Attached files
| file | filename |
|---|---|
| EX-31.2 - SECTION 302 CERTIFICATION CFO - SPARTECH CORP | ex312_q1.htm |
| EXCEL - IDEA: XBRL DOCUMENT - SPARTECH CORP | Financial_Report.xls |
| EX-32.2 - SECTION 1350 CERTIFICATION CFO - SPARTECH CORP | ex322_q1.htm |
| EX-32.1 - SECTION 1350 CERTIFICATION CEO - SPARTECH CORP | ex321_q1.htm |
| EX-31.1 - SECTION 302 CERTIFICATION CEO - SPARTECH CORP | ex311_q1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 4, 2012
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _______________
1-5911
(Commission File Number)
SPARTECH CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware | 43-0761773 |
(State or other jurisdiction | (I.R.S. Employer |
of incorporation or organization) | Identification No.) |
120 S. Central Avenue, Suite 1700
Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)
(314) 721-4242
(Registrant’s telephone number, including area code)
Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer R | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 30,799,666 shares of Common Stock, $.75 par value per share, outstanding as of March 8, 2012.
SPARTECH CORPORATION
FORM 10-Q For the Three Months Ended February 4, 2012 and January 29, 2011
Table of Contents
Cautionary Statements Concerning Forward-Looking Statements
Page No. | |||
As of February 4, 2012 (Unaudited) and October 29, 2011 | |||
Certifications | 26 | ||
EX-31.1 | |||
EX-31.2 | |||
EX-32.1 | |||
EX-32.2 | |||
Cautionary Statements Concerning Forward-Looking Statements
Statements in this Form 10-Q that are not purely historical, including statements that express the Company’s belief, anticipation or expectation about future events, are forward-looking statements. “Forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relate to future events and expectations and include statements containing such words as “anticipates,” “believes,” “estimates,” “expects,” “would,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects,” and similar expressions. Forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which management is unable to predict or control, that may cause actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ from our forward-looking statements are as follows:
(a) | Adverse changes in economic or industry conditions, including global supply and demand conditions and prices for products of the types we produce |
(b) | 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 |
(c) | Our ability to compete effectively on product performance, quality, price, availability, product development, and customer service |
(d) | 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 |
(e) | Volatility of prices and availability of supply of energy and raw materials that are critical to the manufacture of our products, particularly plastic resins derived from oil and natural gas, including future impacts of natural disasters |
(f) | Our inability to manage or pass through to customers an adequate level of increases in the costs of materials, freight, utilities, or other conversion costs |
(g) | 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 |
(h) | Our inability to collect all or a portion of our receivables with large customers or a number of customers |
(i) | Loss of business with a limited number of customers that represent a significant percentage of our revenues |
(j) | Possible asset impairments |
(k) | Our inability to predict accurately the costs to be incurred, time taken to complete, operating disruptions therefrom, potential loss of business or savings to be achieved in connection with announced production plant consolidations and line moves |
(l) | Adverse findings in significant legal or environmental proceedings or our inability to comply with applicable environmental laws and regulations |
(m) | Our inability to develop and launch new products successfully |
(n) | Possible weaknesses in internal controls |
We assume no responsibility to update our forward-looking statements.
PART I — Financial Information
Item 1. Financial Statements
Spartech Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited) | |||||||
February 4, | October 29, | ||||||
(Dollars in thousands, except share data) | 2012 | 2011 | |||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 728 | $ | 877 | |||
Trade receivables, net of allowances of $2,544 and $2,437, respectively | 140,146 | 156,432 | |||||
Inventories, net of inventory reserves of $9,579 and $9,152, respectively | 102,450 | 91,186 | |||||
Prepaid expenses and other current assets, net | 30,704 | 26,367 | |||||
Assets held for sale | 2,624 | 2,744 | |||||
Total current assets | 276,652 | 277,606 | |||||
Property, plant and equipment, net | 203,775 | 208,074 | |||||
Goodwill | 47,466 | 47,466 | |||||
Other intangible assets, net | 12,449 | 12,872 | |||||
Other long-term assets | 4,018 | 3,684 | |||||
Total assets | $ | 544,360 | $ | 549,702 | |||
Liabilities and shareholders’ equity | |||||||
Current liabilities: | |||||||
Current maturities of long-term debt | $ | 25,066 | $ | 25,211 | |||
Accounts payable | 125,499 | 140,628 | |||||
Accrued liabilities | 31,755 | 30,919 | |||||
Total current liabilities | 182,320 | 196,758 | |||||
Long-term debt, less current maturities | 142,764 | 132,000 | |||||
Other long-term liabilities: | |||||||
Deferred taxes | 41,678 | 41,676 | |||||
Other long-term liabilities | 5,981 | 6,336 | |||||
Total liabilities | 372,743 | 376,770 | |||||
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: 30,805,528 and 30,831,919 shares, respectively | 24,849 | 24,849 | |||||
Contributed capital | 202,179 | 201,945 | |||||
Accumulated loss | (13,280 | ) | (11,031 | ) | |||
Treasury stock, at cost, 2,326,318 and 2,299,927 shares, respectively | (48,641 | ) | (49,286 | ) | |||
Accumulated other comprehensive income | 6,510 | 6,455 | |||||
Total shareholders’ equity | 171,617 | 172,932 | |||||
Total liabilities and shareholders’ equity | $ | 544,360 | $ | 549,702 | |||
See accompanying notes to consolidated condensed financial statements.
1
Spartech Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
Three Months Ended | ||||||||
February 4, | January 29, | |||||||
(Unaudited and dollars in thousands, except per share data) | 2012 | 2011 | ||||||
Net sales | $ | 281,781 | $ | 234,783 | ||||
Costs and expenses | ||||||||
Cost of sales | 260,109 | 216,377 | ||||||
Selling, general and administrative expenses | 21,776 | 18,974 | ||||||
Amortization of intangibles | 422 | 422 | ||||||
Restructuring and exit costs | — | 828 | ||||||
Total costs and expenses | 282,307 | 236,601 | ||||||
Operating loss | (526 | ) | (1,818 | ) | ||||
Interest expense, net of interest income | 3,020 | 2,571 | ||||||
Loss from continuing operations before income taxes | (3,546 | ) | (4,389 | ) | ||||
Income tax benefit | (1,276 | ) | (2,551 | ) | ||||
Net loss from continuing operations | (2,270 | ) | (1,838 | ) | ||||
Net earnings from discontinued operations, net of tax | 21 | 2,871 | ||||||
Net (loss) earnings | (2,249 | ) | 1,033 | |||||
Basic (loss) earnings per share: | ||||||||
Loss from continuing operations | $ | (0.07 | ) | $ | (0.06 | ) | ||
Earnings from discontinued operations, net of tax | — | 0.09 | ||||||
Net (loss) earnings per share | $ | (0.07 | ) | $ | 0.03 | |||
Diluted (loss) earnings per share: | ||||||||
Loss from continuing operations | $ | (0.07 | ) | $ | (0.06 | ) | ||
Earnings from discontinued operations, net of tax | — | 0.09 | ||||||
Net (loss) earnings per share | $ | (0.07 | ) | $ | 0.03 | |||
See accompanying notes to consolidated condensed financial statements.
2
Spartech Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
Three Months Ended | |||||||
February 4, | January 29, | ||||||
(Unaudited and dollars in thousands) | 2012 | 2011 | |||||
Cash flows from operating activities | |||||||
Net (loss) earnings | $ | (2,249 | ) | $ | 1,033 | ||
Adjustments to reconcile net (loss) earnings to net cash (used) provided by operating activities: | |||||||
Depreciation and amortization | 8,227 | 8,101 | |||||
Stock-based compensation expense | 943 | 893 | |||||
Restructuring and exit costs | — | 76 | |||||
Loss on disposition of assets, net | 53 | 124 | |||||
Provision for bad debt expense | 282 | 207 | |||||
Change in current assets and liabilities | (13,793 | ) | (1,329 | ) | |||
Other, net | (177 | ) | (1,394 | ) | |||
Net cash (used) provided by operating activities | (6,714 | ) | 7,711 | ||||
Cash flows from investing activities | |||||||
Capital expenditures | (3,884 | ) | (7,986 | ) | |||
Proceeds from the disposition of assets | 105 | — | |||||
Net cash used by investing activities | (3,779 | ) | (7,986 | ) | |||
Cash flows from financing activities | |||||||
Bank credit facility borrowings, net | 11,009 | 800 | |||||
Payments on bonds and leases | (122 | ) | (119 | ) | |||
Debt issuance costs | (485 | ) | (1,595 | ) | |||
Stock-based compensation exercised | (62 | ) | (180 | ) | |||
Net cash provided (used) by financing activities | 10,340 | (1,094 | ) | ||||
Effect of exchange rates on cash and cash equivalents | 4 | 4 | |||||
Decrease in cash and cash equivalents | (149 | ) | (1,365 | ) | |||
Cash and cash equivalents at beginning of period | 877 | 4,900 | |||||
Cash and cash equivalents at end of period | $ | 728 | $ | 3,535 | |||
See accompanying notes to consolidated condensed financial statements.
3
Notes to Consolidated Condensed Financial Statements
(Unaudited and Dollars in thousands, except per share amounts)
1. Basis of Presentation
The consolidated financial statements include the accounts of Spartech Corporation and its consolidated subsidiaries (“Spartech” or the “Company”). These financial statements have been prepared on a condensed basis, and accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, these consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) and disclosures necessary to make the information presented herein not misleading. These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes thereto included in the Company's October 29, 2011 Annual Report on Form 10-K.
In 2009, the Company sold its wheels and profiles businesses and closed and liquidated three businesses, including a manufacturer of boat components sold to the marine market and one compounding and one sheet business that previously serviced single customers. These businesses are classified as discontinued operations based on the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) topic, Discontinued Operations. Accordingly, for all periods presented herein, the consolidated statements of operations conform to this presentation. The wheels, profiles and marine businesses were previously reported in the Engineered Products group and due to these dispositions, the Company no longer has this reporting group. See Notes 2 and 10 for further discussion of the Company's discontinued operations and segments, respectively.
Spartech is organized into three reportable segments based on its operating structure and products manufactured. The three reportable segments are Custom Sheet and Rollstock, Packaging Technologies and Color and Specialty Compounds. During the fourth quarter of 2011, the Company reorganized its internal reporting and management responsibilities for a specific product line from its Color and Specialty Compounds segment to its Custom Sheet and Rollstock segment to better align its management of this product line with end markets. These management and reporting changes resulted in a reorganization of the Company's reportable segments, and historical segment results have been reclassified to conform to these changes. See Note 10 for further discussion of the Company's segments.
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Operating results for any quarter are historically seasonal in nature and are not necessarily indicative of the results expected for the full year. Certain reclassifications have been made to the prior period financial statements and notes to conform to the current period presentation. Dollars presented are in thousands except per share data, unless otherwise indicated.
The Company's fiscal year ends on the Saturday closest to October 31st and fiscal years generally contain 364 days. Because of this convention, every fifth or sixth fiscal year has an additional week, and 2012 will be reported as a 53-week fiscal year containing 371 days of activity. The Company's first quarter, which ended February 4, 2012, included 14 weeks compared to 13 weeks in the first quarter of the prior year. Years presented are fiscal unless noted otherwise.
4
2. Discontinued Operations
In 2009, the Company sold its wheels and profiles businesses and closed and liquidated three businesses, including a manufacturer of boat components sold to the marine market and one compounding and one sheet business that previously serviced single customers. These businesses are classified as discontinued operations. The wheels, profiles and marine businesses were previously reported in the Engineered Products group and due to these dispositions, the Company no longer has this reporting group.
During 2009, the Company filed a proof of claim in Chemtura's Chapter 11 case, alleging losses for breach of contract, fixed asset write-offs, severance and other related facility closure costs. In the first quarter of 2011, the Company reached a final settlement agreement with Chemtura and obtained the approval of the Bankruptcy Court overseeing Chemtura's bankruptcy proceedings for the settlement of the claim for $4,188 in cash and equity in the newly reorganized Chemtura, which was subsequently sold, resulting in $4,844 of total cash proceeds. Chemtura was the sole customer at our closed Arlington, Texas, facility and closure and related expenses were accounted for as discontinued operations. A summary of the net sales and the net earnings from discontinued operations is as follows:
Three Months Ended | ||||||||
February 4, 2012 | January 29, 2011 | |||||||
Earnings from discontinued operations before income taxes | $ | 34 | $ | 4,634 | ||||
Provision for income taxes | 13 | 1,763 | ||||||
Earnings from discontinued operations, net of tax | $ | 21 | $ | 2,871 | ||||
3. Inventories, net
Inventories are valued at the lower of cost or market. Inventory reserves reduce the cost basis of inventory. Inventory values are primarily based on either actual or standard costs, which approximates average cost. Finished goods include the costs of material, labor and overhead. Inventories at February 4, 2012, and October 29, 2011, consisted of the following:
February 4, 2012 | October 29, 2011 | ||||||
Raw materials | $ | 58,176 | $ | 52,270 | |||
Production supplies | 7,055 | 6,843 | |||||
Finished goods | 46,798 | 41,225 | |||||
Inventory reserves | (9,579 | ) | (9,152 | ) | |||
Total inventories, net | $ | 102,450 | $ | 91,186 | |||
4. Restructuring and Exit Costs
Restructuring and exit costs were recorded in the consolidated statements of operations as follows:
Three Months Ended | ||||||||
February 4, 2012 | January 29, 2011 | |||||||
Restructuring and exit costs: | ||||||||
Custom Sheet and Rollstock | $ | — | $ | 350 | ||||
Packaging Technologies | — | 116 | ||||||
Color and Specialty Compounds | — | 356 | ||||||
Corporate | — | 6 | ||||||
Total restructuring and exit costs | — | 828 | ||||||
Income tax benefit | — | (315 | ) | |||||
Impact on net loss from continuing operations | $ | — | $ | 513 | ||||
5
2008 Restructuring Plan
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. Since the plan was initiated, the Company has closed a packaging facility in Mankato, Minnesota; compounding facilities in St. Clair, Michigan, and Kearny, New Jersey; and sheet facilities in Richmond, Indiana, Atlanta, Georgia, and Arlington, Texas. The Company does not expect to incur any further significant restructuring and exit costs from the 2008 restructuring plan because all of its initiatives announced in conjunction with this plan have been substantially finalized.
The following table summarizes the cumulative restructuring and exit costs incurred to date under the 2008 restructuring plan:
Cumulative | |||
To-Date | |||
Employee severance | $ | 6,292 | |
Facility consolidation and shut-down costs | 6,943 | ||
Fixed asset valuation adjustments, net | 3,225 | ||
Total | $ | 16,460 | |
Employee severance includes costs associated with job eliminations and the reduction in jobs resulting from facility consolidations and plant shut downs. Facility consolidation and shut-down costs primarily include costs associated with shutting down production facilities, terminating leases and relocating production lines to continuing production facilities. Fixed asset valuation adjustments, net represents the effect from accelerated depreciation for reduced lives on property, plant and equipment and adjustments to the carrying value of assets held-for-sale to fair value, net of gains or losses on the ultimate sales of the assets.
As of February 4, 2012, the Company had $2,624 of assets held-for-sale. The estimated fair value of assets held for sale, which falls within Level 3 of the fair value hierarchy, represents management's best estimate of fair value upon sale and is determined based on broker analyses of prevailing market prices for similar assets.
The Company's total restructuring liability, representing severance and relocation costs, was $58 and $382 at February 4, 2012, and October 29, 2011, respectively. Cash payments for restructuring activities of continuing operations were $221 and $524 for the three months ended February 4, 2012 and January 29, 2011 respectively.
5. Debt
Debt at February 4, 2012, and October 29, 2011, consisted of the following:
February 4, 2012 | October 29, 2011 | ||||||
2004 Senior Notes | $ | 113,594 | $ | 113,594 | |||
Credit facility | 42,710 | 31,707 | |||||
Other | 11,526 | 11,910 | |||||
Total debt | 167,830 | 157,211 | |||||
Less current maturities | 25,066 | 25,211 | |||||
Total long-term debt | $ | 142,764 | $ | 132,000 | |||
On September 14, 2004 the Company completed a $150,000 private placement of Senior Notes over a term of twelve (12) years (2004 Senior Notes). On June 9, 2010, the Company entered into a new credit facility agreement and amended its 2004 Senior Notes. The new credit facility agreement has a borrowing capacity of $150,000 with an optional $50,000 accordion feature, has a term of four (4) years, bears interest at either Prime or LIBOR plus a borrowing margin and initially required a maximum Leverage Ratio of 3.5 to 1 and a minimum Fixed Charge Coverage Ratio of 2.25 to 1 (which was scheduled to decrease to 1.4 to 1 in the fourth quarter of 2012). The credit facility and amended 2004 Senior Notes are secured with collateral including accounts receivable, inventory, machinery and equipment and intangible assets.
On January 12, 2011, the Company entered into concurrent amendments (collectively, the “January 2011 Amendments”) to its new credit facility and amended 2004 Senior Note agreements. The January 2011 Amendments were effective starting with the
6
Company's first quarter of 2011. Under the January 2011 Amendments, the Company's maximum Leverage Ratio was amended quarterly throughout 2011 in order to provide covenant flexibility, and was subsequently amended by the December 2011 Amendments discussed below. Capitalized fees incurred in the first quarter of 2011 for the January 2011 Amendments were $1,595.
On December 6, 2011, the Company entered into concurrent amendments (collectively, the “December 2011 Amendments”) to its Amended and Restated Credit and 2004 Senior Note agreements (collectively, the “Agreements”) in order to provide covenant flexibility. The December 2011 Amendments are effective starting with the Company's first quarter of 2012. Under the December 2011 Amendments, the Company's minimum Fixed Charge Coverage Ratio was amended to 1.2 to 1 at the end of the fourth quarter of 2012 and first quarter of 2013 and increases to 1.3 to 1 at the end of the second quarter of 2013, and the covenant definition was changed to exclude 50% of scheduled installment payments (previously 100%) in the denominator of the calculation. Under the December 2011 Amendments, the Company's maximum Leverage Ratio was amended to 3.0 to 1 at the end of the third quarter of 2012. Consistent with the previous agreement, the Company's maximum Leverage Ratio continues at 3.0 to 1 at the end of the fourth quarter of 2012 through the third quarter of 2013 and decreases to 2.75 to 1 at the end of fourth quarter of 2013. Under the December 2011 Amendments, the Company's annual capital expenditures will be limited to $30,000 when the Company's Leverage Ratio exceeds 2.5 to 1. In addition, the Company will be subject to certain restrictions in its ability to complete acquisitions, pay dividends or buy back stock. Capitalized fees incurred in the first quarter of 2012 for the December 2011 Amendments were $485. The interest rate increased on the 2004 Senior Notes by 50 basis points to 7.08%. During the term of the Agreements, the Company is subject to an additional fee in the event the Company's credit profile rating decreases to a defined level. The additional fee would be based on the Company's debt level at that time and would have been approximately $1,136 as of February 4, 2012.
The new credit facility and amendment from existing Senior Note holders require the Company to offer early principal payments to Senior Note holders and credit facility investors (only in the event of default) based on a ratable percentage of each fiscal year's excess cash flow and extraordinary receipts, such as the proceeds from the sale of businesses. Under the Agreements, if the Company sells a business, it is required to offer a percentage (which varies based on the Company's Leverage Ratio) of the after tax proceeds (defined as “extraordinary receipts”) to its Senior Note holders and credit facility investors in excess of a $1,000 threshold. In addition, the Company is required to offer a percentage of annual “excess cash flow” as defined in the Agreements to the Senior Note holders and bank credit facility investors. The excess cash flow definition in the Agreements follows a standard free cash flow calculation. The Company is only required to offer the excess cash flow and extraordinary receipts if the Company ends its fiscal year with a Leverage Ratio in excess of 2.50 to 1. The Senior Note holders are not required to accept their allotted portion and to the extent individual holders reject their portion, other holders are entitled to accept the rejected proceeds. Early principal payments made to Senior Note holders reduce the principal balance outstanding. The Company made excess cash flow payments in the second quarter of 2011 of $378 and will make excess cash flow payments of $2,467 in the second quarter of 2012 to the Senior Note holders.
At February 4, 2012, the Company had $95,453 of total capacity and $42,710 of outstanding loans under the credit facility at a weighted average interest rate of 3.40%. In addition to the outstanding loans, the credit facility borrowing capacity was reduced by several standby letters of credit totaling $11,837.
Interest on the amended 2004 Senior Notes is 7.08% and is payable semiannually on March 15 and September 15 of each year. The Company may, at its option and upon notice, prepay at any time all or any part of the amended 2004 Senior Notes, together with accrued interest plus a make-whole amount. As of February 4, 2012, if the Company were to prepay the full principal outstanding on the amended 2004 Senior Notes, the make-whole amount would have been $16,894. The amended 2004 Senior Notes require equal annual principal payments of $22,718 that commence on September 15, 2012, and that are ratably reduced by required early principal payments based on a percentage of annual excess cash flow or extraordinary receipts as defined in the Agreements.
The Company is required to make its first principal payment on its amended 2004 Senior Notes within the next year in addition to the 2011 excess cash flow payment discussed above. The excess cash flow payment is expected to be paid in the second quarter of 2012, the first principal payment is expected to be paid in the fourth quarter of 2012, and the amounts associated with these payments are classified as current maturities of long term debt. Excluding these payments, borrowings under these facilities are classified as long-term because the Company has the ability and intent to keep the balances outstanding over the next twelve (12) months.
The Company's other debt consists primarily of industrial revenue bonds and capital lease obligations used to finance capital expenditures. These financings mature between 2012 and 2019 and have interest rates ranging from 0.20% to 12.47%.
The Company was in compliance with all debt covenants as of February 4, 2012. While the Company was in compliance with
7
its covenants and currently expects to be in compliance with its covenants during the next twelve (12) months, the Company's failure to comply with its covenants or other requirements of its financing arrangements is an event of default and could, among other things, accelerate the payment of indebtedness, which could have a material adverse impact on the Company's results of operations, financial condition and cash flows.
6. Income Taxes
The difference between the Company's federal statutory rate and the Company's effective rate for the three months ended February 4, 2012, was primarily attributable to the impact of state income taxes. These impacts were partially offset by benefits from the domestic manufacturer's deduction.
The difference between the Company's statutory rate and the Company's effective rate for the three months ended January 29, 2011, was primarily attributable to a reorganization of the Company's legal entities which resulted in a one-time $810 deferred benefit, coupled with the reinstatement of the research and development tax credit. These benefits were partially offset by adjustments to the Company's unrecognized tax benefit reserves and the effects of permanent items.
7. Fair Value of Financial Instruments
The Company performs an analysis of all existing financial assets and financial liabilities measured at fair value on a recurring basis to determine the significance and character of all inputs used to determine their fair value. The Company's financial instruments, including cash, accounts receivable, notes receivable, accounts payable and accrued liabilities, have net carrying values that approximate their fair values due to the short-term nature of these instruments.
We prioritize the inputs to valuation techniques used to measure fair value into the following three broad categories:
Level 1 inputs - Quoted prices for identical assets and liabilities in active markets.
Level 2 inputs - Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, observable inputs other than quoted prices and inputs that are derived principally from or corroborated by other observable market data.
Level 3 inputs - Unobservable inputs reflecting the entity's own assumptions about the assumptions market participants would use in pricing the asset or liability.
The estimated fair value of our long-term debt, which falls in Level 2 of the fair value hierarchy, is based on estimated borrowing rates to discount the cash flows to their present value as provided by a broker, or otherwise, quoted, current market prices for the same or similar issues. The following table presents the carrying amount and estimated fair value of long-term debt:
February 4, 2012 | October 29, 2011 | ||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||
Total debt (including credit facilities) | $ | 167,830 | $ | 173,383 | $ | 157,211 | $ | 161,259 | |||||||
The estimated fair value of assets held for sale, which falls within Level 3 of the fair value hierarchy, represents management's best estimate of fair value upon sale and is determined based on broker analyses of prevailing market prices for similar assets. As of February 4, 2012, the Company had $2,624 of assets held-for-sale.
During the three months ended February 4, 2012, there were no significant measurements of non-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition.
8
8. Commitments and Contingencies
In September 2003, the New Jersey Department of Environmental Protection (“NJDEP”) issued a directive to approximately 30 companies, including Franklin-Burlington Plastics, Inc., a subsidiary of the Company (“Franklin-Burlington”), to undertake an assessment of natural resource damage and perform interim restoration of the Lower Passaic River, a 17-mile stretch of the Passaic River in northern New Jersey. The directive, insofar as it relates to the Company and its subsidiary, pertains to the Company's plastic resin manufacturing facility in Kearny, New Jersey, located adjacent to the Lower Passaic River. The Company acquired the facility in 1986, when it purchased the stock of the facility's former owner, Franklin Plastics Corp. The Company acquired all of Franklin Plastics Corp.'s environmental liabilities as part of the acquisition. Franklin-Burlington responded to the directive, and no further action under the directive as yet has been required by NJDEP.
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 and related activities are currently estimated to cost approximately $100 million to complete and are currently expected to be completed by mid-2015. However, the RIFS costs are exclusive of any costs that may ultimately be required to remediate the Lower Passaic River area being studied or costs associated with natural resource damages that may be assessed. By agreeing to bear a portion of the cost of the RIFS, the Company did not admit to or agree to bear any such remediation or natural resource damage costs. In 2007, the USEPA issued a draft study that evaluated nine alternatives for early remedial action of a portion of the Lower Passaic River. The estimated cost of the alternatives in the aggregate ranged from $900 million to $2.3 billion. The Cooperating Parties provided comments to the USEPA regarding this draft study. In early calendar year 2012, the USEPA indicated that it would like to discuss moving forward with early remedial action at a specific location of the river. The Cooperating Parties are currently engaging in these discussions with the USEPA. The USEPA has not finalized its study and the RIFS is still ongoing, and the Company has not determined the extent to which, if any, it will participate in any early remedial action.
In 2009, the Company's subsidiary and over 300 other companies were named as third-party defendants in a suit brought by the NJDEP in Superior Court of New Jersey, Essex County, against Occidental Chemical Corporation and certain related entities (collectively, the “Occidental Parties”) with respect to alleged contamination of the Newark Bay Complex, including the Lower Passaic River. The third-party complaint seeks contributions from the third-party defendants with respect to any award to NJDEP of damages against the Occidental Parties in the matter.
As of February 4, 2012, the Company had approximately $0.9 million 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 because the extent to which the Company may be responsible for such remediation or natural resource damages is not yet known, it is not possible at this time to estimate the Company's ultimate liability related to this matter. Based on currently known facts and circumstances, the Company does not believe that this matter is likely to have a material effect on the Company's results of operations, consolidated financial position, or cash flows because the Company's Kearny, New Jersey, facility could not have contributed contamination along most of the river's length and did not store or use the contaminants that are of the greatest concern in the river sediments and because there are numerous other parties who will likely share in the cost of remediation and damages. However, it is reasonably possible that the ultimate liability resulting from this matter could materially differ from the February 4, 2012, accrual balance, and in the event of one or more adverse determinations related to this matter, the impact on the Company's results of operations, consolidated financial position or cash flows could be material to any specific period.
In March 2010, DPH Holdings Corp., a successor to Delphi Corporation and certain of its affiliates (“Delphi”), served Spartech Polycom, a subsidiary of the Company, with a complaint seeking to avoid and recover approximately $8.6 million in alleged preference payments Delphi made to Spartech Polycom shortly before Delphi's bankruptcy filing in 2005. Delphi initially pursued similar preference complaints against approximately 175 additional unrelated third parties. The complaint, dated September 26, 2007, was originally filed under seal in the United States Bankruptcy Court for the Southern District of New York (in re: DPH Holdings Corp., et al., Delphi Corporation, et al. v Spartech Polycom - Bankruptcy Case No. 05-44481/Adversary Proceeding No. 07-02639), but service of process did not commence until March 2010. The Company filed a motion to dismiss the complaint in May 2010. Following oral argument on the motion to dismiss, the Bankruptcy Court ordered Delphi to file a motion for leave to amend its complaint. Delphi subsequently filed such motion, and an initial hearing on the motion was held in June 2011. A second hearing on certain issues related to the motion for leave to amend was held in October 2011, at which time the Court continued the hearing for further proceedings bearing on the motion to amend. At this point, the
9
Company is unable to predict an outcome or estimate a range of reasonably possible losses, if any, related to the Delphi matter due to the complexity of the issues involved in the case, the early stage of the litigation, and the inherent uncertainties involved in litigation generally. Though the ultimate liabilities resulting from this proceeding, if any, could be material to the Company's results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company's consolidated financial position or cash flows.
On December 14, 2009, Simmons Bedding Company and The Simmons Manufacturing Co., LLC (collectively, “Simmons”) filed suit in the Superior Court of New Jersey, Essex County (Simmons Bedding Company and The Simmons Manufacturing Co., LLC v. Creative Vinyl/Fabrics, Inc. and its owner, Spartech Corporation, Spartech Polycom Calendared and Converted Products, Granwell Products, Inc., Nan Ya Plastics Corporation USA - Docket No. ESX-L-10197-09) alleging that vinyl product supplied to Simmons failed to meet certain specifications and claiming, among other things, a breach of contract, breach of warranty and fraud for which Simmons is seeking unspecified damages, including costs related to a voluntary product recall. Creative Vinyl/Fabrics, Inc. (“Creative”) is seeking common law indemnification and contribution from the Company. The Company supplied Creative with PVC film pursuant to purchase orders submitted by Creative, which Creative further processed and then sold to Simmons. Fact discovery has concluded and expert discovery is ongoing. A date for trial has not yet been scheduled. At this point, the Company is unable to predict an outcome or estimate a range of reasonably possible losses, if any, related to the Simmons matter due to the multiple parties involved in the case, the complexity of the issues involved, the current stage of the litigation, including that expert discovery is ongoing, and the inherent uncertainties involved in litigation generally. Based upon the discovery conducted to date, management believes that although the ultimate liabilities resulting from this proceeding, if any, could be material to the Company's results of operations in the period recognized, such liabilities would not have a material adverse effect on the Company's consolidated financial position or cash flows.
The Company is also subject to various other claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability, employment and other matters, several of which claim substantial amounts of damages. While it is not possible to estimate with certainty the ultimate legal and financial liability with respect to these claims, lawsuits, and administrative proceedings, the Company believes that the outcome of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows.
On September 15, 2011, we received a $4.8 million tax assessment for additional taxes, interest and penalties from the Mexico Tax Authorities related to our 2007 income tax and value added tax filings. The Company has filed an administrative appeal to this assessment and we anticipate that this matter will be resolved during 2012. The Company disagrees with the majority of the issues raised in the assessment and intends to contest them vigorously. We estimate that it is reasonably possible that the ultimate outcome of this matter could have a material impact on our results of operations in the period in which this matter is resolved; however, such liability would not have a material adverse impact on the Company's financial position or cash flows. The Company files US federal, US state and foreign income tax returns. The statute of limitations for US federal income tax returns are open for fiscal year 2008 and forward. For state and foreign returns, the Company is generally no longer subject to tax examinations for years prior to 2006. In addition, the Company is currently the subject of several income tax audits for various periods in multiple jurisdictions. The Company expects that within the next twelve (12) months it will reach closure on certain of these audits or the statute of limitations will lapse. The outcome of these audits is not estimable at this time.
10
9. Net Earnings (Loss) Per Share
Basic earnings per share excludes any dilution and is computed by dividing net earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The dilution from each of these instruments is calculated using the treasury stock method. Outstanding equity instruments that could potentially dilute basic earnings per share in the future but were not included in the computation of diluted earnings per share because they were antidilutive are as follows (in thousands):
Three Months Ended | ||||||
February 4, 2012 | January 29, 2011 | |||||
Antidilutive shares: | ||||||
SSARs | 1,828 | 831 | ||||
Stock options | 522 | 694 | ||||
Total antidilutive shares excluded from diluted earnings per share | 2,350 | 1,525 | ||||
The Company used the two-class method to compute basic and diluted earnings per share for all periods presented. The reconciliation of the net earnings from continuing operations, net earnings attributable to common stockholders and the weighted average number of common and participating shares used in the computations of basic and diluted earnings per share for three months ended February 4, 2012, and January 29, 2011 are as follows (shares in thousands):
Three Months Ended | ||||||||
February 4, 2012 | January 29, 2011 | |||||||
Basic and diluted net earnings: | ||||||||
Net loss from continuing operations | $ | (2,270 | ) | $ | (1,838 | ) | ||
Less: net earnings (loss) from continuing operations allocated to participating securities | — | (4 | ) | |||||
Net loss from continuing operations attributable to common shareholders | (2,270 | ) | (1,834 | ) | ||||
Net earnings from discontinued operations, net of tax | 21 | 2,871 | ||||||
Less: net earnings from discontinued operations allocated to participating securities | — | 6 | ||||||
Net earnings from discontinued operations attributable to common shareholders | 21 | 2,865 | ||||||
Net (loss) earnings attributable to common shareholders | $ | (2,249 | ) | $ | 1,031 | |||
Weighted average shares outstanding: | ||||||||
Basic weighted average common shares outstanding | 30,782 | 30,586 | ||||||
Add: dilutive shares from equity instruments | — | — | ||||||
Diluted weighted average shares outstanding | 30,782 | 30,586 | ||||||
Basic earnings per share attributable to common stockholders: | ||||||||
Net (loss) from continuing operations | $ | (0.07 | ) | $ | (0.06 | ) | ||
Net earnings from discontinued operations, net of tax | — | 0.09 | ||||||
Net (loss) earnings per share | $ | (0.07 | ) | $ | 0.03 | |||
Diluted earnings per share attributable to common shareholders: | ||||||||
Net (loss) from continuing operations | $ | (0.07 | ) | $ | (0.06 | ) | ||
Net earnings from discontinued operations, net of tax | — | 0.09 | ||||||
Net (loss) earnings per share | $ | (0.07 | ) | $ | 0.03 | |||
11
10. Segment Information
The Company is organized into three reportable segments based on its operating structure and the products manufactured. The three reportable segments are Custom Sheet and Rollstock, Packaging Technologies and Color and Specialty Compounds. The Company uses operating earnings (loss) from continuing operations, excluding the effect of foreign exchange, to evaluate business segment performance. Accordingly, discontinued operations have been excluded from the segment results below, which is consistent with management's evaluation metrics. Corporate operating losses include corporate office expenses, shared services costs, information technology costs, professional fees and the effect of foreign currency exchange that are not allocated to the reportable segments.
During the fourth quarter of 2011, the Company reorganized its internal reporting and management responsibilities for a specific product line from its Color and Specialty Compounds segment to its Custom Sheet and Rollstock segment to better align its management of this product line with end markets. These management and reporting changes resulted in a reorganization of the Company's reportable segments, and historical segment results have been reclassified to conform to these changes. A description of the Company's reportable segments is as follows:
Custom Sheet and Rollstock
The Custom Sheet and Rollstock segment primarily manufactures plastic sheet, custom rollstock, calendered film, laminates and acrylic products. The principal raw materials used in manufacturing sheet and rollstock are plastic resins in pellet form. The segment sells sheet and rollstock products principally through its own sales force, but it also uses a limited number of independent sales representatives. This segment produces and distributes its products from facilities in the United States, Canada and Mexico. Finished products are formed by customers that use plastic components in their products. The Company's custom sheet and rollstock is used in several market sectors including material handling, transportation, building and construction, recreation and leisure, electronics and appliances, sign and advertising, aerospace and numerous other end markets.
Packaging Technologies
The Packaging Technologies segment manufactures custom-designed plastic packages and custom rollstock primarily used in the food and consumer product markets. The principal raw materials used in manufacturing packaging are plastic resins in pellet form, which are extruded into rollstock or thermoformed into an end product. This segment sells packaging products principally through its own sales force, but it also uses a limited number of independent sales representatives. This segment produces and distributes the products from facilities in the United States and Mexico. The Company's Packaging Technologies products are mainly used in the food, medical and consumer packaging and graphic arts market sectors.
Color and Specialty Compounds
The Color and Specialty Compounds segment manufactures custom-designed plastic alloys, compounds and color concentrates for use by a large group of manufacturing customers servicing the transportation (primarily automotive), building and construction, packaging, agriculture, lawn and garden, electronics and appliances, and numerous other end markets. The principal raw materials used in manufacturing specialty plastic compounds and color concentrates are plastic resins in powder and pellet form. This segment also uses colorants, mineral and glass reinforcements and other additives to impart specific performance and appearance characteristics to the compounds. The Color and Specialty Compounds segment sells its products principally through its own sales force, but it also uses independent sales representatives. This segment produces and distributes its products from facilities in the United States, Canada, Mexico and France.
12
The following presents the Company's net sales and operating earnings (loss) by reportable segment and the reconciliation to consolidated operating earnings for the three months ended February 4, 2012, and January 29, 2011:
Three Months Ended | ||||||||
February 4, 2012 | January 29, 2011 | |||||||
Net sales: (a)(b) | ||||||||
Custom Sheet and Rollstock | $ | 145,626 | $ | 127,560 | ||||
Packaging Technologies | 62,245 | 51,743 | ||||||
Color and Specialty Compounds | 73,910 | 55,480 | ||||||
$ | 281,781 | $ | 234,783 | |||||
Operating earnings (loss): (b) | ||||||||
Custom Sheet and Rollstock | $ | 3,214 | $ | 4,777 | ||||
Packaging Technologies | 3,706 | 4,642 | ||||||
Color and Specialty Compounds | 821 | (2,892 | ) | |||||
Corporate | (8,267 | ) | (8,345 | ) | ||||
$ | (526 | ) | $ | (1,818 | ) | |||
Notes to Table | ||
(a) | Excludes intersegment sales of $16,992 and $10,758 in the first quarter of 2012 and 2011, respectively. | |
(b) | Excludes discontinued operations. | |
11. Comprehensive Income
At February 4, 2012, and January 29, 2011, other comprehensive income (loss) consisted of cumulative foreign currency translation adjustments. Foreign exchange gains and losses are reported in selling, general and administrative expenses in the results of operations and reflect U.S. dollar-denominated transaction gains and losses due to fluctuations in foreign currency. The reconciliation of net earnings to comprehensive income for the three months ended February 4, 2012, and January 29, 2011 is as follows:
Three Months Ended | ||||||||
February 4, 2012 | January 29, 2011 | |||||||
Net (loss) earnings | $ | (2,249 | ) | $ | 1,033 | |||
Foreign currency translation adjustments | 55 | 412 | ||||||
Total comprehensive (loss) income | $ | (2,194 | ) | $ | 1,445 | |||
The Company recorded foreign exchange losses before taxes of $16 and gains of $106 for the three months ended February 4, 2012 and January 29, 2011, respectively. As of February 4, 2012, the Company had monetary assets denominated in foreign currency of $5,727 of net Canadian liabilities, $781 of net Euro assets and $3,332 of net Mexican Peso assets.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company's financial condition and results of operations contains “forward-looking statements.” The following discussion of the Company's financial condition and results of operations should be read in conjunction with Spartech's condensed consolidated financial statements and accompanying notes. The Company has based its forward-looking statements about its markets and demand for its products and future results on assumptions that the Company considers reasonable. Actual results may differ materially from those suggested by such forward-looking statements for various reasons including those discussed in “Cautionary Statements Concerning Forward-Looking Statements.” Unless otherwise noted, all amounts and analyses are based on continuing operations.
Non-GAAP Financial Measures
Management's Discussion and Analysis of Financial Condition and Results of Operations contains financial information prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and operating earnings (loss) excluding special items, net earnings (loss) from continuing operations excluding special items and net earnings (loss) from continuing operations per diluted share excluding special items that are considered “non-GAAP financial measures.” Special items include restructuring and exit costs.
Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flow that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The presentation of these measures is intended to supplement investors' understanding of the Company's operating performance. These measures may not be comparable to similar measures at other companies. The Company believes that these measurements are useful to investors because it helps them compare the Company's results to previous periods and provides an indication of underlying trends in the business. Non-GAAP measurements are not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. See the “Liquidity and Capital Resources” section of Item 2 for a reconciliation of GAAP to non-GAAP measures.
Business Overview
Spartech is an intermediary producer of plastic products, including polymeric compounds, concentrates, custom extruded sheet and rollstock products and packaging technologies. The Company converts base polymers or resins purchased from commodity suppliers into extruded plastic sheet and rollstock, thermoformed packaging, specialty film laminates, acrylic products, specialty plastic alloys, color concentrates and blended resin compounds for customers in a wide range of markets. The Company has facilities located throughout the United States, Canada, Mexico and France that are organized into three segments; Custom Sheet and Rollstock, Packaging Technologies, and Color and Specialty Compounds.
In 2009, the Company sold its wheels and profiles businesses and closed and liquidated three businesses, including a manufacturer of boat components sold to the marine market and one compounding and one sheet business that previously serviced single customers. These businesses are classified as discontinued operations and all amounts presented within Item 2 are presented on a continuing basis, unless otherwise noted. See the notes to the consolidated condensed financial statements for further details of these divestitures and closures. The wheels, profiles and marine businesses were previously reported in the Engineered Products group and due to these dispositions, the Company no longer has this reporting group.
The Company assesses net sales changes using two major drivers: underlying volume and price/mix. Underlying volume is calculated as the change in pounds sold for a comparable number of days in the reporting period. The Company's fiscal year ends on the Saturday closest to October 31st and fiscal years generally contain 364 days. Because of this convention, every fifth or sixth fiscal year has an additional week, and 2012 will be reported as a 53-week fiscal year containing 371 days of activity. The Company's first quarter, which ended February 4, 2012, included 14 weeks compared to 13 weeks in the first quarter of the prior year. Periods presented are fiscal unless noted otherwise.
Results
Net sales were $281.8 million for the first quarter of 2012, representing a 9% increase from price/mix, an 8% increase in volume from the impact of an extra week and a 3% increase in underlying volume when compared to 2011. The price/mix increases were related to a product mix that included a greater percentage of higher priced products. Our underlying sales volume was up due to increases to specific end markets discussed below. Operating losses excluding special items were $0.5 million for the first quarter of 2012, compared to operating earnings excluding special items of $1.0 million in the same period of 2011.
The first quarter of 2012 was challenging for the Company as we continued our turnaround effort in the Custom Sheet and Rollstock segment. While we remain committed to the level of work necessary to achieve our goals we are realistic about the
14
time and cost associated with this effort. As progress has been measurably improved on certain key metrics, offsetting cost increases associated with implementing the turnaround improvements has resulted in a negative impact to our bottom line in this segment. This coupled with our seasonally low first quarter demand and higher costs has led to diluted per share results that are down from the same period last year. Additionally, during the first quarter of 2012, we were also able to restructure our debt agreements, which will provide for additional covenant flexibility from the fourth quarter of 2012 forward. This flexibility will support greater liquidity to fund organic initiatives and growth from higher margin capacity investments. We also remain committed to our key priorities (delighting customers with improved service levels, enhancing margins through back to basics continuous improvements and material usage, and profitable organic growth) and recognize the challenges present in enacting such change.
Outlook
Although we expect our second quarter earnings will be comparable to the prior year second quarter, we believe our second half of the year will build on our foundation from the turnaround efforts over the last several quarters and support an improvement in our annual earnings per share over the prior year. Opportunity exists for additional margin improvement as we continue to execute the turnaround in our Custom Sheet and Rollstock and Color and Specialty Compounds segments. Slow and uncertain demand recovery in the markets we serve, coupled with a dynamic raw materials market may impact our financial results in future periods. We continue developing a back to basics culture as we move forward in the execution of our key operating priorities. Using these priorities as a foundation, we expect to execute on our organic growth strategy and focus on shifting our product mix toward more specialized and higher margin products. We are focused on providing innovative and sustainable plastics solutions to our customers as we position ourselves as strategic partners within the markets we serve.
Consolidated Results
Net sales were $281.8 million in the three month period ended February 4, 2012. Fluctuations in net sales were caused by:
Q1 2012 vs. Q1 2011 | |||
Underlying volume | 3 | % | |
Volume from additional week | 8 | % | |
Price/Mix | 9 | % | |
Total | 20 | % | |
The increase in underlying volume is primarily attributed to the higher volume in our Color and Specialty Compounds segment related to the construction, automotive and packaging end markets, increased volume to the automotive sector in our Custom Sheet and Rollstock segment, and increased volume in our Packaging Technologies segment related to food packaging. These increases were somewhat offset by a decrease in sales volume to the material handling and appliance and electronics markets in the Custom Sheet and Rollstock segment. The price/mix increase was primarily related to a product mix that included a greater percentage of higher priced products.
The following table presents net sales, cost of sales, and the resulting gross margin in dollars and on a per pound sold basis for the three months ended February 4, 2012 and January 29, 2011. 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.
15
Three Months Ended | ||||||||
February 4, 2012 | January 29, 2011 | |||||||
Dollars and Pounds(in millions) | ||||||||
Net sales | $ | 281.8 | $ | 234.8 | ||||
Cost of sales | 260.1 | 216.4 | ||||||
Gross margin | $ | 21.7 | $ | 18.4 | ||||
Pounds sold | 225.5 | 203.9 | ||||||
Dollars per Pound Sold | ||||||||
Net sales | $ | 1.250 | $ | 1.152 | ||||
Cost of sales | 1.153 | 1.061 | ||||||
Gross margin | $ | 0.097 | $ | 0.091 | ||||
Gross margin per pound sold increased from 9.1 cents for the three months ended January 29, 2011 to 9.7 cents for the three months ended February 4, 2012. The increase primarily reflects improved material margin from an improved mix of high material margin products somewhat offset by increased costs. Cost increases compared to last year are the result of start up costs associated with accelerating production on our first Packaging Technologies line in Mexico and increases in repairs and maintenance, freight costs, labor and benefit expenses, including health care and training costs.
Selling, general and administrative expenses were $21.8 million in the first quarter of 2012 compared to $19.0 million in the prior year. The increase reflects the impact of an additional week, which accounts for approximately $1.6 million of the total change. The remaining $1.2 million is primarily attributed to higher consulting costs to initiate our turnaround effort, compensation and benefit expenses, including health care costs.
The Company completed its previously announced restructuring efforts in 2011 and therefore did not record any restructuring and exit costs in the first quarter of 2012 compared to $0.8 million in the same period of the prior year. Restructuring and exit costs were comprised of employee severance, facility consolidation and shut-down costs and fixed asset valuation adjustments for assets related to restructured facilities.
Interest expense, net of interest income, was $3.0 million in the first quarter of 2012 compared to $2.6 million in the same period of the prior year. The increase was primarily due to the extra week combined with an increase in interest rates on existing debt.
Income tax benefit was $1.3 million in the first quarter of 2012 compared to a $2.6 million benefit in the first quarter of 2011. Income tax benefit in the first quarter of 2012 and 2011 reflects the losses reported in each period. The additional benefit in the first quarter of 2011 can be attributed to a reorganization of the Company's legal entities which resulted in a one-time $0.8 million deferred benefit.
We reported a net loss from continuing operations of $2.3 million or $(0.07) per diluted share for the first quarter of 2012, compared to a net loss from continuing operations of $1.8 million or $(0.06) per diluted share in the prior year. Excluding special items (restructuring and exit costs), we reported a net loss from continuing operations of $2.3 million or $(0.07) per diluted share for the first quarter of 2012, compared to a net loss of $1.3 million or $(0.04) per diluted share in the prior year.
Net earnings from discontinued operations were negligible in the first three months of 2012 compared to $2.9 million in the first quarter of 2011, which mainly resulted from the settlement agreement for the breach of a contract by a third party that led to $4.8 million in total cash proceeds.
Segment Results
The Company is organized into three reportable segments based on its operating structure and the products manufactured. The three reportable segments are Custom Sheet and Rollstock, Packaging Technologies and Color and Specialty Compounds. The information included in this section is intended to provide specific information for the operation results of each segment.
During the fourth quarter of 2011, the Company reorganized its internal reporting and management responsibilities of a product line from its Color and Specialty Compounds segment to its Custom Sheet and Rollstock segment to better align the
16
management of this product line with end markets. This management and reporting change resulted in a reorganization of the Company's reportable segments. Historical segment results have been reclassified to conform to these changes.
Custom Sheet and Rollstock Segment
Net sales were $145.6 million for the three months ended February 4, 2012. Fluctuations in net sales were caused by:
Q1 2012 vs. Q1 2011 | |||
Underlying volume | -5 | % | |
Volume from additional week | 8 | % | |
Price/Mix | 11 | % | |
Total | 14 | % | |
The underlying sales volume in this segment declined for the three months ended February 4, 2012 compared to the prior year, reflecting a decrease in sales volume to the material handling and appliance and electronics end markets. These decreases were somewhat offset by an increase in sales to the automotive sector and recreation and leisure end markets. The price/mix increase was mostly caused by a product mix that included a greater percentage of higher priced products.
Operating earnings excluding special items were $3.2 million for the three months ended February 4, 2012 compared to $5.1 million for the three months ended January 29, 2011. The decrease in earnings can be attributed to increased costs related to compensation, repairs and maintenance, utilities, freight and consulting costs to initiate our turnaround effort. The increased costs were somewhat offset by higher volume and a greater mix of high margin products. Both costs and volume were increased by the inclusion of an extra week during the first quarter of 2012 compared to the same period last year.
Packaging Technologies
Net sales were $62.2 million for the three months ended February 4, 2012. Fluctuations in net sales were caused by:
Q1 2012 vs. Q1 2011 | |||
Underlying volume | 2 | % | |
Volume from additional week | 8 | % | |
Price/Mix | 10 | % | |
Total | 20 | % | |
The underlying sales volume in this segment was up for the three months ended February 4, 2012 compared to the prior year, reflecting an increase in volume to the food packaging market and other packaging applications. The price/mix increase was primarily related to a product mix that included a greater percentage of higher priced products.
Operating earnings excluding special items were $3.7 million for the three months ended February 4, 2012 compared to $4.8 million for the three months ended January 29, 2011. The decrease in earnings can be attributed to increased costs related to compensation, depreciation expenses and freight, in addition to start up costs associated with accelerating production on our first Packaging Technologies line in Mexico. The increased costs were somewhat offset by a greater mix of high material margin product compared to the prior year. Both costs and volume were increased by the inclusion of an extra week during the first quarter of 2012 compared to the same period last year.
Color and Specialty Compounds Segment
Net sales were $73.9 million for the three months ended February 4, 2012. Fluctuations in net sales were caused by:
Q1 2012 vs. Q1 2011 | |||
Underlying volume | 13 | % | |
Volume from additional week | 8 | % | |
Price/Mix | 12 | % | |
Total | 33 | % | |
The underlying sales volume in this segment was up for the three months ended February 4, 2012 compared to the prior year, reflecting a significant increase in sales to the commercial construction market, automotive sector of the transportation market
17
and packaging market. The price/mix increase was mostly caused by a product mix that included a greater percentage of higher priced products.
Operating earnings excluding special items were $0.8 million for the three months ended February 4, 2012 compared to operating losses of $2.5 million in the same period of the prior year. The increase in operating earnings was due to the increase in sales volume, benefits from improvements on our key operating metrics and greater mix of high material margin product compared to the prior year, which more than offset the impact of cost increases related to repairs and maintenance and compensation. Both cost and volume were increased by the inclusion of an extra week during the first quarter of 2012 compared to the same period last year.
Corporate
Corporate expenses include general and administrative expenses, corporate office expenses, shared services costs, information technology costs, professional fees and the impact of foreign currency exchange gains and losses. Corporate operating expenses were $8.3 million for the three months ended February 4, 2012 and January 29, 2011. The period comparison includes lower professional fees and relocation costs, which were offset by the impact of an additional week.
Liquidity and Capital Resources
Cash Flow
The Company's primary sources of liquidity have been cash flows from operating activities and borrowings from third parties. Historically, the Company's principal uses of cash have been to support operating activities, invest in capital improvements, reduce outstanding indebtedness, finance strategic business acquisitions, acquire treasury shares and pay dividends on its common stock. The following summarizes the major categories of changes in cash and cash equivalents for the three months ended February 4, 2012 and January 29, 2011:
Three Months Ended | |||||||
February 4, 2012 | January 29, 2011 | ||||||
Cash Flows (in thousands) | |||||||
Net cash (used) provided by operating activities | $ | (6,714 | ) | $ | 7,711 | ||
Net cash used by investing activities | (3,779 | ) | (7,986 | ) | |||
Net cash provided (used) by financing activities | 10,340 | (1,094 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 4 | 4 | |||||
Decrease in cash and cash equivalents | $ | (149 | ) | $ | (1,365 | ) | |
Net cash used by operating activities was $6.7 million in the first three months of 2012 compared to cash provided of $7.7 million for the same period in the prior year. The decrease reflects the impact of a $3.3 million change in net earnings including earnings from discontinued operations in 2011 and an increased investment in net working capital in 2012. The increase in net working capital can be attributed to receipts of a federal income tax refund of $5.7 million and cash received on a note receivable of $2.0 million in the first quarter of 2011, combined with a greater relative decrease in accounts payable and lower relative increase in accrued liabilities in the first quarter of 2012 compared to the first quarter of the prior year.
Net cash used for investing activities of $3.8 million in the first three months of 2012 consisted of $3.9 million of capital expenditures which were slightly offset by $0.1 million of proceeds from the disposition of assets. Net cash used for investing activities in the first three months of 2011 was comprised of $8.0 million of capital expenditures. We expect to spend approximately $20.0 million to $25.0 million on capital expenditures in 2012. Capital expenditure amounts are expected to be funded from operating cash flows and credit facility borrowings.
Net cash provided by financing activities of $10.3 million in the first three months of 2012 mainly consisted of credit facility borrowings offset by debt financing costs associated with the Company's December 2011 Amendments. Net cash used for financing activities in the first three months of 2011 of $1.1 million reflects the impacts of debt financing costs associated with the Company's January 2011 Amendments, offset by credit facility borrowings.
Financing Arrangements
On September 14, 2004 the Company completed a $150.0 million private placement of Senior Notes over a term of twelve (12)
18
years (2004 Senior Notes). On June 9, 2010, the Company entered into a new credit facility agreement and amended its 2004 Senior Notes. The new credit facility agreement has a borrowing capacity of $150.0 million with an optional $50.0 million accordion feature, has a term of four (4) years, bears interest at either Prime or LIBOR plus a borrowing margin and initially required a maximum Leverage Ratio of 3.5 to 1 and a minimum Fixed Charge Coverage Ratio of 2.25 to 1 (which was scheduled to decrease to 1.4 to 1 in the fourth quarter of 2012). The credit facility and amended 2004 Senior Notes are secured with collateral including accounts receivable, inventory, machinery and equipment and intangible assets.
On January 12, 2011, the Company entered into concurrent amendments (collectively, the “January 2011 Amendments”) to its new credit facility and amended 2004 Senior Note agreements. The January 2011 Amendments were effective starting with the Company's first quarter of 2011. Under the January 2011 Amendments, the Company's maximum Leverage Ratio was amended quarterly throughout 2011 in order to provide covenant flexibility, and was subsequently amended by the December 2011 Amendments discussed below. Capitalized fees incurred in the first quarter of 2011 for the January 2011 Amendments were $1.6 million.
On December 6, 2011, the Company entered into concurrent amendments (collectively, the “December 2011 Amendments”) to its Amended and Restated Credit and 2004 Senior Note agreements (collectively, the “Agreements”) in order to provide covenant flexibility. The December 2011 Amendments are effective starting with the Company's first quarter of 2012. Under the December 2011 Amendments, the Company's minimum Fixed Charge Coverage Ratio was amended to 1.2 to 1 at the end of the fourth quarter of 2012 and first quarter of 2013 and increases to 1.3 to 1 at the end of the second quarter of 2013, and the covenant definition was changed to exclude 50% of scheduled installment payments (previously 100%) in the denominator of the calculation. Under the December 2011 Amendments, the Company's maximum Leverage Ratio was amended to 3.0 to 1 at the end of the third quarter of 2012. Consistent with the previous agreement, the Company's maximum Leverage Ratio continues at 3.0 to 1 at the end of the fourth quarter of 2012 through the third quarter of 2013 and decreases to 2.75 to 1 at the end of fourth quarter of 2013. Under the December 2011 Amendments, the Company's annual capital expenditures will be limited to $30.0 million when the Company's Leverage Ratio exceeds 2.5 to 1. In addition, the Company will be subject to certain restrictions in its ability to complete acquisitions, pay dividends or buy back stock. Capitalized fees incurred in the first quarter of 2012 for the December 2011 Amendments were $0.5 million. The interest rate increased on the 2004 Senior Notes by 50 basis points to 7.08%. During the term of the Agreements, the Company is subject to an additional fee in the event the Company's credit profile rating decreases to a defined level. The additional fee would be based on the Company's debt level at that time and would have been approximately $1.1 million as of February 4, 2012.
The new credit facility and amendment from existing Senior Note holders require the Company to offer early principal payments to Senior Note holders and credit facility investors (only in the event of default) based on a ratable percentage of each fiscal year's excess cash flow and extraordinary receipts, such as the proceeds from the sale of businesses. Under the Agreements, if the Company sells a business, it is required to offer a percentage (which varies based on the Company's Leverage Ratio) of the after tax proceeds (defined as “extraordinary receipts”) to its Senior Note holders and credit facility investors in excess of a $1.0 million threshold. In addition, the Company is required to offer a percentage of annual “excess cash flow” as defined in the Agreements to the Senior Note holders and bank credit facility investors. The excess cash flow definition in the Agreements follows a standard free cash flow calculation. The Company is only required to offer the excess cash flow and extraordinary receipts if the Company ends its fiscal year with a Leverage Ratio in excess of 2.50 to 1. The Senior Note holders are not required to accept their allotted portion and to the extent individual holders reject their portion, other holders are entitled to accept the rejected proceeds. Early principal payments made to Senior Note holders reduce the principal balance outstanding. The Company made excess cash flow payments in the second quarter of 2011 of $0.4 million and will make excess cash flow payments of $2.5 million in the second quarter of 2012 to the Senior Note holders.
At February 4, 2012, the Company had $95.5 million of total capacity and $42.7 million of outstanding loans under the credit facility at a weighted average interest rate of 3.40%. In addition to the outstanding loans, the credit facility borrowing capacity was reduced by several standby letters of credit totaling $11.8 million. Under the Company's most restrictive covenant, the Leverage Ratio, the Company had $15.2 million of availability on its credit facility as of February 4, 2012.
Interest on the amended 2004 Senior Notes is 7.08% and is payable semiannually on March 15 and September 15 of each year. The Company may, at its option and upon notice, prepay at any time all or any part of the amended 2004 Senior Notes, together with accrued interest plus a make-whole amount. As of February 4, 2012, if the Company were to prepay the full principal outstanding on the amended 2004 Senior Notes, the make-whole amount would have been $16.9 million. The amended 2004 Senior Notes require equal annual principal payments of $22.7 million that commence on September 15, 2012, and that are ratably reduced by required early principal payments based on a percentage of annual excess cash flow or extraordinary receipts as defined in the Agreements.
The Company is required to make its first principal payment on its amended 2004 Senior Notes within the next year in addition
19
to the 2011 excess cash flow payment discussed above. The excess cash flow payment is expected to be paid in the second quarter of 2012, the first principal payment is expected to be paid in the fourth quarter of 2012, and the amounts associated with these payments are classified as current maturities of long term debt. Excluding these payments, borrowings under these facilities are classified as long-term because the Company has the ability and intent to keep the balances outstanding over the next twelve (12) months.
The Company's other debt consists primarily of industrial revenue bonds and capital lease obligations used to finance capital expenditures. These financings mature between 2012 and 2019 and have interest rates ranging from 0.20% to 12.47%.
The Company was in compliance with all debt covenants as of February 4, 2012. While the Company was in compliance with its covenants and currently expects to be in compliance with its covenants during the next twelve (12) months, the Company's failure to comply with its covenants or other requirements of its financing arrangements is an event of default and could, among other things, accelerate the payment of indebtedness, which could have a material adverse impact on the Company's results of operations, financial condition and cash flows.
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.
20
Non-GAAP Reconciliations
The following table reconciles operating loss (GAAP) to operating loss excluding special items (Non-GAAP), net loss from continuing operations (GAAP) to net loss from continuing operations excluding special items (Non-GAAP) and net loss from continuing operations per diluted share (GAAP) to net loss from continuing operations per diluted share excluding special items (Non-GAAP):
Three Months Ended | ||||||||
February 4, | January 29, | |||||||
(unaudited and in thousands, except per share data) | 2012 | 2011 | ||||||
Operating loss (GAAP) | $ | (526 | ) | $ | (1,818 | ) | ||
Restructuring and exit costs | — | 828 | ||||||
Operating loss excluding special items (Non-GAAP) | $ | (526 | ) | $ | (990 | ) | ||
Net loss from continuing operations (GAAP) | $ | (2,270 | ) | $ | (1,838 | ) | ||
Restructuring and exit costs, net of tax | — | 513 | ||||||
Net loss from continuing operations excluding special items (Non-GAAP) | $ | (2,270 | ) | $ | (1,325 | ) | ||
Net loss from continuing operations per diluted share (GAAP) | $ | (0.07 | ) | $ | (0.06 | ) | ||
Restructuring and exit costs, net of tax | — | 0.02 | ||||||
Net loss from continuing operations per diluted share excluding special items (Non-GAAP) | $ | (0.07 | ) | $ | (0.04 | ) | ||
The following table reconciles operating earnings (loss) (GAAP) to operating earnings (loss) excluding special items (Non-GAAP) by segment (in thousands):
Three Months Ended | Three Months Ended | ||||||||||||||||||||||
February 4, 2012 | January 29, 2011 | ||||||||||||||||||||||
Operating Earnings (Loss) (GAAP) | Special Items | Operating Earnings (Loss) Excluding (Non-GAAP) Special Items | Operating Earnings (Loss) (GAAP) | Special Items | Operating Earnings (Loss) Excluding (Non-GAAP) Special Items | ||||||||||||||||||
Segment | |||||||||||||||||||||||
Custom Sheet and Rollstock | $ | 3,214 | $ | — | $ | 3,214 | $ | 4,777 | $ | 350 | $ | 5,127 | |||||||||||
Packaging Technologies | 3,706 | — | 3,706 | 4,642 | 116 | 4,758 | |||||||||||||||||
Color and Specialty Compounds | 821 | — | 821 | (2,892 | ) | 356 | (2,536 | ) | |||||||||||||||
Corporate | (8,267 | ) | — | (8,267 | ) | (8,345 | ) | 6 | (8,339 | ) | |||||||||||||
Total | $ | (526 | ) | $ | — | $ | (526 | ) | $ | (1,818 | ) | $ | 828 | $ | (990 | ) | |||||||
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our exposure to market risk since October 29, 2011. Please see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended October 29, 2011, for a discussion of our exposure to market risk at October 29, 2011.
Item 4. Controls and Procedures
Spartech maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including the Company's certifying officers, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation performed, the Company's certifying officers have concluded that the disclosure controls and procedures were effective as of February 4, 2012, to provide reasonable assurance of the achievement of these objectives.
Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company's reports.
There was no change in the Company's internal control over financial reporting during the quarter ended February 4, 2012 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II — Other Information
Item 1. Legal Proceedings
In September 2003, the New Jersey Department of Environmental Protection (“NJDEP”) issued a directive to approximately 30 companies, including Franklin-Burlington Plastics, Inc., a subsidiary of the Company (“Franklin-Burlington”), to undertake an assessment of natural resource damage and perform interim restoration of the Lower Passaic River, a 17-mile stretch of the Passaic River in northern New Jersey. The directive, insofar as it relates to the Company and its subsidiary, pertains to the Company's plastic resin manufacturing facility in Kearny, New Jersey, located adjacent to the Lower Passaic River. The Company acquired the facility in 1986, when it purchased the stock of the facility's former owner, Franklin Plastics Corp. The Company acquired all of Franklin Plastics Corp.'s environmental liabilities as part of the acquisition. Franklin-Burlington responded to the directive, and no further action under the directive as yet has been required by NJDEP.
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 and related activities are currently estimated to cost approximately $100 million to complete and are currently expected to be completed by mid-2015. However, the RIFS costs are exclusive of any costs that may ultimately be required to remediate the Lower Passaic River area being studied or costs associated with natural resource damages that may be assessed. By agreeing to bear a portion of the cost of the RIFS, the Company did not admit to or agree to bear any such remediation or natural resource damage costs. In 2007, the USEPA issued a draft study that evaluated nine alternatives for early remedial action of a portion of the Lower Passaic River. The estimated cost of the alternatives in the aggregate ranged from $900 million to $2.3 billion. The Cooperating Parties provided comments to the USEPA regarding this draft study. In early calendar year 2012, the USEPA indicated that it would like to discuss moving forward with early remedial action at a specific location of the river. The Cooperating Parties are currently engaging in these discussions with the USEPA. The USEPA has not finalized its study and the RIFS is still ongoing, and the Company has not determined the extent to which, if any, it will participate in any early remedial action.
In 2009, the Company's subsidiary and over 300 other companies were named as third-party defendants in a suit brought by the NJDEP in Superior Court of New Jersey, Essex County, against Occidental Chemical Corporation and certain related entities (collectively, the “Occidental Parties”) with respect to alleged contamination of the Newark Bay Complex, including the Lower Passaic River. The third-party complaint seeks contributions from the third-party defendants with respect to any award to NJDEP of damages against the Occidental Parties in the matter.
22
As of February 4, 2012, the Company had approximately $0.9 million 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 because the extent to which the Company may be responsible for such remediation or natural resource damages is not yet known, it is not possible at this time to estimate the Company's ultimate liability related to this matter. Based on currently known facts and circumstances, the Company does not believe that this matter is likely to have a material effect on the Company's results of operations, consolidated financial position, or cash flows because the Company's Kearny, New Jersey, facility could not have contributed contamination along most of the river's length and did not store or use the contaminants that are of the greatest concern in the river sediments and because there are numerous other parties who will likely share in the cost of remediation and damages. However, it is reasonably possible that the ultimate liability resulting from this matter could materially differ from the February 4, 2012, accrual balance, and in the event of one or more adverse determinations related to this matter, the impact on the Company's results of operations, consolidated financial position or cash flows could be material to any specific period.
In March 2010, DPH Holdings Corp., a successor to Delphi Corporation and certain of its affiliates (“Delphi”), served Spartech Polycom, a subsidiary of the Company, with a complaint seeking to avoid and recover approximately $8.6 million in alleged preference payments Delphi made to Spartech Polycom shortly before Delphi's bankruptcy filing in 2005. Delphi initially pursued similar preference complaints against approximately 175 additional unrelated third parties. The complaint, dated September 26, 2007, was originally filed under seal in the United States Bankruptcy Court for the Southern District of New York (in re: DPH Holdings Corp., et al., Delphi Corporation, et al. v Spartech Polycom - Bankruptcy Case No. 05-44481/Adversary Proceeding No. 07-02639), but service of process did not commence until March 2010. The Company filed a motion to dismiss the complaint in May 2010. Following oral argument on the motion to dismiss, the Bankruptcy Court ordered Delphi to file a motion for leave to amend its complaint. Delphi subsequently filed such motion, and an initial hearing on the motion was held in June 2011. A second hearing on certain issues related to the motion for leave to amend was held in October 2011, at which time the Court continued the hearing for further proceedings bearing on the motion to amend. At this point, the Company is unable to predict an outcome or estimate a range of reasonably possible losses, if any, related to the Delphi matter due to the complexity of the issues involved in the case, the early stage of the litigation, and the inherent uncertainties involved in litigation generally. Though the ultimate liabilities resulting from this proceeding, if any, could be material to the Company's results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company's consolidated financial position or cash flows.
On December 14, 2009, Simmons Bedding Company and The Simmons Manufacturing Co., LLC (collectively, “Simmons”) filed suit in the Superior Court of New Jersey, Essex County (Simmons Bedding Company and The Simmons Manufacturing Co., LLC v. Creative Vinyl/Fabrics, Inc. and its owner, Spartech Corporation, Spartech Polycom Calendared and Converted Products, Granwell Products, Inc., Nan Ya Plastics Corporation USA - Docket No. ESX-L-10197-09) alleging that vinyl product supplied to Simmons failed to meet certain specifications and claiming, among other things, a breach of contract, breach of warranty and fraud for which Simmons is seeking unspecified damages, including costs related to a voluntary product recall. Creative Vinyl/Fabrics, Inc. (“Creative”) is seeking common law indemnification and contribution from the Company. The Company supplied Creative with PVC film pursuant to purchase orders submitted by Creative, which Creative further processed and then sold to Simmons. Fact discovery has concluded and expert discovery is ongoing. A date for trial has not yet been scheduled. At this point, the Company is unable to predict an outcome or estimate a range of reasonably possible losses, if any, related to the Simmons matter due to the multiple parties involved in the case, the complexity of the issues involved, the current stage of the litigation, including that expert discovery is ongoing, and the inherent uncertainties involved in litigation generally. Based upon the discovery conducted to date, management believes that although the ultimate liabilities resulting from this proceeding, if any, could be material to the Company's results of operations in the period recognized, such liabilities would not have a material adverse effect on the Company's consolidated financial position or cash flows.
In January 2011, the Stamford, CT facility of Spartech Polycast, Inc., a subsidiary of the Company, received three notices of violation (NOVs) from the Connecticut Department of Environmental Protection (CTDEP) alleging violations of regulations governing air pollution control. The NOVs allege: (1) failure to file a semi-annual monitoring report; (2) failure to have a leak detection and repair program that meets regulatory requirements; and, (3) failure to satisfy certain air emissions standards. Spartech filed timely responses to the NOVs during February 2011 as a first step in resolving these NOVs and is continuing to engage CTDEP to resolve this matter. Though the ultimate liabilities resulting from this proceeding, if any, could be material to the Company's results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company's consolidated financial position or cash flows.
The Company is also subject to various other claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability, employment and other matters, several of which claim substantial amounts of damages. While it is not possible to estimate with certainty the ultimate legal and financial liability with respect to
23
these claims, lawsuits, and administrative proceedings, the Company believes that the outcome of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows.
24
Item 6. Exhibits
Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K)
31.1 | Section 302 Certification of CEO |
31.2 | Section 302 Certification of CFO |
32.1 | Section 1350 Certification of CEO |
32.2 | Section 1350 Certification of CFO |
101 | Data File for the Registrant's Quarterly Report on Form 10-Q for the quarter ended February 4, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements (Filed Herewith). |
25
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SPARTECH CORPORATION (Registrant) | ||||
Date: | March 14, 2012 | By: | /s/ Victoria M. Holt | |
Victoria M. Holt | ||||
President and Chief Executive Officer (Principal Executive Officer) | ||||
/s/ Randy C. Martin | ||||
Randy C. Martin | ||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||
26