[SPARTECH]
COMPANY CONTACTS:
George A. Abd Randy C. Martin
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
(314) 721-4242 (314) 721-4242
FOR IMMEDIATE RELEASE
TUESDAY, JUNE 7, 2005
SPARTECH CORPORATION ANNOUNCES
SECOND QUARTER FISCAL 2005 SALES AND EARNINGS
-----------------------
ST. LOUIS, JUNE 7, 2005 - Spartech Corporation (NYSE:SEH) announced today its
operating results for its second quarter ended April 30, 2005.
SECOND QUARTER 2005 HIGHLIGHTS:
- NET SALES INCREASED BY 31% TO $377.7 MILLION, PRIOR YEAR
ACQUISITION CONTRIBUTING 11%
- CASH FLOW FROM OPERATIONS FOR THE SECOND QUARTER OF 2005 WAS
$20.8 MILLION BETTER THAN THE SECOND QUARTER OF 2004
- NET INCOME EXCLUDING THE EFFECT OF THE NON-RECURRING ITEMS WAS
$11.3 MILLION OR $.35 PER DILUTED SHARE COMPARED TO $13.5
MILLION OR $.41 PER DILUTED SHARE IN 2004
- REPORTED OPERATING EARNINGS WERE $6.3 MILLION OR $24.3 MILLION
EXCLUDING NON-RECURRING ITEMS (FIXED ASSET CHARGES AND
RESTRUCTURING COSTS) COMPARED TO $28.1 IN 2004
OVERVIEW OF RESULTS
Sales for the second quarter of 2005 were $377.7 million, a 31% increase
compared to the same period in 2004. This total is a record quarterly sales
level for the Company that was aided by an 11% increase from the late 2004
acquisition of VPI and a strong price/mix impact following the significant resin
price increases over the last twelve months. Operating earnings reported for the
second quarter of 2005 were $6.3 million compared to $28.1 million in the prior
year quarter. Included in the operating earnings for the quarter was $18.0
million of non-recurring charges related to the complete physical inventory of
our fixed assets of $10.4 million and the plant restructuring activities of $7.6
million ($17.5 million of these items were non-cash asset write offs). A net
loss of $80 thousand was reported for the second quarter of 2005 with no diluted
earnings per share. The net earnings excluding the non-recurring items of $11.3
million after tax were $.35 per diluted share for the second quarter of 2005.
Net earnings for the comparable period of 2004 were $13.5 million or $.41 per
diluted share.
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SPARTECH CORPORATION
SECOND QUARTER 2005 EARNINGS
ADD 1
Commenting on the results, Mr. George A. Abd, President and CEO stated, "While
our operational performance in the second quarter improved significantly from
the first quarter of this year, the results remained disappointing. Components
of the performance were affected by external and internal factors. Externally,
while resin prices saw some decreases late in the second quarter from the peak
levels early in the period, we still experienced resin prices on average over
30-40% higher than the comparable prior year period. Some of the resin price
reductions are related to slowing demand in certain markets, namely automotive,
recreation & leisure and film. While the packaging market remained strong for
us, it was not as strong as expected coming into the quarter, and building &
construction was also slightly weaker than expected.
The key internal factor affecting performance remained the conversion costs of
our business. The conversion costs per pound in Q2 were $0.013 per pound higher
than the same period last year. These costs did improve by $0.02 per pound
compared to our first quarter, but a renewed and vigorous attention to cost
control and reduction is necessary, combined with the benefits of the plant
consolidations announced on February 8, to reach the conversion cost levels at
which our usiness should be operating. This is not a short term project but will
be central to the mission of the company going forward."
Mr. Abd further stated, "I am disappointed that a weakness in internal controls
existed that resulted in the identification of over $7 million dollars of
incorrectly accounted for fixed assets. The process has been completed to
identify, inventory and tag all of our fixed assets and procedures have been put
in place to periodically audit all of the company's fixed assets moving forward.
These errors occurred during past plant shutdowns and asset transfers and new
procedures have been put in place to prevent this issue from occurring again.
This weakness was identified as a result of our Sarbanes-Oxley compliance
process and the correction will be tested and audited as we move forward.
We have made substantial progress in implementing the announced plant
restructurings to sell two businesses and consolidate several plants. Both of
these events had a significant impact on our operating results for the quarter
and we have provided a table summary of these activities and the underlying
operating results by segment for comparison at the end of this release. Despite
these interruptions and the changes in management during the second quarter of
2005, the operating results excluding the non-recurring items did represent a
solid improvement over Q1. This is a good basis upon which to begin for the
remainder of the year but unacceptable as we move forward. Our focus will be on
creating the world class cost structure necessary to realize the profit
potential that exists within our company."
SEGMENT RESULTS
CUSTOM SHEET & ROLLSTOCK--Net sales in our Custom Sheet & Rollstock segment were
$238.1 million in the second quarter of fiscal 2005, an increase of 30% from the
$183.4 million produced in the same three month period of 2004. This sales
increase was attributable to our late fiscal 2004 acquisition of VPI (8%), the
impact of price/mix changes driven by resin prices (19%), and 3% internal volume
growth. This growth in pounds sold was primarily driven by strong demand in the
Packaging and Sign & Advertising markets. The segment's operating earnings
excluding non-recurring items declined $1.8 million or 9% due to higher
conversion costs which included write downs of inventory and operating losses
for assets held for sale that were not classified as non-recurring of $.6
million. The non-recurring items included in this segment included $3.0 million
of restructuring costs (primarily property, plant and equipment and goodwill
impairment write downs on four operations held for sale) and $6.5 million for
fixed asset charges.
(IN MILLIONS) SECOND QUARTER FIRST SIX MONTHS
----------------------- ------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net Sales $ 238.1 $ 183.4 $ 427.8 $ 338.8
========= ========= ========= =========
Operating Earnings, excluding
Non-recurring $ 19.3 $ 21.1 $ 26.9 $ 35.6
========= ========= ========= =========
Operating Earnings $ 9.8 $ 21.1 $ 17.4 $ 35.6
========= ========= ========= =========
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SPARTECH CORPORATION
SECOND QUARTER 2005 EARNINGS
ADD 2
COLOR & SPECIALTY COMPOUNDS--The Company's Color & Specialty Compounds group saw
its sales increase sharply to $113.5 million or 36% greater than last year's
$83.2 million. Approximately 22% of this increase was the result of the
Company's VPI acquisition, with 22% driven by price/mix changes, and an 8%
decline in internal growth. The decline in internal pounds sold reflects a
decrease in sales of toll-compound material to one customer in the electronics
market and special-order sales to another customer that occurred in the second
quarter of 2004 but did not recur in the current year quarter. Excluding the
decrease in sales volume to these two customers, internal volume grew 2%.
However, operating earnings excluding non-recurring items declined by about 4%
due to higher conversion costs including freight and utilities increases. The
non-recurring items included in this segment included $2.7 million of
restructuring costs (consisting of property, plant and equipment impairment
write downs on two properties held for sale) and $1.7 million for fixed asset
charges.
(IN MILLIONS) SECOND QUARTER FIRST SIX MONTHS
--------------------- ---------------------
2005 2004 2005 2004
------ ------- ------ ------
Net Sales $113.5 $ 83.2 $210.5 $154.5
====== ======= ====== ======
Operating Earnings, excluding
Non-recurring $ 7.2 $ 7.5 $ 12.9 $ 13.7
======== ======== ======= =======
Operating Earnings $ 2.8 $ 7.5 $ 8.5 $ 13.7
======== ======== ======== =======
ENGINEERED PRODUCTS--Our Engineered Products segment (formerly the Molded &
Profile Products segment, see caption later in this release) produced its second
consecutive quarterly sales increase of 20% or more in the second quarter of
2005 - $26.1 million compared to $21.0 million in last year's second quarter.
New customers in lawn & garden added by the wheels unit produced the bulk of
this increase. Operating earnings, totaling $1.8 million for the group,
performed significantly better than our first quarter 2005 performance of $.6
million but still behind last year's comparable quarter and well behind our
expectations as costs related to the start-up delays and the ramp-up of new
production capacity were higher than expected. Some of the benefit of better
efficiencies with the new customers will now push into 2006 as we are moving out
of the build season for this market. The non-recurring items included in this
segment included $1.9 million of restructuring costs (primarily property, plant
and equipment, goodwill impairments, and severance costs related to three
operations held for sale or disposed of during the second quarter of 2005) and
$1.6 million for fixed asset charges.
(IN MILLIONS) SECOND QUARTER FIRST SIX MONTHS
--------------------- ---------------------
2005 2004 2005 2004
------- ------- ------- -------
Net Sales $ 26.1 $ 21.0 $ 43.9 $ 35.8
======= ======= ======= =======
Operating Earnings, excluding
Non-recurring $ 1.8 $ 2.6 $ 2.4 $ 3.8
======== ======== ======== ========
Operating Earnings $ (1.7) $ 2.6 $ (1.1) $ 3.8
========= ======== ========= ========
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SPARTECH CORPORATION
SECOND QUARTER 2005 EARNINGS
ADD 3
CASH FLOW PERFORMANCE
Cash provided by operating activities was $22.3 million in the second quarter of
2005 due to focused efforts to collect vendor rebates, a decrease in inventory
balances by $5.9 million from the end of the first quarter of 2005 by reducing
pre-buys, and an increase in trade payables. These favorable changes were
somewhat offset by higher accounts receivable with the seasonally higher sales
in the second quarter of 2005. Cash flow from operations for the second quarter
of 2005 was $20.8 million better than the same three month period in 2004. We
have placed aggressive goals on our operating regions for further improvement in
cash flow.
NON-RECURRING ITEMS
As part of our Sarbanes-Oxley compliance efforts, we initiated a complete
physical count of the Company's property, plant and equipment in the first
quarter of fiscal 2005. Reconciliation of these counts to our books and records
during the second quarter of 2005 resulted in a $7.8 million write off of
equipment that no longer physically existed. The cause of the $7.8 million in
non-existing equipment was traced back to transactions for plant shutdowns and
transfers of equipment between plants and represented a weakness in our internal
controls which led to inaccurate recording of these transactions over a number
of years from the mid-1980's to more recent years. We have taken corrective
actions to institute new policies and procedures for the tracking of equipment
disposals and transfers of equipment between plants, including periodic physical
inventories of our property, plant and equipment at each location. During our
count process, we also identified another $2.6 million of equipment that exists,
but we have evaluated further and decided to liquidate now. A write down in
value for these items was combined with the non-existing assets write off noted
above for presentation as a total non-cash fixed asset charge on the income
statement of $10.4 million for the second quarter of 2005.
In the second quarter of fiscal 2005, the Company initiated several operational
changes to enhance short-term operating performance and longer term operating
efficiencies. The plan, involved the closing and sale of certain plant
facilities segregated into three categories: (i) the elimination of non-core
operations, (ii) the consolidation of capacity for similar operations, and (iii)
the transfer of synergistic or new business to other existing operations. The
effect of the plan is to reduce our operations by seven facilities with a total
cost of implementing these changes of approximately $7.6 million in the second
quarter of fiscal 2005. The charge was comprised of $5.7 million of non-cash
property, plant and equipment write-downs, $1.4 million of non-cash write-downs
for goodwill impairment and $.5 million of cash restructuring charges. The
property, plant and equipment write-downs represent the charges incurred to
write-down the related assets to fair market value, less costs to sell. Cash
restructuring charges represent severance, equipment move, relocation, and
clean-up related costs.
Collectively these non-recurring items resulted in $18.0 million of charges in
the second quarter of 2005 ($17.5 million of these items were non-cash asset
write offs).
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SPARTECH CORPORATION
SECOND QUARTER 2005 EARNINGS
ADD 4
SUBSEQUENT EVENTS
On May 26, 2005, we entered into a Retirement Agreement and Release (Retirement
Agreement) with the former Chairman, President, and Chief Executive Officer of
the Company, Bradley B. Buechler. The Retirement Agreement includes various
terms and conditions pertaining to payments and benefits paid to Mr. Buechler
under this Retirement Agreement that will result in a charge to our operating
earnings in the third quarter of fiscal 2005 of $3.7 million, after considering
items accrued up to the effective date and including $.8 million of non-cash
expenses.
In May 2005, we made a decision to sell an operating line that had been recently
added to the Color & Specialty Compound segment that is expected to result in a
fixed asset charge of approximately $3.5 million in the third quarter of 2005.
This decision was made possible as a result of the late 2004 VPI acquisition and
analysis of the capabilities and capacity within the newly acquired facility. We
are continuing to evaluate the Company's other operations which may lead to
further plant restructuring decisions, related exit costs, and property, plant
and equipment write downs for opportunities where additional short and longer
term efficiencies are deemed to be achievable. Any such charges would be
recorded when those decisions are made and a plan is initiated. We also decided
to terminate the lease on our Company plane which will result in termination
fees and selling expenses of $.8 million, but savings in operating costs upon
disposal of $1 million annually. Finally, we estimate that an additional $.5
million of severance and other exit costs will be incurred relating to the
completion of the plant consolidations that have been previously announced.
Collectively these actions are estimated to result in approximately $8.5 million
of non-recurring charges in the third quarter of 2005 ($.8 million of non-cash
expenses).
EARNINGS GUIDANCE
Our guidance for the Company's second half earnings per diluted share is $.42 to
$.45 after the effect of an estimated $.16 per diluted share in charges from the
subsequent events noted above or $.58 to $.61 per diluted share before the
effect of these items. Our revised guidance considers the effect of the actual
results and activities during the first half of fiscal 2005 and recent signals
of demand weakness in some of the key markets we serve. We have seen some volume
declines which could be temporary inventory destocking with the recent price
decreases in certain resins or could be indicative of a broader slowdown. We
have factored into our estimates a cautious view of the overall economic trends
as well as the significance of the time and effort involved in our short term
restructuring efforts during the remainder of this fiscal year. Finally, some of
the assets held for sale have been conservatively projected to continue to
generate costs or losses while we are attempting to sell during the remainder of
2005.
NON-GAAP MEASURES
Management believes that operating earnings, net income, and earnings per share
excluding non-recurring items, which are non-GAAP measurements, are meaningful
to investors because they provide a view of the Company with respect to ongoing
operating results. Non-recurring items (fixed asset charges and restructuring
costs) represent significant charges that are important to an understanding of
the Company's overall operating results in the periods presented. Such non-GAAP
measurements are not recognized in accordance with generally accepted accounting
principles (GAAP) and should not be viewed as an alternative to GAAP measures of
performance. A reconciliation of GAAP measurements to non-GAAP can be found at
the end of this release.
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SPARTECH CORPORATION
SECOND QUARTER 2005 EARNINGS
ADD 5
ENGINEERED PRODUCTS NAME CHANGE
In conjunction with this release, we are announcing that our Molded & Profile
Products group will now be called the Spartech Engineered Products group. The
group will include four business units: Spartech Industries, Spartech Marine,
Spartech Townsend, and Spartech Profiles. These businesses use technology,
design and support services to provide a diverse set of customers with solutions
engineered to meet their product needs such as: wheels for the lawn and garden
markets; doors, windscreens and cabinets for the marine market; and products for
the medical market. The managers of these businesses will report to Executive
Vice President of Sheet and Engineered Products, Steven Ploeger, as do the two
new Spartech Plastics Sheet Vice Presidents announced on May 31.
* * * * * * *
Spartech Corporation is a leading producer of engineered thermoplastic
materials, polymeric compounds and concentrates, and engineered product
solutions, which following its recently announced plant restructuring plan, will
have 43 facilities located throughout the United States, Canada, Mexico, and
Europe, with annual production capacity of more than 1.4 billion pounds and
sales of approximately $1.2 billion, annually.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements contained herein which are not historical facts are forward-looking
statements within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934 which are intended to be covered by the safe harbors
created thereby. For a summary of important facts, which could cause the
Company's actual results to differ materially from those included in, or
inferred by, the forward-looking statements, refer to the Company's Form 10-K
for the fiscal year ended October 30, 2004, which is on file with the Securities
and Exchange Commission.
-TABLE TO FOLLOW-
SPARTECH CORPORATION
SECOND QUARTER 2005 EARNINGS
ADD 6
SPARTECH CORPORATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING RESULTS
THREE MONTHS ENDED (UNAUDITED) SIX MONTHS ENDED(UNAUDITED)
-------------------------------- ----------------------------------
APRIL 30, May 1, PERCENT APRIL 30, May 1, PERCENT
2005 2004 CHANGE 2005 2004 CHANGE
--------- -------- ------ -------- -------- --------
Net Sales $377,658 $287,591 31% $682,170 $529,054 29%
======== ======== ===== ======== ======== ========
Operating Earnings Excluding Non-recurring
Charges $ 24,257 $ 28,050 (14)% $ 34,540 $ 46,849 (26)%
======== ======== ===== ======== ======== ========
Operating Earnings $ 6,252 $ 28,050 (78)% $ 16,535 $ 46,849 (65)%
======== ======== ===== ======== ======== ========
Interest $ 6,378 $ 6,175 3% $ 12,852 $ 12,505 3%
======== ======== ===== ======== ======== ========
Income Tax Provision $ (46) $ 8,356 (101)% $ 945 $ 13,119 (93)%
======== ======== ===== ======== ======== ========
Net Earnings (Loss) $ (80) $ 13,519 (101)% $ 2,738 $ 21,225 (87)%
======== ======== ===== ======== ======== ========
Net Earnings Excluding Non-recurring Charges $ 11,263 $ 13,519 (17)% $ 14,081 $ 21,225 (34)%
======== ======== ===== ======== ======== ========
Earnings (Loss) Per Common Share - Diluted $ ( - ) $ .41 $ .08 $ .68
======== ======== ======== ======== ========
Earnings Per Diluted Share Excluding Effect
of Non-recurring Items $ .35 $ .41 $ .43 $ .68
======== ======== ======== ======== ========
Weighted Average Common Shares Outstanding
- - Diluted 32,297 37,054 (13)% 32,497 32,768 (1)%
======== ======== ===== ======== ======== ========
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SPARTECH CORPORATION
SECOND QUARTER 2005 EARNINGS
ADD 7
SPARTECH CORPORATION
(IN THOUSANDS, UNAUDITED)
AS OF
----------------------------------------
APRIL 30, Oct. 30, PERCENT
2005 2004 CHANGE
--------- -------- --------
SELECT BALANCE SHEET DATA
RECEIVABLES, NET $220,285 $188,427 17%
======== ======== ========
INVENTORIES $153,750 $142,035 8%
======== ======== ========
PROPERTY, PLANT AND EQUIPMENT, NET $320,234 $330,745 (3)%
======== ======== ========
ACCOUNTS PAYABLE & ACCRUED LIABILITIES $172,790 $160,609 8%
======== ======== ========
TOTAL DEBT $464,206 $474,091 (2)%
======== ======== ========
SHAREHOLDERS' EQUITY $408,130 $417,732 (2)%
======== ======== ========
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
APRIL 30, May 1, APRIL 30, May 1,
2005 2004 2005 2004
-------- -------- -------- --------
SELECT CASH FLOW INFORMATION
CASH FLOW FROM OPERATIONS $ 22,268 $ 1,518 $ 10,184 $ (1,750)
======== ======== ======== ========
CAPITAL EXPENDITURES $ 9,759 $ 7,283 $ 23,233 $ 12,514
======== ======== ======== ========
DEPRECIATION & AMORTIZATION $ 10,024 $ 8,634 $ 20,320 $ 16,968
======== ======== ======== ========
BORROWINGS (REPAYMENTS) OF LONG-TERM DEBT, EXCLUDING
ACQUISITIONS & EQUITY OFFERINGS $ (3,090) $ 12,994 $(11,633) $ 23,238
======== ======== ======== ========
DIVIDENDS ON COMMON STOCK $ 3,848 $ 3,534 $ 7,713 $ 6,763
======== ======== ======== ========
TREASURY STOCK ACQUIRED,
(NET OF OPTION PROCEEDS) $ 6,656 $ (161) $ 5,876 $ (1,907)
======== ======== ======== ========
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SPARTECH CORPORATION
SECOND QUARTER 2005 EARNINGS
ADD 8
SPARTECH CORPORATION
(IN THOUSANDS, UNAUDITED)
Management believes that operating earnings, net income, and earnings per share
excluding non-recurring items, which are non-GAAP measurements, are meaningful
to investors because they provide a view of the Company with respect to ongoing
operating results. Non-recurring items (fixed asset charges and restructuring
costs) represent significant charges that are important to an understanding of
the Company's overall operating results in the periods presented. Such non-GAAP
measurements are not recognized in accordance with generally accepted accounting
principles (GAAP) and should not be viewed as an alternative to GAAP measures of
performance. The following reconciles GAAP to Non-GAAP measures for operating
earnings, net income, and earnings per share excluding non-recurring items used
within this release.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- ------------------------
APRIL 30, May 1, APRIL 30, May 1,
2005 2004 2005 2004
-------- -------- -------- --------
Operating Earnings (GAAP) $ 6,252 $ 28,050 $ 16,535 $ 46,849
Fixed Asset Charge 10,386 -- 10,386 --
Restructuring & Exit Costs 7,619 -- 7,619 --
-------- -------- -------- --------
Operating Earnings Excluding
Non-recurring Items (Non-GAAP) $ 24,257 $ 28,050 $ 34,540 $ 46,849
======== ======== ======== ========
Net Earnings (Loss) (GAAP) $ (80) $ 13,519 $ 2,738 $ 21,225
Fixed Asset Charge 6,543 -- 6,543 --
Restructuring & Exit Costs 4,800 -- 4,800 --
-------- -------- -------- --------
Net Earnings Excluding
Non-recurring Items (Non-GAAP) $ 11,263 $ 13,519 $ 14,081 $ 21,225
======== ======== ======== ========
Earnings (Loss) Per Diluted Share $ ( - ) $ .41 $ .08 $ .68
Fixed Asset Charge .20 -- .20 --
Restructuring & Exit Costs .15 -- .15 --
-------- -------- -------- --------
Earnings (Loss) Per Diluted Share
Excluding Effect of Non-recurring
Items (Non-GAAP) $ .35 $ .41 $ .43 $ .68
======== ======== ======== ========
-30-