Spartech Corporation Announces Second Quarter Fiscal 2005 Results
ST. LOUIS, June 7 /PRNewswire-FirstCall/ -- Spartech Corporation
(NYSE: SEH) announced today its operating results for its second
quarter ended April 30, 2005. Second Quarter 2005 Highlights: * Net
sales increased by 31% to $377.7 million for the quarter, prior
year acquisition contributing 11% * Net loss for the quarter of $80
thousand * Operating earnings for the quarter of $6.3 million,
negatively impacted by $10.4 million Fixed Asset Charge and $7.6
million Restructuring & Exit Costs, compared to $28.1 million
in the prior year quarter * Cash flow provided by operations for
the quarter totaled $22.3 million, favorably impacted by better
management of working capital, compared to $1.5 million in the
prior year quarter * Earnings guidance for the second half of 2005
reduced to a range of 39 cents to 44 cents per diluted share * New
leadership team, with depth in operating skills, focused on
completing plan to integrate and enhance operations Overview of
Results Sales for the second quarter of 2005 were $377.7 million, a
31% increase compared to the same period in 2004. This total
represents a record quarterly sales level for the Company that was
aided by an 11% increase from the late 2004 acquisition of VPI and
a strong price/mix impact following the significant resin price
increases over the last twelve months. Operating earnings reported
for the second quarter of 2005 were $6.3 million compared to $28.1
million in the prior year second quarter. Included in operating
earnings for the quarter was $18.0 million of special charges
related to a complete physical inventory of our fixed assets of
$10.4 million and plant restructuring activities of $7.6 million
($17.5 million of these special items were non-cash asset write
offs). A net loss of $80 thousand was reported for the second
quarter of 2005 with no diluted earnings per share. Net earnings,
excluding special items of $11.3 million after tax, were $.35 per
diluted share for the second quarter of 2005. Net earnings for the
comparable period of 2004 were $13.5 million or $.41 per diluted
share. Refer to the GAAP to Non-GAAP financial measurements
reconciliations at the end of this release. Commenting on the
results, Mr. George A. Abd, President and CEO, stated, "While our
operational performance in the second quarter improved
significantly from the first quarter of this year, the results
remained disappointing. Components of the performance were affected
by external and internal factors. Externally, while resin prices
saw some decreases late in the second quarter from the peak levels
early in the period, we still experienced resin prices on average
between 30-40% higher than the comparable prior year period. Some
of the resin price reductions are related to slowing demand in
certain markets, namely automotive, recreation & leisure and
film. While the packaging market remained strong for us, it was not
as strong as expected coming into the quarter, and building &
construction was also slightly weaker than expected. The key
internal factor affecting performance remained the conversion costs
of our business. The conversion costs per pound sold in the second
quarter of 2005 were $0.013 per pound higher than the same period
last year. These costs did improve by $0.02 per pound compared to
our first quarter, but a renewed and vigorous attention to cost
control and reduction is necessary, combined with the benefits of
the plant consolidations announced on February 8, 2005, to reach
the conversion cost levels at which our business should be
operating. This is not a short term project but will be central to
the mission of the Company going forward." Mr. Abd further stated,
"I am disappointed that a weakness in internal controls existed
that resulted in the identification of over $7 million dollars of
incorrectly accounted-for fixed assets. The process has been
completed to identify, inventory and tag all of our fixed assets,
and procedures have been put in place to periodically examine all
of the Company's fixed assets moving forward. These errors mostly
related to past plant shutdowns and asset transfers, and new
procedures should help to prevent this issue from occurring again.
This weakness was identified as a result of our Sarbanes-Oxley
compliance process and the sufficiency of our efforts to remediate
the weakness will be tested and audited as we move forward. We have
made substantial progress in implementing the announced plant
restructurings to sell two businesses and consolidate several
plants. Both of these events had a significant impact on our
operating results for the quarter and we have provided a table
summary of these activities and the underlying operating results by
segment for comparison at the end of this release. Despite these
interruptions and the changes in management during the second
quarter of 2005, the operating results excluding the special items
did represent a solid improvement over the first quarter of 2005.
This is a good basis upon which to begin improving in the remainder
of this year, but unacceptable as we move forward. Our focus will
be on creating the world class cost structure necessary to realize
the profit potential that exists within our Company. To that end we
are focused on reducing costs in all areas of our business
beginning at the top of the organization and will therefore be
terminating the lease of our corporate jet in the third quarter."
Segment Results Custom Sheet & Rollstock-Net sales in our
Custom Sheet & Rollstock segment were $238.1 million in the
second quarter of fiscal 2005, an increase of 30% from the $183.4
million produced in the same three month period of 2004. This sales
increase was attributable to our late fiscal 2004 acquisition of
VPI (8%), the impact of price/mix changes driven mostly by
increases in resin prices (19%), and internal volume growth (3%).
This growth in pounds sold was primarily driven by strong demand in
the Packaging and Sign & Advertising markets. The decrease in
the segment's operating earnings reflects the special items. The
segment's operating earnings excluding special items declined $1.8
million or 9% due to higher conversion costs which included write
downs of inventory and operating losses for operations held for
sale that were not classified as special of $.5 million. The
special items included in this segment included $3.0 million of
restructuring and exit costs (primarily property, plant and
equipment and goodwill impairment write downs on four operations
held for sale) and $6.5 million for fixed asset charges. (In
Millions) Second Quarter First Six Months 2005 2004 2005 2004 Net
Sales $ 238.1 $ 183.4 $ 427.8 $ 338.8 Operating Earnings, excluding
Special Items $ 19.3 $ 21.1 $ 26.9 $ 35.6 Operating Earnings $ 9.8
$ 21.1 $ 17.5 $ 35.6 Color & Specialty Compounds -- The
Company's Color & Specialty Compounds group saw its sales
increase sharply to $113.4 million or 36% greater than last year's
$83.2 million. Approximately 22% of this increase was the result of
the Company's VPI acquisition, with 22% driven by price/mix
changes, and an 8% decline in internal growth. The decline in
internal pounds sold reflects a decrease in sales of toll-compound
material to one customer in the electronics market and
special-order sales to another customer that occurred in the second
quarter of 2004 but did not recur in the current year quarter.
Excluding the decrease in sales volume to these two customers,
internal volume grew 2%. The decrease in the segment's operating
earnings reflects the special items. Operating earnings excluding
special items declined by about 4% due to higher conversion costs
including freight and utilities increases. The special items
included in this segment included $2.7 million of restructuring and
exit costs (consisting of property, plant and equipment impairment
write downs on two properties held for sale) and $1.7 million for
fixed asset charges. (In Millions) Second Quarter First Six Months
2005 2004 2005 2004 Net Sales $ 113.4 $ 83.2 $ 210.5 $ 154.5
Operating Earnings, excluding Special Items $ 7.2 $ 7.5 $ 12.9 $
13.7 Operating Earnings $ 2.8 $ 7.5 $ 8.5 $ 13.7 Engineered
Products -- Our Engineered Products segment (formerly the Molded
& Profile Products segment, see caption later in this release)
produced its second consecutive quarterly sales increase of 20% or
more in the second quarter of 2005-$26.1 million compared to $21.0
million in last year's second quarter. New customers in Lawn &
Garden added by the Wheels unit produced the bulk of this increase.
The decrease in the segment's operating earnings reflects the
special items. Operating earnings, totaling $1.8 million for the
group, was significantly better than our first quarter 2005
performance of $.6 million but still behind last year's comparable
quarter and well behind our expectations as costs related to the
start-up delays and the ramp-up of new production capacity were
higher than expected. Some of the benefit of better efficiencies
with the new customers will now push into 2006 as we are moving out
of the build season for this market. The special items included in
this segment included $1.9 million of restructuring and exit costs
(primarily property, plant and equipment, goodwill impairments, and
severance costs related to three operations held for sale or
disposed of during the second quarter of 2005) and $1.6 million for
fixed asset charges. (In Millions) Second Quarter First Six Months
2005 2004 2005 2004 Net Sales $ 26.1 $ 21.0 $ 43.9 $ 35.8 Operating
Earnings, excluding Special Items $ 1.8 $ 2.6 $ 2.4 $ 3.8 Operating
Earnings $ (1.7) $ 2.6 $ (1.1) $ 3.8 Cash Flow Performance Cash
provided by operating activities was $22.3 million in the second
quarter of 2005 due to focused efforts to collect vendor rebates, a
decrease in inventory balances by $5.9 million from the end of the
first quarter of 2005 by reducing pre-buys, and an increase in
trade payables. These favorable changes were somewhat offset by
higher accounts receivable with the seasonally higher sales in the
second quarter of 2005. Cash flow from operations for the second
quarter of 2005 was $20.8 million better than the same three month
period in 2004. We have placed aggressive goals on our operating
regions for further improvement in cash flow. Special Items As part
of our Sarbanes-Oxley compliance efforts, we initiated a complete
physical count of the Company's property, plant and equipment in
the first quarter of fiscal 2005. Reconciliation of these counts to
our books and records during the second quarter of 2005 resulted in
a $7.8 million write off of equipment that no longer physically
existed. We believe the cause of the $7.8 million in non-existing
equipment was mostly related to transactions for plant shutdowns
and transfers of equipment between plants. While the Company is not
under the rules which require management to identify material
weaknesses in its internal controls until October 29, 2005, the
control issue over property, plant and equipment would be
considered a material weakness in our internal controls. Due to the
number of transactions, passage of time since many of them
occurred, and the weaknesses in documentation and controls over
these activities, we cannot specifically identify or allocate these
asset write offs to distinct fiscal years with any certainty. We
have taken corrective actions to institute new policies and
procedures for the tracking of equipment disposals and transfers of
equipment between plants, including periodic physical inventories
of our property, plant and equipment at each location. During our
count process, we also identified equipment that exists, but we
have decided to liquidate. Our decision to liquidate these assets
resulted in a $2.6 million fixed asset impairment charge. This
impairment charge combined with the non-existing assets write off
noted above is presented as a total non-cash fixed asset charge on
the income statement of $10.4 million for the second quarter of
2005. In the second quarter of fiscal 2005, the Company initiated
several operational changes to enhance short-term operating
performance and longer term operating efficiencies. The plan
involved the closing and sale of certain plant facilities
segregated into three categories: (i) the elimination of non-core
operations, (ii) the consolidation of capacity for similar
operations, and (iii) the transfer of synergistic or new business
to other existing operations. The effect of the plan is to reduce
our operations by seven facilities with a cost of implementing
these changes of approximately $7.6 million in the second quarter
of fiscal 2005. The charge was comprised of $5.7 million of
non-cash property, plant and equipment write-downs, $1.4 million of
non-cash write-downs for goodwill impairment and $.5 million of
cash restructuring charges. The property, plant and equipment
write-downs represent the charges incurred to write-down the
related assets to fair market value, less costs to sell. Cash
restructuring charges represent severance, equipment move,
relocation, and clean-up related costs. Collectively these special
items resulted in $18.0 million of charges in the second quarter of
2005 ($17.5 million of these items were non-cash asset write offs).
Subsequent Events On May 26, 2005, we entered into a Retirement
Agreement and Release (Retirement Agreement) with the former
Chairman, President, and Chief Executive Officer of the Company,
Bradley B. Buechler. The Retirement Agreement includes various
terms and conditions pertaining to payments and benefits paid to
Mr. Buechler under this Retirement Agreement that will result in a
charge to our operating earnings in the third quarter of fiscal
2005 of $3.7 million, including $.8 million of non-cash expenses.
In May 2005, we made a decision to sell an operating line that had
been recently added to the Color & Specialty Compound segment
that is expected to result in a non-cash fixed asset impairment
charge of approximately $3.5 million in the third quarter of 2005.
This decision was made possible as a result of the late 2004 VPI
acquisition and analysis of the capabilities and capacity within
the newly acquired facility. We are continuing to evaluate the
Company's other operations which may lead to further plant
restructuring decisions, related exit costs, and property, plant
and equipment write downs for opportunities where additional short
and longer term efficiencies are deemed to be achievable. Any such
charges would be recorded when those decisions are made and a plan
is initiated. We also decided to terminate the lease on our Company
airplane, which will result in termination fees and selling
expenses of $.8 million, but savings in operating costs of $1.0
million annually upon disposal. Finally, we estimate that an
additional $.7 million of restructuring and exit costs will be
incurred relating to the completion of the plant consolidations
that have been previously announced. Collectively these actions are
estimated to result in approximately $8.7 million of special
charges in the third quarter of 2005 ($4.3 million of non-cash
expenses). Earnings Guidance Our guidance for the Company's second
half earnings per diluted share is $.39 to $.44 after the effect of
an estimated $.17 per diluted share in charges from the subsequent
events noted above or $.56 to $.61 per diluted share before the
effect of these special items. Our revised guidance considers the
effect of the actual results and activities during the first half
of fiscal 2005 and recent signals of demand weakness in some of the
key markets we serve. We have factored into our guidance stable to
slightly down economic trends as well as the significance of the
time and effort involved in our short term restructuring efforts
during the remainder of this fiscal year. Finally, our guidance is
also based upon a projection of continued losses from operations
that we are attempting to sell during the remainder of 2005.
Non-GAAP Measures Management believes that operating earnings, net
income, and earnings per share excluding special items, which are
non-GAAP measurements, are meaningful to investors because they
provide a view of the Company with respect to ongoing operating
results. Special items (fixed asset charges and restructuring &
exit costs) represent significant charges that are important to an
understanding of the Company's overall operating results in the
periods presented. Such non-GAAP measurements are not recognized in
accordance with generally accepted accounting principles (GAAP) and
should not be viewed as an alternative to GAAP measures of
performance. A reconciliation of GAAP measurements to non-GAAP can
be found at the end of this release. Engineered Products Name
Change In conjunction with this release, we are announcing that our
Molded & Profile Products group will now be called the
Engineered Products group. The group will include four business
units: Spartech Industries, Spartech Marine, Spartech Townsend, and
Spartech Profiles. These businesses use technology, design and
support services to provide a diverse set of customers with
solutions engineered to meet their product needs such as: wheels
for the lawn and garden markets; doors, windscreens and cabinets
for the marine market; and products for the medical market. The
managers of these businesses will report to Executive Vice
President of Sheet and Engineered Products, Steven Ploeger, as do
the two new Spartech Plastics Sheet Vice Presidents announced on
May 31. Spartech Corporation is a leading producer of engineered
thermoplastic materials, polymeric compounds and concentrates, and
engineered product solutions, which following its recently
announced plant restructuring plan, will have 43 facilities located
throughout the United States, Canada, Mexico, and Europe, with
annual production capacity of more than 1.4 billion pounds and
sales of approximately $1.2 billion, annually. Safe Harbor For
Forward-Looking Statements Statements in this Form 10-Q that are
not purely historical, including statements which express the
Company's belief, anticipation or expectation about future events,
are forward-looking statements. Forward-looking statements involve
certain risks and uncertainties that could cause actual results to
differ materially from such statements. In addition to the risk
factors discussed in Item 1 (Business, under the headings Raw
Materials, Seasonality, Competition, Government Regulation and
Environmental Matters, and International Operations) of the
Company's 2004 Annual Report on Form 10-K other important factors
which have impacted and could impact the Company's operations and
results, include: (1) The Company's financial leverage and the
operating and financial restrictions imposed by the instruments
governing its indebtedness may limit or prohibit its ability to
incur additional indebtedness, create liens, sell assets, engage in
mergers, acquisitions or joint ventures, pay cash dividends, or
make certain other payments; the Company's leverage and such
restrictions could limit its ability to respond to changing
business or economic conditions, inability to meet debt obligations
when due could impair its ability to finance operations and could
result in default; (2) The successful expansion through
acquisitions, in which Spartech looks for candidates that can
complement its existing product lines, expand geographic coverage,
and provide superior shareholder returns, is not assured. Acquiring
businesses that meet these criteria continues to be an important
element of the Company's business strategy. Some of the Company's
major competitors have similar growth strategies. As a result,
competition for qualifying acquisition candidates is increasing and
there can be no assurance that such future candidates will exist on
terms agreeable to the Company. Furthermore, integrating acquired
businesses requires significant management time and skill and
places additional demands on Company operations and financial
resources. If we are unable to achieve the anticipated synergies,
the interest and other expenses from our acquisitions could exceed
the net income we derive from the acquired operations, which could
reduce our net income. (3) Our products are sold in a number of end
markets which tend to be cyclical in nature, including
Transportation, Building and Construction, Bath/Pool and Spa, and
Electronics and Appliances. A downturn in one or more of these end
markets could have a material adverse effect on our sales and
operating profit; and (4) Our implementation of planned
restructurings will impact our ability to realize estimated cost
savings. The actual cost savings may differ from our estimates
depending upon the level of success of the implementation. SPARTECH
CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS (Unaudited and dollars in thousands, except per share
amounts) QUARTER ENDED SIX MONTHS ENDED Apr. 30, May 1, Apr. 30,
May 1, 2005 2004 2005 2004 Net Sales $377,658 $287,591 $682,170
$529,054 Costs and Expenses Cost of sales 333,046 243,879 609,142
451,919 Selling and administrative 18,941 15,055 35,816 29,085
Fixed Asset Charge 10,386 -- 10,386 -- Restructuring & Exit
Costs 7,619 -- 7,619 -- Amortization of intangibles 1,414 607 2,672
1,201 371,406 259,541 665,635 482,205 Operating Earnings 6,252
28,050 16,535 46,849 Interest 6,378 6,175 12,852 12,505 Earnings
(Loss) Before Income Taxes (126) 21,875 3,683 34,344 Income Taxes
(46) 8,356 945 13,119 Net Earnings (Loss) $ (80) $ 13,519 $ 2,738 $
21,225 Net Earnings (Loss) Per Common Share: Basic $ ( -- ) $ .42 $
.09 $ .69 Diluted $ ( -- ) $ .41 $ .08 $ .68 Dividends Per Common
Share $ .12 $ .11 $ .24 $ .22 SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands) ASSETS
Apr. 30, 2005 Oct. 30, 2004 (unaudited) Current Assets Cash and
equivalents $ 10,752 $ 48,954 Receivables, net 220,285 188,427
Inventories 153,750 142,035 Prepaids and other 16,989 20,718 Total
Current Assets 401,776 400,134 Property, Plant and Equipment
320,234 330,745 Goodwill, net 358,159 361,957 Other Intangible
Assets, net 43,861 43,967 Other Assets 19,807 12,811 Total Assets
$1,143,837 $1,149,614 LIABILITIES AND SHAREHOLDERS' EQUITY Current
Liabilities Current maturities of long-term debt $ 18,313 $ 18,027
Accounts payable 130,845 116,386 Accrued liabilities 41,945 44,223
Total Current Liabilities 191,103 178,636 Long-Term Debt 445,893
456,064 Deferred taxes and other long-term liabilities 98,711
97,182 Shareholders' Equity 408,130 417,732 Total Liabilities and
Shareholders' Equity $1,143,837 $1,149,614 SPARTECH CORPORATION AND
SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands) SIX MONTHS ENDED Apr. 30, 2005
May 1, 2004 Cash Flows from Operating Activities Net earnings $
2,738 $ 21,225 Adjustments to reconcile net earnings to net cash
provided by operating activities: Fixed Asset Charge 10,386 --
Restructuring & Exit Costs 7,163 -- Depreciation and
amortization 20,739 16,968 Change in current assets and
liabilities, net of the effects of acquisitions (27,339) (40,047)
Other, net (3,503) 104 Net cash provided by (used for) operating
activities 10,184 (1,750) Cash Flows from Investing Activities
Capital expenditures (23,233) (12,514) Business acquisition (1,224)
(1,418) Outsourcing acquisition -- (8,999) Net cash used for
investing activities (24,457) (22,931) Cash Flows from Financing
Activities Bank credit facility (payments)/ borrowings, net (9,830)
(27,203) Issuance of common stock -- 60,922 Payments on bonds and
leases (579) (64) Cash dividends on common stock (7,713) (6,763)
Stock options exercised 970 2,079 Treasury stock acquired (6,846)
(172) Net cash (used for)/provided by financing activities (23,998)
28,799 Effect of exchange rate changes on cash and equivalents 69 7
(Decrease)/Increase in Cash and Equivalents (38,202) 4,125 Cash and
Equivalents at Beginning of Period 48,954 3,779 Cash and
Equivalents at End of Period $ 10,752 $ 7,904 SPARTECH CORPORATION
(In Thousands, Unaudited) Management believes that operating
earnings, net income, and earnings per share excluding special
items, which are non-GAAP measurements, are meaningful to investors
because they provide a view of the Company with respect to ongoing
operating results. Special items (fixed asset charges and
restructuring costs) represent significant charges that are
important to an understanding of the Company's overall operating
results in the periods presented. Such non-GAAP measurements are
not recognized in accordance with generally accepted accounting
principles (GAAP) and should not be viewed as an alternative to
GAAP measures of performance. The following reconciles GAAP to
Non-GAAP measures for operating earnings, net income, and earnings
per share excluding special items used within this release. Three
Months Ended Six Months Ended April 30, May 1, April 30, May 1,
2005 2004 2005 2004 Operating Earnings (GAAP) $ 6,252 $ 28,050 $
16,535 $ 46,849 Fixed Asset Charge 10,386 -- 10,386 --
Restructuring & Exit Costs 7,619 -- 7,619 -- Operating Earnings
Excluding Special Items (Non-GAAP) $ 24,257 $ 28,050 $ 34,540 $
46,849 Net Earnings (Loss) (GAAP) $ (80) $ 13,519 $ 2,738 $ 21,225
Fixed Asset Charge 6,543 -- 6,543 -- Restructuring & Exit Costs
4,800 -- 4,800 -- Net Earnings Excluding Special Items (Non-GAAP) $
11,263 $ 13,519 $ 14,081 $ 21,225 Earnings (Loss) Per Diluted Share
$ (--) $ .41 $ .08 $ .68 Fixed Asset Charge, net of tax .20 -- .20
-- Restructuring & Exit Costs, net of tax .15 -- .15 --
Earnings (Loss) Per Diluted Share Excluding Effect of Special Items
(Non-GAAP) $ .35 $ .41 $ .43 $ .68 DATASOURCE: Spartech Corporation
CONTACT: George A. Abd, President and Chief Executive Officer,
+1-314-721-4242, or Randy C. Martin, Executive Vice President and
Chief Financial Officer, +1-314-721-4242, both of Spartech
Corporation Web site: http://www.spartech.com/
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