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 February 2, 2002
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 S. Central 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 shares outstanding as of February 2, 2002:
Common Stock, $.75 par value per share 26,787,281
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
February 2, 2002
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of February 2, 2002 and November 3, 2001 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter ended
February 2, 2002 and February 3, 2001 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for quarter ended
February 2, 2002 and February 3, 2001 5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION 19
SIGNATURES 20
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands, except share amounts)
ASSETS
Feb. 2, 2002
(unaudited) Nov. 3, 2001
Current Assets
Cash and equivalents $ 8,701 $ 8,572
Receivables, net 114,277 119,074
Inventories 95,840 93,091
Prepayments and other 9,956 9,333
Total Current Assets 228,774 230,070
Property, Plant and Equipment 392,686 389,072
Less accumulated depreciation 121,608 114,917
Net Property, Plant and Equipment 271,078 274,155
Goodwill 292,576 292,576
Other Assets 21,249 18,302
$813,677 $815,103
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 18,184 $ 18,225
Accounts payable 70,777 76,131
Accrued liabilities 23,629 24,568
Total Current Liabilities 112,590 118,924
Long-Term Debt, Less Current Maturities 272,049 270,489
Other Liabilities 57,763 59,144
Total Long-Term Liabilities 329,812 329,633
Company-obligated manditorily redeemable
convertible preferred securities of
Spartech Capital Trust holding solely
convertible subordinated debentures 150,000 150,000
Shareholders' Equity
Common stock, 28,067,023
shares issued in 2002 and 2001 21,050 21,039
Contributed capital 93,824 94,239
Retained earnings 148,230 145,909
Treasury stock, at cost, 1,279,742 shares
in 2002 and 1,367,437 shares in 2001 (29,084) (30,410)
Accumulated Other Comprehensive Income (12,745) (14,231)
Total Shareholders' Equity 221,275 216,546
$813,677 $815,103
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
Feb. 2, 2002 Feb. 3, 2001
Net Sales $190,668 $240,635
Costs and Expenses
Cost of sales 163,507 200,981
Selling and administrative 12,574 14,103
Amortization of goodwill - 2,050
176,081 217,134
Operating Earnings 14,587 23,501
Interest 4,369 7,141
Distributions on
preferred securities of
Spartech Capital Trust 2,562 2,562
Earnings Before Income Taxes 7,656 13,798
Income taxes 2,794 5,243
Net Earnings $ 4,862 $ 8,555
Net Earnings Per Common Share:
Basic $ .18 $ .32
Diluted $ .18 $ .32
Dividends Per Common Share $ .095 $ .095
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
QUARTER ENDED
Feb. 2, 2002 Feb. 3, 2001
Cash Flows from Operating Activities
Net earnings $ 4,862 $ 8,555
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 6,750 9,065
Change in current assets and
liabilities (3,262) (3,264)
Other, net (169) (402)
Net cash provided by
operating activities 8,181 13,954
Cash Flows from Investing Activities
Capital expenditures (3,771) (5,411)
Business Acquisitions (4,180) -
Retirement of assets - 249
Net cash used for investing activities (7,951) (5,162)
Cash Flows from Financing Activities
Bank Borrowings for Business Acquisitions 4,180 -
Net borrowings (payments) on revolving
credit facilities (2,580) 206
Payments on bonds and leases (81) (669)
Cash dividends on common stock (2,542) (2,530)
Stock options exercised 922 521
Treasury stock acquired - (4,987)
Net cash used for
financing activities (101) (7,459)
Effect of exchange rate changes on cash
and equivalents - (101)
Increase In Cash and Equivalents 129 1,232
Cash and Equivalents at Beginning of Period 8,572 10,495
Cash and Equivalents at End of Period $ 8,701 $ 11,727
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE A - Basis of Presentation
The consolidated financial statements include the accounts of Spartech
Corporation and its wholly owned subsidiaries (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 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 the
Company's November 3, 2001 Annual Report on Form 10-K.
The Company's fiscal year ends on the Saturday closest to October 31.
Fiscal year 2001 included 53 weeks compared to 52 weeks in 2002. As a result,
the first quarter ended February 2, 2001 consists of 14 weeks, compared to the
13-week first quarter ended February 2, 2002. Operating results for any quarter
are traditionally seasonal in nature and are not necessarily indicative of the
results expected for the full year.
Freight costs for First Quarter of 2001 have been reclassified to comply
with EITF 00-10 "Accounting for Shipping and Handling Fees and Costs." The
reclassification resulted in an increase to net sales and corresponding increase
to cost of goods sold of $6.0 million.
NOTE B - Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventories at February 2, 2002 and November 3, 2001 are comprised of
the following components:
2002 2001
Raw materials $ 55,509 $ 55,803
Finished goods 40,331 37,288
$ 95,840 $ 93,091
NOTE C - Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142, among other things, eliminates the amortization of
goodwill and certain identified intangible assets.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Effective November 4, 2001 the Company has adopted SFAS No. 142, as such
goodwill is no longer being amortized against earnings. Intangible assets,
including goodwill, that are not subject to amortization will be tested for
impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired, using a two step
impairment assessment. The first step of the impairment test identifies
potential impairment and compares the fair value of the reporting unit with its
carrying amount, including goodwill. We determined that the Company has twelve
reporting units based upon the discrete financial information available and the
manner in which management reviews operating results.
If the fair value of the reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not considered impaired, and the second step
of the impairment test is not necessary. If the carrying amount of the reporting
unit exceeds its fair value, the second step of the impairment test shall be
performed to measure the amount of impairment loss, if any. The amounts used in
the transitional impairment test have been measured as of November 4, 2001.
Early application of SFAS No. 142 is permitted for non-calendar year end
companies with fiscal years beginning after March 15, 2001, but before December
15, 2001. The Company has elected early adoption of these statements as of the
beginning of our fiscal year 2002. In performing step one of the test, the
Company engaged an independent appraisal firm to perform a valuation for each of
our reporting units. The firm reported a fair value conclusion for each of the
reporting units which the Company used to compare the carrying amount of its net
assets including goodwill. In accordance with the transition provisions of SFAS
No. 142, the Company has conducted the first step of the impairment tests as
described above. As of November 4, 2001, the tests indicated that the fair value
of each of the Company's reporting units exceeded their carrying amount,
therefore no impairment charge was recorded upon adoption.
The effect of the adoption of SFAS No. 142 as of November 4, 2001 and February
2, 2002 is summarized in the following table:
February 2, 2002 November 4, 2001
Gross Accumulated Net Carrying Gross Accumulated Net
Carrying Amortization Amount Carrying Amortization Carrying
Amount Amount Amount
Goodwill $ 321,689 $ (29,113) $ 292,576 $ 321,689 $ (29,113) $292,576
Intangible
assets with
finite lives $ 2,500 $ (25) $ 2,475 $ - $ - $ -
Amortization expense for the three months ended February 2, 2002 was $25
which represented the amortization relating to the identified intangible assets
required to be amortized under SFAS No. 142. For each of
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
the next five years intangible amortization expense relating to these identified
intangibles will be $83.
As required by SFAS No. 142, the results for the prior year have not been
restated. A reconciliation of net income for the first quarter ended February 3,
2001 as if SFAS No. 142 had been adopted at the beginning of the prior year is
presented below.
2001
Reported net income $ 8,555
Add back: Goodwill amortization (net of tax) $ 1,310
Adjusted net income $ 9,865
Basic net income per share:
Reported net income $ .32
Adjusted net income $ .38
Diluted net income per share:
Reported net income $ .32
Adjusted net income $ .37
NOTE D - Cash Flow Information
Supplemental information on cash flows and noncash transactions for the
quarters ended February 2, 2002 and February 3, 2001 is as follows:
2002 2001
Cash paid for:
Interest $ 5,559 $ 7,012
Income taxes (refund) $ (799) $ 377
Note E - Comprehensive Income
Comprehensive Income is an entity's change in equity during the period from
transactions, events and circumstances from non-owner sources. The
reconciliation of Net Earnings to Comprehensive Income for the quarters ended
February 2, 2002 and February 3, 2001 is as follows:
QUARTER ENDED
2002 2001
Net Earnings $ 4,862 $ 8,555
Foreign currency translation
adjustments (61) 762
Cash flow hedge adjustments 1,547 (1,976)
Total Comprehensive Income $ 6,348 $ 7,341
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Note F - Segment Information
Spartech's forty-four facilities are organized into three reportable segments
based on the nature of the products manufactured.
Quarter Ended
Feb. 2, 2002 Feb. 3, 2001
Net Sales*
Custom Sheet & Rollstock $ 128,037 $ 155,929
Color & Specialty Compounds 48,925 58,208
Molded & Profile Products 13,706 26,498
Total Net Sales $ 190,668 $ 240,635
Operating Earnings
Custom Sheet & Rollstock $ 11,158 $ 16,668
Color & Specialty Compounds 5,044 6,187
Molded & Profile Products 812 2,372
Corporate/Other (2,427) (1,726)
Total Operating Earnings $ 14,587 $ 23,501
* Excludes intersegment sales of $4,682 in 2002 and
$8,541 in 2001 primarily from the Color & Specialty
Compounds segment
Note G - Recently Issued Accounting Standards Not Yet Adopted
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It applies
to all entities and legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction, development, and/or
the normal operation of a long-lived asset. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and are subsequently allocated to
expense over the asset's useful life. This statement is effective for the
financial statements issued for fiscal years beginning after June 15, 2002 (the
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Company's fiscal year 2003). The Company will adopt SFAS No. 143 at the
beginning of our 2003 fiscal year and we believe it will not have a material
effect on the financial position or results of operations.
In August 2001 the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. This statement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
however, this statement retains the fundamental provisions of SFAS No. 121 for
(a) recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. This statement also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" for segments of a business to be
disposed of. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001 (the Company's fiscal year 2003). The Company does not believe that the
adoption of SFAS No. 144 will have a material effect on its financial position
or results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The Company's fiscal year ends on the Saturday closest to October 31.
Fiscal year 2002 will include 52 weeks compared to 53 weeks in 2001. As a
result, the first quarter ended February 2, 2002 consisted of 13 weeks, a 7%
shorter operating period than the 14-week first quarter ended February 3, 2001.
The operating results presented below include discussions on a percentage of
sales basis for more meaningful comparisons.
Net sales for the first quarter 2002 decreased by 21% to $190.7 million, as
compared to $240.6 million, an approximate 11% decrease after considering the
July 2001 divestiture of Spartech's custom molded products business, along with
the effect of the additional week reported in the first quarter of 2001. The
Company saw a positive trend in overall average weekly sales in January 2002 for
the first time in over a year, which leads us to believe our second quarter
operating results will improve over the first quarter.
Net sales of the Custom Sheet & Rollstock segment decreased to $128.0
million from $155.9 million in the prior year period as economic conditions
produced low demand in the aerospace, mass transit and transportation markets.
Net sales of the Color & Specialty Compounds segment decreased to $48.9 million
from $58.2 million in the first quarter 2001 with comparable 13 week sales
slightly more than 90% of last year's volume. The Molded & Profile Products
segment net sales decreased to $13.7 million from $26.5 million in the first
quarter 2001 following the July 2001 sale of the segment's custom molded
products businesses.
Cost of sales was $163.5 million for the first quarter 2002, compared with
$201.0 million for the first quarter of 2001, but increased as a percentage of
net sales to 85.8% for 2002 from 83.5% for 2001, reflecting the effect of lower
capacity utilization and competitive pricing.
Selling and administrative expenses of $12.6 million for the first quarter
of 2002 decreased from $14.1 million for the first quarter of 2001, but
increased to 6.6% of net sales from 5.9% in the first quarter of 2001 due to the
effect of the lower sales volumes on the fixed expenses in this category.
Operating earnings for the quarter ended February 2, 2002 were $14.6
million, or 7.7% of net sales, compared to $23.5 million or 9.8% of net sales
for the corresponding period of 2001. The Custom Sheet & Rollstock Segment had
low demand in the aerospace, mass transit and transportation markets partially
offset by focused cost reduction efforts, supply-chain management initiatives
and the elimination of $1.6 million in goodwill amortization charges, which
resulted in an operating margin of 8.7% compared to 10.7% in 2001. The Color &
Specialty Compounds segment benefited from some of the plant consolidations
implemented in 2000 and 2001, as the segment's operating margin saw only a
modest decline of .3% in the first three months of fiscal 2002 to 10.3%. The
Molded & Profile segment experienced the largest percentage drop in operating
earnings, following the July 2001 sale of the segment's custom molded products
businesses with an operating margin of 5.9% compared to 8.9% in 2001.
Interest expense and distributions on preferred securities of $6.9 million
for the quarter of 2002 decreased from $9.7 million for the first quarter of
2001 as a result of $63.5 million of debt repayments in fiscal 2001 generated
from operating cash flow and the July 2001 sale of the custom molded products
business, the effect of the extra week in the first quarter of 2001, and a
reduction of interest rates.
The Company's effective tax rate was 36.5% for the first quarter of 2002
compared to 38.0% in first quarter 2001, reflecting an improvement in our
combined state tax rate and ongoing benefits from research and development
credits.
Net earnings of $4.9 million, or $.18 per diluted share, in the first
quarter 2002 compared to $8.6 million, or $.32 per diluted share, in the first
quarter 2001 as a result of the operating factors noted above. The Company
adopted Financial Accounting Standards Board Statement No. 142 "Goodwill and
Other Intangible Assets" effective at the beginning of fiscal year 2002.
Statement No. 142 requires that goodwill no longer be amortized against
earnings, but instead tested for impairment at least annually. Upon adoption,
the Company did not have an impairment charge and eliminated the amortization of
goodwill, which totaled $2.1 million in the prior year first quarter ended
February 3, 2001. Adjusted for the elimination of goodwill, diluted earnings
per share for the quarter ended February 3, 2001 would have been $.37.
Other Matters
The Company operates 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.
The Company does not anticipate that future expenditures for compliance with
these laws and regulations will have a material effect on our capital
expenditures, earnings, or competitive position.
The plastic resins the Company uses in our production process are crude oil
or natural gas derivatives which are available from a number of domestic and
foreign suppliers. The Company is not aware of any trends in the petroleum
industry that will significantly affect our sources of raw materials in the
future. Our raw materials are only somewhat affected by supply, demand and price
trends of the petroleum industry; however, trends in pricing, periods of
anticipated or actual shortages and changes in supplier capacities can have a
significant impact on the cost of our raw materials in a short period of time.
The Company generally manages the impact of both increases and decreases in raw
material costs through the matching of our inventory levels, current orders, the
pass-through of price changes to customers, and the negotiation of competitive
pricing with our suppliers.
Liquidity and Capital Resources
Cash Flow
The Company's primary sources of liquidity have been cash flows from
operating activities and borrowings from third parties. The Company's principal
uses of cash have been to support our operating activities, invest in capital
improvements, and finance strategic acquisitions. Cash flows for the periods
indicated are summarized as follows:
First Quarter
2002 2001
(Dollars in millions)
Net cash provided by
operating activities $ 8.2 $ 14.0
Net cash used for
investing activities $ (8.0) $ (5.2)
Net cash used for
financing activities $ (.1) $ (7.5)
Increase in cash
and equivalents $ .1 $ 1.2
Operating cash flow provided by net earnings decreased 43%, to $4.9 million
for the first quarter 2002 from $8.6 million for the first quarter 2001.
Operating cash flows provided by changes in accounts receivable totaled $5.7
million due to seasonally lower sales in the first quarter. Operating cash
flows used for changes in inventory totaled $1.8 million due to the typical
transition to what is traditionally the Company's highest sales level in the
second quarter of our fiscal year. Operating cash flows used for changes in
accounts payable totaled $5.4 million due to conversion of some significant
resin purchases to more favorable payment discount terms.
The Company's 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 first quarter 2002 were
$3.8 million as compared to $5.4 million for the first quarter of 2001, and
anticipate total capital expenditures of approximately $20 million for fiscal
2002. The Company's purchase of certain business from ProForm, a bath and
shower surround manufacturer, and our investment in X-Core, LLC, a custom
engineered wheels business totaled $4.2 million for the first quarter of fiscal
2002.
The cash flows used for financing activities was $.1 million for the first
quarter of 2002. The primary activity was the net bank repayments of $2.6
million, borrowings for acquisitions of $4.2 million, cash dividend payments of
$2.6 million, and stock option proceeds of $.9 million.
Financing Arrangements
The following table summarizes the Company's obligations under financing
arrangements and lease commitments as of February 2, 2002:
Type of Total 0 - 1 1-3 Years 3 - 5 More Than
Commitment Amount Year Years 5 Years
Committed
(in thousands)
Bank Credit $ 177,100 - - $ 177,100 -
Facilities
Unsecured Notes 103,572 17,857 50,716 28,570 6,429
Other Debt 9,562 327 295 283 8,657
Obligations
Convertible 150,000 - - - 150,000
Debentures
Operating Lease 28,025 5,909 9,983 5,989 6,144
Commitments
Standby Letters 11,936 - - - -
of Credit
Total $ 480,195 $ 24,093 $ 60,994 $ 211,942 $ 171,230
Contractual
Cash
Obligations
At February 2, 2002, the Company's total outstanding borrowings under the
bank credit facilities were $177.1 million at a weighted average rate of 6.0%,
and we had $81.0 million in remaining availability under the $270 million
facilities. The Company anticipates that cash flows 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.
If the Company's cash from operations was substantially reduced and our
access to the debt and equity markets became more limited, we might not be able
to repay the obligations as they became due. The Company's current credit
facilities also contain 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 ratios and net worth levels. While the Company was in compliance with
such covenants in 2001 and currently expect to be in compliance during 2002, 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.
Significant Accounting Policies, Estimates and Judgments
The Company prepares the consolidated financial statements in conformity
with accounting principles generally accepted in the United States. As such, we
are required to make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant accounting policies,
estimates and judgments which the Company believes are the most critical to aid
in fully understanding and evaluating our reported financial results include the
following:
* Revenue Recognition - The Company recognizes revenue as the product is
shipped and title passes to the customer. Our customers require us to meet
strict specifications for our products. The Company has quality controls in
place that attempt to ensure that customer specifications are met prior to
shipment. We continuously monitor and track product returns, which have
historically been within our expectations and the provisions established.
Despite the Company's efforts to improve our quality and service to customers,
we cannot guarantee that we will continue to experience the same or better
return rates that we have in the past. Any significant increase in returns
could have a material negative impact on our operating results.
* Accounts Receivable - The Company performs ongoing credit evaluations of
our customers and adjust credit limits based upon payment history and the
customer's credit worthiness, as determined by our review of their current
credit information. We continuously monitor collections and payments from our
customers and maintain a provision for estimated credit losses based upon our
historical experience and any specific customer collection issues identified.
While such credit losses have historically been within our expectations and the
provisions established, we cannot guarantee that we will continue to experience
the same credit loss rates that we have in the past.
* Inventories - The Company values inventories at the lower of actual cost
(first-in, first-out) to purchase or manufacture the inventory or the current
estimated market value of the inventory. The Company also buys scrap and
recyclable material (including regrind material) to be used in future production
runs. We record these inventories initially at purchase price and, based on the
inventory aging and other considerations for realizable value, we write down the
carrying value to brokerage value, where appropriate. We regularly review
inventory on hand and record provisions for obsolete inventory. A significant
increase in the demand for our raw materials could result in a short-term
increase in the cost of inventory purchases while a significant decrease in
demand could result in an increase in the amount of excess inventory quantities
on hand. In addition, most of our business is custom products, where the loss
of a specific customer could increase the amount of excess or obsolete inventory
on hand. Although we make every effort to ensure the accuracy of our forecasts
of future product demand, any significant unanticipated changes in demand could
have a significant impact on the value of our inventory and the operating
results.
* Acquisition Accounting - The Company has made several acquisitions in
recent years. All of these acquisitions have been accounted for in accordance
with the purchase method, and accordingly, the results of operation were
included in our Consolidated Statement of Operations from the respective date of
acquisition. The purchase price has been allocated to the identifiable assets
and liabilities, and any excess of the cost over the fair value of the net
identifiable assets acquired is recorded as goodwill. The initial allocation of
purchase price is based on preliminary information, which is subject to
adjustments upon obtaining complete valuation information. While the delayed
finalization of purchase price has historically not had a material impact on the
consolidated results of operations, we cannot guarantee the same results in
future acquisitions.
* Valuation of Long-Lived Assets - The Company reviews the carrying value of
our long-lived assets whenever events and changes in business indicate the
carrying value of the assets may not be recoverable. The Company recognizes
impairment losses if expected future cash flows of the related assets (based on
our current projections of anticipated future cash flows) are less than carrying
value or where assets that are held for sale are deemed to be valued in excess
of the expected amount to be realized upon sale. While we believe that our
estimates of future cash flows are reasonable, different assumptions regarding
such cash flows could materially affect our evaluations.
For additional information regarding our significant accounting policies,
see Note 1 to our 2001 Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 142, among other things, eliminates the amortization of
goodwill and certain identified intangible assets. Effective November 4, 2001,
the Company has adopted SFAS No. 142, and no longer amortize goodwill against
earnings. Intangible assets, including goodwill, that are not subject to
amortization will be tested for impairment annually, or more frequently if
events or changes in circumstances indicate that the asset might be impaired,
using a two step impairment assessment. In accordance with the transition
provisions of SFAS No. 142, we have conducted the required testing and concluded
that the Company's goodwill was not impaired.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It applies
to all entities and legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction, development, and/or
the normal operation of a long-lived asset. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and are subsequently allocated to
expense over the asset's useful life. This statement is effective for the
financial statements issued for fiscal years beginning after June 15, 2002 (the
Company's fiscal year 2003). The Company will adopt SFAS No. 143 at the
beginning of our 2003 fiscal year and we believe it will not have a material
effect on the financial position or results of operations.
In August 2001 the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. This statement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
however, this statement retains the fundamental provisions of SFAS No. 121 for
(a) recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. This statement also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" for segments of a business to be
disposed of. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001 (the Company's fiscal year 2003). The Company does not believe that the
adoption of SFAS No. 144 will have a material effect on its financial position
or results of operations.
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
Item 6 (b). Reports on Form 8-K
None
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: March 12, 2002 /s/Bradley B. Buechler
Bradley B. Buechler
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
/s/Randy C. Martin
Randy C. Martin
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)