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
March 31,
2008
|
|
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
0
-10068
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.
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
filer
x
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).
YES
o
NO
x
There
were 27,698,423 shares of common stock without par value
outstanding
as of April 23, 2008
ICO,
INC.
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
Part
I. Financial Information
|
Page
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
Consolidated Balance Sheets as
of March 31, 2008 and September 30, 2007
|
3
|
|
|
|
|
Consolidated Statements of
Operations for the Three and Six Months Ended March 31,
2008 and 2007
|
4
|
|
|
|
|
Consolidated Statements of
Comprehensive Income for the Three and Six Months Ended
March
31, 2008 and 2007
|
5
|
|
|
|
|
Consolidated Statements of Cash
Flows for the Six Months Ended March 31,
2008
and 2007
|
6
|
|
|
|
|
Notes to Consolidated Financial
Statements
|
7
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
17
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
|
26
|
|
|
|
|
Item
4. Controls and
Procedures
|
27
|
|
|
|
|
|
|
Part
II. Other Information
|
|
|
|
|
|
Item
1. Legal Proceedings
|
27
|
|
|
|
|
Item
1A. Risk Factors
|
27
|
|
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
27
|
|
|
|
|
Item
6. Exhibits
|
29
|
PAR
T I ―
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
ICO,
INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited
and in thousands, except share data)
|
|
March
31,
2008
|
|
|
September
30, 2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,403
|
|
|
$
|
8,561
|
|
Trade
receivables (less allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
of
$2,824 and $2,714, respectively)
|
|
|
86,982
|
|
|
|
95,142
|
|
Inventories
|
|
|
74,934
|
|
|
|
60,420
|
|
Deferred
income taxes
|
|
|
1,674
|
|
|
|
1,778
|
|
Prepaid
and other current assets
|
|
|
9,065
|
|
|
|
9,924
|
|
Total
current assets
|
|
|
176,058
|
|
|
|
175,825
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
62,838
|
|
|
|
57,396
|
|
Goodwill
|
|
|
9,414
|
|
|
|
9,228
|
|
Other
assets
|
|
|
3,501
|
|
|
|
3,768
|
|
Total
assets
|
|
$
|
251,811
|
|
|
$
|
246,217
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings under credit facilities
|
|
$
|
26,421
|
|
|
$
|
16,133
|
|
Current
portion of long-term debt
|
|
|
16,137
|
|
|
|
11,611
|
|
Accounts
payable
|
|
|
47,057
|
|
|
|
66,906
|
|
Accrued
salaries and wages
|
|
|
6,265
|
|
|
|
7,313
|
|
Other
current liabilities
|
|
|
14,011
|
|
|
|
16,004
|
|
Total
current liabilities
|
|
|
109,891
|
|
|
|
117,967
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
25,931
|
|
|
|
29,605
|
|
Deferred
income taxes
|
|
|
4,750
|
|
|
|
4,820
|
|
Other
long-term liabilities
|
|
|
3,326
|
|
|
|
2,783
|
|
Total
liabilities
|
|
|
143,898
|
|
|
|
155,175
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, without par value –
|
|
|
|
|
|
|
|
|
0
and 345,000 shares authorized, respectively; 0 and 46,381 shares
issued
|
|
|
|
|
|
|
|
|
shares
issued and outstanding, respectively, with a liquidation
|
|
|
|
|
|
|
|
|
preference
of $0 and $5,812, respectively
|
|
|
-
|
|
|
|
2
|
|
Undesignated
preferred stock, without par value –
|
|
|
|
|
|
|
|
|
500,000
and 155,000 shares authorized, respectively; no shares issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
issued
and outstanding
|
|
|
|
|
|
|
|
|
Common
stock, without par value – 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
27,624,973
and 26,709,370 shares issued
|
|
|
|
|
|
|
|
|
and
outstanding, respectively
|
|
|
54,159
|
|
|
|
47,659
|
|
Additional
paid-in capital
|
|
|
71,957
|
|
|
|
74,920
|
|
Accumulated
other comprehensive income
|
|
|
10,249
|
|
|
|
5,416
|
|
Accumulated
deficit
|
|
|
(28,452
|
)
|
|
|
(36,955
|
)
|
Total
stockholders’ equity
|
|
|
107,913
|
|
|
|
91,042
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
251,811
|
|
|
$
|
246,217
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
ICO,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited
and in thousands, except share data)
|
|
Three
Months Ended
March
31,
|
|
|
Six
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
102,120
|
|
|
$
|
84,893
|
|
|
$
|
203,308
|
|
|
$
|
162,480
|
|
Services
|
|
|
10,006
|
|
|
|
9,826
|
|
|
|
19,683
|
|
|
|
18,500
|
|
Total
revenues
|
|
|
112,126
|
|
|
|
94,719
|
|
|
|
222,991
|
|
|
|
180,980
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and services
(exclusive of depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shown below)
|
|
|
92,838
|
|
|
|
77,371
|
|
|
|
184,611
|
|
|
|
149,140
|
|
Selling, general and
administrative
|
|
|
10,387
|
|
|
|
9,274
|
|
|
|
20,990
|
|
|
|
17,713
|
|
Depreciation and
amortization
|
|
|
1,853
|
|
|
|
1,855
|
|
|
|
3,648
|
|
|
|
3,611
|
|
Impairment, restructuring and
other costs (income)
|
|
|
(1,598
|
)
|
|
|
(654
|
)
|
|
|
(1,400
|
)
|
|
|
(654
|
)
|
Operating
income
|
|
|
8,646
|
|
|
|
6,873
|
|
|
|
15,142
|
|
|
|
11,170
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense,
net
|
|
|
(1,096
|
)
|
|
|
(838
|
)
|
|
|
(2,119
|
)
|
|
|
(1,502
|
)
|
Other
|
|
|
(68
|
)
|
|
|
88
|
|
|
|
(201
|
)
|
|
|
(167
|
)
|
Income
from continuing operations before income taxes
|
|
|
7,482
|
|
|
|
6,123
|
|
|
|
12,822
|
|
|
|
9,501
|
|
Provision
for income taxes
|
|
|
2,489
|
|
|
|
601
|
|
|
|
4,303
|
|
|
|
1,419
|
|
Income
from continuing operations
|
|
|
4,993
|
|
|
|
5,522
|
|
|
|
8,519
|
|
|
|
8,082
|
|
Income
(loss) from discontinued operations, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision (benefit) for
income taxes of $0, $794,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($9) and $775,
respectively
|
|
|
-
|
|
|
|
1,475
|
|
|
|
(16
|
)
|
|
|
1,439
|
|
Net
income
|
|
$
|
4,993
|
|
|
$
|
6,997
|
|
|
$
|
8,503
|
|
|
$
|
9,521
|
|
Preferred
Stock dividends
|
|
|
-
|
|
|
|
(82
|
)
|
|
|
(1
|
)
|
|
|
(390
|
)
|
Net
gain on redemption of Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,023
|
|
Net
income applicable to Common Stock
|
|
$
|
4,993
|
|
|
$
|
6,915
|
|
|
$
|
8,502
|
|
|
$
|
15,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
.18
|
|
|
$
|
.21
|
|
|
$
|
.31
|
|
|
$
|
.53
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
|
.06
|
|
|
|
-
|
|
|
|
.06
|
|
Net
income per common share
|
|
$
|
.18
|
|
|
$
|
.27
|
|
|
$
|
.31
|
|
|
$
|
.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
.18
|
|
|
$
|
.20
|
|
|
$
|
.30
|
|
|
$
|
.29
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
|
.05
|
|
|
|
-
|
|
|
|
.05
|
|
Net
income per common share
|
|
$
|
.18
|
|
|
$
|
.26
|
|
|
$
|
.30
|
|
|
$
|
.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
27,263,000
|
|
|
|
25,907,000
|
|
|
|
27,088,000
|
|
|
|
25,874,000
|
|
Diluted
weighted average shares outstanding
|
|
|
27,949,000
|
|
|
|
27,329,000
|
|
|
|
27,978,000
|
|
|
|
27,508,000
|
|
The
accompanying notes are an integral part of these financial
statements.
ICO,
INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited and in
thousands
)
|
|
Three
Months Ended
March
31,
|
|
|
Six
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,993
|
|
|
$
|
6,997
|
|
|
$
|
8,503
|
|
|
$
|
9,521
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
3,390
|
|
|
|
935
|
|
|
|
4,424
|
|
|
|
3,101
|
|
Unrealized
gain (loss) on foreign currency hedges
|
|
|
(67
|
)
|
|
|
97
|
|
|
|
409
|
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
8,316
|
|
|
$
|
8,029
|
|
|
$
|
13,336
|
|
|
$
|
12,353
|
|
The
accompanying notes are an integral part of these financial
statements.
ICO,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited and in
thousands
)
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows provided by (used for) operating activities:
|
|
|
|
Net
income
|
|
$
|
8,503
|
|
|
$
|
9,521
|
|
(Income)
loss from discontinued operations
|
|
|
16
|
|
|
|
(1,439
|
)
|
Depreciation
and amortization
|
|
|
3,648
|
|
|
|
3,611
|
|
Gain
on sale of fixed assets
|
|
|
-
|
|
|
|
(654
|
)
|
Gain
on involuntary conversion of fixed assets and related
recoveries
|
|
|
(1,300
|
)
|
|
|
-
|
|
Changes
in assets and liabilities providing/(requiring) cash:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
12,428
|
|
|
|
(961
|
)
|
Inventories
|
|
|
(11,472
|
)
|
|
|
1,043
|
|
Other
assets
|
|
|
1,465
|
|
|
|
720
|
|
Income
taxes payable
|
|
|
(168
|
)
|
|
|
(2,588
|
)
|
Deferred
taxes
|
|
|
399
|
|
|
|
(1,387
|
)
|
Accounts
payable
|
|
|
(22,499
|
)
|
|
|
2,547
|
|
Other
liabilities
|
|
|
(660
|
)
|
|
|
1,737
|
|
Net
cash provided by (used for) operating activities by continuing
operations
|
|
|
(9,640
|
)
|
|
|
12,150
|
|
Net
cash used for operating activities by discontinued
operations
|
|
|
(25
|
)
|
|
|
(1,191
|
)
|
Net
cash provided by (used for) operating activities
|
|
|
(9,665
|
)
|
|
|
10,959
|
|
|
|
|
|
|
|
|
|
|
Cash
flows used for investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(7,085
|
)
|
|
|
(4,097
|
)
|
Proceeds
from dispositions of property, plant and equipment
|
|
|
30
|
|
|
|
937
|
|
Cash
received from involuntary conversion of fixed assets
|
|
|
1,700
|
|
|
|
-
|
|
Net
cash used for investing activities for continuing
operations
|
|
|
(5,355
|
)
|
|
|
(3,160
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used for) financing activities:
|
|
|
|
|
|
|
|
|
Common
stock transactions
|
|
|
2,317
|
|
|
|
310
|
|
Redemption
of Preferred Stock
|
|
|
(200
|
)
|
|
|
(28,531
|
)
|
Payment
of dividend on Preferred Stock
|
|
|
(1,312
|
)
|
|
|
(82
|
)
|
Increase
(decrease) in short-term borrowings under credit facilities,
net
|
|
|
9,530
|
|
|
|
(6,087
|
)
|
Proceeds
from long-term debt
|
|
|
3,065
|
|
|
|
13,731
|
|
Repayments
of long-term debt
|
|
|
(3,750
|
)
|
|
|
(2,831
|
)
|
Debt
financing costs
|
|
|
-
|
|
|
|
(244
|
)
|
Net
cash provided by (used for) financing activities for
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
|
9,650
|
|
|
|
(23,734
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rates on cash
|
|
|
212
|
|
|
|
100
|
|
Net
decrease in cash and equivalents
|
|
|
(5,158
|
)
|
|
|
(15,835
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
8,561
|
|
|
|
17,427
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,403
|
|
|
$
|
1,592
|
|
The
accompanying notes are an integral part of these financial
statements.
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 and six months ended
March 31, 2008 are not necessarily indicative of the results expected for the
year ended September 30, 2008. These interim financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2007. 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,
2007.
NOTE
2.
RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157,
Fair Value
Measurements
(“SFAS 157”). SFAS 157 defines “fair value,”
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, rather, its
application will be made pursuant to other accounting pronouncements that
require or permit fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those years. This standard will be
effective for the Company starting with our interim period ending December 31,
2008. The provisions of SFAS 157 are to be applied prospectively upon
adoption, except for limited specified exceptions. The Company does not
expect the adoption of SFAS 157 to have a material impact on its financial
position or results of operations.
In February 2007, the FASB issued SFAS
No. 159,
The Fair Value Option
for Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115
(“SFAS 159”). Under SFAS 159, a company may
elect to measure eligible financial assets and financial liabilities at fair
value at specified election dates. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings
at each subsequent reporting date. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. We are currently assessing
whether or not we will elect the fair value option.
In December
2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
(“SFAS
141 (R)”) and No. 160,
Noncontrolling interests in
Consolidated Financial Statements
(“SFAS 160”). The goal of
these standards is to improve, simplify, and converge internationally the
accounting for business combinations and the reporting of noncontrolling
interests in consolidated financial statements. The provisions of
SFAS 141 (R) and SFAS 160 are effective for the Company on October 1,
2009. We have not yet determined the impact of adopting these
standards.
In March
2008, the FASB issued SFAS No. 161 (“SFAS 161”),
Disclosures about Derivative
Instruments and Hedging
Activities, an amendment of FASB
Statement No. 133.
This Statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
Company will be required to adopt this standard in the interim period ending
December 31, 2009. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. We
have not yet determined the impact of adopting this new standard.
NOTE
3. STOCKHOLDERS’ EQUITY
During November 1993, the Company
completed its initial offering of the $6.75 Convertible Exchangeable Preferred
Stock (“Preferred Stock”). The shares of Preferred Stock were
evidenced by and traded as depositary certificates (“Depositary Shares”), each
representing 1/4 of a share of Preferred Stock. A total of 1,290,000
Depositary Shares were sold at a price of $25 per share. Each share
of Preferred Stock was convertible into 10.96 shares of the Company’s common
stock (“Common Stock”) (equivalent to 2.74 shares of Common Stock per Depositary
Share) at a conversion price of $9.125 per share of Common
Stock.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
During the quarter ended December 31,
2006, the Company repurchased 1,095,853 Depositary Shares for $26.00 per
Depositary Share, for total consideration of $28.5 million. The
dividends that were in arrears on these 1,095,853 Depositary Shares of $7.2
million were extinguished by the repurchase. This repurchase resulted
in a net gain of $6.0 million in the three months ended December 31,
2006. In September 2007, at the instruction of the holders of the
Preferred Stock, 8,624 Depositary Shares were converted into 23,622 shares of
Common Stock. Therefore, as of September 30, 2007, there were 185,523
Depositary Shares outstanding. Dividends in arrears of $6.33 per
Depositary Share on the outstanding 185,523 Depositary Shares as of September
30, 2007 aggregated $1.2 million. The $1.2 million of dividends in
arrears was declared for payment during the fourth quarter of fiscal year 2007
and was paid in October 2007. In addition, four quarterly dividends
aggregating $0.3 million or $1.6875 per Depositary Share were declared in fiscal
year 2007 (of which $0.2 million was paid during fiscal year 2007, with the
remaining fourth quarterly dividend aggregating $0.1 million recorded as a
payable as of September 30, 2007 and paid in October 2007).
On October 3, 2007, the Company
announced its plan to redeem all outstanding Depositary Shares representing the
Preferred Stock at the close of market on November 5, 2007. During
the time period between the referenced announcement and the redemption, at the
instruction of the shareholders, 177,518 Depositary Shares were converted into
486,321 shares of Common Stock. As a result, the Company recorded a
decrease to Additional Paid-In Capital of $4.4 million and an increase to Common
Stock of $4.4 million. The remaining 8,005 Depositary Shares
outstanding on November 5, 2007 were redeemed by the Company at $25 per
Depositary Share for a total consideration of $0.2 million, which was recorded
as a reduction to Additional Paid-In Capital. All of the outstanding
Depositary Shares representing the Preferred Stock were canceled by the Company
at the time of redemption. As of the close of business on November 5,
2007, no shares of Preferred Stock or Depositary Shares remain
outstanding.
A summary of the changes in the
stockholders’ equity accounts for the six months ended March 31, 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Stock
|
|
|
Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(Dollars
in Thousands)
|
|
Balance
at September 30, 2007
|
|
$
|
2
|
|
|
|
26,709,370
|
|
|
$
|
47,659
|
|
|
$
|
74,920
|
|
|
$
|
5,416
|
|
|
$
|
(36,955
|
)
|
|
$
|
91,042
|
|
Issuance
of shares in connection with employee benefit plans
|
|
|
–
|
|
|
|
34,047
|
|
|
|
479
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
479
|
|
Issuance
of stock options
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
155
|
|
|
|
–
|
|
|
|
–
|
|
|
|
155
|
|
Issuance/(forfeiture)
of restricted stock
|
|
|
–
|
|
|
|
(9,500
|
)
|
|
|
–
|
|
|
|
292
|
|
|
|
–
|
|
|
|
–
|
|
|
|
292
|
|
Exercise
of employee stock options
|
|
|
–
|
|
|
|
404,735
|
|
|
|
1,583
|
|
|
|
1,227
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,810
|
|
Preferred
Stock Conversion to Common Stock
|
|
|
(2
|
)
|
|
|
486,321
|
|
|
|
4,438
|
|
|
|
(4,436
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Preferred
Stock redemption
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(200
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(200
|
)
|
Preferred
Stock dividends
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(1
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(1
|
)
|
Translation
adjustment
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,424
|
|
|
|
–
|
|
|
|
4,424
|
|
Unrealized
net gain on foreign currency hedges
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
409
|
|
|
|
–
|
|
|
|
409
|
|
Net
income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
8,503
|
|
|
|
8,503
|
|
Balance
at March 31, 2008
|
|
$
|
-
|
|
|
|
27,624,973
|
|
|
$
|
54,159
|
|
|
$
|
71,957
|
|
|
$
|
10,249
|
|
|
$
|
(28,452
|
)
|
|
$
|
107,913
|
|
NOTE
4.
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.
Basic and diluted earnings per share
for the three and six months ended March 31, 2008, and 2007 are presented
below:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
.18
|
|
|
$
|
.21
|
|
|
$
|
.31
|
|
|
$
|
.53
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
|
.06
|
|
|
|
-
|
|
|
|
.06
|
|
Basic
net income per common share
|
|
$
|
.18
|
|
|
$
|
.27
|
|
|
$
|
.31
|
|
|
$
|
.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
.18
|
|
|
$
|
.20
|
|
|
$
|
.30
|
|
|
$
|
.29
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
|
.05
|
|
|
|
-
|
|
|
|
.05
|
|
Diluted
net income per common share
|
|
$
|
.18
|
|
|
$
|
.26
|
|
|
$
|
.30
|
|
|
$
|
.34
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
For the six months ended March 31,
2007, the Company included the net gain on redemption of 84.9% of the Company’s
outstanding Preferred Stock of $6.0 million in computing basic earnings per
share, but the gain is excluded in the computation of diluted earnings per
share. Refer to the following tables for a reconciliation of the
amounts used in computing basic and diluted earnings per share.
The following presents the
reconciliation from net income to net income applicable to Common Stock used in
computing basic earnings per share:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Net
income
|
|
$
|
4,993
|
|
|
$
|
6,997
|
|
|
$
|
8,503
|
|
|
$
|
9,521
|
|
Preferred
stock dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(390
|
)
|
Net
gain on redemption of Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,023
|
|
Net
income applicable to Common Stock
|
|
$
|
4,993
|
|
|
$
|
6,997
|
|
|
$
|
8,502
|
|
|
$
|
15,154
|
|
In computing diluted earnings per
share, the Company follows the if-converted method, which assumes the conversion
of dilutive convertible securities. For the six months ended March
31, 2007, the Preferred Stock redeemed was treated as being converted at the
beginning of the six months ended March 31, 2007. Consequently, the
net gain on redemption of Preferred Stock and the undeclared and unpaid
Preferred Stock dividends were not included in computing net income applicable
to Common Stock. The following presents the reconciliation from net
income to net income applicable to Common Stock used in computing diluted
earnings per share:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Net
income
|
|
$
|
4,993
|
|
|
$
|
6,997
|
|
|
$
|
8,503
|
|
|
$
|
9,521
|
|
Preferred
stock dividends declared
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(164
|
)
|
Net
income applicable to Common Stock
|
|
$
|
4,993
|
|
|
$
|
6,997
|
|
|
$
|
8,503
|
|
|
$
|
9,357
|
|
The difference between basic and
diluted weighted-average common shares results from the assumed exercise of
outstanding stock options calculated using the treasury stock method, impact
from outstanding restricted stock awards using the treasury stock method and
assumed conversion of the Preferred Stock redeemed during the six months ended
March 31, 2008 and 2007. The following presents the number of
incremental weighted-average shares used in computing diluted per share
amounts:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
March
31,
|
|
March
31,
|
Weighted-average
shares outstanding:
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Basic
|
|
27,263,000
|
|
25,907,000
|
|
27,088,000
|
|
25,874,000
|
Incremental
shares from Preferred Stock
|
|
-
|
|
532,000
|
|
67,000
|
|
722,000
|
Incremental
shares from stock based compensation
|
|
686,000
|
|
890,000
|
|
823,000
|
|
912,000
|
Diluted
|
|
27,949,000
|
|
27,329,000
|
|
27,978,000
|
|
27,508,000
|
The total amount of anti-dilutive
securities for the three and six months ended March 31, 2008 and 2007 were as
follows:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
March
31,
|
|
March
31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Total
shares of anti-dilutive securities
|
|
655,000
|
|
1,204,000
|
|
555,000
|
|
1,714,000
|
NOTE
5.
INVENTORIES
Inventories
consisted of the following:
|
|
March
31,
2008
|
|
|
September
30,
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Raw
materials
|
|
$
|
41,037
|
|
|
$
|
36,268
|
|
Finished
goods
|
|
|
32,254
|
|
|
|
22,621
|
|
Supplies
|
|
|
1,643
|
|
|
|
1,531
|
|
Total
inventory
|
|
$
|
74,934
|
|
|
$
|
60,420
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
6.
INCOME
TAXES
The amounts of income before income
taxes attributable to domestic and foreign continuing operations are as
follows:
|
|
Three
Months Ended March 31,
|
|
|
Six
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Domestic
|
|
$
|
4,052
|
|
|
$
|
2,774
|
|
|
$
|
6,471
|
|
|
$
|
5,348
|
|
Foreign
|
|
|
3,430
|
|
|
|
3,349
|
|
|
|
6,351
|
|
|
|
4,153
|
|
Total
|
|
$
|
7,482
|
|
|
$
|
6,123
|
|
|
$
|
12,822
|
|
|
$
|
9,501
|
|
The
provision (benefit) for income taxes consists of the following:
|
|
Three
Months Ended March 31,
|
|
|
Six
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Current
|
|
$
|
2,780
|
|
|
$
|
1,963
|
|
|
$
|
4,019
|
|
|
$
|
2,701
|
|
Deferred
|
|
|
(291
|
)
|
|
|
(1,362
|
)
|
|
|
284
|
|
|
|
(1,282
|
)
|
Total
|
|
$
|
2,489
|
|
|
$
|
601
|
|
|
$
|
4,303
|
|
|
$
|
1,419
|
|
A reconciliation of the income tax
expense for continuing operations at the federal statutory rate of 35% to the
Company's effective rate for the three and six months ended March 31, 2008 and
2007 is as follows:
|
|
Three
Months Ended
March
31,
|
|
|
Six
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Tax
expense at statutory rate
|
|
$
|
2,619
|
|
|
$
|
2,142
|
|
|
$
|
4,488
|
|
|
$
|
3,324
|
|
Disqualifying
disposition of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
(129
|
)
|
|
|
(18
|
)
|
Chargeback
Reimbursement
|
|
|
(72
|
)
|
|
|
(19
|
)
|
|
|
(147
|
)
|
|
|
(29
|
)
|
Foreign
tax rate differential
|
|
|
9
|
|
|
|
63
|
|
|
|
(27
|
)
|
|
|
71
|
|
Change
in the deferred tax assets valuation allowance
|
|
|
(1
|
)
|
|
|
(1,576
|
)
|
|
|
25
|
|
|
|
(1,644
|
)
|
State
taxes, net of federal benefit
|
|
|
15
|
|
|
|
45
|
|
|
|
41
|
|
|
|
94
|
|
Tax
rate change
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
114
|
|
|
|
-
|
|
Adjustment
to tax contingency
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(350
|
)
|
Non-deductible
expenses and other, net
|
|
|
(73
|
)
|
|
|
(54
|
)
|
|
|
(62
|
)
|
|
|
(29
|
)
|
Income
tax provision
|
|
$
|
2,489
|
|
|
$
|
601
|
|
|
$
|
4,303
|
|
|
$
|
1,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
33.3
|
%
|
|
|
9.8
|
%
|
|
|
33.6
|
%
|
|
|
14.9
|
%
|
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. The Company has
unremitted earnings from foreign subsidiaries of approximately $20.7
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.
In June
2006, the Financial Accounting Standards Board issued FASB Interpretation No.
48,
Accounting for Uncertainty
in Income Taxes – An Interpretation of FASB Statement No. 109
(“FIN 48”),
which clarifies the accounting and disclosure for “uncertain tax positions” (as
the term is defined in FIN 48). FIN 48 seeks to reduce the diversity
in practice associated with certain aspects of the recognition and measurement
related to accounting for income taxes. On October 1, 2007, the
Company adopted the provisions of FIN 48. The adoption of FIN 48 did
not have a material impact on our financial position or results of
operations. The Company also adopted the accounting policy to
classify any interest and penalties on unrecognized tax positions as income tax
in the event any arise in the future. The Company does not anticipate
a material change to the total amount of unrecognized tax benefits within the
next twelve months.
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 2005. In our other
major tax jurisdictions, the earliest years remaining open to examination are as
follows: France - 2005, Australia – 2003, New Zealand - 2003 and the Netherlands
– 2002. In addition, in our other foreign jurisdictions, we are no
longer subject to tax examinations for periods preceding 2001. In
April 2008, the Company received a letter from the Internal Revenue Service
notifying the Company that the 2006 federal tax return had been selected for
examination.
NOTE
7.
COMMITMENTS
AND CONTINGENCIES
The Company has letters of credit
outstanding in the United States of approximately $1.9 million and $1.9 million
as of March 31, 2008 and September 30, 2007, respectively, and foreign letters
of credit outstanding of $3.1 million and $11.8 million as of March 31, 2008 and
September 30, 2007, respectively.
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 insurance coverage applicable to this claim subject to a
$1.0 million self-insured retention. 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
and/or cash flows.
Environmental
Remediation.
The Comprehensive Environmental Response,
Compensation, and Liability Act, as amended (“CERCLA”), also known as
“Superfund,” and comparable state laws impose liability without regard to fault
or the legality of the original conduct on certain classes of persons who are
considered to be responsible for the release of a “hazardous substance” into the
environment. These persons include the owner or operator of the
disposal site or the site where the release occurred, and companies that
disposed or arranged for the disposal of the hazardous substances at the site
where the release occurred. Under CERCLA, such persons may be subject
to joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment, for damages to natural
resources, and for the costs of certain health studies, and it is not uncommon
for neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of hazardous
substances into the environment. The Company is identified as one of
many potentially responsible parties (“PRPs”) under CERCLA in four claims
relating to the following sites: (i) the French Limited site northeast of
Houston, Texas; (ii) the Sheridan Disposal Services site near Hempstead, Texas;
(iii) the Combe Fill South Landfill site in Morris County, New Jersey; and (iv)
the Malone Service Company (MSC) Superfund site in Texas City,
Texas.
Active
remediation of the French Limited site was concluded in 1996. If the
Company is required to contribute to the costs of additional remediation at that
site, such additional costs are not expected to have a material adverse effect
on the Company. With regard to the three remaining Superfund sites,
the Company believes it remains responsible for only
de minimus
levels of wastes
contributed to those sites, and that there are numerous other PRPs identified at
each of these sites that contributed significantly larger volumes of wastes to
the sites. The Company expects that its share of any allocated
liability for cleanup of the Sheridan Disposal Services site and the Combe Fill
South Landfill site will not be significant, and based on the Company’s current
understanding of the remedial status of each of these sites, together with its
relative position in comparison to the many other PRPs at those sites, the
Company does not expect its future environmental liability with respect to those
sites to have a material adverse effect on the Company’s financial condition,
results of operation, and/or cash flows. With regard to the MSC site,
in fiscal year 2005 the Company estimated the Company’s exposure and accrued a
liability in that amount, based on settlement offers made to PRPs by the
Environmental Protection Agency (“EPA”) in fiscal year 2005 and the Company’s
settlement discussions at that time. The EPA subsequently withdrew
its settlement offers to PRPs, in order to process additional evidence of
transactions at the MSC site, and the EPA is expected to issue a new allocation
to the PRPs,
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
upon
which revised settlement offers are expected. The Company does not
expect the eventual outcome with respect to the MSC site to have a material
adverse effect on the Company’s financial condition, results of operations
and/or cash flows.
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.
NOTE
8.
DEBT
Term debt at March 31, 2008 and September 30, 2007 consisted of the
following.
|
|
March
31,
2008
|
|
|
September
30,
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Term
loan of ICO, Inc. under the terms of the Company’s domestic Credit
Agreement with Key Bank collateralized by assets of the Company’s
subsidiaries. Principal and interest paid quarterly through
October 2011. Interest rate as of March 31, 2008 was
4.4%.
|
|
$
|
11,667
|
|
|
$
|
13,333
|
|
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.
|
|
|
6,800
|
|
|
|
6,408
|
|
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. As of March 31, 2008, these loans had a weighted
average interest rate of 6.0% with maturity dates between November 2008
and May 2021. The interest and principal payments are made
monthly.
|
|
|
8,562
|
|
|
|
8,780
|
|
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. As of March 31, 2008, these loans
had a weighted average interest rate of 6.9% with maturity dates between
August 2008 and March 2015. The interest and principal payments
are made monthly or quarterly.
|
|
|
15,039
|
|
|
|
12,695
|
|
Total
term debt
|
|
|
42,068
|
|
|
|
41,216
|
|
Less
current maturities of long-term debt
|
|
|
16,137
|
|
|
|
11,611
|
|
Long-term
debt less current maturities
|
|
$
|
25,931
|
|
|
$
|
29,605
|
|
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
|
|
|
|
March
31,
|
|
September
30,
|
|
|
March
31,
|
|
|
September
30,
|
|
|
March
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Millions)
|
|
Borrowing
Capacity
(a)
|
|
$
|
25.1
|
|
|
$
|
28.1
|
|
|
$
|
58.3
|
|
|
$
|
58.6
|
|
|
$
|
83.4
|
|
|
$
|
86.7
|
|
Outstanding
Borrowings
|
|
|
4.8
|
|
|
|
–
|
|
|
|
21.6
|
|
|
|
16.1
|
|
|
|
26.4
|
|
|
|
16.1
|
|
Net
availability
|
|
$
|
20.3
|
|
|
$
|
28.1
|
|
|
$
|
36.7
|
|
|
$
|
42.5
|
|
|
$
|
57.0
|
|
|
$
|
70.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Based
on the credit facility limits less outstanding letters of
credit.
|
|
On
October 27, 2006, the Company entered into a five-year Credit Agreement (the
“Credit Agreement”) with KeyBank National Association and Wells Fargo Bank
National Association (collectively referred to herein as “KeyBank”),
establishing a $45.0 million domestic credit facility (the “Credit
Facility”). The borrowing capacity made available to the Company
under the KeyBank Credit Facility consists of a five-year $15.0 million term
loan and a five-year $30.0 million revolving credit facility. The
$45.0 million KeyBank Credit Facility contains a variable interest rate and
contains certain financial and nonfinancial covenants. The borrowing
capacity of the $30.0 million revolving credit facility varies based upon the
levels of domestic cash, receivables and inventory. As of March 31,
2008, $11.7 million remains outstanding of the $15.0 million term loan made
available to the Company under the Credit Facility. In April 2008,
the Company entered into an interest rate swap on the $11.7 million term loan
that essentially fixed the interest rate at 4.32%, subject to changes in the
Company’s leverage ratio. During May 2008, the Company amended its
credit facility to provide for an additional $5.0 million of borrowing capacity
and to extend the maturity of the credit facility by one year to October
2012.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
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, which carry various financial covenants, are collateralized by
assets owned by the foreign subsidiaries.
At March 31, 2008, the Company’s
Australian subsidiary was in violation of a financial debt covenant related to
$4.7 million of term debt and $6.5 million of short term borrowings under its
credit facility with its lender in Australia. Of the $36.7 million of
total foreign credit availability as of March 31, 2008, $0.3 million related to
the Company’s Australian subsidiary. The Australian covenant not met
related to a metric of quarterly profitability compared to interest
expense. The Company obtained a waiver from its lender in Australia
on this financial debt covenant violation; however, the Company has classified
all of the Australian term debt as current as of March 31, 2008.
As of March 31, 2007, the Company’s New
Zealand subsidiary was in violation of a financial debt covenant related to $1.3
million of short-term borrowings under its credit facility. Also, the
Company’s Australian subsidiary was in violation of a financial debt covenant
related to $1.5 million of term debt and $3.5 million of short-term borrowings
under its credit facility. The Australian covenant that was not met
related to equity as a percentage of total assets. Because the
Company’s Australian subsidiary was in violation of a debt covenant with its
lender at that time, National Australia Bank Limited (“NAB”), and the total debt
was over $5.0 million, the Company was in violation of its Credit Agreement with
KeyBank; however, the Company received a letter of waiver from KeyBank and NAB
in relation to these debt covenant violations.
NOTE
9.
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 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 and six months ended March 31, 2008 was $0.4 million
and $0.8 million compared to $0.3 million and $0.6 million for the three and six
months ended March 31, 2007. The amount of defined benefit plan
pension expense for the three and six months ended March 31, 2008 was $0.1
million and $0.2 million compared to $0.2 million and $0.3 million for the three
and six months ended March 31, 2007.
NOTE
10. IMPAIRMENT, RESTRUCTURING AND OTHER COSTS
(INCOME)
On July
2, 2007, the Company’s facility in New Jersey suffered a fire that damaged
certain equipment and one of the facility’s buildings. In the fourth
quarter of fiscal year 2007, the Company recorded a receivable for $1.6 million
related to its initial claims for recovery from its insurance
carrier. The Company received those funds plus an additional $0.1
million during the second quarter of fiscal 2008. Additionally, the
Company recorded a receivable in the second quarter of fiscal 2008 in its
Consolidated Balance Sheet for $1.8 million for further claims of recovery from
its insurance carrier related to damaged
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
equipment
as well as reimbursement for business interruption expenses and lost income as a
result of the fire. The $1.8 million was received in April
2008. During the three and six months ended March 31, 2008, the
Company incurred additional costs related to the fire of $0.3 million and $0.5
million, respectively. As a result of the above, the Company recorded
a net gain of $1.6 million and $1.4 million during the three and six months
ended March 31, 2008 in impairment, restructuring and other costs
(income).
NOTE
11. 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.
The income from discontinued operations
during the three and six months ended March 31, 2007 relates to the $2.3 million
settlement the Company entered into with its insurance carrier related to the
indemnity claims asserted by National Oilwell Varco, Inc.
NOTE
12. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company’s primary market risk
exposures include debt obligations that carry variable interest rates, foreign
currency exchange risk and resin price risk. As of March 31, 2008,
the Company had $62.8 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 does enter into forward currency exchange contracts related to future
purchase obligations denominated in a nonfunctional currency. These
forward currency exchange contracts qualify as cash flow hedging instruments and
are highly effective. The Company recognizes the amount of hedge
ineffectiveness in the Consolidated Statement of Operations. The
hedge ineffectiveness was not a significant amount for the three and six months
ended March 31, 2008 and 2007, respectively. When it is determined
that a derivative has ceased to be a highly effective hedge, hedge accounting is
discontinued prospectively. When hedge accounting is discontinued the
asset or liability remains on the consolidated balance sheet at its fair
value. The gain or loss that has not effectively hedged the
identified exposure, if any, is recognized currently in earnings. For
the three and six months ended March 31, 2008 and 2007, this amount was not
significant. The Company’s principal foreign currency exposures
relate to the Euro, British Pound, Australian Dollar, New Zealand Dollar,
Malaysian Ringgit and Brazilian Real. The following table includes
the total value of foreign exchange contracts outstanding as of March 31, 2008
and September 30, 2007:
|
|
As
of
|
|
|
March
31,
|
|
September
30,
|
|
|
2008
|
|
2007
|
|
|
|
Notional
value
|
|
$13.9
million
|
|
$12.6
million
|
Fair
market value
|
|
$0.8
million
|
|
$0.7
million
|
Maturity
Dates
|
|
April
2008
|
|
October
2007
|
|
|
through
July 2008
|
|
through
December 2007
|
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 generally also 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 March 31, 2008 and September 30, 2007, the Company had
$41.0 million and $36.3 million of raw material inventory and $32.3 million and
$22.6 million of finished goods inventory, respectively. The Company
attempts to minimize its exposure to resin price changes by monitoring and
carefully managing the quantity of its inventory on hand and product sales
prices.
Foreign Currency Intercompany
Accounts and Notes Receivable
. From time-to-time, the
Company’s U.S. subsidiaries provide capital to foreign subsidiaries of the
Company through U.S. dollar denominated interest bearing promissory
notes. In addition, certain of the Company’s foreign subsidiaries
also provide access to capital to other foreign subsidiaries of the Company
through foreign currency denominated interest bearing promissory
notes. Such funds are generally used by the Company’s foreign
subsidiaries to purchase capital assets and/or for general working capital
needs. In addition, the Company’s U.S. subsidiaries sell products to
the Company’s foreign subsidiaries in U.S. dollars on trade credit
terms. The Company’s foreign subsidiaries also sell products to other
foreign subsidiaries of the Company denominated in foreign currencies that may
not be the functional currency of the foreign subsidiaries. Because
these intercompany debts are accounted for in the local
functional
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
currency
of the foreign subsidiary, any appreciation or depreciation of the foreign
currencies in which the transactions are denominated could result in a gain or
loss, respectively, to the Consolidated Statement of Operations, subject to
forward currency exchange contracts that may be entered into. These
intercompany loans are eliminated in the Company’s Consolidated Balance
Sheet. At March 31, 2008, the Company had the following significant
outstanding intercompany amounts as described above:
Country
of subsidiary with
|
|
Country
of subsidiary with
|
|
Amount
in US$ as of
|
|
Currency
denomination
|
intercompany
receivable
|
|
intercompany
payable
|
|
March
31, 2008
|
|
of
receivable
|
United
States
|
|
Australia
|
|
$10.0
million
|
|
United
States Dollar
|
New
Zealand
|
|
Australia
|
|
$2.6
million
|
|
New
Zealand Dollar
|
United
States
|
|
Malaysia
|
|
$1.4
million
|
|
United
States Dollar
|
New
Zealand
|
|
Malaysia
|
|
$1.3
million
|
|
New
Zealand Dollar
|
New
Zealand
|
|
United
Arab Emirates
|
|
$1.3
million
|
|
New
Zealand Dollar
|
Malaysia
|
|
Australia
|
|
$1.3
million
|
|
Malaysian
Ringgit
|
United
States
|
|
Italy
|
|
$1.1
million
|
|
United
States Dollar
|
NOTE
13. SEGMENT INFORMATION
Our
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.
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, New Zealand and the United
Arab Emirates.
Six
Months Ended
March
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
|
|
$
|
100,494
|
|
|
$
|
229
|
|
|
$
|
6,518
|
|
|
$
|
1,141
|
|
|
$
|
39
|
|
|
$
|
595
|
|
Bayshore
Industrial
|
|
|
52,519
|
|
|
|
144
|
|
|
|
6,710
|
|
|
|
785
|
|
|
|
-
|
|
|
|
376
|
|
ICO
Asia Pacific
|
|
|
37,572
|
|
|
|
346
|
|
|
|
1,623
|
|
|
|
722
|
|
|
|
-
|
|
|
|
2,088
|
|
ICO
Polymers North America
|
|
|
22,890
|
|
|
|
2,087
|
|
|
|
3,383
|
|
|
|
794
|
|
|
|
(1,439
|
)
|
|
|
3,866
|
|
ICO
Brazil
|
|
|
9,516
|
|
|
|
-
|
|
|
|
329
|
|
|
|
129
|
|
|
|
-
|
|
|
|
125
|
|
Total
from Reportable Segments
|
|
|
222,991
|
|
|
|
2,806
|
|
|
|
18,563
|
|
|
|
3,571
|
|
|
|
(1,400
|
)
|
|
|
7,050
|
|
Unallocated
General Corporate
Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,421
|
)
|
|
|
77
|
|
|
|
-
|
|
|
|
35
|
|
Total
|
|
$
|
222,991
|
|
|
$
|
2,806
|
|
|
$
|
15,142
|
|
|
$
|
3,648
|
|
|
$
|
(1,400
|
)
|
|
$
|
7,085
|
|
Six
Months Ended
March
31, 2007
|
|
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
|
|
$
|
76,381
|
|
|
$
|
42
|
|
|
$
|
3,183
|
|
|
$
|
1,347
|
|
|
$
|
(625
|
)
|
|
$
|
504
|
|
Bayshore
Industrial
|
|
|
43,781
|
|
|
|
90
|
|
|
|
6,313
|
|
|
|
746
|
|
|
|
-
|
|
|
|
787
|
|
ICO
Asia Pacific
|
|
|
34,096
|
|
|
|
-
|
|
|
|
1,846
|
|
|
|
546
|
|
|
|
(29
|
)
|
|
|
2,070
|
|
ICO
Polymers North America
|
|
|
20,403
|
|
|
|
2,092
|
|
|
|
2,760
|
|
|
|
752
|
|
|
|
-
|
|
|
|
606
|
|
ICO
Brazil
|
|
|
6,319
|
|
|
|
-
|
|
|
|
204
|
|
|
|
119
|
|
|
|
-
|
|
|
|
80
|
|
Total
from Reportable Segments
|
|
$
|
180,980
|
|
|
$
|
2,224
|
|
|
$
|
14,306
|
|
|
$
|
3,510
|
|
|
$
|
(654
|
)
|
|
$
|
4,047
|
|
Unallocated
General Corporate
Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,136
|
)
|
|
|
101
|
|
|
|
-
|
|
|
|
50
|
|
Total
|
|
$
|
180,980
|
|
|
$
|
2,224
|
|
|
$
|
11,170
|
|
|
$
|
3,611
|
|
|
$
|
(654
|
)
|
|
$
|
4,097
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three
Months Ended
March
31, 2008
|
|
Revenue
From
External
Customers
|
|
|
Inter-
Segment
Revenues
|
|
|
Operating
Income
(Loss)
(a)
|
|
|
Depreciation
and
Amortization
|
|
|
Impairment,
Restructuring
and Other
Costs
(Income)
(a)
|
|
Expenditures
for
Additions
to
Long-Lived
Assets
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
$
|
54,181
|
|
|
|
72
|
|
|
|
3,520
|
|
|
|
574
|
|
|
|
39
|
|
|
|
295
|
|
Bayshore
Industrial
|
|
|
20,742
|
|
|
|
138
|
|
|
|
2,782
|
|
|
|
400
|
|
|
|
-
|
|
|
|
115
|
|
ICO
Asia Pacific
|
|
|
19,627
|
|
|
|
346
|
|
|
|
761
|
|
|
|
373
|
|
|
|
-
|
|
|
|
1,055
|
|
ICO
Polymers North America
|
|
|
12,559
|
|
|
|
1,096
|
|
|
|
2,937
|
|
|
|
405
|
|
|
|
(1,637
|
)
|
|
|
3,027
|
|
ICO
Brazil
|
|
|
5,017
|
|
|
|
-
|
|
|
|
192
|
|
|
|
63
|
|
|
|
-
|
|
|
|
67
|
|
Total
from Reportable Segments
|
|
|
112,126
|
|
|
|
1,652
|
|
|
|
10,192
|
|
|
|
1,815
|
|
|
|
(1,598
|
)
|
|
|
4,559
|
|
Unallocated
General Corporate
Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,546
|
)
|
|
|
38
|
|
|
|
-
|
|
|
|
21
|
|
Total
|
|
$
|
112,126
|
|
|
$
|
1,652
|
|
|
$
|
8,646
|
|
|
$
|
1,853
|
|
|
$
|
(1,598
|
)
|
|
$
|
4,580
|
|
Three
Months Ended
March
31, 2007
|
|
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
|
|
$
|
42,114
|
|
|
$
|
26
|
|
|
$
|
2,508
|
|
|
$
|
683
|
|
|
$
|
(625
|
)
|
|
$
|
326
|
|
Bayshore
Industrial
|
|
|
19,901
|
|
|
|
70
|
|
|
|
3,023
|
|
|
|
373
|
|
|
|
-
|
|
|
|
436
|
|
ICO
Asia Pacific
|
|
|
18,483
|
|
|
|
-
|
|
|
|
1,128
|
|
|
|
307
|
|
|
|
(29
|
)
|
|
|
1,138
|
|
ICO
Polymers North America
|
|
|
10,797
|
|
|
|
1,577
|
|
|
|
1,752
|
|
|
|
383
|
|
|
|
-
|
|
|
|
436
|
|
ICO
Brazil
|
|
|
3,424
|
|
|
|
-
|
|
|
|
127
|
|
|
|
62
|
|
|
|
-
|
|
|
|
15
|
|
Total
from Reportable Segments
|
|
$
|
94,719
|
|
|
$
|
1,673
|
|
|
$
|
8,538
|
|
|
$
|
1,808
|
|
|
$
|
(654
|
)
|
|
$
|
2,351
|
|
Unallocated
General Corporate
Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,665
|
)
|
|
|
47
|
|
|
|
-
|
|
|
|
40
|
|
Total
|
|
$
|
94,719
|
|
|
$
|
1,673
|
|
|
$
|
6,873
|
|
|
$
|
1,855
|
|
|
$
|
(654
|
)
|
|
$
|
2,391
|
|
Total
Assets
|
|
As
of
March
31,
2008
(c)
|
|
|
As
of
September
30,
2007
(c)
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
$
|
102,066
|
|
|
$
|
99,357
|
|
Bayshore
Industrial
|
|
|
37,364
|
|
|
|
50,487
|
|
ICO
Asia Pacific
|
|
|
72,799
|
|
|
|
60,817
|
|
ICO
Polymers North America
|
|
|
29,836
|
|
|
|
24,478
|
|
ICO
Brazil
|
|
|
7,838
|
|
|
|
6,563
|
|
Total
from Reportable Segments
|
|
|
249,903
|
|
|
|
241,702
|
|
Other
(b)
|
|
|
1,908
|
|
|
|
4,515
|
|
Total
|
|
$
|
251,811
|
|
|
$
|
246,217
|
|
(a)
Impairment, restructuring and other costs (income) are included in operating
income (loss).
(b) Consists of unallocated Corporate
assets.
(c)
Includes goodwill of $4.9 million and $4.7 million for ICO Asia Pacific as of
March 31, 2008 and September 30, 2007, respectively, and $4.5 million for
Bayshore Industrial as of March 31, 2008 and September 30, 2007.
A
reconciliation of total reportable segment operating income to income from
continuing operations before income taxes is as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Reportable
segments operating income
|
|
$
|
10,192
|
|
|
$
|
8,538
|
|
|
$
|
18,563
|
|
|
$
|
14,306
|
|
Unallocated
general corporate expense
|
|
|
(1,546
|
)
|
|
|
(1,665
|
)
|
|
|
(3,421
|
)
|
|
|
(3,136
|
)
|
Consolidated
operating income
|
|
|
8,646
|
|
|
|
6,873
|
|
|
|
15,142
|
|
|
|
11,170
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense,
net
|
|
|
(1,096
|
)
|
|
|
(838
|
)
|
|
|
(2,119
|
)
|
|
|
(1,502
|
)
|
Other
|
|
|
(68
|
)
|
|
|
88
|
|
|
|
(201
|
)
|
|
|
(167
|
)
|
Income
from continuing operations before income taxes
|
|
$
|
7,482
|
|
|
$
|
6,123
|
|
|
$
|
12,822
|
|
|
$
|
9,501
|
|
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
How
We Generate Our Revenues
The Company’s revenues are primarily
derived from product sales and toll processing services in the polymer
processing industry.
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 Company purchasing resin (primarily
polyethylene) and other raw materials that are processed by the
Company, which may involve size reduction and/or
compounding. Compounding involves melt blending various resins and
additives to produce a homogeneous material. Compounding includes 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. After processing, the Company sells the finished
products to customers. The finished products produced by the Company
are most often used to manufacture household items (such as toys, household
furniture and trash receptacles), agricultural products (such as fertilizer and
water tanks), paint, metal and fabric coatings and consumer plastic products
such as plastic bags and food packaging.
Toll processing services involve both
size reduction and compounding whereby these 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 after 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 customer’s product as we do not take ownership of our
customer’s material during any stage of the process.
Demand for the Company’s products and
services tends to be driven by overall economic factors and, particularly,
consumer spending. The trend of applicable resin prices also impacts
customer demand. As resin prices are falling, customers tend to
reduce their inventories and, therefore, reduce their need for the Company’s
products and services as customers choose to purchase resin on a just-in-time
basis 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
lower their raw material costs. Additionally, demand for the
Company’s products and services tends to be seasonal, with customer demand
historically being weakest during the Company’s first fiscal quarter due to the
holiday season.
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.
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
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.
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. The Company’s ICO
Europe
segment includes operations in France, Holland, Italy and the
U.K. The Company’s ICO Asia Pacific segment includes operations in
Australia, Malaysia, New Zealand and the United Arab Emirates.
Results
of Operations
Three and six months ended
March 31, 2008 compared to the three and six months ended March 31,
2007
Executive
Summary
Thus far
in fiscal year 2008, we have recorded growth in volumes and revenues, which has
led to an increase in operating income. All of our business regions
have experienced an increase in revenues. For the six months ended
March 31, 2008, revenues have increased $42.0 million or 23% and operating
income has improved $4.0 million or 36% compared to the six months ended March
31, 2007. We have also benefited from the translation effect of
foreign currencies compared to the U.S. Dollar. Our European region
has produced strong growth in revenues and operating income and is a major
factor in the improved results year-to-date.
|
|
Summary
Financial Information
|
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
Six
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
%
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
%
|
|
|
|
(Dollars
in Thousands)
|
|
Total
revenues
|
|
$
|
112,126
|
|
|
$
|
94,719
|
|
|
$
|
17,407
|
|
|
|
18%
|
|
|
$
|
222,991
|
|
|
$
|
180,980
|
|
|
$
|
42,011
|
|
|
|
23%
|
|
SG&A
(1)
|
|
|
10,387
|
|
|
|
9,274
|
|
|
|
1,113
|
|
|
|
12%
|
|
|
|
20,990
|
|
|
|
17,713
|
|
|
|
3,277
|
|
|
|
19%
|
|
Operating
income
|
|
|
8,646
|
|
|
|
6,873
|
|
|
|
1,773
|
|
|
|
26%
|
|
|
|
15,142
|
|
|
|
11,170
|
|
|
|
3,972
|
|
|
|
36%
|
|
Income
from continuing operations
|
|
|
4,993
|
|
|
|
5,522
|
|
|
|
(529
|
)
|
|
|
(10%
|
)
|
|
|
8,519
|
|
|
|
8,082
|
|
|
|
437
|
|
|
|
5%
|
|
Net
income
|
|
$
|
4,993
|
|
|
$
|
6,997
|
|
|
$
|
(2,004
|
)
|
|
|
(29%
|
)
|
|
$
|
8,503
|
|
|
$
|
9,521
|
|
|
$
|
(1,018
|
)
|
|
|
(11%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes
(2)
|
|
|
83,600
|
|
|
|
82,000
|
|
|
|
1,600
|
|
|
|
2%
|
|
|
|
165,500
|
|
|
|
158,000
|
|
|
|
7,500
|
|
|
|
5%
|
|
Gross
margin
(3)
|
|
|
17.2%
|
|
|
|
18.3%
|
|
|
|
(1.1%
|
)
|
|
|
|
|
|
|
17.2%
|
|
|
|
17.6%
|
|
|
|
(.4%
|
)
|
|
|
|
|
SG&A
as a percentage of revenues
|
|
|
9.3%
|
|
|
|
9.8%
|
|
|
|
(.5%
|
)
|
|
|
|
|
|
|
9.4%
|
|
|
|
9.8%
|
|
|
|
(.4%
|
)
|
|
|
|
|
Operating
income as a percentage of revenues
|
|
|
7.7%
|
|
|
|
7.3%
|
|
|
|
.4%
|
|
|
|
|
|
|
|
6.8%
|
|
|
|
6.2%
|
|
|
|
.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
“SG&A” is defined as selling, general and administrative expense
(including stock option compensation expense).
|
|
(2)
“Volumes” refers to total metric tons sold either selling
proprietary products or toll processing services.
|
|
(3)
Gross margin is calculated as the difference between revenues and
cost of sales and services, divided by revenues.
|
|
Revenues.
Total
revenues increased $17.4 million or 18% to $112.1 million during the three
months ended March 31, 2008, compared to the same period of fiscal
2007. During the six month period, revenues increased $42.0 million
or 23%. The increase in revenues was a result of an increase in
volumes sold by the Company (“volume”), changes in selling prices and mix of
finished products sold or services performed (“price/product mix”) and the
impact from changes in foreign currencies relative to the U.S. Dollar
(“translation effect”).
The components of the increase in
revenue are:
|
Three
Months Ended
March
31, 2008
|
|
Six
Months Ended
March
31, 2008
|
|
%
|
|
$
|
|
%
|
|
$
|
|
(Dollars
in Thousands)
|
Volume
|
4%
|
|
$4,302
|
|
7%
|
|
$13,834
|
Price/product
mix
|
5%
|
|
4,640
|
|
7%
|
|
12,121
|
Translation
effect
|
9%
|
|
8,465
|
|
9%
|
|
16,056
|
Total
increase
|
18%
|
|
$17,407
|
|
23%
|
|
$42,011
|
An increase in volumes sold for the
three and six months ended March 31, 2008 led to increases in revenues of $4.3
million and $13.8 million, respectively. The translation effect of
changes in foreign currencies relative to the U.S. Dollar caused an increase in
revenues of $8.5 million for the three months ended March 31, 2008 and $16.1
million for the six months ended March 31, 2008 due primarily to a stronger Euro
and Australian Dollar compared to the U.S. Dollar.
The Company’s revenues 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 generally also increase or decrease. This will
typically lead to higher or lower average selling prices. Average
selling prices were higher in the current year period than the prior year
periods for both the three and six months ended March 31, 2008. This
fact, as well as a change in product sales mix during the six months ended March
31, 2008, primarily for Bayshore Industrial, caused an increase in revenues of
$4.6 million for the three months ended March 31, 2008 and $12.1 million for the
six months ended March 31, 2008. Although the Company participates in
numerous markets, the graph below illustrates the trend in our resin
prices.
A comparison of revenues by
segment and discussion of the significant segment changes is provided
below.
Revenues
by segment for the three months ended March 31, 2008 compared to the three
months ended March 31, 2007:
|
|
Three
Months Ended
March
31,
|
|
|
|
2008
|
|
|
%
of Total
|
|
|
2007
|
|
|
%
of Total
|
|
|
Change
|
|
|
%
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
$
|
54,181
|
|
|
|
48
|
%
|
|
$
|
42,114
|
|
|
|
44
|
%
|
|
$
|
12,067
|
|
|
|
29
|
%
|
Bayshore
Industrial
|
|
|
20,742
|
|
|
|
18
|
%
|
|
|
19,901
|
|
|
|
21
|
%
|
|
|
841
|
|
|
|
4
|
%
|
ICO
Asia Pacific
|
|
|
19,627
|
|
|
|
18
|
%
|
|
|
18,483
|
|
|
|
20
|
%
|
|
|
1,144
|
|
|
|
6
|
%
|
ICO
Polymers North America
|
|
|
12,559
|
|
|
|
11
|
%
|
|
|
10,797
|
|
|
|
11
|
%
|
|
|
1,762
|
|
|
|
16
|
%
|
ICO
Brazil
|
|
|
5,017
|
|
|
|
5
|
%
|
|
|
3,424
|
|
|
|
4
|
%
|
|
|
1,593
|
|
|
|
47
|
%
|
Total
|
|
$
|
112,126
|
|
|
|
100
|
%
|
|
$
|
94,719
|
|
|
|
100
|
%
|
|
$
|
17,407
|
|
|
|
18
|
%
|
Three
Months Ended March 31, 2008
|
Three
Months Ended March 31, 2007
|
Revenues
by Segment
|
Revenues
by Segment
|
ICO
Europe’s revenues increased $12.1 million or 29% primarily as a result of the
translation effect of stronger European currencies compared to the U.S. Dollar
which caused an increase in revenues of $5.4 million. Additionally,
an increase
in
average selling prices due in part to higher resin costs resulted in an increase
of $4.7
million in revenues. Finally, an increase in product sales volumes as
a result of an increase in customer demand and improved market and economic
conditions increased revenues by $2.8 million. This was partially
offset by a decrease in toll processing volumes which decreased revenues by $0.8
million.
ICO Polymers North America’s revenues
increased $1.8 million or 16% as a result of an increase in volumes sold due to
an increase in customer demand.
ICO Brazil’s revenues increased $1.6
million or 47% due to an increase in product sales volumes (as a result of
increased customer demand) which increased revenue by $0.7
million. Additionally, the translation effect of the stronger
Brazilian Real, compared to the U.S. Dollar, caused an increase in revenues of
$0.9 million.
Revenues
by segment for the six months ended March 31, 2008 compared to the six months
ended March 31, 2007:
|
|
Six
Months Ended
March
31,
|
|
|
|
2008
|
|
|
%
of Total
|
|
|
2007
|
|
|
%
of Total
|
|
|
Change
|
|
|
%
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
$
|
100,494
|
|
|
|
45
|
%
|
|
$
|
76,381
|
|
|
|
42
|
%
|
|
$
|
24,113
|
|
|
|
32
|
%
|
Bayshore
Industrial
|
|
|
52,519
|
|
|
|
24
|
%
|
|
|
43,781
|
|
|
|
24
|
%
|
|
|
8,738
|
|
|
|
20
|
%
|
ICO
Asia Pacific
|
|
|
37,572
|
|
|
|
17
|
%
|
|
|
34,096
|
|
|
|
19
|
%
|
|
|
3,476
|
|
|
|
10
|
%
|
ICO
Polymers North America
|
|
|
22,890
|
|
|
|
10
|
%
|
|
|
20,403
|
|
|
|
11
|
%
|
|
|
2,487
|
|
|
|
12
|
%
|
ICO
Brazil
|
|
|
9,516
|
|
|
|
4
|
%
|
|
|
6,319
|
|
|
|
4
|
%
|
|
|
3,197
|
|
|
|
51
|
%
|
Total
|
|
$
|
222,991
|
|
|
|
100
|
%
|
|
$
|
180,980
|
|
|
|
100
|
%
|
|
$
|
42,011
|
|
|
|
23
|
%
|
Six
Months Ended March 31, 2008
|
Six
Months Ended March 31, 2007
|
Revenues
by Segment
|
Revenues
by Segment
|
ICO
Europe’s revenues increased $24.1 million or 32% primarily as a result of the
translation effect of stronger European currencies compared to the U.S. Dollar
which caused an increase in revenues of $10.2 million. Additionally,
an increase in average selling prices due in part to higher resin costs resulted
in an increase of $6.8 million in revenues. Finally, an increase in
product sales volumes as a result of an increase in customer demand and improved
market and economic conditions increased revenues by $7.7
million. This was partially offset by a decrease in toll processing
volumes which decreased revenues by $0.6 million.
Bayshore
Industrial’s revenues increased $8.7 million or 20% primarily due to a favorable
change in product mix which increased revenues by $6.3
million. Additionally, growth in volumes sold due to an increase in
customer demand increased revenues by $2.4 million.
ICO Asia
Pacific increased revenues by $3.5 million or 10% primarily as a result of the
translation effect of the Australian Dollar compared to the U.S.
Dollar.
ICO Polymers North America’s revenues
increased $2.5 million or 12% as a result of an increase in volumes sold due to
an increase in customer demand.
ICO Brazil’s revenues increased $3.2
million or 51% due primarily to the translation effect of the stronger Brazilian
Real compared to the U.S. Dollar which caused an increase in revenues of $1.6
million and as a result of an increase in volumes sold (due to higher customer
demand) of 27% which increased revenues by $1.6 million.
Gross
Margins.
Consolidated gross margins (calculated as the
difference between revenues and cost of sales and services, divided by revenues)
decreased from 18.3% to 17.2% for the three months ended March 31, 2008 and
declined from 17.6% to 17.2% for the six months ended March 31,
2008. A major reason for this decline was the fact that 69% and 57%
of the revenue increase for the three and six-month comparative periods,
respectively, were in our European region, which typically has a lower gross
margin than the Company’s overall gross margin. Higher operating
costs per metric ton, including higher logistics costs per metric ton, also had
the effect of reducing our gross margins. These items were partially
offset by the improvement in volumes sold and an increase in our feedstock
margins (the difference between product sales revenues and related costs of raw
materials sold).
Selling, General and
Administrative
. Selling, general and administrative expenses
(“SG&A”) increased $1.1 million or 12% and $3.3 million or 19% for the three
and six months ended March 31, 2008. The increase in SG&A for the
three-month comparative period was due primarily to the translation effect of
the stronger foreign currencies which increased SG&A by $0.6 million and
higher compensation and benefits cost of $0.6 million partially offset by a
decline in severance costs of $0.5 million. The increase in SG&A
of $3.3 million or 19% for the six-month comparative periods was due primarily
to the translation effect of the stronger foreign currencies which increased
SG&A by $1.3 million, higher compensation and benefits cost of $1.2 million,
higher external professional fees of $0.7 million partially offset by lower
severance costs of $0.5 million. As a percentage of revenues,
SG&A declined to 9.3% and 9.4% of revenues during the three and six months
ended March 31, 2008, respectively, compared to 9.8% for the same periods last
year due to the increase in revenues.
Impairment, restructuring and other
costs (income)
. On July 2, 2007, the Company’s facility in New
Jersey suffered a fire that damaged certain equipment and one of the facility’s
buildings. In the fourth quarter of fiscal year 2007, the Company
recorded a receivable for $1.6 million related to its initial claims for
recovery from its insurance carrier. The Company received those funds
plus an additional $0.1 million during the second quarter of fiscal
2008. Additionally, the Company recorded a receivable in the second
quarter of fiscal 2008 in its Consolidated Balance Sheet for $1.8 million for
further claims of recovery from its insurance carrier related to damaged
equipment as well as reimbursement for business interruption expenses and lost
income as a result of the fire. The $1.8 million was received in
April 2008. During the three and six months ending March 31, 2008,
the Company incurred additional costs related to the fire of $0.3 million and
$0.5 million, respectively. As a result of the above, the Company
recorded a net gain of $1.6 million and $1.4 million during the three and six
months ended March 31, 2008 in impairment, restructuring and other costs
(income).
During
the three and six months ended March 31, 2007, the Company recorded a pre-tax
gain of $0.6 million related to the sale of a building in the Company’s Dutch
subsidiary.
Operating income (loss) by segment and
discussion of significant segment changes for the three months ended
March 31, 2008 compared to the three months ended March 31, 2007
follows.
Operating
income (loss)
|
|
Three
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
%
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
$
|
3,520
|
|
|
$
|
2,508
|
|
|
$
|
1,012
|
|
|
|
40%
|
|
Bayshore
Industrial
|
|
|
2,782
|
|
|
|
3,023
|
|
|
|
(241
|
)
|
|
|
(8%
|
)
|
ICO
Asia Pacific
|
|
|
761
|
|
|
|
1,128
|
|
|
|
(367
|
)
|
|
|
(33%
|
)
|
ICO
Polymers North America
|
|
|
2,937
|
|
|
|
1,752
|
|
|
|
1,185
|
|
|
|
68%
|
|
ICO
Brazil
|
|
|
192
|
|
|
|
127
|
|
|
|
65
|
|
|
|
51%
|
|
Subtotal
|
|
|
10,192
|
|
|
|
8,538
|
|
|
|
1,654
|
|
|
|
19%
|
|
Unallocated
General Corporate Expense
|
|
|
(1,546
|
)
|
|
|
(1,665
|
)
|
|
|
119
|
|
|
|
(7%
|
)
|
Consolidated
|
|
$
|
8,646
|
|
|
$
|
6,873
|
|
|
$
|
1,773
|
|
|
|
26%
|
|
Operating
income (loss) as a percentage
of
revenues
|
Three
Months Ended
March
31,
|
|
2008
|
|
2007
|
|
Change
|
ICO
Europe
|
6%
|
|
6%
|
|
0%
|
Bayshore
Industrial
|
13%
|
|
15%
|
|
(2%)
|
ICO
Asia Pacific
|
4%
|
|
6%
|
|
(2%)
|
ICO
Polymers North America
|
23%
|
|
16%
|
|
7%
|
ICO
Brazil
|
4%
|
|
4%
|
|
0%
|
Consolidated
|
8%
|
|
7%
|
|
1%
|
ICO
Europe’s operating income improved $1.0 million or 40% due primarily to an
improvement in product sales volumes and feedstock margins. The
effect of the stronger Euro currencies compared to the U.S. Dollar improved
operating income by $0.4 million.
Bayshore Industrial’s operating income
fell $0.2 million or 8% primarily as a result of an increase in production costs
per metric ton. This was partially offset by the benefit from an
increase in volumes sold.
ICO Asia Pacific’s operating income
decreased $0.4 million or 33% as a result of an increase in operating costs,
including higher expenses for logistics. Additionally, an increase in
the number of employees as a result of the expansion of our facility in Malaysia
as well as the opening of our facility in the United Arab Emirates led to higher
SG&A costs. These higher costs were partially offset by the
benefit from an increase in feedstock margins.
ICO Polymers North America’s
operating income increased $1.2 million or 68% primarily as a result of
recording a net gain of $1.6 million during the three months ended March 31,
2008 due to the reimbursement from our insurance company related to the fire at
our New Jersey facility. A considerable portion of the insurance
reimbursement was for business interruption expenses and lost income as a result
of the fire, which reduced the capacity in our New Jersey plant and led to an
increase in operating costs per metric ton.
Operating income (loss) by segment and
discussion of significant segment changes for the six months ended March 31,
2008 compared to the six months ended March 31, 2007 follows.
Operating
income (loss)
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
%
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
$
|
6,518
|
|
|
$
|
3,183
|
|
|
$
|
3,335
|
|
|
|
105%
|
|
Bayshore
Industrial
|
|
|
6,710
|
|
|
|
6,313
|
|
|
|
397
|
|
|
|
6%
|
|
ICO
Asia Pacific
|
|
|
1,623
|
|
|
|
1,846
|
|
|
|
(223
|
)
|
|
|
(12%
|
)
|
ICO
Polymers North America
|
|
|
3,383
|
|
|
|
2,760
|
|
|
|
623
|
|
|
|
23%
|
|
ICO
Brazil
|
|
|
329
|
|
|
|
204
|
|
|
|
125
|
|
|
|
61%
|
|
Subtotal
|
|
|
18,563
|
|
|
|
14,306
|
|
|
|
4,257
|
|
|
|
30%
|
|
Unallocated
General Corporate Expense
|
|
|
(3,421
|
)
|
|
|
(3,136
|
)
|
|
|
(285
|
)
|
|
|
9%
|
|
Consolidated
|
|
$
|
15,142
|
|
|
$
|
11,170
|
|
|
$
|
3,972
|
|
|
|
36%
|
|
Operating
income (loss) as a
|
Six
Months Ended
|
percentage
of revenues
|
March
31,
|
|
2008
|
|
2007
|
|
Change
|
ICO
Europe
|
6%
|
|
4%
|
|
2%
|
Bayshore
Industrial
|
13%
|
|
14%
|
|
(1%)
|
ICO
Asia Pacific
|
4%
|
|
5%
|
|
(1%)
|
ICO
Polymers North America
|
15%
|
|
14%
|
|
1%
|
ICO
Brazil
|
3%
|
|
3%
|
|
-
|
Consolidated
|
7%
|
|
6%
|
|
1%
|
ICO Europe’s operating income improved
$3.3 million or 105% due primarily to an improvement in product sales volumes
and feedstock margins. Additionally, the effect of the stronger Euro
currencies compared to the U.S. Dollar improved operating income by $0.7
million.
ICO Asia Pacific’s operating income
decreased $0.2 million or 12% as a result of an increase in operating costs and
higher SG&A costs partially offset by the benefit from an increase in
volumes sold. The higher operating costs were primarily caused by an
increase in logistics costs. The higher SG&A costs were due to an
increase in employees to support the expansion of our facility in Malaysia as
well as the opening of our facility in the United Arab Emirates.
ICO Polymers North America’s operating
income increased $0.6 million or 23% primarily as a result of recording a net
gain of $1.4 million during the six months ended March 31, 2008 due to the
reimbursement from the insurance company related to the fire at our New Jersey
facility. A considerable portion of the insurance reimbursement was
for business interruption expenses and lost income as a result of the
fire.
Interest Expense,
Net
. For the three and six months ended March 31, 2008, net
interest expense increased $0.3 million or 31% and $0.6 million or 41%,
respectively, as a result of an increase in borrowings to finance an increase in
working capital. For the six month comparison, the higher interest expense was
also due to financing the repurchase of Preferred Stock in the first quarter of
fiscal 2007.
Income Taxes (from continuing
operations).
The Company’s effective income tax rates were
provisions of 33% and 34% during the three and six months ended March 31, 2008,
compared to the U.S. statutory rate of 35%.
The Company’s effective income tax
rates of 10% and 15% during the three and six months ended March 31, 2007 were
lower than the U.S. statutory tax rate of 35% primarily due to the reversal of
the valuation allowance against the deferred tax assets in the Company’s Italian
subsidiary of $1.4 million in the three months ended March 31,
2007. In addition, the reduction of the tax contingency reserve in
the first quarter of 2007 of $0.4 million further reduced the effective tax rate
for the six months ended March 31, 2007.
Income (Loss) From Discontinued
Operations.
The income from discontinued operations during the
three and six months ended March 31, 2007 relates to the settlement the Company
entered into with its insurance carrier related to the indemnity claims asserted
by National Oilwell Varco, Inc. for $2.3 million.
Net
Income.
For the three and six months ended March 31, 2008, the
Company had net income of $5.0 million and $8.5 million, respectively, compared
to net income of $7.0 million and $9.5 million for the comparable periods in
fiscal 2007, 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 and six months
ended March 31, 2008.
|
Three
Months Ended
March
31, 2008
|
|
Six
Months Ended
March
31, 2008
|
|
|
Net
revenues
|
$8.5
million
|
|
$16.1
million
|
Operating
income
|
$0.5
million
|
|
$1.0
million
|
Pre-tax
income
|
$0.4
million
|
|
$0.8
million
|
Net
income
|
$0.3
million
|
|
$0.6
million
|
Recently
Issued Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157,
Fair Value
Measurements
(“SFAS 157”). SFAS 157 defines “fair value,”
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, rather, its
application will be made pursuant to other accounting pronouncements that
require or permit fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those years. This standard will be
effective for the Company starting with our interim period ending December 31,
2008. The provisions of SFAS 157 are to be applied prospectively upon
adoption, except for limited specified exceptions. The Company does not
expect the adoption of SFAS 157 to have a material impact on its financial
position or results of operations.
In February 2007, the FASB issued SFAS
No. 159,
The Fair Value Option
for Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115
(“SFAS 159”). Under SFAS 159, a company may
elect to measure eligible financial assets and financial liabilities at fair
value at specified election dates. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings
at each subsequent reporting date. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. We are currently assessing
whether or not we will elect the fair value option.
In December 2007, the FASB issued SFAS
No. 141 (revised 2007),
Business Combinations
(“SFAS
141 (R)”) and No. 160,
Noncontrolling interests in
Consolidated Financial Statements
(“SFAS 160”). The goal of
these standards is to improve, simplify, and converge internationally the
accounting for business combinations and the reporting of noncontrolling
interests in consolidated financial statements. The provisions of
SFAS 141 (R) and SFAS 160 are effective for the Company on October 1,
2009. We have not yet determined the impact of adopting these
standards.
In March
2008, the FASB issued SFAS No. 161 (“SFAS 161”),
Disclosures about Derivative
Instruments and Hedging
Activities, an amendment of FASB
Statement No. 133.
This Statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
Company will be required to adopt this standard in the interim period ending
December 31, 2009. This Statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. We
have not yet determined the impact of adopting this new
standard.
Liquidity
and Capital Resources
The following are considered
by management as key measures of liquidity applicable to the
Company:
|
March 31, 2008
|
September 30, 2007
|
Cash
and cash equivalents
|
$3.4
million
|
|
$8.6
million
|
|
Working
capital
|
$66.2
million
|
|
$57.9
million
|
|
Cash and cash equivalents
declined $5.2 million and working capital increased $8.3 million during the six
months ended March 31, 2008 due to the factors described below.
Cash
Flows
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Net
cash provided by (used for) operating activities by continuing
operations
|
|
$
|
(9,640
|
)
|
|
$
|
12,150
|
|
Net
cash used for operating activities by discontinued
operations
|
|
|
(25
|
)
|
|
|
(1,191
|
)
|
Net
cash used for investing activities by continuing
operations
|
|
|
(5,355
|
)
|
|
|
(3,160
|
)
|
Net
cash provided by (used for) financing activities by continuing
operations
|
|
|
9,650
|
|
|
|
(23,734
|
)
|
Effect
of exchange rate changes
|
|
|
212
|
|
|
|
100
|
|
Net decrease in cash and
equivalents
|
|
$
|
(5,158
|
)
|
|
$
|
(15,835
|
)
|
Cash
Flows From Operating Activities
During the six months ended March 31,
2008, the Company used $9.6 million of cash for operating activities by
continuing operations as a result of changes in working capital. In
the prior year comparative period ended March 31, 2007, the Company generated
cash of $12.2 million from operating activities by continuing
operations. The main reason for the change was due to using cash in
the current year of $11.5 million for inventory caused by higher inventory
levels while in the prior year period the Company generated cash of $1.0 million
related to inventory. The increase in inventory in the current year
was primarily due to an increase in sales activity in the current year over the
previous year and higher inventory volumes in our Australia
location. In Australia, we encountered a reduction in demand in the
water tank market which led to higher inventory volumes. We expect
that our overall inventory volumes will decline over the coming months compared
to our levels at March 31, 2008. Also contributing to the change in
cash flow is that in the current year, accounts receivable generated $12.4
million of cash flow while in the prior year comparative period it used $1.0
million of cash. This change is due to a decline in revenues in the
three months ended March 31, 2008 compared to the revenues in the three months
ended September 30, 2007 of $11.4 million while in the prior year periods,
revenues in the three months ended March 31, 2007 were higher than the three
months ended September 30, 2006. Finally, accounts payable was a use
of cash of $22.5 million in the six months ended March 31, 2008 compared with
providing cash in the prior year period of $2.5 million. This change
was due to the timing of inventory purchases and the higher inventory levels in
Australia.
Cash used for discontinued operations
decreased $1.1 million as a result of the settlement with National Oilwell
Varco, Inc. in the prior year period.
Cash
Flows Used for Investing Activities
Capital expenditures totaled $7.1
million during the six months ended March 31, 2008. These
expenditures were related primarily to the Company’s relocation to Pennsylvania
from New Jersey and to the expansion of the Company’s production
capacity. The Company leased a facility in Pennsylvania and is
incurring capital expenditures related to the build out of the leased
facility. The Company expects to begin production in the Pennsylvania
facility within the next 120 days and anticipates having all production
relocated from its New Jersey facility to its Pennsylvania facility within the
next 12 months. Approximately 55% of the $7.1 million of capital
expenditures was spent at the Company’s ICO Polymers North America
segment. The Company expects capital expenditures to be approximately
$6.5 million for the remainder of the fiscal year. During the
quarter, the Company received $1.7 million from its insurance carrier for
reimbursements of costs associated with the fire in the Company’s New Jersey
facility.
During the second quarter of fiscal
2007, the Company completed the sale of a building at its Dutch subsidiary for
net proceeds of $0.9 million and recorded a pre-tax gain of $0.6
million.
Cash
Flows Used For Financing Activities
During the six months ended March 31,
2008, financing activities provided $9.7 million of cash. This was
primarily due to borrowings under the Company’s credit facilities as a result of
higher inventory levels. In the prior year period, the Company used
$23.7 million for financing activities primarily to finance the repurchase of
85% of the Company’s Preferred Stock.
Financing
Arrangements
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
|
|
|
|
March
31,
|
|
September
30,
|
|
|
March
31,
|
|
|
September
30,
|
|
|
March
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Borrowing
Capacity
(a)
|
|
$
|
25.1
|
|
|
$
|
28.1
|
|
|
$
|
58.3
|
|
|
$
|
58.6
|
|
|
$
|
83.4
|
|
|
$
|
86.7
|
|
Outstanding
Borrowings
|
|
|
4.8
|
|
|
|
-
|
|
|
|
21.6
|
|
|
|
16.1
|
|
|
|
26.4
|
|
|
|
16.1
|
|
Net
availability
|
|
$
|
20.3
|
|
|
$
|
28.1
|
|
|
$
|
36.7
|
|
|
$
|
42.5
|
|
|
$
|
57.0
|
|
|
$
|
70.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Based
on the credit facility limits less outstanding letters of
credit.
|
|
On
October 27, 2006, the Company entered into a five-year Credit Agreement (the
“Credit Agreement”) with KeyBank National Association and Wells Fargo Bank
National Association (collectively referred to herein as “KeyBank”),
establishing a $45.0 million domestic credit facility (the “Credit
Facility”). The borrowing capacity made available to the Company
under the KeyBank Credit Facility consists of a five-year $15.0 million term
loan and a five-year $30.0 million revolving credit facility. The
$45.0 million KeyBank Credit Facility contains a variable interest rate and
contains certain financial and nonfinancial covenants. The borrowing
capacity of the $30.0 million revolving credit facility varies based upon the
levels of domestic cash, receivables and inventory. As of March 31,
2008, $11.7 million remains outstanding of the $15.0 million term loan made
available to the Company under the Credit Facility. In April 2008,
the Company entered into an interest rate swap on the $11.7 million term loan
that essentially fixed the interest rate at 4.32%, subject to changes in the
Company’s leverage ratio. During May 2008, the Company amended its
credit facility to provide for an additional $5.0 million of borrowing capacity
and to extend the maturity of the credit facility by one year to
2012.
The Company has various
foreign credit facilities in eight foreign countries. The available
credit under these facilities varies based either on the levels of accounts
receivable within the foreign subsidiary, or is a fixed amount. The
foreign credit facilities, which carry various financial covenants, are
collateralized by assets owned by the foreign subsidiaries.
At March 31, 2008, the Company’s
Australian subsidiary was in violation of a financial debt covenant related to
$4.7 million of term debt and $6.5 million of short term borrowings under its
credit facility with its lender in Australia. Of the $36.7 million of
total foreign credit availability as of March 31, 2008, $0.3 million related to
the Company’s Australian subsidiary. The Australian covenant not met
related to a metric of quarterly profitability compared to interest
expense. The Company obtained a waiver from its lender in Australia
on this financial debt covenant violation; however, the Company has classified
all of the Australian term debt as current as of March 31, 2008.
As of March 31, 2007, the Company’s New
Zealand subsidiary was in violation of a financial debt covenant related to $1.3
million of short-term borrowings under its credit facility. Also, the
Company’s Australian subsidiary was in violation of a financial debt covenant
related to $1.5 million of term debt and $3.5 million of short-term borrowings
under its credit facility. The Australian covenant that was not met
related to equity as a percentage of total assets. Because the
Company’s Australian subsidiary was in violation of a debt covenant with its
lender at that time, National Australia Bank Limited (“NAB”), and the total debt
was over $5.0 million, the Company was in violation of its Credit Agreement with
KeyBank; however, the Company received a letter of waiver from KeyBank and NAB
in relation to these debt covenant violations.
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.
Off-Balance Sheet
Arrangements.
The
Company does not have any financial instruments classified as off-balance sheet
(other than operating leases) as of March 31, 2008 and September 30,
2007.
ITEM
3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s primary market risk
exposures include debt obligations that carry variable interest rates, foreign
currency exchange risk and resin price risk. As of March 31, 2008,
the Company had $62.8 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 does enter into forward currency exchange contracts related to future
purchase obligations denominated in a nonfunctional currency. These
forward currency exchange contracts qualify as cash flow hedging instruments and
are highly effective. The Company recognizes the amount of hedge
ineffectiveness in the Consolidated Statement of Operations. The
hedge ineffectiveness was not a significant amount for the three months
ended
March 31,
2008 and 2007, respectively. When it is determined that a derivative
has ceased to be a highly effective hedge, hedge accounting is discontinued
prospectively. When hedge accounting is discontinued the asset or
liability remains on the consolidated balance sheet at its fair
value. The gain or loss that has not effectively hedged the
identified exposure, if any, is recognized currently in earnings. For
the three and six months ended March 31, 2008 and 2007, this amount was not
significant. The Company’s principal foreign currency exposures
relate to the Euro, British Pound, Australian Dollar, New Zealand Dollar,
Malaysian Ringgit and Brazilian Real. The following table includes
the total value of foreign exchange contracts outstanding as of March 31, 2008
and September 30, 2007:
|
|
As
of
|
|
|
March
31,
|
|
September
30,
|
|
|
2008
|
|
2007
|
|
|
|
Notional
value
|
|
$13.9
million
|
|
$12.6
million
|
Fair
market value
|
|
$0.8
million
|
|
$0.7
million
|
Maturity
Dates
|
|
April
2008
|
|
October
2007
|
|
|
through
July 2008
|
|
through
December 2007
|
The
Company’s revenues and profitability are impacted by the change 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 generally also increase
or decrease. This will typically lead to higher or lower average
selling prices and will impact the Company’s gross profit and gross
margin. The impact on gross profit 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 March 31, 2008 and September 30, 2007, the Company had
$41.0 million and $36.3 million of raw material inventory and $32.3 million and
$22.6 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.
The
Company’s variable interest rates subject the Company to the risks of increased
interest costs associated with any upward movements in market interest
rates. As of March 31, 2008, the Company had $43.4 million of
variable interest rate debt. The Company’s variable interest rates
are tied to various bank rates. At March 31, 2008, based on our
current level of borrowings, a 1% increase in interest rates would increase
interest expense annually by approximately $0.4 million.
Foreign Currency Intercompany
Accounts and Notes Receivable
. From time-to-time, the
Company’s U.S. subsidiaries provide capital to foreign subsidiaries of the
Company through U.S. dollar denominated interest bearing promissory
notes. In addition, certain of the Company’s foreign subsidiaries
also provide access to capital to other foreign subsidiaries of the Company
through foreign currency denominated interest bearing promissory
notes. Such funds are generally used by the Company’s foreign
subsidiaries to purchase capital assets and/or for general working capital
needs. In addition, the Company’s U.S. subsidiaries sell products to
the Company’s foreign subsidiaries in U.S. dollars on trade credit
terms. The Company’s foreign subsidiaries also sell products to other
foreign subsidiaries of the Company denominated in foreign currencies that may
not be the functional currency of the foreign subsidiaries. Because
these intercompany debts are accounted for in the local functional currency of
the foreign subsidiary, any appreciation or devaluation of the foreign
currencies the transactions are denominated in will result in a gain or loss,
respectively, to the Consolidated Statement of Operations. These
intercompany loans are eliminated in the Company’s Consolidated Balance
Sheet. At March 31, 2008, the Company had the following significant
outstanding intercompany amounts as described above:
Country
of subsidiary with
|
|
Country
of subsidiary with
|
|
Amount
in US$ as of
|
|
Currency
denomination
|
intercompany
receivable
|
|
intercompany
payable
|
|
March
31, 2008
|
|
of
receivable
|
United
States
|
|
Australia
|
|
$10.0
million
|
|
United
States Dollar
|
New
Zealand
|
|
Australia
|
|
$2.6
million
|
|
New
Zealand Dollar
|
United
States
|
|
Malaysia
|
|
$1.4
million
|
|
United
States Dollar
|
New
Zealand
|
|
Malaysia
|
|
$1.3
million
|
|
New
Zealand Dollar
|
New
Zealand
|
|
United
Arab Emirates
|
|
$1.3
million
|
|
New
Zealand Dollar
|
Malaysia
|
|
Australia
|
|
$1.3
million
|
|
Malaysian
Ringgit
|
United
States
|
|
Italy
|
|
$1.1
million
|
|
United
States Dollar
|
ITEM
4. CONTROLS AND
PROCEDURES
As of
March 31, 2008, the Company carried out an evaluation, under the supervision and
with the participation of the Company’s management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon this
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are
effective.
There
were no changes in the Company’s internal controls over financial reporting
during our second 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 7 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
the Company’s Form 10-K filed December 10, 2007.
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, 2007, 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. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating
results.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
The
Company’s Annual Meeting of Shareholders (“Meeting”) was held on March 11, 2008:
(1) to elect three Class II members of the Board of Directors (“Directors”)
to serve until the 2011 Annual Meeting of Shareholders; (2) to approve certain
amendments to the Fourth Amended and Restated 1993 Stock Option Plan for
Non-Employee Directors of ICO, Inc. (now known as the “2008 Equity Incentive
Plan for Non-Employee Directors of ICO, Inc.,” and referred to herein as the
“Plan”); and (3) to ratify the appointment of PricewaterhouseCoopers LLP as the
Company’s independent registered public accounting firm for the fiscal year
ending September 30, 2008. The number of shares present in person or
by proxy at the Meeting was 24,910,915, or approximately 91% of the outstanding
shares, and therefore a quorum was in existence at the Meeting. The
Directors were duly elected, the amendments to the Plan were approved and the
appointment of Pricewaterhouse Coopers LLP was ratified, as more specifically
described below.
The three
Class II Directors who were so elected were Daniel R. Gaubert, Kumar Shah and
Warren W. Wilder. The number of affirmative votes, the number of
negative votes and the number of votes withheld for the Directors so elected
were:
Names
|
|
Number
of Affirmative Votes
|
|
Number
of Negative Votes
|
|
Number
Withheld
|
Daniel
R. Gaubert
|
|
23,886,495
|
|
0
|
|
1,024,420
|
Kumar
Shah
|
|
23,883,186
|
|
0
|
|
1,027,729
|
Warren
W. Wilder
|
|
23,886,848
|
|
0
|
|
1,024,067
|
Following the Meeting, Gregory T.
Barmore, Eric O. English, David E.K. Frischkorn, Jr., A. John Knapp, Jr., Max W.
Kloesel and Charles T. McCord, III continued in their terms as
directors.
The
number of affirmative votes, the number of negative votes, the number of
abstentions and the number of broker non-votes with respect to the approval of
the amendments to the Fourth Amended and Restated 1993 Stock Option Plan for
Non-Employee Directors of ICO, Inc. were as follows:
Number
of Affirmative Votes
|
|
Number
of Negative Votes
|
|
Abstentions
|
|
Broker
Non-Votes
|
16,283,954
|
|
1,146,178
|
|
43,091
|
|
7,437,692
|
The
number of affirmative votes, the number of negative votes and the number of
abstentions with respect to the ratification of the appointment of
Pricewaterhouse Coopers LLP as the independent registered public accounting firm
for the fiscal year ending September 30, 2008 were as follows:
Number
of Affirmative Votes
|
|
Number
of Negative Votes
|
|
Abstentions
|
24,670,188
|
|
227,054
|
|
13,673
|
ITEM
6. EXHIBITS
The following instruments and documents are included as Exhibits to this Form
10-Q:
Exhibit
No.
|
|
Exhibit
|
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
|
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)
|
|
|
|
|
May 8,
2008
|
/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
|
|
|
-29-
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