<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, 1998 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
- --------------------------------------------------------------------------------
(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, 1998 - 32,179,005
<PAGE> 2
A. SCHULMAN, INC.
STATEMENT OF CONSOLIDATED INCOME (Notes 1 and 2)
<TABLE>
<CAPTION>
For the three months ended
--------------------------
November 30, November 30,
1998 1997
---- ----
Unaudited
---------
<S> <C> <C>
Net sales $ 258,646,000 $ 264,208,000
Interest and other income 651,000 930,000
------------- -------------
259,297,000 265,138,000
------------- -------------
Costs and expenses:
Cost of goods sold 209,196,000 220,389,000
Selling, general and
administrative expenses 27,025,000 23,057,000
Interest expense 830,000 301,000
Foreign currency transaction
losses 809,000 93,000
Minority interest 321,000 184,000
------------- -------------
238,181,000 244,024,000
------------- -------------
Income before taxes and cumulative
effect of accounting change 21,116,000 21,114,000
Provision for income taxes 8,298,000 8,581,000
------------- -------------
Income before cumulative effect
of accounting change 12,818,000 12,533,000
Cumulative effect of accounting
change (Note 6) - (2,007,000)
------------- -------------
Net income 12,818,000 10,526,000
Less: Preferred stock dividends (13,000) (13,000)
------------- -------------
Net income applicable to
common stock $ 12,805,000 $ 10,513,000
============= =============
Weighted average number of
shares outstanding (Note 7):
Basic 32,288,338 36,029,526
Diluted 32,288,338 36,062,769
Basic and diluted earnings per
common share (Note 7):
Income before cumulative effect
of accounting change $ .40 $ .35
Cumulative effect of accounting
change - (.06)
------------- -------------
Net income $ .40 $ .29
============= =============
</TABLE>
-2-
<PAGE> 3
A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEET (Notes 1 and 2)
<TABLE>
<CAPTION>
November 30, August 31,
Assets 1998 1998
------------ ------------
Unaudited
---------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 3) $ 40,839,000 $ 60,766,000
Accounts receivable, less allowance
for doubtful accounts of $5,493,000 at
November 30, 1998 and $4,778,000 at
August 31, 1998 163,281,000 148,838,000
Inventories, average cost or market,
whichever is lower 185,278,000 165,661,000
Prepaids, including tax effect of
temporary differences 17,390,000 20,220,000
------------ ------------
Total current assets 406,788,000 395,485,000
------------ ------------
Other assets:
Cash surrender value of life insurance 486,000 500,000
Deferred charges, etc., including tax effect
of temporary differences 23,556,000 17,752,000
------------ ------------
24,042,000 18,252,000
------------ ------------
Property, plant and equipment, at cost:
Land and improvements 9,421,000 9,253,000
Buildings and leasehold improvements 70,614,000 69,178,000
Machinery and equipment 209,099,000 202,199,000
Furniture and fixtures 22,919,000 22,422,000
Construction in progress 21,240,000 18,854,000
------------ ------------
333,293,000 321,906,000
Accumulated depreciation and investment grants
of $331,000 at November 30, 1998 and
$355,000 at August 31, 1998 181,099,000 173,723,000
------------ ------------
152,194,000 148,183,000
------------ ------------
$583,024,000 $561,920,000
============ ============
</TABLE>
-3-
<PAGE> 4
A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEET (Notes 1 and 2)
<TABLE>
<CAPTION>
November 30, August 31,
Liabilities and Stockholders' Equity 1998 1998
------------- -------------
Unaudited
<S> <C> <C>
Current liabilities:
Notes payable $ 3,500,000 $ 4,000,000
Accounts payable 71,250,000 58,640,000
U.S. and foreign income taxes payable 11,652,000 9,865,000
Accrued payrolls, taxes and related benefits 19,104,000 18,073,000
Other accrued liabilities 20,222,000 16,607,000
------------- -------------
Total current liabilites 125,728,000 107,185,000
------------- -------------
Long-term debt 43,000,000 40,000,000
Other long-term liabilities 37,190,000 35,704,000
Deferred income taxes 9,877,000 9,852,000
Minority interest 1,878,000 2,908,000
Stockholders' equity (Note 4):
Preferred stock, 5% cumulative, $100 par value,
authorized, issued and outstanding - 10,689 shares at November 30,
1998 and August 31, 1998 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 - 38,347,367 shares at November 30, 1998
and August 31, 1998 38,347,000 38,347,000
Other capital 45,778,000 45,778,000
Cumulative foreign currency translation
adjustment (2,513,000) (8,917,000)
Retained earnings 404,821,000 395,746,000
Treasury stock, at cost, 6,118,362 shares at
November 30, 1998 and 5,068,862 shares at
August 31, 1998 (Note 5) (120,318,000) (103,758,000)
Unearned stock grant compensation (1,833,000) (1,994,000)
------------- -------------
Common stockholders' equity 364,282,000 365,202,000
------------- -------------
Total stockholders' equity 365,351,000 366,271,000
------------- -------------
$ 583,024,000 $ 561,920,000
============= =============
</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,
1998 1997
---- ----
Unaudited
---------
<S> <C> <C>
Provided from (used in) operating activities:
Net income $ 12,818,000 $ 10,526,000
Items not requiring the current use of cash:
Cumulative effect of accounting change (Note 6) - 2,007,000
Depreciation 5,307,000 4,618,000
Non-current deferred taxes 98,000 (270,000)
Foreign pension and other deferred compensation 720,000 643,000
Postretirement benefit obligation 309,000 304,000
Changes in working capital:
Accounts receivable (10,752,000) (13,165,000)
Inventories (16,741,000) (5,546,000)
Prepaids 3,137,000 1,428,000
Accounts payable 11,067,000 8,473,000
Income taxes 1,549,000 2,402,000
Accrued payrolls and other accrued liabilities 3,994,000 780,000
Changes in other assets and other
long-term liabilities (6,016,000) (393,000)
------------ ------------
Net cash provided from
operating activities 5,490,000 11,807,000
------------ ------------
Provided from (used in) investing activities:
Expenditures for property, plant and equipment (8,295,000) (7,055,000)
Disposals of property, plant and equipment 264,000 88,000
Purchases of short-term investments - (8,328,000)
------------ ------------
Net cash used in
investing activities (8,031,000) (15,295,000)
------------ ------------
Provided from (used in) financing activities:
Cash dividends paid (3,714,000) (3,793,000)
Increase (decrease) of notes payable (500,000) 6,700,000
Increase of long-term debt 3,000,000 -
Reduction of long-term debt - (7,009,000)
Decrease in minority interest (1,029,000) (866,000)
Purchase of treasury stock (16,560,000) (7,712,000)
------------ ------------
Net cash used in
financing activities (18,803,000) (12,680,000)
------------ ------------
Effect of exchange rate changes on cash 1,417,000 1,527,000
------------ ------------
Net decrease in cash and cash equivalents (19,927,000) (14,641,000)
Cash and cash equivalents at beginning of period 60,766,000 69,147,000
------------ ------------
Cash and cash equivalents at end of period $ 40,839,000 $ 54,506,000
============ ============
</TABLE>
-5-
<PAGE> 6
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The results of operations for the three months ended November 30, 1998 are
not necessarily indicative of the results expected for the year ended August 31,
1999.
(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
$29,793,000 at November 30, 1998 and $40,036,000 at August 31, 1998. 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, 1998 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, 1998 $38,347,000 $45,778,000 $395,746,000 $(8,917,000) $(1,994,000)
Net income 12,818,000
Dividends paid or accrued:
Preferred (13,000)
Common, $.115 per share (3,730,000)
Foreign currency
translation adjustment 6,404,000
Amortization of
restricted stock 161,000
----------- ----------- ------------ ----------- -----------
Balance-November 30, 1998 $38,347,000 $45,778,000 $404,821,000 $(2,513,000) $(1,833,000)
=========== =========== ============ =========== ===========
</TABLE>
(5) During the three months ended November 30, 1998, the Company repurchased
1,049,500 shares of its common stock for $16,560,000. Subject to market
conditions, the Company intends to continue repurchasing its common stock in
1999.
(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.
Accordingly, the Company wrote-off, in fiscal 1998, $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 fiscal 1998.
(7) Effective February 28, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." This statement requires two
presentations of earnings per share - "basic" and "diluted." Basic earnings per
share is computed by dividing income available 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.
Any difference between basic and diluted weighted-average common shares results
from the assumed exercise of outstanding stock options and grants of restricted
stock, calculated using the treasury stock method.
-6-
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Material Changes in Results of Operations
- -----------------------------------------
Net sales for the three months ended November 30, 1998 were $258.6
million, a decrease of 2.1% from sales of $264.2 million for the comparable
period in 1997. A comparison of net sales by classification for the three months
ended November 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
(In Thousands)
Three Months Ended November 30,
-------------------------------
Increase
1998 1997 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Manufacturing $ 175,771 $ 172,846 $ 2,925
Merchant 47,516 49,392 (1,876)
Distribution 35,359 41,970 (6,611)
--------- --------- ---------
$ 258,646 $ 264,208 $ (5,562)
========= ========= =========
</TABLE>
Certain items previously reported have been reclassified to conform with
the 1998 presentation.
The translation effect of foreign currencies was not a significant factor
for the quarter. Translation reduced sales by only $129,000.
Worldwide tonnage was down 2.3% in 1998. Tonnage was up .6% in Europe and
down 5.7% in North America.
Gross margins on sales were 19.1% in 1998 compared with 16.6% in 1997.
Margins increased in all classifications primarily due to lower resin prices.
Overall margins also increased due to a greater percentage of manufacturing
sales which have higher margins than merchant or distribution activities. A
comparison of gross profit by classification for the three months ended November
30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
(In Thousands)
Three Months Ended November 30,
-------------------------------
Increase
1998 1997 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Manufacturing $37,589 $32,463 $ 5,126
Merchant 6,857 6,185 672
Distribution 5,004 5,171 (167)
------- ------- -------
$49,450 $43,819 $ 5,631
======= ======= =======
</TABLE>
Certain items previously reported have been reclassified to conform with
the 1998 presentation.
Selling, general and administrative expenses increased $4.0 million in
1998. Several factors caused this increase; including the expense from a major
plastics trade show held every three years, costs arising from the
implementation of new business systems, additional personnel for future growth
and expansion into new areas of the world to better serve our customers.
Interest expense increased $529,000 in 1998 due to higher levels of
borrowing.
Foreign currency transaction losses were primarily due to changes in the
value of currencies in major areas where the Company operates; including the
U.S. dollar, Euro, U.K. pound sterling, Canadian dollar, Mexican peso and
Indonesian rupiah.
-7-
<PAGE> 8
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 39.3% in 1998 and 40.6% in 1997. The 1998 tax
rate was lower primarily because of greater North American earnings which
generally incur a lower tax rate than earnings generated in Europe and a lower
overall effective tax rate in Europe. The lower European effective tax rate
includes a reduction in the French statutory rate from 41.6% to 40%.
The translation effect of foreign currencies increased net income by only
$95,000, or less than $.01 per share.
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 fiscal 1998, $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 was accounted for as a
cumulative effect of a change in accounting method for fiscal 1998.
Earnings in Europe were down 1.5% in 1998 primarily due to higher expenses
including a major plastics trade show held every three years and costs arising
from the planned implementation of a new business system.
North American profits were up 12%, primarily due to better margins.
The Company experienced some softening in order levels near the end of
November 1998. This softening continued into December. Although December is
historically a period of reduced business activity, demand was softer than
normal. In addition, it will be difficult to maintain margins at the levels of
the first quarter. Although recently there has been an improvement in order
inflows and the Company anticipates good business conditions in the months
ahead, it will require a strong finish to assure good earnings for the second
quarter of fiscal 1999.
Material Changes in Financial Condition
- ---------------------------------------
As of November 30, 1998, the current ratio was 3.2:1 and working capital
was $281 million.
During the three months ended November 30, 1998, the Company repurchased
1,049,500 shares of its common stock for $16,560,000. Approximately 4.8 million
shares remain under a 6 million share authorization approved by the Board of
Directors in August 1998. Subject to market conditions, the Company intends to
continue repurchasing its common stock in 1999.
The ratio of long-term liabilities to capital was 18.0% at November 30,
1998 and 17.1% at August 31, 1998. 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. A primary
factor contributing to the increase of this ratio was an additional $3 million
borrowing under the revolving credit agreement.
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 weakening
of the U.S. dollar during the three months ended November 30, 1998 increased
this account by $6.4 million.
-8-
<PAGE> 9
Year 2000
- ---------
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define a specific year. Any computer program that
has date sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a temporary inability to process
transactions or engage in other business activities.
The Company has been redesigning its North American business processes.
Hardware and software purchased and installed in connection with this project
will provide both Year 2000 readiness and significant additional functionality.
Installation is scheduled to be completed during 1999.
New software is also being installed at the Company's facilities in
Germany, France and the United Kingdom. This software, already being utilized at
the Company's Belgium operations, has been upgraded for the Year 2000
requirements. In addition, this software will provide the Company significant
other benefits, including the adoption of business practices to the Euro.
Installation of this software is scheduled to be completed during 1999.
Information system maintenance or modification costs are expensed as
incurred, while the cost of new software and equipment is capitalized and
amortized over the assets' useful lives. The Year 2000 cost of the software
being installed cannot be specifically identified. Other costs of achieving Year
2000 compliance are not expected to be material to operations or financial
position.
The Company could potentially experience disruptions to some aspects of its
operations as a result of noncompliant systems utilized by unrelated third party
governmental and business entities. The Company is communicating with its
significant suppliers to determine the extent to which the Company may be
vulnerable to their failure to correct their own Year 2000 issues. The Company
has not received sufficient responses to its inquiries to form an accurate
assessment of the Year 2000 readiness of its suppliers.
At the present time, the Company has not yet established a formal
contingency plan. The Company has commenced contingency planning and expects to
formalize a plan during 1999, although in certain cases, especially
infrastructure failures, there may be no practical alternative course of action
available to the Company.
Cautionary Statements
- ---------------------
Statements in this report which are not historical facts are forward
looking statements which involve risks and uncertainties and actual events or
results could differ materially from those expressed or implied in this report.
These "forward-looking statements" are based on currently available
information. They are also inherently 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 in major areas where the
Company operates, i.e. the U.S. dollar, Euro, U.K. pound sterling,
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 10, 1998.
(b) The following Directors were elected at such annual meeting, each for a
three-year term expiring in 2001:
Terry L. Haines
Dr. Paul Craig Roberts
James A. Karman
Continuing Class I Directors serving until the 1999 annual meeting of
stockholders:
Alan L. Ockene
Robert G. Wallace
Willard R. Holland
Continuing Class II Directors serving until the 2000 annual meeting of
stockholders:
Robert A. Stefanko
Ren, 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 III Directors:
<TABLE>
<CAPTION>
Director Name Votes For Abstensions
------------- --------- -----------
<S> <C> <C>
Terry L. Haines 26,479,936 2,265,651
Dr. Paul Craig Roberts 27,951,323 794,264
James A. Karman 28,039,125 706,462
</TABLE>
(2) Ratification of selection of independent accountants for the fiscal year
ending August 31, 1999:
<TABLE>
<CAPTION>
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
<S> <C> <C> <C>
28,650,371 73,027 22,189 -0-
</TABLE>
(3) Stockholder proposal to declassify the Board of Directors:
<TABLE>
<CAPTION>
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
<S> <C> <C> <C>
13,916,017 11,231,966 147,549 3,450,055
</TABLE>
-10-
<PAGE> 11
(4) Stockholder proposal to urge that the Board of Directors arrange for the
prompt sale of the Company:
<TABLE>
<CAPTION>
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
<S> <C> <C> <C>
2,544,778 22,373,904 376,850 3,450,055
</TABLE>
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
Exhibit
Number Exhibit
------ -------
27* Financial Data Schedule
* Filed only in electronic format pursuant to Item 601(b)(27) of
Regulation S-K.
(b) Reports on Form 8-K
-------------------
No Reports on Form 8-K have been filed during the quarter for which this
Report is filed.
-11-
<PAGE> 12
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, 1999 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)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 30, 1998 AND AUGUST 31, 1998 AND THE
STATEMENTS OF CONSOLIDATED INCOME FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998
AND NOVEMBER 30, 1997 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-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 40,839
<SECURITIES> 0
<RECEIVABLES> 163,281
<ALLOWANCES> 5,493
<INVENTORY> 185,278
<CURRENT-ASSETS> 406,788
<PP&E> 333,293
<DEPRECIATION> 181,099
<TOTAL-ASSETS> 583,024
<CURRENT-LIABILITIES> 125,728
<BONDS> 43,000
0
1,069
<COMMON> 38,347
<OTHER-SE> 325,935
<TOTAL-LIABILITY-AND-EQUITY> 583,024
<SALES> 258,646
<TOTAL-REVENUES> 259,297
<CGS> 209,196
<TOTAL-COSTS> 238,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 830
<INCOME-PRETAX> 21,116
<INCOME-TAX> 8,298
<INCOME-CONTINUING> 12,818
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,818
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
