SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
Number of common shares outstanding as of January 31, 1998:
Common Stock, $.75 par value per share 26,398,070
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
January 31, 1998
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of January 31, 1998 and November 1, 1997 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter ended
January 31, 1998 and November 1, 1997 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for quarter ended
January 31, 1998 and November 1, 1997 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION 13
SIGNATURES 14
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands, except share amounts)
ASSETS
Jan. 1, 1998
(unaudited) Nov. 1, 1997
Current Assets
Cash and equivalents $ 4,927 $ 6,058
Receivables, net 73,504 74,271
Inventories 55,830 55,851
Prepayments and other 5,629 4,517
Total Current Assets 139,890 140,697
Property, Plant and Equipment 174,583 173,743
Less accumulated depreciation 47,259 44,381
Net Property, Plant and Equipment 127,324 129,362
Goodwill 83,100 83,565
Other Assets 5,345 5,179
$355,659 $358,803
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 844 $ 921
Accounts payable 41,545 47,221
Accrued liabilities 25,978 26,271
Due to Echlin Inc. - 2,855
Total Current Liabilities 68,367 77,268
Long-Term Debt, Less Current Maturities 144,245 141,693
Other Liabilities 12,284 11,453
Total Long-Term Liabilities 156,529 153,146
Shareholders' Equity
Common stock, 26,628,154 shares issued
in 1998 and 1997 19,971 19,971
Contributed capital 88,639 89,301
Retained earnings 28,344 22,912
Treasury stock, at cost, 230,084 shares
in 1998 and 147,691 shares in 1997 (3,477) (2,127)
Cumulative translation adjustments (2,714) (1,668)
Total Shareholders' Equity 130,763 128,389
$355,659 $358,803
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited and amounts in thousands, except per share data)
QUARTER ENDED
Jan. 31, 1998 Feb. 1, 1997
Net Sales $133,081 $113,387
Costs and Expenses
Cost of sales 110,601 95,308
Selling and administrative 8,161 6,864
Amortization of intangibles 541 325
119,303 102,497
Operating Earnings 13,778 10,890
Interest 2,345 1,910
Earnings Before Income Taxes 11,433 8,980
Income Taxes 4,412 3,502
Net Earnings $ 7,021 $ 5,478
Net Earnings Per Common Share:
Basic $ .27 $ .21
Diluted $ .25 $ .20
Weighted Average Number of Shares Used in
Computing Net Earnings per Common Share:
Basic 26,398 26,382
Diluted 28,101 27,737
Dividends Per Common Share $ .06 $ .05
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
QUARTER ENDED
Jan. 31, 1998 Feb. 1, 1997
Cash Flows From Operating Activities
Net earnings $ 7,021 $ 5,478
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 3,546 2,824
Change in current assets and
liabilities (6,089) (3,134)
Other, net 677 1,103
Net cash provided by operating
activities 5,155 6,271
Cash Flows From Investing Activities
Capital expenditures (2,056) (2,861)
Final installment for Hamelin and
Echlin Acquisitions (3,095) (9,701)
Retirement of assets 32 54
Net cash used for investing activities (5,119) (12,508)
Cash Flows From Financing Activities
Net borrowings (payments) on revolving
credit facilities 3,150 7,500
Payments on bonds and leases (658) (82)
Cash dividends on common stock (1,589) (1,318)
Stock options exercised 329 627
Treasury stock acquired (2,341) (1,653)
Other, net - -
Net cash provided by (used for)
financing activities (1,109) 5,074
Effect of exchange rate changes on cash
and equivalents (58) (75)
Increase (Decrease) In Cash and Equivalents (1,131) (1,238)
Cash and Equivalents At Beginning Of Period 6,058 4,685
Cash and Equivalents At End Of Period $ 4,927 $ 3,447
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 November 1, 1997 Annual Report on Form 10-K.
The Company's fiscal year ends on the Saturday closest to October 31.
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 January 31, 1998 and November 1, 1997 are comprised of
the following components:
1998 1997
Raw materials $ 38,564 $ 37,832
Finished goods 17,266 18,019
$ 55,830 $ 55,851
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE C - Cash Flow Information
Supplemental information on cash flows and noncash transactions for the
quarter ended January 31, 1998 and February 1, 1997 is as follows:
1998 1997
Cash paid for:
Interest $ 61 $ 301
Income taxes $ 304 $ 154
NOTE D - Commitments and Contingencies
The Company currently has no litigation with respect to any environmental
matters.
Note E - Earnings Per Share
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
EPS. Effective with its financial statements for the first quarter ending
January 31, 1998, SFAS 128 replaces the presentation of primary and fully
diluted EPS pursuant to Accounting Principles Board Opinion No. 15 - "Earnings
Per Share" ("APB 15") with the presentation of basic and diluted EPS. Basic EPS
excludes 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 EPS 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. All prior-period EPS data has been restated in
accordance with SFAS 128.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Note F - Subsequent Event -- Acquisition
On February 2, 1998, the Company announced that it entered into an agreement
to acquire all of the stock of Polycom Huntsman, Inc. (Polycom). Polycom is a
leading supplier of proprietary polymer compounds, color & additive
concentrates, and toll compounding services to a diversified base of customers
in North America and Europe. Its nine strategically-located manufacturing
facilities have combined sales of approximately $115 million. The purchase
price is approximately $135 million and will be funded almost entirely with bank
financing. The transaction is scheduled to close on or before March 31, 1998.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the first quarter ending January 31, 1998 increased by 17% to
$133.1 million, as compared to $113.4 million during the same quarter last year,
and operating earnings rose by 27% to $13.8 million, from $10.9 million reported
for the first quarter of 1997. First quarter 1998 net earnings were $7.0
million, or $.25 per diluted share, compared to $5.5 million, or $.20 per
diluted share, reported in 1997.
Net sales of the Extruded Sheet & Rollstock Group increased approximately
24% for the quarter ended January 31, 1998 over the first quarter 1997 amount.
The increase in Extruded Sheet & Rollstock sales resulted from a 10% increase in
pounds shipped and a 17% increase in net sales related to the acquisition of
Preferred Plastic Sheet, net of a 3% decline related to price/product mix
changes and weather-related production problems (in which the ice storms in
Canada limited production at our eastern Canada facilities during the month of
January). Net sales in the Color & Specialty Compounds Group declined by 3%, to
$19.5 million in the first quarter of 1998. Base volume increased by 5%, but
price/mix related changes had a negative 8% effect on sales. The Molded
Products Group had a reasonable quarter in what traditionally is a slow period
for the group, recording sales of $10.5 million compared to $10.4 million in
sales for the same quarter last year.
Cost of sales increased 24% to $110.6 million for the quarter ended January
31, 1998, compared with $95.3 million for the same period of 1997, but decreased
to 83.1% of net sales for 1998 from 84.1% for 1997. The more favorable cost of
sales percentage in 1998 represents a decline in overall raw material prices and
improved production efficiencies, partially offset by an increase in
depreciation as a result of capital expenditures incurred by the Company during
the last 24 months.
Selling and administrative expenses of $8.2 million for the first quarter
of 1998 increased when compared to $6.9 million for the similar period in 1997
due to the 1997 acquisitions. On a percentage of net sales basis, selling and
administrative costs for the quarter remained level at 6.1% in 1998 and 1997.
Operating earnings for the quarter ended January 31, 1998 were $13.8
million (10.4% of net sales) compared to $10.9 million (9.6% of net sales) for
the corresponding period in 1997. These gains in operating earnings were
achieved through the increased sales levels, improved production efficiencies,
cost containment efforts, and the declines in raw material prices, discussed
above.
Interest expense of $2.3 million for the quarter ended January 31, 1998
increased from $1.9 million for the same period in 1997 as a result of
borrowings related to the Preferred Plastics acquisition completed in the fourth
quarter of 1997.
The Company's effective tax rate was 38.6% for the first quarter of 1998
compared to 39.0% in 1996.
Environmental and Inflation
The Company is subject to various laws governing employee safety and
federal, state, & local laws, and regulations governing the quantities of
certain specified substances that may be emitted into the air, discharged into
interstate and intrastate waters, and otherwise disposed of on and off the
properties of the Company. The Company does not anticipate that future
expenditures for the 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 process 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; pricing
of the 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.
The effects of inflation have not been significant on the overall
operations of the Company during the last few years. No material amount of the
Company's sales are made pursuant to fixed price, long-term contracts. The
Company has historically been successful in compensating for inflationary costs
through increased selling prices and/or increased productivity and related
efficiencies. The Company anticipates this trend will continue in the future.
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's cash flows for
the periods indicated are summarized as follows:
First Quarter
1998 1997
(Dollars in millions)
Net cash provided by
operating activities $ 5.2 $ 6.3
Net cash used for
investing activities $ (5.1) $ (12.5)
Net cash provided by (used for)
financing activities $ (1.1) $ 5.1
The Company continues to generate strong cash flows from operations, resulting
from the 28% increase in net earnings in the first quarter 1998 compared to the
corresponding period of the prior year. Operating cash flows used for changes
in working capital totaled $6.1 million in the quarter ended January 31, 1998,
primarily as a result of the decrease in accounts payable to take advantage of
favorable vendors' terms.
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 the quarter January 31, 1998
were $2.1 million as compared to $2.9 million for the first quarter of 1997.
The Company anticipates total capital expenditures of approximately $12.5
million for fiscal 1998. Also impacting the first quarter 1998 cash used for
investing activities was the final payment, in January 1998, on the Preferred
Plastics acquisition. The amount was reflected as a current payable at fiscal
year end November 1, 1997.
The cash flows used by financing activities were $1.1 million for the first
quarter of 1998. The primary activity was the net borrowings of $3.2 million
which included the impact of funding the $3.1 million final installment due
Echlin in the first quarter 1998, cash dividend payments of $1.6 million, and
purchases of treasury stock, net of stock options exercised, of $2.0 million.
Financing Arrangements
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
unsecured bank credit facility. 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 Group. On August 22, 1997,
the Company completed a $60 million private placement of 7.0% senior notes to
finance the Preferred Plastics acquisition.
The Company anticipates that cash flow from operations, together with the
financing and borrowings under the Company's bank credit facility, will satisfy
its working capital needs, regular quarterly dividends, and planned capital
expenditures for the next year.
Other
The information presented herein contains certain forward-looking
statements, as defined in the Private Securities Litigation Reform Act (PSLRA)
of 1995, which are based on current expectations and that involve certain risks
and uncertainties. The Company desires to take advantage of the "safe harbor"
provisions of the PSLRA by cautioning that numerous important factors, in some
cases have affected, and in the future could affect, the Company's actual
results and could cause its consolidated results to differ materially from those
expressed in or implied by the forward-looking statements or related
assumptions. Investors are directed to the discussion of risks and
uncertainties associated with forward-looking statements contained in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
PART II - OTHER INFORMATION
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: March 2, 1998 /s/ Bradley B. Buechler_______
Bradley B. Buechler
President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Randy C. Martin_____________
Randy C. Martin
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)