Annual Report



 

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, 2016
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)
I ndicate 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 29, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $693,000,000 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 29,441,860 shares of common stock, $1.00 par value, at October 21, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
Document
Part of Form 10-K
In Which  Incorporated
Portions of the registrant’s proxy statement for the 2016 Annual Meeting of Stockholders
III

 



TABLE OF CONTENTS
 
PART I
 
PART II
 
PART III
 
PART IV

 


Table of Contents

PART    I

ITEM 1.
BUSINESS

Introduction

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 underserved 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 an international supplier of high-performance plastic formulations, 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 are aimed to provide for a more specialized portfolio while strengthening the Company's core businesses serving customers across a broader set of markets.

The Company leverages the following competitive advantages to develop and maintain strong customer relationships and drive continued profitable growth:
 
The Company's sales, marketing and technical teams partner with customers to understand needs and provide tailored solutions that enhance their 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 five global Innovation and Collaboration Centers located in Belgium, Germany, Mexico and two in 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 has 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 and Collaboration 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, sourcing 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 proud history of consistently supplying products of the highest standards, which is evidenced by the Company's numerous certifications, accreditations and 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 reportable segments: Europe, Middle East and Africa (“EMEA”), United States & Canada ("USCAN"), Latin America ("LATAM"), Asia Pacific (“APAC”), and Engineered Composites ("EC").

The CODM uses net sales to unaffiliated customers, segment gross profit, and segment operating income in order to make decisions, assess performance and allocate resources to each segment. Segment operating income does not include items such as restructuring and related costs including accelerated depreciation, asset impairments, or costs and inventory step-up charges related

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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, which are not allocated to the segments.

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.

Business Transactions

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.

On June 1, 2015, the Company acquired all of the issued and outstanding shares of HGGC Citadel Plastics Holdings, Inc. ("Citadel"), a privately held portfolio company of certain private equity firms, for approximately $801.6 million. Citadel is a plastics materials science business that produces Engineered Composites and Engineered Plastics for specialty product applications spanning multiple industries including transportation, industrial & construction, consumer, electrical, energy and healthcare & safety. The acquisition expanded the Company's presence substantially, especially in the North America Engineered Plastics markets as well as balancing the global geographic footprint and gave the Company a second growth platform with its industry-leading, added-value specialty Engineered Composites business. The acquisition enhanced the Company's existing portfolio and presented attractive expansion opportunities in other fast-growing sectors such as aerospace, medical, LED lighting and oil & gas.
 
Product Families

Globally, the Company operates in six product families: (1) Custom Performance Colors, (2) Engineered Composites, (3) Masterbatch Solutions, (4) Engineered Plastics, (5) Specialty Powders and (6) Distribution Services.

Custom Performance Colors

Custom Performance Colors ("CPC") offers powdered, pelletized, and liquid color concentrates that are 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 2016 , the CPC product family provided 7% of the Company's consolidated net sales.

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 are a trusted source for many of the world’s largest consumer products companies,

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providing aesthetic solutions for a wide range of bottles, containers, caps and closures providing a consistent brand identity for them.

Engineered Composites

Engineered Composites are comprised of highly filled compounds which include thermoset bulk molding compounds ("BMC"), sheet molding compounds ("SMC"), thick molding compounds ("TMC"), and high performance "Quantum" Engineered Structural Composites ("ESC") solutions for multi-national original equipment manufacturers and custom molders that use these products in injection and compression molding processes. Additionally, Engineered Composites include vertically integrated molding and value-added post molding services. The Company first began supplying Engineered Composites on a global basis through its acquisition of Citadel in June 2015. During fiscal 2016 , the Engineered Composites product family provided 8% of the Company's consolidated net sales.

Engineered Composites products primarily serve customers in the mobility, industrial, building & construction, sports & leisure, consumer, electrical, energy & safety industries where their high strength-to-weight ratio, dimensional stability, chemical resistance and high temperature performance is required. Engineered Composites product offering also include carbon fiber compounds; chopped and continuous “Forged Preg” materials used by customers seeking to make their products lighter and stronger such as in automotive and aerospace. Additional features of the Company’s Engineered Composites products include qualities such as thermal and electrical conductivity, impact resistance, corrosion resistance and design flexibility.

The Company supplies Engineered Composites products to its customers through its global network of nine manufacturing facilities including an Innovation and Collaboration Center in Bay City, Michigan. Using a partnership approach with its customers, the Engineered Composites segment provides tailored solutions that enable its customers to maintain a competitive advantage in the markets in which they operate. Engineered Composites products are utilized in a wide range of applications such as automotive forward lighting, engine covers, roof bows, aircraft interior stow bins, electrical circuit breakers, oil and gas downhole fracking tool components, drain pans for HVAC units and heavy trucks, as well as heavy machinery structural parts.

Masterbatch Solutions

Masterbatches, which are also referred to as concentrates, are often the key ingredient in a successful application product formula. Masterbatches 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 2016 , the Masterbatch Solutions product family provided 28 % 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 Solutions 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 and Collaboration Centers are strategically positioned around the world to ensure that the Company meets the local and regional needs of its customers.

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, calcium carbonate concentrates and carbon black, among others;
Additive solutions to enhance performance such as antibacterial, flame retardants, ultra-violet (“UV”), anti-fog, 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 valued for their performance and cost benefits, and are commonly used in biaxially oriented films, biaxially oriented polypropylene, and biaxially oriented polyethylene terephthalate 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 which increases yields and reduces waste.


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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.

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 2016 , the Engineered Plastics product family provided 36 % 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 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 and Collaboration 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 services and material sales for applications such as rotational molding, oil and gas, sports and leisure, and other markets. During fiscal 2016 , the Specialty Powders product family provided 10 % 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 rotational molding markets include compounded resin powders for applications such as gas and storage tanks, high-end recreation and sport coolers, kayaks, playground slides, and other large applications.


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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.

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 2016 , the Distribution Services product family provided 11 % of the Company's consolidated net sales.

The Company 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, which is consolidated by A. Schulman, Inc. 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. ("Surplast"), 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. This venture is consolidated by A. Schulman, Inc.

Bulk Molding Compounds, Inc. ("BMCI") is a wholly-owned subsidiary acquired in conjunction with the Citadel acquisition. BMCI previously entered into a joint venture agreement with EMEI Industrial Limited in which each company owns a 50% interest in the joint venture, BMC Far East LTD, which is located in China. The joint venture manufactures and sells BMC products in the Asia Pacific region and is not consolidated by A. Schulman, Inc.

On June 11, 2012, A. Schulman International, Inc. entered into a 50-50 joint venture with National Petrochemical Industrial Company ("NATPET") of Jeddah, Saudi Arabia, a subsidiary of Alujain Corporation, a Saudi Stock Exchange listed company to form Natpet Schulman Specialty Plastic Compounds Co, which is not consolidated by A. Schulman, Inc. The venture will produce and globally sell polypropylene compounds from a compounding plant which is being built in Yanbu, Saudi Arabia. The venture is expected to be operational in late fiscal 2017.

On September 6, 2013, A. Schulman Plastics Malaysia and SCG Chemicals Company, Ltd. formed a venture, SCG ICO Polymers Co., Ltd. in which A. Schulman owns a 13% interest. This venture is not consolidated by A. Schulman, Inc. The venture was formed in Thailand to manufacture rotomolding powders and rotomolding compound granules and market and sell these products in the Asia Pacific region.

Employee Information

As of August 31, 2016 , the Company had approximately 4,800 employees. Approximately 30% of the Company’s employees are represented by various unions under collective bargaining agreements, primarily outside of the United States.


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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 $19.8 million , $17.8 million , and $16.9 million in fiscal years 2016 , 2015 , and 2014 , 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 Company continues to invest in research and development activities as management believes it is important to the future of the Company.

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 five global Innovation and Collaboration Centers located in Belgium, Germany, Mexico and two in 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 application development centers located within nearly all of 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 valued as an 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 its 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, 2016 , 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 changes in the price of raw materials and energy costs could adversely affect operating results and financial condition, of this Annual Report on Form 10-K.


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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 and molders. 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.

Management believes 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. In addition, the Engineered Composites business mainly competes with other merchants participating in the compounding step of the composites value chain.

Management believes 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 balanced 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, 2016 appears in Note 14 of the Company's audited 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 71; Chairman, President and Chief Executive Officer of the Company since August 2016. Previously, Mr. Gingo served as Chairman since 2008, and President and Chief Executive Officer from 2008 to 2014. Prior to 2008, 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.


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Joseph J. Levanduski: Age 54;     Executive Vice President and Chief Financial Officer of the Company since June 2011. Mr. Levanduski also served as Chief Accounting Officer of the Company from July 2013 until April 2015 and Treasurer from June 2011 until April 2013. Previously, Mr. Levanduski was with Hawk Corporation, a supplier of friction materials and motorsports components, for approximately 15 years, where he held various financial roles before becoming Senior Vice President and Chief Financial Officer. Effective October 31, 2016, Mr. Levanduski will step down as Executive Vice President and Chief Financial Officer and leave the Company.

Gary A. Miller: Age 70; Executive Vice President, Chief Operating Officer of the Company since August 2016. Prior to that, Mr. Miller served as the Company's Global Supply Chain and Chief Procurement Officer since April 2008. Previously, Mr. Miller served as Vice President and Chief Procurement Officer for The Goodyear Tire & Rubber Company, a global tire manufacturing company, since 1992.

Derek R. Bristow: Age 56; Senior Vice President and General Manager – APAC since May 2010. Mr. Bristow formerly was President – Europe of 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.

Andreas K. Günther: Age 53; Executive Vice President and Chief Human Resources Officer since July 2016. Mr. Günther joined A. Schulman in 2011 as its Human Resources Director EMEA. Most recently, he served as Human Resources Director Americas and Vice President of Global Human Resources Operations since 2014. He has more than 20 years of experience in human resources, having held positions for the European operations of several major companies, including W.R. Grace & Co., Hydro Aluminum Metal Products, Delphi Automotive Systems, and Ford of Germany.

Andrean R. Horton: Age 42; Executive Vice President and Chief Legal Officer since September 2016. Ms. Horton joined A. Schulman in 2010 as its Senior Corporate Counsel, Americas. Ms. Horton was promoted to Senior Corporate Counsel, USCAN and LATAM and Assistant Secretary in April 2015 and to Vice President, Secretary and Assistant General Counsel in April 2016.

Heinrich Lingnau: Age 54; Senior Vice President and General Manager – EMEA since April 2013. Previously, Mr. Lingnau was the regional business leader for the Masterbatch Solutions product family and he has held various management-level positions with the Company's EMEA operations since 1999.

Timothy J. McDannold: Age 54; Vice President, 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, an integrated self-service solutions, security systems and services corporation, since 1988.

Gustavo S. Perez: Age 52; Senior Vice President and General Manager – LATAM since July 2014. Mr. Perez was Vice President and General Manager – Americas from July 2010 to June 2013. Mr. Perez previously served as the General Manager of Masterbatch Solutions for the Company’s North America operations and has been with the Company since 1995, serving in a variety of management positions.

John W. Richardson: Age 71; Executive Vice President – Finance since October 2016. Mr. Richardson most recently served as Chief Financial Officer at Qwest Communications International in 2008, having joined the company in 2003 as Senior Vice President & Controller and also serving as Chief Accounting Officer. Mr. Richardson had previously served in progressively senior financial roles at Goodyear Tire & Rubber Company, including Vice President - Corporate Finance and Chief Accounting Officer, and as Chairman and General Manager of the company's British subsidiary, spanning a 35-year career at Goodyear. Mr. Richardson is to succeed Joseph J. Levanduski as the Company's Chief Financial Officer in November 2016.

Frank Roederer: Age 42; Senior Vice President and General Manager of the Company’s United States and Canada (“USCAN”) business since August 2016 and General Manager of the Global Engineered Composites (“EC”) business since November 2015. Mr. Roederer has held various global positions of increasing responsibility since being named the Company’s Specialty Powders business unit leader in 2013.

Rainer R. Schewe: Age 53; Executive Vice President and Chief Supply Chain Officer. Mr. Schewe oversees all of the Company’s procurement, manufacturing and supply chain functions around the world. A 25-year veteran of A. Schulman, Mr. Schewe served the Company in a variety of roles including product development, manufacturing, and operations. Most recently he served as Vice President, Custom Performance Colors in EMEA and oversaw the Company’s operations in Germany and Austria. Mr. Schewe joined the Company as an engineer in the analytical laboratory in Kerpen, Germany.


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Stacy R. Walter: Age 54; Executive Vice President, Internal Audit of the Company since April 2013. Ms. Walter has served as the Director of Internal Audit for the Company from June 2006 until April 2013 and Sarbanes-Oxley Audit Manager from 2005 until 2006.

Kristopher R. Westbrooks: Age 38; Vice President, Chief Accounting Officer and Corporate Controller of the Company since April 2015. Mr. Westbrooks served as the Corporate Controller of the Company from July 2013 to April 1, 2015. Mr. Westbrooks served as Senior Manager – Global Corporate Controlling & Reporting of the company from March 2013 until July 2013 and Assistant Corporate Controller from May 2011 until March 2013. Previously Mr. Westbrooks served as Global Accounting Consultation Manager and Senior Financial Analyst for The Procter & Gamble Company, a multinational manufacturer of consumer goods, from April 2009 until May 2011.

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.
Risks Relating to Economic and Market Conditions
Our sales, profitability, operating results and cash flows are sensitive to global, regional, or industry 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, regional, or industry economic conditions. Deterioration in our customers’ financial position can adversely affect our sales and profitability. Historically, downturns in general, regional, or industry economic conditions have resulted in diminished product demand, excess manufacturing capacity and lower average selling prices, either generally or within a certain region or industry, as the case may be, 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 or significant changes in conditions pertaining to a certain region or industry, 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, such as the oil and gas industry, even during periods of generally 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 mobility, oil and gas, appliances and construction. Economic challenges which more significantly affect such particular industries may directly reduce demand for our products by customers within such industries. Financial difficulties or significant production slowdowns 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. Similarly, financial difficulties or significant production slowdowns by

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major upstream producers who use our products or have customers that use their products, could directly affect their ability to pay and have a cascading effect on the Company.
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 changes in the price of raw materials and energy costs could adversely affect operating results and financial condition.
We purchase various plastic resins to produce our proprietary plastic formulations. 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.
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.

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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 significant portion 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;
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.
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, which we refer to as the 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

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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. Failure of counterparties to perform under the terms and conditions of contractual arrangements may adversely affect our business.
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, which can be substantial in our Engineered Composites and Engineered Plastics businesses, and the growth prospects and overall demand for our products will be adversely affected.

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An impairment of goodwill and other assets 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. As of August 31, 2016 , our goodwill balance was $257.8 million after recognition of an impairment charge of $360.7 million during fiscal 2016. Any determination requiring the write-off of a significant portion of goodwill could negatively impact the Company’s results of operations.
Additionally, we review our long-lived assets, including intangible assets, for impairment when circumstances indicate the carrying value of an asset group may not be recoverable. During the fourth quarter of 2016, we recognized an impairment charge of $41.0 million related to our long-lived assets. Identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating results, competition, and general economic conditions, requires significant judgment. Any determination requiring the write-off of a significant portion of long-lived assets could negatively impact the Company's results of operations.
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 30% of our employees are represented by labor unions primarily outside of the United States. 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 also face the challenge of supporting our older systems and implementing upgrades when necessary. We continually review our global information system options to help strengthen common business practices, improve operational efficiency, reduce risk and drive cost savings.
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. Any system failure, accident or security breach involving our IT systems could result in disruptions to our operations. Theft of sensitive data and our inability to protect trade secrets and personal identifiable information of our employees, customers or suppliers 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.

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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 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.
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. 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, Divestitures and Other Transactions
We may experience difficulties in integrating acquired businesses, or acquisitions may not perform as expected.
During the past several fiscal years, we have acquired multiple businesses, including most recently Citadel, 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. Potential difficulties we may encounter as part of the integration process include the following:
employees 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;
differences in business backgrounds, corporate cultures and management philosophies;
the ability to create and enforce uniform standards, controls, procedures, policies and information systems;
potential unknown liabilities and unforeseen increased expenses or delays associated with the acquisition;
integration may be more costly or more time consuming and complex or simply less effective than anticipated;
we may discover previously undetected operational or other issues, such as fraud; and

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the acquired operations may not otherwise perform as expected or provide expected results.
Any of these factors could adversely affect each company’s ability to maintain relationships with customers, suppliers, employees and other constituencies or our ability to achieve the anticipated benefits of the acquisition or could reduce each company’s earnings or otherwise adversely affect our business and financial results after the acquisition.
We may fail to realize all of the anticipated benefits of acquisitions or divestitures, 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. 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.
From time to time, we may divest certain businesses, product lines or assets, both acquired or otherwise, that are no longer strategically important, or we may exit minority investments, which could materially affect our cash flows and results of operations. If we decide to divest a business, product line or assets, we may encounter difficulty in finding or completing divestiture opportunities or alternative exit strategies on acceptable terms or in a timely manner. These circumstances could delay the achievement of our strategic objectives or cause us to incur additional expenses with respect to the business, product line or assets that we want to dispose of, or we may dispose of the business, product line or assets at a price or on terms that are less favorable than we had anticipated.
We may experience difficulties in completing intended acquisitions, divestitures, and new ventures, particularly those in foreign jurisdictions.
We may acquire other businesses, divest certain 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, divestitures and ventures within our anticipated time frames which are difficult to predict, particularly in foreign jurisdictions. If such acquisitions, divestitures 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.
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.

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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. For example, recent broad proposals for reform of longstanding corporate tax principles, including proposals included in the Base Erosion and Profit Shifting project being undertaken by the Organisation for Economic Co-operation and Development, if finalized and adopted, could materially affect our global tax rate and result in increased compliance.
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 have identified material weaknesses in our internal controls over financial reporting that, if not properly corrected, could have a material adverse effect on our operations and result in material misstatements in our financial statements.
As described in "Item 9A. Controls and Procedures", we have concluded that our internal control over financial reporting was ineffective as of August 31, 2016 because material weaknesses existed in our information technology applications at certain of our acquired Citadel locations and our European shared service center, specifically related to segregation of duties and certain controls not operating effectively within the procure to pay and revenue processes. If we are unable to remediate our material weaknesses in a timely manner, we may be unable to provide holders of our securities with the required financial information in a timely and reliable manner and we may incorrectly report financial information, which could have a material adverse effect on our operations, investor, supplier and customer confidence in our reported financial information and/or the trading price of our common stock.
We may be required to adopt accounting or financial reporting standards and the ultimate adoption of such standards could negatively impact our business, financial condition or results of operations.
We will 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 impact our business, financial condition or results of operations.
Risks Relating to Our Debt
Our current debt position could adversely affect our financial health and prevent us from fulfilling our financial obligations.
After completing the Citadel acquisition in fiscal 2015, the Company has significant debt service obligations. As of August 31, 2016 , the Company has outstanding debt of $955.0 million . Our current debt position could have significant consequences. For example, it could:

make it more difficult for us to satisfy our debt obligations;
increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations, because a portion of our borrowings will be at variable rates of interest;
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, joint ventures and investments and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the product categories in which we participate;

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limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants in our debt agreements;
place us at a competitive disadvantage compared to our competitors that have less debt; and limit our ability to borrow additional funds.
We expect to pay current operating expenses and to pay principal and interest on current and future debt obligations 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 of both common and convertible special stock, sell material assets or operations, obtain additional capital or restructure our debt.

Despite our intentions to reduce debt, we may still be required to incur additional debt. Incurring more debt could increase the risks associated with our current financial position.
We and our subsidiaries may be able to incur substantial additional debt in the future if a financing need arises and other forms of funding, such as equity, are not available to the Company. The terms of the indenture and the credit agreement will restrict, but will not completely prohibit, us from doing so. As of August 31, 2016 , the Company has $279.1 million of undrawn availability under the revolving credit facility, all of which would be secured debt. In addition, the indenture will allow us to issue additional notes under certain circumstances, which will also be guaranteed by the guarantors. The indenture will also allow us to incur certain other additional secured debt. The indenture will allow our non-guarantor subsidiaries, which will include our foreign subsidiaries, to incur additional debt, which debt (as well as other liabilities at any such subsidiary) would be structurally senior to the notes. In addition, the indenture will not prevent us from incurring certain other liabilities that do not constitute indebtedness (as defined in the indenture). If debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.

If we default under the senior secured credit facility or the senior notes, we may not be able to service our debt obligations.
In the event of a default under the senior secured credit facility, the lenders under these facilities could elect to declare all amounts borrowed, together with accrued and unpaid interest and other fees, to be due and payable. If such acceleration occurs, thereby permitting an acceleration of amounts outstanding under the notes, we may not be able to repay the amounts due under the senior secured credit facility, or the notes. This could have serious consequences to the holders of the notes and to our financial condition and results of operations, and could cause us to become bankrupt or insolvent.

We may not be able to generate sufficient cash to service all of our debt, including the notes, and may be forced to take other actions to satisfy our obligations under our debt, which may not be successful.
As of August 31, 2016 , the Company has cash and cash equivalents of $35.3 million . In addition, we have access to a revolving credit facility of $300.0 million , with $279.1 million available as of August 31, 2016 . Our ability to make scheduled payments on or to refinance our debt obligations, including the notes, and to fund working capital, planned capital expenditures and expansion efforts and any strategic alliances or acquisitions we may make in the future depends on our ability to generate cash in the future and our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our debt, including the notes.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our debt, including the notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds sought from them, and these proceeds may not be adequate to meet any debt service obligations then due. Additionally, the agreements governing the term loans, the revolving credit facility and the indenture will limit the use of the proceeds from any disposition; as a result, we may not be allowed, under these documents, to use proceeds from such dispositions to satisfy our debt service obligations. Further, we may need to refinance all or a portion of our debt on or before maturity, and we cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms or at all.

19


We could incur additional interest expense if we are not able to register our $375 million aggregate principal amount of 6.875% Senior Notes due 2023 in a timely manner.
On May 26, 2015, the Company issued $375.0 million aggregate principal amount of 6.875% Senior Notes due 2023 (the “Notes”). The Notes were sold on May 26, 2015 in a private transaction exempt from the registration requirements of the Securities Act of 1933 (the "Securities Act") for 540 days from issuance. If the Notes have not been registered by the 540th day, the Company will incur additional interest expense in the amount of 0.25% per annum during the 90-day period immediately following the occurrence of any Registration Default. Additional interest expense shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall the aggregate increase in such annual interest rate exceed 1.00%. As of August 31, 2016, the Notes had not been registered under the Securities Act. The Company expects to file for registration shortly after the filing of the 10-K.

ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
None.

20



ITEM 2.
PROPERTIES

The following table indicates the location of each of the Company’s 54 manufacturing facilities, the projected annual manufacturing capacity for fiscal 2017 and approximate floor area, including warehouse and office space and the segment that is principally supported by such plants as of August 31, 2016 . 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
84,800

(2)
 
182

Allentown, Pennsylvania
32,000

 
 
128

Bedford, Virginia
90,000

 
 
30

Carpentersville, Illinois
10,000

 
 
118

China, Texas
104,000

 
 
137

East Chicago, Indiana
68,000

 
 
73

Evansville, Indiana
269,300

(3)
 
434

Fontana, California
40,000

 
 
46

Franklin, Tennessee
6,100

 
 
56

Geulph, Canada
15,700

 
 
75

Grand Junction, Tennessee
20,000

 
 
88

Houston, Texas
44,400

 
 
70

La Porte, Texas
230,000

 
 
252

North Canton, Ohio
4,800

 
 
48

Plymouth, Indiana
6,000

 
 
44

Worcester, Massachusetts
27,000

 
 
192

Total USCAN Segment
1,052,100

 
 
1,973

Buenos Aires, Argentina
19,200

 
 
39

San Luis Potosi, Mexico
103,300

 
 
187

Sumare, Brazil
51,600

 
 
122

Total LATAM Segment
174,100

 
 
348

Astorp, Sweden
7,100

 
 
27

Bellignat, France
13,900

 
 
70

Bornem, Belgium
133,800

 
 
455

Budapest, Hungary
1,100

 
 
45

Castellon, Spain
37,500

 
 
111

Crumlin Gwent, South Wales, United Kingdom
25,400

 
 
106

Gainsborough, United Kingdom
60,600

 
 
68

Givet, France
282,200

 
 
241

Gorla Maggiore, Italy
51,600

 
 
166

Kerpen, Germany
152,100

 
 
445

Opglabbeek, Belgium
5,500

 
 
34

Plock, Poland
5,700

 
 
49

s-Gravendeel, The Netherlands
90,400

 
 
172

Saint Germain Laval, France
57,300

 
 
76

Savigny, France
8,800

 
 
27

Warrington, United Kingdom
37,800

 
 
67

Total EMEA Segment
970,800

 
 
2,159

Batu Pahat, Malaysia
38,800

 
 
62


21


Braeside, Australia
11,700

 
 
45

Changshu, China
6,600

 
 
48

East Java, Indonesia
34,400

 
 
136

Guangdong Province, China
83,800

 
 
156

Johor, Malaysia
55,100

 
 
121

Vadodara, India
31,600

 
 
488

Total APAC Segment
262,000

 
 
1,056

Bay City, Michigan
1,800

 
 
51

Geneva, Ohio
10,500

 
 
125

Hamburg, Germany
33,100

 
 
31

Juarez, Mexico
19,800

 
 
32

Mexico City, Mexico
18,200

 
 
32

North Kingsville, Ohio
75,900

 
 
288

Perrysburg, Ohio
77,500

 
 
49

Rio Claro, Brazil
29,400

 
 
69

West Chicago, Illinois
24,000

 
 
76

Total EC Segment
290,200

 
 
753

Total
2,749,200

 
 
6,289


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 2017 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.

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 two manufacturing facilities.

(3)
Evansville, Indiana includes three manufacturing facilities: one from the acquisition of the Specialty Plastics business of Ferro Corporation and two from the acquisition of Citadel.

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.

The Company excludes any plants from the projected manufacturing capacity that are idle and held-for-sale or plants that are owned by non-consolidating joint ventures or ventures.


22


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. See further discussion of legal proceedings in Note 17, Contingencies and Claims, of this Annual Report on Form 10-K

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.
 
ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

23


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.” As of October 21, 2016 , there were 511 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 21, 2016 was $28.43.
The quarterly high and low closing stock prices are presented in the table below:
 
Fiscal 2016
 
Fiscal 2015
Common stock price range
High - Low
 
High - Low
1st Quarter
$38.51 - 30.45
 
$39.05 - 29.46
2nd Quarter
$34.17 - 21.49
 
$42.96 - 33.36
3rd Quarter
$29.29 - 24.10
 
$48.40 - 40.94
4th Quarter
$30.11 - 21.17
 
$46.18 - 32.51

The quarterly cash dividends declared are presented in the tables below:
Cash dividends per share on common stock
Fiscal 2016
 
Fiscal 2015
1st Quarter
$
0.205

 
$
0.205

2nd Quarter
0.205

 
0.205

3rd Quarter
0.205

 
0.205

4th Quarter
0.205

 
0.205

Total
$
0.820

 
$
0.820


Cash dividends per share on convertible special stock
Fiscal 2016
 
Fiscal 2015
1st Quarter
$
15.00

 
$

2nd Quarter
15.00

 

3rd Quarter
15.00

 
$
14.50

4th Quarter
15.00

 
15.00

Total
$
60.00

 
$
29.50


On April 3, 2014, the Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to $55 million of its common stock in the open market or in privately negotiated transactions, subject to market and other conditions (the “Program”). Repurchases under the Program may take place over a three-year period ending April 2, 2017, when the Program is scheduled to expire. The Program may be modified, suspended or terminated by the Company at any time and replaces the Company’s previous share repurchase program, which was authorized on April 1, 2011 and expired on March 31, 2014. The Company did not repurchase any common or special stock during fiscal 2016. The Company repurchased 109,422 shares of common stock under the Program in fiscal 2015 at an average price of $30.46 per share for a total cost of $3.3 million . As of August 31, 2016 , shares valued at $51.7 million remain authorized for repurchase. As a result of the financing related to the Citadel acquisition on June 1, 2015, the Company's strategic focus shifted towards repaying debt and the Board indefinitely suspended the 10b5-1plan.

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

24


ITEM 6.
SELECTED FINANCIAL DATA
 
 
Year Ended August 31,
 
2016 (1)
 
2015 (1)
 
2014 (1)
 
2013
 
2012
 
(In thousands, except per share data)
Net sales
$
2,496,005

 
$
2,392,225

 
$
2,446,998

 
$
2,133,402

 
$
2,081,272

Cost of sales
2,095,085

 
2,031,215

 
2,116,990

 
1,852,223

 
1,802,029

Asset impairment
401,667

 

 
104

 
1,873

 
3,393

Other costs and expenses
366,532

 
335,308

 
258,292

 
226,286

 
211,041

Other income and gains
(774
)
 
(2,728
)
 
(720
)
 
(712
)
 
(2,018
)
Total costs and expenses, net
2,862,510

 
2,363,795

 
2,374,666

 
2,079,670

 
2,014,445

Income (loss) from continuing operations before taxes
(366,505
)
 
28,430

 
72,332

 
53,732

 
66,827

Provision (benefit) for U.S. and foreign income taxes
(8,640
)
 
499

 
18,542

 
19,733

 
13,918

Income (loss) from continuing operations
(357,865
)
 
27,931

 
53,790

 
33,999

 
52,909

Income (loss) from discontinued operations, net of tax
1,861

 
(133
)
 
3,202

 
(6,671
)
 
(860
)
Net income (loss)
(356,004
)
 
27,798

 
56,992

 
27,328

 
52,049

Noncontrolling interests
(1,118
)
 
(1,169
)
 
(799
)
 
(1,229
)
 
(1,162
)
Net income (loss) attributable to A. Schulman, Inc.
(357,122
)
 
26,629

 
56,193

 
26,099

 
50,887

Convertible special stock dividends
7,500

 
2,438

 

 

 

Net income (loss) available to A. Schulman, Inc. common stockholders
$
(364,622
)
 
$
24,191

 
$
56,193

 
$
26,099

 
$
50,887

 
 
 
 
 
 
 
 
 
 
Total assets
$
1,757,681

 
$
2,351,711

 
$
1,512,484

 
$
1,238,342

 
$
1,193,767

Long-term debt
$
929,591

 
$
1,045,349

 
$
339,546

 
$
207,435

 
$
174,466

Total equity
$
168,360

 
$
592,735

 
$
536,451

 
$
514,744

 
$
507,689

 
 
 
 
 
 
 
 
 
 
Weighted-average number of shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
29,300

 
29,149

 
29,061

 
29,260

 
29,389

Diluted
29,300

 
29,483

 
29,362

 
29,337

 
29,549

 
 
 
 
 
 
 
 
 
 
Basic earnings per share available to A. Schulman, Inc. common stockholders
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(12.51
)
 
$
0.83

 
$
1.82

 
$
1.12

 
$
1.76

Income (loss) from discontinued operations
0.07

 

 
0.11

 
(0.23
)
 
(0.03
)
Net income (loss) available to A. Schulman, Inc. common stockholders
$
(12.44
)
 
$
0.83

 
$
1.93

 
$
0.89

 
$
1.73

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share available to A. Schulman, Inc. common stockholders
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(12.51
)
 
$
0.83

 
$
1.80

 
$
1.12

 
$
1.75

Income (loss) from discontinued operations
0.07

 
(0.01
)
 
0.11

 
(0.23
)
 
(0.03
)
Net income (loss) available to A. Schulman, Inc. common stockholders
$
(12.44
)
 
$
0.82

 
$
1.91

 
$
0.89

 
$
1.72

 
 
 
 
 
 
 
 
 
 
Cash dividends per common share
$
0.82

 
$
0.82

 
$
0.80

 
$
0.78

 
$
0.72

Cash dividends per share of convertible special stock
$
60.00

 
$
14.50

 
$

 
$

 
$

 
(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.


25


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help investors understand our results of operations, financial condition and current business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K for the fiscal year ended August 31, 2016 .

The MD&A is organized as follows:

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

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

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

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

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

Overview

Business Summary

A. Schulman, Inc. is an international supplier of high-performance plastic formulations, resins, and services headquartered in Fairlawn, Ohio. The Company’s customers span a wide range of markets such as packaging, mobility, building & construction, electronics & electrical, agriculture, personal care & hygiene, custom services, and sports, home & leisure.

On June 1, 2015, the Company acquired HGGC Citadel Plastic Holdings, Inc. ("Citadel"), a specialty engineered plastics company that produces thermoset composites and thermoplastic compounds for specialty product applications. The thermoset composites business, or engineered composites, is unique to the Company's legacy product families. Based on the structure of the business and an evaluation of how the Chief Operating Decision Maker ("CODM") makes decisions, assesses performance and allocates resources, in fiscal 2015 the Company added a global reportable segment and product family, Engineered Composites, which has operations in the U.S., Mexico, Brazil, Germany and a joint venture in China. The thermoplastic compounds business, or engineered plastics, is similar to the Company's existing operations in the United States & Canada segment and is therefore incorporated into the Company's existing Engineered Plastics product family within the geographical United States & Canada segment.

The CODM makes decisions, assesses performance and allocates resources by the following reportable segments:

Europe, Middle East and Africa ("EMEA"),
United States & Canada ("USCAN"),
Latin America ("LATAM"),
Asia Pacific ("APAC"), and
Engineered Composites ("EC").

The Company has approximately 4,800 employees and 54 manufacturing facilities worldwide. Globally, the Company operates in six product families: (1) Custom Performance Colors, (2) Engineered Composites, (3) Masterbatch Solutions, (4) Engineered Plastics, (5) Specialty Powders and (6) Distribution Services.

26




Key Trends, Developments and Challenges

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

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

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

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

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

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

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

Continuous Improvement . The Company's Six Sigma Black Belt and Green Belt associates continue to look for ways to improve our processes and optimize our performance. We remain determined to control and manage our selling, general and administrative expenses, especially in developed markets. In fiscal 2015, the Company initiated the Manufacturing for Success program in USCAN to strengthen organizational development, cross functional activities, operational effectiveness and footprint optimization. In fiscal 2016, the Manufacturing for Success program was expanded globally.

Lucent Matter

As previously noted, on June 1, 2015, the Company completed the acquisition of Citadel and its subsidiaries from certain private equity firms for $801.6 million . In August 2015, the Company identified quality reporting issues affecting certain product lines at two manufacturing facilities located on Lynch Road in Evansville, Indiana. Both facilities are a part of Lucent Polymers, Inc. (“Lucent”), an indirect wholly-owned subsidiary of Citadel which was acquired as part of the Citadel acquisition. Specifically, the Company discovered discrepancies between laboratory data and certifications provided by Lucent to customers with respect to certain products using recycled or reclaimed raw materials. The Company also discovered inaccuracies in materials provided by Lucent employees to an independent certification organization with respect to such products.

The Company took immediate decisive actions following its initial discoveries, including implementing protocols designed so that future shipments of products meet customer specifications and customer certification requirements, entering into discussions and exploring different certification standards with customers and other third parties. The Company has notified and is working with affected customers to deliver accurate certifications with respect to products going forward. In addition, the Company has notified and is cooperating with Underwriter Laboratories to institute necessary corrective action. As a result, the Company has reformulated and rebranded its products and ceased the use of certain tradenames associated

27


with Citadel, which resulted in the write-off of certain finite-lived intangible assets during the fourth quarter of 2016. For further details, refer to Note 4, Goodwill and Other Intangible Assets, of this Annual Report on Form 10-K for additional details.

The Company also commenced an internal investigation into these matters to determine the scope of products, customers, and other parties affected. The Company’s internal investigation has revealed that the discrepancies and inaccuracies initially identified were due to practices at Lucent under its prior ownership pursuant to which Lucent falsified test results on documents provided to customers and other parties pertaining to the physical properties of certain Lucent products.

To date, no customers or other parties have initiated recalls or have made material claims against the Company. Although to date, no significant customers have terminated their relationships with the Company or its subsidiaries because of the Lucent quality matter, the matter has resulted in decreased volume and revenue, including reductions by certain significant customers.

The Company incurred the following costs related to the Lucent matter that negatively impacted the Company’s operating results for fiscal 2016:
 
Year Ended August 31, 2016
 
(In thousands)

Inventory rework, remediation actions, and investigative costs
$
5,423

Recurring additional costs to produce product to customer specifications
4,737

Total Lucent remediation costs
10,160

Litigation related costs
1,838

Total Lucent matter costs
$
11,998


As no customer or other parties have initiated recalls, or have made material claims against the Company or its subsidiaries from the date we identified this issue in August 2015 through the date of filing, we are currently unable to conclude that losses related to these matters are probable or to estimate the potential range of losses. The Company is currently unable to determine whether such issues will have any future material adverse effect on our financial position, liquidity, or results of operations.

In addition, the Company previously provided a written claim notice to the sellers and to the escrow agent with respect to the indemnity escrow established in connection with the stock purchase agreement pursuant to which the Company acquired Citadel and its subsidiaries. As of August 31, 2016 , approximately $31.0 million remained in such indemnity escrow.

As Lucent was effectively acquired by Citadel in December of 2013, the Company also submitted written claim notices pursuant to the Agreement and Plan of Merger, dated December 6, 2013, among The Matrixx Group, Incorporated, LPI Merger Sub, Inc., LPI Holding Company, River Associates Investments, LLC and certain stockholders of LPI Holding Company, pursuant to which Citadel initially acquired Lucent, and pursuant to the representations and warranties insurance policy issued in connection with that acquisition.

In June 2016, the Company filed a complaint in the Delaware Chancery Court against Citadel Plastics, as well as certain funds affiliated with the sellers and other former executives of Citadel and Lucent (the “defendants”). The complaint alleges breach of contract, indemnification, breach of the implied covenant of good faith and fair dealing, fraudulent inducement, unjust enrichment and violations of blue sky laws in Illinois, Ohio, California and Indiana. All defendants are accused of civil conspiracy. The Company is seeking rescission, damages, rescissory damages, disgorgement or any other remedy deemed proper for the alleged violations as well as seeking the costs and attorneys' fees for bringing suit.

Significant Events

The following items represent significant events during fiscal year 2016 :

1.
Global Expansion. The Company intends to expand its production and technological capabilities in Turkey and Saudi Arabia through continued progress in production facility investments, as previously announced. Additionally, in April 2016, the Company announced that it opened a new plant in Changshu, China to accommodate an increase in demand in custom performance color products.

2.
Restructuring Plans. During fiscal 2016, the Company announced restructuring actions that will further optimize its back-office and support functions as well as consolidate its manufacturing footprint. The Company expects to reduce

28


headcount by approximately 110 from its fiscal 2016 plans and realize annual savings of approximately $20.2 million from all of the restructuring plans. Additionally, the Company closed three manufacturing facilities in Evansville, Indiana and expects to close a fourth facility by the end of calendar 2016.

3.
Impairments. During the fourth quarter of fiscal 2016, the Company incurred goodwill impairment charges of $360.7 million within the USCAN EP, EC and EMEA SP reporting units and $34.5 million of intangible asset impairment charges within the USCAN and EC segments. As of August 31, 2016 , our goodwill and intangible asset balances were $257.8 million and $362.6 million , respectively.

4.
CEO Transition. On August 18, 2016, Joseph M. Gingo was appointed as the Company’s President and Chief Executive Officer, in addition to retaining his duties as Chairman of the Company's Board of Directors, succeeding Bernard Rzepka. Mr. Gingo was previously the Company's President and Chief Executive Officer from 2008 through 2014.

Results of Operations

FISCAL YEAR 2016 COMPARED WITH FISCAL YEAR 2015

The Company uses net sales to unaffiliated customers, segment gross profit and segment operating income before certain items in order to make decisions, assess performance and allocate resources to each segment. The following discussion regarding the Company’s segment gross profit and segment operating income does not include items such as interest income or expense, other income or expense, foreign currency transaction gains or losses, restructuring and related expenses including accelerated depreciation, asset impairments, or costs and inventory step-up charges related to business acquisitions. Corporate expenses include the compensation of certain personnel, certain audit expenses, Board of Directors related costs, certain insurance costs, costs associated with being a publicly traded entity and other miscellaneous legal and professional fees. For a reconciliation of segment operating income to operating income and income from continuing operations before taxes, please refer to Note 14, Segment Information, of this Annual Report on Form 10-K.
Segment Information
  
Year Ended August 31,
 
 
 
 
 
 
 
Favorable (unfavorable)
EMEA
2016
 
2015
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
1,219,294

 
1,253,239

 
(33,945
)
 
(2.7
)%
 
 
 
 
Net sales
$
1,239,963

 
$
1,339,355

 
$
(99,392
)
 
(7.4
)%
 
$
(66,477
)
 
(2.5
)%
Segment gross profit
$
178,376

 
$
189,860

 
$
(11,484
)
 
(6.0
)%
 
$
(8,398
)
 
(1.6
)%
Segment gross profit percentage
14.4
%
 
14.2
%
 
 
 
 
 
 
 
 
Segment operating income
$
76,576

 
$
78,313

 
$
(1,737
)
 
(2.2
)%
 
$
(3,142
)
 
1.8
 %
Price per pound
$
1.017

 
$
1.069

 
$
(0.052
)
 
(4.9
)%
 
$
(0.054
)
 
0.2
 %
Segment operating income per pound
$
0.063

 
$
0.062

 
$
0.001

 
1.6
 %
 
$
(0.002
)
 
4.8
 %

EMEA net sales for the year ended August 31, 2016 were $1,240.0 million , a decrease of $99.4 million compared with the prior year period. Excluding the unfavorable impact of foreign currency translation of $66.5 million , net sales decreased by 2.5% , primarily due to decreased volumes in the Distribution Services and Specialty Powders product families of 11.0% and 8.1%, respectively, as customer purchases decreased due to uncertainty in the future of petroleum-based commodity prices. This decrease was partially offset by higher volumes in the Masterbatch Solutions and Engineered Plastics product families of 2.5% and 3.1%, respectively.

EMEA gross profit was $178.4 million for the year ended August 31, 2016 . Excluding the negative impact of foreign currency translation of $8.4 million , gross profit decreased by $3.1 million or 1.6% primarily due to lower volumes, as noted above, partially offset by improved product mix.

EMEA operating income for the year ended August 31, 2016 was $76.6 million , a decrease of $1.7 million , or 2.2% , compared to the prior year. Excluding the negative impact of foreign currency translation of $3.1 million , operating income increased by $1.4 million, or 1.8% due to lower SG&A expense primarily from decreased variable compensation expense.

29


 
Year Ended August 31,
 
 
 
 
 
 
 
 
 
Favorable (unfavorable)
USCAN
2016
 
2015
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
778,100

 
644,711

 
133,389

 
20.7
 %
 
 
 
 
Net sales
$
691,369

 
$
610,493

 
$
80,876

 
13.2
 %
 
$
(1,160
)
 
13.4
 %
Segment gross profit
$
115,329

 
$
100,550

 
$
14,779

 
14.7
 %
 
$
(237
)
 
14.9
 %
Segment gross profit percentage
16.7
%
 
16.5
%
 
 
 
 
 
 
 
 
Segment operating income
$
47,062

 
$
40,713

 
$
6,349

 
15.6
 %
 
$
(234
)
 
16.2
 %
Price per pound
$
0.889

 
$
0.947

 
$
(0.058
)
 
(6.1
)%
 
$
(0.001
)
 
(6.0
)%
Segment operating income per pound
$
0.060

 
$
0.063

 
$
(0.003
)
 
(4.8
)%
 
$
(0.001
)
 
(3.2
)%

USCAN net sales for the year ended August 31, 2016 , were $691.4 million , an increase of $80.9 million or 13.2% compared with the prior year period. During the year ended August 31, 2016 , the incremental contribution of the Citadel acquisition was $171.6 million and 207.4 million pounds in net sales and volume, respectively. While Citadel provided an incremental benefit during the period, the Citadel net sales and volume decreased 16% and 14%, respectively, when compared to the same prior year period. This is due to the previously disclosed Lucent quality matter and lower demand from customers for recycled materials supplied by Citadel. The prior year period discussion for Citadel is for comparative purposes only given the Company's acquisition of Citadel on June 1, 2015.

The incremental Citadel net sales were partially offset by lower legacy volume in all product families, particularly in the Engineered Plastics, Specialty Powders and Masterbatch Solutions product families as the Company continues its focus towards a more specialty product portfolio. The agricultural equipment market within the Engineered Plastics product family experienced a decrease in customer demand due to a slowdown in the market. Additionally, due to lower oil prices, certain customers utilized internal capacity to fulfill their product requirements resulting in a decline in legacy volumes in our Masterbatch Solutions product family. Since acquiring the Citadel Engineered Plastics business, our overall sales price per pound has decreased as expected due to the nature of the acquired business which utilizes recycled materials.

USCAN gross profit was $115.3 million for the year ended August 31, 2016 , an increase of $14.8 million , or 14.7% , compared to the prior year, mostly driven by the incremental gross profit from the Citadel acquisition.

USCAN operating income for the year ended August 31, 2016 was $47.1 million compared with $40.7 million in the same period last year. Operating income increased due to the above noted increase in gross profit, partially offset by incremental SG&A expenses from the Citadel acquisition of $15.9 million , which included additional intangible asset amortization expense of $8.7 million . Excluding the Citadel acquisition, SG&A expenses decreased by $7.4 million primarily due to $4.4 million of decreased compensation expense related to the benefits of restructuring activity and $2.2 million of decreased variable incentive compensation expense.

Included in USCAN segment results for the year ended August 31, 2016 are incremental Lucent costs of $4.7 million required to produce products to meet customer specifications. Additional Lucent costs excluded from segment operating income of $7.3 million include additional product and manufacturing operational costs for reworking inventory, legal and investigative costs, and dedicated internal personnel costs that would have otherwise been focused on normal operations.



30


 
Year Ended August 31,
 
 
 
 
 
 
 
 
 
Favorable (unfavorable)
LATAM
2016
 
2015
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
144,081

 
132,021

 
12,060

 
9.1
 %
 
 
 
 
Net sales
$
171,650

 
$
177,463

 
$
(5,813
)
 
(3.3
)%
 
$
(33,098
)
 
15.4
%
Segment gross profit
$
36,886

 
$
31,971

 
$
4,915

 
15.4
 %
 
$
(5,362
)
 
32.1
%
Segment gross profit percentage
21.5
%
 
18.0
%
 
 
 
 
 
 
 
 
Segment operating income
$
20,268

 
$
13,061

 
$
7,207

 
55.2
 %
 
$
(1,964
)
 
70.2
%
Price per pound
$
1.191

 
$
1.344

 
$
(0.153
)
 
(11.4
)%
 
$
(0.230
)
 
5.7
%
Segment operating income per pound
$
0.141

 
$
0.099

 
$
0.042

 
42.4
 %
 
$
(0.013
)
 
55.6
%

LATAM net sales for the year ended August 31, 2016 were $171.7 million compared to $177.5 million in the prior year period. Excluding the unfavorable impact of foreign currency translation of $33.1 million , net sales increased by 15.4% primarily driven by strong volume growth in Masterbatch Solutions, Engineered Plastics, and Specialty Powders product families due to the Company's successful strategic focus on certain markets and export sales within the region.

LATAM gross profit was $36.9 million for the year ended August 31, 2016 , an increase of $4.9 million or 15.4% compared to the prior year. Excluding the unfavorable impact of foreign currency translation of $5.4 million , gross profit increased 32.1% compared to the prior year period, primarily due to improved product mix and operational improvements including decreased facilities' costs and labor efficiencies.

LATAM operating income for the year ended August 31, 2016 was $20.3 million compared with $13.1 million in the prior year, an increase of $7.2 million , or 55.2% . Excluding the negative impact of foreign currency translation of $2.0 million , operating income increased by $9.2 million, or 70.2% due to improved gross profit, as noted above, and decreased SG&A expenses primarily related to savings initiatives and the favorable impact of foreign currency translation of $3.4 million.
 
Year Ended August 31,
 
 
 
 
 
 
 
 
 
Favorable (unfavorable)
APAC
2016
 
2015
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
178,488

 
178,542

 
(54
)
 
 %
 
 
 
 
Net sales
$
186,911

 
$
207,781

 
$
(20,870
)
 
(10.0
)%
 
$
(16,484
)
 
(2.1
)%
Segment gross profit
$
32,293

 
$
29,238

 
$
3,055

 
10.4
 %
 
$
(1,709
)
 
16.3
 %
Segment gross profit percentage
17.3
%
 
14.1
%
 
 
 
 
 
 
 
 
Segment operating income
$
17,953

 
$
14,401

 
$
3,552

 
24.7
 %
 
$
(694
)
 
29.5
 %
Price per pound
$
1.047

 
$
1.164

 
$
(0.117
)
 
(10.1
)%
 
$
(0.093
)
 
(2.1
)%
Segment operating income per pound
$
0.101

 
$
0.081

 
$
0.020

 
24.7
 %
 
$
(0.003
)
 
28.4
 %

APAC net sales for the year ended August 31, 2016 were $186.9 million , a decrease of $20.9 million compared with the prior year. Excluding the unfavorable impact of foreign currency translation of $16.5 million , net sales decreased by 2.1% , as increased volume in Masterbatch Solutions and Custom Performance Colors was offset by reduced volume in the other product families. Sales price per pound decreased 2.1% due to product mix compared to prior year.

APAC gross profit for the year ended August 31, 2016 was $32.3 million , an increase of $3.1 million compared with the prior year. Gross profit benefited from improved product mix partially offset by negative foreign currency translation of $1.7 million .

APAC operating income for the year ended August 31, 2016 was $18.0 million compared with $14.4 million in the prior year. The increase in operating income was primarily due to the aforementioned increase in gross profit and decreased SG&A expenses primarily due to the favorable impact of foreign currency translation of $1.0 million.

31


 
Year Ended
EC
August 31, 2016
 
(In thousands, except for %’s and per pound data)
Pounds sold
175,120

Net sales
$
206,112

Segment gross profit
$
50,461

Segment gross profit percentage
24.5
%
Segment operating income
$
14,885

Price per pound
$
1.177

Segment operating income per pound
$
0.085


EC net sales for the year ended August 31, 2016 were $206.1 million , a decrease of $0.6 million over the prior year comparable period. The prior year period discussion is for comparative purposes only given the Company's acquisition of Citadel on June 1, 2015. Organic sales decreased $15.4 million primarily due to a decrease in oil and gas market sales, a decrease in organic volumes in the U.S. compound business driven by softness in our sales into the electrical and automotive markets and the negative impact of unfavorable foreign currency of $4.0 million. The organic sales decrease is partially offset by the incremental contribution of Citadel's November 2014 acquisition of The Composites Group ("TCG"), which was $14.8 million and 5.4 million pounds in net sales and volume, respectively.

EC gross profit for the year ended August 31, 2016 was $50.5 million , a decrease of $4.5 million over the prior year. Gross profit decreased primarily due to the decreased sales as noted above and the unfavorable impact of foreign currency translation of $0.8 million.

EC operating income for the year ended August 31, 2016 was $14.9 million , a decrease of $1.9 million over the prior year. The decrease in operating income was primarily due to decreased gross profit as noted above, partially offset by a decrease in organic SG&A expenses of $4.1 million primarily related to integration synergies and restructuring savings, partially offset by the incremental TCG SG&A expenses of $1.5 million.

 
Year Ended August 31,
 
 
 
 
 
 
 
 
 
Favorable (unfavorable)
Consolidated
2016
 
2015
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
2,495,083

 
2,254,595

 
240,488

 
10.7
 %
 
 
 
 
Net sales
$
2,496,005

 
$
2,392,225

 
$
103,780

 
4.3
 %
 
$
(117,200
)
 
9.2
 %
Asset impairment
$
401,667

 
$

 
$
401,667

 
N.M.

 
N.M.

 
N.M.

Operating income (loss)
$
(309,240
)
 
$
70,428

 
$
(379,668
)
 
N.M.

 
$
(5,777
)
 
N.M.

Total operating income before certain items*
$
145,947

 
$
120,704

 
$
25,243

 
20.9
 %
 
$
(6,035
)
 
25.9
 %
Price per pound
$
1.000

 
$
1.061

 
$
(0.061
)
 
(5.7
)%
 
$
(0.047
)
 
(1.3
)%
Total operating income per pound before certain items*
$
0.058

 
$
0.054

 
$
0.004

 
7.4
 %
 
$
(0.003
)
 
13.0
 %

* Total operating income before certain items, a non-GAAP measurement, represents segment operating income combined with Corporate expenses. For a reconciliation of segment operating income to operating income, refer to the table below.




32


The following table is a reconciliation of operating income before certain items to operating income (loss):
 
Year ended August 31,
 
2016
 
2015
 
(In thousands)
Operating income (loss)
$
(309,240
)
 
$
70,428

Costs related to acquisitions and integrations
8,789

 
17,208

Restructuring and related costs
27,762

 
23,411

Accelerated depreciation
6,309

 
408

CEO transition costs
3,399

 
6,167

Asset impairment
401,667

 

Lucent costs
7,261

 

Inventory step-up

 
3,082

Total operating income before certain items
$
145,947

 
$
120,704


Consolidated net sales for the year ended August 31, 2016 were $2,496.0 million compared with $2,392.2 million in the prior year. During fiscal 2016, incremental net sales and volume from the Citadel acquisition contributed $325.4 million and 337.8 million pounds, respectively. Foreign currency translation unfavorably impacted net sales for the year ended August 31, 2016 by $117.2 million .

Operating loss was $309.2 million for the year ended August 31, 2016 compared to operating income of $70.4 million in the prior year. The decrease was primarily due to asset impairments of $401.7 million . Total operating income before certain items for the year ended August 31, 2016 was $145.9 million , an increase of $25.2 million compared with the prior year period. The increase in total operating income before certain items was primarily due to the contribution from the Citadel acquisition of $18.5 million and decreased legacy SG&A expense of $21.3 million as noted below, partially offset by decreased organic gross profit of $14.6 million and the negative impact of foreign currency translation of $6.0 million .

The Company’s SG&A expenses for the year ended August 31, 2016 were $296.7 million compared to $276.2 million in the prior year. SG&A, excluding certain items, was $267.4 million, an increase of $21.9 million for the year ended August 31, 2016 compared with the prior year. The increase was primarily attributable to the incremental SG&A expense of $43.2 million from the Citadel acquisition, partially offset by decreased variable incentive compensation of $13.0 million and the favorable impact of foreign currency translation of $9.7 million. Certain items excluded from SG&A expenses consist of $29.4 million of expense related to acquisition and integration activities, restructuring and related costs, CEO transition costs and Lucent costs for the year ended August 31, 2016 , and $30.8 million of acquisition and integration activities, restructuring and related costs and CEO transition costs for the year ended August 31, 2015.

Additional consolidated results

During the fourth quarter of fiscal 2016, the Company recorded impairment charges of $401.7 million related to goodwill, intangible assets and certain software licenses that were discontinued. Goodwill impairments were recorded by the USCAN Engineered Plastics reporting unit for $166.8 million , the EC reporting unit for $177.2 million and the EMEA Specialty Powders reporting unit for $16.7 million as of June 1, 2016. The Company is not aware of any triggers which would require an additional goodwill impairment test as of August 31, 2016 . Additionally, the Company recorded intangible asset impairment of $34.5 million . The company impaired intangible assets of $7.6 million in the EC segment and $26.9 million in the USCAN segment. These intangibles were part of the Citadel acquisition and the impairment relates to discontinuing the use of certain tradename and developed technology assets. The Company also recorded impairment expense of $6.5 million during the fourth quarter of fiscal 2016 related to certain software licenses that were discontinued.

Interest expense increased $31.9 million for the year ended August 31, 2016 , as compared with the prior year as a result of higher outstanding debt related to the financing of the Citadel acquisition.

The Company experienced foreign currency transaction losses of $3.5 million and $3.4 million for the years ended August 31, 2016 and 2015 , respectively. Foreign currency losses were primarily related to the strengthening of the U.S. dollar against foreign currencies. Generally, the foreign currency transaction gains or losses relate to the changes in the value of the U.S. dollar compared with the Euro and other local currencies throughout all regions, and changes between the Euro and other non-Euro European currencies. The Company may enter into foreign exchange forward contracts to reduce the impact of changes in foreign exchange

33


rates on the consolidated statements of operations. These contracts reduce exposure to currency movements affecting the remeasurement of foreign currency denominated assets and liabilities primarily related to trade receivables and payables, as well as intercompany activities. Any gains or losses associated with these contracts, as well as the offsetting gains or losses from the underlying assets or liabilities, are recognized on the foreign currency transaction (gains) losses line in the consolidated statements of operations. There were no foreign exchange forward contracts designated as hedging instruments as of August 31, 2016 and 2015 .

Other income for the years ended August 31, 2016 and 2015 was $0.8 million and $1.4 million , respectively. In both fiscal 2016 and 2015 , there were no individually significant transactions.

Net income available to the Company’s common stockholders was a loss of $364.6 million and income of $24.2 million for the years ended August 31, 2016 and 2015 , respectively. Foreign currency translation had an unfavorable impact on net income of $1.2 million for the year ended August 31, 2016 .

Product Family

Globally, the Company operates in six product families: (1) Custom Performance Colors, (2) Engineered Composites, (3) Masterbatch Solutions, (4) Engineered Plastics, (5) Specialty Powders and (6) Distribution Services. The amount and percentage of consolidated net sales for these product families are as follows:

 
Year Ended August 31,
 
2016
 
2015
 
(In thousands, except for %’s)
Custom Performance Colors
$
181,738

 
7
%
 
$
191,453

 
8
%
Engineered Composites
206,112

 
8

 
57,133

 
2

Masterbatch Solutions
700,939

 
28

 
741,354

 
31

Engineered Plastics
886,573

 
36

 
787,258

 
33

Specialty Powders
258,137

 
10

 
294,228

 
12

Distribution Services
262,506

 
11

 
320,799

 
14

Total consolidated net sales
$
2,496,005

 
100
%
 
$
2,392,225

 
100
%

Capacity

The Company’s practical capacity is not based on a theoretical 24-hour, seven-day operation, rather it is determined as the production level at which the manufacturing facilities can operate with an acceptable degree of efficiency, taking into consideration factors such as longer term customer demand, permanent staffing levels, operating shifts, holidays, scheduled maintenance and mix of product. Capacity utilization is calculated by dividing actual production pounds by practical capacity at each plant. A comparison of capacity utilization levels is as follows:
 
Year ended August 31,
 
2016
 
2015
EMEA
81
%
 
87
%
USCAN
66
%
 
66
%
LATAM
70
%
 
73
%
APAC
67
%
 
64
%
EC
69
%
 
72
%
Worldwide
72
%
 
75
%


34


Restructuring

Consolidated Restructuring Summary

The following table summarizes the activity related to the Company’s restructuring plans:
 
Employee-related Costs
 
Other Costs
 
Translation Effect
 
Total Restructuring Costs
 
(In thousands)
Accrual balance as of August 31, 2014
$
1,745

 
$
371

 
$
(304
)
 
$
1,812

Fiscal 2015 charges
12,711

 
1,627

 

 
14,338

Fiscal 2015 payments
(8,670
)
 
(1,537
)
 

 
(10,207
)
Translation

 

 
(560
)
 
(560
)
Accrual balance as of August 31, 2015
$
5,786

 
$
461

 
$
(864
)
 
$
5,383

Fiscal 2016 charges
9,009

 
2,759

 

 
11,768

Fiscal 2016 payments
(10,343
)
 
(2,818
)
 

 
(13,161
)
Translation

 

 
(46
)
 
(46
)
Accrual balance as of August 31, 2016
$
4,452

 
$
402

 
$
(910
)
 
$
3,944


Refer to Note 16, Restructuring, of this Annual Report on Form 10-K for further details regarding the Company's restructuring activities. The Company expects to reduce headcount by approximately 110 from its fiscal 2016 plans and realize annual savings of approximately $20.2 million from all of the restructuring plans.

Income Tax

A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates is as follows:
 
Year Ended August 31,
 
2016
 
2015
 
(In thousands, except for %’s)
U.S. statutory federal income tax rate
$
(128,277
)
 
35.0
 %
 
$
9,951

 
35.0
 %
Foreign rate differential
10,069

 
(2.7
)
 
(692
)
 
(2.4
)
Foreign losses with no tax benefit
1,866

 
(0.5
)
 
3,956

 
14.0

U.S. non-deductible transaction costs

 

 
1,349

 
4.7

Valuation allowance charges (reversals)
863

 
(0.2
)
 
(12,279
)
 
(43.2
)
Non-deductible goodwill impairment
106,503

 
(29.1
)
 

 

Establishment (resolution) of uncertain tax positions
482

 
(0.1
)
 
(1,030
)
 
(3.6
)
Other
(146
)
 

 
(756
)
 
(2.7
)
Provision (benefit) for U.S. and foreign income taxes
$
(8,640
)
 
2.4
 %
 
$
499

 
1.8
 %

The effective tax rate for the year ended August 31, 2016 was less than the U.S. statutory federal income tax rate primarily because of goodwill impairment with no tax benefit.

The effective tax rate for the year ended August 31, 2015 was less than the U.S. statutory federal income tax rate primarily because of the reversal of the valuation allowances associated with certain U.S. deferred tax assets. The favorable effect of the valuation allowance reversal was partially offset by foreign losses with no tax benefit and non-deductible transaction costs.


35


FISCAL YEAR 2015 COMPARED WITH FISCAL YEAR 2014

Segment Information
 
Year Ended August 31,
 
 
 
 
 
 
 
Favorable (unfavorable)
EMEA
2015
 
2014
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
1,253,239

 
1,262,027

 
(8,788
)
 
(0.7
)%
 
 
 
 
Net sales
$
1,339,355

 
$
1,577,867

 
$
(238,512
)
 
(15.1
)%
 
$
(216,999
)
 
(1.4
)%
Segment gross profit
$
189,860

 
$
206,268

 
$
(16,408
)
 
(8.0
)%
 
$
(29,182
)
 
6.2
 %
Segment gross profit percentage
14.2
%
 
13.1
%
 
 
 
 
 
 
 
 
Segment operating income
$
78,313

 
$
80,690

 
$
(2,377
)
 
(2.9
)%
 
$
(11,405
)
 
11.2
 %
Price per pound
$
1.069

 
$
1.250

 
$
(0.181
)
 
(14.5
)%
 
$
(0.173
)
 
(0.6
)%
Segment operating income per pound
$
0.062

 
$
0.064

 
$
(0.002
)
 
(3.1
)%
 
$
(0.010
)
 
12.5
 %

EMEA net sales for the year ended August 31, 2015 were $1,339.4 million compared with $1,577.9 million in the prior year. Excluding the unfavorable impact of foreign currency translation of $217.0 million , net sales declined by 1.4%. Increased organic volume in the Masterbatch Solutions product family, was more than offset by lower organic volumes across all remaining product families. The incremental contribution of the Specialty Plastics acquisition in EMEA was $35.8 million and 27.3 million pounds in net sales and volume, respectively.

EMEA gross profit was $189.9 million for the year ended August 31, 2015. Excluding the negative impact of foreign currency translation of $29.2 million , gross profit increased by $12.8 million or 6.2% primarily due to restructuring savings of $1.7 million, favorable raw material pricing, and the incremental contribution of the Specialty Plastics acquisition.

EMEA operating income for the year ended August 31, 2015 was $78.3 million compared with $80.7 million for the year ended August 31, 2014. Excluding the negative impact of foreign currency translation of $11.4 million , operating income increased by $9.0 million, or 11.2% , due to higher gross profit as noted above and SG&A restructuring savings of $1.8 million partially offset by increased SG&A expense. SG&A expense, excluding the favorable impact of foreign currency translation of $17.8 million, increased by $3.7 million from fiscal 2014. Incremental SG&A expenses from the Specialty Plastics acquisition were $3.0 million.

 
Year Ended August 31,
 
 
 
 
 
 
 
Favorable (unfavorable)
USCAN
2015
 
2014
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
644,711

 
526,845

 
117,866

 
22.4
%
 
 
 
 
Net sales
$
610,493

 
$
475,050

 
$
135,443

 
28.5
%
 
$
(1,925
)
 
28.9
%
Segment gross profit
$
100,550

 
$
73,278

 
$
27,272

 
37.2
%
 
$
(299
)
 
37.6
%
Segment gross profit percentage
16.5
%
 
15.4
%
 
 
 
 
 
 
 
 
Segment operating income
$
40,713

 
$
30,418

 
$
10,295

 
33.8
%
 
$
(297
)
 
34.8
%
Price per pound
$
0.947

 
$
0.902

 
$
0.045

 
5.0
%
 
$
(0.003
)
 
5.3
%
Segment operating income per pound
$
0.063

 
$
0.058

 
$
0.005

 
8.6
%
 
$
(0.001
)
 
10.3
%

USCAN net sales for the year ended August 31, 2015, were $610.5 million , an increase of $135.4 million or 28.5% compared with the prior year period. During the year ended August 31, 2015, the incremental contribution of the fiscal 2014 acquisitions was $94.7 million and 61.4 million pounds in net sales and volume, respectively, and the Engineered Plastics portion of the Citadel acquisition contributed $59.5 million and 70.5 million pounds in net sales and volume, respectively. The acquisition impacts were partially offset by lower organic volumes in the Specialty Powders product family due to weaker demand in the oil and gas market. Foreign currency translation negatively impacted net sales by $1.9 million .


36


USCAN gross profit was $100.6 million for the year ended August 31, 2015, an increase of $27.3 million , or 37.2% , compared to the prior year primarily as a result of the incremental contribution of recent acquisitions and related integration as well as the benefit of restructuring actions of $0.9 million and the Manufacturing for Success efficiencies of $2.3 million partially offset by an unfavorable product mix driven by the oil and gas market.

USCAN operating income for the year ended August 31, 2015 was $40.7 million compared with $30.4 million in the same period last year, an increase of $10.3 million , or 33.8% . Operating income increased due to the above noted increase in gross profit and SG&A restructuring savings of $1.2 million, partially offset by incremental SG&A expenses from recent acquisitions of $11.2 million and increased compensation and benefits of $3.1 million.

 
Year Ended August 31,
 
 
 
 
 
 
 
Favorable (unfavorable)
LATAM
2015
 
2014
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
132,021

 
142,172

 
(10,151
)
 
(7.1
)%
 
 
 
 
Net sales
$
177,463

 
$
198,313

 
$
(20,850