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, 2007

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

For the transition period from                      to                     .

A. SCHULMAN, INC.

(Exact Name of Registrant as Specified in its Charter)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No o

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

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 shares of common stock, $1.00 par value, outstanding as of June 22, 2007 – 27,257,619

 

 

PART I — FINANCIAL INFORMATION

ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS

A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF INCOME

(In thousands except per share data)

		For the three months ended								For the nine months ended
		May 31 ,								May 31,
		2007				2006				2007				2006
		Unaudited								Unaudited
Net sales		$	466,955			$	427,313			$	1,322,450			$	1,195,057
Cost of sales			407,576				369,891				1,165,372				1,027,025
Selling, general and administrative expenses			39,858				39,440				119,923				112,156
Interest expense			2,096				1,986				5,957				4,069
Foreign currency transaction (gains) losses			1,674				1,174				376				2,099
Minority interest			291				242				720				823
Interest income			(755	)			(1,293	)			(1,643	)			(2,504	)
Other (income) expense			9				(700	)			(72	)			(1,818	)
Loss on extinguishment of debt			—				—				—				4,986
Restructuring expense — North America			130				—				1,058				—
			450,879				410,740				1,291,691				1,146,836
Income before taxes			16,076				16,573				30,759				48,221
Provision for U.S. and foreign income taxes			5,955				7,653				16,626				23,052
Net income			10,121				8,920				14,133				25,169
Less: Preferred stock dividends			(13	)			(13	)			(40	)			(40	)
Net income applicable to common stock		$	10,108			$	8,907			$	14,093			$	25,129
Weighted-average number of shares outstanding:
Basic			26,995				29,798				26,942				30,550
Diluted			27,340				30,285				27,280				30,987
Earnings per share of common stock:
Basic		$	0.37			$	0.30			$	0.52			$	0.82
Diluted		$	0.37			$	0.29			$	0.52			$	0.81

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

A. SCHULMAN, INC.
Consolidated Balance Sheets

		May 31,				August 31,
		2007				2006
		Unaudited
		(In thousands except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	81,323			$	50,662
Accounts receivable, less allowance for doubtful accounts of $9,230 at May 31, 2007 and $9,409 at August 31, 2006			310,942				272,929
Inventories, average cost or market, whichever is lower			259,760				286,079
Prepaid expenses and other current assets			13,026				17,678
Total current assets			665,051				627,348
Other assets:
Cash surrender value of life insurance			2,242				1,800
Deferred charges			21,720				20,444
Goodwill			5,534				5,392
Intangible assets			1,444				1,382
			30,940				29,018
Property, plant and equipment, at cost:
Land and improvements			16,404				15,778
Buildings and leasehold improvements			141,964				136,526
Machinery and equipment			342,809				317,499
Furniture and fixtures			37,937				35,918
Construction in progress			9,589				11,079
			548,703				516,800
Accumulated depreciation and investment grants of $1,088 at May 31, 2007 and $1,119 at August 31, 2006			357,218				329,921
			191,485				186,879
		$	887,476			$	843,245
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable		$	2,657			$	10,976
Accounts payable			149,761				135,930
U.S. and foreign income taxes payable			6,430				14,708
Accrued payrolls, taxes and related benefits			32,542				30,866
Other accrued liabilities			37,831				31,081
Total current liabilities			229,221				223,561
Long-term debt			146,473				120,730
Other long-term liabilities			89,423				82,482
Deferred income taxes			6,655				7,196
Minority interest			5,404				5,784
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, 5% cumulative, $100 par value, authorized, issued and outstanding - 10,564 shares at May 31, 2007 and August 31, 2006			1,057				1,057
Special stock, 1,000,000 shares authorized, none outstanding			—				—
Common Stock, $1 par value, authorized - 75,000,000 shares, issued - 41,363,806 shares at May 31, 2007 and 40,707,018 shares at August 31, 2006			41,364				40,707
Other capital			95,166				86,894
Accumulated other comprehensive income			46,892				32,893
Retained earnings			504,985				502,998
Treasury stock, at cost, 14,113,977 shares at May 31, 2007 and 13,343,711 shares at August 31, 2006			(279,164	)			(261,057	)
Common stockholders’ equity			409,243				402,435
Total stockholders’ equity			410,300				403,492
		$	887,476			$	843,245

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

A. Schulman, Inc.
Consolidated Statements of Cash Flows

		For the nine months ended
		May 31,
		2007				2006
		Unaudited
		(In thousands)
Provided from (used in) operating activities:
Net income		$	14,133			$	25,169
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation and amortization			18,918				18,296
Non-current deferred taxes			(1,432	)			(2,148	)
Pension and other deferred compensation			5,207				7,426
Postretirement benefit obligation			1,923				2,527
Minority interest in net income of subsidiaries			720				823
Restructuring charges, including accelerated depreciation of $1.0 million			2,042				—
Non-cash items related to the loss on extinguishment of debt			—				180
Changes in working capital:
Accounts receivable			(26,501	)			(46,604	)
Inventories			36,393				(35,021	)
Prepaid expenses			463				504
Accounts payable			8,884				29,581
Income taxes			(5,479	)			8,680
Restructuring payments			(812	)			—
Accrued payrolls and other accrued liabilities			6,236				14,568
Proceeds from life insurance benefits			—				580
Changes in other assets and other long-term liabilities			822				(6,200	)
Net cash provided from (used in) operating activities			61,517				18,361
Provided from (used in) investing activities:
Expenditures for property, plant and equipment			(20,029	)			(17,855	)
Disposals of property, plant and equipment			762				162
Net cash used in investing activities			(19,267	)			(17,693	)
Provided from (used in) financing activities:
Cash dividends paid			(12,146	)			(13,420	)
Increase (decrease) in notes payable			(8,376	)			931
Borrowings on revolving credit facilities			56,081				112,557
Repayments on revolving credit facilities			(35,160	)			(68,532	)
Prepayment of 7.27% senior notes			—				(50,000	)
Proceeds from issuance of 4.485% and floating rate senior notes			—				91,208
Payment of debt issuance costs			—				(2,637	)
Cash distributions to minority shareholders			(1,100	)			(600	)
Purchase of treasury stock			(18,107	)			(60,036	)
Exercise of stock options			6,031				9,589
Net cash provided from (used in) financing activities			(12,777	)			19,060
Effect of exchange rate changes on cash			1,188				2,224
Net increase (decrease) in cash and cash equivalents			30,661				21,952
Cash and cash equivalents at beginning of period			50,662				102,329
Cash and cash equivalents at end of period		$	81,323			$	124,281

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

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2007 and 2006

(1)		The interim financial statements furnished 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, 2007 are not necessarily indicative of the results expected for the year ending August 31, 2007.
		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, 2006.
(2)		Effective in December 2002, the Company adopted the 2002 Equity Incentive Plan which provided for the grant of incentive stock options, nonqualified stock options, restricted stock awards and director deferred units for employees and non-employee directors. The option price of incentive stock options is the fair market value of the common shares on the date of the grant. In the case of nonqualified options, the Company grants options at 100% of the fair market value of the common shares on the date of the grant. All options vest 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. Restricted stock awards under the 2002 Equity Incentive Plan vest ratably over four years following the date of grant. In accordance with the 2006 Incentive Plan, the shares available for grant under the Company’s 2002 Equity Incentive Plan were terminated upon adoption of the 2006 Incentive Plan.
		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. The time-based nonqualified stock options become exercisable at the rate of 33% per year, commencing on the first anniversary date of the grant. It has been the Company’s practice to issue new common shares upon stock option exercise. On May 31, 2007, there were approximately 3.1 million shares available for grant pursuant to the Company’s 2006 Incentive Plan.
		A summary of non-qualified stock options is as follows:

		Nine months ended May 31,
		2007								2006
		Outstanding								Outstanding
		shares under				Weighted-average				shares under				Weighted-average
		option				exercise price				option				exercise price
Outstanding at beginning of period			1,568,276			$	18.93				1,672,362			$	17.09
Granted			—				—				572,750				19.78
Exercised			(325,721	)			18.52				(631,977	)			15.08
Forfeited and expired			(11,037	)			19.35				(10,602	)			19.16
Outstanding at end of period			1,231,518				19.04				1,602,533				18.83
Exercisable at the end of the period			795,721				18.57				507,676				17.43

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2007 and 2006

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 nine months ended May 31, 2007 and 2006 was approximately $1.3 million and $4.4 million, respectively. The intrinsic value for stock options exercisable at May 31, 2007 was $3.2 million with a remaining term for options exercisable of six years. For stock options outstanding at May 31, 2007, exercise prices range from $11.62 to $24.69. The weighted average remaining contractual life for options outstanding at May 31, 2007 was approximately 6.8 years. Stock options vested and expected to vest at May 31, 2007 were 1,216,429 with a remaining contractual term of 6.8 years and a weighted-average exercise price of $19.03. At May 31, 2007, the aggregate intrinsic value of stock options vested and expected to vest was $4.5 million.

Total unrecognized compensation cost, including forfeitures, related to nonvested share-based compensation arrangements at May 31, 2007 was approximately $7.2 million. This cost is expected to be recognized over a weighted-average period of approximately 1.8 years.

During the three months ended May 31, 2007, the Company granted restricted stock awards for 228,250 shares. Included in the grant are awards for approximately 138,000 shares for which the restrictions will lapse based on market performance criteria. The weighted-average grant date fair value of the performance awards based on market conditions was $20.55 per share. The valuation for these awards which vest based on market performance criteria was based upon the Monte Carlo simulation, which is a binomial model that appropriately represents the characteristics of these grants. Restrictions on the ultimate number of shares underlying performance awards that will lapse, if any, will be dependant 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. These awards were accounted for as awards with market conditions in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 123(R), Share-Based Payment. Restrictions on the remaining shares underlying the restricted stock awards will lapse evenly over a three year period and are valued at the fair market value on the date of grant.

The fair value of the performance based awards granted during the nine months ended May 31, 2007 was estimated using a binomial model with the following weighted-average assumptions:

		Nine months ended
Weighted-Average Assumptions		May 31, 2007
Dividend yield			2.63	%
Expected volatility			26.00	%
Risk-free interest rate			4.45	%
Correlation			30.00	%

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, 2006			362,900			$	18.05
Granted			228,250				21.15
Issued			(102,817	)			15.05
Forfeited			(11,833	)			19.07
Outstanding at May 31, 2007			476,500				20.15

(3)

All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Such investments amounted to $36.5 million at May 31, 2007 and $13.7 million at August 31, 2006.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2007 and 2006

(4)

A summary of the stockholders’ equity section for the nine months ended May 31, 2007 and 2006 is as follows:

(In thousands except per share data)
(Unaudited)

														Accumulated Other												Total
		Preferred				Common				Other				Comprehensive				Retained								Stockholders’
		Stock				Stock				Capital				Income (loss)				Earnings				Treasury Stock				Equity
Balance at September 1, 2006		$	1,057			$	40,707			$	86,894			$	32,893			$	502,998			$	(261,057	)		$	403,492
Comprehensive income:
Net income			—				—				—				—				14,133				—
Foreign currency translation gain (loss)			—				—				—				13,999				—				—
Total comprehensive income																											28,132
Cash dividends paid or accrued:
Preferred stock, $3.75 per share			—				—				—				—				(40	)			—				(40	)
Common stock, $.435 per share			—				—				—				—				(12,106)	*			—				(12,106	)
Stock options exercised			—				326				5,705				—				—				—				6,031
Restricted stock issued			—				331				(331	)			—				—				—				—
Purchase of treasury stock			—				—				—				—				—				(18,107	)			(18,107	)
Non-cash stock based compensation			—				—				1,489				—				—				—				1,489
Amortization of restricted stock			—				—				1,409				—				—				—				1,409
Balance at May 31, 2007		$	1,057			$	41,364			$	95,166			$	46,892			$	504,985			$	(279,164	)		$	410,300

														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			—				—				—				—				25,169				—				—
Foreign currency translation gain (loss)			—				—				—				4,273				—				—				—
Total comprehensive income																															29,442
Cash dividends paid or accrued:
Preferred stock, $3.75 per share			—				—				—				—				(40	)			—				—				(40	)
Common stock, $.435 per share			—				—				—				—				(13,380	)			—				—				(13,380	)
Stock options exercised			—				635				8,954				—				—				—				—				9,589
Restricted stock issued							3				(3	)																			—
Purchase of treasury stock			—				—				—				—				—				(60,036	)			—				(60,036	)
Reclassification due to adoption of SFAS 123R			—				—				(3,234	)			—				—				—				3,234				—
Non-cash stock based compensation			—				—				3,610				—				—				—				—				3,610
Amortization of restricted stock			—				—				1,060				—				—				—				—				1,060
Balance at May 31, 2006		$	1,057			$	40,627			$	85,360			$	30,825			$	499,747			$	(225,268	)		$	—			$	432,348

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2007 and 2006

(5)		Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common stock equivalents were exercised, and the impact of restricted stock and performance based awards expected to vest, which would then share in the earnings of the Company.
		The difference between basic and diluted weighted-average common shares results from the assumed exercise of outstanding stock options and grants of restricted stock, calculated using the treasury stock method. The following 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,
		2007				2006				2007				2006
		(In thousands)
Weighted-average shares outstanding:
Basic			26,995				29,798				26,942				30,550
Incremental shares from stock options			165				208				156				188
Incremental shares from restricted stock			180				279				182				249
Diluted			27,340				30,285				27,280				30,987

		For the three and nine months ended May 31, 2007, there were approximately .1 million and .3 million, respectively, of equivalent shares related to stock options that were excluded from diluted weighted-average shares outstanding because inclusion would have been anti-dilutive.
(6)		The components of Accumulated Other Comprehensive Income (Loss) are as follows:

		May 31,				August 31,
		2007				2006
		(In thousands)
Foreign currency translation gain		$	53,201			$	39,202
Minimum pension liability			(6,309	)			(6,309	)
		$	46,892			$	32,893

		Foreign currency translation gains are not tax effected as such gains are considered permanently reinvested. Minimum pension liability adjustments are recorded net of tax using the applicable effective tax rate.
(7)		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 its President and Chief Executive Officer, who is the Chief Operating Decision Maker. On this basis, the Company operates 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:

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2007 and 2006

(In thousands)
(Unaudited)

		North
		America				Europe				Other				Consolidated
Three months ended May 31, 2007
Sales to unaffiliated customers		$	124,464			$	342,491			$	—			$	466,955
Gross profit		$	11,479			$	47,900			$	—			$	59,379
Income (loss) before interest, restructuring and taxes		$	(5,202	)		$	22,749			$	—			$	17,547
Interest expense, net			—				—				(1,341	)			(1,341	)
Restructuring — North America			—				—				(130	)			(130	)
Income (loss) before taxes		$	(5,202	)		$	22,749			$	(1,471	)		$	16,076
Three months ended May 31, 2006
Sales to unaffiliated customers		$	128,420			$	298,893			$	—			$	427,313
Gross profit		$	13,407			$	44,015			$	—			$	57,422
Income (loss) before interest and taxes		$	(4,034	)		$	21,300			$	—			$	17,266
Interest expense, net			—				—				(693	)			(693	)
Income (loss) before taxes		$	(4,034	)		$	21,300			$	(693	)		$	16,573
Nine months ended May 31, 2007
Sales to unaffiliated customers		$	354,509			$	967,941			$	—			$	1,322,450
Gross profit		$	29,359			$	127,719			$	—			$	157,078
Income (loss) before interest, restructuring and taxes		$	(18,881	)		$	55,012			$	—			$	36,131
Interest expense, net			—				—				(4,314	)			(4,314	)
Restructuring — North America			—				—				(1,058	)			(1,058	)
Income (loss) before taxes		$	(18,881	)		$	55,012			$	(5,372	)		$	30,759
Nine months ended May 31, 2006
Sales to unaffiliated customers		$	369,596			$	825,461			$	—			$	1,195,057
Gross profit		$	43,755			$	124,277			$	—			$	168,032
Income (loss) before interest, debt extinguishment and taxes		$	(6,860	)		$	61,631			$	—			$	54,771
Interest expense, net			—				—				(1,564	)			(1,564	)
Loss on extinguishment of debt			—				—				(4,986	)			(4,986	)
Income (loss) before taxes		$	(6,860	)		$	61,631			$	(6,550	)		$	48,221

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2007 and 2006

The majority of the Company’s sales for the three and nine months ended May 31, 2007 and 2006 can be classified into five primary product families. The approximate amount and percentage of consolidated sales for these product families are as follows:

		For the three months ended May 31,
Product Family		2007								2006
		(In thousands, except for %’s)
Color and additive concentrates		$	163,534				35	%		$	159,810				37	%
Polyolefins			146,985				31				126,457				30
Engineered compounds			105,930				23				102,620				24
Polyvinyl chloride (PVC)			16,659				4				16,225				4
Tolling			4,555				1				4,355				1
Other			29,292				6				17,846				4
		$	466,955				100	%		$	427,313				100	%

		For the nine months ended May 31,
Product Family		2007								2006
		(In thousands, except for %’s)
Color and additive concentrates		$	461,578				35	%		$	425,094				36	%
Polyolefins			411,630				31				364,278				30
Engineered compounds			319,666				24				295,347				25
Polyvinyl chloride (PVC)			47,705				4				45,899				4
Tolling			15,364				1				11,858				1
Other			66,507				5				52,581				4
		$	1,322,450				100	%		$	1,195,057				100	%

(8)

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

		Three months ended								Nine months ended
		May 31,								May 31,
		2007				2006				2007				2006
Statutory U.S. tax rate			35.0	%			35.0	%			35.0	%			35.0	%
Loss on extinguishment of debt - no benefit			—				—				—				3.6
Domestic losses with no benefit			9.3				11.6				26.5				9.3
Estimated dividends to be repatriated from Europe			—				—				—				4.7
Amount of foreign taxes at less than statutory U.S. tax rate			(8.3	)			(5.9	)			(9.4	)			(7.7	)
Tax contingencies			—				4.6				—				2.4
Other			1.0				0.9				1.9				0.5
			37.0	%			46.2	%			54.0	%			47.8	%

Proposed tax legislation in Germany is expected to reduce the German tax rate by an estimated nine percentage points, which will benefit the Company going forward. Although this proposed legislation has not yet been passed, the Company expects it to be signed into law during the fourth quarter of fiscal 2007. If signed into law, the legislation will result in an estimated tax charge of $.6 million in the period that the change is signed into law to reduce the Company’s deferred tax assets based on the revised rate.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2007 and 2006

(9)		During fiscal 2007, the Company announced multiple phases of a restructuring plan to restore its North American segment to profitability. In November 2006, in order to balance capacity with demand, reduce costs and improve efficiencies in the North American segment, the Company announced a plan to close two of its manufacturing lines at its Orange, Texas plant, close a warehouse also located in Orange, Texas and reduce the workforce at its Bellevue, Ohio plant. The two manufacturing lines at the Orange, Texas plant are anticipated to continue production through the fourth quarter of fiscal 2007 and the Orange, Texas warehouse closed during the third quarter of fiscal 2007. In connection with this plan, the Company reduced its workforce by 65 positions.
		In February 2007, the Company announced the second phase of its North America restructuring plan which implements several initiatives that will improve the Company’s operations and profitability in North America. These plans are expected to deliver annual savings of approximately $14 million to $15 million, $7 million of which the Company expects to realize in the second half of fiscal 2007. These estimated savings are coming from the following initiatives:

	•		Reduction in the Company’s North American workforce by approximately 30 positions, primarily in the sales and administrative functions,
	•		Reduction in the Company’s United States retiree healthcare coverage plan,
	•		Greater cost sharing of employee and retiree medical plan costs,
	•		Broad discretionary selling, general and administrative cost reductions,
	•		Savings from improved purchasing processes, and
	•		Improved logistics efficiencies.

In connection with this restructuring plan, the Company recorded pre-tax charges of $2.0 million for the nine months ended May 31, 2007. These charges are summarized below:

(In thousands)

		Fiscal 2007								Accrual balance
		charges				Paid fiscal 2007				May 31, 2007
Employee related costs		$	990			$	(744	)		$	246
Other costs			68				(68	)			—
Restructuring			1,058			$	(812	)		$	246
Accelerated depreciation, included in North America cost of sales in 2007			984
		$	2,042

The employee related costs include severance payments and medical insurance for employees whose positions have been eliminated in North America. The Company recorded approximately $130,000 of restructuring charges and recorded approximately $35,000 of accelerated depreciation during the three months ended May 31, 2007. The accelerated depreciation represents a change in estimate for the reduced life of equipment totaling $1.0 million for the nine months ended May 31, 2007. At May 31, 2007, the Company estimated it will incur additional charges for employee related costs and additional accelerated depreciation totaling $.1 million in fiscal 2007, bringing the total charge to approximately $2.2 million.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2007 and 2006

(10)		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:

		Three Months Ended May 31,								Nine Months Ended May 31,
		2007				2006				2007				2006
		(In thousands)
Service cost		$	630			$	594			$	1,843			$	1,734
Interest cost			953				775				2,777				2,266
Expected return on plan assets			(267	)			(218	)			(786	)			(640	)
Net actuarial loss and net amortization of prior service cost and transition obligation			340				223				847				656
Net periodic benefit cost		$	1,656			$	1,374			$	4,681			$	4,016

Postretirement benefit cost included the following components:

		Three Months Ended May 31,								Nine Months Ended May 31,
		2007				2006				2007				2006
		(In thousands)
Service cost		$	192			$	499			$	1,113			$	1,498
Interest cost			313				417				1,195				1,250
Net amortization of prior service cost and unrecognized loss			(119	)			117				(40	)			350
Net periodic benefit cost		$	386			$	1,033			$	2,268			$	3,098

		The Company’s postretirement benefit costs for the three and nine months ended May 31, 2007 decreased as a result of a plan amendment to its U.S. retiree healthcare coverage plan as a part of its North American restructuring plan.
(11)		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 2006, a railroad company filed suit against the Company seeking compensatory damages and reimbursement of environmental costs to investigate and remediate property located near its Bellevue, Ohio facility. The Company and the railroad company agreed that the Company would pay the railroad company a settlement of approximately $64,000. This payment is expected to be made during the fourth quarter of fiscal 2007. With payment of this settlement, the Company will be released from liability for current and future right of way investigations on this property.
(12)		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 also incurred damage from Hurricane Rita. The claim for this hurricane was filed with the insurance carriers, but the ultimate amount related to this claim had not yet been realized as of May 31, 2007. In June 2007, the Company received $1.5 million as partial settlement of this claim which will be recorded as a gain in the fourth quarter of fiscal 2007.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2007 and 2006

(13)		On February 28, 2006 the Company completed a refinancing in which it replaced a $100.0 million credit facility with a new $260.0 million credit facility. The new credit facility consists of $260.0 million of revolving credit lines of which the U.S. dollar equivalent of $160.0 million is available to certain of the Company’s foreign subsidiaries for borrowings in euros or other currencies. The facility, which matures on February 28, 2011, contains certain covenants that, among other things, limit the Company’s ability to incur indebtedness and enter into certain transactions beyond specified limits. The Company must also maintain a minimum interest coverage ratio and may not exceed a maximum net debt leverage ratio.
		Interest rates on the facility are based on LIBOR or EURIBOR (depending on the borrowing currency) plus a spread determined by the Company’s total leverage ratio. The Company also pays a facility fee on the commitments whether used or unused. At May 31, 2007, there was $48.7 million outstanding under the revolving credit facility.
		The Company used proceeds from the new credit facility to prepay its $50.0 million in 7.27% senior notes which were due in 2009 on February 28, 2006. In conjunction with the prepayment of these notes the Company recorded a loss on extinguishment of debt of approximately $5.0 million, 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 this interest rate lock, the remaining balance of these deferred proceeds of $.2 million was written off.
		On March 1, 2006, the Company issued senior guaranteed notes in the private placement market consisting of the following:

	•		$30.0 million of senior notes in the United States maturing on March 1, 2013 with an interest rate of LIBOR plus 80 bps
	•		€50.3 million of senior notes in Germany maturing on March 1, 2016 with an interest rate of 4.485% (“Euro Notes”). The Euro Notes approximate $67.7 million at May 31, 2007.

		The senior notes are guaranteed by the Company’s wholly-owned domestic subsidiaries and contain covenants substantially identical to those in the $260.0 million revolving credit facility. The senior notes are also secured by up to 65% of the capital stock of certain of the Company’s directly owned foreign subsidiaries.
		Costs of $2.6 million related to the issuance of the private placement notes and the revolving credit facility were deferred and are being amortized over the contractual lives of the senior notes and the revolving credit facility, respectively.
(14)		In the third quarter of fiscal 2007, the Company determined that its anticipated customer claims for products sold in Europe are expected to be more favorable than originally anticipated. Accordingly, the Company changed its estimate for these reserves and recorded an adjustment which resulted in an increase in sales and pre-tax income of $2.4 million ($1.4 million in net income) for the three and nine months ended May 31, 2007.
(15)		In July 2006, the FASB issued FASB interpretation No. 48, (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 clarifies the accounting for uncertain income tax positions that are recognized in a company’s financial statements. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Under the interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values. The adoption of FIN 48 is required by the Company in the beginning of fiscal year 2008. The Company is currently evaluating the impact, if any, of FIN 48 on its financial position, results of operations and cash flows.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended May 31, 2007 and 2006

(16)		In September 2006, the FASB issued FASB Statement No. 157, (“SFAS 157”), Fair Value Measurement. SFAS 157 addresses standardizing the measurement of fair value for companies who are required to use a fair value measure of recognition 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 is required to adopt SFAS 157 for fiscal year 2009. The Company is currently evaluating the impact, if any, of SFAS 157 on its financial position, results of operations and cash flows.
(17)		In September 2006, the FASB issued FASB Statement No. 158, (“SFAS 158”), Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS 158 requires companies to recognize the funded status of defined benefit pension and other postretirement plans as a net asset or liability in its financial statements. In addition, disclosure requirements related to such plans are affected by SFAS 158. As required by SFAS 158, the Company will use a prospective approach in its adoption of SFAS 158. The Company will begin recognition of the funded status of its defined benefit postretirement plans and include the required disclosures under the provisions of SFAS 158 at the end of fiscal year 2007. If the Company had adopted SFAS 158 at May 31, 2007, the Company’s liabilities would have increased by approximately $17.0 million and accumulated other comprehensive income would have decreased by approximately $17.0 million, excluding any tax effect. The adoption of SFAS 158 is not expected to impact the Company’s compliance with its debt covenants of its borrowing arrangements or its cash position. Additionally, the Company does not expect the adoption of SFAS 158 to affect the results of operations.
(18)		In February 2007, the FASB issued FASB Statement No. 159, (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. SFAS 159 permits entities 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 is required to adopt SFAS 159 for fiscal year 2009. The Company is currently evaluating the impact, if any, of SFAS 159 on its financial position, results of operations and cash flows.

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

Results of Operations

Net sales for the three months ended May 31, 2007 were $467.0 million, an increase of $39.7 million or 9.3% over last year’s third-quarter sales of $427.3 million. Net sales for the nine months ended May 31, 2007 increased $127.4 million from $1.2 billion for the same period last year to $1.3 billion this year. The translation effect of foreign currencies, primarily the euro, increased sales by $25.4 million and $70.4 million for the three and nine months ended May 31, 2007, respectively. The reasons for the change in sales for the three and nine months ended May 31, 2007 are as follows:

		Increase (decrease)
		Three months ended				Nine months ended
		May 31, 2007				May 31, 2007
Tonnage			5.3	%			4.7	%
Price and product mix			(1.9	)			0.1
Translation effect			5.9				5.9
			9.3	%			10.7	%

The primary reason for the higher tonnage was an increase in Europe, which includes Asia, of 5.3% and 6.6% for the three and nine months ended May 31, 2007, respectively. The increase in European tonnage relates primarily to additional sales of lower margin, higher volume products. Tonnage in North America increased an encouraging 5.2% for the three months ended May 31, 2007 due to increased merchant and distribution and tolling business. Tonnage for the nine months ended May 31, 2007 for North America was almost flat with an increase of 0.4% as a result of decreased demand across all markets primarily in the first half of the fiscal year.

A comparison of consolidated sales by business segment for the three and nine months ended May 31, 2007 and 2006 is as follows:

		Three months ended								Increase								Nine months ended								Increase
		May 31,								(decrease)								May 31,								(decrease)
Sales		2007				2006				$				%				2007				2006				$				%
(In thousands, except for %’s)
Europe		$	342,491			$	298,893			$	43,598				14.6	%		$	967,941			$	825,461			$	142,480				17.3	%
North America			124,464				128,420				(3,956	)			-3.1	%			354,509				369,596				(15,087	)			-4.1	%
		$	466,955			$	427,313			$	39,642				9.3	%		$	1,322,450			$	1,195,057			$	127,393				10.7	%

The two largest markets served by the Company are the packaging and automotive markets. Other markets include appliances, construction, medical, consumer products, electrical/electronics, office equipment and agriculture. For the three months ended May 31, 2007 and 2006, approximately 36% of consolidated sales were derived from packaging and 16% from the automotive market. For the North America segment, sales to customers in the automotive market accounted for 35% and 33% for the three months ended May 31, 2007 and 2006, respectively. For the Europe segment, sales to customers in the packaging market accounted for 43% and 42% for the three months ended May 31, 2007 and 2006, respectively.

Consolidated sales for the nine months ended May 31, 2007 were approximately 36% derived from packaging and 16% from the automotive market. For the nine months ended May 31, 2006, approximately 36% and 17% of consolidated sales were derived from the packaging and automotive markets, respectively. For the North America segment, sales to customers in the automotive market accounted for 35% and 36% for the nine months ended May 31, 2007 and 2006, respectively. For the Europe segment, sales to customers in the packaging market accounted for 43% and 44% for the nine months ended May 31, 2007 and 2006, respectively.

The U.S. automotive market has been under tremendous stress recently with the Company observing a decline in automotive production of the major U.S. automobile manufacturers during this period.

In the third quarter of fiscal 2007, the Company determined that its anticipated customer claims for products sold in Europe are expected to be more favorable than originally anticipated. Accordingly, the Company changed its estimate for these reserves and recorded an adjustment which resulted in an increase in sales and pre-tax income of $2.4 million ($1.4 million in net income) for the three and nine months ended May 31, 2007.

The majority of the Company’s sales for the three and nine months ended May 31, 2007 and 2006 can be classified into five primary product families. The approximate amount and percentage of consolidated sales for these product families are as follows:

		For the three months ended May 31,
Product Family		2007								2006
		(In thousands, except for %’s)
Color and additive concentrates		$	163,534				35	%		$	159,810				37	%
Polyolefins			146,985				31				126,457				30
Engineered compounds			105,930				23				102,620				24
Polyvinyl chloride (PVC)			16,659				4				16,225				4
Tolling			4,555				1				4,355				1
Other			29,292				6				17,846				4
		$	466,955				100	%		$	427,313				100	%

		For the nine months ended May 31,
Product Family		2007								2006
		(In thousands, except for %’s)
Color and additive concentrates		$	461,578				35	%		$	425,094				36	%
Polyolefins			411,630				31				364,278				30
Engineered compounds			319,666				24				295,347				25
Polyvinyl chloride (PVC)			47,705				4				45,899				4
Tolling			15,364				1				11,858				1
Other			66,507				5				52,581				4
		$	1,322,450				100	%		$	1,195,057				100	%

A comparison of gross profit dollars and percentages by business segment for the three and nine months ended May 31, 2007 and 2006 is as follows:

		(In thousands, except for %’s)
		For the three months ended May 31,								Increase/(decrease)
Gross profit $		2007				2006				$				%
Europe		$	47,900			$	44,015			$	3,885				8.8
North America			11,479				13,407				(1,928	)			(14.4	)
		$	59,379			$	57,422			$	1,957				3.4
Gross profit %
Europe			14.0				14.7
North America			9.2				10.4
Consolidated			12.7				13.4
		For the nine months ended May 31,								Increase/(decrease)
Gross profit $		2007				2006				$				%
Europe		$	127,719			$	124,277			$	3,442				2.8
North America			29,359				43,755				(14,396	)			(32.9	)
		$	157,078			$	168,032			$	(10,954	)			(6.5	)
Gross profit %
Europe			13.2				15.1
North America			8.3				11.8
Consolidated			11.9				14.1

The gross profit dollars increased for Europe for the three and nine months ended May 31, 2007, however, the foreign currency translation effect had a positive impact on gross margins of $3.3 million and $9.2 million for the three and nine months ended May 31, 2007, respectively. The Company recorded a favorable adjustment related to a change in the estimate for its European customer claims reserve, which increased European sales $2.4 million for the three and nine months ended May 31, 2007, without an impact on cost of sales. Therefore, excluding the impact of foreign currency translation and the $2.4 million claims reserve adjustment, gross profit was down $1.8 million for the quarter and $8.2 million for the nine months ended May 31, 2007. The European gross profit percentage decreased for the three and nine months ended May 31, 2007. The declines of gross profit and gross profit percentages were due primarily to the following three factors:

	•		Increased sales of lower margin products which drove increased sales tonnage,
	•		Decrease of production at the Company’s European manufacturing facilities, combined with successful efforts to reduce inventory negatively impacted the capacity utilization at these facilities, and
	•		Higher raw material costs were not able to be fully passed on through increased selling prices due to competitive price pressures.

Gross profit and gross profit percentages for North America decreased for the three and nine months ended May 31, 2007. North America also experienced a decline in production, combined with successful efforts to reduce inventory, which negatively impacted the capacity utilization at the North American manufacturing facilities primarily in the first half of the year. The gross profit decreases were the result of a change in product mix to lower margin sales, increased raw materials costs that the Company was not able to fully pass on through increased selling prices and increased logistics costs on a lower volume of sales. Also contributing to the margin shortfall was additional expense of $1.1 million and $2.1 million for the three and nine months ended May 31, 2007, respectively, related to the Company’s investment in the new Invision^® product line as compared to the same periods last year. Finally, the North American gross profit was negatively impacted by accelerated depreciation of approximately $35,000 and $1.0 million for the

three and nine months ended May 31, 2007, respectively. This accelerated depreciation related to the Company’s announced restructuring plan. The Company is in the process of implementing plans to improve North America’s gross profit as discussed in more detail below.

A comparison of capacity utilization levels for the three and nine months ended May 31, 2007 and 2006 is as follows:

		For the three months ended May 31,								For the nine months ended May 31,
		2007				2006				2007				2006
Europe			93	%			113	%			93	%			102	%
North America			88	%			82	%			82	%			83	%
Worldwide			91	%			100	%			89	%			94	%