Attached files
file | filename |
---|---|
EX-10.4 - EX-10.4 - SPARTECH CORP | c58595exv10w4.htm |
EX-32.2 - EX-32.2 - SPARTECH CORP | c58595exv32w2.htm |
EX-32.1 - EX-32.1 - SPARTECH CORP | c58595exv32w1.htm |
EX-10.1 - EX-10.1 - SPARTECH CORP | c58595exv10w1.htm |
EX-10.2 - EX-10.2 - SPARTECH CORP | c58595exv10w2.htm |
EX-31.2 - EX-31.2 - SPARTECH CORP | c58595exv31w2.htm |
EX-10.3 - EX-10.3 - SPARTECH CORP | c58595exv10w3.htm |
EX-31.1 - EX-31.1 - SPARTECH CORP | c58595exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 1, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
1-5911
(Commission File Number)
(Commission File Number)
SPARTECH CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware | 43-0761773 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
120 S. Central Avenue, Suite 1700
Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)
Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)
(314) 721-4242
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest
practicable date: 30,913,748 shares of Common Stock, $.75 par value per share, outstanding as of June 7, 2010.
Table of Contents
Cautionary Statements Concerning Forward-Looking Statements
Statements in this Form 10-Q that are not purely historical, including statements which
express the Companys belief, anticipation or expectation about future events, are forward-looking
statements. Forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 relate to future events and expectations and include statements containing such
words as anticipates, believes, estimates, expects, would, should, will, will likely
result, forecast, outlook, projects, and similar expressions. Forward-looking statements
are based on managements current expectations and include known and unknown risks, uncertainties
and other factors, many of which management is unable to predict or control, that may cause actual
results, performance or achievements to differ materially from those expressed or implied in the
forward-looking statements. Important factors which could cause actual results to differ from our
forward looking statements include, but are not limited to:
(a) | 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 of the raw materials that are critical to the manufacture of our products, particularly plastic resins derived from oil and natural gas, including future effects of natural disasters; | ||
(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 the Companys 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 impairment charges; | ||
(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 restructurings; | ||
(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; and | ||
(n) | possible weaknesses in internal controls. |
We assume no responsibility to update our forward-looking statements, except as required by law.
SPARTECH CORPORATION
FORM 10-Q FOR THE QUARTER AND SIX MONTHS ENDED MAY 1, 2010
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTER AND SIX MONTHS ENDED MAY 1, 2010
TABLE OF CONTENTS
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | FINANCIAL STATEMENTS |
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
May 1, 2010 | October 31, | |||||||
(Unaudited) | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,858 | $ | 26,925 | ||||
Trade receivables, net of allowances of $1,683 and $2,470, respectively |
147,382 | 130,355 | ||||||
Inventories, net of inventory reserves of $4,900 and $5,430, respectively |
75,743 | 62,941 | ||||||
Prepaid expenses and other current assets |
17,126 | 24,916 | ||||||
Assets held for sale |
4,541 | 2,907 | ||||||
Total current assets |
248,650 | 248,044 | ||||||
Property, plant, and equipment, net of accumulated depreciation of $315,417 and $304,424, respectively |
216,127 | 229,003 | ||||||
Goodwill |
144,070 | 144,345 | ||||||
Other intangible assets, net of accumulated amortization of
$19,565 and $17,733, respectively |
26,382 | 28,404 | ||||||
Other long-term assets |
3,388 | 3,892 | ||||||
Total assets |
$ | 638,617 | $ | 653,688 | ||||
Liabilities and shareholders equity |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | 478 | $ | 36,079 | ||||
Accounts payable |
123,407 | 103,484 | ||||||
Accrued liabilities |
23,504 | 31,122 | ||||||
Total current liabilities |
147,389 | 170,685 | ||||||
Long-term debt, less current maturities |
176,076 | 180,355 | ||||||
Other long-term liabilities: |
||||||||
Deferred taxes |
57,307 | 58,736 | ||||||
Other long-term liabilities |
6,339 | 7,033 | ||||||
Total liabilities |
387,111 | 416,809 | ||||||
Shareholders equity |
||||||||
Preferred stock (authorized: 4,000,000 shares, par value $1.00) Issued: None |
| | ||||||
Issued: None |
||||||||
Common stock (authorized: 55,000,000 shares, par value $0.75) |
24,849 | 24,849 | ||||||
Issued:
33,131,846 shares; Outstanding: 30,913,153 and 30,719,277 shares, respectively |
||||||||
Contributed capital |
203,930 | 204,183 | ||||||
Retained earnings |
69,608 | 60,411 | ||||||
Treasury stock, at cost, 2,218,693 and 2,412,569 shares, respectively |
(52,849 | ) | (54,860 | ) | ||||
Accumulated other comprehensive income |
5,968 | 2,296 | ||||||
Total shareholders equity |
251,506 | 236,879 | ||||||
Total liabilities and shareholders equity |
$ | 638,617 | $ | 653,688 | ||||
See accompanying notes to consolidated condensed financial statements.
1
Table of Contents
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
May 1, | May 2, | May 1, | May 2, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 268,524 | $ | 216,412 | $ | 493,687 | $ | 453,713 | ||||||||
Costs and expenses |
||||||||||||||||
Cost of sales |
237,642 | 185,289 | 435,974 | 401,535 | ||||||||||||
Selling, general and administrative expenses |
20,452 | 17,806 | 38,868 | 39,857 | ||||||||||||
Amortization of intangibles |
963 | 1,161 | 1,928 | 2,329 | ||||||||||||
Restructuring and exit costs |
1,596 | 3,602 | 2,266 | 4,426 | ||||||||||||
Total costs and expenses |
260,653 | 207,858 | 479,036 | 448,147 | ||||||||||||
Operating earnings |
7,871 | 8,554 | 14,651 | 5,566 | ||||||||||||
Interest, net of interest income |
3,251 | 3,797 | 6,767 | 8,132 | ||||||||||||
Earnings (loss) from continuing operations before income taxes |
4,620 | 4,757 | 7,884 | (2,566 | ) | |||||||||||
Income tax expense (benefit) |
80 | 2,608 | (1,393 | ) | 228 | |||||||||||
Net earnings (loss) from continuing operations |
4,540 | 2,149 | 9,277 | (2,794 | ) | |||||||||||
(Loss) earnings from discontinued operations, net of tax |
(87 | ) | 1,615 | (80 | ) | 1,466 | ||||||||||
Net earnings (loss) |
$ | 4,453 | $ | 3,764 | $ | 9,197 | $ | (1,328 | ) | |||||||
Basic earnings (loss) per share: |
||||||||||||||||
Earnings (loss) from continuing operations |
$ | 0.15 | $ | 0.07 | $ | 0.30 | $ | (0.09 | ) | |||||||
Earnings (loss) of discontinued operations, net of tax |
(0.01 | ) | 0.05 | 0.00 | 0.05 | |||||||||||
Net earnings (loss) per share |
$ | 0.14 | $ | 0.12 | $ | 0.30 | $ | (0.04 | ) | |||||||
Diluted earnings (loss) per share: |
||||||||||||||||
Earnings (loss) from continuing operations |
$ | 0.15 | $ | 0.07 | $ | 0.30 | $ | (0.09 | ) | |||||||
Earnings (loss) of discontinued operations, net of tax |
(0.01 | ) | 0.05 | (0.01 | ) | 0.05 | ||||||||||
Net earnings (loss) per share |
$ | 0.14 | $ | 0.12 | $ | 0.29 | $ | (0.04 | ) | |||||||
Dividends declared per share |
$ | | $ | | $ | | $ | 0.05 | ||||||||
See accompanying notes to consolidated condensed financial statements.
2
Table of Contents
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
Six Months Ended | ||||||||
May 1, | May 2, | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net earnings (loss) |
$ | 9,197 | $ | (1,328 | ) | |||
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities: |
||||||||
Restructuring and exit costs |
152 | 823 | ||||||
Depreciation and amortization |
19,013 | 22,294 | ||||||
Provision for bad debt expense |
25 | 3,595 | ||||||
Deferred taxes |
(1,449 | ) | 633 | |||||
Stock-based compensation expense |
1,931 | 1,275 | ||||||
(Gain)/loss on disposition of assets |
(884 | ) | 17 | |||||
Other, net |
(254 | ) | 296 | |||||
Change in current assets and liabilities |
(8,161 | ) | (8,325 | ) | ||||
Net cash provided by operating activities |
19,570 | 19,280 | ||||||
Cash flows from investing activities |
||||||||
Capital expenditures |
(7,579 | ) | (5,096 | ) | ||||
Proceeds from the disposition of assets |
2,876 | 61 | ||||||
Net cash used by investing activities |
(4,703 | ) | (5,035 | ) | ||||
Cash flows from financing activities |
||||||||
Borrowings on bank credit facility, net |
11,900 | 8,105 | ||||||
Payments on notes and bank term loan |
(49,590 | ) | (18,912 | ) | ||||
Payments on bonds and leases, net |
(262 | ) | (528 | ) | ||||
Cash dividends on common stock |
| (3,057 | ) | |||||
Net cash used by financing activities |
(37,952 | ) | (14,392 | ) | ||||
Effect of exchange rate changes on cash
and cash equivalents |
18 | (21 | ) | |||||
Decrease in cash and cash equivalents |
(23,067 | ) | (168 | ) | ||||
Cash and cash equivalents at beginning of year |
26,925 | 2,118 | ||||||
Cash and cash equivalents at end of period |
$ | 3,858 | $ | 1,950 | ||||
See
accompanying notes to consolidated condensed financial statements.
3
Table of Contents
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and Dollars in thousands, except per share amounts)
(Unaudited and Dollars in thousands, except per share amounts)
1) Basis of Presentation
The consolidated financial statements include the accounts of Spartech Corporation and its
controlled affiliates (Spartech or the Company). These financial statements have been prepared
on a condensed basis, and accordingly, certain information and note disclosures normally included
in financial statements prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, these consolidated condensed financial statements
contain all adjustments (consisting of normal recurring adjustments) and disclosures necessary to
make the information presented herein not misleading. These financial statements should be read in
conjunction with the consolidated financial statements and accompanying footnotes thereto included
in the Companys October 31, 2009 Annual Report on Form 10-K.
In 2009, the Company sold its wheels and profiles businesses and closed and liquidated three
businesses including a manufacturer of boat components sold to the marine market, and one
compounding and one sheet business which previously serviced single customers. These businesses
are classified as discontinued operations in accordance with Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 205, Discontinued Operations. Accordingly, for
all periods presented herein, the consolidated condensed statements of operations conform to this
presentation. The wheels, profiles and marine businesses were previously reported in the
Engineered Products segment and due to these dispositions, the Company no longer has this reporting
segment.
During the second quarter of 2010, the Company changed its organizational reporting and
management responsibilities of two businesses previously included in our Color and Specialty
Compounds segment to our Custom Sheet and Rollstock segment. Also in the second quarter, the
Company reorganized its internal reporting and management responsibilities for 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 Companys three reportable segments in the second quarter and
historical segment results have been reclassified to conform to these changes. The results of the
Companys reportable segments are included in Note 12, Segment Information.
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect reported amounts and
related disclosures. Actual results could differ from those estimates. Operating results for any
quarter are historically seasonal in nature and are not necessarily indicative of the results
expected for the full year. Certain prior year amounts have been reclassified to conform to the
current year presentation. The Companys fiscal year ends on the Saturday closest to October 31
and fiscal years presented in this report contain 52 weeks. Years presented are fiscal years
unless noted otherwise.
2) Newly Adopted Accounting Standards
In June 2008, the FASB issued an accounting standard which addresses whether instruments
granted in share-based payment awards that entitle their holders to receive nonforfeitable
dividends or dividend equivalents before vesting should be considered participating securities and
need to be included in the earnings allocation in computing earnings per share (EPS) under the
two-class method. The two-class method is an earnings allocation formula that determines EPS for
each class of common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. In accordance with the standard,
the Companys unvested restricted stock awards are considered participating securities because they
entitle holders to receive nonforfeitable dividends during the vesting term. In applying the
two-class method, undistributed earnings are allocated between common shares and unvested
restricted stock awards. The standard became effective for the Company on November 1, 2009 when the
two-class method of computing basic and diluted EPS was applied for all periods presented. See Note
11, Net Earnings (Loss) Per Share for additional information.
4
Table of Contents
3) Discontinued Operations
A summary of the net sales and the net earnings (loss) from discontinued operations is as
follows:
Three Months Ended | Six Months Ended | |||||||||||||||
May 1, | May 2, | May 1, | May 2, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net Sales |
$ | 6 | $ | 17,922 | $ | 6 | $ | 29,771 | ||||||||
(Loss) earnings of discontinued operations
before income taxes |
(89 | ) | 2,657 | (78 | ) | 2,665 | ||||||||||
Income tax expense (benefit) |
2 | (1,042 | ) | (2 | ) | (1,199 | ) | |||||||||
(Loss) earnings of discontinued operations, net of tax |
$ | (87 | ) | $ | 1,615 | $ | (80 | ) | $ | 1,466 | ||||||
4) Inventories, net
Inventories are valued at the lower of cost or market. Inventories at May 1, 2010 and October
31, 2009 are comprised of the following components:
May 1, | October 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 43,394 | $ | 34,288 | ||||
Production supplies |
6,991 | 7,055 | ||||||
Finished goods |
25,358 | 21,598 | ||||||
Total inventories, net |
$ | 75,743 | $ | 62,941 | ||||
5) Goodwill
As discussed in Note 1, Basis of Presentation the Company reorganized its reportable segments
in the second quarter of 2010. These changes resulted in reclassification of goodwill from the
Color and Specialty Compounds segment to the Custom Sheet and Rollstock segment and
reclassification of goodwill between the Custom Sheet and Rollstock segment and the Packaging
Technologies segment.
Changes in the carrying amount of goodwill for the six month period ended May 1, 2010, by
reporting segment, are as follows:
Color and | ||||||||||||||||
Custom Sheet and | Packaging | Specialty | ||||||||||||||
Rollstock | Technologies | Compounds | Total | |||||||||||||
Goodwill balance as of October 31, 2009 |
$ | 31,307 | $ | 94,636 | $ | 18,402 | $ | 144,345 | ||||||||
Discontinuance of business |
(275 | ) | | | (275 | ) | ||||||||||
Segment reorganization |
9,423 | (2,370 | ) | (7,053 | ) | | ||||||||||
Goodwill balance as of May 1, 2010 |
$ | 40,455 | $ | 92,266 | $ | 11,349 | $ | 144,070 | ||||||||
6) Restructuring and Exit Costs
In 2008, the Company announced a restructuring plan to address declines in end-market demand
and build a low cost-to-serve model. The plan included the consolidation of production facilities,
shutdown of underperforming and non-core operations and reductions in the number of manufacturing
and administrative jobs. During the first quarter of 2010, the Company sold a closed facility and
recorded a $712 gain on this sale.
5
Table of Contents
Restructuring and exit costs were recorded in the consolidated condensed statements of
operations for the three and six months ended May 1, 2010 and May 2, 2009 are as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
May 1, | May 2, | May 1, | May 2, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Restructuring and exit costs: |
||||||||||||||||
Custom Sheet and Rollstock |
$ | 771 | $ | 1,895 | $ | 853 | $ | 2,182 | ||||||||
Packaging Technologies |
10 | 780 | (719 | ) | 1,116 | |||||||||||
Color and Specialty Compounds |
787 | 638 | 2,104 | 822 | ||||||||||||
Corporate |
28 | 289 | 28 | 306 | ||||||||||||
Total restructuring and exit costs |
1,596 | 3,602 | 2,266 | 4,426 | ||||||||||||
Income tax benefit |
(598 | ) | (1,245 | ) | (848 | ) | (1,637 | ) | ||||||||
Impact on net earnings from continuing operations |
$ | 998 | $ | 2,357 | $ | 1,418 | $ | 2,789 | ||||||||
The following table summarizes the cumulative restructuring and exit costs incurred to-date
under the 2008 restructuring plan:
Cumulative | Six Months | |||||||||||
through | Ended | Cumulative | ||||||||||
2009 | May 1, 2010 | To-Date | ||||||||||
Employee Severance |
$ | 3,977 | $ | 1,371 | $ | 5,348 | ||||||
Facility consolidation and shut-down costs |
1,925 | 1,510 | 3,435 | |||||||||
Accelerated depreciation, net |
1,084 | (615 | ) | 469 | ||||||||
Total |
$ | 6,986 | $ | 2,266 | $ | 9,252 | ||||||
Employee severance includes costs associated with the reduction in jobs resulting from
facility consolidations and shut-downs as well as other job reductions. Facility consolidations
and shut-down costs primarily include costs associated with shutting down production facilities,
terminating leases and relocating production lines to continuing production facilities.
Accelerated depreciation, net represents the impact from reduced lives on property, plant and
equipment, net of gains or losses on the ultimate sales of the assets. The Company expects to
incur approximately $2,250 of additional restructuring expenses on continuing operations for
initiatives announced through May 1, 2010 which will primarily consist of employee severance and
facility consolidation and shut-down costs. The Companys announced facility consolidations and
shut-downs are expected to be substantially complete by the end of fiscal 2010.
The Companys total restructuring liability, representing severance and relocation costs, was
$1,620 at May 1, 2010 and $1,772 at October 31, 2009. Cash payments for restructuring activities
of continuing operations were $1,335 and $2,418 for the three and six months ended May 1, 2010.
7) Long-Term Debt
Long-term debt consisted of the following at May 1, 2010 and October 31, 2009:
May 1, | October 31, | |||||||
2010 | 2009 | |||||||
2006 Senior Notes |
$ | 37,992 | $ | 45,684 | ||||
2004 Senior Notes |
113,972 | 137,054 | ||||||
Bank credit facility |
11,900 | | ||||||
Euro Bank term loan |
| 20,292 | ||||||
Other |
12,690 | 13,404 | ||||||
Total debt |
176,554 | 216,434 | ||||||
Less current maturities |
478 | 36,079 | ||||||
Total long-term debt |
$ | 176,076 | $ | 180,355 | ||||
The Companys debt agreements required it to offer early principal payments to Senior Note and
Euro Bank term loan holders based on a ratable percentage of each fiscal years excess cash flow
and extraordinary receipts, such as proceeds from the sale of businesses, as defined in the
agreements. In the first quarter of 2010, the
6
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Company paid $17,208 associated with extraordinary
receipts on the sale of businesses that occurred in 2009. During the second quarter, the Company
paid $15,308 associated with 2009 excess cash flow. In addition, the Companys Euro Bank term loan
matured in February 2010 and the Company paid 12,543 Euros ($17,123 U.S.). The Company borrowed
from its revolving credit facility to fund the required excess cash flow and Euro Bank term loan
payments.
As of May 1, 2010, the Company had $104,459 of total capacity on its revolving credit
facility, which is net of $12,920 used for standby letters of credit. Under the Companys most
restrictive covenant, the Leverage Ratio, the
Company had $115,427 of availability on its revolving credit facility as of May 1, 2010.
Effective May 1, 2010, the Companys maximum Leverage Ratio allowed by its debt agreements
decreased to 3.50 and the minimum Fixed Charge Coverage Ratio increased to 1.75. The Companys
credit facility borrowings are classified as long-term because the Company has the ability and
intent to keep the balances outstanding over the next 12 months.
On
June 9, 2010, the Company entered into a new credit facility agreement and terminated the
previous credit facility agreement, which was set to mature in June 2011. The new credit facility
agreement increases the Companys borrowing capacity to $150,000 with an optional $50,000 accordion
feature, has a term of four years, bears interest at either Prime or LIBOR plus a borrowing margin,
maintains the Companys minimum Leverage Ratio of 3.5 to 1 and the Fixed Charge Coverage
Ratio of
2.25 to 1,
which declines to 1.4 in 2012 to accomodate our required principal payments,
as defined in the agreement and includes other customary debt covenants related to
capital expenditures, dividends, stock buy-backs and acquisitions. Consistent with the previous
credit facility agreement, 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, the Company paid off its higher interest rate 2006 Senior Notes by
borrowing from the facility. The Company expects to record
approximately $800 in non-cash
write-offs of unamortized debt issuance costs from the extinguishment of its previous credit
facility and the 2006 Senior Notes in the third quarter of 2010.
8) Income Taxes
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 Companys Canadian entity used $18,500 to
recapitalize our French operations. These transactions resulted in income tax benefits to the
Company of $1,631 and $4,401 in the second quarter of 2010 and first half of 2010, respectively.
The difference between the Companys statutory rate and effective rate in these periods was
primarily attributable to these transactions. The difference between the Companys statutory rate
and effective rate in the second quarter and first half of 2009 was largely attributable to the
negative impact of a valuation allowance on losses from its Donchery, France operations.
The $18,500 recapitalization made by the Companys Canadian operations in the Companys French
operations in the second quarter of 2010 was used to repay an intercompany loan due from the
Companys French subsidiary. This transaction resulted in an $18,500 permanent reduction in the
Companys cash held in Canada. As of May 1, 2010, the Company held $1,724 of cash in Canada which
is necessary to fund ongoing working capital investments. The Company does not provide for U.S.
income and foreign withholding taxes on accumulated earnings of its foreign subsidiaries of $53,650
which are not subject to United States income tax because it is the Companys intention to reinvest
these earnings indefinitely. If the Company changed its intentions and such earnings were remitted
to the United States, as of May 1, 2010, the Company would be required to recognize approximately
$8,182 to $10,170 of additional income tax expense.
9) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Companys
debt as follows:
May 1, 2010 | October 31, 2009 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Total debt (including bank credit facilities) |
$ | 176,554 | $ | 171,377 | $ | 216,434 | $ | 205,776 |
The estimated fair value of the Companys debt is based on estimated borrowing rates to
discount the cash flows to their present value as provided by a broker, or otherwise, quoted,
current market prices for the same or
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similar issues. The Companys other financial instruments,
including cash, accounts receivable, accounts payable, and accrued liabilities have net carrying
values that approximate their fair values due to the short-term nature of these instruments.
Disclosures for non-financial assets and liabilities that are measured at fair value, but are
recognized and disclosed as fair value on a non-recurring basis, were required prospectively
beginning November 1, 2009. During the three and six months ended May 1, 2010, there were no
significant measurements of non-financial assets or liabilities at fair value on a non-recurring
basis subsequent to their initial recognition.
10) Commitments and Contingencies
In September 2003, 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 Companys 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 facilitys 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 $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 which evaluated six
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 Companys 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 (the Occidental Parties) with
respect to alleged contamination of the Newark Bay Complex, including the Lower Passaic River. The
third-party complaint seeks contribution from the third-party defendants with respect to any award
to NJDEP of damages against the Occidental Parties in the matter.
As of May 1, 2010, the Company had approximately $914 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 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 Companys 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 impact on the Companys capital expenditures, financial
position, or competitive position because the Companys Kearny, New Jersey facility could not have
contributed contamination along most of the rivers length and did not store or use the
contaminants which 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
May 1, 2010 accrual balance and in the event of one or more adverse determinations related to this
matter, the impact on the Companys results of operations could be material to any specific period.
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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 $8,600 in alleged preference payments Delphi made
to Spartech Polycom shortly before Delphis bankruptcy filing in 2005. Delphi is pursuing similar
preference complaints against approximately 175 additional unrelated third parties. The complaint
was originally filed under seal in October 2007 in the United States Bankruptcy Court for the
Southern District of New York and pursuant to certain court orders the service process did
not commence until March 2010. The Company filed a motion to dismiss the complaint in May
2010. Although the ultimate liabilities resulting from this proceeding could be significant to the
Companys results of operations in the period recognized, management does not anticipate they will
have a material adverse effect on the Companys consolidated financial position or liquidity.
The Company is also subject to various other claims, lawsuits, and administrative proceedings
arising in the ordinary course of business with respect to commercial, product liability,
employment, and other matters, several of which claim substantial amounts of damages. While it is
not possible to estimate with certainty the ultimate legal and financial liability with respect to
these claims, lawsuits, and administrative proceedings, the Company believes that the outcome of
these other matters will not have a material adverse effect on the Companys financial position,
results of operations or cash flows.
As
of May 1, 2010, the Company held an unsecured $13,500 trade accounts receivable due
from one customer which represented 8% of second quarter 2010 sales. This customers product, for
which the Company is a significant supplier of sheet, represents a majority of its business and is
undergoing a design change. This change has resulted in a slow-down in this customers business
activity and a need for them to obtain additional financing to manage through the near term. The
Company has not established an allowance for potential loss on this receivable based on the most
recent evaluation. The Company believes it is likely that it will either collect the trade
accounts receivable or obtain collateral or a guarantee which protects the realizability of the
receivable. However, it is possible that the customer will be unable to obtain financing and that
the Company will be unable to collect a portion or all of the receivable. The Company expects this
contingency to be resolved in fiscal 2010.
11) Net Earnings (Loss) Per Share
Basic earnings (loss) per share excludes any dilution and is computed by dividing net earnings
(loss) attributable to common shareholders by the weighted average number of common and
participating shares outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
Outstanding 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 | Six Months Ended | |||||||||||||||
May 1, | May 2, | May 1, | May 2, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Antidilutive Shares |
||||||||||||||||
SSARs |
1,113 | 980 | 1,166 | 980 | ||||||||||||
Stock options |
842 | 1,216 | 927 | 1,216 | ||||||||||||
Unvested restricted stock |
117 | 372 | 117 | 372 | ||||||||||||
Performance shares |
84 | 114 | 84 | 114 | ||||||||||||
Total antidilutive shares excluded from
diluted earnings per share |
2,156 | 2,682 | 2,294 | 2,682 | ||||||||||||
As discussed in Note 2, Newly Adopted Accounting Standards, the Company began using the
two-class method to compute basic and diluted EPS for all periods presented.
The reconciliation of the net earnings (loss) from continuing operations, net earnings (loss)
attributable to common shareholders and the weighted average number of common and participating
shares used in the
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computations of basic and diluted earnings per share for the three and six months ended May 1,
2010 and May 2, 2009 is as follows (shares in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
May 1, | May 2, | May 1, | May 2, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic and diluted net earnings: |
||||||||||||||||
Net earnings (loss) from continuing operations |
$ | 4,540 | $ | 2,149 | $ | 9,277 | $ | (2,794 | ) | |||||||
Less: net earnings (loss) allocated to participating securities |
(65 | ) | (45 | ) | (137 | ) | 16 | |||||||||
Net earnings (loss) from continuing operations attributable
to common shareholders |
4,475 | 2,104 | 9,140 | (2,778 | ) | |||||||||||
(Loss) earnings of discontinued operations, net of tax |
(87 | ) | 1,615 | (80 | ) | 1,466 | ||||||||||
Net earnings (loss) attributable to common shareholders |
$ | 4,388 | $ | 3,719 | $ | 9,060 | $ | (1,312 | ) | |||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic weighted average common and participating
shares outstanding |
30,556 | 30,379 | 30,515 | 30,355 | ||||||||||||
Add: Dilutive shares from equity instruments (a) |
227 | | 215 | | ||||||||||||
Diluted weighted average shares outstanding |
30,783 | 30,379 | 30,730 | 30,355 | ||||||||||||
Basic earnings (loss) per share attributable
to common stockholders: |
||||||||||||||||
Earnings (loss) from continuing operations |
$ | 0.15 | $ | 0.07 | $ | 0.30 | $ | (0.09 | ) | |||||||
Earnings of discontinued operations, net of tax |
(0.01 | ) | 0.05 | 0.00 | 0.05 | |||||||||||
Net earnings (loss) per share |
$ | 0.14 | $ | 0.12 | $ | 0.30 | $ | (0.04 | ) | |||||||
Diluted earnings (loss) per share attributable
to common shareholders: |
||||||||||||||||
Earnings (loss) from continuing operations |
$ | 0.15 | $ | 0.07 | $ | 0.30 | $ | (0.09 | ) | |||||||
Earnings (loss) of discontinued operations, net of tax |
$ | (0.01 | ) | 0.05 | (0.01 | ) | 0.05 | |||||||||
Net earnings (loss) per share |
$ | 0.14 | $ | 0.12 | $ | 0.29 | $ | (0.04 | ) | |||||||
(a) | For the three and six month periods ended May 2, 2009, all outstanding equity compensation instruments were excluded from the calculation of diluted earnings per share because they were antidilutive. |
12) Segment Information
Spartech is organized into three reportable segments based on its operating structure and the
products manufactured. The three reportable segments are Custom Sheet and Rollstock, Packaging
Technologies and Color and Specialty Compounds. The Company uses operating earnings (loss) from
continuing operations, excluding the
impact of foreign exchange, to evaluate business segment performance. Accordingly, discontinued
operations have been excluded from the segment results below, which is consistent with managements
evaluation metrics. Corporate operating losses include corporate office expenses, shared services
costs, information technology costs, professional fees, and the impact of foreign currency exchange
that are not allocated to the reportable segments.
During the second quarter of 2010, the Company changed its organizational reporting and
management responsibilities of two businesses previously included in our Color and Specialty
Compounds segment to our Custom Sheet and Rollstock segment. Also in the second quarter, 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 Companys three reportable segments in the second quarter and
historical segment results have been reclassified to conform to these changes.
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The following presents the Companys net sales and operating earnings (loss) by reportable
segment and the reconciliation to consolidated operating earnings for the three and six months
ended May 1, 2010 and May 2, 2009:
Three Months Ended | Six Months Ended | |||||||||||||||
May 1, | May 2, | May 1, | May 2, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales (a)(b): |
||||||||||||||||
Custom Sheet and Rollstock |
$ | 150,577 | $ | 115,712 | $ | 275,745 | $ | 239,183 | ||||||||
Packaging Technologies |
54,869 | 51,980 | 102,972 | 105,997 | ||||||||||||
Color and Specialty Compounds |
63,078 | 48,720 | 114,970 | 108,533 | ||||||||||||
Corporate |
| | | | ||||||||||||
Net sales |
$ | 268,524 | $ | 216,412 | $ | 493,687 | $ | 453,713 | ||||||||
Operating earnings (loss) from continuing operations: |
||||||||||||||||
Custom Sheet and Rollstock |
$ | 9,815 | $ | 5,043 | $ | 18,106 | $ | 4,829 | ||||||||
Packaging Technologies |
5,467 | 9,578 | 11,472 | 15,988 | ||||||||||||
Color and Specialty Compounds |
2,191 | 2,347 | 3,089 | 2,602 | ||||||||||||
Corporate expenses |
(9,602 | ) | (8,414 | ) | (18,016 | ) | (17,853 | ) | ||||||||
Operating earnings from continuing operations |
$ | 7,871 | $ | 8,554 | $ | 14,651 | $ | 5,566 | ||||||||
(a) | Excludes intersegment sales of $13,388, $12,924, $23,533 and $21,487, respectively. | |
(b) | Excludes discontinued operations. |
13) Comprehensive Income (Loss)
Comprehensive income (loss) is the Companys change in equity during the period related to
transactions, events and circumstances from non-owner sources. The reconciliation of net earnings
(loss) to comprehensive income (loss) for the three and six months ended May 1, 2010 and May 2,
2009 is as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
May 1, | May 2, | May 1, | May 2, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net earnings (loss) |
$ | 4,453 | $ | 3,764 | $ | 9,197 | $ | (1,328 | ) | |||||||
Foreign currency translation adjustments |
2,437 | 820 | 3,672 | 257 | ||||||||||||
Total comprehensive income (loss) |
$ | 6,890 | $ | 4,584 | $ | 12,869 | $ | (1,071 | ) | |||||||
The Company incurred foreign exchange losses before taxes of $1,943 and $2,529 in the second
quarter and first six months of 2010, and $228 and $382 in the second quarter and first six months
of 2009. These losses were reported in selling, general and administrative expenses in the
results of operations and mostly reflected the Companys U.S. dollar denominated cash held in its
Canadian operations during these periods and a deprecation of the U.S. dollar against the Canadian
dollar. In its second quarter of 2010, the Companys foreign currency exposure to the Canadian
dollar in its results of operations was reduced by $18,500 due to the recapitalization by its
Canadian operations into its operations in France. This amount was used to repay an intercompany
loan due from the Companys French subsidiary which was created upon funding of the Companys Euro
bank term loan from its revolver in February 2010. As of May 1, 2010, the Company had monetary
assets denominated in foreign currency of approximately $5,000 of net Canadian liabilities, $850 of
net EURO assets and $500 of net Mexican Peso assets.
14) Subsequent Event
On
June 9, 2010, the Company entered into a new credit facility agreement and terminated the
Companys old credit facility agreement, which was set to mature in June 2011. Concurrent with the
closing of the new credit facility, the Company paid off its 2006 Senior Notes by borrowing from
the facility. Refer to Note 7, Long-Term Debt for a description of significant terms of the
Companys new credit facility.
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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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 which previously serviced single customers. These businesses
are classified as discontinued operations and all amounts presented within Item 2 are presented on
a continuing basis, unless otherwise noted. The wheels, profiles and marine businesses were
previously reported in the Engineered Products group and due to these dispositions, the Company no
longer has this reporting group.
The Companys Color and Specialty Compounds segment sells compound to a previously divested
business and prior to 2009 these sales were eliminated as intercompany sales. In 2010, these sales
are reported as external sales to this business, resulting in a 2% increase in consolidated sales
and a 5% increase in segment sales in the second quarter and first half of 2010 versus the same
periods of the prior year.
Our fiscal year ends on the Saturday closest to October 31 and fiscal years generally contain
52 weeks. In addition, periods presented are fiscal periods unless noted otherwise.
Highlights
In our second quarter of 2010, we saw demand recovery in the automotive sector of our
transportation market and in the construction and recreation and leisure markets for our sheet
business. This demand recovery coupled with strong volume increases of sheet used in refrigerators
and sheet used for material handling applications led to a 12% and 7% increase in underlying sales
volume for our second quarter and first half of 2010 over the same periods of the prior year.
Despite the sales volume increase, our operating earnings decreased $0.7 million from the second
quarter of last year to $7.9 million in the second quarter of 2010. This decrease was caused by
higher resin prices that were not fully passed along to customers which resulted in a reduction in
margins in this years second quarter, foreign currency expense of $1.9 million in this years
second quarter representing a $1.7 million increase versus our prior year second quarter, and the
Companys prior year change in vacation policy which resulted in a $3.7 million one-time earnings
benefit in the second quarter of 2009. These negative impacts on our second quarter operating
earnings comparison were partially offset by the volume increase and benefits from our improvement
initiatives.
In our first half of 2010, we paid down $38.0 million of debt of which $23.1 million was from
a reduction in cash and we ended our second quarter with $176.6 million of debt. Subsequent to our
second quarter end, on June 9, 2010, we entered into a new credit facility agreement and terminated
the Companys old credit facility agreement. Our new four-year credit facility provides us the
ability to pay down higher rate debt and provides additional flexibility for investments in
improvement initiatives of the Company consistent with our strategy of leading technology and
innovation in our markets and building a low cost-to-serve model.
Outlook
In the first half of 2010 we have started to experience demand recovery in many of our major
end markets and have managed through a highly volatile raw material environment. Overall, we
anticipate continued positive market recovery through the remainder of 2010. We expect pricing for
many of our major resins to continue to be volatile in the near term. For the remainder of the
year, we will continue our investments in new products through our new Technology and Innovation
Center and in operations to support our low cost-to serve model. We will continue our focus on
accelerating new business opportunities, executing continuous improve initiatives and maximizing
cash flows to generate profitable growth and enhanced shareholder returns.
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Consolidated Results
Net sales were $268.5 million and $493.7 million in the three and six month periods ended May
1, 2010, representing a 24% increase and a 9% increase, respectively, over the same periods of the
prior year. The increases were caused by:
Three Months | Six Months | |||||||
Ended | Ended | |||||||
Underlying volume |
12 | % | 7 | % | ||||
Sales volume to a divested business |
2 | % | 2 | % | ||||
Price/Mix |
10 | % | 0 | % | ||||
Total |
24 | % | 9 | % | ||||
For both period comparisons the increase in underlying volume occurred across many of our end
markets. Significant drivers of the volume increase included sales of compounds and sheet to the
automotive sector of our transportation market, sales of sheet used in refrigerators into the
appliance market and sales of sheet used for material handling applications. In our second quarter
comparison, we also saw increases in sales of sheet sold to the construction and recreation and
leisure markets from demand recovery. The increases in the second quarter and first half
comparisons were offset somewhat by a decline in compounds sold into the commercial construction
sector of our building and construction end market.
The price/mix increase in the second quarter comparison was mostly caused by increases in
selling prices to pass through a portion of sharp increases in resin costs that occurred in the
later portion of the first quarter and throughout the second quarter of 2010.
The following table presents net sales, cost of sales, and the resulting gross margin in
dollars and on a per pound sold basis for the three and six months ended May 1, 2010 compared to
the same periods in the prior year. 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 | Six Months Ended | |||||||||||||||
May 1, | May 2, | May 1, | May 2, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Dollars and Pounds (in millions) |
||||||||||||||||
Net sales |
$ | 268.5 | $ | 216.4 | $ | 493.7 | $ | 453.7 | ||||||||
Cost of sales |
237.6 | 185.3 | 436.0 | 401.5 | ||||||||||||
Gross margin |
$ | 30.9 | $ | 31.1 | $ | 57.7 | $ | 52.2 | ||||||||
Pounds sold |
242.1 | 211.8 | 452.7 | 416.0 | ||||||||||||
Dollars per Pound Sold |
||||||||||||||||
Net sales |
$ | 1.109 | $ | 1.022 | $ | 1.091 | $ | 1.091 | ||||||||
Cost of sales |
0.982 | 0.875 | 0.963 | 0.965 | ||||||||||||
Gross margin |
$ | 0.127 | $ | 0.147 | $ | 0.128 | $ | 0.126 | ||||||||
Gross margin per pound sold declined from 14.7 cents in the second quarter of 2009 to 12.7
cents in the second quarter of 2010 reflecting leverage on the sales volume increase and cost
reduction benefits that were more than offset by higher resin prices and the impact of the prior
year change in vacation policy. During the quarter, we incurred increases in resin costs that
were not fully passed along as higher selling prices in the quarter. Our second
quarter and first half comparisons were impacted by the Companys one-time $2.7 million
reduction in conversion costs due to the Companys change in vacation policy in the second quarter
of 2009.
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Selling, general and administrative expenses were $20.5 million and $38.9 million in the
second quarter and first six months of 2010 compared to
$17.8 million and $39.9 million in the same
periods of the prior year. These amounts include foreign currency losses of $1.9 million and $2.5
million in the second quarter and first half of 2010, and $0.2 million and $0.4 million in the
second quarter and first half of 2009. The losses in 2010 were mostly caused by a weakening U.S.
dollar to the Canadian dollar. In the second quarter of 2010, most of the Companys exposure to
the Canadian dollar was mitigated. Refer to Note 13, Comprehensive Income (Loss) for further
discussion of the Companys foreign currency positions as of the end of the second quarter. In
addition, the Companys comparisons were impacted by the prior year change in vacation policy which
resulted in a $1.0 million one-time reduction in selling, general and administrative expenses in
the second quarter of 2009. The first half comparison also reflected $3.3 million of lower bad
debts expense in 2010 due to improving credit markets. Our bad debts expense was $0.3 million in
the second quarter of 2010 and $0.1 million in the first half of 2010.
Amortization of intangibles was $1.0 million and $1.9 million in the second quarter and first
six months of 2010 compared to $1.2 and $2.3 million in the same periods of the prior year. The
decreases in both period comparisons reflect intangibles which became fully amortized in 2009.
Restructuring and exit costs were $1.6 million and $2.3 million in the second quarter and
first six months of 2010 compared to $3.6 million and $4.4 million in the same periods of the prior
year. For both period comparisons, restructuring and exit costs are mostly comprised of employee
severance, facility consolidation and shut-down costs and accelerated depreciation. We expect to
incur approximately $2.3 million of additional restructuring expenses for initiatives announced
through May 1, 2010, which will be mostly comprised of cash employee severance, facility
consolidation and shut-down costs. The Companys announced facility consolidations and shut-downs
are expected to be substantially complete by the end fiscal 2010.
Interest expense, net of interest income, was $3.3 million and $6.8 million in the second
quarter and first six months of 2010 compared to $3.8 million and $8.1 million in the same periods
of the prior year. These decreases were primarily driven by the $87.7 million pay down in debt
during the last 12 months.
In the first quarter of 2010, we initiated a tax restructuring of our Donchery, France entity
and in the second quarter of 2010, our Canadian entity used $18.5 million to recapitalize our
French operations in Donchery, France. These transactions resulted in one-time income tax benefits
of $1.6 million and $4.4 million in the second quarter and first half of 2010, respectively.
Excluding these tax restructuring benefits, our effective tax rate would have reflected a more
typical 37-39% for the Company.
We reported net earnings of $4.5 million and $9.2 million for the second quarter and first six
months of 2010 compared to net earnings of $3.8 million and a net loss of $1.3 million in the same
periods of the prior year. These fluctuations reflect the impact of the items previously
discussed.
Segment Results
During the second quarter of 2010, we moved our organizational reporting and management
responsibilities of two businesses previously included in our Color and Specialty Compounds segment
to our Custom Sheet and Rollstock segment. Also in the second quarter, we reorganized our internal
reporting and management responsibilities of certain product lines between our Custom Sheet and
Rollstock and Packaging Technologies segments to better align management of these product lines
with end markets. These management and reporting changes resulted in a reorganization of the
Companys three reportable segments in the second quarter and historical segment results have been
reclassified to conform to these changes.
Custom Sheet and Rollstock Segment
Net sales were $150.6 million and $275.7 million for the three and six months ended May 1,
2010, respectively, compared to $115.7 million and $239.2 million for the three and six months
ended May 2, 2009, respectively, representing an increase of 30% and 15% over the same periods of
the prior year. These increases were caused by the following factors:
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Three Months | Six Months | |||||||
Ended | Ended | |||||||
Underlying volume |
26 | % | 19 | % | ||||
Price/Mix |
4 | % | -4 | % | ||||
Total |
30 | % | 15 | % | ||||
The increase in underlying volume for both period comparisons includes growth in sales of
refrigeration sheet into the appliance market and sheet used for material handling applications.
In our second quarter comparison, we also saw increases in volume sold to the construction and
recreation and leisure markets from increases in demand. Price/mix includes increases in selling
prices in the second quarter of 2010 from the pass through of a portion of increases in resin
costs. A larger mix of lower priced product mitigated the selling price increases in the second
quarter comparison and more than offset the selling price increases in the first half comparison.
The segments operating earnings were $9.8 million and $18.1 million in the second quarter and
first six months of 2010 compared to $5.0 million and $4.8 million in the same periods of the prior
year. The increase in operating earnings was primarily caused by the increase in sales volume,
selling price increases and financial improvement initiatives which more than offset the impact of
the higher resin prices in 2010 and the prior year change in vacation policy.
Packaging Technologies
Net sales were $54.9 million and $103.0 million for the three and six months ended May 1,
2010, respectively, compared to $52.0 million and $106.0 million for the three and six months ended
May 2, 2009, respectively, representing an increase of 6% and a decrease of 3% over the same
periods of the prior year. These fluctuations were caused by the following factors:
Three Months | Six Months | |||||||
Ended | Ended | |||||||
Underlying volume |
-5 | % | -3 | % | ||||
Price/Mix |
11 | % | 0 | % | ||||
Total |
6 | % | -3 | % | ||||
For both comparisons underlying volume declined due to the loss of a customer that vertically
integrated and a customers loss of a product line. Price/mix includes increases in selling prices
in the second quarter of 2010 from the pass through of a portion of increases in resin costs.
The Packaging Technologies segments operating earnings were $5.5 million and $11.5 million in
the second quarter and first six months of 2010 compared to $9.6 million and $16.0 million in the
same periods of the prior year. The decrease in operating earnings was mainly due to the increase
in resin costs in the first half of 2010, the impact of the prior year change in vacation policy
and the decrease in sales volume.
Color and Specialty Compounds Segment
Net sales were $63.1 million and $115.0 million for the three and six months ended May 1,
2010, respectively, compared to $48.7 million and $108.5 million for the three and six months ended
May 2, 2009, respectively, representing an increase of 29% and 6% over the same periods of the
prior year. These increases were caused by the following factors:
Three Months | Six Months | |||||||
Ended | Ended | |||||||
Underlying volume |
5 | % | -3 | % | ||||
Sales volume to a divested business |
5 | % | 5 | % | ||||
Price/Mix |
19 | % | 4 | % | ||||
Total |
29 | % | 6 | % | ||||
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For both comparisons the increase in underlying volume reflects demand recovery in the
automotive sector of the transportation market, which were partially offset by continued weak
demand in the building and construction market. Price/mix includes increases in selling prices in
the second quarter of 2010 from the pass through of a portion of increases in resin costs.
The segments operating earnings were $2.2 million and $3.1 million for the second quarter and
first six months of 2010 compared to $2.4 million and $2.6 million in the same periods of the prior
year. The decrease in the second quarter operating earnings comparison was primarily caused by
higher restructuring costs associated with production facility consolidations and the prior year
change in vacation policy.
Corporate
Corporate expenses are reported as selling, general and administrative expenses in the
consolidated condensed statement of operations and include corporate office expenses, shared
services costs, information technology costs, professional fees and the impact of foreign currency
exchange. Corporate operating expenses were $9.6 million and $18.0 million in the second quarter
and first half of 2010, respectively, compared to $8.4 million and $17.9 million in the same
periods of the prior year. The increase of expense in the second quarter and first half of 2010
over the prior year same periods was mostly caused by an increase in foreign currency expense.
Both period comparisons were impacted by foreign currency expense of $1.9 million and $2.5 million
in the second quarter and first half of 2010 which represented a $1.7 million and $2.1 million
increase, respectively, over the same periods of the prior year.
Liquidity and Capital Resources
Cash Flow
Our primary sources of liquidity have been cash flows from operating activities and borrowings
from third parties. Historically, our principal uses of cash have been to support our operating
activities, invest in capital improvements, reduce outstanding indebtedness, finance strategic
business acquisitions and pay dividends on our common stock. The following summarizes the major
categories of our changes in cash and cash equivalents for the six months ended May 1, 2010 and May
2, 2009:
Six Months Ended | ||||||||
May 1, | May 2, | |||||||
2010 | 2009 | |||||||
Cash Flows (in millions) |
||||||||
Net cash provided by operating activities |
$ | 19,570 | $ | 19,280 | ||||
Net cash used by investing activities |
(4,703 | ) | (5,035 | ) | ||||
Net cash used by financing activities |
(37,952 | ) | (14,392 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
18 | (21 | ) | |||||
Decrease in cash and cash equivalents |
$ | (23,067 | ) | $ | (168 | ) | ||
Net cash provided by operating activities increased by $0.3 million in the first six months of
2010 compared to the same period in the prior year from the increase in net earnings.
Net cash used for investing activities in the first six months of 2010 was comprised of $7.6
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 on capital expenditures in 2010.
Net cash used for financing activities in the first six months of 2010 of $38.0 million
reflects payments on the Senior Notes and funding of the Euro Bank term loan which matured in
February 2010. Of the $38.0 million in net payments, $23.1 million was funded by a decrease in
cash and equivalents which was mostly comprised of $18.5
million of cash previously held in our Canadian operations. In our second quarter of 2010,
our Canadian operations invested this cash in our French operations which was then used to repay an
intercompany loan due to the U.S. which resulted from the February 2010 funding of the Euro Bank
term loan from our revolver.
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Financing Arrangements
As of May 1, 2010, we had $176.6 million of outstanding debt with a weighted average interest
rate of 6.0%, of which 89% represented fixed rate instruments with a weighted average interest rate
of 6.6%. The Companys debt agreements in effect at October 31, 2009 required it to offer early
principal payments to Senior Note and Euro Bank term loan holders based on a ratable percentage of
each fiscal years excess cash flow and extraordinary receipts, such as proceeds from the sale of
businesses, as defined in the agreements. In the first quarter of 2010, the Company paid $17.2
million associated with extraordinary receipts on the sale of businesses that occurred in 2009.
During the second quarter, the Company paid $15.3 million associated with the 2009 excess cash
flow. In addition, the Companys Euro Bank term loan matured in February 2010 and the Company paid
12.5 million Euros ($17.1 million U.S.). The Company borrowed from its revolving credit facility
to fund the required excess cash flow and Euro Bank term loan payments. We are not required to
make any other principal payments on our bank credit facility or senior notes in the next 12
months.
Our bank credit facility and Senior Notes are secured with collateral, which includes our
accounts receivable, inventory, machinery and equipment, and intangible assets. As of May 1, 2010,
availability on our revolving credit facility was $115.4 million under our most restrictive
covenant, the Leverage Ratio and our total revolver capacity was $104.5 million which was net of
$12.9 million used for standby letters of credit.
On
June 9, 2010, the Company entered into a new credit facility agreement and terminated the
previous credit facility agreement, which was set to mature in June 2011. The new credit facility
agreement increases the Companys borrowing capacity to $150,000 with an optional $50,000 accordion
feature, has a term of four years, bears interest at either Prime or LIBOR plus a borrowing margin,
maintains the Companys minimum Leverage Ratio of 3.5 to 1 and the Fixed Charge Coverage Ratio of
2.25 to 1,
which declines to 1.4 in 2012 to accomodate our required principal payments, as defined in the agreement and includes other customary debt covenants related to
capital expenditures, dividends, stock buy-backs and acquisitions. Consistent with the previous
credit facility agreement, 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, the Company paid off its higher interest rate 2006 Senior Notes by
borrowing from the facility. The Company expects to record
approximately $800 in non-cash
write-offs of unamortized debt issuance costs from the extinguishment of its previous credit
facility and the 2006 Senior Notes in the third quarter of 2010.
The Company was in compliance with all debt covenants as of May 1, 2010 and expects to remain
in compliance with all debt covenants for the next twelve months. Failure to comply with debt
covenants or other requirements of the Companys financing arrangements is an event of default and
could, among other things, accelerate the payment of indebtedness, which could have a material
adverse impact on our business, financial condition and results of operations.
We anticipate that cash flows from operations, together with the financing and borrowings
under our bank credit facilities, will provide the resources necessary for reinvestment in our
existing business and managing our capital structure on a short and long-term basis.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material changes in our exposure to market risk during the six months ended
May 1, 2010. For a discussion of our exposure to market risk, refer to Part II Item 7A,
Quantitative and Qualitative Disclosures About Market Risk in our October 31, 2009 Annual Report
on Form 10-K, filed with the Securities and Exchange Commission (SEC) on January 14, 2010.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Spartech maintains a system of disclosure controls and procedures which are designed to
provide reasonable assurance that information required to be disclosed by the Company in the
reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms and is
accumulated and communicated to management, including the Companys certifying officers, as
appropriate to allow timely decisions regarding required disclosure. Based on an evaluation
performed, the Companys certifying officers have concluded that the disclosure controls and
procedures were effective as of May 1, 2010, to provide reasonable assurance of the achievement of
these objectives.
Notwithstanding the foregoing, there can be no assurance that the Companys disclosure
controls and procedures will detect or uncover all failures of persons within the Company and its
consolidated subsidiaries to report material information otherwise required to be set forth in the
Companys reports.
Changes in Internal Control Over Financial Reporting
The Company is in process of transitioning much of its general ledger processing, cash
applications and credit management into a shared services model from a previous decentralized
organizational structure. This shared services transition has resulted in changes and enhancements
that have materially affected the Companys internal control over financial reporting. The
internal controls over financial reporting impacted by the shared services transition were
appropriately tested for design effectiveness. While some processes and controls will continue to
evolve, existing controls and the controls affected by the shared services transition were
evaluated as appropriate and effective during the current period. With the exception of the
aforementioned shared services transition and associated changes to internal control over financial
reporting, there were no other changes to internal control over financial reporting during the
quarter ended May 1, 2010, that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In March 2010, DPH Holdings Corp., a successor to Delphi Corporation and certain of its
affiliates (Delphi), served Spartech Polycom, a subsidiary of the Company, with a complaint
seeking to avoid and recover approximately $8.6 million in alleged preference payments Delphi made
to Spartech Polycom shortly before Delphis bankruptcy filing in 2005. Delphi is pursuing similar
preference complaints against approximately 175 additional unrelated third parties. The complaint,
dated September 26, 2007, was originally filed under seal in the United States Bankruptcy Court for
the Southern District of New York (In re: DPH Holdings Corp., et al., Delphi Corporation, et al.
v. Spartech Polycom Bankruptcy Case No. 05-44481/Adversary Proceeding No. 07-02639) and pursuant
to certain court orders the service process did not commence until March 2010. The Company filed a
motion to dismiss the complaint in May 2010. Although the ultimate liabilities resulting from this
proceeding could be significant to the Companys results of operations in the period recognized,
management does not anticipate they will have a material adverse effect on the Companys
consolidated financial position or liquidity.
Item 1A. RISK FACTORS
As of May 1, 2010, we held an unsecured $13.5 million trade accounts receivable due from one
customer which represented 8% of second quarter 2010 sales. This customers product, for which we
are a significant supplier of sheet, represents a majority of its business and is undergoing a
design change. This change has resulted in a slow-down in this customers business activity and a
need for them to obtain additional financing to manage through the near term. We have not
established an allowance for potential loss on this receivable based on our most recent evaluation.
We believe it is likely we will either collect our trade accounts receivable or obtain collateral
or a guarantee which protects the realizability of our receivable. However, it is possible that
our customer will be unable to obtain financing and that we could be unable to collect a portion or
all of our receivable. We expect this contingency to be resolved in fiscal 2010.
There have been no other material changes to our risk factors during the six months ended May
1, 2010. In addition, refer to Part I Item 1A Risk Factors of our October 31, 2009 Annual
Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on January 14, 2010.
Item 5. OTHER INFORMATION
The Company held its annual meeting of shareholders on March 11, 2010. The shareholders
considered two proposals, each of which is described in more detail in the Companys definitive
proxy statement filed January 19, 2010. The results of the votes were as follows:
Proposal 1. To elect six directors of the Company for one-year terms and until their successors
have been elected and qualified.
BROKER | ||||||||||||||||
NAME | FOR | AGAINST | ABSTAIN | NON-VOTES | ||||||||||||
Edward J. Dineen |
25,610,734 | 1,012,788 | 17,376 | 1,322,322 | ||||||||||||
Victoria M. Holt |
25,625,540 | 1,007,984 | 7,374 | 1,322,322 | ||||||||||||
Walter J. Klein |
26,388,580 | 244,665 | 7,653 | 1,322,322 | ||||||||||||
Pamela F. Lenehan |
26,328,995 | 305,721 | 6,182 | 1,322,322 | ||||||||||||
Myles S. Odaniell |
26,226,488 | 408,264 | 6,146 | 1,322,322 | ||||||||||||
Craig A. Wolfanger |
26,328,287 | 306,224 | 6,387 | 1,322,322 |
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All director nominees were duly elected, having received a majority of the votes cast at the
meeting, which means that the number of votes cast for each director exceeded the number of votes
cast against that director, and excluding abstentions and broker non-votes.
Proposal 2. Ratification of the selection of Ernst & Young, LLP as the Companys independent
registered public accounting firm for fiscal year 2010.
FOR | AGAINST | ABSTAIN | ||
27,110,268
|
845,151 | 7,801 |
Proposal 2 was ratified, having received the affirmative vote of a majority of the stock
having voting power present in person or by proxy and entitled to vote at the meeting
Item 6. EXHIBITS
Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K)
10.1
|
Amended and Restated Credit Agreement Dated as of June 9, 2010 | |
10.2
|
Second Amendment to Amended and Restated Note Purchase Agreement Dated as of June 9, 2010 | |
10.3
|
Amended and Restated Intercreditor and Collateral Agency Agreement Dated as of June 9, 2010 by and Among PNC Bank, National Association, as Collateral and Administrative Agent, the Lenders and Noteholders | |
10.4
|
Amended and Restated Security Agreement Dated as of June 9, 2010 by and Among PNC Bank, National Association, as Collateral Agent for the Secured Parties | |
31.1
|
Section 302 Certification of CEO | |
31.2
|
Section 302 Certification of CFO | |
32.1
|
Section 1350 Certification of CEO | |
32.2
|
Section 1350 Certification of CFO |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SPARTECH CORPORATION (Registrant) |
||||
Date: June 9, 2010 | By: | /s/ Myles S. Odaniell | ||
Myles S. Odaniell | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
/s/ Randy C. Martin | ||||
Randy C. Martin | ||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
||||
/s/ Michael G. Marcely | ||||
Michael G. Marcely | ||||
Senior Vice President Planning and Controller (Principal Accounting Officer) |
20