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, 2006

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ___ to ___

Commission file number: 0-7459

A. Schulman, Inc.

(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)

(330) 666-3751

(Registrant’s Telephone Number, including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-Accelerated filer o

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 common shares outstanding as of March 31, 2006 – 31,301,698

 

 

PART I – FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

A. SCHULMAN, INC.
CONSOLIDATED STATEMENT OF INCOME

(in thousands except per share data)

		For the three months ended February 28,								For the six months ended February 28,
		2006				2005				2006				2005
		Unaudited								Unaudited
Net sales		$	371,219			$	350,042			$	767,744			$	713,184
Interest and other income			1,527				410				2,329				797
			372,746				350,452				770,073				713,981
Cost and expenses:
Cost of sales			320,645				302,761				657,134				612,267
Selling, general and administrative expenses			36,426				33,819				72,715				70,477
Interest expense			1,055				964				2,083				1,881
Foreign currency transaction (gains) losses			665				(277	)			925				2,007
Loss on extinguishment of debt			4,986				—				4,986				—
Restructuring expense — N. America			—				12				—				216
Minority interest			232				215				582				635
			364,009				337,494				738,425				687,483
Income before taxes			8,737				12,958				31,648				26,498
Provision for U.S. and foreign income taxes			4,797				1,748				15,399				8,273
Net income			3,940				11,210				16,249				18,225
Less: Preferred stock dividends			(13	)			(14	)			(26	)			(27	)
Net income applicable to common stock		$	3,927			$	11,196			$	16,223			$	18,198
Weighted-average number of shares outstanding:
Basic			31,109				30,656				30,926				30,598
Diluted			31,619				31,109				31,344				31,081
Earnings per share:
Basic		$	0.12			$	0.36			$	0.52			$	0.59
Diluted		$	0.12			$	0.36			$	0.52			$	0.59

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

A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEET

(in thousands)

		February 28,				August 31,
		2006				2005
		Unaudited
Assets
Current assets:
Cash and cash equivalents		$	82,236			$	102,329
Accounts receivable, less allowance for doubtful accounts of $8,401 at February 28, 2006 and $8,227 at August 31, 2005			248,382				225,442
Inventories, average cost or market, whichever is lower			262,352				233,348
Prepaids, including tax effect of temporary differences			15,794				16,848
Total current assets			608,764				577,967
Other assets:
Cash surrender value of life insurance			1,862				1,454
Deferred charges, etc., including tax effect of temporary differences			18,658				17,316
Goodwill			5,197				5,288
Intangible assets			981				1,026
			26,698				25,084
Property, plant and equipment, at cost:
Land and improvements			14,216				13,667
Buildings and leasehold improvements			129,828				128,884
Machinery and equipment			299,588				292,419
Furniture and fixtures			34,510				35,556
Construction in progress			9,471				13,366
			487,613				483,892
Accumulated depreciation and investment grants of $1,095 at February 28, 2006 and $1,187 at August 31, 2005			308,594				302,581
			179,019				181,311
		$	814,481			$	784,362

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

A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEET

(in thousands)

		February 28,				August 31,
		2006				2005
		Unaudited
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable		$	2,451			$	1,507
Current portion of long-term debt			194				370
Accounts payable			126,040				102,059
U.S. and foreign income taxes payable			22,348				14,788
Accrued payrolls, taxes and related benefits			25,120				27,193
Other accrued liabilities			27,988				26,338
Total current liabilities			204,141				172,255
Long-term debt			48,437				63,158
Other long-term liabilities			74,594				73,713
Deferred income taxes			7,243				7,865
Minority interest			5,250				5,268
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, 5% cumulative, $100 par value, 10,564 shares outstanding at February 28, 2006 and August 31, 2005			1,057				1,057
Special stock, 1,000,000 shares authorized, none outstanding			—				—
Common stock, $1 par value,
Authorized — 75,000,000 shares
Issued — 40,570,423 shares at February 28, 2006 and 39,988,555 at August 31, 2005			40,570				39,989
Other capital			83,067				74,973
Accumulated other comprehensive income			20,197				26,552
Retained earnings			495,157				487,998
Treasury stock, at cost, 9,272,045 shares at February 28, 2006 and August 31, 2005			(165,232	)			(165,232	)
Unearned stock grant compensation			—				(3,234	)
Common stockholders’ equity			473,759				461,046
Total stockholders’ equity			474,816				462,103
		$	814,481			$	784,362

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

A. SCHULMAN, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

		For the six months ended
		February 28,
		2006				2005
		Unaudited
Provided from (used in) operating activities:
Net income		$	16,249			$	18,225
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation and amortization			12,137				12,848
Non-current deferred taxes			(452	)			2,067
Pension and other deferred compensation			5,239				3,874
Postretirement benefit obligation			1,710				1,478
Minority interest in net income of subsidiaries			582				635
Non-cash items related to the loss on extinguishment of debt			180				—
Changes in working capital:
Accounts receivable			(26,913	)			(21,641	)
Inventories			(32,129	)			(41,447	)
Prepaids			278				72
Accounts payable			25,199				14,478
Income taxes			7,623				(2,142	)
Accrued payrolls and other accrued liabilities			728				1,331
Changes in other assets and other long-term liabilities			(189	)			(3,520	)
Net cash provided from (used in) operating activities			10,242				(13,742	)
Provided from (used in) investing activities:
Expenditures for property, plant and equipment			(12,031	)			(8,245	)
Disposals of property, plant and equipment			139				82
Net cash used in investing activities			(11,892	)			(8,163	)
Provided from (used in) financing activities:
Cash dividends paid			(9,090	)			(8,712	)
Increase in notes payable			929				2,544
Repayments of long-term debt			(13,127	)			—
Borrowings of long-term debt			48,405				1,395
Prepayments of 7.27% senior notes			(50,000	)			—
Payment of debt issuance costs			(2,501	)			—
Cash distributions to minority shareholders			(600	)			(600	)
Exercise of stock options			8,662				3,284
Net cash used in financing activities			(17,322	)			(2,089	)
Effect of exchange rate changes on cash			(1,121	)			3,704
Net decrease in cash and cash equivalents			(20,093	)			(20,290	)
Cash and cash equivalents at beginning of period			102,329				72,898
Cash and cash equivalents at end of period		$	82,236			$	52,608

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

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

(1)		The results of operations for the six months ended February 28, 2006 are not necessarily indicative of the results expected for the year ended August 31, 2006.
		The interim financial statements furnished reflect all adjustments, which are, in the opinion of management, necessary to a fair presentation of the results of the interim period presented. All such adjustments are of a normal recurring nature.
		The year-end condensed 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 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, 2005 except for new accounting pronouncements and Stock-Based Compensation which are described below.
(2)		On September 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), (“SFAS 123R”), Share-Based Payment, which requires the Company to measure all employee stock-based compensation awards using a fair value method and record the related expense in the financial statements. The Company elected to use the modified prospective transition method. The modified prospective transition method requires that compensation cost be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption and requires that prior periods not be restated. All periods presented prior to September 1, 2005 were accounted for in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and followed a nominal vesting period approach.
		In October 2005, the Financial Accounting Standards Board (“FASB”), issued FASB Staff Position (“FSP”) No. 123R-2 (“FSP 123R-2”), Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123R, to provide guidance on determining the grant date for an award as defined in SFAS 123R. FSP 123R-2 stipulates that assuming all other criteria in the grant date definition are met, a mutual understanding of the key terms and conditions of an award to an individual employee is presumed to exist upon the award’s approval in accordance with the relevant corporate governance requirements, provided that the key terms and conditions of an award (a) cannot be negotiated by the recipient with the employer because the award is a unilateral grant, and (b) are expected to be communicated to an individual recipient within a relatively short time period from the date of approval. The Company has applied the principles set forth in FSP 123R-2 upon its adoption of SFAS 123R on September 1, 2005.
		In November 2005, the FASB issued FSP No. 123R-3 (“FSP 123R-3”), Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards to provide an alternative transition election related to accounting for the tax effects of share-based payment awards to employees to the guidance provided in Paragraph 81 of SFAS 123R. The guidance in FSP 123R-3 was effective on November 11, 2005. An entity may take up to one year from the later of its initial adoption of SFAS 123R or the effective date of FSP 123R-3 to evaluate its available transition alternatives and make its one-time election. Until and unless an entity elects the transition method described in FSP 123R-3, the entity should follow the transition method described in Paragraph 81 of SFAS 123R. SFAS 123R requires an entity to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting Statement 123R (termed the “APIC Pool”). The Company is currently evaluating which transition method it will use for calculating its APIC Pool.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

		Effective in December 1991, the Company adopted the 1991 Stock Incentive Plan. The 1991 Plan provides for the grant of incentive stock options, nonqualified stock options and restricted stock awards. The option price for incentive stock options is the fair market value of the common shares on the date of grant. In the case of nonqualified stock options, the Company granted options at fair market value on the date of grant. However, the Plan does provide that the option price may not be less than 50% of the fair market value of the common shares on the date of grant. Stock options may be exercised as determined by the Company, but in no event prior to six months following the date of grant or after the 10th anniversary date of grant. Effective in October 1992, the Company adopted the 1992 Non-Employee Directors’ Stock Option Plan to provide for the grant of nonqualified stock options and restricted stock awards. The option price is the fair market value of the common shares on the first business day immediately preceding the date of grant. All options become exercisable at the rate of 25% per year, commencing on the first anniversary of the date of grant of the option. Each option expires five years from the date of grant. Both the 1991 and 1992 Plans have expired and no further shares are available for issuance.
		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 intends that the option prices may not be less than 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% per year, commencing on the first anniversary date of the grant. Each option expires ten years from the date of the grant. On February 28, 2006, 1,719,427 shares are available for grants of nonqualified stock options pursuant to the Company’s 2002 Equity Incentive Plan. It is the Company’s practice to issue new common shares upon stock option exercise.
		The adoption of SFAS 123R reduced income before taxes for the three and six months ended February 28, 2006 by approximately $852,000 ($0.02 per basic and diluted share) and approximately $2.6 million ($0.08 per basic and diluted share), respectively. These expenses are included in selling, general and administrative expenses in the accompanying consolidated statement of income. The first quarter of fiscal 2006 included charges related to the accelerated vesting of retirement eligible employees. The expense recorded did not impact income tax expense since the Company’s deferred tax assets are fully reserved by a valuation allowance. The adoption had an immaterial effect on the Statement of Cash Flows for the three and six months ended February 28, 2006. In addition, Unearned Stock Grant Compensation of $3,234,000 was eliminated against Other Capital in stockholders’ equity upon adoption.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

The following table illustrates the effect on net income and earnings per share had the fair value based method been applied to measure compensation cost for prior periods presented:

		(in thousands, except per share data)
		For the three months				For the six months
		ended				ended
		February 28, 2005				February 28, 2005
Net income applicable to common stock, as reported		$	11,196			$	18,198
Add: Stock-based employee compensation included in reported net income, net of tax			57				546
Deduct: Total stock-based employee compensation determined under the fair value method, net of tax where applicable			(1,030	)			(2,442	)
Net income applicable to common stock, as adjusted		$	10,223			$	16,302
Earnings per share:
Basic   — as reported		$	0.36			$	0.59
— as adjusted		$	0.33			$	0.53
Diluted — as reported		$	0.36			$	0.59
— as adjusted		$	0.33			$	0.53

		The total stock-based employee compensation expense for the three and six months ended February 28, 2005 was calculated using the nominal vesting period approach.
		The weighted-average fair value of stock-based awards was $7.94 for the January 2006 grant, $6.20 for the October 2005 grant and $5.93 for fiscal 2005 grants. These values were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:

		Fiscal				Fiscal
		2006				2005
Expected life of award (years)			5.5				4.0
Risk-free interest rate			4.3	%			3.0	%
Expected volatility of stock			40	%			43	%
Expected dividend yield of stock			3.0	%			3.0	%

		The expected lives of the awards are based on historical exercise patterns and the terms of the options. The risk-free interest rate is based on zero coupon treasury bond rates corresponding to the expected life of the awards. The expected volatility assumption was derived by referring to changes in the Company’s historical common stock prices over the same timeframe as the expected life of the awards. The expected dividend yield of stock is based on the Company’s historical dividend yield. The Company has no reason to believe that future stock volatility or the expected dividend yield is likely to differ from historical patterns.
		Total unrecognized compensation cost, including forfeitures, related to nonvested share-based compensation arrangements at February 28, 2006 was approximately $8.1 million. This cost is expected to be recognized over a weighted-average period of approximately 1.5 years.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

A summary of stock options activity within the Company’s share-based compensation plans and changes for the six months ended February 28, 2006 are as follows:

		Outstanding				Average				Remaining
		Shares Under				Exercise				Contractual				Aggregate
		Option				Price				Term(years)				Intrinsic Value
Outstanding at August 31, 2005			1,672,362			$	17.09
Granted			572,750				19.78
Exercised			(578,368	)			14.98
Forfeited and expired			(10,602	)			19.16
Outstanding at February 28, 2006			1,656,142				18.75				8.4			$	3,903,000
Exercisable at February 28, 2006			549,117				17.27				7.2				2,032,000
Vested and expected to vest at February 28, 2006			1,627,014				18.73				.9				3,857,000

		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 options exercised during the six months ended February 28, 2006 and 2005 was approximately $3.5 million and $1.5 million, respectively. The total fair value of options vested during the six months ended February 28, 2006 and 2005, was approximately $3.5 million and $1.9 million, respectively.
		Restricted stock awards under the 2002 Equity Incentive Plan vest over fours years following the date of grant. Restricted stock awards issued previous to this Plan vest over five years following the date of grant. The following table summarizes the outstanding restricted stock awards and weighted-average fair market value:

		Outstanding				Weighted-Average
		Restricted Stock				Fair Market Value
		Awards				(per share)
Outstanding at August 31, 2005			357,350			$	16.53
Granted			78,950				20.71
Released			(3,500	)			11.00
Forfeited			(3,550	)			17.47
Outstanding at February 28, 2006			429,250				17.33

(3)

All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. Such investments amounted to $52,242,000 at February 28, 2006 and $22,220,000 at August 31, 2005.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

(4)

A summary of the stockholders’ equity section for the six months ended February 28, 2006 and 2005 is as follows:

(in thousands)

(Unaudited)

														Accumulated
														Other												Unearned Stock				Total
		Preferred				Common				Other				Comprehensive				Retained				Treasury				Grant				Stockholders'
		Stock				Stock				Capital				Income(loss)				Earnings				Stock				Compensation				Equity
Balance at September 1, 2005		$	1,057			$	39,989			$	74,973			$	26,552			$	487,998			$	(165,232	)		$	(3,234	)		$	462,103
Comprehensive income:
Net income			—				—				—				—				16,249				—				—
Foreign currency translation loss			—				—				—				(6,355	)			—				—				—
Total comprehensive income																															9,894
Cash dividends paid or accrued:
Preferred, $2.50 per share			—				—				—				—				(26	)			—				—				(26	)
Common, $.29 per share			—				—				—				—				(9,064	)			—				—				(9,064	)
Stock options exercised			—				578				8,084				—				—				—				—				8,662
Restricted stock issued			—				3				(3	)			—				—				—				—				—
Reclassification due to adoption of SFAS 123R			—				—				(3,234	)			—				—				—				3,234				—
Non-cash stock-based compensation			—				—				2,616				—				—				—				—				2,616
Amortization of restricted stock			—				—				631				—				—				—				—				631
Balance at February 28, 2006		$	1,057			$	40,570			$	83,067			$	20,197			$	495,157			$	(165,232	)		$	—			$	474,816

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

(in thousands)

(Unaudited)

														Accumulated
														Other												Unearned Stock				Total
		Preferred				Common				Other				Comprehensive				Retained				Treasury				Grant				Stockholders'
		Stock				Stock				Capital				Income(loss)				Earnings				Stock				Compensation				Equity
Balance at September 1, 2004		$	1,057			$	39,633			$	69,812			$	18,643			$	473,540			$	(164,231	)		$	(3,217	)		$	435,237
Comprehensive income:
Net income			—				—				—				—				18,225				—				—
Foreign currency translation gain			—				—				—				30,394				—				—				—
Total comprehensive income																															48,619
Cash dividends paid or accrued:
Preferred, $2.50 per share			—				—				—				—				(27	)			—				—				(27	)
Common, $.28 per share			—				—				—				—				(8,685	)			—				—				(8,685	)
Stock options exercised			—				239				3,045				—				—				—				—				3,284
Restricted stock granted, net			—				—				1,337				—				—				—				(1,337	)			—
Non-cash stock-based compensation			—				—				187				—				—				—				—				187
Amortization of restricted stock			—				—				—				—				—				—				359				359
Balance at February 28, 2005		$	1,057			$	39,872			$	74,381			$	49,037			$	483,053			$	(164,231	)		$	(4,195	)		$	478,974

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

(5)

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common stock equivalents were exercised and then shared in the earnings of the Company.

For the three and six months ended February 28, 2006, 892,192 and 878,603 common shares subject to stock options, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

(6)

The following non-recurring items were included in net income for the three and six months ended February 28, 2006 and 2005:

	(in thousands, except per share data)
	Income(Expense)
		Three months ended								Six months ended
		February 28,								February 28,
		2006				2005				2006				2005
Costs pertaining to the extinguishment of debt		$	(4,986	)		$	—			$	(4,986	)		$	—
Tax charge for estimated repatriation of $180 million from Europe			—				—				(3,070	)			—
Reduction in first quarter tax charge — actual repatriation from Europe reduced to $142 million			827				—				827				—
Income from cancellation by suppliers of certain distribution agreements in Europe, pre-tax of $840,000, less tax of $240,000			600				—				600				—
Reversal of tax reserves no longer required due to change in Mexican tax law and settlement of tax claim in Canada			—				4,370				—				4,370
Total		$	(3,559	)		$	4,370			$	(6,629	)		$	4,370
Total per diluted share		$	(0.12	)		$	0.14			$	(0.21	)		$	(0.14	)

(7)

The components of Accumulated Other Comprehensive Income (Loss) are as follows:

		(in thousands)
		February 28,				August 31,
		2006				2005
		Unaudited
Foreign currency translation gain		$	25,905			$	32,260
Minimum pension liability			(5,708	)			(5,708	)
		$	20,197			$	26,552

Comprehensive losses from minimum pension liability adjustments are recorded net of tax using the applicable effective tax rate.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

(8)

The Company is engaged in the sale of plastic resins in various forms, which are used as raw materials by its customers. To identify reportable segments, the Company considered its operating structure and the types of information subject to regular review by executive management. On this basis, the Company operates primarily in two geographic segments, North America and Europe, including Asia (“Europe”). A reconciliation of segment income to consolidated income (loss) before taxes is presented below:

(in thousands)

(unaudited)

		North
		America				Europe				Other				Consolidated
Three months ended February 28, 2006
Sales to unaffiliated customers		$	115,750			$	255,469			$	—			$	371,219
Gross profit		$	13,119			$	37,455			$	—			$	50,574
Income (loss) before interest, debt extinguishment and taxes		$	(3,692	)		$	17,843			$	—			$	14,151
Interest expense, net			—				—				(428	)			(428	)
Loss on extinguishment of debt			—				—				(4,986	)			(4,986	)
Income (loss) before taxes		$	(3,692	)		$	17,843			$	(5,414	)		$	8,737
Three months ended February 28, 2005
Sales to unaffiliated customers		$	103,663			$	246,379			$	—			$	350,042
Gross profit		$	11,857			$	35,424			$	—			$	47,281
Income (loss) before interest, restructuring and taxes		$	(1,639	)		$	15,306			$	—			$	13,667
Interest expense, net			—				—				(697	)			(697	)
Restructuring expense			(12	)			—				—				(12	)
Income (loss) before taxes		$	(1,651	)		$	15,306			$	(697	)		$	12,958
Six months ended February 28, 2006
Sales to unaffiliated customers		$	241,176			$	526,568			$	—			$	767,744
Gross profit		$	30,348			$	80,262			$	—			$	110,610
Income (loss) before interest, debt extinguishment and taxes		$	(2,825	)		$	40,330			$	—			$	37,505
Interest expense, net			—				—				(871	)			(871	)
Loss on extinguishment of debt			—				—				(4,986	)			(4,986	)
Income (loss) before taxes		$	(2,825	)		$	40,330			$	(5,857	)		$	31,648
Six months ended February 28, 2005
Sales to unaffiliated customers		$	211,206			$	501,978			$	—			$	713,184
Gross profit		$	23,977			$	76,940			$	—			$	100,917
Income (loss) before interest, restructuring and taxes		$	(5,537	)		$	33,608			$	—			$	28,071
Interest expense, net			—				—				(1,357	)			(1,357	)
Restructuring expense			(216	)			—				—				(216	)
Income (loss) before taxes		$	(5,753	)		$	33,608			$	(1,357	)		$	26,498

North American losses for the three and six months ended February 28, 2006 include approximately $.8 million and $2.4 million, respectively, related to the adoption of SFAS 123R which requires recognition of expense for stock-based compensation.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

The majority of the Company’s sales for the three and six months ended February 28, 2006 and 2005 can be classified into five primary product families. The approximate amount and percentage of consolidated sales for these product families are as follows:

						(in thousands, except for %’s)
		For the three months ended February 28,
Product Family		2006								2005
Color and additive concentrates		$	131,334				35	%		$	122,300				35	%
Polyolefins			114,466				31				104,270				30
Engineered compounds			91,968				25				90,750				26
Polyvinyl chloride (PVC)			13,799				4				12,438				4
Tolling			4,152				1				4,398				1
Other			15,500				4				15,886				4
		$	371,219				100	%		$	350,042				100	%

						(in thousands, except for %’s)
		For the six months ended February 28,
Product Family		2006								2005
Color and additive concentrates		$	265,284				35	%		$	244,026				34	%
Polyolefins			237,821				31				210,666				30
Engineered compounds			192,727				25				187,155				26
Polyvinyl chloride (PVC)			29,674				4				26,736				4
Tolling			7,503				1				8,156				1
Other			34,735				4				36,445				5
		$	767,744				100	%		$	713,184				100	%

(9)

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

		Three months ended								Six months ended
		February 28,								February 28,
		2006				2005				2006				2005
Statutory U.S. tax rate			35.0	%			35.0	%			35.0	%			35.0	%
Loss on extinguishment of debt — no benefit			20.0				—				5.5				—
Domestic losses with no benefit			20.4				12.5				8.1				13.3
Estimated dividends to be repatriated from Europe			—				—				7.1				—
Reduction of first quarter tax charge due to decrease in dividends to be repatriated from Europe			(9.4	)			—				—				—
Amount of foreign taxes at less than statutory U.S. tax rate			(12.1	)			(5.0	)			(7.5	)			(5.9	)
Tax benefit for changes in Mexican tax law and favorable settlement of tax claim in Canada			—				(33.7	)			—				(16.5	)
Other			1.0				4.7				0.5				5.3
			54.9	%			13.5	%			48.7	%			31.2	%

(10)

Accumulated amortization for intangible assets was approximately $1,229,000 and $1,247,000 at November 30, 2005 and August 31, 2005, respectively. Intangible assets that are subject to amortization were fully amortized as of November 30, 2005. The amortization expense for intangible assets was approximately $19,000 for the six months ended February 28, 2006, and approximately $59,000 and $115,000 for the three and six months ended February 28, 2005, respectively.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

(11)

During the fourth quarter of fiscal 2004, in order to balance capacity with demand, the Company closed two manufacturing lines at its Nashville, Tennessee plant. As a result, the Company recorded pre-tax charges of $1,769,000 for the year ended August 31, 2004 and $216,000 for the six months ended February 28, 2005. There were no charges related to this plan during the six months ended February 28, 2006.

These charges were primarily non-cash and are summarized below:

						Paid				Accrual								Paid				Accrual
		Original				fiscal				balance				2005				fiscal				balance
(in thousands)		Charge				2004				8/31/04				Charges				2005				2/28/05
Employee related costs		$	350			$	—			$	350			$	—			$	(310	)		$	40
Other costs			66				—				66				216				(282	)			—
Restructuring			416			$	—			$	416			$	216			$	(592	)		$	40
Accelerated depreciation, included in North America cost of sales in 2004			1,353
		$	1,769

The employee related costs included severance payments and medical insurance for 30 employees at the Nashville facility. The other costs include equipment removal and other exit costs that were incurred as of August 31, 2005. The accelerated depreciation represents a change in estimate for the reduced life on equipment totaling $1,353,000. At August 31, 2005, no further cash out-flows were required by the Company related to this restructuring.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

(12)

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

Net periodic pension cost recognized included the following components:

		(in thousands)
		Three Months Ended February 28,								Six Months Ended February 28,
		2006				2005				2006				2005
Service cost		$	568			$	538			$	1,144			$	1,056
Interest cost			745				826				1,495				1,624
Expected return on plan assets			(210	)			(187	)			(423	)			(367	)
Net actuarial loss and net amortization of prior service cost and transition obligation			214				148				432				293
Net periodic benefit cost		$	1,317			$	1,325			$	2,648			$	2,606

Postretirement benefit cost included the following components:

		(in thousands)
		Three Months Ended February 28,								Six Months Ended February 28,
		2006				2005				2006				2005
Service cost		$	499			$	396			$	999			$	792
Interest cost			417				380				833				760
Net amortization of prior service
cost and unrecognized loss			117				70				233				140
Net periodic benefit cost		$	1,033			$	846			$	2,065			$	1,692

(13)

In November 2004, the FASB issued SFAS No. 151, (“SFAS 151”), Inventory Costs — an amendment of ARB No. 43, Chapter 4 in an effort to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS 151 requires abnormal amounts of idle facility expense, freight, handling costs and spoilage to be recognized as current period charges. SFAS 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of SFAS 151 by the Company in the November 2005 quarter did not have an impact on the Company’s financial condition, results of operations or cash flows.

(14)

In March 2005, the FASB issued FASB Interpretation No. 47, (“FIN 47”), Accounting for Conditional Asset Retirement Obligations. FIN 47 clarifies the definition and treatment of conditional asset retirement obligations as discussed in FASB Statement No. 143, Accounting for Asset Retirement Obligations. A conditional asset retirement obligation is defined as an asset retirement activity in which the timing and/or method of settlement are dependent on future events that may be outside the control of the Company. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

		obligation if the fair value of the liability can be reasonably estimated. FIN 47 is intended to provide more information about long-lived assets, more information about future cash outflows for these obligations and more consistent recognition of these liabilities. The adoption of FIN 47 is required by the end of fiscal 2006. The Company is currently evaluating the impact, if any, of FIN 47 on its financial condition, results of operations and cash flows.
(15)		The Company is engaged in various legal proceedings arising in the ordinary course of business. The ultimate outcome of these proceedings is not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
		During fiscal 2004, a railroad company asserted that the Company was liable for environmental costs to investigate and remediate property located near its Bellevue, Ohio facility. The Company has not recorded a reserve relating to this matter. During fiscal 2006, the railroad company notified the Company that it has filed suit regarding this matter. Legal counsel for the Company is of the opinion that a valid cause of action does not exist. The Company will continue to pursue resolution of this matter. The ultimate outcome of this assertion is not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

(16)		As of February 28, 2006, approximately 1.7 million shares remain under a six-million share repurchase authorization approved by the Board of Directors in August 1998. The timing and amount of repurchases will vary based on market conditions. No shares were repurchased during the six months ended February 28, 2006 and 2005.
		On February 21, 2006 the Company announced that its Board of Directors approved a modified Dutch auction self-tender offer for up to 8.75 million shares of its common stock, at a price between $21.00 and $24.00 per share. The Company commenced the self-tender offer on March 1, 2006. The tender offer is due to expire on April 11, 2006.

(17)

The Company had a $100.0 million revolving credit agreement, which was scheduled to expire in August 2009. On February 28, 2006, this agreement was terminated and replaced by a new $260.0 million Revolving Facility. This new Revolving Facility has an aggregate U.S. dollar equivalent of $260.0 million with the U.S. dollar equivalent of $160.0 million available to certain of the Company’s foreign subsidiaries for borrowings in euros or other currencies. The Revolving Facility will mature on February 28, 2011. The Company’s outstanding borrowings on this Revolving Facility were $48.4 million at February 28, 2006.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended February 28, 2006 and 2005

		On February 28, 2006, the Company borrowed under the Revolving Facility and used the proceeds to prepay the $50.0 million of 7.27% senior notes. The Company recorded a loss on extinguishment of debt of approximately $5.0 million in conjunction with the prepayment of these notes, which included a make-whole provision of approximately $3.3 million, interest rate swap termination fee of $1.5 million and the write-off of related deferred debt costs and deferred interest. Deferred interest related to proceeds deferred in 1999 when the Company completed an interest rate lock effectively reducing the annual interest rate from 7.27% to 7.14% over the life of the notes. In connection with the prepayment of debt and termination of the interest rate lock, the remaining balance of these deferred proceeds of $218,000 was written off.
		On March 1, 2006 the Company issued $90.0 million in senior guaranteed notes, consisting of $30.0 million of notes with an interest rate of the three-month LIBOR plus 80 basis points in the United States that are due March 1, 2013 and $60.0 million of euro notes in Germany with an interest rate of 4.485% which expire on March 1, 2016. The proceeds from the European borrowings of $60.0 million, available cash and borrowings from the Revolving Facility were used to fund the $142 million repatriation from Europe completed in March 2006.
		Charges of $2.5 million related to the issuance of these notes and the Revolving Facility have been deferred as of February 28, 2006 and will be amortized over the contractual lives of the corresponding agreements.
(18)		One of the Company’s major facilities in Texas was closed for a two-week period in September 2005 because of Hurricane Rita. In addition, a warehouse in Texas incurred damage from Hurricane Rita. While repair work continues and operations have returned to normal, the financial impact from this hurricane is still being assessed. The final claims for this hurricane have not yet been filed with the insurance carriers, and the ultimate amount of any gain or loss on these facilities is not yet determined. It is anticipated that amounts not covered by insurance will not have a material impact on future earnings.

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

Results of Operations

Sales of $371.2 million were the highest second-quarter revenues in the history of the Company. Net sales increased $21.2 million or 6.0% over last year’s second-quarter sales of $350.0 million. The translation effect of foreign currencies, primarily the euro, decreased sales by $22.9 million for the three months ended February 28, 2006. The reasons for the change in sales are as follows:

			Increase (decrease)
			Three months ended				Six months ended
			February 28, 2006				February 28, 2006
Tonnage			8.2	%			6.5	%
Price and product mix			4.3				5.9
Translation effect			(6.5	)			(4.7	)
			6.0	%			7.7	%

The primary reason for the higher tonnage in the February 2006 quarter was a 14.2% increase in Europe, including Asia. Tonnage in North America declined 3.6% primarily because of a softening in demand from customers, especially in the automotive market.

A comparison of consolidated sales by segment is as follows:

		(in thousands, except for %'s)
		Three months ended																Six months ended
		February 28,								Increase								February 28,								Increase
Sales		2006				2005				$				%				2006				2005				$				%
Europe		$	255,469			$	246,379			$	9,090				3.7	%		$	526,568			$	501,978			$	24,590				4.9	%
North America			115,750				103,663				12,087				11.7	%			241,176				211,206				29,970				14.2	%
		$	371,219			$	350,042			$	21,177				6.0	%		$	767,744			$	713,184			$	54,560				7.7	%

The two largest markets served by the Company are the packaging and automotive markets. For the six months ended February 28, 2006, approximately 37% of consolidated sales were derived from packaging and 18% from the automotive market. For the six months ended February 28, 2005, approximately 37% and 19% of consolidated sales were derived from the packaging and automotive markets, respectively. Other markets include consumer products, appliances, and agriculture.

The majority of the Company’s sales can be classified into five primary product families. The approximate amount and percentage of consolidated sales for these product families are as follows:

		(in thousands, except for %’s)
		For the three months ended February 28,
Product Family		2006								2005
Color and additive concentrates		$	131,334				35	%		$	122,300				35	%
Polyolefins			114,466				31				104,270				30
Engineered compounds			91,968				25				90,750				26
Polyvinyl chloride (PVC)			13,799				4				12,438				4
Tolling			4,152				1				4,398				1
Other			15,500				4				15,886				4
		$	371,219				100	%		$	350,042				100	%
						(in thousands, except for %’s)
		For the six months ended February 28,
Product Family		2006								2005
Color and additive concentrates		$	265,284				35	%		$	244,026				34	%
Polyolefins			237,821				31				210,666				30
Engineered compounds			192,727				25				187,155				26
Polyvinyl chloride (PVC)			29,674				4				26,736				4
Tolling			7,503				1				8,156				1
Other			34,735				4				36,445				5
		$	767,744				100	%		$	713,184				100	%