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, 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 June 22, 2018 – 29,509,152

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	27
Item 3	Quantitative and Qualitative Disclosure about Market Risk	42
Item 4	Controls and Procedures	42
PART II — OTHER INFORMATION
Item 1	Legal Proceedings	43
Item 1A	Risk Factors	43
Item 6	Exhibits	44
	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 May 31,						Nine months ended May 31,
	2018			2017			2018			2017
	(In thousands, except per share data)
Net sales	$	722,240		$	645,795		$	2,046,961		$	1,814,473
Cost of sales	624,741			547,368			1,752,682			1,525,845
Selling, general and administrative expenses	76,440			65,266			229,923			203,608
Restructuring expense	104			939			695			12,361
(Gain) loss on sale of assets	—			—			(3,077		)	—
Operating income (loss)	20,955			32,222			66,738			72,659
Interest expense	14,285			13,179			41,161			39,450
Foreign currency transaction (gains) losses	(37		)	(68		)	1,233			1,575
Other (income) expense, net	553			(682		)	(1,192		)	(1,138		)
Income (loss) before taxes	6,154			19,793			25,536			32,772
Provision (benefit) for U.S. and foreign income taxes	878			3,695			(495		)	8,157
Net income (loss)	5,276			16,098			26,031			24,615
Noncontrolling interests	(228		)	(320		)	(881		)	(868		)
Net income (loss) attributable to A. Schulman, Inc.	5,048			15,778			25,150			23,747
Convertible special stock dividends	1,875			1,875			5,625			5,625
Net income (loss) available to A. Schulman, Inc. common stockholders	$	3,173		$	13,903		$	19,525		$	18,122

Weighted-average number of shares outstanding:
Basic	29,501			29,421			29,482			29,392
Diluted	29,687			29,530			29,637			29,496

Net income (loss) per common share available to A. Schulman, Inc. common stockholders
Basic	$	0.11		$	0.47		$	0.66		$	0.62
Diluted	$	0.11		$	0.47		$	0.66		$	0.61

Cash dividends per common share	$	0.205		$	0.205		$	0.615		$	0.615
Cash dividends per share of convertible special stock	$	15.00		$	15.00		$	45.00		$	45.00

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 May 31,					Nine months ended May 31,
	2018			2017		2018			2017
	(In thousands)
Net income (loss)	$	5,276		$	16,098	$	26,031		$	24,615
Other comprehensive income (loss):
Foreign currency translation gains (losses)	(19,078		)	14,482		(9,118		)	3,316
Defined benefit retirement plans, net of tax	436			609		1,249			1,813
Other comprehensive income (loss)	(18,642		)	15,091		(7,869		)	5,129
Comprehensive income (loss)	(13,366		)	31,189		18,162			29,744
Less: comprehensive income (loss) attributable to noncontrolling interests	46			273		551			777
Comprehensive income (loss) attributable to A. Schulman, Inc.	$	(13,412	)	$	30,916	$	17,611		$	28,967

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

- 2 -

A. SCHULMAN, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)



	May 31, 2018			August 31, 2017
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	52,002		$	53,251
Restricted cash	—			768
Accounts receivable, less allowance for doubtful accounts of $7,276 at May 31, 2018 and $11,171 at August 31, 2017	443,705			408,439
Inventories	304,438			276,459
Prepaid expenses and other current assets	37,690			36,712
Assets held for sale	3,494			5,676
Total current assets	841,329			781,305
Property, plant, and equipment, less accumulated depreciation of $468,844 at May 31, 2018 and $444,481 at August 31, 2017	282,528			298,703
Deferred charges and other noncurrent assets	76,005			77,847
Goodwill	261,752			263,735
Intangible assets, net	308,376			332,190
Total assets	$	1,769,990		$	1,753,780
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	345,957		$	318,820
U.S. and foreign income taxes payable	4,066			4,900
Accrued payroll, taxes and related benefits	49,677			46,951
Other accrued liabilities	69,488			61,761
Short-term debt	21,205			32,013
Total current liabilities	490,393			464,445
Long-term debt	897,243			885,178
Pension plans	134,838			135,691
Deferred income taxes	21,462			37,699
Other long-term liabilities	22,538			23,735
Total liabilities	1,566,474			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 - 48,567 shares at May 31, 2018 and 48,529 shares at August 31, 2017	48,567			48,529
Additional paid-in capital	281,016			279,207
Accumulated other comprehensive income (loss)	(96,062		)	(88,523		)
Retained earnings	221,909			220,357
Treasury stock, at cost, 19,058 shares at May 31, 2018 and 19,063 shares at August 31, 2017	(382,748		)	(382,841		)
Total A. Schulman, Inc.’s stockholders’ equity	192,971			197,018
Noncontrolling interests	10,545			10,014
Total equity	203,516			207,032
Total liabilities and equity	$	1,769,990		$	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)



	Nine months ended May 31,
	2018			2017
	(In thousands)
Operating activities:
Net income	$	26,031		$	24,615
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation	31,943			32,455
Amortization	25,779			26,381
Deferred tax provision (benefit)	(18,005		)	(9,539		)
Pension, postretirement benefits and other compensation	4,497			5,302
(Gain) loss on sale of assets	(3,077		)	—
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	(44,658		)	(32,841		)
Inventories	(32,758		)	(32,694		)
Accounts payable	30,207			64,795
Income taxes	168			(5,122		)
Accrued payroll and other accrued liabilities	12,335			(1,131		)
Other assets and long-term liabilities	940			1,345
Net cash provided from (used in) operating activities	33,402			73,566
Investing activities
Expenditures for property, plant and equipment	(20,785		)	(30,719		)
Proceeds from the sale of assets	6,514			2,750
Distributions from equity investees	125			125
Net cash provided from (used in) investing activities	(14,146		)	(27,844		)
Financing activities:
Cash dividends paid to convertible special stockholders	(5,625		)	(5,625		)
Cash dividends paid to common stockholders	(18,300		)	(18,129		)
Increase (decrease) in short-term debt	(13,904		)	(2,283		)
Borrowings on long-term debt	592,688			283,943
Repayments on long-term debt including current portion	(577,607		)	(295,708		)
Noncontrolling interests' distributions	(20		)	(53		)
Issuances of stock, common and treasury	175			143
Redemptions of common stock	(1,225		)	(711		)
Net cash provided from (used in) financing activities	(23,818		)	(38,423		)
Effect of exchange rate changes on cash	2,545			496
Net increase (decrease) in cash, cash equivalents, and restricted cash	(2,017		)	7,795
Cash, cash equivalents, and restricted cash at beginning of period	54,019			43,403
Cash, cash equivalents, and restricted cash at end of period	$	52,002		$	51,198

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 nine months ended May 31, 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 $0.8 million and $1.1 million as of August 31, 2017 and May 31, 2017, respectively, represents cash and cash equivalents held in an escrow account for the cash settlement of a commitment to a local government. Restricted cash of $8.1 million as of August 31, 2016 represents proceeds from tax return refunds for certain Citadel acquisition entities for periods prior to the Company's ownership.

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:



	May 31, 2018		August 31, 2017		May 31, 2017		August 31, 2016
	(In thousands)
Cash and cash equivalents	$	52,002	$	53,251	$	50,130	$	35,260
Restricted cash	—		768		1,068		8,143
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows	$	52,002	$	54,019	$	51,198	$	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 May 31, 2018 and August 31, 2017, the Company had $3.5 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 May 31, 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”).

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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. In the following circumstances, the Company will be required to pay LYB a cash termination fee of $50.0 million: (i) (a) either party has terminated the Merger Agreement because the Merger was not consummated by the nine month anniversary of the date of the Merger Agreement, subject to possible extensions in circumstances specified in the Merger Agreement or (b) LYB has terminated the Merger Agreement because there was an uncured material breach of the Merger Agreement by the Company that resulted in a failure of certain conditions obligating LYB to close the Merger, and (ii) at or prior to such a termination, a takeover proposal (as defined in the Merger Agreement for such purpose) for the Company was publicly announced or made known to the Company management or board and not publicly withdrawn, and then (iii) within nine months following such termination, the Company or any of its subsidiaries enters into a definitive acquisition agreement with respect to any takeover proposal, a takeover proposal is consummated, or the Company or its board of directors approves or recommends any takeover proposal.

The proposed Merger, has been unanimously approved by the respective boards of LYB and the Company. The Company and LYB continue to target closing the transaction in the third quarter of calendar year 2018. On June 14, 2018, at a special meeting of the Company's stockholders, the Company's stockholders approved the proposal to adopt the Merger Agreement. The closing of the Merger remains subject to the satisfaction of customary closing conditions. As of the date of this filing, the outstanding regulatory approvals are Russia and the Committee on Foreign Investment in the United States ("CFIUS").

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	(408		)	—		(1,433		)	20		(162		)	(1,983		)
Balance as of May 31, 2018	$	57,772		$	116,369	$	12,095		$	954	$	74,562		$	261,752

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	May 31, 2018							August 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(In thousands)
Customer related	$	358,527	$	(110,502	)	$	248,025	$	359,227	$	(91,910	)	$	267,317
Developed technology	72,805		(21,984		)	50,821		73,171		(18,574		)	54,597
Registered trademarks and tradenames	18,424		(8,894		)	9,530		18,347		(8,071		)	10,276
Total finite-lived intangible assets	$	449,756	$	(141,380	)	$	308,376	$	450,745	$	(118,555	)	$	332,190

Amortization expense of intangible assets was $7.7 million and $23.2 million for the three and nine months ended May 31, 2018, respectively, and $8.0 million and $24.0 million for the three and nine months ended May 31, 2017, respectively.


(3)	LONG-TERM DEBT AND CREDIT ARRANGEMENTS

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



	May 31, 2018			August 31, 2017
	(In thousands)
Notes payable and other, due within one year	$	2,705		$	17,263
Current portion of long-term debt	18,500			14,750
Short-term debt	$	21,205		$	32,013

Revolving credit facility, LIBOR plus applicable spread, due June 2020	$	76,830		$	51,250
Term Loan A, LIBOR plus applicable spread, due June 2020	155,000			166,250
U.S. Term Loan B, LIBOR plus applicable spread, due June 2022	295,571			298,115
Senior notes, 6.875%, due June 2023	375,000			375,000
Capital leases and other long-term debt	2,594			3,276
Unamortized debt issuance costs	(7,752		)	(8,713		)
Long-term debt	$	897,243		$	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. The Company is in compliance with its debt covenants as of May 31, 2018.

(4) FAIR VALUE MEASUREMENT

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



	May 31, 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	$	257	$	—	$	257	$	—	$	286	$	—	$	286	$	—
Liabilities recorded at fair value:
Foreign exchange forward contracts	$	738	$	—	$	738	$	—	$	268	$	—	$	268	$	—

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $394.5 million and $389.5 million as of May 31, 2018 and August 31, 2017, respectively. The carrying value of this debt was $375.0 million as of May 31, 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 $41.0 million and $92.7 million as of May 31, 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 May 31, 2018 and August 31, 2017.

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 14.3% and (1.9)% for the three and nine months ended May 31, 2018, respectively, and 18.7% and 24.9% for the three and nine months ended May 31, 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 May 31, 2018, the Company's effective tax rate was 14.3% and was lower than the blended U.S. federal statutory rate of 25.7% primarily due to foreign earnings taxed at lower than the U.S. tax rate.

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.

The Company calculated the potential impact of the one-time transition tax on deemed repatriated earnings of certain non-U.S. subsidiaries. This one-time transition tax should be primarily offset by foreign tax credits carried forward from prior years which were previously subject to a valuation allowance as well as tax planning, which may result in minimal net consolidated income statement impact. As such, no income tax expense adjustment was recognized in the third quarter of fiscal 2018. 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. The Company is in the process of completing a review of historical E&P and expects to finalize this analysis by the end of calendar year 2018. 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. There were no adjustments recognized in the third quarter of fiscal 2018 related to amounts considered provisional under Staff Accounting Bulletin 118.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of May 31, 2018, the Company's gross unrecognized tax benefits totaled $4.3 million. If recognized, $3.3 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 May 31, 2018, the Company had $1.5 million of accrued interest and penalties on unrecognized tax benefits.

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 May 31,						Nine months ended May 31,
	2018			2017			2018			2017
	(In thousands)
Defined benefit pension plans:
Service cost	$	1,333		$	1,370		$	3,973		$	4,109
Interest cost	793			581			2,360			1,738
Expected return on plan assets	(411		)	(374		)	(1,217		)	(1,117		)
Amortization of actuarial loss (gain)	720			981			2,144			2,939
Net periodic pension benefit cost	$	2,435		$	2,558		$	7,260		$	7,669

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.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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)									(7,539		)	25,150						551			18,162
Cash dividends paid on convertible special stock, $45.00 per share												(5,625		)							(5,625		)
Cash dividends paid on common stock, $0.615 per share												(18,300		)							(18,300		)
Cash distributions to noncontrolling interests																		(20		)	(20		)
Issuance of treasury stock						82									93						175
Restricted stock issued, net of forfeitures			73			(73		)													—
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						2,990															2,990
Balance as of May 31, 2018	$	120,289	$	48,567		$	281,016		$	(96,062	)	$	221,909		$	(382,748	)	$	10,545		$	203,516

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 with respect to the Company's convertible special stock as of May 31, 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 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 immediately prior to the Merger 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.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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 February 28, 2018	$	(42,082	)	$	(35,519	)		$	(77,601	)
Other comprehensive income (loss) before reclassifications	(19,078		)	—				(19,078		)
Amounts reclassified to earnings	—			436			⁽²⁾	436
Net current period other comprehensive income (loss)	(19,078		)	436				(18,642		)
Less: comprehensive income (loss) attributable to noncontrolling interests	(181		)	—				(181		)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.	(18,897		)	436				(18,461		)
Balance as of May 31, 2018	$	(60,979	)	$	(35,083	)		$	(96,062	)



	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	(9,118		)	—				(9,118		)
Amounts reclassified to earnings	—			1,249			⁽²⁾	1,249
Net current period other comprehensive income (loss)	(9,118		)	1,249				(7,869		)
Less: comprehensive income (loss) attributable to noncontrolling interests	(330		)	—				(330		)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.	(8,788		)	1,249				(7,539		)
Balance as of May 31, 2018	$	(60,979	)	$	(35,083	)		$	(96,062	)



	Foreign Currency Translation Gain (Loss)			Pension and Other Retiree Benefits				Total Accumulated Other Comprehensive Income (Loss)
	(In thousands)
Balance as of February 28, 2017	$	(80,840	)	$	(49,800	)		$	(130,640	)
Other comprehensive income (loss) before reclassifications	14,482			—				14,482
Amounts reclassified to earnings	—			609			⁽²⁾	609
Net current period other comprehensive income (loss)	14,482			609				15,091
Less: comprehensive income (loss) attributable to noncontrolling interests	(48		)	—				(48		)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.	14,530			609				15,139
Balance as of May 31, 2017	$	(66,310	)	$	(49,191	)		$	(115,501	)

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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 August 31, 2016	$	(69,717	)	$	(51,004	)		$	(120,721	)
Other comprehensive income (loss) before reclassifications	3,316			—				3,316
Amounts reclassified to earnings	—			1,813			⁽²⁾	1,813
Net current period other comprehensive income (loss)	3,316			1,813				5,129
Less: comprehensive income (loss) attributable to noncontrolling interests	(91		)	—				(91		)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.	3,407			1,813				5,220
Balance as of May 31, 2017	$	(66,310	)	$	(49,191	)		$	(115,501	)

⁽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 nine months ended May 31, 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.

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 May 31,					Nine months ended May 31,
	2018			2017		2018		2017
	(In thousands)
Time-based and performance-based restricted stock awards ⁽¹⁾	$	(145	)	$	775	$	1,605	$	2,122
Stock options	279			130		615		198
Unrestricted awards	—			—		832		1,253
Total share-based incentive compensation	$	134		$	905	$	3,052	$	3,573

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

⁽¹⁾ The benefit related to the performance-based restricted stock awards for the three months ended May 31, 2018 reflects reduced estimated attainment percentages upon vesting.

Total unrecognized compensation cost, including a provision for estimated forfeitures, related to non-vested stock-based compensation arrangements as of May 31, 2018 was $9.0 million. This cost is expected to be recognized over a weighted-average period of 1.7 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 nine months ended May 31, 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.

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



	Three months ended May 31,		Nine months ended May 31,
	2018	2017	2018	2017
	(In thousands)
Weighted-average shares outstanding:
Basic	29,501	29,421	29,482	29,392
Incremental shares from equity awards	186	109	155	104
Incremental shares from convertible special stock	—	—	—	—
Diluted	29,687	29,530	29,637	29,496

Dilutive weighted-average shares outstanding for the three and nine months ended May 31, 2018 excludes 158,150 and 251,448 shares, respectively, related to equity awards, as their inclusion would have been anti-dilutive. Dilutive weighted-average shares outstanding for the three and nine months ended May 31, 2017 excludes 173,200 and 89,455 shares, respectively, related to equity awards, as their inclusion would have been anti-dilutive.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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 May 31,				Nine months ended May 31,
	2018		2017		2018		2017
	(In thousands)
EMEA	$	372,736	$	318,026	$	1,055,827	$	891,000
USCAN	172,624		167,881		488,313		476,217
LATAM	48,544		47,408		141,938		129,286
APAC	68,066		53,228		185,614		152,879
EC	60,270		59,252		175,269		165,091
Total net sales to unaffiliated customers	$	722,240	$	645,795	$	2,046,961	$	1,814,473

Below the Company presents gross profit by segment:



	Three months ended May 31,						Nine months ended May 31,
	2018			2017			2018			2017
	(In thousands)
EMEA	$	42,396		$	42,509		$	129,026		$	126,297
USCAN	22,423			21,844			67,271			66,420
LATAM	9,354			9,928			28,426			28,940
APAC	9,943			9,155			28,776			27,189
EC	13,471			15,331			41,095			42,130
Total segment gross profit	97,587			98,767			294,594			290,976
Accelerated depreciation and restructuring related costs	(88		)	(236		)	(315		)	(2,101		)
Costs related to acquisitions and integrations	—			—			—			(57		)
Lucent costs ⁽¹⁾	—			(104		)	—			(190		)
Total gross profit	$	97,499		$	98,427		$	294,279		$	288,628

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three months ended May 31,						Nine months ended May 31,
	2018			2017			2018			2017
	(In thousands)
EMEA	$	16,116		$	19,712		$	52,382		$	56,006
USCAN	5,530			6,474			18,384			20,416
LATAM	4,878			6,189			15,906			17,083
APAC	5,618			5,260			16,063			15,174
EC	5,010			6,759			14,534			15,981
Total segment operating income	37,152			44,394			117,269			124,660
Corporate	(6,882		)	(7,273		)	(24,804		)	(25,151		)
Costs related to Merger and integrations	(2,120		)	—			(7,169		)	(605		)
Restructuring, strategic and related costs ⁽²⁾	(3,655		)	(2,932		)	(11,766		)	(21,176		)
Accelerated depreciation	—			(237		)	(235		)	(1,060		)
Lucent costs ⁽¹⁾	(3,540		)	(1,730		)	(9,634		)	(3,135		)
Asset impairment	—			—			—			(678		)
Gain (loss) on sale of assets	—			—			3,077			—
CEO transition costs	—			—			—			(196		)
Operating income (loss)	20,955			32,222			66,738			72,659
Interest expense	(14,285		)	(13,179		)	(41,161		)	(39,450		)
Foreign currency transaction gains (losses)	37			68			(1,233		)	(1,575		)
Other income (expense), net	(553		)	682			1,192			1,138
Income (loss) before taxes	$	6,154		$	19,793		$	25,536		$	32,772

⁽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.

⁽²⁾ Restructuring expenses for the three and nine months ended May 31, 2018 of $0.1 million and $0.7 million, respectively, and for the three and nine months ended May 31, 2017 of $0.9 million and $12.4 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 nine months ended May 31, 2018 of $3.6 million and $11.1 million, respectively, and for the three and nine months ended May 31, 2017 of $2.0 million and $8.8 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 May 31,
	2018				2017
	(In thousands, except for %'s)
Engineered Composites	$	60,270	8	%	$	59,252	9	%
Custom Concentrates and Services	337,645		46		296,917		46
Performance Materials	324,325		46		289,626		45
Total consolidated net sales	$	722,240	100	%	$	645,795	100	%

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Nine months ended May 31,
	2018				2017
	(In thousands, except for %'s)
Engineered Composites	$	175,269	9	%	$	165,091	9	%
Custom Concentrates and Services	963,298		47		832,424		46
Performance Materials	908,394		44		816,958		45
Total consolidated net sales	$	2,046,961	100	%	$	1,814,473	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	172			523			695
Fiscal 2018 payments	(2,721		)	(541		)	(3,262		)
Translation	5			11			16
Accrual balance as of May 31, 2018	$	444		$	83		$	527

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



	Three months ended May 31,				Nine months ended May 31,
	2018		2017		2018		2017
	(In thousands)
EMEA	$	104	$	832	$	428	$	9,676
USCAN	—		90		247		2,370
LATAM	—		—		20		59
APAC	—		11		—		103
EC	—		6		—		153
Total restructuring expense	$	104	$	939	$	695	$	12,361

(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.

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 an independent certification organization. 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 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 May 31, 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 Holdings, LLC. (the “Citadel Litigation”), 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 Citadel 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 or rescissory damages, damages, disgorgement or any other remedy deemed proper for the alleged violations as well as seeking attorneys’ fees for bringing suit. The case was bifurcated into two separate trials; one trial related to liability and one trial related to damages. The liability trial took place in April 2018 and the Court is expected to deliver its judgment in the third calendar quarter. The damages trial took place in June 2018 and the Court is expected to deliver its judgment in the fourth calendar quarter.

In November 2016, the Company, through its Matrixx subsidiary, filed a separate Complaint in the Delaware Chancery Court against River Associates (the “River Litigation”), as well as certain funds affiliated with the sellers and other former executives of Lucent (the “River Defendants”). In general, the River Litigation alleges similar theories (except securities violations) and

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 Litigation with the River Litigation. Therefore, the River Litigation is proceeding as a separate lawsuit on a schedule many months behind the Citadel Litigation; however, much of the document discovery and depositions from the Citadel Litigation can be used in the River 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.

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 $4.0 million and $4.1 million during the nine months ended May 31, 2018 and 2017, respectively. Total net periodic pension cost was $7.3 million and $7.7 million for the nine months ended May 31, 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. In preparation for the adoption of the new standard, the Company has captured the key lease agreement terms for all existing lease agreements and is currently evaluating the effects this standard will have on its consolidated financial statements. The Company plans to adopt this standard on 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 expects to use the modified retrospective method. In addition, the Company will continue to treat shipping and handling costs as a fulfillment cost and not a separate performance obligation. The Company is currently evaluating the effects this standard will have on the consolidated financial statements and related disclosures.

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 and certain Non-Guarantors became Guarantors due to bank requirements. 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 $11.7 million, Guarantor total assets decreased by $211.0 million, and Non-Guarantor total assets decreased by $58.0 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 $11.7 million, Guarantor total liabilities decreased by $11.6 million, and Non-Guarantor total liabilities decreased $13.9 million, with corresponding adjustments presented on the same line items in the eliminations column as of August 31, 2017. Guarantor total stockholders' equity decreased $199.5 million and Non-Guarantor total stockholders' equity decreased $44.1 million, with corresponding offsetting adjustments presented on the same line items in the eliminations column as of August 31, 2017. Guarantor net income increased $2.3 million and decreased $3.0 million for the three and nine months ended May 31, 2017, respectively, and Non-Guarantor net income decreased $3.3 million and $6.8 million for the three and nine months ended May 31, 2017, respectively, with corresponding offsetting adjustments presented on the same line item in the eliminations column.

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(Unaudited)



	Condensed Consolidating Balance Sheet
	May 31, 2018
	Parent		Guarantors		Non-Guarantors		Eliminations			Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	308	$	—	$	51,694	$	—		$	52,002
Accounts receivable, net	52,463		60,707		330,535		—			443,705
Accounts receivable, intercompany	21,798		11,944		22,945		(56,687		)	—
Inventories	41,482		34,916		228,040		—			304,438
Prepaid expenses and other current assets	5,276		3,054		29,360		—			37,690
Assets held for sale	—		2,671		823		—			3,494
Total current assets	121,327		113,292		663,397		(56,687		)	841,329
Net property, plant and equipment	59,780		51,179		171,569		—			282,528
Deferred charges and other noncurrent assets	108,432		3,934		53,812		(90,173		)	76,005
Intercompany loans receivable	14,264		18,121		—		(32,385		)	—
Investment in subsidiaries	800,456		70,794		—		(871,250		)	—
Goodwill	56,155		98,909		106,688		—			261,752
Intangible assets, net	37,022		187,298		84,056		—			308,376
Total assets	$	1,197,436	$	543,527	$	1,079,522	$	(1,050,495	)	$	1,769,990
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	45,103	$	40,769	$	260,085	$	—		$	345,957
Accounts payable, intercompany	13,289		26,353		17,045		(56,687		)	—
U.S. and foreign income taxes payable	—		411		3,655		—			4,066
Accrued payroll, taxes and related benefits	11,765		6,001		31,911		—			49,677
Other accrued liabilities	30,159		5,090		34,239		—			69,488
Short-term debt	18,627		37		2,541		—			21,205
Total current liabilities	118,943		78,661		349,476		(56,687		)	490,393
Long-term debt	871,822		43		25,378		—			897,243
Intercompany debt	—		—		32,385		(32,385		)	—
Pension plans	2,164		1,180		131,494		—			134,838
Deferred income taxes	—		78,201		33,434		(90,173		)	21,462
Other long-term liabilities	11,536		1,070		9,932		—			22,538
Total liabilities	1,004,465		159,155		582,099		(179,245		)	1,566,474
Commitments and contingencies
Stockholders’ equity:
Convertible special stock, no par value	120,289		—		—		—			120,289
Common stock	48,567		—		—		—			48,567
Other equity	24,115		384,372		486,878		(871,250		)	24,115
Total A. Schulman, Inc.’s stockholders’ equity	192,971		384,372		486,878		(871,250		)	192,971
Noncontrolling interests	—		—		10,545		—			10,545
Total equity	192,971		384,372		497,423		(871,250		)	203,516
Total liabilities and equity	$	1,197,436	$	543,527	$	1,079,522	$	(1,050,495	)	$	1,769,990

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Condensed Consolidating Balance Sheet
	August 31, 2017
	Parent		Guarantors		Non-Guarantors		Eliminations			Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	620	$	—	$	52,631	$	—		$	53,251
Restricted cash	—		—		768		—			768
Accounts receivable, net	56,339		55,778		296,322		—			408,439
Accounts receivable, intercompany	33,180		8,837		18,721		(60,738		)	—
Inventories	41,862		34,199		200,398		—			276,459
Prepaid expenses and other current assets	1,018		8,900		26,794		—			36,712
Assets held for sale	2,764		2,912		—		—			5,676
Total current assets	135,783		110,626		595,634		(60,738		)	781,305
Net property, plant and equipment	63,693		53,601		181,409		—			298,703
Deferred charges and other noncurrent assets	95,287		4,198		59,620		(81,258		)	77,847
Intercompany loans receivable	16,564		17,460		—		(34,024		)	—
Investment in subsidiaries	769,126		73,394		—		(842,520		)	—
Goodwill	56,155		98,909		108,671		—			263,735
Intangible assets, net	40,416		199,618		92,156		—			332,190
Total assets	$	1,177,024	$	557,806	$	1,037,490	$	(1,018,540	)	$	1,753,780
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	43,433	$	35,580	$	239,807	$	—		$	318,820
Accounts payable, intercompany	13,187		34,309		13,242		(60,738		)	—
U.S. and foreign income taxes payable	—		597		4,303		—			4,900
Accrued payroll, taxes and related benefits	7,928		6,152		32,871		—			46,951
Other accrued liabilities	21,511		4,612		35,638		—			61,761
Short-term debt	14,912		29		17,072		—			32,013
Total current liabilities	100,971		81,279		342,933		(60,738		)	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		78,201		35,163		(81,258		)	37,699
Other long-term liabilities	12,730		1,067		9,938		—			23,735
Total liabilities	980,006		161,896		580,866		(176,020		)	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		395,910		446,610		(842,520		)	28,200
Total A. Schulman, Inc.’s stockholders’ equity	197,018		395,910		446,610		(842,520		)	197,018
Noncontrolling interests	—		—		10,014		—			10,014
Total equity	197,018		395,910		456,624		(842,520		)	207,032
Total liabilities and equity	$	1,177,024	$	557,806	$	1,037,490	$	(1,018,540	)	$	1,753,780

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Consolidating Statement of Operations
	Three months ended May 31, 2018
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(In thousands)
Net sales	$	105,754		$	107,815		$	523,368		$	(14,697	)	$	722,240
Cost of sales	92,540			90,907			455,991			(14,697		)	624,741
Selling, general and administrative expenses	17,391			14,705			44,344			—			76,440
Restructuring expense	—			—			104			—			104
Operating income (loss)	(4,177		)	2,203			22,929			—			20,955
Interest expense	13,489			2			1,014			(220		)	14,285
Intercompany charges	40			8			3,220			(3,268		)	—
Intercompany income	(1,817		)	(1,400		)	(51		)	3,268			—
Foreign currency transaction (gains) losses	(641		)	12			592			—			(37		)
Other (income) expense, net	9			(188		)	512			220			553
(Gain) loss on intercompany investments	(14,930		)	433			—			14,497			—
Income (loss) before taxes	(327		)	3,336			17,642			(14,497		)	6,154
Provision (benefit) for U.S. and foreign income taxes	(5,375		)	437			5,816			—			878
Net income (loss)	5,048			2,899			11,826			(14,497		)	5,276
Noncontrolling interests	—			—			(228		)	—			(228		)
Net income (loss) attributable to A. Schulman, Inc.	5,048			2,899			11,598			(14,497		)	5,048
Convertible special stock dividends	1,875			—			—			—			1,875
Net income (loss) available to A. Schulman, Inc. common stockholders	$	3,173		$	2,899		$	11,598		$	(14,497	)	$	3,173
Comprehensive income (loss)	$	(13,412	)	$	1,707		$	(6,973	)	$	5,312		$	(13,366	)
Less: comprehensive income (loss) attributable to noncontrolling interests	—			—			46			—			46
Comprehensive income (loss) attributable to A. Schulman, Inc.	$	(13,412	)	$	1,707		$	(7,019	)	$	5,312		$	(13,412	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Consolidating Statement of Operations
	Three months ended May 31, 2017
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(In thousands)
Net sales	$	97,961		$	105,590		$	453,077		$	(10,833	)	$	645,795
Cost of sales	82,890			90,644			384,667			(10,833		)	547,368
Selling, general and administrative expenses	11,189			13,827			40,250			—			65,266
Restructuring expense	91			6			842			—			939
Operating income (loss)	3,791			1,113			27,318			—			32,222
Interest expense	12,326			2			1,095			(244		)	13,179
Intercompany charges	112			—			1,810			(1,922		)	—
Intercompany income	(591		)	(1,254		)	(77		)	1,922			—
Foreign currency transaction (gains) losses	(1,481		)	(5		)	1,418			—			(68		)
Other (income) expense, net	(22		)	(429		)	(475		)	244			(682		)
(Gain) loss on intercompany investments	(17,795		)	(118		)	—			17,913			—
Income (loss) before taxes	11,242			2,917			23,547			(17,913		)	19,793
Provision (benefit) for U.S. and foreign income taxes	(4,536		)	259			7,972			—			3,695
Net income (loss)	15,778			2,658			15,575			(17,913		)	16,098
Noncontrolling interests	—			—			(320		)	—			(320		)
Net income (loss) attributable to A. Schulman, Inc.	15,778			2,658			15,255			(17,913		)	15,778
Convertible special stock dividends	1,875			—			—			—			1,875
Net income (loss) available to A. Schulman, Inc. common stockholders	$	13,903		$	2,658		$	15,255		$	(17,913	)	$	13,903
Comprehensive income (loss)	$	30,916		$	2,224		$	30,879		$	(32,830	)	$	31,189
Less: comprehensive income (loss) attributable to noncontrolling interests	—			—			273			—			273
Comprehensive income (loss) attributable to A. Schulman, Inc.	$	30,916		$	2,224		$	30,606		$	(32,830	)	$	30,916

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Consolidating Statement of Operations
	Nine months ended May 31, 2018
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(In thousands)
Net sales	$	302,515		$	299,975		$	1,484,142		$	(39,671	)	$	2,046,961
Cost of sales	259,951			252,083			1,280,319			(39,671		)	1,752,682
Selling, general and administrative expenses	54,406			45,053			130,464			—			229,923
Restructuring expense	247			—			448			—			695
(Gain) loss on sale of assets	(3,004		)	(73		)	—			—			(3,077		)
Operating income (loss)	(9,085		)	2,912			72,911			—			66,738
Interest expense	38,583			4			3,239			(665		)	41,161
Intercompany charges	97			14			9,702			(9,813		)	—
Intercompany income	(5,623		)	(4,083		)	(107		)	9,813			—
Foreign currency transaction (gains) losses	(165		)	23			1,375			—			1,233
Other (income) expense, net	49			(779		)	(1,127		)	665			(1,192		)
(Gain) loss on intercompany investments	(47,910		)	1,333			—			46,577			—
Income (loss) before taxes	5,884			6,400			59,829			(46,577		)	25,536
Provision (benefit) for U.S. and foreign income taxes	(19,266		)	786			17,985			—			(495		)
Net income (loss)	25,150			5,614			41,844			(46,577		)	26,031
Noncontrolling interests	—			—			(881		)	—			(881		)
Net income (loss) attributable to A. Schulman, Inc.	25,150			5,614			40,963			(46,577		)	25,150
Convertible special stock dividends	5,625			—			—			—			5,625
Net income (loss) available to A. Schulman, Inc. common stockholders	$	19,525		$	5,614		$	40,963		$	(46,577	)	$	19,525
Comprehensive income (loss)	$	17,611		$	3,791		$	33,765		$	(37,005	)	$	18,162
Less: comprehensive income (loss) attributable to noncontrolling interests	—			—			551			—			551
Comprehensive income (loss) attributable to A. Schulman, Inc.	$	17,611		$	3,791		$	33,214		$	(37,005	)	$	17,611

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A. SCHULMAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Consolidating Statement of Operations
	Nine months ended May 31, 2017
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(In thousands)
Net sales	$	280,779		$	289,908		$	1,276,855		$	(33,069	)	$	1,814,473
Cost of sales	239,022			247,278			1,072,614			(33,069		)	1,525,845
Selling, general and administrative expenses	36,950			42,525			124,133			—			203,608
Restructuring expense	1,963			449			9,949			—			12,361
Operating income (loss)	2,844			(344		)	70,159			—			72,659
Interest expense	36,309			28			3,879			(766		)	39,450
Intercompany charges	120			—			6,706			(6,826		)	—
Intercompany income	(3,046		)	(3,687		)	(93		)	6,826			—
Foreign currency transaction (gains) losses	555			(31		)

SCHULMAN A INC 10-Q