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A. Schulman Reports Fiscal 2016 Second Quarter Results

The following excerpt is from the company's SEC filing.

Fiscal second quarter 2016 reported earnings per share from continuing operations were a loss of $0.02, compared with a loss of $0.03 in the prior year period; adjusted earnings were $0.31 per share, compared with $0.39 per share in the fiscal 2015 second quarter.

Net sales were $591.8 million, an increase of 9.1% compared with the prior-year quarter.

Adjusted EBITDA rose 60% compared with the prior year period; debt was reduced by $41.9 million from the prior year end.

Adjusted operating income rose 52%, compared with the prior year quarter; adjusted gross margin expanded to 15.9%, up 140 basis points.

AKRON, Ohio - April 6, 2016 - A. Schulman Inc. (Nasdaq: SHLM), a leading international supplier of high-performance plastic compounds, composites, powders, and resins, today announced earnings for the fiscal second quarter ended February 29, 2016.

“Without question, we are disappointed with our fiscal second-quarter adjusted earnings results and reduced outlook for fiscal 2016,” said Bernard Rzepka, president and chief executive officer. “As the quarter progressed, we experienced lower volumes across our legacy businesses and our recent Citadel acquisition. While the deepest contractions have been in the oil & gas markets, there also has been a slowdown in some of our other markets in both Europe and North America. Additionally, costs continued to be incurred to resolve the Lucent issues involving falsified test results which we uncovered last year as we implemented our Citadel integration plans.”

Rzepka continued, “Despite the slowdown in volume, we showed significant improvements in operating margins in nearly all of our reportable segments. This is evidence of our progress towards our strategic vision of moving beyond plastic compounding, to transform A. Schulman into a specialty plastics solutions company. We have devoted additional resources toward accelerating the recognition of synergy and restructuring benefits, cost savings initiatives as well as broadening the scope of the ‘Manufacturing for Success’ productivity program. These programs will yield further benefits in the second half of the fiscal year and beyond.”

Fiscal Second-Quarter Results

Net sales for the fiscal 2016 second quarter were $591.8 million, an increase of 9.1% compared with the prior-year quarter. Foreign currency translation negatively impacted net sales by $35.6 million. Net sales from the Citadel acquisition contributed $102.0 million during the quarter. Excluding the incremental sales from the Citadel acquisition and negative foreign currency impact, net sales declined 3.1% as the Company continued to experience lower volume in its U.S. and Canada (“USCAN”) segment, and slightly negative volumes in the Europe, Middle East and Africa (”EMEA”) segment.

Adjusted gross margin in the second quarter as a percent of net sales increased to 15.9% compared with 14.5% in the prior-year period as the Company continues to move its portfolio towards specialty products.

The Company reported a loss from continuing operations of $0.02 per diluted share, compared with a loss of $0.03 per diluted share in the prior-year period. On an adjusted basis, excluding certain Lucent, restructuring and acquisitions-related costs, the Company generated net income of $0.31 per diluted share compared to $0.39 per diluted share in the prior-year period.

EMEA net sales were $290.3 million compared with $315.1 million in the same prior-year period. Excluding the unfavorable impact of foreign currency translation of $21 million, revenues fell 1.2% primarily related to Distribution Services. Adjusted gross profit margin fell 70 basis points to 13.4%, after excluding the negative impact of foreign currency translation of $2.8 million.

Net sales for USCAN were $170.8 million in the quarter, compared with $133.4 million in the prior-year period. Excluding the $54.6 million of acquired Citadel revenue, legacy revenues fell 12.9%.

“The revenue and volume weakness primarily affected our Masterbatch Solutions, Specialty Powders and Engineered Plastics businesses. We experienced lower customer demand both from the impact of market slowdowns, as well as declines from customer destocking related to lower oil prices,” said Rzepka. “Despite the softness in these businesses, USCAN delivered adjusted gross margin of 15.9%, up 110 basis points, as the impact of the Citadel integration and our strategic actions such as ‘Manufacturing for Success’ and cost savings initiatives accelerated.”

Latin America’s (“LATAM”) net sales for the quarter were $38.2 million. Excluding the unfavorable impact of foreign currency translation of $9.3 million, revenues increased over 15%, the third successive quarter of double-digit growth. This increase was primarily a result of strong volume growth in Masterbatch Solutions due to our continued successful strategic focus in the packaging and agricultural markets in the region. LATAM adjusted gross profit of 22.2% was a record for the segment, up 490 basis points from the prior year driven by improved product mix.

Asia Pacific (“APAC”) net sales were $45.1 million. Adjusting for a negative foreign exchange impact of $5.0 million, revenues fell 4.8% primarily related to weaker regional demand and customer destocking. APAC adjusted gross profit margin was 18.2%, up 420 basis points from the prior period due to improved product mix.

Engineered Composites (“EC”) net sales for the quarter were $47.4 million. While EC was acquired on June 1, 2015, for comparison purposes, the legacy revenues declined 8.6% from the year-ago period results, after adjusting for foreign currency. Organic volumes in the legacy EC business improved by 1% but continued to be offset by domestic weakness in products sold into the fracking industry.

Citadel Integration

“As we stated on March 14, 2016, we now expect this acquisition to be accretive in fiscal 2017. In the meantime, we remain focused on capturing our stated Citadel integration synergy savings of $20 million by the end of fiscal 2016 and expect to achieve the full run rate of $25 million during fiscal 2017,” said Rzepka. “These integration efforts are underway, and are contributing as expected in the current quarter results. Despite a weaker global economic environment and the attention to resolving the Lucent matter, we are committed to our integration efforts, attaining revenue synergies and generating additional savings in order to achieve our accretion goal.”

Lucent Update

As previously reported by the Company including its filings with the SEC, Lucent falsified test results on documents provided to customers and other parties pertaining to the physical properties of Lucent products.

Rzepka said, “At this juncture, we have completed the majority of our internal investigation. We have reviewed our legal position in connection with the purchase agreement of Citadel and we believe that the sellers are responsible to compensate A. Schulman for the Lucent losses that we have and may incur. Therefore, we intend to take full advantage of our contractual rights to pursue remedy. The Company has 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. Further, we believe that appropriate compensation of this matter exceeds the escrow amount. The Company has engaged Skadden Arps as special litigation counsel for this matter.”

The Company incurred a total of $2.1 million of costs related to this matter in the second quarter, including increased product and manufacturing operational costs, additional legal and investigative costs and other costs associated with remediation. On a year-to-date basis, these costs totaled $7 million.

Rzepka noted that no customers or other parties have yet to initiate recalls or have made material claims against the Company or have sought to terminate their relationships with A. Schulman.

Working Capital/Cash Flow

Net cash provided from operations was $30.6 million in the six months ending February 29, 2016, compared to $1.1 million in the year-ago period. Working capital days were 71 days in the current quarter, compared to 64 days in the first quarter of fiscal 2016, primarily due to an increase in accounts receivable days.

Year-to-date capital expenditures were $20.4 million, compared with $21.2 million in the prior year period. During the fiscal 2016 second quarter the Company reduced debt by $11.8 million and continues to focus on deleveraging the balance sheet as quickly as possible. Net leverage on an adjusted basis has increased to 4.22x. The Company made prepayments of €50.0 million on its Euro Term Loan B debt during the six months ended February 29...