Attached files
file | filename |
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EX-31.2 - EX-31.2 - SPARTECH CORP | c56738exv31w2.htm |
EX-31.1 - EX-31.1 - SPARTECH CORP | c56738exv31w1.htm |
EX-32.1 - EX-32.1 - SPARTECH CORP | c56738exv32w1.htm |
EX-32.2 - EX-32.2 - SPARTECH CORP | c56738exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
1-5911
(Commission File Number)
(Commission File Number)
SPARTECH CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware | 43-0761773 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification No.) |
120 S. Central Avenue, Suite 1700
Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)
Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)
(314) 721-4242
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o NO o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES o NO þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest
practicable date: 30,900,151 shares of Common Stock, $.75 par value per share, outstanding as of March 2,
2010.
SPARTECH CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED JANUARY 30, 2010
TABLE OF CONTENTS
FORM 10-Q FOR THE THREE MONTHS ENDED JANUARY 30, 2010
TABLE OF CONTENTS
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | FINANCIAL STATEMENTS |
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
January 30, 2010 | October 31, | |||||||
(Unaudited) | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 18,086 | $ | 26,925 | ||||
Trade receivables, net of allowances of $1,964, and $2,470, respectively |
129,277 | 130,355 | ||||||
Inventories |
65,139 | 62,941 | ||||||
Prepaids and other current assets |
18,349 | 24,916 | ||||||
Assets held for sale |
2,002 | 2,907 | ||||||
Total current assets |
232,853 | 248,044 | ||||||
Property, plant and equipment, net of accumulated depreciation of
$311,587 and $304,424, respectively |
222,958 | 229,003 | ||||||
Goodwill |
144,070 | 144,345 | ||||||
Other intangible assets, net of accumulated amortization of
$18,679 and $17,733, respectively |
27,379 | 28,404 | ||||||
Other long-term assets |
3,587 | 3,892 | ||||||
Total assets |
$ | 630,847 | $ | 653,688 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | 493 | $ | 36,079 | ||||
Accounts payable |
96,905 | 103,484 | ||||||
Accrued liabilities |
26,984 | 31,122 | ||||||
Total current liabilities |
124,382 | 170,685 | ||||||
Long-term debt, less current maturities |
197,226 | 180,355 | ||||||
Other long-term liabilities: |
||||||||
Deferred taxes |
58,908 | 58,736 | ||||||
Other long-term liabilities |
6,393 | 7,033 | ||||||
Total liabilities |
386,909 | 416,809 | ||||||
Shareholders equity |
||||||||
Preferred stock (authorized: 4,000,000 shares, par value $1.00) |
||||||||
Issued: None |
| | ||||||
Common stock (authorized: 55,000,000 shares, par value $0.75)
|
||||||||
Issued: 33,131,846; Outstanding: 30,916,674 and
30,719,277 shares, respectively |
24,849 | 24,849 | ||||||
Contributed capital |
203,952 | 204,183 | ||||||
Retained earnings |
65,155 | 60,411 | ||||||
Treasury stock, at cost, 2,215,172 and 2,412,569 shares, respectively |
(53,549 | ) | (54,860 | ) | ||||
Accumulated other comprehensive income |
3,531 | 2,296 | ||||||
Total shareholders equity |
243,938 | 236,879 | ||||||
Total liabilities and shareholders equity |
$ | 630,847 | $ | 653,688 | ||||
See accompanying notes to consolidated condensed financial statements.
1
Table of Contents
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per share data)
Three Months Ended | ||||||||
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Net sales |
$ | 225,164 | $ | 237,301 | ||||
Costs and expenses: |
||||||||
Cost of sales |
198,332 | 216,246 | ||||||
Selling, general and administrative expenses |
18,416 | 22,051 | ||||||
Amortization of intangibles |
966 | 1,168 | ||||||
Restructuring and exit costs |
671 | 824 | ||||||
218,385 | 240,289 | |||||||
Operating earnings (loss) |
6,779 | (2,988 | ) | |||||
Interest, net of interest income of $0, and $37, respectively |
3,516 | 4,335 | ||||||
Earnings (loss) from continuing operations before income taxes |
3,263 | (7,323 | ) | |||||
Income tax benefit |
(1,473 | ) | (2,380 | ) | ||||
Net earnings (loss) from continuing operations |
4,736 | (4,943 | ) | |||||
Earnings (loss) from discontinued operations, net of tax |
8 | (149 | ) | |||||
Net earnings (loss) |
$ | 4,744 | $ | (5,092 | ) | |||
Basic earnings (loss) per share: |
||||||||
Earnings (loss) from continuing operations |
$ | .16 | $ | (.16 | ) | |||
Earnings (loss) of discontinued operations |
| (.01 | ) | |||||
Net earnings (loss) |
$ | .16 | $ | (.17 | ) | |||
Diluted earnings (loss) per share: |
||||||||
Earnings (loss) from continuing operations |
$ | .15 | $ | (.16 | ) | |||
Earnings (loss) of discontinued operations |
| (.01 | ) | |||||
Net earnings (loss) |
$ | .15 | $ | (.17 | ) | |||
Dividends declared per share |
$ | | $ | .05 | ||||
See accompanying notes to consolidated condensed financial statements.
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Table of Contents
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
Three Months Ended | ||||||||
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net earnings (loss) |
$ | 4,744 | $ | (5,092 | ) | |||
Adjustments to reconcile net earnings to cash provided by
operating activities: |
||||||||
Depreciation and amortization expense |
9,555 | 11,143 | ||||||
Provision for bad debt expense |
(298 | ) | 2,492 | |||||
Deferred taxes |
125 | (1,832 | ) | |||||
Stock-based compensation expense |
1,081 | 725 | ||||||
Gain (loss) on disposition of assets |
(895 | ) | 4 | |||||
Other, net |
(150 | ) | 388 | |||||
Change in current assets and liabilities |
(5,214 | ) | (9,875 | ) | ||||
Net cash provided by (used for) operating activities |
8,948 | (2,047 | ) | |||||
Cash flows from investing activities |
||||||||
Capital expenditures |
(3,368 | ) | (2,895 | ) | ||||
Proceeds from disposition of assets |
2,876 | | ||||||
Net cash used for investing activities |
(492 | ) | (2,895 | ) | ||||
Cash flows from financing activities |
||||||||
Borrowings on bank credit facility, net |
| 6,360 | ||||||
Payments on notes and bank term loan |
(17,185 | ) | | |||||
(Payments) / borrowings on bonds and leases, net |
(131 | ) | 155 | |||||
Cash dividends on common stock |
| (1,529 | ) | |||||
Net cash (used for) provided by financing activities |
(17,316 | ) | 4,986 | |||||
Effect of exchange rate changes on cash and cash equivalents |
21 | (3 | ) | |||||
Increase (decrease) in cash and cash equivalents |
(8,839 | ) | 41 | |||||
Cash and cash equivalents at beginning of year |
26,925 | 2,118 | ||||||
Cash and cash equivalents at end of period |
$ | 18,086 | $ | 2,159 | ||||
See accompanying notes to consolidated condensed financial statements.
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Table of Contents
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and Dollars in thousands, except per share amounts)
1) Basis of Presentation
The consolidated financial statements include the accounts of Spartech Corporation and its
controlled affiliates (Spartech or 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, these consolidated condensed financial statements
contain all adjustments (consisting of normal recurring adjustments) and disclosures necessary to
make the information presented herein not misleading. These financial statements should be read in
conjunction with the consolidated financial statements and accompanying footnotes thereto included
in the Companys October 31, 2009 Annual Report on Form 10-K.
In 2009, the Company sold its wheels and profiles businesses and closed and liquidated three
businesses including a manufacturer of boat components sold to the marine market, and one
compounding and one sheet business which previously serviced single customers. These businesses
are classified as discontinued operations. Accordingly, for all periods presented herein, the
consolidated condensed statements of operations conform to this presentation. The wheels, profiles
and marine businesses were previously reported in the Engineered Products group and due to these
dispositions, the Company no longer has this reporting group.
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. Operating results for any
quarter are historically seasonal in nature and are not necessarily indicative of the results
expected for the full year. Certain prior year amounts have been reclassified to conform to the
current year presentation. The Companys fiscal year ends on the Saturday closest to October 31
and fiscal years generally contain 52 weeks. In addition, years presented are fiscal years unless
noted otherwise.
2) Discontinued Operations
A summary of the net sales and the net earnings (loss) from discontinued operations is as
follows:
Three Months Ended | ||||||||
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Net sales |
$ | | $ | 11,849 | ||||
Earnings of discontinued operations before
income taxes |
12 | 8 | ||||||
Income tax expense |
4 | 157 | ||||||
Earnings (loss) of discontinued operations, net of tax |
$ | 8 | $ | (149 | ) | |||
3) Inventories
Inventories are valued at the lower of cost or market. Inventories at January 30, 2010 and
October 31, 2009 are comprised of the following components:
January 30, | October 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 35,207 | $ | 34,288 | ||||
Production supplies |
6,962 | 7,055 | ||||||
Finished goods |
22,970 | 21,598 | ||||||
Total inventories |
$ | 65,139 | $ | 62,941 | ||||
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4) Restructuring and Exit Costs
Restructuring and exit costs were recorded in the consolidated condensed statements of
operations for the three months ended January 30, 2010 and January 31, 2009 as follows:
Three Months Ended | ||||||||
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Restructuring and exit costs: |
||||||||
Custom Sheet and Rollstock |
$ | 84 | $ | 182 | ||||
Packaging Technologies |
(729 | ) | 336 | |||||
Color and Specialty Compounds |
1,316 | 289 | ||||||
Corporate |
| 17 | ||||||
Total Restructuring and exit costs |
671 | 824 | ||||||
Income tax benefit |
(249 | ) | (303 | ) | ||||
Impact on net earnings from continuing operations |
$ | 422 | $ | 521 | ||||
In 2008, the Company announced a restructuring plan to address declines in end-market demand
by reducing costs and building a low cost-to-serve model. The plan included the consolidation of
production facilities, shutdown of underperforming and noncore operations and reductions in the
number of manufacturing and administrative jobs. During the first quarter of 2010, the Company
sold a closed facility previously included in its Packaging Technologies segment and recorded a
$712 gain on this sale.
The following table summarizes the cumulative restructuring and exit costs incurred to-date
under the 2008 restructuring plan:
Three Months | ||||||||||||
Cumulative | Ended | Cumulative | ||||||||||
through 2009 | January 30, 2010 | To-Date | ||||||||||
Employee severance |
$ | 3,977 | $ | 571 | $ | 4,548 | ||||||
Facility consolidation and shut-down costs |
1,925 | 715 | 2,640 | |||||||||
Accelerated depreciation, net |
1,084 | (615 | ) | 469 | ||||||||
Total |
$ | 6,986 | $ | 671 | $ | 7,657 | ||||||
Employee severance includes costs associated with the reduction in jobs resulting from
facility consolidations and shut-downs as well as other job reductions. Facility consolidations
and shut-down costs primarily include equipment shut-down, moving and installation expenses and
lease terminations. Accelerated depreciation, net represents the impact from reduced lives on
property, plant and equipment, net of gains or losses on the ultimate sales of the assets. The
Company expects to incur approximately $1,200 of additional restructuring expenses on continuing
operations for initiatives announced through January 30, 2010 which will primarily consist of cash
employee severance and facility consolidation and shut-down costs. The Companys announced
facility consolidations and shut-downs are expected to be substantially complete by the end of the
second quarter 2010.
The Companys total restructuring liability, representing severance and moving costs, was
$1,675 at January 30, 2010 and $1,772 at October 31, 2009. Cash payments for restructuring
activities of continuing operations were $1,383 in the first quarter of 2010.
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5) Long-Term Debt
Long-term debt consisted of the following at January 30, 2010 and October 31, 2009:
January 30, | October 31, | |||||||
2010 | 2009 | |||||||
2006 Senior Notes |
$ | 41,819 | $ | 45,684 | ||||
2004 Senior Notes |
125,452 | 137,054 | ||||||
Bank credit facilities |
| | ||||||
Euro Bank term loan |
17,454 | 20,292 | ||||||
Other |
12,994 | 13,404 | ||||||
197,719 | 216,434 | |||||||
Less current maturities |
493 | 36,079 | ||||||
$ | 197,226 | $ | 180,355 | |||||
The Companys debt agreements require it to offer early principal payments to Senior Note and
Euro Bank term loan holders based on a ratable percentage of each fiscal years excess cash flow
and extraordinary receipts as defined in the agreements such as proceeds from the sale of
businesses. In the first quarter of 2010, the Company paid $17,208 associated with extraordinary
receipts on the sale of businesses that occurred in 2009. Subsequent to the end of the first
quarter, the Company paid $15,308 associated with the 2009 excess cash flow. In addition, the
Companys Euro Bank term loan matured in February 2010 and the Company paid 12,524 Euros ($17,097
U.S.). The Company borrowed from its revolving credit facility to fund the excess cash flow and
Euro Bank term loan required payments. As a result of these payments, the Company had $104,460 of
total capacity on its revolving credit facility which is net of $12,920 used for standby letters of
credit. At January 30, 2010, the Companys availability on its revolving credit facility was
$108,535 under its most restrictive covenant, the Leverage Ratio. Effective January 30, 2010, the
Companys maximum Leverage Ratio allowed by its debt agreements decreased to 3.50 and the minimum
Fixed Charge Coverage Ratio increased to 1.75 which compared to the Companys actual Leverage Ratio
of 2.28 and Fixed Charge Coverage Ratio of 4.09. The Companys credit facility matures in June
2011. The Companys credit facility borrowings are classified as long term because the Company has
the ability and intent to keep the balances outstanding over the next 12 months.
6) Income Taxes
In the first quarter of 2010, the Company initiated a tax restructuring of its Donchery,
France entity which resulted in $2,770 of income tax benefit. The difference between the Companys
statutory rate and effective rate in the first quarter of 2010 was largely caused by this benefit.
The Companys higher effective tax rate versus its statutory rate in the first quarter of 2009 was
attributable to the negative impact of recording a valuation allowance on losses generated from its
Donchery, France operations.
7) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Companys debt
as follows:
January 30, 2010 | October 31, 2009 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Long-term debt
(including bank
credit facilities) |
$ | 197,719 | $ | 193,133 | $ | 216,434 | $ | 205,776 |
The estimated fair value of the long-term debt is based on estimated borrowing rates to
discount the cash flows to their present value as provided by a broker, or otherwise, quoted,
current market prices for same or similar issues. The Companys other financial instruments,
including cash, accounts receivable, accounts payable, and accrued liabilities have net carrying
values that approximate their fair values due to the short-term nature of these instruments.
Disclosures for nonfinancial assets and liabilities that are measured at fair value, but are
recognized and disclosed as fair value on a nonrecurring basis, were required prospectively
beginning November 1, 2009. During the three months ended
6
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January 30, 2010, there were no significant measurements of assets or liabilities at fair
value on a nonrecurring basis subsequent to their initial recognition.
8) Commitments and Contingencies
In September 2003, the New Jersey Department of Environmental Protection issued a directive
and the United States Environmental Protection Agency (USEPA) initiated an investigation related
to over 70 companies, including a Spartech subsidiary, regarding the Lower Passaic River. The
subsidiary subsequently agreed to participate in a group of over 40 companies in funding an
environmental study by the USEPA to determine the extent and source of contamination at this site.
In 2005, the New Jersey Department of Environmental Protection initiated civil litigation in the
Superior Court of New Jersey, Law Division Essex County against Occidental Chemical Corporation
and affiliated entities, including Tierra Solutions, Inc. (Tierra), regarding environmental
degradation of the Lower Passaic River and other areas. In 2009, Tierra filed a third party
complaint against other companies doing business in the Lower Passaic River area, including a
former owner of the Companys Kearny, New Jersey facility. The Company assumed certain
environmental liability of such former owner when it acquired the facility. The litigation is in
the early stages with respect to the third party defendants. As of January 31, 2010 and October
31, 2009, the Company had approximately $865 accrued related to its share of the funding and
related legal expenses. Due to uncertainties inherent in this matter, management is unable to
estimate the Companys potential exposure, including possible remediation or other environmental
responsibilities that may result from this matter, which is not expected to occur for a number of
years. These uncertainties primarily include the completion and outcome of the environmental
study, the percentage of contamination attributable to the subsidiary and other parties and the
outcome of the litigation. It is possible that the ultimate liability resulting from this issue
could materially differ from the current accrual balance. In the event of one or more adverse
determinations related to this matter, the impact on the Companys results of operations could be
material to any specific period. However, the Companys opinion is that future expenditures for
compliance with these laws and regulations, as they relate to the Lower Passaic River will not have
a material effect on the Companys capital expenditures, financial position, or competitive
position.
The Company is also subject to various other claims, lawsuits, and administrative proceedings
arising in the ordinary course of business with respect to commercial, product liability,
employment, and other matters, several of which claim substantial amounts of damages. While it is
not possible to estimate with certainty the ultimate legal and financial liability with respect to
these claims, lawsuits, and administrative proceedings, the Company believes that the outcome of
these other matters will not have a material adverse effect on the Companys financial position or
results of operations.
9) Net Earnings (Loss) Per Share
Effective November 1, 2009, the Company retrospectively adopted a Financial Accounting
Standards Board (FASB) standard that requires unvested share-based payment awards that contain
rights to receive non-forfeitable dividends or dividend equivalents to be included in the two-class
method of computing earnings per share as described FASB issued guidance in the Accounting
Standards Codification 260 (Earnings per Share). The adoption of this standard did not have an
impact on the weighted average number of basic shares or net earnings per share for the three
months ended January 31, 2009.
Basic earnings per share excludes any dilution and is computed by dividing net earnings by the
weighted average number of common and participating 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. Outstanding Stock
Appreciation Rights (SARs) and stock options that could potentially dilute basic earnings per
share in the future but were not included in the computation of diluted earnings per share because
they were antidilutive are as follows (in thousands): for the first three months of 2010: 948 SARs,
and 955 stock options; and for the first three months of 2009: 959 SARs, and 1,276 stock options.
The reconciliation of the net earnings and weighted average number of common and participating
shares used in the computations of basic and diluted earnings per share for the three months ended
January 30, 2010 and January 31, 2009 is as follows (shares in thousands):
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Three Months Ended | ||||||||
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Basic and diluted net earnings: |
||||||||
Net earnings (loss) from continuing operations |
$ | 4,736 | $ | (4,943 | ) | |||
Earnings (loss) of discontinued operations |
8 | (149 | ) | |||||
Net earnings (loss) |
$ | 4,744 | $ | (5,092 | ) | |||
Weighted average shares outstanding: |
||||||||
Basic weighted average common and participating shares outstanding |
30,544 | 30,306 | ||||||
Add: Dilutive shares from equity instruments |
175 | | ||||||
Diluted weighted average shares outstanding |
30,719 | 30,306 | ||||||
Basic earnings (loss) per share: |
||||||||
Earnings (loss) from continuing operations |
$ | .16 | $ | (.16 | ) | |||
Earnings (loss) of discontinued operations |
| (.01 | ) | |||||
Net earnings (loss) |
$ | .16 | $ | (.17 | ) | |||
Diluted earnings (loss) per share: |
||||||||
Earnings (loss) from continuing operations |
$ | .15 | $ | (.16 | ) | |||
Earnings (loss) of discontinued operations |
| (.01 | ) | |||||
Net earnings (loss) |
$ | .15 | $ | (.17 | ) | |||
10) Segment Information
Spartech is organized into three reportable segments based on its operating structure and the
products manufactured. The three reportable segments are Custom Sheet and Rollstock, Packaging
Technologies and Color and Specialty Compounds. The Company uses operating earnings (loss) from
continuing operations, excluding the impact of foreign exchange, to evaluate business segment
performance. Accordingly, discontinued operations have been excluded from the segment results
below. Corporate operating losses include corporate office expenses, shared services costs,
information technology costs, professional fees, and the impact of foreign currency exchange that
are not allocated to the reportable segments.
The following presents the Companys net sales and operating earnings (loss) by reportable
segment and the reconciliation to consolidated operating earnings for the three months ended
January 30, 2010 and January 31, 2009:
Three Months Ended | ||||||||
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Net sales (a): |
||||||||
Custom Sheet and Rollstock |
$ | 116,130 | $ | 114,595 | ||||
Packaging Technologies |
48,623 | 55,029 | ||||||
Color and Specialty Compounds |
60,411 | 67,677 | ||||||
Net sales |
$ | 225,164 | $ | 237,301 | ||||
Operating earnings (loss) from continuing operations: |
||||||||
Custom Sheet and Rollstock |
$ | 7,287 | $ | 838 | ||||
Packaging Technologies |
6,706 | 6,178 | ||||||
Color and Specialty Compounds |
1,200 | (565 | ) | |||||
Corporate expenses |
(8,414 | ) | (9,439 | ) | ||||
Operating earnings (loss) |
$ | 6,779 | $ | (2,988 | ) | |||
Notes to table:
8
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(a) | Excludes intersegment sales of $10,144 and $8,563 in the first three months of 2010 and 2009, respectively, primarily from the Color and Specialty Compounds segment. |
11) Comprehensive Income (Loss)
Comprehensive income (loss) is the Companys change in equity during the period related to
transactions, events and circumstances from non-owner sources. The reconciliation of net earnings
(loss) to comprehensive income (loss) for the three months ended January 30, 2010 and January 31,
2009 is as follows ended:
Three Months Ended | ||||||||
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Net earnings (loss) |
$ | 4,744 | $ | (5,092 | ) | |||
Foreign currency translation adjustments |
1,235 | (563 | ) | |||||
Total comprehensive income (loss) |
$ | 5,979 | $ | (5,655 | ) | |||
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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Highlights
We continued to operate in a weak end-market demand environment in our first quarter of 2010.
However, we saw some demand recovery of our compounds sold to the automotive sector of our
transportation market and experienced sheet volume increases to the appliance market and for sheet
used in general industrial applications. These improvements were mitigated by lower demand in the
commercial construction and aerospace sectors and led to an underlying sales volume increase of 3%
in the first quarter of 2010 over the first quarter of the prior year. Despite the modest increase
in sales volume, our earnings improved significantly from the benefits of our structural cost
reduction and production efficiency initiatives. Consolidated operating earnings were $6.8 million
in the first quarter of 2010 compared to an operating loss of $3.0 million in the first quarter of
2009. In addition, we had solid cash flows in our seasonally-low first quarter and paid down $17.3
million of debt, of which half was funded by operations and the other half from a decrease in cash.
In 2009, the Company sold its wheels and profiles businesses and closed and liquidated three
businesses including a manufacturer of boat components sold to the marine market, and one
compounding and one sheet business which previously serviced single customers. These businesses
are classified as discontinued operations and all amounts presented within Item 2 are presented on
a continuing basis, unless otherwise noted. The wheels, profiles and marine businesses were
previously reported in the Engineered Products group and due to these dispositions, the Company no
longer has this reporting group.
Our fiscal year ends on the Saturday closest to October 31 and fiscal years generally contain
52 weeks. In addition, periods presented are fiscal periods unless noted otherwise.
Outlook
Sales volumes in most of our end markets have stabilized, with some recovery in our automotive
business and a lagging decline in commercial construction and aerospace sectors which were late
entrants into the economic downturn. We expect to see these market trends continue for the year
with modestly favorable volume comparisons to the prior year. We anticipate a volatile raw
material pricing environment during the balance of the year. We will continue to focus on
accelerating new business opportunities, executing continuous improvement initiatives, and
maximizing cash flows to better position us for profitable growth and enhanced shareholder returns.
Consolidated Results
Net sales were $225.2 million in the three month period ended January 30, 2010, representing a
5% decrease over the same period of the prior year. This decrease was caused by:
Underlying volume |
3 | % | ||
Price/Mix |
(8 | ) | ||
(5 | )% | |||
Our increase in underlying volume reflects higher sales of compounds to the automotive sector
of our transportation market from demand recovery and increases in sales of sheet to the appliance
market and for sheet used in general industrial applications. These volume increases were
mitigated by declines of compounds sold to the commercial construction market and sheet sold to the
aerospace market which were impacted by the economic downturn later in the cycle than other markets
and therefore, have not yet shown signs of recovery. The price/mix decrease in the first quarter
comparison was primarily due to lower raw material costs which were passed through to customers as
lower selling prices and also reflected a higher mix of lower-priced product associated with
automotive, appliance and general industrial applications. Our raw material prices decreased
sharply at the end of our first quarter of 2009, then gradually increased over the last 12 months,
and have recently started to increase significantly at the end of our first quarter of 2010.
The following table presents net sales, cost of sales, and the resulting gross margin in
dollars and on a per pound sold basis for the three months ended January 30, 2010 compared to the
same period in 2009. Cost of sales presented in the consolidated condensed statements of
operations includes material and conversion costs but excludes amortization of
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intangible assets.
We have not presented cost of sales and gross margin as a percentage of net sales because a
comparison of
this measure is distorted by changes in resin costs that are typically passed through to
customers as changes to selling prices. These changes can materially affect the percentages but do
not present complete performance measures of the business.
Three Months Ended | ||||||||
January 30, | January 31, | |||||||
2010 | 2009 | |||||||
Dollars and Pounds (in millions) |
||||||||
Net sales |
$ | 225.2 | $ | 237.3 | ||||
Cost of sales |
198.4 | 216.2 | ||||||
Gross margin |
$ | 26.8 | $ | 21.1 | ||||
Pounds Sold |
210.6 | 204.1 | ||||||
Dollars per Pound Sold |
||||||||
Net sales |
$ | 1.069 | $ | 1.163 | ||||
Cost of sales |
.942 | 1.060 | ||||||
Gross margin |
$ | .127 | $ | .103 | ||||
The decrease in net sales and cost of sales per pound in the first three months of 2010
compared to the same period in the prior year was primarily caused by lower raw material costs
which were passed through to customers as lower selling prices and structural cost reduction and
production efficiency initiatives. The decrease also reflected a higher mix of lower-priced
product. The 2.4 cent per pound increase in gross margin was driven by the benefits of our
structural cost reduction and production efficiency initiatives which more than offset an adverse
impact of an increase in mix of lower margin products.
Selling, general and administrative expenses were $18.4 million in the first three months of
2010 compared to $22.1 million in the same period of the prior year. This decrease was primarily
due to $2.8 million of lower bad debt expense and the impact of our structural cost reductions.
Amortization of intangibles was $1.0 million in the first three months of 2010 compared to
$1.2 million in the same period of the prior year. The decrease reflects intangibles which were
fully amortized by the end of 2009.
Restructuring and exit costs were $0.7 million in the first quarter of 2010 compared to $0.8
million in the same period of the prior year. The costs for both periods primarily consist of
employee severance, facility consolidation and shut-down costs and accelerated depreciation
associated with our cost reduction initiatives. Our costs in the first quarter of 2010 are net of
gains from sales of assets from previously shut-down operations. We expect to incur approximately
$1.2 million of additional restructuring expenses for initiatives announced through January 30,
2010 primarily comprised of employee severance and facility consolidation and shut-down costs.
Interest expense, net of interest income, was $3.5 million in the first quarter of 2010
compared to $4.3 million in the same period of the prior year. This decrease was primarily driven
by the $85.6 million of debt reduction during the last 12 months.
Our
income tax benefit of $1.5 million in the first quarter of 2010 included a $2.8 million benefit from a tax
restructuring of our entity in Donchery, France. Excluding this
benefit, our effective tax rate would have reflected a more typical 37-39% for the
Company.
We reported net earnings from continuing operations of $4.7 million for the first three months
of 2010 compared to a net loss of $4.9 million in the same period of the prior year. The increases
reflect the impact of the items previously discussed.
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Segment Results
Custom Sheet and Rollstock Segment
Net sales were $116.1 million in three months ended January 30, 2010 compared to $114.6
million in the same period of the prior year representing a 1% increase. This increase was caused
by the following factors:
Underlying volume |
13 | % | ||
Price/Mix |
(12 | ) | ||
1 | % | |||
The underlying volume increases in this segment occurred in the appliance market and for
general industrial applications, partially offset by declines to the aerospace market. The
price/mix declines were caused by a higher mix of lower-priced product and decreases in resin costs
which were passed on to customers as lower selling prices. This segments operating earnings were
$7.3 million in the first quarter 2010 compared to $0.8 million in the same period of the prior
year. The increase in operating earnings was primarily caused by the benefits of our structural
cost reduction, production efficiency initiatives and lower bad debt expense which more than offset
a negative impact of increase in mix of lower margin sales.
Packaging Technologies
Net sales were $48.6 million in the three months ended January 30, 2010 compared to $55.0
million in the same period of the prior year representing a 12% decrease. This decrease was caused
by the following factors:
Underlying volume |
| % | ||
Price/Mix |
(12 | ) | ||
(12 | )% | |||
Underlying volume was flat for this segment reflecting stable demand. The impact of price/mix
on sales was primarily due to lower average resin costs in the first quarter of this year which
were passed through to customers as lower selling prices. This segments operating earnings were
$6.7 million in the first three months of 2010 compared to $6.2 million in the same period of the
prior year. The increase in operating earnings was primarily due to gain on the sale of a
previously consolidated facility. Excluding restructuring and exit costs (includes gain on
sale), operating earnings were $6.0 million in the first quarter of 2010 versus $6.5 million in the
first quarter of the prior year. The decrease primarily reflected lags in indexed pricing with
customers, offset somewhat by the benefit of our improvement initiatives.
Color and Specialty Compounds Segment
Net sales were $60.4 million in the three months ended January 30, 2010 compared to $67.7
million in the same period of the prior year representing an 11% decrease. This decrease was
caused by the following factors:
Underlying volume |
(6 | )% | ||
Price/Mix |
(5 | ) | ||
(11 | )% | |||
The decrease in underlying volume was primarily due to lower sales of compounds to the
commercial construction market, partially offset by the impact of demand recovery in the automotive
sector of our transportation market. The price/mix decline was caused by an increase in the mix
of lower priced sales. This segments operating earnings were $1.2 million in the first quarter of
2010 compared to a loss of $0.6 million in the same period of the prior year. Restructuring and
exit costs increased $1.0 million to $1.3 million in our first quarter of the current year compared
to the same quarter in the prior year. Excluding this impact, operating earnings increased $2.8
million due to the benefits of our structural cost reductions and production efficiencies which
more than offset the impact of a larger mix of lower margin sales.
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Corporate
Corporate expenses were $8.4 million in the first three months of 2010 compared to $9.4
million in the same period of the prior year. Corporate expenses decreased in the first three
months of 2010 due primarily to our structural cost reductions and lower bad debt expense.
Liquidity and Capital Resources
Cash Flow
Our primary sources of liquidity have been cash flows from operating activities and borrowings
from third parties. Historically, our principal uses of cash have been to support our operating
activities, invest in capital improvements, reduce outstanding indebtedness, finance strategic
business acquisitions and pay dividends on our common stock. The following summarizes the major
categories of our changes in cash and cash equivalents for the three months ended January 30, 2010
and January 31, 2009:
Three Months Ended | ||||||||
January 30, | January 31, | |||||||
Cash Flows (in millions) | 2010 | 2009 | ||||||
Net cash provided by (used for) operating activities |
$ | 9.0 | $ | (2.0 | ) | |||
Net cash used for investing activities |
(0.5 | ) | (3.0 | ) | ||||
Net cash provided by (used for) financing activities |
(17.3 | ) | 5.0 | |||||
Decrease in cash and cash equivalents |
$ | (8.8 | ) | $ | | |||
Net cash provided by operating activities increased to $9.0 million in the first three months
of 2010 compared to the same period in the prior year primarily as a result of the increase in net
earnings. Our cash used for investing activities in our first quarter of 2010 was comprised of
$3.4 million of capital expenditures partially offset by $2.9 million of proceeds from dispositions
of assets associated with previously shut down operations. Our $17.3 million of net cash used for
financing activities in our first quarter of this year was from the pay down of debt versus our
borrowing in the first quarter of the prior year to pay $1.5 million of dividends and fund
operations. The $17.3 million pay down of debt included $8.8 million of reduction in cash. We
suspended our cash dividend during the second quarter of 2009.
Financing Arrangements
As of January 30, 2010, we had $197.7 million of outstanding debt with a weighted average
interest rate of 6.0%, of which 87% represented fixed rate instruments with a weighted average
interest rate of 6.6%. As of January 30, 2010, we used approximately $8.9 million of cash from
unremitted foreign earnings held in Canada to pay down debt and held approximately $11.1 million of
cash from Canada. Under Internal Revenue Service regulations, we can use this cash to fund U.S.
operations or pay down U.S. debt for up to 60 consecutive days or 180 total days during our fiscal
year without incurring residual U.S. income tax. If we were to permanently repatriate this $20.0
million of cash to the U.S. from Canada, we would be required to pay approximately $6.5 million of
income tax.
In accordance with our debt agreements, we are required to offer early principal payments to
our Senior Note and Euro Bank term loan holders based on a ratable percentage of our previous
fiscal years excess cash flow and extraordinary receipts such as proceeds from the sale of
businesses. We made early principal payments of $17.2 million in the first quarter of 2010 related
to proceeds from sales of our profiles and wheels businesses. Subsequent to our first quarter end,
in February 2010 we paid $15.3 million associated with our 2009 excess cash flow. In addition, our
Euro Bank term loan matured on February 16, 2010 and accordingly, we paid 12.5 million Euros ($17.1
million U.S. dollars). The first quarter extraordinary receipts payments and subsequent funding of
the excess cash flow and Euro Bank term loan were made from our revolver. We are not required to
make any other principal payments on our bank credit facility or senior notes in the next 12
months.
Our bank credit facility and Senior Notes are secured with collateral, which includes our
accounts receivable, inventory, machinery and equipment, and intangible assets. As of January 30,
2010, availability on our revolving credit facility was $108.5 million under our most restrictive
covenant, the Leverage Ratio. Our revolver capacity is permanently reduced by its pro rata share
of early principal payments made to our Senior Note and Euro Bank term loan holders, and after the
first
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quarter extraordinary receipts payments and subsequent funding of the excess cash flow in our
second quarter of 2010, our total revolver capacity was reduced to $104.5 million which is net of
$12.9 million used by standby letters of credit.
While we were in compliance with our covenants during the first quarter of 2010 and
currently expect to be in compliance with our covenants in the next twelve months, our failure to
comply with our covenants or other requirements of our financing arrangements is an event of
default and could, among other things, accelerate the payment of indebtedness, which could have a
material adverse impact on our business, financial condition and results of operations.
We anticipate that cash flows from operations, together with the financing and borrowings
under our bank credit facilities, will provide the resources necessary for reinvestment in our
existing business and managing our capital structure on a short and long-term basis.
Cautionary Statements Concerning Forward-Looking Statements
Statements in this Form 10-Q that are not purely historical, including statements which
express the Companys belief, anticipation or expectation about future events, are forward-looking
statements. Forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 relate to future events and expectations and include statements containing such
words as anticipates, believes, estimates, expects, would, should, will, will likely
result, forecast, outlook, projects, and similar expressions. Forward-looking statements
are based on managements current expectations and include known and unknown risks, uncertainties
and other factors, many of which management is unable to predict or control, that may cause actual
results, performance or achievements to differ materially from those expressed or implied in the
forward-looking statements. Important factors which could cause actual results to differ from our
forward looking statements include, but are not limited to:
(a) | further adverse changes in economic or industry conditions, including global supply and demand conditions and prices for products of the types we produce; | ||
(b) | our ability to compete effectively on product performance, quality, price, availability, product development, and customer service; | ||
(c) | adverse changes in the markets we serve, including the packaging, transportation, building and construction, recreation and leisure, and other markets, some of which tend to be cyclical; | ||
(d) | our inability to achieve the level of cost savings, productivity improvements, gross margin enhancements, growth or other benefits anticipated from our planned improvement initiatives; | ||
(e) | volatility of prices and availability of supply of energy and of the raw materials that are critical to the manufacture of our products, particularly plastic resins derived from oil and natural gas, including future effects of natural disasters; | ||
(f) | our inability to manage or pass through to customers an adequate level of increases in the costs of materials, freight, utilities, or other conversion costs; | ||
(g) | loss of business with a limited number of customers that represent a significant percentage of the Companys revenues; | ||
(h) | restrictions imposed on us by instruments governing our indebtedness, the possible inability to comply with requirements of those instruments, and inability to access capital markets; | ||
(i) | possible asset impairment charges; | ||
(j) | our inability to predict accurately the costs to be incurred, time taken to complete, operating disruptions therefrom, or savings to be achieved in connection with announced production plant restructurings; | ||
(k) | adverse findings in significant legal or environmental proceedings or our inability to comply with applicable environmental laws and regulations; | ||
(l) | our inability to develop and launch new products successfully; and | ||
(m) | possible weaknesses in internal controls. |
We assume no responsibility to update our forward-looking statements, except as required by
law.
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Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See Item 2, Managements Discussion and Analysis of Financial Condition and Results of
Operations for disclosures about market risk. In addition, refer to Part I Item 1A Risk
Factors of our 2009 Form 10-K, filed with the Securities and Exchange Commission (SEC) on
January 14, 2010 for additional disclosures about market risk.
Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Spartech maintains a system of disclosure controls and procedures which are designed to
provide reasonable assurance that information required to be disclosed by the Company in the
reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms and is
accumulated and communicated to management, including the Companys certifying officers, as
appropriate to allow timely decisions regarding required disclosure. Based on an evaluation
performed, the Companys certifying officers have concluded that the disclosure controls and
procedures were effective as of January 30, 2010, to provide reasonable assurance of the
achievement of these objectives.
Notwithstanding the foregoing, there can be no assurance that the Companys disclosure
controls and procedures will detect or uncover all failures of persons within the Company and its
consolidated subsidiaries to report material information otherwise required to be set forth in the
Companys reports.
Changes in Internal Control Over Financial Reporting
The Company has substantially completed the implementation of its Oracle/Business Process
Improvement enterprise resource planning (ERP) system. This ERP implementation has resulted in
certain changes and enhancements to the Companys internal control over financial reporting
including the ability of the Company to transition to a shared service environment for transaction
processing. The internal controls over financial reporting impacted by the ERP implementation and
the Companys transition to a shared service environment were appropriately tested for design
effectiveness. While some processes and controls will continue to evolve, existing controls and
the controls affected were evaluated as appropriate and effective. There were no other changes to
internal control over financial reporting during the three months ended January 30, 2010, that have
materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
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PART II OTHER INFORMATION
Item 5. | OTHER INFORMATION |
There have been no material changes to the procedures by which security holders may recommend
nominees to the Companys Board of Directors implemented since the filing of the Companys Annual
Report on Form 10-K for the year ended October 31, 2009.
Item 6. | EXHIBITS |
Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K)
31.1
|
Section 302 Certification of CEO | |
31.2
|
Section 302 Certification of CFO | |
32.1
|
Section 1350 Certification of CEO | |
32.2
|
Section 1350 Certification of CFO |
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: March 3, 2010 | /s/ Myles S. Odaniell | |||
Myles S. Odaniell | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
/s/ Randy C. Martin | ||||
Randy C. Martin | ||||
Executive Vice President and Chief
Financial Officer (Principal Financial Officer) |
||||
/s/ Michael G. Marcely | ||||
Michael G. Marcely | ||||
Senior Vice President Planning and
Controller (Principal Accounting Officer) |
16