SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

                 For the quarterly period ended November 30, 2004

                 For the transition period from                      to                      

                 Commission file number: 0-7459

A. Schulman, Inc.

(330) 666-3751

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 December 31, 2004 — 30,648,939

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TABLE OF CONTENTS

	PART I — FINANCIAL INFORMATION
SIGNATURES
Exhibit 31 - Certification of Principal Executive & Principal Financial Officers
Exhibit 32 - Certification of Principal Executive & Principal Financial Officers

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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.

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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.

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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.

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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.

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 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 Company recognizes revenues from tolling services and related materials when such services are performed. 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, 2004.
	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:

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(2)	The results of operations for the three months ended November 30, 2004 are not necessarily indicative of the results expected for the year ended August 31, 2005.
(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.
(4)	All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. Such investments amounted to $25,741,000 at November 30, 2004 and $39,671,000 at August 31, 2004.

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(5)	A summary of the stockholders’ equity section for the three months ended November 30, 2004 and 2003 is as follows:

(in thousands)

(Unaudited)

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(in thousands)

(Unaudited)

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 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 three months ended November 30, 2004, the Company did not repurchase any shares of its common stock. Approximately 1.7 million shares remain under a nine million-share authorization approved by the Board of Directors in August 1998. Although no plans at present, the Company may repurchase additional common stock in fiscal year 2005 subject to market conditions.
(7)	The components of Accumulated Other Comprehensive Income are as follows:

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(8)

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. A reconciliation of segment income to consolidated income (loss) before taxes is presented below:

(in thousands)
(Unaudited)

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

The majority of the Company’s sales for the three months ended November 30, 2004 and 2003 can be classified into five primary product families. The approximate amount and percentage of consolidated sales for these product families is as follows:

(in thousands)

(9)	The effective tax rate of 48.2% and 40.9% for the three months ended November 30, 2004 and 2003, respectively, is greater than the statutory rate of 35% primarily because no tax benefits have been recognized on losses in the United States. In addition, due to a change in German tax law on September 1, 2004, the Company incurred additional tax costs of approximately $1 million during the November 2004 quarter. Changes have been implemented by the Company in the November 2004 quarter that will mitigate the effect of the increase in taxes for Germany.
	On December 1, 2004, Mexico adopted new tax legislation that will be effective January 1, 2005. The Company is currently evaluating the potential impact of this legislation.
(10)	Accumulated amortization for intangible assets was approximately $1,184,000 and $1,044,000 at November 30, 2004 and August 31, 2004, respectively. The amortization expense for intangible assets was approximately $56,000 for the three months ended November 30, 2004 and 2003, respectively. The Company does not anticipate any significant changes in amortization expense for intangible assets in future periods.

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(11)	During fiscal 2004, in order to balance capacity with demand, the Company closed two manufacturing lines at its Nashville, Tennessee plant. As a result, the Company recorded pre-tax charges of $1,769,000 for the year ended August 31, 2004 and $204,000 for the three months ended November 30, 2004.
	The charges were primarily non-cash and are summarized below:

	The employee related costs included severance payments and medical insurance for 30 employees at the Nashville facility. The other costs include equipment removal and other exit costs that were incurred as of November 30, 2004. The accelerated depreciation represents a change in estimate for the reduced life on equipment totaling $1,353,000. At November 30, 2004 the Company had remaining accruals of $89,000 related to cash out-flows for employee severance.
	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 substantially 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 Company also incurred restructuring expense totaling $315,000 related primarily to the disposal of additional equipment and to work pertaining to the closing of the Texas facility during fiscal 2004.

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

The charges were primarily non-cash and are 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 $1,300,000 write-down of the Texas manufacturing facility, the fair market value of which was determined from an independent third party appraisal, 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 November 30, 2004 no further cash out-flows are required by the Company relating to this restructuring.
(12)	The components of the Company’s net periodic benefit cost for defined benefit pension plans and other postretirement benefits are shown below.
	Net periodic pension cost recognized included the following components:

(in thousands)

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

Postretirement benefit cost included the following components:

(in thousands)

(13)

In May 2004, the FASB issued FASB Staff Position 106-2 (“FSP106-2”) regarding SFAS No. 106, Employer’s Accounting for Postretirement Benefits Other than Pensions. FSP 106-2, “Accounting for 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 features introduced in the Act in determining accumulated postretirement benefit obligation and net periodic postretirement benefit cost, which may serve to reduce a company’s postretirement benefit costs. The adoption of FSP 106-2, effective September 1, 2004, did not have a material impact on the Company’s financial position or results of operations.

(14)

In November 2004, the FASB issued SFAS No. 151, (“SFAS 151”), Inventory Costs — an amendment of ARB No. 43, Chapter 4 in an effort to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS 151 requires abnormal amounts of idle facility expense, freight, handling costs and spoilage to be recognized as current period charges. SFAS 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of SFAS 151 is required in the Company’s first quarter of fiscal 2006 and the Company is currently assessing the impact from the adoption of SFAS 151.

(15)

In December 2004, the FASB revised SFAS No. 123, (“SFAS 123R”), Share-Based Payment. SFAS 123R requires companies to measure all employee stock-based compensation awards using a fair value method and record the related expense in the financial statements. In addition, SFAS 123R requires disclosure of information relating to the nature of share-based payment transactions and the effects of those transactions on the financial statements. The adoption of SFAS 123R is required in the Company’s first quarter of fiscal 2006 and the Company is currently assessing the impact from the adoption of SFAS 123R.

(16)

In December 2004, the FASB issued SFAS No. 153, (“SFAS 153”), Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29. SFAS 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. The adoption of SFAS 153 is required in the Company’s first quarter of fiscal 2006. It is not expected to have a material effect on the Company’s financial position or results of operations.

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended November 30, 2004 and 2003

(17)

In December 2004, the FASB issued FASB Staff Position 109-1, (“FSP 109-1”), Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. The FASB also issued FASB Staff Position 109-2, (“FSP 109-2”), Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision Within the American Jobs Creation Act of 2004 (the “Jobs Creation Act”). The Job Creations Act provides deductions for qualified domestic production activities and repatriation of foreign earnings. The adoption of FSP 109‑1 and FSP 109‑2 is required in the Company’s second quarter of fiscal 2005 and the Company is currently assessing the impact from the adoption of FSP 109-1 and FSP 109-2.

(18)	The Company is engaged in various legal proceedings arising in the ordinary course of business. The ultimate outcome of these proceedings is not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
	During fiscal 2004, a railroad company asserted that the Company was liable for environmental costs to investigate and remediate property located near its Bellevue, Ohio facility. The Company has not recorded a reserve relating to this matter and is currently in the process of determining whether it has responsibility with respect to this property. The ultimate outcome of this assertion is not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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

Results of Operations

Sales of $363.1 million for the November 2004 quarter represented the highest first-quarter revenues in the Company’s history. Net sales increased $65.4 million or 22% over sales of $297.8 million for the comparable quarter last year. The reasons for the change in sales for the three months ended November 30, 2004 are as follows:

The tonnage increase for the November 2004 quarter was due primarily to a 13.9% increase in the European operations which was offset by a decline in North American tonnage of 7.9%. The decline in North American tonnage was due to a loss of business that would not accept price increases which were the result of higher raw material costs.

A comparison of consolidated sales by business segment for the three months ended November 30, 2004 and 2003 is as follows:

The two largest markets served by the Company are the packaging and automotive markets. For the three months ended November 30, 2004, approximately 37% of consolidated sales were derived from packaging and 19% from the automotive market. For the three months ended November 30, 2003, approximately 38% and 27% of consolidated sales were derived from the packaging and automotive markets, respectively.

The majority of the Company’s sales can be classified into five primary product families. The approximate amount and percentage of consolidated sales for these product families for the three months ended November 30, 2004 and 2003 are presented below:

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A comparison of gross profit dollars and percentages by business segment for the three months ended November 30, 2004 and 2003 is as follows:

European gross profit was higher for the three months ended November 30, 2004, primarily due to a tonnage increase of 13.9% and the translation effect of exchange rates, primarily the Euro, amounting to $3.8 million. The decline in European gross margin for the November 2004 quarter was primarily due to increased sales of commodity products with lower margins. Margins on manufactured products remained flat.

Gross profits for North America were flat for the three months ended November 30, 2004 as compared to the same period last year. However, gross profit margins declined to 11.3% from 11.8% in last years first quarter. Tonnage was down 7.9% from the same period last year.

A comparison of capacity utilization levels for the three months ended November 30, 2004 and 2003 is as follows:

European manufacturing plants operated at close to full capacity for the three months ended November 30, 2004 primarily as a result of increased production levels required to meet higher customer demand. North American capacity utilization increased primarily as a result of the closing of two manufacturing lines at the Nashville, Tennessee facility in fiscal 2004. Capacity utilization is calculated by dividing production pounds by practical capacity at each plant. November 2003 utilization data has been restated for comparative purposes.

Selling, general and administrative expenses increased $7.3 million or 24.9% for the three months ended November 30, 2004, compared with the same period last year. The increase was due to compensation costs, higher benefit expenses, a major trade show in Germany, an increase in bad debts in Europe and a $624,000 increase in costs for implementation of Sarbanes/Oxley compliance. In addition, the translation effect from the lower U.S. dollar increased expenses by $1.9 million.

During fiscal 2004, in order to balance capacity with demand, the Company closed two manufacturing lines at its Nashville, Tennessee plant. As a result, the Company recorded pre-tax charges of $1,769,000 for the year ended August 31, 2004 and $204,000 for the three months ended November 30, 2004. These charges were primarily non-cash and are summarized below:

The employee related costs included severance payments and medical insurance for 30 employees at the Nashville facility. The other costs include equipment removal and other exit costs that were incurred as of November 30, 2004. The accelerated depreciation represents a change in estimate for the reduced life on equipment totaling $1,353,000. At November 30, 2004 the Company had remaining accruals of $89,000 related to cash out-flows for employee severance.

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 substantially 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 Company also incurred restructuring expense totaling $315,000 related primarily to the disposal of additional equipment and to work pertaining to the closing of the Texas facility during fiscal 2004.

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The charges for this restructuring were primarily non-cash and are 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, the fair market value of which was determined from an independent third party appraisal, 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 November 30, 2004 no further cash out-flows are required by the Company relating to this restructuring.

Foreign currency transaction losses of $2.3 million were the result of changes in the value of currencies in major areas where the Company operates. These losses include $1.8 million which relates to the change in the value of the U.S. dollar compared with 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.

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