A. Schulman, Inc. (A. Schulman) has reported net sales of $388.4 million for the first quarter of fiscal 2009, down 21.8%, compared with the net sales of $496.5 million in the year-ago quarter. It has also reported a net income of $8.17 million, or $0.31 per diluted share, for the fiscal 2009, compared with the net income of $10.02 million, or $0.36 per diluted share, in the year-ago quarter.
Tonnage was down 27.8% and the translation effect of foreign currency, primarily the euro, reduced sales by an incremental 3.7%. The effect of pricing and mix increased sales 9.7%. The tonnage decline primarily reflects the unprecedented drop-off in demand, particularly in November, as well as last year’s downsizing in the company’s North America Engineered Plastics business. Excluding the effect of these planned volume reductions, volume was down around 21%, reflecting the weak marketplace. Gross profit decreased to $41.1 million or 10.6% of net sales from $55.6 million or 11.2% of net sales a year ago as the company’s efforts to reduce fixed costs did not fully offset the sharp decline in sales.
The translation effect of foreign currencies accounted for $1.2 million of the net income decrease or almost $0.05 per diluted share.
Reported net income for the first quarter also included around $0.5 million of charges, net of tax, related to the ongoing restructuring activities and other employee termination costs. Excluding these non-operating charges, net income would have been $8.7 million or $0.33 per diluted share.
Reported net income for the fiscal 2008 first quarter included an after-tax loss of $1.1 million related to employee termination costs in Europe and a final Hurricane Rita insurance claim settlement. Excluding these unusual items, net income for the fiscal 2008 first quarter would have been $11.1 million or $0.39 per diluted share.
“The first quarter of our fiscal year was extremely unusual,” said Joseph M. Gingo, chairman, president and chief executive officer. “September performance was similar to the pattern we saw throughout fiscal 2008. October showed a slight decline, whereas November was significantly worse. The poor performance in November is attributed to both our European and Mexican businesses beginning to see the effects of the global economic recession, and the continued poor performance of the North American automotive market. We were pleased, however, that our prior cost-reduction efforts enabled our overall operating losses in North America to remain essentially flat compared with the first quarter of last year, on 40% less volume. In addition, we have proactively initiated further cost-reduction efforts announced in December 2008 to help offset what we anticipated would be a continuing trend, and as part of our strategy to reduce costs, realign resources and eliminate lower-margin businesses. These actions included significant reductions in our North American automotive capacity and moderate reductions in our European masterbatch capacity.
“Fortunately, the working capital program we initiated during fiscal 2008 continued its strong performance during the first quarter of fiscal 2009. Cash flow was very strong and our cash position and liquidity remain excellent.”
Selling, General and Administrative (SG&A) Expense
Fiscal 2009 first-quarter SG&A expense was $34.9 million, a decrease of $4.4 million compared with last year’s first quarter. Around one-third of the decrease was due to the effects of foreign exchange rate decreases. The remainder of the decrease relates to the cost-reduction initiatives taken in North America over the past year. During the quarter, the company recorded an incremental $0.3 million in bad debt expense.
Cash Flow From Operations
Cash flow from operations was $44.3 million for the quarter ended November 30, 2008, compared with $8.8 million for the comparable period last year. The significant increase in cash flow was driven primarily by the company’s efforts to reduce working capital in line with declining sales, resulting in cash on hand increasing to $115.8 million on November 30, 2008, from $97.7 million on August 31, 2008, and $41.8 million on November 30, 2007.
Days of inventory increased slightly to 49 days at November 30, 2008, from 48 days at fiscal 2008 year-end and 62 days at November 30, 2007. Days of receivables were 57 days compared with 58 at the end of fiscal 2008 and 63 at November 30, 2007. Days of payables were 34 days at both November 30, 2008 and the end of fiscal 2008, compared with 31 days at November 30, 2007. The company’s net debt, defined as debt minus cash, was in a net positive cash position of $6.9 million at November 30, 2008, which was an improvement of $23.0 million compared with the August 31, 2008 net debt of $16.1 million, reflecting the positive effects of the increased cash flow from operations. On November 30, 2008, the company had more than $300 million available to borrow on its credit lines.
During the first quarter, the company bought back around 79,000 shares at an average price of $15.50 per share. The company has around 2.9 million shares available to be repurchased under its existing authorization and may repurchase its common shares from time to time as it reviews the use of its liquidity and the state of market conditions.
On September 1, 2008, the company appointed a General Manager for its Asia operations. As a result, beginning with the first quarter of fiscal 2009, the company will report the Asian segment separately from Europe. Comparable prior period financial statements will be restated quarterly to reflect the change.
Sales in A. Schulman’s Europe operations were $280.8 million for the fiscal 2009 first quarter, down $76.4 million or 21.4% from the comparable quarter last year. Tonnage was down 20.8% and changes in prices and product mix increased sales 3.8%. The translation effect of foreign currencies, primarily the euro, decreased sales $15.7 million or 4.4%. The decline in tonnage was most prominent in November as the effects of the global recession intensified.
Gross profit for the fiscal 2009 first quarter was $34.4 million or 12.2% of net sales, down 24.1% or $10.9 million from $45.3 million or 12.7% of net sales for the first quarter of last year. Foreign exchange contributed $1.7 million of the decrease, with the declining volume, partially offset by the positive change in price and mix, accounting for the remainder. Gross profit was affected by two significant factors, particularly in November:
The primary driver was declining selling prices combined with a write-down of inventory related to decreasing market values, in conjunction with
Fixed manufacturing costs which were not aligned with lower production volumes.
These factors contributed more than $5 million of unfavorable pre-tax variances in November alone. As a result of these developments, the company announced its initial measures to address the fixed manufacturing cost issue on December 10, 2008, including reducing capacity, reducing manufacturing headcount and scheduling major facilities onto a four-day work week.
Operating income for the fiscal 2009 first quarter was $14.0 million compared with $22.8 million in the same quarter last year, a decrease of $8.8 million. The lower gross profit accounted for a majority of the decline while the weakening euro contributed an additional $0.5 million of the decrease.
North America Operations
Total North America reported combined operating losses of $3.4 million for the first quarter of fiscal 2009, compared with operating losses of $3.2 million a year ago. The first-quarter 2009 operating losses included more than $0.3 million of additional bad debt expense and $0.4 million of start-up costs for the new Akron Polybatch facility. Excluding these two incremental expenses, the improvement in operating loss compared with the prior year is directly related to cost-control activities that allowed the business units to offset large declines in volume in light of the current economic environment.