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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File No. 0-7459
A. SCHULMAN, INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
 
34-0514850
(I.R.S. Employer Identification No.)
3637 Ridgewood Road,
Fairlawn, Ohio
(Address of Principal Executive Offices)
 
44333
(ZIP Code)
Registrant’s telephone number, including area code: (330) 666-3751
Securities Registered Pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $1.00 Par Value
 
The NASDAQ Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ         No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨        No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b of the Exchange Act. (Check one):
 
Large accelerated filer  þ
Accelerated filer  o
Non-accelerated filer  ¨
Smaller reporting company  ¨
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨         No  þ
As of February 28, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $979,000,000 based on the closing sale price as reported on the NASDAQ Global Select Market.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date 29,143,212 shares of common stock, $1.00 par value, at October 15, 2014.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Part of Form 10-K
In Which  Incorporated
Portions of the registrant’s proxy statement for the 2014 Annual Meeting of Stockholders
III

 



TABLE OF CONTENTS
 
PART I
 
PART II
 
PART III
 
PART IV

 



PART    I

ITEM 1.
BUSINESS

A. Schulman, Inc. (the “Company,” “A. Schulman,” “we,” “our” and “us”) was founded as an Ohio corporation in 1928 by Alex Schulman in Akron, Ohio as a processor of rubber compounds. During those early days, when Akron, Ohio was known as the rubber capital of the world, Mr. Schulman saw opportunity in taking existing rubber products and compounding new formulations to meet under-served market needs. As the newly emerging science of polymers began to make market strides in the early 1950s, A. Schulman was there to advance the possibilities of the technology, leveraging its compounding expertise into developing solutions to meet exact customer application requirements. The Company later expanded into Europe, Latin America and Asia, establishing manufacturing plants, innovation centers and sales offices in numerous countries. The Company changed its state of incorporation to Delaware in 1969 and went public in 1972. Today, A. Schulman, Inc. is a leading international supplier of high-performance plastic compounds, resins, and services and provides innovative solutions to meet its customers' demanding requirements through proprietary and custom-formulated products. 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. Recent acquisitions have strengthened the Company's core businesses serving its custom performance colors, masterbatch solutions, engineered plastics and specialty powders customers.

The Company leverages the following competitive advantages to develop and maintain strong customer relationships and drive continued profitable growth:
 
The Company's sales and marketing teams partner with customers to understand needs and provide tailored solutions that enhance success through its broad and diverse product line.
The Company has a solid reputation in product innovation and application development driven by its market knowledge and insights, customer relationships and research and development capabilities. To further enhance these capabilities, the Company continues to leverage its four global innovation centers located in Belgium, Germany, Mexico and the United States. These centers combine research and innovation in plastics engineering and application technology with specific product developments. They manage the development of collaborative business projects through networks comprised of customers, suppliers, and in some instances, academic institutions and research centers. In addition, the Company also has over a dozen application development centers located within existing facilities. The Company has a long history of successful application development and these dedicated resources further the Company’s advancement with customers and new markets.
The Company's procurement teams are critical to its success as its global purchasing leverage strategy positions the Company to formulate and manufacture products competitively.
The Company has manufacturing facilities worldwide allowing it to be an ideal partner by quickly servicing target markets for its local and global customers.
The Company's strong financial position provides the resources to effectively grow in the current economic environment as well as aggressively pursue growth through acquisitions.

The Company has successfully created a strong presence in the global market place, providing new and enhanced product solutions that result in a product portfolio that is strongly positioned in the markets we serve. With world-class innovation centers and manufacturing facilities that host application development centers strategically positioned around the world, A. Schulman is able to anticipate and respond to changing market and customer needs. Accordingly, the Company's collaboration between development and production is especially important to the Company and its customers, as a quick response to meet their needs is critical. Of course, a quick response means little without quality. A. Schulman has a long and proud history of consistently supplying products of the highest standards, which is evidenced by the Company's numerous certifications and accreditations as well as supplier awards.

Business Segments

The Company considers its operating structure and the types of information subject to regular review by its President and Chief Executive Officer (“CEO”), who is the Chief Operating Decision Maker (“CODM”), to identify reportable segments. The CODM makes decisions, assesses performance and allocates resources by the following regions, which are also the Company's reportable segments: Europe, Middle East and Africa (“EMEA”), the Americas, and Asia Pacific (“APAC”).

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

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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.

Information regarding the amount of net sales to unaffiliated customers, segment operating income and identifiable assets attributable to each of the Company's business segments for the last three years is set forth in the Notes to Consolidated Financial Statements of the Company appearing in ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, of this Annual Report on Form 10-K.

Recent Business Transactions

On September 2, 2013, the Company acquired the Perrite Group ("Perrite"), a thermoplastics manufacturing business with operations in Malaysia, the United Kingdom and France for $51.3 million, net of cash. Perrite has manufactured and distributed thermoplastic compounds for the household, electrical, automotive and industrial markets for more than 35 years, offering a broad portfolio of standard and custom compounded polymer products. Perrite employs approximately 200 people among the three facilities. Additionally, Perrite holds leading positions in attractive target markets such as electronics, appliances and niche automotive, and offers well-established and respected brands to global customers while maintaining a strong track record of profitable growth. The Perrite acquisition provides the opportunity to expand the custom performance colors and engineered plastics business in the APAC region and the manufacturing facility in Malaysia will enhance the Company's ability to serve key customers in the region, as well as globally. Additionally, the acquisition provides an opportunity to leverage the Company's broader portfolio of products through our successful color and niche engineered plastics business in the EMEA region.

On December 2, 2013, the Company completed the acquisition of Network Polymers, Inc., a niche engineered plastics compounding business with operations in Akron, Ohio for $49.2 million. The acquisition expands A. Schulman's product offerings with a broad spectrum of custom resins and alloys to meet customer-specific product design and manufacturing requirements. The acquisition also provides greater penetration in key markets such as building and construction, agricultural products, and lawn and garden, as well as the opportunity to leverage existing A. Schulman products and technology to a wider customer base.

On December 31, 2013 the Company acquired Prime Colorants, a leading manufacturer of custom color and additive concentrates in Franklin, Tennessee for $15.1 million. The acquisition grew the Company's custom color capabilities in the U.S., as well as further transformed the U.S. operations from commodity products to a business focused on niche products and services. This acquisition also provides an entry point for A. Schulman in the liquid color market.

On July 1, 2014, the Company acquired the majority of the assets of the specialty plastics business from Ferro Corporation for $91 million. The acquisition strategically expands the Company's geographic footprint with four facilities located in the U.S. and one facility located in Spain, diversifies the Company's product mix and strengthens its position in a broad range of attractive product markets. Additionally, the business offers a broad portfolio of proprietary products and recognized brand names serving a wide range of end markets including packaging, transportation, construction, appliances and agriculture. Approximately 300 employees support the five acquired facilities.

On September 2, 2014, the Company acquired Compco Pty. Ltd., a manufacturer of specialty masterbatches and custom colors in Melbourne, Australia for $6.7 million. The acquisition expands the capabilities of the Company's APAC operations and marks its first entry into the growing pipe and highly regulated wire and cable markets. This acquisition also provides additional growth into key markets that include packaging.
 
Product Families

Globally, the Company operates in five product families: (1) custom performance colors, (2) masterbatch solutions, (3) engineered plastics, (4) specialty powders and (5) distribution services. The Company offers tolling services to customers primarily in the specialty powders product family.

Custom Performance Colors

Custom Performance Colors ("CPC") offers powdered or pelletized color concentrates custom-designed to enhance virtually all thermoplastic resins. These concentrates are available separately, or can be combined with additives as a complete package providing additional functionality such as weather resistance. In many instances, the Company’s products are designed to deliver multiple attributes to meet customer needs. During fiscal 2014, the CPC product family provided 7% of the Company's consolidated net sales.

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The Company's expansive offering of color solutions includes:

A wide spectrum of standard and customized colors;
Organic and inorganic pigments;
High chroma colors in translucent or opaque formats; and
Special effects including but not limited to: metallic, pearlescent (shimmer), thermochromatic (heat sensitive), photochromatic (light sensitive), fluorescent, phosphorescent (glow-in-the-dark) and interference (color shift) technologies.

The Company first began expanding color concentrates through its European acquisition of Deltaplast in 2007. Since then, the Company aggressively grew its global network of custom performance colors capabilities through acquisitions as well as strategic investment in key markets. CPC provides customers with a solution-based approach driven by technical understanding, responsive service, and consistent quality to address evolving market needs. The Company’s color business engages with customers at every stage of their product cycle, from color selection to product delivery and ongoing support. Color products are suitable for numerous processes, such as injection molding, blow molding, compression molding, profile extrusion, blown film, cast film, oriented film, rotational molding, sheet and thermoforming, among others.

The Company’s color concentrates excel in many of the same markets as its masterbatch solutions product family (food packaging, industrial packaging, consumer products, etc.) and its engineered plastics product family, which provides an excellent platform for cross utilization of technology. They have become a trusted source for many of the world’s largest consumer products companies, providing aesthetic solutions for a wide range of bottles, caps and closures.

Masterbatch Solutions

Masterbatches (also referred to as “concentrates”) are often the key ingredient in a successful application product formula. These highly concentrated compounds are combined with polymer resins by the Company’s customers at the point-of-process to provide a unique property portfolio that meets needed performance criteria for a given product application. During fiscal 2014, the masterbatch solutions product family provided 33% of the Company's consolidated net sales.

The Company first began supplying masterbatches through its application development center in Bornem, Belgium in the early 1960s. Since then, the Company has expanded its presence in masterbatch globally. Recent acquisitions have broadened the Company’s product offerings in the high-quality masterbatch markets, provided capacity, flexibility and efficiency to advance our growth in targeted markets, and reduced dependence on large volume, commodity-type automotive applications. The Company’s manufacturing facilities and innovation centers are strategically positioned around the world to ensure that orders are shipped within specification and on time.

The Company's masterbatch solutions product offerings include:
Concentrates designed to improve the performance, appearance, and processing of plastics for intended applications such as white color, absorptive, anti-fog, anti-static and carbon black, among others;
Additive solutions to enhance performance such as antibacterial, flame retardants, ultra-violet (“UV”), anti-static, barrier (optimal heat and light transmittance), antioxidants (protection of foods) and processing (foaming agents, slip, process aids, release agents, and anti-blocking) properties; and
Application solutions that have a reduced impact on the environment such as those that minimize the use of plastics or incorporate the use of either recycled plastics or renewable-based polymers.

Film for agricultural and packaging applications continues to be a primary focus for these products. The Company’s film additives for food packaging are internationally renowned for their performance and cost benefits, and are commonly used in biaxially oriented films which are critical for protective packaging of shelf ready foods, snack foods, candy, as well as various consumer products and industrial applications. The Company also provides solutions for agriculture films, offering additives that provide UV control, barrier, and anti-fog solutions among others.

Many of the Company’s masterbatch product offerings contain proprietary technology that plays a key role in providing application solutions that have a reduced impact on the environment. The Company’s technical team works with customers to design and develop products that assist customers in meeting their sustainability goals. The Company continues to advance its additive technologies to support its customer development of more sustainable solutions from packaging to durable goods.


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Engineered Plastics

Engineered plastics provide unique performance characteristics by combining high-performance polymer resins with various modifiers, reinforcements, additives and pigments, which result in a compound tailored to meet stringent customer specifications for durable applications. The Company’s products are often developed to replace metal or other traditional materials. During fiscal 2014, the engineered plastics product family provided 31% of the Company's consolidated net sales.

The Company’s engineered plastics products typically comprise 100% of the plastics material used by its customers in their end products. The Company began formulating a variety of compounds in the early 1950s, meeting the needs of a newly forming plastics industry and has evolved into its current market leader position.

The result of this innovation forms a pipeline of products being produced in A. Schulman facilities around the world. The Company offers an extensive portfolio based on a variety of polymers within the engineered plastics product family, allowing customers to tailor solutions that meet their exact performance needs.

The Company focuses on the ability to develop enhanced polymer solutions that provide:
Structural integrity such as strength, stiffness, low distortion, among others;
Multi-component blends that include polyolefins, nylons, polyesters and elastomers, among others; and
Formulating know-how with fiber reinforcements such as glass and carbon, nano-reinforcements, flame retardants, impact modifiers, and UV stabilization.

The engineered plastics product family uses the Company's state-of-the-art innovation centers to drive technology and innovation. These centers are highly focused on developing niche solutions that meet the needs of existing and developing markets.

The Company’s engineered plastics product family supplies numerous markets and applications. Durable consumer products and industrial applications are core markets where continued growth is planned, including such applications as building and construction materials, household appliances, electrical connectors, power tools, recreational items, and lawn and garden equipment. The Company also supplies materials for major, high-end, or specified automotive applications, working closely with major global manufacturers.

Specialty Powders

Specialty powders includes size reduction and resins for the injection, blow molding and rotational molding markets. During fiscal 2014, the specialty powders product family provided 14% of the Company's consolidated net sales.

Size reduction, or grinding, is a major component of the Company’s specialty powders product family and is a specialized process whereby polymer resins produced by chemical manufacturers in pellet form are reduced to a specified powder size and form, depending on the customer’s specifications. The majority of the Company’s size reduction services involve ambient grinding, a mechanical attrition milling process suitable for products which do not require ultrafine particle size and are not highly heat sensitive. The Company also provides jet milling services used for products requiring very fine particle size such as additives for printing ink, adhesives, waxes and cosmetics. Jet milling uses high velocity compressed air to reduce materials to sizes between 0.5 and 150 microns. For materials with specific thermal characteristics (such as heat sensitive materials) or which are soft and difficult to manage, the Company provides cryogenic milling services, which use liquid nitrogen to chill materials to extremely low temperatures to enable grinding and classification. The Company's cryogenic and jet milling capabilities are very unique in the grinding industry and give the Company a competitive advantage that customers value.

The Company supplies customers in the rotational molding market, while utilizing its compounding expertise and global footprint to add value in specialty powders (which includes custom size reduction service applications such as powder coatings, oil field services, cosmetic applications and additive manufacturing/3D printing). Specialty powders products for the injection, blow molding and rotational molding markets include compounded resin powders, such as gas and storage tanks, kayaks, playground slides, and other large applications.

The Company's specialty powders product portfolio includes:
Compound colors offered in customized colors and specialty effects;
Compounds and cross-linkable resins developed specifically for the rotational molding process; and
Specialty powders for the oil and gas industry.


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Distribution Services

As a distributor, the Company works with leading global polymer producers to assist in servicing market segments that are not easily accessible to these producers, or does not fit into these producers' core customer segment or supply chain. As a merchant, the Company buys, repackages into A. Schulman labeled packaging, and resells producer grade polymers to our customers, providing sales, marketing and technical services where required. During fiscal 2014, the distribution services product family provided 15% of the Company's consolidated net sales.

A. Schulman leverages its global supply relationships to fill customer needs around the world for a variety of olefinic and non-olefinic resins, as well as selected styrenics and engineering plastics. This consumption of large quantities of base resins also helps support the customers of our other product families by providing purchasing leverage to help keep costs down and providing reliable, convenient access to bulk resin supplies to customers.

The Company’s distribution services offerings include specialty polymers for all processing types, including injection molding, blow molding, thermoforming and film and sheet extruding. Offering various compliant grades, the Company has products that meet the most stringent of needs while allowing customers to optimize their cost-to-performance ratio. Most grades can be supplied in carton, bulk truck and rail car quantities, thus helping customers manage inventory levels and their working capital. The Company’s products are supplied into every major plastics market segment such as packaging, mobility, building and construction, electronics and electrical, and agriculture, among others.

Non Wholly-owned Subsidiaries

A. Schulman International, Inc. is a wholly-owned subsidiary which owns a 65% interest in PT. A. Schulman Plastics, Indonesia, an Indonesian joint venture. This joint venture has a manufacturing facility in East Java, Indonesia focusing on the masterbatch solutions and custom performance colors product families. The remaining 35% interest in this joint venture is owned by P.T. Prima Polycon Indah.

A. Schulman International, Inc. also owns a 63% interest in Surplast S.A., an Argentinean venture, with Alta Plastica S.A., one of the largest distributors of resins in Argentina. Surplast has one manufacturing facility in Buenos Aires, Argentina focusing on rotational molded specialty powders.

Prior to December 31, 2011, ASI Investments Holding Co., a wholly-owned subsidiary, owned a 70% partnership interest in The Sunprene Company in Bellevue, Ohio. Effective December 31, 2011, the Company’s partnership with Mitsubishi Chemical MKV Company was dissolved by a vote of the partners.

Employee Information

As of August 31, 2014, the Company had approximately 3,900 employees. Approximately 45% of all of the Company’s employees are represented by various unions under collective bargaining agreements, primarily outside of the United States.

Research and Development

The research and development of new products and the improvement of existing products are important for the Company to continuously improve its product offerings. New product innovation is a term used to describe the new product development process, beginning with the generation of new innovative ideas through their development into new products which are commercialized into the market. The Company has teams of dedicated individuals with varied backgrounds to lead its new product innovation, putting an aggressive global focus on the Company’s research and development activities. New product innovation is a key component of the Company's organic growth strategy.

Research and development expenses totaled $16.9 million, $8.7 million, and $6.1 million in fiscal years 2014, 2013, and 2012, respectively, related to certain activities performed by manufacturing facilities, innovation and application centers, and analytical laboratories that contribute to the development and significant enhancement of the Company's current and new products and processes. The $8.2 million increase in research and development expense in fiscal 2014 is further evidence of the Company's commitment to innovation and belief that research and development is important to our organic growth strategy. Fiscal 2014 investments included improvements in our color matching capabilities within our custom performance colors product family, development of solutions for the mobility market within our engineered plastics product family, product development at manufacturing facilities acquired during the year and an increase in personnel dedicated to research and development efforts.


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The Company focuses on its organic growth strategy which is aimed at increasing the Company's ability to leverage new and existing products into new geographic markets, further explore adjacent markets and improve the profitability of the Company's product mix. Creating new and collaborative innovation models is key to the growth strategy; therefore, the Company has four global innovation centers located in Belgium, Germany, Mexico and the United States that create faster, focused solutions for customers and partners. The expansion of these critical relationships helps to align the Company's global technology and product development efforts with the current requirements and emerging needs of its customers and end-markets. The Company also has over a dozen application development centers located within its manufacturing facilities that assist in the discovery of new applications for existing technologies.

The Company utilizes a stage gate process globally for new product and technology development initiatives. A stage gate development process is internationally recognized as the most effective and efficient method to conduct new product development. The stage gate method is a development process that manages risk in new product development, so the Company's valuable resources of people and capital are invested to improve the success rate and accelerate the time to market for the Company's products. The stage gate process can be thought of as a blueprint that maps out the development process and helps to manage risk by the use of gate reviews at critical investment points in the project. Gate reviews ensure that only those projects with the highest probability of success are afforded investment resources during the product development process.

Compliance with Environmental Regulations

The Company believes that its stewardship responsibilities include attention to environmental concerns. The Company addresses its environmental responsibilities on a global basis and senior management regularly reports the Company’s performance to the Board of Directors. Management believes that the Company is in material compliance with the national, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, and such compliance activity does not currently have a material effect upon the capital expenditures, results of operations, financial position or competitive position of the Company.

Dependence on Customers

During the year ended August 31, 2014, the Company’s five largest customers accounted in the aggregate for less than 10% of net sales. In management’s opinion, the Company is not dependent upon any single customer and the loss of any one customer would not have a materially adverse effect on the Company’s business.

Availability of Raw Materials

The raw materials required by the Company are available from a number of major plastic resin producers or other suppliers. The Company 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. The principal materials used in the manufacture of the Company’s proprietary plastic compounds are polypropylene, polyethylene, polystyrene, nylon and titanium dioxide. For additional information on the availability of raw materials, see ITEM 1A, RISK FACTORS, Shortages or price increases of raw materials and energy costs could adversely affect operating results and financial condition, of this Annual Report on Form 10-K.

Working Capital Practices

The nature of the Company’s business does not require significant amounts of inventories to be held to meet rapid delivery requirements of its products or services or ensure the Company of a continuous allotment of materials from suppliers. The Company’s manufacturing processes are generally performed with a short response time. The Company generally offers payment terms to its customers that factor in credit risk and industry practices. For additional information relating to the Company’s working capital items, see ITEM 7, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, of this Annual Report on Form 10-K.

Competition

The Company’s business is highly competitive. The Company competes with producers of basic plastic resins, many of which also operate compounding plants, as well as other independent plastic compounders. The producers of basic plastic resins generally are large producers of petroleum and chemicals, which are much larger than the Company. Some of these producers compete with the Company principally in such competitors’ own respective local market areas, while other producers compete with the Company on a global basis.


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The Company also competes with other merchants and distributors of plastic resins and other products. Limited information is available to the Company as to the extent of its competitors’ sales and earnings in respect of these activities, but management believes that the Company has a fraction of the highly-fragmented distribution market.

The principal methods of competition in plastics manufacturing are innovation and development of proprietary formulations, application and processing know-how, price, availability of inventory, quality, quick delivery and service. The principal methods of competition for merchant and distribution activities are price, availability of inventory and service. Management believes it has strong financial capabilities, excellent supplier relationships and the ability to provide quality plastic compounds at competitive prices. In addition, A. Schulman has a strong global footprint which allows the Company to effectively serve multi-national customers globally while maintaining a solid local presence to quickly address changing markets, shorten delivery cycles and local customer demands.

Intellectual Property

The Company uses various trademarks and tradenames in its business. These trademarks and tradenames protect certain names of the Company’s products and are significant to the extent they provide a certain amount of goodwill and name recognition in the industry. The Company also holds patents in various parts of the world for certain of its products. Additionally, the Company utilizes proprietary formulas in its product manufacturing and benefits from intangible assets acquired through acquisitions. Collectively, the Company's intellectual property, including other intangible assets, contribute to profitability.

International Operations

The Company has facilities and offices positioned throughout the world. Financial information related to the Company’s geographic areas for the three-year period ended August 31, 2014 appears in Note 13 to the consolidated financial statements in ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, of this Annual Report on Form 10-K and is incorporated herein by reference. For additional information regarding the risks related to the Company’s foreign operations, see ITEM 1A, RISK FACTORS, and ITEM 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, of this Annual Report on Form 10-K.

Executive Officers of the Company

The age, business experience during the past five years and offices held by each of the Company’s executive officers are reported below. The Company’s Amended and Restated By-Laws provide that officers shall hold office until their successors are elected and qualified.

Joseph M. Gingo:    Age 69; Chairman, President and Chief Executive Officer of the Company since January 2008. Previously, Mr. Gingo served as Executive Vice President, Quality Systems and Chief Technical Officer for The Goodyear Tire & Rubber Company since 2003. Prior to that, Mr. Gingo held numerous leadership roles in both technology and business positions in his 41-year tenure at The Goodyear Tire & Rubber Company. On June 19, 2014, the Company’s Board of Directors nominated Mr. Gingo to continue as Chairman of the Board after his retirement as President and Chief Executive Officer. The change is part of the Company’s succession planning process, and the nomination of Mr. Gingo as Chairman of the Board is subject to his re-election as a director by shareholders at the Company’s annual meeting in December 2014.

Bernard Rzepka:    Age 54; Executive Vice President and Chief Operating Officer of the Company since April 2013. Mr. Rzepka formerly served as the General Manager and Chief Operating Officer – EMEA since September 2008 and has been with the Company since 1992, serving in a variety of technology and commercial management positions. On June 19, 2014, the Company’s Board of Directors appointed Mr. Rzepka as President and Chief Executive Officer of the Company, effective January 2015.

Joseph J. Levanduski:    Age 52; Vice President and Chief Financial Officer of the Company since June 2011. Previously, Mr. Levanduski was with Hawk Corporation for approximately 15 years where he held various financial roles before becoming Senior Vice President and Chief Financial Officer. Mr. Levanduski also serves as the Company's Principal Accounting Officer.

Derek Bristow:    Age 54; Vice President and General Manager – APAC since September 2010. Mr. Bristow formerly was General Manager, of ICO Australasia, for ICO, Inc., which was acquired by the Company in April 2010. Mr. Bristow had been with ICO, Inc. since 1998, serving in a variety of management positions.


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Heinrich Lingnau: Age 52; Vice President and General Manager – EMEA since April 2013. Previously, Mr. Lingnau was the regional business leader for the masterbatch product family and held various management-level positions with the Company's EMEA operations since 1999.

Timothy J. McDannold: Age 52; Treasurer and Director of Risk Management of the Company since April 2013. Previously, Mr. McDannold served in various global management roles, including Vice President and Treasurer, and Vice President of Global Business Services for Diebold, Incorporated since 1988.

Donald B. McMillan:    Age 54; Vice President and Chief Information Officer of the Company since July 2013. Previously, Mr. McMillan served as the Chief Accounting Officer and Corporate Controller since April 2011, Corporate Controller since April 2006 and held various financial positions since joining the Company in 1996.

Gary A. Miller:    Age 68; Vice President, Global Supply Chain and Chief Procurement Officer of the Company since April 2008. Previously, Mr. Miller served as Vice President and Chief Procurement Officer for The Goodyear Tire & Rubber Company since 1992.

David C. Minc:    Age 65; Vice President, Chief Legal Officer and Secretary of the Company since May 2008. Previously, Mr. Minc served as General Counsel, Americas, for Flexsys America L.P. since 1996.

Patricia M. Mishic:    Age 49; Vice President and Chief Marketing Officer of the Company since January 2012. Previously, Ms. Mishic served as Global Director of Marketing Excellence for Dow Chemical Company's Performance Materials and Performance Plastics divisions and held a variety of global business development, marketing and business management positions since 2000.

Gustavo Perez:    Age 50; Vice President and General Manager – Americas since August 2010. Mr. Perez most recently served as the General Manager of Masterbatch for the Company’s North America operations and has been with the Company since 1995, serving in a variety of management positions.

Stacy R. Walter: Age 52; Vice President, Internal Audit of the Company since April 2013. Ms. Walter has served as the Director of Internal Audit for the Company since June 2006 and Sarbanes-Oxley Audit Manager since joining the Company in 2005.

Kim L. Whiteman:    Age 57; Vice President, Global Human Resources of the Company since June 2009. Previously, Mr. Whiteman held various human resource management roles at The Goodyear Tire and Rubber Company since 1979.

Available Information

The Company is subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, in accordance with these requirements, files annual, quarterly and other reports, as well as proxy statements and other information with the Securities and Exchange Commission (the “Commission”) relating to its business and financial results. Investors may inspect a copy of such reports, proxy statements and other information the Company files with the Commission on its website at http://www.sec.gov.

The Company’s internet address is www.aschulman.com. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, together with any amendments to those reports filed or furnished pursuant to the Exchange Act, will be made available on its website as soon as reasonably practicable after they are electronically filed with or furnished to the Commission. 

ITEM 1A.
RISK FACTORS
The following are certain risk factors that could materially and adversely affect our business, results of operations, cash flows and/or financial condition. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results or financial condition to differ materially from those projected in forward-looking statements. The risks that are discussed below are not the only ones we face. If any of the following risks occur, our business, results of operations, cash flows and/or financial condition could be adversely affected.

10


Risks Relating to Economic and Market Conditions
Our sales, profitability, operating results and cash flows are sensitive to global economic conditions, financial markets and cyclicality, and could be adversely affected during economic downturns or financial market instability.
The business of our customers can be cyclical in nature and sensitive to changes in general economic conditions. Deterioration in our customers’ financial position can adversely affect our sales and profitability. Historically, downturns in general economic conditions have resulted in diminished product demand, excess manufacturing capacity and lower average selling prices, and we may experience similar problems in the future. Recent global economic conditions have caused, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and fluctuations in equity and currency values worldwide, and concerns that the worldwide economy may enter into a prolonged recessionary or slow growth period, each of which may materially adversely affect our customers’ access to capital. Turbulent global economic conditions, even without a sustained downturn, may limit our customers’ access to capital or otherwise impair their creditworthiness, which could inhibit their ability to purchase our products or affect their ability to pay for products that they have already purchased from us. Such challenges can affect our ability to collect customer receivables on the intended terms and amounts. In addition, downturns in our customers’ industries, even during periods of strong general economic conditions, could adversely affect our sales, profitability, operating results and cash flows.
Although no one customer currently accounts for a significant portion of our sales, we are exposed to certain industries such as automotive, appliances and construction. Economic challenges which more acutely affect such particular industries may directly reduce demand for our products by customers within such industries. Bankruptcies by major original equipment manufacturers (OEM) could have a cascading effect on a group of our customers who supply to OEMs, directly affecting their ability to pay.
Similar to our customers’ situation, turbulent global economic conditions, even without a sustained downturn, may materially adversely affect our suppliers’ access to capital and liquidity with which they maintain their inventories, production levels and product quality, causing them to raise prices or lower production levels. An increase in prices could adversely affect our profitability, operating results and cash flows.
The future of the global economic and financial condition is difficult to forecast and mitigate, and therefore the impact on our operating results for a particular period is difficult to predict. Any of the foregoing effects could have a material adverse effect on our business, results of operations and cash flows.
Negative global financial or credit market conditions may significantly affect our access to capital, cost of capital and ability to meet liquidity needs.
Unstable conditions in the financial or credit markets or sustained poor financial performance may adversely impact our ability to access credit already arranged and the availability and cost of credit to us in the future. A volatile credit market may limit our ability to replace maturing credit facilities and access the capital necessary to grow and maintain our business. Accordingly, we may be required to enter into credit agreements that have terms that we do not prefer, which could require us to pay unattractive interest rates. This could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility. There can be no assurances that government responses to disruptions in the financial markets will stabilize markets or increase liquidity and the availability of credit. Long term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until markets stabilize or until alternative credit arrangements or other funding sources can be arranged. Such measures could include deferring, eliminating or reducing capital expenditures, dividends, share repurchases or other discretionary uses of cash. Overall, our results of operations, financial condition and cash flows could be materially adversely affected by disruptions in the credit markets.
Shortages or price increases of raw materials and energy costs could adversely affect operating results and financial condition.
We purchase various plastic resins to produce our proprietary plastic compounds. These resins, derived from petroleum or natural gas, have on occasion been subject to periods of short supply as well as rapid and significant movements in price. These fluctuations in supply and price may be caused or intensified by a number of factors, including inclement weather, political instability or hostilities in oil-producing countries, other force majeure events affecting the production facilities of our suppliers, and more general supply and demand changes. We may not be able to obtain sufficient raw materials or pass on increases in the prices of raw materials and energy to our customers. Such shortages or higher petroleum or natural gas costs could lead to declining margins, operating results and financial conditions.

11


An unanticipated increase in demand may result in the inability to meet customer needs and loss of sales.
If we experience an unforeseen increase in demand, we may have difficulty meeting our supply obligations to our customers due to limited capacity or delays from our suppliers. We may lose sales as a result of not meeting the demands of our customers in the timeline required and our results of operations may be adversely affected. We may be required to change suppliers or may need to outsource our operations where possible and, if so, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with our high quality standards and with all applicable regulations and guidelines.
The occurrence or threat of extraordinary events, including natural disasters, contagious diseases, political disruptions, domestic and international terrorist attacks and acts of war, could disrupt commerce and significantly decrease demand for our products.
Extraordinary events, including natural disasters, contagious diseases, political disruptions, domestic and international terrorist attacks and acts of war could adversely affect the economy generally, our business and operations specifically, and the demand for our products. The occurrence of extraordinary events cannot be predicted and their occurrence could adversely affect our results.
Risks Related to Our Business
Our substantial international operations subject us to risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations.
We conduct a majority of our business outside of the United States. We expect sales from international markets to continue to represent a significant portion of our net sales. Accordingly, our business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in international operations include, but are not limited to, the following: 
fluctuations in exchange rates may affect product demand and profitability due to volatility in U.S. dollars of products and services we provide in international markets where payment for our products and services is made in the local currency;
potential disruption that could be caused with the partial or complete reconfiguration of the European Union;
intellectual property rights may be more difficult to enforce;
foreign countries may impose additional withholding taxes or otherwise tax our foreign income, or adopt other restrictions on foreign trade or investment, including currency exchange controls;
unexpected adverse changes in foreign laws or regulatory requirements may occur;
agreements may be difficult to enforce and receivables difficult to collect;
compliance with a variety of foreign laws and regulations may be burdensome;
unexpected adverse changes may occur in export duties, quotas and tariffs and difficulties in obtaining export licenses;
general economic conditions in the countries in which we operate could have an adverse effect on our earnings from operations in those countries and economic downturns in any particular country or region may have cascading adverse impacts on our business, financial conditions and results of operations in other countries or regions;
foreign operations may experience staffing difficulties and labor disputes;
foreign governments may nationalize private enterprises;
foreign governments may enact tax law changes to increase revenue;
our business and profitability in a particular country could be affected by political or economic repercussions on a domestic, country specific or global level from terrorist activities and the response to such activities, such as the imposition of economic sanctions or other measures; and
unanticipated geopolitical and other events, such as economic sanctions, could adversely impact our business and profitability in the country being sanctioned and retaliatory actions by such countries may also adversely impact the countries imposing the sanctions which could result in a write-down of some of our international investments.

12


Our continued success as a global supplier will depend, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions by developing, implementing and maintaining policies and strategies that are effective in each location where we and our joint ventures do business.
Although the majority of our international business operations are currently in regions where the risk level and established legal systems are considered reasonable, our international business also includes projects in countries where governmental corruption has been known to exist. We emphasize compliance with the law and have policies, procedures and certain ongoing training of employees with regard to business ethics and key legal requirements such as the U.S. Foreign Corrupt Practices Act (“FCPA”); however, there can be no certain assurances that our employees or outside agents will adhere to our code of business conduct, other internal policies or the FCPA. Additionally, in such high risk regions, our competitors who may not be subject to U.S. laws and regulations, such as the FCPA, can gain competitive advantages over us by securing business awards, licenses or other preferential treatment in those jurisdictions using methods that U.S. law and regulations prohibit us from using. We may be subject to competitive disadvantages to the extent that our competitors are able to secure business, licenses or other preferential treatment by making payments to government officials and others in positions of influence. If we fail to enforce our policies and procedures properly or maintain internal accounting practices to accurately record our international transactions, we may be subject to regulatory sanctions. Violations of these laws could result in significant monetary or criminal penalties for potential violations of the FCPA or other laws or regulations which, in turn, could negatively affect our results of operations, financial position, cash flows, damage our reputation and, therefore, our ability to do business.
Our manufacturing operations are subject to hazards and other risks associated with polymer processing production and the related storage and transportation of inventories, products and wastes.
Our manufacturing operations are subject to the potential hazards and risks associated with polymer production and the related storage and transportation of inventories and wastes, including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of toxic or hazardous substances or gases and other risks. These hazards can cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental contamination. In addition, the occurrence of material operating problems at our facilities due to any of these hazards may diminish our ability to meet our output goals. These hazards, and their consequences, could have a material adverse effect on our operations as a whole, including our results of operations and cash flows, both during and after the period of operational difficulties.
We face competition from other polymer companies, which could adversely affect our sales and financial condition.
We operate in a highly competitive industry, competing against a number of domestic and foreign polymer producers on a variety of key criteria, including product performance and quality, product price, pricing strategies, product availability and security of supply, responsiveness of product development in cooperation with customers and customer service. Some of our competitors are larger than we are and may have greater financial resources. These competitors may also be able to maintain significantly greater operating and financial flexibility than we do. As a result, these competitors may be better able to withstand changes in conditions within our industry, changes in the prices of raw materials and energy and in general economic conditions. Additionally, competitors’ pricing decisions could compel us to decrease our prices, which could adversely affect our margins and profitability. Our ability to maintain or increase our profitability is, and will continue to be, dependent upon our ability to offset decreases in the prices and margins of our products by improving production efficiency and volume, shifting to higher margin products and improving existing products through innovation and research and development. If we are unable to do so or to otherwise maintain our competitive position, we could lose market share to our competitors.
We expect that our competitors will continue to develop and introduce new and enhanced products, which could cause a decline in the market acceptance of our products. In addition, our competitors could lower prices which would cause a reduction in the selling prices of some of our products as a result of intensified price competition. Competitive pressures can also result in the loss of major customers. An inability to compete successfully could have an adverse effect on our results of operations, financial condition and cash flows. We may also experience increased competition from companies that offer products based on alternative technologies and processes that may be more competitive or better in price or performance, causing us to lose customers which would result in a decline in our sales volume and earnings.
We are dependent upon good relationships with our various suppliers, vendors and distributors.
We rely upon good relationships with a number of different suppliers, vendors and distributors. If our relationships with these parties were to deteriorate or if a number of these parties should elect to discontinue doing business with us, our business operations could be adversely affected.

13


If we fail to develop and commercialize new products, our business operations would be adversely affected.
Successful development and commercialization of new products is a key driver in our anticipated growth plans. Also, on an ongoing basis a certain portion of our products slowly become obsolete or commoditized and, therefore, new products are necessary to maintain current volumes. The development and commercialization of new products requires significant investments in research and development, production, and marketing. The successful production and commercialization of these products is uncertain as is the acceptance of the new products in the marketplace. If we fail to successfully develop and commercialize new products, or if customers decline to purchase the new products, we will not be able to recover our development investment and the growth prospects and overall demand for our products will be adversely affected.
Increased indebtedness could restrict growth and adversely affect our financial health.
As of August 31, 2014, our debt on a consolidated basis was $371.3 million. A significant increase in the level of indebtedness could have significant consequences. For example, it could: 
limit our ability to satisfy current debt obligations;
increase interest expense due to the change in interest rates and increase in debt levels;
require us to dedicate a significant portion of cash flow to repay principal and pay interest on the debt, reducing the amount of funds that would be available to finance operations and other business activities;
impair our ability to obtain financing in the future for working capital, capital expenditures, research and development, or acquisitions;
make us vulnerable to economic downturns or adverse developments in our business or markets; and
place us at a competitive disadvantage compared to competitors with less debt.
We expect to pay expenses and to pay principal and interest on current and future debt from cash provided by operating activities. Therefore, our ability to meet these payment obligations will depend on future financial performance and regional cash availability, which is subject in part to numerous economic, business and financial factors beyond our control. If our cash flow and capital resources are insufficient to fund our debt obligations, we may be forced to reduce or delay expansion plans and capital expenditures, limit payment of dividends, sell material assets or operations, obtain additional capital or restructure our debt.
An impairment of goodwill would negatively impact our financial results.
At least annually, we perform an impairment test for goodwill. Under current accounting guidance, if the carrying value of goodwill exceeds the estimated fair value, impairment is deemed to have occurred and the carrying value of goodwill is written down to fair value with a charge against earnings. Accordingly, any determination requiring the write-off of a significant portion of goodwill could negatively impact the Company’s results of operations.
We may not have adequate or cost-effective liquidity or capital resources.
We require cash or committed liquidity facilities for business purposes, such as funding our ongoing working capital, acquisition, and capital expenditure needs, as well as to make interest payments on and to refinance indebtedness and pay taxes. As of August 31, 2014, we had cash and cash equivalents of $135.5 million. In addition, we currently have access to committed credit lines of $559.1 million, with $243.2 million available as of August 31, 2014. Our ability to satisfy our cash needs depends on our ability to generate cash from operations and to access the financial markets, both of which are subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control.
We may, in the future, need to access the financial markets to satisfy our cash needs. Our ability to obtain external financing is affected by various factors including general financial market conditions and our debt ratings. While, thus far, uncertainties in global credit markets have not significantly affected our access to capital, future financing could be difficult or more expensive. Further, any increase in our level of debt, change in status of our debt from unsecured to secured debt, or deterioration of our operating results may impact our ability to obtain favorable financing terms. Any tightening of credit availability could impair our ability to obtain additional financing or renew existing credit facilities on acceptable terms. Under the terms of any external financing, we may incur higher than expected financing expenses and become subject to additional restrictions and covenants. Our lack of access to cost-effective capital resources, an increase in our financing costs, or a breach of debt instrument covenants could have a material adverse effect on our business.

14


On September 24, 2013 the Company entered into a new $500 million Credit Agreement with certain financial institutions. The agreement consists of a $300 million credit facility and a $200 million term loan, replacing a previous $300 million revolving credit facility which was scheduled to expire in January 2016. The new Credit Agreement expires in September 2018.
If we are unable to retain key personnel or attract new skilled personnel, it could have an adverse effect on our business.
The unanticipated departure of any key member of our management team or employee base could have an adverse effect on our business. In addition, because of the specialized and technical nature of our business, our future performance is dependent on the continued service of, and on our ability to attract and retain, qualified management, scientific, technical, marketing and support personnel. Competition for such personnel is intense, and we may be unable to continue to attract or retain such personnel.
Our business depends upon good relations with our employees.
We may experience difficulties in maintaining appropriate relations with unions and employees in certain locations. About 45% of our employees are represented by labor unions. In addition, problems or changes affecting employees in certain locations may affect relations with our employees at other locations. The risk of labor disputes, work stoppages or other disruptions in production could adversely affect us. If we cannot successfully negotiate or renegotiate collective bargaining agreements, or if negotiations take an excessive amount of time, there may be a heightened risk of a prolonged work stoppage. Work stoppages may be caused by the inability of national unions and the governments of countries that the Company operates in from reaching agreement, and are outside the control of the Company. Any work stoppage could have a material adverse effect on the productivity and profitability of a manufacturing facility or on our operations as a whole.
A major failure or breach of our information systems could harm our business.
We currently depend upon numerous local and several regionally integrated information systems to process orders, respond to customer inquiries, manage inventory, purchase, sell and ship goods on a timely basis, maintain cost-efficient operations, prepare financial information and reports, and operate our website. We are also in the process of reviewing our global information system options to help strengthen common business practices including security and improve operational efficiency.
While we have a comprehensive security program that is continuously reviewed and upgraded, we may experience operating problems with our information systems as a result of system security failures such as viruses, cyber attacks, breaches or other causes. Theft of sensitive data and our inability to protect intellectual property could have an adverse effect on our business, customers, suppliers and employees. Additionally, any significant disruption or slowdown of our current or future information systems as a result of a system security failure could disrupt the flow of operational information, cause orders to be lost or delayed and could damage our reputation with our customers or cause our customers to cancel orders, any of which could adversely affect our financial results.
Other increases in operating costs could affect our profitability.
Scheduled or unscheduled maintenance programs could cause significant production outages, higher costs and/or reduced production capacity at our suppliers due to the industry in which they operate. These events could also affect our future profitability.
Although our pension and postretirement plans currently meet all applicable minimum funding requirements, events could occur that would require us to make significant contributions to the plans and reduce the cash available for our business.
We have several defined benefit pension and postretirement plans around the world in which a substantial portion of our employees participate in. We are required to make cash contributions to our pension plans to the extent necessary to comply with minimum funding requirements imposed by the various countries’ benefit and tax laws. The amount of any such required contributions will be determined annually based on an actuarial valuation of the plans as performed by our outside actuaries and as required by law. The amount we may elect or be required to contribute to our pension plans in the future may increase significantly. Specifically, if year-end accumulated obligations exceed assets, we may elect to make a voluntary contribution, over and above the minimum required. These contributions could be substantial and would reduce the cash available for our business.
Increasing cost of employee healthcare may decrease our profitability.
The cost of providing healthcare coverage for our employees is a significant operating cost for the Company. If healthcare costs increase at a rapid pace, we may not be able to or willing to pass on those costs to employees. Therefore, if we are unable to offset rising healthcare costs through improved operating efficiencies and reduced expenditures, the increased costs of employee healthcare may result in declining margins and operating results.

15


Risks Associated With Restructuring Initiatives
The inability to achieve, delays in achieving or achievement of less than the anticipated financial benefit from initiatives related to cost reductions and improving efficiencies could adversely affect our profitability.
From time to time, we undertake plans and initiatives that are expected to reduce costs and improve efficiencies. We could be unable to achieve, or may be delayed in achieving, some or all of the benefits from such initiatives because of limited resources or uncontrollable economic conditions. If these initiatives are not as successful as planned, the result could negatively impact our results of operations or financial condition. Additionally, even if we achieve these goals, we may not receive the expected benefits of the initiatives, or the costs of implementing these initiatives could exceed the related benefits.
We may incur significant charges in the event we close or relocate all or part of a manufacturing facility.
We periodically assess our manufacturing operations in order to manufacture and distribute our products in the most efficient manner. Based on our assessments, we may make capital improvements to modernize certain units, move manufacturing or distribution capabilities from one facility to another facility, discontinue manufacturing or distributing certain products or close all or part of a manufacturing facility. We also have shared services agreements at several of our facilities and if such agreements are terminated or revised, we would assess and potentially adjust our manufacturing operations. The closure or relocation of all or part of a manufacturing facility could create unintended challenges with production quality and result in future charges which could be significant.
Risks Associated With Acquisitions
We may experience difficulties in integrating acquired businesses, or acquisitions may not otherwise perform as expected.
During the past several fiscal years, we have acquired multiple businesses, and we may continue to acquire other businesses, intended to complement or expand our business. The successful integration of these acquisitions depends on our ability to manage the operations and personnel of the acquired businesses. Integrating operations is complex and requires significant efforts and expenses on the part of both the Company and the acquisitions. Personnel may voluntarily or involuntarily exit the Company because of the acquisitions. Our management team may have its attention diverted while trying to integrate the acquired companies. We may encounter obstacles when incorporating the acquired operations into our operations and management and achieving intended levels of manufacturing quality, or the acquired operations may not otherwise perform as expected or provide expected results. If such acquisitions are not integrated successfully or they do not perform as well as anticipated, our results of operations and financial condition could be adversely affected.
We may fail to realize all of the anticipated benefits of acquisitions, which could reduce our anticipated profitability.
We expect that our acquisitions will result in certain synergies, business opportunities and growth prospects, although we may not realize these expected synergies, business opportunities and growth prospects. Integrating operations is complex and requires significant efforts and expenses on the part of both the Company and the acquisitions. Personnel may voluntarily or involuntarily exit the Company because of the acquisitions. Our management team may have its attention diverted while trying to integrate the acquired companies. We may experience increased competition that limits our ability to expand our business. We may not be able to capitalize on expected business opportunities including successfully developing new geographic or product markets or retaining acquired current customers. Our assumptions underlying estimates of expected cost savings may be inaccurate or general industry and business conditions may deteriorate. In addition, our growth and operating strategies for acquired businesses may be different from the strategies that the acquired companies pursued. If these factors limit our ability to integrate or operate the acquired companies successfully or on a timely basis, our expectations of future results of operations, including certain cost savings and synergies expected to result from acquisitions, may not be met.
We may experience difficulties in identifying acquisitions that meet the objectives of our strategic plan and delays or other challenges in completing intended acquisitions and new ventures, particularly those in foreign jurisdictions.
We may acquire other businesses or form new ventures intended to complement or expand our business, both in the U.S. and in foreign jurisdictions, although, we may experience delays and other challenges in completing such acquisitions and ventures within our anticipated time frames which are difficult to predict, particularly in foreign jurisdictions. If such acquisitions or ventures are not completed within anticipated time frames, or are not completed successfully, our results of operations and financial condition could be adversely affected.

16


Risks Related to the Legal and Regulatory Environment
Extensive environmental, health and safety laws and regulations impact our operations and assets, and compliance, or lack of compliance, with these regulations could adversely affect our results of operations.
Our operations on and ownership of real property are subject to extensive environmental, health and safety laws and regulations at the national, state and local governmental levels. The nature of our business exposes us to risks of liability under these laws and regulations due to the production, storage, transportation, recycling or disposal and/or sale of materials that can cause contamination or personal injury if they are released into the environment or workplace. Environmental laws may have a significant effect on the costs of these activities involving inventory and wastes. We may incur substantial costs, including fines, damages, criminal or civil sanctions, remediation costs, or experience interruptions in our operations for violations of these laws.
Also, national and state environmental statutes impose strict, and under some circumstances, joint and several liability for the cost of investigations and remedial actions on any company that generated the waste, arranged for disposal of the waste, transported the waste to the disposal site or selected the disposal site, as well as on the owners and operators of these sites. Any or all of the responsible parties may be required to bear all of the costs of clean up, regardless of fault or legality of the waste disposal or ownership of the site, and may also be subject to liability for natural resource damages. It is possible that we could be identified as a potentially responsible party at various sites in the future, which could result in being assessed substantial investigation or clean-up costs.
Accruals for estimated costs, including, among other things, the ranges associated with our accruals for future environmental compliance and remediation may be too low or we may not be able to quantify the potential costs. We may be subject to additional environmental liabilities or potential liabilities that have not yet been identified. We expect that we will continue to be subject to increasingly stringent environmental, health and safety laws and regulations. We believe that compliance with these laws and regulations may, but does not currently, require significant capital expenditures and operating costs, which could adversely affect our results of operations or financial condition.
Our business and financial condition could be adversely affected if we are unable to protect our material trademarks, tradenames and other proprietary information.
We have numerous patents, trade secrets and know-how, domain names, trademarks and tradenames, which are discussed under ITEM 1 of this Annual Report on Form 10-K. Despite our efforts to protect our trademarks, tradenames and other proprietary rights from unauthorized use or disclosure, other parties, including our former employees or consultants, may attempt to disclose, obtain or use our proprietary information or marks without our authorization. Unauthorized use of our trademarks or tradenames, or unauthorized use or disclosure of our other intellectual property, could negatively impact our business and financial condition.
Changes in tax laws could have an adverse impact on our earnings.
Changes to tax laws, rules and regulations, including changes in the interpretation or implementation of tax laws, rules and regulations by the Internal Revenue Service or other domestic or foreign governmental bodies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional compliance costs and tax liabilities which could have an adverse impact on our earnings. Recently, several proposals to reform U.S. tax laws to effectively increase the U.S. taxation of income with respect to foreign operations have been announced. Whether any such initiatives will win Congressional or executive approval and become law is presently unknown; however, if any such initiatives were to become law and apply to our international operations, there could be a material impact on our financial condition and results of operations.
Litigation from customers, employees or others could adversely affect our financial condition.
From time to time, we may be subject to claims or legal action from customers, employees or others. Whether these claims and legal actions are founded or unfounded, if these claims and legal actions are not resolved in our favor, they may result in significant financial liability and/or adversely affect market perception of the Company and our products. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. The Company could also incur costs in connection with defending these possible claims and legal actions.
We may be required to adopt accounting or financial reporting standards, the ultimate adoption of such standards could negatively impact our business, financial condition or results of operations.
We could be required to adopt new or modified accounting or financial reporting standards that are different than current accounting principles generally accepted in the United States of America. The impact and cost of implementation of new standards could unfavorably impact our business, financial condition or results of operations.


17


ITEM 1B.
UNRESOLVED STAFF COMMENTS
  
None.

ITEM 2.
PROPERTIES

The following table indicates the location of each of the Company’s 42 manufacturing facilities, the projected annual manufacturing capacity for fiscal 2015 and approximate floor area, including warehouse and office space and the segment that is principally supported by such plants as of August 31, 2014. The following locations are owned or leased by the Company: 
Location
Approximate
Annual
Capacity (lbs.)(1)
 
Approximate
Floor Area
(Square Feet)
 
(In thousands)
Akron, Ohio
71,600

(2)
 
236

North Canton, Ohio
4,800

  
 
48

Stryker, Ohio
25,000

 
 
107

Allentown, Pennsylvania
29,000

  
 
128

Fontana, California
40,000

  
 
46

East Chicago, Indiana
68,000

 
 
73

Plymouth, Indiana
6,000

 
 
42

Evansville, Indiana
53,000

 
 
189

Grand Junction, Tennessee
18,000

  
 
88

China, Texas
100,000

  
 
137

La Porte, Texas
294,000

  
 
252

Worcester, Massachusetts
43,800

 
 
216

Franklin, Tennessee
5,500

 
 
55

Carpentersville, Illinois
10,000

 
 
118

Contagem, Belo Horizonte, Brazil
14,300

  
 
26

Sumare, Brazil
41,400

 
 
241

Buenos Aires, Argentina
19,200

  
 
31

San Luis Potosi, Mexico
102,000

  
 
187

Total Americas Segment
945,600

  
 
2,220

Bornem, Belgium
147,200

  
 
455

Opglabbeek, Belgium
6,300

  
 
34

Givet, France
241,000

  
 
241

Beaucaire, France
43,900

  
 
76

Montereau, France
51,700

  
 
57

Bellignat, France
13,900

 
 
92

Savigny, France
17,600

 
 
27

Kerpen, Germany
130,400

  
 
653

Budapest, Hungary
600

  
 
45

Gorla Maggiore, Italy
76,900

  
 
166

s-Gravendeel, The Netherlands
88,200

  
 
172

Nowa Biala, Poland
4,100

  
 
49

Gainsborough, United Kingdom
57,600

  
 
68


18


Crumlin Gwent, South Wales, United Kingdom
22,800

  
 
106

Warrington, United Kingdom
44,100

 
 
67

Astorp, Sweden
6,300

  
 
27

Castellon, Spain
34,300

 
 
108

Total EMEA Segment
986,900

  
 
2,443

Batu Pahat, Malaysia
68,800

  
 
62

Johor, Malaysia
48,500

 
 
120

Guangdong Province, China
64,800

  
 
112

East Java, Indonesia
37,000

  
 
136

Vadodara, India
14,500

 
 
491

Total APAC Segment
233,600

  
 
921

Total
2,166,100

  
 
5,584


The Company considers each of the foregoing facilities to be in good condition and suitable for its purposes. Approximate annual capacity amounts may fluctuate as a result of capital expenditures or lean process initiatives to increase capacity, a shutdown of certain equipment to reduce capacity or permanent changes in mix which could increase or decrease capacity.
 
(1)
The approximate annual capacity for fiscal 2015 set forth in this table is an estimate of practical capacity that is based upon several factors. It is determined as the production level at which the manufacturing facilities can operate with an acceptable degree of efficiency, taking into consideration factors such as longer term customer demand, permanent staffing levels, operating shifts, holidays, scheduled maintenance and mix of product. Capacity utilization is calculated by dividing actual production pounds by practical capacity at each plant.

The annual poundage of plastic compounds manufactured does not, in itself, reflect the extent of utilization of the Company’s plants or the profitability of the plastic compounds produced. 

(2)
Akron, Ohio includes three manufacturing facilities: Akron plant, Innovation and Collaboration Center and Network Polymers.

Public warehouses are used wherever needed to store the Company’s products to best service the needs of customers. The number of public warehouses in use varies from time to time. Currently, the Company utilizes approximately 60 warehouses worldwide. The Company believes an adequate supply of suitable public warehouse facilities is available.

The Company leases its corporate headquarters, which is located in Fairlawn, Ohio and contains approximately 34,000 square feet. The Company also leases sales and administrative offices in various locations globally.
 
ITEM 3.
LEGAL PROCEEDINGS

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 actions, after reviewing all pending and threatened actions with counsel and based on information currently available, management believes that the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the results of operations or financial position of the Company. However, it is possible that the ultimate resolution of such matters, if unfavorable, may be material to the results of operations in a particular future period as the time and amount of any resolution of such 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.
 

19


ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

PART    II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “SHLM.” At October 15, 2014, there were 569 holders of record of the Company’s common stock. This figure does not include beneficial owners who hold shares in nominee name. The closing stock price on October 15, 2014 was $29.95.
The quarterly high and low closing stock prices are presented in the table below: 
 
Fiscal 2014
 
Fiscal 2013
Common stock price range
High - Low
 
High - Low
1st Quarter
$34.53 - 27.27
 
$26.40 - 23.14
2nd Quarter
$35.50 - 32.21
 
$33.03 - 25.88
3rd Quarter
$37.26 - 33.42
 
$32.72 - 24.82
4th Quarter
$42.01 - 34.16
 
$28.83 - 25.73

The quarterly cash dividends declared are presented in the table below: 
Cash dividends per share
Fiscal 2014
 
Fiscal 2013
1st Quarter
$
0.200

 
$
0.195

2nd Quarter
0.200

 
0.195

3rd Quarter
0.200

 
0.195

4th Quarter
0.200

 
0.195

Total
$
0.800

 
$
0.780


On April 3, 2014, the Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to $55 million of its common stock in the open market or in privately negotiated transactions, subject to market and other conditions (the “Program”). Repurchases under the Program may take place over a three-year period ending April 2, 2017, when the Program is scheduled to expire. During fiscal 2014, the Company did not repurchase any shares of common stock under the Program, which may be modified, suspended or terminated by the Company at any time. The Program replaces the Company’s previous share repurchase program, which was authorized on April 1, 2011 and expired on March 31, 2014.

In fiscal 2014, the Company repurchased 40,327 shares of common stock under the previous share repurchase program at an average price of $27.68 per share for a total cost of $1.1 million. In total under the previous program, the Company acquired 2,192,612 shares at an average price of $20.33 per share.







20


ITEM 6.
SELECTED FINANCIAL DATA
 
 
Year Ended August 31,
 
2014(1)
 
2013(1),(2)
 
2012(1),(2)
 
2011(2)
 
2010(2)
 
(In thousands, except per share data)
Net sales
$
2,446,998

 
$
2,133,402

 
$
2,081,272

 
$
2,159,053

 
$
1,577,180

Cost of sales
2,116,990

 
1,852,223

 
1,802,029

 
1,868,443

 
1,340,134

Other costs and expenses
258,396

 
228,159

 
214,434

 
227,024

 
197,072

Interest and other income
(720
)
 
(712
)
 
(2,018
)
 
(2,553
)
 
(3,739
)
Total costs and expenses, net
2,374,666

 
2,079,670

 
2,014,445

 
2,092,914

 
1,533,467

Income from continuing operations before taxes
72,332

 
53,732

 
66,827

 
66,139

 
43,713

Provision (benefit) for U.S. and foreign income taxes
18,542

 
19,733

 
13,918

 
15,764

 
(4,218
)
Income from continuing operations
53,790

 
33,999

 
52,909

 
50,375

 
47,931

Income (loss) from discontinued operations, net of tax
3,202

 
(6,671
)
 
(860
)
 
(8,690
)
 
(3,820
)
Net income
56,992

 
27,328

 
52,049

 
41,685

 
44,111

Noncontrolling interests
(799
)
 
(1,229
)
 
(1,162
)
 
(689
)
 
(221
)
Net income attributable to A. Schulman, Inc.
$
56,193

 
$
26,099

 
$
50,887

 
$
40,996

 
$
43,890

 
 
 
 
 
 
 
 
 
 
Total assets
$
1,512,484

 
$
1,238,342

 
$
1,193,767

 
$
1,239,987

 
$
1,071,315

Long-term debt
$
339,546

 
$
207,435

 
$
174,466

 
$
184,598

 
$
93,834

Total equity
$
536,451

 
$
514,744

 
$
507,689

 
$
554,305

 
$
493,140

 
 
 
 
 
 
 
 
 
 
Weighted-average number of shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
29,061

 
29,260

 
29,389

 
30,978

 
27,746

Diluted
29,362

 
29,337

 
29,549

 
31,141

 
27,976

 
 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to A. Schulman, Inc.
 
 
 
 
 
 
 
 
Income from continuing operations
$
1.82

 
$
1.12

 
$
1.76

 
$
1.60

 
$
1.72

Income (loss) from discontinued operations
0.11

 
(0.23
)
 
(0.03
)
 
(0.28
)
 
(0.14
)
Net income (loss) attributable to A. Schulman, Inc.
$
1.93

 
$
0.89

 
$
1.73

 
$
1.32

 
$
1.58

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share attributable to A. Schulman, Inc.
 
 
 
 
 
 
 
 
Income from continuing operations
$
1.80

 
$
1.12

 
$
1.75

 
$
1.60

 
$
1.71

Income (loss) from discontinued operations
0.11

 
(0.23
)
 
(0.03
)
 
(0.28
)
 
(0.14
)
Net income (loss) attributable to A. Schulman, Inc.
$
1.91

 
$
0.89

 
$
1.72

 
$
1.32

 
$
1.57

 
 
 
 
 
 
 
 
 
 
Cash dividends per common share
$
0.80

 
$
0.78

 
$
0.72

 
$
0.62

 
$
0.60

 
(1) 
For additional information, see ITEM 7, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, of this Annual Report on Form 10-K.

(2) Certain items previously reported in specific financial statement captions have been reclassified to conform to the 2014 presentation.

21


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 consolidated financial statements and related notes included in this Annual Report on Form 10-K for the fiscal year ended August 31, 2014. The MD&A is organized as follows:

Overview: From management’s point of view, we discuss the following:

Summary of our business and the markets in which we operate;
Key trends, developments and challenges; and
Significant events during the current fiscal year.

Results of Operations: An analysis of our results of operations as reflected in our consolidated financial statements. Throughout this MD&A, the Company provides operating results for continuing operations exclusive of certain items such as costs related to acquisitions, restructuring and related expenses and asset write-downs, which are considered relevant to aid analysis and understanding of the Company’s results and business trends.

Critical Accounting Policies: An overview of accounting policies identified by the Company as critical that, as a result of the judgments, uncertainties, and the operations involved, could result in material changes to its financial condition or results of operations under different conditions or using different assumptions.

Liquidity and Capital Resources: An analysis of our cash flows, working capital, debt structure, contractual obligations and other commercial commitments.

Overview

Business Summary

A. Schulman, Inc. is a leading international supplier of high-performance plastic compounds and resins 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 regions which represent our reportable segments:

Europe, Middle East and Africa ("EMEA"),
Americas, and
Asia Pacific ("APAC").

The Company has approximately 3,900 employees and 42 manufacturing facilities worldwide. Globally, the Company operates in five product families: (1) custom performance colors, (2) masterbatch solutions, (3) engineered plastics, (4) specialty powders and (5) distribution services. The Company offers tolling services to customers primarily in the specialty powders product family.

Key Trends, Developments and Challenges

We continue the execution of our growth strategy, which is a set of initiatives aimed at increasing our ability to leverage our innovative products into different geographic markets and explore adjacent markets and applications in order to improve the profitability of the Company's product mix and sales volume.

The following present opportunities and challenges as we work toward our goal of providing attractive returns for all of our stakeholders:

Cross Selling. We engage in the cross selling of our products through the collaborative efforts and training of our sales teams. We encourage cross selling between different product families and promote cross regional sales to better service our valued customers.


22


Development of New Products. We are dedicated to the development of new, higher-margin products and applications that optimize the appearance, performance, and processing of plastics to meet our customers' specifications. We strive to maintain a balanced position between low-cost production and technological leadership with focused application development. We are also committed to continuing our growth in high value-added markets and reducing our exposure to commodity markets. We look to enhance our efforts through strategic collaborations with leading innovators in key markets.

Innovation Centers. We have four global innovation centers located in Belgium, Germany, Mexico and the United States which promote collaborative partnerships between A. Schulman and our customers, suppliers, universities and other technical organizations. These innovation centers enable us to undertake research and development activities that align our technical and product development capabilities with the emerging needs of our customers and end markets.

Adjacent Markets. We are committed to identifying and pursuing adjacent markets, such as personal care and cosmetics, for our products that have sustainable growth opportunities.

Purchasing and Pricing. We pursue opportunities to continue our savings on purchasing and to optimize pricing strategies and vendor payment terms. We continue to leverage our global volume base to enhance savings and identify alternate supply sources.

Continuous Improvement. The Company's Six Sigma Black Belt and Green Belt associates continue to look for ways to improve our processes and optimize our performance. We remain determined to control and manage our selling, general and administrative expenses, especially in developed markets.

Acquisitions and Joint Ventures. We continue to seek acquisitions and joint ventures that are within our specialty plastics business to leverage our product innovation, technical know-how and market knowledge. We will also continue to explore opportunities for transformational acquisitions that will transition us into a premier specialty chemical company.

Significant Events

The following items represent significant events during fiscal year 2014:

1.
Share Repurchases. On April 3, 2014, the Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to $55 million of its common stock. During fiscal 2014, the Company did not repurchase any shares of common stock under this new Program. Under the previous share repurchase program, the Company repurchased 40,327 shares of common stock at an average price of $27.68 per share for a total cost of $1.1 million in fiscal 2014.

2.
Business Acquisitions. On September 2, 2013, the Company acquired the Perrite Group, a thermoplastics manufacturer with business in niche engineered plastics and custom color with operations in Malaysia, the United Kingdom and France, for $51.3 million, net of cash.

On December 2, 2013, the Company completed the acquisition of Network Polymers, a niche engineered plastics compounding business with operations in Akron, Ohio for $49.2 million.

On December 31, 2013, the Company acquired Prime Colorants, a leading manufacturer of custom color and additive concentrates in Franklin, Tennessee, for $15.1 million.

On July 1, 2014, the Company acquired the majority of the assets of the specialty plastics business from Ferro Corporation ("Specialty Plastics" acquisition) for $91 million which includes four facilities located in the U.S. and one facility located in Spain.

3.
Sale of Australia Business. The Company completed the sale of its rotational compounding business in Australia on September 3, 2013. The operating results for this business were previously included in the Company's specialty powders product family within the APAC segment and are reported as discontinued operations.
    
4.
Credit Agreement. On September 24, 2013, the Company entered into a new $500 million Credit Agreement. The
agreement consists of a $300 million Revolving Facility and a $200 million Term Loan Facility, replacing a previous

23


$300 million revolving credit facility, and offers increased borrowing capacity and improved terms and covenants. The agreement expires in September 2018.

5.
Long-term Growth Targets. On April 10, 2014, the Company hosted an Investor Day where the Company introduced
several new long-term financial targets, which are based largely on the Company's expectations for continued success with its organic growth initiatives and acquisition strategy, combined with our financial strength and the growth potential of our global markets. The adjusted earnings per share target for fiscal 2018 is $4.50 to $4.75 per diluted share.

6.
Appointment of President and Chief Executive Officer. On June 19, 2014, the Company's Board of Directors named Bernard Rzepka as President and Chief Executive Officer of the Company, effective January 2015. In addition, the Board nominated Joseph M. Gingo to continue as the Chairman of the Board after his retirement as President and Chief Executive Officer. The nomination of Mr. Gingo as Chairman of the Board is subject to his re-election as a director by shareholders at the Company's annual meeting in December 2014.

The following items represent significant events during early fiscal 2015:

1.
Business Acquisition. On September 2, 2014, the Company acquired Compco Pty. Ltd., a manufacturer of masterbatches and custom colors in Melbourne, Australia for $6.7 million.

2.
Dividend Activities. In October 2014, the Company increased its regular quarterly cash dividend by 2.5% to $0.205 per common share. This reflected the Company's confidence in its ability to generate cash and its long-term growth prospects, along with a continued commitment to shareholders

3.
Restructuring Plan. In October 2014, the Company announced actions to optimize the back-office and support functions in EMEA. The Company expects to reduce headcount by approximately 40 and realize annual savings of approximately $4 million on completion of these actions.

Results of Operations

FISCAL YEAR 2014 COMPARED WITH FISCAL YEAR 2013

The Company uses net sales to unaffiliated customers, gross profit and 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 operating income does not include items such as interest income or expense, other income or expense, foreign currency transaction gains or losses, restructuring and related expenses including accelerated depreciation, asset impairments, or costs and inventory step-up charges related to business acquisitions. Corporate expenses include the compensation of certain personnel, certain audit expenses, Board of Directors related costs, certain insurance costs, costs associated with being a publicly traded entity and other miscellaneous legal and professional fees. For a reconciliation of segment operating income to operating income and income from continuing operations before taxes, please refer to Note 13 of the consolidated financial statements within this Form 10-K.
Segment Information
  
Year Ended August 31,
 
 
 
 
 
 
 
Favorable (unfavorable)
EMEA
2014
 
2013
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
1,262,027

 
1,167,603

 
94,424

 
8.1
%
 
 
 
 
Net sales
$
1,577,867

 
$
1,405,882

 
$
171,985

 
12.2
%
 
$
53,072

 
8.5
%
Segment gross profit
$
206,268

 
$
179,242

 
$
27,026

 
15.1
%
 
$
6,890

 
11.2
%
Segment gross profit percentage
13.1
%
 
12.7
%
 
 
 
 
 
 
 
 
Segment operating income
$
80,690

 
$
67,320

 
$
13,370

 
19.9
%
 
$
2,556

 
16.1
%
Price per pound
$
1.250

 
$
1.204

 
$
0.046

 
3.8
%
 
$
0.042

 
0.3
%
Segment operating income per pound
$
0.064

 
$
0.058

 
$
0.006

 
10.3
%
 
$
0.002

 
6.9
%


24


EMEA net sales for the year ended August 31, 2014 were $1,577.9 million, an increase of $172.0 million or 12.2%, compared with the prior year. Excluding the favorable impact of foreign currency translation of $53.1 million, net sales increased $118.9 million. During fiscal 2014, the incremental contribution of the Perrite and Specialty Plastics acquisitions was $93.2 million and 60.8 million pounds in net sales and volume, respectively. Excluding acquisitions and foreign currency translation, organic sales increased $25.7 million, primarily driven by volume increases in all product families.

EMEA gross profit was $206.3 million for the year ended August 31, 2014, an increase of $27.0 million over prior year. The improvement over prior year was due to the positive contribution of the Perrite and Specialty Plastics acquisitions combined with the favorable impact of foreign currency translation of $6.9 million and organic growth across nearly all product families.

EMEA operating income for the year ended August 31, 2014 was $80.7 million, an increase of $13.4 million compared with the prior year. The increase in segment operating income in fiscal 2014 was primarily due to the aforementioned increase in segment gross profit, benefits from prior restructuring activities of $3.8 million and a reduction of bad debt expense of $1.8 million. Partially offsetting these items were incremental SG&A expenses from acquisitions of $5.0 million and increased variable incentive compensation and a government regulated increase in annual salaries of $5.4 million, and increased promotional trade show activities of $0.9 million. Foreign currency translation negatively impacted EMEA SG&A expense by $4.3 million. Segment operating income per pound increased $0.006 to $0.064 per pound primarily due to increased price per pound, partially offset by increased SG&A expense.
 
Year Ended August 31,
 
 
 
 
 
 
 
 
 
Favorable (unfavorable)
Americas
2014
 
2013
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
669,017

 
653,914

 
15,103

 
2.3
%
 
 
 
 
Net sales
$
673,363

 
$
600,824

 
$
72,539

 
12.1
%
 
$
(14,358
)
 
14.5
%
Segment gross profit
$
99,517

 
$
81,315

 
$
18,202

 
22.4
%
 
$
(1,678
)
 
24.4
%
Segment gross profit percentage
14.8
%
 
13.5
%
 
 
 
 
 
 
 
 
Segment operating income
$
38,806

 
$
28,351

 
$
10,455

 
36.9
%
 
$
(522
)
 
38.7
%
Price per pound
$
1.006

 
$
0.919

 
$
0.087

 
9.5
%
 
$
(0.022
)
 
11.9
%
Segment operating income per pound
$
0.058

 
$
0.043

 
$
0.015

 
34.9
%
 
$
(0.001
)
 
37.2
%

Net sales for the Americas for the years ended August 31, 2014 and 2013 were $673.4 million and $600.8 million, respectively, an increase of $72.5 million or 12.1%. Incremental net sales and volume from the Network Polymers, Prime Colorants and the Specialty Plastics acquisitions were $70.2 million and 46.7 million pounds for the year ended August 31, 2014, respectively. Excluding acquisitions, selling price per pound increased in all product families, while volume declined across all product families partially driven by the continued execution of the Company’s strategy to increase specialty product sales and shift away from less profitable commodity sales.

Americas gross profit was $99.5 million for the year ended August 31, 2014, an increase of $18.2 million from the prior year. The benefits of prior restructuring initiatives of $1.5 million, as well as recent acquisitions and improved mix were partially offset by increased variable incentive compensation of $1.6 million and $1.7 million of unfavorable foreign currency translation.
 
Americas operating income for the year ended August 31, 2014 was $38.8 million compared with $28.4 million last year. Segment operating income benefited from the increase in segment gross profit, offset by increases in SG&A expense from recent acquisitions of $4.8 million and higher variable incentive compensation expense of $2.1 million. Foreign currency translation negatively impacted the Americas operating income by $0.5 million.

25


 
Year Ended August 31,
 
 
 
 
 
 
 
 
 
Favorable (unfavorable)
APAC
2014
 
2013
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
153,899

 
95,994

 
57,905

 
60.3
 %
 
 
 
 
Net sales
$
195,768

 
$
126,696

 
$
69,072

 
54.5
 %
 
$
(649
)
 
55.0
 %
Segment gross profit
$
26,767

 
$
22,345

 
$
4,422

 
19.8
 %
 
$
(57
)
 
20.0
 %
Segment gross profit per pound
13.7
%
 
17.6
%
 
 
 
 
 
 
 
 
Segment operating income
$
12,527

 
$
12,108

 
$
419

 
3.5
 %
 
$
131

 
2.4
 %
Price per pound
$
1.272

 
$
1.320

 
$
(0.048
)
 
(3.6
)%
 
$
(0.004
)
 
(3.3
)%
Segment operating income per pound
$
0.081

 
$
0.126

 
$
(0.045
)
 
(35.7
)%
 
$

 
(35.7
)%

Net sales for APAC for the year ended August 31, 2014 were $195.8 million, an increase of $69.1 million or 54.5%. During fiscal 2014, the Perrite acquisition in APAC provided net sales and volume of $53.6 million and 40.3 million pounds, respectively. Excluding the Perrite acquisition, volumes increased across all product families, partially offset by decreased price per pound driven by competitive pricing pressures primarily in the masterbatch solutions product family. Foreign currency translation unfavorably impacted net sales by $0.6 million.

APAC gross profit for the year ended August 31, 2014 was $26.8 million, an increase of $4.4 million compared with last year. Segment gross profit benefited from the positive contribution of the Perrite acquisition. The APAC gross profit percentage declined as a result of product mix and the competitive pricing pressures, as noted above.

APAC operating income for the year ended August 31, 2014 was $12.5 million, compared with $12.1 million last year. The increase in segment operating income was primarily due to the increased segment gross profit and favorable foreign currency translation, partially offset by incremental SG&A expenses from the Perrite acquisition of $2.3 million.
 
Year Ended August 31,
 
 
 
 
 
 
 
 
 
Favorable (unfavorable)
Consolidated
2014
 
2013
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
2,084,943

 
1,917,511

 
167,432

 
8.7
%
 
 
 
 
Net sales
$
2,446,998

 
$
2,133,402

 
$
313,596

 
14.7
%
 
$
38,065

 
12.9
%
Operating income
$
82,321

 
$
63,103

 
$
19,218

 
30.5
%
 
$
2,135

 
27.1
%
Total operating income before certain items*
$
99,853

 
$
82,853

 
$
17,000

 
20.5
%
 
$
2,165

 
17.9
%
Price per pound
$
1.174

 
$
1.113

 
$
0.061

 
5.5
%
 
$
0.019

 
3.8
%
Total operating income per pound before certain items*
$
0.048

 
$
0.043

 
$
0.005

 
11.6
%
 
$
0.001

 
9.3
%

* Total operating income before certain items represents segment operating income combined with Corporate and other operating expenses. For a reconciliation of segment operating income to operating income and income from continuing operations before taxes, refer to Note 13 of the consolidated financial statements within this Form 10-K.

Consolidated net sales for the year ended August 31, 2014 were $2,447.0 million, an increase of $313.6 million, or 14.7%, compared with the same prior year period. Incremental net sales and volume from the Company’s recent acquisitions contributed $217.0 million and 147.8 million pounds, respectively, for the year ended August 31, 2014. Excluding the impact of recent acquisitions, net sales were positively impacted by a 3.5% increase in price per pound and 1.0% increase in volume. Foreign currency translation favorably impacted net sales for the year ended August 31, 2014 by $38.1 million.

Operating income increased $19.2 million for the year ended August 31, 2014 compared to the prior year. Total operating income, before certain items, for the year ended August 31, 2014 was $99.9 million, an increase of $17.0 million compared with last fiscal year. The increase in both operating income and total operating income, before certain items, was primarily due to increased gross profit across all segments, partially offset by the increased SG&A expense noted below. Recent acquisitions contributed $12.3 million of operating income, before certain items.


26


Excluding $9.8 million and $5.4 million of acquisition and restructuring related costs for the years ended August 31, 2014 and 2013, respectively, the Company’s SG&A expenses increased $32.7 million for the year ended August 31, 2014 compared with the prior year. The increase was primarily attributable to incremental SG&A expense of $12.1 million from recent acquisitions, higher variable incentive compensation expense of $11.5 million and unfavorable foreign currency translation of $3.0 million. The increase in variable incentive compensation expense consists of $6.2 million of annual performance-based cash bonus primarily impacting the regions and $5.3 million of long-term incentive compensation primarily impacting Corporate.

Additional consolidated results

Interest expense, net of interest income, increased $1.1 million for the year ended August 31, 2014, as compared with the prior year primarily related to increased borrowings for recent acquisitions.

Foreign currency transaction gains or losses represent changes in the value of currencies in major areas where the Company operates. The Company experienced foreign currency transaction losses of $2.2 million and $2.4 million for the years ended August 31, 2014 and 2013, respectively. Foreign currency losses related to the Argentine peso from the Company's consolidated venture in Argentina were $1.6 million and were primarily related to the remeasurement of non-functional currency liabilities. The Argentine peso weakened against the US dollar by 48% during the year. The impact of these losses on net income attributable to the Company is reduced in proportion to the equity held by noncontrolling interests in the venture, or $0.8 million for the year ended August 31, 2014.

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 also changes between the Euro and other non-Euro European currencies. The Company may enter into foreign exchange forward contracts to reduce the impact of changes in foreign exchange rates on the consolidated statements of operations. These contracts reduce exposure to currency movements affecting the remeasurement of foreign currency denominated assets and liabilities primarily related to trade receivables and payables, as well as intercompany activities. Any gains or losses associated with these contracts, as well as the offsetting gains or losses from the underlying assets or liabilities, are recognized on the foreign currency transaction line in the consolidated statements of operations. There were no foreign exchange forward contracts designated as hedging instruments as of August 31, 2014 and 2013.

Other income for the year ended August 31, 2014 was $0.4 million, compared with other income of $0.2 for the year ended August 31, 2013. In both fiscal 2014 and 2013, there were no individually significant transactions.

Noncontrolling interests represent a 37% equity position of Alta Plastica S.A. in an Argentinean venture with the Company and a 35% equity position of P.T. Prima Polycon Indah in an Indonesian joint venture with the Company.

Net income attributable to the Company’s common stockholders was $56.2 million and $26.1 million for the years ended August 31, 2014 and 2013, respectively. Foreign currency translation had a favorable impact on net income of $3.0 million for the year ended August 31, 2014.

Product Family

The consolidated net sales for the Company's five product families are as follows:
 
Year Ended August 31,
 
2014
 
2013
 
(In thousands, except for %’s)
Custom performance colors
$
174,007

 
7
%
 
$
150,890

 
7
%
Masterbatch solutions
805,798

 
33

 
781,770

 
37

Engineered plastics

745,493

 
31

 
534,777

 
25

Specialty powders
350,510

 
14

 
308,619

 
14

Distribution services
371,190

 
15

 
357,346

 
17

Total consolidated net sales
$
2,446,998

 
100
%
 
$
2,133,402

 
100
%

Fiscal 2013 includes a reclassification of revenue between product families to better reflect the way the businesses are managed.


27


Capacity

The Company’s practical capacity is not based on a theoretical 24-hour, seven-day operation, rather it is determined as the production level at which the manufacturing facilities can operate with an acceptable degree of efficiency, taking into consideration factors such as longer term customer demand, permanent staffing levels, operating shifts, holidays, scheduled maintenance and mix of product. Capacity utilization is calculated by dividing actual production pounds by practical capacity at each plant. A comparison of capacity utilization levels is as follows: 
 
Years ended August 31,
 
2014
 
2013
EMEA
82
%
 
77
%
Americas
65
%
 
67
%
APAC
70
%
 
68
%
Worldwide
73
%
 
72
%

Restructuring

Consolidated Restructuring Summary

The following table summarizes the activity related to the Company’s restructuring plans: 
 
Employee-related Costs
 
Other Costs
 
Translation Effect
 
Total Restructuring Costs
 
(In thousands)
Accrual balance as of August 31, 2012
$
3,524

 
$
381

 
$
(539
)
 
$
3,366

Fiscal 2013 charges
8,669

 
1,831

 

 
10,500

Fiscal 2013 payments
(6,747
)
 
(1,812
)
 

 
(8,559
)
Translation

 

 
42

 
42

Accrual balance as of August 31, 2013
$
5,446

 
$
400

 
$
(497
)
 
$
5,349

Fiscal 2014 charges
2,223

 
2,660

 

 
4,883

Fiscal 2014 payments
(5,924
)
 
(2,689
)
 

 
(8,613
)
Translation

 

 
193

 
193

Accrual balance as of August 31, 2014
$
1,745

 
$
371

 
$
(304
)
 
$
1,812


See Note 15 of the consolidated financial statements within this Form 10-K for further details regarding the Company's restructuring activities.

Asset Impairment

The Company recorded $0.1 million and $1.9 million in pretax asset impairment charges during the years ended August 31, 2014 and 2013, respectively.

During fiscal 2014 and 2013, the Company recorded asset impairment charges of $0.1 million and $0.5 million, respectively, related to a reduction in the carrying value of one of the Company’s facilities in Oyonnax, France, which was held for sale as of August 31, 2014 and 2013. The impairment charges were determined based on the estimated sales value of the facility less the estimated costs to sell utilizing information provided by a third-party real estate valuation source using the market approach. During early fiscal 2015, the Company sold this facility to a third-party for $0.6 million, which approximated its carrying value.

During fiscal 2013 and 2012, the Company recorded asset impairment charges of $1.4 million and $2.7 million related to a reduction in the carrying value of the Company's facility in Verolanuova, Italy using comparable prices for similar facilities provided by a third-party real estate valuation source using the market approach. During fiscal 2014, the Company sold this facility to a third-party for $1.5 million, which approximated its carrying value.

Refer to Note 19 of the consolidated financial statements within this Form 10-K for the discussion on impairment charges included in discontinued operations.


28


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,
 
2014
 
2013
 
(In thousands, except for %’s)
U.S. statutory federal income tax rate
$
25,316

 
35.0
 %
 
$
18,806

 
35.0
 %
Amount of foreign taxes at less than U.S. statutory federal income tax rate
(13,602
)
 
(18.8
)
 
(9,189
)
 
(17.1
)
U.S. and foreign losses with no tax benefit
4,899

 
6.8

 
5,826

 
10.8

U.S. restructuring and other U.S. charges with no benefit
3,010

 
4.2

 
1,704

 
3.2

Valuation allowance charges

 

 
2,361

 
4.4

Establishment (resolution) of uncertain tax positions
(121
)
 
(0.2
)
 
(84
)
 
(0.2
)
Other
(960
)
 
(1.3
)
 
309

 
0.6

Provision (benefit) for U.S. and foreign income taxes
$
18,542

 
25.7
 %
 
$
19,733

 
36.7
 %

The effective tax rate for the year ended August 31, 2014 was less than the U.S. statutory federal income tax rate primarily because of the Company’s overall foreign rate being less than the U.S. statutory federal income tax rate. This favorable effect of the Company’s tax rate was partially offset by no tax benefits being recognized for U.S. restructuring and other U.S. charges and certain foreign losses. The change in the effective tax rate compared with the same period last year was driven primarily by lower U.S. and foreign losses with no benefit in fiscal 2014 as well as the valuation allowance established in the second quarter of fiscal 2013 against the net operating loss deferred tax asset of the Company’s Brazilian entity due to the uncertainty in the realization of this asset.

The effective tax rate for the year ended August 31, 2013 is greater than the U.S. statutory rate primarily because of no tax benefits being recognized for U.S. and certain foreign losses, realization of tax charges due to changes in valuation allowances, and U.S. restructuring and other U.S. charges with no benefit. These unfavorable effects of the Company tax rate were partially offset by the Company’s overall foreign rate being less than the U.S. statutory rate.

FISCAL YEAR 2013 COMPARED WITH FISCAL YEAR 2012

Segment Information
 
Year ended August 31,
 
 
 
 
 
 
 
Favorable (unfavorable)
EMEA
2013
 
2012
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
1,167,603

 
1,174,515

 
(6,912
)
 
(0.6
)%
 
 
 
 
Net sales
$
1,405,882

 
$
1,403,151

 
$
2,731

 
0.2
 %
 
$
4,226

 
(0.1
)%
Segment gross profit
$
179,242

 
$
175,669

 
$
3,573

 
2.0
 %
 
$
359

 
1.8
 %
Segment gross profit percentage
12.7
%
 
12.5
%
 
 
 
 
 
 
 
 
Segment operating income
$
67,320

 
$
71,849

 
$
(4,529
)
 
(6.3
)%
 
$
39

 
(6.4
)%
Price per pound
$
1.204

 
$
1.195

 
$
0.009

 
0.8
 %
 
$
0.004

 
0.4
 %
Segment operating income per pound
$
0.058

 
$
0.061

 
$
(0.003
)
 
(4.9
)%
 
$

 
(4.9
)%

EMEA net sales for the year ended August 31, 2013 were $1,405.9 million, an increase of $2.7 million or 0.2%, compared with the prior year. Excluding the favorable impact of foreign currency translation of $4.2 million, net sales decreased $1.5 million which was impacted by reduced volume, primarily in the specialty powders and engineered plastics product families due to the weak economic environment in Europe. During fiscal 2013, the incremental contribution of the Elian acquisition was $18.5 million and 5.9 million pounds in net sales and volume, respectively.

EMEA gross profit was $179.2 million for the year ended August 31, 2013, an increase of $3.6 million over prior year. The positive contribution of the Elian acquisition combined with the favorable impact of foreign currency translation of $0.4 million was partially offset by the challenging economic environment in Europe.

29



EMEA operating income for the year ended August 31, 2013 was $67.3 million, a decrease of $4.5 million compared with the prior year. The decrease in segment operating income in fiscal 2013 was primarily due to an $8.1 million increase in selling, general and administrative expenses ("SG&A"). The increase in SG&A expense was primarily driven by increased compensation and benefits expense of $3.8 million, excluding Elian, which includes increased pension expense and annual government regulated compensation increases. SG&A expense was also impacted by increased bad debt expense of $1.0 million, increased information technology expense of $0.8 million, and incremental expenses of $2.5 million from Elian. These expenses were partially offset by savings from successful restructuring initiatives. Segment operating income per pound decreased $0.003 to $0.058 per pound primarily due to the aforementioned economic environment in Europe and increased SG&A expenses.
 
 
Year ended August 31,
 
 
 
 
 
 
 
Favorable (unfavorable)
Americas
2013
 
2012
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
653,914

 
610,418

 
43,496

 
7.1
 %
 
 
 
 
Net sales
$
600,824

 
$
558,910

 
$
41,914

 
7.5
 %
 
$
(680
)
 
7.6
 %
Segment gross profit
$
81,315

 
$
84,282

 
$
(2,967
)
 
(3.5
)%
 
$
180

 
(3.7
)%
Segment gross profit percentage
13.5
%
 
15.1
%
 
 
 
 
 
 
 
 
Segment operating income
$
28,351

 
$
28,872

 
$
(521
)
 
(1.8
)%
 
$
720

 
(4.3
)%
Price per pound
$
0.919

 
$
0.916

 
$
0.003

 
0.3
 %
 
$
(0.001
)
 
0.4
 %
Segment operating income per pound
$
0.043

 
$
0.047

 
$
(0.004
)
 
(8.5
)%
 
$
0.001

 
(10.6
)%

Net sales for the Americas for the years ended August 31, 2013 and 2012 were $600.8 million, and $558.9 million, respectively, an increase of $41.9 million or 7.5%. Incremental net sales and volume from the ECM Plastics, Inc. acquisition were $37.9 million and 33.8 million pounds for the year ended August 31, 2013, respectively. Excluding the impact of ECM Plastics, Inc., net sales and volume increased primarily in the specialty powders product family. Foreign currency translation negatively impacted net sales by $0.7 million.

Americas gross profit was $81.3 million for the year ended August 31, 2013, a decrease of $3.0 million from the prior year. Contribution from the ECM Plastics, Inc. acquisition was offset by increased costs in Mexico to meet customer demand in Brazil as a result of the shortfall in production caused by the facility consolidation. Additional expenses were incurred as the Company increased capacity in Mexico to address anticipated improvement in local market demand that did not materialize. During the fourth quarter of fiscal 2013, the Company initiated restructuring activities to address these issues as discussed below. Foreign currency translation favorably impacted segment gross profit by $0.2 million.

Americas operating income for the year ended August 31, 2013 was $28.4 million compared with $28.9 million last year. Segment operating income decreased as a result of the aforementioned decrease in segment gross profit, offset primarily by the favorable impact of $0.7 million from foreign currency translation and a $2.4 million decrease in SG&A expenses. The decrease in SG&A expenses was primarily due to successful restructuring initiatives and cost control efforts combined with reduced incentive compensation expense of $3.2 million, partially offset by the incremental expenses from ECM Plastics.
 
Year ended August 31,
 
 
 
 
 
 
 
 
 
Favorable (unfavorable)
APAC
2013
 
2012
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
95,994

 
96,893

 
(899
)
 
(0.9
)%
 
 
 
 
Net sales
$
126,696

 
$
119,211

 
$
7,485

 
6.3
 %
 
$
1,151

 
5.3
%
Segment gross profit
$
22,345

 
$
19,969

 
$
2,376

 
11.9
 %
 
$
253

 
10.6
%
Segment gross profit percentage
17.6
%
 
16.8
%
 
 
 
 
 
 
 
 
Segment operating income
$
12,108

 
$
10,908

 
$
1,200

 
11.0
 %
 
$
211

 
9.1
%
Price per pound
$
1.320

 
$
1.230

 
$
0.090

 
7.3
 %
 
$
0.012

 
6.3
%
Segment operating income per pound
$
0.126

 
$
0.113

 
$
0.013

 
11.5
 %
 
$
0.002

 
9.7
%

30



Net sales for APAC for the year ended August 31, 2013 were $126.7 million, an increase of $7.5 million or 6.3% primarily due to improved selling price per pound and product mix. Decreased volumes in the masterbatch solutions and specialty powders product families were largely offset by the increased volumes in the engineered plastics product family. Foreign currency translation favorably impacted net sales by $1.2 million.

APAC gross profit for the year ended August 31, 2013 was $22.3 million, an increase of $2.4 million compared with last year. The increase in segment gross profit was primarily due to the 7.3% increase in price per pound combined with a continued focus on products with higher technical requirements, partially offset by increased plant costs in China and India associated with the start-up of new production lines.

APAC operating income for the year ended August 31, 2013 was $12.1 million, compared with $10.9 million last year. The increase in profitability was principally due to the increase in segment gross profit offset by an increase of $1.2 million in SG&A expenses mainly related to increased compensation expense to support growth in the region and the establishment of the APAC regional office in Hong Kong.
 
Year ended August 31,
 
 
 
 
 
 
 
 
 
Favorable (unfavorable)
Consolidated
2013
 
2012
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
1,917,511

 
1,881,826

 
35,685

 
1.9
 %
 
 
 
 
Net sales
2,133,402

 
2,081,272

 
$
52,130

 
2.5
 %
 
$
4,697

 
2.3
 %
Operating income
63,103

 
73,403

 
$
(10,300
)
 
(14.0
)%
 
$
965

 
(15.3
)%
Total operating income before certain items*
82,853

 
87,843

 
$
(4,990
)
 
(5.7
)%
 
$
971

 
(6.8
)%
Price per pound
$
1.113

 
$
1.106

 
$
0.007

 
0.6
 %
 
$
0.003

 
0.4
 %
Total operating income per pound before certain items*
$
0.043

 
$
0.047

 
$
(0.004
)
 
(8.5
)%
 
$

 
(8.5
)%

* Total operating income before certain items represents segment operating income combined with Corporate and other operating expenses. For a reconciliation of segment operating income to operating income and income from continuing operations before taxes, refer to Note 13 of the consolidated financial statements within this Form 10-K.

The increase of $52.1 million in consolidated net sales for the year ended August 31, 2013 compared with the prior fiscal year was primarily a result of incremental net sales and volume from the Elian and ECM Plastics, Inc. acquisitions of $56.4 million and 39.7 million pounds, respectively. Net sales were positively impacted by the $4.7 million favorable impact of foreign currency translation. Excluding the positive impact of acquisitions and foreign currency translation, net sales and volume decreased primarily due to the aforementioned economic environment in Europe.

The Company’s SG&A expenses increased $7.9 million for the year ended August 31, 2013 compared with the prior year, excluding acquisition related transaction costs of $2.7 million and restructuring related costs of $2.7 million for fiscal 2013 and $1.4 million of acquisition related transaction costs for fiscal 2012. The increase was primarily attributable to incremental SG&A expense of $7.1 million from recent acquisitions, bad debt expense of $1.0 million and an increase in pension expense of $2.2 million. In addition, the Company invested in global marketing related initiatives, strategic planning in the APAC region, the establishment of the APAC regional headquarters in Hong Kong and the global ERP project. This was partially offset by savings from successful restructuring initiatives and cost control efforts, including $3.6 million related to the EMEA restructuring plans. Foreign currency translation favorably impacted SG&A expense by $0.2 million.
 
Operating income decreased $10.3 million for the year ended August 31, 2013 compared to the prior year. Total operating income, before certain items, for the year ended August 31, 2013 was $82.9 million, a decrease of $5.0 million compared with the prior year. The decrease in both operating income and total operating income, before certain items, was primarily due to the aforementioned increase in SG&A expense.

Additional consolidated results

Interest expense, net of interest income, decreased $0.5 million for the year ended August 31, 2013, as compared with the prior year primarily due to decreased borrowings.

31



Foreign currency transaction gains or losses represent changes in the value of currencies in major areas where the Company operates. The Company experienced foreign currency transaction losses of $2.4 million and $0.2 million for the years ended August 31, 2013 and 2012, respectively. Foreign currency transaction losses during fiscal 2013 were primarily related to increased import activity in Brazil. 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 also changes between the Euro and other non-Euro European currencies. The Company may enter into foreign exchange forward contracts to reduce the impact of changes in foreign exchange rates on the consolidated statements of operations. These contracts reduce exposure to currency movements affecting the remeasurement of foreign currency denominated assets and liabilities primarily related to trade receivables and payables, as well as intercompany activities. Any gains or losses associated with these contracts, as well as the offsetting gains or losses from the underlying assets or liabilities, are recognized on the foreign currency transaction line in the consolidated statements of operations. There were no foreign exchange forward contracts designated as hedging instruments as of August 31, 2013 and 2012.

Other income for the year ended August 31, 2013 was $0.2 million, compared with other income of $1.3 million for the year ended August 31, 2012. In both fiscal 2013 and 2012, there were no individually significant transactions.

Noncontrolling interests represent a 49% 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. Effective December 31, 2011, the Company's partnership with Mitsubishi Chemical MKV Company, which held a 30% equity position in The Sunprene Company in Bellevue, Ohio, was dissolved by a vote of the partners.

Net income attributable to the Company’s common stockholders was $26.1 million and $50.9 million for the years ended August 31, 2013 and 2012, respectively. Foreign currency translation had a positive impact on net income of $0.6 million for the year ended August 31, 2013.

Product Family

The consolidated net sales for the Company's five product families are as follows:
 
Year ended August 31,
 
2013
 
2012
 
(In thousands, except for %’s)
Custom performance colors
$
150,890

 
7
%
 
$
125,595

 
6
%
Masterbatch solutions
781,770

 
37

 
750,531

 
36

Engineered plastics
534,777

 
25

 
547,090

 
26

Specialty powders
308,619

 
14

 
314,965

 
16

Distribution services
357,346

 
17

 
343,091

 
16

Total consolidated net sales
$
2,133,402

 
100
%
 
$
2,081,272

 
100
%

Fiscal 2013 includes a reclassification of revenue between product families to better reflect the way the businesses are managed.


32


Capacity

The Company’s practical capacity is not based on a theoretical 24-hour, seven-day operation, rather it is determined as the production level at which the manufacturing facilities can operate with an acceptable degree of efficiency, taking into consideration factors such as longer term customer demand, permanent staffing levels, operating shifts, holidays, scheduled maintenance and mix of product. Capacity utilization is calculated by dividing actual production pounds by practical capacity at each plant. A comparison of capacity utilization levels is as follows: 
 
Years ended August 31,
 
2013
 
2012
EMEA
77
%
 
79
%
Americas
67
%
 
70
%
APAC
68
%
 
81
%
Worldwide
72
%
 
76
%

During fiscal 2013, the Company's new facility in India became operational. Additionally, the Company's APAC segment experienced lower capacity utilization as additional manufacturing capacity was added to existing facilities to meet anticipated demand in the region.

Restructuring

Consolidated Restructuring Summary

The following table summarizes the activity related to the Company’s restructuring plans:
 
Employee-related Costs
 
Other Costs
 
Translation Effect
 
Total Restructuring Costs
 
(In thousands)
Accrual balance as of August 31, 2011
$
3,322

 
$
403

 
$
70

 
$
3,795

Fiscal 2012 charges
7,581

 
1,675

 

 
9,256

Fiscal 2012 payments
(7,379
)
 
(1,697
)
 

 
(9,076
)
Translation

 

 
(609
)
 
(609
)
Accrual balance as of August 31, 2012
$
3,524

 
$
381

 
$
(539
)
 
$
3,366

Fiscal 2013 charges
8,669

 
1,831

 

 
10,500

Fiscal 2013 payments
(6,747
)
 
(1,812
)
 

 
(8,559
)
Translation

 

 
42

 
42

Accrual balance as of August 31, 2013
$
5,446

 
$
400

 
$
(497
)
 
$
5,349


For discussion on the Company's restructuring plans, refer to Note 15 of the consolidated financial statements within this Form 10-K.

Asset Impairment

The Company recorded $1.9 million and $3.4 million in pretax asset impairment charges during the years ended August 31, 2013 and 2012, respectively.

During fiscal 2013, the Company recorded $0.4 million in asset impairments related to the reduction of the carrying value of its facility in Oyonnax, France. Additionally, the Company reduced the carrying value of its facility in Verolanuova, Italy and recorded pretax impairment charges of $1.4 million and $2.7 million in fiscal 2013 and 2012, respectively. Refer to the fiscal 2014 asset impairment discussion above for further details on these two facilities.

In fiscal 2012, as a result of the Americas Engineered Plastics restructuring initiative, the Company reduced the carrying value of its facility, machinery and equipment in Nashville, Tennessee to its combined fair value of $3.8 million. The disposal value of the facility was determined as the estimated sales value of the assets less the costs to sell based on information provided by a third-party real estate valuation source. The disposal value of machinery and equipment to be sold or disposed of was determined based on estimated salvage value. The Company recorded pretax impairment charges of $0.5 million in fiscal 2012, primarily related to

33


real estate, machinery and equipment at the Nashville, Tennessee facility. During fiscal 2013, the Company sold the Nashville, Tennessee facility which resulted in a minimal impact on the Company's consolidated financial results.

Refer to Note 19 of the consolidated financial statements within this Form 10-K for the discussion on impairment charges included in discontinued operations.

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,
 
2013
 
2012
 
(In thousands, except for %’s)
U.S. statutory federal income tax rate
$
18,806

 
35.0
 %
 
$
23,389

 
35.0
 %
Amount of foreign taxes at less than U.S. statutory federal income tax rate
(9,189
)
 
(17.1
)
 
(11,373
)
 
(17.0
)
U.S. and foreign losses with no tax benefit
5,826

 
10.8

 
1,291

 
1.9

U.S. restructuring and other U.S. charges with no benefit
1,704

 
3.2

 
1,029

 
1.5

Valuation allowance charges
2,361

 
4.4

 
(2,380
)
 
(3.6
)
Establishment (resolution) of uncertain tax positions
(84
)
 
(0.2
)
 
1,718

 
2.6

Other
309

 
0.6

 
244

 
0.4

Provision (benefit) for U.S. and foreign income taxes
$
19,733

 
36.7
 %
 
$
13,918

 
20.8
 %

The effective tax rate for the year ended August 31, 2013 is greater than the U.S. statutory rate primarily because of no tax benefits being recognized for U.S. and certain foreign losses, realization of tax charges due to changes in valuation allowances, and U.S. restructuring and other U.S. charges with no benefit. These unfavorable effects on the Company tax rate were partially offset by the Company's overall foreign rate being less than the U.S. statutory rate. The change in the effective tax rate compared with the same prior year period was driven primarily by the valuation allowance established in the second quarter of fiscal 2013 against the net operating loss deferred tax asset of the Company's Brazilian entity due to the uncertainty in the realization of this asset and the adjustment to the Italian valuation allowance in fiscal 2012.

The effective tax rate for the year ended August 31, 2012 was less than the U.S. statutory rate primarily because of the Company's overall foreign rate being less than the U.S. statutory rate and an adjustment to the Italian valuation allowance. These favorable effects on the Company's tax rate were partially offset by no tax benefits being recognized for U.S. and certain foreign losses as well as the establishment of a liability for uncertain tax positions.

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 relate to the allowance for doubtful accounts, inventory reserve, restructuring charges, purchase accounting and goodwill, long-lived assets, income taxes, pension and other postretirement benefits and stock-based compensation.

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.


34


Restructuring Charges

The Company’s policy is to recognize restructuring costs in accordance with the accounting rules related to exit or disposal activities and compensation and non-retirement post-employment benefits. Detailed contemporaneous documentation is maintained and updated to ensure that accruals are properly supported. If management determines that there is a change in estimate, the accruals are adjusted to reflect this change.

Purchase Accounting and Goodwill

Business combinations are accounted for using the purchase method of accounting. This method requires the Company to record assets and liabilities of the business acquired at their estimated fair market values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The Company generally uses valuation specialists to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions.

Goodwill is tested for impairment annually as of June 1. If circumstances change during interim periods between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying value, the Company would test goodwill for impairment. Factors which would necessitate an interim goodwill impairment assessment include a sustained decline in the Company's stock price, prolonged negative industry or economic trends, and significant underperformance relative to expected historical or projected future operating results.

Management uses judgment to determine whether to use a qualitative analysis or a quantitative fair value measurement for its goodwill impairment testing. The Company's fair value measurement approach combines the income and market valuation techniques for each of the Company’s reporting units that carry goodwill. These valuation techniques use estimates and assumptions including, but not limited to, the determination of appropriate market comparables, projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions.

Effective September 1, 2012, the masterbatch product family was split into two separate product families, custom performance colors and masterbatch solutions. Consequently, the related goodwill was allocated to the custom performance colors and masterbatch solutions reporting units in EMEA and the Americas based on the relative fair value of these reporting units. Additional goodwill was recorded in fiscal 2013 as a result of the ECM Plastics, Inc. acquisition and in fiscal 2014 due to the Perrite Group, Network Polymers, Inc., Prime Colorants and Specialty Plastics acquisitions. All acquired goodwill was allocated to appropriate reporting units based on relative fair values.

2014 Annual Goodwill Impairment Test

As of June 1, 2014, the annual goodwill impairment test date for fiscal 2014, goodwill exists in five of the Company's reporting units in EMEA (masterbatch solutions, engineered plastics, specialty powders, custom performance colors and distribution services), four reporting units in the Americas (masterbatch solutions, custom performance colors, engineered plastics and specialty powders) and one reporting unit in APAC (engineered plastics).

Qualitative Analysis

The Company applied the qualitative goodwill impairment accounting guidance to its EMEA masterbatch, EMEA distribution services, Americas masterbatch and Americas custom performance color reporting units as of June 1, 2014. Qualitative trends and factors considered in the Company's analysis included overall economic conditions, access to capital markets, industry projections, competitive environment, actual and forecast operating results, business strategy, stock price and market capitalization, and other relevant qualitative trends and factors. These trends and factors were both compared to, and based on, the assumptions used in the quantitative assessment performed in fiscal 2013. As of June 1, 2014, the Company concluded that there were no indicators of impairment to the goodwill for the Company's EMEA masterbatch, EMEA distribution services, Americas masterbatch and Americas custom performance color reporting units.
Quantitative Analysis

Management used the quantitative fair value measurement for its annual goodwill impairment test as of June 1, 2014 for the EMEA engineered plastics, EMEA specialty powders, EMEA custom performance color, Americas engineered plastics, Americas specialty powders and APAC engineered plastics. The fair values of all these reporting units were established using a combination of the income and market approaches. These valuation methodologies use estimates and assumptions, as noted above.

35



Based on this quantitative analysis, management concluded that as of June 1, 2014, the EMEA engineered plastics, EMEA custom performance color, the Americas specialty powders and APAC engineered plastics 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, 2014, the fair values of the EMEA specialty powders and Americas engineered plastics reporting units exceeded their carrying values by 13% in each instance. As of August 31, 2014, the EMEA specialty powders reporting unit had goodwill of $19.0 million while goodwill in the Americas engineered plastics reporting unit was $28.4 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. A change in macroeconomic conditions in the Americas and EMEA regions, as well as future changes in the judgments, assumptions and estimates that were used in the Company's goodwill impairment testing for these two reporting units, including the discount rate and future cash flow projections, could result in a significantly different estimate of the fair value.

See Note 4 to the consolidated financial statements within this Form 10-K for further discussion on goodwill.

Long-lived Assets

Long-lived assets, except goodwill and indefinite-lived intangible assets, 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 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 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 the U.S. in recent periods provide sufficient negative evidence to require a full valuation allowance against its net deferred tax assets in the U.S. The Company intends to maintain a valuation allowance against its net deferred tax assets in the U.S. until sufficient positive evidence exists to support realization of such assets.


36


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.

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 2.8% as of August 31, 2014, compared with 4.0% as of August 31, 2013. For the other postretirement benefit plan, the rate is 3.8% as of August 31, 2014 and 4.5% as of August 31, 2013. 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 5.2% for fiscal 2014. In consultation with its actuaries, the Company estimates its pension expense will increase by $2.5 million in fiscal 2015 compared with fiscal 2014 primarily as a result of a decrease in the weighted-average discount rate assumption.

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.


37


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, 2014
Change in Assumption
Impact on
Fiscal 2014
Benefits Expense
 
Impact on
August 31, 2014
Projected Benefit
Obligation for
Pension Plans
 
Impact on
August 31, 2014
Projected Benefit
Obligation for
Postretirement Plans
 
 
 
(In thousands)
 
 
25 basis point decrease in discount rate
$
489

 
$
8,422

 
$
306

25 basis point increase in discount rate
$
(456
)
 
$
(7,887
)
 
$
(293
)
25 basis point decrease in expected long-term rate of return on assets
$
82

 
$

 
$

25 basis point increase in expected long- term rate of return on assets
$
(82
)
 
$

 
$


Share-based 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 compensation expense.

The awards with a market condition granted prior to fiscal 2013 are accounted for as equity awards given that recipients receive shares of stock upon vesting, and expense for these awards is recognized over the service period regardless of whether the market condition is achieved and the awards ultimately vest. Awards with a market condition granted in fiscal 2014 and 2013 provide recipients an option to receive cash or shares of common stock upon vesting. Consequently, such awards are accounted for as liability awards and the Company remeasures these awards at fair value on a quarterly basis over the service period. Expense for these awards is recognized only to the extent the market conditions are achieved and the awards ultimately vest.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided from operations was $113.1 million, $83.7 million and $99.5 million for the years ended August 31, 2014, 2013 and 2012, respectively. The increase of $29.4 million in cash provided by operations was primarily due to the increase in net income in fiscal 2014 as compared with 2013. The Company has generated $296.4 million in net cash from operations in fiscal 2014, 2013 and 2012 combined.

The Company’s cash and cash equivalents increased $1.4 million since August 31, 2013. This increase was driven primarily by cash provided from operations in fiscal 2014, coupled with proceeds from the sale of assets of $6.0 million and increased net borrowings of $142.4 million to fund the fiscal 2014 acquisitions. This was offset by the fiscal 2014 acquisitions for $206.6 million in cash consideration, expenditures for capital projects of $35.1 million and dividend payments of $23.7 million.

38



The Company’s approximate working capital days are summarized as follows: 
 
August 31, 2014
 
August 31, 2013
Days in receivables
55
 
53
Days in inventory
50
 
53
Days in payables
48
 
48
Total working capital days
57
 
58

The following table summarizes certain key balances on the Company’s consolidated balance sheets and related metrics: 
 
August 31, 2014
 
August 31, 2013
 
$ Change
 
% Change
 
(In thousands, except for %’s)
Cash and cash equivalents
$
135,493

 
$
134,054

 
$
1,439

 
1.1
%
Working capital, excluding cash
$
263,715

 
$
243,910

 
$
19,805

 
8.1
%
Long-term debt
$
339,546

 
$
207,435

 
$
132,111

 
63.7
%
Total debt
$
371,294

 
$
215,808

 
$
155,486

 
72.0
%
Net debt *
$
235,801

 
$
81,754

 
$
154,047

 
188.4
%
Total A. Schulman, Inc.’s Stockholders’ equity
$
527,043

 
$
507,377

 
$
19,666

 
3.9
%

* Net debt, a non-GAAP financial measure, represents total debt less cash and cash equivalents. The Company believes that net debt provides useful supplemental liquidity information to investors.

As of August 31, 2014 and August 31, 2013, 95% of the Company’s cash and cash equivalents were held by its foreign subsidiaries. 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, acquisitions, 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 normal operating needs and service outstanding debt. These dividends are typically paid out of current year earnings. In addition, excess cash in the U.S. is generally used to repay outstanding debt.

Working capital, excluding cash, was $263.7 million as of August 31, 2014, an increase of $19.8 million from August 31, 2013. The fiscal 2014 acquisitions contributed $42 million to working capital. The translation effect of foreign currencies, primarily the Euro, increased working capital by $5.9 million. Excluding the impact of fiscal 2014 acquisitions, working capital decreased $20.8 million largely due to decreases in inventory and other current assets of $9.3 million and $3.3 million, respectively.

Capital expenditures for the year ended August 31, 2014 were $35.1 million compared with $26.6 million last year. Capital expenditures for fiscal year 2014 primarily related to the regular and ongoing investment in the Company's manufacturing facilities.

In the first quarter of fiscal 2014, the Company and certain of its wholly-owned subsidiaries entered into an amended and restated Credit Agreement, dated September 24, 2013, and containing a maturity date of September 24, 2018, 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, Wells Fargo Securities, LLC and PNC Capital Markets LLC as 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 facility (the "Term Loan Facility") with quarterly payments due until maturity; and
an expansion feature allowing the Company to incur, subject to certain terms and conditions, up to an additional $250 million of revolving loans and/or term loans ("the Incremental Facility" and, together with the Revolving Facility and the Term Loan Facility, the "Credit Facility").

The Credit Facility is jointly and severally guaranteed by certain material domestic subsidiaries. The Credit Agreement contains certain covenants that, among other things, restrict the Company's ability to incur indebtedness and grant liens other than certain types of permitted indebtedness and permitted liens. The Company is also required to maintain a minimum interest coverage ratio

39


and cannot exceed a maximum net debt leverage ratio. The Company was in compliance with these covenants and does not believe a subsequent covenant violation is reasonably possible as of August 31, 2014.

Interest rates under the Credit Agreement are based on LIBOR or EURIBOR (depending on the borrowing currency) plus a spread determined by the Company's total leverage ratio. The Company is also required to pay a facility fee on the commitments, whether used or unused. The Revolving Facility provides for a portion of the funds to be made available as a short-term swing-line loan. The swing-line loan interest rate varies based on a mutually agreed upon rate between the bank and the Company. As of August 31, 2014, the amount available under the Credit Facility was reduced by outstanding letters of credit of $0.7 million and borrowings of $296.0 million. Outstanding letters of credit and borrowings under the previous credit agreement as of August 31, 2013 were $1.0 million and $150.0 million, respectively.

On February 14, 2014, the Company obtained a $15.0 million uncommitted line of credit from a regional financial institution, available until September 24, 2018. The interest rate is based upon the 30-day LIBOR index that is 10 basis points below the applicable spread on the Revolving Facility, noted above. The Company has $15.0 million of outstanding borrowings under this line of credit as of August 31, 2014 which are included in short-term debt on the Company's consolidated balance sheet.

On March 1, 2006, the Company issued €50.3 million of senior guaranteed notes in Germany in the private placement market maturing on March 1, 2016, with a fixed interest rate of 4.485% (the “Euro Notes”). The Euro Notes require annual principal payments of €2.5 million beginning in fiscal 2012. As of August 31, 2014, the amount of Euro Notes outstanding approximated €42.8 million, or $56.4 million. Repayment of the Euro Notes prior to maturity would cost approximately $7.1 million in early termination fees as of August 31, 2014.

The Euro Notes are guaranteed by certain material domestic subsidiaries and contain covenants similar to those in the Credit Agreement discussed above. The Company was in compliance with its covenants relating to the Euro Notes and does not believe a subsequent covenant violation is reasonably possible as of August 31, 2014.

The Company’s interest bearing short-term debt of $31.7 million as of August 31, 2014 had a weighted-average interest rate of approximately 3.1%. Interest bearing short-term debt as of August 31, 2013 was $8.4 million with a weighted-average interest rate of approximately 10.1%.

Below summarizes the Company’s available funds: 
 
As of August 31,
 
2014
 
2013
 
(In thousands)
Existing capacity:
 
 
 
Revolving Facility
$
300,000

 
$
300,000

Term Loan Facility
190,625

 

Domestic short-term lines of credit
15,000

 

Foreign short-term lines of credit
53,520

 
56,178

Total capacity from credit lines and notes
$
559,145

 
$
356,178

Availability:
 
 
 
Revolving Facility
$
193,909

 
$
149,024

Foreign short-term lines of credit
49,250

 
49,302

Total available funds from credit lines and notes
$
243,159

 
$
198,326


Total available funds from credit lines and notes represents the total capacity from credit lines and notes less outstanding borrowings of $315.3 million and $156.9 million as of August 31, 2014 and 2013, respectively, and issued letters of credit of $0.7 million and $1.0 million as of August 31, 2014 and 2013, respectively.

The Company’s underfunded pension liability is $133.1 million as of August 31, 2014. This amount is primarily due to an underfunded plan of $107.4 million maintained by 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.


40


During the year ended August 31, 2014, the Company paid cash dividends aggregating to $0.80 per share. The total amount of these dividends was $23.7 million. Cash flow has been sufficient to fund the payment of these dividends.

On April 3, 2014, the Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to $55 million of its common stock in the open market or in privately negotiated transactions, subject to market and other conditions (the “Program”). Repurchases under the Program may take place over a three-year period ending April 2, 2017, when the Program is scheduled to expire. During fiscal 2014, the Company did not repurchase any shares of common stock under the Program, which may be modified, suspended or terminated by the Company at any time. The Program replaces the Company’s previous share repurchase program, which was authorized on April 1, 2011 and expired on March 31, 2014.

In fiscal 2014, the Company repurchased 40,327 shares of common stock under the previous share repurchase program at an average price of $27.68 per share for a total cost of $1.1 million. In total under the previous program, the Company acquired 2,192,612 shares at an average price of $20.33 per share.

The Company has foreign currency exposures primarily related to the Euro, British pound sterling, Polish zloty, Mexican peso, Brazilian real, and Argentine peso, among others. The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using current exchange rates. Income statement items are translated at average exchange rates prevailing during the period. The resulting translation adjustments are recorded in the accumulated other comprehensive income (loss) account in stockholders’ equity. A significant portion of the Company’s operations uses the Euro as its functional currency. The change in the value of various foreign currencies, primarily the Euro, during the year ended August 31, 2014 increased the accumulated other comprehensive income (loss) account by $5.0 million which was primarily the result of a 4.1% increase in the twelve-month average value of the Euro from 1.308 Euros to 1 U.S. dollar in fiscal 2013 to 1.361 Euros to 1 U.S. dollar in fiscal 2014. Overall, the value of the Euro decreased 0.4% from 1.324 Euros to 1 U.S. dollar as of August 31, 2013 to 1.319 as of August 31, 2014.

Cash flow from operations, borrowing capacity under the credit facilities and current cash and cash equivalents are expected to provide sufficient liquidity to maintain the Company’s current operations and capital expenditure requirements, pay dividends, repurchase shares, pursue acquisitions and service outstanding debt.

A summary of the Company’s future obligations subsequent to August 31, 2014 is presented below: 
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than 5
years
 
Total
 
(In thousands)
Short-Term Debt(a)
$
31,646

 
$

 
$

 
$

 
$
31,646

Long-Term Debt(a),(h)

 
75,665

 
263,525

 

 
339,190

Capital Lease Obligations(a)
102

 
216

 
137

 
3

 
458

Operating Lease Obligations(b)
11,378

 
14,078

 
8,128

 
18,227

 
51,811

Purchase Obligations(c)
123,801

 
27,790

 
12,723

 

 
164,314

Pension Obligations(d)
5,636

 

 

 

 
5,636

Postretirement Benefit Obligations(e)
890

 
1,719

 
1,697

 
4,001

 
8,307

Deferred Compensation Obligations(f)
200

 
350

 

 

 
550

Interest Payments(g)
8,618

 
13,908

 
5,829

 

 
28,355

NATPET Investment(i)
12,792

 

 

 

 
12,792

 
$
195,063

 
$
133,726

 
$
292,039

 
$
22,231

 
$
643,059


(a) 
Short-term debt, long-term debt and capital lease information is provided in the Notes to the Consolidated Financial Statements. Short-term debt and long-term debt in the table above exclude capital lease obligations.
(b) 
Operating lease information is provided in the Notes to the Consolidated Financial Statements.
(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 2015 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, 2014.
(f) 
Deferred compensation obligations represent payments in accordance with agreements for two individuals for a ten-year period through fiscal 2018.
(g) 
Interest obligations on the Company’s short and long-term debt are included assuming the outstanding debt levels and interest rates will be consistent with those as of August 31, 2014.

41


(h) 
The Company's long-term debt was refinanced in September 2013 and matures in September 2018.
(i) 
The NATPET investment represents the Company's commitment for an investment of €9.7 million in a joint venture agreement with NATPET of Jeddah, Saudi Arabia.

The Company had $3.8 million of gross unrecognized tax benefits and $0.9 million of accrued interest and penalties on unrecognized tax benefits as of August 31, 2014 for which it could not reasonably estimate the timing and amount of future payments; therefore, no amounts were included in the Company’s future obligations table. Additional information on unrecognized tax benefits is provided in the Notes to the Consolidated Financial Statements.

The Company’s outstanding commercial commitments as of August 31, 2014 are not material to the Company’s financial position, liquidity or results of operations except as discussed in the Notes to the Consolidated Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet arrangements.

NEW ACCOUNTING PRONOUNCEMENTS

For a discussion of new accounting pronouncements, see Note 1 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 major 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, joint ventures and restructuring initiatives;
escalation in the cost of providing employee health care;

42


uncertainties regarding the resolution of pending and future litigation and other claims;
the performance of the global automotive market as well as other markets served;
further adverse changes in economic or industry conditions, including global supply and demand conditions and prices for products; and
operating problems with our information systems as a result of system security failures such as viruses, computer "hackers" or other causes.
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 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The Company’s exposure to market risk from changes in interest rates relates primarily to variable rate debt obligations which include the Revolving Facility, Term Loan Facility, foreign short-term lines of credit and other floating rate debt. As of August 31, 2014, the Company had $315.0 million outstanding against these facilities. Borrowing costs may fluctuate depending upon the volatility of interest rates and amounts borrowed. There would be an estimated $0.5 million impact on annual interest expense from a 10% increase or decrease in market rates of interest on outstanding variable rate borrowings as of August 31, 2014. The terms of the new credit facility entered into on September 24, 2013 include a 50 basis point rate improvement over the prior agreement in effect as of August 31, 2013.

Foreign Currency Exchange Risk

The Company conducts business on a multinational basis in a variety of foreign currencies. The Company’s exposure to market risk for changes in foreign currency exchange rates arises from anticipated transactions from international trade and repatriation of foreign earnings. The Company’s principal foreign currency exposures relate to the Euro, British pound sterling, Polish zloty, Mexican peso, Brazilian real and Argentine peso, among others.

The Company enters into forward exchange contracts to reduce its exposure to fluctuations in related foreign currencies. These contracts are with major financial institutions and the risk of loss is considered remote. The total value of open contracts and any risk to the Company as a result of these arrangements is not material to the Company’s financial position, liquidity or results of operations. The potential change in fair value as of August 31, 2014 for such financial instruments from an increase or decrease of 10% in quoted foreign currency exchange rates would be $0.1 million.

Commodity Price Risk

The Company uses certain commodities, primarily plastic resins, in its manufacturing processes. The cost of operations can be affected as the market for these commodities changes. As the price of resin increases or decreases, market prices for the Company’s products will also generally increase or decrease. This will typically lead to higher or lower average selling prices and will impact the Company’s gross profit and operating income. The impact on operating income is due to a lag in matching the change in raw material cost of sales and the change in product sales prices. The Company attempts to minimize its exposure to resin price changes by monitoring and carefully managing the quantity of its inventory on hand and product sales prices.

43


ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A. Schulman, Inc.
Index to the Consolidated Financial Statements
 


44


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of A. Schulman, Inc.

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of A. Schulman, Inc. and its subsidiaries at August 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2014 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) 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, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. 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 the accompanying Management's Report on Internal Control over Financial Reporting 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.

As described in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, management has excluded the Perrite Group, Network Polymers, Inc., Prime Colorants, and the specialty plastics business of Ferro Corporation from its assessment of internal control over financial reporting as of August 31, 2014, because they were acquired by the Company in purchase business combinations during fiscal 2014. We have also excluded the above acquisitions from our audit of internal control over financial reporting. All of the acquisitions are wholly-owned subsidiaries. The total assets for the Perrite Group, Network Polymers, Inc., Prime Colorants and the specialty plastics business of Ferro Corporation represent 6.5%, 3.2%, 1.2%, and 7.4% respectively, of the related consolidated financial statement amounts as of August 31, 2014. The total revenue for the Perrite Group, Network Polymers, Inc., Prime Colorants and the specialty plastics business of Ferro Corporation represent 5.8%, 1.9%, 0.3%, and 1.0% respectively, of the related consolidated financial statement amounts for the year ended August 31, 2014.


/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
October 22, 2014

45


A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS 
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands, except per share data)
Net sales
$
2,446,998

 
$
2,133,402

 
$
2,081,272

Cost of sales
2,116,990

 
1,852,223

 
1,802,029

Selling, general and administrative expenses
242,486

 
205,370

 
193,502

Restructuring expense
4,883

 
10,500

 
9,256

Asset impairment
104

 
1,873

 
3,392

Curtailment and settlement (gains) losses
214

 
333

 
(310
)
Operating income
82,321

 
63,103

 
73,403

Interest expense
8,503

 
7,657

 
8,351

Interest income
(286
)
 
(495
)
 
(676
)
Foreign currency transaction (gains) losses
2,206

 
2,426

 
243

Other (income) expense, net
(434
)
 
(217
)
 
(1,342
)
Income from continuing operations before taxes
72,332

 
53,732

 
66,827

Provision (benefit) for U.S. and foreign income taxes
18,542

 
19,733

 
13,918

Income from continuing operations
53,790

 
33,999

 
52,909

Income (loss) from discontinued operations, net of tax
3,202

 
(6,671
)
 
(860
)
Net income
56,992

 
27,328

 
52,049

Noncontrolling interests
(799
)
 
(1,229
)
 
(1,162
)
Net income attributable to A. Schulman, Inc.
$
56,193

 
$
26,099

 
$
50,887

 
 
 
 
 
 
Weighted-average number of shares outstanding:
 
 
 
 
 
Basic
29,061

 
29,260

 
29,389

Diluted
29,362

 
29,337

 
29,549

 
 
 
 
 
 
Basic earnings per share attributable to A. Schulman, Inc.
 
 
 
 
 
Income from continuing operations
$
1.82

 
$
1.12

 
$
1.76

Income (loss) from discontinued operations
0.11

 
(0.23
)
 
(0.03
)
Net income attributable to A. Schulman, Inc.
$
1.93

 
$
0.89

 
$
1.73

 
 
 
 
 
 
Diluted earnings per share attributable to A. Schulman, Inc.
 
 
 
 
 
Income from continuing operations
$
1.80

 
$
1.12

 
$
1.75

Income (loss) from discontinued operations
0.11

 
(0.23
)
 
(0.03
)
Net income attributable to A. Schulman, Inc.
$
1.91

 
$
0.89

 
$
1.72

 
 
 
 
 
 
Cash dividends per common share
$
0.80

 
$
0.78

 
$
0.72

The accompanying notes are an integral part of the consolidated financial statements.

46


A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
 
 
Year Ended August 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
Net Income
 
$
56,992

 
$
27,328

 
$
52,049

Other comprehensive income (loss):
 
 
 
 
 
 
Foreign currency translation gains (losses), net of tax of $0
 
4,987

 
4,174

 
(46,647
)
Net change in net actuarial gains (losses), net of tax of $8,262 in
2014, $55 in 2013 and $4,204 in 2012
 
(21,813
)
 
2,710

 
(6,200
)
     Net change in prior service (costs) credits, net of tax of $0
 
(634
)
 
(436
)
 
(3,171
)
Other comprehensive income (loss)
 
(17,460
)
 
6,448

 
(56,018
)
Comprehensive income (loss)
 
39,532

 
33,776

 
(3,969
)
Less: comprehensive income (loss) attributable to
noncontrolling interests
 
712

 
1,074

 
1,072

Comprehensive income (loss) attributable to A. Schulman, Inc.
 
$
38,820

 
$
32,702

 
$
(5,041
)







The accompanying notes are an integral part of the consolidated financial statements.

47


A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEETS
 
August 31,
2014
 
August 31,
2013
 
(In thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
135,493

 
$
134,054

Accounts receivable, net
384,444

 
310,749

Inventories
292,141

 
261,658

Prepaid expenses and other current assets
40,473

 
41,224

Total current assets
852,551

 
747,685

Property, plant and equipment, at cost:
 
 
 
Land and improvements
28,439

 
27,954

Buildings and leasehold improvements
160,858

 
146,647

Machinery and equipment
398,563

 
356,144

Furniture and fixtures
41,255

 
39,065

Construction in progress
16,718

 
7,149

Gross property, plant and equipment
645,833

 
576,959

Accumulated depreciation
391,912

 
366,438

Net property, plant and equipment
253,921

 
210,521

Deferred charges and other noncurrent assets
65,079

 
48,723

Goodwill
202,299

 
139,526

Intangible assets, net
138,634

 
91,887

Total assets
$
1,512,484

 
$
1,238,342

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
314,957

 
$
265,477

U.S. and foreign income taxes payable
6,385

 
6,423

Accrued payroll, taxes and related benefits
54,199

 
40,759

Other accrued liabilities
46,054

 
48,689

Short-term debt
31,748

 
8,373

Total current liabilities
453,343

 
369,721

Long-term debt
339,546

 
207,435

Pension plans
129,949

 
98,599

Deferred income taxes
23,826

 
20,873

Other long-term liabilities
29,369

 
26,970

Total liabilities
976,033

 
723,598

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Common stock, $1 par value, authorized - 75,000 shares, issued - 48,185 shares in 2014 and 48,094 shares in 2013
48,185

 
48,094

Additional paid-in capital
268,545

 
263,158

Accumulated other comprehensive income (loss)
(16,691
)
 
682

Retained earnings
606,898

 
574,370

Treasury stock, at cost, 18,973 shares in 2014 and 18,940 shares in 2013
(379,894
)
 
(378,927
)
Total A. Schulman, Inc.’s stockholders’ equity
527,043

 
507,377

Noncontrolling interests
9,408

 
7,367

Total equity
536,451

 
514,744

Total liabilities and equity
$
1,512,484

 
$
1,238,342

The accompanying notes are an integral part of the consolidated financial statements.

48


A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
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, 2011
$
47,816

 
$
254,184

 
$
50,007

 
$
541,256

 
$
(344,759
)
 
$
5,801

 
$
554,305

Comprehensive income (loss)
 
 
 
 
(55,928
)
 
50,887

 
 
 
1,072

 
(3,969
)
Cash dividends paid, $0.72 per share
 
 
 
 
 
 
(20,938
)
 
 
 
 
 
(20,938
)
Noncontrolling interests' contributions
(distributions)
 
 
 
 
 
 
 
 
 
 
(580
)
 
(580
)
Purchase 1,463 shares of treasury stock
 
 
 
 
 
 
 
 
(26,752
)
 
 
 
(26,752
)
Issuance of treasury stock
 
 
20

 
 
 
 
 
412

 
 
 
432

Stock options exercised
51

 
864

 
 
 
 
 
 
 
 
 
915

Restricted stock issued, net of forfeitures
108

 
(108
)
 
 
 
 
 
 
 
 
 

Redemption of common stock to cover tax
withholdings
(17
)
 
(365
)
 
 
 
 
 
 
 
 
 
(382
)
Amortization of restricted stock
 
 
4,658

 
 
 
 
 
 
 
 
 
4,658

Balance at August 31, 2012
47,958

 
259,253

 
(5,921
)
 
571,205

 
(371,099
)
 
6,293

 
507,689

Comprehensive income (loss)
 
 
 
 
6,603

 
26,099

 
 
 
1,074

 
33,776

Cash dividends paid, $0.78 per share
 
 
 
 
 
 
(22,934
)
 
 
 
 
 
(22,934
)
Purchase 304 shares of treasury stock
 
 
 
 
 
 
 
 
(8,091
)
 
 
 
(8,091
)
Issuance of treasury stock
 
 
93

 
 
 
 
 
263

 
 
 
356

Stock options exercised
64

 
1,141

 
 
 
 
 
 
 
 
 
1,205

Restricted stock issued, net of forfeitures
93

 
(93
)
 
 
 
 
 
 
 
 
 

Redemption of common stock to cover tax
withholdings
(21
)
 
(375
)
 
 
 
 
 
 
 
 
 
(396
)
Amortization of restricted stock
 
 
3,139

 
 
 
 
 
 
 
 
 
3,139

Balance at August 31, 2013
48,094

 
263,158

 
682

 
574,370

 
(378,927
)
 
7,367

 
514,744

Comprehensive income (loss)
 
 
 
 
(17,373
)
 
56,193

 
 
 
712

 
39,532

Noncontrolling interests' contributions
(distributions)
 
 
 
 
 
 
 
 
 
 
600

 
600

Change in ownership interest
 
 
(729
)
 
 
 
 
 
 
 
729

 

Cash dividends paid, $0.80 per share


 


 


 
(23,665
)
 


 


 
(23,665
)
Purchase 40 shares of treasury stock


 


 


 


 
(1,116
)
 


 
(1,116
)
Issuance of treasury stock


 
105

 


 


 
149

 


 
254

Stock options exercised
13

 
220

 


 


 


 


 
233

Restricted stock issued, net of forfeitures
88

 
(88
)
 


 


 


 


 

Redemption of common stock to cover tax
withholdings
(10
)
 
(351
)
 


 


 


 


 
(361
)
Amortization of restricted stock


 
6,230

 


 


 


 


 
6,230

Balance at August 31, 2014
$
48,185

 
$
268,545

 
$
(16,691
)
 
$
606,898

 
$
(379,894
)
 
$
9,408

 
$
536,451













The accompanying notes are an integral part of the consolidated financial statements.

49


A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
Operating from continuing and discontinued operations:
 
 
 
 
 
Net income
$
56,992

 
$
27,328

 
$
52,049

Adjustments to reconcile net income to net cash provided from (used in) operating activities:
 
 
 
 
 
Depreciation
33,697

 
29,982

 
29,176

Amortization
14,207

 
11,469

 
9,608

Deferred tax provision
(3,007
)
 
(1,194
)
 
(10,867
)
Pension, postretirement benefits and other compensation
10,802

 
6,282

 
6,410

Asset impairment
104

 
5,873

 
3,392

Curtailment and settlement (gains) losses
214

 
333

 
(310
)
Gain on sale of assets from discontinued operations
(3,365
)
 

 

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
 
Accounts receivable
(5,875
)
 
1,790

 
16,788

Inventories
7,099

 
(6,376
)
 
(6,222
)
Accounts payable
(3,497
)
 
8,924

 
9,584

Income taxes
(1,372
)
 
(320
)
 
(4,832
)
Accrued payroll and other accrued liabilities
5,189

 
5,415

 
(11,563
)
Other assets and long-term liabilities
1,954

 
(5,793
)
 
6,284

Net cash provided from (used in) operating activities
113,142

 
83,713

 
99,497

Investing from continuing and discontinued operations:
 
 
 
 
 
Expenditures for property, plant and equipment
(35,089
)
 
(26,568
)
 
(34,003
)
Proceeds from the sale of assets
6,004

 
13,886

 
1,581

Business acquisitions, net of cash
(206,625
)
 
(36,805
)
 
(64,918
)
Net cash provided from (used in) investing activities
(235,710
)
 
(49,487
)
 
(97,340
)
Financing from continuing and discontinued operations:
 
 
 
 
 
Cash dividends paid
(23,665
)
 
(22,934
)
 
(20,938
)
Increase (decrease) in short-term debt
13,774

 
3,324

 
(6,339
)
Borrowings on long-term debt
795,745

 
264,908

 
188,832

Repayments on long-term debt including current portion
(653,894
)
 
(264,613
)
 
(159,323
)
Payment of debt issuance costs
(1,782
)
 

 

Noncontrolling interests' contributions (distributions)
600

 

 
(580
)
Issuances of stock, common and treasury
487

 
1,561

 
1,347

Redemptions of common stock
(361
)
 
(396
)
 
(382
)
Purchases of treasury stock
(1,116
)
 
(8,091
)
 
(26,752
)
Net cash provided from (used in) financing activities
129,788

 
(26,241
)
 
(24,135
)
Effect of exchange rate changes on cash
(5,781
)
 
2,038

 
(9,744
)
Net increase (decrease) in cash and cash equivalents
1,439

 
10,023

 
(31,722
)
Cash and cash equivalents at beginning of year
134,054

 
124,031

 
155,753

Cash and cash equivalents at end of year
$
135,493

 
$
134,054

 
$
124,031

 
 
 
 
 
 
Cash paid during the year for:
 
 
 
 
 
Interest
$
7,578

 
$
5,487

 
$
7,472

Income taxes
$
21,720

 
$
15,598

 
$
26,964

The accompanying notes are an integral part of the consolidated financial statements.

50

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

A. Schulman, Inc. (the “Company”) is a leading international supplier of high-performance plastic compounds and resins. The Company’s customers span a wide range of markets such as packaging, mobility, building & construction, electronics & electrical, agriculture, personal care & hygiene, custom services, and sports, home & leisure. The Company employs approximately 3,900 people and has 42 manufacturing facilities in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”).

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 2014 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, stock-based 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.

The Company provides tolling services for a fee to process materials provided and owned by customers. While providing these services, the Company may provide certain amounts of its materials, such as additives. These materials are charged to the customer as an addition to the tolling fees. The Company records revenues from tolling services and related materials when such services are performed.

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.


51

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Share-based Compensation

The Company accounts for share-based compensation expense based on the fair value of the awards granted in accordance with applicable accounting guidance. The fair value of awards with service and performance conditions is based on quoted market prices of the Company’s stock on the respective grant date. The fair value of awards that include market conditions for vesting is estimated using the Monte Carlo valuation model.

The Monte Carlo valuation model requires assumptions based on management’s judgment regarding the volatility of the Company’s stock, the correlation between the Company’s stock price and that of its peer companies and the expected rates of interest. The Company uses historical data, corresponding to the vesting period, to determine all of the assumptions used in the Monte Carlo valuation model. The expected volatility assumption is based on historical volatility. The Company used the daily stock prices in fiscal 2014 and 2013 and weekly stock prices in fiscal 2012 to determine historical volatility. The correlation between the Company’s stock price and each of the peer companies is determined based on historical daily stock prices of the Company and each of the peer companies. The risk-free interest rate is based on zero coupon treasury bond rates corresponding to the expected life of the awards.

Awards that are expected to settle through the issuance of the Company’s common stock are accounted for as equity-classified awards and related compensation expense is recognized based on grant date fair value over the related service period. Awards that may be settled in cash, at the election of the recipient, are accounted for as liability-classified awards. The fair value of such awards is remeasured at the end of each reporting period and expense is recognized over the requisite service period. The Company uses an estimate of expected forfeitures in the recognition of all share-based compensation expense that is based on historical experience. See Note 10 of this Form 10-K for further discussion on share-based compensation.

Restructuring

The Company records restructuring costs related to the actions implemented to reduce excess and high-cost manufacturing capacity, and to reduce associate headcount. Employee-related costs include severance, supplemental unemployment compensation and benefits, medical benefits, pension curtailments and settlements, and other termination benefits. For ongoing benefit arrangements, a liability is recognized when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated. These conditions are generally met when the restructuring plan is approved by management. For one-time benefit arrangements, a liability is incurred and accrued at the date the plan is communicated to employees, unless they will be retained beyond a minimum retention period. In this case, the liability is estimated at the date the plan is communicated to employees and is accrued ratably over the future service period. Other costs generally include non-cancelable lease costs, contract terminations, and relocation costs. A liability for these costs is recognized in the period in which the liability is incurred. Restructuring charges related to accelerated depreciation and asset impairments are recorded separately within the consolidated statements of operations. See Note 15 of this 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. See Note 16 of this Form 10-K for further discussion on asset impairments.

Income Taxes

The Company recognizes income taxes during the period in which transactions enter into the determination of financial statement income. Accordingly, deferred taxes are provided for temporary differences between the book and tax bases of assets and liabilities. A valuation allowance is established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. No taxes are provided on certain foreign earnings which are permanently reinvested. Accruals for uncertain tax positions are provided for in accordance with accounting rules related to uncertainty in income taxes. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense. See Note 7 of this Form 10-K for further discussion on income taxes.


52

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, 2014 and 2013, the Company did not hold any short-term investments.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Management records an allowance for doubtful accounts receivable based on the current and projected credit quality of the Company’s customers, customer payment history and other factors that affect collectability. Changes in these factors or changes in economic circumstances could result in changes to the allowance for doubtful accounts. The Company reviews its allowance for doubtful accounts on a periodic basis. Trade accounts receivables are charged off against the allowance for doubtful accounts when the Company determines it is probable the account receivable will not be collected. Trade accounts receivables, less allowance for doubtful accounts, reflect the net realizable value of receivables, and approximate fair value. The Company does not have any off-balance sheet exposure related to its customers. See Note 3 of this Form 10-K for further discussion on the allowance for doubtful accounts.

Inventories

Inventories are recorded at lower of average cost or market. The Company generally does not distinguish between raw materials and finished goods because numerous products that can be sold as finished goods are also used as raw materials in the production of other inventory items. Management establishes an estimated excess and obsolete inventory reserve based on historical experience and amounts expected to be realized for slow-moving and obsolete inventory.

Property, Plant and Equipment and Depreciation

Property, plant and equipment is recorded at cost. The cost of renewals and betterments is capitalized in the property accounts. Capital expenditures exclude related accruals of $4.4 million, $1.9 million and $3.4 million in fiscal 2014, 2013 and 2012, 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 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 using the purchase method of accounting. This method requires the Company to record assets and liabilities of the business acquired at their estimated fair market values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The Company generally uses valuation specialists to perform appraisals and assist in the determination of the fair values of the assets acquired and liabilities assumed. These valuations require management to make estimates and assumptions that are critical in determining the fair values of the assets and liabilities.

53

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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. The fair value used in the analysis is established using a combination of the income and market approaches. 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: 
Registered trademarks and tradenames
3
to
25
years
Customer related intangibles
9
to
20
years
Developed technology
10
to
15
years

See Note 4 of this Form 10-K for further discussion on goodwill and other intangible assets.

Retirement Plans

The Company has several defined benefit and defined contribution pension plans, covering certain employees in the U.S. and in foreign countries. The pension and postretirement benefit accounting reflects the recognition of future benefit costs over the employee’s approximate period of employment based on the terms of the plans and the investment and funding decisions made by the Company. Generally, the defined benefit pension plans accrue the current and prior service costs annually and funding is not required for all plans. See Note 8 of this 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 hedge specific transactions are recognized in the consolidated statement of operations offsetting the underlying foreign currency gains or losses. Currently, the Company does not designate any of these contracts as hedges. See Note 6 of this Form 10-K for further discussion on derivative instruments and hedging activities.

Fair Value Measurement

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value under accounting principles generally accepted in the United States. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value as follows:
 
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and
Level 3: Unobservable inputs which reflect an entity’s own assumptions.

See Note 6 and Note 16 of this Form 10-K for further discussion on fair value measurements.


54

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

New Accounting Pronouncements

In May 2014, 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, 2016, including interim periods, and the Company will adopt the new guidance on September 1, 2017. Early adoption is not permitted. The Company will evaluate the effects, if any, that the adoption of this guidance will have on its consolidated financial statements.

In April 2014, the FASB issued new accounting guidance related to reporting discontinued operations that changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. The standard is effective for fiscal years beginning on or after December 15, 2014 on a prospective basis, including interim periods, with early adoption permitted. The Company will evaluate the effects, if any, that the adoption of this guidance will have on its consolidated financial statements.

In February 2013, the FASB issued new accounting guidance related to the reporting of the amounts reclassified out of accumulated other comprehensive income in the consolidated financial statements. The new accounting guidance requires all companies to report the effect of items reclassified out of accumulated other comprehensive income on the respective line items of net income either on the face of the financial statements where net income is presented or in a tabular format in the notes to the financial statements. This standard was effective on a prospective basis for fiscal years beginning after December 15, 2012, including interim periods. The Company adopted this standard for the first quarter of fiscal 2014.

No other new accounting pronouncements issued or with effective dates during fiscal 2014 had or are expected to have a material impact on the Company's consolidated financial statements.

NOTE 2 — BUSINESS ACQUISITIONS

Specialty Plastics Business of Ferro Corporation

On July 1, 2014, the Company acquired the majority of the assets of the specialty plastics business of Ferro Corporation ("Specialty Plastics" acquisition) for $91.0 million. The results of operations for this business have been included in the consolidated financial statements since the date of acquisition.

The acquisition strategically expands the Company's geographic reach with four facilities located in the U.S. and one facility located in Spain and diversifies the Company's product mix and strengthens its position in a broad range of attractive product markets. Additionally, the business offers a broad portfolio of proprietary products and recognized brand names serving a wide range of end markets including packaging, transportation, construction, appliances and agriculture.

The information included herein has been prepared based on the preliminary 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 purchase price allocation is subject to further adjustment until all pertinent information regarding the inventory, intangible assets, property, plant & equipment, accounts receivable, other long-term liabilities, and deferred income tax assets and liabilities acquired are fully evaluated by the Company.


55

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the preliminary estimated fair value of the assets acquired and liabilities assumed from the Specialty Plastics acquisition at the date of acquisition:
 
 
As of July 1, 2014
 
 
(In thousands)
Accounts receivable
 
$
27,870

Inventories
 
12,800

Prepaid expenses and other current assets
 
415

Property, plant and equipment
 
21,025

Intangible assets
 
26,985

Total assets acquired
 
$
89,095

 
 
 
Accounts payable
 
15,327

Accrued payroll, taxes and related benefits
 
1,552

Other accrued liabilities
 
638

Other long-term liabilities
 
181

Total liabilities assumed
 
$
17,698

Identifiable net assets acquired
 
$
71,397

Goodwill
 
19,603

Net assets acquired
 
$
91,000


The Company preliminarily recorded acquired intangible assets of $27.0 million, all of which are customer related intangibles with an estimated weighted-average useful life of 13.6 years.

Goodwill is calculated as the excess of the purchase price over the estimated fair values of the assets acquired and the liabilities assumed in the acquisition, and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The amount allocated to goodwill associated with the Specialty Plastics acquisition is primarily the result of anticipated synergies and market expansion.

The estimated fair value of accounts receivable acquired was $27.9 million with the gross contractual amount being $28.1 million.

Net sales, income before taxes and net income attributable to A. Schulman, Inc. from the Specialty Plastics acquisition included in the Company’s results since the July 1, 2014 acquisition are as follows:
 
July 1, 2014 to August 31, 2014
 
(In thousands)
Net sales
$
25,351

Income before taxes
$
1,644

Net income attributable to A. Schulman, Inc.
$
1,475


Income before taxes for the Specialty Plastics acquisition from July 1, 2014 to August 31, 2014 includes pretax depreciation and amortization costs of $0.6 million due to the increased estimated fair value of fixed assets and intangibles, and $0.6 million of pretax purchase accounting inventory step-up charges.


56

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following pro forma information represents the consolidated results of the Company as if the Specialty Plastics acquisition occurred as of September 1, 2012: 
 
For the Years Ended August 31,
 
2014
 
2013
 
Unaudited
 
(In thousands, except per share data)
Net sales
$
2,580,646

 
$
2,289,719

Net income attributable to A. Schulman, Inc.
$
65,639

 
$
33,480

Net income per share of common stock attributable to A. Schulman, Inc. - diluted
$
2.24

 
$
1.14


The pro forma results reflect certain adjustments related to the acquisition, such as increased depreciation and amortization expense on assets included in the Specialty Plastics acquisition resulting from the valuation of assets acquired and increased interest expense due to additional borrowings to fund the acquisition. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of the acquired business. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed as of September 1, 2012, nor are they indicative of the future operating results of the Company.

Elian SAS

On January 31, 2012, the Company acquired all of the issued share capital of Elian SAS (“Elian”), a French portfolio company of British Vita plc, for $66.5 million, which included the repayment of $4.3 million in debt. The results of Elian’s operations have been included in the consolidated financial statements since the date of acquisition.

Elian provides specialty formulated color concentrates to over 1,000 customers in end markets such as packaging, cosmetics, personal hygiene, healthcare, and pipes and tubing products that require demanding specifications. Elian offers superior quality, technology and responsiveness to its diversified customer base. The acquisition of Elian moved the Company into France’s color masterbatch market and improved the Company's product mix in the EMEA region.

Net sales, income before taxes and net income attributable to A. Schulman, Inc. from Elian included in the Company’s results in the year of acquisition are as follows:
 
January 31, 2012 to August 31, 2012
 
(In thousands)
Net sales
$
20,306

Income before taxes
$
640

Net income attributable to A. Schulman, Inc.
$
402


Income before taxes for Elian from January 31, 2012 to August 31, 2012 includes pretax depreciation and amortization costs of $2.3 million due to the increased value of fixed assets and intangibles, and $0.7 million of pretax purchase accounting inventory step-up charges.

The following pro forma information represents the consolidated results of the Company as if the acquisition of Elian occurred as of September 1, 2011: 
 
Year ended
August 31, 2012
 
Unaudited
(In thousands, except per share data)

Net sales
$
2,097,043

Net income attributable to A. Schulman, Inc.
$
52,423

Net income per share of common stock attributable to A. Schulman, Inc. - diluted
$
1.77


The pro forma results reflect certain adjustments related to the acquisition, such as increased depreciation and amortization expense on assets acquired from Elian resulting from the valuation of assets acquired, increased interest expense due to additional

57

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

borrowings to fund the acquisition of Elian partially offset by the repayment of Elian debt, and decreased interest income from lower cash levels which were also used to fund the acquisition. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of Elian. 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, 2011, nor are they indicative of the future operating results of the consolidated Company.

Other Business Transactions

The following table summarizes the Company's other business transactions for the periods presented as well as the Compco Pty. Ltd. acquisition completed in the first quarter of fiscal 2015:
Transaction Description
Date of Transaction
 
Purchase
Consideration
(In millions)
 
Segment
ECM Plastics, Inc.
September 4, 2012
 
$36.8
 
Americas
A Massachusetts producer of custom color, specialty additive masterbatch and niche engineered plastics products, with a strong presence in personal care and cosmetics
 
 
 
 
 
Perrite Group
September 2, 2013
 
$51.3
 
EMEA and APAC
A thermoplastics manufacturer with business in niche engineered plastics and custom color with operations in Malaysia, the United Kingdom and France
 
 
 
 
 
Network Polymers, Inc.
December 2, 2013
 
$49.2
 
Americas
An Ohio niche engineered plastics compounding business that is a leading single source provider of thermoplastic resins and alloys
 
 
 
 
 
Prime Colorants
December 31, 2013
 
$15.1
 
Americas
A Tennessee manufacturer of custom color and additive concentrates
 
 
 
 
 
Compco Pty. Ltd.
September 2, 2014
 
$6.7
 
APAC
A manufacturer of masterbatches and custom color with operations in Australia.


 
 
 
 
 

The Company incurred $6.0 million and $2.7 million of acquisition related costs, primarily included in selling, general & administrative expenses, during fiscal 2014 and 2013, respectively.

NOTE 3 — ALLOWANCE FOR DOUBTFUL ACCOUNTS

The changes in the Company’s allowance for doubtful accounts are as follows: 
 
For the Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
Beginning balance
$
10,434

 
$
9,190

 
$
9,475

Provision
907

 
2,441

 
1,724

Write-offs, net of recoveries
(491
)
 
(1,481
)
 
(1,007
)
Translation effect
(6
)
 
284

 
(1,002
)
Ending balance
$
10,844

 
$
10,434

 
$
9,190



58

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the Company’s carrying value of goodwill are as follows: 
 
EMEA
 
Americas
 
APAC
 
Total
 
(In thousands)
Balance as of August 31, 2012
$
68,540

 
$
59,813

 
$

 
$
128,353

Acquisitions

 
9,921

 

 
9,921

Translation and other
1,726

 
(474
)
 

 
1,252

Balance as of August 31, 2013
70,266

 
69,260

 

 
139,526

Acquisitions
14,015

 
46,269

 
637

 
60,921

Translation and other
1,676

 
150

 
26

 
1,852

Balance as of August 31, 2014
$
85,957

 
$
115,679

 
$
663

 
$
202,299


The increase in goodwill during fiscal 2014 is due to the Perrite Group, Network Polymers, Inc., Prime Colorants and Specialty Plastics acquisitions. Goodwill associated with the Perrite Group transaction is included in the EMEA and APAC segments and none of the goodwill is deductible for income tax purposes. Goodwill associated with both the Network Polymers and Prime Colorants transactions is included in the Americas segment and is deductible for income tax purposes. The goodwill associated with the Specialty Plastics acquisition is included in the Americas and EMEA segments and is deductible for income tax purposes. The increase in goodwill during fiscal 2013 was due to the acquisition of ECM Plastics, Inc. in the Americas segment and the goodwill is deductible for income tax purposes.

The Company completed its annual impairment review of goodwill as of June 1, 2014 and noted no impairment. The Company is not aware of any triggers which would require a goodwill impairment test as of August 31, 2014.
 
The following table summarizes intangible assets with finite useful lives by major category: 
 
As of August 31, 2014
 
As of August 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
(In thousands)
Customer related
$
139,990

 
$
(29,088
)
 
$
110,902

 
$
85,129

 
$
(19,605
)
 
$
65,524

Developed technology
19,603

 
(6,914
)
 
12,689

 
19,641

 
(5,156
)
 
14,485

Registered trademarks
   and tradenames
20,945

 
(5,902
)
 
15,043

 
15,991

 
(4,113
)
 
11,878

Total finite-lived
   intangible assets
$
180,538

 
$
(41,904
)
 
$
138,634

 
$
120,761

 
$
(28,874
)
 
$
91,887


The increase in intangible assets from August 31, 2013 is due to the fiscal 2014 acquisitions. Amortization expense for intangible assets was $13.0 million, $10.3 million and $8.7 million for fiscal 2014, 2013 and 2012, respectively. The weighted-average useful life of our finite-lived intangible assets as of August 31, 2014 is 12.5 years.

Estimated future amortization expense for intangible assets is as follows:
 
Estimated Future
Amortization Expense
 
(In thousands)
Year ended August 31,
 
2015
$
16,594

2016
15,301

2017
14,615

2018
14,028

2019
13,123



59

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 obligations outstanding: 
 
As of August 31,
 
2014
 
2013
 
(In thousands)
Notes payable and other, due within one year
$
18,429

 
$
5,042

Current portion of long-term debt
13,319

 
3,331

Short-term debt
$
31,748

 
$
8,373

 
 
 
 
Revolving credit loan, LIBOR plus applicable spread, due January 2016
$

 
$
150,000

Revolving credit loan, LIBOR plus applicable spread, due September 2018
105,400

 

Term loan, due September 2018
180,625

 

Euro notes, 4.485%, due March 2016
53,106

 
56,626

Capital leases and other long-term debt
415

 
809

Long-term debt
$
339,546

 
$
207,435


In the first quarter of fiscal 2014, the Company and certain of its wholly-owned subsidiaries entered into an amended and restated Credit Agreement, dated September 24, 2013, and containing a maturity date of September 24, 2018, 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, Wells Fargo Securities, LLC and PNC Capital Markets LLC as 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 facility (the "Term Loan Facility") with quarterly payments due until maturity; and
an expansion feature allowing the Company to incur, subject to certain terms and conditions, up to an additional $250 million of revolving loans and/or term loans ("the Incremental Facility" and, together with the Revolving Facility and the Term Loan Facility, the "Credit Facility").

The Credit Facility is jointly and severally guaranteed by certain material domestic subsidiaries. The Credit Agreement contains certain covenants that, among other things, restrict the Company's ability to incur indebtedness and grant liens other than certain types of permitted indebtedness and permitted liens. The Company is also required to maintain a minimum interest coverage ratio and cannot exceed a maximum net debt leverage ratio. The Company was in compliance with these covenants and does not believe a subsequent covenant violation is reasonably possible as of August 31, 2014.

Interest rates under the Credit Agreement are based on LIBOR or EURIBOR (depending on the borrowing currency) plus a spread determined by the Company's total leverage ratio. The Company is also required to pay a facility fee on the commitments, whether used or unused. The Revolving Facility provides for a portion of the funds to be made available as a short-term swing-line loan. The swing-line loan interest rate varies based on a mutually agreed upon rate between the bank and the Company. As of August 31, 2014, the amount available under the Credit Facility was reduced by outstanding letters of credit of $0.7 million and borrowings of $296.0 million. Outstanding letters of credit and borrowings under the previous credit agreement as of August 31, 2013 were $1.0 million and $150.0 million, respectively.

On February 14, 2014, the Company obtained a $15.0 million uncommitted line of credit from a regional financial institution, available until September 24, 2018. The interest rate is based upon the 30-day LIBOR index that is 10 basis points below the applicable spread on the Revolving Facility, noted above. The Company has $15.0 million of outstanding borrowings under this line of credit as of August 31, 2014 which are included in short-term debt on the Company's consolidated balance sheet.

On March 1, 2006, the Company issued €50.3 million of senior guaranteed notes in Germany in the private placement market maturing on March 1, 2016, with a fixed interest rate of 4.485% (the “Euro Notes”). The Euro Notes require annual principal payments of €2.5 million beginning in fiscal 2012. As of August 31, 2014, the amount of Euro Notes outstanding approximated €42.8 million, or $56.4 million. Repayment of the Euro Notes prior to maturity would cost approximately $7.1 million in early termination fees as of August 31, 2014.


60

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Euro Notes are guaranteed by certain material domestic subsidiaries and contain covenants similar to those in the Credit Agreement discussed above. The Company was in compliance with its covenants relating to the Euro Notes and does not believe a subsequent covenant violation is reasonably possible as of August 31, 2014.

The Company’s interest bearing short-term debt of $31.7 million as of August 31, 2014 had a weighted-average interest rate of approximately 3.1%. Interest bearing short-term debt as of August 31, 2013 was $8.4 million with a weighted-average interest rate of approximately 10.1%.

The table below summarizes the Company’s available funds: 
 
As of August 31,
 
2014
 
2013
 
(In thousands)
Existing capacity:
 
 
 
Revolving Facility
$
300,000

 
$
300,000

Term Loan Facility
190,625

 

Domestic short-term lines of credit
15,000

 

Foreign short-term lines of credit
53,520

 
56,178

Total capacity from credit lines and notes
$
559,145

 
$
356,178

Availability:
 
 
 
Revolving Facility
$
193,909

 
$
149,024

Foreign short-term lines of credit
49,250

 
49,302

Total available funds from credit lines and notes
$
243,159

 
$
198,326


Total available funds from credit lines and notes represents the total capacity from credit lines and notes less outstanding borrowings of $315.3 million and $156.9 million as of August 31, 2014 and 2013, respectively, and issued letters of credit of $0.7 million and $1.0 million as of August 31, 2014 and 2013, respectively.

Aggregate maturities of debt, including capital lease obligations, subsequent to August 31, 2014 are as follows (in thousands): 
Fiscal 2015
$
31,748

2016
63,275

2017
12,606

2018
15,091

2019
248,574


NOTE 6 — FAIR VALUE MEASUREMENT

The following table presents information about the Company’s assets and liabilities measured at fair value: 
 
August 31, 2014
 
August 31, 2013
 
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
$
713

 
$

 
$
713

 
$

 
$
151

 
$

 
$
151

 
$

Liabilities recorded at fair value:
 
 
 
 
 
 
 
 
Foreign exchange
  forward contracts
$
557

 
$

 
$
557

 
$

 
$
1,224

 
$

 
$
1,224

 
$

Liabilities not recorded at fair value:
 
 
 
 
 
 
 
 
Long-term fixed-rate
  debt
$
58,882

 
$

 
$
58,882

 
$

 
$
63,460

 
$

 
$
63,460

 
$


Cash and cash equivalents are recorded at cost, which approximates fair value. Additionally, the carrying value of the Company's variable-rate debt approximates fair value.

The Company measures the fair value of its foreign exchange forward contracts using an internal model. The model maximizes the use of Level 2 market observable inputs including interest rate curves, currency forward and spot prices, and credit spreads. The total contract value of foreign exchange forward contracts outstanding was $118.0 million and $138.0 million as of August 31, 2014 and 2013, 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 credit-worthy 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, 2014 and 2013.

Long-term fixed-rate debt issued in Euros is recorded at cost and is presented at fair value for disclosure purposes as shown in the table above. The Level 2 fair value of the Company's long-term fixed-rate debt was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities. As of August 31, 2014 and 2013, the carrying value of the Company's long-term fixed-rate debt recorded on the consolidated balance sheets was $56.4 million and $60.0 million, respectively.

The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during fiscal 2014, 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 years presented.

Additionally, the Company remeasures assets to fair value, using Level 3 measurements, as a result of the occurrence of triggering events, generally in conjunction with restructuring initiatives. For further discussion on asset impairments, refer to Note 16 of this Form 10-K.

There were no additional significant assets or liabilities that were remeasured at fair value on a non-recurring basis during the periods presented.

NOTE 7 — INCOME TAXES

Income (loss) from continuing operations before taxes is as follows:
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
U.S.
$
(2,426
)
 
$
(8,334
)
 
$
(4,637
)
Foreign
74,758

 
62,066

 
71,464

Income from continuing operations before taxes
$
72,332

 
$
53,732

 
$
66,827



61

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The provisions for U.S. and foreign income taxes consist of the following: 
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
Current taxes:
 
 
 
 
 
U.S.
$
435

 
$
214

 
$
228

Foreign
19,794

 
23,210

 
22,927

Total current tax expense (benefit)
20,229

 
23,424

 
23,155

Deferred taxes:
 
 
 
 
 
U.S.
589

 
213

 
16

Foreign
(2,276
)
 
(3,904
)
 
(9,253
)
Total deferred tax expense (benefit)
(1,687
)
 
(3,691
)
 
(9,237
)
Total income tax expense (benefit)
$
18,542

 
$
19,733

 
$
13,918


A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates of 25.7% in 2014, 36.7% in 2013, and 20.8% in 2012 is as follows: 
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
Amount
 
% of
Pretax
Income
 
Amount
 
% of
Pretax
Income
 
Amount
 
% of
Pretax
Income
 
(In thousands, except for %s)
U.S. statutory federal income tax rate
$
25,316

 
35.0
 %
 
$
18,806

 
35.0
 %
 
$
23,389

 
35.0
 %
Amount of foreign taxes at less than U.S.
   statutory federal income tax rate
(13,602
)
 
(18.8
)
 
(9,189
)
 
(17.1
)
 
(11,373
)
 
(17.0
)
U.S. and foreign losses with no tax benefit
4,899

 
6.8

 
5,826

 
10.8

 
1,291

 
1.9

U.S. restructuring and other U.S. charges with
    no benefit
3,010

 
4.2

 
1,704

 
3.2

 
1,029

 
1.5

Valuation allowance charges

 

 
2,361

 
4.4

 
(2,380
)
 
(3.6
)
Establishment (resolution) of uncertain tax
   positions
(121
)
 
(0.2
)
 
(84
)
 
(0.2
)
 
1,718

 
2.6

Other
(960
)
 
(1.3
)
 
309

 
0.6

 
244

 
0.4

Provision (benefit) for U.S. and foreign income taxes
$
18,542

 
25.7
 %
 
$
19,733

 
36.7
 %
 
$
13,918

 
20.8
 %


62

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred tax assets and (liabilities) consist of the following: 
 
As of August 31,
 
2014
 
2013
 
(In thousands)
Pensions
$
20,890

 
$
12,751

Inventory reserves
1,549

 
1,136

Bad debt reserves
1,337

 
1,040

Accruals
7,095

 
4,831

Postretirement benefits other than pensions
6,185

 
5,293

Depreciation
2,733

 
2,036

Foreign net operating loss carryforwards
16,417

 
14,396

Foreign tax credit carryforwards
502

 
28,111

Alternative minimum tax carryforwards
3,893

 
4,452

Interest carryforwards
3,214

 
10,113

Other
17,929

 
13,898

Gross deferred tax assets
81,744

 
98,057

Valuation allowance
(21,716
)
 
(23,252
)
Total deferred tax assets
60,028

 
74,805

Depreciation
(19,897
)
 
(17,232
)
Intangibles
(25,927
)
 
(25,465
)
Unremitted foreign earnings

 
(26,050
)
Other
(1,554
)
 
(1,245
)
Gross deferred tax liabilities
(47,378
)
 
(69,992
)
Net deferred tax assets (liabilities)
$
12,650

 
$
4,813


The valuation allowance covers benefits which are not likely to be utilized for foreign tax credit carryforwards and other deferred tax assets primarily in the United States, Brazil and Germany.

As of August 31, 2014, the Company has foreign net operating loss carryforwards of $50.4 million resulting in a deferred tax asset of $16.4 million, primarily from countries with unlimited carryforward periods.

As of August 31, 2014, the Company has domestic state and local net operating loss carryforwards of $33.5 million resulting in a deferred tax asset of $1.3 million offset by a corresponding valuation allowance. These net operating loss carryforwards expire in years 2015 to 2023.

The Company has $3.7 million in foreign tax credit carryforwards that will expire in 2019. The amount of foreign tax credit carryforwards shown in the table above has been reduced by unrealized stock compensation attributes of $3.2 million. During 2014, the Company utilized approximately $27.6 million in foreign tax credit carryforwards primarily related to a large distribution from Europe. In 2013, a deferred tax liability of $25.5 million was recorded for the expected tax impact of this 2014 distribution along with a corresponding reduction in the valuation allowance of $25.5 million against the foreign tax credit carryforwards.

In recent years, the Company’s U.S. operations have generated federal tax net operating losses, before considering dividend income from foreign subsidiaries. Such net operating losses are offset against the foreign dividend income, which would otherwise generate U.S. taxable income. The dividend income from foreign subsidiaries also generates foreign tax credits, which either partially offset the tax on any U.S. taxable income remaining after the offset of the net operating losses, or are carried forward. The net effect of foreign dividends received from foreign countries is to place the Company into a position in which it does not generate net operating loss carryforwards for its U.S. operating losses.

The tax effect of temporary differences included in prepaid expenses and other current assets was $8.4 million and $5.7 million at August 31, 2014 and 2013, respectively. Deferred charges included $29.3 million and $22.0 million from the tax effect of temporary differences at August 31, 2014 and 2013, respectively. The tax effect of temporary differences included in other accrued liabilities was $1.2 million and $1.7 million at August, 31, 2014 and 2013, respectively.

63

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


As of August 31, 2014, the Company’s gross unrecognized tax benefits totaled $3.8 million. If recognized $3.0 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, 2014, the Company had $0.9 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, U.S. - from 2011 onward, Belgium - from 2012 onward, other foreign jurisdictions - from 2009 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,
 
2014
 
2013
 
2012
 
(In thousands)
Beginning balance
$
4,986

 
$
6,877

 
$
4,716

Decreases related to prior year tax positions
(576
)
 
(1,165
)
 
(390
)
Increases related to prior year tax positions

 
11

 
2,360

Increases related to current year tax positions
512

 
308

 
627

Settlements
(38
)
 
(1,077
)
 

Lapse of statute of limitations
(1,040
)
 
(228
)
 
4

Foreign currency impact
1

 
260

 
(440
)
Ending balance
$
3,845

 
$
4,986

 
$
6,877


As of August 31, 2014, no taxes have been provided on the undistributed earnings of certain foreign subsidiaries amounting to $442.6 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.


64

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
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Benefit obligation at beginning of year
$
(133,866
)
 
$
(124,948
)
 
$
(11,372
)
 
$
(13,556
)
Service cost
(3,795
)
 
(3,838
)
 
(5
)
 
(14
)
Interest cost
(5,413
)
 
(4,779
)
 
(491
)
 
(450
)
Participant contributions
(228
)
 
(246
)
 
(62
)
 
(105
)
Actuarial gains (losses)
(34,191
)
 
448

 
(1,271
)
 
1,994

Settlement (gains) losses
328

 

 

 

Benefits paid
3,928

 
3,921

 
1,010

 
1,059

Business combinations
(131
)
 

 

 

Curtailment gains (losses)

 

 

 
(358
)
Contractual termination benefits

 

 

 

Plan amendments
(117
)
 
(459
)
 

 
58

Translation adjustment
(498
)
 
(3,965
)
 

 

Benefit obligation at end of year
$
(173,983
)
 
$
(133,866
)
 
$
(12,191
)
 
$
(11,372
)
Fair value of plan assets at beginning of year
$
32,417

 
$
30,190

 
$

 
$

Actual return on assets
6,009

 
1,043

 

 

Employer contributions
5,073

 
4,601

 
948

 
954

Participant contributions
228

 
246

 
62

 
105

Benefits paid
(3,928
)
 
(3,921
)
 
(1,010
)
 
(1,059
)
Translation adjustment
1,105

 
258

 

 

Fair value of plan assets at end of year
$
40,904

 
$
32,417

 
$

 
$

Underfunded
$
(133,079
)
 
$
(101,449
)
 
$
(12,191
)
 
$
(11,372
)
Classification of net amount recognized:
 
 
 
 
 
 
 
Accrued payroll, taxes and related benefits
$
(3,130
)
 
$
(2,850
)
 
$
(880
)
 
$
(880
)
Long-term liabilities
(129,949
)
 
(98,599
)
 
(11,311
)
 
(10,492
)
Net amount recognized
$
(133,079
)
 
$
(101,449
)
 
$
(12,191
)
 
$
(11,372
)
Amounts recognized in AOCI:
 
 
 
 
 
 
 
Net actuarial (gain) loss
$
57,632

 
$
29,434

 
$
(79
)
 
$
(1,368
)
Net prior service cost (credit)
430

 
323

 
(1,982
)
 
(2,523
)
Net amount recognized in AOCI
$
58,062

 
$
29,757

 
$
(2,061
)
 
$
(3,891
)
Change in plan assets and benefit obligations recognized in AOCI:
 
 
 
 
 
 
 
Net actuarial (gain) loss
$
30,002

 
$
(101
)
 
$
1,271

 
$
(1,994
)
Prior service cost (credit)
117

 
459

 

 
(58
)
Amortization of net actuarial loss
(1,373
)
 
(1,438
)
 
18

 

Amortization of prior service (cost) credit
(24
)
 
(505
)
 
541

 
540

Settlement/curtailment gains (losses)
(214
)
 

 

 
25

Translation adjustment
(203
)
 
853

 

 

Total change in AOCI
$
28,305

 
$
(732
)
 
$
1,830

 
$
(1,487
)




65

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,
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
 
(In thousands)
Service cost
$
3,795

 
$
3,838

 
$
2,759

 
$
5

 
$
14

 
$
28

Interest cost
5,413

 
4,779

 
5,099

 
491

 
450

 
607

Expected return on plan assets
(1,819
)
 
(1,485
)
 
(1,298
)
 

 

 

Amortization of prior service cost (credit)
24

 
505

 
48

 
(541
)
 
(540
)
 
(731
)
Recognized losses due to plan settlements
214

 

 

 

 

 

Contractual termination benefits

 

 
79

 

 

 

Recognized (gains) losses due to plan curtailments

 

 
(310
)
 

 
333

 

Recognized net actuarial loss
1,373

 
1,438

 
468

 
(18
)
 

 
171

Total net periodic benefit cost
$
9,000

 
$
9,075

 
$
6,845

 
$
(63
)
 
$
257

 
$
75

 
Amounts expected to be amortized from AOCI and included in total net periodic benefit cost during the year ended August 31, 2015, are as follows:
 
Pension Benefits
 
Other Postretirement
Benefits
 
(In thousands)
Net actuarial loss (gain)
$
3,225

 
$

Prior service cost (credit)
38

 
(541
)
     Total
$
3,263

 
$
(541
)

Selected information regarding the Company’s pension and OPEB plans is as follows: 
 
As of August 31,
 
2014
 
2013
 
(In thousands)
Pension Plans:
 
 
 
All plans:
 
 
 
Accumulated benefit obligation
$
154,788

 
$
119,761

Plans with projected benefit obligations in excess of plan assets:
 
 
 
Projected benefit obligation
$
173,983

 
$
133,806

Accumulated benefit obligation
$
154,788

 
$
119,717

Fair value of plan assets
$
40,904

 
$
32,353

Plans with projected benefit obligations less than plan assets:
 
 
 
Projected benefit obligation
$

 
$
60

Accumulated benefit obligation
$

 
$
44

Fair value of plan assets
$

 
$
64

 
 
 
 
OPEB Plan:
 
 
 
Accumulated benefit obligation
$
12,191

 
$
11,372

Plans with projected benefit obligations in excess of plan assets:
 
 
 
Projected benefit obligation
$
12,191

 
$
11,372

Accumulated benefit obligation
$
12,191

 
$
11,372

Fair value of plan assets
$

 
$


66

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, 2014, the Company’s German and United Kingdom pension plans are underfunded by $120.0 million. In Germany, there are no statutory requirements for funding while in the United Kingdom there are certain statutory minimum funding requirements.

Actuarial assumptions used in the calculation of the recorded liability are as follows: 
Weighted — Average Assumptions as of August 31 :
2014
 
2013
 
2012
Discount rate on pension plans
2.8
%
 
4.0
%
 
3.8
%
Discount rate on other postretirement obligation
3.8
%
 
4.5
%
 
3.5
%
Rate of compensation increase
2.4
%
 
2.4
%
 
2.2
%

Actuarial assumptions used in the calculation of the recorded benefit expense are as follows: 
Weighted — Average Assumptions for the year ended August 31 :
2014
 
2013
 
2012
Discount rate on pension plans
4.0
%
 
3.8
%
 
4.9
%
Discount rate on other postretirement obligation
4.5
%
 
3.5
%
 
4.5
%
Return on pension plan assets
5.2
%
 
5.1
%
 
6.4
%
Rate of compensation increase
2.4
%
 
2.2
%
 
2.5
%
Projected health care cost trend rate
7.5
%
 
8.0
%
 
8.0
%
Ultimate health care rate
5.0
%
 
5.0
%
 
5.0
%
Year ultimate health care trend rate is achieved
2019

 
2019

 
2019


The Company, in consultation with its actuaries, annually, or as needed for interim remeasurements, reviews and selects the discount rates to be used in connection with its defined benefit pension plans. The discount rates used by the Company are based on the yields of various corporate bond indices with actual maturity dates that approximate the estimated benefit payment streams of the related pension plans. For countries in which there are no deep corporate bond markets, discount rates used by the Company are based on yields of various government bond indices with varying maturity dates. The discount rates are also reviewed in comparison with current benchmark indices, economic market conditions and the movement in the benchmark yield since the previous fiscal year.
 
The Company, in consultation with its actuaries, annually, or as needed for interim remeasurements, reviews and selects the discount rate to be used in connection with its postretirement obligation. When selecting the discount rate the Company uses a model that considers the demographics of the participants and the resulting expected benefit payment stream over the participants’ lifetime.

For fiscal 2015, the Company, in consultation with its actuaries, has selected a weighted-average discount rate of 2.8%, expected long-term return on plan assets of 4.7% and rate of compensation increase of 2.4% for its defined benefit pension plans. For its postretirement benefit plan, the Company, in consultation with its actuaries, has selected a discount rate of 3.8% for fiscal 2015.

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, 2014
 
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
$
48

 
$
(41
)
Effect on accumulated postretirement benefit obligation
$
1,209

 
$
(1,045
)
 

67

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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
2014
 
2013
 
2014
 
2013
Equity securities
27
%
 
25
%
 
22
%
 
23
%
Debt securities
24
%
 
15
%
 
12
%
 
13
%
Fixed insurance contracts
45
%
 
39
%
 
58
%
 
31
%
Cash
4
%
 
21
%
 
8
%
 
33
%
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. During fiscal 2014, the Company determined that Level 2 was a more appropriate classification for $10.3 million of certain securities which were previously classified as Level 1. Accordingly, we have revised the presentation in the asset level table below to correct the 2013 classification.
 
The fair values of the Company’s pension plan assets, all of which are for foreign plans, are as follows: 
 
As of August 31, 2014
 
As of August 31, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Equity securities
$
11,081

 
$
6,607

 
$
4,474

 
$

 
$
8,080

 
$
1,328

 
$
6,752

 
$

Debt securities
9,646

 
1,563

 
8,083

 

 
5,007

 
1,457

 
3,550

 

Fixed insurance contracts
18,399

 

 

 
18,399

 
12,435

 

 

 
12,435

Cash
1,611

 
1,611

 

 

 
6,822

 
6,822

 

 

Other
167

 

 

 
167

 
73

 

 

 
73

Total
$
40,904

 
$
9,781

 
$
12,557

 
$
18,566

 
$
32,417

 
$
9,607

 
$
10,302

 
$
12,508


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:
 
2014
 
2013
 
(In thousands)
Balance, beginning of fiscal year
$
12,508

 
$
12,013

Actual return on plan assets
5,466

 
(533
)
Purchases, sales, issuances, and settlements, net
711

 
440

Foreign currency translation
(119
)
 
588

Balance, end of fiscal year
$
18,566

 
$
12,508



68

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company expects to contribute $5.6 million for its pension obligations and $0.9 million to its other postretirement plan in 2015. The benefit payments, which reflect expected future service, are as follows:
Year Ended August 31,
Pension
Benefits
 
OPEB
Benefits
 
(In thousands)
2015
$
4,263

 
$
890

2016
4,335

 
859

2017
5,214

 
860

2018
4,837

 
839

2019
5,244

 
858

Years 2020 — 2024
29,849

 
4,001


The Company maintains several defined contribution plans that cover domestic and foreign employees. The plan in which each employee is eligible to participate depends upon the subsidiary for which the employee works. Certain plans have eligibility requirements related to age and period of service with the Company. Certain plans have salary deferral features that enable participating employees to contribute up to a certain percentage of their earnings, subject to statutory limits and certain foreign plans require the Company to match employee contributions in cash. Employee contributions to the Company’s U.S. 401(k) plans have matching features whereas the Company will match a participant’s contribution up to a pre-approved amount of the participant’s annual salary. The total expense for defined contribution plans was $3.0 million, $2.7 million and $3.3 million in 2014, 2013 and 2012, respectively.


69

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as follows(1):
 
Foreign Currency Translation Gain (Loss)
 
Pension and Other Retiree Benefits(2)
 
Total Accumulated Other Comprehensive Income (Loss)
 
(In thousands)
Balance, August 31, 2012
$
13,383

 
$
(19,304
)
 
$
(5,921
)
Other comprehensive income (loss) before reclassifications, net of tax of $21
4,174

 
862

 
5,036

Amounts reclassified to earnings, net of tax of $34

 
1,412

 
1,412

Net current period other comprehensive income (loss)
4,174

 
2,274

 
6,448

Less: comprehensive income (loss) attributable to
noncontrolling interests
(155
)
 

 
(155
)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
4,329

 
2,274

 
6,603

Balance, August 31, 2013
17,712

 
(17,030
)
 
682

Other comprehensive income (loss) before reclassifications, net of tax of $8,718
5,872

 
(23,043
)
 
(17,171
)
Amounts reclassified to earnings, net of tax of ($456)
(885
)
(3) 
596

(4) 
(289
)
Net current period other comprehensive income (loss)
4,987

 
(22,447
)
 
(17,460
)
Less: comprehensive income (loss) attributable to
noncontrolling interests
(87
)
 

 
(87
)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
5,074

 
(22,447
)
 
(17,373
)
Balance, August 31, 2014
$
22,786

 
$
(39,477
)
 
$
(16,691
)

(1) All amounts presented are net of tax. All tax amounts are related to pension and other retiree benefits.
(2) Reclassified from accumulated other comprehensive income 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 of this Form 10-K for further details.
(3) Reclassified from accumulated other comprehensive income into income (loss) from discontinued operations on the consolidated statements of operations on the sale of the rotational compounding business in Australia. Refer to Note 19 of this Form 10-K for further details.
(4) Represents amortization of net actuarial loss and prior service costs, including settlement charges of $214.

NOTE 10 — SHARE-BASED INCENTIVE COMPENSATION PLANS

On December 7, 2006, the Company adopted the 2006 Incentive Plan, which provides for the grant of various stock-based incentive compensation awards. Upon adoption of the 2006 Incentive Plan, all remaining shares eligible for award under a previous plan were added to the 2006 Incentive Plan. On December 9, 2010, the Company’s stockholders approved the adoption of the A. Schulman, Inc. 2010 Value Creation Rewards Plan (“2010 Rewards Plan”) which also provides for similar grants. 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, 2014, there were 524,749 shares and 22,949 shares of common stock available for grant pursuant to the Company’s 2006 Incentive Plan and the 2010 Rewards Plan, respectively. The restricted stock awards outstanding under these plans have service vesting periods of three years following the date of grant. Also, certain of these awards have market or performance vesting conditions.


70

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2013
133,359

 
1,081,585

 
$
25.20

 
$
20.41

Granted
42,138

 
315,941

 
$
34.42

 
$
34.42

Vested
(19,405
)
 
(30,366
)
 
$
21.63

 
$
11.62

Forfeited

 
(265,723
)
 
$

 
$
15.21

Outstanding at August 31, 2014
156,092

 
1,101,437

 
$
28.14

 
$
25.93


Time-based awards are valued at the fair market value on the date of grant, have voting rights and earn dividends throughout the vesting period which are subject to the same vesting terms as the underlying restricted stock awards. The weighted-average grant date fair value of time-based awards granted during the years ended August 31, 2014, 2013 and 2012 were $34.42, $29.18 and $22.64, 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, 2014 are 485,065 performance-based awards, which earn dividends throughout the vesting period, and the remaining performance-based awards which do not earn dividends. Earned dividends are subject to the same vesting terms as the underlying performance-based awards.

The performance-based awards in the table above include 441,282 shares which vest based on market conditions and are valued based upon a Monte Carlo valuation model. Vesting of the ultimate number of shares underlying such performance-based awards, if any, will be dependent upon the Company’s total stockholder return in relation to the total stockholder return of a select group of peer companies over a three-year period. The probability of meeting the market criteria is considered when calculating the estimated fair market value using a Monte Carlo valuation model. Such awards granted prior to fiscal 2013 are accounted for as equity awards with market conditions given that recipients receive shares of stock upon vesting, and expense for these awards is recognized over the service period regardless of whether the market condition is achieved and the awards ultimately vest. Awards granted in fiscal 2013 and 2014 provide recipients an option to receive cash or shares of common stock upon vesting. As such, the fiscal 2013 and 2014 awards are accounted for as liability awards with a market condition, and the Company remeasures these awards at fair value on a quarterly basis over the service period. Expense for these awards is recognized only to the extent the market conditions are achieved and the awards ultimately vest.

The fair values of the performance-based awards with market conditions were estimated using a Monte Carlo valuation model using the following assumptions: 
 
2014(a)
 
2013(a)
 
2012(b)
Dividend yield
%
 
%
 
3.00
%
Expected volatility
31.00
%
 
35.00
%
 
43.00
%
Risk-free interest rate
1.03
%
 
0.77
%
 
0.42
%
Correlation
53.00
%
 
56.00
%
 
61.00
%
(a) Assumptions as of August 31 for the respective years related to liability classified awards
(b) Weighted average grant date assumptions related to equity classified awards

The fair value of the remaining 660,155 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 such performance-based awards, if any, will be dependent upon the Company's return on invested capital ("ROIC") in relation to an internal targeted ROIC over a three-year period.

The weighted-average grant date fair value of the performance-based awards granted in fiscal 2014, 2013 and 2012 were $34.42, $29.08 and $17.71 per share, respectively.


71

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of stock option activity is as follows:
 
Outstanding Shares
Under Option
 
Weighted-Average
Exercise Price
Outstanding at August 31, 2013
19,002

 
$
19.13

Exercised
(12,167
)
 
$
19.06

Forfeited and expired
(1,834
)
 
$
19.16

Outstanding at August 31, 2014
5,001

 
$
19.29

Exercisable at August 31, 2014
5,001

 
$
19.29


The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The total intrinsic value for stock options outstanding and exercisable as of August 31, 2014 was $0.1 million with a remaining term for options outstanding and exercisable of 1 year. The total intrinsic value of options exercised for the years ended August 31, 2014, 2013, and 2012 was $0.2 million, $0.6 million and $0.4 million, respectively. All outstanding and exercisable stock options are fully vested as of August 31, 2014. The Company did not grant stock options in fiscal years 2014, 2013 or 2012.

Total unrecognized compensation cost, including a provision for estimated forfeitures, related to nonvested stock-based compensation arrangements as of August 31, 2014 was $11.6 million. This cost is expected to be recognized over a weighted-average period of 1.3 years.

The Company made no cash payments for cash-settled restricted stock units and cash-based awards during fiscal 2014. During fiscal 2013 and 2012, the Company made payments of $0.2 million and $0.3 million for cash-settled restricted stock units and cash-based awards, respectively.

During fiscal 2014 and 2013, the Company granted non-employee directors 23,150 shares and 27,860 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 2014, 2013 and 2012. 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,
 
2014
 
2013
 
2012
 
(In thousands)
Time-based and performance-based restricted stock awards
$
7,105

 
$
2,454

 
$
3,813

Board of Directors unrestricted awards
797

 
850

 
845

Total share-based incentive compensation
$
7,902

 
$
3,304

 
$
4,658


NOTE 11 — 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.


72

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. The following table presents the number of incremental weighted-average shares used in computing diluted per share amounts: 
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
Weighted-average shares outstanding:
 
 
 
 
 
Basic
29,061

 
29,260

 
29,389

Incremental shares from equity awards
301

 
77

 
160

Diluted
29,362

 
29,337

 
29,549


During fiscal year 2014, there were no anti-dilutive shares related to share-based incentive compensation plans that were excluded from diluted weighted-average shares outstanding. In fiscal years 2013 and 2012, there were 21,000, and 36,000, respectively, of equivalent shares related to share-based incentive compensation plans that were excluded from diluted weighted-average shares outstanding because inclusion of these shares would have been anti-dilutive.

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. As of August 31, 2014, no shares of special stock were issued and outstanding.
 
NOTE 12 — LEASES

The Company leases certain equipment, buildings, vehicles and computer equipment. Total rental expense was $16.6 million in 2014, $12.7 million in 2013 and $10.4 million in 2012. 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)
2015
$
11,378

2016
7,862

2017
6,217

2018
4,501

2019
3,627

2020 and thereafter
18,227

Total minimum rental commitments
$
51,812


NOTE 13 — SEGMENT INFORMATION

The Company considers its operating structure and the types of information subject to regular review by its President and Chief Executive Officer (“CEO”), who is the Chief Operating Decision Maker (“CODM”), to identify reportable segments. The CODM makes decisions, assesses performance and allocates resources by the following regions, which are also the Company’s reportable segments: Europe, Middle East and Africa (“EMEA”), the Americas, and Asia Pacific (“APAC”).

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.
    

73

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes net sales to unaffiliated customers by segment: 
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
EMEA
$
1,577,867

 
$
1,405,882

 
$
1,403,151

Americas
673,363

 
600,824

 
558,910

APAC
195,768

 
126,696

 
119,211

Total net sales to unaffiliated customers
$
2,446,998

 
$
2,133,402

 
$
2,081,272


Below the Company presents gross profit by segment: 
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
EMEA
$
206,268

 
$
179,242

 
$
175,669

Americas
99,517

 
81,315

 
84,282

APAC
26,767

 
22,345

 
19,969

Total segment gross profit
332,552

 
282,902

 
279,920

Inventory step-up
(1,468
)
 
(138
)
 
(677
)
Accelerated depreciation and restructuring related costs
(1,076
)
 
(1,585
)
 

Total gross profit
$
330,008

 
$
281,179

 
$
279,243


Below is a reconciliation of segment operating income to operating income and income from continuing operations before taxes:
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
EMEA
$
80,690

 
$
67,320

 
$
71,849

Americas
38,806

 
28,351

 
28,872

APAC
12,527

 
12,108

 
10,908

Total segment operating income
132,023

 
107,779

 
111,629

Corporate
(32,170
)
 
(24,926
)
 
(23,786
)
Costs related to acquisitions
(6,021
)
 
(2,661
)
 
(1,425
)
Restructuring and related costs
(9,618
)
 
(13,687
)
 
(9,256
)
Accelerated depreciation
(107
)
 
(1,058
)
 

Asset impairment
(104
)
 
(1,873
)
 
(3,392
)
Curtailment and settlement gains (losses)
(214
)
 
(333
)
 
310

Inventory step-up
(1,468
)
 
(138
)
 
(677
)
Operating income
82,321

 
63,103

 
73,403

Interest expense, net
(8,217
)
 
(7,162
)
 
(7,675
)
Foreign currency transaction gains (losses)
(2,206
)
 
(2,426
)
 
(243
)
Other income (expense), net
434

 
217

 
1,342

Income from continuing operations before taxes
$
72,332

 
$
53,732

 
$
66,827

 

74

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes identifiable assets by segment: 
 
As of August 31,
 
2014
 
2013
 
2012
 
(In thousands)
Identifiable assets:
 
 
 
 
 
EMEA
$
809,670

 
$
735,684

 
$
677,066

Americas
569,235

 
413,438

 
426,963

APAC
133,579

 
89,220

 
89,738

Total identifiable assets
$
1,512,484

 
$
1,238,342

 
$
1,193,767


The following tables summarize depreciation and amortization and capital expenditures by segment: 
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
Depreciation and amortization expense:
 
 
 
 
 
EMEA
$
21,832

 
$
18,072

 
$
17,534

Americas
20,650

 
19,481

 
17,531

APAC
5,422

 
3,898

 
3,719

Total depreciation and amortization expense
$
47,904

 
$
41,451

 
$
38,784

Capital expenditures:
 
 
 
 
 
EMEA
$
13,199

 
$
9,157

 
$
11,383

Americas
16,615

 
15,038

 
17,725

APAC
5,275

 
2,373

 
4,895

Total capital expenditures
$
35,089

 
$
26,568

 
$
34,003


Below is a summary of net sales by point of origin and long-lived assets by location: 
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
Net sales:
 
 
 
 
 
United States
$
457,225

 
$
383,964

 
$
358,376

Germany
548,454

 
536,833

 
571,876

France
238,029

 
221,521

 
196,103

Other international
1,203,290

 
991,084

 
954,917

Total net sales
$
2,446,998

 
$
2,133,402

 
$
2,081,272

 
 
As of August 31,
 
2014
 
2013
 
2012
 
(In thousands)
Long lived assets:
 
 
 
 
 
United States
$
95,349

 
$
70,197

 
$
76,699

Germany
22,716

 
23,316

 
23,020

France
22,758

 
21,854

 
22,832

Other international
113,098

 
95,154

 
103,325

Total long lived assets
$
253,921

 
$
210,521

 
$
225,876



75

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Globally, the Company operates in five product families: (1) custom performance colors, (2) masterbatch solutions, (3) engineered plastics, (4) specialty powders and (5) distribution services. The Company offers tolling services to customers primarily in the specialty powders product family. The consolidated net sales for these product families are as follows:
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands, except for %’s)
Custom performance colors
$
174,007

 
7
%
 
$
150,890

 
7
%
 
$
125,595

 
6
%
Masterbatch solutions
805,798

 
33

 
781,770

 
37

 
750,531

 
36

Engineered plastics
745,493

 
31

 
534,777

 
25

 
547,090

 
26

Specialty powders
350,510

 
14

 
308,619

 
14

 
314,965

 
16

Distribution services
371,190

 
15

 
357,346

 
17

 
343,091

 
16

Total consolidated net sales
$
2,446,998

 
100
%
 
$
2,133,402

 
100
%
 
$
2,081,272

 
100
%

Fiscal 2013 includes a reclassification of revenue between product families to better reflect the way the businesses are managed.

NOTE 14 — RESEARCH AND DEVELOPMENT

Research and development expenditures were $16.9 million, $8.7 million and $6.1 million in fiscal years 2014, 2013 and 2012, respectively. The increase in research and development expense in fiscal 2014 is further evidence of the Company's commitment to innovation and belief that research and development is important to our organic growth strategy.

NOTE 15 — RESTRUCTURING

Fiscal 2015 Restructuring Plans

EMEA Reorganization Plan

In October 2014, the Company announced actions to optimize the back-office and support functions in EMEA. The Company plans to reduce headcount in EMEA by approximately 40, with the majority of reductions expected to occur during the first half of fiscal 2015. The Company expects to record pretax employee-related and other restructuring costs of approximately $10 million, primarily in the first half of fiscal 2015. There were no charges recorded during fiscal 2014 related to this plan.

Fiscal 2013 Restructuring Plans
  
Americas Reorganization Plan

In the fourth quarter of fiscal 2013, the Company conducted restructuring activities primarily in Mexico and Grand Junction, Tennessee to better align capacity with demand. As part of this restructuring, the Company reduced headcount in the Americas by approximately 85, of which the majority of reductions occurred during fiscal 2013. The Company recorded $0.7 million and $1.5 million of pretax employee-related restructuring costs during fiscal 2014 and 2013, respectively. As of August 31, 2014, the Company expects no further charges and has no remaining accrual related to this plan as it is considered complete.

Brazil Consolidation Plan

During fiscal 2013, the Company initiated restructuring activities to consolidate two of its three existing leased manufacturing facilities in Brazil. In fiscal 2014, manufacturing activities at two facilities in the State of Sao Paulo, Brazil were relocated to a new facility. The Company offered eligible associates the ability to transfer from the two existing manufacturing facilities to the new facility. As a result of this consolidation, the Company reduced headcount in Brazil by approximately 55 in fiscal 2013, partially offset by the addition of approximately 35 associates at the Company's new manufacturing facility, including associate transfers and new hires. The Company recorded $3.1 million and $1.6 million of pretax employee-related and other restructuring costs during fiscal 2014 and 2013, respectively. Additionally, the Company recorded $0.1 million and $0.7 million of accelerated depreciation included in cost of sales during fiscal 2014 and 2013, respectively. As of August 31, 2014, the Company has a balance of $0.1 million related to this plan and expects to recognize minimal additional pretax employee-related and other cash charges during fiscal 2015. Cash payments associated with this plan are expected to occur through fiscal 2015 as the plan is completed.


76

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EMEA Reorganization Plan

In fiscal 2013, the Company executed restructuring activities to better reflect its current business footprint and customer needs in the challenging economic environment in Europe. As part of this restructuring, the EMEA regional team reduced headcount by approximately 45, of which the majority of the reductions occurred in fiscal 2013. The Company recorded $0.6 million and $6.4 million of pretax employee-related restructuring costs during fiscal 2014 and 2013, respectively. As of August 31, 2014, the Company has a balance of $0.3 million accrued for employee-related costs related to this plan. The Company expects to recognize minimal additional pretax employee-related cash charges during fiscal 2015. Cash payments associated with this plan are expected to occur through fiscal 2016 as the plan is completed.

Bellevue, Ohio Facility Plan

In the first quarter of fiscal 2013, the Company sold its Bellevue, Ohio facility to continue its focus on higher-value technical products. As part of this sale, the Company recorded minimal charges related to this plan during fiscal 2014 and $0.3 million of pretax employee-related costs and other restructuring expenses in fiscal 2013. Additionally, the Company recorded $0.4 million of accelerated depreciation associated with this plan during fiscal 2013. The Company expects no further charges and has no remaining accrual as of August 31, 2014 related to this plan as it is considered complete.

Fiscal 2012 Restructuring Plans

Masterbatch Reorganization Plan

Effective September 1, 2012 the masterbatch product family was split into two separate product families, Custom Performance Colors and Masterbatch Solutions. As a result, the Company reduced headcount in the EMEA and APAC segments in the fourth quarter of fiscal 2012. The Company recorded $0.4 million in fiscal 2014, minimal charges related to this plan during fiscal 2013 and $2.3 million of pretax employee-related restructuring costs in fiscal 2012, of which the majority was related to the EMEA segment. As of August 31, 2014, the Company has a balance of $1.2 million accrued related to the EMEA segment for employee-related costs and expects minimal charges related to this plan to be recognized in fiscal 2015. Cash payments associated with this plan are expected to occur through fiscal 2016 as the plan is completed.

EMEA Operations and Back-Office Plan

In November 2011, the Company initiated a restructuring plan of EMEA’s operations and back-office functions to better leverage savings from its Shared Service Center located in Belgium. As part of this plan, the Company reduced headcount in EMEA by approximately 50, and the majority of the reductions occurred in the first and second quarters of fiscal 2012. The Company recorded minimal charges during fiscal 2014 and $0.3 million and $4.7 million of pretax employee-related restructuring expense during fiscal 2013 and 2012, respectively. As of August 31, 2014, the Company has a balance of $0.1 million accrued for employee-related costs related to this plan and expects minimal employee-related charges during fiscal 2015. Cash payments associated with this plan are expected to occur through fiscal 2015 as the plan is completed.

Fiscal 2011 Restructuring Plans

During fiscal 2012, the Company recognized charges of $1.6 million and $0.5 million related to the Americas Engineered Plastics and Italy plans, respectively, which are considered complete.



77

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Restructuring Summary

The following table summarizes the activity related to the Company’s restructuring plans: 

 
Employee-related Costs
 
Other Costs
 
Translation Effect
 
Total Restructuring Costs
 
(In thousands)
Accrual balance as of August 31, 2012
3,524

 
381

 
(539
)
 
3,366

Fiscal 2013 charges
8,669

 
1,831

 

 
10,500

Fiscal 2013 payments
(6,747
)
 
(1,812
)
 

 
(8,559
)
Translation

 

 
42

 
42

Accrual balance as of August 31, 2013
$
5,446

 
$
400

 
$
(497
)
 
$
5,349

Fiscal 2014 charges
2,223

 
2,660

 

 
4,883

Fiscal 2014 payments
(5,924
)
 
(2,689
)
 

 
(8,613
)
Translation

 

 
193

 
193

Accrual balance as of August 31, 2014
$
1,745

 
$
371

 
$
(304
)
 
$
1,812


Restructuring costs are excluded from segment operating income but are attributable to the reportable segments as follows: 
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
EMEA
$
1,000

 
$
6,704

 
$
7,531

Americas
3,807

 
3,616

 
1,603

APAC
76

 
180

 
122

Total
$
4,883

 
$
10,500

 
$
9,256


NOTE 16 — ASSET IMPAIRMENTS

The Company recorded $0.1 million, $1.9 million and $3.4 million in pretax asset impairment charges during the years ended August 31, 2014, 2013 and 2012, respectively.

During fiscal 2014 and 2013, the Company recorded asset impairment charges of $0.1 million and $0.5 million, respectively, related to a reduction in the carrying value of one of the Company’s facilities in Oyonnax, France, which was held for sale as of August 31, 2014 and 2013. The impairment charges were determined based on the estimated sales value of the facility less the estimated costs to sell utilizing information provided by a third-party real estate valuation source using the market approach. During early fiscal 2015, the Company sold this facility to a third-party for $0.6 million, which approximated its carrying value.

During fiscal 2013 and 2012, the Company recorded asset impairment charges of $1.4 million and $2.7 million related to a reduction in the carrying value of the Company's facility in Verolanuova, Italy using comparable prices for similar facilities provided by a third-party real estate valuation source using the market approach. During fiscal 2014, the Company sold this facility to a third-party for $1.5 million, which approximated its carrying value.

In fiscal 2012, as a result of the Americas Engineered Plastics restructuring initiative, the Company reduced the carrying value of its facility, machinery and equipment in Nashville, Tennessee to its combined fair value of $3.8 million. The disposal value of the facility was determined as the estimated sales value of the assets less the costs to sell based on information provided by a third-party real estate valuation source. The disposal value of machinery and equipment to be sold or disposed of was determined based on estimated salvage value. The Company recorded pretax impairment charges of $0.5 million in fiscal 2012, primarily related to real estate, machinery and equipment at the Nashville, Tennessee facility. During fiscal 2013, the Company sold the Nashville, Tennessee facility which resulted in a minimal impact on the Company's consolidated financial results.

See Note 19 of this Form 10-K for further discussion on impairment charges included in discontinued operations.


78


NOTE 17 — CONTINGENCIES AND CLAIMS

In the normal course of business, the Company is at times subject to pending and threatened legal actions, some for which the relief or damages sought may be substantial. Although the Company is not able to predict the outcome of such legal actions, after reviewing all pending and threatened legal actions with counsel and based on information currently available, management believes that the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the results of operations or financial position of the Company. However, it is possible that the ultimate resolution of such matters, if unfavorable, may be material to the results of operations in a particular future period as the time and amount of any resolution of such legal actions and its relationship to the future results of operations are not currently known.

Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, it is not considered probable that a liability has been incurred or not possible to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve would be recognized until that time.

NOTE 18 — SHARE REPURCHASE PROGRAM

On April 3, 2014, the Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to $55 million of its common stock in the open market or in privately negotiated transactions, subject to market and other conditions (the “Program”). Repurchases under the Program may take place over a three-year period ending April 2, 2017, when the Program is scheduled to expire. During fiscal 2014, the Company did not repurchase any shares of common stock under the Program, which may be modified, suspended or terminated by the Company at any time. The Program replaces the Company’s previous share repurchase program, which was authorized on April 1, 2011 and expired on March 31, 2014.

In fiscal 2014, the Company repurchased 40,327 shares of common stock under the previous share repurchase program at an average price of $27.68 per share for a total cost of $1.1 million. In total under the previous program, the Company acquired 2,192,612 shares at an average price of $20.33 per share.

NOTE 19 — DISCONTINUED OPERATIONS

The Company completed the sale of all of the fixed and intangible assets of its rotational compounding business in Australia for $3.0 million on September 3, 2013. The operating results for this business were previously included in the Company's specialty powders product family within the APAC segment. The assets and liabilities of this business were classified as held for sale in the Company's consolidated balance sheet as of August 31, 2013 and included in prepaid expenses and other current assets and other accrued liabilities, respectively.

The following summarizes select financial information included in net earnings from discontinued operations:
 
Year ended August 31,
 
2014
 
2013
 
2012
 
(In thousands)
Net sales
$
1,372

 
$
30,009

 
$
25,482

Income (loss) from discontinued operations, net of tax
$
3,202

 
$
(6,671
)
 
$
(860
)

During fiscal 2014, the Company recorded a gain on the sale of assets of $3.4 million. The results for fiscal 2013 include an impairment charge of $4.0 million which represented the difference between the estimated fair market value and the carrying value of the net assets. The estimated fair value was determined based on expected sale price. Income taxes were minimal for all periods presented.


79

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 — QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED) 
 
Quarter Ended
 
Year Ended
 
Nov 30,
2013
 
Feb 28,
2014
 
May 31,
2014
 
Aug 31,
2014
 
Aug 31, 2014
 
Unaudited
 
(In thousands, except per share data)
Net sales
$
585,397

 
$
588,508

 
$
645,735

 
$
627,358

 
$
2,446,998

Gross profit
$
79,108

 
$
74,299

 
$
91,964

 
$
84,637

 
$
330,008

Income (loss) from continuing operations
$
12,631

 
$
6,648

 
$
19,347

 
$
15,164

 
$
53,790

Income (loss) from discontinued operations, net of tax
2,655

 
347

 
(23
)
 
223

 
3,202

Net income (loss)
15,286

 
6,995

 
19,324

 
15,387

 
56,992

Noncontrolling interests
(215
)
 
(136
)
 
(233
)
 
(215
)
 
(799
)
Net income (loss) attributable to A. Schulman, Inc.
$
15,071

 
$
6,859

 
$
19,091

 
$
15,172

 
$
56,193

 
 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to A. Schulman, Inc.(a)
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.43

 
$
0.23

 
$
0.66

 
$
0.51

 
$
1.82

Income (loss) from discontinued operations
0.09

 
0.01

 

 
0.01

 
0.11

Net income attributable to A. Schulman, Inc.
$
0.52

 
$
0.24

 
$
0.66

 
$
0.52

 
$
1.93

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share attributable to A. Schulman, Inc.(a)
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.43

 
$
0.22

 
$
0.65

 
$
0.51

 
$
1.80

Income (loss) from discontinued operations
0.09

 
0.01

 

 
0.01

 
0.11

Net income (loss) attributable to A. Schulman, Inc.
$
0.52

 
$
0.23

 
$
0.65

 
$
0.52

 
$
1.91

 
 
 
 
 
 
 
 
 
 
Certain items included in income from continuing operations, net of tax are as follows:
Asset write-downs(b)
$
107

 
$
70

 
$

 
$

 
$
177

Costs related to acquisitions(c)
546

 
1,822

 
872

 
2,635

 
5,875

Restructuring and related costs(d)
3,340

 
2,513

 
1,840

 
1,463

 
9,156

Inventory step-up(e)
319

 
782

 

 
323

 
1,424

Tax charges (benefits)

 
(426
)
 

 
110

 
(316
)
Total
$
4,312

 
$
4,761

 
$
2,712

 
$
4,531

 
$
16,316


(a) 
The sum of the four quarters does not equal the earnings per share amount calculated for the year due to rounding.
(b) 
Asset write-downs include charges primarily related to the write-down of the facility in Oyonnax, France. Refer to Note 16 of this Form 10-K for further discussion.
(c) 
Costs related to acquisitions include professional, legal and other expenses associated with the Perrite Group, Network Polymers, Inc., Prime Colorants and the Specialty Plastics acquisitions, along with other potential acquisitions.
(d) 
Restructuring and related costs include items such as employee severance charges, lease termination charges, curtailment gains/losses, other employee termination costs and charges related to the reorganization of the legal entity structure. Refer to Note 15 of this Form 10-K for further discussion.
(e) 
Inventory step-up relates to the fiscal 2014 acquisitions noted above.


80

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Quarter Ended
 
Year Ended
 
Nov 30,
2012
 
Feb 28,
2013
 
May 31,
2013
 
Aug 31,
2013
 
Aug 31, 2013
 
Unaudited
 
(In thousands, except per share data)
Net sales
$
532,085

 
$
515,440

 
$
548,589

 
$
537,288

 
$
2,133,402

Gross profit
$
71,667

 
$
63,199

 
$
74,044

 
$
72,269

 
$
281,179

Income (loss) from continuing operations
$
12,142

 
$
12,306

 
$
10,313

 
$
(762
)
 
$
33,999

Income (loss) from discontinued operations, net of tax
3

 
(282
)
 
(4,821
)
 
(1,571
)
 
(6,671
)
Net income (loss)
12,145

 
12,024

 
5,492

 
(2,333
)
 
27,328

Noncontrolling interests
(366
)
 
(239
)
 
(275
)
 
(349
)
 
(1,229
)
Net income (loss) attributable to A. Schulman, Inc.
$
11,779

 
$
11,785

 
$
5,217

 
$
(2,682
)
 
$
26,099

 
 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to A. Schulman, Inc.(f)
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.40

 
$
0.41

 
$
0.34

 
$
(0.04
)
 
$
1.12

Income (loss) from discontinued operations

 
(0.01
)
 
(0.16
)
 
(0.05
)
 
(0.23
)
Net income attributable to A. Schulman, Inc.
$
0.40

 
$
0.40

 
$
0.18

 
$
(0.09
)
 
$
0.89

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share attributable to A. Schulman, Inc.(f)
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.40

 
$
0.41

 
$
0.34

 
$
(0.04
)
 
$
1.12

Income (loss) from discontinued operations

 
(0.01
)
 
(0.16
)
 
(0.05
)
 
(0.23
)
Net income attributable to A. Schulman, Inc.
$
0.40

 
$
0.40

 
$
0.18

 
$
(0.09
)
 
$
0.89

 
 
 
 
 
 
 
 
 
 
Certain items included in income from continuing operations, net of tax are as follows:
Asset write-downs(g)
$
628

 
$
404

 
$
1,386

 
$
365

 
$
2,783

Costs related to acquisitions(h)
313

 
596

 
890

 
736

 
2,535

Restructuring and related costs(i)
1,762

 
1,320

 
2,472

 
5,577

 
11,131

Inventory step-up(j)
138

 

 

 

 
138

Tax charges (benefits)(k)

 
(6,160
)
 
(17
)
 
10,595

 
4,418

Total
$
2,841

 
$
(3,840
)
 
$
4,731

 
$
17,273

 
$
21,005

(f) 
The sum of the four quarters does not equal the earnings per share amount calculated for the year due to rounding.
(g) 
Asset write-downs include charges primarily related to the write-down of the facility in Oyonnax, France and the facility in Verolanuova, Italy during fiscal 2013. Refer to Note 16 of this Form 10-K for further discussion.
(h) 
Costs related to acquisitions include professional, legal and other expenses associated with the acquisitions of ECM, the Perrite Group and other potential acquisitions.
(i) 
Restructuring and related costs include items such as employee severance charges, lease termination charges, curtailment gains/losses, other employee termination costs and charges related to the reorganization of the legal entity structure. Refer to Note 15 of this Form 10-K for further discussion.
(j) 
Inventory step-up relates to the ECM acquisition.
(k) 
Tax charges (benefits) include the effect of the adjustment to the German and Brazilian valuation allowances in fiscal 2013.
 



81


ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.
 
ITEM 9A.
CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company carries out a variety of on-going procedures, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of the Company’s disclosure controls and procedures. During fiscal 2014, the Company acquired the Perrite Group, Network Polymers, Inc., Prime Colorants and the specialty plastics business of Ferro Corporation. The scope of the Company's assessment of the effectiveness of internal control over financial reporting did not include these fiscal 2014 acquisitions. The total assets for the Perrite Group, Network Polymers, Inc., Prime Colorants and the specialty plastics business of Ferro Corporation represent 6.5%, 3.2%, 1.2%, and 7.4% respectively, of the related consolidated financial statement amounts as of August 31, 2014. The total revenue for the Perrite Group, Network Polymers, Inc., Prime Colorants and the specialty plastics business of Ferro Corporation represent 5.8%, 1.9%, 0.3%, and 1.0% respectively, of the related consolidated financial statement amounts for the year ended August 31, 2014.
This exclusion is in accordance with the SEC's general guidance that an assessment of a recently acquired business may be omitted from the Company's scope in the year of acquisition. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Management’s Report On Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The 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 accounting principles generally accepted in the United States of America.
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.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that the internal control over financial reporting was effective as of August 31, 2014.
Management's assessment of the effectiveness of the Company's internal control over financial reporting as of August 31, 2014 excluded from the scope of its assessment of internal control over financial reporting the operations and related assets of the Perrite Group, Network Polymers, Inc., Prime Colorants and the specialty plastics business of Ferro Corporation, which were all acquired during fiscal year 2014. SEC guidelines permit companies to omit an acquired business's internal controls over financial reporting from its management's assessment during the first year of the acquisition.

82


Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of August 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included herein.
 

83


ITEM 9B.
OTHER INFORMATION

None.

84


PART III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers of the Company
The information required by Item 401 of Regulation S-K concerning the Company’s directors and all persons nominated for election as directors at the Annual Meeting of Stockholders to be held on December 12, 2014 (the “2014 Annual Meeting”) is incorporated herein by reference from the disclosure to be included under the caption “Proposal One — Election of Directors” in the Company’s definitive proxy statement relating to the 2014 Annual Meeting to be filed with the Commission (the “2014 Proxy Statement”).
The information required by Item 401 of Regulation S-K concerning the Company’s executive officers is incorporated herein by reference from the disclosure provided under the caption “Executive Officers of the Company” included in Part I of this Annual Report on Form 10-K.
The information required by Item 405 of Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s 2014 Proxy Statement.
Code of Conduct
The information required by Item 406 of Regulation S-K regarding the Company’s Global Code of Conduct is incorporated herein by reference from the disclosure to be included under the caption “Code of Conduct” in the Company’s 2014 Proxy Statement.
Procedures for Recommending Directors Nominees
The information required by Item 407(c)(3) of Regulation S-K concerning the procedures by which stockholders may recommend nominees to the Board of Directors is incorporated herein by reference from the disclosure to be included under the caption “Director Nominations” in the Company’s 2014 Proxy Statement. These procedures have not materially changed from those described in the Company’s definitive proxy materials for the 2013 Annual Meeting of Stockholders held on December 12, 2013.
Audit Committee
The information required by Items 407(d)(4) and 407(d)(5) of Regulation S-K regarding the Audit Committee and the Audit Committee financial expert is incorporated herein by reference from the disclosure to be included under the caption “Audit Committee” in the Company’s 2014 Proxy Statement.
 
ITEM 11.
EXECUTIVE COMPENSATION

The information required by Item 402 of Regulation S-K is incorporated herein by reference from the disclosure to be included under the captions “Compensation Discussion and Analysis” and “Compensation Tables” in the Company’s 2014 Proxy Statement.
The information required by Item 407(e)(4) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the captions “Compensation Committee Interlocks and Insider Participation” in the Company’s 2014 Proxy Statement.
The information required by Item 407(e)(5) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption “The Compensation Committee Report” in the Company’s 2014 Proxy Statement.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 403 of Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption “Security Ownership of Management and Certain Beneficial Owners” in the Company’s 2014 Proxy Statement.
The information by Item 201(d) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption “Equity Compensation Plan Information” in the Company’s 2014 Proxy Statement. 

85



ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 404 of Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption “Certain Relationships and Related Transactions” in the Company’s 2014 Proxy Statement.
The information required by Item 407(a) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption “Director Independence” in the Company’s 2014 Proxy Statement.
 
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item 14 is incorporated herein by reference from the disclosure to be included under the captions “Fees Incurred by Independent Registered Public Accounting Firm” and “Pre-Approval of Fees” in the Company’s 2014 Proxy Statement.

86



PART IV
 
 
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this Annual Report on Form 10-K:
(1) Financial Statements: 
(2) Financial Statement Schedules: 
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3) Exhibits: 
2.1
Agreement, dated January 30, 2012, by and between Vita Polymers France SAS and ICO Europe B.V., to purchase 100 percent of the shares of Elian SAS (incorporated by reference from Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the Commission on February 2, 2012).
2.2
Agreement, dated June 3, 2014, by and among the Company and its wholly-owned subsidiary, A. Schulman Castellon, S.L.U., and Ferro Corporation and its wholly-owned subsidiary, Ferro Spain, S.A. (filed herewith)

3.1
Amended and Restated Certificate of Incorporation of the Company (for purposes of Commission reporting compliance only) (incorporated by reference from Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2009).
3.2
Amended and Restated By-laws of A. Schulman (incorporated by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Commission on June 27, 2011).
10.1*
A. Schulman 2002 Equity Incentive Plan (incorporated by reference from Exhibit 4(l) to the Company’s Registration Statement on Form S-8, dated January 24, 2003 (Registration No. 333-102718)).
10.2*
Form of Indemnification Agreement for all Executive Officers and Directors of A. Schulman (incorporated by reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the Commission on October 20, 2006).
10.3*
A. Schulman Second Amended and Restated Directors Deferred Units Plan (incorporated by reference from Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).
10.4*
First Amendment to Form of Indemnification Agreement for all Executive Officers and Directors of A. Schulman (incorporated by reference from Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).
10.5*
A. Schulman Amended and Restated Nonqualified Profit Sharing Plan (incorporated by reference from Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).
10.6*
First Amendment to the A. Schulman 2002 Equity Incentive Plan (incorporated by reference from Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).
10.7*
A. Schulman Amended and Restated 2006 Incentive Plan (incorporated by reference from Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008).
10.8*
A. Schulman 2006 Incentive Plan Form of Performance Share Award Agreement for Employees (incorporated by reference from Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2009).
10.9*
A. Schulman 2006 Incentive Plan Form of Time-Based and Performance-Based Cash Award Agreement for Employees in Mexico, Canada and Europe (incorporated by reference from Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2009).

87


10.10*
Non-Employee Directors’ Compensation (filed herewith)
10.11*
The Company’s 2014 Bonus Plan (incorporated by reference from the Company’s Current Report on Form 8-K filed with the Commission on October 17, 2013).
10.12*
A. Schulman, Inc. 2010 Value Creation Rewards Plan (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 10, 2010).
10.13*
Form of 2012 Time-Based Restricted Stock Award Agreement for Employees (incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2012).
10.14*
Form of 2012 Time-Based Restricted Stock Unit Award Agreement for Foreign Employees (incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2012).
10.15*
Form of 2012 Whole Share Award Agreement for Non-Employee Directors (incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2012).
10.16*
Form of 2012 Performance Share Award Agreement (ROIC) for Employees (incorporated by reference from Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2012).
10.17*
Form of 2012 Performance Share Award Agreement (TSR) for Employees (incorporated by reference from Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2012).
10.18*
Form of 2012 Performance Unit Award Agreement (ROIC) for Foreign Employees (incorporated by reference from Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2012).
10.19*
Form of 2012 Performance Unit Award Agreement (TSR) for Foreign Employees (incorporated by reference from Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2012).
10.20*
A. Schulman, Inc. Executives and Directors Stock Ownership Guidelines Compliance Program Plan (incorporated by reference from Exhibit 99.1 to the Company's Registration Statement on Form S-8 dated November 23, 2011 (Registration No. 333-178159)).
10.21*
Amended and Restated Employment Agreement, by and between A. Schulman, Inc. and Joseph M. Gingo, dated May 19, 2011 (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 23, 2011).
10.22*
Form of A. Schulman, Inc. Change-in-Control Agreement (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on May 23, 2011).
10.23*
Employment Agreement, by and between A. Schulman, Inc. and Joseph J. Levanduski, dated June 10, 2011 (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 13, 2011).
10.24
Joint Venture Agreement between A. Schulman, Inc. and National Petrochemical Industrial Company of Jeddah, Saudi Arabia dated June 9, 2012 (incorporated by reference from Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the Commission on June 12, 2012).
10.25*
Form of 2013 Restricted Stock Unit Award Agreement for Foreign Employees (incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2013).
10.26*
Notice of 2013 Restricted Stock Unit Award for Foreign Employees (incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2013).
10.27*
Form of 2013 Restricted Stock Award Agreement for Employees (incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2013).
10.28*
Notice of 2013 Restricted Stock Award for Employees (incorporated by reference from Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2013).
10.29*
Form of 2013 Whole Share Award Agreement for Non-Employee Directors (incorporated by reference from Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2013).
10.30
Credit Agreement, dated September 24, 2013 by and among A. Schulman, Inc., A. Schulman International Services BVBA and A. Schulman Plastics BVBA, and JPMorgan Chase Bank, N.A., as Administrative agent and J.P. Morgan Europe Limited as Global Agent, the lenders named in the Credit Agreement. (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 27, 2013).
10.31*
Form of 2014 Restricted Stock Unit Award Agreement for Foreign Employees (incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2014).
10.32*
Form of Notice of 2014 Restricted Stock Unit Awards for Foreign Employees (incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2014).
10.33*
Form of 2014 Restricted Stock Award Agreement for Employees (incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2014).
10.34*
Form of Notice of 2014 Restricted Stock Award for Employees (incorporated by reference from Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2014).

88


10.35*
Form of Notice of 2014 Whole Share Award Agreement for Non-Employee Directors (incorporated by reference from Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2014).
11
Statement re Computation of Per Share Earnings.**
21
Subsidiaries of the Company (filed herewith).
23
Consent of Independent Registered Public Accounting Firm (filed herewith).
24
Powers of Attorney (filed herewith).
31
Certifications of Principal Executive and Principal Financial Officers pursuant to Rule 13a-14(a)/15d-14(a) (filed herewith).
32
Certifications of Principal Executive and Principal Financial Officers pursuant to 18 U.S.C. 1350 (filed herewith).
101.INS
XBRL Instance Document.***
101.SCH
XBRL Taxonomy Extension Schema Document.***
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.***
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.***
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.***
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.***

*
Management contract or compensatory plan or arrangement required to be filed as an Exhibit hereto.

**
Information required to be presented in Exhibit 11 is provided in Note 11 of the Notes to Consolidated Financial Statements under Part II, ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, of this Form 10-K in accordance with accounting rules related to accounting for earnings per share.

*** In accordance with Rule 406T of Regulation S-T, the XBRL (Extensible Business Reporting Language) information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
 
(b)
Exhibits.
See subparagraph (a)(3) above
 
(c)
Financial Statement Schedules.
See subparagraph (a)(2) above


89


A. SCHULMAN, INC.
VALUATION AND QUALIFYING ACCOUNTS
Schedule F-1
 
 
Balance at
beginning
of period
 
Charges to
cost and
expenses
 
Net
write-offs
 
Other
 
Translation
adjustment
 
Balance at
close of
period
 
(In thousands)
Valuation allowance — deferred tax assets
 
 
 
 
 
 
 
 
 
 
 
Year Ended August 31, 2014
$
23,252

 
$
(1,536
)
 
$

 
$

 
$

 
$
21,716

Year Ended August 31, 2013
$
50,478

 
$
(27,226
)
 
$

 
$

 
$

 
$
23,252

Year Ended August 31, 2012
$
60,578

 
$
(10,100
)
 
$

 
$

 
$

 
$
50,478


The reduction in the valuation allowance during the year ended August 31, 2013 includes approximately $25.5 million related to the expected utilization of foreign tax credit carryforwards against the planned fiscal 2014 foreign distribution tax liability which was also recorded at August 31, 2013. Accordingly, this reduction in the valuation allowance had no net impact on net income in the year ended August 31, 2013.


90


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
A. SCHULMAN, INC.

 
 
By:
/s/    Joseph J. Levanduski
 
 
 
Joseph J. Levanduski, Vice President, Chief Financial Officer (Signing as the Principal Financial Officer of Registrant)
 
 
 
 
Date:
October 22, 2014
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.
 
Signature
  
Title
 
Date
 
 
 
 
 
/s/    Joseph M. Gingo
  
Chairman, President and Chief Executive Officer (Director and Principal Executive Officer)
 
October 22, 2014
Joseph M. Gingo
 
 
 
 
 
 
 
 
 
/s/    Joseph J. Levanduski
  
Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
 
October 22, 2014
Joseph J. Levanduski
 
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/    Eugene R. Allspach*
  
Director
 
October 22, 2014
Eugene R. Allspach
 
 
 
 
 
 
 
 
 
/s/    Gregory T. Barmore*
  
Director
 
October 22, 2014
Gregory T. Barmore
 
 
 
 
 
 
 
 
 
/s/    David G. Birney*
  
Director
 
October 22, 2014
David G. Birney
 
 
 
 
 
 
 
 
 
/s/    Howard R. Curd*
  
Director
 
October 22, 2014
Howard R. Curd
 
 
 
 
 
 
 
 
 
/s/    Michael A. McManus, Jr.*
  
Director
 
October 22, 2014
Michael A. McManus, Jr.
 
 
 
 
 
 
 
 
 
/s/    Lee D. Meyer*
  
Director
 
October 22, 2014
Lee D. Meyer
 
 
 
 
 
 
 
 
 
/s/    James A. Mitarotonda*
  
Director
 
October 22, 2014
James A. Mitarotonda
 
 
 
 
 
 
 
 
 
/s/    Ernest J. Novak, Jr.*
  
Director
 
October 22, 2014
Ernest J. Novak, Jr.
 
 
 
 
 
 
 
 
 
/s/    Dr. Irvin D. Reid*
  
Director
 
October 22, 2014
Dr. Irvin D. Reid
 
 
 
 
 
 
 
 
 
/s/    John B. Yasinsky*
  
Director
 
October 22, 2014
John B. Yasinsky
 
 
 
 


91


*
The undersigned, by signing his name hereto, does hereby sign and execute this Annual Report on Form 10-K on behalf of each of the indicated directors pursuant to a Power of Attorney executed by each such director and filed with this Annual Report on Form 10-K.
 
*By:
/s/    Joseph M. Gingo
 
Joseph M. Gingo
Attorney-in-Fact
October 22, 2014

92