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 April 29, 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 May 1, 1995
Common Stock, $.75 par value
per share 23,115,354
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
April 29, 1995
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
April 29, 1995 and October 29, 1994 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the thirteen and
twenty-six weeks ended April 29, 1995
and April 30, 1994 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for the twenty-six weeks
ended April 29, 1995 and April 30, 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
April 29, 1995 October 29,
(unaudited) 1994
Current Assets
Cash $ 1,562 $ 1,752
Accounts and notes receivable, net 52,699 40,493
Inventories 37,560 22,936
Prepayments and other 1,578 1,112
Total Current Assets 93,399 66,293
Plant and Equipment, net 61,268 46,656
Goodwill 24,081 21,044
Other Assets 1,352 1,727
$ 180,100 $ 135,720
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 3,000 $ 2,750
Accounts payable 43,288 28,403
Accrued liabilities 12,230 8,789
Total Current Liabilities 58,518 39,942
Senior Long-Term Debt,
Less Current Maturities 44,829 26,285
9% Convertible Subordinated Debentures 10,134 10,134
Other Liabilities 674 1,126
Total Long-Term Liabilities 55,637 37,545
Shareholders' Equity
6% Cumulative Convertible Preferred
Stock, 776,700 shares issued and
outstanding ($50 per share
liquidation value) 777 777
Common stock, 8,851,947 shares
issued in 1995 and 8,629,947
shares issued in 1994 6,639 6,472
Contributed capital 76,068 74,438
Retained deficit (17,472) (23,449)
Treasury stock, at cost, 11,228 shares
in 1995 and 1,324 shares in 1994 (67) (5)
Total Shareholders' Equity 65,945 58,233
$ 180,100 $ 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 TWENTY-SIX
WEEKS ENDED WEEKS ENDED
April 29, April 30, April 29, April 30,
1995 1994 1995 1994
Net Sales $ 95,649 $ 64,350 $174,907 $113,508
Costs and Expenses
Cost of sales 80,750 54,437 148,021 95,659
Selling and
administrative 6,694 4,815 11,778 8,824
Depreciation and
amortization 1,503 1,107 2,989 2,090
88,947 60,359 162,788 106,573
Operating Earnings 6,702 3,991 12,119 6,935
Interest 1,252 795 2,494 1,466
Earnings Before
Income Taxes 5,450 3,196 9,625 5,469
Provision for
Income Taxes 1,500 400 2,550 570
Net Earnings 3,950 2,796 7,075 4,899
Preferred Stock Accretion 549 518 1,098 1,036
Net Earnings Applicable
to Common Shares $ 3,401 $ 2,278 $ 5,977 $ 3,863
Net Earnings Per
Common Share:
Primary $ .36 $ .25 $ .63 $ .42
Fully diluted $ .16 $ .12 $ .29 $ .21
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)
TWENTY-SIX
WEEKS ENDED
April 29, April 30,
1995 1994
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings $ 7,075 $ 4,899
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 2,989 2,090
Change in current assets and liabilities,
net of effects of acquisitions (411) (1,368)
Other, net (61) 473
Net cash provided by
operating activities 9,592 6,094
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (5,709) (3,984)
Retirement of assets, net 556 63
Business acquisitions (24,060) (6,840)
Proceeds from note receivable - 495
Net cash used for investing activities (29,213) (10,266)
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings under revolving credit loan 15,794 6,533
Term loan additions 5,000 -
Principal payments on term loan (2,000) (3,000)
Stock options exercised 699 607
Treasury stock acquired (62) -
Net cash provided by
financing activities 19,431 4,140
INCREASE (DECREASE) IN CASH (190) (32)
CASH AT BEGINNING OF PERIOD 1,752 1,449
CASH AT END OF PERIOD $ 1,562 $ 1,417
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 and twenty-six weeks ended
April 29, 1995 and April 30, 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 April 29, 1995 and October 29, 1994
are comprised of the following components:
1995 1994
Raw materials $ 27,350 $ 16,171
Finished goods 10,210 6,765
$ 37,560 $ 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 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 April
29, 1995, Chemical's Prime rate was 9.0% and the six month Adjusted
LIBO rate was 6.3125%
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 Twenty-Six Weeks
April 29, 1995 9,566,000 9,478,000
April 30, 1994 9,407,000 9,119,000
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:
Period Ended Thirteen Weeks Twenty-Six Weeks
April 29, 1995 14,453,000 14,508,000
April 30, 1994 14,275,000 14,275,000
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 and
twenty-six weeks ended April 29, 1995 and April 30, 1994 were as
follows:
Thirteen Weeks Twenty-Six Weeks
1995 1994 1995 1994
Primary $ - $ 35 $ - $ 91
Fully Diluted $ 549 $ 518 $1,098 $1,036
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Effective May 1, 1995, all of the Company's Preferred
Stockholders converted their securities into common stock. The
conversion increased the Company's outstanding shares by
14,274,635, resulting in total outstanding common shares, as of May
1, 1995, of 23,115,354. If the Preferred Stock-holders had
converted their securities at the beginning of 1994, the earnings
per share reported for the thirteen and twenty-six weeks ended
April 29, 1995 and April 30, 1994 would be equal to the amount
reported as fully diluted earnings per common share during these
time periods, and is as follows:
Thirteen Weeks Twenty-Six Weeks
1995 1994 1995 1994
Earnings Per Common Share $ .16 $ .12 $ .29 $ .21
NOTE F - Cash Flow Information
Supplemental information on cash flows and noncash
transactions for the thirteen and twenty-six weeks ended April 29,
1995 and April 30, 1994 is as follows:
1995 1994
Cash paid for:
Interest (net of amounts capitalized) $ 2,423 $ 1,434
Income taxes $ 1,635 $ 456
Schedule of noncash transactions:
Business acquisition--
Fair value of assets acquired $26,030 $12,274
Liabilities assumed (1,970) (5,434)
Total cash paid for the net assets acquired $24,060 $ 6,840
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 April 29, 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.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
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.
Due to the absence of a dividend requirement until April 30,
1995 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 Twenty-Six Weeks
April 29, 1995 $ 549 $1,098
April 30, 1994 $ 518 $1,036
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. Effective May 1, 1995, all of the
Company's Preferred Stockholders converted their securities into
common stock. As such, this accretion, along with preferred stock
dividend payments, will not be required in the future.
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 $9,000 for net working capital
assets (inventory and receivables net of assumed accrued
liabilities). 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 and twenty-six weeks ended
April 30, 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 trans-
actions been consummated as of the beginning of the fiscal year
presented, or of future operations of the consolidated companies.
PRO FORMA
April 30, 1994
Thirteen Twenty-Six
Weeks Ended Weeks Ended
Net Sales $ 86,350 $154,808
Earnings Before Income Taxes $ 4,246 $ 7,269
Net Earnings $ 3,576 $ 6,249
Net Earnings Per Common Share:
Primary $ .33 $ .56
Fully diluted $ .15 $ .26
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the thirteen and twenty-six weeks ended April
29, 1995, increased from the similar periods in 1994, as the result
of sizable gains in pounds sold by both of the Company's operating
divisions. The rigid sheet & rollstock group experienced sales
volume increases of approximately 30% and 40%, respectively, for
the thirteen and twenty-six weeks ended April 29, 1995, over the
similar periods of 1994. The majority of the gains in sales volume
during these periods were obtained from our November 1, 1994,
acquisition of Pawnee Industries, Inc.'s ("Pawnee") Extrusion
Division and our February 2, 1994, acquisition of certain assets of
Product Components, Inc. ("ProCom") (see "Financial Condition -
Investing Activities" below for a further discussion of these
acquisitions) and from increased product requests from the rigid
sheet & rolltock gorup's sign/advertising, home improvement and
material handling markets.
In addition, sales volume increases of approximately 30% were
achieved by our merchant compounding group during the thirteen and
twenty-six weeks ended April 29, 1995, from the similar periods in
1994. These increases were primarily the result of stronger demand
from the specialty extrusion, office product, wallcovering, and
footwear industries and the group's newly acquired color
concentrate facility.
Cost of sales showed a sizable increase for both the thirteen
and twenty-six weeks ended April 29, 1995, compared with the
similar periods of 1994, 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 more than 33%
for the thirteen and twenty-six weeks ended April 29, 1995 from the
similar periods of 1994, 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 during the thirteen and twenty-six weeks
ended April 29, 1995.
The increase in depreciation and amortization during the
thirteen and twenty-six weeks ended April 29, 1995 over the similar
periods of 1994 is the direct result of the capital assets and
goodwill associated with the ProCom and Pawnee acquisitions and the
sizable capital expenditures incurred by the Company during the
past eighteen months (approximately $13.9 million).
Operating earnings for the thirteen and twenty-six weeks ended
April 29, 1995, also increased from the similar periods in 1994.
The gains in operating earnings were achieved through the increased
sales volumes discussed above, production efficiencies, cost
containment efforts, and the initial benefits of the ProCom and
Pawnee acquisitions.
Interest expense for the thirteen and twenty-six weeks ended
April 29, 1995, increased from the similar periods in 1994,
reflecting the additional borrowings incurred by the Company for
the acquisition of certain divisions of Pawnee. In addition, the
Company's borrowing rate was approximately 2 percentage points
higher during the thirteen and twenty-six weeks ended April 29,
1995, compared to the similar periods of 1994, as a result of the
Federal Reserve Board's desire to keep inflation under control by
increasing interest rates.
The income tax provision was substantially higher during the
first half of fiscal year 1995, compared to the similar period in
1994, as a result of the utilization of substantially all of the
Company's book net operating loss carryforwards during fiscal year
1994. The Company is projecting a 25-27% effective tax rate for
fiscal year 1995, with a full tax provision anticipated for fiscal
year 1996. Actual tax payments will only be 50-60% of the book
provision due to the tax net operating loss carryforwards and
depreciation timing differences.
Financial Condition
Operations
The improvement in cash flow from operations reflects the
Company's increase in profitability and the improved management of
working capital. On May 2, 1995, the Company's Board of Directors
declared a special dividend of three cents ($.03) per share, payable
May 31, 1995. In addition, the Board reconfirmed its intent to
begin a regular quarterly cash dividend, also likely in the amount
of three cents ($.03) per share, commencing in June of this year.
Investing Activities
Capital expenditures for the twenty-six weeks ended April 29,
1995 increased significantly as compared to the same period of
1994. The Company anticipates total capital expenditures for
fiscal year 1995 to be approximately $8.5 to $9.0 million. The
primary components of these capital expenditures will include the
purchase of four new rollstands and 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
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
Item 6 (b). Reports on Form 8-K
None
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: May 30, 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)