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 quarter ended August 3, 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 August 3, 2002:
Common Stock, $.75 par value per share 29,283,292
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
August 3, 2002
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of August 3, 2002 and November 3, 2001 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter and nine months
ended August 3, 2002 and August 4, 2001 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for nine months ended
August 3, 2002 and August 4, 2001 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION 22
SIGNATURES AND CERTIFICATIONS 23
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands, except share amounts)
ASSETS
Aug. 3, 2002
(unaudited) Nov. 3, 2001
Current Assets
Cash and equivalents $ 10,054 $ 8,572
Receivables, net 126,189 119,074
Inventories 101,240 93,091
Prepayments and other 5,999 9,333
Total Current Assets 243,482 230,070
Property, Plant and Equipment 409,508 389,072
Less accumulated depreciation 135,808 114,917
Net Property, Plant and Equipment 273,700 274,155
Goodwill and Other Intangible Assets 336,070 292,576
Other Assets 18,110 18,302
$871,362 $815,103
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 18,076 $ 18,225
Accounts payable 86,321 76,131
Accrued liabilities 38,587 24,568
Total Current Liabilities 142,984 118,924
Long-Term Debt, Less Current Maturities 232,476 270,489
Other Liabilities 59,967 59,144
Total Long-Term Liabilities 292,443 329,633
Company-obligated manditorily redeemable
convertible preferred securities of
Spartech Capital Trust holding solely
convertible subordinated debentures 150,000 150,000
Shareholders' Equity
Common stock, 30,460,682 and 28,067,023
shares issued in 2002
and 2001, respectively 22,846 21,039
Contributed capital 141,820 94,239
Retained earnings 163,446 145,909
Treasury stock, at cost, 1,177,390 shares
in 2002 and 1,367,437 shares in 2001 (28,617) (30,410)
Accumulated other comprehensive income (13,560) (14,231)
Total Shareholders' Equity 285,935 216,546
$871,362 $815,103
See accompanying notes to consolidated condensed 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
Aug. 3, Aug. 4, Aug. 3, Aug. 4,
2002 2001 2002 2001
Net Sales $237,242 $228,501 $661,114 $721,235
Costs and Expenses
Cost of sales 198,990 191,977 559,643 602,351
Selling and administrative 13,507 13,865 40,794 43,042
Write-down of long lived - 5,550 - 5,550
assets
Amortization of goodwill - 2,040 - 6,130
212,497 213,432 600,437 657,073
Operating Earnings 24,745 15,069 60,677 64,162
Interest 4,094 5,477 12,752 19,320
Distributions on
preferred securities of
Spartech capital trusts 2,563 2,563 7,688 7,688
Earnings Before Income Taxes 18,088 7,029 40,237 37,154
Income taxes 6,602 2,370 14,815 13,817
Net Earnings $ 11,486 $ 4,659 $ 25,422 $ 23,337
Net Earnings Per Common Share:
Basic $ .40 $ .17 $ .93 $ .87
Diluted $ .39 $ .17 $ .91 $ .87
Dividends Per Common Share $ .095 $ .095 $ .285 $ .285
See accompanying notes to consolidated condensed financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
NINE MONTHS ENDED
Aug. 3, 2002 Aug.4, 2001
Cash Flows From Operating Activities
Net earnings $ 25,422 $ 23,337
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 20,715 27,089
Write-down of long-lived assets - 5,550
Change in current assets and
liabilities, net of effects of
acquisitions 13,011 (12,049)
Other, net 4,282 528
Net cash provided by operating
activities 63,430 44,455
Cash Flows From Investing Activities
Capital expenditures (17,236) (11,830)
Retirement of assets 492 1,175
Business (Acquisitions)/Divestitures, net (50,337) 20,721
Net cash (used for) provided by
investing activities (67,081) 10,066
Cash Flows From Financing Activities
Bank borrowings (payments) for business
Acquisitions/ Dispositions 4,690 (20,721)
Net payments on revolving
credit facilities (42,590) (22,640)
Payments on bonds and leases (262) (762)
Issuance of common stock 50,663 -
Cash dividends on common stock (7,886) (7,604)
Stock options exercised 3,114 1,189
Treasury stock acquired (2,596) (5,287)
Net cash provided by (used for)
financing activities 5,133 (55,825)
Increase (Decrease) in Cash and Equivalents 1,482 (1,304)
Cash and Equivalents at Beginning Of Period 8,572 10,495
Cash and Equivalents at End Of Period $ 10,054 $ 9,191
See accompanying notes to consolidated condensed 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 notes 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
nine months ended August 4, 2001 consisted of 40 weeks, compared to the 39-
week nine months ended August 3, 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 third quarter and nine months 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 $5.7 million
for the third quarter and $17.9 million for the nine months ended August 4,
2001.
NOTE B - Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventories at August 3, 2002 and November 3, 2001 are comprised
of the following components:
2002 2001
Raw materials $ 59,123 $ 55,803
Finished goods 42,117 37,288
$101,240 $ 93,091
NOTE C - Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board (FASB) 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 as
such, goodwill
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
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.
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.
We will perform our annual impairment testing as required by SFAS 142
during our fourth quarter of 2002. The annual test will consist of
revaluing several of the Company's reporting units for which substantial
excess was not present between the fair value of the reporting unit and
their net asset values.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
On June 4, 2002, the Company completed the acquisition of GWB Plastics
Holding Co. (GWB) for approximately $48.5 million (see Note H -
Acquisitions). The excess purchase price over the fair value of tangible
assets purchased was approximately $41 million. The Company has engaged an
independent appraisal firm to value the identified intangible assets. The
appraisal, once completed, will result in the allocation of this amount to
its components of goodwill and certain other intangible assets. The
Company currently estimates that the amount to be allocated to goodwill
will exceed $20 million.
Goodwill as of August 3, 2002 and November 4, 2001 are summarized in
the following table, excluding that acquired in the GWB Plastics Holding
Co. transaction discussed below:
August 3, November 4,
2002 2001
Net Carrying Net Carrying
Reporting Segment Amount Amount
Goodwill
Custom Sheet & Rollstock $185,805 $182,900
Color & Specialty Compounds 72,062 72,062
Molded & Profile Products 37,614 37,614
$ 295,481 $292,576
A reclassification of $2,905 was made from Other Intangible Assets
into Goodwill within the Custom Sheet & Rollstock reporting segment during
the quarter related to a current year acquisition.
As required by SFAS No. 142, the results for the prior year have not
been restated. A reconciliation of net income for the third quarter and
nine months ended August 3, 2001 as if SFAS No. 142 had been adopted at the
beginning of the prior year is presented below.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Third Nine
Quarter Months
2001 2001
Reported net income $ 4,659 $ 23,337
Add back: goodwill amortization (net of tax) 1,304 3,917
Adjusted net income $ 5,963 $ 27,254
Basic net income per share:
Reported net income $ .17 $ .87
Adjusted net income $ .22 $ 1.04
Diluted net income per share:
Reported net income $ .17 $ .87
Adjusted net income $ .21 $ 1.02
NOTE D - Cash Flow Information
Supplemental information on cash flows and noncash transactions for
the quarters ended August 3, 2002 and August 4, 2001 is as follows:
2002 2001
Cash paid for:
Interest $ 19,931 $ 23,868
Income taxes $ 4,461 $ 9,254
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
nine months ended August 3, 2002 and August 4, 2001 is as follows:
QUARTER ENDED NINE MONTHS ENDED
Aug. 3, Aug. 4, Aug. 3, Aug. 4,
2002 2001 2002 2001
Net earnings $ 11,486 $ 4,659 $ 25,422 $ 23,337
Foreign currency
translation adjustments 38 (1,758) 462 (2,216)
Cash flow hedge adjustments (1,455) (612) 209 (4,642)
Total comprehensive income $ 10,069 $ 2,289 $ 26,093 $ 16,479
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-three facilities are organized into three reportable
segments based on the nature of the products manufactured.
QUARTER NINE MONTHS
ENDED
8/3/02 8/4/01 8/3/02 8/4/01
Net Sales*
Custom Sheet & Rollstock $157,635 $151,730 $443,856 $ 474,385
Color & Specialty 63,124 55,276 169,428 172,907
Compounds
Molded & Profile Products 16,483 21,495 47,830 73,943
Total Net Sales $237,242 $228,501 $661,114 $ 721,235
Operating Earnings
Custom Sheet & Rollstock $ 19,103 $ 17,457 $ 46,379 $ 52,708
Color & Specialty 6,921 6,077 18,496 18,893
Compounds
Molded & Profile Products 1,234 2,276 3,676 7,594
Corporate/Other (2,513) (10,741) (7,874) (15,033)
Total Operating $ 24,745 $ 15,069 $ 60,677 $ 64,162
Earnings
* Excludes intersegment sales of $7,487 and $6,631 for the three
months ended August 3, 2002 and August 4, 2001, respectively,
and $19,637 and $21,966 for the nine months ended August 3,
2002 and August 4, 2001, respectively, 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 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
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.
In April 2002, the FASB approved for issuance SFAS No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. Among other things, SFAS No. 145 rescinds SFAS
No. 4, which required all gains and losses from extinguishment of debt to
be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. Under SFAS No. 145, the criteria in Accounting
Principles Board (APB) No. 30 will now be used to classify those gains and
losses. The adoption of SFAS No. 145 will not have a material effect on
our consolidated financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. This statement will become effective for exit
or disposal activities initiated after December 31, 2002. The adoption of
SFAS No. 146 will not have a material effect on our consolidated financial
position or results of operations.
NOTE H - Acquisitions
On June 4, 2002, Spartech completed an acquisition for all of the
stock of GWB Plastics Holding Co. (GWB) which is the parent of two
operating companies, UVTEC and PolyTech South. These businesses, which
generated net sales of approximately $40 million for their last twelve
months prior to acquisition, will add approximately 70 million pounds of
production capacity to Spartech's current 11-plant Color & Specialty
Compounds segment as well as expand our regional diversity by adding a
second facility in the south central U.S. Benefits from the combination of
UVTEC and PolyTech South with our Spartech Polycom operations include: (1)
the addition of several polyolefin products with exceptional flame
retardant and UV performance; (2) the broadening of our technical and
marketing knowledge to serve the growing specialty compounds segment; and
(3) enhance logistics and warehouse system to better serve our combined
customer base. The preliminary allocation of the approximately $48.5
million purchase price resulted in $41 million of goodwill and other
intangible assets. The allocation to individual intangible assets and
goodwill will be performed when formal appraisals are completed. The
acquisition was accounted for using the purchase method, and as such, the
results of the acquired company have been consolidated with the Company's
financial statements effective as of the acquisition date. The purchase
was financed through proceeds from our May 30, 2002 common stock offering
of 2.4 million shares at $22 per common share.
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 nine months ended August 3, 2002 consisted of 39 weeks, a 3%
shorter operating period than the 40-week nine months ended August 4, 2001.
The operating results presented below include discussions on a percentage
of sales basis for more meaningful comparisons.
Net sales were $237.2 million for the quarter ended August 3, 2002
representing a 4% increase over the prior year (a 3% increase excluding the
effects of acquisitions and divestitures) and $661.1 million for the nine
months ended August 3, 2002, representing an 8% decrease from the similar
periods in 2001 (a 4% decrease excluding the effects of acquisitions,
divestitures and the additional week reported in the first quarter of
2001).
The Company's fiscal 2002 third quarter operating earnings were $24.7
million (10.4% of sales) as compared to the $15.1 million (6.6% of sales)
reported in 2001. The third quarter of fiscal 2001 included $9.1 million
in non-recurring expenses and $2.0 million of goodwill amortization that
were not incurred in the third quarter of 2002. The third quarter 2002
operating earnings decreased 5% after adding back these items to the prior
year's results. Operating earnings for the nine months ended August 3,
2002 were $60.7 million (9.2% of sales) as compared to the reported $64.2
million (8.9% of sales) in the first nine months of 2001. The operating
earnings for nine months in 2001 were $79.4 million (11.0% of sales) after
adding back the $9.1 million of non-recurring expenses and $6.1 million of
goodwill amortization that were not incurred during 2002. The lower
comparable operating margin for the third quarter was the result of an
unfavorable mix of products sold in the Custom Sheet & Rollstock group, and
continued overall weakness in the Molded & Profile Products segment. The
nine month operating margin for fiscal 2002 was further impacted by lower
overall volume, especially in the first quarter of the year. Year-over-
year volume comparisons have improved in both the second and third quarter
of fiscal 2002 after the weak first quarter, and we expect that trend to
continue through the fourth quarter of the fiscal year. Resin prices began
to rise during our third quarter, and we expect further increases during
the fourth quarter of 2002. Competitive situations hinder our ability to
pass along these cost increases, in full, through increased selling prices
which may reduce our operating margin during the fourth quarter. We expect
to offset most of these increases with past and present cost reduction
efforts and increased volumes.
Cost of sales was $559.6 million for the nine months ended August 3,
2002, compared with $598.8 million before non-recurring expenses for the
first nine months of 2001, but increased as a percentage of net sales to
84.7% for 2002 from 83.5% for 2001. Lower sales prices due to raw material
price decreases and an unfavorable mix of products sold as well as low
first quarter demand, resulted in the increased cost of sales percentage.
Selling and administrative expenses of $40.8 million for the first
nine months of 2002 decreased from $43.0 million for the first nine months
of 2001, but increased to 6.2% of net sales from 6.0% in the first nine
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 nine months of 2002. These expenses decreased to 5.7% of sales
in the third quarter of 2002 as sales volumes continued to improve and some
of our cost reduction programs benefited our results.
In the third quarter of 2001, the Company recorded $9.1 million in non-
recurring pre-tax expenses for costs incurred on the operations slated for
closedown, including the writedowns for the impairment of long-lived
assets. The non-recurring expenses consisted of $5.6 million related to
the impairment of long-lived assets and $3.5 million related to severance,
phase out, and other exit costs recorded in cost of sales. The impairment
charges adjusted the carrying values of these assets to fair value less the
cost to sell. The fair value was determined by using current selling
prices for similar assets. All the asset impairment charges and the
majority of the non-recurring expenses were reflected as a Corporate/Other
operating expense.
Interest expense and distributions on preferred securities of $20.4
million for the first nine months of 2002 decreased from $27.0 million form
the first nine months of 2001 as a result of $106.4 million of debt
repayments in the last 21 months generated from operating cash flow, the
July 2001 sale of the custom molded products business, the May 2002
secondary stock offering, the effect of the extra week in the first quarter
of 2001, and a reduction in interest rates.
Our effective tax rate was 36.8% for the first nine months of 2002
compared to 37.2% 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 $25.4 million, or $.91 per diluted share, in the first
nine months 2002 compared to $23.3 million, or $.87 per diluted share, in
the first nine 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 $6.1 million in the
prior year nine months ended August 4, 2001. Adjusted for the elimination
of goodwill, diluted earnings per share for the nine months ended August 4,
2001 would have been $1.02.
Segment Results
Net sales of the Custom Sheet & Rollstock segment decreased 6% to
$443.9 million for the nine months ended August 3, 2002 from the $474.4
million in the prior year period primarily due to changes in price/mix of
products sold, lower first quarter volume and the extra week reported in
2001. Net sales of the Color & Specialty Compounds segment decreased 2% to
$169.4 million from $172.9 million in the first nine months 2001. Third
quarter sales increased 14% as the group benefited from the acquisition of
PolyTech South and UVTEC (12% increase) and internal sales growth (5%
increase) partially offset by a negative price/mix effect in the quarter
(3% decrease). The Molded & Profile Products segment net sales decreased
to $47.8 million from $73.9 million in the first nine months 2001 following
the July 2001 sale of the segment's custom molded products businesses.
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 $4.8 million in goodwill amortization charges, which resulted in an
operating margin of 10.4% for the first nine months of 2002 compared to
11.1% in the first nine months of 2001. The Color & Specialty Compounds
segment's operating margin remained unchanged at 10.9% for the first nine
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 7.7% compared to 10.3% in 2001.
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:
Nine Months
2002 2001
(Dollars in millions)
Net cash provided by
operating activities $ 63.4 $ 44.5
Net cash (used for) provided by
investing activities $ (67.1) $ 10.1
Net cash provided by (used for)
financing activities $ 5.1 $ (55.8)
Increase (decrease) in cash
and equivalents $ 1.5 $ (1.3)
Operating cash flow provided by net earnings plus depreciation and
amortization decreased 9%, to $46.1 million for the first nine months 2002
from $50.4 million for the first nine months 2001. Operating cash flows
used by changes in accounts receivable totaled $3.1 million due to
seasonally higher sales in the third quarter. Operating cash flows used by
changes in inventory totaled $4.5 million due to higher resin prices and
selective pre-buys of raw materials ahead of price increases. Operating
cash flows provided by changes in accounts payable totaled $6.8 million due
to the seasonally higher sales levels and the increased resin pricing.
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 nine
months 2002 and 2001 were $17.2 million and $11.8 million, respecitvely,
and we anticipate total capital expenditures of approximately $23 million
for fiscal 2002. Acquisitions/divestitures were our purchase of
ProForm, a bath and shower surround
manufacturer, our investment in X-Core, LLC, a custom engineered wheels
business and our purchase of GWB totaled $53.0 million for the first nine
months of fiscal 2002 and final settlement of proceeds from the sale of the
custom molded products business of $2.7 million which occurred during
fiscal 2001.
The cash flows provided by financing activities were $5.1 million for
the nine months of 2002. The primary activity was the net bank repayments
of $42.9 million, borrowings for acquisitions of $4.7 million, cash
dividend payments of $7.9 million, stock option proceeds of $3.1 million,
and treasury stock purchases of $2.6 million, and the issuance of common
stock.
Financing Arrangements
On May 30, 2002, we announced the completion of a secondary public
offering of 8,250,000 shares of our common stock. These shares represented
2,115,000 shares of the Company and 6,135,000 shares offered by two selling
shareholders, Vita International Limited (6,000,000), a wholly owned
subsidiary of British Vita PLC, Inc. and RBA Partners, L.P. (135,000), an
entity controlled by Ralph B. Andy, a non-employee director of Spartech
Corporation. In addition to these shares offered, the Company sold an
additional 309,375 shares and Vita sold an additional 928,125 shares to the
underwriters to cover over-allotments. The stock was sold to the public
at $22.00 per share. The offering was led by an underwriting group managed
by Goldman, Sachs & Co., Merrill Lynch & Co., First Analysis Securities
Corporation, McDonald Investments Inc. and Commerce Capital Markets. The
net proceeds received by the Company from the sale of common shares, $50.7
million, was used to finance the GWB acquisition and repay bank credit
facility borrowings.
The following table summarizes our obligations under financing
arrangements and lease commitments as of August 3, 2002:
Type of Commitment Total Less Than 1-3 Years More Than 5 Years or
Amount 1 Year 3 Years More
Committed But Less
Than 5
Years
Bank credit $ 137,600 $ - $ - $ 137,600 $ -
facilities
Unsecured notes 103,571 17,857 50,716 28,570 6,428
Other debt 9,381 219 282 289 8,591
obligations
Convertible 150,000 - - - 150,000
debentures
Operating lease 32,398 7,433 10,432 6,638 7,895
commitments
Standby letters 12,736 - - - -
of credit
Total Contractual $ 445,686 $ 25,509 $ 61,430 $ 173,097 $ 172,914
Cash Obligations
At August 3, 2002, our total outstanding borrowings under the bank
credit facilities were $137.6 million at a weighted average rate of 6.8%
(including the effect of an interest rate swap). We had $106.0 million in
total availability under the $256 million in credit facilities, however
this availability was limited to $83.9 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 needs, 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 August 3,
2002, we had approximately $36.9 million of unrestricted retained earnings
available for such payments. 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 amortizes 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 SFAS 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.
In April 2002, the FASB approved for issuance SFAS No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. Among other things, SFAS No. 145 rescinds SFAS
No. 4, which required all gains and losses from extinguishment of debt to
be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. Under SFAS No. 145, the criteria in Accounting
Principles Board (APB) No. 30 will now be used to classify those gains and
losses. The adoption of SFAS No. 145 will not have a material effect on
our consolidated financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. This statement will become effective for exit
or disposal activities initiated after December 31, 2002. The adoption of
SFAS No. 146 will not have a material effect on our consolidated 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
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: September 9, 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)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned certifies that this periodic report fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934 and that the information contained in this quarterly
report on Form 10-Q fairly presents, in all material respects, the
financial condition and results of operations of Spartech Corporation.
Date: September 9, 2002
/s/Bradley B. Buechler
Bradley B. Buechler
Chairman, President and Chief
Executive Officer
/s/Randy C. Martin
Randy C. Martin
Executive Vice President and Chief
Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bradley B. Buechler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Spartech
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
Date: September 9, 2002
/s/Bradley B. Buechler
Bradley B. Buechler
Chairman, President and Chief
Executive Officer (Principal
Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Randy C. Martin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Spartech
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
Date: September 9, 2002
/s/Randy C. Martin
Randy C. Martin
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)