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EX-32.2 - EX-32.2 - SPARTECH CORP | c60156exv32w2.htm |
EX-31.2 - EX-31.2 - SPARTECH CORP | c60156exv31w2.htm |
EX-31.1 - EX-31.1 - SPARTECH CORP | c60156exv31w1.htm |
EX-32.1 - EX-32.1 - SPARTECH CORP | c60156exv32w1.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 July 31, 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)
SPARTECH CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
43-0761773 (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 (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 issuers classes of common stock, as of the latest
practicable date: 30,858,678 shares of Common Stock, $.75 par value per share, outstanding as of
September 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.
SPARTECH CORPORATION
FORM 10-Q FOR THE QUARTER AND NINE MONTHS ENDED JULY 31, 2010
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTER AND NINE MONTHS ENDED JULY 31, 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)
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited) | ||||||||
July 31, | October 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,766 | $ | 26,925 | ||||
Trade receivables, net of allowances of $9,961 and $2,470, respectively |
143,712 | 130,355 | ||||||
Inventories, net of inventory reserves of $5,728 and $5,430, respectively |
83,927 | 62,941 | ||||||
Prepaid expenses and other current assets |
18,381 | 24,916 | ||||||
Assets held for sale |
3,951 | 2,907 | ||||||
Total current assets |
251,737 | 248,044 | ||||||
Property, plant, and equipment, net of accumulated depreciation of
$322,287 and $304,424, respectively |
211,825 | 229,003 | ||||||
Goodwill |
144,070 | 144,345 | ||||||
Other intangible assets, net of accumulated amortization of
$20,524 and $17,720, respectively |
25,402 | 28,404 | ||||||
Other long-term assets |
4,100 | 3,892 | ||||||
Total assets |
$ | 637,134 | $ | 653,688 | ||||
Liabilities and shareholders equity |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | 477 | $ | 36,079 | ||||
Accounts payable |
137,434 | 103,484 | ||||||
Accrued liabilities |
23,364 | 31,122 | ||||||
Total current liabilities |
161,275 | 170,685 | ||||||
Long-term debt, less current maturities |
165,054 | 180,355 | ||||||
Other long-term liabilities: |
||||||||
Deferred taxes |
57,125 | 58,736 | ||||||
Other long-term liabilities |
5,626 | 7,033 | ||||||
Total liabilities |
389,080 | 416,809 | ||||||
Shareholders equity |
||||||||
Preferred stock (authorized: 4,000,000 shares, par value $1.00)
Issued: None |
| | ||||||
Common stock (authorized: 55,000,000 shares, par value $0.75) Issued: 33,131,846 shares; Outstanding: 30,855,240 and 30,719,277 shares, respectively |
24,849 | 24,849 | ||||||
Contributed capital |
204,778 | 204,183 | ||||||
Retained earnings |
65,738 | 60,411 | ||||||
Treasury stock, at cost, 2,276,606 and 2,412,569 shares, respectively |
(52,730 | ) | (54,860 | ) | ||||
Accumulated other comprehensive income |
5,419 | 2,296 | ||||||
Total shareholders equity |
248,054 | 236,879 | ||||||
Total liabilities and shareholders equity |
$ | 637,134 | $ | 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)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 269,635 | $ | 230,506 | $ | 763,322 | $ | 684,219 | ||||||||
Costs and expenses |
||||||||||||||||
Cost of sales |
241,706 | 198,313 | 677,680 | 599,847 | ||||||||||||
Selling, general and administrative expenses |
26,725 | 18,923 | 65,593 | 58,781 | ||||||||||||
Amortization of intangibles |
961 | 1,097 | 2,889 | 3,427 | ||||||||||||
Restructuring and exit costs |
2,902 | 872 | 5,168 | 5,297 | ||||||||||||
Total costs and expenses |
272,294 | 219,205 | 751,330 | 667,352 | ||||||||||||
Operating (loss) earnings |
(2,659 | ) | 11,301 | 11,992 | 16,867 | |||||||||||
Interest, net of interest income |
2,799 | 3,597 | 9,566 | 11,728 | ||||||||||||
Debt extinguishment costs |
729 | | 729 | | ||||||||||||
(Loss) earnings from continuing operations before income taxes |
(6,187 | ) | 7,704 | 1,697 | 5,139 | |||||||||||
Income tax (benefit) expense |
(2,361 | ) | 3,794 | (3,754 | ) | 4,023 | ||||||||||
Net (loss) earnings from continuing operations |
(3,826 | ) | 3,910 | 5,451 | 1,116 | |||||||||||
Loss from discontinued operations, net of tax |
(43 | ) | (2,418 | ) | (123 | ) | (951 | ) | ||||||||
Net (loss) earnings |
$ | (3,869 | ) | $ | 1,492 | $ | 5,328 | $ | 165 | |||||||
Basic earnings (loss) per share: |
||||||||||||||||
(Loss) earnings from continuing operations |
$ | (0.12 | ) | $ | 0.13 | $ | 0.18 | $ | 0.04 | |||||||
Loss from discontinued operations, net of tax |
| (0.08 | ) | (0.01 | ) | (0.03 | ) | |||||||||
Net (loss) earnings per share |
$ | (0.12 | ) | $ | 0.05 | $ | 0.17 | $ | 0.01 | |||||||
Diluted earnings (loss) per share: |
||||||||||||||||
(Loss) earnings from continuing operations |
$ | (0.12 | ) | $ | 0.13 | $ | 0.18 | $ | 0.04 | |||||||
Loss from discontinued operations, net of tax |
| (0.08 | ) | (0.01 | ) | (0.03 | ) | |||||||||
Net (loss) earnings per share |
$ | (0.12 | ) | $ | 0.05 | $ | 0.17 | $ | 0.01 | |||||||
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)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
Nine Months Ended | ||||||||
July 31, | August 1, | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net earnings |
$ | 5,328 | $ | 165 | ||||
Adjustments to reconcile net earnings to net cash
provided by operating activities: |
||||||||
Restructuring and exit costs |
1,979 | 2,677 | ||||||
Depreciation and amortization |
27,934 | 33,025 | ||||||
Provision for bad debt expense |
7,893 | 4,064 | ||||||
Deferred taxes |
(1,594 | ) | 962 | |||||
Stock-based compensation expense |
2,905 | 2,350 | ||||||
Gain on disposition of assets |
(905 | ) | (102 | ) | ||||
Other, net |
(270 | ) | 605 | |||||
Change in current assets and liabilities |
(8,131 | ) | 2,387 | |||||
Net cash provided by operating activities |
35,139 | 46,133 | ||||||
Cash flows from investing activities |
||||||||
Capital expenditures |
(13,013 | ) | (6,722 | ) | ||||
Proceeds from the disposition of assets |
2,884 | 102 | ||||||
Net cash used by investing activities |
(10,129 | ) | (6,620 | ) | ||||
Cash flows from financing activities |
||||||||
Borrowing/(payments) on bank credit facility, net |
39,100 | (18,000 | ) | |||||
Payments on notes and bank term loan |
(87,582 | ) | (18,936 | ) | ||||
Payments on bonds and leases, net |
(393 | ) | (887 | ) | ||||
Employee stock option exercises |
(180 | ) | | |||||
Debt issuance costs |
(1,174 | ) | (191 | ) | ||||
Cash dividends on common stock |
| (3,057 | ) | |||||
Net cash used by financing activities |
(50,229 | ) | (41,071 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
60 | (123 | ) | |||||
Decrease in cash and cash equivalents |
(25,159 | ) | (1,681 | ) | ||||
Cash and cash equivalents at beginning of year |
26,925 | 2,118 | ||||||
Cash and cash equivalents at end of period |
$ | 1,766 | $ | 437 | ||||
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 beginning 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 non-forfeitable
dividends or dividend equivalents before vesting should be considered participating securities and
need to be included in the earnings allocation in computing earnings per share (EPS) under the
two-class method. The two-class method is an earnings allocation formula that determines EPS for
each class of common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. In accordance with the standard,
the Companys unvested restricted stock awards are considered participating securities because they
entitle holders to receive non-forfeitable dividends during the vesting term. In applying the
two-class method, undistributed earnings are allocated between common shares and unvested
restricted stock awards. The standard became effective for the Company on November 1, 2009 when the
two-class method of computing basic and diluted EPS was applied for all periods presented. See Note
11, Net Earnings Per Share, for additional information.
3) Discontinued Operations
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A summary of the net sales and the net loss from discontinued operations is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net Sales |
$ | 2 | $ | 11,580 | $ | 8 | $ | 41,350 | ||||||||
Loss from discontinued operations
before income taxes |
(117 | ) | (3,575 | ) | (195 | ) | (909 | ) | ||||||||
Income tax (benefit) expense |
(74 | ) | (1,157 | ) | (72 | ) | 42 | |||||||||
Loss from discontinued operations, net of tax |
$ | (43 | ) | $ | (2,418 | ) | $ | (123 | ) | $ | (951 | ) | ||||
4) Inventories, net
Inventories are valued at the lower of cost or market. Inventories at July 31, 2010 and
October 31, 2009 are comprised of the following components:
July 31, | October 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 47,110 | $ | 34,288 | ||||
Production supplies |
6,945 | 7,055 | ||||||
Finished goods |
29,872 | 21,598 | ||||||
Total inventories, net |
$ | 83,927 | $ | 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 nine month period ended July 31, 2010, by
reporting segment, are as follows:
Custom Sheet and | Packaging | Color and 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 July 31, 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
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Restructuring and exit costs were recorded in the consolidated condensed statements of
operations for the three and nine months ended July 31, 2010 and August 1, 2009 as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Restructuring and exit costs: |
||||||||||||||||
Custom Sheet and Rollstock |
$ | 537 | $ | 692 | $ | 1,390 | $ | 2,873 | ||||||||
Packaging Technologies |
| 56 | (719 | ) | 1,172 | |||||||||||
Color and Specialty Compounds |
2,309 | 124 | 4,412 | 946 | ||||||||||||
Corporate |
56 | | 85 | 306 | ||||||||||||
Total restructuring and exit costs |
2,902 | 872 | 5,168 | 5,297 | ||||||||||||
Income tax benefit |
(1,088 | ) | (287 | ) | (1,936 | ) | (1,945 | ) | ||||||||
Impact on net earnings from continuing operations |
$ | 1,814 | $ | 585 | $ | 3,232 | $ | 3,352 | ||||||||
The following table summarizes the cumulative restructuring and exit costs incurred to-date
under restructuring plan started in 2008:
Cumulative | Nine Months | |||||||||||
through | Ended | Cumulative | ||||||||||
2009 | July 31, 2010 | To-Date | ||||||||||
Employee severance |
$ | 3,977 | $ | 1,583 | $ | 5,560 | ||||||
Facility consolidation and shut-down costs |
1,925 | 2,373 | 4,298 | |||||||||
Fixed asset valuation adjustments, net |
1,084 | 1,212 | 2,296 | |||||||||
Total |
$ | 6,986 | $ | 5,168 | $ | 12,154 | ||||||
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. Fixed
asset valuation adjustment, net represents the impact 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.
During the third quarter of 2010, the Company decided to sell certain fixed assets of the
business and changed its fair value estimates of fixed assets that were previously held-for-sale.
The fair value analyses, which were based on prevailing market prices for similar assets, resulted
in a determination that the carrying amounts may not be recoverable. Accordingly in the third
quarter, non-cash fixed asset impairment expenses of $1,436 and $391 were recorded in the Color and
Specialty Compounds and Custom Sheet and Rollstock segments, respectively. The decisions to sell
these fixed assets were part of the Companys restructuring plan started in 2008 and accordingly,
these expenses were included in restructuring and exit costs. As of July 31, 2010, the Company had
$3,951 of assets held-for-sale the values of which were estimated at fair value upon sale.
The Company expects to incur approximately $1,500 of additional restructuring expenses on
continuing operations for initiatives announced through July 31, 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
$1,058 at July 31, 2010 and $1,772 at October 31, 2009. Cash payments for restructuring activities
of continuing operations were $1,075 and $3,492 for the three and nine months ended July 31, 2010,
respectively.
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7) Long-Term Debt
Long-term debt consisted of the following at July 31, 2010 and October 31, 2009:
July 31, | October 31, | |||||||
2010 | 2009 | |||||||
2006 Senior Notes |
$ | | $ | 45,684 | ||||
2004 Senior Notes |
113,971 | 137,054 | ||||||
Credit facility |
39,100 | | ||||||
Euro Bank term loan |
| 20,292 | ||||||
Other |
12,460 | 13,404 | ||||||
Total debt |
165,531 | 216,434 | ||||||
Less current maturities |
477 | 36,079 | ||||||
Total long-term debt |
$ | 165,054 | $ | 180,355 | ||||
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 to $150,000 with an
optional $50,000 accordion feature, a term of four years, bears interest at either Prime or LIBOR
plus a borrowing margin and requires 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 amendment from existing note holders, acquisitions are permitted
subject to a maximum pro-forma Leverage Ratio of 3.0 to 1 and minimum pro-forma undrawn
availability level of $25,000.
The new credit facility is secured with collateral including accounts receivable, inventory,
machinery and equipment and intangible assets. The new credit facility and amendment from existing
note holders require the Companys to offer early principal payments to Senior Note holders based
on a ratable percentage of each fiscal years excess cash flow and extraordinary receipts, such as
the proceeds from the sale of businesses. The Companys capacity under the new credit facility is
permanently reduced for the new credit facilitys pro rata share of early principal payments.
Concurrent with the closing of the new credit facility, the Company repaid in full its higher
interest rate 6.82% 2006 Senior Notes from borrowings under the new 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 facility in the third quarter of 2010 were $1,174.
In the first quarter of 2010, the Company paid $17,208 associated with extraordinary receipts
from the sale of businesses that occurred in 2009. During the second quarter of 2010, 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.).
At
July 31, 2010, the Company had $97,980 of total capacity and $39,100 of outstanding
loans under the credit facility at a weighted average interest rate of 3.41%. In addition to the
outstanding loans, the credit facility borrowing capacity was partially reduced by several standby
letters of credit totaling $12,920.
Under the Companys most restrictive covenant, the Leverage Ratio,
the Company had $77,133 of availability on its credit facility as of
July 31, 2010.
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.
While the Company was in compliance with its covenants at July 31, 2010 and currently expects
to be in compliance with its covenants during the next twelve months, the Companys 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 Companys results of operations, consolidated financial position or
cash flows.
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 the Companys 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 Companys U.S. federal statutory rate and the
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Companys effective rate for
the nine months ended July 31, 2010 was primarily attributable to these transactions. Items
impacting the Companys third quarter 2010 effective tax rate include the negative impact of state
income taxes offset by foreign losses and the domestic manufacturing deduction.
The difference between the U.S. federal statutory rate and the Companys effective tax rate in
the third quarter and the first nine months of 2009 is largely attributable to the negative impact
of recording a valuation allowance on losses related to the Companys Donchery, France operations,
non-deductable items, and adjustments related to finalizing the Companys 2008 tax returns.
9) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Companys
debt as follows:
July 31, 2010 | October 31, 2009 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Total debt (including credit facilities) |
$ | 165,531 | $ | 170,462 | $ | 216,434 | $ | 205,776 |
The estimated fair value of the Companys debt is based on estimated borrowing rates to
discount cash flows to their present value as provided by a broker, or otherwise, quoted, current
market prices for the same or similar issues. The Companys other financial instruments, including
cash, accounts receivable, accounts payable, and accrued liabilities have net carrying values that
approximate their fair values due to the short-term nature of these instruments.
Disclosures for 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 nine months ended July 31, 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, except for those discussed in Note 6, Restructuring
and Exit Costs.
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 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.
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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 July 31, 2010, the Company had approximately $680 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 results of operations, consolidated
financial position, or cash flows 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
July 31, 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, 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 $8,600 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 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.
Following oral argument on the motion to dismiss, the Bankruptcy Court ordered Delphi to file a
motion for leave to amend its complaint, which motion has not yet been filed. 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 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 other matters will not have a material adverse effect on the Companys financial position,
results of operations or cash flows.
As of July 31, 2010, the Company held an unsecured trade accounts receivable balance, net of reserve
totaling $4,841, due from one customer whose net sales represented 4% of the Companys consolidated
net sales for the third quarter of 2010 and 8% of the Companys consolidated net sales for the first nine
months of 2010. One of this customers products, for which the Company is a significant supplier of
sheet, experienced substantial growth in 2009 followed by a significant reduction in volume during 2010.
As a result of the decline in its business, the customer has been unable to pay the accounts receivable
balance due to the Company in accordance with its terms. On September 7, 2010, this customer
restructured its financing arrangements with its bank, increasing its liquidity in the near term. The
Company also reached an agreement on payment of the aforementioned accounts receivable balance by
converting it to a subordinated secured note receivable, which is payable over a seven month period,
subject to standstill periods of up to 365 days and other restrictions. While the Company has converted
the accounts receivable balance to a note receivable, it is possible that this customers orders will not
materialize at sufficient levels to support its continued operations, the customer will be unable to sustain
adequate financing to fund payments under its obligations or the customer may undergo additional
financial restructuring. As a result, there can be no assurance that this customer will be able to pay the
note receivable balance in accordance with its terms or that the Company will ultimately be able to collect
the remaining note receivable balance.
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Net Earnings Per Share
Basic earnings (loss) per share excludes any dilution and is computed by dividing net earnings
attributable to common shareholders by the weighted average number of common and participating
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.
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 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Antidilutive Shares |
||||||||||||||||
SSARs |
349 | 551 | 349 | 958 | ||||||||||||
Stock options |
705 | 1,165 | 705 | 1,165 | ||||||||||||
Unvested restricted stock |
104 | 192 | 104 | 359 | ||||||||||||
Total antidilutive shares excluded from
diluted earnings per share |
1,158 | 1,908 | 1,158 | 2,482 | ||||||||||||
As discussed in Note 2, Newly Adopted Accounting Standards, the Company used 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 computations of basic and diluted earnings per share for the three and nine
months ended July 31, 2010 and August 1, 2009 is as follows (shares in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic and diluted net earnings: |
||||||||||||||||
Net (loss) earnings from continuing operations |
$ | (3,826 | ) | $ | 3,910 | $ | 5,451 | $ | 1,116 | |||||||
Less: net (loss) earnings allocated to participating securities |
(50 | ) | 17 | 69 | 2 | |||||||||||
Net (loss) earnings from continuing operations attributable
to common shareholders |
(3,776 | ) | 3,893 | 5,382 | 1,114 | |||||||||||
Loss from discontinued operations, net of tax |
(43 | ) | (2,418 | ) | (123 | ) | (951 | ) | ||||||||
Net (loss) earnings attributable to common shareholders |
$ | (3,819 | ) | $ | 1,475 | $ | 5,259 | $ | 163 | |||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic weighted average common and participating
shares outstanding |
30,555 | 30,398 | 30,528 | 30,369 | ||||||||||||
Add: Dilutive shares from equity instruments (a) |
154 | 127 | 149 | | ||||||||||||
Diluted weighted average shares outstanding |
30,709 | 30,525 | 30,677 | 30,369 | ||||||||||||
Basic earnings (loss) per share attributable
to common stockholders: |
||||||||||||||||
(Loss) earnings from continuing operations |
$ | (0.12 | ) | $ | 0.13 | $ | 0.18 | $ | 0.04 | |||||||
Loss from discontinued operations, net of tax |
| (0.08 | ) | (0.01 | ) | (0.03 | ) | |||||||||
Net (loss) earnings per share |
$ | (0.12 | ) | $ | 0.05 | $ | 0.17 | $ | 0.01 | |||||||
Diluted earnings (loss) per share attributable
to common shareholders: |
||||||||||||||||
(Loss) earnings from continuing operations |
$ | (0.12 | ) | $ | 0.13 | $ | 0.18 | $ | 0.04 | |||||||
Loss from discontinued operations, net of tax |
| (0.08 | ) | (0.01 | ) | (0.03 | ) | |||||||||
Net (loss) earnings per share |
$ | (0.12 | ) | $ | 0.05 | $ | 0.17 | $ | 0.01 | |||||||
(a) | For the nine months ended August 1, 2009, all outstanding equity compensation instruments were excluded from the calculation of diluted earnings per share because they were antidilutive. |
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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 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 beginning in the second
quarter and historical segment results have been reclassified to conform to these changes.
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 nine months
ended July 31, 2010 and August 1, 2009:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales (a)(b): |
||||||||||||||||
Custom Sheet and Rollstock |
$ | 143,480 | $ | 133,225 | $ | 419,225 | $ | 372,407 | ||||||||
Packaging Technologies |
60,892 | 51,294 | 163,864 | 157,291 | ||||||||||||
Color and Specialty Compounds |
65,263 | 45,987 | 180,233 | 154,521 | ||||||||||||
Net sales |
$ | 269,635 | $ | 230,506 | $ | 763,322 | $ | 684,219 | ||||||||
Operating earnings (loss) from continuing operations: |
||||||||||||||||
Custom Sheet and Rollstock |
$ | 344 | $ | 11,657 | $ | 18,451 | $ | 16,486 | ||||||||
Packaging Technologies |
6,701 | 7,878 | 18,172 | 23,866 | ||||||||||||
Color and Specialty Compounds |
(1,459 | ) | 1,500 | 1,630 | 4,102 | |||||||||||
Corporate expenses |
(8,245 | ) | (9,734 | ) | (26,261 | ) | (27,587 | ) | ||||||||
Operating earnings
(loss) from
continuing
operations |
$ | (2,659 | ) | $ | 11,301 | $ | 11,992 | $ | 16,867 | |||||||
(a) | Excludes intersegment sales of $14,209, $11,723, $37,742 and $33,107, 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
to comprehensive income (loss) for the three and nine months ended July 31, 2010 and August 1, 2009
is as follows:
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Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net earnings |
$ | (3,869 | ) | $ | 1,492 | $ | 5,328 | $ | 165 | |||||||
Foreign currency translation adjustments |
(549 | ) | 2,834 | 3,123 | 3,091 | |||||||||||
Total comprehensive (loss) income |
$ | (4,418 | ) | $ | 4,326 | $ | 8,451 | $ | 3,256 | |||||||
The Company recorded foreign exchange gains before taxes of $83 and losses of $2,446 in the
third quarter and first nine months of 2010, respectively, and losses of $1,323 and $1,705 in the
third quarter and first nine months of 2009, respectively. Foreign exchange gains and losses are
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 resulting fluctuations of the U.S. dollar against the Canadian dollar.
In the 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 July 31, 2010, the Company had monetary assets
denominated in foreign currency of $7,480 of net Canadian liabilities, $2,055 of net EURO assets
and $500 of net Mexican Peso assets.
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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 1% increase in consolidated sales
and a 3% increase in segment sales in the third quarter and first nine months 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.
Results
In the third quarter of 2010, we experienced improved demand in most of our major end markets
but slower than expected recovery of our sales volumes. Despite the 7% increase in sales volumes
compared to the prior year and the benefits from our structural cost reduction and other earnings
improvement initiatives, our earnings were lower than the prior year. Significant factors
impacting the lower earnings were the substantial increase in bad debt expense associated with two
major customers, the price and availability of certain raw materials, production inefficiencies,
lower sales to one of our largest sheet customers and increases in non-cash impairment charges to
facilities and equipment that will no longer be utilized going forward.
In the third quarter and first nine months of 2010, we paid down $11.0 million and $50.9
million of debt, respectively, ending our third quarter with $165.5 million of debt. During the
quarter we entered into a new credit facility agreement and amended our 2004 Senior Notes. We
utilized borrowings from the new credit facility to fund our higher interest rate 6.82% 2006 Senior
Notes. The new four-year credit facility provides us with the ability to pursue acquisitions and
make investments in improvement initiatives of the Company consistent with our strategy of leading
technology and innovation in our markets.
Outlook
Although certain markets have experienced increased volume over prior year levels, we expect
the overall market recovery will continue at a slow pace. Pricing for many of our major resins and
secondary feed stock materials are expected to continue to be volatile. Given the nature and level
of the issues impacting this quarter, the results were clearly not indicative of our underlying
earnings potential. We expect to see the benefits of our plant consolidation projects as these
initiatives will be completed in our fourth quarter. We have taken specific steps to improve our
performance and address short term operating issues by accelerating new business wins, focusing on
specific improvement plans at four operating locations, implementing spending controls to reduce
costs, and by initiating actions in our procurement function to improve the availability and use of
lower-priced feed stocks. In conjunction with our investments in technology and past cost
reductions, these actions were taken to address our short term operating issues to improve the near
term results and we will continue to execute on our long term improvement initiatives and
investments in new products to maximize cash flow and earnings.
Consolidated Results
Net sales were $269.6 million and $763.3 million in the three and nine month periods ended July 31,
2010, representing a 17% increase and a 12% increase, respectively, over the same periods of the
prior year. The increases were caused by:
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Three Months | Nine Months | |||||||
Ended | Ended | |||||||
Underlying volume |
7 | % | 8 | % | ||||
Sales volume to a divested business |
1 | % | 1 | % | ||||
Price/Mix |
9 | % | 3 | % | ||||
Total |
17 | % | 12 | % | ||||
For both period comparisons the increase in underlying volume occurred across most of our end
markets. Contributors to the volume increases were sales of compounds and sheet to the automotive
sector of our transportation market, sales of sheet used in refrigerators into the appliance
market, sales of sheet and packaging to the sign and advertising market and sales of sheet in the
recreation and leisure market. In the third quarter we also saw an increase in compound sales to
the commercial construction sector of our building and construction end market and to the
agricultural products sector. These increases were offset by a decline in sales of sheet for
material handling applications due to a considerable slowdown in orders from one of our largest
customers.
The price/mix increase in the third quarter comparison was mostly caused by increases in
selling prices to pass through increases in resin and secondary feed stock costs. Major resin
prices were over 40% higher on a weighted average than the prior year third quarter.
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 31, 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 | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Dollars and Pounds (in millions) |
||||||||||||||||
Net sales |
$ | 269.6 | $ | 230.5 | $ | 763.3 | $ | 684.2 | ||||||||
Cost of sales |
241.7 | 198.3 | 677.7 | 599.8 | ||||||||||||
Gross margin |
$ | 27.9 | $ | 32.2 | $ | 85.6 | $ | 84.4 | ||||||||
Pounds sold |
233.8 | 216.4 | 686.5 | 632.3 | ||||||||||||
Dollars per Pound Sold |
||||||||||||||||
Net sales |
$ | 1.153 | $ | 1.065 | $ | 1.112 | $ | 1.082 | ||||||||
Cost of sales |
1.034 | 0.917 | 0.987 | 0.949 | ||||||||||||
Gross margin |
$ | 0.119 | $ | 0.148 | $ | 0.125 | $ | 0.133 | ||||||||
Gross margin per pound sold declined from 14.8 cents in the third quarter of 2009 to 11.9
cents in the third quarter of 2010 reflecting the impact of production inefficiencies, the price
and availability of certain raw materials including secondary feed stocks, increased sales of lower
margin products and higher workers compensation and freight costs. Both comparisons were also
impacted by the Companys implementation of mandatory wage reductions during 2009, which were
reinstated at the start of fiscal 2010.
Selling, general and administrative expenses were $26.7 million and $65.6 million in the third
quarter and first nine months of 2010 compared to $18.9 million and $58.8 million in the same
periods of the prior year. Bad debt
expense of $7.9 million for the quarter was $7.6 million higher than the same period in the
prior year as we provided a reserve for two large customers. Year-to-date bad debt expense was
$4.4 million higher than the same period in the prior year due to the aforementioned specific
reserves. Employee compensation costs of $7.9 million and $23.1 million for the quarter and nine
months ended July 31, 2010 were $1.0 million and $0.9 million higher than the same periods in the
prior year. For the third quarter and first nine months of 2010, the increase is due to the
Companys implementation of mandatory wage reductions during 2009, which were reinstated at the
beginning of fiscal 2010. Selling, general and administrative expenses include foreign currency
gains of $0.1 million and foreign currency losses of $2.4 million in the third quarter and first
nine months of 2010, and foreign currency losses of $1.3 million
14
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and $1.7 million in the third
quarter and first nine months of 2009. Third quarter 2010 results reflect our mitigation of the
Companys exposure to the Canadian dollar in the second quarter of 2010. For the nine months ended
July 31, 2010 the losses were mostly caused by a weakening U.S. dollar to the Canadian dollar.
Refer to Note 13, Comprehensive Income (Loss), for further discussion of the Companys foreign
currency positions as of the end of the third quarter.
Amortization of intangibles was $1.0 million and $2.9 million in the third quarter and first
nine months of 2010 compared to $1.1 and $3.4 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 $2.9 million and $5.2 million in the third quarter and first
nine months of 2010 compared to $0.9 million and $5.3 million in the same periods of the prior
year. For both period comparisons, restructuring and exit costs are comprised of employee
severance, facility consolidation and shut-down costs and accelerated depreciation. We expect to
incur approximately $1.5 million of additional restructuring expenses for initiatives announced
through July 31, 2010, which will include 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 fiscal 2010.
Interest expense, net of interest income, was $2.8 million and $9.6 million in the third
quarter and first nine months of 2010 compared to $3.6 million and $11.7 million in the same
periods of the prior year. These decreases were primarily driven by the $73.7 million reduction 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 $4.4 million in the first nine months of 2010. The difference between the Companys U.S.
federal statutory rate and the Companys effective rate for the nine months ended July 31, 2010 was
primarily attributable to these transactions. Items impacting the Companys third quarter 2010
effective tax rate include the unfavorable effects of state income taxes offset by foreign losses
and the domestic manufacturing deduction.
We reported a net loss of $3.8 million and net earnings of $5.5 million for the third quarter
and first nine months of 2010 compared to net earnings of $3.9 million and $1.1 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 beginning in the second quarter. Historical segment results
have been reclassified to conform to these changes.
Custom Sheet and Rollstock Segment
Net sales were $143.5 million and $419.2 million for the three and nine months ended July 31,
2010, respectively, compared to $133.2 million and $372.4 million for the three and nine months
ended August 1, 2009, respectively, representing an increase of 8% and 13% over the same periods of
the prior year. These increases were caused by the following factors:
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
Underlying volume |
-3 | % | 11 | % | ||||
Price/Mix |
11 | % | 2 | % | ||||
Total |
8 | % | 13 | % | ||||
We experienced increases in demand across most of our custom sheet and rollstock end markets.
However,
overall volumes declined as a result of a slow-down in one customers business activity
due to volatile demand
15
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associated with customer ordering patterns for its new applications. Absent
this customers decline, the increase in underlying volume for both period comparisons includes
growth in sales of refrigeration sheet into the appliance market, sheet used in the automotive
markets and sheet used in the commercial construction and recreation and leisure end markets.
Price/mix includes increases in selling prices in the third quarter of 2010 from the pass through
of increases in resin and secondary feed stock costs.
The segments operating earnings were $0.3 million and $18.5 million in the third quarter and
first nine months of 2010 compared to $11.7 million and $16.5 million in the same periods of the
prior year. The decrease in operating earnings during the third quarter was primarily caused by an
increase in bad debt expense, a 32% increase in ABS resin costs during the quarter and limited
availability of lower priced secondary feed stocks, the decrease in sales volume and the resulting
per pound increase in conversion costs coupled with an increase in workers compensation costs and
freight costs. Labor costs increased due to the reinstatement of wage reductions that were in
effect for the prior year comparisons. For the nine months ended July 31, 2010, the increase in
operating earnings was primarily caused by the increase in sales volume coupled with the benefits
of our financial improvement initiatives.
Packaging Technologies
Net sales were $60.9 million and $163.9 million for the three and nine months ended July 31,
2010, respectively, compared to $51.3 million and $157.3 million for the three and nine months
ended August 1, 2009, respectively, representing an increase of 19% and 4% over the same periods of
the prior year. These fluctuations were caused by the following factors:
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
Underlying volume |
3 | % | -1 | % | ||||
Price/Mix |
16 | % | 5 | % | ||||
Total |
19 | % | 4 | % | ||||
For both periods volumes were impacted by the loss of certain customers product lines.
Offsetting these losses was an increase in sales to our sign and advertising end market. Price/mix
includes increases in selling prices in the third quarter of 2010 from the pass through of
increases in resin costs, partially offset by a higher mix of lower margin products.
The Packaging Technologies segments operating earnings were $6.7 million and $18.2 million in
the third quarter and first nine months of 2010 compared to $7.9 million and $23.9 million in the
same periods of the prior year. The decrease in operating earnings for both periods was mainly due
to a higher mix of lower margin business coupled with an increase in workers compensation and
freight costs. Labor costs increased due to the reinstatement of wage reductions that were in
effect for the prior year comparisons.
Color and Specialty Compounds Segment
Net sales were $65.3 million and $180.2 million for the three and nine months ended July 31,
2010, respectively, compared to $46.0 million and $154.5 million for the three and nine months
ended August 1, 2009, respectively, representing an increase of 42% and 17% over the same periods
of the prior year. These increases were caused by the following factors:
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
Underlying volume |
27 | % | 8 | % | ||||
Sales volume to a divested business |
3 | % | 3 | % | ||||
Price/Mix |
12 | % | 6 | % | ||||
Total |
42 | % | 17 | % | ||||
The increase in underlying volume for the third quarter occurred across many of our end
markets. For both periods we experienced the largest volume increase in the automotive sector of
the transportation end market and in the agricultural products sector. Demand in the building and
construction market increased during the quarter,
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however, on a year-to-date basis, volumes are
still lower compared to the same period in the prior year. Price/mix includes increases in selling
prices in the third quarter of 2010 from the pass through of increases in resin and secondary feed
stocks.
The segment reported an operating loss of $1.5 million and operating earnings of $1.6 million
for the third quarter and first nine months of 2010 compared to operating earnings of $1.5 million
and $4.1 million in the same periods of the prior year. For both periods the decline in operating
earnings was due to the increase in raw materials costs primarily related to availability or
inefficient use of lower priced secondary feed stocks, higher than expected operating costs to meet
customer delivery requirements in the automotive sector, higher restructuring costs associated with
production facility consolidations and higher workers compensation and freight costs. Labor costs
increased due to the reinstatement of wage reductions that were in effect for the prior year
comparisons.
Corporate
Corporate expenses include selling, general and administrative expenses, corporate office
expenses, shared services costs, information technology costs, professional fees and the impact of
foreign currency exchange. Corporate operating expenses were $8.2 million and $26.3 million in the
third quarter and first nine months of 2010, respectively, compared to $9.7 million and $27.6
million in the same periods of the prior year. The decrease in expense during the third quarter
was mostly caused by a decrease in foreign currency expense of $1.4 million compared to the same
period in the prior year. For the nine months ended July 31, 2010, the decrease in expense was
mostly caused by a decrease in selling, general and administrative expense of $2.3 million,
partially offset by an increase in foreign currency expense of $0.7 million compared to the same
period in 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 nine months ended July 31, 2010 and
August 1, 2009:
Nine Months Ended | ||||||||
July 31, | August 1, | |||||||
2010 | 2009 | |||||||
Cash Flows (in millions) |
||||||||
Net cash provided by operating activities |
$ | 35,139 | $ | 46,133 | ||||
Net cash used by investing activities |
(10,129 | ) | (6,620 | ) | ||||
Net cash used by financing activities |
(50,229 | ) | (41,071 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
60 | (123 | ) | |||||
Decrease in cash and cash equivalents |
$ | (25,159 | ) | $ | (1,681 | ) | ||
Net cash provided by operating activities decreased by $11.0 million in the first nine months
of 2010 compared to the same period in the prior year due mostly to changes in working capital
resulting from the Companys increased sales and the associated inventory build, coupled with lower
depreciation and amortization expense due to our reduced operating footprint. Offsetting these
decreases was an increase of $5.2 million in net income and $3.8
million in our bad debt provision.
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 $25.0
million on capital expenditures in 2010.
Net cash used for financing activities in the first nine months of 2010 of $50.2 million
reflects payments on the Senior Notes and Euro Bank term loan, which matured in February 2010,
offset by borrowings under the new credit facility. Of the $48.9 million in net payments, $25.2
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
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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.
Financing Arrangements
On June 9, 2010, the Company entered into a new credit facility agreement and amended its 2004
Senior Notes. The new credit facility agreement has a borrowing capacity to $150.0 million with
an optional $50.0 million accordion feature, a term of four years, bears interest at either Prime
or LIBOR plus a borrowing margin and requires 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 amendment from existing note holders, acquisitions are
permitted subject to a maximum pro-forma Leverage Ratio of 3.0 to 1 and minimum pro-forma undrawn
availability level of $25.0 million.
The new credit facility is secured with collateral including accounts receivable, inventory,
machinery and equipment and intangible assets. The new credit facility and amendment from existing
note holders requires the Company to offer early principal payments to Senior Note holders based on
a ratable percentage of each fiscal years excess cash flow and extraordinary receipts, such as the
proceeds from the sale of businesses. The Companys capacity under the new credit facility is
permanently reduced for the new credit facilitys pro rata share of early principal payments.
Concurrent with the closing of the new credit facility, the Company repaid in full its higher
interest rate 6.82% 2006 Senior Notes from borrowings under the new facility. The Company recorded
$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.
In the first quarter of 2010, the Company paid $17.2 million associated with extraordinary
receipts from the sale of businesses that occurred in 2009. During the second quarter of 2010, the
Company paid $15.3 million associated with 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.).
At July 31, 2010, the Company had $165.5 million of outstanding debt with a weighted average
interest rate of 5.54%, of which 71.5% represented fixed rate instruments with a weighted average
interest rate of 6.56%.
At
July 31, 2010, the Company had $98.0 million of total capacity and $39.1 million of
outstanding loans under the credit facility at a weighted average interest rate of 3.41%. In
addition to the outstanding loans, the credit facility borrowing capacity was partially reduced by
several standby letters of credit totaling $12.9 million. Under
the Companys most restrictive covenant, the Leverage Ratio, the
Company had $77.1 million of availability on its credit facility as
of July 31, 2010. 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.
The Company was in compliance with all debt covenants as of July 31, 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 the Companys results of operations, consolidated financial position or 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material changes in our exposure to market risk during the nine months ended
July 31, 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.
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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 July 31, 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 July 31, 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. Following oral argument on the motion to dismiss, the
Bankruptcy Court ordered Delphi to file a motion for leave to amend its complaint, which motion has
not yet been filed. 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 cash flows.
Item 1A. RISK FACTORS
As of July 31, 2010, the Company held an unsecured trade accounts receivable balance, net of reserve
totaling $4.8 million, due from one customer whose net sales represented 4% of the Companys
consolidated net sales for the third quarter of 2010 and 8% of the Companys consolidated net sales for
the first nine months of 2010. One of this customers products, for which the Company is a significant
supplier of sheet, experienced substantial growth in 2009 followed by a significant reduction in volume
during 2010. As a result of the decline in its business, the customer has been unable to pay the accounts
receivable balance due to the Company in accordance with its terms. On September 7, 2010, this
customer restructured its financing arrangements with its bank, increasing its liquidity in the near term.
The Company also reached an agreement on payment of the aforementioned accounts receivable balance
by converting it to a subordinated secured note receivable, which is payable over a seven month period,
subject to standstill periods of up to 365 days and other restrictions. While the Company has converted
the accounts receivable balance to a note receivable, it is possible that this customers orders will not
materialize at sufficient levels to support its continued operations, the customer will be unable to sustain
adequate financing to fund payments under its obligations or the customer may undergo additional
financial restructuring. As a result, there can be no assurance that this customer will be able to pay the
note receivable balance in accordance with its terms or that the Company will ultimately be able to collect
the remaining note receivable balance.
There have been no other material changes to our risk factors during the nine months ended
July 31, 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 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 |
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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 8, 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) | ||||
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