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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

     
þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

                 For the quarterly period ended November 30, 2004

     
o   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

                 For the transition period from                      to                      

                 Commission file number: 0-7459

A. Schulman, Inc.

(Exact Name of Registrant as Specified in its Charter)
     
Delaware   34-0514850
     
(State or Other Jurisdiction of
Incorporation or Organization) 		  (I.R.S. Employer
Identification No.)
         
3550 West Market Street, Akron, Ohio
    44333  
(Address of Principal Executive Offices)
  (Zip Code)

(330) 666-3751

(Registrant’s Telephone Number, including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Yes  X      No      

Indicate by check mark whether the Registrant is an Accelerated Filer (as defined in Exchange Act Rule 12b-2).

     Yes  X      No      

     Number of common shares outstanding as of December 31, 2004 — 30,648,939

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TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
SIGNATURES
Exhibit 31 - Certification of Principal Executive & Principal Financial Officers
Exhibit 32 - Certification of Principal Executive & Principal Financial Officers

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS

A. SCHULMAN, INC.
CONSOLIDATED STATEMENT OF INCOME (Notes 1, 2 and 3)

(in thousands except per share data)

                 
    For the three months ended  
    November 30,  
    2004     2003  
    Unaudited  
Net sales
   $ 363,142     $ 297,757  
Interest and other income
     387       492  
 
            
 
     363,529       298,249  
 
            
 
                
Cost and expenses:
                
Cost of sales
     309,506       250,888  
Selling, general and administrative expenses
     36,658       29,331  
Interest expense
     917       1,080  
Foreign currency transaction loss
     2,284       497  
Restructuring expense — N. America (Note 11)
     204       —  
Minority interest
     420       305  
 
            
 
     349,989       282,101  
 
            
Income before taxes
     13,540       16,148  
 
                
Provision for U.S. and foreign income taxes (Note 9)
     6,525       6,604  
 
            
Net income
     7,015       9,544  
 
                
Less: Preferred stock dividends
     (13 )     (13 )
 
            
 
                
Net income applicable to common stock
   $ 7,002     $ 9,531  
 
            
 
                
Weighted-average number of shares outstanding (Note 6):
                
Basic
     30,540       29,769  
Diluted
     31,053       30,040  
 
                
Earnings per share (Note 6):
                
Basic
   $ 0.23     $ 0.32  
 
            
Diluted
   $ 0.23     $ 0.32  
 
            

The accompanying notes are an integral part of the consolidated financial statements.

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A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEET (Notes 1, 2 and 3)

(in thousands)

                 
    November 30,     August 31,  
    2004     2004  
Assets
   Unaudited  
Current assets:
                
Cash and cash equivalents (Note 4)
   $ 61,380     $ 72,898  
Accounts receivable, less allowance for doubtful accounts of $10,325 at November 30, 2004 and $9,268 at August 31, 2004
     241,012       204,091  
Inventories, average cost or market, whichever is lower
     277,037       232,102  
Prepaids, including tax effect of temporary differences
     17,531       13,339  
 
            
Total current assets
     596,960       522,430  
 
                
Other assets:
                
Cash surrender value of life insurance
     971       974  
Deferred charges, etc., including tax effect of temporary differences
     16,071       16,080  
Goodwill
     5,524       5,253  
Intangible assets (Note 10)
     2,613       2,653  
 
            
 
     25,179       24,960  
 
                
Property, plant and equipment, at cost:
                
Land and improvements
     13,124       12,465  
Buildings and leasehold improvements
     132,320       124,760  
Machinery and equipment
     294,119       274,279  
Furniture and fixtures
     35,463       32,999  
Construction in progress
     8,798       10,178  
 
            
 
     483,824       454,681  
Accumulated depreciation and investment grants of $1,375 at November 30, 2004 and $1,172 at August 31, 2004
     300,110       277,975  
 
            
 
     183,714       176,706  
 
            
 
                
 
   $ 805,853     $ 724,096  
 
            

The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents

A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEET (Notes 1, 2 and 3)

(in thousands)

                 
    November 30,     August 31,  
    2004     2004  
Liabilities and Stockholders' Equity
   Unaudited  
Current liabilities:
                
Current portion of long-term debt
   $ 457     $ 418  
Accounts payable
     114,873       95,160  
U.S. and foreign income taxes payable
     18,187       12,573  
Accrued payrolls, taxes and related benefits
     29,288       26,300  
Other accrued liabilities
     40,306       29,685  
 
            
Total current liabilities
     203,111       164,136  
 
                
Long-term debt
     49,283       49,679  
Other long-term liabilities
     67,429       61,984  
Deferred income taxes
     8,623       8,030  
Minority interest
     5,150       5,030  
Commitments and contingencies (Note 18)
     —       —  
 Stockholders’ equity (Note 5):
                
Preferred stock, 5% cumulative, $100 par value, 10,566 shares outstanding at November 30, 2004 and August 31, 2004
     1,057       1,057  
Special stock, 1,000,000 shares authorized, none outstanding
     —       —  
Common stock, $1 par value
                
Authorized - 75,000,000 shares
                
Issued - 39,819,715 shares at November 30, 2004 and 39,633,132 at August 31, 2004
     39,820       39,633  
Other capital
     73,925       69,812  
Accumulated other comprehensive income (Note 7)
     49,806       18,643  
Retained earnings
     476,366       473,540  
Treasury stock, at cost, 9,211,095 shares at November 30, 2004 and August 31, 2004
     (164,231 )     (164,231 )
Unearned stock grant compensation
     (4,486 )     (3,217 )
 
            
Common stockholders’ equity
     471,200       434,180  
 
            
Total stockholders’ equity
     472,257       435,237  
 
            
 
   $ 805,853     $ 724,096  
 
            

The accompanying notes are an integral part of the consolidated financial statements.

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A. SCHULMAN, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Notes 1, 2 and 3)

(in thousands)

                 
    For the three months ended  
    November 30,  
    2004     2003  
    Unaudited  
Provided from (used in) operating activities:
                
Net income
   $ 7,015     $ 9,544  
Items not requiring the current use of cash:
                
Depreciation
     6,440       6,164  
Non-current deferred taxes
     150       1,131  
Foreign pension and other deferred compensation
     2,947       1,510  
Postretirement benefit obligation
     686       286  
Minority interest in net income of subsidiaries
     420       305  
Changes in working capital:
                
Accounts receivable
     (22,727 )     (11,879 )
Inventories
     (28,854 )     9,861  
Prepaids
     15       174  
Accounts payable
     14,124       9,815  
Income taxes
     3,269       (3,249 )
Accrued payrolls and other accrued liabilities
     9,117       (298 )
Changes in other assets and other long-term liabilities
     (1,942 )     (1,291 )
 
            
Net cash provided from (used in) operating activities
     (9,340 )     22,073  
 
            
 
                
Provided from (used in) investing activities:
                
Expenditures for property, plant and equipment
     (4,189 )     (6,016 )
Disposals of property, plant and equipment
     19       64  
 
            
Net cash used in investing activities
     (4,170 )     (5,952 )
 
            
 
                
Provided from (used in) financing activities:
                
Cash dividends paid
     (4,189 )     (4,066 )
Notes payable
     —       86  
Reduction in long-term debt
     (420 )     (13,167 )
Cash distributions to minority shareholders
     (300 )     (750 )
Exercise of stock options
     2,542       6,355  
 
            
Net cash used in financing activities
     (2,367 )     (11,542 )
 
            
 
                
Effect of exchange rate changes on cash
     4,359       5,101  
 
            
Net increase (decrease) in cash and cash equivalents
     (11,518 )     9,680  
Cash and cash equivalents at beginning of period
     72,898       62,816  
 
            
Cash and cash equivalents at end of period
   $ 61,380     $ 72,496  
 
            

The accompanying notes are an integral part of the consolidated financial statements.

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(1)  
The Company’s accounting policy regarding revenue recognition is to recognize revenue when products are shipped to unaffiliated customers and both title and the risks and rewards of ownership are transferred.
 
   
The Company provides tolling services as a fee for processing of material provided and owned by customers. On some occasions, the Company is required to provide certain amounts of its materials, such as additives or packaging. These materials are charged to the customer as an addition to the tolling fees. The Company recognizes revenues from tolling services and related materials when such services are performed. The only amounts recorded as revenue related to tolling are the processing fees and the charges related to materials provided by the Company.
 
   
The accounting policies for the periods presented are the same as described in Note 1 — Summary of Significant Accounting Policies to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2004.
 
   
The intrinsic value method is used to measure compensation cost for stock-based compensation plans. Compensation costs for stock options is measured as the excess, if any, of the quoted market price of the Company’s common stock at the date of the grant over the amount the employee would pay to acquire the shares.
 
   
The following table represents the impact on net income and earnings per share had the fair value based method been applied to measure compensation cost:

                 
    For the three months ended
November 30,		  
    2004     2003  
Net income applicable to common stock, as reported
   $ 7,002     $ 9,531  
Add: Stock-based employee compensation included in reported net income, net of tax
     489       572  
Deduct: Total stock-based employee compensation determined under the fair value method, net of tax
     (1,412 )     (1,012 )
 
            
Net income applicable to common stock, as adjusted
   $ 6,079     $ 9,091  
 
            
Earnings per share:
                
Basic     — as reported
   $ 0.23     $ 0.32  
 — as adjusted
   $ 0.20     $ 0.31  
Diluted  — as reported
   $ 0.23     $ 0.32  
 — as adjusted
   $ 0.20     $ 0.30  

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(2)  
The results of operations for the three months ended November 30, 2004 are not necessarily indicative of the results expected for the year ended August 31, 2005.
 
(3)  
The interim financial statements furnished reflect all adjustments, which are, in the opinion of management, necessary to a fair presentation of the results of the interim period presented. All such adjustments are of a normal recurring nature.
 
(4)  
All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. Such investments amounted to $25,741,000 at November 30, 2004 and $39,671,000 at August 31, 2004.

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(5)  
A summary of the stockholders’ equity section for the three months ended November 30, 2004 and 2003 is as follows:

(in thousands)

(Unaudited)

                                                                 
                            Accumulated                              
                            Other                     Unearned Stock     Total  
    Preferred     Common     Other     Comprehensive     Retained             Grant     Stockholders'  
    Stock     Stock     Capital     Income     Earnings     Treasury Stock     Compensation     Equity  
Balance at September 1, 2004
   $ 1,057     $ 39,633     $ 69,812     $ 18,643     $ 473,540     $ (164,231 )   $ (3,217 )   $ 435,237  
Comprehensive income:
                                                                
Net income
     —       —       —       —       7,015       —       —       —
Foreign currency translation gain
     —       —       —       31,163       —       —       —       —
Total comprehensive income
                                                             38,178  
Cash dividends paid or accrued:
                                                                
Preferred, $1.25 per share
     —       —       —       —       (13 )     —       —       (13 )
Common, $.135 per share
     —       —       —       —       (4,176 )     —       —       (4,176 )
Stock options exercised
     —       187       2,355       —       —       —       —       2,542  
Grant of restricted stock
     —       —       1,645       —       —       —       (1,645 )     —  
Non-cash stock based compensation
     —       —       113       —       —       —       —       113  
Amortization of restricted stock
     —       —       —       —       —       —       376       376  
 
                                                
Balance at November 30, 2004
   $ 1,057     $ 39,820     $ 73,925     $ 49,806     $ 476,366     $ (164,231 )   $ (4,486 )   $ 472,257  
 
                                                

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Table of Contents

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(in thousands)

(Unaudited)

                                                                 
                            Accumulated                              
                            Other                     Unearned Stock     Total  
    Preferred     Common     Other     Comprehensive     Retained     Treasury     Grant     Stockholders'  
    Stock     Stock     Capital     Income(Loss)     Earnings     Stock     Compensation     Equity  
Balance at September 1, 2003
   $ 1,057     $ 38,781     $ 56,035     $ (8,365 )   $ 462,104     $ (164,231 )   $ (2,560 )   $ 382,821  
Comprehensive income:
                                                                
Net income
     —       —       —       —       9,544       —       —       —
Foreign currency translation gain
     —       —       —       24,344       —       —       —  
Total comprehensive income
                                                             33,888  
Cash dividends paid or accrued:
                                                                
Preferred, $1.25 per share
     —       —       —       —       (13 )     —       —       (13 )
Common, $.135 per share
     —       —       —       —       (4,053 )     —       —       (4,053 )
Stock options exercised
     —       473       5,882       —       —       —       —       6,355  
Grant of restricted stock
     —       —       1,800       —       —       —       (1,800 )     —  
Non-cash stock based compensation
     —       —       274       —       —       —       —       274  
Amortization of restricted stock
     —       —       —       —       —       —       298       298  
 
                                                
Balance at November 30, 2003
   $ 1,057     $ 39,254     $ 63,991     $ 15,979     $ 467,582     $ (164,231 )   $ (4,062 )   $ 419,570  
 
                                                

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(6)  
Basic earnings per share is computed by dividing income applicable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common stock equivalents were exercised and then shared in the earnings of the Company.
 
   
During the three months ended November 30, 2004, the Company did not repurchase any shares of its common stock. Approximately 1.7 million shares remain under a nine million-share authorization approved by the Board of Directors in August 1998. Although no plans at present, the Company may repurchase additional common stock in fiscal year 2005 subject to market conditions.
 
(7)  
The components of Accumulated Other Comprehensive Income are as follows:

                 
    (in thousands)  
    Unaudited  
    November 30,     August 31,  
    2004     2004  
Foreign currency translation gain
   $ 52,317     $ 21,154  
Minimum pension liability
     (2,511 )     (2,511 )
 
            
 
                
 
   $ 49,806     $ 18,643  
 
            

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(8)  
The Company is engaged in the sale of plastic resins in various forms, which are used as raw materials by its customers. The Company operates in two geographic business segments, North America and Europe. A reconciliation of segment income to consolidated income (loss) before taxes is presented below:

(in thousands)
(Unaudited)

                                 
    North                    
    America     Europe     Other     Consolidated