SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1998
Commission File Number 1-5911
SPARTECH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 43-0761773
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
7733 Forsyth Boulevard, Suite 1450, Clayton, Missouri, 63105
(Address of principal executive offices)
(314) 721-4242
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
Number of common shares outstanding as of August 1, 1998:
Common Stock, $.75 par value per share 27,055,314
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
August 1, 1998
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
as of August 1, 1998 and November 1, 1997 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the quarter and nine months
ended August 1, 1998 and August 2, 1997 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for nine months ended
August 1, 1998 and August 2, 1997 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION 12
SIGNATURES 13
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands, except share amounts)
ASSETS
August 1, 1998
(unaudited) Nov. 1, 1997
Current Assets
Cash and equivalents $ 8,373 $ 6,058
Receivables, net 91,921 74,271
Inventories 65,887 55,851
Prepayments and other 11,008 4,517
Total Current Assets 177,189 140,697
Property, Plant and Equipment 256,450 173,743
Less accumulated depreciation 54,745 44,381
Net Property, Plant and Equipment 201,705 129,362
Goodwill 148,521 83,565
Other Assets 5,920 5,179
$533,335 $358,803
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,752 $ 921
Accounts payable 61,292 47,221
Accrued liabilities 40,677 29,126
Total Current Liabilities 103,721 77,268
Long-Term Debt, Less Current Maturities 249,393 141,693
Other Liabilities 30,150 11,453
Total Long-Term Liabilities 279,543 153,146
Shareholders' Equity
Common stock, 27,530,107 shares issued
in 1998 and 26,619,154 in 1997 20,645 19,971
Contributed capital 99,190 89,301
Retained earnings 42,998 22,912
Treasury stock, at cost, 474,793 shares
in 1998 and 190,815 shares in 1997 (8,551) (2,127)
Cumulative translation adjustments (4,211) (1,668)
Total Shareholders' Equity 150,071 128,389
$533,335 $358,803
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited and amounts in thousands, except per share data)
QUARTER ENDED NINE MONTHS ENDED
August 1, August 2, August 1,August 2,
1998 1997 1998 1997
Net Sales $ 177,702 $123,170 $476,490 $366,372
Costs and Expenses
Cost of sales 147,512 102,735 395,902 306,671
Selling and administrative 10,059 7,473 27,588 22,327
Amortization of intangibles 989 337 2,239 983
158,560 110,545 425,729 329,981
Operating Earnings 19,142 12,625 50,761 36,391
Interest 4,108 1,771 9,448 5,774
Earnings Before Income Taxes 15,034 10,854 41,313 30,617
Income Taxes 6,014 4,123 16,409 11,732
Net Earnings $ 9,020 $ 6,731 $ 24,904 $ 18,885
Net Earnings Per Common Share:
Basic $ .33 $ .25 $ .93 $ .72
Diluted $ .31 $ .24 $ .87 $ .68
Weighted Average Number of
Shares Used in Computing Net
Earnings per Common Share:
Basic 27,102 26,403 26,775 26,387
Diluted 29,103 27,991 28,664 27,824
Dividends Per Common Share $ .06 $ .05 $ .18 $ .15
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
NINE MONTHS ENDED
August 1, 1998 August 2, 1997
Cash Flows From Operating Activities
Net earnings $ 24,904 $ 18,885
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 13,217 8,488
Change in current assets and
liabilities, net of effects of
acquisitions 5,411 367
Other, net 6,153 (65)
Net cash provided by operating
activities 49,685 27,675
Cash Flows From Investing Activities
Capital expenditures (10,594) (8,522)
Business Acquisitions (122,028) (9,701)
Retirement of assets 75 256
Net cash used for investing activities (132,547) (17,967)
Cash Flows From Financing Activities
Bank borrowings for business acquisitions 121,988 -
Net borrowings (payments) on revolving
credit facilities (24,688) (4,200)
Payments on bonds and leases (1,304) (324)
Cash dividends on common stock (4,817) (3,959)
Stock options exercised 1,568 1,431
Treasury stock acquired (7,430) (3,326)
Other, net - -
Net cash provided by (used for)
financing activities 85,317 (10,378)
Effect of exchange rate changes on cash
and equivalents (140) (85)
Increase In Cash and Equivalents 2,315 (755)
Cash and Equivalents At Beginning Of Period 6,058 4,685
Cash and Equivalents At End Of Period $ 8,373 $ 3,930
See accompanying notes to consolidated financial statements.
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE A - Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Spartech Corporation and its wholly-owned subsidiaries (the "Company"). These
financial statements have been prepared on a condensed basis and, accordingly,
certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the financial
statements contain all adjustments (consisting solely of normal recurring
adjustments) and disclosures necessary to make the information presented therein
not misleading. These financial statements should be read in conjunction with
the consolidated financial statements and accompanying footnotes thereto
included in the Company's November 1, 1997 Annual Report on Form 10-K.
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 August 1, 1998 and August 2, 1997 are comprised of, the
following components:
1998 1997
Raw materials $ 43,726 $ 37,832
Finished goods 22,161 18,019
$ 65,887 $ 55,851
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE C - Cash Flow Information
Supplemental information on cash flows and noncash transactions for the
nine months ended August 1, 1998 and August 2, 1997 is as follows:
1998 1997
Cash paid for:
Interest $ 7,127 $ 2,989
Income taxes $ 7,532 $ 7,786
NOTE D - Commitments and Contingencies
The Company currently has no litigation with respect to any environmental
matters.
Note E - Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 - "Earnings Per Share" ("SFAS 128") which
specifies the computation, presentation and disclosure requirements for EPS.
Effective with its financial statements for the first quarter ending January 31,
1998, SFAS 128 replaced the presentation of primary and fully diluted EPS
pursuant to Accounting Principles Board Opinion No. 15 - "Earnings Per Share"
("APB 15") with the presentation of basic and diluted EPS. Basic EPS excludes
any dilution and is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. All prior-period EPS data has been restated in
accordance with SFAS 128.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net sales were $177.7 million and $476.5 million for the quarter and nine
months ended August 1, 1998, representing a 44% and 30% increase from the
similar periods in 1997. These results include an increase in pounds sold by
the Company's Extruded Sheet & Rollstock and Color & Specialty Compounds Groups,
the effect of the late 1997 acquisition of Preferred Plastic Sheet, the March
31, 1998 acquisition of Polycom Huntsman, Inc, and the April 26, 1998
acquisition of Plasticolour.
Net sales of the Extruded Sheet & Rollstock Group increased approximately
25% for the quarter ended August 1, 1998 and 26% for the nine months ended
August 1, 1998 over the 1997 periods, with the August 1997 acquisition of
Preferred Plastics accounting for the majority of the growth. The increase in
Extruded Sheet & Rollstock sales for the nine months resulted from a 11%
increase in base volume as a result of strong sales of higher margin
sign/advertising and specialty packaging products and a 19% increase in net
sales related to the Preferred Plastic Sheet acquisition. Price and product mix
changes had a negative 4% impact on sales for the nine months. Net sales in the
Color & Specialty Compounds Group increased by 152% for the quarter ended August
1, 1998 and 66% for the nine months ended August 1, 1998 versus the comparable
1997 periods. Revenues of approximately $31.6 million generated by our 1998
acquisitions Polycom Huntsman and Plasticolour operations more than offset this
segment's 14% price/mix related decline in sales for the nine months--primarily
due to the additional tolling volume in 1998. This increase in tolling business
was also the principle reason for the group's 13% growth in base volume over the
1997 periods. The Molded Products Group had $9.3 million in sales and $1.1
million in operating earnings for the quarter.
Cost of sales increased to $147.5 million for the quarter ended August 1,
1998, compared with $102.7 million for the same period of 1997, but decreased to
83.0% of net sales for 1998 from 83.4% for 1997. The cost of sales percentages
were 83.1% and 83.7% for the nine months ended August 1, 1998 and August 1,
1997, respectively. The more favorable cost of sales percentages in 1998
represents a decline in overall raw material prices and improved production
efficiencies, partially offset by an increase in depreciation as a result of
capital expenditures incurred by the Company during the last 24 months.
Selling and administrative expenses were $10.1 million and $27.6 million
for the quarter and nine months ended August 1, 1998 compared to $7.5 million
and $22.3 million for the similar periods in 1997. On a percentage of net sales
basis, selling and administrative costs for the quarter decreased to 5.7% in
1998 from 6.1% in 1997 primarily as a result of continued cost containment
efforts in 1998, ongoing synergies from acquisitions, and the effect of the
overall increase in sales volume on the fixed portion of the costs. The 1998
nine-month percentage decreased to 5.8% from 6.1% for the same period last year.
Operating earnings for the quarter ended August 1, 1998 were $19.1 million
(10.8% of net sales) compared to $12.6 million (10.3% of net sales) for the
corresponding period in 1997. Operating earnings for the nine months ended
August 1, 1998 were $50.8 million (10.7% of net sales) compared to $36.4 million
(9.9% of net sales) for the nine months in 1997. These gains in operating
earnings were achieved through the increased sales levels, improved production
efficiencies, cost containment efforts, and the declines in raw material prices,
discussed above.
Interest expense for the quarter and nine months ended August 1, 1998 of
$4.1 million and $9.4 million increased from the same periods in 1997 as a
result of borrowings related to the Preferred Plastics and Polycom Huntsman
acquisitions completed in August 1997 and March 1998, respectively.
The Company's effective tax rate was 40% for the quarter and nine months of
1998 compared to 38% in 1997. The increase reflects the impact of non-
deductible goodwill resulting from the Polycom Huntsman acquisition.
Environmental and Inflation
The Company is subject to various laws governing employee safety and
federal, state, & local laws, and regulations governing the quantities of
certain specified substances that may be emitted into the air, discharged into
interstate and intrastate waters, and otherwise disposed of on and off the
properties of the Company. The Company does not anticipate that future
expenditures for the compliance with such laws and regulations will have a
material effect on its capital expenditures, earnings, or competitive position.
The plastic resins used by the Company in its production process are crude
oil or natural gas derivatives and are available from a number of domestic and
foreign suppliers. Accordingly, the Company's raw materials are only somewhat
affected by supply, demand and price trends of the petroleum industry; pricing
of the resins tends to follow its own supply and demand equation except in
periods of anticipated or actual shortages of crude oil or natural gas. The
Company is not aware of any trends in the petroleum industry which will
significantly affect its sources of raw materials in 1998.
The effects of inflation have not been significant on the overall
operations of the Company during the last few years. No material amount of the
Company's sales are made pursuant to fixed price, long-term contracts. The
Company has historically been successful in compensating for inflationary costs
through increased selling prices and/or increased productivity and related
efficiencies. The Company anticipates this trend will continue in the future.
Liquidity and Capital Resources
Cash Flow
The Company's primary sources of liquidity have been cash flows from
operating activities and borrowings from third parties. The Company's principal
uses of cash have been to support its operating activities, invest in capital
improvements, and finance strategic acquisitions. The Company's cash flows for
the periods indicated are summarized as follows:
Nine Months
1998 1997
(Dollars in millions)
Net cash provided by
operating activities $ 49.7 $ 27.7
Net cash used for
investing activities $(132.5) $ (18.0)
Net cash provided by (used for)
financing activities $ 85.3 $ (10.4)
The Company continues to generate strong cash flows from operations, resulting
from the 32% increase in net earnings in the first nine months of 1998 compared
to the corresponding period of the prior year. Nine month operating cash flows
provided by changes in working capital were a positive $5.4 million as a result
of improved management of accounts receivables, inventories, and accounts
payable.
The Company's primary investing activities are capital expenditures and
acquisitions of businesses in the plastics industry. Capital expenditures are
primarily incurred to maintain and improve productivity, as well as to modernize
and expand facilities. Capital expenditures for the nine months ended August 1,
1998 and August 2, 1997 were $10.6 million and $8.5 million, respectively. The
Company anticipates total capital expenditures of approximately $18 million for
fiscal 1998, including additions for capacity expansions at the Polycom
facilities acquired in 1998. Also impacting the first half 1998 cash used for
investing activities was the final payment of $3.1 million on the Preferred
Plastics acquisition to Echlin in January 1998
On March 31, 1998, the Company completed its acquisition of all the stock of
Polycom Huntsman. The net cash purchase price was approximately $129 million
(including estimated costs of the transaction and net of cash acquired of $3
million). The acquisition was funded through the Company's bank credit facility
and the issuance of $10 million in Spartech common stock to Polycom
shareholders. Polycom's color & specialty compounding and toll compounding
services generate annual sales of approximately $115 million.
On April 26, 1998, the Company completed the purchase of the net assets of
Prismaplast Canada Ltd. of Montreal. Prismaplast, commonly known as
Plasticolour, produces color concentrates & specialty compounds with net sales
for 1997 of approximately $10 million. The acquisition price for Plasticolour
approximated $5 million, which was financed through operating cash flow and our
bank credit facility.
The cash flows provided by financing activities were $85.3 million for the
first nine months of 1998. The primary activities were the bank borrowings of
$122.0 million for the Polycom Huntsman acquisition, repayment of debt of $26.0
million net of the $3.1 million borrowed to fund the final installment due to
Echlin, cash dividend payments of $4.8 million, and purchases of treasury stock
of $5.9 million net of proceeds from stock options exercised of $1.6 million.
Financing Arrangements
On March 31, 1998 the Company amended its $40 million bank credit facility
to $150 million. The bank credit facility has a five-year term, with interest
payable at a rate chosen by the Company of either prime or LIBOR plus .5% to
1.0%. The bank credit facility consists of a $50 million term loan, which has
equal quarterly payments due of $2.5 million over five years, and a $100 million
revolving facility. At August 1, 1998, the Company had total borrowings under
the bank credit facility of $97.6 million at a weighted average rate of 7.0%
The Company anticipates that cash flow from operations, together with the
financing and borrowings under the Company's bank credit facility, will satisfy
its working capital needs, regular quarterly dividends, and planned capital
expenditures for the next year.
Other
The Company has already modified substantially all of its computer systems
to be Year 2000 compliant. In addition, the Company has communicated with
others with whom it does significant business to determine their Year 2000
compliance readiness and the extent to which the Company is vulnerable to any
third party Year 2000 issues. The Company does not anticipate any significant
costs, problems, or uncertainties associated with becoming Year 2000 compliant.
The information presented herein contains certain forward-looking
statements, as defined in the Private Securities Litigation Reform Act (PSLRA)
of 1995, which are based on current expectations and are subject to risk and
uncertainties. The Company desires to take advantage of the "safe harbor"
provisions of the PSLRA by cautioning that numerous important factors, in some
cases have affected, and in the future could affect, the Company's actual
results and could cause its consolidated results to differ materially from those
expressed in or implied by the forward-looking statements or related
assumptions. Investors are directed to the discussion of risks and
uncertainties associated with forward-looking statements contained in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
PART II - OTHER INFORMATION
Item 6 (a). Exhibits
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
Item 6 (b). Reports on Form 8-K
A report on form 8-K/A , dated June 15, 1998, announcing the completion
of the purchase of the stock of Polycom Huntsman, Inc. and its Subsidiaries
("Polycom"). Pursuant to Items 7(a)4 and 7(b)2 of Form 8-K, this amendment was
submitted to file certain financial statements of the business acquired and
pro forma financial statements related to the Polycom acquisition.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPARTECH CORPORATION
(Registrant)
Date: August 28, 1998 /s/ Bradley B. Buechler
Bradley B. Buechler
President and Chief
Executive Officer
(Principal Executive Officer)
Date: August 28, 1998 /s/ Randy C. Martin
Randy C. Martin
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
EXHIBIT 11
SPARTECH CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
QUARTER ENDED NINE MONTHS ENDED
Aug. 1, Aug. 2, Aug. 1, Aug. 2
1998 1997 1998 1997
NET EARNINGS
Basic and diluted
net earnings $ 9,020 $ 6,731 $ 24,904 $ 18,885
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic weighted average common
shares outstanding 27,102 26,403 26,775 26,387
Add: Shares issuable from
assumed exercise of options 2,001 1,588 1,889 1,437
Diluted weighted average 29,103 27,991 28,664 27,824
shares outstanding
NET EARNINGS PER COMMON SHARE
Basic $ .33 $ .25 $ .93 $ .72
Diluted $ .31 $ .24 $ .87 $ .68
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