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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 2004
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
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 S. Central Suite 1700, Clayton, Missouri, 63105
(Address of principal executive offices)
(314) 721-4242
(Registrant's telephone number, including area code)
Indicate by check mark 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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No
Number of shares outstanding as of May 1, 2004:
Common Stock, $.75 par value per share 32,112,212
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
May 1, 2004
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of May 1, 2004 and November 1, 2003 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter and six months
ended May 1, 2004 and May 3, 2003 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for quarter and six months ended
May 1, 2004 and May 3, 2003 5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
CERTIFICATIONS 24
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands)
ASSETS
May 1, 2004
(unaudited) Nov. 1, 2003
------- --------
Current Assets
Cash and equivalents $ 7,904 $ 3,779
Receivables, net 177,739 149,546
Inventories 117,348 99,671
Prepaids and other 9,277 11,052
------- --------
Total Current Assets 312,268 264,048
Property, plant and equipment 470,969 457,732
Less accumulated depreciation 189,086 173,808
------- --------
Net Property, Plant and Equipment 281,883 283,924
Goodwill 334,392 334,392
Other Intangible Assets 29,591 24,974
Other Assets 15,040 13,250
------- --------
$973,174 $920,588
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 32,995 $ 32,991
Accounts payable 103,361 97,586
Accrued liabilities 29,637 35,178
------- --------
Total Current Liabilities 165,993 165,755
Convertible subordinated debentures 154,639 154,639
Other long-term debt, less current maturities 168,918 196,189
------- --------
Total Long-Term Debt 323,557 350,828
Deferred Taxes 81,336 78,568
Other Long-Term Liabilities 2,676 3,079
------- --------
Total Long-Term Liabilities 407,569 432,475
------- --------
Shareholders' Equity
Common stock, 33,131,846
shares issued in 2004 and
30,460,682 in 2003 24,849 22,846
Contributed capital 197,478 139,243
Retained earnings 206,376 191,912
Treasury stock, at cost, 1,019,634 shares
in 2004 and 1,108,381 shares in 2003 (24,550) (27,142)
Accumulated other comprehensive loss (4,541) (4,501)
------- --------
Total Shareholders' Equity 399,612 322,358
------- --------
$973,174 $920,588
======= ========
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited and dollars in thousands, except per share amounts)
QUARTER ENDED SIX MONTHS ENDED
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
-------- -------- -------- --------
Net Sales $287,591 $250,488 $529,054 $464,188
-------- -------- -------- --------
Costs and Expenses
Cost of sales 243,879 214,453 451,919 398,923
Selling and administrative 15,055 13,035 29,085 26,030
Amortization of intangibles 607 544 1,201 1,036
-------- -------- -------- --------
259,541 228,032 482,205 425,989
-------- -------- -------- --------
Operating Earnings 28,050 22,456 46,849 38,199
Interest 6,175 6,265 12,505 12,371
-------- -------- -------- --------
Earnings Before Income Taxes 21,875 16,191 34,344 25,828
Income Taxes 8,356 5,650 13,119 9,129
-------- -------- -------- --------
Net Earnings $ 13,519 $ 10,541 $ 21,225 $ 16,699
======== ======== ======== ========
Net Earnings Per Common Share:
Basic $ .42 $ .36 $ .69 $ .57
======== ======== ======== ========
Diluted $ .41 $ .36 $ .68 $ .57
======== ======== ======== ========
Dividends Per Common Share $ .11 $ .10 $ .22 $ .20
======== ======== ======== ========
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 1, 2004 May 3, 2003
---------- ----------
Cash Flows from Operating Activities
Net earnings $ 21,225 $ 16,699
Adjustments to reconcile net earnings
to net cash (used for)/provided by
operating activities:
Depreciation and amortization 16,968 15,406
Change in current assets and
liabilities, net of the effects
of acquisitions (40,047) (27,812)
Other, net 104 1,813
---------- ----------
Net cash (used for)/provided by
operating activities (1,750) 6,106
---------- ----------
Cash Flows from Investing Activities
Capital expenditures (12,514) (12,013)
Business acquisition (1,418) (23,259)
Outsourcing acquisitions (8,999) -
---------- ----------
Net cash used for investing activities (22,931) (35,272)
---------- ----------
Cash Flows from Financing Activities
Bank borrowings for acquisitions 10,417 23,259
Net (payments)/borrowings on
revolving credit facilities (37,620) 12,476
Issuance of common stock 60,922 -
Payments on bonds and leases (64) (84)
Cash dividends on common stock (6,763) (5,849)
Stock options exercised 2,079 321
Treasury stock acquired (172) (1,767)
---------- ----------
Net cash provided by
financing activities 28,799 28,356
---------- ----------
Effect of exchange rate changes on cash
and equivalents 7 187
---------- ----------
Increase/(Decrease) In Cash and Equivalents 4,125 (623)
Cash and Equivalents at Beginning of Period 3,779 7,511
---------- ----------
Cash and Equivalents at End of Period $ 7,904 $ 6,888
========== ==========
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE A - Basis of Presentation
The consolidated financial statements include the accounts of Spartech
Corporation and its controlled affiliates (the Company). These financial
statements have been prepared on a condensed basis, and accordingly,
certain information and 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, 2003 Annual Report on Form 10-K.
Certain prior year amounts have been reclassified to conform to the
current year presentation. 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 1, 2004 and November 1, 2003 are comprised of
the following components:
2004 2003
-------- --------
Raw materials $ 71,247 $ 57,414
Finished goods 46,101 42,257
-------- --------
$ 117,348 $ 99,671
======== ========
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE C -Other Intangible Assets
At May 1, 2004 other intangible assets are as follows:
Total other Accumulated Net carrying
intangible amortization amount
assets
------- ------- -------
Amortizable
Non-compete and $ 8,501 $ 2,574 $ 5,927
customer contracts
Product formulations $16,236 $ 1,472 $14,764
------- ------- -------
$24,737 $ 4,046 $20,691
------- ------- -------
Not Amortizable
Trademark/Tradename $ 8,900 $ - $ 8,900
------- ------- -------
Total $33,637 $ 4,046 $29,591
======= ======= =======
Amortization expense for our existing other intangible assets over the
next five years is estimated to be: $2,996, $2,649, $2,580, $1,845 and
$1,372 for the one year periods from May 2, 2004 to May 1, 2009.
Note D - Comprehensive Income
Comprehensive Income is an entity's change in equity during the period
from transactions, events and circumstances from non-owner sources. The
reconciliation of Net Earnings to Comprehensive Income for the quarters
ended May 1, 2004 and May 3, 2003 is as follows:
QUARTER ENDED SIX MONTHS ENDED
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
------- -------- -------- --------
Net Earnings $ 13,519 $ 10,541 $ 21,225 $ 16,699
Foreign currency
translation adjustments (1,176) 2,449 (1,883) 3,374
Cash flow hedge adjustments 935 337 1,843 790
------- -------- -------- --------
Total Comprehensive Income $ 13,278 $ 13,327 $ 21,185 $ 20,863
======= ======== ======== ========
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Note E - Segment Information
Spartech's forty-seven facilities are organized into three reportable
segments based on the nature of the products manufactured.
QUARTER ENDED SIX MONTHS
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
Net Sales * -------- -------- -------- --------
Custom Sheet & $ 188,848 $ 163,271 $ 348,956 $ 303,038
Rollstock
Color & Specialty 77,787 67,971 144,312 127,893
Compounds
Molded & Profile 20,956 19,246 35,786 33,257
Products -------- -------- -------- --------
Total Net Sales $287,591 $ 250,488 $ 529,054 $ 464,188
======== ======== ======== ========
Operating Earnings
Custom Sheet & $ 21,878 $ 18,041 $ 36,999 $ 30,642
Rollstock
Color & Specialty 6,737 5,163 12,319 10,532
Compounds
Molded & Profile 2,595 1,928 3,825 2,468
Products
Corporate/Other (3,160) (2,676) (6,294) (5,443)
-------- -------- -------- --------
Total Operating $ 28,050 $ 22,456 $ 46,849 $ 38,199
Earnings
======== ======== ======== ========
* Excludes intersegment sales of $13,168 and $9,716 for the three
months ended May 1, 2004 and May 3, 2003, respectively, and $25,665
and $16,820 for the six months ended May 1, 2004 and May 3, 2003,
respectively, primarily from the Color & Specialty Compounds segment.
Note F - Stock Based Compensation
The Company has adopted the disclosure-only provisions of SFAS 123.
The following table illustrates the effect on net earnings and net earnings
per share if the company had applied the fair value recognition provisions
of SFAS 123 to stock-based employee compensation. The fair value estimate
was computed using the Black-Scholes option-pricing model. The Company's
options are subject to a 4-year vesting period. Beginning in fiscal 2004,
the Company is recognizing pro-forma expense for the fair value of the
options as they vest pro-ratably for each quarter of the fiscal year. In
previous years the vast majority of pro-forma expense was recognized in the
first quarter of the year as the options passed their annual vesting date.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Quarter Ended Six Months Ended
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
------- ------- ------- -------
Net Earnings as $13,519 $10,541 $21,225 $16,699
Reported
Pro Forma Impact of 442 10 884 1,383
Expensing Stock Options
------- ------- ------- -------
Pro forma net earnings $13,077 $10,531 $20,341 $15,316
======= ======= ======= =======
Diluted Earnings per share:
As Reported
Basic $ 0.42 $ 0.36 $ 0.69 $ 0.57
Diluted $ 0.41 $ 0.36 $ 0.68 $ 0.57
Pro forma
Basic $ 0.41 $ 0.36 $ 0.66 $ 0.52
Diluted $ 0.40 $ 0.36 $ 0.65 $ 0.52
Assumptions Used:
Expected Dividend 2% 2% 2% 2%
Yield
Expected Volatility 35% 35% 35% 35%
Risk-Free Interest 3.7% 3.5% 3.7% 3.5%
Rates
Expected Lives 5.5 Years 5.0 Years 5.5 Years 5.0 Years
Note G - Equity Offering
Effective February 3, 2004, Spartech completed a common stock offering
(priced at $24.00 per share) for 2.7 million shares. Proceeds from the
offering (net of expenses) totaled approximately $61 million with
approximately $41 million used to pay down debt and $20 million that was
subsequently used to fund capital expenditures and strategic expansions.
After the offering, the Company's common issued shares increased by 8.8% to
33,131,846.
Note H - Bank Refinancing
On March 3, 2004, Spartech refinanced its unsecured bank credit
facility providing aggregate availability of $200 million and expiring on
March 3, 2009. Interest on the bank credit facility is payable at a rate
chosen by the Company of either prime or Eurodollar Rate plus a 0.5% to
1.125% borrowing margin and the agreement requires a fee of 0.10% to 0.275%
for any unused portion of the facility.
Note I - Recently Issued Accounting Standards
In December 2003, the FASB issued a revised version of FASB
Interpretation No. 46 (FIN 46R), "Consolidation of Variable Interest
Entities," which defines when a business should consolidate a variable
interest entity. The Company adopted FIN 46R on January 31, 2004. As a
result, we no longer consolidate our trusts which were formed solely for
the issuance of trust preferred securities to outside investors. The
effect of this deconsolidation was to: 1) eliminate the Convertible
Preferred Securities issued by the trusts; 2) record the Convertible
Subordinated Debentures issued to the trusts; 3) recognize the Company's
equity investment in the common stock of the trusts; and 4) reclassify the
distributions on the preferred securities to interest expense on the
debentures. The Convertible Subordinated Debentures and equity investments
were previously eliminated in consolidation. The debentures, totaling
$154.6 million are now included in the Consolidated Condensed Balance Sheet
as a separate component of long-term debt and the equity investment of $4.6
million is included in other assets. The adoption of FIN 46R had no impact
on the Company's net income or earnings per share. The previous year's
financial statements have been restated to reflect the affect of the
deconsolidation required by FIN 46R.
Note J - Commitments and Contingencies
On April 30, 2004 the Company entered into loan guarantees related to
the expansion of our Donchery, France. The maximum amount to be guaranteed
will not exceed 5.7 million Euros or approximately US$6.8 million. We
expect the construction to be completed by the end of our third quarter at
which time we will enter into a lease for the amount of the expansion.
In September 2003, the New Jersey Department of Environmental
Protection issued a directive and the United States Environmental
Protection Agency initiated an environmental investigation related to over
70 companies, including Spartech, regarding the Lower Passaic River.
Management has agreed to participate along with thirty-one other companies
in an environmental study to determine the extent and sources of
contamination at this site. The Company has $398 accrued as of May 1, 2004
related to this issue and management believes it is possible that the
ultimate liability from this issue could materially differ from this
amount. This accrued amount includes estimated costs associated with
participation in the environmental study and legal fees. Due to
uncertainties inherent in this matter, management is unable to estimate the
Company's possible exposure upon the ultimate outcome of this issue which
is not expected to occur for a number of years. These uncertainties
primarily include the outcome of the environmental study and the percentage
of contamination attributable to Spartech and other parties.
The Company is also subject to various other claims, lawsuits, and
administrative proceedings arising in the ordinary course of business with
respect to commercial, product liability, employment, and other matters,
several of which claim substantial amounts of damages. While it is not
possible to estimate with certainty the ultimate legal and financial
liability with respect to these claims, lawsuits, and administrative
proceedings, the Company believes that the outcome of these other matters
will not have a material adverse effect on the Company's financial position
or results of operations.
Items 2 and 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The second quarter and first half of 2004 produced improved results
over the same periods of 2003. Sales increased 15% for the second quarter
and 14% for the six months ended May 1, 2004 over the prior year's similar
periods. Demand increased in nearly every major end-market we serve,
resulting in a second quarter record for volume shipped of 375 million
pounds. Cost reductions implemented during fiscal 2003 produced lower
manufacturing costs during the second quarter and first six months of 2004,
however, these improvements were partially offset by increased raw material
costs and changes in mix of products sold. The overall reduction in costs
of sales items and the increased sales level resulted in an improvement in
net earnings of 28% for the second quarter and 27% for the first six months
over the prior year's equivalent periods. Based on the improvements taking
place in the overall economy and our strong backlog at the end of the
second quarter, we believe the improved year-over-year results will
continue for the balance of fiscal 2004.
Results of Operations
(in millions) NET SALES OPERATING EARNINGS
Six Months Ended
Net Sales May 1, May 3, May 1, May 3,
2004 2003 2004 2003
--------- --------- --------- ---------
Custom Sheet & $ 349.0 303.0 $ 37.0 $ 30.6
Rollstock
Color & Specialty 144.3 127.9 12.3 10.5
Compounds
Molded & Profile 35.8 33.3 3.8 2.5
Products
Corporate/Other - - (6.3) (5.4)
--------- --------- --------- ---------
Total $ 529.1 $ 464.2 $ 46.8 $ 38.2
========= ========= ========= =========
Net sales were $287.6 million and $529.1 million for the quarter and
six months ended May 1, 2004. These amounts represented a 15% increase (9%
from internal pounds growth, 4% from acquisitions, and 2% price/mix) and
14% increase (7% from internal pounds growth, 4% from acquisitions, and 3%
price/mix) from the quarter and six-month periods in 2003, respectively.
The strong growth in internal pounds sold is primarily a result of overall
economic improvements during the first half of 2004. The company
experienced increased demand across nearly every major end-market we serve,
led by strong volume increases in the Packaging, Building & Construction
and Transportation markets.
Cost of sales were $243.9 million and $451.9 million for the quarter
and six months ended May 1, 2004, compared with $214.5 million and $398.9
million for the quarter and six months of 2003. Cost of sales decreased as
a percentage of net sales to 84.8% and 85.4% for the quarter and six months
of 2004 from 85.6% and 85.9% for the comparable period of 2003, reflecting
the effect of manufacturing cost reductions initiated in the fourth quarter
of 2003 and increased capacity utilization in 2004 partially offset by
higher raw material prices and a change in mix of products sold.
Selling and administrative expenses of $15.1 million and $29.1 million
for the quarter and six months ended May 1, 2004 increased from $13.0
million and $26.0 million for similar periods of 2003. The increase is a
result of our 2003 acquisitions and increased investments in corporate
governance, information technology, and marketing resources. As a
percentage of sales, selling and administrative costs remained relatively
flat at 5.2% and 5.5% of net sales for the quarter and six months of 2004
as compared to 5.2% and 5.6% in the quarter and six months of 2003.
Operating earnings for the quarter and six months ended May 1, 2004
increased to $28.1 million and $46.8 or 9.8% and 8.9% of net sales,
compared to $22.5 million and $38.2 million or 9.0% and 8.2% of net sales
for the corresponding periods of 2003. Operating earnings per pound sold
increased to 7.5 cents and 6.8 cents from 6.8 cents and 6.2 cents.
Interest expense of $6.2 million and $12.5 million for the quarter and
six months of 2004 were level with the $6.3 million and $12.4 million for
the quarter and six months of 2003. The effect on interest of the
reduction in our debt as compared to the prior year was largely offset by
an increase in our average interest rate. Our interest rate swap on $125.0
million of bank debt will expire on November 10, 2004. At that date the
Company's effective rate on the debt associated with the swap will revert
back to a variable 30-day Eurodollar Rate plus applicable margin (which was
1.10% at May 1, 2004 plus .875% margin) from the fixed, swap affected
rate of 6.06% plus the margin.
The Company's effective tax rate for the quarter and six months ended
May 1, 2004 was 38.2% as compared to 34.9% for the quarter and 35.3% for
the six months ended May 3, 2003. A favorable adjustment related to final
agreement with the Internal Revenue Service regarding refunds of research
and development credits was recorded in the prior year. The current rate
also reflects an increase in the tax rate in Ontario Canada.
Net earnings of $13.5 million and $21.2 million, or $.41 and $.68 per
diluted share, in the quarter and six months ended May 1, 2004 increased
from the $10.5 million and $16.7 million , or $.36 and $.57 per diluted
share, in the similar periods of 2003 as a result of the factors noted
above.
Segment Results
Net sales of the Custom Sheet & Rollstock segment increased by 16% and
15% to $188.8 million and $349.0 in the quarter and six months ended May 1,
2004 from $163.3 million and $303.0 million in the corresponding periods of
the prior year. Internal growth in pounds sold accounted for 7% of the
increase in the quarter and six months of 2004. Our acquisitions of
Polymer Extruded Products and Trienda's Extrusion division in fiscal 2003
accounted for 5-6% of the increases while increased prices due to higher
resin costs accounted for the balance of the increase in net sales.
Operating margin percentage increased to 11.6% and 10.6% in the quarter and
six months ended May 1, 2004 as compared to the 11.0% and 10.1% achieved in
the prior year similar periods. Reductions in manufacturing costs more
than offset increases in material costs during the first half of 2004.
Net sales for the Color & Specialty Compounds segment were $77.8 million
and $144.3 million for the quarter and six months of 2004, an increase of
14% and 13% respectively from the $68.0 million and $127.9 million for the
corresponding periods in 2003, due to internal volume growth. Sales were
especially strong in the Packaging and Transportation markets during the
quarter. Operating Margin percentage increased to 8.7% and 8.5% for the
quarter and six months of 2004 from the 7.6% and 8.2% for the comparable
periods in fiscal 2003. This group had an especially weak second quarter
in 2003 as rapid raw material increases were met with weak demand in that
period. The current year's more favorable economic conditions and
conversion cost reductions resulted in the year-over-year improvement in
operating margin.
The Molded & Profile Products segment net sales increased to $21.0
million and $35.8 million for the quarter and six months ended May 1, 2004
from $19.2 million and $33.3 million in the similar 2003 periods.
Operating earnings also increased to $2.6 million and $3.8 million for the
quarter and six months ended May 1, 2004, from $1.9 million and $2.5
million for the prior year's similar period. While all of our Molded &
Profile operation achieved improved results, increased shipments of
injection molded wheels to the Lawn & Garden market and acrylic rod & tube
sales accounted for a majority of the increases in sales and earnings for
the first half of the year.
Other Matters
We operate under various laws and regulations governing employee safety
and the quantities of specified substances that may be emitted into the
air, discharged into waterways, or otherwise disposed of on and off our
properties. In September 2003, the New Jersey Department of Environmental
Protection issued a directive and the United States Environmental
Protection Agency initiated an investigation related to over 70 companies,
including Spartech, regarding the Lower Passaic River. We have agreed to
participate in an environmental study along with numerous other companies
to determine the extent and sources of contamination at this site. We
believe it is possible that the ultimate liability from this issue could
materially differ from the Company's $398 accrual as of May 1, 2004. In the
event of one or more adverse determinations related to this issue, the
impact on the Company's results of operations could be material to any
specific period. However, it is our opinion that future expenditures for
compliance with these laws and regulations, as they relate to the
Lower Passaic River issue and other potential issues, will not have
a material effect on our capital expenditures, financial position, or
competitive position.
The plastic resins we use in our production processes are crude oil or
natural gas derivatives, which are available from a number of domestic and
foreign suppliers. Our raw materials are only somewhat affected by supply,
demand and price trends of the petroleum industry; however, trends in
pricing, periods of anticipated or actual shortages, and changes in
supplier capacities can have more significant impact on the cost of our raw
materials over the short term. Price spikes in crude oil and natural gas
along with the political unrest in oil producing countries resulted in
unusually high pricing pressures during 2003. These pressures resulted in
dramatic increases in the prices of our raw materials. We were generally
able to minimize the impact of past price increases in raw material costs
by controlling inventory levels, increasing production efficiencies,
passing through price changes to customers, and the negotiating competitive
prices with our suppliers. These pricing changes were more difficult for
us to manage and negatively affected our operating margins in fiscal 2003.
Resin pricing pressures started to stabilize by the third quarter of 2003.
Resin prices have increased somewhat through the first half of fiscal 2004
but have not been as volatile as experienced in 2003. While we have been
successful in managing these increases thus far in 2004, the direction,
degree of volatility, and our ability to manage future pricing changes is
uncertain.
Liquidity and Capital Resources
Cash Flow
Our primary sources of liquidity have been cash flows from operating
activities , borrowings from third parties, and our recent equity offering.
Our principal uses of cash have been to support our operating activities,
invest in capital improvements, finance strategic business/outsourcing
acquisitions, and pay dividends on our common stock. Cash flows for the
periods indicated are summarized as follows:
Six Months Ended
(Dollars in millions) May 1, May 3,
2004 2003
----------- ---------
Net cash (used for)/provided by
operating activities $ (1.8) $ 6.1
=========== =========
Net cash used for
investing activities $ ( 22.9) $ (35.3)
=========== =========
Net cash /(used for)/provided by
financing activities $ 28.8 $ 28.4
=========== =========
Increase/(decrease)/ in cash
and equivalents $ 4.1 $ ( .6)
=========== =========
Operating cash flows provided by net earnings increased 27% to $21.2
million for the six months ended May 1, 2004 from $16.7 million for the six
months ended May 3, 2003. Changes in current assets and liabilities, net
of the effects of acquisitions, used $40.0 million of our operating cash
flows in 2004 compared to $27.8 million in the first six months of 2003.
Operating cash flows used by changes in accounts receivable totaled $27.3
million due to seasonally higher sales in our second quarter. Operating
cash flows used for changes in inventory totaled $15.7 million due to
selective pre-buys of raw materials ahead of announced price increases and
in support of what is traditionally the Company's highest sales period in
the second quarter of our fiscal year.
The Company's primary investing activities are capital expenditures
and business/outsourcing acquisitions 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 first six months of 2004 were $12.5 million as compared to $12.0
million for the first six months of 2003. We currently anticipate total
capital expenditures of approximately $28 million for fiscal 2004 including
expenditures for the expansion of our Donchery France facility and our new
Product Development Center in Warsaw Indiana. Business and outsourcing
acquisitions totaled $10.4 million for the first six months of 2004 as
compared to $23.3 in the first six months of 2003. The 2004 acquisitions
included $1.4 million paid to complete the September 2003 acquisition of
Trienda's extrusion business, $2.2 million spent to acquire certain
equipment and working capital assets from the former Quality Plastic Sheet
operation along with a long-term supply contract from its largest customer
and $6.8 million for certain assets of BASF Aktiengesellschaft of Germany.
The 2003 payment was for the purchase of Polymer Extruded Products.
Cash provided by financing activities totaled $28.8 million for the
first six months of 2004. On February 3, 2004 Spartech completed a common
stock offering that provided $60.9 million. Other financing activities
during the first six months of 2004 included debt repayments funded by the
offering of $60.9 million, borrowings for operations of $23.3 million,
borrowings for acquisitions of $10.4 million, and dividend payments with
other items netting to a usage of $4.9 million.
Financing Arrangements
Effective February 3, 2004, Spartech completed a common stock offering
(priced at $24 per share) for 2.7 million shares. Proceeds from the
offering (net of expenses) totaled approximately $61 million with
approximately $41 million used immediately to pay down debt and $20 million
invested in short term investments and used to fund subsequent capital
expenditures and strategic expansions later in the second quarter.
On March 3, 2004, Spartech refinanced its U.S. unsecured bank credit
facility providing aggregate availability of $200 million and expiring on
March 3, 2009. Interest on the bank credit facility is payable at a rate
chosen by the Company of either prime or Eurodollar Rate plus a 0.5% to
1.125% borrowing margin and the agreement requires a fee of 0.10% to 0.275%
for any unused portion of the facility. At May 1, 2004, our total
outstanding borrowings under our bank credit facilities were $125.0 million
at a weighted average interest rate of 7.18% (including the effect of an
interest rate swap). We had approximately $68 million in borrowing
capacity under our bank credit facilities at the end of the second quarter
of 2004. We anticipate that cash flows from operations, together with the
financing and borrowings under our bank credit facilities, will satisfy our
working capital needs, regular quarterly dividends, and planned capital
expenditures for the next year.
If our cash from operations were substantially reduced and our access
to the debt and equity markets became more limited, we might not be able to
repay the obligations as they become due. Our current credit facilities
also contain certain affirmative and negative covenants, including
restrictions on the incurrence of additional indebtedness, limitations on
both the sale of assets and merger transactions, and requirements to
maintain certain financial and debt service ratios and net worth levels.
While we were in compliance with such covenants through the first half of
2004 and currently expect to be in compliance throughout the balance of the
fiscal year, our failure to comply with the covenants or other requirements
of our financing arrangements could result in an event of default and,
among other things, acceleration of the payment of our indebtedness which
could adversely impact our business, financial condition and results of
operations.
Outlook
As we move forward to the second half of our fiscal year, we continue
to see overall economic improvements, but remain cautious about fluctuating
resin prices and occasional supply concerns related to crude oil. Our
backlog has increased to nearly six weeks at the end of our second quarter
from about five weeks at the corresponding time in 2003. Based on the
expectation of continuing strength in economic conditions, the Company
should continue to generate improved year-over-year earnings results for
the remainder of the fiscal year.
Significant Accounting Policies, Estimates and Judgments
We prepare consolidated financial statements in conformity with
accounting principles generally accepted in the United States. As such, we
are required to make estimates and judgments that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant
accounting policies, estimates and judgments which we believe are the most
critical to aid in fully understanding and evaluating our reported
financial results include the following:
Revenue Recognition - We recognize revenue as the product is shipped
and title passes to the customer. We manufacture our products either
to standard specifications or to custom specifications agreed upon
with the customer in advance, and we inspect our products to ensure
specifications are met prior to shipment. We continuously monitor and
track product returns, which have historically been within our
expectations and the provisions established. Despite our efforts to
improve our quality and service to customers, we cannot guarantee that
we will continue to experience the same, or better return rates, than
we have in the past. Any significant increase in returns could have a
material negative impact on our operating results.
Accounts Receivable - We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history and the
customers' credit worthiness, as determined by our review of their
current credit information. We continuously monitor collections and
payments from our customers and maintain a provision for estimated
credit losses based upon our historical experience and any specific
customer collection issues identified. While such credit losses have
historically been within our expectations and the provisions
established, we cannot guarantee that we will continue to experience
the same or lower credit loss rates that we have in the past.
Inventories - We value inventories at the lower of actual cost to
purchase or manufacture the inventory or the current estimated market
value of the inventory. We also buy scrap and recyclable material
(including regrind material) to be used in future production runs. We
record these inventories initially at purchase price and, based on the
inventory aging and other considerations for realizable value, we
write down the carrying value to brokerage value, where appropriate.
We regularly review inventory on hand and record provisions for
obsolete or aged inventory. A significant increase in the demand for
our raw materials could result in a short-term increase in the cost of
inventory purchases while a significant decrease in demand could
result in an increase in the amount of excess inventory quantities on
hand. In addition, most of our business is custom products, where the
loss of a specific customer could increase the amount of excess or
obsolete inventory on hand. Although we make every effort to ensure
the accuracy of our forecasts of future product demand, any
significant unanticipated changes in demand could have a significant
impact on the value of our inventory and the operating results.
Acquisition Accounting - We have made several business acquisitions in
recent years. All of these acquisitions have been accounted for in
accordance with the purchase method, and accordingly, the results of
operations were included in our Consolidated Statement of Operations
from the respective date of acquisition. The purchase price has been
allocated to the identifiable assets and liabilities, and any excess
of the cost over the fair value of the net identifiable assets
acquired is recorded as goodwill. The initial allocation of purchase
price is based on preliminary information, which is subject to
adjustment upon obtaining complete valuation information. While the
delayed finalization of purchase price has historically not had a
material impact on the consolidated results of operations, we cannot
guarantee the same results in future acquisitions.
Valuation of Long-Lived Assets - Long-lived assets, which primarily
include goodwill, other intangibles and property plant and equipment
are reviewed for impairment whenever events and changes in business
indicate the carrying value of the assets may not be recoverable. The
Company conducts a formal impairment test of goodwill at the end of
each fiscal year and between fiscal years if events occur or
circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying value. We recognize
impairment losses if expected future cash flows of the related assets
(based on our current projections of anticipated future cash flows)
are less than carrying value or where assets that are held for sale
are deemed to be valued in excess of the expected amount to be
realized upon sale. While we believe that our estimates of future
cash flows are reasonable, different assumptions regarding such cash
flows could materially affect our evaluations.
Contingencies - The Company is involved in litigation in the ordinary
course of business, including environmental matters. Our policy is to
record expense for contingencies when it is both probable that a
liability has been incurred and the amount can be reasonably
estimated. Estimating probable losses requires assessment of multiple
outcomes that often depends on management's judgments regarding, but
not limited to, potential actions by third parties such as regulators.
The final resolution of these contingencies could result in expenses
different than current accruals, and could therefore have a material
impact on our consolidated financial results in a future reporting
period.
For additional information regarding our significant accounting
policies, see Note 1 to our 2003 Consolidated Financial Statements
contained in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
Cautionary Note on Forward Looking Statements
Statements in this Form 10-Q that are not purely historical, including
statements which express the Company's belief, anticipation or expectation
about future events, are forward-looking statements. Forward looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from such statements. In addition to the risk
factors discussed in Item 1 (Business, under the headings Raw Materials,
Seasonality, Competition, Government Regulation and Environmental Matters,
and International Operations) of the Company's Annual Report on Form 10-K
other important factors which have impacted and could impact the Company's
operations and results, include:
(1) The Company's financial leverage and the operating and financial
restrictions imposed by the instruments governing its indebtedness may
limit or prohibit its ability to incur additional indebtedness, create
liens, sell assets, engage in mergers, acquisitions or joint ventures, pay
cash dividends, or make certain other payments; the Company's leverage and
such restrictions could limit its ability to respond to changing business
or economic conditions, inability to meet debt obligations when due could
impair its ability to finance operations and could result in default;
(2) The successful expansion through acquisitions, in which Spartech
looks for candidates that can complement its existing product lines, expand
geographic coverage, and provide superior shareholder returns, is not
assured. Acquiring businesses that meet these criteria continues to be an
important element of the Company's business strategy. Some of the
Company's major competitors have similar growth strategies. As a result,
competition for qualifying acquisition candidates is increasing and there
can be no assurance that such future candidates will exist on terms
agreeable to the Company. Furthermore, integrating acquired businesses
requires significant management time and skill and places additional
demands on Company operations and financial resources. If we are unable to
achieve the anticipated synergies, the interest and other expenses from our
acquisitions could exceed the net income we derive from the acquired
operations, which could reduce our net income. However, the Company
continues to seek value-added acquisitions which meet its stringent
acquisition criteria and complement its existing businesses; and
(3) Our products are sold in a number of end markets which tend to be
cyclical in nature, including transportation, building and construction,
bath/pool and spa, and electronics and appliances. A downturn in one or
more of these end markets could have a material adverse effect on our sales
and operating profit.
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.
Item 4. CONTROLS AND PROCEDURES
Spartech maintains a system of disclosure controls and procedures
which are designed to ensure that information required to be disclosed by
the Company in the reports filed under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified under the SEC's rules and forms. Based on an evaluation
performed, the Company's certifying officers have concluded that the
disclosure controls and procedures were effective as of May 1, 2004, to
provide reasonable assurance of the achievement of these objectives.
Notwithstanding the foregoing, there can be no assurance that the
Company's disclosure controls and procedures will detect or uncover all
failures of persons within the Company and its consolidated subsidiaries to
report material information otherwise required to be set forth in the
Company's reports.
There was no change in the Company's internal control over financial
reporting during the quarter ended May 1, 2004, that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
It was determined that there were 29,357,101 shares of
common stock outstanding and entitled to vote at the record
date, of which 27,767,826 shares, or 95%, were represented
at Spartech Corporation's Annual Meeting of Stockholders
held March 10, 2004. At the Annual Shareholders meeting,
Mr. Bradley B. Buechler was elected as a Director of the
Company with 26,774,482 votes for. Mr. Randy C. Martin was
also elected as a director of the Company with 26,694,679
votes for. An amendment to the Certificate of Incorporation
of the Company to increase the authorized number of shares
of Common Stock from 45,000,000 to 55,000,000 shares was
approved with 26,903,881 votes for, 805,514 against, and
55,431 abstentions. The Spartech Corporation 2004 Equity
Compensation Plan was approved 23,307,527 votes for,
2,586,974 against, and 364,338 abstentions. Ernst & Young
LLP was ratified as the Company's auditor with 26,649,755
votes for, 1,100,214 against, and 17,855 abstentions.
Item 6 (a). Exhibits
3 Certificate of Incorporation, with amendments to date.
4.1 Spartech Corporation 2004 Equity Compensation Plan, incorporated
by reference to Form S-8 registration statement no. 333-113752,
filed with the Securities and Exchange Commission and effective
March 19, 2004.
10 Employment Agreement dated May 1, 2004 between Steven J. Ploeger
and Spartech Corporation
11 Statement re Computation of Per Share Earnings
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO.
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO.
32 Section 1350 Certifications of CEO & CFO.
Item 6 (b). Reports on Form 8-K
The Company filed a Form 8-K dated March 4, 2004 to furnish the press
release regarding earnings results of Spartech Corporation for the
quarter ended January 31, 2004.
The Company filed a Form 8-K dated March 11, 2004 to file the opinion
of Armstrong Teasdale LLP as Exhibit 5.1 relating to the sale of
shares of the Company's common stock on February 3, 2004.
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: June 3, 2004 /s/Bradley B. Buechler
Bradley B. Buechler
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
/s/Randy C. Martin
Randy C. Martin
Executive Vice President -
Corporate Development and
Chief Financial Officer
(Principal Financial and
Accounting Officer