9
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 May 4, 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 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 May 4, 2002:
Common Stock, $.75 par value per share 26,915,412
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
May 4, 2002
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of May 4, 2002 and November 3, 2001 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter and six months
ended May 4, 2002 and May 5, 2001 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for six months ended
May 4, 2002 and May 5, 2001 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
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
May 4, 2002
(unaudited) Nov. 3, 2001
Current Assets
Cash and equivalents $ 11,987 $ 8,572
Receivables, net 128,212 119,074
Inventories 93,377 93,091
Prepayments and other 4,504 9,333
Total Current Assets 238,080 230,070
Property, Plant and Equipment 397,157 389,072
Less accumulated depreciation 128,403 114,917
Net Property, Plant and Equipment 268,754 274,155
Goodwill 292,576 292,576
Other Assets 21,502 18,302
$820,912 $815,103
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 18,104 $ 18,225
Accounts payable 85,546 76,131
Accrued liabilities 29,640 24,568
Total Current Liabilities 133,290 118,924
Long-Term Debt, Less Current Maturities 249,909 270,489
Other Liabilities 57,955 59,144
Total Long-Term Liabilities 307,864 329,633
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 93,175 94,239
Retained earnings 154,750 145,909
Treasury stock, at cost, 1,151,611 shares
in 2002 and 1,367,437 shares in 2001 (27,074) (30,410)
Accumulated Other Comprehensive Income (12,143) (14,231)
Total Shareholders' Equity 229,758 216,546
$820,912 $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 SIX MONTHS ENDED
May 4, May 5, May 4, May 5,
2002 2001 2002 2001
Net Sales $233,204 $252,099 $423,872 $492,734
Costs and Expenses
Cost of sales 197,146 209,393 360,653 410,374
Selling and administrative 14,713 15,074 27,287 29,177
Amortization of intangibles - 2,040 - 4,090
211,859 226,507 387,940 443,641
Operating Earnings 21,345 25,592 35,932 49,093
Interest 4,289 6,702 8,658 13,843
Distributions on
preferred securities of
Spartech capital trusts 2,563 2,563 5,125 5,125
Earnings Before Income Taxes 14,493 16,327 22,149 30,125
Income Taxes 5,419 6,204 8,213 11,447
Net Earnings $ 9,074 $ 10,123 $ 13,936 $ 18,678
Net Earnings Per Common Share:
Basic $ .34 $ .38 $ .52 $ .70
Diluted $ .33 $ .37 $ .51 $ .69
Dividends Per Common Share $ .095 $ .095 $ .190 $ .190
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
SIX MONTHS ENDED
May 4, 2002 May 5, 2001
Cash Flows From Operating Activities
Net earnings $ 13,936 $ 18,678
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 13,541 18,081
Change in current assets and
liabilities, net of effects of
acquisitions 8,614 (4,926)
Other, net 905 203
Net cash provided by operating
activities 36,996 32,036
Cash Flows From Investing Activities
Capital expenditures (8,576) (8,568)
Retirement of assets 492 448
Business (Acquisitions)/Divestitures, net (2,000) -
Net cash used for investing activities (10,084) (8,120)
Cash Flows From Financing Activities
Bank borrowings for business acquisitions 4,690 -
Net payments on revolving
credit facilities (25,190) (15,071)
Payments on bonds and leases (201) (631)
Cash dividends on common stock (5,096) (5,065)
Stock options exercised 2,283 899
Treasury stock acquired - (5,068)
Net cash used for
financing activities (23,514) (24,936)
Effect of exchange rate changes on cash
and equivalents 17 (79)
Increase (Decrease) In Cash and Equivalents 3,415 (1,099)
Cash and Equivalents At Beginning Of Period 8,572 10,495
Cash and Equivalents At End Of Period $ 11,987 $ 9,396
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 our November
3, 2001 Annual Report on Form 10-K.
Our 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 six
months ended May 5, 2001 consists of 27 weeks, compared to the 26-week six
months ended May 4, 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 the Second 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 $6.3 million.
NOTE B - Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventories at May 4, 2002 and November 3, 2001 are comprised of the
following components:
2002 2001
Raw materials $ 55,295 $ 55,803
Finished goods 38,082 37,288
$ 93,377 $ 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. Effective November 4, 2001
the Company has adopted SFAS No. 142, as such goodwill is no
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
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.
In performing step one of the test, we 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 based on historical
financial information and management's estimates of future results. We compared
the value of each reporting unit to the carrying amount of its net assets
including goodwill. In accordance with the transition provisions of SFAS No.
142, we have 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 our reporting units exceeded their carrying amount, therefore no impairment
charge was recorded upon adoption.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Goodwill and other Intangible Assets as of November 4, 2001 and May 4, 2002
are summarized in the following table:
May 4, 2002 November 4, 2001
Gross Accum- Net Gross Accum- Net
Reporting Carrying ulated Carrying Carrying ulated Carrying
Segment Amount Amort- Amount Amount Amort- Amount
ization ization
Goodwill
Custom Sheet 200,181 17,281 182,900 200,181 17,281 182,900
& Rollstock
Color & 82,621 10,559 72,062 82,621 10,559 72,062
Specialty
Compounds
Molded & 44,117 6,503 37,614 44,117 6,503
Profile 37,614
Products
$ 321,689 $ (29,113) $ 292,576 $ 321,689 $ (29,113) $292,576
Intangible $ 2,500 $ (46) $ 2,454 $ - $ -
assets with $ -
finite lives
Amortization expense for the three months ended May 4, 2002 was $21 which
represented the amortization relating to the identified intangible assets
required to be amortized under SFAS No. 142. For each of 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 second quarter and six months
ended May 5, 2001 as if SFAS No. 142 had been adopted at the beginning of the
prior year is presented below.
3 Months 6 Months
2001 2001
Reported net income $ 10,123 $ 18,678
Add back: Goodwill amortization (net of tax) $ 1,304 $ 2,614
Adjusted net income $ 11,427 $ 21,292
Basic net income per share:
Reported net income $ .38 $ .70
Adjusted net income $ .44 $ .82
Diluted net income per share:
Reported net income $ .37 $ .69
Adjusted net income $ .42 $ .80
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE D - Cash Flow Information
Supplemental information on cash flows and noncash transactions for the
quarters ended May 4, 2002 and May 5, 2001 is as follows:
2002 2001
Cash paid for:
Interest $ 14,671 $ 17,715
Income taxes $ 974 $ 6,159
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 quarter and six
months ended May 4, 2002 and May 5, 2001 is as follows:
QUARTER ENDED SIX MONTHS ENDED
May 4, May 5, May 4, May 5,
2002 2001 2002 2001
Net Earnings $ 9,074 $ 10,123 $ 13,936 $ 18,678
Foreign currency
translation adjustments 485 (1,220) 424 (458)
Cash flow hedge adjustments 117 (2,054) 1,664 (4,030)
Total Comprehensive Income $ 9,676 $ 6,849 $ 16,024 $ 14,190
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Note F - Segment Information
The Company's forty-four facilities are organized into three reportable
segments based on the nature of the products manufactured.
QUARTER SIX MONTHS
ENDED
N 2002 2001 2002 2001
e
t
S
a
l
e
s
*
Custom Sheet & Rollstock $158,184 $166,726 $286,221 $ 322,655
Color & Specialty 57,379 59,423 106,304 117,631
Compounds
Molded & Profile Products 17,641 25,950 31,347 52,448
Total Net Sales $233,204 $252,099 $423,872 $ 492,734
O
p
e
r
a
t
i
n
g
E
a
r
n
i
n
g
s
Custom Sheet & Rollstock $ 16,118 $ 18,583 $ 27,276 $ 35,251
Color & Specialty 6,531 6,629 11,575 12,816
Compounds
Molded & Profile Products 1,630 2,946 2,442 5,318
Corporate/Other (2,934) (2,566) (5,361) (4,292)
Total Operating $ 21,345 $ 25,592 $ 35,932 $ 49,093
Earnings
* Excludes intersegment sales of $7,468 and $6,794 for the three months
ended May 4, 2002 and May 5, 2001, respectively, and $12,150 and $15,335
for the six months ended May 4, 2002 and May 5, 2001, respectively,
primarily from the color & 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
company's fiscal year 2003).
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
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.
Note H - Subsequent Events
Acquisitions
On June 4, 2002, Spartech completed an acquisition for all of the stock of
GWB Plastics Holding Co. which is the parent of two operating companies: 1)
UVTEC, a manufacturer of specialty plastic additives, concentrates and
engineered compounds, and 2)PolyTech South, a provider of color concentrates and
specialty additives. These businesses generated net sales of more than $40
million during the last twelve months. The cash price for this acquisition is
approximately $48.5 million (subject to working capital adjustments) and will be
primarily financed from the net proceeds of our equity offering that was
completed on May 30, 2002.
Equity Offering
On May 30, 2002 Spartech completed a common stock offering ($22 per share)
for 2.4 million shares. The approximately $50 million in proceeds (net of
expenses) received was used to finance the aforementioned strategic acquisition
and to reduce bank debt. The offering increased the company's issued common
shares 8.6% to 30,460,682.
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 six months ended May 4, 2002 consisted of 27 weeks, a 4% shorter
operating period than the 26-week six months ended May 5, 2001. The operating
results presented below include discussions on a percentage of sales basis for
more meaningful comparisons.
Net sales were $233.2 million and $423.9 million for the quarter and six
months ended May 4, 2002, representing a 7% and 14% decrease from the similar
periods in 2001, an approximate 4% and 8% 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.
Net sales of the Custom Sheet & Rollstock segment decreased 11% to $286.2
million for the first six months of 2002 from the $322.7 million in the prior
year period primarily due to lower first quarter volume, lower average resin
costs and the extra week reported in 2001. Net sales of the Color & Specialty
Compounds segment decreased to $106.3 million from $117.6 million in the first
six months 2002. Volume for the group was flat compared to the prior year after
a second quarter increase of 5% over the comparable period last year. The
Molded & Profile Products segment net sales decreased to $31.3 million from
$52.4 million in the first six months 2001 following the July 2001 sale of the
segment's custom molded products businesses.
Cost of sales was $360.7 million for the first six months 2002, compared
with $410.4 million for the first six months of 2001, but increased as a
percentage of net sales to 85.1% for 2002 from 83.3% for 2001. Lower sales due
to raw material price decreases and low first quarter demand resulted in the
increased Cost of Sales percentage.
Selling and administrative expenses of $27.3 million for the first six
months of 2002 decreased from $29.2 million for the first six months of 2001,
but increased to 6.4% of net sales from 5.9% in the first six months of 2001.
The costs in this category are primarily fixed, resulting in a similar cost
level being incurred despite the lower level of sales during the six months of
2002.
Operating earnings for the six months ended May 4, 2002 were $35.9
million, or 8.5% of net sales, compared to $49.1 million or 10% of net sales for
the corresponding period of 2001. The Custom Sheet & Rollstock Segment
experienced lower first quarter volumes and changes in product mix partially
offset by focused cost reduction efforts, supply-chain management initiatives
and the elimination of $3.2 million in goodwill amortization charges, which
resulted in an operating margin of 9.5% compared to 10.9% in 2001. The Color &
Specialty Compounds segment's operating margin remained unchanged at 10.9% for
the first six months of 2002 from 2001. 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 7.8% compared to 10.1% in 2001.
Interest expense and distributions on preferred securities of $13.8 million
for the first six months of 2002 decreased from $19.0 million from the first six
months of 2001 as a result of $88.9 million of debt repayments in last 18 months
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.
Our effective tax rate was 37.1% for the first six months of 2002 compared
to 38.0% in the similar period of 2001, reflecting an improvement in our
combined state tax rate and ongoing benefits from research and development
credits.
Net earnings of $13.9 million, or $.51 per diluted share, in the first six
months 2002 compared to $18.7 million, or $.69 per diluted share, in the first
six months 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 $4.1 million in the prior year six months ended May 5,
2001. Adjusted for the elimination of goodwill, diluted earnings per share for
the six months ended May 4, 2001 would have been $.80.
Other Matters
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 our 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. We are 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. We generally
manage 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
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. Cash flows for the periods indicated are
summarized as follows:
Six Months
2002 2001
(Dollars in millions)
Net cash provided by
operating activities $ 37.0 $ 32.0
Net cash used for
investing activities $ (10.1) $ (8.1)
Net cash used for
financing activities $ (23.5) $ (24.9)
Increase (Decrease) in cash
and equivalents $ 3.4 $ (1.1)
Operating cash flow provided by net earnings decreased 25%, to $13.9
million for the first six months 2002 from $18.7 million for the first six
months 2001. Operating cash flows used by changes in accounts receivable
totaled $8.1 million due to seasonally higher sales in the second quarter.
Operating cash flows provided by changes in inventory totaled $.4 million.
Operating cash flows provided by changes in accounts payable totaled $9.3
million.
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 first six months 2002 and 2001
were $8.6 million, and we anticipate total capital expenditures of approximately
$20 million for fiscal 2002. Our 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 $4.7 million for the first quarter of
fiscal 2002 and proceeds from the sale of the custom molded products business
was $2.7 million.
The cash flows used for financing activities was $23.5 million for the six
months of 2002. The primary activity was the net bank repayments of $25.4
million, borrowings for acquisitions of $4.7 million, cash dividend payments of
$5.1 million, and stock option proceeds of $2.3 million.
Financing Arrangements
The following table summarizes our obligations under financing arrangements
and lease commitments as of May 4, 2002:
Type of Total Less Than 1-3 Years More Than 5 Years or
Commitment Amount 1 Year 3 Years More
Committed But Less
Than 5
Years
Bank Credit $ 155,000 $ - $ - $ 155,000 $ -
Facilities
Unsecured Notes 103,572 17,857 50,716 28,570 6,429
Other Debt 9,441 247 287 283 8,624
Obligations
Convertible 150,000 - - - 150,000
Debentures
Operating Lease 25,947 5,909 9,983 5,989 4,066
Commitments
Standby Letters 11,936 - - - -
of Credit
Total $ 455,896 $ 24,013 $ 60,986 $ 189,842 $ 169,119
Contractual Cash
Obligations
At May 4, 2002, our total outstanding borrowings under the bank credit
facilities were $155.0 million at a weighted average rate of 6.4% (including the
effect of an interest rate swap). We had $92.3 million in total availability
under the $260 million facilities, however this availability was limited to
$36.3 million due to bank covenant restrictions. We anticipate that cash flows
from operations, together with the financing and borrowings under our bank
credit facility, will satisfy our working capital need, regular quarterly
dividends, and planned capital expenditures for the next year.
If our 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. Our 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 and debt
service ratios and net worth levels. In addition, our combined payment of
dividends on our common stock and the repurchase of common shares for treasury
is limited to 60% of our cumulative consolidated net income since November 1,
1997. At May 4, 2002, we had approximately $8.0 million of unrestricted
retained earnings available for such payments. Future dividends are expected to
be paid from future earnings. While we were 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
We prepare our 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 we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the
following:
* Revenue Recognition - We recognize revenue as the product is shipped and
title passes to the customer. We manufacture our products either to standard
specifications or to custom specifications agreed on with the customer in
advance, and we inspect our products prior to shipment to ensure that these
specifications are met. We continuously monitor and track product returns,
which have historically been within our expectations and the provisions
established. Despite our 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 - We perform 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 - We value 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. We also buy 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 - We have 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 - We review 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. We recognize 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 our 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 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 (our fiscal year 2003).
We will adopt SFAF No. 143 at the beginning of our 2003 fiscal year and we do
not believe it will have a material effect on our 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 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 recognition and
measurement of the impairment of long-lived assets to be held and used and for
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 (our fiscal
2003). We do not believe that the adoption of SFAS No. 144 will have a material
effect on our financial position or results of operation.
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 4 Submission of Matters to a Vote of Security Holders
At
the Annual Shareholders meeting held March 13, 2002, Mr. Ralph B.
Andy was elected as a Director of the Company with 24,773,970
votes for, 130,104 against, and 1,454,887 abstentions. Mr.
Jackson W. Robinson was also elected as a director of the Company
with 24,899,356 votes for, 4,718 against, and 1,454,887
abstentions. Mr. Lloyd E. Campbell was also elected as a
Director of the Company with 24,868,132 votes for, 35,941
against, and 1,454,887 abstentions. Arthur Andersen LLP was
ratified as the Company's auditor with 25,803,179 votes for,
511,595 against, and 46,193 abstentions.
Item 6 (a). Exhibits
11 Statement re Computation of Per Share Earnings
Item 6 (b). Reports on Form 8-K
A report on Form 8-K, dated May 3, 2002 announcing a Change in Registrants
Certifying Accountant from Arthur Andersen to Ernst and Young filed with the
Commission on May 3, 2002 and incorporated herein by reference.
A report on Form 8-K, dated May 30, 2002 announcing the second quarter
2002 earnings and to file an underwriting agreement filed with the Commission
on May 30, 2002 and incorporated herein by reference.
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: June 5, 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)