A. Schulman Reports Fiscal 2016 Fourth Quarter, Full-Year Results

AKRON, Ohio, Oct. 26, 2016 /PRNewswire/ -- A. Schulman, Inc. (Nasdaq: SHLM) today announced earnings for the fiscal 2016 fourth quarter and full-year results for the year ended August 31, 2016.

Consolidated net sales for the fiscal 2016 fourth quarter were $604.6 million, compared with $674.0 million in the same prior year quarter. Net sales fell 8.3% after adjusting for $13.4 million of unfavorable foreign currency translation. Adjusted gross margin in the fiscal 2016 fourth quarter, as a percent of net sales, dropped slightly to 16.1% compared with 16.2% in the prior year period. Adjusted operating margin at 5.6% was 50 basis points below the prior year period. Fourth quarter adjusted EBITDA was $53.9 million, compared to $61.7 million in the prior year period. 

On a GAAP basis, the Company experienced a fourth quarter net loss of $385.1 million, or $13.12 per share, due to a non-cash asset impairment charge primarily related to the fiscal 2015 Citadel acquisition. On an adjusted basis, excluding certain items, the Company generated net income of $13.7 million or $0.47 per diluted share in the fiscal 2016 fourth quarter.

Europe, Middle East and Africa ("EMEA") net sales were $299.2 million, down 6.7% excluding unfavorable foreign currency translation of $5.6 million. EMEA adjusted gross profit was $41.9 million. Excluding currency translation, this led to a gross margin of 13.9%, up 40 basis points, due to improved product mix. 

Net sales for the U.S. and Canada ("USCAN") were $158.9 million, down 18.6%. This volume-driven weakness was broad-based and impacted a majority of the Company's business units. USCAN adjusted gross profit was $25.2 million, or a gross margin of 15.9%, compared with 17.4% in the prior year period. 

Latin America's ("LATAM") net sales for the quarter were $44.9 million. Excluding unfavorable foreign currency translation of $5.9 million, net sales rose 12.2%. This was the fifth consecutive quarter of double-digit revenue growth. LATAM delivered adjusted gross profit of $9.7 million, for a gross margin of 21.8%, excluding currency translation, level with the prior year period. 

Asia Pacific ("APAC") reported net sales of $49.3 million, up 3.2% excluding a slight foreign currency headwind. APAC adjusted gross profit was $8.1 million, leading to a gross margin of 16.5%, up 270 basis points from the prior year period, supported by favorable product mix trends and the transfer of lower margin business into a minority owned joint venture. 

Engineered Composites ("EC") net sales for the quarter were $52.3 million, down 8.5%. EC gross profit for the quarter was $12.5 million, for a gross margin of 23.9%, down 150 basis points, negatively impacted by the weaker oil field services activity. 

Working Capital/Cash Flow Cash provided from operations was $148.1 million in the twelve months ended August 31, 2016, which was more than double the prior year level. Working capital days were lower at 48 days at fiscal year-end 2016, an improvement from 53 days in the prior year. The cash flow was used to reduce total debt by $111 million in fiscal 2016, to a net leverage ratio slightly below 4.0x. Since the purchase of Citadel in mid-2015, the Company has paid down $175 million of debt.

Capital expenditures for fiscal 2016 were $51.2 million compared with $42.6 million last year. These expenditures were primarily related to the Company's new facilities in Turkey and China as well as additional lines in Germany, China and Mexico. During the year, the Company declared and paid quarterly cash dividends to common shareholders of $24 million, or $0.82 per common share. An additional dividend of $7.5 million was paid to holders of the convertible special stock. 

Full-Year ResultsNet sales for fiscal 2016 were $2.5 billion, compared with $2.4 billion in the prior year. Fiscal 2016 net sales results included a negative foreign currency translation of $117.2 million. 

Adjusted gross profit for the year was $413.3 million, and operating income was $146.0 million, compared with $366.2 million and $120.7 million, respectively, in fiscal 2015. Excluding the Citadel acquisition and negative currency translation, this performance led to a gross margin of 16.1% and an operating margin of 5.8%, each improved by 80 basis points. Fiscal 2016 incentive-based compensation expense was $13.8 million lower, or $0.36 per diluted share, as compared with the prior year, based on the Company's operating performance. Adjusted EBITDA improved to $228.9 million, a $49.3 million increase from fiscal 2015 primarily driven from the full year impact of the Citadel acquisition.

Adjusted net income for fiscal 2016 was $61.2 million, or $2.08 per share, which exceeded the Company's previously stated guidance range of $1.90 to $1.95 per diluted share. These compare with $69.9 million, or $2.37 per share in the prior year period.  On a GAAP basis, the Company reported a net loss of $364.6 million, or $12.44 per share, due to the aforementioned impairment charge. 

Lucent UpdateAs 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. In fiscal 2016, the Company recognized $7.3 million of certain Lucent related costs which are reported as a non- GAAP adjustment, including $1.8 million in litigation related costs, in addition to $4.7 million of recurring production and material costs.

"The Lucent matter obviously had a big impact on us in fiscal 2016; however, we do not intend to speak to this issue going forward unless something significant changes," said Joseph M. Gingo, chairman, president and chief executive officer, "We believe that the sellers are responsible to compensate us for the damages that the Company has experienced or may incur. As previously stated, we have filed a lawsuit and are pursuing it aggressively."

Asset ImpairmentA $401.7 million non-cash charge was recorded in the fourth quarter, as a result of the Company's annual goodwill impairment tests and the discontinued use of certain intangible assets. Management concluded that the carrying value of the goodwill and intangibles primarily associated with the USCAN Engineered Plastics and Engineered Composites reporting units exceeded their respective estimated fair values. The goodwill impairment resulted from a combination of items, including the fraudulent activity discovered at Citadel's Lucent subsidiary, as well as a sharply lowered outlook for oil field service activity and other factors that reduced the long-term outlook for these businesses. The impairment of intangibles reduced the amortization expense in the fourth quarter of fiscal 2016 by $1.2 million, or $0.03 per share, and will reduce amortization expense in fiscal 2017 by $4.8 million or $0.12 cents per share.

Business Outlook"As I've said previously, the Board is not satisfied with the Company's performance and the pace of execution throughout fiscal 2016," said Gingo. "Over the past two months as chief executive officer, I've led our internal team and our outside advisors in a thorough review of every aspect of our business in order to verify our market intelligence, refine our vision and improve our execution. I believe we have a clear and realistic path forward to restore and reset A. Schulman's operational and financial performance worldwide to the sustainable levels our shareholders previously realized and rightfully expect of us."

The Company will outline growth and profitability objectives at its upcoming Investor Day on November 16, 2016 in New York City. At this event, management will provide operational details underpinning its fiscal 2017 adjusted net income guidance range of $2.08 to $2.18 per diluted share, as well as provide its long-term outlook for A. Schulman.

Conference Call on the WebA live Internet broadcast of A. Schulman's conference call regarding fiscal 2016 fourth-quarter earnings can be accessed at 9:00 a.m. Eastern Time on October 27, 2016, on the Company's website, www.aschulman.com. An archived replay of the call will also be available on the website.

Investor Presentation MaterialsSenior executives 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 4,800 people and has 54 manufacturing facilities globally. A. Schulman reported net sales of approximately $2.5 billion for the fiscal year ended August 31, 2016. Additional information about A. Schulman can be found at www.aschulman.com.

Use of Non-GAAP Financial MeasuresThis 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 StatementsA 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 areas where the Company operates;
• volatility of prices and availability of the supply of energy and raw materials that are critical to the manufacture of the Company's products, particularly plastic resins derived from oil and natural gas;
• changes in customer demand and requirements;
• effectiveness of the Company to achieve the level of cost savings, productivity improvements, growth and other benefits anticipated from acquisitions and the integration thereof, joint ventures and restructuring initiatives;
• escalation in the cost of providing employee health care;
• uncertainties regarding the resolution of pending and future litigation and other claims;
• the performance of the global automotive market as well as other markets served;
• further adverse changes in economic or industry conditions, including global supply and demand conditions and prices for products;
• operating problems with 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 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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1 - Asset impairments are related to goodwill and intangible assets, and also include information technology assets, in the Company's USCAN, EC and EMEA segments.  Refer to Note 4 and Note 19 of the 2016 Annual Report on Form 10-K for further discussion.

2 - Accelerated depreciation is related to restructuring plans in the Company's USCAN, LATAM and EMEA segments. Refer to Note 14 of the 2016 Annual Report on Form 10-K for further discussion.

3 - 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.

4 - 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.  Refer to Note 16 of the 2016 Annual Report on Form 10-K for further discussion.

5 - 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.

6 - Accelerated amortization of deferred financing costs related to the €108.6 million prepayment of the Euro Term Loan B.

7 - CEO transition costs in 2016 represent charges for deferred compensation granted to Bernard Rzepka.  Costs in 2015 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.

8 - Tax (benefits) charges represent the Company's adjustment of reported tax expense to non-GAAP tax based on the overall estimated annual non-GAAP effective tax rates.

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

10 - Primarily relates to bridge financing fees and the write-off of deferred debt costs of $18.8 million and $1.5 million, respectively. Refer to Note 5 of the 2016 Annual Report on Form 10-K for further discussion.

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

 

 

(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 (1), (3) - (11) and Loss (income) from discontinued operations.  Amounts are included in Operating Income (Loss) and Loss (income) from discontinued operations. 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.

 

 

 

 

 

 

 

 

 

 

 

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SOURCE A. Schulman, Inc.