such as injection molding, because assembly of multiple parts is unnecessary, consistent thickness can be mainta
ined, tooling is less expensive, and molds do not need to be designed to withstand the high pressures inherent in other forms of molding. Examples of end products which are rotationally molded include agricultural tanks, toys and small recreational watercraft.
Other target markets include producers of automotive carpet backing, paint, waxes and metal and fabric coatings.
The Company is also a major supplier of concentrates to the plastic film industry in North America. The concentrates manufactured by the Company are melt-blended into base resins to produce plastic film having the desired characteristics. The Company sells concentrates to both resin producers and to businesses that manufacture plastic films.
The Company provides value-added polymers processing services to customers. The Company often purchases and takes into inventory the raw materials necessary to manufacture products sold to customers. The Company seeks to minimize the risk of price fluctuations in raw materials and other supplies by maintaining relatively short order cycles; however, the purchase of raw materials into inventory may expose the Company to increased risk of price fluctuations (see "-Raw Materials"). The majority of the Company’s domestic size reduction service revenues have historically been carried out on a tolling basis and have not required the purchase of inventory. The Company anticipates that polymer product sales in the United States market will increase in the future and thus the Company’s inve
stment in inventory in the United States could continue to increase.
Sales and Marketing
The Company markets its products and services through a sales force of employees. These sales people are responsible for in-depth customer contact and are required to be technically knowledgeable and have an understanding of the markets they serve. The Company established a global marketing group during fiscal 2002.
Competition
The specialty polymers processing business is highly competitive. Competition is based principally on price, quality of service, manufacturing technology, proximity to markets, timely delivery and customer service and support. The Company's size reduction and toll services competitors are generally small and mid-sized companies which, overall, have fewer locations and a more regional emphasis. The Company’s competitors in the polymer powder sales business tend to be mid-sized to large companies. Several companies also maintain significant size reduction facilities for their own use. The Company believes that it has been able to compete effectively in its markets based on competitive pricing, its network of plants, its technical expertise and equipment manufacturing capabilities and its
range of services, such as flexible storage, packaging facilities, and product development. The Company also believes that its knowledge of the rotational molding industry, through activities such as participation in the Association of Rotational Molders, enhances its competitive position with this key customer group. The Company's competitors in the concentrates industry include a number of large enterprises, as well as small and mid-sized regional companies. The Company believes its technical expertise, processing efficiency, high quality product, customer support and pricing have enabled it to compete successfully in this market.
The ambient size reduction tolling business lacks substantial barriers to entry, but cryogenic grinding and jet milling require a more significant investment and greater technical expertise. The compounding business, including concentrates manufacturing, requires a substantial investment in equipment, as well as extensive technical and mechanical expertise. In general, many of the Company's customers could perform the specialized polymers processing services provided by the Company for themselves if they chose to do so, and new competitors may enter the market from time to time. A number of the Company's competitors and potential competitors in this segment have substantially greater financial and other resources than the Company.
Business Divestitures
On September 6, 2002, the Company completed the sale of substantially all of the oilfield services business to Varco International, Inc. ("Varco"). Total proceeds of the sale were $137,372 in cash, assumed debt of the Company’s Canadian subsidiary of $3,600 and the assumption of certain other liabilities. All proceeds from the sale have been received by the Company except for $5,000 which was placed in escrow to be used to pay for indemnification obligations. See "Item 3. Legal Proceedings" for further discussion of indemnification claims against the Company made by Varco subsequent to the closing. On July 31, 2003 the Company sold its remaining oilfield service operation to Permian Enterprises, Ltd. for $4,053 in cash. There were no other material business acquisitions or dispositions
from continuing operations in fiscal years 2003, 2002 and 2001.
Environmental Regulation
The Company is subject to numerous and changing local, state, federal and foreign laws and regulations concerning the use, storage, treatment, disposal and general handling of materials, some of which may be considered to be hazardous substances and wastes, and restrictions concerning the release of pollutants and contaminants into the environment. These laws and regulations may require the Company to obtain and maintain certain permits and other authorizations mandating procedures under which the Company must operate and restrict emissions and discharges. Many of these laws and regulations provide for strict joint and several liabilities for the costs of cleaning up contamination resulting from releases of regulated materials, substances and wastes into the environment. Violation of these l
aws and regulations as well as terms and conditions of operating permits issued to the Company may result in the imposition of administrative, civil, and criminal penalties and fines, remedial actions or, in more serious situations, shutdowns or revocation of permits or authorizations. The Company believes that future compliance with existing laws and regulations will not have a material adverse effect on the Company and that future capital expenditures for environmental remediation will not be material.
The Company regularly monitors and reviews its operations, procedures and policies for compliance with environmental laws and regulations and the Company's operating permits. There can be no assurance that a review of the Company's past, present or future operations by courts or federal, state, local or foreign regulatory authorities will not result in determinations that could have a material adverse effect on the Company. In addition, the revocation of any of the Company's material operating permits, the denial of any material permit application or the failure to renew any interim permit, could have a material adverse effect on the Company. In addition, compliance with more stringent environmental laws and regulations, more vigorous enforcement policies, or stricter interpretations of curr
ent laws and regulations, or the occurrence of an industrial accident, could have a material adverse effect on the Company. Also, see discussion concerning environmental remediation issues included in "Item 3. Legal Proceedings."
Insurance and Risk
Except for warranties implied by law, the Company does not generally warrant the products and services it provides. Nonetheless, if the Company were found to have been negligent, or to have breached its obligations to its customers, the Company could be exposed to significant liabilities and its reputation could be adversely affected. Likewise, the Company's activities as a vendor of specialty polymers products may result in liability on account of defective products. While the Company has an insurance program in effect to address some of these risks, the insurance coverage is subject to applicable deductibles, exclusions, limitations on coverage and policy limits. The occurrence of a significant adverse event, the risks of which are not fully covered by insurance, could have a material adve
rse effect on the Company's financial condition, results of operations or net cash flows. Moreover, no assurance can be given that the Company will be able to maintain adequate insurance in the future at rates it considers reasonable. See "Item 3. Legal Proceedings."
Raw Materials
The Company purchases and takes into inventory the resins, additives and other materials used in its concentrates manufacturing and a portion of its specialty polymers distribution business. These materials are subject to fluctuating availability and prices. The Company believes that these and other materials used in its operations are available from numerous sources and are available to meet its needs.
Patents and Licenses
The Company holds one United States patent, one United Kingdom patent, one Australia patent, one New Zealand patent, and has four patent applications pending covering the proprietary technology utilized in its polymer blending and rotational molding processing services. The Company's operations are not materially dependent upon any patents or trademarks. The Company does not believe any single patent is essential to the overall successful operation of the Company's business. The Company believes that its patents and licenses are valid and that the duration of its existing patents is satisfactory. However, no assurance can be given that one or more of the Company's competitors may not be able to develop or produce a process or system of comparable or greater quality to those co
vered by the Company's patents or licenses, that patents will issue in respect to filed patent applications, that the Company’s patents will not be found to be invalid or that others will not claim that the Company’s operations infringe upon or use the intellectual property of others. In addition, issued patents may be modified or revoked by the United States Patent and Trademark Office or in legal proceedings.
In connection with the sale of substantially all of the Company’s Oilfield Services business, all U.S. and foreign patents previously owned by the Company for use in the operation of its Oilfield Services business were sold and assigned to Varco.
Employees
As of December 1, 2003, the Company had approximately 807 full-time employees. Certain of the Company's employees working in Italy, France, the Netherlands, Sweden, New Zealand, Australia, and Brazil are parties to collective bargaining agreements. None of the other employees are represented by a union. The Company has experienced no strikes or work stoppages during the past fiscal year and considers its relations with its employees to be satisfactory.
Item 2. Properties
The location and approximate acreage of the Company's operating facilities at December 1, 2003, together with an indication of the services performed at such facilities are set forth below.
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Location |
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Services |
Acres |
Facility
Square
Footage |
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Bloomsbury, NJ................................... |
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Size reduction |
15 |
99,408 |
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China, TX............................................ |
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Size reduction and compounding |
13 |
108,500 |
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East Chicago, IN................................. |
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Size reduction and compounding |
4 |
73,000 |
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Fontana, CA....................................... |
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Size reduction and compounding |
7 |
44,727 |
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Gainsborough, England........................ |
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Size reduction and compounding |
8 |
102,500 |
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Grand Junction, TN............................. |
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Size reduction |
5 |
127,900 |
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La Porte, TX....................................... |
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Compounding |
39 |
179,250 |
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Lovelady, TX...................................... |
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Size reduction |
24 |
90,000 |
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Montereau, France.............................. |
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Size reduction and compounding |
4 |
53,259 |
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Oyonnax, France................................. |
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Compounding |
1 |
26,898 |
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's-Gravendeel, The Netherlands............ |
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Size reduction and compounding |
5 |
240,773 |
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Tanagra, Greece.................................. |
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None – vacant land |
1 |
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Verolanuova, Italy............................... |
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Size reduction and compounding |
11 |
140,313 |
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Total Acreage and Square Footage Owned |
137 |
1,286,528 |
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Properties Leased: |
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Location |
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Services |
Acres |
Facility
Square
Footage |
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Houston, Texas................................... |
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Corporate headquarters |
N/A |
16,897 |
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Beaucaire, France............................... |
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Size reduction |
5 |
72,088 |
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Auckland, New Zealand..................... |
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Size reduction and compounding |
1 |
24,010 |
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Batu Pahat, Malaysia.......................... |
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Size reduction and compounding |
1 |
32,400 |
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Contagem, Brazil................................ |
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Size reduction and compounding |
1 |
23,680 |
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London, England................................ |
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Procurement administration |
N/A |
3,228 |
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Melbourne, Australia.......................... |
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Size reduction and compounding |
1 |
46,550 |
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Rushden, England............................... |
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Technical services and tool fabrication |
N/A |
8,608 |
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Stenungsund, Sweden......................... |
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Size reduction and compounding |
4 |
42,177 |
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Total Acreage and Square Footage Leased |
13 |
269,638 |
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Total Acreage and Square Footage Owned and Leased |
150 |
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