SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 3, 2003
or
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
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 check mark 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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No
Number of shares outstanding as of May 3, 2003:
Common Stock, $.75 par value per share 29,235,148
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
May 3, 2003
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of May 3, 2003 and November 2, 2002 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter and six months
ended May 3, 2003 and May 4, 2002 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for six months ended
May 3, 2003 and May 4, 2002 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
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 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 3, 2003
(unaudited) Nov. 2, 2002
Current Assets
Cash and equivalents $ 6,888 $ 7,511
Receivables, net 148,336 124,966
Inventories 106,565 95,190
Prepayments and other 7,116 4,549
-------- --------
Total Current Assets 268,905 232,216
Property, Plant and Equipment 441,302 422,520
Less accumulated depreciation 157,520 142,046
-------- --------
Net Property, Plant and Equipment 283,782 280,474
Goodwill 328,145 318,841
Other Intangible Assets 25,126 16,360
Other Assets 16,531 17,363
-------- --------
$922,489 $865,254
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 17,989 $ 21,087
Accounts payable 90,575 83,668
Accrued liabilities 34,435 34,173
-------- --------
Total Current Liabilities 142,999 138,928
-------- --------
Long-Term Debt, Less Current Maturities 256,136 217,245
Other Liabilities 68,366 68,383
-------- --------
Total Long-Term Liabilities 324,502 285,628
-------- --------
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
shares issued in 2003 and 2002 22,846 22,846
Contributed capital 140,062 140,213
Retained earnings 180,368 169,518
Treasury stock, at cost, 1,225,534 shares
in 2003 and 1,175,228 shares in 2002 (29,274) (28,701)
Accumulated Other Comprehensive Income (9,014) (13,178)
-------- --------
Total Shareholders' Equity 304,988 290,698
-------- --------
$922,489 $865,254
======== ========
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 SIX MONTHS ENDED
May 3, May 4, May 3, May 4,
2003 2002 2003 2002
--------- -------- -------- --------
Net Sales $250,488 $233,204 $464,188 $423,872
-------- -------- -------- --------
Costs and Expenses
Cost of sales 214,453 197,146 398,923 360,653
Selling and administrative 13,035 14,713 26,030 27,287
Amortization of intangibles 544 - 1,036 -
-------- -------- -------- --------
228,032 211,859 425,989 387,940
-------- -------- -------- --------
Operating Earnings 22,456 21,345 38,199 35,932
Interest 3,702 4,289 7,246 8,658
Distributions on
preferred securities of
Spartech Capital Trusts 2,563 2,563 5,125 5,125
-------- -------- -------- --------
Earnings Before Income Taxes 16,191 14,493 25,828 22,149
Income Taxes 5,650 5,419 9,129 8,213
-------- -------- -------- --------
Net Earnings $ 10,541 $ 9,074 $ 16,699 $ 13,936
======== ======== ======== ========
Net Earnings Per Common Share:
Basic $ .36 $ .34 $ .57 $ .52
======== ======== ======== ========
Diluted $ .36 $ .33 $ .57 $ .51
======== ================ ========
Dividends Per Common Share $ .100 $ .095 $ .200 $ .190
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
SIX MONTHS ENDED
May 3, 2003 May 4, 2002
Cash Flows from Operating Activities
Net earnings $ 16,699 $ 13,936
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation and amortization 15,406 13,541
Change in current assets and
liabilities (27,812) 8,614
Other, net 1,813 905
-------- -------
Net cash provided by
operating activities, net of
effects of acquisitions 6,106 36,996
-------- -------
Cash Flows from Investing Activities
Capital expenditures (12,013) (8,576)
Business Acquisitions (23,259) (2,000)
Retirement of assets __- 492
-------- --------
Net cash used for investing activities (35,272) (10,084)
-------- --------
Cash Flows from Financing Activities
Bank Borrowings for Business Acquisitions 23,259 4,690
Net borrowings (payments) on revolving
credit facilities 12,476 (25,190)
Payments on bonds and leases (84) (201)
Cash dividends on common stock (5,849) (5,096)
Stock options exercised 321 2,283
Treasury stock acquired __(1,767) -
-------- --------
Net cash provided by/(used for)
financing activities 28,356 (23,514)
-------- --------
Effect of exchange rate changes on cash
and equivalents 187 17
-------- --------
(Decrease)/Increase In Cash and Equivalents (623) 3,415
Cash and Equivalents at Beginning of Period _ 7,511 8,572
--------- --------
Cash and Equivalents at End of Period $ 6,888 $ 11,987
========= ========
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 footnotes thereto included in the Company's
November 2, 2002 Annual Report on Form 10-K.
The Company's fiscal year ends on the Saturday closest to October 31.
Operating results for any quarter are traditionally seasonal in nature and
are not necessarily indicative of the results expected for the full year.
NOTE B - Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventories at May 3, 2003 and November 2, 2002 are comprised of
the following components:
2003 2002
Raw materials $ 67,010 $ 55,207
Finished goods 39,555 39,983
--------- --------
$ 106,565 $ 95,190
========= ========
NOTE C - Goodwill and Other Intangible Assets
On March 31, 2003, the Company completed the acquisition of Polymer
Extruded Products, Inc. (PEP) for approximately $23.3 million (see Note H -
Acquistions). The excess purchase price over the fair value of tangible
assets purchased was approximately $18.9 million. Based on initial
estimates, the company has allocated $9.1 million of the purchase price to
goodwill and $9.8 million to other intangible assets. The Company
has engaged an independent appraisal firm to formally value these
identified other intangible assets. The appraisal, once completed,
will result in an adjustment to the initial allocation to the other
intangible assets and goodwill.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
At May 3, 2003 other intangible assets are as follows:
Total Accumulated Net carrying
other amortization amount
intangible
assets
Non compete and $ 4,990 $ 971 $ 4,019
customer contracts
Product formulations $12,030 $ 672 $11,358
Other (PEP) $ 9,800 $ 51 $ 9,749
Amortization expense for the current other intangible assets over
the next five years is estimated to be: $2,582, $2,582, $2,200, $2,165,
$1,449 for the one year periods from May 2003 to April 2008.
The Company's changes in the carrying amount of goodwill for the six
months ended May 3, 2003 are as follows:
Custom Color & Molded &
Sheet Compounds Profile Total
Balance November 2, $185,805 $95,422 $37,614 $318,841
2002
Goodwill 9,075 229 - 9,304
acquired/adjusted
-------- ------- -------- --------
Balance May 3, 2003 $194,880 $95,651 $37,614 $328,145
======== ======= ======= ========
NOTE D - Cash Flow Information
Supplemental information on cash flows and noncash transactions for
the quarters ended May 3, 2003 and May 4, 2002 is as follows:
2003 2002
Cash paid for:
Interest $ 13,515 $ 14,671
======== ========
Income taxes $ 3,940 $ 974
======== ========
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 3, 2003 and May 4, 2002 is as follows:
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
QUARTER ENDED SIX MONTHS ENDED
May 3, May 4, May 3, May 4,
2003 2002 2003 2002
Net Earnings $ 10,541 $ 9,074 $ 16,699 $ 13,936
Foreign currency
translation adjustments 2,449 485 3,374 424
Cash flow hedge adjustments 337 117 790 1,664
------- -------- ------- --------
Total Comprehensive Income $ 13,327 $ 9,676 $ 20,863 $ 16,024
======== ======== ======== ========
Note F - Segment Information
Spartech's forty-six facilities are organized into three reportable
segments based primarily on the nature of the products manufactured.
QUARTER ENDED SIX MONTHS
May 3, May 4, May 3, May 4,
Net Sales * 2003 2002 2003 2002
Custom Sheet & $ 163,271 $ 158,184 $ 303,038 $ 286,221
Rollstock
Color & Specialty 67,971 57,379 127,893 106,304
Compounds
Molded & Profile 19,246 17,641 33,257 31,347
Products
--------- --------- --------- ---------
Total Net Sales $ 250,488 $ 233,204 $ 464,188 $ 423,872
========= ========= ========= =========
Operating Earnings
Custom Sheet & $ 18,041 $ 16,118 $ 30,642 $ 27,276
Rollstock
Color & Specialty 5,163 6,531 10,532 11,575
Compounds
Molded & Profile 1,928 1,630 2,468 2,442
Products
Corporate/Other (2,676) (2,934) (5,443) (5,361)
--------- --------- --------- ---------
Total Operating $ 22,456 $ 21,345 $ 38,199 $ 35,932
Earnings
========= ========= ========= ==========
* Excludes intersegment sales of $9,716 and $7,468 for the three
months ended May 3, 2003 and May 4, 2002, respectively, and $16,820
and $12,150 for the six months ended May 3, 2003 and May 4, 2002,
respectively, primarily from the color & compounds segment.
Note G - Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure, an Amendment of FASB Statement
No. 123," (SFAS 148) that provides alternative methods of transition for an
entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
disclosure provisions of SFAS 123, "Accounting for Stock-Based
Compensation" (SFAS 123) to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used on reported
results. The Company previously adopted the disclosure-only provisions of
SFAS 123. Under APB 25, no compensation cost was recognized for the
Company's stock option plans. The following table illustrates the effect
on net earnings and net earnings per share if the company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee
compensation. The fair value estimate was computed using the Black-Scholes
option-pricing model.
Quarter Ended Six Months Ended
May 3, May 4, May 3, May 4,
2003 2002 2003 2002
Net Earnings as $10,541 $ 9,074 $16,699 $13,936
Reported
Pro Forma Impact of 10 74 1,383 2,385
Expensing Stock Options
------- ------- ------ -------
Pro forma net earnings $10,531 $ 9,000 $15,316 $11,551
======= ======= ======= =======
Diluted Earnings per share:
As Reported
Basic $ 0.36 $ 0.34 $ 0.57 $ 0.52
Diluted $ 0.36 $ 0.33 $ 0.57 $ 0.51
Pro forma
Basic $ 0.36 $ 0.33 $ 0.52 $ 0.43
Diluted $ 0.36 $ 0.33 $ 0.52 $ 0.42
Assumptions Used:
Expected Dividend 2% 2% 2% 2%
Yield
Expected Volatility 35% 35% 35% 35%
Risk-Free Interest 3.47% 4.97% 3.47% 4.97%
Rates
Expected Lives 5 Years 5 Years 5 Years 5 Years
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Note H - Acquisitions
On March 31, 2003 Spartech completed the acquisition of all of the
stock of Polymer Extruded Products, Inc. (PEP) located in Newark,
New Jersey. PEP, a manufacturer of weatherable film laminates and
cellulose specialty extruded products, had annual sales of approximately
$21 million for calendar year 2002-with nearly $4 million of those sales to
Spartech's Custom Sheet & Rollstock segment. The cash paid for this
acquisition was approximately $23.3 million and was funded through our
existing bank credit facility.
Note I - Recently Issued Accounting Standards Not Yet Adopted
In May of 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
which requires certain financial instruments to be classified as a
liability, and requires them to be adjusted to their fair value.
The standard is generally effective for interim periods beginning after
June 15, 2003. The company has determined that none of its current
financial instruments fall under the scope of the statement, and therefore
its adoption will not have a material effect on the Company's financial
position or results of operations.
Items 2 and 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net sales were $250.5 million and $464.2 million for the quarter and
six months ended May 3, 2003. This represented a 7% increase (4% from
acquisitions, 2% price/mix and 1% internal pounds growth) and 10% increase
(4% from acquisitions, 2% price/mix and 4% internal growth) from the
similar period in 2002. The lower 1% growth in internal pounds sold
compared to more recent quarters is a result of econcomic uncertainty due
to the crisis in Iraq, which
occurred in the middle of our second quarter and the impact of volatility
in resin pricing, which tends to cause customers to delay orders until they
fully understand the forward pricing trends. The packaging and spa markets
have been reasonably strong for the year, while many of the other markets
have been more impacted by the generally low GDP growth rate and the Iraq
conflict.
Cost of sales were $214.5 million and $398.9 million for the quarter
and six months ended May 3, 2003, compared with $197.1 million and $360.7
million for the quarter and six months of 2002. This represented an
increase as a percentage of net sales to 85.6% and 85.9% for the quarter
and six months of 2003 from 84.5% and 85.1% for the comparable period of
2002, reflecting the effect of higher resin costs and competitive pricing
pressures. Our margins were favorably impacted by the gradual improvement
in capacity utilization from the prior year plus continued cost reduction
efforts and sales of Alloy Plastics and Product Transformations. These
positives were more than offset by the negative margin impact from
increases in resin prices and the resulting competitive pricing pressures.
Selling and administrative expenses of $13.0 million and $26.0 million
for the quarter and six months ended May 3, 2003 decreased from $14.7
million and $27.3 million for similar periods of 2002. This represented a
decrease to 5.2% and 5.6% of net sales for the quarter and six months of
2003 from 6.3% and 6.4% in the quarter and six months of 2002. These
decreases reflect the effect of cost reduction efforts, additional
provisions for doubtful accounts recorded in 2002, and the higher relative
sales dollars on the fixed expenses in this category.
Operating earnings for the quarter and six months ended May 3, 2003
increased to $22.5 million and $38.2 million but decreased to 9.0% and 8.2%
of net sales, compared to $21.3 million and $35.9 million or 9.2% and 8.5%
of net sales for the corresponding period of 2002, principally due to
competitive pricing pressures in the current sluggish economic environment
and the effect of higher resin costs.
Interest expense and distributions on preferred securities of $6.3
million and $12.4 million for the quarter and six months of 2003 decreased
from $6.9 million and $13.8 million for the quarter and six months of 2002
primarily as a result of $55.0 million of debt repayments in fiscal 2002.
Interest expense is expected to be slightly higher during the last six
months of fiscal 2003 due to the $35.3 million in borrowings for
acquisitions and capital expenditures in the first half of the year.
The Company's effective tax rates for the quarter and six months ended
May 3, 2003 were 34.9% and 35.3% compared to 37.4% and 37.1% in
corresponding periods of 2002, reflecting an improvement in our combined
state tax rate and and favorable adjustments related to final agreement
with the Internal Revenue Service regarding previously filed claims for
refunds of research and development credits.
Net earnings of $10.5 million and $16.7 million, or $.36 and $.57 per
diluted share, in the quarter and six months ended May 3, 2003 increased by
16% and 20%, respectively, from the $9.1 million and $13.9 million , or
$.33 and $.51 per diluted share, in the similar periods of 2002 as a result
of the factors noted above.
Segment Results
Net sales of the Custom Sheet & Rollstock segment increased by 3% and
6% to $163.3 million and $303.0 in the quarter and six months ended May 3,
2003 from $158.2 million and $286.2 million in the prior year primarily due
to changes in product mix, higher pricing from increases in resin costs,
and our late March acquisition of Polymer Extruded Products. Net sales of
the Color & Specialty Compounds segment increased to $68.0 million and
$127.9 million for the quarter and six months of 2003 from $57.4 million
and $106.3 million for the corresponding periods in 2002 due to an increase
in internal volume growth and the acquisition of GWB Plastics last May.
The Molded & Profile Products segment net sales increased to $19.2 million
and $33.3 million for the quarter and six months ended May 3, 2003 from
$17.6 million and $31.3 million in the similar 2002 periods.
The Custom Sheet & Rollstock segment's operating margin improved to
11.0% in the second quarter 2003 versus 10.2% in 2002 as operating results
improved significantly at our Spartech Polycast unit, cost reduction
initiatives implemented last year began to show some positive returns, and
new Product Transformation volume continued to be strong. The Color &
Specialty Compounds segment operating margin of 7.6% for the second quarter
2003 declined from the 11.4% in the second quarter 2002 as the segment saw
its costs of raw materials increase, on average, by more than 40% during
the period. Quarterly price adjustments agreements delayed our ability to
pass through these cost increases in a timely manner. The Company expects
to recover much of the cost increases in the form of higher selling prices
in the third quarter. The Molded & Profile segment operating margin
increased to 10.0% for the second quarter 2003 versus 9.2% for the similar
2002 period as softness in the profiles unit was more than offset by
improvements within our acrylic rods business.
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 we use in our production process are crude oil or
natural gas derivatives, which are available from a number of domestic and
foreign suppliers. 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 more significant impact on the cost of our raw
materials over the short term. Price spikes in crude oil and natural gas ,
along with the continued political unrest in oil producing countries has
resulted in unusually high immediate pricing pressures. These pressures
have resulted in dramatic increases in the prices of the Company's raw
material costs. The Company has been able minimize the impact of past
price increases in raw material costs through control of inventory levels,
increasing production efficiencies, the pass-through of price changes to
customers, and the negotiation of competitive pricing with our suppliers.
These pricing changes have been more difficult to manage, and we expect the
increased cost to continue, at least in part, to negatively affect our
operating margins in the third quarter. Pricing pressures seem to have
eased by the end of our second quarter, however, the volatility and
direction of future pricing changes is uncertain.
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:
Six Months Ended
May 3, May 4,
2003 2002
(Dollars in millions)
Net cash provided by
operating activities $ 6.1 $ 37.0
-------- -------
Net cash used for
investing activities $ (35.3) $ (10.1)
-------- -------
Net cash provided by/(used for)
financing activities $ 28.4 $ (23.5)
-------- -------
(Decrease)/increase in cash
and equivalents $ (.6) $ 3.4
-------- -------
Operating cash flow provided by net earnings increased 20%, to $16.7
million for the first six months of 2003 from $13.9 million for the first
six months of 2002. Operating cash flows used by changes in accounts
receivable totaled $18.3 million due to seasonally higher sales and days
sales outstanding measures as well as the increased selling price
reflecting the higher resin costs in the second quarter. Operating cash
flows used for changes in inventory totaled $9.8 million due to the
selective pre-buys of raw materials and the effect of an investment in
higher resin prices in inventory. Operating cash flows provided by changes
in accounts payable totaled $4.7 million.
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 six months of 2003 were $12.0 million, including $4.5 million for
our new Ramos Arispe, Mexico facility, as compared to $8.6 million for the
first six months of 2002, and we anticipate total capital expenditures of
approximately $21 million for fiscal 2003. Cash used for the acquisition
of Polymer Extruded Products business totaled $23.3 million
Cash flows provided by financing activities were $28.4 million for the
six months ended May 3, 2003. The primary activities were the net bank
borrowings of $12.5 million, bank borrowings for the acquisition of the
Polymer Extruded Products business of $23.3 million, cash dividend payments
of $5.8 million, and treasury stock purchases, net of stock option
proceeds, of $1.4 million. The borrowings in the first six months of 2003
compared to the prior year debt repayments is primarily related to the
impact of rising prices on our balance sheet - both in the amounts we have
invested in receivables and inventories as well as pre-buys we have made to
help protect against price increases.
Financing Arrangements
The following table summarizes the Company's obligations under
financing arrangements and lease commitments as of May 3, 2003:
Type of Total 0 - 1 1-3 Years 3 - 5 More Than
Commitment Amount Year Years 5 Years
Committed
(dollars in thousands)
Bank Credit $ 179,226 - 179,226 - -
Facilities
Unsecured Notes 85,715 17,857 50,715 17,143 -
Other Debt 9,184 132 264 280 8,508
Obligations
Convertible 150,000 - - - 150,000
Debentures
Operating Lease 29,925 7,149 9,876 6,642 6,258
Commitments
Standby Letters 12,689 - - - -
of Credit
---------- --------- ---------- ---------- ---------
Total $ 466,739 $ 25,138 $ 240,081 $ 24,065 $ 164,766
Contractual Cash ========= ========= ========= ========= =========
Obligations
At May 3, 2003, our total outstanding borrowings under the bank credit
facilities were $179.2 million at a weighted average rate of 5.7%
(including the effect of an interest rate swap). We had $77.8 million in
total availability under the $257 million in credit facilities, however
this availability was limited to $65.1 million due to outstanding
letter of credit. 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 become 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 3, 2003,
we had approximately $40.8 million of unrestricted retained earnings
available for such payments. While we were in compliance with such
covenants in 2002 and currently expect to be in compliance during 2003, 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 than 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 adjusts 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. This
finalization in purchase price allocation is completed within the
first year after acquisition.
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 2002 Consolidated Financial Statements
contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
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.
Item 4. CONTROLS AND PROCEDURES
Based upon an evaluation performed within 90 days of the date of this
report, the registrant's certifying officers have concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in internal controls or other
factors that significantly affect these controls subsequent to the date of
the evaluation.
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
It was determined that there were 29,249,454 shares of
common stock outstanding and entitled to vote at the record
date, of which 27,258,710 shares, or 93%, were represented
at the Spartech Corporation's Annual Meeting of Stockholders
held March 12, 2003. At the Annual Shareholders meeting,
Mr. Richard B. Scherrer was elected as a Director of the
Company with 26,011,677 votes for. Mr. Craig A. Wolfanger
was also elected as a director of the Company with
26,032,133 votes for. Ernst & Young LLP was ratified as the
Company's auditor with 26,977,106 votes for, 260,536
against, and 46,193 abstentions.
Item 6 (a). Exhibits
11 Statement re Computation of Per Share Earnings
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Item 6 (b). Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period
ended May 3, 2003.
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 10, 2003 /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
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bradley B. Buechler, Chairman, President, and Chief Executive Officer of
Spartech Corporation, 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 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
statement 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 period presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
auditors any material weakness in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
June 10, 2003 By: /s/ Bradley B. Buechler
(Date) Bradley B. Buechler
Chairman, President and Chief
Executive Officer
Spartech Corporation
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Randy C. Martin, Executive Vice President and Chief Financial Officer of
Spartech Corporation, 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 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
statement 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 period presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
auditors any material weakness in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
June 10, 2003 By: /s/ Randy C. Martin
(Date) Randy C. Martin
Executive Vice President and
Chief Financial Officer
Spartech Corporation