Spartech Corporation (NYSE: SEH), a leading producer of plastic
sheet, compounds, and packaging products, announced today operating
results for its 2011 first quarter.
First Quarter 2011 Financial Results
- Net sales were $234.8 million, up 4% from the prior year first
quarter, reflecting a 3% decrease in volume more than offset by the
effects of higher prices due to the pass through of higher raw
material costs.
- Operating loss excluding special items was $1.0 million in the
first quarter of 2011 compared to operating earnings excluding
special items of $7.5 million in the same period of the prior year.
This decrease in earnings reflects the continued impact of
production inefficiencies that began in the second half of 2010,
increased freight expense, margin compression from increased
competition, and the impact of higher material costs that were not
passed through timely as selling price increases.
- Reported diluted (loss) earnings per share from continuing
operations was $(0.06) in the first quarter of 2011 compared to
$0.15 in the prior year first quarter. Excluding special items,
diluted (loss) earnings per share from continuing operations was
$(0.04) compared to $0.08 in the prior year first quarter.
- Cash flows from operations were $7.7 million for the first
quarter and the Company ended the quarter with $173.2 million of
debt.
Highlights
- We have completed the management restructuring of our business
units, which has provided for direct responsibility for sales,
marketing and operations to each business segment leader. We
believe that this structure will provide for greater responsiveness
to the needs of our customers and improve overall financial
performance of the business units. We are encouraged by the early
results of this management change as we are beginning to make
progress in material formulation, yield enhancement, on-time
deliveries and product quality.
- On January 12, 2011, the Company entered into amendments on its
credit facility and Senior Notes. These amendments were needed in
the near term to complete the organizational restructurings and
continue the actions to improve operations.
- The Company started production at our Lockport, New York
facility during our first quarter of 2011 to serve automotive
customers in our compounds business. We expect to have this
facility operating at normal production rates in the second quarter
of 2011.
- The Company has brought together the research and development
teams of our three businesses into our new Spartech Technology and
Innovation Center located near our corporate headquarters.
Harnessing the collective technical capabilities of our material
science, processing, and creative design groups is allowing us to
bring greater focus on new product developments and sustainable
customer solutions as well as supporting our promising new cross
business unit selling initiative.
Note: Please see the reconciliation tables and the narrative
below for adjustments to GAAP and discussion of items affecting
results.
Spartech's President and Chief Executive Officer, Vicki Holt
stated, "As we expected, our first quarter results reflected
gradual operational improvements from the inefficiencies that began
in the second half of 2010, seasonally low demand with moderate
growth in most markets, the continued impact from certain customer
changes, and progress in completing the remaining two asset
consolidations and general organizational restructurings. Our key
operational priorities continue to focus on operating fundamentals
to improve our on-time delivery, product quality, and production
yields while we manage overall costs, and we are beginning to see
positive results in these key metrics. We also completed the
realignment of our operating businesses and leadership team."
Holt added "Our measured progress in this quarter is the start
of a comprehensive plan to build the foundation for operating and
commercial excellence and accelerating new product developments. A
key focus in the quarter was developing a turnaround plan for our
Color and Specialty Compounds business which did not execute the
final asset consolidations well during the automotive market
recovery last year. The turnaround efforts include specific actions
to grow earnings by improving yield and equipment uptime, and
develop stronger linkage between operations and strategic
procurement."
Additionally, Holt stated "We are prioritizing organic growth
projects to deliver near term results. In addition, we are
re-engaging our customers in specific sustainable product
development programs. Our revitalized earnings growth programs
focus on exceeding customer expectations and a more efficient cost
structure which will lead to improved returns for
shareholders."
Consolidated Results
Net sales increased 4% to $234.8 million in the three month
period ended January 29, 2011 over the same period in the prior
year, representing a 7% increase in price/mix offset by a 3%
decline in volume. The largest increase in volume was from sales of
compounds and sheet to the automotive sector, related to the
recovery experienced throughout 2010, and commercial construction.
Underlying volume in most other markets experienced a modest
increase. Offsetting these increases were a decline in sales of
sheet for material handling applications due to a considerable
slowdown in orders from one of our largest customers, and a decline
in food packaging sales due to a lower share of a key customer's
product line. The price/mix increase was primarily related to
increases in selling prices to pass through increases in raw
material costs.
Gross margin per pound sold declined from 12.8 cents in the
first quarter of 2010 to 9.1 cents in the first quarter of 2011
primarily reflecting the continued impact of production
inefficiencies that began in the second half of 2010, higher labor
costs, increased freight expense, margin compression from increased
competition, and the impact of higher material costs. The decrease
in gross margin was partially offset by reduced depreciation
expense due to the Company's plant consolidation efforts.
Selling, general and administrative expenses were $19.0 million
in the first quarter of 2011 compared to $18.4 million in the same
period of the prior year. The increase was mainly due to higher
employee compensation costs largely related to resource additions
in the technology, sales and marketing and procurement areas.
Amortization of intangibles was $0.4 million in the first
quarter of 2011 compared to $1.0 million in the same period of the
prior year. The decrease reflects intangible assets which became
fully amortized coupled with the impact of intangible asset
impairments recorded by the Company in the fourth quarter of
2010.
Restructuring and exit costs were $0.8 million in the first
quarter of 2011 compared to $0.7 million in the same period of the
prior year. Restructuring and exit costs included employee
severance, facility consolidation and shutdown costs and fixed
asset valuation adjustments.
Interest expense, net of interest income, was $2.6 million in
the first quarter of 2011 compared to $3.5 million in the same
period of the prior year. The decrease was primarily due to the
$24.6 million reduction in debt during the last 12 months, which
included a reduction in higher interest rate debt.
We reported a net loss from continuing operations of $1.8
million or $(0.06) per diluted share in the first quarter of 2011,
compared to earnings of $4.7 million or $0.15 per diluted share in
the same period of the prior year. Excluding special items
(restructuring and exit costs, and tax benefits from restructuring
of foreign operations), we reported a net loss from continuing
operations of $1.3 million or $(0.04) per diluted share in the
first quarter of 2011, compared to net earnings from continuing
operations of $2.4 million or $0.08 per diluted share in the same
period of the prior year. The decrease was mainly due to items
previously discussed, partially offset by the effects of income tax
benefits.
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 the reorganization of the
Company's legal entities which resulted in a $0.8 million deferred
tax benefit, coupled with the reinstatement of the research and
development tax credit. These benefits were partially offset by
adjustments to the Company's FIN 48 reserves and the effects of
permanent items.
Net earnings from discontinued operations were $2.9 million in
the first quarter of 2011, which mainly resulted from the
settlement agreement for the breach of a contract by Chemtura that
led to $4.8 million in total cash proceeds.
Cash flows from operations in the first quarter of 2011 of $7.7
million, which included the benefit of an income tax refund of $5.7
million, were used along with credit facility borrowings to fund
$8.0 million of capital investments for additional capacity in
specialty sheet products, maintenance and cost reductions. We
incurred $1.6 million in debt issuance costs to amend our debt
holder agreements during the first quarter of 2011.
Segment Results
The results of our three operating segments are discussed below.
A table is presented at the end of this release to reconcile
amounts excluding special items to comparable GAAP measures.
Custom Sheet & Rollstock - Net sales were $125.1 million in
the three month period ended January 29, 2011, representing flat
year-over-year net sales, which consisted of a 9% decrease in
volume offset by a 9% increase in price/mix changes. The decrease
in underlying volume reflects the impact of a significant reduction
in one customer's business activity for a material handling
application. Absent this customer's decline, we realized a modest
increase in volume across most of our end markets including the
automotive, appliance and sign and advertising markets. The
price/mix increase was mostly caused by increases in selling prices
and greater mix of higher priced products. Operating earnings
excluding special items were $4.8 million in the first quarter of
2011 compared to $8.4 million in the same period of the prior year.
The decrease in operating earnings reflects lower sales volume to a
material handling customer, increased competition, production
inefficiencies and increased freight expense.
Packaging Technologies - Net sales were $51.7 million in the
three month period ended January 29, 2011, representing an 8%
increase in net sales, which consisted of a 2% decrease in volume
more than offset by a 10% increase in price/mix changes. The
decrease in underlying volume reflects the impact of the loss of
share at a food packaging customer. Partially offsetting this loss
was an increase in sales to the medical packaging and sign and
advertising markets. Price/mix includes increases in selling prices
from the pass through of increases in raw materials costs.
Operating earnings excluding special items were $4.8 million in the
first quarter of 2011 compared to $5.3 million in the same period
of the prior year. The decrease in operating earnings was mainly
due to a higher mix of lower margin business and margin compression
from increased competition, coupled with higher employee
compensation costs primarily related to resource additions in the
technology and sales and marketing areas.
Color & Specialty Compounds - Net sales were $57.9 million
in the three month period ended January 29, 2011, representing a
12% increase in net sales, which consisted of a 5% increase in
volume coupled with a 7% increase in price/mix changes. The
increase in underlying volume was due to a significant increase in
the automotive sector related to the recovery experienced
throughout 2010, coupled with increased sales to the agricultural
products and building and construction markets. Offsetting these
increases was a decline in sales to the appliance and electronics
market. The price/mix increase was mostly caused by increases in
selling prices to pass through increases in raw material costs.
Operating loss excluding special items were $2.2 million in the
first quarter of 2011 compared to operating earnings of $2.2
million in the same period of the prior year. The decrease in
operating earnings reflects production inefficiencies which
resulted in higher labor and material costs, the impact of higher
material costs that were not passed through timely as selling price
increases, a higher mix of lower margin sales, and increased
freight and employee severance costs.
Outlook
We are continuing to focus on improving our operational
performance, building a more customer-focused organization, and
investing in design, technology and equipment to enhance our growth
initiatives. Subject to raw material pricing, we expect these
operational and customer initiatives will result in gross margins
returning back to our peak levels by the first calendar quarter of
2012. We believe these improvements will be achieved during a
period when the overall market recovery continues at a slow pace
and we experience continued volatility in raw material pricing. We
have made organizational changes, continue to make operational
improvements, and have identified the levers to generate higher
margins that we believe will allow us to make steady progress
during 2011.
Special Items and Discontinued
Operations
Restructuring and exit costs totaled $0.8 million during the
first quarter of 2011 compared to $0.7 million in the same period
of the prior year. Restructuring and exit costs are comprised of
employee severance, facility consolidation and shut-down costs and
fixed asset valuation adjustments. These costs resulted from the
Company's improvement initiatives, which include an objective of
reducing the Company's fixed portion of its cost structure. We
expect to incur approximately $1.0 million of additional
restructuring expenses which mostly consist of employee severance
and shutdown costs for facility consolidation initiatives
previously announced.
In the first quarter of 2010, we recognized a $2.8 million tax
benefit related to tax restructuring of foreign operations that was
excluded from our presentation of net earnings from continuing
operations as a special, non-recurring item.
Discontinued operations include our former Marine business,
sheet business in Donchery, France, and toll compounding business
in Arlington, Texas which were all shutdown in the 2009 and the
Wheels and Profiles businesses that were divested in 2009.
The Company reached agreement with Chemtura and the Bankruptcy
Court approved the final settlement of the claim for the breach of
a contract by Chemtura for $4.2 million in cash and equity in the
newly reorganized Chemtura. The equity was subsequently sold,
resulting in $4.8 million of total cash proceeds. The associated
gain was recorded in discontinued operations.
Spartech will hold a conference call with investors and
financial analysts at 11:00 a.m. EST on Tuesday, March 8, 2011, to
discuss Spartech's first quarter 2011 financial results. Prior to
this call, the Company will provide supplemental slides on its
website at www.spartech.com (under Presentations in the Investor
Relations menu). Investors can listen to the call live via a
webcast by logging onto www.spartech.com, or via phone by dialing
800-642-9809 and providing the Conference ID #: 48506732.
International callers may dial 706-679-7637.
Spartech Corporation is a leading producer of plastic products
including polymeric compounds, concentrates, custom extruded sheet
and rollstock products and packaging technologies for a wide
spectrum of customers. The Company's three business segments, which
operate facilities in the United States, Mexico, Canada, and
France, annually process approximately one billion pounds of
plastic resins, specialty plastic alloys, and color and specialty
compounds.
Cautionary Statements Concerning
Forward-Looking Statements
Statements in this Form 10-Q that are not purely historical,
including statements that express the Company's belief,
anticipation or expectation about future events, are
forward-looking statements. "Forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995
relate to future events and expectations and include statements
containing such words as "anticipates," "believes," "estimates,"
"expects," "would," "should," "will," "will likely result,"
"forecast," "outlook," "projects," and similar expressions.
Forward-looking statements are based on management's current
expectations and include known and unknown risks, uncertainties and
other factors, many of which management is unable to predict or
control, that may cause actual results, performance or achievements
to differ materially from those expressed or implied in the
forward-looking statements. Important factors that could cause
actual results to differ from our forward-looking statements are as
follows:
(a) Adverse changes in economic or industry conditions,
including global supply and demand conditions and prices for
products of the types we produce (b) Our ability to compete
effectively on product performance, quality, price, availability,
product development, and customer service (c) Adverse changes in
the markets we serve, including the packaging, transportation,
building and construction, recreation and leisure, and other
markets, some of which tend to be cyclical (d) Volatility of prices
and availability of supply of energy and raw materials that are
critical to the manufacture of our products, particularly plastic
resins derived from oil and natural gas, including future impacts
of natural disasters (e) Our inability to manage or pass through to
customers an adequate level of increases in the costs of materials,
freight, utilities, or other conversion costs (f) Our inability to
achieve and sustain the level of cost savings, productivity
improvements, gross margin enhancements, growth or other benefits
anticipated from our improvement initiatives (g) Our inability to
collect all or a portion of our receivables with large customers or
a number of customers (h) Loss of business with a limited number of
customers that represent a significant percentage of our revenues
(i) Restrictions imposed on us by instruments governing our
indebtedness, the possible inability to comply with requirements of
those instruments and inability to access capital markets (j)
Possible asset impairments (k) Our inability to predict accurately
the costs to be incurred, time taken to complete, operating
disruptions therefrom, potential loss of business or savings to be
achieved in connection with announced production plant
consolidations and line moves (l) Adverse findings in significant
legal or environmental proceedings or our inability to comply with
applicable environmental laws and regulations (m) Our inability to
develop and launch new products successfully (n) Possible
weaknesses in internal controls
We assume no responsibility to update our forward-looking
statements.
Spartech Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
Three Months Ended
------------------------
(Unaudited and dollars in thousands, except per January 29, January 30,
share data) 2011 2010
----------- -----------
Net sales $ 234,783 $ 225,164
Costs and expenses
Cost of sales 216,377 198,332
Selling, general and administrative expenses 18,974 18,416
Amortization of intangibles 422 966
Restructuring and exit costs 828 671
----------- -----------
Total costs and expenses 236,601 218,385
=========== ===========
Operating (loss) earnings (1,818) 6,779
Interest, net of interest income 2,571 3,516
----------- -----------
(Loss) earnings from continuing operations before
income taxes (4,389) 3,263
Income tax benefit (2,551) (1,473)
----------- -----------
Net (loss) earnings from continuing operations (1,838) 4,736
Net earnings from discontinued operations,
net of tax 2,871 8
----------- -----------
Net earnings $ 1,033 $ 4,744
=========== ===========
Basic (loss) earnings per share:
(Loss) earnings from continuing operations $ (0.06) $ 0.16
Earnings from discontinued operations,
net of tax 0.09 -
----------- -----------
Net earnings per share $ 0.03 $ 0.16
=========== ===========
Diluted (loss) earnings per share:
(Loss) earnings from continuing operations $ (0.06) $ 0.15
Earnings from discontinued operations,
net of tax 0.09 -
----------- -----------
Net earnings per share $ 0.03 $ 0.15
=========== ===========
Dividends declared per share $ - $ -
=========== ===========
Spartech Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited)
January 29, October 30,
(Dollars in thousands, except share data) 2011 2010
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 3,535 $ 4,900
Trade receivables, net of allowances of $3,359
and $3,404, respectively 129,094 134,902
Inventories, net of inventory reserves of $7,689
and $6,539, respectively 90,048 79,691
Prepaid expenses and other current assets, net 30,282 35,789
Assets held for sale 3,256 3,256
----------- -----------
Total current assets 256,215 258,538
Property, plant, and equipment, net 210,904 211,844
Goodwill 87,921 87,921
Other intangible assets, net 14,136 14,559
Other long-term assets 4,741 4,279
----------- -----------
Total assets $ 573,917 $ 577,141
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Current maturities of long-term debt $ 876 $ 880
Accounts payable 119,317 129,037
Accrued liabilities 38,472 34,112
----------- -----------
Total current liabilities 158,665 164,029
Long-term debt, less current maturities 172,283 171,592
Other long-term liabilities:
Deferred taxes 41,514 42,648
Other long-term liabilities 6,291 5,866
----------- -----------
Total liabilities 378,753 384,135
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) 24,849 24,849
Issued: 33,131,846 shares; outstanding:
30,865,820 and 30,884,503 shares,
respectively
Contributed capital 204,793 204,966
Retained earnings 11,069 10,036
Treasury stock, at cost, 2,266,026 and 2,247,343
shares, respectively (51,844) (52,730)
Accumulated other comprehensive income 6,297 5,885
----------- -----------
Total shareholders' equity 195,164 193,006
----------- -----------
Total liabilities and shareholders' equity $ 573,917 $ 577,141
=========== ===========
Spartech Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
Three Months Ended
------------------------
January 29, January 30,
(Unaudited and dollars in thousands) 2011 2010
----------- -----------
Cash flows from operating activities
Net earnings $ 1,033 $ 4,744
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 8,101 9,555
Stock-based compensation expense 893 1,081
Goodwill impairment - 275
Restructuring and exit costs 76 97
Gain (loss) on disposition of assets, net 124 (895)
Provision for bad debt expense 207 (298)
Deferred taxes (2,531) 125
Change in current assets and liabilities (1,329) (5,214)
Other, net 1,137 (522)
----------- -----------
Net cash provided by operating activities 7,711 8,948
Cash flows from investing activities
Capital expenditures (7,986) (3,368)
Proceeds from the disposition of assets - 2,876
----------- -----------
Net cash used by investing activities (7,986) (492)
Cash flows from financing activities
Bank credit facility borrowings (payments), net 800 -
Payments on notes and bank term loan - (17,185)
Payments on bonds and leases (119) (131)
Debt issuance costs (1,595) -
Stock-based compensation exercised (180) -
----------- -----------
Net cash used by financing activities (1,094) (17,316)
Effect of exchange rates on cash and cash
equivalents 4 21
----------- -----------
Decrease in cash and cash equivalents (1,365) (8,839)
Cash and cash equivalents at beginning of year 4,900 26,925
----------- -----------
Cash and cash equivalents at end of year $ 3,535 $ 18,086
=========== ===========
Non-GAAP Reconciliations
Within this press release we have included operating (loss)
earnings (GAAP) to operating (loss) earnings excluding special
items (Non-GAAP), net (loss) earnings from continuing operations
(GAAP) to net (loss) earnings from continuing operations excluding
special items (Non-GAAP) and net (loss) earnings from continuing
operations per diluted share (GAAP) to net (loss) earnings from
continuing operations per diluted share excluding special items
(Non-GAAP). Special items include restructuring and exit costs and
a tax benefit on restructuring of foreign operations. We have also
excluded the operations of our discontinued wheels, profiles,
marine, Donchery sheet and Arlington, Texas compounding operations
throughout this press release and in the presentation below.
We use these measurements to assess our ongoing operating
results without the effect of these adjustments and compare such
results to our historical and planned operating results. We believe
these measurements are useful to help investors to compare our
results to previous periods and provide an indication of underlying
trends in the business. 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 tables reconcile (GAAP) to (Non-GAAP)
measures:
Three Months Ended
------------------------
(unaudited and in thousands, except per share January 29, January 30,
data) 2011 2010
----------- -----------
Operating (loss) earnings (GAAP) $ (1,818) $ 6,779
Restructuring and exit costs 828 671
----------- -----------
Operating (loss) earnings excluding special
items (Non-GAAP) $ (990) $ 7,450
=========== ===========
Net (loss) earnings from continuing operations
(GAAP) $ (1,838) $ 4,736
Restructuring and exit costs, net of tax 513 422
Tax benefits from restructuring of foreign
operations - (2,770)
----------- -----------
Net (loss) earnings from continuing
operations excluding special items
(Non-GAAP) $ (1,325) $ 2,388
=========== ===========
Net (loss) earnings from continuing operations
per diluted share (GAAP) $ (0.06) $ 0.15
Restructuring and exit costs, net of tax 0.02 0.02
Tax benefit on restructuring of foreign
operations - (0.09)
----------- -----------
Net (loss) earnings from continuing
operations per diluted share excluding
special items (Non-GAAP) $ (0.04) $ 0.08
=========== ===========
The following table reconciles operating (loss) earnings (GAAP)
to operating (loss) earnings excluding special items (Non-GAAP) by
segment (in thousands):
Three Months Ended Three Months Ended
January 29, 2011 January 30, 2010
-------------------------- --------------------------
Operating Operating
(Loss) (Loss)
Earnings Earnings
Operating Excluding Operating Excluding
(Loss) Special (Loss) Special
Earnings Special Items Earnings Special Items
(GAAP) Items (Non-GAAP) (GAAP) Items (Non-GAAP)
------- ------- -------- ------- ------- --------
Custom Sheet and
Rollstock $ 4,483 $ 350 $ 4,833 $ 8,291 $ 84 $ 8,375
Packaging
Technologies 4,642 116 4,758 6,004 (729) 5,275
Color & Specialty
Compounds (2,598) 356 (2,242) 898 1,316 2,214
Corporate (8,345) 6 (8,339) (8,414) - (8,414)
------- ------- -------- ------- ------- --------
Total $(1,818) $ 828 $ (990) $ 6,779 $ 671 $ 7,450
======= ======= ======== ======= ======= ========
Company Contacts: Victoria M. Holt President and Chief Executive
Officer (314) 721-4242 Randy C. Martin Executive Vice President and
Chief Financial Officer (314) 721-4242
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