MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Comparison Of Fiscal Years 1997 And 1996
The Company's fiscal year ends on the Saturday closest to October 31.
Fiscal year 1997 and 1995 each represented 52 weeks while fiscal 1996 consisted
of 53 weeks. As a result of the extra week in 1996, the operating results
presented below include discussions on a percentage of sales basis for more
meaningful comparisons.
Net sales were $502.7 million in 1997 representing a 28% increase from
$391.3 million in 1996. Excluding acquisitions, this growth in sales represents
a 7% increase in pounds sold offset by a 3% decrease from changes in prices and
mix of products sold and a 2% decline related to the extra week in 1996. The
Extruded Sheet & Rollstock Group's sales increased approximately 18% in 1997
representing an 8% increase in pounds shipped and a 15% increase in sales
related to acquisitions, while price and product mix changes and the extra week
had a negative impact on sales. Net sales in the Color & Specialty Compounds
Group increased 23% resulting from a 5% increase in pounds shipped and a 27%
increase in sales from the 1996 acquisition of Korlin Concentrates, net of
declines from changes in prices, mix of products sold, and the extra week in
1996. The Molded & Profile Products Group contributed $42.9 million in net
sales in its first full year as a market segment for the Company and benefited
from the late-1997 acquisition of Preferred's profile extruded products
operation.
Cost of sales decreased to 83.6% of net sales for 1997 from 84.5% for
1996. The more favorable cost of sales percentage in 1997 reflects improved
production efficiencies and a decline in certain raw material prices, partially
offset by an increase in depreciation as a result of capital expenditures
incurred by the Company during the last 18 months.
Selling and administrative expenses decreased to 6.2% of net sales in 1997
from 6.4% in 1996. The decrease in 1997 reflects continued cost containment
efforts and the economies of scale obtained through acquisitions and sales
growth of the Company.
Operating earnings for 1997 were $49.7 million (9.9% of net sales)
compared to $34.5 million (8.8% of net sales) in 1996. The gains in operating
earnings were achieved through the increased sales levels, improved production
efficiencies, and cost containment efforts.
Interest expense in 1997 increased from 1996, reflecting additional
borrowings related to the Portage, Hamelin and Preferred acqusitions, net of
$15.4 million in paydowns on the 1996 balance of the bank credit facility. In
addition, the Company borrowed, and subsequently paid down, the $9.7 million
due to Hamelin Group Inc. during 1997. The majority of the Company's debt is
based on fixed interest rates and therefore fluctuations in interest rates have
a minimal effect on interest costs.
The Company's effective tax rate was 38.3% for 1997 which is up from 37.8%
in 1996.
Comparison Of Fiscal Years 1996 And 1995
Net sales in 1996 of $391.3 million increased 11.1% from $352.3 million in
1995. The Extruded Sheet & Rollstock Group's sales increased approximately 13%
in 1996 primarily resulting from an increase in pounds shipped of 5%
(excluding acquisitions) and a 7% increase in net sales related to the Portage
and Hamelin acquisitions. Color & Specialty Compound sales declined by less
than 2% in 1996 to $68.2 million, as the group's Cape Girardeau, Missouri
facility spent sizable marketing efforts on new product developments during the
year.
Cost of sales decreased to 84.5% of net sales for 1996 from 85.8% for
1995. The stabilization of raw material prices and improved production
efficiencies contributed to the more favorable cost of sales percentage for
1996.
On a percentage of sales basis, selling and administrative expenses
reflect a decrease to 6.4% in 1996 from 7.0% in 1995. The decrease in 1996 was
primarily a result of the absence of significant legal expenses incurred in
1995 and continued cost containment efforts.
Operating earnings for 1996 were $34.5 million (8.8% of net sales)
compared to $24.6 million (7.0% of net sales) in 1995. The gains in operating
earnings were achieved through the increased sales discussed above, improved
production efficiencies, and cost containment efforts.
Interest expense in 1996 was relatively flat with 1995, representing the
net impact of the refinancings in late 1995 at more favorable interest rates
and the net increases in borrowings in 1996 related to the Portage and Hamelin
acquisitions. See the "Financing Arrangements" discussion that follows.
As a result of the utilization of substantially all of the Company's book
loss carryforwards in 1995, the Company's effective tax rate increased to 37.8%
in 1996 from 26.0% in 1995.
Summary of Costs & Expenses
Fiscal Year
1997 1996 1995
(Dollars in millions)
Cost of sales $420.5 $330.8 $302.4
Selling and admin-
istrative expenses $31.0 $25.2 $24.5
Interest expense $8.4 $5.1 $5.0
sidebar 3-D bar charts
GROSS MARGIN
As % of sales
1995 = 14.2%
1996 = 15.5%
1997 = 16.4%
OPERATING EARNINGS
In millions of dollars
1995 = $24.6
1996 = $34.5
1997 = $49.7
Environmental Matters
The Company is subject to various laws governing employee safety and
Federal, state, and local (including Canadian provincial) regulations governing
the quantities of certain specified substances that may be emitted into the
air, discharged into waterways, and otherwise disposed of on and off the
properties of the Company. The Company does not anticipate that future
expenditures for compliance with such laws and regulations will have a material
effect on its capital expenditures, earnings, or competitive position.
The plastic resins used by the Company in its production processes are
crude oil or natural gas derivatives and are available from a number of
domestic and foreign suppliers. Accordingly, the Company's raw materials are
only somewhat affected by supply, demand, and price trends of the petroleum
industry; the pricing of resins tends to follow its own supply and demand
equation, except in periods of anticipated or actual shortages of crude oil or
natural gas. The Company is not aware of any trends in the petroleum industry
which will significantly affect its sources of raw materials in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
The Company's primary sources of liquidity have been cash flows from
operating activities and borrowings from third parties. The Company's principal
uses of cash have been to support its operating activities, invest in capital
improvements, and finance strategic acquisitions.
The Company continues to generate strong cash flows from operations,
resulting from the 39% increase in net earnings in 1997 compared to the prior
year, net of the impact of changes in working capital. Operating cash flows
provided by changes in working capital totaled $5.5 million in 1997, primarily
as a result of improved inventory turns and higher days payables outstanding.
In addition, the Company paid income taxes of $11.2 million in 1997 versus
$10.8 million for 1996.
The Company's primary investing activities are capital expenditures and
acquisitions of businesses in the plastics industry. Capital expenditures are
primarily incurred to maintain and improve productivity, as well as to
modernize and expand facilities. Capital expenditures for 1997 and 1996 were
$12.2 million and $9.6 million, respectively. The Company anticipates total
capital expenditures in fiscal 1998 of approximately $12.5 million, including
additional equipment for the facilities acquired in 1997.
On August 22, 1997, the Company completed the acquisition of the net
assets of the Preferred Plastic Sheet Division of Echlin Inc. for a cash
purchase price of approximately $65.1 million, including costs of the
transaction. Preferred's extruded sheet and profile extruded product facilities
generate annual sales of approximately $75 million. On September 27, 1996, the
Company finalized the purchase of substantially all the net assets of the
extrusion, color, and molding divisions of Hamelin, which had consolidated
sales of approximately $80 million for its fiscal year ended April 30, 1996.
The purchase price for the net assets of Hamelin was approximately $59.4
million in cash, including costs of the transaction. Effective May 9, 1996, the
Company completed its purchase of Portage for a cash price of approximately
$17.6 million, including estimated costs of the transaction. Refer to Note (2)
to the Consolidated Financial Statements for further discussion. The Company
continues to evaluate value-added acquisition opportunities that meet its
stringent acquisition criteria, which are premised on achieving returns in
excess of its weighted average cost of capital.
Financing Arrangements
In conjunction with the Preferred acquisition, the Company completed a $60
million private placement of debt at a fixed interest rate of 7.0%. In
September 1996, the Company completed a simultaneous public offering of 3
million shares of common stock for $25.9 million in net proceeds and a $30
million private placement of 7.62% guaranteed senior notes to finance the
acquisition of Hamelin. The acquisition of Portage in May 1996 was funded by
the Company's bank credit facility. In August 1995, the Company completed a $50
million private placement of senior unsecured notes at a fixed rate of 7.21%
and finalized a $40 million bank credit facility.
The Company paid common stock dividends of $5.3 million or 20 cents per
share in 1997 and at its December 1997 meeting the Company's Board of Directors
raised the common stock dividend to an annual rate of 24 cents per share.
The Company anticipates that cash flow from operations, together with
borrowings under the Company's bank credit facility, will satisfy its working
capital needs and planned capital expenditures for the next year.
Summary of Cash Flows
Fiscal Year
1997 1996 1995
(Dollars in millions)
Net cash provided by
operating activities $48.4 $23.2 $16.5
Net cash used for
investing activities $83.9 $76.5 $33.5
Net cash provided by
financing activities $37.0 $54.5 $18.8
sidebar 3-D bar charts
CASH FLOW FROM OPERATIONS
In millions of dollars
1995 = $16.5
1996 = $23.2
1997 = $48.4
CAPITAL EXPENDITURES
In millions of dollars
1995 = $10.0
1996 = $9.6
1997 = $12.2
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except share amounts)
NOVEMBER 1, NOVEMBER 2,
ASSETS 1997 1996
Current Assets
Cash and equivalents $6,058 $4,685
Receivables, net of allowances of
$2,212 in 1997 and $1,946 in 1996 74,271 66,176
Inventories 55,851 53,981
Prepayments and other 4,517 3,315
Total Current Assets 140,697 128,157
Property, Plant and Equipment, Net 129,362 112,355
Goodwill 83,565 46,348
Other Assets 5,179 2,100
$358,803 $288,960
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 921 $995
Accounts payable 47,221 40,178
Accrued liabilities 26,271 23,022
Due to Echlin Inc./Hamelin Group Inc. 2,855 9,701
Total Current Liabilities 77,268 73,896
Long-Term Debt,Less Current Maturities 141,693 97,471
Other Liabilities 11,453 5,198
Total Long-Term Liabilities 153,146 102,669
Shareholders' Equity
Common stock, 26,628,154 and
26,609,554 shares issued in 1997
and 1996, respectively 19,971 19,957
Contributed capital 89,301 90,708
Retained earnings 22,912 2,703
Treasury stock, at cost, 147,691 shares
in 1997 and 209,100 shares in 1996 (2,127) (2,061)
Cumulative translation adjustments (1,668) 1,088
Total Shareholders' Equity 128,389 112,395
$358,803 $288,960
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
Fiscal Year
1997 1996 1995
Net Sales $502,715 $391,348 $352,273
Costs and Expenses
Cost of sales 420,500 330,776 302,394
Selling and administrative 31,019 25,184 24,545
Amortization of intangibles 1,495 896 730
453,014 356,856 327,669
Operating Earnings 49,701 34,492 24,604
Interest 8,393 5,062 4,960
Earnings Before Income Taxes 41,308 29,430 19,644
Income taxes 15,815 11,113 5,110
Net Earnings 25,493 18,317 14,534
Preferred stock accretion -- -- (1,098)
Net Earnings Applicable to
Common Shares and Equivalents $25,493 $ 18,317 $ 13,436
Net Earnings Per Common Share
Primary $.91 $.74 $.80
Fully diluted $.91 $.73 $.60
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Cumulative
Retained Trans Total
Common Contrib Earnings Treasury lation Shareholder
Stock Capital (Deficit) Stock Adjust. Equity
Balance,
October 29, 1994 $ 6,472 $75,215 $(23,449) $(5) - $58,233
Preferred stock
conversion 10,706 (10,706) - - - -
Stock options
exercised 345 1,164 - - - 1,509
Cash dividends - - (2,086) - - (2,086)
Preferred stock
accretion - 1,098 (1,098) - - -
Treasury stock
purchases - - - (62) - (62)
Net earnings - - 14,534 - - 14,534
Balance,
October 28, 1995 $17,523 $66,771 $(12,099) $(67) - $72,128
Common stock
issuance 2,250 23,632 - - - 25,882
Stock options
exercised 184 305 - 2,127 - 2,616
Cash dividends - - (3,515) - - (3,515)
Treasury stock
purchases - - - (4,121) - (4,121)
Net earnings - - 18,317 - - 18,317
Translation
adjustments - - - - 1,088 1,088
Balance,
November 2, 1996 19,957 $90,708 $2,703 $(2,061) $1,088 $112,395
Stock options
exercised 14 (1,407) - 4,335 - 2,942
Cash dividends - - (5,284) - - (5,284)
Treasury stock
purchases - - - (4,401) - (4,401)
Net earnings - - 25,493 - - 25,493
Translation
adjustments - - - - (2,756) (2,756)
Balance,
November 1, 1997 $19,971 $89,301 $22,912 $(2,127)$(1,668) $128,389
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Fiscal Year
1997 1996 1995
Cash Flows From Operating Activities
Net earnings $ 25,493 $ 18,317 $ 14,534
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 11,548 7,211 5,798
Change in current assets and
liabilities, net of effects of
acquisitions
Receivables 1,072 365 (4,447)
Inventories 1,296 (8,458) (6,504)
Prepayments and other 538 (21) (17)
Accounts payable 2,902 (3,034) 3,563
Accrued liabilities (311) 6,146 1,410
Other, net 5,852 2,634 2,150
Net cash provided by
operating activities 48,390 23,160 16,487
Cash Flows From Investing Activities
Capital expenditures (12,172) (9,566) (10,015)
Retirement of assets 215 346 538
Business acquisitions (71,920) (67,285) (24,060)
Net cash used for
investing activities (83,877) (76,505) (33,537)
Cash Flows From Financing Activities
Net borrowings (payments)
on revolving credit facilities (15,400) 6,190 (6,525)
Payments on bonds and leases (409) (1,210) -
Issuance of 7.0% Senior Notes 60,000 - -
Issuance of 7.62% Guaranteed
Senior Notes - 30,000 -
Issuance of common stock - 25,882 -
Issuance of 7.21% Senior
Unsecured Notes - - 50,000
Term loan payments - - (13,000)
Redemption of 9% Convertible
Subordinated Debentures - - (10,134)
Debt issuance costs (451) (444) (899)
Cash dividends on common stock (5,284) (3,515) (2,086)
Stock options exercised 2,942 1,704 1,509
Treasury stock acquired (4,401) (4,121) (62)
Net cash provided by
financing activities 36,997 54,486 18,803
Effect of exchange rate changes
on cash and equivalents (137) 39 -
Increase In Cash And Equivalents 1,373 1,180 1,753
Cash And Equivalents At Beginning Of Year 4,685 3,505 1,752
Cash And Equivalents At End Of Year $ 6,058 $ 4,685 $ 3,505
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. Fiscal year 1997 and 1995 each consists of 52 weeks, while 1996 included
53 weeks.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of SPARTECH Corporation and its wholly-owned
subsidiaries (the "Company"). All significant intercompany transactions and
balances have been eliminated.
Foreign Currency Translation - Assets and liabilities of the Company's
Canadian operations are translated from their functional currency (Canadian
dollar) 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 as a
separate component of stockholders' equity. 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
November 1, 1997.
Cash Equivalents - Cash equivalents consist of highly liquid investments
with original maturities of three months or less.
Inventories - Inventories are valued at the lower of cost (first-in,
first-out) or market. Finished goods include the costs of material, labor, and
overhead.
Property, Plant and Equipment - Property, plant and equipment are carried
at cost. Depreciation is provided on a straight-line basis over the estimated
useful lives of the related assets as follows:
Years
Buildings and leasehold improvements 25
Machinery and equipment 12-16
Furniture and fixtures 5-10
Major renewals and betterments 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.
Goodwill - Goodwill, representing the excess of the purchase price over
the fair value of net assets acquired, is charged against operations on a
straight-line basis over the periods estimated to be benefited, not exceeding
40 years. Goodwill amortization totaled $1,495, $896, and $730 in 1997, 1996,
and 1995, respectively. Accumulated amortization at November 1, 1997 totaled
$7,242.
Financial Instruments - 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; and
Long-term debt (including bank credit facility) -- based on borrowing
rates currently available for debt instruments with similar terms and
maturities, the carrying value of these instruments approximates fair value.
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.
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 based on an assessment (which includes anticipating future
income) in determining 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 August 22, 1997, the Company completed the acquisition of the net
assets of the Preferred Plastic Sheet Division of Echlin Inc. ("Preferred").
The purchase of the extruded plastic sheet and profile extruded product
operations included four manufacturing facilities with annual sales of
approximately $75 million. The purchase price for the net assets acquired from
Preferred was $65,074 in cash, including costs of the transaction. The fair
value of assets acquired (including $39,199 of goodwill) and liabilities
assumed (including accounts payable and accrued liabilities) was $73,517 and
$8,443, respectively. The purchase price and related costs of the acquisition
were funded by a $60,000 private placement of debt with a fixed interest rate
of 7.0% and borrowings on the Company's existing unsecured bank credit
facility. The majority of the purchase price was paid to Echlin Inc. on August
22, 1997, with the remaining amount to be paid in December 1997, upon final
settlement of the transaction. An amount representing this final payment of
approximately $2,855 is reflected as Due to Echlin as of November 1, 1997.
On September 27, 1996, the Company completed the purchase of substantially
all of the net assets of the extrusion, color, and molding divisions of Hamelin
Group Inc. ("Hamelin") in accordance with an Asset Purchase and Sale Agreement.
Hamelin was a leading manufacturer of extruded plastic sheet, color concentrate
materials, molded food packaging products and injection molded wheels, based in
Montreal, Canada. Consolidated sales for the seven facilities were
approximately $80,000 for Hamelin's fiscal year ended April 30, 1996. The
purchase price for the net assets acquired from Hamelin was $59,400 in cash,
including costs of the transaction. The fair value of assets acquired
(including $13,500 of goodwill) and liabilities assumed (consisting of lease
liabilities, accounts payable, and accrued liabilities) was $70,900 and
$11,500, respectively. The purchase price was financed through a combination of
a common stock offering of 3 million shares and a private placement of $30,000
in debt. An initial installment was paid to the seller on September 27, 1996,
the closing date, with the remaining purchase price paid November 27, 1996.
Therefore, $9,701 was reflected as Due to Hamelin Group Inc. as of November 2,
1996, representing the amount remaining to be paid to the seller as of such
date.
On May 9, 1996, the Company completed its acquisition of Portage
Industries Corporation ("Portage") and pursuant to the Agreement and Plan of
Merger, each share of Portage common stock was converted into the right to
receive $6.60 in cash. The price for all outstanding shares of Portage's stock
(including exercisable options) totaled approximately $17,600 in cash,
including estimated costs of the transaction. The fair value of assets acquired
(including $9,500 of goodwill) and liabilities assumed was $27,200 and $9,600,
respectively. The purchase price was funded by the Company's existing unsecured
bank credit facility.
All these acquisitions have been accounted for by the purchase method, and
accordingly, the results of operations were included in the Company's
Consolidated Statement of Operations from their respective date of acquisition.
The purchase price has been allocated to the assets and liabilities (on a
preliminary basis for the 1997 acquisition), and the excess of 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 fiscal year 1997 assuming the Preferred acquisition had occurred
at the beginning of the fiscal year. 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 (Unaudited)
Fiscal Year
1997
Net Sales $564,116
Earnings Before Income Taxes $43,277
Net Earnings $26,708
Net Earnings Per Common Share
Fully Diluted $.95
(3) Inventories
Inventories at November 1, 1997 and November 2, 1996 are comprised of the
following components:
1997 1996
Raw materials $37,832 $34,778
Finished goods 18,019 19,203
$55,851 $53,981
(4) Property, Plant and Equipment
Property, plant and equipment consisted of the following at November 1,
1997 and November 2, 1996:
1997 1996
Land $ 5,264 $ 4,964
Buildings and leasehold improvements 31,825 27,898
Machinery and equipment 132,895 110,525
Furniture and fixtures 3,759 3,561
173,743 146,948
Less accumulated depreciation 44,381 34,593
Property, plant and equipment, net $129,362 $112,355
(5) Long-Term Debt
Long-term debt is comprised of the following at November 1, 1997 and
November 2, 1996:
1997 1996
7.0% Senior Notes $ 60,000 $--
7.62% Guaranteed Senior Notes 30,000 30,000
7.21% Senior Unsecured Notes 50,000 50,000
Unsecured Bank Credit Facility 300 15,700
Other 2,314 2,766
142,614 98,466
Less current maturities 921 995
Total long-term debt $141,693 $97,471
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 22, 1997, the Company completed a Private Placement of 7.0%
Senior Notes (the "1997 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 commencing on August 22, 2001
and the Series B 1997 Notes do not require principal payments before becoming
due 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 Senior Notes (the "1996 Notes") over a ten-year term. The
1996 Notes require equal annual principal payments of approximately $4,286
commencing 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 (the "1995 Notes") over a ten-year term. The 1995
Notes require equal annual principal payments of approximately $7,143
commencing on August 15, 1999. Interest on the 1995 Notes is payable
semiannually on February 15 and August 15 of each year. In addition, the
Company concurrently finalized a new revolving $40,000 Unsecured Bank Credit
Facility (the "Bank Credit Facility"). The Bank Credit Facility has a five-year
term, with interest payable at a rate chosen by the Company of either prime
rate or an adjusted LIBOR plus .50%. On May 16, 1996 and September 1, 1995, the
Company entered into six-month fixed LIBOR loans under the Credit Facility of
$9,000 at 6.31% and $5,000 at 6.91%, respectively. The remaining Bank Credit
Facility is at the current prime rate, which, at November 1, 1997 and November
2, 1996, was 8.50% and 8.25%, respectively.
The other debt consists of $1,700 of Industrial Development Revenue Bonds
("the Bonds") and $614 of obligations under capital leases ("the Leases"). The
Bonds mature on November 1, 1999, have an annual mandatory sinking fund
requirement of $550, and carry a floating interest rate, which was 4.30% and
4.45% at November 1, 1997 and November 2, 1996, respectively. The Leases mature
between 1997 and 2000 and bear fixed interest rates varying from 8.13% to
9.38%.
Scheduled maturities of long-term debt for the next five fiscal years are:
1998-$923; 1999-$7,841; 2000-$12,422; 2001-$17,858; and 2002-$17,858.
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.
(6) Income Taxes
The provision for income taxes for fiscal years 1997, 1996, and 1995 is
comprised of the following:
1997 1996 1995
Federal:
Current $8,698 $7,758 $ 2,715
Deferred 3,631 1,480 3,680
State 1,819 1,760 1,348
Foreign 1,667 115 --
15,815 11,113 7,743
Utilization of operating loss carryforwards -- -- (2,633)
Provision for income taxes $15,815 $11,113 $ 5,110
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:
1997 1996 1995
Federal income taxes at statutory rate $14,458 $10,301 $6,875
State income taxes, net of applicable
Federal income tax benefits 1,182 1,144 876
Operating loss carryforwards -- -- (2,633)
Other 175 (332) (8)
$15,815 $11,113 $5,110
At November 1, 1997 and November 2, 1996, the Company's principal
components of deferred tax assets and liabilities consisted of the following:
1997 1996
Deferred tax assets:
Net operating loss carryforwards $1,019 $1,709
Bad debt reserves 712 593
Inventories 445 340
Tax carryforwards -- 888
Accrued liabilities 4,137 2,575
$6,313 $6,105
Deferred tax liabilities:
Depreciation $13,705 $7,491
Other 520 447
$14,225 $7,938
At November 1, 1997, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $2,400, which are available to
offset future Federal taxable income expiring in the years 2001 through 2007.
(7) SHAREHOLDERS' EQUITY & STOCK OPTIONS
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. The Company began the payment of regular quarterly dividends on its
common stock in June of 1995.
The Company has an Incentive Stock Option Plan ("Incentive Plan") and
Restricted Stock Option Plan ("Restricted Plan") for executive officers and key
employees. The maximum number of shares which may be issued under the
Incentive Plan is 1,000,000. The minimum option price is the fair market value
per share at the date of grant, which may be paid upon exercise in Company
shares. The Incentive Plan has 559,000 shares outstanding at November 1, 1997.
The maximum number of shares issuable annually under the Restricted Plan is
limited to 10% of the Company's outstanding common shares (excluding treasury
shares) at each year end through 2001. Notwithstanding the foregoing, the Board
of Directors has resolved that at no time will the total unexercised options
issued to employees be in excess of 10% of the then outstanding common shares.
The options granted and common shares purchased under the Restricted Plan may
not be sold or disposed of for a period of three years from the date of option
grant. Subject to the limitations discussed above, the number of shares
issued, or options granted, pursuant to these plans is at the discretion of the
Compensation Committee of the Board of Directors. The Restricted Plan has
2,081,000 shares outstanding at November 1, 1997. Additional options, which
have been issued outside the Incentive and Resticted plans discussed above,
totaled 375,000 at November 1, 1997.
A summary of the combined activity for the Company's stock options for
fiscal years 1997, 1996, and 1995 follows (shares in thousands):
1997 1996 1995
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Exercise Exercise Exercise
Option Price Option Price Option Price
Outstanding,
beginning of year 2,074 $4.37 2,267 $3.85 2,507 $3.62
Granted 1,414<F1> $9.84 315 $7.07 260 $5.44
Exercised (473) $4.74 (508) $3.70 (500) $3.53
Outstanding,
end of year 3,015 $6.88 2,074 $4.37 2,267 $3.85
Weighted average fair
value of options granted $3.95 $2.49 $1.83
<FN>
<F1>
* Amount includes an option for 900 shares issued in conjunction with the
settlement of litigation with a former
employee--see note (11).
</FN>
Information with respect to options outstanding at November 1, 1997, all
of which are presently exercisable, follows (shares in thousands):
Weighted Average Weighted
Shares Under Remaining Average
Range of Exercise Prices Option Contractual Life Exercise Price
$1.25 - 4.38 1,165 3.2 years $3.66
$5.00 - 7.00 455 4.7 years $6.08
$9.00 - 10.88 1,315 6.7 years $9.59
$11.00 - 16.00 80 9.5 years $13.77
3,015
The Company follows Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" (APB 25), in accounting for its employee stock
options. Under APB 25, if the exercise price of the stock options equals the
market price of the underlying stock on the issuance date, no compensation
expense is recognized. The Company is required by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" to
provide pro forma disclosures under an alternative fair value method of
accounting. The weighted average fair values of options granted were estimated
using the Black-Scholes option-pricing model with the following assumptions:
expected dividend yield of 1.25%, expected volatility of 35.0%, risk-free
interest rates ranging from 5.77% to 5.81%, and expected lives of the options
of 5 years. Had compensation expense been recognized based on these
hypothetical values the Company's net income for 1997 and 1996 would have been
$23,020 and $17,830, respectively, and fully diluted earnings per share for
1997 and 1996 would have been $.82 and $.71, respectively. As a result of
changing assumptions and future option grants, these hypothetical calculations
are not expected to be representative of future calculations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Earnings Per Share
Primary Net Earnings Per 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 27,930,000,
24,872,000, and 16,858,000 for 1997, 1996, and 1995, respectively. The weighted
average shares total for 1995 was affected by the actual conversion of the
Company's preferred stock discussed below.
Fully Diluted Net Earnings Per Share assumes conversion of securities when
the earnings per share result is dilutive. Assumed conversions increased the
weighted average number of common shares used in the computation to 28,131,000,
25,115,000, and 24,111,000 for 1997, 1996, and 1995, respectively.
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 1994, the
Primary Net Earnings Per Share reported for 1994 and 1995 would have been $.46
and $.60, respectively.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 - "Earnings Per Share "
("SFAS 128") which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 replaces the presentation of
primary and fully diluted earnings per share pursuant to Accounting Principles
Board Opinion No. 15 - "Earnings Per Share" ("APB 15") with the presentation of
basic and diluted 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 Company is required
to adopt SFAS 128 beginning with its financial statements for the first quarter
ending January 31, 1998 and restate all prior-period earnings per share data.
Earnings per share in this report have been prepared and presented under APB
15. Under SFAS 128, the Company's basic earnings per share for 1997, 1996, and
1995 would have been $.96, $.77, and $.84 per share respectively, and the
Company's diluted earnings per share for 1997, 1996, and 1995 would have been
$.92, $.74, and $.60 per share, respectively.
(9) EMPLOYEE BENEFITS
The Company sponsors or contributes to various retirement benefit and
savings plans covering substantially all employees. The total cost of such
plans for 1997, 1996, and 1995 was $1,057, $698, and $465, respectively.
(10) Cash Flow Information
Supplemental information on cash flows is as follows:
Fiscal Year
1997 1996 1995
Cash paid during the year for:
Interest $7,470 $4,558 $ 4,099
Income taxes $11,245 $10,846 $ 3,517
Schedule of business acquisitions:
Fair value of assets acquired $73,517 $98,062 $26,330
Liabilities assumed (8,443) (21,076) (2,270)
Due to Echlin Inc./Hamelin Group Inc. 6,846 (9,701) --
Total cash paid for the net assets acquired $71,920 $67,285 $24,060
(11) Commitments and Contingencies
The Company conducts certain of its operations in facilities under
operating leases. Rental expense for 1997, 1996, and 1995 was $3,780, $2,807,
and $2,872, respectively.
Future minimum lease payments under non-cancelable operating leases, by
fiscal year, are: 1998 - $2,547; 1999 - $1,750; 2000 - $1,160; 2001 - $832;
2002 - $363; and $267 thereafter.
On June 2, 1992, Mr. Lawrence M. Powers, former Director, 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 claimed 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 additional shares of common
stock, and award to him attorney's fees and interest. In January 1996, Mr.
Powers filed a similar lawsuit in the Circuit Court of St. Louis County,
Missouri against the Company and two officer directors. In February 1997, the
Company settled both lawsuits. The settlement resolved all claims and
terminated all disputes between the respective parties and general releases
were executed to prevent further action on such disputes. The settlement was
reflected in the Company's first quarter financial statements and, after
consideration of amounts previously accrued, did not result in a net charge to
earnings.
At November 1, 1997, there were no other known contingent liabilities
(including guarantees, pending litigation, and environmental claims) that, in
the opinion of management, are expected to be material in relation to the
Company's financial position or results of operations, nor were there any
material commitments outside the normal course of business.
(12) Segment Information
The Company operates in one industry segment as a producer of engineered
thermoplastics, polymeric compounds, and molded products for a wide spectrum of
manufacturing customers. The Company operates from 26 plants in 25 cities
throughout the United States and Canada and its customer base is diverse--no
one customer represents greater than 5% of total sales, and the Company's
customers supply product to a broad range of markets (including
sign/advertising, lawn & garden, transportation, building & construction,
medical, and packaging).
Following the acquisition of six plants in Canada from the Hamelin Group
on September 27, 1996, the Company began operating in two reportable geographic
areas -- the United States and Canada. Geographic financial information for
1997 and 1996 is as follows:
Operating Total
Net Sales Earnings Assets
1997 1996 1997 1996 1997 1996
United States $427,530 $384,334 $41,957 $33,856 $295,511 $221,542
Canada 75,185 7,014 7,744 636 63,292 67,418
$502,715 $391,348 $49,701 $34,492 $358,803 $288,960
(13) Quarterly Financial Information
Certain unaudited quarterly financial information for the years ended
November 1, 1997 and November 2, 1996 is as follows:
Quarter Ended Fiscal
Jan April July Oct Year
1997
Net Sales $113,387 $129,815 $123,170 $136,343 $502,715
Gross Profit 18,079 21,187 20,435 22,514 82,215
Net Earnings 5,479 6,675 6,731 6,608 25,493
Net Earnings Per Share:
Primary . 20 .24 .24 .23 .91
Fully diluted .20 .24 .24 .23 .91
1996
Net Sales $87,466 $98,330 $101,223 $104,329 $391,348
Gross Profit 12,993 14,881 16,194 16,504 60,572
Net Earnings 3,786 4,775 5,020 4,736 18,317
Net Earnings Per Share:
Primary .16 .19 .20 .19 .74
Fully diluted .16 .19 .20 .18 .73
MANAGEMENT & AUDITORS' REPORTS
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 assure that the books and records accurately reflect the transactions of the
Company, and 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.
Arthur Andersen LLP, independent public accountants, are engaged to
provide an objective audit of the financial statements of SPARTECH Corporation
and issue reports thereon. Their audit is conducted in accordance with
generally accepted auditing standards.
The Board of Directors, acting upon the advice and recommendations of the
Audit Committee, is responsible for assuring that management fulfills its
responsibilities in the preparation of 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/David B. Mueller /s/Randy C. Martin
President and Executive Vice President Vice President-Finance
Chief Executive Officer and Chief Operating Officer and Chief Financial
Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO SPARTECH CORPORATION
We have audited the accompanying consolidated balance sheet of SPARTECH
Corporation (a Delaware Corporation) and subsidiaries as of November 1, 1997
and November 2, 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three fiscal years in the
period ended November 1, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial position of SPARTECH Corporation and
subsidiaries as of November 1, 1997 and November 2, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended November 1, 1997 in conformity with generally accepted accounting
principles.
St. Louis, Missouri /s/ Arthur Andersen LLP
December 5, 1997
FIVE YEAR FINANCIAL SUMMARY
(Dollars in thousands, except per share amounts)
The following table sets forth selected financial data for each of the most
recent five fiscal years.
FISCAL YEAR
1997 1996 1995 1994 1993
SUMMARY OF OPERATIONS
Net Sales $502,715 $391,348 $352,273 $256,593 $189,401
Gross Profit $82,215 $60,572 $49,879 $36,998 $28,008
Depreciation and
Amortization $11,548 $7,211 $5,798 $4,422 $4,000
Operating Earnings $49,701 $34,492 $24,604 $16,410 $10,569
Interest Expense $8,393 $5,062 $4,960 $3,125 $3,350
Net Earnings $25,493 $18,317 $14,534 $10,835 $6,716
PER SHARE INFORMATION
Fully Diluted
Earnings $ .91 $ .73 $ .60 $ .46 $ .30
Dividends Declared $ .20 $.15 $ .09 $ - $ -
Book Value Per Share $ 4.85 $4.26 $ 3.09 $2.54 $2.08
BALANCE SHEET INFORMATION
Working Capital $63,429 $54,261 $ 45,108 $ 26,351 $ 25,032
Capital Expenditures 12,172 $9,566 $10,015 $ 8,152 $ 2,610
Long-Term Debt,
Less Current
Maturities $ 141,693 $97,471 $ 59,510 $ 36,419 $ 36,417
Total Assets $358,803 $288,960 $178,329 $135,720 $114,194
Shareholders'
Equity $128,389 $112,395 $ 72,128 $ 58,233 $ 46,041
Market Value
of Equity $420,377 $290,405 $148,876 $131,694 $83,055
Ratios/Other Data
Gross Margin 16.4% 15.5% 14.2% 14.4% 14.8%
Operating Margin 9.9% 8.8% 7.0% 6.4% 5.6%
Effective Tax Rate 38.3% 37.8% 26.0% 18.4% 7.0%
Long-Term Debt
to Capitalization 52.5% 46.4% 45.2% 38.5% 44.2%
Return on Average
Equity 21.2% 20.0% 22.3% 20.8% 15.8%
Number of Employees 2,125 1,800 1,200 925 700
Weighted Average Shares
Outstanding 28,131 25,115 24,111 23,434 23,438
INVESTOR INFORMATION
Annual Shareholders' Meeting
SPARTECH Corporation's Annual Shareholders' Meeting will be held on
Wednesday, March 11, 1998 at the Pierre Laclede Conference Center, 7733 Forsyth
Boulevard, Clayton, Missouri 63105 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, 1998, there were approximately 5,500 shareholders of the
Company's common stock. The Company's Registrar and Transfer Agent is
ChaseMellon Shareholder Services LLC, 85 Challenger, Overpeck Center,
Ridgefield Park, New Jersey 07660. SPARTECH Corporation's common stock is
traded on the New York Stock Exchange under the symbol "SEH." Quarterly and
year-end stock prices for fiscal years 1997 and 1996 are shown below.
1997 1996
High Low High Low
First Quarter $11 1/2 $ 9 3/8 $ 7 3/8 $ 6
Second Quarter 13 3/4 10 5/8 10 1/4 6 7/8
Third Quarter 16 11 1/2 12 8 7/8
Fourth Quarter 18 15 11 9 1/2
Fiscal Year End $15 7/8 $11
Dividend Reinvestment Plan and Report on Form 10-K
A Dividend Reinvestment Plan is available to shareholders of the Company,
allowing for the automatic investment of cash dividends into SPARTECH common
stock. For details on the Plan, please contact the Company's Registrar and
Transfer Agent, ChaseMellon Shareholder Services at (888) 213-0965. In
addition, the Company will provide, without charge to any shareholder, a copy
of its 1997 Report on Form 10-K as filed with the Securities and Exchange
Commission. Requests should be directed to SPARTECH Investor Relations at
(314) 721-4242 or via internet at http://www.spartech.com/.
Research and Informational Reports
Research and informational reports on SPARTECH Corporation are available
from the following companies and individuals by calling SPARTECH Investor
Relations at (314) 721-4242 or the listed companies direct at the numbers shown
below:
A.G. Edwards - Mike Braig (314) 289-5894
C S First Boston - Brian Langenberg (312) 750-3101
EVEREN Securities - Shawn Severson (312) 574-5905
First Analysis - Allan Cohen (312) 258-1400
Huntleigh Securities - John Rast (314) 727-5454
Mesirow Financial - Gary Prestipino (312) 595-6750
Safe Harbor Statement
This Annual Report contains various forward-looking statements that
involve certain risks and uncertainties that could cause actual results to
differ materially from such statements. Potential risks and uncertainties
include such factors as continued economic growth, the successful integration
of acquired operations, and the pricing stability of resins. Investors are
directed to consider other risks and uncertainties discussed in documents filed
by the Company with the Securities and Exchange Commission.