Updated — Materials maker A. Schulman Inc. is seeking compensation after a business it acquired last year allegedly falsified product test results.
In an April 5 news release, officials with Schulman in Fairlawn, Ohio, said that Lucent Polymers falsified test results for materials made at two of its plants in Evansville, Ind. Lucent was part of Citadel Plastic Holdings, the West Chicago, Ill.-based materials firm that Schulman acquired for $800 million in early 2015.
Schulman officials said their firm is owed more than the $31 million in escrow that was established in the Citadel deal. Additional costs related to the alleged false results have totaled $7 million in the first half of Schulman's 2016 fiscal year. The firm is working with New York law firm Skadden, Arps, Slate, Meagher & Flom LLP on the matter.
Schulman first disclosed the Lucent problem in January. In March, the firm lowered its earnings estimate for fiscal 2016. Both of those announcements had a negative impact on Schulman's stock price.
“We've reviewed our positions and we believe [Lucent] is responsible for our compensation,” President and CEO Bernard Rzepka said in an April 6 conference call with analysts. “We're all eager to put this behind us.”
Schulman acquired Citadel — and Lucent — from Palo Alto, Calif.-based private equity firm HGGC. In an April 7 email, an HGGC spokeswoman said that the firm has “no comment at this time” on the topic.
HGGC had bought Citadel in 2012 from private equity firm Wind Point Partners of Chicago. HGGC — formerly known as Huntsman Gay Global Capital — was founded in 2007 by plastics and chemicals veteran Jon Huntsman and Hall of Fame quarterback Steve Young, along with three other partners.
Schulman officials added that $35 million in synergies from the Citadel deal now are expected to benefit Schulman in fiscal 2017 rather than this year. The alleged false results affected materials sold to 300 customers. On the conference call, Rzepka said none of those customers have filed claims or stopped doing business with Schulman, but the firm has lost some of that business for technical reasons.
As much as $20 million to $25 million of Lucent's $71 million in annual sales could be lost as a result of the alleged false results, officials said. Based on previous estimates, Lucent generated about 13 percent of annual sales for Citadel. Schulman officials previously had said the quality issues were with compounds based on polypropylene or polycarbonate that included recycled or reclaimed content.
In spite of the recent problems, Rzepka said on the call that he's “confident that the long-term value of Citadel is intact.” The acquisition — the largest in Schulman's 88-year history — doubled the size of the firm's business in the U.S. and Canada, making it more attractive to global customers and less vulnerable to currency exchange rates.
Schulman, however, is going through with previously announced plans to close three Evansville plants — including the two Lucent plants involved in the alleged false results. The Citadel deal and other acquisitions had left Schulman with multiple plants in that city.
Company officials previously have said the closing decisions were made before the quality issues became known. Two Evansville plants will close in the third quarter of Schulman's fiscal year, while a third will close during the firm's 2017 fiscal year.
Schulman also on April 5 announced financial results for the second quarter of its 2016 fiscal year. Sales for the quarter grew 9 percent to almost $592 million, but taking out Citadel left Schulman sales down 3 percent.
For the first half of its 2016 fiscal year, Schulman's sales were up 7 percent to $1.24 billion, but the firm's profit fell 25 percent to just over $9.5 million.
On Wall Street, Schulman's per-share stock price was down 3.5 percent to just above $25 in late trading April 7. It had been above $28 as recently as March 11.
Schulman ranks as one of the largest makers of compounds and concentrates, both in North America and Europe. The firm reported sales of just under $2.4 billion for its 2015 fiscal year.