A. Schulman Reports Fiscal 2016 Second Quarter Results

OREANDA-NEWS. April 06, 2016. A. Schulman, Inc. (Nasdaq: SHLM), a leading international supplier of high-performance plastic compounds, composites, powders, and resins, today announced earnings for the fiscal second quarter ended February 29, 2016.

"Without question, we are disappointed with our fiscal second-quarter adjusted earnings results and reduced outlook for fiscal 2016," said

Bernard Rzepka, president and chief executive officer.  "As the quarter progressed, we experienced lower volumes across our legacy businesses and our recent Citadel acquisition. While the deepest contractions have been in the oil & gas markets, there also has been a slowdown in some of our other markets in both Europe and North America. Additionally, costs continued to be incurred to resolve the Lucent issues involving falsified test results which we uncovered last year as we implemented our Citadel integration plans." 

Rzepka continued, "Despite the slowdown in volume, we showed significant improvements in operating margins in nearly all of our reportable segments. This is evidence of our progress towards our strategic vision of moving beyond plastic compounding, to transform A. Schulman into a specialty plastics solutions company. We have devoted additional resources toward accelerating the recognition of synergy and restructuring benefits, cost savings initiatives as well as broadening the scope of the 'Manufacturing for Success' productivity program. These programs will yield further benefits in the second half of the fiscal year and beyond."

Fiscal Second-Quarter Results
Net sales for the fiscal 2016 second quarter were \\$591.8 million, an increase of 9.1% compared with the prior-year quarter. Foreign currency translation negatively impacted net sales by \\$35.6 million. Net sales from the Citadel acquisition contributed \\$102.0 million during the quarter. Excluding the incremental sales from the Citadel acquisition and negative foreign currency impact, net sales declined 3.1% as the Company continued to experience lower volume in its U.S. and Canada ("USCAN") segment, and slightly negative volumes in the Europe, Middle East and Africa ("EMEA") segment. 

Adjusted gross margin in the second quarter as a percent of net sales increased to 15.9% compared with 14.5% in the prior-year period as the Company continues to move its portfolio towards specialty products. 

The Company reported a loss from continuing operations of \\$0.02 per diluted share, compared with a loss of \\$0.03 per diluted share in the prior-year period. On an adjusted basis, excluding certain Lucent, restructuring and acquisitions-related costs, the Company generated net income of \\$0.31 per diluted share compared to \\$0.39 per diluted share in the prior-year period.

EMEA net sales were \\$290.3 million compared with \\$315.1 million in the same prior-year period. Excluding the unfavorable impact of foreign currency translation of \\$21 million, revenues fell 1.2% primarily related to Distribution Services. Adjusted gross profit margin fell 70 basis points to 13.4%, after excluding the negative impact of foreign currency translation of \\$2.8 million.

Net sales for USCAN were \\$170.8 million in the quarter, compared with \\$133.4 million in the prior-year period. Excluding the \\$54.6 million of acquired Citadel revenue, legacy revenues fell 12.9%.

"The revenue and volume weakness primarily affected our Masterbatch Solutions, Specialty Powders and Engineered Plastics businesses. We experienced lower customer demand both from the impact of market slowdowns, as well as declines from customer destocking related to lower oil prices," said Rzepka. "Despite the softness in these businesses, USCAN delivered adjusted gross margin of 15.9%, up 110 basis points, as the impact of the Citadel integration and our strategic actions such as 'Manufacturing for Success' and cost savings initiatives accelerated."

Latin America's ("LATAM") net sales for the quarter were \\$38.2 million. Excluding the unfavorable impact of foreign currency translation of \\$9.3 million, revenues increased over 15%, the third successive quarter of double-digit growth. This increase was primarily a result of strong volume growth in Masterbatch Solutions due to our continued successful strategic focus in the packaging and agricultural markets in the region. LATAM adjusted gross profit of 22.2% was a record for the segment, up 490 basis points from the prior year driven by improved product mix.

Asia Pacific ("APAC") net sales were \\$45.1 million. Adjusting for a negative foreign exchange impact of \\$5.0 million, revenues fell 4.8% primarily related to weaker regional demand and customer destocking. APAC adjusted gross profit margin was 18.2%, up 420 basis points from the prior period due to improved product mix.

Engineered Composites ("EC") net sales for the quarter were \\$47.4 million. While EC was acquired on June 1, 2015, for comparison purposes, the legacy revenues declined 8.6% from the year-ago period results, after adjusting for foreign currency. Organic volumes in the legacy EC business improved by 1% but continued to be offset by domestic weakness in products sold into the fracking industry.

Citadel Integration
"As we stated on March 14, 2016, we now expect this acquisition to be accretive in fiscal 2017. In the meantime, we remain focused on capturing our stated Citadel integration synergy savings of \\$20 million by the end of fiscal 2016 and expect to achieve the full run rate of \\$25 million during fiscal 2017," said Rzepka. "These integration efforts are underway, and are contributing as expected in the current quarter results. Despite a weaker global economic environment and the attention to resolving the Lucent matter, we are committed to our integration efforts, attaining revenue synergies and generating additional savings in order to achieve our accretion goal."

Lucent Update
As previously reported by the Company including its filings with the SEC, Lucent falsified test results on documents provided to customers and other parties pertaining to the physical properties of Lucent products.

Rzepka said, "At this juncture, we have completed the majority of our internal investigation. We have reviewed our legal position in connection with the purchase agreement of Citadel and we believe that the sellers are responsible to compensate A. Schulman for the Lucent losses that we have and may incur. Therefore, we intend to take full advantage of our contractual rights to pursue remedy.  The Company has provided a written claim notice to this effect to the sellers and to the escrow agent with respect to the \\$31 million indemnity escrow established.  Further, we believe that appropriate compensation of this matter exceeds the escrow amount.  The Company has engaged

Skadden Arps as special litigation counsel for this matter."

The Company incurred a total of \\$2.1 million of costs related to this matter in the second quarter, including increased product and manufacturing operational costs, additional legal and investigative costs and other costs associated with remediation. On a year-to-date basis, these costs totaled \\$7 million.

Rzepka noted that no customers or other parties have yet to initiate recalls or have made material claims against the Company or have sought to terminate their relationships with A. Schulman.

Working Capital/Cash Flow
Net cash provided from operations was \\$30.6 million in the six months ending February 29, 2016, compared to \\$1.1 million in the year-ago period. Working capital days were 71 days in the current quarter, compared to 64 days in the first quarter of fiscal 2016, primarily due to an increase in accounts receivable days.

Year-to-date capital expenditures were \\$20.4 million, compared with \\$21.2 million in the prior year period. During the fiscal 2016 second quarter the Company reduced debt by \\$11.8 million and continues to focus on deleveraging the balance sheet as quickly as possible. Net leverage on an adjusted basis has increased to 4.22x. The Company made prepayments of €50.0 million on its Euro Term Loan B debt during the six months ended February 29, 2016, in addition to normal required payments of \\$7.5 million on all term debt.

During the second quarter of fiscal 2016, the Company declared and paid quarterly cash dividends of \\$0.205 per common share, for a total of \\$6.0 million. In addition, a quarterly cash dividend of \\$15.00 per share was declared and paid on the 125,000 shares of the Company's convertible special stock, representing a \\$1.9 million cash outflow.

Business Outlook
Rzepka said, "Thus far, market demand in fiscal 2016 has slowed from our initial outlook initiated in November 2015.  In particular, the steep contractions in oil & gas capital spending and operational activity have rippled out into many other sectors of industrial activity. Despite the additional company-wide cost reduction actions we implemented after the first quarter shortfall, we concluded that we will not achieve our initial earnings target and, on March 14, 2016, we issued new full-year fiscal 2016 adjusted earnings guidance of \\$2.40 to \\$2.45 per diluted share.

"As we move past the Lucent matter from an operational perspective, we are focused on delivering on our strategic transformation, and realizing the value that we clearly see in Citadel," he said.

Conference Call on the Web
A live Internet broadcast of A. Schulman's conference call regarding fiscal 2016 second quarter results will be held on Wednesday, April 6, 2016 at 11 a.m. Eastern time.  The conference call will be available via a live webcast and a replay will be archived for 90 days. To access the webcast or replay, visit the Company's website, www.aschulman.com.

Investor Presentation Materials
Senior executives of the Company participate in meetings with analysts and investors throughout the fiscal year. The Company has posted presentation materials, portions of which are being used during such meetings, in the Investors section of its website at www.aschulman.com. The presentation will remain on the website as long as it is in use.

About A. Schulman, Inc.
A. Schulman, Inc. is a leading international supplier of high-performance plastic compounds and resins headquartered in Akron, Ohio. Since 1928, the Company has been providing innovative solutions to meet its customers' demanding requirements. The Company's customers span a wide range of markets such as packaging, mobility, building & construction, electronics & electrical, agriculture, personal care & hygiene, sports, leisure & home, custom services and others. The Company employs approximately 5,000 people and has 58 manufacturing facilities globally. A. Schulman reported net sales of approximately \\$2.4 billion for the fiscal year ended August 31, 2015. Additional information about A. Schulman can be found at www.aschulman.com.

Cautionary Statements 
A number of the matters discussed in this document that are not historical or current facts deal with potential future circumstances and developments and constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historic or current facts and relate to future events and expectations. Forward-looking statements contain such words as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which management is unable to predict or control, that could cause actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could adversely affect the Company's future financial performance, include, but are not limited to, the following:

• worldwide and regional economic, business and political conditions, including continuing economic uncertainties in some or all of the Company's major product markets or countries where the Company has operations;
• the effectiveness of the Company's efforts to improve operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques;
• competitive factors, including intense price competition;
• fluctuations in the value of currencies in areas where the Company operates;
• volatility of prices and availability of the supply of energy and raw materials that are critical to the manufacture of the Company's products, particularly plastic resins derived from oil and natural gas;
• changes in customer demand and requirements;
• effectiveness of the Company to achieve the level of cost savings, productivity improvements, growth and other benefits anticipated from acquisitions, joint ventures and restructuring initiatives;
• escalation in the cost of providing employee health care;
• uncertainties and unanticipated developments regarding contingencies, such as pending and future litigation and other claims, including developments that would require increases in our costs and/or reserves for such contingencies;
• the performance of the global automotive market as well as other markets served;
• further adverse changes in economic or industry conditions, including global supply and demand conditions and prices for products;
• operating problems with our information systems as a result of system security failures such as viruses, cyber-attacks or other causes;
• our current debt position could adversely affect our financial health and prevent us from fulfilling our financial obligations;
• integration of acquisitions, including most recently Citadel, with our existing business, including the risk that the integration will be more costly or more time consuming and complex or simply less effective than anticipated;
• our ability to achieve the anticipated synergies, cost savings and other benefits from the Citadel acquisition;
• substantial time devoted by management to the integration of the Citadel acquisition; and
• failure of counterparties to perform under the terms and conditions of contractual arrangements, including suppliers, customers, buyers and sellers of a business and other third parties with which the Company contracts.

The risks and uncertainties identified above are not the only risks the Company faces. Additional risk factors that could affect the Company's performance are set forth in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2015. In addition, risks and uncertainties not presently known to the Company or that it believes to be immaterial also may adversely affect the Company. Should any known or unknown risks or uncertainties develop into actual events, or underlying assumptions prove inaccurate, these developments could have material adverse effects on the Company's business, financial condition and results of operations.

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