SPARTECH CORP - FORM 10-Q - September 7, 2011

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EX-32.2 - 32.2 CERTIFICATION - SPARTECH CORPex322_q3.htm
EX-31.1 - 31.1 CERTIFICATION - SPARTECH CORPex311_q3.htm
EX-31.2 - 31.2 CERTIFICATION - SPARTECH CORPex312_q3.htm
EX-32.1 - 32.1 CERTIFICATION - SPARTECH CORPex321_q3.htm
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
For the quarterly period ended July 30, 2011
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)
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 þ     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.
Large accelerated filer o
Accelerated filer R
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
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: 30,830,756 shares of Common Stock, $.75 par value per share, outstanding as of August 31, 2011.
SPARTECH CORPORATION
FORM 10-Q For the Three and Nine Months Ended July 30, 2011 and July 31, 2010
Table of Contents

Cautionary Statements Concerning Forward-Looking Statements

Page No.
 
 
 

 

 
 
 

 
 

 

 
 
 

 
 

 

 
 
 

 
 

 

 
 
 

 

 
 
 


 
 
 


 
 
 

 

 
 
 


 
 
 


 
 
 

 

 
 
 

 
Certifications
26

 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)

 
 
 
July 30,

 
October 30,

(Dollars in thousands, except share data)
2011

 
2010

Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,208

 
$
4,900

Trade receivables, net of allowances of $3,571 and $3,404, respectively
147,175

 
134,902

Inventories, net of inventory reserves of $8,581 and $6,539, respectively
101,819

 
79,691

Prepaid expenses and other current assets, net
26,009

 
35,789

Assets held for sale
3,156

 
3,256

Total current assets
279,367

 
258,538

Property, plant, and equipment, net
207,620

 
211,844

Goodwill
87,921

 
87,921

Other intangible assets, net
13,294

 
14,559

Other long-term assets
4,002

 
4,279

 
 
 
 
Total assets
$
592,204

 
$
577,141

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
520

 
$
880

Accounts payable
139,637

 
129,037

Accrued liabilities
32,486

 
34,112

Total current liabilities
172,643

 
164,029

 
 
 
 
Long-term debt, less current maturities
164,034

 
171,592

 
 
 
 
Other long-term liabilities:
 
 
 
Deferred taxes
46,045

 
42,648

Other long-term liabilities
6,374

 
5,866

Total liabilities
389,096

 
384,135

Stockholders’ 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: 30,830,529 and 30,884,503 shares, respectively
24,849

 
24,849

Contributed capital
204,966

 
204,966

Retained earnings
16,696

 
10,036

Treasury stock, at cost, 2,301,317 and 2,247,343 shares, respectively
(50,828
)
 
(52,730
)
Accumulated other comprehensive income
7,425

 
5,885

Total stockholders’ equity
203,108

 
193,006

 
 
 
 
Total liabilities and stockholders’ equity
$
592,204

 
$
577,141

See accompanying notes to consolidated condensed financial statements.

1

Spartech Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
 
Three Months Ended
 
Nine Months Ended
 
July 30,

 
July 31,

 
July 30,

 
July 31,

(Unaudited and dollars in thousands, except per share data)
2011

 
2010

 
2011

 
2010

Net sales
$
291,716

 
$
269,635

 
$
809,050

 
$
763,322

Costs and expenses
 
 
 
 
 
 
 
Cost of sales
265,051

 
241,706

 
736,902

 
677,680

Selling, general and administrative expenses
17,744

 
26,725

 
55,730

 
65,593

Amortization of intangibles
422

 
961

 
1,265

 
2,889

Restructuring and exit costs
174

 
2,902

 
1,550

 
5,168

Total costs and expenses
283,391

 
272,294

 
795,447

 
751,330

Operating earnings (loss)
8,325

 
(2,659
)
 
13,603

 
11,992

Interest, net of interest income
2,784

 
2,799

 
8,041

 
9,566

Debt extinguishment costs
—

 
729

 
—

 
729

Earnings (loss) from continuing operations before income taxes
5,541

 
(6,187
)
 
5,562

 
1,697

Income tax expense (benefit)
2,553

 
(2,361
)
 
1,566

 
(3,754
)
Net earnings (loss) from continuing operations
2,988

 
(3,826
)
 
3,996

 
5,451

Net earnings (loss) from discontinued operations, net of tax
19

 
(43
)
 
2,664

 
(123
)
Net earnings (loss)
3,007

 
(3,869
)
 
6,660

 
5,328

Basic earnings (loss) per share:
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
0.10

 
$
(0.12
)
 
$
0.13

 
$
0.18

Earnings (loss) from discontinued operations, net of tax
—

 
—

 
0.09

 
(0.01
)
Net earnings (loss) per share
$
0.10

 
$
(0.12
)
 
$
0.22

 
$
0.17

Diluted earnings (loss) per share:
 

 
 

 
 
 
 
Earnings (loss) from continuing operations
$
0.10

 
$
(0.12
)
 
$
0.13

 
$
0.18

Earnings (loss) from discontinued operations, net of tax
—

 
—

 
0.08

 
(0.01
)
Net earnings (loss) per share
$
0.10

 
$
(0.12
)
 
$
0.21

 
$
0.17

See accompanying notes to consolidated condensed financial statements.

2

Spartech Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
 
Nine Months Ended
 
July 30,

 
July 31,

(Unaudited and dollars in thousands)
2011

 
2010

Cash flows from operating activities
 
 
 
Net earnings
$
6,660

 
$
5,328

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
23,868

 
27,934

Stock-based compensation expense
2,200

 
2,905

Restructuring and exit costs
510

 
1,979

(Gain) loss on disposition of assets, net
67

 
(905
)
(Benefit) provision for bad debt expense
(1,154
)
 
7,893

Change in current assets and liabilities
(8,938
)
 
(8,131
)
Other, net
1,998

 
(1,864
)
Net cash provided by operating activities
25,211

 
35,139

Cash flows from investing activities
 
 
 
Capital expenditures
(19,191
)
 
(13,013
)
Proceeds from the disposition of assets
420

 
2,884

Net cash used by investing activities
(18,771
)
 
(10,129
)
Cash flows from financing activities
 
 
 
Bank credit facility (payment) borrowings, net
(7,504
)
 
39,100

Payments on notes and bank term loan
(378
)
 
(87,582
)
Payments on bonds and leases
(395
)
 
(393
)
Debt issuance costs
(1,558
)
 
(1,174
)
Stock-based compensation exercised
(299
)
 
(180
)
Net cash provided (used) by financing activities
(10,134
)
 
(50,229
)
Effect of exchange rates on cash and cash equivalents
2

 
60

Decrease in cash and cash equivalents
(3,692
)
 
(25,159
)
Cash and cash equivalents at beginning of year
4,900

 
26,925

Cash and cash equivalents at end of year
$
1,208

 
$
1,766

See accompanying notes to consolidated condensed financial statements.

3

Notes to Consolidated Condensed Financial Statement
(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 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 2 and 10 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 10 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.


4

2. 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 approval of the Bankruptcy Court overseeing Chemtura's bankruptcy proceedings 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. Chemtura was the sole customer at our closed Arlington, Texas, facility and closure and related expenses were accounted for as discontinued operations. A summary of the net sales and the net earnings from discontinued operations is as follows:

 
Three Months Ended
 
Nine Months Ended
 
July 30,
2011

 
July 31,
2010

 
July 30,
2011

 
July 31,
2010

Earnings (loss) from discontinued operations before income taxes
$
30

 
$
(117
)
 
$
4,301

 
$
(195
)
Provision (benefit) for income taxes
11

 
(74
)
 
1,637

 
(72
)
Earnings (loss) from discontinued operations, net of tax
$
19

 
$
(43
)
 
$
2,664

 
$
(123
)

3. 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 July 30, 2011, and October 30, 2010, consisted of the following:
 
July 30, 2011

 
October 30, 2010

Raw materials
$
63,088

 
$
50,258

Production supplies
6,795

 
6,547

Finished goods
40,517

 
29,425

Inventory reserves
(8,581
)
 
(6,539
)
Total inventories, net
$
101,819

 
$
79,691


4. Restructuring and Exit Costs
Restructuring and exit costs were recorded in the consolidated statements of operations as follows:
 
Three Months Ended
 
Nine Months Ended
 
July 30, 2011

 
July 31, 2010

 
July 30, 2011

July 31, 2010

Restructuring and exit costs:
 
 
 
 
 
 
Custom Sheet and Rollstock
$
(86
)
 
$
537

 
$
372

$
1,390

Packaging Technologies
—

 
—

 
247

(719
)
Color and Specialty Compounds
260

 
2,309

 
925

4,412

Corporate
—

 
56

 
6

85

Total restructuring and exit costs
174

 
2,902

 
1,550

5,168

Income tax (benefit)
(64
)
 
(1,088
)
 
(574
)
(1,936
)
Impact on net earnings from continuing operations
$
110

 
$
1,814

 
$
976

$
3,232



5

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 one of these closed facilities that was previously included in the Packaging Technologies segment and recorded a $711 gain on the sale. The remaining closed facilities owned by the Company have been classified as assets held for sale and the Company is currently trying to liquidate.

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

 
Cumulative
 
Nine Months Ended
 
Cumulative
 
through 2010
 
July 30, 2011
 
To-Date
Employee severance
$
5,798

 
$
494

 
$
6,292

Facility consolidation and shut-down costs
5,311

 
1,243

 
6,554

Fixed asset valuation adjustments, net
3,167

 
(187
)
 
2,980

Total
$
14,276

 
$
1,550

 
$
15,826


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 $319 of additional restructuring and exit costs in continuing operations for initiatives announced through July 30, 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 end of the fiscal year.
    
The Company's total restructuring liability, representing severance and relocation costs, was $554 and $540 at July 30, 2011, and October 30, 2010, respectively. Cash payments for restructuring activities of continuing operations were $227 and $1,026 for the three and nine months ended July 30, 2011.

5. Debt
Debt at July 30, 2011, and October 30, 2010, consisted of the following:
 
July 30,
2011

 
October 30, 2010

2004 Senior Notes
$
113,594

 
$
113,972

Credit facility
38,396

 
45,900

Other
12,564

 
12,600

Total debt
164,554

 
172,472

Less current maturities
520

 
880

Total long-term debt
$
164,034

 
$
171,592


On September 14, 2004 the Company completed a $150,000 private placement of Senior Unsecured Notes over a term of twelve (12) years (2004 Senior Notes). 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,

6

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 July 30, 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 paid $378 to the Senior Note holders during the second quarter of 2011.
 
At July 30, 2011, the Company had $99,653 of total capacity and $38,396 of outstanding loans under the credit facility at a weighted average interest rate of 2.33%. 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 $15,736 of availability on its credit facility as of July 30, 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 excess cash flow payment discussed above.

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 0.86% to 12.47%.

The Company was in compliance with all debt covenants as of July 30, 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.

6. Income Taxes

The difference between the Company's U.S. federal statutory and the Company's effective tax rate for the three months ended July 30, 2011 was primarily attributable to a change in state tax law which resulted in a one-time write-off of a $1,469 deferred tax asset established in 2008 as tax expense.  This was partially offset by $790 of discrete credits and other items including research and development tax credits from 2010 and state tax incentives related to the expansion of our Wichita, Kansas facility.

7


The difference between the Company's U.S. federal statutory and the Company's effective tax rate for the nine months ended July 30, 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, both of which occurred in the first quarter of 2011.  These benefits were partially offset by adjustments to the Company's tax contingency reserves, a change in state tax law as noted above, and the effects of permanent items. 

In the first quarter of 2010, the Company initiated a tax restructuring of its Donchery, France entity and in the second quarter of 2010, the Company's Canadian entity used $18,500 to recapitalize the Company's French operations.  These transactions resulted in income tax benefits to the Company of $2,770 and $1,631 in the first and second quarter of 2010, respectively.  The difference between the Company's U.S. federal statutory rate and the Company's effective rate for the nine months ended July 31, 2010 was primarily attributable to these transactions.  Items impacting the Company's third quarter 2010 effective tax rate include the negative impact of state income taxes offset by foreign losses and the domestic manufacturing deduction. 

7. Fair Value of Financial Instruments

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.

We prioritize 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 our 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 the same or similar issues. The following table presents the carrying amount and estimated fair value of long-term debt:

 
July 30, 2011
 
October 30, 2010
 
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

Total debt (including credit facilities)
$
164,554

 
$
170,514

 
$
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 July 30, 2011, the Company had $3,156 of assets held-for-sale.

During the nine months ended July 30, 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.

8. 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

8

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 July 30, 2011, the Company had approximately $714 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 July 30, 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, 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) but 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 subsequently filed such motion, and a hearing on the motion was held in June 2011.  A second hearing date is scheduled for late October 2011 for continued oral argument on such motion. 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.

On December 14, 2009, Simmons Bedding Company and The Simmons Manufacturing Co., LLC (collectively, “Simmons”) filed suit in the Superior Court of New Jersey, Essex County (Simmons Bedding Company and The Simmons Manufacturing Co., LLC v. Creative Vinyl/Fabrics, Inc. and its owner, Spartech Corporation, Spartech Polycom Calendared & Converted Products, Granwell Products, Inc., Nan Ya Plastics Corporation USA - Docket No. ESX-L-10197-09) alleging that vinyl product supplied to Simmons failed to meet certain specifications and claiming, among other things, a breach of contract, breach of warranty and fraud for which Simmons is seeking unspecified damages, including costs related to a product recall.  Creative Vinyl/Fabrics, Inc. (“Creative”) is seeking common law indemnification and contribution from the Company.  The Company supplied Creative with PVC film pursuant to purchase orders submitted by Creative, which Creative further

9

processed and then sold to Simmons.  Discovery is ongoing and a date for trial has not yet been scheduled.  At this point, the Company is unable to reasonably predict an outcome or estimate a range of reasonably possible losses, if any.  Based upon the discovery conducted to date, management believes that although the ultimate liabilities resulting from this proceeding, if any, could be significant to the Company's results of operations in the period recognized, such liabilities would not 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 with a customer for $9.9 million. As of July 30, 2011 the Company's gross receivable balance was approximately $4.0 million. The subordinated secured note receivable matured in April 2011 and is in default. During the third quarter of 2011 the customer sold its assets in a U.C.C article 9 foreclosure sale. The Company understands the customer is no longer a revenue generating entity and does not appear to have any additional assets to settle claims. It is doubtful that this customer will be able to pay the subordinated secured note receivable balance or that the Company will ultimately be able to collect from this customer. Based on the above circumstances we have adequate reserves for the potential uncollectible portion of the subordinated secured note receivable as of July 30, 2011.


10

9. Net Earnings (Loss) Per Share

Basic earnings per share excludes any dilution and is computed by dividing net earnings attributable to common stockholders 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
 
Nine Months Ended
 
July 30,
2011

 
July 31,
2010

 
July 30,
2011

 
July 31,
2010

Antidilutive shares:
 
 
 
 
 
 
 
SSARs
1,282

 
349

 
976

 
349

Stock options
670

 
705

 
670

 
705

Total antidilutive shares excluded from diluted earnings per share
1,952

 
1,054

 
1,646

 
1,054


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 from continuing operations, net earnings attributable to common stockholders and the weighted average number of common and participating shares used in the computations of basic and diluted earnings per share for three and nine months ended July 30, 2011, and July 31, 2010 is as follows (shares in thousands):
 
Three Months Ended
 
Nine Months Ended
 
July 30,
2011

 
July 31,
2010

 
July 30,
2011

 
July 31,
2010

Basic and diluted net earnings:
 
 
 
 
 
 
 
Net earnings (loss) from continuing operations
$
2,988

 
$
(3,826
)
 
$
3,996

 
$
5,451

Less: net earnings (loss) from continuing operations allocated to participating securities
30

 
(50
)
 
40

 
69

Net earnings (loss) from continuing operations attributable to common shareholders
2,958

 
(3,776
)
 
3,956

 
5,382

Net earnings (loss) from discontinued operations, net of tax
19

 
(43
)
 
2,664

 
(123
)
Less: net earnings from discontinued operations allocated to participating securities
—

 
—

 
26

 
—

Net earnings (loss) from discontinued operations attributable to common shareholders
19

 
(43
)
 
2,638

 
(123
)
Net earnings (loss) attributable to common shareholders
$
2,977

 
$
(3,819
)
 
$
6,594

 
$
5,259

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
30,658

 
30,555

 
30,632

 
30,528

Add: dilutive shares from equity instruments
58

 
154

 
77

 
149

Diluted weighted average shares outstanding
30,716

 
30,709

 
30,709

 
30,677

Basic earnings per share attributable to common stockholders:
 
 
 
 
 
 
 
Net earnings (loss) from continuing operations
$
0.10

 
$
(0.12
)
 
$
0.13

 
$
0.18

Net earnings (loss) from discontinued operations, net of tax
—

 
—

 
0.09

 
(0.01
)
Net earnings (loss) per share
$
0.10

 
$
(0.12
)
 
$
0.22

 
$
0.17

Diluted earnings per share attributable to common shareholders:
 
 
 
 
 
 
 
Net earnings (loss) from continuing operations
$
0.10

 
$
(0.12
)
 
$
0.13

 
$
0.18

Net earnings (loss) from discontinued operations, net of tax
—

 
—

 
0.08

 
(0.01
)
Net earnings (loss) per share
$
0.10

 
$
(0.12
)
 
$
0.21

 
$
0.17



11

10. 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 numerous end markets, including packaging, transportation, building and construction, recreation and leisure, electronics and appliances, sign and advertising, aerospace and others.

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.



12

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 and nine months ended July 30, 2011, and July 31, 2010:

 
Three Months Ended
 
Nine Months Ended
 
July 30,
2011

 
July 31,
2010

 
July 30,
2011

 
July 31,
2010

Net sales: (a)(b)
 
 
 
 
 
 
 
Custom Sheet and Rollstock
$
145,185

 
$
143,480

 
416,446

 
419,225

Packaging Technologies
64,989

 
60,892

 
179,094

 
163,864

Color and Specialty Compounds
81,542

 
65,263

 
213,510

 
180,233

 
$
291,716

 
$
269,635

 
$
809,050

 
$
763,322

Operating earnings (loss): (b)
 
 
 
 
 
 
 
Custom Sheet and Rollstock
$
5,772

 
$
344

 
17,331

 
18,451

Packaging Technologies
6,855

 
6,701

 
17,855

 
18,172

Color and Specialty Compounds
3,333

 
(1,459
)
 
1,696

 
1,630

Corporate
(7,635
)
 
(8,245
)
 
(23,279
)
 
(26,261
)
 
$
8,325

 
$
(2,659
)
 
$
13,603

 
$
11,992


Notes to Table
(a)
 
Excludes intersegment sales of $15,526 and $14,209 in the third quarter of 2011 and 2010, respectively, and intersegment sales of $40,297 and $37,742 in the first nine months of 2011 and 2010 respectively.
(b)
 
Excludes discontinued operations.

11. 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 and nine months ended July 30, 2011, and July 31, 2010 is as follows:
 
Three Months Ended
 
Nine Months Ended
 
July 30,
2011

 
July 31,
2010

 
July 30,
2011

 
July 31,
2010

Net earnings (loss)
$
3,007

 
$
(3,869
)
 
$
6,660

 
$
5,328

Foreign currency translation adjustments
(128
)
 
(549
)
 
1,540

 
3,123

Total comprehensive income (loss)
$
2,879

 
$
(4,418
)
 
$
8,200

 
$
8,451


The Company recorded foreign exchange losses before taxes of $423 and gains of $83 for the three months ended July 30, 2011 and July 31, 2010, respectively. The Company recorded foreign exchange gains before taxes of $198 and losses of $2,446 for the nine months ended July 30, 2011, and July 31, 2010, respectively. Foreign exchange gains and losses are reported in selling, general and administrative expenses in the results of operations. As of July 30, 2011, the Company had monetary assets denominated in foreign currency of $3,624 of net Canadian liabilities, $547 of net Euro assets and $2,397 of net Mexican Peso assets.



13

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 earnings (loss) excluding special items, net earnings (loss) from continuing operations excluding special items and net earnings (loss) 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 $291.7 million and $809.1 million for the third quarter and first nine months of 2011, increased 8% and 6% from the same periods in 2010, representing a 9% increase from price/mix offset by a 1% decrease in volume for the third quarter, and an 8% increase from price/mix offset by a 2% decrease in volume for the first nine months of 2011. These decreases in volume were due to a decline in sales of sheet for material handling applications caused by a considerable slowdown in orders from one of our customers. Mitigating these decreases was increased sales volume of compounds and sheet to the automotive sector and agricultural sector and compounds to the commercial construction market from gradual recovery of these end markets. The price/mix increases were related to increases in selling prices to pass through increases in raw material costs and a product mix that included a greater percentage of higher priced products. Operating earnings excluding special items were $8.5 million and $15.2 million for the third quarter and first nine months of 2011, compared to operating earnings excluding special items of $0.2 million and $17.2 million in the same periods of 2010.


14

During the third quarter, the Company began to implement its turnaround effort in the Custom Sheet and Rollstock segment and continued to realize improved operational effectiveness resulting from turnaround efforts in the Color and Specialty Compounds segment. In the Custom Sheet and Rollstock segment, we have identified opportunities to improve key metrics by implementing the same turnaround process which has been effective in the Color and Specialty Compounds segment. We remain committed to the level of work necessary to advance cultural change and achieve our targeted improvements from our six key priorities (back to basics in operations, optimizing material usage, organic growth, new technology center, cross-unit business selling and engaging customers at multiple levels), but remain realistic with regard to the amount of time required for such changes to take root, especially in the challenging economic environment in which we currently operate.

Outlook
The Company continues to emphasize a back to basics culture as it moves forward in the execution of its six key priorities.  While we remain optimistic in the future earnings potential of our growth strategy and production capabilities, we believe recent economic volatility is indicative of slow and uncertain recovery in most of the markets we serve.  The current economic environment, coupled with a dynamic raw materials market, may impact our financial results for future periods.  We remain committed to providing value to our stockholders through the completion of our turnaround strategy and focus on sustainable growth. 
 
Consolidated Results    
Net sales were $291.7 million in the three month period ended July 30, 2011, representing an 8% increase over the same period in the prior year. The increase was caused by:

 
Q3 2011 vs. Q3 2010

 
YTD 2011 vs. YTD 2010

Underlying volume
-1
 %
 
-2
 %
Price/Mix
9
 %
 
8
 %
Total
8
 %
 
6
 %

The decrease in underlying volume for both period comparisons primarily reflected a reduction in one customer's business activity for a sheet material handling application. Mitigating this decrease were increases in sales volume of compounds and sheet to the automotive sector of the transportation market and compounds to the commercial construction and agricultural end markets from gradual demand recovery. The price/mix increase was primarily related to increases in selling prices to pass through increases in raw material costs and a product mix that included a greater percentage of higher priced products.

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 and nine months ended July 30, 2011 and July 31, 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
 
Nine Months Ended
 
July 30, 2011

 
July 31, 2010

 
July 30,
2011

 
July 31,
2010

Dollars and Pounds(in millions)
 
 
 
 
 
 
 
Net sales
$
291.7

 
$
269.6

 
$
809.1

 
$
763.3

Cost of sales
265.1

 
241.7

 
736.9

 
677.7

Gross margin
$
26.6

 
$
27.9

 
$
72.2

 
$
85.6

 
 
 
 
 
 
 
 
Pounds sold
231.2

 
233.8

 
670.9

 
686.5

Dollars per Pound Sold
 
 
 
 
 
 
 
Net sales
$
1.262

 
$
1.153

 
$
1.206

 
$
1.112

Cost of sales
1.147

 
1.034

 
1.098

 
0.987

Gross margin
$
0.115

 
$
0.119

 
$
0.108

 
$
0.125


15


Gross margin per pound sold declined from 11.9 cents for the three months ended July 31, 2010 to 11.5 cents for the three months ended July 30, 2011, and declined from 12.5 cents for the nine months ended July 31, 2010 to 10.8 cents for the nine months ended July 30, 2011. These decreases primarily reflect the continued impact of production inefficiencies that began in the second half of 2010, and higher costs. The inefficiencies and higher costs were partially offset by reduced depreciation expense due to the Company's plant consolidation efforts and a decrease in workers compensation expense due to lower claims.

Selling, general and administrative expenses were $17.7 million and $55.7 million in the third quarter and first nine months of 2011 compared to $26.7 million and $65.6 million in the same periods of the prior year. Both period comparisons reflect the impacts of $1.9 million of bad debt income in the third quarter of 2011 and $7.9 million of bad debt expense in the third quarter of 2010. We established reserves for two large customers in the third quarter of 2010 and in the third quarter of 2011 we recorded $2.1 million of income because of favorable developments of contingencies on two customer receivable balances. Selling, general and administrative expenses also include amounts of foreign currency losses of $0.4 million and gains of $0.2 million in the third quarter and first nine months of 2011, and gains of $0.1 million and losses of $2.5 million in the third quarter and first nine months of 2010. The losses in the first nine months of 2010 were mostly caused by a weakening U.S. dollar to the Canadian dollar. Refer to Note 11, Comprehensive Income (Loss) for further discussion of the Company's foreign currency positions as of the end of the third quarter. The decrease in bad debt expense and foreign currency losses were partially offset by higher employee compensation and relocation costs for the nine month period of comparison.

Amortization of intangibles was $0.4 million and $1.3 million in the third quarter and first nine months of 2011 compared to $1.0 million and $2.9 million in the same periods of the prior year. The decreases in both period comparisons reflects intangible assets 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 $0.2 million and $1.6 million in the third quarter and first nine months of 2011 compared to $2.9 million and $5.2 million in the same periods of the prior year. For both third quarter periods of comparison, restructuring and exit costs are comprised of employee severance and facility consolidation and shut-down costs, while the third quarter ended July 31, 2010 also experienced significant fixed asset valuation adjustments for assets related to restructured facilities. For the first nine months of 2011, restructuring and exit costs are mostly comprised of employee severance, facility consolidation and shut-down costs and accelerated depreciation, while restructuring and exit costs in the first nine months of 2010 were comprised of the same expenses and also experienced significant fixed asset valuation adjustments for assets related to restructured facilities. We expect to incur approximately $0.3 million of additional restructuring expenses for initiatives announced through July 30, 2011, which will be mostly comprised of cash employee severance and facility consolidation.

Interest expense, net of interest income, was $2.8 million and $8.0 million in the third quarter and first nine months of 2011 compared to $2.8 million and $9.6 million in the same periods of the prior year. The decrease for the nine month periods of comparison was primarily driven by a reduction in higher interest rate debt.

We reported net earnings from continuing operations of $3.0 million or $0.10 per diluted share and $4.0 million or $0.13 per diluted share for the third quarter and first nine months of 2011, compared to net losses from continuing operations of $3.8 million or $(0.12) per diluted share and net earnings from continuing operations of $5.5 million or $0.18 per diluted share in the same periods of the prior year. Excluding special items (restructuring and exit costs, debt extinguishment costs, and tax benefits from restructuring of foreign operations), we reported net earnings from continuing operations of $3.1 million or $0.10 per diluted share and $5.0 million or $0.16 per diluted share for the third quarter and first nine months of 2011, compared to a net loss of $1.6 million or $(0.05) per diluted share and net earnings of $4.7 million or $0.16 per diluted share in the same periods of the prior year. The changes reflected the impact of items above.

Income tax expense was $2.6 million in the third quarter of 2011 compared to a $2.4 million benefit in the third quarter of 2010. Income tax expense in the current year third quarter includes a $1.5 million expense associated with the write-off of a deferred tax asset due to a change in Michigan tax law which was partially offset by $0.8 million of income from discrete tax credits. The income tax benefit in the prior year third quarter reflected the loss reported in this period. Income tax expense was $1.6 million in the first nine months of 2011 compared to a $3.8 million benefit in the first nine months of 2010. The expense in the current year reflects the impact of the change in Michigan tax law discussed above, partially offset by additional discrete tax credits throughout the year. The benefit recognized last year was the result of the Company initiating tax restructuring of its Donchery, France entity in the first quarter of 2010 and in the second quarter of 2010, the Company's Canadian entity used $18,500 to recapitalize the Company's French operations.  These transactions resulted in income tax benefits to the Company of $2,770 and $1,631 in the first and second quarter of 2010, respectively. 


16

Net earnings from discontinued operations were $2.7 million in the first nine months 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

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 information included in this section is intended to provide specific information for the operation results of each segment.

Custom Sheet and Rollstock Segment
Net sales were $145.2 million and $416.4 million for the three and nine months ended July, 30, 2011, respectively, representing an increase of 1% and decrease of 1% over the same periods of the prior year, respectively. Fluctuations in net sales were caused by:

 
Q3 2011 vs. Q3 2010

 
YTD 2011 vs. YTD 2010

Underlying volume
-8
 %
 
-11
 %
Price/Mix
9
 %
 
10
 %
Total
1
 %
 
-1
 %

The decrease in underlying volume for both period comparisons reflected a reduction in one customer's business activity for a material handling application. Absent this customer's decline, our sales volume was down slightly for the three months ended July 30, 2011 and July 31, 2010 reflecting a decrease in sales volume of construction and building product sheet partially offset by additional sales volume to the agricultural market. Absent the reduction in one material handling customer's business, our sales volume increased slightly for the nine months ended July 30, 2011 compared to the same period of the prior year reflecting additional sales volume sold to the automotive sector, agriculture sector and sign and advertising market, which was slightly offset by a decrease in volume sold of construction and building product sheet and refrigeration sheet. The price/mix increase for both period comparisons was mostly caused by increases in selling prices and product mix that included a greater percentage of higher priced products.

Operating earnings excluding special items were $5.7 million and $17.7 million for the three and nine months ended July, 30, 2011 compared to $0.9 million and $19.8 million for the three and nine months ended July 31, 2010. Both period comparisons reflect the impact of $9.1 million of earnings increase from a change in bad debt expense. We reported $7.6 million of bad debt expense to establish reserves for two large customers in the third quarter of 2010 and recorded $1.5 million of income because of favorable developments on one of the large customers in the third quarter of 2011. Without the bad debt expense change, operating earnings excluding special items decreased $4.2 million for the quarter comparison and $11.1 million for the nine month comparison due to the lower sales volume and cost increases.

Packaging Technologies
Net sales were $65.0 million and $179.1 million for the three and nine months ended July, 30, 2011, representing an increase of 7% and 9% over the same periods of the prior year. The increases were caused by:

 
Q3 2011 vs. Q3 2010

 
YTD 2011 vs. YTD 2010

Underlying volume
(8
)%
 
(3
)%
Price/Mix
15
 %
 
12
 %
Total
7
 %
 
9
 %

The decrease in underlying volume for both period comparisons reflected the impact of a loss of share at a food packaging customer. The decrease for the quarter comparison also included lost sales volume on graphic art products. This was slightly offset by new customer volume sold for packaging applications in both period comparisons. Price/mix for both period comparisons includes increases in selling prices from the pass through of increases in raw materials costs.

Operating earnings excluding special items were $6.9 million and $18.1 million for the three and nine months ended July, 30, 2011 compared to $6.7 million and $17.4 million for the three and nine months ended July 31, 2010. The increase in operating earnings for both period comparisons was due to lower depreciation and amortization expense from our prior year impairments

17

and income resulting from resolving a customer return, which more than offset the impact of lower sales volume and cost increases.

Color and Specialty Compounds Segment
Net sales were $81.5 million and $213.5 million for the three and nine months ended July, 30, 2011, representing a 25% and 18% increase over the same periods in the prior year. The increases were caused by:
 
Q3 2011 vs. Q3 2010

 
YTD 2011 vs. YTD 2010

Underlying volume
11
%
 
10
%
Price/Mix
14
%
 
8
%
Total
25
%
 
18
%

The increase in underlying volume for both period comparisons was due to a significant increase in sales to the commercial construction market, automotive sector of the transportation market and agricultural market. Offsetting these increases in the nine month period comparison is a decline in sales to the appliance and electronics market. The price/mix increase for both period comparisons was mostly caused by increases in selling prices to pass through increases in raw material costs and for the three month period comparison included a product mix that included a greater percentage of higher priced products.

Operating earnings excluding special items were $3.6 million and $2.6 million for the three and nine months ended July, 30, 2011 compared to operating earnings of $0.9 million and $6.0 million in the same periods of the prior year. The increase in operating earnings was due to the increase in sales volume, benefits from improvements on our key priorities and $0.8 million of lower bad debt expense from favorable developments on a contingency, which more than offset the impact of cost increases. The decrease in operating earnings for the nine month period comparison reflects the continued production inefficiencies in the first two quarters of 2011 and the impact of cost increases.

Corporate
Corporate expenses include 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 $7.6 million and $23.3 million for the three and nine months ended July, 30, 2011 compared to $8.2 million and $26.3 million for the same periods of the prior year. The decrease in expenses for the three month period of comparison can be attributed to lower professional service fees, stock option expense, and fringe benefits which were slightly offset by higher foreign currency exchange losses. The decrease in expense for the nine month period of comparison can mainly be attributed to foreign currency exchange gains, in addition to lower labor costs, professional fees and depreciation 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 July 30, 2011 and July 31, 2010:

 
Nine Months Ended
 
July 30, 2011

 
July 31, 2010

Cash Flows (in thousands)
 
 
 
Net cash provided by operating activities
$
25,211

 
$
35,139

Net cash used by investing activities
(18,771
)
 
(10,129
)
Net cash used by financing activities
(10,134
)
 
(50,229
)
Effect of exchange rate changes on cash and cash equivalents
2

 
60

Decrease in cash and cash equivalents
$
(3,692
)
 
$
(25,159
)

Net cash provided by operating activities was $25.2 million in the first nine months of 2011 compared to $35.1 million for the same period in the prior year. The decrease reflects the impact of lower non-cash charges related to bad debt expense and

18

depreciation expense, coupled with the impacts of lower working capital. The decrease is offset by lower non-cash charges related to deferred taxes, fixed asset impairments and restructuring costs. Net cash provided by operating activities in the first nine months of 2011 include U.S. Federal income tax refunds of $7.3 million.

Net cash used for investing activities of $18.7 million in the first nine months of 2011 consisted of $19.2 million of capital expenditures which were slightly offset by $0.4 million of proceeds from the disposition of assets. Net cash used for investing activities in the first nine months of 2010 was comprised of $13.0 million of capital expenditures partially offset by $2.9 million of proceeds from dispositions of assets associated with previously shut down operations. We expect to spend approximately $27.0 million of capital expenditures in 2011. Capital expenditure amounts are expected to be funded mainly from operating cash flows and credit facility borrowings.

Net cash used for financing activities of $10.1 million in the first nine months of 2011 mainly consisted of credit facility payments and debt financing costs associated with the Company's Amendments.  Net cash used for financing activities in the first nine months of 2010 of $50.2 million reflects payments on the Senior Notes and funding of the Company's Euro Bank term loan which matured in February 2010.

Financing Arrangements
On September 14, 2004 the Company completed a $150,000 private placement of Senior Unsecured Notes over a term of twelve (12) years (2004 Senior Notes). 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 July 30, 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 paid $0.4 million to the Senior Note holders during the second quarter of 2011.
 

19

At July 30, 2011, the Company had $164.6 million of outstanding debt with a weighted average interest rate of 5.37%, of which 71.8% represented fixed rate instruments with a weighted average interest rate of 6.57%.

At July 30, 2011, the Company had $99.7 million of total capacity and $38.4 million of outstanding loans under the credit facility at a weighted average interest rate of 2.33%. 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 $15.7 million of availability on its credit facility as of July 30, 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 0.86% 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. 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.

While the Company was in compliance with its covenants as of July 30, 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 earnings (loss) (GAAP) to operating earnings excluding special items (Non-GAAP), net earnings (loss) from continuing operations (GAAP) to net earnings (loss) from continuing operations excluding special items (Non-GAAP) and net earnings (loss) from continuing operations per diluted share (GAAP) to net earnings (loss) from continuing operations per diluted share excluding special items (Non-GAAP):

 
Three Months Ended
 
Nine Months Ended
 
July 30,

 
July 31,

 
July 30,

July 31,

(unaudited and in thousands, except per share data)
2011

 
2010

 
2011

2010

Operating earnings (loss) (GAAP)
$
8,325

 
$
(2,659
)
 
$
13,603

$
11,992

Restructuring and exit costs
174

 
2,902

 
1,550

5,168

Operating earnings excluding special items (Non-GAAP)
$
8,499

 
$
243

 
$
15,153

$
17,160

Net earnings (loss) from continuing operations (GAAP)
$
2,988

 
$
(3,826
)
 
$
3,996

$
5,451

   Restructuring and exit costs, net of tax
110


1,814


976

3,232

   Debt Extinguishment costs, net of tax
—

 
456

 
—

456

Tax benefits from restructuring of foreign operations
—

 
—

 
—

(4,401
)
Net earnings (loss) from continuing operations excluding special items (Non-GAAP)
$
3,098

 
$
(1,556
)
 
$
4,972

$
4,738

Net earnings (loss) from continuing operations per diluted share (GAAP)
$
0.10

 
$
(0.12
)
 
$
0.13

$
0.18

   Restructuring and exit costs, net of tax
—

 
0.06

 
0.03

0.11

   Debt Extinguishment costs, net of tax
—

 
0.01

 
—

0.01

   Tax benefit on restructuring of foreign operations
—

 
—

 
—

(0.14
)
Net earnings (loss) from continuing operations per diluted share excluding special items (Non-GAAP)
$
0.10

 
$
(0.05
)
 
$
0.16

$
0.16



20

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

 
Three Months Ended
 
Three Months Ended
 
July 30, 2011
 
July 31, 2010
 
Operating
Earnings (Loss)
 (GAAP)
 
Special
Items
 
Operating Earnings
(Loss)
Excluding
(Non-GAAP)
Special Items
 
Operating
Earnings (Loss)
 (GAAP)
 
Special
Items
 
Operating Earnings
(Loss)
Excluding
(Non-GAAP)
Special Items
Segment
 
 
 
 
 
Custom Sheet and Rollstock
$
5,772

 
$
(86
)
 
$
5,686

 
$
344

 
$
537

 
$
881

Packaging Technologies
6,855

 
—

 
6,855

 
6,701

 
—

 
6,701

Color & Specialty Compounds
3,333

 
260

 
3,593

 
(1,459
)
 
2,309

 
850

Corporate
(7,635
)
 
—

 
(7,635
)
 
(8,245
)
 
56

 
(8,189
)
Total
$
8,325

 
$
174

 
$
8,499

 
$
(2,659
)
 
$
2,902

 
$
243


 
Nine Months Ended
 
Nine Months Ended
 
July 30, 2011
 
July 31, 2010
 
Operating
Earnings (Loss)
 (GAAP)
 
Special
Items
 
Operating Earnings
(Loss)
Excluding
(Non-GAAP)
Special Items
 
Operating
Earnings (Loss)
 (GAAP)
 
Special
Items
 
Operating Earnings
(Loss)
Excluding
(Non-GAAP)
Special Items
Segment
 
 
 
 
 
Custom Sheet and Rollstock
$
17,331

 
$
372

 
$
17,703

 
$
18,451

 
$
1,390

 
$
19,841

Packaging Technologies
17,855

 
247

 
18,102

 
18,172

 
(719
)
 
17,453

Color & Specialty Compounds
1,696

 
925

 
2,621

 
1,630

 
4,412

 
6,042

Corporate
(23,279
)
 
6

 
(23,273
)
 
(26,261
)
 
85

 
(26,176
)
Total
$
13,603

 
$
1,550

 
$
15,153

 
$
11,992

 
$
5,168

 
$
17,160



21

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 July 30, 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 July 30, 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 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 July 30, 2011, the Company had approximately $714 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 July 30, 2011,

22

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, 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) but 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 subsequently filed such motion, and a hearing on the motion was held in June 2011.  A second hearing date is scheduled for late October 2011 for continued oral argument on such motion. 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.

On December 14, 2009, Simmons Bedding Company and The Simmons Manufacturing Co., LLC (collectively, “Simmons”) filed suit in the Superior Court of New Jersey, Essex County (Simmons Bedding Company and The Simmons Manufacturing Co., LLC v. Creative Vinyl/Fabrics, Inc. and its owner, Spartech Corporation, Spartech Polycom Calendared & Converted Products, Granwell Products, Inc., Nan Ya Plastics Corporation USA - Docket No. ESX-L-10197-09) alleging that vinyl product supplied to Simmons failed to meet certain specifications and claiming, among other things, a breach of contract, breach of warranty and fraud for which Simmons is seeking unspecified damages, including costs related to a product recall.  Creative Vinyl/Fabrics, Inc. (“Creative”) is seeking common law indemnification and contribution from the Company.  The Company supplied Creative with PVC film pursuant to purchase orders submitted by Creative, which Creative further processed and then sold to Simmons.  Discovery is ongoing and a date for trial has not yet been scheduled.  At this point, the Company is unable to reasonably predict an outcome or estimate a range of reasonably possible losses, if any.  Based upon the discovery conducted to date, management believes that although the ultimate liabilities resulting from this proceeding, if any, could be significant to the Company's results of operations in the period recognized, such liabilities would not 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.


23


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
101
Data File for the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements (Filed Herewith).




24

Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
SPARTECH CORPORATION
(Registrant)
 
Date:
September 7, 2011
By:  
/s/ Victoria M. Holt  
 
 
 
Victoria M. Holt 
 
 
 
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 of Finance
(Principal Accounting Officer) 

25

SPARTECH CORP Reports

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