Spartech Corporation
2003 Annual Report
Management's Discussion and Analysis
Business Overview
SPARTECH is an intermediate processor of thermoplastics which converts base
polymers or resins from commodity suppliers into extruded plastic sheet and
rollstock, specialty film laminates, cell cast acrylic sheet, specialty plastic
alloys, color concentrates & blended resin compounds, and injection molded &
profile extruded products for customers in a wide range of markets. We operate
47 production facilities (46 throughout North America and one in Europe) that
are organized into three business segments: (1) Custom Sheet & Rollstock (66% of
total 2003 sales), (2) Color & Specialty Compounds (27% of total 2003 sales),
and (3) Molded & Profile Products (7% of total 2003 sales). The results
discussed below include our 2002 acquisition of GWB Plastics Holding Company
(GWB), parent of UVTEC and PolyTech South (June 2002), and our 2003 acquisitions
of Polymer Extruded Products (PEP), Inc. (March 2003) and the sheet extrusion
business of TriEnda, a division of Wilbert, Inc. (September 2003), from the date
of acquisition. The results also reflect the divestiture of the two Canadian
molded products businesses in July 2001.
Bar Graph
Net Sales
(Price Per Pound)
2001 - $ .78
2002 - $ .75
2003 - $ .77
Results of Operations
Comparison of Fiscal Years 2003 and 2002
Net sales were $956.2 million for the year ended November 1, 2003, representing
a 6% increase from the prior year. Acquisitions accounted for approximately 3%
of the increase while internal volume in pounds grew by 1% and price/mix
accounted for the balance of the increase over 2002 (resulting in a 2
cent increase in the average sales price per pound).
Compared to the prior year, sales in 2003 were strong to customers serving the
Transportation market, Roofing applications, and Lawn & Garden market as well as
a solid performance in Pool & Spa applications. All other major markets served
by the Company were relatively flat compared to the prior year. Net sales of
the Custom Sheet & Rollstock segment increased 5% to $628.5 million in fiscal
2003, from $600.5 million in 2002. The March 2003 acquisition of PEP accounted
for 2% of the increase, while internal growth added 3% (2% increase in volume
along with 1% price/mix effect). The Custom Sheet & Rollstock segment accounted
for most of the increase in sales to the Transportation market. This segment
also benefited from the opening of our new facility in Mexico which began
shipping production volumes in April 2003. All three sheet extrusion lines are
in operation, and the plant is positioned to serve the appliance and
distribution markets in Mexico. Net sales of the Color & Specialty Compounds
segment increased 12% to $263.0 million in 2003 from $235.7 million in 2002.
Sales from the full year effect of the GWB acquisition, primarily servicing the
Roofing market, contributed nearly 9% of the increase. The remaining growth was
due to price/mix changes, as internal volume shipped was flat for the year.
Sales for our Molded & Profile Products segment increased 4% to $64.6 million in
2003 from $62.1 million in 2002, led by a strong performance from our Custom
Engineered Wheels group for Lawn & Garden applications.
BarGraph
SG&A Expenses
(As % of Net Sales)
2001 - 6.0%
2002 - 6.0%
2003 - 5.6%
Cost of sales in 2003 increased to $822.1 million from $763.1 million in 2002,
and increased as a percentage of net sales to 86.0% from 85.0% in 2002. The
increased cost of sales percentage was due mainly to price increases on most of
the Company's raw materials, primarily in the second quarter of 2003. These
increases began to stabilize by the third quarter and throughout the fourth
quarter. We expect prices to remain relatively stable through at least the
first quarter of fiscal 2004.
Amortization of intangible assets increased to $2.2 million in 2003 from $0.7
million in 2002 due to intangible assets acquired from GWB and PEP. Selling,
general, and administrative expenses were $53.5 million for 2003, comparable to
$53.6 million in 2002. A decrease in bad debt expense incurred for the year was
partially offset by costs added from recent acquisitions. As a percentage of net
sales, selling, general, and administrative expenses declined to 5.6% in 2003
from 6.0% in 2002.
The Company's fiscal 2003 operating earnings were $78.3 million (8.2% of net
sales) compared to $80.9 million (9.0% of net sales) reported in 2002. The
decrease in operating earnings was attributable mainly to the company's Color &
Specialty Compounds segment which was hardest hit by the sharp increases in
resin cost during the first half of 2003. The operating margin percentage in
this group dropped to 8.0% from the 10.9% achieved in 2002. Operating margins
began to rebound in this group during our fourth quarter as resin prices
stabilized and contracted price increases were more fully in effect. Operating
margins in the Custom Sheet & Rollstock segment reduced slightly from 2002, but
remained in the double digits.
Bar Graph
Consolidated Operating Margin
(As % of Net Sales)
2001 - 8.8%
2002 - 9.0%
2003 - 8.2%
Interest expense and distributions on preferred securities of $25.0 million for
fiscal 2003 decreased by 7% from $26.8 million in fiscal 2002. The reduction in
interest expense resulting from debt repayments of $37.1 during 2003 was
partially offset by the $27.6 million spent for acquisitions during the year.
Approximately 93% of the Company's debt and convertible preferred financings are
fixed rate, resulting in interest expense being less affected by the reduction
in interest rates during the year.
Our effective tax rate was 36.0% for fiscal 2003, compared to 36.6% in 2002,
reflecting an improvement in our combined state tax rate and favorable
adjustments related to a final settlement with the Internal Revenue Service on
refunds, as well as ongoing benefits, from research and development credits. We
expect the effective tax rate to return to the 37% level without the favorable
adjustments from tax credits.
Net earnings of $34.1 million in 2003 decreased slightly from the $34.3 million
in 2002. Diluted earnings per share declined to $1.15 in 2003 from $1.21 in
2002, due mainly to an increase in average shares outstanding from our May 2002
stock offering which were outstanding for the full year in 2003.
Comparison of Fiscal Years 2002 and 2001
The Company's fiscal year ends on the Saturday closest to October 31. Fiscal
year 2001 includes 53 weeks compared to 52 weeks in 2003 and 2002. This results
in approximately 2% additional operating activity in 2001 compared to the other
years, therefore, the operating results presented below include data on a
percentage of net sales basis for more comparable discussions.
Net sales were $898.3 million for the year ended November 2, 2002, representing
a 4% decrease from $937.1 million in 2001. An increase in overall internal
volume of approximately 2% was more than offset by the effect of the 2% shorter
period in fiscal 2002 and lower raw material prices passed through to our
customers. Net sales for the Custom Sheet & Rollstock segment decreased 4% to
$600.5 million in 2002 from $621.9 million in 2001. Volume was slightly higher
for the comparable 52-week year, but resin price decreases reduced sales in
dollars for most of 2002. Net sales for the Color & Specialty Compounds segment
increased 3% to $235.7 million in 2002 from $227.8 million in 2001. Sales added
from our June 2002 acquisition of GWB and increased internal volume was
partially offset by a lower price/mix of products sold and the shorter 2002
fiscal year. Net sales for the Molded & Profile Products segment decreased to
$62.1 million in 2002 from $87.4 million, or 29%, mostly due to the sale of our
Canadian molded products businesses in the third quarter of 2001. Overall, year-
over-year volume comparisons improved steadily during each quarter of fiscal
2002.
Picture
Sign Products - "Spartech Plastics' 'Tuf-Glas' is Utilized In BP Amoco's
New Resinage Program"
Operating costs and expenses in 2002 decreased to $817.4 million from $854.7
million in 2001, but remained relatively flat as a percentage of net sales,
91.0% for 2002 compared to 91.2% in 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 operating cost percentage remaining flat
despite the elimination of goodwill amortization and the non-recurring charge in
2001.
In the third quarter of 2001, we recorded $9.1 million (1.0% of net sales) in
non-recurring pre-tax expenses for costs incurred on operations slated for
closedown. 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.
Amortization of intangible assets decreased to $0.7 million in 2002, from $8.1
million in 2001. We adopted Statement of Financial Accounting Standards 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, we did not have an impairment charge and eliminated the amortization
of goodwill, which totaled $8.1 million in fiscal 2001. The fiscal 2002
amortization resulted from intangible assets acquired in connection with the GWB
acquisition.
Picture
Packaging Product - "Pizza Hut's Marinara Sauce Is Packaged In Spartech
Plastics' Multi-Layer Barrier Container"
Selling, general, and administrative expenses of $53.6 million for fiscal 2002
decreased from $56.0 million in fiscal 2001, but remained a flat 6.0% of net
sales for both years. These expenses decreased below 6.0% of net sales during
the latter half of 2002, as our cost reduction programs began to benefit
results. The remainder of these costs are largely fixed and further improved as
a percentage of net sales as volumes increased during the second half of 2002.
Fiscal 2002 operating earnings were $80.9 million (9.0% of net sales) compared
to the $82.4 million (8.8% of net sales) reported in 2001. Fiscal 2001 included
$9.1 million in non-recurring expenses and $8.1 million of goodwill amortization
that were not incurred in 2002.
Operating earnings for 2002 decreased 19% after adding back these items to the
prior year's results. Operating earnings for fiscal 2002 were impacted by low
demand within the Company's Spartech Polycast and Spartech Profiles groups,
which combined, accounted for nearly half of the decrease. Spartech Profiles
realigned its capacity during 2002 and is pursuing sales in product offerings
that we believe better capitalize on its production capabilities. Our Custom
Engineered Wheels group incurred some start-up costs and inefficiencies at two
facilities in 2002. Resin prices began to rise during the last half of 2002,
which increased the competitive situations and hindered our ability to pass
along these cost increases in full.
Interest expense and distributions on preferred securities of $26.8 million for
fiscal 2002 decreased from the $34.8 million in fiscal 2001 as a result of
$113.9 million of debt repayments during those two fiscal years and lower
overall interest rates. Our effective tax rate was 36.6% for fiscal 2002,
compared to 37.1% in 2001, reflecting an improvement in our combined state tax
rate and ongoing benefits from research and development credits.
Bar Graph
Income Taxes
(Effective Tax Rate)
2001 - 37.1%
2002 - 36.6%
2003 - 36.0%
Net earnings of $34.3 million, or $1.21 per diluted share, in 2002 increased
from $29.9 million, or $1.11 per diluted share, in 2001 as a result of the
operating factors noted above. Fiscal 2001 included goodwill amortization and
the non-recurring charge which impacted diluted earnings per share by $.21 and
$.22, respectively.
Other Matters
We operate under various laws and regulations governing employee safety and the
quantities of specified substances that may be emitted into the air, discharged
into waterways, or otherwise disposed of on and off our properties. In September
2003, the New Jersey Department of Environmental Protection issued a directive
and the United States Environmental Protection Agency initiated an investigation
related to over 70 companies, including Spartech, regarding the Lower Passaic
River. We expect that an environmental study will be conducted to determine the
extent and sources of contamination at this site. We believe it is possible
that the ultimate liability from this issue could materially differ from the
Company's $375 accrual as of November 1, 2003. In the event of one or more
adverse determinations related to this issue, the impact on the Company's
results of operations could be material to any specific period. However, it is
our opinion that future expenditures for compliance with these laws and
regulations, as they relate to the Lower Passaic River issue and other potential
issues, will not have a material effect on our capital expenditures, financial
position, 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 2003.
These pressures resulted in dramatic increases in the prices of our raw
materials. In prior years, we were able to minimize the impact of such price
increases in raw material costs by controlling our inventory levels, increasing
production efficiencies, passing through price changes to customers, and
negotiating competitive prices with our suppliers. These pricing changes were
more difficult for us to manage and negatively affected our operating margins in
fiscal 2003. Resin pricing pressures started to ease by the end of our second
quarter of 2003 and continued to stabilize through the end of 2003, however, the
volatility and direction of future pricing changes is uncertain.
Bar Graph
Operating Cash Flow
(In Millions of Dollars)
2001=$70.5
2002=$87.1
2003=$66.7
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.
Our cash flows from operations of $66.7 million in 2003 was lower than the $87.1
million generated in 2002 as changes in working capital used $14.3 million of
cash flow in 2003 while changes in working capital provided $12.5 million of
cash flow in 2002. The use of working capital in 2003 was reflective of the
growth in business and the sharp increase in resin prices compared to the prior
year. Working capital in 2002 benefited from lower resin prices and improvements
in nearly every major category.
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 were $16.2 million for 2001, $28.2 million for
2002, and $22.0 million for 2003. The lower capital expenditures in 2001
reflected the impact of the plant closings that allowed for more effective usage
of existing equipment and lower maintenance expenditures while the higher
expenditures in 2002 reflected the expansions in Tupelo, Mississippi and Ramos
Arizpe, Mexico. We expect capital expenditures in 2004 to total approximately
the same as 2003.
In 2001, we divested our three non-core molded products facilities in Canada for
$22.3 million of proceeds to pay down our debt and identified several investment
opportunities/expansions that were initiated at or just after our fiscal year
end (e.g., wheels plant expansion and joint venture, the acquisition of $7.5
million in ProForm bath & shower surround business for $2.5 million, and the
ground breaking on a Mexico facility in the first quarter of 2002). In fiscal
2002, we completed the acquisition of GWB for $47.5 million and outsourcing
acquisitions of certain business from MTD, Acros Whirlpool, and MAAX requiring
$3.0 million in investments. In fiscal 2003, we completed the acquisition of PEP
for $23.6 million and the sheet extrusion business of Wilbert, Inc.'s TriEnda
division for $4.0 million.
Picture Transportation Product - "Subaru Utilizes Spartech Plastic's TPO's In
Their Cargo Management Systems
Cash flows used for financing activities were $79.8 million for 2001. The
primary activities were bank debt repayments of $22.3 million from divestitures
as well as an additional $41.2 million from operations, purchases of treasury
stock of $8.7 million, and proceeds from stock options exercised of $2.6
million. Cash flows used for financing activities were $11.6 million for 2002.
The primary activities were proceeds received from our May 30, 2002 stock
offering of $50.7 million (which were used primarily to fund the GWB
acquisition), bank borrowings of $4.7 million for acquisitions, repayment of
debt of $55.1 million, purchases of treasury stock of $6.7 million, common stock
dividends of $10.7 million, and proceeds from stock options exercised of $5.5
million. Cash flows used for financing activities were $21.3 million for 2003.
The primary activities were bank borrowings of $27.6 million for acquisitions,
repayment of debt of $37.1 million, purchases of treasury stock of $3.5 million,
common stock dividends of $11.7 million, and proceeds from stock options
exercised of $3.3 million. The debt repayments from operations were lower in
2003 than 2002, mainly due to the decrease in cash flow from operations of $20.4
million. We paid common stock dividends at a rate of 40 cents per share
in 2003, and our Board of Directors has approved an annual rate of
44 cents for calendar 2004.
Financing Arrangements
On February 25, 2000, we entered into a new $250 million bank credit facility
representing a revolving credit line with a five-year term. Interest on our bank
credit facility is payable at a rate chosen by us of either prime or LIBOR plus
a 0.625% to 1.250% borrowing margin. At November 1, 2003, our total borrowings
under the bank credit facilities were $152.2 million at a weighted average rate
of 6.2%, and we had $91.5 million in remaining availability.
The following table summarizes our contractual cash obligations under financing
arrangements and lease commitments as of November 1, 2003 (dollars in
thousands):
More Than 5 Years
3 Years or More
But Less
Than
5 Years
Type of Commitment Total Amount Less Than 1-3 Years
Committed 1 Year
- -------------------- ----------- --------- --------- ---------- ---------
Bank Credit Facilities $ 152,203 $ - $ 152,203 $ - $ -
Unsecured Notes 67,857 32,857 28,572 6,428 -
Other Debt Obligations 9,120 134 281 147 8,558
Convertible Debentures 150,000 - - - 150,000
Operating Lease
Commitments 27,997 7,171 9,608 3,351 7,867
Standby Letters
of Credit 13,884 - - - -
- -------------------- ----------- --------- --------- ---------- ---------
Total Contractual
Cash Obligations $ 421,061 $ 40,162 $ 190,664 $ 9,926 $ 166,425
========= ======== ========= ======= =========
Bar Graph
Capital Expenditures
(In Millions of Dollars)
2001=$16.2
2002=$28.2
2003=$22.0
Picture
Recreation and Leisure Product - "Spartech PEP's Weatherable Korad(r) Laminate
Is Regularly Utilized in Recreational
Vehicles"
In November 2000, we entered into an interest rate swap for $125 million of our
fixed LIBOR loans outstanding. Under the swap arrangement, our LIBOR rate is
fixed at 6.06%, plus the borrowing margin, until November 2004. This swap
arrangement is accounted for in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
On May 30, 2002, we completed a public offering of 9,487,500 shares of our
common stock. These shares represented 7,063,125 shares of common stock of the
Company owned by two selling shareholders and 2,424,375 new shares issued by the
Company. The common stock was sold to the public at $22.00 per share. The net
proceeds received by the Company from the sale of the primary shares, $50.7
million, were principally used to finance the GWB acquisition. In October 2003,
we registered 6 million shares of the Company's common stock in a shelf
registration statement for primary offering by the Company. Periodically we have
utilized the proceeds from equity offerings to finance acquisitions and other
investing activities of the Company. These shares may be used in the future to
continue to fund such investments.
Our current credit facilities 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. The
most restrictive covenant regarding borrowings is the ratio of total debt to
operating earnings plus depreciation and amortization contained in our primary
credit facility. This debt ratio covenant would have allowed additional
borrowings of $94.0 million as of November 1, 2003. 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 November 1, 2003, we had approximately $46.7 million of
unrestricted retained earnings available for such payments. Future dividends
are expected to be paid from future earnings. The most restrictive covenant
regarding our operations is the debt service coverage ratio in our primary
credit facility. While we were in compliance with such covenants in 2003 and
currently expect to be in compliance during 2004, 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.
Graph
Total Dept
(In Millions of Dollars)
2001 - $ 288.7
2002 - $ 238.3
2003 - $ 229.2
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 at
least the next year.
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 upon 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, 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 creditworthiness, 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.
Picture
Building and Construction Products - "New Garage Doors Are Typically
Manufactured Utilizing Spartech Plastic's Extruded Sheet"
* Inventories - We value inventories at the lower of actual cost 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 a purchase price has historically not had a
material impact on the consolidated results of operations, we cannot
guarantee the same results in future acquisitions.
Picture
Lawn and Garden Product - "Rubbermaid Garden Carts Utilize Spartech
Industries Thermoplastic Wheels"
* 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 our estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect our evaluations.
Bar Graph
Total Goodwill
(In Millions of Dollars)
2001=$292.6
2002=$318.8
2003=$334.4
* Contingencies - The Company is involved in litigation in the ordinary
course of business, including environmental matters. Our policy is to record
expense for contingencies when it is both probable that a liability has been
incurred and the amount can be reasonably estimated. Estimating probable
losses requires assessment of multiple outcomes that often depends on
management's judgments regarding, but not limited to, potential actions by
third parties such as regulators. The final resolution of these contingencies
could result in expenses different than current accruals, and therefore have
a material impact on our consolidated financial results in a future reporting
period.
Recently Issued Accounting Standards
In January 2003, the Emerging Issues Task Force reached a consensus on Issue No.
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor." This issue requires that cash
consideration received by a customer from a vendor be recorded as a reduction of
cost of sales within a company's results of operations, excluding payments
received when a customer sells products and services to the vendor as well as
reimbursement of costs incurred by the customer in selling the vendor's product.
This issue also requires rebates or refunds provided to a customer as the result
of achieving certain purchase levels or other defined measures to be recorded as
a reduction of cost of sales. If the rebate or refund is probable and reasonably
estimable, it can be allocated over the time period in which it is earned. The
adoption of this consensus did not have a material effect on the Company's
financial position or results of operations.
Bar Graph
Dept Repayments
(In Millions of Dollars, Excluding Acquisitions and Divestitures)
2001 - $ 41.2
2002 - $ 55.1
2003 - $ 37.1
In December 2003, the Financial Accounting Standards Board (FASB) reissued
Revised Interpretation No. 46, "Consolidation of Variable Interest Entities."
This interpretation defines when a business enterprise should consolidate a
variable interest entity and applies in the first fiscal year or interim period
ending after December 15, 2003, to entities in which an enterprise holds a
variable interest. We are in process of assessing the impact of this
interpretation on the Company's ability to consolidate the trusts holding the
Company-Obligated, Mandatorily Redeemable Convertible Preferred Securities
("preferred securities"). If the Company is no longer allowed to consolidate
the trusts, we will be required to reclassify the preferred securities to long-
term debt. The adoption of this interpretation will not have a material effect
on the Company's results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
clarifies the definition of a liability, as currently defined under FASB
Concepts Statement No. 6 "Elements of Financial Statements," as well as other
items. The statement requires that financial instruments that embody an
obligation of an issuer be classified as a liability. Furthermore, the standard
provides guidance for the initial and subsequent measurement as well as
disclosure requirements of these financial instruments. SFAS No. 150 is
effective for financial instruments for interim periods beginning after June 15,
2003. The adoption of this statement did not have a material effect on the
Company's financial position or results from operations because the Company's
Company-Obligated, Mandatorily Redeemable Convertible Preferred Securities are
contingently redeemable, not redeemable at a determinable date or upon an event
certain to occur.
Forward-Looking Statements
This Report 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, the level of financial leverage and
restrictions from our indebtedness agreements, decreases in our level of sales
or operating profits, the volatility or decline of our stock price, the
requirement to pay substantial remediation costs or regulatory fines,
unanticipated events that may prevent us from competing in existing or new
markets, and our ability to successfully complete or integrate acquisitions.
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.
Bar Graph
Total Interest & Distributions
(In Millions of Dollars)
2001 - $ 34.8
2002 - $ 26.8
2003 - $ 25.0
Consolidated Balance Sheet
November 1, November 2,
(Dollars in thousands) 2003 2002
Assets
Current Assets
Cash and equivalents $ 3,779 $ 7,511
Receivables, net of allowance
of $3,737 in 2003 and $4,058 in 2002 149,546 124,966
Inventories 99,671 95,190
Prepaids and other 11,052 10,983
-------- --------
Total Current Assets 264,048 238,650
Property, Plant and Equipment, Net 283,924 280,474
Goodwill 334,392 318,841
Other Intangible Assets 24,974 16,360
Other Assets 8,611 10,929
-------- --------
$ 915,949 $ 865,254
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt $ 32,991 $ 21,087
Accounts payable 97,586 83,668
Accrued liabilities 35,178 34,173
---------- ----------
Total Current Liabilities 165,755 138,928
========== ==========
Long-term debt, less current 196,189 217,245
maturities
Deferred taxes 78,568 62,979
Other liabilities 3,079 5,404
---------- ----------
Total Long-Term Liabilities 277,836 285,628
========== ==========
Company-Obligated, Mandatorily
Redeemable
Convertible Preferred Securities of
Spartech Capital Trusts
Holding Solely Convertible 150,000 150,000
Subordinated Debentures
Shareholders' Equity
Common stock, 30,460,682 shares
issued in 2003 and 2002 22,846 22,846
Contributed capital 139,243 140,213
Retained earnings 191,912 169,518
Treasury stock, at cost, 1,108,381
shares
in 2003 and 1,175,228 shares in (27,142) (28,701)
2002
Accumulated other comprehensive loss (4,501) (13,178)
----------- -----------
Total Shareholders' Equity 322,358 290,698
----------- -----------
$ 915,949 $ 865,254
========== ==========
See accompanying notes to consolidated financial statements.
Consolidated Statement of Operations
(Dollars in thousands, except per 2003 2002 2001
share amounts)
Net Sales $ 956,160 $ 898,308 $ 937,059
---------- ---------- ----------
Costs and Expenses
Cost of sales 822,147 763,145 785,010
Selling, general, and administrative 53,540 53,624 55,996
Write-down of long-lived assets - - 5,550
Amortization of intangibles 2,187 660 8,129
---------- ---------- ----------
877,874 817,429 854,685
---------- ---------- ----------
Operating Earnings 78,286 80,879 82,374
Interest 14,715 16,566 24,571
Distributions on preferred securities
of Spartech Capital Trusts 10,250 10,250 10,250
---------- ---------- ----------
Earnings Before Income Taxes 53,321 54,063 47,553
Income taxes 19,218 19,793 17,650
---------- ---------- ----------
Net Earnings $ 34,103 $ 34,270 $ 29,903
========== ========== ==========
Net Earnings Per Common Share
Basic $ 1.17 $ 1.23 $ 1.12
======== ======== ========
Diluted $ 1.15 $ 1.21 $ 1.11
======== ======== ========
See accompanying notes to consolidated financial statements.
Consolidated Statement of Shareholders' Equity
(Dollars in thousands) Common Contributed Retained Treasury Accumulated Total
Stock Capital Earnings Stock Other Shareholders'
Comprehensive Equity
Loss
------- ---------- -------- --------------- ------------ -------------
Balance, October 28, $21,039 $ 95,241 $126,149 $ (25,306) (6,101) $ 211,022
2000
Comprehensive income:
Net earnings - - 29,903 - - 29,903
Other comprehensive
income (Loss):
Translation - - - - (2,381) (2,381)
adjustments
Cash flow hedge
adjustments,
net of tax of - - - - (5,749) (5,749)
$3,558
-----------
Comprehensive 21,773
income
Stock options exercised - (1,002) - 3,643 - 2,641
Cash dividends - - (10,143) - - (10,143)
Treasury stock purchases - - - (8,747) - (8,747)
------- ---------- -------- ----------- ----------- -----------
Balance, November 3, $21,039 $ 94,239 $ 145,909 $ (30,410) $ (14,231) $ 216,546
2001
------- ---------- -------- ----------- ----------- -----------
Comprehensive income:
Net earnings - - 34,270 - - 34,270
Other comprehensive
income (Loss):
Translation - - - - 1,518 1,518
adjustments
Cash flow hedge
adjustments,
net of tax of $288 - - - - (465) (465)
-----------
Comprehensive 35,323
income
Common stock issuance 1,807 48,856 - - - 50,663
Stock options exercised - (2,882) - 8,423 - 5,541
Cash dividends - - (10,661) - - (10,661)
Treasury stock purchases - - - (6,714) - (6,714)
------- ---------- -------- ----------- ----------- -----------
Balance, November 2, $ 22,846 $ 140,213 $ 169,518 $ (28,701) $ (13,178) $ 290,698
2002
------- ---------- -------- ----------- ----------- -----------
Comprehensive income:
Net earnings - - 34,103 - - 34,103
Other comprehensive
income (Loss):
Translation - - - - 6,038 6,038
adjustments
Cash flow hedge
adjustments,
net of tax of - - - - 2,639 2,639
$ (1,633)
-----------
Comprehensive 42,780
income
Stock options exercised - (970) - 4,275 - 3,305
Cash dividends - - (11,709) - - (11,709)
Treasury stock purchases - - - (2,716) - (2,716)
------- ---------- -------- ----------- ----------- -----------
Balance, November 1, $22,846 $ 139,243 $191,912 $ (27,142) $ (4,501) $ 322,358
2003
======= ========= ======== ========== ========= =========
See accompanying notes to consolidated financial statements.
Consolidated Statement of Cash Flows
(Dollars in thousands) 2003 2002 2001
Cash Flows from Operating Activities
Net earnings $ 34,103 $ 34,270 $ 29,903
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 31,566 28,120 34,921
Write-down of long-lived assets - - 5,550
Change in current assets and liabilities,
net of effects of acquisitions and divestitures:
Receivables (18,472) (1,380) 20,661
Inventories (713) 1,879 (2,003)
Prepaids and other (2,192) 2,063 840
Accounts payable 10,975 3,871 (19,439)
Accrued liabilities (3,881) 6,023 (7,584)
Other, net 15,294 12,224 7,604
---------- ---------- ----------
Net cash provided by operating activities 66,680 87,070 70,453
---------- ---------- ----------
Cash Flows from Investing Activities
Capital expenditures (22,009) (28,217) (16,237)
Business (acquisitions) divestitures (27,589) (49,092) 22,313
Dispositions of assets 293 492 1,300
---------- ---------- ----------
Net cash provided (used) for investing activities (49,305) (76,817) 7,376
---------- ---------- ----------
Cash Flows from Financing Activities
Bank borrowings for acquisitions 27,589 4,690 -
Payments on bank credit facilities from divestitures - - (22,313)
Payments on bank credit facilities (36,916) (54,698) (40,406)
Payments on bonds and leases (150) (374) (791)
Issuance of common stock - 50,663 -
Cash dividends on common stock (11,709) (10,661) (10,143)
Stock options exercised 3,331 5,541 2,641
Treasury stock acquired (3,462) (6,714) (8,747)
---------- ---------- ----------
Net cash used by financing activities (21,317) (11,553) (79,759)
---------- ---------- ----------
Effect of exchange rate changes on cash and equivalents 210 239 7
---------- ---------- ----------
Decrease in cash and equivalents (3,732) (1,061) (1,923)
Cash and Equivalents at Beginning of Year 7,511 8,572 10,495
---------- ---------- ----------
Cash and Equivalents at End of Year $ 3,779 $ 7,511 $ 8,572
========= ========== ==========
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
1) Significant Accounting Policies
Basis of Presentation - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates. 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. Fiscal year
2001 included 53 weeks, while 2002 and 2003 each included 52 weeks.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of SPARTECH Corporation and its controlled affiliates. All
intercompany transactions and balances have been eliminated. Investments in
entities of 20 to 50 percent of the outstanding capital stock of an entity is
accounted for by the equity method.
Foreign Currency Translation - Assets and liabilities of the Company's non-U.S.
operations are translated from their functional currency to U.S. dollars using
exchange rates in effect at the balance sheet date. Results of operations are
translated using average rates during the period. Adjustments resulting from
the translation process are included in a separate component of shareholders'
equity. The Company may periodically enter into foreign currency contracts to
manage exposures to market risks from prospective changes in exchange rates. No
such contracts were outstanding as of November 1, 2003 or November 2, 2002.
Cash Equivalents - Cash equivalents consist of highly liquid investments with
original maturities of three months or less.
Inventories - Inventories are valued at the lower of cost (first-in, first-out)
or market. Finished goods include the costs of material, labor, and overhead.
Property, Plant and Equipment - Property, plant and equipment are carried at
cost. Depreciation expense is recorded on a straight-line basis over the
estimated useful lives of the related assets as shown below and totaled $29,379,
$27,460, and $26,792 in fiscal years 2003, 2002, and 2001, respectively.
Years
Buildings and improvements 20-25
Machinery and equipment 12-16
Furniture and fixtures 5-10
Major additions and improvements are capitalized. Maintenance and repairs are
expensed as incurred. Upon disposition, the net book value is eliminated from
the accounts, with the resultant gain or loss reflected in operations.
Acquisitions - Acquisitions are accounted for by the purchase method, and
accordingly, the results of operations are included in the Company's Statement
of Operations from the respective date of acquisition. The purchase price is
allocated to the identifiable assets and liabilities, and any excess of the cost
over the fair value of the identifiable assets acquired is recorded as goodwill.
Identifiable intangible assets with definite lives are amortized as expense over
the estimated periods to be benefited. Intangible assets with indefinite lives,
including goodwill, are not subject to periodic amortization, but will be tested
for impairment annually, or more frequently if events or changes in
circumstances indicate the asset might be impaired.
Financial Instruments - The Company selectively uses derivative financial
instruments to manage its interest costs as well as its balance of floating rate
and fixed rate financings. No credit loss is anticipated, as the counterparties
to these agreements are major financial institutions with high credit ratings.
The Company does not enter into derivatives for trading purposes. The net
amount paid or received under an interest rate swap agreement is recorded as
interest expense.
Derivative instruments (including certain derivative instruments embedded in
other contracts) are recorded in the balance sheet as either an asset or
liability measured at fair value, and changes in the derivative's fair value are
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying derivatives designated as fair value
hedges allows a derivative's gains and losses to be offset in the income
statement by the related change in the fair value of the hedged item. Special
accounting for qualifying derivatives designated as cash flow hedges, allows the
effective portion of a derivative's gains and losses to be reported as a
component of accumulated other comprehensive loss and reclassified into earnings
in the period during which the hedged transaction affects earnings.
The Company uses the following methods and assumptions in estimating the fair
value of financial instruments:
Cash, accounts receivable, accounts payable, and accrued liabilities - the
carrying value of these instruments approximates fair value due to their short-
term nature;
Derivative financial instruments - based upon quoted market prices or
market prices for instruments with similar terms and maturities; and
Long-term debt (including bank credit facilities) and mandatorily
redeemable convertible preferred securities - based on quoted, current market
prices for the same or similar issues. As of November 1, 2003, the fair value
of long-term debt was $226,524 as compared to its carrying amount of $229,180
and the fair value of the convertible preferred securities was $162,760 as
compared to the carrying amount of $150,000.
Stock Based Compensation - In 2003, we adopted Statement of Financial Accounting
Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based
Compensation" to provide transition methods for a voluntary change to measuring
compensation cost in connection with employee share option plans using a fair
value based method. We continue to use the intrinsic value based method and do
not recognize compensation expense for the issuance of options with an exercise
price equal to or greater than the market price at the time of grant. As a
result, the adoption of SFAS No. 148 had no impact on our results of operations
or financial position. Had the fair value based provisions of SFAS No. 123 been
adopted by the Company, the effect on net income and earnings per common share
for fiscal 2003, 2002, and 2001 would have been as follows:
2003 2002 2001
---------- ---------- ----------
Net Earnings as Reported $ 34,103 $ 34,270 $ 29,903
Deduct fair value of options granted 1,592 2,519 1,020
---------- ---------- ----------
Pro Forma Net Earnings $ 32,511 31,751 28,883
---------- ---------- ----------
Earnings Per Share
As Reported:
Basic $ 1.17 $ 1.23 $ 1.12
Diluted 1.15 1.21 1.11
========== ========== ==========
Pro Forma:
Basic $ 1.11 $ 1.14 $ 1.09
Diluted 1.10 1.12 1.08
========== ========== ==========
Using the Black-Scholes option-pricing model, the estimated weighted-average
fair value of options granted during fiscal 2003, 2002, and 2001 is as follows:
2003 2002 2001
Weight Average Fair Value $ 5.58 $ 6.91 $ 3.32
Assumptions:
Expected Dividend Yield 2.0% 2.0% 3.0%
Expected Volatility 35% 35% 30%
Risk-Free Interest Rates 2.52-3.50% 4.38-5.14% 4.76-5.17%
Expected Lives 5 years 5 years 5 years
The effects of applying SFAS No. 123 in the pro forma disclosure are not
necessarily indicative of the effects that may be realized in future years.
Revenue Recognition - The Company manufactures products for specific customer
orders and for standard stock inventory. Revenues are recognized and billings
are rendered as the product is shipped to the customer in accordance with U.S.
generally accepted accounting principles as well as the Securities and Exchange
Commission's Staff Accounting Bulletin No.101. Shipping and handling costs
associated with the shipment of goods are recorded as costs of sales in the
consolidated statement of operations.
Income Taxes - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets are also recognized for credit carryforwards and
then assessed (including the anticipation of future income) to determine the
likelihood of realization. Deferred tax assets and liabilities are measured
using the rates expected to apply to taxable income in the years in which the
temporary differences are expected to reverse and the credits are expected to be
used. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment
date.
2) Acquisitions, Divestitures, and Facility Restructurings
On September 30, 2003, the Company completed the purchase of certain assets and
entered into a supply agreement with Wilbert Inc.'s TriEnda Division located in
Portage, Wisconsin. The acquired business was a "captive" (internal consumption)
manufacturer of extruded sheet, primarily for the TriEnda line of reusable
shipping and material handling containers. The total purchase price for these
assets, will be approximately $5,500. Cash of $4,000 was paid on the transaction
date with the remainder to be settled upon completion of the working capital
adjustment.
On March 31, 2003, the Company completed its acquisition of Polymer Extruded
Products, Inc. (PEP), a manufacturer of weatherable film laminates and cellulose
specialty extruded products. PEP had annual sales of approximately $21,000 for
calendar year 2002, with nearly $4,000 of those sales to Spartech's Custom Sheet
& Rollstock segment. The cash paid for this acquisition of $23,761 was
allocated to the assets acquired and liabilities assumed of $32,724 and $8,963,
respectively (acquired assets included $14,484 of goodwill, $1,887 of which is
deductible for tax purposes, non-compete agreements and customer relationships
totaling $1,900 with amortization periods of 5 years, and a trademark of $8,900
which was determined to have an indefinite life). This acquisition was funded
through our existing bank credit facility.
On June 4, 2002, the Company completed its acquisition of GWB Plastics Holding
Co. (GWB), which is the parent of two operating companies, UVTEC and PolyTech
South. These businesses generated net sales of approximately $40,000 during the
12 months prior to the acquisition. The final purchase price of $47,228 was
allocated to the assets acquired (including $23,675 of goodwill - $17,747 of
which is deductible for tax purposes, non-compete agreements and customer
contacts totaling $4,990 with amortization periods of 3 to 5 years, and product
formulations totaling $12,030 with an amortization period of 15 years) and
liabilities assumed of $52,157 and $4,929, respectively. The purchase was
financed through proceeds from our May 30, 2002 common stock offering of 2.4
million shares at $22 per common share.
Effective July 19, 2001, the Company completed the sale of its custom molded
product businesses based in Canada for approximately $25,000 to a group of
former managers. These two businesses, Spartech Industries - Thin-Wall
Containers and Spartech Industries - Custom Molded Products, consisted of three
production facilities (two in Ontario and one in Quebec) and represented
approximately $23,000 of the Company's fiscal 2001 sales. The proceeds
consisted of approximately $23,000 in cash and a $2,000 five-year, interest-
bearing note.
During fiscal 2001, the Company implemented a series of cost reduction actions
to further streamline its core operations, increase production efficiencies, and
strengthen the Company's position for future growth. These streamlining efforts
included the closing of three plant facilities. In connection with these
efforts, the Company recorded $9,090 in non-recurring pre-tax expenses in the
third quarter. The non-recurring expenses consisted of $5,550 related to
writedowns for the impairment of long-lived assets and $3,540 related to
severance, phase out, and other exit costs recorded in cost of sales. The
impairment charges adjusted the carrying values of the affected assets to an
estimate of fair value less the cost to sell. Most of the activities occurred
in fiscal 2001 with the balance completed in fiscal 2002.
3) Inventories
Inventories at November 1, 2003 and November 2, 2002 are comprised of the
following components:
2003 2002
---------- ----------
Raw materials $ 57,414 $ 55,207
Finished goods 42,257 39,983
---------- ----------
$ 99,671 $ 95,190
========== ==========
4) Property, Plant and Equipment
Property, plant and equipment consisted of the following at November 1, 2003 and
November 2, 2002:
2003 2002
---------- ----------
Land $ 12,247 $ 10,997
Buildings and leasehold
improvements 74,264 72,487
Machinery and equipment 361,684 329,974
Furniture and fixtures 9,537 9,062
---------- ----------
457,732 422,520
Less accumulated depreciation 173,808 142,046
---------- ----------
Property, plant and
equipment, net $ 283,924 $ 280,474
=========== ===========
5) Goodwill and Other Intangible Assets
During fiscal year 2001 and prior periods, amortization of goodwill and
intangible assets was charged against operations on a straight-line basis over
the periods estimated to be benefited, not exceeding 40 years. In July 2001,
the Financial Accounting Standards Board (FASB) issued SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142, among other things, eliminated the
amortization of goodwill and certain identified intangible assets. Effective
November 4, 2001, the Company adopted SFAS No. 142, and as such, intangible
assets, including goodwill, 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.
As required by SFAS No. 142, the results for prior periods have not been
restated. A reconciliation of net earnings and per share amounts for fiscal
year 2001 is presented below as if SFAS No. 142 had been adopted at the
beginning of that period.
2001
-----------
Reported Net Earnings $ 29,903
Add back: goodwill amortization (net of tax) 6,164
-----------
Adjusted Net Earnings $ 36,067
==========
Basic Net Earnings Per Share:
Reported Net Earnings $ 1.12
Add back: goodwill amortization (net of tax) .23
-----------
Adjusted Net Earnings $ 1.35
===========
Diluted Net Earnings Per Share:
Reported Net Earnings $ 1.11
Add back: goodwill amortization (net of tax) .21
-----------
Adjusted Net Earnings $ 1.32
===========
Amortization expense for intangible assets totaled $2,187 in 2003 and $660 in
2002. At November 1, 2003, accumulated amortization of the non-compete &
customer contracts, and product formulations was $1,775 and $1,136,
respectively. Amortization expense for our current amortizable intangible
assets over the next five fiscal years is estimated to be: 2004-$2,347,
2005-$2,104, 2006-$1,930, 2007-$1,680, and 2008-$961.
The Company's changes in the carrying amount of goodwill for the years ended
November 1, 2003 and November 2, 2002 are as follows:
Custom Color & Molded &
Sheet Compounds Profile Total
-------- ---------- -------- --------
Balance, November 3, 2001 $182,900 $ 72,062 $ 37,614 $292,576
Goodwill acquired $ 2,905 $ 23,360 $ - $ 26,265
-------- ---------- -------- --------
Balance, November 2, 2002 $185,805 $ 95,422 $ 37,614 $318,841
Goodwill acquired $ 15,236 $ 315 $ - $ 15,551
-------- ---------- -------- --------
Balance, November 1, 2003 $201,041 $ 95,737 $ 37,614 $334,392
======== ========== ======== ========
Total accumulated amortization for goodwill at November 1, 2003 and November 2,
2002 is $29,773.
6) Long-Term Debt
Long-term debt is comprised of the following at November 1, 2003 and November 2,
2002:
2003 2002
---------- ----------
7.0% Senior Unsecured Notes $ 40,714 $ 47,143
7.62% Guaranteed Senior Unsecured Notes 12,857 17,143
7.21% Senior Unsecured Notes 14,286 21,429
Bank Credit Facilities 152,203 140,268
Other 9,120 12,349
---------- ----------
229,180 238,332
Less current maturities 32,991 21,087
---------- ----------
Total long-term debt $ 196,189 $ 217,245
========== ==========
The Company's unsecured bank credit facility provides an aggregate availability
of $250,000 and expires February 25, 2005. Borrowings under this facility are
classified as long-term, as no paydowns of the aggregate facilities are required
within the next fiscal year. The Company's Canadian entity has an additional
Canadian $10,000 revolving facility in Canada. The total capacity under these
bank credit facilities was $257,577 at November 1, 2003. Interest on the bank
credit facilities is payable at a rate chosen by the Company of either prime or
LIBOR plus a 0.625% to 1.25% borrowing margin and the agreement requires a fee
of 0.15% to 0.30% for any unused portion of the facilities. At November 1, 2003,
the Company had fixed LIBOR loans outstanding under the bank credit facilities
of $150,900 at 2.13%-2.25% in the U.S. for one to three month periods (LIBOR
loans totaled $135,000 at 2.81%-2.88% in the U.S. and $2,568 at 3.62% in Canada
on November 2, 2002). The remaining bank credit facility borrowings were at the
current prime rate (November 1, 2003 of $1,000 at 4% and November 2, 2002 of
$2,700 at 4.75% in the U.S. and November 1, 2003 of $303 at 4.75% in Canada).
The Company has a $125,000 interest rate swap agreement through November 2004
under which it pays interest at 6.06% and receives interest at LIBOR plus the
borrowing margin . We have designated the swap as a cash flow hedge of the LIBOR
borrowings under the bank credit facilities.
On August 22, 1997, the Company completed a private placement of 7.0% Senior
Unsecured Notes consisting of $45,000 designated as Series A and $15,000
designated as Series B. The Series A 1997 Notes require equal annual principal
payments of approximately $6,429 that commenced on August 22, 2001 and the
Series B 1997 Notes do not require principal payments before becoming due on
August 22, 2004. Interest on the 1997 Notes is payable semiannually on February
22 and August 22 of each year. On September 27, 1996, the Company completed a
$30,000 private placement of 7.62% Guaranteed Unsecured Notes over a ten-year
term. The 1996 Notes require equal annual principal payments of approximately
$4,286 that commenced on September 27, 2000. Interest on the 1996 Notes is
payable semiannually on March 27 and September 27 of each year. On August 15,
1995, the Company completeda $50,000 private placement of 7.21% Senior Unsecured
Notes over a ten-year term. The 1995 Notes require equal annual principal
payments of approximately $7,143 that commenced on August 15, 1999. Interest on
the 1995 Notes is payable semiannually on February 15 and August 15 of each
year.
The other debt consists of industrial revenue bonds utilized to finance capital
expenditures. These financings mature between 2004 and 2020 and have interest
rates ranging from 1.25% to 3.75%.
Scheduled maturities of long-term debt for the next five fiscal years are: 2004-
$32,991; 2005-$170,199; 2006-$10,857; 2007-$6,575; and 2008-$100. The long-term
debt contains certain covenants which, among other matters, require the Company
to restrict the incurrence of additional indebtedness, satisfy certain ratios
and net worth levels, and limit both the sale of assets and merger transactions.
7) Convertible Preferred Securities
On February 18, 2000, the Company issued $100,000 of 7.0% convertible
subordinated debentures to Spartech Capital Trust II, a Delaware trust
controlled by the Company. The Company used the proceeds to repay borrowings
under its bank credit facility. The debentures are the sole asset of the trust
and eliminate in consolidation. The trust purchased the debentures with the
proceeds of a $100,000 private placement of 7.0% convertible preferred
securities of the trust having an aggregate liquidation preference of $100,000
and guaranteed by SPARTECH. The debentures:
* Are convertible along with the trust's preferred securities, at the
option of the preferred security holders, into shares of the Company's common
stock at a conversion price equivalent to $34.00 per share of common stock, for
a total of 2,941,176 shares;
* Are redeemable along with the trust's preferred securities, at the
Company's option, at a price equal to 104.9% of the principal amount plus
accrued interest through March 1, 2004. This amount declines annually to a price
equal to the principal amount plus accrued and unpaid interest after March 1,
2010; and
* Mature and are payable, along with the trust's preferred securities, on
March 31, 2015, if they have not been previously redeemed or converted.
On March 5, 1999, the Company issued $50,000 of 6.5% convertible subordinated
debentures to Spartech Capital Trust, a Delaware trust controlled by the
Company. The Company used the proceeds to repay borrowings under its bank credit
facilities. The debentures are the sole asset of the trust and eliminate in
consolidation. The trust purchased the debentures with the proceeds of a $50,000
private placement of 6.5% convertible preferred securities of the trust, having
an aggregate liquidation preference of $50,000 and guaranteed by the Company.
The debentures:
* Are convertible along with the trust's preferred securities, at the
option of the preferred security holders, into shares of the Company's common
stock at a conversion price equivalent to $30.55 per share of common stock, for
a total of 1,636,661 shares;
* Are redeemable along with the trust's preferred securities, at the
Company's option, at a price equal to 103.9% of the principal amount plus
accrued interest through March 1, 2004. This amount declines annually to a price
equal to the principal amount plus accrued and unpaid interest after March 1,
2009; and
* Mature and are payable, along with the trust's preferred securities, on
March 31, 2014, if they have not been previously redeemed or converted.
8) Shareholders' Equity & Stock Options
The authorized capital stock of the Company consists of 45 million shares of
$.75 par value common stock and 4 million shares of $1 par value preferred
stock.
In April 2001, the Company adopted a Shareholder Rights Plan by declaring a
dividend of one Preferred Share Purchase Right (Right) for each outstanding
share of the Company's common stock. The Rights will initially trade with, and
will be inseparable from, the common stock. Prior to exercise, a Right does not
give its holder any dividend, voting, or liquidation rights. Under certain
circumstances, a Right may be exercised to purchase one one-thousandth of a
share of Series Z Preferred Stock for $70 per share. The Rights become
exercisable, subject to certain exceptions, if a new person or group acquires
beneficial ownership of 15% or more, to purchase shares of the Company's common
stock with a market value of $140.00, for $70.00 per Right. The Rights will
expire on April 2, 2011 and may be redeemed by the Company for $.01 per Right at
any time before a new person or group becomes a beneficial owner of 15% or more
of the Company's outstanding common stock.
The Company has a Stock Option Plan for executive officers, key employees, and
directors. The minimum exercise price is the fair market value per share at the
date of grant. Options are granted with lives ranging from 5-10 years and vest
over a four-year period. No more than 3,000,000 shares may be issued as
incentive stock options under the plan, and the maximum number of shares
issuable annually under the plan is limited to 10% of the Company's outstanding
common shares (excluding treasury shares) at the prior year end. Subject to the
limitations discussed above, the number of options granted pursuant to these
plans is at the discretion of the Compensation Committee of the Board of
Directors.
A summary of the combined activity for the Company's stock options for fiscal
years 2003, 2002, and 2001 follows (shares in thousands):
2003 2002 2001
------ ------ ------
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Option Exercise Option Exercise
Price Price Price
------- -------- ------ -------- ------ --------
Outstanding, beginning of 2,382 $ 19.23 2,463 $ 16.67 2,475 $ 15.86
year
Granted 461 $ 18.74 576 $ 21.38 489 $ 12.48
Exercised (250) $ 15.25 (609) $ 10.99 (481) $ 7.01
Canceled/Expired (71) $ 20.78 (48) $ 18.36 (20) $ 22.09
------- -------- ------ -------- ------ --------
Outstanding, end of year 2,522 $ 19.50 2,382 $ 19.23 2,463 $ 16.67
======= ======= ====== ======= ====== =======
Exercisable, end of year 1,443 1,453 1,681
======= ====== ======
Information with respect to options outstanding at November 1, 2003 follows
(shares in thousands):
Outstanding Exercisable
Weighted
Remaining
Contractual
Life
Shares Average Average
Exercise Exercise
Price Price
Range of Exercise Prices Shares
------ ------- ----------- ------ -----------
$ 10.88 - 15.88 818 $13.90 5.2 years 655 $14.57
$ 16.00 - 21.00 579 $17.91 8.0 years 155 $17.54
$ 21.10 - 25.48 680 $21.64 8.1 years 191 $21.74
$ 27.00 - 28.94 445 $28.59 4.6 years 442 $28.60
------ ------
2,522 1,443
===== =====
9) Income Taxes
The provision for income taxes for fiscal years 2003, 2002, and 2001 is
comprised of the following:
2003 2002 2001
-------- --------- --------
Federal:
Current $ 8,614 $ 8,651 $ 9,104
Deferred 6,984 6,890 5,338
State 2,475 2,393 1,833
Foreign 1,145 1,859 1,375
-------- --------- --------
Provision for income taxes $ 19,218 $ 19,793 $ 17,650
======== ======== ========
Earnings before income taxes for 2003, 2002, and 2001 include $3,762, $5,329,
and $4,016, respectively from non-U.S. operations. The income tax provision on
earnings of the Company differs from the amounts computed by applying the U.S.
Federal tax rate of 35% as follows:
2003 2002 2001
------- ------- -------
Federal income taxes at statutory rate $ 18,662 $ 18,922 $ 16,644
State income taxes, net of applicable
Federal income tax benefits 1,609 1,555 1,191
Other (1,053) (684) (185)
--------- -------- --------
$ 19,218 $ 19,793 $ 17,650
========= ========= =========
At November 1, 2003 and November 2, 2002, the Company's principal components of
deferred tax assets and liabilities consisted of the following:
2003 2002
---------- ---------
Deferred tax assets:
Bad debt reserves $ 1,319 $ 1,398
Inventories 1,187 318
Accrued liabilities 4,782 9,827
--------- --------
$ 7,288 $ 11,543
========= ========
Deferred tax liabilities:
Depreciation $ 57,540 $ 52,951
Goodwill and other intangibles 24,289 15,137
---------- ---------
$ 81,829 $ 68,088
========== ========
At November 1, 2003 and November 2, 2002, the net current deferred tax asset was
$4,027 and $6,434, respectively, and the net noncurrent deferred tax liability
was $78,568 and $62,979, respectively.
As of November 1, 2003, no deferred taxes have been provided on the $21,825 in
accumulated earnings of the Company's foreign subsidiaries that are not subject
to United States income tax. The Company's intention is to reinvest these
earnings indefinitely or to repatriate the earnings only when it is tax
effective to do so.
10) Earnings Per Share
Basic earnings per share excludes any dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
The reconciliation of the net earnings and weighted average number of common
shares used in the computations of basic and diluted earnings per share for
fiscal years 2003, 2002, and 2001, was as follows (shares in thousands):
2003 2002 2001
---------- ---------- ----------
Earnings Shares Earnings Shares Earnings Shares
-------- ------ -------- ------ -------- ------
Basic Earnings Per Share $ 34,103 29,268 $ 34,270 27,895 $ 29,903 26,697
Effect of stock options - 299 - 484 - 445
Effect of convertible
preferred securities - - - - 2,086 1,554
--------- ------ --------- ------ -------- ------
Diluted Earnings Per Share $ 34,103 29,567 $ 34,270 28,379 $ 31,989 28,696
========= ====== ========= ====== ======== ======
The effect of stock options represents the shares resulting from the assumed
exercise of outstanding stock options calculated using the treasury stock
method. The effect of convertible preferred securities represents the shares
resulting from the assumed conversion using the "if converted" method and the
add back of the distributions on preferred securities after tax for the assumed
conversion at the beginning of each year. All convertible preferred securities
were antidilutive in fiscal years 2003 and 2002. The calculation of diluted
earnings per share excluded 4,577,838 potentially dilutive shares, and the
benefit of an interest expense add-back of approximately $6,500, net of tax, in
both years. In fiscal 2001, only a portion of these securities were
antidilutive, and the diluted earnings per share calculation excluded 3,024,213
potentially dilutive shares, and $4,361 in interest expense benefit, net of tax.
11) Employee Benefits
The Company sponsors or contributes to various defined contribution retirement
benefit and savings plans covering substantially all employees. The total cost
of such plans for fiscal years 2003, 2002, and 2001 was $2,530, $2,742, and
$3,084, respectively.
12) Cash Flow Information
Supplemental information on cash flows for fiscal years 2003, 2002, and 2001 was
as follows:
2003 2002 2001
-------- --------- ----------
Cash paid during the year for:
Interest $ 26,690 $ 28,267 $ 36,084
Income taxes $ 8,896 $ 4,507 $ 9,863
Schedule of business acquisitions/divestitures:
Fair value of assets acquired (disposed) $ 37,937 $ 57,521 $ (31,219)
Liabilities (assumed) transferred (10,348) 4,019
(5,589)
Non-cash consideration/holdback payments - (2,840) 4,887
-------- --------- ----------
Total cash paid (received) $ 27,589 $ 49,092 $ (22,313)
======== ======== ==========
13) Commitments and Contingencies
The Company conducts certain of its operations in facilities under operating
leases. Rental expense for fiscal years 2003, 2002, and 2001, was $10,657,
$9,264, and $8,967, respectively. Future minimum lease payments under non-
cancelable operating leases, by fiscal year, are: 2004-$7,171; 2005-$5,563;
2006-$4,045; 2007-$3,351, 2008-$2,449, and $5,418 thereafter.
In September 2003, the New Jersey Department of Environmental Protection issued
a directive and the United States Environmental Protection Agency initiated an
investigation related to over 70 companies, including Spartech, regarding the
Lower Passaic River. Management expects that an environmental study will be
conducted to determine the extent and sources of contamination at this site.
Management believes it is possible that the ultimate liability from this issue
could materially differ from the Company's $375 accrual as of November 1, 2003.
Due to uncertainties inherent in this matter, management is unable to estimate
the Company's possible exposure upon the ultimate outcome of this issue. These
uncertainties primarily include the completion and outcome of the environmental
study and the percentage of contamination attributable to Spartech and other
parties.
The Company is also subject to various other claims, lawsuits, and
administrative proceedings arising in the ordinary course of business with
respect to commercial, product liability, employment, and other matters, several
of which claim substantial amounts of damages. While it is not possible to
estimate with certainty the ultimate legal and financial liability with respect
to these claims, lawsuits, and administrative proceedings, the Company believes
that the outcome of these other matters will not have a material adverse effect
on the Company's financial position or results of operations.
14) Segment Information
The Company's forty-seven facilities are organized into three reportable
segments based on the nature of the products manufactured. The Company utilizes
operating earnings to evaluate business segment performance and determine the
allocation of resources. Segment accounting policies are the same as policies
described in Note 1. A description of reportable segments for the Company
follows:
Custom Sheet & Rollstock - This segment has twenty-six manufacturing
facilities and is the largest extruder of plastic sheet, custom rollstock,
laminates, and cell cast acrylic sheet in North America. The segment's finished
products are formed by its customers for use in a wide variety of markets.
Color & Specialty Compounds - This segment operates fourteen plants
throughout North America and Europe. The Color & Specialty Compounds segment
manufactures custom-designed plastic alloys, compounds, color concentrates, and
calendered film for utilization in numerous applications.
Molded & Profile Products - This segment has seven North American
facilities which manufacture a number of proprietary items. These include
injection molded products, complete thermoplastic wheels and tires, and profile
extruded products.
Corporate & Other includes unallocated corporate office expenses and other non-
allocated expenses. Assets included in Corporate & Other consist primarily of
deferred taxes, cash & cash equivalents.
2003 2002 2001
------- -------- --------
Net Sales
Custom Sheet & Rollstock $628,535 $600,486 $621,866
Color & Specialty Compounds 263,034 235,728 227,809
Molded & Profile Products 64,591 62,094 87,384
------- -------- --------
Total Net Sales $956,160 $898,308 $937,059
======== ======== ========
Operating Earnings
Custom Sheet & Rollstock $63,096 $62,294 $66,589
Color & Specialty Compounds 20,986 25,721 24,767
Molded & Profile Products 5,393 3,496 8,571
Corporate & Other (11,189) (10,632) (17,553)
------- -------- --------
Total Operating Earnings $ 78,286 $80,879* $82,374*
======== ======== ========
Assets
Custom Sheet & Rollstock $ 558,312 $509,513 $527,388
Color & Specialty Compounds 259,381 254,371 210,752
Molded & Profile Products 84,514 77,252 64,059
Corporate & Other 13,742 24,118 12,904
------- -------- --------
Total Assets $915,949 $865,254 $815,103
======== ======== ========
Depreciation and Amortization
Custom Sheet & Rollstock $17,561 $ 16,364 $20,011
Color & Specialty Compounds 10,646 8,705 9,502
Molded & Profile Products 3,021 2,608 5,130
Corporate & Other 338 443 278
Total Depreciation ------- -------- --------
and Amortization $31,566 $ 28,120 $34,921
======== ======== ========
Capital Expenditures
Custom Sheet & Rollstock $ 10,345 $ 16,062 $7,915
Color & Specialty Compounds 6,698 6,153 3,097
Molded & Profile Products 2,565 4,357 4,567
Corporate & Other 2,401 1,645 658
------- -------- --------
Total Capital Expenditures $ 22,009 $ 28,217 $16,237
======== ======== ========
* - Total Operating Earnings for 2001 are reduced by the pre-tax $9,090 non-
recurring charges related to the impairment of long-lived assets, severance,
and plant closedown costs ($8,080 reflected as Corporate & Other) and total
operating earnings for 2002 benefited from the elimination of $8,129 of
goodwill amortization incurred in the prior year.
In addition to external sales to customers, intersegment sales were $36,948,
$25,950, and $27,544 for the fiscal years ended 2003, 2002, and 2001,
respectively. Most intersegment sales were generated from our Color & Specialty
Compounds segment.
The Company operates in five reportable geographic areas - the United States,
Canada, Mexico, Europe, and Asia & Other. Geographic financial information for
fiscal years 2003, 2002, and 2001 was as follows:
Net Sales Property, Plant and Equipment, Net
2003 2002 2001 2003 2002 2001
-------- --------- ----------- --------- --------- ---------
United States $ 815,009 $ 776,749 $ 809,632 $ 239,825 $ 258,827 $ 253,484
Canada 79,023 74,312 92,338 26,500 19,061 17,200
Mexico 31,400 23,070 15,215 14,192 - -
Europe 19,382 15,923 14,415 3,407 2,586 3,471
Asia & Other 11,346 8,254 5,459 - - -
-------- --------- ----------- --------- --------- ---------
$ 956,160 $ 898,308 $ 937,059 $ 283,924 $ 280,474 $ 274,155
========= ========= =========== ========= ========= =========
15) Comprehensive Income
Comprehensive Income is an entity's change in equity during the period related
to transactions, events, and circumstances from non-owner sources. Accumulated
other comprehensive loss consisted of foreign currency translation adjustments
of $926 and $6,964, and cash flow hedge adjustments of $3,575 and $6,214 at
November 1, 2003 and November 2, 2002, respectively.
16) Quarterly Financial Information
Certain unaudited quarterly financial information for the fiscal years ended
November 1, 2003 and November 2, 2002 was as follows:
Quarter Ended Fiscal
Jan April July Oct Year
2003
Net Sales $ 213,700 $ 250,488 $ 238,870 $ 253,102 $ 956,160
Gross Profit 29,230 36,035 33,090 35,658 134,013
Net Earnings 6,158 10,541 8,147 9,257 34,103
Net Earnings Per Share - Basic .21 .36 .28 .32 1.17
- Diluted .21 .36 .28 .31 1.15
2002
Net Sales $ 190,668 $ 233,204 $ 237,242 $ 237,194 $ 898,308
Gross Profit 27,161 36,058 38,252 33,692 135,163
Net Earnings 4,862 9,074 11,486 8,848 34,270
Net Earnings Per Share - Basic .18 .34 .40 .30 1.23
- Diluted .18 .33 .39 .30 1.21
Management and Independent Accountants' Reports
Management Report To Our Shareholders
The financial statements of SPARTECH Corporation and subsidiaries were prepared
under the direction of management, which is responsible for their integrity and
objectivity. The statements have been prepared in conformity with generally
accepted accounting principles and, as such, include amounts based on informed
estimates and judgment of management.
Management has developed a system of internal controls, which is designed to
ensure that the books and records accurately reflect the transactions of the
Company and that its established policies and procedures are followed properly.
This system is augmented by written policies and procedures, and the selection
and training of qualified personnel.
Ernst & Young LLP, independent public accountants, is engaged to provide an
objective audit of the financial statements of SPARTECH Corporation and issue
reports thereon. Their audit is conducted in accordance with generally accepted
auditing standards in the United States.
The Board of Directors, acting upon the advice and recommendations of the Audit
Committee, is responsible for assuring that management fulfills its
responsibilities in preparing the financial statements and for engaging the
independent public accountants with whom the Committee reviews the scope of the
audits and the accounting principles to be applied in financial reporting. The
Committee meets regularly with the independent public accountants and
representatives of management to review their activities and ensure that each is
properly discharging its responsibilities.
/s/ Bradley B. Buechler /s/Randy C. Martin
Bradley B. Buechler Randy C. Martin
Chairman, President Executive Vice President
& Chief Executive Officer & Chief Financial Officer
Reports of Independent Accountants
Board of Directors SPARTECH Corporation
We have audited the accompanying consolidated balance sheets of SPARTECH
Corporation (the Company) as of November 1, 2003 and November 2, 2002, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows of the Company for the two years in the period ended November 1,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of SPARTECH
Corporation as of November 3, 2001 and for the year then ended were audited by
other auditors who have ceased operation. Those auditors expressed an
unqualified opinion on those financial statements in their report dated December
6, 2001.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SPARTECH
Corporation as of November 1, 2003 and November 2, 2002 and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended November 1, 2003 in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 5 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", in 2002.
/s/Ernst & Young LLP
Ernst & Young LLP
St. Louis, Missouri
December 11, 2003
THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED REPORT AND HAS NOT BEEN REISSUED
BY ARTHUR ANDERSEN LLP
We have audited the accompanying consolidated balance sheet of SPARTECH
Corporation (a Delaware Corporation) and subsidiaries as of November 3, 2001 and
October 28, 2000, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three fiscal years in the
period ended November 3, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SPARTECH Corporation and
subsidiaries as of November 3, 2001 and October 28, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended November 3, 2001 in conformity with accounting principles generally
accepted in the United States.
/s/Arthur Andersen LLP
Arthur Andersen LLP
St. Louis, Missouri
December 6, 2001
Eleven-Year Summary
The following table sets forth selected financial data for each of the most
recent eleven years. This data should be read in conjunction with the
Consolidated Financial Statements and Notes related thereto, and Management's
Discussion and Analysis which begins on Page 10 of this Report. (Amounts in
Thousands, except employee and per share data).
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS
Net Sales:
In Dollars $ 956,160 $ 898,308 $ 937,059 $ 987,532 $ 790,427
In Pounds 1,244,000 1,205,000 1,198,000 1,309,000 1,186,000
Gross Profit $ 134,013 $ 135,163 $ 152,049 $ 171,669 $ 136,962
Depreciation & $ 31,566 $ 28,120 $ 34,921 $ 31,905 $ 23,222
Amortization
Operating Earnings $ 78,286 $ 80,879 $ 82,374* $ 109,761 $ 87,707
Interest & Preferred $ 24,965 $ 26,816 $ 34,821 $ 29,131 $ 16,198
Distributions
Net Earnings $ 34,103 $ 34,270 $ 29,903* $ 49,907 $ 43,071
PER SHARE INFORMATION
Earnings Per Share-Diluted $ 1.15 $ 1.21 $ 1.11* $ 1.72 $ 1.48
Dividends Declared Per $ .40 $ .38 $ .38 $ .34 $ .28
Share
Book Value Per Share $ 10.98 $ 9.93 $ 8.11 $ 7.86 $ 6.98
BALANCE SHEET INFORMATION
Working Capital $ 98,293 $ 99,722 $ 111,146 $ 111,041 $ 77,698
Total Debt $ 229,180 $ 238,332 $ 288,714 $ 352,845 $ 230,309
Total Assets $ 915,949 $ 865,254 $ 815,103 $ 888,969 $ 625,401
Cash Flow From Operations $ 66,680 $ 87,070 $ 70,453 $ 60,413 $ 76,547
Capital Expenditures $ 22,009 $ 28,217 $ 16,237 $ 29,129 $ 24,692
Shareholders' Equity $ 322,358 $ 290,698 $ 216,546 $ 211,022 $ 190,042
RATIOS/OTHER DATA
Gross Margin 14.0% 15.0% 16.2% 17.4% 17.3%
Operating Margin 8.2% 9.0% 8.8%* 11.1% 11.1%
Effective Tax Rate 36.0% 36.6% 37.1% 38.1% 39.8%
Total Debt to Total Debt 41.6% 45.1% 57.1% 62.6% 54.8%
and Equity
Return on Average Equity 11.1% 13.5% 14.0%* 24.9% 25.1%
Number of Employees 3,325 3,475 3,300 4,075 3,350
Common Shares:
Outstanding at Year-End 29,352 29,285 26,700 26,864 27,240
Weighted Average-Diluted 29,567 28,379 28,696 31,874 29,982
1998 1997 1996 1995 1994 1993
SUMMARY OF OPERATIONS
Net Sales:
In Dollars $ 670,477 $ 514,891 $ 401,132 $ 361,080 $ 263,008 $ 194,136
In Pounds 902,000 535,000 409,000 283,000 234,000 216,000
Gross Profit $ 111,215 $ 82,215 $ 60,572 $ 49,879 $ 36,998 $ 28,008
Depreciation & Amortization $ 18,530 $ 11,548 $ 7,211 $ 5,798 $ 4,422 $ 4,000
Operating Earnings $ 69,728 $ 49,701 $ 34,492 $ 24,604 $ 16,410 $ 10,569
Interest & Preferred $ 13,602 $ 8,393 $ 5,062 $ 4,960 $ 3,125 $ 3,350
Distributions
Net Earnings $ 33,720 $ 25,493 $ 18,317 $ 14,534 $ 10,835 $ 6,716
PER SHARE INFORMATION
Earnings Per Share-Diluted $ 1.18 $ .92 $ .73 $ .60 $ .46 $ .30
Dividends Declared Per Share $ .24 $ .20 $ .15 $ .09 $ - $ -
Book Value Per Share $ 5.72 $ 4.85 $ 4.26 $ 3.09 $ 6.75 $ 5.85
BALANCE SHEET INFORMATION
Working Capital $ 72,204 $ 63,429 $ 54,261 $ 45,108 $ 26,351 $ 25,032
Total Debt $254,220 $ 142,614 $ 98,466 $ 59,510 $ 39,169 $ 39,417
Total Assets $533,309 $ 358,803 $ 288,960 $ 178,329 $ 135,720 $ 114,194
Cash Flow From Operations $ 64,546 $ 48,390 $ 23,160 $ 16,487 $ 13,358 $ 10,645
Capital Expenditures $ 17,859 $ 12,172 $ 9,220 $ 9,477 $ 7,819 $ 2,583
Shareholders' Equity $153,596 $ 128,389 $ 112,395 $ 72,128 $ 58,233 $ 46,041
RATIOS/OTHER DATA
Gross Margin 16.6% 16.0% 15.1% 13.8% 14.1% 14.4%
Operating Margin 10.4% 9.7% 8.6% 6.8% 6.2% 5.4%
Effective Tax Rate 39.9% 38.3% 37.8% 26.0% 18.4% 7.0%
Total Debt to Total Debt and 62.3% 52.6% 46.7% 45.2% 40.2% 46.1%
Equity
Return on Average Equity 23.9% 21.2% 19.9% 22.3% 20.8% 15.8%
Number of Employees 2,700 2,125 1,800 1,200 925 700
Common Shares:
Outstanding at Year-End 26,861 26,480 26,400 23,353 8,629 7,873
Weighted Average-Diluted 28,609 27,838 25,115 24,111 23,434 23,438
Investor Information
Annual Shareholders' Meeting
SPARTECH's Annual Shareholders' Meeting will be held on Wednesday, March 10,
2004 at Washington University's Knight Center, One Brookings Drive, St. Louis,
Missouri at 10:00 a.m. Central Standard Time. A formal notice and invitation to
attend the meeting, together with a Proxy Statement, will be mailed before the
meeting to shareholders entitled to vote.
Common Stock & Transfer Agent
As of January 1, 2004, there were approximately 5,500 shareholders of the
Company's common stock. The Company's Registrar and Transfer Agent is Mellon
Investor Services LLC, 85 Challenger Road, Ridgefield Park, New Jersey 07660
(www.melloninvestor.com). SPARTECH Corporation's common stock is traded on the
New York Stock Exchange under the symbol "SEH." Quarterly stock prices for
fiscal years 2003 and 2002 are shown below:
Quarter
1st 2nd 3rd 4th
------- ------- ------- -------
2003- High $ 21.50 $ 22.35 $ 23.65 $ 24.49
Low $ 17.71 $ 16.47 $ 19.69 $ 20.30
2002- High $ 22.95 $ 27.10 $ 27.75 $ 22.35
Low $ 19.26 $ 20.51 $ 21.00 $ 17.90
Dividend Reinvestment Plan & Report on Form 10-K
A Dividend Reinvestment Plan is available to shareholders of the Company,
allowing for the automatic investment of cash dividends and direct cash
purchases of SPARTECH common stock. For details on the Plan, please contact the
Company's Registrar and Transfer Agent, Mellon Investor Services LLC, at (888)
213-0965. The Company's common stock dividends paid and the year-end stock
prices for fiscal years 2000-2003 are shown below. In addition the Company will
provide, without charge to any shareholder, a copy of its 2003 Report
on Form 10-K as filed with the Securities and Exchange Commission.
Requests should be directed to SPARTECH Investor Relations at (888) 721-4242.
Additionally a link to all of the Company's SEC filings can be found in
the Investor Relations section of the Company's website at www.spartech.com.
Year
2000 2001 2002 2003
Common Stock Dividends $ .34 .38 $ .38 $ .40
Year-End Stock Price $ 13.00 $ 21.05 $ 18.79 $ 23.18
Corporate Governance
The Corporate Governance Committee has established specific Corporate Governance
Guidelines, a Code of Business Conduct & Ethics, and a Code of Ethics for the
CEO and Senior Financial Officers. These documents are provided on Spartech's
website at www.spartech.com within the Investor Relations/Corporate Governance
section of the site. At this same website location, Spartech provides an Ethics
Hotline phone number that allows employees, shareholders and other interested
parties to communicate with the Company's management or Audit Committee (on an
anonymous basis, if so desired) through an independent third party hotline. In
addition, this same website location provides instructions for shareholders or
other interested parties to contact the Company's Board of Directors.