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|
|
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, 2017
.
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 restructuring and related expenses, acquisitions and integration, asset impairments and asset write-downs, which are considered relevant to aid analysis and understanding of the Company’s results and business trends. The Company believes that operating income before certain items is a useful measure to investors and management in understanding current profitability levels that may serve as a basis for evaluating future performance. In addition, operating income before certain items is important to management as it is a component of the Company's annual and long-term employee incentive compensation plans.
|
|
|
•
|
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.
The Chief Operating Decision Maker 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
4,900
employees and
54
manufacturing facilities worldwide. Globally, the Company operates in three product families: Engineered Composites, Custom Concentrates and Services, and Performance Materials.
Key Trends, Developments and Challenges
The following represent the Company’s key trends, developments and challenges as we work toward our goal of providing attractive returns for all of our stakeholders while positioning the Company for further growth:
|
|
•
|
Simplify Management Structure and Business Processing.
In fiscal 2017, the Company opportunistically restructured its business by reducing the number of product families from six to three while also simplifying customer relations. This reorganization has and will continue to facilitate more effective cross-selling by maintaining a single voice to service our valued customers.
|
|
|
•
|
Reinvigorate Innovation Process.
We are dedicated to the development of new, higher-margin products and applications in our five global Innovation and Collaboration Centers that optimize the appearance, performance, and processing of plastics to meet our customers’ specifications. During fiscal 2017, the Company reinvigorated its innovation process through quarterly product innovation reviews and an emphasis on cross-regional technology transfers to drive efficiency. Through the creation of a disciplined approach to the stage gate product development process, the Company seeks to drive global product family innovation.
|
|
|
•
|
Strengthen Sales.
We are committed to driving sales growth through the simplified management structure and new product innovation discussed above. In an effort to support these activities, the Company enhanced its performance-based incentive program for sales associates and is providing ongoing coaching and development to the sales organization. The implementation of new tools and technologies will facilitate ongoing pricing discipline.
|
|
|
•
|
Optimize Operations.
Focusing on continuous improvement and tracking of key operational performance metrics in the Company’s manufacturing facilities, the organization identifies opportunities for improvement and effectively optimizes its performance.
|
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, including its indirect wholly owned subsidiary Lucent Polymers, Inc. In August 2015, the Company discovered discrepancies between laboratory data and certifications provided by Lucent to customers and also discovered inaccuracies in materials and information provided by Lucent employees to an independent certification organization. The Company took immediate decisive actions following its initial discoveries, including, but not limited to, remediation measures, notifications to affected customers, and notification to Underwriter Laboratories. The Company also commenced an internal investigation, which revealed that the discrepancies and inaccuracies initially identified were due to practices at Lucent under its prior ownership. 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 impairment of certain finite-lived intangible assets during the fourth quarter of fiscal 2016. In addition, the Engineered Plastics business, which is now part of the Performance Materials product family, did not meet volume and revenue expectations in fiscal 2016 and the product had lower margins than planned due primarily to the remediation and changes in business practices undertaken to address the Lucent quality matter. The deterioration of results due to the aforementioned factors and economic conditions soon after the acquisition resulted in the impairment of the acquired goodwill during the fourth quarter of fiscal 2016. For a discussion of the goodwill and intangible asset impairments, refer to Note 4,
Goodwill and Other Intangible Assets
, of this Annual Report on Form 10-K for details.
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:
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Inventory rework, remediation actions, and investigative costs
|
$
|
250
|
|
|
$
|
5,423
|
|
Recurring additional costs to produce product to customer specifications
|
3,756
|
|
|
4,737
|
|
Total Lucent remediation costs
|
4,006
|
|
|
10,160
|
|
Litigation related costs
|
5,716
|
|
|
1,838
|
|
Total Lucent matter costs
|
$
|
9,722
|
|
|
$
|
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 recalls or claims 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, 2017
, approximately
$31.0 million
remained in such indemnity escrow.
As Lucent was effectively acquired by Citadel in December 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. The Company also submitted written claim notices pursuant to a
$3.8 million
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 Holdings, LLC (the “Citadel Complaint”), as well as certain funds affiliated with the sellers and other former executives of Citadel and Lucent (the “Citadel Defendants”). In January 2017, the Court denied the defendants motion to dismiss seventeen of twenty claims. The Court's ruling sustained claims for breach of contract, fraudulent inducement, civil conspiracy and violations of blue sky laws in Illinois, Ohio, California and Indiana. On February 16, 2017, the Court entered a stipulated order establishing an equitable lien over all pre-closing tax refunds paid by the Company to Citadel Plastics Holdings, LLC under the stock purchase agreement until resolution of litigation. The funds are currently subject to the equitable lien are
$7.5 million
. The Company is seeking rescission, damages, rescissory damages, disgorgement or any other remedy deemed proper for the alleged violations as well as seeking attorneys’ fees for bringing suit.
In November 2016, the Company, through its Matrixx subsidiary, filed a separate Complaint in the Delaware Chancery Court against River Associates (the “River Complaint”), as well as certain funds affiliated with the sellers and other former executives of Lucent (the “River Defendants”). In general, the River Complaint alleges similar theories (except securities violations) and seeks similar relief (except rescission) and the River Defendants filed a similar motion to dismiss as in the Citadel litigation. On August 23, 2017, the Court ruled on River Defendants’ Motions to Dismiss and Motions for Summary Judgment. The Court dismissed certain claims pertaining to one Defendant and all other motions to dismiss parties or claims were denied. In addition, the Court ruled against the Citadel Defendants’ Motions to (in effect) combine the Citadel Holdings litigation with the River litigation. Therefore, the River litigation will proceed as a separate lawsuit on a schedule months behind the Citadel Holdings Litigation.
There are ongoing parallel investigations being undertaken by the United States Attorneys' Office for the Southern District of Indiana ("USAO") and the SEC that we understand relate to the allegations made by the Company in the Citadel Complaint arising out of the Company's acquisition of Citadel (including Citadel's subsidiary, Lucent). On September 6, 2017, the Federal Bureau of Investigation, Indianapolis division, notified the Company's counsel that the Company was a potential victim of a crime. We are cooperating fully with the USAO and the SEC in their investigations.
Significant Events
The following items represent significant events during fiscal year
2017
:
|
|
1.
|
EC Expansion.
In October 2016, the Company announced plans to expand its EC operations in EMEA. The Company is expanding its compounding capacity with the addition of a new sheet molding compound production line in Germany. The new $4.5 million line will be operational by the end of calendar year 2017. The new production line will allow the Company to produce its entire range of glass and carbon fiber sheet molding compounds in Europe, including its Quantum Engineered Structural Composites® portfolio.
|
|
|
2.
|
USCAN Distribution Center Expansion.
In February 2017, the Company announced it will open a distribution center at its idle Stryker, Ohio plant to serve customers located in Indiana, Illinois, Michigan, Ohio and Wisconsin. This is an extension to the Company's existing distribution services business in order to address the needs of the local market. The Stryker distribution center commenced operations during the fourth quarter of fiscal 2017.
|
|
|
3.
|
CFO Transition.
On November 1, 2016, John W. Richardson was appointed as the Company’s Executive Vice President and Chief Financial Officer, succeeding Joseph J. Levanduski. Mr. Richardson had most recently served as Chief Financial Officer for Qwest Communications International. Prior to that, Mr. Richardson served in progressively senior financial roles at The Goodyear Tire & Rubber Company, including Vice President - Corporate Finance and Chief Accounting Officer, and as Chairman and General Manager of the company's British subsidiary, spanning a 35-year career at Goodyear.
|
|
|
4.
|
Chief Commercial Officer.
On December 14, 2016, Gary Phillips was appointed as the Company's Chief Commercial Officer. In this capacity, Mr. Phillips' newly created organization will work closely with all of the critical stakeholders, in order to build a customer centric, growth oriented sales culture. Mr. Phillips' ability to create impactful relationships with colleagues and customers alike will be critical to the Company's success in reinvigorating its growth plan. Prior to joining A. Schulman, Mr. Phillips served as the Vice President and General Manager of Comcast Cable in West Palm Beach, Florida from 2014 through 2016 and various roles of increasing responsibility with CenturyLink, and its predecessor company Qwest Communications, from 2001 through 2012.
|
|
|
5.
|
Restructuring Plans.
During fiscal 2017, the Company announced restructuring actions that will simplify its product families, further optimize its back-office, and support functions as well as consolidate its manufacturing footprint. The Company reduced headcount by approximately
120
from its fiscal 2017 plans and expects to realize annual savings of approximately
$11.0 million
.
|
Results of Operations
FISCAL YEAR
2017
COMPARED WITH FISCAL YEAR
2016
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, Lucent matter costs, restructuring and related expenses including accelerated depreciation, asset impairments, or costs and inventory step-up charges related to business acquisitions. Segment operating income also does not include corporate expenses, such as 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.
The Company calculates the impact of foreign currency translation by multiplying or dividing, as appropriate, the prior year local currency results by the current year average foreign exchange rates and comparing with current year U.S. dollar results.
Segment Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
EMEA
|
2017
|
|
2016
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
1,184,826
|
|
|
1,219,294
|
|
|
(34,468
|
)
|
|
(2.8
|
)%
|
|
|
|
|
Net sales
|
$
|
1,208,818
|
|
|
$
|
1,239,963
|
|
|
$
|
(31,145
|
)
|
|
(2.5
|
)%
|
|
$
|
(32,096
|
)
|
|
0.1
|
%
|
Segment gross profit
|
$
|
161,184
|
|
|
$
|
178,376
|
|
|
$
|
(17,192
|
)
|
|
(9.6
|
)%
|
|
$
|
(4,209
|
)
|
|
(7.3
|
)%
|
Segment gross profit percentage
|
13.3
|
%
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
67,831
|
|
|
$
|
76,576
|
|
|
$
|
(8,745
|
)
|
|
(11.4
|
)%
|
|
$
|
(1,989
|
)
|
|
(8.8
|
)%
|
Price per pound
|
$
|
1.020
|
|
|
$
|
1.017
|
|
|
$
|
0.003
|
|
|
0.3
|
%
|
|
$
|
(0.027
|
)
|
|
2.9
|
%
|
EMEA net sales for the year ended
August 31, 2017
were
$1,208.8 million
, a decrease of
$31.1 million
compared with the prior year. Excluding the unfavorable impact of foreign currency translation of
$32.1 million
, net sales increased slightly due primarily to passing on a portion of raw material price increases to customers and changes in the product mix, offset by decreased volume of 5.6% in the Performance Materials product family linked to lower distribution volumes.
EMEA gross profit was
$161.2 million
for the year ended
August 31, 2017
. Excluding the negative impact of foreign currency translation of
$4.2 million
, gross profit decreased by $13.0 million or
7.3%
primarily due to higher raw material prices and increased logistics costs, partially offset by lower production costs as a result of plant efficiency improvements executed throughout the year.
EMEA operating income for the year ended
August 31, 2017
was
$67.8 million
, a decrease of
$8.7 million
, or
11.4%
, compared with the prior year. Excluding the negative impact of foreign currency translation of
$2.0 million
, segment operating income decreased by $6.8 million, or
8.8%
. Segment operating income decreased primarily due to lower gross profit, as noted above, partially offset by lower selling, general, and administrative ("SG&A") expense of $8.5 million. Excluding the favorable impact of foreign currency of $2.2 million, SG&A expense decreased by $6.3 million primarily due to lower professional fees of $2.6 million and lower employment expenses of $2.4 million, primarily driven by savings from the product family restructuring actions completed earlier in the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
|
USCAN
|
2017
|
|
2016
|
|
Increase (decrease)
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
727,617
|
|
|
778,100
|
|
|
(50,483
|
)
|
|
(6.5
|
)%
|
Net sales
|
$
|
640,441
|
|
|
$
|
691,369
|
|
|
$
|
(50,928
|
)
|
|
(7.4
|
)%
|
Segment gross profit
|
$
|
91,768
|
|
|
$
|
115,329
|
|
|
$
|
(23,561
|
)
|
|
(20.4
|
)%
|
Segment gross profit percentage
|
14.3
|
%
|
|
16.7
|
%
|
|
|
|
|
Segment operating income
|
$
|
29,080
|
|
|
$
|
47,062
|
|
|
$
|
(17,982
|
)
|
|
(38.2
|
)%
|
Price per pound
|
$
|
0.880
|
|
|
$
|
0.889
|
|
|
$
|
(0.009
|
)
|
|
(1.0
|
)%
|
USCAN net sales for the year ended
August 31, 2017
, were
$640.4 million
, a decrease of
$50.9 million
or
7.4%
compared with the prior year. The decrease was due to lower volume in the Performance Materials product family of 7.6% and the Custom Concentrates and Services of 4.9%. The decrease in Performance Materials was primarily the result of complexity of the business consolidation in Evansville, Indiana and a decrease in flame retardant business associated with the Lucent matter. The decrease in Custom Concentrates and Services was due to delays associated with qualifications on new and upgraded manufacturing lines and certain low margin commodity business taken in-house by customers.
USCAN gross profit was
$91.8 million
for the year ended
August 31, 2017
, a decrease of
$23.6 million
, or
20.4%
, compared to the prior year. The decrease was mainly due to the volume impact as noted above and Performance Materials plant consolidation costs associated with reformulation and processing consistency to meet the Company's standards, partially offset by cost savings from previous plant consolidation efforts. The increased costs associated with qualification of products on newly invested Custom Concentrates and Services manufacturing lines also contributed to the year-over-year decline in gross profit.
USCAN operating income for the year ended
August 31, 2017
was
$29.1 million
compared with
$47.1 million
the prior year. Segment operating income decreased due to the above noted decrease in gross profit, partially offset by lower SG&A expenses of $5.6 million. The SG&A expense decrease was primarily due to lower compensation expense of $2.2 million related to savings from the product family restructuring and decreased amortization expense of $3.0 million related to the write-down of intangible assets in the fourth quarter of fiscal 2016.
During the last week of fiscal 2017, Hurricane Harvey directly impacted three of our facilities in the Houston, Texas area. The Company currently believes there was minimal property damage; however, Hurricane Harvey temporarily impacted the availability and timing of raw material supply and product shipments to customers from these and other facilities. The Company is in the process of finalizing the financial impact and preparing claims to submit to our insurance provider in fiscal 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
LATAM
|
2017
|
|
2016
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
145,296
|
|
|
144,081
|
|
|
1,215
|
|
|
0.8
|
%
|
|
|
|
|
Net sales
|
$
|
179,352
|
|
|
$
|
171,650
|
|
|
$
|
7,702
|
|
|
4.5
|
%
|
|
$
|
3,166
|
|
|
2.6
|
%
|
Segment gross profit
|
$
|
38,565
|
|
|
$
|
36,886
|
|
|
$
|
1,679
|
|
|
4.6
|
%
|
|
$
|
(85
|
)
|
|
4.8
|
%
|
Segment gross profit percentage
|
21.5
|
%
|
|
21.5
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
23,096
|
|
|
$
|
20,268
|
|
|
$
|
2,828
|
|
|
14.0
|
%
|
|
$
|
(418
|
)
|
|
16.0
|
%
|
Price per pound
|
$
|
1.234
|
|
|
$
|
1.191
|
|
|
$
|
0.043
|
|
|
3.6
|
%
|
|
$
|
0.021
|
|
|
1.8
|
%
|
LATAM net sales for the year ended
August 31, 2017
were
$179.4 million
compared to
$171.7 million
in the prior year. Excluding the favorable impact of foreign currency translation of
$3.2 million
, net sales increased by
2.6%
primarily driven by strong volume growth in the Performance Materials product family primarily within the automotive market. Additionally, selling price per pound increased primarily due to the Company increasing the prices of its value added products to attempt to offset the increase in raw material costs.
LATAM gross profit was
$38.6 million
for the year ended
August 31, 2017
, an increase of
$1.7 million
or
4.6%
compared with the prior year. The increase in gross profit is primarily due to the net sales drivers noted above.
LATAM operating income for the year ended
August 31, 2017
was
$23.1 million
compared with
$20.3 million
in the prior year, an increase of
$2.8 million
, or
14.0%
. Excluding the negative impact of foreign currency translation of
$0.4 million
, segment operating income increased by $3.2 million, or
16.0%
due to improved gross profit, as noted above, and lower compensation expense of $1.0 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
APAC
|
2017
|
|
2016
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
187,351
|
|
|
178,488
|
|
|
8,863
|
|
|
5.0
|
%
|
|
|
|
|
Net sales
|
$
|
208,507
|
|
|
$
|
186,911
|
|
|
$
|
21,596
|
|
|
11.6
|
%
|
|
$
|
(5,028
|
)
|
|
14.2
|
%
|
Segment gross profit
|
$
|
35,587
|
|
|
$
|
32,293
|
|
|
$
|
3,294
|
|
|
10.2
|
%
|
|
$
|
(1,020
|
)
|
|
13.4
|
%
|
Segment gross profit percentage
|
17.1
|
%
|
|
17.3
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
19,330
|
|
|
$
|
17,953
|
|
|
$
|
1,377
|
|
|
7.7
|
%
|
|
$
|
(647
|
)
|
|
11.3
|
%
|
Price per pound
|
$
|
1.113
|
|
|
$
|
1.047
|
|
|
$
|
0.066
|
|
|
6.3
|
%
|
|
$
|
(0.027
|
)
|
|
8.9
|
%
|
APAC net sales for the year ended
August 31, 2017
were
$208.5 million
, an increase of
$21.6 million
compared with the prior year. Excluding the unfavorable impact of foreign currency translation of
$5.0 million
, net sales increased by
14.2%
, due to increased volume and improved customer pricing, primarily in the Performance Materials product family. Custom Concentrates and Services volume increased in the electrical & electronics market as the company improved production output and dedicated more capacity to this important value added segment. Consequently less capacity was dedicated to the commodity grades resulting in decreased volumes.
APAC gross profit for the year ended
August 31, 2017
was
$35.6 million
, an increase of
$3.3 million
compared with the prior year. Segment gross profit benefited from increased sales, as noted above, and improved product mix, partially offset by negative foreign currency translation of
$1.0 million
.
APAC operating income for the year ended
August 31, 2017
was
$19.3 million
compared with
$18.0 million
in the prior year. The increase in segment operating income was primarily due to the aforementioned increase in gross profit, partially offset by a $1.7 million increase in employment costs due to the appointment of key country management positions and increased focus on sales personnel to generate revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
EC
|
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
|
2017
|
|
2016
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
179,442
|
|
|
175,120
|
|
|
4,322
|
|
|
2.5
|
%
|
|
|
|
|
Net sales
|
$
|
224,006
|
|
|
$
|
206,112
|
|
|
$
|
17,894
|
|
|
8.7
|
%
|
|
$
|
1,035
|
|
|
8.2
|
%
|
Segment gross profit
|
$
|
56,003
|
|
|
$
|
50,461
|
|
|
$
|
5,542
|
|
|
11.0
|
%
|
|
$
|
209
|
|
|
10.6
|
%
|
Segment gross profit percentage
|
25.0
|
%
|
|
24.5
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
20,700
|
|
|
$
|
14,885
|
|
|
$
|
5,815
|
|
|
39.1
|
%
|
|
$
|
(81
|
)
|
|
39.6
|
%
|
Price per pound
|
$
|
1.248
|
|
|
$
|
1.177
|
|
|
$
|
0.071
|
|
|
6.0
|
%
|
|
$
|
0.005
|
|
|
5.6
|
%
|
EC net sales for the year ended August 31,
2017
were
$224.0 million
, an increase of
$17.9 million
over the prior year. The increase in revenue and price per pound was consistent across all geographic locations and was primarily driven by volume and higher mix of specialized product sales in the oil & gas, sports, leisure & home, and automotive markets.
EC gross profit for the year ended August 31,
2017
was
$56.0 million
, an increase of
$5.5 million
over the prior year. Segment gross profit increased primarily driven by the favorable mix from the high margin product sales noted above.
EC operating income for the year ended August 31,
2017
was
$20.7 million
, an increase of
$5.8 million
over the prior year. The increase in segment operating income was primarily related to the favorable product mix and strong sales from all regions, as noted above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
Consolidated
|
2017
|
|
2016
|
|
Increase (decrease)
|
|
FX Impact
|
|
Excluding FX
|
|
(In thousands, except for %’s and per pound data)
|
Pounds sold
|
2,424,532
|
|
|
2,495,083
|
|
|
(70,551
|
)
|
|
(2.8
|
)%
|
|
|
|
|
Net sales
|
$
|
2,461,124
|
|
|
$
|
2,496,005
|
|
|
$
|
(34,881
|
)
|
|
(1.4
|
)%
|
|
$
|
(32,837
|
)
|
|
(0.1
|
)%
|
Asset impairment
|
$
|
1,053
|
|
|
$
|
401,667
|
|
|
$
|
(400,614
|
)
|
|
N.M.
|
|
|
N.M.
|
|
|
N.M.
|
|
Operating income (loss)
|
$
|
85,796
|
|
|
$
|
(309,240
|
)
|
|
$
|
395,036
|
|
|
N.M.
|
|
|
$
|
(2,945
|
)
|
|
N.M.
|
|
Operating income before certain items*
|
$
|
126,495
|
|
|
$
|
145,947
|
|
|
$
|
(19,452
|
)
|
|
(13.3
|
)%
|
|
$
|
(3,114
|
)
|
|
(11.2
|
)%
|
Price per pound
|
$
|
1.015
|
|
|
$
|
1.000
|
|
|
$
|
0.015
|
|
|
1.5
|
%
|
|
$
|
(0.014
|
)
|
|
2.9
|
%
|
*
Operating income before certain items is a non-GAAP measurement. For a reconciliation of operating income (loss) to operating income before certain items, refer to the table below.
The following table is a reconciliation of operating income (loss) to operating income before certain items:
|
|
|
|
|
|
|
|
|
|
Year ended August 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Operating income (loss)
|
$
|
85,796
|
|
|
$
|
(309,240
|
)
|
Costs related to acquisitions and integrations
|
605
|
|
|
8,789
|
|
Restructuring and restructuring related costs
(1)
|
28,960
|
|
|
27,762
|
|
Accelerated depreciation
|
1,890
|
|
|
6,309
|
|
CEO transition costs
|
196
|
|
|
3,399
|
|
Asset impairment
|
1,053
|
|
|
401,667
|
|
Curtailment and settlement (gains) losses
|
2,029
|
|
|
—
|
|
Lucent costs
|
5,966
|
|
|
7,261
|
|
Total operating income before certain items
|
$
|
126,495
|
|
|
$
|
145,947
|
|
(1)
Restructuring related costs for fiscal
2017
and
2016
of
$15.5 million
and
$16.0 million
, respectively, primarily included in selling, general and administrative expenses in the Company’s statements of operations, are costs associated with professional fees for outside strategic consultants regarding actions to improve the profitability, improve efficiency of its operations, comply with new legislation, costs associated with new software implementation that are not eligible for capitalization, and costs associated with reorganizations of the legal entity structure of the Company. Restructuring expenses for fiscal
2017
and
2016
of
$13.5 million
and
$11.8 million
, respectively, included in restructuring expense in the Company’s statements of operations include costs permitted under ASC 420, Exit or Disposal Obligations, such as severance costs, outplacement services and contract termination costs.
Consolidated net sales for the year ended
August 31, 2017
were
$2,461.1 million
compared with
$2,496.0 million
in the prior year. Excluding the unfavorable impact of foreign currency translation of
$32.8 million
, net sales were flat, as increases in EC, LATAM and APAC were offset by decreased sales in USCAN.
Operating income was
$85.8 million
for the year ended
August 31, 2017
compared to an operating loss of
$309.2 million
in the prior year. The increase was primarily due to asset impairments of
$401.7 million
in the prior year. Total operating income before certain items for the year ended
August 31, 2017
was
$126.5 million
, a decrease of
$19.5 million
compared with the prior year period. The decrease in total operating income before certain items was primarily due to lower gross profit in USCAN and EMEA and unfavorable foreign currency translation of
$3.1 million
. These decreases were partially offset by lower SG&A, as noted below, and higher gross profit in EC, LATAM and APAC.
The Company’s SG&A expenses for the year ended
August 31, 2017
were
$277.4 million
compared to
$296.7 million
in the prior year. SG&A, excluding certain items, was $256.6 million for the year ended
August 31, 2017
, a decrease of $10.8 million compared with the prior year. The decrease was primarily attributable to lower compensation expense of $4.1 million related to savings from the product family restructuring plan, lower amortization expense of $4.3 million and legal and professional fees of $4.0 million, partially offset by increased variable incentive compensation of $3.1 million and the unfavorable impact of foreign currency translation of $2.0 million. Certain items excluded from SG&A expenses consist of $20.8 million of expense related to acquisition and integration activities, restructuring and related costs, CEO transition costs, Lucent matter costs, and a curtailment gain for the year ended
August 31, 2017
, and $29.4 million of acquisition and integration activities, restructuring and related costs, CEO transition costs and Lucent matter costs for the year ended
August 31, 2016
.
The Company experienced foreign currency transaction losses of
$1.8 million
and
$3.5 million
for the years ended
August 31, 2017
and
2016
, respectively. 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, 2017
and
2016
.
Other income for the years ended
August 31, 2017
and
2016
was
$1.5 million
and
$0.8 million
, respectively. In both fiscal
2017
and
2016
, there were no individually significant transactions.
Net income available to the Company’s common stockholders was income of
$25.5 million
and a loss of
$364.6 million
for the years ended
August 31, 2017
and
2016
, respectively. Foreign currency translation had an unfavorable impact on net income of $2.1 million for the year ended
August 31, 2017
.
Product Family
Globally, the Company operates in three product families: Engineered Composites, Custom Concentrates and Services, and Performance Materials. The amount and percentage of consolidated net sales for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
(In thousands, except for %’s)
|
Engineered Composites
|
$
|
224,006
|
|
|
9
|
%
|
|
$
|
206,112
|
|
|
8
|
%
|
Custom Concentrates and Services
|
1,134,305
|
|
|
46
|
|
|
1,140,814
|
|
|
46
|
|
Performance Materials
|
1,102,813
|
|
|
45
|
|
|
1,149,079
|
|
|
46
|
|
Total consolidated net sales
|
$
|
2,461,124
|
|
|
100
|
%
|
|
$
|
2,496,005
|
|
|
100
|
%
|
Restructuring
Consolidated Restructuring Summary
The following table summarizes the activity related to the Company’s restructuring plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-related Costs
|
|
Other Costs
|
|
Total Restructuring Costs
|
|
(In thousands)
|
Accrual balance as of August 31, 2015
|
$
|
4,922
|
|
|
$
|
461
|
|
|
$
|
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
|
$
|
3,542
|
|
|
$
|
402
|
|
|
$
|
3,944
|
|
Fiscal 2017 charges
|
11,653
|
|
|
1,867
|
|
|
13,520
|
|
Fiscal 2017 payments
|
(12,559
|
)
|
|
(2,236
|
)
|
|
(14,795
|
)
|
Translation
|
352
|
|
|
57
|
|
|
409
|
|
Accrual balance as of August 31, 2017
|
$
|
2,988
|
|
|
$
|
90
|
|
|
$
|
3,078
|
|
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,
|
|
2017
|
|
2016
|
|
(In thousands, except for %’s)
|
U.S. statutory federal income tax rate
|
$
|
11,317
|
|
|
35.0
|
%
|
|
$
|
(128,277
|
)
|
|
35.0
|
%
|
Foreign rate differential, net of U.S. tax on certain foreign current year earnings
|
2,213
|
|
|
6.8
|
|
|
10,069
|
|
|
(2.7
|
)
|
Foreign losses with no tax benefit
|
1,026
|
|
|
3.2
|
|
|
1,866
|
|
|
(0.5
|
)
|
Worthless stock deduction
|
(14,735
|
)
|
|
(45.6
|
)
|
|
—
|
|
|
—
|
|
State taxes, net of federal benefit
|
(3,894
|
)
|
|
(12.0
|
)
|
|
2,564
|
|
|
(0.7
|
)
|
Valuation allowance charges (reversals)
|
—
|
|
|
—
|
|
|
863
|
|
|
(0.2
|
)
|
Non-deductible goodwill impairment
|
—
|
|
|
—
|
|
|
106,503
|
|
|
(29.1
|
)
|
Establishment (resolution) of uncertain tax positions
|
1,724
|
|
|
5.3
|
|
|
482
|
|
|
(0.1
|
)
|
Other
|
509
|
|
|
1.6
|
|
|
(2,710
|
)
|
|
0.7
|
|
Provision (benefit) for U.S. and foreign income taxes
|
$
|
(1,840
|
)
|
|
(5.7
|
)%
|
|
$
|
(8,640
|
)
|
|
2.4
|
%
|
The effective tax rate for the year ended
August 31, 2017
was less than the U.S. statutory federal income tax rate primarily because of a worthless stock tax deduction relating to the Company's investment in an insolvent foreign subsidiary. The fiscal 2017 effective tax rate benefit represents a U.S. tax deduction for prior accounting losses for which no tax benefit has previously been allowed.
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.
FISCAL YEAR
2016
COMPARED WITH FISCAL YEAR
2015
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
|
%
|
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 declined by
2.5%
, primarily due to decreased volumes in the Performance Materials and Custom Concentrates and Services product families of 10.1% and 5.0%, respectively, as customer purchases decreased due to uncertainty in the future of petroleum-based commodity prices.
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,
|
|
|
|
|
|
|
USCAN
|
2016
|
|
2015
|
|
Increase (decrease)
|
|
(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
|
%
|
Segment gross profit
|
$
|
115,329
|
|
|
$
|
100,550
|
|
|
$
|
14,779
|
|
|
14.7
|
%
|
Segment gross profit percentage
|
16.7
|
%
|
|
16.5
|
%
|
|
|
|
|
Segment operating income
|
$
|
47,062
|
|
|
$
|
40,713
|
|
|
$
|
6,349
|
|
|
15.6
|
%
|
Price per pound
|
$
|
0.889
|
|
|
$
|
0.947
|
|
|
$
|
(0.058
|
)
|
|
(6.1
|
)%
|
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 as the Company continues its focus towards a more specialty product portfolio. The agricultural equipment market within the Performance Materials 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 Custom Concentrates and Services product family. Since acquiring the Citadel business, our overall Performance Materials' product family 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
|
)%
|
|
$
|
(12,883
|
)
|
|
4.0
|
%
|
Segment gross profit
|
$
|
36,886
|
|
|
$
|
31,971
|
|
|
$
|
4,915
|
|
|
15.4
|
%
|
|
$
|
(814
|
)
|
|
17.9
|
%
|
Segment gross profit percentage
|
21.5
|
%
|
|
18.0
|
%
|
|
|
|
|
|
|
|
|
Segment operating income
|
$
|
20,268
|
|
|
$
|
13,061
|
|
|
$
|
7,207
|
|
|
55.2
|
%
|
|
$
|
964
|
|
|
47.8
|
%
|
Price per pound
|
$
|
1.191
|
|
|
$
|
1.344
|
|
|
$
|
(0.153
|
)
|
|
(11.4
|
)%
|
|
$
|
(0.090
|
)
|
|
(4.7
|
)%
|
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
$12.9 million
, net sales increased by
4.0%
primarily driven by strong volume growth in all 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
$0.8 million
, gross profit increased
17.9%
compared to the prior year, 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 positive impact of foreign currency translation of
$1.0 million
, operating income increased by $6.2 million, or
47.8%
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 $1.8 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
|
)%
|
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 the Custom Concentrates and Services product family was offset by reduced volume in the Performance Materials product family. 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
|
|
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
|
%
|
|
$
|
(96,986
|
)
|
|
8.4
|
%
|
Asset impairment
|
$
|
401,667
|
|
|
$
|
—
|
|
|
$
|
401,667
|
|
|
N.M.
|
|
|
N.M.
|
|
|
N.M.
|
|
Operating income (loss)
|
$
|
(309,240
|
)
|
|
$
|
70,428
|
|
|
$
|
(379,668
|
)
|
|
N.M
|
|
|
$
|
(2,851
|
)
|
|
N.M.
|
|
Total operating income before certain items*
|
$
|
145,947
|
|
|
$
|
120,704
|
|
|
$
|
25,243
|
|
|
20.9
|
%
|
|
$
|
(3,107
|
)
|
|
23.5
|
%
|
Price per pound
|
$
|
1.000
|
|
|
$
|
1.061
|
|
|
$
|
(0.061
|
)
|
|
(5.7
|
)%
|
|
$
|
(0.039
|
)
|
|
(2.1
|
)%
|
*
Operating income before certain items is a non-GAAP measurement. For a reconciliation of operating income (loss) to operating income before certain items, refer to the table below.
The following table is a reconciliation of operating income (loss) to operating income before certain items:
|
|
|
|
|
|
|
|
|
|
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 restructuring related costs
(1)
|
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
|
|
(1)
Restructuring related costs for fiscal
2016
and
2015
of
$16.0 million
and
$9.1 million
, respectively, primarily included in selling, general and administrative expenses in the Company’s statements of operations, are costs associated with professional fees for outside strategic consultants regarding actions to improve the profitability of the organization and efficiency of its operations, and costs associated with reorganizations of the legal entity structure of the Company. Restructuring expenses for fiscal
2016
and
2015
of
$11.8 million
and
$14.3 million
, respectively, included in restructuring expense in the Company’s statements of operations include costs permitted under ASC 420, Exit or Disposal Obligations, such as severance costs, outplacement services and contract termination costs.
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
$97.0 million
.
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, which is now part of the Performance Materials reporting unit, for $166.8 million, the EC reporting unit for $177.2 million and the EMEA Specialty Powders reporting unit, which is now part of the Custom Concentrates and Services 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.
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
$3.1 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 $8.1 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.
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 three product families: Engineered Composites, Custom Concentrates and Services, and Performance Materials. 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)
|
Engineered Composites
|
$
|
206,112
|
|
|
8
|
%
|
|
$
|
57,133
|
|
|
2
|
%
|
Custom Concentrates and Services
|
1,140,814
|
|
|
46
|
|
|
1,227,035
|
|
|
51
|
|
Performance Materials
|
1,149,079
|
|
|
46
|
|
|
1,108,057
|
|
|
47
|
|
Total consolidated net sales
|
$
|
2,496,005
|
|
|
100
|
%
|
|
$
|
2,392,225
|
|
|
100
|
%
|
Restructuring
Consolidated Restructuring Summary
The following table summarizes the activity related to the Company’s restructuring plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-related Costs
|
|
Other Costs
|
|
Total Restructuring Costs
|
|
(In thousands)
|
Accrual balance as of August 31, 2014
|
$
|
1,441
|
|
|
$
|
371
|
|
|
$
|
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
|
$
|
4,922
|
|
|
$
|
461
|
|
|
$
|
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
|
$
|
3,542
|
|
|
$
|
402
|
|
|
$
|
3,944
|
|
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,
|
|
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, net of U.S. tax on certain foreign current year earnings
|
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
|
|
State taxes, net of federal benefit
|
2,564
|
|
|
(0.7
|
)
|
|
(202
|
)
|
|
(0.7
|
)
|
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
|
(2,710
|
)
|
|
0.7
|
|
|
(554
|
)
|
|
(2.0
|
)
|
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.
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 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 2015 as a result of the Compco and Citadel acquisitions. All acquired goodwill was allocated to appropriate reporting units based on relative fair values.
In January 2017, the Financial Accounting Standards Board ("FASB") issued an accounting standard update removing step two from the goodwill impairment test. If a reporting unit fails the quantitative impairment test, impairment expense is immediately recorded as the difference between the reporting unit's fair value and carrying value. The Company adopted this standard effective March 1, 2017. Refer to Note 1,
Business and Summary of Significant Accounting Policies,
of this Annual Report on Form 10-K for details.
2017
Annual Goodwill Impairment Test
As of June 1,
2017
, the annual goodwill impairment test date for fiscal
2017
, goodwill existed in two of the Company's reporting units in EMEA (Custom Concentrates and Services ("CCS") and Performance Materials ("PM")), two reporting units in USCAN (CCS and PM), one reporting unit in LATAM (CCS), two reporting units in APAC (CCS and PM), and Engineered Composites ("EC").
Qualitative Analysis
The Company applied the qualitative goodwill impairment accounting guidance to its LATAM CCS, APAC CCS, and APAC PM reporting units as of June 1,
2017
. Qualitative trends and factors considered in the Company's analysis included overall economic conditions, access to capital markets, industry projections, competitive environment, forecasted 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,
2017
, 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
2017
.
Quantitative Analysis
Management used the quantitative fair value measurement for its annual goodwill impairment test as of June 1,
2017
for the following reporting units: EMEA CCS, EMEA PM, USCAN CCS, USCAN PM, and EC. The fair values of all these reporting units were established using an equal weighting 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, 2017, the EMEA CCS, EMEA PM, USCAN CCS and EC reporting units had fair values that substantially exceeded their carrying values. Management also concluded, based on the quantitative fair value measurements performed, that as of June 1, 2017, the fair value of the USCAN PM reporting unit exceeded its carrying values by 5%. A change in macroeconomic conditions, especially near-term changes in USCAN operating results, as well as future changes in the judgments, assumptions and estimates that were used in the Company's goodwill impairment testing including the discount rate and future cash flow projections, could result in a goodwill impairment. Significant assumptions utilized for the USCAN PM reporting unit included: (i) annual revenue growth rates; (ii) weighted average cost of capital; (iii) slight improvements in margins related to manufacturing efficiencies; and (iv) peer group EBITDA multiples. As of August 31, 2017, the USCAN PM reporting unit had goodwill of $47.1 million. The goodwill associated with these reporting units is primarily the result of the acquisitions made within the last few years. Generally, goodwill recorded in business combinations is more susceptible to risk of impairment soon after 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. If operating results or economic conditions deteriorate soon after an acquisition, it could result in the impairment of the acquired goodwill.
Refer to Note 4,
Goodwill and Other Intangible Assets,
of this Annual Report on Form 10-K for further discussion on goodwill.
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.
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 fiscal 2015, 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, 2017 and 2016, the Company utilized a spot rate approach for the estimation of service and interest cost for its major plans by applying specific spot rates along the yield curve to the relevant projected cash flows.
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 2.1% as of August 31, 2017, compared with 1.5% as of August 31, 2016 and 2.6% as of August 31, 2015. For the other postretirement benefit plan, the rate is 3.4% as of August 31, 2017 compared with 3.1% as of August 31, 2016 and 4.0% as of August 31, 2015. 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 3.1% for fiscal 2017.
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, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Assumption
|
Impact on
Fiscal 2017
Benefits Expense
|
|
Impact on
August 31, 2017
Projected Benefit
Obligation for
Pension Plans
|
|
Impact on
August 31, 2017
Projected Benefit
Obligation for
Postretirement Plans
|
|
|
|
(In thousands)
|
|
|
25 basis point decrease in discount rate
|
$
|
643
|
|
|
$
|
8,785
|
|
|
$
|
222
|
|
25 basis point increase in discount rate
|
$
|
(588
|
)
|
|
$
|
(8,355
|
)
|
|
$
|
(228
|
)
|
25 basis point decrease in expected long-term rate of return on assets
|
$
|
126
|
|
|
$
|
—
|
|
|
$
|
—
|
|
25 basis point increase in expected long-term rate of return on assets
|
$
|
(126
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
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. As of August 31, 2017, there were no market-based awards outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operations was
$104.7 million
,
$148.1 million
and
$60.2 million
for the years ended August 31,
2017
,
2016
and
2015
, respectively. The decrease of
$43.4 million
in cash provided by operations in fiscal
2017
compared to fiscal
2016
was primarily due to a lower working capital cash inflow compared to the prior period, generating
$10.8 million
in cash during fiscal
2017
from working capital, as compared to
$45.4 million
in fiscal
2016
. In fiscal
2017
, increased accounts receivable of
$19.1 million
was driven by increased fourth quarter net sales, primarily due to higher raw material prices. The source of cash of
$33.8 million
from accounts payable was driven by higher raw material prices combined with higher days in payables of three days compared to fiscal
2016
. The Company has generated
$313.0 million
in net cash from operations in
fiscal 2017
,
2016
and
2015
combined.
Net cash provided from financing activities was a use of cash of
$62.5 million
in fiscal
2017
compared to a use of cash of
$147.2 million
in fiscal
2016
. This decrease is primarily due to net debt repayments of
$30.3 million
in fiscal
2017
compared to net debt repayments of
$114.8 million
in fiscal
2016
.
The Company’s cash, cash equivalents, and restricted cash increased
$10.6 million
since August 31,
2016
. This increase was driven primarily by cash from operations of
$104.7 million
partially offset by capital expenditures of
$36.9 million
, dividends paid of
$31.7 million
, and net debt repayments of
$30.3 million
.
The Company’s approximate working capital days are summarized as follows:
|
|
|
|
|
|
August 31, 2017
|
|
August 31, 2016
|
Days in receivables
|
57
|
|
56
|
Days in inventory
|
47
|
|
48
|
Days in payables
|
59
|
|
56
|
Total working capital days
|
45
|
|
48
|
The following table summarizes certain key balances on the Company’s consolidated balance sheets and related metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
August 31, 2016
|
|
$ Change
|
|
% Change
|
|
(In thousands, except for %’s)
|
Cash, cash equivalents, and restricted cash
|
$
|
54,019
|
|
|
$
|
43,403
|
|
|
$
|
10,616
|
|
|
24.5
|
%
|
Working capital, excluding cash and assets held for sale
|
$
|
257,165
|
|
|
$
|
250,901
|
|
|
$
|
6,264
|
|
|
2.5
|
%
|
Long-term debt
(1)
|
$
|
885,178
|
|
|
$
|
919,349
|
|
|
$
|
(34,171
|
)
|
|
(3.7
|
)%
|
Total debt
(1)
|
$
|
917,191
|
|
|
$
|
944,796
|
|
|
$
|
(27,605
|
)
|
|
(2.9
|
)%
|
Net debt
(1) (2)
|
$
|
863,172
|
|
|
$
|
901,393
|
|
|
$
|
(38,221
|
)
|
|
(4.2
|
)%
|
Total A. Schulman, Inc.’s stockholders’ equity
|
$
|
197,018
|
|
|
$
|
159,269
|
|
|
$
|
37,749
|
|
|
23.7
|
%
|
(1)
Long-term debt, Total debt and Net debt at August 31, 2016 have been recast to include debt issuance costs recognized as a deduction from the carrying amount of that debt liability. The debt issuance costs were previously classified as deferred charges and other noncurrent assets on the Company's consolidated balance sheet. Refer to Note 1, Business and Summary of Significant Accounting Policies, for additional information.
(2)
Net debt, a non-GAAP financial measure, represents total debt less cash, cash equivalents and restricted cash. The Company believes that net debt provides useful supplemental liquidity information to investors as it is utilized in leverage calculations.
As of August 31,
2017
, 95% of the Company's cash and cash equivalents were held by its foreign subsidiaries, compared to 97% of the Company’s cash and cash equivalents at
August 31, 2016
. 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 global cash pooling system. Excess cash in the U.S. and EMEA is generally used to repay outstanding debt.
Working capital, excluding cash and assets held for sale, was
$257.2 million
as of
August 31, 2017
, an increase of
$6.3 million
from
August 31, 2016
. The primary reasons for the increase in working capital from
August 31, 2016
include an increase of $31.7 million in accounts receivable and an increase of $12.8 million in inventory, mostly offset by an increase in accounts payable of $38.8 million.
Capital expenditures for the year ended
August 31, 2017
were
$36.9 million
compared to
$51.2 million
in the prior year. Capital expenditures for fiscal years
2017
and
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. During fiscal 2015, the Company capitalized
$11.3 million
in debt issuance costs related to the Notes.
In connection with the sale of the Notes, the Company entered into a Registration Rights Agreement with the representatives of the initial purchasers of the Notes (the “Registration Rights Agreement”) that, among other things, obligated the Company to complete an offer to exchange the Notes for a new issue of substantially identical exchange notes (the “Exchange Offer”) registered under the Securities Act. The interest rate on the Notes temporarily increased in accordance with the terms of the Registration Rights Agreement during the period between November 17, 2016 to, but not including, the date of the completion of the Exchange Offer on March 21, 2017. The Company did not receive any proceeds from the Exchange Offer.
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, 2017
.
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
$56.0 million
of term debt in fiscal 2017. As of August 31, 2017, the Euro Term Loan B Facility has been repaid in full.
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. In October 2017, the Company amended the Credit Agreement and increased the net leverage ratio covenant to provide the Company additional financial flexibility to execute on its growth strategy. The Company was in compliance with these covenants as of
August 31, 2017
and does not believe a subsequent covenant violation is reasonably possible at this time.
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,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Existing capacity:
|
|
|
|
Revolving Facility, due June 2020
|
$
|
300,000
|
|
|
$
|
300,000
|
|
Foreign short-term lines of credit
|
30,890
|
|
|
37,953
|
|
Total capacity from credit lines
|
$
|
330,890
|
|
|
$
|
337,953
|
|
Availability:
|
|
|
|
Revolving Facility, due June 2020
|
$
|
242,040
|
|
|
$
|
279,120
|
|
Foreign short-term lines of credit
|
14,660
|
|
|
27,959
|
|
Total available funds from credit lines
|
$
|
256,700
|
|
|
$
|
307,079
|
|
Total available funds from credit lines represents the total capacity from credit lines less outstanding borrowings of
$67.4 million
and
$26.6 million
as of August 31,
2017
and
2016
, respectively, and issued letters of credit of
$6.8 million
and
$4.3 million
as of August 31,
2017
and
2016
, respectively.
The Company’s underfunded pension liability is
$139.1 million
as of
August 31, 2017
. This amount is primarily due to an underfunded plan of $116.2 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, 2017
, the Company paid cash dividends to common stockholders aggregating to
$0.82
per share. The total amount of these dividends was
$24.2 million
. The Company also paid cash dividends of
$60.00
per share to convertible special stockholders during the year ended
August 31, 2017
. 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 share repurchase program under which the Company was 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”). 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 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 10b5-1 plan. No shares were repurchased during fiscal 2016 or 2017. This program expired on April 2, 2017 and was not renewed.
The Company has foreign currency exposures primarily related to the Euro, British pound sterling, Polish zloty, 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. The change in the value of all foreign currencies during the year ended August 31,
2017
increased the accumulated other comprehensive income (loss) account by
$17.4 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 and reduce outstanding debt.
A summary of the Company’s future obligations subsequent to
August 31, 2017
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5
years
|
|
Total
|
|
(In thousands)
|
Short-Term Debt
(a)
|
$
|
30,874
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,874
|
|
Long-Term Debt
(a),(g)
|
—
|
|
|
224,500
|
|
|
291,625
|
|
|
375,000
|
|
|
891,125
|
|
Capital Lease Obligations
(a)
|
1,139
|
|
|
2,880
|
|
|
396
|
|
|
—
|
|
|
4,415
|
|
Operating Lease Obligations
(b)
|
17,155
|
|
|
18,876
|
|
|
7,614
|
|
|
12,901
|
|
|
56,546
|
|
Purchase Obligations
(c)
|
184,174
|
|
|
20,803
|
|
|
13,188
|
|
|
6,236
|
|
|
224,401
|
|
Pension Obligations
(d)
|
5,767
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,767
|
|
Postretirement Benefit Obligations
(e)
|
824
|
|
|
1,678
|
|
|
1,547
|
|
|
3,374
|
|
|
7,423
|
|
Interest Payments
(f)
|
47,633
|
|
|
89,392
|
|
|
69,952
|
|
|
10,742
|
|
|
217,719
|
|
|
$
|
287,566
|
|
|
$
|
358,129
|
|
|
$
|
384,322
|
|
|
$
|
408,253
|
|
|
$
|
1,438,270
|
|
|
|
(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
2018
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,
2017
.
|
|
|
(f)
|
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,
2017
, adjusted for scheduled mandatory payments on term debt.
|
|
|
(g)
|
The Company's long-term debt consists of Senior Notes, Revolving Facility, Term Loan A and U.S. Term Loan B that mature in June 2023, June 2020, June 2020 and June 2022, respectively.
|
The Company had
$4.2 million
of gross unrecognized tax benefits and
$1.4 million
of accrued interest and penalties on unrecognized tax benefits as of August 31,
2017
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. Refer to Note 7,
Income Taxes,
for additional information on unrecognized tax benefits.
The Company’s outstanding commercial commitments as of
August 31, 2017
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, Refer to 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 and unanticipated developments regarding contingencies, such as pending and future litigation and other claims, including developments that would require increases in our costs and/or reserves for such contingencies;
|
|
|
•
|
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; 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 accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity, and of cash flows present fairly, in all material respects, the financial position of A. Schulman, Inc. and its subsidiaries as of August 31, 2017 and August 31, 2016, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2017 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) for each of the three years in the period ended August 31, 2017 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 maintained, in all material respects, effective internal control over financial reporting as of August 31, 2017, based on criteria established in
Internal Control - Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the 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.
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 25, 2017
A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands, except per share data)
|
Net sales
|
$
|
2,461,124
|
|
|
$
|
2,496,005
|
|
|
$
|
2,392,225
|
|
Cost of sales
|
2,081,361
|
|
|
2,095,085
|
|
|
2,031,215
|
|
Selling, general and administrative expenses
|
277,365
|
|
|
296,725
|
|
|
276,244
|
|
Restructuring expense
|
13,520
|
|
|
11,768
|
|
|
14,338
|
|
Asset impairment
|
1,053
|
|
|
401,667
|
|
|
—
|
|
Curtailment and settlement (gains) losses
|
2,029
|
|
|
—
|
|
|
—
|
|
Operating income (loss)
|
85,796
|
|
|
(309,240
|
)
|
|
70,428
|
|
Interest expense
|
53,195
|
|
|
54,548
|
|
|
22,613
|
|
Bridge financing fees
|
—
|
|
|
—
|
|
|
18,750
|
|
Foreign currency transaction (gains) losses
|
1,781
|
|
|
3,491
|
|
|
3,363
|
|
Other (income) expense, net
|
(1,513
|
)
|
|
(774
|
)
|
|
(1,438
|
)
|
Gain on early extinguishment of debt
|
—
|
|
|
—
|
|
|
(1,290
|
)
|
Income (loss) from continuing operations before taxes
|
32,333
|
|
|
(366,505
|
)
|
|
28,430
|
|
Provision (benefit) for U.S. and foreign income taxes
|
(1,840
|
)
|
|
(8,640
|
)
|
|
499
|
|
Income (loss) from continuing operations
|
34,173
|
|
|
(357,865
|
)
|
|
27,931
|
|
Income (loss) from discontinued operations, net of tax
|
—
|
|
|
1,861
|
|
|
(133
|
)
|
Net income (loss)
|
34,173
|
|
|
(356,004
|
)
|
|
27,798
|
|
Noncontrolling interests
|
(1,147
|
)
|
|
(1,118
|
)
|
|
(1,169
|
)
|
Net income (loss) attributable to A. Schulman, Inc.
|
33,026
|
|
|
(357,122
|
)
|
|
26,629
|
|
Convertible special stock dividends
|
7,500
|
|
|
7,500
|
|
|
2,438
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
25,526
|
|
|
$
|
(364,622
|
)
|
|
$
|
24,191
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding:
|
|
|
|
|
|
Basic
|
29,401
|
|
|
29,300
|
|
|
29,149
|
|
Diluted
|
29,515
|
|
|
29,300
|
|
|
29,483
|
|
|
|
|
|
|
|
Basic earnings per share available to A. Schulman, Inc. common stockholders
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
0.87
|
|
|
$
|
(12.51
|
)
|
|
$
|
0.83
|
|
Income (loss) from discontinued operations
|
—
|
|
|
0.07
|
|
|
—
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
0.87
|
|
|
$
|
(12.44
|
)
|
|
$
|
0.83
|
|
|
|
|
|
|
|
Diluted earnings per share available to A. Schulman, Inc. common stockholders
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
0.86
|
|
|
$
|
(12.51
|
)
|
|
$
|
0.83
|
|
Income (loss) from discontinued operations
|
—
|
|
|
0.07
|
|
|
(0.01
|
)
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
0.86
|
|
|
$
|
(12.44
|
)
|
|
$
|
0.82
|
|
|
|
|
|
|
|
Cash dividends per common share
|
$
|
0.82
|
|
|
$
|
0.82
|
|
|
$
|
0.82
|
|
Cash dividends per share of convertible special stock
|
$
|
60.00
|
|
|
$
|
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,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Net income (loss)
|
|
$
|
34,173
|
|
|
$
|
(356,004
|
)
|
|
$
|
27,798
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Foreign currency translation gains (losses), net of tax of $0 in 2017, $0 in 2016 and $7,076 in 2015
|
|
17,355
|
|
|
(20,831
|
)
|
|
(72,526
|
)
|
Net change in net actuarial gains (losses), net of tax of $(6,300) in 2017, $7,288 in 2016 and $(2,743) in 2015
|
|
15,192
|
|
|
(16,597
|
)
|
|
6,086
|
|
Net change in prior service (costs) credits, net of tax of $0 for all periods presented
|
|
(520
|
)
|
|
(509
|
)
|
|
(507
|
)
|
Other comprehensive income (loss)
|
|
32,027
|
|
|
(37,937
|
)
|
|
(66,947
|
)
|
Comprehensive income (loss)
|
|
66,200
|
|
|
(393,941
|
)
|
|
(39,149
|
)
|
Less: comprehensive income (loss) attributable to noncontrolling interests
|
|
976
|
|
|
442
|
|
|
991
|
|
Comprehensive income (loss) attributable to A. Schulman, Inc.
|
|
$
|
65,224
|
|
|
$
|
(394,383
|
)
|
|
$
|
(40,140
|
)
|
The accompanying notes are an integral part of the consolidated financial statements.
A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
August 31,
2017
|
|
August 31,
2016
|
|
(In thousands)
|
ASSETS
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
53,251
|
|
|
$
|
35,260
|
|
Restricted cash
|
768
|
|
|
8,143
|
|
Accounts receivable, net
|
408,439
|
|
|
376,786
|
|
Inventories
|
276,459
|
|
|
263,617
|
|
Prepaid expenses and other current assets
|
36,712
|
|
|
40,263
|
|
Assets held for sale
|
5,676
|
|
|
—
|
|
Total current assets
|
781,305
|
|
|
724,069
|
|
Net property, plant and equipment
|
298,703
|
|
|
314,822
|
|
Deferred charges and other noncurrent assets
|
77,847
|
|
|
88,161
|
|
Goodwill
|
263,735
|
|
|
257,773
|
|
Intangible assets, net
|
332,190
|
|
|
362,614
|
|
Total assets
|
$
|
1,753,780
|
|
|
$
|
1,747,439
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
318,820
|
|
|
$
|
280,060
|
|
U.S. and foreign income taxes payable
|
4,900
|
|
|
8,985
|
|
Accrued payroll, taxes and related benefits
|
46,951
|
|
|
47,569
|
|
Other accrued liabilities
|
61,761
|
|
|
67,704
|
|
Short-term debt
|
32,013
|
|
|
25,447
|
|
Total current liabilities
|
464,445
|
|
|
429,765
|
|
Long-term debt
|
885,178
|
|
|
919,349
|
|
Pension plans
|
135,691
|
|
|
145,108
|
|
Deferred income taxes
|
37,699
|
|
|
59,013
|
|
Other long-term liabilities
|
23,735
|
|
|
25,844
|
|
Total liabilities
|
1,546,748
|
|
|
1,579,079
|
|
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 - 48,529 shares in 2017 and 48,510 shares in 2016
|
48,529
|
|
|
48,510
|
|
Additional paid-in capital
|
279,207
|
|
|
275,115
|
|
Accumulated other comprehensive income (loss)
|
(88,523
|
)
|
|
(120,721
|
)
|
Retained earnings
|
220,357
|
|
|
219,039
|
|
Treasury stock, at cost, 19,063 shares in 2017 and 19,069 shares in 2016
|
(382,841
|
)
|
|
(382,963
|
)
|
Total A. Schulman, Inc.’s stockholders’ equity
|
197,018
|
|
|
159,269
|
|
Noncontrolling interests
|
10,014
|
|
|
9,091
|
|
Total equity
|
207,032
|
|
|
168,360
|
|
Total liabilities and equity
|
$
|
1,753,780
|
|
|
$
|
1,747,439
|
|
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, 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' 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 paid 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
|
)
|
Amortization of restricted stock
|
|
|
|
|
2,278
|
|
|
|
|
|
|
|
|
|
|
2,278
|
|
Tax windfall (shortfall) related to share-based incentive compensation
|
|
|
|
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
(302
|
)
|
Balance at August 31, 2016
|
120,289
|
|
|
48,510
|
|
|
275,115
|
|
|
(120,721
|
)
|
|
219,039
|
|
|
(382,963
|
)
|
|
9,091
|
|
|
168,360
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
32,198
|
|
|
33,026
|
|
|
|
|
976
|
|
|
66,200
|
|
Noncontrolling interests' distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
(53
|
)
|
Cash dividends on common stock, $0.82 per share
|
|
|
|
|
|
|
|
|
(24,208
|
)
|
|
|
|
|
|
(24,208
|
)
|
Cash dividends paid on convertible special stock, $60.00 per share
|
|
|
|
|
|
|
|
|
(7,500
|
)
|
|
|
|
|
|
(7,500
|
)
|
Issuance of treasury stock
|
|
|
|
|
69
|
|
|
|
|
|
|
122
|
|
|
|
|
191
|
|
Restricted stock issued, net of forfeitures
|
|
|
41
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
—
|
|
Redemption of common stock to cover tax withholdings
|
|
|
(22
|
)
|
|
(689
|
)
|
|
|
|
|
|
|
|
|
|
(711
|
)
|
Amortization of restricted stock
|
|
|
|
|
4,753
|
|
|
|
|
|
|
|
|
|
|
4,753
|
|
Balance at August 31, 2017
|
$
|
120,289
|
|
|
$
|
48,529
|
|
|
$
|
279,207
|
|
|
$
|
(88,523
|
)
|
|
$
|
220,357
|
|
|
$
|
(382,841
|
)
|
|
$
|
10,014
|
|
|
$
|
207,032
|
|
The accompanying notes are an integral part of the consolidated financial statements.
A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Operating from continuing and discontinued operations:
|
|
|
|
|
|
Net income (loss)
|
$
|
34,173
|
|
|
$
|
(356,004
|
)
|
|
$
|
27,798
|
|
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
|
|
|
|
|
Depreciation
|
43,768
|
|
|
49,925
|
|
|
37,257
|
|
Amortization
|
35,038
|
|
|
39,339
|
|
|
21,983
|
|
Deferred tax provision
|
(21,970
|
)
|
|
(37,919
|
)
|
|
(19,253
|
)
|
Pension, postretirement benefits and other compensation
|
9,520
|
|
|
3,516
|
|
|
7,560
|
|
Restricted stock compensation - CEO transition costs, net of cash
|
—
|
|
|
—
|
|
|
4,789
|
|
Asset impairment
|
1,053
|
|
|
401,667
|
|
|
—
|
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
Accounts receivable
|
(19,077
|
)
|
|
28,227
|
|
|
(2,395
|
)
|
Inventories
|
(3,911
|
)
|
|
44,627
|
|
|
(17,382
|
)
|
Accounts payable
|
33,806
|
|
|
(27,465
|
)
|
|
(8,139
|
)
|
Income taxes
|
(2,793
|
)
|
|
12,549
|
|
|
(3,342
|
)
|
Tax windfall related to share-based incentive compensation
|
—
|
|
|
—
|
|
|
(506
|
)
|
Accrued payroll and other accrued liabilities
|
(9,360
|
)
|
|
(9,319
|
)
|
|
18,359
|
|
Other assets and long-term liabilities
|
4,471
|
|
|
(1,016
|
)
|
|
(6,559
|
)
|
Net cash provided from (used in) operating activities
|
104,718
|
|
|
148,127
|
|
|
60,170
|
|
Investing from continuing and discontinued operations:
|
|
|
|
|
|
Expenditures for property, plant and equipment
|
(36,866
|
)
|
|
(51,238
|
)
|
|
(42,587
|
)
|
Proceeds from the sale of assets
|
4,401
|
|
|
1,366
|
|
|
1,985
|
|
Distributions from (investments in) equity investees
|
250
|
|
|
—
|
|
|
(12,456
|
)
|
Business acquisitions, net of cash
|
—
|
|
|
—
|
|
|
(808,258
|
)
|
Net cash provided from (used in) investing activities
|
(32,215
|
)
|
|
(49,872
|
)
|
|
(861,316
|
)
|
Financing from continuing and discontinued operations:
|
|
|
|
|
|
Cash dividends paid to common stockholders
|
(24,208
|
)
|
|
(24,029
|
)
|
|
(24,024
|
)
|
Cash dividends paid to special stockholders
|
(7,500
|
)
|
|
(7,500
|
)
|
|
(1,813
|
)
|
Increase (decrease) in short-term debt
|
6,328
|
|
|
2,945
|
|
|
(8,759
|
)
|
Borrowings on long-term debt
|
392,593
|
|
|
244,231
|
|
|
1,430,513
|
|
Repayments on long-term debt including current portion
|
(429,187
|
)
|
|
(362,002
|
)
|
|
(713,717
|
)
|
Payment of debt issuance costs
|
—
|
|
|
—
|
|
|
(15,007
|
)
|
Noncontrolling interests' distributions
|
(53
|
)
|
|
—
|
|
|
(1,750
|
)
|
Tax windfall related to share-based incentive compensation
|
—
|
|
|
—
|
|
|
506
|
|
Issuances of common stock, common and treasury
|
191
|
|
|
258
|
|
|
289
|
|
Issuances of convertible special stock, net
|
—
|
|
|
—
|
|
|
120,289
|
|
Redemptions of common stock
|
(711
|
)
|
|
(1,139
|
)
|
|
(4,999
|
)
|
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
(3,335
|
)
|
Net cash provided from (used in) financing activities
|
(62,547
|
)
|
|
(147,236
|
)
|
|
778,193
|
|
Effect of exchange rate changes on cash
|
660
|
|
|
(4,488
|
)
|
|
(15,668
|
)
|
Net increase (decrease) in cash, cash equivalents, and restricted cash
|
10,616
|
|
|
(53,469
|
)
|
|
(38,621
|
)
|
Cash, cash equivalents, and restricted cash at beginning of year
|
43,403
|
|
|
96,872
|
|
|
135,493
|
|
Cash, cash equivalents, and restricted cash at end of year
|
$
|
54,019
|
|
|
$
|
43,403
|
|
|
$
|
96,872
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
Interest
|
$
|
49,044
|
|
|
$
|
54,432
|
|
|
$
|
11,187
|
|
Income taxes
|
$
|
20,932
|
|
|
$
|
22,392
|
|
|
$
|
22,651
|
|
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 an 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
4,900
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
2017
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 daily stock price 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. As of August 31, 2017, there were no market-based awards outstanding.
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. Refer to 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. Refer to 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. Refer to 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, 2017
and
2016
, the Company did not hold any short-term investments.
Restricted Cash
Restricted cash of
$0.8 million
as of August 31, 2017 represents cash and cash equivalents held in an escrow account for the future cash settlement of a commitment to a local government. The cash will be paid over the next 12 months. Restricted cash of
$8.1 million
as of August 31, 2016 included proceeds from tax return refunds for certain Citadel acquisition entities for periods prior to the Company's ownership. These tax refunds were repaid to the seller during the second quarter of fiscal 2017 and
$7.5 million
of these refunds repaid to the seller are subject to an equitable lien related to the Lucent Matter. Refer to Note 17,
Contingencies and Claims
, of this Annual Report on Form 10-K for further discussion.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount shown in the consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
August 31, 2016
|
|
August 31, 2015
|
|
August 31, 2014
|
|
(In thousands)
|
|
|
|
|
Cash and cash equivalents
|
$
|
53,251
|
|
|
$
|
35,260
|
|
|
$
|
96,872
|
|
|
$
|
135,493
|
|
Restricted cash
|
768
|
|
|
8,143
|
|
|
—
|
|
|
—
|
|
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
|
$
|
54,019
|
|
|
$
|
43,403
|
|
|
$
|
96,872
|
|
|
$
|
135,493
|
|
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. Refer to 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 net realizable value. Cost is determined using the weighted-average cost or first-in, first-out method. 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.
Assets Held for Sale
During fiscal 2017, the Company began actively marketing for sale certain properties and machinery and equipment at recently closed plants in the U.S. and Europe. As of
August 31, 2017
, the Company has
$5.7 million
of assets held for sale classified on the consolidated balance sheet that represents the net book value of these properties along with certain machinery and equipment. We expect the sale of those assets to be completed within the next twelve months and have, accordingly, presented the held for
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
sale assets as current and depreciation has ceased. Based on the present real estate market and discussions with the Company's real estate adviser, no impairment of the recorded amounts has occurred as of
August 31, 2017
.
Subsequent to August 31, 2017, the Company sold two properties, previously classified as held for sale, received cash proceeds of
$6.1 million
and recognized a gain of
$3.1 million
.
Property, Plant and Equipment and Depreciation
The components of net property, plant and equipment at
August 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
August 31, 2016
|
|
(In thousands)
|
Property, plant and equipment, at cost:
|
|
|
|
Land and improvements
|
$
|
31,933
|
|
|
$
|
32,957
|
|
Buildings and leasehold improvements
|
186,785
|
|
|
184,291
|
|
Machinery and equipment
|
471,978
|
|
|
447,932
|
|
Furniture and fixtures
|
34,628
|
|
|
34,457
|
|
Construction in progress
|
17,860
|
|
|
20,431
|
|
Gross property, plant and equipment
|
743,184
|
|
|
720,068
|
|
Accumulated depreciation
|
444,481
|
|
|
405,246
|
|
Net property, plant and equipment
|
$
|
298,703
|
|
|
$
|
314,822
|
|
Property, plant and equipment is recorded at cost. The cost of significant betterments and improvements are capitalized in the property accounts. Capital expenditures for each fiscal year exclude liabilities that are included in accounts payable of
$1.9 million
,
$8.8 million
and
$4.4 million
as of August 31,
2017
,
2016
and
2015
, 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.
Purchase Accounting, Goodwill and Other Intangible Assets
Business combinations are accounted for 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 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. Qualitative trends and factors considered in the Company's analysis included overall economic conditions, access to capital markets, industry projections, competitive environment, forecasted operating results, business strategy, stock price and market capitalization, and other relevant qualitative trends and factors. The fair value used in the quantitative
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
analysis is established using an equal weighting 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.
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
|
Refer to 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. Refer to Note 8,
Pension and Postretirement Benefit Plans,
of this Annual Report on Form 10-K for further discussion on retirement plans.
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. Refer to 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.
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Refer to Note 6,
Fair Value Measurement,
of this Annual Report on Form 10-K for further discussion on fair value measurements.
New Accounting Pronouncements
Accounting Standards Adopted In The Current Period
In January 2017, the Financial Accounting Standards Board ("FASB") issued an accounting standard update removing step two from the goodwill impairment test. If a reporting unit fails the quantitative impairment test, impairment expense is immediately recorded as the difference between the reporting unit's fair value and carrying value. The amendment is effective for fiscal years beginning after December 15, 2019 and is applied prospectively. Early adoption is permitted. The Company adopted this standard effective March 1, 2017.
In November 2016, the FASB issued an accounting standard update requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company early adopted this standard effective December 1, 2016. The Company has
$0.8 million
and
$8.1 million
of restricted cash on its consolidated balance sheet as of
August 31, 2017
and
2016
, respectively, whose cash flow statement classification changed to align with the new guidance.
In April 2015, and as subsequently updated, the FASB issued new accounting guidance that requires entities to present debt issuance costs related to a recognized debt liability as a deduction from the carrying amounts of that debt liability. Debt issuance costs incurred in connection with line of credit arrangements will continue to be presented as an asset. Previous guidance classified all debt issuance costs as an asset. The standard is effective for fiscal years beginning after December 15, 2015. The Company adopted this standard effective September 1, 2016 and applied it retrospectively. The amount of debt issuance costs related to term notes retrospectively reclassified from the deferred charges and other noncurrent assets line to the long-term debt line in the consolidated balance sheet was
$10.2 million
at August 31, 2016.
In August 2014, the FASB issued new accounting guidance regarding how a company considers its ability to continue as a going concern, regardless of the Company's performance or financial position. In connection with preparing financial statements for each annual and interim reporting period, an entity's management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. The Company adopted this standard effective September 1, 2016.
Accounting Standards Issued, To Be Adopted By The Company In Future Periods
In March 2017, the FASB issued an accounting standard update requiring that an employer report the pension service cost component in the same line items as compensation costs, but report all other components of net periodic pension cost in a line below operating income. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company had pension service cost of
$5.8 million
and
$5.1 million
during the twelve months ended August 31,
2017
and
2016
, respectively. Total net periodic pension cost was
$12.7 million
and
$10.3 million
during the twelve months ended August 31,
2017
and
2016
, respectively. The Company plans to adopt this standard on September 1, 2018.
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 adoption is permitted. The Company anticipates maintaining its current policy to estimate forfeitures expected to occur to determine stock-based compensation expense and does not expect the adoption of the standard to have a material impact on the consolidated financial statements. The Company will adopt this standard on September 1, 2017.
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 adoption is permitted. The Company regularly enters into operating leases which previously did not require recognition on the balance sheet. The Company has developed its project plan, is currently evaluating the effects this standard will have on its consolidated financial statements and plans to adopt this standard on September 1, 2019.
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 new revenue standard may be applied using either of the following transition methods: (1) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (2) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). The Company preliminarily expects to use the modified retrospective method. The Company is continuing to evaluate the impact of the standard, and the planned adoption method is subject to change. Currently, the Company is in the process of documenting the impact of the guidance on our current accounting policies and practices in order to identify material differences, if any, that would result from applying the new requirements to our revenue contracts. We continue to make progress on our revenue recognition review and are also in the process of evaluating the impact, if any, on changes to our business processes, systems, and controls to support recognition and disclosure requirements under the new guidance.
No other new accounting pronouncements issued or with effective dates during fiscal
2017
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 mobility, industrial & construction, consumer, electrical, energy and healthcare & safety. The acquisition was intended to expand the Company's presence, especially in the North America engineered plastics markets as well as balance the global geographic footprint, and give the Company a second growth platform with its added-value specialty engineered composites business. The acquisition was intended to enhance the Company's existing portfolio and presented attractive expansion opportunities in other fast-growing sectors such as aerospace, medical, LED lighting and oil & gas. Refer to Note 17,
Contingencies and Claims,
of this Annual Report on Form 10-K for details on the Company's ongoing litigation against the defendants related to the Citadel acquisition.
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:
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
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
.
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 reporting unit, which is now part of the Performance Materials reporting unit, and to its global Engineered Composites reporting unit. Except for certain pre-acquisition tax-deductible goodwill,
none
of the goodwill associated with this transaction is deductible for income tax purposes.
Certain goodwill and intangible assets from the Citadel acquisition were subsequently impaired during fiscal 2016. Refer to Note 4,
Goodwill and Other Intangible Assets,
of this Annual Report on Form 10-K for details.
Net sales, income before taxes and net income attributable to A. Schulman, Inc. from the Citadel acquisition are included in fiscal 2017 and 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, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 following pro forma information represents the consolidated results of the Company as if the Citadel acquisition occurred as of September 1, 2013:
|
|
|
|
|
|
For the Year Ended August 31,
|
|
2015
|
|
Unaudited
|
|
(In thousands, except per share data)
|
Net sales
|
$
|
2,769,560
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
23,870
|
|
Net income (loss) per share of common stock attributable to A. Schulman, Inc. - diluted
|
$
|
0.81
|
|
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 September 1, 2013.
|
|
|
•
|
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 U.S. deferred tax assets.
|
|
|
•
|
To push back acquisition-related costs of
$14.1 million
to September 1, 2013. 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 September 1, 2013. 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.
Other Business Acquisitions
The following table summarizes the Company's other business acquisition for the periods presented:
|
|
|
|
|
|
|
Transaction Description
|
Date of Transaction
|
|
Purchase
Consideration
(In millions)
|
|
Segment
|
Compco Pty. Ltd.
|
September 2, 2014
|
|
$6.7
|
|
APAC
|
A manufacturer of masterbatches and custom color with operations in Australia
|
|
|
|
|
|
The Company incurred
$0.6 million
,
$8.8 million
and
$17.3 million
of acquisition and integration related costs, primarily included in selling, general & administrative expenses, during fiscal
2017
,
2016
and
2015
, 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,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Beginning balance
|
$
|
11,341
|
|
|
$
|
10,777
|
|
|
$
|
10,844
|
|
Provision
|
2,062
|
|
|
2,097
|
|
|
1,956
|
|
Write-offs, net of recoveries
|
(2,801
|
)
|
|
(1,445
|
)
|
|
(973
|
)
|
Translation effect
|
569
|
|
|
(88
|
)
|
|
(1,050
|
)
|
Ending balance
|
$
|
11,171
|
|
|
$
|
11,341
|
|
|
$
|
10,777
|
|
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, 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
|
|
Translation
|
4,149
|
|
|
—
|
|
|
1,600
|
|
|
(2
|
)
|
|
215
|
|
|
5,962
|
|
Balance as of August 31, 2017
|
$
|
58,180
|
|
|
$
|
116,369
|
|
|
$
|
13,528
|
|
|
$
|
934
|
|
|
$
|
74,724
|
|
|
$
|
263,735
|
|
(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, and is included in asset impairment charges in the Company's consolidated statements of operations. During 2016, the EMEA Specialty Powers ("SP") reporting unit, which is now part of the EMEA Custom Concentrates & Services ("CCS") reporting unit, the USCAN Engineered Plastics ("EP") reporting unit, which is now part of the USCAN Performance Materials ("PM") reporting unit, and the EC reporting unit did not meet volume and revenue expectations. Additionally, the reporting units associated with the Citadel acquisition had lower margins than planned due, in part, to remediation and changes in business practices undertaken to address the Lucent quality matter (USCAN PM), as well as the impact of the current oil and gas market (EC).
The Company completed its annual impairment review of goodwill as of June 1,
2017
and noted
no
impairment. Based on the quantitative fair value measurements performed, the Company concluded that the fair value of the USCAN PM reporting unit exceeded its carrying values by 5%. The Company is not aware of any triggers which would require a goodwill impairment test as of
August 31, 2017
.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes intangible assets with finite useful lives by major category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2017
|
|
As of August 31, 2016
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
(In thousands)
|
Customer related
|
$
|
359,227
|
|
|
$
|
(91,910
|
)
|
|
$
|
267,317
|
|
|
$
|
359,713
|
|
|
$
|
(67,207
|
)
|
|
$
|
292,506
|
|
Developed technology
|
73,171
|
|
|
(18,574
|
)
|
|
54,597
|
|
|
72,657
|
|
|
(13,864
|
)
|
|
58,793
|
|
Registered trademarks
and tradenames
|
18,347
|
|
|
(8,071
|
)
|
|
10,276
|
|
|
18,097
|
|
|
(6,782
|
)
|
|
11,315
|
|
Total finite-lived
intangible assets
|
$
|
450,745
|
|
|
$
|
(118,555
|
)
|
|
$
|
332,190
|
|
|
$
|
450,467
|
|
|
$
|
(87,853
|
)
|
|
$
|
362,614
|
|
Amortization expense for intangible assets was
$31.7 million
,
$36.1 million
and
$19.4 million
for fiscal
2017
,
2016
and
2015
, respectively. The weighted-average useful life of our finite-lived intangible assets as of
August 31, 2017
is
12.0
years.
During the fourth quarter of fiscal 2016, the Company discontinued the use of certain tradenames and developed technology associated with the Citadel acquisition. While the Company initially concluded there was value to these assets at the time of the acquisition in June 2015, while performing the ASC 360 test in the fourth quarter of fiscal 2016, the Company determined that there was no value for these intangible assets and recorded intangible asset impairment of
$34.5 million
. This determination was based on the abandonment of the majority of the Citadel tradenames following the acquisition integration in the fourth quarter of fiscal 2016 primarily as a result of the Lucent matter. The developed technology impairment was a result of the Lucent matter, as significant changes were required to thermoplastic formulations subsequent to the acquisition. The company impaired intangible assets of
$7.6 million
in the EC segment and
$26.9 million
in the USCAN segment which are included in asset impairment charges in the Company's consolidated statements of operations.
Estimated future amortization expense for intangible assets is as follows:
|
|
|
|
|
|
Estimated Future
Amortization Expense
|
|
(In thousands)
|
Year ended August 31,
|
|
2018
|
$
|
30,917
|
|
2019
|
30,514
|
|
2020
|
30,334
|
|
2021
|
28,924
|
|
2022
|
27,066
|
|
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,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Notes payable and other, due within one year
|
$
|
17,263
|
|
|
$
|
10,333
|
|
Current portion of long-term debt
|
14,750
|
|
|
15,114
|
|
Short-term debt
|
$
|
32,013
|
|
|
$
|
25,447
|
|
Short-term weighted average interest rate
|
6.20
|
%
|
|
7.58
|
%
|
|
|
|
|
Revolving credit facility, LIBOR plus applicable spread, due June 2020
|
$
|
51,250
|
|
|
$
|
17,279
|
|
Term Loan A, LIBOR plus applicable spread, due June 2020
|
166,250
|
|
|
177,500
|
|
U.S. Term Loan B, LIBOR plus applicable spread, due June 2022
|
298,115
|
|
|
341,407
|
|
Euro Term Loan B, LIBOR plus applicable spread, due June 2022
|
—
|
|
|
14,678
|
|
Senior notes, 6.875%, due June 2023
|
375,000
|
|
|
375,000
|
|
Capital leases and other long-term debt
|
3,276
|
|
|
3,727
|
|
Unamortized debt issuance costs
|
(8,713
|
)
|
|
(10,242
|
)
|
Long-term debt
|
$
|
885,178
|
|
|
$
|
919,349
|
|
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. During fiscal 2015, the Company capitalized
$11.3 million
in debt issuance costs related to the Notes.
In connection with the sale of the Notes, the Company entered into a Registration Rights Agreement with the representatives of the initial purchasers of the Notes (the “Registration Rights Agreement”) that, among other things, obligated the Company to complete an offer to exchange the Notes for a new issue of substantially identical exchange notes (the “Exchange Offer”) registered under the Securities Act. The interest rate on the Notes temporarily increased in accordance with the terms of the Registration Rights Agreement during the period between November 17, 2016 to, but not including, the date of the completion of the Exchange Offer on March 21, 2017. The Company did not receive any proceeds from the Exchange Offer.
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, 2017
.
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. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
•
|
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
|
|
|
•
|
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
$56.0 million
of term debt in fiscal 2017. As of August 31, 2017, the Euro Term Loan B Facility has been repaid in full.
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. In October 2017, the Company amended the Credit Agreement and increased the net leverage ratio covenant to provide the Company additional financial flexibility to execute on its growth strategy. The Company was in compliance with these covenants as of
August 31, 2017
and does not believe a subsequent covenant violation is reasonably possible at this time.
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,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Existing capacity:
|
|
|
|
Revolving Facility, due June 2020
|
$
|
300,000
|
|
|
$
|
300,000
|
|
Foreign short-term lines of credit
|
30,890
|
|
|
37,953
|
|
Total capacity from credit lines
|
$
|
330,890
|
|
|
$
|
337,953
|
|
Availability:
|
|
|
|
Revolving Facility, due June 2020
|
$
|
242,040
|
|
|
$
|
279,120
|
|
Foreign short-term lines of credit
|
14,660
|
|
|
27,959
|
|
Total available funds from credit lines
|
$
|
256,700
|
|
|
$
|
307,079
|
|
Total available funds from credit lines represents the total capacity from credit lines less outstanding borrowings of
$67.4 million
and
$26.6 million
as of August 31,
2017
and
2016
, respectively, and issued letters of credit of
$6.8 million
and
$4.3 million
as of August 31,
2017
and
2016
, respectively.
Aggregate maturities of debt, including capital lease obligations, subsequent to August 31,
2017
are as follows (in thousands):
|
|
|
|
|
Year ended August 31,
|
|
2018
|
$
|
32,013
|
|
2019
|
19,582
|
|
2020
|
207,798
|
|
2021
|
3,728
|
|
2022
|
288,293
|
|
2023 and thereafter
|
375,000
|
|
Less: unamortized discount and unamortized debt issuance costs
|
(9,223
|
)
|
Total debt
|
917,191
|
|
NOTE 6 — FAIR VALUE MEASUREMENT
The following table presents information about the Company’s assets and liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
August 31, 2016
|
|
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
|
$
|
286
|
|
|
$
|
—
|
|
|
$
|
286
|
|
|
$
|
—
|
|
|
$
|
487
|
|
|
$
|
—
|
|
|
$
|
487
|
|
|
$
|
—
|
|
Liabilities recorded at fair value:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
$
|
268
|
|
|
$
|
—
|
|
|
$
|
268
|
|
|
$
|
—
|
|
|
$
|
951
|
|
|
$
|
—
|
|
|
$
|
951
|
|
|
$
|
—
|
|
The Company's cash and cash equivalents are recorded at cost, which approximates fair value. The carrying value of the Company's variable-rate debt approximates fair value. The fair value of the Company’s long-term fixed-rate Senior Notes, based on quoted market prices, was
$389.5 million
as of
August 31, 2017
. The fair value of the Company's long-term fixed-rate Senior Notes, estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities, was
$378.8 million
as of
August 31, 2016
. The carrying value of this debt was
$375.0 million
as of
August 31, 2017
and
2016
, respectively.
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 aggregate notional amount of foreign exchange forward contracts outstanding was
$92.7 million
and
$115.9 million
as of
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017
and
2016
, 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 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, 2017
and
2016
.
The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during fiscal
2017
, 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 goodwill and long-lived assets within the EMEA SP reporting unit, which is now part of the EMEA CCS reporting unit, the USCAN EP reporting unit, which is now part of the USCAN PM reporting unit, and the EC reporting unit. We utilized income and market approaches to determine the fair value of these Level 3 assets. For more information, refer to Note 4,
Goodwill and Other Intangible Assets
, of this Annual Report on Form 10-K. There were
no
other significant assets or liabilities that were remeasured at fair value on a non-recurring basis as of
August 31, 2017
and
2016
.
NOTE 7 — INCOME TAXES
Income (loss) from continuing operations before taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
U.S.
|
$
|
(32,930
|
)
|
|
$
|
(433,199
|
)
|
|
$
|
(43,770
|
)
|
Foreign
|
65,263
|
|
|
66,694
|
|
|
72,200
|
|
Income from continuing operations before taxes
|
$
|
32,333
|
|
|
$
|
(366,505
|
)
|
|
$
|
28,430
|
|
The provisions for U.S. and foreign income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Current taxes:
|
|
|
|
|
|
U.S.
|
$
|
(1,561
|
)
|
|
$
|
813
|
|
|
$
|
1,674
|
|
Foreign
|
21,691
|
|
|
28,466
|
|
|
18,078
|
|
Total current tax expense (benefit)
|
20,130
|
|
|
29,279
|
|
|
19,752
|
|
Deferred taxes:
|
|
|
|
|
|
U.S.
|
(18,552
|
)
|
|
(34,069
|
)
|
|
(19,985
|
)
|
Foreign
|
(3,418
|
)
|
|
(3,850
|
)
|
|
732
|
|
Total deferred tax expense (benefit)
|
(21,970
|
)
|
|
(37,919
|
)
|
|
(19,253
|
)
|
Total income tax expense (benefit)
|
$
|
(1,840
|
)
|
|
$
|
(8,640
|
)
|
|
$
|
499
|
|
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
(5.7)%
in
2017
,
2.4%
in
2016
, and
1.8%
in
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
Amount
|
|
% of
Pretax
Income
|
|
Amount
|
|
% of
Pretax
Income
|
|
Amount
|
|
% of
Pretax
Income
|
|
(In thousands, except for %s)
|
U.S. statutory federal income tax rate
|
$
|
11,317
|
|
|
35.0
|
%
|
|
$
|
(128,277
|
)
|
|
35.0
|
%
|
|
$
|
9,951
|
|
|
35.0
|
%
|
Foreign rate differential, net of U.S. tax on certain foreign current year earnings
|
2,213
|
|
|
6.8
|
|
|
10,069
|
|
|
(2.7
|
)
|
|
(692
|
)
|
|
(2.4
|
)
|
Foreign losses with no tax benefit
|
1,026
|
|
|
3.2
|
|
|
1,866
|
|
|
(0.5
|
)
|
|
3,956
|
|
|
14.0
|
|
Worthless stock deduction
|
(14,735
|
)
|
|
(45.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
U.S. non-deductible transaction costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,349
|
|
|
4.7
|
|
State taxes, net of federal benefit
|
(3,894
|
)
|
|
(12.0
|
)
|
|
2,564
|
|
|
(0.7
|
)
|
|
(202
|
)
|
|
(0.7
|
)
|
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
|
1,724
|
|
|
5.3
|
|
|
482
|
|
|
(0.1
|
)
|
|
(1,030
|
)
|
|
(3.6
|
)
|
Other
|
509
|
|
|
1.6
|
|
|
(2,710
|
)
|
|
0.7
|
|
|
(554
|
)
|
|
(2.0
|
)
|
Provision (benefit) for U.S. and foreign income taxes
|
$
|
(1,840
|
)
|
|
(5.7
|
)%
|
|
$
|
(8,640
|
)
|
|
2.4
|
%
|
|
$
|
499
|
|
|
1.8
|
%
|
Deferred tax assets and (liabilities) consist of the following:
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Pensions
|
$
|
23,585
|
|
|
$
|
28,400
|
|
Inventory reserves
|
3,503
|
|
|
2,176
|
|
Bad debt reserves
|
2,071
|
|
|
1,680
|
|
Accruals
|
6,509
|
|
|
7,844
|
|
Postretirement benefits other than pensions
|
6,599
|
|
|
6,255
|
|
Foreign net operating loss carryforwards
|
23,305
|
|
|
21,967
|
|
Foreign tax credit carryforwards
|
5,442
|
|
|
5,442
|
|
Alternative minimum tax carryforwards
|
1,493
|
|
|
2,289
|
|
Interest carryforwards
|
6,039
|
|
|
2,713
|
|
U.S. net operating loss carryforwards
|
35,288
|
|
|
33,059
|
|
Other
|
11,299
|
|
|
13,498
|
|
Gross deferred tax assets
|
125,133
|
|
|
125,323
|
|
Valuation allowance
|
(33,648
|
)
|
|
(29,089
|
)
|
Total deferred tax assets
|
91,485
|
|
|
96,234
|
|
Property, plant and equipment
|
(12,039
|
)
|
|
(16,194
|
)
|
Intangibles
|
(80,991
|
)
|
|
(89,919
|
)
|
Unremitted foreign earnings
|
—
|
|
|
(9,003
|
)
|
Other
|
(4,529
|
)
|
|
(3,925
|
)
|
Gross deferred tax liabilities
|
(97,559
|
)
|
|
(119,041
|
)
|
Net deferred tax assets (liabilities)
|
$
|
(6,074
|
)
|
|
$
|
(22,807
|
)
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective tax rate for the year ended
August 31, 2017
was less than the U.S. statutory federal income tax rate primarily because of a worthless stock tax deduction relating to the Company's investment in an insolvent foreign subsidiary. The fiscal 2017 effective tax rate benefit represents a U.S. tax deduction for prior accounting losses for which no tax benefit has previously been allowed.
As of
August 31, 2017
, the Company has a U.S. federal net operating loss carryforward of
$83.5 million
which will begin to expire in 2035, resulting in a deferred tax asset of
$29.3 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, 2017
, the Company has foreign net operating loss carryforwards of
$76.7 million
resulting in a deferred tax asset of
$23.3 million
. These foreign net operating loss carryforwards are primarily from countries with unlimited carryforward periods, but include
$4.9 million
of carryforwards subject to expiration in years 2020 to 2025. A valuation allowance totaling
$15.1 million
has been recorded against this deferred tax asset where recovery of the carryforward is uncertain.
As of
August 31, 2017
, the Company has domestic state and local net operating loss carryforwards of
$166.9 million
resulting in a deferred tax asset of
$6.0 million
partially offset by a valuation allowance of
$4.3 million
. These net operating loss carryforwards expire in years 2018 to 2037.
As of
August 31, 2017
, 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 fiscal
2017
has been reduced by unrealized stock compensation attributes of
$2.6 million
.
As of
August 31, 2017
, the Company has
$1.5 million
of alternative minimum tax carryforwards which have an unlimited carryforward period.
Deferred charges included
$31.6 million
and
$36.2 million
from the tax effect of temporary differences at
August 31, 2017
and
2016
, respectively.
As of
August 31, 2017
, the Company’s gross unrecognized tax benefits totaled
$4.2 million
. If recognized
$3.3 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, 2017
, the Company had
$1.4 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 2015 onward, other foreign jurisdictions - from 2011 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,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Beginning balance
|
$
|
2,993
|
|
|
$
|
2,031
|
|
|
$
|
3,845
|
|
Decreases related to prior year tax positions
|
(194
|
)
|
|
(53
|
)
|
|
(259
|
)
|
Increases related to prior year tax positions
|
1,661
|
|
|
275
|
|
|
509
|
|
Increases related to current year tax positions
|
489
|
|
|
826
|
|
|
61
|
|
Settlements
|
(945
|
)
|
|
—
|
|
|
(376
|
)
|
Lapse of statute of limitations
|
—
|
|
|
(71
|
)
|
|
(1,192
|
)
|
Foreign currency impact
|
223
|
|
|
(15
|
)
|
|
(557
|
)
|
Ending balance
|
$
|
4,227
|
|
|
$
|
2,993
|
|
|
$
|
2,031
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
August 31, 2017
, no taxes have been provided on the undistributed earnings of certain foreign subsidiaries amounting to
$515.9 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
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Benefit obligation at beginning of year
|
$
|
(198,385
|
)
|
|
$
|
(165,205
|
)
|
|
$
|
(10,491
|
)
|
|
$
|
(10,137
|
)
|
Service cost
|
(5,816
|
)
|
|
(5,051
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Interest cost
|
(2,348
|
)
|
|
(4,198
|
)
|
|
(249
|
)
|
|
(390
|
)
|
Participant contributions
|
(55
|
)
|
|
(155
|
)
|
|
(42
|
)
|
|
(47
|
)
|
Actuarial gains (losses)
|
18,499
|
|
|
(36,159
|
)
|
|
(208
|
)
|
|
(755
|
)
|
Settlements
|
7,171
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Curtailments
|
318
|
|
|
1,369
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
4,289
|
|
|
4,597
|
|
|
921
|
|
|
841
|
|
Plan amendments
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Translation adjustment
|
(8,341
|
)
|
|
6,417
|
|
|
—
|
|
|
—
|
|
Benefit obligation at end of year
|
$
|
(184,658
|
)
|
|
$
|
(198,385
|
)
|
|
$
|
(10,072
|
)
|
|
$
|
(10,491
|
)
|
Fair value of plan assets at beginning of year
|
$
|
50,066
|
|
|
$
|
44,325
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on assets
|
264
|
|
|
8,365
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
5,124
|
|
|
5,658
|
|
|
879
|
|
|
794
|
|
Participant contributions
|
55
|
|
|
155
|
|
|
42
|
|
|
47
|
|
Settlements
|
(7,075
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
Benefits paid
|
(4,289
|
)
|
|
(4,597
|
)
|
|
(921
|
)
|
|
(841
|
)
|
Translation adjustment
|
1,396
|
|
|
(3,840
|
)
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
$
|
45,541
|
|
|
$
|
50,066
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Underfunded
|
$
|
(139,117
|
)
|
|
$
|
(148,319
|
)
|
|
$
|
(10,072
|
)
|
|
$
|
(10,491
|
)
|
Classification of net amount recognized:
|
|
|
|
|
|
|
|
Accrued payroll, taxes and related benefits
|
$
|
(3,426
|
)
|
|
$
|
(3,211
|
)
|
|
$
|
(819
|
)
|
|
$
|
(805
|
)
|
Long-term liabilities
|
(135,691
|
)
|
|
(145,108
|
)
|
|
(9,253
|
)
|
|
(9,686
|
)
|
Net amount recognized
|
$
|
(139,117
|
)
|
|
$
|
(148,319
|
)
|
|
$
|
(10,072
|
)
|
|
$
|
(10,491
|
)
|
Amounts recognized in AOCI:
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
$
|
52,249
|
|
|
$
|
73,922
|
|
|
$
|
(766
|
)
|
|
$
|
(974
|
)
|
Net prior service cost (credit)
|
118
|
|
|
132
|
|
|
(357
|
)
|
|
(899
|
)
|
Net amount recognized in AOCI
|
$
|
52,367
|
|
|
$
|
74,054
|
|
|
$
|
(1,123
|
)
|
|
$
|
(1,873
|
)
|
Change in plan assets and benefit obligations recognized in AOCI:
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
$
|
(17,577
|
)
|
|
$
|
28,358
|
|
|
$
|
208
|
|
|
$
|
755
|
|
Prior service cost (credit)
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net actuarial (loss) gain
|
(3,962
|
)
|
|
(2,843
|
)
|
|
—
|
|
|
56
|
|
Amortization of prior service (cost) credit
|
(11
|
)
|
|
(32
|
)
|
|
542
|
|
|
541
|
|
Settlement/curtailment gains (losses)
|
(2,052
|
)
|
|
(68
|
)
|
|
—
|
|
|
—
|
|
Translation adjustment
|
1,926
|
|
|
(2,324
|
)
|
|
—
|
|
|
—
|
|
Total change in AOCI
|
$
|
(21,687
|
)
|
|
$
|
23,091
|
|
|
$
|
750
|
|
|
$
|
1,352
|
|
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,
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Service cost
|
$
|
5,816
|
|
|
$
|
5,051
|
|
|
$
|
4,609
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Interest cost
|
2,348
|
|
|
4,198
|
|
|
4,362
|
|
|
249
|
|
|
390
|
|
|
440
|
|
Expected return on plan assets
|
(1,502
|
)
|
|
(1,934
|
)
|
|
(1,799
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
11
|
|
|
32
|
|
|
144
|
|
|
(542
|
)
|
|
(597
|
)
|
|
(541
|
)
|
Recognized (gains) losses due to plan settlements
|
2,258
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized (gains) losses due to plan curtailments
|
(229
|
)
|
|
68
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized net actuarial loss (gain)
|
3,985
|
|
|
2,843
|
|
|
2,884
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit cost
|
$
|
12,687
|
|
|
$
|
10,258
|
|
|
$
|
10,200
|
|
|
$
|
(290
|
)
|
|
$
|
(204
|
)
|
|
$
|
(98
|
)
|
Amounts expected to be amortized from AOCI and included in total net periodic benefit cost during the year ended August 31,
2018
, are as follows:
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
|
(In thousands)
|
Net actuarial loss (gain)
|
$
|
2,791
|
|
|
$
|
—
|
|
Prior service cost (credit)
|
11
|
|
|
(241
|
)
|
Total
|
$
|
2,802
|
|
|
$
|
(241
|
)
|
Selected information regarding the Company’s pension and OPEB plans is as follows:
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Pension Plans:
|
|
|
|
All plans:
|
|
|
|
Accumulated benefit obligation
|
$
|
184,151
|
|
|
$
|
183,298
|
|
Plans with projected benefit obligations in excess of plan assets:
|
|
|
|
Projected benefit obligation
|
$
|
184,658
|
|
|
$
|
198,385
|
|
Accumulated benefit obligation
|
$
|
171,300
|
|
|
$
|
183,298
|
|
Fair value of plan assets
|
$
|
45,541
|
|
|
$
|
50,066
|
|
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
|
$
|
10,072
|
|
|
$
|
10,491
|
|
Plans with projected benefit obligations in excess of plan assets:
|
|
|
|
Projected benefit obligation
|
$
|
10,072
|
|
|
$
|
10,491
|
|
Accumulated benefit obligation
|
$
|
10,072
|
|
|
$
|
10,491
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The underfunded position of the pension plans is primarily related to the Company’s German and United Kingdom pension plans. As of
August 31, 2017
, the Company’s German and United Kingdom pension plans are underfunded by
$124.0 million
. In Germany, there are no statutory requirements for funding while in the United Kingdom there are certain statutory minimum funding requirements.
Pension Benefits
Assumptions used to determine pension obligations and expense follow:
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine benefit obligation
|
2017
|
|
2016
|
|
2015
|
Discount rate
|
2.1
|
%
|
|
1.5
|
%
|
|
2.6
|
%
|
Rate of compensation increase
|
2.1
|
%
|
|
2.1
|
%
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine expense
|
2017
|
|
2016
|
|
2015
|
Discount rate used to determine benefit obligation
|
1.5
|
%
|
|
2.6
|
%
|
|
2.8
|
%
|
Discount rate used to determine service cost
|
1.6
|
%
|
|
2.6
|
%
|
|
2.8
|
%
|
Discount rate used to determine interest cost
|
1.2
|
%
|
|
2.6
|
%
|
|
2.8
|
%
|
Expected long-term return on plan assets
|
3.1
|
%
|
|
4.5
|
%
|
|
4.7
|
%
|
Rate of compensation increase
|
2.1
|
%
|
|
2.4
|
%
|
|
2.4
|
%
|
The expected long-term rate of return on pension assets was determined for each country and reflects long-term historical data taking into account each plan's target asset allocation. The discount rates were determined using appropriate bond data for each country.
Other Postretirement Benefits
Assumptions used to determine other postretirement benefits obligations and expense follow:
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine benefit obligation
|
2017
|
|
2016
|
|
2015
|
Discount rate
|
3.4
|
%
|
|
3.1
|
%
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine expense
|
2017
|
|
2016
|
|
2015
|
Discount rate used to determine benefit obligation
|
3.1
|
%
|
|
4.0
|
%
|
|
3.8
|
%
|
Discount rate used to determine service cost
|
2.9
|
%
|
|
4.0
|
%
|
|
3.8
|
%
|
Discount rate used to determine interest cost
|
2.5
|
%
|
|
4.0
|
%
|
|
3.8
|
%
|
Initial health care cost trend rate
|
6.3
|
%
|
|
6.5
|
%
|
|
6.8
|
%
|
Ultimate health care cost trend rate
|
5.0
|
%
|
|
5.0
|
%
|
|
5.0
|
%
|
Year ultimate health care trend rate is achieved
|
2023
|
|
|
2023
|
|
|
2023
|
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.
For fiscal
2018
, the Company, in consultation with its actuaries, has selected assumptions used to determine expense yielding a weighted-average discount rate of
2.1%
to determine benefit obligation,
2.4%
to determine service cost,
1.7%
to determine
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest cost, expected long-term return on plan assets of
3.4%
and rate of compensation increase of
1.8%
for its defined benefit pension plans. For its postretirement benefit plan, the Company, in consultation with its actuaries, has selected assumptions used to determine expense yielding a weighted-average discount rate of
3.4%
to determine benefit obligation,
3.3%
to determine service cost, and
2.8%
to determine interest cost for fiscal
2018
.
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,
2017
:
|
|
|
|
|
|
|
|
|
|
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
|
$
|
24
|
|
|
$
|
(21
|
)
|
Effect on accumulated postretirement benefit obligation
|
$
|
865
|
|
|
$
|
(753
|
)
|
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
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Equity securities
|
29
|
%
|
|
22
|
%
|
|
27
|
%
|
|
20
|
%
|
Debt securities
|
18
|
%
|
|
18
|
%
|
|
6
|
%
|
|
9
|
%
|
Fixed insurance contracts
|
50
|
%
|
|
59
|
%
|
|
64
|
%
|
|
70
|
%
|
Cash
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
Real Estate
|
2
|
%
|
|
—
|
%
|
|
2
|
%
|
|
—
|
%
|
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, 2017
|
|
As of August 31, 2016
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(In thousands)
|
Equity securities
|
$
|
13,149
|
|
|
$
|
7,550
|
|
|
$
|
5,599
|
|
|
$
|
—
|
|
|
$
|
10,940
|
|
|
$
|
1,615
|
|
|
$
|
9,325
|
|
|
$
|
—
|
|
Debt securities
|
8,133
|
|
|
5,844
|
|
|
2,289
|
|
|
—
|
|
|
8,969
|
|
|
4,905
|
|
|
4,064
|
|
|
—
|
|
Fixed insurance contracts
|
23,002
|
|
|
—
|
|
|
—
|
|
|
23,002
|
|
|
29,855
|
|
|
—
|
|
|
—
|
|
|
29,855
|
|
Cash
|
442
|
|
|
442
|
|
|
—
|
|
|
—
|
|
|
302
|
|
|
302
|
|
|
—
|
|
|
—
|
|
Other
|
815
|
|
|
—
|
|
|
—
|
|
|
815
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
45,541
|
|
|
$
|
13,836
|
|
|
$
|
7,888
|
|
|
$
|
23,817
|
|
|
$
|
50,066
|
|
|
$
|
6,822
|
|
|
$
|
13,389
|
|
|
$
|
29,855
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
(In thousands)
|
Balance, beginning of fiscal year
|
$
|
29,855
|
|
|
$
|
18,538
|
|
Actual return on plan assets
|
(14,315
|
)
|
|
11,539
|
|
Purchases, sales, issuances, and settlements, net
|
3,322
|
|
|
2,864
|
|
Foreign currency translation
|
4,955
|
|
|
(3,086
|
)
|
Balance, end of fiscal year
|
$
|
23,817
|
|
|
$
|
29,855
|
|
The Company expects to contribute
$5.8 million
for its pension obligations and
$0.8 million
to its other postretirement plan in fiscal
2018
. The benefit payments, which reflect expected future service, are as follows:
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
Pension
Benefits
|
|
OPEB
Benefits
|
|
(In thousands)
|
2018
|
$
|
4,869
|
|
|
$
|
833
|
|
2019
|
4,694
|
|
|
854
|
|
2020
|
5,154
|
|
|
823
|
|
2021
|
5,336
|
|
|
772
|
|
2022
|
5,446
|
|
|
775
|
|
Years 2023 — 2027
|
34,260
|
|
|
3,374
|
|
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
$4.1 million
,
$3.9 million
and
$4.2 million
in
2017
,
2016
and
2015
, 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, 2017
, 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
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
will rank senior to the Convertible Special Stock.
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
,
$7.5 million
, and
$1.8 million
of convertible special stock dividends during fiscal
2017
,
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, 2017
) 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, 2017
.
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, 2017
.
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)
(4)
|
|
Pension and Other Retiree Benefits
(2)
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
|
(In thousands)
|
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 ($456)
|
—
|
|
|
1,427
|
|
(3)
|
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 ($1,061)
|
—
|
|
|
1,721
|
|
(3)
|
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
|
)
|
Other comprehensive income (loss) before reclassifications, net of tax of $0 related to foreign currency translation gains (losses), and ($4,634) related to pension and other retiree benefits
|
17,355
|
|
|
10,855
|
|
|
28,210
|
|
Amounts reclassified to earnings, net of tax of ($1,667)
|
—
|
|
|
3,817
|
|
(3)
|
3,817
|
|
Net current period other comprehensive income (loss)
|
17,355
|
|
|
14,672
|
|
|
32,027
|
|
Less: comprehensive income (loss) attributable to
noncontrolling interests
|
(171
|
)
|
|
—
|
|
|
(171
|
)
|
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
|
17,526
|
|
|
14,672
|
|
|
32,198
|
|
Balance as of August 31, 2017
|
$
|
(52,191
|
)
|
|
$
|
(36,332
|
)
|
|
$
|
(88,523
|
)
|
(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)
Represents amortization of net actuarial loss and prior service costs. Fiscal 2017 includes a curtailment gain of $229 and settlement charges of $2,281, and fiscal 2016 includes a curtailment charge of $68. There were no curtailments or settlements recognized in fiscal 2015.
(4)
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 9, 2010, the Company’s stockholders approved the adoption of the A. Schulman, Inc. 2010 Value Creation Rewards Plan (“2010 Rewards Plan”). 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, 2017
, there were
259,904
shares of common stock available for grant pursuant to the Company’s 2010 Rewards Plan, and
707,269
shares of common stock available for grant pursuant to the Company’s 2014 Equity Incentive Plan. 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 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, 2016
|
86,715
|
|
|
585,492
|
|
|
$
|
27.94
|
|
|
$
|
27.77
|
|
Granted
|
234,620
|
|
|
227,220
|
|
|
$
|
29.54
|
|
|
$
|
32.55
|
|
Vested
|
(22,992
|
)
|
|
(25,007
|
)
|
|
$
|
31.86
|
|
|
$
|
34.42
|
|
Forfeited
|
(36,113
|
)
|
|
(179,504
|
)
|
|
$
|
26.89
|
|
|
$
|
31.84
|
|
Outstanding at August 31, 2017
|
262,230
|
|
|
608,201
|
|
|
$
|
29.17
|
|
|
$
|
28.82
|
|
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,
2017
,
2016
and
2015
were
$29.54
,
$22.95
and
$33.90
, 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, 2017
are
304,101
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 fair value of the
608,201
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
2017
,
2016
and
2015
were
$32.55
,
$22.93
and
$33.90
per share, respectively.
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
Outstanding Shares
Under Option
|
|
Weighted-Average
Exercise Price
|
Outstanding at August 31, 2016
|
—
|
|
|
$
|
—
|
|
Granted
|
173,200
|
|
|
$
|
32.55
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
Forfeited and expired
|
(1,200
|
)
|
|
$
|
32.55
|
|
Outstanding at August 31, 2017
|
172,000
|
|
|
$
|
32.55
|
|
Exercisable at August 31, 2017
|
—
|
|
|
$
|
—
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. There were
no
stock options exercised for the year ended August 31,
2017
. The total intrinsic value of stock options exercised for the years ended August 31,
2016
and
2015
was not material.
In fiscal 2017, the Company granted
173,200
stock options with a weighted average exercise price of
$32.55
and a weighted average fair value of
$10.41
. The fair value of the stock options was estimated using a Black Scholes model with the following assumptions:
Expected term:
6.5
years
Risk-free rate:
2.22%
Volatility:
39.1%
Dividend yield:
2.52%
The Company did
no
t grant stock options in fiscal
2016
or
2015
.
Total unrecognized compensation cost, including a provision for estimated forfeitures, related to nonvested share-based incentive compensation arrangements as of
August 31, 2017
was
$6.9 million
. This cost is expected to be recognized over a weighted-average period of
1.6 years
. As of
August 31, 2017
, the weighted average remaining term for outstanding stock options was
9.36 years
.
The Company made
$0.8 million
in cash payments for cash-settled restricted stock units and cash-based awards during both fiscal
2017
and fiscal
2016
.
During fiscal
2017
and
2016
, the Company granted non-employee directors
16,317
shares and
24,624
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 2017
,
2016
and
2015
. It is the Company’s current practice to use treasury shares for the share settlement on the Investment Date.
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,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Time-based and performance-based restricted stock awards
|
$
|
3,538
|
|
|
$
|
879
|
|
|
$
|
4,071
|
|
Stock options
|
328
|
|
|
—
|
|
|
—
|
|
Unrestricted awards
|
1,253
|
|
|
564
|
|
|
631
|
|
CEO transition costs
|
—
|
|
|
—
|
|
|
6,167
|
|
Total share-based incentive compensation
|
$
|
5,119
|
|
|
$
|
1,443
|
|
|
$
|
10,869
|
|
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.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2017
,
2016
, and
2015
the accumulated dividend per share on conversion exceeds basic EPS, therefore the respective
2,388,913
,
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,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Weighted-average shares outstanding:
|
|
|
|
|
|
Basic
|
29,401
|
|
|
29,300
|
|
|
29,149
|
|
Incremental shares from equity awards
|
114
|
|
|
—
|
|
|
334
|
|
Incremental shares from convertible special stock
|
—
|
|
|
—
|
|
|
—
|
|
Diluted
|
29,515
|
|
|
29,300
|
|
|
29,483
|
|
Diluted weighted-average shares outstanding for fiscal
2017
and
2016
excludes approximately
110,000
and
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
, there were
no
anti-dilutive shares related to equity awards that were excluded from diluted weighted-average shares outstanding.
NOTE 13 — LEASES
The Company leases certain equipment, buildings, vehicles and computer equipment. Total rental expense was
$23.4 million
in
2017
,
$22.4 million
in
2016
and
$18.1 million
in
2015
. 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)
|
2018
|
$
|
17,155
|
|
2019
|
11,769
|
|
2020
|
7,107
|
|
2021
|
4,318
|
|
2022
|
3,296
|
|
2023 and thereafter
|
12,901
|
|
Total minimum rental commitments
|
$
|
56,546
|
|
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
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
EMEA
|
$
|
1,208,818
|
|
|
$
|
1,239,963
|
|
|
$
|
1,339,355
|
|
USCAN
|
640,441
|
|
|
691,369
|
|
|
610,493
|
|
LATAM
|
179,352
|
|
|
171,650
|
|
|
177,463
|
|
APAC
|
208,507
|
|
|
186,911
|
|
|
207,781
|
|
EC
|
224,006
|
|
|
206,112
|
|
|
57,133
|
|
Total net sales to unaffiliated customers
|
$
|
2,461,124
|
|
|
$
|
2,496,005
|
|
|
$
|
2,392,225
|
|
No single customer accounted for more than 10% of consolidated sales and revenues for the years ended August 31,
2017
,
2016
, and
2015
.
Below the Company presents gross profit by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
EMEA
|
$
|
161,184
|
|
|
$
|
178,376
|
|
|
$
|
189,860
|
|
USCAN
|
91,768
|
|
|
115,329
|
|
|
100,550
|
|
LATAM
|
38,565
|
|
|
36,886
|
|
|
31,971
|
|
APAC
|
35,587
|
|
|
32,293
|
|
|
29,238
|
|
EC
|
56,003
|
|
|
50,461
|
|
|
14,536
|
|
Total segment gross profit
|
383,107
|
|
|
413,345
|
|
|
366,155
|
|
Inventory step-up
|
—
|
|
|
—
|
|
|
(3,082
|
)
|
Accelerated depreciation and restructuring related costs
(1)
|
(3,097
|
)
|
|
(7,571
|
)
|
|
(1,796
|
)
|
Costs related to acquisitions and integrations
|
(57
|
)
|
|
(2,769
|
)
|
|
(267
|
)
|
Lucent costs
(2)
|
(190
|
)
|
|
(2,085
|
)
|
|
—
|
|
Total gross profit
|
$
|
379,763
|
|
|
$
|
400,920
|
|
|
$
|
361,010
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below is a reconciliation of segment operating income to operating income (loss) and income (loss) from continuing operations before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
EMEA
|
$
|
67,831
|
|
|
$
|
76,576
|
|
|
$
|
78,313
|
|
USCAN
|
29,080
|
|
|
47,062
|
|
|
40,713
|
|
LATAM
|
23,096
|
|
|
20,268
|
|
|
13,061
|
|
APAC
|
19,330
|
|
|
17,953
|
|
|
14,401
|
|
EC
|
20,700
|
|
|
14,885
|
|
|
5,454
|
|
Total segment operating income
|
160,037
|
|
|
176,744
|
|
|
151,942
|
|
Corporate
|
(33,542
|
)
|
|
(30,797
|
)
|
|
(31,238
|
)
|
Costs related to acquisitions and integrations
|
(605
|
)
|
|
(8,789
|
)
|
|
(17,208
|
)
|
Restructuring and related costs
(1)
|
(28,960
|
)
|
|
(27,762
|
)
|
|
(23,411
|
)
|
Accelerated depreciation
|
(1,890
|
)
|
|
(6,309
|
)
|
|
(408
|
)
|
CEO transition costs
|
(196
|
)
|
|
(3,399
|
)
|
|
(6,167
|
)
|
Asset impairment
|
(1,053
|
)
|
|
(401,667
|
)
|
|
—
|
|
Curtailment and settlement gains (losses)
|
(2,029
|
)
|
|
—
|
|
|
—
|
|
Lucent costs
(2)
|
(5,966
|
)
|
|
(7,261
|
)
|
|
—
|
|
Inventory step-up
|
—
|
|
|
—
|
|
|
(3,082
|
)
|
Operating income (loss)
|
85,796
|
|
|
(309,240
|
)
|
|
70,428
|
|
Interest expense
|
(53,195
|
)
|
|
(54,548
|
)
|
|
(22,613
|
)
|
Bridge financing fees
|
—
|
|
|
—
|
|
|
(18,750
|
)
|
Foreign currency transaction gains (losses)
|
(1,781
|
)
|
|
(3,491
|
)
|
|
(3,363
|
)
|
Other income (expense), net
|
1,513
|
|
|
774
|
|
|
1,438
|
|
Gain on early extinguishment of debt
|
—
|
|
|
—
|
|
|
1,290
|
|
Income (loss) from continuing operations before taxes
|
$
|
32,333
|
|
|
$
|
(366,505
|
)
|
|
$
|
28,430
|
|
(1)
Restructuring related costs of
$15.5 million
,
$16.0 million
, and
$9.1 million
for fiscal
2017
,
2016
and
2015
, respectively, primarily included in selling, general and administrative expenses in the Company’s statements of operations, are costs associated with professional fees for outside strategic consultants regarding actions to improve the profitability of the organization, improve efficiency of its operations or comply with new legislation, and costs associated with reorganizations of the legal entity structure of the Company. Restructuring expenses for fiscal
2017
,
2016
and
2015
of
$13.5 million
,
$11.8 million
, and
$14.3 million
respectively, included in restructuring expense in the Company’s statements of operations include costs permitted under ASC 420, Exit or Disposal Obligations, such as severance costs, outplacement services and contract termination costs.
(2)
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. Lucent costs in selling, general and administrative expenses include legal and investigative costs. In addition, in the year ended August 31, 2016, Lucent costs in SG&A also include dedicated internal personnel costs that would have otherwise been focused on normal operations.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes identifiable assets by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Identifiable assets:
|
|
|
|
|
|
EMEA
|
$
|
611,364
|
|
|
$
|
594,599
|
|
|
$
|
701,263
|
|
USCAN
|
564,464
|
|
|
599,586
|
|
|
861,985
|
|
LATAM
|
107,468
|
|
|
86,105
|
|
|
96,210
|
|
APAC
|
146,455
|
|
|
131,356
|
|
|
126,965
|
|
EC
|
324,029
|
|
|
335,793
|
|
|
553,459
|
|
Total identifiable assets
|
$
|
1,753,780
|
|
|
$
|
1,747,439
|
|
|
$
|
2,339,882
|
|
The following tables summarize depreciation and amortization and capital expenditures by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Depreciation and amortization expense:
|
|
|
|
|
|
EMEA
|
$
|
21,203
|
|
|
$
|
22,646
|
|
|
$
|
21,730
|
|
USCAN
|
31,714
|
|
|
39,139
|
|
|
24,197
|
|
LATAM
|
3,681
|
|
|
3,822
|
|
|
3,255
|
|
APAC
|
5,167
|
|
|
5,409
|
|
|
5,424
|
|
EC
|
17,041
|
|
|
18,248
|
|
|
4,634
|
|
Total depreciation and amortization expense
|
$
|
78,806
|
|
|
$
|
89,264
|
|
|
$
|
59,240
|
|
Capital expenditures:
|
|
|
|
|
|
EMEA
|
$
|
12,053
|
|
|
$
|
17,763
|
|
|
$
|
21,321
|
|
USCAN
|
12,259
|
|
|
17,447
|
|
|
10,332
|
|
LATAM
|
4,264
|
|
|
5,514
|
|
|
3,597
|
|
APAC
|
4,258
|
|
|
9,322
|
|
|
6,895
|
|
EC
|
4,032
|
|
|
1,192
|
|
|
442
|
|
Total capital expenditures
|
$
|
36,866
|
|
|
$
|
51,238
|
|
|
$
|
42,587
|
|
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,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Net sales:
|
|
|
|
|
|
United States
|
$
|
772,434
|
|
|
$
|
807,673
|
|
|
$
|
632,906
|
|
Germany
|
404,081
|
|
|
415,965
|
|
|
432,822
|
|
France
|
163,544
|
|
|
170,304
|
|
|
195,507
|
|
Other international
|
1,121,065
|
|
|
1,102,063
|
|
|
1,130,990
|
|
Total net sales
|
$
|
2,461,124
|
|
|
$
|
2,496,005
|
|
|
$
|
2,392,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Long lived assets:
|
|
|
|
|
|
United States
|
$
|
131,326
|
|
|
$
|
149,098
|
|
|
$
|
159,394
|
|
Germany
|
25,177
|
|
|
25,716
|
|
|
27,224
|
|
France
|
28,530
|
|
|
26,450
|
|
|
18,472
|
|
Other international
|
113,670
|
|
|
113,558
|
|
|
109,404
|
|
Total long lived assets
|
$
|
298,703
|
|
|
$
|
314,822
|
|
|
$
|
314,494
|
|
Globally, the Company operates in three product families: Engineered Composites, Custom Concentrates and Services, and Performance Materials. The amount and percentage of consolidated net sales for these product families are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands, except for %’s)
|
Engineered Composites
|
$
|
224,006
|
|
|
9
|
%
|
|
$
|
206,112
|
|
|
8
|
%
|
|
$
|
57,133
|
|
|
2
|
%
|
Custom Concentrates and Services
|
1,134,305
|
|
|
46
|
|
|
1,140,814
|
|
|
46
|
|
|
1,227,035
|
|
|
51
|
|
Performance Materials
|
1,102,813
|
|
|
45
|
|
|
1,149,079
|
|
|
46
|
|
|
1,108,057
|
|
|
47
|
|
Total consolidated net sales
|
$
|
2,461,124
|
|
|
100
|
%
|
|
$
|
2,496,005
|
|
|
100
|
%
|
|
$
|
2,392,225
|
|
|
100
|
%
|
NOTE 15 — RESEARCH AND DEVELOPMENT
Research and development expenditures were
$19.8 million
in fiscal 2017 and 2016, and
$17.8 million
in fiscal 2015. 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 2017 Restructuring Plans
USCAN Plan
During the second quarter of fiscal 2017, the Company approved plans to close its facility in Fontana, California and shift production to other U.S. facilities. The Company reduced headcount by approximately
10
as a result of this plan upon the closure of the facility in the fourth quarter of fiscal 2017. The Company recorded
$0.7 million
of pre-tax employee-related costs during fiscal 2017. The Company does not expect to incur any additional charges, make any additional cash payments, and has
no
balance accrued for this plan as of
August 31, 2017
as the plan is considered complete.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Global Product Family Simplification Plan
During the first quarter of fiscal 2017, the Company announced plans to reduce middle management and consolidate the number of product families from six to three. This action simplified the management structure and processes of the product families and allowed the Company to refocus on the priority of sales growth. The Company eliminated approximately
60
positions during fiscal 2017, primarily in EMEA and USCAN. The Company recorded
$6.6 million
of pre-tax employee-related costs during fiscal 2017. As of
August 31, 2017
, the company has a balance of
$0.9 million
accrued for this plan. The Company does not expect any additional charges related to this plan. Cash payments associated with this plan are expected to occur through fiscal 2018 as the plan is completed.
EMEA Plans
During the second quarter of fiscal 2017, the Company announced plans to close its facility in L'Arbresle, France and shift production to other EMEA facilities. The Company reduced headcount in fiscal 2017 by approximately
20
as a result of this plan. The Company recorded
$1.6 million
of pre-tax employee-related costs during fiscal 2017. The Company does not expect any additional charges related to this plan and has a balance of
$0.9 million
accrued for this plan as of
August 31, 2017
. Cash payments associated with this plan are expected to occur through fiscal 2018 as the plan is completed.
In the first quarter of fiscal 2017, the Company approved plans to further streamline EMEA operations and back-office functions. The Company reduced headcount in EMEA by approximately
30
as a result of this plan. During fiscal 2017, the Company recorded
$1.6 million
of pre-tax employee-related costs. The Company does not expect any additional charges related to this plan and has a balance of
$0.3 million
accrued for this plan as of
August 31, 2017
. Cash payments related to this plan are expected to occur through fiscal 2018 as the plan is completed.
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
as a result of this plan. The Company recorded minimal and
$4.0 million
of pre-tax employee-related and other charges during fiscal 2017 and 2016. The Company has
no
balance accrued for this plan as of
August 31, 2017
. The Company does not expect any additional charges or payments related to this plan as the plan is considered complete.
USCAN Plans
In the third quarter of fiscal 2016, the Company announced plans to create an Accounting and Shared Service Center of Excellence ("U.S. SSC") in Fairlawn, Ohio that will be responsible for back office processes for all U.S. and Canada operations (USCAN and EC segments). The Company reduced 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
$0.9 million
and
$0.7 million
of pre-tax employee-related and other costs during fiscal 2017 and 2016, respectively. As of
August 31, 2017
, the Company has a balance of
$0.5 million
accrued for the employee-related costs related to this plan. The Company anticipates recording less than
$1.0 million
of additional pre-tax employee-related charges through fiscal 2018. Cash payments associated with this plan are expected to occur through fiscal 2018 as the plan is completed.
In fiscal 2016, as part of the Company’s previously announced Citadel acquisition integration strategy and a careful evaluation of capacity utilization and manufacturing capabilities, the Company closed three manufacturing facilities in Evansville, Indiana and consolidated production into other existing facilities in the area. 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. Additionally, the Company recorded approximately
$0.5 million
of pretax machinery and equipment accelerated depreciation during fiscal 2017. The Company has
no
balance accrued for this plan as of
August 31, 2017
, and does not expect any additional charges or payments related to this plan as the plan is considered complete.
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, 2017
, the Company has
no
balance accrued for
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017
, the Company has
no
balance accrued and does not expect any additional charges or payments 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 in Belgium during fiscal 2016, offset by headcount additions in Poland. 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, 2017
, the Company has
no
balance accrued for this plan and does not expect any additional charges or payments in fiscal 2018.
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 by approximately
20
in fiscal 2016, partially offset by the addition of approximately
15
associates at the Company's new facility. The Company recognized
$0.3 million
,
$2.3 million
, and
$0.7 million
in pre-tax employee-related and other charges in fiscal 2017, 2016 and 2015, respectively. The Company expects to incur minimal charges related to pretax employee-related costs in fiscal 2018. As of
August 31, 2017
, the Company has a balance of
$0.5 million
accrued for this plan. Cash payments associated with this plan are expected to occur through fiscal 2018 as the plan is completed.
USCAN Plans
In November 2014, the Company evaluated its North American production facility footprint and closed a plant within its CCS product family in fiscal 2015, shifted production to other North American facilities, and 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, 2017
, 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
and recorded pretax employee-related costs of
$0.7 million
during fiscal 2015. As of
August 31, 2017
, 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.
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, 2017
, 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 and 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, 2017
, the Company expects no further charges or payments and has
no
remaining accrual related to this plan as the plan is considered complete.
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
|
|
Total Restructuring Costs
|
|
(In thousands)
|
Accrual balance as of August 31, 2015
|
4,922
|
|
|
461
|
|
|
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
|
$
|
3,542
|
|
|
$
|
402
|
|
|
$
|
3,944
|
|
Fiscal 2017 charges
|
11,653
|
|
|
1,867
|
|
|
13,520
|
|
Fiscal 2017 payments
|
(12,559
|
)
|
|
(2,236
|
)
|
|
(14,795
|
)
|
Translation
|
352
|
|
|
57
|
|
|
409
|
|
Accrual balance as of August 31, 2017
|
$
|
2,988
|
|
|
$
|
90
|
|
|
$
|
3,078
|
|
Restructuring costs are excluded from segment operating income but are attributable to the reportable segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
EMEA
|
$
|
10,218
|
|
|
$
|
4,568
|
|
|
$
|
10,073
|
|
USCAN
|
2,702
|
|
|
5,107
|
|
|
3,229
|
|
LATAM
|
59
|
|
|
417
|
|
|
990
|
|
APAC
|
388
|
|
|
312
|
|
|
46
|
|
EC
|
153
|
|
|
1,364
|
|
|
—
|
|
Total
|
$
|
13,520
|
|
|
$
|
11,768
|
|
|
$
|
14,338
|
|
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, financial position or cash flows 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, including its indirect wholly owned subsidiary Lucent Polymers, Inc. In August 2015, the Company discovered discrepancies between laboratory data and certifications provided by Lucent to customers and also discovered inaccuracies in materials and information provided by Lucent employees to an independent certification organization. The Company took immediate decisive actions following its initial discoveries, including, but not limited to, remediation measures, notifications to affected customers, and notification to Underwriter Laboratories. The Company also commenced an internal investigation, which revealed that the discrepancies and inaccuracies initially identified were due to practices at Lucent under its prior ownership. 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 impairment of certain finite-lived intangible assets during the fourth quarter of fiscal 2016. In addition, the Engineered Plastics business, which is now part of the Performance Materials product family, did not meet volume and revenue expectations in fiscal 2016 and the product had lower margins than planned due primarily to the remediation and changes in business practices undertaken to address the Lucent quality matter. The deterioration of results due to the aforementioned factors and economic conditions soon after the acquisition resulted in the impairment of the acquired goodwill during the fourth quarter of fiscal 2016. For a discussion of the goodwill and intangible asset impairments, refer to Note 4,
Goodwill and Other Intangible Assets
, of this Annual Report on Form 10-K for details.
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.
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 recalls or claims 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, 2017
, approximately
$31.0 million
remained in such indemnity escrow.
As Lucent was effectively acquired by Citadel in December 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. The Company also submitted written claim notices pursuant to a
$3.8 million
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 Holdings, LLC (the “Citadel Complaint”), as well as certain funds affiliated with the sellers and other former executives of Citadel and Lucent (the “Citadel Defendants”). In January 2017, the Court denied the defendants motion to dismiss seventeen of twenty claims. The Court's ruling sustained claims for breach of contract, fraudulent inducement, civil conspiracy and violations of blue sky laws in Illinois, Ohio, California and Indiana. On February 16, 2017, the Court entered a stipulated order establishing an equitable lien over all pre-closing tax refunds paid by the Company to Citadel Plastics Holdings, LLC under the stock purchase agreement until resolution of litigation. The funds are currently subject to the equitable lien are
$7.5 million
. The Company is seeking rescission, damages, rescissory damages, disgorgement or any other remedy deemed proper for the alleged violations as well as seeking attorneys’ fees for bringing suit.
In November 2016, the Company, through its Matrixx subsidiary, filed a separate Complaint in the Delaware Chancery Court against River Associates (the “River Complaint”), as well as certain funds affiliated with the sellers and other former executives of Lucent (the “River Defendants”). In general, the River Complaint alleges similar theories (except securities violations) and seeks similar relief (except rescission) and the River Defendants filed a similar motion to dismiss as in the Citadel litigation. On August 23, 2017, the Court ruled on River Defendants’ Motions to Dismiss and Motions for Summary Judgment. The Court dismissed certain claims pertaining to one Defendant and all other motions to dismiss parties or claims were denied. In addition, the Court ruled against the Citadel Defendants’ Motions to (in effect) combine the Citadel Holdings litigation with the River litigation. Therefore, the River litigation will proceed as a separate lawsuit on a schedule months behind the Citadel Holdings Litigation.
There are ongoing parallel investigations being undertaken by the United States Attorneys' Office for the Southern District of Indiana ("USAO") and the SEC that we understand relate to the allegations made by the Company in the Citadel Complaint arising out of the Company's acquisition of Citadel (including Citadel's subsidiary, Lucent). On September 6, 2017, the Federal Bureau of Investigation, Indianapolis division, notified the Company's counsel that the Company was a potential victim of a crime. We are cooperating fully with the USAO and the SEC in their investigations.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 — SHARE REPURCHASE PROGRAM
On April 3, 2014, the Board of Directors approved a share repurchase program under which the Company was 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”). 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 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 10b5-1 plan. No shares were repurchased during fiscal 2016 or 2017. This program expired on April 2, 2017 and was not renewed.
NOTE 19 — ASSET IMPAIRMENT
The following table summarizes the Company's asset impairment activity for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Goodwill impairment
|
$
|
—
|
|
|
$
|
360,708
|
|
|
$
|
—
|
|
Finite-lived intangible asset impairment
|
—
|
|
|
34,471
|
|
|
—
|
|
Information technology asset impairment
|
1,053
|
|
|
6,488
|
|
|
—
|
|
Total
|
$
|
1,053
|
|
|
$
|
401,667
|
|
|
$
|
—
|
|
During fiscal 2017 and 2016, the Company recorded an impairment charges of
$1.1 million
and
$6.5 million
, respectively, related to certain software licenses that were discontinued.
During fiscal 2016, the Company recorded goodwill impairment of
$360.7 million
and intangible asset impairment of
$34.5 million
. Refer to Note 4,
Goodwill and Other Intangible Assets,
of this Annual Report on Form 10-K for details.
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 Custom Concentrates and Services 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,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
1,861
|
|
|
$
|
(133
|
)
|
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 2017 and fiscal 2015.
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.
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain Non-Guarantors are limited in their ability to remit funds to Parent 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, 2017
|
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
615
|
|
|
$
|
—
|
|
|
$
|
52,636
|
|
|
$
|
—
|
|
|
$
|
53,251
|
|
Restricted cash
|
—
|
|
|
—
|
|
|
768
|
|
|
—
|
|
|
768
|
|
Accounts receivable, net
|
47,683
|
|
|
61,311
|
|
|
299,445
|
|
|
—
|
|
|
408,439
|
|
Accounts receivable, intercompany
|
33,294
|
|
|
15,077
|
|
|
26,188
|
|
|
(74,559
|
)
|
|
—
|
|
Inventories
|
34,432
|
|
|
40,097
|
|
|
201,930
|
|
|
—
|
|
|
276,459
|
|
Prepaid expenses and other current assets
|
7,557
|
|
|
2,326
|
|
|
26,829
|
|
|
—
|
|
|
36,712
|
|
Assets held for sale
|
2,764
|
|
|
2,912
|
|
|
—
|
|
|
—
|
|
|
5,676
|
|
Total current assets
|
126,345
|
|
|
121,723
|
|
|
607,796
|
|
|
(74,559
|
)
|
|
781,305
|
|
Net property, plant and equipment
|
44,961
|
|
|
69,260
|
|
|
184,482
|
|
|
—
|
|
|
298,703
|
|
Deferred charges and other noncurrent assets
|
95,294
|
|
|
4,201
|
|
|
59,599
|
|
|
(81,247
|
)
|
|
77,847
|
|
Intercompany loans receivable
|
2,593
|
|
|
31,432
|
|
|
—
|
|
|
(34,025
|
)
|
|
—
|
|
Investment in subsidiaries
|
841,645
|
|
|
244,408
|
|
|
—
|
|
|
(1,086,053
|
)
|
|
—
|
|
Goodwill
|
26,862
|
|
|
110,289
|
|
|
126,584
|
|
|
—
|
|
|
263,735
|
|
Intangible assets, net
|
27,630
|
|
|
187,533
|
|
|
117,027
|
|
|
—
|
|
|
332,190
|
|
Total assets
|
$
|
1,165,330
|
|
|
$
|
768,846
|
|
|
$
|
1,095,488
|
|
|
$
|
(1,275,884
|
)
|
|
$
|
1,753,780
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
36,211
|
|
|
$
|
41,830
|
|
|
$
|
240,779
|
|
|
$
|
—
|
|
|
$
|
318,820
|
|
Accounts payable, intercompany
|
17,788
|
|
|
43,118
|
|
|
13,653
|
|
|
(74,559
|
)
|
|
—
|
|
U.S. and foreign income taxes payable
|
—
|
|
|
597
|
|
|
4,303
|
|
|
—
|
|
|
4,900
|
|
Accrued payroll, taxes and related benefits
|
6,970
|
|
|
6,826
|
|
|
33,155
|
|
|
—
|
|
|
46,951
|
|
Other accrued liabilities
|
18,989
|
|
|
7,083
|
|
|
35,689
|
|
|
—
|
|
|
61,761
|
|
Short-term debt
|
14,912
|
|
|
29
|
|
|
17,072
|
|
|
—
|
|
|
32,013
|
|
Total current liabilities
|
94,870
|
|
|
99,483
|
|
|
344,651
|
|
|
(74,559
|
)
|
|
464,445
|
|
Long-term debt
|
858,446
|
|
|
41
|
|
|
26,691
|
|
|
—
|
|
|
885,178
|
|
Intercompany debt
|
—
|
|
|
—
|
|
|
34,025
|
|
|
(34,025
|
)
|
|
—
|
|
Pension plans
|
2,266
|
|
|
1,308
|
|
|
132,117
|
|
|
—
|
|
|
135,691
|
|
Deferred income taxes
|
—
|
|
|
71,584
|
|
|
47,362
|
|
|
(81,247
|
)
|
|
37,699
|
|
Other long-term liabilities
|
12,730
|
|
|
1,067
|
|
|
9,938
|
|
|
—
|
|
|
23,735
|
|
Total liabilities
|
968,312
|
|
|
173,483
|
|
|
594,784
|
|
|
(189,831
|
)
|
|
1,546,748
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
Convertible special stock, no par value
|
120,289
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
120,289
|
|
Common stock
|
48,529
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
48,529
|
|
Other equity
|
28,200
|
|
|
595,363
|
|
|
490,690
|
|
|
(1,086,053
|
)
|
|
28,200
|
|
Total A. Schulman, Inc.’s stockholders’ equity
|
197,018
|
|
|
595,363
|
|
|
490,690
|
|
|
(1,086,053
|
)
|
|
197,018
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
10,014
|
|
|
—
|
|
|
10,014
|
|
Total equity
|
197,018
|
|
|
595,363
|
|
|
500,704
|
|
|
(1,086,053
|
)
|
|
207,032
|
|
Total liabilities and equity
|
$
|
1,165,330
|
|
|
$
|
768,846
|
|
|
$
|
1,095,488
|
|
|
$
|
(1,275,884
|
)
|
|
$
|
1,753,780
|
|
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
|
74,463
|
|
|
4,205
|
|
|
66,038
|
|
|
(56,545
|
)
|
|
88,161
|
|
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
|
$
|
1,169,237
|
|
|
$
|
787,339
|
|
|
$
|
1,052,849
|
|
|
$
|
(1,261,986
|
)
|
|
$
|
1,747,439
|
|
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
|
894,441
|
|
|
—
|
|
|
24,908
|
|
|
—
|
|
|
919,349
|
|
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
|
1,009,968
|
|
|
156,676
|
|
|
557,778
|
|
|
(145,343
|
)
|
|
1,579,079
|
|
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
|
$
|
1,169,237
|
|
|
$
|
787,339
|
|
|
$
|
1,052,849
|
|
|
$
|
(1,261,986
|
)
|
|
$
|
1,747,439
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating Statement of Operations
|
|
Year Ended August 31, 2017
|
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Net sales
|
$
|
324,526
|
|
|
$
|
420,378
|
|
|
$
|
1,761,311
|
|
|
$
|
(45,091
|
)
|
|
$
|
2,461,124
|
|
Cost of sales
|
263,918
|
|
|
381,043
|
|
|
1,481,491
|
|
|
(45,091
|
)
|
|
2,081,361
|
|
Selling, general and administrative expenses
|
45,246
|
|
|
60,364
|
|
|
171,755
|
|
|
—
|
|
|
277,365
|
|
Restructuring expense
|
2,180
|
|
|
563
|
|
|
10,777
|
|
|
—
|
|
|
13,520
|
|
Asset impairment
|
1,053
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,053
|
|
Curtailment and settlement (gains) losses
|
—
|
|
|
—
|
|
|
2,029
|
|
|
—
|
|
|
2,029
|
|
Operating income (loss)
|
12,129
|
|
|
(21,592
|
)
|
|
95,259
|
|
|
—
|
|
|
85,796
|
|
Interest expense
|
49,322
|
|
|
29
|
|
|
4,860
|
|
|
(1,016
|
)
|
|
53,195
|
|
Intercompany charges
|
164
|
|
|
244
|
|
|
15,066
|
|
|
(15,474
|
)
|
|
—
|
|
Intercompany income
|
(10,189
|
)
|
|
(5,095
|
)
|
|
(190
|
)
|
|
15,474
|
|
|
—
|
|
Foreign currency transaction (gains) losses
|
(380
|
)
|
|
22
|
|
|
2,139
|
|
|
—
|
|
|
1,781
|
|
Other (income) expense, net
|
861
|
|
|
(1,263
|
)
|
|
(2,127
|
)
|
|
1,016
|
|
|
(1,513
|
)
|
(Gain) loss on intercompany investments
|
(35,995
|
)
|
|
(7,679
|
)
|
|
—
|
|
|
43,674
|
|
|
—
|
|
Income (loss) from continuing operations before taxes
|
8,346
|
|
|
(7,850
|
)
|
|
75,511
|
|
|
(43,674
|
)
|
|
32,333
|
|
Provision (benefit) for U.S. and foreign income taxes
|
(24,680
|
)
|
|
(5,997
|
)
|
|
28,837
|
|
|
—
|
|
|
(1,840
|
)
|
Income (loss) from continuing operations
|
33,026
|
|
|
(1,853
|
)
|
|
46,674
|
|
|
(43,674
|
)
|
|
34,173
|
|
Income (loss) from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss)
|
33,026
|
|
|
(1,853
|
)
|
|
46,674
|
|
|
(43,674
|
)
|
|
34,173
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
(1,147
|
)
|
|
—
|
|
|
(1,147
|
)
|
Net income (loss) attributable to A. Schulman, Inc.
|
33,026
|
|
|
(1,853
|
)
|
|
45,527
|
|
|
(43,674
|
)
|
|
33,026
|
|
Convertible special stock dividends
|
7,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,500
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
25,526
|
|
|
$
|
(1,853
|
)
|
|
$
|
45,527
|
|
|
$
|
(43,674
|
)
|
|
$
|
25,526
|
|
Comprehensive income (loss)
|
$
|
65,224
|
|
|
$
|
(1,674
|
)
|
|
$
|
79,344
|
|
|
$
|
(76,694
|
)
|
|
$
|
66,200
|
|
Less: comprehensive income (loss) attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
976
|
|
|
—
|
|
|
976
|
|
Comprehensive income (loss) attributable to A. Schulman, Inc.
|
$
|
65,224
|
|
|
$
|
(1,674
|
)
|
|
$
|
78,368
|
|
|
$
|
(76,694
|
)
|
|
$
|
65,224
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
Year Ended August 31, 2017
|
|
Parent
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
(In thousands)
|
Operating from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) operating activities
|
$
|
72,906
|
|
|
$
|
4,874
|
|
|
$
|
107,774
|
|
|
$
|
(80,836
|
)
|
|
$
|
104,718
|
|
Investing from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant and equipment
|
(7,653
|
)
|
|
(6,204
|
)
|
|
(23,009
|
)
|
|
—
|
|
|
(36,866
|
)
|
Proceeds from the sale of assets
|
167
|
|
|
2,314
|
|
|
1,920
|
|
|
—
|
|
|
4,401
|
|
Distributions from equity investees
|
—
|
|
|
250
|
|
|
—
|
|
|
—
|
|
|
250
|
|
Intercompany investments
|
(228
|
)
|
|
(1,166
|
)
|
|
—
|
|
|
1,394
|
|
|
—
|
|
Net cash provided from (used in) investing activities
|
(7,714
|
)
|
|
(4,806
|
)
|
|
(21,089
|
)
|
|
1,394
|
|
|
(32,215
|
)
|
Financing from continuing and discontinued operations:
|
|
|
|
|
|
|
|
|
|
Cash dividends paid to common stockholders
|
(24,208
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,208
|
)
|
Cash dividends paid to special stockholders
|
(7,500
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,500
|
)
|
Intercompany dividends paid
|
—
|
|
|
—
|
|
|
(80,836
|
)
|
|
80,836
|
|
|
—
|
|
Increase (decrease) in short-term debt
|
—
|
|
|
—
|
|
|
6,328
|
|
|
—
|
|
|
6,328
|
|
Borrowings on long-term debt
|
213,100
|
|
|
—
|
|
|
179,493
|
|
|
—
|
|
|
392,593
|
|
Repayments on long-term debt including current portion
|
(249,849
|
)
|
|
(68
|
)
|
|
(179,270
|
)
|
|
—
|
|
|
(429,187
|
)
|
Noncontrolling interests' distributions
|
—
|
|
|
—
|
|
|
(53
|
)
|
|
—
|
|
|
(53
|
)
|
Issuances of common stock, common and treasury
|
191
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
191
|
|
Redemptions of common stock
|
(711
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(711
|
)
|
Intercompany equity contributions received
|
—
|
|
|
—
|
|
|
1,394
|
|
|
(1,394
|
)
|
|
—
|
|
Net cash provided from (used in) financing activities
|
(68,977
|
)
|
|
(68
|
)
|
|
(72,944
|
)
|
|
79,442
|
|
|
(62,547
|
)
|
Effect of exchange rate changes on cash
|
—
|
|
|
—
|
|
|
660
|
|
|
—
|
|
|
660
|
|
Net increase (decrease) in cash, cash equivalents, and restricted cash
|
(3,785
|
)
|
|
—
|
|
|
14,401
|
|
|
—
|
|
|
10,616
|
|
Cash, cash equivalents, and restricted cash at beginning of year
|
4,400
|
|
|
—
|
|
|
39,003
|
|
|
—
|
|
|
43,403
|
|
Cash, cash equivalents, and restricted cash at end of year
|
$
|
615
|
|
|
$
|
—
|
|
|
$
|
53,404
|
|
|
$
|
—
|
|
|
$
|
54,019
|
|
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
|
|
|
—
|
|
Net cash provided from (used in) investing activities
|
(9,717
|
)
|
|
(7,650
|
)
|
|
(32,645
|
)
|
|
140
|
|
|
(49,872
|
)
|
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, cash equivalents, and restricted cash
|
(2,690
|
)
|
|
—
|
|
|
(50,779
|
)
|
|
—
|
|
|
(53,469
|
)
|
Cash, cash equivalents, and restricted cash at beginning of year
|
7,090
|
|
|
—
|
|
|
89,782
|
|
|
—
|
|
|
96,872
|
|
Cash, cash equivalents, and restricted cash at end of year
|
$
|
4,400
|
|
|
$
|
—
|
|
|
$
|
39,003
|
|
|
$
|
—
|
|
|
$
|
43,403
|
|
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' 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, cash equivalents, and restricted cash
|
2,908
|
|
|
715
|
|
|
(42,244
|
)
|
|
—
|
|
|
(38,621
|
)
|
Cash, cash equivalents, and restricted cash at beginning of year
|
4,182
|
|
|
(715
|
)
|
|
132,026
|
|
|
—
|
|
|
135,493
|
|
Cash, cash equivalents, and restricted cash at end of year
|
$
|
7,090
|
|
|
$
|
—
|
|
|
$
|
89,782
|
|
|
$
|
—
|
|
|
$
|
96,872
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 — QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Year Ended
|
|
Nov 30,
2016
|
|
Feb 28,
2017
|
|
May 31,
2017
|
|
Aug 31,
2017
|
|
Aug 31,
2017
|
|
Unaudited
|
|
(In thousands, except per share data)
|
Net sales
|
$
|
600,000
|
|
|
$
|
568,678
|
|
|
$
|
645,795
|
|
|
$
|
646,651
|
|
|
$
|
2,461,124
|
|
Gross profit
|
$
|
101,015
|
|
|
$
|
89,186
|
|
|
$
|
98,427
|
|
|
$
|
91,135
|
|
|
$
|
379,763
|
|
Income (loss) from continuing operations
|
$
|
3,184
|
|
|
$
|
5,336
|
|
|
$
|
16,098
|
|
|
$
|
9,555
|
|
|
$
|
34,173
|
|
Income (loss) from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss)
|
3,184
|
|
|
5,336
|
|
|
16,098
|
|
|
9,555
|
|
|
34,173
|
|
Noncontrolling interests
|
(241
|
)
|
|
(306
|
)
|
|
(320
|
)
|
|
(280
|
)
|
|
(1,147
|
)
|
Net income (loss) attributable to A. Schulman, Inc.
|
2,943
|
|
|
5,030
|
|
|
15,778
|
|
|
9,275
|
|
|
33,026
|
|
Convertible special stock dividends
|
1,875
|
|
|
1,875
|
|
|
1,875
|
|
|
1,875
|
|
|
7,500
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
1,068
|
|
|
$
|
3,155
|
|
|
$
|
13,903
|
|
|
$
|
7,400
|
|
|
$
|
25,526
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share available to A. Schulman, Inc.
common stockholders
(a)
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.47
|
|
|
$
|
0.25
|
|
|
$
|
0.87
|
|
Income (loss) from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.47
|
|
|
$
|
0.25
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share available to A. Schulman, Inc.
common stockholders
(a)
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.47
|
|
|
$
|
0.25
|
|
|
$
|
0.86
|
|
Income (loss) from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss) available to A. Schulman, Inc. common stockholders
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.47
|
|
|
$
|
0.25
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
Certain items included in income (loss) from continuing operations, net of tax are as follows:
|
Accelerated depreciation
(b)
|
$
|
260
|
|
|
$
|
355
|
|
|
$
|
188
|
|
|
$
|
552
|
|
|
$
|
1,355
|
|
Costs related to acquisitions and integrations
(c)
|
442
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
442
|
|
Accelerated amortization of deferred financing fees
(d)
|
150
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
166
|
|
Restructuring and related costs
(e)
|
9,689
|
|
|
3,777
|
|
|
2,328
|
|
|
4,884
|
|
|
20,678
|
|
CEO transition costs
(f)
|
138
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
142
|
|
Lucent costs
(g)
|
591
|
|
|
453
|
|
|
1,374
|
|
|
1,760
|
|
|
4,178
|
|
Curtailment and settlement losses
(h)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,330
|
|
|
1,330
|
|
Gains on asset sales
(i)
|
—
|
|
|
—
|
|
|
(134
|
)
|
|
(693
|
)
|
|
(827
|
)
|
Asset impairments and other charges
(j)
|
495
|
|
|
1,233
|
|
|
—
|
|
|
1,452
|
|
|
3,180
|
|
Total
|
$
|
11,765
|
|
|
$
|
5,838
|
|
|
$
|
3,756
|
|
|
$
|
9,285
|
|
|
$
|
30,644
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 attributable 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
(k)
|
$
|
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
(l)
|
—
|
|
|
—
|
|
|
—
|
|
|
311,292
|
|
|
311,292
|
|
Total
|
$
|
8,715
|
|
|
$
|
10,156
|
|
|
$
|
11,576
|
|
|
$
|
323,384
|
|
|
$
|
353,831
|
|
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(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, LATAM, 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 early payments of Term Loan B.
|
|
|
(e)
|
Restructuring related costs primarily included in selling, general and administrative expenses in the Company’s statements of operations, are costs associated with professional fees for outside strategic consultants regarding actions to improve the profitability of the organization, improve efficiency of its operations or comply with new legislation, and costs associated with reorganizations of the legal entity structure of the Company. Restructuring expenses included in restructuring expense in the Company’s statements of operations include costs permitted under ASC 420, Exit or Disposal Obligations, such as severance costs, outplacement services and contract termination costs and related costs are costs associated with professional fees for outside strategic consultants regarding actions to improve the profitability, improve efficiency of its operations, comply with new legislation, and costs associated with reorganizations of the legal entity structure of the Company. Refer to Note 16,
Restructuring,
of this Annual Report on Form 10-K for further discussion.
|
|
|
(f)
|
CEO transition costs represent charges related to the separation of the Company's previous CEO, 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 in fiscal 2016.
|
|
|
(h)
|
Curtailment and settlement losses represent losses on pension obligations in EMEA.
|
|
|
(i)
|
The gains on asset sales represent gains on the sale of assets in USCAN and EMEA that had previously been classified as held for sale.
|
|
|
(j)
|
Asset impairments and other charges primarily relate to the write down of information technology assets in the USCAN segment. Please refer to Note 19,
Asset Impairment,
of this Annual Report on Form 10-K for further discussion.
|
|
|
(k)
|
Relates to accelerated depreciation in the Company's USCAN and EMEA segments.
|
|
|
(l)
|
Asset impairments relate to the write down of goodwill, intangible assets and information technology assets. Refer to Note 19,
Asset Impairment,
of this Annual Report on Form 10-K for further discussion.
|
NOTE 23 — SUBSEQUENT EVENTS
On October 10, 2017, the Company amended the Credit Agreement with its lenders. The amendment increased the net leverage ratio covenant beginning with the quarter ended November 30, 2017 to provide the Company additional financial flexibility to execute on its growth strategy. Step-downs reverting to existing levels begin with the quarter ended November 30, 2019. There were no other changes to the Credit Agreement's original terms. Refer to Note 5,
Long-Term Debt and Credit Arrangements,
of this Annual Report on Form 10-K for details on the Credit Agreement.
During the last week of fiscal 2017, Hurricane Harvey directly impacted three of our facilities in the Houston, Texas area. The Company currently believes there was minimal property damage; however, Hurricane Harvey temporarily impacted the availability and timing of raw material supply and product shipments to customers from these and other facilities. The Company is in the process of finalizing the financial impact and preparing claims to submit to our insurance provider in fiscal 2018.