SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 28, 1995
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5911
SPARTECH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 43-0761773
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7733 Forsyth Boulevard, Suite 1450, Clayton, Missouri, 63105
(address of principal executive offices)
(314) 721-4242
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding as of January 28, 1995
Common Stock, $.75 par value 8,708,177
per share
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
January 28, 1995
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
January 28, 1995 and October 29, 1994 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the thirteen weeks ended
January 28, 1995 and January 29, 1994 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for the thirteen weeks ended
January 28, 1995 and January 29, 1994 5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION 13
SIGNATURES 14
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands, except per share amounts)
ASSETS
Jan. 28, 1995 October 29,
(unaudited) 1994
Current Assets
Cash $ 1,776 $ 1,752
Accounts and notes receivable, net 45,627 40,493
Inventories 31,989 22,936
Prepayments and other 1,717 1,112
Total Current Assets 81,109 66,293
Plant and Equipment, Net 60,153 46,656
Goodwill 24,262 21,044
Other Assets 1,518 1,727
$ 167,042 $ 135,720
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 3,000 $ 2,750
Accounts payable 32,700 28,403
Accrued liabilities 10,961 8,789
Total Current Liabilities 46,661 39,942
Senior Long-Term Debt,
Less Current Maturities 47,606 26,285
9% Convertible Subordinated Debentures 10,134 10,134
Other Liabilities 1,048 1,126
Total Long-Term Liabilities 58,788 37,545
Shareholders' Equity
6% Cumulative Convertible Preferred Stock,
776,700 shares issued and outstanding
($50 per share liquidation value) 777 777
Common stock, 8,709,947 shares issued
in 1995 and 8,629,947 shares issued
in 1994 6,532 6,472
Contributed capital 75,165 74,438
Retained deficit (20,873) (23,449)
Treasury stock, at cost, 1,770 shares
in 1995 and 1,324 shares in 1994 (8) (5)
Total Shareholders' Equity 61,593 58,233
$ 167,042 $ 135,720
The accompanying notes are an integral part
of this financial statement.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited and dollars in thousands, except per share amounts)
THIRTEEN WEEKS ENDED
January 28, January 29,
1995 1994
Net Sales $ 79,258 $ 49,158
Costs and Expenses
Cost of sales 67,271 41,222
Selling and administrative 5,084 4,009
Depreciation and amortization 1,486 983
73,841 46,214
Operating Earnings 5,417 2,944
Interest 1,242 671
Earnings Before Income Taxes 4,175 2,273
Provision for Income Taxes 1,050 170
Net Earnings 3,125 2,103
Preferred Stock Accretion 549 518
Net Earnings Applicable
to Common Shares $ 2,576 $ 1,585
Net Earnings Per Common Share:
Primary $ .27 $ .17
Fully diluted $ .13 $ .09
The accompanying notes are an integral part
of this financial statement.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
THIRTEEN WEEKS ENDED
Jan. 28, Jan. 29,
1995 1994
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings $ 3,125 $ 2,103
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 1,486 983
Change in current assets and liabilities,
net of effects of acquisitions 991 (817)
Other, net (152) 452
Net cash provided by
operating activities 5,450 2,721
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (2,737) (2,496)
Retirement of assets, net 21 3
Business acquisition (24,516) -
Net cash used for
investing activities (27,232) (2,493)
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (payments)
on revolving loan 17,071 (463)
Term loan additions 5,000 -
Principal payments on term loan (500) -
Stock options exercised 238 273
Other, net (3) -
Net cash provided by (used for)
financing activities 21,806 (190)
INCREASE IN CASH 24 38
CASH AT BEGINNING OF PERIOD 1,752 1,449
CASH AT END OF PERIOD $ 1,776 $ 1,487
The accompanying notes are an integral part
of this financial statement.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE A - Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Spartech Corporation and its wholly-owned subsidiaries
(the "Company"). These financial statements have been prepared on
a condensed basis and, accordingly, certain information and note
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management,
the financial statements contain all adjustments (consisting solely
of normal recurring adjustments) and disclosures necessary to make
the information presented therein not misleading. These financial
statements should be read in conjunction with the consolidated
financial statements and accompanying footnotes thereto included in
the Company's October 29, 1994 Annual Report on Form 10-K.
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.
Operating results for the thirteen weeks ended January 28,
1995 and January 29, 1994 are seasonal in nature and are not
necessarily indicative of the results expected for the full year.
NOTE B - Inventories
Inventories are valued at the lower of cost (first-in, first-
out) or market. Inventories at January 28, 1995 and October 29,
1994 are comprised of the following components:
1995 1994
Raw materials $ 22,255 $ 16,171
Finished goods 9,734 6,765
$ 31,989 $ 22,936
NOTE C - Income Taxes
The Company accounts for income taxes pursuant to SFAS No.
109, "Accounting for Income Taxes". Under SFAS No. 109, 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. 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. SFAS No. 109 requires an assessment, which
includes anticipating future income, in determining the likelihood
of realizing deferred tax assets.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE D - Senior Long-Term Debt
On November 1, 1994, the Company acquired certain divisions of
Pawnee Industries, Inc. (see Note I, Acquisition, for a discussion
of this purchase). To facilitate the funding of this purchase, the
Company amended its Credit Facility effective November 1, 1994, by
increasing its Revolving Credit Loan commitment from $37,000 to
$47,000 and its Term Loan commitment from $13,000 to $18,000.
The Term Loan is due in quarterly payments of $500 to $1,000,
commencing on November 1, 1994, with the remaining principal
balance to be paid in full on April 30, 1998. Both the Revolving
Credit Loan and Term Loan are secured by receivables, inventories
and all of the property of the Company. Interest on these loans is
payable at a rate chosen by the Company of either Chemical's Prime
rate plus 0.25% or the Adjusted LIBO rate plus 1.75%. As of
January 28, 1995, Chemical's Prime rate was 8.5% and the six month
Adjusted LIBO rate was 6.75%
NOTE E - Earnings Per Share
Primary net earnings per common share are computed based upon
the weighted average number of common shares outstanding during
each period after consideration of the dilutive effect of stock
options and warrants. Such average shares were:
Period Ended Thirteen Weeks
January 28, 1995 9,529,000
January 29, 1994 9,314,000
Fully diluted net earnings per common share assumes conversion
of securities when the earnings per share result is dilutive.
Assumed conversions increased the weighted average number of common
shares outstanding by 14,275,000 for the thirteen weeks ended
January 28, 1995 and January 29, 1994.
For the computation of primary net earnings per common share,
net earnings have been increased for an after-tax interest expense
reduction as computed under the modified treasury stock method.
For the computation of fully diluted net earnings per common share,
net earnings have been further increased for the elimination of
preferred stock accretion resulting from the assumed conversion of
preferred stock. Net earnings increases for the thirteen weeks
ended January 28, 1995 and January 29, 1994 were as follows:
Thirteen Weeks
1995 1994
Primary $ 6 $ 70
Fully Diluted $ 549 $ 518
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE F - Cash Flow Information
Supplemental information on cash flows and noncash
transactions for the thirteen weeks ended January 28, 1995 and
January 29, 1994 is as follows:
1995 1994
Cash paid for:
Interest (net of amounts capitalized) $ 965 $ 484
Income taxes $ 106 $ 109
Schedule of noncash transactions:
Business acquisition--
Fair value of assets acquired $26,031 $ -
Liabilities assumed (1,515) -
Total cash paid for
the net assets acquired $24,516 $ -
NOTE G - Shareholders' Equity
The authorized capital stock of the Company consists of 35
million shares of $.75 par value common stock and 4 million shares
of $1 par value preferred stock.
Preferred stock outstanding as of January 28, 1995 and October
29, 1994 consisted of the following series of 6% Cumulative
Convertible Preferred Stock, which are convertible into the shares
of common stock indicated and which carry the equivalent common
share voting rights indicated prior to conversion:
Preferred Number of Common Stock Equivalent Common
Stock Preferred Shares Issuable Upon Share Voting
Series Outstanding Conversion Rights
Series L 373,500 6,884,987 1,721,247
Series M 343,200 6,289,998 1,572,500
Series N 60,000 1,099,650 274,913
These series of preferred stock were issued at an equivalent
price of $50 per share as part of a debt-to-equity restructuring
completed April 30, 1992. In total, the restructuring resulted in
the exchange of $30,163 of the Company's subordinated debt for
these issues of preferred and common stock.
Dividends are payable on each series of preferred stock
commencing April 30, 1995 at an annual rate of $3.00 per share;
provided however, that in the event a cash dividend is not declared
by the Company's Board of Directors, dividends shall be payable in
shares of common stock based on a price of $5.00 per share of
common stock. These series of preferred stock are not subject to
mandatory redemption; however, they may be redeemed at the option
of the Company for $50 per share from and after December 1, 1994 if
certain conditions with respect to the market price of the
Company's common stock have been met and, in any event, from and
after December 1, 1999. The holders of these series of preferred
stock are entitled to receive $50 per share, plus accrued but
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
unpaid dividends, in the event of liquidation, dissolution or
winding up of the Company. In December, 1994, the holders of such
preferred stock indicated that they intend to convert their
preferred securities into common stock, effective May 1995.
The dividend terms of each series of preferred stock provide
that dividends will not begin accruing until April 30, 1995. Due
to the absence of a dividend requirement on these series of
preferred stock, a noncash charge for the accretion of the
preferred stock has been recognized. Such charges were:
Period Ended Thirteen Weeks
January 28, 1995 $ 549
January 29, 1994 $ 518
The charge results in no net change in shareholders' equity, as the
same amount charged to retained earnings each quarter is added back
to contributed capital. This accretion will not be required in the
future if the above conversion takes place in May.
NOTE H - Commitments and Contingencies
On June 2, 1992, Mr. Lawrence M. Powers, a former Director and
former Chairman of the Board and Chief Executive Officer of the
Company, filed a lawsuit in the United States District Court for
the Southern District of New York against the Company and certain
of its Directors and major shareholders. In the suit, Mr. Powers
claims that, by reason of the Company's April 30, 1992 debt-to-
equity restructuring (which he had previously, on April 13, 1992,
voted in favor of as a Director), the Company should adjust his
existing stock options, provide for the issuance of 167,744
additional shares of common stock to him, and award to him
attorney's fees and interest. Mr. Powers seeks judgment against
the Company and the other defendants: (1) in excess of $13,000 plus
punitive damages, (2) requiring the Company to issue him an
additional 167,744 shares of common stock, (3) requiring an
adjustment increasing his then outstanding options to purchase the
Company's common stock from 1,871,201 shares to 4,080,000 shares,
and (4) for attorney's fees and interest. In June, 1993, in
responding to the Company's request for summary judgment, the Court
ruled the Board of Directors' decision to not adjust Mr. Powers'
options was "final, binding and conclusive" unless Mr. Powers can
establish the Board was not acting independently and that it could
not have acted appropriately. Discovery has concluded in the
litigation, and the Company, together with the other defendants,
have moved for summary judgment dismissing the complaint. The
Company believes Mr. Powers' litigation is without merit and will
continue defending against it vigorously.
The Company currently has no litigation with respect to any
environmental matters.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE I - Acquisition
On November 1, 1994, the Company acquired Pawnee Industries,
Inc.'s ("Pawnee") Extrusion and Color Divisions. The purchase
included two rigid plastic sheet & rollstock manufacturing plants
(Extrusion Division), located in Wichita, Kansas and Paulding,
Ohio, along with a color concentrate manu-facturing plant (Color
Division), located in Goddard, Kansas. The purchase price for
Pawnee's net assets, exclusive of working capital purchased,
totaled $15,000, subject to post-closing adjustments. In addition,
the Company paid approximately $10,000 for working capital assets
(inventory and receivables). The acquisition has been accounted
for by the purchase method, and accordingly, the results of
operations of Pawnee are included in the Company's Consolidated
Statement of Operations from the date of acquisition. The excess
cost over the fair value of net assets acquired is being amortized
over a forty year period on a straight line basis.
On February 2, 1994, the Company acquired certain assets of
Product Components, Inc. ("ProCom"). The purchase included two
rigid plastic sheet & rollstock manufacturing plants, located in
Richmond, Indiana and Clare, Michigan, along with various other
assets of ProCom. The purchase price for ProCom's net assets
totaled $8,160, subject to post-closing adjustments. Approximately
$6,800 of this purchase price was paid in cash, while the remaining
balance represented the net liabilities assumed by the Company.
The acquisition has been accounted for by the purchase method, and
accord-ingly, the results of operations of ProCom are included in
the Company's Consolidated Statement of Operations from the date of
acquisition. The excess cost over the fair value of net assets
acquired is being amortized over a forty year period on a straight
line basis.
The following summarizes unaudited pro forma consolidated
results of operations for the thirteen weeks ended January 29,
1994, assuming the Pawnee and ProCom acquisitions had occurred at
the beginning of fiscal year 1994. The results are not necessarily
indicative of what would have occurred had these transactions been
consummated as of the beginning of the fiscal year presented, or of
future operations of the consolidated companies.
PRO FORMA
THIRTEEN WEEKS ENDED
January 29, 1994
Net Sales $ 68,458
Earnings Before Income Taxes $ 3,023
Net Earnings $ 2,673
Net Earnings Per Common Share:
Primary $ .23
Fully diluted $ .11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the thirteen weeks ended January 28, 1995,
increased from the similar period in 1994, primarily the result of
sizable gains in pounds sold by the Company's rigid sheet &
rollstock group. This group experienced sales volume increases of
approximately 56% for the thirteen weeks ended January 28, 1995,
over the similar period of 1994. The majority of the gains in
sales volume during this period were obtained from our February 2,
1994, acquisition of certain assets of Product Components, Inc.
("ProCom") and our November 1, 1994, acquisition of Pawnee
Industries, Inc.'s ("Pawnee") Extru-sion Division (see "Financial
Condition - Investing Activities" below for a further discussion of
these acquisitions) and from the sign/advertising, home improvement
and material handling markets.
In addition, sales volume increases of approximately 33% were
achieved by our merchant compounding group during the thirteen
weeks ended January 28, 1995, from the similar period in 1994.
These increases were primarily the result of stronger demand from
the specialty medical, office product and footwear industries and
the group's newly acquired color concentrate facility.
Cost of sales showed a sizable increase from the prior year
but remained consistent when stated as a percentage of net sales.
This consistency was achieved, despite higher material costs caused
by the increase in worldwide demand for plastic resins, as
production efficiencies offset that portion of the raw material
increases not absorbed by customers.
Selling and administrative expense increased by nearly 27%, a
direct result of the ProCom and Pawnee acquisitions. However,
through the Company's cost containment efforts, selling and
administrative costs as a percentage of net sales actually
decreased by nearly 2%.
The increase in depreciation and amortization is the result of
the ProCom and Pawnee acquisitions and the capital expenditures
incurred by the Company during the last three quarters of fiscal
1994 and the first quarter of fiscal 1995 (approximately $8.4
million).
Operating earnings for the thirteen weeks ended January 28,
1995, also increased from the similar period in 1994. The gains in
operating earnings were achieved through the increased sales
volumes discussed above, cost containment efforts and the initial
benefits of our ProCom and Pawnee acquisitions.
Interest expense for the thirteen weeks ended January 28,
1995, increas-ed from the similar period in 1994, reflecting the
additional borrowings incurred by the Company for the acquisition
of certain divisions of Pawnee. In addition, the Company's
borrowing rate was approximately 2 percentage points higher during
the thirteen weeks ended January 28, 1995, compared to the similar
period of 1994, as a result of the Federal Reserve Board's desire
to keep inflation under control by increasing interest rates during
1994.
The income tax provision was substantially higher during the
first quarter of fiscal year 1995, compared to the similar period
in 1994, as a result of the utilization of substantially all of the
Company's book net operating loss carryforwards during fiscal year
1994. The Company is pro-jecting a 25% tax provision for fiscal
year 1995, with a full tax provision anticipated for fiscal year
1996. Actual tax payments will only be 50-60% of the book
provision due to the tax net operating loss carryforwards.
Financial Condition
Operations
The improvement in cash flow from operations reflects the
Company's increase in profitability and the better management of
working capital. The Company anticipates that it should be in a
position to declare a cash dividend after the close of the second
quarter of fiscal 1995. The Board currently intends to pay a
special dividend of three cents (3) per share in May and then
begin paying regular quarterly dividends in June, 1995.
Investing Activities
Capital expenditures for the thirteen weeks ended January 28,
1995 increased slightly as compared to the same period of 1994.
The Company anticipates total capital expenditures for fiscal year
1995 to be approximately $6.5 to $7.0 million. The primary
component of these capital expenditures will include the upgrading
of all facilities, in particular those operations obtained through
our recent acquisitions of ProCom and Pawnee.
Reference is made to Note I, Acquisition, in Item 1 of this
report, which is incorporated herein by reference, for a discussion
of the Company's February 2, 1994, acquisition of certain assets of
ProCom and November 1, 1994, acquisition of certain divisions of
Pawnee.
The Company has not incurred any significant capital
expenditures in order to comply with the Clean Air Act Amendments
of 1990. In addition, the Company does not anticipate such capital
expenditures to be material in the future.
Financing Activities
The Company renegotiated its senior credit facility with
Chemical Bank on November 1, 1994. This new facility increased the
Company's borrowing capacity from $37.0 to $47.0 million and its
Term Loan commitment from $13.0 to $18.0 million. Reference is
made to Note D, Senior Long-Term Debt, in Item 1 of this report,
which is incorporated herein by reference, for a further discussion
of the Company's Senior Long-Term Debt refinancing.
The Company anticipates that cash flow from operations and the
additional borrowing capacity provided under the Company's
refinanced senior credit facility will be adequate to provide
necessary funds for the balance of fiscal year 1995.
PART II - OTHER INFORMATION
Responses to Part II, Items 1, 2, 3, 4, and 5, are omitted
because the requested information has been previously reported, the
items are inapplicable or the answer is negative.
Item 6 (a). Exhibits
10 Spartech Corporation Non-Qualified
Deferred Compensation Plan
11 Statement re Computation of Per Share
Earnings
27 Financial Data Schedule
Item 6 (b). Reports on Form 8-K
A report on Form 8-K, dated November 1, 1994,
relating to the acquisition of Pawnee Industries,
Inc.'s ("Pawnee") Extrusion and Color Divisions,
was filed on November 16, 1994. In addition, a
Form 8-K/A, an amendment to the above Form 8-K,
was filed with the Securities and Exchange
Commission on January 13, 1995. This amendment
was filed to submit certain financial statements
and pro forma financial statements concerning
Spartech Corporation's November 1, 1994
acquisition of Pawnee.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SPARTECH CORPORATION
(Registrant)
Date: February 22, 1995 /s/ Bradley B. Buechler
Bradley B. Buechler
President and Chief
Executive Officer
(Principal Executive Officer)
/s/ David B. Mueller
David B. Mueller
Vice President of Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)