1
Exhibit 13
Company's 1998 Annual Report to Shareholders.
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A. SCHULMAN INC. 1998 ANNUAL REPORT
[PHOTO OF PLASTIC BOTTLES WITH A. SCHULMAN LOGO AND COMPANY NAME]
[OUTSIDE FRONT COVER]
3
COMPOUNDING YOUR SUCCESS
ON THE COVER: Bottles from A. Schulman's
blow molding line at its new Product
Development Center in Akron, Ohio. The
Center contains state-of-the-art [PHOTO OF MAN INSPECTING PLASTIC RESIN]
equipment, enabling A. Schulman to
significantly expand its ability to
analyze and develop new materials in
North America.
[LOGO - "COMPOUNDING YOUR SUCCESS"
IMPRINTED ON PLASTIC BOTTLE]
RIGHT: The Product Development Center
contains all the latest equipment
necessary for customer product [PHOTO OF MAN LOOKING THROUGH MICROSCOPE]
development and analysis. Included are
physical testing, wet chemistry and
flame testing laboratories.
A. Schulman is a leading international supplier of high-performance plastic
compounds and resins. These materials are fabricated into a wide variety of end
products by manufacturers around the world.
The Company's principal product lines consist of proprietary and
custom-formulated engineered plastic compounds matched to customer product
specifications. A. Schulman also produces specialty color concentrates and
additive masterbatches used in products such as films for plastic packaging,
fibers and other applications.
In addition, the Company's worldwide marketing organization serves as a
distributor and merchant for plastic materials manufactured by major polymer
producers.
A. Schulman's business is highly service oriented, providing timely and
effective response to challenging technical, product performance and customer
delivery requirements.
Headquartered in Akron, Ohio, A. Schulman currently has 13 manufacturing
plants in North America, Europe, Mexico and the Asia-Pacific region. The Company
employs approximately 2,300 people. A. Schulman stock is quoted through the
NASDAQ National Market System (Symbol: SHLM).
[INSIDE FRONT COVER]
4
FINANCIAL HIGHLIGHTS
Year Ended August 31,
============ ============ ============
1998 1997 1996
Net sales ................................................ $993,394,000 $996,376,000 $976,694,000
Net income ............................................... $ 50,143,000 $ 50,744,000 $ 42,177,000
Diluted earnings per share of common stock ............... $1.42 $1.37 $1.12
Capital expenditures ..................................... $ 30,987,000 $ 27,201,000 $ 18,542,000
Long-term debt and other non-current liabilities ......... $ 75,704,000 $ 44,318,000 $ 73,696,000
Long-term liabilities to capital ......................... 17.1% 10.1% 14.5%
Stockholders' equity ..................................... $366,271,000 $393,401,000 $433,110,000
Book value per common share .............................. $10.97 $10.83 $11.43
Number of stockholders ................................... 1,066 1,178 1,278
CASH DIVIDENDS PER SHARE
1st Quarter .............................................. $.105 $.095 $.085
2nd Quarter .............................................. .115 .105 .095
3rd Quarter .............................................. .115 .105 .095
4th Quarter .............................................. .115 .105 .095
------------ ------------ ------------
$.450 $.410 $.370
============ ============ ============
COMMON STOCK PRICE RANGE ................................. HIGH -- LOW HIGH -- LOW HIGH -- LOW
1st Quarter .............................................. 24 3/4 -- 19 1/2 25 -- 19 1/2 27 3/4 -- 17 1/4
2nd Quarter .............................................. 26 1/2 -- 22 3/8 25 1/8 -- 19 24 1/2 -- 17 1/2
3rd Quarter .............................................. 26 1/8 -- 19 7/8 22 3/8 -- 18 26 1/4 -- 20
4th Quarter .............................................. 21 1/2 -- 15 11/16 25 -- 21 1/4 26 1/2 -- 20 1/8
NET SALES NET INCOME CAPITAL EXPENDITURES
(Dollars in Billions) (Dollars in Millions) (Dollars in Millions)
Fiscal Year 1989 .6 Fiscal Year 1989 30.8 Fiscal Year 1989 26.0
Fiscal Year 1990 .7 Fiscal Year 1990 36.1 Fiscal Year 1990 17.7
Fiscal Year 1991 .7 Fiscal Year 1991 42.3 Fiscal Year 1991 18.0
Fiscal Year 1992 .7 Fiscal Year 1992 43.8 Fiscal Year 1992 15.8
Fiscal Year 1993 .7 Fiscal Year 1993 36.7 Fiscal Year 1993 18.2
Fiscal Year 1994 .7 Fiscal Year 1994 44.6 Fiscal Year 1994 25.3
Fiscal Year 1995 1.0 Fiscal Year 1995 53.6 Fiscal Year 1995 58.5
Fiscal Year 1996 1.0 Fiscal Year 1996 42.2 Fiscal Year 1996 18.5
Fiscal Year 1997 1.0 Fiscal Year 1997 50.7 Fiscal Year 1997 27.2
Fiscal Year 1998 1.0 Fiscal Year 1998 50.1 Fiscal Year 1998 31.0
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5
TO OUR STOCKHOLDERS:
We are pleased to report record net income per share for the fourth quarter
ended August 31, 1998. Per share earnings for fiscal 1998 were also an all time
high prior to recognizing the cumulative effect of an accounting change.
Net income per share for the fourth quarter ended August 31, 1998 was $.44,
a 5% increase over last year's record of $.42. Net income was $15,099,000 for
1998 compared with $15,293,000 for the 1997 fourth quarter. Net income for the
fourth quarter was off slightly due to a 2% decline in European profits and the
negative effect from the General Motors strike. Sales totaled $232.5 million
compared with $238.2 million in the 1997 quarter. Sales were down due to the
General Motors strike, lower prices and a $2.8 million adverse translation
effect from a stronger U.S. dollar. These factors offset overall volume gains of
3%.
For the year ended August 31, 1998, per share earnings before the
cumulative effect of an accounting change were a record $1.48, or 8% higher than
1997 per share earnings of $1.37. Income before the cumulative effect of an
accounting change increased to $52,150,000 compared with $50,744,000 in fiscal
1997. Sales for fiscal 1998 were $993.4 million compared with $996.4 million for
the 1997 fiscal year. The translation effect from the stronger U.S. dollar
reduced sales by $45.8 million and more than offset annual tonnage gains of 7%.
There was a positive impact on per share earnings due to the lower
number of outstanding shares. During the last two fiscal years, we completed
two share repurchase plans aggregating 4.5 million shares. In August 1998, the
Board authorized a plan for an additional six million shares. Since the
announcement of that plan, we have been aggressive buyers and have repurchased
approximately 1.2 million shares. We believe that at current market prices,
these purchases are an excellent investment and are an affirmation of
management's commitment to enhance shareholder value. Currently, there are 32.3
million outstanding shares.
We are pleased to attain record per share earnings before the cumulative
effect of accounting changes, especially in such a difficult competitive
environment which also included the adverse effect of translation and the
General Motors strike.
We are redesigning our North American business processes. This project,
BETT (Business Enhancement for Today & Tomorrow), includes new software which
also addresses the required changes for the year 2000.
BETT is a major corporate initiative and is planned for installation at
many of our North American facilities in fiscal 1999. This redesign will enable
us to better serve our customers, increase efficiencies and productivity, and
provide us with timely information necessary to effectively manage our business
in today's competitive environment.
In November 1997, the FASB issued a new ruling requiring the write-off of
business process re-engineering costs. Accordingly, in our first quarter, we
wrote off $3,237,000 of such costs that were capitalized as of August 31, 1997.
This write-off, net of income taxes, amounted to $2,007,000 or $.06 per common
share and has been accounted for as a cumulative effect of an accounting change.
After deducting this charge, net income for the year was $50,143,000 or $1.42
per common share compared with $50,744,000 or $1.37 per share in fiscal 1997. In
addition, charges to income in 1998 for the redesign of our business processes
in North America, net of tax, were $1,500,000. Such charges had been capitalized
prior to fiscal 1998.
We are also currently installing new software at our facilities in Germany,
France and the United Kingdom. This software, already being utilized at our
Belgium operations, has been upgraded for the Year 2000 requirements. In
addition, this software will enhance our capabilities to serve our customers
throughout Europe. It will also enable us to adopt our business practices to the
Euro. Installation of this software is scheduled to be completed during 1999.
Profits in our European operations were down for the fourth quarter, mainly
because of lower profit margins which more than offset volume gains of 12%.
During the fourth quarter, the translation effect from foreign currencies
increased net income by $382,000 or $.01 per share. Income in our European
operations was off 3% for fiscal 1998 due to lower profit margins and the
adverse effect of translation from the strength of the U.S. dollar. During the
first three quarters of fiscal 1998, the U.S. dollar strengthened against the
currencies of the countries where the Company operates. The stronger U.S. dollar
reduced net income for the year by $2,180,000 or $.06 per share.
Profits in North America before the cumulative effect of the accounting
change improved 26% for the year. Fourth quarter profits for 1998 were
approximately the same as in 1997, mainly due to the General Motors strike,
which reduced sales by approximately $15 million and net income by about $.03
to $.04 per share.
Worldwide gross profit margins for the year were 17.1% compared with 16.4%
in fiscal 1997. The higher margins are the result of lower resin prices and
capacity utilization which improved year to year from 83% to 90% for fiscal
1998. Europe operated at close to capacity throughout the year and North
American utilization improved significantly from 77% to 86% in the current year.
Capital expenditures for 1998 were $31 million, the second highest in the
history of the Company. These expenditures cover a number of projects throughout
our worldwide operations. We recently completed the
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replacement of a manufacturing line in
our United Kingdom plant. This line cost
approximately $4 million and will
increase our 1999 fiscal year capacity
by approximately 16 million pounds.
Also, a second manufacturing line in our [PHOTO OF ROBERT A. STEFANKO
Mexican facility was placed in service AND TERRY L. HAINES]
in September 1998. This line, with a
cost of $5.8 million, has a capacity of
15 million pounds and will broaden our
manufacturing capabilities for Latin
America.
We are also adding additional capacities to our Canadian and Givet, France
facilities. These projects will cost approximately $15 million and will increase
worldwide capacities by 45 million pounds. Both projects will commence operation
during fiscal 1999.
We will be spending $10 million in our German operation for a major
warehouse facility. This project will enable us to better serve our customers,
increase our efficiencies and centralize the logistics of our German business.
This project should be completed in fiscal 2000.
We have recently completed a new Product Development Center in Akron, Ohio.
This project cost $1.6 million and will provide us with additional capabilities
to penetrate new business opportunities. We have also invested $3 million at our
Specialty Compounding division. This project, which included new warehouse space
and modifications of our manufacturing lines, will improve our productivity and
overall efficiencies.
We are confident on the outlook for A. Schulman. Our European
operations have a good level of orders and stabilization of the U.S. dollar at
current levels will have a positive impact on earnings.
Last year's acquisition in Poland is now profitable and the Company has
recently opened an office in Hungary. We plan on increasing our presence in
other Eastern European countries.
We recently purchased the assets of Isopolymer, Inc., a distributor of
Schulman products in Italy, the second largest plastic market in Europe. Annual
sales of this unit are approximately $30 million. We anticipate this unit will
be accretive to earnings in fiscal 1999 although the amount will not be
material. This is a strategic acquisition that will provide us with an expanded
market for our products.
We commenced production at our new Indonesian facility in January 1998.
This facility, with a capacity of 12 million pounds, will serve the Asia-Pacific
region. Although the economic situation is difficult at the present time, we
believe this region offers many growth opportunities and it is important for us
to have a facility in this area of the world.
In North America, our order level has improved since the settlement of the
General Motors strike. However, there has been some moderating of business
activity. During the year, we have closed certain high cost manufacturing lines
in the United States. These steps and overall production and operating
efficiencies provide us with a solid base to meet the challenges in today's
competitive environment.
Fiscal 1998 has been an important year. Earnings per share before
accounting changes were a new record. We have aggressively repurchased our
shares which will enable us to improve per share earnings in the years ahead. We
have maintained a strong balance sheet and have repatriated over $120 million
from Europe during the last two years. We have made a number of capital
investments throughout the world and have improved our return on equity to
approximately 13.2%. Also, in January 1998, we increased the annual cash
dividend by 10%, from $.42 to $.46 per share, for the sixteenth consecutive year
of increased dividends.
Though there are a number of economic uncertainties throughout the world,
we have taken many actions over the past year which provide us with the
capability to operate successfully in the year ahead. Unless global economic
conditions weaken, we anticipate an improvement in earnings for the 1999 fiscal
year.
/s/ Terry L. Haines /s/ Robert A. Stefanko
Terry L. Haines Robert A. Stefanko
President and Chairman
Chief Executive Officer
November 5, 1998
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CLEVELAND PLASTICS FILM, A LONG-TIME CUSTOMER OF A.
SCHULMAN, IS USING OUR POLYBATCH(R) MATERIAL FOR
PRODUCING BANNERS. "WE'VE BEEN BUYING A. SCHULMAN
MATERIALS FOR OVER FIVE YEARS NOW, AND WE'VE BEEN
EXTREMELY SATISFIED," NOTED CLEVELAND PLASTICS FILM
PRESIDENT JIM HENDERSHOT. "IN FACT, MY QUALITY MANAGER
REFUSES TO LET ME BUY ANYTHING ELSE."
[PHOTO OF THREE MEN IN CONVERSATION NEAR PRESS]
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COMPOUNDING YOUR SUCCESS
In 1998, A. Schulman established several programs designed to enhance
revenues, control costs and increase earnings. Global sales and
procurement alliances, product innovation and development, and
strategic improvement programs will enable the Company to maximize
future business opportunities.
GLOBAL ALLIANCES
A. Schulman has established several global arrangements in sales and
procurement. Due to increasing worldwide competition, strong alliances
with leading edge international organizations are important factors
for success.
SALES. A. Schulman reached an agreement with Procter & Gamble to
become a global single-source supplier of white concentrates for
packaging applications. The Company's innovative, comprehensive
approach, as well as its international technical and service
capabilities were major reasons for the selection. Under the
arrangement, A. Schulman will also provide Procter & Gamble with
engineering and technical consulting services.
The Company also has agreements to distribute products for
various resin manufacturers in North America. In the United Kingdom,
A. Schulman recently signed a contract to distribute Appryl
polypropylene and special grades of Aspell HDPE for blow molding and
injection molding.
In the years ahead, the Company's strategy will continue to focus
on pursuing global contracts with international organizations.
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[PHOTO OF PRODUCT BANNERS PRODUCED USING A.
SCHULMAN'S POLYBATCH(R) MATERIALS]
10
PICTURED ARE BANNERS
PRODUCED BY
CLEVELAND PLASTICS
FILM USING A.
SCHULMAN MATERIAL.
THIS CUSTOMER USES
A. SCHULMAN'S
POLYBATCH(R) IN A
VARIETY OF OTHER
APPLICATIONS,
INCLUDING FLORAL
SLEEVES, CARRY-OUT
BAGS, FOOD PACKAGING
AND AUTOMOTIVE
PRODUCTS.
PROCUREMENT. Strong procurement capabilities are extremely important in today's
competitive environment. A. Schulman is establishing a supply chain management
system that will result in significant savings and enhanced product quality.
This program will result in a reduction of inventory complexities and
quantities, while upgrading the quality required for today's demanding
applications.
Inventory complexity. The Company is simplifying and reducing the number of
products used in manufacturing. By combining the purchasing requirements of
various facilities and consolidating the products used, overall procurement
costs will decrease. Worldwide, A. Schulman plans to increase its purchases from
suppliers who can provide the quality, skills and capabilities that fulfill the
requirements of A. Schulman.
Inventory quantities. An example of the Company's efforts to reduce quantities
is the establishment of a supplier managed inventory system for packaged raw
materials in North America. This "best practices" system will lower costs and
working capital.
Inventory quality. Consistent raw materials mean superior products. The Company
is using suppliers who not only have the capability to deliver the highest
quality products, but who can also provide technical support in product
innovation. Procurement on a worldwide basis enables A. Schulman to partner with
the most advanced and sophisticated suppliers.
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[PHOTO OF TWO MEN STANDING NEAR BED OF A TRUCK]
12
A. SCHULMAN IS
WIDELY KNOWN
THROUGHOUT THE
AUTOMOTIVE INDUSTRY
FOR ITS TECHNICAL
SERVICE AND
EXPERTISE IN
DEVELOPING MATERIALS
FOR SPECIFIC
APPLICATIONS. THIS
GMC TRUCK UTILIZES
A. SCHULMAN'S
FORMION(R) IN ITS
BED RAIL CAPS.
FORMION(R) IS USED
FOR ITS TOUGHNESS,
MAR RESISTANCE AND
DIMENSIONAL
STABILITY.
PRODUCT INNOVATION AND DEVELOPMENT
Product innovation has always been a major strength of A. Schulman. The
Company's ability to develop materials for specific applications sets it apart
from the competition. For example, Chrysler required a new material for a
steering wheel used in its Jeep Cherokee. A. Schulman created a unique solution
from its Polyvin(R) product line. The Jeep Cherokee now offers a steering wheel
that is not only comfortable to grip, but significantly reduces hand fatigue.
For European customers, the Company is widely known for its superior technology
and innovative solutions, especially for packaging applications.
Product innovation is the key to sales growth. Customer satisfaction
and excellent product research are necessary for effective innovation and
development. During the first half of fiscal year 1999, the Company will open
the following two facilities in North America that will significantly enhance
its position in product innovation.
PRODUCT DEVELOPMENT CENTER
The Company's new state-of-the-art development center in Akron, Ohio will be a
valuable resource for customers, providing both technical support and joint
product development opportunities. This center will provide A. Schulman with the
capability to more effectively penetrate targeted markets, particularly the
packaging sector, where technical service is of paramount importance.
The Product Development Center offers film and blow molding equipment
that will become operational during the first half of fiscal 1999. This facility
will provide new testing capabilities including a lab for analysis and
development of flame-retardant materials. Future plans include the addition of
laboratory injection molding and compounding lines.
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Currently, many film and packaging customers conduct costly
developmental work using their own production machinery. By utilizing A.
Schulman's equipment, particularly the cast film and blow molding lines,
customers can effectively work with us to create new materials. Once product
development is complete, customers will be able to conduct trials and tests at
the Center. The Center will enable A. Schulman to respond effectively to
technical issues.
At the Product Development Center, A. Schulman has invested not only in
technology but also in industry expertise in the development of products. The
Company is confident that this facility will provide opportunities to expand its
position in the North American film and packaging market.
COLOR TECHNOLOGY CENTER
In Europe, A. Schulman is known as a customer-responsive color concentrate
supplier. To establish this position in the North American market, the Company
is constructing a Color Technology Center in Sharon Center, Ohio. Expected to be
operational during the first half of fiscal year 1999, the facility will enable
A. Schulman to provide unique color services to customers including color
matches, timely samples and quick production turnarounds.
The Company can build on its solid foundation to make important inroads
in the color market. A. Schulman has strong relationships with key suppliers,
including resin manufacturers, and can readily supply color in any form --
pre-colored, blends and concentrates. Additionally, the Company employs some of
the top color experts in the industry.
Along with the ability to serve customers better, the Color Technology
Center will increase the efficiency of A. Schulman's North American plants.
Manufacturing facilities will be supplied with color concentrates, eliminating
time-consuming color matching and lengthy pigment cleanups.
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THE PRODUCT DEVELOPMENT CENTER'S
BLOW MOLDING LINE OFFERS THE LATEST
TECHNOLOGY IN BLOW MOLDING
MACHINERY. THIS LINE PRODUCES THE
BOTTLES PICTURED ON THE COVER OF
THIS ANNUAL REPORT.
[PHOTO OF BLOW MOLDING APPARATUS AND FEMALE TECHNICIAN HOLDING BOTTLE]
15
[PHOTO OF TWO WOMEN WORKING AT COMPUTER TERMINAL]
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IN NORTH AMERICA, A.
SCHULMAN IS
CENTRALIZING ITS
CUSTOMER SERVICE
DEPARTMENT TO
PROVIDE MORE
EFFICIENT, TIMELY
INFORMATION WHILE
RETAINING A HIGH
LEVEL OF PERSONAL
SERVICE.
STRATEGIC IMPROVEMENT PROGRAMS
North America. A. Schulman has developed a number of plans to aggressively
target North American industrial and consumer sectors, while maintaining its
strong presence with automotive manufacturers. This course of action will be
accomplished through a variety of programs.
Business Enhancement for Today and Tomorrow (BETT). This program is a complete
redesign of A. Schulman's business processes. Its major objective is to better
serve the customer and increase productivity and efficiency throughout the
organization. A large portion of the redesign will be implemented during fiscal
year 1999. Benefits will include the following:
- Better customer support due to more efficient order processing,
- Higher operating profits through enhanced production planning,
scheduling, execution and control, and
- Reduced supply side lead time via better logistics, sourcing and
distribution.
Customer Sales Support Center (CSSC). An important aspect of BETT is the design
of a corporate Customer Sales Support Center. This department will simplify and
provide more efficient order processing for customers. Sales representatives
will partner with customer service associates to provide the highest level of
service possible.
Product Realignment. Manufactured products have been organized into five
families: Polyolefins, color concentrates/additive masterbatches, PVC,
engineered materials, and merchant/distribution. This restructuring will allow
for more efficient sales and production strategies.
Europe. A. Schulman continues to expand its strength and market share throughout
the European continent. During the past two years,
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[PHOTO OF COLORFUL FOREIGN CANDY BAR WRAPPERS]
18
A. SCHULMAN PLASTIC
MATERIALS ARE USED
IN THE PACKAGING
MARKET FOR THEIR
PERFORMANCE AS WELL
AS AESTHETIC
PROPERTIES.
the Company has increased activity in Western Europe by opening an office in
Spain and acquiring a business in Italy. Today, a wide variety of A. Schulman
products are sold and distributed through the office in Barcelona, Spain, now in
its third year of operation. In Italy, the Company purchased a former
distributor of its products, Isopolymer S.p.a. Sales are expected to be $30
million per year, and future growth looks promising in the second largest
European market for plastics.
Eastern Europe continues to present opportunities for expansion. Last
year, A. Schulman acquired a distributor/merchant business in Poland. A.
Schulman Polybatch(R) products and engineered compounds, along with
distribution and merchant materials, are sold throughout the country. The
Company opened an office in Budapest, Hungary during the summer of 1998.
Customers in the Hungarian market require a local presence for technical
assistance and service.
The Company's German operation will consolidate its warehouse and
logistics functions. This project, with a cost of $10 million, includes a new
warehouse which will offer better material handling, lower costs and increased
efficiencies. It is scheduled for completion in 2000.
Asia. In Indonesia, A. Schulman began operations in January 1998. Materials
produced from this plant are supplied to customers who previously were sourced
from A. Schulman Europe. The Company's Asian sales team has added new customers
in Indonesia, China, India, Thailand, Malaysia, Singapore and Taiwan.
Through global partnerships and programs, product innovation, product
development, and strategic improvement programs, the Company has established a
firm foundation to improve growth and earnings. Both now and in the future, A.
Schulman remains committed to "Compounding Your Success."
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A. Schulman, Inc.
CONSOLIDATED STATEMENT OF INCOME
Year Ended August 31,
============== =================================
1998 1997 1996
NET SALES ............................................................... $ 993,394,000 $ 996,376,000 $ 976,694,000
INTEREST AND OTHER INCOME ............................................... 3,072,000 4,998,000 6,075,000
-------------- -------------- --------------
TOTAL ............................................................. 996,466,000 1,001,374,000 982,769,000
-------------- -------------- --------------
COSTS AND EXPENSES:
Cost of sales ........................................................ 823,856,000 833,345,000 826,076,000
Selling, general and administrative expenses ......................... 85,293,000 78,500,000 81,118,000
Interest expense ..................................................... 1,933,000 3,143,000 4,192,000
Foreign currency transaction (gains) losses .......................... (1,669,000) (756,000) 57,000
Minority interest .................................................... 724,000 860,000 354,000
-------------- -------------- --------------
910,137,000 915,092,000 911,797,000
-------------- -------------- --------------
INCOME BEFORE TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE .......... 86,329,000 86,282,000 70,972,000
PROVISION FOR U.S. AND FOREIGN INCOME TAXES ............................. 34,179,000 35,538,000 28,795,000
-------------- -------------- --------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE .................... 52,150,000 50,744,000 42,177,000
CUMULATIVE EFFECT OF ACCOUNTING CHANGE .................................. (2,007,000) -- --
-------------- -------------- --------------
NET INCOME .............................................................. $ 50,143,000 $ 50,744,000 $ 42,177,000
============== ============== ==============
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic ................................................................ 35,236,098 37,125,345 37,584,561
Diluted .............................................................. 35,275,327 37,149,595 37,591,747
BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK:
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE ................. $1.48 $1.37 $1.12
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ............................... (0.06) -- --
-------------- -------------- --------------
NET INCOME ........................................................... $1.42 $1.37 $1.12
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
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20
A. Schulman, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Cumulative
Foreign Unearned
Currency Stock
Common Other Retained Translation Grant
Stock Capital Earnings Adjustment Compensation
============================================================================
Balance at August 31, 1995 ........................ $38,022,000 $38,069,000 $297,979,000 $41,979,000 $ (1,064,000)
Net income for 1996 ............................... 42,177,000
Cash dividends paid or accrued:
Preferred stock, $5 per share .................. (54,000)
Common stock, $.37 per share ................... (13,931,000)
Foreign currency translation adjustment ........... (5,117,000)
Stock options exercised ........................... 287,000 5,369,000
Grant of restricted stock ......................... 1,036,000 (1,036,000)
Amortization of restricted stock .................. 386,000
----------- ----------- ------------ ------------ ------------
Balance at August 31, 1996 ........................ 38,309,000 44,474,000 326,171,000 36,862,000 (1,714,000)
Net income for 1997 ............................... 50,744,000
Cash dividends paid or accrued:
Preferred stock, $5 per share .................. (53,000)
Common stock, $.41 per share ................... (15,271,000)
Foreign currency translation adjustment ........... (43,435,000)
Issue of restricted stock ......................... 34,000 (62,000)
Amortization of restricted stock .................. 562,000
----------- ----------- ------------ ------------ ------------
Balance at August 31, 1997 ........................ 38,343,000 44,412,000 361,591,000 (6,573,000) (1,152,000)
Net income for 1998 ............................... 50,143,000
Cash dividends paid or accrued:
Preferred stock, $5 per share .................. (53,000)
Common stock, $.45 per share ................... (15,935,000)
Foreign currency translation adjustment ........... (2,344,000)
Stock options exercised ........................... 4,000 97,000
Grant of restricted stock ......................... 1,269,000 (1,269,000)
Amortization of restricted stock .................. 427,000
----------- ----------- ------------ ------------ ------------
Balance at August 31, 1998 ........................ $38,347,000 $45,778,000 $395,746,000 $ (8,917,000) $ (1,994,000)
=========== =========== ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
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A. Schulman, Inc.
CONSOLIDATED BALANCE SHEET
August 31, August 31,
1998 1997
============ ============
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 60,766,000 $ 69,147,000
Short-term investments, at cost ................................................. -- 2,762,000
Accounts receivable, less allowance for doubtful accounts of $4,778,000 in 1998
and $5,304,000 in 1997 ........................................................ 148,838,000 150,192,000
Inventories, average cost or market, whichever is lower ......................... 165,661,000 164,432,000
Prepaids, including tax effect of temporary differences ......................... 20,220,000 17,181,000
------------ ------------
TOTAL CURRENT ASSETS .......................................................... 395,485,000 403,714,000
------------ ------------
OTHER ASSETS:
Cash surrender value of life insurance .......................................... 500,000 447,000
Deferred charges, etc., including tax effect of temporary differences ........... 17,752,000 19,389,000
------------ ------------
18,252,000 19,836,000
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and improvements ........................................................... 9,253,000 9,995,000
Buildings and leasehold improvements ............................................ 69,178,000 67,129,000
Machinery and equipment ......................................................... 202,199,000 188,777,000
Furniture and fixtures .......................................................... 22,422,000 20,358,000
Construction in progress ........................................................ 18,854,000 9,158,000
------------ ------------
321,906,000 295,417,000
Accumulated depreciation and investment grants of $355,000 in 1998
and $395,000 in 1997 .......................................................... 173,723,000 156,022,000
------------ ------------
148,183,000 139,395,000
------------ ------------
$561,920,000 $562,945,000
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
18
22
August 31, August 31,
1998 1997
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ................................................................... $ 4,000,000 $ 3,000,000
Current portion of long-term debt ............................................... -- 36,000
Accounts payable ................................................................ 58,640,000 63,095,000
U.S. and foreign income taxes payable ........................................... 9,865,000 12,244,000
Accrued payrolls, taxes and related benefits .................................... 18,073,000 17,139,000
Other accrued liabilities ....................................................... 16,607,000 16,227,000
------------ ------------
TOTAL CURRENT LIABILITIES .................................................... 107,185,000 111,741,000
------------ ------------
LONG-TERM DEBT .................................................................. 40,000,000 12,009,000
OTHER LONG-TERM LIABILITIES ..................................................... 35,704,000 32,309,000
DEFERRED INCOME TAXES ........................................................... 9,852,000 9,462,000
MINORITY INTEREST ............................................................... 2,908,000 4,023,000
STOCKHOLDERS' EQUITY:
Preferred stock, 5% cumulative, $100 par value, authorized,
issued and outstanding - 10,689 shares in 1998 and 1997 ...................... 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 in 1998 and 38,342,867 shares in 1997 ............. 38,347,000 38,343,000
Other capital ................................................................... 45,778,000 44,412,000
Cumulative foreign currency translation adjustment .............................. (8,917,000) (6,573,000)
Retained earnings ............................................................... 395,746,000 361,591,000
Treasury stock, at cost, 5,068,862 shares in 1998 and 2,112,674 shares in 1997 .. (103,758,000) (44,289,000)
Unearned stock grant compensation ............................................... (1,994,000) (1,152,000)
------------ ------------
COMMON STOCKHOLDERS' EQUITY ..................................................... 365,202,000 392,332,000
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................................... 366,271,000 393,401,000
------------ ------------
$561,920,000 $562,945,000
============ ============
19
23
A. Schulman, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended August 31,
============= ================================
1998 1997 1996
Provided from (used in) operating activities:
Net income $ 50,143,000 $ 50,744,000 $ 42,177,000
Items not requiring the current use of cash:
Cumulative effect of accounting change 2,007,000 -- --
Depreciation 17,817,000 17,800,000 18,130,000
Non-current deferred taxes 192,000 1,266,000 2,410,0000
Foreign pension and other deferred compensation 2,129,000 2,284,000 2,654,000
Postretirement benefit obligation 814,000 774,000 820,000
Changes in working capital:
Accounts receivable 1,531,000 (16,753,000) (10,190,000)
Inventories (3,180,000) (27,794,000) 39,603,000
Prepaids (3,209,000) (4,417,000) (1,126,000)
Accounts payable (2,517,000) 21,849,000 (8,015,000)
Income taxes (1,306,000) 2,385,000 (4,058,000)
Accrued payrolls and other accrued liabilities 721,000 1,199,000 1,381,000
Changes in other assets and other long-term liabilities (1,341,000) (3,791,000) (161,000)
------------ ------------ ------------
Net cash provided from operating activities 63,801,000 45,546,000 83,625,000
------------ ------------ ------------
Provided from (used in) investing activities:
Expenditures for property, plant and equipment (30,987,000) (27,201,000) (18,542,000)
Disposals of property, plant and equipment 812,000 1,428,000 529,000
Purchases of short-term investments (8,160,000) (10,893,000) (173,573,000)
Proceeds from sales of short-term investments 10,957,000 41,504,000 196,446,000
------------ ------------ ------------
Net cash provided from (used in) investing activities (27,378,000) 4,838,000 4,860,000
------------ ------------ ------------
Provided from (used in) financing activities:
Cash dividends paid (15,946,000) (15,335,000) (13,958,000)
Increase (decrease) of notes payable 1,000,000 (4,000,000) (10,800,000)
Reduction of long-term debt (45,000) (28,037,000) (35,039,000)
Increase of long-term debt 28,000,000 -- --
Exercise of stock options 101,000 -- 5,656,000
Investment grants from foreign countries 70,000 -- 255,000
Increase (decrease) in minority interest, net of distributions (326,000) 2,085,000 355,000
Purchase of treasury stock (59,469,000) (32,226,000) (1,225,000)
Redemption of preferred stock -- (2,000) --
------------ ------------ ------------
Net cash used in financing activities (46,615,000) (77,515,000) (54,756,000)
------------ ------------ ------------
Effect of exchange rate changes on cash 1,811,000 (17,277,000) (4,171,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (8,381,000) (44,408,000) 29,558,000
Cash and cash equivalents at beginning of year 69,147,000 113,555,000 83,997,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 60,766,000 $ 69,147,000 $113,555,000
============ ============ ============
Cash paid during the year for:
Interest $ 1,842,000 $ 3,388,000 $ 4,795,000
Income Taxes $ 36,069,000 $ 30,760,000 $ 32,227,000
The accompanying notes are an integral part of the consolidated financial
statements.
24
A. Schulman, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of A. Schulman,
Inc. and its domestic and foreign subsidiaries. All significant intercompany
transactions have been eliminated.
Minority interest represents a 30% equity position of Mitsubishi Chemical MKV
Co. 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.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments purchased with a maturity of three months or
less are considered to be cash equivalents. Such investments amounted to
$40,036,000 at August 31, 1998 and $61,679,000 at August 31, 1997. Investments
with maturities between three and twelve months are considered to be short-term
investments. Investments are placed with numerous financial institutions having
good credit ratings. The recorded amount of these investments approximates fair
value.
DEPRECIATION
It is the Company's policy to depreciate the cost of property, plant and
equipment over the estimated useful lives of the assets generally using the
straight-line method. The estimated useful lives used in the computation of
depreciation are as follows:
Buildings and leasehold improvements 10 to 40 years
Machinery and equipment 5 to 10 years
Furniture and fixtures 10 years
The cost of property sold or otherwise disposed of is eliminated from the
property accounts and the related reserve accounts, with recognition of gain or
loss.
Maintenance and repair costs are charged against income. The cost of renewals
and betterments is capitalized in the property accounts.
INVENTORIES
The Company and its subsidiaries do not distinguish between raw materials and
finished goods because numerous products which can be sold as finished goods are
also used as raw materials in the production of other inventory items.
GOODWILL
Net goodwill of $6,636,000 is being amortized over 5 to 25 years using the
straight-line method and is included in deferred charges.
INCOME TAXES
Income taxes are recognized during the year in which transactions enter into
the determination of financial statement income. Accordingly, deferred taxes are
provided for temporary differences between the book and tax bases of assets and
liabilities.
RETIREMENT PLANS
The Company has several pension plans covering hourly employees in the U.S.
and certain employees in foreign countries. For certain plans in the U.S.,
pension funding is based on an amount paid to trust funds at an agreed rate for
each hour for which employees are paid. For other U.S. plans, the policy is to
fund amounts to cover current cost and amortize prior service costs over
approximately 30 years.
Generally, the foreign plans accrue the current and prior service costs
annually. In certain countries, funding is not required and the liability for
such pensions is included in other long-term liabilities.
The Company also has deferred profit sharing plans for its North American
salaried employees for which contributions are determined at the discretion of
the Board of Directors.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign
subsidiaries, except those subsidiaries located in highly inflationary
economies, are measured using local currency as the functional currency. Assets
and liabilities of these subsidiaries are translated at the exchange rate in
effect at each year-end. Income statement accounts are translated at the average
rate of exchange prevailing during the year. The cumulative foreign currency
translation adjustment account in stockholders' equity includes primarily
translation adjustments arising from the use of different exchange rates on the
balance sheet from period to period. For subsidiaries operating in highly
inflationary economies, any translation adjustments are included in net income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK BASED COMPENSATION
Effective September 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"). As provided for under this statement, the Company has elected to continue
to account for stock based compensation under the provisions of Accounting
Principles Boards Opinion No. 25, "Accounting for Stock Issued to Employees."
Compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. Refer to Note 8.
NOTE 2 -- INVESTMENT GRANTS
The Company has received investment grants from various European countries.
These grants have been provided to subsidize a portion of the Company's European
manufacturing facilities. The total cost of the facilities has been included in
plant and equipment and the amount of the grants has been included with
accumulated depreciation in the financial statements. The entire cost of the
facilities is depreciated over their estimated useful life and the investment
grants are amortized against the related depreciation charges. The amortization
of these grants amounted to $123,000 in 1998, $123,000 in 1997 and $119,000 in
1996.
21
25
NOTE 3 -- LONG-TERM DEBT AND CREDIT ARRANGEMENTS
August 31,
1998 1997
=========== ===========
A. Schulman, Inc.:
Revolving credit loan, 5.82% in 1998
and 1997 ............................ $40,000,000 $12,000,000
Notes payable of foreign subsidiary:
5% payable in French Franc ............ -- 45,000
----------- -----------
40,000,000 12,045,000
Less current portion ..................... -- 36,000
----------- -----------
$40,000,000 $12,009,000
=========== ===========
The revolving credit agreement, as amended on August 14, 1997, provides for
borrowings of up to $100,000,000 on a revolving credit basis through August 14,
2002. A facility fee of 7 1/2 basis points must be paid to the banks. Under the
terms of this agreement, approximately $58,000,000 of retained earnings was
available for the payment of cash dividends at August 31, 1998.
The Company has $34,000,000 of unsecured short-term lines of credit from
various domestic banks. Short-term borrowings of $4,000,000 with a weighted
average interest rate of 6.23% at August 31, 1998 and $3,000,000 with a weighted
average interest rate of 5.98% at August 31, 1997 were outstanding under these
domestic lines.
The Company has $30,848,000 of unsecured short-term foreign lines of credit
available to its subsidiaries at August 31, 1998. No foreign short-term
borrowings were outstanding at August 31, 1998 or 1997.
NOTE 4 -- FOREIGN CURRENCY FORWARD CONTRACTS
The Company enters into forward foreign exchange contracts as a hedge against
amounts due or payable in foreign currencies. These contracts limit the
Company's exposure to fluctuations in foreign currency exchange rates. Any gains
or losses associated with these contracts as well as the offsetting gains or
losses from the underlying assets or liabilities hedged are recognized on the
foreign currency transaction line in the Consolidated Statement of Income. The
Company does not hold or issue foreign exchange contracts for trading purposes.
The following table presents a summary of foreign exchange contracts
outstanding as of August 31, 1998 and August 31, 1997:
1998 1997
=========================== ===========================
Contract Fair Contract Fair
Amount Value Amount Value
=========== =========== =========== ===========
Buy Currency:
German mark.... $ 1,339,000 $ 1,339,000 $ 1,265,000 $ 1,131,000
All other...... 418,000 419,000 1,371,000 1,398,000
----------- ----------- ----------- -----------
$ 1,757,000 $ 1,758,000 $ 2,636,000 $ 2,529,000
=========== =========== =========== ===========
Sell Currency:
German mark.... $27,874,000 $27,731,000 $34,724,000 $34,143,000
Italian lira... 8,641,000 8,601,000 6,041,000 6,123,000
British pound.. 9,584,000 8,994,000 658,000 643,000
French franc... 10,397,000 10,395,000 4,891,000 4,907,000
U.S. dollar.... 2,516,000 2,508,000 3,902,000 3,966,000
All other...... 1,080,000 1,079,000 531,000 533,000
----------- ----------- ----------- -----------
$60,092,000 $59,308,000 $50,747,000 $50,315,000
=========== =========== =========== ===========
The fair value of foreign exchange contracts was estimated by obtaining
quotes from banks. Foreign exchange contracts are entered into with several
financial institutions having good credit ratings and generally have maturities
of less than nine months.
NOTE 5 -- INCOME TAXES
Income before taxes and cumulative effect of accounting change is as follows:
Year Ended August 31,
1998 1997 1996
=========== =========== ===========
Domestic .............. $11,308,000 $ 8,470,000 $ 4,876,000
Foreign ............... 75,021,000 77,812,000 66,096,000
----------- ----------- -----------
$86,329,000 $86,282,000 $70,972,000
=========== =========== ===========
The provisions for U.S. and foreign income taxes consist of the following:
Year Ended August 31,
1998 1997 1996
============ ============ ============
Current taxes:
U.S ............... $ 4,255,000 $ 3,402,000 $ 1,764,000
Foreign ........... 30,986,000 32,812,000 26,946,000
------------ ------------ ------------
35,241,000 36,214,000 28,710,000
------------ ------------ ------------
Deferred taxes:
U.S ............... (405,000) (1,357,000) 72,000
Foreign ........... (657,000) 681,000 13,000
------------ ------------ ------------
(1,062,000) (676,000) 85,000
------------ ------------ ------------
$ 34,179,000 $ 35,538,000 $ 28,795,000
============ ============ ============
A reconciliation of the statutory U.S. federal income tax rate with the
effective tax rates of 39.6% in 1998, 41.2% in 1997 and 40.6% in 1996 is as
follows:
1998 1997 1996
% of % of % of
Pretax Pretax Pretax
(in thousands) Amount Income Amount Income Amount Income
============== ===============================
Statutory U.S.
tax rate ............... $ 30,215 35.0% $30,199 35.0% $24,840 35.0%
Amount of
foreign
income taxes
in excess of
U.S. taxes at
statutory rate ........ 2,452 2.8 4,751 5.5 4,208 5.9
Other, net .............. 1,512 1.8 588 .7 (253) (.3)
-------------- ------------------------------
$ 34,179 39.6% $35,538 41.2% $28,795 40.6%
============== ==============================
22
26
Deferred tax assets and (liabilities) consist of the following at August 31,
1998 and August 31, 1997:
(in thousands) 1998 1997
======== ========
Pensions ..................................... $ 2,559 $ 2,450
Inventory reserves ........................... 2,585 2,259
Bad debt reserves ............................ 848 1,217
Accruals ..................................... 4,044 3,181
Dividends to be received ..................... 888 709
Postretirement benefits other than pensions .. 4,501 4,216
Foreign tax credit carryforwards ............. 5,968 5,937
Alternative minimum tax carryforwards ........ 1,828 1,684
Other ........................................ 2,998 2,715
-------- --------
Gross deferred tax assets .................... 26,219 24,368
Valuation allowance .......................... (5,968) (5,937)
-------- --------
Total deferred tax assets .................... 20,251 18,431
-------- --------
Depreciation ................................. (16,272) (15,365)
Other ........................................ -- (143)
-------- --------
Gross deferred tax liabilities ............... (16,272) (15,508)
-------- --------
$ 3,979 $ 2,923
======== ========
The valuation allowance is for foreign tax credit carryforward benefits which
are not likely to be utilized. The foreign tax credit carryforwards will expire
in periods from 2001 to 2002.
The tax effect of temporary differences included in prepaids was $11,282,000
and $9,996,000 at August 31, 1998 and 1997 respectively. Deferred charges also
included $2,549,000 and $2,389,000 from the tax effect of temporary differences
at August 31, 1998 and 1997 respectively.
At August 31, 1998, no taxes have been provided on the undistributed earnings
of certain foreign subsidiaries amounting to $180,192,000 because the Company
intends to reinvest these earnings.
NOTE 6 -- RETIREMENT PLANS
The total expense for all retirement plans was $6,845,000 in 1998, $6,191,000
in 1997 and $6,009,000 in 1996.
The components of pension expense are as follows:
Year Ended August 31,
=========== =========== ===========
1998 1997 1996
----------- ----------- -----------
Defined Benefit Plans:
Service cost-benefits earned
during the period ............ $ 1,376,000 $ 1,372,000 $ 1,402,000
Interest accrued on projected
benefit obligation ........... 1,757,000 1,675,000 1,783,000
Actual return on assets ...... (393,000) (681,000) (414,000)
Net amortization and deferral 39,000 268,000 242,000
----------- ----------- -----------
2,779,000 2,634,000 3,013,000
Defined contribution plans ..... 4,066,000 3,557,000 2,996,000
----------- ----------- -----------
Net periodic pension cost ...... $ 6,845,000 $ 6,191,000 $ 6,009,000
=========== =========== ===========
The following table presents the funded status of the defined benefit plans as
of August 31, 1998 and August 31, 1997:
1998 1997
========================== ============================
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
------------- ----------- ------------- -----------
Actuarial present value of benefit obligations:
Vested benefit obligation .................................... $ 752,000 $ 21,145,000 $4,551,000 $ 13,765,000
Non-vested benefit obligation ................................ 79,000 2,221,000 -- 1,929,000
---------- ------------ ---------- ------------
Accumulated benefit obligation. .............................. $ 831,000 $ 23,366,000 $4,551,000 $ 15,694,000
========== ============ ========== ============
Projected benefit obligation ................................... $1,455,000 $ 27,645,000 $6,165,000 $ 17,668,000
Plan assets at fair value ...................................... 848,000 6,095,000 4,576,000 1,148,000
---------- ------------ ---------- ------------
Projected benefit obligation in excess of plan assets .......... (607,000) (21,550,000) (1,589,000) (16,520,000)
Unrecognized net liability at date of adoption of SFAS No. 87 .. 348,000 1,167,000 342,000 1,341,000
Unrecognized prior service cost ................................ -- 646,000 49,000 399,000
Unrecognized net loss (gain) ................................... 32,000 40,000 1,055,000 (2,447,000)
Adjustment required to recognize minimum liability ............. -- (915,000) -- (716,000)
---------- ------------ ---------- ------------
Accrued pension cost ........................................... $ (227,000) $(20,612,000) $ (143,000) $(17,943,000)
========== ============ ========== ============
Significant Assumptions: ....................................... U.S.-1998 Foreign-1998 U.S.-1997 Foreign-1997
---------- ------------ ---------- ------------
Discount rate .................................................. 7.0% 6.0% - 7.0% 7.5% 7.0%- 8.0%
Expected rate of return on assets .............................. 9.5% 0.0% - 9.5% 9.5% 0.0%-11.0%
Rate of increase in compensation levels -- 3.0% - 5.0% -- 3.0%- 7.0%
23
27
In respect to multiemployer plans in the U.S., ERISA extends the Company's
liability for benefit obligations in the event of termination or withdrawal. The
extent of any potential unfunded liability is not determinable at this time.
The Company has agreements with three current employees that upon
retirement, or death or disability prior to retirement, it shall make ten
payments of $100,000 each to two employees or their beneficiaries for a ten year
period and $75,000 to one employee or his beneficiary for a ten year period.
Under these agreements, $2,000,000 is vested and $750,000 will vest over the
next three to five years. However, vesting and payments may be accelerated under
certain conditions. The Company has provided $131,000 in 1998, 1997 and 1996 to
cover the current cost for such agreements. In connection with such agreements,
the Company owns and is the beneficiary of life insurance policies amounting to
$3,500,000. The amounts provided are included in other long-term liabilities.
NOTE 7 -- POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company provides postretirement health care and life insurance benefits
to certain domestic employees. The postretirement benefit cost includes the
following components:
Year Ended August 31,
==========================================
1998 1997 1996
---------- --------- ---------
Service cost -- benefits earned
during the period ........... $ 653,000 $ 542,000 $ 550,000
Interest cost on projected
benefit obligation .......... 697,000 607,000 572,000
Net amortization .............. (133,000) (152,000) (135,000)
---------- --------- ---------
$1,217,000 $ 997,000 $ 987,000
========== ========= =========
The Company's postretirement health care and life insurance plans are not
funded. The status of the plans at August 31, 1998 and August 31, 1997 is as
follows:
1998 1997
=========== ===========
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees ........................................ $ 1,900,000 $ 2,089,000
Fully eligible active plan participants ......... 1,934,000 1,708,000
Other active plan participants .................. 7,450,000 5,030,000
----------- -----------
11,284,000 8,827,000
Unrecognized net gain ............................. 510,000 1,447,000
Unrecognized prior service cost ................... 1,067,000 1,773,000
----------- -----------
Net postretirement benefit liability .............. $12,861,000 $12,047,000
=========== ===========
The net postretirement benefit liability is included in other long-term
liabilities.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.5% in 1998, 10% in 1997 and 10.5% in
1996, gradually declining to 6% in 2005 and remaining at that level thereafter.
A one-percentage-point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation by
$1,474,000 at August 31, 1998 and the postretirement benefit cost by $158,000
for the year then ended.
The discount rate used in determining the accumulated postretirement benefit
obligation at August 31 was 7.0% in 1998 and 7.5% in 1997.
NOTE 8 -- INCENTIVE STOCK PLANS
Effective in December 1991, the Company adopted the 1991 Stock Incentive Plan
and authorized 1,875,000 shares for future grants. The 1991 Plan provides for
the grant of incentive stock options, nonqualified stock options and restricted
stock awards. The option price of incentive stock options is the fair market
value of the common shares on the date of grant. In the case of nonqualified
stock options, the Company intends to grant options at fair market value on the
date of grant. However, the Plan does provide that the option price may not be
less than 50% of the fair market value of the common shares on the date of
grant. Stock options may be exercised as determined by the Company, but in no
event prior to six months following the date of grant or after the tenth
anniversary date of grant. At August 31, 1998, there were 466,531 shares
available for issuance under the 1991 Plan.
Effective in October 1992, the Company adopted the 1992 Non-Employee
Directors' Stock Option Plan and authorized 125,000 shares for future grants.
The 1992 Plan provides for the grant of 875 nonqualified stock options to each
non-employee director on the first business day of February of each year. The
option price is the fair market value of the common shares on the first business
day immediately preceding the date of grant. All options become exercisable at
the rate of 25% per year, commencing on the first anniversary of the date of
grant of the option. Each option expires five years from the date of grant. At
August 31, 1998, there were 87,125 shares available for issuance under the 1992
Plan.
The following is a summary with respect to option activity for all of the
plans:
Year Ended August 31,
=======================================
1998 1997
-------------------- -----------------
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
--------- ----- ------- -----
Outstanding at beginning
of year ........................ 915,695 $22.94 768,658 $24.86
Granted during the year .......... 307,600 19.07 261,450 18.58
Exercised during the year ........ (4,500) 22.50 --
Cancelled during the year ........ (161,870) 24.43 (114,413) 25.87
--------- -------
Outstanding at end of year ....... 1,056,925 21.59 915,695 22.94
========= =======
Exercisable at end of year ....... 416,996 24.10 387,221 25.01
========= =======
24
28
Under the 1991 Plan, 35,125 shares of restricted stock were granted on August
18, 1992, 34,000 shares were granted on August 19, 1994, 43,150 shares were
granted on July 11, 1996 and 67,100 shares were granted on July 8, 1998. The
fair market value on the date of grant in 1992 was $26 per share, 1994 was
$26.25 per share, 1996 was $23 per share and in 1998 was $18.91 per share. These
shares vest five years following the date of grant so long as the holder remains
employed by the Company. Unearned compensation representing the fair market
value of the shares at the date of grant is charged to income over the five year
vesting period. Compensation expense for restricted stock was $428,000 in 1998,
$533,000 in 1997 and $387,000 in 1996.
The following table summarizes information about options outstanding at
August 31, 1998:
Weighted Average
------------------------
Grant Options Options Exercise Remaining
Date Outstanding Exercisable Price Life (Years)
- ----------------------------------------------------------------
8/94 126,350 126,350 $26.25 1
8/95 159,550 119,663 25.50 2
7/96 189,000 94,500 23.00 3
4/97 248,175 62,044 18.50 3.7
7/98 298,600 -- 18.91 5
All other 35,250 14,439 24.00 2.8
No expense has been charged to income relating to stock options. If the fair
value method of accounting for stock options under SFAS 123 had been used, the
after tax expense relating to the stock options would have been $405,000, or
$.01 per share, in 1998, $249,000, or $.01 per share, in 1997 and $28,000, or no
impact on earnings per share, in 1996. Pro forma net income would have been
$49,738,000 in 1998, $50,495,000 in 1997 and $42,149,000 in 1996. The pro forma
amounts listed above do not take into consideration the pro forma compensation
expense related to grants made prior to fiscal 1996. The weighted average fair
value at the date of grant was $5.31, $5.84 and $7.22 for options granted in
1998, 1997 and 1996.
Under SFAS 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option- pricing model. The following weighted
average assumptions were used for grants:
Year Ended August 31,
-----------------------------
1998 1997 1996
---- ---- ----
Expected life (years) ... 5 5 5
Interest rate ........... 5.4% 6.7% 6.7%
Volatility .............. 23.7% 26.9% 27.1%
Dividend yield .......... 1.25% 1.33% 1.33%
NOTE 9 -- EARNINGS PER COMMON SHARE
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.
Under both the basic and diluted earnings per share calculations, reported
net income is reduced by preferred dividends of $53,000. The weighted-average
number of common shares used is as follows:
Year Ended August 31,
===================================
1998 1997 1996
---------- ---------- ----------
Basic ............. 35,236,098 37,125,345 37,584,561
Diluted ........... 35,275,327 37,149,595 37,591,747
The 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.
The following stock equivalents are not included in the diluted earnings per
share calculation because their effects are antidilutive:
Year Ended August 31,
===================================
1998 1997 1996
---------- ---------- ----------
Stock equivalents ...... 1,158,096 968,595 873,747
The Company repurchased approximately one million shares of its common stock
subsequent to August 31, 1998.
NOTE 10 -- CAPITAL STOCK AND STOCKHOLDER RIGHTS PLAN
The Special Stock of 1,000,000 shares was authorized with such preferences or
special terms and for such consideration as may be determined at the discretion
of the Board of Directors.
In January 1996, the Company adopted a Shareholder Rights Plan, and reserved
100,000 shares of Special Stock for use under such Plan. Under this Plan, one
Right shall be attached to each share of Common Stock of the Company. Initially,
the Rights are not exercisable and automatically trade with the Common Stock.
However, 10 days after a person or group acquires 15% or more of the Company's
Common Stock, or 10 business days after a person or group commences a tender or
exchange offer that would result in such person or group owning 15% or more of
the outstanding shares of Common Stock of the Company (even if no purchases
actually occur), whichever is earlier, the Rights will become exercisable.
25
29
When the Rights first become exercisable, each Right will entitle the holder
thereof to buy from the Company one share of Special Stock for $85.00 (subject
to adjustment thereafter). However, if any person or entity acquires 15% or more
of the Company's Common Stock, each Right not owned by a 15%-or-more stockholder
would become exercisable for a certain number of shares of Common Stock of the
Company in lieu of one share of Special Stock. The number of shares of Common
Stock would be that having at that time, a market value of two times the then
current exercise price of the Right. If the Company is involved in a merger or
other business combination with or into another person or entity in which the
Company's Common Stock is changed into or exchanged for common stock of such
other person or entity, or if the Company sells 50% or more of its assets or
earning power to another person or entity, at any time after the Rights become
exercisable, each Right will entitle the holder thereof to buy such number of
shares of common stock of such other person or entity as have a market value of
twice the then current exercise price of each Right.
The Company may redeem the Rights at a price of $.01 per Right at any time
prior to the 10th business day after public announcement of the acquisition by
any person or entity of 15% or more of the Company's Common Stock. The Rights
will expire on January 25, 2006 unless earlier redeemed by the Company. At no
time will the Rights have any voting power.
NOTE 11 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE
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. The
cumulative effect of this change to September 1, 1997 was to decrease the pretax
income by $3,237,000 and net income by $2,007,000 or $.06 per share and is
accounted for as a cumulative effect of a change in accounting method.
NOTE 12 -- LEASES
Total rental expense was $3,398,000 in 1998, $3,021,000 in 1997 and
$2,847,000 in 1996. The future minimum rental commitments for non-cancellable
leases excluding obligations for taxes, insurance, etc. are as follows:
Year ended August 31, Minimum rental
===============================================================
1999 $2,320,000
2000 2,465,000
2001 1,637,000
2002 802,000
2003 352,000
Later years 39,000
----------
$7,615,000
==========
NOTE 13 -- BUSINESS SEGMENT INFORMATION
The Company is engaged in the sale of plastic resins in various forms which
are used as raw materials by its customers. The Company considers its business
to be a single industry segment.
A summary of operating information by geographic area for the three years
ended August 31, 1998 is as follows:
Adjust-
ments and
North Europe, Elimina- Consoli-
(in thousands) America etc. tions dated
-------- -------- ------- ---------
AUGUST 31, 1998
Sales to unaffiliated
customers ....................... $421,188 $572,206 -- $ 993,394
Inter-geographic sales ............ 693 612 $(1,305) --
-------- -------- ------- ---------
Total sales ....................... $421,881 $572,818 $(1,305) $ 993,394
======== ======== ======= =========
Operating income .................. $ 36,247 $ 64,945 -- $ 101,192
======== ======== =======
Interest expense .................. (1,933)
Corporate expense less revenues ... (14,599)
Foreign currency transaction gains 1,669
---------
Income before taxes ............... $ 86,329
=========
Identifiable assets ............... $268,734 $290,884 $(1,162) $ 558,456
======== ======== =======
Corporate assets .................. 3,464
---------
Total assets ...................... $561,920
=========
AUGUST 31, 1997
Sales to unaffiliated
customers ....................... $446,832 $549,544 -- $ 996,376
Inter-geographic sales ............ 3,253 497 $(3,750) --
-------- -------- ------- ---------
Total sales ................... $450,085 $550,041 $(3,750) $ 996,376
======== ======== ======= =========
Operating income .................. $ 31,676 $ 66,495 -- $ 98,171
======== ======== =======
Interest expense .................. (3,143)
Corporate expense less revenues ... (9,502)
Foreign currency transaction gains 756
---------
Income before taxes ............... $ 86,282
=========
Identifiable assets ............... $280,344 $282,533 $ (945) $ 561,932
======== ======== =======
Corporate assets .................. 1,013
---------
Total assets ...................... $ 562,945
=========
AUGUST 31, 1996
Sales to unaffiliated
customers ....................... $415,322 $561,372 -- $ 976,694
Inter-geographic sales ............ 2,440 334 $(2,774) --
-------- -------- ------- ---------
Total sales .................... $417,762 $561,706 $(2,774) $ 976,694
======== ======== ======= =========
Operating income .................. $ 26,511 $ 55,823 -- $ 82,334
======== ======== =======
Interest expense .................. (4,192)
Corporate expense less revenues ... (7,113)
Foreign currency transaction losses (57)
---------
Income before taxes ............... $ 70,972
=========
Identifiable assets ............... $261,942 $361,302 $ (573) $ 622,671
======== ======== =======
Corporate assets .................. 707
---------
Total assets ...................... $ 623,378
=========
26
30
The North American geographic area includes operations in the United States,
Canada and Mexico. The Company's European area includes operations conducted in
Belgium, France, Germany, Poland, Hungary, Indonesia, Switzerland and the United
Kingdom.
Inter-geographic sales are based on selling prices which are negotiated at
the time of the transaction. These sales have no significant effect on the
operating income of any geographic segment.
Operating income is total revenues less operating expenses, gains on
disposals of properties and excludes corporate expense and revenues, interest
expense, loss or gain on foreign currency transactions, and income taxes.
General corporate expense and revenue are primarily domestic central office
administrative expenses less other income.
Assets of geographic segments represent those assets identified with the
operation of each segment. Corporate assets consist mainly of cash and other
miscellaneous investments.
NOTE 14 -- CONTINGENCIES
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.
NOTE 15 -- QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
(In thousands, except per share data)
Quarter ended Year ended
------------------------------------------------ ----------
Nov. 30, Feb. 28, May 31, Aug. 31, Aug. 31,
1997 1998 1998 1998 1998
================================================ ==========
Net Sales .......... $264,208 $239,840 $256,810 $232,536 $993,394
Gross Profit ....... 43,819 40,878 43,989 40,852 169,538
Income Before
Cumulative Effect
of Accounting
Change ............ 12,533 10,985 13,533 15,099 52,150
Cumulative Effect
of Accounting
Change ............ (2,007) -- -- -- (2,007)
------- ------- ------- ------- -------
Net Income ......... $10,526 $10,985 $13,533 $15,099 $50,143
======= ======= ======= ======= =======
Basic and Diluted
Earnings Per Share
of Common Stock:
Income Before
Cumulative Effect
of Accounting
Change .......... $.35 $.31 $.38 $.44 $1.48
Cumulative Effect
of Accounting
Change .......... (.06) -- -- -- (.06)
------- ------- ------- ------- -------
Net Income ...... $.29 $.31 $.38 $.44 $1.42
======= ======= ======= ======= =======
Quarter ended Year ended
------------------------------------------------ ----------
Nov. 30, Feb. 28, May 31, Aug. 31, Aug. 31,
1996 1997 1997 1997 1997
================================================ ==========
Net Sales .......... $257,807 $241,125 $259,231 $238,213 $996,376
Gross Profit ....... 42,243 36,898 43,869 40,021 163,031
Net Income ......... 11,982 9,747 13,722 15,293 50,744
Basic and Diluted
Earnings Per Share
of Common Stock .. $.32 $.26 $.37 $.42 $1.37
A. Schulman, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
[PricewaterhouseCoopers Logo]
To the Board of Directors and Stockholders
of A. Schulman, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of A. Schulman, Inc.
and its subsidiaries at August 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
October 15, 1998
27
31
A. Schulman, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1998
Net sales were $993.4 million in 1998, a decrease of $3.0 million over 1997
sales of $996.4 million. A comparison of net sales is as follows:
(In Thousands)
======== ==================
Increase
1998 1997 (Decrease)
Manufacturing ....... $661,280 $661,152 $ 128
Merchant ............ 178,482 176,120 2,362
Distribution ........ 153,632 159,104 (5,472)
-------- -------- -------
$993,394 $996,376 $(2,982)
======== ======== =======
Certain items previously reported have been reclassified to conform with the
1998 presentation.
The translation effect from the stronger U.S. dollar reduced sales by $45.8
million in 1998.
Worldwide tonnage was 7% higher than in 1997. European tonnage increased 14%
while North American tonnage was approximately the same as in 1997. North
American tonnage declined during the 1998 fourth quarter due to the General
Motors strike.
Gross margins on sales were 17.1% in 1998 compared with 16.4% in 1997. The
higher margins were the result of lower resin prices and capacity utilization
which improved year to year from 83% to 90% for fiscal 1998. A comparison of
gross profit is as follows:
(In Thousands)
======== ==================
Increase
1998 1997 (Decrease)
Manufacturing ....... $128,995 $120,400 $ 8,595
Merchant ............ 21,333 22,421 (1,088)
Distribution ........ 19,210 20,210 (1,000)
-------- -------- -------
$169,538 $163,031 $ 6,507
======== ======== =======
Certain items previously reported have been reclassified to conform with the
1998 presentation.
Selling, general and administrative expenses increased $6.8 million in 1998.
During 1998, the Company incurred $2.4 million of business process
re-engineering costs related to the redesign of its business processes in North
America. These types of charges had been capitalized prior to fiscal 1998. In
addition, higher compensation levels and additional costs were incurred in 1998
to support the increase in sales volume.
Interest expense decreased approximately $1.2 million in 1998 due to lower
levels of borrowing.
Foreign currency transaction gains were primarily due to changes in the value
of currencies within the European Monetary System, as well as the U.S. dollar,
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 was down because of lower interest income resulting from a
decline in European temporary investments.
The effective tax rate in 1998 was 39.6% compared with 41.2% 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 strengthening in the value of the U.S. dollar decreased net income by
approximately $2,180,000 or $.06 per share in 1998.
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.
Earnings in Europe were off 3% for 1998 due to lower profit margins and the
adverse effect of translation from the strength of the U.S. dollar.
Profits in North America before the cumulative effect of the accounting
change improved 26% for 1998. Profit margins in North America were higher due
to a number of factors, including an increase in plant utilization from 77% to
86% in the current year. Certain high cost manufacturing lines in the United
States were closed during 1998.
The European operations currently have a good level of orders and
stabilization of the U.S. dollar at current levels should have a positive impact
on earnings.
In North America, although order levels have improved since the settlement of
the General Motors strike, there has been some moderating of business activity.
1997
Net sales for 1997 were $996.4 million or 2% higher than 1996 sales of $976.7
million. A comparison of net sales is as follows:
(In Thousands)
======== =================
Increase
1997 1996 (Decrease)
Manufacturing ....... $661,152 $634,414 $26,738
Merchant ............ 176,120 165,678 10,442
Distribution ........ 159,104 176,602 (17,498)
-------- -------- -------
$996,376 $976,694 $19,682
======== ======== =======
Certain items previously reported have been reclassified to conform with the
1998 presentation.
The translation effect from the stronger U.S. dollar decreased 1997 sales by
$57.5 million.
Worldwide tonnage for 1997 was 8.8% higher than 1996. Tonnage was up
approximately 10% in Europe and 7% in North America.
Gross margins on sales were 16.4% in 1997 compared with 15.4% in 1996. The
increase in 1997 gross profit margins was primarily derived from manufacturing.
The improvement in manufacturing margins was partially offset by lower margins
for distribution activities. A comparison of gross profit is as follows:
(In Thousands)
======== ==================
Increase
1997 1996 (Decrease)
Manufacturing ....... $120,400 $104,682 $15,718
Merchant ............ 22,421 20,206 2,215
Distribution ........ 20,210 25,730 (5,520)
-------- -------- -------
$163,031 $150,618 $12,413
======== ======== =======
Certain items previously reported have been reclassified to conform with the
1998 presentation.
Selling, general and administrative expenses decreased $2.6 million in 1997.
The strengthening of the U.S. dollar decreased these expenses by $4.9 million in
1997. In addition, bad debt provisions were lower in 1997. These reductions were
partially offset by higher compensation levels and additional costs to support
the increase in sales volume.
Interest expense decreased in 1997 due to lower levels of borrowing.
Other income was down because of lower interest income resulting from a
decline in European temporary investments.
Foreign currency transaction gains in 1997 resulted primarily from the
payment of dividends from affiliates outside the United States.
The minority interest on the Consolidated Statement of Income represents a
30% equity position of MKV America Inc., an affiliate of Mitsubishi Chemical MKV
Company, in a partnership with the Company. Earnings of the partnership
increased during 1997 due to the addition of a second manufacturing line.
28
32
The effective tax rate was 41.2% in 1997 and 40.6% in 1996. The 1997 tax rate
was higher primarily because of greater provisions for various international
issues.
The strengthening in the value of the U.S. dollar decreased net income by
approximately $3.8 million or $.10 per share in 1997.
Earnings in Europe increased $4.6 million or 13% in 1997 despite the adverse
translation effect from the stronger U.S. dollar. Overall, tonnage was up 10%
with especially strong results in the manufacturing operations where volume
increased 14%. European profit margins were up due to utilization rates close to
capacity.
North American earnings increased $4 million or 61% in 1997. Total tonnage
grew 7% and plant capacity utilization was approximately 77%.
FINANCIAL CONDITION
Historically, the Company's primary source of funds has been from operations.
It is expected that this source of cash flow will continue to provide a
substantial portion of the Company's future needs.
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
strengthening of the U.S. dollar during the fiscal year decreased this account
by approximately $2.3 million during 1998.
The following represent key measurements of the capital structure and
profitability of the Company:
(Dollars in Thousands
except per share data)
========= ======================
1998 1997 1996
Net worth ................................ $366,271 $393,401 $433,110
Book value per share ..................... $10.97 $10.83 $11.43
Ratio of long-term liabilities to capital 17.1% 10.1% 14.5%
Return on average net worth .............. 13.2% 12.3% 10.1%
Net income as a percent of sales ......... 5.0% 5.1% 4.3%
The ratio of long-term liabilities to capital is computed by dividing
long-term debt and other long-term liabilities by the sum of total stockholders'
equity plus long-term debt and other long-term liabilities. This ratio was
higher in 1998 primarily due to a $28 million increase in the outstanding debt
under the revolving credit agreement.
The return on average net worth is computed by dividing net income by the
average of the total stockholders' equity during the year. This ratio increased
in 1998 due to a reduction in net worth.
During 1998, the Company repurchased 2,956,188 shares of its common stock for
$59,469,000. In August 1998, the Board of Directors of the Company approved the
repurchase of an additional six million shares. The Company repurchased
approximately one million shares of its common stock subsequent to August 31,
1998. Subject to market conditions, the Company intends to continue repurchasing
its common stock in 1999.
Working capital and the current ratio are as follows:
(In Thousands)
======== ===================
1998 1997 1996
Working capital ....... $288,300 $291,973 $360,846
Current ratio ......... 3.7:1 3.6:1 4.4:1
The Company has a revolving credit agreement which provides for borrowings up
to $100 million through August 14, 2002. At August 31, 1998, $40 million was
outstanding under this facility. Also, short-term lines of credit are maintained
with various domestic and foreign banks. The unused commitment under these lines
was $60.8 million at August 31, 1998.
The Company's unfunded pension liability is approximately $22.2 million at
August 31, 1998. This amount is primarily due to a book reserve plan maintained
by the Company's German subsidiary. Under such plans, there is no separate
vehicle to accumulate assets to provide for the payment of benefits. The
benefits are paid directly by the Company to the participants. It is anticipated
that the German subsidiary will generate sufficient funds from operations to pay
these benefits in the future.
The Company enters into forward foreign exchange contracts as a hedge against
amounts due or payable in foreign currencies. These contracts limit the
Company's exposure to fluctuations in foreign currency exchange rates. Any gains
or losses associated with these contracts as well as the offsetting gains or
losses from the underlying assets or liabilities hedged are recognized on the
foreign currency transaction line in the Consolidated Statement of Income. The
Company estimates that a 10% change in foreign exchange rates at August 31, 1998
would have changed the fair value of the contracts by approximately $5.8
million. Changes in the fair value of forward exchange contracts are
substantially offset by changes in the fair value of the hedged positions. The
Company does not hold or issue foreign exchange contracts for trading purposes
or utilize any other types of derivative instruments.
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 in the years ahead.
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 the Company 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 within the European Monetary
System, as well as the U.S. dollar, Canadian dollar, Mexican peso and
Indonesian rupiah
- - Fluctuations in the prices of plastic resins and other raw materials
- - Changes in customer demand and requirements
29
33
A. Schulman, Inc.
TEN YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share data)
Year Ended August 31,
========== ======================================
1998 1997 1996 1995
Net sales .......................................................... $ 993,394 $ 996,376 $ 976,694 $1,027,458
Interest and other income .......................................... 3,072 4,998 6,075 7,099
---------- ---------- ---------- ----------
996,466 1,001,374 982,769 1,034,557
---------- ---------- ---------- ----------
Cost of sales ...................................................... 823,856 833,345 826,076 863,409
Other costs, expenses, etc ......................................... 86,281 81,747 85,721 81,336
---------- ---------- ---------- ----------
910,137 915,092 911,797 944,745
---------- ---------- ---------- ----------
Income before taxes and cumulative effect of accounting changes .... 86,329 86,282 70,972 89,812
Provision for U.S. and foreign income taxes ........................ 34,179 35,538 28,795 36,194
---------- ---------- ---------- ----------
Income before cumulative effect of accounting changes .............. 52,150 50,744 42,177 53,618
Cumulative effect of accounting changes (1) (2) .................... (2,007) -- -- --
---------- ---------- ---------- ----------
Net income ......................................................... $ 50,143 $ 50,744 $ 42,177 $ 53,618
========== ======================================
Total assets ....................................................... $ 561,920 $ 562,945 $ 623,378 $ 647,166
Long-term debt ..................................................... $ 40,000 $ 12,009 $ 40,054 $ 75,096
Total stockholders' equity ......................................... $ 366,271 $ 393,401 $ 433,110 $ 405,218
Average number of common shares outstanding, net of treasury shares:
Basic ........................................................ 35,236,098 37,125,345 37,584,561 37,544,408
Diluted ...................................................... 35,275,327 37,149,595 37,591,747 37,703,820
Diluted earnings per share:
Before cumulative effect of accounting changes ............... $ 1.48 $ 1.37 $ 1.12 $ 1.42
Cumulative effect of accounting changes (1) (2) .............. (0.06) -- -- --
Net income ................................................... $ 1.42 $ 1.37 $ 1.12 $ 1.42
Cash dividends per common share .................................... $ .45 $ .41 $ .37 $ .33
Book value per common share ........................................ $10.97 $10.83 $11.43 $10.75
(1) Effective September 1, 1992, the Company adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and SFAS 109,
"Accounting for Income Taxes."
(2) 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, $3,237,000 of such costs capitalized as of August 31,
1997 were written off in the quarter ending November 30, 1997. This
write-off, net of income taxes, amounted to $2,007,000 or $.06 per common
share and was accounted for as a change in accounting.
(3) Includes a gain of $887,000 or $.02 per share from life insurance proceeds
and a tax benefit of $945,000 or $.03 per share from a new U.S./German tax
treaty. This tax benefit included $466,000 or $.01 per share applicable to
1990 and $479,000 or $.01 per share applicable to prior years.
SUPPLEMENTAL INFORMATION
(In thousands of dollars)
Year Ended August 31,
================= ==========================================================================
1998 1997 1996 1995 1994
NET SALES
Manufacturing ..... $ 661,280 67% $ 661,152 66% $ 634,414 65% $ 624,917 61% $ 449,085 60%
Merchant Activities 178,482 18% 176,120 18% 165,678 17% 198,891 19% 149,798 20%
Distribution ...... 153,632 15% 159,104 16% 176,602 18% 203,650 20% 149,895 20%
----------------- --------------------------------------------------------------------------
Total ............. $ 993,394 100% $ 996,376 100% $ 976,694 100% $1,027,458 100% $ 748,778 100%
================= ==========================================================================
GROSS PROFIT
Manufacturing ..... $ 128,995 76% $ 120,400 74% $ 104,682 70% $ 109,537 66% $ 88,609 68%
Merchant Activities 21,333 13% 22,421 14% 20,206 13% 29,082 18% 22,582 17%
Distribution ...... 19,210 11% 20,210 12% 25,730 17% 25,430 16% 19,732 15%
----------------- --------------------------------------------------------------------------
Total ............. $ 169,538 100% $ 163,031 100% $ 150,618 100% $ 164,049 100% $ 130,923 100%
================= ==========================================================================
Certain items previously reported have been reclassified to conform with the
1998 presentation.
30
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Year Ended August 31,
====================================
1994 1993 1992
Net sales ..........................................................$ 748,778 $ 685,112 $ 732,170
Interest and other income .......................................... 7,456 8,103 6,778
---------- ---------- ----------
756,234 693,215 738,948
---------- ---------- ----------
Cost of sales ...................................................... 617,855 565,284 599,009
Other costs, expenses, etc ......................................... 67,939 65,480 66,838
---------- ---------- ----------
685,794 630,764 665,847
---------- ---------- ----------
Income before taxes and cumulative effect of accounting changes .... 70,440 62,451 73,101
Provision for U.S. and foreign income taxes ........................ 25,869 23,544 29,341
---------- ---------- ----------
Income before cumulative effect of accounting changes .............. 44,571 38,907 43,760
Cumulative effect of accounting changes (1) (2) .................... -- (2,169) --
---------- ---------- ----------
Net income .........................................................$ 44,571 $ 36,738 $ 43,760
=========== =======================
Total assets .......................................................$ 510,419 $ 407,865 $ 427,966
Long-term debt .....................................................$ 23,126 $ 10,149 $ 10,108
Total stockholders' equity .........................................$ 345,919 $ 294,209 $ 307,576
Average number of common shares outstanding, net of treasury shares:
Basic ........................................................37,438,118 37,325,547 37,024,548
Diluted ......................................................37,540,391 37,411,527 37,340,053
Diluted earnings per share:
Before cumulative effect of accounting changes ............... $1.19 $1.04 $1.17
Cumulative effect of accounting changes (1) (2) .............. -- (.06) --
Net income ................................................... $1.19 $ .98 $1.17
Cash dividends per common share .................................... $.286 $.248 $.216
Book value per common share ........................................ $9.21 $7.84 $8.26
======================================
1991 1990 1989
Net sales .......................................................... $ 736,007 $ 678,644 $ 624,410
Interest and other income .......................................... 4,083 2,409 1,675
---------- ---------- ----------
740,090 681,053 626,085
---------- ---------- ----------
Cost of sales ...................................................... 614,001 566,872 528,296
Other costs, expenses, etc ......................................... 55,876 50,644 43,000
---------- ---------- ----------
669,877 617,516 571,296
---------- ---------- ----------
Income before taxes and cumulative effect of accounting changes .... 70,213 63,537 54,789
Provision for U.S. and foreign income taxes ........................ 27,864 27,441 23,977
---------- ---------- ----------
Income before cumulative effect of accounting changes .............. 42,349 36,096 30,812
Cumulative effect of accounting changes (1) (2) .................... -- -- --
---------- ---------- ----------
Net income ......................................................... $ 42,349(3) $ 36,096 $ 30,812
============== ======================
Total assets ....................................................... $ 344,273 $ 328,210 $ 257,687
Long-term debt ..................................................... $ 9,000 $ 7,000 $ 10,000
Total stockholders' equity ......................................... $ 232,567 $ 223,973 $ 166,640
Average number of common shares outstanding, net of treasury shares:
Basic ........................................................ 36,963,010 37,699,043 37,674,290
Diluted ...................................................... 37,239,413 37,927,662 37,840,157
Diluted earnings per share:
Before cumulative effect of accounting changes ............... $1.14 $ .95 $ .81
Cumulative effect of accounting changes (1) (2) .............. -- -- --
Net income ................................................... $1.14(3) $ .95 $ .81
Cash dividends per common share .................................... $.186 $.153 $.135
Book value per common share ........................................ $6.26 $5.91 $4.39
CORPORATE HEADQUARTERS
3550 West Market Street
Akron, Ohio 44333
(330) 666-3751
www.aschulman.com
ANNUAL MEETING
of Stockholders will be held on
Thursday, December 10, 1998,
at 10 AM E.S.T., at the Fairlawn Country Club,
200 North Wheaton Road
Akron, Ohio 44313
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
BP Tower
27th Floor
200 Public Square
Cleveland, Ohio 44114-2301
STOCK LISTING
The common stock of
A. Schulman, Inc. is traded
and quoted through the
NASDAQ National Market
System. Symbol: SHLM
TRANSFER AGENT
First Chicago Trust Company
P.O. Box 2500
Jersey City NJ 07303-2500
Any questions regarding shareholder
records should be directed to:
First Chicago Trust Company
800-317-4445
http://www.fctc.com
fctc@em.fcnbd.com
The annual report to the Securities
and Exchange Commission,
Form 10-K, will be made available
upon request without charge.
Write:
Robert A. Stefanko,
Chairman and
Chief Financial Officer
A. Schulman, Inc.
3550 West Market Street
Akron, Ohio 44333
31
35
A. Schulman, Inc.
THE BOARD OF DIRECTORS
ROBERT A. STEFANKO
Chairman
TERRY L. HAINES
President and Chief Executive Officer
DR. PEGGY GORDON ELLIOTT
President, South Dakota State University
WILLARD R. HOLLAND
Chairman and Chief Executive Officer,
FirstEnergy Corp.
JAMES A. KARMAN
President, RPM, Inc.
JAMES S. MARLEN
Chairman, President and
Chief Executive Officer,
Ameron International Corporation
ALAN L. OCKENE
Former President and
Chief Executive Officer,
General Tire, Inc.
DR. PAUL CRAIG ROBERTS
Chairman,
The Institute for Political Economy
RENE C. ROMBOUTS
General Manager-Europe
ROBERT G. WALLACE
Former Executive Vice President
and Director,
Phillips Petroleum Company
EXECUTIVE OFFICERS
TERRY L. HAINES
President and Chief Executive Officer
ROBERT A. STEFANKO
Chairman and Chief Financial Officer
LARRY A. KUSHKIN
Executive Vice President --
International Automotive Operations
GORDON L. TRIMMER
Vice President --
North American Sales and Marketing
ALAIN C. ADAM
Vice President -- Automotive Marketing
LEONARD E. EMGE
Vice President -- Manufacturing
JOHN M. MYLES
Vice President --
North American Purchasing
BRIAN R. COLBOW
Treasurer
JAMES H. BERICK
Secretary
EUROPEAN OPERATIONS
RENE C. ROMBOUTS
General Manager -- Europe
GERALD M. WEINBERGER
Managing Director -- Germany
OTTO H. BRUDER
Managing Director -- France
RITSON D. GILLINGS
Managing Director -- United Kingdom
CORPORATE HEADQUARTERS
A. SCHULMAN, INC.
3550 West Market Street
Akron, OH 44333
(330) 666-3751
DOMESTIC OFFICES
NORTHEAST REGIONAL SALES OFFICE
367 Ghent Road, Suite 3C
Akron, OH 44333
(330) 666-3751
INTERNATIONAL AUTOMOTIVE
MARKETING CENTER
2100 East Maple Road
Birmingham, MI 48009-6524
(248) 643-6100
SOUTHEAST REGIONAL SALES OFFICE
424 B Gallimore Dairy Road
Greensboro, NC 27409
(336) 668-8081
MIDWEST REGIONAL SALES OFFICE
Embassy Plaza
1933 N. Meacham Road
Schaumburg, IL 60173
(847) 397-3973
WESTERN REGIONAL SALES OFFICE
600 South Lake Avenue, Suite 506
Pasadena, CA 91106
(626) 792-0053
NASHVILLE, TENNESSEE 37211-3333
ComAlloy International Company
481 Allied Drive
(615) 333-3453
ORANGE, TEXAS 77632
Texas Polymer Services, Inc.
6522 Interstate Highway 10 West
(409) 883-4331
32
36
A. Schulman, Inc.
REPRESENTATIVE OFFICES
BARCELONA, SPAIN
Oficina de representacion
BCIN - Pol. Ind Les Guixeres s/n
08915 Barcelona
34-3-464-8043
SINGAPORE
Singapore Representative Office
Contact Address:
311 Bukit Timah Road
07-01, Rich Mansions
Singapore - 259709
65-235-7675
FOREIGN OFFICES
BORNEM, BELGIUM
N.V.A. Schulman Plastics, S.A.
Pedro Colomalaan 25 Industriepark
2880 Bornem
32-3-890-4211
KERPEN, GERMANY
A. Schulman GmbH
HYttenstrassBe 211
D-50170 Kerpen
49-2273-5610
PARIS, FRANCE
A. Schulman, S.A.
Diffusion Plastique
Immeuble Dynasteur
10/12 rue Andras Beck
92360 Meudon-la-Foret
33-1-4107-7500
CRUMLIN, SOUTH WALES (U.K.)
A. Schulman Inc. Limited
Croespenmaen Industrial Estate
Crumlin, Newport
Gwent NP1 4AG
44-1495-244090
ZURICH, SWITZERLAND
A. Schulman AG
Kernstrasse 10
CH 8004 Zurich
41-1-241-6030
WARSAW, POLAND
A. Schulman Polska Sp. z o.o.
ul. Instalatorow 9
02-237 Warsaw
48-22-868-2682
BUDAPEST, HUNGARY
A. Schulman Hungary Kft.
XI. Bezirk, Bartfai u. 54
H-1115 Budapest
36-1-203-4264
MILAN, ITALY
A. Schulman Plastics, S.p.A.
Via Siviglia, 11
I-20093 Cologno Monzese (Mi)
39-02-25-391-912
MISSISSAUGA, ONTARIO, CANADA
L5R 3G5
A. Schulman Canada Ltd.
5770 Hurontario Street, Suite 602
(905) 568-8470
MEXICO CITY, MEXICO
A. Schulman de Mexico, S.A. de C.V.
Manuel E. Izaguirre #13
Despacho 304 - Ciudad Satelite
Naucalpan, Edo. de Mexico 53100
(525) 393-1216
MONTERREY, MEXICO
A. Schulman de Mexico, S.A. de C.V.
Camino del Lago #4517, Sector 4
Colonia Cortijo del Rio
Monterrey, N.L. 64890
(5283) 655-505
SAN LUIS POTOSI, MEXICO
A. Schulman de Mexico, S.A. de C.V.
Avenida CFE, 730
Entre Eje 134 y Eje 136
Zona Industrial del Potosi
San Luis Potosi, S.L.P. 78090
(5248) 240-708
PLANTS
AKRON, OHIO 44310
790 E. Tallmadge Ave.
(330) 633-8164
BELLEVUE, OHIO 44811
350 North Buckeye Street
(419) 483-2931
ORANGE, TEXAS 77630
(Dispersion Plant)
3007 Burnett
(409) 883-9371
SHARON CENTER, OHIO 44274
(Specialty Compounding Division)
1475 Wolf Creek Trail
(330) 239-0101
NASHVILLE, TENNESSEE 37211-3333
ComAlloy International Company
481 Allied Drive
(615) 333-3453
ORANGE, TEXAS 77632
Texas Polymer Services, Inc.
6522 Interstate Highway 10 West
(409) 883-4331
BORNEM, BELGIUM
N.V.A. Schulman Plastics, S.A.
Pedro Colomalaan 25
Industriepark
2880 Bornem
32-3-890-4211
KERPEN, GERMANY
A. Schulman GmbH
HYttenstrass.e 211
D-50170 Kerpen
49-2273-5610
CRUMLIN, SOUTH WALES (U.K.)
A. Schulman Inc. Limited
Croespenmaen Industrial Estate
Crumlin, Newport
Gwent NP1 4AG
44-1495-244090
GIVET, FRANCE
A. Schulman Plastics S.A.
Rue Alex Schulman
F-08600 Givet
33-24-427161
EAST JAVA, INDONESIA
PT A. Schulman Plastics
Desa Ngerong - Gempol
Kab. Pasuruan
62-343-854-232
ST. THOMAS, ONTARIO, CANADA
N5P 3Z5
A. Schulman Canada Ltd.
400 S. Edgeware Road
(519) 633-3451
SAN LUIS POTOSI, MEXICO
A. Schulman de Mexico, S.A. de C.V.
Avenida CFE, 730
Entre Eje 134 y Eje 136
Zona Industrial del Potosi
San Luis Potosi, S.L.P. 78090
(5248) 240-708
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33
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[A. Schulman Inc. Logo]
3550 West Market Street, Akron, Ohio 44333 - 330/666-3751
www.aschulman.com
[OUTSIDE BACK COVER]