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 August 2, 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 August 2, 2003:
Common Stock, $.75 par value per share 29,288,822
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
August 2, 2003
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of August 2, 2003 and November 2, 2002 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter and nine months
ended August 2, 2003 and August 3, 2002 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for nine months ended
August 2, 2003 and August 3, 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
Aug. 2, 2003
(unaudited) Nov. 2, 2002
Current Assets
Cash and equivalents $ 4,366 $ 7,511
Receivables, net 136,754 124,966
Inventories 101,052 95,190
Prepayments and other 7,946 4,549
--------- --------
Total Current Assets 250,118 232,216
Property, Plant and Equipment 447,999 422,520
Less accumulated depreciation 165,147 142,046
--------- --------
Net Property, Plant and Equipment 282,852 280,474
Goodwill 329,506 318,841
Other Intangible Assets 25,561 16,360
Other Assets 15,312 17,363
--------- --------
$903,349 $865,254
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 17,990 $ 21,087
Accounts payable 87,945 83,668
Accrued liabilities 40,287 34,173
-------- --------
Total Current Liabilities 146,222 138,928
-------- --------
Long-Term Debt, Less Current Maturities 225,967 217,245
Other Liabilities 68,527 68,383
-------- --------
Total Long-Term Liabilities 294,494 285,628
-------- --------
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 139,982 140,213
Retained earnings 185,588 169,518
Treasury stock, at cost, 1,171,860 shares
in 2003 and 1,175,228 shares in 2002 (28,359) (28,701)
Accumulated Other Comprehensive Income (7,424) (13,178)
-------- --------
Total Shareholders' Equity 312,633 290,698
-------- --------
$903,349 $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 NINE MONTHS ENDED
August 2, August 3, August 2,
August 3,
2003 2002 2003 2002
-------- -------- -------- --------
Net Sales $238,870 $237,242 $703,058 $661,114
-------- -------- -------- --------
Costs and Expenses
Cost of sales 205,780 198,990 604,703 559,643
Selling and administrative 13,216 13,297 39,246 40,584
Amortization of intangibles 565 210 1,601 210
-------- -------- -------- --------
219,561 212,497 645,550 600,437
-------- -------- -------- --------
Operating Earnings 19,309 24,745 57,508 60,677
Interest 3,924 4,094 11,170 12,752
Distributions on
preferred securities of
Spartech Capital Trusts 2,563 2,563 7,688 7,688
-------- -------- -------- --------
Earnings Before Income Taxes 12,822 18,088 38,650 40,237
Income Taxes 4,675 6,602 13,804 14,815
-------- -------- -------- --------
Net Earnings $ 8,147 $ 11,486 $ 24,846 $ 25,422
======= ======== ======== ========
Net Earnings Per Common Share:
Basic $ .28 $ .40 $ .85 $ .93
======= ======== ======== ========
Diluted $ .28 $ .39 $ .84 $ .91
======= ======== ======== ========
Dividends Per Common Share $ .100 $ .095 $ .300 $ .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
August 2, 2003 August 3, 2002
Cash Flows from Operating Activities
Net earnings $ 24,846 $ 25,422
Adjustments to reconcile net earnings
to net cash (used for) provided by
operating activities:
Depreciation and amortization 23,376 20,715
Change in current assets and
liabilities (8,221) 13,011
Other, net 1,584 4,282
-------- -------
Net cash provided by
operating activities, net of effects
of acquisitions 41,585 63,430
-------- -------
Cash Flows from Investing Activities
Capital expenditures (17,742) (17,236)
Business Acquisitions (23,588) (50,337)
Retirement of assets 293 492
-------- --------
Net cash used for investing activities (41,037) (67,081)
-------- --------
Cash Flows from Financing Activities
Bank Borrowings for Business Acquisitions 23,588 4,690
Net payments on revolving
credit facilities (17,975) (42,590)
Payments on bonds and leases (116) (262)
Issuance of common stock 50,663
Cash dividends on common stock (8,776) (7,886)
Stock options exercised 1,155 3,114
Treasury stock acquired (1,767) (2,596)
Net cash (used for) provided by
financing activities (3,891) 5,133
-------- --------
Effect of exchange rate changes on cash
and equivalents 198 -
-------- --------
(Decrease) Increase In Cash and Equivalents (3,145) 1,482
Cash and Equivalents at Beginning of Period 7,511 8,572
-------- --------
Cash and Equivalents at End of Period $ 4,366 $ 10,054
========= ========
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.
Certain prior year amounts have been reclassified to conform to the
current year presentation. 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 August 2, 2003 and November 2, 2002 are comprised
of the following components:
2003 2002
--------- ---------
Raw materials $ 59,457 $ 55,207
Finished goods 41,595 39,983
--------- --------
$ 101,052 $ 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 $23.6 million (see Note G - Acquistions).
The excess purchase price over the fair value of tangible assets purchased
was $21.2 million. The Company has allocated $10.4 million of the purchase
price to goodwill and $10.8 million to other intangible assets. Of the
$10.8 million of acquired intangible assets, $8.9 million was assigned to
registered trademarks/tradenames that are not subject to amortization. The
remaining $1.9 million of acquired intangible assets have a weighted
average useful life of 5 years. The Company engaged an independent
appraisal firm to value these identified other intangible assets.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
At August 2, 2003 other intangible assets are as follows:
Total other Accumulated Net carrying
intangible amortization amount
assets
----------- ----------- -----------
Amortizable
Non-compete and $ 6,890 $ 1,388 $ 5,502
customer contracts
Product formulations $12,030 $ 871 $11,159
------- ------- -------
$18,920 $ 2,259 $16,661
Not Amortizable
Trademark/Tradename $ 8,900 $ - $ 8,900
Amortization expense for our existing other intangible assets over the
next five years is estimated to be: $2,347, $2,312, $1,930, $1,867, $1,056
for the twelve month periods from August 2003 to July 2008.
The Company's changes in the carrying amount of goodwill for the nine
months ended August 2, 2003 are as follows:
Custom Color & Molded &
Sheet Compounds Profile Total
-------- --------- -------- --------
Balance November 2, 2002 $185,805 $95,422 $37,614 $318,841
Goodwill 10,350 315 - 10,665
acquired/adjusted
-------- ------- -------- --------
Balance August 2, 2003 $196,155 $95,737 $37,614 $329,506
======== ======= ======= ========
Note D - Comprehensive Income
Comprehensive Income is an entity's change in equity during the period
from transactions, events and circumstances from non-owner sources. The
reconciliation of Net Earnings to Comprehensive Income for the quarter and
nine months ended August 2, 2003 and August 3, 2002 is as follows:
QUARTER ENDED NINE MONTHS ENDED
August 2, August 3, August 2, August 3,
2003 2002 2003 2002
---------- --------- -------- --------
Net Earnings $ 8,147 $ 11,486 $ 24,846 $ 25,422
Foreign currency
translation adjustments 585 38 3,958 462
Cash flow hedge 1,005 (1,455) 1,796 209
adjustments
-------- --------- -------- --------
Total Comprehensive Income $ 9,737 $ 10,069 $ 30,600 $ 26,093
======== ========= ======== ========
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Note E - Segment Information
Spartech's forty-six facilities are organized into three reportable
segments based primarily on the nature of the products manufactured.
QUARTER ENDED NINE MONTHS ENDED
August 2, August 3, August 2, August 3,
Net Sales * 2003 2002 2003 2002
-------- -------- --------- ---------
Custom Sheet & $ 158,949 $ 157,635 $ 461,987 $ 443,856
Rollstock
Color & Specialty 64,319 63,124 192,212 169,428
Compounds
Molded & Profile 15,602 16,483 48,859 47,830
Products
-------- -------- --------- ---------
Total Net Sales $ 238,870 $ 237,242 $ 703,058 $ 661,114
========= ========= ========= =========
Operating Earnings
Custom Sheet & $ 15,978 $ 19,103 $ 46,620 $ 46,379
Rollstock
Color & Specialty 4,665 6,921 15,197 18,496
Compounds
Molded & Profile 1,342 1,234 3,810 3,676
Products
Corporate/Other (2,676) (2,513) (8,119) (7,874)
-------- -------- --------- ---------
Total Operating $ 19,309 $ 24,745 $ 57,508 $ 60,677
Earnings
========= ========= ========= =========
* Excludes intersegment sales of $9,646 and $7,487 for the three months
ended August 2, 2003 and August 3, 2002, respectively, and $26,466 and
$19,453 for the nine months ended August 2, 2003 and August 3, 2002,
respectively, primarily from the color & compounds segment.
Note F - 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 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
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
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 Nine Months Ended
August 2, August 3, August 2, August 3,
2003 2002 2003 2002
-------- -------- -------- ----------
Net Earnings as Reported $ 8,147 $ 11,486 $24,846 $25,422
Pro Forma Impact of 84 135 1,467 2,520
Expensing Stock Options
-------- -------- -------- --------
Pro forma net earnings $ 8,063 $ 11,351 $23,379 $22,902
========= ========== ========= ===========
Diluted Earnings per share:
As Reported
Basic $ 0.28 $ 0.40 $ 0.85 $ 0.93
Diluted $ 0.28 $ 0.39 $ 0.84 $ 0.91
Pro forma
Basic $ 0.28 $ 0.40 $ 0.80 $ 0.83
Diluted $ 0.27 $ 0.38 $ 0.79 $ 0.82
Assumptions Used:
Expected Dividend 2% 2% 2% 2%
Yield
Expected Volatility 35% 35% 35% 35%
Risk-Free Interest 2.60% 4.60% 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 G - 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
$23.6 million and was funded through our existing bank credit facility.
Note H - Recently Issued Accounting Standards
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 $238.9 million and $703.1 million for the quarter and
nine months ended August 2, 2003. This represented a 1% increase
(including a 3% increase from acquisitions) over the third quarter of 2002
and a 6% increase (including 4% from acquisitions) from the nine months
ended August 3, 2002. Sales excluding acquisitions for the third quarter
were down 2% as weak volume was somewhat offset by the effect of higher
resin prices compared to the same quarter of 2002. The lower pounds sold
compared to increases experienced in prior quarters was a result of the
sluggish economic environment and the rapid acceleration in resin costs
during the second quarter of 2003 which combined led to weak product demand
in several industries we serve. Resin pricing began to ease during the
last six to eight weeks of the quarter, resulting in some customers
deferring purchases, reducing inventories, and moving to more just-in-time
orders. Order backlog is down at the end of the third quarter,
representing 34 days at August 2, 2003 compared to 39 days at August 3,
2002, further reflecting this decrease in order pattern.
Cost of sales were $205.8 million and $ 604.7 million for the quarter
and nine months ended August 2, 2003, compared with $199.0 million and
$559.6 million for the corresponding quarter and nine months of 2002. This
represented an increase as a percentage of net sales to 86.1% and 86.0% for
the quarter and nine months of 2003, from 83.9% and 84.7% for the
comparable periods of 2002, reflecting the effect of the higher resin costs
and competitive pricing pressures. Lower capacity utilization during the
third quarter of 2003 contributed to the higher cost of sales percentage,
as overall pounds shipped decreased by about 5% excluding the effect of
acquisitions.
Selling and administrative expenses of $13.2 million and $39.2 million
for the quarter and nine months ended August 2, 2003 decreased from $13.3
million and $40.6 million for the comparable periods of 2002. This
represented a decrease to 5.5% and 5.6% of net sales for the quarter and
nine months ended August 2, 2003 respectively from 5.6% and 6.1% in the
quarter and nine months of 2002. These decreases reflect the effect of
cost reduction efforts and higher provisions for doubtful accounts recorded
in 2002. We have experienced fewer business failures in our customer base
so far in 2003 and we expect this positive trend to continue as long as the
overall economy continues to stabilize or improve.
Operating earnings for the quarter and nine months ended August 2,
2003 decreased to $19.3 million and $57.5 million respectively, or as a
percentage of sales 8.1% and 8.2%, compared to $24.7 million and $60.7
million or 10.4% and 9.2% of net sales for the corresponding periods of
2002, principally due to the effect of higher resin costs and competitive
pricing pressures in the current sluggish economic environment. We have
launched a new initiative to increase our operating margin percentage back
to pre-recession levels. Total savings targeted by the initiative is
approximately $12 million. Much of the cost savings is from a reduction in
the overall manufacturing workforce by about 10% that will be completed
during the fourth quarter of 2003. The costs associated with this effort
are not expected to be material and should be fully absorbed by the end of
fiscal 2003.
Interest expense and distributions on preferred securities of $6.5
million and $18.9 million for the quarter and nine months ended August 2,
2003 decreased from $6.7 million and $20.4 million for the corresponding
quarter and nine months of 2002 primarily as a result of $55.0 million of
debt repayments in fiscal 2002 and lower interest rates on our floating
rate debt. Interest expense is expected to be slightly lower in the last
three months of the fiscal year due to approximately $30 million in debt
repayments in the third quarter of 2003.
Our effective tax rates for the quarter and nine months ended August
2, 2003 were 36.5% and 35.7% compared to 36.5% and 36.8% in the
corresponding periods of 2002, reflecting a consistent rate except for the
favorable second quarter of 2003 adjustments related to a final agreement
with the Internal Revenue Service regarding previously filed claims for
refunds of research and development credits.
Net earnings of $8.1 million and $24.8 million, or $.28 and $.84 per
diluted share, in the quarter and nine months ended August 2, 2003
decreased by 29% and 2%, respectively, from $11.5 million and $25.4
million, or $.39 and $.91 per diluted share, in the comparable periods of
2002 as a result of the factors noted above.
Segment Results
Net sales of the Custom Sheet & Rollstock segment increased by 4% to
$462.0 million in the nine months ended August 2, 2003 from $443.9 million
in the corresponding period of 2002. For the quarter ended August 2, 2003,
net sales of the Custom Sheet & Rollstock segment increased by 1% to $158.9
from $157.6 million in the corresponding quarter of 2002, primarily due to
higher pricing from increases in resin costs and our late March acquisition
of Polymer Extruded Products. Excluding the acquisition, net sales in
pounds decreased 3% for the third quarter of 2003 compared to the prior
year.
Net sales of the Color & Specialty Compounds segment increased by 13%
to $192.2 million for the nine months ended August 2, 2003 from $169.4
million for the corresponding period of 2002. The acquisition of GWB
Plastics represented nearly the entire increase for the nine months of 2003
over the comparable period of 2002. For the quarter ended August 2, 2003,
net sales of the Color & Specialty Compounds segment increased by 2% to
$64.3 million from $63.1 million for the corresponding quarter of 2002, due
to higher pricing from increases in resin costs and the mid-2002
acquisition of GWB Plastics. Excluding the acquisition, net sales in
pounds decreased 6% for the third quarter as compared to the prior year.
The Molded & Profile segment net sales increased by 2% to $48.9
million for the nine months ended August 2, 2003 from $47.8 million in the
comparable period of 2002 due to higher pricing from increases in resin
costs. The Molded & Profile Products segment net sales decreased by 5% to
$15.6 million for the quarter from $16.5 million in the third quarter of
2002 due to volume decreases partially offset by higher pricing from
increases in resin costs.
The Custom Sheet & Rollstock segment's operating margin decreased to
10.1% in the third quarter of 2003 compared to 12.1% in the corresponding
period of 2002 due to competitive pricing pressure and decreased capacity
utilization rates. The Color & Specialty Compounds segment's operating
margin of 7.3% for the third quarter of 2003 declined from the 11.0% in the
third quarter of 2002. The rapid rise in resin costs during the first half
of the year had a significant effect on this segment's margins, as the mix
of raw materials utilized were among the most affected by the increases.
The Molded & Profile segment's operating margin increased to 8.6% for the
third quarter of 2003 from 7.5% for the corresponding period of 2002 with
better mix from our acrylic rods and tubes business and some benefits in
operational changes initiated in the prior year..
Other Matters
We operate under various laws and regulations governing employee
safety, and regulating the quantities and methods of disposition 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 processes 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 political unrest in oil producing countries resulted in
unusually high pricing pressures during the second quarter of 2003. These
pressures resulted in dramatic increases in the prices of our raw materials
during that time. We were able to 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 for us to manage and have
negatively affected our operating margins in fiscal 2003. Resin pricing
pressures started to ease by the end of our second quarter and continued to
stabilize through the third quarter, however, the volatility and direction
of future pricing changes is uncertain.
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 Ended
Aug. 2, Aug 3,
2003 2002
(Dollars in millions) ---------- ---------
Net cash provided by
operating activities $ 41.6 $ 63.4
======= =======
Net cash used for
investing activities $ (41.0) $ (67.1)
======= =======
Net cash provided by/(used for)
financing activities $ (3.9) $ 5.1
======= =======
(Decrease)/increase in cash
and equivalents $ (3.1) $ 1.5
======= =======
Operating cash flows provided by net earnings decreased 2.3% to $24.8
million for the first nine months of 2003 from $25.4 million for the first
nine months of 2002. Operating cash flow was negatively affected by an
increase in accounts receivable totaling $6.5 million due to increased
selling prices resulting from the higher resin costs in the second and
third quarters of 2003. Operating cash flows used for changes in inventory
totaled $4.0 million due to the effect of higher resin prices in inventory.
Reductions in accounts receivables and inventories in the third quarter
increased operating cash flows by $17.6 million related to improvements in
days sales outstanding, inventory reductions as pre-buys were eliminated,
and seasonal reductions in working capital investments. Operating cash
flows provided by changes in accounts payable totaled $1.8 million for the
first nine months of 2003.
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. Our capital expenditures for the first
nine months of 2003 were $17.7 million, including approximately $6.0
million for our new Ramos Arizpe, Mexico facility, as compared to $17.2
million for the first nine months of 2002. We anticipate total capital
expenditures of approximately $23 million for fiscal 2003. Cash used for
the acquisition of the Polymer Extruded Products business totaled $23.6
million.
Cash flows used by financing activities were $3.9 million for the nine
months ended August 2, 2003. The primary activities were net loan
repayments of $18.1 million, bank borrowings for the acquisition of the
Polymer Extruded Products business of $23.6 million, cash dividend payments
of $8.8 million, and treasury stock purchases, net of stock option
proceeds, of $.6 million. The lower amount of debt repayments in the first
nine months of 2003 compared to the first nine months of 2002 is primarily
related to the impact of rising resin prices on our balance sheet - both in
the amounts we have invested in receivables and inventories. However, we
were able to pay down $30.5 million in debt in the third quarter with more
favorable working capital management.
Financing Arrangements
The following table summarizes the Company's obligations under
financing arrangements and lease commitments as of August 2, 2003:
Type of Total 0 - 1 1-3 Years 3 - 5 More
Commitment Amount Year Years Than 5
Committed Years
-------------- ---------- -------- --------- --------- --------
(dollars in thousands)
Bank Credit $149,090 $ - $149,090 $ - $ -
Facilities
Unsecured Notes 85,715 17,857 50,715 17,143 -
Other Debt 9,152 134 280 280 8,458
Obligations
Convertible 150,000 - - - 150,000
Debentures
Operating Lease 29,618 7,125 9,983 6,550 5,960
Commitments
Standby Letters 13,889 - - -
of Credit -
---------- -------- --------- --------- --------
Total Contractual $437,464 $25,116 $210,068 $23,973 $164,418
Cash Obligations
======== ======== ========= ======== ========
At August 2, 2003, our total outstanding borrowings under the bank credit
facilities were $149.1 million at a weighted average rate of 6.4%
(including the effect of an interest rate swap). We had $94.2 million in
total availability under the $257 million in credit facilities; however
this availability was limited to $77.5 million due to certain financial
ratio restrictions contained in our bank credit facilities. 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 were 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 August 2,
2003, we had approximately $43.6 million of unrestricted retained earnings
available for such payments. While we were in compliance with such
covenants through the third quarter of 2003 and currently expect to be in
compliance during balance of the fiscal year, 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 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. Our customers require us
to meet strict specifications for our products. We have 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 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 than 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
their 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 adjustment 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 - 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 2002 Consolidated Financial Statements
contained in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
Recently Issued Accounting Standards
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. We have determined that none of our current financial
instruments fall under the scope of the statement, and therefore its
adoption will not have a material effect on our 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 judgment 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
We maintain a system of disclosure controls and procedures which are
designed to ensure that information required to be disclosed by the Company
in the reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified under
the SEC's rules and forms. Based on an evaluation performed, our certifying
officers have concluded that the disclosure controls and procedures were
effective as of August 2, 2003, to provide reasonable assurance of the
achievement of these objectives.
Notwithstanding the foregoing, there can be no assurance that our
disclosure controls and procedures will detect or uncover all failures of
persons within our company and its consolidated subsidiaries to disclose
material information otherwise required to be set forth in our reports.
There was no change in our internal control over financial reporting
during the quarter ended August 2, 2003, that has materially affected, or
is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 6 (a). Exhibits
11 Statement re Computation of Per Share Earnings
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO.
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO.
32 Section 1350 Certifications of CEO & CFO.
Item 6 (b). Reports on Form 8-K
Pursuant to Items 7 and 9, the Company filed a Report on Form 8-K
dated May 29, 2003, to furnish the press release for the second
quarter of fiscal 2003 under Item 12, "Results of Operations and
Financial Condition."
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 8, 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)