A. Schulman Inc. has filed a lawsuit against the previous owners of Citadel Plastics, accusing them of falsifying results before selling the company to Schulman for $800 million, but executives maintain the deal was still “the right move.”
Fairlawn, Ohio-based Schulman filed the suit June 15 in Chancery Court in Wilmington, Del. Schulman is seeking unspecified damages from former Citadel owners including Huntsman Gay Capital Partners and Charlesbank, as well as from several former Citadel executives, including Michael Huff and Matthew McDonald.
Most of Schulman's accusations center around Lucent Polymers, an Evansville, Ind.-based compounding firm that Lucent had acquired in late 2013. Schulman acquired Citadel in early 2015 in what was the biggest deal in Schulman's 88-year history.
In the filing, Schulman officials said that the firm “never would have purchased, much less paid $800 million for Citadel had it know that [Lucent] was engaging in fraudulent business practices that…substantially reduced [Citadel's] profitability and growth prospects.”
Schulman also accuses Citadel/Lucent of falsifying Certificates of Analysis (COAs) given to customers that exaggerated flame retardant properties and other characteristics of the compounds that Lucent was making.
“Knowledge of this pervasive fraudulent scheme…went all the way to the top,” Schulman officials said in the filing. “Lucent and Citadel officers and directors knew of and condoned these wrongful practices.”
Huff was reached by Plastics News and declined to comment on the lawsuit. Officials with Huntsman Gay in Palo, Alto, Calif., could not be reached for comment.
Schulman CEO Bernard Rzepka addressed the Citadel deal June 29 in a conference call with analysts. Schulman reported financial results for the third quarter of its 2016 fiscal year on that same date.
“Despite reported challenges, I firmly believe this acquisition was the right move for us,” Rzepka said. “We would have missed an enormous opportunity for future growth had we not made this move.
“How many years would have it taken us to double the size of our U.S. business or have a meaningful participation in the macro trend?” he asked. “Could we have offered more solutions to customers without these two platforms?
“The Citadel acquisition provides us a great platform for growth in future years,” Rzepka added. “It will continue to fuel organic growth with higher margin product initiatives, drive synergies, and improve our combined operations to capitalize on this investment.”
Buying Citadel added $550 million in annual sales and 21 production plants to Schulman's portfolio. Of that sales total, 55 percent came from engineering plastics — mainly compounding — with the rest coming from thermoset composites.
On the call, Rzepka also addressed the United Kingdom's recent vote to leave the European Union. Schulman generates just over half of its sales from the Europe/Middle East/Africa region.
“I would be remiss if I didn't stop and mention the Brexit at this point,” he said. “The word has certainly created turbulence in the financial market and generated a lot of speculation. Plus specifically, we have three facilities in the U.K. and our sales there are so far 10 percent of our total revenue in EMEA.”
“In discussions with our customers in the last few days, we do not see an immediate impact with the order pattern,” Rzepka added. “However, uncertainty in this fragile environment is never good, and it is too early to tell if there will be an impact in the coming months for manufacturers.”
For the three months ended May 31, Schulman's sales grew 16 percent to $650.4 million vs. the year-ago period. The firm also posted a $17.6 million profit after losing almost $9 million in the same three months of fiscal 2015. Both of those results largely are attributed to the addition of Citadel.
For the first nine months of fiscal 2016, Schulman's sales were up 10 percent to almost $1.9 billion. Nine-month profit of $27.1 million far surpassed the $3.8 million seen in the first nine months of fiscal 2015.
But concerns about materials made at the Lucent plant have affected Schulman's per-share stock price since the company reported them earlier this year. The price was above $29 in late April but was near $24 in early trading June 30.