A. Schulman Reports Fiscal 2016 First Quarter Results

AKRON, Ohio, Jan. 11, 2016 /PRNewswire/ -- A. Schulman, Inc. (Nasdaq: SHLM) announced today earnings for the fiscal first quarter ended November 30, 2015.

Bernard Rzepka, president and chief executive officer, said, "We are pleased to demonstrate ongoing progress toward our strategic vision of moving beyond plastic compounding by continuing to transform A. Schulman from a commodity business to a specialty solutions company. All of our segments posted considerable profit improvement, excluding the impact of foreign currency, driven by our focus on our '3S' execution excellence initiatives: Safety, Smart Sales, and Smart Savings, and in addition, our acquisition of the high-margin Citadel business. When compared with the prior year, we boosted adjusted gross margin by 260 basis points and adjusted operating margin by 120 basis points as we continue to drive product mix improvements."

Joseph Levanduski, executive vice president & chief financial officer, said, "Our bottom line was significantly impacted by the costs incurred during the investigation and the ongoing resolution process of the Lucent quality reporting matter. Our GAAP results were negatively impacted by $4.9 million or $0.12 per diluted share related to these actions, of which $3.7 million or $0.09 per diluted share were excluded from our non-GAAP results. Still, we have confidence that we will drive restructuring, integration, and other smart savings actions that will overcome the ongoing costs to resolve the Lucent matter and our strategic initiatives are continuing to provide greater profitability. Therefore, we reaffirm our full year guidance."

Fiscal First-Quarter Results
Net sales for the fiscal 2016 first quarter were $649.2 million, an increase of 5.6% compared with $615.1 million in the prior-year quarter. Foreign currency translation negatively impacted net sales by $62 million, or 10% of sales. Net sales from Citadel contributed $111.1 million of revenue during the quarter. Excluding the incremental sales from the Citadel acquisition and negative foreign currency impact, net sales declined 2.4% as the Company experienced lower volumes in its U.S. and Canada ("USCAN") segment's commodity product and service offerings.

Adjusted gross margin in the first quarter as a percent of net sales improved to 16.8% compared with 14.2% in the prior-year period due to a stronger customer shift to higher value added product sales and mix improvement from higher margin product sales from the Citadel acquisition.

The Company reported GAAP income from continuing operations of $0.18 per diluted share, compared with $0.45 in the year-ago period. On an adjusted basis, excluding certain financing, restructuring and acquisitions-related costs, the Company generated net income of $0.50 per diluted share compared to $0.63 in the year-ago period.

Europe, Middle East and Africa ("EMEA") net sales were $328.1 million compared with $371.2 million in the same prior-year period. Excluding the unfavorable impact of foreign currency translation of $44.2 million, legacy revenues were essentially flat, consistent with fiscal fourth-quarter 2015 results. Excluding the negative impact of foreign currency translation of $5.9 million, adjusted gross profit margin rose 110 basis points to 14.5%, primarily due to improved product mix and favorable raw material pricing.

Net sales for the USCAN were $178.3 million in the quarter, compared with $144.7 million in the prior-year period. Excluding the $59.1 million of acquired Citadel revenue, legacy revenues fell 17.6%.

"We experienced USCAN revenue and volume weakness in our Masterbatch and Specialty Powders business units as well as Engineered Plastics. The declines in Masterbatch and Specialty Powders were primarily driven by certain tolling customers who destocked their inventory and shifted some production in-house. The decline in Engineered Plastics is a result of the team's intense focus to resolve the previously disclosed Lucent quality reporting matter," said Rzepka. "Despite the contraction in these businesses, USCAN adjusted gross margin was 17.0%, steady with the prior-year period, as the Citadel integration and our focus on added-value products continue to bear fruit."

Latin America's ("LATAM") net sales for the quarter were $45.2 million. Excluding the unfavorable impact of foreign currency translation of $10.6 million, core revenues increased nearly 21%, up significantly from the 12.7% growth in the fourth quarter. LATAM adjusted gross profit of 21.5% was nearly double that of the 12.2% in the prior year.  LATAM results were driven by market expansion and operational improvements. 

Asia Pacific ("APAC") reported net sales were $45.7 million. Adjusting for a negative foreign exchange impact of $6.7 million, legacy revenues fell 1%. APAC adjusted gross profit margin was 17.2%, up 350 basis points from the prior period due to the benefits of several strategic focus initiatives to improve product mix.

Engineered Composites ("EC") net sales for the quarter were $51.9 million. While EC was acquired on June 1, 2015, for comparison purposes, the legacy revenues declined slightly from the year-ago period results, after adjusting for currency and Citadel's earlier acquisition of The Composites Group. Organic volumes in the legacy EC business improved but were offset by domestic weakness in the oil & gas market. EC gross profit margin for the quarter was 25.4%, stable with the fourth quarter of fiscal 2015 results. 

Citadel Integration
"We are pleased that during the quarter we over-delivered on our internal synergy targets. We remain focused on capturing our stated Citadel integration synergy savings of $20 million by the end of fiscal 2016 and achieve the full run rate of $25 million during fiscal 2017," said Rzepka. "In October, we announced the consolidation across several Engineered Plastics operations, which will result in closure of three manufacturing facilities, more efficient operations at the remaining facilities, and ultimate annual savings of $9.5 million. The remainder of the synergy savings will be driven from sourcing actions and SG&A consolidations. These efforts are underway, and contributed $3.8 million or $0.09 per share to the current quarter results." 

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.

"We took immediate decisive actions following our initial discovery, including implementing strict protocols designed to meet customer standards and certification requirements for all future shipments," stated Rzepka. "To date, we have notified all affected customers and I am encouraged that no customers or other parties have initiated recalls or have made material claims against the Company or have sought to terminate their relationships with us."

The Company incurred a total of $4.9 million of costs related to this matter that negatively impacted the Company's operating results for the first quarter of fiscal 2016, including product and manufacturing operational costs, dedicated internal personnel costs, a reduction in inventory value, and additional legal and investigative costs.

An internal investigation will continue as to the scope of products, customers, and other parties affected. The Company has provided a written claim notice to the sellers and to the escrow agent with respect to the indemnity escrow established in connection with the stock purchase agreement pursuant to which the Company acquired Citadel and its subsidiaries.

Working Capital/Cash Flow
Cash provided from operations was $40.0 million in the quarter ending November 30, 2015, compared to $10.3 million in the year-ago quarter. Working capital days were 64 days in the current quarter, unchanged from the fourth quarter of fiscal 2015.

Capital expenditures for the quarter were $7.4 million compared with $10.3 million in the prior year. During the fiscal 2016 first quarter the Company paid down 20 million Euro of its Term Loan B debt in Europe and continued to focus on deleveraging the balance sheet as quickly as possible. Net leverage on an adjusted basis is now further lowered to 3.85x, and the Company continues to repay term debt, with an additional 10 million Euro term debt pay down in early January, 2016.

During the first quarter of fiscal 2016, the Company declared and paid quarterly cash dividends of $0.205 per common share, for a total amount of $6.0 million. 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 Outlook
Rzepka said, "Fiscal 2016 has begun on a challenging note, with weakening macroeconomic conditions across several regions, continued pressure in the oil, energy, and material markets, ongoing currency headwinds, and the costs of our internal actions to resolve the Lucent matter. To that end, we are undertaking additional cost reduction actions company-wide, designed to more than offset the first quarter shortfall. Therefore, we maintain our fiscal 2016 earnings guidance range of $2.80 to $2.85 per diluted share. 

"We have faced challenges before and our seasoned team is highly focused on our commitment to deliver substantial annual earnings growth from both the continuing transformation to higher specialization and the wide-ranging benefits that are unfolding from the integration of Citadel."

Conference Call on the Web
A live Internet broadcast of A. Schulman's conference call regarding fiscal 2016 first-quarter earnings can be accessed at 10:00 a.m. Eastern Time on Monday, January 11, 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 participate in meetings with analysts and investors throughout the fiscal year. The Company has posted presentation materials, portions of which are 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 5,000 people and has 58 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, August not be reported by all of the Company's competitors and August 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 August 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 August 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; 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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