SECURITIES AND EXCHANGE COMMISSION

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 29, 2004 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: 0-7459

A. Schulman, Inc.

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

     Yes [X] No [  ]

Indicate by checkmark whether the Registrant is an Accelerated Filer (as defined in Exchange Act Rule 12b-2).     Yes [X] No [  ]

Number of common shares outstanding as of March 31, 2004 - 30,153,070

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)

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

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

(In thousands)

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

A. SCHULMAN, INC.

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

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

(In thousands)

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

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 29, 2004 and February 28, 2003

(1)		The Company’s accounting policy regarding revenue recognition is to recognize revenue when products are shipped to unaffiliated customers and both title and the risks and rewards of ownership are transferred.
		The Company provides tolling services as a fee for processing of material provided and owned by customers. On some occasions, the Company is required to provide certain amounts of its materials, such as additives or packaging. These materials are charged to the customer as an addition to the tolling fees. The 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, 2003.
		The intrinsic value method is used to measure compensation cost for stock-based compensation plans. Compensation costs for stock options is measured as the excess, if any, of the quoted market price of the Company’s common stock at the date of the grant over the amount the employee would pay to acquire the shares.
		The following table represents the impact on net income and earnings per share had the fair value based method been applied to measure compensation cost:

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 29, 2004 and February 28, 2003

(2)		The results of operations for the three and six months ended February 29, 2004 are not necessarily indicative of the results expected for the year ended August 31, 2004.
(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. Certain items previously reported in specific financial statement captions have been reclassified to conform to the 2004 presentation.
(4)		All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. Such investments amounted to $45,602,000 at February 29, 2004 and $30,582,000 at August 31, 2003.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 29, 2004 and February 28, 2003

(5)

A summary of the stockholders’ equity section for the six months ended February 29, 2004 and February 28, 2003 is as follows:

(In thousands)

(Unaudited)

[Continued from above table, first column(s) repeated]

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 29, 2004 and February 28, 2003

(In thousands)

(Unaudited)

[Continued from above table, first column(s) repeated]

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 29, 2004 and February 28, 2003

(6)		Basic earnings per share is computed by dividing income applicable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common stock equivalents were exercised and then shared in the earnings of the Company.
		During the six months ended February 29, 2004, no shares were repurchased by the Company under its existing repurchase authorization of 1.7 million shares. Although there are no plans at present, the Company may repurchase additional common stock in fiscal year 2004 subject to market conditions.
(7)		The components of Accumulated Other Comprehensive Income are as follows:

(8)

A summary of the other comprehensive income section for the three and six months ended February 29, 2004 and February 28, 2003 is as follows:

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 29, 2004 and February 28, 2003

(9)

The Company is engaged in the sale of plastic resins in various forms, which are used as raw materials by its customers. The Company operates in two geographic business segments, North America and Europe. In 2004, the Company changed certain items of its corporate allocations between North America and Europe. Certain reported items of 2003 have been reclassified to conform to the 2004 presentation. A reconciliation of segment income (loss) to consolidated income before taxes is presented below:

(In thousands)
(Unaudited)

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 29, 2004 and February 28, 2003

The majority of the Company’s sales for the six months ended February 29, 2004 and February 28, 2003 can be classified into four primary product families. The approximate percentage of consolidated sales for these product families is as follows:

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 29, 2004 and February 28, 2003

(10)		The effective tax rate of 50.9% and 44.9% for the three and six months ended February 29, 2004, respectively, and 53.0% and 47.0% for the three and six months ended February 28, 2003, respectively, is greater than the statutory rate of 35% primarily because no tax benefit is available or has been recognized on losses in the United States.
		Germany adopted new tax legislation that will be effective in fiscal 2005. This legislation could potentially increase the Company’s German taxes by up to approximately $4 million annually.
(11)		Accumulated amortization for intangible assets was approximately $955,000 and $753,000 at February 29, 2004 and August 31, 2003, respectively. The amortization expense for intangible assets was approximately $59,000 and $115,000 for the three and six months ended February 29, 2004, and $51,000 and $99,000 for the three and six months ended February 28, 2003, respectively. The Company does not anticipate any significant changes in amortization expense for intangible assets in future periods.
(12)		During fiscal 2003, the Company implemented a restructuring program in its North American operations. The purpose of the program was to improve cost efficiencies and profitability. A large part of this plan included the termination of manufacturing at its plant in Orange, Texas. The Company completed its 2003 restructuring plan at August 31, 2003. As a result, the Company recorded a pre-tax charge of $8,616,000, net of a curtailment gain of $288,000, for the year ended August 31, 2003. The charge was primarily non-cash and is summarized below:

(in thousands)

The employee related costs included severance payments and medical insurance, net of a curtailment gain of $288,000, for 35 salaried and 97 hourly employees primarily at facilities in Ohio and Texas. The curtailment gain represents the gain realized from a reduction of the post-retirement obligation due to a reduction in the workforce. The other costs include

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 29, 2004 and February 28, 2003

		a $1,300,000 write-down of the Texas manufacturing facility based on fair value of the property, a $2,269,000 write-off and disposal of manufacturing equipment and other assets related to dropped product lines and other exit costs. The accelerated depreciation represents a change in estimate for the reduced life on equipment at the Texas manufacturing facility totaling $2,379,000. At February 29, 2004 the Company has remaining reserves of $415,000 related to cash out-flows primarily for employee severance costs, which are expected to be paid during the next seven months.
(13)		In January 2003, the FASB issued Interpretation Number 46, (“FIN 46”), Consolidation of Variable Interest Entities, which was later revised in December 2003. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to transactions entered into prior to February 1, 2003 for the Company’s second quarter ending February 29, 2004 for special purpose entities and for non-special purpose entities the third quarter ending May 31, 2004. The adoption of FIN 46 did not have an impact on the Company’s financial position or results of operations.
(14)		In December 2003, the FASB issued a revision to FASB Statement No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits (“SFAS 132-revised 2003”). This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, Employers’ Accounting for Pensions, No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in FASB Statement No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures to those in the original Statement about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. SFAS 132-revised 2003, is effective for the Company’s financial statements in the fiscal year ending August 31, 2004, with interim-period disclosures required by this Statement for the quarter ending May 31, 2004. The adoption of SFAS 132-revised 2003 is not expected to have an impact on the Company’s financial position or results of operations.
(15)		On January 12, 2004, the FASB issued a FASB Staff Position (“FSP”) regarding SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. FSP 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, discusses the effect of the Medicare Prescription Drug, Improvement and Modernization Act (“the Act”) enacted on December 8, 2003. FSP 106-1 considers the effect of the two new features introduced in the Act in determining accumulated postretirement benefit obligation (“APBO”) and net periodic postretirement benefit cost, which may serve to reduce a company’s post-retirement benefit costs. Companies may elect to defer accounting for this benefit or may attempt to reflect the best estimate of the impact of the Act on net periodic costs currently. The Company has chosen to defer accounting for the benefit until the FASB issues final accounting guidance due to various uncertainties related to this legislation and the appropriate accounting. Specific authoritative guidance on the accounting for the Act is pending and that guidance, when issued could require the Company to change previously reported information. The Company’s measures of APBO and net periodic postretirement benefit costs as of and for the quarter ended February 29, 2004 do not reflect the effect of the Act. The adoption of FSP 106-1 is not expected to have a material impact on the Company’s financial position or results of operations.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 29, 2004 and February 28, 2003

(16)		The Company entered into a long-term supply agreement with a producer of thermoplastic polyurethane (TPU). Under the supply agreement effective January 2002, the Company is required to purchase, and the producer is required to supply, a minimum of 80% of the Company’s annual TPU requirements, through calendar year 2006. Subsequent to August 31, 2003, per the terms of the agreement, the Company served notice of termination of the supply agreement. The products received from the producer were considered unstable and did not meet acceptable specifications for the Company. This resulted in significant customer complaints and increased costs and inefficiencies. The Company believed that there was a material breach of the contract conditions by the producer. The producer claimed that it was not in breach of the supply agreement.
		The Company also has a formal agreement for the purchase of TPU with another supplier that expires in fiscal 2004. As of August 31, 2003, both agreements combined provided for quantities in excess of the anticipated production requirements of the Company. Since the Company had served notice of termination for the first mentioned supplier agreement, no provision was recorded as of August 31, 2003.
		In late January 2004, the Company reinstated the terms of the original long-term supply agreement in a good faith effort to resolve the instability and technical specifications of the product. In conjunction with the contract reinstatement, minimum usage requirements were clarified. This reduced the Company’s purchase obligation. The 80% minimum requirement applies to selected material applications instead of all TPU requirements. Currently, both agreements combined do not provide for quantities beyond the anticipated production requirements, for the contract period through 2006.
(17)		On March 19, 2004, the Company entered into an interest rate swap to take advantage of lower short-term borrowing costs. Currently, this swap converts $25 million of the $50 million in long-term fixed rate debt to variable rate debt and is designated as a fair value hedge.

Item 2 – Management’s Discussion and Analysis of Financial Condition and the Results of Operations

Higher prices, product mix and a positive translation effect of foreign currencies were the contributing factors that resulted in increases in sales. Net income for the quarter ended February 29, 2004 was higher due to the positive translation effect of foreign currencies and reduced North American losses. The reduction in North American loss before interest and taxes was due to better profit margins and lower costs from the fiscal 2003 restructuring program.

A comparison of consolidated sales by business segment for the three and six months ended February 29, 2004 and February 28, 2003 is as follows:

The two largest markets served by the Company are the packaging and automotive markets. For the six months ended February 29, 2004 approximately 36% of consolidated sales were derived from packaging and 22% from the automotive market. For the six months ended February 28, 2003, approximately 40% and 28% of consolidated sales were derived from the packaging and automotive markets.

The majority of the Company’s sales can be classified into four primary product families. The approximate percentage of consolidated sales for these product families for the six months ended February 29, 2004 and February 28, 2003 are presented below:

The translation effect of the weak U.S. dollar increased sales by $26.8 million or 10.0% for the quarter and $51.3 million or 9.6 % for the six months ended February 29, 2004.

The reasons for the change in sales for the three and six months ended February 29, 2004, respectively, are as follows:

The tonnage decrease for the February 2004 quarter relates primarily to manufactured and commodity products. The tonnage decrease for the six months ended February 29, 2004 was due mainly to lower sales of commodity products offset by an increase in European manufactured products.

A comparison of gross profit dollars and percentages by business segment for the three and six months ended February 29, 2004 and February 28, 2003 are as follows: