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 May 31, 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 of Incorporation or Organization)		(I.R.S. Employer Identification No.)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 June 30, 2009 — 26,068,463

 

 

PART I – FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

A. SCHULMAN, INC.

(In thousands except per share data)

		Three months ended May 31,								Nine months ended May 31,
		2009				2008				2009				2008
		Unaudited								Unaudited
Net sales		$	297,699			$	511,767			$	958,792			$	1,488,152
Cost of sales			251,962				451,906				843,568				1,317,314
Selling, general and administrative expenses			32,888				40,496				105,392				126,202
Minority interest			291				245				141				621
Interest expense			1,192				2,311				3,587				5,930
Interest income			(530	)			(494	)			(1,961	)			(1,397	)
Foreign currency transaction (gains) losses			2,430				984				(6,218	)			1,580
Other (income) expense			(1,218	)			253				(2,231	)			252
Curtailment gain			—				(2,313	)			(2,609	)			(2,313	)
Goodwill impairment			—				—				—				964
Asset impairment			283				3,601				2,462				8,820
Restructuring expense			981				3,685				6,230				6,307
			288,279				500,674				948,361				1,464,280
Income before taxes			9,420				11,093				10,431				23,872
Provision for U.S. and foreign income taxes			1,971				3,961				5,324				10,491
Net income			7,449				7,132				5,107				13,381
Less: Preferred stock dividends			(13	)			(13	)			(40	)			(40	)
Net income applicable to common stock		$	7,436			$	7,119			$	5,067			$	13,341
Weighted-average number of shares outstanding:
Basic			25,789				26,398				25,783				27,048
Diluted			25,939				26,665				25,962				27,299
Earnings per share of common stock:
Basic		$	0.29			$	0.26			$	0.20			$	0.49
Diluted		$	0.29			$	0.26			$	0.20			$	0.49

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

A. SCHULMAN, INC.

		May 31,				August 31,
		2009				2008
		Unaudited
		(In thousands except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	202,517			$	97,728
Accounts receivable, less allowance for doubtful accounts of $9,232 at May 31, 2009 and $8,316 at August 31, 2008			208,709				320,926
Inventories, average cost or market, whichever is lower			127,373				224,964
Prepaid expenses and other current assets			18,341				18,499
Total current assets			556,940				662,117
Other assets:
Cash surrender value of life insurance			3,109				2,665
Deferred charges and other assets			20,795				23,017
Goodwill			11,208				10,679
Intangible assets			164				195
			35,276				36,556
Property, plant and equipment, at cost:
Land and improvements			16,098				17,026
Buildings and leasehold improvements			148,182				156,465
Machinery and equipment			352,278				346,999
Furniture and fixtures			39,132				41,272
Construction in progress			4,668				9,726
			560,358				571,488
Accumulated depreciation and investment grants of $1,017 at May 31, 2009 and $1,123 at August 31, 2008			378,059				379,740
Net property, plant and equipment			182,299				191,748
		$	774,515			$	890,421
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable		$	2,672			$	9,540
Accounts payable			124,723				174,226
U.S. and foreign income taxes payable			9,461				3,212
Accrued payrolls, taxes and related benefits			29,857				37,686
Other accrued liabilities			31,474				34,566
Total current liabilities			198,187				259,230
Long-term debt			101,306				104,298
Other long-term liabilities			83,524				88,235
Deferred income taxes			5,190				5,544
Minority interest			4,694				5,533
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, 5% cumulative, $100 par value, authorized, issued and outstanding - 10,564 shares at May 31, 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 - 42,270,354 shares at May 31, 2009 and 42,231,341 shares at August 31, 2008			42,270				42,231
Other capital			114,097				112,105
Accumulated other comprehensive income			40,299				79,903
Retained earnings			506,703				513,451
Treasury stock, at cost, 16,207,011 shares at May 31, 2009 and 16,095,491 shares at August 31, 2008			(322,812	)			(321,166	)
Common stockholders’ equity			380,557				426,524
Total stockholders’ equity			381,614				427,581
		$	774,515			$	890,421

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

A. SCHULMAN, INC.

		Nine months ended May 31,
		2009				2008
		Unaudited
		(In thousands)
Provided from (used in) operating activities:
Net income		$	5,107			$	13,381
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation and amortization			17,926				21,047
Deferred tax provision			(307	)			(1,255	)
Pension and other deferred compensation			777				4,966
Postretirement benefit obligation			146				2,145
Net losses on asset sales			162				334
Minority interest in net income of subsidiaries			141				621
Restructuring charges, including $1,185 and $0 of accelerated depreciation in fiscal 2009 and 2008, respectively			7,415				6,307
Curtailment gain			(2,609	)			(2,313	)
Goodwill impairment			—				964
Asset impairment			2,462				8,820
Changes in assets and liabilities:
Accounts receivable			85,259				1,991
Inventories			82,381				7,933
Accounts payable			(38,229	)			7,002
Restructuring payments			(3,849	)			(2,266	)
Income taxes			4,768				(8,427	)
Accrued payrolls and other accrued liabilities			(9,153	)			3,250
Changes in other assets and other long-term liabilities			(1,772	)			2,046
Net cash provided from operating activities			150,625				66,546
Provided from (used in) investing activities:
Expenditures for property, plant and equipment			(21,951	)			(18,648	)
Proceeds from the sale of assets			744				3,341
Net cash used in investing activities			(21,207	)			(15,307	)
Provided from (used in) financing activities:
Cash dividends paid			(11,855	)			(12,114	)
Net decrease in notes payable			(7,156	)			(787	)
Borrowings on revolving credit facilities			19,000				104,032
Repayments on revolving credit facilities			(19,000	)			(74,139	)
Cash distributions to minority shareholders			(980	)			(600	)
Common stock issued			(34	)			1,830
Purchase of treasury stock			(1,646	)			(30,580	)
Net cash used in financing activities			(21,671	)			(12,358	)
Effect of exchange rate changes on cash			(2,958	)			1,935
Net increase in cash and cash equivalents			104,789				40,816
Cash and cash equivalents at beginning of period			97,728				43,045
Cash and cash equivalents at end of period		$	202,517			$	83,861

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

A. SCHULMAN, INC.

(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 nine months ended May 31, 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 $142.5 million at May 31, 2009 and $44.0 million at August 31, 2008. 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 short-term time deposits. The money-market funds are primarily AAA rated by third parties. Management continues to monitor the placement of its cash given the current credit market. The recorded amount of these investments approximates fair value. Investments with maturities between three and twelve months are considered to be short-term investments. As of May 31, 2009 and August 31, 2008, the Company did not hold any short-term investments.

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 goodwill impairment review as of February 28, 2009, which is all related to the Europe segment, and no impairment charges were necessary. In addition, the Company is not aware of any triggers which would require a goodwill impairment test as of May 31, 2009. 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. The Company recorded approximately $1.0 million in the second quarter of fiscal 2009 related to the second deferred payment related to this purchase agreement and an additional $0.3 million in the third quarter of fiscal 2009, which increased goodwill by the same amounts. The total amount of approximately $1.3 million was paid in the third quarter of fiscal 2009.

The carrying amount of goodwill for the European segment was $11.2 million at May 31, 2009 and $10.7 million at August 31, 2008.

The changes in the Company’s carrying value of goodwill during the nine months ended May 31, 2009 are as follows:

		Europe
		(In thousands)
Balance as of August 31, 2008		$	10,679
Deferred payment related to business acquisition in fiscal 2007			1,343
Translation effect			(814	)
Balance as of May 31, 2009		$	11,208

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 May 31,								Nine months ended May 31,
		2009				2008				2009				2008
		(In thousands)
Net periodic pension cost (income) recognized included the following components:
Service cost		$	429			$	640			$	1,289			$	1,860
Interest cost			1,105				1,190				3,325				3,516
Expected return on plan assets			(230	)			(312	)			(708	)			(944	)
Net actuarial loss and net amortization of prior service cost and transition obligation			79				196				244				590
Curtailment gain			—				(2,200	)			—				(2,200	)
Net periodic benefit cost (income)		$	1,383			$	(486	)		$	4,150			$	2,822
Postretirement benefit cost (income) included the following components:
Service cost		$	14			$	26			$	41			$	359
Interest cost			222				227				668				850
Net amortization of prior service cost (credit) and unrecognized loss			(212	)			(203	)			(637	)			(444	)
Curtailment gain			—				(113	)			(2,609	)			(113	)
Net periodic benefit cost (income)		$	24			$	(63	)		$	(2,537	)		$	652

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. During the third quarter of fiscal 2008, the Company recorded curtailment gains of $2.3 million as a result of a significant reduction in the expected years of future service primarily due to the sale of the Orange, Texas facility and a change in the executive management. The restructurings are 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 STOCKHOLDERS’ EQUITY

A summary of the stockholders’ equity section for the nine months ended May 31, 2009 and 2008 is as follows:

(In thousands except per share data)
(Unaudited)

														Accumulated other												Total
		Preferred				Common								comprehensive				Retained				Treasury				stockholders’
		stock				stock				Other 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			—				—				—				—				5,107				—
Foreign currency translation loss			—				—				—				(36,258	)			—				—
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 of tax of $96)			—				—				—				(328	)			—				—
Total comprehensive income (loss)																											(34,497	)
Cash dividends paid or accrued:
Preferred stock, $3.75 per share			—				—				—				—				(40	)			—				(40	)
Common stock, $0.45 per share			—				—				—				—				(11,815	)			—				(11,815	)
Stock options exercised			—				9				149				—				—				—				158
Restricted stock issued, net of forfeitures			—				43				(43	)			—				—				—				—
Redemption of common stock to cover tax withholdings			—				(13	)			(179	)			—				—				—				(192	)
Purchase of treasury stock			—				—				—				—				—				(1,646	)			(1,646	)
Non-cash stock based compensation			—				—				16				—				—				—				16
Amortization of restricted stock			—				—				2,049				—				—				—				2,049
Balance at May 31, 2009		$	1,057			$	42,270			$	114,097			$	40,299			$	506,703			$	(322,812	)		$	381,614
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			—				—				—				—				13,381				—
Foreign currency translation gain			—				—				—				41,158				—				—
Amortization of unrecognized transition obligations, actuarial losses and prior service costs (credits) (net of tax of $83)			—				—				—				5,651				—				—
Total comprehensive income																											60,190
Cash dividends paid or accrued:
Preferred stock, $3.75 per share			—				—				—				—				(40	)			—				(40	)
Common stock, $0.44 per share			—				—				—				—				(12,074	)			—				(12,074	)
Stock options exercised			—				101				1,823				—				—				—				1,924
Restricted stock issued, net of forfeitures			—				239				(239	)			—				—				—				—
Redemption of common stock to cover tax withholdings			—				(5	)			(89	)			—				—				—				(94	)
Purchase of treasury stock			—				—				—				—				—				(30,580	)			(30,580	)
Non-cash stock based compensation			—				—				601				—				—				—				601
Amortization of restricted stock			—				—				3,008				—				—				—				3,008
Balance at May 31, 2008		$	1,057			$	42,120			$	108,932			$	96,901			$	512,760			$	(309,744	)		$	452,026

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
		translation				prior service costs				other comprehensive
		gain (loss)				(credits), net				income
		(In thousands)
Balance as of August 31, 2008		$	76,112			$	3,791			$	79,903
Current period change			(36,258	)			(3,346	)			(39,604	)
Balance as of May 31, 2009		$	39,854			$	445			$	40,299

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 nine months ended May 31, 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 May 31, 2009 in the Company’s consolidated balance sheet:

						Quoted prices in				Significant other				Significant
						active markets for				observable				unobservable
		Total measured at				identical assets				inputs				inputs
		fair value				(Level 1)				(Level 2)				(Level 3)
		(In thousands)
Assets:
Cash equivalents		$	142,466			$	142,466			$	—			$	—
Total assets at fair value		$	142,466			$	142,466			$	—			$	—
Liabilities:
Derivative liabilities		$	250			$	—			$	250			$	—
Total liabilities at fair value		$	250			$	—			$	250			$	—

The fair value of cash equivalents, by their nature, is determined utilizing Level 1 inputs. The Company measures the fair value of its 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 May 31, 2009. The Company’s long-term fixed-rate debt was issued in euros.

		May 31, 2009								August 31, 2008
		(In millions of $)				(In millions of €)				(In millions of $)				(In millions of €)
Carrying value of long-term fixed-rate debt		$	71.2			€	50.3			$	73.8			€	50.3
Fair value of long-term fixed-rate debt		$	56.6			€	40.0			$	63.7			€	43.4

The fair value was calculated using discounted future cash flows. The decline in fair value compared with 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 shares of common stock 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 shares of common stock 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. It has been the Company’s practice to issue new shares of common stock upon stock option exercise and other equity grants. On May 31, 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:

		Nine months ended
		May 31, 2009								May 31, 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			(9,234	)		$	16.56				(101,352	)		$	18.99
Forfeited and expired			(40,172	)		$	18.85				(20,839	)		$	19.21
Outstanding at end of period			517,841			$	19.17				691,519			$	19.11
Exercisable at the end of the period			517,841			$	19.17				610,128			$	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 nine months ended May 31, 2009 was insignificant due to the small number of options exercised. The total intrinsic value of stock options exercised during the nine months ended May 31, 2008 was approximately $0.2 million. The intrinsic value for stock options exercisable at May 31, 2009 was $0.1 million with a remaining term for options exercisable of approximately 3.9 years. For stock options outstanding at May 31, 2009, exercise prices range from $11.62 to $24.69. The weighted average remaining contractual life for options outstanding at May 31, 2009 was approximately 3.9 years. All 517,841 outstanding and exercisable stock options are fully vested as of May 31, 2009. There were no grants of stock options during the first nine 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			(95,900	)		$	20.38
Forfeited			(14,856	)		$	21.18
Outstanding at May 31, 2009			184,112			$	19.60

The Company did not grant any time-based restricted stock awards during the third quarter of fiscal 2009 or fiscal 2008. During the nine months ended May 31, 2009 and 2008, the Company granted 62,111 and 99,150 shares of time-based restricted stock, 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.

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 (“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			(10,750	)		$	15.89
Outstanding at May 31, 2009			511,981			$	12.80

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 May 31, 2009 are 245,594 Performance Shares that earn dividends throughout the vesting period and approximately 181,917 Performance Shares that do not earn dividends. Also included in the balance are 84,470 shares 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 42,235 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.

The Company did not grant any Performance Shares during the third quarters of fiscal 2009 or fiscal 2008. During the nine months ended May 31, 2009 and 2008, the Company granted 236,475 and 203,725 Performance Shares, respectively. 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 nine months ended May 31, 2009 was $9.66 per share.

The valuation for the awards included in the performance-based awards table above are 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-based 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 nine months ended May 31, 2009 was estimated using a Monte Carlo simulation with the following weighted-average assumptions:

		Nine months ended
Weighted-average Assumption		May 31, 2009
Dividend yield			3.60	%
Expected volatility			36.00	%
Risk-free interest rate			1.09	%
Correlation			52.00	%

Total unrecognized compensation cost, including a provision for forfeitures, related to nonvested share-based compensation arrangements at May 31, 2009 was approximately $5.0 million. This cost is expected to be recognized over a weighted-average period of approximately two years.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the third quarter of fiscal 2009, the Company granted 27,500 stock-settled restricted stock units which were fully vested as of the grant date. There are no service requirements for vesting for this grant. These restricted stock units will be settled in shares of the Company’s common stock, on a one-to-one basis, no later than 60 days after the third anniversary of the award grant date. These awards do earn dividends during the restriction period; however, they do not have voting rights until released from restriction. These awards are treated as equity awards and have a grant date fair value based on the award grant date of $13.61. The Company did not grant any restricted stock units during the third quarter of fiscal 2008.

The Company had approximately 277,000 and 311,000 cash-settled restricted stock units outstanding with various vesting periods and criteria at May 31, 2009 and 2008, respectively. The Company granted approximately 60,000 and 114,000 cash-settled restricted stock units during the nine months ended May 31, 2009 and 2008, respectively. Each cash-settled restricted stock unit is equivalent to one share of the Company’s common stock on the vesting date. Certain cash-settled restricted stock units earn dividends during the vesting period. Cash-settled 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 nine months ended May 31, 2009, the Company granted approximately $2.4 million cash-based awards which are treated as liability awards. These awards were granted to foreign employees. Such awards include approximately $0.5 million which have service vesting periods of three years following the date of grant and the remaining $1.9 million is performance-based. The performance-based awards are based on the same market conditions utilized for the Performance Shares. The Company records a liability for these cash-based awards equal to the amount of the award vested to date and adjusts the performance-based awards based on expected payout.

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

		Three months ended May 31,								Nine months ended May 31,
		2009				2008				2009				2008
		(In thousands)
Stock options		$	—			$	173			$	16			$	600
Restricted stock awards and Performance-based awards			496				973				2,049				3,007
Cash-settled restricted stock units			419				1,006				(486	)			1,766
Cash-based awards			58				—				118				—
Total stock-based compensation		$	973			$	2,152			$	1,697			$	5,373

During the nine months ended May 31, 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 decline in restricted stock award and performance-based award expense is partially related to lower stock price for the fiscal 2009 grant and the Company increased its estimated forfeiture rate used for restricted stock and performance-based awards expense as a result of the fiscal 2008 and fiscal 2009 restructurings. The change in the estimate forfeiture rate resulted in an adjustment of approximately $0.8 million of income in the third quarter of fiscal 2009.

(10)

EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock 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.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 May 31,								Nine months ended May 31,
		2009				2008				2009				2008
		(In thousands)
Weighted-average shares outstanding:
Basic			25,789				26,398				25,783				27,048
Incremental shares from stock options			1				72				8				66
Incremental shares from restricted stock			149				195				171				185
Diluted			25,939				26,665				25,962				27,299

For the three and nine months ended May 31, 2009, there were approximately 0.5 million, equivalent shares related to stock options and restricted stock that were excluded from diluted weighted-average shares outstanding because inclusion would have been anti-dilutive. For the three and nine months ended May 31, 2008, there were approximately 0.1 million, equivalent shares related to stock options and restricted stock that were excluded from diluted weighted-average shares outstanding because inclusion would have been anti-dilutive.

(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, each of these lines of business has a general manager who reports 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 for 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 by segment to consolidated income before taxes.

		Three months ended May 31,								Nine months ended May 31,
		2009				2008				2009				2008
		(In thousands)
Net sales to unaffiliated customers
Europe		$	220,337			$	379,163			$	699,829			$	1,089,547
NAMB			26,922				33,202				78,212				100,078
NAEP			26,137				52,009				95,783				164,665
NADS			11,443				34,050				53,798				97,652
Asia			12,805				13,244				30,987				35,900
Invision			55				99				183				310
Total net sales to unaffiliated customers		$	297,699			$	511,767			$	958,792			$	1,488,152
Segment gross profit
Europe		$	38,634			$	50,808			$	99,582			$	143,230
NAMB			2,167				2,299				4,687				9,988
NAEP			1,540				3,340				4,869				10,610
NADS			1,634				2,902				4,779				7,126
Asia			2,558				1,657				3,891				3,796
Invision			(796	)			(1,145	)			(2,584	)			(3,912	)
Total segment gross profit		$	45,737			$	59,861			$	115,224			$	170,838
Segment operating income
Europe		$	16,544			$	25,355			$	35,371			$	71,647
NAMB			1,026				623				883				4,929
NAEP			(724	)			(1,262	)			(4,904	)			(4,796	)
NADS			1,027				1,750				1,965				3,737
Asia			1,511				587				1,068				754
Invision			(823	)			(1,611	)			(2,870	)			(5,306	)
All other North America			(2,534	)			(2,582	)			(8,243	)			(11,034	)
Total segment operating income		$	16,027			$	22,860			$	23,270			$	59,931
Corporate and other			(3,469	)			(3,740	)			(13,579	)			(15,916	)
Interest expense, net			(662	)			(1,817	)			(1,626	)			(4,533	)
Foreign currency transaction gains (losses)			(2,430	)			(984	)			6,218				(1,580	)
Other income (expense)			1,218				(253	)			2,231				(252	)
Curtailment gain			—				2,313				2,609				2,313
Goodwill impairment			—				—				—				(964	)
Asset impairment			(283	)			(3,601	)			(2,462	)			(8,820	)
Restructuring expense			(981	)			(3,685	)			(6,230	)			(6,307	)
Income before taxes		$	9,420			$	11,093			$	10,431			$	23,872

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The majority of the Company’s sales for the three and nine months ended May 31, 2009 and 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		May 31, 2009								May 31, 2008
		(In thousands, except for %’s)
Color and additive concentrates		$	145,065				49	%		$	186,782				36	%
Polyolefins			70,846				24				169,392				33
Engineered compounds			60,350				20				108,915				21
Polyvinyl chloride (PVC)			7,967				3				15,373				3
Tolling			4,081				1				4,003				1
Other			9,390				3				27,302				6
		$	297,699				100	%		$	511,767				100	%

		Nine months ended
Product Family		May 31, 2009								May 31, 2008
		(In thousands, except for %’s)
Color and additive concentrates		$	413,442				43	%		$	532,778				36	%
Polyolefins			270,513				28				492,766				33
Engineered compounds			199,352				21				317,601				21
Polyvinyl chloride (PVC)			28,814				3				43,994				3
Tolling			10,543				1				16,178				1
Other			36,128				4				84,835				6
		$	958,792				100	%		$	1,488,152				100	%

(12)

INCOME TAXES

At May 31, 2009, the Company’s gross unrecognized tax benefits totaled $2.8 million. If recognized, approximately $0.8 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 May 31, 2009, the Company had $0.5 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 2007 onward and generally from fiscal 2002 onward for most foreign jurisdictions. Additionally, the expiration of certain statutes of limitation in foreign jurisdictions during the third quarter of fiscal 2009 resulted in a tax benefit of approximately $1.2 million related to the reversal of tax and interest primarily accrued during the second half of fiscal 2006.

The amount of unrecognized tax benefits is expected to change in the next 12 months; however, the change is not expected to have a significant impact on the financial position of the Company.

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
		May 31, 2009								May 31, 2008
		(In thousands except for %’s)
Statutory U.S. tax rate		$	3,297				35.0	%		$	3,883				35.0	%
Amount of foreign taxes at less than U.S. statutory tax rate			(3,086	)			(32.8	)			(2,992	)			(27.0	)
U.S. losses with no tax benefit			2,985				31.7				2,655				23.9
U.S. restructuring and other U.S. unusual charges with no tax benefit			41				0.4				933				8.4
Establishment (resolution) of uncertain tax positions			(1,268	)			(13.5	)			(624	)			(5.6	)
Other			2				0.1				106				1.0
Total income tax expense (benefit)		$	1,971				20.9	%		$	3,961				35.7	%

		Nine months ended								Nine months ended
		May 31, 2009								May 31, 2008
		(In thousands except for %’s)
Statutory U.S. tax rate		$	3,651				35.0	%		$	8,355				35.0	%
Amount of foreign taxes at less than U.S. statutory tax rate			(9,138	)			(87.6	)			(9,859	)			(41.3	)
U.S. losses with no tax benefit			11,302				108.3				8,581				35.9
U.S. restructuring and other U.S. unusual charges with no tax benefit			584				5.6				4,094				17.1
Establishment (resolution) of uncertain tax positions			(1,170	)			(11.2	)			(1,083	)			(4.5	)
Other			95				0.9				403				1.7
Total income tax expense (benefit)		$	5,324				51.0	%		$	10,491				43.9	%

The effective tax rate of 20.9% for the three months ended May 31, 2009 is less than the U.S. statutory rate of 35.0% primarily because of the Company’s overall foreign rate being less than the U.S. statutory rate and the resolution of uncertain tax positions. These favorable effects on the Company’s tax rate were partially offset by no tax benefits being recognized for U.S. losses from continuing operations and other U.S. charges. As compared with the effective rate of 35.7% for the three months ended May 31, 2008, the current quarter’s effective rate is driven by a decrease in the overall foreign rate, the resolution of uncertain tax positions and a decrease in other U.S. charges with no tax benefit.

The effective tax rate of 51.0% for the nine months ended May 31, 2009 is 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 because of the Company’s overall foreign rate being less than the U.S. statutory rate and the resolution of uncertain tax positions. As compared with the effective rate of 43.9% for the nine months ended May 31, 2008, the current period’s effective rate is driven by the reduction in worldwide pre-tax income, which significantly increased the tax rate impact of the U.S. losses with no tax benefit.

(13)

RESTRUCTURING OF OPERATIONS

Fiscal 2009 Plan

During fiscal 2009, the Company announced various plans to realign its domestic and international operations to strengthen the Company’s performance and financial position. The realignment was primarily completed by the end of the third quarter, but will continue into the fourth quarter of fiscal 2009 as needed. The Company initiated 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 is in the process of eliminating certain positions related to the previously announced consolidation of back-office operations to the Europe Shared Service Center located in Belgium. The implementation of the Europe Shared Service Center will continue into early fiscal 2010.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company reduced its workforce by approximately 170 positions worldwide during the first nine months of fiscal 2009. The Company’s major European locations implemented a “short work” schedule when necessary 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 one line 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 reduced 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 and were completed by the end of the third quarter of fiscal 2009.

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

						Contract termination				Accelerated
		Employee-				and other related				depreciation included
		related costs				restructuring costs				in cost of sales				Total
		(In millions)
Three months ended May 31, 2009
Europe		$	0.6			$	0.2			$	—			$	0.8
NAMB			—				—				—				—
NAEP			0.2				—				0.7				0.9
All other North America			—				—				—				—
Total restructuring related charges for the fiscal 2009 actions		$	0.8			$	0.2			$	0.7			$	1.7
Nine months ended May 31, 2009
Europe		$	2.7			$	0.3			$	—			$	3.0
NAMB			0.1				—				—				0.1
NAEP			2.4				0.6				1.2				4.2
All other North America			0.1				—				—				0.1
Total restructuring related charges for the fiscal 2009 actions		$	5.3			$	0.9			$	1.2			$	7.4