UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
|
|
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
For the quarterly
period ended
December
31,
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.
Yes
x
No ___
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 Act).
Yes
____ No
x
There
were 27,558,092 shares of common stock without par value
outstanding
as of January 20, 2009
ICO,
INC.
INDEX
TO QUARTERLY REPORT ON FORM 10-Q
Part
I. Financial Information
|
Page
|
|
|
|
Item
1. Financial Statements
|
|
|
|
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|
|
|
|
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|
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|
|
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|
|
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|
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Ended
December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
28
|
|
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|
|
Item
4. Controls and Procedures
|
30
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Part
II. Other Information
|
|
|
|
|
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30
|
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30
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|
31
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|
32
|
P
ART I ― FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
ICO,
INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited
and in Thousands, except share data)
|
|
December
31,
2008
|
|
|
September
30,
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,975
|
|
|
$
|
5,589
|
|
Trade
receivables (less allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
of
$3,171 and $2,973, respectively)
|
|
|
59,884
|
|
|
|
75,756
|
|
Inventories
|
|
|
35,919
|
|
|
|
53,458
|
|
Deferred
income taxes
|
|
|
2,314
|
|
|
|
2,056
|
|
Prepaid
and other current assets
|
|
|
8,495
|
|
|
|
10,514
|
|
Total
current assets
|
|
|
117,587
|
|
|
|
147,373
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
59,001
|
|
|
|
61,164
|
|
Goodwill
|
|
|
8,154
|
|
|
|
8,689
|
|
Other
assets
|
|
|
3,799
|
|
|
|
3,870
|
|
Total
assets
|
|
$
|
188,541
|
|
|
$
|
221,096
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings under credit facilities
|
|
$
|
6,009
|
|
|
$
|
9,607
|
|
Current
portion of long-term debt
|
|
|
13,629
|
|
|
|
15,201
|
|
Accounts
payable
|
|
|
24,689
|
|
|
|
37,674
|
|
Accrued
salaries and wages
|
|
|
4,568
|
|
|
|
5,978
|
|
Other
current liabilities
|
|
|
10,194
|
|
|
|
11,912
|
|
Total
current liabilities
|
|
|
59,089
|
|
|
|
80,372
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
23,207
|
|
|
|
25,122
|
|
Deferred
income taxes
|
|
|
4,727
|
|
|
|
5,039
|
|
Other
long-term liabilities
|
|
|
2,295
|
|
|
|
2,728
|
|
Total
liabilities
|
|
|
89,318
|
|
|
|
113,261
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Undesignated
preferred stock, without par value – 500,000
|
|
|
|
|
|
|
|
|
shares
authorized, no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, without par value – 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
28,162,173
and 27,817,673 shares issued, respectively
|
|
|
55,247
|
|
|
|
54,756
|
|
Treasury
Stock, at cost, 578,081 and 90,329 shares, respectively
|
|
|
(3,017
|
)
|
|
|
(543
|
)
|
Additional
paid-in capital
|
|
|
72,428
|
|
|
|
72,241
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(2,718
|
)
|
|
|
3,022
|
|
Accumulated
deficit
|
|
|
(22,717
|
)
|
|
|
(21,641
|
)
|
Total
stockholders’ equity
|
|
|
99,223
|
|
|
|
107,835
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
188,541
|
|
|
$
|
221,096
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
ICO,
INC.
C
ONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited
and in Thousands, except share data)
|
|
Three
Months Ended
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
Sales
|
|
$
|
71,857
|
|
|
$
|
101,188
|
|
Services
|
|
|
7,501
|
|
|
|
9,677
|
|
Total
revenues
|
|
|
79,358
|
|
|
|
110,865
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
Cost of sales and services
(exclusive of depreciation shown below)
|
|
|
69,248
|
|
|
|
91,773
|
|
Selling, general and
administrative
|
|
|
9,138
|
|
|
|
10,603
|
|
Depreciation and
amortization
|
|
|
1,713
|
|
|
|
1,795
|
|
Impairment, restructuring and
other costs (income)
|
|
|
(293
|
)
|
|
|
198
|
|
Operating
income (loss)
|
|
|
(448
|
)
|
|
|
6,496
|
|
Other
expense:
|
|
|
|
|
|
|
|
|
Interest expense,
net
|
|
|
(639
|
)
|
|
|
(1,023
|
)
|
Other
|
|
|
(331
|
)
|
|
|
(133
|
)
|
Income
(loss) from continuing operations before income taxes
|
|
|
(1,418
|
)
|
|
|
5,340
|
|
Provision
(benefit) for income taxes
|
|
|
(342
|
)
|
|
|
1,814
|
|
Income
(loss) from continuing operations
|
|
|
(1,076
|
)
|
|
|
3,526
|
|
Loss
from discontinued operations, net of benefit for
|
|
|
|
|
|
|
|
|
income taxes of $0 and $9,
respectively
|
|
|
-
|
|
|
|
(16
|
)
|
Net
income (loss)
|
|
$
|
(1,076
|
)
|
|
$
|
3,510
|
|
Preferred
Stock dividends
|
|
|
-
|
|
|
|
(1
|
)
|
Net
income (loss) applicable to Common Stock
|
|
$
|
(1,076
|
)
|
|
$
|
3,509
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share:
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(.04
|
)
|
|
$
|
.13
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Net
income (loss) per common share
|
|
$
|
(.04
|
)
|
|
$
|
.13
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share:
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(.04
|
)
|
|
$
|
.13
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Net
income (loss) per common share
|
|
$
|
(.04
|
)
|
|
$
|
.13
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
27,099,000
|
|
|
|
26,914,000
|
|
Diluted
weighted average shares outstanding
|
|
|
27,099,000
|
|
|
|
28,008,000
|
|
The
accompanying notes are an integral part of these financial
statements.
ICO,
INC.
C
ONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(Unaudited
and in Thousands)
|
|
Three
Months
|
|
|
|
Ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net
income (loss)
|
|
$
|
(1,076
|
)
|
|
$
|
3,510
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
(4,418
|
)
|
|
|
1,034
|
|
Unrealized gain (loss) on
foreign currency hedges
|
|
|
(864
|
)
|
|
|
476
|
|
Unrealized (loss) on interest
rate swaps
|
|
|
(458
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(6,816
|
)
|
|
$
|
5,020
|
|
The
accompanying notes are an integral part of these financial
statements.
ICO,
INC.
C
ONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited
and in Thousands)
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows provided by (used for) operating activities:
|
|
|
|
Net
income (loss)
|
|
$
|
(1,076
|
)
|
|
$
|
3,510
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
|
16
|
|
Depreciation
and amortization
|
|
|
1,713
|
|
|
|
1,795
|
|
Stock-based
compensation expense
|
|
|
148
|
|
|
|
242
|
|
Impairment,
restructuring and other costs
|
|
|
(520
|
)
|
|
|
-
|
|
Changes
in assets and liabilities providing/(requiring) cash:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
12,192
|
|
|
|
16,534
|
|
Inventories
|
|
|
14,411
|
|
|
|
(17,799
|
)
|
Other
assets
|
|
|
1,728
|
|
|
|
(2,392
|
)
|
Income
taxes payable
|
|
|
18
|
|
|
|
(316
|
)
|
Deferred
taxes
|
|
|
(871
|
)
|
|
|
627
|
|
Accounts
payable
|
|
|
(11,527
|
)
|
|
|
(11,292
|
)
|
Other
liabilities
|
|
|
(2,695
|
)
|
|
|
(2,339
|
)
|
Net
cash provided by (used for) operating activities by
continuing
|
|
|
|
|
|
|
|
|
operations
|
|
|
13,521
|
|
|
|
(11,414
|
)
|
Net
cash provided by (used for) operating activities by
discontinued
|
|
|
|
|
|
|
|
|
operations
|
|
|
184
|
|
|
|
(25
|
)
|
Net
cash provided by (used for) operating activities
|
|
|
13,705
|
|
|
|
(11,439
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows used for investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(1,364
|
)
|
|
|
(2,505
|
)
|
Net
cash used for investing activities for continuing
operations
|
|
|
(1,364
|
)
|
|
|
(2,505
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used for) financing activities:
|
|
|
|
|
|
|
|
|
Common
stock issued
|
|
|
44
|
|
|
|
350
|
|
Purchases
of Treasury Stock
|
|
|
(1,990
|
)
|
|
|
-
|
|
Redemption
of Preferred Stock
|
|
|
-
|
|
|
|
(200
|
)
|
Preferred
Stock dividends
|
|
|
-
|
|
|
|
(1,312
|
)
|
Increase
(decrease) in short-term borrowings under credit
|
|
|
|
|
|
|
|
|
facilities,
net
|
|
|
(2,446
|
)
|
|
|
9,595
|
|
Proceeds
from long-term debt
|
|
|
-
|
|
|
|
2,402
|
|
Repayments
of long-term debt
|
|
|
(2,507
|
)
|
|
|
(1,671
|
)
|
Net
cash provided by (used for) financing activities
|
|
|
(6,899
|
)
|
|
|
9,164
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rates on cash
|
|
|
(56
|
)
|
|
|
93
|
|
Net
increase (decrease) in cash and equivalents
|
|
|
5,386
|
|
|
|
(4,687
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
5,589
|
|
|
|
8,561
|
|
Cash
and cash equivalents at end of period
|
|
$
|
10,975
|
|
|
$
|
3,874
|
|
The
accompanying notes are an integral part of these financial
statements.
N
OTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1.
BASIS
OF FINANCIAL STATEMENTS
The
unaudited 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 periods presented and have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission
(“SEC”). All such adjustments are of a normal recurring
nature. The fiscal year-end balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of
America. The results of operations for the three months ended
December 31, 2008 are not necessarily indicative of the results expected for the
fiscal year ending September 30, 2009. 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, 2008. 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, 2008.
NOTE
2.
RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 141 (revised 2007),
Business Combinations
(“SFAS
141 (R)”) and SFAS 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. As SFAS No. 141 (R) will apply to future acquisitions, it is
not possible at this time for the Company to determine the impact of adopting
this standard.
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. SFAS 161 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
March 31, 2009. SFAS 161 encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. We
are currently evaluating the impact of adopting this new standard.
In April
2008, the FASB issued FSP FAS 142-3,
Determination of the Useful Life of
Intangible Assets
("FSP FAS 142-3"). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible
Assets
("SFAS 142"). The intent of FSP FAS 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS 141(R) and other applicable accounting literature. FSP FAS
142-3 is effective for financial statements issued for fiscal years beginning
after December 15, 2008. The Company does not anticipate that the adoption of
FSP FAS 142-3 will have a material impact on its results of operations or
financial condition.
In June
2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force
(“EITF”) 03-6-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securitie
s
. This FSP
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
computing earnings per share under the two-class method described in
SFAS No. 128,
Earnings Per
Share
. This FSP will be effective for the Company beginning with
the first quarter of fiscal year 2010 and will be applied
retrospectively. We are currently evaluating the impact of adopting
this new standard.
In
December 2008, the FASB issued FSP FAS 132 (R)-1,
Employers’ Disclosures about
Post-retirement Benefit Plan Assets
, which amends SFAS No. 132,
Employers’ Disclosures about
Pensions and Other Postretirement Benefits
. This FSP provides
guidance on an employer’s disclosures about plan assets of a defined benefit
pension or other postretirement plan. The objectives of these
disclosures are to provide users of financial statements with an understanding
of:
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
a.
|
how
investment allocation decisions are made, including the factors that are
pertinent to an understanding of investment policies and
strategies;
|
b.
|
the
major categories of plan assets;
|
c.
|
the
inputs and valuation techniques used to measure the fair value of plan
assets;
|
d.
|
the
effect of fair value measurements using significant unobservable inputs
(Level 3) on changes in plan assets for the period;
and
|
e.
|
significant
concentrations of risk within plan
assets.
|
The
disclosures about plan assets required by this FSP shall be provided for fiscal
years ending after December 15, 2009. We are currently evaluating the
impact of adopting this new standard.
NOTE
3.
STOCKHOLDERS’
EQUITY
In
September 2008, the Company announced that its Board of Directors authorized the
repurchase of up to $12.0 million of its outstanding Common Stock over a two
year period ending September 2010 (the “Share Repurchase Plan”). The
specific timing and amount of repurchases will vary based on market conditions
and other factors. The Share Repurchase Plan may be modified,
extended or terminated at any time.
In
September 2008, the Company repurchased 90,329 shares of Common Stock under the
Share Repurchase Plan at an average price (excluding commissions) of $5.99 per
share, for total cash consideration of $0.5 million. In October 2008,
the Company repurchased 487,752 shares of Common Stock under the Share
Repurchase Plan at an average price (excluding commissions) of $5.04 per share,
for total cash consideration of $2.5 million.
As of
September 30, 2007, there were 185,523 depositary certificates (“Depositary
Shares”) representing the Company’s $6.75 convertible exchangeable preferred
stock (“Preferred Stock”) outstanding, for which dividends in arrears of $1.2
million were owed. During the first quarter of fiscal year 2008, the
holders of 177,518 of the outstanding Depositary Shares converted such
Depositary Shares into 486,321 shares of Common Stock, and the Company redeemed
the remaining 8,005 Depositary Shares at $25 per Depositary Share for a total
consideration of $0.2 million. All the outstanding Depositary Shares
representing the Preferred Stock were canceled by the Company at the time of
redemption. No shares of Preferred Stock or Depositary Shares were
outstanding as of September 30, 2008.
NOTE
4.
EARNINGS PER SHARE
(“EPS”)
The
Company presents both basic and diluted 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. There were no potentially dilutive securities for the
three months ended December 31, 2008 due to the Company reporting a loss from
continuing operations.
The
difference between basic and diluted weighted-average common shares results from
the assumed exercise of outstanding stock options and vesting of restricted
stock and assumed conversion of the Depositary Shares representing the Preferred
Stock which were outstanding during a portion of the three months ended December
31, 2007. The following presents the number of incremental
weighted-average shares used in computing diluted EPS amounts:
|
|
Three
Months Ended December 31,
|
|
Weighted-average
shares outstanding:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,099,000
|
|
|
|
26,914,000
|
|
Incremental
shares from Preferred Stock
|
|
|
-
|
|
|
|
135,000
|
|
Incremental
shares from stock options
|
|
|
-
|
|
|
|
897,000
|
|
Incremental
shares from restricted stock awards
|
|
|
-
|
|
|
|
62,000
|
|
Diluted
|
|
|
27,099,000
|
|
|
|
28,008,000
|
|
The total
amount of anti-dilutive securities for the three months ended December 31, 2008
and 2007 were 1,495,000 and 663,000 shares, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
5.
INVENTORIES
Inventories
consisted of the following:
|
|
December
31,
2008
|
|
|
September
30,
2008
|
|
|
|
(Dollars
in Thousands)
|
|
Raw
materials
|
|
$
|
16,957
|
|
|
$
|
26,166
|
|
Finished
goods
|
|
|
17,757
|
|
|
|
25,868
|
|
Supplies
|
|
|
1,205
|
|
|
|
1,424
|
|
Total
inventories
|
|
$
|
35,919
|
|
|
$
|
53,458
|
|
NOTE
6.
INCOME
TAXES
The
amounts of income (loss) before income taxes attributable to domestic and
foreign continuing operations are as follows:
|
|
Three
months ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Domestic
|
|
$
|
60
|
|
|
$
|
2,419
|
|
Foreign
|
|
|
(1,478
|
)
|
|
|
2,921
|
|
Total
|
|
$
|
(1,418
|
)
|
|
$
|
5,340
|
|
The
provision (benefit) for income taxes consisted of the following:
|
|
Three
months ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Current
|
|
$
|
204
|
|
|
$
|
1,239
|
|
Deferred
|
|
|
(546
|
)
|
|
|
575
|
|
Total
|
|
$
|
(342
|
)
|
|
$
|
1,814
|
|
Reconciliations
of the income tax expense for continuing operations at the federal statutory
rate of 35% to the Company's effective rate for the three months ending December
31, 2008 and 2007 are as follows:
|
|
Three
Months Ended
|
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Tax
expense (benefit) at statutory rate
|
|
$
|
(496
|
)
|
|
$
|
1,869
|
|
Disqualifying
disposition of stock options
|
|
|
-
|
|
|
|
(129
|
)
|
Chargeback
Reimbursement
|
|
|
(61
|
)
|
|
|
(75
|
)
|
Foreign
tax rate differential
|
|
|
151
|
|
|
|
(36
|
)
|
State
taxes, net of federal benefit
|
|
|
22
|
|
|
|
26
|
|
Tax
rate change
|
|
|
-
|
|
|
|
122
|
|
Non-deductible
expenses and other, net
|
|
|
42
|
|
|
|
37
|
|
Income
tax provision (benefit)
|
|
$
|
(342
|
)
|
|
$
|
1,814
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
24%
|
|
|
|
34%
|
|
The
Company does not provide for U.S. income taxes on foreign subsidiaries’
undistributed earnings intended to be permanently reinvested in foreign
operations. It is not practicable to estimate the amount of
additional tax that might be payable should the earnings be remitted or should
the Company sell its stock in the subsidiaries. As of December 31,
2008, the Company has unremitted earnings from foreign subsidiaries of
approximately $25.5 million. The Company has determined that the
undistributed earnings of foreign subsidiaries, exclusive of those repatriated
under the American Jobs Creation Act, will be permanently
reinvested.
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 - 2006, Australia – 2004, Italy - 2004 and the Netherlands –
2002. In addition, in our other foreign jurisdictions, we are no longer subject
to tax examinations for periods preceding 2002. In April 2008, the
Company received a letter from the Internal Revenue Service notifying the
Company that the 2006 federal income tax return had been selected for
examination. The Internal Revenue Service review began in June 2008
and is currently ongoing.
At
December 31, 2008 the Company had no unrecognized tax benefits or
liabilities. In the event that the Company incurs interest and
penalties related to tax matters in the future, such interest and penalties will
be reported as income tax expense. The Company does not anticipate
that any tax contingencies which may arise in the next twelve months will have a
material impact on its financial position or results of operations.
NOTE
7.
COMMITMENTS AND
CONTINGENCIES
The
Company has letters of credit outstanding in the United States of approximately
$1.6 million as of December 31, 2008 and September 30, 2008, and foreign letters
of credit outstanding of $3.3 million and $5.1 million as of December 31, 2008
and September 30, 2008, 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 sufficient insurance coverage applicable to this claim
subject to a $1.0 million self-insured retention. However, an adverse
judgment against the Company, combined with a lack of insurance coverage, could
have a material adverse effect on the Company's financial condition, results of
operations 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, through acquisitions
that it has made, is identified as one of many potentially responsible parties
(“PRPs”) under CERCLA in pending claims relating to the Combe Fill South
Landfill (“CFS”) superfund site in Morris County, New Jersey and the Malone
Service Company (“MSC”) Superfund site in Texas City, Texas.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
With
regard to both of the CFS and MSC Superfund sites, the Environmental Protection
Agency (“EPA”) has indicated that the Company is responsible for only
de minimus
levels of wastes
contributed to those sites, and there are numerous other PRPs identified at each
of these sites that contributed more than 99% of the volume of waste at the
sites. The Company has executed a consent decree, subject to court
and EPA approval, to settle its liability related to CFS site, for an amount
that is immaterial to the Company’s financial condition, results of operations,
and/or cash flows. The Company expects to enter into an agreement to
resolve its liability in the MSC Superfund matter during the second quarter of
fiscal year 2009, and in previous fiscal quarters has accrued a liability in
regard to the anticipated settlement. The Company does not expect the
settlement related 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 December 31, 2008 and September 30, 2008 consisted of the
following.
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(Dollars
in Thousands)
|
|
Term
loan of ICO, Inc. under the terms of the KeyBank Credit
Agreement. Principal and interest paid quarterly through
September 2011. Interest rates as of December 31, 2008 and
September 30, 2008 were 4.1%.
|
|
$
|
9,167
|
|
|
$
|
10,000
|
|
Term
loan of ICO, Inc. under the terms of the KeyBank Credit
Agreement. Principal and interest paid quarterly through
September 2012. Interest rates as of December 31, 2008 and
September 30, 2008 were 5.2%.
|
|
|
4,167
|
|
|
|
4,444
|
|
Term
loan of the Company’s Italian subsidiary, collateralized by a mortgage
over the subsidiary’s real estate. Principal and interest paid quarterly
with a fixed interest rate of 5.2% through June 2016.
|
|
|
5,541
|
|
|
|
5,758
|
|
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 December 31, 2008, these loans had a
weighted average interest rate of 6.0% with maturity dates between
November 2009 and May 2021. The interest and principal payments
are made monthly.
|
|
|
7,995
|
|
|
|
8,064
|
|
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 December 31, 2008, these
loans had a weighted average interest rate of 7.1% with maturity dates
between January 2010 and March 2015. The interest and principal
payments are made monthly or quarterly.
|
|
|
9,966
|
|
|
|
12,057
|
|
Total
term debt
|
|
|
36,836
|
|
|
|
40,323
|
|
Less
current maturities of long-term debt
|
|
|
13,629
|
|
|
|
15,201
|
|
Long-term
debt less current maturities
|
|
$
|
23,207
|
|
|
$
|
25,122
|
|
The
Company maintains several lines of credit. The facilities are
collateralized by certain assets of the Company. The following table
presents the borrowing capacity, outstanding borrowings and net availability
under the various credit facilities in the Company’s domestic and foreign
operations.
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
|
As
of
|
|
|
As
of
|
|
|
As
of
|
|
|
|
December
31,
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(Dollars
in Millions)
|
|
Borrowing
Capacity
(a)
|
|
$
|
17.4
|
|
|
$
|
19.9
|
|
|
$
|
43.9
|
|
|
$
|
52.5
|
|
|
$
|
61.3
|
|
|
$
|
72.4
|
|
Outstanding
Borrowings
|
|
|
–
|
|
|
|
–
|
|
|
|
6.0
|
|
|
|
9.6
|
|
|
|
6.0
|
|
|
|
9.6
|
|
Net
availability
|
|
$
|
17.4
|
|
|
$
|
19.9
|
|
|
$
|
37.9
|
|
|
$
|
42.9
|
|
|
$
|
55.3
|
|
|
$
|
62.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Based
on the credit facility limits less outstanding letters of
credit.
|
|
At
December 31, 2008 and September 30, 2008, the Company’s Australian subsidiary
was in violation of a financial debt covenant under its credit facility with its
lender in Australia related to $2.7 million and $3.9 million of term debt,
respectively, and $0 and $2.1 million of short-term borrowings,
respectively. The Australian covenant that was not met related to a
metric of profitability compared to interest expense. The Company has classified
all of the Australian term debt as current as of December 31, 2008 and September
30, 2008.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally,
at December 31, 2008 and September 30, 2008, the Company’s New Zealand
subsidiary was in violation of a financial covenant related to short-term
borrowings of $1.7 million and $2.3 million, respectively, under its credit
facility with its lender in New Zealand. The Company obtained a
waiver from its New Zealand lender for this violation at September 30,
2008.
The
Company maintains a Credit Agreement (the “Credit Agreement”) with KeyBank
National Association and Wells Fargo Bank National Association (collectively
referred to herein as “KeyBank”), with a maturity date of October 2012.
The KeyBank Credit Agreement consists of a $30.0 million revolving credit
facility (the “Credit Facility”), a five year $15.0 million term loan (of which
$9.2 million remains outstanding as of December 31, 2008) and an additional $5.0
million five year term loan (of which $4.2 million remains outstanding as of
December 31, 2008). The Credit Agreement 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 Company’s current levels of domestic cash, receivables and
inventory. During fiscal year 2008, the Company entered into interest
rate swaps on its $9.2 million and $4.2 million term loans. The swaps
lock in the Company’s interest rate on (i) the $9.2 million term loan at 2.82%
plus the credit spread on the corresponding debt, and (ii) on the $4.2 million
term loan at 3.69% plus the credit spread on the corresponding debt. The
interest rates as of December 31, 2008 were 4.1% and 5.2%,
respectively.
The
Credit Agreement establishing the Credit Facility contains financial covenants,
including:
·
|
a
minimum tangible net worth requirement, as defined under the Credit
Agreement, of $50.0 million plus 50% of each fiscal quarter’s net
income;
|
·
|
a
leverage ratio, as defined under the Credit Agreement, not to exceed 3.0
to 1.0;
|
·
|
a
fixed charge coverage ratio of at least 1.1 to 1.0, defined as “Adjusted
EBITDA” (as defined under the Credit Agreement), plus rent expense divided
by fixed charges (defined as the sum of interest expense, income tax
expense paid, scheduled principal debt repayments in the prior four
quarters, capital distributions, capital expenditures for the purpose of
maintaining existing fixed assets and rent expense);
and
|
·
|
a
required level of profitability, as defined under the Credit Agreement to
not be less than zero for two consecutive fiscal
quarters.
|
In
addition, the Credit Agreement contains a number of limitations on the ability
of the Company and its restricted U.S. subsidiaries to (i) incur additional
indebtedness, (ii) pay dividends or redeem any Common Stock, (iii) incur liens
or other encumbrances on their assets, (iv) enter into transactions with
affiliates, (v) merge with or into any other entity or (vi) sell any of their
assets. Additionally, any “material adverse change” of the Company
could restrict the Company’s ability to borrow under its Credit Agreement and
could also be deemed an event of default under the Credit
Agreement. A “material adverse change” is defined as a change in the
financial or other condition, business, affairs or prospects of the Company, or
its properties and assets considered as an entirety that could reasonably be
expected to have a material adverse effect, as defined in the Credit Agreement,
on the Company.
In
addition, any “Change of Control” of the Company or its restricted U.S.
subsidiaries will constitute a default under the Credit
Agreement. “Change of Control,” as defined in the Credit Agreement,
means: (i) the acquisition of, or, if earlier, the shareholder or director
approval of the acquisition of, ownership or voting control, directly or
indirectly, beneficially or of record, by any person, entity, or group (within
the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as then in
effect), of shares representing more than 50% of the aggregate ordinary voting
power represented by the issued and outstanding Common Stock of the Company;
(ii) the occupation of a majority of the seats (other than vacant seats) on the
board of directors of the Company by individuals who were neither (A) nominated
by the Company’s board of directors nor (B) appointed by directors so nominated;
(iii) the occurrence of a change in control, or other similar provision, under
or with respect to any “Material Indebtedness Agreement” (as defined in the
Credit Agreement); or (iv) the failure of the Company to own directly or
indirectly, all of the outstanding equity interests of the Company’s Bayshore
Industrial L.P. and ICO Polymers North America, Inc. subsidiaries.
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 are collateralized by assets owned by the foreign subsidiaries
and also carry various financial covenants. These facilities either
have a remaining maturity of less than twelve months or do not have a stated
maturity date, or can be cancelled at the option of the lender. The
aggregate amounts of available borrowings under the foreign credit facilities,
based on the credit facility limits, current levels of accounts receivables, and
outstanding letters of credit and borrowings, were $37.9 million as of December
31, 2008 and $42.9 million as of September 30, 2008. Of the $37.9
million of total foreign credit availability as of December 31, 2008, $2.1
million related to our Australian subsidiary and $1.5 million related to our New
Zealand subsidiary.
The
Company is currently in compliance with all of its credit facilities except in
Australia and New Zealand as discussed above.
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. Contributions by employees to the Company’s domestic 401(k)
plan historically have been matched typically with ICO Common
Stock. 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. Participants contribute a portion of the cost
associated with the benefit plan. The plan provides retirement
benefits at the normal retirement age of 65. This plan is insured by
an insurance contract with Aegon Levensverzekering N.V. (“Aegon”), located in
The Hague, The Netherlands. The insurance contract guarantees the
funding of the Company’s future pension obligations for its defined benefit
pension plan. In accordance with the contract, Aegon will pay all
future obligations under the provisions of this plan, while the Company pays
annual insurance premiums. Payment of the insurance premiums by the
Company constitutes an unconditional and irrevocable transfer of the related
pension obligation from the Company to Aegon. Aegon has a Standard
and Poor’s financial strength rating of AA-. The premiums paid for
the insurance contracts are included in pension expense.
The
Company also maintains several termination plans, usually mandated by law,
within certain of its foreign subsidiaries that provide a one-time payment if a
covered employee is terminated.
The
defined contribution plan expense for the three months ended December
31, 2008 and 2007 was $0.3 million and $0.4 million,
respectively. The defined benefit plan pension expense for the three
months ended December 31, 2008 and 2007 was $0.1 million.
NOTE
10.
IMPAIRMENT,
RESTRUCTURING AND OTHER COSTS (INCOME)
During
the three months ended December 31, 2008, the Company recorded an insurance
reimbursement of $0.4 million related to financial losses resulting
from the loss of power at its Bayshore Industrial location as a result of
Hurricane Ike which hit the Gulf Coast area in the fourth quarter of fiscal year
2008.
On July
26, 2008, the Company’s facility in New Jersey suffered a fire which caused
damage to one of the facility’s buildings. The Company incurred $0.1
million of one-time expenses related to the fire offset by the recording of $0.2
million in insurance claims receivable during the three months ended December
31, 2008. During fiscal year 2008, the Company moved its New Jersey
operations to Allentown, Pennsylvania and the Company is no longer operating in
New Jersey.
During
the fourth quarter of fiscal year 2008, the Company decided to close its plant
in the United Arab Emirates, effective with the lease agreement expiring January
31, 2009. As a result of the closure, we recorded a $0.2 million
impairment related to property, plant and equipment and plant closure costs in
the three months ended December 31, 2008.
During
the first quarter of fiscal year 2007, the Company incurred $0.2 million of
costs related to the fire that occurred in the Company’s facility in New Jersey
on July 2, 2007.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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.
NOTE
12.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are
exposed to certain market risks as part of our ongoing business operations,
including debt obligations that carry variable interest rates, foreign currency
exchange risk, and resin price risk that could impact our financial condition,
results of operations and/or cash flows. We manage our exposure to these and
other market risks through regular operating and financing activities, including
the use of derivative financial instruments. Our intention is to use these
derivative financial instruments as risk management tools and not for trading
purposes or speculation.
As
mentioned above, the Company’s revenues and profitability are impacted by
changes in resin prices. The Company uses various resins (primarily
polyethylene) to manufacture its products. As the price of resin
increases or decreases, market prices for the Company’s products will also
generally increase or decrease. This will typically lead to higher or
lower average selling prices and will impact the Company’s operating income and
operating margin. The impact on operating income is due to a lag in
matching the change in raw material cost of goods sold and the change in product
sales prices. As of December 31, 2008 and September 30, 2008, the
Company had $17.0 million and $26.2 million of raw material inventory and $17.8
million and $25.9 million of finished goods inventory,
respectively. The Company attempts to minimize its exposure to resin
price changes by monitoring and carefully managing the quantity of its inventory
on hand and product sales prices.
As of
December 31, 2008, the Company had $70.4 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, however, enter into forward currency exchange contracts related to
both future purchase obligations and other forecasted transactions denominated
in non-functional currencies, primarily repayments of foreign currency
intercompany transactions. Certain of these forward currency exchange contracts
qualify as cash flow hedging instruments and are highly effective. In
accordance with SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities,
as amended and interpreted, the
Company recognizes the amount of hedge ineffectiveness for these hedging
instruments in the Consolidated Statement of Operations. The hedge
ineffectiveness on the Company’s designated cash flow hedging instruments was
not a significant amount for the three months ended December 31, 2008 and 2007,
respectively. The Company’s principal foreign currency exposures
relate to the Euro, British Pound, Australian Dollar, New Zealand Dollar,
Malaysian Ringgit and Brazilian Real. The Company’s forward contracts
have original maturities of one year or less. The following table includes the
total value of foreign exchange contracts outstanding for which hedge accounting
is being applied as of December 31, 2008 and September 30, 2008:
|
|
As
of
|
|
|
December
31,
|
|
September
30,
|
|
|
2008
|
|
2008
|
|
|
(Dollars
in Thousands)
|
Notional
value
|
|
$6.5
million
|
|
$8.3
million
|
Fair
market value
|
|
$0.3
million
|
|
$(0.5)
million
|
Maturity
Dates
|
|
January
2009
|
|
October
2008
|
|
|
through
April 2009
|
|
through
February 2009
|
When it
is determined that a derivative has ceased to be a highly effective hedge, or
that forecasted transactions have not occurred as specified in the hedge
documentation, hedge accounting is discontinued prospectively. As a
result, these derivatives are marked to market, with the resulting gains and
losses recognized in the Consolidated Statements of Operations.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Foreign Currency Intercompany
Accounts and Notes Receivable
. As mentioned above, from
time-to-time, the Company’s U.S. subsidiaries provide capital to the Company’s
foreign subsidiaries through U.S. Dollar denominated interest bearing promissory
notes. In addition, certain of the Company’s foreign subsidiaries
also provide other foreign subsidiaries with access to capital through foreign
currency denominated interest bearing promissory notes. Such funds
are generally used by the Company’s foreign subsidiaries to purchase capital
assets and/or for general working capital needs. The Company’s U.S.
subsidiaries also sell products to the Company’s foreign subsidiaries in U.S.
Dollars on trade credit terms. In addition, the Company’s foreign
subsidiaries sell products to other foreign subsidiaries denominated in foreign
currencies that may not be the functional currency of one or more of the foreign
subsidiaries that are parties to such intercompany agreements. These
intercompany debts are accounted for in the local functional currency of the
contracting foreign subsidiary, and are eliminated in the Company’s Consolidated
Balance Sheet. At December 31, 2008, the Company had the following
significant outstanding intercompany amounts as described above:
Country
of subsidiary with
|
|
Country
of subsidiary with
|
|
Amount
in US$ as of
|
|
Currency
denomination
|
intercompany
receivable
|
|
intercompany
payable
|
|
December
31, 2008
|
|
of
receivable
|
United
States
|
|
Australia
|
|
$7.4
million
|
|
United
States Dollar
|
Holland
|
|
United
Kingdom
|
|
$1.3
million
|
|
Great
Britain Pound
|
United
States
|
|
Malaysia
|
|
$1.2
million
|
|
United
States Dollar
|
Because
these intercompany lending transactions are denominated in various foreign
currencies and are subject to financial exposure from foreign exchange rate
movement from the date a loan is recorded to the date it is settled or revalued,
any appreciation or depreciation of the foreign currencies in which the
transactions are denominated could result in a gain or loss, respectively, to
the Consolidated Statement of Operations, subject to forward currency exchange
contracts that may be entered into. To mitigate this risk, the Company sometimes
enters into foreign currency exchange contracts. The following table
includes the total value of foreign exchange contracts outstanding for which
hedge accounting is not being applied as of December 31, 2008 and September 30,
2008.
|
|
As
of
|
|
|
December
31,
|
|
September
30,
|
|
|
2008
|
|
2008
|
|
|
(Dollars
in Thousands)
|
Notional
value
|
|
$6.0
million
|
|
$5.4 million
|
Fair
market value
|
|
$0.1
million
|
|
$(0.8)
million
|
Maturity
Dates
|
|
January
2009
|
|
October
2008
|
|
|
through
March 2009
|
|
through
February 2009
|
The
Company also marks to market the underlying transactions related to these
foreign exchange contracts which offsets the fluctuation in the fair market
value of the derivative instruments. As of December 31, 2008, the net
unrealized gain or loss on these derivative instruments and their underlyings
was insignificant.
Interest Rate Swaps.
In some
circumstances, the Company enters into interest rate swap agreements that
mitigate the exposure to interest rate risk by converting variable-rate debt to
a fixed rate. The interest rate swap and instrument being hedged are marked to
market in the balance sheet.
During
fiscal year 2008, the Company entered into a Pay-Fixed / Receive Variable
Interest Rate swap on its term loans in the U.S. with KeyBank National
Association and Wells Fargo Bank, National Association which currently have $9.2
million and $4.2 million outstanding. The swaps lock in the Company’s
interest rate on (i) the $9.2 million term loan at 2.82% plus the credit spread
on the corresponding debt, and (ii) on the $4.2 million term loan at 3.69% plus
the credit spread on the corresponding debt. The Company’s risk
management objective with respect to these interest rate swaps is to hedge the
variability to changes in cash flows attributable to interest rate risk caused
by changes in the benchmark interest rate (i.e. LIBOR), related to $13.4 million
of the Company’s variable-rate term loan debt.
As of
December 31, 2008, the Company calculated the estimated fair value of the $13.4
million notional swaps identified above to be a liability of $0.4
million. The fair value is an estimate of the net amount that the
Company would pay on December 31, 2008 if the agreements were transferred to
another party or cancelled by the Company.
Please
refer to Note 14,
Fair Value
Measurements of Assets and Liabilities,
for additional disclosures
related to the Company’s forward foreign exchange contracts and interest rate
swaps.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
13.
SEGMENT
INFORMATION
Our
management structure and reportable segments are organized into five business
segments defined as ICO Polymers North America, ICO Brazil, Bayshore Industrial,
ICO Europe and ICO Asia Pacific. This organization is consistent with
the way information is reviewed and decisions are made by executive
management.
ICO
Polymers North America, ICO Brazil, ICO Europe and ICO Asia Pacific primarily
produce competitively priced 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 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.
Three
Months Ended
December
31, 2008
|
|
Revenue
From
External
Customers
|
|
|
Inter-
Segment
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
Depreciation
and
Amortization
|
|
|
Impairment,
Restructuring
and Other
Costs/
(Income)
(a)
|
|
Expenditures
for
Additions
to
Long-Lived
Assets
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
$
|
34,762
|
|
|
$
|
130
|
|
|
$
|
(149
|
)
|
|
$
|
452
|
|
|
|
–
|
|
|
$
|
227
|
|
Bayshore
Industrial
|
|
|
18,330
|
|
|
|
105
|
|
|
|
1,718
|
|
|
|
411
|
|
|
|
(382
|
)
|
|
|
39
|
|
ICO
Asia Pacific
|
|
|
14,481
|
|
|
|
–
|
|
|
|
(1,287
|
)
|
|
|
329
|
|
|
|
168
|
|
|
|
71
|
|
ICO
Polymers North America
|
|
|
8,889
|
|
|
|
897
|
|
|
|
582
|
|
|
|
434
|
|
|
|
(79
|
)
|
|
|
961
|
|
ICO
Brazil
|
|
|
2,896
|
|
|
|
–
|
|
|
|
(58
|
)
|
|
|
42
|
|
|
|
–
|
|
|
|
64
|
|
Total
from Reportable Segments
|
|
|
79,358
|
|
|
|
1,132
|
|
|
|
806
|
|
|
|
1,668
|
|
|
|
(293
|
)
|
|
|
1,362
|
|
Unallocated
General Corporate expense
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,254
|
)
|
|
|
45
|
|
|
|
–
|
|
|
|
2
|
|
Total
|
|
$
|
79,358
|
|
|
$
|
1,132
|
|
|
$
|
(448
|
)
|
|
$
|
1,713
|
|
|
$
|
(293
|
)
|
|
$
|
1,364
|
|
Three
Months Ended
December
31, 2007
|
|
Revenue
From
External
Customers
|
|
|
Inter-
Segment
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
Depreciation
and
Amortization
|
|
|
Impairment,
Restructuring
and Other
Costs
(a)
|
|
|
Expenditures
for
Additions
to
Long-Lived
Assets
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
$
|
46,313
|
|
|
$
|
157
|
|
|
$
|
2,998
|
|
|
$
|
567
|
|
|
|
–
|
|
|
$
|
300
|
|
Bayshore
Industrial
|
|
|
31,777
|
|
|
|
6
|
|
|
|
3,928
|
|
|
|
385
|
|
|
|
–
|
|
|
|
261
|
|
ICO
Asia Pacific
|
|
|
17,945
|
|
|
|
–
|
|
|
|
862
|
|
|
|
349
|
|
|
|
–
|
|
|
|
1,033
|
|
ICO
Polymers North America
|
|
|
10,331
|
|
|
|
991
|
|
|
|
446
|
|
|
|
389
|
|
|
|
198
|
|
|
|
839
|
|
ICO
Brazil
|
|
|
4,499
|
|
|
|
–
|
|
|
|
137
|
|
|
|
66
|
|
|
|
–
|
|
|
|
58
|
|
Total
from Reportable Segments
|
|
|
110,865
|
|
|
|
1,154
|
|
|
|
8,371
|
|
|
|
1,756
|
|
|
|
198
|
|
|
|
2,491
|
|
Unallocated
General Corporate expense
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,875
|
)
|
|
|
39
|
|
|
|
–
|
|
|
|
14
|
|
Total
|
|
$
|
110,865
|
|
|
$
|
1,154
|
|
|
$
|
6,496
|
|
|
$
|
1,795
|
|
|
$
|
198
|
|
|
$
|
2,505
|
|
Total
Assets
|
|
As
of
December
31,
2008
(c)
|
|
|
As
of
September
30,
2008
(c)
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
$
|
78,036
|
|
|
$
|
89,910
|
|
Bayshore
Industrial
|
|
|
32,080
|
|
|
|
33,840
|
|
ICO
Asia Pacific
|
|
|
41,522
|
|
|
|
55,593
|
|
ICO
Polymers North America
|
|
|
27,574
|
|
|
|
30,050
|
|
ICO
Brazil
|
|
|
5,275
|
|
|
|
8,624
|
|
Total
from Reportable Segments
|
|
|
184,487
|
|
|
|
218,017
|
|
Other
(b)
|
|
|
4,054
|
|
|
|
3,079
|
|
Total
|
|
$
|
188,541
|
|
|
$
|
221,096
|
|
(a)
Impairment, restructuring and other costs are included in operating income
(loss).
(b)
Consists of unallocated Corporate assets.
(c)
Includes goodwill of $3.7 million and $4.2 million for ICO Asia Pacific as of
December 31, 2008 and September 30, 2008, respectively, and $4.5 million for
Bayshore Industrial as of December 31, 2008 and September 30, 2008.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A
reconciliation of total reportable segment operating income to income from
continuing operations before income taxes is as follows:
|
|
Three
Months Ended
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Reportable
segments operating income
|
|
$
|
806
|
|
|
$
|
8,371
|
|
Unallocated
general corporate expense
|
|
|
(1,254
|
)
|
|
|
(1,875
|
)
|
Consolidated
operating income (loss)
|
|
|
(448
|
)
|
|
|
6,496
|
|
Other
(expense):
|
|
|
|
|
|
|
|
|
Interest expense,
net
|
|
|
(639
|
)
|
|
|
(1,023
|
)
|
Other
|
|
|
(331
|
)
|
|
|
(133
|
)
|
Income
(loss) from continuing operations before income taxes
|
|
$
|
(1,418
|
)
|
|
$
|
5,340
|
|
NOTE
14.
FAIR
VALUE MEASUREMENTS OF ASSETS AND LIABILITIES
In
September 2006, FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS 157”), which clarified the definition of fair value, established a
framework and a hierarchy based on the level of observability and judgment
associated with inputs used in measuring fair value, and expanded disclosures
about fair value measurements. SFAS 157 applies whenever other accounting
pronouncements require or permit assets or liabilities to be measured at fair
value but does not require any new fair value measurements.
SFAS 157
establishes a three-level valuation hierarchy for disclosure of fair value
measurements. The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement date. The three
levels are defined as follows:
·
|
Level
1 – Fair value based on quoted prices in active markets for identical
assets or liabilities.
|
·
|
Level
2 – Fair value based on significant directly observable data (other than
Level 1 quoted prices) or significant indirectly observable data through
corroboration with observable market data. Inputs would normally be (i)
quoted prices in active markets for similar assets or liabilities, (ii)
quoted prices in inactive markets for identical or similar assets or
liabilities or (iii) information derived from or corroborated by
observable market data.
|
·
|
Level
3 – Fair value based on prices or valuation techniques that require
significant unobservable data inputs. Inputs would normally be a reporting
entity’s own data and judgments about assumptions that market participants
would use in pricing the asset or
liability.
|
An
asset’s or liability’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement.
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-1,
Application of FASB Statement No.
157 to FASB Statement 13 and Other
Accounting Pronouncements that
Address Fair Value Measurements for Purposes of
Lease Classification or Measurement
under Statement 13
(“FSP 157-1”) and FSP No. FAS 157-2,
Effective Date of FASB Statement No.
157
(“FSP 157-2”). FSP 157-1 amends SFAS 157 to exclude SFAS No. 13,
Accounting for Leases
and its related accounting pronouncements that address leasing
transactions while FSP 157-2 defers the effective date of SFAS 157 to fiscal
years beginning after November 15, 2008 and interim periods within those fiscal
years for non-financial assets and liabilities, except those that are recognized
or disclosed in the financial statements at fair value at least
annually.
The
Company has elected to utilize this deferral and has only partially applied SFAS
157 (to financial assets and liabilities measured at fair value on a recurring
basis). Accordingly, we will apply SFAS 157 to our nonfinancial assets and
liabilities, which we disclose or recognize at fair value on a nonrecurring
basis, such as goodwill impairment and other assets and liabilities, in the
first quarter of fiscal year 2010. We do not expect that the application of SFAS
157 to our nonfinancial assets and liabilities, which we disclose or recognize
at fair value on a nonrecurring basis, will have a significant impact on our
consolidated financial position, results of operations or cash
flows.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis at December 31, 2008:
|
|
|
|
|
Fair Value Measurement
Using:
|
|
|
|
Total
|
|
|
Quoted
Price in active markets
|
|
|
Significant
Other
|
|
|
Significant
|
|
|
|
Fair
|
|
|
for
Identical Assets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
Value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
|
(In
Thousands)
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
Exchange Contracts
|
|
$
|
336
|
|
|
|
-
|
|
|
$
|
336
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
Exchange Contracts
|
|
|
768
|
|
|
|
-
|
|
|
|
768
|
|
|
|
-
|
|
Interest
Rate Swaps
|
|
|
362
|
|
|
|
-
|
|
|
|
362
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
“Forward
exchange contracts” represent net unrealized gains or losses on foreign currency
hedges, which is the net difference between (i) the amount in U.S. Dollars, or
local currency translated into U.S. Dollars, to be received or paid at the
contracts’ settlement date and (ii) the U.S. dollar value of the foreign
currency to be sold or purchased at the current forward exchange
rate. “Interest rate swaps” represent the net unrealized gains or
losses on Variable Interest Rate swaps related to our term loans in the United
States. For additional disclosures required by SFAS 157 for these
assets, see Note 12,
“Quantitative and Qualitative
Disclosures About Market Risk”
, to our condensed consolidated financial
statements.
I
TEM 2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Introduction
How
We Generate Our Revenues
Our
revenues are primarily derived from (1) product sales and (2) toll processing
services in the polymer processing industry. “Toll processing services” or
“tolling” refers to processing customer-owned material for a service
fee. Product sales result from the sale of finished products to
the customer such as polymer powders, proprietary concentrates, masterbatches
and specialty compounds. The creation of such products begins with the purchase
of resin (primarily polyethylene) and other raw materials which
are further processed within our operating facilities. The
further processing of raw materials may involve size reduction services,
compounding services, and the production of
masterbatches. Compounding services involve melt blending various
resins and additives to produce a homogeneous material. Compounding
services include the manufacture and sale of
concentrates. Concentrates are polymers loaded with high levels of
chemical and organic additives that are melt blended into base resins to give
plastic films and other finished products desired physical
properties. Masterbatches are concentrates that incorporate all
additives a customer needs into a single package for a particular product
manufacturing process, as opposed to requiring numerous
packages. After processing, we sell our products to our
customers. Our products are used by our customers to manufacture
finished goods such as household items (e.g. toys, household furniture and trash
receptacles), automobile parts, agricultural products (such as fertilizer and
water tanks), paints, waxes, and metal and fabric coatings.
We are
also a major supplier of concentrates to the plastic film industry in North
America. These plastic films are predominantly used to produce
plastic packaging. The concentrates we manufacture are melt-blended
into base resins to produce plastic film having the desired
characteristics. We sell concentrates to both resin producers and
businesses that manufacture plastic films.
Toll
processing services, which may involve size reduction, compounding, and other
processing services, are performed on customer-owned material for a
fee. We consider our toll processing services to be completed when we
have processed the customer-owned material and no further services remain to be
performed. Pursuant to the service arrangements with our customers,
we are entitled to collect our agreed upon toll processing fee upon completion
of our toll processing services. Shipping of the product to and from
our facilities is determined by and paid for by the customer. The
revenue we recognize for toll processing services is net of the value of our
customer’s product as we do not take ownership of our customer’s material during
any stage of the process.
Demand
for our products and services tends to be driven by overall economic factors
and, particularly, consumer spending. Accordingly, the recent
downturn in the U.S. and global economies that has escalated over the past few
months has had an impact on the demand for our products and services. The
trend of applicable resin prices also impacts customer demand. As
resin prices fall, as they have dramatically in recent months, customers tend to
reduce their inventories and, therefore, reduce their need for the Company’s
products and services as customers choose to purchase resin upon demand rather
than building large levels of inventory. Conversely, as resin prices
are rising, customers often increase their inventories and accelerate their
purchases of products and services from the Company to help control their raw
material costs. Historically, resin price changes have generally
followed the trend of oil and natural gas prices, and we believe that this trend
will continue in the future. Additionally, demand for our products and
services tends to be seasonal, with customer demand historically being weakest
during our first fiscal quarter due to the holiday season and also due to
property taxes levied in the U.S. on customers’ inventories on January
1.
Cost
of Sales and Services
Cost of
sales and services is primarily comprised of purchased 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 (“SG&A”) consist primarily of
compensation and related benefits paid to the sales and marketing, executive
management, information technology, accounting, legal, human resources and other
administrative employees of the Company, other sales and marketing expenses,
communications costs, systems costs, insurance costs, consulting costs and legal
and professional accounting fees.
How
We Manage Our Operations
Our
management structure and reportable segments are organized into five business
segments defined as ICO Polymers North America, ICO Brazil, Bayshore Industrial,
ICO Europe and ICO Asia Pacific. This organization is consistent with
the way information is reviewed and decisions are made by executive
management.
The ICO
Polymers North America, ICO Brazil, ICO Europe and ICO Asia Pacific segments
primarily produce competitively priced polymer powders for the rotational
molding industry and other specialty markets, for powdered polymers, including
masterbatch and concentrate producers, users of polymer-based metal coatings,
and non-woven textile markets. Additionally, the above-referenced
four segments provide specialty size reduction services on a tolling
basis. The Bayshore Industrial segment designs and produces
proprietary concentrates, masterbatches and specialty compounds, primarily for
the plastic film industry in North America and in selected export markets. Our
ICO Europe segment includes operations in France, Holland, Italy and the
U.K. Our ICO Asia Pacific segment includes operations in Australia,
Malaysia, New Zealand and the United Arab Emirates.
Results
of Operations
Three
months ended December 31, 2008 compared to the three months ended December 31,
2007
Executive
Summary
During
the first quarter of fiscal year 2009, we generated revenues of $79.4 million, a
decrease of $31.5 million compared to the first quarter of fiscal year 2008. The
global economic downturn resulted in lower demand in all of our segments,
causing a significant decrease in revenues. Also during the quarter resin prices
fell dramatically. This downward resin price trend typically leads
our customers to reduce their level of demand for our products and services as
they reduce their inventory levels. As a result of the global
economic downturn and the dramatic reduction in resin prices, our total volumes
sold decreased 21%. Operating income decreased 107%, or $6.9 million to a loss
of $(0.4) million. This was a result of the decrease in revenues and
a lower gross margin (12.7% for the three months ended December 31, 2008
compared to 17.2% for the three months ended December 31,
2007). During the first quarter of fiscal year 2009, we experienced
an unprecedented decline in resin prices which followed historically high resin
prices. This dramatic and unfavorable change in resin price
environment, led to a decline in our profitability. During the first
quarter of fiscal year 2009 we reduced the carrying cost of our inventory by 33%
to address these changing market conditions. After the end of the
first fiscal quarter, we believe that resin prices have stabilized.
|
|
Summary
Financial Information
|
|
|
|
Three
Months Ended
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
%
|
|
|
|
(Dollars
in Thousands)
|
|
Total
revenues
|
|
$
|
79,358
|
|
|
$
|
110,865
|
|
|
$
|
(31,507
|
)
|
|
|
(28%
|
)
|
SG&A
|
|
|
9,138
|
|
|
|
10,603
|
|
|
|
(1,465
|
)
|
|
|
(14%
|
)
|
Operating
income
|
|
|
(448
|
)
|
|
|
6,496
|
|
|
|
(6,944
|
)
|
|
|
(107%
|
)
|
Income
from continuing operations
|
|
|
(1,076
|
)
|
|
|
3,526
|
|
|
|
(4,602
|
)
|
|
|
(131%
|
)
|
Net
income
|
|
$
|
(1,076
|
)
|
|
$
|
3,510
|
|
|
$
|
(4,586
|
)
|
|
|
(131%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes
(1)
|
|
|
64,600
|
|
|
|
81,900
|
|
|
|
(17,300
|
)
|
|
|
(21%
|
)
|
Gross
margin
(2)
|
|
|
12.7%
|
|
|
|
17.2%
|
|
|
|
(4.5%
|
)
|
|
|
|
|
SG&A
as a percentage of revenue
|
|
|
11.6%
|
|
|
|
9.6%
|
|
|
|
2.0%
|
|
|
|
|
|
Operating
income as a percentage of revenue
|
|
|
(0.6%
|
)
|
|
|
5.9%
|
|
|
|
(6.5%
|
)
|
|
|
|
|
(1)
“Volumes” refers to total metric tons of materials for which the
Company’s customers are invoiced, either in connection with product sales
or
|
the
performance of toll processing services.
|
(2)
Gross margin is calculated as the difference between revenues and
cost of sales and services excluding depreciation, divided by
revenues.
|
Revenues.
Total
revenues decreased year-over-year by $31.5 million or 28% to $79.4
million. The decrease in revenues was a result of the changes in
volumes sold by us (“volume”), changes in selling prices and mix of finished
products sold or services performed (“price/product mix”) and, finally, the
impact from changes in foreign currencies relative to the U.S. Dollar
(“translation effect”). Due to the variance in average
prices between our product sales revenues and our toll processing revenues due
to the raw material component embedded in the product sales average price, we
compute the volume impacts and the price/product mix impacts separately for each
of those components and then combine them in the table that
follows.
The
components of the decrease in revenue are:
|
Increase/(Decrease)
|
|
|
%
|
|
$
|
|
|
(Dollars
in Thousands)
|
|
Volume
|
(16%)
|
|
($18,307)
|
|
Price/product
mix
|
(4%)
|
|
(4,000)
|
|
Translation
effect
|
(8%)
|
|
(9,200)
|
|
Total
change in revenue
|
(28%)
|
|
$(31,507)
|
|
As
mentioned above, the Company’s revenues and profitability are impacted by the
change in raw material prices (“resin” prices) as well as product sales
mix. As the price of resin increases or decreases, market prices for
our products will also generally increase or decrease. This will
typically lead to higher or lower average selling prices. Although
average resin prices were lower in the first quarter of fiscal year 2009
compared to the first quarter of fiscal year 2008, our average selling prices
tended to be slightly higher than the previous year’s first quarter due to the
spike in resin prices in the fourth quarter of fiscal year 2008 and the rapid
and dramatic decline in resin prices in the first quarter of fiscal year
2009. An unfavorable change in product mix at our Bayshore Industrial
facility caused a decline in revenues. As a result of the slightly
higher average prices and the unfavorable product mix change at our Bayshore
Industrial facility, the revenue impact from changes in price and product mix
led to a reduction in revenues of $4.0 million. Although we
participate in numerous markets, the graph below illustrates the general trend
in the prices of resin we purchased.
Total
volumes sold decreased 17,300 metric tons, or 21%, during the first quarter of
fiscal year 2009 compared to the first quarter of the previous fiscal
year. This decrease in volumes sold led to a decrease in revenues of
$18.3 million. All segments of the Company experienced a decrease in volumes,
primarily a result of the slowing global economy and the downward trend in resin
prices.
In
addition, the translation effect of changes in foreign currencies relative to
the U.S. Dollar caused a decrease in revenues of $9.2 million due primarily to
weaker European and Australian currencies compared to the U.S.
Dollar.
A
comparison of revenues by segment and discussion of the significant segment
changes is provided below.
Revenues
by segment for the three months ended December 31, 2008 compared to the three
months ended
December
31, 2007:
|
|
Three
Months Ended
December
31
|
|
|
|
2008
|
|
|
%
of Total
|
|
|
2007
|
|
|
%
of Total
|
|
|
Change
|
|
|
%
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
$
|
34,762
|
|
|
|
44%
|
|
|
$
|
46,313
|
|
|
|
42%
|
|
|
$
|
(11,551
|
)
|
|
|
(25%
|
)
|
Bayshore
Industrial
|
|
|
18,330
|
|
|
|
23%
|
|
|
|
31,777
|
|
|
|
29%
|
|
|
|
(13,447
|
)
|
|
|
(42%
|
)
|
ICO
Asia Pacific
|
|
|
14,481
|
|
|
|
18%
|
|
|
|
17,945
|
|
|
|
16%
|
|
|
|
(3,464
|
)
|
|
|
(19%
|
)
|
ICO
Polymers North America
|
|
|
8,889
|
|
|
|
11%
|
|
|
|
10,331
|
|
|
|
9%
|
|
|
|
(1,442
|
)
|
|
|
(14%
|
)
|
ICO
Brazil
|
|
|
2,896
|
|
|
|
4%
|
|
|
|
4,499
|
|
|
|
4%
|
|
|
|
(1,603
|
)
|
|
|
(36%
|
)
|
Total
|
|
$
|
79,358
|
|
|
|
100%
|
|
|
$
|
110,865
|
|
|
|
100%
|
|
|
$
|
(31,507
|
)
|
|
|
(28%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008 Revenues by Segment
December 31, 2007
Revenues by Segment
ICO
Europe’s revenues decreased $11.6 million or 25% year-over-year due to lower
volumes sold of 20% which negatively impacted revenues by $7.1 million. The
lower volumes were caused by lower customer demand due to a decline in the
global economic environment and the downward trend in resin
prices. Additionally, the translation effect of weaker European
currencies compared to the U.S. Dollar caused a decrease in revenues of $5.0
million.
Bayshore
Industrial’s revenues decreased $13.4 million or 42% as a result of a lower
volumes sold which negatively impacted revenues by $7.5 million as well as an
unfavorable change in product mix and lower average prices which decreased
revenues $5.9 million.
ICO Asia
Pacific’s revenues decreased $3.5 million or 19% primarily due to the $3.4
million translation effect of weaker foreign currencies of that region
(Australian Dollar, New Zealand Dollar and Malaysian Ringgit) compared to the
U.S. Dollar. An increase in product sales volumes led to an increase
in revenues of $1.2 million while changes in product mix led to a $0.8 million
decline in revenues.
ICO
Polymers North America’s revenues decreased $1.4 million or 14% due to lower
volumes sold ($2.8 million impact), offset by the positive impact of $1.4
million resulting from favorable changes in product mix.
ICO
Brazil’s revenues decreased $1.6 million or 36% due to lower volumes sold which
negatively impacted revenues by $1.1 million, and also due to the negative
effect of the weaker Brazilian currency compared to the U.S. Dollar, which
negatively impacted revenues by $0.8 million.
Gross
Margin.
Consolidated gross margins (calculated as the
difference between revenues and cost of sales and services, divided by revenues)
decreased from 17.2% to 12.7%. This decline was primarily due to the lower
volumes sold and due to lower feedstock margins (the difference between product
sales revenues and related cost of raw materials sold). The decline
in volumes sold was primarily caused by the global recession and the dramatic
downward trend in resin prices in the first quarter of fiscal year 2009, both of
which led to reduced customer demand. The decline in feedstock
margins was primarily caused by the unfavorable resin price
environment. The unfavorable resin price environment was caused by
resin prices reaching historically high levels in the fourth quarter of fiscal
year 2008, followed by the rapid and dramatic fall in resin prices in the first
quarter of fiscal year 2009. This combination led to a reduction in
our feedstock margins. These negative impacts were partially offset
by lower operating expenses, primarily payroll and utility costs.
Selling, General and
Administrative
. SG&A decreased $1.5 million or 14%. The
decrease in SG&A was due to the effect of weaker foreign currencies related
to the U.S. Dollar, which decreased SG&A by $0.8 million, lower external
professional fees of $0.7 million and lower compensation and benefits cost of
$0.3 million. The declines were partially offset by an increase in
bad debt expense of $0.6 million. As a percentage of revenues,
SG&A increased to 11.6% of revenue during the three months ended December
31, 2008 compared to 9.6% for the same quarter last year due to lower
revenues.
Impairment, restructuring and other
costs (income)
. During the three months ended December 31,
2008, the Company recorded an insurance reimbursement of $0.4 million related to
financial losses resulting from the loss of power experienced at its Bayshore
Industrial location as a result of Hurricane Ike which hit the Gulf Coast area
in the fourth quarter of fiscal year 2008.
On July
26, 2008, the Company’s facility in New Jersey suffered a fire which caused
damage to one of the facility’s buildings. The Company incurred $0.1
million of one-time expenses related to the fire offset by the recording of $0.2
million in insurance claims receivable during the three months ended December
31, 2008. During fiscal year 2008, the Company moved its New Jersey
operations to Allentown, Pennsylvania and is no longer operating in New
Jersey.
During
the fourth quarter of fiscal year 2008, the Company decided to close its plant
in the United Arab Emirates, effective with the expiration of its lease
agreement on January 31, 2009. As a result of the closure, we
recorded a $0.2 million impairment related to property, plant and equipment and
plant closure costs in the three months ended December 31, 2008.
During
the first quarter of fiscal year 2007, the Company incurred $0.2 million of
costs related to the fire that occurred in the Company’s facility in New Jersey
on July 2, 2007.
Operating
income.
As compared with the same quarter in the previous
fiscal year, consolidated operating income decreased $6.9 million or 107% during
the three months ended December 31, 2008 to $(0.4) million. The
decrease was primarily due to the decrease in volumes sold and lower feedstock
margins as a result of the unfavorable resin pricing environment partially
offset by lower operating costs and lower SG&A.
Operating
income (loss) by segment and discussion of significant segment changes
follows.
Operating
income (loss)
|
|
Three
Months Ended
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
%
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
$
|
(149
|
)
|
|
$
|
2,998
|
|
|
$
|
(3,147
|
)
|
|
|
(105%
|
)
|
Bayshore
Industrial
|
|
|
1,718
|
|
|
|
3,928
|
|
|
|
(2,210
|
)
|
|
|
(56%
|
)
|
ICO
Asia Pacific
|
|
|
(1,287
|
)
|
|
|
862
|
|
|
|
(2,149
|
)
|
|
|
(249%
|
)
|
ICO
Polymers North America
|
|
|
582
|
|
|
|
446
|
|
|
|
136
|
|
|
|
30%
|
|
ICO
Brazil
|
|
|
(58
|
)
|
|
|
137
|
|
|
|
(195
|
)
|
|
|
(142%
|
)
|
Total
reportable segments
|
|
|
806
|
|
|
|
8,371
|
|
|
|
(7,565
|
)
|
|
|
(90%
|
)
|
Unallocated
general corporate expense
|
|
|
(1,254
|
)
|
|
|
(1,875
|
)
|
|
|
621
|
|
|
|
(33%
|
)
|
Consolidated
|
|
$
|
(448
|
)
|
|
$
|
6,496
|
|
|
$
|
(6,944
|
)
|
|
|
(107%
|
)
|
Operating
income (loss) as a percentage of revenues
|
|
Three
Months Ended
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(Dollars
in Thousands)
|
|
ICO
Europe
|
|
|
0%
|
|
|
|
6%
|
|
|
|
(6%
|
)
|
Bayshore
Industrial
|
|
|
9%
|
|
|
|
12%
|
|
|
|
(3%
|
)
|
ICO
Asia Pacific
|
|
|
(9%
|
)
|
|
|
5%
|
|
|
|
(14%
|
)
|
ICO
Polymers North America
|
|
|
7%
|
|
|
|
4%
|
|
|
|
3%
|
|
ICO
Brazil
|
|
|
(2%
|
)
|
|
|
3%
|
|
|
|
(5%
|
)
|
Consolidated
|
|
|
(1%
|
)
|
|
|
6%
|
|
|
|
(7%
|
)
|
ICO
Europe’s operating income decreased $3.1 million or 105% due to a decrease in
volumes sold and to a lesser extent the negative impact from feedstock margins
as a result of the unfavorable resin price environment.
ICO Asia
Pacific’s operating income declined year-over-year from income of $0.9 million
to a loss of $1.3 million. This decline in operating income was
primarily a result of reduced feedstock margins due to the unfavorable resin
price environment. This decline was partially offset by reduced
operating expenses. The company incurred an operating loss in the
three months ended December 31, 2008 of $0.7 million related to its facility in
the United Arab Emirates.
Bayshore
Industrial’s operating income decreased $2.2 million or 56%, primarily as a
result of a decrease in volumes sold due to lower customer demand.
ICO
Polymers North America’s operating income increased $0.1 million or 30%
primarily due to lower impairment, restructuring and other costs of $0.3 million
and lower operating expenses of $0.5 million during the three months ended
December 31, 2008 as compared to the same three months ended December 31,
2007. These benefits were partially offset by a reduction in volumes
sold which reduced operating income by approximately $0.7 million.
ICO
Brazil’s operating income declined from income of $0.1 million to a loss of $0.1
million primarily caused by the reduction in volumes sold due to lower customer
demand.
Unallocated
general corporate expense decreased $0.6 million or 33% due to lower external
professional fees.
Interest Expense,
Net.
For the three months ended December 31, 2008, net
interest expense decreased $0.4 million or 38% year-over-year primarily as a
result of a decrease in borrowings.
Income Taxes (from continuing
operations).
The Company’s effective income tax rates were a
benefit of 24% and a provision of 34% during the three months ended December 31,
2008 and 2007. The Company’s effective income tax rate of 24% during
the three months ended December 31, 2008 was primarily due to the mix of pre-tax
income and loss in the Company’s various tax jurisdictions.
Net Income.
For
the three months ended December 31, 2008, the Company incurred a net loss of
$1.1 million compared to net income of $3.5 million for the comparable period in
fiscal year 2008, due to the above factors.
Foreign Currency
Translation
. The fluctuations of the U.S Dollar against the
Euro, British Pound, New Zealand Dollar, Brazilian Real, Malaysian Ringgit and
the Australian Dollar have impacted the translation of revenues and expenses of
our international operations. The table below summarizes the impact
of changing exchange rates for the above currencies for the three months ended
December 31, 2008.
|
|
Three
Months Ended
|
|
|
December
31, 2008
|
Net
revenues
|
|
$(9.2)
million
|
|
Operating
income
|
|
$0.3
million
|
|
Pre-tax
income
|
|
$0.4
million
|
|
Net
income
|
|
$0.2
million
|
|
Recently
Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
(“SFAS
141 (R)”) and SFAS 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 us on October 1, 2009. As
SFAS No. 141 (R) will apply to future acquisitions, it is not possible at this
time for us to determine the impact of adopting this standard.
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. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. We will be
required to adopt this standard in the interim period ending March 31,
2009. SFAS 161 encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. We are currently
evaluating the impact of adopting this new standard.
In April
2008, the FASB issued FSP FAS 142-3,
Determination of the Useful Life of
Intangible Assets
("FSP FAS 142-3"). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible
Assets
("SFAS 142"). The intent of FSP FAS 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS 141(R) and other applicable accounting literature. FSP FAS
142-3 is effective for financial statements issued for fiscal years beginning
after December 15, 2008. We do not anticipate that the adoption of FSP FAS 142-3
will have a material impact on our results of operations or financial
condition.
In June
2008, the FASB issued FSP EITF 03-6-1,
Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
("FSP EITF 03-6-1"). This FSP addresses whether instruments granted
in share-based payment transactions are participating securities prior to
vesting and, therefore, need to be included in computing earnings per share
under the two-class method described in SFAS No. 128,
Earnings Per Share
.
This FSP will be effective for the Company beginning with the first
quarter of fiscal year 2010 and will be applied retrospectively. We
are currently evaluating the impact of adopting this new standard.
In
December 2008, the FASB issued FSP FAS 132 (R)-1,
Employers’ Disclosures about
Post-retirement Benefit Plan Assets
, which amends SFAS No. 132,
Employers’ Disclosures about
Pensions and Other Postretirement Benefits
. This FSP provides
guidance on an employer’s disclosures about plan assets of a defined benefit
pension or other postretirement plan. The objectives of these
disclosures are to provide users of financial statements with an understanding
of:
a.
|
how
investment allocation decisions are made, including the factors that are
pertinent to an understanding of investment policies and
strategies;
|
b.
|
the
major categories of plan assets;
|
c.
|
the
inputs and valuation techniques used to measure the fair value of plan
assets;
|
d.
|
the
effect of fair value measurements using significant unobservable inputs
(Level 3) on changes in plan assets for the period;
and
|
e.
|
significant
concentrations of risk within plan
assets.
|
The
disclosures about plan assets required by this FSP shall be provided for fiscal
years ending after December 15, 2009. We are currently evaluating the
impact of adopting this new standard.
Liquidity
and Capital Resources
The
Company’s major source of cash inflows is generally net income. The
primary uses of cash for other than operations are generally capital
expenditures, debt service and share repurchases. 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.
The
following are considered by management as key measures of liquidity applicable
to the Company:
|
December 31, 2008
|
September 30, 2008
|
Cash
and cash equivalents
|
$11.0
million
|
|
$5.6
million
|
|
Working
capital
|
$58.5
million
|
|
$67.0
million
|
|
Cash and
cash equivalents increased $5.4 million and working capital declined $8.5
million during the three months ended December 31, 2008, as compared with
September 30, 2008, due to the factors described below.
Cash
Flows
|
|
Three
Months Ended
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
Net
cash provided by (used for) operating activities by continuing
operations
|
|
$
|
13,521
|
|
|
$
|
(11,414
|
)
|
Net
cash provided by (used for) operating activities by discontinued
operations
|
|
|
184
|
|
|
|
(25
|
)
|
Net
cash used for investing activities
|
|
|
(1,364
|
)
|
|
|
(2,505
|
)
|
Net
cash provided by (used for) financing activities
|
|
|
(6,899
|
)
|
|
|
9,164
|
|
Effect
of exchange rate changes
|
|
|
(56
|
)
|
|
|
93
|
|
Net
increase/(decrease) in cash and cash equivalents
|
|
$
|
5,386
|
|
|
$
|
(4,687
|
)
|
Cash
Flows From Operating Activities
During
the three months ended December 31, 2008, we improved our liquidity position by
generating net cash from operating activities of $13.5 million, compared with a
net use of cash of $11.4 million for the three months ended December 31,
2007. The $24.9 million positive change in cash provided by operating
activities over the previous year was primarily due to a decline in inventory,
compared to an increase in inventory in the prior year. This
inventory fluctuation was largely driven by decreased sales volumes, lower
average prices held in inventory as a result of lower resin prices and our
efforts to reduce working capital.
Cash
Flows Used for Investing Activities
Capital
expenditures totaled $1.4 million during the three months ended December 31,
2008 and were related primarily to the relocation to Pennsylvania from our New
Jersey facility, which is now substantially
complete. Non-discretionary capital expenditures are approximately
$2.0 million to $3.0 million per year. For the remainder of fiscal
year 2009, we expect discretionary capital expenditures to be approximately $2.0
million.
Cash
Flows Used For Financing Activities
During
the three months ended December 31, 2008, the Company used $6.9 million of cash
for financing activities. This was primarily due to short and long
term debt repayments of $5.0 million and due to $2.0 million used for purchasing
common shares on the open market, which were converted into Treasury
Stock. In the prior year period, financing activities provided $9.2
million of cash. This was primarily a result of borrowings under the
Company’s domestic credit facility to finance higher inventory
levels.
Financing
Arrangements
We
maintain several lines of credit. The facilities are collateralized
by certain of our assets and are generally used to finance our working capital
needs. The following table presents the borrowing capacity, outstanding
borrowings and net availability under the various credit facilities in the
Company’s domestic and foreign operations.
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
|
|
As
of
|
|
|
As
of
|
|
|
As
of
|
|
|
|
December
31,
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(Dollars
in Millions)
|
|
Borrowing
Capacity
(a)
|
|
$
|
17.4
|
|
|
$
|
19.9
|
|
|
$
|
43.9
|
|
|
$
|
52.5
|
|
|
$
|
61.3
|
|
|
$
|
72.4
|
|
Outstanding
Borrowings
|
|
|
–
|
|
|
|
–
|
|
|
|
6.0
|
|
|
|
9.6
|
|
|
|
6.0
|
|
|
|
9.6
|
|
Net
availability
|
|
$
|
17.4
|
|
|
$
|
19.9
|
|
|
$
|
37.9
|
|
|
$
|
42.9
|
|
|
$
|
55.3
|
|
|
$
|
62.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Based
on the credit facility limits less outstanding letters of
credit.
|
|
We
maintain a Credit Agreement (the “Credit Agreement”) with KeyBank National
Association and Wells Fargo Bank National Association (collectively referred to
herein as “KeyBank”), with a maturity date of October 2012. The KeyBank
Credit Agreement consists of a $30.0 million revolving credit facility, a five
year $15.0 million term loan (of which $9.2 million remains outstanding as of
December 31, 2008) and through an amendment in May 2008, an additional $5.0
million five year term loan (of which $4.2 million remains outstanding as of
December 31, 2008). The Credit Agreement contains a variable interest
rate and 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. During fiscal
year 2008, we entered into interest rate swaps on our $9.2 million and $4.2
million term loans. The swaps lock in the Company’s interest rate on (i)
the $9.2 million term loan at 2.82% plus the credit spread on the corresponding
debt, and (ii) on the $4.2 million term loan at 3.69% plus the credit spread on
the corresponding debt. The interest rates as of December 31,
2008 were 4.1% and 5.2%, respectively.
The
Credit Agreement establishing the Credit Facility contains financial covenants,
including:
·
|
a
minimum tangible net worth requirement, as defined under the Credit
Agreement, of $50.0 million plus 50% of each fiscal quarter’s net
income;
|
·
|
a
leverage ratio, as defined under the Credit Agreement, not to exceed 3.0
to 1.0;
|
·
|
a
fixed charge coverage ratio of at least 1.1 to 1.0, defined as “Adjusted
EBITDA” (as defined under the Credit Agreement), plus rent expense divided
by fixed charges (defined as the sum of interest expense, income tax
expense paid, scheduled principal debt repayments in the prior four
quarters, capital distributions, capital expenditures for the purpose of
maintaining existing fixed assets and rent expense);
and
|
·
|
a
required level of profitability, as defined under the Credit Agreement to
not be less than zero for two consecutive fiscal
quarters.
|
In
addition, the Credit Agreement contains a number of limitations on the ability
of the Company and its restricted U.S. subsidiaries to (i) incur additional
indebtedness, (ii) pay dividends or redeem any Common Stock, (iii) incur liens
or other encumbrances on their assets, (iv) enter into transactions with
affiliates, (v) merge with or into any other entity or (vi) sell any of their
assets. Additionally, any “material adverse change” of the Company
could restrict the Company’s ability to borrow under its Credit Agreement and
could also be deemed an event of default under the Credit
Agreement. A “material adverse change” is defined as a change in the
financial or other condition, business, affairs or prospects of the Company, or
its properties and assets considered as an entirety that could reasonably be
expected to have a material adverse effect, as defined in the Credit Agreement,
on the Company.
In
addition, any “Change of Control” of the Company or its restricted U.S.
subsidiaries will constitute a default under the Credit
Agreement. “Change of Control,” as defined in the Credit Agreement,
means: (i) the acquisition of, or, if earlier, the shareholder or director
approval of the acquisition of, ownership or voting control, directly or
indirectly, beneficially or of record, by any person, entity, or group (within
the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as then in
effect), of shares representing more than 50% of the aggregate ordinary voting
power represented by the issued and outstanding Common Stock of the Company;
(ii) the occupation of a majority of the seats (other than vacant seats) on the
board of directors of the Company by individuals who were neither (A) nominated
by the Company’s board of directors nor (B) appointed by directors so nominated;
(iii) the occurrence of a change in control, or other similar provision, under
or with respect to any “Material Indebtedness Agreement” (as defined in the
Credit Agreement); or (iv) the failure of the Company to own directly or
indirectly, all of the outstanding equity interests of the Company’s Bayshore
Industrial L.P. and ICO Polymers North America, Inc. subsidiaries.
As the
financial covenants under our Credit Agreement are based on profitability, it is
possible that we may violate one of the financial covenants if the trend in our
operating results experienced during the first quarter of fiscal year 2009
persists. Such a violation could result in our inability to borrow
further under the Credit Agreement and our lenders demanding repayment of the
outstanding borrowings under the Credit Agreement. We are currently
in discussions with our lenders regarding an amendment to the Credit Agreement
to revise the referenced financial covenants. We can make no
assurances that such an amendment will be executed.
The
Company has various foreign credit facilities in eight foreign countries. The
available credit under these facilities varies based on the levels of accounts
receivable within the foreign subsidiary, or is a fixed amount. The foreign
credit facilities are collateralized by assets owned by the foreign subsidiaries
and also carry various financial covenants. These facilities either
have a remaining maturity of less than twelve months or do not have a stated
maturity date, or can be cancelled at the option of the lender. The
aggregate amounts of available borrowings under the foreign credit facilities,
based on the credit facility limits, current levels of accounts receivables, and
outstanding letters of credit and borrowings, were $37.9 million as of December
31, 2008 and $42.9 million as of September 30, 2008. Of the $37.9
million of total foreign credit availability as of December 31, 2008, $2.1
million related to our Australian subsidiary and $1.5 million related to our New
Zealand subsidiary.
At
December 31, 2008 and September 30, 2008, the Company’s Australian subsidiary
was in violation of a financial debt covenant under its credit facility with its
lender in Australia related to $2.7 million and $3.9 million of term debt,
respectively and $0 and $2.1 million of short-term borrowings,
respectively. The Australian covenant that was not met related to a
metric of profitability compared to interest expense. We have classified all of
the Australian term debt as current as of December 31, 2008 and September 30,
2008. The Company is in the process of modifying the financial
covenant within the loan agreement with its lender in Australia. We
can make no assurance that such modification will be executed.
Additionally,
at December 31, 2008 and September 30, 2008, the Company’s New Zealand
subsidiary was in violation of a financial covenant related to short-term
borrowings of $1.7 million and $2.3 million, respectively, under its credit
facility with its lender in New Zealand. The Company obtained a
waiver from its New Zealand lender for this violation at September 30, 2008 and
is in the process of obtaining a waiver from its New Zealand lender for the
violation as of December 31, 2008. We can make no assurance that the
waiver will be executed.
The
Company is currently in compliance with all of its credit facilities except in
Australia and New Zealand as discussed above.
Off-Balance Sheet
Arrangements.
The
Company does not have any financial instruments classified as off-balance sheet
(other than operating leases) as of December 31, 2008 and September 30,
2008.
Forward-Looking
Statements
Matters
discussed and statements made in this document which are not historical facts
and which involve substantial risks, uncertainties and assumptions are
“forward-looking statements,” within the meaning of section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (“Exchange Act”), and are intended to qualify for the
safe harbors from liability established by the Private Securities Litigation
Reform Act of 1995. When words such as “anticipate,” “believe,”
“estimate,” “intend,” “expect,” “plan” and similar expressions are used, they
are intended to identify the statements as forward-looking. Our
statements regarding future, projected or potential
liquidity,
acquisitions, market conditions, reductions in expenses, derivative
transactions, net operating losses, tax credits, tax refunds, growth plans,
capital expenditures and financial results are examples of such forward-looking
statements. Other examples of forward-looking statements include, but
are not limited to, statements regarding trends in the marketplace, restrictions
imposed by our outstanding indebtedness, changes in the cost and availability of
resins (polymers) and other raw materials, general economic conditions, demand
for our services and products, business cycles and other industry conditions,
international risks, operational
risks,
our lack of asset diversification, the timing of new services or facilities, our
ability to compete, effects of compliance with laws, fluctuation of the U.S.
Dollar against foreign currencies, matters relating to operating facilities,
effect and cost of claims, litigation and environmental remediation, and our
ability to manage global inventory, develop technology and proprietary know-how,
and attract and retain key personnel. Actual results and outcomes can differ
materially from results or outcomes suggested by these forward-looking
statements due to a number of factors, our financial condition, results of
litigation, results of operations, capital expenditures and other spending
requirements, demand for our products and services, and the risks and risk
factors referenced below and elsewhere in this document and those described in
our other filings with the SEC.
You
should carefully consider the factors in “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the fiscal year ended September 30, 2008 and other
information contained in this document. The risks and uncertainties
described in Item 1A are not the only ones we face. Additional risks and
uncertainties not presently known to us, which are similar to those faced by
other companies in our industry or business in general, may also impair our
business operations. If any of the risks and uncertainties actually
occurs, our business, financial condition, results of operations and cash flows
could be materially and adversely affected. In such case, the trading
price of our Common Stock could decline, and you may lose all or part of your
investment.
I
TEM 3.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are
exposed to certain market risks as part of our ongoing business operations,
including debt obligations that carry variable interest rates, foreign currency
exchange risk, and resin price risk that could impact our financial condition,
results of operations and/or cash flows. We manage our exposure to these and
other market risks through regular operating and financing activities, including
the use of derivative financial instruments. Our intention is to use these
derivative financial instruments as risk management tools and not for trading
purposes or speculation.
As
mentioned above, the Company’s revenues and profitability are impacted by
changes in resin prices. The Company uses various resins (primarily
polyethylene) to manufacture its products. As the price of resin
increases or decreases, market prices for the Company’s products will also
generally increase or decrease. This will typically lead to higher or
lower average selling prices and will impact the Company’s operating income and
operating margin. The impact on operating income is due to a lag in
matching the change in raw material cost of goods sold and the change in product
sales prices. As of December 31, 2008 and September 30, 2008, the
Company had $17.0 million and $26.2 million of raw material inventory and $17.8
million and $25.9 million of finished goods inventory,
respectively. The Company attempts to minimize its exposure to resin
price changes by monitoring and carefully managing the quantity of its inventory
on hand and product sales prices.
As of
December 31, 2008, the Company had $70.4 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, however, enter into forward currency exchange contracts related to
both future purchase obligations and other forecasted transactions denominated
in non-functional currencies, primarily repayments of foreign currency
intercompany transactions. Certain of these forward currency exchange contracts
qualify as cash flow hedging instruments and are highly effective. In
accordance with SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, as amended and interpreted, the
Company recognizes the amount of hedge ineffectiveness for these hedging
instruments in the Consolidated Statement of Operations. The hedge
ineffectiveness on the Company’s designated cash flow hedging instruments was
not a significant amount for the three months ended December 31, 2008 and 2007,
respectively. The Company’s principal foreign currency exposures
relate to the Euro, British Pound, Australian Dollar, New Zealand Dollar,
Malaysian Ringgit and Brazilian Real. The Company’s forward contracts
have original maturities of one year or less. The following table includes the
total value of foreign exchange contracts outstanding for which hedge accounting
is being applied as of December 31, 2008 and September 30, 2008:
|
|
As
of
|
|
|
December
31,
|
|
September
30,
|
|
|
2008
|
|
2008
|
|
|
(Dollars
in Thousands)
|
Notional
value
|
|
$6.5
million
|
|
$8.3
million
|
Fair
market value
|
|
$0.3
million
|
|
$(0.5)
million
|
Maturity
Dates
|
|
January
2009
|
|
October
2008
|
|
|
through
April 2009
|
|
through
February
2009
|
When it
is determined that a derivative has ceased to be a highly effective hedge, or
that forecasted transactions have not occurred as specified in the hedge
documentation, hedge accounting is discontinued prospectively. As a
result, these derivatives are marked to market, with the resulting gains and
losses recognized in the Consolidated Statements of Operations.
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
December
3
1
, 2008, the
Company had
$7.2
million
of variable interest rate
debt.
The
Company’s variable interest rates are tied to various bank rates.
At
December
3
1
, 2008, based on our current
level of borrowings, a 1% increase in interest rates would increase interest
expense annually by
approximately $0.1
million
.
Foreign Currency Intercompany
Accounts and Notes Receivable
. As mentioned above, from
time-to-time, the Company’s U.S. subsidiaries provide capital to the Company’s
foreign subsidiaries through U.S. Dollar denominated interest bearing promissory
notes. In addition, certain of the Company’s foreign subsidiaries
also provide other foreign subsidiaries with access to capital through foreign
currency denominated interest bearing promissory notes. Such funds
are generally used by the Company’s foreign subsidiaries to purchase capital
assets and/or for general working capital needs. The Company’s U.S.
subsidiaries also sell products to the Company’s foreign subsidiaries in U.S.
Dollars on trade credit terms. In addition, the Company’s foreign
subsidiaries sell products to other foreign subsidiaries denominated in foreign
currencies that may not be the functional currency of one or more of the foreign
subsidiaries that are parties to such intercompany agreements. These
intercompany debts are accounted for in the local functional currency of the
contracting foreign subsidiary, and are eliminated in the Company’s Consolidated
Balance Sheet. At September 30, 2008, the Company had the following
significant outstanding intercompany amounts as described above:
Country
of subsidiary with
|
|
Country
of subsidiary with
|
|
Amount
in US$ as of
|
|
Currency
denomination
|
intercompany
receivable
|
|
intercompany
payable
|
|
December
31, 2008
|
|
of
receivable
|
United
States
|
|
Australia
|
|
$7.4
million
|
|
United
States Dollar
|
Holland
|
|
United
Kingdom
|
|
$1.3
million
|
|
Great
Britain Pound
|
United
States
|
|
Malaysia
|
|
$1.2
million
|
|
United
States Dollar
|
Because these intercompany lending
transactions are denominated in various foreign currencies and are subject to
financial exposure from foreign exchange rate movement from the date a loan is
recorded to the date it is settled or revalued, any appreciation or depreciation
of the foreign currencies in which the transactions are denominated could result
in a gain or loss, respectively, to the Consolidated Statement of Operations,
subject to forward currency exchange contracts that may be entered
into. To mitigate this risk, the Company sometimes enters into
foreign currency exchange contracts. The following table includes the
total value of foreign exchange contracts outstanding for which hedge accounting
is not being applied as of December 31, 2008 and September 30,
2008.
|
|
As
of
|
|
|
December
31,
|
|
September
30,
|
|
|
2008
|
|
2008
|
|
|
(Dollars
in Thousands)
|
Notional
value
|
|
$6.0
million
|
|
$5.4 million
|
Fair
market value
|
|
$0.1
million
|
|
$(0.8)
million
|
Maturity
Dates
|
|
January
2009
|
|
October
2008
|
|
|
Through
March 2009
|
|
through
February 2009
|
The
Company also marks to market the underlying transactions related to these
foreign exchange contracts which offsets the fluctuation in the fair market
value of the derivative instruments. As of December 31, 2008, the net
unrealized gain or loss on these derivative instruments and their underlyings
was insignificant.
Interest Rate Swaps.
In some
circumstances, the Company enters into interest rate swap agreements that
mitigate the exposure to interest rate risk by converting variable-rate debt to
a fixed rate. The interest rate swap and instrument being hedged are marked to
market in the balance sheet.
During
fiscal year 2008, the Company entered into a Pay-Fixed / Receive Variable
Interest Rate swap on its term loans in the U.S. with KeyBank National
Association and Wells Fargo Bank, National Association which currently have $9.2
million and $4.2 million outstanding. The swaps lock in the Company’s
interest rate on (i) the $9.2 million term loan at 2.82% plus the credit spread
on the corresponding debt, and (ii) on the $4.2 million term loan at 3.69% plus
the credit spread on the corresponding debt. The Company’s risk
management objective with respect to these interest rate swaps is to hedge the
variability to changes in cash flows attributable to interest rate risk caused
by changes in the benchmark interest rate (i.e. LIBOR), related to $13.4 million
of the Company’s variable-rate term loan debt.
As of
December 31, 2008, the Company calculated the estimated fair value of the $13.4
million notional swaps identified above to be a liability of $0.4
million. The fair value is an estimate of the net amount that the
Company would receive on December 31, 2008 if the agreements were transferred to
another party or cancelled by the Company.
Please
refer to Note 14,
Fair Value
Measurements of Assets and Liabilities,
for additional disclosures
related to the Company’s forward foreign exchange contracts and interest rate
swaps.
I
TEM 4.
CONTROLS AND
PROCEDURES
We
maintain disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit to the Securities and Exchange Commission (“SEC”)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is
recorded, processed, summarized and reported within the time periods specified
by the SEC’s rules and forms. Our disclosure controls and procedures
are designed to ensure that information required to be disclosed in the reports
we file or submit under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), as appropriate, to allow timely decisions regarding required
disclosure.
In
accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our CEO and CFO, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the
period covered by this report. Based upon that evaluation, our CEO
and CFO have concluded that our disclosure controls and procedures were
effective as of December 31, 2008.
There
were no changes in our internal controls over financial reporting during our
first fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART
II
OTHER
INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
For a
description of the Company’s legal proceedings, see Note 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 our Annual Report on Form 10-K for the year ended
September 30, 2008.
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 1A, under the heading "Risk
Factors” in our Annual Report on Form 10-K for the year ended September 30,
2008, which could materially affect our business, financial condition or future
results. 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
2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In
September 2008, the Company announced that its Board of Directors authorized the
repurchase of up to $12.0 million of its outstanding Common Stock over a two
year period ending September 2010, (the “Share Repurchase Plan”). The
specific timing and amount of repurchases will vary based on market conditions
and other factors. The Share Repurchase Plan may be modified,
extended or terminated at any time.
|
|
Total
number
of
shares repurchased
|
|
|
Average
price
Paid
per share
|
|
|
Total
number of shares as part of a publicly announced plan
|
|
|
Maximum
amount that may yet be purchased under the plan
|
|
Beginning
amount available
|
|
|
|
|
|
|
|
|
|
|
$12.0
million
|
|
September
1-30, 2008
|
|
|
90,329
|
|
|
$
|
5.99
|
|
|
|
90,329
|
|
|
0.5
million
|
|
October
1-31, 2008
|
|
|
487,752
|
|
|
$
|
5.04
|
|
|
|
487,752
|
|
|
2.5
million
|
|
November
1-30, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
December
1-31, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
578,081
|
|
|
$
|
5.19
|
|
|
|
578,081
|
|
|
$9.0
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
February
5, 2009
|
/s/
A. John Knapp, Jr.
|
|
A.
John Knapp, Jr.
|
|
President,
Chief Executive Officer, and
|
|
Director
(Principal Executive Officer)
|
|
|
|
|
|
/s/
Bradley T. Leuschner
|
|
Bradley
T. Leuschner
|
|
Chief
Financial Officer and Treasurer
|
|
(Principal
Financial
Officer)
|
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