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 May 2, 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 May 2, 1998:
Common Stock, $.75 par value per share 27,145,958
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
May 2, 1998
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of May 2, 1998 and November 1, 1997 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter and six months
ended May 2, 1998 and May 3, 1997 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for six months ended
May 2, 1998 and May 3, 1997 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION 12
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
May 2, 1998
(unaudited) Nov. 1, 1997
Current Assets
Cash and equivalents $ 6,882 $ 6,058
Receivables, net 95,946 74,271
Inventories 63,648 55,851
Prepayments and other 10,792 4,517
Total Current Assets 177,268 140,697
Property, Plant and Equipment 252,778 173,743
Less accumulated depreciation 50,544 44,381
Net Property, Plant and Equipment 202,234 129,362
Goodwill 149,593 83,565
Other Assets 7,401 5,179
$536,496 $358,803
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,759 $ 921
Accounts payable 63,223 47,221
Accrued liabilities 34,709 29,126
Total Current Liabilities 99,691 77,268
Long-Term Debt, Less Current Maturities 262,180 141,693
Other Liabilities 27,468 11,453
Total Long-Term Liabilities 289,648 153,146
Shareholders' Equity
Common stock, 27,474,651 shares issued
in 1998 and 26,628,154 in 1997 20,606 19,971
Contributed capital 98,956 89,301
Retained earnings 35,611 22,912
Treasury stock, at cost, 328,693 shares
in 1998 and 147,691 shares in 1997 (5,421) (2,127)
Cumulative translation adjustments (2,595) (1,668)
Total Shareholders' Equity 147,157 128,389
$536,496 $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 SIX MONTHS ENDED
May 2, May 3, May 2, May 3,
1998 1997 1998 1997
Net Sales $ 165,707 $129,815 $298,788 $243,202
Costs and Expenses
Cost of sales 137,789 108,629 248,390 203,937
Selling and administrative 9,368 7,990 17,529 14,854
Amortization of intangibles 709 321 1,250 646
147,866 116,940 267,169 219,437
Operating Earnings 17,841 12,875 31,619 23,765
Interest 2,995 2,093 5,340 4,003
Earnings Before Income Taxes 14,846 10,782 26,279 19,762
Income Taxes 5,983 4,107 10,395 7,609
Net Earnings $ 8,863 $ 6,675 $ 15,884 $ 12,153
Net Earnings Per Common Share:
Basic $ .33 $ .25 $ .60 $ .46
Diluted $ .31 $ .24 $ .56 $ .44
Weighted Average Number of
Shares Used in Computing Net
Earnings per Common Share:
Basic 26,764 26,387 26,611 26,385
Diluted 28,728 27,757 28,445 27,747
Dividends Per Common Share $ .06 $ .05 $ .12 $ .10
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
SIX MONTHS ENDED
May 2, 1998 May 3, 1997
Cash Flows From Operating Activities
Net earnings $ 15,884 $ 12,154
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 7,776 5,669
Change in current assets and
liabilities, net of effects of
acquisitions (99) (7,912)
Other, net 2,031 858
Net cash provided by operating
activities 25,592 10,769
Cash Flows From Investing Activities
Capital expenditures (5,326) (5,789)
Final installment for Echlin and (3,095) (9,701)
Hamelin Acquisitions
Retirement of assets 23 245
Business Acquisitions (128,933) -
Net cash used for investing activities (137,331) (15,245)
Cash Flows From Financing Activities
Bank borrowings for business acquisitions 121,988 -
Net borrowings (payments) on revolving
credit facilities (12,288) 10,050
Payments on bonds and leases (922) (215)
Issuance of common stock 10,000 -
Cash dividends on common stock (3,185) (2,639)
Stock options exercised 1,296 1,016
Treasury stock acquired (4,300) (3,207)
Other, net - -
Net cash provided by (used for)
financing activities 112,589 5,005
Effect of exchange rate changes on cash
and equivalents (26) (198)
Increase In Cash and Equivalents 824 331
Cash and Equivalents At Beginning Of Period 6,058 4,685
Cash and Equivalents At End Of Period $ 6,882 $ 5,016
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 any 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 May 2, 1998 and November 1, 1997 are comprised of the
following components:
1998 1997
Raw materials $ 41,231 $ 37,832
Finished goods 22,417 18,019
$ 63,648 $ 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 six
months ended May 2, 1998 and May 3, 1997 is as follows:
1998 1997
Cash paid for:
Interest $ 5,823 $ 2,507
Income taxes $ 3,584 $ 4,833
NOTE D - Commitments and Contingencies
At May 2, 1998, there were no known contingent liabilities (including
guarantees, pending litigation, and environmental assessments) 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.
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 replaced 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 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 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 - Acquisitions
On March 31, 1998, the Company completed its acquisition of all the stock of
Polycom Huntsman, Inc. ("Polycom"). The net cash purchase price was
approximately $129 million (including estimated costs of the transaction and net
of cash acquired of $3 million). The purchase price was determined by arms'
length negotiations between the Company and Polycom's shareholders. The
acquisition was funded through the Company's bank credit facility and the
issuance of $10 million in Spartech common stock to Polycom shareholders. The
fair value of the assets acquired (including approximately $65 million in
goodwill) and liabilities assumed (consisting of accounts payable, accrued
liabilities, lease liabilities, and industrial development revenue bonds) was
$171 million and $39 million, respectively. Polycom's color & specialty
compounding and toll compounding services generate annual sales of approximately
$115 million.
On April 26, 1998, the Company completed the purchase of the net assets of
Prismaplast Canada Ltd. of Montreal. Prismaplast, commonly known as
Plasticolour, produces color concentrates & specialty compounds with net sales
for 1997 of approximately $10 million. The acquisition price for Plasticolour
approximated $5 million, which was financed through operating cash flow and our
bank credit facility.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net sales were $165.7 million and $298.8 million for the quarter and six
months ended May 2, 1998, representing a 28% and 23% increase from the similar
periods in 1997. These results include an increase in pounds sold by the
Company's Extruded Sheet & Rollstock and Color & Specialty Compounds Groups, the
effect of the late 1997 acquisition of Preferred Plastic Sheet, and the March
31, 1998 acquisition of Polycom Huntsman, Inc.
Net sales of the Extruded Sheet & Rollstock Group increased approximately
28% for the quarter ended May 2, 1998 and 26% for the six months ended May 2,
1998 over the 1997 periods, with the August 1997 acquisition of Preferred
Plastics accounting for the majority of the growth. The increase in Extruded
Sheet & Rollstock sales for the six months resulted from a 10% increase in base
volume as a result of strong sales to the packaging and manufactured housing
markets and a 19% increase in net sales related to the Preferred Plastic Sheet
acquisition. Price and product mix changes had a negative 3% impact on sales for
the six months. Net sales in the Color & Specialty Compounds Group increased by
48% for the quarter ended May 2, 1998 and 24% for the six months ended May 2,
1998 versus the comparable 1997 periods. Revenues of approximately $11 million
generated by the recently-acquired Polycom Huntsman operation more than offset
this segment's 13% price/mix related decline in sales for the six months--
primarily due to the additional tolling volume in 1998. This increase in
tolling business was also the principle reason for the group's 11% growth in
base volume over the 1997 periods. The Molded Products Group had $11.1 million
in sales and $1.8 million in operating earnings for the quarter - level with
that of the prior year.
Cost of sales increased to $137.8 million for the quarter ended May 2,
1998, compared with $108.6 million for the same period of 1997, but decreased to
83.2% of net sales for 1998 from 83.7% for 1997. The cost of sales percentages
were 83.1% and 83.9% for the six months ended May 2, 1998 and May 3, 1997,
respectively. The more favorable cost of sales percentages 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 were $9.4 million and $17.5 million for
the quarter and six months ended May 2, 1998 compared to $8.0 million and $14.9
million for the similar periods in 1997. On a percentage of net sales basis,
selling and administrative costs for the quarter decreased to 5.7% in 1998 from
6.2% in 1997 primarily as a result of continued cost containment efforts in
1998, ongoing synergies from acquisitions, and the effect of the overall
increase in sales volume on the fixed portion of the costs. The 1998 six month
percentage decreased to 5.9% from 6.1% for the same period last year.
Operating earnings for the quarter ended May 2, 1998 were $17.8 million
(10.8% of net sales) compared to $12.9 million (9.9% of net sales) for the
corresponding period in 1997. Operating earnings for the six months ended May
2, 1998 were $31.6 million (10.6% of net sales) compared to $23.8 million (9.8%
of net sales) for the six months 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 for the quarter and six months ended May 2, 1998 of $3.0
million and $5.3 million increased from the same periods in 1997 as a result of
borrowings related to the Preferred Plastics and Polycom Huntsman acquisitions
completed in August 1997 and March 1998, respectively.
The Company's effective tax rate was 40% for the quarter and six months of
1998 compared to 39% in 1997. The increase reflects the impact of non-
deductible goodwill resulting from the Polycom Huntsman acquisition.
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:
Six Months
1998 1997
(Dollars in millions)
Net cash provided by
operating activities $ 25.6 $ 10.8
Net cash used for
investing activities $(137.3) $ (15.2)
Net cash provided by (used for)
financing activities $(112.6) $ 5.0
The Company continues to generate strong cash flows from operations, resulting
from the 31% increase in net earnings in the first half of 1998 compared to the
corresponding period of the prior year, net of the impact of changes in working
capital. Operating cash flows used for changes in working capital totaled $.1
million in the six months ended May 2, 1998, despite the level of inventories
needed to support future shipments and the expanded sales level.
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 six months ended May 2,
1998 and May 3, 1997 were $5.3 million and $5.8 million, respectively. The
Company anticipates total capital expenditures of approximately $16 million for
fiscal 1998, including capital investments related to the facilities recently
purchased in 1998. Also impacting the first half 1998 cash used for investing
activities was the final payment on the Preferred Plastics acquisition to Echlin
in January 1998. The amount was reflected as a current payable at fiscal year
end November 1, 1997.
On March 31, 1998, the Company completed its acquisition of all the stock
of Polycom Huntsman. The net cash purchase price was approximately $129 million
(including estimated costs of the transaction and net of cash acquired of $3
million). The acquisition was funded through the Company's bank credit facility
and the issuance of $10 million in Spartech common stock to Polycom
shareholders. Polycom's color & specialty compounding and toll compounding
services generate annual sales of approximately $115 million.
The cash flows provided by financing activities were $112.6 million for the
first half of 1998. The primary activities were the bank borrowings of $122.0
million and issuance of $10.0 million of common stock for the Polycom Huntsman
acquisition, repayment of debt of $13.2 million net of the $3.1 million borrowed
to fund the final installment due to Echlin, cash dividend payments of $3.2
million, and purchases of treasury stock of $3.0 million net of proceeds from
stock options exercised of $1.3 million.
Financing Arrangements
On March 31, 1998 the Company amended its $40 million bank credit facility
to $150 million. The bank credit facility has a five-year term, with interest
payable at a rate chosen by the Company of either prime or LIBOR plus .5% to
1.0%. The bank credit facility consists of a $50 million term loan, which has
equal quarterly payments due of $2.5 million over five years, and a $100 million
revolving facility. At May 2, 1998, the Company had total borrowings under the
bank credit facility of $110.0 million.
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 4 Submission of Matters to a Vote of Security Holders
At
the Annual Shareholders meeting held March 11, 1998, Mr. Bradley
B. Buechler was elected as a Director of the Company with
25,834,488 votes for, 44,795 against, and 543,165 shares unvoted.
Mr. John R. Kennedy was also elected as a director of the Company
with 25,839,234 votes for, 40,049 against, and 543,165 shares
unvoted. Mr. Calvin J. O'Connor was also elected as a Director
of the Company with 25,845,321 votes for, 33,962 against, and
543,165 shares unvoted. An increase in the authorized shares of
Common Stock was approved with 25,443,386 votes for, 419,171
against, 51,594 abstentions, and 534,230 unvoted. Amendments to
the Company's Incentive Stock Option Plan were approved with
22,736,996 votes for, 3,099,628 against, 51,594 abstentions, and
534,230 unvoted. Amendments to the Company's Restricted Stock
Option Plan were approved with 22,758,431 votes for, 3,037,693
against, 92,094 abstentions, and 534,230 unvoted. Incentive
bonuses for the Company's CEO & COO were approved with 25,184,517
votes for, 618,963 against, 84,738 abstentions, and 534,230
unvoted. Arthur Andersen LLP was ratified as the Company's
auditors with 25,804,197 votes for, 31,344 against, 52,678
abstentions, and 534,230 shares unvoted.
Item 6 (a). Exhibits
3 Restated Certificate of Incorporation
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
Item 6 (b). Reports on Form 8-K
A report on Form 8-K, dated March 31, 1998, announcing the
completion of the acquisition of all the stock of Polycom
Huntsman was filed on April 14, 1998. Financial statements of
the business acquired and pro forma financial information will
be filed in an amendment to that report within 60 days after the
time for filing that report.
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 29, 1998 /S/ Bradley B. Buechler
Bradley B. Buechler
President and Chief
Executive Officer
(Principal Executive Officer)
Date: May 29, 1998 /S/ Randy C. Martin
Randy C. Martin
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)