A. Schulman Reports Fiscal 2016 Third Quarter Results

AKRON, Ohio, June 28, 2016 /PRNewswire/ -- A. Schulman, Inc. (Nasdaq: SHLM) announced today earnings for the fiscal 2016 third quarter ended May 31, 2016 of $0.53 per diluted share, compared to a loss of ($0.34) per share in the prior year period. On an adjusted basis, reported earnings per share were $0.79 compared with $0.72 in the prior year period. 

Consolidated net sales for the fiscal 2016 third quarter were $650.4 million, compared with $560.9 million in the same prior-year quarter. After adjusting for negative foreign currency translation of $6.2 million, and net sales from the Citadel acquisition of $112.4 million during the quarter, legacy revenues declined 3%, approximately the same as in the prior quarter due to the reduction of our commodity portfolio embedded within the Company's Distribution Services and Specialty Powders product families. As a result of the Company's relentless focus on growing value-added products, the Company improved its product mix. Adjusted gross margin in the fiscal third quarter increased to 17.4% compared with 16.2% in the prior year period and adjusted operating income increased to 7% compared with 5.9% in the prior year period. Both Citadel and legacy portfolios contributed to these improved adjusted gross and operating margins.

"We are encouraged by the continued improvement in our adjusted margins which validates our strategy to provide superior value to a vast array of market leading customers," said Bernard Rzepka, President and Chief Executive Officer. "Much of this profit improvement was a result of our Smart Sales, Savings and Safety initiative that is entrenched within our businesses and is positioning us as the preferred premier materials solutions provider."

Europe, Middle East and Africa ("EMEA") net sales were $322.4 million, compared with $326.3 million in the same prior-year period. Excluding the favorable impact of foreign currency translation of $4.3 million, revenues fell 2.5% primarily related to commodity products in the Specialty Powders and Distribution Services product families. This decrease was partially offset by increased activity in the Masterbatch solutions product family. Adjusted gross profit for the segment fell 30 basis points to 15.5% when compared to the same prior year period.

Net sales for United States and Canada ("USCAN") were $183.3 million, compared with $137.1 million in the third quarter of fiscal 2015. The incremental contribution from the Citadel acquisition was $57.9 million in net sales in the Company's Engineered Product family. Excluding the contribution of Citadel's Engineered Plastics sales, legacy revenues declined 8.5% in the third quarter of fiscal 2016. Softness in the agricultural and sports & leisure markets, and continued focus to replace commodity product offerings contributed to the sales decline. The combination of improved mix of product sales; lower production costs and the contribution of Citadel Engineered Plastic revenues resulted in adjusted gross margin improving to 17.8% compared with 16.1% in the prior year period.

"While we are in no way satisfied with the results in these regions, our teams have done a good job controlling what they could control as evidenced by the USCAN adjusted gross margin improvement," said Rzepka. "With the claims and operational issues at Lucent largely identified and addressed, we can now focus on realizing our full growth potential. As we enter our fiscal fourth quarter, our priorities will be to further deepen our engagement with existing customers, increase our share in attractive target markets, and continue to invest smartly in R&D while aggressively managing our costs through productivity initiatives and supply chain efficiencies."

LATAM net sales for the quarter were $43.4 million, compared with $44.8 million a year ago. Excluding the unfavorable impact of foreign currency translation of $7.3 million, revenues increased 13.1%.  Excluding a $1.5 million negative impact of foreign currency, gross profit rose 13% over the prior year period yielding an adjusted gross margin of 20.9%.

"This marks our fourth consecutive quarter of double-digit growth in this region," Rzepka said. "We saw strength in the agricultural market in the LATAM region. Our business also increased in packaging and we experienced improved product mix in our Engineered Plastics business related to the strong automotive markets. Lastly, our export business in Brazil increased roughly 18% during the quarter to further improve our performance in the region."  

Asia Pacific ("APAC") net sales were $46.9 million, compared with $52.7 million in the third quarter of fiscal 2015. Adjusting for a negative foreign exchange impact of $2.9 million, revenues fell 5.5% primarily related to lower sales in Specialty Powders due to the transfer of our rotational molded product line into a minority owned joint venture during fiscal 2016. APAC adjusted gross profit margin was 17.2%, up 250 basis points from the prior period due to improved product mix.  

Engineered Composites ("EC") net sales for the quarter were $54.5 million, compared with $56.9 million in the year-ago comparable period, prior to the June 1 acquisition. On a year-over-year comparison, revenues from the Citadel business declined 4.2% due to the impact of weak oil and gas customer activity. On the lower volumes, gross margin fell 110 basis points to 25.2%, but operating margin increased considerably to 9.2% as restructuring and integration synergies begin to impact the operating performance. 

Lucent Update
As previously reported, the Company identified quality reporting issues affecting certain product lines at two former Citadel manufacturing facilities that were once part of Lucent Polymers, which was acquired as part of the Citadel acquisition. Specifically, the Company discovered discrepancies between laboratory data and certifications provided by Lucent to customers with respect to certain products using recycled or reclaimed raw materials.

"The fact that we were able to identify and address this matter as quickly as we did without the need for any product recalls speaks volumes to the strength of our team and culture. As a result of the tireless efforts and excellent work of our team, we are now focusing our attention toward organic growth instead of resolving issues of the past," said Rzepka. "We thank our customers for their patience and support as we addressed this critical matter."

The Company incurred costs of $1.8 million in the quarter related to the Lucent remediation matter, including $1.1 million of recurring production and material costs down from the prior quarter and $0.7 million of other costs including settlement of claims and dedicated internal personnel costs.

A. Schulman believes that the sellers are responsible to compensate A. Schulman for the Lucent losses that the Company has experienced or may incur. Therefore, on June 15, 2016, the Company filed a lawsuit against the sellers of Citadel Plastics in the Court of Chancery of the State of Delaware. Among other things, the suit seeks indemnification and damages for the fraudulent business practices within the Lucent subsidiary. Previously, the Company provided a written claim notice to this effect to the sellers and to the escrow agent with respect to the $31 million indemnity escrow established. During the fiscal third quarter, the Company incurred $1.2 million of legal costs associated with this lawsuit.

In accordance with the Company's policy, it will make no further comments on this ongoing legal matter, nor will it speculate to the timing or potential outcome of this matter. A. Schulman can make no assurances it will be able to recoup funds sufficient enough to offset the substantial costs it has incurred – and will incur – to investigate, isolate and mitigate these fraudulent practices.

Working Capital/Cash Flow 
Cash provided from operations was $95.7 million in the nine months ended May 31, 2016, an improvement compared to $56.3 million in the comparable prior year period. Net working capital days were 61 at May 31, compared to 71 days on February 29, 2016. Both metrics were favorably impacted by a focus on supply chain leading to significant improvements in days of inventory on hand.  

During the quarter, the Company reduced its debt position by approximately $40 million. This brings net debt to $937 million, which equates to an adjusted net leverage ratio of 3.96 at quarter-end.

Capital expenditures for the nine months ended May 31, 2016 were $34.6 million, compared with $32.7 million last year.  During the three months ended May 31, 2016, the Company declared and paid quarterly cash dividends of $6.1 million, or $0.205 per quarter per common share in accordance to its ongoing goal to provide an attractive yield to shareholders. In addition, a quarterly cash dividend of $15.00 per share was declared and paid on the 125,000 shares of the Company's convertible special stock, representing a $1.9 million cash outflow.

Business Update and Outlook
"Despite the continued volatility in the global marketplace, our outlook for the full year remains unchanged," said Rzepka. "We continue to anticipate full-year fiscal 2016 adjusted earnings to be in the range of $2.40 to $2.45 per diluted share."

Rzepka noted that the Company is positioning itself for accelerating earnings growth in fiscal 2017 and beyond. "We have organic growth programs as well as cost and productivity initiatives underway, and with the distraction of addressing the Lucent matter largely behind us, we fully expect that these focused efforts will continue to improve our operating margins. We are actively pursuing different avenues to further advance our strategy and drive value through additional investments in profitable growth."

As is customary, the Company will provide fiscal 2017 earnings and other financial metrics guidance at the end of October when it releases results for the full year.

Conference Call on the Web
A live Internet broadcast of A. Schulman's conference call regarding fiscal 2016 third-quarter earnings can be accessed at 10:00 a.m. Eastern Time on June 29, 2016, on the Company's website, www.aschulman.com. An archived replay of the call will also be available on the website.

Investor Presentation Materials
Senior executives of the Company may participate in meetings with analysts and investors throughout the fiscal year. The Company has posted presentation materials, portions of which may be used during such meetings, in the Investors section of its website at www.aschulman.com. The presentation will remain on the website as long as it is in use.

About A. Schulman, Inc.
A. Schulman, Inc. is a leading international supplier of high-performance plastic compounds and resins headquartered in Akron, Ohio. Since 1928, the Company has been providing innovative solutions to meet its customers' demanding requirements. The Company's customers span a wide range of markets such as packaging, mobility, building & construction, electronics & electrical, agriculture, personal care & hygiene, sports, leisure & home, custom services and others. The Company employs approximately 4,900 people and has 57 manufacturing facilities globally. A. Schulman reported net sales of approximately $2.4 billion for the fiscal year ended August 31, 2015. Additional information about A. Schulman can be found at www.aschulman.com.

Use of Non-GAAP Financial Measures
This release includes certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States ("GAAP"). These non-GAAP financial measures include segment gross profit, SG&A expenses excluding certain items, segment operating income, operating income before certain items, net income excluding certain items, net income per diluted share excluding certain items and adjusted EBITDA, as discussed further in the Reconciliation of GAAP and Non-GAAP Financial Measures below. These non-GAAP financial measures are considered relevant to aid analysis and understanding of the Company's results and business trends. However, non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures, and tables included in this release reconcile each non-GAAP financial measure with the most directly comparable GAAP financial measure. The most directly comparable GAAP financial measures for these purposes are gross profit, SG&A expenses, operating income, net income and net income per diluted share. The Company's non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP.

While the Company believes that these non-GAAP financial measures provide useful supplemental information to investors, there are very significant limitations associated with their use. These non-GAAP financial measures are not prepared in accordance with GAAP, may not be reported by all of the Company's competitors and may not be directly comparable to similarly titled measures of the Company's competitors due to potential differences in the exact method of calculation. The Company compensates for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures.

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 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 could 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 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;
• uncertainties and unanticipated developments regarding contingencies, such as pending and future litigation and other claims, including developments that would require increases in our costs and/or reserves for such contingencies;
• 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 our information systems as a result of system security failures such as viruses, cyber-attacks or other causes;
• our current debt position could adversely affect our financial health and prevent us from fulfilling our financial obligations;
• integration of acquisitions, including most recently Citadel, with our existing business, including the risk that the integration will be more costly or more time consuming and complex or simply less effective than anticipated;
• our ability to achieve the anticipated synergies, cost savings and other benefits from the Citadel acquisition;
• substantial time devoted by management to the integration of the Citadel acquisition; and
• failure of counterparties to perform under the terms and conditions of contractual arrangements, including suppliers, customers, buyers and sellers of a business and other third parties with which the Company contracts.

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 the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2015. 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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1 - Accelerated depreciation is related to restructuring plans in the Company's USCAN and EMEA segments. Refer to Note 14 in the Company's Quarterly Report on Form 10-Q for further discussion.

2 - Costs related to acquisitions and integrations primarily include third party professional, legal, IT and other expenses associated with successful and unsuccessful full or partial acquisition and divestiture/dissolution transactions, as well as certain employee-related expenses such as travel, bonuses and post-acquisition severance separate from a formal restructuring plan.

3 - Restructuring and related costs include items such as employee severance charges, lease termination charges, curtailment gains/losses, other employee termination costs, and professional fees related to the reorganization of the Company's legal entity structure and facility operations.

4 - Lucent costs primarily represent legal and investigation costs related to resolving the Lucent matter, product manufacturing costs for reworking existing Lucent inventory, obsolete Lucent inventory reserve costs, and dedicated internal personnel costs that would have otherwise been focused on normal operations.

5 - Write off of deferred financing costs related to the €79.0 million prepayment of the Euro Term Loan B.

6 - Tax (benefits) charges represent the Company's quarterly non-GAAP tax based on the overall estimated annual non-GAAP effective tax rates.

7 - Inventory step-up costs represent the amortization of adjustments to fair value of inventory acquired for acquisition purchase accounting.

8 - CEO transition costs represent a charge for the modification and accelerated vesting upon retirement of the outstanding equity compensation awards granted to Joseph M. Gingo in 2013 and 2014.

9 - Convertible special stock dividends have been added back as the 2.4 million shares of convertible special stock were considered dilutive to the third quarter of fiscal 2016.

10 - Represents a pre-tax net gain of $1.3 million on the early extinguishment of debt.

11 - Primarily relates to $18.8 million in bridge financing fees.

 

 

 

(1) - Other includes Foreign currency transaction (gains) losses, Other (income) expense, net, and Gain on early extinguishment of debt.

(2) - For details on Non-GAAP adjustments, refer to "Reconciliation of GAAP and Non-GAAP Financial Measures", items (2) - (11) and Loss (income) from discontinued operations.  Amounts are included in Non Operating (Income) Expense, Income Tax Expense (Benefit) and Net Income Available to ASI Common Stockholders.  Accelerated depreciation on the "Reconciliation of GAAP and Non-GAAP Financial Measures" has been excluded as it is already included in Depreciation and Amortization above. The three months ended May 31, 2015 and nine months ended May 31, 2016 and May 31, 2015 also include additional amortization expense which is in SG&A in the "Reconciliation of GAAP and Non-GAAP Financial Measures".  This expense has been added back to adjusted EBITDA.

 

 

 

 

 

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SOURCE A. Schulman, Inc.