| SCHULMAN A INC ITEM 1A RISK FACTORS in this Report |
| WORKING CAPITAL PRACTICES The Company, along with other companies in its industry, is generally not subject to unusual working capital practices |
| The nature of the Company’s business does not require significant amounts of inventories to be held to meet rapid delivery requirements of its products or services or assure the Company of a continuous allotment of goods from suppliers |
| The Company’s manufacturing processes are generally performed with a short turnaround time |
| The Company does not generally offer extended payment terms to its customers |
| The Company generally allows its customers to return merchandise for failure to meet pre-agreed quality standards or specifications; however, the Company employs quality assurance practices that minimize customer returns |
| COMPETITION The Company’s business is highly competitive |
| The Company competes with producers of basic plastic resins, many of which also operate compounding plants, as well as other independent plastic compounders |
| The producers of basic plastic resins generally are large producers of petroleum and chemicals, which are much larger than the Company and have greater financial resources |
| Some of these producers compete with the Company principally in such competitors’ own respective local market areas, while other producers compete with the Company on a global basis |
| The Company also competes with other merchants and distributors of plastic resins and other products |
| No accurate information is available to the Company as to the extent of its competitors’ sales and earnings in respect of these activities, but management believes that the Company has only a small fraction of the total market |
| The principal methods of competition in plastics manufacturing are innovation, price, availability of inventory, quality and service |
| The principal methods of competition in respect of merchant and distribution activities are price and service |
| Management believes it has strong financial capabilities, excellent supplier relationships and the ability to provide quality plastic compounds at competitive prices |
| TRADEMARKS AND TRADE NAMES The Company uses various trademarks and trade names in its business |
| These trademarks and trade names protect names of certain of the Company’s products and are significant to the extent they provide a certain amount of goodwill and name recognition in the industry |
| The Company also holds patents in various parts of the world for certain of its products |
| These trademarks, trade names and patents, including those which are pending, contribute to profitability, however the Company does not consider its business to be dependent on such trademarks and trade names, except in the case of its new Invision^® product line |
| 8 _________________________________________________________________ [60]Table of Contents AVAILABLE INFORMATION The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, together with any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, will be made available free of charge on the Company’s web site, www |
| com, as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission |
| ITEM 1A RISK FACTORS The following are certain risk factors that could affect our business, results of operations, cash flows and financial condition |
| These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results or financial condition to differ materially from those projected in forward-looking statements |
| Before you invest in us, you should know that making such an investment involves some risks, including the risks we describe below |
| If any of the following risks occur, our business, results of operations, cash flows or financial condition could be negatively affected |
| If we fail to develop and commercialize new products, our business operations would be adversely affected |
| A significant portion of our anticipated growth is dependent upon the successful development and commercialization of new products, such as our Invision^® product line |
| The development and commercialization of new products, including Invision^®, requires significant investments in research and development, production, and marketing costs |
| The successful production and commercialization of these products is uncertain as is the acceptance of the new products in the marketplace |
| If we fail to successfully develop and commercialize new products, or if customers decline to purchase the new products, we will not be able to recover our development investment and the growth prospects for our products will be adversely affected |
| If we are unable to retain key personnel or attract new skilled personnel, it could have an adverse effect on our business |
| The unanticipated departure of any key member of our management team could have an adverse effect on our business |
| In addition, because of the specialized and technical nature of our business, our future performance is dependent on the continued service of, and on our ability to attract and retain, qualified management, scientific, technical, marketing and support personnel |
| Competition for such personnel is intense, and we may be unable to continue to attract or retain such personnel |
| Our sales, profitability, operating results and cash flows are sensitive to global economic conditions and cyclicality, and could be adversely affected during economic downturns |
| General economic conditions and business conditions of our customers’ industries affect demand for our products |
| The business of most of our customers, particularly our industrial, automotive, construction and electronics customers, can be cyclical in nature and sensitive to changes in general economic conditions |
| Political instability may lead to financial and economic instability, which could lead to deterioration in general global economic conditions |
| Downturns in the businesses that use our products will adversely affect our sales |
| Historically, downturns in general economic conditions have resulted in diminished product demand, excess manufacturing capacity and lower average selling prices, and we may experience similar problems in the future |
| In addition, downturns in our customers’ industries, even during periods of strong general economic conditions, could adversely affect our sales, profitability, operating results and cash flows |
| Price increases in raw materials and energy costs could adversely affect operating results and financial condition |
| We purchase various plastic resins to produce our proprietary plastic compounds |
| These resins, derived from petroleum or natural gas, have been subject to periods of rapid and significant movements in price |
| These fluctuations in price may be caused or aggravated by a number of factors, including political instability or hostilities in oil-producing countries and supply and demand changes |
| We may not be able to pass on increases in the prices of raw materials and energy to our customers |
| As a result, higher petroleum or natural gas costs could lead to declining margins, operating results and financial conditions |
| 9 _________________________________________________________________ [61]Table of Contents A major failure of our information systems could harm our business |
| We depend upon integrated information systems to process orders, respond to customer inquiries, manage inventory, purchase, sell and ship goods on a timely basis, maintain cost-efficient operations, prepare financial information and reports, and operate our website |
| We may experience operating problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes |
| Any significant disruption or slowdown of our systems could cause orders to be lost or delayed and could damage our reputation with our customers or cause our customers to cancel orders, which could adversely affect our results of operations |
| Our manufacturing operations are subject to hazards and other risks associated with polymer production and the related storage and transportation of raw materials, products and wastes |
| Our manufacturing operations are subject to the possible hazards and risks associated with polymer production and the related storage and transportation of raw materials, products and wastes, including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of toxic or hazardous substances or gases and other risks |
| These hazards can cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental contamination |
| In addition, the occurrence of material operating problems at our facilities due to any of these hazards may diminish our ability to meet our output goals |
| Accordingly, these hazards, and their consequences could have a material adverse effect on our operations as a whole, including our results of operations and cash flows, both during and after the period of operational difficulties |
| Extensive environmental, health and safety laws and regulations impact our operations and assets, and compliance, or lack of compliance, with these regulations could adversely affect our results of operations |
| Our operations on and ownership of real property are subject to extensive environmental, health and safety laws and regulations at the national, state and local governmental levels |
| The nature of our business exposes us to risks of liability under these laws and regulations due to the production, storage, transportation, recycling or disposal and/or sale of materials that can cause contamination or personal injury if they are released into the environment or workplace |
| Environmental laws may have a significant effect on the costs of these activities involving raw materials, finished products and wastes |
| We may incur substantial costs, including fines, damages, criminal or civil sanctions, remediation costs, or experience interruptions in our operations for violations of these laws |
| Also, national and state environmental statutes impose strict, and under some circumstances, joint and several liability for the cost of investigations and remedial actions on any company that generated the waste, arranged for disposal of the waste, transported the waste to the disposal site or selected the disposal site, as well as on the owners and operators of these sites |
| Any or all of the responsible parties may be required to bear all of the costs of clean up, regardless of fault or legality of the waste disposal or ownership of the site, and may also be subject to liability for natural resource damages |
| It is possible that we will be identified as a potentially responsible party at more sites in the future, which could result in our being assessed substantial investigation or clean up costs |
| Accruals for estimated costs, including, among other things, the ranges associated with our accruals for future environmental compliance and remediation may be too low or we may not be able to quantify the potential costs |
| We may be subject to additional environmental liabilities or potential liabilities that have not been identified |
| We expect that we will continue to be subject to increasingly stringent environmental, health and safety laws and regulations |
| We believe that compliance with these laws and regulations may, but does not currently, require significant capital expenditures and operating costs, which could adversely affect our results of operations or financial condition |
| We face competition from other polymer companies, which could adversely affect our sales and financial condition |
| We operate in a highly competitive marketplace, competing against a number of domestic and foreign polymer producers |
| Competition is based on several key criteria, including product performance and quality, product price, product availability and security of supply, responsiveness of product development in cooperation with customers and customer service |
| Some of our competitors are larger than we are and may have greater financial resources |
| These competitors may also be able to maintain significantly greater operating and financial flexibility than we do |
| As a result, these competitors may be better able to withstand changes in conditions within our industry, changes in the prices of raw materials and energy and in 10 _________________________________________________________________ [62]Table of Contents general economic conditions |
| Additionally, competitors’ pricing decisions could compel us to decrease our prices, which could affect our margins and profitability adversely |
| Our ability to maintain or increase our profitability is, and will continue to be, dependent upon our ability to offset decreases in the prices and margins of our products by improving production efficiency and volume, shifting to higher margin products and improving existing products through innovation and research and development |
| If we are unable to do so or to otherwise maintain our competitive position, we could lose market share to our competitors |
| We expect that our competitors will continue to develop and introduce new and enhanced products, which could cause a decline in the market acceptance of our products |
| In addition, our competitors could cause a reduction in the selling prices of some of our products as a result of intensified price competition |
| Competitive pressures can also result in the loss of major customers |
| An inability to compete successfully could have an adverse effect on our results of operations, financial condition and cash flows |
| We may also experience increased competition from companies that offer products based on alternative technologies and processes that may be more competitive or better in price or performance, causing us to lose customers and result in a decline in our sales volume and earnings |
| We may incur significant charges in the event we close all or part of a manufacturing plant or facility |
| We periodically assess our manufacturing operations in order to manufacture and distribute our products in the most efficient manner |
| Based on our assessments, we may make capital improvements to modernize certain units, move manufacturing or distribution capabilities from one plant or facility to another plant or facility, discontinue manufacturing or distributing certain products or close all or part of a manufacturing plant or facility |
| We also have shared services agreements at several of our plants and if such agreements are terminated or revised, we would assess and potentially adjust our manufacturing operations |
| The closure of all or part of a manufacturing plant or facility could result in future charges which could be significant |
| Our substantial international operations subject us to risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations |
| We and our joint ventures currently have ten manufacturing facilities located outside the United States, including facilities and offices located in Mexico, Canada, Belgium, France, Germany, Poland, Hungary, Indonesia, Italy, Spain, Switzerland, China, Luxembourg, Denmark and the United Kingdom |
| We expect sales from international markets to continue to represent a significant portion of our net sales |
| Accordingly, our business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions |
| Risks inherent in international operations include the following: • fluctuations in exchange rates may affect product demand and may adversely affect the profitability in US dollars of products and services we provide in international markets where payment for our products and services is made in the local currency; • intellectual property rights may be more difficult to enforce; • foreign countries may impose additional withholding taxes or otherwise tax our foreign income, or adopt other restrictions on foreign trade or investment, including currency exchange controls; • unexpected adverse changes in foreign laws or regulatory requirements may occur; • agreements may be difficult to enforce and receivables difficult to collect; • compliance with a variety of foreign laws and regulations may be burdensome; • unexpected adverse changes in export duties, quotas and tariffs and difficulties in obtaining export licenses; • general economic conditions in the countries in which we operate could have an adverse effect on our earnings from operations in those countries; • foreign operations may experience staffing difficulties and labor disputes; • foreign governments may nationalize private enterprises; 11 _________________________________________________________________ [63]Table of Contents • our business and profitability in a particular country could be affected by political or economic repercussions on a domestic, country specific or global level from terrorist activities and the response to such activities; and • unanticipated events, such as geopolitical changes, could result in a write-down of our investment in the affected joint venture in Indonesia |
| Our success as a global business will depend, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions by developing, implementing and maintaining policies and strategies that are effective in each location where we and our joint ventures do business |
| Other increases in operating costs could affect our profitability |
| Scheduled or unscheduled maintenance programs could cause significant production outages, higher costs and/or reduced production capacity at our equity affiliates and suppliers due to the industry in which they operate |
| The inability to achieve or the delay in achieving the anticipated financial benefits from our cost reduction initiatives and employee productivity goals could also affect our future profitability |
| Our business depends upon good relations with our employees |
| We may experience difficulties in maintaining appropriate relations with unions and employees in certain locations |
| About 80prca of our hourly employees at our operations are represented by labor unions |
| In addition, problems or changes affecting employees in certain locations may affect relations with our employees at other locations |
| The risk of labor disputes, work stoppages or other disruptions in production could adversely affect us |
| If we cannot successfully negotiate or renegotiate collective bargaining agreements or if the negotiations take an excessive amount of time, there may be a heightened risk of a prolonged work stoppage |
| Any work stoppage could have a material adverse effect on the productivity and profitability of a manufacturing facility or on our operations as a whole |
| Our business and financial condition could be adversely affected if we are unable to protect our material trademarks and other proprietary information |
| We have numerous valuable patents, trade secrets and know-how, domain names, trademarks and trade names, including certain marks that are material to our business, which are identified under Item 1 of this Report |
| Despite our efforts to protect our trademarks and other proprietary rights from unauthorized use or disclosure, other parties, including our former employees or consultants, may attempt to disclose, obtain or use our proprietary information or marks without our authorization |
| Unauthorized use of our trademarks, or unauthorized use or disclosure of our other intellectual property, could negatively impact our business and financial condition |
| Although our pension and postretirement plans are currently adequately funded, events could occur that would require us to make significant contributions to the plans and reduce the cash available for our business |
| We have several defined benefit pension and postretirement plans around the world, including in the United States, covering most of our employees |
| We are required to make cash contributions to our pension plans to the extent necessary to comply with minimum funding requirements imposed by the various countries’ benefit and tax laws |
| The amount of any such required contributions will be determined annually based on an actuarial valuation of the plans as performed by the plans’ actuaries and as required by law |
| The amount we may elect or be required to contribute to our pension plans in the future may increase significantly |
| Specifically, if year-end accumulated obligations exceed assets, we may elect to make a voluntary contribution, over and above the minimum required, in order to avoid charges to our balance sheet and consequent reductions to shareholders’ equity |
| These contributions could be substantial and would reduce the cash available for our business |
| Increasing cost of employee healthcare may decrease our profitability |
| The cost of providing healthcare coverage for our employees is continually increasing |
| If healthcare costs continue to rise at a rapid pace, the Company may not be able to or willing to pass on those costs to employees |
| Therefore, if we are unable to offset continued rising healthcare costs through improved operating efficiencies and reduced expenditures, the increased costs of employee healthcare may result in declining margins and operating results |
| Changes to tax laws, rules and regulations, including changes in the interpretation or implementation of tax laws, rules and regulations by the Internal Revenue Service or other domestic or foreign governmental bodies, could affect us in substantial and unpredictable ways |
| Such changes could subject us to additional compliance costs and tax liabilities which could have an adverse impact on our earnings |
| Specific acts of terrorism may disrupt operations and cause increased costs and liabilities |
| The threat of terrorist attacks or actual terrorist events in the United States or abroad could affect us in unpredictable ways |
| Terrorist threats or events could create political or economic instability, affecting our business in general |
| The increased costs related to heightened security or insurance coverage could also have a negative impact on our financial condition |
| Such threats or events could also result in operational disruption, including difficulty in obtaining raw materials, difficulty in delivering products to customers, or general delay and inefficiencies in our supply chain |
| Additionally, our manufacturing facilities, both within the United States and those located abroad, may become direct targets or indirect casualties of terrorist attacks, leading to severe damage including loss of life and loss of property |
| Increased indebtedness could restrict growth and adversely affect our financial health |
| As of August 31, 2006, our debt on a consolidated basis was approximately dlra131dtta7 million |
| We are more heavily leveraged than in the past and an increase in the level of indebtedness could have significant consequences |
| For example, it could: • limit our ability to satisfy current debt obligations; • increase interest expense due to the change in interest rates and increase in debt levels; • require us to dedicate a significant portion of cash flow to repay principal and pay interest on the debt, reducing the amount of funds that would be available to finance operations and other business activities; • impair our ability to obtain financing in the future for working capital, capital expenditures, research and development, or acquisitions; • make us vulnerable to economic downturns or adverse developments in our business or markets; and • place us at a competitive disadvantage compared to competitors with less debt |
| We expect to pay expenses and to pay principal and interest on current and future debt from cash provided by operating activities |
| Therefore, our ability to meet these payment obligations will depend on future financial performance which is subject in part to numerous economic, business and financial factors beyond our control |
| If our cash flow and capital resources are insufficient to fund our increased debt, we may be forced to reduce or delay expansion plans and capital expenditures, limit payment of dividends, sell material assets or operations, obtain additional capital or restructure our debt |
| Litigation from customers, employees or others could adversely affect our financial condition |
| From time to time, we may be subject to claims or legal action from customers, employees and/or others |
| Whether these claims and legal action are founded or unfounded, if these claims and legal actions are not resolved in our favor, they may result in significant financial liability and/or adversely affect market perception of the Company and our products |
| Any financial liability or reputation damage could have a material adverse effect on our business |
| This, in turn, could have a material adverse effect on our financial condition and results of operations |
| We are dependent upon good relationships with our various suppliers, vendors and distributors |
| We rely upon good relationships with a number of different suppliers, vendors and distributors |
| If our relationships with these parties were to deteriorate or if a number of these parties should elect to discontinue doing business with us, our business operations could be adversely affected |