Spartech (SEH) 10-Q 2009 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August 1, 2009

OR

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

For the transition period from                    to                    

1-5911
(Commission File Number)

SPARTECH CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization) 43-0761773
(I.R.S. Employer
Identification No.)

120 S. Central Avenue, Suite 1700
Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)

(314) 721-4242
(Registrant’s telephone number, including area code)

Indicate by checkmark 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 o NO o

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

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

30,722,927 shares of Common Stock, $.75 par value per share, outstanding as of September 8, 2009.

SPARTECH CORPORATION
FORM 10-Q FOR THE QUARTER AND NINE MONTHS ENDED AUGUST 1, 2009
TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Condensed Balance Sheets — As of: August 1, 2009 (Unaudited) and November 1, 2008	1
	Unaudited Consolidated Condensed Statements of Operations — For the three and nine months ended August 1, 2009 and August 2, 2008	2
	Unaudited Consolidated Condensed Statements of Cash Flows — For the nine months ended August 1, 2009 and August 2, 2008	3
	Unaudited Notes To Consolidated Condensed Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	Cautionary Statements Concerning Forward-Looking Statements	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4.	Controls and Procedures	16
PART II	OTHER INFORMATION
Item 1A.	Risk Factors	17
Item 5.	Other Information	17
Item 6.	Exhibits	17
	Signatures	18
	Certifications	19
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1.FINANCIAL STATEMENTS

SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)

	August 1, 2009			November 1,
	(Unaudited)			2008
Assets
Current assets:
Cash and cash equivalents	$	437		$	2,118
Trade receivables, net of allowances of $3,522, and $4,550, respectively		128,706			176,108
Inventories		71,596			96,721
Prepaid expenses and other current assets		26,867			24,665
Total current assets		227,606			299,612
Property, plant and equipment, net of accumulated depreciation of $338,784 and $297,876, respectively		256,303			280,202
Goodwill		145,498			145,498
Other intangible assets, net of accumulated amortization of $16,689 and $13,148, respectively		29,429			32,722
Other long-term assets		3,889			4,385
Total assets	$	662,725		$	762,419
Liabilities and Shareholders’ Equity
Current liabilities:
Current maturities of long-term debt	$	20,071		$	20,428
Accounts payable		93,163			155,594
Accrued liabilities		35,395			42,676
Total current liabilities		148,629			218,698
Long-term debt, less current maturities		219,167			254,226
Other long-term liabilities:
Deferred taxes		57,413			56,516
Other long-term liabilities		6,649			6,189
Total liabilities		431,858			535,629
Shareholders’ equity
Preferred stock (authorized: 4,000,000 shares, par value $1.00)
Issued: None		—			—
Common stock (authorized: 55,000,000 shares, par value $0.75)
Issued: 33,131,846; Outstanding: 30,722,927 and 30,563,605 shares, respectively		24,849			24,849
Contributed capital		203,577			202,656
Retained earnings		52,225			53,588
Treasury stock, at cost, 2,408,919 and 2,568,241 shares, respectively		(54,961	)		(56,389	)
Accumulated other comprehensive income		5,177			2,086
Total shareholders’ equity		230,867			226,790
Total liabilities and shareholders’ equity	$	662,725		$	762,419

See accompanying notes to consolidated condensed financial statements.

1

SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per share data)

	Three Months Ended					Nine Months Ended
	August 1,			August 2,		August 1,			August 2,
	2009			2008		2009			2008
Net sales	$	241,736		$	347,459	$	722,740		$	1,043,135
Costs and expenses:
Cost of sales		206,861			313,041		629,403			950,421
Selling, general and administrative expenses		19,642			21,706		61,074			66,671
Amortization of intangibles		1,098			1,249		3,427			3,889
Restructuring and exit costs		1,130			857		5,556			1,693
		228,731			336,853		699,460			1,022,674
Operating earnings		13,005			10,606		23,280			20,461
Interest, net of interest income of $0, $122, $22 and $334, respectively		3,845			5,223		12,597			15,328
Earnings from continuing operations before income taxes		9,160			5,383		10,683			5,133
Income tax expense		4,448			1,023		6,388			122
Net earnings from continuing operations		4,712			4,360		4,295			5,011
(Loss) / earnings of discontinued operations, net of tax		(3,219	)		50		(4,130	)		274
Net earnings	$	1,493		$	4,410	$	165		$	5,285
Basic earnings per share:
Earnings from continuing operations	$	.16		$	.14	$	.14		$	.17
(Loss) / earnings of discontinued operations		(.11	)		.01		(.13	)		—
Net earnings	$	.05		$	.15	$	.01		$	.17
Diluted earnings per share:
Earnings from continuing operations	$	.15		$	.14	$	.14		$	.17
(Loss) / earnings of discontinued operations		(.10	)		.01		(.13	)		—
Net earnings	$	.05		$	.15	$	.01		$	.17
Dividends declared per share	$	—		$	.05	$	.05		$	.32

See accompanying notes to consolidated condensed financial statements.

2

SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)

	Nine Months Ended
	August 1,			August 2,
	2009			2008
Cash flows from operating activities
Net earnings	$	165		$	5,285
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization expense		33,025			35,496
Provision for bad debt expense		4,064			2,110
Restructuring and exit costs		2,677			296
Stock-based compensation expense		2,350			2,469
Other, net		1,465			(942	)
Change in current assets and liabilities		2,387			6,062
Net cash provided by operating activities		46,133			50,776
Cash flows from investing activities
Capital expenditures		(6,722	)		(13,850	)
Business acquisitions		—			(792	)
Proceeds from disposition of assets		102			571
Net cash used for investing activities		(6,620	)		(14,071	)
Cash flows from financing activities
Payments on bank credit facility, net		(18,000	)		(19,352	)
Payments on notes and bank term loan		(18,936	)		—
(Payments) / borrowings on bonds and leases, net		(887	)		990
Debt issuance costs		(191	)		—
Cash dividends on common stock		(3,057	)		(12,397	)
Issuance of common stock		—			2,812
Stock options exercised		—			16
Treasury stock acquired		—			(9,667	)
Net cash used for financing activities		(41,071	)		(37,598	)
Effect of exchange rate changes on cash and cash equivalents		(123	)		4
Decrease in cash and cash equivalents		(1,681	)		(889	)
Cash and cash equivalents at beginning of year		2,118			3,409
Cash and cash equivalents at end of period	$	437		$	2,520

See accompanying notes to consolidated condensed financial statements.

3

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and Dollars in thousands, except per share amounts)

1) Basis of Presentation

     The consolidated financial statements include the accounts of Spartech Corporation and its controlled affiliates (“Spartech” or “the Company”). These financial statements have been prepared on a condensed basis, and accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) and disclosures necessary to make the information presented herein not misleading. These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes thereto included in the Company’s November 1, 2008 Annual Report on Form 10-K.

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Operating results for any quarter are historically seasonal in nature and are not necessarily indicative of the results expected for the full year. Certain prior year amounts have been reclassified to conform to the current year presentation. The Company’s fiscal year ends on the Saturday closest to October 31 and fiscal years generally contain 52 weeks. In addition, years presented are fiscal years unless noted otherwise.

2) Discontinued Operations

     In the third quarter 2009, the Company closed and liquidated its Marine business in Rockledge, Florida as a result of operating losses and the outlook for the marine industry in the foreseeable future. The Marine business was previously reported as a part of the Engineered Products group. Additionally, the Company shut down a compounding business located in Arlington, Texas that serviced one customer. The closure was due to the termination of its supply contract as part of this customer’s bankruptcy proceedings. A summary of the net sales and the net loss from discontinued operations is as follows:

	Three Months Ended					Nine Months Ended
	August 1,			August 2,		August 1,			August 2,
	2009			2008		2009			2008
Net sales	$	351		$	2,886	$	2,830		$	9,663
(Loss) / earnings of discontinued operations before income taxes		(5,031	)		78		(6,454	)		428
Income tax (benefit) / expense		(1,812	)		28		(2,324	)		154
(Loss) / earnings of discontinued operations, net of tax	$	(3,219	)	$	50	$	(4,130	)	$	274

     The carrying amounts of assets and liabilities associated with discontinued operations consisted of the following at August 1, 2009 and November 1, 2008:

	August 1,		November 1,
	2009		2008
Assets
Current Assets:
Trade receivables, net	$	58	$	1,319
Inventories		140		1,532
Prepaids and other current assets		342		41
Current assets of discontinued operations		540		2,892
Property, plant, and equipment, net		—		2,498
Other assets of discontinued operations		24		24
Total assets of discontinued operations	$	564	$	5,414

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	August 1,		November 1,
	2009		2008
Liabilities
Accounts payable	$	61	$	399
Accrued liabilities		1,678		482
Current liabilities of discontinued operations	$	1,739	$	881

     The accrued liabilities primarily represent exit and restructuring costs including severance and lease obligations that are expected to be substantially paid during fiscal year 2010.

3) Inventories

     Inventories are valued at the lower of cost or market. Inventories at August 1, 2009 and November 1, 2008 are comprised of the following components:

	August 1,		November 1,
	2009		2008
Raw materials	$	38,033	$	54,052
Production supplies		8,397		8,725
Finished goods		25,166		33,944
Total inventories	$	71,596	$	96,721

4) Restructuring and Exit Costs

     Restructuring and exit costs were recorded in the consolidated condensed statements of operations for the three and nine months ended August 1, 2009 and August 2, 2008 as follows:

	Three Months Ended						Nine Months Ended
	August 1,			August 2,			August 1,			August 2,
	2009			2008			2009			2008
Restructuring and exit costs:
Custom Sheet and Rollstock	$	950		$	228		$	2,807		$	666
Packaging Technologies		56			558			1,172			681
Color and Specialty Compounds		124			71			1,271			343
Engineered Products		—			—			—			—
Corporate		—			—			306			3
Total Restructuring and exit costs		1,130			857			5,556			1,693
Income tax benefit		(411	)		(311	)		(1,936	)		(551	)
Impact on net earnings from continuing operations	$	719		$	546		$	3,620		$	1,142

     In 2008, the Company announced a restructuring plan to address declines in end-market demand by reducing costs and building a low cost-to-serve model. The plan included the consolidation of production facilities, shut down of underperforming and non-core operations and reductions in the number of manufacturing and administrative jobs. Since the plan was initiated, the Company has closed its packaging facility in Mankato, Minnesota, its compounding facility in St. Clair, Michigan and its sheet operations in Donchery, France and Atlanta, Georgia.

     The following table summarizes the cumulative restructuring and exit costs incurred to-date under the 2008 restructuring plan:

			Nine Months
	Cumulative		Ended		Cumulative
	through 2008		August 1, 2009		To-Date
Employee severance	$	894	$	3,240	$	4,134
Facility consolidation and shut-down costs		258		1,383		1,641
Accelerated depreciation		667		933		1.600
Total	$	1,819	$	5,556	$	7,375

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     Employee severance includes costs associated with the reduction in jobs resulting from facility consolidations and shut-downs as well as other job reductions. Facility consolidations and shut-down costs primarily include equipment shut-down, moving and installation expenses and lease terminations. Accelerated deprecation represents the impact from reduced lives on property, plant and equipment. The Company expects to incur approximately $1,600 of additional restructuring expenses for initiatives announced through August 1, 2009 which will primarily consist of cash employee severance and facility consolidation and shut-down costs. The Company’s announced facility consolidations and shut-downs are expected to be substantially complete by the end of 2009.

     The Company’s total restructuring liability from continuing operations, representing primarily severance, was $1,198 at August 1, 2009 and $121 at November 1, 2008. Cash payments for restructuring activities of continuing operations were $3,546 in the first nine months of 2009.

5) Long-Term Debt

     Long-term debt consisted of the following at August 1, 2009 and November 1, 2008:

	August 1,		November 1,
	2009		2008
2006 Senior Notes	$	45,684	$	50,000
2004 Senior Notes		137,054		150,000
Bank credit facility		23,600		41,600
Bank term loan		19,391		19,113
Other		13,509		13,941
		239,238		274,654
Less current maturities		20,071		20,428
	$	219,167	$	254,226

     In accordance with the Company’s debt agreements, it is required to offer to fund early principal payments to its senior note and term loan holders based on a ratable percentage of its previous fiscal year excess cash flow as defined in the agreements. Based on the Company’s excess cash flow in 2008, it made payments of $18,936 in the second quarter of 2009.

     The Company’s Euro bank term loan matures on February 16, 2010 and, accordingly, 15,000 Euro ($19,391 U.S.) has been included in the current maturities of long-term debt at August 1, 2009. The Company is not required to make any other principal payments on its bank credit facility or senior notes in the next 12 months and borrowings under these facilities are classified as long term because the Company has the ability and intent to keep the balances outstanding over the next 12 months.

     While the Company was in compliance with its covenants and currently expects to be in compliance with its covenants during the next twelve months, the Company’s failure to comply with its covenants or other requirements of its financing arrangements is an event of default and could, among other things, accelerate the payment of indebtedness, which could have a material adverse impact on the Company’s business, financial condition and results of operations.

     At August 1, 2009, the Company had a one-month LIBOR-based loan outstanding under the bank credit facilities of $10,000 at 2.30% and additional prime-based borrowings of $13,600 at 4.25%. At November 1, 2008, the Company had one-month LIBOR-based loans outstanding under the bank credit facilities of $20,000 at 6.84% and $20,000 at 5.47%, and additional prime-based borrowings of $1,600 at 5.25%. The bank credit facility will expire on June 2, 2011.

6) Income Taxes

     The difference between the U.S. federal statutory rate and the Company’s effective tax rate in the third quarter and the first nine months of 2009 is largely attributable to the negative impact of recording a valuation allowance on losses related to the Company’s Donchery, France operations, non-deductable items, and adjustments related to finalizing the Company’s 2008 tax returns.

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     The difference between the U.S. federal statutory rate and the Company’s effective tax rate in the third quarter 2008 is largely attributable to the recognition of previously unrecognized tax benefits upon the expiration of the statute of limitations period for 2004. Other items impacting the third quarter 2008 effective tax rate include state income taxes, the domestic manufacturing deduction, a foreign valuation allowance and research and development credits. In addition, the Company’s effective tax rate for the nine-month period in 2008 reflects the impact of state and foreign tax law changes in the first quarter of 2008.

7) Fair Value of Financial Instruments

     Effective November 2, 2008, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 157,Fair Value Measurements(“SFAS 157”), with the exception of the application of the statement to non-recurring, non-financial assets and liabilities which has been deferred by Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) 157-2,Effective Date of Statement 157, and will be effective on the first day of fiscal year 2010. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The adoption of SFAS 157 did not impact the Company’s financial position, results of operations or cash flows.

     In addition, effective November 2, 2008, the Company adopted SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The Company has elected not to measure any financial instruments or certain other items at fair value.

     FSP FAS No. 107-1 and APB 28-1,Interim Disclosures about Fair Value and Financial Statements (“FSP FAS 107-1”) requires disclosures about the fair values of financial instruments for interim reporting periods as well as in annual consolidated financial statements. The Company has adopted FSP FAS 107-1 effective for the interim period ended August 1, 2009.

The following table presents the carrying amounts and estimated fair values of the Company’s debt as follows:

	August 1, 2009				November 1, 2008
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Long-term debt (including bank credit facilities)	$	239,238	$	232,681	$	274,654	$	259,832

     The estimated fair value of the long-term debt is based on estimated borrowing rates to discount the cash flows to their present value as provided by a broker, or otherwise, quoted, current market prices for same or similar issues.

     The Company’s other financial instruments, including cash, accounts receivable, accounts payable, and accrued liabilities have net carrying values that approximate their fair values due to the short-term nature of these instruments.

8) Commitments and Contingencies

     In September 2003, the New Jersey Department of Environmental Protection issued a directive, and the United States Environmental Protection Agency (“USEPA”) initiated an investigation, related to over 70 companies, including a Spartech subsidiary, regarding the Lower Passaic River. The subsidiary subsequently agreed to participate in a group of over 40 companies in funding an environmental study by the USEPA to determine the extent and source of contamination at this site. As of August 1, 2009, the Company had approximately $800 accrued related to its share of the funding and related legal expenses. The Company expects this liability will be paid over the next three to five years, the anticipated remaining timeframe of the study. Due to uncertainties inherent in this matter, management is unable to estimate the Company’s potential exposure, including possible remediation or other environmental responsibilities that may result from this matter, which is not expected to occur for a number of years. These uncertainties primarily include the completion and outcome of the environmental study and the percentage of contamination attributable to the subsidiary and other parties. It is possible that the ultimate liability resulting from this issue could materially differ from the current accrual balance. In the event of one or more adverse determinations related to this issue, the impact on the Company’s results of operations could be material to any specific period. However, the Company’s currently believes that future expenditures for compliance with these laws

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and regulations, as they relate to the Lower Passaic River issue and other potential issues, will not have a material effect on the Company’s capital expenditures, financial position, or competitive position.

     The Company is also subject to various other claims, lawsuits, and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability, employment, and other matters, several of which claim substantial amounts of damages. While it is not possible to estimate with certainty the ultimate legal and financial liability with respect to these claims, lawsuits, and administrative proceedings, the Company believes that the outcome of these other matters will not have a material adverse effect on the Company’s financial position or results of operations.

9) Net Earnings Per Share

     Basic earnings per share excludes any dilution and is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. During the three and nine month periods ended August 1, 2009, 192 and 359 thousand shares of unvested restricted stock, respectively, 551 and 958 thousand stock appreciation rights, respectively, and 1,165 thousand stock options were outstanding and could potentially dilute basic earnings per share in the future, but were not included in the computation of diluted earnings per share for the periods because they were antidilutive.

     The reconciliation of the net earnings and weighted average number of common shares used in the computations of basic and diluted earnings per share for the three and nine-month periods ended August 1, 2009 and August 2, 2008 is as follows (shares in thousands):

	Three Months Ended					Nine Months Ended
	August 1,			August 2,		August 1,			August 2,
	2009			2008		2009			2008
Basic and diluted net earnings:
Net earnings from continuing operations	$	4,712		$	4,360	$	4,295		$	5,011
(Loss) / earnings of discontinued operations		(3,219	)		50		(4,130	)		274
Net earnings	$	1,493		$	4,410	$	165		$	5,285
Weighted average shares outstanding:
Basic weighted average common shares outstanding		30,398			30,306		30,369			30,250
Add: Dilutive shares from equity instruments		127			—		—			4
Diluted weighted average shares outstanding		30,525			30,306		30,369			30,254
Basic net earnings per share:
Net earnings from continuing operations per share	$	.16		$	.14	$	.14		$	.17
Loss from discontinued operations per share		(.11	)		.01		(.13	)		—
Net earnings per share	$	.05		$	.15	$	.01		$	.17
Diluted net earnings per share:
Net earnings from continuing operations per share	$	.15		$	.14	$	.14		$	.17
Loss from discontinued operations per share		(.10	)		.01		(.13	)		—
Net earnings per share	$	.05		$	.15	$	.01		$	.17

10) Segment Information

     Spartech is organized into three reportable segments and one group of operating segments based on the products the Company manufactures. The three reportable segments are Custom Sheet and Rollstock, Packaging Technologies and Color and Specialty Compounds, with the remaining businesses grouped together in Engineered Products. The Company utilizes operating earnings from continuing operations excluding the impact of foreign exchange to evaluate business segment and group performance. Accordingly, the discontinued operations have been excluded from the segment and group results below.

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     Corporate operating losses include corporate office expenses, information technology costs, professional fees, and the impact of foreign currency exchange that are not allocated to the reportable segments and group.

     The following presents the Company’s net sales and operating earnings by reportable segment and group and the reconciliation to consolidated operating earnings for the three and nine-month periods ended August 1, 2009 and August 2, 2008:

	Three Months Ended						Nine Months Ended
	August 1,			August 2,			August 1,			August 2,
	2009			2008			2009			2008
Net sales:
Custom Sheet and Rollstock	$	122,302		$	161,677		$	342,332		$	475,656
Packaging Technologies		52,713			70,268			160,088			205,790
Color and Specialty Compounds		54,372			100,168			178,403			311,082
Engineered Products		12,349			15,346			41,917			50,607
Net sales (1)	$	241,736		$	347,459		$	722,740		$	1,043,135
Operating earnings from continuing operations:
Custom Sheet and Rollstock	$	9,335		$	6,751		$	13,327		$	12,684
Packaging Technologies		8,048			4,505			23,648			14,149
Color and Specialty Compounds		2,706			6,212			5,027			12,721
Engineered Products		2,638			2,327			8,882			7,390
Corporate expenses		(9,722	)		(9,189	)		(27,604	)		(26,483	)
Operating earnings	$	13,005		$	10,606		$	23,280		$	20,461

(1) Excludes discontinued operations and inter-segment sales of $11,741, $15,189, $33,228 and $45,102, respectively, primarily from the Color and Specialty Compounds segment.

11) Comprehensive Income

     Comprehensive income is the Company’s change in equity during the period related to transactions, events and circumstances from non-owner sources. The reconciliation of net earnings to comprehensive income for the three and nine months ended August 1, 2009 and August 2, 2008 is as follows ended:

	Three Months Ended					Nine Months Ended
	August 1,		August 2,			August 1,		August 2,
	2009		2008			2009		2008
Net earnings	$	1,493	$	4,410		$	165	$	5,285
Foreign currency translation adjustments		2,835		(206	)		3,092		(2,706	)
Total comprehensive income	$	4,328	$	4,204		$	3,257	$	2,579

12) Subsequent Events

     In May 2009, the FASB issued SFAS No. 165,Subsequent Events(“SFAS 165”), which requires public entities to evaluate subsequent events through the date that the financial statements are issued. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. The Company adopted SFAS 165 on August 1, 2009. The adoption of SFAS 165 did not impact the Company’s financial position, results of operations or cash flows.

     The Company evaluated subsequent events up to and including September 9, 2009, the date on which these financial statements were issued. On September 9, 2009, the Company entered into an agreement to sell its profiles extrusion business located in Winnipeg, Manitoba Canada to Acrylon Plastics Inc. The sale of this business, which is reported in the Company’s Engineered Products segment and has annual sales of approximately $9 million, is expected to close in October 2009 and will subsequently be reported as a discontinued operation. Additionally, subsequent to August 1, 2009, the Company initiated the consolidation of its compounding facility in Lockport, New York into existing facilities.

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Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Highlights

     We continued to operate in a weak end-market demand environment in the third quarter and first nine months of 2009. Our underlying sales volume declined 25% and 30% in the third quarter and nine month comparisons, respectively. Most of these declines occurred in our end markets that are more sensitive to discretionary spending levels including the transportation, recreation and leisure and building and construction markets. While we continue to see challenging volumes compared to the prior year, volumes in many of the markets we serve have stabilized and our third quarter sales volume was relatively flat compared to our second quarter. We continue to make substantive progress on our structural cost reductions and other earnings improvement initiatives. The positive impact of these initiatives, benefits from shorter term actions and debt pay down helped to mitigate the adverse impact of lower sales volumes on our earnings.

     We reported operating earnings of $13.0 million and $23.3 million in the third quarter and first nine months of 2009 compared to $10.6 million and $20.5 million in the third quarter and first nine months of 2008. In addition, we paid down $26.5 million of debt in our third quarter and have paid down $37.8 million in the first nine months of 2009.

     In the third quarter, we closed and liquidated our Marine business previously reported in our Engineered Products group and a compounding business that previously serviced one customer in our Color and Specialty Compounding segment. All amounts presented within Item 2 are presented on a continuing operations basis, unless otherwise noted.

     Our fiscal year ends on the Saturday closest to October 31 and fiscal years generally contain 52 weeks. In addition, periods presented are fiscal periods unless noted otherwise.

Outlook

     Volumes in many of the markets we serve stabilized in the third quarter, albeit at continued low levels of end-market demand. We are cautiously optimistic by this general stabilization and improved customer sentiment, but our operating plans assume the lower demand levels will continue through 2009 and that end-market demand will remain weak. The level of general economic demand and its ultimate impact on the end markets we serve are still uncertain. In addition, we continue to manage through a volatile raw material pricing environment. We continue to execute our improvement initiatives and focus on maximizing cash flows. We expect to emerge from this recessionary environment as a stronger company that is better able to leverage its cost structure and positioned to generate profitable growth and enhanced shareholder returns.

Consolidated Results

     Net sales were $241.7 million and $722.7 million in the three and nine-month periods ended August 1, 2009, respectively, representing 30% and 31% decreases over the same periods of the prior year. These decreases were caused by:

	Three Months			Nine Months
Underlying volume		(25	)%		(30	)%
Price/Mix		(5	)		(1	)
		(30	)%		(31	)%

     For both period comparisons, the decreases in underlying volumes were caused by lower end-market demand and decreases in discretionary spending in the economy. The lower volumes occurred across all of our segments and major end markets with the most significant declines occurring in those which are more sensitive to discretionary spending, including the transportation, recreation and leisure and building and construction markets. The price/mix decline in the third quarter was primarily due to lower resin costs that were passed through to customers as lower selling prices.

     The following table presents net sales, cost of sales, and the resulting gross margin in dollars and on a per pound sold basis for the third quarter and first nine months of 2009 compared to the same periods in 2008. Cost of sales presented in the consolidated condensed statements of operations includes material and conversion costs and excludes amortization of intangible assets and restructuring and exit costs. Cost of sales are presented in the following table, and we have not presented it as a percentage of net sales because a comparison of this measure is distorted by changes in resin costs that are

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generally passed through to customers as changes to selling prices. These changes can materially affect the percentages but do not present accurate performance measures of the business.

	Three Months Ended				Nine Months Ended
	August 1,		August 2,		August 1,		August 2,
	2009		2008		2009		2008
Dollars and Pounds (in millions)
Net sales	$	241.7	$	347.5	$	722.7	$	1,043.1
Cost of sales		206.8		313.1		629.4		950.4
Gross margin	$	34.9	$	34.4	$	93.3	$	92.7
Pounds Sold		223.3		296.6		657.4		936.5
Dollars per Pound Sold
Net sales	$	1.082	$	1.171	$	1.099	$	1.114
Cost of sales		.926		1.055		.957		1.015
Gross margin	$	.156	$	.116	$	.142	$	.099

     The decrease in net sales per pound in the third quarter of 2009 compared to the same period in the prior year was caused by lower resin prices that were passed through to customers as lower selling prices. For the first nine months of 2009, the decrease in net sales per pound was due to lower resin prices in the second and third quarters that were passed through to customers as lower selling prices, partially offset by higher resin costs and selling prices in the first quarter of 2009. The 4.0 cent and 4.3 cent per pound increases in gross margin for the third quarter and first nine months of 2009 reflect a reduced mix of lower margin products sold to the automotive sector of the transportation market, and margin increases from our improvement initiatives and conversion cost reductions. Our conversion cost dollars decreased 26% and 25% in the third quarter and first nine months, respectively, due to the impact of our cost reductions and the volume declines. In addition, our conversion costs in the first nine months of 2009 were impacted by a $2.9 million one-time reduction in our second quarter from a change in our vacation policy and by approximately $1.0 million of benefit each quarter from compensation reductions initiated in the second quarter that will be restored at the end of 2009 and will be replaced by further structural reductions.

     Selling, general and administrative expenses were $19.6 million and $61.1 million in the third quarter and first nine months of 2009 compared to $21.7 million and $66.7 million in the same periods of the prior year. For both period comparisons, the benefits associated with our improvement initiatives were partially offset by the impact of $1.3 million and $1.7 million of foreign currency losses for the third quarter and the first nine months of 2009, respectively. In addition, our selling, general and administrative expenses in the first nine months of 2009 were impacted by a $1.0 million one-time reduction in our second quarter from a change in our vacation policy and by approximately $1.0 million of benefit each quarter from compensation reductions initiated in the second quarter that will be restored at the end of 2009 and will be replaced by further structural reductions.

     Amortization of intangibles was $1.1 million and $3.4 million in the third quarter and first nine months of 2009 compared to $1.2 and $3.9 million in the same periods of the prior year. The decreases in both period comparisons reflect intangibles which were fully amortized by the end of 2008.

     Restructuring and exit costs were $1.1 million and $5.6 million in the third quarter and first nine months of 2009 compared to $0.9 million and $1.7 million in the same periods of the prior year. The costs during the third quarter and first nine months of 2009 primarily consist of employee severance, facility consolidation and shut-down costs and accelerated depreciation resulting from our improvement initiatives. We expect to incur approximately $1.6 million of additional restructuring expenses for initiatives announced through August 1, 2009 which will be mostly comprised of employee severance and facility consolidation and shut-down costs. In the future, we expect to announce additional cost reduction activities to further facilitate a low cost-to-serve model and improve earnings.

     Interest expense, net of interest income, was $3.8 million and $12.6 million in the third quarter and first nine months of 2009 compared to $5.2 million and $15.3 million in the same periods of the prior year. These decreases were primarily driven by the $76.7 million debt paydowns during the last 12 months.

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     Our third quarter and first nine months of 2009 effective tax rate was negatively impacted by increases in losses from our Donchery, France operations for which we have not recorded a tax benefit, non-deductable items, and adjustments related to finalizing the Company’s 2008 tax returns. Exclusive of these items, our effective tax rate reflected our typical 37-39% tax rate.

     We reported net earnings from continuing operations of $4.7 million and $4.3 million for the third quarter and first nine months of 2009 compared to net earnings of $4.4 million and $5.0 million in the same periods of the prior year. These decreases reflect the impact of the items previously discussed.

Segment Results

Custom Sheet and Rollstock Segment

     Net sales were $122.3 million and $342.3 million in the three and nine-month periods ended August 1, 2009, respectively, representing 24% and 28% decreases over the same periods of the prior year. These decreases were caused by:

	Three Months			Nine Months
Underlying volume		(12	)%		(23	)%
Price/Mix		(12	)		(5	)
		(24	)%		(28	)%

     For both period comparisons, most of our underlying volume decreases in this segment occurred in the transportation, building and construction, and recreation and leisure markets. The price/mix declines were primarily due to lower resin costs that were passed through to customers as lower selling prices.

     This segment’s operating earnings were $9.3 million and $13.3 million in the third quarter and first nine months of 2009 compared to $6.8 million and $12.7 million in the same periods of the prior year. The increases in operating earnings for both period comparisons were primarily caused by the benefits of our improvement initiatives partially offset by the decrease in sales volumes and the increase in restructuring and exit costs.

Packaging Technologies

     Net sales were $52.7 million and $160.1 million in the three and nine-month periods ended August 1, 2009, respectively, representing 25% and 22% decreases over the same periods of the prior year. These decreases were caused by:

	Three Months			Nine Months
Underlying volume		(15	)%		(18	)%
Price/Mix		(10	)		(4	)
		(25	)%		(22	)%

     The decreases in underlying volume reflected 6% and 7% declines to packaging-related markets for the third quarter and first nine-months of 2009, which represent approximately 80% of this segment’s total sales volume. The remaining declines in underlying volume for the three and nine-month periods were attributable to the portion of this segment which sells to non-packaging related markets. The price/mix declines were primarily due to lower resin costs that were passed through to customers as lower selling prices.

     This segment’s operating earnings were $8.0 million and $23.6 million in the third quarter and first nine months of 2009 compared to $4.5 million and $14.1 million in the same periods of the prior year. The increase in operating earnings was due to the positive benefits of a higher mix of food packaging products and the benefits of our improvement initiatives, including our Mankato, Minnesota facility consolidation.

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Color and Specialty Compounds Segment

     Net sales were $54.4 million and $178.4 million in the three and nine-month periods ended August 1, 2009, respectively, representing 46% and 43% decreases over the same periods of the prior year. These decreases were caused by:

	Three Months			Nine Months
Underlying volume		(41	)%		(41	)%
Price/Mix		(5	)		(2	)
		(46	)%		(43	)%

     For both period comparisons, the decrease in underlying volume was due to lower sales of compounds across all of our end markets. In particular, underlying volumes sold to the automotive sector of the transportation market, the building and construction market and the film packaging end market were down significantly. The price/mix decline in both period comparisons were caused by lower resin costs that were passed through to customers as lower selling prices, partially offset by a smaller mix of lower priced automotive sales.

     This segment’s operating earnings were $2.7 million and $5.0 million in the third quarter and first nine months of 2009 compared to $6.2 million and $12.7 million of operating earnings in the same periods of the prior year. For both period comparisons, these declines were primarily caused by the decrease in sales volumes, partially offset by benefits from our improvement initiatives.

Engineered Products Group

     Net sales were $12.3 million and $41.9 million in the three and nine-month periods ended August 1, 2009, respectively, representing 20% and 17% decreases over the same periods of the prior year. These decreases were caused by:

	Three Months			Nine Months
Underlying volume		(25	)%		(22	)%
Price/Mix		5			5
		(20	)%		(17	)%

     The decreases in underlying volume for both period comparisons were largely caused by lower sales volume to the lawn and garden markets due to decreases in discretionary spending in the economy.

     This group’s operating earnings were $2.6 million and $8.9 in the third quarter and first nine months of 2009 compared to $2.3 million and $7.4 million in the same periods of the prior year. The increase in operating earnings for both period comparisons was largely was due to the positive benefits of our improvement initiatives, partially offset by the decline in sales volumes.

Corporate

     Corporate expenses are reported as selling, general and administrative expenses in the consolidated condensed statement of operations and include corporate office expenses, information technology costs, professional fees and the impact of foreign currency exchange. Corporate expenses were $9.7 million and $27.6 million in third quarter and the first nine months of 2009 compared to $9.2 million and $26.5 million in the same periods of the prior year. Excluding the impact of foreign currency exchange, corporate expenses were essentially flat in both period comparisons reflecting the positive benefits of our improvement initiatives offset by higher corporate expenses from our transition to a shared service environment.

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Liquidity and Capital Resources

Cash Flow

     Our primary sources of liquidity have been cash flows from operating activities and borrowings from third parties. Historically, our principal uses of cash have been to support our operating activities, invest in capital improvements, reduce outstanding indebtedness, finance strategic business and acquisitions, acquire treasury shares and pay dividends on our common stock. The following summarizes the major categories of our changes in cash and cash equivalents for the nine months ended August 1, 2009 and August 2, 2008:

	Nine Months Ended
	August 1,			August 2,
	2009			2008
Cash Flows (in millions)
Net cash provided by operating activities	$	46.1		$	50.8
Net cash used for investing activities		(6.6	)		(14.1	)
Net cash used for financing activities		(41.1	)		(37.6	)
Effect of exchange rate changes		(0.1	)		—
Decrease in cash and cash equivalents	$	(1.7	)	$	(0.9	)

     Net cash provided by operating activities was $46.1 million in the first nine months of 2009, compared to $50.8 million in the same period of the prior year. The decrease is largely due to lower net earnings.

     Our primary investing activity in 2009 was capital expenditures. In the first nine months of the current year, capital expenditures were primarily incurred to maintain our facilities and amounted to $6.7 million, compared to $13.9 million in same period of 2008. The $7.2 million decrease was largely attributable to our focus on cash management in the current year.

     Net cash used for financing activities was $41.1 million in the first nine months of 2009, compared to $37.6 million for the same period of 2008. The cash used for financing activities in the current period reflects $37.8 million to pay down debt and $3.1 million used to pay dividends. The cash used for financing activities in the same period of the prior year reflects $18.4 million to pay down debt, $12.4 million to pay dividends and $9.7 million of treasury share purchases, partially offset by $2.8 million received from a director purchase of common stock. We suspended our cash dividend during the second quarter of 2009.

Financing Arrangements

     As of August 1, 2009, we had $239.2 million of outstanding debt with a weighted average interest rate of 6.0%, of which 79% represented fixed rate instruments with a weighted average interest rate of 6.6%. In addition, as of August 1, 2009, we used $14.3 million of cash from unremitted foreign earnings held in Canada to pay down debt. Under Internal Revenue Service regulations, we can use this cash to fund U.S. operations or pay down U.S. debt for up to 60 consecutive days or 180 total days during our fiscal year without incurring residual U.S. income tax. If we were to permanently transfer this cash to the U.S., we may be required to pay income tax of approximately $3 to $4 million on the transferred cash.

     As of August 1, 2009, we had $73.8 million of borrowing availability under our most restrictive financial covenant. While we were in compliance with our covenants during the third quarter of 2009 and currently expect to be in compliance with our covenants in the next twelve months, our failure to comply with our covenants or other requirements of our financing arrangements is an event of default and could, among other things, accelerate the payment of indebtedness, which could have a material adverse impact on our business, financial condition and results of operations.

     In accordance with our debt agreements, we are required to offer to fund early principal payments to our senior note and term loan holders based on a ratable percentage of our previous fiscal year’s excess cash flow as defined in the agreements. Based on our excess cash flow in 2008, we made payments of $18.9 million in the second quarter of 2009.

     Our Euro bank term loan matures on February 16, 2010 and, accordingly, 15.0 million Euro ($19.4 million U.S.) has been included in the current maturities of long-term debt at August 1, 2009. We are not required to make any other principal

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payments on our bank credit facility or senior notes in the next 12 months and borrowings under these facilities are classified as long term because we have the ability and intent to keep the balances outstanding over the next 12 months.

     Our bank credit facility, senior notes and bank term loan are secured with collateral, which includes our accounts receivable, inventory, machinery and equipment, and intangible assets. As of August 1, 2009, capacity under the revolving credit agreement was $135.1 million, of which $73.8 million was available under our most restrictive covenant.

     We anticipate that cash flows from operations, together with the financing and borrowings under our bank credit facilities, will provide the resources necessary for reinvestment in our existing business and managing our capital structure on a short and long-term basis.

Cautionary Statements Concerning Forward-Looking Statements

     Statements in this Form 10-Q that are not purely historical, including statements which express the Company’s belief, anticipation or expectation about future events, are forward-looking statements. “Forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relate to future events and expectations and include statements containing such words as “anticipates,” “believes,” “estimates,” “expects,” “would,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects,” and similar expressions. 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 which have impacted and could impact our operations and results include, but are not limited to:

(a)	Further adverse changes in economic or industry conditions, including global supply and demand conditions and prices for products of the types we produce;
(b)	our ability to compete effectively on product performance, quality, price, availability, product development, and customer service;
(c)	adverse changes in the markets we serve, including the packaging, transportation, building and construction, recreation and leisure, and other markets, some of which tend to be cyclical;
(d)	adverse changes in the domestic automotive markets, including the bankruptcy filings by the automobile original equipment manufacturers which could have a cascading effect on our customers and adversely impact our business;
(e)	our inability to achieve the level of cost savings, productivity improvements, gross margin enhancements, growth or other benefits anticipated from our planned improvement initiatives;
(f)	volatility of prices and availability of supply of energy and of the raw materials that are critical to the manufacture of our products, particularly plastic resins derived from oil and natural gas, including future effects of natural disasters;
(g)	our inability to manage or pass through to customers an adequate level of increases in the costs of materials, freight, utilities, or other conversion costs;
(h)	restrictions imposed on us by instruments governing our indebtedness, the possible inability to comply with requirements of those instruments, and inability to access capital markets;
(i)	possible asset impairment charges;
(j)	our inability to predict accurately the costs to be incurred, time taken to complete, operating disruptions therefrom, or savings to be achieved in connection with announced production plant restructurings;
(k)	adverse findings in significant legal or environmental proceedings or our inability to comply with applicable environmental laws and regulations;
(l)	our inability to develop and launch new products successfully;
(m)	possible weaknesses in internal controls; and
(n)	our ability to successfully complete the implementation of a new enterprise resource planning computer system and to obtain expected benefits from our system.

     We assume no responsibility to update our forward-looking statements, except as required by law.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for disclosures about market risk. In addition, refer to Part I — Item 1A “Risk Factors” of our 2008 Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on January 14, 2009 and Part II — Item 1A “Risk Factors” below, for additional disclosures about market risk.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     Spartech maintains a system of disclosure controls and procedures which are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the Company’s certifying officers, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation performed, the Company’s certifying officers have concluded that the disclosure controls and procedures were effective as of August 1, 2009, to provide reasonable assurance of the achievement of these objectives.

     Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company’s reports.

Changes in Internal Control Over Financial Reporting

     The Company has nearly completed the implementation of its Oracle/Business Process Improvement enterprise resource planning (“ERP”) system. This ERP implementation has resulted in certain changes and enhancements to the Company’s internal control over financial reporting including the ability for the Company to transition to a shared service environment for transaction processing. The internal controls over financial reporting impacted by the ERP implementation and the Company’s transition to a shared service environment were appropriately tested for design effectiveness. While some processes and controls will continue to evolve, existing controls and the controls affected were evaluated as appropriate and effective. There were no other changes to internal control over financial reporting during the quarter ended August 1, 2009, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1A. RISK FACTORS

     In addition to the other information set forth in this report, you should carefully consider the factors in Part I — Item 1A “Risk Factors” of our 2008 Form 10-K for the year ended November 1, 2008 and as set forth below, which could materially affect our business, financial condition or future results. These factors may or may not occur and we are not in a position to express a view on the likelihood of any such factor occurring. Other factors may exist that we do not consider significant based on information that is currently available or that we are not currently able to anticipate.

The bankruptcy filings by the automobile original equipment manufactures (OEMs) could have a cascading effect on our customers and adversely impact our business.

     We are exposed to the automotive market. The bankruptcy filings by the automobile OEMs could have a cascading effect on a group of our customers directly affecting their ability to pay or cause their own bankruptcy filings which could, in turn, adversely impact our business.

Item 5. OTHER INFORMATION

     There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors implemented since the filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 2, 2009.

Item 6. EXHIBITS

Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K)

31.1	Section 302 Certification of CEO
31.2	Section 302 Certification of CFO
32.1	Section 1350 Certification of CEO
32.2	Section 1350 Certification of CFO

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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.

	SPARTECH CORPORATION (Registrant)
Date: September 9, 2009	/s/ Myles S. Odaniell
	Myles S. Odaniell
	President and Chief Executive Officer (Principal Executive Officer)
	/s/ Randy C. Martin
	Randy C. Martin
	Executive Vice President Corporate Development and Chief Financial Officer (Principal Financial Officer)
	/s/ Michael G. Marcely
	Michael G. Marcely
	Senior Vice President Planning and Controller (Principal Accounting Officer)

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