-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TQdgsYdDfogh1wiaYJlqBOPUdptoB1K6NO/yDSX20+B2raT7wLYZaRjNl3cr/S/U dWm2fH7kF2DZA39sVwdsjQ== 0000077597-02-000010.txt : 20020910 0000077597-02-000010.hdr.sgml : 20020910 20020910172124 ACCESSION NUMBER: 0000077597-02-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020803 FILED AS OF DATE: 20020910 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPARTECH CORP CENTRAL INDEX KEY: 0000077597 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PLASTIC PRODUCTS [3080] IRS NUMBER: 430761773 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05911 FILM NUMBER: 02761083 BUSINESS ADDRESS: STREET 1: 120 S CENTRAL AVE STREET 2: STE 1700 CITY: CLAYTON STATE: M0 ZIP: 63105 BUSINESS PHONE: 3147214242 MAIL ADDRESS: STREET 1: 120 S CENTRAL AVE STREET 2: STE 1700 CITY: CLAYTON STATE: MO ZIP: 63105 FORMER COMPANY: FORMER CONFORMED NAME: PERMANEER CORP DATE OF NAME CHANGE: 19781019 FORMER COMPANY: FORMER CONFORMED NAME: SPARTAN MANUFACTURING CORP DATE OF NAME CHANGE: 19830621 10-Q 1 tenq-3q02_2.txt 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 quarter ended August 3, 2002 Commission File Number 1-5911 SPARTECH CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 43-0761773 (State or other jurisdiction of (I.R.S Employer incorporation or organization) Identification No.) 120 South Central Avenue, Suite 1700, 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 3, 2002: Common Stock, $.75 par value per share 29,283,292 SPARTECH CORPORATION AND SUBSIDIARIES INDEX August 3, 2002 PART I. FINANCIAL INFORMATION PAGE CONSOLIDATED CONDENSED BALANCE SHEET - as of August 3, 2002 and November 3, 2001 3 CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS - for the quarter and nine months ended August 3, 2002 and August 4, 2001 4 CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS - for nine months ended August 3, 2002 and August 4, 2001 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 PART II. OTHER INFORMATION 22 SIGNATURES AND CERTIFICATIONS 23 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS SPARTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands, except share amounts) ASSETS Aug. 3, 2002 (unaudited) Nov. 3, 2001 Current Assets Cash and equivalents $ 10,054 $ 8,572 Receivables, net 126,189 119,074 Inventories 101,240 93,091 Prepayments and other 5,999 9,333 Total Current Assets 243,482 230,070 Property, Plant and Equipment 409,508 389,072 Less accumulated depreciation 135,808 114,917 Net Property, Plant and Equipment 273,700 274,155 Goodwill and Other Intangible Assets 336,070 292,576 Other Assets 18,110 18,302 $871,362 $815,103 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 18,076 $ 18,225 Accounts payable 86,321 76,131 Accrued liabilities 38,587 24,568 Total Current Liabilities 142,984 118,924 Long-Term Debt, Less Current Maturities 232,476 270,489 Other Liabilities 59,967 59,144 Total Long-Term Liabilities 292,443 329,633 Company-obligated manditorily redeemable convertible preferred securities of Spartech Capital Trust holding solely convertible subordinated debentures 150,000 150,000 Shareholders' Equity Common stock, 30,460,682 and 28,067,023 shares issued in 2002 and 2001, respectively 22,846 21,039 Contributed capital 141,820 94,239 Retained earnings 163,446 145,909 Treasury stock, at cost, 1,177,390 shares in 2002 and 1,367,437 shares in 2001 (28,617) (30,410) Accumulated other comprehensive income (13,560) (14,231) Total Shareholders' Equity 285,935 216,546 $871,362 $815,103 See accompanying notes to consolidated condensed financial statements. SPARTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (Unaudited and dollars in thousands, except per share data) QUARTER ENDED NINE MONTHS ENDED Aug. 3, Aug. 4, Aug. 3, Aug. 4, 2002 2001 2002 2001 Net Sales $237,242 $228,501 $661,114 $721,235 Costs and Expenses Cost of sales 198,990 191,977 559,643 602,351 Selling and administrative 13,507 13,865 40,794 43,042 Write-down of long lived - 5,550 - 5,550 assets Amortization of goodwill - 2,040 - 6,130 212,497 213,432 600,437 657,073 Operating Earnings 24,745 15,069 60,677 64,162 Interest 4,094 5,477 12,752 19,320 Distributions on preferred securities of Spartech capital trusts 2,563 2,563 7,688 7,688 Earnings Before Income Taxes 18,088 7,029 40,237 37,154 Income taxes 6,602 2,370 14,815 13,817 Net Earnings $ 11,486 $ 4,659 $ 25,422 $ 23,337 Net Earnings Per Common Share: Basic $ .40 $ .17 $ .93 $ .87 Diluted $ .39 $ .17 $ .91 $ .87 Dividends Per Common Share $ .095 $ .095 $ .285 $ .285 See accompanying notes to consolidated condensed financial statements. SPARTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited and dollars in thousands) NINE MONTHS ENDED Aug. 3, 2002 Aug.4, 2001 Cash Flows From Operating Activities Net earnings $ 25,422 $ 23,337 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 20,715 27,089 Write-down of long-lived assets - 5,550 Change in current assets and liabilities, net of effects of acquisitions 13,011 (12,049) Other, net 4,282 528 Net cash provided by operating activities 63,430 44,455 Cash Flows From Investing Activities Capital expenditures (17,236) (11,830) Retirement of assets 492 1,175 Business (Acquisitions)/Divestitures, net (50,337) 20,721 Net cash (used for) provided by investing activities (67,081) 10,066 Cash Flows From Financing Activities Bank borrowings (payments) for business Acquisitions/ Dispositions 4,690 (20,721) Net payments on revolving credit facilities (42,590) (22,640) Payments on bonds and leases (262) (762) Issuance of common stock 50,663 - Cash dividends on common stock (7,886) (7,604) Stock options exercised 3,114 1,189 Treasury stock acquired (2,596) (5,287) Net cash provided by (used for) financing activities 5,133 (55,825) Increase (Decrease) in Cash and Equivalents 1,482 (1,304) Cash and Equivalents at Beginning Of Period 8,572 10,495 Cash and Equivalents at End Of Period $ 10,054 $ 9,191 See accompanying notes to consolidated condensed financial statements. SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) NOTE A - Basis of Presentation The consolidated financial statements include the accounts of Spartech Corporation and its 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 notes thereto included in our November 3, 2001 Annual Report on Form 10-K. Our fiscal year ends on the Saturday closest to October 31. Fiscal year 2001 included 53 weeks compared to 52 weeks in 2002. As a result, the nine months ended August 4, 2001 consisted of 40 weeks, compared to the 39- week nine months ended August 3, 2002. Operating results for any quarter are traditionally seasonal in nature and are not necessarily indicative of the results expected for the full year. Freight costs for the third quarter and nine months of 2001 have been reclassified to comply with EITF 00-10 "Accounting for Shipping and Handling Fees and Costs." The reclassification resulted in an increase to net sales and corresponding increase to cost of goods sold of $5.7 million for the third quarter and $17.9 million for the nine months ended August 4, 2001. NOTE B - Inventories Inventories are valued at the lower of cost (first-in, first-out) or market. Inventories at August 3, 2002 and November 3, 2001 are comprised of the following components: 2002 2001 Raw materials $ 59,123 $ 55,803 Finished goods 42,117 37,288 $101,240 $ 93,091 NOTE C - Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142, among other things, eliminates the amortization of goodwill and certain identified intangible assets. Effective November 4, 2001, the Company has adopted SFAS No. 142, and as such, goodwill SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) is no longer being amortized against earnings. Intangible assets, including goodwill, that are not subject to amortization will be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, using a two-step impairment assessment. The first step of the impairment test identifies potential impairment and compares the fair value of the reporting unit with its carrying amount, including goodwill. We determined that the Company has twelve reporting units based upon the discrete financial information available and the manner in which management reviews operating results. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, and the second step of the impairment test is not necessary. If the carrying amount of the reporting unit exceeds its fair value, the second step of the impairment test shall be performed to measure the amount of impairment loss, if any. The amounts used in the transitional impairment test have been measured as of November 4, 2001. In performing step one of the test, we engaged an independent appraisal firm to perform a valuation for each of our reporting units. The firm reported a fair value conclusion for each of the reporting units based on historical financial information and management's estimates of future results. We compared the value of each reporting unit to the carrying amount of its net assets including goodwill. In accordance with the transition provisions of SFAS No. 142, we have conducted the first step of the impairment tests as described above. As of November 4, 2001, the tests indicated that the fair value of each of our reporting units exceeded their carrying amount; therefore, no impairment charge was recorded upon adoption. We will perform our annual impairment testing as required by SFAS 142 during our fourth quarter of 2002. The annual test will consist of revaluing several of the Company's reporting units for which substantial excess was not present between the fair value of the reporting unit and their net asset values. SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) On June 4, 2002, the Company completed the acquisition of GWB Plastics Holding Co. (GWB) for approximately $48.5 million (see Note H - Acquisitions). The excess purchase price over the fair value of tangible assets purchased was approximately $41 million. The Company has engaged an independent appraisal firm to value the identified intangible assets. The appraisal, once completed, will result in the allocation of this amount to its components of goodwill and certain other intangible assets. The Company currently estimates that the amount to be allocated to goodwill will exceed $20 million. Goodwill as of August 3, 2002 and November 4, 2001 are summarized in the following table, excluding that acquired in the GWB Plastics Holding Co. transaction discussed below: August 3, November 4, 2002 2001 Net Carrying Net Carrying Reporting Segment Amount Amount Goodwill Custom Sheet & Rollstock $185,805 $182,900 Color & Specialty Compounds 72,062 72,062 Molded & Profile Products 37,614 37,614 $ 295,481 $292,576 A reclassification of $2,905 was made from Other Intangible Assets into Goodwill within the Custom Sheet & Rollstock reporting segment during the quarter related to a current year acquisition. As required by SFAS No. 142, the results for the prior year have not been restated. A reconciliation of net income for the third quarter and nine months ended August 3, 2001 as if SFAS No. 142 had been adopted at the beginning of the prior year is presented below. SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) Third Nine Quarter Months 2001 2001 Reported net income $ 4,659 $ 23,337 Add back: goodwill amortization (net of tax) 1,304 3,917 Adjusted net income $ 5,963 $ 27,254 Basic net income per share: Reported net income $ .17 $ .87 Adjusted net income $ .22 $ 1.04 Diluted net income per share: Reported net income $ .17 $ .87 Adjusted net income $ .21 $ 1.02 NOTE D - Cash Flow Information Supplemental information on cash flows and noncash transactions for the quarters ended August 3, 2002 and August 4, 2001 is as follows: 2002 2001 Cash paid for: Interest $ 19,931 $ 23,868 Income taxes $ 4,461 $ 9,254 NOTE E - Comprehensive Income Comprehensive income is an entity's change in equity during the period from transactions, events and circumstances from non-owner sources. The reconciliation of net earnings to comprehensive income for the quarter and nine months ended August 3, 2002 and August 4, 2001 is as follows: QUARTER ENDED NINE MONTHS ENDED Aug. 3, Aug. 4, Aug. 3, Aug. 4, 2002 2001 2002 2001 Net earnings $ 11,486 $ 4,659 $ 25,422 $ 23,337 Foreign currency translation adjustments 38 (1,758) 462 (2,216) Cash flow hedge adjustments (1,455) (612) 209 (4,642) Total comprehensive income $ 10,069 $ 2,289 $ 26,093 $ 16,479 SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) NOTE F - Segment Information The Company's forty-three facilities are organized into three reportable segments based on the nature of the products manufactured. QUARTER NINE MONTHS ENDED 8/3/02 8/4/01 8/3/02 8/4/01 Net Sales* Custom Sheet & Rollstock $157,635 $151,730 $443,856 $ 474,385 Color & Specialty 63,124 55,276 169,428 172,907 Compounds Molded & Profile Products 16,483 21,495 47,830 73,943 Total Net Sales $237,242 $228,501 $661,114 $ 721,235 Operating Earnings Custom Sheet & Rollstock $ 19,103 $ 17,457 $ 46,379 $ 52,708 Color & Specialty 6,921 6,077 18,496 18,893 Compounds Molded & Profile Products 1,234 2,276 3,676 7,594 Corporate/Other (2,513) (10,741) (7,874) (15,033) Total Operating $ 24,745 $ 15,069 $ 60,677 $ 64,162 Earnings * Excludes intersegment sales of $7,487 and $6,631 for the three months ended August 3, 2002 and August 4, 2001, respectively, and $19,637 and $21,966 for the nine months ended August 3, 2002 and August 4, 2001, respectively, primarily from the Color & Specialty Compounds segment. NOTE G - Recently Issued Accounting Standards Not Yet Adopted In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long- lived assets and the associated asset retirement costs. It applies to all entities and legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or normal operation of a long-lived asset. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and are subsequently allocated to expense over the asset's useful life. This statement is effective for the financial statements issued for fiscal years beginning after June 15, 2002 (the Company's fiscal year 2003). SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) The Company will adopt SFAS No. 143 at the beginning of our 2003 fiscal year and we believe it will not have a material effect on the financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of", however, this statement retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This statement also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for segments of a business to be disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 (the Company's fiscal year 2003). The Company does not believe that the adoption of SFAS No. 144 will have a material effect on its financial position or results of operations. In April 2002, the FASB approved for issuance SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other things, SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Under SFAS No. 145, the criteria in Accounting Principles Board (APB) No. 30 will now be used to classify those gains and losses. The adoption of SFAS No. 145 will not have a material effect on our consolidated financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 replaces Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement will become effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 will not have a material effect on our consolidated financial position or results of operations. NOTE H - Acquisitions On June 4, 2002, Spartech completed an acquisition for all of the stock of GWB Plastics Holding Co. (GWB) which is the parent of two operating companies, UVTEC and PolyTech South. These businesses, which generated net sales of approximately $40 million for their last twelve months prior to acquisition, will add approximately 70 million pounds of production capacity to Spartech's current 11-plant Color & Specialty Compounds segment as well as expand our regional diversity by adding a second facility in the south central U.S. Benefits from the combination of UVTEC and PolyTech South with our Spartech Polycom operations include: (1) the addition of several polyolefin products with exceptional flame retardant and UV performance; (2) the broadening of our technical and marketing knowledge to serve the growing specialty compounds segment; and (3) enhance logistics and warehouse system to better serve our combined customer base. The preliminary allocation of the approximately $48.5 million purchase price resulted in $41 million of goodwill and other intangible assets. The allocation to individual intangible assets and goodwill will be performed when formal appraisals are completed. The acquisition was accounted for using the purchase method, and as such, the results of the acquired company have been consolidated with the Company's financial statements effective as of the acquisition date. The purchase was financed through proceeds from our May 30, 2002 common stock offering of 2.4 million shares at $22 per common share. 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 2002 will include 52 weeks compared to 53 weeks in 2001. As a result, the nine months ended August 3, 2002 consisted of 39 weeks, a 3% shorter operating period than the 40-week nine months ended August 4, 2001. The operating results presented below include discussions on a percentage of sales basis for more meaningful comparisons. Net sales were $237.2 million for the quarter ended August 3, 2002 representing a 4% increase over the prior year (a 3% increase excluding the effects of acquisitions and divestitures) and $661.1 million for the nine months ended August 3, 2002, representing an 8% decrease from the similar periods in 2001 (a 4% decrease excluding the effects of acquisitions, divestitures and the additional week reported in the first quarter of 2001). The Company's fiscal 2002 third quarter operating earnings were $24.7 million (10.4% of sales) as compared to the $15.1 million (6.6% of sales) reported in 2001. The third quarter of fiscal 2001 included $9.1 million in non-recurring expenses and $2.0 million of goodwill amortization that were not incurred in the third quarter of 2002. The third quarter 2002 operating earnings decreased 5% after adding back these items to the prior year's results. Operating earnings for the nine months ended August 3, 2002 were $60.7 million (9.2% of sales) as compared to the reported $64.2 million (8.9% of sales) in the first nine months of 2001. The operating earnings for nine months in 2001 were $79.4 million (11.0% of sales) after adding back the $9.1 million of non-recurring expenses and $6.1 million of goodwill amortization that were not incurred during 2002. The lower comparable operating margin for the third quarter was the result of an unfavorable mix of products sold in the Custom Sheet & Rollstock group, and continued overall weakness in the Molded & Profile Products segment. The nine month operating margin for fiscal 2002 was further impacted by lower overall volume, especially in the first quarter of the year. Year-over- year volume comparisons have improved in both the second and third quarter of fiscal 2002 after the weak first quarter, and we expect that trend to continue through the fourth quarter of the fiscal year. Resin prices began to rise during our third quarter, and we expect further increases during the fourth quarter of 2002. Competitive situations hinder our ability to pass along these cost increases, in full, through increased selling prices which may reduce our operating margin during the fourth quarter. We expect to offset most of these increases with past and present cost reduction efforts and increased volumes. Cost of sales was $559.6 million for the nine months ended August 3, 2002, compared with $598.8 million before non-recurring expenses for the first nine months of 2001, but increased as a percentage of net sales to 84.7% for 2002 from 83.5% for 2001. Lower sales prices due to raw material price decreases and an unfavorable mix of products sold as well as low first quarter demand, resulted in the increased cost of sales percentage. Selling and administrative expenses of $40.8 million for the first nine months of 2002 decreased from $43.0 million for the first nine months of 2001, but increased to 6.2% of net sales from 6.0% in the first nine months of 2001. The costs in this category are primarily fixed, resulting in a similar cost level being incurred despite the lower level of sales during the nine months of 2002. These expenses decreased to 5.7% of sales in the third quarter of 2002 as sales volumes continued to improve and some of our cost reduction programs benefited our results. In the third quarter of 2001, the Company recorded $9.1 million in non- recurring pre-tax expenses for costs incurred on the operations slated for closedown, including the writedowns for the impairment of long-lived assets. The non-recurring expenses consisted of $5.6 million related to the impairment of long-lived assets and $3.5 million related to severance, phase out, and other exit costs recorded in cost of sales. The impairment charges adjusted the carrying values of these assets to fair value less the cost to sell. The fair value was determined by using current selling prices for similar assets. All the asset impairment charges and the majority of the non-recurring expenses were reflected as a Corporate/Other operating expense. Interest expense and distributions on preferred securities of $20.4 million for the first nine months of 2002 decreased from $27.0 million form the first nine months of 2001 as a result of $106.4 million of debt repayments in the last 21 months generated from operating cash flow, the July 2001 sale of the custom molded products business, the May 2002 secondary stock offering, the effect of the extra week in the first quarter of 2001, and a reduction in interest rates. Our effective tax rate was 36.8% for the first nine months of 2002 compared to 37.2% in the similar period of 2001, reflecting an improvement in our combined state tax rate and ongoing benefits from research and development credits. Net earnings of $25.4 million, or $.91 per diluted share, in the first nine months 2002 compared to $23.3 million, or $.87 per diluted share, in the first nine months 2001 as a result of the operating factors noted above. The Company adopted Financial Accounting Standards Board Statement No. 142 "Goodwill and Other Intangible Assets" effective at the beginning of fiscal year 2002. Statement No. 142 requires that goodwill no longer be amortized against earnings, but instead tested for impairment at least annually. Upon adoption, the Company did not have an impairment charge and eliminated the amortization of goodwill, which totaled $6.1 million in the prior year nine months ended August 4, 2001. Adjusted for the elimination of goodwill, diluted earnings per share for the nine months ended August 4, 2001 would have been $1.02. Segment Results Net sales of the Custom Sheet & Rollstock segment decreased 6% to $443.9 million for the nine months ended August 3, 2002 from the $474.4 million in the prior year period primarily due to changes in price/mix of products sold, lower first quarter volume and the extra week reported in 2001. Net sales of the Color & Specialty Compounds segment decreased 2% to $169.4 million from $172.9 million in the first nine months 2001. Third quarter sales increased 14% as the group benefited from the acquisition of PolyTech South and UVTEC (12% increase) and internal sales growth (5% increase) partially offset by a negative price/mix effect in the quarter (3% decrease). The Molded & Profile Products segment net sales decreased to $47.8 million from $73.9 million in the first nine months 2001 following the July 2001 sale of the segment's custom molded products businesses. The Custom Sheet & Rollstock Segment experienced lower first quarter volumes and changes in product mix partially offset by focused cost reduction efforts, supply-chain management initiatives and the elimination of $4.8 million in goodwill amortization charges, which resulted in an operating margin of 10.4% for the first nine months of 2002 compared to 11.1% in the first nine months of 2001. The Color & Specialty Compounds segment's operating margin remained unchanged at 10.9% for the first nine months of 2002 from 2001. The Molded & Profile segment experienced the largest percentage drop in operating earnings, following the July 2001 sale of the segment's custom molded products businesses with an operating margin of 7.7% compared to 10.3% in 2001. Other Matters We operate under various laws and regulations governing employee safety, the quantities of specified substances that may be emitted into the air, discharged into waterways, and 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. We are not aware of any trends in the petroleum industry that will significantly affect our sources of raw materials in the future. Our raw materials are only somewhat affected by supply, demand and price trends of the petroleum industry; however, trends in pricing, periods of anticipated or actual shortages and changes in supplier capacities can have a significant impact on the cost of our raw materials in a short period of time. We generally manage the impact of both increases and decreases in raw material costs through the matching of our inventory levels, current orders, the pass-through of price changes to customers, and the negotiation of competitive pricing with our suppliers. 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. Cash flows for the periods indicated are summarized as follows: Nine Months 2002 2001 (Dollars in millions) Net cash provided by operating activities $ 63.4 $ 44.5 Net cash (used for) provided by investing activities $ (67.1) $ 10.1 Net cash provided by (used for) financing activities $ 5.1 $ (55.8) Increase (decrease) in cash and equivalents $ 1.5 $ (1.3) Operating cash flow provided by net earnings plus depreciation and amortization decreased 9%, to $46.1 million for the first nine months 2002 from $50.4 million for the first nine months 2001. Operating cash flows used by changes in accounts receivable totaled $3.1 million due to seasonally higher sales in the third quarter. Operating cash flows used by changes in inventory totaled $4.5 million due to higher resin prices and selective pre-buys of raw materials ahead of price increases. Operating cash flows provided by changes in accounts payable totaled $6.8 million due to the seasonally higher sales levels and the increased resin pricing. 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 for the first nine months 2002 and 2001 were $17.2 million and $11.8 million, respecitvely, and we anticipate total capital expenditures of approximately $23 million for fiscal 2002. Acquisitions/divestitures were our purchase of ProForm, a bath and shower surround manufacturer, our investment in X-Core, LLC, a custom engineered wheels business and our purchase of GWB totaled $53.0 million for the first nine months of fiscal 2002 and final settlement of proceeds from the sale of the custom molded products business of $2.7 million which occurred during fiscal 2001. The cash flows provided by financing activities were $5.1 million for the nine months of 2002. The primary activity was the net bank repayments of $42.9 million, borrowings for acquisitions of $4.7 million, cash dividend payments of $7.9 million, stock option proceeds of $3.1 million, and treasury stock purchases of $2.6 million, and the issuance of common stock. Financing Arrangements On May 30, 2002, we announced the completion of a secondary public offering of 8,250,000 shares of our common stock. These shares represented 2,115,000 shares of the Company and 6,135,000 shares offered by two selling shareholders, Vita International Limited (6,000,000), a wholly owned subsidiary of British Vita PLC, Inc. and RBA Partners, L.P. (135,000), an entity controlled by Ralph B. Andy, a non-employee director of Spartech Corporation. In addition to these shares offered, the Company sold an additional 309,375 shares and Vita sold an additional 928,125 shares to the underwriters to cover over-allotments. The stock was sold to the public at $22.00 per share. The offering was led by an underwriting group managed by Goldman, Sachs & Co., Merrill Lynch & Co., First Analysis Securities Corporation, McDonald Investments Inc. and Commerce Capital Markets. The net proceeds received by the Company from the sale of common shares, $50.7 million, was used to finance the GWB acquisition and repay bank credit facility borrowings. The following table summarizes our obligations under financing arrangements and lease commitments as of August 3, 2002: Type of Commitment Total Less Than 1-3 Years More Than 5 Years or Amount 1 Year 3 Years More Committed But Less Than 5 Years Bank credit $ 137,600 $ - $ - $ 137,600 $ - facilities Unsecured notes 103,571 17,857 50,716 28,570 6,428 Other debt 9,381 219 282 289 8,591 obligations Convertible 150,000 - - - 150,000 debentures Operating lease 32,398 7,433 10,432 6,638 7,895 commitments Standby letters 12,736 - - - - of credit Total Contractual $ 445,686 $ 25,509 $ 61,430 $ 173,097 $ 172,914 Cash Obligations At August 3, 2002, our total outstanding borrowings under the bank credit facilities were $137.6 million at a weighted average rate of 6.8% (including the effect of an interest rate swap). We had $106.0 million in total availability under the $256 million in credit facilities, however this availability was limited to $83.9 million due to bank covenant restrictions. 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. If our cash from operations was substantially reduced and our access to the debt and equity markets became more limited, we might not be able to repay the obligations as they became due. Our current credit facilities also contain certain affirmative and negative covenants, including restrictions on the incurrence of additional indebtedness, limitations on both the sale of assets and merger transactions, and requirements to maintain certain financial and debt service ratios and net worth levels. In addition, our combined payment of dividends on our common stock and the repurchase of common shares for treasury is limited to 60% of our cumulative consolidated net income since November 1, 1997. At August 3, 2002, we had approximately $36.9 million of unrestricted retained earnings available for such payments. While we were in compliance with such covenants in 2001 and currently expect to be in compliance during 2002, our failure to comply with the covenants or other requirements of our financing arrangements could result in an event of default and, among other things, acceleration of the payment of our indebtedness which could adversely impact our business, financial condition and results of operations. Significant Accounting Policies, Estimates and Judgments We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting policies, estimates and judgments which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: * Revenue Recognition - We recognize revenue as the product is shipped and title passes to the customer. We manufacture our products either to standard specifications or to custom specifications agreed on with the customer in advance, and we inspect our products prior to shipment to ensure that these specifications are met. We continuously monitor and track product returns, which have historically been within our expectations and the provisions established. Despite our efforts to improve our quality and service to customers, we cannot guarantee that we will continue to experience the same or better return rates that we have in the past. Any significant increase in returns could have a material negative impact on our operating results. * Accounts Receivable - We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. * Inventories - We value inventories at the lower of actual cost (first- in, first-out) to purchase or manufacture the inventory or the current estimated market value of the inventory. We also buy scrap and recyclable material (including regrind material) to be used in future production runs. We record these inventories initially at purchase price and, based on the inventory aging and other considerations for realizable value, we write down the carrying value to brokerage value, where appropriate. We regularly review inventory on hand and record provisions for obsolete inventory. A significant increase in the demand for our raw materials could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, most of our business is custom products, where the loss of a specific customer could increase the amount of excess or obsolete inventory on hand. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and the operating results. * Acquisition Accounting - We have made several acquisitions in recent years. All of these acquisitions have been accounted for in accordance with the purchase method, and accordingly, the results of operation were included in our Consolidated Statement of Operations from the respective date of acquisition. The purchase price has been allocated to the identifiable assets and liabilities, and any excess of the cost over the fair value of the net identifiable assets acquired is recorded as goodwill. The initial allocation of purchase price is based on preliminary information, which is subject to adjustments upon obtaining complete valuation information. While the delayed finalization of purchase price has historically not had a material impact on the consolidated results of operations, we cannot guarantee the same results in future acquisitions. * Valuation of Long-Lived Assets - We review the carrying value of our long-lived assets whenever events and changes in business indicate the carrying value of the assets may not be recoverable. We recognize impairment losses if expected future cash flows of the related assets (based on our current projections of anticipated future cash flows) are less than carrying value or where assets that are held for sale are deemed to be valued in excess of the expected amount to be realized upon sale. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations. For additional information regarding our significant accounting policies, see Note 1 to our 2001 Consolidated Financial Statements contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142, among other things, eliminates the amortization of goodwill and certain identified intangible assets. Effective November 4, 2001, the Company has adopted SFAS No. 142, and no longer amortizes goodwill against earnings. Intangible assets, including goodwill, that are not subject to amortization will be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, using a two step impairment assessment. In accordance with the transition provisions of SFAS No. 142, we have conducted the required testing and concluded that the Company's goodwill was not impaired. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long- lived assets and the associated asset retirement costs. It applies to all entities and legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and are subsequently allocated to expense over the asset's useful life. This statement is effective for the financial statements issued for fiscal years beginning after June 15, 2002 (our fiscal year 2003). We will adopt SFAS No. 143 at the beginning of our 2003 fiscal year and we do not believe it will have a material effect on our financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets to be disposed of. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of;" however, this statement retains the fundamental provisions of SFAS No. 121 for recognition and measurement of the impairment of long- lived assets to be held and used and for measurement of long-lived assets to be disposed of by sale. This statement also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for segments of a business to be disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 (our fiscal 2003). We do not believe that the adoption of SFAS No. 144 will have a material effect on our financial position or results of operation. In April 2002, the FASB approved for issuance SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other things, SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Under SFAS No. 145, the criteria in Accounting Principles Board (APB) No. 30 will now be used to classify those gains and losses. The adoption of SFAS No. 145 will not have a material effect on our consolidated financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 replaces Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement will become effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 will not have a material effect on our consolidated financial position or results of operations. Other The information presented herein 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, changes in the economy or the plastics industry in general, other unanticipated events that may prevent us from competing successfully in existing or new markets, and our ability to manage our growth effectively. 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. PART II - OTHER INFORMATION Item 6 (a). Exhibits 11 Statement re Computation of Per Share Earnings Item 6 (b). Reports on Form 8-K A report on Form 8-K, dated May 30, 2002 announcing the second quarter 2002 earnings and to file an underwriting agreement filed with the commission on May 30, 2002 and incorporated herein by reference. 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: September 9, 2002 /s/Bradley B. Buechler Bradley B. Buechler Chairman, President and Chief Executive Officer (Principal Executive Officer) /s/Randy C. Martin Randy C. Martin Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies that this periodic report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in this quarterly report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Spartech Corporation. Date: September 9, 2002 /s/Bradley B. Buechler Bradley B. Buechler Chairman, President and Chief Executive Officer /s/Randy C. Martin Randy C. Martin Executive Vice President and Chief Financial Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Bradley B. Buechler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Spartech Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; Date: September 9, 2002 /s/Bradley B. Buechler Bradley B. Buechler Chairman, President and Chief Executive Officer (Principal Executive Officer) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Randy C. Martin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Spartech Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; Date: September 9, 2002 /s/Randy C. Martin Randy C. Martin Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EX-11 3 ex113q02_10q.txt 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. 3, Aug. 4, Aug 3., Aug. 4, 2002 2001 2002 2001 NET EARNINGS Basic net earnings $ 11,486 $ 4,659 $ 25,422 $ 23,337 Add: distributions on preferred securities, net of tax 1,614 - - 2,086 Diluted net earnings $ 13,100 $ 4,659 $ 25,422 $ 25,423 WEIGHTED AVERAGE SHARES OUTSTANDING Basic weighted average common shares outstanding 28,724 26,746 27,447 26,690 Add: shares issuable from assumed conversion of preferred stock 4,578 - - 2,071 Add: shares issuable from assumed exercise of options 588 577 537 423 Diluted weighted average shares outstanding 33,890 27,323 27,984 29,184 NET EARNINGS PER SHARE Basic $ .40 $ .17 $ .93 $ .87 Diluted $ .39 $ .17 $ .91 $ .87 -----END PRIVACY-ENHANCED MESSAGE-----