ameron_10q208.htm

United States
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended June 1, 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 1-9102

AMERON INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
77-0100596
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)

245 South Los Robles Avenue
Pasadena, CA 91101-3638
(Address of principal executive offices)
(626) 683-4000
(Registrant's telephone number, including area code)

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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
 
Large accelerated filer  ¨        Accelerated filer  x        Non-accelerated filer  ¨        Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨  No x

The number of outstanding shares of Common Stock, $2.50 par value, was 9,179,192 on June 1, 2008.  No other class of Common Stock exists.
 
 
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

 
FORM 10-Q
 
For the Quarter Ended June 1, 2008
 
Table of Contents
 

 



 



2
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

PART I – FINANCIAL INFORMATION
 

ITEM 1 – FINANCIAL STATEMENTS
 
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
   
Three Months Ended
    
Six Months Ended
  
   
June 1,
    
May 27,
    
June 1,
    
May 27,
  
(Dollars in thousands, except per share data)
  
2008
    
2007
    
2008
    
2007
  
Sales
  
$
159,793
    
$
156,756
    
$
309,562
    
$
277,111
  
Cost of sales
    
(120,047
)
    
(115,994
)
    
(236,364
)
    
(211,029
)
Gross profit
    
39,746
      
40,762
      
73,198
      
66,082
  
                                 
Selling, general and administrative expenses
    
(25,865
)
    
(25,959
)
    
(51,667
)
    
(47,459
)
Other income, net
    
575
      
937
      
3,550
      
1,955
  
Income from continuing operations before interest, income taxes and equity in earnings of joint venture
    
14,456
      
15,740
      
25,081
      
20,578
  
Interest (expense)/income, net
    
142
      
(18
)
    
431
      
348
  
Income from continuing operations before income taxes and equity in earnings of joint venture
    
14,598
      
15,722
      
25,512
      
20,926
  
Provision for income taxes
    
(5,000
)
    
(5,137
)
    
(8,929
)
    
(7,057
)
Income from continuing operations before equity in earnings of joint venture
    
9,598
      
10,585
      
16,583
      
13,869
  
Equity in earnings of joint venture, net of taxes
    
6,735
      
4,228
      
9,487
      
9,256
  
Income from continuing operations
    
16,333
      
14,813
      
26,070
      
23,125
  
Income from discontinued operations, net of taxes
    
-
      
990
      
-
      
1,146
  
Net income
  
$
16,333
    
$
15,803
    
$
26,070
    
$
24,271
  
                                 
Basic earnings per share:
                                
Income from continuing operations
  
$
1.79
    
$
1.64
    
$
2.86
    
$
2.57
  
Income from discontinued operations, net of taxes
    
-
      
.11
      
-
      
.13
  
Net income
  
$
1.79
    
$
1.75
    
$
2.86
    
$
2.70
  
                                 
Diluted earnings per share:
                                
Income from continuing operations
  
$
1.78
    
$
1.63
    
$
2.85
    
$
2.55
  
Income from discontinued operations, net of taxes
    
-
      
.11
      
-
      
.13
  
Net income
  
$
1.78
    
$
1.74
    
$
2.85
    
$
2.68
  
                                 
Weighted-average shares (basic)
    
9,132,172
      
9,024,190
      
9,110,712
      
9,009,133
  
Weighted-average shares (diluted)
    
9,186,649
      
9,065,681
      
9,151,897
      
9,058,103
  
                                 
Cash dividends per share
  
$
.30
    
$
.20
    
$
.55
    
$
.40
  
 
The accompanying notes are an integral part of these consolidated financial statements.
 

3
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS – ASSETS (UNAUDITED)

   
June 1,
    
November 30,
  
(Dollars in thousands)
  
2008
    
2007
  
ASSETS
                
                 
Current assets
                
Cash and cash equivalents
  
$
159,581
    
$
155,433
  
Receivables, less allowances of $6,137 in 2008 and $6,235 in 2007
    
159,866
      
185,335
  
Inventories
    
102,421
      
97,717
  
Deferred income taxes
    
22,934
      
22,446
  
Prepaid expenses and other current assets
    
14,228
      
12,100
  
                 
Total current assets
    
459,030
      
473,031
  
                 
Investments in joint ventures
                
Equity method
    
20,112
      
14,677
  
Cost method
    
3,784
      
3,784
  
                 
Property, plant and equipment
                
Land
    
39,455
      
35,860
  
Buildings
    
81,662
      
75,245
  
Machinery and equipment
    
304,074
      
292,563
  
Construction in progress
    
31,661
      
24,655
  
                 
Total property, plant and equipment at cost
    
456,852
      
428,323
  
Accumulated depreciation
    
(263,218
)
    
(254,592
)
                 
Total property, plant and equipment, net
    
193,634
      
173,731
  
Deferred income taxes
    
5,218
      
4,202
  
Goodwill and intangible assets, net of accumulated amortization of $1,206 in 2008 and $1,130 in 2007
    
2,190
      
2,243
  
Other assets
    
39,202
      
34,144
  
                 
Total assets
  
$
723,170
    
$
705,812
  
 
The accompanying notes are an integral part of these consolidated financial statements.
 


4
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS – LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)

   
June 1,
    
November 30,
  
(Dollars in thousands, except per share data)
  
2008
    
2007
  
LIABILITIES AND STOCKHOLDERS' EQUITY
                
                 
Current liabilities
                
Current portion of long-term debt
  
$
17,479
    
$
17,055
  
Trade payables
    
47,214
      
45,216
  
Accrued liabilities
    
69,493
      
84,436
  
Income taxes payable
    
3,244
      
11,985
  
                 
Total current liabilities
    
137,430
      
158,692
  
                 
Long-term debt, less current portion
    
55,617
      
57,593
  
Other long-term liabilities
    
53,926
      
44,154
  
                 
Total liabilities
    
246,973
      
260,439
  
                 
Commitments and contingencies
                
                 
Stockholders' equity
                
Common stock, par value $2.50 per share, authorized 24,000,000 shares, outstanding 9,179,192 shares in 2008 and 9,138,563 shares in 2007, net of treasury shares
    
29,796
      
29,623
  
Additional paid-in capital
    
51,798
      
46,675
  
Retained earnings
    
451,957
      
430,925
  
Accumulated other comprehensive loss
    
(2,620
)
    
(9,870
)
Treasury stock (2,739,300 shares in 2008 and 2,710,479 shares in 2007)
    
(54,734
)
    
(51,980
)
                 
Total stockholders' equity
    
476,197
      
445,373
  
                 
Total liabilities and stockholders' equity
  
$
723,170
    
$
705,812
  
 
The accompanying notes are an integral part of these consolidated financial statements.
 


5
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

   
Six Months Ended
  
   
June 1,
    
May 27,
  
(Dollars in thousands)
  
2008
    
2007
  
OPERATING ACTIVITIES
            
Net income
  
$
26,070
    
$
24,271
  
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
                
Depreciation
    
9,688
      
7,773
  
Amortization
    
71
      
12
  
Earnings in excess of distributions from joint ventures
    
(5,435
)
    
(3,453
)
Loss/(gain) from sale of property, plant and equipment
    
22
      
(1,006
)
Stock compensation expense
    
3,633
      
1,264
  
Other
    
-
      
1
  
Changes in operating assets and liabilities:
                
Receivables, net
    
28,767
      
(7,601
)
Inventories
    
(2,959
)
    
(41,799
)
Prepaid expenses and other current assets
    
(2,021
) 
    
5,332
  
Other assets
    
(5,296
)
    
(499
) 
Trade payables
    
838
      
(880
) 
Accrued liabilities and income taxes payable
    
(30,966
) 
    
23,625
  
Other long-term liabilities
    
13,456
      
(1,669
)
Net cash provided by operating activities
    
35,868
      
5,371
  
                 
INVESTING ACTIVITIES
                
Proceeds from sale of property, plant and equipment
    
1,433
      
3,568
  
Additions to property, plant and equipment
    
(28,638
)
    
(23,694
)
Net cash used in investing activities
    
(27,205
)
    
(20,126
)
                 
FINANCING ACTIVITIES
                
Issuance of debt
    
-
      
1,099
  
Repayment of debt
    
(4,001
)
    
(2,644
)
Dividends on common stock
    
(5,038
)
    
(3,639
)
Issuance of common stock
    
810
      
511
  
Excess tax benefits related to stock-based compensation
    
1,251
      
1,955
  
Purchase of treasury stock
    
(2,754
)
    
(1,595
)
Net cash used in financing activities
    
(9,732
)
    
(4,313
)
                 
Effect of exchange rate changes on cash and cash equivalents
    
5,217
      
574
  
Net change in cash and cash equivalents
    
4,148
      
(18,494
) 
Cash and cash equivalents at beginning of period
    
155,433
      
139,479
  
                 
Cash and cash equivalents at end of period
  
$
159,581
    
$
120,985
  
 
 The accompanying notes are an integral part of these consolidated financial statements.
 


6
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

Consolidated financial statements for the interim periods included herein are unaudited; however, they contain all adjustments, including normal recurring accruals, which, in the opinion of management, are necessary to present fairly the consolidated financial position of Ameron International Corporation and all subsidiaries (the "Company" or "Ameron" or the "Registrant") as of June 1, 2008, and consolidated results of operations and cash flows for the six months ended June 1, 2008.  Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end.  Results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
 
For accounting consistency, the quarter typically ends on the Sunday closest to the end of the relevant calendar month.  The Company’s fiscal year ends on November 30, regardless of the day of the week.  Each quarter consists of approximately 13 weeks, but the number of days per quarter can change from period to period.  The quarters ended June 1, 2008 and May 27, 2007 consisted of 91 days each.  The six months ended June 1, 2008 and May 27, 2007 consisted of 184 days and 178 days, respectively.

The consolidated financial statements do not include certain footnote disclosures and financial information normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America and, therefore, should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended November 30, 2007 ("2007 Annual Report").

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.”  FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return.  The minimum threshold is defined in FIN No. 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN No. 48 must be applied to all existing tax positions upon initial adoption. The cumulative effect of applying FIN No. 48 at adoption is to be reported as an adjustment to beginning retained earnings for the year of adoption.  FIN No. 48 is effective for the current year and was adopted by the Company as of December 1, 2007.  Further information about the application of FIN No. 48 may be found in Note 17, herein.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and expands disclosure about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.  Relative to SFAS No. 157, the FASB issued FASB Staff Position (“FSP”) Nos. 157-1 and 157-2.  FSP No. 157-1 amends SFAS No. 157 to exclude SFAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions.  FSP No. 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The Company adopted SFAS No. 157, as amended, effective December 1, 2007 with the exception of the application of SFAS No. 157 to non-recurring non-financial assets and non-financial liabilities.  The adoption of SFAS No. 157 did not have a significant impact on the Company’s financial results of operations or financial position.  See Note 18, “Fair Value Measurements,” for further discussion.

In September 2006, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” effective for fiscal years beginning after December 15, 2007.  EITF Issue No. 06-4 requires that, for split-dollar life insurance arrangements providing a benefit to an employee extending to postretirement periods, an employer should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting For Postretirement Benefits Other Than Pensions.”  EITF Issue No. 06-4 requires that recognition of the effects of adoption should be either by (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods.  The Company is evaluating whether the adoption of EITF Issue No. 06-4 will have a material effect on its consolidated financial statements.

7
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES


In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”  SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.  SFAS No. 159 also provides companies the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  SFAS No. 159 is effective for the current year and was adopted by the Company as of December 1, 2007.  The Company elected not to exercise the fair value irrevocable option.  The adoption of SFAS No. 159 did not have a material effect on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.”  SFAS No. 141(R) amends accounting and reporting standards associated with business combinations and requires the acquiring entity to recognize the assets acquired, liabilities assumed and noncontrolling interests in the acquired entity at the date of acquisition at their fair values.  In addition, SFAS No. 141(R) requires that direct costs associated with an acquisition be expensed as incurred and sets forth various other changes in accounting and reporting related to business combinations.  SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  An entity may not apply SFAS No. 141(R) before that date.  The first such reporting period for the Company will be 2010.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.”  SFAS No. 160 amends the accounting and reporting for noncontrolling interests in a consolidated subsidiary and the deconsolidation of a subsidiary.  Included in this statement is the requirement that noncontrolling interests be reported in the equity section of the balance sheet.  SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Earlier adoption is prohibited.  The first such reporting period for the Company will be 2010.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133,” effective for fiscal years beginning after November 15, 2008, with early application encouraged.  SFAS No. 161 amends and expands the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosures about how and why the Company uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect the Company’s financial position, financial performance and cash flows.  The adoption of SFAS No. 161 is not expected to have a material effect on the Company’s consolidated financial statements.  The Company is evaluating when to adopt SFAS No. 161, with adoption by the Company required in 2009.

NOTE 3 – DISCONTINUED OPERATIONS

On August 1, 2006, the Company completed the sale of its Performance Coatings & Finishes business (the "Coatings Business") to PPG Industries, Inc. ("PPG").  Certain real properties that were used in the Coatings Business were excluded from the sale.  During the second quarter of 2007, one of the properties was sold for a gain of $990,000, net of taxes.  During the first quarter of 2007, the Company recognized $156,000 of research and development tax credits related to the Coatings Business.  The tax credits were attributable to the retroactive application of tax legislation enacted in 2007.

The results of discontinued operations were as follows:
   
Three Months Ended
    
Six Months Ended
  
   
June 1,
    
May 27,
    
June 1,
    
May 27,
  
(In thousands)
  
2008
    
2007
    
2008
    
2007
  
Tax credits from discontinued operations
  
$
-
    
$
-
    
$
-
    
$
156
  
Gain on sale of discontinued operations, net of taxes
    
-
      
990
      
-
      
990
  
Income from discontinued operations, net of taxes
  
$
-
    
$
990
    
$
-
    
$
1,146
  

Income from discontinued operations, net of taxes, was $.11 per diluted share and $.13 per diluted share, for the three and six months ended May 27, 2007, respectively.

8
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

 NOTE 4 - RECEIVABLES

The Company’s receivables consisted of the following:
   
June 1,
    
November 30,
  
(In thousands)
  
2008
    
2007
  
Trade
  
$
143,478
    
$
156,562
  
Joint ventures
    
1,832
      
2,714
  
Other
    
20,693
      
32,294
  
Allowances
    
(6,137
)
    
(6,235
)
   
$
159,866
    
$
185,335
  

Trade receivables included unbilled receivables related to percentage-of-completion revenue recognition of $33,820,000 and $45,578,000 at June 1, 2008 and November 30, 2007, respectively.
 
NOTE 5 – INVENTORIES

Inventories are stated at the lower of cost or market.  Inventories consisted of the following:
   
June 1,
    
November 30,
  
(In thousands)
  
2008
    
2007
  
Finished products
  
$
42,231
    
$
41,580
  
Materials and supplies
    
22,464
      
28,246
  
Products in process
    
37,726
      
27,891
  
   
$
102,421
    
$
97,717
  

NOTE 6 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Supplemental cash flow information included the following:

   
Six Months Ended
  
   
June 1,
    
May 27,
  
(In thousands)
  
2008
    
2007
  
Interest paid
  
$
1,181
    
$
1,005
  
Income taxes paid
    
8,588
      
16,612
  

NOTE 7 – JOINT VENTURES

Operating results of TAMCO, an investment which is accounted for under the equity method, were as follows:

   
Three Months Ended
    
Six Months Ended
  
   
June 1,
    
May 27,
    
June 1,
    
May 27,
  
(In thousands)
  
2008
    
2007
    
2008
    
2007
  
Net sales
  
$
135,742
    
$
71,449
    
$
218,458
    
$
147,871
  
                                 
Gross profit
    
28,976
      
19,120
      
42,799
      
40,910
  
                                 
Net income
    
14,900
      
9,539
      
20,989
      
20,875
  

Investments in Ameron Saudi Arabia, Ltd. ("ASAL") and Bondstrand, Ltd. ("BL") are accounted for under the cost method due to management's current assessment of the Company's influence over these joint ventures.

9
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

 
Earnings and dividends from the Company's joint ventures were as follows:

   
Three Months Ended
    
Six Months Ended
  
   
June 1,
    
May 27,
    
June 1,
    
May 27,
  
(In thousands)
  
2008
    
2007
    
2008
    
2007
  
Earnings from joint ventures
                        
Equity in earnings of TAMCO before income taxes
  
$
7,450
    
$
4,770
    
$
10,495
    
$
10,438
  
Less provision for income taxes
    
(715
)
    
(542
)
    
(1,008
)
    
(1,182
)
Equity in earnings of TAMCO, net of taxes
  
$
6,735
    
$
4,228
    
$
9,487
    
$
9,256
  
Dividends received from joint ventures
                                
TAMCO
  
$
4,510
    
$
6,985
    
$
5,060
    
$
6,985
  
ASAL
    
-
      
-
      
1,496
      
-
  
BL
    
-
      
-
      
-
      
-
  

Earnings from ASAL and BL, if any, are included in other income, net.

NOTE 8 – NET INCOME PER SHARE
 
Basic net income per share is computed on the basis of the weighted-average number of common shares outstanding during the periods presented.  Diluted net income per share is computed on the basis of the weighted-average number of common shares outstanding plus the effect of outstanding stock options and restricted stock, using the treasury stock method.  Outstanding common stock equivalents, consisting of 42,520 and 30,967 restricted shares and options to purchase 45,802 and 90,000 common shares, were dilutive for the six months ended June 1, 2008 and May 27, 2007, respectively.   Following is a reconciliation of the weighted-average number of shares used in the computation of basic and diluted net income per share:

   
Three Months Ended
    
Six Months Ended
  
   
June 1,
    
May 27,
    
June 1,
    
May 27,
  
(In thousands, except per share data)
  
2008
    
2007
    
2008
    
2007
  
Numerator:
                        
Income from continuing operations
  
$
16,333
    
$
14,813
    
$
26,070
    
$
23,125
  
Income from discontinued operations, net of taxes
    
-
      
990
      
-
      
1,146
  
Net income
  
$
16,333
    
$
15,803
    
$
26,070
    
$
24,271
  
                                 
Denominator for basic income per share:
                                
Weighted-average shares outstanding, basic
    
9,132,172
      
9,024,190
      
9,110,712
      
9,009,133
  
                                 
Denominator for diluted income per share:
                                
Weighted-average shares outstanding, basic
    
9,132,172
      
9,024,190
      
9,110,712
      
9,009,133
  
Dilutive effect of stock options and restricted stock
    
54,477
      
41,491
      
41,185
      
48,970
  
Weighted-average shares outstanding, diluted
    
9,186,649
      
9,065,681
      
9,151,897
      
9,058,103
  
                                 
Basic net income per share:
                                
Income from continuing operations
  
$
1.79
    
$
1.64
    
$
2.86
    
$
2.57
  
Income from discontinued operations, net of taxes
    
-
      
.11
      
-
      
.13
  
Net income
  
$
1.79
    
$
1.75
    
$
2.86
    
$
2.70
  
                                 
Diluted net income per share:
                                
Income from continuing operations
  
$
1.78
    
$
1.63
    
$
2.85
    
$
2.55
  
Income from discontinued operations, net of taxes
    
-
      
.11
      
-
      
.13
  
Net income
  
$
1.78
    
$
1.74
    
$
2.85
    
$
2.68
  


10
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTE 9 – COMPREHENSIVE INCOME

Comprehensive income was as follows:
   
Three Months Ended
    
Six Months Ended
  
   
June 1,
    
May 27,
    
June 1,
    
May 27,
  
(In thousands)
  
2008
    
2007
    
2008
    
2007
  
Net income
  
$
16,333
    
$
15,803
    
$
26,070
    
$
24,271
  
Foreign currency translation adjustment
    
2,448
      
1,362
      
7,250
      
2,780
  
Comprehensive income
  
$
18,781
    
$
17,165
    
$
33,320
    
$
27,051
  

NOTE 10 – DEBT

The Company's long-term debt consisted of the following:

   
June 1,
    
November 30,
  
(In thousands)
  
2008
    
2007
  
Fixed-rate notes:
                
5.36%, payable in annual principal installments of $10,000
  
$
20,000
    
$
20,000
  
4.25%, payable in Singapore dollars, in annual principal installments of $7,479
    
37,396
      
35,274
  
Variable-rate industrial development bonds:
                
payable in 2016 (1.90% at June 1, 2008)
    
7,200
      
7,200
  
payable in 2021 (1.90% at June 1, 2008)
    
8,500
      
8,500
  
Variable-rate bank revolving credit facility
    
-
      
3,674
  
Total long-term debt
    
73,096
      
74,648
  
Less current portion
    
(17,479
)
    
(17,055
)
Long-term debt, less current portion
  
$
55,617
    
$
57,593
  

The Company maintains a $100,000,000 revolving credit facility with six banks (the "Revolver").  Under the Revolver, the Company may, at its option, borrow at floating interest rates (LIBOR plus a spread ranging from .75% to 1.625%, determined by the Company's financial condition and performance), at any time until September 2010, when all borrowings under the Revolver must be repaid.  The
lending agreements contain various restrictive covenants, including the requirements to maintain specified amounts of net worth and restrictions on cash dividends, borrowings, liens, investments, guarantees, and financial covenants.  The Company was in compliance with all covenants as of June 1, 2008.  The Revolver, the 4.25% term notes and the 5.36% term notes are collateralized by substantially all of the Company's assets.  The industrial development bonds are supported by standby letters of credit that are issued under the Revolver.  The interest rate on the industrial development bonds is based on a weekly index of tax-exempt issues plus a spread of .20%.  Certain note agreements contain provisions regarding the Company's ability to grant security interests or liens in association with other debt instruments.  If the Company grants such a security interest or lien, then such notes will be collateralized equally and ratably as long as such other debt shall be collateralized.

The Company intends for short-term borrowings under certain bank facilities utilized by the Company and its foreign subsidiaries to be refinanced on a long-term basis via the Revolver.  In addition, the amount available under the Revolver exceeded such short-term borrowings at November 30, 2007.  Accordingly, amounts due under these bank facilities are classified as long-term debt and are considered payable when the Revolver is due.


11
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTE 11 – SEGMENT INFORMATION

The Company provides certain information about operating segments in accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.”  In accordance with SFAS No. 131, the Company determined that it has four operating and three reportable segments: Fiberglass-Composite Pipe, Water Transmission and Infrastructure Products.  Infrastructure Products consists of two operating segments, the Pole Products and Hawaii Divisions, which are aggregated.  In prior periods, the Company included a fourth reportable segment, Performance Coatings & Finishes, which was sold effective August 1, 2006.  The results from this segment are reported as discontinued operations for all reporting periods.  Each of the segments has a dedicated management team and is managed separately, primarily because of differences in products.  The Company's Chief Operating Decision Maker is the Chief Executive Officer who primarily reviews sales and income before interest, income taxes and equity in earnings of joint venture for each operating segment in making decisions about allocating resources and assessing performance.  The Company allocates certain selling, general and administrative expenses to operating segments utilizing assumptions believed to be appropriate in the circumstances.  Costs of shared services (e.g., costs of Company-wide insurance programs or benefit plans) are allocated to the operating segments based on revenue, wages or net assets employed.  Other items not related to current operations or of an unusual nature are not allocated to the reportable segments, such as adjustments to reflect inventory balances of certain steel inventories under the last-in, first-out ("LIFO") method, certain unusual legal costs and expenses, interest expense and income taxes.

Following is information related to each reportable segment included in, and in a manner consistent with, internal management reports:
   
Three Months Ended
    
Six Months Ended
  
   
June 1,
    
May 27,
    
June 1,
    
May 27,
  
(In thousands)
  
2008
    
2007
    
2008
    
2007
  
Sales
                        
Fiberglass-Composite Pipe
  
$
69,388
    
$
61,120
    
$
135,231
    
$
107,629
  
Water Transmission
    
44,026
      
43,258
      
85,010
      
72,851
  
Infrastructure Products
    
46,791
      
53,645
      
90,119
      
98,932
  
Eliminations
    
(412
)
    
(1,267
)
    
(798
)
    
(2,301
)
Total Sales
  
$
159,793
    
$
156,756
    
$
309,562
    
$
277,111
  
                                 
Income from Continuing Operations Before Interest, Income Taxes and Equity in Earnings of Joint Venture
                                
Fiberglass-Composite Pipe
  
$
17,865
    
$
16,739
    
$
34,500
    
$
25,738
  
Water Transmission
    
(1,775
) 
    
800
      
(5,714
)
    
(3,331
) 
Infrastructure Products
    
6,640
      
10,004
      
12,934
      
16,731
  
Corporate and unallocated
    
(8,274
)
    
(11,803
) 
    
(16,639
)
    
(18,560
)
Total Income from Continuing Operations Before Interest, Income Taxes and Equity in Earnings of Joint Venture
  
$
14,456
    
$
15,740
    
$
25,081
    
$
20,578
  

   
June 1,
    
November 30,
  
(In thousands)
  
2008
    
2007
  
Assets
                
Fiberglass-Composite Pipe
  
$
300,704
    
$
260,567
  
Water Transmission
    
219,701
      
218,247
  
Infrastructure Products
    
110,103
      
103,993
  
Corporate and unallocated
    
245,368
      
226,383
  
Eliminations
    
(152,706
)
    
(103,378
)
Total Assets
  
$
723,170
    
$
705,812
  


12
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTE 12 – COMMITMENTS AND CONTINGENCIES

The Company is one of numerous defendants in various asbestos-related personal injury lawsuits.  These cases generally seek unspecified damages for asbestos-related diseases based on alleged exposure to products previously manufactured by the Company and others, and at this time the Company is generally not aware of the extent of injuries allegedly suffered by the individuals or the facts supporting the claim that injuries were caused by the Company's products.  Based upon the information available to it at this time, the Company is not in a position to evaluate its potential exposure, if any, as a result of such claims or future similar claims, if any, that may be filed.  Hence, no amounts have been accrued for loss contingencies related to these lawsuits in accordance with SFAS No. 5, "Accounting for Contingencies."  The Company continues to vigorously defend all such lawsuits.  As of June 1, 2008, the Company was a defendant in asbestos-related cases involving 29 claimants, compared to 25 claimants as of March 2, 2008.  The Company is not in a position to estimate the number of additional claims that may be filed against it in the future.  For the quarter ended June 1, 2008, there were new claims involving seven claimants, dismissals and/or settlements involving three claimants and no judgments.  No net costs or expenses were incurred by the Company for the quarter ended June 1, 2008 in connection with asbestos-related claims.

In May 2003, Dominion Exploration and Production, Inc. and Pioneer Natural Resources USA, Inc. (collectively "Dominion") brought an action against the Company in Civil District Court for the Parish of Orleans, Louisiana as owners of an offshore production facility known as a SPAR.  Dominion seeks damages allegedly sustained by it resulting from delays in delivery of the SPAR caused by the removal and replacement of certain coatings containing lead and/or lead chromate for which the manufacturer of the SPAR alleged the Company was responsible.  Dominion contends that the Company made certain misrepresentations and warranties to Dominion concerning the lead-free nature of those coatings.  Dominion's petition as filed alleged a claim for damages in an unspecified amount; however, Dominion's economic expert has since estimated Dominion's damages at approximately $128,000,000 a figure which the Company contests.  This matter is in discovery and no trial date has yet been established.  The Company believes that it has meritorious defenses to this action.   Based upon the information available to it at this time, the Company is not in a position to evaluate the ultimate outcome of this matter.
 
In April 2004, Sable Offshore Energy Inc. ("Sable"), as agent for certain owners of the Sable Offshore Energy Project, brought an action against various coatings suppliers and application contractors, including the Company and two of its subsidiaries, Ameron (UK) Limited and Ameron B.V. (collectively "Ameron Subsidiaries") in the Supreme Court of Nova Scotia, Canada.  Sable seeks damages allegedly sustained by it resulting from performance problems with several coating systems used on the Sable Offshore Energy Project, including coatings products furnished by the Company and the Ameron Subsidiaries.  Sable's originating notice and statement of claim alleged a claim for damages in an unspecified amount; however, Sable has since alleged that its claim for damages against all defendants is approximately 428,000,000 Canadian dollars, a figure which the Company and the Ameron Subsidiaries contest.  This matter is in discovery, and no trial date has yet been established.  The Company believes that it has meritorious defenses to this action.  Based upon the information available to it at this time, the Company is not in a position to evaluate the ultimate outcome of this matter.

In addition, certain other claims, suits and complaints that arise in the ordinary course of business, have been filed or are pending against the Company. Management believes that these matters are either adequately reserved, covered by insurance, or would not have a material effect on the Company's financial position, cash flows, or its results of operations if disposed of unfavorably.

The Company is subject to federal, state and local laws and regulations concerning the environment and is currently participating in administrative proceedings at several sites under these laws. While the Company finds it difficult to estimate with any certainty the total cost of remediation at the several sites, on the basis of currently available information and reserves provided, the Company believes that the outcome of such environmental regulatory proceedings will not have a material effect on the Company's financial position, cash flows, or its results of operations.

13
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES
 
NOTE 13 – PRODUCT WARRANTIES AND GUARANTEES

The Company's product warranty accrual reflects management's estimate of probable liability associated with product warranties.  The Company generally provides a standard product warranty covering defects for a period not exceeding one year from date of purchase.  Management establishes product warranty accruals based on historical experience and other currently-available information.  Changes in the product warranty accrual were as follows:

   
Six Months Ended
  
   
June 1,
    
May 27,
  
(In thousands)
  
2008
    
2007
  
Balance, beginning of period
  
$
3,590
    
$
3,146
  
Payments
    
(534
)
    
(674
)
Warranties issued during the period
    
(676
) 
    
912
  
Balance, end of period
  
$
2,380
    
$
3,384
  

NOTE 14 – GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the Company’s carrying amount of goodwill by business segment were as follows:
         
Foreign
        
         
Currency
        
   
November 30,
    
Translation
    
June 1,
  
(In thousands)
  
2007
    
Adjustments
    
2008
  
Fiberglass-Composite Pipe
  
$
1,440
    
$
-
    
$
1,440
  
Water Transmission
    
392
      
9
      
401
  
Infrastructure Products
    
201
      
-
      
201
  
   
$
2,033
    
$
9
    
$
2,042
  

The Company's intangible assets, other than goodwill, and related accumulated amortization consisted of the following:
 
   
June 1, 2008
    
November 30, 2007
  
   
Gross Intangible
    
Accumulated
    
Gross Intangible
    
Accumulated
  
(In thousands)
  
Assets
    
Amortization
    
Assets
    
Amortization
  
Trademarks
  
$
113
    
$
(104
)
  
$
113
    
$
(101
)
Non-compete agreements
    
300
      
(176
)
    
299
      
(163
)
Patents
    
212
      
(212
)
    
212
      
(212
)
Other
    
94
      
(79
) 
    
79
      
(17
)
   
$
719
    
$
(571
)
  
$
703
    
$
(493
)

All of the Company's intangible assets, other than goodwill, are subject to amortization.  Amortization expense for the three and six months ended June 1, 2008 was $33,000 and $71,000, respectively.  Amortization expense for the three and six months ended May 27, 2007 was $6,000 and $12,000, respectively.  At June 1, 2008, estimated future amortization expense was as follows: $23,000 for the remaining six months of 2008, $44,000 for 2009, $33,000 for 2010, $33,000 for 2011, and $15,000 for 2012.

14
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTE 15 – INCENTIVE STOCK COMPENSATION PLANS

As of June 1, 2008, the Company had outstanding grants under the following share-based compensation plans:

 ·     1994 Non-Employee Director Stock Option Plan ("1994 Plan") - The 1994 Plan was terminated in 2001, except as to the outstanding options.  A total of 240,000 new shares of Common Stock were made available for awards to non-employee directors.  Non-employee directors were granted options to purchase the Company's Common Stock at prices not less than 100% of market value on the date of grant.  Such options vested in equal annual installments over four years and terminate ten years from the date of grant.

·     2001 Stock Incentive Plan ("2001 Plan") - The 2001 Plan was terminated in 2004, except as to the outstanding stock options and restricted stock grants.  A total of 380,000 new shares of Common Stock were made available for awards to key employees and non-employee directors.  The 2001 Plan served as the successor to the 1994 Plan and superseded that plan.  Non-employee directors were granted options under the 2001 Plan to purchase the Company's Common Stock at prices not less than 100% of market value on the date of grant.  Such options vested in equal annual installments over four years.  Such options terminate ten years from the date of grant.  Key employees were granted restricted stock under the 2001 Plan.  Such restricted stock grants vested in equal annual installments over four years.

·     2004 Stock Incentive Plan ("2004 Plan") - The 2004 Plan serves as the successor to the 2001 Plan and supersedes that plan.  A total of 525,000 new shares of Common Stock were made available for awards to key employees and non-employee directors and may include, but are not limited to, stock options and restricted stock grants.  Non-employee directors were granted options under the 2004 Plan to purchase the Company's Common Stock at prices not less than 100% of market value on the date of grant.  Such options vest in equal annual installments over four years and terminate ten years from the date of grant.  Key employees and non-employee directors were granted restricted stock under the 2004 Plan.  Such restricted stock grants typically vest in equal annual installments over three years.  During the six months ended June 1, 2008, the Company granted 3,802 stock options to non-employee directors with a fair value on the grant date of $101,000.  The Company also granted 7,200 restricted shares to non-employee directors with a fair value on the grant dates of $675,000 and 19,000 restricted shares to key employees with fair value on the grant dates of  $1,976,000.

In addition to the above, on January 24, 2001, non-employee directors were granted options to purchase the Company's Common Stock at prices not less than 100% of market value on the date of grant.  Such options vested in equal annual installments over four years and terminate ten years from the date of grant.  At June 1, 2008, there were 13,000 shares subject to such stock options.

The Company's income from continuing operations before income taxes and equity in earnings of joint venture for the three months ended June 1, 2008 and May 27, 2007 included compensation expense of $1,777,000 and $780,000, respectively, related to stock-based compensation arrangements.  Related tax benefits were $693,000 and $304,000, respectively.  For the six months ended June 1, 2008 and May 27, 2007 included compensation expense of $3,633,000 and $1,264,000, respectively, related to stock-based compensation arrangements.  Related tax benefits were $1,417,000 and $493,000, respectively.  There were no capitalized share-based compensation costs for the three and six months ended June 1, 2008 and May 27, 2007.

15
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES


The following table summarizes the stock option activity for the six months ended June 1, 2008:
               
Weighted-
        
         
Weighted-
    
Average
        
         
Average
    
Remaining
    
Aggregate
  
   
Number of
    
Exercise Price
    
Contractual
    
Intrinsic Value
  
Options
  
Options
    
per Share
    
Term (Years)
    
(in thousands)
  
Outstanding at November 30, 2007
    
67,250
    
$
28.77
              
Granted
    
3,802
      
101.23
              
Exercised
    
(25,250
)
    
29.60
              
Outstanding at June 1, 2008
    
45,802
      
25.92
      
4.64
    
$
3,680
  
                                 
Options exercisable at June 1, 2008
    
40,500
      
28.08
      
4.08
    
$
3,507
  

For the three and six months ended June 1, 2008, 3,802 options were granted; and no options were forfeited or expired.  For the three and six months ended May 27, 2007, no options were granted, forfeited or expired.  The aggregate intrinsic value in the table above represents the total pretax intrinsic value, which is the difference between the closing price of the Company’s Common Stock on the last trading day of the second quarter of 2008 and the exercise price times the number of shares that would have been received by the option holders if the options were exercised on such trading day.  This amount will change based on the fair market value of the Company's Common Stock.  The aggregate intrinsic value of stock options exercised during the three and six months ended June 1, 2008 were $87,000 and $1,789,000, respectively.  The aggregate intrinsic value of stock options exercised during the three and six months ended May 27, 2007 were $ 375,000 and $1,550,000, respectively.  As of June 1, 2008, unrecognized compensation cost related to stock-based compensation arrangements totaled $8,607,000, which is expected to be recognized over a weighted-average period of three years.

For the three and six months ended June 1, 2008, 10,200 and 26,200 shares of restricted stock, respectively, were granted.  The weighted-average grant-date, fair value of such restricted stock was $99.21 and $101.70 per share, respectively.  The fair value of restricted stock, which vested during the three and six months ended June 1, 2008, was $356,000 and $5,844,000, respectively.  For the three and six months ended May 27, 2007, 6,000 and 34,550 shares of restricted stock, respectively, were granted.  The weighted-average grant-date, fair value of such restricted stock was $56.18 and $76.47 per share, respectively.  The fair value of restricted stock, which vested during the three and six months ended May 27, 2007, was $1,238,000 and $3,562,000, respectively.

Cash proceeds from the exercise of stock options during the three and six months ended June 1, 2008 were $50,000 and $810,000, respectively.  Cash proceeds from the exercise of stock options during the three and six months ended May 27, 2007 were $106,000 and $511,000, respectively.  The Company's policy is to issue shares from its authorized shares upon the exercise of stock options.


16
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES
 
NOTE 16 – EMPLOYEE BENEFIT PLANS

For the three and six months ended June 1, 2008 and May 27, 2007, net pension and postretirement costs were comprised of the following:
 
Employee Benefits (Three Months Ended June 1, 2008 and May 27, 2007)
                           
U.S. Postretirement
  
   
Pension Benefits
    
Benefits
  
   
U.S. Plans
    
Non-U.S. Plans
              
(In thousands)
  
2008
    
2007
    
2008
    
2007
    
2008
    
2007
  
Service cost
  
$
757
    
$
732
    
$
109
    
$
132
    
$
24
    
$
22
  
Interest cost
    
2,871
      
2,795
      
638
      
565
      
52
      
51
  
Expected return on plan assets
    
(3,900
)
    
(3,543
)
    
(429
)
    
(420
)
    
(8
)
    
(9
)
Amortization of unrecognized
                                                
prior service cost
    
28
      
28
      
76
      
70
      
5
      
5
  
Amortization of unrecognized
                                                
net transition obligation
    
-
      
-
      
-
      
38
      
12
      
12
  
Amortization of accumulated loss
    
233
      
976
      
-
      
-
      
3
      
4
  
Net periodic cost
  
$
(11
) 
  
$
988
    
$
394
    
$
385
    
$
88
    
$
85
  

Employee Benefits (Six Months Ended June 1, 2008 and May 27, 2007)
                           
U.S. Postretirement
  
   
Pension Benefits
    
Benefits
  
   
U.S. Plans
    
Non-U.S. Plans
              
(In thousands)
  
2008
    
2007
    
2008
    
2007
    
2008
    
2007
  
Service cost
  
$
1,514
    
$
1,464
    
$
218
    
$
264
    
$
48
    
$
44
  
Interest cost
    
5,742
      
5,590
      
1,276
      
1,130
      
105
      
102
  
Expected return on plan assets
    
(7,800
)
    
(7,086
)
    
(858
)
    
(840
)
    
(16
)
    
(18
)
Amortization of unrecognized
                                                
     prior service cost
    
56
      
56
      
152
      
140
      
10
      
10
  
Amortization of unrecognized
                                                
     net transition obligation
    
-
      
-
      
-
      
76
      
23
      
24
  
Amortization of accumulated loss
    
466
      
1,952
      
-
      
-
      
6
      
8
  
Net periodic cost
  
$
(22
) 
  
$
1,976
    
$
788
    
$
770
    
$
176
    
$
170
  

The Company contributed $1,063,000 to the non-U.S. defined benefit pension plans and made no payment to its U.S. defined benefit pension plan in the first six months of 2008.  Based on current actuarial projections, the Company anticipates that the funded status of the U.S. pension plan will be sufficient so that the Company will not be required to make contributions in 2008 under the funding regulations of the Pension Protection Act of 2006 (“PPA”).  However, the Company expects to contribute approximately $3,000,000 to its U.S. defined benefit pension plan and an additional $360,000 to the non-U.S. pension plans during the remainder of fiscal year 2008.


17
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTE 17 – PROVISION FOR INCOME TAXES

Income taxes decreased to $5,000,000 in the second quarter of 2008, from $5,137,000 in the same period of 2007.  Income taxes increased to $8,929,000 in the first six months of 2008, from $7,057,000 in the comparable period in 2007.  The effective tax rate on income from continuing operations increased to 35.0% in 2008, from 33.7% in 2007.  The effective tax rate for the first half of 2008 is based on forecasted full-year earnings and the anticipated mix of domestic and foreign earnings.  Income from certain foreign operations and joint ventures is taxed at rates that are lower than the U.S. statutory tax rates.  The effective tax rate for the first half of 2008 is not necessarily indicative of the tax rate for the full fiscal year.

Prior to December 1, 2007, the Company recorded reserves related to uncertain tax positions as a current liability.  Upon adoption of FIN No. 48, the Company reclassified tax reserves related to uncertain tax positions for which a cash payment is not expected within the next 12 months to noncurrent liabilities.  The Company’s adoption of FIN No. 48 did not require a cumulative adjustment to the opening balance of retained earnings.

At December 1, 2007, the total amount of gross unrecognized tax benefits, excluding interest, was $13,102,000.  This amount is not reduced for offsetting benefits in other tax jurisdictions and for the benefit of future tax deductions that would arise as a result of settling such liabilities as recorded.  Of this amount, $5,836,000 would reduce the Company’s income tax expense and effective tax rate, after giving effect to offsetting benefits from other tax jurisdictions and resulting future deductions.  There have been no material changes to these amounts during the quarter or six months ended June 1, 2008.

The Company anticipates that it is reasonably possible that the total amount of unrecognized tax benefits may significantly change within the succeeding 12 months as a result of the expiration of certain federal and state statutes of limitations for examination and the settlement of certain state audits.  The Company estimates that these events could reasonably result in a possible decrease in unrecognized tax benefits of $1,887,000.

The Company accrues interest and penalties related to unrecognized tax benefits as income tax expense.  Accruals totaling $1,415,000 were recorded as a liability in the Company’s consolidated balance sheet at December 1, 2007.  There were no material changes to these amounts during the quarter or six months ended June 1, 2008.

The Company’s federal income tax returns remain subject to examination for the 2004 through 2007 tax years.  The Company files multiple state income tax returns, including California, Hawaii, Arizona and Texas, with open statutes ranging from 2000 through 2007.  The Company also files multiple foreign income tax returns and remains subject to examination in major foreign jurisdictions, including the Netherlands, Singapore and Malaysia, for years ranging from 1996 through 2007.

NOTE 18 – FAIR VALUE MEASUREMENTS

Effective December 1, 2007, the Company adopted SFAS No. 157, which provides a framework for measuring fair value under GAAP.  As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The Company utilizes market data or assumptions that the Company believes market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated or generally unobservable.

The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information.  Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  The Company is able to classify fair value balances based on the observability of those inputs.


18
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).  The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:
 
Level 1
Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.  Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.  Level 1 primarily consists of financial instruments such as exchange-traded derivatives, listed equities and U.S. government treasury securities.
 
Level 2
Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.  Level 2 includes those financial instruments that are valued using models or other valuation methodologies.  These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.  Instruments in this category include non-exchange-traded derivatives such as over-the-counter forwards, options and repurchase agreements.
 
Level 3
Pricing inputs include significant inputs that are generally less observable from objective sources.  These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.  Level 3 instruments include those that may be more structured or otherwise tailored to customers’ needs.  At each balance sheet date, the Company performs an analysis of all instruments subject to SFAS No. 157 and includes in Level 3 all of those whose fair value is based on significant unobservable inputs.

Assets and liabilities measured at fair value on a recurring basis include the following as of June 1, 2008:

                         
   
Fair Value Measurements Using
    
Liabilities
  
(In thousands)
  
Level 1
    
Level 2
    
Level 3
    
At Fair Value
  
Liabilities
                                
Derivative liabilities
  
$
-
    
$ 
13
    
$
-
    
$
13
  
Total liabilities
  
$
-
    
$
13
    
$
-
    
$
13
  

Derivatives

The Company’s subsidiaries conduct business in several countries where transactions are completed in currencies other than the U.S. dollar.  The Company’s primary objective with respect to currency risk is to reduce net income volatility that would otherwise occur due to exchange-rate fluctuations.  In order to minimize the risk of gain or loss to cash flows due to exchange rates, the Company uses foreign currency derivatives.  As of June 1, 2008, the Company held 19 foreign currency forward contracts in the amount of $10,000,000 U.S. dollars, hedging Singapore dollars.  As of June 1, 2008, such instruments had a fair value loss of $13,000 based on quotations from the financial institutions.
 

19
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

Ameron International Corporation ("Ameron" or the "Company") is a multinational manufacturer of highly-engineered products and materials for the chemical, industrial, energy, transportation and infrastructure markets.  Ameron is a leading producer of water transmission lines; fiberglass-composite pipe for transporting oil, chemicals and corrosive fluids and specialized materials and products used in infrastructure and energy projects.  The Company operates businesses in North America, South America, Europe and Asia.  The Company has three reportable segments.  The Fiberglass-Composite Pipe Group manufactures and markets filament-wound and molded composite fiberglass pipe, tubing, fittings and well screens.  The Water Transmission Group manufactures and supplies concrete and steel pressure pipe, concrete non-pressure pipe, protective linings for pipe and fabricated steel products, such as large-diameter wind towers.  The Infrastructure Products Group consists of two operating segments, which are aggregated: the Hawaii Division which manufactures and sells ready-mix concrete, sand and aggregates, concrete pipe and culverts and the Pole Products Division which manufactures and sells concrete and steel lighting and traffic poles.  The markets served by the Fiberglass-Composite Pipe Group are worldwide in scope.  The Water Transmission Group serves primarily the western U.S. for pipe and sells wind towers primarily west of the Mississippi river.  The Infrastructure Products Group's quarry and ready-mix business operates exclusively in Hawaii, and poles are sold throughout the U.S.  Ameron also participates in several joint-venture companies, directly in the U.S. and Saudi Arabia, and indirectly in Egypt.

During the third quarter of 2006, the Company sold its Performance Coatings & Finishes business ("Coatings Business").  The results from this segment are reported as discontinued operations for all the reporting periods.  Accordingly, the following discussions generally reflect summary results from continuing operations unless otherwise noted.  However, the net income and net income per share discussions include the impact of discontinued operations.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Management's Discussion and Analysis of Liquidity and Capital Resources and Results of Operations are based upon the Company's consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires Management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities during the reporting periods.  Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates.

A summary of the Company's significant accounting policies is provided in Note (1) of the Notes to Consolidated Financial Statements, under Part I, Item 1 in the Company’s report on Form 10-K for fiscal year ended November 30, 2007.  In addition, Management believes the following accounting policies affect the more significant estimates used in preparing the consolidated financial statements.

The consolidated financial statements include the accounts of Ameron International Corporation and all wholly-owned subsidiaries.  All material intercompany accounts and transactions are eliminated.  The functional currencies for the Company's foreign operations are the applicable local currencies.  The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the period.  The resulting translation adjustments are recorded in accumulated other comprehensive income/(loss).  The Company advances funds to certain foreign subsidiaries that are not expected to be repaid in the foreseeable future.  Translation adjustments arising from these advances are also included in accumulated other comprehensive income/(loss).  The timing of repayments of intercompany advances could materially impact the Company's consolidated financial statements.  Additionally, earnings of foreign subsidiaries are often permanently reinvested outside the U.S.  Unforeseen repatriation of such earnings could result in significant unrecognized U.S. tax liability.  Gains or losses resulting from foreign currency transactions are included in other income, net.

20
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

Revenue for the Fiberglass-Composite Pipe and Infrastructure Products segments is recognized when risk of ownership and title pass, primarily at the time goods are shipped, provided that an agreement exists between the customer and the Company, the price is fixed or determinable and collection is reasonably assured.  Revenue is recognized for the Water Transmission Group primarily under the percentage-of-completion method, typically based on completed units of production, since products are manufactured under enforceable and binding construction contracts, typically are designed for specific applications, are not interchangeable between projects, and are not manufactured for stock.  Revenue for the period is determined by multiplying total estimated contract revenue by the percentage-of-completion of the contract and then subtracting the amount of previously recognized revenue.  Cost of earned revenue is computed by multiplying estimated contract completion cost by the percentage-of-completion of the contract and then subtracting the amount of previously recognized cost.  In some cases, if products are manufactured for stock or are not related to specific construction contracts, revenue is recognized under the same criteria used by the other two segments.  Revenue under the percentage-of-completion method is subject to a greater level of estimation, which affects the timing of revenue recognition, costs and profits.  Estimates are reviewed on a consistent basis and are adjusted periodically to reflect current expectations.  Costs attributable to unpriced change orders are treated as costs of contract performance in the period, and contract revenue is recognized if recovery is probable.  Disputed or unapproved change orders are treated as claims.  Recognition of amounts of additional contract revenue relating to claims occurs when amounts are received or awarded with recognition based on the percentage-of-completion methodology.
 
The Company expenses environmental clean-up costs related to existing conditions resulting from past or current operations on a site-by-site basis.  Liabilities and costs associated with these matters, as well as other pending litigation and asserted claims arising in the ordinary course of business, require estimates of future costs and judgments based on the knowledge and experience of management and its legal counsel.  When the Company's exposures can be reasonably estimated and are probable, liabilities and expenses are recorded.  The ultimate resolution of any such exposure to the Company may differ due to subsequent developments.

Inventories are stated at the lower of cost or market with cost determined principally on the first-in, first-out ("FIFO") method.  Certain steel inventories used by the Water Transmission Group are valued using the last-in, first-out ("LIFO") method.  Significant changes in steel levels or costs could materially impact the Company's financial statements.  Reserves are established for excess, obsolete and rework inventories based on estimates of salability and forecasted future demand.  Management records an allowance for doubtful accounts receivable based on historical experience and expected trends.  A significant reduction in demand or a significant worsening of customer credit quality could materially impact the Company’s consolidated financial statements.

Investments in unconsolidated joint ventures or affiliates ("joint ventures") over which the Company has significant influence are accounted for under the equity method of accounting, whereby the investment is carried at the cost of acquisition, plus the Company's equity in undistributed earnings or losses since acquisition.  Investments in joint ventures over which the Company does not have the ability to exert significant influence over the investees' operating and financing activities are accounted for under the cost method of accounting.  The Company's investment in TAMCO, a steel mini-mill in California, is accounted for under the equity method.  Investments in Ameron Saudi Arabia, Ltd. and Bondstrand, Ltd. are accounted for under the cost method due to management's current assessment of the Company's influence over these joint ventures.

Property, plant and equipment is stated on the basis of cost and depreciated principally using a straight-line method based on the estimated useful lives of the related assets, generally three to 40 years.  The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.  If the estimated future, undiscounted cash flows from the use of an asset are less than its carrying value, a write-down is recorded to reduce the related asset to estimated fair value.  Actual cash flows may differ significantly from estimated cash flows.  Additionally, current estimates of future cash flows may differ from subsequent estimates of future cash flows.  Changes in estimated or actual cash flows could materially impact the Company's consolidated financial statements.


21
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

The Company is self-insured for a portion of the losses and liabilities primarily associated with workers' compensation claims and general, product and vehicle liability.  Losses are accrued based upon the Company's estimates of the aggregate liability for claims incurred using historical experience and certain actuarial assumptions followed in the insurance industry.  The estimate of self-insurance liability includes an estimate of incurred but not reported claims, based on data compiled from historical experience.  Actual experience could differ significantly from these estimates and could materially impact the Company's consolidated financial statements.  The Company purchases varying levels of insurance to cover a portion of the losses in excess of the self-insured limits.  Currently, the Company's primary self-insurance limits are $1.0 million per workers' compensation claim, $.1 million per general, property or product liability claim, and $.25 million per vehicle liability claim.

The Company follows the guidance of Statement of Financial Accounting Standards ("SFAS") No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” SFAS No. 87, “Employers' Accounting for Pensions”, and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” when accounting for pension and other postretirement benefits.  Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and the performance of plan assets that are controlled and invested by third-party fiduciaries.  Delayed recognition of differences between actual results and expected or estimated results is a guiding principle of these standards.  Such delayed recognition provides a gradual recognition of benefit obligations and investment performance over the working lives of the employees who benefit under the plans, based on various assumptions.  Assumed discount rates are used to calculate the present values of benefit payments which are projected to be made in the future, including projections of increases in employees' annual compensation and health care costs.  Management also projects the future returns on invested assets based principally on prior performance.  These projected returns reduce the net benefit costs the Company records in the current period.  Actual results could vary significantly from projected results, and such deviations could materially impact the Company's consolidated financial statements.  Management consults with the Company’s actuaries when determining these assumptions.  Program changes, including termination, freezing of benefits or acceleration of benefits, could result in an immediate recognition of unrecognized benefit obligations; and such recognition could materially impact the Company's consolidated financial statements.

The Company adopted SFAS No. 157, “Fair Value Measurements,” which provides a framework for measuring fair value.  As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The Company utilizes market data or assumptions that the Company believes market participants would use in pricing assets or liabilities, including assumptions about risk and the risks inherent in the inputs to valuation technique.  These inputs can be readily observable, market corroborated or generally unobservable.  The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information.  Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  The Company classifies fair value balances based on the observability of those inputs.
 
Management incentive compensation is accrued based on current estimates of the Company's ability to achieve short-term and long-term performance targets.

Deferred income tax assets and liabilities are computed for differences between the financial statement and income tax bases of assets and liabilities.  Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse.  Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amounts expected to be realized.  Quarterly income taxes are estimated based on the mix of income by jurisdiction forecasted for the full fiscal year.  The Company believes that it has adequately provided for tax-related matters.


22
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

The amount of income taxes the Company pays is subject to ongoing audits by federal, state and foreign tax authorities.  The Company’s estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time, pursuant to the Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.”  FIN No. 48 requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.  A liability is recorded for the difference between the benefit recognized and measured pursuant to FIN No. 48 and tax position taken or expected to be taken on the tax return.  To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made.  The Company reports tax-related interest and penalties as a component of income tax expense.

LIQUIDITY AND CAPITAL RESOURCES
 
As of June 1, 2008, the Company's working capital, including cash and cash equivalents, totaled $321.6 million, an increase of $7.3 million from working capital of $314.3 million as of November 30, 2007.  Higher working capital resulted primarily from a decrease in accrued wages, employee benefits, and taxes payable and an increase in cash and inventory, offset by a decrease in receivables.  Cash and cash equivalents totaled $159.6 million as of June 1, 2008, compared to $155.4 million as of November 30, 2007.

For the six months ended June 1, 2008, net cash of $35.9 million was generated from operating activities, compared to $5.4 million in the similar period in 2007.  The higher operating cash flow in 2008 was primarily due to higher earnings, excluding non-cash items and asset sales, and a net change in operating assets and liabilities.  In the six months ended June 1, 2008, the Company's cash provided by operating activities included net income of $26.1 million, plus non-cash adjustments (depreciation, amortization, equity income from joint ventures in excess of dividends and stock compensation expense) of $8.0 million, plus changes in operating assets and liabilities of $1.8 million.  In the six months ended May 27, 2007, the Company’s cash from operating activities included net income of $24.3 million, plus similar non-cash adjustments of $5.6 million, and less gain from sale of property, plant and equipment of $1.0 million and changes in operating assets and liabilities of $23.5 million.  The non-cash adjustments in 2008 were higher due primarily to higher depreciation and stock compensation expense, offset by higher equity in earnings of TAMCO in excess of dividends received from TAMCO.  The positive change in operating assets and liabilities in 2008 was primarily due to a decrease of receivables partially offset by a reduction in liabilities in 2008 and an increase of inventories offset by a decrease in accrued liabilities in 2007.

Net cash used in investing activities totaled $27.2 million in six months ended June 1, 2008, compared to $20.1 million used in the six months ended May 27, 2007.  Net cash used in investing activities during the first half of 2008 consisted of capital expenditures of $28.6 million, compared to $23.7 million in the same period of 2007.  Capital expenditures were primarily for normal replacement and upgrades of machinery and equipment in both 2008 and 2007.  Capital expenditures for both years also included the expansion of the Company’s steel fabrication plant in California to manufacture large-diameter wind towers.  During the year ending November 30, 2008, the Company anticipates spending between $50 and $80 million on capital expenditures.  Capital expenditures are expected to be funded by existing cash balances, cash generated from operations or additional borrowings.
 
Net cash used in financing activities totaled $9.7 million during the six months ended June 1, 2008, compared to $4.3 million used in the six months ended May 27, 2007.  Net cash used in 2008 consisted of net repayment of debt of $4.0 million, payment of Common Stock dividends of $5.0 million and treasury stock purchases of $2.8 million, related to the payment of taxes associated with the vesting of restricted shares. Also in 2008, the Company received $.8 million from the issuance of Common Stock related to exercised stock options and recognized tax benefits related to stock-based compensation of $1.3 million.   Net cash used in 2007 consisted of net repayment of debt of $1.5 million, payment of Common Stock dividends of $3.6 million and treasury stock purchases of $1.6 million.   In 2007, the Company received $.5 million from the issuance of Common Stock related to exercised stock options and recognized tax benefits related to stock-based compensation of $2.0 million. 


23
AMERON INTERNATIONAL CORPORATION AND SUBSIDIARIES

The Company utilizes a $100.0 million revolving credit facility with six banks (the "Revolver").  Under the Revolver, the Company may, at its option, borrow at floating interest rates (LIBOR plus a spread ranging from .75% to 1.625%, determined based on the Company’s financial condition and performance), at any time until September 2010, when all borrowings under the Revolver must be repaid.

The Company's lending agreements contain various restrictive covenants, including the requirements to maintain specified amounts of net worth and restrictions on cash dividends, borrowings, liens, investments, guarantees, and financial covenants. The Company is required to maintain consolidated net worth of $181.4 million plus 50% of net income and 75% of proceeds from any equity issued after January 24, 2003. The Company's consolidated net worth exceeded the covenant amount by $174.4 million as of June 1, 2008. The Company is required to maintain a consolidated leverage ratio of consolidated funded indebtedness to earnings before interest, taxes, depreciation and amortization ("EBITDA") of no more than 2.5 times. At June 1, 2008, the Company maintained a consolidated leverage ratio of .75 times EBITDA. Lending agreements require that the Company maintain qualified consolidated tangible assets at least equal to the outstanding secured funded indebtedness. At June 1, 2008, qualifying tangible assets equaled 2.78 times funded indebtedness. Under the most restrictive fixed charge coverage ratio, the sum of EBITDA and rental expense less cash taxes must be at least 1.5 times the sum of interest expense, rental expense, dividends and scheduled funded debt payments. At June 1, 2008, the Company maintained such a fixed charge coverage ratio of 3.51 times.  Under the most restrictive provisions of the Company's lending agreements, approximately $36.0 million of retained earnings was not restricted, at June 1, 2008, as to the declaration of cash dividends or the repurchase of Company stock.  At June 1, 2008, the Company was in compliance with all covenants.

At June 1, 2008, the Company had total debt outstanding of $73.1 million, compared to $74.6 million at November 30, 2007, and approximately $116.5 million in unused committed and uncommitted credit lines available from foreign and domestic banks.  The Company's highest borrowing and the average borrowing levels during 2008 were $74.5 million and $73.6 million, respectively.

The Company contributed $1.1 million to the non-U.S. defined benefit pension plans and did not contribute to the U.S. defined benefit pension plan during the first half of 2008.  The Company expects to contribute approximately $3.0 million to its U.S. defined benefit pension plan and an additional $.4 million to the non-U.S. pension plans during the remainder of fiscal year 2008.