<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended November 30, 1997 or
[ ] 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: 2-45166
-------
A. Schulman, Inc. and its Consolidated Subsidiaries
-------------------------------------------------------------------------
(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
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(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
----- -----
Number of common shares outstanding
as of December 31, 1997 - 35,833,693
<PAGE> 2
A. SCHULMAN, INC.
STATEMENT OF CONSOLIDATED INCOME (Notes 1 and 2)
<TABLE>
<CAPTION>
For the three months ended
--------------------------
November 30, November 30,
1997 1996
---- ----
Unaudited
---------
<S> <C> <C>
Net sales $ 264,208,000 $ 257,807,000
Interest and other income 930,000 1,534,000
------------- -------------
265,138,000 259,341,000
------------- -------------
Costs and expenses:
Cost of goods sold 220,389,000 215,564,000
Selling, general and
administrative expenses 23,057,000 22,447,000
Interest expense 301,000 776,000
Foreign currency transaction
losses 93,000 364,000
Minority interest 184,000 241,000
------------- -------------
244,024,000 239,392,000
------------- -------------
Income before taxes and cumulative
effect of accounting change 21,114,000 19,949,000
Provision for income taxes 8,581,000 7,967,000
------------- -------------
Income before cumulative effect
of accounting change 12,533,000 11,982,000
Cumulative effect of accounting
change (Note 6) (2,007,000) -
------------- -------------
Net income 10,526,000 11,982,000
Less: Preferred stock dividends (13,000) (13,000)
------------- -------------
Net income applicable to
common stock $ 10,513,000 $ 11,969,000
============= =============
Net income per share:
Income before cumulative effect
of accounting change $ .35 $ .32
Cumulative effect of accounting
change (Note 6) (.06) -
------- -------
Net income $ .29 $ .32
======= =======
Cash dividends per share of
common stock $ .105 $ .095
======= =======
Average number of shares outstanding
which were used in computing net
income per common share 36,029,526 37,791,964
</TABLE>
- 2 -
<PAGE> 3
A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEET (Notes 1 and 2)
<TABLE>
<CAPTION>
November 30, August 31,
Assets 1997 1997
----------- ----------
Unaudited
---------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 3) $ 54,506,000 $ 69,147,000
Short-term investments, at cost 11,097,000 2,762,000
Accounts receivable, less allowance
for doubtful accounts of $5,775,000 at
November 30, 1997 and $5,304,000 at
August 31, 1997 165,827,000 150,192,000
Inventories, average cost or market,
whichever is lower 171,592,000 164,432,000
Prepaids, including tax effect of
temporary differences 15,848,000 17,181,000
------------ ------------
Total current assets 418,870,000 403,714,000
------------ ------------
Other assets:
Cash surrender value of life insurance 433,000 447,000
Deferred charges, etc., including tax effect
of temporary differences 18,021,000 19,389,000
------------ ------------
18,454,000 19,836,000
------------ ------------
Property, plant and equipment, at cost:
Land and improvements 9,972,000 9,995,000
Buildings and leasehold improvements 68,186,000 67,129,000
Machinery and equipment 191,686,000 188,777,000
Furniture and fixtures 21,221,000 20,358,000
Construction in progress 13,384,000 9,158,000
------------ ------------
304,449,000 295,417,000
Accumulated depreciation and investment grants
of $377,000 at November 30, 1997 and
$395,000 at August 31, 1997 162,769,000 156,022,000
------------ ------------
141,680,000 139,395,000
------------ ------------
$579,004,000 $562,945,000
============ ============
</TABLE>
- 3 -
<PAGE> 4
A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEET (Notes 1 and 2)
<TABLE>
<CAPTION>
November 30, August 31,
Liabilities and Stockholders' Equity 1997 1997
----------- ----------
Unaudited
---------
<S> <C> <C>
Current liabilities:
Notes payable $ 9,700,000 $ 3,000,000
Current portion of long-term debt 28,000 36,000
Accounts payable 72,281,000 63,095,000
U.S. and foreign income taxes payable 14,893,000 12,244,000
Accrued payrolls, taxes and related benefits 16,152,000 17,139,000
Other accrued liabilities 18,554,000 16,227,000
------------ ------------
Total current liabilities 131,608,000 111,741,000
------------ ------------
Long-term debt 5,010,000 12,009,000
Other long-term liabilities 33,544,000 32,309,000
Deferred income taxes 9,510,000 9,462,000
Minority interest 2,909,000 4,023,000
Stockholders' equity (Note 4):
Preferred stock, 5% cumulative, $100
par value, authorized, issued and
outstanding - 10,689 shares at November 30,
1997 and August 31, 1997 1,069,000 1,069,000
Special stock, 1,000,000 shares authorized,
none outstanding - -
Common stock, $1 par value
Authorized - 75,000,000 shares
Issued - 38,342,867 shares at November 30, 1997
and August 31, 1997 38,343,000 38,343,000
Other capital 44,412,000 44,412,000
Cumulative foreign currency translation
adjustment (2,648,000) (6,573,000)
Retained earnings 368,304,000 361,591,000
Treasury stock, at cost, 2,456,674 shares at
November 30, 1997 and 2,112,674 shares at
August 31, 1997 (Note 5) (52,001,000) (44,289,000)
Unearned stock grant compensation (1,056,000) (1,152,000)
------------ ------------
Common stockholders' equity 395,354,000 392,332,000
------------ ------------
Total stockholders' equity 396,423,000 393,401,000
------------ ------------
$579,004,000 $562,945,000
============ ============
</TABLE>
- 4 -
<PAGE> 5
A. SCHULMAN, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Notes 1 and 2)
<TABLE>
<CAPTION>
Three months ended
------------------
November 30, November 30,
1997 1996
---- ----
Unaudited
---------
<S> <C> <C>
Provided from (used in) operating activities:
Net income $ 10,526,000 $ 11,982,000
Items not requiring the current use of cash:
Cumulative effect of accounting change (Note 6) 2,007,000 -
Depreciation 4,618,000 4,777,000
Non-current deferred taxes (270,000) 40,000
Foreign pension and other deferred compensation 643,000 743,000
Postretirement benefit obligation 304,000 249,000
Changes in working capital:
Accounts receivable (13,165,000) (14,088,000)
Inventories (5,546,000) (10,935,000)
Prepaids 1,428,000 15,000
Accounts payable 8,473,000 20,391,000
Income taxes 2,402,000 2,044,000
Accrued payrolls and other accrued liabilities 780,000 2,519,000
Changes in other assets and other
long-term liabilities (393,000) (878,000)
------------- -------------
Net cash provided from
operating activities 11,807,000 16,859,000
------------- -------------
Provided from (used in) investing activities:
Expenditures for property, plant and equipment (7,055,000) (11,200,000)
Disposals of property, plant and equipment 88,000 577,000
Purchases of short-term investments (8,328,000) (5,210,000)
Proceeds from sales of short-term investments - 28,617,000
------------- -------------
Net cash provided from (used in)
investing activities (15,295,000) 12,784,000
------------- -------------
Provided from (used in) financing activities:
Cash dividends paid (3,793,000) (3,591,000)
Increase (decrease) of notes payable 6,700,000 (400,000)
Increase of long-term debt - 10,000,000
Reduction of long-term debt (7,009,000) (9,000)
Increase (decrease) in minority interest (866,000) 241,000
Purchase of treasury stock (7,712,000) (721,000)
Redemption of preferred stock - (2,000)
------------- -------------
Net cash provided from (used in)
financing activities (12,680,000) 5,518,000
------------- -------------
Effect of exchange rate changes on cash 1,527,000 (2,594,000)
------------- -------------
Net increase (decrease) in cash and cash equivalents (14,641,000) 32,567,000
Cash and cash equivalents at beginning of period 69,147,000 113,555,000
------------- -------------
Cash and cash equivalents at end of period $ 54,506,000 $ 146,122,000
============= =============
</TABLE>
- 5 -
<PAGE> 6
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The results of operations for the three months ended November 30, 1997 are
not necessarily indicative of the results expected for the year ended August 31,
1998.
(2) 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 periods presented. All such adjustments are of a normal
recurring nature.
(3) All highly liquid investments purchased with a maturity of three months or
less are considered to be cash equivalents. Such investments amounted to
$47,598,000 at November 30, 1997 and $61,679,000 at August 31, 1997. Investments
with maturities between three and twelve months are considered to be short-term
investments.
(4) A summary of the stockholders' equity accounts for the three months ended
November 30, 1997 is as follows:
<TABLE>
<CAPTION>
Foreign Unearned
Currency Stock
Common Other Retained Translation Grant
Stock Capital Earnings Adjustment Compensation
----- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance-September 1, 1997 $38,343,000 $44,412,000 $361,591,000 $(6,573,000) $(1,152,000)
Net income 10,526,000
Dividends paid or accrued:
Preferred (13,000)
Common, $.105 per share (3,800,000)
Foreign currency
translation adjustment 3,925,000
Amortization of
restricted stock 96,000
----------- ----------- ------------ ----------- ---------
Balance-November 30, 1997 $38,343,000 $44,412,000 $368,304,000 $(2,648,000) $(1,056,000)
=========== =========== ============ =========== =========
</TABLE>
(5) During the three months ended November 30, 1997, the Company repurchased
344,000 shares of its common stock for $7,712,000. The Board of Directors of the
Company has authorized the repurchase of up to 1,046,000 additional shares.
Subject to market conditions, the Company plans to complete the program by the
end of fiscal 1998.
(6) On November 20, 1997, the FASB Emerging Issues Task Force issued a new
ruling which requires the write-off of business process re-engineering costs.
The cumulative effect of this change to September 1, 1997 was to decrease pretax
income by $3,237,000 and net income by $2,007,000 or $.06 per share and is
accounted for as a cumulative effect of a change in accounting method. During
the three months ended November 30, 1997, pretax income was reduced an
additional $541,000. These costs relate to the Company's redesign of its
business processes in North America. All future costs for re-engineering will be
expensed as incurred.
- 6 -
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Results of Operations
- -----------------------------------------
On November 20, 1997, the FASB Emerging Issues Task Force issued a new
ruling which requires the write-off of business process re-engineering costs.
Accordingly, the Company wrote off, in this quarter, $3,237,000 of such costs
which were capitalized as of August 31, 1997. This write-off, net of income
taxes, amounted to $2,007,000 or $.06 per share and is accounted for as a
cumulative effect of a change in accounting method for the quarter ended
November 30, 1997.
Net sales for the three months ended November 30, 1997 were $264.2 million,
an increase of 2.5% from sales of $257.8 million for the comparable period in
1996. A comparison of net sales by classification for the three months ended
November 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
(In Thousands)
Three Months Ended November 30,
-------------------------------
Increase
1997 1996 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Manufacturing $157,428 $159,836 $ (2,408)
Merchant 64,801 55,413 9,388
Distribution 41,979 42,558 (579)
-------- -------- --------
$264,208 $257,807 $ 6,401
======== ======== ========
</TABLE>
The translation effect from the stronger U.S. dollar decreased 1997 sales by
$19.2 million.
Worldwide tonnage was 10% higher than in 1996. Tonnage was up approximately
13% in Europe and 7% in North America.
Gross margins on sales were 16.6% in 1997 compared with 16.4% in 1996. The
increase in gross profit margins was derived primarily from manufacturing. A key
factor in this margin improvement was increasing the plant utilization rate from
85% to 92% in 1997. Margins for merchant activities were flat compared with last
year, but distribution declined due to lower margins in Europe. A comparison of
gross profit by classification for the three months ended November 30, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
(In Thousands)
Three Months Ended November 30,
-------------------------------
Increase
1997 1996 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Manufacturing $31,130 $30,324 $ 806
Merchant 7,517 6,368 1,149
Distribution 5,172 5,551 (379)
------- ------- -------
$43,819 $42,243 $ 1,576
======= ======= =======
</TABLE>
Selling, general and administrative expenses increased $610,000 in 1997
primarily due to $541,000 of business process re-engineering costs related to
the Company's redesign of its business processes in North America. These costs
now have to be written off as incurred under a new accounting rule mandated by a
November 20, 1997 ruling of the FASB Emerging Issues Task Force.
Interest expense decreased $475,000 in 1997 due to lower levels of
borrowing.
-7-
<PAGE> 8
Foreign currency transaction losses were primarily due to changes in the
value of currencies within the European Monetary System, as well as the U.S.
dollar, Canadian dollar, Mexican peso and Indonesian rupiah.
Minority interest represents a 30% equity position of Mitsubishi Chemical
MKV Company in a partnership with the Company and a 35% equity position of P.T.
Prima Polycon Indah in an Indonesian joint venture with the Company.
Other income was down because of lower interest income resulting from a
decline in European temporary investments.
The effective tax rate was 40.6% in 1997 and 39.9% in 1996. The increase was
primarily due to the imposition of a 15% surtax in France.
Earnings in Europe declined $640,000 because of a $1,054,000 or $.03 per
share adverse currency translation effect from a stronger U.S. dollar. European
margins were 18.1%, compared with 19% last year, primarily due to lower margins
in merchant and distribution activities. Margins in manufacturing were
approximately the same as last year.
North American earnings, prior to the cumulative effect of an accounting
change, improved by $1.2 million, an increase of 53%. The primary reasons for
the higher profits were margins which increased from 12.8% to 14.6%, a 7%
tonnage increase and capacity utilization of 84% versus 76% last year.
The Company currently has a solid level of orders and, overall, economic
conditions are quite good. Although the Company is concerned with the Asian
financial crisis, it is not expected to have a major adverse impact on the
Company's profitability. Also, the strength of the U.S. dollar should continue
to have an adverse impact on results in the second fiscal quarter. Nevertheless,
the Company anticipates an improvement in earnings for the balance of fiscal
1998.
Material Changes in Financial Condition
- ---------------------------------------
As of November 30, 1997, the current ratio was 3.2:1 and working capital was
$287.3 million.
During the three months ended November 30, 1997, the Company repurchased
344,000 shares of its common stock for $7,712,000. The Board of Directors of the
Company has authorized the repurchase of up to 1,046,500 additional shares.
Subject to market conditions, the Company plans to complete the program by the
end of fiscal 1998.
The ratio of long-term liabilities to capital was 8.9% at November 30, 1997
and 10.1% at August 31, 1997. This ratio is calculated by dividing the sum of
long-term debt and other long-term liabilities by the sum of total stockholders'
equity, long-term debt and other long-term liabilities. This ratio decreased
during the three months ended November 30, 1997 due to reductions in the
outstanding debt under the revolving credit agreement of $7 million.
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars using current exchange rates. Income statement
items are translated at average exchange rates prevailing during the period. The
resulting translation adjustments are recorded in the "cumulative foreign
currency translation adjustment" account in stockholders' equity. The change of
the U.S. dollar during the three months ended November 30, 1997 increased this
account by $3,925,000.
Cautionary Statements
- ---------------------
From time to time, in written reports and oral statements, we discuss our
expectations regarding future performance of the Company. These "forward-looking
statements" are based on currently available information. They are also
inherently
-8-
<PAGE> 9
uncertain, and investors must recognize that events could turn out to be
significantly different from what we had expected. Examples of such
uncertainties include, but are not limited to, the following:
- Worldwide and regional economic, business and political conditions
- Fluctuations in the value of currencies within the European Monetary
System, as well as the U.S. dollar, Canadian dollar, Mexican peso and
Indonesian rupiah
- Fluctuations in prices of plastic resins and other raw materials
- Changes in customer demand and requirements
- 9 -
<PAGE> 10
Part II - Other Information
- ---------------------------
Items 1 through 3 and 5 are not applicable or the answer to such items is
negative; therefore, the items have been omitted and no reference is required in
this report.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
(a) The Company's annual meeting of stockholders was held on December 4, 1997.
(b) The following Directors were elected at such annual meeting, each for a
three- year term expiring in 2000:
Robert A. Stefanko
Rene C. Rombouts
Dr. Peggy Gordon Elliott
James S. Marlen
(c) The following matters were voted on at the annual meeting of stockholders:
(1) Election of Class II Directors:
-------------------------------
Director Name Votes For Abstensions
------------- --------- -----------
Robert A. Stefanko 31,374,756 369,546
Rene C. Rombouts 31,370,259 374,043
Dr. Peggy Gordon Elliott 31,348,499 395,803
James S. Marlen 31,376,665 367,637
(2) Ratification of selection of independent accountants for the fiscal
year ending August 31, 1998:
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
31,671,797 44,702 27,803 -0-
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibit
Number Exhibit
------ -------
27 Financial Data Schedule*
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
- -----
* Filed only in electronic format pursuant to Item 601(b)(27) of Regulation S-K.
- 10 -
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date January 14, 1998 A. Schulman, Inc.
---------------- -----------------------------------------
(Registrant)
/s/ R. A. Stefanko
-----------------------------------------
R. A. Stefanko, Executive Vice President-
Finance & Administration
(Signing on behalf of Registrant as a duly
authorized officer of Registrant and signing as
the Principal Financial Officer of Registrant)
- 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 30, 1997 AND AUGUST 31, 1997 AND THE
STATEMENT OF CONSOLIDATED INCOME FOR THE THREE MONTHS ENDED NOVEMBER 30, 1997
AND NOVEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000087565
<NAME> A. SCHULMAN, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 54,506
<SECURITIES> 11,097
<RECEIVABLES> 165,827
<ALLOWANCES> 5,775
<INVENTORY> 171,592
<CURRENT-ASSETS> 418,870
<PP&E> 304,449
<DEPRECIATION> 162,769
<TOTAL-ASSETS> 579,004
<CURRENT-LIABILITIES> 131,608
<BONDS> 5,010
0
1,069
<COMMON> 38,343
<OTHER-SE> 357,011
<TOTAL-LIABILITY-AND-EQUITY> 579,004
<SALES> 264,208
<TOTAL-REVENUES> 265,138
<CGS> 220,389
<TOTAL-COSTS> 244,024
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 301
<INCOME-PRETAX> 21,114
<INCOME-TAX> 8,581
<INCOME-CONTINUING> 12,533
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,007<F1>
<NET-INCOME> 10,526
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
<FN>
<F1>On November 20, 1997, the FASB Emerging Issues Task Force issued a new ruling
which requires the write-off of business process re-engineering costs. The
cumulative effect of this change to September 1, 1997 was to decrease pretax
income by $3,237,000 and net income by $2,007,000 or $.06 per share and is
accounted for as a cumulative effect of a change in accounting method.
</FN>
</TABLE>
