SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 1996
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5911
SPARTECH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 43-0761773
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7733 Forsyth Boulevard, Suite 1450, Clayton, Missouri, 63105
(Address of principal executive offices)
(314) 721-4242
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of May 4, 1996
Common Stock, $.75 par value
per share 23,488,791<PAGE>
<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
May 4, 1996
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of May 4, 1996 and October 28, 1995 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter and six
months ended May 4, 1996 and
April 29, 1995 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for the six months
ended May 4, 1996 and April 29, 1995 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
PART II. OTHER INFORMATION 12
SIGNATURES 13
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands, except share amounts)
ASSETS
May 4, 1996 October 28,
(unaudited) 1995
Current Assets
Cash $ 3,053 $ 3,505
Receivables, net 54,893 51,762
Inventories 40,053 33,002
Prepayments and other 1,192 1,274
Total Current Assets 99,191 89,543
Plant and Equipment 96,768 91,702
Less accumulated depreciation 31,281 28,552
Net Plant and Equipment 65,487 63,150
Goodwill 23,633 24,014
Other Assets 1,631 1,622
$ 189,942 $ 178,329
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 37,189 $ 31,966
Accrued liabilities 13,188 12,469
Total Current Liabilities 50,377 44,435
Long-Term Debt 58,000 59,510
Other Liabilities 2,735 2,256
Total Long-Term Liabilities 60,735 61,766
Shareholders' Equity
Common stock, 23,582,990 shares issued in 1996
and 23,364,407 shares issued in 1995 17,687 17,523
Contributed capital 67,094 66,771
Retained deficit (5,176) (12,099)
Treasury stock, at cost, 94,199 shares
in 1996 and 11,291 shares in 1995 (775) (67)
Total Shareholders' Equity 78,830 72,128
$ 189,942 $ 178,329
See accompanying notes to consolidated financial statements.
3
<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited and dollars in thousands, except per share amounts)
QUARTER ENDED SIX MONTHS ENDED
May 4, April 29, May 4, April 29,
1996 1995 1996 1995
Net Sales $ 98,330 $ 95,649 $185,796 $174,907
Costs and Expenses
Cost of sales 83,449 82,073 157,922 150,648
Selling and administrative 5,989 6,694 11,592 11,778
Amortization of intangibles 183 180 381 362
89,621 88,947 169,895 162,788
Operating Earnings 8,709 6,702 15,901 12,119
Interest 1,100 1,252 2,201 2,494
Earnings Before Income Taxes 7,609 5,450 13,700 9,625
Provision for income taxes 2,834 1,500 5,139 2,550
Net Earnings 4,775 3,950 8,561 7,075
Preferred stock accretion - 549 - 1,098
Net Earnings Applicable
to Common Shares and
Equivalents $ 4,775 $ 3,401 $ 8,561 $ 5,977
Net Earnings Per Common Share:
Primary $ .19 $ .36 $ .35 $ .63
Fully diluted $ .19 $ .16 $ .35 $ .29
See accompanying notes to consolidated financial statements.
4
<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
SIX MONTHS ENDED
May 4, April 29,
1996 1995
Cash Flows From Operating Activities
Net earnings $ 8,561 $ 7,075
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 3,229 2,989
Change in current assets and liabilities,
net of effects of acquisitions (4,158) (411)
Other, net 470 (61)
Net cash provided by operating activities 8,102 9,592
Cash Flows From Investing Activities
Capital expenditures (5,187) (5,709)
Retirement of assets, net of depreciation 2 556
Business acquisition - (24,060)
Net cash used for investing activities (5,185) (29,213)
Cash Flows From Financing Activities
Net borrowings (payments) on revolving
credit facilities (1,510) 15,794
Term loan additions (net of repayments) - 3,000
Cash dividends on common stock (1,638) -
Stock options exercised 487 699
Treasury stock acquired (708) (62)
Net cash provided by (used for)
financing activities (3,369) 19,431
Increase/(Decrease) In Cash (452) (190)
Cash At Beginning Of Period 3,505 1,752
Cash At End Of Period $ 3,053 $ 1,562
See accompanying notes to consolidated financial statements.
5
<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE A - Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Spartech Corporation and its wholly-owned subsidiaries (the "Company").
These financial statements have been prepared on a condensed basis and,
accordingly, certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, the financial statements contain all adjustments (consisting
solely of normal recurring adjustments) and disclosures necessary to make the
information presented therein not misleading. These financial statements
should be read in conjunction with the consolidated financial statements and
accompanying footnotes thereto included in the Company's October 28, 1995
Annual Report on Form 10-K.
The Company's fiscal year ends on the Saturday closest to October 31.
Fiscal year 1996 will include 53 weeks compared to 52 weeks in 1995. As a
result, the first quarter ended February 3, 1996 and six months ended May 4,
1996 consist of 14 and 27 weeks, compared to 13 and 26 weeks for the
respective 1995 periods. 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 4, 1996 and October 28, 1995 are comprised of the
following components:
1996 1995
Raw materials $ 28,807 $ 23,368
Finished goods 11,246 9,634
$ 40,053 $ 33,002
6
<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE C - Earnings Per Share
Primary net earnings per common share is computed based upon the
weighted average number of common shares outstanding during each period,
after consideration of the dilutive effect of stock options. Such average
shares were:
Period Quarter Ended Six Months Ended
May 4, 1996 24,603,000 24,456,000
April 29, 1995 9,566,000 9,478,000
Fully diluted net earnings per common share assumes conversion of
securities when the earnings per share result is dilutive. Assumed
conversions increased the weighted average number of common shares
outstanding to:
Period Quarter Ended Six Months Ended
May 4, 1996 24,779,000 24,759,000
April 29, 1995 24,019,000 23,986,000
The increase in the weighted average share total from 1995 was due to
the third quarter 1995 conversion of the Company's preferred stock.
Effective May 1, 1995, all of the Company's Preferred Stockholders converted
their shares into the Company's common stock. The conversion increased the
Company's outstanding common shares by 14,274,635. If the Preferred
Stockholders had converted their shares at the beginning of 1995, the primary
net earnings per share reported for the quarter and six months ended April
29, 1995 would have been $.16 and $.29, respectively.
NOTE D - Cash Flow Information
Supplemental information on cash flows and noncash transactions for the
six months ended May 4, 1996 and April 29, 1995 is as follows:
1996 1995
Cash paid for:
Interest $ 2,145 $ 2,423
Income taxes $ 4,228 $ 1,635
Schedule of business acquisition:
Fair value of assets acquired $ - $ 26,030
Liabilities assumed - (1,970)
Total cash paid for the net assets acquired $ - $ 24,060
7
<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE E - Commitments and Contingencies
On June 2, 1992, Mr. Lawrence M. Powers, a former Director and former
Chairman of the Board and Chief Executive Officer of the Company, filed a
lawsuit in the United States District Court for the Southern District of New
York against the Company and certain of its Directors and major shareholders.
In the suit, Mr. Powers claims that, by reason of the Company's April 30,
1992 debt-to-equity restructuring (which he had previously, on April 13,
1992, voted in favor of as a Director), the Company should adjust his
existing stock options, provide for the issuance of 167,744 additional shares
of common stock to him, and award to him attorney's fees and interest. Mr.
Powers seeks judgment against the Company and the other defendants: (1) in
excess of $13,000 plus punitive damages, (2) requiring the Company to issue
him an additional 167,744 shares of common stock, (3) requiring an adjustment
increasing his then outstanding options to purchase the Company's common
stock from 1,871,201 shares to 4,080,000 shares, and (4) for attorney's fees
and interest. In June, 1993, in responding to the Company's request for
summary judgment, the Court ruled the Board of Directors' decision to not
adjust Mr. Powers' options was "final, binding and conclusive" unless Mr.
Powers can establish the Board was not acting independently and that it could
not have acted appropriately. Discovery has concluded in the litigation, and
the Company, together with the other defendants, have moved for summary
judgment dismissing the complaint. On January 9, 1996, Mr. Powers filed a
similar lawsuit in the Circuit Court of St. Louis County, Missouri against
the Company and two officer directors. The Company believes that this is
simply a restatement of the claims made in the 1992 lawsuit. The Company
believes Mr. Powers' lawsuits are without merit and will continue defending
against them vigorously.
8
<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE F - Subsequent Event
On May 9, 1996, the Company completed its acquisition of Portage
Industries Corporation ("Portage") by means of a cash merger pursuant to
which Spartech Plastics, Inc., a newly formed, wholly-owned subsidiary of the
Company, was merged with and into Portage.
Pursuant to an Agreement and Plan of Merger among the Company, Spartech
Plastics, Inc., and Portage, each share of Portage Common Stock was converted
into the right to receive $6.60 in cash. The total price for all outstanding
shares of Portage's stock totaled approximately $17 million in cash,
including estimated costs of the transaction. The purchase price was
determined by arms' length negotiations between the parties. The purchase
was funded by the Company's existing unsecured credit facility.
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The Company's fiscal year ends on the Saturday closest to October 31.
Fiscal year 1996 will include 53 weeks compared to 52 weeks in 1995. As a
result, the first quarter ended February 3, 1996 and six months ended May 4,
1996 consist of 14 and 27 weeks, respectively, compared to 13 and 26 weeks
for the respective 1995 periods. The operating results presented below
include discussions as a percentage of sales for additional comparison.
Net sales for the 13 weeks and six months ended May 4, 1996 increased
from the similar periods in 1995. The extruded sheet & rollstock group
experienced sales increases of approximately 4% and 7%, respectively, for the
13 weeks and six months ended May 4, 1996, over the similar periods of 1995.
The increases reflect a 2% increase in pounds shipped and a change in mix to
higher-priced engineered thermoplastic products for the sign and advertising
markets. Sales by the merchant compounding group were relatively flat for
the 13 weeks and six months ended May 4, 1996, from the similar periods in
1995.
Cost of sales dollars increased for both the 13 weeks and six months
ended May 4, 1996, compared with the similar periods of 1995, but decreased
somewhat when stated as a percentage of net sales. The stabilization of raw
material prices and improved production efficiencies, partially offset by an
increase in depreciation as a result of capital expenditures incurred by the
Company during the last 12 months, contributed to a more favorable cost of
sales percentage.
Selling and administrative expense decreased in dollars and as a percent
of net sales for the 13 weeks and six months ended May 4, 1996, compared to
the similar periods for 1995. The decrease was the result of cost
containment efforts and higher legal fees incurred in the second quarter of
1995 (as the Company continued to address the Powers litigation discussed in
Note E - Commitments and Contingencies, in Item 1 of this report.)
Operating earnings for the 13 weeks ended May 4, 1996 were $8.7 million
(8.9% of net sales) compared to $6.7 million (7.0% of net sales) in the
comparable period for 1995. Operating earnings for the six months ended May
4, 1996 were $15.9 million (8.6% of net sales) compared to $12.1 (6.9% of net
sales) of the corresponding period in 1995. The gains in operating earnings
were achieved through the increased sales discussed above, production
efficiencies, and cost containment efforts.
Interest expense for the 13 weeks and six months ended May 4, 1996
decreased from the similar periods in 1995, reflecting both the refinancing
of the Company's Bank Credit Facility and completion of a $50 million Private
Placement in the last quarter of fiscal 1995 at more favorable rates than the
previous financing arrangements.
10
<PAGE>
As a result of the final utilization of the Company's book net operating
loss carry forwards in 1995, the income tax provision was substantially
higher during the second quarter and first half of fiscal year 1996, compared
to the similar periods in 1995. The Company's effective tax rate was
approximately 27% for both periods of 1995 and 38% in 1996. However, actual
tax payments in 1996 will be only 70-80% of the provision due to the tax net
operating loss carryforwards and depreciation timing differences.
Financial Condition
Operations
Cash flow from operations reflects the Company's increase in
profitability, offset by increases in inventories related primarily to bulk
purchases in the first half of 1996 and accounts receivables associated with
the growth in sales levels. Periodically the Company makes large volume
purchases of raw material to take advantage of favorable prices. In
addition, the increased tax expense resulted in higher tax payments in the
second quarter of 1996 compared to 1995. These uses of cash were somewhat
offset by increases in current liabilities.
Investing Activities
Capital expenditures for the six months ended May 4, 1996 decreased
slightly as compared to the same period of 1995. The Company anticipates
making total capital expenditures of approximately $8 million in 1996 of
which $5.2 million have been made through May 4, 1996. New extrusion lines,
at the Spartech Compounding, and Spartech Plastics - Cape Girardeau, Missouri
facilities, represent the major items included in this figure. Capital
requirements for the recently acquired Spartech Plastics - Portage, Wisconsin
operation are currently being evaluated. Reference is made to Note F -
Subsequent Event, in Item 1 of this report, which is incorporated herein by
reference, for a discussion of the Company's acquisition of all the
outstanding stock of Portage Industries Corporation in a cash merger
transaction, which was effective May 9, 1996.
Financing Activities
The Company anticipates that cash flow from operations and the
additional borrowing capacity provided under the Company's $40 million bank
credit facility will adequately provide the necessary operating funds for the
balance of fiscal year 1996. As of May 4, 1996, $8 million was outstanding
under this facility. Cash flows from financing activities includes the
payment of quarterly dividends, the first of which was declared in the third
quarter of fiscal 1995.
11
<PAGE>
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
At the Annual Shareholders meeting held March 23, 1996,
Mr. W.R. Clerihue was elected as a Director of the Company
with 9,464,220 votes for, 15,087 against and 1,827,594
shares unvoted. Mr. Jackson W. Robinson was also elected as
a Director of the Company with 9,465,377 votes for, 13,930
against and 1,827,594 shares unvoted. Arthur Andersen & Co
was ratified as the Company's auditors with 9,460,483 votes
for, 12,122 against and 1,834,296 shares unvoted.
Item 6 (a). Exhibits
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
Item 6 (b). Reports on Form 8-K
None
12
<PAGE>
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: May 31, 1996 /s/ Bradley B. Buechler
Bradley B. Buechler
President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Randy C. Martin
Randy C. Martin
Vice President of Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
13
<PAGE>
EXHIBIT 11
SPARTECH CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
<TABLE>
<S> <C> <C> <C> <C>
QUARTER ENDED SIX MONTHS ENDED
May 4, April 29, May 4, April 29,
1996 1995 1996 1995
NET EARNINGS
Net Earnings $ 4,775 $ 3,950 $ 8,561 $ 7,075
Less: Preferred stock dividend requirements - (549) - (1,098)
Primary net earnings applicable to common shares 4,775 3,401 8,561 5,977
Add: Preferred stock accretion elimination resulting from
the assumed conversion of preferred stock - 549 - 1,098
Fully diluted net earnings applicable to common shares $ 4,775 $ 3,950 $ 8,561 $ 7,075
WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average common shares outstanding 23,419 8,734 23,387 8,708
Add: Shares issuable from assumed exercise of options
(in excess of the 20% limitation for 1995) 1,184 832 1,069 770
Primary weighted average shares outstanding 24,603 9,566 24,456 9,478
Add: Shares issuable from assumed conversion of preferred
stock - 14,275 - 14,275
Additional shares issuable from assumed exercise of
options (in excess of the 20% limitation in 1995) due
to the difference in the share repurchase price under
the fully diluted computation 176 178 303 233
Fully diluted weighted average shares outstanding 24,779 24,019 24,759 23,986
NET EARNINGS PER SHARE
Primary $ .19 $ .36 $ .35 $ .63
Fully Diluted $ .19 $ .16 $ .35 $ .29
NOTE: Prior to May 1, 1995, Primary and Fully Diluted Net Earnings Per Common Share were computed using the Modified Treasury Stock
Method. Due to the 1995 conversion of the Company's Preferred Stockholders, the Treasury Stock Method was used to compute
Primary and Fully Diluted Net Earnings Per Common Share for 1996.
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
CONDENSED BALANCE SHEET AND THE CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-02-1996
<PERIOD-END> MAY-04-1996
<CASH> 3,053
<SECURITIES> 0
<RECEIVABLES> 56,226
<ALLOWANCES> 1,333
<INVENTORY> 40,053
<CURRENT-ASSETS> 99,191
<PP&E> 96,768
<DEPRECIATION> 31,281
<TOTAL-ASSETS> 189,942
<CURRENT-LIABILITIES> 50,377
<BONDS> 0
0
0
<COMMON> 17,687
<OTHER-SE> 61,143
<TOTAL-LIABILITY-AND-EQUITY> 189,942
<SALES> 185,796
<TOTAL-REVENUES> 185,796
<CGS> 157,922
<TOTAL-COSTS> 169,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,201
<INCOME-PRETAX> 13,700
<INCOME-TAX> 5,139
<INCOME-CONTINUING> 8,561
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,561
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
