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, 2008

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

For the transition period from                      to                     .

A. SCHULMAN, INC.

(Exact Name of Registrant as Specified in its Charter)

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

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

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

Yes þ     No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company 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 30, 2008 — 26,450,624

 

 

PART I — FINANCIAL INFORMATION

Item 1 — Consolidated Financial Statements

A. SCHULMAN, INC.
Consolidated Statements of Operations

(In thousands except per share data)

		Three months ended								Nine months ended
		May 31, 2008				May 31, 2007				May 31, 2008				May 31, 2007
		Unaudited								Unaudited
Net sales		$	511,767			$	466,955			$	1,488,152			$	1,322,450
Cost of sales			450,183				408,276				1,312,361				1,167,506
Selling, general and administrative expenses			42,219				39,158				131,155				117,789
Minority interest			245				291				621				720
Interest expense			2,311				2,096				5,930				5,957
Interest income			(494	)			(755	)			(1,397	)			(1,643	)
Foreign currency transaction (gains) losses			984				1,674				1,580				376
Other (income) expense			253				9				252				(72	)
Curtailment gain			(2,313	)			—				(2,313	)			—
Goodwill impairment-North America			—				—				964				—
Asset impairment-North America			3,601				—				8,820				—
Restructuring expense-North America			3,685				130				6,307				1,058
			500,674				450,879				1,464,280				1,291,691
Income before taxes			11,093				16,076				23,872				30,759
Provision for U.S. and foreign income taxes			3,961				5,955				10,491				16,626
Net income			7,132				10,121				13,381				14,133
Less: Preferred stock dividends			(13	)			(13	)			(40	)			(40	)
Net income applicable to common stock		$	7,119			$	10,108			$	13,341			$	14,093
Weighted-average number of shares outstanding:
Basic			26,398				26,995				27,048				26,942
Diluted			26,665				27,340				27,299				27,280
Earnings per share of common stock:
Basic		$	0.26			$	0.37			$	0.49			$	0.52
Diluted		$	0.26			$	0.37			$	0.49			$	0.52

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

A. SCHULMAN, INC.
Consolidated Balance Sheets

		May 31,				August 31,
		2008				2007
		Unaudited
		(In thousands except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	83,861			$	43,045
Accounts receivable, less allowance for doubtful accounts of $9,196 at May 31, 2008 and $9,056 at August 31, 2007			350,355				317,774
Inventories, average cost or market, whichever is lower			282,515				263,047
Prepaid expenses and other current assets			20,882				16,163
Total current assets			737,613				640,029
Other assets:
Cash surrender value of life insurance			2,673				2,231
Deferred charges and other assets			24,606				21,784
Goodwill			11,180				9,350
Intangible assets			196				174
			38,655				33,539
Property, plant and equipment, at cost:
Land and improvements			17,524				16,768
Buildings and leasehold improvements			157,374				145,952
Machinery and equipment			359,423				352,044
Furniture and fixtures			43,154				38,955
Construction in progress			13,932				13,035
			591,407				566,754
Accumulated depreciation and investment grants of $1,236 at May 31, 2008 and $1,322 at August 31, 2007			390,917				366,207
Net property, plant and equipment			200,490				200,547
		$	976,758			$	874,115
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable		$	2,563			$	2,762
Accounts payable			162,120				141,838
U.S. and foreign income taxes payable			4,728				11,544
Accrued payrolls, taxes and related benefits			37,521				32,249
Other accrued liabilities			42,172				33,112
Total current liabilities			249,104				221,505
Long-term debt			165,280				123,080
Other long-term liabilities			98,816				91,316
Deferred income taxes			5,950				5,640
Minority interest			5,582				5,561
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, 5% cumulative, $100 par value, authorized, issued and outstanding - 10,564 shares at May 31, 2008 and August 31, 2007			1,057				1,057
Special stock, 1,000,000 shares authorized, none outstanding			—				—
Common stock $1 par value, authorized -75,000,000 shares, issued - 42,120,030 shares at May 31, 2008 and 41,784,640 shares at August 31, 2007			42,120				41,785
Other capital			108,932				103,828
Accumulated other comprehensive income			96,901				50,092
Retained earnings			512,760				509,415
Treasury stock, at cost, 15,603,614 shares at May 31, 2008 and 14,113,977 shares at August 31, 2007			(309,744	)			(279,164	)
Common stockholders’ equity			450,969				425,956
Total stockholders’ equity			452,026				427,013
		$	976,758			$	874,115

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

A. SCHULMAN, INC.
Consolidated Statements of Cash Flows

		Nine months ended
		May 31, 2008				May 31, 2007
		Unaudited
		(In thousands)
Provided from (used in) operating activities:
Net income		$	13,381			$	14,133
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation and amortization			21,047				18,918
Deferred tax provision			(1,255	)			(627	)
Pension and other deferred compensation			4,966				5,207
Postretirement benefit obligation			2,145				1,923
Net (gains) losses on asset sales			334				82
Minority interest in net income of subsidiaries			621				720
Restructuring charges, including $0 and $984 of accelerated depreciation in fiscal 2008 and 2007, respectively			6,307				2,042
Goodwill impairment — North America			964				—
Asset impairment — North America			8,820				—
Curtailment gain			(2,313	)			—
Changes in assets and liabilities:
Accounts receivable			1,991				(26,951	)
Inventories			7,933				36,393
Accounts payable			7,002				8,884
Income taxes			(8,427	)			(6,094	)
Restructuring payments			(2,266	)			(812	)
Accrued payrolls and other accrued liabilities			3,250				6,236
Changes in other assets and other long-term liabilities			2,046				1,095
Net cash provided from (used in) operating activities			66,546				61,149
Provided from (used in) investing activities:
Expenditures for property, plant and equipment			(18,648	)			(20,124	)
Proceeds from the sale of assets			3,341				680
Proceeds of insurance settlements			—				545
Net cash provided from (used in) investing activities			(15,307	)			(18,899	)
Provided from (used in) financing activities:
Cash dividends paid			(12,114	)			(12,146	)
Increase (decrease) in notes payable			(787	)			(8,376	)
Borrowings on revolving credit facilities			104,032				56,081
Repayments on revolving credit facilities			(74,139	)			(35,160	)
Cash distributions to minority shareholders			(600	)			(1,100	)
Common stock issued			1,830				6,031
Purchase of treasury stock			(30,580	)			(18,107	)
Net cash provided from (used in) financing activities			(12,358	)			(12,777	)
Effect of exchange rate changes on cash			1,935				1,188
Net increase (decrease) in cash and cash equivalents			40,816				30,661
Cash and cash equivalents at beginning of period			43,045				50,662
Cash and cash equivalents at end of period		$	83,861			$	81,323

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

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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, 2008 are not necessarily indicative of the results expected for the year ending August 31, 2008.
		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, 2007 except for new accounting pronouncements and accounting for uncertain tax positions which are described in the footnotes.
		Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2008 presentation.
(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 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.
		On December 7, 2006, the Company adopted the 2006 Incentive Plan which provides for the grant of incentive stock options, nonqualified stock options, whole shares, restricted stock awards, restricted stock units, stock appreciation rights, performance shares, performance units, cash-based awards, dividend equivalents and performance-based awards. Upon adoption of the 2006 Incentive Plan all remaining shares eligible for award under the 2002 Equity Incentive Plan were added to the 2006 Incentive Plan and no further awards could be made from the 2002 Equity Incentive Plan. The time-based nonqualified stock options granted under the 2006 Incentive Plan become exercisable at the rate of 33 1/3% per year, commencing on the first anniversary date of the grant. It has been the Company’s practice to issue new common shares upon stock option exercise. On May 31, 2008, there were approximately 2.9 million shares available for grant pursuant to the Company’s 2006 Incentive Plan.
		A summary of stock options is as follows:

		Nine months ended								Nine months ended
		May 31, 2008								May 31, 2007
		Outstanding								Outstanding				Weighted-
		shares under				Weighted-average				shares under				average exercise
		option				exercise price				option				price
Outstanding at beginning of period			813,710			$	19.10				1,568,276			$	18.93
Granted			—				—				—				—
Exercised			(101,352	)			18.99				(325,721	)			18.52
Forfeited and expired			(20,839	)			19.21				(11,037	)			19.35
Outstanding at end of period			691,519				19.11				1,231,518				19.04
Exercisable at the end of the period			610,128				18.92				795,721				18.57

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, 2008 and 2007 was approximately $0.2 million and $1.3 million, respectively. The intrinsic value for stock options exercisable at May 31, 2008 was $1.5 million with a remaining term for options

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

exercisable of approximately 4 years. For stock options outstanding at May 31, 2008, exercise prices range from $11.62 to $24.69. The weighted average remaining contractual life for options outstanding at May 31, 2008 was approximately 4.5 years. Stock options vested and expected to vest at May 31, 2008 were approximately 683,000 with a remaining contractual term of approximately 4.5 years and a weighted-average exercise price of $19.10. The aggregate intrinsic value of stock options vested and expected to vest was $1.6 million at May 31, 2008. There were no grants of stock options during the nine months ended May 31, 2008 or in the comparable period last fiscal year.

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 restricted stock awards and weighted-average fair market value:

		Outstanding				Weighted-Average
		Restricted Stock				Fair Market Value
		Awards				(per share)
Outstanding at August 31, 2007			330,775			$	20.01
Granted			99,150				20.44
Vested			(151,322	)			19.12
Forfeited			(53,344	)			20.36
Outstanding at May 31, 2008			225,259				20.70

		No restricted stock was granted during the third quarter of fiscal 2008. During the nine months ended May 31, 2008, the Company granted 99,150 time-based restricted shares. 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. The Company granted time-based restricted stock awards for 90,375 shares during the three and nine months ended May 31, 2007.
		The Company also grants awards with market performance vesting criteria. In the table below, the Company summarizes all performance-based awards which include performance-based restricted stock awards and Performance Shares.

						Weighted-Average
		Outstanding				Fair Market Value
		Performance-based Awards				(per share)
Outstanding at August 31, 2007			137,525			$	20.55
Granted			203,725				13.13
Vested			—				—
Forfeited			(70,744	)			18.16
Outstanding at May 31, 2008			270,506				15.59

There were no grants of performance-based awards during the third quarter of fiscal 2008. During the nine months ended May 31, 2008, the Company granted 203,725 performance-based awards. Performance share awards (“Performance Shares”) are awards for which the vesting will occur based on both service and market performance criteria and do not have voting rights. Included in the fiscal 2008 grant are approximately 135,817 Performance Shares which earn dividends throughout the vesting period and approximately 67,908 Performance Shares which 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, 2008 was $13.13 per share. The valuation for these awards granted during the period ended May 31, 2008 which vest based on market performance criteria was based upon the Monte Carlo simulation, which is a binomial model that represents the characteristics of these grants. Vesting of the ultimate number of shares underlying

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		performance awards, if any, will be dependent upon the Company’s total shareholder return in relation to the total shareholder return of a select group of peer companies over a three-year period. 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.
		The Company granted performance-based awards for 137,875 shares during the three and nine months ended May 31, 2007. As of May 31, 2008, approximately 89,595 awards of the outstanding performance-based awards in the table above are 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, approximately 44,797 additional shares could be issued and released 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 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 as explained below.
		The fair value of the Performance Shares awards granted during the nine months ended May 31, 2008 was estimated using a Monte Carlo simulation binomial model with the following weighted-average assumptions:

		Nine months ended
Weighted-Average Assumptions		May 31, 2008
Dividend yield			2.84	%
Expected volatility			30.00	%
Risk-free interest rate			1.97	%
Correlation			32.00	%

		Total unrecognized compensation cost, including a provision for forfeitures, related to nonvested share-based compensation arrangements at May 31, 2008 was approximately $6.8 million. This cost is expected to be recognized over a weighted-average period of approximately 1.9 years.
		At May 31, 2008, the Company had approximately 311,000 restricted stock units outstanding with various vesting periods and criteria. Each restricted stock unit is equivalent to one share of A. Schulman, Inc. stock on the vesting date. There was no grant of restricted stock units during the third quarter of fiscal 2008. The Company granted approximately 114,000 restricted stock units during the nine months ended May 31, 2008. The Company granted approximately 108,000 restricted stock units during the three and nine months ended May 31, 2007. Certain restricted stock units earn dividends during the vesting period. Restricted stock units are settled only in cash at the vesting date and therefore are treated as a liability award. The Company records a liability for these restricted stock units in an amount equal to the total of (a) the mark-to-market adjustment of the units vested to date, and (b) accrued dividends on the units. The Company has recorded approximately $1.0 million and $0.5 million of expense related to restricted stock units for the three months ended May 31, 2008 and 2007, respectively. The Company has recorded approximately $1.8 million and $0.8 million of expense related to restricted stock units for the nine months ended May 31, 2008 and 2007, respectively.
(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 $46.1 million at May 31, 2008 and $11.0 million at August 31, 2007.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4)

A summary of the stockholders’ equity section for the nine months ended May 31, 2008 and 2007 is as follows:

(In thousands except per share data)
(Unaudited)

														Accumulated Other												Total
		Preferred				Common								Comprehensive				Retained								Stockholders’
		Stock				Stock				Other Capital				Income (Loss)				Earnings				Treasury Stock				Equity
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 (loss)			—				—				—				41,158				—				—
Amortization of unrecognized transition obligations, actuarial losses and prior service costs (credits), net			—				—				—				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
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, $0.435 per share			—				—				—				—				(12,106	)*			—				(12,106	)
Stock options exercised			—				326				5,705				—				—				—				6,031
Restricted stock issued, net of forfeitures			—				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

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 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,
		2008				2007				2008				2007
						(In thousands)
Weighted-average shares outstanding:
Basic			26,398				26,995				27,048				26,942
Incremental shares from stock options			72				165				66				156
Incremental shares from restricted stock			195				180				185				182
Diluted			26,665				27,340				27,299				27,280

		For the three and nine months ended May 31, 2008, there were approximately 0.1 million equivalent shares related to stock options that were excluded from diluted weighted-average shares outstanding because inclusion would have been anti-dilutive.
(6)		The components of Accumulated Other Comprehensive Income are as follows:

						Unrecognized transition
						obligations, actuarial losses				Total Accumulated
		Foreign Currency				and prior service costs				Other Comprehensive
		Translation Gain				(credits), net				Income
						(in thousands)
Balance as of August 31, 2007		$	55,397			$	(5,305	)		$	50,092
Current period change			41,158				5,651				46,809
Balance as of May 31, 2008		$	96,555			$	346			$	96,901

		Foreign currency translation gains are not tax effected as such gains are considered permanently reinvested.
(7)		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 (“CODM”). The Company historically identified and presented two geographical operating segments, North America and Europe, which includes Asia, based on how the CODM regularly reviewed information and allocated resources. In addition, the Company presented other financial information separately which represented items below operating income which were not managed at a segment level. During the first quarter of fiscal 2008, management began excluding corporate from the segment results and other charges such as foreign currency transaction gains or losses and other expenses, which are not under full control of segment management. Management believed this better reflects the actual operating performance of the segments. Prior to fiscal 2008, the Company allocated certain corporate expenses to the operating segments. Prior periods were recast to reflect the current presentation.
		As a result of changes in North American management in the third quarter of fiscal 2008 and an assessment of how the Company’s performance is reviewed and resources are allocated by the CODM, the Company redefined its North America segment to align with the Company’s North American business units during the third quarter of fiscal 2008. The reportable segments are North America Polybatch, North America

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Distribution Services, North America Engineered Plastics, A. Schulman Invision, Inc. (Invision) and Europe, which includes Asia. The North America Polybatch segment includes color and additive concentrates which improve the appearance and performance of resins targeted at the film and packaging markets. The North America Distribution Services segment provides bulk and packaged plastic materials used in a variety of applications. The North America Engineered Plastics segment includes multi-component blends of ionomers, urethanes and nylons, generally for the durable goods market, formulated to meet customer’s specific performance requirements, regardless of the base resin. Invision includes a new sheet product which is in a start-up phase as the Company is exploring potential market opportunities. As a result of the redefined segments, certain portions of the Company’s operations which are not managed separately are included in the All Other North America segment. The Company also includes in the All Other North America column any administrative costs that are not directly related or allocated to a North America business unit such as North American information technology, human resources, accounting and purchasing. The North American administrative costs are directly related to the four North American segments. Prior periods were restated to reflect the current presentation. Management has continued to manage and review the results of the European segment consistent with previous periods and no changes have been made to the reporting of that segment.

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 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, and other miscellaneous legal and professional fees.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of operating income (loss) by segment to consolidated income before taxes is presented below:

		For the three months ended								For the nine months ended
		May 31,								May 31,
		2008				2007				2008				2007
						(In thousands)
Net sales to unaffiliated customers
Europe		$	392,407			$	342,491			$	1,125,447			$	967,941
North America PolyBatch			41,209				40,563				124,378				115,449
North America Distribution Services			34,050				34,979				97,652				96,601
North America Engineered Plastics			44,002				48,900				140,365				142,391
Invision			99				22				310				68
Net sales		$	511,767			$	466,955			$	1,488,152			$	1,322,450
Segment Gross Profit
Europe		$	54,188			$	47,900			$	151,979			$	127,719
North America PolyBatch			2,884				4,893				11,892				12,593
North America Distribution Services			2,902				3,263				7,126				7,609
North America Engineered Plastics			2,755				4,266				8,706				10,663
Invision			(1,145	)			(1,643	)			(3,912	)			(3,640	)
Total Segment Gross Profit		$	61,584			$	58,679			$	175,791			$	154,944
Segment Operating Income
Europe		$	25,942			$	24,383			$	72,401			$	59,307
North America PolyBatch			839				2,891				5,867				6,659
North America Distribution Services			1,750				2,026				3,737				3,635
North America Engineered Plastics			(1,478	)			(694	)			(5,734	)			(4,686	)
Invision			(1,611	)			(2,175	)			(5,306	)			(4,467	)
All other North America			(2,582	)			(3,711	)			(11,034	)			(13,419	)
Total Segment Operating Income		$	22,860			$	22,720			$	59,931			$	47,029
Corporate and other			(3,740	)			(3,490	)			(15,916	)			(10,594	)
Interest expense, net			(1,817	)			(1,341	)			(4,533	)			(4,314	)
Foreign currency transaction gains (losses)			(984	)			(1,674	)			(1,580	)			(376	)
Other income (expense)			(253	)			(9	)			(252	)			72
Curtailment gain			2,313				—				2,313				—
Goodwill impairment — North America			—				—				(964	)			—
Asset impairment — North America			(3,601	)			—				(8,820	)			—
Restructuring — North America			(3,685	)			(130	)			(6,307	)			(1,058	)
Income before taxes		$	11,093			$	16,076			$	23,872			$	30,759

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The majority of the Company’s sales for the three and nine months ended May 31, 2008 and 2007 can be classified into five primary product families. The approximate amount and percentage of consolidated sales for these product families are as follows:

		Three months ended May 31,
Product Family		2008								2007
		(In thousands, except for %’s)
Color and additive concentrates		$	186,782				36	%		$	163,534				35	%
Polyolefins			169,392				33				146,985				31
Engineered compounds			108,915				21				105,930				23
Polyvinyl chloride (PVC)			15,373				3				16,659				4
Tolling			4,003				1				4,555				1
Other			27,302				6				29,292				6
		$	511,767				100	%		$	466,955				100	%

		Nine months ended May 31,
Product Family		2008								2007
		(In thousands, except for %’s)
Color and additive concentrates		$	532,778				36	%		$	461,578				35	%
Polyolefins			492,766				33				411,630				31
Engineered compounds			317,601				21				319,666				24
Polyvinyl chloride (PVC)			43,994				3				47,705				4
Tolling			16,178				1				15,364				1
Other			84,835				6				66,507				5
		$	1,488,152				100	%		$	1,322,450				100	%

(8)		In June 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. FIN 48 requires a company to recognize a financial statement benefit for a position taken or expected to be taken in a tax return when it is more-likely-than-not that the position will be sustained.
		The Company adopted FIN 48 on September 1, 2007, as required. As a result of the implementation, the Company recognized an increase in the opening balance of retained earnings of $2.1 million for unrecognized tax benefits not previously recognized under historical practice.
		As of May 31, 2008, the Company’s gross unrecognized tax benefits totaled $5.4 million. If recognized, approximately $2.8 million of the total unrecognized tax benefits would favorably affect the Company’s effective tax rate. The Company elects to report interest and penalties related to income tax matters in income tax expense. At May 31, 2008, the Company had $1.0 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 2004 onward and generally from fiscal year 2001 onward for most foreign jurisdictions. Specifically, in Belgium the Company is open for examination from 2005 onward. In addition, the Company is currently under examination in Germany for years 2000 through 2004. The completion of certain transfer pricing documentation during the third quarter of fiscal 2008 resulted in a tax benefit of approximately $0.7 million relating to the reversal of tax and interest previously accrued for under FIN 48. Additionally, the expiration of certain statutes of limitation in foreign jurisdictions during the second quarter of fiscal 2008 resulted in a tax benefit of approximately $0.6 million relating to the reversal of tax and interest previously accrued for under FIN 48.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

In October 2007, significant tax legislation was passed in Mexico, which was generally effective starting January 1, 2008. Of particular importance is the law’s introduction of a flat tax, which will apply to taxpaying entities along with Mexico’s regular income tax. The new legislation is not expected to have a material effect on the Company’s current financial condition, results of operations or cash flows.

In December 2007, tax legislation was passed in Italy, which was effective January 1, 2008 and includes a reduction in the combined corporate and local income tax rate by approximately six percentage points. The new legislation did not have a material effect on the Company’s current financial position, results of operations or cash flows.

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, 2008								May 31, 2007
		(In thousands except for %’s)
Statutory U.S. tax rate		$	3,883				35.0	%		$	5,627				35.0	%
Domestic losses with no benefit			2,655				23.9				1,503				9.3
Amount of foreign taxes at less than statutory U.S. tax rate			(2,992	)			(27.0	)			(1,340	)			(8.3	)
U.S. restructuring and other U.S. unusual charges with no tax benefit			933				8.4				—				—
FIN 48			(624	)			(5.6	)			—				—
Other			106				1.0				165				1.0
Total income tax expense (benefit)		$	3,961				35.7	%		$	5,955				37.0	%

		Nine months ended								Nine months ended
		May 31, 2008								May 31, 2007
		(In thousands except for %’s)
Statutory U.S. tax rate		$	8,355				35.0	%		$	10,766				35.0	%
Domestic losses with no benefit			8,581				35.9				7,565				24.6
Amount of foreign taxes at less than statutory U.S. tax rate			(9,859	)			(41.3	)			(2,902	)			(9.4	)
U.S. restructuring and other U.S. unusual charges with no tax benefit			4,094				17.1				603				1.9
FIN 48			(1,083	)			(4.5	)			—				—
Other			403				1.7				594				1.9
Total income tax expense (benefit)		$	10,491				43.9	%		$	16,626				54.0	%

The effective tax rate of 35.7% for the three months ended May 31, 2008 is consistent with 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. This favorable effect on the Company’s tax rate was offset by no tax benefits being recognized for losses in the U.S., including losses from continuing operations, charges incurred for the sale of the Orange, Texas plant, employee termination costs, and the impairment of the Findlay, Ohio facility. As compared to the effective rate of 37.0% for the three months ended May 31, 2007, the current quarter’s effective rate is driven by a decrease in the overall foreign rate and an increase in the U.S. pre-tax loss from operations and other U.S. charges for which no tax benefit was recognized. The reduction in the overall foreign tax rate is driven by an increase in foreign pre-tax income in lower rate jurisdictions, recently implemented tax planning strategies,

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		recently enacted tax legislation in Germany which reduced the German statutory rate by approximately 10 percentage points, and the reduction of a FIN 48 reserve.
		The effective tax rate of 43.9% for the nine months ended May 31, 2008 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, charges incurred for the sale of the Orange, Texas plant, employee termination costs, lease termination costs, CEO transition costs, and the impairment of the Findlay, Ohio facility. This unfavorable effect on the Company’s effective tax rate was partially offset by the overall foreign tax rate being less than the U.S. statutory rate. As compared to the effective rate of 54.0% for the nine months ended May 31, 2007, the current period’s effective rate is driven by increases in the U.S. pre-tax loss from operations and other U.S. charges for which no tax benefit was recognized. This unfavorable impact on the rate is partially offset by an increase in foreign pre-tax income in lower rate jurisdictions, recently implemented tax planning strategies, recently enacted tax legislation in Germany which reduced the German statutory rate by approximately 10 percentage points, and the reduction of FIN 48 reserves.
(9)		In January 2008, the Company’s CEO announced a 100-day plan which included many initiatives to improve profitability and drive growth. On February 6, 2008, the Company announced two steps in its continuing effort to improve the profitability of its North American operations. The Company announced it would shut down its manufacturing facility in St. Thomas, Ontario, Canada and would pursue a sale of its manufacturing facility in Orange, Texas.
		Impairment related charges
		As a result of the announcement made in February 2008, management deemed that a trigger to evaluate goodwill in North America had occurred. The goodwill in North America relates only to the tolling reporting unit of which the Orange, Texas facility is the only facility. The tolling reporting unit is included in the Company’s North America Engineered Plastics segment. The reporting units for purposes of goodwill have not changed as a result of the change in reportable segments made in the third quarter of fiscal 2008. In accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), the Company’s analysis resulted in an impairment of goodwill related to this tolling reporting unit in the amount of approximately $1.0 million recorded during the second quarter of fiscal 2008.
		As a result of the announcement in February 2008, the Company evaluated the inventory and property, plant and equipment of the Orange, Texas facility and recorded an impairment related to the long-lived assets of the Orange facility during the second quarter of fiscal 2008 of approximately $2.7 million. The impairment of the assets for the Orange, Texas facility is related to the North American Engineered Plastics reportable segment. All assets were sold during March 2008.
		As of May 31, 2008, the Company considered the assets of the St. Thomas, Ontario, Canada facility to be held and used as the facility is not available for immediate sale. In connection with the planned closure of this facility, the analysis of the possible impairment of the property, plant and equipment resulted in an impairment charge of $2.5 million recorded in the second quarter of fiscal 2008 and an additional impairment of $0.2 million during the third quarter of fiscal 2008 due to refinement in the estimated amount of equipment necessary for future use at other locations. A total impairment of $2.7 million related to the Canadian facility was recorded during fiscal 2008. The impairment of the assets for the Canadian facility is related to the North American Engineered Plastics reportable segment.
		As part of new CEO Joe Gingo’s 100-day plan to improve profitability and drive growth, the Company announced on January 3, 2008 that it would suspend further capital expenditures on Invision until the marketing strategy had been refined. The Company has considered use of the Findlay, Ohio facility for other purposes, however, as of May 31, 2008 the Company considered all assets associated with this property as held for sale. The Company recorded an impairment of its Findlay, Ohio facility of $3.4 million during the three months ended May 31, 2008 which is included in the Asset Impairment line item in the consolidated statements of operations. The impairment recorded for the Findlay, Ohio facility is related to the Invision reportable segment. The net book value of the assets held for sale after impairment is approximately $9.2 million which is included in the property, plant and equipment line item in the Company’s consolidated balance sheet as of May 31, 2008.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		Restructuring related charges
		The St. Thomas, Ontario, Canada facility primarily produces engineered plastics for the automotive market, with a capacity of 74 million pounds per year and approximately 120 employees. Production related to low-margin business at the St. Thomas facility will be discontinued and the remaining higher margin business is expected to be absorbed by primarily the Company’s Nashville, Tennessee manufacturing facility and the Bellevue, Ohio manufacturing facility. The shutdown is expected to be completed during the fourth quarter of fiscal 2008.
		The Orange, Texas facility provided primarily North American third-party tolling services in which the Company processed customer-owned materials for a fee. The Company decided to exit the North American tolling business to concentrate on higher value-added products. Total annual capacity at the Orange, Texas facility was approximately 135 million pounds and employed approximately 100 employees. The Company completed the sale of this facility in March 2008 to Alloy Polymers, Inc. for total consideration of $3.7 million. The Company recorded a loss on the sale of the Orange, Texas facility of approximately $0.3 million in the third quarter of fiscal 2008 which is included in other (income) expense in the consolidated statements of operations. In connection with this sale, the Company entered into a tolling agreement with Alloy Polymers, Inc. to have specified minimum quantities of products tolled over a period of four years.
		During the nine months ended May 31, 2008, the Company recorded approximately $6.1 million in employee related costs which include estimated severance payments and medical insurance for approximately 150 employees whose positions have been or will be eliminated throughout the North American operations and administrative support. All the restructuring costs related to the sale of the Orange, Texas and the St. Thomas, Ontario, Canada facilities are related to the North America Engineered Plastics reportable segment. Costs not specifically connected to these two events are related to All Other North America. In the third quarter of fiscal 2008, in continuation of its initiatives the Company announced it has changed its organizational reporting structure related to its North America operations.
		At May 31, 2008, the Company estimated it will incur additional charges for employee related costs, contract termination costs and other related costs of approximately $0.3 to $1.0 million related to the initiatives of the Company. The Company anticipates the majority of the accrued balance for restructuring charges to be paid during the fourth quarter of fiscal 2008. Any additional severance to be paid in excess of the amounts recorded will be charged to restructuring expense when finalized and communicated to the employees.
		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. Due to unanticipated customer demand on certain lines, the two manufacturing lines at the Orange, Texas plant continued production through the sale of the facility in March 2008. The Orange, Texas warehouse was closed during the third quarter of fiscal 2007. The warehouse and related assets were considered held for sale and are included in the Company’s consolidated balance sheet in property, plant and equipment and therefore the Company ceased depreciation on those assets. In connection with this plan, the Company reduced its workforce by 65 positions at various facilities including the Bellevue, Ohio plant.
		In February 2007, the Company announced the second phase of its restructuring plan which implemented several initiatives to improve the Company’s operations and profitability in North America. This restructuring plan includes savings 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,

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	•		Savings from improved purchasing processes, and
	•		Improved logistics efficiencies.

As a result of the initiatives announced in fiscal 2007, the Company recorded approximately $1.0 million of accelerated depreciation for the nine months ended May 31, 2007, which represents a change in estimate for the reduced life of equipment. The employee related costs include severance payments and medical insurance for employees whose positions have been eliminated in North America. The Company recorded minimal charges in fiscal 2008 related to the fiscal 2007 initiatives. At May 31, 2008, the Company believes the charges related to this restructuring plan are complete and it will not incur additional cash out-flows related to the announced initiatives in 2007. The total charge for this plan was approximately $2.1 million recorded primarily in fiscal 2007.

In connection with the announced plans in fiscal 2007 and fiscal 2008, the Company recorded the following restructuring charges.

		Fiscal 2007				Paid Fiscal				Accrual Balance				Fiscal 2008				Paid Fiscal				Accrual Balance
		Charges				2007				August 31, 2007				Charges				2008				May 31, 2008
		(In thousands)
Employee related costs		$	980			$	(906	)		$	74			$	6,072			$	(2,031	)		$	4,115
Other costs			68				(68	)			—				235				(235	)			—
Restructuring			1,048			$	(974	)		$	74			$	6,307			$	(2,266	)		$	4,115
Accelerated depreciation, included in North America cost of sales in 2007			1,071
		$	2,119

(10)

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,
		2008				2007				2008				2007
		(In thousands)
Net periodic pension cost (income) recognized included the following components:
Service cost		$	640			$	630			$	1,860			$	1,843
Interest cost			1,190				953				3,516				2,777
Expected return on plan assets			(312	)			(267	)			(944	)			(786	)
Net actuarial loss and net amortization of prior service cost and transition obligation			196				340				590				847
Curtailment gain			(2,200	)			—				(2,200	)			—
Net periodic benefit cost (income)		$	(486	)		$	1,656			$	2,822			$	4,681
Postretirement benefit cost (income) included the following components:
Service cost		$	26			$	192			$	359			$	1,113
Interest cost			227				313				850				1,195
Net amortization of prior service cost and unrecognized loss			(203	)			(119	)			(444	)			(40	)
Curtailment gain			(113	)			—				(113	)			—
Net periodic benefit cost (income)		$	(63	)		$	386			$	652			$	2,268

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		On February 21, 2008, the Company announced that it planned to amend its U.S. postretirement health care coverage plan by eliminating post-65 retiree coverage as of March 24, 2008. During the second quarter of fiscal 2008, the Company reduced its postretirement health care benefit liability by approximately $5.0 million with a corresponding increase in accumulated other comprehensive income due to the negative plan amendment. This postretirement health care benefit liability is included in other long-term liabilities on the Company’s consolidated balance sheet.
		During the third quarter of fiscal 2008, the Company recorded a curtailment gain 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.
(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.
(12)		One of the Company’s manufacturing facilities in Orange, 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, and the final settlement amount was agreed upon in November 2007. The Company recorded a charge of approximately $0.4 million during the three months ended November 30, 2007 as a result of an adjustment to its claim receivable during the final settlement negotiations. This amount was recorded in other (income) expense in the Consolidated Statements of Operations. The settlement amount was received during the second quarter of fiscal 2008.
(13)		On September 15, 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 adoption of certain portions of FAS 157 has been deferred to later years, although the Company is required to adopt part of SFAS 157 in fiscal year 2009. The remaining portions will be adopted in fiscal 2010. The Company is currently evaluating the impact, if any, of SFAS 157 on its financial position, results of operations and cash flows.
(14)		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 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 is required to adopt SFAS 159 in 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.
(15)		In December 2007, the FASB issued FASB Statement No. 141(R), Business Combinations (“SFAS 141R”). SFAS 141R replaces FASB Statement No. 141 and provides greater consistency in the accounting and financial reporting of business combinations. SFAS 141R requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction and any non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of that date. This includes the measurement of the acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance and deferred taxes. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted. The Company is required to adopt SFAS 141R in fiscal year 2010. The Company will assess the impact that SFAS 141R may have on its financial position, results of operations and cash flows.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(16)		In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for the Company for the fiscal year 2010, with early adoption being prohibited. The Company will assess the impact that SFAS 160 may have on its financial position, results of operations and cash flows.
(17)		The Company announced on November 16, 2007 that it reached an agreement with a group of investors led by Barington Capital Group, L.P. (“the Barington Group”) on matters relating to the Company’s 2007 annual meeting of stockholders which occurred on January 10, 2008. The Company agreed to form a special committee of the Board, to include Mr. James Mitarotonda, director, along with other directors, to consider all strategic alternatives available to the Company to maximize stockholder value, including, without limitation, a strategic acquisition, merger or sale of the Company. The Board also agreed to increase to five million the number of shares authorized to be repurchased under the Company’s current share repurchase program. The Company intends to repurchase at least two million shares under the program in the fiscal year ending August 31, 2008, subject to market conditions, materially relevant capital considerations of the Company and compliance with applicable laws. During the nine months ended May 31, 2008, the Company repurchased approximately 1.5 million shares of common stock at an average price of $20.53 per share.
(18)		The Company entered into a transition agreement with the Company’s former President and Chief Executive Officer, Terry L. Haines, in March 2008. Costs under this agreement include, among other things, a lump sum payment of approximately $2.4 million, additional vesting related to existing equity awards and miscellaneous perquisites. During the second quarter of fiscal 2008, the Company recorded a charge of approximately $3.0 million coincident with communication of the agreement terms.
(19)		During the second quarter of fiscal 2008, the Company recorded approximately $0.6 million in expense related to the termination of an operating lease for an airplane which is included in selling, general and administrative expense.
(20)		In accordance with SFAS 142, 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. Although the Company changed the reportable segments for disclosure during the third quarter of fiscal 2008, the reporting units used for the testing of goodwill did not change. As discussed in Footnote 9, as a result of the Company’s announcement in February 2008 to pursue a sale of its Orange, Texas facility and close the St. Thomas, Ontario, Canada facility the Company noted a trigger to test for impairment of goodwill in the North America Engineered Plastics segment. The analysis of goodwill in North America Engineered Plastics related to the tolling reporting unit resulted in an impairment charge of approximately $1.0 million. The fair value was based on estimated future cash flows including potential sale proceeds. The Company also completed its annual impairment review as of February 29, 2008 of the remaining goodwill which is related to the European segment and noted no impairment. 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 their method of estimating fair value where an indication of fair value from a buyer or similar specific transactions is not available.
		During fiscal 2007, the Company acquired the Delta Plast Group, a European color masterbatch manufacturer with operations in Sweden and Belgium. In connection with the acquisition, the Company recorded approximately $3.8 million of goodwill. The purchase price also included a potential deferred payment that could be paid over a three year period based on certain terms in the purchase agreement. During the second quarter of fiscal 2008, the Company recorded a liability for a payment related to this purchase agreement of approximately $1.6 million, which increased goodwill.

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table includes a rollforward of the carrying amount of the Company’s goodwill from August 31, 2006:

						North America
		Europe				Engineered Plastics				Total
		(In thousands)
Balance as of August 31, 2006		$	4,428			$	964			$	5,392
Goodwill recognized from business acquisition			3,780				—				3,780
Translation effect			178				—				178
Balance as of August 31, 2007		$	8,386			$	964			$	9,350
Goodwill impairment			—				(964	)			(964	)
Additional purchase price			1,578				—				1,578
Translation effect			1,216				—				1,216
Balance as of May 31, 2008		$	11,180			$	—			$	11,180

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview of the Business and Recent Developments

A. Schulman, Inc. is a leading international supplier of high-performance plastic compounds and resins headquartered in Akron, Ohio. The Company’s customers span a wide range of markets including consumer products, industrial, automotive and packaging. The Company has approximately 2,200 employees and 16 plants in countries in North America, Europe and Asia. As a result of changes in North American management in the latter part of fiscal 2008 and an assessment of how the Company’s performance is reviewed and resources are allocated by the CODM, the Company redefined its North America segment to align with the Company’s North American business units during the third quarter of fiscal 2008. The segments are Europe, which includes Asia, North America Polybatch (NAPB), North America Engineered Plastics (NAEP), North America Distribution Services (NADS) and A. Schulman Invision, Inc. (Invision).

The Company offers such products as color and additive concentrates, polyolefins, engineered compounds and polyvinyl chloride (PVC) used in packaging, durable goods and commodity products. The Company also offers a tolling service to customers from its European operations. Recently, the Company introduced its new Invision^® sheet product which is a replacement for painted plastic. The Company is exploring potential market opportunities.

Joseph M. Gingo was appointed as President and Chief Executive Officer (CEO) effective January 1, 2008. On March 21, 2008, the Company’s former Chairman, President and CEO, Terry L. Haines, retired from the Company. The Company recorded approximately $3.6 million in connection with the CEO transition during the second quarter of fiscal 2008, which includes costs for both Mr. Gingo and Mr. Haines. On February 26, 2008, the Company announced that its Board of Directors appointed Mr. Gingo as Chairman of the Board.

In January 2008, Mr. Gingo announced a 100-day plan to improve profitability and drive growth. This plan focuses on six primary areas:

	•		More efficient and effective utilization of the Company’s North American manufacturing facilities;
	•		Enhanced focus on value-added products;
	•		Re-assessment of the Company’s North American automotive business;
	•		Suspension of capital expenditures for Invision until marketing strategy has been refined;
	•		Identification of additional efficiencies in the sales and administrative structure of European and North American operations; and
	•		Ensuring the best leadership team is in place to execute the strategy.

The Company has further articulated additional initiatives including:

	•		Launching a global working capital initiative to get the Company’s working capital at competitive levels over the next three to four years;
	•		Launching an initiative to revamp the Company’s global purchasing processes and realize significant savings;
	•		Revitalizing the Company’s product development process to ensure a pipeline full of higher margin products; and
	•		Launching a continuous improvement process to ensure cost reductions continue globally.

In February 2008, the Company announced the planned closure of the St. Thomas, Ontario, Canada plant and the approval to sell the Orange, Texas manufacturing facility. The Company plans to achieve more efficient and effective utilization through the consolidation of production and exit of low-margin businesses which no longer meet the Company’s strategy of focusing on higher margin value-added products. The details of the announcement and sale are discussed further in the Results of Operations section of Management’s Discussion and Analysis and Results of Operations. The Company completed the sale of the Orange, Texas facility in March 2008 to Alloy Polymers, Inc. for total consideration of $3.7 million.

The Company announced on November 16, 2007 that it reached an agreement with a group of investors led by Barington Capital Group, L.P. (“the Barington Group”) on matters relating to the Company’s 2007 annual meeting of stockholders which occurred on January 10, 2008. The Company agreed to form a special committee of the Board, to include Mr. James Mitarotonda, director, along with other directors, to consider all strategic alternatives available to the

Company to maximize stockholder value, including, without limitation, a strategic acquisition, merger or sale of the Company. The Board also agreed to increase to five million the number of shares authorized to be repurchased under the Company’s current share repurchase program. The Company intends to repurchase at least two million shares under the program in the fiscal year ending August 31, 2008, subject to market conditions, materially relevant capital considerations of the Company and compliance with applicable laws. During the nine months ended May 31, 2008, the Company repurchased 1.5 million shares of common stock at an average price of $20.53 per share.

Results of Operations

Net sales for the three months ended May 31, 2008 were $511.8 million, an increase of $44.8 million or 9.6% over last year’s third-quarter sales of $467.0 million. Net sales for the nine months ended May 31, 2008 were $1.5 billion, an increase of $0.2 billion or 12.5% over last year’s sales for the same period of $1.3 billion. The translation effect of foreign currencies, primarily the euro, increased sales by $53.5 million and $130.8 million for the three and nine months ended May 31, 2008, respectively.

A comparison of consolidated sales by segment for the three and nine months ended May 31, 2008 and 2007 is as follows:

																										% Due to
										Total increase								% Due to				% Due to				price/ product
		Three months ended May 31,								(decrease)								tonnage				translation				mix
Sales		2008				2007				$				%
	(In thousands, except for %’s)
Europe		$	392,407			$	342,491			$	49,916				14.6	%			-2.9	%			15.1	%			2.4	%
NAPB			41,209				40,563				646				1.6	%			0.1	%			2.7	%			-1.2	%
NADS			34,050				34,979				(929	)			-2.7	%			-18.0	%			0.8	%			14.5	%
NAEP			44,002				48,900				(4,898	)			-10.0	%			-35.4	%			0.9	%			24.5	%
Invision			99				22				77				—				—				—				—
		$	511,767			$	466,955			$	44,812				9.6	%			-8.2	%			11.4	%			6.4	%