Spartech Corporation
2004 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
51 production facilities (49 throughout North America and two in Europe) that
are organized into three business segments: (1) Custom Sheet & Rollstock (67% of
total 2004 sales), (2) Color & Specialty Compounds (27% of total 2004 sales),
and (3) Molded & Profile Products (6% of total 2004 sales). The discussions of
results that follow incorporate acquisitions of businesses including our 2004
acquisition of three divisions of VPI (October 2004), 2003 acquisitions of the
sheet extrusion business of TriEnda, a division of Wilbert Inc. (September
2003), and Polymer Extruded Products (PEP), Inc. (March 2003), and our 2002
acquisition of GWB Plastics Holding Company (GWB), parent of UVTEC and PolyTech
South (June 2002). We consider purchases of certain assets and liabilities that
do not qualify as a business for accounting purposes (referred to as outsourcing
acquisitions) as internal growth because such purchases are comparable to other
internal investments such as capital expenditures.
Results of Operations
Comparison of Fiscal Years 2004 and 2003
Net sales were $1,121.7 million for the year ended October 30, 2004,
representing a 17% increase from the prior year. Internal volume of pounds sold
comprised 9% of the net sales growth, acquisitions accounted for 4%, and
price/mix accounted for the remaining 4% of the increase.
The strong internal volume growth in 2004 was due primarily to demand increases
in every major market we serve. Demand was particularly strong in the
Packaging, Transportation, and Recreation & Leisure markets. Net sales of the
Custom Sheet & Rollstock segment increased 19% to $750.5 million in 2004 from
$628.5 million in 2003. The percentage increase was comprised of internal
volume of pounds sold (11%), the TriEnda, VPI, and PEP acquisitions (5%), and
price/mix (3%). The internal volume of pounds sold in this segment was mostly
driven by strong demand primarily in the Packaging, Building & Construction, and
Transportation markets. Approximately 4% of the increase in pounds sold in 2004
compared to the prior year was due to the full year impact of our new facility
in Mexico which began shipping to customers in the spring of 2003. Net sales of
the Color & Specialty Compounds segment increased 15% to $302.7 million in 2004
from $263.0 million in 2003. The percentage increase was comprised of internal
volume of pounds sold (10%), the impact of the VPI acquisition (2%), and
price/mix (3%). Internal volume growth was primarily attributable to strong
demand in the Transportation and Building & Construction markets. The Molded &
Profile Products segment net sales increased to $68.6 million, or 6%, from $64.6
million in 2003. The percentage increase was due mostly to price/mix as sales
in pounds were flat in 2004 compared to 2003.
Bar Chart
Net Sales
In Millions of Dollars
2002 - $898.3
2003 - $956.2
2004 - $1,121.7
Photograph
Packaging for M&M's Is Produced With Materials Manufactured By Spartech Polycom
Cost of sales in 2004 increased to $967.0 million, or 86.2% of net sales, from
$822.1 million in 2003, or 86.0% of net sales. The slight increase in cost of
sales as a percentage of net sales reflected the net effect of sharp increases
in resin prices throughout 2004 partially offset by better leverage on
conversion costs from increased sales volume and lean manufacturing initiatives.
Material margins per pound sold for 2004 dropped just under .7 cent per pound
from 2003 to 2004 due to resin price increases that could not be passed on
quickly enough in terms of higher sales prices. The 2004 decrease in material
margin per pound was more than offset by reductions in conversion costs
resulting from better capacity utilization rates and our lean manufacturing
initiative leading to a .2 cent increase in operating earnings per pound sold.
We expect to continue experiencing pricing pressures on raw material costs, and
we will attempt to minimize the impact of delays in passing on such increases to
customers with production efficiencies, inventory control techniques, and
negotiating competitive prices with our suppliers.
Amortization of intangibles increased to $2.8 million in 2004 compared to $2.2
million in 2003. This increase reflected the full year impact of the PEP
acquisition, one month of the VPI acquisition, and the 2004 outsourcing
acquisition of the European Specialty Polystyrene Compounds business of BASF in
April 2004. Selling, general, and administrative expenses were $59.1 million in
2004 compared to $53.5 million in 2003. This increase was mostly caused by the
variable portion of expenses resulting from growth in sales and the impact of
acquisitions which accounted for approximately 3% of the dollar increase. As a
percentage of net sales, selling, general, and administrative expenses declined
to 5.3% in 2004 from 5.6% in 2003 primarily reflecting leverage from strong
sales growth.
Operating earnings were $92.8 million in 2004, or 8.3% of net sales, compared to
$78.3 million in 2003, or 8.2% of net sales. More importantly, our key measure
of operating earnings per pound increased from 6.5 cents in 2003 to 6.7 cents in
2004. Each of the operating segments generated increases in operating earnings
due primarily to increases in sales volume and cost leverage. The Custom Sheet
& Rollstock segment experienced the largest improvement in conversion costs per
pound of 2.4 cents from 2003 to 2004, but lost 2.6 cents of this improvement
from lower material margin per pound due to higher resin prices and mix.
Operating earnings per pound for the Color & Specialty Compounds segment
improved .1 cent in 2004 compared to 2003 due to more favorable mix of sales of
engineered filled compounds and better leverage on selling costs which more than
offset pressure on material margin from resin price increases. The Molded &
Profile Products segment saw a 2.2 cents increase in operating earnings per
pound in 2004 over 2003 due mostly to a favorable shift in mix of product sold
from custom profiles to wheels sold primarily to the Lawn & Garden market.
Interest expense was $25.4 million in 2004 compared to $25.0 million in 2003.
The slight increase in interest expense reflects an increase in our average
interest rate and additional borrowings in the fourth quarter of 2004 to finance
the VPI acquisition, partially offset by lower borrowing levels in the earlier
portion of 2004. An interest rate swap encompassing $125.0 million of bank debt
expired on November 10, 2004. On this date, our effective interest rate on this
bank debt reverted back to a variable 30-day Eurodollar rate plus applicable
margin (which was 2.59% at October 30, 2004) from the fixed swap effective rate
including the applicable margin totaling 6.80%.
Our effective tax rate was 37.6% in 2004 compared to 36.0% in 2003. The 2004
increase primarily reflects the lack of favorable adjustments included in 2003
related to a final settlement with the Internal Revenue Service on certain
income tax refunds.
Bar Chart
Net Sales
In Millions of Pounds
2002 - 1,179
2003 - 1,207
2004 - 1,383
Bar Chart
Net Sales
Price Per Pound Sold
2002 - $0.76
2003 - $0.79
2004 - $0.81
Net earnings increased to $42.1 million in 2004, or 23%, from $34.1 million in
2003 reflecting the impact of strong sales volume growth from strong demand and
acquisitions. Diluted earnings per share increased to $1.32, or 15%, from $1.15
in 2003 reflecting the increase in net earnings, partially offset by an increase
in shares outstanding from our February 2004 stock offering.
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 sold grew by 1% and price/mix
accounted for the balance of the increase over 2002 (resulting in a 3 cents
increase in the average sales price per pound).
Compared to the prior year, sales in 2003 were strong to customers serving the
Transportation, Roofing, and Lawn & Garden markets 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 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. 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 the 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.
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.
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.
Operating earnings were $78.3 million in 2003 (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 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 Chart
Operating Earnings
Cents Per Pound Sold
2002 - 6.9 cents
2003 - 6.5 cents
2004 - 6.7 cents
Bar Chart
Operating Earnings
As a % of Net Sales
2002 - 9.0%
2003 - 8.2%
2004 - 8.3%
Interest expense of $25.0 million in 2003 decreased by 7% from $26.8 million in
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. In 2003, approximately 93% of our debt and convertible
preferred financings were 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% in 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 income tax refunds,
as well as ongoing benefits from research and development credits.
Net earnings of $34.1 million in 2003 decreased slightly from $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.
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 a SPARTECH subsidiary, regarding the
Lower Passaic River. Our subsidiary has agreed to participate along with at
least 39 other companies (including several companies added in 2004) in an
environmental study 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 our $221 thousand accrual as of October 30, 2004.
In the event of one or more adverse determinations related to this issue, the
impact on our 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 derived from crude oil
or natural gas, which are available from a number of domestic and foreign
suppliers. Historically, our raw materials have been only somewhat affected by
supply, demand, and price trends of the petroleum industry, however, more
recently the unusually high price of crude oil has had a greater impact on
increasing the price of plastic resins, our most significant raw material. We
currently expect this pricing relationship to continue in the foreseeable
future. Past trends in resin pricing, periods of anticipated or actual
shortages of a particular resin, and changes in supplier capacities can also
have an impact on the cost of our raw materials during a particular period.
Price spikes in crude oil and natural gas along with the political unrest in oil
producing countries have resulted in unusually high pricing pressures during
2003 and 2004 which 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 have negatively affected our operating
margins in 2003 and 2004. While we will continue to implement the actions noted
above to help minimize the impact of price changes on our margins, the
direction, degree of volatility, and our ability to manage future pricing
changes is uncertain.
Bar Chart
SG&A Expenses
As % of Net Sales
2002 - 6.0%
2003 - 5.6%
2004 - 5.3%
Photograph
Appliances & Electronics
Wheels Produced At Out Spartech Industries Facility Are Used On A Variety Of
Small Appliances
Liquidity and Capital Resources
Cash Flow
Our primary sources of liquidity have been cash flows from operating activities,
borrowings from third parties, and equity offerings. 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 common
stock.
Cash flows from operations were $37.8 million in 2004 compared to $66.7 million
in 2003. The decrease in 2004 reflects investment in net working capital of
$48.1 million in 2004 compared to $14.3 million in 2003. The increase in net
working capital investment primarily resulted from strong sales growth in 2004,
continued increases in resin prices, and selective pre-buys of raw materials
ahead of announced resin price increases which led to increases in inventory and
receivable amounts. 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 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
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 were $35.0 million for
2004, $22.0 million for 2003, and $28.2 million for 2002. The higher capital
expenditures in 2004 are associated with the expansion of our Donchery, France
facility and our new Product Development Center in Warsaw, Indiana. The capital
expenditures in 2002 reflected expansions in Tupelo, Mississippi and Ramos
Arizpe, Mexico. We expect capital expenditures in 2005 to approximate the level
of capital expenditures in 2004.
In 2004, our business acquisitions totaled $87.9 million and consisted of $86.5
million paid for the VPI business and $1.4 million paid to complete the
September 2003 acquisition of TriEnda extrusion assets. Our outsourcing
acquisitions in 2004 included $6.0 million for certain assets of BASF's
specialty polystyrene business and $2.1 million for a large portion of the
business of the former QPS operation. In 2003, we completed the business
acquisitions of PEP for $23.6 million and the sheet extrusion business of
Wilbert, Inc.'s TriEnda division for $4.0 million. Cash invested for business
acquisitions in 2002 mostly includes net cash paid of $47.1 million for the GWB
acquisition.
Cash flows provided by financing activities were $138.3 million for 2004. In
September 2004, we completed a private placement of unsecured notes that
provided proceeds of $150.0 million, which were partially used to fund the VPI
business acquisition. In February 2004, we completed a common stock offering
that provided proceeds of $60.9 million. Payments on notes in 2004 were $32.9
million. The increase in payments on notes over the prior year was attributable
to the single principal payment on the 1997 Series B Notes due in fiscal 2004
(see Note 7 to the Consolidated Financial Statements). Net payments on bank
credit facilities were $27.2 million. The bank credit facility payments
included a pay down of the balance to $125.0 million, the portion of the
borrowings covered by our interest rate swap agreement that expired on November
10, 2004. Additional financing activities during 2004 included common stock
dividends of $13.8 million, proceeds of stock options exercised of $4.1 million
and the purchase of treasury stock for $2.7 million. The amount remaining from
financing activities contributed to the increase in year end cash of $45.2
million. In November 2004, a portion of the year end cash balance was used to
pay down a portion of the bank credit facility, subsequent to the expiration of
the interest rate swap agreement. We paid common stock dividends at a rate of
44 cents per share in calendar 2004, and our Board of Directors has approved an
annual rate of 48 cents per share for calendar 2005.
Photograph
Medical
Spartech Townsend's Acrylic Tubes Are Utilized in Various Medical Devices
Bar Chart
Capital Expenditures
In Millions of Dollars
2002 - $28.2
2003 - $22.0
2004 - $35.0
Cash flows used in financing activities were $21.3 million for 2003. The
primary activities were net bank credit facility borrowings of $8.5 million,
payments on notes of $17.9 million, purchase of treasury stock of $3.4 million,
common stock dividends of $11.7 million, and proceeds from stock options
exercised of $3.3 million. Cash flows used in 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), net bank credit facility payments of $32.2 million, payments
on notes of $17.9 million, purchase of treasury stock of $6.7 million, common
stock dividends of $10.7 million, and proceeds from stock options exercised of
$5.5 million.
The following table summarizes our contractual obligations as of October 30,
2004 (dollars in thousands):
Contractual Less Than 5 Years
Obligations Total 1 Year 1-3 Years 3-5 Years or More
- ------------ ------------ ------------ ------------ ------------ ------------
Long-term $ 672,826 $ 38,737 $ 56,444 $ 162,954 $ 414,691
Debt
Capital 466 32 76 117 241
Lease
Obligations
Operating 34,154 7,813 10,635 6,725 8,981
Lease
Obligations
Purchase 247 247 - - -
Obligations
------------ ------------ ------------ ------------ ------------
Total $ 707,693 $ 46,829 $ 67,155 $ 169,796 $ 423,913
============ ============ ============ ============ ============
Amounts included in long-term debt include principal and guaranteed interest
payments. Amounts included in purchase obligations represent future contractual
payments under various take-or-pay arrangements entered into as part of the
normal course of business. Commitments made under these arrangements represent
future purchases in line with expected usage to obtain favorable pricing. The
amounts in the previous table exclude obligations that are not take-or-pay
arrangements. Such contractual purchase obligations are primarily purchase
orders that are part of normal operations and are reflected in historical
operating cash flow. We do not believe such purchase obligations will adversely
affect our liquidity position. In addition, the previous table does not include
long term contingent liabilities and liabilities related to deferred taxes
because it is not certain when these liabilities will become due.
Financing Arrangements
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 was
fixed at 6.06%, plus the borrowing margin, until November 10, 2004. This swap
arrangement was 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 owned by two selling
shareholders and 2,424,375 newly issued shares. The common stock was sold to
the public at $22.00 per share. We used the net proceeds from the sale of our
shares, totaling $50.7 million, primarily to finance the GWB acquisition.
Effective February 3, 2004, we completed a public offering of 8,054,000 shares
of our common stock. These shares represented 5,382,836 shares owned by Vita
International Limited and 2,671,164 newly issued shares. The common stock was
sold to the public at $24.00 per share. We used the net proceeds from the sale
of our shares, totaling $60.9 million, to reduce borrowings under our bank
credit facility and to finance acquisitions and other investing activities of
the Company.
Bar Chart
Operating Cash Flow
In Millions of Dollars
2002 - $87.1
2003 - $66.7
2004 - $37.8
Bar Chart
Business Acquisitions
In Millions Of Dollars
2002 - $46.2
2003 - $27.6
2004 - $88.0
On March 3, 2004, we refinanced our U.S. 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 us of either
prime or Eurodollar Rate plus a 0.5% to 1.125% borrowing margin, and the
agreement requires a fee of 0.10% to 0.275% for any unused portion of the
facility. On April 27, 2004, our Canadian subsidiary refinanced its unsecured
bank credit facility providing aggregate availability of $10 million Canadian
and expiring on March 3, 2009. Interest on the bank credit facility is payable
at a rate chosen by us of either prime or LIBOR plus a .5% to 1.125% borrowing
margin, and the agreement requires a non-use fee of .10% to .275% for any unused
portion of the facility. At October 30, 2004, our total outstanding borrowings
under our bank credit facilities were $125 million at a weighted average
interest rate of 6.8% (including the effect of an interest rate swap which
expired on November 10, 2004). At October 30, 2004 we had access to $69.4
million under our credit facilities in addition to $49.0 million of cash and
equivalents.
On September 15, 2004, we completed a private placement of unsecured notes at an
interest rate of 5.54% totaling $150 million. We used these proceeds primarily
to finance our acquisition of three divisions of VPI on October 1, 2004.
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.
While we were in compliance with such covenants in 2004 and currently expect to
be in compliance during 2005, 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.
We anticipate that cash flows from operations, together with the financing and
borrowings under our bank credit facility, will provide the resources for (i)
satisfying our working capital needs, regular quarterly dividends, and planned
capital expenditures and (ii) managing the capital structure on a short and
long-term basis.
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,
liabilities, shareholders' equity, revenues and expenses, and disclosures of
contingent assets and liabilities at the date of the financial statements.
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.
Bar Chart
Total Debt
In Millions Of Dollars
2002 - $393.0
2003 - $383.8
2004 - $474.1
Bar Chart
Total Interest Expense
In Millions of Dollars
2002 - $26.8
2003 - $25.0
2004 - $25.4
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.
Inventories - We value inventories at the lower of (i) actual cost to purchase
or manufacture the inventory or (ii) 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.
Valuation of Long-Lived Assets - We review the carrying value of our long-lived
assets, which primarily include property plant and equipment, goodwill, and
other intangible assets, whenever events and changes in business circumstances
indicate the carrying value of the assets may not be recoverable. If we
determine that the carrying value of a long-lived asset may not be recoverable,
a permanent impairment charge is recorded for the amount by which the carrying
value of the long-lived asset exceeds its fair value. Fair value is generally
measured based on a projected discounted cash flow method using a discount rate
determined to be commensurate with the risk inherent in the business. The
estimates in projected cash flows and discount rates are subject to change due
to the economic environment, including such factors as interest rates, expected
market returns, and the volatility of markets served. We believe that the
estimates are reasonable; however, changes in estimates could materially affect
the fair value assessments.
Bar Chart
Cash Dividends
Per Share of Common Stock
2002 - $.38
2003 - $.40
2004 - $.44
Photograph
Appliances & Electronics
Spartech Plastics Produces Sheet Used In A Variety Of Appliances
Contingencies - We are 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 December 2004, the Financial Accounting Standards Board (FASB) issued a
revised version of Statement of Financial Accounting Standards (SFAS) 123,
"Share Based Payment," (SFAS 123R) which replaces the original SFAS 123,
"Accounting for Stock-Based Compensation" and supersedes Accounting Principals
Board (APB) Opinion 25, "Accounting for Stock Issued to Employees." SFAS 123R
requires public companies to recognize the costs associated with the award of
equity instruments to employees in the results of operations over the service
period related to the award. The cost is based on the fair value of the equity
instrument at the date of grant. The provisions of SFAS 123R will be effective
for us in the fourth quarter of 2005. The impact of the adoption of this
standard on our historical net income and earnings per share is disclosed in
Note 1 to the Notes to the Consolidated Financial Statements.
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.
Photograph
Sign & Advertising
McDonald's Outdoor Signs Utilize Weatherable Sheet Produced At Out Spartech
Plastics Cape Girardeau, Missouri Facility
Bar Chart
Return on Equity
Average Balance
2002 - 13.5%
2003 - 11.1%
2004 - 11.2%
Consolidated Balance Sheet
Assets October 30, November 1,
2004 2003
----------- ------------
(Dollars in thousands)
Current Assets
Cash and equivalents $ 48,954 $ 3,779
Receivables, net of allowance of $2,997 in 188,427 149,546
2004 and $3,737 in 2003
Inventories 142,035 99,671
Prepaids and other 20,718 15,127
---------- -----------
Total Current Assets 400,134 268,123
Property, Plant, and Equipment, Net 330,745 283,924
Goodwill, Net 361,957 334,392
Other Intangible Assets, Net 43,967 24,974
Other Assets 12,811 13,250
----------- -----------
$ 1,149,614 $ 924,663
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt $ 18,027 $ 32,991
Accounts payable 116,386 97,586
Accrued liabilities 44,223 39,987
----------- -----------
Total Current Liabilities 178,636 170,564
----------- -----------
Long-Term Liabilities
Convertible subordinated debentures 154,639 154,639
Other long-term debt, less current 301,425 196,189
maturities
Deferred taxes 94,825 78,568
Other liabilities 2,357 2,345
----------- -----------
Total Long-Term Liabilities 553,246 431,741
----------- -----------
Shareholders' Equity
Common stock, 33,131,846 and 30,460,682 24,849 22,846
shares issued in 2004 and 2003, respectively
Contributed capital 196,264 139,243
Retained earnings 220,136 191,912
Treasury stock, at cost, 952,073 shares
in 2004 and 1,108,381 shares in 2003 (23,653) (27,142)
Accumulated other comprehensive income 136 (4,501)
(loss)
----------- -----------
Total Shareholders' Equity 417,732 322,358
----------- -----------
$ 1,149,614 $ 924,663
=========== ===========
See accompanying notes to consolidated financial statements.
Consolidated Statement of Operations
Fiscal Year 2004 2003 2002
--------- --------- ----------
(Dollars in thousands, except per share
amounts)
Net Sales $ 1,121,725 $ 956,160 $ 898,308
--------- ---------- ----------
Costs and Expenses
Cost of sales 966,963 822,147 763,145
Selling, general, and administrative 59,121 53,540 53,624
Amortization of intangibles 2,840 2,187 660
--------- ---------- ----------
1,028,924 877,874 817,429
--------- ---------- ----------
Operating Earnings 92,801 78,286 80,879
Interest 25,436 24,965 26,816
--------- ---------- ----------
Earnings Before Income Taxes 67,365 53,321 54,063
Income taxes 25,302 19,218 19,793
--------- ---------- ----------
Net Earnings $ 42,063 $ 34,103 $ 34,270
========== ========== ==========
Net Earnings Per Common Share
Basic $ 1.34 $ 1.17 $ 1.23
========== ========== ==========
Diluted $ 1.32 $ 1.15 $ 1.21
========== ========== ==========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Common Contributed Retained Treasury Accumulated Total Share-
Stock Capital Earnings Stock Other holders'
Compre- Equity
hensive
Income
(Loss)
--------- --------- --------- --------- ----------- ----------
Balance, November 3, 2001 $ 21,039 $ 94,239 $ 145,909 $ (30,410) $(14,231) $ 216,546
--------- --------- --------- --------- ----------- ----------
Comprehensive income:
Net earnings - - 34,270 - - 34,270
Other comprehensive income:
Translation adjustments - - - - 1,518 1,518
Cash flow hedge adjustments,
net of tax of $288 - - - - (465) (465)
----------
Comprehensive income 35,323
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, 2002 $ 22,846 $ 140,213 $ 169,518 $ (28,701) $ (13,178) $ 290,698
--------- --------- --------- --------- ----------- ----------
Comprehensive income:
Net earnings - - 34,103 - - 34,103
Other comprehensive income:
Translation adjustments - - - - 6,038 6,038
Cash flow hedge adjustments,
net of tax of $ (1,633) - - - - 2,639 2,639
----------
Comprehensive income 42,780
Stock options exercised - (970) - 4,275 - 3,305
Cash dividends - - (11,709) - - (11,709)
Treasury stock purchases - - - (2,716) - (2,716)
--------- --------- --------- --------- ----------- ----------
Balance, November 1, 2003 $ 22,846 $ 139,243 $ 191,912 $ (27,142) $ (4,501) $ 322,358
--------- --------- --------- --------- ----------- ----------
Comprehensive income:
Net earnings - - 42,063 - - 42,063
Other comprehensive income:
Translation adjustments - - - - 941 941
Cash flow hedge adjustments,
net of tax of $ (2,170) - - - - 3,696 3,696
----------
Comprehensive income 46,700
Common stock issuance 2,003 58,919 - - - 60,922
Restricted stock grant - 180 - - - 180
Stock options exercised - (2,078) - 6,144 - 4,066
Cash dividends - - (13,839) - - (13,839)
Treasury stock purchases - - - (2,655) - (2,655)
--------- --------- --------- --------- ----------- ----------
Balance, October 30, 2004 $ 24,849 $ 196,264 $ 220,136 $ (23,653) $ 136 $ 417,732
--------- --------- --------- --------- ----------- ----------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Year 2004 2003 2002
(Dollars in thousands) ----------- --------- ---------
Cash Flows from Operating Activities
Net earnings $ 42,063 $ 34,103 $ 34,270
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation and amortization 35,056 31,566 28,120
Change in current assets and
liabilities, net of effects of
acquisitions and divestitures:
Receivables (21,599) (18,472) (1,380)
Inventories (32,771) (713) 1,879
Prepaids and other (7,538) (2,192) 2,063
Accounts payable 10,944 10,975 3,871
Accrued liabilities 2,914 (3,881) 6,023
Other, net 8,703 15,294 12,224
---------- ---------- ----------
Net cash provided by operating activities 37,772 66,680 87,070
---------- ---------- ----------
Cash Flows from Investing Activities
Capital expenditures (35,003) (22,009) (28,217)
Business acquisitions (87,952) (27,589) (46,176)
Outsourcing acquisitions (8,141) - (2,916)
Dispositions of assets - 293 492
---------- ---------- ----------
Net cash used for investing activities (131,096) (49,305) (76,817)
---------- ---------- ----------
Cash Flows from Financing Activities
Bank credit facility (27,204) 8,530 (32,151)
(payments)/borrowings, net
Borrowings from issuance of notes 150,000 - -
Payments on notes (32,857) (17,857) (17,857)
Payments on bonds and leases (133) (150) (374)
Issuance of common stock 60,922 - 50,663
Cash dividends on common stock (13,839) (11,709) (10,661)
Stock options exercised 4,066 3,305 5,541
Treasury stock acquired (2,655) (3,436) (6,714)
---------- ---------- ----------
Net cash provided (used) by financing 138,300 (21,317) (11,553)
activities
---------- ---------- ----------
Effect of exchange rate changes on cash 199 210 239
and equivalents
---------- ---------- ----------
Increase (decrease) in cash and 45,175 (3,732) (1,061)
equivalents
Cash and Equivalents at Beginning of Year 3,779 7,511 8,572
---------- ---------- ----------
Cash and Equivalents at End of Year $ 48,954 $ 3,779 $ 7,511
========== ========= =========
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.
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 such entities
are 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. Transactional gains and losses arise from receivable and payable
balances in the normal course of business that are denominated in a currency
other than the functional currency of the operation and are recorded in income
when they occur. 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 October 30, 2004 or
November 1, 2003.
Cash Equivalents - Cash equivalents consist of highly liquid investments with
original maturities of three months or less.
Allowance for Doubtful Accounts - The Company performs ongoing credit
evaluations of customers that includes reviewing creditworthiness from third-
party reporting agencies, monitoring payment histories, and adjusting credit
limits as necessary. We continually monitor collections and payments for our
customers and maintain a provision for estimated credit losses recorded based on
historical experience and specifically identified customer collection issues.
Inventories - Inventories are valued at the lower of (i) actual cost to purchase
or manufacture the inventory (specific identification) or (ii) the current
estimated market value. 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 $32,216,
$29,379, and $27,460 in fiscal years 2004, 2003, and 2002, respectively.
Years
Buildings and leasehold 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 are tested for
impairment annually, or more frequently if events or changes in circumstances
indicate the asset might be impaired. The Company's annual impairment date is
the last day of the fiscal year.
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 income or 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 convertible
subordinated debentures) - based on quoted, current market prices for the same
or similar issues. As of October 30, 2004, the fair value of the convertible
subordinated debentures was $162,680 as compared to the carrying amount of
$154,639 and the fair value of other long-term debt was $328,156 as compared to
its carrying amount of $319,452.
Stock Based Compensation - In 2003, we adopted Statement of Financial Accounting
Standards (SFAS) 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amends SFAS 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 in the results of operations 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 recognition provisions of
SFAS No. 123 been adopted by the Company, the effect on net income and earnings
per common share for fiscal 2004, 2003, and 2002 would have been as follows:
2004 2003 2002
---------- ---------- ----------
Net Earnings as Reported $ 42,063 $ 34,103 $34,270
Deduct fair value of options 1,834 1,592 2,519
granted
---------- --------- ---------
Pro Forma Net Earnings $ 40,229 $ 32,511 $ 31,751
========== ========= =========
Earnings Per Share
As Reported:
Basic $ 1.34 $ 1.17 $ 1.23
Diluted 1.32 1.15 1.21
========== ========== =========
Pro Forma:
Basic $ 1.28 $ 1.11 $ 1.14
Diluted 1.26 1.10 1.12
========== ========== =========
Using the Black-Scholes option-pricing model, the estimated weighted-average
fair value of options granted during fiscal 2004, 2003, and 2002 is as follows:
2004 2003 2002
---------- ----------- ----------
Weight Average Fair Value $ 6.94 $ 5.58 $ 6.91
Assumptions:
Expected Dividend Yield 2.0% 2.0% 2.0%
Expected Volatility 35% 35% 35%
Risk-Free Interest Rates 2.95-3.70% 2.52-3.50% 4.38-5.14%
Expected Lives 5.5 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. In
December 2004, SFAS 123R, a revised version of SFAS 123, was issued which
requires the recognition of compensation expense in the results of operations
for the issuance of employee stock options. The provisions of SFAS 123R will be
effective for the Company in the fourth quarter of 2005. The approximate impact
of SFAS 123R on the Company's historical net earnings and earnings per share is
presented in the previous table.
The Company granted 7,596 restricted stock units to non-employee directors in
June 2004. The grant-date fair value was $23.70 per share, and $180 of
compensation expense was recorded upon issuance.
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
On October 1, 2004, the Company completed the acquisition of substantially all
of the assets of three divisions of VPI, based in Sheboygan, Wisconsin. The
operations purchased included (1) The Sheet Products Division, a custom extruded
sheet manufacturer serving the graphic arts, medical packaging, and specialty
retail markets; (2) The Contract Manufacturing Division, a provider of non-
carpet flooring and sound barrier products to the transportation industry; and
(3) The Film and Converting Division calenders, prints, and laminates products
for distribution to various markets including the Medical and Recreation &
Leisure industries. The Sheet Products Division was added to the Company's
Custom Sheet & Rollstock segment, and the Contract Manufacturing and Film and
Converting Divisions were added to the Color & Specialty Compounds segment.
Sales within the three divisions acquired totaled approximately $110 million for
the 12 months prior to acquisition. The cash price for this acquisition of
approximately $86.5 million was allocated to the assets acquired and liabilities
assumed of $97.5 million and $11.0 million, respectively. The assets acquired
include $39.6 million of property, plant, and equipment, $15.9 million of
identified intangibles, and $19.9 million of goodwill, all of which is
deductible for tax purposes. The preliminary identified intangibles and
respective weighted average amortization periods includes $13.1 million of
customer relationships (nine years), $1.5 million of technology (12 years) and
$1.3 million of non-compete agreements (four years). The final cash price will
change upon completion of a working capital adjustment. In addition, the Company
has not finalized the allocation of the cash price to assets acquired and
liabilities assumed and the determination of intangible amortization lives, and
is awaiting final valuations from our independent advisors.
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 cash purchase price for
these assets was $5,420 and was allocated to assets and liabilities of $5,517
and $97, respectively. Assets acquired included $752 of goodwill, all of which
is deductible for tax purposes. This business is reported in the Company's
Custom Sheet & Rollstock segment.
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 five years, and a trademark of
$8,900 which was determined to have an indefinite life). PEP is reported in the
Company's Custom Sheet & Rollstock segment.
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 three to five years, and
product formulations totaling $12,030 with an amortization period of 15 years)
and liabilities assumed of $52,157 and $4,929, respectively. GWB is reported in
the Company's Color & Specialty Compounds segment.
3) Inventories
Inventories at October 30, 2004 and November 1, 2003 are comprised of the
following components:
2004 2003
---------- --------
Raw materials $ 82,571 $ 57,414
Finished goods 59,464 42,257
---------- --------
$ 142,035 $ 99,671
========== ========
4) Property, Plant, and Equipment
Property, plant, and equipment consisted of the following at October 30, 2004
and November 1, 2003:
2004 2003
-------- ---------
Land $ 14,167 $ 12,247
Buildings and leasehold improvements 85,915 74,264
Machinery and equipment 428,890 361,684
Furniture and fixtures 9,299 9,537
-------- --------
538,271 457,732
Less accumulated depreciation 207,526 173,808
-------- --------
Property, plant, and equipment, net $ 330,745 $ 283,924
======== =========
5) Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the years ended October 30, 2004
and November 1, 2003 are as follows:
Custom Color & Molded & Total
Sheet& Specialty Profile
Rollstock Compounds Products
--------- --------- --------- ---------
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
Goodwill acquired 11,088 8,650 478 20,216
Reclassifications 721 6,628 - 7,349
--------- --------- --------- ---------
Balance, October 30, 2004 $ 212,850 $ 111,015 $ 38,092 $ 361,957
========== ========= ========= =========
Total accumulated goodwill amortization at October 30, 2004 and November 1, 2003
is $29,773. Reclassifications represent opening balance adjustments between
goodwill and deferred taxes.
As of October 30, 2004 and November 1, 2003, the Company had amortizable
intangible assets as follows:
Gross Accumulated
Carrying Amount Amortization
2004 2003 2004 2003
------------ ------------ ------------ -----------
Non-compete agreements $ 3,960 $ 1,750 $ 1,242 $ 612
Customer 18,981 5,140 2,380 1,161
contracts/relationships
Product formulations 17,811 12,030 2,063 1,073
----------- ------------ ------------ -----------
Total $ 40,752 $ 18,920 $ 5,685 $ 2,846
=========== ============ =========== ===========
Amortization expense for intangible assets totaled $2,840 in 2004, $2,187 in
2003, and $660 in 2002. Amortization expense for amortizable intangible assets
over the next five fiscal years is estimated to be: 2005-$3,291, 2006-$3,012,
2007-$2,728, 2008-$1,963, and 2009-$1,570. The Company has a $8,900 trademark
included in other intangible assets which has an indefinite life and therefore,
is not subject to amortization.
6) Convertible Subordinated Debentures
On February 18, 2000, the Company issued $103,093 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.
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 104.2% of the principal amount plus accrued interest
through March 1, 2005. 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 $51,546 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. 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 103.3% of the principal amount plus accrued interest
through March 1, 2005. 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.
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 our 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 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 years' financial statements have been restated to reflect
the effect of the deconsolidation required by FIN 46R.
7) Other Long-Term Debt
Other long-term debt is comprised of the following at October 30, 2004 and
November 1, 2003:
2004 2003
------------- -------------
5.54% Senior Unsecured 2004 Notes $ 150,000 $ -
7.0% Senior Unsecured 1997 Notes 19,286 40,714
7.62% Guaranteed Senior Unsecured 1996 Notes 8,571 12,857
7.21% Senior Unsecured 1995 Notes 7,143 14,286
Bank Credit Facilities 125,000 152,203
Other 9,452 9,120
------------ ------------
319,452 229,180
Less current maturities 18,027 32,991
------------ ------------
Total other long-term debt $ 301,425 $ 196,189
============ ============
On September 15, 2004, the Company completed a $150,000 private placement of
5.54% Senior Unsecured Notes over a twelve-year term. The 2004 Notes require
equal annual principal payments of $30,000 that commence on September 15, 2012.
Interest on the 2004 Notes is payable semiannually on March 15 and September 15
of each year. 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 required $15,000 principal payment due on the Series B 1997 Notes was paid
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 completed a $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.
On March 3, 2004, the Company amended its unsecured bank credit facility to an
aggregate availability of $200,000 for a new five-year term. On April 27, 2004,
the Company's Canadian subsidiary entered into an additional $10,000 (Canadian)
revolving credit facility in Canada that expires on March 3, 2009. The total
capacity under these bank credit facilities was $208,192 at October 30, 2004.
Borrowings under these facilities are classified as long-term, because no
paydowns of the aggregate facilities are required within the next fiscal year.
Interest on the bank credit facilities is payable at a rate chosen by the
Company of either prime or Eurodollar rate plus a 0.5% to 1.125% borrowing
margin and the agreement requires a fee of 0.10% to 0.275% for any unused
portion of the facilities. At October 30, 2004, the Company had fixed LIBOR
loans outstanding under the bank credit facilities of $125,000 at 2.59% in the
U.S. for a one month period (LIBOR loans totaled $150,900 at 2.13%-2.25% in the
U.S. on November 1, 2003). As of October 30, 2004, there were no bank credit
facility borrowings at the current prime rate (November 1, 2003 of $1,000 at 4%
in the U.S. and $303 at 4.75% in Canada). The Company had a $125,000 interest
rate swap agreement that expired November 10, 2004 under which it paid interest
at 6.06% and received interest at LIBOR plus the borrowing margin. We designated
the swap as a cash flow hedge of the LIBOR borrowings under the bank credit
facilities.
The other debt consists of industrial revenue bonds utilized to finance capital
expenditures. These financings mature between 2007 and 2015 and have interest
rates ranging from 1.91% to 3.75%.
Scheduled maturities of long-term debt for the next five fiscal years are: 2005-
$18,027; 2006-$10,893; 2007-$6,523; 2008-$155; and 2009-$125,162. 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.
8) Shareholders' Equity & Stock Options
The authorized capital stock of the Company consists of 55 million shares of
$.75 par value common stock and 4 million shares of $1 par value preferred
stock. On March 10, 2004 shareholders approved an increase to the authorized
number of shares of common stock from 45,000,000 shares to 55,000,000 shares.
The additional authorized shares will be used to provide flexibility (i) for the
issuance of stock options and other stock-based compensation and incentive
awards and (ii) raising additional capital, acquisitions, stock dividends, or
other corporate purposes.
On February 3, 2004, SPARTECH completed a common stock offering for 2.7 million
newly issued shares. The stock was sold to the public at $24.00 per share. The
net proceeds received by the Company for the sales of the shares totaled
approximately $61 million with approximately $41 million used to pay down debt
and $20 million that was subsequently used to fund capital expenditures and
strategic expansions. After the offering, the Company's common issued shares
increased by 8.8% to 33,131,846.
The Company has a Shareholder Rights Plan in which rights trade with, and are
inseparable from, each share of 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 2004, 2003, and 2002 follows (shares in thousands):
2004 2003 2002
-------------- -------------- --------------
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Option Exercise Option Exercise
Price Price Price
------ -------- ------ -------- ------ --------
Outstanding, beginning of 2,522 $ 19.50 2,382 $ 19.23 2,463 $ 16.67
year
Granted 453 22.08 461 18.74 576 21.38
Exercised (298) 15.03 (250) 15.25 (609) 10.99
Canceled/Expired - - (71) 20.78 (48) 18.36
------ ------ ------
Outstanding, end of year 2,677 20.38 2,522 19.50 2,382 19.23
Exercisable, end of year 1,606 1,443 1,453
====== ====== ======
Information with respect to options outstanding at October 30, 2004 follows
(shares in thousands):
Range of Exercise Outstand- Weighted Remaining Exercisable Exercise
Prices ing Shares Average Contractual Average Price
Exercise Life Shares
Price
--------- --------- ---------- ---------- --------
$ 10.88 - 16.40 636 $13.95 4.4 years 546 $14.29
$ 18.00 - 21.00 501 18.15 7.2 years 206 18.23
$ 21.10 - 21.90 915 21.45 8.0 years 290 21.10
$ 21.94 - 28.94 625 27.15 4.6 years 564 27.48
---------- ----------
2,677 1,606
========== ==========
9) Income Taxes
The provision for income taxes for fiscal years 2004, 2003, and 2002 is
comprised of the following:
2004 2003 2002
---------- ---------- ------------
Federal:
Current $ 13,269 $ 8,614 $ 8,651
Deferred 6,610 6,984 6,890
State 2,749 2,475 2,393
Foreign 2,674 1,145 1,859
---------- ---------- ------------
Provision for income taxes $ 25,302 $ 19,218 $ 19,793
========= ========== ===========
Earnings before income taxes for 2004, 2003, and 2002 include $5,996, $3,762,
and $5,329, 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:
2004 2003 2002
--------- ---------- ----------
Federal income taxes at statutory $ 23,578 $ 18,662 $ 18,922
rate
State income taxes, net of 1,787 1,609 1,555
applicable Federal income tax
benefits
Other (63) (1,053) (684)
-------- --------- ----------
$ 25,302 $ 19,218 $ 19,793
======== ========= ==========
At October 30, 2004 and November 1, 2003 the Company's principal components of
deferred tax assets and liabilities consisted of the following:
2004 2003
---------- ------------
Deferred tax assets:
Employee benefits and $ 2,507 $ 1,411
compensation
Workers' compensation 1,474 1,261
Deferred compensation benefit 973 716
plans
Bad debt reserves 955 1,319
Other 590 3,143
-------- ----------
$ 6,499 $ 7,850
======== ==========
Deferred tax liabilities:
Depreciation $ 59,830 $ 57,540
Goodwill and other intangibles 36,095 23,744
Inventory capitalization and 970 1,107
reserves
--------- ----------
$ 96,895 $ 82,391
========= ==========
At October 30, 2004 and November 1, 2003, the net current deferred tax asset was
$4,429 and $4,027, respectively, and the net noncurrent deferred tax liability
was $94,825 and $78,568, respectively.
As of October 30, 2004, no deferred taxes have been provided on the $26,337 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 2004, 2003, and 2002 was as follows (shares in thousands):
2004 2003 2002
--------------- ---------------- ----------------
Earnings Shares Earnings Shares Earnings Shares
-------- --------- -------- ------- -------- --------
Basic Earnings Per $ 42,063 31,426 $ 34,103 29,268 $ 34,270 27,895
Share
Effect of stock - 406 - 299 - 484
options
Effect of convertible 2,010 1,636 - - - -
preferred securities
-------- -------- -------- ------- ------- -------
Diluted Earnings Per $44,073 33,468 $34,103 29,567 $34,270 28,379
Share
======= ======= ======= ======= ======= =======
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 subordinated debentures represents the shares
resulting from the assumed conversion using the "if converted" method and the
add-back of the interest expense, after tax, for the assumed conversion at the
beginning of each year. In 2004, a portion of these debentures were
antidilutive, and the diluted earnings per share calculation excluded 2,941,176
potentially dilutive shares, and the benefit of an interest expense add-back of
$4,368, net of tax. In 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.
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 2004, 2003, and 2002 was $2,237, $2,530, and
$2,742 respectively.
12) Cash Flow Information
Supplemental information on cash flows for fiscal years 2004, 2003, and 2002 was
as follows:
2004 2003 2002
-------- --------- --------
Cash paid during the year for:
Interest $ 25,524 $ 26,690 $ 28,267
Income taxes 20,647 8,896 4,507
Schedule ofacquisitions/divestitures:
Fair value of assets acquired $ 107,712 $ 37,937 $ 57,521
Liabilities assumed (10,146) (10,348) (5,589)
Non-cash consideration/holdback payments (1,473) - (2,840)
-------- -------- --------
Total cash paid $ 96,093 $ 27,589 $ 49,092
======== ======== ========
13) Commitments and Contingencies
The Company conducts certain of its operations in facilities under operating
leases. Rental expense for fiscal years 2004, 2003, and 2002, was $10,530,
$10,657, and $9,264, respectively. Future minimum lease payments under non-
cancelable operating leases, by fiscal year, are: 2005-$7,813; 2006-$5,997;
2007-$4,638; 2008-$3,893, 2009-$2,832, and $8,981 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 a SPARTECH subsidiary,
regarding the Lower Passaic River. The subsidiary has agreed to participate
along with at least 39 other companies (including several added in 2004) in an
environmental study 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 $221 accrual as of October 30, 2004.
This accrual includes estimated costs associated with participation in the
environmental study and legal fees. Due to uncertainties inherent in this
matter, management is unable to estimate the Company's possible additional
exposure upon the ultimate outcome of this issue which is not expected to occur
for a number of years. These uncertainties primarily include the completion and
outcome of the environmental study and the percentage of contamination
attributable to the subsidiary 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 51 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 the Company's reportable segments follows:
Custom Sheet & Rollstock - This segment has 28 manufacturing
facilities and is the largest extruder of plastic sheet, custom rollstock,
laminates, and cell cast acrylic sheet in North America. Its finished products
are formed by its customers for use in a wide variety of markets.
Color & Specialty Compounds - This segment operates 16 plants
throughout North America and Europe. It 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 includes corporate office expenses. Assets included in Corporate &
Other consist primarily of deferred taxes, cash & cash equivalents.
2004 2003 2002
---------- ---------- ----------
Net Sales
Custom Sheet & Rollstock $ 750,490 $ 628,535 $ 600,486
Color & Specialty Compounds 302,660 263,034 235,728
Molded & Profile Products 68,575 64,591 62,094
---------- ---------- ----------
Total Net Sales $1,121,725 $956,160 $898,308
=========== ========== ===========
Operating Earnings
Custom Sheet & Rollstock $76,079 $63,096 $62,294
Color & Specialty Compounds 23,741 20,986 25,721
Molded & Profile Products 6,319 5,393 3,496
Corporate (13,338) (11,189) (10,632)
---------- ---------- ----------
Total Operating Earnings $92,801 $78,286 $80,879
=========== ========== ===========
Assets
Custom Sheet & Rollstock $641,673 $562,387 $515,415
Color & Specialty Compounds 354,158 259,381 254,371
Molded & Profile Products 89,153 84,514 77,252
Corporate & Other 64,630 18,381 28,757
---------- ---------- ----------
Total Assets $1,149,614 $924,663 $875,795
=========== ========== ===========
Depreciation and Amortization
Custom Sheet & Rollstock $18,567 $17,561 $16,364
Color & Specialty Compounds 11,921 10,646 8,705
Molded & Profile Products 3,279 3,021 2,608
Corporate 1,289 338 443
---------- ---------- ----------
Total Depreciation and $35,056 $31,566 $28,120
Amortization
=========== ========== ===========
Capital Expenditures
Custom Sheet & Rollstock $21,094 $10,345 $16,062
Color & Specialty Compounds 7,538 6,698 6,153
Molded & Profile Products 3,658 2,565 4,357
Corporate 2,713 2,401 1,645
---------- ---------- ----------
Total Capital Expenditures $35,003 $22,009 $28,217
=========== ========== ===========
In addition to external sales to customers, intersegment sales were $49,769,
$36,948, and $25,950 for the fiscal years ended 2004, 2003, and 2002,
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 2004, 2003, and 2002 was as follows:
Net Sales By Destination Property, Plant and
Equipment, Net
---------------------------- ----------------------------
2004 2003 2002 2004 2003 2002
---------- --------- --------- --------- --------- --------
United States $ 935,321 $ 815,009 $ 776,749 $ 282,947 $239,825 $258,827
Canada 99,996 79,023 74,312 26,437 26,500 19,061
Mexico 43,167 31,400 23,070 14,465 14,192 -
Europe 29,452 19,382 15,923 6,896 3,407 2,586
Asia & Other 13,789 11,346 8,254 - - -
---------- --------- --------- --------- --------- --------
$1,121,725 $ 956,160 $ 898,308 $330,745 $283,924 $280,474
========== ========= ========= ========= ========= ========
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 income (loss) consisted of foreign currency translation
adjustments of $15 and $(926), and cash flow hedge adjustments of $121 and
$(3,575) at October 30, 2004 and November 1, 2003, respectively.
16) Quarterly Financial Information
Certain unaudited quarterly financial information for the fiscal years ended
October 30, 2004 and November 1, 2003 was as follows:
Quarter Ended Fiscal
-------------------------------------------- ----------
Jan April July Oct Year
---------- ---------- ---------- ---------- ----------
2004
- ---------------
Net Sales $241,463 $287,591 $288,035 $304,636 $1,121,725
Gross Profit 33,423 43,712 40,957 36,670* 154,762
Net Earnings 7,706 13,519 11,712 9,126* 42,063
Net Earnings Per .26 .42 .36 .28* 1.34
Share - Basic
- Diluted .26 .41 .36 .28* 1.32
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 .21 .36 .28 .32 1.17
Share - Basic
- Diluted .21 .36 .28 .31 1.15
* Amounts are impacted by approximately $1.8 million of pre-tax, out-of-
period charges to correct account balances identified from the implementation of
information technology systems.
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, an independent registered public accounting firm, is engaged
to provide an objective audit of the financial statements of SPARTECH
Corporation and issue a report thereon. Their audit is conducted in accordance
with standards set by the Public Company Accounting Oversight Board (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
Chairman, President Executive Vice President
& Chief Executive Officer Corporate Development
& Chief Financial Officer
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Board of Directors SPARTECH Corporation
We have audited the accompanying consolidated balance sheets of SPARTECH
Corporation (the Company) as of October 30, 2004 and November 1, 2003, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows of the Company for the three years in the period ended October
30, 2004. 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.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 at October 30, 2004 and November 1, 2003 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended October 30, 2004 in conformity with U.S. generally accepted
accounting principles.
Ernst & Young LLP
St. Louis, Missouri
December 17, 2004
/
Eleven-Year Summary
The following table sets forth selected financial data for each of the most
recent 11 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 13 of this Report. (Amounts in thousands, except
per share data).
2004 2003 2002 2001
----------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Net Sales:
In Dollars $ 1,121,725 $ 956,160 $ 898,308 $ 937,059
In Pounds 1,383,000 1,207,000 1,179,000 1,170,000
Gross Profit $154,762 $134,013 $135,163 $152,049
Depreciation & Amortization $35,056 $31,566 $28,120 $34,921
Operating Earnings $92,801 $78,286 $80,879 $82,374*
Interest Expense $25,436 $24,965 $26,816 $34,821
Net Earnings $42,063 $34,103 $34,270 $29,903*
PER SHARE INFORMATION
Earnings Per Share-Diluted $1.32 $1.15 $1.21 $1.11*
Dividends Declared Per Share $.44 $.40 $.38 $.38
Book Value Per Share $12.98 $10.98 $9.93 $8.11
BALANCE SHEET INFORMATION
Working Capital $221,498 $97,559 $99,150 $111,139
Total Debt $474,091 $383,819 $392,971 $443,353
Total Assets $1,149,614 $924,663 $875,795 $824,967
Cash Flow From Operations $37,772 $66,680 $87,070 $70,453
Capital Expenditures $35,003 $22,009 $28,217 $16,237
Shareholders' Equity $417,732 $322,358 $290,698 $216,546
RATIOS/OTHER DATA
Gross Margin 13.8% 14.0% 15.0% 16.2%
Operating Margin
In Percentage 8.3% 8.2% 9.0% 8.8%*
In Cents Per Pound 6.7 cents 6.5 cents 6.9 cents 7.0 cents
Effective Tax Rate 37.6% 36.0% 36.6% 37.1%
Total Debt to Total Debt and Equity 53.2% 54.4% 57.5% 67.2%
Return on Average Equity 11.2% 11.1% 13.5% 14.0%*
Number of Employees 3,750 3,325 3,475 3,300
Common Shares:
Outstanding at Year-End 32,180 29,352 29,285 26,700
Weighted Average-Diluted 33,468 29,567 28,379 28,696
* Reduced by pre-tax $9.1 million non-recurring charges related to the
impairment of long-lived assets, severance and plan closedown costs
2000 1999 1998 1997
----------- --------- --------- --------
SUMMARY OF OPERATIONS
Net Sales:
In Dollars $987,532 $790,427 $670,477 $514,891
In Pounds 1,286,000 1,166,000 886,000 522,000
Gross Profit $171,669 $136,962 $111,215 $82,215
Depreciation & Amortization $31,905 $ 23,222 $18,530 $11,548
Operating Earnings $109,761 $87,707 $69,728 $49,701
Interest Expense $29,131 $16,198 $13,602 $8,393
Net Earnings $49,907 $43,071 $33,720 $25,493
PER SHARE INFORMATION
Earnings Per Share-Diluted $1.72 $1.48 $1.18 $.92
Dividends Declared $.34 $.28 $.24 $.20
Per Share
Book Value Per $ 7.86 $6.98 $5.72 $4.85
Share
BALANCE SHEET
INFORMATION
Working Capital $110,565 $76,711 $72,204 $63,429
Total Debt $507,484 $281,855 $254,220 $142,614
Total Assets $902,032 $633,134 $536,747 $360,875
Cash Flow From Operations $60,413 $76,547 $64,546 $48,390
Capital Expenditures $29,129 $24,692 $17,859 $12,172
Shareholders' Equity $211,022 $190,042 $153,596 $128,389
RATIOS/OTHER DATA
Gross Margin 17.4% 17.3% 16.6% 16.0%
Operating Margin
In Percentage 11.1% 11.1% 10.4% 9.7%
In Cents Per Pound 8.5 cents 7.5 cents 7.9 cents 9.5 cents
Effective Tax Rate 38.1% 39.8% 39.9% 38.3%
Total Debt to Total Debt and Equity 70.6% 59.7% 62.3% 52.6%
Return on Average Equity 24.9% 25.1% 23.9% 21.2%
Number of Employees 4,075 3,350 2,700 2,125
Common Shares:
Outstanding at Year-End 26,864 27,240 26,861 26,480
Weighted Average-Diluted 31,874 29,982 28,609 27,838
1996 1995 1994
---------- --------- ---------
SUMMARY OF OPERATIONS
Net Sales:
In Dollars $401,132 $361,080 $263,008
In Pounds 400,000 371,000 310,000
Gross Profit $60,572 $49,879 $36,998
Depreciation & Amortization $7,211 $5,798 $4,422
Operating Earnings $34,492 $24,604 $16,410
Interest Expense $5,062 $4,960 $3,125
Net Earnings $18,317 $14,534 $10,835
PER SHARE INFORMATION
Earnings Per Share-Diluted $.73 $.60 $.46
Dividends Declared Per Share $.15 $.09 $-
Book Value Per Share $4.26 $3.09 $6.75
BALANCE SHEET
INFORMATION
Working Capital $53,610 $45,108 $26,351
Total Debt $98,466 $59,510 $39,169
Total Assets $291,610 $179,169 $136,223
Cash Flow From Operations $23,160 $16,487 $13,358
Capital Expenditures $9,220 $9,477 $7,819
Shareholders' Equity $112,395 $72,128 $58,233
RATIOS/OTHER DATA
Gross Margin 15.1% 13.8% 14.1%
Operating Margin
In Percentage 8.6% 6.8% 6.2%
In Cents Per Pound 8.6 cents 6.6 cents 5.3 cents
Effective Tax Rate 37.8% 26.0% 18.4%
Total Debt to Total Debt and Equity 46.7% 45.2% 40.2%
Return on Average Equity 19.9% 22.3% 20.8%
Number of Employees 1,800 1,200 925
Common Shares:
Outstanding at Year-End 26,400 23,353 8,629
Weighted Average-Diluted 25,115 24,111 23,434
ANNUAL SHAREHOLDERS' MEETING
SPARTECH's Annual Shareholders' Meeting will be held on Wednesday, March 9, 2005
at Washington University's Knight Center, One Brookings Drive, St. Louis,
Missouri at 10:00 a.m. A formal notice of the Meeting, together with a Proxy
Statement, will be mailed before the meeting to shareholders entitled to vote.
COMMON STOCK AND TRANSFER AGENT
As of January 1, 2005, there were approximately 1,500 registered shareholders
and 4,300 shareholders with shares held by banks and brokers of the Company's
common stock. The Company's Registrar and Transfer Agent is Mellon Investor
Services, LLC, 85 Challenger Overpeck Center, Ridgefield Park, New Jersey 07660.
The Company's common stock is traded on the New York Stock Exchange under the
symbol "SEH." Quarterly stock prices for fiscal years 2004 and 2003, and year-
ends 2001 to 2004, are shown to the right.
DIVIDEND REINVESTMENT PLAN AND REPORT ON FORM 10-K
A Dividend Reinvestment Plan is available to shareholders of the Company,
allowing the automatic investment of cash dividends and direct cash purchases of
the Company's common stock. For details on the Plan, please contact the
Company's Registrar and Transfer Agent, Mellon Investor Services LLC, at (888)
213-0965. Common stock dividends paid for fiscal years 2001- 2004 are shown to
the right. In addition, the Company will provide, without charge to any
shareholder a copy of its 2004 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.
Corporate Governance
The Board of Directors has established specific Corporate Governance Guidelines,
a Code of Ethics for the CEO and Senior Financial Officers, and a Code of
Business Conduct and Ethics for all directors, officers and employees. These
documents are provided on the Company's website at www.spartech.com within the
Investor Relations/Corporate Governance section of the site. At this same
website location, The Company 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.
The rules of the New York Stock Exchange (NYSE) require Mr. Buechler, our Chief
Executive Officer, to certify to the NYSE annually that he is not aware of any
violation by the Company of the NYSE's corporate governance listing standards.
In addition, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Mr.
Buechler and Mr. Martin, our Chief Financial Officer, must each execute a
certificate as to the quality of our public disclosures as part of our quarterly
reports to the Securities and Exchange Commission (SEC). Their latest Section
302 certifications have been filed with the SEC as exhibits to our 2004 Form 10-
K.
Bar Chart
2004 Quarterly Common Stock Prices
1st - $21.58 - $26.00
2nd - $22.55 - $25.41
3rd - $21.36 - $26.30
4th - $21.85 - $25.95
Bar Chart
2003 Quarterly Common Stock Prices
1st - $17.71 - $21.05
2nd - $16.47 - $22.35
3rd - $19.69 - $23.65
4th - $20.30 - $24.49
Bar Chart
2001-2004 Year-End Common Stock Prices
2001 - $21.05
2002 - $18.79
2003 - $23.18
2004 - $25.20
Bar Chart
2001-2004 Common Stock Dividends
2001 - 38 cents
2002 - 38 cents
2003 - 40 cents
2004 - 44 cents