UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________________

FORM 10-Q

______________________________

(Mark One)



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

For the quarterly period ended February 28, 2018



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

For the transition period from to .

Commission File No. 0-7459

______________________________

A. SCHULMAN, INC.

(Exact Name of Registrant as Specified in its Charter)

______________________________



Delaware		34-0514850
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3637 Ridgewood Road, Fairlawn, Ohio		44333
(Address of Principal Executive Offices)		(ZIP Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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



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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Number of shares of common stock, $1.00 par value, outstanding as of March 22, 2018 – 29,525,402

TABLE OF CONTENTS



		PAGE
PART I — FINANCIAL INFORMATION
Item 1	Financial Statements	1
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3	Quantitative and Qualitative Disclosure about Market Risk	40
Item 4	Controls and Procedures	40
PART II — OTHER INFORMATION
Item 1	Legal Proceedings	42
Item 1A	Risk Factors	42
Item 6	Exhibits	43
	SIGNATURES

Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
EX-101 LABEL LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

A. SCHULMAN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three months ended February 28,						Six months ended February 28,
	2018			2017			2018			2017
	(In thousands, except per share data)
Net sales	$	650,098		$	568,678		$	1,324,721		$	1,168,678
Cost of sales	558,403			479,492			1,127,941			978,477
Selling, general and administrative expenses	78,356			65,967			153,483			138,342
Restructuring expense	124			1,878			591			11,422
(Gain) loss on sale of assets	—			—			(3,077		)	—
Operating income (loss)	13,215			21,341			45,783			40,437
Interest expense	13,435			13,107			26,876			26,271
Foreign currency transaction (gains) losses	483			1,081			1,270			1,643
Other (income) expense, net	(849		)	674			(1,746		)	(459		)
Income (loss) before taxes	146			6,479			19,383			12,982
Provision (benefit) for U.S. and foreign income taxes	(5,530		)	1,143			(1,373		)	4,462
Net income (loss)	5,676			5,336			20,756			8,520
Noncontrolling interests	(289		)	(306		)	(654		)	(547		)
Net income (loss) attributable to A. Schulman, Inc.	5,387			5,030			20,102			7,973
Convertible special stock dividends	1,875			1,875			3,750			3,750
Net income (loss) available to A. Schulman, Inc. common stockholders	$	3,512		$	3,155		$	16,352		$	4,223

Weighted-average number of shares outstanding:
Basic	29,487			29,394			29,473			29,378
Diluted	29,661			29,503			29,657			29,470

Net income (loss) per common share available to A. Schulman, Inc. common stockholders
Basic	$	0.12		$	0.11		$	0.55		$	0.14
Diluted	$	0.12		$	0.11		$	0.55		$	0.14

Cash dividends per common share	$	0.205		$	0.205		$	0.410		$	0.410
Cash dividends per share of convertible special stock	$	15.00		$	15.00		$	30.00		$	30.00

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

- 1 -

A. SCHULMAN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended February 28,				Six months ended February 28,
	2018		2017		2018		2017
	(In thousands)
Net income (loss)	$	5,676	$	5,336	$	20,756	$	8,520
Other comprehensive income (loss):
Foreign currency translation gains (losses)	8,980		4,150		9,960		(11,166		)
Defined benefit retirement plans, net of tax	435		610		813		1,204
Other comprehensive income (loss)	9,415		4,760		10,773		(9,962		)
Comprehensive income (loss)	15,091		10,096		31,529		(1,442		)
Less: comprehensive income (loss) attributable to noncontrolling interests	135		333		505		504
Comprehensive income (loss) attributable to A. Schulman, Inc.	$	14,956	$	9,763	$	31,024	$	(1,946	)

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

- 2 -

A. SCHULMAN, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)



	February 28, 2018			August 31, 2017
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	51,475		$	53,251
Restricted cash	169			768
Accounts receivable, less allowance for doubtful accounts of $10,419 at February 28, 2018 and $11,171 at August 31, 2017	439,454			408,439
Inventories	345,381			276,459
Prepaid expenses and other current assets	40,538			36,712
Assets held for sale	2,671			5,676
Total current assets	879,688			781,305
Property, plant, and equipment, less accumulated depreciation of $474,073 at February 28, 2018 and $444,481 at August 31, 2017	292,977			298,703
Deferred charges and other noncurrent assets	78,612			77,847
Goodwill	265,253			263,735
Intangible assets, net	318,332			332,190
Total assets	$	1,834,862		$	1,753,780
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	351,430		$	318,820
U.S. and foreign income taxes payable	6,405			4,900
Accrued payroll, taxes and related benefits	46,922			46,951
Other accrued liabilities	65,961			61,761
Short-term debt	19,492			32,013
Total current liabilities	490,210			464,445
Long-term debt	930,632			885,178
Pension plans	140,353			135,691
Deferred income taxes	26,015			37,699
Other long-term liabilities	23,569			23,735
Total liabilities	1,610,779			1,546,748
Commitments and contingencies
Stockholders’ equity:
Convertible special stock, no par value	120,289			120,289
Common stock, $1 par value, authorized - 75,000 shares, issued - 48,585 shares at February 28, 2018 and 48,529 shares at August 31, 2017	48,585			48,529
Additional paid-in capital	280,331			279,207
Accumulated other comprehensive income (loss)	(77,601		)	(88,523		)
Retained earnings	224,794			220,357
Treasury stock, at cost, 19,060 shares at February 28, 2018 and 19,063 shares at August 31, 2017	(382,807		)	(382,841		)
Total A. Schulman, Inc.’s stockholders’ equity	213,591			197,018
Noncontrolling interests	10,492			10,014
Total equity	224,083			207,032
Total liabilities and equity	$	1,834,862		$	1,753,780

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

- 3 -

A. SCHULMAN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six months ended February 28,
	2018			2017
	(In thousands)
Operating activities:
Net income	$	20,756		$	8,520
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation	21,218			22,215
Amortization	17,283			17,644
Deferred tax provision (benefit)	(12,794		)	(4,493		)
Pension, postretirement benefits and other compensation	3,694			3,361
(Gain) loss on sale of assets	(3,077		)	—
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	(24,780		)	(15,866		)
Inventories	(62,198		)	(24,670		)
Accounts payable	25,665			40,363
Income taxes	2,154			(4,639		)
Accrued payroll and other accrued liabilities	3,049			(4,311		)
Other assets and long-term liabilities	(3,587		)	2,025
Net cash provided from (used in) operating activities	(12,617		)	40,149
Investing activities
Expenditures for property, plant and equipment	(13,083		)	(24,505		)
Proceeds from the sale of assets	6,420			478
Distributions from equity investees	125			125
Net cash provided from (used in) investing activities	(6,538		)	(23,902		)
Financing activities:
Cash dividends paid to special stockholders	(3,750		)	(3,750		)
Cash dividends paid to common stockholders	(12,242		)	(12,057		)
Increase (decrease) in short-term debt	(15,144		)	5,153
Borrowings on long-term debt	399,923			238,543
Repayments on long-term debt including current portion	(353,597		)	(237,034		)
Noncontrolling interests' distributions	(27		)	—
Issuances of stock, common and treasury	58			93
Redemptions of common stock	(1,225		)	(620		)
Net cash provided from (used in) financing activities	13,996			(9,672		)
Effect of exchange rate changes on cash	2,784			(494		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	(2,375		)	6,081
Cash, cash equivalents, and restricted cash at beginning of period	54,019			43,403
Cash, cash equivalents, and restricted cash at end of period	$	51,644		$	49,484

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

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(1)	GENERAL

The unaudited interim consolidated financial statements included for A. Schulman, Inc. (the “Company,” “A. Schulman,” “we,” “our” and “us”) reflect all adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods presented. All such adjustments are of a normal recurring nature. The fiscal year-end consolidated 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 unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.

The results of operations for the three and six months ended February 28, 2018 are not necessarily indicative of the results expected for the fiscal year ending August 31, 2018.

The accounting policies for the periods presented are the same as described in Note 1 – Business and 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, 2017.

Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2018 presentation.

Restricted Cash

Restricted cash of $0.2 million and $0.8 million as of February 28, 2018 and August 31, 2017, respectively, represents cash and cash equivalents held in an escrow account for the cash settlement of a commitment to a local government.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount shown in the consolidated statements of cash flows:



	February 28, 2018		August 31, 2017		February 28, 2017		August 31, 2016
	(In thousands)
Cash and cash equivalents	$	51,475	$	53,251	$	47,861	$	35,260
Restricted cash	169		768		1,623		8,143
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows	$	51,644	$	54,019	$	49,484	$	43,403

Assets Held for Sale

During fiscal 2017, the Company began actively marketing for sale certain properties and machinery and equipment at recently closed plants in the U.S. and Europe. As of February 28, 2018 and August 31, 2017, the Company had $2.7 million and $5.7 million, respectively, of assets held for sale classified on the consolidated balance sheet that represents the net book value of these properties along with certain machinery and equipment. In the first quarter of fiscal 2018, the Company sold two facilities in USCAN and received total cash proceeds of $6.1 million and recognized a gain on sale of $3.1 million. The gain on sale has been recorded within (gain) loss on sale of assets in the consolidated statements of operations. We expect the sale of the remaining assets held for sale to be completed within the next twelve months and have, accordingly, presented the held for sale assets as current. Proceeds from the sale of the assets will be used for general corporate purposes. Based on the present real estate market and discussions with the Company's real estate adviser, no impairment of the recorded amounts has occurred as of February 28, 2018.

Pending Merger

On February 15, 2018, LyondellBasell Industries N.V. (“LYB”), LYB Americas Holdco Inc., a wholly owned subsidiary of LYB, and the Company, entered into an agreement (the “Merger Agreement”) whereby LYB will acquire the Company (the “Merger”).

Upon consummation of the Merger, each share of Company common stock, par value $1.00 per share (“Company Common Stock”), issued and outstanding immediately prior to the Effective Time (other than shares owned by the Company or any of its subsidiaries or LyondellBasell or any of its subsidiaries (including Merger Sub), which shall be canceled, and any Dissenting

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Shares (as defined in the Merger Agreement)), will be canceled and automatically converted into the right to receive (i) $42.00 in cash, without interest and subject to any applicable withholding taxes (the "Per-Share Amount"), and (ii) one contractual contingent value right without interest and less applicable withholding taxes (a "CVR"), which will represent the right to receive certain net proceeds, if any, resulting from the Lucent Matter (in each case subject to the terms and conditions of the CVR agreement to be entered into in accordance with the Merger Agreement). There is no guaranty that any proceeds will be received from the CVR agreement. Net proceeds, if any, related to such claims, litigations, and investigations that are received before consummation of the Merger will be classified in the Company’s consolidated balance sheet as restricted cash. Upon consummation of the Merger, any such net proceeds will be deposited in an escrow account and may be disbursed in accordance with the terms and subject to the conditions of the CVR agreement. If the Merger is not consummated, there is no restriction on the Company’s use of any cash proceeds received upon resolution of the Lucent Matter. Refer to Note 13 in this Form 10-Q for details on the Lucent Matter.

Pursuant to the Merger Agreement, each Company stock option, restricted share, restricted stock unit and performance stock unit award, whether vested or unvested, in each case, that is outstanding immediately prior to closing, will be canceled and converted into the right to receive an amount in cash, without interest, equal to the Per-Share Amount (or, in the case of Company stock options, the excess of the Per-Share Amount over the per-share exercise price for such Company stock options) for each share of the Company’s common stock underlying the applicable award, plus one CVR for each share of the Company’s common stock underlying the applicable award. Each performance-based award will be deemed to have vested at target achievement levels.

The Merger Agreement contains certain termination rights and provides that, upon termination of the Merger Agreement under specified circumstances, including a permitted change in the recommendation of the Company’s Board of Directors of or a termination of the Merger Agreement by the Company to enter into an agreement for a superior proposal, the Company will pay LYB a cash termination fee of $50.0 million.

The proposed Merger, which has been unanimously approved by the respective boards of LYB and the Company, is subject to customary closing conditions, including regulatory approvals and approval by the Company’s shareholders. The Merger is expected to close in the second half of calendar year 2018.

For further discussion related to the convertible special stock, refer to Note 7 in this Form 10-Q.


(2)	GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the Company's carrying value of goodwill are as follows:



	EMEA		USCAN		LATAM			APAC		EC			Total
	(In thousands)
Balance as of August 31, 2017	$	58,180	$	116,369	$	13,528		$	934	$	74,724		$	263,735
Translation	2,039		—		(535		)	40		(26		)	1,518
Balance as of February 28, 2018	$	60,219	$	116,369	$	12,993		$	974	$	74,698		$	265,253

The following table summarizes intangible assets with finite useful lives by major category:



	February 28, 2018							August 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(In thousands)
Customer related	$	361,478	$	(105,605	)	$	255,873	$	359,227	$	(91,910	)	$	267,317
Developed technology	73,479		(21,073		)	52,406		73,171		(18,574		)	54,597
Registered trademarks and tradenames	18,939		(8,886		)	10,053		18,347		(8,071		)	10,276
Total finite-lived intangible assets	$	453,896	$	(135,564	)	$	318,332	$	450,745	$	(118,555	)	$	332,190

Amortization expense of intangible assets was $7.8 million and $15.5 million for the three and six months ended February 28, 2018, respectively, and $8.0 million and $16.0 million for the three and six months ended February 28, 2017, respectively.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(3)	LONG-TERM DEBT AND CREDIT ARRANGEMENTS

The following table summarizes short-term and long-term debt:



	February 28, 2018			August 31, 2017
	(In thousands)
Notes payable and other, due within one year	$	2,242		$	17,263
Current portion of long-term debt	17,250			14,750
Short-term debt	$	19,492		$	32,013

Revolving credit facility, LIBOR plus applicable spread, due June 2020	$	105,744		$	51,250
Term Loan A, LIBOR plus applicable spread, due June 2020	158,750			166,250
U.S. Term Loan B, LIBOR plus applicable spread, due June 2022	296,419			298,115
Senior notes, 6.875%, due June 2023	375,000			375,000
Capital leases and other long-term debt	2,930			3,276
Unamortized debt issuance costs	(8,211		)	(8,713		)
Long-term debt	$	930,632		$	885,178

For a detailed discussion of the Company's long-term debt and credit arrangements, refer to Note 5 in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2017.

In October 2017, the Company amended the 2015 Credit Agreement and increased the net leverage ratio covenant to provide the Company additional financial flexibility to execute on its growth strategy. The Company is in compliance with its debt covenants as of February 28, 2018.

(4) FAIR VALUE MEASUREMENT

The following table presents information about the Company’s assets and liabilities measured at fair value:



	February 28, 2018								August 31, 2017
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	(In thousands)
Assets recorded at fair value:
Foreign exchange forward contracts	$	255	$	—	$	255	$	—	$	286	$	—	$	286	$	—
Liabilities recorded at fair value:
Foreign exchange forward contracts	$	378	$	—	$	378	$	—	$	268	$	—	$	268	$	—

The Company's cash and cash equivalents are recorded at cost, which approximates fair value. The carrying value of the Company's variable-rate debt approximates fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was $397.8 million and $389.5 million as of February 28, 2018 and August 31, 2017, respectively. The carrying value of this debt was $375.0 million as of February 28, 2018 and August 31, 2017, respectively.

The Company measures the fair value of its foreign exchange forward contracts using an internal model. The model maximizes the use of Level 2 market observable inputs including interest rate curves, currency forward and spot prices, and credit spreads. The aggregate notional amount of foreign exchange forward contracts outstanding was $46.3 million and $92.7 million as of February 28, 2018 and August 31, 2017, respectively. The amount of foreign exchange forward contracts outstanding as of the end of the period is indicative of the exposure of current balances and the forecasted change in exposures for the following quarter. Any gains or losses associated with these contracts as well as the offsetting gains or losses from the underlying assets or liabilities are included in the foreign currency transaction (gains) losses line in the Company’s consolidated statements of operations. The fair values of the Company’s foreign exchange forward contracts are recognized in other current assets and other accrued liabilities in the consolidated balance sheets. The foreign exchange forward contracts are entered into with creditworthy financial institutions, generally have a term of three months or less, and the Company does not hold or issue foreign exchange forward contracts for trading purposes. There were no foreign exchange forward contracts designated as hedging instruments as of February 28, 2018 and August 31, 2017.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For a discussion of the Company’s fair value measurement policies under the fair value hierarchy, refer to Note 1 in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017. The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during fiscal 2018, and transfers between levels within the fair value hierarchy, if any, are recognized at the end of each quarter. There were no transfers between levels during the period presented.

Additionally, the Company remeasures certain assets to fair value, using Level 3 measurements, as a result of the occurrence of triggering events. There were no significant assets or liabilities that were remeasured at fair value on a non-recurring basis during the period presented.

(5) INCOME TAXES

The effective tax rate was (3,787.7)% and (7.1)% for the three and six months ended February 28, 2018, respectively, and 17.6% and 34.4% for the three and six months ended February 28, 2017, respectively. The decrease in the effective tax rate as compared with the same period last year is primarily related to impacts of the recently enacted Tax Cuts and Jobs Act ("U.S. Tax Reform") and higher uncertain tax positions recorded in the prior year.

As a result of U.S. Tax Reform, the Company will be subject to a U.S. federal statutory tax rate of 25.7% for its fiscal year ending August 31, 2018, which reflects a blended federal statutory rate of 35% for its first four months and 21% for the remaining eight months. For the three months ended February 28, 2018, the Company's effective tax rate was (3,787.7)% and was lower than the blended U.S. federal statutory rate of 25.7% primarily due to the discrete impacts of U.S. Tax Reform.

On December 22, 2017, U.S. Tax Reform was enacted and significantly revised U.S. corporate income tax. The Company remeasured certain deferred tax assets and liabilities based on the tax rate that is expected to be in effect when the deferred items reverse, which is generally 21% due to the Company’s U.S. net operating loss position. In the second quarter of fiscal 2018, as a result of U.S. Tax Reform, the Company recorded a discrete non-cash tax benefit of $6.8 million due to the remeasurement of U.S deferred tax assets and liabilities. The Company believes the accounting for the impacts of the revaluation of its deferred taxes are substantially complete, except for changes in estimates that can result from finalizing the filing of its fiscal 2017 U.S. income tax return, which are not anticipated to be material, and changes that may be a direct impact of other provisional amounts recorded as a result of U.S. Tax Reform.

In the second quarter of fiscal 2018, the Company recorded a net discrete tax charge of $10.6 million due to the one-time transition tax on deemed repatriated earnings of certain non-U.S. subsidiaries. This one-time transition tax should be fully offset by foreign tax credits carried forward from prior years which were previously subject to a valuation allowance resulting in no effective tax rate impact recognized in the quarter. This one-time transition tax is based on the Company’s post-1986 earnings and profits (“E&P”) not previously subjected to U.S. taxation. This one-time transition tax is provisional as the Company has not yet completed its determination of its post-1986 non-U.S. E&P. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. Given the varying tax rates (15.5% on cash and 8% on other property), this amount may change when the Company completes the calculation of post-1986 non-U.S. E&P previously deferred from U.S. federal taxation and concludes on the amounts held in cash versus other specified assets.

U.S. Tax Reform created a new income inclusion item called the Global Intangible Low Taxed Income (“GILTI”). GILTI is effective for tax years beginning after December 31, 2017, which would be the Company’s tax year beginning September 1, 2018. The Company has elected to treat this item as a period cost when it is incurred in the future.

As stated above, the Company believes its accounting for remeasurement of deferred tax assets and liabilities are substantially complete, except for changes in estimates. The tax impacts of the one-time transition tax and the realizability of certain deferred tax assets are still being evaluated by the Company and may materially differ from the estimated impacts recognized in the second quarter of fiscal 2018 due to future treasury regulations, tax law technical corrections, and other potential guidance, notices, rulings, refined computations, actions the Company may take as a result of U.S. Tax Reform and other items. The SEC has issued Staff Accounting Bulletin 118 that allows for a measurement period of up to one year after the enactment date of U.S. Tax Reform to finalize the recording of the related tax impacts.

As of February 28, 2018, the Company's gross unrecognized tax benefits totaled $4.4 million. If recognized, $3.4 million of the total unrecognized tax benefits would favorably affect the Company's effective tax rate. 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. The Company reports interest and penalties related to income tax matters in income tax expense. As of February 28, 2018, the Company had $1.5 million of accrued interest and penalties on unrecognized tax benefits.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company’s statute of limitations is open in various jurisdictions as follows: Germany - from 2005 onward, France - from 2010 onward, U.S. - from 2014 onward, Belgium - from 2015 onward, other foreign jurisdictions - from 2011 onward.

(6) PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

The components of the Company’s net periodic benefit cost for defined benefit pension plans are shown below:



	Three months ended February 28,						Six months ended February 28,
	2018			2017			2018			2017
	(In thousands)
Defined benefit pension plans:
Service cost	$	1,342		$	1,344		$	2,640		$	2,739
Interest cost	796			570			1,567			1,157
Expected return on plan assets	(410		)	(367		)	(806		)	(743		)
Amortization of actuarial loss (gain)	724			961			1,424			1,958
Net periodic pension benefit cost	$	2,452		$	2,508		$	4,825		$	5,111

In fiscal 2018, there have been no significant charges incurred related to the Company's other postretirement benefit plan. For discussion of the Company's other postretirement benefit plan, refer to Note 8 in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.

(7) CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

A summary of the changes in stockholders’ equity is as follows:



	Convertible Special Stock		Common Stock ($1 par value)			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Non-controlling Interests			Total Equity
	(In thousands, except per share data)
Balance as of August 31, 2017	$	120,289	$	48,529		$	279,207		$	(88,523	)	$	220,357		$	(382,841	)	$	10,014		$	207,032
Comprehensive income (loss)									10,922			20,102						505			31,529
Cash dividends paid on convertible special stock, $30.00 per share												(3,750		)							(3,750		)
Cash dividends paid on common stock, $0.41 per share												(12,242		)							(12,242		)
Cash distributions to noncontrolling interests																		(27		)	(27		)
Issuance of treasury stock						24									34						58
Restricted stock issued, net of forfeitures			91			(91		)													—
Redemption of common stock to cover tax withholdings			(35		)	(1,190		)													(1,225		)
Cumulative effect adjustment upon adoption of ASU 2016-09												327									327
Share-based compensation plans						2,381															2,381
Balance as of February 28, 2018	$	120,289	$	48,585		$	280,331		$	(77,601	)	$	224,794		$	(382,807	)	$	10,492		$	224,083

For a detailed discussion of the Company's convertible special stock, refer to Note 9 in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2017. There have been no fundamental changes in the Company's convertible special stock as of February 28, 2018 or August 31, 2017, however, the pending LyondellBasell Merger discussed in Note 1 in this Form 10-Q will represent a fundamental change upon closing of the proposed Merger.

Holders of the Company’s convertible special stock continue to have the ability to convert their convertible special stock at any time before or after the Merger closing date. If holders convert prior to the Merger closing date, they will receive shares

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

of the Company’s common stock at the current conversion rate. Upon Merger closing, the Company’s convertible special stock will become convertible into the Merger consideration, with each share of the Company’s convertible special stock becoming convertible into the consideration that a holder of a number of shares of the Company’s common stock equal to the conversion rate would have been entitled to receive at closing. If a holder of the Company’s convertible special stock elects to convert during the period beginning at the open of business on the trading day immediately following the Merger closing date and ending at the close of business on the 30th trading day following the closing date, holders will be entitled to an increase in the conversion rate. After such 30th trading day, the increase to the conversion rate will no longer apply but the convertible special stock will remain convertible into the Merger consideration.

(8) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) are as follows⁽¹⁾:



	Foreign Currency Translation Gain (Loss)			Pension and Other Retiree Benefits				Total Accumulated Other Comprehensive Income (Loss)
	(In thousands)
Balance as of November 30, 2017	$	(51,216	)	$	(35,954	)		$	(87,170	)
Other comprehensive income (loss) before reclassifications	8,980			—				8,980
Amounts reclassified to earnings	—			435			⁽²⁾	435
Net current period other comprehensive income (loss)	8,980			435				9,415
Less: comprehensive income (loss) attributable to noncontrolling interests	(154		)	—				(154		)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.	9,134			435				9,569
Balance as of February 28, 2018	$	(42,082	)	$	(35,519	)		$	(77,601	)



	Foreign Currency Translation Gain (Loss)			Pension and Other Retiree Benefits				Total Accumulated Other Comprehensive Income (Loss)
	(In thousands)
Balance as of August 31, 2017	$	(52,191	)	$	(36,332	)		$	(88,523	)
Other comprehensive income (loss) before reclassifications	9,960			—				9,960
Amounts reclassified to earnings	—			813			⁽²⁾	813
Net current period other comprehensive income (loss)	9,960			813				10,773
Less: comprehensive income (loss) attributable to noncontrolling interests	(149		)	—				(149		)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.	10,109			813				10,922
Balance as of February 28, 2018	$	(42,082	)	$	(35,519	)		$	(77,601	)

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Foreign Currency Translation Gain (Loss)			Pension and Other Retiree Benefits				Total Accumulated Other Comprehensive Income (Loss)
	(In thousands)
Balance as of November 30, 2016	$	(84,963	)	$	(50,410	)		$	(135,373	)
Other comprehensive income (loss) before reclassifications	4,150			—				4,150
Amounts reclassified to earnings	—			610			⁽²⁾	610
Net current period other comprehensive income (loss)	4,150			610				4,760
Less: comprehensive income (loss) attributable to noncontrolling interests	27			—				27
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.	4,123			610				4,733
Balance as of February 28, 2017	$	(80,840	)	$	(49,800	)		$	(130,640	)



	Foreign Currency Translation Gain (Loss)			Pension and Other Retiree Benefits				Total Accumulated Other Comprehensive Income (Loss)
	(In thousands)
Balance as of August 31, 2016	$	(69,717	)	$	(51,004	)		$	(120,721	)
Other comprehensive income (loss) before reclassifications	(11,166		)	—				(11,166		)
Amounts reclassified to earnings	—			1,204			⁽²⁾	1,204
Net current period other comprehensive income (loss)	(11,166		)	1,204				(9,962		)
Less: comprehensive income (loss) attributable to noncontrolling interests	(43		)	—				(43		)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.	(11,123		)	1,204				(9,919		)
Balance as of February 28, 2017	$	(80,840	)	$	(49,800	)		$	(130,640	)

⁽¹⁾ All amounts presented are net of tax. All tax amounts are related to pension and other retiree benefits.

⁽²⁾Amounts represent amortization of net actuarial loss and prior service costs and are reclassified from accumulated other comprehensive income into cost of sales and selling, general & administrative expenses on the consolidated statements of operations. These components are included in the computation of net periodic pension cost. Refer to Note 6 in this Form 10-Q for further details.

(9) SHARE-BASED INCENTIVE COMPENSATION PLANS

During the six months ended February 28, 2018, the Company granted 46,180 and 239,440 shares of time-based and performance-based awards, respectively, with a weighted-average grant date fair value of $38.90 per share. The time-based awards vest after three years. Vesting of the ultimate number of shares underlying a portion of these performance-based awards, if any, will be dependent upon the Company's return on invested capital ("ROIC") while vesting for the remaining performance-based awards, if any, will be dependent upon the Company's cumulative earnings per share ("Cumulative EPS"), both over a three-year performance period.

During the three months ended November 30, 2017, the Company granted its new non-employee directors and its Senior Advisor to the Board of Directors a total of 2,553 shares of unrestricted common stock. During the three months ended February 28, 2018, the Company granted all non-employee directors and its Senior Advisor to the Board of Directors a total of 19,377 shares of unrestricted common stock.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Additionally, in the second quarter of fiscal 2018, the Company granted 158,150 stock options with a weighted average exercise price of $38.90 and a weighted average fair value of $13.13. The fair value of the stock options was estimated using a Black-Scholes model and the following assumptions:

Expected term: 6.5 years

Risk-free rate: 2.40%

Volatility: 39.0%

Dividend yield: 2.11%

The following table summarizes the impact to the Company’s consolidated statements of operations from share-based incentive compensation plans, which is primarily included in selling, general and administrative expenses in the accompanying consolidated statements of operations:



	Three months ended February 28,				Six months ended February 28,
	2018		2017		2018		2017
	(In thousands)
Time-based and performance-based restricted stock awards	$	643	$	446	$	1,750	$	1,347
Stock options	207		68		335		68
Unrestricted awards	754		531		832		1,253
Total share-based incentive compensation	$	1,604	$	1,045	$	2,917	$	2,668

Total unrecognized compensation cost, including a provision for estimated forfeitures, related to non-vested stock-based compensation arrangements as of February 28, 2018 was $11.9 million. This cost is expected to be recognized over a weighted-average period of 1.9 years.

For a discussion of the Merger's impact on share-based incentive compensation, refer to Note 1 in this Form 10-Q.

(10) EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common stock equivalents are exercised as well as the impact of restricted stock awards expected to vest, which combined would then share in the earnings of the Company.

Dividends on convertible special stock that an issuer has paid or intends to pay are deducted from net income or added to the amount of a net loss in computing income available to common stockholders.

The difference between basic and diluted weighted-average shares results from the assumed exercise of outstanding stock options and vesting of restricted stock awards, calculated using the treasury stock method, and the inclusion of the convertible special stock dividends, calculated using the if-converted method.

The Company computes income available to common stockholders by deducting dividends accumulated on the convertible special stock from net income attributable to A. Schulman, Inc. The convertible special stock does not impact the denominator of basic EPS. The dilutive effect of convertible special stock is reflected in diluted EPS by application of the if-converted method. In applying the if-converted method, conversion shall not be assumed for purposes of computing diluted EPS if the effect would be anti-dilutive. The convertible special stock is anti-dilutive whenever the amount of the dividend declared in or accumulated for the current period per share on conversion exceeds basic EPS. For the three and six months ended February 28, 2018 and 2017, the accumulated dividend per share on conversion exceeded basic EPS, therefore the 2,388,913 shares related to the convertible special stock were considered anti-dilutive.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three months ended February 28,		Six months ended February 28,
	2018	2017	2018	2017
	(In thousands)
Weighted-average shares outstanding:
Basic	29,487	29,394	29,473	29,378
Incremental shares from equity awards	174	109	184	92
Incremental shares from convertible special stock	—	—	—	—
Diluted	29,661	29,503	29,657	29,470

Dilutive weighted-average shares outstanding for the three and six months ended February 28, 2018 excludes 257,448 and 259,712 shares, respectively, related to equity awards, as their inclusion would have been anti-dilutive. Dilutive weighted-average shares outstanding for the three and six months ended February 28, 2017 excludes 94,298 and 88,225 shares, respectively, related to equity awards, as their inclusion would have been anti-dilutive.

(11) SEGMENT INFORMATION

The Company considers its operating structure and the types of information subject to regular review by its President and Chief Executive Officer (“CEO”), who is the Chief Operating Decision Maker (“CODM”), to identify reportable segments. The CODM makes decisions, assesses performance and allocates resources by the following reportable segments: Europe, Middle East and Africa (“EMEA”), United States & Canada (“USCAN”), Latin America (“LATAM”), Asia Pacific (“APAC”), and Engineered Composites ("EC").

The CODM uses net sales to unaffiliated customers, segment gross profit and segment operating income in order to make decisions, assess performance and allocate resources to each segment. Segment operating income does not include items such as interest income or expense, other income or expense, foreign currency transaction gains or losses, restructuring and related costs including accelerated depreciation, asset impairments, or costs related to the Merger. Corporate expenses include the compensation of certain personnel, certain audit expenses, Board of Directors related costs, certain insurance costs, costs associated with being a publicly traded entity and other miscellaneous legal and professional fees.

The following table summarizes net sales to unaffiliated customers by segment:



	Three months ended February 28,				Six months ended February 28,
	2018		2017		2018		2017
	(In thousands)
EMEA	$	335,671	$	276,902	$	683,091	$	572,974
USCAN	156,452		151,918		315,688		308,336
LATAM	44,982		39,662		93,395		81,878
APAC	57,384		48,914		117,548		99,651
EC	55,609		51,282		114,999		105,839
Total net sales to unaffiliated customers	$	650,098	$	568,678	$	1,324,721	$	1,168,678

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Below the Company presents gross profit by segment:



	Three months ended February 28,						Six months ended February 28,
	2018			2017			2018			2017
	(In thousands)
EMEA	$	40,185		$	39,130		$	86,631		$	83,788
USCAN	20,219			20,060			44,847			44,576
LATAM	8,869			9,595			19,071			19,012
APAC	8,922			8,908			18,833			18,034
EC	13,645			12,831			27,624			26,799
Total segment gross profit	91,840			90,524			197,006			192,209
Accelerated depreciation and restructuring related costs	(145		)	(1,338		)	(226		)	(1,865		)
Costs related to acquisitions and integrations	—			—			—			(57		)
Lucent costs ⁽¹⁾	—			—			—			(86		)
Total gross profit	$	91,695		$	89,186		$	196,780		$	190,201

Below is a reconciliation of segment operating income to operating income (loss) and income (loss) before taxes:



	Three months ended February 28,						Six months ended February 28,
	2018			2017			2018			2017
	(In thousands)
EMEA	$	15,166		$	16,527		$	36,266		$	36,295
USCAN	4,713			5,447			12,854			13,943
LATAM	5,071			5,459			11,028			10,894
APAC	4,684			4,901			10,444			9,914
EC	4,267			4,111			9,523			9,222
Total segment operating income	33,901			36,445			80,115			80,268
Corporate	(8,521		)	(9,065		)	(17,922		)	(17,881		)
Costs related to Merger and integrations	(4,569		)	—			(5,049		)	(605		)
Restructuring, strategic and related costs ⁽²⁾	(4,222		)	(4,970		)	(8,111		)	(18,243		)
Accelerated depreciation	(57		)	(467		)	(235		)	(823		)
Lucent costs ⁽¹⁾	(3,317		)	(596		)	(6,092		)	(1,405		)
Asset impairment	—			—			—			(678		)
Gain (loss) on sale of assets	—			—			3,077			—
CEO transition costs	—			(6		)	—			(196		)
Operating income (loss)	13,215			21,341			45,783			40,437
Interest expense	(13,435		)	(13,107		)	(26,876		)	(26,271		)
Foreign currency transaction gains (losses)	(483		)	(1,081		)	(1,270		)	(1,643		)
Other income (expense), net	849			(674		)	1,746			459
Income (loss) before taxes	$	146		$	6,479		$	19,383		$	12,982

⁽¹⁾Refer to Note 13 in this form 10-Q for additional discussion on this matter. Lucent costs in cost of sales include additional product and manufacturing operational costs for reworking inventory. Lucent costs in selling, general and administrative expenses include legal and investigative costs.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

⁽²⁾ Restructuring expenses for the three and six months ended February 28, 2018 of $0.1 million and $0.6 million, respectively, and for the three and six months ended February 28, 2017 of $1.9 million and $11.4 million, respectively, included in restructuring expense in the Company’s statements of operations include costs permitted under ASC 420, Exit or Disposal Obligations, such as severance costs, outplacement services and contract termination costs. Strategic and restructuring related costs for the three and six months ended February 28, 2018 of $4.1 million and $7.5 million, respectively, and for the three and six months ended February 28, 2017 of $3.1 million and $6.8 million, respectively, primarily included in selling, general and administrative expenses in the Company’s statements of operations, are costs associated with professional fees for outside strategic consultants regarding actions to improve the profitability of the organization, improve efficiency of its operations or comply with new legislation, costs associated with reorganizations of the legal entity structure of the Company, and costs associated with new software implementation that are not eligible for capitalization.

Globally, the Company operates in three product families: Engineered Composites, Custom Concentrates and Services, and Performance Materials. The amount and percentage of consolidated net sales for these product families are as follows:



	Three months ended February 28,
	2018				2017
	(In thousands, except for %'s)
Engineered Composites	$	55,609	9	%	$	51,282	9	%
Custom Concentrates and Services	304,454		46		259,586		46
Performance Materials	290,035		45		257,810		45
Total consolidated net sales	$	650,098	100	%	$	568,678	100	%



	Six months ended February 28,
	2018				2017
	(In thousands, except for %'s)
Engineered Composites	$	114,999	9	%	$	105,839	9	%
Custom Concentrates and Services	625,655		47		535,505		46
Performance Materials	584,067		44		527,334		45
Total consolidated net sales	$	1,324,721	100	%	$	1,168,678	100	%

(12) RESTRUCTURING

In fiscal 2018, no new restructuring plans have been announced and no significant charges have been incurred related to prior year plans. For discussion of the Company's previous restructuring plans, refer to Note 16 in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.

The following table summarizes the activity related to the Company’s restructuring plans:



	Employee-related Costs			Other Costs			Total Restructuring Costs
	(In thousands)
Accrual balance as of August 31, 2017	$	2,988		$	90		$	3,078
Fiscal 2018 charges	88			503			591
Fiscal 2018 payments	(2,243		)	(509		)	(2,752		)
Translation	7			43			50
Accrual balance as of February 28, 2018	$	840		$	127		$	967

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restructuring expenses are excluded from segment operating income but are attributable to the reportable segments as follows:



	Three months ended February 28,				Six months ended February 28,
	2018		2017		2018		2017
	(In thousands)
EMEA	$	65	$	830	$	324	$	8,844
USCAN	59		813		247		2,280
LATAM	—		—		20		59
APAC	—		88		—		92
EC	—		147		—		147
Total restructuring expense	$	124	$	1,878	$	591	$	11,422

(13) CONTINGENCIES AND CLAIMS

In the normal course of business, the Company is at times subject to pending and threatened legal actions, some for which the relief or damages sought may be substantial. Although the Company is not able to predict the outcome of such legal actions, after reviewing all pending and threatened legal actions with counsel and based on information currently available, management believes that the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the results of operations, financial position or cash flows of the Company. However, it is possible, that the ultimate resolution of such matters, if unfavorable, may be material to the results of operations in a particular future period as the time and amount of any resolution of such legal actions and its relationship to the future results of operations are not currently known.

Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, it is not considered probable that a liability has been incurred or it is not possible to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve would be recognized until that time.

There were no material changes to the Company’s future contractual obligations as previously reported in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.

Lucent Matter

As previously reported by the Company in its filings with the U.S. Securities and Exchange Commission ("SEC"), on June 1, 2015, the Company completed the acquisition of Citadel and its subsidiaries, including its indirect wholly owned subsidiary Lucent Polymers, Inc. In August 2015, the Company discovered discrepancies between laboratory data and certifications provided by Lucent to customers and also discovered inaccuracies in materials and information provided by Lucent employees to an independent certification organization. The Company took immediate decisive actions following its initial discoveries, including, but not limited to, remediation measures, notifications to affected customers, and notification to Underwriter Laboratories. The Company also commenced an internal investigation, which revealed that the discrepancies and inaccuracies initially identified were due to practices at Lucent under its prior ownership. As a result, the Company has reformulated and rebranded its products and ceased the use of certain tradenames associated with Citadel, which resulted in the impairment of certain finite-lived intangible assets during the fourth quarter of fiscal 2016. In addition, the Engineered Plastics business, which is now part of the Performance Materials product family, did not meet volume and revenue expectations in fiscal 2016 and the product had lower margins than planned due primarily to the remediation and changes in business practices undertaken to address the Lucent quality matter. The deterioration of results due to the aforementioned factors and economic conditions soon after the acquisition resulted in the impairment of the acquired goodwill during the fourth quarter of fiscal 2016. For a discussion of the goodwill and intangible asset impairments, refer to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.

To date, no customers or other parties have initiated recalls or have made material claims against the Company. Although to date, no significant customers have terminated their relationships with the Company or its subsidiaries because of the Lucent quality matter, the matter has resulted in decreased volume and revenue, including reductions by certain significant customers. Additionally, the Company continues to incur recurring additional costs to produce product to customer specification.

As no customer or other parties have initiated recalls, or have made material claims against the Company or its subsidiaries from the date we identified this issue in August 2015 through the date of filing, we are currently unable to conclude that losses related to recalls or claims are probable or to estimate the potential range of losses. The Company is currently unable to

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

determine whether such issues will have any future material adverse effect on our financial position, liquidity, or results of operations.

In addition, the Company previously provided a written claim notice to the sellers and to the escrow agent with respect to the indemnity escrow established in connection with the stock purchase agreement pursuant to which the Company acquired Citadel and its subsidiaries. As of February 28, 2018, approximately $31.0 million remained in such indemnity escrow.

As Lucent was effectively acquired by Citadel in December of 2013, the Company also submitted written claim notices pursuant to the Agreement and Plan of Merger, dated December 6, 2013, among The Matrixx Group, Incorporated, LPI Merger Sub, Inc., LPI Holding Company, River Associates Investments, LLC and certain stockholders of LPI Holding Company, pursuant to which Citadel initially acquired Lucent. The Company also submitted written claim notices pursuant to a $3.8 million representations and warranties insurance policy issued in connection with that acquisition.

In June 2016, the Company filed a complaint in the Delaware Chancery Court against Citadel Plastics (the “Citadel Complaint”), as well as certain funds affiliated with the sellers and other former executives of Citadel and Lucent (the “Citadel Defendants”). In January 2017, the Court denied the defendants motion to dismiss seventeen of twenty claims. The Court's ruling sustained claims for breach of contract, fraudulent inducement, civil conspiracy and violations of blue sky laws in Illinois, Ohio, California and Indiana. On February 16, 2017, the Court entered a stipulated order establishing an equitable lien over all pre-closing tax refunds payable by the Company to Citadel Plastics under the stock purchase agreement until resolution of litigation. The funds currently subject to the equitable lien are $7.5 million. The Company is seeking rescission, damages, rescissory damages, disgorgement or any other remedy deemed proper for the alleged violations as well as seeking attorneys’ fees for bringing suit. The case has been scheduled for trial in April 2018.

In November 2016, the Company, through its Matrixx subsidiary, filed a separate Complaint in the Delaware Chancery Court against River Associates (the “River Complaint”), as well as certain funds affiliated with the sellers and other former executives of Lucent (the “River Defendants”). In general, the River Complaint alleges similar theories (except securities violations) and seeks similar relief (except rescission) and the River Defendants filed a similar motion to dismiss as in the Citadel litigation. On August 23, 2017, the Court ruled on River Defendants’ Motions to Dismiss and Motions for Summary Judgment. The Court dismissed certain claims pertaining to one Defendant and all other motions to dismiss parties or claims were denied. In addition, the Court ruled against the Citadel Defendants’ Motions to (in effect) combine the Citadel Holdings litigation with the River litigation. Therefore, the River litigation will proceed as a separate lawsuit on a schedule months behind the Citadel Holdings Litigation. No trial date has yet been scheduled.

There are ongoing parallel investigations being undertaken by the United States Attorneys' Office for the Southern District of Indiana ("USAO") and the SEC that we understand relate to the allegations made by the Company in the Citadel Complaint arising out of the Company's acquisition of Citadel (including Citadel's subsidiary, Lucent). On September 6, 2017, the Federal Bureau of Investigation, Indianapolis division, notified the Company's counsel that the Company was a potential victim of a crime. We are cooperating fully with the USAO and the SEC in their investigations.

(14) ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in the Current Period

In March 2016, the Financial Accounting Standards Board (the "FASB") issued an accounting standard update to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification on the statement of cash flows, and accounting for forfeitures. The standard was effective for fiscal years beginning after December 15, 2016, including interim periods. The Company adopted the new standard on September 1, 2017 and reversed deferred tax liabilities of $0.3 million for all excess tax deficiencies or benefits that had not been previously recognized via a cumulative-effect adjustment to retained earnings. The Company will continue to estimate forfeitures as part of recording equity-based compensation expense. The adoption of this accounting standard did not impact the Company's consolidated statements of operations or consolidated statements of cash flows for the periods presented.

Accounting Standards Issued, to be Adopted by the Company in Future Periods

In February 2018, the FASB issued an accounting standard update addressing the ability to reclassify the "stranded tax effects" of items from accumulated other comprehensive income to retained earnings rather than record such items in the income tax provision as previously required. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods. Early adoption is permitted. The Company plans to adopt this standard on September 1, 2019 and the impact of the standard is not expected to be material.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In March 2017, the FASB issued an accounting standard update requiring that an employer report the pension service cost component in the same line items as compensation costs, but report all other components of net periodic pension cost in a line below operating income. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company had pension service cost of $2.6 million and $2.7 million during the six months ended February 28, 2018 and 2017, respectively. Total net periodic pension cost was $4.8 million and $5.1 million for the six months ended February 28, 2018 and 2017, respectively. The Company plans to adopt this standard on September 1, 2018.

In February 2016, the FASB issued new accounting guidance which requires companies to recognize a lease liability and right-of-use asset on the balance sheet for operating leases with a term greater than one year. The standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company regularly enters into operating leases which previously did not require recognition on the balance sheet. As a result, the Company is currently evaluating the effects this standard will have on its consolidated financial statements by capturing the key lease agreement terms for all lease agreement. The Company plans to adopt this standard September 1, 2019.

In May 2014, and as subsequently updated, the FASB issued new accounting guidance that creates a single revenue recognition model, while clarifying the principles for recognizing revenue. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods. The Company will adopt the new guidance on September 1, 2018. The new revenue standard may be adopted using either of the following transition methods: (1) a full retrospective approach reflecting the adoption of the standard in each prior reporting period with the option to elect certain practical expedients, or (2) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). The Company preliminarily expects to use the modified retrospective method. However, the Company is continuing to evaluate the impact of the standard, and the planned adoption method is subject to change.

No other new accounting pronouncements issued or with effective dates during fiscal 2018 had or are expected to have a material impact on the Company's consolidated financial statements.

(15) CONSOLIDATING FINANCIAL INFORMATION

Certain of our subsidiaries have guaranteed our obligations under the $375.0 million outstanding principal amount of 6.875% Senior Notes due June 2023 (the "Notes"). The following presents the condensed consolidating financial information separately for:

(i) A. Schulman Inc. (“Parent”), the issuer of the guaranteed obligations;

(ii) Guarantor subsidiaries (“Guarantors”), on a combined basis, as specified in the indentures related to the Company’s obligations under the Notes;

(iii) Non-guarantor subsidiaries (“Non-Guarantors”), on a combined basis;

(iv) Eliminations representing adjustments to (a) eliminate intercompany transactions between or among Parent, Guarantors and Non-Guarantors and (b) eliminate the investments in our subsidiaries;

(v) A. Schulman, Inc. and Subsidiaries on a consolidated basis (“Consolidated”).

Each Guarantor is 100% owned by Parent for each period presented. The Notes are fully and unconditionally guaranteed on a joint and several basis by each Guarantor. The guarantees of the Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions. Each entity in the consolidating financial information follows the same accounting policies as described in the notes to the consolidated financial statements, except for the use by Parent and Guarantors of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation. Changes in intercompany receivables and payables related to operations, such as intercompany sales or service charges, are included in cash flows from operating activities. Intercompany transactions reported as investing or financing activities include the sale of the capital stock of various subsidiaries, loans and other capital transactions between members of the consolidated group.

Certain Non-Guarantors are limited in their ability to remit funds to Parent by means of dividends, advances or loans due to required foreign government and/or currency exchange board approvals or limitations in credit agreements or other debt instruments of those subsidiaries.

During fiscal 2018, certain Guarantors merged with Parent in conjunction with simplification of the Company's legal entity structure. As required, the Company has changed the prior year consolidating financial statement presentation to conform to the current legal entity structure. As a result, Parent's total assets increased by $11.4 million, and Guarantor total assets

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(Unaudited)

decreased by $224.5 million, with corresponding offsetting adjustments presented on the same line items in the eliminations column as of August 31, 2017. Parent's total liabilities increased by $11.4 million, Guarantor total liabilities decreased by $25.7 million, and Guarantor total stockholders' equity decreased $198.8 million, with corresponding offsetting adjustments presented on the same line items in the eliminations column as of August 31, 2017. Guarantor net income increased $1.6 million and decreased $5.4 million for the three and six months ended February 28, 2017, respectively, with corresponding offsetting adjustments presented on the same line item in the eliminations column. There were no material adjustments made to the Non-Guarantors, other than intercompany balances, which eliminate in consolidation.

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(Unaudited)



	Condensed Consolidating Balance Sheet
	February 28, 2018
	Parent		Guarantors		Non-Guarantors		Eliminations			Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	861	$	—	$	50,614	$	—		$	51,475
Restricted cash	—		—		169		—			169
Accounts receivable, net	54,423		52,510		332,521		—			439,454
Accounts receivable, intercompany	22,422		6,817		28,092		(57,331		)	—
Inventories	49,315		37,580		258,486		—			345,381
Prepaid expenses and other current assets	4,331		2,898		33,309		—			40,538
Assets held for sale	—		2,671		—		—			2,671
Total current assets	131,352		102,476		703,191		(57,331		)	879,688
Net property, plant and equipment	60,425		48,828		183,724		—			292,977
Deferred charges and other noncurrent assets	104,590		4,009		56,859		(86,846		)	78,612
Intercompany loans receivable	14,264		17,896		—		(32,160		)	—
Investment in subsidiaries	812,907		115,097		—		(928,004		)	—
Goodwill	56,155		80,996		128,102		—			265,253
Intangible assets, net	38,159		167,652		112,521		—			318,332
Total assets	$	1,217,852	$	536,954	$	1,184,397	$	(1,104,341	)	$	1,834,862
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	48,715	$	29,532	$	273,183	$	—		$	351,430
Accounts payable, intercompany	9,779		34,105		13,447		(57,331		)	—
U.S. and foreign income taxes payable	—		716		5,689		—			6,405
Accrued payroll, taxes and related benefits	10,524		5,907		30,491		—			46,922
Other accrued liabilities	26,348		4,365		35,248		—			65,961
Short-term debt	17,393		37		2,062		—			19,492
Total current liabilities	112,759		74,662		360,120		(57,331		)	490,210
Long-term debt	877,384		52		53,196		—			930,632
Intercompany debt	—		—		32,160		(32,160		)	—
Pension plans	2,203		1,233		136,917		—			140,353
Deferred income taxes	—		65,991		46,870		(86,846		)	26,015
Other long-term liabilities	11,915		1,122		10,532		—			23,569
Total liabilities	1,004,261		143,060		639,795		(176,337		)	1,610,779
Commitments and contingencies
Stockholders’ equity:
Convertible special stock, no par value	120,289		—		—		—			120,289
Common stock	48,585		—		—		—			48,585
Other equity	44,717		393,894		534,110		(928,004		)	44,717
Total A. Schulman, Inc.’s stockholders’ equity	213,591		393,894		534,110		(928,004		)	213,591
Noncontrolling interests	—		—		10,492		—			10,492
Total equity	213,591		393,894		544,602		(928,004		)	224,083
Total liabilities and equity	$	1,217,852	$	536,954	$	1,184,397	$	(1,104,341	)	$	1,834,862

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(Unaudited)



	Condensed Consolidating Balance Sheet
	August 31, 2017
	Parent		Guarantors		Non-Guarantors		Eliminations			Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	614	$	—	$	52,637	$	—		$	53,251
Restricted cash	—		—		768		—			768
Accounts receivable, net	56,354		52,640		299,445		—			408,439
Accounts receivable, intercompany	26,690		7,203		26,188		(60,081		)	—
Inventories	41,862		32,667		201,930		—			276,459
Prepaid expenses and other current assets	7,662		2,221		26,829		—			36,712
Assets held for sale	2,764		2,912		—		—			5,676
Total current assets	135,946		97,643		607,797		(60,081		)	781,305
Net property, plant and equipment	63,150		51,072		184,481		—			298,703
Deferred charges and other noncurrent assets	95,287		4,198		59,609		(81,247		)	77,847
Intercompany loans receivable	16,564		17,460		—		(34,024		)	—
Investment in subsidiaries	769,813		117,617		—		(887,430		)	—
Goodwill	55,534		81,617		126,584		—			263,735
Intangible assets, net	40,416		174,748		117,026		—			332,190
Total assets	$	1,176,710	$	544,355	$	1,095,497	$	(1,062,782	)	$	1,753,780
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	43,429	$	34,612	$	240,779	$	—		$	318,820
Accounts payable, intercompany	13,191		33,370		13,520		(60,081		)	—
U.S. and foreign income taxes payable	—		597		4,303		—			4,900
Accrued payroll, taxes and related benefits	7,752		6,044		33,155		—			46,951
Other accrued liabilities	21,373		4,699		35,689		—			61,761
Short-term debt	14,912		29		17,072		—			32,013
Total current liabilities	100,657		79,351		344,518		(60,081		)	464,445
Long-term debt	858,446		41		26,691		—			885,178
Intercompany debt	—		—		34,024		(34,024		)	—
Pension plans	2,266		1,308		132,117		—			135,691
Deferred income taxes	5,593		65,991		47,362		(81,247		)	37,699
Other long-term liabilities	12,730		1,067		9,938		—			23,735
Total liabilities	979,692		147,758		594,650		(175,352		)	1,546,748
Commitments and contingencies
Stockholders’ equity:
Convertible special stock, no par value	120,289		—		—		—			120,289
Common stock	48,529		—		—		—			48,529
Other equity	28,200		396,597		490,833		(887,430		)	28,200
Total A. Schulman, Inc.’s stockholders’ equity	197,018		396,597		490,833		(887,430		)	197,018
Noncontrolling interests	—		—		10,014		—			10,014
Total equity	197,018		396,597		500,847		(887,430		)	207,032
Total liabilities and equity	$	1,176,710	$	544,355	$	1,095,497	$	(1,062,782	)	$	1,753,780

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(Unaudited)



	Consolidating Statement of Operations
	Three months ended February 28, 2018
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(In thousands)
Net sales	$	98,254		$	86,151		$	478,137		$	(12,444	)	$	650,098
Cost of sales	84,676			76,460			409,711			(12,444		)	558,403
Selling, general and administrative expenses	20,187			13,725			44,444			—			78,356
Restructuring expense	59			—			65			—			124
Operating income (loss)	(6,668		)	(4,034		)	23,917			—			13,215
Interest expense	12,777			1			806			(149		)	13,435
Intercompany charges	40			6			3,289			(3,335		)	—
Intercompany income	(1,858		)	(1,427		)	(50		)	3,335			—
Foreign currency transaction (gains) losses	344			15			124			—			483
Other (income) expense, net	—			(284		)	(714		)	149			(849		)
(Gain) loss on intercompany investments	(13,037		)	(2,921		)	—			15,958			—
Income (loss) before taxes	(4,934		)	576			20,462			(15,958		)	146
Provision (benefit) for U.S. and foreign income taxes	(10,321		)	493			4,298			—			(5,530		)
Net income (loss)	5,387			83			16,164			(15,958		)	5,676
Noncontrolling interests	—			—			(289		)	—			(289		)
Net income (loss) attributable to A. Schulman, Inc.	5,387			83			15,875			(15,958		)	5,387
Convertible special stock dividends	1,875			—			—			—			1,875
Net income (loss) available to A. Schulman, Inc. common stockholders	$	3,512		$	83		$	15,875		$	(15,958	)	$	3,512
Comprehensive income (loss)	$	14,956		$	179		$	25,611		$	(25,655	)	$	15,091
Less: comprehensive income (loss) attributable to noncontrolling interests	—			—			135			—			135
Comprehensive income (loss) attributable to A. Schulman, Inc.	$	14,956		$	179		$	25,476		$	(25,655	)	$	14,956

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(Unaudited)



	Consolidating Statement of Operations
	Three months ended February 28, 2017
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(In thousands)
Net sales	$	92,062		$	84,420		$	403,859		$	(11,663	)	$	568,678
Cost of sales	79,036			75,818			336,301			(11,663		)	479,492
Selling, general and administrative expenses	11,235			12,670			42,062			—			65,967
Restructuring expense	674			277			927			—			1,878
Operating income (loss)	1,117			(4,345		)	24,569			—			21,341
Interest expense	12,056			21			1,292			(262		)	13,107
Intercompany charges	6			—			3,043			(3,049		)	—
Intercompany income	(1,911		)	(1,127		)	(11		)	3,049			—
Foreign currency transaction (gains) losses	1,056			(2		)	27			—			1,081
Other (income) expense, net	(43		)	(325		)	780			262			674
(Gain) loss on intercompany investments	(10,872		)	(1,616		)	—			12,488			—
Income (loss) before taxes	825			(1,296		)	19,438			(12,488		)	6,479
Provision (benefit) for U.S. and foreign income taxes	(4,205		)	530			4,818			—			1,143
Net income (loss)	5,030			(1,826		)	14,620			(12,488		)	5,336
Noncontrolling interests	—			—			(306		)	—			(306		)
Net income (loss) attributable to A. Schulman, Inc.	5,030			(1,826		)	14,314			(12,488		)	5,030
Convertible special stock dividends	1,875			—			—			—			1,875
Net income (loss) available to A. Schulman, Inc. common stockholders	$	3,155		$	(1,826	)	$	14,314		$	(12,488	)	$	3,155
Comprehensive income (loss)	$	9,763		$	(747	)	$	19,354		$	(18,274	)	$	10,096
Less: comprehensive income (loss) attributable to noncontrolling interests	—			—			333			—			333
Comprehensive income (loss) attributable to A. Schulman, Inc.	$	9,763		$	(747	)	$	19,021		$	(18,274	)	$	9,763

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(Unaudited)



	Consolidating Statement of Operations
	Six months ended February 28, 2018
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(In thousands)
Net sales	$	196,761		$	176,205		$	976,626		$	(24,871	)	$	1,324,721
Cost of sales	167,411			155,148			830,253			(24,871		)	1,127,941
Selling, general and administrative expenses	37,015			26,890			89,578			—			153,483
Restructuring expense	247			—			344			—			591
(Gain) loss on sale of assets	(3,004		)	(73		)	—			—			(3,077		)
Operating income (loss)	(4,908		)	(5,760		)	56,451			—			45,783
Interest expense	25,094			2			2,225			(445		)	26,876
Intercompany charges	57			6			6,489			(6,552		)	—
Intercompany income	(3,806		)	(2,683		)	(63		)	6,552			—
Foreign currency transaction (gains) losses	476			9			785			—			1,270
Other (income) expense, net	39			(591		)	(1,639		)	445			(1,746		)
(Gain) loss on intercompany investments	(32,979		)	(5,566		)	—			38,545			—
Income (loss) before taxes	6,211			3,063			48,654			(38,545		)	19,383
Provision (benefit) for U.S. and foreign income taxes	(13,891		)	349			12,169			—			(1,373		)
Net income (loss)	20,102			2,714			36,485			(38,545		)	20,756
Noncontrolling interests	—			—			(654		)	—			(654		)
Net income (loss) attributable to A. Schulman, Inc.	20,102			2,714			35,831			(38,545		)	20,102
Convertible special stock dividends	3,750			—			—			—			3,750
Net income (loss) available to A. Schulman, Inc. common stockholders	$	16,352		$	2,714		$	35,831		$	(38,545	)	$	16,352
Comprehensive income (loss)	$	31,024		$	2,083		$	47,205		$	(48,783	)	$	31,529
Less: comprehensive income (loss) attributable to noncontrolling interests	—			—			505			—			505
Comprehensive income (loss) attributable to A. Schulman, Inc.	$	31,024		$	2,083		$	46,700		$	(48,783	)	$	31,024

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(Unaudited)



	Consolidating Statement of Operations
	Six months ended February 28, 2017
	Parent		Guarantors		Non-Guarantors		Eliminations			Consolidated
	(In thousands)
Net sales	$	182,818	$	172,480	$	835,880	$	(22,500	)	$	1,168,678
Cost of sales	156,132		152,380		692,465		(22,500		)	978,477
Selling, general and administrative expenses	25,732		25,618		86,992		—			138,342
Restructuring expense	1,872		443		9,107		—

SCHULMAN A INC 10-Q