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SCHULMAN A INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[October 22, 2014]

SCHULMAN A INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help investors understand our results of operations, financial condition and current business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and related notes included in this Annual Report on Form 10-K for the fiscal year ended August 31, 2014. The MD&A is organized as follows: • Overview: From management's point of view, we discuss the following: •Summary of our business and the markets in which we operate; •Key trends, developments and challenges; and •Significant events during the current fiscal year.



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

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


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

Overview Business Summary A. Schulman, Inc. is a leading international supplier of high-performance plastic compounds and resins headquartered in Fairlawn, Ohio. The Company's customers span a wide range of markets such as packaging, mobility, building & construction, electronics & electrical, agriculture, personal care & hygiene, custom services, and sports, home & leisure. The Chief Operating Decision Maker makes decisions, assesses performance and allocates resources by the following regions which represent our reportable segments: • Europe, Middle East and Africa ("EMEA"), • Americas, and • Asia Pacific ("APAC").

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

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

The following present opportunities and challenges as we work toward our goal of providing attractive returns for all of our stakeholders: • Cross Selling. We engage in the cross selling of our products through the collaborative efforts and training of our sales teams. We encourage cross selling between different product families and promote cross regional sales to better service our valued customers.

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

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

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

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

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

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

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

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

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

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

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

and one facility located in Spain.

3. Sale of Australia Business. The Company completed the sale of its rotational compounding business in Australia on September 3, 2013. The operating results for this business were previously included in the Company's specialty powders product family within the APAC segment and are reported as discontinued operations.

4. Credit Agreement. On September 24, 2013, the Company entered into a new $500 million Credit Agreement. The agreement consists of a $300 million Revolving Facility and a $200 million Term Loan Facility, replacing a previous 23-------------------------------------------------------------------------------- Table of Contents $300 million revolving credit facility, and offers increased borrowing capacity and improved terms and covenants. The agreement expires in September 2018.

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

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

The following items represent significant events during early fiscal 2015: 1. Business Acquisition. On September 2, 2014, the Company acquired Compco Pty. Ltd., a manufacturer of masterbatches and custom colors in Melbourne, Australia for $6.7 million.

2. Dividend Activities. In October 2014, the Company increased its regular quarterly cash dividend by 2.5% to $0.205 per common share. This reflected the Company's confidence in its ability to generate cash and its long-term growth prospects, along with a continued commitment to shareholders 3. Restructuring Plan. In October 2014, the Company announced actions to optimize the back-office and support functions in EMEA. The Company expects to reduce headcount by approximately 40 and realize annual savings of approximately $4 million on completion of these actions.

Results of Operations FISCAL YEAR 2014 COMPARED WITH FISCAL YEAR 2013 The Company uses net sales to unaffiliated customers, gross profit and operating income before certain items in order to make decisions, assess performance and allocate resources to each segment. The following discussion regarding the Company's segment gross profit and operating income does not include items such as interest income or expense, other income or expense, foreign currency transaction gains or losses, restructuring and related expenses including accelerated depreciation, asset impairments, or costs and inventory step-up charges related to business acquisitions. Corporate expenses include the compensation of certain personnel, certain audit expenses, Board of Directors related costs, certain insurance costs, costs associated with being a publicly traded entity and other miscellaneous legal and professional fees. For a reconciliation of segment operating income to operating income and income from continuing operations before taxes, please refer to Note 13 of the consolidated financial statements within this Form 10-K.

Segment Information Year Ended August 31, Favorable (unfavorable) EMEA 2014 2013 Increase (decrease) FX Impact Excluding FX (In thousands, except for %'s and per pound data) Pounds sold 1,262,027 1,167,603 94,424 8.1 % Net sales $ 1,577,867 $ 1,405,882 $ 171,985 12.2 % $ 53,072 8.5 % Segment gross profit $ 206,268 $ 179,242 $ 27,026 15.1 % $ 6,890 11.2 % Segment gross profit percentage 13.1 % 12.7 %Segment operating income $ 80,690 $ 67,320 $ 13,370 19.9 % $ 2,556 16.1 % Price per pound $ 1.250 $ 1.204 $ 0.046 3.8 % $ 0.042 0.3 % Segment operating income per pound $ 0.064 $ 0.058 $ 0.006 10.3 % $ 0.002 6.9 % 24-------------------------------------------------------------------------------- Table of Contents EMEA net sales for the year ended August 31, 2014 were $1,577.9 million, an increase of $172.0 million or 12.2%, compared with the prior year. Excluding the favorable impact of foreign currency translation of $53.1 million, net sales increased $118.9 million. During fiscal 2014, the incremental contribution of the Perrite and Specialty Plastics acquisitions was $93.2 million and 60.8 million pounds in net sales and volume, respectively. Excluding acquisitions and foreign currency translation, organic sales increased $25.7 million, primarily driven by volume increases in all product families.

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

EMEA operating income for the year ended August 31, 2014 was $80.7 million, an increase of $13.4 million compared with the prior year. The increase in segment operating income in fiscal 2014 was primarily due to the aforementioned increase in segment gross profit, benefits from prior restructuring activities of $3.8 million and a reduction of bad debt expense of $1.8 million. Partially offsetting these items were incremental SG&A expenses from acquisitions of $5.0 million and increased variable incentive compensation and a government regulated increase in annual salaries of $5.4 million, and increased promotional trade show activities of $0.9 million. Foreign currency translation negatively impacted EMEA SG&A expense by $4.3 million. Segment operating income per pound increased $0.006 to $0.064 per pound primarily due to increased price per pound, partially offset by increased SG&A expense.

Year Ended August 31, Favorable (unfavorable) Americas 2014 2013 Increase (decrease) FX Impact Excluding FX (In thousands, except for %'s and per pound data) Pounds sold 669,017 653,914 15,103 2.3 % Net sales $ 673,363 $ 600,824 $ 72,539 12.1 % $ (14,358 ) 14.5 % Segment gross profit $ 99,517 $ 81,315 $ 18,202 22.4 % $ (1,678 ) 24.4 % Segment gross profit percentage 14.8 % 13.5 % Segment operating income $ 38,806 $ 28,351 $ 10,455 36.9 % $ (522 ) 38.7 % Price per pound $ 1.006 $ 0.919 $ 0.087 9.5 % $ (0.022 ) 11.9 % Segment operating income per pound $ 0.058 $ 0.043 $ 0.015 34.9 % $ (0.001 ) 37.2 % Net sales for the Americas for the years ended August 31, 2014 and 2013 were $673.4 million and $600.8 million, respectively, an increase of $72.5 million or 12.1%. Incremental net sales and volume from the Network Polymers, Prime Colorants and the Specialty Plastics acquisitions were $70.2 million and 46.7 million pounds for the year ended August 31, 2014, respectively. Excluding acquisitions, selling price per pound increased in all product families, while volume declined across all product families partially driven by the continued execution of the Company's strategy to increase specialty product sales and shift away from less profitable commodity sales.

Americas gross profit was $99.5 million for the year ended August 31, 2014, an increase of $18.2 million from the prior year. The benefits of prior restructuring initiatives of $1.5 million, as well as recent acquisitions and improved mix were partially offset by increased variable incentive compensation of $1.6 million and $1.7 million of unfavorable foreign currency translation.

Americas operating income for the year ended August 31, 2014 was $38.8 million compared with $28.4 million last year. Segment operating income benefited from the increase in segment gross profit, offset by increases in SG&A expense from recent acquisitions of $4.8 million and higher variable incentive compensation expense of $2.1 million. Foreign currency translation negatively impacted the Americas operating income by $0.5 million.

25-------------------------------------------------------------------------------- Table of Contents Year Ended August 31, Favorable (unfavorable) APAC 2014 2013 Increase (decrease) FX Impact Excluding FX (In thousands, except for %'s and per pound data) Pounds sold 153,899 95,994 57,905 60.3 % Net sales $ 195,768 $ 126,696 $ 69,072 54.5 % $ (649 ) 55.0 % Segment gross profit $ 26,767 $ 22,345 $ 4,422 19.8 % $ (57 ) 20.0 % Segment gross profit per pound 13.7 % 17.6 % Segment operating income $ 12,527 $ 12,108 $ 419 3.5 % $ 131 2.4 % Price per pound $ 1.272 $ 1.320 $ (0.048 ) (3.6 )% $ (0.004 ) (3.3 )% Segment operating income per pound $ 0.081 $ 0.126 $ (0.045 ) (35.7 )% $ - (35.7 )% Net sales for APAC for the year ended August 31, 2014 were $195.8 million, an increase of $69.1 million or 54.5%. During fiscal 2014, the Perrite acquisition in APAC provided net sales and volume of $53.6 million and 40.3 million pounds, respectively. Excluding the Perrite acquisition, volumes increased across all product families, partially offset by decreased price per pound driven by competitive pricing pressures primarily in the masterbatch solutions product family. Foreign currency translation unfavorably impacted net sales by $0.6 million.

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

APAC operating income for the year ended August 31, 2014 was $12.5 million, compared with $12.1 million last year. The increase in segment operating income was primarily due to the increased segment gross profit and favorable foreign currency translation, partially offset by incremental SG&A expenses from the Perrite acquisition of $2.3 million.

Year Ended August 31, Favorable (unfavorable) Consolidated 2014 2013 Increase (decrease) FX Impact Excluding FX (In thousands, except for %'s and per pound data) Pounds sold 2,084,943 1,917,511 167,432 8.7 % Net sales $ 2,446,998 $ 2,133,402 $ 313,596 14.7 % $ 38,065 12.9 % Operating income $ 82,321 $ 63,103 $ 19,218 30.5 % $ 2,135 27.1 % Total operating income before certain items* $ 99,853 $ 82,853 $ 17,000 20.5 % $ 2,165 17.9 % Price per pound $ 1.174 $ 1.113 $ 0.061 5.5 % $ 0.019 3.8 % Total operating income per pound before certain items* $ 0.048 $ 0.043 $ 0.005 11.6 % $ 0.001 9.3 % * Total operating income before certain items represents segment operating income combined with Corporate and other operating expenses. For a reconciliation of segment operating income to operating income and income from continuing operations before taxes, refer to Note 13 of the consolidated financial statements within this Form 10-K.

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

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

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

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

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

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

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

Noncontrolling interests represent a 37% equity position of Alta Plastica S.A.

in an Argentinean venture with the Company and a 35% equity position of P.T.

Prima Polycon Indah in an Indonesian joint venture with the Company.

Net income attributable to the Company's common stockholders was $56.2 million and $26.1 million for the years ended August 31, 2014 and 2013, respectively.

Foreign currency translation had a favorable impact on net income of $3.0 million for the year ended August 31, 2014.

Product Family The consolidated net sales for the Company's five product families are as follows: Year Ended August 31, 2014 2013 (In thousands, except for %'s) Custom performance colors $ 174,007 7 % $ 150,890 7 % Masterbatch solutions 805,798 33 781,770 37 Engineered plastics 745,493 31 534,777 25 Specialty powders 350,510 14 308,619 14 Distribution services 371,190 15 357,346 17 Total consolidated net sales $ 2,446,998 100 % $ 2,133,402 100 % Fiscal 2013 includes a reclassification of revenue between product families to better reflect the way the businesses are managed.

27-------------------------------------------------------------------------------- Table of Contents Capacity The Company's practical capacity is not based on a theoretical 24-hour, seven-day operation, rather it is determined as the production level at which the manufacturing facilities can operate with an acceptable degree of efficiency, taking into consideration factors such as longer term customer demand, permanent staffing levels, operating shifts, holidays, scheduled maintenance and mix of product. Capacity utilization is calculated by dividing actual production pounds by practical capacity at each plant. A comparison of capacity utilization levels is as follows: Years ended August 31, 2014 2013 EMEA 82 % 77 % Americas 65 % 67 % APAC 70 % 68 % Worldwide 73 % 72 % Restructuring Consolidated Restructuring Summary The following table summarizes the activity related to the Company's restructuring plans: Total Restructuring Employee-related Costs Other Costs Translation Effect Costs (In thousands) Accrual balance as of August 31, 2012 $ 3,524 $ 381 $ (539 ) $ 3,366 Fiscal 2013 charges 8,669 1,831 - 10,500 Fiscal 2013 payments (6,747 ) (1,812 ) - (8,559 ) Translation - - 42 42 Accrual balance as of August 31, 2013 $ 5,446 $ 400 $ (497 ) $ 5,349 Fiscal 2014 charges 2,223 2,660 - 4,883 Fiscal 2014 payments (5,924 ) (2,689 ) - (8,613 ) Translation - - 193 193 Accrual balance as of August 31, 2014 $ 1,745 $ 371 $ (304 ) $ 1,812 See Note 15 of the consolidated financial statements within this Form 10-K for further details regarding the Company's restructuring activities.

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

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

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

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

28-------------------------------------------------------------------------------- Table of Contents Income Tax A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates is as follows: Year Ended August 31, 2014 2013 (In thousands, except for %'s) U.S. statutory federal income tax rate $ 25,316 35.0 % $ 18,806 35.0 % Amount of foreign taxes at less than U.S.

statutory federal income tax rate (13,602 ) (18.8 ) (9,189 ) (17.1 ) U.S. and foreign losses with no tax benefit 4,899 6.8 5,826 10.8 U.S. restructuring and other U.S. charges with no benefit 3,010 4.2 1,704 3.2 Valuation allowance charges - - 2,361 4.4 Establishment (resolution) of uncertain tax positions (121 ) (0.2 ) (84 ) (0.2 ) Other (960 ) (1.3 ) 309 0.6 Provision (benefit) for U.S. and foreign income taxes $ 18,542 25.7 % $ 19,733 36.7 % The effective tax rate for the year ended August 31, 2014 was less than the U.S.

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

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

FISCAL YEAR 2013 COMPARED WITH FISCAL YEAR 2012 Segment Information Year ended August 31, Favorable (unfavorable) EMEA 2013 2012 Increase (decrease) FX Impact Excluding FX (In thousands, except for %'s and per pound data) Pounds sold 1,167,603 1,174,515 (6,912 ) (0.6 )% Net sales $ 1,405,882 $ 1,403,151 $ 2,731 0.2 % $ 4,226 (0.1 )% Segment gross profit $ 179,242 $ 175,669 $ 3,573 2.0 % $ 359 1.8 % Segment gross profit percentage 12.7 % 12.5 % Segment operating income $ 67,320 $ 71,849 $ (4,529 ) (6.3 )% $ 39 (6.4 )% Price per pound $ 1.204 $ 1.195 $ 0.009 0.8 % $ 0.004 0.4 % Segment operating income per pound $ 0.058 $ 0.061 $ (0.003 ) (4.9 )% $ - (4.9 )% EMEA net sales for the year ended August 31, 2013 were $1,405.9 million, an increase of $2.7 million or 0.2%, compared with the prior year. Excluding the favorable impact of foreign currency translation of $4.2 million, net sales decreased $1.5 million which was impacted by reduced volume, primarily in the specialty powders and engineered plastics product families due to the weak economic environment in Europe. During fiscal 2013, the incremental contribution of the Elian acquisition was $18.5 million and 5.9 million pounds in net sales and volume, respectively.

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

29-------------------------------------------------------------------------------- Table of Contents EMEA operating income for the year ended August 31, 2013 was $67.3 million, a decrease of $4.5 million compared with the prior year. The decrease in segment operating income in fiscal 2013 was primarily due to an $8.1 million increase in selling, general and administrative expenses ("SG&A"). The increase in SG&A expense was primarily driven by increased compensation and benefits expense of $3.8 million, excluding Elian, which includes increased pension expense and annual government regulated compensation increases. SG&A expense was also impacted by increased bad debt expense of $1.0 million, increased information technology expense of $0.8 million, and incremental expenses of $2.5 million from Elian. These expenses were partially offset by savings from successful restructuring initiatives. Segment operating income per pound decreased $0.003 to $0.058 per pound primarily due to the aforementioned economic environment in Europe and increased SG&A expenses.

Year ended August 31, Favorable (unfavorable) Americas 2013 2012 Increase (decrease) FX Impact Excluding FX (In thousands, except for %'s and per pound data) Pounds sold 653,914 610,418 43,496 7.1 % Net sales $ 600,824 $ 558,910 $ 41,914 7.5 % $ (680 ) 7.6 % Segment gross profit $ 81,315 $ 84,282 $ (2,967 ) (3.5 )% $ 180 (3.7 )% Segment gross profit percentage 13.5 % 15.1 % Segment operating income $ 28,351 $ 28,872 $ (521 ) (1.8 )% $ 720 (4.3 )% Price per pound $ 0.919 $ 0.916 $ 0.003 0.3 % $ (0.001 ) 0.4 % Segment operating income per pound $ 0.043 $ 0.047 $ (0.004 ) (8.5 )% $ 0.001 (10.6 )% Net sales for the Americas for the years ended August 31, 2013 and 2012 were $600.8 million, and $558.9 million, respectively, an increase of $41.9 million or 7.5%. Incremental net sales and volume from the ECM Plastics, Inc.

acquisition were $37.9 million and 33.8 million pounds for the year ended August 31, 2013, respectively. Excluding the impact of ECM Plastics, Inc., net sales and volume increased primarily in the specialty powders product family. Foreign currency translation negatively impacted net sales by $0.7 million.

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

Americas operating income for the year ended August 31, 2013 was $28.4 million compared with $28.9 million last year. Segment operating income decreased as a result of the aforementioned decrease in segment gross profit, offset primarily by the favorable impact of $0.7 million from foreign currency translation and a $2.4 million decrease in SG&A expenses. The decrease in SG&A expenses was primarily due to successful restructuring initiatives and cost control efforts combined with reduced incentive compensation expense of $3.2 million, partially offset by the incremental expenses from ECM Plastics.

Year ended August 31, Favorable (unfavorable) APAC 2013 2012 Increase (decrease) FX Impact Excluding FX (In thousands, except for %'s and per pound data) Pounds sold 95,994 96,893 (899 ) (0.9 )% Net sales $ 126,696 $ 119,211 $ 7,485 6.3 % $ 1,151 5.3 % Segment gross profit $ 22,345 $ 19,969 $ 2,376 11.9 % $ 253 10.6 % Segment gross profit percentage 17.6 % 16.8 % Segment operating income $ 12,108 $ 10,908 $ 1,200 11.0 % $ 211 9.1 % Price per pound $ 1.320 $ 1.230 $ 0.090 7.3 % $ 0.012 6.3 % Segment operating income per pound $ 0.126 $ 0.113 $ 0.013 11.5 % $ 0.002 9.7 % 30-------------------------------------------------------------------------------- Table of Contents Net sales for APAC for the year ended August 31, 2013 were $126.7 million, an increase of $7.5 million or 6.3% primarily due to improved selling price per pound and product mix. Decreased volumes in the masterbatch solutions and specialty powders product families were largely offset by the increased volumes in the engineered plastics product family. Foreign currency translation favorably impacted net sales by $1.2 million.

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

APAC operating income for the year ended August 31, 2013 was $12.1 million, compared with $10.9 million last year. The increase in profitability was principally due to the increase in segment gross profit offset by an increase of $1.2 million in SG&A expenses mainly related to increased compensation expense to support growth in the region and the establishment of the APAC regional office in Hong Kong.

Year ended August 31, Favorable (unfavorable) Consolidated 2013 2012 Increase (decrease) FX Impact Excluding FX (In thousands, except for %'s and per pound data) Pounds sold 1,917,511 1,881,826 35,685 1.9 % Net sales 2,133,402 2,081,272 $ 52,130 2.5 % $ 4,697 2.3 % Operating income 63,103 73,403 $ (10,300 ) (14.0 )% $ 965 (15.3 )% Total operating income before certain items* 82,853 87,843 $ (4,990 ) (5.7 )% $ 971 (6.8 )% Price per pound $ 1.113 $ 1.106 $ 0.007 0.6 % $ 0.003 0.4 % Total operating income per pound before certain items* $ 0.043 $ 0.047 $ (0.004 ) (8.5 )% $ - (8.5 )% * Total operating income before certain items represents segment operating income combined with Corporate and other operating expenses. For a reconciliation of segment operating income to operating income and income from continuing operations before taxes, refer to Note 13 of the consolidated financial statements within this Form 10-K.

The increase of $52.1 million in consolidated net sales for the year ended August 31, 2013 compared with the prior fiscal year was primarily a result of incremental net sales and volume from the Elian and ECM Plastics, Inc.

acquisitions of $56.4 million and 39.7 million pounds, respectively. Net sales were positively impacted by the $4.7 million favorable impact of foreign currency translation. Excluding the positive impact of acquisitions and foreign currency translation, net sales and volume decreased primarily due to the aforementioned economic environment in Europe.

The Company's SG&A expenses increased $7.9 million for the year ended August 31, 2013 compared with the prior year, excluding acquisition related transaction costs of $2.7 million and restructuring related costs of $2.7 million for fiscal 2013 and $1.4 million of acquisition related transaction costs for fiscal 2012.

The increase was primarily attributable to incremental SG&A expense of $7.1 million from recent acquisitions, bad debt expense of $1.0 million and an increase in pension expense of $2.2 million. In addition, the Company invested in global marketing related initiatives, strategic planning in the APAC region, the establishment of the APAC regional headquarters in Hong Kong and the global ERP project. This was partially offset by savings from successful restructuring initiatives and cost control efforts, including $3.6 million related to the EMEA restructuring plans. Foreign currency translation favorably impacted SG&A expense by $0.2 million.

Operating income decreased $10.3 million for the year ended August 31, 2013 compared to the prior year. Total operating income, before certain items, for the year ended August 31, 2013 was $82.9 million, a decrease of $5.0 million compared with the prior year. The decrease in both operating income and total operating income, before certain items, was primarily due to the aforementioned increase in SG&A expense.

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

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

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

Noncontrolling interests represent a 49% equity position of Alta Plastica S.A.

in an Argentinean venture with the Company and a 35% equity position of P.T.

Prima Polycon Indah in an Indonesian joint venture with the Company. Effective December 31, 2011, the Company's partnership with Mitsubishi Chemical MKV Company, which held a 30% equity position in The Sunprene Company in Bellevue, Ohio, was dissolved by a vote of the partners.

Net income attributable to the Company's common stockholders was $26.1 million and $50.9 million for the years ended August 31, 2013 and 2012, respectively.

Foreign currency translation had a positive impact on net income of $0.6 million for the year ended August 31, 2013.

Product Family The consolidated net sales for the Company's five product families are as follows: Year ended August 31, 2013 2012 (In thousands, except for %'s) Custom performance colors $ 150,890 7 % $ 125,595 6 % Masterbatch solutions 781,770 37 750,531 36 Engineered plastics 534,777 25 547,090 26 Specialty powders 308,619 14 314,965 16 Distribution services 357,346 17 343,091 16 Total consolidated net sales $ 2,133,402 100 % $ 2,081,272 100 % Fiscal 2013 includes a reclassification of revenue between product families to better reflect the way the businesses are managed.

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

Additionally, the Company's APAC segment experienced lower capacity utilization as additional manufacturing capacity was added to existing facilities to meet anticipated demand in the region.

Restructuring Consolidated Restructuring Summary The following table summarizes the activity related to the Company's restructuring plans: Total Restructuring Employee-related Costs Other Costs Translation Effect Costs (In thousands) Accrual balance as of August 31, 2011 $ 3,322 $ 403 $ 70 $ 3,795 Fiscal 2012 charges 7,581 1,675 - 9,256 Fiscal 2012 payments (7,379 ) (1,697 ) - (9,076 ) Translation - - (609 ) (609 ) Accrual balance as of August 31, 2012 $ 3,524 $ 381 $ (539 ) $ 3,366 Fiscal 2013 charges 8,669 1,831 - 10,500 Fiscal 2013 payments (6,747 ) (1,812 ) - (8,559 ) Translation - - 42 42 Accrual balance as of August 31, 2013 $ 5,446 $ 400 $ (497 ) $ 5,349 For discussion on the Company's restructuring plans, refer to Note 15 of the consolidated financial statements within this Form 10-K.

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

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

In fiscal 2012, as a result of the Americas Engineered Plastics restructuring initiative, the Company reduced the carrying value of its facility, machinery and equipment in Nashville, Tennessee to its combined fair value of $3.8 million. The disposal value of the facility was determined as the estimated sales value of the assets less the costs to sell based on information provided by a third-party real estate valuation source. The disposal value of machinery and equipment to be sold or disposed of was determined based on estimated salvage value. The Company recorded pretax impairment charges of $0.5 million in fiscal 2012, primarily related to 33-------------------------------------------------------------------------------- Table of Contents real estate, machinery and equipment at the Nashville, Tennessee facility.

During fiscal 2013, the Company sold the Nashville, Tennessee facility which resulted in a minimal impact on the Company's consolidated financial results.

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

Income Tax A reconciliation of the statutory U.S. federal income tax rate with the effective tax rates is as follows: Year Ended August 31, 2013 2012 (In thousands, except for %'s) U.S. statutory federal income tax rate $ 18,806 35.0 % $ 23,389 35.0 % Amount of foreign taxes at less than U.S.

statutory federal income tax rate (9,189 ) (17.1 ) (11,373 ) (17.0 ) U.S. and foreign losses with no tax benefit 5,826 10.8 1,291 1.9 U.S. restructuring and other U.S. charges with no benefit 1,704 3.2 1,029 1.5 Valuation allowance charges 2,361 4.4 (2,380 ) (3.6 ) Establishment (resolution) of uncertain tax positions (84 ) (0.2 ) 1,718 2.6 Other 309 0.6 244 0.4 Provision (benefit) for U.S. and foreign income taxes $ 19,733 36.7 % $ 13,918 20.8 % The effective tax rate for the year ended August 31, 2013 is greater than the U.S. statutory rate primarily because of no tax benefits being recognized for U.S. and certain foreign losses, realization of tax charges due to changes in valuation allowances, and U.S. restructuring and other U.S. charges with no benefit. These unfavorable effects on the Company tax rate were partially offset by the Company's overall foreign rate being less than the U.S. statutory rate.

The change in the effective tax rate compared with the same prior year period was driven primarily by the valuation allowance established in the second quarter of fiscal 2013 against the net operating loss deferred tax asset of the Company's Brazilian entity due to the uncertainty in the realization of this asset and the adjustment to the Italian valuation allowance in fiscal 2012.

The effective tax rate for the year ended August 31, 2012 was less than the U.S.

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

CRITICAL ACCOUNTING POLICIES The Company has identified critical accounting policies that, as a result of the judgments, uncertainties, and the operations involved, could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. The Company's critical accounting policies relate to the allowance for doubtful accounts, inventory reserve, restructuring charges, purchase accounting and goodwill, long-lived assets, income taxes, pension and other postretirement benefits and stock-based compensation.

Allowance for Doubtful Accounts Management records an allowance for doubtful accounts receivable based on the current and projected credit quality of the Company's customers, customer payment history, and other factors that affect collectability. Changes in these factors or changes in economic circumstances could result in changes to the allowance for doubtful accounts.

Inventory Reserve Management establishes an inventory reserve based on historical experience and amounts expected to be realized for slow-moving and obsolete inventory. The Company continuously monitors its slow-moving and obsolete inventory and makes adjustments as considered necessary. The proceeds from the sale or dispositions of these inventories may differ from the net recorded amount.

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

Purchase Accounting and Goodwill Business combinations are accounted for using the purchase method of accounting.

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

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

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

Effective September 1, 2012, the masterbatch product family was split into two separate product families, custom performance colors and masterbatch solutions.

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

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

Qualitative Analysis The Company applied the qualitative goodwill impairment accounting guidance to its EMEA masterbatch, EMEA distribution services, Americas masterbatch and Americas custom performance color reporting units as of June 1, 2014.

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

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

35-------------------------------------------------------------------------------- Table of Contents Based on this quantitative analysis, management concluded that as of June 1, 2014, the EMEA engineered plastics, EMEA custom performance color, the Americas specialty powders and APAC engineered plastics reporting units had fair values that substantially exceeded their carrying values.

Management also concluded, based on the quantitative fair value measurements performed, that as of June 1, 2014, the fair values of the EMEA specialty powders and Americas engineered plastics reporting units exceeded their carrying values by 13% in each instance. As of August 31, 2014, the EMEA specialty powders reporting unit had goodwill of $19.0 million while goodwill in the Americas engineered plastics reporting unit was $28.4 million. The goodwill associated with these reporting units is primarily the result of the acquisitions made within the last few years. Generally, goodwill recorded in business combinations is more susceptible to risk of impairment soon after the acquisition primarily because the business combination is recorded at fair value based on operating plans and economic conditions present at the time of the acquisition. If operating results or economic conditions deteriorate soon after an acquisition, it could result in the impairment of the acquired goodwill. A change in macroeconomic conditions in the Americas and EMEA regions, as well as future changes in the judgments, assumptions and estimates that were used in the Company's goodwill impairment testing for these two reporting units, including the discount rate and future cash flow projections, could result in a significantly different estimate of the fair value.

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

Long-lived Assets Long-lived assets, except goodwill and indefinite-lived intangible assets, are reviewed for impairment when circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of the asset group to future undiscounted net cash flows estimated by the Company to be generated by such asset groups. Fair value is the basis for the measurement of any asset write-downs that are recorded. Adjustments to the estimated remaining useful lives may result in accelerated depreciation, which is included in cost of sales.

Income Taxes The Company's provision for income taxes involves a significant amount of judgment by management. This provision is impacted by the income and tax rates of the countries where the Company operates. A change in the geographical source of the Company's income can have a significant effect on the tax rate. No taxes are provided on certain foreign earnings which are permanently reinvested.

Various taxing authorities periodically audit the Company's tax returns. These audits may include questions regarding the Company's tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures associated with these various tax filing positions, the Company records tax liabilities for uncertain tax positions where the likelihood of sustaining the position is not more-likely-than-not based on its technical merits. A significant period of time may elapse before a particular matter, for which the Company has recorded a tax liability, is audited and fully resolved.

The establishment of the Company's tax liabilities relies on the judgment of management to estimate the exposures associated with its various filing positions. Although management believes those estimates and judgments are reasonable, actual results could differ, resulting in gains or losses that may be material to the Company's consolidated statements of operations.

To the extent that the Company prevails in matters for which tax liabilities have been recorded, or are required to pay amounts in excess of these tax liabilities, the Company's effective tax rate in any given financial statement period could be materially affected. An unfavorable tax settlement could result in an increase in the Company's effective tax rate in the financial statement period of resolution. A favorable tax settlement could be recognized as a reduction in the Company's effective tax rate in the financial statement period of resolution.

The Company records a valuation allowance to reduce its deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is considered to determine whether a valuation allowance is needed. Evidence, such as the results of operations for the current and preceding years, is given more weight than projections of future income, which is inherently uncertain. The Company's losses in the U.S. in recent periods provide sufficient negative evidence to require a full valuation allowance against its net deferred tax assets in the U.S. The Company intends to maintain a valuation allowance against its net deferred tax assets in the U.S. until sufficient positive evidence exists to support realization of such assets.

36-------------------------------------------------------------------------------- Table of Contents Pension and Other Postretirement Benefits The Company has several postretirement benefit plans worldwide. These plans consist primarily of defined benefit and defined contribution pension plans and other postretirement benefit plans. These benefit plans are a significant cost of doing business that represents obligations that will be ultimately settled far into the future. Pension and postretirement benefit accounting is intended to reflect the recognition of future benefit costs over the employee's approximate period of employment based on the terms of the plans and the investment and funding decisions made by the Company.

For financial statements prepared in conformity with accounting principles generally accepted in the United States of America, management is required to make many assumptions in order to value the plans' liabilities on a projected and accumulated basis, as well as to determine the annual expense for the plans.

The assumptions chosen take into account historical experience, the current economic environment and management's best judgment regarding future experience.

Assumptions include the discount rate, the expected long-term rate of return on assets, future salary increases, health care escalation rates, cost of living increases, turnover, retirement ages and mortality. While management believes the Company's assumptions are appropriate, significant differences in the Company's actual experience or significant changes in the Company's assumptions, including the discount rate used and the expected long-term rate of return on plan assets, may materially affect the Company's pension and postretirement obligations and future expenses.

Accounting guidance requires the full unfunded liability to be recognized on the consolidated balance sheet. The cumulative difference between actual experience and assumed experience is included in accumulated other comprehensive income (loss). For most of the plans, these gains or losses are recognized in expense over the average future service period of employees to the extent that they exceed 10% of the greater of the Projected Benefit Obligation (or Accumulated Postretirement Benefit Obligation for other postretirement benefits) and assets.

The effects of any plan changes are also included as a component of accumulated other comprehensive income (loss) and then recognized in expense over the average future service period of the affected plan.

The Company consults with various actuaries at least annually when reviewing and selecting the discount rates to be used. The discount rates used by the Company are based on yields of various local corporate and governmental bond indices with actual maturity dates that approximate the estimated benefit payment streams of the related pension plans. The discount rates are also reviewed in comparison with current benchmark indices, economic market conditions and the movement in the benchmark yield since the previous fiscal year. The liability weighted-average discount rate for the defined benefit pension plans is 2.8% as of August 31, 2014, compared with 4.0% as of August 31, 2013. For the other postretirement benefit plan, the rate is 3.8% as of August 31, 2014 and 4.5% as of August 31, 2013. This rate represents the interest rates generally available in the United States, which is the Company's only country with other postretirement benefit liabilities. Another assumption that affects the Company's pension expense is the expected long-term rate of return on assets.

Some of the Company's plans are funded. The weighted-average expected long-term rate of return on assets assumption is 5.2% for fiscal 2014. In consultation with its actuaries, the Company estimates its pension expense will increase by $2.5 million in fiscal 2015 compared with fiscal 2014 primarily as a result of a decrease in the weighted-average discount rate assumption.

The Company's principal objective is to ensure that sufficient funds are available to provide benefits as and when required under the terms of the plans.

The Company utilizes investments that provide benefits and maximizes the long-term investment performance of the plans without taking on undue risk while complying with various legal funding requirements. The Company, through its investment advisors, has developed detailed asset and liability models to aid in implementing optimal asset allocation strategies. Equity securities are invested in equity indexed funds, which minimizes concentration risk while offering market returns. The debt securities are invested in a long-term bond indexed fund which provides a stable low risk return. The fixed insurance contracts allow the Company to closely match a portion of the liability to the expected payout of benefit with little risk. The Company, in consultation with its actuaries, analyzes current market trends, the current plan performance and expected market performance of both the equity and bond markets to arrive at the expected return on each asset category over the long term.

37-------------------------------------------------------------------------------- Table of Contents The following table illustrates the sensitivity to a change in the assumed discount rate and expected long-term rate of return on assets for the Company's pension plans and other postretirement plans as of August 31, 2014: Impact on Impact on August 31, 2014 August 31, 2014 Impact on Projected Benefit Projected Benefit Fiscal 2014 Obligation for Obligation for Change in Assumption Benefits Expense Pension Plans Postretirement Plans (In thousands) 25 basis point decrease in discount rate $ 489 $ 8,422 $ 306 25 basis point increase in discount rate $ (456 ) $ (7,887 ) $ (293 ) 25 basis point decrease in expected long-term rate of return on assets $ 82 $ - $ - 25 basis point increase in expected long- term rate of return on assets $ (82 ) $ - $ - Share-based Compensation The Company grants certain types of equity awards as part of its long-term incentive compensation strategy. All such awards are expensed based on the fair value of the respective award. Fair value for awards that involve service or performance conditions for vesting is determined based on the market price on the grant date, while fair value for awards which include market conditions for vesting requires the use of a valuation model. The concept of modeling is used with such awards because observable market prices for these types of awards are not available. The modeling technique that is generally considered to most appropriately value this type of award is the Monte Carlo valuation model.

The Monte Carlo valuation model requires assumptions based on management's judgment regarding, among others, the volatility of the Company's stock, the correlation between the Company's stock price and that of its peer companies and the expected rate of interest. The Company uses historical data, corresponding to the vesting period, to determine the assumptions to be used in the Monte Carlo valuation model and has no reason to believe that future data is likely to materially differ from historical data. However, changes in the assumptions to reflect future stock price volatility, future correlation experience and future interest rates may result in a material change to the fair value of such awards.

While management believes the Company's assumptions used are appropriate, significant differences in the Company's actual experience or significant changes in the Company's assumptions, including the volatility of the Company's stock, the correlation rate and the interest rate, may materially affect the Company's future share-based compensation expense.

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

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

The Company's cash and cash equivalents increased $1.4 million since August 31, 2013. This increase was driven primarily by cash provided from operations in fiscal 2014, coupled with proceeds from the sale of assets of $6.0 million and increased net borrowings of $142.4 million to fund the fiscal 2014 acquisitions.

This was offset by the fiscal 2014 acquisitions for $206.6 million in cash consideration, expenditures for capital projects of $35.1 million and dividend payments of $23.7 million.

38-------------------------------------------------------------------------------- Table of Contents The Company's approximate working capital days are summarized as follows: August 31, 2014 August 31, 2013 Days in receivables 55 53 Days in inventory 50 53 Days in payables 48 48 Total working capital days 57 58 The following table summarizes certain key balances on the Company's consolidated balance sheets and related metrics: August 31, 2014 August 31, 2013 $ Change % Change (In thousands, except for %'s) Cash and cash equivalents $ 135,493 $ 134,054 $ 1,439 1.1 %Working capital, excluding cash $ 263,715 $ 243,910 $ 19,805 8.1 % Long-term debt $ 339,546 $ 207,435 $ 132,111 63.7 % Total debt $ 371,294 $ 215,808 $ 155,486 72.0 % Net debt * $ 235,801 $ 81,754 $ 154,047 188.4 % Total A. Schulman, Inc.'s Stockholders' equity $ 527,043 $ 507,377 $ 19,666 3.9 % * Net debt, a non-GAAP financial measure, represents total debt less cash and cash equivalents. The Company believes that net debt provides useful supplemental liquidity information to investors.

As of August 31, 2014 and August 31, 2013, 95% of the Company's cash and cash equivalents were held by its foreign subsidiaries. The majority of these foreign cash balances are associated with earnings that we have asserted are permanently reinvested and which we plan to use to support continued growth plans outside the U.S. through funding of capital expenditures, acquisitions, operating expenses or other similar cash needs of foreign operations. From time to time, we repatriate cash from foreign subsidiaries to the U.S. through intercompany dividends for normal operating needs and service outstanding debt. These dividends are typically paid out of current year earnings. In addition, excess cash in the U.S. is generally used to repay outstanding debt.

Working capital, excluding cash, was $263.7 million as of August 31, 2014, an increase of $19.8 million from August 31, 2013. The fiscal 2014 acquisitions contributed $42 million to working capital. The translation effect of foreign currencies, primarily the Euro, increased working capital by $5.9 million.

Excluding the impact of fiscal 2014 acquisitions, working capital decreased $20.8 million largely due to decreases in inventory and other current assets of $9.3 million and $3.3 million, respectively.

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

In the first quarter of fiscal 2014, the Company and certain of its wholly-owned subsidiaries entered into an amended and restated Credit Agreement, dated September 24, 2013, and containing a maturity date of September 24, 2018, with JPMorgan Chase Bank, N.A., as administrative agent, J.P. Morgan Europe Limited, as global agent, the lenders named in the Credit Agreement and J.P. Morgan Securities LLC, Wells Fargo Securities, LLC and PNC Capital Markets LLC as lead arrangers ("the Credit Agreement"). The Credit Agreement provides for: • a multicurrency revolving credit facility in the aggregate principal amount of up to $300 million (the "Revolving Facility"); • a $200 million term loan facility (the "Term Loan Facility") with quarterly payments due until maturity; and • an expansion feature allowing the Company to incur, subject to certain terms and conditions, up to an additional $250 million of revolving loans and/or term loans ("the Incremental Facility" and, together with the Revolving Facility and the Term Loan Facility, the "Credit Facility").

The Credit Facility is jointly and severally guaranteed by certain material domestic subsidiaries. The Credit Agreement contains certain covenants that, among other things, restrict the Company's ability to incur indebtedness and grant liens other than certain types of permitted indebtedness and permitted liens. The Company is also required to maintain a minimum interest coverage ratio 39-------------------------------------------------------------------------------- Table of Contents and cannot exceed a maximum net debt leverage ratio. The Company was in compliance with these covenants and does not believe a subsequent covenant violation is reasonably possible as of August 31, 2014.

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

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

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

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

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

Below summarizes the Company's available funds: As of August 31, 2014 2013 (In thousands) Existing capacity: Revolving Facility $ 300,000 $ 300,000 Term Loan Facility 190,625 - Domestic short-term lines of credit 15,000 - Foreign short-term lines of credit 53,520 56,178 Total capacity from credit lines and notes $ 559,145 $ 356,178 Availability: Revolving Facility $ 193,909 $ 149,024 Foreign short-term lines of credit 49,250 49,302 Total available funds from credit lines and notes $ 243,159 $ 198,326 Total available funds from credit lines and notes represents the total capacity from credit lines and notes less outstanding borrowings of $315.3 million and $156.9 million as of August 31, 2014 and 2013, respectively, and issued letters of credit of $0.7 million and $1.0 million as of August 31, 2014 and 2013, respectively.

The Company's underfunded pension liability is $133.1 million as of August 31, 2014. This amount is primarily due to an underfunded plan of $107.4 million maintained by the Company's German subsidiary. Under this plan, no separate vehicle is required to accumulate assets to provide for the payment of benefits.

The benefits are paid directly by the Company to the participants. It is anticipated that the German subsidiary will generate sufficient funds from operations to pay these benefits in the future.

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

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

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

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

dollar in fiscal 2014. Overall, the value of the Euro decreased 0.4% from 1.324 Euros to 1 U.S. dollar as of August 31, 2013 to 1.319 as of August 31, 2014.

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

A summary of the Company's future obligations subsequent to August 31, 2014 is presented below: Less than More than 5 1 year 1-3 years 3-5 years years Total (In thousands) Short-Term Debt(a) $ 31,646 $ - $ - $ - $ 31,646 Long-Term Debt(a),(h) - 75,665 263,525 - 339,190 Capital Lease Obligations(a) 102 216 137 3 458 Operating Lease Obligations(b) 11,378 14,078 8,128 18,227 51,811 Purchase Obligations(c) 123,801 27,790 12,723 - 164,314 Pension Obligations(d) 5,636 - - - 5,636Postretirement Benefit Obligations(e) 890 1,719 1,697 4,001 8,307 Deferred Compensation Obligations(f) 200 350 - - 550 Interest Payments(g) 8,618 13,908 5,829 - 28,355 NATPET Investment(i) 12,792 - - - 12,792 $ 195,063 $ 133,726 $ 292,039 $ 22,231 $ 643,059 (a) Short-term debt, long-term debt and capital lease information is provided in the Notes to the Consolidated Financial Statements. Short-term debt and long-term debt in the table above exclude capital lease obligations.

(b) Operating lease information is provided in the Notes to the Consolidated Financial Statements.

(c) Purchase obligations include purchase contracts and purchase orders for inventory.

(d) Pension obligations represent future estimated pension payments to comply with local funding requirements, as well as estimated benefit payments. The projected payments beyond fiscal year 2015 are not currently determinable.

(e) Postretirement benefit obligations represent the estimated benefit payments of the U.S. postretirement benefit plan using the plan provisions in effect as of August 31, 2014.

(f) Deferred compensation obligations represent payments in accordance with agreements for two individuals for a ten-year period through fiscal 2018.

(g) Interest obligations on the Company's short and long-term debt are included assuming the outstanding debt levels and interest rates will be consistent with those as of August 31, 2014.

41-------------------------------------------------------------------------------- Table of Contents (h) The Company's long-term debt was refinanced in September 2013 and matures in September 2018.

(i) The NATPET investment represents the Company's commitment for an investment of €9.7 million in a joint venture agreement with NATPET of Jeddah, Saudi Arabia.

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

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

OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements.

NEW ACCOUNTING PRONOUNCEMENTS For a discussion of new accounting pronouncements, see Note 1 to the consolidated financial statements in ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, of this Annual Report on Form 10-K.

Cautionary Statements A number of the matters discussed in this document that are not historical or current facts deal with potential future circumstances and developments and may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historic or current facts and relate to future events and expectations. Forward-looking statements contain such words as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance.

Forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which management is unable to predict or control, that may cause actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could adversely affect the Company's future financial performance, include, but are not limited to, the following: • worldwide and regional economic, business and political conditions, including continuing economic uncertainties in some or all of the Company's major product markets or countries where the Company has operations; • the effectiveness of the Company's efforts to improve operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques; • competitive factors, including intense price competition; • fluctuations in the value of currencies in major areas where the Company operates; • volatility of prices and availability of the supply of energy and raw materials that are critical to the manufacture of the Company's products, particularly plastic resins derived from oil and natural gas; • changes in customer demand and requirements; • effectiveness of the Company to achieve the level of cost savings, productivity improvements, growth and other benefits anticipated from acquisitions, joint ventures and restructuring initiatives; • escalation in the cost of providing employee health care; 42-------------------------------------------------------------------------------- Table of Contents • uncertainties regarding the resolution of pending and future litigation and other claims; • the performance of the global automotive market as well as other markets served; • further adverse changes in economic or industry conditions, including global supply and demand conditions and prices for products; and • operating problems with our information systems as a result of system security failures such as viruses, computer "hackers" or other causes.

The risks and uncertainties identified above are not the only risks the Company faces. Additional risk factors that could affect the Company's performance are set forth in ITEM 1A, RISK FACTORS, of this Annual Report on Form 10-K. In addition, risks and uncertainties not presently known to the Company or that it believes to be immaterial also may adversely affect the Company. Should any known or unknown risks or uncertainties develop into actual events, or underlying assumptions prove inaccurate, these developments could have material adverse effects on the Company's business, financial condition and results of operations.

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