Quarterly Report




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, 2017
OR  
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 or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
þ
 
  
Accelerated filer
 
o
Non-accelerated filer
 
o
 (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ
Number of shares of common stock, $1.00 par value, outstanding as of March 31, 2017 29,487,059





TABLE OF CONTENTS

 
 
PAGE
Legal Proceedings
 
 
 
 
 
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
 
Six months ended
 
February 28,
2017
 
February 29,
2016
 
February 28,
2017
 
February 29,
2016
 
(In thousands, except per share data)
Net sales
$
568,678


$
591,761

 
$
1,168,678

 
$
1,240,980

Cost of sales
479,492

 
501,937

 
978,477

 
1,046,227

Selling, general and administrative expenses
65,967

 
71,604

 
138,342

 
148,841

Restructuring expense
1,878

 
2,214

 
11,422

 
3,760

Operating income (loss)
21,341


16,006

 
40,437

 
42,152

Interest expense
13,107

 
13,790

 
26,271

 
27,408

Foreign currency transaction (gains) losses
1,081

 
950

 
1,643

 
1,679

Other (income) expense, net
674

 
(269
)
 
(459
)
 
(218
)
Income (loss) before taxes
6,479


1,535

 
12,982

 
13,283

Provision (benefit) for U.S. and foreign income taxes
1,143

 
(487
)
 
4,462

 
3,764

Net income (loss)
5,336


2,022

 
8,520

 
9,519

Noncontrolling interests
(306
)
 
(430
)
 
(547
)
 
(834
)
Net income (loss) attributable to A. Schulman, Inc.
5,030

 
1,592

 
7,973

 
8,685

Convertible special stock dividends
1,875

 
1,875

 
3,750

 
3,750

Net income (loss) available to A. Schulman, Inc. common stockholders
$
3,155

 
$
(283
)
 
$
4,223

 
$
4,935

 
 
 
 
 
 
 
 
Weighted-average number of shares outstanding:
 
 
 
 
 
 
 
Basic
29,394


29,292

 
29,378

 
29,257

Diluted
29,503


29,292

 
29,470

 
29,455

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

 
$
(0.01
)
 
$
0.14

 
$
0.17

Diluted
$
0.11

 
$
(0.01
)
 
$
0.14

 
$
0.17

 
 
 
 
 
 
 
 
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
 
Six months ended
 
February 28,
2017
 
February 29,
2016
 
February 28,
2017
 
February 29,
2016
 
(In thousands)
Net income (loss)
$
5,336

 
$
2,022

 
$
8,520

 
$
9,519

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gains (losses)
4,150

 
(9,243
)
 
(11,166
)
 
(20,019
)
Defined benefit retirement plans, net of tax
610

 
150

 
1,204

 
1,165

Other comprehensive income (loss)
4,760

 
(9,093
)
 
(9,962
)
 
(18,854
)
Comprehensive income (loss)
10,096

 
(7,071
)
 
(1,442
)
 
(9,335
)
Less: comprehensive income (loss) attributable to noncontrolling interests
333

 
(224
)
 
504

 
111

Comprehensive income (loss) attributable to A. Schulman, Inc.
$
9,763

 
$
(6,847
)
 
$
(1,946
)
 
$
(9,446
)


The accompanying notes are an integral part of the consolidated financial statements
- 2 -




A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
February 28,
2017
 
August 31,
2016
 
(In thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
47,861

 
$
35,260

Restricted cash
1,623

 
8,143

Accounts receivable, less allowance for doubtful accounts of $11,411 at February 28, 2017 and $11,341 at August 31, 2016
380,791

 
376,786

Inventories
279,814

 
263,617

Prepaid expenses and other current assets
40,837

 
40,263

Assets held for sale
9,669

 

Total current assets
760,595


724,069

Property, plant and equipment, at cost:
 
 
 
Land and improvements
29,798

 
32,957

Buildings and leasehold improvements
170,485

 
184,291

Machinery and equipment
434,993

 
447,932

Furniture and fixtures
32,720

 
34,457

Construction in progress
25,000

 
20,431

Gross property, plant and equipment
692,996

 
720,068

Accumulated depreciation
401,288

 
405,246

Net property, plant and equipment
291,708

 
314,822

Deferred charges and other noncurrent assets
85,364

 
88,161

Goodwill
257,507

 
257,773

Intangible assets, net
344,622

 
362,614

Total assets
$
1,739,796

 
$
1,747,439

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
303,160

 
$
280,060

U.S. and foreign income taxes payable
5,783

 
8,985

Accrued payroll, taxes and related benefits
41,039

 
47,569

Other accrued liabilities
66,844

 
67,704

Short-term debt
28,857

 
25,447

Total current liabilities
445,683

 
429,765

Long-term debt
921,312

 
919,349

Pension plans
138,574

 
145,108

Deferred income taxes
56,113

 
59,013

Other long-term liabilities
24,850

 
25,844

Total liabilities
1,586,532

 
1,579,079

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 - 48,553 shares at February 28, 2017 and 48,510 shares at August 31, 2016
48,553

 
48,510

Additional paid-in capital
277,165

 
275,115

Accumulated other comprehensive income (loss)
(130,640
)
 
(120,721
)
Retained earnings
211,205

 
219,039

Treasury stock, at cost, 19,066 shares at February 28, 2017 and 19,069 shares at August 31, 2016
(382,903
)
 
(382,963
)
Total A. Schulman, Inc.’s stockholders’ equity
143,669

 
159,269

Noncontrolling interests
9,595

 
9,091

Total equity
153,264

 
168,360

Total liabilities and equity
$
1,739,796

 
$
1,747,439


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,
2017
 
February 29,
2016
 
(In thousands)
Operating activities:
 
 
 
Net income
$
8,520

 
$
9,519

Adjustments to reconcile net income to net cash provided from (used in) operating activities:
 
 
 
Depreciation
22,215

 
25,053

Amortization
17,644

 
20,032

Deferred tax provision (benefit)
(4,493
)
 
(2,360
)
Pension, postretirement benefits and other compensation
3,361

 
2,621

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(15,866
)
 
10,822

Inventories
(24,670
)
 
4,772

Accounts payable
40,363

 
(30,846
)
Income taxes
(4,639
)
 
(1,491
)
Accrued payroll and other accrued liabilities
(4,311
)
 
(5,773
)
Other assets and long-term liabilities
2,025

 
(1,712
)
Net cash provided from (used in) operating activities
40,149

 
30,637

Investing activities
 
 
 
Expenditures for property, plant and equipment
(24,505
)
 
(20,365
)
Proceeds from the sale of assets
478

 
843

Other investing activities
125

 

Net cash provided from (used in) investing activities
(23,902
)
 
(19,522
)
Financing activities:
 
 
 
Cash dividends paid to special stockholders
(3,750
)
 
(3,750
)
Cash dividends paid to common stockholders
(12,057
)
 
(12,043
)
Increase (decrease) in short-term debt
5,153

 
4,275

Borrowings on revolving credit facility
238,543

 
45,655

Repayments of revolving credit facility
(173,895
)
 
(29,900
)
Repayments of other long-term debt and capital leases
(63,139
)
 
(61,450
)
Issuances of stock, common and treasury
93

 
148

Redemptions of common stock
(620
)
 
(900
)
Net cash provided from (used in) financing activities
(9,672
)
 
(57,965
)
Effect of exchange rate changes on cash
(494
)
 
(3,144
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
6,081

 
(49,994
)
Cash, cash equivalents, and restricted cash at beginning of period
43,403

 
96,872

Cash, cash equivalents, and restricted cash at end of period
$
49,484

 
$
46,878

 
 
 
 
Cash and cash equivalents
$
47,861

 
$
46,878

Restricted cash
1,623

 

Total cash, cash equivalents, and restricted cash
$
49,484

 
$
46,878


The accompanying notes are an integral part of the consolidated financial statements
- 4 -



A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



(1)
GENERAL
The unaudited interim consolidated financial statements included for A. Schulman, Inc. (the “Company”) 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, 2016 .
The results of operations for the three and six months ended February 28, 2017 are not necessarily indicative of the results expected for the fiscal year ending August 31, 2017 .
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, 2016 .
Restricted Cash
Restricted cash of $1.6 million as of February 28, 2017 represents cash and cash equivalents held in an escrow account for the future cash settlement of a commitment to a local government. The cash will be paid over the next 16 months. Restricted cash of $8.1 million as of August 31, 2016 included proceeds from tax return refunds for certain Citadel acquisition entities for periods prior to the Company's ownership. These tax refunds were repaid to the seller during the second quarter of fiscal 2017.
Assets Held for Sale
During the second quarter of 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 a result of that decision, we have reclassified $9.7 million of net book value related to these properties along with certain machinery and equipment as assets held for sale in the balance sheet. We expect the sale of those assets 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, 2017 .
Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2017 presentation.

(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, 2016
$
54,031

 
$
116,369

 
$
11,928

 
$
936

 
$
74,509

 
$
257,773

Translation
(982
)
 

 
533

 
(32
)
 
215

 
(266
)
Balance as of February 28, 2017
$
53,049

 
$
116,369

 
$
12,461

 
$
904

 
$
74,724

 
$
257,507


- 5 -

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table summarizes intangible assets with finite useful lives by major category:
 
February 28, 2017
 
August 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
(In thousands)
Customer related
$
357,341

 
$
(79,363
)
 
$
277,978

 
$
359,713

 
$
(67,207
)
 
$
292,506

Developed technology
72,260

 
(15,981
)
 
56,279

 
72,657

 
(13,864
)
 
58,793

Registered trademarks and tradenames
17,514

 
(7,149
)
 
10,365

 
18,097

 
(6,782
)
 
11,315

Total finite-lived intangible assets
$
447,115

 
$
(102,493
)
 
$
344,622

 
$
450,467

 
$
(87,853
)
 
$
362,614

Amortization expense of intangible assets was $8.0 million and $16.0 million for the three and six months ended February 28, 2017 , respectively, and $9.3 million and $18.6 million for the three and six months ended February 29, 2016 , respectively.

(3)
LONG-TERM DEBT AND CREDIT ARRANGEMENTS

The following table summarizes short-term and long-term debt:
 
February 28, 2017
 
August 31, 2016
 
(In thousands)
Notes payable and other, due within one year
$
15,357

 
$
10,333

Current portion of long-term debt
13,500

 
15,114

Short-term debt
$
28,857

 
$
25,447

 
 
 
 
Revolving credit facility, LIBOR plus applicable spread, due June 2020
$
80,090

 
$
17,279

Term Loan A, LIBOR plus applicable spread, due June 2020
172,500

 
177,500

U.S. Term Loan B, LIBOR plus applicable spread, due June 2022
299,811

 
341,407

Euro Term Loan B, LIBOR plus applicable spread, due June 2022

 
14,678

Senior notes, 6.875%, due June 2023
375,000

 
375,000

Capital leases and other long-term debt
3,389

 
3,727

Unamortized debt issuance costs
(9,478
)
 
(10,242
)
Long-term debt
$
921,312

 
$
919,349

On May 26, 2015, the Company issued  $375.0 million  aggregate principal amount of 6.875%  Senior Notes due 2023 (the “Notes”) in a private transaction initially exempt from the registration requirements of the Securities Act of 1933 (the “Securities Act”). In connection with the sale of the Notes, the Company entered into a Registration Rights Agreement with the representatives of the initial purchasers of the Notes (the “Registration Rights Agreement”) that, among other things, obligated the Company to complete an offer to exchange the Notes for a new issue of substantially identical exchange notes (the “Exchange Offer”) registered under the Securities Act. The interest rate on the Notes temporarily increased in accordance with the terms of the Registration Rights Agreement during the period between November 16, 2016 to, but not including, the date of the completion of the Exchange Offer on March 21, 2017. The Company did not receive any proceeds from the Exchange Offer.
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, 2016 .
The Company is in compliance with its debt covenants as of February 28, 2017 .
The Company prepaid $56.0 million on its term debt, in addition to normal required payments of $6.8 million , during the six months ended February 28, 2017 .


- 6 -

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(4) FAIR VALUE MEASUREMENT
The following table presents information about the Company’s assets and liabilities measured at fair value:
 
February 28, 2017
 
August 31, 2016
 
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
$
2,558

 
$

 
$
2,558

 
$

 
$
487

 
$

 
$
487

 
$

Liabilities recorded at fair value:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
1,865

 
$

 
$
1,865

 
$

 
$
951

 
$

 
$
951

 
$

Liabilities not recorded at fair value:
 
 
 
 
 
 
 
 
 
 
Long-term fixed-rate debt
$
397,031

 
$

 
$
397,031

 
$

 
$
378,750

 
$

 
$
378,750

 
$

Cash and cash equivalents are recorded at cost, which approximates fair value. Additionally, the carrying value of the Company's variable-rate debt approximates fair value.
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 total contract value of foreign exchange forward contracts outstanding was $165.1 million and $115.9 million as of February 28, 2017 and August 31, 2016 , 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 value of the Company’s foreign exchange forward contracts is recognized in other current assets or other accrued liabilities in the consolidated balance sheets based on the net settlement value. 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, 2017 and August 31, 2016 .
Long-term fixed-rate debt as of February 28, 2017 and August 31, 2016 represents the Senior Notes, due 2023, recorded at cost and presented at fair value for disclosure purposes. The Level 2 fair value of the Company's fixed-rate debt was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities. As of February 28, 2017 and August 31, 2016 , the carrying value of the Company's long-term fixed-rate debt recorded on the consolidated balance sheets was $375.0 million .
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, 2016 . The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during fiscal 2017 , 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.


- 7 -

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(5) INCOME TAXES
The effective tax rate was 17.6% and 34.4% for the three and six months ended February 28, 2017 , respectively, and (36.0)% and 28.8% for the three and six months ended February 29, 2016 , respectively. The increase in the effective tax rate for the three and six months ended February 28, 2017 as compared with the same periods last year was driven primarily by an increase in uncertain tax positions as well as a benefit recorded in the prior period from the extension of certain expired tax provisions.
We record quarterly taxes based on overall estimated annual effective tax rates. The difference between our effective tax rate and the U.S. statutory federal income tax rate in the current year is primarily attributable to our overall foreign rate being less than the U.S. statutory federal income tax rate partially offset by an increase in the amount of uncertain tax positions recorded.
As of February 28, 2017 , 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 Company reports interest and penalties related to income tax matters in income tax expense. As of February 28, 2017 , the Company had $1.3 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 2013 onward, Belgium - from 2014 onward, other foreign jurisdictions - from 2011 onward.
The increase in uncertain tax positions during the six months ended February 28, 2017 relates to various ongoing examinations in the EMEA region. In connection with these examinations, it is reasonably possible that the amount of unrecognized tax benefits could change by approximately $1.0 million in the next 12 months.

(6) PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The components of the Company’s net periodic benefit cost for defined benefit pension and other postretirement benefit plans are shown below:
 
Three months ended
 
Six months ended
 
February 28,
2017
 
February 29,
2016
 
February 28,
2017
 
February 29,
2016
 
(In thousands)
Defined benefit pension plans:
 
 
 
 
 
 
 
Service cost
$
1,344

 
$
1,275

 
$
2,739

 
$
2,569

Interest cost
570

 
1,041

 
1,157

 
2,104

Expected return on plan assets
(367
)
 
(485
)
 
(743
)
 
(989
)
Amortization of actuarial loss (gain)
961

 
712

 
1,958

 
1,436

Net periodic pension benefit cost
$
2,508

 
$
2,543

 
$
5,111

 
$
5,120

 
 
 
 
 
 
 
 
Other postretirement benefit plan:
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
$
2

 
$
2

Interest cost
63

 
97

 
126

 
194

Prior service cost (credit)
(135
)
 
(149
)
 
(271
)
 
(298
)
Net periodic postretirement benefit cost (credit)
$
(71
)
 
$
(51
)
 
$
(143
)
 
$
(102
)

- 8 -

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, 2016
$
120,289

 
$
48,510

 
$
275,115

 
$
(120,721
)
 
$
219,039

 
$
(382,963
)
 
$
9,091

 
$
168,360

Comprehensive income (loss)
 
 
 
 

 
(9,919
)
 
7,973

 

 
504

 
(1,442
)
Cash dividends paid on convertible special stock, $30.00 per share
 
 
 
 
 
 
 
 
(3,750
)
 
 
 
 
 
(3,750
)
Cash dividends paid on common stock, $0.410 per share
 
 
 
 

 

 
(12,057
)
 

 

 
(12,057
)
Issuance of treasury stock
 
 
 
 
33

 

 

 
60

 

 
93

Restricted stock issued, net of forfeitures
 
 
63

 
(63
)
 
 
 
 
 
 
 
 
 

Redemption of common stock to cover tax withholdings
 
 
(20
)
 
(600
)
 
 
 
 
 
 
 
 
 
(620
)
Share-based compensation plans
 
 
 
 
2,680

 

 

 

 

 
2,680

Balance as of February 28, 2017
$
120,289

 
$
48,553

 
$
277,165

 
$
(130,640
)
 
$
211,205

 
$
(382,903
)
 
$
9,595

 
$
153,264

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, 2016 . There have been no fundamental changes in the Company's convertible special stock as of February 28, 2017 or August 31, 2016 .

(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, 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
)


- 9 -

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
(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
)

 
Foreign Currency Translation Gain (Loss)
 
Pension and Other Retiree Benefits
 
Total Accumulated Other Comprehensive Income (Loss)
 
(In thousands)
Balance as of November 30, 2015
$
(60,269
)
 
$
(32,883
)
 
$
(93,152
)
Other comprehensive income (loss) before reclassifications
(9,243
)
 

 
(9,243
)
Amounts reclassified to earnings

 
150

(2)  
150

Net current period other comprehensive income (loss)
(9,243
)
 
150

 
(9,093
)
Less: comprehensive income (loss) attributable to
noncontrolling interests
(654
)
 

 
(654
)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
(8,589
)
 
150

 
(8,439
)
Balance as of February 29, 2016
$
(68,858
)
 
$
(32,733
)
 
$
(101,591
)


 
Foreign Currency Translation Gain (Loss)
 
Pension and Other Retiree Benefits
 
Total Accumulated Other Comprehensive Income (Loss)
 
(In thousands)
Balance as of August 31, 2015
$
(49,562
)
 
$
(33,898
)
 
$
(83,460
)
Other comprehensive income (loss) before reclassifications
(20,019
)
 

 
(20,019
)
Amounts reclassified to earnings

 
1,165

(2)  
1,165

Net current period other comprehensive income (loss)
(20,019
)
 
1,165

 
(18,854
)
Less: comprehensive income (loss) attributable to
noncontrolling interests
(723
)
 

 
(723
)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
(19,296
)
 
1,165

 
(18,131
)
Balance as of February 29, 2016
$
(68,858
)
 
$
(32,733
)
 
$
(101,591
)

(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 of this Form 10-Q for further details.


- 10 -

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(9) SHARE-BASED INCENTIVE COMPENSATION PLANS

During the six months ended February 28, 2017, the Company granted 234,620 and 227,220 shares of time-based and performance-based awards, respectively, with a weighted-average grant date fair value of $29.47 and $32.55 per share, respectively. 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.

In the first quarter of fiscal 2017, the Company granted 25,000 shares of unrestricted common stock to Joseph M. Gingo related to the terms and conditions of his new employment agreement as the Chief Executive Officer and President of the Company in the first quarter of fiscal 2017. The Company also granted non-employee directors a total of 16,317 shares of unrestricted common stock in the second quarter of fiscal 2017.

Additionally, in the second quarter of fiscal 2017, the Company granted 173,200 stock options with a weighted average exercise price of $32.55 and a weighted average fair value of $10.41 . The fair value of the stock options was estimated using a Black Scholes model using the following assumptions:

Expected term:     6.5 years
Risk-free rate:     2.22%
Volatility:     39.1%
Dividend yield:     2.52%
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
 
Six months ended
 
February 28,
2017
 
February 29,
2016
 
February 28,
2017
 
February 29,
2016
 
(In thousands)
Time-based and performance-based restricted stock awards
$
446

 
$
842

 
$
1,347

 
$
1,267

Stock options
68

 

 
68

 

Unrestricted awards
531

 
564

 
1,253

 
564

Total share-based incentive compensation
$
1,045

 
$
1,406

 
$
2,668

 
$
1,831

Total unrecognized compensation cost, including a provision for estimated forfeitures, related to non-vested stock-based compensation arrangements as of February 28, 2017 was $10.1 million . This cost is expected to be recognized over a weighted-average period of 1.9 years.
As of February 28, 2017 , there were 259,011 shares of common stock available for grant pursuant to the Company's 2010 Rewards Plan and 703,521 shares of common stock available for grant pursuant to the Company's 2014 Equity Incentive Plan. For further discussion of the Company's share-based incentive compensation plans, refer to Note 11 in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2016 .


- 11 -

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(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, 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
 
Six months ended
 
February 28,
2017
 
February 29,
2016
 
February 28,
2017
 
February 29,
2016
 
(In thousands)
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
29,394

 
29,292

 
29,378

 
29,257

Incremental shares from equity awards
109

 

 
92

 
198

Incremental shares from convertible special stock

 

 

 

Diluted
29,503

 
29,292

 
29,470

 
29,455

Diluted 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. Diluted weighted-average shares outstanding for the three and six months ended February 29, 2016 excludes 165,141 and 6,638 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 current 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 and inventory step-up charges related to business acquisitions. 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.

- 12 -

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table summarizes net sales to unaffiliated customers by segment:
 
Three months ended
 
Six months ended
 
February 28,
2017
 
February 29,
2016
 
February 28,
2017
 
February 29,
2016
 
(In thousands)
EMEA
$
276,902


$
290,330

 
$
572,974

 
$
618,426

USCAN
151,918


170,817

 
308,336

 
349,099

LATAM
39,662

 
38,158

 
81,878

 
83,361

APAC
48,914


45,063

 
99,651

 
90,755

EC
51,282

 
47,393

 
105,839

 
99,339

Total net sales to unaffiliated customers
$
568,678

 
$
591,761

 
$
1,168,678

 
$
1,240,980

Below the Company presents gross profit by segment:
 
Three months ended
 
Six months ended
 
February 28,
2017
 
February 29,
2016
 
February 28,
2017
 
February 29,
2016
 
(In thousands)
EMEA
$
39,130

 
$
38,953

 
$
83,788

 
$
86,637

USCAN
20,060

 
27,241

 
44,576

 
57,535

LATAM
9,595

 
8,466

 
19,012

 
18,171

APAC
8,908

 
8,199

 
18,034

 
16,073

EC
12,831

 
10,987

 
26,799

 
24,195

Total segment gross profit
90,524

 
93,846

 
192,209

 
202,611

Accelerated depreciation and restructuring related costs
(1,338
)
 
(2,504
)
 
(1,865
)
 
(4,381
)
Costs related to acquisitions and integrations

 
(1,970
)
 
(57
)
 
(2,099
)
Lucent costs (1)

 
452

 
(86
)
 
(1,378
)
Total gross profit
$
89,186

 
$
89,824

 
$
190,201

 
$
194,753


- 13 -

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
 
Six months ended
 
February 28,
2017
 
February 29,
2016
 
February 28,
2017
 
February 29,
2016
 
(In thousands)
EMEA
$
16,527

 
$
15,612

 
$
36,295

 
$
35,765

USCAN
5,447

 
10,427

 
13,943

 
22,590

LATAM
5,459

 
4,229

 
10,894

 
9,833

APAC
4,901

 
4,670

 
9,914

 
8,977

EC
4,111

 
1,450

 
9,222

 
5,552

Total segment operating income
36,445

 
36,388

 
80,268

 
82,717

Corporate
(9,065
)
 
(7,684
)
 
(17,881
)
 
(16,172
)
Costs related to acquisitions and integrations

 
(4,261
)
 
(605
)
 
(6,127
)
Restructuring and related costs (2)
(4,970
)
 
(5,769
)
 
(18,243
)
 
(10,439
)
Accelerated depreciation
(467
)
 
(2,057
)
 
(823
)
 
(3,510
)
Lucent costs (1)
(596
)
 
(611
)
 
(1,405
)
 
(4,317
)
Asset impairment

 

 
(678
)
 

CEO transition costs
(6
)
 

 
(196
)
 

Operating income (loss)
21,341

 
16,006

 
40,437

 
42,152

Interest expense
(13,107
)
 
(13,790
)
 
(26,271
)
 
(27,408
)
Foreign currency transaction gains (losses)
(1,081
)
 
(950
)
 
(1,643
)
 
(1,679
)
Other income (expense), net
(674
)
 
269

 
459

 
218

Income (loss) before taxes
$
6,479

 
$
1,535

 
$
12,982

 
$
13,283

  (1) Refer to Note 13, Commitments and Contingencies, 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. In addition, in the three and six months ended February 29, 2016, Lucent costs in SG&A also include dedicated internal personnel costs that would have otherwise been focused on normal operations.
(2) Restructuring related costs for the three and six months ended February 28, 2017 of $3.1 million and $6.8 million , respectively, and for the three and six months ended February 29, 2016 of $3.6 million and $6.7 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 and efficiency of its operations, and costs associated with reorganizations of the legal entity structure of the Company. Restructuring expenses 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.
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, 2017
 
February 29, 2016
 
(In thousands, except for %'s)
Engineered Composites
$
51,282

 
9
%
 
$
47,393

 
8
%
Custom Concentrates and Services
259,586

 
46

 
268,459

 
45

Performance Materials
257,810

 
45

 
275,909

 
47

Total consolidated net sales
$
568,678

 
100
%
 
$
591,761

 
100
%


- 14 -

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Six months ended
 
February 28, 2017
 
February 29, 2016
 
(In thousands, except for %'s)
Engineered Composites
$
105,839

 
9
%
 
$
99,339

 
8
%
Custom Concentrates and Services
535,505

 
46

 
564,296

 
45

Performance Materials
527,334

 
45

 
577,345

 
47

Total consolidated net sales
$
1,168,678

 
100
%
 
$
1,240,980

 
100
%

(12) RESTRUCTURING
Fiscal 2017 Restructuring Plans
USCAN Plan
During the second quarter of fiscal 2017, the Company approved plans to close its plant in Fontana, California and shift production to other U.S. facilities. The Company plans to reduce headcount by approximately 10 as a result of this plan. The Company recorded $0.5 million of pre-tax employee-related costs during the three and six months ended February 28, 2017 . The Company expects to incur approximately $1.5 million of pre-tax employee-related costs and other charges during the remainder of fiscal 2017 for this plan and has a balance of $0.4 million accrued for this plan as of February 28, 2017 . Cash payments associated with this plan are expected to occur through fiscal 2017 as the plan is completed.
Global Product Family Simplification Plan
During the first quarter of fiscal 2017, the Company announced plans to reduce middle management and consolidate the number of product families from six to three. This action simplified the management structure and processes of the product families and allowed the Company to refocus on the priority of sales growth. The Company has eliminated approximately 60 positions during fiscal 2017, primarily in EMEA and USCAN. The Company recorded $6.3 million of pre-tax employee-related costs during the six months ended February 28, 2017 , a majority of which was recorded during the first quarter of fiscal 2017. As of February 28, 2017 , the company has a balance of $2.5 million accrued for this plan. The Company does not expect any additional charges related to this plan. Cash payments associated with this plan are expected to occur through fiscal 2017 as the plan is completed.
EMEA Plans
During the second quarter of fiscal 2017, the Company announced plans to close its plant in L'Arbresle, France and shift production to other EMEA facilities. The Company plans to reduce headcount by approximately 20 as a result of this plan. The Company recorded $1.4 million of pre-tax employee-related costs during the three and six months ended February 28, 2017 . The Company expects to incur minimal charges during the remainder of fiscal 2017 for this plan and has a balance of $1.3 million accrued for this plan as of February 28, 2017 . Cash payments associated with this plan are expected to occur through fiscal 2018 as the plan is completed.
In the first quarter of fiscal 2017, the Company approved plans to further streamline EMEA operations and back-office functions. The Company reduced headcount in EMEA by approximately 30 as a result of this plan. During the six months ended February 28, 2017 , the Company recorded $1.8 million of pre-tax employee-related costs, the majority of which was recorded during the first quarter of fiscal 2017. As of February 28, 2017 , the Company has a balance of $0.6 million accrued for this plan. The Company anticipates recording approximately $1.0 million of additional pre-tax employee-related charges during the remainder of fiscal 2017 for this plan. Cash payments associated with this plan are expected to occur through fiscal 2017 as the plan is completed.
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, 2016 .

- 15 -

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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, 2016
$
3,542

 
$
402

 
$
3,944

Fiscal 2017 charges
10,718

 
704

 
11,422

Fiscal 2017 payments
(7,980
)
 
(857
)
 
(8,837
)
Translation
(134
)
 
(8
)
 
(142
)
Accrual balance as of February 28, 2017
$
6,146

 
$
241

 
$
6,387

Restructuring expenses are excluded from segment operating income but are attributable to the reportable segments as follows:
 
Three months ended
 
Six months ended
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
 
(In thousands)
EMEA
$
830

 
$
759

 
$
8,844

 
$
1,970

USCAN
813

 
490

 
2,280

 
724

LATAM

 
94

 
59

 
164

APAC
88

 

 
92

 
31

EC
147

 
871

 
147

 
871

Total restructuring expense
$
1,878

 
$
2,214

 
$
11,422

 
$
3,760


(13) COMMITMENTS AND CONTINGENCIES
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, 2016 .

- 16 -

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Lucent Matter
As previously reported by the Company in its filings with the 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, 2016.
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.
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 February 28, 2017 , 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.  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) as the Citadel Complaint.


- 17 -

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(14) ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted In The Current Period
In November 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standard update requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company has early adopted this standard effective December 1, 2016. The Company has $1.6 million and $8.1 million of restricted cash on its consolidated balance sheet as of February 28, 2017 and August 31, 2016 , respectively, whose cash flow statement classification changed to align with the new guidance.
In April 2015, and as subsequently updated, the FASB issued new accounting guidance that requires entities to present debt issuance costs related to a recognized debt liability as a deduction from the carrying amounts of that debt liability. Debt issuance costs incurred in connection with line of credit arrangements will continue to be presented as an asset. Previous guidance classified all debt issuance costs as an asset. The standard is effective for fiscal years beginning after December 15, 2015. The Company has adopted this standard effective September 1, 2016 and applied it retrospectively. The amount of debt issuance costs related to term notes retrospectively reclassified from the deferred charges and other noncurrent assets line to the long-term debt line in the consolidated balance sheet was $10.2 million at August 31, 2016.
In August 2014, the FASB issued new accounting guidance regarding how a company considers its ability to continue as a going concern, regardless of the Company's performance or financial position. In connection with preparing financial statements for each annual and interim reporting period, an entity's management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. The Company has adopted this standard effective September 1, 2016 and noted no additional disclosures.
Accounting Standards Issued, To Be Adopted By The Company In Future Periods
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 $2.7 million and $2.6 million during the six months ended February 28, 2017 and six months ended February 29, 2016, respectively. Total net periodic pension cost was $5.1 million during the six months ended February 28, 2017 and six months ended February 29, 2016. The Company is currently evaluating its plans regarding the adoption date.
In March 2016, the FASB issued new guidance which is intended 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 is effective for fiscal years beginning after December 15, 2016, including interim periods. Early application is permitted. The Company is currently evaluating the effects this standard will have on its consolidated financial statements together with evaluating the adoption date.
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 application is permitted. The Company regularly enters into operating leases which previously did not require recognition on the balance sheet. The Company is currently evaluating the effects this standard will have on its consolidated financial statements and 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 applied using either of the following transition methods: (1) a full retrospective approach reflecting the application 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

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A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


change. Currently, the Company is in the process of reviewing historical sales contracts to analyze the impact that the adoption of the standard may have, if any, on the consolidated financial statements.
No other new accounting pronouncements issued or with effective dates during fiscal 2017 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 it 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.

- 19 -

A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Condensed Consolidating Balance Sheet
 
February 28, 2017
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
870

 
$

 
$
46,991

 
$

 
$
47,861

Restricted cash

 

 
1,623

 

 
1,623

Accounts receivable, net
41,538

 
56,885

 
282,368

 

 
380,791

Accounts receivable, intercompany
29,366

 
3,744

 
25,209

 
(58,319
)
 

Inventories
38,118

 
48,118

 
193,578

 

 
279,814

Prepaid expenses and other current assets
9,437

 
2,876

 
28,524

 

 
40,837

Assets held for sale
2,933

 
5,067

 
1,669

 

 
9,669

Total current assets
122,262

 
116,690

 
579,962

 
(58,319
)
 
760,595

Net property, plant and equipment
46,779

 
70,993

 
173,936

 

 
291,708

Deferred charges and other noncurrent assets
83,430

 
4,045

 
61,348

 
(63,459
)
 
85,364

Intercompany loans receivable
2,593

 
33,491

 

 
(36,084
)
 

Investment in subsidiaries
829,061

 
243,005

 

 
(1,072,066
)
 

Goodwill
26,862

 
110,289

 
120,356

 

 
257,507

Intangible assets, net
28,966

 
195,729

 
119,927

 

 
344,622

Total assets
$
1,139,953

 
$
774,242

 
$
1,055,529

 
$
(1,229,928
)
 
$
1,739,796

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
42,013

 
$
47,427

 
$
213,720

 
$

 
$
303,160

Accounts payable, intercompany
12,564

 
29,979

 
15,776

 
(58,319
)
 

U.S. and foreign income taxes payable

 
174

 
5,609

 

 
5,783

Accrued payroll, taxes and related benefits
11,347

 
6,855

 
22,837

 

 
41,039

Other accrued liabilities
19,110

 
5,823

 
41,911

 

 
66,844

Short-term debt
13,674

 
28

 
15,155

 

 
28,857

Total current liabilities
98,708

 
90,286

 
315,008

 
(58,319
)
 
445,683

Long-term debt
881,103

 
63

 
40,146

 

 
921,312

Intercompany debt

 

 
36,084

 
(36,084
)
 

Pension plans
2,382

 
1,374

 
134,818

 

 
138,574

Deferred income taxes

 
72,148

 
47,424

 
(63,459
)
 
56,113

Other long-term liabilities
14,091

 
1,040

 
9,719

 

 
24,850

Total liabilities
996,284

 
164,911

 
583,199

 
(157,862
)
 
1,586,532

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
 
 
Convertible special stock, no par value
120,289

 

 

 

 
120,289

Common stock
48,553

 

 

 

 
48,553

Other equity
(25,173
)
 
609,331

 
462,735

 
(1,072,066
)
 
(25,173
)
Total A. Schulman, Inc.’s stockholders’ equity
143,669

 
609,331

 
462,735

 
(1,072,066
)
 
143,669

Noncontrolling interests

 

 
9,595

 

 
9,595

Total equity
143,669

 
609,331

 
472,330

 
(1,072,066
)
 
153,264

Total liabilities and equity
$
1,139,953

 
$
774,242

 
$