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 August 1, 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 August 1, 1998: Common Stock, $.75 par value per share 27,055,314 SPARTECH CORPORATION AND SUBSIDIARIES INDEX August 1, 1998 PART I. FINANCIAL INFORMATION PAGE CONSOLIDATED CONDENSED BALANCE SHEET - as of August 1, 1998 and November 1, 1997 3 CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS - for the quarter and nine months ended August 1, 1998 and August 2, 1997 4 CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS - for nine months ended August 1, 1998 and August 2, 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 12 SIGNATURES 13 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS SPARTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands, except share amounts) ASSETS August 1, 1998 (unaudited) Nov. 1, 1997 Current Assets Cash and equivalents $ 8,373 $ 6,058 Receivables, net 91,921 74,271 Inventories 65,887 55,851 Prepayments and other 11,008 4,517 Total Current Assets 177,189 140,697 Property, Plant and Equipment 256,450 173,743 Less accumulated depreciation 54,745 44,381 Net Property, Plant and Equipment 201,705 129,362 Goodwill 148,521 83,565 Other Assets 5,920 5,179 $533,335 $358,803 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 1,752 $ 921 Accounts payable 61,292 47,221 Accrued liabilities 40,677 29,126 Total Current Liabilities 103,721 77,268 Long-Term Debt, Less Current Maturities 249,393 141,693 Other Liabilities 30,150 11,453 Total Long-Term Liabilities 279,543 153,146 Shareholders' Equity Common stock, 27,530,107 shares issued in 1998 and 26,619,154 in 1997 20,645 19,971 Contributed capital 99,190 89,301 Retained earnings 42,998 22,912 Treasury stock, at cost, 474,793 shares in 1998 and 190,815 shares in 1997 (8,551) (2,127) Cumulative translation adjustments (4,211) (1,668) Total Shareholders' Equity 150,071 128,389 $533,335 $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 NINE MONTHS ENDED August 1, August 2, August 1,August 2, 1998 1997 1998 1997 Net Sales $ 177,702 $123,170 $476,490 $366,372 Costs and Expenses Cost of sales 147,512 102,735 395,902 306,671 Selling and administrative 10,059 7,473 27,588 22,327 Amortization of intangibles 989 337 2,239 983 158,560 110,545 425,729 329,981 Operating Earnings 19,142 12,625 50,761 36,391 Interest 4,108 1,771 9,448 5,774 Earnings Before Income Taxes 15,034 10,854 41,313 30,617 Income Taxes 6,014 4,123 16,409 11,732 Net Earnings $ 9,020 $ 6,731 $ 24,904 $ 18,885 Net Earnings Per Common Share: Basic $ .33 $ .25 $ .93 $ .72 Diluted $ .31 $ .24 $ .87 $ .68 Weighted Average Number of Shares Used in Computing Net Earnings per Common Share: Basic 27,102 26,403 26,775 26,387 Diluted 29,103 27,991 28,664 27,824 Dividends Per Common Share $ .06 $ .05 $ .18 $ .15 See accompanying notes to consolidated financial statements. SPARTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited and dollars in thousands) NINE MONTHS ENDED August 1, 1998 August 2, 1997 Cash Flows From Operating Activities Net earnings $ 24,904 $ 18,885 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 13,217 8,488 Change in current assets and liabilities, net of effects of acquisitions 5,411 367 Other, net 6,153 (65) Net cash provided by operating activities 49,685 27,675 Cash Flows From Investing Activities Capital expenditures (10,594) (8,522) Business Acquisitions (122,028) (9,701) Retirement of assets 75 256 Net cash used for investing activities (132,547) (17,967) Cash Flows From Financing Activities Bank borrowings for business acquisitions 121,988 - Net borrowings (payments) on revolving credit facilities (24,688) (4,200) Payments on bonds and leases (1,304) (324) Cash dividends on common stock (4,817) (3,959) Stock options exercised 1,568 1,431 Treasury stock acquired (7,430) (3,326) Other, net - - Net cash provided by (used for) financing activities 85,317 (10,378) Effect of exchange rate changes on cash and equivalents (140) (85) Increase In Cash and Equivalents 2,315 (755) Cash and Equivalents At Beginning Of Period 6,058 4,685 Cash and Equivalents At End Of Period $ 8,373 $ 3,930 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 August 1, 1998 and August 2, 1997 are comprised of, the following components: 1998 1997 Raw materials $ 43,726 $ 37,832 Finished goods 22,161 18,019 $ 65,887 $ 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 nine months ended August 1, 1998 and August 2, 1997 is as follows: 1998 1997 Cash paid for: Interest $ 7,127 $ 2,989 Income taxes $ 7,532 $ 7,786 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 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. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net sales were $177.7 million and $476.5 million for the quarter and nine months ended August 1, 1998, representing a 44% and 30% 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, the March 31, 1998 acquisition of Polycom Huntsman, Inc, and the April 26, 1998 acquisition of Plasticolour. Net sales of the Extruded Sheet & Rollstock Group increased approximately 25% for the quarter ended August 1, 1998 and 26% for the nine months ended August 1, 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 nine months resulted from a 11% increase in base volume as a result of strong sales of higher margin sign/advertising and specialty packaging products and a 19% increase in net sales related to the Preferred Plastic Sheet acquisition. Price and product mix changes had a negative 4% impact on sales for the nine months. Net sales in the Color & Specialty Compounds Group increased by 152% for the quarter ended August 1, 1998 and 66% for the nine months ended August 1, 1998 versus the comparable 1997 periods. Revenues of approximately $31.6 million generated by our 1998 acquisitions Polycom Huntsman and Plasticolour operations more than offset this segment's 14% price/mix related decline in sales for the nine months--primarily due to the additional tolling volume in 1998. This increase in tolling business was also the principle reason for the group's 13% growth in base volume over the 1997 periods. The Molded Products Group had $9.3 million in sales and $1.1 million in operating earnings for the quarter. Cost of sales increased to $147.5 million for the quarter ended August 1, 1998, compared with $102.7 million for the same period of 1997, but decreased to 83.0% of net sales for 1998 from 83.4% for 1997. The cost of sales percentages were 83.1% and 83.7% for the nine months ended August 1, 1998 and August 1, 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 $10.1 million and $27.6 million for the quarter and nine months ended August 1, 1998 compared to $7.5 million and $22.3 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 6.1% 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 nine-month percentage decreased to 5.8% from 6.1% for the same period last year. Operating earnings for the quarter ended August 1, 1998 were $19.1 million (10.8% of net sales) compared to $12.6 million (10.3% of net sales) for the corresponding period in 1997. Operating earnings for the nine months ended August 1, 1998 were $50.8 million (10.7% of net sales) compared to $36.4 million (9.9% of net sales) for the nine 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 nine months ended August 1, 1998 of $4.1 million and $9.4 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 nine months of 1998 compared to 38% 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: Nine Months 1998 1997 (Dollars in millions) Net cash provided by operating activities $ 49.7 $ 27.7 Net cash used for investing activities $(132.5) $ (18.0) Net cash provided by (used for) financing activities $ 85.3 $ (10.4) The Company continues to generate strong cash flows from operations, resulting from the 32% increase in net earnings in the first nine months of 1998 compared to the corresponding period of the prior year. Nine month operating cash flows provided by changes in working capital were a positive $5.4 million as a result of improved management of accounts receivables, inventories, and accounts payable. 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 nine months ended August 1, 1998 and August 2, 1997 were $10.6 million and $8.5 million, respectively. The Company anticipates total capital expenditures of approximately $18 million for fiscal 1998, including additions for capacity expansions at the Polycom facilities acquired in 1998. Also impacting the first half 1998 cash used for investing activities was the final payment of $3.1 million on the Preferred Plastics acquisition to Echlin in January 1998 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. 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. The cash flows provided by financing activities were $85.3 million for the first nine months of 1998. The primary activities were the bank borrowings of $122.0 million for the Polycom Huntsman acquisition, repayment of debt of $26.0 million net of the $3.1 million borrowed to fund the final installment due to Echlin, cash dividend payments of $4.8 million, and purchases of treasury stock of $5.9 million net of proceeds from stock options exercised of $1.6 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 August 1, 1998, the Company had total borrowings under the bank credit facility of $97.6 million at a weighted average rate of 7.0% 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 Company has already modified substantially all of its computer systems to be Year 2000 compliant. In addition, the Company has communicated with others with whom it does significant business to determine their Year 2000 compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 issues. The Company does not anticipate any significant costs, problems, or uncertainties associated with becoming Year 2000 compliant. 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 are subject to risk 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 A report on form 8-K/A , dated June 15, 1998, announcing the completion of the purchase of the stock of Polycom Huntsman, Inc. and its Subsidiaries ("Polycom"). Pursuant to Items 7(a)4 and 7(b)2 of Form 8-K, this amendment was submitted to file certain financial statements of the business acquired and pro forma financial statements related to the Polycom acquisition. 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: August 28, 1998 /s/ Bradley B. Buechler Bradley B. Buechler President and Chief Executive Officer (Principal Executive Officer) Date: August 28, 1998 /s/ Randy C. Martin Randy C. Martin Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer)