-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NCbsqoSm/P96UA19TnUyZHgLVrfceKW3AvJ6V9d+HDvt/bl58nNEF9WTBesHcpm7 80iOnS+Cey5rQvxm7bZM1g== 0000950152-99-003239.txt : 19990415 0000950152-99-003239.hdr.sgml : 19990415 ACCESSION NUMBER: 0000950152-99-003239 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHULMAN A INC CENTRAL INDEX KEY: 0000087565 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 340514850 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-07459 FILM NUMBER: 99593347 BUSINESS ADDRESS: STREET 1: 3550 W MARKET ST CITY: AKRON STATE: OH ZIP: 44333 BUSINESS PHONE: 2166663751 MAIL ADDRESS: STREET 1: 1350 EATON CENTER STREET 2: 1111 SUPERIOR AVENUE CITY: CLEVELAND STATE: OH ZIP: 44114 10-Q 1 A.SCHULMAN, INC. QUARTERLY REPORT FORM 10-Q 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 February 28, 1999 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 March 31, 1999 - 31,362,505 2
A. SCHULMAN, INC. STATEMENT OF CONSOLIDATED INCOME (Notes 1 and 2) For the three months ended For the six months ended ---------------------------------- ---------------------------------- February February February February 28, 28, 28, 28, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Unaudited Unaudited --------- --------- Net sales $ 235,198,000 $ 239,840,000 $ 493,844,000 $ 504,048,000 Interest and other income 1,111,000 673,000 1,762,000 1,603,000 ------------- ------------- ------------- ------------- 236,309,000 240,513,000 495,606,000 505,651,000 ------------- ------------- ------------- ------------- Costs and expenses: Cost of goods sold 195,706,000 198,962,000 404,902,000 419,351,000 Selling, general and administrative expenses 25,205,000 22,642,000 52,230,000 45,699,000 Interest expense 793,000 382,000 1,623,000 683,000 Foreign currency transaction (gains) losses (87,000) (449,000) 722,000 (356,000) Minority interest 382,000 367,000 703,000 551,000 ------------- ------------- ------------- ------------- 221,999,000 221,904,000 460,180,000 465,928,000 ------------- ------------- ------------- ------------- Income before taxes and cumulative effect of accounting change 14,310,000 18,609,000 35,426,000 39,723,000 Provision for income taxes 5,670,000 7,624,000 13,968,000 16,204,000 ------------- ------------- ------------- ------------- Income before cumulative effect of accounting change 8,640,000 10,985,000 21,458,000 23,519,000 Cumulative effect of accounting change (Note 6) -- -- -- (2,007,000) ------------- ------------- ------------- ------------- Net income 8,640,000 10,985,000 21,458,000 21,512,000 Less: Preferred stock dividends (13,000) (13,000) (27,000) (27,000) ------------- ------------- ------------- ------------- Net income applicable to common stock $ 8,627,000 $ 10,972,000 $ 21,431,000 $ 21,485,000 ============= ============= ============= ============= Weighted average number of shares outstanding (Note 7): Basic 31,981,838 35,764,943 32,135,088 35,897,235 Diluted 32,005,575 35,834,581 32,146,957 35,948,676 Basic and diluted earnings per common share (Note 7): Income before cumulative effect of accounting change $ .27 $ .31 $ .67 $ .66 Cumulative effect of accounting change -- -- -- (.06) ------------- ------------- ------------- ------------- Net income $ .27 $ .31 $ .67 $ .60 ============= ============= ============= =============
- 2 - 3
A. SCHULMAN, INC. CONSOLIDATED BALANCE SHEET (Notes 1 and 2) February 28, August 31, Assets 1999 1998 ----------- ---------- Unaudited --------- Current assets: Cash and cash equivalents (Note 3) $ 48,175,000 $ 60,766,000 Accounts receivable, less allowance for doubtful accounts of $4,554,000 at February 28, 1999 and $4,778,000 at August 31, 1998 173,646,000 148,838,000 Inventories, average cost or market, whichever is lower 172,656,000 165,661,000 Prepaids, including tax effect of temporary differences 16,015,000 20,220,000 ------------ ------------ Total current assets 410,492,000 395,485,000 ------------ ------------ Other assets: Cash surrender value of life insurance 494,000 500,000 Deferred charges, etc., including tax effect of temporary differences 23,012,000 17,752,000 ------------ ------------ 23,506,000 18,252,000 ------------ ------------ Property, plant and equipment, at cost: Land and improvements 9,224,000 9,253,000 Buildings and leasehold improvements 71,478,000 69,178,000 Machinery and equipment 211,522,000 202,199,000 Furniture and fixtures 22,814,000 22,422,000 Construction in progress 19,655,000 18,854,000 ------------ ------------ 334,693,000 321,906,000 Accumulated depreciation and investment grants of $287,000 at February 28, 1999 and $355,000 at August 31, 1998 182,151,000 173,723,000 ------------ ------------ 152,542,000 148,183,000 ------------ ------------ $586,540,000 $561,920,000 ============ ============
- 3 - 4 A. SCHULMAN, INC. CONSOLIDATED BALANCE SHEET (Notes 1 and 2)
February 28, August 31, Liabilities and Stockholders' Equity 1999 1998 ------------ ---------- Unaudited --------- Current liabilities: Notes payable $ 4,900,000 $ 4,000,000 Accounts payable 67,347,000 58,640,000 U.S. and foreign income taxes payable 12,964,000 9,865,000 Accrued payrolls, taxes and related benefits 18,579,000 18,073,000 Other accrued liabilities 19,768,000 16,607,000 ------------- ------------- Total current liabilities 123,558,000 107,185,000 ------------- ------------- Long-term debt 60,000,000 40,000,000 Other long-term liabilities 36,975,000 35,704,000 Deferred income taxes 9,577,000 9,852,000 Minority interest 2,260,000 2,908,000 Stockholders' equity (Note 4): Preferred stock, 5% cumulative, $100 par value, authorized, issued and outstanding - 10,689 shares at February 28, 1999 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 February 28, 1999 and August 31, 1998 38,347,000 38,347,000 Other capital 45,778,000 45,778,000 Cumulative foreign currency translation adjustment (11,030,000) (8,917,000) Retained earnings 409,421,000 395,746,000 Treasury stock, at cost, 6,527,862 shares at February 28, 1999 and 5,068,862 shares at August 31, 1998 (Note 5) (127,742,000) (103,758,000) Unearned stock grant compensation (1,673,000) (1,994,000) ------------- ------------- Common stockholders' equity 353,101,000 365,202,000 ------------- ------------- Total stockholders' equity 354,170,000 366,271,000 ------------- ------------- $ 586,540,000 $ 561,920,000 ============= =============
-4- 5 A. SCHULMAN, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Notes 1 and 2)
Six months ended ---------------- February 28, February 28, 1999 1998 ---- ---- Unaudited --------- Provided from (used in) operating activities: Net income $ 21,458,000 $ 21,512,000 Items not requiring the current use of cash: Cumulative effect of accounting change (Note 6) - 2,007,000 Depreciation 10,643,000 9,380,000 Non-current deferred taxes 228,000 (92,000) Foreign pension and other deferred compensation 1,432,000 1,296,000 Postretirement benefit obligation 532,000 608,000 Changes in working capital: Accounts receivable (28,037,000) (14,110,000) Inventories (7,750,000) (19,611,000) Prepaids 4,302,000 194,000 Accounts payable 11,048,000 8,905,000 Income taxes 3,249,000 (3,313,000) Accrued payrolls and other accrued liabilities 4,007,000 1,469,000 Changes in other assets and other long-term liabilities (6,300,000) (948,000) ------------ ------------ Net cash provided from operating activities 14,812,000 7,297,000 ------------ ------------ Provided from (used in) investing activities: Expenditures for property, plant and equipment (16,072,000) (13,759,000) Disposals of property, plant and equipment 318,000 580,000 Purchases of short-term investments - (8,187,000) Proceeds from sales of short-term investments - 10,993,000 ------------ ------------ Net cash used in investing activities (15,754,000) (10,373,000) ------------ ------------ Provided from (used in) financing activities: Cash dividends paid (7,722,000) (7,906,000) Increase of notes payable 900,000 3,400,000 Increase of long-term debt 20,000,000 18,000,000 Reduction of long-term debt - (27,000) Decrease in minority interest (648,000) (499,000) Purchase of treasury stock (23,984,000) (11,814,000) Exercise of stock options - 59,000 ------------ ------------ Net cash provided from (used in) financing activities (11,454,000) 1,213,000 ------------ ------------ Effect of exchange rate changes on cash (195,000) (142,000) ------------ ------------ Net decrease in cash and cash equivalents (12,591,000) (2,005,000) Cash and cash equivalents at beginning of period 60,766,000 69,147,000 ------------ ------------ Cash and cash equivalents at end of period $ 48,175,000 $ 67,142,000 ============ ============
-5- 6 A. SCHULMAN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) The results of operations for the six months ended February 28, 1999 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 period 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 $38,778,000 at February 28, 1999 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 six months ended February 28, 1999 is as follows:
Foreign Unearned Currency Stock Common Other Retained Translation Grant Stock Capital Earnings Adjustment Compensation ----- ------- -------- ---------- ------------ Balance-September 1, 1998 $38,347,000 $45,778,000 $395,746,000 $ (8,917,000) $(1,994,000) Net income 21,458,000 Dividends paid or accrued: Preferred (27,000) Common, $.24 per share (7,756,000) Foreign currency translation adjustment (2,113,000) Amortization of restricted stock 321,000 ----------- ----------- ------------ ------------ ----------- Balance-February 28, 1999 $38,347,000 $45,778,000 $409,421,000 $(11,030,000) $(1,673,000) =========== =========== ============ ============ ===========
(5) During the six months ended February 28, 1999, the Company repurchased 1,459,000 shares of its common stock for $23,984,000. 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- 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Material Changes in Results of Operations - ----------------------------------------- A comparison of net sales by classification for both the three month and six month periods ending February 28, 1999 and 1998 is as follows: (In Thousands) Three Months Ended February 28, Six Months Ended February 28, ------------------------------- ----------------------------- Increase Increase 1999 1998 (Decrease) 1999 1998 (Decrease) ---- ---- ---------- ---- ---- ---------- Manufacturing $162,140 $158,513 $ 3,627 $337,911 $331,359 $ 6,552 Merchant 38,950 43,353 (4,403) 86,466 92,745 (6,279) Distribution 34,108 37,974 (3,866) 69,467 79,944 (10,477) -------- -------- ------- -------- -------- -------- $235,198 $239,840 $(4,642) $493,844 $504,048 $(10,204) ======== ======== ======= ======== ======== ======== The primary reason for the decline in sales was the extremely low level of pricing in the worldwide plastics market. The translation effect of foreign currencies was not a significant factor in 1999. It increased sales by $5.8 million for the quarter and $5.7 million for the six month period. Total tonnage was up 2.5% for the quarter, but flat for the six month period. Although manufacturing tonnage was flat for the quarter, merchant tonnage grew 11.7% with increases in both Europe and North America. Gross margins on sales for the quarter were 16.8% compared to 17% for the same quarter last year. Gross margins on sales for the six months ended February 28, 1999 were 18% compared with 16.8% for the comparable six month period last year. An important factor for the increase in gross margins was lower resin prices. A major reason for the decline in the gross profit percentage during the current quarter compared to the same quarter last year was a decline in the plant utilization rate from 86% in 1998 to 82% in 1999. Utilization was off in both Europe and North America due to higher capacities and softer than anticipated business conditions. A comparison of gross profit by classification for both the three month and six month periods ending February 28, 1999 and 1998 is as follows: (In Thousands) Three Months Ended February 28, Six Months Ended February 28, ------------------------------- ----------------------------- Increase Increase 1999 1998 (Decrease) 1999 1998 (Decrease) ---- ---- ---------- ---- ---- ---------- Manufacturing $30,375 $30,968 $ (593) $ 67,964 $ 63,431 $4,533 Merchant 4,210 5,265 (1,055) 11,067 11,450 (383) Distribution 4,907 4,645 262 9,911 9,816 95 ------- ------- ------- -------- -------- ------ $39,492 $40,878 $(1,386) $ 88,942 $ 84,697 $4,245 ======= ======= ======= ======== ======== ====== Selling, general and administrative expenses increased in 1999. These increases were the result of including the first quarter expense from a major plastics trade show held every three years, additional personnel for future growth and expansion into new areas of the world to better serve our customers and costs arising from the implementation of new business systems. Interest expense increased in 1999 due to higher levels of borrowing. Foreign currency transaction gains and losses were primarily due to changes in the value of currencies in major areas where the Company operates; including the U.S. -7- 8 dollar, Euro, U.K. pound sterling, 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 is higher in 1999 due to a settlement arising from the termination of a supplier arrangement in Europe. The effective tax rates for the respective three month periods were 39.6% in 1999 and 41% in 1998. For the six months ended February 28, the effective tax rates were 39.4% in 1999 and 40.8% in 1998. The 1999 tax rates were lower primarily due to 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 approximately $192,000 or $.01 per share for the quarter and $287,000 or $.01 per share for the six month period. 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. Net income for the quarter was down due to a $4.6 million reduction in sales, slightly lower margins and higher operating expenses including interest. Profits for the quarter were off in Europe and North America. Although December is historically a period of reduced business activity, demand in December 1998 was softer than normal. The extent of the recovery in the subsequent months was not enough to overcome this difficult December. Business in Europe was soft. European profits were off $1,800,000 or 21% due to the extremely low level of pricing in the worldwide plastics market and higher expenses. Quarterly profits in North America were down approximately $600,000 primarily because of lower sales and increased expenses including personnel, interest and costs arising from the implementation of new business processes. The Company has recently seen an improvement in both North American and European order levels as well as some firming in the prices of certain plastic resins. Nevertheless, low levels of pricing, higher costs and weakness in Europe will hamper improvement in profits for fiscal 1999. Material Changes in Financial Condition - --------------------------------------- As of February 28, 1999, the current ratio was 3.3:1 and working capital was $287 million. During the six months ended February 28, 1999, the Company repurchased 1,459,000 shares of its common stock for $23,984,000. An additional 497,000 shares have been purchased since February 28, 1999. Approximately 3.9 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 21.5% at February 28, 1999 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 $20 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 -8- 9 adjustments are recorded in the "cumulative foreign currency translation adjustment" account in stockholders' equity. The strengthening of the U.S. dollar during the six months ended February 28, 1999 decreased this account by $2.1 million. 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. Currently, most of the Company's suppliers have acknowledged Year 2000 compliance, however, not all are yet compliant. 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- 10 Part II - Other Information - --------------------------- Items 1 through 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 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- 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 April 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) - 11 - EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF FEBRUARY 28, 1999 AND AUGUST 31, 1998 AND THE STATEMENT OF CONSOLIDATED INCOME FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000087565 A. SCHULMAN, INC. 1,000 6-MOS AUG-31-1999 SEP-01-1998 FEB-28-1999 48,175 0 173,646 4,554 172,656 410,492 334,693 182,151 586,540 123,558 60,000 0 1,069 38,347 314,754 586,540 493,844 495,606 404,902 460,180 0 0 1,623 35,426 13,968 21,458 0 0 0 21,458 .67 .67
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