UNITED STATES
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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(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)

(314) 721-4242
(Registrant’s telephone number, including area code)

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES 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.

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 issuer’s classes of common stock, as of the latest practicable date: 30,868,616 shares of Common Stock, $.75 par value per share, outstanding as of March 4, 2011.

 

 

SPARTECH CORPORATION
FORM 10-Q For the Three Months Ended January 29, 2011
Table of Contents

Cautionary Statements Concerning Forward-Looking Statements

				Page No.
PART I — Financial Information
Item 1.		Financial Statements
		Consolidated Condensed Balance Sheets:
		As of January 29, 2011 (Unaudited) and October 30, 2010			1
		Unaudited Consolidated Condensed Statements of Operations:
		For the Three Months Ended January 29, 2011 and January 30, 2010			2
		Unaudited Consolidated Condensed Statement of Cash Flows:
		For the Three Months Ended January 29, 2011 and January 30, 2010			3
		Notes to Unaudited Consolidated Condensed Financial Statements			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 4.		Controls and Procedures			20
PART II — Other Information
Item 1.		Legal Proceedings			20
Item 6.		Exhibits			21
		Signatures			21
		Certifications			22
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Cautionary Statements Concerning Forward-Looking Statements

Statements in this Form 10-Q that are not purely historical, including statements that express the Company’s 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 management’s 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 that could cause actual results to differ from our forward-looking statements are as follows:

	(a)		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)		Volatility of prices and availability of supply of energy and raw materials that are critical to the manufacture of our products, particularly plastic resins derived from oil and natural gas, including future impacts of natural disasters
	(e)		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
	(f)		Our inability to achieve and sustain the level of cost savings, productivity improvements, gross margin enhancements, growth or other benefits anticipated from our improvement initiatives
	(g)		Our inability to collect all or a portion of our receivables with large customers or a number of customers
	(h)		Loss of business with a limited number of customers that represent a significant percentage of our revenues
	(i)		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
	(j)		Possible asset impairments
	(k)		Our inability to predict accurately the costs to be incurred, time taken to complete, operating disruptions therefrom, potential loss of business or savings to be achieved in connection with announced production plant consolidations and line moves
	(l)		Adverse findings in significant legal or environmental proceedings or our inability to comply with applicable environmental laws and regulations
	(m)		Our inability to develop and launch new products successfully
	(n)		Possible weaknesses in internal controls

We assume no responsibility to update our forward-looking statements.

PART I — Financial Information

Item 1.		Financial Statements

Spartech Corporation and Subsidiaries
Consolidated Condensed Balance Sheets

		(Unaudited)
		January 29,				October 30,
(Dollars in thousands, except share data)		2011				2010
Assets
Current assets:
Cash and cash equivalents		$	3,535			$	4,900
Trade receivables, net of allowances of $3,359 and $3,404, respectively			129,094				134,902
Inventories, net of inventory reserves of $7,689 and $6,539, respectively			90,048				79,691
Prepaid expenses and other current assets, net			30,282				35,789
Assets held for sale			3,256				3,256
Total current assets			256,215				258,538
Property, plant, and equipment, net			210,904				211,844
Goodwill			87,921				87,921
Other intangible assets, net			14,136				14,559
Other long-term assets			4,741				4,279
Total assets		$	573,917			$	577,141
Liabilities and shareholders’ equity
Current liabilities:
Current maturities of long-term debt		$	876			$	880
Accounts payable			119,317				129,037
Accrued liabilities			38,472				34,112
Total current liabilities			158,665				164,029
Long-term debt, less current maturities			172,283				171,592
Other long-term liabilities:
Deferred taxes			41,514				42,648
Other long-term liabilities			6,291				5,866
Total liabilities			378,753				384,135
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 shares; outstanding: 30,865,820 and 30,884,503 shares, respectively			24,849				24,849
Contributed capital			204,793				204,966
Retained earnings			11,069				10,036
Treasury stock, at cost, 2,266,026 and 2,247,343 shares, respectively			(51,844	)			(52,730	)
Accumulated other comprehensive income			6,297				5,885
Total shareholders’ equity			195,164				193,006
Total liabilities and shareholders’ equity		$	573,917			$	577,141

See accompanying notes to consolidated condensed financial statements.

Spartech Corporation and Subsidiaries
Consolidated Condensed Statements of Operations

		Three Months Ended
		January 29,				January 30,
(Unaudited and dollars in thousands, except per share data)		2011				2010
Net sales		$	234,783			$	225,164
Costs and expenses
Cost of sales			216,377				198,332
Selling, general and administrative expenses			18,974				18,416
Amortization of intangibles			422				966
Restructuring and exit costs			828				671
Total costs and expenses			236,601				218,385
Operating (loss) earnings			(1,818	)			6,779
Interest, net of interest income			2,571				3,516
(Loss) earnings from continuing operations before income taxes			(4,389	)			3,263
Income tax benefit			(2,551	)			(1,473	)
Net (loss) earnings from continuing operations			(1,838	)			4,736
Net earnings from discontinued operations, net of tax			2,871				8
Net earnings		$	1,033			$	4,744
Basic (loss) earnings per share:
(Loss) earnings from continuing operations		$	(0.06	)		$	0.16
Earnings from discontinued operations, net of tax			0.09				—
Net earnings per share		$	0.03			$	0.16
Diluted (loss) earnings per share:
(Loss) earnings from continuing operations		$	(0.06	)		$	0.15
Earnings from discontinued operations, net of tax			0.09				—
Net earnings per share		$	0.03			$	0.15

See accompanying notes to consolidated condensed financial statements.

Spartech Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows

		Three Months Ended
		January 29,				January 30,
(Unaudited and dollars in thousands)		2011				2010
Cash flows from operating activities
Net earnings		$	1,033			$	4,744
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			8,101				9,555
Stock-based compensation expense			893				1,081
Goodwill impairment			—				275
Restructuring and exit costs			76				97
Gain (loss) on disposition of assets, net			124				(895	)
Provision for bad debt expense			207				(298	)
Deferred taxes			(2,531	)			125
Change in current assets and liabilities			(1,329	)			(5,214	)
Other, net			1,137				(522	)
Net cash provided by operating activities			7,711				8,948
Cash flows from investing activities
Capital expenditures			(7,986	)			(3,368	)
Proceeds from the disposition of assets			—				2,876
Net cash used by investing activities			(7,986	)			(492	)
Cash flows from financing activities
Bank credit facility borrowings (payments), net			800				—
Payments on notes and bank term loan			—				(17,185	)
Payments on bonds and leases			(119	)			(131	)
Debt issuance costs			(1,595	)			—
Stock-based compensation exercised			(180	)			—
Net cash used by financing activities			(1,094	)			(17,316	)
Effect of exchnage rates on cash and cash equivalents			4				21
Decrease in cash and cash equivalents			(1,365	)			(8,839	)
Cash and cash equivalents at beginning of year			4,900				26,925
Cash and cash equivalents at end of year		$	3,535			$	18,086

See accompanying notes to consolidated condensed financial statements.

Notes to Consolidated Condensed Financial Statement

1. Basis of Presentation

The consolidated financial statements include the accounts of Spartech Corporation and its consolidated subsidiaries (“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. All intercompany transactions and balances have been eliminated in consolidation. 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 Company’s October 30, 2010 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 that previously serviced single customers. These businesses are classified as discontinued operations based on the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) topic, Discontinued Operations. Accordingly, for all periods presented herein, the consolidated 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. See Notes 3 and 11 for further discussion of the Company’s discontinued operations and segments, respectively.

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. During the second quarter of 2010, the Company moved organizational reporting and management responsibilities of two businesses previously included in the Color and Specialty Compounds segment to the Custom Sheet and Rollstock segment. Also in the second quarter, the Company reorganized the internal reporting and management responsibilities of certain product lines between the Custom Sheet and Rollstock and Packaging Technologies segments to better align management of these product lines with end markets. These management and reporting changes resulted in a reorganization of the Company’s three reportable segments beginning in the second quarter. Accordingly, historical segment results have been reclassified to conform to these changes. See Note 11 for further discussion of the Company’s segments.

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) 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 reclassifications have been made to the prior period financial statements and notes to conform to the current period presentation. Dollars presented are in thousands except per share data, unless otherwise indicated.

The Company’s fiscal year ends on the Saturday closest to October 31st. Fiscal years presented in this report contain 52 weeks and periods presented are fiscal unless noted otherwise.

2. Newly Adopted Accounting Standards

In June 2008, the FASB issued an accounting standard which addresses whether instruments granted in share-based payment awards that entitle their holders to receive non-forfeitable dividends or dividend equivalents before vesting should be considered participating securities and need to be included in the earnings allocation in computing earnings per share (“EPS”) under the “two-class method.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In accordance with the standard, the Company’s unvested restricted stock awards are considered participating securities because they entitle holders to receive non-forfeitable dividends during the vesting term. In applying the two-class method, undistributed earnings are allocated between common shares and unvested restricted stock awards. The standard became effective for the Company on November 1, 2009 when the two-class method of computing basic and diluted EPS was applied for all periods presented. See Note 10 for additional information.

3. Discontinued Operations

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 that previously serviced single customers. These businesses are classified as discontinued operations. 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.

During 2009, the Company filed a proof of claim in Chemtura’s Chapter 11 case, alleging losses for breach of contract, fixed asset write-offs, severance and other related facility closure costs. In the first quarter of 2011, the Company reached a final settlement agreement with Chemtura and obtained the Bankruptcy Court’s approval for the settlement of the claim for $4,188 in cash and equity in the newly reorganized Chemtura, which was subsequently sold, resulting in $4,844 of total cash proceeds. A summary of the net sales and the net earnings from discontinued operations is as follows:

		Three Months Ended
		January 29,				January 30,
		2011				2010
Net sales		$	—			$	—
Earnings from discontinued operations before income taxes			4,634				12
Provision for income taxes			1,763				4
Earnings from discontinued operations, net of tax		$	2,871			$	8

4. Inventories, net

Inventories are valued at the lower of cost or market. Inventory reserves reduce the cost basis of inventory. Inventory values are primarily based on either actual or standard costs, which approximate average cost. Finished goods include the costs of material, labor and overhead. Inventories at January 29, 2011, and October 30, 2010, consisted of the following:

		January 29,				October 30,
		2011				2010
Raw materials		$	54,997			$	50,258
Production supplies			6,601				6,547
Finished goods			36,139				29,425
Inventory reserves			(7,689	)			(6,539	)
Total inventories, net		$	90,048			$	79,691

5. Restructuring and Exit Costs

Restructuring and exit costs were recorded in the consolidated statements of operations as follows:

		Three Months Ended
		January 29,				January 30,
		2011				2010
Restructuring and exit costs:
Custom Sheet and Rollstock		$	350			$	84
Packaging Technologies			116				(729	)
Color and Specialty Compounds			356				1,316
Corporate			6				—
Total restructuring and exit costs			828				671
Income tax benefit			(315	)			(249	)
Impact on net earnings from continuing operations		$	513			$	422

2008 Restructuring Plan

In 2008, the Company announced a restructuring plan to address declines in end-market demand and to build a low cost-to-serve model. The plan included the consolidation of production facilities, shut-down of underperforming and non-core 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 the Packaging Technologies segment and recorded a $712 gain on the sale.

The following table summarizes the cumulative restructuring and exit costs incurred to date under the 2008 restructuring plan:

						Three Months
						Ended
		Cumulative				January 29,				Cumulative
		through 2010				2011				To-Date
Employee severance		$	5,798			$	473			$	6,271
Facility consolidation and shut-down costs			5,311				279				5,590
Fixed asset valuation adjustments, net			3,167				76				3,243
Total		$	14,276			$	828			$	15,104

Employee severance includes costs associated with job eliminations and the reduction in jobs resulting from facility consolidations and shut-downs. Facility consolidation and shut-down costs primarily include costs associated with shutting down production facilities, terminating leases and relocating production lines to continuing production facilities. Fixed asset valuation adjustments, net represents the effect from accelerated depreciation for reduced lives on property, plant and equipment and adjustments to the carrying value of assets held-for-sale to fair value, net of gains or losses on the ultimate sales of the assets.

The Company expects to incur approximately $1,000 of additional restructuring and exit costs in continuing operations for initiatives announced through January 29, 2011, which will primarily consist of employee severance and facility consolidation and shut-down costs. The Company’s announced facility consolidations and shut-downs are expected to be substantially complete by the third quarter of 2011.

The Company’s total restructuring liability, representing severance and relocation costs, was $1,164 and $540 at January 29, 2011, and October 30, 2010, respectively. Cash payments for restructuring activities of continuing operations were $128 and $1,383 for the three months ended January 29, 2011, and January 30, 2010, respectively.

6. Debt

Debt at January 29, 2011, and October 30, 2010, consisted of the following:

		January 29,				October 30,
		2011				2010
2004 Senior Notes		$	113,972			$	113,972
Credit facility			46,700				45,900
Other			12,487				12,600
Total debt			173,159				172,472
Less current maturities			876				880
Total long-term debt		$	172,283			$	171,592

On June 9, 2010, the Company entered into a new credit facility agreement and amended its 2004 Senior Notes. The new credit facility agreement has a borrowing capacity of $150,000 with an optional $50,000 accordion feature, has a term of four (4) years, bears interest at either Prime or LIBOR plus a borrowing margin and initially required a maximum Leverage Ratio of 3.5 to 1 and a minimum Fixed Charge Coverage Ratio of 2.25 to 1 (which decreases to 1.4 to 1 in the fourth quarter of 2012). Under the new credit facility and amended 2004 Senior Notes, acquisitions are permitted subject to a maximum pro forma Leverage Ratio of 3.0 to 1 and minimum pro forma undrawn availability under the credit facility of $25,000. The new credit facility is secured with collateral including accounts receivable, inventory, machinery and equipment and intangible assets.

Concurrent with the closing of the new credit facility in June of 2010, the Company repaid in full its higher interest rate 6.82% 2006 Senior Notes from borrowings under the new credit facility. The Company recorded a $729 non-cash write-off of unamortized debt issuance costs from the extinguishment of its previous credit facility and the 2006 Senior Notes in the third quarter of 2010. Capitalized fees incurred to establish the new credit facility in the third quarter of 2010 were $1,174.

On January 12, 2011, the Company entered into concurrent amendments (collectively, the “Amendments”) to its new credit facility and 2004 Senior Note agreements (collectively, the “Agreements”). The Amendments were effective starting with the Company’s first quarter of 2011. Under the Amendments, the Company’s maximum Leverage Ratio is amended from 3.5 to 1 during the term of the Agreements to 4.25 to 1 in the first quarter of 2011, 4.5 to 1 in the second quarter of 2011, 3.75 to 1 in the third quarter of 2011, 3.5 to 1 in the fourth quarter of 2011, 3.25 to 1 in the first quarter of 2012 through the third quarter of 2012, 3.0 to 1 in the fourth quarter of 2012 through the third quarter of 2013, and 2.75 to 1 in the fourth quarter of 2013 through the end of the Agreements. Under the Amendments, annual capital expenditures are limited to $30,000 when the Company’s Leverage Ratio exceeds 3.0 to 1, and during 2011 the Company is not permitted to pay dividends, complete purchases of its common stock, or prepay its Senior Notes. In addition, the Company is subject to certain restrictions on its ability to complete acquisitions during 2011. Capitalized fees incurred in the first quarter of 2011 for the Amendments were $1,595. During the term of the Agreements, the Company is subject to an additional fee in the event the Company’s credit rating decreases to a defined level. The additional fee would be based on the Company’s debt level at the time of the ratings decrease and would have been approximately $1,100 as of January 29, 2011.

The Agreements require the Company to offer early principal payments to Senior Note holders and credit facility investors (only in the event of default) based on a ratable percentage of each fiscal year’s excess cash flow and extraordinary receipts, such as the proceeds from the sale of businesses. Under the Agreements, if the Company sells a business, it is required to offer a percentage (which varies based on the Company’s Leverage Ratio) of the after tax proceeds (defined as “extraordinary receipts”) to its Senior Note holders and credit facility investors in excess of a $1,000 threshold. In addition, the Company is required to offer a percentage of annual “excess cash flow” as defined in the Agreements to the Senior Note holders and bank credit facility investors. The excess cash flow definition in the Agreements follows a standard free cash flow calculation. The Company is only required to offer the excess cash flow and extraordinary receipts if the Company ends its fiscal year with a Leverage Ratio in excess of 2.50 to 1. The Senior Note holders are not required to accept their allotted portion and to the extent individual holders reject their portion, other holders are entitled to accept the rejected proceeds. Early principal payments made to Senior Note holders reduce the principal balance outstanding. Based on the Company’s 2010 excess cash flow, the Company will offer $378 to the Senior Note holders. If accepted by the Senior Note holders, the early principal payment is expected to be paid in the second quarter of 2011.

At January 29, 2011, the Company had $91,349 of total capacity and $46,700 of outstanding loans under the credit facility at a weighted average interest rate of 3.27%. In addition to the outstanding loans, the credit facility borrowing capacity was partially reduced by several standby letters of credit totaling $11,951. Under the Company’s most restrictive covenant, the Leverage Ratio, the Company had $17,863 of availability on its credit facility as of January 29, 2011.

The Company is not required to make any principal payments on its bank credit facility or the 2004 Senior Notes within the next year other than the 2010 excess cash flow payment discussed above, which is expected to be paid in the second quarter of 2011. Excluding the 2010 excess cash flow payment, borrowings under these facilities are classified as long-term because the Company has the ability and intent to keep the balances outstanding over the next twelve (12) months. As a result of the Company’s requirement to offer the 2010 excess cash flow amount, $378 has been classified as a current maturity of long-term debt.

The Company’s other debt consists primarily of industrial revenue bonds and capital lease obligations used to finance capital expenditures. These financings mature between 2012 and 2019 and have interest rates ranging from 2.00% to 12.47%.

The Company was in compliance with all debt covenants as of January 29, 2011. While the Company was in compliance with its covenants and currently expects to be in compliance with its covenants during the next twelve (12) months, the Company’s failure to comply with its covenants or other requirements of its 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 the Company’s results of operations, financial condition and cash flows.

7. Income Taxes

The difference between the Company’s statutory rate and the Company’s effective rate for the three months ended January 29, 2011, was primarily attributable to a reorganization of the Company’s legal entities which resulted in a one-time $810 deferred benefit, coupled with the reinstatement of the research and development tax credit. These benefits were partially offset by adjustments to the Company’s FIN 48 reserves and the effects of permanent items.

The difference between the Company’s statutory rate and the Company’s effective rate for the three months ended January 30, 2010, was primarily attributable to the Company’s restructuring of its French entity, which resulted in an income tax benefit of $2,770.

8. Fair Value of Financial Instruments

Effective November 2, 2008, the Company adopted the Fair Value Measurements and Disclosures topic of the ASC. Disclosures for non-financial assets and liabilities that are measured at fair value, but are recognized and disclosed as fair value on a non-recurring basis, were required prospectively beginning November 1, 2009. The Fair Value Measurements and Disclosures topic of the ASC defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.

The Company performs an analysis of all existing financial assets and financial liabilities measured at fair value on a recurring basis to determine the significance and character of all inputs used to determine their fair value. The Company’s financial instruments, including cash, accounts receivable, notes receivable, accounts payable and accrued liabilities, have net carrying values that approximate their fair values due to the short-term nature of these instruments.

The standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories:

Level 1 inputs — Quoted prices for identical assets and liabilities in active markets.

Level 2 inputs — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, observable inputs other than quoted prices and inputs that are derived principally from or corroborated by other observable market data.

Level 3 inputs — Unobservable inputs reflecting the entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

The estimated fair value of the long-term debt, which falls in Level 2 of the fair value hierarchy, 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 following table presents the carrying amount and estimated fair value of long-term debt:

		January 29, 2011								October 30, 2010
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
Total debt (including credit facilities)		$	173,159			$	178,071			$	172,472			$	176,631

The estimated fair value of assets held for sale, which falls within Level 3 of the fair value hierarchy, represents management’s best estimate of fair value upon sale and is determined based on broker analyses of prevailing market prices for similar assets. As of January 29, 2011, the Company had $3,256 of assets held-for-sale.

During the three months ended January 29, 2011, there were no significant measurements of non-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition.

9. Commitments and Contingencies

In September 2003, the New Jersey Department of Environmental Protection (“NJDEP”) issued a directive to approximately 30 companies, including Franklin-Burlington Plastics, Inc., a subsidiary of the Company (“Franklin-Burlington”), to undertake an assessment of natural resource damage and perform interim restoration of the Lower Passaic River, a 17-mile stretch of the Passaic River in northern New Jersey. The directive, insofar as it relates to the Company and its subsidiary, pertains to the Company’s plastic resin manufacturing facility in Kearny, New Jersey, located adjacent to the Lower Passaic River. The Company acquired the facility in 1986, when it purchased the stock of the facility’s former owner, Franklin Plastics Corp. The Company acquired all of Franklin Plastics Corp.’s environmental liabilities as part of the acquisition.

Also in 2003, the United States Environmental Protection Agency (“USEPA”) requested that companies located in the area of the Lower Passaic River, including Franklin-Burlington, cooperate in an investigation of contamination of the Lower Passaic River. In response, the Company and approximately 70 other companies (collectively, the “Cooperating Parties”) agreed, pursuant to an Administrative Order of Consent with the USEPA, to assume responsibility for completing a Remedial Investigation/Feasibility Study (“RIFS”) of the Lower Passaic River. The RIFS is currently estimated to cost approximately $85 million to complete (in addition to USEPA oversight costs) and is currently expected to be completed by late 2012 or early 2013. However, the RIFS costs are exclusive

of any costs that may ultimately be required to remediate the Lower Passaic River area being studied or costs associated with natural resource damages that may be assessed. By agreeing to bear a portion of the cost of the RIFS, the Company did not admit to or agree to bear any such remediation or natural resource damage costs. In 2007, the USEPA issued a draft study that evaluated nine alternatives for early remedial action of a portion of the Lower Passaic River. The estimated cost of the alternatives ranged from $900 million to $2.3 billion. The Cooperating Parties provided comments to the USEPA regarding this draft study and to date the USEPA has not taken further action. Given that the USEPA has not finalized its study and that the RIFS is still ongoing, the Company does not believe that remedial costs can be reliably estimated at this time.

In 2009, the Company’s subsidiary and over 300 other companies were named as third-party defendants in a suit brought by the NJDEP in Superior Court of New Jersey, Essex County, against Occidental Chemical Corporation and certain related entities (collectively, the “Occidental Parties”) with respect to alleged contamination of the Newark Bay Complex, including the Lower Passaic River. The third-party complaint seeks contributions from the third-party defendants with respect to any award to NJDEP of damages against the Occidental Parties in the matter.

As of January 29, 2011, the Company had approximately $866 accrued related to these Lower Passaic River matters representing funding of the RIFS costs and related legal expenses of the RIFS and this litigation. Given the uncertainties pertaining to this matter, including that the RIFS is ongoing, the ultimate remediation has not yet been determined and since the extent to which the Company may be responsible for such remediation or natural resource damages is not yet known, it is not possible at this time to estimate the Company’s ultimate liability related to this matter. Based on currently known facts and circumstances, the Company does not believe that this matter is reasonably likely to have a material effect on the Company’s results of operations, consolidated financial position, or cash flows because the Company’s Kearny, New Jersey, facility could not have contributed contamination along most of the river’s length and did not store or use the contaminants that are of the greatest concern in the river sediments and because there are numerous other parties who will likely share in the cost of remediation and damages. However, it is possible that the ultimate liability resulting from this matter could materially differ from the January 29, 2011, accrual balance, and in the event of one or more adverse determinations related to this matter, the impact on the Company’s results of operations, consolidated financial position or cash flows could be material to any specific period.

In March 2010, DPH Holdings Corp., a successor to Delphi Corporation and certain of its affiliates (“Delphi”), served Spartech Polycom, a subsidiary of the Company, with a complaint seeking to avoid and recover approximately $8.6 million in alleged preference payments Delphi made to Spartech Polycom shortly before Delphi’s bankruptcy filing in 2005. Delphi initially pursued similar preference complaints against approximately 175 additional unrelated third parties. The complaint was originally filed under seal in September 2007 in the United States Bankruptcy Court for the Southern District of New York, and pursuant to certain court orders the service of process did not commence until March 2010. The Company filed a motion to dismiss the complaint in May 2010. Following oral argument on the motion to dismiss, the Bankruptcy Court ordered Delphi to file a motion for leave to amend its complaint. Delphi has filed such motion, but a hearing on the motion has not yet been scheduled. Though the ultimate liabilities resulting from this proceeding, if any, could be significant to the Company’s results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company’s consolidated financial position or cash flows.

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 matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

In September 2010, the Company entered into a subordinated secured note receivable for $9.9 million with a customer. As of January 29, 2011 the gross note balance was $5.9 million. This customer’s net sales represented approximately 4% of the Company’s consolidated net sales for the first quarter of 2011. One of this customer’s products, for which the Company is a significant supplier of sheet, experienced substantial growth in 2009 followed by a significant reduction in volume during 2010 and 2011. As a result of the decline in its business, this customer restructured its financing arrangements with its bank, increasing its liquidity in the near term. The subordinated secured note receivable, which was in default as of January 29, 2011, is payable over a seven (7) month period, maturing in April 2011, and is subject to standstill periods and other restrictions. There can be no assurance that this customer will be able to pay the subordinated secured note receivable balance in accordance with its terms or that the Company will ultimately be able to collect the remaining subordinated secured note receivable balance. Also, it is possible that this customer’s orders will not materialize at sufficient levels to support its continued operations, the customer will be unable to sustain adequate financing to fund payments under its obligations or the customer may undergo additional financial restructuring, which could have a material impact on the Company’s results of operations, consolidated financial position and cash flows. We believe we have adequate reserves for the potential uncollectible portion of the subordinated secured note receivable as of January 29, 2011.

10. Net Earnings (Loss) Per Share

Basic earnings (loss) per share excludes any dilution and is computed by dividing net earnings attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) 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. The dilution from each of these instruments is calculated using the treasury stock method. Outstanding equity instruments 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):

		Three Months Ended
		January 29,				January 30,
		2011				2010
Antidilutive shares:
SSARs			831				948
Stock options			694				955
Unvested restricted stock			165				88
Total antidilutive shares excluded from diluted earnings per share			1,690				1,991

The Company used the two-class method to compute basic and diluted earnings per share for all periods presented. The reconciliation of the net earnings (loss) from continuing operations, net earnings (loss) attributable to common shareholders and the weighted average number of common and participating shares used in the computations of basic and diluted earnings per share for three months ended January 29, 2011, and January 30, 2010 is as follows (shares in thousands):

		Three Months Ended
		January 29,				January 30,
		2011				2010
Basic and diluted net earnings:
Net (loss) earnings from continuing operations		$	(1,838	)		$	4,736
Less: net (loss) earnings from continuing operations allocated to participating securities			(4	)			13
Net (loss) earnings from continuing operations attributable to common shareholders			(1,834	)			4,723
Net earnings from discontinued operations, net of tax			2,871				8
Less: net earnings from discontinued operations allocated to participating securities			6				—
Net earnings from discontinued operations attributable to common shareholders			2,865				8
Net earnings attributable to common shareholders		$	1,031			$	4,731
Weighted average shares outstanding:
Basic weighted average common shares outstanding			30,586				30,544
Add: dilutive shares from equity instruments			—				175
Diluted weighted average shares outstanding			30,586				30,719
Basic earnings per share attributable to common stockholders:
Net (loss) earnings from continuing operations		$	(0.06	)		$	0.16
Net earnings from discontinued operations, net of tax			0.09				—
Net earnings per share		$	0.03			$	0.16
Diluted earnings per share attributable to common shareholders:
Net (loss) earnings from continuing operations		$	(0.06	)		$	0.15
Net earnings from discontinued operations, net of tax			0.09				—
Net earnings per share		$	0.03			$	0.15

11. Segment Information

The Company 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 effect of foreign exchange, to evaluate business segment performance. Accordingly, discontinued operations have been excluded from the segment results below, which is consistent with management’s evaluation metrics. Corporate operating losses include corporate office expenses, shared services costs, information technology costs, professional fees and the effect of foreign currency exchange that are not allocated to the reportable segments.

During the second quarter of 2010, the Company changed its organizational reporting and management responsibilities of two businesses previously included in the Color and Specialty Compounds segment to our Custom Sheet and Rollstock segment. Also in the second quarter, the Company reorganized its internal reporting and management responsibilities of certain product lines between its Custom Sheet and Rollstock and Packaging Technologies segments to better align its management of these product lines with end markets. These management and reporting changes resulted in a reorganization of the Company’s three reportable segments beginning in the second quarter and historical segment results have been reclassified to conform to these changes. A description of the Company’s reportable segments is as follows:

Custom Sheet and Rollstock

The Custom Sheet and Rollstock segment primarily manufactures plastic sheet, custom rollstock, calendered film, laminates and cell cast acrylic. The principal raw materials used in manufacturing sheet and rollstock are plastic resins in pellet form. The segment sells sheet and rollstock products principally through its own sales force, but it also uses a limited number of independent sales representatives. This segment produces and distributes its products from facilities in the United States, Canada and Mexico. Finished products are formed by customers that use plastic components in their products. The Company’s custom sheet and rollstock is used in several end markets, including packaging, transportation, building and construction, recreation and leisure, electronics and appliances, sign and advertising, aerospace and numerous other end markets.

Packaging Technologies

The Packaging Technologies segment manufactures custom-designed plastic packages and custom rollstock primarily used in the food and consumer product markets. The principal raw materials used in manufacturing packaging are plastic resins in pellet form, which are extruded into rollstock or thermoformed into an end product. The segment sells packaging products principally through its own sales force and produces and distributes the products from facilities in the United States. The Company’s Packaging Technologies products are mainly used in the food, medical and consumer packaging, and sign and advertising end markets.

Color and Specialty Compounds

The Color and Specialty Compounds segment manufactures custom-designed plastic alloys, compounds and color concentrates for use by a large group of manufacturing customers servicing the transportation (mostly automotive), building and construction, packaging, agriculture, lawn and garden, electronics and appliances, and numerous other end markets. The principal raw materials used in manufacturing specialty plastic compounds and color concentrates are plastic resins in powder and pellet form. This segment also uses colorants, mineral and glass reinforcements and other additives to impart specific performance and appearance characteristics to the compounds. The Color and Specialty Compounds segment sells its products principally through its own sales force, but it also uses independent sales representatives. This segment produces and distributes its products from facilities in the United States, Canada, Mexico and France.

The following presents the Company’s net sales and operating earnings (loss) by reportable segment and the reconciliation to consolidated operating earnings for the three months ended January 29, 2011, and January 30, 2010:

		Three Months Ended
		January 29,				January 30,
		2011				2010
Net sales: (a)(b)
Custom Sheet and Rollstock		$	125,144			$	125,170
Packaging Technologies			51,743				48,102
Color and Specialty Compounds			57,896				51,892
		$	234,783			$	225,164
Operating earnings (loss): (b)
Custom Sheet and Rollstock		$	4,483			$	8,291
Packaging Technologies			4,642				6,004
Color and Specialty Compounds			(2,598	)			898
Corporate			(8,345	)			(8,414	)
		$	(1,818	)		$	6,779

12. Comprehensive Income

Comprehensive income is an entity’s change in equity during the period related to transactions, events and circumstances from non-owner sources. Foreign exchange gains and losses are reported in selling, general and administrative expenses in the results of operations and reflect U.S. dollar-denominated transaction gains and losses due to fluctuations in foreign currency. The reconciliation of net earnings to comprehensive income for the three months ended January 29, 2011, and January 30, 2010 is as follows:

		Three Months Ended
		January 29,				January 30,
		2011				2010
Net earnings		$	1,033			$	4,744
Foreign currency translation adjustments			412				1,235
Total comprehensive income		$	1,445			$	5,979

The Company recorded foreign exchange gains before taxes of $106 and losses of $586 for the three months ended January 29, 2011, and January 30, 2010, respectively. Foreign exchange gains and losses are reported in selling, general and administrative expenses in the results of operations. As of January 29, 2011, the Company had monetary assets denominated in foreign currency of $5,538 of net Canadian liabilities, $5,794 of net euro assets and $3,852 of net Mexican Peso assets.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company’s financial condition and results of operations contains “forward-looking statements.” The following discussion of the Company’s financial condition and results of operations should be read in conjunction with Spartech’s condensed consolidated financial statements and accompanying notes. The Company has based its forward-looking statements about its markets and demand for its products and future results on assumptions that the Company considers reasonable. Actual results may differ materially from those suggested by such forward-looking statements for various reasons including those discussed in “Cautionary Statements Concerning Forward-Looking Statements.” Unless otherwise noted, all amounts and analyses are based on continuing operations.

Non-GAAP Financial Measures

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains financial information prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and operating (loss) earnings excluding special items, net (loss) earnings from continuing operations excluding special items and net (loss) earnings from continuing operations per diluted share excluding special items that are considered “non-GAAP financial measures.” Special items include restructuring and exit costs, and tax benefits from restructuring of foreign operations.

Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flow that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The presentation of these measures is intended to supplement investors’ understanding of the Company’s operating performance. These measures may not be comparable to similar measures at other companies. The Company believes that these measurements are useful to investors because it helps them compare the Company’s results to previous periods and provides an indication of underlying trends in the business. Non-GAAP measurements are not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. See the “Liquidity and Capital Resources” section of Item 2 for a reconciliation of GAAP to non-GAAP measures.

Business Overview

Spartech is an intermediary producer of plastic products, including polymeric compounds, concentrates, custom extruded sheet and rollstock products and packaging technologies. The Company converts base polymers or resins purchased from commodity suppliers into extruded plastic sheet and rollstock, thermoformed packaging, specialty film laminates, acrylic products, specialty plastic alloys, color concentrates and blended resin compounds for customers in a wide range of markets. The Company has facilities located throughout the United States, Canada, Mexico and France that are organized into three segments; Custom Sheet and Rollstock, Packaging Technologies, and Color and Specialty Compounds.

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 that 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. See the notes to the consolidated condensed financial statements for further details of these divestitures and closures. 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 Company assesses net sales changes using two major drivers: underlying volume and price/mix. Underlying volume is calculated as the change in pounds sold for a comparable number of days in the reporting period. The Company’s fiscal year ends on the Saturday closest to October 31 and generally contains 52 weeks or 364 calendar days. In addition, periods presented are fiscal periods unless noted otherwise.

Results

Net sales of $234.8 million in the first quarter of 2011 increased 4% from the same period in 2010, reflecting a 3% decrease in volume more than offset by the pass-through of higher raw material costs as selling price increases. Operating loss excluding special items was $1.0 million in the first quarter of 2011 compared to operating earnings excluding special items of $7.5 million in the same period of 2010.

During the first quarter, the Company completed the management restructuring of our business units, which has provided for direct responsibility for sales, marketing and operations to each business segment leader. We believe that this structure will provide for greater responsiveness to the needs of our customers and improve overall financial performance of the business units. We are encouraged by the early results of this management change as we are beginning to make progress in material formulation, yield enhancement, on-time deliveries and product quality. We also finalized the Arlington, Texas sheet facility consolidation and restarted

production at our Lockport, New York compounding facility. The Company continues to invest in new capital equipment that will increase capacity and expand the breadth of our product offerings. Operationally we are focusing our efforts to ensure our product formulations provide the most cost efficient solutions to our customers, while maintaining the highest quality standards.

Outlook

We are continuing to focus on improving our operational performance, building a more customer-focused organization, and investing in design, technology and equipment to enhance our growth initiatives. Subject to raw material pricing, we expect these operational and customer initiatives will result in gross margins returning back to our peak levels by the first calendar quarter of 2012. We believe these improvements will be achieved during a period when the overall market recovery continues at a slow pace and we experience continued volatility in raw material pricing. We have made organizational changes, continue to make operational improvements, and have identified the levers to generate higher margins that we believe will allow us to make steady progress during 2011.

Consolidated Results

Net sales were $234.8 million in the three month period ended January 29, 2011, representing a 4% increase, over the same period in the prior year. The increase was caused by:

		Q1 2011 vs. Q1 2010
Underlying volume			-3	%
Price/Mix			7	%
Total			4	%

The largest increase in volume was from sales of compounds and sheet to the automotive sector related to the recovery experienced throughout 2010, and commercial construction. Underlying volume in most other markets experienced a modest increase. Offsetting these increases were a decline in sales of sheet for material handling applications due to a considerable slowdown in orders from one of our largest customers, and a decline in food packaging sales due to lower share of a key customer’s product line. It is possible that our main material handling customer’s orders will not materialize at sufficient levels to support its continued operations, the customer will be unable to sustain adequate financing to fund payments under its obligations or the customer may undergo additional financial restructuring, which could have a material impact on the Company’s results of operations, consolidated financial position and cash flows. The price/mix increase was primarily related to increases in selling prices to pass through increases in raw material costs.

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 29, 2011 and January 30, 2010. Cost of sales presented in the consolidated condensed statements of operations includes material and conversion costs but excludes amortization of 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 29,				January 30,
		2011				2010
Dollars and Pounds (in millions)
Net sales		$	234.8			$	225.2
Cost of sales			216.4				198.3
Gross margin		$	18.4			$	26.9
Pounds sold			203.9				210.6
Dollars per Pound Sold
Net sales		$	1.152			$	1.069
Cost of sales			1.061				0.941
Gross margin		$	0.091			$	0.128

Gross margin per pound sold declined from 12.8 cents in the first quarter of 2010 to 9.1 cents in the first quarter of 2011 primarily reflecting the continued impact of production inefficiencies that began in the second half of 2010, higher labor costs, increased freight expense, margin compression from increased competition, and the impact of higher material costs. The decrease in gross margin was partially offset by reduced depreciation expense due to the Company’s plant consolidation efforts.

Selling, general and administrative expenses were $19.0 million in the first quarter of 2011 compared to $18.4 million in the same period of the prior year. The increase was mainly due to higher employee compensation costs largely related to resource additions in the technology, sales and marketing and procurement areas.

Amortization of intangibles was $0.4 million in the first quarter of 2011 compared to $1.0 million in the same period of the prior year. The decrease reflects intangibles which became fully amortized coupled with the impact of intangible asset impairments recorded by the Company in the fourth quarter of 2010.

Restructuring and exit costs were $0.8 million in the first quarter of 2011 compared to $0.7 million in the same period of the prior year. Restructuring and exit costs included employee severance, facility consolidation and shut-down costs and fixed asset valuation adjustments.

Interest expense, net of interest income, was $2.6 million in the first quarter of 2011 compared to $3.5 million in the same period of the prior year. The decrease was primarily due to the $24.6 million reduction in debt during the last 12 months, which included a reduction in higher interest rate debt.

We reported a net loss from continuing operations of $1.8 million or $(0.06) per diluted share in the first quarter of 2011, compared to earnings of $4.7 million or $0.15 per diluted share in the same period of the prior year. Excluding special items (restructuring and exit costs, and tax benefits from restructuring of foreign operations), we reported a net loss from continuing operations of $1.3 million or $(0.04) per diluted share in the first quarter of 2011, compared to net earnings from continuing operations of $2.4 million or $0.08 per diluted share in the same period of the prior year. The decrease was mainly due to items previously discussed, partially offset by the effects of income tax benefits.

The difference between the Company’s statutory rate and the Company’s effective rate for the three months ended January 29, 2011, was primarily attributable to the reorganization of the Company’s legal entities which resulted in a $0.8 million deferred tax benefit, coupled with the reinstatement of the research and development tax credit. These benefits were partially offset by adjustments to the Company’s FIN 48 reserves and the effects of permanent items.

Net earnings from discontinued operations were $2.9 million in the first quarter of 2011, which mainly resulted from the settlement agreement for the breach of a contract by Chemtura that led to $4.8 million in total cash proceeds.

Segment Results

During the second quarter of 2010, we moved our organizational reporting and management responsibilities of two businesses previously included in our Color and Specialty Compounds segment to our Custom Sheet and Rollstock segment. Also in the second quarter, we reorganized our internal reporting and management responsibilities of certain product lines between our Custom Sheet and Rollstock and Packaging Technologies segments to better align management of these product lines with end markets. These management and reporting changes resulted in a reorganization of the Company’s three reportable segments beginning in the second quarter. Historical segment results have been reclassified to conform to these changes.

Custom Sheet and Rollstock Segment

Net sales were $125.1 million in the three month period ended January 29, 2011, representing flat year-over-year net sales. Fluctuations in net sales were caused by:

		Q1 2011 vs. Q1 2010
Underlying volume			-9	%
Price/Mix			9	%
Total			0	%

The decrease in underlying volume reflects the impact of a significant reduction in one customer’s business activity for a material handling application. Absent this customer’s decline, we realized a modest increase in volume across most of our end markets including the automotive, appliance and sign and advertising markets. The price/mix increase was mostly caused by increases in selling prices and greater mix of higher priced products.

Operating earnings excluding special items were $4.8 million in the first quarter of 2011 compared to $8.4 million in the same period of the prior year. The decrease in operating earnings reflects lower sales volume to a material handling customer, increased competition, production inefficiencies and increased freight expense.

Packaging Technologies

Net sales were $51.7 million in the three month period ended January 29, 2011, representing an 8% increase, over the same period in the prior year. The increase was caused by:

		Q1 2011 vs. Q1 2010
Underlying volume			-2	%
Price/Mix			10	%
Total			8	%

The decrease in underlying volume reflects the impact of the loss of share at a food packaging customer. Partially offsetting this loss was an increase in sales to the medical packaging and sign and advertising markets. Price/mix includes increases in selling prices from the pass through of increases in raw materials costs.

Operating earnings excluding special items were $4.8 million in the first quarter of 2011 compared to $5.3 million in the same period of the prior year. The decrease in operating earnings was mainly due to a higher mix of lower margin business and margin compression from increased competition, coupled with higher employee compensation costs primarily related to resource additions in the technology and sales and marketing areas.

Color and Specialty Compounds Segment

Net sales were $57.9 million in the three month period ended January 29, 2011, representing a 12% increase, over the same period in the prior year. The increase was caused by:

		Q1 2011 vs. Q1 2010
Underlying volume			5	%
Price/Mix			7	%
Total			12	%

The increase in underlying volume was due to a significant increase in the automotive sector related to the recovery experienced throughout 2010, coupled with increased sales to the agricultural products and building and construction markets. Offsetting these increases was a decline in sales to the appliance and electronics market. The price/mix increase was mostly caused by increases in selling prices to pass through increases in raw material costs.

Operating loss excluding special items were $2.2 million in the first quarter of 2011 compared to operating earnings of $2.2 million in the same period of the prior year. The decrease in operating earnings reflects production inefficiencies which resulted in higher labor and material costs, the impact of higher material costs that were not passed through timely as selling price increases, a higher mix of lower margin sales, and increased freight and employee severance costs.

Corporate

Corporate expenses include selling, general and administrative expenses, corporate office expenses, shared services costs, information technology costs, professional fees and the impact of foreign currency exchange gains and losses. Corporate operating expenses were $8.4 million in the first quarter of 2011 and 2010. Higher professional fees in the first quarter of 2011 were offset by lower foreign currency and bonus expense.

Liquidity and Capital Resources

Cash Flow

The Company’s primary sources of liquidity have been cash flows from operating activities and borrowings from third parties. Historically, the Company’s principal uses of cash have been to support operating activities, invest in capital improvements, reduce outstanding indebtedness, finance strategic business acquisitions, acquire treasury shares and pay dividends on its common stock. The following summarizes the major categories of changes in cash and cash equivalents for the three months ended January 29, 2011 and January 30, 2010:

		Three Months Ended
		January 29,				January 30,
		2011				2010
Cash Flows (in thousands)
Net cash provided by operating activities		$	7,711			$	8,948
Net cash used by investing activities			(7,986	)			(492	)
Net cash used by financing activities			(1,094	)			(17,316	)
Effect of exchange rate changes on cash and cash equivalents			4				21
Decrease in cash and cash equivalents		$	(1,365	)		$	(8,839	)

Net cash provided by operating activities was $7.7 million in the first quarter of 2011 compared to $8.9 million for the same period in the prior year. The decrease was mainly due to lower earnings. Net cash provided by operating activities in the first quarter of 2011 included a U.S. Federal income tax refund of $5.7 million.

Net cash used for investing activities of $8.0 million in the first quarter of 2011 consisted of capital expenditures. Net cash used for investing activities of $0.5 million in the first quarter of 2010 consisted of $3.4 million in capital expenditures partially offset by $2.9 million in proceeds from dispositions of assets associated with previously closed facilities. We expect to spend approximately $30.0 million of capital expenditures in 2011. Capital expenditure amounts are expected to be funded mainly from operating cash flows.

Net cash used for financing activities was $1.1 million in the first quarter of 2011 mainly consisted of debt financing costs associated with the Company’s Amendments, partially offset by credit facility borrowings. Net cash used for financing activities of $17.3 million in the first quarter of 2010 mainly consisted of required payments to debt holders associated with extraordinary receipts on the sale of a business that occurred in 2009.

Financing Arrangements

On June 9, 2010, the Company entered into a new credit facility agreement and amended its 2004 Senior Notes. The new credit facility agreement has a borrowing capacity of $150.0 million with an optional $50.0 million accordion feature, has a term of four (4) years, bears interest at either Prime or LIBOR plus a borrowing margin and initially required a maximum Leverage Ratio of 3.5 to 1 and a minimum Fixed Charge Coverage Ratio of 2.25 to 1 (which decreases to 1.4 to 1 in the fourth quarter of 2012). Under the new credit facility and amended 2004 Senior Notes, acquisitions are permitted subject to a maximum pro forma Leverage Ratio of 3.0 to 1 and minimum pro forma undrawn availability under the credit facility of $25.0 million. The new credit facility is secured with collateral including accounts receivable, inventory, machinery and equipment and intangible assets.

Concurrent with the closing of the new credit facility in June of 2010, the Company repaid in full its higher interest rate 6.82% 2006 Senior Notes from borrowings under the new credit facility. The Company recorded a $0.7 million non-cash write-off of unamortized debt issuance costs from the extinguishment of its previous credit facility and the 2006 Senior Notes in the third quarter of 2010. Capitalized fees incurred to establish the new credit facility in the third quarter of 2010 were $1.2 million.

On January 12, 2011, the Company entered into concurrent amendments (collectively, the “Amendments”) to its new credit facility and 2004 Senior Note agreements (collectively, the “Agreements”). The Amendments were effective starting with the Company’s first quarter of 2011. Under the Amendments, the Company’s maximum Leverage Ratio is amended from 3.5 to 1 during the term of the Agreements to 4.25 to 1 in the first quarter of 2011, 4.5 to 1 in the second quarter of 2011, 3.75 to 1 in the third quarter of 2011, 3.5 to 1 in the fourth quarter of 2011, 3.25 to 1 in the first quarter of 2012 through the third quarter of 2012, 3.0 to 1 in the fourth quarter of 2012 through the third quarter of 2013, and 2.75 to 1 in the fourth quarter of 2013 through the end of the Agreements. Under the Amendments, annual capital expenditures are limited to $30.0 million when the Company’s Leverage Ratio exceeds 3.0 to 1, and during 2011 the Company is not permitted to pay dividends, complete purchases of its common stock, or prepay its Senior Notes. In addition, the Company is subject to certain restrictions on its ability to complete acquisitions during 2011. Capitalized fees incurred in the first quarter of 2011 for the Amendments were $1.6 million. During the term of the Agreements, the Company is subject to an additional fee in the event the Company’s credit rating decreases to a defined level. The additional fee would be based on the Company’s debt level at that the time of the ratings decrease and would have been approximately $1.1 million as of January 29, 2011.

The Agreements require the Company to offer early principal payments to Senior Note holders and credit facility investors (only in the event of default) based on a ratable percentage of each fiscal year’s excess cash flow and extraordinary receipts, such as the proceeds from the sale of businesses. Under the Agreements, if the Company sells a business, it is required to offer a percentage (which varies based on the Company’s Leverage Ratio) of the after tax proceeds (defined as “extraordinary receipts”) to its Senior Note holders and credit facility investors in excess of a $1.0 million threshold. In addition, the Company is required to offer a percentage of annual

“excess cash flow” as defined in the Agreements to the Senior Note holders and bank credit facility investors. The excess cash flow definition in the Agreements follows a standard free cash flow calculation. The Company is only required to offer the excess cash flow and extraordinary receipts if the Company ends its fiscal year with a Leverage Ratio in excess of 2.50 to 1. The Senior Note holders are not required to accept their allotted portion and to the extent individual holders reject their portion, other holders are entitled to accept the rejected proceeds. Early principal payments made to Senior Note holders reduce the principal balance outstanding. Based on the Company’s 2010 excess cash flow, the Company will offer $0.4 million to the Senior Note holders. If accepted by the Senior Note holders, the early principal payment is expected to be paid in the second quarter of 2011.

At January 29, 2011, the Company had $173.2 million of outstanding debt with a weighted average interest rate of 5.41%, of which 68.4% represented fixed rate instruments with a weighted average interest rate of 6.56%.

At January 29, 2011, the Company had $91.3 million of total capacity and $46.7 million of outstanding loans under the credit facility at a weighted average interest rate of 3.27%. In addition to the outstanding loans, the credit facility borrowing capacity was partially reduced by several standby letters of credit totaling $12.0 million. Under the Company’s most restrictive covenant, the Leverage Ratio, the Company had $17.9 million of availability on its credit facility as of January 29, 2011.

The Company’s other debt consists primarily of industrial revenue bonds and capital lease obligations used to finance capital expenditures. These financings mature between 2012 and 2019 and have interest rates ranging from 2.00% to 12.47%.

The Company is not required to make any principal payments on its bank credit facility or the 2004 Senior Notes within the next year other than the 2010 excess cash flow payment discussed above, which is expected to be paid in the second quarter of 2011. Excluding the 2010 excess cash flow payment, borrowings under these facilities are classified as long-term because the Company has the ability and intent to keep the balances outstanding over the next twelve (12) months. As a result of the Company’s requirement to offer the 2010 excess cash flow amount, $0.4 million has been classified as a current maturity of long-term debt.

While the Company was in compliance with its covenants as of January 29, 2011 and currently expects to be in compliance with its covenants during the next twelve (12) months, the Company’s failure to comply with its covenants or other requirements of its 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 the Company’s results of operations, financial condition and cash flows.

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.

Non-GAAP Reconciliations

The following table reconciles operating (loss) earnings (GAAP) to operating (loss) earnings excluding special items (Non-GAAP), net (loss) earnings from continuing operations (GAAP) to net (loss) earnings from continuing operations excluding special items (Non-GAAP) and net (loss) earnings from continuing operations per diluted share (GAAP) to net (loss) earnings from continuing operations per diluted share excluding special items (Non-GAAP):

		Three Months Ended
		January 29,				January 30,
(unaudited and in thousands, except per share data)		2011				2010
Operating (loss) earnings (GAAP)		$	(1,818	)		$	6,779
Restructuring and exit costs			828				671
Operating (loss) earnings excluding special items (Non-GAAP)		$	(990	)		$	7,450
Net (loss) earnings from continuing operations (GAAP)		$	(1,838	)		$	4,736
Restructuring and exit costs, net of tax			513				422
Tax benefits from restructuring of foreign operations			—				(2,770	)
Net (loss) earnings from continuing operations excluding special items (Non-GAAP)		$	(1,325	)		$	2,388
Net (loss) earnings from continuing operations per diluted share (GAAP)		$	(0.06	)		$	0.15
Restructuring and exit costs, net of tax			0.02				0.02
Tax benefit on restructuring of foreign operations			—				(0.09	)
Net (loss) earnings from continuing operations per diluted share excluding special items (Non-GAAP)		$	(0.04	)		$	0.08

The following table reconciles operating (loss) earnings (GAAP) to operating (loss) earnings excluding special items (Non-GAAP) by segment (in thousands):

		Three Months Ended January 29, 2011												Three Months Ended January 30, 2010
										Operating												Operating
										(Loss)												(Loss)
		Operating								Earnings				Operating								Earnings
		(Loss)								Excluding				(Loss)								Excluding
		Earnings				Special				Special Items				Earnings				Special				Special Items
Segment		(GAAP)				Items				(Non-GAAP)				(GAAP)				Items				(Non-GAAP)
Custom Sheet and Rollstock		$	4,483			$	350			$	4,833			$	8,291			$	84			$	8,375
Packaging Technologies			4,642				116				4,758				6,004				(729	)			5,275
Color & Specialty Compounds			(2,598	)			356				(2,242	)			898				1,316				2,214
Corporate			(8,345	)			6				(8,339	)			(8,414	)			—				(8,414	)
Total		$	(1,818	)		$	828			$	(990	)		$	6,779			$	671			$	7,450

Item 4.		Controls and Procedures

Spartech maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the Company’s certifying officers, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation performed, the Company’s certifying officers have concluded that the disclosure controls and procedures were effective as of January 29, 2011, to provide reasonable assurance of the achievement of these objectives.

Notwithstanding the foregoing, there can be no assurance that the Company’s 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 Company’s reports.

There was no change in the Company’s internal control over financial reporting during the quarter ended January 29, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — Other Information

Item 1.		Legal Proceedings

In March 2010, DPH Holdings Corp., a successor to Delphi Corporation and certain of its affiliates (“Delphi”), served Spartech Polycom, a subsidiary of the Company, with a complaint seeking to avoid and recover approximately $8.6 million in alleged preference payments Delphi made to Spartech Polycom shortly before Delphi’s bankruptcy filing in 2005. Delphi initially pursued similar preference complaints against approximately 175 additional unrelated third parties. The complaint, dated September 26, 2007, was originally filed under seal in the United States Bankruptcy Court for the Southern District of New York (In re: DPH Holdings Corp., et al., Delphi Corporation, et al. v. Spartech Polycom — Bankruptcy Case No. 05-44481/Adversary Proceeding No. 07-02639) and pursuant to certain court orders the service process did not commence until March 2010. The Company filed a motion to dismiss the complaint in May 2010. Following oral argument on the motion to dismiss, the Bankruptcy Court ordered Delphi to file a motion for leave to amend its complaint. Delphi has filed such motion, but a hearing on the motion has not yet been scheduled. Though the ultimate liabilities resulting from this proceeding, if any, could be significant to the Company’s results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company’s consolidated financial position or cash flows.

In January 2011, the Stamford, CT facility of Spartech Polycast, Inc., a subsidiary of the Company, received three notices of violation (NOVs) from the Connecticut Department of Environmental Protection (CTDEP) alleging violations of regulations governing air pollution control. The NOVs allege: (1) failure to file a semi-annual monitoring report; (2) failure to have a leak detection and repair program that meets regulatory requirements; and, (3) failure to satisfy certain air emissions standards. Spartech filed timely responses to the NOVs during February 2011 as a first step in resolving these NOVs and will continue to engage CTDEP to resolve this matter. Though the ultimate liabilities resulting from this proceeding, if any, could be significant to the Company’s results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company’s consolidated financial position or cash flows.

In addition to the matters described above and the notes to the consolidated financial statements, the Company is subject to various other claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to environmental, 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’s management believes that the outcome of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

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.