Download SCHULMAN A INC (Form: 8-K, Received: 04/27/2015 16:28:20)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): April 27, 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))
Item 8.01.
Other Events.
As previously disclosed, A. Schulman, Inc. (the “Company”) has entered into a Stock Purchase Agreement, dated March 15, 2015,
among the Company, HGGC Citadel Plastics Holdings, Inc. (“Citadel”), Citadel Plastics Holdings, LLC and certain other individuals party
thereto pursuant to which the Company agreed to purchase all of the issued and outstanding shares of capital stock of Citadel
(the “Acquisition”).
The Company is providing: a description of Citadel’s business, selected financial data and management’s discussion and analysis of
financial condition and results of operations with respect to certain historical financial statements of Citadel; certain historical financial
statements of Citadel; and pro forma financial statements of the Company giving effect to the Acquisition, which are filed as Exhibits 99.1,
99.2 and 99.3, respectively, to this Current Report on Form 8-K and are incorporated herein by reference.
Cautionary Statements
A number of the matters discussed in this Current Report on Form 8-K, including the documents incorporated by reference, 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. Any
forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation, and
specifically decline any obligation, other than that imposed by law, to publicly update or revise any forward-looking statements whether as a
result of new information, future events or otherwise.
Risk factors and uncertainties that may cause actual results to differ materially from expected results include, among others: the
Company’s ability to successfully integrate Citadel, into the Company’s operations; the Company’s ability to achieve fully the strategic and
financial objectives related to the Acquisition; and unexpected costs or liabilities that may arise from the Acquisition or the Company’s
ownership or operation of Citadel.
Additional risk factors and uncertainties that may cause actual results to differ materially from expected results include, among others:
worldwide and regional economic, business and political conditions, including continuing economic uncertainties in some or all of the
Company’s major product markets or countries where the Company has operations; the effectiveness of the Company’s efforts to improve
operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques; competitive factors,
including intense price competition; fluctuations in the value of currencies in areas where the Company operates; volatility of prices and
availability of the supply of energy and raw materials that are critical to the manufacture of the Company’s products, particularly plastic resins
derived from oil and natural gas; changes in customer demand and requirements; effectiveness of the Company to achieve the level of cost
savings, productivity improvements, growth and other benefits anticipated from acquisitions and the integration thereof, joint ventures and
restructuring initiatives; escalation in the cost of providing employee health care; uncertainties regarding the resolution of pending and future
litigation and other claims; the performance of the global automotive market as well as other markets served; further adverse changes in
economic or industry conditions, including global supply and demand conditions and prices for products; operating problems with the
Company’s information systems as a result of system security failures such as viruses, cyber-attacks or other causes; the Company’s ability to
consummate the Acquisition and the timing of the closing of the Acquisition for any reason, whether or not the fault of the Company; the
failure to obtain the necessary financing, including the debt the Company expects to incur, in connection with the Acquisition for any reason,
whether or not the fault of the Company; the impact of any indebtedness incurred to finance the Acquisition; integration of the business of
Citadel with the Company’s existing business, including the risk that the integration will be more costly or more time consuming and complex
or simply less effective than anticipated; the Company’s ability to achieve the anticipated synergies, cost savings and other benefits from the
Acquisition; transaction and acquisition-related costs incurred in connection with the Acquisition and related transactions; and substantial time
devoted by management to the integration of Citadel after the closing of the Acquisition.
The risks and uncertainties identified above are not the only risks the Company faces. Additional risk factors that could affect the
Company’s performance are set forth in ITEM 1A, RISK FACTORS, of the Company’s Annual Report on Form 10-K for the fiscal year ended
August 31, 2014, as amended and superseded in part by the Company’s Current Report on Form 8-K filed on April 27, 2015, or in other
documents filed by the Company with the Securities and Exchange Commission. In addition, risks and uncertainties not presently known to the
Company or that it believes to be immaterial also may adversely affect the Company. Should any known or unknown risks or uncertainties
develop into actual events, or underlying assumptions prove inaccurate, these developments could have material adverse effects on the
Company’s business, financial condition and results of operations.
Item 9.01.
Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The audited consolidated financial statements of HGGC Citadel Plastics Holdings, Inc. for the years ended December 31, 2014 and 2013
and the period from February 29, 2012 through December 31, 2012, together with the report of BDO USA, LLP with respect thereto, are
included as Exhibit 99.2 to this Current Report on Form 8-K and are incorporated herein by reference.
(b) Pro forma financial information.
The unaudited pro forma financial statements of the Company are included as Exhibit 99.3 to this Current Report on Form 8-K and are
incorporated herein by reference.
(d) Exhibits.
Exhibit
Number
Description
23.1
Consent of BDO USA, LLP
99.1
Business Description of HGGC Citadel Plastics Holdings, Inc., Selected Financial Data of HGGC Citadel Plastics Holdings,
Inc. and Management’s Discussion and Analysis of Financial Condition and Results of Operations of HGGC Citadel Plastics
Holdings, Inc.
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
99.3
Unaudited Pro Forma Financial Statements of A. Schulman, Inc.
2
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.
April 27, 2015
By:
3
/s/ David C. Minc
David C. Minc
Vice President, Chief Legal Officer and Secretary
EXHIBIT INDEX
Exhibit
Number
Description
23.1
Consent of BDO USA, LLP
99.1
Business Description of HGGC Citadel Plastics Holdings, Inc., Selected Financial Data of HGGC Citadel Plastics Holdings,
Inc. and Management’s Discussion and Analysis of Financial Condition and Results of Operations of HGGC Citadel Plastics
Holdings, Inc.
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
99.3
Unaudited Pro Forma Financial Statements of A. Schulman, Inc.
4
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 appears in this Form 8-K.
/s/ BDO USA, LLP
Chicago, Illinois
April 27, 2015
Exhibit 99.1
DESCRIPTION OF CITADEL’S BUSINESS
Introduction
HGGC Citadel Plastics Holdings, Inc., or Citadel, is a leading provider of custom material solutions, including both thermoplastic and
engineered composite compounds, as well as a leading provider of custom material solutions, with material science expertise in providing
custom engineered solutions for specialized applications. Citadel is privately held and was established in 2007 as a Delaware corporation in
connection with the acquisition of The Matrixx Group, Inc., or Matrixx. On February 29, 2012, HGGC Citadel LLC, an entity owned by
HGGC, the current majority stockholder of Citadel, and Charlesbank Capital Partners, along with certain institutional investors, members of
management and employees of Citadel, acquired all of the outstanding common stock of Citadel from Wind Point Partners, the then majority
stockholder of Citadel, and the other stockholders and option holders of Citadel. Upon consummation of the merger, Citadel continued as the
surviving corporation and operating subsidiary of HGGC Citadel LLC.
Citadel is headquartered in West Chicago, Illinois. 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.
Business Segments
Engineered Plastics
Citadel’s compounded thermoplastic resin product lines are manufactured across eight facilities throughout the United States and Canada,
along with two warehouses in Evansville, Indiana. In 2014, Citadel’s Engineered Plastics revenue by end market was 30% consumer, 24%
industrial and construction, 19% transportation, 9% electrical, 2% healthcare and safety and 16% other. Revenue generated from the
thermoplastic segment was 94% from the United States, 5.6% from Canada and 0.4% from other. Citadel maintains a broad range of base resin
expertise, which encompasses polypropylene, polyamide, polycarbonate and polyester alloys. Citadel maintains specialized flame retardant
technologies, with a broad portfolio of UL listings, including special strength UL94 5V-A rated materials and best-in-class relative thermal
indices on glass and talc filled flame retardant polypropylenes. Citadel also maintains sustainable recycled thermoplastics capabilities which
deliver economic and environmental advantages.
Matrixx primarily comprises Citadel’s Engineered Plastics 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. As discussed below, Matrixx acquired Lucent Polymers, Inc., or
Lucent, a Delaware corporation, on December 6, 2013.
Lucent was founded in 1997 and is headquartered in Evansville, Indiana. On December 6, 2013, Citadel acquired Lucent, resulting in its
acquisition of Lucent’s portfolio of over 1,400 formulations, increasing Citadel’s presence in engineered resins. Since its acquisition, Lucent
has begun producing Citadel’s Matrixx, Aclo, QTR and Fiberfill brands in addition to Citadel’s portfolio of products. Lucent has two separate
facilities with 12 production compounding lines. As part of the acquisition, Citadel acquired the “Lucent” trade name and the “Ecollent” trade
name. At the time of the acquisition, approximately 90% of Lucent’s products sold used the “Lucent” trade name and about 10% used the
“Ecollent” trade name.
Engineered Composites
Bulk Molding Compounds, Inc., or BMCI, comprises Citadel’s Engineered Composites 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. In 2014, Citadel’s Engineered Composites revenue by end market was 37% transportation, 36% electrical,
8% industrial and construction, 4% energy, 10% consumer and 5% other. Revenue
1
generated from the Engineered Composites segment was 54% from the United States, 14% from Europe/Middle East, 26% from Central/South
America, 4% from Asia and 2% from other. BMCI operates in the United States with manufacturing facilities in Illinois, Ohio and Michigan.
BMCI’s foreign sales of bulk molding compounds, or BMC, are supplied to Europe, Asia and Latin America through wholly-owned
subsidiaries and a joint venture. BMCI acquired The Composites Group, or TCG, on November 5, 2014, to expand Citadel’s high performance
composites and sheet molding compound, or SMC, capabilities. SMC is a glass-fiber reinforced polyester compound used in compression
molding where higher mechanical strength is needed. SMC product lines are custom-tailored to specific customer needs. TCG’s principal
products include material compounding, Quantum–high performance glass and carbon fiber specialty compounds, molding, and value-added
post-molding services which are sold across diverse end use markets.
End Markets
Globally, Citadel operates primarily in seven end markets: (1) transportation, (2) industrial and construction, (3) consumer, (4) electrical,
(5) energy, (6) healthcare and safety and (7) aerospace and defense. Healthcare and safety and aerospace and defense are end markets that
comprised only 1% of consolidated sales prior to the acquisition of TCG, and the remaining portion of sales fall into categories outside of these
defined end markets.
Transportation
Transportation products contributed 36%, 38% and 39% of Citadel’s revenue for fiscal years 2014, 2013 and 2012, respectively.
Transportation’s principal products include Engineered Plastics, BMC, SMC, and Quantum high performance composites, as well as molded
parts and value added processes.
For transportation products, principal BMC applications include forward lighting and under hood applications such as valve covers and
high performance structural parts. Multiple thermoplastic products are supplied into this market for automotive interior systems including pillar
covers, glove boxes, door panels, floor boards, wheel covers, bezels, trim parts and sound dampening.
The automotive market for Quantum high performance composites represents a strong emerging market with high growth potential,
strong margins, and a small numbers of direct competitors. Our broad material solutions and product technology enable us to deliver
customized solutions for light weighting structural, semi-structural, and complex geometries. Applications utilizing this high performance
offering include roof bows, underbody shields, engine bay covers, deck lids, inner fender supports, window seals and floor pans.
Industrial and Construction
Industrial and construction products contributed 13%, 10% and 7% of Citadel’s revenue for fiscal years 2014, 2013 and 2012,
respectively. Principal products of industrial and construction include Thermoplastic, BMC and SMC compounds. Principal applications
include pump housings, drain pans, concrete reinforcements, and rail insulators. The broad array of applications utilizes company strengths in
flame retardant and recycle technologies.
Consumer
Consumer products contributed 25%, 27% and 30% of Citadel’s revenue for fiscal years 2014, 2013 and 2012, respectively. Consumer’s
principal products include BMC, SMC and Thermoplastics. Applications include dishware, industrial food service and specialty cookware.
Plastic tableware is a market space that has demonstrated strong global growth based on a trend toward less formal and more time
constrained dining. In tandem with a growing demand for functional, quick use polymer dishes and bowls, food contact regulations have
consistently tightened, narrowing allowable raw material inputs and, in some cases, eliminating popular materials from recognized food contact
listings. Citadel’s BMC products have proven to be a safe, new alternative in this space due to the ability to decorate and microwave the
finished product. Citadel has drawn interest from some of the biggest names in retail as it is launching programs to replace melamine and
introduce a new solution into this growing segment.
2
Electrical
Electrical products contributed 14%, 15% and 14% of Citadel’s revenue for fiscal years 2014, 2013 and 2012, respectively. Electrical’s
principal products utilize much of the Citadel portfolio including BMC, SMC, Thermoplastics and molded parts. With over 400 listings with
UL, the product offering is utilized by many of the top global suppliers in this segment. Applications include circuit breakers, electrical boxes,
UPS battery cases, wire termination ties and buss bars.
Energy
Energy products contributed 2%, 0% and 0% of Citadel’s revenue for fiscal years 2014, 2013 and 2012, respectively. Energy represents
one of Citadel’s fastest growing segments. Energy’s principal products include BMC and Quantum High Performance Composites, some of
which are molded and assembled in Citadel’s facilities. Illustrative applications include drill centralizers, frack plug components, frack balls,
valves brackets and fittings for offshore platforms.
Oil and gas is a high growth, highly profitable aspect of the energy market that values Citadel’s technology solutions. Prominent oil
services customers appreciate Citadel’s ability to manufacture parts that can withstand high temperatures and pressures and maintain strength in
wet corrosive conditions. The thermoset offerings of the portfolio at Citadel allow its customers to capture significant efficiencies in the end
use environment.
Healthcare and Safety
Healthcare and safety’s principal products include Quantum High Performance Composites, Thermoplastics, BMC and SMC.
Applications include fire helmets, hospital bed components and patient transport systems.
Aerospace and Defense
Aerospace and defense’s principal products include BMC and Quantum High Performance Composites. Applications include aircraft
interior parts and external structural parts.
Aerospace and defense represents a high growth and profitable market segment for the Quantum High Performance composite products.
Citadel’s unique OEM-specified glass and carbon epoxy, phenolic and BMI materials coupled with functional requirements such as low
density, fire retardant, low flame and toxicity enables the OEM to replace metals with composites to reduce weight and enable better fuel
efficiency. Citadel’s customers continue to look for reliable, light-weight solutions in this space. Key applications in aerospace and defense
include stow bins, enclosures, brackets, fittings, fairings, bulk heads, access doors, hub caps, helicopter blade counter weights, missile cones
and satellite dishes.
Employee Information
As of December 31, 2014, Citadel had approximately 1,230 employees. The vast majority of Citadel’s international workforce is
non-union. All of Citadel’s U.S. and Canadian workforce (954 employees) were non-union.
Research and Development
Citadel spends approximately $3 million annually on internal research and development. Citadel, through its TCG-Quantum business
unit, performs customer-sponsored research and development. However, due to the late 2014 acquisition of TCG, the amount is immaterial for
2014. Citadel maintains laboratory facilities and capabilities that provide a broad range of material analysis and support product consistency
and quality. Citadel’s product development initiatives are supported by Citadel’s laboratory and technical service capabilities. Citadel’s
thermoplastic lab is capable of extensive testing including thermal indexing, tensile testing and impact testing, which allows Citadel to test and
approve certain products and formulations for its customers. Citadel also maintains full prototyping and tooling capabilities, which allow
Citadel to produce net-shape prototype parts.
3
Compliance with Environmental Regulations
Citadel is subject to various environmental laws and regulations that apply to the production, use and sale of chemicals, emissions into the
air, discharges into waterways and other releases of materials into the environment and the generation, handling, storage, transportation,
treatment and disposal of waste material. Citadel incurred environmental expenses, before insurance recoveries, of $0.7 million in 2014, $0.7
million in 2013 and $0.5 million in the ten month period ended December 31, 2012.
Government Approvals
Citadel does not have any material portion of its business subject to renegotiation of profits or termination of contracts at the election of
the U.S. Government.
Dependence on Customers
Citadel has a diverse customer base, with over 1,500 active customer relationships as of December 31, 2014. During the year ended
December 31, 2014, Citadel’s ten largest customers accounted in the aggregate for approximately 22% of revenue and no single customer
accounted for more than 3% of revenue. Approximately half of Citadel’s business is on one to two year contracts with quarterly adjustments
based on the cost of key raw materials. In management’s opinion, Citadel is not dependent upon any single customer and the loss of any one
customer would not have a material adverse effect on Citadel’s business.
Availability of Raw Materials
Citadel maintains a diverse supplier base. Citadel has access to alternative suppliers and proactively examines product formulas to
identify material substitution opportunities to reduce overall cost without impacting compound quality. As a result, Citadel does not rely on any
one supplier.
Working Capital Practices
Citadel’s working capital level at the end of 2014 represented an average of 17.2% of net sales. Given the made-to-order nature of its
business, Citadel does not manufacture any “made-to-stock” items, as all orders are custom, proprietary formulations. With a current operation
utilization of installed equipment capacity at 48%, Citadel can leverage its existing platform to execute its organic growth initiatives with
minimal incremental growth capital, with expected capital expenditures representing between 1.5 and 2% of sales.
Competition
Citadel’s products are specified in over 95% of applications of several of its customers and more than 50% of its customers sole source
from Citadel for at least one application. Once Citadel’s products are specified by a customer, there are generally high switching costs
associated with changing suppliers given the time involved for product development and approval processes. As a result, customers rarely
switch to a competitor’s product once a Citadel product is selected.
Intellectual Property
Citadel uses various trademarks and trade names in its business. These trademarks and trade names, such as “Lucent” and “Ecollent,”
protect certain names of Citadel’s products and are significant to the extent they provide a certain amount of goodwill and name recognition in
the industry. Citadel also holds patents in various parts of the world for certain of its products. Additionally, Citadel utilizes proprietary
formulas in its product manufacturing and benefits from intangible assets acquired through acquisitions.
International Operations
Citadel has facilities and offices positioned throughout the United States as well as in Germany, Mexico, Brazil, and a joint venture in
China.
4
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CITADEL
The following table sets forth selected historical financial data from the consolidated balance sheets of Citadel as of December 31, 2014
and 2013, and the related consolidated statements of operations, and cash flows for the years ended December 31, 2014 and 2013 and for the
period from February 29, 2012 through December 31, 2012. This selected financial data should be read in conjunction with Citadel’s
consolidated financial statements and related notes included elsewhere in this Current Report on Form 8-K.
($ in thousands)
2012
Statement of Operations Data :
Net sales
Cost of sales
Year Ended December 31,
2013
2014
$ 247,129
194,540
$ 324,858
260,012
$ 428,549
348,879
52,589
53,099
10,283
64,846
56,891
26,038
79,670
58,759
—
Operating income (loss)
Interest expense, net of interest income
Other (income) expense, net
(10,793 )
14,756
(154 )
(18,083 )
16,591
(1,012 )
20,911
18,287
2,202
Income (loss) before income taxes
Provision (benefit) for income taxes
(25,395 )
(2,757 )
(33,662 )
(4,707 )
422
5,230
Gross profit
Selling, general and administrative expenses
Asset impairment
Net income (loss)
Other Data (at period end):
Depreciation
Amortization
Capital expenditures
Certain Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Long-term debt excluding current portion
Citadel stockholders’ equity
$
(22,638 )
$
(28,955 )
$
(4,808 )
$
3,443
19,723
4,005
$
4,995
22,419
4,853
$
7,524
20,918
6,125
6,671
68,336
423,667
258,490
68,621
5
10,909
86,817
626,992
397,600
89,705
CITADEL MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Citadel’s consolidated financial statements and the notes to those statements
and other financial information included elsewhere in this Current Report on Form 8-K.
Recent Trends
Although Citadel’s financial statements are not available for the quarter ended March 31, 2015 as of the date of this Current Report on
Form 8-K, Citadel’s 2015 revenues may be adversely impacted compared to the prior year quarter by macro economic 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; however, as of the date of this Current Report on Form 8-K, Citadel’s operating income for such quarter is not
expected to be adversely impacted.
SEGMENT INFORMATION
Citadel makes decisions, assesses performance and allocates resources by the following operating segments which are also Citadel’s
reportable segments: Engineered Plastics (EP) and Engineered Composites (EC).
Citadel uses net sales to unaffiliated customers, gross profit and operating income before certain items in order to make decisions, assess
performance and allocate resources to each segment. The following discussion regarding Citadel’s segment gross profit and operating income
does not include items such as interest income or expense, other income or expense, accelerated depreciation, asset impairments, 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.
Fiscal year 2013 is a twelve month period compared to fiscal year 2012 which is a ten month period as Citadel’s 2012 fiscal period
commenced following the acquisition of Citadel by HGGC on February 29, 2012.
The following tables summarize net sales to unaffiliated customers, gross profit and SG&A expenses by segment (in thousands):
Net Sales
Year Ended December 31,
2014
2013
Engineered Plastics
Engineered Composites
Total net sales to unaffiliated customers
10 Months
Ended
December 31,
2012
$ 287,575
140,974
$ 196,806
128,052
$
141,900
105,229
$ 428,549
$ 324,858
$
247,129
Gross Profit
Year Ended December 31,
2014
2013
Engineered Plastics
Engineered Composites
$ 41,318
40,440
Total segment gross profits
Inventory step-up
81,758
(2,088 )
Total gross profit
$ 79,670
6
$ 27,889
38,050
10 Months
Ended
December 31,
2012
$
65,939
(1,093 )
$ 64,846
20,252
32,337
52,589
—
$
52,589
SG&A Expenses
Year Ended December 31,
2014
2013
Engineered Plastics
Engineered Composites
$ 22,438
29,144
$ 17,907
31,444
51,582
7,177
49,351
7,540
40,675
12,424
58,759
56,891
53,099
26,038
10,283
Total segment SG&A expenses
Corporate G&A expenses
Total SG&A expenses before certain items
—
Goodwill and intangibles impairment
Total operating expenses
10 Months
Ended
December 31,
2012
$ 58,759
$ 82,929
$
$
15,176
25,499
63,382
Below is a reconciliation of segment operating income (loss) to operating income (loss) and income (loss) before income taxes:
Year Ended December 31,
2014
2013
Engineered Plastics
Engineered Composites
$
18,880
11,296
$
9,982
6,606
10 Months
Ended
December 31,
2012
$
5,076
6,838
Total segment operating income (loss)
Corporate
30,176
(7,177 )
16,588
(7,540 )
11,914
(12,424 )
Operating income (loss) before certain items
Goodwill and intangibles impairment
Inventory step-up
22,999
—
(2,088 )
9,048
(26,038 )
(1,093 )
(510 )
(10,283 )
—
20,911
(18,287 )
47
(2,249 )
(18,083 )
(16,591 )
320
692
(10,793 )
(14,756 )
461
(307 )
Operating income (loss)
Interest expense, net
Equity in income of joint venture
Miscellaneous
Income (loss) before income taxes
$
422
$
(33,662 )
$
(25,395 )
Results of Operations — Fiscal Year 2014 Compared with Fiscal Year 2013
Citadel uses net sales to unaffiliated customers, segment gross profit and segment operating income before certain items in order to make
decisions, assess performance and allocate resources to each segment. Citadel has the following reportable segments: Engineered Plastics
(“EP”) and Engineered Composites (“EC”). The following discussion regarding Citadel’s segment gross profit, segment SG&A expenses and
segment operating income does not include items such as interest income or expense, other income or expense, accelerated depreciation, asset
impairments, 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.
7
Segment Information
Engineered Plastics
2014
Pounds sold
Net sales
Segment gross profit
Segment gross profit percentage
Segment SG&A expenses
Segment operating income
Price per pound
Segment gross profit per pound
$
$
$
$
$
$
Year Ended December 31,
2013
Increase (decrease)
(in thousands, except for %’s and per pound data)
317,055
287,575
41,318
14.4 %
22,438
18,880
0.907
0.130
$
$
$
$
$
$
230,256
196,806
27,889
14.2 %
17,907
9,982
0.855
0.121
$
$
$
$
$
$
86,799
90,769
13,429
0.2 %
4,531
8,898
0.052
0.009
37.7 %
46.1 %
48.2 %
25.3 %
89.1 %
6.1 %
7.6 %
EP net sales for the year ended December 31, 2014 were $287.6 million, an increase of $90.8 million or 46.1%, compared with the prior
year. During fiscal year 2014, the incremental sales and volumes provided by the December 2013 Lucent Polymers acquisition were $80.5
million and 80.1 million pounds, respectively. Excluding the Lucent Polymers acquisition organic sales increased $10.3 million driven by
volume increases across all EP business units from further penetration of existing customers, new product offerings and volume lift from year
over year improvement in the housing and auto markets.
EP gross profit increased $13.4 million to $41.3 million for the year ended December 31, 2014. The increase over 2013 was due to the
positive contribution from the Lucent Polymers acquisition offset by decreased gross profit at the EP legacy business resulting from margin
compression due to polypropylene market pricing dynamics, incrementally higher manufacturing costs at EP’s Virginia tolling operations to
accommodate growing production volumes, and product mix.
EP SG&A expenses increased $4.5 million during the year ended December 31, 2014. Increases to SG&A of $7.3 million from the
Lucent Polymers acquisition were partially offset by $2.7 million of lower salary and other operating costs from cost out program initiatives.
EP operating income for the year ended December 31, 2014 was $18.9 million, an increase of $8.9 million from the prior year. The
increase in EP operating income in 2014 was primarily due to the contribution of the Lucent acquisition and the lower salary and other
operating costs mentioned above.
Engineered Composites
2014
Pounds sold
Net sales
Segment gross profit
Segment gross profit percentage
Segment SG&A expenses
Segment operating income
Price per pound
Segment gross profit per pound
Year Ended December 31,
2013
Increase (decrease)
(in thousands, except for %’s and per pound data)
139,138
$ 140,974
$ 40,440
28.7 %
$ 29,144
$ 11,296
$
1.013
$
0.291
135,850
$ 128,052
$ 38,050
29.7 %
$ 31,444
$
6,606
$
0.943
$
0.280
3,288
$ 12,922
$ 2,390
(1.0 )%
$ (2,300 )
$ 4,690
$ 0.070
$ 0.011
2.4 %
10.1 %
6.3 %
(7.3 )%
71.0 %
7.4 %
3.8 %
EC net sales for the year ended December 31, 2014 were $141.0 million, an increase of $12.9 million or 10.1%, compared with the prior
year. During fiscal year 2014, the incremental sales and volumes provided by the November 2014 acquisition of The Composites Group, or
TCG, were $14.8 million and 5.6 million pounds, respectively. Excluding the TCG acquisition organic sales decreased $1.9 million driven by a
depressed economy in Brazil, unfavorable foreign currency translation caused by a strengthening U.S. dollar, and weak market conditions in
Mexico offset by modest organic growth in US and European markets.
8
EC gross profit was $40.4 million for the year ended December 31, 2014, an increase of $2.4 million over prior year. The improvement
over the prior year was due to the TCG acquisition offset by the impact of lower sales volumes in Brazil and Mexico. Gross profit per pound
increased $0.01 or 3.8% from the higher margin contribution of the TCG product portfolio.
EC SG&A expenses decreased $2.3 million during the year ended December 31, 2014. Increases to SG&A of $1.7 million from the TCG
acquisition were offset by $3.0 million of lower amortization of intangibles and $1.0 million of lower salary and other operating costs from cost
out program initiatives.
EC operating income for the year ended December 31, 2014 was $11.3 million, an increase of $4.7 million from the prior year. The
increase in EC operating income in 2014 was primarily driven by the aforementioned $2.4 million increase in gross profit, $3.0 million lower
amortization of intangibles and $1.0 million lower operating expenses offset by the $1.7 million of incremental operating expenses of the TCG
acquisition.
Consolidated
2014
Pounds sold
Net sales
Total SG&A expenses before certain items
Total operating income before certain items
Operating income (loss)
Price per pound
Year Ended December 31,
2013
Increase (decrease)
(in thousands, except for %’s and per pound data)
456,193
$ 428,549
$ 58,759
$ 22,999
$ 20,911
$
0.939
366,106
$ 324,858
$ 56,891
$
9,048
$ (18,083 )
$
0.887
90,087
$ 103,691
$
1,868
$ 13,951
$ 38,994
$
0.052
24.6 %
31.9 %
3.3 %
154.2 %
(215.6 )%
5.9 %
* Total SG&A expenses before certain items represents segment SG&A expenses combined with Corporate general and administrative
expenses. 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 year ended December 31, 2014 were $428.5 million, an increase of $103.7 million, or 31.9%, compared
with the prior year period. Incremental net sales and volume from Citadel’s December 2013 Lucent Polymers and November 2014 TCG
acquisitions contributed $95.3 million and 85.7 million pounds, respectively, for the year ended December 31, 2014. Excluding acquisitions
organic sales increased $8.4 million driven primarily by volume increases in the EP business unit.
Total SG&A expenses before certain items increased $1.9 million for the year ended December 31, 2014 compared to the prior year. A
$2.2 million increase in SG&A expenses from the combined EP and EC reporting segments was offset by a $0.4 million decrease in corporate
SG&A expenses. The $2.2 million increase in the combined EP and EC reportable segments SG&A expense consists of a $10.5 million
contribution from acquisitions offset by a $8.3 million decrease in the legacy operating business. The $0.4 million decrease in corporate SG&A
expenses consists primarily of a $1.7 million decrease in LLC equity unit compensation expense offset by a $1.4 million increase in
acquisition-related expenses.
Total operating income before certain items for the year ended December 31, 2014 was $23.0 million, an increase of $14.0 million over
the prior year. The increase in total operating income before certain items was comprised of contributions from acquisitions and the legacy
business (including corporate) of $8.4 million and $5.6 million, respectively. Operating income improved $39.0 million to $20.9 million due
primarily to no charges in 2014 for impairment of goodwill and intangibles compared to $26.0 million in 2013 plus the increase in operating
income before certain items mentioned above.
Interest expense, net of interest income, increased $1.7 million for the year ended December 31, 2014, as compared to the prior year
primarily related to increased borrowings for acquisitions.
Equity in income of joint venture decreased $0.3 million to near zero for the year ended December 31, 2014.
9
Miscellaneous income (expense) for the year ended December 31, 2014 was ($2.2) million, compared with $0.7 million for the year
ended December 31, 2013 and primarily represents gains (losses) from remeasuring non-local currency denominated intercompany loans
between EC subsidiaries in the U.S. and Europe.
Income (loss) before income taxes was $0.4 million and ($33.7) million for the years ended December 31, 2014 and 2013, respectively.
Results of Operations — Fiscal Year 2013 Compared with Fiscal Year 2012
Fiscal year 2013 is a twelve month period compared to fiscal year 2012 which is a ten month period as Citadel’s 2012 fiscal period
commenced following the acquisition of Citadel by HGGC on February 29, 2012.
Segment Information
Engineered Plastics
10 Months
Year Ended
Ended
December 31,
December 31,
2013
2012
Increase (decrease)
(in thousands, except for %’s and per pound data)
Pounds sold
Net sales
Segment gross profit
Segment gross profit percentage
Segment SG&A expenses
Segment operating income
Price per pound
Segment gross profit per pound
$
$
$
$
$
$
230,256
196,806
27,889
14.2 %
17,907
9,982
0.855
0.121
$
$
$
$
$
$
171,338
141,900
20,252
14.3 %
15,176
5,076
0.828
0.118
58,918
$ 54,906
$ 7,637
(0.1 )%
$ 2,731
$ 4,906
$ 0.027
$ 0.003
34.4 %
38.7 %
37.7 %
18.0 %
96.7 %
3.3 %
2.5 %
EP net sales were $196.8 million for the year ended December 31, 2013, an increase of $54.9 million over the prior year ten month
period. Net sales from the incremental January 2013 and February 2013 periods were $33.6 million. EP net sales for the ten months ended
December 31, 2013 were $163.2 million, an increase of $21.2 million or 15.0%, compared with the prior year. During fiscal year 2013, the
incremental sales and volumes provided by the December 2013 Lucent Polymers acquisition were $3.9 million and 3.8 million pounds,
respectively. Excluding the Lucent Polymers acquisition organic sales increased $17.3 million driven by volume increases across all EP
business units and enhanced by improved mix in EP’s higher selling price/gross profit engineered plastics business unit.
EP gross profit was $27.9 million for the year ended December 31, 2013, an increase of $7.6 million over the prior year ten month period.
Gross profit from the incremental January 2013 and February 2013 periods was $5.0 million. EP gross profit increased $2.7 million to $22.9
million for the ten months ended December 31, 2013 versus the comparable prior year period. The increase in gross profit over 2012 was
comprised of incremental contributions from the Lucent Polymers acquisition and increased volume/sales of higher margin engineered products
of $1.9 million offset by unfavorable mix in EP’s performance products business unit of $0.3 million.
EP SG&A expenses were $17.9 million for the year ended December 31, 2013, an increase of $2.7 million over the prior year ten month
period. SG&A from the incremental January 2013 and February 2013 periods was $2.6 million. EP SG&A expenses for the ten months ended
December 31, 2013 increased $0.1 million versus the comparable prior year period. A decrease in amortization of intangibles expense of $2.1
million was offset by incremental SG&A expenses from the Lucent acquisition of $0.5 million and higher operating expenses in the legacy EP
business of $1.6 million. The higher legacy EP SG&A expenses consisted primarily of incremental employee severance and executive
recruitment costs of $0.7 million and incremental manufacturing expenses at EP’s Virginia tolling plant operations caused by an unexpected
equipment breakdown of $0.5 million.
10
EP operating income was $10.0 million for the year ended December 31, 2013, an increase of $4.9 million over the prior year ten month
period. Operating income from the incremental January 2013 and February 2013 periods was $2.3 million. EP operating income for the ten
months ended December 31, 2013 was $7.6 million, an increase of $2.6 million over the prior year period. The increase in EP operating income
in 2013 was primarily due to the aforementioned increase in gross profit as increases in SG&A operating expenses were nearly offset by a
similar decrease in amortization of intangibles.
Engineered Composites
10 Months
Year Ended
Ended
December 31,
December 31,
2013
2012
Increase (decrease)
(in thousands, except for %’s and per pound data)
Pounds sold
Net sales
Segment gross profit
Segment gross profit percentage
Segment SG&A expenses
Segment operating income
Price per pound
Segment gross profit per pound
$
$
$
$
$
$
135,850
128,052
38,050
29.7 %
31,444
6,606
0.943
0.280
$
$
$
$
$
$
110,755
105,229
32,337
30.7 %
25,499
6,838
0.950
0.292
25,095
$ 22,823
$ 5,713
(1.0 )%
$ 5,945
$
(232 )
$ (0.007 )
$ (0.012 )
22.7 %
21.7 %
17.7 %
23.3 %
(3.4 )%
(0.7 )%
(4.1 )%
EC net sales were $128.1 million for the year ended December 31, 2013, an increase of $22.8 million over the prior year ten month
period. Net sales from the incremental January 2013 and February 2013 periods were $22.3 million. For the ten months ended December 31,
2013 EC net sales of $105.8 million were up $0.5 million to the comparable prior year period as a $1.0 million increase in the EC domestic
operations were offset by $0.5 million decrease at EC’s foreign operations. The increase in EC domestic sales was primarily due to further
penetration of existing customers and volume lift in the auto markets. The decrease in the level of foreign sales was primarily due to
unfavorable foreign currency translation in Brazil.
EC gross profit was $38.1 million for the year ended December 31, 2013, an increase of $5.7 million over the prior year ten month
period. Gross profit from the incremental January 2013 and February 2013 periods was $6.8 million. EC gross profit decreased $1.1 million to
$31.2 million for the ten months ended December 31, 2013 versus the comparable prior year period. The decrease in gross profit was primarily
due to unfavorable foreign currency translation in Brazil along with unfavorable sales mix in the foreign operations.
EC SG&A expenses were $31.4 million for the year ended December 31, 2013, an increase of $5.9 million over the prior year ten month
period. SG&A from the incremental January 2013 and February 2013 periods was $5.4 million. EC SG&A expenses for the ten months ended
December 31, 2013 increased $0.5 million versus the comparable prior year period. The increase was primarily due to a $1.5 million
investment in US marketing and technology growth resources plus an increase in amortization of intangibles expense of $0.8 million offset by
lower SG&A spending in the foreign operations.
EC operating income was $6.6 million for the year ended December 31, 2013, a decrease of $0.2 million over the prior year ten month
period. Operating income from the incremental January 2013 and February 2013 periods was $1.4 million. EC operating income for the ten
months ended December 31, 2013 was $5.2 million, a decrease of $1.6 million over the prior year period. The decrease in EC operating income
in 2013 was primarily due to the aforementioned decrease in gross profit plus the net increase in SG&A expenses.
11
Consolidated
Year Ended
December 31,
2013
Pounds sold
Net sales
Total SG&A expenses before certain items
Total operating income before certain items
Operating income (loss)
Price per pound
$
$
$
$
$
10 Months
Ended
December 31,
2012
Increase (decrease)
(in thousands, except for %’s and per pound data)
366,106
324,858
56,891
9,048
(18,083 )
0.887
$
$
$
$
$
282,093
247,129
53,099
(510 )
(10,793 )
0.876
84,013
$ 77,729
$ 3,792
$ 9,558
$ (7,290 )
$ 0.011
29.8 %
31.5 %
7.1 %
(1,874.1 )%
67.5 %
1.3 %
* Total SG&A expenses before certain items represents segment SG&A expenses combined with Corporate general and administrative
expenses. 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 were $324.9 million for the year ended December 31, 2013, an increase of $77.7 million over the prior year ten
month period. Net sales from the incremental January 2013 and February 2013 periods were $55.9 million. Consolidated net sales for the ten
months ended December 31, 2013 were $268.9 million, an increase of $21.8 million or 8.8%, compared with the prior year period. The
incremental net sales and volume from the December 2013 acquisition of Lucent Polymers was $3.9 million and 3.8 million pounds,
respectively. Excluding the Lucent Polymers acquisition organic sales increased $17.9 million driven primarily by net sales and volume
increases in the EP business unit of $17.3 million and 14.3 million pounds, respectively.
Total SG&A expenses before certain items were $56.9 million for the year ended December 31, 2013, an increase of $3.8 million over
the prior year ten month period. SG&A from the incremental January 2013 and February 2013 periods was $8.5 million. Consolidated SG&A
expenses for the ten months ended December 31, 2013 were $48.4 million, a decrease of $4.7 million or 8.9%, compared with the prior year
period. The $4.7 million decrease in SG&A expenses were largely corporate expenses consisting primarily of a $7.6 million decrease in
acquisition expenses related to the sale of Citadel to HGGC on February 29, 2012 and $0.7 million lower professional fees to implement
Citadel’s 2012 tax restructuring offset by a $2.4 million increase in LLC equity unit compensation expense.
Total operating income before certain items was $9.0 million for the year ended December 31, 2013, an increase of $9.6 million over the
prior year ten month period. Operating income before certain items from the incremental January 2013 and February 2013 periods was $3.3
million. Consolidated operating income before certain items for the ten months ended December 31, 2013 was $5.7 million, an increase of $6.3
million compared with the prior year period. The $6.3 million increase in operating income before certain items was primarily due to the
aforementioned decrease in corporate SG&A expenses and incremental gross profit from the volume and sales growth of the EP reporting unit.
Operating (loss) of ($18.1) million increased ($7.3) million during the year ended December 31, 2013 due primarily to $15.8 million
incremental charges for impairment of goodwill and intangibles plus the increase in operating income before certain items mentioned above.
Interest expense, net of interest income, increased $1.8 million for the year ended December 31, 2013, as compared to the prior year ten
month period. Net interest expense from the incremental January 2013 and February 2013 periods was $2.7 million. Net interest expense for
the ten months ended December 31, 2013 was $0.9 million lower than the prior year comparable period due primarily to lower average interest
rate resulting from restructuring Citadel’s debt in 2013.
Equity in income of joint venture decreased $0.1 million to $0.3 million for the year ended December 31, 2013.
Miscellaneous income (expense) for the year ended December 31, 2013 was $0.7 million, compared with ($0.3) million for the period
ended December 31, 2012 and primarily represents gains (losses) from remeasuring non-local currency denominated intercompany loans
between EC subsidiaries in the U.S. and Europe.
12
Income (loss) before income taxes was ($33.7) million and ($25.4) million for the periods ended December 31, 2013 and 2012,
respectively.
Critical Accounting Policies
Citadel has identified critical accounting policies that, as a result of the judgments, uncertainties, and the operations involved, could result
in material changes to its financial condition or results of operations under different conditions or using different assumptions. The critical
accounting policies of Citadel are as follows:
Revenue Recognition
Revenue is recognized when persuasive evidence of an agreement exists, shipment of goods has occurred, risk of ownership has passed to
the buyer, the price is fixed and determinable and collectability is reasonably assured. Provisions for discounts, rebates to customers and returns
are provided for in the same period that the related sales are recorded.
Allowance for Doubtful Accounts
Citadel determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts
receivable are past due, Citadel’s previous loss history, the customer’s current ability to pay its obligation to Citadel and the condition of the
general economy as a whole. Changes in these factors or changes in the general economic conditions could result in changes to the allowance
for doubtful accounts.
Inventory Reserves
Citadel records a reserve for slow-moving and obsolete inventory based on historical experience and monitoring of current inventory
activity. Citadel’s estimate of this reserve is based on a periodic detailed analysis, using both qualitative and quantitative factors. The proceeds
from the sale or disposition of these inventories may differ from recorded amounts.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated useful life of each asset. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful lives of the improvements. Annual depreciation is primarily computed using
the straight-line method. The cost of maintenance and repairs is charged to expense as incurred while significant renewals and betterments are
capitalized. The estimated useful lives are as follows:
Asset Classification
Years
Buildings
Machinery and equipment
Leasehold improvements
20
5-7
Lease Term
Income Taxes
Citadel’s provision for income taxes involves a significant amount of judgment by management. This provision is impacted by the
income and tax rates of the countries where Citadel operates.
Various taxing authorities periodically audit Citadel’s tax returns. These audits may include questions regarding Citadel’s tax filing
positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures
associated with these various tax filing positions, Citadel records tax liabilities for uncertain tax positions where the likelihood of sustaining the
position is not more-likely-than-not based on its technical merits. A significant period of time may elapse before a particular matter, for which
Citadel has recorded a tax liability, is audited and fully resolved.
The establishment of Citadel’s tax liabilities relies on the judgment of management to estimate the exposures associated with its various
filing positions. Although management believes those estimates and judgments are reasonable, actual results could differ, resulting in gains or
losses that may be material to Citadel’s consolidated statements of operations.
13
To the extent that Citadel prevails in matters for which tax liabilities have been recorded, or are required to pay amounts in excess of
these tax liabilities, Citadel’s effective tax rate in any given financial statement period could be materially affected. An unfavorable tax
settlement could result in an increase in Citadel’s effective tax rate in the financial statement period of resolution. A favorable tax settlement
could be recognized as a reduction in Citadel’s effective tax rate in the financial statement period of resolution.
Citadel records a valuation allowance to reduce its deferred tax assets if it is more likely than not that some portion or all of the deferred
tax assets will not be realized. All available evidence, both positive and negative, is considered to determine whether a valuation allowance is
needed. Evidence, such as the results of operations for the current and preceding years, is given more weight than projections of future income,
which is inherently uncertain.
Citadel’s losses in the U.S. in recent periods provide sufficient negative evidence to require a full valuation allowance against its net
deferred tax assets in the U.S. Citadel intends to maintain a valuation allowance against its net deferred tax assets in the U.S. until sufficient
positive evidence exists to support realization of such assets.
Fair Value Measurements
The authoritative guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 –
Quoted prices in active markets for identical assets or liabilities.
Level 2 –
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities: quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level 3 –
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.
Citadel applies fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to goodwill,
when determining the fair value of its business combinations and to value certain unit based compensation. To determine the fair value in these
situations, Citadel determines what a market participant would pay on the measurement date. To evaluate impairments of goodwill, Citadel
used Level 3 inputs such as discounted cash flows. To determine the fair value of the assets acquired in business combinations, Citadel uses
Level 3 inputs such as discounted cash flows, excess earnings of customer relationships and relief from royalties. Citadel also uses Level 3
inputs to value certain unit-based compensation.
Goodwill
Citadel completes an annual (or more often if circumstances are required) impairment assessment of its goodwill on a reporting unit level
as of the end of each fiscal year. For management purposes, Citadel is organized into five reporting units: 1) Bulk Molding Compounds, Inc.
(including TCG) (“BMCI”), 2) Bulk Molding Compounds Mexico (“BMC Mexico”), 3) Bulk Molding Compounds Brazil (“BMC Brazil”), 4)
Bulk Molding Compounds Europe (“BMC Europe”), and 5) Matrixx (including Lucent).
The fair value measurement method used in Citadel’s quantitative impairment analysis utilizes a number of significant unobservable
inputs or Level 3 assumptions. These assumptions include, among others, projections of our future operating results, the implied fair value of
these assets using an income approach by preparing a discounted cash flow analysis and other subjective assumptions. In performing the
goodwill impairment assessment, the carrying values of Citadel’s reporting units were compared to their estimated fair values, as calculated by
the discounted cash flow method. Management uses judgment to determine whether to use quantitative fair value measurement analysis as
described above or a qualitative analysis.
14
In performing its goodwill assessment for the year ended December 31, 2014, Citadel elected to skip the qualitative analysis.
Accordingly, the first step of the two-step goodwill impairment test includes estimating the fair values of each reporting unit and comparing
those values to the reporting units’ carrying value. Citadel determined that no material impairments existed as of and for the year ended
December 31, 2014.
In performing its goodwill assessment for the year ended December 31, 2013, Citadel evaluated the following factors that affect future
business performance: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance,
entity-specific events, and reporting unit factors. As a result of the assessment of these qualitative factors, Citadel concluded that it was not
more likely than not that the fair values of all five of the reporting units exceeded their carrying value. Accordingly, the first step of the
two-step goodwill impairment test was performed. The resultant estimated fair value of BMCI reporting unit exceeded its carrying value and no
goodwill impairment charges were recorded. The resultant estimated fair values of Citadel’s remaining four reporting units were less than their
respective carrying values. As a result, when the estimated fair value of a reporting unit is less than its carrying value, an impairment charge is
recorded for amount by which the carrying value of the goodwill exceeds its calculated implied fair value. Accordingly, during the year ended
December 31, 2013, it was determined that the goodwill of Matrixx, BMC Mexico, and BMC Brazil were partially impaired, and the goodwill
and intangible assets of BMC Europe were completely impaired. Citadel recorded non-cash impairment charges to recognize the impairment.
In performing its goodwill assessment for the period ended December 31, 2012, Citadel evaluated the same factors that affect future
business performance. As a result of the assessment, Citadel concluded that it was more likely than not that the fair values of two (BMCI and
BMC Mexico) of the five reporting units exceeded their carrying value. Accordingly, the first step of the two-step goodwill impairment test
was not considered necessary for these two reporting units and no goodwill impairment charges were recorded. However, the first step of the
two-step goodwill impairment test was considered necessary for the remaining three. The resultant estimated fair value of BMC Brazil
reporting unit exceeded its carrying value and no goodwill impairment charges were recorded. It was determined that the goodwill of Citadel’s
remaining Matrixx and BMC Europe reporting units were partially impaired, and the goodwill and intangible assets of BMC Europe were
completely impaired. Citadel recorded non-cash impairment charges to recognize the impairment.
Intangibles
Citadel’s finite intangible assets consisting of customer relationships, formulas, internally developed software and non-compete
agreements were valued at the date of acquisition and are amortized on a straight-line basis (or an accelerated basis in the case of customer
relationships) over the lesser of their remaining useful or contractual lives (generally 5 to 25 years).
Long-Lived Assets
Property and equipment and finite life intangible assets are reviewed whenever events or changes in circumstances occur that indicate
possible impairment. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition are less than its carrying amount.
Additionally, Citadel also evaluates the remaining useful life each reporting period to determine whether events and circumstances
warrant a revision to the remaining period of depreciation or amortization. If the estimate of a long lived asset’s remaining useful life is
changed, the remaining carrying amount of the asset is amortized prospectively over that revised remaining useful life.
Unit-based Compensation
Citadel grants Citadel LLC’s (Citadel’s Parent Company) Class A units (“LLC equity units”) in the form of Management Incentive Units
(“MIU”) as part of its long-term incentive compensation strategy for employees and management of the Company. All such MIU awards are
expensed based on the fair value of the respective award. Fair value for awards that involve service or performance conditions for vesting is
determined based on the market price on the grant date. Citadel determined the fair value of the MIUs using an earnings multiple for the 2014
MIU issuances and the discounted cash value method for the 2013 issuances under the income approach.
15
Liquidity and Capital Resources
Working capital, excluding cash and debt, was $78.3 million as of December 31, 2014, an increase of $14.3 million from December 31,
2013. The fiscal 2014 acquisition of TCG contributed $15.0 million to working capital. The translation effect of foreign currencies, primarily
the Euro and Brazilian real, decreased working capital by $1.2 million. Excluding the impact of the 2014 TCG working capital, working capital
decreased by $0.7 million largely due to decreases in inventory of $7.1 million offset by increases in accounts receivable and other current
assets of $4.4 million and $1.0 million, respectively.
Capital expenditures for the year ended December 31, 2014 were $6.1 million compared with $4.9 million last year. Capital expenditures
for fiscal year 2014 primarily related to the regular and ongoing investment in Citadel’s manufacturing facilities and incremental expenditures
around the integration of Citadel’s December 2013 acquisition of Lucent Polymers.
Long-term debt, including current maturities, consists of the following at December 31, 2014 and 2013 (in thousands):
2014
EC Europe revolving loan
Term loan – 1st Lien
Term loan – 2nd Lien
Senior subordinated notes payable
$
2013
—
320,000
80,000
—
$ 400,000
$
814
234,825
—
25,199
$ 260,838
During the year ended December 31, 2014 long-term debt increased $139.2 million resulting from incremental 1st lien and 2nd lien term
loan borrowings totaling $167.5 million to fund the TCG acquisition offset by conversion of the senior subordinated notes payable to $26.3
million equity units of the parent, 1st lien term loan payments of $2.3 million and pay off of EC Europe revolving loan borrowings of $0.8
million.
Contractual Obligations - as of 12/31/2014
($ in thousands)
Less than
1 yr
Category
Long-Term Debt
Capital Lease Obligations
Operating Lease Obligations
Purchase Obligations (l)
Pension Obligations (2)
Life Insurance Obligations (3)
Postretirement Benefit Obligations (4)
Interest Payments
$
2,400
19
2,540
6,400
207
207
180
23,937
$ 35,890
(1)
(2)
(3)
(4)
More than
5 yrs
Total
6,400
—
1,224
—
—
415
300
46,740
$ 384,800
—
—
—
—
—
524
26,458
$ 400,000
23
7,327
6,400
207
1,037
1,336
144,547
$ 55,079
$ 411,782
$ 560,877
1-3 yrs
$
6,400
4
3,563
—
—
415
332
47,412
$ 58,126
3-5 yrs
$
Take or pay vendor contracts.
Relate to foreign operations and plans mandated by respective governments. Projected payments beyond one year are not currently
determinable.
Whole Life policy paid annually until death. Term policy paid annually for 10 years or death. Policies related to TCG operations.
Amount paid to five former executives or surviving spouses under “SERP” at TCG.
16
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 BMC Mexico is the U.S. dollar. Transactions in currencies other than U.S. dollar of BMC Mexico are
recorded at the rates of exchange prevailing at the date of the transaction. BMC Mexico’s 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 BMC Mexico’s monetary assets and liabilities denominated in currencies other
than U.S. dollar, are recorded in operating expenses. The functional currency of BMC Germany, BMC Turkey and BMC Brazil is the Euro,
Lira and Real, respectively. Foreign currency adjustments, arising from the translation of the foreign subsidiaries’ financial statements, are
recorded in accumulated other comprehensive income (loss) as a separate component of stockholders’ 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. The results
of operations are translated using the monthly average exchange rates for the year. Foreign currency transaction remeasurement gains and
losses are included in current earnings.
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.
17
Exhibit 99.2
HGGC Citadel Plastics Holdings, Inc.
Consolidated Financial Statements
For the Years Ended December 31, 2014 and 2013 and the Period from February 29, 2012 Through December 31, 2012
HGGC Citadel Plastics Holdings, Inc.
Consolidated Financial Statements
For the Years Ended December 31, 2014 and 2013 and the Period from February 29,
2012 Through December 31, 2012
HGGC Citadel Plastics Holdings, Inc.
Contents
3-4
Independent Auditor’s Report
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2014 and 2013
5-6
Consolidated Statements of Operations and Comprehensive Loss For the Years Ended December 31, 2014 and 2013 and
the Period from February 29, 2012 Through December 31, 2012
7
Consolidated Statements of Stockholders’ Equity For the Years Ended December 31, 2014 and 2013 and the Period from
February 29, 2012 Through December 31, 2012
8
Consolidated Statements of Cash Flows For the Years Ended December 31, 2014 and 2013 and the Period from February
29, 2012 Through December 31, 2012
9-10
Notes to Consolidated Financial Statements
11-33
2
Independent Auditor’s Report
Management
HGGC Citadel Plastics Holdings, Inc.
West Chicago, IL
We have audited the accompanying consolidated balance sheets of HGGC Citadel Plastics Holdings, Inc. and Subsidiaries (the “Company”), as
of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash
flows for the years ended December 31, 2014 and 2013 and for the period from February 29, 2012 through December 31, 2012, and the related
notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we
express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
3
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HGGC
Citadel Plastics Holdings, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the
years ended December 31, 2014 and 2013 and for the period from February 29, 2012 through December 31, 2012 in accordance with
accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Chicago, Illinois
April 27, 2015
4
HGGC Citadel Plastics Holdings, Inc.
Consolidated Balance Sheets
(in thousands)
December 31,
2013
2014
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $895 and $661, respectively
Inventories, net
Prepaid expenses and other
Deferred income taxes
$
10,909
69,709
43,582
6,604
3,491
$
6,671
51,352
41,738
4,776
1,952
134,295
106,489
3,559
22,235
62,208
3,201
2,036
15,025
38,729
2,023
91,203
16,682
57,813
8,113
74,521
49,700
Other Assets
Goodwill
Intangible assets, net
Deferred loan costs, net of accumulated amortzation of $4,869 and $2,874, respectively
Deferred income taxes
Other long-term assets
Investment in joint venture
159,647
240,093
11,278
1,037
2,999
3,122
82,558
174,059
6,718
1,067
—
3,076
Total Other Assets
418,176
267,478
$ 626,992
$ 423,667
Total Current Assets
Property and Equipment
Land
Buildings and improvements
Machinery and equipment
Construction in progress
Less accumulated depreciation and amortization
Net Property and Equipment
Total Assets
5
HGGC Citadel Plastics Holdings, Inc.
Consolidated Balance Sheets
(in thousands)
December 31,
2013
2014
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable
Accrued expenses
Interest
Other
Current maturities of long-term debt
Current maturities of capital lease obligations
$
30,422
$
26,079
1,800
12,837
2,400
19
1,269
8,442
2,348
15
Total Current Liabilities
Long-Term Debt, less current maturities
Capital Lease Obligations, less current maturities
Other Long-Term Liabilities
Deferred Income Taxes
47,478
397,600
4
1,322
90,883
38,153
258,490
59
—
58,344
Total Liabilities
537,287
355,046
Commitments and Contingencies
Stockholders’ Equity
Common Stock
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
154
161,373
(15,421 )
(56,401 )
130
133,365
(13,281 )
(51,593 )
89,705
68,621
$ 626,992
$ 423,667
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements.
6
HGGC Citadel Plastics Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands)
Year Ended
December 31,
2014
Net Sales
Cost of Goods Sold
$
428,549
348,879
Year Ended
December 31,
2013
$
324,858
260,012
Period from
February 29,
2012 through
December 31,
2012
$
247,129
194,540
Gross profit
79,670
64,846
52,589
Operating Expenses
Selling and distribution
General and administrative
Asset impairment charges
15,320
43,439
—
13,454
43,437
26,038
8,572
44,527
10,283
Total operating expenses
58,759
82,929
63,382
Operating income (loss)
20,911
(18,083 )
(10,793 )
Other (Expense) Income
Interest expense, net of interest income of $194, $94 and $82, respectively
Equity in income of joint venture
Miscellaneous
(18,287 )
47
(2,249 )
(16,591 )
320
692
(14,756 )
461
(307 )
Total other expense
(20,489 )
(15,579 )
(14,602 )
422
5,230
(33,662 )
(4,707 )
(25,395 )
(2,757 )
(4,808 )
(2,140 )
(28,955 )
(4,521 )
(22,638 )
(8,760 )
Income (Loss) before income taxes
Income tax expense (benefit)
Net Loss
Foreign currency translation and other adjustments, net of taxes
Total Comprehensive Loss
$
(6,948 )
$
(33,476 )
$
(31,398 )
See accompanying notes to consolidated financial statements.
7
HGGC Citadel Plastics Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands except share data)
Common Stock
Amoun
Shares
t
Issuance of common stock, initial
capitalization
Issuance of common stock
Redemption of common stock
Net loss
Foreign currency translation
adjustment
127,935
775
(1,040 )
—
—
$ 128
1
(1 )
—
Additional
Paid in
Accumulated
Other
Comprehensive
Accumulated
Total
Stockholders’
Capital
Loss
Deficit
Equity
$ 129,394
774
(1,039 )
—
—
$
—
$
$
—
(8,760 )
129,129
2,966
(1,080 )
2,350
—
—
—
—
(22,638 )
(8,760 )
127,670
2,969
(1,081 )
—
—
Balance, December 31, 2013
Issuance of stock
Redemption of stock
Related-party debt extinguished with
issuance of commons stock
Exercise of options on common
stock
Stock compensation expense
Net loss
Foreign currency translation
adjustment
Change in postretirement obligation
benefits
129,558
1,067
(135 )
130
1
—
133,365
1,167
(156 )
21,911
22
26,272
—
—
26,294
1
Balance, December 31, 2014
153,279
—
(8,760 )
—
—
—
—
129,522
775
(1,040 )
(22,638 )
Balance, December 31, 2012
Issuance of common stock
Redemption of common stock
Stock compensation expense
Net loss
Foreign currency translation
adjustment
—
128
3
(1 )
—
—
—
—
—
—
—
(22,638 )
—
—
—
(28,955 )
97,859
2,969
(1,081 )
2,350
(28,955 )
—
(4,521 )
(13,281 )
—
—
(4,521 )
(51,593 )
—
—
68,621
1,168
(156 )
878
—
—
—
—
127
598
—
—
—
—
—
—
(4,808 )
128
598
(4,808 )
—
—
—
(2,133 )
—
(2,133 )
—
—
—
(7 )
—
(7 )
$ 154
$ 161,373
$
(15,421 )
$
(56,401 )
$
89,705
See accompanying notes to consolidated financial statements.
8
HGGC Citadel Plastics Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended
December 31,
2014
Cash Flows From Operating Activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating
activities, net of effect of acquisitions
Depreciation and amortization
Asset impairment losses
(Gains) losses on sale of property and equipment
Deferred income taxes
Payment-in-kind interest on subordinated notes payable
Equity in (income)/loss of joint venture
Stock based compensation expense
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accrued expenses
$
Net cash provided by operating activities
(4,808 )
Year Ended
December 31,
2013
$
(28,955 )
Period from
February 29,
2012 through
December 31,
2012
$
(22,638 )
28,442
—
(21 )
(3,273 )
1,095
(47 )
598
27,414
26,038
95
(10,466 )
1,180
(320 )
2,350
23,166
10,283
—
(5,875 )
763
(461 )
—
(3,157 )
8,124
(4,627 )
(4,124 )
(2,855 )
(6,078 )
498
(1,096 )
7,387
1,733
2,522
(8,855 )
18,202
7,805
8,025
Cash Flows From Investing Activities
Purchase of property and equipment
Proceeds from sale of property and equipment
Acquisition of businesses, net of cash acquired of $217, $371 and $6,260,
respectively
(6,125 )
9
(4,853 )
220
(4,005 )
—
(168,783 )
(65,287 )
(306,984 )
Net cash used in investing activities
(174,899 )
(69,920 )
(310,989 )
Cash Flows From Financing Activities
Payments on revolving line of credit, net
Proceeds from issuance of long-term debt, net of deferred financing costs
Principal payments on long-term debt
Principal payments on capital lease obligations
Capital contributions (redemptions)
Proceeds from issuance of common stock
(781 )
160,967
(2,348 )
(51 )
1,141
—
(211 )
108,313
(47,207 )
(18 )
1,888
—
(2,418 )
195,238
(5,775 )
(22 )
(265 )
122,220
Net cash provided by financing activities
158,928
62,765
308,978
Effects of exchange rate changes on cash
2,007
(782 )
789
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, beginning of year
4,238
6,671
(132 )
6,803
6,803
—
Cash and Cash Equivalents, end of year
$
9
10,909
$
6,671
$
6,803
HGGC Citadel Plastics Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended
December 31,
2014
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest
Cash paid during the year for income taxes
Related-party debt extinguished with equity
Issuance of common stock in connection with the acquisition of Citadel
$
17,858
8,882
26,294
—
Year Ended
December 31,
2013
$
17,181
5,495
—
—
Period from
February 29,
2012 through
December 31,
2012
$
12,888
3,782
—
7,301
See accompanying notes to consolidated financial statements.
10
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
1. Nature of Operations
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, the Company develops, produces, and markets a
broad line of high quality compounded products to industrial customers.
The 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 the Company’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”) (Note 14) (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 the Company’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. As discussed in Note 2, Matrixx acquired Lucent Polymers, Inc. (“Lucent”) on
December 6, 2013.
2. Acquisition
Citadel Plastics Holdings, Inc.
On February 29, 2012 (the “closing date”), HGGC Citadel LLC, a wholly-owned subsidiary of Huntsman Gay Global Capital (a private equity
firm and the majority stockholder) (“HGGC”), certain institutional investors and members of management and employees of Citadel acquired
all
11
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
of the outstanding common stock of Citadel from Wind Point Partners. Upon consummation of the merger, Citadel continued as the surviving
corporation and wholly owned operating subsidiary of HGGC Citadel. The total selling price was $320,545 plus a $64 adjustment for the
post-closing true-up of the selling price based on the level of working capital (as defined). A total of $19,200 of the selling price was placed
into an escrow and was held until April 30, 2013 to cover claims by HGGC Citadel relating to possible representations from Citadel,
warranties, taxes, and environmental matters. During 2013, the entire escrow was liquidated with $18,504 disbursed to the Sellers, $552
disbursed back to the Company and $144 disbursed to cover fees. The acquisition has been accounted for under the purchase method.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date, February 29,
2012:
Current assets
Property and equipment
Goodwill
Intangible assets
Other
$
Total assets acquired
83,606
37,958
88,578
212,011
5,513
427,666
Current liabilities
Long-term obligations
Deferred income taxes
38,519
1,406
67,196
Total liabilities assumed
107,121
Net assets acquired
$ 320,545
Approximately $10,800 of the goodwill recorded as a result of the acquisition is deductible for income tax purposes. Intangible assets acquired
consisted of formulas/trade names of $57,120, customer relationships of $139,436, non-compete agreements of $11,096, computer software of
$601 and backlog of $3,758. The weighted-average amortization period on the acquired intangible assets was 19 years.
To fund the acquisition, including acquisition costs of $8,215 (included in operating expenses) and loan financing costs of $6,442, the
Company utilized $4,000 of its available cash and issued $122,220 of common stock for cash, $7,301 of common stock to former stockholders
of the sellers, and long-term debt, including borrowings on the Company’s revolving credit line, of $201,680. On December 21, 2012, HGGC
formed Citadel Plastics Holdings, LLC (“Citadel LLC” or the “Parent”). On December 31, 2012, all of the shareholders of the common stock
of HGGC Citadel contributed their common stock holdings to Citadel LLC in exchange for Class L units of Citadel LLC.
Lucent Polymers, Inc.
On December 6, 2013, Matrixx acquired all of the outstanding stock of LPI Holding Company and its wholly owned operating company,
Lucent Polymers, Inc. (“Lucent”), from River Associates Investments, LLC (“Sellers”). The total purchase price paid at closing, net of cash
acquired of
12
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
$371, was $65,287. Two escrow accounts were established at close. The first escrow account of $1,000 is to cover amounts that may become
due from the Sellers back to the Company for the true-up of the purchase price based on the level of working capital (as defined) on the
acquisition date. During 2014 this escrow account was settled and resulted in an additional $283 payment to the Sellers. A second escrow
account of $644 is to cover claims by the Company relating to possible representations from the Sellers, warranties, taxes and environmental
matters. No claims were made related to this escrow account during 2014. The Lucent acquisition has been accounted for under the purchase
method. Beginning December 6, 2013, the Lucent operations were reflected in the Company’s consolidated financial statements.
Lucent is a manufacturer of highly engineered, custom formulated thermoplastics compounds utilizing recycled and prime feed stocks 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, December 6,
2013:
Current assets
Property and equipment
Goodwill
Intangible assets
$ 26,158
11,988
19,093
22,187
Total assets acquired
79,426
Current liabilities
Deferred income taxes
7,312
6,827
Total liabilities assumed
14,139
Net assets acquired
$ 65,287
Approximately $6,457 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 $10,251, customer relationships of $9,873 and non-compete agreements of $2,063. The weighted-average
amortization period on the acquired intangible assets was 15 years.
To fund the acquisition, including acquisition costs of $1,224 (included in operating expenses) and loan financing costs of $1,891, the
Company utilized $1,037 of its available cash and issued $2,059 of Class L units to former shareholders of the Sellers and long-term debt of
$66,100.
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 the Company for the true-up of the purchase price based on
the level of working capital (as defined) on the acquisition date. A second escrow account of $3,400 is to cover claims
13
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
by the Company relating to possible representations from the Sellers, warranties, taxes and exposures to environmental matters. The TCG
acquisition has been accounted for under the purchase method. Beginning November 5, 2014, TCG’s operations were reflected in the
Company’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
Property and equipment
Goodwill
Intangible assets
$
Total assets acquired
27,152
26,843
76,500
87,800
218,295
Current liabilities
Other liabilities, net
Deferred income taxes
13,546
635
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.
3. Summary of Significant Accounting Policies
A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements for the
Company are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of HGGC Citadel, and through various holding companies HGGC Citadel’s wholly
owned operating subsidiaries. All material intercompany accounts and transactions between consolidated entities have been eliminated. Joint
venture investments for which the Company exercises significant influence are accounted for by the equity method.
14
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, all highly-liquid investments with a maturity date of three months or less when
purchased are considered cash equivalents. From time to time, amounts deposited exceed federally insured limits. The Company believes the
associated credit risk to be minimal.
Accounts Receivable and Allowance for Doubtful Accounts
Credit is extended based on an evaluation of a customer’s financial condition and collateral is generally not required. Accounts receivable are
generally due between 30 to 60 days and stated at amounts due from customers, net of an allowance for doubtful accounts.
The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts
receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company and the
condition of the general economy as a whole. The Company writes off account balances when they become uncollectible and payments
subsequently received on such receivables are recorded as a reduction in bad debt expense. At December 31, 2014 and 2013, the Company
believes the allowance for doubtful accounts is adequate.
Inventories, net
Inventories consist of raw materials and finished goods. Inventories are stated at the lower of cost or market. Cost of inventories is determined
using a first-in, first-out (FIFO) method, except for certain inventories of TCG which are determined using a last-in, first-out (LIFO) method.
The Company records a reserve for slow-moving and obsolete inventory based on historical experience and monitoring of current inventory
activity. The Company’s estimate of this reserve is based on a periodic detailed analysis, using both qualitative and quantitative factors.
15
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated useful life of each asset. Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful lives of the improvements. Annual depreciation is primarily computed using the
straight-line method. The cost of maintenance and repairs is charged to expense as incurred while significant renewals and betterments are
capitalized. The estimated useful lives are as follows:
Asset Classification
Years
Buildings
Machinery and equipment
Leasehold improvements
20
5-7
Lease Term
Intangible Assets
The Company’s finite intangible assets consisting of customer relationships, formulas, internally developed software and non-compete
agreements were valued at the date of acquisition and are amortized on a straight-line basis (or an accelerated basis in the case of customer
relationships) over the lesser of their remaining useful or contractual lives (generally 5 to 25 years).
Long-Lived Assets
Property and equipment and finite life intangible assets are reviewed whenever events or changes in circumstances occur that indicate possible
impairment. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition are less than its carrying amount.
Additionally, the Company also evaluates the remaining useful life each reporting period to determine whether events and circumstances
warrant a revision to the remaining period of depreciation or amortization. If the estimate of a long lived asset’s remaining useful life is
changed, the remaining carrying amount of the asset is amortized prospectively over that revised remaining useful life.
Goodwill
The Company completes an annual (or more often if circumstances required) impairment assessment of its goodwill on a reporting unit level.
For management purposes, the Company is organized into five reporting units; BMCI (including TCG), BMC Mexico, BMC Brazil, BMC
Europe, and Matrixx (including Lucent).
In performing the goodwill impairment assessments, the carrying values of the Company’s reporting units were compared to their estimated
fair values, as calculated by the discounted cash flow method. As of February 29, 2012, the Company elected to adopt the provisions of
Financial Accounting Standards Board (“FASB”) Accounting Standards Update No. 2011-08, “Intangibles – Goodwill and Other,” (Topic
350) (“ASU 2011-08”). ASU 2011-08 provides an option to first qualitatively assess whether current events or changes in circumstances lead
to a determination that it is more likely than not (defined as a likelihood of more than 50 percent) that the fair value of a reporting unit is less
than its carrying amount. This qualitative assessment included the Company evaluating the following factors that affected future business
performance: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific events,
and reporting unit factors. Absent a qualitative determination
16
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
that the fair value of a particular reporting unit was more likely than not to be less than its carrying value, the Company did not need to proceed
to the traditional two-step goodwill test for that reporting unit. If this qualitative assessment indicated a more likely than not potential that the
asset may be impaired, the estimated fair value of the reporting unit was calculated by the discounted cash flow method. If the estimated fair
value of a reporting unit was less than its carrying value, an impairment charge was recorded for the amount by which the carrying value of the
goodwill exceeds its calculated implied fair value.
Deferred Loan Costs
Deferred loan costs are amortized over the lives of the respective debt agreements using the straight-line method, which approximates the
effective interest method.
Income Taxes
Deferred income taxes are provided using the asset and liability method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases and are measured using
enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Further, the Company
analyzes whether it is more likely than not that deferred tax assets will be realizable. Based upon this analysis, the Company establishes a
valuation allowance for amounts that are not expected to be realized.
The Company follows the guidance in FASB Accounting Standards Codification (“ASC”) 740-10-25, “ Accounting for Uncertainty in Income
Taxes .” ASC 740 prescribes a recognition threshold of more-likely-than-not and a measurement attribute for all tax positions taken or expected
to be taken on a tax return in order for those tax positions to be recognized in the financial statements. This statement clarifies the criteria that
each tax position must satisfy for some or all of the benefits of that position to be recognized in the Company’s financial statements. The
Company’s policy is to account for interest and penalties related to uncertain tax positions as income tax expense in the accompanying
consolidated statement of operations. There was no income tax interest or penalties in 2014, 2013 and 2012. The Company has evaluated its
uncertain tax positions and has determined that, as of December 31, 2014, there are no positions that meet the criteria for recognition as an
uncertain tax position. The periods ended December 31, 2014, 2013 and 2012 remain open for examination.
Comprehensive Income (Loss)
Comprehensive income (loss) represents net earnings and any revenues, expenses, gains, and losses that, under generally accepted accounting
principles in the United States of America, are excluded from net income and recognized directly as a component of stockholders’ equity.
Foreign Currency Translation
The functional currency of BMC Mexico is the U.S. dollar. Transactions in currencies other than the U.S. dollar of BMC Mexico are recorded
at the rates of exchange prevailing at the date of the transaction. BMC Mexico’s 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 BMC Mexico’s monetary assets and liabilities denominated in currencies other than
U.S. dollar, are recorded in operating expenses. The functional currency of BMC Germany, BMC Turkey and BMC Brazil is the Euro, Lira and
Real, respectively. Foreign currency adjustments, arising from the
17
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
translation of the foreign subsidiaries’ financial statements, are recorded in accumulated other comprehensive income (loss) as a separate
component of stockholders’ 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. The results of operations are translated using the monthly average exchange rates for
the year. Foreign currency transaction and remeasurement gains and losses are included in current earnings. Total net currency transaction
gains for the periods ended December 31, 2014, 2013 and 2012 were $126, $181 and $(5), respectively, which are included in operating
expenses. Included in miscellaneous other income (expense) for the periods ended December 31, 2014, 2013 and 2012 are gains/(losses) of
$(2,251), $785 and $(307), respectively, from remeasuring non-local currency denominated intercompany loans between BMCI subsidiaries in
the U.S and Europe.
Revenue Recognition
Revenue is recognized when persuasive evidence of an agreement exists, shipment of goods has occurred, risk of ownership has passed to the
buyer, the price is fixed and determinable and collectability is reasonably assured. Provisions for discounts, rebates to customers and returns are
provided for in the same period that the related sales are recorded.
Self-Insurance
The Company has elected to self-insure certain costs related to employee health and accident benefit programs. Costs resulting from
non-insured losses are charged to expense when incurred. The Company has purchased insurance that limits its annual exposure for individual
claims to $80. The Company has also purchased insurance that provides 100% coverage (up to $1,000) for the amount of total claims which
exceeds 125% of the total expected claims (as defined by the insurance company) in a plan year.
Shipping and Handling Costs
Shipping and handling costs are included in cost of goods sold and related shipping and handling amounts billed to customers are included in
net sales.
Fair Value Measurements
The authoritative guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 –
Quoted prices in active markets for identical assets or liabilities.
Level 2 –
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities: quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Level 3 –
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.
18
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
The Company applies fair value techniques on a non-recurring basis associated with valuing potential impairment losses related to goodwill
and also when determining the fair value of its business combinations. To determine the fair value in these situations, the Company determines
what a market participant would pay on the measurement date. To evaluate impairments of goodwill, the Company used Level 3 inputs such as
discounted cash flows. To determine the fair value of the assets acquired in business combinations, the Company uses Level 3 inputs such as
discounted cash flows, excess earnings of customer relationships and relief from royalties. The Company also uses Level 3 inputs to value
certain unit-based compensation.
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.
Recent Accounting Pronouncements
In May 2014, Financial Accounting Standards Board issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes
nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when
promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for
those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates
may be required within the revenue recognition process than required under existing U.S. GAAP. This pronouncement is effective for annual
reporting periods beginning after December 15, 2017 and is to be applied using one of two retrospective application methods, with early
application not permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on the financial statements
and has not yet determined the method by which the standard will be adopted in 2017.
Subsequent Events
The Company evaluated subsequent events through April 27, 2015, which was the date the financial statements were available to be issued.
4. Inventories, net
Inventories consist of the following at December 31, 2014 and 2013:
2014
Raw materials
Finished goods
Inventory reserves for obsolescence
Less allowances to reduce carrying value to LIFO basis
19
2013
$ 30,404
14,623
(1,315 )
(130 )
$ 35,835
7,133
(1,230 )
—
$ 43,582
$ 41,738
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
Approximately 11% of inventories at December 31, 2014 were valued on the LIFO basis.
5. Goodwill and Intangible Assets
The following is a summary of goodwill activity for the periods ended December 31, 2014, 2013 and 2012:
$
Balance at February 29, 2012
Citadel acquisition
Purchase price adjustments
Effect of changes in exchange rates
Impairment charges
—
89,591
406
(2,325 )
(10,283 )
Balance, at December 31, 2012
Lucent acquisition
Purchase price adjustments
Effect of changes in exchange rates
Impairment charges
77,389
19,093
21
(401 )
(13,544 )
Balance, at December 31, 2013
TCG acquisition
Purchase price adjustments
Effect of changes in exchange rates
82,558
76,500
1,259
(670 )
Balance, at December 31, 2014
$ 159,647
Goodwill consists of the following at December 31, 2014 and 2013:
2013
2014
Gross carrying amount of goodwill
Less: Accumulated impairment losses
$ 183,474
(23,827 )
$ 106,385
(23,827
Net goodwill
$ 159,647
$
82,558
In performing its goodwill assessment for the year ended December 31, 2014, the Company elected to skip the qualitative analysis.
Accordingly, the first step of the two-step goodwill impairment test as described in FASB ASC 350-20-35, which includes estimating the fair
values of each reporting unit and comparing those values to the reporting unit’s carrying value. Management has determined that no material
impairments exist as of and for the year ended December 31, 2014.
In performing its goodwill assessment for the year ended December 31, 2013, the Company evaluated the following factors that affect future
business performance: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance,
entity-specific events, and reporting unit factors. As a result of the assessment of these
20
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
qualitative factors, the Company concluded that it was not more likely than not that the fair values of all five of the Company’s reporting units
exceeded their carrying value. Accordingly, the first step of the two-step goodwill impairment test as described in FASB ASC 350-20-35 was
performed. The resultant estimated fair value of BMCI reporting unit exceeded its carrying value by approximately $1,751 as of December 31,
2013 and no goodwill impairment charges were recorded. The resultant estimated fair values of the Company’s remaining four reporting units
were less than their respective carrying values. As a result, when the estimated fair value of a reporting unit is less than its carrying value, an
impairment charge is recorded for the amount by which the carrying value of the goodwill exceeds its calculated implied fair value.
Accordingly, during the year ended December 31, 2013, the Company recorded non-cash charges totaling $13,544 to recognize the impairment
of goodwill in the following reporting units as follows:
Period ended
December 31, 2013
Matrixx
BMC Mexico
BMC Brazil
BMC Europe
$
2,835
2,299
2,210
6,200
$
13,544
These goodwill impairment charges in each of the above four reporting units during the year ended December 31, 2013 resulted from
reductions in the estimated fair values based on sluggish economic activity and lower expectations for future revenue, profitability and cash
flows due largely to lower estimates of organic growth.
In performing its goodwill assessment for the period ended December 31, 2012, the Company evaluated the following factors that affect future
business performance: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance,
entity-specific events, and reporting unit factors. As a result of the assessment of these qualitative factors, the Company concluded that it was
more likely than not that the fair values of two of the five reporting units with goodwill as of December 31, 2012, exceeded their carrying
value. Accordingly, the first step of the two-step goodwill impairment test as described in FASB ASC 350-20-35, which includes estimating
the fair values of each reporting unit, was not considered necessary for these two reporting units and no goodwill impairment charges were
recorded in 2012.
The analysis of these qualitative factors for the other three reporting units led to the conclusion that it was not more likely than not that the fair
value for these reporting units exceeded their carrying value. Accordingly, the first step of the two-step goodwill impairment test as described
in FASB ASC 350-20-35 was performed. The resultant estimated fair value of BMC Brazil reporting unit exceeded its carrying value by
approximately $1.4 million as of December 31, 2012 and no goodwill impairment charges were recorded. The resultant estimated fair values of
the Company’s remaining two reporting units were less than their respective carrying values. As a result, when the estimated fair value of a
reporting unit is less than its carrying value, an impairment charge is recorded for the amount by which the carrying value of the goodwill
exceeds its calculated implied fair value. Accordingly, during the period ended December 31, 2012, the Company recorded non-cash charges
totaling $10,283 to recognize the impairment of goodwill in the following reporting units as follows:
Period ended
December 31, 2012
Matrixx
BMC Europe
21
$
7,698
2,585
$
10,283
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
The decline in fair value of Matrixx resulted from unfavorable operating results primarily relating to the sluggish residential housing market
and lower estimates of future earnings growth. The decline in fair value of BMC Europe was almost entirely due to the depressed earnings of
its BMC Turkey operations. As discussed in Note 14, the Company shut down of its BMC Turkey operations during the first quarter of 2013.
The fair value measurement method used in the Company’s impairment analysis utilizes a number of significant unobservable inputs or Level 3
assumptions. These assumptions include, among others, projections of our future operating results, the implied fair value of these assets using
an income approach by preparing a discounted cash flow analysis and other subjective assumptions.
The following tables provide information about the Company’s intangible assets at December 31, 2014 and 2013:
December 31, 2014
Gross
Carrying
Amount
Intangible assets with definite lives
Customer relationships
Formulas/trade names
Noncompete agreements
Computer software
Accumulated
Amortization
Accumulated
Impairment
Net
$ 198,459
92,590
15,159
601
$
(35,114 )
(9,692 )
(9,076 )
(340 )
$
(5,723 )
(6,715 )
(56 )
—
$ 157,622
76,183
6,027
261
$ 306,809
$
(54,222 )
$
(12,494 )
$ 240,093
December 31, 2013
Gross
Carrying
Amount
Intangible assets with definite lives
Customer relationships
Formulas/trade names
Noncompete agreements
Computer software
Accumulated
Amortization
Accumulated
Impairment
Net
$ 142,097
66,235
13,160
601
$
(22,544 )
(6,056 )
(6,675 )
(265 )
$
(5,723 )
(6,715 )
(56 )
—
$ 113,830
53,464
6,429
336
$ 222,093
$
(35,540 )
$
(12,494 )
$ 174,059
The Company did not record any impairment charges to its intangible assets during the periods ended December 31, 2014 and 2012. During the
year ended December 31, 2013 the Company recorded impairment charges of $12,494 related to certain finite-lived intangible assets associated
with its BMC Europe reporting unit and was based on the results of its impairment testing for finite-lived assets. Amortization expense was
approximately $18,934, $20,447 and $15,093 during the periods ended December 31, 2014, 2013 and 2012 , respectively.
22
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
Estimated amortization expense for each of the next five years and thereafter is as follows:
Year ending December 31,
Amount
2015
2016
2017
2018
2019
Thereafter
$
24,953
24,013
21,191
19,428
18,402
132,106
Total
$ 240,093
6. Long-Term Debt
The Company’s long-term debt consists of the following at December 31, 2014 and 2013:
2013
2014
BMC Europe revolving loan
Term loan – 1 st lien
Term loan – 2 nd lien
Senior subordinated notes payable
$
—
320,000
80,000
—
400,000
(2,400 )
Less current maturities
$ 397,600
$
814
234,825
—
25,199
260,838
(2,348 )
$ 258,490
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.
23
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
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 which 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 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 again Credit Agreement remained basically 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 that fees paid of $1,891 for the amendment have been
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 from April 1, 2015 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 (effectively
5.25% at December 31, 2014). All other terms of the amended again Credit Agreement remained basically 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 that fees paid
of $5,755 for the amendment have been recorded as deferred financing fees at December 31, 2014 and are being amortized over the remaining
term of the debt.
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 (effectively 9.0% at December 31, 2014). The Company paid fees of $800 for the
2nd Lien Term Debt which have been recorded as deferred financing fees at December 31, 2014, and are being amortized over the remaining
term of the debt.
24
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
Under the Credit Agreement, the Company is 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 $75,369 and $76,919 as of December 31, 2014 and 2013, respectively. The Company has treated this
interest rate cap as an ineffective hedge, and the loss associated with this cap agreement totaled approximately $2, $9 and $101 for the periods
ended December 31, 2014, 2013 and 2012, respectively.
The Company had no borrowings outstanding under the Revolver at December 31, 2014 and 2013. There were outstanding letters of credit of
$565 and $250 at December 31, 2014 and 2013. The effective interest rate on the Term Loan was 6% and 5% at December 31, 2014 and 2013,
respectively.
Senior Subordinated Notes
On February 29, 2012, the Company entered into a $44,600 senior subordinated financing agreement (the “Senior Subordinated Agreement”)
with a lender which was subordinated to the Credit Agreement. The Senior Subordinated Agreement consisted of a $44,600 term loan and
accrued interest at 12% per annum, payable quarterly, plus PIK interest of 2%. The senior subordinated borrowings are unsecured. The
Subordinated Agreement was due February 28, 2019.
As mentioned above, in conjunction with the March 13, 2013 debt recapitalization of the Company, the Senior Subordinated Agreement was
paid off with the combination of the increased borrowings of the Credit Agreement as detailed above and proceeds from 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 12), totaling $24,200. The interest rate on the New Senior Subordinated Agreement was at 14% per annum,
payable quarterly, plus PIK interest of 5%. The New Senior Subordinated Agreement, due August 28, 2018, was subordinated to the amended
Credit Agreement. All other terms of the New Senior Subordinated Agreement remained basically the same as the previous senior subordinated
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 the Parent. The transaction was recorded as a
capital contribution and was deemed to be at market value and no gain or loss was recorded on the conversion.
The Company is 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
at December 31, 2014 and 2013.
25
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
Other Debt
BMC Europe has a revolving loan note up to €2.5 million (USD $3,050) with no stated expiration date. Interest is calculated on the basis of the
Euro Overnight Index Average (“EONIA”) interest rate plus 3.50% (effectively 3.49% and 3.66% at December 31, 2014 and 2013,
respectively) and is payable quarterly. The amount outstanding under this line of credit was $0 and $814 at December 31, 2014 and 2013,
respectively.
The long-term debt obligations mature as follows:
Year ending December 31,
Amount
2015
2016
2017
2018
2019
Thereafter
$
2,400
3,200
3,200
3,200
3,200
384,800
Total
$ 400,000
7. Other Accrued Expenses
Other accrued expenses consist of the following at December 31, 2014 and 2013:
2014
Accrued compensation
Accrued taxes
Accrued employee benefits
Accrued other
26
2013
3,793
892
1,050
7,102
$ 3,962
603
450
3,427
$ 12,837
$ 8,442
$
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
8. Stockholders’ Equity Structure
The Company has authorized 200,000 shares, par value $0.001 per share, of common stock of which 153,279 and 129,558 shares are issued
and outstanding as of December 31, 2014 and 2013, respectively. In addition, there were 980 and 1,858 options to purchase the common stock
outstanding as of December 31, 2014 and 2013, respectively. The Company’s parent company, Citadel LLC, owns 152,401 and 129,558 of the
total outstanding common stock as of December 31, 2014 and 2013, respectively. Each share of common stock has the right to one vote for
each share held.
Citadel LLC also had net (forfeitures)/issuances of (1,295) and 14,392 Class A Units issued in the form of Management Incentive Units
(“MIU’s”). 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 the MIUs using an earnings multiple for the 2014 MIU issuances and the discounted cash value
method for the 2013 issuances under the income approach. Based on this income approach, the Company recognized unit compensation
expense of $598 and $2,350 in 2014 and 2013, respectively, that was pushed down from Citadel LLC. There were 6,137 and 4,893 Class A
Units vested at Citadel LLC as of December 31, 2014 and 2013, respectively.
9. Income Taxes
The income tax for the periods ended December 31, 2014, 2013 and 2012 is composed of the following:
Period ending December 31,
2013
2014
Current
Federal
Foreign
State
Deferred
Federal
Foreign
State
$
Change in valuation allowance
Income tax expense (benefit)
$
27
5,367
2,296
893
$
2,180
2,758
300
2012
$
—
3,118
—
(2,319 )
(643 )
(364 )
(2,156 )
(7,377 )
(412 )
(1,609 )
(1,459 )
(308 )
5,230
—
(4,707 )
—
(258 )
(2,499 )
5,230
$ (4,707 )
$ (2,757 )
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
The components of the Company’s net deferred tax assets and liabilities at December 31, 2014 and 2013:
2013
2014
Deferred assets
Federal and state net operating losses
Reserves
Accrued expenses
Foreign
Other
$
Net deferred tax assets
—
972
1,677
879
1,000
$
—
763
924
1,534
—
4,528
3,221
Deferred liabilities
Property and equipment
Goodwill and intangible assets
LIFO reserve
Foreign – intangible assets
Other
7,728
71,969
733
10,250
203
4,658
41,181
—
12,317
390
Deferred tax liabilities
90,883
58,546
Net deferred tax liability
$
(86,355 )
$
(55,325 )
As of December 31, 2014 and 2013 the Company had net operating loss carryforwards in Brazil of $2,137 and $3,622, respectively.
The Company had total income tax receivables of $949 and $1,511 which were included in prepaid expenses at December 31, 2014 and 2013,
respectively.
The Company’s income tax expense at the statutory rate differs from the Company’s effective tax rate. For the year ended December 31, 2014,
the primary reasons for the deviation between the effective tax rate and the statutory federal tax rate of 35% are due to permanent
non-deductible amortization and depreciation expenses relating to purchase accounting for goodwill, intangibles and fixed assets and
non-deductible transactions costs offset by other net permanent deductible items. For the year ended December 31, 2013, the primary reasons
for the deviation between the effective tax rate and the statutory federal tax rate of 35% are due to permanent non-deductible amortization,
impairment and depreciation expenses relating to purchase accounting for goodwill, intangibles and fixed assets and non-deductible stock
compensation expense. For the period ended December 31, 2012, the primary reason for the deviation between the effective tax rate and the
statutory tax rate of 34% are due to state income taxes and the change in the valuation allowance relative to pre-tax net income offset primarily
by permanent non-deductible amortization, impairment and depreciation expenses related to US GAAP purchase accounting for goodwill,
intangibles, fixed assets, and transaction costs.
28
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
10. 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 $591, $311 and $0 for the periods ended December 31, 2014, 2013 and 2012, respectively.
BMC Europe has an employee pension plan. Expenses related to this plan were approximately $112, $128 and $121 for the periods ended
December 31, 2014, 2013 and 2012, respectively.
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 $247, $283 and $337 for the periods ended December 31, 2014, 2013 and 2012, respectively.
BMC Brazil, as required by the government, maintains an employee pension plan. Expenses related to this plan were approximately $48, 45
and $40 for the periods ended December 31, 2014, 2013 and 2012, respectively.
Employees of Matrixx’s Ontario Canada plant have an employee pension plan. Expenses related to this plan were approximately $47, $60 and
$84 for the periods ended December 31, 2014, 2013 and 2012, respectively.
TCG sponsors an unfunded supplemental executive retirement plan (“SERP”), 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 following table sets forth the funded status of the SERP and amounts recognized in the consolidated balance sheet as of December 31,
2014 as well as certain key assumptions used in the computations during the period November 5, 2014 through December 31, 2014:
Obligations and funded status:
Projected benefit obligation
Plan assets, at fair value
$ 1,502
—
Net liability
$ 1,502
Amounts recognized in the consolidated balance sheets:
Liability
Net loss in OCI
$ 1,491
11
Net consolidated balance sheet liability
$ 1,502
The net consolidated balance sheet liability is recorded in other accrued expenses and other long-term liabilities.
29
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
The following table sets forth the activity for the period November 5, 2014 through December 31, 2014:
Benefit costs
Employer contribution
Benefits paid
Participant contribution
$ 18
16
(16 )
—
The weighted-average discount rate was 3.5%, determined using the Tower Watson Pension Discount Index Rate. The total net periodic
pension cost plus the amount recognized in other comprehensive income was $19 for the period November 5, 2014 through December 31,
2014. The expected contribution for 2015 is estimated to be $182.
A reconciliation of this actuarial (gain)/loss as of December 31, 2014 and a breakout of pension expense for the period November 5, 2014
through December 31, 2014 are as follows:
Reconciliation of actuarial (gain) loss:
Balance at beginning of period, (pre-tax)
Actuarial loss
Amortization loss
Curtailment
$—
11
—
—
Balance at end of period, (pre-tax)
Tax benefit
11
4
Balance at end of year, (after tax)
$
Postretirement benefit expense (gain):
Service cost
Interest cost
Amortization of prior service cost
Recognized net actuarial loss
Curtailment gain
7
$—
8
—
—
—
Total postretirement benefit expense
$
8
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid in fiscal years ending:
Year ending December 31,
Amount
2015
2016
2017
2018
2019
Thereafter
$
Total
$ 1,336
30
180
171
161
150
150
524
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
11. 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 12). Rental expense for operating leases for the periods ended December 31, 2014,
2013 and 2012 was approximately $2,898, $2,525, and 2,227, respectively.
The minimum rental commitments by year under these operating leases are as follows:
Year ending December 31,
Amount
2015
2016
2017
2018
2019
$ 2,540
1,929
1,634
1,164
60
Total
$ 7,327
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 the Company’s consolidated financial position.
31
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
12. Related-Party Transactions
On the February 29, 2012 closing date, the Company paid HGGC a $4,800 (included in operating expenses) transaction fee.
The Company is committed to pay annual management fees of $1,500 (in four equal quarterly installments) to HGGC. The Company paid total
management fees of $1,125, $1,500 and $1,125 (included in operating expenses) for the periods ended December 31, 2014, 2013 and 2012,
respectively. There were $375 and $0 of unpaid management fees at December 31, 2014 and 2013.
The Company’s Senior Subordinated Agreement lender, HGGC Citadel Lender, LLC was owned by HGGC and certain other investors in the
Company. During the years ended December 31, 2014 and 2013, the Company accrued total cash and PIK interest owing to HGGC Citadel
Lender, LLC of $4,160 and $3,796, respectively. As of November 5, 2014, this debt was converted to equity as discussed in Note 6.
The Company rents its BMCI headquarters building in West Chicago, Illinois from Maxwell Properties, which is partially owned by an
employee of the Company. For the periods ended December 31, 2014, 2013 and 2012 the Company paid rents to Maxwell Properties of $282,
285 and $261, respectively. The lease expires in January 2018.
13. 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.
The following is a summary of financial position and results of operations of BMC Far East LTD as of December 31, 2014 and 2013 and for
the periods ended December 31, 2014, 2013 and 2012:
2014
2013
Current assets
Property, plant and equipment
$ 5,071
1,901
$ 5,248
888
Total assets
$ 6,972
$ 6,136
Current liabilities
Long-term liabilities
Equity
$ 1,660
1,735
3,577
$ 1,414
1,237
3,485
Total liabilities and equity
$ 6,972
$ 6,136
Period ended December 31,
2014
2013
2012
Net sales
$ 9,545
$ 10,202
$ 7,708
Net income
$
$
$
92
640
922
Included in the Company’s accounts receivable at December 31, 2014 and 2013 are receivables from BMC Far East LTD of $873 and $617,
respectively. During the periods ended December 31, 2014, 2013 and 2012, the Company had sales to BMC Far East LTD of $67, $89 and $47,
respectively, and charged BMC Far East LTD management and technical fees of $363, $408 and $298, respectively.
32
HGGC Citadel Plastics Holdings, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
14. Restructuring Charges
During the fourth quarter of 2012, a decision was made to close the BMC Turkey operations by the end of the first quarter of 2013. The
Company continued to retain direct cash flows (significant to the BMC Turkey operations) associated with the revenues (and related cost of
goods sold) of the closed operation as the primary customers of BMC Turkey will be served out of BMC Germany. Accordingly, the closure
has not been presented as discontinued operations. During the period ended December 31, 2012, the Company recorded in the consolidated
statement of operations $280 of charges associated with costs to terminate employees and the exit facilities as well as $358 of charges relating
to write-downs of receivables, inventory and fixed assets. There were no further charges recorded in the consolidated statement of operations
during the years ended December 31, 2014 and 2013 associated with the closure of the BMC Turkey operations.
33
Exhibit 99.3
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 the
financial statements of Citadel, which are included in A. Schulman’s Current Report on Form 8-K filed on April 27, 2015.
A. Schulman, with a fiscal year that ends on August 31, has agreed to acquire Citadel (the “Acquisition”), 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 to be obtained by A. Schulman in connection with the Acquisition is assumed to be financed by long-term bank debt of
approximately $700.0 million, other new indebtedness of approximately $375.0 million, an equity issuance of approximately $110.0 million,
and revolving credit facility borrowings of approximately $47.0 million.
At the effective time of the Acquisition, the cash paid, debt financing required and shares of A. Schulman capital stock issued may differ
from the information in the unaudited pro forma condensed combined financial information. In addition, the actual allocation of the type and
amount and the terms of the financing may differ from that set forth herein.
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 at the effective time of the Acquisition. 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. Transaction-related costs may also differ at the effective time of the Acquisition.
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. Upon completion of the
Acquisition, or 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 March 15, 2015, the Company entered into a definitive stock purchase agreement to acquire all of the issued and outstanding capital
stock of privately held Citadel, a portfolio company of certain private equity firms, for $800 million. The purchase price will be 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 may be increased or decreased, as applicable, based on the Citadel’s
1
working capital on the closing date relative to target working capital, among other adjustments. Citadel is a major provider of custom material
solutions and custom engineered solutions for specialized applications across a diverse set of end markets, geographics and blue chip
customers.
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
)
(a)
Net sales
$
2,446,998
$ 434,633
$
(3,740
Cost of sales
$
2,877,891
)
(b)
2,116,990
347,072
(4,752
Selling, general and administrative expenses
2,459,310
)
(c)
Restructuring expense
Asset impairment
Curtailment and settlement (gains) losses
242,486
4,883
104
214
70,018
—
26,038
—
(1,378
—
—
—
82,321
(8,495 )
2,390
Operating income (loss)
311,126
4,883
26,142
214
(c)
Interest expense
76,216
(d)
8,503
(286 )
2,206
(434 )
Interest income
Foreign currency transaction (gains) losses
Other income, net
Income (loss) from continuing operations before
taxes
Provision (benefit) for U.S. and foreign income taxes
24,294
(151 )
(939 )
(2,186 )
33,846
—
—
—
66,643
(437 )
1,267
(2,620 )
72,332
(29,513 )
18,542
(4,147 )
Income from continuing operations
Noncontrolling interests
53,790
(799 )
(25,366 )
—
(20,446 )
—
7,978
(799 )
Net income (loss) from continuing operations
attributable to A. Schulman, Inc.
New equity dividends
52,991
(25,366 )
(20,446 )
(g)
7,425
7,179
—
Net income (loss) from continuing operations
available to A. Schulman, Inc. common
stockholders
$
52,991
Weighted-average number of shares outstanding:
Basic
Diluted
—
$
(25,366 )
$
(27,871 )
11,363
3,385
7,425
$
29,061
(246 )
29,061
(g)
29,362
Earnings (loss) per share from continuing operations
available to A. Schulman Inc. common stockholders
Basic
Diluted
(31,456 )
)
(11,010 (f)
$
$
1.82
1.80
2
2,100
31,462
$
$
(0.01 )
(0.01 )
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
)
(a)
Net sales
$
1,157,348
$ 251,445
$
(2,075
Cost of sales
$
1,406,718
)
(b)
992,430
202,185
(2,544
Selling, general and administrative expenses
1,192,071
)
(c)
Restructuring expense
130,640
7,881
36,628
—
(2,303
—
26,397
12,632
2,772
Operating income
164,965
7,881
(c)
Interest expense
41,801
(d)
Interest income
Foreign currency transaction (gains) losses
Other income, net
Gain on early extinguishment of debt
4,670
(161 )
2,240
(404 )
11,698
(110 )
2,096
(896 )
16,866
—
—
—
33,234
(271 )
4,336
(1,300 )
(1,290 )
—
1,290
—
21,342
(156 )
(15,384 )
)
(5,384 (f)
5,802
(e)
Income (loss) from continuing operations before
taxes
Provision (benefit) for U.S. and foreign income taxes
8,457
2,312
Income (loss) from continuing operations
Noncontrolling interests
12,885
(547 )
(2,468 )
—
(10,000 )
—
417
(547 )
Net income (loss) from continuing operations
attributable to A. Schulman, Inc.
New equity dividends
12,338
(2,468 )
(10,000 )
(g)
3,713
(130 )
—
Net income (loss) from continuing operations
available to A. Schulman, Inc. common
stockholders
$
12,338
Weighted-average number of shares outstanding:
Basic
Diluted
$
(2,468 )
$
(13,713 )
3,713
$
29,078
(3,843 )
29,078
(g)
29,538
Earnings (loss) per share from continuing operations
available to A. Schulman Inc. common stockholders
Basic
Diluted
—
5,385
$
$
0.42
0.42
3
2,100
31,638
$
$
(0.13 )
(0.13 )
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
ASSETS
Current Assets:
Cash and cash equivalents
$
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
91,872
354,257
257,464
40,399
Total current assets
Net property, plant and equipment
Deferred charges and other noncurrent assets
Goodwill
Intangible assets, net
743,992
239,969
73,211
192,940
123,932
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
U.S. and foreign income taxes payable
Accrued payroll, taxes and related benefits
Other accrued liabilities
10,909
69,709
43,582
10,095
$
134,295
74,521
18,436
159,647
240,093
1,374,044
$
626,992
$
$
251,091
4,426
42,232
$
30,422
892
4,843
$
Total current liabilities
Long-term debt
Pension plans
Deferred income taxes
Other long-term liabilities
Total liabilities
Stockholders’ equity:
Common stock, par value $0.001
New equity
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings (deficit)
Treasury stock, at cost
Total A. Schulman, Inc.’s stockholders’ equity
Noncontrolling interests
Total equity
$
)
(8,148 (h)
—
3,416 (i)
(2,241 ) (j)
$
(6,973 )
7,567 (i)
650 (k)
247,449 (i)
112,407 (i)
$
Short-term debt
Total liabilities and equity
$
Pro Forma
Combined
361,100
—
—
—
94,633
423,966
304,462
48,253
871,310
322,057
92,297
600,036
476,432
$
2,362,136
$
281,513
5,318
47,075
)
(1,075 (m)
3,784 (l)
46,067
24,197
8,902
2,419
53,894
30,400
368,013
365,406
112,501
22,003
26,485
47,478
397,604
—
90,883
1,322
2,709
332,635 (l)
—
30,963 (i)
—
418,200
1,095,645
112,501
143,849
27,807
894,408
537,287
366,307
1,798,002
48,367
—
154
—
272,934
(73,801 )
607,162
(383,170 )
161,373
(15,421 )
(56,401 )
—
(154 )(o)
110,000 (n)
)
(165,123 (p)
15,421 (o)
34,649 (q)
—
471,492
8,144
89,705
—
(5,207 )
—
555,990
8,144
479,636
89,705
(5,207 )
564,134
1,374,044
4
$
626,992
$
361,100
48,367
110,000
$
269,184
(73,801 )
585,410
(383,170 )
2,362,136
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 A. Schulman’s contemplated
Acquisition of Citadel 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 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. A. Schulman expects the purchase price allocation to be completed upon the finalization of the related valuations. The final
valuations may be materially different from the preliminary valuations. The pro forma adjustments included herein may be revised as additional
information becomes available and as additional analyses are performed. 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.
5
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
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.
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 $46.5 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
three and six months ended February 28, 2015 and 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
Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2015. Citadel’s financial statements for the years ended
December 31, 2014 and 2013 and the period from February 29, 2012 through December 31, 2012 are included in A. Schulman’s Current
Report on Form 8-K filed on April 27, 2015.
2. Citadel Acquisition
On March 15, 2015, the Company entered into a definitive stock purchase agreement to acquire all of the issued and outstanding capital
stock of privately held HGGC Citadel Plastics Holdings, Inc., or Citadel, a portfolio company of certain private equity firms, for $800 million.
The purchase price will be 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 may be increased or decreased, as applicable, based on the
company’s working capital on the closing date relative to target working capital, among other adjustments. Citadel is a major provider or
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.”
6
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
3. Financing
In connection with the Acquisition, the Company and certain of its wholly-owned subsidiaries expect to obtain approximately $1,232.0
million of financing, including, without limitation: long-term bank debt of approximately $700.0 million, consisting of a $200.0 million senior
secured term loan A facility and approximately $500.0 million of senior secured term loan B facilities; other new indebtedness of
approximately $375.0 million; an equity issuance of approximately $110.0 million; and revolving credit facility borrowings of approximately
$47.0 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.
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
Inventories
Prepaid expenses and other
$
Total current assets
Property, plant, and equipment (1)
Intangible assets (1)
Other assets (2)
126,798
82,088
352,500
7,126
Total assets
Liabilities assumed, at fair market value:
Accounts payable
Accrued liabilities
Deferred income taxes (3)
Other liabilities
Capital lease obligations
568,512
30,422
12,837
131,004
1,322
23
Total liabilities assumed
175,608
Identifiable net assets acquired
Goodwill (4)
392,904
407,096
$
Net assets acquired
(1)
69,709
46,998
10,091
800,000
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. At this time, A. Schulman does not have sufficient
information as to the amount, timing and risk of cash flows of all of these intangible assets. 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.
7
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(2)
(3)
(4)
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.
As of the completion of the Acquisition, A. Schulman will provide 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.
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 is not amortized.
A. Schulman expects the purchase price allocation to be finalized upon the completion of the related valuations pursuant to ASC 805. The
adjustments to deferred tax accounts reflected in the unaudited pro forma condensed combined financial statements are based on prevailing
statutory tax rates within applicable jurisdictions. The pro forma adjustments included herein may be revised as additional information becomes
available and as additional analyses are performed. 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 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
Trademarks and trade names
Developed technology/know-how
Customer relationships
$
20,400
77,200
254,900
$
352,500
Estimated Useful Life
3 - 10 years
10 - 13 years
14 - 16 years
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 six months
ended February 28, 2015.
8
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(b)
To adjust cost of sales for each period as follows:
Six months
Ended
February 28, 2015
Year Ended
August 31, 2014
(c)
Elimination of cost of sales to A. Schulman from Citadel
Adjustment of depreciation and amortization (see (c))
$
(3,740 )
(1,012 )
$
(2,075 )
(469 )
Pro forma adjustment
$
(4,752 )
$
(2,544 )
To record change in depreciation, amortization, and transaction costs:
Six months
Ended
February 28, 2015
Year Ended
August 31, 2014
Reversal of Citadel’s depreciation recognized
Reversal of Citadel’s amortization recognized
Estimated depreciation of assets required
Estimated amortization of identifiable intangible assets
Reverse transactions costs to acquire Citadel
$
$
(4,718 )
(11,901 )
4,197
12,523
(2,873 )
Pro forma adjustment
(2,390 )
(2,772 )
Allocation to cost of sales
Allocation to selling, general, & administrative
(1,012 )
(1,378 )
(469 )
(2,303 )
$
(d)
(9,519 )
(26,311 )
8,395
25,045
—
(2,390 )
$
(2,772 )
To record adjustments to interest expense and amortization of new debt issue costs:
Year Ended
August 31,
2014
Reversal of A. Schulman’s existing interest expense
Reversal of Citadel’s existing interest expense
Record estimated interest expense
$
(7,134 )
(22,500 )
63,929
Six months
Ended
February 28,
2015
$
(4,094 )
(10,801 )
31,964
Interest adjustment
34,295
Reversal of A. Schulman’s amortization of existing debt issue cost
Reversal of Citadel’s amortization of existing debt issue costs
Record estimated amortization of new debt issue costs
(507 )
(1,794 )
1,852
(232 )
(897 )
926
(449 )
(203 )
Deferred financing fees amortization adjustment
Total interest expense pro forma adjustment
$
33,846
17,069
$
16,866
A. Schulman estimates a combined weighted average interest rate of 5.75% based on $700 million of aggregate principal amount of new
term loans under the new term loan A facility and new term loan B facility, and $47 million aggregate principal amount of revolving
loans under the new revolving credit facility and $375 million of other new indebtedness expenses to be 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, it is expected that the new term loan facilities will have required quarterly amortization
payments of $30.4 million.
9
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
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 other new indebtedness. $19.8 million related to the bridge financing will be expensed over a shortened bridge period, and
$13.2 million will be deferred and amortized straight line over their respective lives. An additional $0.4 million existing deferred
financing fees related to the old credit agreement will be carried forward and amortized straight line over its new life. The fees that A.
Schulman will ultimately pay under this new debt could vary significantly from what is assumed in these unaudited pro forma condensed
combined financial statements, and will depend on the actual timing and amount of borrowings and repayments under the new debt, and
A. Schulman’s credit rating, leverage, and other factors.
(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 one-time 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)
As a result of the expected new equity issuance, A. Schulman expects to have an additional 2.1 million shares of common stock
outstanding, assuming dilution. A. Schulman also expects to pay a quarterly dividend on the newly issued equity, which equals $7.4
million and $3.7 million for the year ended August 31, 2014 and six months ended February 28, 2015.
(h)
To record anticipated changes in cash from the Acquisition and refinancing, as follows:
February 28, 2015
(i)
New equity offering (see (n) below)
Change in A. Schulman debt (see (l) below)
Removal of Citadel cash not transferring
Cash paid to Citadel (see note 4)
Transaction costs
$
110,000
736,419
(10,909 )
(800,000 )
(43,658 )
Pro forma adjustment
$
(8,148 )
To record fair value adjustments based on the Citadel purchase price allocation as seen below:
Book Value
Inventories
Property, plant, & equipment
Intangible assets
Goodwill
Deferred tax liability
Joint venture
$
10
43,582
74,521
240,093
159,647
90,883
3,122
Fair Market
Value
(Note 4)
$
46,998
82,088
352,500
407,096
131,004
3,090
Adjustment
Recorded
$
3,416
7,567
112,407
247,449
40,121
(32 )
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The $40.1 million increase in the deferred income tax liability resulting from the Citadel fair value adjustments has been allocated $4.0
million to current and $36.1 million to non-current. The $36.1 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 $4.0 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 $2.2 million for prepaid expenses and other current assets represents a decrease in current deferred tax
assets of $4.0 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
(l)
Write-off of existing A. Schulman deferred financing fees
Write-off of existing Citadel deferred financing fees
New deferred financing fees
Write-down of joint venture (see (i) above)
$
Increase in deferred charges and other noncurrent assets
$
(1,275 )
(11,278 )
13,235
(32 )
650
To record the change in debt as a result of the Acquisition and refinancing:
February 28, 2015
New term loan
New revolver
Other new indebtedness
Extinguishment of old debt
$
Net change in A. Schulman debt
Citadel debt not transferring
700,000
47,000
375,000
(385,581 )
736,419
(400,000 )
Net change in pro forma total debt
Change in Current Portion (see below)
336,419
3,784
Change in Long Term Portion
$
332,635
Current debt, per A. Schulman historical
Current debt, per Citadel historical
Pro forma adjustment
$
24,197
2,419
3,784
$
30,400
Pro forma current debt, based on term loan payments due within
twelve months
(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 $110.0 million has been made to account for the issuance of new equity.
(o)
The adjustments of $0.2 million and $15.4 million are to eliminate Citadel’s common stock and accumulated other comprehensive loss.
11
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(p)
The adjustment of $165.1 million to additional paid in capital consists of $161.4 million to eliminate Citadel’s existing balance, and $3.7
million in fees related to the new equity issuance.
(q)
To record the change in retained earnings as a result of the Acquisition and refinancing:
February 28, 2015
Elimination of Citadel accumulated deficit
Elimination of a deferred tax asset valuation allowance
Unpaid transaction fees
Write off of existing deferred financing fees
Accrued severance
$
56,401
6,921
(26,673 )
(1,275 )
(725 )
Increase in retained earnings
$
34,649
(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
The Composites
Group
Historical
Citadel
Net sales
Cost of sales
Selling, general and administrative
expenses
Asset impairment
$ 332,570
269,148
$
102,063
77,700
Pro Forma
Adjustments
$
—
224 (I)
Pro Forma
Citadel
$ 434,633
347,072
53,077
26,038
11,455
—
5,486 (II)
—
70,018
26,038
Operating income (loss)
Interest expense
Interest income
Foreign currency transaction (gains) losses
Other (income) expense, net
(15,693 )
16,685
(151 )
(939 )
(1,507 )
12,908
1,802
—
—
(679 )
(5,710 )
5,807 (III)
—
—
—
(8,495 )
24,294
(151 )
(939 )
(2,186 )
Income (loss) before taxes
Provision (benefit) for U.S. and foreign
income taxes
(29,781 )
11,785
(3,076 )
3,375
Net income (loss)
$
(26,705 )
$
12
8,410
(11,517 )
(29,513 )
(4,446 )(IV)
$
(7,071 )
(4,147 )
$
(25,366 )
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(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
The Composites
Group (B)
Historical
Citadel (A)
Net sales
Cost of sales
Selling, general and administrative
expenses
$
Income loss before taxes
Provision (benefit) for U.S. and foreign
income taxes
(A)
(B)
$
31,184
Operating income
Interest expense
Interest income
Foreign currency transaction (gains)
losses
Other (income) expense, net
Net (loss) income
212,544
173,719
$
—
76 (I)
Pro Forma
Citadel
$ 251,445
202,185
5,044
400 (II)
36,628
7,641
9,908
(110 )
5,467
500
—
(476 )
1,290 (III)
—
12,632
11,698
(110 )
2,096
(83 )
—
6,336
—
(7,149 )(V)
2,096
(896 )
(4,170 )
(1,369 )
846
$
38,901
28,390
Pro Forma
Adjustments
5,383
(612 )
(5,016 )
$
(757 )
(156 )
2,078 (IV)
$
3,305
2,312
$
(2,468 )
The Historical Citadel information includes the results of operations for The Composites Group for the period November 5, 2014 through
December 31, 2014.
The Historical The Composites Group information includes the results of operations for The Composites Group for the period July 1,
2014 through November 4, 2014.
13
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(I) To record adjustments to depreciation.
Twelve
months ended
June 30, 2014
(II)
Reversal of The Composites Group depreciation recognized
Record estimated depreciation of assets acquired
$
Pro forma adjustment
$
(2,558 )
2,782
224
$
$
(1,068 )
1,144
76
To record adjustments to depreciation, amortization, and transaction costs.
Twelve months
ended June 30,
2014
(III)
Six months
ended
December 31,
2014
Six months
ended
December 31,
2014
Reversal of The Composites Group depreciation recognized
Reversal of The Composites Group amortization recognized
Record estimated depreciation of assets acquired
Record estimated amortization of identifiable intangible assets
Reversal of transaction costs to acquire The Composites Group
$
(277 )
(299 )
301
5,761
—
$
Pro forma adjustment
$
5,486
$
(93 )
(100 )
100
2,880
(2,387 )
400
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
Reversal of Citadel existing interest expense
Reversal of The Composites Group’s existing interest expense
Record estimated interest expense
$
Pro forma adjustment
Reversal of Citadel amortization of existing debt issue costs
Record estimated amortization of new debt issue costs
Pro forma adjustment
Total interest expense pro forma adjustment
(16,685 )
(1,802 )
23,937
Six months
ended
December 31,
2014
$
5,450
1,582
(1,437 )
1,794
(1,189 )
897
357
$
(9,908 )
(500 )
11,990
5,807
(292 )
$
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 The Composites Group acquisition for the six months ended
December 31, 2014.
14