Quality reporting issues on some materials made with recycled or reclaimed content had a negative impact on A. Schulman Inc.'s recent quarterly earnings — and sent the firm's stock price down almost 25 percent.
The issues were with some material made at plants in the Evansville, Ind., area that originally were operated by Lucent Polymers and then by Citadel Plastic Holdings. Schulman acquired Citadel last year.
Schulman first reported the issues in its 2015 annual report, which was filed Oct. 20. But on Jan. 11, when they were cited again in the company's first-quarter financial report, they sent the stock price tumbling.
“We were open and honest about this since day one,” President and CEO Bernard Rzepka said in a Jan. 13 phone interview. “We haven't lost any customers, and I'm now feeling even more optimistic, because our business is really starting to grow.”
By Jan. 15, Schulman's share price had regained some of its losses, but it was still 17 percent down from its closing price on Jan. 8, before first-quarter earnings were announced.
The Fairlawn, Ohio-based company said it had “discovered discrepancies between laboratory data and certifications provided by Lucent to customers with respect to certain products using recycled or reclaimed raw materials.”
Schulman “took immediate decisive actions following our initial discovery, including implementing strict protocols designed to meet customer standards and certification requirements for all future shipments,” the firm said.
Rzepka said the affected materials mainly were polypropylene and polycarbonate blends used in compounds. The materials represent annual sales of between $15 million and $20 million and are sold to approximately 300 customers.
“Once we realized we couldn't replicate the formulas, we stopped shipping all products that didn't comply and looked into prior shipments [of the materials] at all facilities,” Rzepka said.
The reporting situation cost Schulman $4.9 million in the first quarter of fiscal 2016. Officials said that an internal investigation will continue as to the scope of products, customers, and other parties affected.
“Our bottom line was significantly impacted by the costs incurred during the investigation and the ongoing resolution process of the Lucent quality reporting matter,” Executive Vice President and Chief Financial Officer Joseph Levanduski said in the company's quarterly release.
The Lucent plants involved in the quality reporting incident are two of three that will be closed by mid-year. Rzepka said the decision to close the plants was not related to the reporting issue, but was centered on how best to use assets in the Evansville area, where Schulman and Citadel each had operated production facilities.
The third plant to be closed also is in Evansville. Even after those closings, Schulman will have four production plants there. Those closings were announced in October.
Although Schulman's first-quarter sales grew more than 5 percent to $649.2 million vs. the same quarter in fiscal 2015, the Lucent matter and currency conversion caused first-quarter profit to tumble 44 percent to less than $7.5 million.
Schulman's 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,” Rzepka said in the Jan. 11 release.
As a result, he added, Schulman “is undertaking additional cost reduction actions company-wide, designed to more than offset the first quarter shortfall.”
Lucent was founded in 1997 by compounding veteran Tim Martin. It then was acquired in late 2013 by Citadel, which combined numerous materials firms — including several compounders — before it was acquired by Schulman. At the time it was acquired by Citadel, Lucent operated 15 extrusion lines and employed 250 at four Evansville-area plants.
Materials market sources said that integrating Citadel has been more challenging than expected for Schulman. The $800 million deal was the largest acquisition in Schulman's 88-year history. The transaction added 21 plants, 1,200 employees and $550 million in annual sales to Schulman's base.
Rzepka remains confident. The Citadel deal was announced just a couple of months after he became the firm's CEO in January 2015.
“People have asked us if we would do the Citadel deal again if we had the chance,” said Rzepka, a 24-year Schulman veteran. “And the answer is yes, we would do it again.”
Schulman is one of the largest compounders and concentrate makers in North America and Europe. The firm posted sales of $2.4 billion in fiscal 2015.