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 February 3, 1996
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 February 3, 1996
Common Stock, $.75 par value
per share 23,361,216
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
February 3, 1996
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of February 3, 1996 and October 28, 1995 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter ended
February 3, 1996 and January 28, 1995 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for the quarter ended
February 3, 1996 and January 28, 1995 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION 11
SIGNATURES 12
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands, except share amounts)
ASSETS
Feb. 3, 1996 October 28,
(unaudited) 1995
Current Assets
Cash $ 1,607 $ 3,505
Receivables, net 51,088 51,762
Inventories 39,751 33,002
Prepayments and other 1,679 1,274
Total Current Assets 94,125 89,543
Plant and Equipment 94,498 91,702
Less accumulated depreciation 29,896 28,552
Net Plant and Equipment 64,602 63,150
Goodwill 23,816 24,014
Other Assets 1,467 1,622
$ 184,010 $ 178,329
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 33,044 $ 31,966
Accrued liabilities 14,313 12,469
Total Current Liabilities 47,357 44,435
Long-Term Debt 58,850 59,510
Other Liabilities 2,717 2,256
Total Long-Term Liabilities 61,567 61,766
Shareholders' Equity
Common stock, 23,420,907 shares
issued in 1996 and 23,364,407
shares issued in 1995 17,566 17,523
Contributed capital 66,937 66,771
Retained deficit (9,014) (12,099)
Treasury stock, at cost, 59,691 shares
in 1996 and 11,291 shares in 1995 (403) (67)
Total Shareholders' Equity 75,086 72,128
$ 184,010 $ 178,329
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited and dollars in thousands, except per share amounts)
QUARTER ENDED
February 3, January 28,
1996 1995
Net Sales $ 87,466 $ 79,258
Costs and Expenses
Cost of sales 74,473 68,411
Selling and administrative 5,603 5,248
Amortization of intangibles 198 182
80,274 73,841
Operating Earnings 7,192 5,417
Interest 1,101 1,242
Earnings Before Income Taxes 6,091 4,175
Provision for income taxes 2,305 1,050
Net Earnings 3,786 3,125
Preferred stock accretion - 549
Net Earnings Applicable to Common
Shares and Equivalents $ 3,786 $ 2,576
Net Earnings Per Common Share:
Primary $ .16 $ .27
Fully diluted $ .16 $ .13
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
QUARTER ENDED
February 3, January 28,
1996 1995
Cash Flows From Operating Activities
Net earnings $ 3,786 $ 3,125
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 1,626 1,486
Change in current assets and
liabilities, net of effects
of acquisitions (3,099) 991
Other, net 157 (152)
Net cash provided by operating
activities 2,470 5,450
Cash Flows From Investing Activities
Capital expenditures (2,882) (2,737)
Retirement of assets 2 21
Business acquisition - (24,516)
Net cash used for investing
activities (2,880) (27,232)
Cash Flows From Financing Activities
Net borrowings (payments) on revolving
credit facilities (660) 17,071
Term loan additions (payments) - 4,500
Cash dividends on common stock (701) -
Stock options exercised 209 238
Treasury stock acquired (336) -
Other, net - (3)
Net cash provided by (used for)
financing activities (1,488) 21,806
Increase (Decrease) In Cash (1,898) 24
Cash At Beginning Of Period 3,505 1,752
Cash At End Of Period $ 1,607 $ 1,776
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 28, 1995 Annual Report on Form 10-K.
The Company's fiscal year ends on the Saturday closest to
October 31. Fiscal year 1996 will include 53 weeks compared to 52
weeks in 1995. As a result, the first quarter ended February 3,
1996 consists of 14 weeks, compared to the 13-week first quarter
ended January 28, 1995. Operating results for the first quarter
are traditionally seasonal in nature and are not necessarily
indicative of the results expected for the full year.
NOTE B - Inventories
Inventories are valued at the lower of cost (first-in, first-
out) or market. Inventories at February 3, 1996 and October 28,
1995 are comprised of the following components:
1996 1995
Raw materials $ 29,047 $ 23,368
Finished goods 10,704 9,634
$ 39,751 $ 33,002
NOTE C - Earnings Per Share
Primary net earnings per common share is computed based upon
the weighted average number of common shares outstanding during
each period, after consideration of the dilutive effect of stock
options. Such average shares were 24,311,000 and 9,529,000 in 1996
and 1995, respectively. The increase in the weighted average share
total from 1995 was due to the third quarter 1995 conversion of the
Company's Preferred Stock, as discussed below.
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 to 24,375,000 for the quarter ended February 3,
1996 compared to 23,804,000 for the quarter ended January 28, 1995.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Effective May 1, 1995, all of the Company's Preferred
Stockholders converted their shares into the Company's common
stock. The conversion increased the Company's outstanding common
shares by 14,274,635. If the Preferred Stockholders had converted
their shares at the beginning of 1995, the primary net earnings per
share reported for the quarter ended January 28, 1995 would have
been $.13.
NOTE D - Cash Flow Information
Supplemental information on cash flows and noncash
transactions for the quarter ended February 3, 1996 and January 28,
1995 is as follows:
1996 1995
Cash paid for:
Interest $ 187 $ 965
Income taxes $ 317 $ 106
Schedule of business acquisition:
Fair value of assets acquired $ - $ 26,031
Liabilities assumed - (1,515)
Total cash paid for the net assets acquired $ - $ 24,516
NOTE E - 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. On
January 9, 1996, Mr. Powers filed a similar lawsuit in the Circuit
Court of St. Louis County, Missouri against the Company and two
officer directors. The Company believes that this is simply a
restatement of the claims made in the 1992 lawsuit. The Company
believes Mr. Powers' lawsuits are without merit and will continue
defending against them vigorously.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
The Company currently has no litigation with respect to any
environmental matters.
NOTE F - Acquisition
On February 23, 1996, the Company announced the execution of
a definitive merger agreement with Portage Industries Corporation
(Portage), a thermoplastic processor specializing in custom heavy
and light gauge extrusion and thermoforming products, with annual
sales of approximately $35,000, based in Portage, Wisconsin. The
merger agreement provides for the acquisition of all the stock of
Portage (approximately 2.5 million equivalent shares) for $6.60 per
share, in cash. The merger, which is subject to the receipt of
customary consents and regulatory approvals, as well as approval by
Portage shareholders, will be funded within the Company's existing
bank facility and is expected to close on or about May 1, 1996.
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The Company's fiscal year ends on the Saturday closest to
October 31. Fiscal year 1996 will include 53 weeks compared to 52
weeks in 1995. As a result, the first quarter ended February 3,
1996 consists of 14 weeks, compared to the 13-week first quarter
ended January 28, 1995. The operating results presented below
include discussions as a percentage of sales for additional
comparison.
Net sales for the first quarter ended February 3, 1996
increased from the similar period in 1995 as a result of gains in
pounds sold by the Company's extruded sheet & rollstock group and
the effect of the extra week in fiscal 1996. Sales of the extruded
sheet & rollstock group increased approximately 12% for the quarter
ended February 3, 1996 over the period reported in 1995. The
increase reflects strong sales gains in the transportation and sign
products markets. Sales in the merchant compounding group
increased by 9% as compared to the 1995 first quarter output.
Somewhat lower demand for flexible PVC compounds was more than
offset by strong volume for calendered PVC film and color
concentrates.
Cost of sales dollars increased from the prior year but was
down over 1% when stated as a percentage of net sales. The
stabilization of raw material prices during the last half of 1995
and improved production efficiencies, partially offset by an
increase in depreciation as a result of the capital expenditures
incurred by the Company during the last twelve months
(approximately $10.2 million), contributed to the more favorable
cost of sales percentage.
Selling and administrative expense increased by 7%. However,
through the Company's cost containment efforts, selling and
administrative costs as a percentage of net sales decreased
slightly.
Operating earnings for the fourteen weeks ended February 3,
1996 were $7.2 million (8.2% of net sales) compared to $5.4 million
(6.8% of net sales) in 1995. The gains in operating earnings were
achieved through the increased sales volumes discussed above, the
continued benefits of our ProCom and Pawnee acquisitions, and cost
containment efforts.
Interest expense for the quarter ended February 3, 1996
decreased from 1995, reflecting both the refinancing of the
Company's Bank Credit Facility, and completion of a $50 million
Private Placement, in the last quarter of fiscal 1995 at more
favorable rates than the previous financing arrangements.
As a result of the final utilization of the Company's book net
operating loss carryforwards in 1995, the income tax provision was
substantially higher during the first quarter of fiscal year 1996,
compared to the similar period in 1995. The Company's effective
tax rate was 25% for 1995 and 38% in 1996. However, actual tax
payments will be
only 70-80% of the provision due to the tax net operating loss carryforwards
and depreciation timing differences.
Financial Condition
Operations
Cash flow from operations reflects the Company's increase in
profitability, net of the increases in inventories associated with
the growth in sales volume. In addition, the increase to a 38%
effective tax rate resulted in larger tax payments in the first
quarter of 1996 compared to 1995.
Investing Activities
Capital expenditures for the quarter ended February 3, 1996
increased slightly as compared to the same period of 1995. During
1996, the Company anticipates making capital expenditures of
approximately $7.1 million. New extrusion lines, scheduled for
Spartech Compounding-Cape Girardeau, Missouri, and Spartech
Plastics-Cape Girardeau, Missouri facilities, represent the major
items included in this figure.
Reference is made to Note F, Acquisition, in Item 1 of this
report, which is incorporated herein by reference, for a discussion
of the Company's agreement to acquire all the outstanding stock of
Portage Industries Corporation in a cash merger transaction,
expected to close May 1, 1996.
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 anticipates that cash flow from operations and the
additional borrowing capacity provided under the Company's $40
million bank credit facility will be adequate to provide necessary
funds for the balance of fiscal year 1996. As of February 3, 1996,
approximately $8.9 million was outstanding under this facility.
Cash flows from financing activities includes the payment of a
quarterly dividend, the first of which was declared in the third
quarter of fiscal 1995.
PART II - OTHER INFORMATION
Item 6 (a). Exhibits
2 Agreement and Plan of Merger between Spartech
Corporation, Spartech Plastics, Inc., and
Portage Industries Corporation, dated as of
February 22, 1996.
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: March 1, 1996 /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)