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 May 31, 2004

     [  ] 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 check mark 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 June 30, 2004 – 30,335,223

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.
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.
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 nine months ended May 31, 2004 and 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 (Certain reported items of 2003 have been reclassified to conform to the 2004 presentation):

(In thousands, except per share data)

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2004 and 2003

(2)		The results of operations for the three and nine months ended May 31, 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 $44,334,000 at May 31, 2004 and $30,582,000 at August 31, 2003.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2004 and 2003

(5)

A summary of the stockholders’ equity section for the nine months ended May 31, 2004 and 2003 is as follows:

(In thousands)

(Unaudited)

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2004 and 2003

(In thousands)

(Unaudited)

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2004 and 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 nine months ended May 31, 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:

(In thousands)

(8)

A summary of the other comprehensive income section for the three and nine months ended May 31, 2004 and 2003 is as follows:

(In thousands)

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2004 and 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 to consolidated income (loss) before taxes is presented below:

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2004 and 2003

(In thousands)

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2004 and 2003

The majority of the Company’s sales for the nine months ended May 31, 2004 and 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 nine months ended May 31, 2004 and 2003

(10)		The effective tax rate of 35.2% and 40.8% for the three and nine months ended May 31, 2004, respectively, and 72.3% and 53.5% for the three and nine months ended May 31, 2003, respectively, is greater than the statutory rate of 35% primarily because no tax benefits have been recognized on losses in the United States.
		For the quarter ended May 31, 2003, included is a $4.1 million charge for restructuring in the United States. Due to improved profitability in Mexico, the Company recognized a $1.2 million tax benefit during the May 2003 quarter from the reversal of a valuation allowance on deferred tax assets.
		Germany has adopted new tax legislation that will be effective in fiscal 2005. This legislation could increase the Company’s German taxes up to approximately $4 million annually.
(11)		Accumulated amortization for intangible assets was approximately $991,000 and $753,000 at May 31, 2004 and August 31, 2003, respectively. The amortization expense for intangible assets was approximately $55,000 and $170,000 for the three and nine months ended May 31, 2004 and $54,000 and $153,000 for the three and nine months ended May 31, 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 $4,093,000 in the quarter ended May 31, 2003 and $8,616,000 for the year ended August 31, 2003, net of a curtailment gain of $288,000. The charge was primarily non-cash and is summarized below:

(in thousands)

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2004 and 2003

		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 $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.
		During fiscal 2004, restructuring expense totaling $295,000 related primarily to the disposal of additional equipment and to work pertaining to the closing of the Texas facility. At May 31, 2004 the Company has remaining reserves of $148,000 related to cash out-flows primarily for employee severance costs, which are expected to be paid during the next four months.
(13)		In December 2003 the Financial Accounting Standards Board (FASB) issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This Statement requires revisions to employers’ disclosures about pension plans and other postretirement benefit plans but does not change the measurement or recognition provisions of SFAS No. 87 and SFAS No. 106. The annual disclosure requirements will be effective for the fiscal year ended August 31, 2004. The following provides the interim period disclosures required by SFAS No. 132 (revised 2003).
		Net periodic pension cost recognized included the following components:

(in thousands)

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2004 and 2003

Postretirement benefit cost included the following components:

(in thousands)

(14)		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. As of May 31, 2004, the notional value of the underlying debt has been marked-to-market to $23.6 million and carries a variable interest rate of 5.7%. The interest rate swap has been recorded at fair market value of $1.4 million and is included in other current liabilities at May 31, 2004.
(15)		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 in the second quarter ending February 29, 2004 for special purpose entities and 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.
(16)		On May 19, 2004, the FASB issued FASB Staff Position 106-2 (“FSP 106-2”) regarding SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. FSP 106-2, “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 106-2 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. The adoption of FSP 106-2 in the Company’s first quarter of fiscal 2005 is not expected to have a material impact on the Company’s financial position or results of operations.

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

Higher tonnage and the positive translation effect of foreign currencies were the major factors that resulted in increases in sales. Net income for the quarter ended May 31, 2004 was higher due to the positive translation effect of foreign currencies and reduced North American losses. The fiscal 2003 quarter included $4.1 million of restructuring charges relating to the discontinuance of manufacturing and a write-down of assets in Orange, Texas. The reduction in North American loss before interest and taxes was due to better profit margins and lower costs.

A comparison of consolidated sales by business segment for the three and nine months ended May 31, 2004 and 2003 is as follows:

The two largest markets served by the Company are the packaging and automotive markets. For the nine months ended May 31, 2004 approximately 36% of consolidated sales were derived from packaging and 22% from the automotive market. For the nine months ended May 31, 2003, approximately 36% and 25% of consolidated sales were derived from the packaging and automotive markets, respectively.

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 nine months ended May 31, 2004 and 2003 are presented below:

The translation effect of the weak U.S. dollar increased sales by $17.1 million or 5.7% for the quarter and $68.4 million or 8.2 % for the nine months ended May 31, 2004.

The reasons for the change in sales for the three and nine months ended May 31, 2004, respectively, are as follows:

The tonnage increase for the May 2004 quarter was up primarily due to an 11.8% increase in European volume.

A comparison of gross profit dollars and percentages by business segment for the three and nine months ended May 31, 2004 and May 31, 2003 are as follows:

European gross profit dollars were higher for the three and nine months ended May 31, 2004, primarily due to the translation effect of exchanges rates, primarily the Euro, which increased margins $2.9 million and $12.0 million, respectively. The decline in European gross profit

percentage for the three and nine months ended May 31, 2004 periods was due to declining margins on the sale of commodity products.

Gross profits and percentages in North America were up slightly in the three and nine months ended May 31, 2004, due to higher sales prices and the benefits derived from the fiscal 2003 restructuring program, which lowered the North American cost structure and improved plant utilization.

A comparison of capacity utilization levels for the three and nine months ended May 31, 2004 and May 31, 2003 is as follows:

European manufacturing plants operated at close to full capacity for the three months ended May 31, 2004. North American capacity utilization increased primarily as a result of closing the manufacturing plant in Orange, Texas in August 2003. Capacity utilization is calculated by dividing production pounds by practical capacity at each plant. Fiscal 2003 utilization data has been restated for comparative purposes.

Selling, general and administrative expenses increased $1.6 million or 5.5% for the quarter and $7.0 million or 8.4% for the nine months ended May 31, 2004, compared with the same periods last year. The majority of this increase was due to the translation effect from the lower U.S. dollar, which increased these expenses by $1.4 million for the quarter and $6.0 million for the nine months ended May 31, 2004 and expenditures related to Sarbanes-Oxley compliance of $0.8 million and $2.0 million for the three and nine months ended May 31, 2004, respectively.

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 $4,093,000 in the quarter ended May 31, 2003 and $8,616,000 for the year ended August 31, 2003, net of a curtailment gain of $288,000. The charge was primarily non-cash and is summarized below:

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 $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.

During fiscal 2004, restructuring expense totaling $295,000 related primarily to the disposal of additional equipment and to work pertaining to the closing of the Texas facility. At May 31, 2004 the Company has remaining reserves of $148,000 related to cash out-flows primarily for employee severance costs, which are expected to be paid during the next four months.

Foreign currency transaction gains or losses were the result of changes in the value of currencies in major areas where the Company operates. The majority of the gain for the three months ended May 31, 2004 relates primarily to changes in the value of the U.S. dollar compared with mainly the Mexican peso and the Canadian dollar.

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.

A comparison of income (loss) before taxes, interest and restructuring for each business segment for the three and nine months ended May 31, 2004 and May 31, 2003 is as follows: