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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 February 28, 2005

     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
  (I.R.S. Employer
Incorporation or Organization)
  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 þ       No o

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

     Yes þ       No o

Number of common shares outstanding as of March 31, 2005 – 30,661,080

 
 

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TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
Item 2 — Management’s Discussion and Analysis of Financial Condition and the Results of Operations
Item 3 — Quantitative and Qualitative Disclosure about Market Risk
Item 4 – Controls and Procedures
PART II – OTHER INFORMATION
Item 6 – Exhibits
SIGNATURES
Exhibit 31 Certification
Exhibit 32 Certification

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     For the six months ended  
    February 28,     February 29,     February 28,     February 29,  
    2005     2004     2005     2004  
    Unaudited     Unaudited  
Net sales
   $ 350,042     $ 291,246     $ 713,184     $ 589,003  
Interest and other income
     410       382       797       874  
 
                        
 
     350,452       291,628       713,981       589,877  
 
                        
 
                                
Cost and expenses:
                                
Cost of sales
     302,761       248,609       612,267       499,497  
Selling, general and administrative expenses
     33,819       30,772       70,477       60,103  
Interest expense
     964       1,037       1,881       2,117  
Foreign currency transaction (gain) loss
     (277 )     77       2,007       574  
Restructuring expense – N. America (Note 11)
     12       —       216       —  
Minority interest
     215       325       635       630  
 
                        
 
     337,494       280,820       687,483       562,921  
 
                        
 
                                
Income before taxes
     12,958       10,808       26,498       26,956  
 
                                
Provision for U.S. and foreign income taxes (Note 9)
     1,748       5,498       8,273       12,102  
 
                        
 
                                
Net income (Note 9)
     11,210       5,310       18,225       14,854  
 
                                
Less: Preferred stock dividends
     (14 )     (14 )     (27 )     (27 )
 
                        
 
                                
Net income applicable to common stock
   $ 11,196     $ 5,296     $ 18,198     $ 14,827  
 
                        
 
                                
Weighted-average number of shares outstanding (Note 6):
                                
Basic
     30,656       30,123       30,598       29,946  
Diluted
     31,109       30,588       31,081       30,314  
 
                                
Earnings per share (Note 6):
                                
Basic
   $ 0.36     $ 0.18     $ 0.59     $ 0.50  
 
                        
Diluted
   $ 0.36     $ 0.17     $ 0.59     $ 0.49  
 
                        

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)

                 
    February 28,     August 31,  
    2005     2004  
    Unaudited  
Assets
                
 
                
Current assets:
                
Cash and cash equivalents (Note 4)
   $ 52,608     $ 72,898  
Accounts receivable, less allowance for doubtful accounts of $11,082 at February 28, 2005 and $9,268 at August 31, 2004
     239,728       204,091  
Inventories, average cost or market, whichever is lower
     288,822       232,102  
Prepaids, including tax effect of temporary differences
     21,065       13,339  
 
            
Total current assets
     602,223       522,430  
 
                
Other assets:
                
Cash surrender value of life insurance
     1,382       974  
Deferred charges, etc., including tax effect of temporary differences
     14,911       16,080  
Goodwill
     5,487       5,253  
Intangible assets (Note 10)
     2,621       2,653  
 
            
 
     24,401       24,960  
 
                
Property, plant and equipment, at cost:
                
Land and improvements
     13,091       12,465  
Buildings and leasehold improvements
     132,355       124,760  
Machinery and equipment
     294,269       274,279  
Furniture and fixtures
     35,279       32,999  
Construction in progress
     10,075       10,178  
 
            
 
     485,069       454,681  
Accumulated depreciation and investment grants of $1,338 at February 28, 2005 and $1,172 at August 31, 2004
     303,793       277,975  
 
            
 
     181,276       176,706  
 
            
 
                
 
   $ 807,900     $   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)

                 
    February 28,     August 31,  
    2005     2004  
    Unaudited  
Liabilities and Stockholders’ Equity
                
 
                
Current liabilities:
                
Notes payable
   $ 2,590     $ —  
Current portion of long-term debt
     461       418  
Accounts payable
     114,923       95,160  
U.S. and foreign income taxes payable
     20,817       12,573  
Accrued payrolls, taxes and related benefits
     25,189       26,300  
Other accrued liabilities
     31,197       29,685  
 
            
Total current liabilities
     195,177       164,136  
 
                
Long-term debt
     51,100       49,679  
Other long-term liabilities
     69,203       61,984  
Deferred income taxes
     8,381       8,030  
Minority interest
     5,065       5,030  
Commitments and contingencies (Note 18)
     —       —  
 
                
Stockholders’ equity (Note 5):
                
Preferred stock, 5% cumulative, $100 par value, 10,564 shares outstanding at February 28, 2005 and 10,566 shares at 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 - 39,871,675 shares at February 28, 2005 and 39,633,132 at August 31, 2004
     39,872       39,633  
Other capital
     74,381       69,812  
Accumulated other comprehensive income (Note 7)
     49,037       18,643  
Retained earnings
     483,053       473,540  
Treasury stock, at cost, 9,211,095 shares at February 28, 2005 and August 31, 2004
     (164,231 )     (164,231 )
Unearned stock grant compensation
     (4,195 )     (3,217 )
 
            
Common stockholders’ equity
     477,917       434,180  
 
            
Total stockholders’ equity
     478,974       435,237  
 
            
 
   $ 807,900     $ 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 STATEMENT OF CASH FLOWS (Notes 1, 2 and 3)

(in thousands)

                 
    For the six months ended  
    February 28,     February 29,  
    2005     2004  
    Unaudited  
Provided from (used in) operating activities:
                
Net income
   $ 18,225     $ 14,854  
Items not requiring the current use of cash:
                
Depreciation
     12,848       13,333  
Non-current deferred taxes
     2,067       2,501  
Foreign pension and other deferred compensation
     3,874       3,200  
Postretirement benefit obligation
     1,478       485  
Minority interest in net income of subsidiaries
     635       630  
Changes in working capital:
                
Accounts receivable
     (21,641 )     (9,103 )
Inventories
     (41,447 )     4,530  
Prepaids
     72       (485 )
Accounts payable
     14,478       12,796  
Income taxes
     (2,142 )     (3,787 )
Accrued payrolls and other accrued liabilities
     1,331       (4,852 )
Changes in other assets and other long-term liabilities
     (3,520 )     (429 )
 
            
Net cash provided from (used in) operating activities
     (13,742 )     33,673  
 
            
 
                
Provided from (used in) investing activities:
                
Expenditures for property, plant and equipment
     (8,245 )     (11,733 )
Disposals of property, plant and equipment
     82       106  
 
            
Net cash used in investing activities
     (8,163 )     (11,627 )
 
            
 
                
Provided from (used in) financing activities:
                
Cash dividends paid
     (8,712 )     (8,202 )
Notes payable
     2,544       (26 )
Increase in long-term debt
     1,395       —  
Reduction in long-term debt
     —       (8,172 )
Cash distributions to minority shareholders
     (600 )     (750 )
Exercise of stock options
     3,284       7,836  
 
            
Net cash used in financing activities
     (2,089 )     (9,314 )
 
            
 
                
Effect of exchange rate changes on cash
     3,704       6,278  
 
            
Net increase (decrease) in cash and cash equivalents
     (20,290 )     19,010  
Cash and cash equivalents at beginning of period
     72,898       62,816  
 
            
Cash and cash equivalents at end of period
   $ 52,608     $ 81,826  
 
            

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

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Table of Contents

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2005 and February 29, 2004

(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 cost 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:

                                 
    (in thousands except per share data)  
    For the three months ended     For the six months ended  
    February 28,     February 29,           February 28,     February 29,  
    2005     2004     2005     2004  
Net income applicable to common stock, as reported
   $ 11,196     $ 5,296     $ 18,198     $ 14,827  
Add: Stock-based employee compensation included in reported net income, net of tax
     57       567       546       1,139  
Deduct: Total stock-based employee compensation determined under the fair value method, net of tax where applicable
     (1,030 )     (1,231 )     (2,442 )     (2,243 )
 
                        
 
                                
Net income applicable to common stock, as adjusted
   $ 10,223     $ 4,632     $ 16,302     $ 13,723  
 
                        
 
                                
Earnings per share:
                                
Basic    — as reported
   $ 0.36     $ 0.18     $ 0.59     $ 0.50  
   — as adjusted
   $ 0.33     $ 0.15     $ 0.53     $ 0.46  
 
                                
Diluted — as reported
   $ 0.36     $ 0.17     $ 0.59     $ 0.49  
— as adjusted
   $ 0.33     $ 0.15     $ 0.53     $ 0.45  

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Table of Contents

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2005 and February 29, 2004

(2)   The results of operations for the three and six months ended February 28, 2005 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 $12,739,000 at February 28, 2005 and $39,671,000 at August 31, 2004.

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Table of Contents

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2005 and February 29, 2004

(5)   A summary of the stockholders’ equity section for the six months ended February 28, 2005 and February 29, 2004 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
     —       —       —       —       18,225       —       —          
Foreign currency translation gain
     —       —       —       30,394       —       —       —          
Total comprehensive income
                                                             48,619  
Cash dividends paid or accrued:
                                                                
Preferred, $2.50 per share
     —       —       —       —       (27 )     —       —       (27 )
Common, $.28 per share
     —       —       —       —       (8,685 )     —       —       (8,685 )
Stock options exercised
     —       239       3,045       —       —       —       —       3,284  
Grant of restricted stock, net
     —       —       1,337       —       —       —       (1,337 )     —  
Non-cash stock based compensation
     —       —       187       —       —       —       —       187  
Amortization of restricted stock
     —       —       —       —       —       —       359       359  
 
                                                
Balance at February 28, 2005
   $ 1,057     $ 39,872     $ 74,381     $ 49,037     $ 483,053     $ (164,231 )   $ (4,195 )   $ 478,974  
 
                                                

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Table of Contents

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2005 and February 29, 2004

(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
     —       —       —       —       14,854       —       —          
Foreign currency translation gain
     —       —       —       36,269       —       —       —          
Total comprehensive income
                                                             51,123  
Cash dividends paid or accrued:
                                                                
Preferred, $2.50 per share
     —       —       —       —       (27 )     —       —       (27 )
Common, $.27 per share
     —       —