Updated — Materials firm A. Schulman Inc. continues to feel the fallout from a quality issue with compounds made at one of its plants and from other economic challenges.
On March 14, Fairlawn, Ohio-based Schulman lowered its earnings expectations for its 2016 fiscal year. Officials had expected full-year earnings per share of $2.80 to $2.85, but now expect that total to be $2.40 to $2.45.
That move caused Schulman's per-share stock price to drop more than 10 percent on March 14. The price had recovered to almost $25.20 in late trading March 17, but remained more than 9 percent below its opening price of March 14.
President and CEO Bernard Rzepka in a March 14 news release cited lower oil prices affecting sales volume and the global economic slowdown as reasons for Schulman's lessened results. Rzepka also pointed to ongoing problems relating to the Lucent Polymers business that Schulman acquired in 2015.
Schulman in mid-January disclosed quality issues on some materials made with recycled or reclaimed content at a Lucent plant in Evansville, Ind. Schulman had acquired Lucent as part of its $800 million purchase of Citadel Plastic Holdings. The disclosure caused Schulman's per-share stock price to drop almost 25 percent at the time.
“While the long-term value of the Citadel acquisition remains intact, the near-term impact of the Lucent quality issue and the current oil price climate will be challenging to overcome,” Rzepka said in the March 14 release.
Officials added that on April 5 — when its fiscal second-quarter results are released — the firm “will provide additional insight into the factors impacting its near-term results…and the company's legal options related to the Citadel acquisition.”
Earlier this year, Rzepka told Plastics News that 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. He added that Schulman hadn't lost any customers as a result of the Lucent quality issues.
Extensive use of recycled resins was a profitable idea for Schulman and other materials firms when virgin resin prices were high, according to Bill Ridenour, a financial pro who's worked with Schulman in the past. But with virgin prices down in recent years, the advantage isn't as great, added Ridenour, owner of Polymer Transactions Inc. in Wapiti, Wyo.
Industry sources also said that Schulman management may have been under pressure to make a large acquisition, leading them to do less due diligence work on the Citadel deal. That deal — announced in March 2015 — was Schulman's 11th since 2009, but its $800 million price tag was about $200 million more than that of the previous 10 deals combined.
Citadel had operated 21 plants, including 17 in North America. The Citadel acquisition nearly doubled Schulman's U.S. sales and increased its annual sales by $550 million overall.
But other sources argued against that version of events, saying that Schulman “didn't take any shortcuts” on due diligence for Citadel. These sources added that external factors such as slower global economic growth and the impact of low oil prices likely are having just as much — if not more — impact on Schulman than the Citadel/Lucent issues.
Schulman in October announced the closing of three of seven plants that Schulman and Citadel combined had operated in Evansville. Two of the three to be closed are the Lucent plants that have had quality issues. Schulman officials have said that the quality issues didn't affect the decision to close those locations.
In the first quarter of its 2016 fiscal year – the three months ended Nov. 30 – Schulman's sales were up more than 5 percent to $649.2 million, but the firm's profit for the quarter fell 44 percent to $7.5 million.
For fiscal 2015 — the year ended Aug. 31 — Schulman's sales fell 2 percent to just under $2.4 billion. Schulman's fiscal 2015 profit fell 51 percent to just under $28 million vs. fiscal 2014. But the firm's annual sales volume in pounds of product sold increased 8 percent to almost 2.3 billion pounds.
Schulman ranks as a leading compounder and concentrate maker in both North America and Europe, as well as a leading European resin distributor. The firm employs 5,000 worldwide and posted sales of $2.4 billion in it 2015 fiscal year.
