Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 CERTIFICATION OF CFO - ICO INC | exhibit32-2.htm |
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF CEO - ICO INC | exhibit31-1.htm |
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF CFO - ICO INC | exhibit31-2.htm |
EX-32.1 - EXHIBIT 32.1 CERTIFICATION OF CEO - ICO INC | exhibi32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
______________________________________________________________________________________________
FORM
10-Q
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
|
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
|
For
the quarterly period ended December 31,
2009
|
|
OR
|
|
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
|
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period
from ___
to ___
Commission
file number 1-8327
ICO, INC.
|
(Exact
name of registrant as specified in its
charter)
|
TEXAS
|
76-0566682
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
1811
Bering Drive, Suite 200
|
|
Houston,
Texas
|
77057
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number (713) 351-4100
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 x NOo
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
YES o NO o
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions
of “large accelerated filer”, “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer o Accelerated filerx
Non-accelerated filer o Smaller reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YESo NO x
There
were 27,724,820
shares of common stock without par value
outstanding
as of January 27, 2010.
ICO,
INC.
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
Part
I. Financial Information
|
Page
|
|
Item
1. Financial Statements
|
||
Consolidated Balance Sheets as of December 31, 2009
and September 30, 2009
|
3
|
|
Consolidated Statements of Operations for the Three
Months Ended December 31, 2009 and 2008
|
4
|
|
Consolidated Statements of Comprehensive Income
(Loss) for the Three Months Ended
December 31, 2009 and
2008
|
5
|
|
Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 2009 and 2008
|
6
|
|
Notes to Consolidated Financial
Statements
|
7
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
19
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
28
|
|
Item
4. Controls and Procedures
|
30
|
|
Part
II. Other Information
|
||
Item
1. Legal
Proceedings
|
30
|
|
Item
1A. Risk
Factors
|
30
|
|
Item
6. Exhibits
|
31
|
-2-
PART I
― FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
ICO,
INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited
and in Thousands, except share data)
December
31,
|
September
30,
|
|||||||
ASSETS
|
2009
|
2009
|
||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 13,921 | $ | 21,880 | ||||
Trade
receivables (less allowance for doubtful accounts
|
||||||||
of
$3,688 and $3,746, respectively)
|
57,444 | 57,124 | ||||||
Inventories
|
40,997 | 37,397 | ||||||
Deferred
income taxes
|
1,751 | 1,848 | ||||||
Prepaid
and other current assets
|
6,178 | 6,446 | ||||||
Total
current assets
|
120,291 | 124,695 | ||||||
Property,
plant and equipment, net
|
56,158 | 57,144 | ||||||
Goodwill
|
4,549 | 4,549 | ||||||
Deferred
income taxes
|
4,596 | 4,128 | ||||||
Other
assets
|
1,767 | 1,757 | ||||||
Total
assets
|
$ | 187,361 | $ | 192,273 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Short-term
borrowings under credit facilities
|
$ | 557 | $ | - | ||||
Current
portion of long-term debt
|
11,935 | 12,980 | ||||||
Accounts
payable
|
32,410 | 33,281 | ||||||
Accrued
salaries and wages
|
4,435 | 4,997 | ||||||
Other
current liabilities
|
9,414 | 9,344 | ||||||
Total
current liabilities
|
58,751 | 60,602 | ||||||
Long-term
debt, net of current portion
|
16,420 | 18,823 | ||||||
Deferred
income taxes
|
4,717 | 4,786 | ||||||
Other
long-term liabilities
|
2,108 | 2,907 | ||||||
Total
liabilities
|
81,996 | 87,118 | ||||||
Commitments
and contingencies
|
- | - | ||||||
Stockholders'
equity:
|
||||||||
Undesignated
preferred stock, without par value -
|
||||||||
500,000
shares authorized, no shares issued and outstanding
|
- | - | ||||||
Common
stock, without par value - 50,500,000 shares authorized;
|
||||||||
28,302,921
and 28,205,173 shares issued, respectively
|
55,787 | 55,248 | ||||||
Additional
paid-in capital
|
71,905 | 73,081 | ||||||
Accumulated
other comprehensive income
|
2,524 | 2,723 | ||||||
Accumulated
deficit
|
(21,834 | ) | (22,880 | ) | ||||
Treasury
stock, at cost, 578,081 shares
|
(3,017 | ) | (3,017 | ) | ||||
Total
stockholders' equity
|
105,365 | 105,155 | ||||||
Total
liabilities and stockholders' equity
|
$ | 187,361 | $ | 192,273 |
The
accompanying notes are an integral part of these financial
statements.
-3-
ICO,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited
and in Thousands, except share and per share data)
Three
Months Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 85,371 | $ | 79,358 | ||||
Cost
and expenses:
|
||||||||
Cost
of sales and services (exclusive of depreciation
|
||||||||
shown
below)
|
70,800 | 69,248 | ||||||
Selling,
general and administrative
|
10,152 | 9,138 | ||||||
Depreciation
and amortization
|
2,022 | 1,713 | ||||||
Long-lived
asset impairment, restructuring and other costs (income)
|
142 | (293 | ) | |||||
Operating
income (loss)
|
2,255 | (448 | ) | |||||
Other
expense:
|
||||||||
Interest
expense, net
|
(527 | ) | (639 | ) | ||||
Other
|
(8 | ) | (331 | ) | ||||
Income
(loss) before income taxes
|
1,720 | (1,418 | ) | |||||
Provision
(benefit) for income taxes
|
674 | (342 | ) | |||||
Net
income (loss) applicable to Common Stock
|
$ | 1,046 | $ | (1,076 | ) | |||
Basic
net income (loss) per common share
|
$ | .04 | $ | (.04 | ) | |||
Diluted
net income (loss) per common share
|
$ | .04 | $ | (.04 | ) | |||
Basic
weighted average shares outstanding
|
27,691,000 | 27,412,000 | ||||||
Diluted
weighted average shares outstanding
|
28,025,000 | 27,412,000 | ||||||
The
accompanying notes are an integral part of these financial
statements.
-4-
ICO,
INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in
Thousands)
Three
Months Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Net
income (loss)
|
$ | 1,046 | $ | (1,076 | ) | |||
Other
comprehensive income (loss)
|
||||||||
Foreign
currency translation adjustment
|
(596 | ) | (4,418 | ) | ||||
Unrealized
gain (loss) on foreign currency hedges
|
340 | (864 | ) | |||||
Unrealized
gain (loss) on interest rate swaps
|
57 | (458 | ) | |||||
Comprehensive
income (loss)
|
$ | 847 | $ | (6,816 | ) | |||
The
accompanying notes are an integral part of these financial
statements.
-5-
ICO,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited and in
Thousands)
Three
Months Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows provided by (used for) operating activities:
|
||||||||
Net
income (loss)
|
$ | 1,046 | $ | (1,076 | ) | |||
Depreciation
and amortization
|
2,022 | 1,713 | ||||||
Stock
based compensation expense
|
249 | 148 | ||||||
Long-lived
asset impairment, restructuring and other costs
|
- | (520 | ) | |||||
Changes
in assets and liabilities providing/(requiring) cash:
|
||||||||
Receivables
|
(578 | ) | 12,192 | |||||
Inventories
|
(5,045 | ) | 14,411 | |||||
Other
assets
|
(22 | ) | 1,728 | |||||
Income
taxes payable
|
529 | 18 | ||||||
Deferred
taxes
|
(412 | ) | (871 | ) | ||||
Accounts
payable
|
592 | (11,527 | ) | |||||
Other
liabilities
|
(986 | ) | (2,695 | ) | ||||
Net
cash provided by (used for) operating activities by continuing
operations
|
(2,605 | ) | 13,521 | |||||
Net
cash provided by operating activities by discontinued
operations
|
- | 184 | ||||||
Net
cash provided by (used for) operating activities
|
(2,605 | ) | 13,705 | |||||
Cash
flows used for investing activities:
|
||||||||
Capital
expenditures
|
(1,015 | ) | (1,364 | ) | ||||
Net
cash used for investing activities
|
(1,015 | ) | (1,364 | ) | ||||
Cash
flows provided by (used for) financing activities:
|
||||||||
Common
stock issued
|
12 | 44 | ||||||
Purchases
of Treasury Stock
|
- | (1,990 | ) | |||||
Payment
of dividend on Common Stock
|
(1,386 | ) | - | |||||
Increase
(decrease) in short-term borrowings under credit facilities,
net
|
557 | (2,446 | ) | |||||
Repayments
of long-term debt
|
(3,448 | ) | (2,507 | ) | ||||
Net
cash used for financing activities
|
(4,265 | ) | (6,899 | ) | ||||
Effect
of exchange rates on cash
|
(74 | ) | (56 | ) | ||||
Net
increase (decrease) in cash and equivalents
|
(7,959 | ) | 5,386 | |||||
Cash
and cash equivalents at beginning of period
|
21,880 | 5,589 | ||||||
Cash
and cash equivalents at end of period
|
$ | 13,921 | $ | 10,975 |
The
accompanying notes are an integral part of these financial
statements.
-6-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1. BASIS
OF FINANCIAL STATEMENTS
The
interim financial statements furnished reflect all adjustments, which are, in
the opinion of management, necessary for a fair presentation of the results of
the interim period presented and have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission
(“SEC”). All such adjustments are of a normal recurring
nature. The fiscal year-end balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of
America. The results of operations for the three months ended
December 31, 2009 are not necessarily indicative of the results expected for the
year ended September 30, 2010. These interim financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company’s Annual Report on Form 10-K for the
fiscal year ended September 30, 2009. The accounting policies for the
periods presented are the same as described in Note 1 – “Summary of Significant
Accounting Policies” to the consolidated financial statements contained in the
Company’s Annual Report on Form 10-K for the fiscal year ended September 30,
2009.
NOTE
2. MERGER
On
December 2, 2009, the Company signed a definitive merger agreement (the “merger
agreement”) with A. Schulman, Inc. (“A. Schulman”) in a combined cash and stock
transaction pursuant to which 100% of the outstanding stock of the Company will
be acquired by A. Schulman (the “merger”). Under the terms of the
merger agreement, the total consideration is comprised of $105.0 million in cash
and 5.1 million shares of A. Schulman common stock. Closing of the transaction
is subject to approval by at least two-thirds of the votes entitled to be cast
by holders of the Company's Common Stock, regulatory approvals and other
customary closing conditions. On January 18, 2010, the Federal Trade
Commission granted early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. If the merger
agreement is terminated before the Company completes the merger, under certain
circumstances, the Company may be required to pay either a termination fee to A.
Schulman in the amount of $6.8 million or up to $1.0 million in expense
reimbursement instead of the termination fee.
NOTE
3. RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
Business
Combinations in Consolidated Financial Statements – In December 2007,
the Financial Accounting Standards Board (“FASB”) issued authoritative guidance
that establishes the principles and requirements for how an acquirer (i)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; (ii) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (iii) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The new
accounting rules require the acquiring entity in a business combination to
recognize all assets acquired and liabilities assumed in the transaction and any
non-controlling interest in the acquiree at the acquisition date, measured at
the fair value as of that date. This includes the measurement of the acquirer
shares issued in consideration for a business combination, the recognition of
contingent consideration, the accounting for pre-acquisition gain and loss
contingencies, the recognition of capitalized in-process research and
development, the accounting for acquisition-related restructuring cost accruals,
the treatment of acquisition related transaction costs and the recognition of
changes in the acquirer’s income tax valuation allowance and deferred taxes. The
guidance was effective for the Company on October 1,
2009.For any
acquisitions completed during fiscal year 2010, the Company expects the adoption of
the guidance will have an impact on its consolidated financial
statements; however, the magnitude of the impact will depend upon the nature,
terms and size of any acquisitions the Company consummates.
Noncontrolling
Interests – In
December 2007, the FASB issued new accounting guidance on noncontrolling
interests. The new accounting rules clarify that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. The implementation
of new accounting rules related to noncontrolling interests, effective
October 1, 2009, did not have a material impact on the Company’s financial
position, results of operations or cash flows, as the Company had no
noncontrolling interests during the three months ended December 31,
2009.
Share-based
payment transactions and participating securities – In June 2008, the FASB
issued authoritative guidance governing whether instruments granted in
share-based payment transactions are participating securities. This
guidance addresses whether these instruments are participating securities prior
to vesting and therefore need to be included in computing earnings per share
under the two-class method. The implementation of this new guidance,
effective October 1, 2009, changed reported weighted average shares outstanding
but it did not have a material impact on the Company’s earnings per share
calculation.
-7-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Variable
Interest Entities - In June 2009, the FASB issued guidance that amends
the consolidation guidance applicable to variable interest entities. The
provisions of this guidance significantly affect the overall consolidation
analysis under previous guidance. It is effective as of the beginning of the
first fiscal year that begins after November 15, 2009; specifically it will be
effective for the Company beginning in October 1, 2010. The Company does not
expect the provisions of this guidance to have a material effect on our
consolidated financial condition, results of operations or cash
flows.
NOTE
4.
STOCKHOLDERS’ EQUITY
In
September 2008, the Company announced that its Board of Directors authorized the
repurchase of up to $12.0 million of its outstanding Common Stock through
September 2010 (the “Share Repurchase Plan”). Through December 2,
2009, 578,081 shares had been repurchased for total cash consideration of $3.0
million at an average price of $ 5.22 per share. In connection with
the merger agreement, on December 2, 2009, the Board of Directors terminated the
Share Repurchase Plan.
NOTE
5. EARNINGS
PER SHARE
The
Company presents both basic and diluted earnings per share (“EPS”)
amounts. Basic EPS is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS assumes the conversion of all dilutive
securities.
The difference between basic
and diluted weighted-average common shares results from the assumed exercise of
outstanding stock options. There were no potentially dilutive
securities for the three months ended December 31, 2008 due to the Company
reporting a net loss. The following presents the number of
incremental weighted-average shares used in computing diluted EPS
amounts:
Three
Months Ended December 31,
|
||||||||
Weighted-average
shares outstanding:
|
2009
|
2008
|
||||||
Basic
|
27,691,000 | 27,412,000 | ||||||
Incremental
shares from stock – based compensation
|
334,000 | - | ||||||
Diluted
|
28,025,000 | 27,412,000 |
The total
amount of anti-dilutive securities for the three months ended December 31, 2009
and 2008 were as follows:
Three
Months Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Total
shares of anti-dilutive securities
|
609,000 | 979,000 |
NOTE
6. INVENTORIES
Inventories
consisted of the following:
December
31,
|
September
30,
|
|||||||
2009
|
2009
|
|||||||
(Dollars
in Thousands)
|
||||||||
Raw
Materials
|
$ | 21,754 | $ | 18,407 | ||||
Finished
Goods
|
18,149 | 17,879 | ||||||
Supplies
|
1,094 | 1,111 | ||||||
Total
Inventories
|
$ | 40,997 | $ | 37,397 |
NOTE
7. INCOME
TAXES
The
amounts of income (loss) before income taxes attributable to domestic and
foreign operations are as follows:
-8-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three
Months Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(Dollars
in Thousands)
|
||||||||
Domestic
|
$ | 84 | $ | 60 | ||||
Foreign
|
1,636 | (1,478 | ) | |||||
Total
|
$ | 1,720 | $ | (1,418 | ) |
The
provision (benefit) for income taxes consists of the following:
Three
Months Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(Dollars
in Thousands)
|
||||||||
Current
|
$ | 1,063 | $ | 204 | ||||
Deferred
|
(389 | ) | (546 | ) | ||||
Total
|
$ | 674 | $ | (342 | ) |
Reconciliations
of the income tax expense (benefit) at the federal statutory rate of 35% to the
Company's effective rate for the three months ended December 31, 2009 and 2008
are as follows:
Three
Months Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
(Dollars
in Thousands)
|
||||||||
Tax
expense (benefit) at statutory rate
|
$ | 602 | $ | (496 | ) | |||
Chargeback
Reimbursement
|
- | (61 | ) | |||||
Foreign
tax rate differential
|
(94 | ) | 151 | |||||
State
taxes, net of federal benefit
|
- | 22 | ||||||
Reinvestment
Allowance tax credit
|
(31 | ) | - | |||||
Non-deductible
transaction costs
|
240 | - | ||||||
Non-deductible
expenses and other, net
|
(43 | ) | 42 | |||||
Income
tax provision (benefit)
|
$ | 674 | $ | (342 | ) | |||
Effective
income tax rate
|
39% | 24% |
The
Company’s effective income tax rates were a provision of 39% and a benefit of
24% during the three months ended December 31, 2009 and 2008,
respectively. The higher effective tax rate during the three months
ended December 31, 2009 was primarily due to permanent differences from
transaction costs associated with the pending merger that will not be deductible
if the merger is completed. The lower effective tax rate in the three months
ended December 31, 2008 was primarily a result of the mix of pretax income or
loss generated by the Company’s operations in various taxing jurisdictions and
the impact of nondeductible items and other permanent differences.
The
Company does not provide for U.S. income taxes on foreign subsidiaries’
undistributed earnings intended to be permanently reinvested in foreign
operations. It is not practicable to estimate the amount of
additional tax that might be payable should the earnings be remitted or should
the Company sell its stock in the subsidiaries. As of December 31,
2009, the Company has unremitted earnings from foreign subsidiaries of
approximately $26.5
million. The Company has determined that the undistributed
earnings of foreign subsidiaries, exclusive of those repatriated under the
American Jobs Creation Act, will be permanently
reinvested.
-9-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Company files income tax returns in the U.S. federal jurisdiction, various
states and foreign jurisdictions. The Company is no longer subject to
U.S. income tax examinations for periods preceding 2006. In
the Company’s other major tax jurisdictions, the earliest years remaining open
to examination are as follows: France - 2007, Australia –
2005, Italy - 2005 and the Netherlands – 2004. Additionally, in its other
foreign jurisdictions, the Company is no longer subject to tax examinations for
periods preceding 2002.
At December 31, 2009, the
Company had no unrecognized tax benefits or liabilities. In
the event that the Company incurs interest and penalties related to tax matters
in the future, such interest and penalties will be reported as income tax
expense. The Company does not anticipate that any tax contingencies
which may arise in the next twelve months will have a material impact on its
financial position or results of operations.
NOTE
8. COMMITMENTS AND
CONTINGENCIES
The
Company has letters of credit outstanding in the United States of approximately $1.7 million as
of both December 31, 2009 and September 30, 2009, and foreign letters of credit
outstanding of $0.7 million as of both December 31, 2009 and September
30, 2009.
Thibodaux
Litigation. Since September 2004, the Company has been a
defendant in litigation pending in District Court in the Parish of Orleans,
Louisiana (the “Thibodaux Lawsuit”) filed by C.M. Thibodaux Company
(“Thibodaux”). Other defendants in the case include Intracoastal
Tubular Services, Inc. (“ITCO”), thirty different oil companies (the “Oil
Company Defendants”), several insurance companies and four trucking
companies. Thibodaux, the owner of industrial property located in
Amelia, Louisiana that has historically been leased to tenants conducting
oilfield services businesses, contends that the property has been contaminated
with naturally occurring radioactive material (“NORM”). NORM is found
naturally occurring in the earth, and when pipe is removed from the ground it is
not uncommon for the corroded rust on the pipe to contain very small amounts of
NORM. The Company’s former Oilfield Services business leased a
portion of the subject property from Thibodaux. Thibodaux contends
that the subject property was contaminated with NORM generated during the
servicing of oilfield equipment by the Company and other tenants, and further
alleges that the Oil Company Defendants (customers of Thibodaux’s tenants) and
trucking companies (which delivered tubular goods and other oilfield equipment
to the subject property) allowed or caused the uncontrolled dispersal of NORM on
Thibodaux’s property. Thibodaux seeks recovery from the defendants
for clean-up costs, diminution or complete loss of property values, and other
damages. Discovery in the Thibodaux Lawsuit is ongoing, and the
Company intends to assert a vigorous defense in this litigation. At
this time, the Company does not believe it has any liability in this
matter. In the event the Company is found to have liability, the
Company believes it has sufficient insurance coverage applicable to this claim
subject to a $1.0 million self-insured retention. However, an adverse
judgment against the Company, combined with a lack of insurance coverage, could
have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
Wastewater Discharge Permit.
In the second quarter of fiscal year 2009, the Company self-reported to
the Texas Commission on Environmental Quality (“TCEQ”) facts surrounding certain
events of noncompliance with its Bayshore Industrial facility’s Texas Pollutant
Discharge Elimination System wastewater discharge permit, and subsequently
received notification from the TCEQ that it is conducting an investigation into
the matter. The Company has cooperated in the
investigation. The Company has taken certain corrective action with
respect to the operation of its wastewater treatment facility and the
requirements of its wastewater discharge permit. In July 2009 the
Company received a Notice of Violation (Notice) from the TCEQ stating that an
alleged violation of the permit was noted in the TCEQ’s investigation, and
requesting that the Company provide documentation of the corrective action and
demonstration that compliance has been achieved for the alleged
violation. The Company complied with the TCEQ’s request for
information, and subsequently received notification from the TCEQ confirming
that the TCEQ was satisfied that appropriate corrective action had been
taken. No administrative penalties have been imposed on the Company
as a result of the Notice; however, the investigation is still
pending. It is possible that the investigation could result in the
Company receiving civil and/or criminal penalties. An adverse finding
in the investigation and any resulting penalties imposed on the Company could
have a material adverse effect on the Company's financial condition, results of
operations or cash flows. However, at this time, the Company does not
believe that the outcome will have a material adverse effect on the Company’s
financial condition, results of operations or cash flows.
-10-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Merger
Litigation. Following the announcement of the proposed sale of
the Company to A. Schulman, two lawsuits were filed as follows:
Fred Wilebski v. Gregory T.
Barmore, et al., Cause No. 2009-77782, in the 152nd
Judicial District Court of Harris County, Texas. On December 7, 2009, plaintiff
filed this suit against the Company, all of its directors and A. Schulman as a
class action on behalf of all the Company’s shareholders except those affiliated
with any of the defendants. On January 12, 2010, plaintiff filed an
amended petition, which purports to bring claims derivatively on behalf of the
Company. Plaintiff alleges that the director defendants breached
their fiduciary duties, including duties of loyalty, due care, independence,
good faith and fair dealing, and wasted the Company’s
assets. Plaintiff claims that the consideration to be paid to the
Company’s shareholders under the merger agreement is unfair and inadequate; that
the termination fee and deal protection provisions of the merger agreement are
unfair, unreasonable, and/or improper; and that the directors failed to ensure a
fair and proper process to maximize value for all the Company’s shareholders and
wasted corporate assets. Plaintiff further maintains that the Form
S-4 Registration Statement filed by A. Schulman with the SEC in connection with
the Merger fails to provide the Company’s shareholders with material information
and/or provides them with materially misleading
information. Plaintiff brings additional claims for aiding and
abetting against the defendants and A. Schulman. Plaintiff generally
seeks:
·
|
to
enjoin the defendants from effectuating the Merger or, in the event that
the transaction is consummated, to rescind it or award rescissory
damages;
|
·
|
monetary
damages on behalf of the Company against the defendants for all losses
and/or damages suffered by the Company;
and
|
·
|
attorney’s
fees and expert fees.
|
On
January 14, 2010, counsel for Mr. Wilebski filed a motion seeking expedited
proceedings and discovery. The referenced motion is currently
scheduled for oral hearing on February 19, 2010.
On
January 19, 2010, the defendants answered the lawsuit. On January 20,
2010, a Special Litigation Committee, was formed, composed of three
disinterested, independent directors, to investigate, analyze and evaluate the
allegations and claims asserted in Wilebski’s lawsuit and the stockholder demand
letters referenced below, and with respect to any related, amended or other
demand letters or lawsuits containing similar or related claims that may be
filed or made in the future. The members of the Special Litigation
Committee are Eric O. English, David E. K. Frischkorn, Jr., and Daniel R.
Gaubert, with Mr. English serving as Chairman. The Special Litigation
Committee will determine, after reasonable inquiry, whether it is in the best
interests of the Company for any such claims to be pursued.
On
January 25, 2010, the Company filed a statement pursuant to section 21.555(b) of
the Texas Business Organizations Code (the “TBOC”) advising the Court,
plaintiff, and all interested parties that it had established a Special
Litigation Committee and commenced an inquiry into the allegations asserted in
Mr. Wilebski’s amended petition to determine what actions, if any, the Company
should take. On the same day, the Company filed a motion to stay
proceedings in this action pursuant to the mandatory and automatic stay
provision under section 21.555 of the TBOC.
David Mraud v. A. John Knapp,
et al., Cause No. 2009-79556, in the 127th Judicial District
Court of Harris County, Texas. On December 15, 2009, plaintiff
brought this action derivatively on behalf of the Company against all of its
directors, A. Schulman, Wildcat and the Company (as nominal defendant),
alleging, among other things, breach of the Company’s board of directors’
fiduciary duties and that the consideration to be received by the Company’s
shareholders is inadequate. The Company’s board of directors had
received a demand letter dated December 4, 2009, from counsel for Mr.
Mraud, also alleging breaches of fiduciary duties by the board, and that the
Merger consideration is inadequate, and demanding that the board take action to
remedy the claimed breaches of fiduciary duty. On January 24, 2010,
the lawsuit filed on behalf of Mr. Mraud was nonsuited.
Demand Letter. The
Company’s board of directors received a demand letter dated December 4, 2009,
regarding the Merger from counsel for a shareholder of the Company (this letter
was separate from plaintiff David Mraud’s demand letter of the same date
referenced above). The letter states, among other things, that the
consideration to be paid to the Company’s shareholders under the Merger
Agreement is inadequate and that the Company’s board of directors breached
fiduciary duties to the shareholders and was motivated by its self interest in
approving the merger. The letter demands that the Company’s board of directors
initiate a lawsuit against the members of the Company’s board of directors and
A. Schulman.
Other Legal
Proceedings. The Company is also named as a defendant in
certain other lawsuits arising in the ordinary course of business. The outcome
of these lawsuits cannot be predicted with certainty, but the Company does not
believe they will have a material adverse effect on the Company’s financial
condition, results of operations or cash flows.
-11-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
9. DEBT
Term debt
at December 31, 2009 and September 30, 2009 consisted of the
following:
December
31,
|
September
30,
|
|||||||
2009
|
2009
|
|||||||
(Dollars
in Thousands)
|
||||||||
Term
loan of ICO, Inc. under the terms of the KeyBank Credit
Agreement. Principal and interest paid quarterly through
September 2011. The interest rate as of both December 31, 2009
and September 30, 2009 was 6.6%.
|
$ | 5,833 | $ | 6,667 | ||||
Term
loan of ICO, Inc. under the terms of the KeyBank Credit
Agreement. Principal and interest paid quarterly through
September 2012. The interest rate as of both December 31, 2009
and September 30, 2009 was 7.9%.
|
3,056 | 3,333 | ||||||
Term
loan of the Company’s Italian subsidiary, collateralized by a mortgage
over the subsidiary’s real estate. Principal and interest paid
quarterly with a fixed interest rate of 5.2% through June
2016.
|
5,067 | 5,324 | ||||||
Various
other U.S. loans of the Company’s U.S. subsidiaries collateralized by
mortgages on land and buildings and other assets of the
subsidiaries. These loans had a weighted average interest rate
of 6.0% and 6.1% as of December 31, 2009 and September 30, 2009,
respectively, with maturity dates between November 2010 and May
2021. The interest and principal payments are made
monthly.
|
6,674 | 7,545 | ||||||
Various
other loans provided by foreign banks of the Company’s foreign
subsidiaries collateralized by mortgages on land and buildings and other
assets of the subsidiaries. These loans had a weighted average
interest rate of 7.4% and 7.0% as of December 31, 2009 and
September 30, 2009, respectively, with maturity dates between January 2010
and March 2015. The interest and principal payments are made
monthly or quarterly.
|
7,725 | 8,934 | ||||||
Total
term debt
|
28,355 | 31,803 | ||||||
Less
current maturities of long-term debt
|
11,935 | 12,980 | ||||||
Long-term
debt less current maturities
|
$ | 16,420 | $ | 18,823 | ||||
The
Company maintains several lines of credit. The facilities are
collateralized by certain assets of the Company. The following table
presents the borrowing capacity, outstanding borrowings and net availability
under the various credit facilities in the Company’s domestic and foreign
operations.
Domestic
|
Foreign
|
Total
|
||||||||||||||||||||||
As
of
|
As
of
|
As
of
|
||||||||||||||||||||||
December
31,
|
September
30,
|
December
31,
|
September
30,
|
December
31,
|
September
30,
|
|||||||||||||||||||
2009
|
2009
|
2009
|
2009
|
2009
|
2009
|
|||||||||||||||||||
(Dollars
in Millions)
|
||||||||||||||||||||||||
Borrowing Capacity
(a)
|
$ | 11.7 | $ | 10.6 | $ | 38.3 | $ | 39.9 | $ | 50.0 | $ | 50.5 | ||||||||||||
Outstanding
Borrowings
|
- | - | 0.6 | - | 0.6 | - | ||||||||||||||||||
Net
availability
|
$ | 11.7 | $ | 10.6 | $ | 37.7 | $ | 39.9 | $ | 49.4 | $ | 50.5 | ||||||||||||
(a) Based
on the credit facility limits less outstanding letters of
credit.
|
The
Company maintains a Credit Agreement (the “Credit Agreement”) with KeyBank
National Association and Wells Fargo Bank National Association, with a maturity
date of October 2012. Under the Credit Agreement, there is a total of $8.9
million outstanding in the form of two term loans as of December 31, 2009. The
Credit Agreement also contains a revolving credit facility of $20.0 million
based on the Company’s levels of domestic receivables and
inventory. As of December 31, 2009, the borrowing capacity was $11.7
million after subtracting $1.7 million of letters of credit
outstanding. There were no borrowings under the revolving credit
facility as of December 31, 2009 and September 30, 2009.
-12-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Credit Agreement contains a variable interest rate and contains certain
financial and nonfinancial covenants. During fiscal year 2008, the
Company entered into interest rate swaps on its $5.8 million and $3.1 million
term loans. The swaps lock in the Company’s interest rate on (i) the
$5.8 million term loan at 2.82% plus the credit spread on the corresponding
debt, and (ii) the $3.1 million term loan at 3.69% plus the credit spread on the
corresponding debt. The interest rates as of December 31, 2009 were
6.6% and 7.9%, respectively.
The
Credit Agreement establishing the credit facility contains financial covenants,
including:
·
|
A
minimum tangible net worth requirement (as defined in the Credit
Agreement) of $50.0 million plus 50% of each fiscal quarter’s net
income. As of December 31, 2009 and September 30, 2009, the
Company’s required minimum tangible net worth was $70.2 million and $69.7
million, respectively. The Company’s actual tangible net worth
was $98.1 million and $97.6 million, respectively, as of December 31, 2009
and September 30, 2009.
|
·
|
A
leverage ratio (as defined in the Credit Agreement) not to exceed 3.0 to
1.0. As of December 31, 2009 and September 30, 2009, the
Company’s leverage ratios were 1.8 to 1.0 and 2.5 to 1.0,
respectively.
|
·
|
A
fixed charge coverage ratio of at least 1.0 to 1.0, defined as “Adjusted
EBITDA” (as defined in the Credit Agreement), plus rent expense divided by
fixed charges (defined as the sum of interest expense, income tax expense,
scheduled principal debt repayments in the prior four quarters, capital
expenditures for the purpose of maintaining existing fixed assets and rent
expense); and as of December 31, 2009 and September 30, 2009, the
Company’s fixed charge coverage ratios were 1.1 to
1.0.
|
·
|
A requirement that
“Adjusted EBITDA” less interest expense (as defined in the Credit
Agreement), not be less than zero for two consecutive fiscal
quarters. As of December 31, 2009 and September 30, 2009, the
Company has maintained the required level of profitability above
zero.
|
In
addition, the Credit Agreement contains a number of limitations on the ability
of the Company and its restricted U.S. subsidiaries to (i) incur additional
indebtedness, (ii) pay dividends or redeem any Common Stock, (iii) incur liens
or other encumbrances on their assets, (iv) enter into transactions with
affiliates, (v) merge with or into any other entity or (vi) sell any of their
assets. Additionally, any “material adverse change” of the Company
could restrict the Company’s ability to borrow under its Credit Agreement and
could also be deemed an event of default under the Credit
Agreement. A “material adverse change” is defined as a change in the
financial or other condition, business, affairs or prospects of the Company, or
its properties and assets considered as an entirety that could reasonably be
expected to have a material adverse effect (as defined in the Credit Agreement)
on the Company.
In
addition, any “Change of Control” of the Company or its restricted U.S.
subsidiaries will constitute a default under the Credit
Agreement. “Change of Control,” as defined in the Credit Agreement,
means: (i) the acquisition of, or, if earlier, the shareholder or director
approval of the acquisition of, ownership or voting control, directly or
indirectly, beneficially or of record, by any person, entity, or group (within
the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as then in
effect), of shares representing more than 50% of the aggregate ordinary voting
power represented by the issued and outstanding Common Stock of the Company;
(ii) the occupation of a majority of the seats (other than vacant seats) on the
board of directors of the Company by individuals who were neither (A) nominated
by the Company’s board of directors nor (B) appointed by directors so nominated;
(iii) the occurrence of a change in control, or other similar provision, under
or with respect to any “Material Indebtedness Agreement” (as defined in the
Credit Agreement); or (iv) the failure of the Company to own directly or
indirectly, all of the outstanding equity interests of the Company’s Bayshore
Industrial L.P. and ICO Polymers North America, Inc. subsidiaries.
The merger agreement, if
consummated, will result in a “Change of Control”. The Company
obtained the consent of KeyBank, subject to certain terms and conditions,
to the approval by our board of directors and/or shareholders of the pending
merger.
The
Company has various foreign credit facilities in eight foreign countries. The
available credit under these facilities varies based on the levels of accounts
receivable within the foreign subsidiary, or is a fixed amount. The foreign
credit facilities are collateralized by assets owned by the foreign
subsidiaries. These facilities either have a remaining maturity of
less than twelve months, do not have a stated maturity date, or can be cancelled
at the option of the lender. The aggregate amounts of available
borrowings under the foreign credit facilities, based on the credit facility
limits, current levels of accounts receivables, and outstanding letters of
credit and borrowings, were $37.7 million as of December 31, 2009 and $39.9
million as of September 30, 2009.
-13-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following table contains the financial covenants within the Company’s foreign
loan agreements. The financial covenant computations are specific to
the subsidiary of the country listed.
As
of December 31, 2009
|
||||||||||
Country
|
Outstanding
Borrowings
|
Available
Borrowing Capacity
|
Financial
Covenant Requirement
|
December
31, 2009
|
September
30, 2009
|
|||||
Australia
|
$2.7
million
|
$0.9
million
|
Equity
exceeds 29.9% of total assets
|
48%
|
43%
|
|||||
Earnings
more than -1.6x interest expense
|
(a)
|
(a)
|
||||||||
Holland
|
1.4
million
|
5.3
million
|
Equity
exceeds 34.9% of total assets
|
60%
|
56%
|
|||||
Malaysia
|
0.3
million
|
1.5
million
|
Total
debt less than 2x equity
|
.4x
|
.4x
|
|||||
Malaysia
|
2.0
million
|
2.0
million
|
Equity
greater than US $1.6 million
|
$6.0
million
|
$5.6
million
|
(a) As of December 31, 2009
and September 30, 2009, the Company did not meet this covenant due to losses in
its Australian subsidiary. At December 31, 2009 and September 30,
2009 there was $2.7 million and $2.8 million of term debt outstanding,
respectively. The Company has classified all of the Australian term
debt as current. The Company obtained a waiver from its Australian
bank as of September 30, 2009 and is seeking a waiver for the December 31, 2009
covenant violation. Of the $37.7 million of total foreign credit
availability as of December 31, 2009, $0.9 million related to the Company’s
Australian subsidiary.
NOTE
10. EMPLOYEE BENEFIT PLANS
The
Company maintains several defined contribution plans that cover domestic and
foreign employees who meet certain eligibility requirements related to age and
period of service with the Company. The plan in which each employee
is eligible to participate depends upon the subsidiary for which the employee
works. All plans have a salary deferral feature that enables
participating employees to contribute up to a certain percentage of their
earnings, subject to governmental regulations. Many of the foreign
plans require the Company to match employees’ contributions in
cash. Employee contributions to the Company’s domestic 401(k) plan
have historically been voluntarily matched by the Company with shares of ICO,
Inc. Common Stock. Both foreign and domestic employees’ interests in
Company matching contributions are generally vested immediately upon
contribution.
The
Company maintains a defined benefit plan for employees of the Company’s Dutch
operating subsidiary (the “Dutch Plan”). Participants are responsible for a
portion of the cost associated with the Dutch Plan, which provides retirement
benefits at the normal retirement age of 65. This Dutch Plan is insured by an
insurance contract with Aegon Levensverzekering N.V. ("Aegon"), located in The
Hague, The Netherlands. The Aegon insurance contract guarantees the
funding of the Company’s future pension obligations under the Dutch
Plan. Pursuant to the Aegon contract, Aegon is responsible for
payment of all future obligations under the provisions of the Dutch Plan, while
the Company pays annual insurance premiums to Aegon. Payment of the insurance
premiums by the Company constitutes an unconditional and irrevocable transfer of
the related pension obligation under the Dutch Plan from the Company to
Aegon. Currently, Aegon’s Standard and Poor’s financial strength
rating is AA-. The premiums paid by the Company for the Aegon
insurance contracts are included in pension expense.
The
Company also maintains several termination plans, usually mandated by law,
within certain of its foreign subsidiaries, which plans provide for a one-time
payment to a covered employee upon the employee’s termination of
employment.
The
amount of defined contribution plan expense for the three months ended December
31, 2009 and December 31, 2008 was $0.3 million. The amount of
defined benefit plan pension expense for the three months ended December 31,
2009 and December 31, 2008 was $0.1 million.
NOTE
11. LONG-LIVED ASSET IMPAIRMENT, RESTRUCTURING AND
OTHER COSTS (INCOME)
During
the three months ended December 31, 2009, the Company incurred restructuring
charges of $0.1 million related to relocation costs incurred in
Australia. In the three month period ended December 31, 2008, the
Company recorded a net benefit from insurance proceeds of $0.4 million at its
Bayshore Industrial location resulting from Hurricane Ike and a net benefit from
insurance proceeds of $0.1 million related to a fire suffered at the Company’s
facility in New Jersey in July 2008. Additionally, the Company
recorded a $0.2 million impairment related to property, plant and equipment and
plant closure costs in the three months ended December 31, 2008 related to its
former United Arab Emirates plant.
-14-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
12. DISCONTINUED
OPERATIONS
During
fiscal year 2002, the Company completed the sale of substantially all of its
Oilfield Services business to National Oilwell Varco, Inc., formerly Varco
International, Inc. The Oilfield Services results of operations are
presented as discontinued operations, net of income taxes, in the Consolidated
Statement of Operations. Legal fees and other expenses incurred
related to discontinued operations are expensed as incurred to discontinued
operations.
NOTE
13. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The
Company is exposed to certain market risks as part of its ongoing business
operations, including debt obligations that carry variable interest rates,
foreign currency exchange risk, and resin price risk that could impact the
Company’s financial condition, results of operations or cash flows. The Company
manages its exposure to these and other market risks through regular operating
and financing activities, including the use of derivative financial instruments.
The Company’s intention is to use these derivative financial instruments as risk
management tools and not for trading purposes or speculation.
The
Company’s revenues and profitability are impacted by changes in resin
prices. The Company uses various resins (primarily polyethylene) to
manufacture its products. As the price of resin increases or
decreases, market prices for the Company’s products will also generally increase
or decrease. This will typically lead to higher or lower average
selling prices and will impact the Company’s operating income and operating
margin. The impact on operating income is due to a lag in matching
the change in raw material cost of goods sold and the change in product sales
prices. As of December 31, 2009 and September 30, 2009, the Company
had $21.8 million and $18.4 million of raw material inventory and $18.1 million
and $17.9 million of finished goods inventory, respectively. The
Company attempts to minimize its exposure to resin price changes by monitoring
and carefully managing the quantity of its inventory on hand and product sales
prices.
As of
December 31, 2009, the Company had $73.3 million of net investment in foreign
wholly-owned subsidiaries. The Company does not hedge the foreign
exchange rate risk inherent with this non-U.S. Dollar denominated
investment.
The
Company enters into forward currency exchange contracts related to both future
purchase obligations and other forecasted transactions denominated in
non-functional currencies, primarily repayments of foreign currency intercompany
transactions. Certain of these forward currency exchange contracts qualify as
cash flow hedging instruments and are highly effective. In accordance
with authoritative guidance over accounting for derivative instruments and
hedging activities, the Company recognizes the amount of hedge ineffectiveness
for these hedging instruments in the Consolidated Statement of
Operations. The hedge ineffectiveness on the Company’s designated
cash flow hedging instruments was not a significant amount for the three months
ended December 31, 2009 and 2008, respectively. The Company’s
principal foreign currency exposures relate to the Euro, British Pound,
Australian Dollar, New Zealand Dollar, Malaysian Ringgit and Brazilian
Real. The Company’s forward contracts have original maturities of one
year or less.
The
following table includes the total value of foreign exchange contracts
outstanding for which hedge accounting is being applied as of December 31, 2009
and September 30, 2009
As
of
|
||||
December
31,
|
September
30,
|
|||
2009
|
2009
|
|||
Notional
value
|
$2.9
million
|
$5.5
million
|
||
Fair
market value
|
$0.0
million
|
$(0.3)
million
|
||
Maturity
Dates
|
January
through April 2010
|
October
2009
|
||
through January
2010
|
When it
is determined that a derivative has ceased to be a highly effective hedge, or
that forecasted transactions have not occurred as specified in the hedge
documentation, hedge accounting is discontinued prospectively. As a
result, these derivatives are marked to market, with the resulting gains and
losses recognized in the Consolidated Statements of Operations.
-15-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Foreign Currency Intercompany
Accounts and Notes Receivable. From time-to-time, the
Company’s U.S. subsidiaries provide capital to the Company’s foreign
subsidiaries through U.S. Dollar denominated interest bearing promissory
notes. In addition, certain of the Company’s foreign subsidiaries
also provide other foreign subsidiaries with access to capital through foreign
currency denominated interest bearing promissory notes. Such funds
are generally used by the Company’s foreign subsidiaries to purchase capital
assets and for general working capital needs. The Company’s U.S.
subsidiaries also sell products to the Company’s foreign subsidiaries in U.S.
Dollars on trade credit terms. In addition, the Company’s foreign
subsidiaries sell products to other foreign subsidiaries denominated in foreign
currencies that may not be the functional currency of one or more of the foreign
subsidiaries that are parties to such intercompany agreements. These
intercompany debts are accounted for in the local functional currency of the
contracting foreign subsidiary, and are eliminated in the Company’s Consolidated
Balance Sheet. At December 31, 2009, the Company had the following
significant outstanding intercompany amounts as described above:
Country
of subsidiary with
|
Country
of subsidiary with
|
Amount
in US$ as of
|
Currency
denomination
|
|||
intercompany
receivable
|
intercompany
payable
|
December
31, 2009
|
of
receivable
|
|||
US
|
Australia
|
$5.1
million
|
United
States Dollar
|
|||
Holland
|
UK
|
$3.5
million
|
Great
Britain Pound
|
|||
Holland
|
Australia
|
$2.8
million
|
Australian
Dollar
|
|||
US
|
Malaysia
|
$1.3
million
|
United
States Dollar
|
Because
these intercompany lending transactions are denominated in various foreign
currencies and are subject to financial exposure from foreign exchange rate
movement from the date a loan is recorded to the date it is settled or revalued,
any appreciation or depreciation of the foreign currencies in which the
transactions are denominated could result in a gain or loss, respectively, to
the Consolidated Statement of Operations, subject to forward currency exchange
contracts that may be entered into to mitigate this risk. The
following table includes the total value of foreign exchange contracts
outstanding for which hedge accounting is not being applied as of December 31,
2009 and September 30, 2009.
As
of
|
||||
December
31,
|
September
30,
|
|||
2009
|
2009
|
|||
Notional
value
|
$10.7
million
|
$9.0 million
|
||
Fair
market value
|
$(0.1)
million
|
$0.0
million
|
||
Maturity
Dates
|
January
through March 2010
|
October
2009
|
||
through
January 2010
|
The
Company also marks to market the underlying transactions related to these
foreign exchange contracts which offsets the fluctuation in the fair market
value of the derivative instruments. As of December 31, 2009, the net
unrealized gain or loss on these derivative instruments and their underlyings
was insignificant.
Interest Rate Swaps. In some
circumstances, the Company enters into interest rate swap agreements that
mitigate the exposure to interest rate risk by converting variable-rate debt to
a fixed rate. The interest rate swap is marked to market in the balance
sheet.
As of
December 31, 2009, the Company has $10.1 million in notional
interest rate swaps. The estimated fair value of these interest rate
swaps as of December 31, 2009, was a liability of $0.3
million. The fair value is an estimate of the net amount that
the Company would pay on December 31, 2009 if the agreements were transferred to
another party or cancelled by the Company.
NOTE
14. SEGMENT INFORMATION
The
Company’s management structure and reportable segments are organized into five
business segments referred to as ICO Polymers North America, ICO Brazil,
Bayshore Industrial, ICO Europe and ICO Asia Pacific. This
organization is consistent with the way information is reviewed and decisions
are made by executive management.
-16-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ICO
Polymers North America, ICO Brazil, ICO Europe and ICO Asia Pacific primarily
produce competitively priced engineered polymer powders for the rotational
molding industry as well as other specialty markets for powdered polymers,
including masterbatch and concentrate producers, users of polymer-based metal
coatings, and non-woven textile markets. Additionally, these segments
provide specialty size reduction services on a tolling
basis. “Tolling” refers to processing customer owned material for a
service fee. The Bayshore Industrial segment designs and produces
proprietary concentrates, masterbatches and specialty compounds, primarily for
the plastic film industry, in North America and in selected export
markets. The Company’s European segment includes operations in
France, Holland, Italy and the U.K. The Company’s Asia Pacific
segment includes operations in Australia, Malaysia and New Zealand.
Three
Months Ended December 31, 2009
|
Revenue
From
External
Customers
|
Inter-
Segment
Revenues
|
Operating
Income
(Loss)
|
Depreciation
and
Amortization
|
Impairment,
Restructuring
and
Other
Costs
(Income)(a)
|
Expenditures
for
Additions
to
Long-Lived
Assets
|
||||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||||||
ICO
Europe
|
$ | 36,375 | $ | 143 | $ | 1,657 | $ | 464 | $ | - | $ | 281 | ||||||||||||
Bayshore
Industrial
|
16,864 | 55 | 1,818 | 406 | - | 169 | ||||||||||||||||||
ICO
Asia Pacific
|
17,076 | 91 | (192 | ) | 471 | 142 | 310 | |||||||||||||||||
ICO
Polymers North America
|
9,716 | 713 | 742 | 554 | - | 233 | ||||||||||||||||||
ICO
Brazil
|
5,340 | - | 419 | 70 | - | 12 | ||||||||||||||||||
Total
from Reportable Segments
|
85,371 | 1,002 | 4,444 | 1,965 | 142 | 1,005 | ||||||||||||||||||
Unallocated
General Corporate
|
- | - | (2,189 | ) | 57 | - | 10 | |||||||||||||||||
Expense
|
||||||||||||||||||||||||
Total
|
$ | 85,371 | $ | 1,002 | $ | 2,255 | $ | 2,022 | $ | 142 | $ | 1,015 |
Three
Months Ended December 31, 2008
|
Revenue
From
External
Customers
|
Inter-
Segment
Revenues
|
Operating
Income
(Loss)
|
Depreciation
and
Amortization
|
Impairment,
Restructuring
and
Other
Costs
(Income)(a)
|
Expenditures
for
Additions
to
Long-Lived
Assets
|
||||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||||||
ICO
Europe
|
$ | 34,762 | $ | 130 | $ | (149 | ) | $ | 452 | $ | - | $ | 227 | |||||||||||
Bayshore
Industrial
|
18,330 | 105 | 1,718 | 411 | (382 | ) | 39 | |||||||||||||||||
ICO
Asia Pacific
|
14,481 | - | (1,287 | ) | 329 | 168 | 71 | |||||||||||||||||
ICO
Polymers North America
|
8,889 | 897 | 582 | 434 | (79 | ) | 961 | |||||||||||||||||
ICO
Brazil
|
2,896 | - | (58 | ) | 42 | - | 64 | |||||||||||||||||
Total
from Reportable Segments
|
79,358 | 1,132 | 806 | 1,668 | (293 | ) | 1,362 | |||||||||||||||||
Unallocated
General Corporate
|
- | - | (1,254 | ) | 45 | - | 2 | |||||||||||||||||
Expense
|
||||||||||||||||||||||||
Total
|
$ | 79,358 | $ | 1,132 | $ | (448 | ) | $ | 1,713 | $ | (293 | ) | $ | 1,364 |
As
of
|
As
of
|
|||||||
December
31,
|
September
30,
|
|||||||
Total Assets |
2009
(c)
|
2009
(c)
|
||||||
(Dollars
in Thousands)
|
||||||||
ICO
Europe
|
$ | 75,351 | $ | 76,578 | ||||
Bayshore
Industrial
|
29,838 | 29,725 | ||||||
ICO
Asia Pacific
|
43,292 | 42,570 | ||||||
ICO
Polymers North America
|
26,233 | 27,509 | ||||||
ICO
Brazil
|
7,728 | 7,593 | ||||||
Total
from Reportable Segments
|
182,442 | 183,975 | ||||||
Other (b)
|
4,919 | 8,298 | ||||||
Total
|
$ | 187,361 | $ | 192,273 | ||||
(a)
Impairment, restructuring and other costs (income) are included in operating
income (loss).
(b)
Consists of unallocated Corporate assets.
(c)
Includes goodwill of $4.5 million for Bayshore Industrial as of December 31,
2009 and September 30, 2009.
-17-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A
reconciliation of total reportable segment operating income to income from
continuing operations before income taxes is as follows:
Three
Months Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
(Dollars
in Thousands)
|
||||||||
Reportable
segments operating income
|
$ | 4,444 | $ | 806 | ||||
Unallocated
general corporate expense
|
(2,189 | ) | (1,254 | ) | ||||
Consolidated
operating income (loss)
|
2,255 | (448 | ) | |||||
Other
expense:
|
||||||||
Interest
expense, net
|
(527 | ) | (639 | ) | ||||
Other
|
(8 | ) | (331 | ) | ||||
Income
(loss) before income taxes
|
$ | 1,720 | $ | (1,418 | ) |
NOTE
15. FAIR VALUE MEASUREMENTS OF
ASSETS AND LIABILITIES
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The FASB provides accounting rules that establish a fair
value hierarchy to prioritize the inputs used in valuation techniques into three
levels as follows:
·
|
Level
1 – Fair value based on quoted prices in active markets for identical
assets or liabilities.
|
·
|
Level
2 – Fair value based on significant directly observable data (other than
Level 1 quoted prices) or significant indirectly observable data through
corroboration with observable market data. Inputs would normally be (i)
quoted prices in active markets for similar assets or liabilities, (ii)
quoted prices in inactive markets for identical or similar assets or
liabilities or (iii) information derived from or corroborated by
observable market data.
|
·
|
Level
3 – Fair value based on prices or valuation techniques that require
significant unobservable data inputs. Inputs would normally be a reporting
entity’s own data and judgments about assumptions that market participants
would use in pricing the asset or
liability.
|
The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis at December 31, 2009:
Fair
Value Measurement Using:
|
||||||||||||||||
Total
|
Quoted
Price in active
|
Significant
Other
|
Significant
|
|||||||||||||
Fair
|
markets
for Identical Assets
|
Observable
Inputs
|
Unobservable
Inputs
|
|||||||||||||
Value
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
(In
Thousands)
|
||||||||||||||||
Financial
Assets:
|
||||||||||||||||
Forward
Exchange Contracts
|
$ | 52 | $ | - | $ | 52 | $ | - | ||||||||
Financial
Liabilities:
|
||||||||||||||||
Forward
Exchange Contracts
|
158 | - | 158 | - | ||||||||||||
Interest
Rate Swaps
|
310 | - | 310 | - |
“Forward
exchange contracts” represent net unrealized gains or losses on foreign currency
hedges, which are the net differences between (i) the amount in U.S. Dollars, or
local currency translated into U.S. Dollars, to be received or paid at the
contracts’ settlement date and (ii) the U.S. Dollar value of the foreign
currency to be sold or purchased at the current forward exchange
rate. “Interest rate swaps” represent the net unrealized gains or
losses on interest rate swaps related to the Company’s term loans in the United
States and the United Kingdom. For additional disclosures required by
this accounting guidance for financial assets and liabilities, see Note 13 –
“Quantitative and Qualitative Disclosures About Market Risk” to the Company’s
consolidated financial statements.
NOTE
16. SUBSEQUENT EVENTS
The
Company evaluated all events and transactions that occurred after December 31,
2009 and through February 4, 2010, the date the Company issued these financial
statements. During this period, the Company did not have any material
recognizable subsequent events or unrecognizable subsequent
events.
-18-
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
Pending
Merger with A. Schulman, Inc.
On
December 2, 2009, the Company signed a definitive merger agreement with A.
Schulman, Inc. (“A. Schulman”) in a combined cash and stock transaction pursuant
to which 100% of the outstanding stock of the Company will be acquired by A.
Schulman (the “merger”). Under the terms of the merger agreement, the
total consideration is comprised of $105.0 million in cash and 5.1 million
shares of A. Schulman common stock. Closing of the transaction is subject to
approval by at least two-thirds of the votes entitled to be cast by holders of
the Company's Common Stock, regulatory approvals and other customary closing
conditions. On January 18, 2010, the Federal Trade Commission granted
early termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. If the merger agreement is terminated
before we complete the merger, under certain circumstances, we may be required
to pay either a termination fee to A. Schulman in the amount of $6.8 million or
up to $1.0 million in expense reimbursement instead of the termination
fee.
How
We Generate Our Revenues
Our
revenues are primarily derived from (1) product sales and (2) toll processing
services in the polymer processing industry. “Toll processing
services” or “tolling” refers to processing customer-owned material for a
service fee. Product sales result from the sale of finished products
to the customer such as polymer powders, proprietary concentrates, masterbatches
and specialty compounds. The creation of such products begins with the purchase
of resin (primarily polyethylene) and other raw materials which are further
processed within our operating facilities. The further processing of
raw materials may involve size reduction services, compounding services, and the
production of masterbatches. Compounding services involve melt
blending various resins and additives to produce a homogeneous
material. Compounding services include the manufacture and sale of
concentrates. Concentrates are polymers loaded with high levels of
chemical and organic additives that are melt blended into base resins to give
plastic films and other finished products desired physical
properties. Masterbatches are concentrates that incorporate all
additives a customer needs into a single package for a particular product
manufacturing process, as opposed to requiring numerous
packages. After processing, we sell our products to our
customers. Our products are used by our customers to manufacture
finished goods such as household items (e.g. toys, household furniture and trash
receptacles), automobile parts, agricultural products (such as fertilizer and
water tanks), paints, waxes, and metal and fabric coatings.
We are
also a major supplier of concentrates to the plastic film industry in North
America. These plastic films are predominantly used to produce
plastic packaging. The concentrates we manufacture are melt-blended
into base resins to produce plastic film having the desired
characteristics. We sell concentrates to both resin producers and
businesses that manufacture plastic films.
Toll
processing services, which may involve size reduction, compounding, and other
processing services, are performed on customer-owned material for a
fee. We consider our toll processing services to be completed when we
have processed the customer-owned material and no further services remain to be
performed. Pursuant to the service arrangements with our customers,
we are entitled to collect our agreed upon toll processing fee upon completion
of our toll processing services. Shipping of the product to and from
our facilities is determined by and paid for by the customer. The
revenue we recognize for toll processing services is net of the value of our
customers’ product as we do not take ownership of our customers’ material during
any stage of the process.
Demand
for our products and services tends to be driven by overall economic factors
and, particularly, consumer spending. Accordingly, the recent
downturn in the U.S. and global economies had an impact on the demand for our
products and services. The trend of applicable resin prices also
impacts customer demand. As resin prices fall, customers tend to
reduce their inventories and therefore reduce their need for our products and
services as customers choose to purchase resin upon demand rather than building
large levels of inventory. Conversely, as resin prices are rising,
customers often increase their inventories and accelerate their purchases of
products and services from the Company to help control their raw material
costs. Historically, resin price changes have generally followed the
trend of oil and natural gas prices, and we believe that this trend will
continue in the future. Additionally, demand for our products and
services tends to be seasonal, with customer demand historically being weakest
during our first fiscal quarter due to the holiday season and also due to
property taxes levied in the U.S. on customers’ inventories on January
1.
Cost
of Sales and Services
Cost of
sales and services is primarily comprised of raw materials (resins and various
additives), compensation and benefits to non-administrative employees,
electricity, repair and maintenance, occupancy costs and
supplies.
-19-
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist primarily of compensation and
related benefits paid to the sales and marketing, executive management,
information technology, accounting, legal, human resources and other
administrative employees of the Company, other sales and marketing expenses,
communications costs, systems costs, insurance costs, consulting costs and legal
and professional accounting fees.
How
We Manage Our Operations
Our
management structure and reportable segments are organized into five business
segments defined as ICO Polymers North America, ICO Brazil, Bayshore Industrial,
ICO Europe and ICO Asia Pacific. This organization is consistent with
the way information is reviewed and decisions are made by executive
management.
ICO
Polymers North America, ICO Brazil, ICO Europe and ICO Asia Pacific primarily
produce competitively priced polymer powders for the rotational molding industry
as well as other specialty markets for powdered polymers, including masterbatch
and concentrate producers, users of polymer-based metal coatings, and non-woven
textile markets. Masterbatches are concentrates that incorporate all
of the additives a customer needs into a single package for a particular product
manufacturing process, as opposed to requiring numerous
packages. Additionally, these segments provide specialty size
reduction services on a tolling basis. The Bayshore Industrial
segment designs and produces proprietary concentrates, masterbatches and
specialty compounds, primarily for the plastic film industry, in North America
and in selected export markets. Our ICO Europe segment includes
operations in France, Holland, Italy and the U.K. Our Asia Pacific
segment includes operations in Australia, Malaysia, and New
Zealand.
Results
of Operations
Three
months ended December 31, 2009 compared to the three months ended December 31,
2008
Executive
Summary
Although
the Company continues to face challenging industry conditions, net income was
$1.0 million for the first quarter of fiscal year 2010 versus a loss of
$1.1 million for the first quarter of fiscal year 2009, an increase of
$2.1 million. This increase was primarily due to higher volumes as a result
of an improvement in customer demand. Volumes in the first quarter of
fiscal year 2010 increased 11% compared to the quarter ended December 31, 2008
and 6% compared sequentially to the quarter ended September 30, 2009. The
unprecedented drop in resin prices in the quarter ended December 31, 2008 led to
significantly reduced margins in that period. Resin prices stabilized throughout
the remainder of fiscal year 2009, and along with the 11% growth in volumes, led
to improved gross margins from 12.7% in the quarter ended December 31, 2008 to
17.1% in the quarter ended December 31, 2009.
Summary
Financial Information
|
||||||||||||||||
Three
Months Ended
|
||||||||||||||||
December
31,
|
||||||||||||||||
2009
|
2008
|
Change
|
%
|
|||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||
Total
revenues
|
$ | 85,371 | $ | 79,358 | $ | 6,013 | 8% | |||||||||
SG&A (1)
|
10,152 | 9,138 | 1,014 | 11% | ||||||||||||
Operating
income
|
2,255 | (448 | ) | 2,703 |
N.M.
|
|||||||||||
Net
income (loss)
|
$ | 1,046 | $ | (1,076 | ) | $ | 2,122 |
N.M.
|
||||||||
Volumes (2)
|
71,600 | 64,600 | 7,000 | 11% | ||||||||||||
Gross margin (3)
|
17.1 | 12.7% | 4.4% | |||||||||||||
SG&A
as a percentage of revenues
|
11.9% | 11.6% | 0.3% | |||||||||||||
Operating
income as a percentage of revenues
|
2.6% | (0.6% | ) | 3.2% | ||||||||||||
N.M. – Not
meaningful
(1)
“SG&A” is defined as selling, general and administrative
expense.
(2)
“Volumes” refers to total metric tons of materials for which the Company’s
customers are invoiced, either in connection with product sales or the
performance of toll processing services.
(3) The
Company has presented a measurement, gross margin (computed as gross profit
divided by revenues), that is not calculated in accordance with generally
accepted accounting principles in the United States (a “Non-GAAP
measurement”), but that is derived from relevant items in the Company’s
financial statements prepared in accordance with US GAAP. The Company
presents this measurement because the Company uses this measurement as an
indicator of the income the Company generates from its revenues. The material
limitation of this Non-GAAP measurement is that it excludes depreciation and
amortization expense. The Company mitigates this limitation by the provision of
the specific detailed computation of the measurement, and by presenting this
Non-GAAP measurement such that it is no more prominent in the Company’s filings
than GAAP measures of profitability.
-20-
Revenues. Total revenues increased $6.0
million or 8% to $85.4 million during the three months ended December 31, 2009,
compared to the same period of fiscal year 2009. The increase in revenues was a
result of an increase in volumes sold by the Company (“volume”), the positive
impact from changes in foreign currencies relative to the U.S. Dollar
(“translation effect”), partially offset by unfavorable changes in selling
prices and mix of finished products sold or services performed (“price/product
mix”). Due to the variance in average prices between our product
sales revenues and our toll processing revenues as a result of the raw material
component embedded in the average product sales price, we compute the volume
impacts and the price/product mix impacts separately for each of those
components and then combine them in the table that follows.
The
components of the increase (decrease) in revenue are:
Three
Months Ended
|
||||||||
December
31, 2009
|
||||||||
%
|
$ | |||||||
(Dollars
in Thousands)
|
||||||||
Volume
|
10% | $ | 7,959 | |||||
Price/product
mix
|
(13% | ) | (10,085 | ) | ||||
Translation
effect
|
10% | 8,139 | ||||||
Total
increase
|
8% | $ | 6,013 | |||||
As
mentioned above, the Company’s revenues and profitability are impacted by the
change in raw material prices (“resin” prices) as well as product sales
mix. As the price of resin increases or decreases, market prices for
our products will also generally increase or decrease. This will
typically lead to higher or lower average selling prices. Price changes coupled
with unfavorable changes in product mix caused a decrease in revenues of $10.1
million for the three months ended December 31, 2009, while increased volumes
and the positive impact of the translation effect of foreign currencies against
the U.S. Dollar generated increases in revenues of $8.0 million and $8.1
million, respectively, for the same period. Although we participate in numerous
markets, the graph below illustrates the general trends in the prices of resin
we purchased.
-21-
A
comparison of revenues by segment and discussion of the significant segment
changes is provided below.
Revenues
by segment for the three months ended December 31, 2009 compared to the three
months ended December 31, 2008:
Three
Months Ended
|
||||||||||||||||||||||||
December
31,
|
||||||||||||||||||||||||
2009
|
%
of Total
|
2008
|
%
of Total
|
Change
|
%
|
|||||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||||||
ICO
Europe
|
$ | 36,375 | 43% | $ | 34,762 | 44% | $ | 1,613 | 5% | |||||||||||||||
Bayshore
Industrial
|
16,864 | 20% | 18,330 | 23% | (1,466 | ) | (8% | ) | ||||||||||||||||
ICO
Asia Pacific
|
17,076 | 20% | 14,481 | 18% | 2,595 | 18% | ||||||||||||||||||
ICO
Polymers North America
|
9,716 | 11% | 8,889 | 11% | 827 | 9% | ||||||||||||||||||
ICO
Brazil
|
5,340 | 6% | 2,896 | 4% | 2,444 | 84% | ||||||||||||||||||
Total
|
$ | 85,371 | 100% | $ | 79,358 | 100% | $ | 6,013 | 8% | |||||||||||||||
Three
Months Ended December 31, 2009
|
Three
Months Ended December 31, 2008
|
Revenues
by Segment
|
Revenues
by Segment
|
ICO Europe’s
revenues increased $1.6 million or 5% primarily as a result of the translation
effect of a weaker U.S. Dollar against European currencies. This
resulted in an increase in revenues of $3.3 million. Additionally,
higher volumes, as a result of an increase in customer demand, caused an
increase in revenues of $1.6 million. An unfavorable change in price partially
offset these increases, negatively impacting revenues by $3.3
million.
Bayshore
Industrial’s revenues decreased $1.5 million or 8% as a result of an unfavorable
change in product mix and price, which impacted revenues by $2.2 million. Higher
volumes, due to improved customer demand, positively impacted revenues by $0.7
million.
ICO Asia
Pacific’s revenues increased $2.6 million or 18% primarily as a result of the
translation effect of a weaker U.S. Dollar against currencies of that region
(Australian Dollar, New Zealand Dollar and Malaysian Ringgit). The
translation effect of currencies against the U.S. Dollar caused an increase in
revenues of $3.5 million, and higher volumes caused an increase in revenues of
$1.7 million. Additionally, an unfavorable change in price resulted in a decline
in revenues of $2.6 million.
ICO
Polymers North America’s revenues increased $0.8 million or 9%. This
increase was primarily a result of increased volumes sold due to improved
customer demand, producing a revenue increase of $2.2 million. This increase was
offset by the negative effect of price changes, which decreased revenue by $1.4
million.
ICO
Brazil’s revenues increased $2.4 million or 84% due to higher volumes sold,
which favorably impacted revenues by $1.8 million, and the translation effect of
the stronger Brazilian currency compared to the U.S. Dollar positively impacted
revenues by $1.3 million. Offsetting these increases was an
unfavorable price change which negatively impacted revenues by $0.6
million.
-22-
Selling, General and
Administrative. Compared to last fiscal year, selling, general
and administrative expenses (“SG&A”) increased $1.0 million or 11% in the
period ended December 31, 2009 primarily due to an increase of $0.9 million
incurred for external
professional fees related to the pending A. Schulman merger. As a
percentage of revenues, SG&A showed a slight increase to 11.9% during the
three months ended December 31, 2009 compared to 11.6% for the same period last
year.
Operating
income (loss) by segment and discussion of significant segment changes for the
three months ended December 31, 2009 compared to the three months ended December
31, 2008 follows.
Three
Months Ended
|
||||||||||||||||
Operating
income (loss)
|
December
31,
|
|||||||||||||||
2009
|
2008
|
Change
|
%
|
|||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||
ICO
Europe
|
$ | 1,657 | $ | (149 | ) | $ | 1,806 |
N.M.
|
||||||||
Bayshore
Industrial
|
1,818 | 1,718 | 100 | 6% | ||||||||||||
ICO
Asia Pacific
|
(192 | ) | (1,287 | ) | 1,095 | 85% | ||||||||||
ICO
Polymers North America
|
742 | 582 | 160 | 27% | ||||||||||||
ICO
Brazil
|
419 | (58 | ) | 477 |
N.M.
|
|||||||||||
Subtotal
|
4,444 | 806 | 3,638 | 451% | ||||||||||||
Unallocated
General Corporate Expense
|
(2,189 | ) | (1,254 | ) | (935 | ) | 75% | |||||||||
Consolidated
|
$ | 2,255 | $ | (448 | ) | $ | 2,703 |
N.M.
|
||||||||
* N.M.
– Not meaningful
Operating
income (loss) as a percentage
|
Three
Months Ended
|
|||||||||||
of
revenues
|
December
31,
|
|||||||||||
2009
|
2008
|
Change
|
||||||||||
ICO
Europe
|
5% | 0% | 5% | |||||||||
Bayshore
Industrial
|
11% | 9% | 2% | |||||||||
ICO
Asia Pacific
|
(1% | ) | (9% | ) | 8% | |||||||
ICO
Polymers North America
|
8% | 7% | 1% | |||||||||
ICO
Brazil
|
8% | (2% | ) | 10% | ||||||||
Consolidated
|
3% | (1% | ) | 4% |
ICO
Europe’s operating income increased $1.8 million to income of $1.7 million
due to increased tolling revenues of $1.4 million, a $0.2 million improvement in
feedstock margins (the difference between product sales revenues and related
costs of raw materials sold) and a $0.2 million positive impact of the
translation effect of the European currency (Euro) against the U.S
Dollar.
Bayshore
Industrial’s operating income increased $0.1 million or 6% primarily from a
$0.4 million
improvement in feedstock margins and a $0.1 million decrease in operating
expenses, offset by the lack of the net benefit from insurance proceeds in the
amount of $0.4 million recorded in the period ended December 31,
2008.
ICO Asia
Pacific’s operating
income increased $1.1 million or 85% primarily due to not having the $0.7
million operating loss from the Company’s ICO Dubai plant, which closed in
January 2009. Also contributing to the operating income increase was a $0.4
million positive impact from increased sales volumes due to higher customer
demand.
ICO
Polymers North American’s operating income increased $0.2 million or 27%
primarily from an increase of 19% in volumes as a result of an increase in
customer demand.
ICO
Brazil’s operating income increased $0.5 million primarily caused
by $0.6 million in higher volumes sold due to improved customer demand,
partially offset by $0.1 million in lower feedstock
margins.
Compared
to the same period last fiscal year, Unallocated General Corporate Expense
increased $0.9 million or 75% primarily due to incurring $0.9 million
of external professional fees related to the pending A. Schulman
merger.
-23-
Long-lived Asset Impairment,
Restructuring and Other Costs (Income). During the three
months ended December 31, 2009, the Company incurred restructuring charges of
$0.1 million related to relocation costs incurred in Australia. In
the three month period ended December 31, 2008, the Company recorded a net
benefit from insurance proceeds of $0.4 million at its Bayshore Industrial
location resulting from Hurricane Ike and a net benefit from insurance proceeds
of $0.1 million related to a fire suffered at the Company’s facility in New
Jersey in July 2008. Additionally, the Company recorded a $0.2
million impairment related to property, plant and equipment and plant closure
costs in the three months ended December 31, 2008 related to its former United
Arab Emirates plant.
Income Taxes. The
Company’s effective income tax rates were a provision of 39% and a benefit of
24% during the three months ended December 31, 2009 and 2008,
respectively. The higher effective tax rate during the three months
ended December 31, 2009 was primarily due to permanent differences from merger
related costs associated with the pending merger that will not be deductible if
the merger is completed. The lower effective tax rate in the three months ended
December 31, 2008 was primarily a result of the mix of pretax income or loss
generated by the Company’s operations in various taxing jurisdictions and the
impact of nondeductible items and other permanent
differences.
Net Income
(Loss). For the three months ended December 31, 2009, the
Company had net income of $1.0 million, compared to a net loss of $1.1 million
due to the factors discussed above.
Foreign Currency
Translation. The fluctuations of the U.S. Dollar against the
Euro, British Pound, New Zealand Dollar, Brazilian Real, Malaysian Ringgit and
the Australian Dollar have impacted the translation of revenues and expenses of
our international operations. The table below summarizes the impact
of changing exchange rates for the above currencies for the three months ended
December 31, 2009.
Three
Months Ended
|
|
December
31, 2009
|
|
Net
revenues
|
$8.1
million
|
Operating
income
|
$0.1
million
|
Pre-tax
income
|
$0.1
million
|
Net
income
|
$0.1
million
|
Recently
Issued Accounting Pronouncements
Business
Combinations in Consolidated Financial Statements – In December 2007,
the FASB issued authoritative guidance
that establishes the principles and requirements for how an acquirer (i)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; (ii) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (iii) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The new
accounting rules require the acquiring entity in a business combination to
recognize all assets acquired and liabilities assumed in the transaction and any
non-controlling interest in the acquiree at the acquisition date, measured at
the fair value as of that date. This includes the measurement of the acquirer
shares issued in consideration for a business combination, the recognition of
contingent consideration, the accounting for pre-acquisition gain and loss
contingencies, the recognition of capitalized in-process research and
development, the accounting for acquisition-related restructuring cost accruals,
the treatment of acquisition related transaction costs and the recognition of
changes in the acquirer’s income tax valuation allowance and deferred taxes. The
guidance was effective for us on October 1,
2009.For any
acquisitions completed during fiscal year 2010, we expect the adoption of the
guidance will have an impact on our consolidated financial statements; however,
the magnitude of the impact will depend upon the nature, terms and size of any
acquisitions we consummate.
Noncontrolling
Interests – In
December 2007, the FASB issued new accounting guidance on noncontrolling
interests. The new accounting rules clarify that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. The implementation
of new accounting rules related to noncontrolling interests, effective
October 1, 2009, did not have a material impact on our financial position,
results of operations or cash flows, as we had no noncontrolling interests
during the three months ended December 31, 2009.
-24-
Share-based
payment transactions and participating securities – In June 2008, the FASB
issued authoritative guidance governing whether instruments granted in
share-based payment transactions are participating securities. This
guidance addresses whether these instruments are participating securities prior
to vesting and therefore need to be included in computing earnings per share
under the two-class method. The implementation of this new guidance,
effective October 1, 2009, changed reported weighted average shares outstanding
but it did not have a material impact on the Company’s earnings per share
calculation.
Variable
Interest Entities - In June 2009, the FASB issued guidance that amends
the consolidation guidance applicable to variable interest entities. The
provisions of this guidance significantly affect the overall consolidation
analysis under previous guidance. It is effective as of the beginning of the
first fiscal year that begins after November 15, 2009; specifically it will be
effective for the Company beginning in October 1, 2010. The Company does not
expect the provisions of this guidance to have a material effect on our
consolidated financial condition, results of operations or cash
flows.
Liquidity
and Capital Resources
The
following are considered by management as key measures of liquidity applicable
to the Company:
December
31, 2009
|
September
30, 2009
|
||
Cash
and cash equivalents
|
$13.9
million
|
$21.9
million
|
|
Working
capital
|
$61.5
million
|
$64.1
million
|
|
Total
outstanding debt
|
$28.9
million
|
$31.8
million
|
|
Available
borrowing capacity
|
$49.4
million
|
$50.5
million
|
The
primary uses of cash for other than operations are generally capital
expenditures, debt service and dividend payments. Presently, the
Company anticipates that cash flow from operations and availability under credit
facilities will be sufficient to meet its short and long-term operational
requirements.
Cash
Flows
Cash and
cash equivalents decreased $8.0 million and working capital declined $2.6
million during the three months ended December 31, 2009, as compared with the
three months ended December 31, 2008, due to the factors described
below.
December
31,
|
December
31,
|
||
2009
|
2008
|
||
(Dollars
in Thousands)
|
|||
Net
cash provided (used for) by operating activities by continuing
operations
|
$(2,605)
|
$13,521
|
|
Net
cash provided by operating activities by discontinued
operations
|
-
|
184
|
|
Net
cash used for investing activities
|
(1,015)
|
(1,364)
|
|
Net
cash used for financing activities
|
(4,265)
|
(6,899)
|
|
Effect
of exchange rate changes
|
(74)
|
(56)
|
|
Net
increase/(decrease) in cash and cash equivalents
|
$(7,959)
|
$5,386
|
Cash
Flows From Operating Activities
During the three months ended
December 31, 2009, the Company used $2.6 million of cash for operating
activities by continuing operations as a result of changes in working
capital. In the three month period ended December 31, 2008, the
Company generated cash of $13.5 million from operating activities by continuing
operations. The main reason for the change was due to using cash in
the current period of $5.0 million for inventory caused by higher inventory
levels while in the prior year period the Company generated cash of $14.4
million related to inventory. The increase in inventory in the current period
was primarily due to an increase in sales activity in the current period over
the same prior year period. Also contributing to the change in cash
flow is that in the current period the Company used $0.6 million of cash for
accounts receivable while in the same period of the previous fiscal year it
generated $12.2 million of cash. Offsetting those two items were cash
inflows from accounts payable in the current fiscal period of $0.6 million
compared to a use of cash for accounts payable of $11.5 million in the same
period of the prior year.
-25-
Cash
Flows Used for Investing Activities
Net cash
used for investing activities for the three months ended December 31, 2009 was
$1.0 million, compared to $1.4 million during the same period of the prior
fiscal year, primarily caused by a reduction in capital expenditures of $0.4
million period over period. Non-discretionary capital expenditures
have historically been approximately $2.0 million to $3.0 million per
year. For
the remainder of fiscal year 2010, we expect discretionary capital expenditures
to be approximately $4.0 million.
Cash
Flows Used For Financing Activities
During the three months ended
December 31, 2009, the Company used $4.3 million of cash for financing
activities, consisting of short and long term debt repayments of $3.4 million
and $1.4 million used for a dividend payment. In the prior year
period, financing activities used $6.9 million of cash primarily to finance the
repurchase of treasury stock of $2.0 million and debt repayments of $5.0
million.
Financing
Arrangements
We
maintain several lines of credit. The facilities are collateralized
by certain of our assets and are generally used to finance our working capital
needs.
The
following table presents the borrowing capacity, outstanding borrowings and net
availability under the various credit facilities in our domestic and foreign
operations.
Domestic
|
Foreign
|
Total
|
||||||||||||||||||||||
As
of
|
As
of
|
As
of
|
||||||||||||||||||||||
December
31,
|
September
30,
|
December
31,
|
September
30,
|
December
31,
|
September
30,
|
|||||||||||||||||||
2009
|
2009
|
2009
|
2009
|
2009
|
2009
|
|||||||||||||||||||
(Dollars
in Millions)
|
||||||||||||||||||||||||
Borrowing Capacity
(a)
|
$ | 11.7 | $ | 10.6 | $ | 38.3 | $ | 39.9 | $ | 50.0 | $ | 50.5 | ||||||||||||
Outstanding
Borrowings
|
- | - | 0.6 | - | 0.6 | - | ||||||||||||||||||
Net
availability
|
$ | 11.7 | $ | 10.6 | $ | 37.7 | $ | 39.9 | $ | 49.4 | $ | 50.5 | ||||||||||||
(a) Based
on the credit facility limits less outstanding letters of
credit.
|
We
maintain a Credit Agreement (the “Credit Agreement”) with KeyBank National
Association and Wells Fargo Bank National Association, with a maturity date of
October 2012. Under the Credit Agreement, there is a total of $8.9
million outstanding in the form of two term loans as of December 31, 2009. The
Credit Agreement also contains a revolving credit facility of $20.0 million
based on the Company’s levels of domestic receivables and
inventory. As of December 31, 2009, the borrowing capacity was $11.7
million after subtracting $1.7 million of letters of credit
outstanding. There were no borrowings under the revolving credit
facility as of December 31, 2009 and September 30, 2009.
The
Credit Agreement contains a variable interest rate and contains certain
financial and nonfinancial covenants. During fiscal year 2008, the
Company entered into interest rate swaps on its $5.8 million and $3.1 million
term loans. The swaps lock in the Company’s interest rate on (i) the
$5.8 million term loan at 2.82% plus the credit spread on the corresponding
debt, and (ii) the $3.1 million term loan at 3.69% plus the credit spread on the
corresponding debt. The interest rates as of December 31, 2009 were
6.6% and 7.9%, respectively.
We must
meet certain financial covenants as defined in the KeyBank Credit
Agreement. We were in compliance with these covenants at December 31,
2009 and at September 30, 2009. In the event that we are unable to
remain in compliance with the Credit Agreement’s covenants in the future, our
lenders would have the right to declare us in default with respect to such
obligations, and consequently, certain of our debt obligations, would be deemed
to also be in default. All debt obligations in default would be
required to be reclassified as a current liability. In the event that
we were unable to obtain a waiver from our lenders or renegotiate or refinance
these obligations, a material adverse effect on our ability to conduct our
operations in the ordinary course would likely result. The financial
covenants in the KeyBank Credit Agreement include:
·
|
A
minimum tangible net worth requirement (as defined in the Credit
Agreement) of $50.0 million plus 50% of each fiscal quarter’s net
income. As of December 31, 2009 and September 30, 2009, the
Company’s required minimum tangible net worth was $70.2 million and $69.7
million, respectively. The Company’s actual tangible net worth
was $98.1 million and $97.6 million, respectively, as of December 31, 2009
and September 30, 2009.
|
·
|
A
leverage ratio (as defined in the Credit Agreement) not to exceed 3.0 to
1.0. As of December 31, 2009 and September 30, 2009, the
Company’s leverage ratios were 1.8 to 1.0 and 2.5 to 1.0,
respectively.
|
-26-
·
|
A
fixed charge coverage ratio of at least 1.0 to 1.0, defined as “Adjusted
EBITDA” (as defined in the Credit Agreement), plus rent expense divided by
fixed charges (defined as the sum of interest expense, income tax expense,
scheduled principal debt repayments in the prior four quarters, capital
expenditures for the purpose of maintaining existing fixed assets and rent
expense); and as of December 31, 2009 and September 30, 2009, the
Company’s fixed charge coverage ratios were 1.1 to
1.0.
|
·
|
A requirement that
“Adjusted EBITDA” less interest expense (as defined in the Credit
Agreement), not be less than zero for two consecutive fiscal
quarters. As of December 31, 2009 and September 30, 2009, the
Company has maintained the required level of profitability above
zero.
|
In
addition, the Credit Agreement contains a number of limitations on the ability
of the Company and its restricted U.S. subsidiaries to (i) incur additional
indebtedness, (ii) pay dividends or redeem any Common Stock, (iii) incur liens
or other encumbrances on their assets, (iv) enter into transactions with
affiliates, (v) merge with or into any other entity or (vi) sell any of their
assets. Additionally, any “material adverse change” of the Company
could restrict the Company’s ability to borrow under its Credit Agreement and
could also be deemed an event of default under the Credit
Agreement. A “material adverse change” is defined as a change in the
financial or other condition, business, affairs or prospects of the Company, or
its properties and assets considered as an entirety that could reasonably be
expected to have a material adverse effect (as defined in the Credit Agreement)
on the Company.
In
addition, any “Change of Control” of the Company or its restricted U.S.
subsidiaries will constitute a default under the Credit
Agreement. “Change of Control,” as defined in the Credit Agreement,
means: (i) the acquisition of, or, if earlier, the shareholder or director
approval of the acquisition of, ownership or voting control, directly or
indirectly, beneficially or of record, by any person, entity, or group (within
the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as then in
effect), of shares representing more than 50% of the aggregate ordinary voting
power represented by the issued and outstanding Common Stock of the Company;
(ii) the occupation of a majority of the seats (other than vacant seats) on the
board of directors of the Company by individuals who were neither (A) nominated
by the Company’s board of directors nor (B) appointed by directors so nominated;
(iii) the occurrence of a change in control, or other similar provision, under
or with respect to any “Material Indebtedness Agreement” (as defined in the
Credit Agreement); or (iv) the failure of the Company to own directly or
indirectly, all of the outstanding equity interests of the Company’s Bayshore
Industrial L.P. and ICO Polymers North America, Inc. subsidiaries.
The merger with A. Schulman,
if consummated, will result in a “Change of Control”. The Company
obtained the consent of KeyBank, subject to certain terms and conditions,
to the approval by our board of directors and/or shareholders of the proposed
merger.
The
Company has various foreign credit facilities in eight foreign countries. The
available credit under these facilities varies based on the levels of accounts
receivable within the foreign subsidiary, or is a fixed amount. The foreign
credit facilities are collateralized by assets owned by the foreign
subsidiaries. These facilities either have a remaining maturity of
less than twelve months, do not have a stated maturity date, or can be cancelled
at the option of the lender. The aggregate amounts of available
borrowings under the foreign credit facilities, based on the credit facility
limits, current levels of accounts receivables, and outstanding letters of
credit and borrowings, were $37.7 million as of December 31, 2009 and $39.9
million as of September 30, 2009.
The
following table contains the financial covenants within the Company’s foreign
loan agreements. The financial covenant computations are specific to
the subsidiary of the country listed.
As
of December 31, 2009
|
||||||||||
Country
|
Outstanding
Borrowings
|
Available
Borrowing Capacity
|
Financial
Covenant Requirement
|
December
31, 2009
|
September
30, 2009
|
|||||
Australia
|
$2.7
million
|
$0.9
million
|
Equity
exceeds 29.9% of total assets
|
48%
|
43%
|
|||||
Earnings
more than -1.6x interest expense
|
(a)
|
(a)
|
||||||||
Holland
|
1.4
million
|
5.3
million
|
Equity
exceeds 34.9% of total assets
|
60%
|
56%
|
|||||
Malaysia
|
0.3
million
|
1.5
million
|
Total
debt less than 2x equity
|
.4x
|
.4x
|
|||||
Malaysia
|
2.0
million
|
2.0
million
|
Equity
greater than US $1.6 million
|
$6.0
million
|
$5.6
million
|
-27-
(a) As of December 31, 2009
and September 30, 2009, the Company did not meet this covenant due to losses in
its Australian subsidiary. At December 31, 2009 and September 30,
2009 there was $2.7 million and $2.8 million of term debt outstanding,
respectively. The Company has classified all of the Australian term
debt as current. The Company obtained a waiver from its Australian
bank as of September 30, 2009 and is seeking a waiver for the December 31, 2009
covenant violation. Of the $37.7 million of total foreign credit
availability as of December 31, 2009, $0.9 million related to the Company’s
Australian subsidiary.
Off-Balance Sheet
Arrangements. The
Company does not have any financial instruments classified as off-balance sheet
(other than operating leases) as of December 31, 2009 and September 30,
2009.
Forward-Looking
Statements
Matters
discussed and statements made in this document which are not historical facts
and which involve substantial risks, uncertainties and assumptions are
“forward-looking statements,” within the meaning of section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (“Exchange Act”), and are intended to qualify for the
safe harbors from liability established by the Private Securities Litigation
Reform Act of 1995. When words such as “anticipate,” “believe,”
“estimate,” “intend,” “expect,” “plan” and similar expressions are used, they
are intended to identify the statements as forward-looking. Our
statements regarding future, projected or potential liquidity,
acquisitions, market conditions, reductions in expenses, derivative
transactions, net operating losses, tax credits, tax refunds, growth plans,
trends in the marketplace, capital expenditures and financial results are
examples of such forward-looking statements. Our forward looking
statements can become untrue, and actual results and outcomes can differ
materially from results or outcomes suggested by these forward-looking
statements due to a number of factors, risks, uncertainties, and circumstances
that present risks, including: the failure to receive the approval of the merger
by the Company’s shareholders; satisfaction of the conditions to the closing of
the merger; costs and difficulties related to integration of businesses and
operations; delays, costs and difficulties relating to the merger; restrictions
imposed by our outstanding indebtedness, changes in the cost and availability of
resins (polymers) and other raw materials, general economic conditions, changes
in demand for our services and products, business cycles and other industry
conditions, international risks, operational risks, our lack of asset
diversification, the timing of new services or facilities, our ability to
compete, effects of compliance with laws, fluctuation of the U.S. Dollar against
foreign currencies, matters relating to operating facilities, failure of closing
conditions in any transaction to be satisfied, integration of acquired
businesses, effect and cost of claims, litigation and environmental remediation,
and our ability to manage global inventory, develop technology and proprietary
know-how, and attract and retain key personnel, our financial condition, results
of litigation, results of operations, capital expenditures and other spending
requirements, and the risks and risk factors referenced below and elsewhere in
this document and those described in our other filings with the
SEC.
You
should carefully consider the factors in “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the fiscal year ended September 30, 2009 and other
information contained in this document. If any of the risks and
uncertainties actually occurs, our business, financial condition, results of
operations and cash flows could be materially and adversely
affected. In such case, the trading price of our Common Stock could
decline, and you may lose all or part of your investment.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are
exposed to certain market risks as part of our ongoing business operations,
including debt obligations that carry variable interest rates, foreign currency
exchange risk, and resin price risk that could impact our financial condition,
results of operations and/or cash flows. We manage our exposure to these and
other market risks through regular operating and financing activities, including
the use of derivative financial instruments. Our intention is to use these
derivative financial instruments as risk management tools and not for trading
purposes or speculation.
As
mentioned above, our revenues and profitability are impacted by changes in resin
prices. We use various resins (primarily polyethylene) to manufacture
our products. As the price of resin increases or decreases, market
prices for our products will also generally increase or
decrease. This will typically lead to higher or lower average selling
prices and will impact our operating income and operating margin. The
impact on operating income is due to a lag in matching the change in raw
material cost of goods sold and the change in product sales
prices. As of December 31, 2009 and September 30, 2009, we had $21.8 million and $18.4
million of raw material inventory and $18.1 million and $17.9 million of
finished goods inventory, respectively. We attempt to minimize
our exposure to resin price changes by monitoring and carefully managing the
quantity of our inventory on hand and product sales prices.
As of
December 31, 2009, we had $73.3 million of net
investment in foreign wholly-owned subsidiaries. We do not
hedge the foreign exchange rate risk inherent with this non-U.S. Dollar
denominated investment.
-28-
We enter into forward currency exchange contracts related to both future
purchase obligations and other forecasted transactions denominated in
non-functional currencies, primarily repayments of foreign currency intercompany
transactions. Certain of these forward currency exchange contracts qualify as
cash flow hedging instruments and are highly effective. In accordance
with authoritative guidance over accounting for derivative instruments and
hedging activities, we recognize the amount of hedge ineffectiveness for these
hedging instruments in our Consolidated Statement of Operations. The
hedge ineffectiveness on our designated cash flow hedging instruments was not a
significant amount for the three months ended December 31, 2009 and 2008,
respectively. Our principal foreign currency exposures relate to the
Euro, British Pound, Australian Dollar, New Zealand Dollar, Malaysian Ringgit
and Brazilian Real. Our forward contracts have original maturities of
one year or less.
The
following table includes the total value of foreign exchange contracts
outstanding for which hedge accounting is being applied as of December 31, 2009
and September 30, 2009:
As
of
|
||||
December
31,
|
September
30,
|
|||
2009
|
2009
|
|||
Notional
value
|
$2.9
million
|
$5.5
million
|
||
Fair
market value
|
$0.0
million
|
$(0.3)
million
|
||
Maturity
Dates
|
January
through April 2010
|
October
2009
|
||
through
January 2010
|
When it
is determined that a derivative has ceased to be a highly effective hedge, or
that forecasted transactions have not occurred as specified in the hedge
documentation, hedge accounting is discontinued prospectively. As a
result, these derivatives are marked to market, with the resulting gains and
losses recognized in the Consolidated Statements of Operations.
Foreign Currency Intercompany Accounts and Notes
Receivable. As mentioned above, from time-to-time, the
Company’s U.S. subsidiaries provide capital to the Company’s foreign
subsidiaries through U.S. Dollar denominated interest bearing promissory
notes. In addition, certain of the Company’s foreign subsidiaries
also provide other foreign subsidiaries with access to capital through foreign
currency denominated interest bearing promissory notes. Such funds
are generally used by the Company’s foreign subsidiaries to purchase capital
assets and/or for general working capital needs. The Company’s U.S.
subsidiaries also sell products to the Company’s foreign subsidiaries in U.S.
Dollars on trade credit terms. In addition, the Company’s foreign
subsidiaries sell products to other foreign subsidiaries denominated in foreign
currencies that may not be the functional currency of one or more of the foreign
subsidiaries that are parties to such intercompany agreements. These
intercompany debts are accounted for in the local functional currency of the
contracting foreign subsidiary, and are eliminated in the Company’s Consolidated
Balance Sheet. At December 31, 2009, the Company had the following
significant outstanding intercompany amounts as described above:
Country
of subsidiary with
|
Country
of subsidiary with
|
Amount
in US$ as of
|
Currency
denomination
|
|||
intercompany
receivable
|
intercompany
payable
|
December
31, 2009
|
of
receivable
|
|||
US
|
Australia
|
$5.1
million
|
United
States Dollar
|
|||
Holland
|
UK
|
$3.5
million
|
Great
Britain Pound
|
|||
Holland
|
Australia
|
$2.8
million
|
Australian
Dollar
|
|||
US
|
Malaysia
|
$1.3
million
|
United
States Dollar
|
Because
these intercompany lending transactions are denominated in various foreign
currencies and are subject to financial exposure from foreign exchange rate
movement from the date a loan is recorded to the date it is settled or revalued,
any appreciation or depreciation of the foreign currencies in which the
transactions are denominated could result in a gain or loss, respectively, to
the Consolidated Statement of Operations, subject to forward currency exchange
contracts that we enter into to mitigate this risk. The following
table includes the total value of foreign exchange contracts outstanding for
which hedge accounting is not being applied as of December 31, 2009 and
September 30, 2009.
As
of
|
||||
December
31,
|
September
30,
|
|||
2009
|
2009
|
|||
Notional
value
|
$10.7
million
|
$9.0 million
|
||
Fair
market value
|
$(0.1)
million
|
$0.0
million
|
||
Maturity
Dates
|
January
through March 2010
|
October
2009
|
||
through
January 2010
|
-29-
The
Company also marks to market the underlying transactions related to these
foreign exchange contracts which offsets the fluctuation in the fair market
value of the derivative instruments. As of December 31, 2009, the net
unrealized gain or loss on these derivative instruments and their underlyings
was insignificant.
Interest Rate Swaps. In some
circumstances, the Company enters into interest rate swap agreements that
mitigate the exposure to interest rate risk by converting variable-rate debt to
a fixed rate. The interest rate swap is marked to market in the balance
sheet.
As of
December 31, 2009, the Company has $10.1 million in notional
interest rate swaps. The estimated fair value of these interest rate
swaps as of December 31, 2009, was a liability of $0.3
million. The fair value is an estimate of the net amount that
the Company would pay on December 31, 2009 if the agreements were transferred to
another party or cancelled by the Company.
Please
refer to Note 15 – “Fair Value Measurements of Assets and Liabilities” for
additional disclosures related to the Company’s forward foreign exchange
contracts and interest rate swaps.
ITEM
4. CONTROLS AND PROCEDURES
We
maintain disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit to the Securities and Exchange Commission (“SEC”)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is
recorded, processed, summarized and reported within the time periods specified
by the SEC’s rules and forms. Our disclosure controls and procedures
are designed to ensure that information required to be disclosed in the reports
we file or submit under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), as appropriate, to allow timely decisions regarding required
disclosure.
In
accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our CEO and CFO, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e)) and 15d-15(e) as of the
end of the period covered by this report. Based upon that evaluation,
our CEO and CFO have concluded that our disclosure controls and procedures were
effective as of December 31, 2009.
There
were no changes in our internal controls over financial reporting during our
first fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART II
OTHER
INFORMATION
ITEM
1. LEGAL PROCEEDINGS
For a
description of the Company’s legal proceedings, see Note 8 – “Commitments and
Contingencies” to the Consolidated Financial Statements included in Part I, Item
1 of this quarterly report on Form 10-Q and Part I, Item 3 of our Annual Report
on Form 10-K for the year ended September 30, 2009.
ITEM
1A. RISK FACTORS
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 7, under the heading "Risk
Factors” in our Annual Report on Form 10-K for the year ended September 30,
2009, which could materially affect our business, financial condition or future
results. There have been no material changes in our Risk Factors as
disclosed in our Annual Report on Form 10-K. The risks described in
our Annual Report on Form 10-K are not the only risks facing our
Company.
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ITEM
6. EXHIBITS
|
The
following instruments and documents are included as Exhibits to this Form
10-Q:
|
Exhibit No.
|
Exhibit
|
|
2.1
|
—
|
Agreement
and Plan of Merger, dated as of December 2, 2009, by and among A.
Schulman, Inc., Wildcat Spider, LLC and ICO, Inc. (incorporated by
reference to Exhibit 2.1 to Form 8-K dated December 1,
2009).
|
10.1
|
—
|
Limited
Consent Agreement, dated as of December 1, 2009, among ICO, Inc., Bayshore
Industrial L.P. and ICO Polymers North America, Inc. (as Borrowers),
KeyBank National Association, Wells Fargo Bank, National Association and
the other lending institutions named therein (as Lenders); and KeyBank
National Association (as an LC Issuer, Lead Arranger, Bookrunner,
Administrative Agent and Syndication Agent”) (incorporated by reference to
Exhibit 10.1 to Form 8-K dated December 1, 2009).
|
31.1*
|
—
|
Certification
of Chief Executive Officer and ICO, Inc. pursuant to 15 U.S.C. Section
7241.
|
31.2*
|
—
|
Certification
of Chief Financial Officer and ICO, Inc. pursuant to 15 U.S.C. Section
7241.
|
32.1**
|
—
|
Certification
of Chief Executive Officer of ICO, Inc. pursuant to 18 U.S.C. Section
1350.
|
32.2**
|
—
|
Certification
of Chief Financial Officer of ICO, Inc. pursuant to 18 U.S.C. Section
1350.
|
*Filed
herewith
**Furnished
herewith
|
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|
SIGNATURES
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ICO, Inc.
|
|
(Registrant)
|
|
February
4, 2010
|
/s/
A. John Knapp, Jr.
|
A.
John Knapp, Jr.
|
|
President,
Chief Executive Officer, and
|
|
Director
(Principal Executive Officer)
|
|
/s/
Bradley T. Leuschner
|
|
Bradley
T. Leuschner
|
|
Chief
Financial Officer and Treasurer
|
|
(Principal
Financial and Accounting Officer)
|
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