Securities and Exchange Commission Washington, D.C. 20549 Gentlemen: Pursuant to the requirements of the Securities Exchange Act of 1934, we are transmitting herewith the attached Form 10-Q. Sincerely, SPARTECH CORPORATION /s/ Randy Martin Randy Martin Vice President - Finance and Chief Financial Officer 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 30, 1999 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 shares outstanding as of January 30, 1999: Common Stock, $.75 par value per share 26,945,382 SPARTECH CORPORATION AND SUBSIDIARIES INDEX January 30, 1999 PART I. FINANCIAL INFORMATION PAGE CONSOLIDATED CONDENSED BALANCE SHEET - as of January 30, 1999 and October 31, 1998 3 CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS - for the quarter ended January 30, 1999 and January 31, 1998 4 CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS - for quarter ended January 30, 1999 and January 31, 1998 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. 31, 1999 (unaudited) Oct. 31, 1998 Current Assets Cash and equivalents $ 6,024 $ 7,247 Receivables, net 92,430 91,631 Inventories 69,417 64,859 Prepayments and other 10,036 9,459 Total Current Assets 177,907 173,196 Property, Plant and Equipment 271,094 263,626 Less accumulated depreciation 61,527 56,739 Net Property, Plant and Equipment 209,567 206,887 Goodwill 150,599 148,668 Other Assets 4,921 4,558 $542,994 $533,309 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 8,817 $ 8,948 Accounts payable 58,049 59,578 Accrued liabilities 32,917 32,466 Total Current Liabilities 99,783 100,992 Long-Term Debt, Less Current Maturities 246,919 245,272 Other Liabilities 34,660 33,449 Total Long-Term Liabilities 281,579 278,721 Shareholders' Equity Common stock, 27,550,107 shares issued in 1999 and 1998 20,663 20,663 Contributed capital 97,654 99,407 Retained earnings 57,459 50,185 Treasury stock, at cost, 604,725 shares in 1999 and 688,917 shares in 1998 (10,081) (11,875) Cumulative translation adjustments (4,063) (4,784) Total Shareholders' Equity 161,632 153,596 $542,994 $533,309 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. 30, 1999 Jan. 31, 1998 Net Sales $167,801 $133,081 Costs and Expenses Cost of sales 137,604 110,601 Selling and administrative 10,125 8,161 Amortization of intangibles 997 541 148,726 119,303 Operating Earnings 19,075 13,778 Interest 3,851 2,345 Earnings Before Income Taxes 15,224 11,433 Income Taxes 6,067 4,412 Net Earnings $ 9,157 $ 7,021 Net Earnings Per Common Share: Basic $ .34 $ .27 Diluted $ .32 $ .25 Weighted Average Number of Shares Used in Computing Net Earnings per Common Share: Basic 26,896 26,398 Diluted 28,748 28,101 Dividends Per Common Share $ .07 $ .06 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. 30, 1999 Jan. 31, 1998 Cash Flows from Operating Activities Net earnings $ 9,157 $ 7,021 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 5,667 3,546 Change in current assets and liabilities (1,171) (6,089) Other, net 897 677 Net cash provided by operating activities 14,550 5,155 Cash Flows from Investing Activities Capital expenditures (4,956) (2,056) Business Acquisitions (10,437) (3,095) Retirement of assets 20 32 Net cash used for investing activities (15,373) (5,119) Cash Flows from Financing Activities Bank Borrowings for Business Acquisitions 10,437 3,095 Net borrowings (payments) on revolving credit facilities (8,037) 55 Payments on bonds and leases (962) (658) Cash dividends on common stock (1,883) (1,589) Stock options exercised 480 329 Treasury stock acquired (439) (2,341) Net cash used for financing activities (404) (1,109) Effect of exchange rate changes on cash and equivalents 4 (58) Decrease In Cash and Equivalents (1,223) (1,131) Cash and Equivalents At Beginning Of Period 7,247 6,058 Cash and Equivalents At End Of Period $ 6,024 $ 4,927 See accompanying notes to consolidated financial statements. SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) NOTE A - Basis of Presentation The accompanying consolidated financial statements include the accounts of Spartech Corporation and its wholly owned subsidiaries (the "Company"). These financial statements have been prepared on a condensed basis and, accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements contain all adjustments (consisting solely of normal recurring adjustments) and disclosures necessary to make the information presented therein not misleading. These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes thereto included in the Company's October 31, 1998 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 30, 1999 and October 31, 1998 are comprised of the following components: 1999 1998 Raw materials $ 45,987 $ 42,016 Finished goods 23,430 22,843 $ 69,417 $ 64,859 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 30, 1999 and January 31, 1998 is as follows: 1999 1998 Cash paid for: Interest $ 1,579 $ 61 Income taxes $ 312 $ 304 NOTE D - Commitments and Contingencies The Company currently has no litigation with respect to any environmental matters. Note E - Comprehensive Income On November 1, 1998 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130--"Reporting Comprehensive Income". Comprehensive Income is an entities change in equity during the period from transactions, events and circumstances from non-owner sources. A summary of the components of Total Comprehensive Income follows: QUARTER ENDED Jan. 30, 1999 Jan. 31, 1998 Net Earnings $ 9,157 $ 7,021 Foreign currency translation adjustments 721 (1,046) Total Comprehensive Income $ 9,878 $ 5,975 The Company's other comprehensive income consists solely of foreign currency translation adjustments. Accumulated other comprehensive income is represented on the balance sheet as cumulative translation adjustments as of January 30, 1999 and October 31, 1998, respectively. Note F - Acquisitions On January 7, 1999 the Company completed its acquisition of the net assets of Lustro Plastics Company, a custom sheet and rollstock extruder with annual sales of approximately $28 million. The total purchase price was approximately $10.4 million, including estimated costs of the transaction. The fair value of assets acquired, including $2.8 million of goodwill, and liabilities assumed were $13.9 million and $3.5 million, respectively. The acquisition was funded through the Company's existing bank credit facility. 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 30, 1999 increased by 26% to $167.8 million, as compared to $133.1 million during the same quarter last year, and operating earnings rose by 38% to $19.1 million, from $13.8 million reported for the first quarter of 1998. First quarter 1999 net earnings were $9.2 million, or $.32 per diluted share, compared to $7.0 million, or $.25 per diluted share, reported in 1998. Net sales of the Extruded Sheet & Rollstock group increased to $105.0 million, with a negative 7% price/product mix change being offset by a 7% increase in base volume. Sales to the growing packaging and recreation/leisure markets led the solid increase in base volume for the sheet group. Net sales of the Color & Specialty Compound group grew to $50.5 million for the first quarter as the impact of our 1998 midyear acquisitions of both Polycom Huntsman and Plasticolour were realized. Base volume increased by 8% while price/mix related changes had a negative 12% effect on sales. The Molded & Profile Products segment benefited from the October 1998 acquisition of Anjac-Doron. Sales for the group were up 17% to $12.3 million as compared to $10.5 million for the same three-month period last year. Cost of sales increased 24% to $137.6 million for the quarter ended January 30, 1999, compared with $110.6 million for the same period of 1998, but decreased to 82.0% of net sales for 1999 from 83.1% for 1998. The more favorable cost of sales percentage in 1999 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 $10.1 million for the first quarter of 1999 increased when compared to $8.2 million for the similar period in 1998 but decreased to 6.0% of net sales for 1999 from 6.1% in 1998. Operating earnings for the quarter ended January 30, 1999 were $19.1 million (11.4% of net sales) compared to $13.8 million (10.4% of net sales) for the corresponding period in 1998. These gains in operating earnings were achieved through the increased sales levels, improved production efficiencies and the declines in raw material prices, discussed above. Interest expense of $3.9 million for the quarter ended January 30, 1999 increased from $2.3 million for the same period in 1998 as a result of borrowings related to the Polycom Huntsman, Plasticolour, and Anjac-Doron acquisitions completed in 1998. The Company's effective tax rate was 39.9% for the first quarter of 1999 compared to 38.6% in 1998. Environmental and Inflation The Company is subject to various laws and regulations governing employee safety and 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 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 which 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 1999. 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 1999 1998 (Dollars in millions) Net cash provided by operating activities $ 14.6 $ 5.2 Net cash used for investing activities $ (15.4) $ (5.1) Net cash used for financing activities $ (0.4) $(1.1) The Company continues to generate strong cash flows from operations, resulting from the 30% increase in net earnings in the first quarter 1999 compared to the corresponding period of the prior year. Operating cash flows used for changes in working capital totaled $1.2 million in the quarter ended January 30, 1999. 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 30, 1999 were $5.0 million as compared to $2.1 million for the first quarter of 1998. The Company anticipates total capital expenditures of approximately $22 million for fiscal 1999 The cash flows used by financing activities were $.4 million for the first quarter of 1999. The primary activity was the bank borrowings of $10.4 million for the Lustro Plastics Company acquisition, net repayment of debt of $9.0 million, and cash dividend payments of $1.9 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 January 30, 1999 the company had total borrowings under the bank credit facility of $102.1 million at a weighted average rate of 6.4% 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. The Company has only needed to expend a limited amount on specific Year 2000 related issues. The Company does not anticipate any significant costs, problems, or uncertainties associated with any additional Year 2000 compliance efforts. The implementation of new information systems and other software and hardware replacements / upgrades take place in the normal course of our business. Our Year 2000 readiness has been enhanced by these efforts without the incurrence of significant incremental costs. The Company could potentially experience disruption to some aspects of its operations as a result of noncompliant systems utilized by unrelated third party governmental and business entities. The Company continues to communicate 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. These plans will evolve as 1999 progresses and more information is gained on the Year 2000 readiness of any of our third party suppliers. The Company is in the process of developing contingency plans to ensure critical operations continue uninterrupted or mitigates the impact of any Year 2000 failures. The information presented herein contains certain forward-looking statements, defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements represent our judgement relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. They are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from the information contained in the forward-looking statements due to a number of factors, including changes in the availability and cost of raw materials, changes in the economy in general, unanticipated developments and competitive factors in the plastics industry that may prevent us from competing successfully in existing or new markets, and our ability to manage our growth effectively. Investors are also 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: February 26, 1999 /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) EXHIBIT 11 SPARTECH CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (In thousands, except per share data) QUARTER ENDED January 30, January 31, 1999 1998 NET EARNINGS Basic and diluted net earnings $ 9,157 $ 7,021 WEIGHTED AVERAGE SHARES OUTSTANDING Basic weighted average common shares outstanding 26,896 26,398 Add: Shares issuable from assumed exercise of options 1,852 1,703 Diluted weighted average shares 28,748 28,101 outstanding NET EARNINGS PER SHARE: Basic $ .34 $ .27 Diluted $ .32 $ .25