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 January 31, 2004
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 January 31, 2004:
Common Stock, $.75 par value per share 29,444,899
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
January 31, 2004
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of January 31, 2004 and November 1, 2003 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter ended
January 31, 2004 and February 1, 2003 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for quarter ended
January 31, 2004 and February 1, 2003 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 21
SIGNATURES
22
CERTIFICATIONS 23
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands)
ASSETS
Jan. 31, 2004
(unaudited) Nov. 1, 2003
Current Assets
Cash and equivalents $ 4,130 $ 3,779
Receivables, net 147,069 149,546
Inventories 113,874 99,671
Prepaids and other 10,896 11,052
-------- --------
Total Current Assets 275,969 264,048
Property, plant and equipment 465,509 457,732
Less accumulated depreciation 181,908 173,808
------- -------
Net Property, Plant and Equipment 283,601 283,924
Goodwill 334,392 334,392
Other Intangible Assets 25,031 24,974
Other Assets 14,155 13,250
-------- --------
$933,148 $920,588
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 32,991 $ 32,991
Accounts payable 88,942 97,586
Accrued liabilities 33,936 35,178
------- -------
Total Current Liabilities 155,869 165,755
Convertible subordinated debentures 154,639 154,639
Other long-term debt, less current maturities 210,046 196,189
------- -------
Total Long-Term Debt 364,685 350,828
Deferred Taxes 80,191 78,568
Other Long-Term Liabilities 3,623 3,079
------- -------
Total Long-Term Liabilities 448,499 432,475
Shareholders' Equity
Common stock, 30,460,682
shares issued in 2004 and 2003 22,846 22,846
Contributed capital 138,658 139,243
Retained earnings 196,388 191,912
Treasury stock, at cost, 1,015,783 shares
in 2004 and 1,108,381 shares in 2003 (24,811) (27,142)
Accumulated other comprehensive loss (4,301) (4,501)
-------- --------
Total Shareholders' Equity 328,780 322,358
-------- --------
$933,148 $920,588
======== ========
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited and dollars in thousands, except per share data)
QUARTER ENDED
Jan. 31, 2004 Feb. 1, 2003
Net Sales $241,463 $213,700
Costs and Expenses
Cost of sales 208,040 184,470
Selling and administrative 14,030 12,995
Amortization of intangibles 594 492
------- -------
222,664 197,957
Operating Earnings 18,799 15,743
Interest 6,330 6,106
------- -------
Earnings Before Income Taxes 12,469 9,637
Income taxes 4,763 3,479
------- -------
Net Earnings $ 7,706 $ 6,158
======== =======
Net Earnings Per Common Share:
Basic $ .26 $ .21
======== ========
Diluted $ .26 $ .21
======== ========
Dividends Per Common Share $ .11 $ .10
======== ========
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
QUARTER ENDED
Jan. 31, 2004 Feb. 1, 2003
Cash Flows from Operating Activities
Net earnings $ 7,706 $ 6,158
Adjustments to reconcile net earnings
to net cash (used for)/provided by
operating activities:
Depreciation and amortization 8,335 7,714
Change in current assets and
liabilities, net of the effects
of acquisitions (19,901) (16,343)
Other, net 592 1,366
-------- -------
Net cash used for operating activities (3,268) (1,105)
Cash Flows from Investing Activities
Capital expenditures (5,231) (4,589)
Business acquisition (1,515) -
Outsourcing acquisition (2,150) -
------- -------
Net cash used for investing activities (8,896) (4,589)
-------- -------
Cash Flows from Financing Activities
Bank borrowings for acquisitions 3,665 -
Net borrowings on revolving
credit facilities 10,278 8,710
Payments on bonds and leases (34) (51)
Cash dividends on common stock (3,229) (2,925)
Stock options exercised 1,798 310
Treasury stock acquired (52) (1,495)
Net cash provided by ------ -------
financing activities 12,426 4,549
------ -------
Effect of exchange rate changes on cash
and equivalents 89 103
------ -------
Increase/(Decrease) In Cash and Equivalents 351 (1,042)
Cash and Equivalents at Beginning of Period 3,779 7,511
------ -------
Cash and Equivalents at End of Period $ 4,130 $ 6,469
======= ========
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE A - Basis of Presentation
The consolidated financial statements include the accounts of Spartech
Corporation and its controlled affiliates (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 1, 2003 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 January 31, 2004 and November 1, 2003 are comprised
of the following components:
2004 2003
Raw materials $ 65,762 $ 57,414
Finished goods 48,112 42,257
--------- --------
$ 113,874 $ 99,671
========= ========
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE C -Other Intangible Assets
At January 31, 2004 other intangible assets are as follows:
Total other Accumulated Net carrying
intangible amortization amount
assets
Amortizable
Non-compete and $ 7,540 $ 2,166 $ 5,373
customer contracts
Product formulations $12,030 $ 1,272 $10,758
------- ------- -------
$19,570 $ 3,438 $16,131
Not Amortizable
Trademark/Tradename $ 8,900 $ - $ 8,900
------- ------- -------
Total $28,470 $ 3,438 $25,031
======= ======= =======
Amortization expense for our existing other intangible assets over the
next five years is estimated to be: $2,412, $2,170, $1,995, $1,558 and $931
for the one year periods from February 1, 2004 to January 31, 2009.
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 quarters
ended January 31, 2004 and February 1, 2003 is as follows:
QUARTER ENDED
2004 2003
Net Earnings $ 7,706 $ 6,158
Foreign currency translation
adjustments (707) 925
Cash flow hedge adjustments 907 454
-------- --------
Total Comprehensive Income $ 7,906 $ 7,537
======== ========
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-seven facilities are organized into three reportable
segments based on the nature of the products manufactured.
Quarter Ended
Jan. 31, 2004 Feb. 1, 2003
Net Sales*
Custom Sheet & Rollstock $ 160,108 $ 139,767
Color & Specialty Compounds 66,525 59,922
Molded & Profile Products 14,830 14,011
---------- ----------
Total Net Sales $ 241,463 $ 213,700
========== ==========
Operating Earnings
Custom Sheet & Rollstock $ 15,121 $ 12,601
Color & Specialty Compounds 5,582 5,369
Molded & Profile Products 1,230 540
Corporate/Other (3,134) (2,767)
---------- ----------
Total Operating Earnings $ 18,799 $ 15,743
========== ==========
* Excludes intersegment sales of $12,497 in 2004 and
$7,104 in 2003 primarily from the Color & Specialty
Compounds segment
Note F - Stock Based Compensation
The Company has adopted the disclosure-only provisions of SFAS 123.
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.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Quarter Ended
Jan. 31, 2004 Feb. 1, 2003
Net Earnings as Reported $ 7,706 $ 6,158
Deduct fair value of options 1,717 1,456
granted
Pro Forma Net Earnings $ 5,989 $ 4,702
Diluted Earnings per share:
As Reported
Basic $ .26 $ .21
Diluted $ .26 $ .21
Pro forma
Basic $ .20 $ .16
Diluted $ .20 $ .16
Assumptions Used:
Expected Dividend 2% 2%
Yield
Expected Volatility 35% 35%
Risk-Free Interest 3.7% 3.5%
Rates
Expected Lives 5.5 Years 5.0 Years
Note G - Subsequent Events
Equity Offering
Effective February 3, 2004, Spartech completed a common stock offering
(priced at $24.00 per share) for 2.7 million shares. Proceeds from the
offering (net of expenses) totaled approximately $61 million with
approximately $41 million used to pay down debt and $20 million invested in
short term investments that will be used to fund future capital
expenditures and strategic expansions. After the offering, the Company's
common shares outstanding increased by 9.1% to 32,116,063.
Bank Refinancing
On March 3, 2004, Spartech refinanced its unsecured bank credit
facility providing aggregate availability of $200 million and expiring on
March 3, 2009. Interest on the bank credit facility is payable at a rate
chosen by the Company of either prime or Eurodollar Rate plus a 0.625% to
1.25% borrowing margin and the agreement requires a fee of 0.10% to 0.275%
for any unused portion of the facility.
Note H - Recently Issued Accounting Standards
In December 2003, the FASB issued a revised version of FASB
Interpretation No. 46 (FIN 46R), "Consolidation of Variable Interest
Entities," which defines when a business should consolidate a variable
interest entity. The Company adopted FIN 46R on January 31, 2004. As a
result, we no longer consolidate the trusts which were formed solely for
the issuance of trust preferred securities to outside investors. The
effect of this deconsolidation was to: 1) eliminate the Convertible
Preferred Securities issued by the trusts; 2) record the Convertible
Subordinated Debentures issued to the trusts; 3) recognize the Company's
equity investment in the common stock of the trusts; and 4) reclassify the
distributions on the preferred securities to interest expense on the
debentures. The Convertible Subordinated Debentures and equity investments
were previously eliminated in consolidation. The debentures, totaling
$154.6 million are now included in the Consolidated Condensed Balance Sheet
as a separate component of long-term debt and the equity investment of $4.6
million is included in other assets. The adoption of FIN 46R had no impact
on the Company's net income or earnings per share. The previous year's
financial statements have been restated to reflect the affect of the
deconsolidation required by FIN 46R.
Note I - Contingencies
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 $343 accrual as of January 31, 2004. 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.
Items 2 and 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The first quarter of 2004 produced improved results over the first
quarter of 2003 as sales increased 13% over the prior year's similar
period. Demand increased in nearly every major end-market we serve,
resulting in a first quarter record for volume shipped of 317 million
pounds. Cost reductions implemented during fiscal 2003 produced lower
manufacturing costs during the first quarter, however, increased raw
material costs, a reduction in tolling pounds, and other changes in mix of
products sold offset nearly all of the benefit. Despite these offsetting
costs of sales items, the increased sales level and lower selling and
administrative costs results in a 25% improvement in net earnings over the
prior year's first quarter. Spartech's financial position remains strong
and, while first quarter required working capital investments to support
the higher second quarter sales expectations, improving seasonal positive
cash flow should support both capital investments and strategic acquisition
growth in the balance of the year.
Results of Operations
(in millions) NET SALES OPERATING EARNINGS
Three Months Ended
Net Sales January February January February
31, 2004 1, 2003 31, 2004 1, 2003
Custom Sheet & $ 160.1 $139.8 $ 15.1 $ 12.6
Rollstock
Color & Specialty 66.5 59.9 5.6 5.4
Compounds
Molded & Profile 14.8 14.0 1.2 .5
Products
Corporate/Other - - (3.1) (2.8)
------- ------- ------- -------
Total $ 241.5 $ 213.7 $ 18.8 $ 15.7
======= ======= ======= =======
Net sales for the quarter ended January 31, 2004 represented a 13%
increase over the first quarter of 2003. An increase in pounds shipped
excluding acquisitions contributed 5% of the growth from the prior year,
while acquisitions added another 4% to our sales. Price and mix of
products sold accounted for the balance of the sales increase. Increased
demand was experienced across each major market led by gains in the
transportation and building & construction markets. Backlogs have
increased nearly one full week from the fourth quarter of 2003, to about
six weeks going into the second quarter.
Cost of sales were $208.0 million for the quarter ended January 31,
2004, compared with $184.5 million for the corresponding quarter of 2003.
Cost of sales as a percentage of net sales of 86.1% improved only slightly
from the 86.3% as lower material margins offset reductions in manufacturing
costs. Increased resin prices over the prior year, a reduction of tolling
business (which includes no material cost for resin) within our Color &
Specialty Compounds segment, and other mix changes accounted for the
unfavorable material cost comparison to the prior year.
Selling and administrative expenses were $14.0 million, or 5.8% of
sales for the quarter ended January 31, 2004 as compared to $13.0 million
or 6.1% of sales in the first quarter of 2003. Selling and administrative
expenses increased with the higher sales level, but resulted in a more
favorable percentage, benefiting from the change in mix of more non-tolling
sales and better leverage of the fixed portion of the costs.
Operating earnings for the quarter increased to 7.8%, as a percentage
of sales, compared to 7.4% in the first quarter of 2003, principally due to
the higher sales volumes and cost reductions implemented during 2003,
partially offset by higher material costs and the sales mix changes.
Interest expense of $6.3 million for the quarter ended January 31,
2004 increased slightly from $6.1 million for the corresponding quarter of
2003 as debt repayments during 2003 were largely offset by acquisition
borrowings during the year and due to borrowings for operations and
acquisitions during the first quarter of 2004. Interest expense is
expected to be lower over the last three quarters of the fiscal year due to
approximately $41 million in debt repayments made from proceeds received in
a common stock offering completed in early February 2004 and positive cash
flows from operations.
Our effective tax rates for the quarter ended January 31, 2004 was
38.2% as compared to 36.1% in the first quarter of 2003 primarily due to
tax rate changes in Ontario, Canada that must be reflected in the period of
enactment on both our current income and deferred tax account balances. We
are continuing to explore tax planning strategies to reduce our overall
effective tax rate.
Net earnings of $7.7 million, or $.26 per diluted share, in the
quarter ended January 31, 2004 increased 25% from $6.2 million or $.21 per
diluted share, in the first quarter of 2003 as a result of the factors
noted above. Primary and diluted shares outstanding will increase in the
second quarter due to the February 2004 stock offering where approximately
2.7 million new shares were issued.
Segment Results
Net sales of the Custom Sheet & Rollstock segment increased by 15% to
$160.1 million in the three months ended January 31, 2004 from $139.8
million in the corresponding period of 2003. Our 2003 acquisitions of
Polymer Extruded Products and Trienda's extrusion division and our January
6, 2004 purchase of certain assets of the former Quality Plastic Sheet
operation accounted for 7% of the growth. Excluding the acquisitions, net
sales in pounds increased 8% for the first quarter of 2004 compared to the
prior year. Sales were strong to the transportation, building &
construction and sign/advertising markets during the quarter. The
operating margin percentage increased to 9.4% during the first quarter of
2004 as compared to 9.0% in the same quarter in 2003. Our successful
efforts in lowering the manufacturing costs more than offset increased
material costs during the quarter.
Net sales of the Color & Specialty Compounds segment increased by 11%
to $66.5 million in the first quarter of 2004 from the $59.9 million for
the corresponding period of 2003. Volume in pounds grew 2%, while
increased prices, and a favorable product mix accounted for 9% growth in
sales. Strong shipments to the automotive and lawn and garden markets were
largely offset by decreased volume in a specific application within the
electronics market where the group's largest consumer products customer
lost a portion of its business during fiscal 2003. The lost volume carried
a low, tolling only price (the customer supplied the raw material, and was
charged only for conversion). The pounds gained to replace this lost
volume represented more traditional business for which the price includes
the cost of materials. This also effects our operating margin percentage,
as the traditional business margin is lower as a percentage of sales then
the tolling business. The affect of this customer's lost volume was
approximately $.9 million in margin lost, or 1.3% of sales, and offset a
large part of margin improvements in most of the other markets. Overall
the operating margin for this segment dropped to 8.4% in the first quarter
of 2004 as compared to the 9.0% achieved in the first quarter of 2003.
The Molded & Profile segment net sales increased by 6% to $14.8
million in the first quarter of 2004 as compared to the first quarter of
2003 due to a more favorable mix of products sold. The Molded & Profile
Products segment operating earnings increased to $1.2 million for the first
quarter of 2004 as compared to the $.5 million earned in the first quarter
of 2003. Strong performance in the Custom Engineered Wheels business
combined with improvements in the Marine Products business accounted for
the increase.
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 $343
accrual as of January 31, 2004. 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. We are generally
able to minimize the impact of past price increases in raw material costs
by controlling inventory levels, increasing production efficiencies,
passing through price changes to customers, and the 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
and continued to stabilize through the end of 2003. Resin pricing was more
stable in the first quarter of 2004, but has seen some increases with more
expected in the second quarter. We have been more successful in pre-buying
certain materials and managing these some of the increase, however, the
direction, degree of volatility, and ability to manage 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, finance strategic business/outsourcing acquisitions, and pay
dividends on our common stock. Cash flows for the periods indicated are
summarized as follows:
Three Months Ended
(Dollars in millions) Jan. 31, Feb. 1,
2004 2003
Net cash used for
operating activities $ (3.3) $ (1.1)
========= =========
Net cash used for
investing activities $ ( 8.9) $ (4.6)
========= =========
Net cash provided by/(used for)
financing activities $ 12.4 $ 4.5
========= ========
(Decrease)/increase in cash
and equivalents $ .4 $ ( 1.0)
========= =========
Operating cash flows provided by net earnings increased 25%, to $7.7
million for the first quarter of 2004 from $6.2 million for the first
quarter 2003. Changes in current assets and liabilities, net of the
effects of acquisitions, used $19.9 million of our operating cash flows in
2004 compared to $16.3 million in the first quarter of 2003. Operating
cash flows provided by changes in accounts receivable totaled $3.2 million
due to seasonally lower sales in the first quarter. Operating cash flows
used for changes in inventory totaled $14.3 million due to the selective
pre-buys of raw materials ahead of announced price increases and the
typical transition to what is traditionally the Company's highest sales
level in the second quarter of our fiscal year. Operating cash flows used
for changes in accounts payable totaled $6.4 million as a result of pre-
buying inventory that is paid under discounting terms prior to its use.
The Company's primary investing activities are capital expenditures
and business/outsourcing acquisitions in the plastics industry. Capital
expenditures are primarily incurred to maintain and improve productivity,
as well as to modernize and expand facilities. Capital expenditures for
the first quarter of 2004 were $5.2 million as compared to $4.6 million for
the first quarter of 2003. We currently anticipate total capital
expenditures of approximately $25 million for fiscal 2004. Business and
outsourcing acquisitions totaled $3.7 million for the first quarter of 2004
as compared to no payments in the first quarter of 2003. The 2004
acquistions included $1.5 million paid to complete the September 2003
acquisition of Trienda's extrusion business, and $2.2 million spent to
acquire certain equipment and working capital assets from the former
Quality Plastic Sheet operation and a long-term supply contract from its
largest customer.
The cash flows provided by financing activities of $12.4 million for
the first quarter of 2004 were used to fund the increases in working
capital and our capital expenditures during the period.
Financing Arrangements
At January 31, 2004, our total outstanding borrowings under the bank
credit facilities were $166.1 million at a weighted average interest rate
of 6.0% (including the effect of an interest rate swap). We had $77.6
million in total availability under the $258 million in credit facilities.
On March 3, 2004, Spartech refinanced its unsecured bank credit facility
providing aggregate availability of $200 million that will expire on March
3, 2009. Interest on the bank credit facility is payable at a rate chosen
by the Company of either prime or Eurodollar Rate plus a 0.625% to 1.25%
borrowing margin and the agreement requires a fee of 0.10% to 0.275% for
any unused portion of the facility.
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 January 31,
2004, we had approximately $49.9 million of unrestricted retained earnings
available for such payments. While we were in compliance with such
covenants through the first quarter of 2004 and currently expect to be in
compliance throughout the 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.
Effective February 3, 2004, Spartech completed a common stock offering
(priced at $24 per share) for 2.7 million shares. Proceeds from the
offering (net of expenses) totaled approximately $61 million with
approximately $41 million used to pay down debt and $20 million invested in
short term investments that will be used to fund future capital
expenditures and strategic expansions.
Outlook
As we move forward to the second quarter, we continue to see signs
that the economy is improving. We currently expect to see these positive
trends in increased demand continue throughout the remainder of the fiscal
year. Based on the expectation of consistently stronger economic
conditions the company should continue to generate improved year-over-year
earnings results in each quarter during the remainder of the fiscal year.
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. We manufacture our products either
to standard specifications or to custom specifications agreed upon
with the customer in advance, and we inspect our products to ensure
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 or lower credit loss rates that we have in the past.
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
operations 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.
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.
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.
For additional information regarding our significant accounting
policies, see Note 1 to our 2003 Consolidated Financial Statements
contained in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
Cautionary Note on Forward Looking Statements
Statements in this Form 10-Q that are not purely historical, including
statements which express the Company's belief, anticipation or expectation
about future events, are forward-looking statements. Forward looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from such statements. In addition to the risk
factors discussed in Item 1 (Business, under the headings Raw Materials,
Seasonality, Competition, Government Regulation and Environmental Matters,
and International Operations) of the Company's Annual Report on Form 10-K
other important factors which have impacted and could impact the Company's
operations and results, include:
(1) the Company's financial leverage and the operating and financial
restrictions imposed by the instruments governing its indebtedness may
limit or prohibit its ability to incur additional indebtedness, create
liens, sell assets, engage in mergers, acquisitions or joint ventures, pay
cash dividends, or make certain other payments; the Company's leverage and
such restrictions could limit its ability to respond to changing business
or economic conditions, inability to meet debt obligations when due could
impair our ability to finance operations and could result in default;
(2) the successful expansion through acquisitions, in which Spartech
looks for candidates that can complement its existing product lines, expand
geographic coverage, and provide superior shareholder returns, is not
assured. Acquiring businesses that meet these criteria continues to be an
important element of the Company's business strategy. Some of the
Company's major competitors have similar growth strategies. As a result,
competition for qualifying acquisition candidates is increasing and there
can be no assurance that such future candidates will exist on terms
agreeable to the Company. Furthermore, integrating acquired businesses
requires significant management time and skill and places additional
demands on Company operations and financial resources. If we are unable to
achieve the anticipated synergies, the interest and other expenses from our
acquisitions could exceed the net income we derive from the acquired
operations, which could reduce our net income. However, the Company
continues to seek value-added acquisitions which meet its stringent
acquisition criteria and complement its existing businesses; and
(3) our products are sold in a number of end markets which tend to be
cyclical in nature, including transportation, building and construction,
bath/pool and spa, and electronics and appliances. A downturn in one or
more of these end markets could have a material adverse effect on our sales
and operating profit.
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
Spartech maintains 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, the Company's certifying officers have concluded that the
disclosure controls and procedures were effective as of January 31, 2004,
to provide reasonable assurance of the achievement of these objectives.
Notwithstanding the foregoing, there can be no assurance that the
Company's disclosure controls and procedures will detect or uncover all
failures of persons within the Company and its consolidated subsidiaries to
report material information otherwise required to be set forth in the
Company's reports.
There was no change in the Company's internal control over financial
reporting during the quarter ended January 31, 2004, 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
The Company filed a Form 8-K dated January 20, 2004 to furnish the
press release providing guidance for the fiscal 2004 first quarter and
annual financial results.
The Company filed a Form 8-K dated December 11, 2003 to furnish the
press release announcing its fourth quarter and fiscal 2003 earnings.