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 July 31, 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.)
120 South Central Avenue, Suite 1700, 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 July 31, 1999:
Common Stock, $.75 par value per share 27,291,019
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
July 31, 1999
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of July 31, 1999 and October 31, 1998 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter and nine months
ended July 31, 1999 and August 1, 1998 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for nine months ended
July 31, 1999 and August 1, 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 14
SIGNATURES 15
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Amounts in thousands, except share amounts)
ASSETS
July 31, 1999
(unaudited) Oct. 31, 1998
Current Assets
Cash and equivalents $ 8,247 $ 7,247
Receivables, net 106,520 91,631
Inventories 68,427 64,859
Prepayments and other 8,858 9,459
Total Current Assets 192,052 173,196
Property, Plant and Equipment 300,340 263,626
Less accumulated depreciation 70,762 56,739
Net Property, Plant and Equipment 229,578 206,887
Goodwill 161,884 148,668
Other Assets 7,005 4,558
$590,519 $533,309
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 8,762 $ 8,948
Accounts payable 70,062 59,578
Accrued liabilities 36,022 32,466
Total Current Liabilities 114,846 100,992
Long-Term Debt, Less Current Maturities 206,052 245,272
Other Liabilities 38,132 33,449
Total Long-Term Liabilities 244,184 278,721
Company-obligated manditorily redeemable
convertible preferred securities of
Spartech Capital Trust holding solely
6.5% convertible subordinated debentures 50,000 -
Shareholders' Equity
Common stock, 27,684,852 and 27,550,107
shares issued in 1999 and 1998 20,756 20,663
Contributed capital 95,714 99,407
Retained earnings 76,174 50,185
Treasury stock, at cost, 393,833 shares
in 1999 and 688,917 shares in 1998 (6,641) (11,875)
Cumulative translation adjustments (4,514) (4,784)
Total Shareholders' Equity 181,489 153,596
$590,519 $533,309
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited and dollars in thousands, except per share data)
QUARTER ENDED NINE MONTHS ENDED
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
Net Sales $201,802 $177,702 $566,540 $476,490
Costs and Expenses
Cost of sales 166,451 147,512 465,926 395,902
Selling and administrative 11,325 10,059 32,735 27,588
Amortization of intangibles 1,087 989 3,085 2,239
178,863 158,560 501,746 425,729
Operating Earnings 22,939 19,142 64,794 50,761
Interest 3,278 4,108 10,670 9,448
Distributions on
preferred securities of
Spartech Capital Trust 813 - 1,322 -
Earnings Before Income Taxes 18,848 15,034 52,802 41,313
Income Taxes 7,433 6,014 21,125 16,409
Net Earnings $ 11,415 $ 9,020 $ 31,677 $ 24,904
Net Earnings Per Common Share:
Basic $ .42 $ .33 $ 1.17 $ .93
Diluted $ .39 $ .31 $ 1.09 $ .87
Dividends Per Common Share $ .07 $ .06 $ .21 $ .18
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
July 31, 1999 August 1, 1998
Cash Flows From Operating Activities
Net earnings $ 31,677 $ 24,904
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 17,302 13,217
Change in current assets and
liabilities, net of effects of
acquisitions 3,538 5,411
Other, net 3,582 6,153
Net cash provided by operating
activities 56,099 49,685
Cash Flows From Investing Activities
Capital expenditures (16,281) (10,594)
Final installment for Echlin - (3,095)
Retirement of assets 226 75
Business Acquisitions (44,166) (128,933)
Net cash used for investing activities (60,221) (142,547)
Cash Flows From Financing Activities
Bank borrowings for business acquisitions 44,166 121,988
Net borrowings (payments) on revolving
credit facilities (31,053) (24,688)
Payments on bonds and leases (3,889) (1,304)
Issuance of common stock 7,613 10,000
Cash dividends on common stock (5,688) (4,817)
Stock options exercised 3,275 1,568
Treasury stock acquired (9,254) (7,430)
Other, net - -
Net cash provided by
financing activities 5,170 95,317
Effect of exchange rate changes on cash
and equivalents (48) (140)
Increase In Cash and Equivalents 1,000 2,315
Cash and Equivalents At Beginning Of Period 7,247 6,058
Cash and Equivalents At End Of Period $ 8,247 $ 8,373
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
Our consolidated financial statements include the accounts of Spartech
Corporation and its wholly owned subsidiaries. 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 our October
31, 1998 Annual Report on Form 10-K.
Our 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 July 31, 1999 and October 31, 1998 are comprised of the
following components:
1999 1998
Raw materials $ 41,939 $ 42,016
Finished goods 26,488 22,843
$ 68,427 $ 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
nine months ended July 31, 1999 and August 1, 1998 is as follows:
1999 1998
Cash paid for:
Interest $ 10,161 $ 7,127
Income taxes $ 15,397 $ 7,532
Note D - Comprehensive Income
On November 1, 1998 we adopted Statement of Financial Accounting Standards
(SFAS) No. 130--"Reporting Comprehensive Income". Comprehensive Income is an
entity's change in equity during the period from transactions, events and
circumstances from non-owner sources. A summary of our components of Total
Comprehensive Income follows:
QUARTER ENDED NINE MONTHS ENDED
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
Net Earnings $ 11,415 $ 9,020 $ 31,677 $ 24,904
Foreign currency
translation adjustments (1,569) (1,616) 270 (2,543)
Total Comprehensive Income $ 9,846 $ 7,404 $ 31,947 $ 22,361
Our 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 July 31, 1999
and October 31, 1998.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Note E - Convertible Preferred Securities
On March 5, 1999 we issued $50 million of 6.5% convertible subordinated
debentures to Spartech Capital Trust, a Delaware trust we control. We used the
proceeds to repay borrowings under our bank credit facility. The debentures are
the sole asset of the Trust and eliminate in consolidation. The Trust purchased
the debentures with the proceeds of a $50 million private placement of 6.5%
convertible preferred securities of the Trust having an aggregate liquidation
preference of $50 million and guaranteed by Spartech. The debentures:
- Are convertible along with the Trust preferred securities, at the
option of the preferred security holders, into shares of our common
stock at a conversion price equivalent to $30.55 per share of common
stock, for a total of 1,636,661 shares;
- Are redeemable along with the Trust preferred securities, at
Spartech's option on or after March 1, 2002, at a price equal to
104.56% of the principal amount plus accrued interest, declining
annually to a price equal to the principal amount plus accrued
interest by March 1, 2009; and
- Mature and are payable, along with the Trust preferred securities, on
March 1, 2014 if they have not been previously redeemed or converted.
Note F - Aquisitions
On May 24, 1999 we completed our acquisition of the net assets of the
Alltrista Plastic Packaging Division of Alltrista Corporation, a well-
established manufacturer of extruded sheet & rollstock packaging materials based
in Muncie, Indiana. This operation, which has annual sales approaching $30
million, was added to our Extruded Sheet & Rollstock group, giving it now 19
production facilities. The cash purchase price of approximately $34 million was
funded through our existing bank credit facility.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net sales were $201.8 million and $566.5 million for the quarter and nine
months ended July 31, 1999, representing a 14% and 19% increase from the similar
periods in 1998. These results include an increase in pounds sold by our
Extruded Sheet & Rollstock and Color & Specialty Compounds Groups, the
acquisition of Alltrista Plastic Packaging (May 24, 1999), the acquisition of
Lustro Plastics Company (January 7, 1999), and the acquisition of Polycom
Huntsman, Inc. (March 31, 1998).
Our Extruded Sheet & Rollstock Group generated sales of $363.6 million
during the first nine months of 1999 compared to $339.9 million in the first
nine months of 1998. Base volume increased by 7% for the first nine months, as
a result of strong sales to the packaging and transportation markets. The
recent acquisitions of Lustro Plastics and Alltrista Plastic Packaging added
another 5% to sales for the first nine months. Price and product mix changes
had a negative 5% effect on sales during the first nine months of 1999. Sales
increased 54% for the Color & Specialty Compounds group to $162.3 million in
first nine months of 1999, including incremental revenues of approximately $53.7
million generated by our 1998 acquisitions of Polycom Huntsman and Plasticolour.
The group's growth in base volume of 9% was partially offset by a 5% price/mix
decline in sales dollars. Our Molded & Profile Products group generated $40.6
million in sales for the first nine months of 1999. The approximate 31%
increase, from the prior year, was primarily due to the October 1998 acquisition
of Anjac-Doron.
Cost of sales increased to $166.5 million for the quarter ended July 31,
1999, compared with $147.5 million for the same period in 1998, but decreased to
82.5% of net sales for 1999 from 83.0% for 1998. The cost of sales percentages
were 82.2% for the nine months ended July 31, 1999 and 83.1% for the similar
period in 1998. Our more favorable cost of sales percentages in 1999 represents
improved production efficiencies, partially offset by an increase in
depreciation as a result of capital expenditures incurred during the last 24
months.
Selling and administrative expenses were $11.3 million and $32.7 million
for the quarter and nine months ended July 31, 1999 compared to $10.1 million
and $27.6 million for the similar periods in 1998. On a percentage of net sales
basis, selling and administrative costs for the quarter ended July 31, 1999 were
at 5.6% as compared to 5.7% for the same period in 1998. The 1999 nine-month
percentage was unchanged from the prior year at 5.8%.
Operating earnings for the quarter ended July 31, 1999 were $22.9 million
(11.4% of net sales) compared to $19.1 million (10.8% of net sales) for the
corresponding period in 1998. Operating earnings for the nine months ended July
31, 1999 were $64.8 million (11.4% of net sales) compared to $50.8 million
(10.7% of net sales) for the nine months in 1998. These gains in operating
earnings were achieved through the increased sales levels, improved production
efficiencies and cost containment efforts.
Interest expense and Distributions on Preferred Securities Distributions
for the quarter and nine months ended July 31, 1999 of $4.1 million and $12.0
million increased from the same periods in 1998 as a result of borrowings
related to the Polycom Huntsman, Plasticolour, Anjac-Doron, Lustro Plastics, and
Alltrista Plastic Packaging.
Our effective tax rate was approximately 40% for the quarter and nine
months of 1999 and 1998.
Environmental
We operate under various laws and regulations governing employee safety,
the quantities of specified substances that may be emitted into the air,
discharged into waterways, and otherwise disposed of on and off our properties.
We do not anticipate that future expenditures for compliance with these laws and
regulations will have a material effect on its capital expenditures, earnings,
or competitive position.
The plastic resins we use in our production process are crude oil or
natural gas derivatives which are available from a number of domestic and
foreign suppliers. Accordingly, our raw materials are only somewhat affected by
supply, demand, and price trends of the petroleum industry. The pricing of
resins tends to be independent of crude oil or natural gas except in periods of
anticipated or actual shortages. We are 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
Our primary sources of liquidity have been cash flows from operating
activities and borrowings from third parties. Our principal uses of cash have
been to support our operating activities, invest in capital improvements, and
finance strategic acquisitions. Our cash flows for the periods indicated are
summarized as follows:
Nine Months
1999 1998
(Dollars in millions)
Net cash provided by
operating activities $ 56.1 $ 49.7
Net cash used for
investing activities $ (60.2) $ (142.5)
Net cash provided by (used for)
financing activities $ 5.2 $ 95.3
Increase (Decrease) in cash and equivalents $ 1.0 $ 2.3
We continue to generate strong cash flows from operations, resulting from the
27% increase in net earnings in the first nine months of 1999 compared to the
corresponding period of the prior year, net of the impact of changes in working
capital. Operating cash flows generated by changes in working capital totaled
$3.5 million in the nine months ended July 31, 1999. This was primarily the
result of improved inventory and accounts payable management.
Our 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 July 31, 1999
were $16.3 million as compared to $10.6 million for the similar period in 1998.
We anticipate total capital expenditures of approximately $23 million for fiscal
1999, including expenditures for the most recent acquisitions.
The cash flows generated by financing activities were $5.2 million for the
first nine months of 1999. The primary activity was the bank borrowings of
$44.2 million for acquisitions, net repayment of debt of $34.9 million, cash
dividend payments of $5.7 million, and purchases of treasury stock, net of
options exercised, of $6.0 million. In addition, $7.6 million was generated
from the sale of 345,000 shares of common stock upon completion of a secondary
public offering June 8, 1999.
Financing Arrangements
On March 5, 1999 we issued $50 million of 6.5% convertible subordinated
debentures to Spartech Capital Trust, a Delaware trust we control. We used the
proceeds to repay borrowings under our bank credit facility. The debentures are
the sole asset of the Trust and eliminate in consolidation. The Trust purchased
the debentures with the proceeds of a $50 million private placement of 6.5%
convertible preferred securities of the Trust having an aggregate liquidation
preference of $50 million and guaranteed by Spartech. The debentures:
- Are convertible along with the Trust preferred securities, at the
option of the preferred security holders, into shares of our common
stock at a conversion price equivalent to $30.55 per share of common
stock, for a total of 1,636,661 shares;
- Are redeemable along with the Trust preferred securities, at
Spartech's option on or after March 1, 2002, at a price equal to
104.56% of the principal amount plus accrued interest, declining
annually to a price equal to the principal amount plus accrued
interest by March 1, 2009; and
- Mature and are payable, along with the Trust preferred securities, on
March 1, 2014 if they have not been previously redeemed or converted.
On June 8, 1999, we announced the completion of a secondary public offering
of 2,328,968 previously issued and outstanding shares of our common stock.
These shares represented all the common stock of the Company owned by two
selling shareholders, TCW Group, Inc. and Huntsman International Corporation.
In addition to the shares offered by the selling shareholders, we sold the
underwriters an additional 345,000 shares to cover over-allotments. The stock
was sold to the public at $24.00 per share. The offering was led by an
underwriting group managed by First Analysis Securities Corporation, EVEREN
Securities, Inc., and Janney Montgomery Scott Inc. The net proceeds received by
the Company from the sale of the over-allotment shares, $7.6 million, was used
to repay bank credit facility borrowings in support of future strategic
expansions.
We anticipate that cash flow from operations, together with the financing
and borrowings under our bank credit facility, will satisfy our working capital
needs, regular quarterly dividends, and planned capital expenditures for the
next year.
Year 2000
We have instituted a plan to help ensure that we have no material business
interruptions related to Year 2000 issues. The plan consists of evaluation,
prioritization, analysis, testing, correction, and contingency planning. We have
completed the testing and correction phases with regard to substantially all of
our systems. Our current state of readiness is:
- Major Business Systems. Our major business systems include all
financial, sales, purchasing, product manufacturing, inventory management,
and logistics modules. We have performed formal testing on all of these
major business systems with no transitional problems being identified. We
will continue to monitor these systems for any new, unforeseen issues that
may arise.
- Information Technology (IT) Systems Infrastructure. We have completed
over 95% of the evaluation and upgrade of our existing IT systems
infrastructure company-wide. Areas that we have evaluated include
workstations, servers, network hardware, operating software, and
application software. We have not identified any significant issues to
date, and our target completion date is October 1999.
- Non-IT Systems. We are over 95% complete in evaluations of compliance
with respect to non-IT systems such as process control equipment,
analytical equipment, quality systems, HVAC systems, security systems and
material handling systems. We have not identified any significant issues
to date, and our target completion date is October 1999.
- Third Party Issues. We have surveyed our key supply chain business
partners including key raw material suppliers, process control equipment
providers, and key providers of utilities, telecommunications, waste
management and transportation. We are over 95% complete with this process,
with no indications that the supply of key materials or services will be
interrupted by Year 2000 related problems. The surveying process is
expected to be complete by October 1999.
We have not incurred, nor do we expect to incur, any material costs related
to our Year 2000 compliance efforts. Amounts spent on information technology,
and non-IT equipment upgrades, have been planned in accordance with continual
efforts to upgrade our capabilities.
At this time, we believe that all major Year 2000 software, hardware, and
business-related issues have been identified. In addition, substantially all
internal Year 2000 necessary actions have occurred though normal maintenance and
upgrade plans. However, due to the general uncertainty inherent in the Year 2000
issue we are unable to determine with certainty whether the consequences of Year
2000 failures will have a material impact on our financial position, results of
operations or cash flows. We believe the upgrades to systems and software that
have occurred should reduce the possibility of significant interruptions of
normal operations. However, we may experience problems due to Year 2000
difficulties of others. We may experience either lost revenues or profits if any
of our major customers experience Year 2000 problems or if a mass interruption
to our supply chain occurs from the lack of readiness of our suppliers. In
addition, our customers or suppliers or our own production capabilities could
also be adversely affected in similar ways due to disruptions to the
transportation network or public utilities.
We are in the process of developing contingency plans for the critical
aspects of our business. These plans will consist of manual back-up in case of
internal IT or non-IT systems failures, identification of alternative suppliers
for our key supply chain channels, providing IT disaster recovery resources, and
ensuring extra staffing is available near and over the Year 2000 transition.
These plans will be completed and ready for implementation by November 1999.
Other
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. Our 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 or the plastics industry in general, other unanticipated
events 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 our Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 6 (a). Exhibits
10 Employment Agreement between Jeffrey D. Fisher and
Spartech Corporation dated as of April 30, 1999
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 May 25, 1999, announcing the
Company's Second Quarter and Six Months 1999 Operating Results,
filed on May 15, 1999
A report on Form 8-K/A, dated March 31, 1998, amending the
Company's Form 8-K filed on April 14, 1998, and submitted to
adjust the pro forma financial statements related to the Polycom
acquisition in connection with a Form S-3 filing
A report on Form 8-K/A, dated March 31, 1998, providing a
modified Report of Independent Auditors for Polycom SA, filed
May 27, 1999
A report on Form 8-K, dated May 14, 1999, announcing the
acquisition of the net assets of the Alltrista Plastic Packaging
Division of Alltrista Corporation, filed on May 17, 1999
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 31, 1999 /S/ Bradley B. Buechler
Bradley B. Buechler
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
Date: August 31, 1999 /S/ Randy C. Martin
Randy C. Martin
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)