SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 29, 2000 Commission File Number 1-5911 SPARTECH CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 43-0761773 (State or other jurisdiction of (I.R.S Employer incorporation or organization) Identification No.) 120 South Central Avenue, Suite 1700, Clayton, Missouri 63105 (Address of principal executive offices) (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, and (2) has been subject to such filing requirements for the past 90 days. Yes x No Number of common shares outstanding as of July 29, 2000: Common Stock, $.75 par value per share 27,428,622 SPARTECH CORPORATION AND SUBSIDIARIES INDEX July 29, 2000 PART I. FINANCIAL INFORMATION PAGE CONSOLIDATED CONDENSED BALANCE SHEET - as of July 29, 2000 and October 30, 1999 3 CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS - for the quarter and nine months ended July 29, 2000 and July 31, 1999 4 CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS - for nine months ended July 29, 2000 and July 31, 1999 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 PART II. OTHER INFORMATION 14 SIGNATURES 15 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS SPARTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands, except share amounts) ASSETS July 29, 2000 (unaudited) Oct 30, 1999 Current Assets Cash and equivalents $ 12,136 $ 8,890 Receivables, net 137,451 117,345 Inventories 105,641 72,108 Prepayments and other 14,981 8,634 ------- ------- Total Current Assets 270,209 206,977 Property, Plant and Equipment 407,328 318,528 Less accumulated depreciation 94,686 75,829 ------- ------- Net Property, Plant and Equipment 312,642 242,699 Goodwill 300,468 168,497 Other Assets 10,440 7,228 ------- ------- $893,759 $625,401 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 12,280 $ 13,215 Accounts payable 84,411 78,644 Accrued liabilities 40,563 37,420 ------- ------- Total Current Liabilities 137,254 129,279 ------- ------- Long-Term Debt, Less Current Maturities 341,277 217,094 Other Liabilities 50,751 38,986 ------- ------- Total Long-Term Liabilities 392,028 256,080 ------- ------- Company-obligated manditorily redeemable convertible preferred securities of Spartech capital trusts holding solely convertible subordinated debentures 150,000 50,000 Shareholders' Equity Common stock, 28,067,023 and 27,915,873 shares issued in 2000 and 1999 21,038 20,925 Contributed capital 95,453 101,709 Retained earnings 117,129 85,651 Treasury stock, at cost, 638,401 shares in 2000 and 675,937 shares in 1999 (14,998) (14,835) Cumulative translation adjustments (4,145) (3,408) ------- ------- Total Shareholders' Equity 214,477 190,042 ------- ------- $893,759 $625,401 ======== ======== See accompanying notes to consolidated financial statements. SPARTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (Unaudited and dollars in thousands, except per share data) QUARTER ENDED NINE MONTHS ENDED July 29, July 31, July 29, July 31, 2000 1999 2000 1999 Net Sales $255,935 $201,802 $711,050 $566,540 -------- -------- -------- -------- Costs and Expenses Cost of sales 208,250 166,451 581,309 465,926 Selling and administrative 14,764 11,325 41,250 32,735 Amortization of intangibles 1,874 1,087 4,591 3,085 -------- -------- -------- -------- 224,888 178,863 627,150 501,746 -------- -------- -------- -------- Operating Earnings 31,047 22,939 83,900 64,794 Interest 6,099 3,278 14,871 10,670 Distributions on preferred securities of Spartech Capital Trust 2,563 813 5,573 1,322 -------- -------- -------- -------- Earnings Before Income Taxes 22,385 18,848 63,456 52,802 Income Taxes 8,781 7,433 24,904 21,125 -------- -------- -------- -------- Net Earnings $ 13,604 $ 11,415 $ 38,552 $ 31,677 ========= ======== ======== ======== Net Earnings Per Common Share: Basic $ .50 $ .42 $ 1.41 $ 1.17 ========= ======== ======== ======== Diluted $ .46 $ .39 $ 1.32 $ 1.09 ========= ======== ======== ======== Dividends Per Common Share $ .085 $ .070 $ .255 $ .210 ========= ======== ======== ======== See accompanying notes to consolidated financial statements. SPARTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited and dollars in thousands) NINE MONTHS ENDED July 29, 2000 July 31, 1999 Cash Flows From Operating Activities Net earnings $ 38,552 $ 31,677 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 23,827 17,302 Change in current assets and liabilities, net of effects of acquisitions (27,304) 3,538 Other, net 1,815 3,582 --------- -------- Net cash provided by operating activities 36,890 56,099 --------- -------- Cash Flows From Investing Activities Capital expenditures (20,561) (16,281) Retirement of assets 86 226 Business Acquisitions (216,765) (44,166) --------- -------- Net cash used for investing activities (237,240) (60,221) --------- -------- Cash Flows From Financing Activities Bank borrowings for business acquisitions 216,765 44,166 Net borrowings (payments) on revolving credit facilities 8,146 (31,053) Payments on bonds and leases (1,565) (3,889) Issuance of common stock - 7,613 Debt issuance costs (2,915) - Cash dividends on common stock (7,074) (5,688) Stock options exercised 1,887 3,275 Treasury stock acquired (11,631) (9,254) --------- -------- Net cash provided by financing activities 203,613 5,170 --------- -------- Effect of exchange rate changes on cash and equivalents (17) (48) --------- -------- Increase In Cash and Equivalents 3,246 1,000 Cash and Equivalents At Beginning Of Period 8,890 7,247 --------- -------- Cash and Equivalents At End Of Period $ 12,136 $ 8,247 ========= ======== See accompanying notes to consolidated financial statements. SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) NOTE A - Basis of Presentation Our consolidated financial statements include the accounts of Spartech Corporation and its wholly owned subsidiaries. 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 solely 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 our October 30, 1999 Annual Report on Form 10-K. Our fiscal year ends on the Saturday closest to October 31. Operating results for any quarter are traditionally seasonal in nature and are not necessarily indicative of the results expected for the full year. NOTE B - Inventories Inventories are valued at the lower of cost (first-in, first-out) or market. Inventories at July 29, 2000 and October 30, 1999 are comprised of the following components: 2000 1999 Raw materials $ 63,855 $ 41,781 Finished goods 41,786 30,327 --------- -------- $ 105,641 $ 72,108 ========= ======== SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) NOTE C - Cash Flow Information Supplemental information on cash flows and noncash transactions for the nine months ended July 29, 2000 and July 31, 1999 is as follows: 2000 1999 Cash paid for: Interest $ 17,417 $ 10,161 ======== ======== Income taxes $ 18,288 $ 15,397 ======== ======== Note D - Comprehensive Income Comprehensive Income is an entity's change in equity during the period from transactions, events and circumstances from non-owner sources. A summary of our components of Total Comprehensive Income follows: QUARTER ENDED NINE MONTHS ENDED July 29, July 31, July 29, July 31, 2000 1999 2000 1999 Net Earnings $ 13,604 $11,415 $ 38,552 $ 31,677 Foreign currency translation adjustments (219) (1,569) (737) 270 -------- ------- -------- -------- Total Comprehensive Income $ 13,385 $ 9,846 $ 37,815 $ 31,947 ======== ======= ======== ======== Our other comprehensive income consists solely of foreign currency translation adjustments. Accumulated other comprehensive income is represented on the balance sheet as cumulative translation adjustments as of July 29, 2000 and October 30, 1999. SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) Note E - Segment Information Spartech's fifty-two facilities are organized into three reportable segments based on the nature of the products manufactured. QUARTER NINE MONTHS ENDED 2000 1999 2000 1999 Net Sales Extruded Sheet & $ 168,935 $ 133,259 $ 458,816 $ 363,696 Rollstock Color & Specialty 60,923 54,641 178,952 162,246 Compounds Molded & Profile Products 26,077 13,902 73,282 40,598 --------- --------- --------- ---------- Total Net Sales $ 255,935 $ 201,802 $ 711,050 $ 566,540 ========= ========= ========= ========== Operating Earnings Extruded Sheet & $ 21,200 $ 15,805 $ 56,247 $ 42,096 Rollstock Color & Specialty 8,333 6,857 23,323 21,252 Compounds Molded & Profile Products 3,677 2,014 9,756 5,715 Corporate/Other (2,163) (1,737) (5,426) (4,269) --------- --------- --------- ---------- Total Operating $ 31,047 $ 22,939 $ 83,900 $ 64,794 Earnings ========= ========= ========= ========== Excludes intersegment sales of $6,075 and $4,450 for the three months ended July 29, 2000 and July 31, 1999, respectively, and $18,829 and $14,374 for the nine months ended July 29, 2000 and July 31, 1999, respectively, primarily from the Color & Specialty Compounds segment. Note F - Convertible Preferred Securities On February 18, 2000 we issued $100 million of 7.0% convertible subordinated debentures to Spartech Capital Trust, a Delaware trust we control. We used the proceeds to repay borrowings under our bank credit facility. The debentures are the sole asset of the Trust and eliminate in consolidation. The Trust purchased the debentures with the proceeds of a $100 million private placement of 7.0% convertible preferred securities of the Trust having an aggregate liquidation preference of $100 million and guaranteed by Spartech. The debentures: - Are convertible along with the Trust preferred securities, at the option of the preferred security holders, into shares of our common stock at a conversion price equivalent to $34.00 per share of common stock, for a total of 2,941,476 shares; - Are redeemable along with the Trust preferred securities, at Spartech's option on or after February 17, 2003, at a price equal to 104.56% of the principal amount plus accrued interest, declining annually to a price equal to the principal amount plus accrued interest by February 17, 2010; and - Mature and are payable, along with the Trust preferred securities, on February 17, 2015 if they have not been previously redeemed or converted. SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) Note G - Acquisition On February 29, 2000, Spartech announced that it completed the purchase of substantially all of the assets of Uniroyal Technology Corporation's High Performance Plastics, Inc. ("HPP"), a well-established manufacturer of extruded sheet and rollstock, cell cast acrylic, and other proprietary plastic products based in South Bend, Indiana with sales of approximately $130 million for its most recent fiscal year which ended September 26, 1999. The acquisition price for HPP was approximately $216 million including costs of the transaction. The purchase was financed through our new $250 million bank credit facility. The new bank credit facility has a five year term and bears interest at a rate chosen by us of prime or LIBOR plus 0.625% to 1.250%. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net sales were $255.9 million and $711.1 million for the quarter and nine months ended July 29, 2000, respectively, representing a 27% and 26% increase from the similar periods in 1999. This sales growth included a 21% increase in volume related to acquired operations and a 6% increase from internal growth. These sales increases along with our ongoing improvements in production efficiency helped us produce our thirty-fifth consecutive quarter of improved year-over-year results. Our Custom Sheet & Rollstock segment generated sales of $458.8 million during the first nine months of 2000 up 26% from the $363.7 million in the first nine months of 1999. Recent acquisitions, primarily Uniroyal's HPP Group, added 18% to sales for the first nine months. Base volume/internal price growth added 8% for the first nine months as a result of strong volume in the recreation & leisure and packaging markets and increases in Alloy Plastics and Product Transformation sales. Sales increased 10% for the Color & Specialty Compounds group to $179.0 million in the first nine months of 2000, with base volume increasing 7% and price/mix making up the balance of 3%. Our Molded & Profile Products group generated $73.3 million in sales for the first nine months of 2000 up 80% from the prior year. This increase was related to three recent acquisitions (60%) and internal growth (20%). Cost of sales increased to $208.3 million for the quarter ended July 29, 2000, compared with $166.5 million for the same period in 1999, but decreased to 81.4% of net sales for 2000 from 82.5% for 1999. The cost of sales percentages were 81.8% for the nine months ended July 29, 2000 and 82.2% for the similar period in 1999. Our more favorable cost of sales percentages in 2000 represents improved production efficiencies and sales of higher margin new products, partially offset by the impact of resin cost increases. Selling and administrative expenses were $14.8 million and $41.3 million for the quarter and nine months ended July 29, 2000 compared to $11.3 million and $32.7 million for the similar periods in 1999. On a percentage of net sales basis, selling and administrative costs for the quarter ended July 29, 2000 were at 5.8% as compared to 5.6% for the same period in 1999. The 2000 nine-month percentage was unchanged from the prior year at 5.8%. Operating earnings for the quarter ended July 29, 2000 were $31.0 million (12.1% of net sales) compared to $22.9 million (11.4% of net sales) for the corresponding period in 1999. Operating earnings for the nine months ended July 29, 2000 were $83.9 million (11.8% of net sales) compared to $64.8 million (11.4% of net sales) for the nine months in 1999. These gains in operating earnings were achieved through the increased sales levels, improved production efficiencies and cost containment efforts. Interest expense and Distributions on Preferred Securities Distributions for the quarter and nine months ended July 29, 2000 of $8.7 million and $20.4 million increased from the same periods in 1999 as a result of borrowings related to the acquisitions completed in 1999 and the acquisition of Uniroyal's HPP Group on February 28, 2000. This increase in interest expense has also been impacted by prime rate increases totaling 1.75% since May 1, 1999 and increases in working capital resulting from higher resin prices and investments to support the growth in sales. As of July 29, 2000, we have $208.9 million of floating rate debt at an average rate of 7.6% up from 6.2% last year (approximately 42% of our total financings). Our effective tax rate was approximately 39.2% and 40.0% for the nine months ending July 29, 2000 and July 31, 1999 reflecting an improvement in our combined state tax rate. Environmental We operate under various laws and regulations governing employee safety, the quantities of specified substances that may be emitted into the air, discharged into waterways, and otherwise disposed of on and off our properties. We do not anticipate that future expenditures for compliance with these laws and regulations will have a material effect on its capital expenditures, earnings, or competitive position. The plastic resins we use in our production process are crude oil or natural gas derivatives which are available from a number of domestic and foreign suppliers. Accordingly, our raw materials are only somewhat affected by supply, demand, and price trends of the petroleum industry. The pricing of resins tends to be independent of crude oil or natural gas except in periods of anticipated or actual shortages. We are not aware of any trends in the petroleum industry which will significantly affect its sources of raw materials in 2000. 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 support our operating activities, invest in capital improvements, and finance strategic acquisitions. Our cash flows for the periods indicated are summarized as follows: Nine Months 2000 1999 (Dollars in millions) Net cash provided by operating activities $ 36.9 $ 56.1 ======== ======== Net cash used for investing activities $ (237.2) $ (60.2) ======== ======== Net cash provided by (used for) financing activities $ 203.6 $ 5.2 ======== ======== Increase in cash and equivalents $ 3.2 $ 1.0 ======== ======== Operating cash flow provided by net earnings increased 22% to $38.6 in the nine months of 2000 compared to the corresponding period of the prior year. Operating cash flows used for changes in working capital totaled $27.3 million for the nine months ended July 29, 2000. This was primarily the result of the increases in receivables derived from our expanded sales level, the effect of increases of resin prices on both receivables and inventory, and the tightening of payment terms by certain suppliers. Our primary investing activities are capital expenditures and acquisitions of businesses in the plastics industry. Capital expenditures are primarily incurred to maintain and improve productivity, as well as to modernize and expand facilities. Capital expenditures for the nine months ended July 29, 2000 and July 31, 1999 were $20.6 million and $16.3 million, respectively. We anticipate total capital expenditures of approximately $28 million for fiscal 2000, including expenditures for the most recent acquisitions. The cash flows provided by financing activities were $203.6 million for the first nine months of 2000. The primary activity was the bank borrowings of $216.8 million for acquisitions, net borrowings of $6.6 million, cash dividend payments of $7.1 million, and purchases of treasury stock, net of options exercised, of $9.7 million. Financing Arrangements On February 18, 2000 we issued $100 million of 7.0% convertible subordinated debentures to Spartech Capital Trust, a Delaware trust we control. We used the proceeds to repay borrowings under our bank credit facility. The debentures are the sole asset of the Trust and eliminate in consolidation. The Trust purchased the debentures with the proceeds of a $100 million private placement of 7.0% convertible preferred securities of the Trust having an aggregate liquidation preference of $100 million and guaranteed by Spartech. The debentures: - Are convertible along with the Trust preferred securities, at the option of the preferred security holders, into shares of our common stock at a conversion price equivalent to $34.00 per share of common stock, for a total of 2,941,476 shares; - Are redeemable along with the Trust preferred securities, at Spartech's option on or after February 17, 2003, at a price equal to 104.56% of the principal amount plus accrued interest, declining annually to a price equal to the principal amount plus accrued interest by February 17, 2010; and - Mature and are payable, along with the Trust preferred securities, on February 17, 2015 if they have not been previously redeemed or converted. On February 28, 2000, we entered into a new $250 million bank credit facility representing a revolving credit line with a five year term. Interest on our bank credit facility is payable at a rate chosen by us of either prime or LIBOR plus 0.625% to 1.250%. We anticipate that cash flow from operations, together with the financing and borrowings under our bank credit facility, will satisfy our working capital needs, regular quarterly dividends, and planned capital expenditures for the next year. Other The information presented herein contains certain forward-looking statements, defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements represent our judgement relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. They are based largely on our current expectations. Our actual results could differ materially from the information contained in the forward-looking statements due to a number of factors, including changes in the availability and cost of raw materials, changes in the economy or the plastics industry in general, other unanticipated events that may prevent us from competing successfully in existing or new markets, and our ability to manage our growth effectively. Investors are also directed to the discussion of risks and uncertainties associated with forward- looking statements contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. PART II - OTHER INFORMATION Item 6 (a). Exhibits 11 Statement re Computation of Per Share Earnings 27 Financial Data Schedule Item 6 (b). Reports on Form 8-K 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: August 25, 2000 /S/ Bradley B. Buechler Bradley B. Buechler Chairman, President and Chief Executive Officer (Principal Executive Officer) Date: August 25, 2000 /S/ Randy C. Martin Randy C. Martin Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT 11 SPARTECH CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (In thousands, except per share data) QUARTER ENDED NINE MONTHS ENDED July 29, July 31, July 29, July 31, 2000 1999 2000 1999 NET EARNINGS Basic net earnings $ 13,604 $ 11,415 $ 38,552 $ 31,677 Add: Distributions on Preferred Securities, net of tax 1,563 488 3,380 793 --------- -------- ------- -------- Diluted net earnings $ 15,167 $ 11,903 $41,932 $ 32,470 ========= ======== ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING Basic weighted average common shares outstanding 27,427 27,084 27,358 26,958 Add: Shares issuable from assumed conversion of Preferred Stock 4,578 1,637 3,382 887 Add: Shares issuable from assumed exercise of options 855 1,911 985 1,872 --------- -------- ------- -------- Diluted weighted average 32,860 30,632 31,725 29,717 shares outstanding ========= ======== ======== ======== NET EARNINGS PER SHARE Basic $ .50 $ .42 $ 1.41 $ 1.17 ========= ======== ======== ======== Diluted $ .46 $ .39 $ 1.32 $ 1.09 ========= ======== ======== ========