UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

A. SCHULMAN, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		34-0514850
(State or Other Jurisdiction		(I.R.S. Employer Identification No.)
of Incorporation or Organization)
3550 West Market Street, Akron, Ohio		44333
(Address of Principal Executive Offices)		(ZIP Code)

Registrant’s telephone number, including area code: (330) 666-3751

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of common stock, $1.00 par value, outstanding as of March 31, 2009 — 26,071,265

 

 

PART I — FINANCIAL INFORMATION

Item 1 — Consolidated Financial Statements

A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share data)

		Three months ended								Six months ended
		February 28, 2009				February 29, 2008				February 28, 2009				February 29, 2008
		Unaudited								Unaudited
Net sales		$	272,688			$	479,811			$	661,093			$	976,385
Cost of sales			244,254				424,423				591,606				865,407
Selling, general and administrative expenses			37,589				46,398				72,503				85,707
Minority interest			(308	)			131				(150	)			376
Interest expense			1,146				2,008				2,395				3,619
Interest income			(582	)			(421	)			(1,431	)			(903	)
Foreign currency transaction (gains) losses			(1,342	)			463				(8,648	)			597
Other (income) expense			(790	)			(334	)			(1,012	)			(2	)
Curtailment gain			(2,609	)			—				(2,609	)			—
Goodwill impairment			—				964				—				964
Asset impairment			2,179				5,219				2,179				5,219
Restructuring expense			4,648				2,616				5,249				2,622
			284,185				481,467				660,082				963,606
Income (loss) before taxes			(11,497	)			(1,656	)			1,011				12,779
Provision for U.S. and foreign income taxes			(982	)			2,118				3,353				6,530
Net income (loss)			(10,515	)			(3,774	)			(2,342	)			6,249
Less: Preferred stock dividends			(13	)			(13	)			(26	)			(26	)
Net income (loss) applicable to common stock		$	(10,528	)		$	(3,787	)		$	(2,368	)		$	6,223
Weighted-average number of shares outstanding:
Basic			25,753				27,223				25,781				27,372
Diluted			25,753				27,223				25,781				27,618
Earnings (losses) per share of common stock:
Basic		$	(0.41	)		$	(0.13	)		$	(0.09	)		$	0.23
Diluted		$	(0.41	)		$	(0.13	)		$	(0.09	)		$	0.23

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

A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEETS

		February 28, 2009				August 31, 2008
		Unaudited
		(In thousands except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	141,254			$	97,728
Accounts receivable, less allowance for doubtful accounts of $8,758 at February 28, 2009 and $8,316 at August 31, 2008			195,575				320,926
Inventories, average cost or market, whichever is lower			134,555				224,964
Prepaid expenses and other current assets			15,193				18,499
Total current assets			486,577				662,117
Other assets:
Cash surrender value of life insurance			3,074				2,665
Deferred charges and other assets			19,004				23,017
Goodwill			9,777				10,679
Intangible assets			136				195
			31,991				36,556
Property, plant and equipment, at cost:
Land and improvements			15,022				17,026
Buildings and leasehold improvements			137,081				156,465
Machinery and equipment			320,864				346,999
Furniture and fixtures			35,579				41,272
Construction in progress			6,606				9,726
			515,152				571,488
Accumulated depreciation and investment grants of $956 at February 28, 2009 and $1,123 at August 31, 2008			341,843				379,740
Net property, plant and equipment			173,309				191,748
		$	691,877			$	890,421
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable		$	2,529			$	9,540
Accounts payable			100,397				174,226
U.S. and foreign income taxes payable			5,946				3,212
Accrued payrolls, taxes and related benefits			25,582				37,686
Other accrued liabilities			31,628				34,566
Total current liabilities			166,082				259,230
Long-term debt			93,993				104,298
Other long-term liabilities			77,301				88,235
Deferred income taxes			4,651				5,544
Minority interest			5,383				5,533
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, 5% cumulative, $100 par value, authorized, issued and outstanding — 10,564 shares at February 28, 2009 and August 31, 2008			1,057				1,057
Special stock, 1,000,000 shares authorized, none outstanding			—				—
Common stock $1 par value, authorized — 75,000,000 shares, issued — 42,279,444 shares at February 28, 2009 and 42,231,341 shares at August 31, 2008			42,279				42,231
Other capital			113,637				112,105
Accumulated other comprehensive income			7,096				79,903
Retained earnings			503,210				513,451
Treasury stock, at cost, 16,207,011 shares at February 28, 2009 and 16,095,491 shares at August 31, 2008			(322,812	)			(321,166	)
Common stockholders’ equity			343,410				426,524
Total stockholders’ equity			344,467				427,581
		$	691,877			$	890,421

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

A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six months ended
		February 28, 2009				February 29, 2008
		Unaudited
		(In thousands)
Provided from (used in) operating activities:
Net income (loss)		$	(2,342	)		$	6,249
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation and amortization			11,818				14,040
Deferred tax provision			143				(1,263	)
Pension and other deferred compensation			(228	)			5,247
Postretirement benefit obligation			68				569
Net gains on asset sales			176				9
Minority interest in net income (loss) of subsidiaries			(150	)			376
Restructuring charges, including $474 and $0 of accelerated depreciation in fiscal 2009 and 2008, respectively			5,723				2,622
Curtailment gain			(2,609	)			—
Goodwill impairment			—				964
Asset impairment			2,179				5,219
Changes in assets and liabilities:
Accounts receivable			77,545				(10,681	)
Inventories			63,002				(10,947	)
Accounts payable			(52,518	)			(2,972	)
Restructuring payments			(3,097	)			(80	)
Income taxes			4,796				(5,733	)
Accrued payrolls and other accrued liabilities			(8,429	)			967
Changes in other assets and other long-term liabilities			(1,344	)			883
Net cash provided from operating activities			94,733				5,469
Provided from (used in) investing activities:
Expenditures for property, plant and equipment			(17,051	)			(13,187	)
Proceeds from the sale of assets			349				465
Net cash used in investing activities			(16,702	)			(12,722	)
Provided from (used in) financing activities:
Cash dividends paid			(7,899	)			(8,123	)
Increase (decrease) in notes payable			(7,208	)			(554	)
Borrowings on revolving credit facilities			19,000				81,502
Repayments on revolving credit facilities			(19,000	)			(52,569	)
Cash distributions to minority shareholders			—				(300	)
Common stock issued			12				1,083
Purchase of treasury stock			(1,646	)			(13,284	)
Net cash provided from (used in) financing activities			(16,741	)			7,755
Effect of exchange rate changes on cash			(17,764	)			1,103
Net increase (decrease) in cash and cash equivalents			43,526				1,605
Cash and cash equivalents at beginning of period			97,728				43,045
Cash and cash equivalents at end of period		$	141,254			$	44,650

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

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)

GENERAL

The interim financial statements included reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of the results of the interim period presented. All such adjustments are of a normal recurring nature.

The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The results of operations for the six months ended February 28, 2009 are not necessarily indicative of the results expected for the year ending August 31, 2009.

To identify reportable segments, A. Schulman, Inc. (the “Company”) considers its operating structure and the types of information subject to regular review by its President and Chief Executive Officer (“CEO”), who is the Chief Operating Decision Maker (“CODM”). Effective September 1, 2008, the Company named a general manager of Asia and a general manager of Europe. This change separated the responsibilities that were previously combined under the general manager of Europe, which then included Asia. Based on the Company’s new management structure and an evaluation of how the CODM reviews performance and allocates resources, the Company redefined its European segment to separate the Asian operations from the European operations beginning in the first quarter of fiscal 2009. Prior periods have been restated to reflect the current presentation. The Company’s segments are Europe, North America Masterbatch (“NAMB”) (previously, referred to as North America Polybatch or NAPB), North America Engineered Plastics (“NAEP”), North America Distribution Services (“NADS”), Asia and A. Schulman Invision, Inc. (“Invision”). The segments are discussed further in footnote 11.

The accounting policies for the periods presented are the same as described in Note 1 — Summary of Significant Accounting Policies to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008, except for new accounting pronouncements which includes the adoption of Financial Accounting Standards Board (“FASB”) Statement No. 157, (“SFAS 157”), Fair Value Measurement and FASB Statement No. 159, (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115. The adoption of SFAS 157 and SFAS 159 is discussed in footnote 8.

Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2009 presentation.

(2)

CASH AND CASH EQUIVALENTS

All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Such investments amounted to $76.5 million at February 28, 2009 and $44.0 million at August 31, 2008. Investments with maturities between three and twelve months are considered to be short-term investments. The Company’s cash equivalents and investments are diversified with numerous financial institutions which management believes to have acceptable credit ratings. These investments are primarily money-market funds and bank deposits. Management continues to monitor the placement of its cash given the current credit market. The recorded amount of these investments approximates fair value.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3)

GOODWILL

In accordance with FASB Statement No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets, the Company is required to review goodwill and indefinite-lived intangible assets at least annually for impairment. Goodwill impairment is tested at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

The Company completed its annual impairment review as of February 28, 2009 of the goodwill, which is related to the Europe segment and noted no impairment. Although the Company redefined its Europe segment to separate the Asia operations from the Europe operations beginning in fiscal 2009, this did not impact the reporting units for goodwill testing. The fair value used in the analysis was based on average earnings before interest, taxes, depreciation and amortization and cash flow multiples. The Company has been consistent with its method of estimating fair value when an indication of fair value from a buyer or similar specific transactions is not available.

During the second quarter of fiscal 2008, as a result of the Company’s announcement in February 2008 to pursue a sale of its Orange, Texas facility, the Company noted a trigger event to test for impairment of goodwill in the NAEP segment. The analysis of goodwill in the NAEP segment related to the tolling reporting unit resulted in an impairment charge of approximately $1.0 million in the second quarter of fiscal 2008. The fair value was based on estimated future cash flows including potential sale proceeds.

During fiscal 2007, the Company acquired the Delta Plast Group, a European color masterbatch manufacturer with operations in Sweden and Belgium. In connection with the acquisition, the Company recorded approximately $3.8 million of goodwill. The purchase price also included a potential deferred payment that could be paid over a three-year period based on certain terms in the purchase agreement. During the second quarter of fiscal 2009, the Company accrued the second deferred payment related to this purchase agreement of approximately $1.0 million, which increased goodwill by the same amount.

The carrying amount of goodwill for the European segment was $9.8 million at February 28, 2009 and $10.7 million at August 31, 2008.

The changes in the Company’s carrying value of goodwill during the six months ended February 28, 2009 are as follows:

		Europe
		(In thousands)
Balance as of August 31, 2008		$	10,679
Goodwill impairment			—
Deferred payment related to business acquisition in fiscal 2007			978
Translation effect			(1,880	)
Balance as of February 28, 2009		$	9,777

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4)

PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS

The components of the Company’s net periodic benefit cost (income) for defined benefit pension plans and other postretirement benefits are shown below.

		Three months ended								Six months ended
		February 28, 2009				February 29, 2008				February 28, 2009				February 29, 2008
		(In thousands)
Net periodic pension cost (income) recognized included the following components:
Service cost		$	418			$	617			$	859			$	1,220
Interest cost			1,080				1,173				2,219				2,326
Expected return on plan assets			(224	)			(311	)			(478	)			(632	)
Net actuarial loss and net amortization of prior service cost and transition obligation			77				196				165				394
Net periodic benefit cost		$	1,351			$	1,675			$	2,765			$	3,308
Postretirement benefit cost (income) included the following components:
Service cost		$	14			$	167			$	28			$	333
Interest cost			223				311				445				623
Net amortization of prior service cost (credit) and unrecognized loss			(212	)			(121	)			(425	)			(242	)
Curtailment gain			(2,609	)			—				(2,609	)			—
Net periodic benefit cost (income)		$	(2,584	)		$	357			$	(2,561	)		$	714

During the second quarter of fiscal 2009, the Company recorded a curtailment gain of $2.6 million as a result of a significant reduction in the expected years of future service, primarily due to the U.S. restructuring plan for NAEP that was announced in December 2008. This restructuring is further discussed in footnote 13.

(5)

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, results of operations or cash flows.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6)

STATEMENTS OF SHAREHOLDERS’ EQUITY

A summary of the stockholders’ equity section for the six months ended February 28, 2009 and February 29, 2008 is as follows:

(In thousands except per share data)
(Unaudited)

														Accumulated
														Other												Total
		Preferred				Common				Other				Comprehensive				Retained				Treasury				Stockholders’
		Stock				Stock				Capital				Income (Loss)				Earnings				Stock				Equity
Balance at September 1, 2008		$	1,057			$	42,231			$	112,105			$	79,903			$	513,451			$	(321,166	)		$	427,581
Comprehensive income (loss):
Net income (loss)			—				—				—				—				(2,342	)			—
Foreign currency translation loss			—				—				—				(69,553	)			—				—
Recognition of negative plan amendment related to curtailment of postretirement benefit plan			—				—				—				(3,018	)			—				—
Amortization of unrecognized transition obligations, actuarial losses and prior service costs (credits), net			—				—				—				(236	)			—				—
Total comprehensive income (loss)																											(75,149	)
Cash dividends paid or accrued:
Preferred stock, $2.50 per share			—				—				—				—				(26	)			—				(26	)
Common stock, $0.30 per share			—				—				—				—				(7,873	)			—				(7,873	)
Stock options exercised			—				8				136				—				—				—				144
Restricted stock issued, net of forfeitures			—				49				(49	)			—				—				—				—
Redemption of common stock to cover tax withholdings			—				(9	)			(123	)			—				—				—				(132	)
Purchase of treasury stock			—				—				—				—				—				(1,646	)			(1,646	)
Non-cash stock based compensation			—				—				16				—				—				—				16
Amortization of restricted stock			—				—				1,552				—				—				—				1,552
Balance at February 28, 2009		$	1,057			$	42,279			$	113,637			$	7,096			$	503,210			$	(322,812	)		$	344,467
Balance at September 1, 2007		$	1,057			$	41,785			$	103,828			$	50,092			$	509,415			$	(279,164	)		$	427,013
Impact due to adoption of FIN 48			—				—				—				—				2,078				—				2,078
Adjusted balance at September 1, 2007		$	1,057			$	41,785			$	103,828			$	50,092			$	511,493			$	(279,164	)		$	429,091
Comprehensive income:
Net income			—				—				—				—				6,249				—
Foreign currency translation gain			—				—				—				30,711				—				—
Amortization of unrecognized transition obligations, actuarial losses and prior service costs (credits), net			—				—				—				5,115				—				—
Total comprehensive income																											42,075
Cash dividends paid or accrued:
Preferred stock, $2.50 per share			—				—				—				—				(26	)			—				(26	)
Common stock, $0.29 per share			—				—				—				—				(8,097	)			—				(8,097	)
Stock options exercised			—				57				1,026				—				—				—				1,083
Restricted stock issued, net of forfeitures			—				329				(329	)			—				—				—				—
Purchase of treasury stock			—				—				—				—				—				(13,284	)			(13,284	)
Non-cash stock based compensation			—				—				428				—				—				—				428
Amortization of restricted stock			—				—				2,034				—				—				—				2,034
Balance at February 29, 2008		$	1,057			$	42,171			$	106,987			$	85,918			$	509,619			$	(292,448	)		$	453,304

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7)

ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of Accumulated Other Comprehensive Income are as follows:

		Foreign Currency				Unrecognized Losses and				Total Accumulated Other
		Translation				Prior Service Costs (credits),				Comprehensive
		Gain (Loss)				Net				Income
		(In thousands)
Balance as of August 31, 2008		$	76,112			$	3,791			$	79,903
Current period change			(69,553	)			(3,254	)			(72,807	)
Balance as of February 28, 2009		$	6,559			$	537			$	7,096

Foreign currency translation gains do not have a tax effect, as such gains are considered permanently reinvested. The decline in the accumulated other comprehensive income account is primarily due to the significant decline in the value of the Euro and other currencies against the U.S. dollar. Accumulated other comprehensive income adjustments related to pensions and other postretirement benefit plans are recorded net of tax using the applicable effective tax rate. The decline in this portion of accumulated other comprehensive income during the six months ended February 28, 2009 is primarily due to the recognition of a $3.0 million curtailment related to the U.S. postretirement benefit plan.

(8)

FAIR VALUE MEASUREMENT

On September 15, 2006, the FASB issued SFAS 157, which addresses standardizing the measurement of fair value for companies who are required to use a fair value measure for recognition or disclosure purposes. The FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure date.” The Company’s adoption of the required portions of SFAS 157 as of September 1, 2008 did not have a material impact on the Company’s financial position, results of operations and cash flows. In February 2008, the FASB issued Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No.157, which delayed the required adoption of portions of SFAS 157 related to nonfinancial assets and nonfinancial liabilities, except for items recognized or disclosed at fair value on a recurring basis. Accordingly, the Company will adopt the provisions of SFAS 157 related to nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value on a nonrecurring basis in fiscal 2010. The Company is currently evaluating the impact, if any, of the adoption of this portion of SFAS 157 on its financial position, results of operations and cash flows.

SFAS 157 establishes a fair value hierarchy to prioritize the inputs used in valuation techniques into three levels as follows:

	•		Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
	•		Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and
	•		Level 3: Unobservable inputs which reflect an entity’s own assumptions.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents information about the Company’s assets and liabilities recorded at fair value as of February 28, 2009 in the Company’s consolidated balance sheet:

						Quoted Prices in
						Active Markets for				Significant Other				Significant
		Total Measured at				Identical Assets				Observable Inputs				Unobservable Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
		(In thousands)
Assets:
Cash equivalents		$	76,550			$	76,550			$	—			$	—
Derivative assets			196				—				196				—
Total assets at fair value		$	76,746			$	76,550			$	196			$	—
Liabilities:
Derivative liabilities		$	(8	)		$	—			$	(8	)		$	—
Total liabilities at fair value		$	(8	)		$	—			$	(8	)		$	—

The fair value of cash equivalents, by their nature, is determined utilizing Level 1 inputs. The Company measures the fair value of the forward foreign exchange contracts using Level 2 inputs through observable market transactions in active markets provided by banks. The forward foreign exchange contracts are entered into with creditworthy multinational banks.

The following information presents the supplemental fair value information about long-term fixed-rate debt at February 28, 2009. The Company’s long-term fixed-rate debt was issued in euros.

		February 28, 2009								August 31, 2008
		(In millions of $)				(In millions of € )				(In millions of $)				(In millions of € )
Carrying value of long-term fixed-rate debt		$	63.8			€	50.3			$	73.8			€	50.3
Fair value of long-term fixed-rate debt		$	50.3			€	39.7			$	63.7			€	43.4

The fair value was calculated using discounted future cash flows. The decline in fair value compared to August 31, 2008 is primarily related to an increase in market interest rates, particularly the credit spread component, for new issues of companies with similar credit profiles.

In February 2007, the FASB issued SFAS 159 which permits companies to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected would be reported in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. The Company did not elect the fair value option for any of its existing financial instruments other than those already measured at fair value. Therefore, the Company’s adoption of SFAS 159 as of September 1, 2008 did not have an impact on the Company’s financial position, results of operations and cash flows.

(9)

INCENTIVE STOCK PLANS

Effective in December 2002, the Company adopted the 2002 Equity Incentive Plan, which provided for the grant of incentive stock options, nonqualified stock options, restricted stock awards and director deferred units for employees and non-employee directors. The option price of incentive stock options is the fair market value of the common shares on the date of the grant. In the case of nonqualified options, the Company grants options at 100% of the fair market value of the common shares on the date of the grant. All options become exercisable at the rate of 33 1/3% per year, commencing on the first anniversary date of the grant. Each option expires ten years from the date of the grant. Restricted stock awards under the 2002 Equity Incentive Plan vest ratably over four years following the date of grant.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On December 7, 2006, the Company adopted the 2006 Incentive Plan, which provides for the grant of incentive stock options, nonqualified stock options, whole shares, restricted stock awards, restricted stock units, stock appreciation rights, performance shares, performance units, cash-based awards, dividend equivalents and performance-based awards. Upon adoption of the 2006 Incentive Plan, all remaining shares eligible for award under the 2002 Equity Incentive Plan were added to the 2006 Incentive Plan and no further awards could be made from the 2002 Equity Incentive Plan. The time-based nonqualified stock options granted under the 2006 Incentive Plan become exercisable at the rate of 33 1/3% per year, commencing on the first anniversary date of the grant. It has been the Company’s practice to issue new common shares upon stock option exercise and other equity grants. On February 28, 2009, there were approximately 2.2 million shares available for grant pursuant to the Company’s 2006 Incentive Plan.

A summary of stock options is as follows:

		Six months ended
		February 28, 2009								February 29, 2008
		Outstanding								Outstanding
		Shares Under				Weighted-Average				Shares Under				Weighted-Average
		Option				Exercise Price				Option				Exercise Price
Outstanding at beginning of period			567,247			$	19.12				813,710			$	19.10
Granted			—			$	—				—			$	—
Exercised			(8,234	)		$	17.00				(57,216	)		$	18.93
Forfeited and expired			(8,335	)		$	19.08				(4,169	)		$	19.23
Outstanding at end of period			550,678			$	19.14				752,325			$	19.11
Exercisable at the end of the period			550,678			$	19.14				614,597			$	18.92

The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The total intrinsic value of stock options exercised during the six months ended February 28, 2009 was insignificant due to a small number of options exercised. The total intrinsic value of stock options exercised during the six months ended February 29, 2008 was approximately $0.1 million. The intrinsic value for stock options exercisable at February 28, 2009 was $0.2 million with a remaining term for options exercisable of approximately 3.9 years. For stock options outstanding at February 28, 2009, exercise prices range from $11.62 to $24.69. The weighted average remaining contractual life for options outstanding at February 28, 2009 was approximately 3.9 years. All 550,678 outstanding and exercisable stock options are fully vested as of February 28, 2009. There were no grants of stock options during the first six months of fiscal 2009 or fiscal 2008.

Restricted stock awards under the 2002 Equity Incentive Plan vest over four years following the date of grant. Restricted stock awards under the 2006 Incentive Plan can vest over various periods. The restricted stock grants outstanding under the 2006 Incentive Plan have service vesting periods of three years following the date of grant. The following table summarizes the outstanding time-based restricted stock awards and weighted-average fair market value:

						Weighted-Average
		Outstanding Restricted				Fair Market Value
		Stock Awards				(per share)
Outstanding at August 31, 2008			232,757			$	20.81
Granted			62,111			$	16.65
Vested			(75,031	)		$	19.92
Forfeited			(9,687	)		$	20.40
Outstanding at February 28, 2009			210,150			$	19.92

During the three months ended February 28, 2009 and February 29, 2008, the Company granted 62,111 and 99,150 time-based restricted shares, respectively. Restrictions on these shares underlying the restricted stock awards will lapse ratably over a three-year period and were valued at the fair market value on the date of grant. There were no other grants of restricted stock awards during the six months ended February 28, 2009 or February 29, 2008.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company also grants awards with market performance vesting criteria under the 2006 Incentive Plan. In the table below, the Company summarizes all performance-based awards, which include performance-based restricted stock awards and Performance Shares.

						Weighted-Average
		Outstanding				Fair Market Value
		Performance-Based Awards				(per share)
Outstanding at August 31, 2008			286,256			$	15.50
Granted			236,475			$	9.66
Vested			—			$	—
Forfeited			(9,500	)		$	15.86
Outstanding at February 28, 2009			513,231			$	12.80

Performance share awards (“Performance Shares”) are awards for which the vesting will occur based on both service and market performance criteria and do not have voting rights. Included in the outstanding performance-based awards at February 28, 2009 are 246,094 Performance Shares that earn dividends throughout the vesting period and approximately 182,167 Performance Shares that do not earn dividends. Also included in the balance are 84,970 awards of performance-based restricted stock awards from the fiscal 2007 grant with vesting based on both service and market performance criteria. The performance-based restricted stock awards have voting rights and earn dividends. At the vesting date of these performance-based restricted stock awards in April 2010, approximately 42,485 additional shares could be issued if certain market conditions are met which are not included in the table. The additional shares do not earn dividends and do not have voting rights.

During the three months ended February 28, 2009 and February 29, 2008, the Company granted 236,475 and 203,725 performance share awards, respectively. There were no other grants of Performance Shares during the six months ended February 28, 2009 or February 29, 2008. Included in the fiscal 2009 grant are approximately 118,000 Performance Shares that earn dividends throughout the vesting period and approximately 118,000 Performance Shares that do not earn dividends. The weighted-average grant date fair value of the Performance Shares based on market conditions granted during the three months ended February 28, 2009 was $9.66 per share.

The valuation for the awards included in the performance-based awards table above was based upon a Monte Carlo simulation, which is a lattice valuation model that represents the characteristics of these grants. Vesting of the ultimate number of shares underlying performance awards, if any, will be dependent upon the Company’s total shareholder return in relation to the total shareholder return of a select group of peer companies over a three-year period. The probability of meeting the market criteria was considered when calculating the estimated fair market value on the date of grant using a Monte Carlo simulation. These awards were accounted for as awards with market conditions in accordance with FASB Statement No. 123(R), Share-Based Payment.

The fair value of the Performance Shares granted during the six months ended February 28, 2009 was estimated using a Monte Carlo simulation with the following weighted-average assumptions:

		Six months ended
Weighted-average Assumption		February 28, 2009
Dividend yield			3.60	%
Expected volatility			36.00	%
Risk-free interest rate			1.09	%
Correlation			52.00	%

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total unrecognized compensation cost, including a provision for forfeitures, related to nonvested share-based compensation arrangements at February 28, 2009 was approximately $6.6 million. This cost is expected to be recognized over a weighted-average period of approximately two years.

The Company had approximately 287,000 restricted stock units and approximately 358,000 restricted stock units outstanding with various vesting periods and criteria at February 28, 2009 and February 29, 2008, respectively. Each restricted stock unit is equivalent to one share of the Company’s common stock on the vesting date. The Company granted approximately 60,000 and 114,000 restricted stock units during the three months ended February 28, 2009 and February 29, 2008, respectively. There were no other grants of restricted stock units during the six months ended February 28, 2009 or February 29, 2008. Certain restricted stock units earn dividends during the vesting period. Restricted stock units are settled only in cash at the vesting date and therefore are treated as a liability award. The Company records a liability for these restricted stock units in an amount equal to the total of (a) the mark-to-market adjustment of the units vested to date, and (b) accrued dividends on the units. As a result of these mark-to-market adjustments, these restricted stock units introduce volatility into the Company’s consolidated income statements. During the six months ended February 28, 2009, the Company experienced a significant decline in restricted stock unit expense due to the decline in the Company’s common stock price, which occurred primarily in the first quarter of fiscal 2009.

The following table summarizes the impact to the Company’s consolidated statements of operations from stock-based compensation:

		Three months ended								Six months ended
		February 28, 2009				February 29, 2008				February 28, 2009				February 29, 2008
		(In thousands)
Stock Options		$	38			$	169			$	16			$	428
Restricted Stock Awards and Performance-Based Awards			1,027				1,269				1,553				2,034
Restricted Stock Units			488				377				(905	)			760
Total stock-based compensation		$	1,553			$	1,815			$	664			$	3,222

(10)

EARNINGS PER SHARE

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 the impact of restricted stock and performance-based awards expected to vest, which would then share in the earnings of the Company.

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 table presents the number of incremental weighted-average shares used in computing diluted per share amounts:

		Three months ended								Six months ended
		February 28, 2009				February 29, 2008				February 28, 2009				February 29, 2008
		(In thousands)
Weighted-average shares outstanding:
Basic			25,753				27,223				25,781				27,372
Incremental shares from stock options			—				—				—				65
Incremental shares from restricted stock			—				—				—				181
Diluted			25,753				27,223				25,781				27,618

For both the three months ended February 28, 2009 and February 29, 2008, approximately 0.2 million stock options and restricted stock were excluded from the calculation of diluted net loss per common share, because they would have had an anti-dilutive effect due to the Company’s net loss. Additionally, approximately 0.2 million stock options and restricted stock were excluded from the calculation of diluted net loss per common share for the six months ended February 28, 2009, because they would have had an anti-dilutive effect due to the Company’s net loss. For the six months ended February 29, 2008, there were approximately 0.1 million, equivalent shares related to stock options that were excluded from diluted weighted-average shares outstanding because inclusion would have been anti-dilutive.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11)

SEGMENT INFORMATION

To identify reportable segments, the Company considers its operating structure and the types of information subject to regular review by its President and CEO, who is the CODM. Globally, the Company operates primarily in three lines of business: engineered plastics, masterbatch and distribution services. In North America, there is a general manager of each of these lines of business each of who report directly to the Company’s CEO. Also, in North America the Company operates a specialty sheet line of business called “Invision” which has its own general manager who also reports to the CEO. Effective September 1, 2008, the Company named a general manager of Asia and a general manager of Europe. This change separated the responsibilities that were previously combined under the general manager of Europe, which then included Asia. Based on the Company’s new management structure and an evaluation of how the CODM reviews performance and allocates resources, the Company redefined its European segment to separate the Asian operations from the European operations beginning in the first quarter of fiscal 2009. Prior periods have been restated to reflect the current presentation. The Company’s Europe and Asia segments have managers of each line of business, who report to general managers of the respective segments who then report to the CEO. Currently, the Company’s CEO does not directly manage the business line level when reviewing performance and allocating resources for the Europe and Asia segments. The Company’s segments are Europe, NAMB, NAEP, NADS, Asia and Invision.

Certain portions of the Company’s North America operations are not managed separately and are included in All Other North America. The Company also includes in All Other North America any administrative costs that are not directly related or allocated to a North America business unit such as North America information technology, human resources, accounting and purchasing. The North America administrative costs are directly related to the four North America segments.

The CODM uses net sales to unaffiliated customers, gross profit and operating income in order to make decisions, assess performance and allocate resources to each segment. Operating income does not include interest income or expense, other income or expense, restructuring expense, asset impairments, goodwill impairments, curtailment gains or foreign currency transaction gains or losses. In some cases, the Company may choose to exclude from a segment’s results certain non-recurring items as determined by management. These items are included in the Corporate and Other section in the table below. Corporate expenses include the compensation of certain personnel, certain audit expenses, board of directors related costs, certain insurance costs and other miscellaneous legal and professional fees.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Below the Company presents net sales, gross profit and operating income by segment. Also included is a reconciliation of operating income (loss) by segment to consolidated income (loss) before taxes.

		Three months ended								Six months ended
		February 28, 2009				February 29, 2008				February 28, 2009				February 29, 2008
		(In thousands)
Net Sales to Unaffiliated Customers
Europe		$	198,646			$	353,118			$	479,492			$	710,384
NAMB			23,245				31,901				51,290				66,876
NAEP			25,379				53,544				69,646				112,656
NADS			16,384				29,208				42,355				63,602
Asia			8,994				11,917				18,181				22,656
Invision			40				123				129				211
Total Net Sales to Unaffiliated Customers		$	272,688			$	479,811			$	661,093			$	976,385
Segment Gross Profit
Europe		$	26,552			$	47,109			$	60,950			$	92,422
NAMB			230				4,080				2,520				7,689
NAEP			572				2,229				3,328				7,270
NADS			1,300				1,810				3,145				4,223
Asia			619				1,363				1,332				2,140
Invision			(839	)			(1,203	)			(1,788	)			(2,766	)
Total Segment Gross Profit		$	28,434			$	55,388			$	69,487			$	110,978
Segment Operating Income (loss)
Europe		$	4,795			$	23,503			$	18,827			$	46,292
NAMB			(835	)			2,386				(143	)			4,305
NAEP			(3,240	)			(3,053	)			(4,180	)			(3,534	)
NADS			15				596				938				1,987
Asia			(153	)			378				(443	)			167
Invision			(980	)			(1,809	)			(2,047	)			(3,694	)
All other North America			(2,699	)			(4,348	)			(5,708	)			(8,452	)
Total Segment Operating Income (Loss)		$	(3,097	)		$	17,653			$	7,244			$	37,071
Corporate and other			(5,750	)			(8,794	)			(10,110	)			(12,176	)
Interest expense, net			(564	)			(1,587	)			(964	)			(2,716	)
Foreign currency transaction gains (losses)			1,342				(463	)			8,648				(597	)
Other income (expense)			790				334				1,012				2
Curtailment gain			2,609				—				2,609				—
Goodwill impairment			—				(964	)			—				(964	)
Asset impairment			(2,179	)			(5,219	)			(2,179	)			(5,219	)
Restructuring expense			(4,648	)			(2,616	)			(5,249	)			(2,622	)
Income (Loss) Before Taxes		$	(11,497	)		$	(1,656	)		$	1,011			$	12,779

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The majority of the Company’s sales for the three and six months ended February 28, 2009 and February 29, 2008 can be classified into five primary product families. The amount and percentage of consolidated sales for these product families are as follows:

		Three months ended
Product Family		February 28, 2009								February 29, 2008
		(In thousands, except for %’s)
Color and additive concentrates		$	118,999				44	%		$	167,041				35	%
Polyolefins			78,295				29				163,061				34
Engineered compounds			52,953				19				101,873				21
Polyvinyl chloride (PVC)			8,155				3				13,923				3
Tolling			3,891				1				6,218				1
Other			10,395				4				27,695				6
		$	272,688				100	%		$	479,811				100	%

		Six months ended
Product Family		February 28, 2009								February 29, 2008
		(In thousands, except for %’s)
Color and additive concentrates		$	268,377				41	%		$	345,996				35	%
Polyolefins			199,668				30				323,374				33
Engineered compounds			139,002				21				208,686				22
Polyvinyl chloride (PVC)			20,847				3				28,621				3
Tolling			6,462				1				12,175				1
Other			26,737				4				57,533				6
		$	661,093				100	%		$	976,385				100	%

(12)

INCOME TAXES

At February 28, 2009, the Company’s gross unrecognized tax benefits totaled $3.6 million. If recognized, approximately $1.7 million of the total unrecognized tax benefits would favorably affect the Company’s effective tax rate. The Company reports interest and penalties related to income tax matters in income tax expense. At February 28, 2009, the Company had $0.8 million of accrued interest and penalties on unrecognized tax benefits.

The Company is open to potential income tax examinations in the U.S. from fiscal 2005 onward and generally from fiscal 2002 onward for most foreign jurisdictions. The Company is currently under examination in the U.S. for fiscal 2006 and in Belgium for fiscal 2006 and 2007. In addition, the Company is currently under examination in Germany for fiscal years 2001 through 2004.

The Company believes it is reasonably possible that its unrecognized tax benefits may decrease by approximately $1.0 million within the next 12 months due to statute of limitations expiring in certain foreign jurisdictions.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the statutory U.S. federal income tax rate of 35% with the effective tax rate is as follows:

		Three months ended								Three months ended
		February 28, 2009								February 29, 2008
		(In thousands except for %’s)
Statutory U.S. tax rate		$	(4,024	)			35.0	%		$	(580	)			35.0	%
Amount of foreign taxes at less than U.S. statutory tax rate			(2,241	)			19.5				(3,717	)			224.2
U.S. losses with no tax benefit			4,795				(41.7	)			3,742				(225.8	)
U.S. restructuring and other U.S. unusual charges with no tax benefit			517				(4.5	)			3,073				(185.4	)
Establishment (resolution) of uncertain tax positions			15				(0.1	)			(567	)			34.2
Other			(44	)			0.3				167				(10.0	)
Total income tax expense (benefit)		$	(982	)			8.5	%		$	2,118				(127.8)	%

		Six months ended								Six months ended
		February 28, 2009								February 29, 2008
						(In thousands except for %’s)
Statutory U.S. tax rate		$	354				35.0	%		$	4,473				35.0	%
Amount of foreign taxes at less than U.S. statutory tax rate			(6,052	)			(599.0	)			(6,867	)			(53.8	)
U.S. losses with no tax benefit			8,318				823.2				6,013				47.1
U.S. restructuring and other U.S. unusual charges with no tax benefit			543				53.8				3,073				24.1
Establishment (resolution) of uncertain tax positions			98				9.7				(459	)			(3.6	)
Other			92				9.1				297				2.3
Total income tax expense (benefit)		$	3,353				331.8	%		$	6,530				51.1	%

The effective tax rate of 8.5% for the three months ended February 28, 2009 is less than the U.S. statutory rate of 35.0% primarily because no tax benefits were recognized for U.S. losses from continuing operations and other U.S charges. This unfavorable effect on the Company’s tax rate was partially offset by a decrease in the overall foreign rate driven by an increase in foreign pre-tax income in lower rate jurisdictions. The effective tax rate of 331.8% for the six months ended February 28, 2009 is significantly greater than the U.S. statutory rate of 35.0% primarily because no tax benefits were recognized for U.S. losses from continuing operations and other U.S charges. This unfavorable effect on the Company’s tax rate was partially offset by a decrease in the overall foreign rate driven by an increase in foreign pre-tax income in lower rate jurisdictions.

(13)

RESTRUCTURING OF OPERATIONS

During the first six months of fiscal 2009, the Company has announced various plans to realign its domestic and international operations to strengthen the Company’s performance and financial position. The Company has taken these proactive actions to address the current global economic conditions and improve the Company’s competitive position. The actions include a reduction in capacity and reduced headcount within cost of sales and selling, general and administrative expenses. In addition, the Company plans to eliminate certain positions related to the previously announced consolidation of back-office operations to the Europe Shared Service Center located in Belgium. The realignment is expected to be completed by late in the third quarter or early in the fourth quarter of fiscal 2009. The Europe Shared Service Center is not yet fully operational and implementation will continue into early fiscal 2010.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company reduced its workforce by approximately 100 positions worldwide during the first six months of fiscal 2009. The Company’s major European locations have implemented a “short work” schedule when necessary beginning primarily in the second quarter of fiscal 2009.

In the NAEP segment, the Company reduced production capacity by temporarily idling one manufacturing line, in addition to permanently shutting down two lines at the plant in Bellevue, Ohio. The Company reduced shifts from seven to five days at its Nashville, Tennessee plant.

In addition to the NAEP headcount reductions, the actions taken in fiscal 2009 resulted in a reduction in its Akron-based North American administrative staff by six full-time employees and three contract positions. These actions took place primarily in the second quarter of fiscal 2009 with expected completion by the end of the third quarter of fiscal 2009.

The following table summarizes the charges related to the fiscal 2009 initiatives by segment:

										Accelerated
						Contract termination				depreciation
		Employee-related				and other related				included in cost of
		costs				restructuring costs				sales				Total
		(In millions)
Three months ended February 28, 2009
Europe		$	1.7			$	0.1			$	—			$	1.8
NAMB			0.1				—				—				0.1
NAEP			2.2				0.5				0.5				3.2
All other North America			0.1				—				—				0.1
Total restructuring related charges for the fiscal 2009 actions		$	4.1			$	0.6			$	0.5			$	5.2
Six months ended February 28, 2009
Europe		$	2.0			$	0.1			$	—			$	2.1
NAMB			0.1				—				—				0.1
NAEP			2.2				0.5				0.5				3.2
All other North America			0.1				—				—				0.1
Total restructuring related charges for the fiscal 2009 actions		$	4.4			$	0.6			$	0.5			$	5.5

At February 28, 2009, approximately $2.3 million remains accrued for employee-related costs, which include estimated severance payments and medical insurance, related to the fiscal 2009 initiatives. The Company anticipates the majority of the accrued balance for restructuring charges to be paid throughout fiscal 2009 and the remaining to be paid in fiscal 2010.

Fiscal 2008 Plan

In January 2008, the Company announced two steps in its continuing effort to improve the profitability of its North American operations. The Company announced it would shut down its manufacturing facility in St. Thomas, Ontario, Canada and would pursue a sale of its manufacturing facility in Orange, Texas. All the restructuring costs related to the sale of the Orange, Texas and the St. Thomas, Ontario, Canada facilities are related to the NAEP reportable segment.

The St. Thomas, Ontario, Canada facility primarily produced engineered plastics for the automotive market, with a capacity of approximately 74 million pounds per year and employed approximately 120 individuals. The facility was shutdown at the end of June 2008. The Company continues to finalize closing procedures into fiscal 2009.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Orange, Texas facility provided primarily North American third-party tolling services in which the Company processed customer-owned materials for a fee. Total annual capacity at the Orange, Texas facility was approximately 135 million pounds and employed approximately 100 employees. The Company completed the sale of this facility in March 2008 for total consideration of $3.7 million.

The Company recorded charges related to the fiscal 2008 initiatives of approximately $0.2 million for employee-related costs and $0.1 million for contract termination and other related restructuring costs during the six months ended February 28, 2009. These charges recorded in fiscal 2009 are related to the NAEP segment. Approximately $0.3 million remains accrued for employee-related costs at February 28, 2009 related to the fiscal 2008 initiatives, which the Company anticipates the majority of the accrued balance for restructuring charges to be paid throughout fiscal 2009. During the second quarter of fiscal 2008, the Company recorded approximately $2.6 million in employee-related costs, which include estimated severance payments and medical insurance for approximately 135 employees, whose positions were eliminated at the Orange, Texas and St. Thomas, Ontario, Canada facilities.

The following table summarizes the liabilities as of February 28, 2009 related to the announced restructuring plans in fiscal 2008 and fiscal 2009.

		Accrual Balance				Fiscal 2009				Fiscal 2009				Accrual Balance
		August 31, 2008				Charges				Paid				February 28, 2009
		(In thousands)
Employee related costs		$	507			$	4,507			$	(2,421	)		$	2,593
Other costs			—				742				(675	)			67
Translation effect			(22	)											(22	)
Restructuring charges		$	485			$	5,249			$	(3,096	)		$	2,638