A. Schulman Inc. is no longer an independent company, but the global compounder and resin distributor remains involved in a court case.
Fairlawn, Ohio-based Schulman now is owned by petrochemicals giant LyondellBasell Industries. LyondellBasell of Houston paid $2.25 billion for Schulman, which now has been combined with its own compounding unit to create a global business with sales of $4.6 billion.
But Schulman's seemingly never ending battle with Citadel Plastics has yet to be decided in Delaware Chancery Court. A court employee said the case remained active as of Oct. 5, but no further court dates had been scheduled. Schulman filed the suit in June 2016, seeking damages from its $800 million acquisition of Citadel in early 2015.
According to court documents, Schulman is seeking damages of as much as $272 million from former Citadel partners — including investment firm HGGC — as well as from several former Citadel executives. Most of Schulman's damage claims center on products made by Citadel's Lucent Polymers unit in Evansville, Ind.
Schulman alleges that Lucent falsified information about the recycled content and other attributes of its products. Almost 200 customers received material that had been sold with false qualifications, according to court records. When these issues were discovered, Schulman stopped selling those products, affecting Lucent's sales and the overall profitability of Schulman's acquisition of Citadel.
In a post-trial brief filed in July by Schulman's lawyers, the firm claimed that the Lucent business had been an earnings "hero" prior to the deal, but later saw its sales fall from $88 million in 2014 to $39 million in 2017 with "its profits nearly disappearing."
"For at least seven months after the fraud, Schulman's resources were commandeered to fix defective products … and otherwise clean up [Citadel's] mess," Schulman attorneys wrote. "During this time, Schulman's managerial, technical and marketing resources couldn't pursue new business opportunities. Schulman continues to address problems caused by [Citadel] to this day."
False information provided by Citadel also inflated the firm's earnings (EBITDA), Schulman lawyers argued, as a result driving up the price Schulman paid when it used an earnings multiple to arrive at a purchase price.
Schulman's closing arguments also cited testimony given by former Schulman CEO Bernard Rzepka, executive Daniel Baek and others. Rzepka said that "the entire team was focused on remediating this issue and making sure that these products which go out in the markets are OK."
He added that "there was no time whatsoever with the team to go after new business" and that "your customer will tell you, actually, 'you know what, before you come to me and talk about new projects, you better fix this mess here.'"
Baek, who was assigned to handle Lucent litigation, testified about the challenges the situation caused for Schulman. "I mean, mathematically, you got to produce it four times … before you can deliver … the quantity that the customer needs," he said. "What happens is because this testing takes quite a while to do properly … instead of delivering in a week, you can probably only deliver it in a month."
The Citadel/Lucent issue also caused Schulman to lose several key employees, including one sales rep who had generated 25 percent of Lucent's sales and another employee who had good relationships with suppliers of higher-quality recycled material.
"The consistent theme I heard from people after that Lucent quality issue is 'Why are we going to have a job?' " another employee testified.
In its 2016 fiscal year, Schulman took a $166 million impairment charge related to Lucent and an additional $177 million impairment charge related to its engineered composites business, which it also had acquired in the Citadel deal. Officials cited reduced oil and gas drilling as a result of lower oil prices as a reason for the engineered composites charge.
The Citadel deal was the last in a long series of acquisitions Schulman made under former CEO Joseph Gingo. But instead of providing an exclamation point to Schulman's acquisitions strategy, it ended up being the first step in a sequence that led to the sale of a company that had operated independently since 1928.
Rubicon Insurance Services LLC, a Menlo Park, Calif.-based company that provides insurance to financial firms, defended Citadel owner HGGC's position in an Aug. 8 blog post. The post was headlined "Case Study: A PE Acquisition and Add-On Gone Wrong."
"It's a tough spot for HGGC," Rubicon wrote. "They're technically managing [Citadel], but it's just one in their portfolio. They can't know everything, especially with a subsidiary.
"It would have been very hard for (HGGC) to identify this falsification, if it indeed happened," Rubicon added. "They're essentially a victim here, too."
