OREANDA-NEWS. A. Schulman, Inc. (Nasdaq: SHLM) announced today earnings for the fiscal first quarter ended November 30, 2015.

Bernard Rzepka, president and chief executive officer, said, "We are pleased to demonstrate ongoing progress toward our strategic vision of moving beyond plastic compounding by continuing to transform A. Schulman from a commodity business to a specialty solutions company. All of our segments posted considerable profit improvement, excluding the impact of foreign currency, driven by our focus on our '3S' execution excellence initiatives: Safety, Smart Sales, and Smart Savings, and in addition, our acquisition of the high-margin Citadel business. When compared with the prior year, we boosted adjusted gross margin by 260 basis points and adjusted operating margin by 120 basis points as we continue to drive product mix improvements."

Joseph Levanduski, executive vice president & chief financial officer, said, "Our bottom line was significantly impacted by the costs incurred during the investigation and the ongoing resolution process of the Lucent quality reporting matter. Our GAAP results were negatively impacted by $4.9 million or $0.12 per diluted share related to these actions, of which $3.7 million or $0.09 per diluted share were excluded from our non-GAAP results. Still, we have confidence that we will drive restructuring, integration, and other smart savings actions that will overcome the ongoing costs to resolve the Lucent matter and our strategic initiatives are continuing to provide greater profitability. Therefore, we reaffirm our full year guidance."

Fiscal First-Quarter Results
Net sales for the fiscal 2016 first quarter were $649.2 million, an increase of 5.6% compared with $615.1 million in the prior-year quarter. Foreign currency translation negatively impacted net sales by $62 million, or 10% of sales. Net sales from Citadel contributed $111.1 million of revenue during the quarter. Excluding the incremental sales from the Citadel acquisition and negative foreign currency impact, net sales declined 2.4% as the Company experienced lower volumes in its U.S. and Canada ("USCAN") segment's commodity product and service offerings.

Adjusted gross margin in the first quarter as a percent of net sales improved to 16.8% compared with 14.2% in the prior-year period due to a stronger customer shift to higher value added product sales and mix improvement from higher margin product sales from the Citadel acquisition.

The Company reported GAAP income from continuing operations of $0.18 per diluted share, compared with $0.45 in the year-ago period. On an adjusted basis, excluding certain financing, restructuring and acquisitions-related costs, the Company generated net income of $0.50 per diluted share compared to $0.63 in the year-ago period.

Europe, Middle East and Africa ("EMEA") net sales were $328.1 million compared with $371.2 million in the same prior-year period. Excluding the unfavorable impact of foreign currency translation of $44.2 million, legacy revenues were essentially flat, consistent with fiscal fourth-quarter 2015 results. Excluding the negative impact of foreign currency translation of $5.9 million, adjusted gross profit margin rose 110 basis points to 14.5%, primarily due to improved product mix and favorable raw material pricing.

Net sales for the USCAN were $178.3 million in the quarter, compared with $144.7 million in the prior-year period. Excluding the $59.1 million of acquired Citadel revenue, legacy revenues fell 17.6%.

"We experienced USCAN revenue and volume weakness in our Masterbatch and Specialty Powders business units as well as Engineered Plastics. The declines in Masterbatch and Specialty Powders were primarily driven by certain tolling customers who destocked their inventory and shifted some production in-house. The decline in Engineered Plastics is a result of the team's intense focus to resolve the previously disclosed Lucent quality reporting matter," said Rzepka. "Despite the contraction in these businesses, USCAN adjusted gross margin was 17.0%, steady with the prior-year period, as the Citadel integration and our focus on added-value products continue to bear fruit."

Latin America's ("LATAM") net sales for the quarter were $45.2 million. Excluding the unfavorable impact of foreign currency translation of $10.6 million, core revenues increased nearly 21%, up significantly from the 12.7% growth in the fourth quarter. LATAM adjusted gross profit of 21.5% was nearly double that of the 12.2% in the prior year.  LATAM results were driven by market expansion and operational improvements. 

Asia Pacific ("APAC") reported net sales were $45.7 million. Adjusting for a negative foreign exchange impact of $6.7 million, legacy revenues fell 1%. APAC adjusted gross profit margin was 17.2%, up 350 basis points from the prior period due to the benefits of several strategic focus initiatives to improve product mix.

Engineered Composites ("EC") net sales for the quarter were $51.9 million. While EC was acquired on June 1, 2015, for comparison purposes, the legacy revenues declined slightly from the year-ago period results, after adjusting for currency and Citadel's earlier acquisition of The Composites Group. Organic volumes in the legacy EC business improved but were offset by domestic weakness in the oil & gas market. EC gross profit margin for the quarter was 25.4%, stable with the fourth quarter of fiscal 2015 results. 

Citadel Integration
"We are pleased that during the quarter we over-delivered on our internal synergy targets. We remain focused on capturing our stated Citadel integration synergy savings of $20 million by the end of fiscal 2016 and achieve the full run rate of $25 million during fiscal 2017," said Rzepka. "In October, we announced the consolidation across several Engineered Plastics operations, which will result in closure of three manufacturing facilities, more efficient operations at the remaining facilities, and ultimate annual savings of $9.5 million. The remainder of the synergy savings will be driven from sourcing actions and SG&A consolidations. These efforts are underway, and contributed $3.8 million or $0.09 per share to the current quarter results." 

Lucent Update
As previously reported, the Company identified quality reporting issues affecting certain product lines at two former Citadel manufacturing facilities that were once part of Lucent Polymers, which was acquired as part of the Citadel acquisition. Specifically, the Company discovered discrepancies between laboratory data and certifications provided by Lucent to customers with respect to certain products using recycled or reclaimed raw materials.

"We took immediate decisive actions following our initial discovery, including implementing strict protocols designed to meet customer standards and certification requirements for all future shipments," stated Rzepka. "To date, we have notified all affected customers and I am encouraged that no customers or other parties have initiated recalls or have made material claims against the Company or have sought to terminate their relationships with us."

The Company incurred a total of $4.9 million of costs related to this matter that negatively impacted the Company's operating results for the first quarter of fiscal 2016, including product and manufacturing operational costs, dedicated internal personnel costs, a reduction in inventory value, and additional legal and investigative costs.

An internal investigation will continue as to the scope of products, customers, and other parties affected. The Company has provided a written claim notice to the sellers and to the escrow agent with respect to the indemnity escrow established in connection with the stock purchase agreement pursuant to which the Company acquired Citadel and its subsidiaries.

Working Capital/Cash Flow
Cash provided from operations was $40.0 million in the quarter ending November 30, 2015, compared to $10.3 million in the year-ago quarter. Working capital days were 64 days in the current quarter, unchanged from the fourth quarter of fiscal 2015.

Capital expenditures for the quarter were $7.4 million compared with $10.3 million in the prior year. During the fiscal 2016 first quarter the Company paid down 20 million Euro of its Term Loan B debt in Europe and continued to focus on deleveraging the balance sheet as quickly as possible. Net leverage on an adjusted basis is now further lowered to 3.85x, and the Company continues to repay term debt, with an additional 10 million Euro term debt pay down in early January, 2016.

During the first quarter of fiscal 2016, the Company declared and paid quarterly cash dividends of $0.205 per common share, for a total amount 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, "Fiscal 2016 has begun on a challenging note, with weakening macroeconomic conditions across several regions, continued pressure in the oil, energy, and material markets, ongoing currency headwinds, and the costs of our internal actions to resolve the Lucent matter. To that end, we are undertaking additional cost reduction actions company-wide, designed to more than offset the first quarter shortfall. Therefore, we maintain our fiscal 2016 earnings guidance range of $2.80 to $2.85 per diluted share. 

"We have faced challenges before and our seasoned team is highly focused on our commitment to deliver substantial annual earnings growth from both the continuing transformation to higher specialization and the wide-ranging benefits that are unfolding from the integration of Citadel."

Conference Call on the Web
A live Internet broadcast of A. Schulman's conference call regarding fiscal 2016 first-quarter earnings can be accessed at 10:00 a.m. Eastern Time on Monday, January 11, 2016, on the Company's website, www.aschulman.com. An archived replay of the call will also be available on the website.

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 be 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.