SCHULMAN A INC - FORM 10-Q - March 28, 2018

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EX-32 - EXHIBIT 32 - SCHULMAN A INCshlm-20180228xexx32.htm
EX-31.2 - EXHIBIT 31.2 - SCHULMAN A INCshlm-20180228xexx312.htm
EX-31.1 - EXHIBIT 31.1 - SCHULMAN A INCshlm-20180228xexx311.htm
EX-10.11 - EXHIBIT 10.11 - SCHULMAN A INCshlm-20180228xexx1011.htm
EX-10.10 - EXHIBIT 10.10 - SCHULMAN A INCshlm-20180228xexx1010.htm
EX-10.9 - EXHIBIT 10.9 - SCHULMAN A INCshlm-20180228xexx109.htm
EX-10.8 - EXHIBIT 10.8 - SCHULMAN A INCshlm-20180228xexx108.htm
EX-10.7 - EXHIBIT 10.7 - SCHULMAN A INCshlm-20180228xexx107.htm
EX-10.6 - EXHIBIT 10.6 - SCHULMAN A INCshlm-20180228xexx106.htm
EX-10.5 - EXHIBIT 10.5 - SCHULMAN A INCshlm-20180228xexx105.htm
EX-10.4 - EXHIBIT 10.4 - SCHULMAN A INCshlm-20180228xexx104.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ______________________________
FORM 10-Q
 ______________________________
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2018
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, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, "smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
þ
 
Accelerated filer
o
 
Emerging growth company
o
Non-accelerated filer
 
o
 
Smaller reporting company
o
 
 
 
 (Do not check if a smaller reporting company)

 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o 
Number of shares of common stock, $1.00 par value, outstanding as of March 22, 2018 – 29,525,402



TABLE OF CONTENTS

 
 
PAGE
 
 
 
 
 
Exhibit 31.1

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



PART I—FINANCIAL INFORMATION
Item 1—Financial Statements
A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended February 28,
 
Six months ended February 28,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share data)
Net sales
$
650,098


$
568,678

 
$
1,324,721

 
$
1,168,678

Cost of sales
558,403

 
479,492

 
1,127,941

 
978,477

Selling, general and administrative expenses
78,356

 
65,967

 
153,483

 
138,342

Restructuring expense
124

 
1,878

 
591

 
11,422

(Gain) loss on sale of assets
—

 
—

 
(3,077
)
 
—

Operating income (loss)
13,215


21,341

 
45,783

 
40,437

Interest expense
13,435

 
13,107

 
26,876

 
26,271

Foreign currency transaction (gains) losses
483

 
1,081

 
1,270

 
1,643

Other (income) expense, net
(849
)
 
674

 
(1,746
)
 
(459
)
Income (loss) before taxes
146


6,479

 
19,383

 
12,982

Provision (benefit) for U.S. and foreign income taxes
(5,530
)
 
1,143

 
(1,373
)
 
4,462

Net income (loss)
5,676


5,336

 
20,756

 
8,520

Noncontrolling interests
(289
)
 
(306
)
 
(654
)
 
(547
)
Net income (loss) attributable to A. Schulman, Inc.
5,387

 
5,030

 
20,102

 
7,973

Convertible special stock dividends
1,875

 
1,875

 
3,750

 
3,750

Net income (loss) available to A. Schulman, Inc. common stockholders
$
3,512

 
$
3,155

 
$
16,352

 
$
4,223

 
 
 
 
 
 
 
 
Weighted-average number of shares outstanding:
 
 
 
 
 
 
 
Basic
29,487


29,394

 
29,473

 
29,378

Diluted
29,661


29,503

 
29,657

 
29,470

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

 
$
0.11

 
$
0.55

 
$
0.14

Diluted
$
0.12

 
$
0.11

 
$
0.55

 
$
0.14

 
 
 
 
 
 
 
 
Cash dividends per common share
$
0.205

 
$
0.205

 
$
0.410

 
$
0.410

Cash dividends per share of convertible special stock
$
15.00

 
$
15.00

 
$
30.00

 
$
30.00



The accompanying notes are an integral part of the consolidated financial statements
- 1 -



A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended February 28,
 
Six months ended February 28,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income (loss)
$
5,676

 
$
5,336

 
$
20,756

 
$
8,520

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gains (losses)
8,980

 
4,150

 
9,960

 
(11,166
)
Defined benefit retirement plans, net of tax
435

 
610

 
813

 
1,204

Other comprehensive income (loss)
9,415

 
4,760

 
10,773

 
(9,962
)
Comprehensive income (loss)
15,091

 
10,096

 
31,529

 
(1,442
)
Less: comprehensive income (loss) attributable to noncontrolling interests
135

 
333

 
505

 
504

Comprehensive income (loss) attributable to A. Schulman, Inc.
$
14,956

 
$
9,763

 
$
31,024

 
$
(1,946
)


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



A. SCHULMAN, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
February 28,
2018
 
August 31,
2017
 
(In thousands)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
51,475

 
$
53,251

Restricted cash
169

 
768

Accounts receivable, less allowance for doubtful accounts of $10,419 at February 28, 2018 and $11,171 at August 31, 2017
439,454

 
408,439

Inventories
345,381

 
276,459

Prepaid expenses and other current assets
40,538

 
36,712

Assets held for sale
2,671

 
5,676

Total current assets
879,688


781,305

Property, plant, and equipment, less accumulated depreciation of $474,073 at February 28, 2018 and $444,481 at August 31, 2017
292,977

 
298,703

Deferred charges and other noncurrent assets
78,612

 
77,847

Goodwill
265,253

 
263,735

Intangible assets, net
318,332

 
332,190

Total assets
$
1,834,862

 
$
1,753,780

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
351,430

 
$
318,820

U.S. and foreign income taxes payable
6,405

 
4,900

Accrued payroll, taxes and related benefits
46,922

 
46,951

Other accrued liabilities
65,961

 
61,761

Short-term debt
19,492

 
32,013

Total current liabilities
490,210

 
464,445

Long-term debt
930,632

 
885,178

Pension plans
140,353

 
135,691

Deferred income taxes
26,015

 
37,699

Other long-term liabilities
23,569

 
23,735

Total liabilities
1,610,779

 
1,546,748

Commitments and contingencies


 


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

 
120,289

Common stock, $1 par value, authorized - 75,000 shares, issued - 48,585 shares at February 28, 2018 and 48,529 shares at August 31, 2017
48,585

 
48,529

Additional paid-in capital
280,331

 
279,207

Accumulated other comprehensive income (loss)
(77,601
)
 
(88,523
)
Retained earnings
224,794

 
220,357

Treasury stock, at cost, 19,060 shares at February 28, 2018 and 19,063 shares at August 31, 2017
(382,807
)
 
(382,841
)
Total A. Schulman, Inc.’s stockholders’ equity
213,591

 
197,018

Noncontrolling interests
10,492

 
10,014

Total equity
224,083

 
207,032

Total liabilities and equity
$
1,834,862

 
$
1,753,780


The accompanying notes are an integral part of the consolidated financial statements
- 3 -



A. SCHULMAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six months ended February 28,
 
2018
 
2017
 
(In thousands)
Operating activities:
 
 
 
Net income
$
20,756

 
$
8,520

Adjustments to reconcile net income to net cash provided from (used in) operating activities:
 
 
 
Depreciation
21,218

 
22,215

Amortization
17,283

 
17,644

Deferred tax provision (benefit)
(12,794
)
 
(4,493
)
Pension, postretirement benefits and other compensation
3,694

 
3,361

(Gain) loss on sale of assets
(3,077
)
 
—

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(24,780
)
 
(15,866
)
Inventories
(62,198
)
 
(24,670
)
Accounts payable
25,665

 
40,363

Income taxes
2,154

 
(4,639
)
Accrued payroll and other accrued liabilities
3,049

 
(4,311
)
Other assets and long-term liabilities
(3,587
)
 
2,025

Net cash provided from (used in) operating activities
(12,617
)
 
40,149

Investing activities
 
 
 
Expenditures for property, plant and equipment
(13,083
)
 
(24,505
)
Proceeds from the sale of assets
6,420

 
478

Distributions from equity investees
125

 
125

Net cash provided from (used in) investing activities
(6,538
)
 
(23,902
)
Financing activities:
 
 
 
Cash dividends paid to special stockholders
(3,750
)
 
(3,750
)
Cash dividends paid to common stockholders
(12,242
)
 
(12,057
)
Increase (decrease) in short-term debt
(15,144
)
 
5,153

Borrowings on long-term debt
399,923

 
238,543

Repayments on long-term debt including current portion
(353,597
)
 
(237,034
)
Noncontrolling interests' distributions
(27
)
 
—

Issuances of stock, common and treasury
58

 
93

Redemptions of common stock
(1,225
)
 
(620
)
Net cash provided from (used in) financing activities
13,996

 
(9,672
)
Effect of exchange rate changes on cash
2,784

 
(494
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(2,375
)
 
6,081

Cash, cash equivalents, and restricted cash at beginning of period
54,019

 
43,403

Cash, cash equivalents, and restricted cash at end of period
$
51,644

 
$
49,484


The accompanying notes are an integral part of the consolidated financial statements
- 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,” “A. Schulman,” “we,” “our” and “us”) reflect all adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods presented. All such adjustments are of a normal recurring nature. The fiscal year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.
The results of operations for the three and six months ended February 28, 2018 are not necessarily indicative of the results expected for the fiscal year ending August 31, 2018.
The accounting policies for the periods presented are the same as described in Note 1 – Business and Summary of Significant Accounting Policies to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.
Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal 2018 presentation.
Restricted Cash
Restricted cash of $0.2 million and $0.8 million as of February 28, 2018 and August 31, 2017, respectively, represents cash and cash equivalents held in an escrow account for the cash settlement of a commitment to a local government.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount shown in the consolidated statements of cash flows:
 
February 28, 2018
 
August 31, 2017
 
February 28, 2017
 
August 31, 2016
 
(In thousands)
Cash and cash equivalents
$
51,475

 
$
53,251

 
$
47,861

 
$
35,260

Restricted cash
169

 
768

 
1,623

 
8,143

Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
$
51,644

 
$
54,019

 
$
49,484

 
$
43,403

Assets Held for Sale
During fiscal 2017, the Company began actively marketing for sale certain properties and machinery and equipment at recently closed plants in the U.S. and Europe. As of February 28, 2018 and August 31, 2017, the Company had $2.7 million and $5.7 million, respectively, of assets held for sale classified on the consolidated balance sheet that represents the net book value of these properties along with certain machinery and equipment. In the first quarter of fiscal 2018, the Company sold two facilities in USCAN and received total cash proceeds of $6.1 million and recognized a gain on sale of $3.1 million. The gain on sale has been recorded within (gain) loss on sale of assets in the consolidated statements of operations. We expect the sale of the remaining assets held for sale to be completed within the next twelve months and have, accordingly, presented the held for sale assets as current. Proceeds from the sale of the assets will be used for general corporate purposes. Based on the present real estate market and discussions with the Company's real estate adviser, no impairment of the recorded amounts has occurred as of February 28, 2018.
Pending Merger
On February 15, 2018, LyondellBasell Industries N.V. (“LYB”), LYB Americas Holdco Inc., a wholly owned subsidiary of LYB, and the Company, entered into an agreement (the “Merger Agreement”) whereby LYB will acquire the Company (the “Merger”).
Upon consummation of the Merger, each share of Company common stock, par value $1.00 per share (“Company Common Stock”), issued and outstanding immediately prior to the Effective Time (other than shares owned by the Company or any of its subsidiaries or LyondellBasell or any of its subsidiaries (including Merger Sub), which shall be canceled, and any Dissenting

- 5 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Shares (as defined in the Merger Agreement)), will be canceled and automatically converted into the right to receive (i) $42.00 in cash, without interest and subject to any applicable withholding taxes (the "Per-Share Amount"), and (ii) one contractual contingent value right without interest and less applicable withholding taxes (a "CVR"), which will represent the right to receive certain net proceeds, if any, resulting from the Lucent Matter (in each case subject to the terms and conditions of the CVR agreement to be entered into in accordance with the Merger Agreement). There is no guaranty that any proceeds will be received from the CVR agreement. Net proceeds, if any, related to such claims, litigations, and investigations that are received before consummation of the Merger will be classified in the Company’s consolidated balance sheet as restricted cash. Upon consummation of the Merger, any such net proceeds will be deposited in an escrow account and may be disbursed in accordance with the terms and subject to the conditions of the CVR agreement. If the Merger is not consummated, there is no restriction on the Company’s use of any cash proceeds received upon resolution of the Lucent Matter. Refer to Note 13 in this Form 10-Q for details on the Lucent Matter.
Pursuant to the Merger Agreement, each Company stock option, restricted share, restricted stock unit and performance stock unit award, whether vested or unvested, in each case, that is outstanding immediately prior to closing, will be canceled and converted into the right to receive an amount in cash, without interest, equal to the Per-Share Amount (or, in the case of Company stock options, the excess of the Per-Share Amount over the per-share exercise price for such Company stock options) for each share of the Company’s common stock underlying the applicable award, plus one CVR for each share of the Company’s common stock underlying the applicable award. Each performance-based award will be deemed to have vested at target achievement levels.
The Merger Agreement contains certain termination rights and provides that, upon termination of the Merger Agreement under specified circumstances, including a permitted change in the recommendation of the Company’s Board of Directors of or a termination of the Merger Agreement by the Company to enter into an agreement for a superior proposal, the Company will pay LYB a cash termination fee of $50.0 million.
The proposed Merger, which has been unanimously approved by the respective boards of LYB and the Company, is subject to customary closing conditions, including regulatory approvals and approval by the Company’s shareholders. The Merger is expected to close in the second half of calendar year 2018.
For further discussion related to the convertible special stock, refer to Note 7 in this Form 10-Q.

(2)
GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the Company's carrying value of goodwill are as follows:
 
EMEA
 
USCAN
 
LATAM
 
APAC
 
EC
 
Total
 
(In thousands)
Balance as of August 31, 2017
$
58,180

 
$
116,369

 
$
13,528

 
$
934

 
$
74,724

 
$
263,735

Translation
2,039

 
—

 
(535
)
 
40

 
(26
)
 
1,518

Balance as of February 28, 2018
$
60,219

 
$
116,369

 
$
12,993

 
$
974

 
$
74,698

 
$
265,253

The following table summarizes intangible assets with finite useful lives by major category:
 
February 28, 2018
 
August 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
(In thousands)
Customer related
$
361,478

 
$
(105,605
)
 
$
255,873

 
$
359,227

 
$
(91,910
)
 
$
267,317

Developed technology
73,479

 
(21,073
)
 
52,406

 
73,171

 
(18,574
)
 
54,597

Registered trademarks and tradenames
18,939

 
(8,886
)
 
10,053

 
18,347

 
(8,071
)
 
10,276

Total finite-lived intangible assets
$
453,896

 
$
(135,564
)
 
$
318,332

 
$
450,745

 
$
(118,555
)
 
$
332,190

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

- 6 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(3)
LONG-TERM DEBT AND CREDIT ARRANGEMENTS

The following table summarizes short-term and long-term debt:
 
February 28, 2018
 
August 31, 2017
 
(In thousands)
Notes payable and other, due within one year
$
2,242

 
$
17,263

Current portion of long-term debt
17,250

 
14,750

Short-term debt
$
19,492

 
$
32,013

 
 
 
 
Revolving credit facility, LIBOR plus applicable spread, due June 2020
$
105,744

 
$
51,250

Term Loan A, LIBOR plus applicable spread, due June 2020
158,750

 
166,250

U.S. Term Loan B, LIBOR plus applicable spread, due June 2022
296,419

 
298,115

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

 
375,000

Capital leases and other long-term debt
2,930

 
3,276

Unamortized debt issuance costs
(8,211
)
 
(8,713
)
Long-term debt
$
930,632

 
$
885,178

For a detailed discussion of the Company's long-term debt and credit arrangements, refer to Note 5 in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2017.
In October 2017, the Company amended the 2015 Credit Agreement and increased the net leverage ratio covenant to provide the Company additional financial flexibility to execute on its growth strategy. The Company is in compliance with its debt covenants as of February 28, 2018.
(4) FAIR VALUE MEASUREMENT
The following table presents information about the Company’s assets and liabilities measured at fair value:
 
February 28, 2018
 
August 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets recorded at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
255

 
$
—

 
$
255

 
$
—

 
$
286

 
$
—

 
$
286

 
$
—

Liabilities recorded at fair value:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
378

 
$
—

 
$
378

 
$
—

 
$
268

 
$
—

 
$
268

 
$
—

The Company's cash and cash equivalents are recorded at cost, which approximates fair value. The carrying value of the Company's variable-rate debt approximates fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was $397.8 million and $389.5 million as of February 28, 2018 and August 31, 2017, respectively. The carrying value of this debt was $375.0 million as of February 28, 2018 and August 31, 2017, respectively.
The Company measures the fair value of its foreign exchange forward contracts using an internal model. The model maximizes the use of Level 2 market observable inputs including interest rate curves, currency forward and spot prices, and credit spreads. The aggregate notional amount of foreign exchange forward contracts outstanding was $46.3 million and $92.7 million as of February 28, 2018 and August 31, 2017, respectively. The amount of foreign exchange forward contracts outstanding as of the end of the period is indicative of the exposure of current balances and the forecasted change in exposures for the following quarter. Any gains or losses associated with these contracts as well as the offsetting gains or losses from the underlying assets or liabilities are included in the foreign currency transaction (gains) losses line in the Company’s consolidated statements of operations. The fair values of the Company’s foreign exchange forward contracts are recognized in other current assets and other accrued liabilities in the consolidated balance sheets. The foreign exchange forward contracts are entered into with creditworthy financial institutions, generally have a term of three months or less, and the Company does not hold or issue foreign exchange forward contracts for trading purposes. There were no foreign exchange forward contracts designated as hedging instruments as of February 28, 2018 and August 31, 2017.

- 7 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


For a discussion of the Company’s fair value measurement policies under the fair value hierarchy, refer to Note 1 in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017. The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during fiscal 2018, and transfers between levels within the fair value hierarchy, if any, are recognized at the end of each quarter. There were no transfers between levels during the period presented.
Additionally, the Company remeasures certain assets to fair value, using Level 3 measurements, as a result of the occurrence of triggering events. There were no significant assets or liabilities that were remeasured at fair value on a non-recurring basis during the period presented.
(5) INCOME TAXES
The effective tax rate was (3,787.7)% and (7.1)% for the three and six months ended February 28, 2018, respectively, and 17.6% and 34.4% for the three and six months ended February 28, 2017, respectively. The decrease in the effective tax rate as compared with the same period last year is primarily related to impacts of the recently enacted Tax Cuts and Jobs Act ("U.S. Tax Reform") and higher uncertain tax positions recorded in the prior year.
As a result of U.S. Tax Reform, the Company will be subject to a U.S. federal statutory tax rate of 25.7% for its fiscal year ending August 31, 2018, which reflects a blended federal statutory rate of 35% for its first four months and 21% for the remaining eight months. For the three months ended February 28, 2018, the Company's effective tax rate was (3,787.7)% and was lower than the blended U.S. federal statutory rate of 25.7% primarily due to the discrete impacts of U.S. Tax Reform.

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

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

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

As stated above, the Company believes its accounting for remeasurement of deferred tax assets and liabilities are substantially complete, except for changes in estimates. The tax impacts of the one-time transition tax and the realizability of certain deferred tax assets are still being evaluated by the Company and may materially differ from the estimated impacts recognized in the second quarter of fiscal 2018 due to future treasury regulations, tax law technical corrections, and other potential guidance, notices, rulings, refined computations, actions the Company may take as a result of U.S. Tax Reform and other items. The SEC has issued Staff Accounting Bulletin 118 that allows for a measurement period of up to one year after the enactment date of U.S. Tax Reform to finalize the recording of the related tax impacts.
As of February 28, 2018, the Company's gross unrecognized tax benefits totaled $4.4 million. If recognized, $3.4 million of the total unrecognized tax benefits would favorably affect the Company's effective tax rate. The amount of unrecognized tax benefits is expected to change in the next 12 months; however, the change is not expected to have a significant impact on the financial position of the Company. The Company reports interest and penalties related to income tax matters in income tax expense. As of February 28, 2018, the Company had $1.5 million of accrued interest and penalties on unrecognized tax benefits.

- 8 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The Company’s statute of limitations is open in various jurisdictions as follows: Germany - from 2005 onward, France - from 2010 onward, U.S. - from 2014 onward, Belgium - from 2015 onward, other foreign jurisdictions - from 2011 onward.
(6) PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The components of the Company’s net periodic benefit cost for defined benefit pension plans are shown below:
 
Three months ended February 28,
 
Six months ended February 28,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Defined benefit pension plans:
 
 
 
 
 
 
 
Service cost
$
1,342

 
$
1,344

 
$
2,640

 
$
2,739

Interest cost
796

 
570

 
1,567

 
1,157

Expected return on plan assets
(410
)
 
(367
)
 
(806
)
 
(743
)
Amortization of actuarial loss (gain)
724

 
961

 
1,424

 
1,958

Net periodic pension benefit cost
$
2,452

 
$
2,508

 
$
4,825

 
$
5,111


In fiscal 2018, there have been no significant charges incurred related to the Company's other postretirement benefit plan. For discussion of the Company's other postretirement benefit plan, refer to Note 8 in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.
(7) CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
A summary of the changes in stockholders’ equity is as follows:
 
Convertible Special Stock
 
Common
Stock ($1 par value)
 
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury
Stock
 
Non-controlling
Interests
 
Total
Equity
 
(In thousands, except per share data)
Balance as of August 31, 2017
$
120,289

 
$
48,529

 
$
279,207

 
$
(88,523
)
 
$
220,357

 
$
(382,841
)
 
$
10,014

 
$
207,032

Comprehensive income (loss)
 
 
 
 

 
10,922

 
20,102

 

 
505

 
31,529

Cash dividends paid on convertible special stock, $30.00 per share
 
 
 
 
 
 
 
 
(3,750
)
 
 
 
 
 
(3,750
)
Cash dividends paid on common stock, $0.41 per share
 
 
 
 

 

 
(12,242
)
 

 

 
(12,242
)
Cash distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(27
)
 
(27
)
Issuance of treasury stock
 
 
 
 
24

 

 

 
34

 

 
58

Restricted stock issued, net of forfeitures
 
 
91

 
(91
)
 
 
 
 
 
 
 
 
 
—

Redemption of common stock to cover tax withholdings
 
 
(35
)
 
(1,190
)
 
 
 
 
 
 
 
 
 
(1,225
)
Cumulative effect adjustment upon adoption of ASU 2016-09
 
 
 
 
 
 
 
 
327

 
 
 
 
 
327

Share-based compensation plans
 
 
 
 
2,381

 

 

 

 

 
2,381

Balance as of February 28, 2018
$
120,289

 
$
48,585

 
$
280,331

 
$
(77,601
)
 
$
224,794

 
$
(382,807
)
 
$
10,492

 
$
224,083

For a detailed discussion of the Company's convertible special stock, refer to Note 9 in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2017. There have been no fundamental changes in the Company's convertible special stock as of February 28, 2018 or August 31, 2017, however, the pending LyondellBasell Merger discussed in Note 1 in this Form 10-Q will represent a fundamental change upon closing of the proposed Merger.
Holders of the Company’s convertible special stock continue to have the ability to convert their convertible special stock at any time before or after the Merger closing date. If holders convert prior to the Merger closing date, they will receive shares

- 9 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


of the Company’s common stock at the current conversion rate. Upon Merger closing, the Company’s convertible special stock will become convertible into the Merger consideration, with each share of the Company’s convertible special stock becoming convertible into the consideration that a holder of a number of shares of the Company’s common stock equal to the conversion rate would have been entitled to receive at closing. If a holder of the Company’s convertible special stock elects to convert during the period beginning at the open of business on the trading day immediately following the Merger closing date and ending at the close of business on the 30th trading day following the closing date, holders will be entitled to an increase in the conversion rate. After such 30th trading day, the increase to the conversion rate will no longer apply but the convertible special stock will remain convertible into the Merger consideration.
(8) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as follows(1):
 
Foreign Currency Translation Gain (Loss)
 
Pension and Other Retiree Benefits
 
Total Accumulated Other Comprehensive Income (Loss)
 
(In thousands)
Balance as of November 30, 2017
$
(51,216
)
 
$
(35,954
)
 
$
(87,170
)
Other comprehensive income (loss) before reclassifications
8,980

 
—

 
8,980

Amounts reclassified to earnings
—

 
435

(2) 
435

Net current period other comprehensive income (loss)
8,980

 
435

 
9,415

Less: comprehensive income (loss) attributable to
noncontrolling interests
(154
)
 
—

 
(154
)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
9,134

 
435

 
9,569

Balance as of February 28, 2018
$
(42,082
)
 
$
(35,519
)
 
$
(77,601
)

 
Foreign Currency Translation Gain (Loss)
 
Pension and Other Retiree Benefits
 
Total Accumulated Other Comprehensive Income (Loss)
 
(In thousands)
Balance as of August 31, 2017
$
(52,191
)
 
$
(36,332
)
 
$
(88,523
)
Other comprehensive income (loss) before reclassifications
9,960

 
—

 
9,960

Amounts reclassified to earnings
—

 
813

(2) 
813

Net current period other comprehensive income (loss)
9,960

 
813

 
10,773

Less: comprehensive income (loss) attributable to
noncontrolling interests
(149
)
 
—

 
(149
)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
10,109

 
813

 
10,922

Balance as of February 28, 2018
$
(42,082
)
 
$
(35,519
)
 
$
(77,601
)


- 10 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Foreign Currency Translation Gain (Loss)
 
Pension and Other Retiree Benefits
 
Total Accumulated Other Comprehensive Income (Loss)
 
(In thousands)
Balance as of November 30, 2016
$
(84,963
)
 
$
(50,410
)
 
$
(135,373
)
Other comprehensive income (loss) before reclassifications
4,150

 
—

 
4,150

Amounts reclassified to earnings
—

 
610

(2) 
610

Net current period other comprehensive income (loss)
4,150

 
610

 
4,760

Less: comprehensive income (loss) attributable to
noncontrolling interests
27

 
—

 
27

Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
4,123

 
610

 
4,733

Balance as of February 28, 2017
$
(80,840
)
 
$
(49,800
)
 
$
(130,640
)


 
Foreign Currency Translation Gain (Loss)
 
Pension and Other Retiree Benefits
 
Total Accumulated Other Comprehensive Income (Loss)
 
(In thousands)
Balance as of August 31, 2016
$
(69,717
)
 
$
(51,004
)
 
$
(120,721
)
Other comprehensive income (loss) before reclassifications
(11,166
)
 
—

 
(11,166
)
Amounts reclassified to earnings
—

 
1,204

(2) 
1,204

Net current period other comprehensive income (loss)
(11,166
)
 
1,204

 
(9,962
)
Less: comprehensive income (loss) attributable to
noncontrolling interests
(43
)
 
—

 
(43
)
Net current period other comprehensive income (loss) attributable to A. Schulman, Inc.
(11,123
)
 
1,204

 
(9,919
)
Balance as of February 28, 2017
$
(80,840
)
 
$
(49,800
)
 
$
(130,640
)

(1) All amounts presented are net of tax. All tax amounts are related to pension and other retiree benefits.
(2) Amounts represent amortization of net actuarial loss and prior service costs and are reclassified from accumulated other comprehensive income into cost of sales and selling, general & administrative expenses on the consolidated statements of operations. These components are included in the computation of net periodic pension cost. Refer to Note 6 in this Form 10-Q for further details.
(9) SHARE-BASED INCENTIVE COMPENSATION PLANS

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

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


- 11 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

Expected term:    6.5 years
Risk-free rate:    2.40%
Volatility:    39.0%
Dividend yield:    2.11%
The following table summarizes the impact to the Company’s consolidated statements of operations from share-based incentive compensation plans, which is primarily included in selling, general and administrative expenses in the accompanying consolidated statements of operations:
 
Three months ended February 28,
 
Six months ended February 28,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Time-based and performance-based restricted stock awards
$
643

 
$
446

 
$
1,750

 
$
1,347

Stock options
207

 
68

 
335

 
68

Unrestricted awards
754

 
531

 
832

 
1,253

Total share-based incentive compensation
$
1,604

 
$
1,045

 
$
2,917

 
$
2,668


Total unrecognized compensation cost, including a provision for estimated forfeitures, related to non-vested stock-based compensation arrangements as of February 28, 2018 was $11.9 million. This cost is expected to be recognized over a weighted-average period of 1.9 years.
For a discussion of the Merger's impact on share-based incentive compensation, refer to Note 1 in this Form 10-Q.
(10) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common stock equivalents are exercised as well as the impact of restricted stock awards expected to vest, which combined would then share in the earnings of the Company.
Dividends on convertible special stock that an issuer has paid or intends to pay are deducted from net income or added to the amount of a net loss in computing income available to common stockholders.
The difference between basic and diluted weighted-average shares results from the assumed exercise of outstanding stock options and vesting of restricted stock awards, calculated using the treasury stock method, and the inclusion of the convertible special stock dividends, calculated using the if-converted method.
The Company computes income available to common stockholders by deducting dividends accumulated on the convertible special stock from net income attributable to A. Schulman, Inc. The convertible special stock does not impact the denominator of basic EPS. The dilutive effect of convertible special stock is reflected in diluted EPS by application of the if-converted method. In applying the if-converted method, conversion shall not be assumed for purposes of computing diluted EPS if the effect would be anti-dilutive. The convertible special stock is anti-dilutive whenever the amount of the dividend declared in or accumulated for the current period per share on conversion exceeds basic EPS. For the three and six months ended February 28, 2018 and 2017, the accumulated dividend per share on conversion exceeded basic EPS, therefore the 2,388,913 shares related to the convertible special stock were considered anti-dilutive.

- 12 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents the number of incremental weighted-average shares used in computing diluted per share amounts:
 
Three months ended February 28,
 
Six months ended February 28,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
29,487

 
29,394

 
29,473

 
29,378

Incremental shares from equity awards
174

 
109

 
184

 
92

Incremental shares from convertible special stock
—

 
—

 
—

 
—

Diluted
29,661

 
29,503

 
29,657

 
29,470

Dilutive weighted-average shares outstanding for the three and six months ended February 28, 2018 excludes 257,448 and 259,712 shares, respectively, related to equity awards, as their inclusion would have been anti-dilutive. Dilutive weighted-average shares outstanding for the three and six months ended February 28, 2017 excludes 94,298 and 88,225 shares, respectively, related to equity awards, as their inclusion would have been anti-dilutive.
(11) SEGMENT INFORMATION
The Company considers its operating structure and the types of information subject to regular review by its President and Chief Executive Officer (“CEO”), who is the Chief Operating Decision Maker (“CODM”), to identify reportable segments. The CODM makes decisions, assesses performance and allocates resources by the following reportable segments: Europe, Middle East and Africa (“EMEA”), United States & Canada (“USCAN”), Latin America (“LATAM”), Asia Pacific (“APAC”), and Engineered Composites ("EC").
The CODM uses net sales to unaffiliated customers, segment gross profit and segment operating income in order to make decisions, assess performance and allocate resources to each segment. Segment operating income does not include items such as interest income or expense, other income or expense, foreign currency transaction gains or losses, restructuring and related costs including accelerated depreciation, asset impairments, or costs related to the Merger. Corporate expenses include the compensation of certain personnel, certain audit expenses, Board of Directors related costs, certain insurance costs, costs associated with being a publicly traded entity and other miscellaneous legal and professional fees.
The following table summarizes net sales to unaffiliated customers by segment:
 
Three months ended February 28,
 
Six months ended February 28,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
EMEA
$
335,671


$
276,902

 
$
683,091

 
$
572,974

USCAN
156,452


151,918

 
315,688

 
308,336

LATAM
44,982

 
39,662

 
93,395

 
81,878

APAC
57,384


48,914

 
117,548

 
99,651

EC
55,609

 
51,282

 
114,999

 
105,839

Total net sales to unaffiliated customers
$
650,098

 
$
568,678

 
$
1,324,721

 
$
1,168,678


- 13 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Below the Company presents gross profit by segment:
 
Three months ended February 28,
 
Six months ended February 28,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
EMEA
$
40,185

 
$
39,130

 
$
86,631

 
$
83,788

USCAN
20,219

 
20,060

 
44,847

 
44,576

LATAM
8,869

 
9,595

 
19,071

 
19,012

APAC
8,922

 
8,908

 
18,833

 
18,034

EC
13,645

 
12,831

 
27,624

 
26,799

Total segment gross profit
91,840

 
90,524

 
197,006

 
192,209

Accelerated depreciation and restructuring related costs
(145
)
 
(1,338
)
 
(226
)
 
(1,865
)
Costs related to acquisitions and integrations
—

 
—

 
—

 
(57
)
Lucent costs (1)
—

 
—

 
—

 
(86
)
Total gross profit
$
91,695

 
$
89,186

 
$
196,780

 
$
190,201

Below is a reconciliation of segment operating income to operating income (loss) and income (loss) before taxes:
 
Three months ended February 28,
 
Six months ended February 28,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
EMEA
$
15,166

 
$
16,527

 
$
36,266

 
$
36,295

USCAN
4,713

 
5,447

 
12,854

 
13,943

LATAM
5,071

 
5,459

 
11,028

 
10,894

APAC
4,684

 
4,901

 
10,444

 
9,914

EC
4,267

 
4,111

 
9,523

 
9,222

Total segment operating income
33,901

 
36,445

 
80,115

 
80,268

Corporate
(8,521
)
 
(9,065
)
 
(17,922
)
 
(17,881
)
Costs related to Merger and integrations
(4,569
)
 
—

 
(5,049
)
 
(605
)
Restructuring, strategic and related costs (2)
(4,222
)
 
(4,970
)
 
(8,111
)
 
(18,243
)
Accelerated depreciation
(57
)
 
(467
)
 
(235
)
 
(823
)
Lucent costs (1)
(3,317
)
 
(596
)
 
(6,092
)
 
(1,405
)
Asset impairment
—

 
—

 
—

 
(678
)
Gain (loss) on sale of assets
—


—

 
3,077

 
—

CEO transition costs
—

 
(6
)
 
—

 
(196
)
Operating income (loss)
13,215

 
21,341

 
45,783

 
40,437

Interest expense
(13,435
)
 
(13,107
)
 
(26,876
)
 
(26,271
)
Foreign currency transaction gains (losses)
(483
)
 
(1,081
)
 
(1,270
)
 
(1,643
)
Other income (expense), net
849

 
(674
)
 
1,746

 
459

Income (loss) before taxes
$
146

 
$
6,479

 
$
19,383

 
$
12,982

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

- 14 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(2) Restructuring expenses for the three and six months ended February 28, 2018 of $0.1 million and $0.6 million, respectively, and for the three and six months ended February 28, 2017 of $1.9 million and $11.4 million, respectively, included in restructuring expense in the Company’s statements of operations include costs permitted under ASC 420, Exit or Disposal Obligations, such as severance costs, outplacement services and contract termination costs. Strategic and restructuring related costs for the three and six months ended February 28, 2018 of $4.1 million and $7.5 million, respectively, and for the three and six months ended February 28, 2017 of $3.1 million and $6.8 million, respectively, primarily included in selling, general and administrative expenses in the Company’s statements of operations, are costs associated with professional fees for outside strategic consultants regarding actions to improve the profitability of the organization, improve efficiency of its operations or comply with new legislation, costs associated with reorganizations of the legal entity structure of the Company, and costs associated with new software implementation that are not eligible for capitalization.
Globally, the Company operates in three product families: Engineered Composites, Custom Concentrates and Services, and Performance Materials. The amount and percentage of consolidated net sales for these product families are as follows:
 
Three months ended February 28,
 
2018
 
2017
 
(In thousands, except for %'s)
Engineered Composites
$
55,609

 
9
%
 
$
51,282

 
9
%
Custom Concentrates and Services
304,454

 
46

 
259,586

 
46

Performance Materials
290,035

 
45

 
257,810

 
45

Total consolidated net sales
$
650,098

 
100
%
 
$
568,678

 
100
%

 
Six months ended February 28,
 
2018
 
2017
 
(In thousands, except for %'s)
Engineered Composites
$
114,999

 
9
%
 
$
105,839

 
9
%
Custom Concentrates and Services
625,655

 
47

 
535,505

 
46

Performance Materials
584,067

 
44

 
527,334

 
45

Total consolidated net sales
$
1,324,721

 
100
%
 
$
1,168,678

 
100
%
(12) RESTRUCTURING
In fiscal 2018, no new restructuring plans have been announced and no significant charges have been incurred related to prior year plans. For discussion of the Company's previous restructuring plans, refer to Note 16 in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.
The following table summarizes the activity related to the Company’s restructuring plans:
 
Employee-related Costs
 
Other Costs
 
Total Restructuring Costs
 
(In thousands)
Accrual balance as of August 31, 2017
$
2,988

 
$
90

 
$
3,078

Fiscal 2018 charges
88

 
503

 
591

Fiscal 2018 payments
(2,243
)
 
(509
)
 
(2,752
)
Translation
7

 
43

 
50

Accrual balance as of February 28, 2018
$
840

 
$
127

 
$
967


- 15 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Restructuring expenses are excluded from segment operating income but are attributable to the reportable segments as follows:
 
Three months ended February 28,
 
Six months ended February 28,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
EMEA
$
65

 
$
830

 
$
324

 
$
8,844

USCAN
59

 
813

 
247

 
2,280

LATAM
—

 
—

 
20

 
59

APAC
—

 
88

 
—

 
92

EC
—

 
147

 
—

 
147

Total restructuring expense
$
124

 
$
1,878

 
$
591

 
$
11,422

(13) CONTINGENCIES AND CLAIMS
In the normal course of business, the Company is at times subject to pending and threatened legal actions, some for which the relief or damages sought may be substantial. Although the Company is not able to predict the outcome of such legal actions, after reviewing all pending and threatened legal actions with counsel and based on information currently available, management believes that the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the results of operations, financial position or cash flows of the Company. However, it is possible, that the ultimate resolution of such matters, if unfavorable, may be material to the results of operations in a particular future period as the time and amount of any resolution of such legal actions and its relationship to the future results of operations are not currently known.
Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, it is not considered probable that a liability has been incurred or it is not possible to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve would be recognized until that time.
There were no material changes to the Company’s future contractual obligations as previously reported in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.
Lucent Matter
As previously reported by the Company in its filings with the U.S. Securities and Exchange Commission ("SEC"), on June 1, 2015, the Company completed the acquisition of Citadel and its subsidiaries, including its indirect wholly owned subsidiary Lucent Polymers, Inc. In August 2015, the Company discovered discrepancies between laboratory data and certifications provided by Lucent to customers and also discovered inaccuracies in materials and information provided by Lucent employees to an independent certification organization. The Company took immediate decisive actions following its initial discoveries, including, but not limited to, remediation measures, notifications to affected customers, and notification to Underwriter Laboratories. The Company also commenced an internal investigation, which revealed that the discrepancies and inaccuracies initially identified were due to practices at Lucent under its prior ownership. As a result, the Company has reformulated and rebranded its products and ceased the use of certain tradenames associated with Citadel, which resulted in the impairment of certain finite-lived intangible assets during the fourth quarter of fiscal 2016. In addition, the Engineered Plastics business, which is now part of the Performance Materials product family, did not meet volume and revenue expectations in fiscal 2016 and the product had lower margins than planned due primarily to the remediation and changes in business practices undertaken to address the Lucent quality matter. The deterioration of results due to the aforementioned factors and economic conditions soon after the acquisition resulted in the impairment of the acquired goodwill during the fourth quarter of fiscal 2016. For a discussion of the goodwill and intangible asset impairments, refer to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.
To date, no customers or other parties have initiated recalls or have made material claims against the Company. Although to date, no significant customers have terminated their relationships with the Company or its subsidiaries because of the Lucent quality matter, the matter has resulted in decreased volume and revenue, including reductions by certain significant customers. Additionally, the Company continues to incur recurring additional costs to produce product to customer specification.
As no customer or other parties have initiated recalls, or have made material claims against the Company or its subsidiaries from the date we identified this issue in August 2015 through the date of filing, we are currently unable to conclude that losses related to recalls or claims are probable or to estimate the potential range of losses. The Company is currently unable to

- 16 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


determine whether such issues will have any future material adverse effect on our financial position, liquidity, or results of operations.
In addition, the Company previously provided a written claim notice to the sellers and to the escrow agent with respect to the indemnity escrow established in connection with the stock purchase agreement pursuant to which the Company acquired Citadel and its subsidiaries. As of February 28, 2018, approximately $31.0 million remained in such indemnity escrow.
As Lucent was effectively acquired by Citadel in December of 2013, the Company also submitted written claim notices pursuant to the Agreement and Plan of Merger, dated December 6, 2013, among The Matrixx Group, Incorporated, LPI Merger Sub, Inc., LPI Holding Company, River Associates Investments, LLC and certain stockholders of LPI Holding Company, pursuant to which Citadel initially acquired Lucent. The Company also submitted written claim notices pursuant to a $3.8 million representations and warranties insurance policy issued in connection with that acquisition.
In June 2016, the Company filed a complaint in the Delaware Chancery Court against Citadel Plastics (the “Citadel Complaint”), as well as certain funds affiliated with the sellers and other former executives of Citadel and Lucent (the “Citadel Defendants”). In January 2017, the Court denied the defendants motion to dismiss seventeen of twenty claims. The Court's ruling sustained claims for breach of contract, fraudulent inducement, civil conspiracy and violations of blue sky laws in Illinois, Ohio, California and Indiana. On February 16, 2017, the Court entered a stipulated order establishing an equitable lien over all pre-closing tax refunds payable by the Company to Citadel Plastics under the stock purchase agreement until resolution of litigation. The funds currently subject to the equitable lien are $7.5 million. The Company is seeking rescission, damages, rescissory damages, disgorgement or any other remedy deemed proper for the alleged violations as well as seeking attorneys’ fees for bringing suit. The case has been scheduled for trial in April 2018.
In November 2016, the Company, through its Matrixx subsidiary, filed a separate Complaint in the Delaware Chancery Court against River Associates (the “River Complaint”), as well as certain funds affiliated with the sellers and other former executives of Lucent (the “River Defendants”). In general, the River Complaint alleges similar theories (except securities violations) and seeks similar relief (except rescission) and the River Defendants filed a similar motion to dismiss as in the Citadel litigation. On August 23, 2017, the Court ruled on River Defendants’ Motions to Dismiss and Motions for Summary Judgment. The Court dismissed certain claims pertaining to one Defendant and all other motions to dismiss parties or claims were denied. In addition, the Court ruled against the Citadel Defendants’ Motions to (in effect) combine the Citadel Holdings litigation with the River litigation. Therefore, the River litigation will proceed as a separate lawsuit on a schedule months behind the Citadel Holdings Litigation. No trial date has yet been scheduled.
There are ongoing parallel investigations being undertaken by the United States Attorneys' Office for the Southern District of Indiana ("USAO") and the SEC that we understand relate to the allegations made by the Company in the Citadel Complaint arising out of the Company's acquisition of Citadel (including Citadel's subsidiary, Lucent). On September 6, 2017, the Federal Bureau of Investigation, Indianapolis division, notified the Company's counsel that the Company was a potential victim of a crime. We are cooperating fully with the USAO and the SEC in their investigations.
(14) ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted in the Current Period
In March 2016, the Financial Accounting Standards Board (the "FASB") issued an accounting standard update to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification on the statement of cash flows, and accounting for forfeitures. The standard was effective for fiscal years beginning after December 15, 2016, including interim periods. The Company adopted the new standard on September 1, 2017 and reversed deferred tax liabilities of $0.3 million for all excess tax deficiencies or benefits that had not been previously recognized via a cumulative-effect adjustment to retained earnings. The Company will continue to estimate forfeitures as part of recording equity-based compensation expense. The adoption of this accounting standard did not impact the Company's consolidated statements of operations or consolidated statements of cash flows for the periods presented.
Accounting Standards Issued, to be Adopted by the Company in Future Periods

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

- 17 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In March 2017, the FASB issued an accounting standard update requiring that an employer report the pension service cost component in the same line items as compensation costs, but report all other components of net periodic pension cost in a line below operating income. This amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The Company had pension service cost of $2.6 million and $2.7 million during the six months ended February 28, 2018 and 2017, respectively. Total net periodic pension cost was $4.8 million and $5.1 million for the six months ended February 28, 2018 and 2017, respectively. The Company plans to adopt this standard on September 1, 2018.
In February 2016, the FASB issued new accounting guidance which requires companies to recognize a lease liability and right-of-use asset on the balance sheet for operating leases with a term greater than one year. The standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company regularly enters into operating leases which previously did not require recognition on the balance sheet. As a result, the Company is currently evaluating the effects this standard will have on its consolidated financial statements by capturing the key lease agreement terms for all lease agreement. The Company plans to adopt this standard September 1, 2019.
In May 2014, and as subsequently updated, the FASB issued new accounting guidance that creates a single revenue recognition model, while clarifying the principles for recognizing revenue. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods. The Company will adopt the new guidance on September 1, 2018. The new revenue standard may be adopted using either of the following transition methods: (1) a full retrospective approach reflecting the adoption of the standard in each prior reporting period with the option to elect certain practical expedients, or (2) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which includes additional footnote disclosures). The Company preliminarily expects to use the modified retrospective method. However, the Company is continuing to evaluate the impact of the standard, and the planned adoption method is subject to change.
No other new accounting pronouncements issued or with effective dates during fiscal 2018 had or are expected to have a material impact on the Company's consolidated financial statements.
(15) CONSOLIDATING FINANCIAL INFORMATION
Certain of our subsidiaries have guaranteed our obligations under the $375.0 million outstanding principal amount of 6.875% Senior Notes due June 2023 (the "Notes"). The following presents the condensed consolidating financial information separately for:

(i) A. Schulman Inc. (“Parent”), the issuer of the guaranteed obligations;
(ii) Guarantor subsidiaries (“Guarantors”), on a combined basis, as specified in the indentures related to the Company’s obligations under the Notes;
(iii) Non-guarantor subsidiaries (“Non-Guarantors”), on a combined basis;
(iv) Eliminations representing adjustments to (a) eliminate intercompany transactions between or among Parent, Guarantors and Non-Guarantors and (b) eliminate the investments in our subsidiaries;
(v) A. Schulman, Inc. and Subsidiaries on a consolidated basis (“Consolidated”).
Each Guarantor is 100% owned by Parent for each period presented. The Notes are fully and unconditionally guaranteed on a joint and several basis by each Guarantor. The guarantees of the Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions. Each entity in the consolidating financial information follows the same accounting policies as described in the notes to the consolidated financial statements, except for the use by Parent and Guarantors of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation. Changes in intercompany receivables and payables related to operations, such as intercompany sales or service charges, are included in cash flows from operating activities. Intercompany transactions reported as investing or financing activities include the sale of the capital stock of various subsidiaries, loans and other capital transactions between members of the consolidated group.
Certain Non-Guarantors are limited in their ability to remit funds to Parent by means of dividends, advances or loans due to required foreign government and/or currency exchange board approvals or limitations in credit agreements or other debt instruments of those subsidiaries.
During fiscal 2018, certain Guarantors merged with Parent in conjunction with simplification of the Company's legal entity structure. As required, the Company has changed the prior year consolidating financial statement presentation to conform to the current legal entity structure. As a result, Parent's total assets increased by $11.4 million, and Guarantor total assets

- 18 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

- 19 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Condensed Consolidating Balance Sheet
 
February 28, 2018
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
861

 
$
—

 
$
50,614

 
$
—

 
$
51,475

Restricted cash
—

 
—

 
169

 
—

 
169

Accounts receivable, net
54,423

 
52,510

 
332,521

 
—

 
439,454

Accounts receivable, intercompany
22,422

 
6,817

 
28,092

 
(57,331
)
 
—

Inventories
49,315

 
37,580

 
258,486

 
—

 
345,381

Prepaid expenses and other current assets
4,331

 
2,898

 
33,309

 
—

 
40,538

Assets held for sale
—

 
2,671

 
—

 
—

 
2,671

Total current assets
131,352

 
102,476

 
703,191

 
(57,331
)
 
879,688

Net property, plant and equipment
60,425

 
48,828

 
183,724

 
—

 
292,977

Deferred charges and other noncurrent assets
104,590

 
4,009

 
56,859

 
(86,846
)
 
78,612

Intercompany loans receivable
14,264

 
17,896

 
—

 
(32,160
)
 
—

Investment in subsidiaries
812,907

 
115,097

 
—

 
(928,004
)
 
—

Goodwill
56,155

 
80,996

 
128,102

 
—

 
265,253

Intangible assets, net
38,159

 
167,652

 
112,521

 
—

 
318,332

Total assets
$
1,217,852

 
$
536,954

 
$
1,184,397

 
$
(1,104,341
)
 
$
1,834,862

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
48,715

 
$
29,532

 
$
273,183

 
$
—

 
$
351,430

Accounts payable, intercompany
9,779

 
34,105

 
13,447

 
(57,331
)
 
—

U.S. and foreign income taxes payable
—

 
716

 
5,689

 
—

 
6,405

Accrued payroll, taxes and related benefits
10,524

 
5,907

 
30,491

 
—

 
46,922

Other accrued liabilities
26,348

 
4,365

 
35,248

 
—

 
65,961

Short-term debt
17,393

 
37

 
2,062

 
—

 
19,492

Total current liabilities
112,759

 
74,662

 
360,120

 
(57,331
)
 
490,210

Long-term debt
877,384

 
52

 
53,196

 
—

 
930,632

Intercompany debt
—

 
—

 
32,160

 
(32,160
)
 
—

Pension plans
2,203

 
1,233

 
136,917

 
—

 
140,353

Deferred income taxes
—

 
65,991

 
46,870

 
(86,846
)
 
26,015

Other long-term liabilities
11,915

 
1,122

 
10,532

 
—

 
23,569

Total liabilities
1,004,261

 
143,060

 
639,795

 
(176,337
)
 
1,610,779

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

 
—

 
—

 
—

 
120,289

Common stock
48,585

 
—

 
—

 
—

 
48,585

Other equity
44,717

 
393,894

 
534,110

 
(928,004
)
 
44,717

Total A. Schulman, Inc.’s stockholders’ equity
213,591

 
393,894

 
534,110

 
(928,004
)
 
213,591

Noncontrolling interests
—

 
—

 
10,492

 
—

 
10,492

Total equity
213,591

 
393,894

 
544,602

 
(928,004
)
 
224,083

Total liabilities and equity
$
1,217,852

 
$
536,954

 
$
1,184,397

 
$
(1,104,341
)
 
$
1,834,862



- 20 -
A. SCHULMAN, INC.
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
$
614

 
$
—

 
$
52,637

 
$
—

 
$
53,251

Restricted cash
—

 
—

 
768

 
—

 
768

Accounts receivable, net
56,354

 
52,640

 
299,445

 
—

 
408,439

Accounts receivable, intercompany
26,690

 
7,203

 
26,188

 
(60,081
)
 
—

Inventories
41,862

 
32,667

 
201,930

 
—

 
276,459

Prepaid expenses and other current assets
7,662

 
2,221

 
26,829

 
—

 
36,712

Assets held for sale
2,764

 
2,912

 
—

 
—

 
5,676

Total current assets
135,946

 
97,643

 
607,797

 
(60,081
)
 
781,305

Net property, plant and equipment
63,150

 
51,072

 
184,481

 
—

 
298,703

Deferred charges and other noncurrent assets
95,287

 
4,198

 
59,609

 
(81,247
)
 
77,847

Intercompany loans receivable
16,564

 
17,460

 
—

 
(34,024
)
 
—

Investment in subsidiaries
769,813

 
117,617

 
—

 
(887,430
)
 
—

Goodwill
55,534

 
81,617

 
126,584

 
—

 
263,735

Intangible assets, net
40,416

 
174,748

 
117,026

 
—

 
332,190

Total assets
$
1,176,710

 
$
544,355

 
$
1,095,497

 
$
(1,062,782
)
 
$
1,753,780

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
43,429

 
$
34,612

 
$
240,779

 
$
—

 
$
318,820

Accounts payable, intercompany
13,191

 
33,370

 
13,520

 
(60,081
)
 
—

U.S. and foreign income taxes payable
—

 
597

 
4,303

 
—

 
4,900

Accrued payroll, taxes and related benefits
7,752

 
6,044

 
33,155

 
—

 
46,951

Other accrued liabilities
21,373

 
4,699

 
35,689

 
—

 
61,761

Short-term debt
14,912

 
29

 
17,072

 
—

 
32,013

Total current liabilities
100,657

 
79,351

 
344,518

 
(60,081
)
 
464,445

Long-term debt
858,446

 
41

 
26,691

 
—

 
885,178

Intercompany debt
—

 
—

 
34,024

 
(34,024
)
 
—

Pension plans
2,266

 
1,308

 
132,117

 
—

 
135,691

Deferred income taxes
5,593

 
65,991

 
47,362

 
(81,247
)
 
37,699

Other long-term liabilities
12,730

 
1,067

 
9,938

 
—

 
23,735

Total liabilities
979,692

 
147,758

 
594,650

 
(175,352
)
 
1,546,748

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

 
—

 
—

 
—

 
120,289

Common stock
48,529

 
—

 
—

 
—

 
48,529

Other equity
28,200

 
396,597

 
490,833

 
(887,430
)
 
28,200

Total A. Schulman, Inc.’s stockholders’ equity
197,018

 
396,597

 
490,833

 
(887,430
)
 
197,018

Noncontrolling interests
—

 
—

 
10,014

 
—

 
10,014

Total equity
197,018

 
396,597

 
500,847

 
(887,430
)
 
207,032

Total liabilities and equity
$
1,176,710

 
$
544,355

 
$
1,095,497

 
$
(1,062,782
)
 
$
1,753,780




- 21 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



 
Consolidating Statement of Operations
 
Three months ended February 28, 2018
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Net sales
$
98,254

 
$
86,151

 
$
478,137

 
$
(12,444
)
 
$
650,098

Cost of sales
84,676

 
76,460

 
409,711

 
(12,444
)
 
558,403

Selling, general and administrative expenses
20,187

 
13,725

 
44,444

 
—

 
78,356

Restructuring expense
59

 
—

 
65

 
—

 
124

Operating income (loss)
(6,668
)
 
(4,034
)
 
23,917

 
—

 
13,215

Interest expense
12,777

 
1

 
806

 
(149
)
 
13,435

Intercompany charges
40

 
6

 
3,289

 
(3,335
)
 
—

Intercompany income
(1,858
)
 
(1,427
)
 
(50
)
 
3,335

 
—

Foreign currency transaction (gains) losses
344

 
15

 
124

 
—

 
483

Other (income) expense, net
—

 
(284
)
 
(714
)
 
149

 
(849
)
(Gain) loss on intercompany investments
(13,037
)
 
(2,921
)
 
—

 
15,958

 
—

Income (loss) before taxes
(4,934
)
 
576

 
20,462

 
(15,958
)
 
146

Provision (benefit) for U.S. and foreign income taxes
(10,321
)
 
493

 
4,298

 
—

 
(5,530
)
Net income (loss)
5,387

 
83

 
16,164

 
(15,958
)
 
5,676

Noncontrolling interests
—

 
—

 
(289
)
 
—

 
(289
)
Net income (loss) attributable to A. Schulman, Inc.
5,387

 
83

 
15,875

 
(15,958
)
 
5,387

Convertible special stock dividends
1,875

 
—

 
—

 
—

 
1,875

Net income (loss) available to A. Schulman, Inc. common stockholders
$
3,512

 
$
83

 
$
15,875

 
$
(15,958
)
 
$
3,512

Comprehensive income (loss)
$
14,956

 
$
179

 
$
25,611

 
$
(25,655
)
 
$
15,091

Less: comprehensive income (loss) attributable to noncontrolling interests
—

 
—

 
135

 
—

 
135

Comprehensive income (loss) attributable to A. Schulman, Inc.
$
14,956

 
$
179

 
$
25,476

 
$
(25,655
)
 
$
14,956


- 22 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Consolidating Statement of Operations
 
Three months ended February 28, 2017
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Net sales
$
92,062

 
$
84,420

 
$
403,859

 
$
(11,663
)
 
$
568,678

Cost of sales
79,036

 
75,818

 
336,301

 
(11,663
)
 
479,492

Selling, general and administrative expenses
11,235

 
12,670

 
42,062

 
—

 
65,967

Restructuring expense
674

 
277

 
927

 
—

 
1,878

Operating income (loss)
1,117

 
(4,345
)
 
24,569

 
—

 
21,341

Interest expense
12,056

 
21

 
1,292

 
(262
)
 
13,107

Intercompany charges
6

 
—

 
3,043

 
(3,049
)
 
—

Intercompany income
(1,911
)
 
(1,127
)
 
(11
)
 
3,049

 
—

Foreign currency transaction (gains) losses
1,056

 
(2
)
 
27

 
—

 
1,081

Other (income) expense, net
(43
)
 
(325
)
 
780

 
262

 
674

(Gain) loss on intercompany investments
(10,872
)
 
(1,616
)
 
—

 
12,488

 
—

Income (loss) before taxes
825

 
(1,296
)
 
19,438

 
(12,488
)
 
6,479

Provision (benefit) for U.S. and foreign income taxes
(4,205
)
 
530

 
4,818

 
—

 
1,143

Net income (loss)
5,030

 
(1,826
)
 
14,620

 
(12,488
)
 
5,336

Noncontrolling interests
—

 
—

 
(306
)
 
—

 
(306
)
Net income (loss) attributable to A. Schulman, Inc.
5,030

 
(1,826
)
 
14,314

 
(12,488
)
 
5,030

Convertible special stock dividends
1,875

 
—

 
—

 
—

 
1,875

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

 
$
(1,826
)
 
$
14,314

 
$
(12,488
)
 
$
3,155

Comprehensive income (loss)
$
9,763

 
$
(747
)
 
$
19,354

 
$
(18,274
)
 
$
10,096

Less: comprehensive income (loss) attributable to noncontrolling interests
—

 
—

 
333

 
—

 
333

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

 
$
(747
)
 
$
19,021

 
$
(18,274
)
 
$
9,763



- 23 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Consolidating Statement of Operations
 
Six months ended February 28, 2018
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Net sales
$
196,761

 
$
176,205

 
$
976,626

 
$
(24,871
)
 
$
1,324,721

Cost of sales
167,411

 
155,148

 
830,253

 
(24,871
)
 
1,127,941

Selling, general and administrative expenses
37,015

 
26,890

 
89,578

 
—

 
153,483

Restructuring expense
247

 
—

 
344

 
—

 
591

(Gain) loss on sale of assets
(3,004
)
 
(73
)
 
—

 
—

 
(3,077
)
Operating income (loss)
(4,908
)
 
(5,760
)
 
56,451

 
—

 
45,783

Interest expense
25,094

 
2

 
2,225

 
(445
)
 
26,876

Intercompany charges
57

 
6

 
6,489

 
(6,552
)
 
—

Intercompany income
(3,806
)
 
(2,683
)
 
(63
)
 
6,552

 
—

Foreign currency transaction (gains) losses
476

 
9

 
785

 
—

 
1,270

Other (income) expense, net
39

 
(591
)
 
(1,639
)
 
445

 
(1,746
)
(Gain) loss on intercompany investments
(32,979
)
 
(5,566
)
 
—

 
38,545

 
—

Income (loss) before taxes
6,211

 
3,063

 
48,654

 
(38,545
)
 
19,383

Provision (benefit) for U.S. and foreign income taxes
(13,891
)
 
349

 
12,169

 
—

 
(1,373
)
Net income (loss)
20,102

 
2,714

 
36,485

 
(38,545
)
 
20,756

Noncontrolling interests
—

 
—

 
(654
)
 
—

 
(654
)
Net income (loss) attributable to A. Schulman, Inc.
20,102

 
2,714

 
35,831

 
(38,545
)
 
20,102

Convertible special stock dividends
3,750

 
—

 
—

 
—

 
3,750

Net income (loss) available to A. Schulman, Inc. common stockholders
$
16,352

 
$
2,714

 
$
35,831

 
$
(38,545
)
 
$
16,352

Comprehensive income (loss)
$
31,024

 
$
2,083

 
$
47,205

 
$
(48,783
)
 
$
31,529

Less: comprehensive income (loss) attributable to noncontrolling interests
—

 
—

 
505

 
—

 
505

Comprehensive income (loss) attributable to A. Schulman, Inc.
$
31,024

 
$
2,083

 
$
46,700

 
$
(48,783
)
 
$
31,024



- 24 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Consolidating Statement of Operations
 
Six months ended February 28, 2017
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Net sales
$
182,818

 
$
172,480

 
$
835,880

 
$
(22,500
)
 
$
1,168,678

Cost of sales
156,132

 
152,380

 
692,465

 
(22,500
)
 
978,477

Selling, general and administrative expenses
25,732

 
25,618

 
86,992

 
—

 
138,342

Restructuring expense
1,872

 
443

 
9,107

 
—

 
11,422

Operating income (loss)
(918
)
 
(5,961
)
 
47,316

 
—

 
40,437

Interest expense
23,983

 
26

 
2,784

 
(522
)
 
26,271

Intercompany charges
8

 
—

 
4,896

 
(4,904
)
 
—

Intercompany income
(2,455
)
 
(2,433
)
 
(16
)
 
4,904

 
—

Foreign currency transaction (gains) losses
2,038

 
(36
)
 
(359
)
 
—

 
1,643

Other (income) expense, net
(306
)
 
(606
)
 
(69
)
 
522

 
(459
)
(Gain) loss on intercompany investments
(12,080
)
 
(3,661
)
 
—

 
15,741

 
—

Income (loss) before taxes
(12,106
)
 
749

 
40,080

 
(15,741
)
 
12,982

Provision (benefit) for U.S. and foreign income taxes
(20,079
)
 
3,529

 
21,012

 
—

 
4,462

Net income (loss)
7,973

 
(2,780
)
 
19,068

 
(15,741
)
 
8,520

Noncontrolling interests
—

 
—

 
(547
)
 
—

 
(547
)
Net income (loss) attributable to A. Schulman, Inc.
7,973

 
(2,780
)
 
18,521

 
(15,741
)
 
7,973

Convertible special stock dividends
3,750

 
—

 
—

 
—

 
3,750

Net income (loss) available to A. Schulman, Inc. common stockholders
$
4,223

 
$
(2,780
)
 
$
18,521

 
$
(15,741
)
 
$
4,223

Comprehensive income (loss)
$
(1,946
)
 
$
(2,048
)
 
$
9,138

 
$
(6,586
)
 
$
(1,442
)
Less: comprehensive income (loss) attributable to noncontrolling interests
—

 
—

 
504

 
—

 
504

Comprehensive income (loss) attributable to A. Schulman, Inc.
$
(1,946
)
 
$
(2,048
)
 
$
8,634

 
$
(6,586
)
 
$
(1,946
)


- 25 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Condensed Consolidating Statement of Cash Flows
 
Six months ended February 28, 2018
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Operating activities:
 
 
 
 
 
 
 
 
 
Net cash provided from (used in) operating activities
$
(10,087
)
 
$
1,049

 
$
96

 
$
(3,675
)
 
$
(12,617
)
Investing activities
 
 
 
 
 
 
 
 
 
Expenditures for property, plant and equipment
(1,345
)
 
(1,688
)
 
(10,050
)
 
—

 
(13,083
)
Proceeds from the sale of assets
5,655

 
531

 
234

 
—

 
6,420

Distributions from equity investees
—

 
125

 
—

 
—

 
125

Net cash provided from (used in) investing activities
4,310

 
(1,032
)
 
(9,816
)
 
—

 
(6,538
)
Financing activities:
 
 
 
 
 
 
 
 
 
Cash dividends paid to common stockholders
(12,242
)
 
—

 
—

 
—

 
(12,242
)
Cash dividends paid to special stockholders
(3,750
)
 
—

 
—

 
—

 
(3,750
)
Intercompany dividends paid
—

 
—

 
(3,675
)
 
3,675

 
—

Increase (decrease) in short-term debt
—

 
—

 
(15,144
)
 
—

 
(15,144
)
Borrowings on long-term debt
163,150

 
—

 
236,773

 
—

 
399,923

Repayments on long-term debt including current portion
(142,267
)
 
(17
)
 
(211,313
)
 
—

 
(353,597
)
Intercompany loan borrowings and repayments
2,300

 
—

 
(2,300
)
 
—

 
—

Noncontrolling interests' distributions
—

 
—

 
(27
)
 
—

 
(27
)
Issuances of stock, common and treasury
58

 
—

 
—

 
—

 
58

Redemptions of common stock
(1,225
)
 
—

 
—

 
—

 
(1,225
)
Net cash provided from (used in) financing activities
6,024


(17
)
 
4,314

 
3,675

 
13,996

Effect of exchange rate changes on cash
—

 
—

 
2,784

 
—

 
2,784

Net increase (decrease) in cash, cash equivalents, and restricted cash
247

 
—

 
(2,622
)
 
—

 
(2,375
)
Cash, cash equivalents, and restricted cash at beginning of period
614

 
—

 
53,405

 
—

 
54,019

Cash, cash equivalents, and restricted cash at end of period
$
861

 
$
—

 
$
50,783

 
$
—

 
$
51,644




- 26 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Condensed Consolidating Statement of Cash Flows
 
Six months ended February 28, 2017
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Operating activities:
 
 
 
 
 
 
 
 
 
Net cash provided from (used in) operating activities
$
41,005

 
$
1,006

 
$
37,235

 
$
(39,097
)
 
$
40,149

Investing activities
 
 
 
 
 
 
 
 
 
Expenditures for property, plant and equipment
(9,450
)
 
(1,181
)
 
(13,874
)
 
—

 
(24,505
)
Proceeds from the sale of assets
43

 
78

 
357

 
—

 
478

Distributions from equity investees
—

 
125

 
—

 
—

 
125

Net cash provided from (used in) investing activities
(9,407
)
 
(978
)
 
(13,517
)
 
—

 
(23,902
)
Financing activities:
 
 
 
 
 
 
 
 
 
Cash dividends paid to common stockholders
(12,057
)
 
—

 
—

 
—

 
(12,057
)
Cash dividends paid to special stockholders
(3,750
)
 
—

 
—

 
—

 
(3,750
)
Intercompany dividends paid
—

 
—

 
(39,097
)
 
39,097

 
—

Increase (decrease) in short-term debt
—

 
—

 
5,153

 
—

 
5,153

Borrowings on long-term debt
107,800

 
—

 
130,743

 
—

 
238,543

Repayments on long-term debt including current portion
(122,194
)
 
(28
)
 
(114,812
)
 
—

 
(237,034
)
Issuances of stock, common and treasury
93

 
—

 
—

 
—

 
93

Redemptions of common stock
(620
)
 
—

 
—

 
—

 
(620
)
Net cash provided from (used in) financing activities
(30,728
)
 
(28
)
 
(18,013
)
 
39,097

 
(9,672
)
Effect of exchange rate changes on cash
—

 
—

 
(494
)
 
—

 
(494
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
870

 
—

 
5,211

 
—

 
6,081

Cash, cash equivalents, and restricted cash at beginning of period
—

 
—

 
43,403

 
—

 
43,403

Cash, cash equivalents, and restricted cash at end of period
$
870

 
$
—

 
$
48,614

 
$
—

 
$
49,484



- 27 -

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help investors understand our results of operations, financial condition and current business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report and the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2017.
The MD&A is organized as follows:
•
Overview: From management’s point of view, we discuss the following:
◦
Summary of our business and the markets in which we operate; and
◦
Significant events during the current fiscal year.
•
Results of Operations: An analysis of our results of operations as reflected in our consolidated financial statements. Throughout this MD&A, the Company provides operating results exclusive of certain items such as costs related to restructuring and related expenses, Merger and integrations, asset impairments and asset write-downs, which are considered relevant to aid analysis and understanding of the Company’s results and business trends. The Company believes that operating income before certain items is a useful measure to investors and management in understanding current profitability levels that may serve as a basis for evaluating future performance and facilitating comparability of results. In addition, operating income before certain items is important to management as it is a component of the Company’s annual and long-term employee incentive compensation plans.
•
Liquidity and Capital Resources: An analysis of our cash flows, working capital, debt structure, contractual obligations and other commercial commitments.
Overview
Business Summary
A. Schulman, Inc. is an international supplier of high-performance plastic formulations, resins and services headquartered in Fairlawn, Ohio. The Company’s customers span a wide range of markets such as packaging, mobility, building & construction, electrical & electronics, agriculture, personal care & hygiene, custom services, and sports, leisure & home. The Chief Operating Decision Maker ("CODM") makes decisions, assesses performance and allocates resources by the following five reportable segments:
•
Europe, Middle East and Africa ("EMEA"),
•
United States & Canada ("USCAN"),
•
Latin America ("LATAM"),
•
Asia Pacific ("APAC"), and
•
Engineered Composites ("EC").
As of February 28, 2018, the Company has approximately 5,200 employees and 54 manufacturing facilities worldwide. Globally, the Company operates in three product families: Engineered Composites, Custom Concentrates and Services, and Performance Materials.

- 28 -

Lucent Matter
As previously reported by the Company in its filings with the U.S. Securities and Exchange Commission ("SEC"), on June 1, 2015, the Company completed the acquisition of Citadel and its subsidiaries, including its indirect wholly owned subsidiary Lucent Polymers, Inc. In August 2015, the Company discovered discrepancies between laboratory data and certifications provided by Lucent to customers and also discovered inaccuracies in materials and information provided by Lucent employees to an independent certification organization. The Company took immediate decisive actions following its initial discoveries, including, but not limited to, remediation measures, notifications to affected customers, and notification to Underwriter Laboratories. The Company also commenced an internal investigation, which revealed that the discrepancies and inaccuracies initially identified were due to practices at Lucent under its prior ownership. As a result, the Company has reformulated and rebranded its products and ceased the use of certain tradenames associated with Citadel, which resulted in the impairment of certain finite-lived intangible assets during the fourth quarter of fiscal 2016. In addition, the Engineered Plastics business, which is now part of the Performance Materials product family, did not meet volume and revenue expectations in fiscal 2016 and the product had lower margins than planned due primarily to the remediation and changes in business practices undertaken to address the Lucent quality matter. The deterioration of results due to the aforementioned factors and economic conditions soon after the acquisition resulted in the impairment of the acquired goodwill during the fourth quarter of fiscal 2016. For a discussion of the goodwill and intangible asset impairments, refer to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.
To date, no customers or other parties have initiated recalls or have made material claims against the Company. Although to date, no significant customers have terminated their relationships with the Company or its subsidiaries because of the Lucent quality matter, the matter has resulted in decreased volume and revenue, including reductions by certain significant customers. Additionally, the Company continues to incur recurring additional costs to produce product to customer specification.
As no customer or other parties have initiated recalls, or have made material claims against the Company or its subsidiaries from the date we identified this issue in August 2015 through the date of filing, we are currently unable to conclude that losses related to recalls or claims are probable or to estimate the potential range of losses. The Company is currently unable to determine whether such issues will have any future material adverse effect on our financial position, liquidity, or results of operations.
In addition, the Company previously provided a written claim notice to the sellers and to the escrow agent with respect to the indemnity escrow established in connection with the stock purchase agreement pursuant to which the Company acquired Citadel and its subsidiaries. As of February 28, 2018, approximately $31.0 million remained in such indemnity escrow.
As Lucent was effectively acquired by Citadel in December of 2013, the Company also submitted written claim notices pursuant to the Agreement and Plan of Merger, dated December 6, 2013, among The Matrixx Group, Incorporated, LPI Merger Sub, Inc., LPI Holding Company, River Associates Investments, LLC and certain stockholders of LPI Holding Company, pursuant to which Citadel initially acquired Lucent. The Company also submitted written claim notices pursuant to a $3.8 million representations and warranties insurance policy issued in connection with that acquisition.
In June 2016, the Company filed a complaint in the Delaware Chancery Court against Citadel Plastics (the “Citadel Complaint”), as well as certain funds affiliated with the sellers and other former executives of Citadel and Lucent (the “Citadel Defendants”). In January 2017, the Court denied the defendants motion to dismiss seventeen of twenty claims. The Court's ruling sustained claims for breach of contract, fraudulent inducement, civil conspiracy and violations of blue sky laws in Illinois, Ohio, California and Indiana. On February 16, 2017, the Court entered a stipulated order establishing an equitable lien over all pre-closing tax refunds payable by the Company to Citadel Plastics under the stock purchase agreement until resolution of litigation. The funds currently subject to the equitable lien are $7.5 million. The Company is seeking rescission 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 has been scheduled for trial in April 2018.
In November 2016, the Company, through its Matrixx subsidiary, filed a separate Complaint in the Delaware Chancery Court against River Associates (the “River Complaint”), as well as certain funds affiliated with the sellers and other former executives of Lucent (the “River Defendants”). In general, the River Complaint alleges similar theories (except securities violations) and seeks similar relief (except rescission) and the River Defendants filed a similar motion to dismiss as in the Citadel litigation. On August 23, 2017, the Court ruled on River Defendants’ Motions to Dismiss and Motions for Summary Judgment. The Court dismissed certain claims pertaining to one Defendant and all other motions to dismiss parties or claims were denied. In addition, the Court ruled against the Citadel Defendants’ Motions to (in effect) combine the Citadel Holdings litigation with the River litigation. Therefore, the River litigation will proceed as a separate lawsuit on a schedule months behind the Citadel Holdings Litigation. No trial date has yet been scheduled.
There are ongoing parallel investigations being undertaken by the United States Attorneys' Office for the Southern District of Indiana ("USAO") and the SEC that we understand relate to the allegations made by the Company in the Citadel Complaint arising out of the Company's acquisition of Citadel (including Citadel's subsidiary, Lucent). On September 6, 2017, the Federal Bureau

- 29 -

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.
The Company has incurred $6.1 million and $1.3 million of litigation costs related to the Lucent Matter in the six months ended February 28, 2018 and 2017, respectively.
Fiscal Year 2018 Significant Events
The following represent significant events during fiscal year 2018:
1.
Credit Agreement. During October 2017, the Company amended the 2015 Credit Agreement with its lenders. The amendment increased the net leverage ratio covenant to provide the Company additional financial flexibility to execute on its growth strategy.
2.
Automotive Innovation Award. During November 2017, the Company received the 2017 Automotive Innovation Award from the Society of Plastics Engineers for most innovative use of plastics. The Company received the award for its innovative material in the automotive aftermarket.
3.
LyondellBasell Transaction. 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 whereby LYB will acquire the Company (the “Merger”) for (i) $42.00 per share in cash, without interest and subject to any applicable withholding taxes, and (ii) one contractual contingent value right per share 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). For further discussion, refer to Note 1 in this Form 10-Q.
Results of Operations
Segment Information
 
Three months ended February 28,
 
2018
 
2017
 
 
 
Favorable (unfavorable)
EMEA
 
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
282,150

 
285,194

 
(3,044
)
 
(1.1
)%
 
 
 
 
Net sales
$
335,671

 
$
276,902

 
$
58,769

 
21.2
 %
 
$
39,227

 
7.1
 %
Segment gross profit
$
40,185

 
$
39,130

 
$
1,055

 
2.7
 %
 
$
5,717

 
(11.9
)%
Segment gross profit percentage
12.0
%
 
14.1
%
 
 
 
 
 
 
 
 
Segment operating income
$
15,166

 
$
16,527

 
$
(1,361
)
 
(8.2
)%
 
$
2,388

 
(22.7
)%
Price per pound
$
1.190

 
$
0.971

 
$
0.219

 
22.6
 %
 
$
0.139

 
8.2
 %
Three months ended February 28, 2018
EMEA net sales for the three months ended February 28, 2018 were $335.7 million, an increase of $58.8 million compared with the prior year period. Excluding the favorable impact of foreign currency translation of $39.2 million, net sales increased 7.1% primarily due to favorable product mix, increased sales price per pound in an effort to offset increased raw material costs and increased volumes of 3.3% in the Custom Concentrates & Services product family with growth in multiple end markets and decreased volumes of 5.7% in the Performance Materials product family driven by decreased distribution sales.

EMEA gross profit was $40.2 million for the three months ended February 28, 2018, an increase of $1.1 million compared with the prior year period. Excluding the favorable impact of foreign currency translation of $5.7 million, segment gross profit decreased 11.9% primarily due to higher production costs resulting from increased production volumes, as well as rising freight rates throughout Europe and increased costs associated with the establishment of a central distribution center.

EMEA operating income for the three months ended February 28, 2018 was $15.2 million, a decrease of $1.4 million compared with the prior year period. Excluding the favorable impact of foreign currency translation of $2.4 million, segment operating income decreased by 22.7%, as lower gross profit noted above was partially offset by the benefit from cost savings initiatives.

- 30 -

 
Six months ended February 28,
 
2018
 
2017
 
 
 
Favorable (unfavorable)
EMEA
 
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
583,268

 
580,701

 
2,567

 
0.4
 %
 
 
 
 
Net sales
$
683,091

 
$
572,974

 
$
110,117

 
19.2
 %
 
$
59,242

 
8.9
 %
Segment gross profit
$
86,631

 
$
83,788

 
$
2,843

 
3.4
 %
 
$
8,788

 
(7.1
)%
Segment gross profit percentage
12.7
%
 
14.6
%
 
 
 
 
 
 
 
 
Segment operating income
$
36,266

 
$
36,295

 
$
(29
)
 
(0.1
)%
 
$
3,736

 
(10.4
)%
Price per pound
$
1.171

 
$
0.987

 
$
0.184

 
18.6
 %
 
$
0.101

 
8.4
 %
Six months ended February 28, 2018
EMEA net sales for the six months ended February 28, 2018 were $683.1 million, an increase of $110.1 million compared with the prior year period. Excluding the favorable impact of foreign currency translation of $59.2 million, net sales increased 8.9%, primarily due to favorable product mix, increased sales price per pound in an effort to offset increased raw material costs and increased volumes of 7.1% in the Custom Concentrates & Services product family with growth in multiple end markets. These increases were partially offset by decreased volume of 6.4% in the Performance Materials product family primarily linked to lower distribution volumes.

EMEA gross profit was $86.6 million for the six months ended February 28, 2018, an increase of $2.8 million compared with the prior year period. Excluding the favorable impact of foreign currency translation of $8.8 million, segment gross profit decreased 7.1% primarily due to higher production costs resulting from increased production volumes, as well as rising freight rates throughout Europe and increased costs associated with the establishment of a central distribution center.

EMEA operating income for the six months ended February 28, 2018 was $36.3 million, essentially flat with prior year. Excluding the favorable impact of foreign currency translation of $3.7 million, segment operating income decreased by 10.4%, attributable to lower gross profit noted above which was partially offset by the benefit from cost savings initiatives.
 
Three months ended February 28,
USCAN
2018
 
2017
 
Increase (decrease)
 
(In thousands, except for %'s and per pound data)
Pounds sold
169,521

 
177,987

 
(8,466
)
 
(4.8
)%
Net sales
$
156,452

 
$
151,918

 
$
4,534

 
3.0
 %
Segment gross profit
$
20,219

 
$
20,060

 
$
159

 
0.8
 %
Segment gross profit percentage
12.9
%
 
13.2
%
 
 
 
 
Segment operating income
$
4,713

 
$
5,447

 
$
(734
)
 
(13.5
)%
Price per pound
$
0.923

 
$
0.854

 
$
0.069

 
8.1
 %
Three months ended February 28, 2018
USCAN net sales for the three months ended February 28, 2018 were $156.5 million, an increase of $4.5 million or 3.0% compared with the prior year period. Net sales increased primarily due to increased price per pound in an effort to offset increased raw material costs and due to improved product mix, within both the Custom Concentrates & Services and Performance Materials product families. These increases were partially offset by decreased volume in the Performance Materials product family related to the mobility, agriculture, and custom services markets.
USCAN gross profit was $20.2 million for the three months ended February 28, 2018, up $0.2 million or 0.8% from the prior year primarily due to the improved product mix noted above.
USCAN operating income for the three months ended February 28, 2018 was $4.7 million compared with $5.4 million in the same quarter of fiscal 2017. Segment operating income decreased primarily due to increased variable compensation expense.

- 31 -

 
Six months ended February 28,
USCAN
2018
 
2017
 
Increase (decrease)
 
(In thousands, except for %'s and per pound data)
Pounds sold
342,928

 
357,259

 
(14,331
)
 
(4.0
)%
Net sales
$
315,688

 
$
308,336

 
$
7,352

 
2.4
 %
Segment gross profit
$
44,847

 
$
44,576

 
$
271

 
0.6
 %
Segment gross profit percentage
14.2
%
 
14.5
%
 
 
 
 
Segment operating income
$
12,854

 
$
13,943

 
$
(1,089
)
 
(7.8
)%
Price per pound
$
0.921

 
$
0.863

 
$
0.058

 
6.7
 %
Six months ended February 28, 2018
USCAN net sales for the six months ended February 28, 2018 were $315.7 million, an increase of $7.4 million or 2.4% compared with the prior year period. Net sales increased primarily due to increased price per pound in an effort to offset increased raw material costs and due to improved product mix, primarily within the Custom Concentrates & Services product family in the oilfield services market. These increases were partially offset by decreased volume in the Performance Materials product family related to the mobility market and reduction in volumes due to temporary plant shutdowns and resin availability associated with Hurricane Harvey in the first quarter of fiscal 2018.
USCAN gross profit was $44.8 million for the six months ended February 28, 2018, up $0.3 million or 0.6% compared to the prior year. The improved product mix noted above was partially offset by the first quarter of fiscal 2018 effects of Hurricane Harvey, including temporary plant shutdowns, resin availability, higher prices paid for raw materials, and higher freight rates all combined to partially offset the increased profitability.
USCAN operating income for the six months ended February 28, 2018 was $12.9 million compared with $13.9 million in fiscal 2017. Segment operating income decreased primarily due to the effects of Hurricane Harvey in the first quarter of fiscal 2018 as well as higher variable compensation expense. The Company believes the Hurricane Harvey operating income impact as a result of lost volume, raw material shortages and price increases, and freight cost increases is a loss of approximately $1.5 million impacting the first quarter of fiscal 2018.
 
Three months ended February 28,
 
2018
 
2017
 
 
 
Favorable (unfavorable)
LATAM
 
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
35,482

 
32,982

 
2,500

 
7.6
 %
 
 
 
 
Net sales
$
44,982

 
$
39,662

 
$
5,320

 
13.4
 %
 
$
(497
)
 
14.7
 %
Segment gross profit
$
8,869

 
$
9,595

 
$
(726
)
 
(7.6
)%
 
$
(77
)
 
(6.8
)%
Segment gross profit percentage
19.7
%
 
24.2
%
 
 
 
 
 
 
 
 
Segment operating income
$
5,071

 
$
5,459

 
$
(388
)
 
(7.1
)%
 
$
—

 
(7.1
)%
Price per pound
$
1.268

 
$
1.203

 
$
0.065

 
5.4
 %
 
$
(0.014
)
 
6.6
 %
Three months ended February 28, 2018
LATAM net sales for the three months ended February 28, 2018 were $45.0 million compared with $39.7 million in the prior year period. Net sales increased 14.7% excluding the unfavorable impact of foreign currency translation, compared with the prior year period primarily due to volume growth of 6.4% in the Custom Concentrates & Services product family in the packaging market, and volume growth of 10.2% in the Performance Materials product family in the electrical & electronics market. In addition, sales increased as a result of increased price per pound in an effort to offset increased raw material prices.
LATAM gross profit was $8.9 million for the three months ended February 28, 2018, a decrease of $0.7 million or 7.6% from the comparable period last year, primarily due to planned increased plant costs to meet additional customer demand in Performance Materials, increased raw material costs, and a prior year local currency cost benefit.
LATAM operating income for the three months ended February 28, 2018 was $5.1 million, a decrease of $0.4 million or 7.1% compared with the same quarter of fiscal 2017. The decrease was primarily due to lower segment gross profit, as noted above, partially offset by lower professional fees.

- 32 -

 
Six months ended February 28,
 
2018
 
2017
 
 
 
Favorable (unfavorable)
LATAM
 
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
73,404

 
67,170

 
6,234

 
9.3
%
 
 
 
 
Net sales
$
93,395

 
$
81,878

 
$
11,517

 
14.1
%
 
$
(569
)
 
14.8
%
Segment gross profit
$
19,071

 
$
19,012

 
$
59

 
0.3
%
 
$
(117
)
 
0.9
%
Segment gross profit percentage
20.4
%
 
23.2
%
 
 
 
 
 
 
 
 
Segment operating income
$
11,028

 
$
10,894

 
$
134

 
1.2
%
 
$
(18
)
 
1.4
%
Price per pound
$
1.272

 
$
1.219

 
$
0.053

 
4.3
%
 
$
(0.008
)
 
5.0
%
Six months ended February 28, 2018
LATAM net sales for the six months ended February 28, 2018 were $93.4 million compared with $81.9 million in the prior year period. Net sales increased 14.8% excluding the unfavorable impact of foreign currency translation, compared with the prior year period primarily due to volume growth of 8.7% in the Custom Concentrates & Services product family, specifically in the packaging market, and volume growth of 10.7% in the Performance Materials product family in the electrical & electronics market. In addition, sales increased as a result of increased price per pound in an effort to offset increased raw material prices.
LATAM gross profit was $19.1 million for the six months ended February 28, 2018, an increase of $0.1 million or 0.3% from the comparable period last year, primarily due to increased volumes and price per pound as noted above partially offset by increased raw material costs, planned increased plant costs to meet additional customer demand in Performance Materials, and a prior year local currency cost benefit.
LATAM operating income for the six months ended February 28, 2018 was $11.0 million, an increase of $0.1 million or 1.2% compared with the same quarter of fiscal 2017. The increase was primarily due to higher segment gross profit, as noted above.
 
Three months ended February 28,
 
2018
 
2017
 
 
 
Favorable (unfavorable)
APAC
 
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
46,177

 
45,133

 
1,044

 
2.3
 %
 
 
 
 
Net sales
$
57,384

 
$
48,914

 
$
8,470

 
17.3
 %
 
$
3,490

 
10.2
 %
Segment gross profit
$
8,922

 
$
8,908

 
$
14

 
0.2
 %
 
$
548

 
(6.0
)%
Segment gross profit percentage
15.5
%
 
18.2
%
 
 
 
 
 
 
 
 
Segment operating income
$
4,684

 
$
4,901

 
$
(217
)
 
(4.4
)%
 
$
279

 
(10.1
)%
Price per pound
$
1.243

 
$
1.084

 
$
0.159

 
14.7
 %
 
$
0.076

 
7.7
 %
Three months ended February 28, 2018
APAC net sales for the three months ended February 28, 2018 were $57.4 million, an increase of $8.5 million or 17.3% compared with the same prior year period. Excluding the favorable impact of foreign currency translation of $3.5 million, net sales increased 10.2%, primarily due to higher volumes in the Performance Materials product family in the mobility and electrical & electronics markets, and in the Custom Concentrates & Services product family in the personal care & hygiene market. In addition, sales increased as a result of increased price per pound related to the effort to offset increased raw material prices.
APAC gross profit for the three months ended February 28, 2018 was $8.9 million, essentially flat with the prior year period. Excluding the favorable impact of foreign currency translation of $0.5 million, gross profit decreased 6.0%, primarily due to increased raw material costs and higher plant costs associated with recent capital investments.
APAC operating income for the three months ended February 28, 2018 was $4.7 million compared with $4.9 million in the prior year comparable quarter, or a decrease of 10.1% when excluding the impact of foreign currency translation. The decrease in segment operating income was primarily due to the aforementioned decrease in gross profit.

- 33 -

 
Six months ended February 28,
 
2018
 
2017
 
 
 
Favorable (unfavorable)
APAC
 
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
95,820

 
93,181

 
2,639

 
2.8
%
 
 
 
 
Net sales
$
117,548

 
$
99,651

 
$
17,897

 
18.0
%
 
$
4,073

 
13.9
%
Segment gross profit
$
18,833

 
$
18,034

 
$
799

 
4.4
%
 
$
664

 
0.7
%
Segment gross profit percentage
16.0
%
 
18.1
%
 
 
 
 
 
 
 
 
Segment operating income
$
10,444

 
$
9,914

 
$
530

 
5.3
%
 
$
337

 
1.9
%
Price per pound
$
1.227

 
$
1.069

 
$
0.158

 
14.8
%
 
$
0.043

 
10.8
%
Six months ended February 28, 2018
APAC net sales for the six months ended February 28, 2018 were $117.5 million, an increase of $17.9 million or 18.0% compared with the same prior year period. Excluding the favorable impact of foreign currency translation of $4.1 million, net sales increased 13.9%, primarily due to higher volumes and increased sales price per pound in the Performance Materials product family in the mobility and electrical & electronics markets and in the Custom Concentrates & Services product family in the personal care & hygiene market. In addition, sales increased as a result of increased price per pound related to the effort to offset increased raw material prices.
APAC gross profit for the six months ended February 28, 2018 was $18.8 million, an increase of $0.8 million compared with the prior year period, or an increase of 0.7% when excluding the favorable impact of foreign currency translation. Segment gross profit benefited from increased sales, as noted above, improved product mix and favorable foreign currency translation, partially offset by increased raw material costs.
APAC operating income for the six months ended February 28, 2018 was $10.4 million compared with $9.9 million in the prior year comparable period, or an increase of 1.9% when excluding the favorable impact of foreign currency translation. The increase in segment operating income was primarily due to the aforementioned increase in gross profit partially offset by increased employment expenses.
 
Three months ended February 28,
 
2018
 
2017
 
 
 
Favorable (unfavorable)
EC
 
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
41,938

 
40,556

 
1,382

 
3.4
%
 
 
 
 
Net sales
$
55,609

 
$
51,282

 
$
4,327

 
8.4
%
 
$
783

 
6.9
%
Segment gross profit
$
13,645

 
$
12,831

 
$
814

 
6.3
%
 
$
106

 
5.5
%
Segment gross profit percentage
24.5
%
 
25.0
%
 
 
 
 
 
 
 
 
Segment operating income
$
4,267

 
$
4,111

 
$
156

 
3.8
%
 
$
10

 
3.6
%
Price per pound
$
1.326

 
$
1.264

 
$
0.062

 
4.9
%
 
$
0.019

 
3.4
%
Three months ended February 28, 2018
EC net sales for the three months ended February 28, 2018 were $55.6 million, an increase of $4.3 million or 8.4% over the prior year comparable period. Excluding the favorable currency translation of $0.8 million, net sales increased 6.9%, primarily due to a higher mix of specialized product sales in the oil & gas and mobility markets, and increased volumes in the electrical & electronics market.
EC gross profit for the three months ended February 28, 2018 was $13.6 million, an increase of $0.8 million compared to the prior year period, as higher sales noted above were partially offset by increased raw material and production costs.
EC operating income for the three months ended February 28, 2018 was $4.3 million, an increase of $0.2 million over the prior year. The increase in segment operating income was primarily due to increased gross profit, as noted above, partially offset by increased variable compensation.

- 34 -

 
Six months ended February 28,
 
2018
 
2017
 
 
 
Favorable (unfavorable)
EC
 
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
88,895

 
85,761

 
3,134

 
3.7
%
 
 
 
 
Net sales
$
114,999

 
$
105,839

 
$
9,160

 
8.7
%
 
$
1,255

 
7.5
%
Segment gross profit
$
27,624

 
$
26,799

 
$
825

 
3.1
%
 
$
189

 
2.4
%
Segment gross profit percentage
24.0
%
 
25.3
%
 
 
 
 
 
 
 
 
Segment operating income
$
9,523

 
$
9,222

 
$
301

 
3.3
%
 
$
37

 
2.9
%
Price per pound
$
1.294

 
$
1.234

 
$
0.060

 
4.9
%
 
$
0.014

 
3.7
%
Six months ended February 28, 2018
EC net sales for the six months ended February 28, 2018 were $115.0 million, an increase of $9.2 million or 8.7% over the prior year comparable period. Excluding the favorable currency translation of $1.3 million, net sales increased 7.5%, primarily due to a higher mix of specialized product sales in the oil & gas and mobility markets, and increased volumes in the electrical & electronics market.
EC gross profit for the six months ended February 28, 2018 was $27.6 million, a increase of $0.8 million compared to the prior year period, as higher sales noted above were partially offset by increased raw material and production costs.
EC operating income for the six months ended February 28, 2018 was $9.5 million, an increase of $0.3 million over the prior year. The increase in segment operating income was primarily due to the increase in gross profit, as noted above, partially offset by increased SG&A expenses of $0.5 million, primarily due to increased variable compensation.
 
Three months ended February 28,
 
2018
 
2017
 
 
 
Favorable (unfavorable)
Consolidated
 
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
575,268

 
581,852

 
(6,584
)
 
(1.1
)%
 
 
 
 
Net sales
$
650,098

 
$
568,678

 
$
81,420

 
14.3
 %
 
$
43,148

 
6.7
 %
Operating income
$
13,215

 
$
21,341

 
$
(8,126
)
 
(38.1
)%
 
$
2,334

 
(49.0
)%
Operating income before certain items*
$
25,380

 
$
27,380

 
$
(2,000
)
 
(7.3
)%
 
$
2,717

 
(17.2
)%
Price per pound
$
1.130

 
$
0.977

 
$
0.153

 
15.7
 %
 
$
0.075

 
8.0
 %
* Operating income before certain items is a non-GAAP measurement. For a reconciliation of operating income (loss) to operating income before certain items refer to the table below.

The following table is a reconciliation of operating income (loss) to operating income before certain items:
 
Three months ended February 28,
 
2018
 
2017
 
(In thousands)
Operating income (loss)
$
13,215

 
$
21,341

Costs related to Merger and integrations
4,569

 
—

Restructuring, strategic and related costs (1)
4,222

 
4,970

Accelerated depreciation
57

 
467

Lucent costs
3,317

 
596

CEO transition costs
—

 
6

Total operating income before certain items
$
25,380

 
$
27,380


- 35 -

(1) Restructuring expenses included in restructuring expense in the Company’s statements of operations for the three months ended February 28, 2018 and 2017 of $0.1 million and $1.9 million, respectively, include costs permitted under ASC 420, Exit or Disposal Obligations, such as severance costs, outplacement services and contract termination costs. Restructuring related and strategic costs for the three months ended February 28, 2018 and 2017 of $4.1 million and $3.1 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, 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.
Three months ended February 28, 2018
Consolidated net sales for the three months ended February 28, 2018 were $650.1 million compared with $568.7 million for the prior period. Excluding the favorable impact of foreign currency of $43.1 million, net sales increased by 6.7% with positive contributions from all segments primarily due to improved mix and efforts to offset increased raw material prices.
Operating income for the three months ended February 28, 2018 was $13.2 million compared to $21.3 million for the prior period, a decrease of 38.1%, or 49.0% excluding the favorable impact of foreign currency translation. This decrease was primarily due to the increased SG&A expenses related to the LYB Merger transaction and Lucent Matter litigation costs. Total operating income before certain items for the three months ended February 28, 2018 was $25.4 million, a decrease of $2.0 million compared with the same prior year period. The decrease in total operating income before certain items was primarily due to decreased gross profit in EMEA and increased employee expenses in USCAN as noted above, partially offset by the favorable impact of foreign currency translation of $2.7 million.
The Company’s SG&A expenses for the three months ended February 28, 2018 were $78.4 million compared with $66.0 million in the prior year period. The Company’s SG&A expenses, excluding certain items, increased by $3.3 million for the three months ended February 28, 2018 compared with the same prior year period, primarily attributable to the unfavorable impact of foreign currency translation of $3.6 million and higher variable compensation expense of $2.4 million, partially offset by the benefit from cost savings initiatives. Certain items excluded from SG&A expenses consist of $11.9 million of expense primarily related to LYB Merger transaction costs, restructuring, strategic and related costs, and Lucent Matter litigation costs for the three months ended February 28, 2018 and $2.8 million primarily related to restructuring and related costs and Lucent costs for the prior period.
 
Six months ended February 28,
 
2018
 
2017
 
 
 
Favorable (unfavorable)
Consolidated
 
 
Increase (decrease)
 
FX Impact
 
Excluding FX
 
(In thousands, except for %’s and per pound data)
Pounds sold
1,184,315

 
1,184,072

 
243

 
—
 %
 
 
 
 
Net sales
$
1,324,721

 
$
1,168,678

 
$
156,043

 
13.4
 %
 
$
64,336

 
7.8
 %
Operating income
$
45,783

 
$
40,437

 
$
5,346

 
13.2
 %
 
$
1,160

 
10.4
 %
Operating income before certain items*
$
62,193

 
$
62,387

 
$
(194
)
 
(0.3
)%
 
$
4,184

 
(7.0
)%
Price per pound
$
1.119

 
$
0.987

 
$
0.132

 
13.4
 %
 
$
0.055

 
7.8
 %
* Operating income before certain items is a non-GAAP measurement. For a reconciliation of operating income (loss) to operating income before certain items refer to the table below.
 
Six months ended February 28,
 
2018
 
2017
 
(In thousands)
Operating income (loss)
$
45,783

 
$
40,437

Costs related to Merger and integrations
5,049

 
605

Restructuring, strategic, and related costs (1)
8,111

 
18,243

Accelerated depreciation
235

 
823

Lucent costs
6,092

 
1,405

Asset impairment
—

 
678

(Gain) loss on sale of assets
(3,077
)
 
—

CEO transition costs
—

 
196

Total operating income before certain items
$
62,193

 
$
62,387


- 36 -

(1) Restructuring expenses included in restructuring expense in the Company’s statements of operations for the six months ended February 28, 2018 and 2017 of $0.6 million and $11.4 million, respectively, 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 six months ended February 28, 2018 and 2017 of $7.5 million and $6.8 million, respectively, primarily included in selling, general and administrative expenses in the Company’s statements of operations, are costs associated with professional fees for outside strategic consultants regarding actions to improve the profitability of the organization and efficiency of its operations, 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.
Six months ended February 28, 2018
Consolidated net sales for the six months ended February 28, 2018 were $1,324.7 million compared with $1,168.7 million for the prior period. Excluding the favorable impact of foreign currency of $64.3 million, net sales increased by 7.8% with positive contributions from all segments primarily due to improved mix and efforts to offset increased raw material prices.
Operating income for the six months ended February 28, 2018 was $45.8 million compared to $40.4 million for the prior period, an increase of 13.2%, or 10.4% excluding the favorable impact of foreign currency translation. This increase was primarily due the decrease in restructuring and related costs and the gain on sale of assets, partially offset by increased LYB Merger transaction and Lucent Matter litigation costs. Total operating income before certain items for the six months ended February 28, 2018 was $62.2 million, a decrease of $0.2 million compared with the same prior year period. The decrease in total operating income before certain items was primarily due to decreased EMEA gross profit partially offset by the favorable impact of foreign currency translation of $4.2 million.
The Company’s SG&A expenses for the six months ended February 28, 2018 were $153.5 million compared with $138.3 million in the prior year period. The Company’s SG&A expenses, excluding certain items, increased by $5.0 million for the six months ended February 28, 2018 compared with the same prior year period, primarily attributable to the unfavorable impact of foreign currency translation of $5.5 million and higher variable compensation expense of $2.6 million, partially offset by the benefit from cost savings initiatives. Certain items excluded from SG&A expenses consist of $18.7 million of expense primarily related to LYB Merger transaction costs, restructuring, strategic and related costs, and Lucent Matter litigation costs for the six months ended February 28, 2018 and $8.5 million of expense primarily related to restructuring and related costs, and Lucent costs for the prior period.
Product Families

Globally, the Company operates in three product families: Engineered Composites, Custom Concentrates and Services, and Performance Materials. The amount and percentage of consolidated net sales for these product families are as follows:
 
Three months ended February 28,
 
2018
 
2017
 
(In thousands, except for %'s)
Engineered Composites
$
55,609

 
9
%
 
$
51,282

 
9
%
Custom Concentrates and Services
304,454

 
46

 
259,586

 
46

Performance Materials
290,035

 
45

 
257,810

 
45

Total consolidated net sales
$
650,098

 
100
%
 
$
568,678

 
100
%

 
Six months ended February 28,
 
2018
 
2017
 
(In thousands, except for %'s)
Engineered Composites
$
114,999

 
9
%
 
$
105,839

 
9
%
Custom Concentrates and Services
625,655

 
47

 
535,505

 
46

Performance Materials
584,067

 
44

 
527,334

 
45

Total consolidated net sales
$
1,324,721

 
100
%
 
$
1,168,678

 
100
%

- 37 -

Income Tax
The effective tax rate was (3,787.7)% and (7.1)% for the three and six months ended February 28, 2018, respectively, and 17.6% and 34.4% for the three and six months ended February 28, 2017, respectively. The decrease in the effective tax rate as compared with the same period last year is primarily related to the impacts of the recently enacted Tax Cuts and Jobs Act and higher uncertain tax positions recorded in the prior year.
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. For further discussion, refer to Note 5 in this Form 10-Q.
The Company currently has a full valuation allowance against its deferred tax assets of $1.2 million at one of its subsidiaries in Belgium due to significant negative evidence. As of each reporting date, the Company considers new evidence, both positive and negative, that could impact its view with regard to the future realization of deferred tax assets. Due to the recent profitability of this entity, it is reasonably possible that these deferred tax assets will be realized in the next 12 months.
Goodwill
Goodwill is tested for impairment annually during the fiscal fourth quarter as of June 1. Management uses judgment to determine whether to use a qualitative analysis or a quantitative fair value measurement approach that combines the income and market valuation techniques for each of the Company’s reporting units that carry goodwill. These valuation techniques use estimates and assumptions including, but not limited to, the determination of appropriate market comparables, projected future cash flows (including timing and profitability), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and projected future economic and market conditions.
As of June 1, 2017, the Company completed its annual goodwill impairment test for fiscal 2017. Refer to the Annual Report on Form 10-K for the fiscal year ended August 31, 2017 for additional information on the Company's annual goodwill impairment test.
If circumstances change between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying value, the Company would test goodwill for impairment. Factors which would necessitate an interim goodwill impairment assessment include a sustained decline in the Company's stock price, prolonged negative industry or economic trends, and significant under-performance relative to historical or projected future operating results. Given the fair value of the USCAN Performance Materials exceeding its carrying value by 5% as of June 1, 2017, the Company is closely monitoring this reporting unit and its operating results to determine whether there are any indicators of goodwill impairment. No such indicators of impairment exist as of February 28, 2018.
Liquidity and Capital Resources
Net cash used in operations was $12.6 million for the six months ended February 28, 2018, compared to a source of $40.1 million for the six months ended February 28, 2017. This decrease of $52.8 million compared to the prior period is driven by higher levels of working capital in the current period, which is discussed further below. The Company’s cash, cash equivalents and restricted cash decreased $2.4 million from August 31, 2017. This decrease was driven primarily by capital expenditures of $13.1 million, dividend payments of $16.0 million, and operating cash outflows of $12.6 million, mostly offset by net borrowings of $31.2 million and proceeds from asset sales of $6.4 million.
The Company’s working capital days are summarized as follows:
 
February 28, 2018
 
August 31, 2017
 
February 28, 2017
Days in receivables
61
 
57
 
60
Days in inventory
58
 
47
 
54
Days in payables
65
 
59
 
66
Total working capital days
54
 
45
 
48
The following table summarizes certain key balances on the Company’s consolidated balance sheets and related metrics:
 
February 28, 2018
 
August 31, 2017
 
$ Change
 
% Change
 
(In thousands, except for %’s)
Cash and cash equivalents, and restricted cash
$
51,644

 
$
54,019

 
$
(2,375
)
 
(4.4
)%
Working capital, excluding cash and assets held for sale
$
335,163

 
$
257,165

 
$
77,998

 
30.3
 %
Long-term debt
$
930,632

 
$
885,178

 
$
45,454

 
5.1
 %
Total debt
$
950,124

 
$
917,191

 
$
32,933

 
3.6
 %
Net debt (1)
$
898,480

 
$
863,172

 
$
35,308

 
4.1
 %
Total A. Schulman, Inc. stockholders’ equity
$
213,591

 
$
197,018

 
$
16,573

 
8.4
 %
(1) Net debt, a non-GAAP financial measure, represents total debt less cash and cash equivalents and restricted cash. The Company believes that net debt provides useful supplemental liquidity information to investors.
As of February 28, 2018 and August 31, 2017, the Company held 97% and 95% of the Company's cash and cash equivalents at its foreign subsidiaries, respectively. The majority of these foreign cash balances are associated with earnings that we have asserted are permanently reinvested and which we plan to use to support continued growth plans outside the U.S. through funding of capital expenditures, operating expenses or other similar cash needs of foreign operations. From time to time, we repatriate cash from foreign subsidiaries to the U.S. through intercompany dividends for normal operating needs and service of outstanding debt. These dividends are paid out of current year earnings. The Company has assessed their permanent reinvestment assertion as a result of U.S. Tax Reform and we continue to remain permanently reinvested. A significant portion of our cash and cash equivalents are in the Company’s bank accounts that are part of the Company's established global cash pooling system. In addition, excess cash in the U.S. and EMEA is generally used to repay outstanding debt.
Working capital, excluding cash and assets held for sale, was $335.2 million as of February 28, 2018, an increase of $78.0 million from August 31, 2017. Increases in accounts receivable and inventory were partially offset by an increase in accounts payable. Accounts receivable and inventory increases are primarily driven by higher raw material prices and inventory build. Additionally, foreign currency translation increased working capital by $5.9 million.
Capital expenditures for the six months ended February 28, 2018 were $13.1 million compared with $24.5 million last year. Capital expenditures for both periods primarily relate to the Company's continued regular and ongoing investments in its global manufacturing facilities and technical innovation centers.
Below summarizes the Company’s available funds:
 
February 28, 2018
 
August 31, 2017
 
(In thousands)
Existing capacity:
 
 
 
Revolving Facility
$
300,000

 
$
300,000

Foreign short-term lines of credit
25,863

 
30,890

Total capacity from credit lines
$
325,863

 
$
330,890

Availability:
 
 
 
Revolving Facility
$
186,881

 
$
242,040

Foreign short-term lines of credit
24,673

 
14,660

Total available funds from credit lines
$
211,554

 
$
256,700

Total available funds from credit lines represents the total capacity from credit lines less outstanding borrowings of $106.8 million and $67.4 million as of February 28, 2018 and August 31, 2017, respectively, and issued letters of credit of $7.5 million and $6.8 million as of February 28, 2018 and August 31, 2017, respectively.
During the three and six months ended February 28, 2018, the Company declared and paid quarterly cash dividends of $15.00 and $30.00, respectively, per share to special stockholders. The total amount of these dividends was $1.9 million and $3.8 million, respectively. During the three and six months ended February 28, 2018, the Company declared and paid quarterly cash dividends of $0.205 and $0.410 per share to common stockholders, respectively. The total amount of these dividends was $6.0 million and $12.2 million, respectively.
The Company has foreign currency exposures primarily related to the Euro, British pound sterling, Polish zloty, Mexican peso, Brazilian real, and Argentine peso, among others. The assets and liabilities of the Company’s foreign subsidiaries are translated

- 38 -

into U.S. dollars using current exchange rates. The resulting translation adjustments are recorded in the accumulated other comprehensive income (loss) account in stockholders’ equity. Accumulated other comprehensive income increased by $10.9 million during the six months ended February 28, 2018 primarily due to the weakening of the U.S. dollar against various foreign currencies. Income statement items are translated at average exchange rates prevailing during the period.
Cash flow from operations, borrowing capacity under the credit facilities and cash and cash equivalents are expected to provide sufficient liquidity to maintain and grow the Company’s current operations and capital expenditure requirements, pay dividends, and reduce outstanding debt.
Contractual Obligations
As of February 28, 2018, 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.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements as of February 28, 2018.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Management bases its estimates on historical experience and other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. The Company’s critical accounting policies are the same as discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2017.
Accounting Pronouncements
For a discussion of accounting pronouncements, refer to Note 14 in this Form 10-Q.
Cautionary Statements
A number of the matters discussed in this document that are not historical or current facts deal with potential future circumstances and developments and may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historic or current facts and relate to future events and expectations. Forward-looking statements contain such words as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "forecast," "foresee," "likely," "may," "should," "goal," "target," "might," "will," "could," "predict," "continue," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which management is unable to predict or control, that may cause actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could adversely affect the Company’s future financial performance, include, but are not limited to, the following:
•
worldwide and regional economic, business and political conditions, including continuing economic uncertainties in some or all of the Company’s major product markets or countries where the Company has operations;
•
risks and uncertainties posed by international operations, including foreign currency fluctuations;
•
the business cyclicality of the chemical, polymers and refining industries;
•
the effectiveness of the Company’s efforts to improve operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques;
•
competitive factors, including intense price competition;
•
fluctuations in the value of currencies in areas where the Company operates;
•
volatility of prices and availability of the supply of energy and raw materials that are critical to the manufacture of the Company’s products, particularly plastic resins derived from oil and natural gas;
•
changes in customer demand and requirements;

- 39 -

•
the supply/demand balances for our and our joint ventures' products, and the related effects of industry production capacities and operating rates;
•
effectiveness of the Company to achieve the level of cost savings, productivity improvements, growth and other benefits anticipated from acquisitions and the integration thereof, joint ventures and restructuring initiatives;
•
labor conditions;
•
our ability to attract and retain key personnel;
•
escalation in the cost of providing employee health care;
•
uncertainties and unanticipated developments regarding contingencies, such as pending and future litigation and other claims, including legal and environmental proceedings, potential governmental regulatory actions, tax rulings and developments that would require increases in our costs and/or reserves for such contingencies;
•
the performance of the global automotive market as well as other markets served;
•
further adverse changes in economic or industry conditions, including global supply and demand conditions and prices for products;
•
operating problems with our information systems as a result of system security failures such as viruses, cyber-attacks or other causes;
•
operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime, supplier disruptions, labor shortages, strikes, work stoppages or other labor difficulties, transportation interruptions, spills and releases and other environmental risks);
•
our current debt position could adversely affect our financial health and prevent us from fulfilling our financial obligations;
•
failure of counterparties to perform under the terms and conditions of contractual arrangements, including suppliers, customers, buyers and sellers of a business and other third parties with which the Company contracts; and
•
the announcement and pendency of the LyondellBasell merger, including risks arising from the effect thereof on our business relationships (including employees, customers and suppliers), operating results, business generally, and the diversion of management’s attention from our ongoing business operations, risks of failing to consummate the merger in a timely manner, if at all, and risks related to obtaining the requisite consents to the merger could have an adverse effect on our business.
The risks and uncertainties identified above are not the only risks the Company faces. Additional risk factors that could affect the Company’s performance are set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2017.
These risks, as well as other risks associated with the proposed merger, are more fully discussed in the preliminary proxy statement, dated March 26, 2018, that the Company filed with the SEC in connection with the proposed transaction. The list of factors presented here is, and the list of factors presented in the preliminary proxy statement should not be considered to be a complete statement of all potential risks and uncertainties. In addition, risks and uncertainties not presently known to the Company or that it believes to be immaterial also may adversely affect the Company. Should any known or unknown risks or uncertainties develop into actual events, or underlying assumptions prove inaccurate, these developments could have material adverse effects on the Company’s business, financial condition and results of operations. The Company is under no obligation, and expressly disclaims any obligation, to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise. Persons reading this communication are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof.

Item 3 – Quantitative and Qualitative Disclosure about Market Risk
In the ordinary course of business, the Company is subject to interest rate, foreign currency, and commodity risks. Information related to these risks and management of these exposures is included in Part II, ITEM 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2017. Exposures to market risks have not changed materially since August 31, 2017.
Item 4 – Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company carries out a variety of on-going procedures, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.

- 40 -

There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.


- 41 -

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings
During the six months ended February 28, 2018, there have been no material developments from the legal proceedings disclosed in our Annual Report on Form 10-K for our fiscal year ended August 31, 2017.
Item 1A – Risk Factors
There are certain risks and uncertainties in the Company’s business that could cause our actual results to differ materially from those anticipated. In “ITEM 1A. RISK FACTORS” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2017, the Company included a detailed discussion of its risk factors. Additionally, the following new risk factors were identified:

Risks Associated With Acquisitions, Divestitures and Other Transactions

The announcement and pendency of our Agreement to be acquired by LyondellBasell could have an adverse effect on our business.

On February 15, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with LyondellBasell Industries N.V., a naamloze vennootschap (a public limited liability company, the “Parent”) formed under the laws of The Netherlands (“LyondellBasell” or "LYB"), and LYB Americas Holdco Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will be merged with and into the Company (the “Merger”) with the Company continuing as the surviving corporation in the Merger, and, at the effective time 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 Company 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.

Uncertainty about the effect of the Merger on our employees, customers, suppliers, distributors and other parties may have a material adverse effect on our business. There can be no assurance that our employees, including key personnel, can be retained to the same extent that we have previously been able to attract and retain employees. Any loss or distraction of such employees could have a material adverse effect on our business and operations. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the Merger, which could materially adversely affect our business and operations. Parties with which we do business, including our suppliers and distributors, may experience uncertainty associated with the Merger, including with respect to current or future business relationships with us. In addition, costs, fees, expenses and charges related to the Merger Agreement, the CVR agreement, the Merger or pending and future litigation and other legal proceedings, including any such proceedings related to the Merger and instituted against us and others, are uncertain and such costs, fees, expenses and charges could result in a material adverse effect on our financial position. Pending closing, the Company is required to operate under certain restrictions on its business pursuant to the terms of the Merger Agreement and may have to forgo certain opportunities, which could have a negative impact on our business. Finally, the Company may experience a loss of business based on the expectation that LyondellBasell will own the Company following the closing of the Merger.

- 42 -


Pursuant to the terms of the Merger Agreement, we are subject to certain restrictions on the conduct of our business, including, among other things, the ability in certain cases to enter into contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures, until the Merger becomes effective or the Merger Agreement terminates. These restrictions may prevent us from taking actions with respect to our business that we may consider advantageous and result in our inability to respond effectively to competitive pressures and industry developments, and may otherwise harm our business and operations.

The failure to complete the Merger with LyondellBasell could adversely affect our business.

Completion of the Merger with LyondellBasell is subject to several conditions beyond our control that may prevent, delay or otherwise materially adversely affect its completion, including certain regulatory approvals and the adoption of the Merger Agreement by our stockholders. If the Merger is not completed, the share price of Company Common Stock will drop to the extent that the current market price of Company Common Stock reflects an assumption that a transaction will be completed. The Merger Agreement contains certain termination rights and provides that, upon termination of the Merger Agreement under specified circumstances, including a permitted change in the recommendation of the Company’s Board of Directors of or a termination of the Merger Agreement by the Company to enter into an agreement for a superior proposal, the Company will pay LYB a cash termination fee of $50.0 million. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. Finally, any disruption to our business resulting from the announcement and pendency of the Merger, including any adverse impact in our relationships with employees, distributors or suppliers could continue or accelerate in the event of a failed transaction. There can be no assurance that our business, these relationships or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the Merger, if the Merger is not consummated.
Items 2, 3, 4, and 5 are not applicable or the answer to such items is negative; therefore, the items have been omitted and no reference is required in this Quarterly Report.

Item 6 – Exhibits
(a)
Exhibits
Exhibit Number
  
Exhibit
 
 
 
2.1
 
 
 
 
3.1
  
 
 
 
3.2
  
 
 
 
3.3
 

 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
4.3
 

 
 
 

- 43 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


4.4
 
 
 
 
4.5
 
 
 
 
4.6
 
 
 
 
10.1
 
 
 
 
10.2*
 

 
 
 
10.3
 
 
 
 
10.4*
 
 
 
 
10.5*
 
 
 
 
10.6*
 
 
 
 
10.7*
 
 
 
 
10.8*
 
 
 
 
10.9*
 
 
 
 
10.10*
 
 
 
 
10.11*
 
 
 
 
31.1
  
 
 
 
31.2
  
 
 
 
32
  
 
 
 
101.INS
  
XBRL Instance Document.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.


- 44 -
A. SCHULMAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


* Management contract or compensatory plan or arrangement required to be filed as an Exhibit hereto.

- 45 -

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
A. Schulman, Inc.
(Registrant)
 
/s/ John W. Richardson
John W. Richardson, Executive Vice President, Chief Financial Officer of A. Schulman, Inc. (Signing on behalf of Registrant as a duly authorized officer of Registrant and signing as the Principal Financial Officer of Registrant)
Date:
March 28, 2018


- 46 -

SCHULMAN A INC Reports