Spartech (SEH) 10-Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 4, 2007

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
(314) 721-4242
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.75 par value
Title of Each Class New York Stock Exchange
Name of Exchange of Which Registered

Securities registered pursuant to Section 12(g) of the Act:None

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, and (2) has been subject to such filing requirements for the past 90 days. YESþ NOo

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

Large Accelerated Filerþ     Accelerated Filero     Non-Accelerated Filero

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOþ

Number of shares outstanding as of August 4, 2007:

Common stock, $.75 par value per share 32,136,127

SPARTECH CORPORATION
FORM 10-Q FOR THE QUARTER ENDED AUGUST 4, 2007
TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets – As of: August 4, 2007 and October 28, 2006	1
Consolidated Condensed Statements of Operations – For the three and nine months ended August 4, 2007 and July 29, 2006	2
Consolidated Condensed Statements of Cash Flows – For the nine months ended August 4, 2007 and July 29, 2006	3
Notes To Consolidated Condensed Financial Statements	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3. Quantitative and Qualitative Disclosures about Market Risk	15
Item 4. Controls and Procedures	15
PART II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 6. Exhibits	16
Signatures	17
Certifications	18
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer

PART I — FINANCIAL INFORMATION

Item 1.FINANCIAL STATEMENTS

SPARTECH CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands)

	August 4, 2007			October 28,
	(Unaudited)			2006
Assets
Current assets
Cash and cash equivalents	$	3,389		$	5,372
Receivables, net		201,706			200,728
Inventories		125,814			122,329
Prepaids and other		15,151			14,193
Total current assets		346,060			342,622
Property, plant and equipment, net		303,618			304,779
Goodwill		350,399			350,399
Other intangible assets, net		33,510			36,582
Other assets		8,180			7,412
Total assets	$	1,041,767		$	1,041,794
Liabilities and Shareholders’ Equity
Current liabilities
Current maturities of long-term debt	$	6,871		$	6,898
Accounts payable		154,414			149,520
Accrued liabilities		45,676			51,186
Total current liabilities		206,961			207,604
Long-term debt, less current maturities		261,838			282,325
Deferred taxes		99,958			97,681
Other long-term liabilities		8,917			11,491
Total long-term liabilities		370,713			391,497
Shareholders’ equity
Common stock, 33,131,846 shares issued in 2007 and 2006		24,849			24,849
Contributed capital		200,661			198,661
Retained earnings		259,987			240,398
Treasury stock, at cost, 995,719 shares in 2007; 1,007,766 shares in 2006		(25,282	)		(22,845	)
Accumulated other comprehensive income		3,878			1,630
Total shareholders’ equity		464,093			442,693
Total liabilities and shareholders’ equity	$	1,041,767		$	1,041,794

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 4,		July 29,		August 4,		July 29,
	2007		2006		2007		2006
Net sales	$	361,123	$	377,709	$	1,085,745	$	1,110,578
Cost and expenses
Cost of sales		320,389		329,617		955,549		981,059
Selling, general and administrative		21,232		19,309		61,441		55,443
Amortization of intangibles		1,063		1,192		3,335		3,567
		342,684		350,118		1,020,325		1,040,069
Operating earnings		18,439		27,591		65,420		70,509
Interest (net of interest income of $152, $247, $382 and $528, respectively)		4,065		5,039		13,119		16,382
Early debt extinguishment costs		—		5,505		—		5,505
		4,065		10,544		13,119		21,887
Earnings before income taxes		14,374		17,047		52,301		48,622
Income taxes		5,568		6,433		19,720		18,443
Net earnings	$	8,806	$	10,614	$	32,581	$	30,179
Net earnings per common share
Basic	$	.27	$	.33	$	1.02	$	.94
Diluted	$	.27	$	.33	$	1.01	$	.94
Dividends declared per common share	$	.135	$	.125	$	.405	$	.375

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 4,			July 29,
	2007			2006
Cash flows from operating activities
Net earnings	$	32,581		$	30,179
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Depreciation and amortization		31,787			30,429
Restructuring and exit costs		559			30
Stock compensation expense		2,272			2,165
Early debt extinguishment costs		—			5,505
Other, net		5,462			4,949
Change in current assets and liabilities		(2,949	)		15,407
Net cash provided by operating activities		69,712			88,664
Cash flows from investing activities
Capital expenditures		(28,774	)		(14,385	)
Sale of assets		81			2,393
Net cash used for investing activities		(28,693	)		(11,992	)
Cash flows from financing activities
Net (payments) / borrowings on notes and revolving credit facilities		(27,211	)		39,922
Issuance of senior notes		—			50,000
Payment of convertible subordinated debentures		—			(150,000	)
Payments on bonds and leases		(504	)		(421	)
Early payment premiums on convertible subordinated debentures		—			(3,780	)
Cash dividends on common stock		(12,668	)		(11,873	)
Stock options exercised		6,959			2,202
Treasury stock acquired		(10,413	)		(1,541	)
Excess tax benefits from stock based compensation		752			237
Net cash used for financing activities		(43,085	)		(75,254	)
Effect of exchange rate changes on cash and cash equivalents		83			38
(Decrease) increase in cash and cash equivalents		(1,983	)		1,456
Cash and cash equivalents at beginning of year		5,372			4,601
Cash and cash equivalents at end of quarter	$	3,389		$	6,057

See accompanying notes to consolidated condensed financial statements.

3

SPARTECH CORPORATION AND SUBSIDIARIES

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 (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, the financial statements contain all adjustments (consisting of normal recurring adjustments) and disclosures necessary to make the information presented therein not misleading. These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes thereto included in the Company’s October 28, 2006 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 or 364 calendar days. Because of this convention, every fifth or sixth fiscal year has an additional week and 2007 will be reported as a 53-week fiscal year containing 371 days of activity. The first quarter ended February 3, 2007 included an additional week and the nine month period ended August 4, 2007 contained 40 weeks which compares to 39 weeks in the same period of the prior year.

2) Former President and Chief Executive Officer Separation Agreement

     During the third quarter ended August 4, 2007, the Company entered into a Separation Agreement and Release (“Separation Agreement”), with its former President and Chief Executive Officer (“CEO”), George A. Abd, effective July 16, 2007 (“Effective Date”). Mr. Abd resigned as an officer and director of the Company as of the Effective Date, but will remain an employee until October 14, 2007 (“Termination Date”). During this period, Mr. Abd will continue to serve the Company in an advisory capacity.

     The Separation Agreement includes various terms and conditions pertaining to Mr. Abd’s resignation from the Company. The payments and benefits to be paid to Mr. Abd under this Separation Agreement include, but are not limited to, the following major provisions:

• Severance compensation in accordance with the terms of the Corporation’s Severance and Noncompetition Policy and Agreement with Mr. Abd which is based upon a multiple of his former annual salary and the average of his bonus payments earned during the prior three fiscal years, totaling $2,224. Of this amount, $556 will be paid in April 2008 and the remaining $1,668 will be paid in equal monthly installments over the following 18 months with the last payment occurring in October 2009.

• Compensation for the period between the Effective Date through the Termination Date at a rate of one-third of Mr. Abd’s former annual salary. This amount will total $62 for the 90 day period and will be recognized as incurred.

• A performance bonus for the current fiscal year, if any, as determined by the Board of Directors at the end of the fiscal year.

• In accordance with the terms of the applicable stock option plans and agreements, 168,687 vested stock options will be exercisable until the Termination Date, and an additional 32,250 vested stock options expiring within three years of the Termination Date will remain exercisable until their stated expiration dates. All stock-based compensation awards that are not vested as of the Termination Date will be forfeited. As a result, $368 of stock-based compensation expense was reversed as income during the third quarter for awards that were previously expected to vest, but will be forfeited as of the Termination Date.

     The provisions of the Separation Agreement resulted in a net expense of $1,856 in the third quarter, recorded in selling, general and administrative expense, which represents the $2,224 of severance less the $368 reversal of stock-based compensation during the third quarter.

4

SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)

3) Inventories

     Inventories are valued at the lower of cost or market. Inventories at August 4, 2007 and October 28, 2006 are comprised of the following components:

	2007		2006
Raw materials	$	64,169	$	61,872
Production supplies		8,679		8,982
Finished goods		52,966		51,475
	$	125,814	$	122,329

4) Stock-Based Compensation

     The Company’s 2004 Equity Compensation Plan allows for grants of stock options, restricted stock and restricted stock units. During the first quarter of 2007, the compensation committee of the board of directors adopted an amendment to the plan that provides for the grant of stock appreciation rights (“SARS”) and performance shares. The following table details the effect of stock-based compensation from the issuance of these instruments on operating earnings, net income and earnings per share:

	Three Months Ended				Nine Months Ended
	August 4,		July 29,		August 4,		July 29,
	2007		2006		2007		2006
Cost of sales	$	67	$	72	$	202	$	201
Selling, general and administrative		249		538		2,070		1,964
Total stock-based compensation expense included in operating earnings		316		610		2,272		2,165
Income taxes		48		137		637		518
Effect on net earnings	$	268	$	473	$	1,635	$	1,647
Effect on basic and diluted earnings per share	$	.01	$	.01	$	.05	$	.05

5) Restructuring

     The Company reported $237 and $627 of restructuring related expenses in cost of sales during the third quarter and first nine months of 2007 compared to $352 and $1,314 for the same periods in 2006. Below is a summary of the first nine months of 2007 restructuring activity by plan.

     2006 Restructuring Plan

     In 2006, the Company announced the consolidation of three existing Custom Sheet and Rollstock production facilities into one newly constructed facility in Greenville, Ohio. The following table summarizes the restructuring and exit costs related to the 2006 restructuring plan:

			Nine Months
			Ended		Cumulative
	2006		August 4, 2007		to Date
Accelerated depreciation	$	126	$	365	$	491
Facility restructuring and exit costs		75		144		219
Total	$	201	$	509	$	710

     Accelerated depreciation represents the impact from the reduced life on property, plant and equipment related to a decision to sell one of the existing production facilities after the consolidation is complete. Facility restructuring and exit costs represent employee severance costs and equipment moving expenses. The Company incurred $230 and $509 of expenses related to the 2006 restructuring plan in the third quarter and first nine months of 2007, respectively. The Company expects the plan to be substantially complete by the end of 2007 and the Company expects to incur total charges in 2007 of approximately $450 of cash restructuring costs, primarily employee severance and equipment moving expenses plus $500 of

5

SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)

non-cash restructuring expenses representing accelerated depreciation on the facility and equipment that will be sold after completion of the consolidation. The Company’s restructuring liability representing accrued severance and incurred invoices was $213 at August 4, 2007 and $75 at October 28, 2006. The increase in liability reflects severance charges that will be paid when the consolidation is complete and moving expenses incurred but not yet paid.

2005 Restructuring Plan

     In 2005, the Company initiated a plan involving the closing or sale of certain plant facilities and other cost reduction efforts. While these activities are substantially complete, we continue to incur expenses related to the final settlement of liabilities and maintenance on held for sale properties. These expenses totaled $7 in the third quarter and $118 in the first nine months of 2007. Related to this plan, there is a single remaining asset (a calendered film line) that is classified as held for sale which has a book value of $100. This balance is carried within the Color and Specialty Compounds segment and is classified as other current assets on the Consolidated Condensed Balance Sheet.

6) Earnings Per Share

     Basic earnings per share excludes any dilution and is computed by dividing net income 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. 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 months ended August 4, 2007 and July 29, 2006 is as follows (shares in thousands):

	Three Months Ended				Nine Months Ended
	August 4,		July 29,		August 4,		July 29,
	2007		2006		2007		2006
Net earnings:
Basic and diluted net earnings	$	8,806	$	10,614	$	32,581	$	30,179
Weighted average shares outstanding:
Basic weighted average common shares outstanding		32,108		32,109		32,065		32,081
Add: Dilutive shares from equity instruments		255		179		300		182
Diluted weighted average shares outstanding		32,363		32,288		32,365		32,263
Net earnings per share:
Basic	$	.27	$	.33	$	1.02	$	.94
Diluted	$	.27	$	.33	$	1.01	$	.94

7) 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, including many of these companies and other companies subsequently identified, to fund an environmental study by the USEPA. As of August 4, 2007, the group included over 70 companies and the Company has accrued $607 related to this matter of which $547 represents its share of the estimated cost to complete the study that is expected to take place over the next five years. 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, if any, ultimately determined to be attributable to the Company’s subsidiary and other parties. It is possible that our ultimate liability resulting from this issue could materially differ from the August 4, 2007 accrual balance. In the event of one or more adverse determinations related to this issue, the impact on our results of operations could be material to any specific period. However, the Company’s opinion is that future expenditures for compliance with these laws 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.

6

SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)

     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 materially adverse effect on the Company’s financial position or results of operations.

     During the first quarter of 2007, the Company entered into a financing agreement with the local government for the expansion of its Donchery, France facility. Since the inception of the expansion in 2005, the Company has paid 1,190 Euros through a transitory rent agreement which will be finalized once the local government’s financing amount is determined. The remaining commitment under the financing agreement of 3,620 Euros ($4,968) is presented as debt at August 4, 2007.

8) Segment Information

     The following presents the Company’s net sales and operating earnings by reportable segment and group:

	Three Months Ended						Nine Months Ended
	August 4,			July 29,			August 4,			July 29,
	2007			2006			2007			2006
Net sales
Custom Sheet and Rollstock	$	231,308		$	239,956		$	693,539		$	699,142
Color and Specialty Compounds		111,982			118,726			329,160			347,422
Engineered Products		17,833			19,027			63,046			64,014
Total net sales*	$	361,123		$	377,709		$	1,085,745		$	1,110,578
Operating earnings (loss)
Custom Sheet and Rollstock	$	16,272		$	22,147		$	53,622		$	55,350
Color and Specialty Compounds		7,133			7,711			20,166			20,234
Engineered Products		2,679			1,840			9,191			6,210
Corporate / Other		(7,645	)		(4,107	)		(17,559	)		(11,285	)
Total operating earnings	$	18,439		$	27,591		$	65,420		$	70,509

* Excludes inter-segment sales of $13,926, $14,310, $42,369 and $44,368, respectively, primarily from the Color and Specialty Compounds segment.

9) 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 following presents a reconciliation of net earnings to comprehensive income:

	Three Months Ended					Nine Months Ended
	August 4,		July 29,			August 4,		July 29,
	2007		2006			2007		2006
Net earnings	$	8,806	$	10,614		$	32,581	$	30,179
Foreign currency translation adjustments		2,130		(328	)		2,248		788
Total comprehensive income	$	10,936	$	10,286		$	34,829	$	30,967

10) Subsequent Event

     On September 6, 2007, the Company announced the agreement to acquire the stock of Creative Forming, Inc. (“Creative”) for approximately $61,000 in cash adjusted for changes in working capital. The acquisition will be financed from the Company’s bank credit facility and operating cash flows and is expected to close on September 14, 2007. Creative is a custom manufacturer of plastic packaging for the food, consumer product, produce, and medical/pharmaceutical markets with approximately $48,000 in annual sales.

7

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

Executive Summary

     Net earnings were $8.8 million during the third quarter and $32.6 million during the first nine months of 2007. When compared to the same periods last year, this represents a 17% decline for the quarter, but an 8% increase year to date.

     The 17% decrease in net earnings during the third quarter was largely attributable to a 4% decline in sales volume and 12% decrease in gross margin per pound sold. The decline in sales volume was primarily attributable to weak demand in the transportation and recreation and leisure markets and the short-term interruption caused by the consolidation of three plants into our new Greenville facility. The decrease in gross margin per pound sold largely occurred in the sheet business and was caused by rising resin prices during the current year third quarter while we were also experiencing weak demand. These factors along with the disruption from the plant consolidations made it difficult to pass along the resin price increases to our customers as higher selling prices on a timely basis. Net earnings during 2007 also reflect the resignation of our former President and Chief Executive Officer, George A. Abd. The provisions of the related Separation Agreement and Release resulted in a $1.9 million charge to operating earnings during the third quarter.

     The 8% increase in net earnings for the year to date comparison reflected the prior year early debt extinguishment costs and lower current year interest expense from our prior year pay down of debt, partially offset by the decrease in net earnings from our third quarter comparison previously discussed.

     Our fiscal year ends on the Saturday closest to October 31 and our fiscal year generally contains 52 weeks or 364 calendar days. Because of this convention, every fifth or sixth fiscal year has an additional week and 2007 will be reported as a 53-week fiscal year containing 371 days of activity. Our first quarter ended February 3, 2007 included an additional week and the nine month period ended August 4, 2007 contained 40 weeks which compares to 39 weeks in the same period of the prior year.

Consolidated Results

     Net sales were $361.1 million and $1,085.7 million, respectively, for the three and nine month periods ending August 4, 2007. These sales represent a 4% and 2% decrease from the same periods of the prior year and were caused by:

	Three Months			Nine Months
Underlying volume		(4	)%		(3	)%
Volume from additional week		—			3
Price/Mix		—			(2	)
		(4	)%		(2	)%

     The decrease in underlying volume for both period comparisons was caused by lower sales of compounds to the automotive sector of the transportation market, color concentrates to the packaging market and sheet to the recreation and leisure market, the residential sector of the building and construction market and the heavy truck and automotive sectors of the transportation market. These declines were partially offset by increases in sales of sheet to the packaging market and the refrigeration sector of the appliance and electronics market and higher sales of compounds to the commercial building and construction market. Disruptions from the Greenville sheet consolidation also contributed to the decline in sales volume during the third quarter. For the nine month period comparison, sales volume from the additional week reflects 40 weeks in the first nine months of this year versus 39 weeks during the same period last year. For the third quarter comparison, the price/mix impact was flat because of higher resin costs which were partially passed through to customers as higher selling prices offset by a higher sales mix of lower per pound priced product. The price/mix impact in the year to date comparison reflects lower resin costs during the first half of 2007 which we passed through to customers as lower selling prices partially offset by a higher sales mix of lower per pound priced product.

8

     The following table presents net sales, components of 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 2007 compared to the same periods of 2006. Cost of sales presented in the Consolidated Condensed Statements of Operations includes material and conversion costs and excludes amortization of intangible assets. The material and conversion cost components of cost of sales are presented in the following table and we have not presented these components as a percentage of net sales because a comparison of this measure is distorted by changes in resin costs that are 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 4,		July 29,		August 4,		July 29,
	2007		2006		2007		2006
Dollars and Pounds (in millions)
Net sales	$	361.1	$	377.7	$	1,085.7	$	1,110.6
Material costs		237.3		246.4		702.7		723.3
Material margin		123.8		131.3		383.0		387.3
Conversion costs		83.1		83.2		252.8		257.8
Gross margin	$	40.7	$	48.1	$	130.2	$	129.5
Pounds Sold		358.4		372.5		1,084.3		1,092.1
Dollars per Pound Sold
Net sales	$	1.008	$	1.014	$	1.001	$	1.017
Material costs		.662		.662		.648		.662
Material margin		.346		.352		.353		.355
Conversion costs		.232		.223		.233		.236
Gross margin	$	.114	$	.129	$	.120	$	.119

     Material margin per pound sold decreased for both periods presented above due in part to higher resin costs which we were not able to pass on to customers as higher selling prices on a timely basis in the current year third quarter because of a soft demand environment and the disruption associated with our Greenville sheet consolidation. A higher mix of lower margin per pound product added to the decreases in material margin per pound for both period comparisons.

     Conversion costs per pound sold increased 0.9¢ in the third quarter of 2007, but decreased 0.3¢ in the first nine months of 2007 compared to the same periods of 2006. Conversion cost dollars remained consistent in the third quarter of 2007 compared to the same period last year and sales volume declined 4% which resulted in the increase in conversion costs per pound sold. For the nine month period, the slight improvement in conversion costs per pound sold was largely caused by mix changes and lower freight, utilities and repairs and maintenance.

     Selling, general and administrative expenses were $21.2 million and $61.4 million in the third quarter and first nine months of 2007 representing a $1.9 million and $6.0 million increase, respectively, over the same periods of the prior year. These increases reflect a $1.9 million charge associated with the resignation of the Company’s former President and Chief Executive Officer in the third quarter of 2007. Both period comparisons also include $0.8 million and $0.9 million of increases in foreign currency losses in the third quarter and first nine months, respectively, due to a weaker U.S. dollar. Excluding these factors, selling, general and administrative expenses decreased $0.7 million in the third quarter due to lower bonus and bad debt expenses partially offset by higher professional fees, depreciation expense and information technology related costs associated with our company-wide Oracle information system implementation. The remaining $3.3 million increase in the nine month period comparison reflects the inclusion of an additional week and increases in the aforementioned information system costs. We expect our total IT-related expenses to approximate $11.2 million in 2007 which will compare to $8.6 million in 2006 with the increase primarily attributable to our Oracle implementation.

     Amortization of intangibles was $1.1 million and $3.3 million in the third quarter and first nine months of 2007 which was slightly lower than the same periods of the prior year.

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     Interest expense, net of interest income, was $4.1 million and $13.1 million in the third quarter and first nine months of 2007 compared to $5.0 million and $16.4 million in the same periods of 2006. These decreases were due to the benefit realized from our focused efforts on debt reduction and lower average interest rates.

     In the third quarter of fiscal 2006, we redeemed all $150 million of our convertible subordinated debentures resulting in $3.8 million of early-payment premium and $1.7 million of non-cash write-off of unamortized debt issuance costs which were reported in total as early debt extinguishment costs.

     Our effective tax rate was 38.7% and 37.7% in the third quarter and first nine months of 2007 compared to 37.7% and 37.9% in the same periods of the prior year. For the first nine months of 2007, the lower current year tax rate reflects the reinstatement of a research and development tax credit that had expired in the prior year but was retroactively extended by the U.S. government during our first quarter of this year. Excluding this reinstatement, our effective tax rate would have been 38.4% in the first nine months of 2007. The remaining changes in the effective tax rates reflect the impact from changes in losses incurred by our Donchery, France operation during both period comparisons. In accordance with GAAP, we did not recognize tax benefits on these losses. However, the net operating loss carryforwards in France do not expire, and we expect to recognize the associated tax benefit when this operation generates a level of pre-tax earnings sufficient to offset cumulative historical pre-tax losses.

     We reported net earnings of $8.8 million and $32.6 million in the third quarter and first nine months of 2007 compared to $10.6 million and $30.2 million in the prior year.

Segment Results

Custom Sheet and Rollstock Segment

     Net sales were $231.3 million and $693.5 million in the three and nine month periods ending August 4, 2007. These sales represent a 4% and 1% decrease, respectively, over the same periods of the prior year and were caused by:

	Three Months			Nine Months
Underlying volume		(5	)%		(2	)%
Volume from additional week		—			3
Price/Mix		1			(2	)
		(4	)%		(1	)%

     For the third quarter comparison, the decrease in underlying volume occurred in the recreation and leisure market, the residential sector of the building and construction market and the heavy truck sector of the transportation market. These decreases were partially offset by increases in sales of sheet to the refrigeration sector of the appliance and electronics market and the food and consumer sector of the packaging market. This segment reported lower sales of sheet used in home bath surrounds, portable toilets, recreational vehicles, pools and spas and automotive dunnage. The sales increase in the refrigeration sector has been supported by the on-going capacity increases of our manufacturing facility in Mexico. Of the 5% decline in sales volume during the third quarter, 4% occurred at the three facilities which are in the process of being consolidated into our new Greenville facility. These facilities primarily produce polyethylene-based products to the building and construction, recreation and leisure and transportation markets. The weak demand from these markets combined with the short-term interruption caused by the consolidation was the primary cause of the reduction in sheet sales volume during the third quarter. The price/mix impact reflected higher resin costs in 2007 which we passed through to customers as higher selling prices partially offset by a higher sales mix of lower sales price per pound sheet

     For the nine month comparison, the 2% decline in sales volume was less than the 5% decline during the third quarter because of an increase in sales to the packaging market during the first half of 2007. This increase was attributable to higher sales of material handling sheet to the industrial packaging industry and sheet to the food and consumer packaging industry. The volume from the additional week reflects 40 weeks in the first nine months of this year versus 39 weeks during the same period last year. The price/mix impact primarily reflected the higher sales mix of lower sales price per pound product.

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     This segment’s operating earnings were $16.3 million and $53.6 million in the third quarter and first nine months of 2007 compared to $22.1 million and $55.4 million in the same periods of the prior year. For the third quarter comparison, the $5.9 million decrease was primarily caused by the lower sales volume and a 2.8¢ decrease in gross margin per pound sold with approximately half of the decrease attributable to a reduction in material margin per pound sold and the other half attributable to an increase in conversion costs per pound sold. The material margin per pound decrease was caused by rising resin prices in the current year third quarter during a difficult demand environment and the interruptions caused by the Greenville consolidation which made it difficult to pass along the resin price increases to our customers as higher selling prices on a timely basis. Conversion cost dollars remained consistent with the prior year third quarter and sales volume decreased 5% resulting in the increase in conversion costs per pound sold during the third quarter comparison. For the nine month comparison, the $1.7 million decrease in operating earnings was largely caused by a 0.4¢ decline in the year to date material margin which occurred during the third quarter as noted above.

Color and Specialty Compounds Segment

     Net sales were $112.0 million and $329.2 million in the three and nine month periods ending August 4, 2007. These sales represent a 6% and 5% decrease, respectively, over the same periods of the prior year and were caused by:

	Three Months			Nine Months
Underlying volume		(3	)%		(5	)%
Volume from additional week		—			3
Price/Mix		(3	)		(3	)
		(6	)%		(5	)%

     The decrease in underlying volume for both period comparisons was caused by lower sales of compounds to the automotive sector of the transportation market and color concentrates to the packaging market partially offset by a significant increase in sales of thermoplastic olefin compounds used in roofs of commercial buildings. For the nine month period, sales volume from the additional week reflects 40 weeks in the first nine months of this year versus 39 weeks during the same period last year. The decrease in price/mix for the third quarter comparison was largely caused by a higher sales mix of toll-manufactured product which has a lower than average selling price per pound sold. The price/mix impact for the nine month comparison reflects this mix change and lower resin costs in 2007 compared to the prior year which we passed through to customers as lower selling prices.

     This segment’s operating earnings were $7.1 million and $20.2 million in the third quarter and first nine months of 2007 compared to $7.7 million and $20.2 million in the same periods of the prior year. For the third quarter comparison, the $0.6 million decrease was primarily caused by lower sales volume and a 0.3¢ decrease in gross margin per pound sold due to an increase in conversion costs per pound sold. Conversion cost dollars remained consistent and sales volume declined 3% causing this increase. For the nine month comparison, operating earnings remained flat because the adverse impact on gross margin from lower volume was largely offset by the $1.2 million reduction in restructuring expenses related to prior year plant consolidations.

Engineered Products Group

     Net sales were $17.8 million and $63.0 million in the three and nine month periods ending August 4, 2007. These sales represent a 6% and 2% decrease, respectively, over the same periods of the prior year and were caused by:

	Three Months			Nine months
Underlying volume		2	%		2	%
Volume from additional week		—			3
Price/Mix		(8	)		(7	)
		(6	)%		(2	)%

     For both period comparisons, the increase in the underlying volume reflects an increase in sales volume of wheels to the lawn and garden market and the price/mix impact reflects a higher sales mix of wheels which have a lower per pound sales price than the segment average.

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     This group’s operating earnings were $2.7 million and $9.2 million in the third quarter and first nine months of 2007 compared to $1.8 million and $6.2 million in the same periods of the prior year. Both period comparisons were impacted by changes in foreign currency gains. Excluding this currency impact, operating earnings still increased $0.3 million in the third quarter and $2.6 million in the first nine months of 2007 largely due to an increase in sales volume and higher profitability in our wheels business.

Corporate

     Corporate includes corporate office expenses and portions of information technology and professional fees that are not allocated to our two segments and group. Corporate expenses are reported as selling, general and administrative expenses in the Consolidated Condensed Statement of Operations. Corporate expenses were $7.6 million and $17.6 million in the third quarter and first nine months of 2007 compared to $4.1 million and $11.3 million in the same periods of the prior year. Both period comparisons were impacted by the $1.9 million charge from the resignation of our former President and Chief Executive Officer. When compared to the prior year, foreign currency losses increased $1.1 million during the third quarter and $1.0 million year to date due to a weaker U.S. dollar. Excluding the impact from these items, corporate expenses increased $0.6 million in the third quarter and $3.4 million during the first nine months of 2007 which were caused by higher professional fees, depreciation expense and information technology related costs associated with our company-wide Oracle information system implementation partially offset by lower employee bonus expenses. The nine month period also reflects the inclusion of an additional week of expenses.

Liquidity and Capital Resources

Cash Flow

     Our primary sources of liquidity have been cash flows from operating activities and borrowings from third parties. Our principal uses of cash have been to fund our operating activities, invest in capital improvements, pay down outstanding indebtedness, acquire treasury stock 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 in 2007 and 2006:

	2007			2006
Cash Flows (in millions)
Net cash provided by operating activities	$	69.7		$	88.7
Net cash used for investing activities		(28.7	)		(12.0	)
Net cash used for financing activities		(43.1	)		(75.2	)
Effect of exchange rate changes		0.1			—
(Decrease) Increase in cash and cash equivalents	$	(2.0	)	$	1.5

     Net cash provided by operating activities was $69.7 million in the first nine months of 2007 compared to $88.7 million in the prior year. The $19.0 million decrease is largely attributable to working capital reductions achieved in the prior year. Although we continue to focus on working capital management to improve cash flow, much of the working capital improvement had been achieved by the end of 2006.

     Our primary investing activities are capital expenditures in the plastics industry. Capital expenditures are primarily incurred to enhance our facilities for safety and environmental improvements and to maintain and improve productivity, as well as to modernize and expand facilities. Capital expenditures for the first nine months of 2007 were $28.8 million compared to $14.4 million for the same period of 2006. The $14.4 million increase was mostly comprised of $5 million for our new production facility in Greenville, Ohio, $4 million for the expansion of our Mexico operation and $4 million of additional capital for our information systems implementation. We expect capital expenditures to approximate $35 million in 2007.

     Net cash used for financing activities totaled $43.1 million for the first nine months of 2007 compared to $75.2 million for the same period of 2006. The net cash used for financing activities in the current year includes $27.7 million to pay down debt, $12.7 million to pay dividends and $10.4 million for treasury share purchases, partially offset by $7.0 million received from employee stock option exercises.

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     Overall, increased spending on capital expenditures and repurchases of our treasury shares as well as the reduced cash benefit derived from working capital improvements resulted in a lower repayment of debt in the first nine months of 2007 compared to the same period in 2006. Cash declined $2.0 million in the first nine months of 2007 due to the factors noted above.

Financing Arrangements

     As of August 4, 2007, we had $268.7 million of outstanding debt with a weighted average interest rate of 5.6% of which 82% represented fixed rate instruments also with a weighted average interest rate of 5.6%. At the end of the third quarter, we had $273.7 million unused on our credit facilities. On September 6, 2007, the Company announced an agreement to acquire the stock of Creative Forming, Inc. for approximately $61.0 million in cash adjusted for changes in working capital. The acquisition will be financed from our bank credit facility and operating cash flows and is expected to close on September 14, 2007. Following the acquisition, we will have $212.7 million unused on our credit facility.

     At August 4, 2007, our credit facilities contained certain affirmative and negative covenants, including restrictions on the incurrence of additional indebtedness, limitations on both the sale of assets and merger transactions, and requirements to maintain certain financial and debt service ratios and net worth ratios. While we were in compliance with our covenants through the first nine months of 2007 and currently expect to be in compliance with our covenants in the next twelve months, our failure to comply with the covenants or other requirements of our financing arrangements could result in an event of default and, among other things, acceleration of the payment of our indebtedness, which could adversely impact our business, financial condition, and results of operations.

     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, strategic acquisitions and managing our capital structure on a short and long-term basis.

Outlook

     We expect the weak demand environment to continue through the rest of the year, particularly within the domestic automotive, residential construction and recreational vehicle market sectors. We expect the fourth quarter 2007 net earnings to fall below earnings during the same period last year due to the weak demand environment previously discussed combined with additional expenses related to our Oracle ERP implementation. In addition, we anticipate further inefficiencies in our fourth quarter resulting from our Greenville consolidation. Upon completion of the consolidation, we expect to realize an estimated $2.5 million of annual pre-tax cost savings. Please refer to the Cautionary Statements Concerning Forward-Looking Statements located below.

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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. These statements may be found above in Management’s Discussion and Analysis of Financial Condition and Results of Operations. These sections include statements about new products and market benefits, expected operating trends, future capital expenditures, expenditures for environmental compliance, and anticipated cash flow and borrowings.

     “Forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relate to future events and expectations, 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 the Company’s operations and results include:

(a)	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)	material 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)	our inability to achieve the level of cost savings, productivity improvements, synergies, growth or other benefits anticipated from acquired businesses and their integration;
(e)	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;
(f)	our inability to manage or pass through an adequate level of increases to customers in the costs of materials, freight, utilities, or other conversion costs;
(g)	our inability to predict accurately the costs to be incurred or savings to be achieved in connection with announced production plant restructurings;
(h)	adverse findings in significant legal or environmental proceedings or our inability to comply with applicable environmental laws and regulations;
(i)	adverse developments with work stoppages or labor disruptions, particularly in the automotive industry;
(j)	our inability to achieve operational efficiency goals or cost reduction initiatives;
(k)	our inability to develop and launch new products successfully,
(l)	restrictions imposed on us by instruments governing our indebtedness, and the possible inability to comply with requirements of those instruments;
(m)	possible weaknesses in our internal controls; and
(n)	our ability to successfully complete the implementation of a new enterprise resource planning computer system.

We assume no duty 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 Item 1A “Risk Factors” of our 2006 Form 10-K, filed with the Commission on December 21, 2006, for additional disclosures about market risk.

Item 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     The Company maintains a system of disclosure controls and procedures which are designed to ensure 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 officer, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation performed, the Company’s certifying officer has concluded that the disclosure controls and procedures were effective as of August 4, 2007 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 Controls

     The Company is in the process of implementing a new Oracle enterprise resource planning (“ERP”) system. Implementation began in 2006 and is scheduled to occur in phases through 2008. As the Company continues to implement the new ERP system, it expects that there will be future improvements in internal controls as a result of this implementation. During the quarter ended August 4, 2007, eight manufacturing facilities implemented the new ERP system which resulted in some changes to internal controls. This ERP system, along with the internal controls over financial reporting impacted by the implementation, were appropriately tested for design effectiveness. While some processes and controls will continue to evolve as the implementation progresses, existing controls and the controls affected by the implementation of the new system are appropriate and functioning effectively. There were no other changes to internal controls during the quarter ended August 4, 2007, that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Issuer Purchases of Equity Securities

     There were no repurchases of equity securities during the third quarter of 2007 and the Company currently has no outstanding publicly announced plan or program to repurchase shares; however the Company may periodically repurchase shares to reissue upon the exercise of stock options, the vesting of restricted stock or for other purposes.

Item 6.EXHIBITS

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

3.1	Restated Certificate of Incorporation of Registrant, as amended and restated effective March 9, 2006, incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarterly period ended July 29, 2006, filed with the Commission on June 8, 2006.
3.2	Bylaws of Registrant, as amended and restated March 7, 2006, incorporated by reference to Exhibit 3.1 of Form 8-K filed with the Commission on March 9, 2006.
10.1	Separation Agreement and Release dated July 16, 2007 between the Company and George A. Abd, incorporated by reference to Exhibit 1.01 of Form 8-K filed with the Commission on July 16, 2007.
31.1	Section 302 Certification of Chief Executive Officer
31.2	Section 302 Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

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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 12, 2007	/s/ Randy C. Martin
	Randy C. Martin
	President and Chief Executive Officer
	Chief Financial Officer
	(Principal Executive and Financial Officer)
	/s/ Michael G. Marcely
	Michael G. Marcely
	Vice President and Corporate Controller
	(Principal Accounting Officer)

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