PAGE 9
SPARTECH CORPORATION
2000 Annual Report
Management's Discussion and Analysis
Business Overview
Spartech is an intermediate processor of thermoplastics which converts base
polymers or resins from commodity suppliers into extruded plastic sheet and
rollstock, cell cast acrylic sheet, color concentrates & blended resin
compounds, and injection molded & profile extruded products for customers in a
wide range of markets. We operate 50 production facilities throughout North
America and one in Europe, and are organized into three business segments: (1)
Custom Sheet & Rollstock (65% of total sales), (2) Color & Specialty Compounds
(24% of total sales), and (3) Molded & Profile Products (11% of total sales).
The results discussed below include our 1998 acquisitions of Polycom Huntsman,
Inc. (March 1998), Prismaplast Canada Ltd. (April 1998), and Anjac-Doron
Plastics, Inc. (October 1998); the 1999 acquisitions of Lustro Plastics Company
(January 1999), Alltrista Plastic Packaging (May 1999), Accura Molding Company,
Ltd. (October 1999), OS Plastics (October 1999), and GeoPlast (October 1999);
and our 2000 acquisitions of High Performance Plastics, Inc. (HPP), a wholly-
owned subsidiary of Uniroyal Technology Corporation (February 2000), and Alshin
Corporation (October 2000), from the date of acquisition.
Results of Operations
Comparison of Fiscal Years 2000 and 1999
Consolidated net sales increased 25%, from $767.9 million to $961.4 million,
including 8% from internal growth. Net sales of the Custom Sheet & Rollstock
segment increased 26%, from $494.1 million to $623.7 million. This was due
primarily to a 7% increase in internal growth and a 19% increase in sales
related to the Lustro, Alltrista, OS Plastics, and HPP acquisitions. Sales to
the growing packaging market, net of decreases in sales for manufactured
housing, recreational vehicle, and agriculture applications, was the primary
factor in the increase in total pounds sold for the sheet group. Net sales of
the Color & Specialty Compounds group increased 10%, from $217.6 million to
$240.5 million. This was the result of volume increases of 5% and price/mix
changes adding another 5% to sales. Sales for the Molded & Profile Products
group increased 73%, from $56.2 million to $97.3 million, primarily as a result
of the acquisitions of Accura, GeoPlast, and HPP. The sluggishness of several
customer end markets is expected to continue through the first half of 2001, but
we continue to focus on Product Transformations, new opportunities in packaging
markets utilizing Alloy Plastics, and the completion of the modernization of our
Spartech Polycast-Stamford facility to improve our sales.
Cost of sales increased from $630.9 million to $789.8 million, but decreased
slightly as a percentage of net sales from 82.2% to 82.1%. The cost of sales
percentage in 2000 reflected the net effect of improvements in production
efficiencies mostly offset by the impact of increasing resin prices, higher raw
material costs, research & development costs on pending projects, and costs to
convert three production plants to warehouse facilities during the year.
PAGE 10
Selling, general, and administrative expenses increased from $45.1 million to
$55.3 million, but dropped to 5.8% as a percentage of net sales.
Operating earnings increased 25%, from $87.7 million to $109.8 million.
Operating earnings as a percentage of net sales remained at 11.4% despite
significant increases in resin prices during fiscal 2000, as our Pyramid of
Productivity teams worked to improve our key measures of pounds produced per
machine hour, reject rates, and machine downtime.
Interest expense increased from $16.2 million to $29.1 million, as a result of
borrowings related to our 1999 and 2000 acquisitions.
Our effective tax rate decreased from 39.8% to 38.1% as a result of the
implementation of the initial phase of our state tax restructuring effort. We
expect this lower rate to be in effect for fiscal 2001 as well, with continuing
benefits anticipated from several tax reduction projects.
Comparison of Fiscal Years 1999 and 1998
Consolidated net sales increased 17%, from $653.9 million to $767.9 million,
including 8% from internal growth. Net sales of the Custom Sheet & Rollstock
segment increased 9%, from $455.1 million to $494.1 million. This was due
primarily to a 7% increase in pounds sold and a 5% increase in sales related to
the Lustro and Alltrista acquisitions, offset in part by a negative 3%
price/product mix change. Sales to the growing packaging and recreation &
leisure markets were the primary factor in the increase in pounds sold for the
sheet group. Net sales of the Color & Specialty Compounds group increased 38%,
from $158.2 million to $217.6 million. This was primarily the result of our 1998
mid-year acquisitions of Polycom and Prismaplast. Pounds sold increased by 9%
while price and product mix changes had a negative 5% effect on sales. The
negative price change reduced sales dollars, mostly reflecting an increase in
our tolling business, which is the value-added processing and conversion of
customer-owned material. Sales for the Molded & Profile Products group increased
38%, from $40.6 million to $56.2 million, primarily as a result of our 1998
acquisition of Anjac-Doron.
Cost of sales increased from $542.6 million to $630.9 million, but as a
percentage of net sales decreased from 83.0% to 82.2%. The more favorable cost
of sales percentage in 1999 was primarily due to improved production
efficiencies and sales of Alloy Plastics and Product Transformation products,
partially offset by an increase in depreciation as a result of our capital
expenditures during the last 24 months.
Selling, general, and administrative expenses increased from $38.3 million to
$45.1 million, but remained at 5.9% as a percentage of net sales.
Operating earnings increased 26%, from $69.7 million to $87.7 million. Operating
earnings as a percentage of net sales also increased from 10.7% to 11.4%. These
gains in operating earnings were achieved through the increased sales levels,
improved production efficiencies, and the sale of Alloy Plastics, discussed
above.
PAGE 11
Interest expense and distributions on Preferred Securities increased 19%, from
$13.6 million to $16.2 million, as a result of borrowings related to the 1998
and 1999 acquisitions.
Our effective tax rate decreased from 39.9% to 39.8% as we gained some synergies
in our multi-jurisdiction tax filings across our 43 operations.
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. We do not
anticipate that future expenditures for compliance with these laws and
regulations will have a material effect on our capital expenditures, earnings,
or competitive position.
The plastic resins we use in our production process are crude oil or natural gas
derivatives which are available from a number of domestic and foreign suppliers.
Accordingly, our raw materials are only somewhat affected by supply, demand, and
price trends of the petroleum industry. The pricing of resins tends to be
independent of crude oil or natural gas prices except in periods of anticipated
or actual shortages. We are not aware of any trends in the petroleum industry
which will significantly affect our sources of raw materials in 2001.
Sidebar Bar Chart
Net Sales
In Million of Pounds
1998 = 902
1999 = 1,186
2000 = 1,309
Sidebar Bar Chart
Gross Margin
As % of Sales
1998 = 17.0%
1999 = 17.8%
2000 = 17.9%
Sidebar Bar Chart
SG&A Expenses
As a Percent of Sales
1998 = 5.9%
1999 = 5.9%
2000 = 5.8%
Sidebar Bar Chart
Operating Earnings
In Millions of Dollars
1998 = $69.7
1999 = $87.7
2000 = $109.8
Liquidity and Capital Resources
Cash Flow
Our primary sources of liquidity have been cash flows from operating activities
and borrowings from third parties. Our principal uses of cash have been to
support our operating activities, invest in capital improvements, and finance
strategic acquisitions.
We continue to generate strong cash flows from operations, due in part to the
continuing increases in our net earnings. Operating cash flows used by changes
in working capital were $24.4 million in 2000 resulting from the significant
increases in our raw material costs during the year, while changes in working
capital provided $6.3 million of cash flow in 1999.
Our primary investing activities are capital expenditures and acquisitions of
businesses in the plastics industry. Capital expenditures are primarily incurred
to maintain and improve productivity, as well as to modernize and expand
facilities. Capital expenditures were $17.9 million for 1998, $24.7 million for
1999, and $29.2 million for 2000. We anticipate total capital expenditures of
approximately $20 million for 2001. The net cash purchase price for Polycom, in
March 1998, was approximately $129 million. In addition, we completed two other
acquisitions in fiscal 1998 which, when combined with the Polycom purchase,
totaled $132.6 million of cash paid for acquired businesses. Our 1999 business
acquisitions combined for a total cash paid of $64.8 million. In fiscal 2000, we
completed two acquisitions-the purchase of HPP for $215.4 million and Alshin for
$10.2 million. In the first half of fiscal 2001 we will focus primarily on
strengthening our balance sheet (working capital improvements and debt
reduction), but continue to evaluate value-added acquisition opportunities that
meet our stringent acquisition criteria.
PAGE 12
Our cash flows provided by financing activities were $82.9 million for 1998. The
primary activities were bank borrowings of $132.6 million for acquisitions,
repayment of debt of $33.5 million, purchases of treasury stock of $13.2
million, common stock dividends of $6.4 million, and proceeds from stock options
exercised of $4.3 million. Our cash flows provided by financing activities were
$14.3 million for 1999. The primary activities were bank borrowings of $64.8
million for acquisitions, repayment of debt of $42.6 million, purchases of
treasury stock of $16.6 million, common stock dividends of $7.6 million, and
proceeds from stock options exercised of $8.6 million. Our cash flows provided
by financing activities were $194.5 million for 2000. The primary activities
were bank borrowings of $225.6 million for acquisitions, repayment of debt of
$4.9 million, purchases of treasury stock of $22.7 million, and proceeds from
stock options exercised of $5.9 million. The lower debt repayments total in 2000
reflected the effect of higher stock repurchases, and the increases in capital
expenditures and working capital during the year. We paid common stock dividends
of $9.4 million, or 34 cents per share, in 2000, and at its December
2000 meeting, our board of directors raised the dividend to an annual rate of
38 cents per share.
Financing Arrangements
In conjunction with the Polycom acquisition, on March 31, 1998, we increased our
$40 million bank credit facility to an aggregate availability of $150 million.
The facility was unsecured and had a five-year term, with interest payable at a
rate chosen by us of either prime or LIBOR plus 0.5% to 1.0%. In conjunction
with our two Canadian acquisitions in October 1999, we entered into a credit
facility for an additional $20 million (in US dollars) of availability in
Canada. On February 25, 2000, in connection with the closing of the HPP
acquisition, we entered into a new $250 million bank credit facility
representing a revolving credit line with a five-year term. Interest on our bank
credit facility is payable at a rate chosen by us of either prime or LIBOR plus
a 0.625% to 1.250% borrowing margin. At October 28, 2000, our total borrowings
under the bank credit facilities were $220.4 million at a weighted average rate
of 7.5%, and we had $49.6 in remaining availability.
On November 8, 2000, we entered into an interest rate swap for $125 million of
our fixed LIBOR loans outstanding. Under the swap arrangement, our LIBOR rate is
fixed at 6.48%, plus the borrowing margin, for a period of two years. This swap
arrangement will be accounted for in accordance with Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities." The adoption of this standard in fiscal 2001 is not anticipated to
have a material effect on the consolidated financial statements.
PAGE 13
On March 5, 1999, we issued $50 million of 6.5% convertible subordinated
debentures to Spartech Capital Trust, a Delaware trust we control. We used the
proceeds to repay borrowings under our bank credit facility. The debentures are
(1) convertible into shares of our common stock at a conversion price equivalent
to $30.55 per share of common stock, for a total of 1,636,661 shares; (2)
redeemable on or after March 1, 2002, at the option of the Company; and (3)
payable on March 1, 2014, if they have not been previously redeemed or
converted.
On June 8, 1999, we announced the completion of a secondary public offering of
2,328,968 shares of our common stock. These shares represented all the common
stock of the Company owned by two selling shareholders. In addition to the
shares offered by the selling shareholders, we sold the underwriters an
additional 345,000 shares to cover over-allotments. The stock was sold to the
public at $24.00 per share. The net proceeds received by the Company from the
sale of the over-allotment shares, $7.6 million, was used to repay bank credit
facility borrowings in support of future strategic expansions.
On February 18, 2000, we issued $100 million of 7.0% convertible subordinated
debentures to Spartech Capital Trust. We used the proceeds to repay borrowings
under our bank credit facility. The debentures are (1) convertible into shares
of our common stock at a conversion price equivalent to $34.00 per share of
common stock, for a total of 2,941,476 shares; (2) redeemable after March 1,
2003, at the option of the Company; and (3) payable on March 31, 2015, if they
have not been previously redeemed or converted.
We anticipate that cash flows from operations, together with the financing and
borrowings under our bank credit facility, will satisfy our working capital
needs, regular quarterly dividends, and planned capital expenditures for the
next year.
Safe Harbor
This Report contains certain forward-looking statements, defined in Section 21E
of the Securities Exchange Act of 1934. Forward-looking statements represent our
judgement relating to, among other things, future results of operations, growth
plans, sales, capital requirements, and general industry and business conditions
applicable to us. They are based largely on our current expectations. Our actual
results could differ materially from the information contained in the forward-
looking statements due to a number of factors, including changes in the
availability and cost of raw materials, the level of financial leverage and
restrictions from our indebtedness agreements, unanticipated events that may
prevent us from competing in existing or new markets, and our ability to
successfully complete or integrate acquisitions. 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.
PAGE 14
Sidebar Bar Chart
Operating Cash Flow
In Millions of Dollars
1998 = $64.5
1999 = $76.5
2000 = $60.4
Sidebar Bar Chart
Capital Expenditures
In Millions of Dollars
1998 = $17.9
1999 = $24.7
2000 = $29.2
Sidebar Bar Chart
Cash Paid for Acquisitions
In Millions of Dollars
1998 = $132.6
1999 = $64.8
2000 = $225.6
Sidebar Bar Chart
Debt Repayments
In Millions of Dollars
1998 = $33.5
1999 = $42.6
2000 = $4.9
Sidebar Bar Chart
Fixed Rate Financings
% of Total Financings
1998 = 60%
1999 = 70%
2000 = 81%
Sidebar Bar Chart
Interest Rates
Weighted Average Rate
1998 = 6.7%
1999 = 6.7%
2000 = 7.2%
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except share amounts)
October 28,October 30,
2000 1999
ASSETS
Current Assets
Cash and equivalents $ 10,495 $ 8,890
Receivables, net of allowances
of $3,627 in 2000 and $3,016 in 1999 143,733 117,345
Inventories 95,130 72,108
Prepayments and other 8,443 8,634
-------- -------
Total Current Assets 257,801 206,977
-------- -------
Property, Plant and Equipment, Net 311,621 242,699
Goodwill 305,153 168,497
Other Assets 14,394 7,228
-------- ---------
$ 888,969 $ 625,401
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 18,667 $ 13,215
Accounts payable 90,077 78,644
Accrued liabilities 38,016 37,420
-------- --------
Total Current Liabilities 146,760 129,279
-------- --------
Long-Term Debt, Less Current Maturities 334,178 217,094
Other Liabilities 47,009 38,986
-------- --------
Total Long-Term Liabilities 381,187 256,080
-------- --------
Company-obligated, mandatorily redeemable convertible
preferred securities of Spartech Capital Trusts
holding solely convertible subordinated debentures 150,000 50,000
Shareholders' Equity
Common stock, 28,067,023 and 27,915,873
Shares issued in 2000 and 1999, respectively 21,039 20,925
Contributed capital 95,241 101,709
Retained earnings 126,149 85,651
Treasury stock, at cost, 1,203,456 shares in
2000 and 675,937 shares in 1999 (25,306) (14,835)
Cumulative translation adjustments (6,101) (3,408)
-------- --------
Total Shareholders' Equity 211,022 190,042
-------- --------
$ 888,969 $ 625,401
======== ========
See accompanying notes to consolidated financial statements.
PAGE 15
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
Fiscal Year
2000 1999 1998
Net Sales $961,428 $767,873 $653,855
-------- -------- --------
Costs and Expenses
Cost of sales 789,759 630,911 542,640
Selling, general and administrative 55,317 45,067 38,257
Amortization of intangibles 6,591 4,188 3,230
-------- -------- --------
851,667 680,166 584,127
-------- -------- --------
Operating Earnings 109,761 87,707 69,728
Interest 20,996 14,063 13,602
Distributions on preferred securities of
Spartech Capital Trusts 8,135 2,135 -
-------- -------- --------
Earnings Before Income Taxes 80,630 71,509 56,126
Income taxes 30,723 28,438 22,406
-------- -------- --------
Net Earnings $49,907 43,071 33,720
======== ======== ========
Net Earnings Per Common Share
Basic $ 1.83 $ 1.59 $ 1.26
======== ======== ========
Diluted $ 1.72 $ 1.48 $ 1.18
======== ======== ========
See accompanying notes to consolidated financial statements.
PAGE 16
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<CAPTION>
Cumulative Total
CommonContributed RetainedTreasuryTranslationShareholders'
Stock Capital Earnings Stock Adjustments Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1,
1997 $19,971 $89,301 $ 22,912 $(2,127) $(1,668) $ 128,389
------- -------- -------- -------- -------- --------
Common stock
issuance 476 9,524 - - - 10,000
Stock options
exercised 216 582 - 3,459 - 4,257
Cash dividends - - (6,447) - - (6,447)
Treasury stock
purchases - - - (13,207) - (13,207)
Net earnings - - 33,720 - - 33,720
Translation
adjustments - - - - (3,116) (3,116)
-------- -------- -------- -------- -------- --------
Balance, October 31,
1998 $20,663 $99,407 $ 50,185 $(11,875) $(4,784) $ 153,596
-------- -------- -------- --------- -------- --------
Common stock
issuance - 1,344 - 6,269 - 7,613
Stock options
exercised 262 958 - 7,394 - 8,614
Cash dividends - - (7,605) - - (7,605)
Treasury stock
purchases - - - (16,623) - (16,623)
Net earnings - - 43,071 - - 43,071
Translation
adjustments - - - - 1,376 1,376
------- -------- -------- -------- -------- --------
Balance, October 30,
1999 $20,925 $101,709 $ 85,651 $(14,835) $(3,408) $ 190,042
------- -------- -------- --------- -------- --------
Stock options
exercised 114 (6,468) - 12,231 - 5,877
Cash dividends - - (9,409) - - (9,409)
Treasury stock
purchases - - - (22,702) - (22,702)
Net earnings - - 49,907 - - 49,907
Translation
adjustments - - - - (2,693) (2,693)
-------- -------- -------- -------- --------- --------
Balance, October 28,
2000 $21,039 $95,241 $126,149 $(25,306) $(6,101) $ 211,022
======== ======== ======== ========= ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 17
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands, except per share amounts)
Fiscal Year
2000 1999 1998
Cash Flows From Operating Activities
Net earnings $ 49,907 $ 43,071 $ 33,720
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 31,905 23,222 18,530
Change in current assets
and liabilities, net of
effects of acquisitions:
Receivables (8,529) (12,944) (2,383)
Inventories (5,336) 685 (2,268)
Prepayments and other 211 1,411 1,314
Accounts payable (2,636) 12,337 4,257
Accrued liabilities (8,098) 4,784 151
Other, net 2,989 3,981 11,225
--------- --------- ---------
Net cash provided by operating
activities 60,413 76,547 64,546
--------- --------- ---------
Cash Flows From Investing Activities
Capital expenditures (29,192) (24,692) (17,859)
Business acquisitions (225,554) (64,826) (132,590)
Dispositions of assets 1,473 283 4,264
---------- --------- ---------
Net cash used for investing
activities (253,273) (89,235) (146,185)
---------- --------- ---------
Cash Flows From Financing Activities
Bank borrowings for business
acquisitions 225,554 64,826 132,590
Payments on bank credit facilities (2,996) (41,847) (32,190)
Payments on bonds and leases (1,863) (718) (1,272)
Issuance of common stock - 7,613 -
Debt issuance costs - - (801)
Cash dividends on common stock (9,409) (7,605) (6,447)
Stock options exercised 5,877 8,614 4,257
Treasury stock acquired (22,702) (16,623) (13,207)
--------- --------- ---------
Net cash provided by financing
activities 194,461 14,260 82,930
--------- --------- ---------
Effect of exchange rate changes on
cash and equivalents 4 71 (102)
Increase in cash and equivalents 1,605 1,643 1,189
Cash And Equivalents At Beginning Of Year 8,890 7,247 6,058
--------- --------- ---------
Cash And Equivalents At End Of Year $ 10,495 $ 8,890 $ 7,247
========= ========= =========
See accompanying notes to consolidated financial statements.
PAGE 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates. 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. Fiscal years
2000, 1999, and 1998 each consisted of 52 weeks, while fiscal year 2001 will
include 53 weeks.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of SPARTECH Corporation and its wholly-owned subsidiaries.
All significant intercompany transactions and balances have been eliminated.
Foreign Currency Translation - Assets and liabilities of the Company's non-U.S.
operations are translated from their functional currency to U.S. dollars using
exchange rates in effect at the balance sheet date. Results of operations are
translated using average rates during the period. Adjustments resulting from the
translation process are included as a separate component of shareholders'
equity. The Company may periodically enter into foreign currency contracts to
manage exposures to market risks from prospective changes in exchange rates. No
such contracts were outstanding as of October 28, 2000 or October 30, 1999.
Cash Equivalents - Cash equivalents consist of highly liquid investments with
original maturities of three months or less.
Inventories - Inventories are valued at the lower of cost (first-in, first-out)
or market. Finished goods include the costs of material, labor, and overhead.
Property, Plant and Equipment - Property, plant and equipment are carried at
cost. Depreciation is provided on a straight-line basis over the estimated
useful lives of the related assets as follows:
Years
Buildings and leasehold improvements 25
Machinery and equipment 12-16
Furniture and fixtures 5-10
Major renewals and betterments are capitalized. Maintenance and repairs are
expensed as incurred. Upon disposition, the net book value is eliminated from
the accounts, with the resultant gain or loss reflected in operations.
Goodwill - Goodwill, representing the excess of the purchase price over the fair
value of net assets acquired, is charged against operations on a straight-line
basis over the periods estimated to be benefited, not exceeding 40 years.
Goodwill amortization totaled $6,591, $4,188, and $3,230 in 2000, 1999, and
1998, respectively. Accumulated amortization at October 28, 2000 and October 30,
1999 totaled $21,251 and $14,660, respectively.
The Company reviews goodwill and other long-lived assets for impairment whenever
events and changes in business circumstances indicate the carrying value of the
assets may not be recoverable. It recognizes impairment losses if expected
undiscounted future cash flows of the related assets are less than their
carrying value. An impairment loss represents the amount by which the carrying
value of an asset exceeds the fair value of the asset. The Company did not
recognize any impairment losses for the periods presented.
Financial Instruments - The Company selectively uses derivative financial
instruments to manage its interest costs as well as its balance of floating rate
and fixed rate financings. No credit loss is anticipated as the counterparties
to these agreements are major financial institutions with high credit ratings.
The Company does not enter into derivatives for trading purposes. The net amount
to be paid or received under an interest rate swap agreement is accrued over the
life of the agreement as a separate component of interest expense. No such
derivatives were outstanding at October 28, 2000 or October 30, 1999.
PAGE 19
The Company uses the following methods and assumptions in estimating the fair
value of financial instruments:
Cash, accounts receivable, accounts payable, and accrued liabilities - the
carrying value of these instruments approximates fair value due to their
short-term nature;
Derivative Financial Instruments - Based upon quoted market prices or market
prices for instruments with similar terms and maturities; and
Long-term debt (including bank credit facilities) and mandatorily redeemable
convertible preferred securities - based on borrowing rates currently
available for these security instruments with similar terms and maturities,
the carrying value of these instruments approximates fair value.
Revenue Recognition - The Company manufactures products for specific customer
orders and for standard stock inventory. Revenues are recognized and billings
are rendered as the product is shipped to the customer.
Income Taxes - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets are also recognized for credit carry forwards based
on an assessment (which includes anticipating future income) in determining the
likelihood of realization. Deferred tax assets and liabilities are measured
using the rates expected to apply to taxable income in the years in which the
temporary differences are expected to reverse and the credits are expected to be
used. The effect of a change in tax rates on deferred tax assets and liabilities
is recognized in income in the period that includes the enactment date.
2) ACQUISITIONS
In October 2000, the Company completed its acquisition of Alshin Corporation, a
manufacturer of urethane-based tires supplying primarily the healthcare
industry, with annual sales of approximately $10,000. The cash purchase price of
approximately $10,200 was funded through our existing bank credit facility.
On February 28, 2000, the Company completed the purchase of substantially all of
the assets of HPP, a well-established manufacturer of extruded sheet and
rollstock, cell cast acrylic, and other proprietary plastic products, based in
South Bend, Indiana, with sales of approximately $130,000 for its most recent
fiscal year, which ended September 26, 1999. The net cash purchase price for HPP
was approximately $215,400 including costs of the transaction. The purchase was
financed through our new $250,000 bank credit facility. The fair value of the
assets acquired (including approximately $134,000 in goodwill) and liabilities
assumed (consisting of accounts payable and accrued liabilities) were $234,800
and $19,400, respectively.
In October 1999, the Company completed the acquisitions of the net assets of
Accura Molding Company, Ltd., OS Plastics, and GeoPlast Profile Extrusion. Sales
for the group of companies was approximately $24,000, and the cash purchase
price of approximately $21,000 was funded primarily through our revolving bank
credit facility in Canada. These acquisitions added custom injection molding,
extruded corrugated sheet, and profile extrusion product capabilities to the
Company.
On May 24, 1999, the Company completed its acquisition of the net assets of the
Plastic Packaging Division of Alltrista Corporation, a well-established
manufacturer of extruded sheet & rollstock packaging materials, based in Muncie,
Indiana, with sales approaching $30,000. The cash purchase price of
approximately $34,000 was funded through our existing bank credit facility.
On January 7, 1999, the Company completed its acquisition of the net assets of
Lustro Plastics Company, a custom sheet and rollstock extruder located in
Evanston, Illinois, with annual sales of approximately $28,000. The cash
purchase price of approximately $10,400 was funded through our existing bank
credit facility.
On October 30, 1998, the Company completed its purchase of all the stock of
Anjac-Doron Plastics, Inc., a custom profile extruder with annual sales of
approximately $9,000. The acquisition price of approximately $6,700 was financed
through our bank credit facility.
PAGE 20
On April 26, 1998, the Company completed the purchase of the net assets of
Prismaplast Canada Ltd. of Montreal, a producer of color concentrates and
specialty compounds, with net sales for 1997 of approximately $10,000. The
acquisition price approximated $5,000, which was financed through operating cash
flow and our bank credit facility.
On March 31, 1998, the Company completed its acquisition of all the stock of
Polycom Huntsman, Inc., a manufacturer of color & specialty compounds. The net
cash purchase price was approximately $129,000. The acquisition was funded
through our bank credit facility and the issuance of $10,000 in SPARTECH common
stock to Polycom shareholders. The fair value of the assets acquired (including
approximately $65,000 in goodwill) and liabilities assumed (consisting of
accounts payable, accrued liabilities, lease liabilities, and industrial revenue
bonds) were $171,000 and $39,000, respectively. For its fiscal year ended March
31, 1998, Polycom's color, specialty, and toll compounding businesses generated
annual sales of approximately $115,000.
All these acquisitions have been accounted for by the purchase method, and
accordingly, the results of operations were included in the Company's
Consolidated Statement of Operations from their respective date of acquisition.
The purchase price has been allocated to the assets and liabilities (on a
preliminary basis for the HPP Acquisition), and the excess of cost over the fair
value of net assets acquired is being amortized over a forty-year period on a
straight-line basis.
The following summarizes unaudited pro forma consolidated results of operations
assuming the OS Plastics, Accura, Alltrista, Lustro, GeoPlast, HPP, and Alshin
acquisitions had occurred at the beginning of each of the fiscal years
presented. The results are not necessarily indicative of what would have
occurred had these transactions been consummated as of the beginning of the
fiscal year presented, or of future operations of the consolidated companies.
Pro Forma (Unaudited)
2000 1999
Net Sales $1,013,103 $ 953,727
========== ==========
Earnings Before Income Taxes $ 82,055 $ 77,092
========== ==========
Net Earnings $ 50,789 $ 46,434
========== ==========
Net Earnings Per Common
Share - Diluted $ 1.75 $ 1.59
========== ==========
3) INVENTORIES
Inventories at October 28, 2000 and October 30, 1999 are comprised of the
following components:
2000 1999
Raw materials $ 55,253 $ 41,781
Finished goods 39,877 30,327
---------- ----------
$ 95,130 $ 72,108
========== ==========
4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at October 28, 2000 and
October 30, 1999:
2000 1999
Land $ 12,095 $ 6,936
Buildings and leasehold
improvements 65,947 51,559
Machinery and equipment 323,866 251,755
Furniture and fixtures 10,465 8,278
---------- ----------
412,373 318,528
Less accumulated depreciation 100,752 75,829
---------- ----------
Property, plant and
equipment, net $ 311,621 $ 242,699
========== ==========
PAGE 21
5) LONG-TERM DEBT
Long-term debt is comprised of the following at October 28, 2000 and October 30,
1999:
2000 1999
7.0% Senior Unsecured Notes $ 60,000 $ 60,000
7.62% Guaranteed Unsecured Notes 25,714 30,000
7.21% Senior Unsecured Notes 35,714 42,857
Bank Credit Facilities 220,361 84,500
Other 11,056 12,952
---------- ----------
352,845 230,309
Less current maturities 18,667 13,215
---------- ----------
Total long-term debt $ 334,178 $ 217,094
========== ==========
On February 25, 2000, the Company amended its unsecured bank credit facility to
an aggregate availability of $250,000 for a new five-year term. On September 24,
1999, the Company's Canadian entity entered into an additional $20,000 revolving
facility in Canada. The total availability under these bank credit facilities
was $270,000 at October 28, 2000, all of which is classified as long-term, as no
paydowns of the aggregate facilities are required within the next year. Interest
on our bank credit facilities is payable at a rate chosen by the Company of
either prime or LIBOR plus a 0.625% to 1.25% borrowing margin and the agreement
requires a fee of 0.15 - 0.30% for any unused portion of the facilities. At
October 28, 2000, the Company had fixed LIBOR loans outstanding under the bank
credit facilities of $180,000 at 7.625% in the U.S. and $16,361 at 6.58% in
Canada for a one-month period (LIBOR loans totaled $64,000 at 6.2% on October
30, 1999). On November 8, 2000, the Company entered into an interest rate swap
for $125,000 of its fixed LIBOR loans outstanding. Under the swap arrangement,
the Company's LIBOR rate is fixed at 6.48%, plus the borrowing margin, for a
period of two years. The remaining bank credit facility borrowings were at the
current prime rate (October 28, 2000 of $24,000 at 9.5% and October 30, 1999 of
$3,400 at 8.25% in the U.S. and $17,100 at 5.69% in Canada).
On August 22, 1997, the Company completed a private placement of 7.0% Senior
Unsecured Notes consisting of $45,000 designated as Series A and $15,000
designated as Series B. The Series A 1997 Notes require equal annual principal
payments of approximately $6,429 commencing on August 22, 2001 and the Series B
1997 Notes do not require principal payments before becoming due on August 22,
2004. Interest on the 1997 Notes is payable semiannually on February 22 and
August 22 of each year.
On September 27, 1996, the Company completed a $30,000 private placement of
7.62% Guaranteed Unsecured Notes over a ten-year term. The 1996 Notes require
equal annual principal payments of approximately $4,286 that commenced on
September 27, 2000. Interest on the 1996 Notes is payable semiannually on March
27 and September 27 of each year.
On August 15, 1995, the Company completed a $50,000 private placement of 7.21%
Senior Unsecured Notes over a ten-year term. The 1995 Notes require equal annual
principal payments of approximately $7,143 that commenced on August 15, 1999.
Interest on the 1995 Notes is payable semiannually on February 15 and August 15
of each year.
The other debt consists of industrial revenue bonds, capital leases, and other
term notes utilized to finance capital expenditures. These financings mature
between 2000 and 2016 and have interest rates ranging from 4.60% to 9.38%.
Scheduled maturities of long-term debt for the next five fiscal years are: 2001-
$18,667; 2002-$18,526; 2003-$34,613; 2004-$33,028; and 2005-$221,995. The long-
term debt contains certain covenants which, among other matters, require the
Company to restrict the incurrence of additional indebtedness, satisfy certain
ratios and net worth levels, and limit both the sale of assets and merger
transactions.
PAGE 22
6) CONVERTIBLE PREFERRED SECURITIES
On February 18, 2000, the Company issued $100,000 of 7.0% convertible
subordinated debentures to Spartech Capital Trust II, a Delaware trust we
control. We used the proceeds to repay borrowings under our bank credit
facility. The debentures are the sole asset of the trust and eliminate in
consolidation. The trust purchased the debentures with the proceeds of a
$100,000 private placement of 7.0% convertible preferred securities of the trust
having an aggregate liquidation preference of $100,000 and guaranteed by
SPARTECH. The debentures:
Are convertible along with the trust's preferred securities, at the option of
the preferred security holders, into shares of our common stock at a
conversion price equivalent to $34.00 per share of common stock, for a total
of 2,941,476 shares;
Are redeemable along with the trust's preferred securities, at SPARTECH's
option after March 1, 2003, at a price equal to 104.90% of the principal
amount plus accrued interest at October 28, 2000, declining annually to a
price equal to the principal amount plus accrued interest after March 1, 2010;
and
Mature and are payable, along with the trust's preferred securities, on March
31, 2015, if they have not been previously redeemed or converted.
On March 5, 1999, the Company issued $50,000 of 6.5% convertible subordinated
debentures to Spartech Capital Trust, a Delaware trust under the Company's
control. The Company used the proceeds to repay borrowings under our bank credit
facilities. The debentures are the sole asset of the trust and eliminate in
consolidation. The trust purchased the debentures with the proceeds of a $50,000
private placement of 6.5% convertible preferred securities of the trust, having
an aggregate liquidation preference of $50,000 and guaranteed by SPARTECH. The
debentures:
Are convertible along with the trust's preferred securities, at the option of
the preferred security holders, into shares of our common stock at a
conversion price equivalent to $30.55 per share of common stock, for a total
of 1,636,661 shares;
Are redeemable along with the trust's preferred securities, at SPARTECH's
option after March 1, 2002, at a price equal to 104.56% of the principal
amount plus accrued interest at October 28, 2000, declining annually to a
price equal to the principal amount plus accrued interest after March 1, 2009;
and
Mature and are payable, along with the trust's preferred securities, on March
31, 2014, if they have not been previously redeemed or converted.
7) SHAREHOLDERS' EQUITY & STOCK OPTIONS
The authorized capital stock of the Company consists of 45 million shares of
$.75 par value common stock and 4 million shares of $1 par value preferred
stock.
The Company has an Incentive Stock Option Plan and Restricted Stock Option Plan
for executive officers and key employees. The minimum option price is the fair
market value per share at the date of grant. The maximum number of shares
issuable annually under the Restricted Plan is limited to 10% of the Company's
outstanding common shares (excluding treasury shares) at each year end.
Notwithstanding the foregoing, the Board of Directors has resolved that at no
time will the total unexercised options issued to employees be in excess of 10%
of the then outstanding common shares. The options granted and common shares
purchased under the Restricted Plan may not be sold or disposed of for a period
of three years from the date of option grant. Subject to the limitations
discussed above, the number of options granted pursuant to these plans is at the
discretion of the Compensation Committee of the Board of Directors. The
Incentive Plan has 604,762 shares outstanding at October 28, 2000. The
Restricted Plan has 1,790,600 shares outstanding at October 28, 2000. Additional
options outstanding, which have been issued outside the Incentive and Restricted
plans totaled 80,000 at October 28, 2000.
PAGE 23
<TABLE>
A summary of the combined activity for the Company's stock options for fiscal
years 2000, 1999, and 1998 follows (shares in thousands):
<CAPTION>
2000 1999 1998
---------------- --------------- ----------------
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Option Exercise Option Exercise
Price Price Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 2,838 $10.91 3,293 $ 9.36 3,015 $ 6.88
Granted 484 $28.48 302 $ 18.74 793 $ 16.11
Exercised (830) $ 6.58 (757) $ 7.27 (515) $ 5.29
Canceled/Expired (17) $15.84 - - - -
------- ------- -------
Outstanding,
end of year 2,475 * $15.86 2,838 $ 10.91 3,293 $ 9.36
======= ======= =======
Exercisable, end
of year 1,826 * 2,531 3,287
======= ======= =======
Weighted average
fair value of
options granted $ 10.66 $ 6.89 $ 5.00
======= ======= =======
*Amount includes an option issued in conjunction with the settlement of
litigation, 300 shares of which remains outstanding at October 28, 2000.
</TABLE>
Information with respect to options outstanding at October 28, 2000 follows
(shares in thousands):
Weighted Average Weighted
Range of Exercise Shares Under Remaining Average
Prices Option Contractual Life Exercise Price
$ 3.00- 6.75 319 2.8 years $ 4.76
$ 9.00-10.88 584 5.1 years $ 9.91
$11.00-16.00 758 6.2 years $15.68
$17.19-29.88 814 6.6 years $25.47
-----------
2,475
===========
The range from $17.19 - $29.88 includes only 165 shares under option, at an
average exercise price of $22.24, that were exercisable at October 28, 2000.
All other shares under option in the other ranges presented were exercisable at
October 28, 2000.
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" in accounting for its employee stock options. Under
APB 25, if the exercise price of the stock option equals the market price of the
underlying stock on the issuance date, no compensation expense is recognized.
The Company is required by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" to provide pro forma disclosures under
an alternative fair value method of accounting. The weighted average fair values
of options granted were estimated using the Black-Scholes option-pricing model
with the following assumptions:
2000 1999 1998
Expected Dividend Yield 1.20% 1.10% 1.30%
Expected Volatility 35% 33% 31%
Risk-Free Interest
Rates 6.03-6.68% 5.70-5.80% 4.52-4.83%
Expected Lives 5 Years 5 Years 5 Years
Had compensation expense been recognized based on these hypothetical values the
Company's net income for 2000, 1999, and 1998 would have been $46,715, $41,818,
and $31,330, respectively, and diluted earnings per share for 2000, 1999, and
1998 would have been $1.62, $1.39, and $1.10, respectively. As a result of
changing assumptions, these hypothetical calculations are not necessarily
representative of future results.
PAGE 24
8) INCOME TAXES
The provision for income taxes for fiscal years 2000, 1999, and 1998 is
comprised of the following:
2000 1999 1998
Federal:
Current $18,627 $19,823 $14,844
Deferred 8,116 3,138 3,483
State 2,695 3,441 2,697
Foreign 1,285 2,036 1,382
------- -------- --------
Provision for
income taxes $30,723 $28,438 $22,406
======= ======== ========
Earnings before income taxes for 2000, 1999, and 1998 include $3,521, $5,634,
and $4,383, respectively from non-U.S. operations. The income tax provision on
earnings of the Company differs from the amounts computed by applying the U.S.
Federal tax rate of 35% as follows:
2000 1999 1998
Federal income taxes at
statutory rate $28,221 $ 25,028 $19,644
State income taxes, net of
applicable Federal
income tax benefits 1,752 2,237 1,753
Other 750 1,173 1,009
-------- -------- --------
$30,723 $ 28,438 $22,406
======== ======== ========
At October 28, 2000 and October 30, 1999, the Company's principal components of
deferred tax assets and liabilities consisted of the following:
2000 1999
Deferred tax assets:
Tax carry forwards $ 186 $ 387
Bad debt reserves 835 657
Inventories 127 250
Accrued liabilities 4,849 7,236
-------- --------
$ 5,997 $ 8,530
======== ========
Deferred tax liabilities:
Depreciation $ 42,733 $38,064
Other 6,152 3,570
-------- --------
$ 48,885 $41,634
======== ========
At October 28, 2000 and October 30, 1999, the net current deferred tax asset was
$3,299 and $5,446, respectively, and the net noncurrent deferred tax liability
was $46,187 and $38,550, respectively.
9) EARNINGS PER SHARE
Basic earnings per share 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 earnings per share 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.
PAGE 25
The reconciliation of the net earnings and weighted average number of common
shares used in the computations of basic and diluted earnings per share for
2000, 1999, and 1998 was as follows:
2000 1999 1998
Earnings Shares Earnings Shares Earnings Shares
Basic earnings
per share $49,907 27,322 $ 43,071 27,038 $ 33,720 26,807
Effect of stock
options - 871 - 1,869 - 1,802
Effect of
convertible
preferred
securities 4,990 3,681 1,280 1,075 - -
------- ------- ------- ------- -------- -------
Diluted earnings
per share $54,897 31,874 $ 44,351 29,982 $ 33,720 28,609
======= ======= ======== ======== ======== =======
The effect of stock options represents the shares resulting from the assumed
exercise of outstanding stock options calculated using the treasury stock
method. The effect of convertible preferred securities represents the shares
resulting from the assumed conversion using the if converted method and the add
back of the distributions on preferred securities after tax for the assumed
conversion at the beginning of 2000 and 1999.
10) EMPLOYEE BENEFITS
The Company sponsors or contributes to various retirement benefit and savings
plans covering substantially all employees. The total cost of such plans for
fiscal years 2000, 1999, and 1998 was $3,093, $2,639, and $1,856, respectively.
11) CASH FLOW INFORMATION
Supplemental information on cash flows for fiscal years 2000, 1999, and 1998 was
as follows:
2000 1999 1998
Cash paid during the year for:
Interest $ 32,424 $ 17,422 $ 14,535
========= ========= =========
Income taxes $ 21,685 $ 18,431 $ 15,642
========= ========= =========
Schedule of business acquisitions:
Fair value of assets acquired $ 249,584 $ 75,528 $ 183,073
Liabilities assumed (21,706) (10,146) (43,434)
Non-cash consideration/
holdback payments (2,324) (556) (7,049)
-------- --------- ---------
Total cash paid for the net
assets acquired $ 225,554 $ 64,826 $ 132,590
========= ========= =========
12) COMMITMENTS AND CONTINGENCIES
The Company conducts certain of its operations in facilities under operating
leases. Rental expense for 2000, 1999, and 1998 was $8,611, $6,767, and $5,408,
respectively.
Future minimum lease payments under non-cancelable operating leases, by fiscal
year, are: 2001-$5,821; 2002-$3,612; 2003-$3,153; 2004-$2,282; 2005-$1,691, and
$5,676 thereafter.
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
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. The Company currently has
no litigation with respect to any environmental matters.
PAGE 26
13) SEGMENT INFORMATION
The Company's fifty-one facilities are organized into three reportable segments
based on the nature of the products manufactured. The Company utilizes operating
earnings to evaluate business segment performance and determine the allocation
of resources. Segment accounting policies are the same as policies described in
note (1) A description of reportable segments for SPARTECH Corporation follows:
Custom Sheet & Rollstock - This segment has twenty-seven manufacturing
facilities and is the largest extruder of plastic sheet, custom rollstock, and
cell cast acrylic sheet in North America. The segment's finished products are
formed by its customers for use in a wide variety of markets.
Color & Specialty Compounds - This segment operates twelve plants throughout
North America and Europe. The Color & Specialty Compounds segment manufactures
custom-designed plastic alloys, compounds, color concentrates, and calendered
film for utilization in numerous applications.
Molded & Profile Products - This segment has twelve North American facilities
which manufacture a number of proprietary items. These include injection molded
and printed food packaging, complete thermoplastic wheels and tires, profile
extruded products, and injection molded parts for water filtration systems.
Corporate & Other includes unallocated corporate office expenses, goodwill
amortization, and other non-allocated expenses. Assets included in Corporate &
Other are made up primarily of goodwill and cash & cash equivalents.
2000 1999 1998
Net Sales
Custom Sheet & Rollstock $623,692 $494,088 $455,096
Color & Specialty Compounds 240,476 217,640 158,191
Molded & Profile Products 97,260 56,145 40,568
-------- -------- --------
Net Sales $961,428 $767,873 $653,855
======== ======== ========
Operating Earnings
Custom Sheet & Rollstock $ 74,838 $ 57,648 $ 50,531
Color & Specialty Compounds 30,810 28,622 18,078
Molded & Profile Products 12,307 7,784 5,664
Corporate & Other (8,194) (6,347) (4,545)
-------- -------- --------
Total Operating Earnings $109,761 $ 87,707 $ 69,728
======== ======== ========
Assets
Custom Sheet & Rollstock $372,394 $252,661 $185,505
Color & Specialty Compounds 154,610 152,279 149,810
Molded & Profile Products 58,458 49,574 29,467
Corporate & Other 303,507 170,887 168,527
-------- -------- --------
Total Assets $888,969 $625,401 $533,309
======== ======== ========
Depreciation and Amortization
Custom Sheet & Rollstock $ 13,854 $ 8,821 $ 7,495
Color & Specialty Compounds 7,499 7,467 5,118
Molded & Profile Products 3,605 2,512 2,117
Corporate & Other 6,947 4,422 3,800
-------- -------- --------
Total Depreciation and
Amortization $ 31,905 $ 23,222 $ 18,530
======== ======== ========
Capital Expenditures
Custom Sheet & Rollstock $ 15,999 $ 12,927 $ 9,908
Color & Specialty Compounds 8,205 6,670 5,018
Molded & Profile Products 4,644 4,595 2,881
Corporate & Other 344 500 52
-------- -------- --------
Total Capital Expenditures $ 29,192 $ 24,692 $ 17,859
======== ======== ========
PAGE 27
In addition to external sales to customers, intersegment sales were $23,864,
$20,457, and $14,756 for the fiscal years ended 2000, 1999, and 1998,
respectively. Nearly all intersegment sales were generated from our Color &
Specialty Compounds segment.
The Company operates in three reportable geographic areas-the United States,
Canada, and Europe. Geographic financial information for fiscal years 2000,
1999, and 1998 was as follows:
Total
Net Sales Assets
2000 1999 1998 2000 1999 1998
United States $838,456 $675,988 $572,676 $788,454 $526,502 $ 460,897
Canada 115,380 82,464 75,970 92,136 91,868 63,898
Europe 7,592 9,421 5,209 8,379 7,031 8,514
-------- -------- -------- -------- -------- --------
$961,428 $767,873 $653,855 $888,969 $625,401 $ 533,309
======== ======== ======== ======== ======== ========
14) 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 fiscal years 2000,
1999 and 1998 was as follows:
2000 1999 1998
Net Earnings $ 49,907 $ 43,071 $ 33,720
Other Comprehensive Income -
Foreign Currency Translation
Adjustments (2,693) 1,376 (3,116)
-------- -------- --------
Comprehensive Income $ 47,214 $ 44,447 $ 30,604
======== ======== ========
15) QUARTERLY FINANCIAL INFORMATION
Certain unaudited quarterly financial information for the fiscal years ended
October 28, 2000 and
October 30, 1999 was as follows:
Quarter Ended Fiscal
Jan April July Oct Year
2000
Net Sales $198,455 $256,660 $255,935 $250,378 $ 961,428
Gross Profit 36,120 45,936 47,685 41,928 171,669
Net Earnings 11,167 13,781 13,604 11,355 49,907
Net Earnings Per Share:
Basic .41 .50 .50 .42 1.83
Diluted .39 .47 .46 .40 1.72
1999
Net Sales $167,801 $196,937 $201,802 $201,333 $ 767,873
Gross Profit 30,197 35,066 35,351 36,348 136,962
Net Earnings 9,157 11,105 11,415 11,394 43,071
Net Earnings Per Share:
Basic .34 .41 .42 .42 1.59
Diluted .32 .38 .39 .39 1.48
PAGE 28
SPARTECH CORPORATION
Management Report
To Our Shareholders
The financial statements of SPARTECH Corporation and subsidiaries were prepared
under the direction of management, which is responsible for their integrity and
objectivity. The statements have been prepared in conformity with generally
accepted accounting principles and, as such, include amounts based on informed
estimates and judgement of management.
Management has developed a system of internal controls, which is designed to
assure that the books and records accurately reflect the transactions of the
Company, and that its established policies and procedures are followed properly.
This system is augmented by written policies and procedures, and the selection
and training of qualified personnel.
Arthur Andersen LLP, independent public accountants, are engaged to provide an
objective audit of the financial statements of SPARTECH Corporation and issue
reports thereon. Their audit is conducted in accordance with generally accepted
auditing standards.
The Board of Directors, acting upon the advice and recommendations of the Audit
Committee, is responsible for assuring that management fulfills its
responsibilities in preparing the financial statements and for engaging the
independent public accountants with whom the Committee reviews the scope of the
audits and the accounting principles to be applied in financial reporting. The
Committee meets regularly with the independent public accountants and
representatives of management to review their activities and ensure that each is
properly discharging its responsibilities.
/s/Bradley B. Buechler /s/Randy C. Martin
Chairman, President Executive Vice President
& Chief Executive Officer & Chief Financial Officer
Report of Independent Accountants
To SPARTECH Corporation
We have audited the accompanying consolidated balance sheet of SPARTECH
Corporation (a Delaware Corporation) and subsidiaries as of October 28, 2000 and
October 30, 1999, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three fiscal years in the
period ended October 28, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SPARTECH Corporation and
subsidiaries as of October 28, 2000 and October 30, 1999, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended October 28, 2000 in conformity with accounting principles generally
accepted in the United States.
/s/Arthur Andersen
St. Louis, Missouri
December 5, 2000
PAGE 29
Five Year Summary
The following table sets forth selected financial data for each of the most
recent five fiscal years.
(Dollars in thousands, except per share amounts)
Summary Of Operations 2000 1999 1998 1997 1996
Net Sales $961,428 $767,873 $653,855 $502,715 $391,348
Gross Profit $171,669 $136,962 $111,215 $82,215 $ 60,572
Depreciation and
Amortization $31,905 $ 23,222 $ 18,530 $11,548 $ 7,211
Operating Earnings $109,761 $ 87,707 $ 69,728 $49,701 $ 34,492
Interest and Preferred
Distributions $29,131 $ 16,198 $ 13,602 $ 8,393 $ 5,062
Net Earnings $49,907 $ 43,071 $ 33,720 $25,493 $ 18,317
Per Share Information
Earnings Per Share-Diluted $ 1.72 $ 1.48 $ 1.18 $ .92 $ .74
Dividends Declared Per Share$ .34 $ .28 $ .24 $ .20 $ .15
Book Value Per Share $ 7.86 $ 6.98 $ 5.72 $ 4.85 $ 4.26
Balance Sheet Information
Working Capital $111,041 $ 77,698 $ 72,204 $63,429 $ 54,261
Total Debt $352,845 $230,309 $254,220 $142,614 $ 98,466
Total Assets $888,969 $625,401 $533,309 $358,803 $288,960
Cash Flow From Operations $ 60,413 $ 76,547 $ 64,546 $48,390 $ 23,160
Capital Expenditures $ 29,192 $ 24,692 $ 17,859 $12,172 $ 9,566
Shareholders' Equity $211,022 $190,042 $153,596 $128,389 $112,395
Ratios/Other Data
Gross Margin 17.9% 17.8% 17.0% 16.4% 15.5%
Operating Margin 11.4% 11.4% 10.7% 9.9% 8.8%
Effective Tax Rate 38.1% 39.8% 39.9% 38.3% 37.8%
Total Debt to Capitalization 49.4% 49.0% 62.3% 52.6% 46.7%
Return on Average Equity 24.9% 25.1% 23.9% 21.2% 20.0%
Number of Employees 4,075 3,350 2,700 2,125 1,800
Common Shares (000's):
Outstanding at Year End 26,864 27,240 26,861 26,480 26,400
Weighted Average - Diluted 31,874 29,982 28,609 27,838 24,874
PAGE 31
Sidebar Bar Chart
2000 Quarterly
Common Stock Prices
1st = $25 1/4 - $33 5/8
2nd = $23 - $40 1/2
3rd = $24 13/16 - $36 3/8
4th = $10 3/8 - $28 1/4
Sidebar Bar Chart
1999 Quarterly
Common Stock Prices
1st = $17 5/8 - $24 3/8
2nd = $20 - $25 3/8
3rd = $21 1/4 - $32 1/2
4th = $26 7/8 - $30 5/16
Sidebar Bar Chart
1997 - 2000
Common Stock Dividends
97 = $0.20
98 = $0.24
99 = $0.28
00 = $0.34
