UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended November 3, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the transition period
from
to
1-5911
(Commission File Number)
SPARTECH CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other jurisdiction
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43-0761773
(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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120 S. Central Avenue, Suite 1700
Clayton, Missouri 63105
(314) 721-4242
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, $.75 par value
Title of Each Class
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New York Stock Exchange
Name of Exchange of Which Registered
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
YES
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NO
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
YES
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NO
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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, and (2)
has been subject to such filing requirements for the past 90 days.
YES
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NO
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Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
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Accelerated Filer
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Non-Accelerated Filer
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Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES
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NO
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The aggregate market value of the voting stock held by non-affiliates of the Registrant was
approximately $890.7 million on May 5, 2007. There were 30,072,006 total shares of common stock
outstanding as of November 30, 2007.
Documents incorporated by reference
1) Portions of the Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders
(Part III).
SPARTECH CORPORATION
FORM 10-K FOR THE YEAR ENDED NOVEMBER 3, 2007
TABLE OF CONTENTS
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
Statements in this Form 10-K that are not purely historical, including statements which
express the Companys belief, anticipation or expectation about future events, are forward-looking
statements. These statements may be found in (i) the description of the Companys business in Item
1, (ii) the description of legal proceedings in Item 3 and (iii) Managements Discussion and
Analysis of Financial Condition and Results of Operations in Item 7. These sections include
statements about new products and market benefits, expected operating trends, future capital
expenditures, expenditures for environmental compliance, and anticipated cash flow and borrowings.
Forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 relate to future events and expectations, include statements containing such
words as anticipates, believes, estimates, expects, would, should, will, will likely
result, forecast, outlook, projects, and similar expressions. Forward-looking statements
are based on managements current expectations and include known and unknown risks, uncertainties
and other factors, many of which management is unable to predict or control, that may cause actual
results, performance or achievements to differ materially from those expressed or implied in the
forward-looking statements. Important factors which have impacted and could impact our operations
and results include:
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(a)
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adverse changes in economic or industry conditions generally, including global supply
and demand conditions and prices for products of the types we produce;
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(b)
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our ability to compete effectively on product performance, quality, price,
availability, product development, and customer service;
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(c)
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material 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;
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(d)
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our inability to achieve the level of cost savings, productivity improvements,
synergies, growth or other benefits anticipated from acquired businesses and their
integration;
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(e)
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volatility of prices and availability of supply of energy and of the raw materials that
are critical to the manufacture of our products, particularly plastic resins derived from
oil and natural gas, including future effects of natural disasters;
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(f)
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our inability to manage or pass through an adequate level of increases to customers in
the costs of materials, freight, utilities, or other conversion costs;
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(g)
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our inability to predict accurately the costs to be incurred, time taken to complete,
or savings to be achieved in connection with announced production plant restructurings;
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(h)
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adverse movements in foreign currency exchange rates in the foreign markets in which we
operate.
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(i)
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adverse findings in significant legal or environmental proceedings or our inability to
comply with applicable environmental laws and regulations;
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(j)
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adverse developments with work stoppages or labor disruptions, particularly in the
automotive industry;
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(k)
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our inability to achieve operational efficiency goals or cost reduction initiatives;
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(l)
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our inability to develop and launch new products successfully;
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(m)
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restrictions imposed on us by instruments governing our indebtedness, and the possible
inability to comply with requirements of those instruments;
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(n)
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possible weaknesses in internal controls; and
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(o)
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our ability to successfully complete the implementation of a new enterprise resource
planning computer system and to obtain expected benefits from our system.
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We assume no duty to update our forward-looking statements, except as required by law.
1
PART I
Item 1. BUSINESS
General
Spartech Corporation (the Company or Spartech) was incorporated in the state of Delaware
in 1968, succeeding a business which had commenced operations in 1960. The Company, together with
its subsidiaries, is an intermediary processor of engineered thermoplastics. 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, and injection molded and profile extruded
products. Our products are sold to original equipment manufacturers and other customers in a wide
range of end markets.
Spartech is organized into three reportable segments and one group of operating segments based
on the products we manufacture. The three reportable segments are Custom Sheet and Rollstock,
Packaging Technologies and Color and Specialty Compounds with the remaining businesses grouped
together in Engineered Products. Net sales, operating earnings and total assets attributable to
each segment are located in Note 16 to the Consolidated Financial Statements. Sales by segment and
group were Custom Sheet and Rollstock 46%, Packaging Technologies 18%, Color and Specialty
Compounds 31% and Engineered Products 5% in 2007. Information with respect to acquisition and
divestiture activities by Spartech is set forth in Note 2 to the Consolidated Financial Statements.
A description of the reportable segments and group of operating segments, including its principal
products and markets, is summarized below.
Custom Sheet and Rollstock
The Custom Sheet and Rollstock segment manufactures plastic sheet, custom rollstock, laminates
and cell cast acrylic. The principal raw materials used in manufacturing sheet and rollstock are
plastic resins in pellet form. We sell sheet and rollstock products principally through our own
sales force, but we also use a limited number of independent sales representatives. We produce and
distribute the products from facilities in the United States, Canada, Mexico and France. Its
finished products are formed by its customers that use plastic components in their products. Our
custom sheet and rollstock is utilized in several end markets including packaging, transportation,
building and construction, recreation and leisure, electronics and appliances, signs/advertising
and aerospace. The Custom Sheet and Rollstock segment is highly competitive and we compete in many
different areas with many other companies because the Company and our customers manufacture a wide
variety of products.
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 we extrude into rollstock
or thermoform into the end product. We sell packaging products principally through our own sales
force and produce and distribute the products from facilities in the United States. The Packaging
Technologies segment operates in competitive markets and we compete with some companies which are
larger and have more extensive production facilities, larger sales and marketing staffs and greater
financial resources.
Color and Specialty Compounds
The Color and Specialty Compounds segment comprise operating segments that are aggregated into
a reportable segment based on the nature of the products manufactured. This segment manufactures
custom-designed plastic alloys, compounds, color concentrates, and calendered film for utilization
in numerous applications. The principal raw materials used in manufacturing specialty plastic
compounds and color concentrates are plastic resins in powder and pellet form. We also use
colorants, mineral and glass reinforcements and other additives to impart specific performance and
appearance characteristics to the compounds. The Company sells the segments products principally
through its own sales force, but also uses independent sales representatives. We produce and
distribute these products from facilities in the United States, Canada, Mexico and France. It
sells custom-designed plastic alloys, compounds, color concentrates and calendered film for
utilization by a large group of manufacturing customers servicing the automotive equipment,
building and construction, food/medical packaging, lawn and garden equipment, electronics and
appliances, and numerous other end markets. The Color and Specialty Compounds segment operates in
competitive markets. We compete with some companies which are larger and have more extensive
production facilities, larger sales and marketing staffs and greater financial resources.
Engineered Products
The Engineered Products group consists of four operating segments that are combined because
each operating segment does not meet the materiality threshold for separate disclosure. The
Spartech Wheels operating segment has three facilities in the United States and Mexico and
manufactures a number of proprietary items including thermoplastic tires and wheels for the
medical, lawn and garden, refuse container, and toy markets. The Spartech Profiles operating
segment is a facility in Canada that manufactures profile window frames and fencing for the
building and construction market. The Spartech Townsend operating segment is a facility in the
United States that manufactures and sells acrylic tubes and rods to a variety of industries.
2
The Spartech Marine operating segment is a facility in the United States that manufactures and
sells custom made doors, hatches, cabinets and windscreens to boat manufacturers. The principal
raw materials used in our manufacturing of molded tires and wheels, profile and other engineered
products are PVC, acrylics, polyethylene and polypropylene. Our products in this group are
generally manufactured either through injection molding or profile extrusion processes. We sell
the groups products principally through our own sales force, but also use independent sales
representatives and wholesale distributors. The Engineered Products group is competitive and
fragmented. Because we manufacture a wide variety of products, we compete in different areas with
many other companies, some of which are much larger and have more extensive production facilities,
larger sales and marketing staffs and substantially greater financial resources.
Raw Materials
The raw materials used in our production processes are largely plastic resins which are
derivatives of crude oil or natural gas and are readily available from a number of suppliers. The
Company has multiple sources of supply for our raw materials and is not significantly dependent on
any one or a few suppliers.
Production
Spartech utilizes various production operations and methods. The principal production
operations are extrusion, casting, compounding, calendering, printing, lamination and molding
processes. Management believes the equipment, machinery and tooling used in these processes are of
modern design and are well maintained.
Intellectual Property and Trademarks
Spartech has various intellectual property and trademarks. The intellectual property includes
certain product formulations and the trademarks protect names of certain of the Companys products.
These assets are significant to the extent they provide a certain amount of goodwill and name
recognition in the industry. While proprietary intellectual property and trademarks are important
to the Company, management believes the loss or expiration of any intellectual property right or
trademark would not materially impact the Company or any of its segments.
Customer Base
We sell our products to thousands of customers in a broad range of end markets, with our
largest customer accounting for 6% of our 2007 sales. Our top 25 customers represented
approximately 37% of our 2007 sales. Based on our classification of end markets, packaging is our
largest single market, accounting for approximately 24% of our 2007 sales. The packaging market
historically has experienced faster growth and less cyclicality than the other major markets served
by plastics processors. In our opinion, we are not dependent upon any single customer and the loss
of any one customer would not have a materially adverse effect on our business other than,
potentially, on a temporary basis. The following table presents our sales dollar mix by end market
for 2007 and 2006:
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2007
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2006
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Packaging
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24
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24
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Transportation
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Building and construction
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Recreation and leisure
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10
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11
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Sign and advertising
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7
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Appliance and electronics
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Lawn and garden
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Other
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9
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10
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100
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100
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Distribution
Generally, we sell our products through our own sales force, but we also use a limited number
of independent sales representatives and wholesale distributors. Our plants are strategically
located such that their proximity to our customers saves shipping costs, reduces delivery times and
increases our presence in a variety of markets.
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Backlog
We estimate that the total dollar value of our backlog of firm orders as of November 3, 2007
and October 28, 2006 was approximately $120.0 million and $109.9 million, respectively, all of
which we expect to ship within one year. The estimated backlog by segment and group at November 3,
2007 and October 28, 2006 follows (in millions):
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2007
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2006
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Custom Sheet and Rollstock
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$
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56.5
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$
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49.2
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Packaging Technologies
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23.0
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16.7
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Color and Specialty Compounds
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37.4
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39.9
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Engineered Products
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3.1
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4.1
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$
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120.0
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$
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109.9
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Competition
Spartech operates in markets that are highly competitive and that environment is expected to
continue. The Company experiences substantial competition in each of its segments and in each of
the geographic areas in which it operates. Generally, we compete on the basis of quality, price,
product availability and security of supply, product development and customer service. Important
competitive factors include the ability to manufacture consistently to required quality levels,
meet demanding delivery times, provide technical support, exercise skill in raw material
purchasing, achieve production efficiencies to make our products cost effective for our customers,
and provide new product solutions to customer applications. Although no single company competes
directly with Spartech in all of its product lines, various companies compete in one or more
product lines. Some of these companies have substantially greater sales and assets than Spartech,
and Spartech also competes with many smaller companies. The number of our competitors varies by
product line, and we believe that Spartech has a market leadership position in many of these
product lines.
Seasonality
Our sales are seasonal in nature. Fewer orders are placed and less manufacturing activity
occurs during the November through January period. This seasonal variation tends to track the
manufacturing activities of our various customers in each region.
Environment
Our operations are subject to extensive environmental, health and safety laws and regulations
at the national, state and local governmental levels. The nature of the Companys business exposes
it to risks of liability under these laws and regulations due to the production, storage,
transportation, recycling or disposal and/or sale of materials that can cause contamination or
personal injury if they are released into the environment or workplace. Compliance with laws
regulating the discharge of materials into the environment or otherwise relating to the protection
of the environment has not had a material effect upon the Companys capital expenditures, earnings
or competitive position. It is not anticipated that we will have material capital expenditures for
environmental control facilities during the next year. For additional information regarding risks
due to regulations relating to the protection of the environment as well as our participation in
the Lower Passaic River environmental study, see Item 1A.
Employees
Spartech had approximately 3,600 employees at the end of 2007 and management believes that the
Companys employee relations are favorable. Some of the Companys employees are represented under
collective bargaining agreements, but none of these agreements are considered significant.
Geographic Areas
We operate in 40 manufacturing facilities in North America and one in Europe. Information
regarding our operations in various geographic segments is located in Note 16 to the Consolidated
Financial Statements. Our Canadian, French and Mexican operations may be affected periodically by
foreign political and economic developments, laws and regulations, and currency fluctuations.
Available Information
Our Forms 10-K, 10-Q, 8-K and any amendments to those reports are available without charge
through our Web site on the Internet as soon as reasonably practicable after they are
electronically filed with or furnished to the Securities and Exchange Commission. They may be
accessed directly as follows:
www.spartech.com
, Investor Relations, SEC Filings.
Our principal executive office is located at 120 South Central Avenue, Suite 1700, Clayton,
Missouri 63105-1705. Our telephone number is (314) 721-4242. Our Web site address is
www.spartech.com
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Item 1A.
RISK FACTORS
The factors listed below represent our principal risks. These factors may or may not occur
and we are not in a position to express a view on the likelihood of any such factor occurring.
Other factors may exist that we do not consider significant based on information that is currently
available or that we are not currently able to anticipate.
Price increases in raw materials and energy costs could adversely affect operating results and
financial condition.
In 2007, raw material costs represented 74% of total costs of sales. We purchase various raw
material resins derived from crude oil or natural gas to produce our products. The cost of these
resins has been highly volatile in the last few years with significant price increases. This
volatility of resin costs is expected to continue and may be affected by a number of factors
including political instability or hostilities in oil-producing countries, vendor consolidations,
exchange rates between the U.S. dollar and other currencies and changes in supply and demand. We
have historically been successful at managing the impact of this volatility on our margins by
passing through price changes to customers, negotiating competitive prices with suppliers,
increasing production efficiencies and controlling inventory levels. While we will continue to try
to manage these costs, the direction and degree of future resin cost changes and our ability to
manage such changes is uncertain. As a result, higher crude oil and natural gas costs could lead
to declining margins, operating results, cash flows and financial condition.
The cyclical nature of our suppliers and customers businesses could adversely affect our sales,
profitability, operating results and cash flows during economic downturns.
General economic conditions and business conditions of our suppliers and customers
industries affect the supply and demand for our products. The businesses of most of our suppliers
and customers can be cyclical in nature and sensitive to changes in general economic conditions.
Political instability may lead to financial and economic instability, which could lead to
deterioration in general global economic conditions. Downturns in the businesses that use our
products would adversely affect our sales. Downturns in general economic conditions may result in
diminished product demand, excess manufacturing capacity and lower average selling prices. In
addition, downturns in our customers industries, even during periods of strong general economic
conditions, could adversely affect our sales, profitability, operating results, cash flows and
financial condition.
We operate in a highly competitive marketplace, which could adversely affect our sales and
financial condition.
We compete on the basis of quality, price, product availability and security of supply,
product development and customer service. Some competitors are larger than we are in certain
markets and may have greater financial resources that allow them to be better positioned to
withstand changes in our industry. Our competitors may introduce new products based on alternative
technologies that may be more competitive causing us to lose customers which would result in a
decline in our sales volume and earnings. Our customers demand high quality and low cost products
and services. The cost and availability of energy and strategic raw materials may continue to
deteriorate domestically while improving in the international market. Given the global competitive
marketplace in which we compete, any such change could adversely impact the demand for our
products. Competition could cause us to lose market share, exit certain lines of business,
increase expenditures or reduce pricing, each of which could have an adverse effect on our results
of operations, cash flows and financial condition.
We may incur significant charges or be adversely impacted by the closure of all or part of a
manufacturing facility
We periodically assess the cost structure of our manufacturing facilities to manufacture and
sell our products in the most efficient manner. Based on our assessments, we may make capital
investments to modernize facilities, move or discontinue manufacturing capabilities, or close all
or part of a manufacturing facility. These changes could result in significant future charges or
disruptions in our operations, and we may not achieve the expected benefits from these investments
which could result in an adverse impact on our operating results, cash flows and financial
condition.
We are in the process of implementing a new Enterprise Resource Planning (ERP) computer system
which could cause substantial business interruption that could adversely impact our operating
results.
We are implementing a new ERP system and investing significant financial and personnel
resources into this project. We are using a controlled project plan and believe we have assigned
adequate staffing and other resources to the project to ensure its successful implementation.
However, there is no assurance that the design will meet our current and future business needs or
that it will operate as designed. We are heavily dependent on such computer systems, and any
significant failure or delay in the system implementation, if encountered, would cause a
substantial interruption to our business and additional expense which could result in an adverse
impact on our operating results, cash flows and financial condition.
We may encounter difficulties in integrating businesses we have acquired, and therefore we may not
realize the anticipated benefits of the acquisitions.
In the past several years, we have made strategic acquisitions intended to complement or
expand our business, and may continue to do so in the future. The success of these transactions
will depend on our ability to integrate assets and personnel acquired in these transactions. We
may encounter difficulties in integrating acquisitions with our operations, and in managing
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strategic investments. Furthermore, we may not realize the degree or timing of benefits we
anticipate when we first enter into a transaction. Any of the foregoing could adversely affect our
business and results of operations.
We have a significant amount of goodwill, and any future goodwill impairment charges could
adversely impact our results of operations.
As of November 3, 2007, we had goodwill of $384 million, which is 35% of our total assets. We
completed our annual impairment review required by Statement of Financial Accounting Standards
(SFAS) 142,
Goodwill and Other Intangible Assets
(SFAS 142) during the fourth quarter of 2007,
and determined that none of our reporting units were impaired. In addition, the occurrence of a
potential indicator of impairment, such as a significant adverse change in business climate,
unanticipated competition, loss of key personnel or a more-likely-than-not expectation that a
reporting unit or a significant portion of a reporting unit will be sold or disposed of, would
require us to perform another valuation analysis, as required under SFAS 142, for some or all of
our reporting units prior to the next required annual assessment. These types of events and the
resulting analysis could result in additional charges for goodwill which could adversely impact our
results of operations.
Our foreign operations subject us to economic risk as our results of operations may be adversely
affected by foreign currency fluctuations and changes in local government regulations and policies.
We sell, manufacture and purchase products in foreign markets as well as hold assets and
liabilities in these jurisdictions. Changes in the relative value of foreign currencies to U.S.
dollars to which we are exposed, specifically the euro, Canadian dollar and Mexican peso, occur
from time to time and have an impact on our operating results. While we monitor our currency
exposures and attempt to minimize these exposures, this risk could adversely affect our operating
results. Our net foreign currency losses totaled $2.8 million in 2007.
We are part of an environmental investigation initiated by the New Jersey Department of
Environmental Protection and the USEPA in 2003 and if our liability is materially different from
the amount accrued, it could impact our results of operations.
We operate under various laws and regulations governing employee safety and the quantities of
specified substances that may be emitted into the air, discharged into waterways, or otherwise
disposed of on and off our properties. In September 2003, the New Jersey Department of
Environmental Protection issued a directive and the United States Environmental Protection Agency
(USEPA) initiated an investigation related to over 70 companies, including one of our
subsidiaries, regarding the Lower Passaic River. The subsidiary subsequently agreed to participate
in a group of over 40 companies in funding an environmental study by the USEPA to determine the
extent and source of contamination at this site. In 2006, the USEPA asked the group to assume the
responsibility for completing the study, and in the fourth quarter of 2006, we recorded a $0.6
million charge in selling, general and administrative expense primarily for the subsidiarys
expected funding to complete the study. In 2007, we paid $0.1 million toward the study. As of
November 3, 2007, we had $0.6 million accrued related to its share of the funding and related legal
expenses. We expect the groups commitment to be funded over five years, the expected timeframe of
the study. Due to uncertainties inherent in this matter, we are unable to estimate our potential
exposure, including possible remediation or other environmental responsibilities that may result
from this matter which is not expected to occur for a number of years. These uncertainties
primarily include the completion and outcome of the environmental study and the percentage of
contamination attributable to the subsidiary and other parties. It is possible that our ultimate
liability resulting from this issue could materially differ from the November 3, 2007 accrual
balance. In the event of one or more adverse determinations related to this issue, the impact on
our results of operations could be material to any specific period. However, our opinion is that
future expenditures for compliance with these laws and regulations, as they relate to the Lower
Passaic River issue and other potential issues, will not have a material effect on our capital
expenditures, financial position, or competitive position.
Access to funding through capital markets is an important part of our business plan and if we are
unable to maintain such access we could experience a material adverse effect on our business and
financial results.
Our ability to invest in our businesses, make strategic acquisitions and refinance maturing
debt obligations requires access to the capital markets and sufficient bank credit lines to support
short-term borrowings. If we are unable to continue to access the capital markets, we could
experience a material adverse effect on our business and financial results.
We are subject to a number of restrictive covenants in our credit facilities and breaches of these
covenants could become events of default under our credit facilities and cause the acceleration of
the majority of debt beyond our ability to pay.
Our credit facilities contain a number of restrictive covenants, as described in more detail
in Note 9 of the Consolidated Financial Statements. These covenants require us to, among other
matters, restrict the incurrence of additional indebtedness, satisfy certain ratios and net worth
levels, and limit both the sale of assets and merger transactions. If breached, these restrictive
covenants would force us to negotiate with our bankers to waive the covenants and if denied could
significantly impact our ability to manage its business. In addition, those covenants could limit
our flexibility in making investments and acquisitions.
6
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
We operate in 41 manufacturing facilities located in the United States, Canada, France and
Mexico, with 17 facilities in the Custom Sheet and Rollstock segment, six in the Packaging
Technologies segment, 12 facilities in the Color and Specialty Compounds segment and six facilities
in the Engineered Products group. Our manufacturing locations are owned or occupied under
operating or capital leases. Additional information regarding our operations within the various
geographic segments is located in Note 16 to the Consolidated Financial Statements. In addition,
we lease office facilities for our corporate headquarters in St. Louis, Missouri and
administrative offices in Washington, Pennsylvania.
Use of our manufacturing facilities may vary with seasonal, economic and other business
conditions. We believe that our present facilities are sufficient and adequate for the manufacture
and distribution of Spartechs products and generally have sufficient capacity for existing needs
and expected near-term growth.
Item 3.
LEGAL PROCEEDINGS
In addition to the Lower Passaic River matter described in Item 1A, we are subject to various
other claims, lawsuits and administrative proceedings arising in the ordinary course of business
with respect to environmental, commercial, product liability, employment and other matters, several
of which claim substantial amounts of damages. While it is not possible for us to estimate with
certainty the ultimate legal and financial liability with respect to these claims, lawsuits and
administrative proceedings, we believe that the outcome of these matters will not have a material
adverse effect on our capital expenditures, financial position or competitive position.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Companys security holders during the fourth
quarter of 2007.
7
PART II
Item 5.
|
|
MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Spartech Corporations common stock is listed for trading on the New York Stock Exchange
(NYSE) under the symbol SEH. There were approximately 1,400 shareholders of record at November
30, 2007. The following table sets forth the high and low prices of the common stock and cash
dividends per common share for each quarter of 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Data (per share)
|
|
1
st
Qtr.
|
|
2
nd
Qtr.
|
|
3
rd
Qtr.
|
|
4th Qtr.
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
30.71
|
|
|
$
|
30.54
|
|
|
$
|
28.75
|
|
|
$
|
22.81
|
|
Low
|
|
|
24.57
|
|
|
|
25.06
|
|
|
|
20.94
|
|
|
|
14.41
|
|
|
Dividends declared
|
|
$
|
.135
|
|
|
$
|
.135
|
|
|
$
|
.135
|
|
|
$
|
.135
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
25.11
|
|
|
$
|
25.01
|
|
|
$
|
24.61
|
|
|
$
|
27.98
|
|
Low
|
|
|
18.68
|
|
|
|
22.06
|
|
|
|
20.54
|
|
|
|
20.56
|
|
|
Dividends declared
|
|
$
|
.125
|
|
|
$
|
.125
|
|
|
$
|
.125
|
|
|
$
|
.125
|
|
The Companys Board of Directors reviews the dividend policy each December based on the
Companys previous years results, and our business plan and cash flow projections for the next
year. In September of 2007, the Companys Board of Directors approved the repurchase of up to 2
million shares of the Companys stock. Repurchases of equity securities, including repurchases
under this program during the fourth quarter of 2007, are listed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
of Shares That May
|
|
|
|
Total Number
|
|
|
|
|
|
|
Part of Publicly
|
|
|
Yet Be Purchased
|
|
|
|
Of Shares
|
|
|
Average Price
|
|
|
Announced Plans or
|
|
|
Under the Plans or
|
|
Period
|
|
Purchased
|
|
|
Paid per Share
|
|
|
Programs
|
|
|
Programs
|
|
August 2007
|
|
|
|
|
|
$
|
n/a
|
|
|
|
|
|
|
|
|
|
September 2007
|
|
|
674,452
|
|
|
|
18.01
|
|
|
|
522,800
|
|
|
|
1,477,200
|
|
October 2007
|
|
|
933,900
|
|
|
|
18.58
|
|
|
|
933,900
|
|
|
|
543,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,608,352
|
|
|
$
|
18.34
|
|
|
|
1,456,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In November of 2007, the Company purchased an additional 524,000 shares at an average price of
$15.52. As of November 30, 2007, 1,980,700 shares had been purchased under this program at an
average price per share of $17.62 and there were 19,300 shares that may yet be purchased under the
program.
8
Item 6.
SELECTED FINANCIAL DATA
The selected financial and other data below presents consolidated financial information of
Spartech Corporation and subsidiaries for the last five years and has been derived from our audited
consolidated financial statements. Our operating history includes significant acquisitions. The
selected financial data should be read in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations and our Consolidated Financial Statements and the
notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Dollars
|
|
$
|
1,451,983
|
|
|
$
|
1,485,597
|
|
|
$
|
1,396,860
|
|
|
$
|
1,121,725
|
|
|
$
|
956,160
|
|
In Volume (pounds) (a)
|
|
|
1,436,000
|
|
|
|
1,460,000
|
|
|
|
1,472,000
|
|
|
|
1,383,000
|
|
|
|
1,207,000
|
|
Gross Margin (b)
|
|
$
|
163,581
|
|
|
$
|
176,537
|
|
|
$
|
153,477
|
|
|
$
|
155,947
|
|
|
$
|
135,149
|
|
Depreciation & Amortization
|
|
|
43,069
|
|
|
|
40,698
|
|
|
|
39,380
|
|
|
|
33,704
|
|
|
|
30,336
|
|
Operating Earnings (c)
|
|
|
72,439
|
|
|
|
91,424
|
|
|
|
57,869
|
|
|
|
90,854
|
|
|
|
78,544
|
|
Interest Expense
|
|
|
17,629
|
|
|
|
20,981
|
|
|
|
25,195
|
|
|
|
25,436
|
|
|
|
24,965
|
|
Net Earnings (d)
|
|
|
33,846
|
|
|
|
38,798
|
|
|
|
18,263
|
|
|
|
40,857
|
|
|
|
34,263
|
|
|
Per Share Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share-Diluted
|
|
$
|
1.05
|
|
|
$
|
1.20
|
|
|
$
|
.57
|
|
|
$
|
1.28
|
|
|
$
|
1.16
|
|
Dividends Declared per Share
|
|
|
.54
|
|
|
|
.50
|
|
|
|
.48
|
|
|
|
.44
|
|
|
|
.40
|
|
Book Value per Share
|
|
|
14.37
|
|
|
|
13.78
|
|
|
|
12.93
|
|
|
|
12.81
|
|
|
|
10.84
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital (e)
|
|
$
|
131,835
|
|
|
$
|
136,544
|
|
|
$
|
171,459
|
|
|
$
|
198,253
|
|
|
$
|
127,496
|
|
Working Capital as a percentage
of Net Sales
|
|
|
9.1
|
%
|
|
|
9.2
|
%
|
|
|
12.3
|
%
|
|
|
17.7
|
%
|
|
|
13.3
|
%
|
Total Debt
|
|
$
|
334,283
|
|
|
$
|
289,223
|
|
|
$
|
379,955
|
|
|
$
|
474,091
|
|
|
$
|
383,819
|
|
Total Assets
|
|
|
1,110,871
|
|
|
|
1,041,794
|
|
|
|
1,071,826
|
|
|
|
1,133,284
|
|
|
|
917,237
|
|
Shareholders Equity
|
|
|
439,280
|
|
|
|
442,693
|
|
|
|
413,760
|
|
|
|
412,374
|
|
|
|
318,206
|
|
|
Ratios/Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow from Operations
|
|
$
|
104,011
|
|
|
$
|
127,543
|
|
|
$
|
105,018
|
|
|
$
|
31,647
|
|
|
$
|
69,485
|
|
Capital Expenditures
|
|
|
34,743
|
|
|
|
23,966
|
|
|
|
39,265
|
|
|
|
35,003
|
|
|
|
22,009
|
|
Operating Earnings
per pound sold (actual) (a)
|
|
|
5.0
|
¢
|
|
|
6.3
|
¢
|
|
|
3.9
|
¢
|
|
|
6.6
|
¢
|
|
|
6.5
|
¢
|
Total Debt to
Total Debt and Equity
|
|
|
43.2
|
%
|
|
|
39.5
|
%
|
|
|
47.9
|
%
|
|
|
53.5
|
%
|
|
|
54.7
|
%
|
Number of Employees (actual) (a)
|
|
|
3,600
|
|
|
|
3,425
|
|
|
|
3,500
|
|
|
|
3,750
|
|
|
|
3,325
|
|
Common Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at Year-End
|
|
|
30,565
|
|
|
|
32,124
|
|
|
|
31,988
|
|
|
|
32,180
|
|
|
|
29,352
|
|
Weighted Average-Diluted
|
|
|
32,180
|
|
|
|
32,297
|
|
|
|
32,311
|
|
|
|
33,468
|
|
|
|
29,567
|
|
|
|
|
Notes to table:
|
|
(a)
|
|
Amounts are unaudited.
|
|
(b)
|
|
Calculated as net sales less cost of sales. Gross margin excludes the impact of amortization
expense.
|
|
(c)
|
|
2007 operating earnings were reduced by pre-tax charges of $4.7 million related to
restructuring and exit costs ($1.3 million), an impairment of an identified intangible asset
($1.6 million) and a separation agreement with our former CEO ($1.8 million). 2006 operating
earnings were reduced by pre-tax charges of $5.0 million related to restructuring and exit
costs ($1.9 million) and goodwill impairment ($3.2 million). 2005 operating earnings were
reduced by pre-tax charges of $20.1 million related to restructuring and exit costs ($10.1
million), a retirement settlement with our former CEO ($3.6 million), fixed asset charges
($1.9 million) and goodwill impairment ($4.5 million). 2004 and 2003 operating earnings were
reduced by pre-tax fixed asset charges of $3.5 million and $1.0 million, respectively.
|
|
(d)
|
|
2006 net income was reduced by a $3.4 million after-tax charge ($5.5 million pre-tax) related
to the early extinguishment of our convertible subordinated debentures.
|
|
(e)
|
|
Calculated as total current assets excluding cash and cash equivalents less total current
liabilities excluding current maturities of long-term debt.
|
9
Item 7.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis of our financial condition and results of operations
contains Forward-Looking Statements. You should read the following discussion of our financial
condition and results of operations with Selected Financial Data and our consolidated financial
statements and related notes thereto. We have based our forward-looking statements about our
markets and demand for our products and future results on assumptions that we consider reasonable.
Actual results may differ materially from those suggested by our forward-looking statements for
various reasons including those discussed in Cautionary Statements Concerning Forward-Looking
Statements.
Business Overview
Spartech is an intermediary processor of engineered thermoplastics which 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, and injection molded and profile extruded products for
customers in a wide range of markets.
On September 14, 2007, we completed the acquisition of Creative Forming, Inc., (Creative), a
custom manufacturer of plastic packaging with approximately $48 million in annual sales, based in
Ripon, Wisconsin. The acquired operations included one facility that primarily extrudes plastic
rollstock and thermoforms plastic packaging products for the food and consumer products markets.
In the fourth quarter of 2007, we realigned our organizational structure to increase our strategic
focus on plastic packaging-related products. As a result of this realignment, we established a new
reportable segment, Packaging Technologies, which includes the newly acquired operations and
packaging focused operations that had formerly been managed as part of the Custom Sheet and
Rollstock segment. The remaining Custom Sheet and Rollstock operations focus on manufacturing
plastic sheet and rollstock that caters to durable goods manufacturers. We now report three
reportable segments and one group and all periods have been restated as if this change occurred at
the beginning of the periods presented. We operate 40 manufacturing facilities throughout North
America and one in Europe that are organized into three segments and one group as follows:
|
|
|
|
|
|
|
% of
|
|
|
2007 Sales
|
Custom Sheet and Rollstock
|
|
|
46
|
|
Packaging Technologies
|
|
|
18
|
|
Color and Specialty Compounds
|
|
|
31
|
|
Engineered Products
|
|
|
5
|
|
We assess net sales changes using three major drivers: underlying volume, the impact of
business acquisitions or divestitures and price/mix. Underlying volume is calculated as the change
in pounds sold exclusive of the impact on pounds sold from business acquisitions or divestitures
and for a comparable number of days in the reporting period. Our fiscal year ends on the Saturday
closest to October 31 and our fiscal year generally contains 52 weeks or 364 calendar days.
Because of this convention, every fifth or sixth fiscal year has an additional week and fiscal 2007
was reported as a 53-week fiscal year containing 371 days of activity. The additional week was
reported in the first quarter of fiscal 2007.
Executive Summary
Net earnings were $33.8 million during fiscal 2007 compared to $38.8 million last year. The
decrease in net earnings was largely caused by a 2% decline in sales volume and 0.7¢ per pound sold
decrease in gross margin per pound sold. The decline in sales volume was attributable to weak
demand for durable goods which resulted in lower consolidated volumes sold to the transportation
and recreation and leisure markets and lower sales of sheet to the building and construction
market. We experienced weak demand in the domestic automotive, heavy truck, residential
construction, recreational vehicles and pool and spa sectors of our end markets. The decrease in
gross margin per pound sold was caused by increases in resin prices during the second half of the
year while we were also experiencing weak demand which made it difficult to fully pass on the resin
price increases as higher selling prices to our customers.
We generated $104.0 million in cash flows from operations during 2007 compared to $127.5
million last year. Of the $23.5 million decrease in cash flow from operations, $17.4 million was
from a larger improvement in net working capital in 2006 and the remainder reflected lower current
year earnings.
10
Results of Operations
Comparison of 2007 and 2006
Consolidated Summary
Net sales were $1,452.0 million and $1,485.6 million for the year ended 2007 and 2006,
respectively, representing a 2% decrease in 2007. The causes of this percentage decrease were as
follows:
|
|
|
|
|
Underlying volume
|
|
|
(4
|
)%
|
Volume from additional week
|
|
|
2
|
|
Acquisition of business
|
|
|
|
|
Price/Mix
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)%
|
|
|
|
|
|
The decrease in underlying volume was caused by (i) lower sales of compounds to the automotive
sector of the transportation market, (ii) color concentrates to the packaging market and (iii)
lower sales of sheet to the recreation and leisure market, the residential sector of the building
and construction market and the heavy truck and automotive sectors of the transportation market.
These declines were partially offset by increases in sales of thermoformed product to the packaging
market, sheet to the refrigeration sector of the appliance and electronics market and compounds to
the commercial building and construction market. Disruptions from the Greenville sheet
consolidation also contributed to the decline in sales volume during 2007. Sales volume from the
additional week reflects 53 weeks of sales activity in 2007 compared to 52 weeks last year. The
price/mix impact was flat reflecting a benefit from an increase in sales mix of thermoformed
product offset by the impact from lower average resin costs in 2007 versus 2006 which were passed
through to customers as lower selling prices.
The following table presents sales, components of cost of sales, and the resulting gross
margin in dollars and on a per pound sold basis for 2007 and 2006. Cost of sales presented in the
Consolidated Statements of Operations includes material and conversion costs and excludes
amortization of intangible assets. The material and conversion costs components of cost of sales
are presented in the following table and we have not presented these components 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.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Dollars and Pounds (in millions)
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
$ 1,452.0
|
|
|
|
$1,485.6
|
|
Material costs
|
|
|
952.1
|
|
|
|
968.3
|
|
|
|
|
|
|
|
|
|
|
Material margin
|
|
|
499.9
|
|
|
|
517.3
|
|
Conversion costs
|
|
|
336.3
|
|
|
|
340.8
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
$ 163.6
|
|
|
|
$ 176.5
|
|
|
|
|
|
|
|
|
|
|
|
Pounds Sold
|
|
|
1,436
|
|
|
|
1,460
|
|
|
|
|
|
|
|
|
|
|
|
Dollars per Pound Sold
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
$ 1.011
|
|
|
|
$ 1.017
|
|
Material costs
|
|
|
0.663
|
|
|
|
0.663
|
|
|
|
|
|
|
|
|
|
|
Material margin
|
|
|
0.348
|
|
|
|
0.354
|
|
Conversion costs
|
|
|
0.234
|
|
|
|
0.233
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
$ 0.114
|
|
|
|
$ 0.121
|
|
|
|
|
|
|
|
|
|
|
Material margin and gross margin per pound sold decreased primarily because of higher resin
costs in the second half of 2007 which we were not able to fully pass on to customers as higher
selling prices due to a soft demand environment. Conversion costs per pound sold during 2007
increased slightly from 2006 due to an increase in per pound labor-related expenses and higher
depreciation expense partially offset by a shift in mix of sales to lower cost plants and
reductions in freight, repairs and maintenance and packaging expenses per pound sold.
Selling, general and administrative expenses were $83.8 million in 2007 representing an $8.5
million increase over the prior year. The 2007 expenses include a $1.9 million charge associated
with the resignation of the Companys former President and Chief Executive Officer in the third
quarter of 2007, a $2.8 million foreign currency net loss due to a weaker U.S. dollar during 2007
and $0.4 million of selling, general and administrative expenses reported in our Creative business.
11
Excluding these factors, selling, general and administrative expenses increased $3.6 million in
2007 due primarily to a $2.5 million increase in information technology related costs, including
depreciation expense, associated with our company-wide Oracle information system implementation,
higher
professional fees and the impact from the inclusion of an additional week during 2007, all of
which were partially offset by lower incentive compensation expenses.
The $2.8 million net foreign currency loss recognized in 2007 was reported as a $2.7 million
loss in our corporate group and a $2.4 million loss in our Color and Specialty Compounds segment
which were partially offset by a $1.9 million gain in our Engineered Products group and a $0.4
million gain in our Custom Sheet and Rollstock segment. In our fourth quarter of 2007, we
restructured our U.S. dollar investment previously held by our Canadian operations which will
mitigate the majority of our consolidated foreign currency exposure that caused the net currency
losses in 2007.
In the first quarter of 2006, we adopted SFAS 123 (revised 2004),
Share-Based Payment
(SFAS
123(R)). Prior to the adoption of SFAS 123(R), we had adopted the disclosure-only provisions of
SFAS 123 and no expense related to stock options was recognized in our results of operations. We
implemented SFAS 123(R) using the modified prospective transition method, which requires the
expensing of stock options upon adoption without restating prior periods. Stock-based compensation
was $2.9 million in 2007, of which $2.6 million was recognized in selling, general and
administrative and $0.3 million was recorded as cost of sales. In 2006, stock-based compensation
expense was $2.8 million, of which $2.5 million was recognized in selling, general and
administrative and $0.3 million was recorded as cost of sales.
Amortization of intangibles was $6.1 million in 2007 compared to $4.7 million in 2006. The
2007 expense includes a $1.6 million charge related to the impairment of a customer-related
intangible asset acquired with the Creative business. In October of 2007, Pfizer, Inc. (Pfizer),
a customer of Creative, announced the exit of its new inhaled insulin product, Exubera, which
resulted in the impairment of a customer-related intangible asset assigned to the Pfizer
relationship upon acquisition. We expect amortization of intangibles to approximate $5.1 million
in 2008.
In the fourth quarter of 2006, we recorded a $3.2 million non-cash goodwill impairment charge
due to changes in our profiles business and the reorganization of the operations, management and
reporting of this business which led to a redefinition of our operating segments comprising our
Engineered Products group and allocation of goodwill to our new profiles reporting unit. The fair
value of our profiles business did not support the $3.2 million goodwill allocation which resulted
in the impairment charge.
Restructuring and exit costs were $1.3 million during 2007 and $1.9 million in 2006 and
largely represent employee severance, equipment moving and accelerated depreciation charges. The
2007 restructuring and exit costs primarily reflect the expenses associated with the consolidation
of three existing Custom Sheet and Rollstock production facilities into one newly constructed
facility in Greenville, Ohio. The 2006 restructuring and exit costs primarily represent the
expenses associated with the consolidation of three Color and Specialty Compounds production
facilities into one plant in Donora, Pennsylvania.
Operating earnings for 2007 were $72.4 million compared to $91.4 million in 2006 representing
a $19.0 million decrease. The decrease in operating earnings is largely attributable to the $13.0
million decrease in gross margin and the $8.5 million increase in selling, general, and
administrative expenses, partially offset by the reduction in goodwill impairment charges.
Interest expense, net was $17.6 million in 2007 compared to $21.0 million in 2006. The
decrease in interest expense was due to the benefit realized from our focused efforts on debt
reduction over the past two years and the extinguishment of our convertible subordinated debentures
in 2005, partially offset by the increase in debt to fund the Creative acquisition and stock
repurchases during the fourth quarter of 2007. Interest expense also benefited from lower average
interest rates during 2007.
In 2006, we completed a $50 million private placement of debt and amended our U.S. unsecured
bank credit facility which increased our borrowing availability from $200 million to $300 million.
We used the proceeds from the private placement and borrowings from our amended credit facility to
redeem our $150 million convertible subordinated debentures which resulted in a $5.5 million charge
for early debt extinguishment costs. The $5.5 million early debt extinguishment costs represent
$3.8 million of early-payment premium and $1.7 million of non-cash write-off of unamortized debt
issuance costs. This redemption eliminated the potential dilutive effect of a future conversion of
the convertible subordinated debentures and reduced our cost of borrowing.
Our effective tax rate was 38.2% in 2007 compared to 40.3% in 2006. The improvement in the
effective rate during 2007 is attributable to the impact of the non-deductible goodwill impairment
charge in 2006. Excluding the non-deductible portion of goodwill impairment charge, our effective
tax rate was 38.4% in 2006. We expect the effective tax rate to approximate 36.3% in 2008 which
reflects an enacted increase in the manufacturing deduction.
We reported net earnings of $33.8 million in 2007 compared to $38.8 million in 2006. These
amounts reflect the impact of the items previously discussed.
12
Custom Sheet and Rollstock Segment
Net sales were $674.8 million and $709.1 million for 2007 and 2006, respectively, representing
a 5% decrease in 2007. This decrease was caused by:
|
|
|
|
|
Underlying volume
|
|
|
(6
|
)%
|
Volume from additional week
|
|
|
2
|
|
Price/Mix
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
(5
|
)%
|
|
|
|
|
|
The decrease in underlying volume is primarily due to weak demand in the durable goods markets
which adversely impacted our volume sold to the heavy truck, residential construction, automotive,
recreational vehicles and pool and spa sectors of our end markets. These declines were partially
offset by increases in sales of material handling sheet to the industrial packaging industry and
sales of sheet from our Mexico facility to the refrigeration sector of the appliance and
electronics market. Two-thirds of the underlying volume decline occurred at our three facilities
being consolidated into our newly constructed Greenville facility. These facilities mostly produce
polyethylene-based product for many of the aforementioned weak markets. Sales volume from the
additional week reflects 53 weeks of sales activity in 2007 compared to 52 weeks last year. The
price/mix impact reflects lower average resin costs in 2007 versus 2006 which were passed through
to customers as lower selling prices and the impact from a lower mix of higher priced sheet,
particularly in the heavy truck, recreation and leisure and pool and spa sectors of our end
markets.
This segments operating earnings in 2007 were $40.9 million which compared to $50.5 million
in 2006. The decrease in operating earnings in 2007 was impacted by a $0.9 million increase in
restructuring and exit costs associated with the Greenville consolidation. Excluding the impact of
restructuring and exit costs, operating earnings decreased $8.7 million in 2007 over the prior year
of which $5.9 million occurred at the three plants impacted by the Greenville consolidation. The
reduction in operating earnings in 2007 was caused by the decline in sales volume along with a 1.1¢
reduction in gross margin per pound sold which reflects a 0.7¢ decrease in material margin per
pound sold and a 0.4¢ increase in conversion costs per pound sold. Material margin per pound
decreased because of higher resin costs in the second half of the year which we were not able to
fully pass on to our customers as higher selling prices due to a soft demand environment. The
disruption associated with our Greenville sheet consolidation combined with the significant
increase in polyethylene prices in the second half of 2007 also contributed to the decline in
material margin. Despite a benefit received from a shift in sales mix to lower cost plants,
conversion cost per pound sold increased due to a decrease in volume that exceeded our reductions
in conversion costs. We expect our Greenville sheet consolidation to result in a $2.5 million
reduction in annual pre-tax expenses upon completion in early fiscal 2008.
Packaging Technologies Segment
Net sales were $253.7 million and $234.0 million in 2007 and 2006, respectively, representing
an 8% increase. This increase was caused by:
|
|
|
|
|
Underlying volume
|
|
|
3
|
%
|
Volume from additional week
|
|
|
2
|
|
Acquisition of business
|
|
|
2
|
|
Price/Mix
|
|
|
1
|
|
|
|
|
|
|
|
|
|
8
|
%
|
|
|
|
|
|
The increase in underlying volume was driven by sales of thermoformed product to the food
packaging market. Sales volume from the additional week reflects 53 weeks of sales activity in
2007 compared to 52 weeks last year. The Creative acquisition provided additional sales revenue of
$6.8 million for post acquisition sales in our fourth quarter of 2007. The price/mix impact
reflects a larger mix of higher priced thermoformed product.
This segments operating earnings in 2007 were $25.0 million compared to $24.9 million in
2006. Operating earnings in 2007 includes a $1.6 million impairment charge related to the
impairment of the Pfizer customer-related intangible asset acquired with the Creative business.
Excluding this impairment and a benefit from Creatives operating results. Operating earnings
increased $0.9 million in 2007 over the prior year due to the increase in underlying sales volume.
13
Color and Specialty Compounds Segment
Net sales were $446.8 million and $463.0 million in 2007 and 2006, respectively, representing
a 4% decrease. This decrease was caused by:
|
|
|
|
|
Underlying volume
|
|
|
(4
|
)%
|
Volume from additional week
|
|
|
2
|
|
Price/Mix
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
(4
|
)%
|
|
|
|
|
|
The decrease in underlying volume was caused by lower sales of compounds to the domestic
automotive sector of the transportation market and color concentrates to the packaging market
partially offset by an increase in sales of commercial roofing applications. Sales volume from the
additional week reflects 53 weeks of sales activity in 2007 compared to 52 weeks last year. The
decrease in price/mix was largely caused by lower average resin costs in 2007 compared to the prior
year which we passed through to customers as lower selling prices and a reduction in the sales mix
of color concentrates which have a higher than average selling price per pound sold.
Operating earnings for this segment were $19.4 million in 2007 and $27.0 million in 2006. The
decrease in operating earnings was primarily caused by the decrease in underlying volumes coupled
with a 1.0¢ drop in gross margin per pound sold. The drop in gross margin per pound was caused by
rising resin costs in the second half of the year coupled with soft demand which prevented us from
fully passing on the cost increases as higher selling prices, a lower mix of higher margin color
concentrates as well as $3.3 million of inventory adjustments in the fourth quarter of 2007. A
portion of the $3.3 million resulted from the correction of an error identified by our system
implementation process and another portion from a decision to liquidate certain scrap inventory.
Current year operating earnings compared to the prior year also reflects a $2.4 million increase in
foreign currency losses due to a weaker dollar in 2007 and a $1.5 million decrease in restructuring
and exit costs from the prior year Donora consolidation.
Engineered Products Group
Net sales were $76.7 million and $79.6 million for 2007 and 2006, respectively, representing a
4% sales decrease in 2007. This decrease was caused by:
|
|
|
|
|
Underlying volume
|
|
|
|
%
|
Volume from additional week
|
|
|
2
|
|
Price/Mix
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
(4
|
)%
|
|
|
|
|
|
Sales volume from the additional week reflects 53 weeks of sales activity in 2007 compared to
52 weeks last year. The price/mix impact reflects lower average resin costs in 2007 compared to
2006 which we passed through to customers as lower selling prices and a higher sales mix of wheels
which have a lower per pound sales price than the segment average.
This groups operating earnings in 2007 were $11.2 million compared to $4.5 million in 2006.
The increase in operating earnings reflects a $3.2 million write-off of goodwill related to our
profiles business in the prior year. In addition, operating earnings benefited from a $1.5
million increase in foreign currency gains resulting from a weakening U.S. dollar during 2007.
Excluding the impact from these two items, operating earnings increased $2.0 million which was
driven by the profitability improvement in our wheels business.
Corporate
Corporate includes corporate expenses and portions of information technology and professional fees
that are not allocated to the segments and group. Corporate expenses are reported as selling,
general and administrative expenses in the Consolidated Statements of Operations. Corporate
expenses were $24.0 million in 2007 compared to $15.5 million in the prior year. In 2007,
corporate expenses were impacted by the $1.9 million charge from the resignation of our former
President and Chief Executive Officer and a $2.3 million increase in foreign currency losses due to
a weakening U.S. dollar. Excluding the impact from these items, corporate expenses increased $4.4
million in 2007 from higher depreciation expense and information technology related costs
associated with our company-wide Oracle information system implementation, higher professional fees
and the impact from an additional week of expenses, all of which were partially offset by lower
incentive compensation expenses.
Outlook
While we expect to realize earnings benefits next year from our Greenville consolidation, more
aggressive cost reduction efforts, and recovery from current year consolidation disruptions, we
expect a weak demand environment to continue through the first half of next fiscal year. We expect
this demand weakness in the durable goods markets including the domestic
14
automotive, heavy truck,
residential construction, recreational vehicles and pool and spa sectors of our end markets. In
addition, we expect a difficult resin cost environment to continue into next year because of
continuing high oil prices, a weak U.S. dollar and vendor consolidations in the plastics resin
industry. We are responding to these challenges by focusing on additional cost structure
reductions, driving business
process improvements, passing along price increases to customers and targeting of new business
opportunities. Please refer to the Cautionary Statements Concerning Forward-Looking Statements
located below.
Comparison of 2006 and 2005
Consolidated Summary
Net sales were $1,485.6 million and $1,396.9 million for the year ended 2006 and 2005,
respectively, representing a 6% increase in 2006. The causes of this percentage increase were as
follows:
|
|
|
|
|
Underlying volume
|
|
|
|
%
|
Disposition of business
|
|
|
(1
|
)
|
Price/Mix
|
|
|
7
|
|
|
|
|
|
|
|
|
|
6
|
%
|
|
|
|
|
|
Underlying volume was impacted by the loss of volume associated with the sale of assets of an
operation in our Engineered Products segment in the first quarter of 2006. Excluding the negative
volume impact of this loss, underlying volume increased slightly in 2006 compared to 2005. This
slight volume increase reflected an increase in sales from our Custom Sheet and Rollstock and
Packaging Technologies segments, partially offset by a decrease in volume sold from our other
businesses. The disposition of business impact reflects lost pounds from the sale of our
corrugated sheet business in the Custom Sheet and Rollstock segment in the fourth quarter of 2005.
The price/mix impact reflects sales mix changes and the management of selling prices for changes in
resin and conversion costs.
The following table presents sales, components of cost of sales, and the resulting gross
margin in dollars and on a per pound sold basis for 2006 and 2005. Cost of sales presented in the
Consolidated Statements of Operations includes material and conversion costs and excludes
amortization of intangible assets. The material and conversion costs components of cost of sales
are presented in the following table and we have not presented these components as a percentage of
net sales because a comparison of this measure is distorted by changes in resin costs that are
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.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Dollars and Pounds (in millions)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,485.6
|
|
|
$
|
1,396.9
|
|
Material costs
|
|
|
968.3
|
|
|
|
900.6
|
|
|
|
|
|
|
|
|
Material margin
|
|
|
517.3
|
|
|
|
496.3
|
|
Conversion costs
|
|
|
340.8
|
|
|
|
344.7
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
176.5
|
|
|
$
|
151.6
|
|
|
|
|
|
|
|
|
|
Pounds Sold
|
|
|
1,460
|
|
|
|
1,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars per Pound Sold
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1.017
|
|
|
$
|
.949
|
|
Material costs
|
|
|
.663
|
|
|
|
.612
|
|
|
|
|
|
|
|
|
Material margin
|
|
|
.354
|
|
|
|
.337
|
|
Conversion costs
|
|
|
.233
|
|
|
|
.234
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
.121
|
|
|
$
|
.103
|
|
|
|
|
|
|
|
|
The increases in net sales and material costs per pound sold in 2006 reflect sales mix changes
and the management of selling prices in response to increases in costs. The prices of our major
resins increased approximately 4% on a weighted average basis in 2006 over the prior year.
Material margin per pound sold increased 1.7 cents in 2006 over the prior year reflecting sales mix
changes and our focused efforts on managing margins for changes in resin prices and certain
conversion costs.
Conversion costs decreased $2.0 million compared to 2005 reflecting lower labor-related and
other costs due to our restructuring efforts partially offset by higher utilities and freight costs
from higher energy costs. We completed the consolidation of three Color and Specialty Compounds
production facilities into one plant in the fourth quarter of 2006 and began construction of a new
Custom Sheet and Rollstock production facility in Greenville, Ohio in the second quarter of 2006
into which three existing production facilities will be consolidated.
15
Selling, general and administrative expenses were $75.4 million in 2006 representing a $1.1
million increase over the prior year. In the third quarter of 2005, we entered into a Retirement
Agreement with the former chief executive officer of the Company which resulted in a $3.6 million
charge, of which $0.8 million represented a non-cash charge. Excluding this charge, selling,
general and administrative expenses increased $4.8 million in 2006. Expensing stock options from
the adoption of SFAS 123(R) beginning in 2006 resulted in $2.2 million of additional selling,
general and administrative expense in 2006. The remaining $2.6 million increase was primarily due
to increases in labor-related costs, higher IT-related costs from our company-wide Oracle
information system implementation and a $0.6 million charge related to the Lower Passaic River
environmental issue recorded in 2006, partially offset by savings from the termination of the
Companys airplane lease in the third quarter of 2005 and other corporate cost reduction efforts.
Amortization of intangibles was $4.7 million in 2006 compared to $4.9 million in 2005. The
decrease reflects the final amortization of certain intangibles acquired in 2002.
In the first quarter of 2006, we adopted SFAS 123(R). Prior to the adoption of SFAS 123(R),
we had adopted the disclosure-only provisions of SFAS 123 and no expense related to stock options
was recognized in our results of operations. We have implemented SFAS 123(R) using the modified
prospective transition method, which requires the expensing of stock options upon adoption without
restating prior periods. Compensation expense related to stock options was $2.5 million in 2006,
of which $2.2 million was recognized in selling, general and administrative and $0.3 million was
recorded as costs of sales. This resulted in a reduction to diluted earnings per share of 6 cents
in 2006. The following table presents the impact of the adoption of SFAS 123(R) and resulting
stock option expense on operating earnings during 2006 (in millions):
|
|
|
|
|
Custom Sheet and Rollstock
|
|
$
|
0.6
|
|
Packaging Technologies
|
|
|
0.3
|
|
Color and Specialty Compounds
|
|
|
0.5
|
|
Engineering Products
|
|
|
0.1
|
|
Corporate
|
|
|
1.0
|
|
|
|
|
|
|
|
$
|
2.5
|
|
|
|
|
|
In the fourth quarter of 2006, we recorded a $3.2 million non-cash goodwill impairment charge
due to recent changes in our profiles business and the reorganization of the operations, management
and reporting of this business which led to a redefinition of our operating segments comprising our
Engineered Products group and allocation of goodwill to our new profiles reporting unit. The fair
value of our profiles business did not support the $3.2 million goodwill allocation which resulted
in the impairment charge. In the fourth quarter of 2005, we recorded a $4.5 million non-cash
goodwill impairment charge triggered by the underperformance of a profiles business in the
Engineered Products group and the loss of a major customer at another operation in our Color and
Specialty Compounds segment.
In the fourth quarter of 2005, we initiated a plan to consolidate three Color and Specialty
Compounds production facilities into one plant in Donora, Pennsylvania. This restructuring
activity, which was completed in the fourth quarter of 2006, resulted in $1.7 million of cash
restructuring expense in 2006 primarily related to equipment moving and employee severance costs.
In the second quarter of 2006, we began construction of a new Custom Sheet and Rollstock production
facility in Greenville, Ohio into which three existing production facilities will be consolidated.
This consolidation resulted in $0.2 million of restructuring expense in 2006 primarily related to
employee severance costs and accelerated depreciation.
In the second quarter of 2005, we initiated several strategic changes to enhance short-term
operating performance and longer-term operating efficiencies. The plan involved the consolidation,
sale or closing of seven plant facilities, the shut-down of a calendered film line and other cost
reduction efforts including the termination of the Companys airplane lease. These activities
resulted in $10.1 million of restructuring and exit costs in 2005 of which $7.2 million represented
non-cash charges.
Operating earnings for 2006 were $91.4 million compared to $57.9 million in 2005 representing
a $33.6 million increase which was primarily caused by a $24.9 million increase in gross margin and
an $8.2 million decrease in restructuring and exit costs, both due to the various reasons
previously discussed.
Interest expense, net was $21.0 million in 2006 compared to $25.2 million in 2005. The
decrease in interest expense was due to the benefit realized from our significant debt pay-down in
the second half of 2005 and through 2006 including the extinguishment of our convertible
subordinated debentures. The lower debt levels were partially offset by a higher average interest
rate.
In the third quarter of 2006, we redeemed all $150 million of our convertible subordinated
debentures resulting in $3.8 million of early-payment premium and $1.7 million of non-cash
write-off of unamortized debt issuance costs which were reported in total as early debt
extinguishment costs.
16
Our effective tax rate was 40.3% in 2006 compared to 44.1% in 2005. The effective rates for
both periods were higher due to the impact of non-deductible goodwill impairment charges.
Excluding the non-deductible portion of goodwill impairment charges, our effective tax rate was
38.4% in 2006 and 39.1% in 2005. The 2006 effective tax rate declined 3.3% when compared to the
2005 rate
due to the reduction in the amount of valuation allowance recorded for net operating losses
generated by our Donchery, France operation in 2006 compared to 2005. Partially offsetting the
rate improvements outlined above, the effective tax rate was higher in 2006 by 1.2% due to the
impact on the 2005 effective rate from the implementation of certain state tax planning strategies
last year, 0.7% due the expensing of stock options from the adoption of SFAS 123(R) in 2006 and
0.6% due a reduction in research and development credits from 2006 to 2005. We did not record the
benefit of a research and development tax credit during calendar 2006 because this credit expired
on December 31, 2005. In December 2006, the government approved legislation that extends the
credit retroactively and as a result, we recovered this benefit in the first quarter of 2007.
We reported net earnings of $38.8 million in 2006 compared to $18.3 million in 2005. These
amounts reflect the impact of the items previously discussed.
Custom Sheet and Rollstock Segment
Net sales were $709.1 million and $657.3 million for 2006 and 2005, respectively, representing
an 8% increase in 2006. This increase was caused by:
|
|
|
|
|
Underlying volume
|
|
|
4
|
%
|
Disposition of business
|
|
|
(1
|
)
|
Price/Mix
|
|
|
5
|
|
|
|
|
|
|
|
|
|
8
|
%
|
|
|
|
|
|
The increase in underlying volume is primarily due to additional sales of lower-priced pallet
material to this segments largest customer and incremental sales from our Mexico operation to a
large customer selling to the home appliance market. The disposition of business impact represents
pounds lost from the sale of our corrugated sheet business in the fourth quarter of 2005. The
price/mix impact reflects the management of selling prices for changes in raw material and
conversion costs, partially offset by the mix impact of an increase in volume sold of lower per
pound priced products.
This segments operating earnings in 2006 were $50.5 million which compared to $38.4 million
in 2005. This increase was largely driven by higher volume sold, an increase in material margin
from our focused efforts to manage margins for changes in resin and the reduction in conversion
costs per pound sold, partially offset by an increase in selling, general and administrative
expense. Although the reduction in conversion costs per pound sold largely reflects lower per
pound labor-related expenses, the increase in selling, general and administrative expenses was due
to higher labor-related costs. Improvements from our Ramos Arizpe, Mexico and Donchery, France
sheet operations contributed to the operating earnings increase in 2006 compared to the prior year
as these operations continue to benefit from increased sales volume and improved operational
efficiencies.
Packaging Technologies Segment
Net sales were $234.0 million and $227.0 million for 2006 and 2005, respectively, representing
a 3% increase in 2006. This increase was caused by:
|
|
|
|
|
Underlying volume
|
|
|
2
|
%
|
Price/Mix
|
|
|
1
|
|
|
|
|
|
|
|
|
|
3
|
%
|
|
|
|
|
|
The increase in underlying volume is primarily due to additional sales to the food packaging
sector of the packaging market. The price/mix impact reflects the management of selling prices for
changes in raw material and conversion costs, partially offset by the mix impact of an increase in
volume sold of lower per pound priced products.
This segments operating earnings in 2006 were $24.9 million which compared to $26.7 million
in 2005. Higher conversion costs per pound sold and an increase in selling, general and
administrative expenses were only partially offset by the benefit received from higher volume sold
and an increase in material margin from our focused efforts to manage margins for changes in resin
costs. The higher conversion costs reflected increased freight and utility costs partially offset
by lower labor-related expenses, and the increase in selling, general and administrative expenses
was due to higher labor-related costs.
17
Color and Specialty Compounds Segment
Net sales were $463.0 million and $430.9 million in 2006 and 2005, respectively, representing
a 7% increase. This increase was caused by:
|
|
|
|
|
Underlying volume
|
|
|
(3
|
)%
|
Price/Mix
|
|
|
10
|
|
|
|
|
|
|
|
|
|
7
|
%
|
|
|
|
|
|
Approximately 93% of sales dollars and 88% of sales volume of this segment represents
proprietary products which include engineered compounds and color concentrates which are made using
formulas and manufacturing processes that are proprietary in nature. The remaining sales of this
segment represents tolling product, which is customer-provided material that we compound for a
conversion fee. The 3% decrease in underlying volume in 2006 compared to the prior year reflects a
decrease in sales of both tolling and proprietary products. Sales volumes of tolling products
decreased due to customer-specific decreases in their business volumes. The decrease in sales
volumes of proprietary products reflects disruptions associated with our Donora consolidation
efforts, particularly in the first and third quarters of the current year, which required us to
temporarily decrease our capacity while we physically moved production lines. The move of
production lines from our former production facilities to our Donora facility substantially
occurred in the first and third quarter of this year. The price/mix increase reflects increases of
selling prices for changes in raw material and conversion costs and a favorable shift in mix
towards higher sales price per pound products.
This segments operating earnings in 2006 were $27.0 million which compared to $15.3 million
in the same period of the prior year. The increase in operating earnings for both periods was
impacted by a decrease in special items and the impact of stock option expense associated with the
implementation of SFAS 123(R). Excluding the impact of special items and stock option expense,
operating earnings increased $3.9 million in 2006 over the prior year. This increase was driven by
an increase in mix of higher margin sales and an increase in material margin dollars due to our
focused efforts to manage margins for changes in resin and certain conversion costs, partially
offset by higher conversion costs and an increase in selling, general and administrative expense.
The higher conversion costs reflected higher freight and utility costs and the increase in selling,
general and administrative expenses was due to higher labor-related costs as well as the impact of
the $0.6 million increase to the Lower Passaic River environmental accrual.
Engineered Products Group
Net sales were $79.6 million and $81.7 million for 2006 and 2005, respectively, representing a
3% sales decrease in 2006. This decrease was caused by:
|
|
|
|
|
Underlying volume
|
|
|
(11
|
)%
|
Price/Mix
|
|
|
8
|
|
|
|
|
|
|
|
|
|
(3
|
)%
|
|
|
|
|
|
The underlying volume decrease reflects the sale of assets of an operation which was part of
our 2005 restructuring activities. Excluding the negative volume impact of these sold assets,
underlying volume decreased 6% in 2006 from the prior year. This decrease reflects lower sales
volume of wheels to the lawn and garden market and a lower volume sold of profile products to the
building and construction market. The positive impact of price/mix reflects the management of
selling prices for changes in raw material and conversion cost fluctuations as well as a favorable
shift in mix towards wheels with a higher selling price per pound.
This segments operating earnings in 2006 were $4.5 million which compared to an operating
loss of $3.5 million in 2005. The 2006 increase in operating earnings was impacted by a reduction
in special items and the impact of stock option expense associated with the adoption of SFAS
123(R). Excluding the impact of special items and stock option expense, operating earnings
increased $6.1 million in 2006 compared to the prior year. This increase was mostly driven by
profitability improvement in our wheels and profiles businesses resulting primarily from reductions
in labor-related costs.
Corporate
Corporate includes corporate expenses and portions of information technology and professional
fees that are not allocated to the segments and group. Corporate expenses are reported as selling,
general and administrative expenses in our Consolidated Statements of Operations. Corporate
expenses as a component of operating earnings were $15.5 million in 2006 and $19.1 million in the
prior year. The comparison for both periods was impacted by a reduction in special items and stock
option expense associated with the impact of SFAS 123(R). Excluding the impact of special items
and stock option expense, corporate expenses decreased $0.2 million in 2006 due mostly to savings
from the termination of the Companys airplane lease in the third quarter of 2005, partially offset
by an increase in labor-related costs and higher IT-related cost from our company-wide Oracle
information system implementation.
18
Liquidity and Capital Resources
Cash Flow
Our primary sources of liquidity have been cash flows from operating activities, borrowings
from third parties and equity offerings. Our principal uses of cash have been to support our
operating activities, invest in capital improvements, pay off outstanding indebtedness, finance
strategic business and outsourcing acquisitions, acquire treasury shares and pay dividends on our
common stock. The following summarizes the major categories of our changes in cash and cash
equivalents in 2007, 2006 and 2005:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash Flows (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
104.0
|
|
|
$
|
127.5
|
|
|
$
|
105.0
|
|
Net cash used for investing activities
|
|
|
(96.0
|
)
|
|
|
(21.5
|
)
|
|
|
(31.4
|
)
|
Net cash used for financing activities
|
|
|
(10.0
|
)
|
|
|
(105.2
|
)
|
|
|
(110.3
|
)
|
Effect of exchange rate changes
|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/Increase in cash and cash equivalents
|
|
$
|
(2.0
|
)
|
|
$
|
0.8
|
|
|
$
|
(36.7
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities was $104.0 million in 2007 compared to $127.5
million in the prior year. Of the $23.5 million decrease in cash flow, $17.4 million was from a
larger improvement in net working capital in the prior year and the remainder reflects lower
current year earnings. We continued to focus on managing working capital in the current year. Our
inventory turns improved to 11.1 times at October 2007 from 10.4 times at October 2006 and our days
payable outstanding improved to 43.3 days at October 2007 from 38.8 days at October 2006. These
improvements drove a reduction in our working capital as a percentage of trailing-two months of net
sales metric from 9.0% at the end of fiscal 2006 to 8.6% at the end of fiscal 2007. Our days sales
outstanding increased to 50.5 days at October 2007 from 48.3 days at October 2006 due to an
increase in sales mix to customers with longer payment terms. Our inventory turns, days payables
outstanding and days sales outstanding metrics are calculated using trailing-two month averages.
Our primary investing activities are capital expenditures. Capital expenditures are primarily
incurred to enhance our facilities for safety and environmental improvements, to improve
productivity, and to modernize and expand facilities. Capital expenditures in 2007 were $34.7
million compared to $24.0 million in 2006. The $10.7 million increase in capital expenditures was
largely attributable to the new production facility in Greenville, Ohio, the expansion of our
Mexico operation and additional capital for our information systems implementation.
Net cash used for financing activities totaled $10.0 million in 2007 and $105.2 million in
2006. The net cash used for financing activities during 2007 reflects $38.4 million for treasury
share repurchases and $17.0 million to pay dividends, partially offset by $8.4 million received
from employee stock option exercises and $36.2 million from additional borrowings. During the
fourth quarter of 2007, we borrowed $61.4 million to fund the Creative acquisition.
Financing Arrangements
In the third quarter of 2006, we amended our U.S. unsecured bank credit facility agreement
which increased our total availability from $200 million to $300 million and extended the term to
June 2, 2011. Interest on the bank credit facility is payable at a rate we may choose of either
the Prime rate or LIBOR plus a 0.625% to 1.0% borrowing margin, and requires a fee of 0.125% to
0.2% on the unused portion of the facility. We classify borrowings under the amended bank credit
facility as long-term because no paydowns are required within the next 12 months and we have the
ability to keep the balances outstanding over the next 12 months. The bank credit facility
requires the Company to meet certain affirmative and negative covenants which include minimum
consolidated net worth, minimum interest coverage and maximum total leverage requirements.
In the third quarter of 2006, we completed a $50 million private placement of 5.78% Senior
Notes which are payable on June 5, 2011. The notes do not require annual principal payments and
are pre-payable at our option after June 5, 2009 at par. Interest on the 2006 Notes is payable
semi-annually on December 5 and June 5 of each year. We used the proceeds from these notes and our
new unsecured bank credit facility to redeem our $150 million convertible subordinated debentures.
We incurred $3.8 million of early-payment premiums and $1.7 million of non-cash write-offs of
unamortized debt issuance costs as early debt extinguishment costs in the third quarter of 2006
related to the redemption of these debentures.
As of November 3, 2007, we had $334.3 million of outstanding debt with a weighted average
interest rate of 5.6% of which 64% represented fixed rate instruments with a weighted average
interest rate of 5.5%. At the end of 2007, we had $204.4 million unused on our credit facilities
of which $107.2 million was available under our most restrictive covenant. Our credit facilities
contain certain affirmative and negative covenants, including restrictions on the incurrence of
additional
19
indebtedness, limitations on both the sale of assets and merger transactions, and requirements
to maintain certain financial, debt service and net worth ratios. While we were in compliance with
our covenants throughout 2007 and currently expect to be in compliance with our covenants in the
next twelve months, our failure to comply with the covenants or other requirements of our financing
arrangements could result in an event of default and, among other things, acceleration of the
payment of our indebtedness, which could adversely impact our business, financial condition, and
results of operations.
We anticipate that cash flows from operations, together with the financing and borrowings
under our bank credit facilities, will provide the resources necessary for reinvestment in our
existing business, strategic acquisitions and managing our capital structure on a short and
long-term basis.
Contractual Obligations
The following table summarizes our contractual obligations as of November 3, 2007 and the
estimated payments due by period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Less Than
|
|
|
Years
|
|
|
Years
|
|
|
Greater than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
2 and 3
|
|
|
4 and 5
|
|
|
5 Years
|
|
Long-Term Debt
|
|
$
|
429.3
|
|
|
$
|
18.9
|
|
|
$
|
65.6
|
|
|
$
|
194.9
|
|
|
$
|
149.9
|
|
Capital Lease Obligations
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
16.3
|
|
|
|
7.1
|
|
|
|
7.7
|
|
|
|
1.5
|
|
|
|
|
|
Purchase Obligations
|
|
|
74.0
|
|
|
|
74.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Obligations
|
|
|
2.7
|
|
|
|
1.2
|
|
|
|
1.3
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
522.7
|
|
|
$
|
101.3
|
|
|
$
|
74.7
|
|
|
$
|
196.7
|
|
|
$
|
150.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in long-term debt include principal and interest payments. Interest on debt
with variable rates was calculated using the current rate of that particular debt instrument at
November 3, 2007. Purchase obligations primarily consist of inventory purchases made in the normal
course of business to meet operational requirements. Other obligations consist primarily of a
guarantee to enter into a financing agreement in return for government investment subsidies. The
obligations table does not include long term contingent liabilities, deferred compensation
obligations and liabilities related to deferred taxes because it is not certain when these
liabilities will become due.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with accounting principles
generally accepted in the United States. As such, we are required to make estimates and judgments
that affect the reported amounts of assets, liabilities, shareholders equity, revenues and
expenses, and disclosures of contingent assets and liabilities at the date of the financial
statements. Accounting policies, estimates and judgments which we believe are the most critical to
aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition
- We recognize revenue as product is shipped and title passes to the
customer. We manufacture our products either to standard specifications or to custom
specifications agreed upon with the customer in advance, and we inspect our products prior to
shipment to ensure that these specifications are met. We monitor and track product returns, which
have historically been within our expectations and the provisions established. Despite our efforts
to improve our quality and service to customers, we cannot guarantee that we will continue to
experience the same or better return rates than we have in the past. Any significant increase in
returns could have a material negative impact on our operating results.
Accounts Receivable
- We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customers creditworthiness, as determined by our review
of their current credit information. We monitor collections and payments from our customers and
maintain a provision for estimated credit losses based upon any specific customer collection issues
identified. While such credit losses have historically been within our expectations and the
provisions established, actual credit loss rates may differ from our estimates.
Inventories
- We value inventories at the lower of (i) cost to purchase or manufacture the
inventory or (ii) the current estimated market value of the inventory. We also buy scrap and
recyclable material (including regrind material) to be used in future production. We record these
inventories initially at purchase price, and based on the inventory aging and other considerations
for realizable value, we write down the carrying value to market value where appropriate. We
review inventory on-hand and record provisions for obsolete inventory. A significant increase in
the demand for our raw materials could result in a short-term increase in the cost of inventory
purchases, while a significant decrease in demand could result in an increase in the amount of
excess inventory quantities on hand. In addition, most of our business is custom products, where
the loss of a specific customer could increase the amount of excess or obsolete inventory on hand.
Although we make efforts to ensure the accuracy of our forecasts of future product demand, any
significant unanticipated changes in demand could have a significant impact on the value of our
inventory and operating results.
20
Acquisition Accounting
- We have made several acquisitions in recent years. All of these
acquisitions have been accounted for in accordance with the purchase method, and accordingly, the
results of operation were included in our Consolidated Statement of Operations from the respective
date of acquisition. The purchase price has been allocated to the identifiable assets and
liabilities, and any excess of the cost over the fair value of the net identifiable assets acquired
is recorded as goodwill. The initial allocation of purchase price is based on preliminary
information, which is subject to adjustments upon obtaining complete valuation information. While
the delayed finalization of a purchase price has historically not had a material impact on the
consolidated results of operations, we cannot guarantee the same results in future acquisitions.
Goodwill
- Our formal annual impairment testing date for goodwill is the first day of the
Companys fourth quarter and prior to the next annual testing date if an event occurs or
circumstances change that would make it more likely than not that the fair value of a reporting
unit is below its carrying amount. The goodwill impairment test is a two-step process which
requires us to make judgmental assumptions regarding fair value. The first step consists of
estimating the fair value of each reporting unit using a number of judgmental factors including
projected future operating results and business plans, economic projections, anticipated future
cash flows, discount rates and comparable marketplace fair value data from within a comparable
industry grouping. We compare the estimated fair values of each reporting unit to the respective
carrying values which includes allocated goodwill. If the estimated fair value is less than the
carrying value, the second step is completed to compute the impairment amount by determining the
implied fair value of goodwill. This determination requires the allocation of the estimated fair
value of the reporting unit to the assets and liabilities of the reporting unit. Any remaining
unallocated fair value represents the implied fair value of goodwill which is compared to the
corresponding carrying value to compute the goodwill impairment amount. We believe our estimates
of the underlying components of fair value are reasonable. However, should actual results not meet
our expectations or assumptions change in future years, our impairment assessment could result in a
lower fair value estimate which could result in an impairment charge that may materially affect the
carrying value of our assets and results from operations.
Long-Lived Assets
- We review the carrying amounts of property, plant and equipment, other
intangible assets and other long-lived assets for potential impairment if an event occurs or
circumstances change that indicates the carrying amount may not be recoverable. In evaluating the
recoverability of a long-lived asset, such assets are grouped at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets, and we compare
the carrying value of each asset group with the corresponding estimated undiscounted future
operating cash flows. In the event the carrying value of an asset group is not recoverable by
future undiscounted operating cash flows, impairment exists. In the event of impairment, an
impairment charge would be measured as the amount by which the carrying value of the long-lived
asset group exceeds its fair value.
Income Taxes
- Deferred tax assets and liabilities are determined based on temporary
differences between financial statement carrying amounts and tax bases of assets and liabilities,
applying enacted tax rates expected to be in effect for the year in which the differences are
expected to reverse. Deferred tax assets are recognized for credit carryforwards and then assessed
to determine the likelihood of realization. Valuation allowances are established to the extent we
believe it is more likely than not that deferred tax assets will not be realized. Expectations of
future earnings, the scheduled reversal of deferred tax liabilities, the ability to carryback
losses and credits to offset taxable income in a prior year, and tax planning strategies are the
primary drivers underlying our evaluation of valuation allowances. Deferred tax amounts recorded
may materially differ from the amounts that are ultimately payable and expensed if our estimates of
future earnings and outcomes of treasury and tax planning strategies are ultimately inaccurate.
Deferred income taxes are not provided for undistributed earnings on foreign consolidated
subsidiaries, to the extent that such earnings are reinvested for an indefinite period of time. If
those undistributed foreign earnings were not considered indefinitely reinvested, we would be
required to recognize approximately $4.5 million to $6.0 million of additional income tax expense.
We accrue for tax contingencies when it is probable that a liability to a taxing authority has
been incurred and the amount of the contingency can be reasonably estimated. The tax contingency
is adjusted for changes in circumstances and additional uncertainties, such as significant
amendments to existing tax law. To the extent we prevail in matters for which accruals have been
established, or are required to pay amounts in excess of recorded reserves, our effective tax rate
in a given financial statement period may be materially impacted.
In June 2006, the FASB issued FIN 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting for uncertainty
in tax positions. FIN 48 requires financial statement recognition of the impact of a tax position,
if that position is more likely than not to be sustained on examination, based on the technical
merits of the position. The Company has analyzed FIN 48, which will be adopted at the beginning of
fiscal 2008, and has determined that it will not have a material impact on the financial
statements.
21
Contingencies
- We are involved in litigation in the ordinary course of business, including
environmental matters. Our policy is to record expense for contingencies when it is both probable
that a liability has been incurred and the amount can be reasonably estimated. Estimating probable
losses requires assessment of multiple outcomes that often depends on managements judgments
regarding, but not limited to, potential actions by third parties such as regulators. The final
resolution of these contingencies could result in expenses different from current accruals and
therefore have a material impact on our consolidated financial results in a future reporting
period.
For additional information regarding our significant accounting policies, as well as the
impact of recently issued accounting standards, see Note 1 to our 2007 Consolidated Financial
Statements.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates primarily as a result of our borrowing activities.
Our earnings and cash flows are subject to fluctuations in interest rates on our floating rate
debt facilities. At November 3, 2007, we had $120.2 million of debt subject to variable short-term
interest rates and $214.1 million of fixed rate debt outstanding. Based upon the November 3, 2007
balance of the floating rate debt, a hypothetical ten-percent increase in interest rates would
cause an immaterial change in future net earnings, fair values and cash flows. We are not
currently engaged in any interest rate derivative instruments to manage our exposure to interest
rate fluctuations. The fair market value of our fixed rate debt is subject to changes in interest
rates and the November 3, 2007 fair values of such instruments are disclosed in the notes to our
consolidated financial statements. We do not anticipate material changes to the fair value of our
debt in the next 12 months.
We are also exposed to market risk through changes in foreign currency exchange rates,
specifically the Canadian dollar, euro and Mexican peso. Based upon our November 3, 2007 currency
exposure, a hypothetical ten-percent weakening of the U.S. dollar in each currency would cause an
immaterial change in future earnings, fair values and cash flows.
See Item 1A for additional disclosures about market risk.
22
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Managements Responsibility for Financial Statements
The Companys management is responsible for the integrity and accuracy of the financial
statements. Management believes that the financial statements for the three years ended November
3, 2007 have been prepared in accordance with accounting principles generally accepted in the
United States. In preparing the financial statements, management makes informed judgments and
estimates when necessary to reflect the expected effects of events and transactions that have not
been completed. The Companys disclosure controls and procedures ensure that material information
required to be disclosed is recorded, processed, summarized and communicated with management and
reported within the required time periods.
In meeting its responsibility for the reliability of the financial statements, management
relies on a system of internal control. This system is designed to provide reasonable assurance
that assets are safeguarded and transactions are executed in accordance with managements
authorization and recorded properly to allow the preparation of financial statements in accordance
with accounting principles generally accepted in the United States. The design of this system
recognizes that errors or irregularities may occur and that estimates and judgments are required to
assess the relative cost and expected benefits of the controls. Management believes the Companys
accounting controls provide reasonable assurance that errors or irregularities that could be
material to the financial statements are prevented or would be detected in a timely period.
The Companys board of directors is responsible for ensuring the independence and
qualifications of audit committee members under applicable New York Stock Exchange and Securities
and Exchange Commission standards. The audit committee consists of four independent directors and
oversees the Companys financial reporting and internal controls system. The audit committee meets
with management, the independent registered public accountant and internal auditors periodically to
review auditing, financial reporting and internal control matters. The audit committee held nine
meetings during 2007.
The Companys independent registered public accounting firm, Ernst & Young LLP, is engaged to
express an opinion on the Companys consolidated financial statements and on the Companys internal
control over financial reporting. Their opinions are based on procedures which they believe to be
sufficient to provide reasonable assurance that the financial statements contain no material errors
and that the Companys internal controls are effective.
Managements Report on Internal Control over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting. With the participation of the chief executive officer and chief
financial officer, management conducted an assessment of the effectiveness of its internal control
over financial reporting based on the framework set forth in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
this evaluation, management concluded that the Companys internal control over financial reporting
was effective as of November 3, 2007.
The Companys independent registered public accounting firm, Ernst & Young LLP, has issued an
audit report on the Companys internal control over financial reporting.
23
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The Shareholders and the Board of Directors
Spartech Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Spartech Corporation and
subsidiaries (the Company) as of November 3, 2007, and October 28, 2006, and the related
consolidated statements of operations, shareholders equity, and cash flows of the Company for each
of the three years in the period ended November 3, 2007. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial statements and schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and the
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Spartech Corporation and subsidiaries at November
3, 2007, and October 28, 2006, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended November 3, 2007, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Spartech Corporation and subsidiaries internal control over financial
reporting as of November 3, 2007, based on criteria established in
Internal Control Integrated
Framework
, issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated December 20, 2007, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
St. Louis, Missouri
December 20, 2007
24
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The Shareholders and the Board of Directors
Spartech Corporation and Subsidiaries
We have audited Spartech Corporation and subsidiaries (the Company) internal control over
financial reporting as of November 3, 2007, based on criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of November 3, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of November 3, 2007, and
October 28, 2006, and the related consolidated statements of operations, shareholders equity, and
cash flows of the Company for each of the three years in the period ended November 3, 2007, and our
report dated December 20, 2007, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
St. Louis, Missouri
December 20, 2007
25
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
November 3,
|
|
|
October 28,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,409
|
|
|
$
|
5,372
|
|
Receivables, net of allowance of $1,572 in 2007 and $1,514 in 2006
|
|
|
212,221
|
|
|
|
200,728
|
|
Inventories
|
|
|
116,076
|
|
|
|
122,329
|
|
Prepaids and other current assets
|
|
|
20,570
|
|
|
|
14,193
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
352,276
|
|
|
|
342,622
|
|
|
Property, plant and equipment, net
|
|
|
324,025
|
|
|
|
304,779
|
|
Goodwill
|
|
|
383,988
|
|
|
|
350,399
|
|
Other intangible assets, net
|
|
|
45,151
|
|
|
|
36,582
|
|
Other assets
|
|
|
5,431
|
|
|
|
7,412
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,110,871
|
|
|
$
|
1,041,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
448
|
|
|
$
|
6,898
|
|
Accounts payable
|
|
|
167,713
|
|
|
|
149,520
|
|
Accrued liabilities
|
|
|
49,319
|
|
|
|
51,186
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
217,480
|
|
|
|
207,604
|
|
Long-Term Debt:
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
333,835
|
|
|
|
282,325
|
|
Other Long-Term Liabilities:
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
|
111,997
|
|
|
|
97,681
|
|
Other liabilities
|
|
|
8,279
|
|
|
|
11,491
|
|
|
|
|
|
|
|
|
Total Long-Term Liabilities
|
|
|
454,111
|
|
|
|
391,497
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, 33,131,846 shares issued in 2007 and 2006
|
|
|
24,849
|
|
|
|
24,849
|
|
Contributed capital
|
|
|
200,485
|
|
|
|
198,661
|
|
Retained earnings
|
|
|
257,111
|
|
|
|
240,398
|
|
Treasury stock, at cost, 2,566,900 shares in 2007 and 1,007,766
shares in 2006
|
|
|
(52,531
|
)
|
|
|
(22,845
|
)
|
Accumulated other comprehensive income
|
|
|
9,366
|
|
|
|
1,630
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
439,280
|
|
|
|
442,693
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
1,110,871
|
|
|
$
|
1,041,794
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
26
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net Sales
|
|
$
|
1,451,983
|
|
|
$
|
1,485,597
|
|
|
$
|
1,396,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
1,288,402
|
|
|
|
1,309,060
|
|
|
|
1,245,253
|
|
Selling, general, and administrative
|
|
|
83,830
|
|
|
|
75,379
|
|
|
|
74,243
|
|
Amortization of intangibles
|
|
|
6,050
|
|
|
|
4,718
|
|
|
|
4,939
|
|
Goodwill impairment
|
|
|
|
|
|
|
3,159
|
|
|
|
4,468
|
|
Restructuring and exit costs
|
|
|
1,262
|
|
|
|
1,857
|
|
|
|
10,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,379,544
|
|
|
|
1,394,173
|
|
|
|
1,338,991
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings
|
|
|
72,439
|
|
|
|
91,424
|
|
|
|
57,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (net of interest income: 2007, $501; 2006, $655; 2005, $488)
|
|
|
17,629
|
|
|
|
20,981
|
|
|
|
25,195
|
|
Early debt extinguishment costs
|
|
|
|
|
|
|
5,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
|
54,810
|
|
|
|
64,938
|
|
|
|
32,674
|
|
|
Income taxes
|
|
|
20,964
|
|
|
|
26,140
|
|
|
|
14,411
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$
|
33,846
|
|
|
$
|
38,798
|
|
|
$
|
18,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.06
|
|
|
$
|
1.21
|
|
|
$
|
.57
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.05
|
|
|
$
|
1.20
|
|
|
$
|
.57
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
27
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Common
|
|
|
Contributed
|
|
|
Retained
|
|
|
Treasury
|
|
|
Income
|
|
|
Total Shareholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
(Loss)
|
|
|
Equity
|
|
Balance, October 30, 2004
|
|
$
|
24,849
|
|
|
$
|
196,264
|
|
|
$
|
214,778
|
|
|
$
|
(23,653
|
)
|
|
$
|
136
|
|
|
$
|
412,374
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
18,263
|
|
|
|
|
|
|
|
|
|
|
|
18,263
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260
|
|
|
|
260
|
|
Cash flow hedge
adjustments,
net of tax of $(50)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,604
|
|
|
Restricted stock grant
|
|
|
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217
|
|
Stock options exercised
|
|
|
|
|
|
|
330
|
|
|
|
|
|
|
|
6,339
|
|
|
|
|
|
|
|
6,669
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
(15,399
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,399
|
)
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,705
|
)
|
|
|
|
|
|
|
(8,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 29, 2005
|
|
$
|
24,849
|
|
|
$
|
196,811
|
|
|
$
|
217,642
|
|
|
$
|
(26,019
|
)
|
|
$
|
477
|
|
|
$
|
413,760
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
38,798
|
|
|
|
|
|
|
|
|
|
|
|
38,798
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,153
|
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,951
|
|
|
Restricted stock grant
|
|
|
|
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283
|
|
Stock options exercised
|
|
|
|
|
|
|
1,567
|
|
|
|
|
|
|
|
3,994
|
|
|
|
|
|
|
|
5,561
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
(16,042
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,042
|
)
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(820
|
)
|
|
|
|
|
|
|
(820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 28, 2006
|
|
$
|
24,849
|
|
|
$
|
198,661
|
|
|
$
|
240,398
|
|
|
$
|
(22,845
|
)
|
|
$
|
1,630
|
|
|
$
|
442,693
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
33,846
|
|
|
|
|
|
|
|
|
|
|
|
33,846
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,736
|
|
|
|
7,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,582
|
|
|
Restricted stock grant
|
|
|
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430
|
|
Stock options exercised
|
|
|
|
|
|
|
1,394
|
|
|
|
|
|
|
|
10,225
|
|
|
|
|
|
|
|
11,619
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
(17,133
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,133
|
)
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,911
|
)
|
|
|
|
|
|
|
(39,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, November 3, 2007
|
|
$
|
24,849
|
|
|
$
|
200,485
|
|
|
$
|
257,111
|
|
|
$
|
(52,531
|
)
|
|
$
|
9,366
|
|
|
$
|
439,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
28
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
33,846
|
|
|
$
|
38,798
|
|
|
$
|
18,263
|
|
Adjustments to reconcile net earnings to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
43,069
|
|
|
|
40,698
|
|
|
|
39,380
|
|
Stock compensation expense
|
|
|
2,884
|
|
|
|
2,790
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
3,159
|
|
|
|
4,468
|
|
Early debt extinguishment costs
|
|
|
|
|
|
|
5,505
|
|
|
|
|
|
Restructuring and exit costs
|
|
|
573
|
|
|
|
269
|
|
|
|
7,198
|
|
Change in current assets and liabilities, net of effects
of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(6,172
|
)
|
|
|
9,331
|
|
|
|
(26,270
|
)
|
Inventories
|
|
|
10,291
|
|
|
|
(2,789
|
)
|
|
|
23,050
|
|
Prepaids and other current assets
|
|
|
(664
|
)
|
|
|
(1,472
|
)
|
|
|
7,484
|
|
Accounts payable
|
|
|
16,761
|
|
|
|
28,639
|
|
|
|
14,883
|
|
Accrued liabilities
|
|
|
(6,078
|
)
|
|
|
(2,157
|
)
|
|
|
6,014
|
|
Other, net
|
|
|
9,501
|
|
|
|
4,772
|
|
|
|
10,548
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
104,011
|
|
|
|
127,543
|
|
|
|
105,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(34,743
|
)
|
|
|
(23,966
|
)
|
|
|
(39,265
|
)
|
Business acquisitions
|
|
|
(61,371
|
)
|
|
|
|
|
|
|
(1,224
|
)
|
Dispositions of assets
|
|
|
94
|
|
|
|
2,428
|
|
|
|
9,116
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(96,020
|
)
|
|
|
(21,538
|
)
|
|
|
(31,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank credit facility borrowings / (payments), net
|
|
|
36,823
|
|
|
|
23,812
|
|
|
|
(76,370
|
)
|
Borrowings from issuance of notes
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Payments on notes
|
|
|
|
|
|
|
(10,715
|
)
|
|
|
(17,857
|
)
|
Payment of convertible subordinated debentures
|
|
|
|
|
|
|
(150,000
|
)
|
|
|
|
|
Payments on bonds and leases
|
|
|
(580
|
)
|
|
|
(469
|
)
|
|
|
(671
|
)
|
Early payment premiums on convertible subordinated debentures
|
|
|
|
|
|
|
(3,780
|
)
|
|
|
|
|
Cash dividends on common stock
|
|
|
(17,006
|
)
|
|
|
(15,883
|
)
|
|
|
(11,547
|
)
|
Stock options exercised
|
|
|
8,449
|
|
|
|
2,990
|
|
|
|
4,083
|
|
Treasury stock acquired
|
|
|
(38,374
|
)
|
|
|
(1,541
|
)
|
|
|
(7,982
|
)
|
Excess tax benefits from stock options
|
|
|
716
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(9,972
|
)
|
|
|
(105,242
|
)
|
|
|
(110,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
18
|
|
|
|
8
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/Increase in cash and cash equivalents
|
|
|
(1,963
|
)
|
|
|
771
|
|
|
|
(36,671
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
5,372
|
|
|
|
4,601
|
|
|
|
41,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
3,409
|
|
|
$
|
5,372
|
|
|
$
|
4,601
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1) Significant Accounting Policies
Basis of Presentation
- The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect
reported amounts and related disclosures. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current year presentation.
The Companys fiscal year ends on the Saturday closest to October 31 and fiscal years
generally contain 52 weeks or 364 calendar days. Because of this convention, every fifth or sixth
fiscal year has an additional week and 2007 was reported as a 53-week fiscal year containing 371
days of activity. The additional week was reported in the first quarter ended February 3, 2007.
Principles of Consolidation
- The accompanying consolidated financial statements include the
accounts of Spartech Corporation and its controlled affiliates. All intercompany transactions and
balances have been eliminated. Investments in entities of 20% to 50% of the outstanding capital
stock of such entities are accounted for by the equity method.
Segments
Spartech is organized into three reportable segments and one group of operating
segments based on the products manufactured. The three reportable segments are Custom Sheet and
Rollstock, Packaging Technologies and Color and Specialty Compounds with the remaining businesses
combined together in the Engineered Products group. The Color and Specialty Compounds segment
consists of three operating segments that are aggregated into a reportable segment based on the
nature of the products manufactured. The Engineered Products group consists of four operating
segments that are combined because each operating segment does not meet the materiality threshold
for separate disclosure.
Revenue Recognition
- The Company manufactures products for specific customer orders and for
standard stock inventory. Revenues are recognized as the product is shipped to the customer in
accordance with U.S. generally accepted accounting principles as well as the Securities and
Exchange Commissions Staff Accounting Bulletin 104. Shipping and handling costs associated with
the shipment of goods are recorded as costs of sales in the consolidated statement of operations.
Cash Equivalents
- Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
Allowance for Doubtful Accounts
- The Company performs ongoing credit evaluations of customers
that include reviewing creditworthiness from third-party reporting agencies, monitoring payment
histories, and adjusting credit limits as necessary. The Company continually monitors collections
and payments from customers and maintains a provision for estimated credit losses based on
specifically identified customer collection issues.
Inventories
- Inventories are valued at the lower of cost or market. Inventory values are
primarily based on either actual or standard costs which approximate average cost. Standard costs
are revised at least once annually, the effect of which is allocated between inventories and cost
of sales. Finished goods include the costs of material, labor, and overhead.
Property, Plant and Equipment
- Property, plant and equipment are carried at cost less
accumulated depreciation. Major additions and improvements are capitalized. Maintenance and
repairs are expensed as incurred. Depreciation expense is recorded on a straight-line basis over
the estimated useful lives of the related assets as shown below and totaled $38,569, $35,980, and
$34,441 in years 2007, 2006, and 2005, respectively.
|
|
|
|
|
|
|
Years
|
Buildings and leasehold improvements
|
|
|
20-25
|
|
Machinery and equipment
|
|
|
12-16
|
|
Furniture and fixtures
|
|
|
5-10
|
|
Computer equipment and software
|
|
|
3-7
|
|
Goodwill
Assets and liabilities acquired in business combinations are accounted for using
the purchase method and recorded at their respective fair values. Goodwill is assigned to the
reporting unit which benefits from the acquired business. The Companys annual goodwill impairment
testing date is the first day of the Companys fourth quarter and prior to the next annual testing
date if an event occurs or circumstances change that would make it more likely than not that the
fair value of a reporting unit is below its carrying amount. The goodwill impairment test is a
two-step process which requires us to make judgmental assumptions regarding fair value. The first
step consists of estimating the fair value of each reporting unit using a
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
number of judgmental factors including projected future operating results and business plans,
economic projections, anticipated future cash flows, discount rates and comparable marketplace fair
value data from within a comparable industry grouping. The estimated fair values of each reporting
unit are compared to the respective carrying values which includes allocated goodwill. If the
estimated fair value is less than the carrying value, the second step is completed to compute the
impairment amount by determining the implied fair value of goodwill. This determination requires
the allocation of the estimated fair value of the reporting unit to the assets and liabilities of
the reporting unit. Any remaining unallocated fair value represents the implied fair value of
goodwill which is compared to the corresponding carrying value to compute the goodwill impairment
amount. Management believes the estimates of the underlying components of fair value are
reasonable.
Other Intangible Assets
Costs allocated to customer contracts, product formulations and
other intangible assets are based on their fair value at the date of acquisition. The cost of
other intangible assets is amortized on a straight-line basis over its estimated useful life
ranging from 3 to 15 years unless such life is deemed indefinite. Identified intangible assets
that have indefinite useful lives will be amortized when their useful life is determined to no
longer be indefinite.
Long-Lived Assets
The Company reviews the carrying amounts of property, plant and equipment,
other intangible assets and other long-lived assets for potential impairment if an event occurs or
circumstances change that indicates the carrying amount may not be recoverable. In evaluating the
recoverability of a long-lived asset, such assets are grouped at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets, and management
compares the carrying value of each asset group with the corresponding estimated undiscounted
future operating cash flows. In the event the carrying value of an asset group is not recoverable
by future undiscounted operating cash flows, impairment exists. In the event of impairment, an
impairment charge would be measured as the amount by which the carrying value of the long-lived
asset group exceeds its fair value.
Financial Instruments
- The Company selectively uses derivative financial instruments to
manage its interest costs as well as its balance of floating rate and fixed rate financings. No
credit loss is anticipated from such instruments because the counterparties to these agreements are
major financial institutions with high credit ratings. The Company does not enter into derivatives
for trading purposes.
Derivative instruments (including certain derivative instruments embedded in other contracts)
are recorded in the balance sheet as either an asset or liability measured at fair value, and
changes in the derivatives fair value are recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying derivatives designated as fair
value hedges allows a derivatives gains and losses to be offset in the income statement by the
related change in the fair value of the hedged item. Special accounting for qualifying derivatives
designated as cash flow hedges allows the effective portion of a derivatives gains and losses to
be reported as a component of accumulated other comprehensive income or loss and reclassified into
earnings in the period during which the hedged transaction affects earnings. No such contracts
were outstanding as of November 3, 2007 or October 28, 2006.
The Company uses the following methods and assumptions in estimating the fair value of
financial instruments:
|
|
|
Cash, accounts receivable, accounts payable, and accrued liabilities the carrying
value of these instruments approximates fair value due to their short-term nature;
|
|
|
|
|
Derivative financial instruments based upon quoted market prices or market prices for
instruments with similar terms and maturities; and
|
|
|
|
|
Long-term debt (including bank credit facilities) based on quoted, current market
prices for the same or similar issues. As of November 3, 2007, the fair value of other
long-term debt was $334,171 compared to the carrying amount of $334,283.
|
Stock-Based Compensation
In fiscal 2006, the Company adopted SFAS 123 (revised 2004),
Share-Based Payment
(SFAS 123(R)). The Company adopted the provisions of SFAS 123(R) using the
modified prospective transition method. Under this method, the Companys consolidated financial
statements for 2007 and 2006 reflect the impact of SFAS 123(R), while the consolidated financial
statements for prior periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R). Prior to the adoption of SFAS 123(R), the Company had adopted the disclosure-only
provisions of SFAS 123 and accounted for stock-based compensation under the intrinsic value method,
and no expense related to stock options was recognized. In accordance with SFAS 123(R), the
Company reports excess tax benefits as a financing cash inflow rather than as a reduction of taxes
paid, which is included within operating cash flows.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
Foreign Currency Translation
- Assets and liabilities of the Companys non-U.S. operations are
translated from their functional currency to U.S. dollars using exchange rates in effect at the
balance sheet date and adjustments resulting from the translation process are included in
accumulated other comprehensive income. Transactional gains and losses arising from receivable and payable balances, including intercompany balances, in the normal course of
business that are denominated in a currency other than the functional currency of the operation are
recorded in income when they occur. The Company may periodically enter into foreign currency
contracts to manage exposures to market risks from prospective changes in exchange rates. No such
contracts were outstanding as of November 3, 2007 or October 28, 2006. The Companys foreign
currency net losses totaled $2,839 and $286 in 2007 and 2006, respectively and a net gain of $280
in 2005.
Income Taxes
- Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial statement carrying amounts
of assets and liabilities and their respective tax bases. Deferred tax assets are also recognized
for credit carryforwards and then assessed (including the anticipation of future income) to
determine the likelihood of realization. A valuation allowance is established to the extent
management believes that it is more likely than not that a deferred tax asset will not be realized.
Deferred tax assets and liabilities are measured using the rates expected to apply to taxable
income in the years in which the temporary differences are expected to reverse and the credits are
expected to be used. The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date. The Company accrues for tax
contingencies when it is probable that a liability to a taxing authority has been incurred and the
amount of the contingency can be reasonably estimated. Deferred income taxes are not provided for
undistributed earnings on foreign consolidated subsidiaries to the extent such earnings are
reinvested for an indefinite period of time.
Comprehensive Income
- Comprehensive income is the Companys change in equity during the
period related to transactions, events, and circumstances from non-owner sources. At November 3,
2007 and October 28, 2006, accumulated other comprehensive income consisted of cumulative foreign
currency translation adjustments. In 2005, a cumulative currency translation gain of $1,909 was
recognized from the sale of a foreign business.
Recently Issued Accounting Standards
In June 2006, the FASB issued FIN 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting for uncertainty
in tax positions. FIN 48 requires financial statement recognition of the impact of a tax position,
if that position is more likely than not to be sustained on examination, based on the technical
merits of the position. The Company has analyzed FIN 48, which will be adopted at the beginning of
fiscal 2008, and has determined that it will not have a material impact on the financial
statements.
In September 2006, the FASB issued SFAS 157,
Fair Value Measurements
(SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. This statement is
effective for the Company beginning in fiscal 2009 and management is currently evaluating the
impact of SFAS 157 on the Companys consolidated financial statements.
2) Acquisition
On September 14, 2007, the Company completed the acquisition of Creative Forming, Inc.,
(CFI) based in Ripon, Wisconsin. The operations purchased included a facility that primarily
thermoforms plastic packaging products for the food packaging and consumer products markets. CFI
is included in the Packaging Technologies segment and sales for the facility totaled approximately
$48,000 for the 12 months prior to acquisition. The cash price for this acquisition of $61,000
plus working capital adjustments was allocated to the assets acquired and liabilities assumed of
$78,033 and $16,662, respectively.
The preliminary allocation of purchase price to assets acquired includes $3,766 of net working
capital, $21,308 of property, plant, and equipment, $14,168 of identified intangibles, $11,460 of
net deferred tax liabilities and $33,589 of goodwill, none of which is deductible for tax purposes.
The identified intangibles and respective weighted average amortization periods upon acquisition
were $12,300 of customer contracts and relationships (nine years), $1,754 of trademarks (three
years), $14 of patents (nine years) and $100 of non-compete agreements (two years). As discussed
in Note 5, a specific customer of CFI discontinued a product line subsequent to the acquisition
date. As a result, $1,550 of the customer contract and relationship intangible asset established
upon acquisition was impaired. The Company has not finalized the allocation of the purchase price
to assets acquired and liabilities assumed and is awaiting final valuations from the independent
advisor that it has engaged.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
3) Inventories
Inventories at November 3, 2007 and October 28, 2006 are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Raw materials
|
|
$
|
60,218
|
|
|
$
|
61,872
|
|
Production supplies
|
|
|
9,204
|
|
|
|
8,982
|
|
Finished goods
|
|
|
46,654
|
|
|
|
51,475
|
|
|
|
|
|
|
|
|
|
|
$
|
116,076
|
|
|
$
|
122,329
|
|
|
|
|
|
|
|
|
4) Property, Plant and Equipment
Property, plant and equipment consisted of the following at November 3, 2007 and October 28,
2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Land
|
|
$
|
11,749
|
|
|
$
|
11,479
|
|
Buildings and leasehold improvements
|
|
|
106,647
|
|
|
|
85,564
|
|
Machinery and equipment
|
|
|
445,888
|
|
|
|
414,100
|
|
Computer equipment and software
|
|
|
33,565
|
|
|
|
23,700
|
|
Furniture and fixtures
|
|
|
6,978
|
|
|
|
7,264
|
|
|
|
|
|
|
|
|
|
|
|
604,827
|
|
|
|
542,107
|
|
Accumulated depreciation
|
|
|
(280,802
|
)
|
|
|
(237,328
|
)
|
|
|
|
|
|
|
|
|
|
$
|
324,025
|
|
|
$
|
304,779
|
|
|
|
|
|
|
|
|
5) Goodwill and Identifiable Intangible Assets
Changes in the carrying amount of goodwill for the years ended November 3, 2007 and October
28, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Color and
|
|
|
|
|
|
|
|
|
|
Custom Sheet
|
|
|
Packaging
|
|
|
Specialty
|
|
|
Engineered
|
|
|
|
|
|
|
and Rollstock
|
|
|
Technologies
|
|
|
Compounds
|
|
|
Products
|
|
|
Total
|
|
Balance, October 29, 2005
|
|
$
|
195,359
|
|
|
$
|
|
|
|
$
|
122,927
|
|
|
$
|
35,272
|
|
|
$
|
353,558
|
|
Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,159
|
)
|
|
|
(3,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 28, 2006
|
|
|
195,359
|
|
|
|
|
|
|
|
122,927
|
|
|
|
32,113
|
|
|
|
350,399
|
|
Reclassifications
|
|
|
(70,039
|
)
|
|
|
70,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFI acquisition
|
|
|
|
|
|
|
33,589
|
|
|
|
|
|
|
|
|
|
|
|
33,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, November 3, 2007
|
|
$
|
125,320
|
|
|
$
|
103,628
|
|
|
$
|
122,927
|
|
|
$
|
32,113
|
|
|
$
|
383,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 16, the Company formed a new segment in 2007, Packaging Technologies,
which contains operations that were formerly included in the Custom Sheet and Rollstock segment.
As a result, a portion of Custom Sheet and Rollstocks goodwill was allocated to Packaging
Technologies based on the relative fair value of those reporting units.
The goodwill impairment in 2006 resulted from the reorganization of a reporting unit in the
Engineered Products group. A single reporting unit was split into two reporting units and goodwill
was allocated to the new reporting units using the relative fair value of those reporting units.
The fair value of the new Spartech Profiles reporting unit based on future operating projections
did not support the allocated fair value of goodwill resulting in an impairment.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
As of November 3, 2007 and October 28, 2006, the Company had amortizable intangible assets as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
Carrying Amount
|
|
|
Amortization
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Non-compete agreements
|
|
$
|
1,768
|
|
|
$
|
3,694
|
|
|
$
|
1,146
|
|
|
$
|
2,667
|
|
Customer contracts/relationships
|
|
|
28,115
|
|
|
|
21,612
|
|
|
|
6,421
|
|
|
|
8,191
|
|
Product formulations
|
|
|
20,324
|
|
|
|
18,006
|
|
|
|
6,389
|
|
|
|
4,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,207
|
|
|
$
|
43,312
|
|
|
$
|
13,956
|
|
|
$
|
15,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets totaled $4,500, $4,718 and $4,939 in 2007, 2006 and
2005, respectively. Amortization expense for amortizable intangible assets over the next five
years is estimated to be:
|
|
|
|
|
|
|
Intangible
|
Year Ended
|
|
Amortization
|
2008
|
|
$
|
5,084
|
|
2009
|
|
|
4,610
|
|
2010
|
|
|
3,894
|
|
2011
|
|
|
3,389
|
|
2012
|
|
|
3,389
|
|
The Company has an $8,900 trademark included in other intangible assets which has an
indefinite life and, therefore is not subject to amortization.
On September 14, 2007, the Company completed the purchase of CFI. On October 18, 2007,
Pfizer, Inc. (Pfizer), a customer of CFI, announced the exit of its new inhaled insulin product
named Exubera. Management determined that the $1,550 intangible asset assigned to the Pfizer
relationship upon acquisition had become impaired. The impairment charge was included in the
Packaging Technologies segment and is presented in amortization of intangibles on the Consolidated
Statements of Operations.
6) Restructuring
2006 Restructuring Plan
In 2006, the Company announced the consolidation of three existing Custom Sheet and Rollstock
production facilities into one newly constructed facility in Greenville, OH. The following table
summarizes the restructuring and exit costs which are largely related to the 2006 restructuring
plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cumulative
|
|
Accelerated depreciation
|
|
$
|
501
|
|
|
$
|
126
|
|
|
$
|
627
|
|
Facility restructuring and exit costs
|
|
|
561
|
|
|
|
75
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,062
|
|
|
$
|
201
|
|
|
$
|
1,263
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation represents the impact from the reduced life on property, plant and
equipment related to a decision to sell one of the three consolidated production facilities and
certain production equipment. Facility restructuring charges represent employee severance and
moving costs. The Companys restructuring liability related to the 2006 restructuring plan was
$129 and $75 at November 3, 2007 and October 28, 2006, and $507 of cash payments were made during
2007. As of the end of 2007, the Company had $150 of assets held for sale within the Custom Sheet
and Rollstock segment, representing a building which is classified in other current assets and is
expected to be sold during 2008. The 2006 restructuring plan activities are substantially complete
and all activities are expected to be finalized in the first quarter of 2008.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
2005 Restructuring Plan
In 2005, the Company initiated a plan involving the closing or sale of certain plant
facilities and other cost reduction efforts. While these activities were substantially complete at
the beginning of the year, we continued to incur expenses related to the final settlement of
liabilities and maintenance of held for sale properties. Total expenses under this plan for 2007,
2006 and 2005 were $200, $1,656 and $10,088 for a cumulative total of the plan of $11,944. Of the
expenses recognized in 2007, $120 represented the final write-off of a calendered film line that
was previously classified as held for sale. As of November 3, 2007 all properties held for sale
had been sold or disposed and all outstanding liabilities had been settled.
7) Stock-Based Compensation
On October 30, 2005, the Company adopted SFAS 123(R) using the modified prospective transition
method. Under this method, the Companys consolidated financial statements of 2007 and 2006
reflect the impact of SFAS 123(R), while the consolidated financial statements for prior periods
have not been restated to reflect, and do not include, the impact of SFAS 123(R). The Companys
2004 Equity Compensation Plan allows for grants of stock options, restricted stock and restricted
stock units. During the first quarter of 2007, the compensation committee of the board of
directors adopted an amendment to the plan that provides for the grant of stock appreciation rights
(SARS) and performance shares. Beginning in 2007, SARS, restricted stock and performance shares
had replaced stock options as the equity compensation instruments used by the Company.
General
The following table details the effect of stock-based compensation from the issuance of equity
compensation instruments on operating earnings, net income and earnings per share:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Cost of sales
|
|
$
|
278
|
|
|
$
|
273
|
|
Selling, general and administrative
|
|
|
2,606
|
|
|
|
2,517
|
|
|
|
|
|
|
|
|
Total stock based compensation expense included in operating earnings
|
|
|
2,884
|
|
|
|
2,790
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
796
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on net earnings
|
|
$
|
2,088
|
|
|
$
|
2,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on basic and diluted earnings per share
|
|
$
|
.07
|
|
|
$
|
.07
|
|
|
|
|
|
|
|
|
As discussed in Note 8, the Company entered into a separation agreement with its former Chief
Executive Officer (CEO) during 2007. As a result, all non-vested stock compensation was
forfeited on his termination date and $368 of compensation expense was reversed related to equity
instruments that were initially expected to vest but were ultimately forfeited.
Prior to the adoption of SFAS 123(R), the Company adopted the disclosure-only provisions of
SFAS 123 and accounted for stock-based compensation under the intrinsic value method, and no
expense related to stock options was recognized. Had the fair value recognition provisions of SFAS
123 been adopted by the Company, the effect on net income and earnings per common share in 2005
would have been as follows:
|
|
|
|
|
|
|
2005
|
|
Net Earnings as Reported
|
|
$
|
18,263
|
|
Add: Stock-based compensation included in net earnings as reported, net of tax
|
|
|
649
|
|
Deduct: Total stock-based compensation, net of tax
|
|
|
(2,535
|
)
|
|
|
|
|
Pro Forma Net Earnings
|
|
$
|
16,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
As Reported
|
|
Pro Forma
|
Basic
|
|
$
|
.57
|
|
|
$
|
.51
|
|
Diluted
|
|
|
.57
|
|
|
|
.51
|
|
As discussed in Note 8, the Company entered into a retirement agreement with its former CEO,
during 2005. Among other items, the agreement included an amendment to the terms of the former
CEOs vested stock options to treat his
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
resignation as a retirement before having reached the
minimum retirement age of 60 specified in his option agreements which resulted in a new measurement
of the options for accounting purposes and a non-cash, pre-tax expense of $831. In addition, the
agreement required the cancellation of all the former CEOs unvested stock options.
Stock Appreciation Rights (SARS)
SARS are granted with lives of 10 years and graded vesting over four years and can be settled
only in the Companys common stock. The estimated fair value is computed using the Black-Scholes
option-pricing model. Expected volatility is based on historical periods commensurate with the
expected life of options and expected life is based on historical experience and expected exercise
patterns in the future. Stock compensation expense is recognized in the consolidated statements of
operations ratably over the vesting period based on the number of instruments that are expected to
ultimately vest. The weighted average fair value of SARS granted in 2007 was $9.85 per right and
the weighted average assumptions used in the SARS Black-Scholes valuations for 2007 are as follows:
risk free interest rate of 4.6%, expected volatility of 40%, expected dividend yield of 2% and
expected life of 5.5 years.
During 2007, there were 242 thousand SARS granted at a weighted average strike price of $27.01
per right. There were 81 thousand SARS forfeited during the year and as of November 3, 2007, 162
thousand SARS were outstanding with a weighted average strike price of $27.26 per right, none of
which were vested. The SARS outstanding at November 3, 2007 had no intrinsic value and a weighted
average remaining life of 9.2 years.
Restricted Stock
Restricted stock is granted at fair value based on the closing stock price on the date of
grant and vests over four years. During 2007, there were 52 thousand shares of restricted stock
granted with a fair value of $26.41 per share. Stock compensation expense is recognized in the
consolidated statements of operations ratably over the vesting period based on the number of
instruments that are expected to ultimately vest. There were 21 thousand restricted shares
forfeited during the year and as of November 3, 2007, 31 thousand shares were outstanding with a
weighted average life of 3.2 years.
During 2007 the Company granted 16 thousand shares of restricted stock with a fair value of
$26.22 to non-employee directors. These shares vested 15 days subsequent to their issuance and all
stock compensation expense related to the awards was recognized upon grant.
Performance Shares
Performance share awards permit the holder to receive, after a specified performance period, a
number of shares of Company common stock for each performance share awarded. The number of shares
of common stock to be received is determined by a predetermined formula based on the extent to
which the Company achieves certain performance criteria specified in the award relative to a
selected group of peer companies. The awards cliff vest at the end of the performance period which
is three years. Stock compensation expense is recognized in the consolidated statements of
operations ratably over the vesting period based on the number of instruments that are expected to
ultimately vest.
During 2007 the Company granted 35 thousand performance share awards with a fair value of
$32.90 per share as determined by an independent appraiser using a Monte-Carlo simulation model.
There were 17 thousand awards forfeited in 2007 and had the performance period ended at the end of
2007, 15 thousand shares would have been settled with a pay-out factor of 0.83.
Restricted Stock Units
Restricted stock units, which have been awarded only to non-employee directors of the Company,
provide the grantee the right to receive one share of common stock per restricted unit at the end
of the restricted period and to receive dividend equivalents during the restricted period in the
form of additional restricted stock units. The restricted period ends one year after the director
leaves the Board of Directors. During 2007, 2006 and 2005 the Company granted 567, 13,304, and
8,353 restricted stock units, respectively to non-employee directors based on the fair value of the
Companys stock at the date of grant. As of November 3, 2007, there were 25,882 restricted stock
units outstanding.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
Stock Options
During 2006 and 2005, the Company granted stock options under a plan which requires the
exercise price of stock options to be the fair market value of the Companys stock, at a minimum,
at the date of grant. Under the plan, up to 3 million shares of common stock may be granted and
options are typically granted with lives of 10 years with graded vesting over four years. The
estimated fair value of stock option grants was computed using the Black-Scholes option-pricing
model. Expected volatility was based on historical periods commensurate with the expected life of
options and expected life was based on historical experience and expected exercise patterns in the
future. Stock option expense is recognized in the consolidated statements of operations ratably
over the vesting period based on the number of options that are expected to ultimately vest. The
following table presents the assumptions used in valuing options granted during 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Weighted Average Fair Value
|
|
$
|
7.78
|
|
|
$
|
7.65
|
|
|
|
|
|
|
|
|
Assumptions Used:
|
|
|
|
|
|
|
|
|
Expected Dividend Yield
|
|
|
2
|
%
|
|
|
2
|
%
|
Expected Volatility
|
|
|
40
|
%
|
|
|
35
|
%
|
Risk-Free Interest Rates
|
|
|
4.37-4.72
|
%
|
|
|
3.59-3.79
|
%
|
Expected Lives
|
|
5.5 Years
|
|
|
5.5 Years
|
|
Changes in stock options for 2007, 2006, and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
(in 000s)
|
|
|
Exercise
|
|
|
(in 000s)
|
|
|
Exercise
|
|
|
(in 000s)
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding, beginning of the year
|
|
|
2,287
|
|
|
$
|
21.43
|
|
|
|
2,177
|
|
|
$
|
21.21
|
|
|
|
2,677
|
|
|
$
|
20.38
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
368
|
|
|
|
21.51
|
|
|
|
577
|
|
|
|
24.46
|
|
Exercised
|
|
|
(447
|
)
|
|
$
|
19.89
|
|
|
|
(181
|
)
|
|
|
17.05
|
|
|
|
(280
|
)
|
|
|
15.80
|
|
Forfeited
|
|
|
(324
|
)
|
|
$
|
21.19
|
|
|
|
(77
|
)
|
|
|
22.29
|
|
|
|
(797
|
)
|
|
|
22.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
1,516
|
|
|
$
|
21.83
|
|
|
|
2,287
|
|
|
$
|
21.43
|
|
|
|
2,177
|
|
|
$
|
21.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
|
1,143
|
|
|
$
|
21.34
|
|
|
|
1,417
|
|
|
$
|
20.89
|
|
|
|
1,313
|
|
|
$
|
20.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information with respect to options outstanding at November 3, 2007 follows (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
Outstanding
|
|
Exercise
|
|
Contractual
|
|
Exercisable
|
|
Exercise
|
Range of Exercise Prices
|
|
Shares
|
|
Price
|
|
Life
|
|
Shares
|
|
Price
|
$10.88 - 17.01
|
|
|
155
|
|
|
$
|
11.78
|
|
|
3.1 years
|
|
|
155
|
|
|
$
|
11.78
|
|
$18.00 - 21.00
|
|
|
179
|
|
|
|
18.41
|
|
|
4.5 years
|
|
|
179
|
|
|
|
18.41
|
|
$21.10 - 21.99
|
|
|
616
|
|
|
|
21.42
|
|
|
5.9 years
|
|
|
422
|
|
|
|
21.45
|
|
$22.34 - 28.94
|
|
|
566
|
|
|
|
26.12
|
|
|
5.6 years
|
|
|
387
|
|
|
|
26.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,516
|
|
|
|
|
|
|
|
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value, cash received and actual tax benefit realized for stock options
exercised in 2007, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Stock Options Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value
|
|
$
|
3,281
|
|
|
$
|
1,070
|
|
|
$
|
1,423
|
|
Cash received
|
|
|
8,449
|
|
|
|
2,990
|
|
|
|
4,083
|
|
Actual tax benefit realized
|
|
|
856
|
|
|
|
346
|
|
|
|
349
|
|
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
The stock options outstanding at November 3, 2007 had a remaining average term of 4.6 years
while the stock options exercisable had a remaining average term of 4.5 years. The aggregate
intrinsic value of options outstanding was $598, all of which were vested.
As of November 3, 2007, there was a total of $4,073 of unrecognized compensation cost for
stock-based compensation awards of which the Company expects to recognize $3,581 as compensation
expense which is net of expected forfeitures. The unrecognized compensation cost is expected to be
recognized over a weighted-average period of 2.5 years.
8) Former Chief Executive Officers Arrangements
George A. Abd
During 2007, the Company entered into a Separation Agreement and Release (Separation
Agreement), with its former President and Chief Executive Officer (CEO), George A. Abd,
effective July 16, 2007 (Effective Date). Mr. Abd resigned as an officer and director of the
Company as of the Effective Date, but remained an employee until October 14, 2007 (Termination
Date). During this period, Mr. Abd served the Company in an advisory capacity.
The Separation Agreement included various terms and conditions pertaining to Mr. Abds
resignation from the Company. The payments and benefits to be paid to Mr. Abd under this Separation
Agreement include, but are not limited to, the following major provisions:
|
|
|
Severance compensation in accordance with the terms of the Corporations Severance and
Noncompetition Policy and Agreement with Mr. Abd which is based on a multiple of his former
annual salary and the average of his bonus payments earned during the prior three fiscal
years, totaling $2,224. Of this amount, $556 will be paid in April 2008 and the remaining
$1,668 will be paid in equal monthly installments over the following 18 months with the
last payment occurring in October 2009.
|
|
|
|
|
Compensation of $62 for the period between the Effective Date through the Termination
Date at a rate of one-third of Mr. Abds former annual salary.
|
|
|
|
|
In accordance with the terms of the applicable stock option plans and agreements,
168,687 vested stock options were exercisable until the Termination Date, and an additional
32,250 vested stock options will expire within three years of the Termination Date and will
remain exercisable until their stated expiration dates. All stock-based compensation
awards that were not vested as of the Termination Date were forfeited. As a result, $368
of stock-based compensation expense was reversed as income during 2007 for awards that were
previously expected to vest, but were forfeited.
|
The provisions of the Separation Agreement resulted in a $1,856 net charge to operating
earnings in 2007, which represents the $2,224 of severance less the $368 reversal of stock-based
compensation during the third quarter and was included in selling, general and administrative
expenses in the Consolidated Statements of Operations.
Bradley B. Buechler
During 2005, the Company entered into a Retirement Agreement and Release (Retirement
Agreement) with its former Chairman, President, and Chief Executive Officer, Bradley B. Buechler.
This Retirement Agreement replaced Mr. Buechlers Amended and Restated Employment Agreement dated
November 2, 2002.
The Retirement Agreement included various terms and conditions pertaining to Mr. Buechlers
retirement. The payments and benefits paid to Mr. Buechler under this Retirement Agreement
included the following major provisions:
|
-
|
|
A cash settlement paid June 3, 2005, based upon a multiple of Mr. Buechlers former
annual salary plus his previous deferred compensation arrangement, totaling $2,711.
|
|
|
-
|
|
A bonus to be paid based on the Companys 2005 results pro-rated for Mr. Buechlers
employment through the effective date of the Retirement Agreement.
|
38
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
|
¯
|
|
An amendment to the terms of Mr. Buechlers vested stock options to permit him to
retire before having reached the minimum retirement age of 60 specified in his option
agreements, resulting in a new measurement of the options for accounting purposes and a
non-cash expense of $831.
|
The provisions of the Retirement Agreement resulted in a $3,645 charge to operating earnings
in 2005 which was included in selling, general and administrative expenses in the Consolidated
Statements of Operations.
9) Long-Term Debt and Convertible Subordinated Debentures
Long-Term Debt
Long-term debt is comprised of the following at November 3, 2007 and October 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
5.78% Senior Unsecured 2006 Notes
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
5.54% Senior Unsecured 2004 Notes
|
|
|
150,000
|
|
|
|
150,000
|
|
7.0% Senior Unsecured 1997 Notes
|
|
|
|
|
|
|
6,429
|
|
Bank Credit Facilities
|
|
|
91,400
|
|
|
|
48,000
|
|
Bank Term Loan
|
|
|
28,822
|
|
|
|
25,408
|
|
Other
|
|
|
14,061
|
|
|
|
9,386
|
|
|
|
|
|
|
|
|
|
|
|
334,283
|
|
|
|
289,223
|
|
Less current maturities
|
|
|
448
|
|
|
|
6,898
|
|
|
|
|
|
|
|
|
|
|
$
|
333,835
|
|
|
$
|
282,325
|
|
|
|
|
|
|
|
|
On June 5, 2006, the Company completed a $50,000 private placement of 5.78% Senior Unsecured
Notes which are payable on June 5, 2011. The 2006 Notes do not require annual principal payments,
but can be prepaid at the Companys option after June 5, 2009 at par. Interest on the 2006 Notes
is payable semi-annually on December 5 and June 5 of each year.
On September 15, 2004, the Company completed a $150,000 private placement of 5.54% Senior
Unsecured Notes over a twelve-year term. The 2004 Notes require equal annual principal payments of
$30,000 that commence on September 15, 2012. Interest on the 2004 Notes is payable semiannually on
March 15 and September 15 of each year.
On August 22, 1997, the Company completed a private placement of 7.0% Senior Unsecured Notes
consisting of $45,000 designated as Series A and $15,000 designated as Series B. The Series A 1997
Notes required equal annual principal payments of approximately $6,429 with the final payment made
on August 22, 2007 and the required $15,000 principal payment due on the Series B 1997 Notes was
paid on August 22, 2004. Interest on the 1997 Notes was payable semiannually on February 22 and
August 22 of each year.
On June 2, 2006 the Company amended its existing U.S. unsecured bank credit facility agreement
which increased the total availability from $200,000 to $300,000 and extended the term to June 2,
2011. Interest on the amended bank credit facility is payable at a rate chosen by the Company of
either Prime or LIBOR plus a 0.625% to 1.0% borrowing margin and requires a fee of 0.125% to 0.2%
on the unused portion of the facility. The amended bank credit facility requires the Company to
maintain certain affirmative and negative covenants which include minimum consolidated net worth,
minimum interest coverage and maximum total leverage requirements. On April 27, 2004, the
Companys Canadian subsidiary entered into a $10,000 (Canadian Dollar) revolving credit facility in
Canada that expires on March 3, 2009.
The total capacity under the Companys bank credit facilities was $310,685 at November 3,
2007. The unused portion of the credit facilities was $204,365 of which $107,247 was available
under the most restrictive covenant. Borrowings under these facilities are classified as
long-term, because no paydowns of the aggregate facilities are required within the next year and we
have the ability and intent to keep the balances outstanding over the next 12 months. At November
3, 2007, the Company had LIBOR loans outstanding under the bank credit facilities of $75,200 at
5.7% and $13,000 at 5.4% in the U.S. and additional borrowings of $3,200 at the prime rate of 7.5%.
At October 28, 2006, the Company had fixed LIBOR loans
outstanding of $48,000 at 6.1%. In addition to the outstanding loans, the bank credit
facility was also partially utilized by several standby letters of credit amounting to $14,920 at
year-end.
39
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
On February 16, 2005, the Company entered into a 20 million Euro bank term loan that matures
on February 16, 2010. Interest on the term loan is payable monthly at a floating rate chosen by
the Company equal to either the one-month, three-month, or six-month EURIBO rate plus a 1%
borrowing margin. At November 3, 2007, the 20 million Euro term loan was outstanding at a rate of
5.2%.
The Companys other debt consists primarily of industrial revenue bonds and capital lease
obligations utilized to finance capital expenditures. These financings mature between 2008 and
2019 and have interest rates ranging from 2.0% to 6.0%. Scheduled maturities of long-term debt for
the next five years and thereafter are:
|
|
|
|
|
Year Ended
|
|
Maturities
|
|
2008
|
|
$
|
448
|
|
2009
|
|
|
489
|
|
2010
|
|
|
29,325
|
|
2011
|
|
|
141,923
|
|
2012
|
|
|
30,559
|
|
Thereafter
|
|
|
131,539
|
|
|
|
|
|
|
|
$
|
334,283
|
|
|
|
|
|
The long-term debt contains certain covenants which, among other matters, require the Company
to restrict the incurrence of additional indebtedness, satisfy certain ratios and net worth levels,
and limit both the sale of assets and merger transactions.
Convertible Subordinated Debentures
On June 7, 2006, the Company redeemed its $50,000, 6.5% convertible subordinated debentures,
and on July 12, 2006 the Company redeemed its $100,000, 7.0% convertible subordinated debentures.
The Company recorded $3,780 of early-payment premiums and $1,725 of non-cash write-offs of
unamortized debt issuance costs from the extinguishment of its debentures in the third quarter of
2006. Proceeds from a new issuance of senior notes as well as funds from the Companys unsecured
bank credit facility were used to extinguish the convertible subordinated debentures.
10) Shareholders Equity
The authorized capital stock of the Company consists of 55 million shares of $.75 par value
common stock and 4 million shares of $1 par value preferred stock. At November 3, 2007, the
Company had 33 million common shares issued and 2.6 million shares of common stock were held in
treasury shares, primarily for issuance under the Companys stock-based compensation plans. During
2007, 2.0 million treasury shares were acquired and 0.4 million shares were issued.
The Company has a Shareholder Rights Plan in which rights trade with, and are inseparable
from, each share of common stock. Prior to exercise, a Right does not give its holder any
dividend, voting, or liquidation rights. Under certain circumstances, a Right may be exercised to
purchase one one-thousandth of a share of Series Z Preferred Stock for $70 per share. The Rights
become exercisable, subject to certain exceptions, if a new person or group acquires beneficial
ownership of 15% or more, to purchase shares of the Companys common stock with a market value of
$140.00, for $70.00 per Right. The Rights will expire on April 2, 2011 and may be redeemed by the
Company for $.01 per Right at any time before a new person or group becomes a beneficial owner of
15% or more of the Companys outstanding common stock.
40
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
11) Income Taxes
Earnings before income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
United States
|
|
$
|
51,605
|
|
|
$
|
56,254
|
|
|
$
|
31,769
|
|
Non-U.S. operations
|
|
|
3,205
|
|
|
|
8,684
|
|
|
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,810
|
|
|
$
|
64,938
|
|
|
$
|
32,674
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes for 2007, 2006, and 2005 is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
14,390
|
|
|
$
|
16,294
|
|
|
$
|
9,474
|
|
State and Local
|
|
|
2,119
|
|
|
|
1,978
|
|
|
|
611
|
|
Foreign
|
|
|
2,399
|
|
|
|
4,810
|
|
|
|
2,482
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
|
18,908
|
|
|
|
23,082
|
|
|
|
12,567
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,371
|
|
|
|
4,039
|
|
|
|
3,084
|
|
State and Local
|
|
|
167
|
|
|
|
594
|
|
|
|
367
|
|
Foreign
|
|
|
518
|
|
|
|
(1,575
|
)
|
|
|
(1,607
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
|
2,056
|
|
|
|
3,058
|
|
|
|
1,844
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
$
|
20,964
|
|
|
$
|
26,140
|
|
|
$
|
14,411
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provision on earnings of the Company differs from the amounts computed by
applying the U.S. Federal tax rate of 35% as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Federal income taxes at statutory rate
|
|
$
|
19,184
|
|
|
$
|
22,728
|
|
|
$
|
11,436
|
|
State income taxes, net of applicable Federal income tax benefit
|
|
|
1,485
|
|
|
|
1,672
|
|
|
|
636
|
|
Impairment of goodwill
|
|
|
|
|
|
|
1,106
|
|
|
|
1,454
|
|
Foreign valuation allowance
|
|
|
944
|
|
|
|
541
|
|
|
|
1,133
|
|
Expensing of stock options
|
|
|
260
|
|
|
|
380
|
|
|
|
|
|
Manufacturing deduction
|
|
|
(477
|
)
|
|
|
(468
|
)
|
|
|
|
|
Research and development tax credit
|
|
|
(989
|
)
|
|
|
(74
|
)
|
|
|
(524
|
)
|
Other
|
|
|
557
|
|
|
|
255
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,964
|
|
|
$
|
26,140
|
|
|
$
|
14,411
|
|
|
|
|
|
|
|
|
|
|
|
The increase in tax expense from the impairment of goodwill represents the portion of goodwill
impairments that were not deductible for tax purposes. The Company did not record the benefit of a
research and development tax credit during 2006 as this credit expired on December 31, 2005. In
December 2006, the government approved legislation that extended the credit retroactively. As a
result, the Company recognized this benefit in the first quarter of 2007.
41
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
At November 3, 2007 and October 28, 2006 the Companys principal components of deferred tax
assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Employee benefits and compensation
|
|
$
|
3,956
|
|
|
$
|
2,771
|
|
Workers compensation
|
|
|
1,368
|
|
|
|
1,635
|
|
Inventory capitalization and reserves
|
|
|
1,525
|
|
|
|
1,427
|
|
Reserve for product returns
|
|
|
782
|
|
|
|
832
|
|
Deferred compensation benefit plans
|
|
|
978
|
|
|
|
769
|
|
Bad debt reserves
|
|
|
624
|
|
|
|
564
|
|
Foreign net operating loss
|
|
|
3,072
|
|
|
|
2,460
|
|
Valuation allowance
|
|
|
(2,587
|
)
|
|
|
(1,566
|
)
|
Other
|
|
|
930
|
|
|
|
673
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
10,648
|
|
|
$
|
9,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
(59,008
|
)
|
|
$
|
(54,250
|
)
|
Goodwill and other intangibles
|
|
|
(53,393
|
)
|
|
|
(43,519
|
)
|
Inventory capitalization and reserves
|
|
|
(1,189
|
)
|
|
|
(1,298
|
)
|
Other
|
|
|
(801
|
)
|
|
|
(725
|
)
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(114,391
|
)
|
|
$
|
(99,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
$
|
(103,743
|
)
|
|
$
|
(90,227
|
)
|
|
|
|
|
|
|
|
At November 3, 2007 and October 28, 2006, the net current deferred tax asset was $8,254 and
$7,454, respectively and the net noncurrent deferred tax liability was $111,997 and $97,681,
respectively.
As of November 3, 2007 no deferred income taxes or foreign withholding taxes have been
provided on the $32,043 in accumulated earnings of the Companys foreign subsidiaries that are not
subject to United States income tax. The Companys intention is to reinvest these earnings
indefinitely. If the Company changed its intentions or if such earnings were remitted to the
United States, as of November 3, 2007, the Company would be required to recognize approximately
$4,500 to $6,000 of additional income tax expense.
As of November 3, 2007, the Company had available approximately $9,409 in net operating loss
carryforwards which related to the France and Mexico operations. The Company assessed the
likelihood as to whether or not these net operating loss carryforwards would be utilized prior to
their expiration based on the amount of positive and negative evidence available. The Company
concluded that it is more likely than not that the $1,205 net operating loss carryforward in Mexico
will be utilized prior to its expiration in 2012 to 2015 based on the amount of expected future
taxable income. The Company evaluated its France net operating loss carryforward of $8,204 and
determined that a valuation allowance of $7,762 was required for the amount of net operating losses
that cannot be carried back or utilized through tax planning strategies. This asset does not
expire and would be realized upon consistent future earnings that are sustained over a period of
time.
12) Earnings Per Share
Basic earnings per share excludes any dilution and is computed by dividing net income
available to common stockholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings of the entity.
42
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
The reconciliation of the net earnings and weighted average number of common shares used in
the computations of basic and diluted earnings per share for 2007, 2006, and 2005 was as follows
(shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Earnings
|
|
|
Shares
|
|
|
Earnings
|
|
|
Shares
|
|
|
Earnings
|
|
|
Shares
|
|
Basic Earnings Per Share Computation
|
|
$
|
33,846
|
|
|
|
31,966
|
|
|
$
|
38,798
|
|
|
|
32,092
|
|
|
$
|
18,263
|
|
|
|
32,074
|
|
Dilutive shares
|
|
|
|
|
|
|
214
|
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share Computation
|
|
$
|
33,846
|
|
|
|
32,180
|
|
|
$
|
38,798
|
|
|
|
32,297
|
|
|
$
|
18,263
|
|
|
|
32,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of dilutive shares represents the shares resulting from the assumed exercise of
outstanding stock appreciation rights and stock options as well as the assumed vesting of
restricted stock, restricted stock units and performance shares. The dilution from each of these
instruments is calculated using the treasury stock method.
13) Employee Benefits
The Company sponsors or contributes to various defined contribution retirement benefit and
savings plans covering substantially all employees. The total cost of such plans for 2007, 2006
and 2005 was $3,358, $2,827, and $2,823, respectively.
14) Cash Flow and Other Information
Supplemental information on cash flows for 2007, 2006, and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
16,586
|
|
|
$
|
19,801
|
|
|
$
|
26,328
|
|
Income taxes
|
|
|
21,838
|
|
|
|
23,809
|
|
|
|
8,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of business and outsourcing acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
78,033
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities assumed
|
|
|
16,662
|
|
|
|
|
|
|
|
|
|
Purchase price adjustments
|
|
|
|
|
|
|
|
|
|
|
1,224
|
|
|
|
|
|
|
|
|
|
|
|
Total cash paid
|
|
$
|
61,371
|
|
|
$
|
|
|
|
$
|
1,224
|
|
|
|
|
|
|
|
|
|
|
|
15) Commitments and Contingencies
The Company conducts certain of its operations in facilities under operating leases. Rental
expense in 2007, 2006, and 2005, was $10,118, $10,699 and $12,207, respectively. Future minimum
lease payments under non-cancelable operating leases, by year, are as follows:
|
|
|
|
|
|
|
Operating
|
|
Year ended
|
|
Leases
|
|
2008
|
|
$
|
7,071
|
|
2009
|
|
|
5,041
|
|
2010
|
|
|
2,668
|
|
2011
|
|
|
1,275
|
|
2012
|
|
|
208
|
|
Thereafter
|
|
|
28
|
|
|
|
|
|
|
|
$
|
16,291
|
|
|
|
|
|
In September 2003, the New Jersey Department of Environmental Protection issued a directive
and the United States Environmental Protection Agency (USEPA) initiated an investigation related
to over 70 companies, including a Spartech subsidiary, regarding the Lower Passaic River. The
subsidiary subsequently agreed to participate in a group of over 40 companies in funding of an
environmental study by the USEPA to determine the extent and source of contamination at this
site. In 2006, the USEPA asked the group to assume the responsibility for completing the
study, and in the fourth quarter of 2006, the Company recorded a $627 charge in selling, general
and administrative expense primarily for the subsidiarys expected funding to complete the study.
In 2007, we paid $138 toward the study. As of November 3, 2007, the Company had
43
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
$607 accrued related to its share of the funding and related legal expenses. The Company
expects the groups commitment to be funded over five years, the expected timeframe of the study.
Due to uncertainties inherent in this matter, management is unable to estimate the Companys
potential exposure, including possible remediation or other environmental responsibilities that may
result from this matter, which is not expected to occur for a number of years. These uncertainties
primarily include the completion and outcome of the environmental study and the percentage of
contamination attributable to the subsidiary and other parties. It is possible that the ultimate
liability resulting from this issue could materially differ from the November 3, 2007 accrual
balance. In the event of one or more adverse determinations related to this issue, the impact on
our results of operations could be material to any specific period. However, the Companys opinion
is that future expenditures for compliance with these laws and regulations, as they relate to the
Lower Passaic River issue and other potential issues, will not have a material effect on the
Companys capital expenditures, financial position, or competitive position.
The Company is also subject to various other claims, lawsuits, and administrative proceedings
arising in the ordinary course of business with respect to commercial, product liability,
employment, and other matters, several of which claim substantial amounts of damages. While it is
not possible to estimate with certainty the ultimate legal and financial liability with respect to
these claims, lawsuits, and administrative proceedings, the Company believes that the outcome of
these other matters will not have a material adverse effect on the Companys financial position or
results of operations.
16) Segment Information
The Companys facilities are organized into three reportable segments and one group of
operating segments including businesses that do not meet the materiality threshold for separate
disclosure. In the fourth quarter of 2007, the Company realigned its organizational structure to
increase its strategic focus on plastic packaging-related products and to better support its
various markets and customers served. Concurrent with this realignment, the Company formed a new
Packaging Technologies segment which includes operations that were formerly included in the
Customer Sheet and Rollstock Segment. All years have been restated as if this change occurred at
the beginning of the periods presented.
The Company utilizes operating earnings to evaluate business segment and group performance and
determine the allocation of resources. Segment and group accounting policies are the same as
policies described in Note 1. A description of the Companys reportable segments and group
follows:
Custom Sheet and Rollstock
This segment manufactures extruded plastic sheet, custom
rollstock, laminates, and cell cast acrylic sheet in North America. Its finished products are
formed by its customers for use in a wide variety of markets. This segment operates throughout
North America and has one plant in Europe.
Packaging Technologies
This segment provides various packaging solutions including
clamshells, blisters, tubs, lids and display packaging. Its finished products are used by its
customers to distribute, ship, protect and display their products. This segment operates
throughout North America.
Color and Specialty Compounds
This segment manufactures custom-designed plastic alloys,
compounds, color concentrates, and calendered film for utilization in numerous applications. This
segments facilities comprise operating segments that are aggregated into a reportable segment
based on the nature of the products manufactured. This segment operates throughout North America
and has one plant in Europe.
Engineered Products
This group manufactures a number of proprietary items including
injection molded products, complete thermoplastic wheels and tires, and profile extruded products.
This group of operating segments has facilities located throughout North America and are combined
because each operating segment does not meet the materiality threshold for separate disclosure.
44
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
Corporate operating earnings include corporate office expenses and portions of information
technology and professional fees that are not allocated to the reportable segments and group.
Corporate assets consist primarily of property, plant and equipment and deferred taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Sheet and Rollstock
|
|
$
|
674,751
|
|
|
$
|
709,098
|
|
|
$
|
657,343
|
|
Packaging Technologies
|
|
|
253,718
|
|
|
|
233,959
|
|
|
|
226,969
|
|
Color and Specialty Compounds
|
|
|
446,804
|
|
|
|
462,987
|
|
|
|
430,893
|
|
Engineered Products
|
|
|
76,710
|
|
|
|
79,553
|
|
|
|
81,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,451,983
|
|
|
$
|
1,485,597
|
|
|
$
|
1,396,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Sheet and Rollstock
|
|
$
|
40,949
|
|
|
$
|
50,496
|
|
|
$
|
38,406
|
|
Packaging Technologies
|
|
|
24,956
|
|
|
|
24,941
|
|
|
|
26,723
|
|
Color and Specialty Compounds
|
|
|
19,405
|
|
|
|
27,032
|
|
|
|
15,295
|
|
Engineered Products
|
|
|
11,150
|
|
|
|
4,475
|
|
|
|
(3,492
|
)
|
Corporate
|
|
|
(24,021
|
)
|
|
|
(15,520
|
)
|
|
|
(19,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,439
|
|
|
$
|
91,424
|
|
|
$
|
57,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Sheet and Rollstock
|
|
$
|
396,474
|
|
|
$
|
396,959
|
|
|
$
|
413,640
|
|
Packaging Technologies
|
|
|
239,377
|
|
|
|
161,187
|
|
|
|
162,554
|
|
Color and Specialty Compounds
|
|
|
362,651
|
|
|
|
374,754
|
|
|
|
399,311
|
|
Engineered Products
|
|
|
72,212
|
|
|
|
73,583
|
|
|
|
83,918
|
|
Corporate
|
|
|
40,157
|
|
|
|
35,311
|
|
|
|
16,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,110,871
|
|
|
$
|
1,041,794
|
|
|
$
|
1,075,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Sheet and Rollstock
|
|
$
|
14,993
|
|
|
$
|
14,634
|
|
|
$
|
14,951
|
|
Packaging Technologies
|
|
|
5,780
|
|
|
|
5,416
|
|
|
|
4,966
|
|
Color and Specialty Compounds
|
|
|
14,677
|
|
|
|
14,410
|
|
|
|
14,004
|
|
Engineered Products
|
|
|
3,333
|
|
|
|
3,317
|
|
|
|
3,391
|
|
Corporate
|
|
|
4,286
|
|
|
|
2,921
|
|
|
|
2,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,069
|
|
|
$
|
40,698
|
|
|
$
|
39,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Sheet and Rollstock
|
|
$
|
14,594
|
|
|
$
|
8,398
|
|
|
$
|
9,179
|
|
Packaging Technologies
|
|
|
4,048
|
|
|
|
3,249
|
|
|
|
6,679
|
|
Color and Specialty Compounds
|
|
|
4,514
|
|
|
|
5,525
|
|
|
|
12,353
|
|
Engineered Products
|
|
|
1,692
|
|
|
|
1,634
|
|
|
|
5,483
|
|
Corporate
|
|
|
9,895
|
|
|
|
5,160
|
|
|
|
5,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,743
|
|
|
$
|
23,966
|
|
|
$
|
39,265
|
|
|
|
|
|
|
|
|
|
|
|
In addition to external sales to customers, intersegment sales were $52,987, $58,427, and
$52,696 in 2007, 2006, and 2005, respectively. Most intersegment sales were generated from the
Color and Specialty Compounds segment.
Geographic financial information for 2007, 2006, and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales By Destination
|
|
|
Property, Plant and Equipment, Net
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
United States
|
|
$
|
1,203,204
|
|
|
$
|
1,234,160
|
|
|
$
|
1,145,643
|
|
|
$
|
272,506
|
|
|
$
|
258,394
|
|
|
$
|
261,582
|
|
Canada
|
|
|
92,121
|
|
|
|
104,216
|
|
|
|
116,197
|
|
|
|
20,731
|
|
|
|
19,179
|
|
|
|
19,780
|
|
Mexico
|
|
|
98,708
|
|
|
|
86,084
|
|
|
|
70,605
|
|
|
|
18,537
|
|
|
|
15,489
|
|
|
|
13,749
|
|
Europe
|
|
|
45,792
|
|
|
|
49,560
|
|
|
|
50,026
|
|
|
|
12,251
|
|
|
|
11,717
|
|
|
|
12,275
|
|
Asia and Other
|
|
|
12,158
|
|
|
|
11,577
|
|
|
|
14,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,451,983
|
|
|
$
|
1,485,597
|
|
|
$
|
1,396,860
|
|
|
$
|
324,025
|
|
|
$
|
304,779
|
|
|
$
|
307,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Dollars in thousands, except per share amounts)
17) Quarterly Financial Information
Certain unaudited quarterly financial information for the years ended November 3, 2007 and
October 28, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
|
|
|
1
st
|
|
|
2
nd
|
|
|
3
rd
|
|
|
4
th
|
|
|
Year
|
|
2007 (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
347,254
|
|
|
$
|
377,368
|
|
|
$
|
361,123
|
|
|
$
|
366,238
|
|
|
$
|
1,451,983
|
|
Gross Profit (b)
|
|
|
38,025
|
|
|
|
49,555
|
|
|
|
39,908
|
|
|
|
30,043
|
|
|
|
157,531
|
|
Operating Earnings (c)
|
|
|
17,428
|
|
|
|
29,553
|
|
|
|
18,439
|
|
|
|
7,019
|
|
|
|
72,439
|
|
Net Earnings (c)
|
|
|
8,065
|
|
|
|
15,710
|
|
|
|
8,806
|
|
|
|
1,265
|
|
|
|
33,846
|
|
Net Earnings Per Share Basic
|
|
|
.25
|
|
|
|
.49
|
|
|
|
.27
|
|
|
|
.04
|
|
|
|
1.06
|
|
Diluted
|
|
|
.25
|
|
|
|
.49
|
|
|
|
.27
|
|
|
|
.04
|
|
|
|
1.05
|
|
Dividends declared per common share
|
|
|
.135
|
|
|
|
.135
|
|
|
|
.135
|
|
|
|
.135
|
|
|
|
.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
343,591
|
|
|
$
|
389,278
|
|
|
$
|
377,709
|
|
|
$
|
375,019
|
|
|
$
|
1,485,597
|
|
Gross Profit (b)
|
|
|
33,067
|
|
|
|
46,947
|
|
|
|
47,252
|
|
|
|
44,553
|
|
|
|
171,819
|
|
Operating Earnings (d)
|
|
|
14,871
|
|
|
|
28,047
|
|
|
|
27,591
|
|
|
|
20,915
|
|
|
|
91,424
|
|
Net Earnings (d)
|
|
|
5,656
|
|
|
|
13,909
|
|
|
|
10,614
|
|
|
|
8,619
|
|
|
|
38,798
|
|
Net Earnings Per Share Basic
|
|
|
.18
|
|
|
|
.43
|
|
|
|
.33
|
|
|
|
.27
|
|
|
|
1.21
|
|
Diluted
|
|
|
.18
|
|
|
|
.42
|
|
|
|
.33
|
|
|
|
.27
|
|
|
|
1.20
|
|
Dividends declared per common share
|
|
|
.125
|
|
|
|
.125
|
|
|
|
.125
|
|
|
|
.125
|
|
|
|
.50
|
|
|
|
|
Notes to table:
|
|
(a)
|
|
As discussed in Note 1, 2007 was reported as a 53-week fiscal year containing 371 days of
activity. The additional week was reported in the first quarter ended February 3, 2007.
|
|
(b)
|
|
Gross profit is calculated as net sales less cost of sales and amortization expense.
|
|
(c)
|
|
Operating earnings in the
3
rd
quarter of 2007 were impacted by a charge of $1,856
($1,147 net of tax) related to a separation agreement with our former CEO. Operating earnings
in the 4
th
quarter of 2007 were impacted by a charge of $1,550 ($960 net of tax)
related to an intangible asset impairment, $2,057 ($1,275 net of tax)
related to an inventory error identified
by a new system implementation and $1,268 ($1,268 net of tax) related to a change in estimate
of inventory valuation reserves due to managements decision to liquidate certain scrap
inventory.
|
|
(d)
|
|
Operating earnings and net earnings in the 4
th
Quarter of 2006 were impacted by a
$3,159 impairment of goodwill and net earnings were impacted by a $3,411 charge related to
early debt extinguishment costs.
|
46
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
CONTROLS AND PROCEDURES
Spartech maintains a system of disclosure controls and procedures which are designed to ensure
that information required to be disclosed by the Company in the reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified under the SECs rules and forms. Based on an evaluation performed, the Companys
certifying officers have concluded that the disclosure controls and procedures were effective as of
November 3, 2007 to:
|
a)
|
|
ensure that information required to be disclosed in the reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within time
periods specified in Securities and Exchange Commission rules and forms; and
|
|
|
b)
|
|
ensure that information is accumulated and communicated to the Companys management, including
the Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosures.
|
|
Notwithstanding the foregoing, there can be no assurance that the Companys disclosure
controls and procedures will detect or uncover all failures of persons within the Company and its
consolidated subsidiaries to report material information otherwise required to be set forth in the
Companys reports.
The Company is in the process of implementing a new Oracle enterprise resource planning
(ERP) system. Implementation began in 2006 and is scheduled to occur in phases through 2008. As
the Company continues to implement the new ERP system, it expects that there will be future
improvements in internal controls as a result of this implementation. As of November 3, 2007, 15
manufacturing facilities have implemented the new ERP system which resulted in some changes to
internal controls. This ERP system, along with the internal controls over financial reporting
impacted by the implementation, were appropriately tested for design effectiveness. While some
processes and controls will continue to evolve as the implementation progresses, existing controls
and the controls affected by the implementation of the new system are appropriate and functioning
effectively. There were no other changes to internal controls during the year ended November 3,
2007, that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
Managements report on internal control over financial reporting, and the related report of
the Companys independent registered public accounting firm, Ernst & Young LLP, are included in
Item 8.
Item 9B.
OTHER INFORMATION
None.
47
PART III
Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning Directors of the Company contained in the section entitled
Proposal 1: Election of Directors of the Definitive Proxy Statement for the 2008 Annual Meeting
of Shareholders, to be filed with the Commission on or about February 4, 2008, is incorporated
herein by reference in response to this item.
The information concerning Equity Compensation Plans is contained in the section entitled
Equity Plan Compensation Information of the Definitive Proxy Statement for the 2008 Annual
Meeting of Shareholders, to be filed with the Commission on or about February 4, 2008, and is
incorporated herein by reference in response to this item.
The information regarding the audit committee and audit committee financial expert is
contained in the sections entitled Board of Directors and Committees of the Definitive Proxy
Statement for the 2008 Annual Meeting of Shareholders, to be filed with the Commission on or about
February 4, 2008, and is incorporated herein by reference in response to this item.
The Board of Directors has established specific Corporate Governance Guidelines, a Code of
Ethics for the CEO and Senior Financial Officers, and a Code of Business Conduct and Ethics for all
directors, officers and employees. These documents are provided on the Companys Web site at
www.spartech.com within the Investor Relations/Corporate Governance section of the site. At this
same Web site location, the Company provides an Ethics Hotline phone number that allows employees,
shareholders, and other interested parties to communicate with the Companys management or Audit
Committee (on an anonymous basis, if so desired) through an independent third-party hotline. In
addition, this same Web site location provides instructions for shareholders or other interested
parties to contact the Companys Board of Directors.
The rules of the New York Stock Exchange (NYSE) require Mr. Martin, our Chief Executive
Officer, to certify to the NYSE annually that he is not aware of any violation by the Company of
the NYSEs corporate governance listing standards. In addition, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, Mr. Martin, who is currently serving as our Chief Executive Officer and
Chief Financial Officer, must execute a certificate as to the quality of our public disclosure as
part of our quarterly reports to the Securities and Exchange Commission (SEC). His latest
Section 302 certifications are filed with the SEC as exhibits to this Form 10-K.
Executive Officers of the Registrant
The following table provides certain information about the Companys executive officers, their
positions with the Company, and their prior business experience and employment for at least the
past five years:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Current Office, and Prior Positions and Employment
|
Randy C. Martin
|
|
|
45
|
|
|
Interim President and Chief Executive Officer
(since July 2007), Executive Vice President
(since September 2000) Corporate Development
(since May 2004) and Chief Financial Officer
(since May 1996); Corporate Controller from
September 1995 to May 1996; Vice President,
Finance from May 1996 to September 2000. Mr.
Martin, a CPA and CMA, was with KPMG Peat Marwick
LLP for eleven years before joining the Company
in 1995.
|
|
|
|
|
|
|
|
Steven J. Ploeger
|
|
|
46
|
|
|
Executive Vice President Custom Sheet and
Rollstock and Engineered Products (since May
2004); Vice President Spartech Plastics from 2000
to 2004; General Manager Spartech Plastics
North Region from 1996 to 2000. Mr. Ploeger also
held various sales management positions with the
Company from 1985 to 1996.
|
|
|
|
|
|
|
|
Michael L. Marcum
|
|
|
59
|
|
|
Senior Vice President Color and Specialty
Compounds and Marketing and International
Business Development (since April 2006). Mr.
Marcum was most recently President & Chief
Executive Officer of American Decorative Surfaces
Inc. from 2001 to 2006, and with Monsanto Company
for 29 years in various general management,
corporate strategic planning, and sales &
marketing executive positions, both domestically
as well as internationally, before joining the
Company in 2006
|
|
|
|
|
|
|
|
Jeffrey D. Fisher
|
|
|
59
|
|
|
Senior Vice President and General Counsel (since
July 1999), and Secretary (since September 2000).
Mr. Fisher, an attorney, was with the law firm
of Armstrong Teasdale LLP for 24 years, the last
17 years as a partner, before joining the Company
in July 1999.
|
48
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Current Office, and Prior Positions and Employment
|
Darrell W. Betz
|
|
|
44
|
|
|
Senior Vice President of Human Resources (since
April 2005). Mr. Betz was with Emerson Electric
for 16 years in various human resource positions
prior to joining the Company in April 2005.
|
|
|
|
|
|
|
|
Michael G. Marcely
|
|
|
40
|
|
|
Vice President (since December 2004), Corporate
Controller (since July 2004) and Assistant
Secretary (since June 2005), Director of Internal
Audit (January 2003 to July 2004). Mr. Marcely,
a CPA, was with Ernst & Young LLP for four years,
Emerson Electric for four years and KPMG LLP for
six years before joining the Company in 2003.
|
|
|
|
|
|
|
|
Phillip M. Karig
|
|
|
52
|
|
|
Vice President-Purchasing and Supply Chain
Management (since September 2001), Director of
Purchasing from February 2000 to September 2001.
Mr. Karig was with Uniroyal Technology
Corporation for 12 years in various purchasing,
logistics, and materials management positions
before joining the Company in February 2000.
|
Item 11.
EXECUTIVE COMPENSATION
The information contained in the sections entitled Executive Compensation and Compensation
of Directors of the Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders, to be
filed with the Commission on or about February 4, 2008, is incorporated herein by reference in
response to this item.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
information contained in the sections entitled Security
Ownership and Equity Compensation Plan Information of the Definitive Proxy
Statement for the 2008 Annual Meeting of Shareholders, to be filed with the Commission on or about
February 4, 2008, is incorporated herein by reference in response to this item.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information
contained in the sections entitled Proposal 1: Election of Directors
and Certain Business Relationships and Transactions of the Definitive
Proxy Statement for the 2008 Annual Meeting of Shareholders, to be filed with the Commission on or
about February 4, 2008, is incorporated herein by reference in response to this item.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained in the section entitled Fees Paid to Auditors of the Definitive
Proxy Statement for the 2008 Annual Meeting of Shareholders, to be filed with the Commission on or
about February 4, 2008, is incorporated herein by reference in response to this item.
49
PART IV
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Financial Statements and Financial Statement Schedule
The following financial statements and financial statement schedule are included in this Form
10-K:
|
|
|
|
|
Managements Report on Internal Control over Financial Reporting
|
|
|
23
|
|
Reports of Independent Registered Public Accounting Firm
|
|
|
24
|
|
|
|
|
|
|
Financial Statements
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
26
|
|
Consolidated Statements of Operations
|
|
|
27
|
|
Consolidated Statements of Shareholders Equity
|
|
|
28
|
|
Consolidated Statements of Cash Flows
|
|
|
29
|
|
Notes to Consolidated Financial Statements
|
|
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30
|
|
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts
|
|
|
F-1
|
|
(c)
Exhibits
The Exhibits required to be filed by Item 601(a) of Regulation S-K are included
as follows:
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Location
|
3.1
|
|
Certificate of Incorporation, as
currently in effect
|
|
Incorporated by
reference to Exhibit 3.1
to the Companys Form
10-Q filed with the
Commission on June 8,
2006
|
|
|
|
|
|
3.2
|
|
By-Laws, as currently in effect
|
|
Incorporated by
reference to Exhibit
5.03 to the Companys
Form 8-K filed with the
Commission on December
20, 2007
|
|
|
|
|
|
4
|
|
Rights Agreement dated April 2,
2001 between Spartech Corporation
and Mellon Investor Services LLC,
as Rights Agent
|
|
Incorporated by
reference to Exhibit
99.1 to the Companys
Form 8-K filed with the
Commission on April 5,
2001
|
|
|
|
|
|
10.1
|
|
Note Purchase Agreement dated June
5, 2006 between the company and
purchasers of $50 million of the
companys 5.78% Senior Notes
|
|
Incorporated by
reference to Exhibit
10.1 to the Companys
Form 8-K filed with the
Commission on June 8,
2006
|
|
|
|
|
|
10.2
|
|
Separation Agreement and Release
dated July 16, 2007 between the
Company and George A. Abd
|
|
Incorporated by
reference to Exhibit
1.01 of the Companys
Form 8-K filed with the
Commission on July 16,
2007
|
|
|
|
|
|
10.3
|
|
Form of Indemnification Agreement
entered into between the Company
and each of its officers and
directors
|
|
Incorporated by
reference to Exhibit
10.10 to the Companys
Form 10-K filed with the
Commission on January
17, 2003
|
|
|
|
|
|
10.4
|
|
Spartech Corporation 2006 Executive
Bonus Plan
|
|
Incorporated by
reference to Exhibit
1.01(a) to the Companys
Form 8-K filed with the
Commission on December
21, 2005
|
|
|
|
|
|
10.5
|
|
Spartech Corporation Deferred
Compensation Plan, as amended
|
|
Incorporated by
reference to Exhibit
5.02 to the Companys
Form 8-K filed with the
Commission on December
20, 2007
|
|
|
|
|
|
10.6
|
|
Spartech Corporation 2004 Equity
Compensation Plan, as amended
|
|
Incorporated by
reference to Exhibit
5.02(2) to the Companys
Form 8-K filed with the
Commission on December
7, 2006
|
50
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Location
|
10.7
|
|
Spartech Corporation Long-Term
Equity Incentive Program
|
|
Incorporated by
reference to Exhibit
5.02(1) to the Companys
Form 8-K filed with the
Commission on December
7, 2006
|
|
|
|
|
|
10.8
|
|
Form of Incentive Stock Option
|
|
Incorporated by
reference to Exhibit
1.01(2) to the Companys
Form 8-K filed with the
Commission on December
14, 2004
|
|
|
|
|
|
10.9
|
|
Form of Nonqualified Stock Option
|
|
Incorporated by
reference to1.01(3) to
the Companys Form 8-K
filed with the
Commission on December
14, 2004
|
|
|
|
|
|
10.10
|
|
Form of Restricted Stock Unit Award
(directors)
|
|
Incorporated by
reference to Exhibit
1.01(4) to the Companys
Form 8-K filed with the
Commission on December
14, 2004
|
|
|
|
|
|
10.11
|
|
Form of Restricted Stock Award
(directors)
|
|
Incorporated by
reference to Exhibit
10.7 to the Companys
Form 10-Q filed with the
Commission on March 12,
2007
|
|
|
|
|
|
10.12
|
|
Form of Restricted Stock Award
|
|
Incorporated by
reference to Exhibit
5.02(1) to the Companys
Form 8-K filed with the
Commission on December
21, 2006
|
|
|
|
|
|
10.13
|
|
Form of Stock-Settled Stock
Appreciation Right Award
|
|
Incorporated by
reference to Exhibit
5.02(2) to the Companys
Form 8-K filed with the
Commission on December
21, 2006
|
|
|
|
|
|
10.14
|
|
Form of Performance Share Award
|
|
Incorporated by
reference to Exhibit
5.02(1) to the Companys
Form 8-K filed with the
Commission on November
21, 2007
|
|
|
|
|
|
10.15
|
|
Performance Share Award Performance
Criteria for 2007-2009 Performance
Period
|
|
Incorporated by
reference to Exhibit
5.02(4) to the Companys
Form 8-K filed with the
Commission on December
21, 2006
|
|
|
|
|
|
10.16
|
|
Performance Share Award Performance
Criteria for 2008-2010 Performance
Period
|
|
Incorporated by
reference to Exhibit
5.02(1) to the Companys
Form 8-K filed with the
Commission on November
21, 2007
|
|
|
|
|
|
18
|
|
Letter re change in accounting
principle
|
|
Incorporated by
reference to Exhibit 18
to the Companys Form
10-Q filed with the
Commission on June 8,
2006
|
|
|
|
|
|
21
|
|
Subsidiaries of Registrant
|
|
Filed herewith
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
Filed herewith
|
|
|
|
|
|
31.1
|
|
Section 302 Certification of Chief
Executive Officer
|
|
Filed herewith
|
|
|
|
|
|
31.2
|
|
Section 302 Certification of Chief
Financial Officer
|
|
Filed herewith
|
|
|
|
|
|
32.1
|
|
Section 1350 Certification of Chief
Executive Officer
|
|
Filed herewith
|
|
|
|
|
|
32.2
|
|
Section 1350 Certification of Chief
Financial Officer
|
|
Filed herewith
|
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
|
|
|
/s/ Randy C. Martin
|
|
|
Randy C. Martin
|
|
December 19, 2007
|
President, Chief Executive Officer and Chief Financial Officer
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Date
|
|
Signature
|
|
Title
|
|
|
|
|
|
December 19, 2007
|
|
/s/ Randy C. Martin
Randy C. Martin
|
|
President, Chief
Executive Officer and
Chief Financial Officer
(Principal Executive
and Financial Officer)
|
|
|
|
|
|
December 19, 2007
|
|
/s/ Michael G. Marcely
Michael G. Marcely
|
|
Vice President and
Corporate Controller
(Principal Accounting
Officer)
|
|
|
|
|
|
December 19, 2007
|
|
/s/ Ralph B. Andy
Ralph B. Andy
|
|
Director
|
|
|
|
|
|
December 19, 2007
|
|
/s/ Lloyd E. Campbell
Lloyd E. Campbell
|
|
Director
|
|
|
|
|
|
December 19, 2007
|
|
/s/ Edward J. Dineen
Edward J. Dineen
|
|
Director
|
|
|
|
|
|
December 19, 2007
|
|
/s/ Victoria M. Holt
Victoria M. Holt
|
|
Director
|
|
|
|
|
|
December 19, 2007
|
|
/s/ Walter J. Klein
Walter J. Klein
|
|
Director
|
|
|
|
|
|
December 19, 2007
|
|
/s/ Pamela F. Lenehan
Pamela F. Lenehan
|
|
Director
|
|
|
|
|
|
December 19, 2007
|
|
/s/ Jackson W. Robinson
Jackson W. Robinson
|
|
Director
|
|
|
|
|
|
|
|
Craig A. Wolfanger
|
|
Director
|
52
SPARTECH CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED 2007, 2006, AND 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONS AND
|
|
|
|
|
|
|
|
|
BALANCE AT
|
|
CHARGES TO
|
|
|
|
|
|
|
|
|
BEGINNING OF
|
|
COSTS AND
|
|
|
|
|
|
BALANCE AT
|
DESCRIPTION
|
|
PERIOD
|
|
EXPENSES
|
|
WRITE-OFFS
|
|
END OF PERIOD
|
November 3, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
Doubtful Accounts
|
|
$
|
1,514
|
|
|
$
|
2,099
|
|
|
$
|
(2,041
|
)
|
|
$
|
1,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
Doubtful Accounts
|
|
$
|
2,557
|
|
|
$
|
2,330
|
|
|
$
|
(3,373
|
)
|
|
$
|
1,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
Doubtful Accounts
|
|
$
|
2,997
|
|
|
$
|
1,705
|
|
|
$
|
(2,145
|
)
|
|
$
|
2,557
|
|
F-1
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