|
|
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help investors understand our results of operations, financial condition and current business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K for the fiscal year ended
August 31, 2016
.
The MD&A is organized as follows:
|
|
•
|
Overview
:
From management’s point of view, we discuss the following:
|
◦
Summary of our business and the markets in which we operate;
◦
Key trends, developments and challenges; and
◦
Significant events during the current fiscal year.
|
|
•
|
Results of Operations
: An analysis of our results of operations as reflected in our consolidated financial statements. Throughout this MD&A, the Company provides operating results for continuing operations exclusive of certain items such as costs related to acquisitions and integration, restructuring and related expenses, asset impairments and asset write-downs, which are considered relevant to aid analysis and understanding of the Company’s results and business trends.
|
|
|
•
|
Critical Accounting Policies:
An overview of
accounting policies identified by the Company as critical that, as a result of the judgments, uncertainties, and the operations involved, could result in material changes to its financial condition or results of operations under different conditions or using different assumptions.
|
|
|
•
|
Liquidity and Capital Resources
: An analysis of our cash flows, working capital, debt structure, contractual obligations and other commercial commitments.
|
Overview
Business Summary
A. Schulman, Inc. is an international supplier of high-performance plastic formulations, resins, and services headquartered in Fairlawn, Ohio. The Company’s customers span a wide range of markets such as packaging, mobility, building & construction, electronics & electrical, agriculture, personal care & hygiene, custom services, and sports, home & leisure.
On June 1, 2015, the Company acquired HGGC Citadel Plastic Holdings, Inc. ("Citadel"), a specialty engineered plastics company that produces thermoset composites and thermoplastic compounds for specialty product applications. The thermoset composites business, or engineered composites, is unique to the Company's legacy product families. Based on the structure of the business and an evaluation of how the Chief Operating Decision Maker ("CODM") makes decisions, assesses performance and allocates resources, in fiscal 2015 the Company added a global reportable segment and product family, Engineered Composites, which has operations in the U.S., Mexico, Brazil, Germany and a joint venture in China. The thermoplastic compounds business, or engineered plastics, is similar to the Company's existing operations in the United States & Canada segment and is therefore incorporated into the Company's existing Engineered Plastics product family within the geographical United States & Canada segment.
The CODM makes decisions, assesses performance and allocates resources by the following reportable segments:
|
|
•
|
Europe, Middle East and Africa ("EMEA"),
|
|
|
•
|
United States & Canada ("USCAN"),
|
|
|
•
|
Latin America ("LATAM"),
|
|
|
•
|
Asia Pacific ("APAC"), and
|
|
|
•
|
Engineered Composites ("EC").
|
The Company has approximately
4,800
employees and
54
manufacturing facilities worldwide. Globally, the Company operates in six product families: (1) Custom Performance Colors, (2) Engineered Composites, (3) Masterbatch Solutions, (4) Engineered Plastics, (5) Specialty Powders and (6) Distribution Services.
Key Trends, Developments and Challenges
We continue the execution of our growth strategy, which is a set of initiatives aimed at increasing our ability to leverage our innovative products into different geographic markets and explore adjacent markets and applications in order to improve the profitability of the Company's product mix and sales volume.
The following present opportunities and challenges as we work toward our goal of providing attractive returns for all of our stakeholders:
|
|
•
|
Cross Selling.
We engage in the cross selling of our products through the collaborative efforts and training of our sales teams. We encourage cross selling between different product families and promote cross regional sales to better service our valued customers.
|
|
|
•
|
Development of New Products
. We are dedicated to the development of new, higher-margin products and applications that optimize the appearance, performance, and processing of plastics to meet our customers' specifications. We strive to maintain a balanced position between low-cost production and technological leadership with focused application development. We are also committed to continuing our growth in high value-added markets and reducing our exposure to commodity markets. We look to enhance our efforts through strategic collaborations with leading innovators in key markets.
|
|
|
•
|
Innovation and Collaboration Centers.
We have five global Innovation and Collaboration Centers located in Belgium, Germany, Mexico and two in the United States which promote collaborative partnerships between A. Schulman and our customers, suppliers, universities and other technical organizations. These Innovation and Collaboration Centers enable us to undertake research and development activities that align our technical and product development capabilities with the emerging needs of our customers and end markets.
|
|
|
•
|
Adjacent Markets.
We are committed to identifying and pursuing adjacent markets, such as personal care and cosmetics, for our products that have sustainable growth opportunities.
|
|
|
•
|
Purchasing and Pricing
. We pursue opportunities to continue our savings on purchasing and to optimize pricing strategies and vendor payment terms. We continue to leverage our global volume base to enhance savings and identify alternate supply sources.
|
|
|
•
|
Continuous Improvement
. The Company's Six Sigma Black Belt and Green Belt associates continue to look for ways to improve our processes and optimize our performance. We remain determined to control and manage our selling, general and administrative expenses, especially in developed markets. In fiscal 2015, the Company initiated the Manufacturing for Success program in USCAN to strengthen organizational development, cross functional activities, operational effectiveness and footprint optimization. In fiscal 2016, the Manufacturing for Success program was expanded globally.
|
Lucent Matter
As previously noted, on June 1, 2015, the Company completed the acquisition of Citadel and its subsidiaries from certain private equity firms for
$801.6 million
. In August 2015, the Company identified quality reporting issues affecting certain product lines at two manufacturing facilities located on Lynch Road in Evansville, Indiana. Both facilities are a part of Lucent Polymers, Inc. (“Lucent”), an indirect wholly-owned subsidiary of Citadel which was acquired as part of the Citadel acquisition. Specifically, the Company discovered discrepancies between laboratory data and certifications provided by Lucent to customers with respect to certain products using recycled or reclaimed raw materials. The Company also discovered inaccuracies in materials provided by Lucent employees to an independent certification organization with respect to such products.
The Company took immediate decisive actions following its initial discoveries, including implementing protocols designed so that future shipments of products meet customer specifications and customer certification requirements, entering into discussions and exploring different certification standards with customers and other third parties. The Company has notified and is working with affected customers to deliver accurate certifications with respect to products going forward. In addition, the Company has notified and is cooperating with Underwriter Laboratories to institute necessary corrective action. As a result, the Company has reformulated and rebranded its products and ceased the use of certain tradenames associated
with Citadel, which resulted in the write-off of certain finite-lived intangible assets during the fourth quarter of 2016. For further details, refer to Note 4,
Goodwill and Other Intangible Assets,
of this Annual Report on Form 10-K for additional details.
The Company also commenced an internal investigation into these matters to determine the scope of products, customers, and other parties affected. The Company’s internal investigation has revealed that the discrepancies and inaccuracies initially identified were due to practices at Lucent under its prior ownership pursuant to which Lucent falsified test results on documents provided to customers and other parties pertaining to the physical properties of certain Lucent products.
To date, no customers or other parties have initiated recalls or have made material claims against the Company. Although to date, no significant customers have terminated their relationships with the Company or its subsidiaries because of the Lucent quality matter, the matter has resulted in decreased volume and revenue, including reductions by certain significant customers.
The Company incurred the following costs related to the Lucent matter that negatively impacted the Company’s operating results for fiscal 2016:
|
|
|
|
|
|
Year Ended August 31, 2016
|
|
(In thousands)
|
Inventory rework, remediation actions, and investigative costs
|
$
|
5,423
|
|
Recurring additional costs to produce product to customer specifications
|
4,737
|
|
Total Lucent remediation costs
|
10,160
|
|
Litigation related costs
|
1,838
|
|
Total Lucent matter costs
|
$
|
11,998
|
|
As no customer or other parties have initiated recalls, or have made material claims against the Company or its subsidiaries from the date we identified this issue in August 2015 through the date of filing, we are currently unable to conclude that losses related to these matters are probable or to estimate the potential range of losses. The Company is currently unable to determine whether such issues will have any future material adverse effect on our financial position, liquidity, or results of operations.
In addition, the Company previously provided a written claim notice to the sellers and to the escrow agent with respect to the indemnity escrow established in connection with the stock purchase agreement pursuant to which the Company acquired Citadel and its subsidiaries. As of
August 31, 2016
, approximately
$31.0 million
remained in such indemnity escrow.
As Lucent was effectively acquired by Citadel in December of 2013, the Company also submitted written claim notices pursuant to the Agreement and Plan of Merger, dated December 6, 2013, among The Matrixx Group, Incorporated, LPI Merger Sub, Inc., LPI Holding Company, River Associates Investments, LLC and certain stockholders of LPI Holding Company, pursuant to which Citadel initially acquired Lucent, and pursuant to the representations and warranties insurance policy issued in connection with that acquisition.
In June 2016, the Company filed a complaint in the Delaware Chancery Court against Citadel Plastics, as well as certain funds affiliated with the sellers and other former executives of Citadel and Lucent (the “defendants”). The complaint alleges breach of contract, indemnification, breach of the implied covenant of good faith and fair dealing, fraudulent inducement, unjust enrichment and violations of blue sky laws in Illinois, Ohio, California and Indiana. All defendants are accused of civil conspiracy. The Company is seeking rescission, damages, rescissory damages, disgorgement or any other remedy deemed proper for the alleged violations as well as seeking the costs and attorneys' fees for bringing suit.
Significant Events
The following items represent significant events during fiscal year
2016
:
|
|
1.
|
Global Expansion.
The Company intends to expand its production and technological capabilities in Turkey and Saudi Arabia through continued progress in production facility investments, as previously announced. Additionally, in April 2016, the Company announced that it opened a new plant in Changshu, China to accommodate an increase in demand in custom performance color products.
|
|
|
2.
|
Restructuring Plans.
During fiscal 2016, the Company announced restructuring actions that will further optimize its back-office and support functions as well as consolidate its manufacturing footprint. The Company expects to reduce
|
headcount by approximately
110
from its fiscal 2016 plans and realize annual savings of approximately
$20.2 million
from all of the restructuring plans. Additionally, the Company closed three manufacturing facilities in Evansville, Indiana and expects to close a fourth facility by the end of calendar 2016.
|
|
3.
|
Impairments.
During the fourth quarter of fiscal 2016, the Company incurred goodwill impairment charges of
$360.7 million
within the USCAN EP, EC and EMEA SP reporting units and
$34.5 million
of intangible asset impairment charges within the USCAN and EC segments. As of
August 31, 2016
, our goodwill and intangible asset balances were
$257.8 million
and
$362.6 million
, respectively.
|
|
|
4.
|
CEO Transition.
On August 18, 2016, Joseph M. Gingo was appointed as the Company’s President and Chief Executive Officer, in addition to retaining his duties as Chairman of the Company's Board of Directors, succeeding Bernard Rzepka. Mr. Gingo was previously the Company's President and Chief Executive Officer from 2008 through 2014.
|
Results of Operations
FISCAL YEAR
2016
COMPARED WITH FISCAL YEAR
2015
The Company uses net sales to unaffiliated customers, segment gross profit and segment operating income before certain items in order to make decisions, assess performance and allocate resources to each segment. The following discussion regarding the Company’s segment gross profit and segment operating income does not include items such as interest income or expense, other income or expense, foreign currency transaction gains or losses, restructuring and related expenses including accelerated depreciation, asset impairments, or costs and inventory step-up charges related to business acquisitions. Corporate expenses include the compensation of certain personnel, certain audit expenses, Board of Directors related costs, certain insurance costs, costs associated with being a publicly traded entity and other miscellaneous legal and professional fees. For a reconciliation of segment operating income to operating income and income from continuing operations before taxes, please refer to Note 14,
Segment Information,
of this Annual Report on Form 10-K.
Segment Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
EMEA
|
2016
|
|
2015
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
1,219,294
|
|
|
1,253,239
|
|
|
(33,945
|
)
|
|
(2.7
|
)%
|
|
|
|
|
Net sales
|
$
|
1,239,963
|
|
|
$
|
1,339,355
|
|
|
$
|
(99,392
|
)
|
|
(7.4
|
)%
|
|
$
|
(66,477
|
)
|
|
(2.5
|
)%
|
Segment gross profit
|
$
|
178,376
|
|
|
$
|
189,860
|
|
|
$
|
(11,484
|
)
|
|
(6.0
|
)%
|
|
$
|
(8,398
|
)
|
|
(1.6
|
)%
|
Segment gross profit percentage
|
14.4
|
%
|
|
14.2
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
76,576
|
|
|
$
|
78,313
|
|
|
$
|
(1,737
|
)
|
|
(2.2
|
)%
|
|
$
|
(3,142
|
)
|
|
1.8
|
%
|
Price per pound
|
$
|
1.017
|
|
|
$
|
1.069
|
|
|
$
|
(0.052
|
)
|
|
(4.9
|
)%
|
|
$
|
(0.054
|
)
|
|
0.2
|
%
|
Segment operating income per pound
|
$
|
0.063
|
|
|
$
|
0.062
|
|
|
$
|
0.001
|
|
|
1.6
|
%
|
|
$
|
(0.002
|
)
|
|
4.8
|
%
|
EMEA net sales for the year ended
August 31, 2016
were
$1,240.0 million
, a decrease of
$99.4 million
compared with the prior year period. Excluding the unfavorable impact of foreign currency translation of
$66.5 million
, net sales decreased by
2.5%
, primarily due to decreased volumes in the Distribution Services and Specialty Powders product families of 11.0% and 8.1%, respectively, as customer purchases decreased due to uncertainty in the future of petroleum-based commodity prices. This decrease was partially offset by higher volumes in the Masterbatch Solutions and Engineered Plastics product families of 2.5% and 3.1%, respectively.
EMEA gross profit was
$178.4 million
for the year ended
August 31, 2016
. Excluding the negative impact of foreign currency translation of
$8.4 million
, gross profit decreased by $3.1 million or
1.6%
primarily due to lower volumes, as noted above, partially offset by improved product mix.
EMEA operating income for the year ended
August 31, 2016
was
$76.6 million
, a decrease of
$1.7 million
, or
2.2%
, compared to the prior year. Excluding the negative impact of foreign currency translation of
$3.1 million
, operating income increased by $1.4 million, or
1.8%
due to lower SG&A expense primarily from decreased variable compensation expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
USCAN
|
2016
|
|
2015
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
778,100
|
|
|
644,711
|
|
|
133,389
|
|
|
20.7
|
%
|
|
|
|
|
Net sales
|
$
|
691,369
|
|
|
$
|
610,493
|
|
|
$
|
80,876
|
|
|
13.2
|
%
|
|
$
|
(1,160
|
)
|
|
13.4
|
%
|
Segment gross profit
|
$
|
115,329
|
|
|
$
|
100,550
|
|
|
$
|
14,779
|
|
|
14.7
|
%
|
|
$
|
(237
|
)
|
|
14.9
|
%
|
Segment gross profit percentage
|
16.7
|
%
|
|
16.5
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
47,062
|
|
|
$
|
40,713
|
|
|
$
|
6,349
|
|
|
15.6
|
%
|
|
$
|
(234
|
)
|
|
16.2
|
%
|
Price per pound
|
$
|
0.889
|
|
|
$
|
0.947
|
|
|
$
|
(0.058
|
)
|
|
(6.1
|
)%
|
|
$
|
(0.001
|
)
|
|
(6.0
|
)%
|
Segment operating income per pound
|
$
|
0.060
|
|
|
$
|
0.063
|
|
|
$
|
(0.003
|
)
|
|
(4.8
|
)%
|
|
$
|
(0.001
|
)
|
|
(3.2
|
)%
|
USCAN net sales for the year ended
August 31, 2016
, were
$691.4 million
, an increase of
$80.9 million
or
13.2%
compared with the prior year period. During the year ended
August 31, 2016
, the incremental contribution of the Citadel acquisition was $171.6 million and 207.4 million pounds in net sales and volume, respectively. While Citadel provided an incremental benefit during the period, the Citadel net sales and volume decreased 16% and 14%, respectively, when compared to the same prior year period. This is due to the previously disclosed Lucent quality matter and lower demand from customers for recycled materials supplied by Citadel. The prior year period discussion for Citadel is for comparative purposes only given the Company's acquisition of Citadel on June 1, 2015.
The incremental Citadel net sales were partially offset by lower legacy volume in all product families, particularly in the Engineered Plastics, Specialty Powders and Masterbatch Solutions product families as the Company continues its focus towards a more specialty product portfolio. The agricultural equipment market within the Engineered Plastics product family experienced a decrease in customer demand due to a slowdown in the market. Additionally, due to lower oil prices, certain customers utilized internal capacity to fulfill their product requirements resulting in a decline in legacy volumes in our Masterbatch Solutions product family. Since acquiring the Citadel Engineered Plastics business, our overall sales price per pound has decreased as expected due to the nature of the acquired business which utilizes recycled materials.
USCAN gross profit was
$115.3 million
for the year ended
August 31, 2016
, an increase of
$14.8 million
, or
14.7%
, compared to the prior year, mostly driven by the incremental gross profit from the Citadel acquisition.
USCAN operating income for the year ended
August 31, 2016
was
$47.1 million
compared with
$40.7 million
in the same period last year. Operating income increased due to the above noted increase in gross profit, partially offset by incremental SG&A expenses from the Citadel acquisition of
$15.9 million
, which included additional intangible asset amortization expense of
$8.7 million
. Excluding the Citadel acquisition, SG&A expenses decreased by
$7.4 million
primarily due to
$4.4 million
of decreased compensation expense related to the benefits of restructuring activity and
$2.2 million
of decreased variable incentive compensation expense.
Included in USCAN segment results for the year ended August 31, 2016 are incremental Lucent costs of $4.7 million required to produce products to meet customer specifications. Additional Lucent costs excluded from segment operating income of
$7.3 million
include additional product and manufacturing operational costs for reworking inventory, legal and investigative costs, and dedicated internal personnel costs that would have otherwise been focused on normal operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
LATAM
|
2016
|
|
2015
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
144,081
|
|
|
132,021
|
|
|
12,060
|
|
|
9.1
|
%
|
|
|
|
|
Net sales
|
$
|
171,650
|
|
|
$
|
177,463
|
|
|
$
|
(5,813
|
)
|
|
(3.3
|
)%
|
|
$
|
(33,098
|
)
|
|
15.4
|
%
|
Segment gross profit
|
$
|
36,886
|
|
|
$
|
31,971
|
|
|
$
|
4,915
|
|
|
15.4
|
%
|
|
$
|
(5,362
|
)
|
|
32.1
|
%
|
Segment gross profit percentage
|
21.5
|
%
|
|
18.0
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
20,268
|
|
|
$
|
13,061
|
|
|
$
|
7,207
|
|
|
55.2
|
%
|
|
$
|
(1,964
|
)
|
|
70.2
|
%
|
Price per pound
|
$
|
1.191
|
|
|
$
|
1.344
|
|
|
$
|
(0.153
|
)
|
|
(11.4
|
)%
|
|
$
|
(0.230
|
)
|
|
5.7
|
%
|
Segment operating income per pound
|
$
|
0.141
|
|
|
$
|
0.099
|
|
|
$
|
0.042
|
|
|
42.4
|
%
|
|
$
|
(0.013
|
)
|
|
55.6
|
%
|
LATAM net sales for the year ended
August 31, 2016
were
$171.7 million
compared to
$177.5 million
in the prior year period. Excluding the unfavorable impact of foreign currency translation of
$33.1 million
, net sales increased by
15.4%
primarily driven by strong volume growth in Masterbatch Solutions, Engineered Plastics, and Specialty Powders product families due to the Company's successful strategic focus on certain markets and export sales within the region.
LATAM gross profit was
$36.9 million
for the year ended
August 31, 2016
, an increase of
$4.9 million
or
15.4%
compared to the prior year. Excluding the unfavorable impact of foreign currency translation of
$5.4 million
, gross profit increased
32.1%
compared to the prior year period, primarily due to improved product mix and operational improvements including decreased facilities' costs and labor efficiencies.
LATAM operating income for the year ended
August 31, 2016
was
$20.3 million
compared with
$13.1 million
in the prior year, an increase of
$7.2 million
, or
55.2%
. Excluding the negative impact of foreign currency translation of
$2.0 million
, operating income increased by $9.2 million, or
70.2%
due to improved gross profit, as noted above, and decreased SG&A expenses primarily related to savings initiatives and the favorable impact of foreign currency translation of $3.4 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
APAC
|
2016
|
|
2015
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
178,488
|
|
|
178,542
|
|
|
(54
|
)
|
|
—
|
%
|
|
|
|
|
Net sales
|
$
|
186,911
|
|
|
$
|
207,781
|
|
|
$
|
(20,870
|
)
|
|
(10.0
|
)%
|
|
$
|
(16,484
|
)
|
|
(2.1
|
)%
|
Segment gross profit
|
$
|
32,293
|
|
|
$
|
29,238
|
|
|
$
|
3,055
|
|
|
10.4
|
%
|
|
$
|
(1,709
|
)
|
|
16.3
|
%
|
Segment gross profit percentage
|
17.3
|
%
|
|
14.1
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
17,953
|
|
|
$
|
14,401
|
|
|
$
|
3,552
|
|
|
24.7
|
%
|
|
$
|
(694
|
)
|
|
29.5
|
%
|
Price per pound
|
$
|
1.047
|
|
|
$
|
1.164
|
|
|
$
|
(0.117
|
)
|
|
(10.1
|
)%
|
|
$
|
(0.093
|
)
|
|
(2.1
|
)%
|
Segment operating income per pound
|
$
|
0.101
|
|
|
$
|
0.081
|
|
|
$
|
0.020
|
|
|
24.7
|
%
|
|
$
|
(0.003
|
)
|
|
28.4
|
%
|
APAC net sales for the year ended
August 31, 2016
were
$186.9 million
, a decrease of
$20.9 million
compared with the prior year. Excluding the unfavorable impact of foreign currency translation of
$16.5 million
, net sales decreased by
2.1%
, as increased volume in Masterbatch Solutions and Custom Performance Colors was offset by reduced volume in the other product families. Sales price per pound decreased
2.1%
due to product mix compared to prior year.
APAC gross profit for the year ended
August 31, 2016
was
$32.3 million
, an increase of
$3.1 million
compared with the prior year. Gross profit benefited from improved product mix partially offset by negative foreign currency translation of
$1.7 million
.
APAC operating income for the year ended
August 31, 2016
was
$18.0 million
compared with
$14.4 million
in the prior year. The increase in operating income was primarily due to the aforementioned increase in gross profit and decreased SG&A expenses primarily due to the favorable impact of foreign currency translation of $1.0 million.
|
|
|
|
|
|
Year Ended
|
EC
|
August 31, 2016
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
175,120
|
|
Net sales
|
$
|
206,112
|
|
Segment gross profit
|
$
|
50,461
|
|
Segment gross profit percentage
|
24.5
|
%
|
Segment operating income
|
$
|
14,885
|
|
Price per pound
|
$
|
1.177
|
|
Segment operating income per pound
|
$
|
0.085
|
|
EC net sales for the year ended August 31,
2016
were
$206.1 million
, a decrease of $0.6 million over the prior year comparable period. The prior year period discussion is for comparative purposes only given the Company's acquisition of Citadel on June 1, 2015. Organic sales decreased $15.4 million primarily due to a decrease in oil and gas market sales, a decrease in organic volumes in the U.S. compound business driven by softness in our sales into the electrical and automotive markets and the negative impact of unfavorable foreign currency of $4.0 million. The organic sales decrease is partially offset by the incremental contribution of Citadel's November 2014 acquisition of The Composites Group ("TCG"), which was $14.8 million and 5.4 million pounds in net sales and volume, respectively.
EC gross profit for the year ended August 31,
2016
was
$50.5 million
, a decrease of $4.5 million over the prior year. Gross profit decreased primarily due to the decreased sales as noted above and the unfavorable impact of foreign currency translation of $0.8 million.
EC operating income for the year ended August 31,
2016
was
$14.9 million
, a decrease of $1.9 million over the prior year. The decrease in operating income was primarily due to decreased gross profit as noted above, partially offset by a decrease in organic SG&A expenses of $4.1 million primarily related to integration synergies and restructuring savings, partially offset by the incremental TCG SG&A expenses of $1.5 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
Consolidated
|
2016
|
|
2015
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
2,495,083
|
|
|
2,254,595
|
|
|
240,488
|
|
|
10.7
|
%
|
|
|
|
|
Net sales
|
$
|
2,496,005
|
|
|
$
|
2,392,225
|
|
|
$
|
103,780
|
|
|
4.3
|
%
|
|
$
|
(117,200
|
)
|
|
9.2
|
%
|
Asset impairment
|
$
|
401,667
|
|
|
$
|
—
|
|
|
$
|
401,667
|
|
|
N.M.
|
|
|
N.M.
|
|
|
N.M.
|
|
Operating income (loss)
|
$
|
(309,240
|
)
|
|
$
|
70,428
|
|
|
$
|
(379,668
|
)
|
|
N.M.
|
|
|
$
|
(5,777
|
)
|
|
N.M.
|
|
Total operating income before certain items*
|
$
|
145,947
|
|
|
$
|
120,704
|
|
|
$
|
25,243
|
|
|
20.9
|
%
|
|
$
|
(6,035
|
)
|
|
25.9
|
%
|
Price per pound
|
$
|
1.000
|
|
|
$
|
1.061
|
|
|
$
|
(0.061
|
)
|
|
(5.7
|
)%
|
|
$
|
(0.047
|
)
|
|
(1.3
|
)%
|
Total operating income per pound before certain items*
|
$
|
0.058
|
|
|
$
|
0.054
|
|
|
$
|
0.004
|
|
|
7.4
|
%
|
|
$
|
(0.003
|
)
|
|
13.0
|
%
|
*
Total operating income before certain items, a non-GAAP measurement, represents segment operating income combined with Corporate expenses. For a reconciliation of segment operating income to operating income, refer to the table below.
The following table is a reconciliation of operating income before certain items to operating income (loss):
|
|
|
|
|
|
|
|
|
|
Year ended August 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Operating income (loss)
|
$
|
(309,240
|
)
|
|
$
|
70,428
|
|
Costs related to acquisitions and integrations
|
8,789
|
|
|
17,208
|
|
Restructuring and related costs
|
27,762
|
|
|
23,411
|
|
Accelerated depreciation
|
6,309
|
|
|
408
|
|
CEO transition costs
|
3,399
|
|
|
6,167
|
|
Asset impairment
|
401,667
|
|
|
—
|
|
Lucent costs
|
7,261
|
|
|
—
|
|
Inventory step-up
|
—
|
|
|
3,082
|
|
Total operating income before certain items
|
$
|
145,947
|
|
|
$
|
120,704
|
|
Consolidated net sales for the year ended
August 31, 2016
were
$2,496.0 million
compared with
$2,392.2 million
in the prior year. During fiscal 2016, incremental net sales and volume from the Citadel acquisition contributed $325.4 million and 337.8 million pounds, respectively. Foreign currency translation unfavorably impacted net sales for the year ended
August 31, 2016
by
$117.2 million
.
Operating loss was
$309.2 million
for the year ended
August 31, 2016
compared to operating income of
$70.4 million
in the prior year. The decrease was primarily due to asset impairments of
$401.7 million
. Total operating income before certain items for the year ended
August 31, 2016
was
$145.9 million
, an increase of
$25.2 million
compared with the prior year period. The increase in total operating income before certain items was primarily due to the contribution from the Citadel acquisition of $18.5 million and decreased legacy SG&A expense of $21.3 million as noted below, partially offset by decreased organic gross profit of $14.6 million and the negative impact of foreign currency translation of
$6.0 million
.
The Company’s SG&A expenses for the year ended
August 31, 2016
were
$296.7 million
compared to
$276.2 million
in the prior year. SG&A, excluding certain items, was $267.4 million, an increase of $21.9 million for the year ended
August 31, 2016
compared with the prior year. The increase was primarily attributable to the incremental SG&A expense of $43.2 million from the Citadel acquisition, partially offset by decreased variable incentive compensation of
$13.0 million
and the favorable impact of foreign currency translation of $9.7 million. Certain items excluded from SG&A expenses consist of $29.4 million of expense related to acquisition and integration activities, restructuring and related costs, CEO transition costs and Lucent costs for the year ended
August 31, 2016
, and $30.8 million of acquisition and integration activities, restructuring and related costs and CEO transition costs for the year ended August 31, 2015.
Additional consolidated results
During the fourth quarter of fiscal 2016, the Company recorded impairment charges of
$401.7 million
related to goodwill, intangible assets and certain software licenses that were discontinued. Goodwill impairments were recorded by the USCAN Engineered Plastics reporting unit for
$166.8 million
, the EC reporting unit for
$177.2 million
and the EMEA Specialty Powders reporting unit for
$16.7 million
as of June 1, 2016. The Company is not aware of any triggers which would require an additional goodwill impairment test as of
August 31, 2016
. Additionally, the Company recorded intangible asset impairment of
$34.5 million
. The company impaired intangible assets of
$7.6 million
in the EC segment and
$26.9 million
in the USCAN segment. These intangibles were part of the Citadel acquisition and the impairment relates to discontinuing the use of certain tradename and developed technology assets. The Company also recorded impairment expense of
$6.5 million
during the fourth quarter of fiscal 2016 related to certain software licenses that were discontinued.
Interest expense increased
$31.9 million
for the year ended
August 31, 2016
, as compared with the prior year as a result of higher outstanding debt related to the financing of the Citadel acquisition.
The Company experienced foreign currency transaction losses of
$3.5 million
and
$3.4 million
for the years ended
August 31, 2016
and
2015
, respectively. Foreign currency losses were primarily related to the strengthening of the U.S. dollar against foreign currencies. Generally, the foreign currency transaction gains or losses relate to the changes in the value of the U.S. dollar compared with the Euro and other local currencies throughout all regions, and changes between the Euro and other non-Euro European currencies. The Company may enter into foreign exchange forward contracts to reduce the impact of changes in foreign exchange
rates on the consolidated statements of operations. These contracts reduce exposure to currency movements affecting the remeasurement of foreign currency denominated assets and liabilities primarily related to trade receivables and payables, as well as intercompany activities. Any gains or losses associated with these contracts, as well as the offsetting gains or losses from the underlying assets or liabilities, are recognized on the foreign currency transaction (gains) losses line in the consolidated statements of operations. There were no foreign exchange forward contracts designated as hedging instruments as of
August 31, 2016
and
2015
.
Other income for the years ended
August 31, 2016
and 2015 was
$0.8 million
and
$1.4 million
, respectively. In both fiscal
2016
and
2015
, there were no individually significant transactions.
Net income available to the Company’s common stockholders was a loss of
$364.6 million
and income of
$24.2 million
for the years ended
August 31, 2016
and
2015
, respectively. Foreign currency translation had an unfavorable impact on net income of $1.2 million for the year ended
August 31, 2016
.
Product Family
Globally, the Company operates in six product families: (1) Custom Performance Colors, (2) Engineered Composites, (3) Masterbatch Solutions, (4) Engineered Plastics, (5) Specialty Powders and (6) Distribution Services. The amount and percentage of consolidated net sales for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
(In thousands, except for %’s)
|
Custom Performance Colors
|
$
|
181,738
|
|
|
7
|
%
|
|
$
|
191,453
|
|
|
8
|
%
|
Engineered Composites
|
206,112
|
|
|
8
|
|
|
57,133
|
|
|
2
|
|
Masterbatch Solutions
|
700,939
|
|
|
28
|
|
|
741,354
|
|
|
31
|
|
Engineered Plastics
|
886,573
|
|
|
36
|
|
|
787,258
|
|
|
33
|
|
Specialty Powders
|
258,137
|
|
|
10
|
|
|
294,228
|
|
|
12
|
|
Distribution Services
|
262,506
|
|
|
11
|
|
|
320,799
|
|
|
14
|
|
Total consolidated net sales
|
$
|
2,496,005
|
|
|
100
|
%
|
|
$
|
2,392,225
|
|
|
100
|
%
|
Capacity
The Company’s practical capacity is not based on a theoretical 24-hour, seven-day operation, rather it is determined as the production level at which the manufacturing facilities can operate with an acceptable degree of efficiency, taking into consideration factors such as longer term customer demand, permanent staffing levels, operating shifts, holidays, scheduled maintenance and mix of product. Capacity utilization is calculated by dividing actual production pounds by practical capacity at each plant. A comparison of capacity utilization levels is as follows:
|
|
|
|
|
|
|
|
Year ended August 31,
|
|
2016
|
|
2015
|
EMEA
|
81
|
%
|
|
87
|
%
|
USCAN
|
66
|
%
|
|
66
|
%
|
LATAM
|
70
|
%
|
|
73
|
%
|
APAC
|
67
|
%
|
|
64
|
%
|
EC
|
69
|
%
|
|
72
|
%
|
Worldwide
|
72
|
%
|
|
75
|
%
|
Restructuring
Consolidated Restructuring Summary
The following table summarizes the activity related to the Company’s restructuring plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-related Costs
|
|
Other Costs
|
|
Translation Effect
|
|
Total Restructuring Costs
|
|
(In thousands)
|
Accrual balance as of August 31, 2014
|
$
|
1,745
|
|
|
$
|
371
|
|
|
$
|
(304
|
)
|
|
$
|
1,812
|
|
Fiscal 2015 charges
|
12,711
|
|
|
1,627
|
|
|
—
|
|
|
14,338
|
|
Fiscal 2015 payments
|
(8,670
|
)
|
|
(1,537
|
)
|
|
—
|
|
|
(10,207
|
)
|
Translation
|
—
|
|
|
—
|
|
|
(560
|
)
|
|
(560
|
)
|
Accrual balance as of August 31, 2015
|
$
|
5,786
|
|
|
$
|
461
|
|
|
$
|
(864
|
)
|
|
$
|
5,383
|
|
Fiscal 2016 charges
|
9,009
|
|
|
2,759
|
|
|
—
|
|
|
11,768
|
|
Fiscal 2016 payments
|
(10,343
|
)
|
|
(2,818
|
)
|
|
—
|
|
|
(13,161
|
)
|
Translation
|
—
|
|
|
—
|
|
|
(46
|
)
|
|
(46
|
)
|
Accrual balance as of August 31, 2016
|
$
|
4,452
|
|
|
$
|
402
|
|
|
$
|
(910
|
)
|
|
$
|
3,944
|
|
Refer to Note 16,
Restructuring,
of this Annual Report on Form 10-K for further details regarding the Company's restructuring activities. The Company expects to reduce headcount by approximately
110
from its fiscal 2016 plans and realize annual savings of approximately
$20.2 million
from all of the restructuring plans.
Income Tax
A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
(In thousands, except for %’s)
|
U.S. statutory federal income tax rate
|
$
|
(128,277
|
)
|
|
35.0
|
%
|
|
$
|
9,951
|
|
|
35.0
|
%
|
Foreign rate differential
|
10,069
|
|
|
(2.7
|
)
|
|
(692
|
)
|
|
(2.4
|
)
|
Foreign losses with no tax benefit
|
1,866
|
|
|
(0.5
|
)
|
|
3,956
|
|
|
14.0
|
|
U.S. non-deductible transaction costs
|
—
|
|
|
—
|
|
|
1,349
|
|
|
4.7
|
|
Valuation allowance charges (reversals)
|
863
|
|
|
(0.2
|
)
|
|
(12,279
|
)
|
|
(43.2
|
)
|
Non-deductible goodwill impairment
|
106,503
|
|
|
(29.1
|
)
|
|
—
|
|
|
—
|
|
Establishment (resolution) of uncertain tax positions
|
482
|
|
|
(0.1
|
)
|
|
(1,030
|
)
|
|
(3.6
|
)
|
Other
|
(146
|
)
|
|
—
|
|
|
(756
|
)
|
|
(2.7
|
)
|
Provision (benefit) for U.S. and foreign income taxes
|
$
|
(8,640
|
)
|
|
2.4
|
%
|
|
$
|
499
|
|
|
1.8
|
%
|
The effective tax rate for the year ended August 31, 2016 was less than the U.S. statutory federal income tax rate primarily because of goodwill impairment with no tax benefit.
The effective tax rate for the year ended August 31, 2015 was less than the U.S. statutory federal income tax rate primarily because of the reversal of the valuation allowances associated with certain U.S. deferred tax assets. The favorable effect of the valuation allowance reversal was partially offset by foreign losses with no tax benefit and non-deductible transaction costs.
FISCAL YEAR
2015
COMPARED WITH FISCAL YEAR
2014
Segment Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
EMEA
|
2015
|
|
2014
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
1,253,239
|
|
|
1,262,027
|
|
|
(8,788
|
)
|
|
(0.7
|
)%
|
|
|
|
|
Net sales
|
$
|
1,339,355
|
|
|
$
|
1,577,867
|
|
|
$
|
(238,512
|
)
|
|
(15.1
|
)%
|
|
$
|
(216,999
|
)
|
|
(1.4
|
)%
|
Segment gross profit
|
$
|
189,860
|
|
|
$
|
206,268
|
|
|
$
|
(16,408
|
)
|
|
(8.0
|
)%
|
|
$
|
(29,182
|
)
|
|
6.2
|
%
|
Segment gross profit percentage
|
14.2
|
%
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
78,313
|
|
|
$
|
80,690
|
|
|
$
|
(2,377
|
)
|
|
(2.9
|
)%
|
|
$
|
(11,405
|
)
|
|
11.2
|
%
|
Price per pound
|
$
|
1.069
|
|
|
$
|
1.250
|
|
|
$
|
(0.181
|
)
|
|
(14.5
|
)%
|
|
$
|
(0.173
|
)
|
|
(0.6
|
)%
|
Segment operating income per pound
|
$
|
0.062
|
|
|
$
|
0.064
|
|
|
$
|
(0.002
|
)
|
|
(3.1
|
)%
|
|
$
|
(0.010
|
)
|
|
12.5
|
%
|
EMEA net sales for the year ended August 31, 2015 were
$1,339.4 million
compared with
$1,577.9 million
in the prior year. Excluding the unfavorable impact of foreign currency translation of
$217.0 million
, net sales declined by 1.4%. Increased organic volume in the Masterbatch Solutions product family, was more than offset by lower organic volumes across all remaining product families. The incremental contribution of the Specialty Plastics acquisition in EMEA was $35.8 million and 27.3 million pounds in net sales and volume, respectively.
EMEA gross profit was
$189.9 million
for the year ended August 31, 2015. Excluding the negative impact of foreign currency translation of
$29.2 million
, gross profit increased by $12.8 million or
6.2%
primarily due to restructuring savings of $1.7 million, favorable raw material pricing, and the incremental contribution of the Specialty Plastics acquisition.
EMEA operating income for the year ended August 31, 2015 was
$78.3 million
compared with
$80.7 million
for the year ended August 31, 2014. Excluding the negative impact of foreign currency translation of
$11.4 million
, operating income increased by $9.0 million, or
11.2%
, due to higher gross profit as noted above and SG&A restructuring savings of $1.8 million partially offset by increased SG&A expense. SG&A expense, excluding the favorable impact of foreign currency translation of $17.8 million, increased by $3.7 million from fiscal 2014. Incremental SG&A expenses from the Specialty Plastics acquisition were $3.0 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
USCAN
|
2015
|
|
2014
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
644,711
|
|
|
526,845
|
|
|
117,866
|
|
|
22.4
|
%
|
|
|
|
|
Net sales
|
$
|
610,493
|
|
|
$
|
475,050
|
|
|
$
|
135,443
|
|
|
28.5
|
%
|
|
$
|
(1,925
|
)
|
|
28.9
|
%
|
Segment gross profit
|
$
|
100,550
|
|
|
$
|
73,278
|
|
|
$
|
27,272
|
|
|
37.2
|
%
|
|
$
|
(299
|
)
|
|
37.6
|
%
|
Segment gross profit percentage
|
16.5
|
%
|
|
15.4
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
40,713
|
|
|
$
|
30,418
|
|
|
$
|
10,295
|
|
|
33.8
|
%
|
|
$
|
(297
|
)
|
|
34.8
|
%
|
Price per pound
|
$
|
0.947
|
|
|
$
|
0.902
|
|
|
$
|
0.045
|
|
|
5.0
|
%
|
|
$
|
(0.003
|
)
|
|
5.3
|
%
|
Segment operating income per pound
|
$
|
0.063
|
|
|
$
|
0.058
|
|
|
$
|
0.005
|
|
|
8.6
|
%
|
|
$
|
(0.001
|
)
|
|
10.3
|
%
|
USCAN net sales for the year ended August 31, 2015, were
$610.5 million
, an increase of
$135.4 million
or
28.5%
compared with the prior year period. During the year ended August 31, 2015, the incremental contribution of the fiscal 2014 acquisitions was $94.7 million and 61.4 million pounds in net sales and volume, respectively, and the Engineered Plastics portion of the Citadel acquisition contributed $59.5 million and 70.5 million pounds in net sales and volume, respectively. The acquisition impacts were partially offset by lower organic volumes in the Specialty Powders product family due to weaker demand in the oil and gas market. Foreign currency translation negatively impacted net sales by
$1.9 million
.
USCAN gross profit was
$100.6 million
for the year ended August 31, 2015, an increase of
$27.3 million
, or
37.2%
, compared to the prior year primarily as a result of the incremental contribution of recent acquisitions and related integration as well as the benefit of restructuring actions of $0.9 million and the Manufacturing for Success efficiencies of $2.3 million partially offset by an unfavorable product mix driven by the oil and gas market.
USCAN operating income for the year ended August 31, 2015 was
$40.7 million
compared with
$30.4 million
in the same period last year, an increase of
$10.3 million
, or
33.8%
. Operating income increased due to the above noted increase in gross profit and SG&A restructuring savings of $1.2 million, partially offset by incremental SG&A expenses from recent acquisitions of $11.2 million and increased compensation and benefits of $3.1 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
LATAM
|
2015
|
|
2014
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
132,021
|
|
|
142,172
|
|
|
(10,151
|
)
|
|
(7.1
|
)%
|
|
|
|
|
Net sales
|
$
|
177,463
|
|
|
$
|
198,313
|
|
|
$
|
(20,850
|
)
|
|
(10.5
|
)%
|
|
$
|
(28,517
|
)
|
|
3.9
|
%
|
Segment gross profit
|
$
|
31,971
|
|
|
$
|
26,239
|
|
|
$
|
5,732
|
|
|
21.8
|
%
|
|
$
|
(2,221
|
)
|
|
30.3
|
%
|
Segment gross profit percentage
|
18.0
|
%
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
13,061
|
|
|
$
|
8,388
|
|
|
$
|
4,673
|
|
|
55.7
|
%
|
|
$
|
74
|
|
|
54.8
|
%
|
Price per pound
|
$
|
1.344
|
|
|
$
|
1.395
|
|
|
$
|
(0.051
|
)
|
|
(3.7
|
)%
|
|
$
|
(0.216
|
)
|
|
11.8
|
%
|
Segment operating income per pound
|
$
|
0.099
|
|
|
$
|
0.059
|
|
|
$
|
0.040
|
|
|
67.8
|
%
|
|
$
|
0.001
|
|
|
66.1
|
%
|
LATAM net sales for the year ended August 31, 2015 were
$177.5 million
, a decrease of
$20.9 million
or
10.5%
compared with the prior year. Excluding the unfavorable impact of foreign currency translation of
$28.5 million
, net sales increased by $7.7 million primarily driven by improved product mix across in all product families partially offset by lower volume in the Specialty Powders and Engineered Plastics product families.
LATAM gross profit was
$32.0 million
for the year ended August 31, 2015, an increase of
$5.7 million
compared to the prior year. Excluding the unfavorable impact of foreign currency translation of
$2.2 million
, gross profit increased $7.9 million, or
30.3%
compared to the prior year due to the benefits of improved product mix and facility consolidation activities in Brazil.
LATAM operating income for the year ended August 31, 2015 was
$13.1 million
compared with
$8.4 million
in the prior year, an increase of
$4.7 million
, or
55.7%
. Operating income increased primarily due to the improved gross profit, as noted above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
APAC
|
2015
|
|
2014
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
178,542
|
|
|
153,899
|
|
|
24,643
|
|
|
16.0
|
%
|
|
|
|
|
Net sales
|
$
|
207,781
|
|
|
$
|
195,768
|
|
|
$
|
12,013
|
|
|
6.1
|
%
|
|
$
|
(9,614
|
)
|
|
11.0
|
%
|
Segment gross profit
|
$
|
29,238
|
|
|
$
|
26,767
|
|
|
$
|
2,471
|
|
|
9.2
|
%
|
|
$
|
(839
|
)
|
|
12.4
|
%
|
Segment gross profit percentage
|
14.1
|
%
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
14,401
|
|
|
$
|
12,527
|
|
|
$
|
1,874
|
|
|
15.0
|
%
|
|
$
|
(220
|
)
|
|
16.7
|
%
|
Price per pound
|
$
|
1.164
|
|
|
$
|
1.272
|
|
|
$
|
(0.108
|
)
|
|
(8.5
|
)%
|
|
$
|
(0.054
|
)
|
|
(4.2
|
)%
|
Segment operating income per pound
|
$
|
0.081
|
|
|
$
|
0.081
|
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
(0.001
|
)
|
|
1.2
|
%
|
APAC net sales for the year ended August 31, 2015 were
$207.8 million
, an increase of
$12.0 million
compared with the prior year. Excluding the unfavorable impact of foreign currency translation of
$9.6 million
, net sales increased by $21.6 million, or
11.0%
. For the year ended August 31, 2015, the Compco acquisition in Australia contributed net sales and volume of $11.2 million and 8.6 million pounds, respectively. Organic volumes increased in the Engineered Plastics, Masterbatch Solutions and Custom
Performance Colors product families, partially offset by unfavorable product and price mix in the Engineered Plastics and Masterbatch Solutions product families.
APAC gross profit for the year ended August 31, 2015 was
$29.2 million
, an increase of
$2.5 million
compared with the prior year. Gross profit benefited from the positive contribution of the Compco acquisition, increased organic volumes and improved product mix, partially offset by negative foreign currency translation of
$0.8 million
.
APAC operating income for the year ended August 31, 2015 was
$14.4 million
compared with
$12.5 million
in the prior year. The increase in operating income was primarily due to the aforementioned increase in gross profit, partially offset by incremental SG&A expenses from the Compco acquisition of $0.8 million.
|
|
|
|
|
|
Three Months Ended
|
EC
|
August 31, 2015
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
46,082
|
|
Net sales
|
$
|
57,133
|
|
Segment gross profit
|
$
|
14,536
|
|
Segment gross profit percentage
|
25.4
|
%
|
Segment operating income
|
$
|
5,454
|
|
Price per pound
|
$
|
1.240
|
|
Segment operating income per pound
|
$
|
0.118
|
|
EC net sales for the three months ended August 31, 2015 were
$57.1 million
, an increase of $25.2 million over the prior year comparable period. The prior year period discussion is for comparative purposes only given the Company's acquisition of Citadel on June 1, 2015. The incremental contribution of Citadel's November 2014 acquisition of The Composites Group ("TCG") acquisition was $24.6 million and 12.5 million pounds in net sales and volume, respectively. An increase in organic volumes in the legacy EC business were offset by the impact of unfavorable currency translation of $2.4 million.
EC gross profit for the three months ended August 31, 2015 was
$14.5 million
, an increase of $5.3 million over the prior year. Gross profit increased primarily due to the positive contribution of the TCG acquisition, partially offset by the unfavorable impact of foreign currency translation of $0.5 million.
EC operating income for the three months ended August 31, 2015 was
$5.5 million
, an increase of $2.5 million over the prior year. The increase in operating income was primarily due to the aforementioned increase in gross profit, partially offset by incremental SG&A expenses from the TCG acquisition of $2.4 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
Consolidated
|
2015
|
|
2014
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
2,254,595
|
|
|
2,084,943
|
|
|
169,652
|
|
|
8.1
|
%
|
|
|
|
|
Net sales
|
$
|
2,392,225
|
|
|
$
|
2,446,998
|
|
|
$
|
(54,773
|
)
|
|
(2.2
|
)%
|
|
$
|
(257,055
|
)
|
|
8.3
|
%
|
Operating income
|
$
|
70,428
|
|
|
$
|
82,321
|
|
|
$
|
(11,893
|
)
|
|
(14.4
|
)%
|
|
$
|
(11,193
|
)
|
|
(0.9
|
)%
|
Total operating income before certain items*
|
$
|
120,704
|
|
|
$
|
99,853
|
|
|
$
|
20,851
|
|
|
20.9
|
%
|
|
$
|
(11,848
|
)
|
|
32.7
|
%
|
Price per pound
|
$
|
1.061
|
|
|
$
|
1.174
|
|
|
$
|
(0.113
|
)
|
|
(9.6
|
)%
|
|
$
|
(0.114
|
)
|
|
0.1
|
%
|
Total operating income per pound before certain items*
|
$
|
0.054
|
|
|
$
|
0.048
|
|
|
$
|
0.006
|
|
|
12.5
|
%
|
|
$
|
(0.005
|
)
|
|
22.9
|
%
|
*
Total operating income before certain items, a non-GAAP measurement, represents segment operating income combined with Corporate expenses. For a reconciliation of segment operating income to operating income and income from continuing operations before taxes, refer to Note 14, Segment Information, of this Annual Report on Form 10-K.
The following table is a reconciliation of operating income before certain items to operating income (loss):
|
|
|
|
|
|
|
|
|
|
Year ended August 31,
|
|
2015
|
|
2014
|
|
(In thousands)
|
Operating income (loss)
|
$
|
70,428
|
|
|
$
|
82,321
|
|
Costs related to acquisitions and integrations
|
17,208
|
|
|
6,021
|
|
Restructuring and related costs
|
23,411
|
|
|
9,832
|
|
Accelerated depreciation
|
408
|
|
|
107
|
|
CEO transition costs
|
6,167
|
|
|
—
|
|
Asset impairment
|
—
|
|
|
104
|
|
Inventory step-up
|
3,082
|
|
|
1,468
|
|
Total operating income before certain items
|
$
|
120,704
|
|
|
$
|
99,853
|
|
Consolidated net sales for the year ended August 31, 2015 were
$2,392.2 million
compared with
$2,447.0 million
in the prior year. Net sales and volume for the year ended August 31, 2015 from the Company’s recent acquisitions contributed $258.3 million and 213.9 million pounds, respectively. Foreign currency translation unfavorably impacted net sales for the year ended August 31, 2015 by
$257.1 million
. Refer to the previous segment discussions for further details.
Operating income decreased
$11.9 million
for the year ended August 31, 2015 compared with the prior year. Total operating income before certain items for the year ended August 31, 2015 was
$120.7 million
, an increase of
$20.9 million
compared with last year. The increase in total operating income before certain items was primarily due to the contribution from recent acquisitions of $22.4 million and increased gross profit partially offset by the negative impact of foreign currency translation of
$11.8 million
and the increased SG&A expense as noted below.
The Company’s SG&A expenses for the year ended August 31, 2015 were
$276.2 million
compared to
$242.7 million
in the prior year. The Company’s SG&A expenses, excluding certain items, increased $12.8 million for the year ended August 31, 2015 compared with the prior year. The recent acquisitions contributed incremental SG&A expense of $24.0 million, which was partially offset by the favorable foreign currency translation of $20.7 million and SG&A restructuring savings of $3.2 million. The remainder of the increase was due to increased compensation and benefits expense of $2.5 million and professional fees of $2.1 million. Items excluded from SG&A expenses consist of $6.2 million of CEO transition costs, $16.9 million of acquisition and integration related costs and $7.7 million of restructuring and related costs for the year ended August 31, 2015, and $9.8 million of acquisition and integration activities and restructuring and related costs for the year ended August 31, 2014.
Additional consolidated results
Interest expense increased $14.1 million for the year ended August 31, 2015, as compared with the prior year as a result of higher outstanding debt. Additionally, the Company incurred $18.8 million in costs related to the Bridge Financing from the Citadel acquisition, as discussed in Note 5,
Long-Term Debt and Credit Arrangements,
of this Annual Report on Form 10-K.
Foreign currency transaction gains or losses represent changes in the value of currencies in major areas where the Company operates. The Company experienced foreign currency transaction losses of $3.4 million and $2.2 million for the years ended August 31, 2015 and 2014, respectively. Foreign currency losses were primarily related to the strengthening of the U.S. dollar against foreign currencies.
Generally, the foreign currency transaction gains or losses relate to the changes in the value of the U.S. dollar compared with the Euro and other local currencies throughout all regions, and changes between the Euro and other non-Euro European currencies. The Company may enter into foreign exchange forward contracts to reduce the impact of changes in foreign exchange rates on the consolidated statements of operations. These contracts reduce exposure to currency movements affecting the remeasurement of foreign currency denominated assets and liabilities primarily related to trade receivables and payables, as well as intercompany activities. Any gains or losses associated with these contracts, as well as the offsetting gains or losses from the underlying assets or liabilities, are recognized on the foreign currency transaction line in the consolidated statements of operations. There were no foreign exchange forward contracts designated as hedging instruments as of August 31, 2015 and 2014.
Other income for the years ended August 31, 2015 and 2014 was $1.4 million and $0.7 million, respectively. In both fiscal 2015 and 2014, there were no individually significant transactions.
Noncontrolling interests represent a 37% equity position of Alta Plastica S.A. in an Argentinean venture with the Company and a 35% equity position of P.T. Prima Polycon Indah in an Indonesian joint venture with the Company.
Net income available to the Company’s common stockholders was $24.2 million and $56.2 million for the years ended August 31, 2015 and 2014, respectively. Foreign currency translation had an unfavorable impact on net income of $5.2 million for the year ended August 31, 2015.
Product Family
The consolidated net sales for the Company's six product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2015
|
|
2014
|
|
(In thousands, except for %’s)
|
Custom Performance Colors
|
$
|
191,453
|
|
|
8
|
%
|
|
$
|
188,221
|
|
|
8
|
%
|
Engineered Composites
|
57,133
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Masterbatch Solutions
|
741,354
|
|
|
31
|
|
|
766,788
|
|
|
31
|
|
Engineered Plastics
|
787,258
|
|
|
33
|
|
|
753,728
|
|
|
31
|
|
Specialty Powders
|
294,228
|
|
|
12
|
|
|
350,510
|
|
|
14
|
|
Distribution Services
|
320,799
|
|
|
14
|
|
|
387,751
|
|
|
16
|
|
Total consolidated net sales
|
$
|
2,392,225
|
|
|
100
|
%
|
|
$
|
2,446,998
|
|
|
100
|
%
|
Capacity
The Company’s practical capacity is not based on a theoretical 24-hour, seven-day operation, rather it is determined as the production level at which the manufacturing facilities can operate with an acceptable degree of efficiency, taking into consideration factors such as longer term customer demand, permanent staffing levels, operating shifts, holidays, scheduled maintenance and mix of product. Capacity utilization is calculated by dividing actual production pounds by practical capacity at each plant. A comparison of capacity utilization levels is as follows:
|
|
|
|
|
|
|
|
Years Ended August 31,
|
|
2015
|
|
2014
|
EMEA
|
87
|
%
|
|
84
|
%
|
USCAN
|
66
|
%
|
|
64
|
%
|
LATAM
|
73
|
%
|
|
76
|
%
|
APAC
|
64
|
%
|
|
70
|
%
|
EC
|
72
|
%
|
|
—
|
%
|
Worldwide
|
75
|
%
|
|
75
|
%
|
Restructuring
Consolidated Restructuring Summary
The following table summarizes the activity related to the Company’s restructuring plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-related Costs
|
|
Other Costs
|
|
Translation Effect
|
|
Total Restructuring Costs
|
|
(In thousands)
|
Accrual balance as of August 31, 2013
|
$
|
5,446
|
|
|
$
|
400
|
|
|
$
|
(497
|
)
|
|
$
|
5,349
|
|
Fiscal 2014 charges
|
2,223
|
|
|
2,660
|
|
|
—
|
|
|
4,883
|
|
Fiscal 2014 payments
|
(5,924
|
)
|
|
(2,689
|
)
|
|
—
|
|
|
(8,613
|
)
|
Translation
|
—
|
|
|
—
|
|
|
193
|
|
|
193
|
|
Accrual balance as of August 31, 2014
|
$
|
1,745
|
|
|
$
|
371
|
|
|
$
|
(304
|
)
|
|
$
|
1,812
|
|
Fiscal 2015 charges
|
12,711
|
|
|
1,627
|
|
|
—
|
|
|
14,338
|
|
Fiscal 2015 payments
|
(8,670
|
)
|
|
(1,537
|
)
|
|
—
|
|
|
(10,207
|
)
|
Translation
|
—
|
|
|
—
|
|
|
(560
|
)
|
|
(560
|
)
|
Accrual balance as of August 31, 2015
|
$
|
5,786
|
|
|
$
|
461
|
|
|
$
|
(864
|
)
|
|
$
|
5,383
|
|
Refer to Note 16,
Restructuring,
of this Annual Report on Form 10-K for further details regarding the Company's restructuring activities.
Income Tax
A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2015
|
|
2014
|
|
(In thousands, except for %’s)
|
U.S. statutory federal income tax rate
|
$
|
9,951
|
|
|
35.0
|
%
|
|
$
|
25,316
|
|
|
35.0
|
%
|
Foreign rate differential
|
(692
|
)
|
|
(2.4
|
)
|
|
(13,602
|
)
|
|
(18.8
|
)
|
Foreign losses with no tax benefit
|
3,956
|
|
|
14.0
|
|
|
4,899
|
|
|
6.8
|
|
U.S. restructuring and other U.S. charges with no benefit
|
—
|
|
|
—
|
|
|
3,010
|
|
|
4.2
|
|
U.S. non-deductible transaction costs
|
1,349
|
|
|
4.7
|
|
|
—
|
|
|
—
|
|
Valuation allowance charges (reversals)
|
(12,279
|
)
|
|
(43.2
|
)
|
|
—
|
|
|
—
|
|
Establishment (resolution) of uncertain tax positions
|
(1,030
|
)
|
|
(3.6
|
)
|
|
(121
|
)
|
|
(0.2
|
)
|
Other
|
(756
|
)
|
|
(2.7
|
)
|
|
(960
|
)
|
|
(1.3
|
)
|
Provision (benefit) for U.S. and foreign income taxes
|
$
|
499
|
|
|
1.8
|
%
|
|
$
|
18,542
|
|
|
25.7
|
%
|
The effective tax for the year ended August 31, 2015 was less than the U.S. statutory federal income tax rate primarily because of the reversal of the valuation allowances associated with certain U.S. deferred tax assets. The favorable effect of the valuation allowance reversal was partially offset by foreign losses with no tax benefit and non-deductible transaction costs.
The effective tax rate for the year ended August 31, 2014 was less than the U.S. statutory federal income tax rate primarily because of the Company’s overall foreign rate being less than the U.S. statutory federal income tax rate. This favorable effect of the Company’s tax rate was partially offset by no tax benefits being recognized for U.S. restructuring and other U.S. charges and certain foreign losses.
CRITICAL ACCOUNTING POLICIES
The Company has identified critical accounting policies that, as a result of the judgments, uncertainties, and the operations involved, could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. The Company’s critical accounting policies include the following:
Allowance for Doubtful Accounts
Management records an allowance for doubtful accounts receivable based on the current and projected credit quality of the Company’s customers, customer payment history, and other factors that affect collectability. Changes in these factors or changes in economic circumstances could result in changes to the allowance for doubtful accounts.
Inventory Reserve
Management establishes an inventory reserve based on historical experience and amounts expected to be realized for slow-moving and obsolete inventory. The Company continuously monitors its slow-moving and obsolete inventory and makes adjustments as considered necessary. The proceeds from the sale or dispositions of these inventories may differ from the net recorded amount.
Restructuring Charges
The Company’s policy is to recognize restructuring costs in accordance with the accounting rules related to exit or disposal activities and compensation and non-retirement post-employment benefits. Detailed contemporaneous documentation is maintained and updated to ensure that accruals are properly supported. If management determines that there is a change in estimate, the accruals are adjusted to reflect this change.
Purchase Accounting and Goodwill
Business combinations are accounted for using the purchase method of accounting. This method requires the Company to record assets and liabilities of the business acquired at their estimated fair market values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The Company generally uses valuation specialists to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions.
Goodwill is tested for impairment annually as of June 1. If circumstances change during interim periods between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying value, the Company would test goodwill for impairment. Factors which would necessitate an interim goodwill impairment assessment include a sustained decline in the Company's stock price, prolonged negative industry or economic trends, and significant underperformance relative to expected historical or projected future operating results.
Management uses judgment to determine whether to use a qualitative analysis or a quantitative fair value measurement for its goodwill impairment testing. The Company's fair value measurement approach combines the income and market valuation techniques for each of the Company’s reporting units that carry goodwill. These valuation techniques use estimates and assumptions including, but not limited to, the determination of appropriate market comparables, projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions.
Additional goodwill was recorded in fiscal 2014 as a result of the Perrite Group, Network Polymers, Inc., Prime Colorants and Specialty Plastics acquisitions and in fiscal 2015 as a result of the Compco and Citadel acquisitions. All acquired goodwill was allocated to appropriate reporting units based on relative fair values.
2016
Annual Goodwill Impairment Test
As of June 1,
2016
, the annual goodwill impairment test date for fiscal
2016
, goodwill existed in five of the Company's reporting units in EMEA (Masterbatch Solutions, Engineered Plastics, Specialty Powders, Custom Performance Colors and Distribution Services), four reporting units in USCAN (Masterbatch Solutions, Custom Performance Colors, Engineered Plastics and Specialty Powders), three reporting units in LATAM (Masterbatch Solutions, Custom Performance Colors, and Specialty Powders), two reporting units in APAC (Custom Performance Colors and Engineered Plastics), and EC.
Qualitative Analysis
The Company applied the qualitative goodwill impairment accounting guidance to its EMEA Masterbatch Solutions, EMEA Engineered Plastics, EMEA Custom Performance Colors, EMEA Distribution Services, USCAN Masterbatch Solutions, USCAN Specialty Powders, LATAM Masterbatch Solutions, LATAM Custom Performance Colors, LATAM Specialty Powders, APAC Engineered Plastics and APAC Custom Performance Colors reporting units as of June 1,
2016
. Qualitative trends and factors considered in the Company's analysis included overall economic conditions, access to capital markets, industry projections, competitive environment, actual and forecast operating results, business strategy, stock price and market capitalization, and other relevant qualitative trends and factors. These trends and factors were both compared to, and based on, the assumptions used in previous quantitative assessments performed. As of June 1,
2016
, the Company concluded that there were no indicators of impairment to the goodwill for the Company's reporting units noted above that were tested on a qualitative basis in fiscal 2016.
Quantitative Analysis
Management used the quantitative fair value measurement for its annual goodwill impairment test as of June 1,
2016
for the following reporting units: EMEA Specialty Powders ("EMEA SP"), USCAN Engineered Plastics ("USCAN EP"), USCAN Custom Performance Colors ("USCAN CPC"), and Engineered Composites ("EC"). The fair values of all these reporting units were established using a combination of the income (discounted cash flow method) and market (market comparable method) approaches. These valuation methodologies use estimates and assumptions, as noted above. The impairment test incorporates our judgment and estimates of future cash flows, future growth rates, terminal value amounts, allocations of certain assets, liabilities and cash flows among reporting units, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The estimates and projections used in the estimate of fair value are consistent with our current budget and long-range plans, including anticipated changes in market conditions, industry trends, growth rates, and planned capital expenditures, among other considerations.
Based on this quantitative analysis, management concluded that as of June 1, 2016, the USCAN CPC reporting unit had a fair value that exceeded its carrying value. As of June 1, 2016, the goodwill associated with the USCAN CPC reporting unit was $17.2 million. Management concluded that as of June 1, 2016, the EMEA SP, USCAN EP and EC reporting units had carrying values that exceeded its fair value. A decrease in the fair value of the reporting units resulted in the determination that
$16.7 million
of goodwill within EMEA SP,
$166.8 million
in USCAN EP and
$177.2 million
in EC reporting units was impaired. As of August 31, 2016, the amount of goodwill remaining within the USCAN EP and EC reporting units was $47.1 million and $74.5 million, respectively. The EMEA SP reporting unit has no goodwill remaining as of August 31, 2016. See Note 4,
Goodwill and Other Intangible Assets,
of this Annual Report on Form 10-K for further discussion on goodwill.
The following table presents the cushion from each reporting unit's fiscal 2016 quantitative goodwill impairment test compared to the 2015 test, if applicable:
|
|
|
|
|
|
|
|
As of June 1,
|
|
2016
|
|
2015
|
Amount of cushion (% fair value exceeded carrying value):
|
|
EMEA SP
|
N/A*
|
|
|
7.6
|
%
|
USCAN CPC
|
17.5
|
%
|
|
14.3
|
%
|
USCAN EP
|
N/A*
|
|
|
41.2
|
%
|
EC
|
N/A*
|
|
|
N/A*
|
|
* The cushion as of June 1, 2015 is N/A for EC due to the Company's acquisition of Citadel on June 1, 2015. As of June 1, 2016, the cushion for EMEA SP, USCAN EP and EC is N/A as the carrying value exceeds the fair value of the reporting unit.
The majority of the goodwill associated with the USCAN EP and EC reporting units was the result of the June 1, 2015 Citadel acquisition. Generally, goodwill recorded in recent business combinations is more susceptible to risk of impairment subsequent to the acquisition primarily because the business combination is recorded at fair value based on operating plans and economic conditions present at the time of the acquisition. The reporting units associated with the Citadel acquisition did not meet volume and revenue expectations, and the product mix had lower margins than planned due, in part, to remediation and changes in business practices undertaken to address the Lucent quality matter, as well as the impact of the current oil and gas market. The deterioration of the results and economic conditions soon after the acquisition resulted in the impairment of the acquired goodwill. Additionally, EMEA SP reporting unit did not meet volume and revenue expectations, due, in part to the economic environment within EMEA, specifically within the oil & gas and agricultural markets, resulting in goodwill impairment. EMEA SP was previously disclosed as a reporting unit at risk of goodwill impairment.
Long-lived Assets
Long-lived assets, except goodwill, are reviewed for impairment when circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of the asset group to future undiscounted net cash flows estimated by the Company to be generated by such asset groups. Fair value is the basis for the measurement of any asset write-downs that are recorded. Adjustments to the estimated remaining useful lives may result in accelerated depreciation, which is primarily included in cost of sales.
In the fourth quarter of fiscal 2016, the Company concluded that the carrying value of certain trademarks and developed technology acquired in the Citadel acquisition allocated to the USCAN EP and EC reporting units exceeded their fair value, as these trademarks and developed technology were discontinued during 2016. As a result, we recorded an impairment charge of
$34.5 million
as noted below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered Trademarks and Tradenames
|
|
Developed Technology
|
|
Total Intangible Impairment
|
USCAN EP
|
$
|
6,554
|
|
|
$
|
20,340
|
|
|
$
|
26,894
|
|
EC
|
7,577
|
|
|
—
|
|
|
7,577
|
|
Total
|
$
|
14,131
|
|
|
$
|
20,340
|
|
|
$
|
34,471
|
|
Refer to Note 4,
Goodwill and Other Intangible Assets,
of this Annual Report on Form 10-K for further discussion on long-lived assets.
Income Taxes
The Company’s provision for income taxes involves a significant amount of judgment by management. This provision is impacted by the income and the tax rates of the countries where the Company operates. A change in the geographical source of the Company’s income can have a significant effect on the tax rate. No taxes are provided on certain foreign earnings which are permanently reinvested.
Various taxing authorities periodically audit the Company’s tax returns. These audits may include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures associated with these various tax filing positions, the Company records tax liabilities for uncertain tax positions where the likelihood of sustaining the position is not more-likely-than-not based on its technical merits. A significant period of time may elapse before a particular matter, for which the Company has recorded a tax liability, is audited and fully resolved.
The establishment of the Company’s tax liabilities relies on the judgment of management to estimate the exposures associated with its various filing positions. Although management believes those estimates and judgments are reasonable, actual results could differ, resulting in gains or losses that may be material to the Company’s consolidated statements of operations.
To the extent that the Company prevails in matters for which tax liabilities have been recorded, or are required to pay amounts in excess of these tax liabilities, the Company’s effective tax rate in any given financial statement period could be materially affected. An unfavorable tax settlement could result in an increase in the Company’s effective tax rate in the financial statement period of resolution. A favorable tax settlement could be recognized as a reduction in the Company’s effective tax rate in the financial statement period of resolution.
The Company records a valuation allowance to reduce its deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is considered to determine whether a valuation allowance is needed. Evidence, such as the results of operations for the current and preceding years, is given more weight than projections of future income, which is inherently uncertain. The Company’s losses in foreign jurisdictions in recent periods provide sufficient negative evidence to require a valuation allowance against certain net deferred tax assets. The Company intends to maintain a valuation allowance against its net deferred tax assets in these foreign jurisdictions until sufficient positive evidence exists to support realization of such assets. In connection with the acquisition of Citadel during the prior year, the Company reversed its valuation allowance on most of its federal deferred tax assets. The reversal was due to deferred tax liabilities recorded as part of the Citadel acquisition.
Pension and Other Postretirement Benefits
The Company has several postretirement benefit plans worldwide. These plans consist primarily of defined benefit and defined contribution pension plans and other postretirement benefit plans. These benefit plans are a significant cost of doing business that represents obligations that will be ultimately settled far into the future. Pension and postretirement benefit accounting is intended to reflect the recognition of future benefit costs over the employee’s approximate period of employment based on the terms of the plans and the investment and funding decisions made by the Company.
For financial statements prepared in conformity with accounting principles generally accepted in the United States of America, management is required to make many assumptions in order to value the plans’ liabilities on a projected and accumulated basis, as well as to determine the annual expense for the plans. The assumptions chosen take into account historical experience, the current economic environment and management’s best judgment regarding future experience. Assumptions include the discount rate, the expected long-term rate of return on assets, future salary increases, health care escalation rates, cost of living increases, turnover, retirement ages and mortality. While management believes the Company’s assumptions are appropriate, significant differences in the Company’s actual experience or significant changes in the Company’s assumptions, including the discount rate used and the expected long-term rate of return on plan assets, may materially affect the Company’s pension and postretirement obligations and future expenses.
Accounting guidance requires the full unfunded liability to be recognized on the consolidated balance sheet. The cumulative difference between actual experience and assumed experience is included in accumulated other comprehensive income (loss). For most of the plans, these gains or losses are recognized in expense over the average future service period of employees to the extent that they exceed 10% of the greater of the Projected Benefit Obligation (or Accumulated Postretirement Benefit Obligation for other postretirement benefits) and assets. The effects of any plan changes are also included as a component of accumulated other comprehensive income (loss) and then recognized in expense over the average future service period of the affected plan.
As of August 31, 2016, the Company changed the approach utilized to estimate the service and interest cost components of net periodic benefit cost for its major defined benefit postretirement plans. Historically, the Company estimated the service and interest cost components using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. As of August 31, 2016, the Company utilized a spot rate approach for the estimation of service and interest cost for our major plans by applying specific spot rates along the yield curve to the relevant projected cash flows, to provide a better estimate of service and interest costs. Service and interest costs on the obligation are expected to be $0.7 million and $0.1 million lower for the twelve months ended August 31, 2017 for pension and other postretirement benefits plans, respectively, as a result of using the spot rate approach compared to the historical approach.
The Company consults with various actuaries at least annually when reviewing and selecting the discount rates to be used. The discount rates used by the Company are based on yields of various local corporate and governmental bond indices with actual maturity dates that approximate the estimated benefit payment streams of the related pension plans. The discount rates are also reviewed in comparison with current benchmark indices, economic market conditions and the movement in the benchmark yield since the previous fiscal year. The liability weighted-average discount rate for the defined benefit pension plans is 1.5% as of August 31, 2016, compared with 2.6% as of August 31, 2015 and 2.8% as of August 31, 2014. For the other postretirement benefit plan, the rate is 3.1% as of August 31, 2016 compared with 4.0% as of August 31, 2015 and 3.8% as of August 31, 2014. This rate represents the interest rates generally available in the United States, which is the Company’s only country with other postretirement benefit liabilities. Another assumption that affects the Company’s pension expense is the expected long-term rate of return on assets. Some of the Company’s plans are funded. The weighted-average expected long-term rate of return on assets assumption is 4.5% for fiscal 2016.
The Company’s principal objective is to ensure that sufficient funds are available to provide benefits as and when required under the terms of the plans. The Company utilizes investments that provide benefits and maximizes the long-term investment performance of the plans without taking on undue risk while complying with various legal funding requirements. The Company, through its investment advisors, has developed detailed asset and liability models to aid in implementing optimal asset allocation strategies. Equity securities are invested in equity indexed funds, which minimizes concentration risk while offering market returns. The debt securities are invested in a long-term bond indexed fund which provides a stable low risk return. The fixed insurance contracts allow the Company to closely match a portion of the liability to the expected payout of benefit with little risk. The Company, in consultation with its actuaries, analyzes current market trends, the current plan performance and expected market performance of both the equity and bond markets to arrive at the expected return on each asset category over the long term.
The following table illustrates the sensitivity to a change in the assumed discount rate and expected long-term rate of return on assets for the Company’s pension plans and other postretirement plans as of
August 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Assumption
|
Impact on
Fiscal 2016
Benefits Expense
|
|
Impact on
August 31, 2016
Projected Benefit
Obligation for
Pension Plans
|
|
Impact on
August 31, 2016
Projected Benefit
Obligation for
Postretirement Plans
|
|
|
|
(In thousands)
|
|
|
25 basis point decrease in discount rate
|
$
|
649
|
|
|
$
|
10,303
|
|
|
$
|
249
|
|
25 basis point increase in discount rate
|
$
|
(575
|
)
|
|
$
|
(9,758
|
)
|
|
$
|
(239
|
)
|
25 basis point decrease in expected long-term rate of return on assets
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
—
|
|
25 basis point increase in expected long- term rate of return on assets
|
$
|
(114
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Convertible Special Stock
The convertible special stock redemption, conversion and covenant characteristics are equity-like while the dividends and voting rights characteristics are debt-like. In making a determination under the whole instrument approach, the Company considered the weight of available evidence and gave appropriate consideration to each feature identified while at the same time not concluding that any one feature is determinative on its own. The accumulation of all characteristics were evaluated by the Company, as well as the fact that the convertible special stock is not mandatorily redeemable, to result in an equity-like instrument conclusion.
Share-based Incentive Compensation
The Company grants certain types of equity awards as part of its long-term incentive compensation strategy. All such awards are expensed based on the fair value of the respective award. Fair value for awards that involve service or performance conditions for vesting is determined based on the market price on the grant date, while fair value for awards which include market conditions for vesting requires the use of a valuation model. The concept of modeling is used with such awards because observable market prices for these types of awards are not available. The modeling technique that is generally considered to most appropriately value this type of award is the Monte Carlo valuation model.
The Monte Carlo valuation model requires assumptions based on management’s judgment regarding, among others, the volatility of the Company’s stock, the correlation between the Company’s stock price and that of its peer companies and the expected rate of interest. The Company uses historical data, corresponding to the vesting period, to determine the assumptions to be used in the Monte Carlo valuation model and has no reason to believe that future data is likely to materially differ from historical data. However, changes in the assumptions to reflect future stock price volatility, future correlation experience and future interest rates may result in a material change to the fair value of such awards. While management believes the Company’s assumptions used are appropriate, significant differences in the Company’s actual experience or significant changes in the Company’s assumptions, including the volatility of the Company’s stock, the correlation rate and the interest rate, may materially affect the Company’s future share-based incentive compensation expense.
The awards with a market condition granted prior to fiscal 2013 and fiscal 2014 are accounted for as equity awards given that recipients receive shares of stock upon vesting, and expense for these awards is recognized over the service period regardless of whether the market condition is achieved and the awards ultimately vest. Awards with a market condition granted in fiscal 2013 and 2014 provide recipients an option to receive cash or shares of common stock upon vesting. Consequently, such awards are accounted for as liability awards and the Company remeasures these awards at fair value on a quarterly basis over the service period. Expense for these awards is recognized only to the extent the market conditions are achieved and the awards ultimately vest.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operations was
$148.1 million
,
$60.2 million
and
$113.1 million
for the years ended August 31,
2016
,
2015
and
2014
, respectively. The increase of
$88.0 million
in cash provided by operations in fiscal
2016
compared to fiscal
2015
was primarily due to positive operating cash flow from the Citadel acquisition combined with effective working capital management. The Company has generated
$321.4 million
in net cash from operations in
fiscal 2016
,
2015
and
2014
combined.
Net cash provided from financing activities was a use of cash of
$147.2 million
in fiscal
2016
compared to a source of cash of
$778.2 million
in fiscal
2015
. This decrease is primarily due to net debt repayments of
$114.8 million
in fiscal
2016
compared to net debt issuances of
$708.0 million
in fiscal
2015
and the issuance of convertible special stock of
$120.3 million
in fiscal 2015.
The Company’s cash and cash equivalents decreased
$53.5 million
since August 31,
2015
, including restricted cash. This decrease was driven primarily by capital expenditures of
$51.2 million
, dividends paid of
$31.5 million
, net debt repayments of
$114.8 million
and the unfavorable exchange rate impact of
$4.5 million
, partially offset by cash from operations of
$148.1 million
.
The Company’s approximate working capital days are summarized as follows:
|
|
|
|
|
|
August 31, 2016
|
|
August 31, 2015
|
Days in receivables
|
56
|
|
55
|
Days in inventory
|
48
|
|
53
|
Days in payables*
|
56
|
|
55
|
Total working capital days
|
48
|
|
53
|
* During the fourth quarter of 2016, the Company changed its calculation for days in payables, which is calculated as accounts payable / (cost of sales - cost of sales labor). Prior periods have been recast to reflect this change.
The following table summarizes certain key balances on the Company’s consolidated balance sheets and related metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2016
|
|
August 31, 2015
|
|
$ Change
|
|
% Change
|
|
(In thousands, except for %’s)
|
Cash and cash equivalents, and restricted cash
|
$
|
43,403
|
|
|
$
|
96,872
|
|
|
$
|
(53,469
|
)
|
|
(55.2
|
)%
|
Working capital, excluding cash
|
$
|
250,901
|
|
|
$
|
334,160
|
|
|
$
|
(83,259
|
)
|
|
(24.9
|
)%
|
Long-term debt
|
$
|
929,591
|
|
|
$
|
1,045,349
|
|
|
$
|
(115,758
|
)
|
|
(11.1
|
)%
|
Total debt
|
$
|
955,038
|
|
|
$
|
1,066,059
|
|
|
$
|
(111,021
|
)
|
|
(10.4
|
)%
|
Net debt *
|
$
|
911,635
|
|
|
$
|
969,187
|
|
|
$
|
(57,552
|
)
|
|
(5.9
|
)%
|
Total A. Schulman, Inc.’s stockholders’ equity
|
$
|
159,269
|
|
|
$
|
584,086
|
|
|
$
|
(424,817
|
)
|
|
(72.7
|
)%
|
* Net debt, a non-GAAP financial measure, represents total debt less cash and cash equivalents. The Company believes that net debt provides useful supplemental liquidity information to investors as it is utilized in leverage calculations.
As of August 31,
2016
, 97% of the Company's cash and cash equivalents were held by its foreign subsidiaries, compared to 96% of the Company’s cash and cash equivalents at
August 31, 2015
. The majority of these foreign cash balances are associated with earnings that we have asserted are permanently reinvested and which we plan to use to support continued growth plans outside the U.S. through funding of capital expenditures, operating expenses or other similar cash needs of foreign operations. From time to time, we repatriate cash from foreign subsidiaries to the U.S. through intercompany dividends for servicing outstanding debt. These dividends are typically paid out of current year earnings. A significant portion of our cash and cash equivalents are in the Company’s bank accounts that are part of the Company's recently established global cash pooling system, which has resulted in a decrease in cash and cash equivalents needed on hand as of
August 31, 2016
compared to
August 31, 2015
. Excess cash in the U.S. and EMEA is generally used to repay outstanding debt.
Working capital, excluding cash, was
$250.9 million
as of
August 31, 2016
, a decrease of
$83.3 million
from
August 31, 2015
. The primary reasons for the decrease in working capital from
August 31, 2015
include a decrease of $37.2 million in accounts receivable, a decrease of $53.7 million in inventory, and a decrease of $19.9 million in prepaid expenses, partially offset by a decrease in accounts payable of $25.3 million.
Capital expenditures for the year ended
August 31, 2016
were
$51.2 million
compared to
$42.6 million
in the prior year. Capital expenditures for fiscal year
2016
primarily relate to the regular and ongoing investment in the Company's manufacturing facilities and global expansion.
Senior Notes
On May 26, 2015, the Company issued
$375.0 million
aggregate principal amount of
6.875%
Senior Notes due 2023 (the “Notes”). The Notes were sold on May 26, 2015 in a private transaction exempt from the registration requirements of the Securities
Act of 1933 (the "Securities Act") for 540 days from issuance. The Notes have not been registered under the Securities Act as of
August 31, 2016
. During fiscal 2015, the Company capitalized
$11.3 million
in debt issuance costs related to the Notes.
The Notes mature on June 1, 2023 and are senior unsecured obligations of the Company that are guaranteed on a senior basis by the material domestic guarantors under the Credit Facility (as defined below).
The Notes contain certain covenants that, among other things, limit the ability, in certain circumstances, of the Company to incur additional indebtedness, pay dividends or other restricted payments, incur liens on assets, enter into transactions with affiliates, merge or consolidate with another company, and transfer or sell all or substantially all of the Company’s assets. The Company was in compliance with these covenants as of
August 31, 2016
.
The Company has the option to redeem these Notes, in whole or in part, at any time on or after June 1, 2018 at redemption prices, plus accrued and unpaid interest to the redemption date of
105.156%
,
103.438%
,
101.719%
and
100%
during the 12-month periods commencing on June 1, 2018, 2019, 2020 and 2021 and thereafter, respectively. Prior to June 1, 2018, the Company may redeem these Notes, in whole or in part, and pay the applicable premium that includes the redemption price plus accrued and unpaid interest to the redemption date.
2015 Credit Agreement
On June 1, 2015, the Company and certain of its wholly-owned subsidiaries entered into an amended and restated Credit Agreement for approximately
$1 billion
with JPMorgan Chase Bank, N.A., as administrative agent, J.P. Morgan Europe Limited, as global agent, the lenders named in the Credit Agreement and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint bookrunners and joint lead arrangers (the "Credit Agreement"). The Credit Agreement provides for:
|
|
•
|
a multicurrency revolving credit facility in the aggregate principal amount of up to
$300 million
(the “Revolving Facility");
|
|
|
•
|
a
$200 million
term loan A facility (the "Term Loan A Facility") with quarterly payments due until maturity;
|
|
|
•
|
a
$350 million
U.S. term loan B facility (the "U.S. Term Loan B Facility") with quarterly payments due until maturity;
|
|
|
•
|
a
€145 million
term loan B facility (the "Euro Term Loan B Facility") with quarterly payments due until maturity; and
|
|
|
•
|
an expansion feature allowing the Company to incur additional revolving loans and/or term loans in an aggregate principal amount of up to
$250 million
plus additional amounts that are subject to certain terms and conditions (the "Incremental Facility" and, together with the Revolving Facility, the Term Loan A Facility, the U.S. Term Loan B Facility and the Euro Term Loan B Facility, the "Credit Facility").
|
The Revolving Facility and Term Loan A Facility each mature on June 1, 2020, and the U.S. Term Loan B Facility and Euro Term Loan B Facility each mature on June 1, 2022. In addition to the required Term Loan quarterly payments due until maturity, the Company repaid
€108.6 million
of the Euro Term Loan B Facility during the year ended
August 31, 2016
.
The Credit Facility is jointly and severally guaranteed by certain material domestic subsidiaries of the Company (the "Guarantors”). Payment and performance under the Credit Facility is secured by a first priority security interest in substantially all tangible property of the Company and each Guarantor; including a pledge of 100% of the stock of certain domestic subsidiaries and 65% of the stock of certain foreign subsidiaries subject to materiality and customary exceptions. Foreign obligations are secured by a pledge of 100% of the stock of the foreign borrower and other pledged foreign subsidiaries.
The Credit Agreement contains certain covenants that, among other things, restrict the Company and its subsidiaries' ability to incur indebtedness and grant liens other than certain types of permitted indebtedness and permitted liens. In addition, the Company is required to maintain a minimum interest coverage ratio and cannot exceed a maximum net debt leverage ratio for the Revolving Facility and Term Loan A Facility. The Company was in compliance with these covenants and does not believe a subsequent covenant violation is reasonably possible as of
August 31, 2016
.
Interest rates under the Credit Agreement are based on ABR or LIBOR (depending on the borrowing currency) plus a spread determined by the Company's total leverage ratio. Borrowings under the U.S. Term Loan B Facility and Euro Term Loan B Facility are subject to a LIBOR floor of 0.75%. When market LIBOR rates are lower than the 0.75% floor, the interest rate on the Term Loan B Facilities is based on the LIBOR floor plus a spread. The Company is also required to pay a facility fee on the commitments for the unused portion of the Revolving Facility. Additionally, the Revolving Facility provides for a portion of the funds to be made available as a short-term swing-line loan.
Below summarizes the Company’s available funds:
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Existing capacity:
|
|
|
|
Revolving Facility, due June 2020
|
$
|
300,000
|
|
|
$
|
300,000
|
|
Foreign short-term lines of credit
|
37,953
|
|
|
34,921
|
|
Total capacity from credit lines
|
$
|
337,953
|
|
|
$
|
334,921
|
|
Availability:
|
|
|
|
Revolving Facility, due June 2020
|
$
|
279,120
|
|
|
$
|
298,574
|
|
Foreign short-term lines of credit
|
27,959
|
|
|
25,999
|
|
Total available funds from credit lines
|
$
|
307,079
|
|
|
$
|
324,573
|
|
Total available funds from credit lines represents the total capacity from credit lines less outstanding borrowings of
$26.6 million
and
$8.9 million
as of August 31,
2016
and
2015
, respectively, and issued letters of credit of
$4.3 million
and
$1.4 million
as of August 31,
2016
and
2015
, respectively.
The Company’s underfunded pension liability is
$148.3 million
as of
August 31, 2016
. This amount is primarily due to an underfunded plan of $120.2 million in the Company's German subsidiary. Under this plan, no separate vehicle is required to accumulate assets to provide for the payment of benefits. The benefits are paid directly by the Company to the participants. It is anticipated that the German subsidiary will generate sufficient funds from operations to pay these benefits in the future.
During the year ended
August 31, 2016
, the Company paid cash dividends to common stockholders aggregating to
$0.82
per share. The total amount of these dividends was
$24.0 million
. The Company also paid cash dividends of
$60.00
per share to convertible special stockholders during the year ended
August 31, 2016
. The total amount of these dividends was
$7.5 million
. Cash flow has been sufficient to fund the payment of these dividends.
On April 3, 2014, the Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to
$55 million
of its common stock in the open market or in privately negotiated transactions, subject to market and other conditions (the “Program”). Repurchases under the Program may take place over a three-year period ending April 2, 2017, when the Program is scheduled to expire. The Company did not repurchase any common or special stock during fiscal 2016. The Company repurchased
109,422
shares of common stock under the Program in fiscal
2015
at an average price of
$30.46
per share for a total cost of
$3.3 million
. As of
August 31, 2016
, shares valued at
$51.7 million
remain authorized for repurchase. As a result of the financing related to the Citadel acquisition on June 1, 2015, the Company's strategic focus shifted towards repaying debt and the Board indefinitely suspended the Program.
The Company has foreign currency exposures primarily related to the Euro, British pound sterling, Polish zloty, Mexican peso, Brazilian real, and Argentine peso, among others. The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using current exchange rates. Income statement items are translated at average exchange rates prevailing during the period. The resulting translation adjustments are recorded in the accumulated other comprehensive income (loss) account in stockholders’ equity. A significant portion of the Company’s operations uses the Euro as its functional currency. While the Euro has been flat compared to the prior period, significant decreases in the British pound sterling ("GBP") and Mexican peso ("MXN") had a negative impact on results. The GBP weakened 14.9% from 1.54 US Dollars ("USD") to 1 GBP as of
August 31, 2015
to 1.31 USD to 1 GBP as of
August 31, 2016
. The Mexican peso weakened 11.2% from 16.9 MXN to 1 USD at
August 31, 2015
to 18.8 MXN to 1 USD at
August 31, 2016
. The change in the value of all foreign currencies during the year ended August 31,
2016
decreased the accumulated other comprehensive income (loss) account by
$20.8 million
.
Cash flow from operations, borrowing capacity under the credit facilities and current cash and cash equivalents are expected to provide sufficient liquidity to maintain and grow the Company’s current operations and capital expenditure requirements, pay dividends, reduce outstanding debt, and repurchase shares.
A summary of the Company’s future obligations subsequent to
August 31, 2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5
years
|
|
Total
|
|
(In thousands)
|
Short-Term Debt
(a)
|
$
|
24,430
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,430
|
|
Long-Term Debt
(a),(h)
|
—
|
|
|
35,229
|
|
|
180,006
|
|
|
710,630
|
|
|
925,865
|
|
Capital Lease Obligations
(a)
|
1,017
|
|
|
1,952
|
|
|
1,774
|
|
|
—
|
|
|
4,743
|
|
Operating Lease Obligations
(b)
|
14,254
|
|
|
17,438
|
|
|
6,567
|
|
|
12,067
|
|
|
50,326
|
|
Purchase Obligations
(c)
|
112,948
|
|
|
19,857
|
|
|
6,307
|
|
|
1,437
|
|
|
140,549
|
|
Pension Obligations
(d)
|
5,712
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,712
|
|
Postretirement Benefit Obligations
(e)
|
817
|
|
|
1,598
|
|
|
1,494
|
|
|
3,347
|
|
|
7,256
|
|
Deferred Compensation Obligations
(f)
|
125
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
150
|
|
Interest Payments
(g)
|
46,700
|
|
|
91,943
|
|
|
81,219
|
|
|
42,087
|
|
|
261,949
|
|
|
$
|
206,003
|
|
|
$
|
168,042
|
|
|
$
|
277,367
|
|
|
$
|
769,568
|
|
|
$
|
1,420,980
|
|
|
|
(a)
|
Short-term debt, long-term debt and capital lease information is provided in the Notes of this Annual Report on Form 10-K. Short-term debt and long-term debt in the table above exclude capital lease obligations.
|
|
|
(b)
|
Operating lease information is provided in the Notes of this Annual Report on Form 10-K.
|
|
|
(c)
|
Purchase obligations include purchase contracts and purchase orders for inventory.
|
|
|
(d)
|
Pension obligations represent future estimated pension payments to comply with local funding requirements, as well as estimated benefit payments. The projected payments beyond fiscal year
2017
are not currently determinable.
|
|
|
(e)
|
Postretirement benefit obligations represent the estimated benefit payments of the U.S. postretirement benefit plan using the plan provisions in effect as of August 31,
2016
.
|
|
|
(f)
|
Deferred compensation obligations represent payments in accordance with agreements for two individuals for a ten-year period through fiscal 2018.
|
|
|
(g)
|
Interest obligations on the Company’s short and long-term debt are included assuming the outstanding debt levels and interest rates will be consistent with those as of August 31,
2016
.
|
|
|
(h)
|
The Company's long-term debt consists of Senior Notes, Revolving Facility, Term Loan A, U.S. Term Loan B and Euro Term Loan B that mature in June 2023, June 2020, June 2020, June 2022 and June 2022, respectively.
|
The Company had
$3.0 million
of gross unrecognized tax benefits and
$1.1 million
of accrued interest and penalties on unrecognized tax benefits as of August 31,
2016
for which it could not reasonably estimate the timing and amount of future payments; therefore, no amounts were included in the Company’s future obligations table. Additional information on unrecognized tax benefits is provided in the Notes to the Consolidated Financial Statements.
The Company’s outstanding commercial commitments as of
August 31, 2016
are not material to the Company’s financial position, liquidity or results of operations except as discussed in the Notes of this Annual Report on Form 10-K.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 1,
Business and Summary of Significant Accounting Policies,
to the consolidated financial statements in ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, of this Annual Report on Form 10-K.
Cautionary Statements
A number of the matters discussed in this document that are not historical or current facts deal with potential future circumstances and developments and may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historic or current facts and relate to future events and expectations. Forward-looking statements contain such words as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which management is unable to predict or control, that may cause actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could adversely affect the Company’s future financial performance, include, but are not limited to, the following:
|
|
•
|
worldwide and regional economic, business and political conditions, including continuing economic uncertainties in some or all of the Company’s major product markets or countries where the Company has operations;
|
|
|
•
|
the effectiveness of the Company’s efforts to improve operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques;
|
|
|
•
|
competitive factors, including intense price competition;
|
|
|
•
|
fluctuations in the value of currencies in areas where the Company operates;
|
|
|
•
|
volatility of prices and availability of the supply of energy and raw materials that are critical to the manufacture of the Company’s products, particularly plastic resins derived from oil and natural gas;
|
|
|
•
|
changes in customer demand and requirements;
|
|
|
•
|
effectiveness of the Company to achieve the level of cost savings, productivity improvements, growth and other benefits anticipated from acquisitions and the integration thereof, joint ventures and restructuring initiatives;
|
|
|
•
|
escalation in the cost of providing employee health care;
|
|
|
•
|
uncertainties regarding the resolution of pending and future litigation and other claims;
|
|
|
•
|
the performance of the global automotive market as well as other markets served;
|
|
|
•
|
further adverse changes in economic or industry conditions, including global supply and demand conditions and prices for products;
|
|
|
•
|
operating problems with our information systems as a result of system security failures such as viruses, cyber-attacks or other causes;
|
|
|
•
|
our current debt position could adversely affect our financial health and prevent us from fulfilling our financial obligations;
|
|
|
•
|
integration of acquisitions, including most recently Citadel, with our existing business, including the risk that the integration will be more costly or more time consuming and complex or simply less effective than anticipated;
|
|
|
•
|
our ability to achieve the anticipated synergies, cost savings and other benefits from the Citadel acquisition;
|
|
|
•
|
substantial time devoted by management to the integration of the Citadel acquisition; and
|
|
|
•
|
failure of counterparties to perform under the terms and conditions of contractual arrangements, including suppliers, customers, buyers and sellers of a business and other third parties with which the Company contracts.
|
The risks and uncertainties identified above are not the only risks the Company faces. Additional risk factors that could affect the Company’s performance are set forth in ITEM 1A, RISK FACTORS, of this Annual Report on Form 10-K. In addition, risks
and uncertainties not presently known to the Company or that it believes to be immaterial also may adversely affect the Company. Should any known or unknown risks or uncertainties develop into actual events, or underlying assumptions prove inaccurate, these developments could have material adverse effects on the Company’s business, financial condition and results of operations.
|
|
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
A. Schulman, Inc.
Index to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders
of A. Schulman, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of A. Schulman, Inc. and its subsidiaries as of August 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2), respectively presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of August 31, 2016, based on criteria established in
Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting related to ineffective controls over information technology program and data changes and ineffective controls over user access to programs and data at the Citadel locations, an insufficient number of professionals with an appropriate level of knowledge, training and experience to properly analyze and record accounting matters at the Company’s European shared services center, which contributed to additional material weaknesses related to the segregation of duties over certain accounting functions, including the review and approval of manual journal entries, ineffective controls over cash disbursements related to accounts payable and ineffective controls over revenue existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the August 31, 2016 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on these financial statements and financial statement schedule and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1,
Business and Summary of Significant Accounting Policies,
to the consolidated financial statements, the Company changed the manner in which it classifies deferred income taxes in fiscal 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Cleveland, Ohio
October 26, 2016
A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands, except per share data)
|
Net sales
|
$
|
2,496,005
|
|
|
$
|
2,392,225
|
|
|
$
|
2,446,998
|
|
Cost of sales
|
2,095,085
|
|
|
2,031,215
|
|
|
2,116,990
|
|
Selling, general and administrative expenses
|
296,725
|
|
|
276,244
|
|
|
242,700
|
|
Restructuring expense
|
11,768
|
|
|
14,338
|
|
|
4,883
|
|
Asset impairment
|
401,667
|
|
|
—
|
|
|
104
|
|
Operating income (loss)
|
(309,240
|
)
|
|
70,428
|
|
|
82,321
|
|
Interest expense
|
54,548
|
|
|
22,613
|
|
|
8,503
|
|
Bridge financing fees
|
—
|
|
|
18,750
|
|
|
—
|
|
Foreign currency transaction (gains) losses
|
3,491
|
|
|
3,363
|
|
|
2,206
|
|
Other (income) expense, net
|
(774
|
)
|
|
(1,438
|
)
|
|
(720
|
)
|
Gain on early extinguishment of debt
|
—
|
|
|
(1,290
|
)
|
|
—
|
|
Income (loss) from continuing operations before taxes
|
(366,505
|
)
|
|
28,430
|
|
|
72,332
|
|
Provision (benefit) for U.S. and foreign income taxes
|
(8,640
|
)
|
|
499
|
|
|
18,542
|
|
Income (loss) from continuing operations
|
(357,865
|
)
|
|
27,931
|
|
|
53,790
|
|
Income (loss) from discontinued operations, net of tax
|
1,861
|
|
|
(133
|
)
|
|
3,202
|
|
Net income (loss)
|
(356,004
|
)
|
|
27,798
|
|
|
56,992
|
|
Noncontrolling interests
|
(1,118
|
)
|
|
(1,169
|
)
|
|
(799
|
)
|
Net income (loss) attributable to A. Schulman, Inc.
|
(357,122
|
)
|
|
26,629
|
|
|
56,193
|
|
Convertible special stock dividends
|
7,500
|
|
|
2,438
|
|
|
—
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
(364,622
|
)
|
|
$
|
24,191
|
|
|
$
|
56,193
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding:
|
|
|
|
|
|
Basic
|
29,300
|
|
|
29,149
|
|
|
29,061
|
|
Diluted
|
29,300
|
|
|
29,483
|
|
|
29,362
|
|
|
|
|
|
|
|
Basic earnings per share available to A. Schulman, Inc. common stockholders
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(12.51
|
)
|
|
$
|
0.83
|
|
|
$
|
1.82
|
|
Income (loss) from discontinued operations
|
0.07
|
|
|
—
|
|
|
0.11
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
(12.44
|
)
|
|
$
|
0.83
|
|
|
$
|
1.93
|
|
|
|
|
|
|
|
Diluted earnings per share available to A. Schulman, Inc. common stockholders
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(12.51
|
)
|
|
$
|
0.83
|
|
|
$
|
1.80
|
|
Income (loss) from discontinued operations
|
0.07
|
|
|
(0.01
|
)
|
|
0.11
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
(12.44
|
)
|
|
$
|
0.82
|
|
|
$
|
1.91
|
|
|
|
|
|
|
|
Cash dividends per common share
|
$
|
0.82
|
|
|
$
|
0.82
|
|
|
$
|
0.80
|
|
Cash dividends per share of convertible special stock
|
$
|
60.00
|
|
|
$
|
14.50
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of the consolidated financial statements.
A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(In thousands)
|
Net income (loss)
|
|
$
|
(356,004
|
)
|
|
$
|
27,798
|
|
|
$
|
56,992
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Foreign currency translation gains (losses), net of tax of $0 in 2016, $7,076 in 2015 and $0 in 2014
|
|
(20,831
|
)
|
|
(72,526
|
)
|
|
4,987
|
|
Net change in net actuarial gains (losses), net of tax of $7,288 in 2016, $(2,743) in 2015 and $8,262 in 2014
|
|
(16,597
|
)
|
|
6,086
|
|
|
(21,813
|
)
|
Net change in prior service (costs) credits, net of tax of $0 for all periods presented
|
|
(509
|
)
|
|
(507
|
)
|
|
(634
|
)
|
Other comprehensive income (loss)
|
|
(37,937
|
)
|
|
(66,947
|
)
|
|
(17,460
|
)
|
Comprehensive income (loss)
|
|
(393,941
|
)
|
|
(39,149
|
)
|
|
39,532
|
|
Less: comprehensive income (loss) attributable to noncontrolling interests
|
|
442
|
|
|
991
|
|
|
712
|
|
Comprehensive income (loss) attributable to A. Schulman, Inc.
|
|
$
|
(394,383
|
)
|
|
$
|
(40,140
|
)
|
|
$
|
38,820
|
|
The accompanying notes are an integral part of the consolidated financial statements.
A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
August 31,
2016
|
|
August 31,
2015
|
|
(In thousands)
|
ASSETS
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
35,260
|
|
|
$
|
96,872
|
|
Restricted cash
|
8,143
|
|
|
—
|
|
Accounts receivable, net
|
376,786
|
|
|
413,943
|
|
Inventories
|
263,617
|
|
|
317,328
|
|
Prepaid expenses and other current assets
|
40,263
|
|
|
60,205
|
|
Total current assets
|
724,069
|
|
|
888,348
|
|
Property, plant and equipment, at cost:
|
|
|
|
Land and improvements
|
32,957
|
|
|
31,674
|
|
Buildings and leasehold improvements
|
184,291
|
|
|
164,759
|
|
Machinery and equipment
|
447,932
|
|
|
427,183
|
|
Furniture and fixtures
|
34,457
|
|
|
34,393
|
|
Construction in progress
|
20,431
|
|
|
23,866
|
|
Gross property, plant and equipment
|
720,068
|
|
|
681,875
|
|
Accumulated depreciation
|
405,246
|
|
|
367,381
|
|
Net property, plant and equipment
|
314,822
|
|
|
314,494
|
|
Deferred charges and other noncurrent assets
|
98,403
|
|
|
90,749
|
|
Goodwill
|
257,773
|
|
|
623,583
|
|
Intangible assets, net
|
362,614
|
|
|
434,537
|
|
Total assets
|
$
|
1,757,681
|
|
|
$
|
2,351,711
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
280,060
|
|
|
$
|
305,385
|
|
U.S. and foreign income taxes payable
|
8,985
|
|
|
4,205
|
|
Accrued payroll, taxes and related benefits
|
47,569
|
|
|
56,192
|
|
Other accrued liabilities
|
67,704
|
|
|
70,824
|
|
Short-term debt
|
25,447
|
|
|
20,710
|
|
Total current liabilities
|
429,765
|
|
|
457,316
|
|
Long-term debt
|
929,591
|
|
|
1,045,349
|
|
Pension plans
|
145,108
|
|
|
117,889
|
|
Deferred income taxes
|
59,013
|
|
|
115,537
|
|
Other long-term liabilities
|
25,844
|
|
|
22,885
|
|
Total liabilities
|
1,589,321
|
|
|
1,758,976
|
|
Commitments and contingencies
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Convertible special stock, no par value
|
120,289
|
|
|
120,289
|
|
Common stock, $1 par value, authorized - 75,000 shares, issued - 48,510 shares in 2016 and 48,369 shares in 2015
|
48,510
|
|
|
48,369
|
|
Additional paid-in capital
|
275,115
|
|
|
274,319
|
|
Accumulated other comprehensive income (loss)
|
(120,721
|
)
|
|
(83,460
|
)
|
Retained earnings
|
219,039
|
|
|
607,690
|
|
Treasury stock, at cost, 19,069 shares in 2016 and 19,077 shares in 2015
|
(382,963
|
)
|
|
(383,121
|
)
|
Total A. Schulman, Inc.’s stockholders’ equity
|
159,269
|
|
|
584,086
|
|
Noncontrolling interests
|
9,091
|
|
|
8,649
|
|
Total equity
|
168,360
|
|
|
592,735
|
|
Total liabilities and equity
|
$
|
1,757,681
|
|
|
$
|
2,351,711
|
|
The accompanying notes are an integral part of the consolidated financial statements.
A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Special Stock
|
|
Common
Stock
($1 par
value)
|
|
Additional Paid-In Capital
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Non-controlling
Interests
|
|
Total
Equity
|
|
(In thousands, except per share data)
|
Balance at August 31, 2013
|
$
|
—
|
|
|
$
|
48,094
|
|
|
$
|
263,158
|
|
|
$
|
682
|
|
|
$
|
574,370
|
|
|
$
|
(378,927
|
)
|
|
$
|
7,367
|
|
|
$
|
514,744
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
(17,373
|
)
|
|
56,193
|
|
|
|
|
712
|
|
|
39,532
|
|
Noncontrolling interests' contributions
(distributions)
|
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
600
|
|
Change in ownership interest
|
|
|
|
|
(729
|
)
|
|
|
|
|
|
|
|
729
|
|
|
—
|
|
Cash dividends paid on common stock,
$0.80 per share
|
|
|
|
|
|
|
|
|
(23,665
|
)
|
|
|
|
|
|
(23,665
|
)
|
Purchase 40 shares of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(1,116
|
)
|
|
|
|
(1,116
|
)
|
Issuance of treasury stock
|
|
|
|
|
105
|
|
|
|
|
|
|
149
|
|
|
|
|
254
|
|
Stock options exercised
|
|
|
13
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
233
|
|
Restricted stock issued, net of forfeitures
|
|
|
88
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
—
|
|
Redemption of common stock to cover tax
withholdings
|
|
|
(10
|
)
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
(361
|
)
|
Amortization of restricted stock
|
|
|
|
|
6,230
|
|
|
|
|
|
|
|
|
|
|
6,230
|
|
Balance at August 31, 2014
|
—
|
|
|
48,185
|
|
|
268,545
|
|
|
(16,691
|
)
|
|
606,898
|
|
|
(379,894
|
)
|
|
9,408
|
|
|
536,451
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
(66,769
|
)
|
|
26,629
|
|
|
|
|
991
|
|
|
(39,149
|
)
|
Noncontrolling interests' contributions
(distributions)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,750
|
)
|
|
(1,750
|
)
|
Cash dividends paid on common stock,
$0.82 per share
|
|
|
|
|
|
|
|
|
(24,024
|
)
|
|
|
|
|
|
(24,024
|
)
|
Cash dividends paid on convertible special
stock, $14.50 per share
|
|
|
|
|
|
|
|
|
(1,813
|
)
|
|
|
|
|
|
(1,813
|
)
|
Purchase 109 shares of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(3,335
|
)
|
|
|
|
(3,335
|
)
|
Issuance of treasury stock
|
|
|
|
|
117
|
|
|
|
|
|
|
108
|
|
|
|
|
225
|
|
Stock options exercised
|
|
|
3
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Restricted stock issued, net of forfeitures
|
|
|
331
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
|
—
|
|
Redemption of common stock to cover tax
withholdings
|
|
|
(150
|
)
|
|
(4,849
|
)
|
|
|
|
|
|
|
|
|
|
(4,999
|
)
|
Amortization of restricted stock
|
|
|
|
|
10,270
|
|
|
|
|
|
|
|
|
|
|
10,270
|
|
Tax windfall (shortfall) related to share-based incentive compensation
|
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
506
|
|
Issuance of convertible special stock, net of
issuance costs
|
120,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,289
|
|
Balance at August 31, 2015
|
120,289
|
|
|
48,369
|
|
|
274,319
|
|
|
(83,460
|
)
|
|
607,690
|
|
|
(383,121
|
)
|
|
8,649
|
|
|
592,735
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
(37,261
|
)
|
|
(357,122
|
)
|
|
|
|
442
|
|
|
(393,941
|
)
|
Cash dividends on common stock, $0.82 per share
|
|
|
|
|
|
|
|
|
(24,029
|
)
|
|
|
|
|
|
(24,029
|
)
|
Cash dividends paid on convertible special stock, $60.00 per share
|
|
|
|
|
|
|
|
|
(7,500
|
)
|
|
|
|
|
|
(7,500
|
)
|
Issuance of treasury stock
|
|
|
|
|
67
|
|
|
|
|
|
|
158
|
|
|
|
|
225
|
|
Stock options exercised
|
|
|
2
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
33
|
|
Restricted stock issued, net of forfeitures
|
|
|
190
|
|
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
—
|
|
Redemption of common stock to cover tax withholdings
|
|
|
(51
|
)
|
|
(1,088
|
)
|
|
|
|
|
|
|
|
|
|
(1,139
|
)
|
Tax windfall (shortfall) related to share-based incentive compensation
|
|
|
|
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
(302
|
)
|
Amortization of restricted stock
|
|
|
|
|
2,278
|
|
|
|
|
|
|
|
|
|
|
2,278
|
|
Balance at August 31, 2016
|
$
|
120,289
|
|
|
$
|
48,510
|
|
|
$
|
275,115
|
|
|
$
|
(120,721
|
)
|
|
$
|
219,039
|
|
|
$
|
(382,963
|
)
|
|
$
|
9,091
|
|
|
$
|
168,360
|
|
The accompanying notes are an integral part of the consolidated financial statements.
A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Operating from continuing and discontinued operations:
|
|
|
|
|
|
Net income (loss)
|
$
|
(356,004
|
)
|
|
$
|
27,798
|
|
|
$
|
56,992
|
|
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
|
|
|
|
|
Depreciation
|
49,925
|
|
|
37,257
|
|
|
33,697
|
|
Amortization
|
39,339
|
|
|
21,983
|
|
|
14,207
|
|
Deferred tax provision
|
(37,919
|
)
|
|
(19,253
|
)
|
|
(3,007
|
)
|
Pension, postretirement benefits and other compensation
|
3,516
|
|
|
7,560
|
|
|
10,802
|
|
Restricted stock compensation - CEO transition costs, net of cash
|
—
|
|
|
4,789
|
|
|
—
|
|
Asset impairment
|
401,667
|
|
|
—
|
|
|
104
|
|
Curtailment and settlement (gains) losses
|
—
|
|
|
—
|
|
|
214
|
|
Gain on sale of assets from discontinued operations
|
—
|
|
|
—
|
|
|
(3,365
|
)
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
Accounts receivable
|
28,227
|
|
|
(2,395
|
)
|
|
(5,875
|
)
|
Inventories
|
44,627
|
|
|
(17,382
|
)
|
|
7,099
|
|
Accounts payable
|
(27,465
|
)
|
|
(8,139
|
)
|
|
(3,497
|
)
|
Income taxes
|
12,549
|
|
|
(3,342
|
)
|
|
(1,372
|
)
|
Tax windfall related to share-based incentive compensation
|
—
|
|
|
(506
|
)
|
|
—
|
|
Accrued payroll and other accrued liabilities
|
(9,319
|
)
|
|
18,359
|
|
|
5,189
|
|
Other assets and long-term liabilities
|
(1,016
|
)
|
|
(6,559
|
)
|
|
1,954
|
|
Net cash provided from (used in) operating activities
|
148,127
|
|
|
60,170
|
|
|
113,142
|
|
Investing from continuing and discontinued operations:
|
|
|
|
|
|
Expenditures for property, plant and equipment
|
(51,238
|
)
|
|
(42,587
|
)
|
|
(35,089
|
)
|
Proceeds from the sale of assets
|
1,366
|
|
|
1,985
|
|
|
6,004
|
|
Restricted cash
|
(8,143
|
)
|
|
—
|
|
|
—
|
|
Investment in equity investees
|
—
|
|
|
(12,456
|
)
|
|
—
|
|
Business acquisitions, net of cash
|
—
|
|
|
(808,258
|
)
|
|
(206,625
|
)
|
Net cash provided from (used in) investing activities
|
(58,015
|
)
|
|
(861,316
|
)
|
|
(235,710
|
)
|
Financing from continuing and discontinued operations:
|
|
|
|
|
|
Cash dividends paid to common stockholders
|
(24,029
|
)
|
|
(24,024
|
)
|
|
(23,665
|
)
|
Cash dividends paid to special stockholders
|
(7,500
|
)
|
|
(1,813
|
)
|
|
—
|
|
Increase (decrease) in short-term debt
|
2,945
|
|
|
(8,759
|
)
|
|
13,774
|
|
Borrowings on long-term debt
|
244,231
|
|
|
1,430,513
|
|
|
795,745
|
|
Repayments on long-term debt including current portion
|
(362,002
|
)
|
|
(713,717
|
)
|
|
(653,894
|
)
|
Payment of debt issuance costs
|
—
|
|
|
(15,007
|
)
|
|
(1,782
|
)
|
Noncontrolling interests' contributions (distributions)
|
—
|
|
|
(1,750
|
)
|
|
600
|
|
Tax windfall related to share-based incentive compensation
|
—
|
|
|
506
|
|
|
—
|
|
Issuances of common stock, common and treasury
|
258
|
|
|
289
|
|
|
487
|
|
Issuances of convertible special stock, net
|
—
|
|
|
120,289
|
|
|
—
|
|
Redemptions of common stock
|
(1,139
|
)
|
|
(4,999
|
)
|
|
(361
|
)
|
Purchases of treasury stock
|
—
|
|
|
(3,335
|
)
|
|
(1,116
|
)
|
Net cash provided from (used in) financing activities
|
(147,236
|
)
|
|
778,193
|
|
|
129,788
|
|
Effect of exchange rate changes on cash
|
(4,488
|
)
|
|
(15,668
|
)
|
|
(5,781
|
)
|
Net increase (decrease) in cash and cash equivalents
|
(61,612
|
)
|
|
(38,621
|
)
|
|
1,439
|
|
Cash and cash equivalents at beginning of year
|
96,872
|
|
|
135,493
|
|
|
134,054
|
|
Cash and cash equivalents at end of year
|
$
|
35,260
|
|
|
$
|
96,872
|
|
|
$
|
135,493
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
Interest
|
$
|
54,432
|
|
|
$
|
11,187
|
|
|
$
|
7,578
|
|
Income taxes
|
$
|
22,392
|
|
|
$
|
22,651
|
|
|
$
|
21,720
|
|
The accompanying notes are an integral part of the consolidated financial statements.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
A. Schulman, Inc. (the “Company”) is a leading international supplier of high-performance plastic compounds and resins. The Company’s customers span a wide range of markets such as packaging, mobility, building & construction, electronics & electrical, agriculture, personal care & hygiene, custom services, and sports, home & leisure. The Company employs approximately
4,800
people and has
54
manufacturing facilities in the United States & Canada ("USCAN"), Latin America ("LATAM"), Europe, Middle East and Africa (“EMEA”), Asia Pacific (“APAC”) and Engineered Composites ("EC") segments.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries in which a controlling interest is maintained. All significant intercompany transactions have been eliminated.
Noncontrolling interests represent a
37%
equity position of Alta Plastica S.A. in an Argentinean venture with the Company and a
35%
equity position of P.T. Prima Polycon Indah in an Indonesian joint venture with the Company.
The financial position and results of operations of the Company’s foreign subsidiaries are generally recorded using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each reporting period end. Income statement accounts are translated each month at the average rate of exchange during the month. Other comprehensive income and accumulated other comprehensive income (loss) in stockholders’ equity include translation adjustments arising from the use of different exchange rates from period to period.
Certain items previously reported in specific financial statement captions have been reclassified to conform to the
2016
presentation.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Actual results could differ from those estimates. Such estimates include the value of purchase consideration, valuation of accounts receivables, inventories, goodwill, other intangible assets, other long-lived assets, contingencies, and assumptions used in the calculation of income taxes, pension and other postretirement benefits, share-based incentive compensation, and restructuring, among others. These estimates and assumptions are based on management’s judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Management monitors any factors which may have an impact and adjusts such estimates and assumptions when required. Changes in those estimates are reflected in the consolidated financial statements in the period of change.
Revenue Recognition
The Company’s accounting policy regarding revenue recognition is to recognize revenue when there is persuasive evidence of a sales agreement, the delivery of goods has occurred where both title and the risks and rewards of ownership are transferred, the sales price is fixed or determinable and collection of related billings is reasonably assured. A provision for payment discounts is recorded as a reduction of sales in the same period that the revenue is recognized.
Cost of Sales
Cost of sales is primarily comprised of direct materials and supplies consumed in the manufacturing, distribution and tolling of product, as well as related labor, depreciation and overhead expense necessary to acquire and convert the purchased materials and supplies into finished products. Cost of sales also includes freight, packaging and warehousing.
Convertible Special Stock
Convertible special stock is recorded as an equity instrument as it is not mandatorily redeemable and has more equity-like characteristics. The Company monitors for any potential conversions or fundamental changes as defined in the agreement that
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
would impact the valuation of the convertible special stock. In the event of a conversion or fundamental change, the valuation would be updated based on the valuation on that date.
Share-based Incentive Compensation
The Company accounts for share-based incentive compensation expense based on the fair value of the awards granted in accordance with applicable accounting guidance. The fair value of awards with service and performance conditions is based on quoted market prices of the Company’s stock on the respective grant date. The fair value of awards that include market conditions for vesting is estimated using the Monte Carlo valuation model.
The Monte Carlo valuation model requires assumptions based on management’s judgment regarding the volatility of the Company’s stock, the correlation between the Company’s stock price and that of its peer companies and the expected rates of interest. The Company uses historical data, corresponding to the vesting period, to determine all of the assumptions used in the Monte Carlo valuation model. The expected volatility assumption is based on historical volatility. The Company used the daily stock prices in fiscal
2016
,
2015
and
2014
to determine historical volatility. The correlation between the Company’s stock price and each of the peer companies is determined based on historical daily stock prices of the Company and each of the peer companies. The risk-free interest rate is based on zero coupon treasury bond rates corresponding to the expected life of the awards.
Awards that are expected to settle through the issuance of the Company’s common stock are accounted for as equity-classified awards and related compensation expense is recognized based on grant date fair value over the related service period. Awards that may be settled in cash, at the election of the recipient, are accounted for as liability-classified awards. The fair value of such awards is remeasured at the end of each reporting period and expense is recognized over the requisite service period. The Company uses an estimate of expected forfeitures in the recognition of all share-based incentive compensation expense that is based on historical experience. See Note 11,
Share-Based Incentive Compensation Plans,
of this Annual Report on Form 10-K for further discussion on share-based incentive compensation.
Restructuring
The Company records restructuring costs related to the actions implemented to reduce excess and high-cost manufacturing capacity and to reduce associate headcount. Employee-related costs include severance, supplemental unemployment compensation and benefits, medical benefits, pension curtailments and settlements, and other termination benefits. For ongoing benefit arrangements, a liability is recognized when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. These conditions are generally met when the restructuring plan is approved by management. For one-time benefit arrangements, a liability is incurred and accrued at the date the plan is communicated to employees, unless they will be retained beyond a minimum retention period. In this case, the liability is estimated at the date the plan is communicated to employees and is accrued ratably over the future service period. Other costs generally include non-cancelable lease costs, contract terminations, and relocation costs. A liability for these costs is recognized in the period in which the liability is incurred. Restructuring charges related to accelerated depreciation and asset impairments are recorded separately within the consolidated statements of operations. See Note 16,
Restructuring,
of this Annual Report on Form 10-K for further discussion on restructuring charges.
Asset Impairment
Long-lived assets, except goodwill, are reviewed for impairment when circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of the asset group to future undiscounted net cash flows estimated by the Company to be generated by such asset groups. If such asset groups are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset group exceeds the fair value. Assets held for sale are recorded at the lower of carrying value or fair value less costs to sell.
Income Taxes
The Company recognizes income taxes during the period in which transactions enter into the determination of financial statement income. Accordingly, deferred taxes are provided for temporary differences between the book and tax bases of assets and liabilities. A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. No taxes are provided on certain foreign earnings which are permanently reinvested. Accruals for uncertain tax positions are provided for in accordance with accounting rules related to uncertainty in income taxes. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense. See Note 7,
Income Taxes,
of this Annual Report on Form 10-K for further discussion on income taxes.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Equivalents and Short-Term Investments
All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. The Company’s cash equivalents are diversified with numerous financial institutions which management believes to have acceptable credit ratings. These cash equivalents are primarily money-market funds and short-term time deposits. The money-market funds are rated primarily A or higher by third parties. Management monitors the placement of its cash given the current credit market. The recorded amount of these cash equivalents approximates fair value. Investments with maturities between three and twelve months are considered to be short-term investments. As of
August 31, 2016
and
2015
, the Company did not hold any short-term investments.
Restricted Cash
At
August 31, 2016
, restricted cash represents proceeds from tax return refunds for certain Citadel acquisition entities for periods prior to the Company's ownership. These proceeds are payable to the seller per the terms of the stock purchase agreement, and the liability is reflected on the consolidated balance sheet within other accrued liabilities as of
August 31, 2016
.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Management records an allowance for doubtful accounts receivable based on the current and projected credit quality of the Company’s customers, customer payment history and other factors that affect collectability. Changes in these factors or changes in economic circumstances could result in changes to the allowance for doubtful accounts. The Company reviews its allowance for doubtful accounts on a periodic basis. Trade accounts receivables are charged off against the allowance for doubtful accounts when the Company determines it is probable the account receivable will not be collected. Trade accounts receivables, less allowance for doubtful accounts, reflect the net realizable value of receivables, and approximate fair value. The Company does not have any off-balance sheet exposure related to its customers. See Note 3,
Allowance for Doubtful Accounts,
of this Annual Report on Form 10-K for further discussion on the allowance for doubtful accounts.
Inventories
Inventories are recorded at lower of cost or market. The Company generally does not distinguish between raw materials and finished goods because numerous products that can be sold as finished goods are also used as raw materials in the production of other inventory items. Management establishes an estimated excess and obsolete inventory reserve based on historical experience and amounts expected to be realized for slow-moving and obsolete inventory.
Property, Plant and Equipment and Depreciation
Property, plant and equipment is recorded at cost. The cost of renewals and betterments is capitalized in the property accounts. Capital expenditures exclude liabilities that are included in accounts payable of
$8.8 million
,
$4.4 million
and
$4.4 million
in fiscal
2016
,
2015
and
2014
, respectively.
It is the Company’s policy to depreciate the cost of property, plant and equipment over the estimated useful lives of the assets, and for leasehold improvements over the shorter of the applicable lease term or the estimated useful life of the asset, using the straight-line method. The estimated useful lives used in the computation of depreciation are as follows:
|
|
|
|
|
|
Buildings and leasehold improvements
|
7
|
to
|
40
|
years
|
Machinery and equipment
|
5
|
to
|
10
|
years
|
Furniture and fixtures
|
5
|
to
|
10
|
years
|
Estimated useful lives are reviewed when certain events occur or operating conditions change and when appropriate, changes are made prospectively.
The cost of assets sold or otherwise disposed of is eliminated from the related accounts. Gains or losses are recognized in other (income) expense when sales or disposals occur. Maintenance and repair costs are expensed as incurred.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Accounting, Goodwill and Other Intangible Assets
Business combinations are accounted for using the purchase method of accounting. This method requires the Company to record assets and liabilities of the business acquired at their estimated fair market values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The Company generally uses valuation specialists to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions that are critical in determining the fair values of the assets and liabilities.
Goodwill is tested for impairment annually as of June 1 for all reporting units. If circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, the Company would test goodwill for impairment during interim periods between annual tests. Management uses judgment to determine whether to use a qualitative or quantitative fair value measurement approach. The fair value used in the quantitative analysis is established using a combination of the income and market approaches. The impairment test incorporates our judgment and estimates of future cash flows, future growth rates, terminal value amounts, allocations of certain assets, liabilities and cash flows among reporting units, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The estimates and projections used in the estimate of fair value are consistent with our current budget and long-range plans, including anticipated changes in market conditions, industry trends, growth rates, and planned capital expenditures, among other considerations. These valuation methodologies use estimates and assumptions including, but not limited to, the determination of appropriate market comparables, projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions.
As of June 1,
2016
, the Company concluded that there were no indicators of impairment to the goodwill for the Company's reporting units that were tested on a qualitative basis in fiscal 2016. Based on the quantitative analysis performed, management concluded that as of June 1, 2016, the EMEA Specialty Powders ("EMEA SP"), USCAN Engineered Plastics ("USCAN EP") and EC reporting units had carrying values that exceeded its fair value. A decrease in the fair value of the reporting units resulted in the determination that
$16.7 million
of goodwill within EMEA SP,
$166.8 million
in USCAN EP and
$177.2 million
in EC reporting units was impaired. See Note 4,
Goodwill and Other Intangible Assets,
of this Annual Report on Form 10-K for further discussion on goodwill.
Other intangible assets with finite useful lives, which consist primarily of registered trademarks and tradenames, customer related intangibles, and developed technology, are amortized over their estimated useful lives on either a straight-line or double-declining basis, reflective of the pattern of economic benefits consumed. The estimated useful lives for each major category of intangible assets with finite useful lives are:
|
|
|
|
|
|
Customer related intangibles
|
9
|
to
|
20
|
years
|
Developed technology
|
10
|
to
|
20
|
years
|
Registered trademarks and tradenames
|
3
|
to
|
25
|
years
|
See Note 2,
Business Acquisitions,
and Note 4,
Goodwill and Other Intangible Assets,
of this Annual Report on Form 10-K for further discussion on acquisitions, goodwill and other intangible assets.
Retirement Plans
The Company has defined benefit and defined contribution pension plans covering certain employees in the U.S. and in foreign countries. The pension and postretirement benefit accounting reflects the recognition of future benefit costs over the employee’s approximate period of employment based on the terms of the plans and the investment and funding decisions made by the Company. Generally, the defined benefit pension plans accrue the current and prior service costs annually and funding is not required for all plans. See Note 8,
Pension and Postretirement Benefit Plans,
of this Annual Report on Form 10-K for further discussion on retirement plans.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments and Hedging Activities
The Company accounts for its derivative instruments in accordance with the applicable accounting guidance which requires all derivatives, whether designated in hedging relationships or not, to be recorded on the consolidated balance sheet at fair value. The Company’s foreign exchange forward contracts are adjusted to their fair market value through the consolidated statement of operations. Gains or losses on foreign exchange forward contracts that relate to specific transactions are recognized in the consolidated statement of operations offsetting the underlying foreign currency gains or losses. Currently, the Company does not designate any of these contracts as hedges. See Note 6,
Fair Value Measurement,
of this Annual Report on Form 10-K for further discussion on derivative instruments and hedging activities.
Fair Value Measurement
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value under accounting principles generally accepted in the United States. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value as follows:
|
|
•
|
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
|
|
|
•
|
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and
|
|
|
•
|
Level 3: Unobservable inputs which reflect an entity’s own assumptions.
|
See Note 6,
Fair Value Measurement,
of this Annual Report on Form 10-K for further discussion on fair value measurements.
New Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board ("the FASB") issued new guidance amending certain cash flow issues which apply to all entities required to present a statement of cash flows. The amendments are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company is currently evaluating the impact it may have on its consolidated financial statements together with evaluating the adoption date.
In March 2016, the FASB issued new guidance which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification on the statement of cash flows, and accounting for forfeitures. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods. Early application is permitted. The Company is currently evaluating the effects this standard will have on its consolidated financial statements together with evaluating the adoption date.
In February 2016, the FASB issued new accounting guidance which requires companies to recognize a lease liability and right-of-use asset on the balance sheet for operating leases with a term greater than one year. The standard is effective for fiscal years beginning after December 15, 2018. Early application is permitted. The Company regularly enters into operating leases which previously did not require recognition on the balance sheet. The Company is currently evaluating the effects this standard will have on its consolidated financial statements together with evaluating the adoption date.
In November 2015, the FASB issued new accounting guidance that requires deferred tax assets and liabilities to be classified as noncurrent in the balance sheet. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods. Early application is permitted. The Company has early-adopted this standard effective August 31, 2016 and applied it prospectively.
In April 2015, the FASB issued new accounting guidance that required entities to present debt issuance costs related to a recognized debt liability as a deduction from the carrying amounts of that debt liability. Current guidance classifies debt issuance costs as an asset. The standard is effective for fiscal years beginning after December 15, 2015. The Company will retrospectively adopt the new guidance on September 1, 2016.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2014, and as subsequently updated, the FASB issued new accounting guidance that creates a single revenue recognition model, while clarifying the principles for recognizing revenue. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods. The Company will adopt the new guidance on September 1, 2018. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on its consolidated financial statements.
No other new accounting pronouncements issued or with effective dates during fiscal
2016
had or are expected to have a material impact on the Company's consolidated financial statements.
NOTE 2 — BUSINESS ACQUISITIONS
Citadel
On June 1, 2015, the Company acquired all of the issued and outstanding shares of Citadel, a privately held portfolio company of certain private equity firms, for
$801.6 million
. Citadel was a plastics materials science business that produced engineered composites and engineered plastics for specialty product applications spanning multiple industries including transportation, industrial & construction, consumer, electrical, energy and healthcare & safety. The acquisition expanded the Company's presence substantially, especially in the North America engineered plastics markets as well as balanced the global geographic footprint, and gave the Company a second growth platform with its industry-leading, added-value specialty Engineered Composites business. The business enhanced the Company's existing portfolio and presented attractive expansion opportunities in other fast-growing sectors such as aerospace, medical, LED lighting and oil & gas. Additionally, the acquisition has enabled the Company to better serve its global customer base with comprehensive solutions to address their needs such as light-weighting, material replacement, and high temperature strength.
The information included herein has been prepared based on the allocation of the purchase price using estimates of the fair value and useful lives of assets acquired and liabilities assumed which were determined with the assistance of independent valuations using discounted cash flow and comparative market multiple approaches, quoted market prices and estimates made by management.
The following table presents the estimated fair value of the assets acquired and liabilities assumed from the Citadel acquisition at the date of acquisition:
|
|
|
|
|
|
|
|
As of June 1, 2015
|
|
|
(In thousands)
|
Accounts receivable
|
|
$
|
71,767
|
|
Inventories
|
|
40,942
|
|
Prepaid expenses and other current assets
|
|
14,556
|
|
Property, plant and equipment
|
|
78,112
|
|
Intangible assets
|
|
325,000
|
|
Other long-term assets
|
|
3,606
|
|
Total assets acquired
|
|
$
|
533,983
|
|
|
|
|
Accounts payable
|
|
$
|
28,854
|
|
Accrued liabilities
|
|
19,853
|
|
Deferred income taxes, long-term
|
|
111,507
|
|
Other long-term liabilities
|
|
3,121
|
|
Total liabilities assumed
|
|
$
|
163,335
|
|
Identifiable net assets acquired
|
|
$
|
370,648
|
|
Goodwill
|
|
430,912
|
|
Net assets acquired
|
|
$
|
801,560
|
|
The Company recorded acquired intangible assets of
$325.0 million
, with an estimated weighted-average useful life of
14.1
years. These intangible assets include customer related intangibles of
$230.5 million
, developed technology of
$75.3 million
, and trademarks and trade names of
$19.2 million
, with estimated weighted-average useful lives of
14.0
years,
16.3
years and
8.1
years, respectively. In addition, the estimated fair value of accounts receivable acquired was
$71.8 million
with the gross contractual amount being
$72.1 million
.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill is calculated as the excess of the purchase price over the estimated fair values of the assets acquired and the liabilities assumed in the acquisition, and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The amount allocated to goodwill associated with the Citadel acquisition is primarily the result of anticipated synergies resulting from the consolidation and centralization of manufacturing and global purchasing activities, insurance savings, and elimination of duplicate corporate administrative costs and the previously discussed market expansion. The Company allocated goodwill to its USCAN Engineered Plastics and global Engineered Composites reporting units. Except for certain pre-acquisition tax-deductible goodwill,
none
of the goodwill associated with this transaction is deductible for income tax purposes.
Net sales, income before taxes and net income attributable to A. Schulman, Inc. from the Citadel acquisition are included in fiscal 2016 results. Amounts included in the Company’s results in fiscal 2015 are as follows:
|
|
|
|
|
|
June 1, 2015 to August 31, 2015
|
|
(In thousands)
|
Net sales
|
$
|
116,659
|
|
Income before taxes
|
4,999
|
|
Net income attributable to A. Schulman Inc.
|
4,304
|
|
Income before taxes for the Citadel acquisition from June 1, 2015 to August 31, 2015 includes
$2.7 million
of pretax purchase accounting inventory step-up charges.
A. Schulman's fiscal year ends on August 31 while Citadel's fiscal year ended on December 31. The pro forma information in the table below for the year ended August 31, 2015 includes A. Schulman's twelve months ended August 31, 2015 and Citadel's nine months ended March 31, 2015. The pro forma information in the table below for the year ended August 31, 2014 includes A. Schulman’s twelve months ended August 31, 2014 and Citadel's twelve months ended June 30, 2014. The following pro forma information represents the consolidated results of the Company as if the Citadel acquisition occurred as of September 1, 2013:
|
|
|
|
|
|
|
|
|
|
For the Years Ended August 31,
|
|
2015
|
|
2014
|
|
Unaudited
|
|
(In thousands, except per share data)
|
Net sales
|
$
|
2,769,560
|
|
|
$
|
2,877,891
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
23,870
|
|
|
$
|
(1,516
|
)
|
Net income (loss) per share of common stock attributable to A. Schulman, Inc. - diluted
|
$
|
0.81
|
|
|
$
|
(0.05
|
)
|
The unaudited pro forma information has been adjusted with respect to certain aspects of the acquisition to reflect the following:
|
|
•
|
Citadel acquired The Composites Group (“TCG”) in November of 2014. For purposes of the pro forma information disclosed above, the TCG acquisition was included as if the acquisition date was as of the earliest presented period.
|
|
|
•
|
Additional depreciation and amortization expenses that would have been recognized assuming fair value adjustments to the existing Citadel assets acquired and liabilities assumed, including intangible assets, fixed assets and expense associated with the fair value step-up of inventory acquired.
|
|
|
•
|
Increased interest expense due to additional borrowings to fund the acquisition.
|
|
|
•
|
Adjustment of valuation allowances associated with US deferred tax assets.
|
|
|
•
|
To push back acquisition-related costs of
$14.1 million
to the earliest period presented. These costs were included in the Company’s results of operations for the year ended August 31, 2015.
|
|
|
•
|
To push back costs associated with the Bridge Financing of
$18.8 million
to the earliest period presented. These costs were expensed during the third quarter of fiscal 2015.
|
The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of the acquired business. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed as of September 1, 2013, nor are they indicative of the future operating results of the Company.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Specialty Plastics Business of Ferro Corporation
On July 1, 2014, the Company acquired the majority of the assets of the specialty plastics business of Ferro Corporation ("Specialty Plastics" acquisition) for
$91.0 million
. The results of operations for this business have been included in the consolidated financial statements since the date of acquisition.
The acquisition strategically expands the Company's geographic reach with three facilities located in the U.S. and one facility located in Spain, diversifies the Company's product mix and strengthens its position in a broad range of attractive product markets. Additionally, the business offers a broad portfolio of proprietary products and recognized brand names serving a wide range of end markets including packaging, transportation, construction, appliances and agriculture.
The information included herein has been prepared based on the allocation of the purchase price using the fair value and useful lives of assets acquired and liabilities assumed which were determined with the assistance of independent valuations using discounted cash flow and comparative market multiple approaches, quoted market prices and estimates made by management.
The following table presents the fair value of the assets acquired and liabilities assumed from the Specialty Plastics acquisition at the date of acquisition:
|
|
|
|
|
|
|
|
As of July 1, 2014
|
|
|
(In thousands)
|
Accounts receivable
|
|
$
|
27,850
|
|
Inventories
|
|
12,781
|
|
Prepaid expenses and other current assets
|
|
553
|
|
Property, plant and equipment
|
|
20,049
|
|
Intangible assets
|
|
26,985
|
|
Total assets acquired
|
|
$
|
88,218
|
|
|
|
|
Accounts payable
|
|
15,192
|
|
Accrued payroll, taxes and related benefits
|
|
1,690
|
|
Other accrued liabilities
|
|
951
|
|
Other long-term liabilities
|
|
181
|
|
Total liabilities assumed
|
|
$
|
18,014
|
|
Identifiable net assets acquired
|
|
$
|
70,204
|
|
Goodwill
|
|
20,796
|
|
Net assets acquired
|
|
$
|
91,000
|
|
The Company recorded acquired intangible assets of
$27.0 million
, all of which are customer related intangibles with an estimated weighted-average useful life of
13.6
years. In addition, the fair value of accounts receivable acquired was
$27.9 million
with the gross contractual amount being
$28.0 million
.
Goodwill is calculated as the excess of the purchase price over the estimated fair values of the assets acquired and the liabilities assumed in the acquisition, and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The amount allocated to goodwill associated with the Specialty Plastics acquisition is primarily the result of anticipated synergies in the areas of procurement and manufacturing consolidation, as well as market expansion.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net sales, income before taxes and net income attributable to A. Schulman, Inc. from the Specialty Plastics acquisition are included in the Company’s fiscal 2016 and 2015 results. Amounts included in the Company's results in fiscal 2014 are as follows:
|
|
|
|
|
|
July 1, 2014 to August 31, 2014
|
|
(In thousands)
|
Net sales
|
$
|
25,351
|
|
Income before taxes
|
$
|
1,644
|
|
Net income attributable to A. Schulman, Inc.
|
$
|
1,475
|
|
Income before taxes for the Specialty Plastics acquisition from July 1, 2014 to August 31, 2014 includes pretax depreciation and amortization costs of
$0.6 million
due to the increased estimated fair value of fixed assets and intangibles, and
$0.6 million
of pretax purchase accounting inventory step-up charges.
The following pro forma information represents the consolidated results of the Company as if the Specialty Plastics acquisition occurred as of September 1, 2012:
|
|
|
|
|
|
For the Year Ended August 31, 2014
|
|
Unaudited
|
|
(In thousands, except per share data)
|
Net sales
|
$
|
2,580,646
|
|
Net income attributable to A. Schulman, Inc.
|
$
|
65,639
|
|
Net income per share of common stock attributable to A. Schulman, Inc. - diluted
|
$
|
2.24
|
|
The pro forma results reflect certain adjustments related to the acquisition, such as increased depreciation and amortization expense on assets included in the Specialty Plastics acquisition resulting from the valuation of assets acquired and increased interest expense due to additional borrowings to fund the acquisition. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of the acquired business. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed as of September 1, 2012, nor are they indicative of the future operating results of the Company.
Other Business Transactions
The following table summarizes the Company's other business transactions for the periods presented:
|
|
|
|
|
|
|
Transaction Description
|
Date of Transaction
|
|
Purchase
Consideration
(In millions)
|
|
Segment
|
Perrite Group
|
September 2, 2013
|
|
$51.3
|
|
EMEA and APAC
|
A thermoplastics manufacturer with business in niche engineered plastics and custom color with operations in Malaysia, the United Kingdom and France
|
|
|
|
|
|
Network Polymers, Inc.
|
December 2, 2013
|
|
$49.2
|
|
USCAN
|
An Ohio niche engineered plastics compounding business that is a single source provider of thermoplastic resins and alloys
|
|
|
|
|
|
Prime Colorants
|
December 31, 2013
|
|
$15.1
|
|
USCAN
|
A Tennessee manufacturer of custom color and additive concentrates
|
|
|
|
|
|
Compco Pty. Ltd.
|
September 2, 2014
|
|
$6.7
|
|
APAC
|
A manufacturer of masterbatches and custom color with operations in Australia
|
|
|
|
|
|
The Company incurred
$8.8 million
,
$17.3 million
and
$6.0 million
of acquisition and integration related costs, primarily included in selling, general & administrative expenses, during fiscal
2016
,
2015
and
2014
, respectively.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — ALLOWANCE FOR DOUBTFUL ACCOUNTS
The change in the Company’s allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Beginning balance
|
$
|
10,777
|
|
|
$
|
10,844
|
|
|
$
|
10,434
|
|
Provision
|
2,097
|
|
|
1,956
|
|
|
907
|
|
Write-offs, net of recoveries
|
(1,445
|
)
|
|
(973
|
)
|
|
(491
|
)
|
Translation effect
|
(88
|
)
|
|
(1,050
|
)
|
|
(6
|
)
|
Ending balance
|
$
|
11,341
|
|
|
$
|
10,777
|
|
|
$
|
10,844
|
|
NOTE 4 — GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the Company’s carrying value of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
USCAN
|
|
LATAM
|
|
APAC
|
|
EC
|
|
Total
|
|
(In thousands)
|
Balance as of August 31, 2014
|
$
|
85,957
|
|
|
$
|
102,735
|
|
|
$
|
12,944
|
|
|
$
|
663
|
|
|
$
|
—
|
|
|
$
|
202,299
|
|
Acquisitions
|
(111
|
)
|
(1)
|
183,056
|
|
|
—
|
|
|
407
|
|
|
249,482
|
|
|
432,834
|
|
Translation
|
(10,132
|
)
|
|
—
|
|
|
(1,249
|
)
|
|
(169
|
)
|
|
—
|
|
|
(11,550
|
)
|
Balance as of August 31, 2015
|
75,714
|
|
|
285,791
|
|
|
11,695
|
|
|
901
|
|
|
249,482
|
|
|
623,583
|
|
Acquisitions
(1)
|
—
|
|
|
(2,633
|
)
|
|
—
|
|
|
—
|
|
|
2,154
|
|
|
(479
|
)
|
Impairment
|
(16,752
|
)
|
|
(166,789
|
)
|
|
—
|
|
|
—
|
|
|
(177,167
|
)
|
|
(360,708
|
)
|
Translation
|
(4,931
|
)
|
|
—
|
|
|
233
|
|
|
35
|
|
|
40
|
|
|
(4,623
|
)
|
Balance as of August 31, 2016
|
$
|
54,031
|
|
|
$
|
116,369
|
|
|
$
|
11,928
|
|
|
$
|
936
|
|
|
$
|
74,509
|
|
|
$
|
257,773
|
|
(1)
Activity relates to adjustments to preliminary purchase price allocations, primarily due to inventory and deferred tax adjustments.
The decrease in goodwill during fiscal 2016 is primarily due to goodwill impairment of
$360.7 million
, which also represents total accumulated impairment expense recognized to-date. The increase in goodwill during fiscal 2015 is primarily due to the Citadel acquisition. Goodwill associated with the Citadel acquisition is included in the USCAN and EC segments. Except for certain pre-acquisition tax deductible goodwill,
none
of the goodwill associated with the Citadel acquisition is deductible for income tax purposes.
The Company completed its annual impairment review of goodwill as of June 1,
2016
, using judgment to determine whether to use a qualitative analysis or a quantitative fair value measurement for its goodwill impairment testing. The Company's fair value measurement approach combines the income (discounted cash flow method) and market valuation (market comparable method) techniques for each of the Company’s reporting units that carry goodwill. These valuation techniques use estimates and assumptions including, but not limited to, the determination of appropriate market comparables, projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions.
Upon completion of the annual testing, goodwill for the EMEA Specialty Powders ("EMEA SP"), USCAN Engineered Plastics ("USCAN EP"), and EC reporting units was determined to be impaired based on quantitative analyses, as the carrying value exceeded the fair value. During 2016, the EMEA SP reporting unit did not meet volume and revenue expectations, due, in part to the economic environment within EMEA, specifically within the oil and gas and agricultural markets. Additionally, the reporting units associated with the Citadel acquisition, USCAN EP and EC, did not meet volume and revenue expectations, and the product mix had lower margins than planned due, in part, to remediation and changes in business practices undertaken to address the Lucent quality matter, as well as the impact of the current oil and gas market. Based on the results of the annual testing, the Company recorded goodwill impairment charges within the EMEA SP, USCAN EP, and EC reporting units of
$16.7 million
,
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$166.8 million
, and
$177.2 million
, respectively, and are included in asset impairment charges in the Company's consolidated statements of operations. No other instances of goodwill impairment were identified in the June 1, 2016 test.
The following table summarizes intangible assets with finite useful lives by major category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2016
|
|
As of August 31, 2015
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
(In thousands)
|
Customer related
|
$
|
359,713
|
|
|
$
|
(67,207
|
)
|
|
$
|
292,506
|
|
|
$
|
360,193
|
|
|
$
|
(40,447
|
)
|
|
$
|
319,746
|
|
Developed technology
|
72,657
|
|
|
(13,864
|
)
|
|
58,793
|
|
|
93,518
|
|
|
(9,398
|
)
|
|
84,120
|
|
Registered trademarks
and tradenames
|
18,097
|
|
|
(6,782
|
)
|
|
11,315
|
|
|
37,964
|
|
|
(7,293
|
)
|
|
30,671
|
|
Total finite-lived
intangible assets
|
$
|
450,467
|
|
|
$
|
(87,853
|
)
|
|
$
|
362,614
|
|
|
$
|
491,675
|
|
|
$
|
(57,138
|
)
|
|
$
|
434,537
|
|
Amortization expense for intangible assets was
$36.1 million
,
$19.4 million
and
$13.0 million
for fiscal
2016
,
2015
and
2014
, respectively. The weighted-average useful life of our finite-lived intangible assets as of
August 31, 2016
is
12.8
years.
During the fourth quarter of fiscal 2016, the Company discontinued the use of certain tradenames and developed technology associated with the Citadel acquisition and recorded intangible asset impairment of
$34.5 million
. The company impaired intangible assets of
$7.6 million
in the EC segment and
$26.9 million
in the USCAN segment.
Estimated future amortization expense for intangible assets is as follows:
|
|
|
|
|
|
Estimated Future
Amortization Expense
|
|
(In thousands)
|
Year ended August 31,
|
|
2017
|
$
|
31,877
|
|
2018
|
30,693
|
|
2019
|
30,288
|
|
2020
|
30,107
|
|
2021
|
28,758
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The following table summarizes short-term and long-term debt:
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Notes payable and other, due within one year
|
$
|
10,333
|
|
|
$
|
5,584
|
|
Current portion of long-term debt
|
15,114
|
|
|
15,126
|
|
Short-term debt
|
$
|
25,447
|
|
|
$
|
20,710
|
|
Short-term weighted average interest rate
|
7.58
|
%
|
|
6.75
|
%
|
|
|
|
|
Revolving credit facility, LIBOR plus applicable spread, due June 2020
|
$
|
17,279
|
|
|
$
|
—
|
|
Term Loan A, LIBOR plus applicable spread, due June 2020
|
177,500
|
|
|
187,500
|
|
U.S. Term Loan B, LIBOR plus applicable spread, due June 2022
|
341,407
|
|
|
344,781
|
|
Euro Term Loan B, LIBOR plus applicable spread, due June 2022
|
14,678
|
|
|
137,818
|
|
Senior notes, 6.875%, due June 2023
|
375,000
|
|
|
375,000
|
|
Capital leases and other long-term debt
|
3,727
|
|
|
250
|
|
Long-term debt
|
$
|
929,591
|
|
|
$
|
1,045,349
|
|
Senior Notes
On May 26, 2015, the Company issued
$375.0 million
aggregate principal amount of
6.875%
Senior Notes due 2023 (the “Notes”). The Notes were sold on May 26, 2015 in a private transaction exempt from the registration requirements of the Securities Act of 1933 (the "Securities Act") for 540 days from issuance. The Notes have not been registered under the Securities Act as of
August 31, 2016
. During fiscal 2015, the Company capitalized
$11.3 million
in debt issuance costs related to the Notes.
The Notes mature on June 1, 2023 and are senior unsecured obligations of the Company that are guaranteed on a senior basis by the material domestic guarantors under the Credit Facility (as defined below).
The Notes contain certain covenants that, among other things, limit the ability, in certain circumstances, of the Company to incur additional indebtedness, pay dividends or other restricted payments, incur liens on assets, enter into transactions with affiliates, merge or consolidate with another company, and transfer or sell all or substantially all of the Company’s assets. The Company was in compliance with these covenants as of
August 31, 2016
.
The Company has the option to redeem these Notes, in whole or in part, at any time on or after June 1, 2018 at redemption prices, plus accrued and unpaid interest to the redemption date of
105.156%
,
103.438%
,
101.719%
and
100%
during the 12-month periods commencing on June 1, 2018, 2019, 2020 and 2021 and thereafter, respectively. Prior to June 1, 2018, the Company may redeem these Notes, in whole or in part, and pay the applicable premium that includes the redemption price plus accrued and unpaid interest to the redemption date.
2015 Credit Agreement
On June 1, 2015, the Company and certain of its wholly-owned subsidiaries entered into an amended and restated Credit Agreement for approximately
$1 billion
with JPMorgan Chase Bank, N.A., as administrative agent, J.P. Morgan Europe Limited, as global agent, the lenders named in the Credit Agreement and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint bookrunners and joint lead arrangers (the "Credit Agreement"). The Credit Agreement provides for:
|
|
•
|
a multi-currency revolving credit facility in the aggregate principal amount of up to
$300 million
(the “Revolving Facility");
|
|
|
•
|
a
$200 million
term loan A facility (the "Term Loan A Facility") with quarterly payments due until maturity;
|
|
|
•
|
a
$350 million
U.S. term loan B facility (the "U.S. Term Loan B Facility") with quarterly payments due until maturity;
|
|
|
•
|
a
€145 million
term loan B facility (the "Euro Term Loan B Facility") with quarterly payments due until maturity; and
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
•
|
an expansion feature allowing the Company to incur additional revolving loans and/or term loans in an aggregate principal amount of up to
$250 million
plus additional amounts that are subject to certain terms and conditions (the "Incremental Facility" and, together with the Revolving Facility, the Term Loan A Facility, the U.S. Term Loan B Facility and the Euro Term Loan B Facility, the "Credit Facility").
|
The Revolving Facility and Term Loan A Facility each mature on June 1, 2020, and the U.S. Term Loan B Facility and Euro Term Loan B Facility each mature on June 1, 2022. In addition to the required Term Loan quarterly payments due until maturity, the Company repaid
€108.6 million
of the Euro Term Loan B Facility during the year ending
August 31, 2016
.
The Credit Facility is jointly and severally guaranteed by certain material domestic subsidiaries of the Company (the "Guarantors”). Payment and performance under the Credit Facility is secured by a first priority security interest in substantially all tangible property of the Company and each Guarantor, including a pledge of
100%
of the stock of certain domestic subsidiaries and
65%
of the stock of certain foreign subsidiaries subject to materiality and customary exceptions. Foreign obligations are secured by a pledge of
100%
of the stock of the foreign borrower and other pledged foreign subsidiaries.
The Credit Agreement contains certain covenants that, among other things, restrict the Company and its subsidiaries' ability to incur indebtedness and grant liens other than certain types of permitted indebtedness and permitted liens. In addition, the Company is required to maintain a minimum interest coverage ratio and cannot exceed a maximum net debt leverage ratio for the Revolving Facility and Term Loan A Facility. The Company was in compliance with these covenants and does not believe a subsequent covenant violation is reasonably possible as of
August 31, 2016
.
Interest rates under the Credit Agreement are based on ABR or LIBOR (depending on the borrowing currency) plus a spread determined by the Company's total leverage ratio. Borrowings under the U.S. Term Loan B Facility and Euro Term Loan B Facility are subject to a LIBOR floor of
0.75%
. When market LIBOR rates are lower than the
0.75%
floor, the interest rate on the Term Loan B Facilities is based on the LIBOR floor plus a spread. The Company is also required to pay a facility fee on the commitments for the unused portion of the Revolving Facility. Additionally, the Revolving Facility provides for a portion of the funds to be made available as a short-term swing-line loan.
Additional Debt
During the third quarter of fiscal 2015, the Company obtained commitments for a senior unsecured bridge loan of
$425.0 million
and a senior secured credit facility of
$875.0 million
(together, the "Bridge Financing") to finance the Citadel acquisition in the event permanent financing was not available in time to close the Citadel acquisition. The Company did not draw on the Bridge Financing due to the successful issuance of the Notes and the Convertible Special Stock (refer to Note 9,
Convertible Special Stock,
of this Annual Report on Form 10-K) and the execution of the Credit Agreement. The Company incurred and expensed financing fees of
$18.8 million
on the Bridge Financing during the third quarter of fiscal 2015. Upon finalizing the Citadel acquisition and related financings on June 1, 2015, the Bridge Financing was terminated and no longer available to the Company.
During the second quarter of fiscal 2015, the Company prepaid the entire principal balance of
€42.8 million
of its Euro Notes along with accrued interest. The Company recognized a net gain of
$1.3 million
on the early extinguishment of debt consisting of a gain of
$3.9 million
on a related foreign currency swap, partially offset by early termination fees of
$2.5 million
and a write-off of
$0.1 million
of deferred financing fees.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes the Company’s available funds:
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Existing capacity:
|
|
|
|
Revolving Facility, due June 2020
|
$
|
300,000
|
|
|
$
|
300,000
|
|
Foreign short-term lines of credit
|
37,953
|
|
|
34,921
|
|
Total capacity from credit lines
|
$
|
337,953
|
|
|
$
|
334,921
|
|
Availability:
|
|
|
|
Revolving Facility, due June 2020
|
$
|
279,120
|
|
|
$
|
298,574
|
|
Foreign short-term lines of credit
|
27,959
|
|
|
25,999
|
|
Total available funds from credit lines
|
$
|
307,079
|
|
|
$
|
324,573
|
|
Total available funds from credit lines represents the total capacity from credit lines less outstanding borrowings of
$26.6 million
and
$8.9 million
as of August 31,
2016
and
2015
, respectively, and issued letters of credit of
$4.3 million
and
$1.4 million
as of August 31,
2016
and
2015
, respectively.
Aggregate maturities of debt, including capital lease obligations, subsequent to August 31,
2016
are as follows (in thousands):
|
|
|
|
|
Year ended August 31,
|
|
2017
|
$
|
25,447
|
|
2018
|
16,114
|
|
2019
|
21,067
|
|
2020
|
175,778
|
|
2021
|
6,002
|
|
2022 and thereafter
|
710,630
|
|
NOTE 6 — FAIR VALUE MEASUREMENT
The following table presents information about the Company’s assets and liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2016
|
|
August 31, 2015
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Assets recorded at fair value:
|
|
|
|
|
|
|
|
|
Foreign exchange
forward contracts
|
$
|
487
|
|
|
$
|
—
|
|
|
$
|
487
|
|
|
$
|
—
|
|
|
$
|
1,818
|
|
|
$
|
—
|
|
|
$
|
1,818
|
|
|
$
|
—
|
|
Liabilities recorded at fair value:
|
|
|
|
|
|
|
|
|
Foreign exchange
forward contracts
|
$
|
951
|
|
|
$
|
—
|
|
|
$
|
951
|
|
|
$
|
—
|
|
|
$
|
1,576
|
|
|
$
|
—
|
|
|
$
|
1,576
|
|
|
$
|
—
|
|
Liabilities not recorded at fair value:
|
|
|
|
|
|
|
|
|
Long-term fixed-rate
debt
|
$
|
378,750
|
|
|
$
|
—
|
|
|
$
|
378,750
|
|
|
$
|
—
|
|
|
$
|
374,229
|
|
|
$
|
—
|
|
|
$
|
374,229
|
|
|
$
|
—
|
|
Cash and cash equivalents are recorded at cost, which approximates fair value. Additionally, the carrying value of the Company's variable-rate debt approximates fair value.
The Company measures the fair value of its foreign exchange forward contracts using an internal model. The model maximizes the use of Level 2 market observable inputs including interest rate curves, currency forward and spot prices, and credit spreads. The total contract value of foreign exchange forward contracts outstanding was
$115.9 million
and
$161.5 million
as of
August 31, 2016
and
2015
, respectively. The amount of foreign exchange forward contracts outstanding as of the end of the period is indicative of the exposure of current balances and the forecasted change in exposures for the following quarter. Any gains or losses associated
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with these contracts as well as the offsetting gains or losses from the underlying assets or liabilities are included in the foreign currency transaction (gains) losses line in the Company’s consolidated statements of operations. The fair value of the Company’s foreign exchange forward contracts is recognized in other current assets or other accrued liabilities in the consolidated balance sheets based on the net settlement value. The foreign exchange forward contracts are entered into with creditworthy financial institutions, generally have a term of three months or less, and the Company does not hold or issue foreign exchange forward contracts for trading purposes. There were
no
foreign exchange forward contracts designated as hedging instruments as of
August 31, 2016
and
2015
.
Long-term fixed-rate debt as of
August 31, 2016
and
2015
represents the Senior Notes, due 2023, recorded at cost and presented at fair value for disclosure purposes. The Level 2 fair value of the Company's long-term fixed-rate debt was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities. As of
August 31, 2016
and
2015
, the carrying value of the Company's long-term fixed-rate debt recorded on the consolidated balance sheets was
$375.0 million
.
The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during fiscal
2016
, and transfers between levels within the fair value hierarchy, if any, are recognized at the end of each quarter. There were
no
transfers between levels during the period presented.
Additionally, the Company remeasures certain assets to fair value, using Level 3 measurements, as a result of the occurrence of triggering events. In the fourth quarter of fiscal 2016, for the purpose of impairment evaluation, the Company measured the implied fair value of the Company's EMEA Specialty Powders, USCAN Engineered Plastics, and EC reporting unit goodwill. We utilized income and market approaches to determine the fair value of these Level 3 assets. For more information, see Note 4,
Goodwill and Other Intangible Assets,
of this Annual Report on Form 10-K. Besides goodwill from certain business units noted above, there were
no
significant assets or liabilities that were remeasured at fair value on a non-recurring basis during the period presented.
NOTE 7 — INCOME TAXES
Income (loss) from continuing operations before taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
U.S.
|
$
|
(433,199
|
)
|
|
$
|
(43,770
|
)
|
|
$
|
(2,426
|
)
|
Foreign
|
66,694
|
|
|
72,200
|
|
|
74,758
|
|
Income from continuing operations before taxes
|
$
|
(366,505
|
)
|
|
$
|
28,430
|
|
|
$
|
72,332
|
|
The provisions for U.S. and foreign income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Current taxes:
|
|
|
|
|
|
U.S.
|
$
|
813
|
|
|
$
|
1,674
|
|
|
$
|
435
|
|
Foreign
|
28,466
|
|
|
18,078
|
|
|
19,794
|
|
Total current tax expense (benefit)
|
29,279
|
|
|
19,752
|
|
|
20,229
|
|
Deferred taxes:
|
|
|
|
|
|
U.S.
|
(34,069
|
)
|
|
(19,985
|
)
|
|
589
|
|
Foreign
|
(3,850
|
)
|
|
732
|
|
|
(2,276
|
)
|
Total deferred tax expense (benefit)
|
(37,919
|
)
|
|
(19,253
|
)
|
|
(1,687
|
)
|
Total income tax expense (benefit)
|
$
|
(8,640
|
)
|
|
$
|
499
|
|
|
$
|
18,542
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates of
2.4%
in
2016
,
1.8%
in
2015
, and
25.7%
in
2014
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
Amount
|
|
% of
Pretax
Income
|
|
Amount
|
|
% of
Pretax
Income
|
|
Amount
|
|
% of
Pretax
Income
|
|
(In thousands, except for %s)
|
U.S. statutory federal income tax rate
|
$
|
(128,277
|
)
|
|
35.0
|
%
|
|
$
|
9,951
|
|
|
35.0
|
%
|
|
$
|
25,316
|
|
|
35.0
|
%
|
Foreign rate differential
|
10,069
|
|
|
(2.7
|
)
|
|
(692
|
)
|
|
(2.4
|
)
|
|
(13,602
|
)
|
|
(18.8
|
)
|
Foreign losses with no tax benefit
|
1,866
|
|
|
(0.5
|
)
|
|
3,956
|
|
|
14.0
|
|
|
4,899
|
|
|
6.8
|
|
U.S. restructuring and other U.S. charges with
no benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,010
|
|
|
4.2
|
|
U.S. non-deductible transaction costs
|
—
|
|
|
—
|
|
|
1,349
|
|
|
4.7
|
|
|
—
|
|
|
—
|
|
Valuation allowance charges (reversals)
|
863
|
|
|
(0.2
|
)
|
|
(12,279
|
)
|
|
(43.2
|
)
|
|
—
|
|
|
—
|
|
Non-deductible goodwill impairment
|
106,503
|
|
|
(29.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Establishment (resolution) of uncertain tax
positions
|
482
|
|
|
(0.1
|
)
|
|
(1,030
|
)
|
|
(3.6
|
)
|
|
(121
|
)
|
|
(0.2
|
)
|
Other
|
(146
|
)
|
|
—
|
|
|
(756
|
)
|
|
(2.7
|
)
|
|
(960
|
)
|
|
(1.3
|
)
|
Provision (benefit) for U.S. and foreign income taxes
|
$
|
(8,640
|
)
|
|
2.4
|
%
|
|
$
|
499
|
|
|
1.8
|
%
|
|
$
|
18,542
|
|
|
25.7
|
%
|
Deferred tax assets and (liabilities) consist of the following:
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Pensions
|
$
|
28,400
|
|
|
$
|
20,431
|
|
Inventory reserves
|
2,176
|
|
|
1,635
|
|
Bad debt reserves
|
1,680
|
|
|
1,674
|
|
Accruals
|
7,844
|
|
|
8,479
|
|
Postretirement benefits other than pensions
|
6,255
|
|
|
6,094
|
|
Foreign net operating loss carryforwards
|
21,967
|
|
|
15,999
|
|
Foreign tax credit carryforwards
|
5,442
|
|
|
4,952
|
|
Alternative minimum tax carryforwards
|
2,289
|
|
|
3,330
|
|
Interest carryforwards
|
2,713
|
|
|
2,733
|
|
U.S. net operating loss carryforwards
|
33,059
|
|
|
17,309
|
|
Other
|
13,498
|
|
|
15,305
|
|
Gross deferred tax assets
|
125,323
|
|
|
97,941
|
|
Valuation allowance
|
(29,089
|
)
|
|
(23,859
|
)
|
Total deferred tax assets
|
96,234
|
|
|
74,082
|
|
Property, plant and equipment
|
(16,194
|
)
|
|
(16,783
|
)
|
Intangibles
|
(89,919
|
)
|
|
(122,485
|
)
|
Unremitted foreign earnings
|
(9,003
|
)
|
|
—
|
|
Other
|
(3,925
|
)
|
|
(9,208
|
)
|
Gross deferred tax liabilities
|
(119,041
|
)
|
|
(148,476
|
)
|
Net deferred tax assets (liabilities)
|
$
|
(22,807
|
)
|
|
$
|
(74,394
|
)
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
August 31, 2016
, the Company has a U.S. federal net operating loss carryforward of
$81.6 million
which will begin to expire in 2035, resulting in a deferred tax asset of
$28.3 million
. In connection with the acquisition of Citadel during the year ended August 31, 2015, the Company reversed its valuation allowance on most of its federal deferred tax assets. This reversal was due to deferred tax liabilities recorded as part of the Citadel acquisition.
As of
August 31, 2016
, the Company has foreign net operating loss carryforwards of
$68.1 million
resulting in a deferred tax asset of
$21.9 million
. These foreign net operating loss carryforwards are primarily from countries with unlimited carryforward periods, but include
$2.6 million
of carryforwards subject to expiration in years 2020 to 2025. A valuation allowance totaling
$12.3 million
has been recorded against this deferred tax asset where recovery of the carryforward is uncertain.
As of
August 31, 2016
, the Company has domestic state and local net operating loss carryforwards of
$153.1 million
resulting in a deferred tax asset of
$4.8 million
partially offset by a valuation allowance of
$4.1 million
. These net operating loss carryforwards expire in years 2017 to 2036.
As of
August 31, 2016
, the Company has
$2.3 million
in foreign tax credit carryforwards that will expire in 2019 and
$5.4 million
of foreign tax credit carryforwards that will expire in 2025. The foreign tax credit carryforwards have been offset by a full valuation allowance.
The amount of foreign tax credit carryforwards and U.S. net operating loss carryforwards shown in the table above for the year
2016
has been reduced by unrealized stock compensation attributes of
$2.6 million
.
As of
August 31, 2016
, the Company has
$2.3 million
of alternative minimum tax carryforwards which have an unlimited carryforward period.
The tax effect of temporary differences included in prepaid expenses and other current assets was
$14.8 million
at August 31, 2015. Deferred charges included
$36.2 million
and
$27.5 million
from the tax effect of temporary differences at
August 31, 2016
and
2015
, respectively. The tax effect of temporary differences included in other accrued liabilities was
$1.1 million
at August 31, 2015.
As of
August 31, 2016
, the Company’s gross unrecognized tax benefits totaled
$3.0 million
. If recognized
$2.1 million
of the total unrecognized tax benefits would favorably affect the Company’s effective tax rate. The Company elects to report interest and penalties related to income tax matters in income tax expense. At
August 31, 2016
, the Company had
$1.1 million
of accrued interest and penalties on unrecognized tax benefits.
The Company's statute of limitations is open in various jurisdictions as follows: Germany - from 2005 onward, France - from 2010 onward, U.S. - from 2013 onward, Belgium - from 2013 onward, other foreign jurisdictions - from 2010 onward.
The amount of unrecognized tax benefits is expected to change in the next 12 months; however, the change is not expected to have a significant impact on the financial position of the Company.
A reconciliation of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Beginning balance
|
$
|
2,031
|
|
|
$
|
3,845
|
|
|
$
|
4,986
|
|
Decreases related to prior year tax positions
|
(53
|
)
|
|
(259
|
)
|
|
(576
|
)
|
Increases related to prior year tax positions
|
275
|
|
|
509
|
|
|
—
|
|
Increases related to current year tax positions
|
826
|
|
|
61
|
|
|
512
|
|
Settlements
|
—
|
|
|
(376
|
)
|
|
(38
|
)
|
Lapse of statute of limitations
|
(71
|
)
|
|
(1,192
|
)
|
|
(1,040
|
)
|
Foreign currency impact
|
(15
|
)
|
|
(557
|
)
|
|
1
|
|
Ending balance
|
$
|
2,993
|
|
|
$
|
2,031
|
|
|
$
|
3,845
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
August 31, 2016
,
no
taxes have been provided on the undistributed earnings of certain foreign subsidiaries amounting to
$488.3 million
because the Company intends to permanently reinvest these earnings. Quantification of the deferred tax liability associated with these undistributed earnings is not practicable.
NOTE 8 — PENSION AND POSTRETIREMENT BENEFIT PLANS
The Company has defined benefit pension plans that cover employees primarily in its foreign subsidiaries, and other postretirement benefit plans that primarily include health care and life insurance plans in the U.S. Benefits for the defined benefit pension plans are based primarily on years of service and qualifying compensation during the final years of employment. The measurement date for all plans is August 31.
Postretirement health care and life insurance benefits are provided to certain U.S. employees that have met certain age and length of service requirements while working for the Company. The U.S. postretirement health care and life insurance ("OPEB") plan is closed to new participants and is an unfunded plan.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of the plan obligations and assets, the recorded liability and accumulated other comprehensive income (loss) ("AOCI") are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands)
|
Benefit obligation at beginning of year
|
$
|
(165,205
|
)
|
|
$
|
(173,983
|
)
|
|
$
|
(10,137
|
)
|
|
$
|
(12,191
|
)
|
Service cost
|
(5,051
|
)
|
|
(4,609
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Interest cost
|
(4,198
|
)
|
|
(4,362
|
)
|
|
(390
|
)
|
|
(440
|
)
|
Participant contributions
|
(155
|
)
|
|
(203
|
)
|
|
(47
|
)
|
|
(59
|
)
|
Actuarial gains (losses)
|
(36,159
|
)
|
|
(7,453
|
)
|
|
(755
|
)
|
|
1,705
|
|
Settlement (gains) losses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Curtailment (gains) losses
|
1,369
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
4,597
|
|
|
4,002
|
|
|
841
|
|
|
851
|
|
Business combinations
|
—
|
|
|
(1,806
|
)
|
|
—
|
|
|
—
|
|
Plan amendments
|
—
|
|
|
(110
|
)
|
|
—
|
|
|
—
|
|
Translation adjustment
|
6,417
|
|
|
23,319
|
|
|
—
|
|
|
—
|
|
Benefit obligation at end of year
|
$
|
(198,385
|
)
|
|
$
|
(165,205
|
)
|
|
$
|
(10,491
|
)
|
|
$
|
(10,137
|
)
|
Fair value of plan assets at beginning of year
|
$
|
44,325
|
|
|
$
|
40,904
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on assets
|
8,365
|
|
|
6,030
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
5,658
|
|
|
5,662
|
|
|
794
|
|
|
792
|
|
Participant contributions
|
155
|
|
|
203
|
|
|
47
|
|
|
59
|
|
Benefits paid
|
(4,597
|
)
|
|
(4,002
|
)
|
|
(841
|
)
|
|
(851
|
)
|
Translation adjustment
|
(3,840
|
)
|
|
(4,472
|
)
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
$
|
50,066
|
|
|
$
|
44,325
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Underfunded
|
$
|
(148,319
|
)
|
|
$
|
(120,880
|
)
|
|
$
|
(10,491
|
)
|
|
$
|
(10,137
|
)
|
Classification of net amount recognized:
|
|
|
|
|
|
|
|
Accrued payroll, taxes and related benefits
|
$
|
(3,211
|
)
|
|
$
|
(2,991
|
)
|
|
$
|
(805
|
)
|
|
$
|
(780
|
)
|
Long-term liabilities
|
(145,108
|
)
|
|
(117,889
|
)
|
|
(9,686
|
)
|
|
(9,357
|
)
|
Net amount recognized
|
$
|
(148,319
|
)
|
|
$
|
(120,880
|
)
|
|
$
|
(10,491
|
)
|
|
$
|
(10,137
|
)
|
Amounts recognized in AOCI:
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
$
|
73,922
|
|
|
$
|
50,612
|
|
|
$
|
(974
|
)
|
|
$
|
(1,785
|
)
|
Net prior service cost (credit)
|
132
|
|
|
351
|
|
|
(899
|
)
|
|
(1,440
|
)
|
Net amount recognized in AOCI
|
$
|
74,054
|
|
|
$
|
50,963
|
|
|
$
|
(1,873
|
)
|
|
$
|
(3,225
|
)
|
Change in plan assets and benefit obligations recognized in AOCI:
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
$
|
28,358
|
|
|
$
|
3,432
|
|
|
$
|
755
|
|
|
$
|
(1,705
|
)
|
Prior service cost (credit)
|
—
|
|
|
110
|
|
|
—
|
|
|
—
|
|
Amortization of net actuarial (loss) gain
|
(2,843
|
)
|
|
(2,884
|
)
|
|
56
|
|
|
—
|
|
Amortization of prior service (cost) credit
|
(32
|
)
|
|
(144
|
)
|
|
541
|
|
|
541
|
|
Settlement/curtailment gains (losses)
|
(68
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Translation adjustment
|
(2,324
|
)
|
|
(7,613
|
)
|
|
—
|
|
|
—
|
|
Total change in AOCI
|
$
|
23,091
|
|
|
$
|
(7,099
|
)
|
|
$
|
1,352
|
|
|
$
|
(1,164
|
)
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
Year Ended August 31,
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Service cost
|
$
|
5,051
|
|
|
$
|
4,609
|
|
|
$
|
3,795
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
5
|
|
Interest cost
|
4,198
|
|
|
4,362
|
|
|
5,413
|
|
|
390
|
|
|
440
|
|
|
491
|
|
Expected return on plan assets
|
(1,934
|
)
|
|
(1,799
|
)
|
|
(1,819
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
32
|
|
|
144
|
|
|
24
|
|
|
(597
|
)
|
|
(541
|
)
|
|
(541
|
)
|
Recognized losses due to plan settlements
|
—
|
|
|
—
|
|
|
214
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized (gains) losses due to plan curtailments
|
68
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized net actuarial loss (gain)
|
2,843
|
|
|
2,884
|
|
|
1,373
|
|
|
—
|
|
|
—
|
|
|
(18
|
)
|
Total net periodic benefit cost
|
$
|
10,258
|
|
|
$
|
10,200
|
|
|
$
|
9,000
|
|
|
$
|
(204
|
)
|
|
$
|
(98
|
)
|
|
$
|
(63
|
)
|
Amounts expected to be amortized from AOCI and included in total net periodic benefit cost during the year ended August 31,
2017
, are as follows:
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
|
(In thousands)
|
Net actuarial loss (gain)
|
$
|
4,024
|
|
|
$
|
—
|
|
Prior service cost (credit)
|
10
|
|
|
(541
|
)
|
Total
|
$
|
4,034
|
|
|
$
|
(541
|
)
|
Selected information regarding the Company’s pension and OPEB plans is as follows:
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
2016
|
|
2015
|
|
(In thousands)
|
Pension Plans:
|
|
|
|
All plans:
|
|
|
|
Accumulated benefit obligation
|
$
|
183,298
|
|
|
$
|
149,536
|
|
Plans with projected benefit obligations in excess of plan assets:
|
|
|
|
Projected benefit obligation
|
$
|
198,385
|
|
|
$
|
165,205
|
|
Accumulated benefit obligation
|
$
|
183,298
|
|
|
$
|
149,536
|
|
Fair value of plan assets
|
$
|
50,066
|
|
|
$
|
44,325
|
|
Plans with projected benefit obligations less than plan assets:
|
|
|
|
Projected benefit obligation
|
$
|
—
|
|
|
$
|
—
|
|
Accumulated benefit obligation
|
$
|
—
|
|
|
$
|
—
|
|
Fair value of plan assets
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
OPEB Plan:
|
|
|
|
Accumulated benefit obligation
|
$
|
10,491
|
|
|
$
|
10,137
|
|
Plans with projected benefit obligations in excess of plan assets:
|
|
|
|
Projected benefit obligation
|
$
|
10,491
|
|
|
$
|
10,137
|
|
Accumulated benefit obligation
|
$
|
10,491
|
|
|
$
|
10,137
|
|
The underfunded position of the pension plans is primarily related to the Company’s German and United Kingdom pension plans. As of
August 31, 2016
, the Company’s German and United Kingdom pension plans are underfunded by
$132.2 million
. In
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Germany, there are no statutory requirements for funding while in the United Kingdom there are certain statutory minimum funding requirements.
Actuarial assumptions used in the calculation of the recorded liability are as follows:
|
|
|
|
|
|
|
|
|
|
Weighted — Average Assumptions as of August 31 :
|
2016
|
|
2015
|
|
2014
|
Discount rate on pension plans
|
1.5
|
%
|
|
2.6
|
%
|
|
2.8
|
%
|
Discount rate on other postretirement obligation
|
3.1
|
%
|
|
4.0
|
%
|
|
3.8
|
%
|
Rate of compensation increase
|
2.1
|
%
|
|
2.4
|
%
|
|
2.4
|
%
|
Actuarial assumptions used in the calculation of the recorded benefit expense are as follows:
|
|
|
|
|
|
|
|
|
|
Weighted — Average Assumptions for the year ended August 31 :
|
2016
|
|
2015
|
|
2014
|
Discount rate on pension plans
|
2.6
|
%
|
|
2.8
|
%
|
|
4.0
|
%
|
Discount rate on other postretirement obligation
|
4.0
|
%
|
|
3.8
|
%
|
|
4.5
|
%
|
Return on pension plan assets
|
4.5
|
%
|
|
4.7
|
%
|
|
5.2
|
%
|
Rate of compensation increase
|
2.4
|
%
|
|
2.4
|
%
|
|
2.4
|
%
|
Projected health care cost trend rate
|
6.5
|
%
|
|
6.8
|
%
|
|
7.5
|
%
|
Ultimate health care rate
|
5.0
|
%
|
|
5.0
|
%
|
|
5.0
|
%
|
Year ultimate health care trend rate is achieved
|
2023
|
|
|
2023
|
|
|
2019
|
|
The Company, in consultation with its actuaries, annually, or as needed for interim remeasurements, reviews and selects the discount rates to be used in connection with its defined benefit pension plans. The discount rates used by the Company are based on the yields of various corporate bond indices with actual maturity dates that approximate the estimated benefit payment streams of the related pension plans. For countries in which there are no deep corporate bond markets, discount rates used by the Company are based on yields of various government bond indices with varying maturity dates. The discount rates are also reviewed in comparison with current benchmark indices, economic market conditions and the movement in the benchmark yield since the previous fiscal year.
The Company, in consultation with its actuaries, annually, or as needed for interim remeasurements, reviews and selects the discount rate to be used in connection with its postretirement obligation. When selecting the discount rate the Company uses a model that considers the demographics of the participants and the resulting expected benefit payment stream over the participants’ lifetime.
As of August 31, 2016, the Company changed the approach utilized to estimate the service and interest cost components of net periodic benefit cost for our major defined benefit postretirement plans. Historically, the Company estimated the service and interest cost components using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. As of August 31, 2016, the Company utilized a spot rate approach for the estimation of service and interest cost for our major plans by applying specific spot rates along the yield curve to the relevant projected cash flows, to provide a better estimate of service and interest costs. Service and interest costs on the obligation are expected to be
$0.7 million
and
$0.1 million
lower for the twelve months ended August 31, 2017 for pension and other postretirement benefits plans, respectively, as a result of using the spot rate approach compared to the historical approach.
For fiscal
2017
, the Company, in consultation with its actuaries, has selected a weighted-average discount rate of
1.5%
, expected long-term return on plan assets of
3.1%
and rate of compensation increase of
2.1%
for its defined benefit pension plans. For its postretirement benefit plan, the Company, in consultation with its actuaries, has selected a discount rate of
3.1%
for fiscal
2017
.
Assumed health care cost trend rates have a significant effect on the amounts reported for the OPEB plan. A one-percentage point change in assumed health care cost trend rates would have the following effects as of August 31,
2016
:
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
One-Percentage -
Point Increase
|
|
One-Percentage -
Point Decrease
|
|
(In thousands)
|
Effect on aggregate of service and interest cost components of net periodic postretirement benefit cost
|
$
|
38
|
|
|
$
|
(33
|
)
|
Effect on accumulated postretirement benefit obligation
|
$
|
972
|
|
|
$
|
(846
|
)
|
The Company’s pension plan weighted-average asset allocation and target allocation, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets
|
|
Target
Allocation
|
|
As of August 31,
|
|
As of August 31,
|
Asset Category
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Equity securities
|
22
|
%
|
|
28
|
%
|
|
20
|
%
|
|
20
|
%
|
Debt securities
|
18
|
%
|
|
27
|
%
|
|
9
|
%
|
|
11
|
%
|
Fixed insurance contracts
|
59
|
%
|
|
41
|
%
|
|
70
|
%
|
|
62
|
%
|
Cash
|
1
|
%
|
|
3
|
%
|
|
1
|
%
|
|
7
|
%
|
Real Estate
|
—
|
%
|
|
1
|
%
|
|
—
|
%
|
|
—
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The Company’s principal objective is to ensure that sufficient funds are available to provide benefits as and when required under the terms of the plans. The Company utilizes investments that provide benefits and maximizes the long-term investment performance of the plans without taking on undue risk while complying with various legal funding requirements. The Company, through its investment advisors, has developed detailed asset and liability models to aid in implementing optimal asset allocation strategies. The equity securities are invested in equity indexed funds, which minimizes concentration risk while offering market returns. The debt securities are invested in a long-term bond indexed fund which provides a stable low risk return. The fixed insurance contracts allow the Company to closely match a portion of the liability to the expected payout of benefit with little risk. The Company, in consultation with its actuaries, analyzes current market trends, the current plan performance and expected market performance of both the equity and bond markets to arrive at the expected return on each asset category over the long term. The Company’s plan assets which are invested in equity and debt securities are valued utilizing Level 1 and Level 2 inputs. In consultation with the Company's actuaries, plan assets invested in fixed insurance contracts are valued utilizing Level 3 inputs primarily based on the present value of discounted future cash flows taking into account the estimated future benefits of a profit sharing arrangement with an insurance company. The Company believes there is not a significant concentration of risk within its plan assets.
The fair values of the Company’s pension plan assets, all of which are for foreign plans, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2016
|
|
As of August 31, 2015
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Equity securities
|
$
|
10,940
|
|
|
$
|
1,615
|
|
|
$
|
9,325
|
|
|
$
|
—
|
|
|
$
|
12,432
|
|
|
$
|
6,887
|
|
|
$
|
5,545
|
|
|
$
|
—
|
|
Debt securities
|
8,969
|
|
|
4,905
|
|
|
4,064
|
|
|
—
|
|
|
12,076
|
|
|
4,457
|
|
|
7,619
|
|
|
—
|
|
Fixed insurance contracts
|
29,855
|
|
|
—
|
|
|
—
|
|
|
29,855
|
|
|
18,183
|
|
|
—
|
|
|
—
|
|
|
18,183
|
|
Cash
|
302
|
|
|
302
|
|
|
—
|
|
|
—
|
|
|
1,279
|
|
|
1,279
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
355
|
|
|
—
|
|
|
—
|
|
|
355
|
|
Total
|
$
|
50,066
|
|
|
$
|
6,822
|
|
|
$
|
13,389
|
|
|
$
|
29,855
|
|
|
$
|
44,325
|
|
|
$
|
12,623
|
|
|
$
|
13,164
|
|
|
$
|
18,538
|
|
The change in fair value of the Company’s pension plan assets classified as Level 3, all of which are for foreign plans, is as follows:
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(In thousands)
|
Balance, beginning of fiscal year
|
$
|
18,538
|
|
|
$
|
18,566
|
|
Actual return on plan assets
|
11,539
|
|
|
177
|
|
Purchases, sales, issuances, and settlements, net
|
2,864
|
|
|
116
|
|
Foreign currency translation
|
(3,086
|
)
|
|
(321
|
)
|
Balance, end of fiscal year
|
$
|
29,855
|
|
|
$
|
18,538
|
|
The Company expects to contribute
$5.7 million
for its pension obligations and
$0.8 million
to its other postretirement plan in
2017
. The benefit payments, which reflect expected future service, are as follows:
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
Pension
Benefits
|
|
OPEB
Benefits
|
|
(In thousands)
|
2017
|
$
|
4,604
|
|
|
$
|
817
|
|
2018
|
4,142
|
|
|
793
|
|
2019
|
4,502
|
|
|
805
|
|
2020
|
4,715
|
|
|
768
|
|
2021
|
5,010
|
|
|
726
|
|
Years 2022 — 2026
|
30,795
|
|
|
3,347
|
|
The Company maintains several defined contribution plans that cover domestic and foreign employees. The plan in which each employee is eligible to participate depends upon the subsidiary for which the employee works. Certain plans have eligibility requirements related to age and period of service with the Company. Certain plans have salary deferral features that enable participating employees to contribute up to a certain percentage of their earnings, subject to statutory limits and certain foreign plans require the Company to match employee contributions in cash. Employee contributions to the Company’s U.S. 401(k) plans have matching features whereas the Company will match a participant’s contribution up to a pre-approved amount of the participant’s annual salary. The total expense for defined contribution plans was
$3.9 million
,
$4.2 million
and
$3.0 million
in
2016
,
2015
and
2014
, respectively.
NOTE 9 — CONVERTIBLE SPECIAL STOCK
The Company’s Amended and Restated Certificate of Incorporation authorizes
1,000,000
shares of special stock. The Board of Directors may designate these shares of special stock with special designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions prior to issuance.
On May 4, 2015, the Company filed with the Delaware Secretary of State a Certificate of Designation, Preferences, Rights and Limitations (the "Certificate of Designation") for the purpose of amending its Restated Certificate of Incorporation to fix the designations, preferences, limitations and relative rights of
125,000 shares
of the Company’s
6.00%
Cumulative Perpetual Convertible Special Stock, without par value (the “Convertible Special Stock”). On May 4, 2015, the Company received gross cash proceeds of
$125.0 million
from the sale of
125,000
shares of Convertible Special Stock. As of
August 31, 2016
, the
$120.3 million
amount recorded in the Convertible Special Stock line in the balance sheet is net of issuance costs of
$4.7 million
.
The Certificate of Designation for the Convertible Special Stock provides that:
Ranking.
The Convertible Special Stock, with respect to the payment of dividends and distributions upon the Company’s liquidation, winding-up or dissolution, will rank:
|
|
•
|
senior to the Company’s common stock and to all of the Company’s other capital stock issued in the future, unless the terms of that stock expressly provide that it ranks senior to, or on parity with, the Convertible Special Stock;
|
|
|
•
|
on parity with any of the Company’s capital stock issued in the future, the terms of which expressly provide that it will rank on parity with the Convertible Special Stock; and
|
|
|
•
|
junior to all of the Company’s capital stock issued in the future, the terms of which expressly provide that such stock will rank senior to the Convertible Special Stock.
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dividends.
Holders of Convertible Special Stock are entitled to receive cumulative dividends at the rate of 6.00% per annum on the
$1,000
liquidation preference per share of the Convertible Special Stock. When declared by the Company’s Board of Directors, dividends will be payable quarterly in arrears on each dividend payment date. Dividends may be paid in cash or, where freely transferable by any non-affiliate recipient thereof, in common stock of the Company or a combination thereof, and are payable on February 1, May 1, August 1 and November 1 of each year, commencing on August 1, 2015. The Company paid
$7.5 million
and
$1.8 million
of convertible special stock dividends during fiscal
2016
and
2015
, respectively and currently intends to pay future dividends in cash.
Voting Rights.
Except as required by Delaware law, and subject to the following limitations, holders of the Convertible Special Stock will have no voting rights. If dividends are in arrears and unpaid for six or more quarterly periods, until such arrearage is paid in full, the holders of the Convertible Special Stock will be entitled (voting on an as-converted basis, together with the holders of the Company’s common stock) at the next regular or special meeting of the Company’s stockholders, to vote on matters presented to the Company’s stockholders for a vote at such meeting. Furthermore, so long as any shares of Convertible Special Stock remain outstanding, the Company may not, without the affirmative consent of the holders of at least
66.67%
of the shares of the Convertible Special Stock outstanding at the time, voting together as a single class with all series of parity stock with similar voting rights, take certain actions altering or preempting the rights of the holders of the Convertible Special Stock, as described in the Certificate of Designation.
Liquidation.
In the event of any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, each holder of Convertible Special Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, a liquidation preference per share of Convertible Special Stock equal to
$1,000
(
$125.0 million
in aggregate for the
125,000
shares outstanding as of
August 31, 2016
) plus accumulated dividends to the date fixed for liquidation, winding-up or dissolution in the order described within Ranking above.
Redemption.
The Convertible Special Stock has no maturity date, is not redeemable by the Company at any time and will remain outstanding unless converted by the holders or mandatorily converted by the Company as described below.
Optional Conversion by Holders.
Each share of Convertible Special Stock is convertible, at the holder’s option at any time, into shares of common stock at the initial conversion rate of approximately
19.1113
shares of common stock of the Company (which is equivalent to an initial conversion price of approximately
$52.33
per share) to one share of Convertible Special Stock. The conversion rate is subject to specified adjustments as set forth in the Certificate of Designation. There have been
no
conversions as of
August 31, 2016
.
If the Company undergoes a fundamental change, as defined in the Certificate of Designation, and a holder converts its shares of Convertible Special Stock at any time beginning at the opening of business on the trading day immediately following the effective date of such fundamental change and ending at the close of business on the 30th trading day immediately following such effective date, the holder will receive, for each share of Convertible Special Stock surrendered for conversion, a number of shares of common stock of the Company as set forth in the Certificate of Designations. There have been no fundamental changes as of
August 31, 2016
.
Optional Conversion by the Company.
On or after May 1, 2020, the Company may, at its option, give notice of its election to cause all outstanding shares of Convertible Special Stock to be automatically converted into shares of common stock of the Company at the conversion rate then in effect, if the closing sale price of the Company’s common stock equals or exceeds
150%
of the conversion price then in effect for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as follows
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Gain (Loss)
(5)
|
|
Pension and Other Retiree Benefits
(2)
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
|
(In thousands)
|
Balance as of August 31, 2013
|
$
|
17,712
|
|
|
$
|
(17,030
|
)
|
|
$
|
682
|
|
Other comprehensive income (loss) before reclassifications, net of tax of $0 related to foreign currency translation gains (losses), and $8,718 related to pension and other retiree benefits
|
5,872
|
|
|
(23,043
|
)
|
|
(17,171
|
)
|
Amounts reclassified to earnings, net of tax of ($456)
|
(885
|
)
|
(3)
|
596
|
|
(4)
|
(289
|
)
|
Net current period other comprehensive income (loss)
|
4,987
|
|
|
(22,447
|
)
|
|
(17,460
|
)
|
Less: comprehensive income (loss) attributable to
noncontrolling interests
|
(87
|
)
|
|
—
|
|
|
(87
|
)
|
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
|
5,074
|
|
|
(22,447
|
)
|
|
(17,373
|
)
|
Balance as of August 31, 2014
|
22,786
|
|
|
(39,477
|
)
|
|
(16,691
|
)
|
Other comprehensive income (loss) before reclassifications, net of tax of $7,076 related to foreign currency translation gains (losses), and ($1,682) related to pension and other retiree benefits
|
(72,526
|
)
|
|
4,152
|
|
|
(68,374
|
)
|
Amounts reclassified to earnings, net of tax of ($1,061)
|
—
|
|
(3)
|
1,427
|
|
(4)
|
1,427
|
|
Net current period other comprehensive income (loss)
|
(72,526
|
)
|
|
5,579
|
|
|
(66,947
|
)
|
Less: comprehensive income (loss) attributable to
noncontrolling interests
|
(178
|
)
|
|
—
|
|
|
(178
|
)
|
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
|
(72,348
|
)
|
|
5,579
|
|
|
(66,769
|
)
|
Balance as of August 31, 2015
|
(49,562
|
)
|
|
(33,898
|
)
|
|
(83,460
|
)
|
Other comprehensive income (loss) before reclassifications, net of tax of $0 related to foreign currency translation gains (losses), and $7,912 related to pension and other retiree benefits
|
(20,831
|
)
|
|
(18,827
|
)
|
|
(39,658
|
)
|
Amounts reclassified to earnings, net of tax of ($624)
|
—
|
|
(3)
|
1,721
|
|
(4)
|
1,721
|
|
Net current period other comprehensive income (loss)
|
(20,831
|
)
|
|
(17,106
|
)
|
|
(37,937
|
)
|
Less: comprehensive income (loss) attributable to
noncontrolling interests
|
(676
|
)
|
|
—
|
|
|
(676
|
)
|
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
|
(20,155
|
)
|
|
(17,106
|
)
|
|
(37,261
|
)
|
Balance as of August 31, 2016
|
$
|
(69,717
|
)
|
|
$
|
(51,004
|
)
|
|
$
|
(120,721
|
)
|
(1)
All amounts presented are net of tax.
(2)
Reclassified from accumulated other comprehensive income (loss) into cost of sales and selling, general & administrative expenses on the consolidated statements of operations. These components are included in the computation of net periodic pension cost. Refer to Note 8,
Pension and Postretirement Benefit Plans,
of this Annual Report on Form 10-K for further details.
(3)
Reclassified from accumulated other comprehensive income (loss) into income (loss) from discontinued operations on the consolidated statements of operations on the sale of the rotational compounding business in Australia. Refer to Note 20,
Discontinued Operations,
of this Annual Report on Form 10-K for further details.
(4)
Represents amortization of net actuarial loss and prior service costs. Fiscal 2016 includes a curtailment gain of $68, and fiscal 2014 includes settlement charges of $214. There were no curtailments or settlements recognized in fiscal 2015.
(5)
The tax amounts on the foreign currency loss relate to a note denominated in euros which was repaid in fiscal 2015.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — SHARE-BASED INCENTIVE COMPENSATION PLANS
On December 7, 2006, the Company adopted the 2006 Incentive Plan, which provides for the grant of various share-based incentive compensation awards. Upon adoption of the 2006 Incentive Plan, all remaining shares eligible for award under a previous plan were added to the 2006 Incentive Plan. On December 9, 2010, the Company’s stockholders approved the adoption of the A. Schulman, Inc. 2010 Value Creation Rewards Plan (“2010 Rewards Plan”) which also provides for similar grants. On December 12, 2014, upon approval by its stockholders and Board of Directors, the Company adopted the A. Schulman, Inc. 2014 Equity Incentive Plan ("2014 Equity Incentive Plan"). The 2014 Equity Incentive Plan provides for the grant of various share-based incentive compensation awards and unless terminated earlier, will continue until December 12, 2024. A total of
2,000,000
shares of common stock may be issued under the 2014 Equity Incentive Plan. It has been the Company’s practice to issue new shares of common stock upon stock option exercise and the vesting of awards under these plans. As of
August 31, 2016
, there were
971,627
shares,
395,987
shares and
1,531,680
shares of common stock available for grant pursuant to the Company’s 2006 Incentive Plan, the 2010 Rewards Plan and the 2014 Equity Incentive Plan, respectively. The restricted stock awards outstanding under these plans have service vesting periods of three years following the date of grant. Also, certain of these awards have market or performance vesting conditions.
The following table summarizes the activity of time-based and performance-based restricted stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards Outstanding
|
|
Weighted-Average
Fair Market Value
(per share)
|
|
Time-
Based
|
|
Performance-
Based
|
|
Time-
Based
|
|
Performance-
Based
|
Outstanding at August 31, 2015
|
96,930
|
|
|
575,957
|
|
|
$
|
31.51
|
|
|
$
|
31.78
|
|
Granted
|
57,350
|
|
|
339,510
|
|
|
$
|
22.95
|
|
|
$
|
22.93
|
|
Vested
|
(37,837
|
)
|
|
(108,596
|
)
|
|
$
|
28.47
|
|
|
$
|
29.91
|
|
Forfeited
|
(12,792
|
)
|
|
(165,864
|
)
|
|
$
|
29.24
|
|
|
$
|
29.74
|
|
Outstanding at August 31, 2016
|
103,651
|
|
|
641,007
|
|
|
$
|
28.16
|
|
|
$
|
27.93
|
|
Time-based awards are valued at the fair market value on the date of grant, have voting rights and earn dividends throughout the vesting period which are subject to the same vesting terms as the underlying restricted stock awards. The weighted-average grant date fair value of time-based awards granted during the years ended August 31,
2016
,
2015
and
2014
were
$22.95
,
$33.90
and
$34.42
, respectively.
Performance-based awards vest based on market or performance conditions and do not have voting rights. Included in the outstanding performance-based awards as of
August 31, 2016
are
300,785
performance-based awards which earn dividends throughout the vesting period, and the remaining performance-based awards which do not earn dividends. Earned dividends are subject to the same vesting terms as the underlying performance-based awards.
The performance-based awards in the table above include
61,641
shares which vest based on market conditions and are valued based upon a Monte Carlo valuation model. Vesting of the ultimate number of shares underlying such performance-based awards, if any, will be dependent upon the Company’s total stockholder return in relation to the total stockholder return of a select group of peer companies over a three-year period. The probability of meeting the market criteria is considered when calculating the estimated fair market value using a Monte Carlo valuation model. Such awards granted prior to fiscal 2013 are accounted for as equity awards with market conditions given that recipients receive shares of stock upon vesting, and expense for these awards is recognized over the service period regardless of whether the market condition is achieved and the awards ultimately vest. Awards granted in fiscal 2013 and 2014 provide recipients an option to receive cash or shares of common stock upon vesting. As such, the fiscal 2013 and 2014 awards are accounted for as liability awards with a market condition, and the Company remeasures these awards at fair value on a quarterly basis over the service period. The fair value of these awards is not material to the Company's consolidated financial results. Expense for these awards is recognized only to the extent the market conditions are achieved and the awards ultimately vest.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the performance-based awards with market conditions were estimated using a Monte Carlo valuation model using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Expected volatility
|
42.00
|
%
|
|
29.00
|
%
|
|
31.00
|
%
|
Risk-free interest rate
|
0.48
|
%
|
|
0.55
|
%
|
|
1.03
|
%
|
Correlation
|
41.00
|
%
|
|
38.00
|
%
|
|
53.00
|
%
|
The fair value of the remaining
579,366
performance-based awards in the table above is based on the closing price of the Company’s common stock on the date of the grant. Vesting of the ultimate number of shares underlying a portion of these performance-based awards, if any, will be dependent upon the Company's return on invested capital ("ROIC") while vesting for the remaining performance-based awards, if any, will be dependent upon the Company's cumulative earnings per share ("Cumulative EPS"), both over a three-year performance period.
The weighted-average grant date fair value of the performance-based awards granted in fiscal
2016
,
2015
and
2014
were
$22.93
,
$33.90
and
$34.42
per share, respectively.
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
Outstanding Shares
Under Option
|
|
Weighted-Average
Exercise Price
|
Outstanding at August 31, 2015
|
1,667
|
|
|
$
|
19.20
|
|
Exercised
|
(1,667
|
)
|
|
$
|
19.20
|
|
Forfeited and expired
|
—
|
|
|
$
|
—
|
|
Outstanding at August 31, 2016
|
—
|
|
|
$
|
—
|
|
Exercisable at August 31, 2016
|
—
|
|
|
$
|
—
|
|
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The total intrinsic value of options exercised for the years ended August 31,
2016
,
2015
, and
2014
was
$0.1 million
,
$0.1 million
and
$0.2 million
, respectively. All outstanding and exercisable stock options are fully vested and exercised as of
August 31, 2016
. The Company did
no
t grant stock options in fiscal years
2016
,
2015
or
2014
.
Total unrecognized compensation cost, including a provision for estimated forfeitures, related to nonvested share-based incentive compensation arrangements as of
August 31, 2016
was
$2.2 million
. This cost is expected to be recognized over a weighted-average period of
1.6 years
.
The Company made
$0.8 million
and
$1.4 million
in cash payments for cash-settled restricted stock units and cash-based awards during fiscal
2016
and fiscal
2015
, respectively.
During fiscal
2016
and
2015
, the Company granted non-employee directors
24,624
shares and
18,810
shares of unrestricted common stock, respectively.
The Company has an Employee Stock Purchase Plan (“ESPP”) whereby employees may purchase Company stock through a payroll deduction plan. Purchases are made from the plan and credited to each participant’s account at the end of each calendar quarter (the “Investment Date”). The purchase price of the stock is
85%
of the fair market value on the Investment Date. The plan is compensatory and the
15%
discount is expensed ratably over the three month offering period. All employees, including officers, are eligible to participate in this plan. An employee whose stock ownership of the Company exceeds five percent of the outstanding common stock is not eligible to participate in this plan. The Company recorded minimal expense related to the ESPP during
fiscal 2016
,
2015
and
2014
. It is the Company’s current practice to use treasury shares for the share settlement on the Investment Date.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the impact to the Company’s consolidated statements of operations from share-based incentive compensation plans, which is primarily included in selling, general and administrative expenses in the accompanying consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Time-based and performance-based restricted stock awards
|
$
|
879
|
|
|
$
|
4,071
|
|
|
$
|
7,105
|
|
Board of Directors unrestricted awards
|
564
|
|
|
631
|
|
|
797
|
|
CEO transition costs
|
—
|
|
|
6,167
|
|
|
—
|
|
Total share-based incentive compensation
|
$
|
1,443
|
|
|
$
|
10,869
|
|
|
$
|
7,902
|
|
CEO transition costs represent a one-time charge for the modification and accelerated vesting upon retirement of the outstanding equity compensation awards granted to Joseph M. Gingo in 2013 and 2014.
NOTE 12 — EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common stock equivalents are exercised as well as the impact of restricted stock awards expected to vest, which combined would then share in the earnings of the Company.
Dividends on convertible special stock that an issuer has paid or intends to pay are deducted from net income or added to the amount of a net loss in computing income available to common shareholders.
The difference between basic and diluted weighted-average shares results from the assumed exercise of outstanding stock options and vesting of restricted stock awards, calculated using the treasury stock method, and the inclusion of the convertible special stock dividends, calculated using the if-converted method.
The Company computes income available to common stockholders by deducting dividends accumulated on the convertible special stock from income (loss) from continuing operations and net income (loss). The convertible special stock does not impact the denominator of basic EPS. The dilutive effect of convertible special stock is reflected in diluted EPS by application of the if-converted method. In applying the if-converted method, conversion shall not be assumed for purposes of computing diluted EPS if the effect would be anti-dilutive. The convertible special stock is anti-dilutive whenever the amount of the dividend declared in or accumulated for the current period per share on conversion exceeds basic EPS. For fiscal years
2016
and
2015
, the accumulated dividend per share on conversion exceeds basic EPS, therefore the respective
2,388,913
and
772,502
shares related to the convertible special stock were considered anti-dilutive.
The following table presents the number of incremental weighted-average shares used in computing diluted per share amounts:
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Weighted-average shares outstanding:
|
|
|
|
|
|
Basic
|
29,300
|
|
|
29,149
|
|
|
29,061
|
|
Incremental shares from equity awards
|
—
|
|
|
334
|
|
|
301
|
|
Incremental shares from convertible special stock
|
—
|
|
|
—
|
|
|
—
|
|
Diluted
|
29,300
|
|
|
29,483
|
|
|
29,362
|
|
Diluted weighted-average shares outstanding for fiscal
2016
excludes approximately
745,000
shares related to equity awards which are potentially dilutive in future periods, as their inclusion would have been anti-dilutive. During fiscal
2015
and
2014
, there were
no
anti-dilutive shares related to equity awards that were excluded from diluted weighted-average shares outstanding.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — LEASES
The Company leases certain equipment, buildings, vehicles and computer equipment. Total rental expense was
$22.4 million
in
2016
,
$18.1 million
in
2015
and
$16.6 million
in
2014
. The approximate future minimum rental commitments for non-cancelable operating leases, excluding obligations for taxes and insurance, are as follows:
|
|
|
|
|
Year Ended August 31,
|
Minimum Rental
Commitments
|
|
(In thousands)
|
2017
|
$
|
14,254
|
|
2018
|
10,715
|
|
2019
|
6,723
|
|
2020
|
4,047
|
|
2021
|
2,520
|
|
2022 and thereafter
|
12,067
|
|
Total minimum rental commitments
|
$
|
50,326
|
|
NOTE 14 — SEGMENT INFORMATION
The Company considers its operating structure and the types of information subject to regular review by its President and Chief Executive Officer ("CEO"), who is the Chief Operating Decision Maker ("CODM"), to identify reportable segments. The CODM makes decisions, assesses performance and allocates resources by the following reportable segments: EMEA, USCAN, LATAM, APAC, and EC.
The CODM uses net sales to unaffiliated customers, segment gross profit and segment operating income in order to make decisions, assess performance and allocate resources to each segment. Segment operating income does not include items such as interest income or expense, other income or expense, foreign currency transaction gains or losses, restructuring and related costs including accelerated depreciation, asset impairments, or costs and inventory step-up charges related to business acquisitions. Corporate expenses include the compensation of certain personnel, certain audit expenses, Board of Directors related costs, certain insurance costs, costs associated with being a publicly traded entity and other miscellaneous legal and professional fees.
The following table summarizes net sales to unaffiliated customers by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
EMEA
|
$
|
1,239,963
|
|
|
$
|
1,339,355
|
|
|
$
|
1,577,867
|
|
USCAN
|
691,369
|
|
|
610,493
|
|
|
475,050
|
|
LATAM
|
171,650
|
|
|
177,463
|
|
|
198,313
|
|
APAC
|
186,911
|
|
|
207,781
|
|
|
195,768
|
|
EC
|
206,112
|
|
|
57,133
|
|
|
—
|
|
Total net sales to unaffiliated customers
|
$
|
2,496,005
|
|
|
$
|
2,392,225
|
|
|
$
|
2,446,998
|
|
No single customer accounted for more than 10% of consolidated sales and revenues for the years ended August 31, 2016, 2015 and 2014.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below the Company presents gross profit by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
EMEA
|
$
|
178,376
|
|
|
$
|
189,860
|
|
|
$
|
206,268
|
|
USCAN
|
115,329
|
|
|
100,550
|
|
|
73,278
|
|
LATAM
|
36,886
|
|
|
31,971
|
|
|
26,239
|
|
APAC
|
32,293
|
|
|
29,238
|
|
|
26,767
|
|
EC
|
50,461
|
|
|
14,536
|
|
|
—
|
|
Total segment gross profit
|
413,345
|
|
|
366,155
|
|
|
332,552
|
|
Inventory step-up
|
—
|
|
|
(3,082
|
)
|
|
(1,468
|
)
|
Accelerated depreciation and restructuring related costs
|
(7,571
|
)
|
|
(1,796
|
)
|
|
(1,042
|
)
|
Costs related to acquisitions
|
(2,769
|
)
|
|
(267
|
)
|
|
(34
|
)
|
Lucent costs
(1)
|
(2,085
|
)
|
|
—
|
|
|
—
|
|
Total gross profit
|
$
|
400,920
|
|
|
$
|
361,010
|
|
|
$
|
330,008
|
|
Below is a reconciliation of segment operating income to operating income and income from continuing operations before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
EMEA
|
$
|
76,576
|
|
|
$
|
78,313
|
|
|
$
|
80,690
|
|
USCAN
|
47,062
|
|
|
40,713
|
|
|
30,418
|
|
LATAM
|
20,268
|
|
|
13,061
|
|
|
8,388
|
|
APAC
|
17,953
|
|
|
14,401
|
|
|
12,527
|
|
EC
|
14,885
|
|
|
5,454
|
|
|
—
|
|
Total segment operating income
|
176,744
|
|
|
151,942
|
|
|
132,023
|
|
Corporate
|
(30,797
|
)
|
|
(31,238
|
)
|
|
(32,170
|
)
|
Costs related to acquisitions and integrations
|
(8,789
|
)
|
|
(17,208
|
)
|
|
(6,021
|
)
|
Restructuring and related costs
|
(27,762
|
)
|
|
(23,411
|
)
|
|
(9,832
|
)
|
Accelerated depreciation
|
(6,309
|
)
|
|
(408
|
)
|
|
(107
|
)
|
CEO transition costs
|
(3,399
|
)
|
|
(6,167
|
)
|
|
—
|
|
Asset impairment
|
(401,667
|
)
|
|
—
|
|
|
(104
|
)
|
Lucent costs
(1)
|
(7,261
|
)
|
|
—
|
|
|
—
|
|
Inventory step-up
|
—
|
|
|
(3,082
|
)
|
|
(1,468
|
)
|
Operating income (loss)
|
(309,240
|
)
|
|
70,428
|
|
|
82,321
|
|
Interest expense
|
(54,548
|
)
|
|
(22,613
|
)
|
|
(8,503
|
)
|
Bridge financing fees
|
—
|
|
|
(18,750
|
)
|
|
—
|
|
Foreign currency transaction gains (losses)
|
(3,491
|
)
|
|
(3,363
|
)
|
|
(2,206
|
)
|
Other income (expense), net
|
774
|
|
|
1,438
|
|
|
720
|
|
Gain on early extinguishment of debt
|
—
|
|
|
1,290
|
|
|
—
|
|
Income (loss) from continuing operations before taxes
|
$
|
(366,505
|
)
|
|
$
|
28,430
|
|
|
$
|
72,332
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Refer to Note 17,
Contingencies and Claims,
of this Annual Report on Form 10-K for additional discussion on this matter. Lucent costs in costs of sales include additional product and manufacturing operational costs for reworking inventory. Additional Lucent costs in selling, general and administrative expenses include legal and investigative costs and dedicated internal personnel costs that would have otherwise been focused on normal operations.
The following table summarizes identifiable assets by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Identifiable assets:
|
|
|
|
|
|
EMEA
|
$
|
594,599
|
|
|
$
|
701,263
|
|
|
$
|
809,670
|
|
USCAN
|
609,828
|
|
|
873,814
|
|
|
458,109
|
|
LATAM
|
86,105
|
|
|
96,210
|
|
|
111,126
|
|
APAC
|
131,356
|
|
|
126,965
|
|
|
133,579
|
|
EC
|
335,793
|
|
|
553,459
|
|
|
—
|
|
Total identifiable assets
|
$
|
1,757,681
|
|
|
$
|
2,351,711
|
|
|
$
|
1,512,484
|
|
The following tables summarize depreciation and amortization and capital expenditures by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Depreciation and amortization expense:
|
|
|
|
|
|
EMEA
|
$
|
22,646
|
|
|
$
|
21,730
|
|
|
$
|
21,832
|
|
USCAN
|
39,139
|
|
|
24,197
|
|
|
16,522
|
|
LATAM
|
3,822
|
|
|
3,255
|
|
|
4,128
|
|
APAC
|
5,409
|
|
|
5,424
|
|
|
5,422
|
|
EC
|
18,248
|
|
|
4,634
|
|
|
—
|
|
Total depreciation and amortization expense
|
$
|
89,264
|
|
|
$
|
59,240
|
|
|
$
|
47,904
|
|
Capital expenditures:
|
|
|
|
|
|
EMEA
|
$
|
17,763
|
|
|
$
|
21,321
|
|
|
$
|
13,199
|
|
USCAN
|
17,447
|
|
|
10,332
|
|
|
12,235
|
|
LATAM
|
5,514
|
|
|
3,597
|
|
|
4,380
|
|
APAC
|
9,322
|
|
|
6,895
|
|
|
5,275
|
|
EC
|
1,192
|
|
|
442
|
|
|
—
|
|
Total capital expenditures
|
$
|
51,238
|
|
|
$
|
42,587
|
|
|
$
|
35,089
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary of net sales by point of origin and long-lived assets by location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Net sales:
|
|
|
|
|
|
United States
|
$
|
807,673
|
|
|
$
|
632,906
|
|
|
$
|
457,225
|
|
Germany
|
415,965
|
|
|
432,822
|
|
|
548,454
|
|
France
|
170,304
|
|
|
195,507
|
|
|
238,029
|
|
Other international
|
1,102,063
|
|
|
1,130,990
|
|
|
1,203,290
|
|
Total net sales
|
$
|
2,496,005
|
|
|
$
|
2,392,225
|
|
|
$
|
2,446,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Long lived assets:
|
|
|
|
|
|
United States
|
$
|
149,098
|
|
|
$
|
159,394
|
|
|
$
|
95,349
|
|
Germany
|
25,716
|
|
|
27,224
|
|
|
22,716
|
|
France
|
26,450
|
|
|
18,472
|
|
|
22,758
|
|
Other international
|
113,558
|
|
|
109,404
|
|
|
113,098
|
|
Total long lived assets
|
$
|
314,822
|
|
|
$
|
314,494
|
|
|
$
|
253,921
|
|
Globally, the Company operates in six product families: (1) Custom Performance Colors, (2) Engineered Composites, (3) Masterbatch Solutions, (4) Engineered Plastics, (5) Specialty Powders and (6) Distribution Services. The consolidated net sales for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands, except for %’s)
|
Custom Performance Colors
|
$
|
181,738
|
|
|
7
|
%
|
|
$
|
191,453
|
|
|
8
|
%
|
|
$
|
188,221
|
|
|
8
|
%
|
Engineered Composites
|
206,112
|
|
|
8
|
|
|
57,133
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Masterbatch Solutions
|
700,939
|
|
|
28
|
|
|
741,354
|
|
|
31
|
|
|
766,788
|
|
|
31
|
|
Engineered Plastics
|
886,573
|
|
|
36
|
|
|
787,258
|
|
|
33
|
|
|
753,728
|
|
|
31
|
|
Specialty Powders
|
258,137
|
|
|
10
|
|
|
294,228
|
|
|
12
|
|
|
350,510
|
|
|
14
|
|
Distribution Services
|
262,506
|
|
|
11
|
|
|
320,799
|
|
|
14
|
|
|
387,751
|
|
|
16
|
|
Total consolidated net sales
|
$
|
2,496,005
|
|
|
100
|
%
|
|
$
|
2,392,225
|
|
|
100
|
%
|
|
$
|
2,446,998
|
|
|
100
|
%
|
NOTE 15 — RESEARCH AND DEVELOPMENT
Research and development expenditures were
$19.8 million
,
$17.8 million
and
$16.9 million
in fiscal years
2016
,
2015
and
2014
, respectively. The Company continues to invest in research and development activities as management believes it is important to the future of the Company.
NOTE 16 — RESTRUCTURING
Fiscal 2016 Restructuring Plans
Global Headcount Reduction Plan
In the third quarter of fiscal 2016, the Company approved a plan for a global headcount reduction to drive further efficiency and cost savings in the organization, primarily in the USCAN segment and Corporate location. The Company reduced headcount by approximately
60
with the majority of the reductions occurring in third quarter of fiscal 2016. The Company recorded
$4.0
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million
of pre-tax employee-related and other charges during fiscal
2016
of which
$0.7 million
remains accrued as of
August 31, 2016
. The Company does not expect any additional charges related to this plan during fiscal 2017. Cash payments associated with this plan are expected to occur through fiscal 2017 as the plan is completed.
USCAN Plans
In May 2016, the Company announced plans to create an Accounting and Shared Service Center of Excellence ("U.S. SSC") in Akron, Ohio that will be responsible for back office processes for all U.S. and Canada operations (USCAN and EC segments). The Company plans to reduce headcount by approximately
25
throughout the U.S. through fiscal 2017, partially offset by the addition of approximately
15
associates at the U.S. SSC. The Company recorded
$0.7 million
of pre-tax employee-related and other costs during fiscal
2016
. As of
August 31, 2016
, the Company has a balance of
$0.6 million
accrued for the employee-related costs related to this plan. The Company anticipates recording approximately
$1.0 million
of additional pre-tax employee-related charges through fiscal 2017. Cash payments associated with this plan are expected to occur through fiscal 2018 as the plan is completed.
In October 2015, as part of the Company’s previously announced Citadel acquisition integration strategy and a careful evaluation of capacity utilization and manufacturing capabilities, the Company approved plans to close three manufacturing facilities in Evansville, Indiana and consolidate production into other existing facilities in the area. Overall, the Company reduced headcount by approximately
25
as a result of these actions through natural attrition. The Company recorded
$0.4 million
of pre-tax employee-related and other charges and
$4.8 million
of accelerated depreciation costs during fiscal 2016. The Company anticipates recognizing between
$0.5 million
and
$1.0 million
of additional pretax machinery and equipment accelerated depreciation through fiscal 2017. As of
August 31, 2016
, the Company has a minimal balance accrued for this plan.
EC Plan
In the second quarter of fiscal 2016, the Company approved plans to optimize the Engineered Composites segment administrative functions and reduced headcount by approximately
10
in fiscal 2016. The Company recorded
$1.2 million
of pre-tax employee-related restructuring expense during fiscal 2016. As of
August 31, 2016
, the Company has a minimal balance accrued for the employee-related costs for this plan. The Company does not expect any additional charges or cash payments related to this plan as the plan is considered complete.
Fiscal 2015 Restructuring Plans
EMEA Plans
In October 2014, the Company announced actions to optimize the back-office and support functions in EMEA. The Company reduced headcount in EMEA by approximately
40
during fiscal 2015. The Company recorded pretax employee-related and other charges of
$0.2 million
and
$5.9 million
during fiscal 2016 and 2015, respectively. As of
August 31, 2016
, the Company has a minimal balance accrued and does not expect any additional charges for this plan.
In May 2015, the Company announced plans to relocate its EMEA Shared Service Center from Londerzeel, Belgium to Poznan, Poland as part of the Company’s ongoing cost control initiatives. The Company reduced headcount by approximately
40
employees during fiscal 2016. The Company recorded pretax employee-related and other charges of
$1.2 million
and
$2.3 million
during fiscal 2016 and 2015, respectively. As of
August 31, 2016
, the Company has a balance of
$0.7 million
accrued for this plan and does not expect any additional charges in fiscal 2017. Cash payments associated with this plan are expected to occur through fiscal 2017 as the plan is completed.
In August 2015, the Company approved plans to integrate the existing Paris, Montereau, and Beaucaire, France facilities into one new facility in St. Germain-Laval. As a result of this consolidation, the Company reduced headcount in France by approximately
20
in fiscal 2016, partially offset by the addition of approximately
15
associates at the Company's new facility. The Company has recognized
$2.3 million
and
$0.7 million
in pre-tax employee-related and other charges in fiscal 2016 and 2015, respectively. The Company expects to incur minimal charges related to pretax employee-related costs in fiscal 2017. As of
August 31, 2016
, the Company has a balance of
$1.5 million
accrued for this plan. Cash payments associated with this plan are expected to occur through fiscal 2017 as the plan is completed.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USCAN Plans
In November 2014, the Company announced plans to consolidate its North American production facilities. As part of the ongoing review of its manufacturing footprint, the Company closed its plant in Stryker, Ohio in fiscal 2015 and shifted the plant’s production to other North American facilities. The Company reduced headcount by approximately
70
. The Company recorded pretax employee-related and other charges of
$0.5 million
and
$1.3 million
during fiscal 2016 and 2015, respectively. As of
August 31, 2016
, the Company has
no
balance accrued for this plan. The Company does not expect any additional charges or cash payments related to this plan as the plan is considered complete.
In November 2014, the Company announced plans to reduce headcount primarily in North America selling, general and administrative ("SG&A") functions as part of its ongoing effort to drive further synergies from recent acquisitions. The Company reduced headcount by approximately
15
in fiscal 2015. The Company recorded pretax employee-related costs of
$0.7 million
during fiscal 2015. As of
August 31, 2016
, the Company has
no
remaining accrual related to this plan. The Company does not expect any additional charges or payments associated with this plan, as the plan is considered complete.
In August 2015, the Company approved additional plans to improve manufacturing and SG&A efficiency throughout the USCAN segment. As a result of this restructuring, the Company reduced headcount by approximately
25
. The Company recognized
$0.3 million
and
$1.2 million
in pre-tax employee-related and other charges during fiscal 2016 and 2015, respectively. As of
August 31, 2016
, the Company has
no
balance accrued for this plan. The Company does not expect any additional charges or payments associated with this plan, as the plan is considered complete.
LATAM Plan
In February 2015, the Company initiated plans to close its facility in Contagem, Brazil. During fiscal 2015, the Company shifted the production to its facility in Sumare, Brazil. The Company reduced headcount by approximately
20
during fiscal 2015. The Company recorded pretax employee-related costs of
$0.5 million
during fiscal 2015. As of
August 31, 2016
, the Company expects no further charges or payments and has
no
remaining accrual related to this plan as the plan is considered complete.
Fiscal 2013 Restructuring Plans
USCAN and LATAM Plans
In the fourth quarter of fiscal 2013, the Company conducted restructuring activities primarily in Mexico and Grand Junction, Tennessee to better align capacity with demand. As part of this restructuring, the Company reduced headcount in USCAN and LATAM by approximately
85
, of which the majority of reductions occurred during fiscal 2013. The Company recorded
$0.7 million
of pretax employee-related restructuring costs during fiscal 2014. In fiscal 2015, the Company had
no
remaining accrual related to the plan as it was considered complete.
During fiscal 2013, the Company initiated restructuring activities to consolidate two of its three existing leased manufacturing facilities in Brazil. In fiscal 2014, manufacturing activities at two facilities in the State of Sao Paulo, Brazil were relocated to a new facility. As a result of this consolidation, the Company reduced headcount in Brazil by approximately
55
in fiscal 2013, partially offset by the addition of approximately
35
associates at the Company's new manufacturing facility, including associate transfers and new hires. The Company recorded
$3.1 million
of pretax employee-related and other restructuring costs during fiscal 2014. Additionally, the Company recorded
$0.1 million
of accelerated depreciation included in cost of sales during fiscal 2014. In fiscal 2015, the Company had
no
accrual related to this plan and minimal cash payments occurred throughout fiscal 2016 as the plan was completed.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Restructuring Summary
The following table summarizes the activity related to the Company’s restructuring plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-related Costs
|
|
Other Costs
|
|
Translation Effect
|
|
Total Restructuring Costs
|
|
(In thousands)
|
Accrual balance as of August 31, 2014
|
1,745
|
|
|
371
|
|
|
(304
|
)
|
|
1,812
|
|
Fiscal 2015 charges
|
12,711
|
|
|
1,627
|
|
|
—
|
|
|
14,338
|
|
Fiscal 2015 payments
|
(8,670
|
)
|
|
(1,537
|
)
|
|
—
|
|
|
(10,207
|
)
|
Translation
|
—
|
|
|
—
|
|
|
(560
|
)
|
|
(560
|
)
|
Accrual balance as of August 31, 2015
|
$
|
5,786
|
|
|
$
|
461
|
|
|
$
|
(864
|
)
|
|
$
|
5,383
|
|
Fiscal 2016 charges
|
9,009
|
|
|
2,759
|
|
|
—
|
|
|
11,768
|
|
Fiscal 2016 payments
|
(10,343
|
)
|
|
(2,818
|
)
|
|
—
|
|
|
(13,161
|
)
|
Translation
|
—
|
|
|
—
|
|
|
(46
|
)
|
|
(46
|
)
|
Accrual balance as of August 31, 2016
|
$
|
4,452
|
|
|
$
|
402
|
|
|
$
|
(910
|
)
|
|
$
|
3,944
|
|
Restructuring costs are excluded from segment operating income but are attributable to the reportable segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
EMEA
|
$
|
4,568
|
|
|
$
|
10,073
|
|
|
$
|
1,000
|
|
USCAN
|
5,107
|
|
|
3,229
|
|
|
754
|
|
LATAM
|
417
|
|
|
990
|
|
|
3,053
|
|
APAC
|
312
|
|
|
46
|
|
|
76
|
|
EC
|
1,364
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
11,768
|
|
|
$
|
14,338
|
|
|
$
|
4,883
|
|
NOTE 17 — CONTINGENCIES AND CLAIMS
In the normal course of business, the Company is at times subject to pending and threatened legal actions, some for which the relief or damages sought may be substantial. Although the Company is not able to predict the outcome of such legal actions, after reviewing all pending and threatened legal actions with counsel and based on information currently available, management believes that the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the results of operations or financial position of the Company. However, it is possible that the ultimate resolution of such matters, if unfavorable, may be material to the results of operations in a particular future period as the time and amount of any resolution of such legal actions and its relationship to the future results of operations are not currently known.
Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, it is not considered probable that a liability has been incurred or not possible to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve would be recognized until that time.
Lucent Matter
As previously reported by the Company in its filings with the SEC, on June 1, 2015, the Company completed the acquisition of Citadel and its subsidiaries from certain private equity firms for
$801.6 million
. In August 2015, the Company identified quality reporting issues affecting certain product lines at two manufacturing facilities located on Lynch Road in Evansville, Indiana. Both facilities are a part of Lucent Polymers, Inc. (“Lucent”), an indirect wholly-owned subsidiary of Citadel which was acquired as part of the Citadel acquisition. Specifically, the Company discovered discrepancies between laboratory data and certifications provided by Lucent to customers with respect to certain products using recycled or reclaimed raw materials. The Company also discovered inaccuracies in materials provided by Lucent employees to an independent certification organization with respect to such products.
The Company took immediate decisive actions following its initial discoveries, including implementing protocols designed so that future shipments of products meet customer specifications and customer certification requirements, entering into discussions and exploring different certification standards with customers and other third parties. The Company has notified and is working with affected customers to deliver accurate certifications with respect to products going forward. In addition, the Company has notified and is cooperating with Underwriter Laboratories to institute necessary corrective action. As a result, the Company has reformulated and rebranded its products and ceased the use of certain tradenames associated with Citadel, which resulted in the write-off of certain finite-lived intangible assets during the fourth quarter of 2016. Reference Note 4,
Goodwill and Other Intangible Assets,
of this Annual Report on Form 10-K for additional details.
The Company also commenced an internal investigation into these matters to determine the scope of products, customers, and other parties affected. The Company’s internal investigation has revealed that the discrepancies and inaccuracies initially identified were due to practices at Lucent under its prior ownership pursuant to which Lucent falsified test results on documents provided to customers and other parties pertaining to the physical properties of certain Lucent products.
To date, no customers or other parties have initiated recalls or have made material claims against the Company. Although to date, no significant customers have terminated their relationships with the Company or its subsidiaries because of the Lucent quality matter, the matter has resulted in decreased volume and revenue, including reductions by certain significant customers.
The Company incurred the following costs related to the Lucent matter that negatively impacted the Company’s operating results for fiscal 2016:
|
|
|
|
|
|
Year Ended August 31, 2016
|
|
(In thousands)
|
Inventory rework, remediation actions, and investigative costs
|
$
|
5,423
|
|
Recurring additional costs to produce product to customer specifications
|
4,737
|
|
Total Lucent remediation costs
|
10,160
|
|
Litigation related costs
|
1,838
|
|
Total Lucent matter costs
|
$
|
11,998
|
|
As no customer or other parties have initiated recalls, or have made material claims against the Company or its subsidiaries from the date we identified this issue in August 2015 through the date of filing, we are currently unable to conclude that losses related to these matters are probable or to estimate the potential range of losses. The Company is currently unable to determine whether such issues will have any future material adverse effect on our financial position, liquidity, or results of operations.
In addition, the Company previously provided a written claim notice to the sellers and to the escrow agent with respect to the indemnity escrow established in connection with the stock purchase agreement pursuant to which the Company acquired Citadel and its subsidiaries. As of
August 31, 2016
, approximately
$31.0 million
remained in such indemnity escrow.
As Lucent was effectively acquired by Citadel in December of 2013, the Company also submitted written claim notices pursuant to the Agreement and Plan of Merger, dated December 6, 2013, among The Matrixx Group, Incorporated, LPI Merger Sub, Inc., LPI Holding Company, River Associates Investments, LLC and certain stockholders of LPI Holding Company, pursuant to which Citadel initially acquired Lucent, and pursuant to the representations and warranties insurance policy issued in connection with that acquisition.
In June 2016, the Company filed a complaint in the Delaware Chancery Court against Citadel Plastics, as well as certain funds affiliated with the sellers and other former executives of Citadel and Lucent (the “defendants”). The complaint alleges breach of contract, indemnification, breach of the implied covenant of good faith and fair dealing, fraudulent inducement, unjust enrichment and violations of blue sky laws in Illinois, Ohio, California and Indiana. All defendants are accused of civil conspiracy. The Company is seeking rescission, damages, rescissory damages, disgorgement or any other remedy deemed proper for the alleged violations as well as seeking the costs and attorneys' fees for bringing suit.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 — SHARE REPURCHASE PROGRAM
On April 3, 2014, the Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to
$55 million
of its common stock in the open market or in privately negotiated transactions, subject to market and other conditions (the “Program”). Repurchases under the Program may take place over a three-year period ending April 2, 2017, when the Program is scheduled to expire. The Program may be modified, suspended or terminated by the Company at any time and replaces the Company’s previous share repurchase program, which was authorized on April 1, 2011 and expired on March 31, 2014. The Company did not repurchase any common or special stock during fiscal 2016. The Company repurchased
109,422
shares of common stock under the Program in fiscal
2015
at an average price of
$30.46
per share for a total cost of
$3.3 million
. As of
August 31, 2016
, shares valued at
$51.7 million
remain authorized for repurchase. As a result of the financing related to the Citadel acquisition on June 1, 2015, the Company's strategic focus shifted towards repaying debt and the Board indefinitely suspended the 10b5-1plan.
In fiscal 2014, the Company repurchased
40,327
shares of common stock under the previous share repurchase program at an average price of
$27.68
per share for a total cost of
$1.1 million
. In total under the previous program, the Company acquired
2,192,612
shares at an average price of
$20.33
per share.
NOTE 19 — ASSET IMPAIRMENT
The following table summarizes the Company's asset impairment activity for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Goodwill impairment
|
$
|
360,708
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finite-lived intangible asset impairment
|
34,471
|
|
|
—
|
|
|
—
|
|
Information technology asset impairment
|
6,488
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
104
|
|
Total
|
$
|
401,667
|
|
|
$
|
—
|
|
|
$
|
104
|
|
During fiscal 2016, the Company recorded goodwill impairment of
$360.7 million
and intangible asset impairment of
$34.5 million
. See Note 4,
Goodwill and Other Intangible Assets,
of this Annual Report on Form 10-K for details.
During fiscal 2016, the Company recorded an impairment charge of
$6.5 million
related to certain software licenses that were discontinued.
NOTE 20 — DISCONTINUED OPERATIONS
The Company completed the sale of all of the fixed and intangible assets of its rotational compounding business in Australia for
$3.0 million
on September 3, 2013. The operating results for this business were previously included in the Company's Specialty Powders product family within the APAC segment.
The following summarizes select financial information included in net earnings from discontinued operations related to the Australia business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,372
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
1,861
|
|
|
$
|
(133
|
)
|
|
$
|
3,202
|
|
Fiscal 2016 includes a tax benefit of
$1.6 million
related to a worthless stock deduction relating to the discontinued business entity. Income taxes were minimal for fiscal 2015 and fiscal 2014.
During fiscal 2014, the Company recorded a gain on the sale of assets of
$3.4 million
.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 — CONSOLIDATING FINANCIAL INFORMATION
Certain of our subsidiaries have guaranteed our obligations under the
$375.0 million
outstanding principal amount of
6.875%
Senior Notes due June 2023 (the "Notes"). The following presents the condensed consolidating financial information separately for:
(i) A. Schulman Inc. (“Parent”), the issuer of the guaranteed obligations;
(ii) Guarantor subsidiaries (“Guarantors”), on a combined basis, as specified in the indentures related to the Company’s obligations under the Notes;
(iii) Non-guarantor subsidiaries (“Non-Guarantors”), on a combined basis;
(iv) Eliminations representing adjustments to (a) eliminate intercompany transactions between or among Parent, Guarantors and Non-Guarantors and (b) eliminate the investments in our subsidiaries;
(v) A. Schulman, Inc. and Subsidiaries on a consolidated basis (“Consolidated”).
Each Guarantor is 100% owned by Parent for each period presented. The Notes are fully and unconditionally guaranteed on a joint and several basis by each Guarantor. The guarantees of the Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions. Each entity in the consolidating financial information follows the same accounting policies as described in the notes to the consolidated financial statements, except for the use by Parent and Guarantors of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation. Changes in intercompany receivables and payables related to operations, such as intercompany sales or service charges, are included in cash flows from operating activities. Intercompany transactions reported as investing or financing activities include the sale of the capital stock of various subsidiaries, loans and other capital transactions between members of the consolidated group.
Certain Non-Guarantors are limited in their ability to remit funds to it by means of dividends, advances or loans due to required foreign government and/or currency exchange board approvals or limitations in credit agreements or other debt instruments of those subsidiaries.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet
|
|
August 31, 2016
|
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,260
|
|
|
$
|
—
|
|
|
$
|
35,260
|
|
Restricted cash
|
4,400
|
|
|
—
|
|
|
3,743
|
|
|
—
|
|
|
8,143
|
|
Accounts receivable, net
|
40,017
|
|
|
56,995
|
|
|
279,774
|
|
|
—
|
|
|
376,786
|
|
Accounts receivable, intercompany
|
16,245
|
|
|
9,906
|
|
|
26,839
|
|
|
(52,990
|
)
|
|
—
|
|
Inventories
|
33,702
|
|
|
41,895
|
|
|
188,020
|
|
|
—
|
|
|
263,617
|
|
Prepaid expenses and other current assets
|
6,874
|
|
|
4,006
|
|
|
29,383
|
|
|
—
|
|
|
40,263
|
|
Total current assets
|
101,238
|
|
|
112,802
|
|
|
563,019
|
|
|
(52,990
|
)
|
|
724,069
|
|
Net property, plant and equipment
|
52,653
|
|
|
77,800
|
|
|
184,369
|
|
|
—
|
|
|
314,822
|
|
Deferred charges and other noncurrent assets
|
84,705
|
|
|
4,205
|
|
|
66,038
|
|
|
(56,545
|
)
|
|
98,403
|
|
Intercompany loans receivable
|
2,593
|
|
|
33,015
|
|
|
200
|
|
|
(35,808
|
)
|
|
—
|
|
Investment in subsidiaries
|
871,441
|
|
|
245,202
|
|
|
—
|
|
|
(1,116,643
|
)
|
|
—
|
|
Goodwill
|
36,533
|
|
|
110,289
|
|
|
110,951
|
|
|
—
|
|
|
257,773
|
|
Intangible assets, net
|
30,316
|
|
|
204,026
|
|
|
128,272
|
|
|
—
|
|
|
362,614
|
|
Total assets
|
$
|
1,179,479
|
|
|
$
|
787,339
|
|
|
$
|
1,052,849
|
|
|
$
|
(1,261,986
|
)
|
|
$
|
1,757,681
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
36,671
|
|
|
$
|
36,157
|
|
|
$
|
207,232
|
|
|
$
|
—
|
|
|
$
|
280,060
|
|
Accounts payable, intercompany
|
17,886
|
|
|
20,050
|
|
|
15,054
|
|
|
(52,990
|
)
|
|
—
|
|
U.S. and foreign income taxes payable
|
1,242
|
|
|
100
|
|
|
7,643
|
|
|
—
|
|
|
8,985
|
|
Accrued payroll, taxes and related benefits
|
10,326
|
|
|
5,980
|
|
|
31,263
|
|
|
—
|
|
|
47,569
|
|
Other accrued liabilities
|
17,684
|
|
|
14,195
|
|
|
35,825
|
|
|
—
|
|
|
67,704
|
|
Short-term debt
|
13,626
|
|
|
—
|
|
|
11,821
|
|
|
—
|
|
|
25,447
|
|
Total current liabilities
|
97,435
|
|
|
76,482
|
|
|
308,838
|
|
|
(52,990
|
)
|
|
429,765
|
|
Long-term debt
|
904,683
|
|
|
—
|
|
|
24,908
|
|
|
—
|
|
|
929,591
|
|
Intercompany debt
|
—
|
|
|
200
|
|
|
35,608
|
|
|
(35,808
|
)
|
|
—
|
|
Pension plans
|
2,444
|
|
|
1,450
|
|
|
141,214
|
|
|
—
|
|
|
145,108
|
|
Deferred income taxes
|
—
|
|
|
77,507
|
|
|
38,051
|
|
|
(56,545
|
)
|
|
59,013
|
|
Other long-term liabilities
|
15,648
|
|
|
1,037
|
|
|
9,159
|
|
|
—
|
|
|
25,844
|
|
Total liabilities
|
1,020,210
|
|
|
156,676
|
|
|
557,778
|
|
|
(145,343
|
)
|
|
1,589,321
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
Convertible special stock, no par value
|
120,289
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
120,289
|
|
Common stock
|
48,510
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
48,510
|
|
Other equity
|
(9,530
|
)
|
|
630,663
|
|
|
485,980
|
|
|
(1,116,643
|
)
|
|
(9,530
|
)
|
Total A. Schulman, Inc.’s stockholders’ equity
|
159,269
|
|
|
630,663
|
|
|
485,980
|
|
|
(1,116,643
|
)
|
|
159,269
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
9,091
|
|
|
—
|
|
|
9,091
|
|
Total equity
|
159,269
|
|
|
630,663
|
|
|
495,071
|
|
|
(1,116,643
|
)
|
|
168,360
|
|
Total liabilities and equity
|
$
|
1,179,479
|
|
|
$
|
787,339
|
|
|
$
|
1,052,849
|
|
|
$
|
(1,261,986
|
)
|
|
$
|
1,757,681
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet
|
|
August 31, 2015
|
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
7,090
|
|
|
$
|
—
|
|
|
$
|
89,782
|
|
|
$
|
—
|
|
|
$
|
96,872
|
|
Accounts receivable, net
|
49,398
|
|
|
68,425
|
|
|
296,120
|
|
|
—
|
|
|
413,943
|
|
Accounts receivable, intercompany
|
57,570
|
|
|
43,064
|
|
|
11,836
|
|
|
(112,470
|
)
|
|
—
|
|
Inventories
|
47,082
|
|
|
48,998
|
|
|
221,248
|
|
|
—
|
|
|
317,328
|
|
Prepaid expenses and other current assets
|
12,629
|
|
|
13,067
|
|
|
34,509
|
|
|
—
|
|
|
60,205
|
|
Total current assets
|
173,769
|
|
|
173,554
|
|
|
653,495
|
|
|
(112,470
|
)
|
|
888,348
|
|
Net property, plant and equipment
|
55,151
|
|
|
83,907
|
|
|
175,436
|
|
|
—
|
|
|
314,494
|
|
Deferred charges and other noncurrent assets
|
27,182
|
|
|
4,288
|
|
|
59,279
|
|
|
—
|
|
|
90,749
|
|
Intercompany loans receivable
|
19,604
|
|
|
28,144
|
|
|
200
|
|
|
(47,948
|
)
|
|
—
|
|
Investment in subsidiaries
|
1,268,607
|
|
|
355,138
|
|
|
—
|
|
|
(1,623,745
|
)
|
|
—
|
|
Goodwill
|
61,558
|
|
|
313,130
|
|
|
248,895
|
|
|
—
|
|
|
623,583
|
|
Intangible assets, net
|
33,135
|
|
|
257,636
|
|
|
143,766
|
|
|
—
|
|
|
434,537
|
|
Total assets
|
$
|
1,639,006
|
|
|
$
|
1,215,797
|
|
|
$
|
1,281,071
|
|
|
$
|
(1,784,163
|
)
|
|
$
|
2,351,711
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
40,940
|
|
|
$
|
38,641
|
|
|
$
|
225,804
|
|
|
$
|
—
|
|
|
$
|
305,385
|
|
Accounts payable, intercompany
|
31,365
|
|
|
72,613
|
|
|
8,492
|
|
|
(112,470
|
)
|
|
—
|
|
U.S. and foreign income taxes payable
|
444
|
|
|
—
|
|
|
3,761
|
|
|
—
|
|
|
4,205
|
|
Accrued payroll, taxes and related benefits
|
15,235
|
|
|
5,693
|
|
|
35,264
|
|
|
—
|
|
|
56,192
|
|
Other accrued liabilities
|
17,318
|
|
|
14,544
|
|
|
38,962
|
|
|
—
|
|
|
70,824
|
|
Short-term debt
|
13,561
|
|
|
—
|
|
|
7,149
|
|
|
—
|
|
|
20,710
|
|
Total current liabilities
|
118,863
|
|
|
131,491
|
|
|
319,432
|
|
|
(112,470
|
)
|
|
457,316
|
|
Long-term debt
|
907,499
|
|
|
—
|
|
|
137,850
|
|
|
—
|
|
|
1,045,349
|
|
Intercompany debt
|
—
|
|
|
200
|
|
|
47,748
|
|
|
(47,948
|
)
|
|
—
|
|
Pension plans
|
2,377
|
|
|
1,470
|
|
|
114,042
|
|
|
—
|
|
|
117,889
|
|
Deferred income taxes
|
13,553
|
|
|
56,721
|
|
|
45,263
|
|
|
—
|
|
|
115,537
|
|
Other long-term liabilities
|
12,628
|
|
|
1,032
|
|
|
9,225
|
|
|
—
|
|
|
22,885
|
|
Total liabilities
|
1,054,920
|
|
|
190,914
|
|
|
673,560
|
|
|
(160,418
|
)
|
|
1,758,976
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Convertible special stock, no par value
|
120,289
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
120,289
|
|
Common stock
|
48,369
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
48,369
|
|
Other equity
|
415,428
|
|
|
1,024,883
|
|
|
598,862
|
|
|
(1,623,745
|
)
|
|
415,428
|
|
Total A. Schulman, Inc.’s stockholders’ equity
|
584,086
|
|
|
1,024,883
|
|
|
598,862
|
|
|
(1,623,745
|
)
|
|
584,086
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
8,649
|
|
|
—
|
|
|
8,649
|
|
Total equity
|
584,086
|
|
|
1,024,883
|
|
|
607,511
|
|
|
(1,623,745
|
)
|
|
592,735
|
|
Total liabilities and equity
|
$
|
1,639,006
|
|
|
$
|
1,215,797
|
|
|
$
|
1,281,071
|
|
|
$
|
(1,784,163
|
)
|
|
$
|
2,351,711
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating Statement of Operations
|
|
Year Ended August 31, 2016
|
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Net sales
|
$
|
322,515
|
|
|
$
|
461,295
|
|
|
$
|
1,759,401
|
|
|
$
|
(47,206
|
)
|
|
$
|
2,496,005
|
|
Cost of sales
|
262,334
|
|
|
404,004
|
|
|
1,475,953
|
|
|
(47,206
|
)
|
|
2,095,085
|
|
Selling, general and administrative expenses
|
42,608
|
|
|
69,139
|
|
|
184,978
|
|
|
—
|
|
|
296,725
|
|
Restructuring expense
|
3,885
|
|
|
2,094
|
|
|
5,789
|
|
|
—
|
|
|
11,768
|
|
Asset impairment
|
31,512
|
|
|
236,871
|
|
|
133,284
|
|
|
—
|
|
|
401,667
|
|
Operating income (loss)
|
(17,824
|
)
|
|
(250,813
|
)
|
|
(40,603
|
)
|
|
—
|
|
|
(309,240
|
)
|
Interest expense
|
48,361
|
|
|
5
|
|
|
7,840
|
|
|
(1,658
|
)
|
|
54,548
|
|
Intercompany charges
|
29
|
|
|
16
|
|
|
12,944
|
|
|
(12,989
|
)
|
|
—
|
|
Intercompany income
|
(8,337
|
)
|
|
(4,637
|
)
|
|
(15
|
)
|
|
12,989
|
|
|
—
|
|
Foreign currency transaction (gains) losses
|
3,519
|
|
|
(135
|
)
|
|
107
|
|
|
—
|
|
|
3,491
|
|
Other (income) expense, net
|
(163
|
)
|
|
(1,056
|
)
|
|
(1,213
|
)
|
|
1,658
|
|
|
(774
|
)
|
(Gain) loss on intercompany investments
|
316,066
|
|
|
122,371
|
|
|
—
|
|
|
(438,437
|
)
|
|
—
|
|
Income (loss) from continuing operations before taxes
|
(377,299
|
)
|
|
(367,377
|
)
|
|
(60,266
|
)
|
|
438,437
|
|
|
(366,505
|
)
|
Provision (benefit) for U.S. and foreign income taxes
|
(20,178
|
)
|
|
(23,707
|
)
|
|
35,245
|
|
|
—
|
|
|
(8,640
|
)
|
Income (loss) from continuing operations
|
(357,121
|
)
|
|
(343,670
|
)
|
|
(95,511
|
)
|
|
438,437
|
|
|
(357,865
|
)
|
Income (loss) from discontinued operations, net of tax
|
—
|
|
|
1,579
|
|
|
282
|
|
|
—
|
|
|
1,861
|
|
Net income (loss)
|
(357,121
|
)
|
|
(342,091
|
)
|
|
(95,229
|
)
|
|
438,437
|
|
|
(356,004
|
)
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
(1,118
|
)
|
|
—
|
|
|
(1,118
|
)
|
Net income (loss) attributable to A. Schulman, Inc.
|
(357,121
|
)
|
|
(342,091
|
)
|
|
(96,347
|
)
|
|
438,437
|
|
|
(357,122
|
)
|
Convertible special stock dividends
|
7,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,500
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
(364,621
|
)
|
|
$
|
(342,091
|
)
|
|
$
|
(96,347
|
)
|
|
$
|
438,437
|
|
|
$
|
(364,622
|
)
|
Comprehensive income (loss)
|
$
|
(394,383
|
)
|
|
$
|
(340,609
|
)
|
|
$
|
(133,350
|
)
|
|
$
|
474,401
|
|
|
$
|
(393,941
|
)
|
Less: comprehensive income (loss) attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
442
|
|
|
—
|
|
|
442
|
|
Comprehensive income (loss) attributable to A. Schulman, Inc.
|
$
|
(394,383
|
)
|
|
$
|
(340,609
|
)
|
|
$
|
(133,792
|
)
|
|
$
|
474,401
|
|
|
$
|
(394,383
|
)
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating Statement of Operations
|
|
Year Ended August 31, 2015
|
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Net sales
|
$
|
394,116
|
|
|
$
|
218,081
|
|
|
$
|
1,818,184
|
|
|
$
|
(38,156
|
)
|
|
$
|
2,392,225
|
|
Cost of sales
|
329,324
|
|
|
189,439
|
|
|
1,550,608
|
|
|
(38,156
|
)
|
|
2,031,215
|
|
Selling, general and administrative expenses
|
57,711
|
|
|
37,391
|
|
|
181,142
|
|
|
—
|
|
|
276,244
|
|
Restructuring expense
|
2,367
|
|
|
290
|
|
|
11,681
|
|
|
—
|
|
|
14,338
|
|
Operating income (loss)
|
4,714
|
|
|
(9,039
|
)
|
|
74,753
|
|
|
—
|
|
|
70,428
|
|
Interest expense
|
18,352
|
|
|
2
|
|
|
5,734
|
|
|
(1,475
|
)
|
|
22,613
|
|
Bridge financing fees
|
18,750
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,750
|
|
Intercompany charges
|
14
|
|
|
38
|
|
|
7,379
|
|
|
(7,431
|
)
|
|
—
|
|
Intercompany income
|
(6,201
|
)
|
|
(1,225
|
)
|
|
(5
|
)
|
|
7,431
|
|
|
—
|
|
Foreign currency transaction (gains) losses
|
1,819
|
|
|
(172
|
)
|
|
1,716
|
|
|
—
|
|
|
3,363
|
|
Other (income) expense, net
|
(1,436
|
)
|
|
(563
|
)
|
|
(914
|
)
|
|
1,475
|
|
|
(1,438
|
)
|
(Gain) loss on intercompany investments
|
(37,382
|
)
|
|
9,424
|
|
|
—
|
|
|
27,958
|
|
|
—
|
|
Gain on early extinguishment of debt
|
—
|
|
|
—
|
|
|
(1,290
|
)
|
|
—
|
|
|
(1,290
|
)
|
Income (loss) from continuing operations before taxes
|
10,798
|
|
|
(16,543
|
)
|
|
62,133
|
|
|
(27,958
|
)
|
|
28,430
|
|
Provision (benefit) for U.S. and foreign income taxes
|
(15,831
|
)
|
|
(2,704
|
)
|
|
19,034
|
|
|
—
|
|
|
499
|
|
Income (loss) from continuing operations
|
26,629
|
|
|
(13,839
|
)
|
|
43,099
|
|
|
(27,958
|
)
|
|
27,931
|
|
Income (loss) from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
(133
|
)
|
|
—
|
|
|
(133
|
)
|
Net income (loss)
|
26,629
|
|
|
(13,839
|
)
|
|
42,966
|
|
|
(27,958
|
)
|
|
27,798
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
(1,169
|
)
|
|
—
|
|
|
(1,169
|
)
|
Net income (loss) attributable to A. Schulman, Inc.
|
26,629
|
|
|
(13,839
|
)
|
|
41,797
|
|
|
(27,958
|
)
|
|
26,629
|
|
Convertible special stock dividends
|
2,438
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,438
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
24,191
|
|
|
$
|
(13,839
|
)
|
|
$
|
41,797
|
|
|
$
|
(27,958
|
)
|
|
$
|
24,191
|
|
Comprehensive income (loss)
|
$
|
(40,140
|
)
|
|
$
|
(25,698
|
)
|
|
$
|
(28,731
|
)
|
|
$
|
55,420
|
|
|
$
|
(39,149
|
)
|
Less: comprehensive income (loss) attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
991
|
|
|
—
|
|
|
991
|
|
Comprehensive income (loss) attributable to A. Schulman, Inc.
|
$
|
(40,140
|
)
|
|
$
|
(25,698
|
)
|
|
$
|
(29,722
|
)
|
|
$
|
55,420
|
|
|
$
|
(40,140
|
)
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating Statement of Operations
|
|
Year Ended August 31, 2014
|
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Net sales
|
$
|
353,762
|
|
|
$
|
87,788
|
|
|
$
|
2,037,236
|
|
|
$
|
(31,788
|
)
|
|
$
|
2,446,998
|
|
Cost of sales
|
301,618
|
|
|
77,828
|
|
|
1,769,332
|
|
|
(31,788
|
)
|
|
2,116,990
|
|
Selling, general and administrative expenses
|
43,304
|
|
|
13,645
|
|
|
185,751
|
|
|
—
|
|
|
242,700
|
|
Restructuring expense
|
691
|
|
|
64
|
|
|
4,128
|
|
|
—
|
|
|
4,883
|
|
Asset impairment
|
—
|
|
|
—
|
|
|
104
|
|
|
—
|
|
|
104
|
|
Operating income (loss)
|
8,149
|
|
|
(3,749
|
)
|
|
77,921
|
|
|
—
|
|
|
82,321
|
|
Interest expense
|
5,039
|
|
|
—
|
|
|
4,693
|
|
|
(1,229
|
)
|
|
8,503
|
|
Intercompany charges
|
—
|
|
|
—
|
|
|
6,747
|
|
|
(6,747
|
)
|
|
—
|
|
Intercompany income
|
(6,747
|
)
|
|
—
|
|
|
—
|
|
|
6,747
|
|
|
—
|
|
Foreign currency transaction (gains) losses
|
1,738
|
|
|
—
|
|
|
468
|
|
|
—
|
|
|
2,206
|
|
Other (income) expense, net
|
(1,006
|
)
|
|
(59
|
)
|
|
(884
|
)
|
|
1,229
|
|
|
(720
|
)
|
(Gain) loss on intercompany investments
|
(47,543
|
)
|
|
7,910
|
|
|
—
|
|
|
39,633
|
|
|
—
|
|
Income (loss) from continuing operations before taxes
|
56,668
|
|
|
(11,600
|
)
|
|
66,897
|
|
|
(39,633
|
)
|
|
72,332
|
|
Provision (benefit) for U.S. and foreign income taxes
|
475
|
|
|
651
|
|
|
17,416
|
|
|
—
|
|
|
18,542
|
|
Income (loss) from continuing operations
|
56,193
|
|
|
(12,251
|
)
|
|
49,481
|
|
|
(39,633
|
)
|
|
53,790
|
|
Income (loss) from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
3,202
|
|
|
—
|
|
|
3,202
|
|
Net income (loss)
|
56,193
|
|
|
(12,251
|
)
|
|
52,683
|
|
|
(39,633
|
)
|
|
56,992
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
(799
|
)
|
|
—
|
|
|
(799
|
)
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
56,193
|
|
|
$
|
(12,251
|
)
|
|
$
|
51,884
|
|
|
$
|
(39,633
|
)
|
|
$
|
56,193
|
|
Comprehensive income (loss)
|
$
|
38,820
|
|
|
$
|
(10,596
|
)
|
|
$
|
36,415
|
|
|
$
|
(25,107
|
)
|
|
$
|
39,532
|
|
Less: comprehensive income (loss) attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
712
|
|
|
—
|
|
|
712
|
|
Comprehensive income (loss) attributable to A. Schulman, Inc.
|
$
|
38,820
|
|
|
$
|
(10,596
|
)
|
|
$
|
35,703
|
|
|
$
|
(25,107
|
)
|
|
$
|
38,820
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
Year Ended August 31, 2016
|
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Operating from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) operating activities
|
$
|
31,297
|
|
|
$
|
7,650
|
|
|
$
|
109,936
|
|
|
$
|
(756
|
)
|
|
$
|
148,127
|
|
Investing from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant and equipment
|
(9,877
|
)
|
|
(7,882
|
)
|
|
(33,479
|
)
|
|
—
|
|
|
(51,238
|
)
|
Proceeds from the sale of assets
|
300
|
|
|
232
|
|
|
834
|
|
|
—
|
|
|
1,366
|
|
Intercompany investments
|
(140
|
)
|
|
—
|
|
|
—
|
|
|
140
|
|
|
—
|
|
Restricted cash
|
(4,400
|
)
|
|
—
|
|
|
(3,743
|
)
|
|
—
|
|
|
(8,143
|
)
|
Net cash provided from (used in) investing activities
|
(14,117
|
)
|
|
(7,650
|
)
|
|
(36,388
|
)
|
|
140
|
|
|
(58,015
|
)
|
Financing from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Cash dividends paid to common stockholders
|
(24,029
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,029
|
)
|
Cash dividends paid to special stockholders
|
(7,500
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,500
|
)
|
Intercompany dividends paid
|
—
|
|
|
—
|
|
|
(756
|
)
|
|
756
|
|
|
—
|
|
Increase (decrease) in short-term debt
|
—
|
|
|
—
|
|
|
2,945
|
|
|
—
|
|
|
2,945
|
|
Borrowings on long-term debt
|
164,500
|
|
|
—
|
|
|
79,731
|
|
|
—
|
|
|
244,231
|
|
Repayments on long-term debt including current portion
|
(167,441
|
)
|
|
—
|
|
|
(194,561
|
)
|
|
—
|
|
|
(362,002
|
)
|
Intercompany loan borrowings (repayments)
|
11,081
|
|
|
—
|
|
|
(11,081
|
)
|
|
—
|
|
|
—
|
|
Issuances of common stock, common and treasury
|
258
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
258
|
|
Redemptions of common stock
|
(1,139
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,139
|
)
|
Intercompany equity contributions received
|
—
|
|
|
—
|
|
|
140
|
|
|
(140
|
)
|
|
—
|
|
Net cash provided from (used in) financing activities
|
(24,270
|
)
|
|
—
|
|
|
(123,582
|
)
|
|
616
|
|
|
(147,236
|
)
|
Effect of exchange rate changes on cash
|
—
|
|
|
—
|
|
|
(4,488
|
)
|
|
—
|
|
|
(4,488
|
)
|
Net increase (decrease) in cash and cash equivalents
|
(7,090
|
)
|
|
—
|
|
|
(54,522
|
)
|
|
—
|
|
|
(61,612
|
)
|
Cash and cash equivalents at beginning of year
|
7,090
|
|
|
—
|
|
|
89,782
|
|
|
—
|
|
|
96,872
|
|
Cash and cash equivalents at end of year
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,260
|
|
|
$
|
—
|
|
|
$
|
35,260
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
Year Ended August 31, 2015
|
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Operating from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) operating activities
|
$
|
125,104
|
|
|
$
|
3,159
|
|
|
$
|
51,102
|
|
|
$
|
(119,195
|
)
|
|
$
|
60,170
|
|
Investing from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant and equipment
|
(6,818
|
)
|
|
(2,467
|
)
|
|
(33,302
|
)
|
|
—
|
|
|
(42,587
|
)
|
Proceeds from the sale of assets
|
293
|
|
|
23
|
|
|
1,669
|
|
|
—
|
|
|
1,985
|
|
Investment in equity investees
|
—
|
|
|
—
|
|
|
(12,456
|
)
|
|
—
|
|
|
(12,456
|
)
|
Business acquisitions, net of cash
|
(801,560
|
)
|
|
—
|
|
|
(6,698
|
)
|
|
—
|
|
|
(808,258
|
)
|
Net cash provided from (used in) investing activities
|
(808,085
|
)
|
|
(2,444
|
)
|
|
(50,787
|
)
|
|
—
|
|
|
(861,316
|
)
|
Financing from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Cash dividends paid to common stockholders
|
(24,024
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,024
|
)
|
Cash dividends paid to special stockholders
|
(1,813
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,813
|
)
|
Intercompany dividends paid
|
—
|
|
|
—
|
|
|
(119,195
|
)
|
|
119,195
|
|
|
—
|
|
Increase (decrease) in short-term debt
|
(11,617
|
)
|
|
—
|
|
|
2,858
|
|
|
—
|
|
|
(8,759
|
)
|
Borrowings on long-term debt
|
1,095,000
|
|
|
—
|
|
|
335,513
|
|
|
—
|
|
|
1,430,513
|
|
Repayments on long-term debt including current portion
|
(469,400
|
)
|
|
—
|
|
|
(244,317
|
)
|
|
—
|
|
|
(713,717
|
)
|
Payment of debt issuance costs
|
(15,007
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,007
|
)
|
Noncontrolling interests' contributions (distributions)
|
—
|
|
|
—
|
|
|
(1,750
|
)
|
|
—
|
|
|
(1,750
|
)
|
Tax windfall related to share-based incentive compensation
|
506
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
506
|
|
Issuances of common stock, common and treasury
|
289
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
289
|
|
Issuances of convertible special stock, net
|
120,289
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
120,289
|
|
Redemptions of common stock
|
(4,999
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,999
|
)
|
Purchases of treasury stock
|
(3,335
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,335
|
)
|
Net cash provided from (used in) financing activities
|
685,889
|
|
|
—
|
|
|
(26,891
|
)
|
|
119,195
|
|
|
778,193
|
|
Effect of exchange rate changes on cash
|
—
|
|
|
—
|
|
|
(15,668
|
)
|
|
—
|
|
|
(15,668
|
)
|
Net increase (decrease) in cash and cash equivalents
|
2,908
|
|
|
715
|
|
|
(42,244
|
)
|
|
—
|
|
|
(38,621
|
)
|
Cash and cash equivalents at beginning of year
|
4,182
|
|
|
(715
|
)
|
|
132,026
|
|
|
—
|
|
|
135,493
|
|
Cash and cash equivalents at end of year
|
$
|
7,090
|
|
|
$
|
—
|
|
|
$
|
89,782
|
|
|
$
|
—
|
|
|
$
|
96,872
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
Year Ended August 31, 2014
|
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Operating from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) operating activities
|
$
|
36,003
|
|
|
$
|
(157
|
)
|
|
$
|
94,370
|
|
|
$
|
(17,074
|
)
|
|
$
|
113,142
|
|
Investing from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant and equipment
|
(6,919
|
)
|
|
(565
|
)
|
|
(27,605
|
)
|
|
—
|
|
|
(35,089
|
)
|
Proceeds from the sale of assets
|
564
|
|
|
191
|
|
|
5,249
|
|
|
—
|
|
|
6,004
|
|
Intercompany investments
|
(27,252
|
)
|
|
(13,000
|
)
|
|
—
|
|
|
40,252
|
|
|
—
|
|
Business acquisitions, net of cash
|
(138,325
|
)
|
|
—
|
|
|
(68,300
|
)
|
|
—
|
|
|
(206,625
|
)
|
Net cash provided from (used in) investing activities
|
(171,932
|
)
|
|
(13,374
|
)
|
|
(90,656
|
)
|
|
40,252
|
|
|
(235,710
|
)
|
Financing from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Cash dividends paid to common stockholders
|
(23,665
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23,665
|
)
|
Intercompany dividends paid
|
—
|
|
|
—
|
|
|
(17,074
|
)
|
|
17,074
|
|
|
—
|
|
Increase (decrease) in short-term debt
|
15,114
|
|
|
—
|
|
|
(1,340
|
)
|
|
—
|
|
|
13,774
|
|
Borrowings on long-term debt
|
660,350
|
|
|
—
|
|
|
135,395
|
|
|
—
|
|
|
795,745
|
|
Repayments on long-term debt including current portion
|
(518,499
|
)
|
|
—
|
|
|
(135,395
|
)
|
|
—
|
|
|
(653,894
|
)
|
Payment of debt issuance costs
|
(1,782
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,782
|
)
|
Intercompany loan borrowings (repayments)
|
3,000
|
|
|
—
|
|
|
(3,000
|
)
|
|
—
|
|
|
—
|
|
Noncontrolling interests' contributions (distributions)
|
—
|
|
|
—
|
|
|
600
|
|
|
—
|
|
|
600
|
|
Issuances of common stock, common and treasury
|
487
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
487
|
|
Redemptions of common stock
|
(361
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(361
|
)
|
Intercompany equity contributions received
|
—
|
|
|
13,000
|
|
|
27,252
|
|
|
(40,252
|
)
|
|
—
|
|
Purchases of treasury stock
|
(1,116
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,116
|
)
|
Net cash provided from (used in) financing activities
|
133,528
|
|
|
13,000
|
|
|
6,438
|
|
|
(23,178
|
)
|
|
129,788
|
|
Effect of exchange rate changes on cash
|
—
|
|
|
—
|
|
|
(5,781
|
)
|
|
—
|
|
|
(5,781
|
)
|
Net increase (decrease) in cash and cash equivalents
|
(2,401
|
)
|
|
(531
|
)
|
|
4,371
|
|
|
—
|
|
|
1,439
|
|
Cash and cash equivalents at beginning of year
|
6,583
|
|
|
(184
|
)
|
|
127,655
|
|
|
—
|
|
|
134,054
|
|
Cash and cash equivalents at end of year
|
$
|
4,182
|
|
|
$
|
(715
|
)
|
|
$
|
132,026
|
|
|
$
|
—
|
|
|
$
|
135,493
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 — QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Year Ended
|
|
Nov 30,
2015
|
|
Feb 29,
2016
|
|
May 31,
2016
|
|
Aug 31,
2016
|
|
Aug 31,
2016
|
|
Unaudited
|
|
(In thousands, except per share data)
|
Net sales
|
$
|
649,219
|
|
|
$
|
591,761
|
|
|
$
|
650,439
|
|
|
$
|
604,586
|
|
|
$
|
2,496,005
|
|
Gross profit
|
$
|
104,929
|
|
|
$
|
89,824
|
|
|
$
|
109,474
|
|
|
$
|
96,693
|
|
|
$
|
400,920
|
|
Income (loss) from continuing operations
|
$
|
7,477
|
|
|
$
|
1,841
|
|
|
$
|
17,556
|
|
|
$
|
(384,739
|
)
|
|
$
|
(357,865
|
)
|
Income (loss) from discontinued operations, net of tax
|
20
|
|
|
181
|
|
|
82
|
|
|
1,578
|
|
|
1,861
|
|
Net income (loss)
|
7,497
|
|
|
2,022
|
|
|
17,638
|
|
|
(383,161
|
)
|
|
(356,004
|
)
|
Noncontrolling interests
|
(404
|
)
|
|
(430
|
)
|
|
(241
|
)
|
|
(43
|
)
|
|
(1,118
|
)
|
Net income (loss) attributable to A. Schulman, Inc.
|
7,093
|
|
|
1,592
|
|
|
17,397
|
|
|
(383,204
|
)
|
|
(357,122
|
)
|
Convertible special stock dividends
|
1,875
|
|
|
1,875
|
|
|
1,875
|
|
|
1,875
|
|
|
7,500
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
5,218
|
|
|
$
|
(283
|
)
|
|
$
|
15,522
|
|
|
$
|
(385,079
|
)
|
|
$
|
(364,622
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share available to A. Schulman, Inc.
common stockholders
(a)
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
0.18
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.53
|
|
|
$
|
(13.18
|
)
|
|
$
|
(12.51
|
)
|
Income (loss) from discontinued operations
|
—
|
|
|
0.01
|
|
|
—
|
|
|
0.06
|
|
|
0.07
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
0.18
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.53
|
|
|
$
|
(13.12
|
)
|
|
$
|
(12.44
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share available to A. Schulman, Inc.
common stockholders
(a)
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
0.18
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.53
|
|
|
$
|
(13.18
|
)
|
|
$
|
(12.51
|
)
|
Income (loss) from discontinued operations
|
—
|
|
|
0.01
|
|
|
—
|
|
|
0.06
|
|
|
0.07
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
0.18
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.53
|
|
|
$
|
(13.12
|
)
|
|
$
|
(12.44
|
)
|
|
|
|
|
|
|
|
|
|
|
Certain items included in income (loss) from continuing operations, net of tax are as follows:
|
Accelerated depreciation
(b)
|
$
|
1,047
|
|
|
$
|
1,578
|
|
|
$
|
1,043
|
|
|
$
|
1,221
|
|
|
$
|
4,889
|
|
Costs related to acquisitions and integrations
(c)
|
1,344
|
|
|
3,239
|
|
|
1,208
|
|
|
1,020
|
|
|
6,811
|
|
Accelerated amortization of deferred financing fees
(d)
|
79
|
|
|
126
|
|
|
129
|
|
|
131
|
|
|
465
|
|
Restructuring and related costs
(e)
|
3,576
|
|
|
4,653
|
|
|
7,630
|
|
|
6,254
|
|
|
22,113
|
|
CEO transition costs
(f)
|
—
|
|
|
—
|
|
|
—
|
|
|
2,634
|
|
|
2,634
|
|
Lucent costs
(g)
|
2,669
|
|
|
560
|
|
|
1,566
|
|
|
832
|
|
|
5,627
|
|
Asset impairments
(h)
|
—
|
|
|
—
|
|
|
—
|
|
|
311,292
|
|
|
311,292
|
|
Total
|
$
|
8,715
|
|
|
$
|
10,156
|
|
|
$
|
11,576
|
|
|
$
|
323,384
|
|
|
$
|
353,831
|
|
|
|
(a)
|
The sum of the four quarters does not equal the earnings per share amount calculated for the year due to rounding.
|
|
|
(b)
|
Relates to accelerated depreciation in the Company's USCAN and EMEA segments. Please refer to Note 14,
Segment Information,
of this Annual Report on Form 10-K for further discussion.
|
|
|
(c)
|
Costs related to acquisitions and integrations primarily include professional, legal, IT and other expenses associated with successful and unsuccessful full or partial acquisition and divestiture/dissolution transactions, as well as certain employee-related expenses such as travel, bonuses and post-acquisition severance separate from a formal restructuring plan.
|
|
|
(d)
|
Write-off of deferred financing costs related to the
€108.6 million
prepayment of the Euro Term Loan B.
|
|
|
(e)
|
Restructuring and related costs include items such as employee severance charges, lease termination charges, curtailment gains/losses, other employee termination costs, and professional fees related to the reorganization of the Company’s legal entity structure and facility operations. Refer to Note 16,
Restructuring,
of this Annual Report on Form 10-K for further discussion.
|
|
|
(f)
|
CEO transition costs represent charges for deferred compensation granted to Bernard Rzepka.
|
|
|
(g)
|
Lucent costs primarily represent legal and investigation costs related to resolving the Lucent matter, product manufacturing costs for reworking existing Lucent inventory, obsolete Lucent inventory reserve costs, and dedicated internal personnel costs that would have otherwise been focused on normal operations.
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(h)
|
Asset Impairments primarily relate to the write down of goodwill, intangible assets and information technology assets. Please refer to Note 19,
Asset Impairment,
of this Annual Report on Form 10-K for further discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Year Ended
|
|
Nov 30,
2014
|
|
Feb 28,
2015
|
|
May 31,
2015
|
|
Aug 31,
2015
|
|
Aug 31,
2015
|
|
Unaudited
|
|
(In thousands, except per share data)
|
Net sales
|
$
|
615,053
|
|
|
$
|
542,295
|
|
|
$
|
560,858
|
|
|
$
|
674,019
|
|
|
$
|
2,392,225
|
|
Gross profit
|
$
|
86,844
|
|
|
$
|
78,074
|
|
|
$
|
90,757
|
|
|
$
|
105,335
|
|
|
$
|
361,010
|
|
Income (loss) from continuing operations
|
$
|
13,388
|
|
|
$
|
(503
|
)
|
|
$
|
(8,968
|
)
|
|
$
|
24,014
|
|
|
$
|
27,931
|
|
Income (loss) from discontinued operations, net of tax
|
(10
|
)
|
|
(58
|
)
|
|
(18
|
)
|
|
(47
|
)
|
|
(133
|
)
|
Net income (loss)
|
13,378
|
|
|
(561
|
)
|
|
(8,986
|
)
|
|
23,967
|
|
|
27,798
|
|
Noncontrolling interests
|
(220
|
)
|
|
(327
|
)
|
|
(343
|
)
|
|
(279
|
)
|
|
(1,169
|
)
|
Net income (loss) attributable to A. Schulman, Inc.
|
$
|
13,158
|
|
|
$
|
(888
|
)
|
|
$
|
(9,329
|
)
|
|
$
|
23,688
|
|
|
$
|
26,629
|
|
Convertible special stock dividends
|
—
|
|
|
—
|
|
|
(563
|
)
|
|
(1,875
|
)
|
|
(2,438
|
)
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
13,158
|
|
|
$
|
(888
|
)
|
|
$
|
(9,892
|
)
|
|
$
|
21,813
|
|
|
$
|
24,191
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share available to A. Schulman, Inc. common stockholders
(i)
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
0.45
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
0.75
|
|
|
$
|
0.83
|
|
Income (loss) from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
0.45
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
0.75
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to A. Schulman, Inc. common stockholders
(i)
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
0.45
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
0.75
|
|
|
$
|
0.83
|
|
Income (loss) from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
0.45
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
0.74
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
Certain items included in income (loss) from continuing operations, net of tax are as follows:
|
Accelerated depreciation
(j)
|
$
|
—
|
|
|
$
|
298
|
|
|
$
|
29
|
|
|
$
|
53
|
|
|
$
|
380
|
|
Costs related to acquisitions and integrations
(k)
|
976
|
|
|
3,135
|
|
|
3,561
|
|
|
9,200
|
|
|
16,872
|
|
Acquisition related interest expense
(l)
|
—
|
|
|
—
|
|
|
19,134
|
|
|
1,190
|
|
|
20,324
|
|
Restructuring and related costs
(m)
|
4,096
|
|
|
3,260
|
|
|
4,793
|
|
|
6,927
|
|
|
19,076
|
|
CEO transition costs
(n)
|
—
|
|
|
6,167
|
|
|
—
|
|
|
—
|
|
|
6,167
|
|
Inventory step-up
(o)
|
239
|
|
|
—
|
|
|
—
|
|
|
2,631
|
|
|
2,870
|
|
Gain on early extinguishment of debt
(p)
|
—
|
|
|
(863
|
)
|
|
—
|
|
|
—
|
|
|
(863
|
)
|
Total
|
$
|
5,311
|
|
|
$
|
11,997
|
|
|
$
|
27,517
|
|
|
$
|
20,001
|
|
|
$
|
64,826
|
|
|
|
(i)
|
The sum of the four quarters does not equal the earnings per share amount calculated for the year due to rounding.
|
|
|
(j)
|
Relates to accelerated depreciation in the U.S., France and Brazil.
|
|
|
(k)
|
Costs related to acquisitions include professional, legal and other expenses associated with the Citadel acquisition, along with other potential acquisitions.
|
|
|
(l)
|
Primarily relates to bridge financing fees and the write-off of deferred debt costs of
$18.8 million
and
$1.5 million
, respectively. Refer to Note 5,
Long-Term Debt and Credit Arrangements,
of this Annual Report on Form 10-K for further discussion.
|
|
|
(m)
|
Restructuring and related costs include items such as employee severance charges, lease termination charges, curtailment gains/losses, other employee termination costs, and professional fees related to the reorganization of the Company’s legal entity structure and facility operations.
|
|
|
(n)
|
CEO transition costs represent a charge for the modification and accelerated vesting upon retirement of the outstanding equity compensation awards granted to Joseph M. Gingo in 2013 and 2014. Refer to Note 11,
Share-Based Incentive Compensation Plans,
of this Annual Report on Form 10-K for further discussion.
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(o)
|
Inventory step-up relates to the fiscal 2015 acquisition noted above.
|
|
|
(p)
|
Represents a pre-tax net gain on the early extinguishment of debt. Refer to Note 5,
Long-Term Debt and Credit Arrangements,
of this Annual Report on Form 10-K for further discussion.
|
NOTE 23 — SUBSEQUENT EVENTS
On October 3, 2016, the Company announced Joseph J. Levanduski will be stepping down as Executive Vice President and Chief Financial Officer on October 31, 2016. He will be succeeded by John W. Richardson, who has joined the Company initially as Executive Vice President - Finance.