SHLM A. Schulman, Inc. (delisted)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K/A

(Amendment No. 1)

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): June 1, 2015

 

 

A. SCHULMAN, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		0-7459		34-0514850
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)

 

3637 Ridgewood Road Fairlawn, Ohio		44333
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (330) 666-3751

 

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

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Explanatory Note

This Amendment No. 1 to the Current Report on Form 8-K, which was originally filed with the Securities and Exchange Commission (the “Commission”) on June 3, 2015 (the “Original 8-K”), amends and restates in its entirety Item 9.01 of the Original 8-K to include the financial statements and pro forma financial information required by Item 9.01 of Form 8-K with respect to the acquisition of HGGC Citadel Plastics Holdings, Inc. (“Citadel”) by A. Schulman, Inc. (the “Company”) on June 1, 2015 and includes additional disclosure under Item 8.01 below. The remainder of the information contained in the Original 8-K is not hereby amended.

 

Item 8.01.

Other Events.

On June 1, 2015, the Company issued a press release (the “Press Release”) announcing the consummation of the Transaction (as defined in the Original 8-K). A copy of the Press Release is filed as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated by reference herein.

The Company is providing disclosure regarding management’s discussion and analysis of financial condition and results of operations with respect to certain historical financial statements of Citadel, which is filed as Exhibit 99.5 to this Current Report on Form 8-K and is incorporated by reference herein.

 

Item 9.01.

Financial Statements and Exhibits.

 

(a)

Financial Statements of Business Acquired.

 

1.

The historical audited consolidated financial statements of Citadel required by Item 9.01(a) of Form 8-K are attached as Exhibit 99.2 to this Current Report on Form 8-K and are incorporated by reference herein.

 

2.

The historical unaudited consolidated financial statements of Citadel required by Item 9.01(a) of Form 8-K are attached as Exhibit 99.3 to this Current Report on Form 8-K and are incorporated by reference herein.

 

(b)

Pro Forma Financial Information.

 

1.

The unaudited pro forma combined financial statements required by Item 9.01(b) of Form 8-K are attached as Exhibit 99.4 to this Current Report on Form 8-K and are incorporated by reference herein.

 

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(d)

Exhibits.

The following exhibits are filed herewith:

 

Exhibit Number		Description
2.1		Stock Purchase Agreement, dated as of March 15, 2015, by and among the Company, Citadel, Citadel Plastics Holdings, LLC (in its capacity as the representative of the holders of securities of the company), and certain other individual persons (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-3 filed with the Commission on April 27, 2015 (Reg. No. 333-203670))**
4.1		First Supplemental Indenture, dated as of June 1, 2015, by and among A. Schulman, Inc. and the Citadel Guarantors (as defined in the Original 8-K) and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Original 8-K filed with the Commission on June 3, 2015 (Commission File No. 000-07459))
4.2		Joinder to Registration Rights Agreement, dated as of June 1, 2015, by and among A. Schulman, Inc., A. Schulman S.a.r.l., and JPMorgan Chase Bank, N.A., as Administrative agent and J.P. Morgan Europe Limited as Global Agent, and the lenders named in the Credit Agreement (as defined in the Original 8-K) (incorporated by reference to Exhibit 4.1 of the Original 8-K filed with the Commission on June 3, 2015 (Commission File No. 000-07459))
10.1		Credit Agreement, dated as of June 1, 2015 by and among A. Schulman, Inc., A. Schulman S.a.r.l., and JPMorgan Chase Bank, N.A., as Administrative agent and J.P. Morgan Europe Limited as Global Agent, and the lenders named in the Credit Agreement (incorporated by reference to Exhibit 4.1 of the Original 8-K filed with the Commission on June 3, 2015 (Commission File No. 000-07459))
23.1		Consent of BDO USA, LLP
99.1		Press Release, dated June 1, 2015 (incorporated by reference to Exhibit 4.1 of the Original 8-K filed with the Commission on June 3, 2015 (Commission File No. 000-07459))
99.2		HGGC Citadel Plastics Holdings, Inc. Audited Financial Statements for the Years Ended December 31, 2014 and 2013 and the period from February 29, 2012 through December 31, 2012 (incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed with the Commission on April 27, 2015 (Commission File No. 000-07459, Film No. 15795456))
99.3		Unaudited financial statements of HGGC Citadel Plastics Holdings, Inc. for the three months ended March 31, 2015
99.4		Unaudited Pro Forma Financial Statements of A. Schulman, Inc.
99.5		Management’s Discussion and Analysis of Financial Condition and Results of Operations of HGGC Citadel Plastics Holdings, Inc. for the three months ended March 31, 2015

 

**	Certain immaterial schedules and exhibits to this exhibit have been omitted pursuant to the provisions of Regulation S-K, Item 601(b)(2). A copy of any of the omitted schedules and exhibits will be furnished to the Commission upon request.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

				A. Schulman, Inc.
August 10, 2015				By:		/s/ David C. Minc
				David C. Minc
				Executive Vice President, Chief Legal Officer and Secretary

 

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Exhibit Index

 

Exhibit Number		Description
2.1		Stock Purchase Agreement, dated as of March 15, 2015, by and among the Company, Citadel, Citadel Plastics Holdings, LLC (in its capacity as the representative of the holders of securities of the company), and certain other individual persons (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-3 filed with the Commission on April 27, 2015 (Reg. No. 333-203670))**
4.1		First Supplemental Indenture, dated as of June 1, 2015, by and among A. Schulman, Inc. and the Citadel Guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Original 8-K filed with the Commission on June 3, 2015 (Commission File No. 000-07459))
4.2		Joinder to Registration Rights Agreement, dated as of June 1, 2015, by and among A. Schulman, Inc., A. Schulman S.a.r.l., and JPMorgan Chase Bank, N.A., as Administrative agent and J.P. Morgan Europe Limited as Global Agent, and the lenders named in the Credit Agreement (incorporated by reference to Exhibit 4.1 of the Original 8-K filed with the Commission on June 3, 2015 (Commission File No. 000-07459))
10.1		Credit Agreement, dated as of June 1, 2015 by and among A. Schulman, Inc., A. Schulman S.a.r.l., and JPMorgan Chase Bank, N.A., as Administrative agent and J.P. Morgan Europe Limited as Global Agent, and the lenders named in the Credit Agreement (incorporated by reference to Exhibit 4.1 of the Original 8-K filed with the Commission on June 3, 2015 (Commission File No. 000-07459))
23.1		Consent of BDO USA, LLP
99.1		Press Release, dated June 1, 2015 (incorporated by reference to Exhibit 4.1 of the Original 8-K filed with the Commission on June 3, 2015 (Commission File No. 000-07459))
99.2		HGGC Citadel Plastics Holdings, Inc. Audited Financial Statements for the Years Ended December 31, 2014 and 2013 and the period from February 29, 2012 through December 31, 2012 (incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed with the Commission on April 27, 2015 (Commission File No. 000-07459, Film No. 15795456))
99.3		Unaudited financial statements of HGGC Citadel Plastics Holdings, Inc. for the three months ended March 31, 2015
99.4		Unaudited Pro Forma Financial Statements of A. Schulman, Inc.
99.5		Management’s Discussion and Analysis of Financial Condition and Results of Operations of HGGC Citadel Plastics Holdings, Inc. for the three months ended March 31, 2015

 

**	Certain immaterial schedules and exhibits to this exhibit have been omitted pursuant to the provisions of Regulation S-K, Item 601(b)(2). A copy of any of the omitted schedules and exhibits will be furnished to the Commission upon request.

 

5

Exhibit 23.1

Consent of Independent Auditor

A. Schulman, Inc.

Fairlawn, Ohio

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-164366, 333-93093, 333-102718, 333-139236, 333-171649, 333-178159 and 333-201419) of A. Schulman, Inc. of our report dated April 27, 2015 relating to the consolidated financial statements of HGGC Citadel Plastics Holdings, Inc. which are filed as an exhibit to this Current Report on Form 8-K/A.

/s/ BDO USA, LLP

Chicago, Illinois

August 10, 2015

Exhibit 99.3

HGGC Citadel Plastics Holdings, Inc.

Condensed Consolidated Balance Sheets

 

		March 31, 2015				December 31, 2014
		Unaudited
		(in thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	15,603			$	10,909
Accounts receivable, less allowance for doubtful accounts of $827 and $895, respectively			79,058				69,709
Inventories, net			42,073				43,582
Prepaid expenses and other current assets			5,353				6,604
Deferred income taxes			3,268				3,491
Total current assets			145,355				134,295
Property, plant and equipment, at cost:
Land			3,559				3,559
Buildings and improvements			22,589				22,235
Machinery and equipment			62,346				62,208
Construction in progress			2,363				3,201
Total property, plant and equipment			90,857				91,203
Accumulated depreciation			18,675				16,682
Net property, plant and equipment			72,182				74,521
Goodwill			157,904				159,647
Intangible assets, net			230,506				240,093
Deferred loan costs, net			10,800				11,278
Deferred income taxes			1,431				1,037
Investment in joint venture			3,032				3,122
Other noncurrent assets			3,199				2,999
Total assets		$	624,409			$	626,992
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	34,528			$	30,422
Accrued interest			1,800				1,800
Accrued other expenses			11,620				12,837
Current maturities of long-term debt			2,400				2,400
Current maturities of capital lease obligations			12				19
Total current liabilities			50,360				47,478
Long-term debt, less current maturities			397,638				397,600
Capital lease obligations, less current maturities			2				4
Deferred income taxes			89,285				90,883
Other long-term liabilities			1,288				1,322
Total liabilities			538,573				537,287
Stockholders’ equity:
Common stock			154				154
Additional paid-in capital			161,752				161,373
Accumulated other comprehensive loss			(19,014	)			(15,421	)
Accumulated deficit			(57,056	)			(56,401	)
Total stockholders’ equity			85,836				89,705
Total liabilities and members’ equity		$	624,409			$	626,992

See accompanying notes to condensed consolidated financial statements

 

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HGGC Citadel Plastics Holdings, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 

		Three Months Ended March 31,
		2015				2014
		Unaudited
		(in thousands)
Net sales		$	129,050			$	106,695
Cost of goods sold			103,045				87,279
Gross profit			26,005				19,416
Operating expenses
Selling and distribution			5,237				4,069
General and administrative			13,853				10,901
Total operating expenses			19,090				14,970
Operating income			6,915				4,446
Other (expense) income
Interest expense, net of interest income of $31 and $45, respectively			(6,028	)			(4,264	)
Equity in income (loss) of joint venture			(90	)			60
Foreign currency losses			(1,860	)			(27	)
Income (loss) before income taxes			(1,063	)			215
Income tax expense (benefit)			(408	)			80
Net income (loss)			(655	)			135
Foreign currency transaction gains (losses), and other adjustments, net of taxes			(3,593	)			1,304
Total comprehensive income (loss)		$	(4,248	)		$	1,439

See accompanying notes to condensed consolidated financial statements

 

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HGGC Citadel Plastics Holdings, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

 

										Additional Paid in Capital				Accumulated Other Comprehensive Loss								Total Stockholders’ Equity
		Common Stock																Accumulated Deficit
		Shares				Amount
		Unaudited
		(in thousands, except share data)
Balance, December 31, 2014			153,279			$	154			$	161,373			$	(15,421	)		$	(56,401	)		$	89,705
Issuance of stock			—				—				30				—				—				30
Stock compensation expense			—				—				349				—				—				349
Net loss			—				—				—				—				(655	)			(655	)
Foreign currency translation adjustment			—				—				—				(3,579	)			—				(3,579	)
Change in postretirement obligation benefits			—				—				—				(14	)			—				(14	)
Balance, March 31, 2015			153,279			$	154			$	161,752			$	(19,014	)		$	(57,056	)		$	85,836

See accompanying notes to condensed consolidated financial statements

 

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HGGC Citadel Plastics Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

 

		Three Months Ended March 31,
		2015				2014
		Unaudited
		(in thousands)
Cash flows from operating activities
Net income (loss)		$	(655	)		$	135
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation			2,701				1,561
Amortization			6,554				4,920
Deferred income taxes			(841	)			(775	)
Gain on sale of property and equipment			—				(2	)
Stock based compensation expense			349				322
Payment-in-kind interest on subordinated notes payable			—				315
Equity in (income) / loss of joint venture			90				(60	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(10,309	)			(10,236	)
Inventories			963				3,340
Prepaid expenses and other assets			1,845				375
Accounts payable and accrued expenses			3,268				(172	)
Net cash provided by (used in) operating activities			3,965				(277	)
Cash flows from investing activities
Purchase of property and equipment			(960	)			(1,247	)
Proceeds from the sale of property and equipment			—				19
Net cash used in investing activities			(960	)			(1,228	)
Cash flows from financing activities
Borrowings on revolving line of credit			40				861
Principal payments on long-term debt			—				(587	)
Principal payments on capital lease obligations			(9	)			(14	)
Capital contributions			30				539
Net cash provided by financing activities			61				799
Effect of exchange rate changes on cash			1,628				124
Net increase (decrease) in cash and cash equivalents			4,694				(582	)
Cash and cash equivalents at beginning of period			10,909				6,671
Cash and cash equivalents at end of period		$	15,603			$	6,089
Supplemental Disclosures of Cash Flow Information
Cash paid during the quarter for interest		$	6,049			$	4,276
Cash paid during the quarter for income taxes		$	424			$	685

See accompanying notes to condensed consolidated financial statements

 

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HGGC CITADEL PLASTICS HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, dollars in thousands)

1. General

HGGC Citadel Plastics Holdings, Inc. (“HGGC Citadel” or the “Company”) is the 100% owner of Citadel Plastics Holdings, Inc. (“Citadel”), a manufacturer of compounded thermoset and thermoplastic materials. International in scope, Citadel develops, produces, and markets a broad line of high quality compounded products to industrial customers.

The condensed consolidated financial statements include the accounts of HGGC Citadel, and through various holding companies, HGGC Citadel’s wholly-owned operating subsidiaries: The Matrixx Group, Inc. (“Matrixx”) and Bulk Molding Compounds, Inc. (“BMCI”).

BMCI comprises Citadel’s Thermoset business and is principally engaged in the manufacture and supply of thermoset bulk and sheet molding compounds serving the electrical, automotive, consumer appliance, power tool and conductive plastic industries. BMCI operates in the U.S. with manufacturing facilities in Illinois, Ohio and Michigan. BMCI’s foreign sales of bulk molding compounds are supplied to Europe, Asia and Latin America through wholly-owned subsidiaries and a joint venture company as follows:

Europe: 100% owned holding company, BMC Deutschland GmbH, and its operating companies, Tetra – DUR Kunststoff-Produktion GmbH (combined “BMC Germany”) based in Seevetal, Germany and its 100% owned subsidiary in Turkey, BMC TetraDURTurkey Plastik Hammadde Kompozit üretim Sanayi vw Ticaret Limited Sirketi (“BMC Turkey”) (together “BMC Europe”).

Mexico: 100% owned operating companies, Bulk Molding Compounds Mexico S. de R.L. de C.V. and Satchmo S. de R.L. de C.V (combined “BMC Mexico”), located in Mexico City and Juarez, Mexico, respectively.

Brazil: 100% owned operating company, Bulk Molding Compounds do Brasil Industria de Plasticos Reforcados Ltda. (“BMC Brazil”), located in Cotia, Brazil.

Asia: 50% owned joint venture, BMC Far East Ltd., located in Hong Kong and its operating companies, BMC Dongguan Limited, located in Dongguan, China, and BMC Composite Materials Co. Ltd., located in Changshu, China.

As discussed in Note 2, BMCI acquired The Composites Group (“TCG”) on November 5, 2014.

Matrixx comprises Citadel’s Thermoplastic business and is a compounder of thermoplastic resins serving the power tool, lawn and garden, appliance, automotive, HVAC, electronics and construction markets. Matrixx operates in the U.S. and Canada with manufacturing facilities in Indiana, Texas, Virginia and Ontario, Canada. Matrixx acquired Lucent Polymers, Inc. (“Lucent”) on December 6, 2013. Lucent is a manufacturer of highly engineered, custom-formulated thermoplastics compounds utilizing recycled and prime feed stocks that are sold across diverse end use markets.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The unaudited interim condensed consolidated financial statements included for HGGC Citadel, as of and for the three month periods ended March 31, 2014 and 2015, reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of the interim periods presented. All such adjustments are of a normal recurring nature. The fiscal year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 31, 2014, and notes thereto, which are filed as an exhibit to A. Schulman, Inc.’s Current Report on Form 8-K filed on April 27, 2015.

 

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HGGC CITADEL PLASTICS HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, dollars in thousands)

 

The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results expected for the fiscal year ending December 31, 2015.

The accounting policies for the periods presented are the same as described in Note 3 – Summary of Significant Accounting Policies to the audited consolidated financial statements for the fiscal year ended December 31, 2014, which are filed as an exhibit to A. Schulman, Inc.’s Current Report on Form 8-K filed on April 27, 2015.

2. Business Acquisitions

The Composites Group

On November 5, 2014, BMCI acquired all of the outstanding stock of HPC Holdings, LLC and its wholly owned operating companies, Premix, Inc., Quantum Composites, Inc. and Hadlock Plastics, LLC (collectively, “TCG”), from Highlander Partners, L.P. (“Sellers”). The total purchase price paid at closing, net of cash acquired of $217, was $168,783. Two escrow accounts were established at closing. The first escrow account of $500 is to cover amounts that may become due from the Sellers back to BMCI for the true-up of the purchase price based on the level of working capital (as defined) on the acquisition date and was released in February 2015. A second escrow account of $3,400 is to cover claims by BMCI relating to possible representations from the Sellers, warranties, taxes and exposures to environmental matters and is due to be released in November 2015. The TCG acquisition has been accounted for under the purchase method. Beginning November 5, 2014, TCG’s operations were reflected in BMCI’s consolidated financial statements.

TCG is a provider of specialty composites including material compounding, molding, and value-added post-molding services which are sold across diverse end use markets.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date, November 5, 2014:

 

Current Assets		$	27,152
Property and equipment			26,843
Goodwill			76,500
Intangible assets			87,800
Total assets acquired			218,295
Current liabilities			13,546
Other liabilities, net			635
Deferred income taxes			35,331
Total liabilities assumed			49,512
Net assets acquired		$	168,783

Approximately $612 of the goodwill recorded as a result of the acquisition is deductible for income tax purposes. Intangible assets acquired consist of formulas/trade names of $26,900, customer relationships of $58,900 and non-compete agreements of $2,000. The weighted-average amortization period on the acquired intangible assets was 18 years.

To fund the acquisition, including acquisition costs of $2,387 (included in operating expenses) and loan financing costs of $6,555, the Company utilized $10,202 of its available cash and issued long-term debt of $167,523.

 

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HGGC CITADEL PLASTICS HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, dollars in thousands)

 

A. Schulman, Inc.

On June 1, 2015, A. Schulman, Inc. acquired all of the issued and outstanding shares of the Company for approximately $800 million. In conjunction with the acquisition of the Company, the outstanding debt was repaid.

3. Inventories, net

Inventories consist of the following:

 

		March 31,				December 31,
		2015				2014
Raw materials		$	31,823			$	30,404
Finished goods			12,205				14,623
Inventory reserves for obsolescence			(1,825	)			(1,315	)
Less allowances to reduce carrying value to LIFO basis			(130	)			(130	)
		$	42,073			$	43,582

Approximately 13% and 11% of inventories at March 31, 2015 and December 31, 2014, respectively, were valued on the LIFO basis.

4. Goodwill and Intangible Assets

The following is a summary of goodwill activity for the three month period ended March 31, 2015:

 

Balance, at December 31, 2014		$	159,647
Effect of changes in exchange rates			(837	)
Purchase price adjustments			(906	)
Balance, at March 31, 2015		$	157,904

Goodwill consists of the following:

 

		March 31,				December 31,
		2015				2014
Gross carrying amount of goodwill		$	181,731			$	183,474
Less: Accumulated impairment losses			(23,827	)			(23,827	)
Net Goodwill		$	157,904			$	159,647

The Company did not record any impairment charges for the three months ended March 31, 2015 or 2014. The Company performs its annual impairment analysis in the fourth quarter of each calendar year unless triggering events dictate that an impairment analysis should be performed sooner.

 

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HGGC CITADEL PLASTICS HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, dollars in thousands)

 

The following tables provide information about Citadel’s intangible assets as of March 31, 2015 and December 31, 2014:

 

March 31, 2015
		Gross Carrying				Accumulated				Accumulated
		Amount				Amortization				Impairment				Net
Intangible assets with definite lives
Customer relationships		$	195,538			$	(39,324	)		$	(5,723	)		$	150,491
Formulas / trade names			91,998				(11,013	)			(6,715	)			74,270
Noncompete agreements			15,158				(9,603	)			(56	)			5,499
Computer software			601				(355	)			—				246
		$	303,295			$	(60,295	)		$	(12,494	)		$	230,506
December 31, 2014
		Gross Carrying				Accumulated				Accumulated
		Amount				Amortization				Impairment				Net
Intangible assets with definite lives
Customer relationships		$	198,459			$	(35,114	)		$	(5,723	)		$	157,622
Formulas / trade names			92,590				(9,692	)			(6,715	)			76,183
Noncompete agreements			15,159				(9,076	)			(56	)			6,027
Computer software			601				(340	)			—				261
		$	306,809			$	(54,222	)		$	(12,494	)		$	240,093

Amortization expense related to the intangible assets amounted to $6,077 and $4,517 for the three months ended March 31, 2015 and March 31, 2014, respectively. The Company did not record any impairment charges to its intangible assets for the three months ended March 31, 2015 and 2014.

5. Long-Term Debt

Citadel’s long-term debt consists of the following:

 

		March 31, 2015 (1)				December 31, 2014 (1)
BMC Europe revolving loan		$	38			$	—
Term loan—1st lien			320,000				320,000
Term loan—2nd lien			80,000				80,000
			400,038				400,000
Less current maturities			(2,400	)			(2,400	)
		$	397,638			$	397,600

 

(1)	Upon acquisition of the Company by A. Schulman, Inc. on June 1, 2015 the outstanding debt agreements, noted above, were settled (See Note 2).

 

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HGGC CITADEL PLASTICS HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, dollars in thousands)

 

Term Loans and Revolver Debt

On February 29, 2012, the Company entered into a $185,000 senior secured credit agreement (the “Credit Agreement”) with a syndication of lenders. The Credit Agreement consisted of a term loan in the amount of $155,000 (“Term Loan”), and a revolving line of credit in the aggregate amount of $30,000 (the “Revolver”). The Term Loan had quarterly principal payments of $388 through January 1, 2018 and a balloon payment of $141,088 (after a $5,000 optional prepayment made by the Company on December 31, 2012) due February 28, 2018. There can also be an annual mandatory prepayment based on preceding year cash flows (as defined). No mandatory prepayment was due in 2013 for 2012 cash flows (as defined). The Revolver was reduced by any outstanding letters of credit and was due February 2017. The Credit Agreement gave the Company the option to pay interest based on the Company’s total leverage ratio (as defined) at LIBOR (subject to a 1.50% floor) plus 5.0% to 5.25% or the bank’s prime rate plus 4.0% to 4.25% per annum. In addition, there is an unused commitment fee of 0.50% of any unused portion of the revolving credit facility as well as a 5.0% to 5.25% per annum monthly fee on the average amount of the outstanding letters of credit in any given month. The Credit Agreement is secured by a first lien on substantially all of the Company’s personal and real property.

On March 13, 2013, the Credit Agreement was amended with largely the same syndication of lenders to support the debt recapitalization of the Company. To fund this recapitalization the Company increased its borrowings under the Term Loan by $21,163 to $170,000, borrowed $4,000 under its Revolver, issued new Senior Subordinated Notes of $24,200 as discussed below, and utilized $651 of its available cash. The incremental proceeds from these fundings totaling $50,014 were used to fund the concurrent payoff of all of the outstanding principal and interest of the Senior Subordinated Notes of $46,633, financing fees of $1,259 and other interest and fees of $2,122. The interest rate on the amended Term Loan and Revolver is at LIBOR (subject to a 1.25% floor) plus 4.0% to 4.25% or the bank’s prime rate plus 3.0% to 3.25% per annum. All other terms of the amended Credit Agreement remained basically the same as the previous agreement.

The Company considered whether the March 13, 2013 recapitalization of the Company resulted in a debt modification or extinguishment. Based on the appropriate accounting guidance the Company determined that the portion of the refinanced debt that continued to be held by the original senior secured credit agreement lenders was a debt modification. Accordingly, new loan costs paid in 2013 to the senior secured credit agreement lenders of $775 were capitalized as additional deferred loan costs. In addition, the net deferred loan costs of $765 associated with the extinguished Senior Subordinated Agreement were fully amortized in 2013.

On December 6, 2013, in conjunction with the the Company’s acquisition of Lucent Polymers, Inc., the Credit Agreement was amended again to, among other things, provide $66,100 of new borrowings under the Term Loan to fund the Lucent Acquisition, reduce the lending interest rates and ease financial covenants. The new borrowings under the Term Loan raised the outstanding principal to $234,825, with quarterly principal payments of $587 through January 1, 2018 and a balloon payment of $224,825 due February 28, 2018. The interest rate on the amended Credit Agreement is at LIBOR (subject to a 1.00% floor) plus 3.75% to 4.00% or the bank’s prime rate plus 2.75% to 3.00% per annum. All other terms of the amended Credit Agreement remained substantially the same as the March 13, 2013 amended credit agreement. The Company determined that this amendment to the Credit Agreement was a debt modification and fees paid of $1,891 for the amendment were recorded as deferred financing fees at December 31, 2013 and are being amortized over the remaining term of the debt.

On November 5, 2014, in conjunction with the Company’s acquisition of TCG, the Credit Agreement was amended again to, among other things, provide $87,523 of new borrowings under the Term Loan to fund in part the TCG Acquisition, increase the lending interest rates and ease financial covenants. The new borrowings under the Term Loan raised the outstanding principal to $320,000 with quarterly principal payments of $800 through October 1, 2020 and a balloon payment of $301,600 due November 5, 2020. The interest rate on the amended Credit Agreement is at LIBOR (subject to a 1.00% floor) plus 4.25% or the bank’s prime rate plus 3.25% per annum. All other terms of the amended Credit Agreement remained substantially the same as the December 6, 2013 amended credit agreement. The Company determined that this amendment to the Credit Agreement was a debt modification and fees paid of $5,755 for the amendment were recorded as deferred financing fees and are being amortized over the remaining term of the debt.

 

9

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HGGC CITADEL PLASTICS HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, dollars in thousands)

 

On November 5, 2014, to complete the debt funding of the Company’s acquisition of TCG, the Company entered into an $80,000 Second Lien Senior Secured Term Loan (the “2nd Lien Term Debt”) with certain lenders from the syndication of lenders funding the Credit Agreement. The 2nd Lien Term Debt, due November 5, 2021, is subordinated to the amended Credit Agreement and has a second priority perfected security interest in substantially all of the assets of the Company. The interest rate on the 2nd Lien Term Debt is at LIBOR (subject to a 1.00% floor) plus 8.00% or the bank’s prime rate plus 7.00% per annum. The Company paid fees of $800 for the 2nd Lien Term Debt which have been recorded as deferred financing fees and are being amortized over the remaining term of the debt.

At March 31, 2015, under the Credit Agreement, the Company was required to maintain hedging agreements that effectively fix interest rates on at least 50% of the outstanding aggregate principal of the Term Loan for a minimum of two years starting before May 29, 2012. Effective May 8, 2012, the Company purchased for $112 an interest rate cap with an initial notional amount of $77,500, which caps LIBOR at 2.50%. The notional amount of the interest rate cap was $0 as March 31, 2015. The Company has treated this interest rate cap as an ineffective hedge, and the loss associated with this cap agreement totaled approximately $112 through March 31, 2015.

The Company had no borrowings outstanding under the Revolver as of March 31, 2015 or December 31, 2014. There were outstanding letters of credit of $565 as of March 31, 2015 and December 31, 2014, respectively. The effective interest rate on the Term Loan was 6.00% as of March 31, 2015.

Senior Subordinated Notes

In conjunction with the March 13, 2013 debt recapitalization of the Company, described above, the Company entered into a new senior subordinated agreement (the “New Senior Subordinated Agreement”), loaned by a newly formed company, HGGC Citadel Lender, LLC (a related party as discussed in Note 11), totaling $24,200. The interest rate on the New Senior Subordinated Agreement was at 14% per annum, payable quarterly, plus payment-in-kind (“PIK”) interest of 5%. The New Senior Subordinated Agreement, were due August 28, 2018, is subordinated to the amended Credit Agreement. The Company paid fees of $484 for the New Senior Subordinated Agreement which have been recorded as deferred financing fees at December 31, 2013, and were being amortized over the remaining term of the debt.

In conjunction with the Company’s November 5, 2014 debt refinancing to fund the TCG acquisition discussed above, the outstanding principal (including accumulated PIK interest) of $26,294 was converted to 21,911 Class L equity units of Citadel Plastics Holdings, LLC (Citadel LLC), the Company’s parent company. The transaction was deemed to be at market value and no gain or loss was recorded on the conversion.

At March 31, 2015, the Company was required by all of its debt agreements to maintain a total leverage ratio below certain levels and a minimum fixed charge coverage ratio (until the Company’s November 5, 2014 acquisition of TCG only) and is limited on its ability to make investments, obtain additional indebtedness, make capital expenditures and pay dividends. The Company was in compliance with the terms of its debt agreements as of March 31, 2015.

Other Debt

At March 31, 2015, BMC Europe had a revolving loan note up to €2.5 million (USD $2,710) with no stated expiration date. Interest is calculated on the basis of the Euro Overnight Index Average interest rate plus 3.50% (effectively 3.46% at March 31, 2015) and is payable quarterly. The amount outstanding under this line of credit was $38 and $0 as of March 31, 2015 and December 31, 2014, respectively.

 

10

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HGGC CITADEL PLASTICS HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, dollars in thousands)

 

6. Accrued Expenses

Accrued expenses consist of the following:

 

		March 31,				December 31,
		2015				2014
Accrued compensation		$	3,664			$	3,793
Accrued taxes			814				892
Accrued employee benefits			948				1,050
Accrued other			6,194				7,102
		$	11,620			$	12,837

7. Stockholders’ Equity Structure

The Company has authorized 200,000 shares, par value $0.001 per share, of common stock of which 153,279 shares were issued and outstanding on both March 31, 2015 and December 31, 2014. In addition, there were 980 options to purchase the common stock outstanding on both March 31, 2015 and December 31, 2014. The Company’s parent company, Citadel LLC, owns 152,401 of the total outstanding common stock on both March 31, 2015 and December 31, 2014. Each share of common stock has the right to one vote for each share held.

During the three months ended March 31, 2015, Citadel LLC had no issuances or forfeitures of Class A Units in the form of Management Incentive Units (“MIUs”). The issuance of Class A Units are issued to employees and management of the Company as compensation. The MIUs vest 20% per year. Citadel LLC determined the fair value of MIUs using an earnings multiple for the 2014 MIU issuances. The Company recognized unit compensation expense of $349 and $322 during the three months ended March 31, 2015 and 2014, respectively, that was pushed down from Citadel LLC. There were 6,806 and 6,137 Class A Units vested at Citadel LLC as of March 31, 2015 and December 31, 2014, respectively.

Upon acquisition by A. Schulman, Inc. on June 1, 2015 the un-vested Class A Units immediately vested and were settled as part of the acquisition transaction.

8. Income Taxes

The tax provision for the three months ended March 31, 2015 and 2014 is based on an estimated combined statutory effective tax rate. The Company recorded for the three months ended March 31, 2015 and 2014, a tax benefit of $408 and expense of $80, respectively, for an effective tax rate of 38.38% and 37.02%, respectively. For the three months ended March 31, 2015 and 2014 the difference between the Company’s effective tax rate and the U.S. federal 35% statutory rate and state 6.0% (net of federal benefit) statutory rate was primarily related to income in foreign jurisdictions that is taxed at a lower income tax rate.

9. Employee Benefit Plans

Matrixx, Lucent, BMCI and TCG have 401(k) profit-sharing plans covering certain employees who meet certain age and service requirements. Employer contributions to the plans are discretionary and are made through a match of employee deferrals up to a certain level. Employer contributions by the Company to the plans were $276 and $118 for the three months ended March 31, 2015 and 2014, respectively.

BMC Europe has an employee pension plan. Expenses related to this plan were approximately $17 and $29 for the three months end March 31, 2015 and 2014, respectively.

 

11

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HGGC CITADEL PLASTICS HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, dollars in thousands)

 

Employees of Bulk Molding Compounds Mexico S.A. de C.V., by law, are entitled to 10% profit sharing on the net profits of the subsidiary. Expenses related to this plan were approximately $104 and $69 for the three months ended March 31, 2015 and 2014, respectively.

BMC Brazil, as required by the government, maintains an employee pension plan. Expenses related to this plan were approximately $11 and $12 for the three months ended March 31, 2015 and 2014, respectively.

Employees of Matrixx’s Ontario Canada plant have an employee pension plan. Expenses related to this plan were approximately $10 and $10 for the three months ended March 31, 2015 and 2014, respectively.

TCG sponsors an unfunded supplemental executive retirement plan, which is a non-qualified plan that provides five former officers of TCG defined benefits in excess of qualified plan limits imposed by federal tax law. The liability related to this plan was $1,467 and $1,502 as of March 31, 2015 and December 31, 2014, respectively, and is recorded in accrued other in the condensed consolidated balance sheets.

10. Commitments and Contingencies

The Company conducts a portion of its operations in leased facilities under non-cancellable operating leases with expiration dates through 2019. Some of these leases are with related parties (Note 11). Rental expense for operating leases for the three months ended March 31, 2015 and 2014 was approximately $844 and $621, respectively.

The Company is involved in various litigation and other claims arising in the ordinary course of business. While the results of litigation against the Company cannot be predicted with certainty, management believes that uninsured losses, if any, arising from these proceedings will not have a material adverse effect on Citadel’s consolidated financial position.

11. Related-Party Transactions

The Company is committed to pay annual management fees of $1,500 (in four equal quarterly installments) to HGGC Citadel. The Company paid total management fees of $349 and $375 (included in operating expenses) for the three months ended March 31, 2015 and 2014, respectively. There were $375 and $0 of unpaid management fees at March 31, 2015 and December 31, 2014, respectively. The fees are recorded in general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

The New Senior Subordinated Agreement lender, HGGC Citadel Lender, LLC was owned by HGGC and certain other investors in Citadel. As of March 31, 2014, the Company accrued total cash and PIK interest owing to HGGC Citadel Lender, LLC of $1,197 respectively. As of November 5, 2014, this debt was converted to equity as discussed in Note 5 above and was settled on June 1, 2015 when the Company was acquired by A. Schulman, Inc.

The Company rents its BMCI headquarters building in West Chicago, Illinois from Maxwell Properties, which was partially owned by an employee of Citadel as of March 15, 2015. For the three months ended March 31, 2015 and 2014, Citadel paid rents to Maxwell Properties of $71 and $71, respectively. The lease expires in January 2018.

12. Joint Venture

BMCI entered into a joint venture agreement with EMEI Industrial Limited during 2005. Each company owns a 50% interest in the joint venture, BMC Far East LTD (located in China). All profits and losses are shared equally.

 

12

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HGGC CITADEL PLASTICS HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited, dollars in thousands)

 

The following is a summary of financial position and results of operations of BMC Far East LTD as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014:

 

						December 31,
		March 31, 2015				2014
Current assets		$	4,770			$	5,071
Property, plant and equipment			1,868				1,901
Total assets		$	6,638			$	6,972
Current liabilities		$	1,515			$	1,660
Long-term liabilities			1,732				1,735
Equity			3,391				3,577
Total liabilities and equity		$	6,638			$	6,972
		Three Months Ended March 31,
		2015				2014
Net sales		$	1,916			$	2,270
Net income (loss)		$	(180	)		$	120

Included in Citadel’s accounts receivable as of March 31, 2015 and December 31, 2014 are receivables from BMC Far East LTD of $877 and $873, respectively. During the three months ended March 31, 2015 and 2014, Citadel had sales to BMC Far East LTD of $0 and $37, respectively, and charged BMC Far East LTD management and technical fees of $73 and $69, respectively.

 

13

Exhibit 99.4

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements, or pro forma statements, give effect to the Acquisition by A. Schulman, Inc. (“A. Schulman”) of HGCC Citadel Plastics Holdings, Inc. (“Citadel”) and the related financings on the historical financial position and results of operations of A. Schulman. The historical financial information set forth below has been derived from, and should be read in connection with, the financial statements of A. Schulman, which are included in A. Schulman’s Annual Report on Form 10-K for the year ended August 31, 2014, as amended and superseded in part in A. Schulman’s Current Report on Form 8-K filed on April 27, 2015, and its Quarterly Reports on Form 10-Q for the quarters ended November 30, 2014, February 28, 2015 and May 31, 2015 and the financial statements of Citadel. The financial statements of Citadel are included in, or incorporated by reference into, this Current Report on Form 8-K. A. Schulman, with a fiscal year that ends on August 31, acquired Citadel, with a fiscal year that ends on December 31. The pro forma income statement for the year-ended August 31, 2014 will include (1) A. Schulman’s year ended August 31, 2014 and (2) Citadel’s twelve months ended June 30, 2014. The pro forma income statement for the interim period will include (1) A. Schulman’s six months ended February 28, 2015 and (2) Citadel’s six months ended December 31, 2014. For purposes of preparing this data, the $1,232.0 million of financing that was obtained by A. Schulman in connection with the Acquisition (as defined below) includes long-term bank debt of approximately $709.0 million, senior notes of $375.0 million, a convertible special stock issuance of $125.0 million and revolving credit facility borrowings of approximately $23.0 million.

The allocation of the purchase price used in the unaudited pro forma condensed combined financial information is based on preliminary estimates. The estimates and assumptions are subject to change up to a year following the time of the Acquisition once all pertinent information regarding the assets and liabilities acquired are fully evaluated by the Company. The final determination of the allocation of the purchase price will be based on the actual tangible assets and liabilities, and intangible assets of Citadel as of the effective time of the Acquisition. Accordingly, the final purchase accounting adjustments may be materially different from the preliminary unaudited adjustments presented herein.

The unaudited pro forma condensed combined financial information has been compiled in a manner consistent with the accounting policies adopted by A. Schulman. These accounting policies are similar in all material respects to those of Citadel. As more information becomes available, A. Schulman will perform a more detailed review of Citadel’s accounting policies. As a result of that review, differences could be identified between the accounting policies of the two companies that, when conformed, could have a material impact on the consolidated financial statements.

The pro forma statements give effect to the Acquisition and the related financings as if they had been consummated for the pro forma condensed combined statements of operations on September 1, 2013 for A. Schulman and July 1, 2013 for Citadel, and for the pro forma condensed combined balance sheet on February 28, 2015.

The pro forma statements are provided for informational purposes only and do not purport to represent what the condensed combined financial position or results of operations actually would have been had the Acquisition and related financings and other pro forma adjustments occurred on the dates indicated. Additionally, the pro forma statements are not necessarily indicative of the future financial condition or results of operations of A. Schulman.

The Acquisition

On June 1, 2015, A. Schulman acquired all of the issued and outstanding capital stock of privately held Citadel, a portfolio company of certain private equity firms, for approximately $800 million. The purchase price was reduced by the amount of Citadel’s indebtedness and unpaid transaction expenses on the closing date, increased by the amount of Citadel’s cash and cash equivalents on the closing date, and increased by approximately $1.9 million based on Citadel’s estimated working capital on the closing date relative to target working capital. Citadel is a major provider of custom material solutions and custom engineered solutions for specialized applications across a diverse set of end markets, geographies and blue chip customers. We refer to the acquisition of Citadel as the “Acquisition.”

 

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A. SCHULMAN, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Year Ended August 31, 2014

(Dollars and shares in thousands, except per share data)

 

		Historical A. Schulman, Inc.				Pro Forma Citadel (r)				Pro Forma Adjustments				Pro Forma Combined
Net sales		$	2,446,998			$	434,633			$	(3,740	)(a)		$	2,877,891
Cost of sales			2,116,990				347,072				(4,834	)(b)			2,459,228
Selling, general and administrative expenses			242,486				70,018				(1,495	)(c)			311,009
Restructuring expense			4,883				—				—				4,883
Asset impairment			104				26,038				—				26,142
Curtailment and settlement (gains) losses			214				—				—				214
Operating income (loss)			82,321				(8,495	)			2,589				76,415
Interest expense			8,503				24,294				19,137	(d)			51,934
Interest income			(286	)			(151	)			—				(437	)
Foreign currency transaction (gains) losses			2,206				(939	)			—				1,267
Other income, net			(434	)			(2,186	)			—				(2,620	)
Income (loss) from continuing operations before taxes			72,332				(29,513	)			(16,548	)			26,271
Provision (benefit) for U.S. and foreign income taxes			18,542				(4,147	)			(5,792	)(f)			8,603
Income from continuing operations			53,790				(25,366	)			(10,756	)			17,668
Noncontrolling interests			(799	)			—				—				(799	)
Net income (loss) from continuing operations attributable to A. Schulman, Inc.			52,991				(25,366	)			(10,756	)			16,869
Convertible special stock dividends			—				—				7,500	(g)			7,500
Net income (loss) from continuing operations available to A. Schulman, Inc. common stockholders		$	52,991			$	(25,366	)		$	(18,256	)		$	9,369
Weighted-average number of shares outstanding:
Basic			29,061												29,061
Diluted			29,362												29,362
Earnings per share from continuing operations attributable to A. Schulman Inc.
Basic		$	1.82											$	0.32
Diluted		$	1.80											$	0.32

 

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A. SCHULMAN, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Six Months Ended February 28, 2015

(Dollars and shares in thousands, except per share data)

 

		Historical A. Schulman, Inc.				Pro Forma Citadel (s)				Pro Forma Adjustments				Pro Forma Combined
Net sales		$	1,157,348			$	251,445			$	(2,075	)(a)		$	1,406,718
Cost of sales			992,430				202,185				(2,585	)(b)			1,192,030
Selling, general and administrative expenses			130,640				36,628				(2,362	)(c)			164,906
Restructuring expense			7,881				—				—				7,881
Operating income			26,397				12,632				2,872				41,901
Interest expense			4,670				11,698				9,512	(d)			25,880
Interest income			(161	)			(110	)			—				(271	)
Foreign currency transaction (gains) losses			2,240				2,096				—				4,336
Other income, net			(404	)			(896	)			—				(1,300	)
Gain on early extinguishment of debt			(1,290	)			—				1,290	(e)			—
Income (loss) from continuing operations before taxes			21,342				(156	)			(7,930	)			13,256
Provision (benefit) for U.S. and foreign income taxes			8,457				2,312				(2,776	)(f)			7,993
Income (loss) from continuing operations			12,885				(2,468	)			(5,154	)			5,263
Noncontrolling interests			(547	)			—				—				(547	)
Net income (loss) from continuing operations attributable to A. Schulman, Inc.			12,338				(2,468	)			(5,154	)			4,716
Convertible special stock dividends			—				—				3,750	(g)			3,750
Net income (loss) from continuing operations available to A. Schulman, Inc. common stockholders		$	12,338			$	(2,468	)		$	(8,904	)		$	966
Weighted-average number of shares outstanding:
Basic			29,078												29,078
Diluted			29,538												29,538
Earnings per share from continuing operations attributable to A. Schulman Inc.
Basic		$	0.42											$	0.03
Diluted		$	0.42											$	0.03

 

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A. SCHULMAN, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of February 28, 2015

(Dollars in thousands)

 

		Historical A. Schulman, Inc.				Historical Citadel (as of December 31, 2014)				Pro Forma Adjustments				Pro Forma Combined
ASSETS
Current assets:
Cash and cash equivalents		$	91,872			$	10,909			$	(11,735	)(h)		$	91,046
Accounts receivable, net			354,257				69,709				—				423,966
Inventories, net			257,464				43,582				3,718	(i)			304,764
Prepaid expenses and other current assets			40,399				10,095				(1,595	)(j)			48,899
Total current assets			743,992				134,295				(9,612	)			868,675
Net property, plant and equipment			239,969				74,521				7,030	(i)			321,520
Deferred charges and other noncurrent assets			73,211				18,436				1,246	(k)			92,893
Goodwill			192,940				159,647				270,831	(i)			623,418
Intangible assets, net			123,932				240,093				81,807	(i)			445,832
Total assets		$	1,374,044			$	626,992			$	351,302			$	2,352,338
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	251,091			$	30,422			$	—			$	281,513
U.S. and foreign income taxes payable			4,426				892				—				5,318
Accrued payroll, taxes and related benefits			42,232				4,843				—				47,075
Other accrued liabilities			46,067				8,902				(1,075	)(m)			53,894
Short-term debt			24,197				2,419				(11,616	)(l)			15,000
Total current liabilities			368,013				47,478				(12,691	)			402,800
Long-term debt			365,406				397,604				332,039	(l)			1,095,049
Pension plans			112,501				—				—				112,501
Deferred income taxes			22,003				90,883				24,134	(i)			137,020
Other long-term liabilities			26,485				1,322				—				27,807
Total liabilities			894,408				537,287				343,482				1,775,177
Stockholders’ equity:
Common stock, par value $0.001			48,367				154				(154	)(o)			48,367
Convertible special stock			—				—				120,313	(n)			120,313
Additional paid-in capital			272,934				161,373				(161,373	)(p)			272,934
Accumulated other comprehensive income (loss)			(73,801	)			(15,421	)			15,421	(o)			(73,801	)
Retained earnings (deficit)			607,162				(56,401	)			33,613	(q)			584,374
Treasury stock, at cost			(383,170	)			—				—				(383,170	)
Total A. Schulman, Inc.’s stockholders’ equity			471,492				89,705				7,820				569,017
Noncontrolling interests			8,144				—				—				8,144
Total equity			479,636				89,705				7,820				577,161
Total liabilities and equity		$	1,374,044			$	626,992			$	351,302			$	2,352,338

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. Basis of Pro Forma Presentation

The unaudited pro forma condensed combined financial information was prepared using the purchase method of accounting and was based on the historical consolidated financial statements of A. Schulman and Citadel after giving effect to the Acquisition and related financing arrangements. All pro forma statements use A. Schulman’s period end date.

A. Schulman’s fiscal year ends on August 31 with interim periods ending on November 30, February 28 or 29 and May 31. Citadel’s fiscal year ends on December 31 with interim periods ending on March 31, June 30 and September 30.

The unaudited pro forma condensed combined balance sheet as of February 28, 2015 is presented as if the Acquisition occurred on February 28, 2015. The unaudited pro forma condensed combined statements of operations for all periods are presented as if the Acquisition had taken place on September 1, 2013. The unaudited pro forma condensed combined statement of operations for the year ended August 31, 2014 includes results of operations of (1) A. Schulman for the year ended August 31, 2014 and (2) Citadel for the twelve months ended June 30, 2014. The unaudited pro forma condensed combined statement of operations for the six months ended February 28, 2015 includes results of operations of (1) A. Schulman for the six months ended February 28, 2015 and (2) Citadel for the six months ended December 31, 2014.

In addition to those pro forma adjustments directly linked to the Acquisition, the unaudited pro forma condensed combined statements of operations for the year ended August 31, 2014 and the six months ended February 28, 2015 include pro forma adjustments related to Citadel’s acquisition of The Composites Group (“TCG”) as if they had been consummated for the pro forma condensed combined statements of operations on September 1, 2013 for A. Schulman and July 1, 2013 for Citadel, the beginning of the earliest periods presented.

The allocation of the purchase price used in the unaudited pro forma condensed combined financial statements is based on preliminary estimates of the fair value of assets acquired and liabilities assumed, and the related income tax impact of the Acquisition accounting adjustments. The final allocation of the purchase price will be determined after the Acquisition is completed and after completion of a final analysis to determine the fair values of the tangible assets, identifiable intangible assets, and liabilities as of the date the Acquisition is complete. Accordingly, the final purchase accounting adjustments may be materially different from the pro forma adjustments presented in the unaudited pro forma condensed combined financial statements. Increases or decreases in the fair value of the net assets may change the amount of the purchase price allocated to goodwill and other assets and liabilities. This may impact the unaudited pro forma condensed combined statements of operations due to an increase or decrease in the amount of amortization or depreciation of the adjusted assets.

The purchase method of accounting is based on Accounting Standards Codification, ASC, Topic 805, “Business Combinations,” and uses the fair value concepts defined in ASC Subtopic 820-10, “Fair Value Measurement.” ASC Topic 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the Acquisition date.

ASC Subtopic 820-10 defines the term “fair value” and sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined in ASC Subtopic 820-10 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result of these standards, A. Schulman may be required to record assets that are not intended to be used or sold and/or to value assets at fair value measures that do not reflect A. Schulman’s intended use of those assets. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Under the purchase method of accounting, the assets acquired and liabilities assumed will be recorded as of the completion of the Acquisition, at their respective fair values and consolidated with those of A. Schulman. Financial statements and reported results of operations of A. Schulman issued after completion of the Acquisition will reflect these values. Periods prior to completion of the Acquisition will not be retroactively restated to reflect the historical financial position or results of operations of Citadel.

 

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Under ASC Subtopic 805-10, transaction costs (e.g., advisory, legal, valuation, other professional fees) and certain restructuring charges impacting the target company are not included as a component of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred. Total transaction costs expected to be incurred by A. Schulman are estimated to be $50.4 million, of which $2.9 million has been incurred and recognized through February 28, 2015.

The unaudited pro forma condensed combined financial statements are not intended to represent or be indicative of the consolidated results of operations or financial position of A. Schulman that would have been reported had the Acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial position of A. Schulman. The unaudited pro forma condensed combined financial statements should be read in conjunction with A. Schulman’s financial statements for the year ended August 31, 2014, which are included in its Annual Report on Form 10-K for the year ended August 31, 2014, as amended and superseded in part in its Current Report on Form 8-K filed on April 27, 2015, and in its Quarterly Reports on Form 10-Q for the quarterly periods ended November 30, 2014, February 28, 2015 and May 31, 2015. Citadel’s audited financial statements for the years ended December 31, 2014 and 2013 and the period from February 29, 2012 through December 31, 2012 are incorporated by reference into this Current Report on Form 8-K.

2. Citadel Acquisition

On June 1, 2015, A. Schulman acquired all of the issued and outstanding capital stock of privately held Citadel, a portfolio company of certain private equity firms, for approximately $800 million. The purchase price was reduced by the amount of Citadel’s indebtedness and unpaid transaction expenses on the closing date, increased by the amount of Citadel’s cash and cash equivalents on the closing date, and increased by approximately $1.9 million based on Citadel’s estimated working capital on the closing date relative to target working capital. Citadel is a major provider of custom material solutions and custom engineered solutions for specialized applications across a diverse set of end markets, geographies and blue chip customers.

3. Financing

In connection with the Acquisition, A. Schulman and certain of its wholly-owned subsidiaries obtained approximately $1,232.0 million of financing, including, without limitation: long-term bank debt of approximately $709.0 million, consisting of a $200.0 million senior secured term loan A facility and approximately $509.0 million of senior secured term loan B facilities; senior notes of approximately $375.0 million; a convertible special stock issuance of approximately $125.0 million; and revolving credit facility borrowings of approximately $23.0 million (with availability of up to $300.0 million).

4. Estimate of Assets Acquired and Liabilities Assumed

The preliminary estimate of the fair values of assets acquired and liabilities assumed as of the closing of the Acquisition were allocated to each of Citadel’s assets, liabilities and intangible assets. The excess of purchase price over the estimated fair values of assets acquired and liabilities assumed is allocated to goodwill.

 

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The preliminary estimate of the fair values of assets acquired and liabilities assumed (in thousands) is as follows:

 

		February 28, 2015
Assets acquired, at fair market value:
Accounts receivable		$	69,709
Inventories			47,300
Prepaid expenses and other			10,091
Total current assets			127,100
Property, plant, and equipment(1)			81,551
Intangible assets(1)			321,900
Other assets(2)			7,126
Total assets			537,677
Liabilities assumed, at fair market value:
Accounts payable			30,422
Accrued liabilities			12,837
Deferred income taxes(3)			123,551
Other liabilities			1,322
Capital lease obligations			23
Total liabilities assumed			168,155
Identifiable net assets acquired			369,522
Goodwill(4)			430,478
Net assets acquired		$	800,000

 

(1)

The fair values of property, plant, and equipment were determined based on management’s estimate of the replacement cost of similar fixed assets using information obtained during A. Schulman’s due diligence process. The fair values of the identifiable intangible assets were determined based on management’s estimate of preliminary estimated cash flows associated with these identifiable intangible assets based on information obtained during A. Schulman’s due diligence process. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including revenue, cost of sales, research and development costs, sales and marketing expenses, and working capital); the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, as well as other factors.

(2)	Other assets are comprised of Citadel’s investment in joint venture, at fair market value of $3.1 million plus noncurrent deferred income tax assets of $1.0 million and other long-term assets of $3.0 million at December 31, 2014 book value, which approximate fair market values.

(3)

As part of finalizing the preliminary fair value of the Acquisition assets and liabilities, A. Schulman will update deferred taxes and other tax adjustments as part of the allocation of the purchase price due to differences between book valuations and tax valuations, primarily related to the estimated fair value adjustments for acquired long-lived assets.

(4)

Goodwill is calculated as the difference between the Acquisition date fair value of the consideration expected to be transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill associated with the Citadel acquisition is primarily the result of anticipated synergies and the previously discussed market expansion resulting from the consolidation and centralization of manufacturing and global purchasing activities, insurance savings, and elimination of duplicate corporate administrative costs.

 

- 7 -

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The preliminary estimated fair value of the identifiable intangible assets and their weighted-average useful lives have been estimated as follows (dollars in thousands):

 

		Estimated Fair Value				Estimated Useful Life
Trademarks and trade names		$	19,200				3 - 10 years
Developed technology/know-how			75,000				10 - 20 years
Customer relationships			227,700				14 years
		$	321,900

Finite lived intangible assets will be amortized over their estimated useful lives. Goodwill will not be amortized but will be tested for impairment at least annually. All intangible assets and goodwill are also tested for impairment when certain indicators are present. In the future, if it is determined that intangible assets or goodwill are impaired, an impairment charge would be recorded at that time.

5. Pro Forma Adjustments

Pro forma adjustments include the following (all tables in thousands):

 

(a)	To eliminate sales from Citadel to A. Schulman of $3.7 million and $2.1 million for the year ended August 31, 2014 and the six months ended February 28, 2015, respectively.

 

(b)	To adjust cost of sales for each period as follows:

 

		Year Ended August 31, 2014				Six months Ended February 28, 2015
Elimination of cost of sales to A. Schulman from Citadel		$	(3,740	)		$	(2,075	)
Adjustment of depreciation and amortization (see (c) below)			(1,094	)			(510	)
Pro forma adjustment		$	(4,834	)		$	(2,585	)

 

(c)	To record change in depreciation, amortization, and transaction costs:

 

		Year Ended August 31, 2014				Six months Ended February 28, 2015
Reversal of Citadel’s depreciation recognized		$	(9,519	)		$	(4,718	)
Reversal of Citadel’s amortization recognized			(26,311	)			(11,901	)
Estimated depreciation of assets required			8,303				4,151
Estimated amortization of identifiable intangible assets			24,938				12,469
Reverse transactions costs to acquire Citadel			—				(2,873	)
Pro forma adjustment			(2,589	)			(2,872	)
Allocation to cost of sales			(1,094	)			(510	)
Allocation to selling, general, & administrative			(1,495	)			(2,362	)
		$	(2,589	)		$	(2,872	)

 

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(d)	To record adjustments to interest expense and amortization of new debt issue costs:

 

		Year Ended August 31, 2014				Six months Ended February 28, 2015
Reversal of A. Schulman’s existing interest expense		$	(7,134	)		$	(4,094	)
Reversal of Citadel’s existing interest expense			(22,500	)			(10,801	)
Record estimated interest expense			48,922				24,461
Interest adjustment			19,288				9,566
Reversal of A. Schulman’s amortization of existing debt issue cost			(507	)			(232	)
Reversal of Citadel’s amortization of existing debt issue costs			(1,794	)			(897	)
Record estimated amortization of new debt issue costs			2,150				1,075
Deferred financing fees amortization adjustment			(151	)			(54	)
Total interest expense pro forma adjustment		$	19,137			$	9,512

A. Schulman estimates a combined weighted average interest rate of 4.44% based on $709.3 million of aggregate principal amount of new term loans under the new term loan A facility and new term loan B facilities, and $23.0 million aggregate principal amount of revolving loans under the new revolving credit facility and $375.0 million aggregate principal amount of senior notes that were incurred in connection with the Acquisition. An increase or decrease of 12.5 basis points in the actual combined weighted average interest rate would impact our interest expense by $0.9 million annually. Additionally, the new term loan facilities have required quarterly principal payments of $15.0 million in the aggregate on an annual basis.

A. Schulman estimates it will incur $33.0 million of financing fees in connection with the new term loan facilities, new revolving credit facility and senior notes, $18.8 million related to the bridge financing was expensed over a shortened bridge period, $13.7 million will be deferred and amortized straight line over their respective lives, and $1.3 million of original issue discount will be netted against their respective term loan B facilities. An additional $0.5 million existing deferred financing fees related to the old credit agreement will be carried forward and amortized straight line over its new life.

 

(e)	In February 2015, A. Schulman recorded a gain on the extinguishment of its euro notes debt, which was extinguished as part of the refinancing for the Acquisition. This adjustment has been recorded to remove the $1.3 million gain associated with the debt repayment.

 

(f)

We have reflected the applicable tax provision on the pro forma adjustments presented in the unaudited pro-forma condensed combined statements of operations. The pro forma adjustments pertain primarily to the U.S. tax jurisdiction, and are subject to a 35% federal tax rate. These adjustments do not include the release of a portion of A. Schulman’s U.S. valuation allowance that may result when considering Citadel’s U.S. deferred income tax liabilities. The effective tax rate of the combined company could be significantly different depending on post-transaction activities.

 

(g)	A. Schulman expects to pay a quarterly dividend on the newly issued convertible special stock, payable quarterly, which equals $7.5 million and $3.8 million for the year ended August 31, 2014 and six months ended February 28, 2015, respectively.

 

(h)	To record the changes in cash from the Acquisition and refinancing, as follows:

 

		February 28, 2015
Convertible special stock offering (see (n) below)		$	125,000
Change in A. Schulman debt (see (l) below)			721,696
Removal of Citadel cash not transferring			(10,909	)
Cash paid to Citadel (see note 4)			(800,000	)
Transaction costs			(47,522	)
Pro forma adjustment		$	(11,735	)

 

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(i)	To record fair value adjustments based on the Citadel purchase price allocation as seen below:

 

		Book Value				Fair Market Value (Note 4)				Adjustment Recorded
Inventories		$	43,582			$	47,300			$	3,718
Property, plant, & equipment			74,521				81,551				7,030
Intangible assets			240,093				321,900				81,807
Goodwill			159,647				430,478				270,831
Deferred income taxes			90,883				123,551				32,668
Joint venture			3,122				3,068				(54	)

The $32.7 million increase in the deferred income tax liability resulting from the Citadel fair value adjustments has been allocated $3.4 million to current and $29.3 million to non-current. The $29.3 million non-current piece is partially offset by a decrease of $5.1 million to reflect the anticipated one-time release of a portion of A. Schulman’s U.S. valuation allowance as a result of Citadel’s U.S. deferred income tax liabilities. The $3.4 million current piece is recorded in footnote (j) below as a decrease to current deferred tax assets. The amount of the actual U.S. valuation allowance release could vary significantly from what is assumed in these unaudited pro forma condensed combined financial statements and will depend on the specific deferred income tax assets and liabilities at the time of the Acquisition.

 

(j)

The pro forma adjustment of $1.6 million for prepaid expenses and other current assets represents a decrease in current deferred tax assets of $3.4 million as well as an increase to current deferred income tax assets of $1.8 million to reflect the anticipated one-time release of a portion of A. Schulman’s U.S. valuation allowance as a result of Citadel’s U.S. deferred income tax liabilities.

 

(k)	To record the change in deferred charges and other noncurrent assets as a result of the Acquisition and refinancing:

 

		February 28, 2015
Write-off of existing A. Schulman deferred financing fees		$	(1,156	)
Write-off of existing Citadel deferred financing fees			(11,278	)
New deferred financing fees			13,734
Write-down of joint venture (see (i) above)			(54	)
Increase in deferred charges and other noncurrent assets		$	1,246

 

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(l)	To record the change in debt as a result of the Acquisition and refinancing:

 

		February 28, 2015
New term loan		$	709,323
New revolver			22,954
Senior notes			375,000
Original issue discount			(1,273	)
Extinguishment of old debt			(385,581	)
Net change in A. Schulman debt			720,423
Citadel debt not transferring			(400,000	)
Net change in pro forma total debt			320,423
Change in current portion (see below)			(11,616	)
Change in long term portion		$	332,039
Current debt, per A. Schulman historical		$	24,197
Current debt, per Citadel historical			2,419
Pro forma adjustment			(11,616	)
Pro forma current debt, based on term loan payments due within twelve months		$	15,000

 

(m)	The pro forma adjustment of $1.1 million for other accrued liabilities represents accrued severance of $0.7 million, less $1.8 million of Citadel accrued interest which is not transferring as part of the Acquisition.

 

(n)	This adjustment of $125.0 million, net of $4.7 million in fees, has been made to account for the issuance of convertible special stock.

 

(o)	The adjustments of $0.2 million and $15.4 million are to eliminate Citadel’s common stock and accumulated other comprehensive loss.

 

(p)	The adjustment of $161.4 million is to eliminate Citadel’s existing additional paid in capital balance.

 

(q)	To record the change in retained earnings as a result of the Acquisition and refinancing:

 

		February 28, 2015
Elimination of Citadel accumulated deficit		$	56,401
Elimination of a deferred tax asset valuation allowance			6,921
Unpaid transaction fees			(27,828	)
Write off of existing deferred financing fees			(1,156	)
Accrued severance			(725	)
Increase in retained earnings		$	33,613

 

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(r)

HGGC CITADEL PLASTICS HOLDINGS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Twelve Months Ended June 30, 2014

(Dollars in thousands)

 

		Historical Citadel				Historical The Composites Group				Pro Forma Adjustments				Pro Forma Citadel
Net sales		$	332,570			$	102,063			$	—			$	434,633
Cost of sales			269,148				77,700				224	(I)			347,072
Selling, general and administrative expenses			53,077				11,455				5,486	(II)			70,018
Asset impairment			26,038				—				—				26,038
Operating income (loss)			(15,693	)			12,908				(5,710	)			(8,495	)
Interest expense			16,685				1,802				5,807	(III)			24,294
Interest income			(151	)			—				—				(151	)
Foreign currency transaction (gains) losses			(939	)			—				—				(939	)
Other (income) expense, net			(1,507	)			(679	)			—				(2,186	)
Income (loss) before taxes			(29,781	)			11,785				(11,517	)			(29,513	)
Provision (benefit) for U.S. and foreign income taxes			(3,076	)			3,375				(4,446	)(IV)			(4,147	)
Net income (loss)		$	(26,705	)		$	8,410			$	(7,071	)		$	(25,366	)

 

(s)

HGGC CITADEL PLASTICS HOLDINGS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Six Months Ended December 31, 2014

(Dollars in thousands)

 

		Historical Citadel(A)				Historical The Composites Group(B)				Pro Forma Adjustments				Pro Forma Citadel
Net sales		$	212,544			$	38,901			$	—			$	251,445
Cost of sales			173,719				28,390				76	(I)			202,185
Selling, general and administrative expenses			31,184				5,044				400	(II)			36,628
Operating income			7,641				5,467				(476	)			12,632
Interest expense			9,908				500				1,290	(III)			11,698
Interest income			(110	)			—				—				(110	)
Foreign currency transaction (gains) losses			2,096				—				—				2,096
Other (income) expense, net			(83	)			6,336				(7,149	)(V)			(896	)
Income loss before taxes			(4,170	)			(1,369	)			5,383				(156	)
Provision (benefit) for U.S. and foreign income taxes			846				(612	)			2,078	(IV)			2,312
Net (loss) income		$	(5,016	)		$	(757	)		$	3,305			$	(2,468	)

 

(A)	The historical Citadel information includes the results of operations for TCG for the period November 5, 2014 through December 31, 2014.

(B)	The historical TCG information includes the results of operations for TCG for the period July 1, 2014 through November 4, 2014.

 

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(I)	To record adjustments to depreciation.

 

		Twelve months ended June 30, 2014				Six months ended December 31, 2014
Reversal of TCG depreciation recognized		$	(2,558	)		$	(1,068	)
Record estimated depreciation of assets acquired			2,782				1,144
Pro forma adjustment		$	224			$	76

 

(II)	To record adjustments to depreciation, amortization, and transaction costs.

 

		Twelve months ended June 30, 2014				Six months ended December 31, 2014
Reversal of TCG depreciation recognized		$	(277	)		$	(93	)
Reversal of TCG amortization recognized			(299	)			(100	)
Record estimated depreciation of assets acquired			301				100
Record estimated amortization of identifiable intangible assets			5,761				2,880
Reversal of transaction costs to acquire TCG			—				(2,387	)
Pro forma adjustment		$	5,486			$	400

 

(III)

To record adjustments to interest expense and amortization of debt issue costs incurred by Citadel in connection with the acquisition of TCG.

 

		Twelve months ended June 30, 2014				Six months ended December 31, 2014
Reversal of Citadel existing interest expense		$	(16,685	)		$	(9,908	)
Reversal of The Composites Group’s existing interest expense			(1,802	)			(500	)
Record estimated interest expense			23,937				11,990
Pro forma adjustment			5,450				1,582
Reversal of Citadel amortization of existing debt issue costs			(1,437	)			(1,189	)
Record estimated amortization of new debt issue costs			1,794				897
Pro forma adjustment			357				(292	)
Total interest expense pro forma adjustment		$	5,807			$	1,290

Citadel used the actual interest rate of 5.25% for its $320 million term loan and 9.00% for its $80 million second lien senior secured term loan for an aggregate principal amount of $400 million. This resulted in a weighted average interest rate of 6%. An increase or decrease of 12.5 basis points in the actual combined weighted average interest rate would impact Citadel’s interest expense by $0.5 million annually. Additionally, it is expected that the new term loan will have required quarterly payments of $0.8 million.

Citadel incurred $6.6 million of deferred financing fees in connection with the issuance of the term loan and second lien senior secured term loan.

 

(IV)

We have reflected the applicable tax provision on the pro forma adjustments presented in the unaudited pro-forma condensed combined statements of operations. The pro forma adjustments pertain primarily to the U.S. tax jurisdiction, and are subject to a 35% federal tax rate, plus applicable state taxes.

 

(V)	To reverse $7.1 million of the seller’s transaction costs related to TCG acquisition for the six months ended December 31, 2014.

 

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Exhibit 99.5

HGGC Citadel Plastics Holdings, Inc.

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 unaudited condensed consolidated financial statements and related notes included elsewhere in, or incorporated by reference into, this Current Report on Form 8-K.

Overview

Business Summary

HGGC Citadel Plastics Holdings, Inc., or Citadel, is a major provider of custom material solutions, and engineered solutions for specialized applications across a diverse set of end markets, geographies and blue chip customers. Citadel was established in 2007 as a Delaware corporation. On June 1, 2015, A. Schulman, Inc. acquired all of the issued and outstanding shares of Citadel for approximately $800 million. As a result of the acquisition, Citadel became a wholly owned subsidiary of A. Schulman, Inc.

Citadel supplies materials for numerous applications in a variety of markets globally, including transportation, industrial and construction, consumer, electrical, energy, healthcare and safety, and aerospace and defense. Citadel has an established North American presence, but also has operations in Mexico, Brazil, Germany and China. Citadel focuses on providing high quality services and materials as well as technical expertise in an effort to successfully develop and commercialize new products for over 1,300 global customers.

Recent Trend

Citadel’s 2015 results of operations may be adversely impacted compared to 2014 by macroeconomic trends, including, without limitation, recent compression in the U.S. oil and gas industry as well as negative impacts of foreign exchange rates due to the recent strengthening of the U.S. dollar.

Segment Information

Citadel has two business segments: Engineered Plastics (EP) and Engineered Composites (EC).

Citadel uses gross profit and operating income before certain items in order to make decisions, assess performance and allocate resources to each segment. The following discussion regarding Citadel’s segment gross profit and operating income, which are considered Non-GAAP measures, does not include items such as interest income or expense, other income or expense, or amortization of inventory step-up charges related to business acquisitions. Corporate expenses include Board of Directors related costs, private equity ownership management fees, LLC equity units compensation expense and other miscellaneous legal and professional fees primarily related to acquisitions and debt financings.

The following tables summarize net sales to unaffiliated customers, gross profit and SG&A expenses by segment (in thousands):

Net Sales

 

		Three Months Ended March 31,
		2015				2014
Engineered Plastics		$	71,444			$	74,586
Engineered Composites			57,606				32,109
Total net sales to unaffiliated customers		$	129,050			$	106,695

 

1

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Gross Profit

 

		Three Months Ended March 31,
		2015				2014
Engineered Plastics		$	10,709			$	11,147
Engineered Composites			15,296				9,362
Total segment gross profits			26,005				20,509
Engineered Plastics inventory step-up			—				(1,093	)
Total gross profit		$	26,005			$	19,416

SG&A Expenses

 

		Three Months Ended March 31,
		2015				2014
Engineered Plastics		$	6,179			$	6,549
Engineered Composites			11,363				7,092
Total segment SG&A expenses			17,542				13,641
Corporate G&A expenses			1,548				1,329
Total operating expenses		$	19,090			$	14,970

Below is a reconciliation of segment operating income to operating income and income (loss) before income taxes:

 

		Three Months Ended March 31,
		2015				2014
Engineered Plastics		$	4,530			$	4,598
Engineered Composites			3,933				2,270
Total segment operating income			8,463				6,868
Corporate			(1,548	)			(1,329	)
Total operating income before certain items			6,915				5,539
Engineered Plastics inventory step-up			—				(1,093	)
Total operating income			6,915				4,446
Interest expense, net			(6,028	)			(4,264	)
Equity in income (loss) of joint venture			(90	)			60
Foreign currency losses			(1,860	)			(27	)
Income (loss) before income taxes		$	(1,063	)		$	215

 

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		Three Months Ended March 31,
Engineered Plastics		2015				2014				Increase (decrease)
		(In thousands, except for %’s and per pound data)
Pounds sold			80,600				83,474				(2,874	)			-3.4	%
Net sales		$	71,444			$	74,586			$	(3,142	)			-4.2	%
Segment gross profit		$	10,709			$	11,147			$	(438	)			-3.9	%
Segment gross profit percentage			15.0	%			14.9	%			0.1	%
Segment SG&A expenses		$	6,179			$	6,549			$	(370	)			-5.6	%
Segment operating income		$	4,530			$	4,598			$	(68	)			-1.5	%
Price per pound		$	0.886			$	0.894			$	(0.008	)			-0.9	%
Segment gross profit per pound		$	0.133			$	0.134			$	(0.001	)			-0.7	%

EP net sales for the three months ended March 31, 2015 were $71.4 million, a decrease of $3.1 million or 4.2%, compared with the prior year. The decrease in sales was primarily due to lower volumes resulting from softness in EP’s housing and lawn and garden markets and unfavorable mix in EP’s higher selling price/gross profit products.

EP segment gross profit was $10.7 million for the three months ended March 31, 2015, a decrease of $0.4 million compared with the prior year. The decrease in EP gross profit from 2014 was primarily due to the lower sales volume partially offset by lower manufacturing costs as a result of operating efficiency initiatives.

EP SG&A expenses decreased $0.4 million during the three months ended March 31, 2015 resulting from lower amortization of intangibles expense and lower salary and other operating costs from cost out program initiatives.

EP segment operating income for the three months ended March 31, 2015 of $4.5 million was down slightly from the prior year for the reasons described above.

 

		Three Months Ended March 31,
Engineered Composites		2015				2014				Increase (decrease)
		(In thousands, except for %’s and per pound data)
Pounds sold			49,381				34,030				15,351				45.1	%
Net sales		$	57,606			$	32,109			$	25,497				79.4	%
Segment gross profit		$	15,296			$	9,362			$	5,934				63.4	%
Segment gross profit percentage			26.6	%			29.2	%			-2.6	%
Segment SG&A expenses		$	11,363			$	7,092			$	4,271				60.2	%
Segment operating income		$	3,933			$	2,270			$	1,663				73.3	%
Price per pound		$	1.167			$	0.944			$	0.223				23.6	%
Segment gross profit per pound		$	0.310			$	0.275			$	0.035				12.7	%

EC net sales for the three months ended March 31, 2015 were $57.6 million, an increase of $25.5 million or 79.4%, compared with the prior year. During the three months ended March 31, 2015, the incremental sales and volumes provided by the November 2014 acquisition of The Composites Group (“TCG”) were $27.0 million and 14.7 million pounds, respectively. Excluding the TCG acquisition, organic sales decreased $1.5 million compared with the prior year driven primarily by unfavorable foreign currency translation caused by a strengthening U.S. dollar and lower volumes in United States and Brazil, which was partially offset by organic growth in EC’s Mexican and European markets.

 

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EC segment gross profit was $15.3 million for the three months ended March 31, 2015, an increase of $5.9 million over the prior year. The improvement over the prior year was primarily due to the improved product mix following the acquisition of TCG, which was partially offset by the impact of lower volume in the United States and Brazil. Gross profit per pound increased $0.035 or 12.7%.

EC SG&A expenses increased $4.3 million during the three months ended March 31, 2015. Increases to SG&A of $5.1 million from the TCG acquisition were partially offset by $0.4 million of lower amortization of intangibles expense and $0.4 million of lower salary and other operating costs due to cost out program initiatives.

EC segment operating income for the year three months ended March 31, 2015 was $3.9 million, an increase of $1.7 million compared with the prior year. The increase in EC operating income in 2015 was primarily driven by the aforementioned $5.9 million increase in gross profit, $0.4 million lower amortization of intangibles and $0.4 million lower operating expenses, which were partially offset by the $5.1 million of incremental operating expenses as a result of the TCG acquisition.

 

		Three Months Ended March 31,
Consolidated		2015				2014				Increase (decrease)
		(In thousands, except for %’s and per pound data)
Pounds sold			129,981				117,504				12,477				10.6	%
Net sales		$	129,050			$	106,695			$	22,355				21.0	%
Gross profit		$	26,005			$	20,509			$	5,496				26.8	%
Gross profit percentage			20.2	%			19.2	%			1.0	%
Total operating expenses		$	19,090			$	14,970			$	4,120				27.5	%
Total operating income before certain items*		$	6,915			$	5,539			$	1,376				24.8	%
Operating Income		$	6,915			$	4,446			$	2,469				55.5	%
Price per pound		$	0.993			$	0.908			$	0.085				9.4	%

 

*	Total operating income before certain items represents segment operating income combined with Corporate general and administrative expenses. For a reconciliation of total operating income before certain items to operating income and income (loss) before income taxes refer to Segment Information.

Consolidated net sales for the three months ended March 31, 2015 were $129.1 million, an increase of $22.4 million, or 21.0%, compared with the prior year. Incremental net sales and volume from the November 2014 TCG acquisition contributed $27.0 million and 14.7 million pounds, respectively, for the three months ended March 31, 2015. Excluding the TCG acquisition, organic sales decreased $4.6 million driven primarily by volume decreases and unfavorable mix in the EP segment and lower EC sales resulting from unfavorable foreign currency translation and a depressed economy in Brazil.

Total operating expenses increased $4.1 million or 27.5% for the three months ended March 31, 2015 compared to the prior year. The increase in operating expenses consists of $5.1 million of expenses from the November 2014 TCG acquisition and a $0.2 million increase in corporate expenses related to costs in connection with the TCG acquisition, which was more than offset by a $1.1 million decrease in the legacy operating business due to cost out program initiatives.

Total operating income before certain items for the three months ended March 31, 2015 was $6.9 million, an increase of $1.4 million over the prior year. The increase in total operating income before certain items was comprised primarily of the contribution from the TCG acquisition of $1.6 million offset by the above mentioned corporate expenses of $0.2 million. Operating income improved by $2.5 million from 2014 million due primarily to $1.1 million of acquisition related inventory step-up costs in 2014 plus the increase in operating income before certain items mentioned above.

Interest expense, net of interest income, increased $1.8 million for the three months ended March 31, 2015, compared to the prior year primarily related to increased borrowings for the TCG acquisition.

 

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Equity income from the joint venture was a loss of $0.1 million for the three months ended March 31, 2015, a decrease of $0.2 million compared to the prior year.

Foreign currency losses for the three months ended March 31, 2015 were $1.9 million, compared with less than $0.1 million for the prior year and primarily represents losses from remeasuring non-functional currency denominated temporary intercompany loans between EC subsidiaries in the United States and Europe.

During the three months ended March 31, 2015 and 2014, Citadel had a loss before income taxes of $1.1 million and income before income taxes of $0.2 million, respectively.

Liquidity and Capital Resources

Working capital, excluding cash and debt, was $81.8 million as of March 31, 2015, an increase of $3.5 million from December 31, 2014. The increase in working capital was primarily due to increases in accounts receivable of $9.3 million partially offset by decreases in inventory of $1.5 million and increases in accounts payable of $4.1 million. The translation effect on foreign currencies, primarily the Euro and Brazilian real, decreased working capital by $1.4 million.

Capital expenditures for the three months ended March 31, 2015 were $1.0 million. These capital expenditures primarily related to the regular and ongoing investment in Citadel’s manufacturing facilities and incremental expenditures around the integration of the Citadel’s November 2014 acquisition of TCG.

Long-term debt consists of the following at March 31, 2015 and December 31, 2014 (in thousands):

 

		March 31, 2015				December 31, 2014
BMC Europe revolving loan		$	38			$	—
Term loan—1st lien			320,000				320,000
Term loan—2nd lien			80,000				80,000
Total term loan			400,038				400,000
Less current maturities			2,400				2,400
Total long-term debt		$	397,638			$	397,600

There was no change in long-term debt during the three months ended March 31, 2015.

Off-Balance Sheet Arrangements

Citadel does not have any off-balance sheet arrangements.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. Long-term debt also approximates fair value as a result of its variable interest rate.

Foreign Currency Exchange Risk

The functional currency of Citadel’s Mexican subsidiary is the U.S. dollar. Transactions in currencies other than the U.S. dollar of Citadel’s Mexican subsidiary are recorded at the rates of exchange prevailing at the date of the transaction. The Mexican subsidiaries’ monetary assets and liabilities in currencies other than the U.S. dollar are translated at rates of exchange prevailing at the balance sheet date to U.S. dollar. Foreign currency exchange gains and losses reflecting transaction gains and losses, which arise from the Mexican subsidiaries’ monetary assets and liabilities denominated in currencies other than U.S. dollar, are recorded in operating expenses. The functional currency of Citadel’s subsidiaries in Germany, Turkey and Brazil is the Euro, Lira and Real, respectively. Foreign currency adjustments, arising from the translation of the foreign subsidiaries’ financial statements, are recorded in the accumulated other comprehensive income (loss) account as a separate component of members’ equity until a foreign business is sold or substantially liquidated. Assets and liabilities are translated to U.S. dollars using exchange rates in effect at the balance sheet date.

 

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Citadel also conducts business on a multinational basis in a variety of foreign currencies. Citadel’s primary exposure to market risk for changes in foreign currency exchange rates arises from anticipated transactions from international trade and/or repatriation of funds in Mexico, Brazil, Germany, Turkey and China. Citadel’s principal foreign currency exposures relate to the Euro, Brazilian real and Mexican peso, among others. Citadel does not believe these exposures are significant and consequently, settles these exposures through entering into spot trades when due.

Commodity Price Risk

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

Cautionary Statements Regarding Forward-Looking Information

A number of the matters discussed in this document that are not historical or current facts deal with potential future circumstances and developments and may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historic or current facts and relate to future events and expectations. Forward-looking statements contain such words as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which management is unable to predict or control, that may cause actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could adversely affect A. Schulman’s future financial performance, include, but are not limited to, the following:

 

•

worldwide and regional economic, business and political conditions, including continuing economic uncertainties in some or all of A. Schulman’s major product markets or countries where A. Schulman has operations;

 

•

the effectiveness of A. Schulman’s efforts to improve operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques;

 

•

competitive factors, including intense price competition;

 

•

fluctuations in the value of currencies in areas where A. Schulman operates;

 

•

volatility of prices and availability of the supply of energy and raw materials that are critical to the manufacture of A. Schulman’s products, particularly plastic resins derived from oil and natural gas;

 

•

changes in customer demand and requirements;

 

•

effectiveness of A. Schulman to achieve the level of cost savings, productivity improvements, growth and other benefits anticipated from acquisitions, joint ventures and restructuring initiatives;

 

•

escalation in the cost of providing employee health care and retirement benefits;

 

•

uncertainties regarding the resolution of pending and future litigation and other claims;

 

•

the performance of the global automotive market as well as other markets served;

 

•

further adverse changes in economic or industry conditions, including global supply and demand conditions and prices for products;

 

•

operating problems with A. Schulman’s information systems as a result of system security failures such as viruses, cyber-attacks or other causes;

 

•

the impact of the indebtedness incurred to finance A. Schulman’s acquisition of Citadel;

 

•

integration of the business of Citadel with A. Schulman’s existing business, including the risk that the integration will be more costly or more time consuming and complex than anticipated;

 

•

A. Schulman’s ability to achieve the anticipated synergies, cost savings and other benefits from the acquisition of Citadel;

 

•

transaction and acquisition-related costs incurred in connection with the acquisition of Citadel and related transactions; and

 

•

substantial time devoted by management to the integration of the Citadel acquisition.

The risks and uncertainties identified above are not the only risks A. Schulman faces. Additional risk factors that could affect A. Schulman’s performance are set forth in A. Schulman’s Annual Report on Form 10-K for the fiscal year ended August 31, 2014, as amended and superseded in part by A. Schulman’s Current Report on Form 8-K filed on April 27, 2015. In addition, risks and uncertainties not presently known to A. Schulman or that it believes to be immaterial also may adversely affect A. Schulman. Should any known or unknown risks or uncertainties develop into actual events, or underlying assumptions prove inaccurate, these developments could have material adverse effects on A. Schulman’s business, financial condition and results of operations.

 

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