XNYS:SEH Quarterly Report 10-Q Filing - 8/4/2012

Effective Date 8/4/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
1-5911
(Commission File Number)
SPARTECH CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
43-0761773
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)

120 S. Central Avenue, Suite 1700
Clayton, Missouri 63105
(Address of principal executive offices) (Zip Code)

(314) 721-4242
(Registrant’s telephone number, including area code)
Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ     NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ     NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer R
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o     NO þ

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 30,794,111 shares of Common Stock, $.75 par value per share, outstanding as of September 1, 2012.



SPARTECH CORPORATION
FORM 10-Q For the Three and Nine Months Ended August 4, 2012 and July 30, 2011
Table of Contents

Cautionary Statements Concerning Forward-Looking Statements

Page No.
 
 
 

 

 
 
 

 
 

 
As of August 4, 2012 (Unaudited) and October 29, 2011

 
 
 

 
 

 

 
 
 

 
 

 

 
 
 

 

 
 
 


 
 
 

 
 
 


 
 
 

 

 
 
 


 
 
 


 
 
 

 

 
 
 

 
Certifications
25

 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2



Cautionary Statements Concerning Forward-Looking Statements
Statements in this Form 10-Q that are not purely historical, including statements that express the Company’s belief, anticipation or expectation about future events, are forward-looking statements. “Forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relate to future events and expectations and include statements containing such words as “anticipates,” “believes,” “estimates,” “expects,” “would,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects,” and similar expressions. Forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which management is unable to predict or control, that may cause actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ from our forward-looking statements are as follows:
(a)
Adverse changes in economic or industry conditions, including global supply and demand conditions and prices for products of the types we produce;
(b)
Restrictions imposed on us by instruments governing our indebtedness, the possible inability to comply with requirements and covenants of those instruments and inability to access capital markets;
(c)
Our ability to compete effectively on product performance, quality, price, availability, product development, and customer service;
(d)
Adverse changes in the markets we serve, including the packaging, transportation, building and construction, recreation and leisure, and other markets, some of which tend to be cyclical;
(e)
Volatility of prices and availability of supply of energy and raw materials that are critical to the manufacture of our products, particularly plastic resins derived from oil and natural gas, including future impacts of natural disasters;
(f)
Our inability to manage or pass through to customers an adequate level of increases in the costs of materials, freight, utilities, or other conversion costs;
(g)
Our inability to achieve and sustain the level of cost savings, productivity improvements, gross margin enhancements, growth or other benefits anticipated from our improvement initiatives;
(h)
Our inability to collect all or a portion of our receivables with large customers or a number of customers;
(i)
Loss of business with a limited number of customers that represent a significant percentage of our revenues;
(j)
Significant changes in or termination of major contracts with customers or suppliers;
(k)
Possible asset impairments;
(l)
Our inability to predict accurately the costs to be incurred, time taken to complete, operating disruptions therefrom, potential loss of business or savings to be achieved in connection with announced production plant consolidations and line moves;
(m)
Adverse findings in significant legal or environmental proceedings or our inability to comply with applicable environmental laws and regulations;
(n)
Our inability to develop and launch new products successfully;
(o)
Possible weaknesses in internal controls; and
We assume no responsibility to update our forward-looking statements.




PART I — Financial Information
Item 1. Financial Statements
Spartech Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
 
(Unaudited)

 
 
 
August 4,

 
October 29,

(Dollars in thousands, except share data)
2012

 
2011

Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
933

 
$
877

Trade receivables, net of allowances of $2,955 and $2,437, respectively
146,857

 
156,432

Inventories, net of inventory reserves of $9,461 and $9,152, respectively
98,248

 
91,186

Prepaid expenses and other current assets, net
27,122

 
26,367

Assets held for sale
2,624

 
2,744

Total current assets
275,784

 
277,606

Property, plant and equipment, net
197,722

 
208,074

Goodwill
47,466

 
47,466

Other intangible assets, net
11,604

 
12,872

Other long-term assets
4,566

 
3,684

 
 
 
 
Total assets
$
537,142

 
$
549,702

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
22,610

 
$
25,211

Accounts payable
134,210

 
140,628

Accrued liabilities
34,482

 
30,919

Total current liabilities
191,302

 
196,758

 
 
 
 
Long-term debt, less current maturities
119,931

 
132,000

 
 
 
 
Other long-term liabilities:
 
 
 
Deferred taxes
41,668

 
41,676

Other long-term liabilities
6,800

 
6,336

Total liabilities
359,701

 
376,770

Shareholders’ equity
 
 
 
Preferred stock (authorized: 4,000,000 shares, par value $1.00)
Issued: None

 

Common stock (authorized: 55,000,000 shares, par value $0.75)
Issued: 33,131,846 shares; outstanding: 30,795,692 and 30,831,919 shares, respectively
24,849

 
24,849

Contributed capital
202,172

 
201,945

Accumulated losses
(7,770
)
 
(11,031
)
Treasury stock, at cost, 2,336,154 and 2,299,927 shares, respectively
(48,210
)
 
(49,286
)
Accumulated other comprehensive income
6,400

 
6,455

Total shareholders’ equity
177,441

 
172,932

 
 
 
 
Total liabilities and shareholders’ equity
$
537,142

 
$
549,702

See accompanying notes to consolidated condensed financial statements.

1


Spartech Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
 
Three Months Ended
 
Nine Months Ended
 
 
August 4,

 
July 30,

 
August 4,

 
July 30,

 
(Unaudited and dollars in thousands, except per share data)
2012

 
2011

 
2012

 
2011

 
Net sales
$
282,447

 
$
291,716

 
$
862,551

 
$
809,050

 
Costs and expenses
 
 
 
 
 
 
 
 
Cost of sales
255,315

 
265,051

 
783,924

 
736,902

 
Selling, general and administrative expenses
20,673

 
17,744

 
63,302

 
55,730

 
Amortization of intangibles
422

 
422

 
1,267

 
1,265

 
Restructuring and exit costs
897

 
174

 
897

 
1,550

 
Total costs and expenses
277,307

 
283,391

 
849,390

 
795,447

 
Operating earnings
5,140

 
8,325

 
13,161

 
13,603

 
Interest expense, net of interest income
3,181

 
2,784

 
9,129

 
8,041

 
Earnings from continuing operations before income taxes
1,959

 
5,541

 
4,032

 
5,562

 
Income tax expense
121

 
2,553

 
791

 
1,566

 
Net earnings from continuing operations
1,838

 
2,988

 
3,241

 
3,996

 
Net earnings from discontinued operations, net of tax

 
19

 
18

 
2,664

 
Net earnings
$
1,838

 
$
3,007

 
$
3,259

 
$
6,660

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 Earnings from continuing operations
$
0.06

 
$
0.10

 
$
0.10

 
$
0.13

 
 Earnings from discontinued operations, net of tax

 

 

 
0.09

 
   Net earnings per share
$
0.06

 
$
0.10

 
$
0.10

 
$
0.22

 
Diluted earnings per share:
 

 
 

 
 

 
 

 
Earnings from continuing operations
$
0.06

 
$
0.10

 
$
0.10

 
$
0.13

 
Earnings from discontinued operations, net of tax

 

 

 
0.08

 
Net earnings per share
$
0.06

 
$
0.10

 
$
0.10

 
$
0.21

 
See accompanying notes to consolidated condensed financial statements.

2


Spartech Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
 
Nine Months Ended
 
August 4,

 
July 30,

(Unaudited and dollars in thousands)
2012

 
2011

Cash flows from operating activities
 
 
 
Net earnings
$
3,259

 
$
6,660

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
23,838

 
23,868

Stock-based compensation expense
1,406

 
2,200

Restructuring and exit costs
897

 
510

Loss on disposition of assets, net
161

 
67

Provision for bad debt expense
627

 
(1,154
)
Change in current assets and liabilities
(1,479
)
 
(8,938
)
Other, net
388

 
1,998

Net cash provided by operating activities
29,097

 
25,211

Cash flows from investing activities
 
 
 
Capital expenditures
(13,281
)
 
(19,191
)
Proceeds from the disposition of assets
115

 
420

Net cash used by investing activities
(13,166
)
 
(18,771
)
Cash flows from financing activities
 
 
 
Bank credit facility (payments) borrowings, net
(11,345
)
 
(7,504
)
Payments on notes and bank term loan
(2,467
)
 
(378
)
Payments on bonds and leases
(372
)
 
(395
)
Debt issuance costs
(1,597
)
 
(1,558
)
Sale of treasury stock
2

 

Stock-based compensation exercised
(103
)
 
(299
)
Net cash used by financing activities
(15,882
)
 
(10,134
)
Effect of exchange rates on cash and cash equivalents
7

 
2

Increase (decrease) in cash and cash equivalents
56

 
(3,692
)
Cash and cash equivalents at beginning of period
877

 
4,900

Cash and cash equivalents at end of period
$
933

 
$
1,208

See accompanying notes to consolidated condensed financial statements.

3


Notes to Consolidated Condensed Financial Statements
(Unaudited and Dollars in thousands, except per share amounts)

1. Basis of Presentation

The consolidated financial statements include the accounts of Spartech Corporation and its consolidated subsidiaries (“Spartech” or the “Company”). These financial statements have been prepared on a condensed basis, and accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, these consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) and disclosures necessary to make the information presented herein not misleading. These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes thereto included in the Company's October 29, 2011 Annual Report on Form 10-K.

In 2009, the Company sold its wheels and profiles businesses and closed and liquidated three businesses, including a manufacturer of boat components sold to the marine market and one compounding and one sheet business that previously serviced single customers. These businesses are classified as discontinued operations based on the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) topic, Discontinued Operations. Accordingly, for all periods presented herein, the consolidated statements of operations conform to this presentation. See Notes 3 and 11 for further discussion of the Company's discontinued operations and segments, respectively.

Spartech is organized into three reportable segments based on its operating structure and products manufactured. The three reportable segments are Custom Sheet and Rollstock, Packaging Technologies and Color and Specialty Compounds. The Company reorganized its internal reporting structure and management responsibilities for the Passaic matter and the associated closed facility during the third quarter of 2012 as a result of developments with the environmental matters, as described in Note 9. These costs were previously reported under the Color & Specialty Compounds segment, but will now be reported in Corporate. Historical results have been reclassified to conform to these changes.

During the fourth quarter of 2011, the Company reorganized its internal reporting structure and management responsibilities for a specific product line from its Color and Specialty Compounds segment to its Custom Sheet and Rollstock segment to better align its management of this product line with end markets. These management and reporting changes resulted in a reorganization of the Company's reportable segments, and historical segment results have been reclassified to conform to these changes.

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Operating results for any quarter are historically seasonal in nature and are not necessarily indicative of the results expected for the full year. Dollars presented are in thousands except per share data, unless otherwise indicated.

The Company's fiscal year ends on the Saturday closest to October 31st and fiscal years generally contain 52 weeks. However, because of this accounting convention, every fifth or sixth fiscal year has an additional week, and 2012 will be reported as a 53 week fiscal year. The Company's first quarter ended February 4, 2012 and nine months ended August 4, 2012 included 14 weeks and 40 weeks respectively, compared to 13 weeks and 39 weeks in the first quarter and nine months of the prior year. Years presented are fiscal unless noted otherwise.


4


2. Newly Adopted Accounting Standards

In May 2011, the FASB issued a new accounting standard update that amends ASC 820, Fair Value Measurement, and includes certain enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The amendment became effective for interim and annual periods beginning after December 15, 2011. For a description of how the Company estimates fair value and the process for reviewing fair value measurements classified as Level 3 in the fair value hierarchy, refer to Note 8. Adoption of this amendment did not have an effect on the Company's financial position, results of operations or cash flows.

3. Discontinued Operations

In 2009, the Company sold its wheels and profiles businesses and closed and liquidated three businesses, including a manufacturer of boat components sold to the marine market and one compounding and one sheet business that previously serviced single customers. These businesses are classified as discontinued operations. The wheels, profiles and marine businesses were previously reported in the Engineered Products group and due to these dispositions, the Company no longer has this reporting group.

During 2009, the Company filed a proof of claim in Chemtura's Chapter 11 case, alleging losses for breach of contract, fixed asset write-offs, severance and other related facility closure costs. In the first quarter of 2011, the Company reached a final settlement agreement with Chemtura and obtained the approval of the Bankruptcy Court overseeing Chemtura's bankruptcy proceedings for the settlement of the claim for $4,188 in cash and equity in the newly reorganized Chemtura, which was subsequently sold, resulting in $4,844 of total cash proceeds. Chemtura was the sole customer at our closed Arlington, Texas, facility and closure and related expenses were accounted for as discontinued operations. A summary of the net sales and the net earnings from discontinued operations is as follows:

 
Three Months Ended
 
Nine Months Ended
 
August 4,
2012

 
July 30,
2011

 
August 4,
2012

 
July 30,
2011

Earnings from discontinued operations before income taxes
$
3

 
$
30

 
$
33

 
$
4,301

Provision for income taxes
3

 
11

 
15

 
1,637

Earnings from discontinued operations, net of tax
$

 
$
19

 
$
18

 
$
2,664


4. Inventories, net
Inventories are valued at the lower of cost or market. Inventory reserves reduce the cost basis of inventory. Inventory values are primarily based on either actual or standard costs, which approximates average cost. Finished goods include the costs of material, labor and overhead. Inventories at August 4, 2012, and October 29, 2011, consisted of the following:
 
August 4, 2012

 
October 29, 2011

Raw materials
$
60,666

 
$
52,270

Production supplies
7,068

 
6,843

Finished goods
39,975

 
41,225

Inventory reserves
(9,461
)
 
(9,152
)
Total inventories, net
$
98,248

 
$
91,186



5


5. Restructuring and Exit Costs
Restructuring and exit costs were recorded in the consolidated statements of operations as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 4, 2012

 
July 30, 2011

 
August 4, 2012

 
July 30, 2011

Restructuring and exit costs:
 
 
 
 
 
 
 
Custom Sheet and Rollstock
$
897

 
$
(86
)
 
$
897

 
$
372

Packaging Technologies

 

 

 
247

Color and Specialty Compounds

 
260

 

 
925

Corporate

 

 

 
6

Total restructuring and exit costs
897

 
174

 
897

 
1,550

Income tax benefit
(269
)
 
(64
)
 
(269
)
 
(574
)
Impact on net earnings from continuing operations
$
628

 
$
110

 
$
628

 
$
976


2012 Restructuring Actions
On May 15, 2012, the Company initiated restructuring actions to reduce costs and reposition its portfolio to more specialty and higher-value products. The plan includes the consolidation of two Custom Sheet and Rollstock facilities in Canada into the Granby, Quebec location in order to reduce fixed costs and better leverage equipment and resources within one operation. The Company expects to incur approximately $1,700 in restructuring costs over the next 12 months, which will be comprised of employee severance, facility consolidation and shut-down costs and fixed asset valuation adjustments.

The following table summarizes the cumulative restructuring and exit costs incurred under the 2012 restructuring plan:

 
Three & Nine Months Ended August 4, 2012
Cumulative To-Date
Employee severance and other exit costs
$
808

$
808

Fixed asset valuation adjustments, net
89

89

Total
$
897

$
897


2008 Restructuring Plan
In 2008, the Company announced a restructuring plan to address declines in end-market demand and build a low cost-to-serve model. The plan included the consolidation of production facilities, shutdown of underperforming and non-core operations and reductions in the number of manufacturing and administrative jobs. Since the plan was initiated, the Company has closed a packaging facility in Mankato, Minnesota; compounding facilities in St. Clair, Michigan, and Kearny, New Jersey; and sheet facilities in Richmond, Indiana, Atlanta, Georgia, and Arlington, Texas. The Company does not expect to incur any further significant restructuring and exit costs from the 2008 restructuring plan because all of its initiatives announced in conjunction with this plan have been substantially finalized.

The following table summarizes the cumulative restructuring and exit costs incurred under the 2008 restructuring plan:
 
Cumulative
Employee severance
$
6,292

Facility consolidation and shut-down costs
6,943

Fixed asset valuation adjustments, net
3,225

Total
$
16,460


Employee severance includes costs associated with job eliminations and the reduction in jobs resulting from facility consolidations and plant shut downs. Facility consolidation and shut-down costs primarily include costs associated with shutting down production facilities, terminating leases and relocating production lines to continuing production facilities. Fixed asset valuation adjustments, net represents the effect from accelerated depreciation for reduced lives on property, plant and equipment and adjustments to the carrying value of assets held-for-sale to fair value, net of gains or losses on the ultimate sales of the assets.

6



As of August 4, 2012, the Company had $2,624 of assets held-for-sale. The estimated fair value of assets held for sale, which falls within Level 3 of the fair value hierarchy, represents management's best estimate of fair value upon sale and is determined based on broker analyses of prevailing market prices for similar assets.
    
The Company's total restructuring liability, representing severance, consolidation and shut-down costs was $822 and $382 at August 4, 2012, and October 29, 2011, respectively. Cash payments for restructuring activities of continuing operations were $11 and $232 for the three and nine months ended August 4, 2012 and $227 and $1,026 for the three and nine months ended July 30, 2011 respectively.

6. Debt

Debt at August 4, 2012, and October 29, 2011, consisted of the following:
 
August 4, 2012

 
October 29, 2011

2004 Senior Notes
$
111,127

 
$
113,594

Credit facility
20,356

 
31,707

Other
11,058

 
11,910

Total debt
142,541

 
157,211

Less current maturities
22,610

 
25,211

Total long-term debt
$
119,931

 
$
132,000


On September 14, 2004 the Company completed a $150 million private placement of Senior Notes over a term of twelve (12) years (2004 Senior Notes). On June 9, 2010, the Company entered into a new credit facility agreement and amended its 2004 Senior Notes. The new credit facility agreement has a borrowing capacity of $150 million with an optional $50.0 million accordion feature, has a term of four (4) years, bears interest at either Prime or LIBOR plus a borrowing margin and initially required a maximum Leverage Ratio of 3.5 to 1 and a minimum Fixed Charge Coverage Ratio of 2.25 to 1 (which was scheduled to decrease to 1.4 to 1 in the fourth quarter of 2012). The credit facility and amended 2004 Senior Notes are secured with collateral including accounts receivable, inventory, machinery and equipment and intangible assets.

On December 6, 2011, the Company entered into concurrent amendments (collectively, the “December 2011 Amendments”) to its Amended and Restated Credit and 2004 Senior Note agreements (collectively, the “Agreements”) in order to provide covenant flexibility. Under the December 2011 Amendments, the Company's minimum Fixed Charge Coverage Ratio was amended to 1.2 to 1 at the end of the fourth quarter of 2012 and first quarter of 2013 and increases to 1.3 to 1 at the end of the second quarter of 2013, and the covenant definition was changed to exclude 50% of scheduled installment payments (previously included 100%) in the denominator of the calculation. Under the December 2011 Amendments, the Company's maximum Leverage Ratio was amended to 3.0 to 1 at the end of the third quarter of 2012. Consistent with the previous agreement, the Company's maximum Leverage Ratio continues at 3.0 to 1 at the end of the fourth quarter of 2012 through the third quarter of 2013 and decreases to 2.75 to 1 at the end of fourth quarter of 2013. Under the December 2011 Amendments, the Company's annual capital expenditures will be limited to $30.0 million when the Company's Leverage Ratio exceeds 2.5 to 1. In addition, the Company will be subject to certain restrictions in its ability to complete acquisitions, pay dividends or buy back stock. The interest rate increased on the 2004 Senior Notes by 50 basis points to 7.08%. Capitalized fees incurred in the first quarter of 2012 for the December 2011 Amendments were $0.5 million. During the term of the Agreements, the Company was subject to an additional fee of 100 basis points in the event the Company's credit profile rating decreased to a defined level. Such a decrease occurred during the second quarter of 2012 and the Company incurred an additional fee of $1.1 million to its Senior Note holders, which was capitalized and will be amortized over the remaining life of the Notes as an adjustment to interest expense.

The agreements require the Company to offer early principal payments to Senior Note holders and credit facility investors (only in the event of default) based on a ratable percentage of each fiscal year's excess cash flow and extraordinary receipts, such as the proceeds from the sale of businesses. Under the Agreements, if the Company sells a business, it is required to offer a percentage (which varies based on the Company's Leverage Ratio) of the after tax proceeds (defined as “extraordinary receipts”) to its Senior Note holders and credit facility investors in excess of a $1.0 million threshold. The excess cash flow definition in the Agreements follows a standard free cash flow calculation. The Company is only required to offer the excess cash flow and extraordinary receipts if the Company ends its fiscal year with a Leverage Ratio in excess of 2.5 to 1. The Senior Note holders are not required to accept their allotted portion and to the extent individual holders reject their portion, other

7


holders are entitled to accept the rejected proceeds. Early principal payments made to Senior Note holders reduce the principal balance outstanding. The Company made excess cash flow payments to the Senior Note holders of $2.5 million and $0.4 million in the second quarters of 2012 and 2011, respectively.
 
At August 4, 2012, the Company had $118.3 million of total capacity and $20.4 million of outstanding loans under the credit facility at a weighted average interest rate of 1.77%. In addition to the outstanding loans, the credit facility borrowing capacity was reduced by several standby letters of credit totaling $11.3 million. Under the Company's most restrictive covenant, the Leverage Ratio, the Company had $18.9 million of availability on its credit facility as of August 4, 2012. We primarily have used the borrowings on our revolving credit facility for working capital purposes and capital expenditures.

Interest on the amended 2004 Senior Notes is 7.08% and is payable semiannually on March 15 and September 15 of each year. The Company may, at its option and upon notice, prepay at any time all or any part of the amended 2004 Senior Notes, together with accrued interest plus a make-whole amount. As of August 4, 2012, if the Company were to prepay the full principal outstanding on the amended 2004 Senior Notes, the make-whole amount would have been $13.4 million. The amended 2004 Senior Notes require equal annual principal payments of $22.2 million that commence on September 15, 2012, and that are ratably reduced by required early principal payments based on a percentage of annual excess cash flow or extraordinary receipts as defined in the Agreements. The first principal payment is to be paid in the fourth quarter of 2012, and the amounts associated with these payments are classified as current maturities of long term debt. This payment is expected to be made from a combination of cash flows from operations and amounts available under the credit facility. Excluding these payments, borrowings under these facilities are classified as long-term because the Company has the ability and intent to keep the balances outstanding over the next twelve (12) months.

The Company's other debt consists primarily of industrial revenue bonds and capital lease obligations used to finance capital expenditures. These financings mature between 2012 and 2019 and have interest rates ranging from 0.22% to 12.47%.

The Company was in compliance with all debt covenants as of August 4, 2012. While the Company was in compliance with its covenants and currently expects to be in compliance with its covenants during the next twelve (12) months, the Company's failure to comply with its covenants or other requirements of its financing arrangements is an event of default and could, among other things, accelerate the payment of indebtedness, which could have a material adverse impact on the Company's results of operations, financial condition and cash flows.

7. Income Taxes

Income tax expense was $121 and $2,553 for the three months ended August 4, 2012 and July 30, 2011, respectively. The current quarter tax expense was reduced by $649 for income tax benefits related to discrete items including additional research and development credits and other deferred tax adjustments, resulting in an effective tax rate of 6%. The prior quarter tax expense included a $1,469 expense associated with the write-off of a deferred tax asset due to a change in state tax law partially offset by $790 of income tax benefits from discrete items including additional research and development tax credits claimed on the 2010 returns and state tax incentives, reflecting a 46% effective tax rate. These tax rates compare to our statutory rate of 35% which is impacted by the mix of income by tax jurisdictions, various tax credits, and discrete items incurred in each period.

Income tax expense was $791 and $1,566 for the nine months ended August 4, 2012 and July 30, 2011, respectively. Income tax expense for the nine months ended August 4, 2012 included a net income tax benefit of $732 for discrete items primarily related to additional research and development tax credits and other income tax return to provision adjustments as well as adjustments to valuation allowances and tax contingency reserves. Income tax expense for the nine months ended July 30, 2011 included a net benefit of $242 for discrete items, which included a $1,469 income tax charge related to a change in state tax law which resulted in a write-off of a deferred tax asset and a $810 income tax benefit related to a reorganization of the Company's legal entities.

8. Fair Value of Financial Instruments

The Company performs an analysis of all existing financial assets and financial liabilities measured at fair value on a recurring basis to determine the significance and character of all inputs used to determine their fair value. The Company's financial instruments, including cash, accounts receivable, notes receivable, accounts payable and accrued liabilities, have net carrying values that approximate their fair values due to the short-term nature of these instruments.

8



We prioritize the inputs to valuation techniques used to measure fair value into the following three broad categories:

Level 1 inputs - Quoted prices for identical assets and liabilities in active markets.

Level 2 inputs - Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, observable inputs other than quoted prices and inputs that are derived principally from or corroborated by other observable market data.

Level 3 inputs - Unobservable inputs reflecting the entity's own assumptions about the assumptions market participants would use in pricing the asset or liability.

The estimated fair value of our long-term debt, which falls in Level 2 of the fair value hierarchy, is based on estimated borrowing rates to discount the cash flows to their present value as provided by a broker, or otherwise, quoted, current market prices for the same or similar issues. The following table presents the carrying amount and estimated fair value of long-term debt:

 
August 4, 2012
 
October 29, 2011
 
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

Total debt (including credit facilities)
$
142,541

 
$
148,817

 
$
157,211

 
$
161,259


The estimated fair value of assets held for sale, which falls within Level 3 of the fair value hierarchy, represents management's best estimate of fair value upon sale and is determined based on broker analyses of prevailing market prices for similar assets. As of August 4, 2012, the Company had $2,624 of assets held-for-sale.

During the nine months ended August 4, 2012, there were no significant measurements of non-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition.

9. Commitments and Contingencies

In September 2003, the New Jersey Department of Environmental Protection (“NJDEP”) issued a directive to approximately 30 companies, including Franklin-Burlington Plastics, Inc., a subsidiary of the Company (“Franklin-Burlington”), to undertake an assessment of natural resource damage and perform interim restoration of the Lower Passaic River, a 17-mile stretch of the Passaic River in northern New Jersey.  The directive, insofar as it relates to the Company and its subsidiary, pertains to the Company's plastic resin manufacturing facility in Kearny, New Jersey, located adjacent to the Lower Passaic River.  The Company acquired the facility in 1986, when it purchased the stock of the facility's former owner, Franklin Plastics Corp.  The Company acquired all of Franklin Plastics Corp.'s environmental liabilities as part of the acquisition. Franklin-Burlington responded to the directive, and no further action under the directive as yet has been required by NJDEP.

Also in 2003, the United States Environmental Protection Agency (“USEPA”) requested that companies located in the area of the Lower Passaic River, including Franklin-Burlington, cooperate in an investigation of contamination of the Lower Passaic River.  In response, the Company and approximately 70 other companies (collectively, the “Cooperating Parties”) agreed, pursuant to an Administrative Order of Consent with the USEPA, to assume responsibility for completing a remedial investigation/feasibility study (“RIFS”) of the Lower Passaic River.  The RIFS and related activities are currently estimated to cost approximately $100 million to complete and are currently expected to be completed by mid-2015.  However, the RIFS costs are exclusive of any costs that may ultimately be required to remediate the Lower Passaic River area being studied or costs associated with natural resource damages that may be assessed. By agreeing to bear a portion of the cost of the RIFS, the Company did not admit to or agree to bear any such remediation or natural resource damage costs. In 2007, the USEPA issued a draft study that evaluated nine alternatives for early remedial action of a portion of the Lower Passaic River. The estimated cost of the alternatives in the aggregate ranged from $900 million to $2.3 billion.  The Cooperating Parties provided comments to the USEPA regarding this draft study, but the USEPA has not yet finalized its study. In early calendar year 2012, the USEPA indicated to the Cooperating Parties that it would like to move forward with early remedial activity at a specific location along the river. In the third quarter of 2012, the Company and the other Cooperating Parties, with one exception, have agreed with USEPA to undertake a removal action at the specific location and the Company accrued $0.2 million. By agreeing to participate in this specific removal action, the Company did not admit ultimate responsibility for the removal action at such location, nor did the Company admit to or agree to bear costs for any other removal action at or remediation of the river, or for

9


natural resource damages.
 
In 2009, the Company's subsidiary and over 300 other companies were named as third-party defendants in a suit brought by the NJDEP in Superior Court of New Jersey, Essex County, against Occidental Chemical Corporation and certain related entities (collectively, the “Occidental Parties”) with respect to alleged contamination of the Newark Bay Complex, including the Lower Passaic River.  The third-party complaint seeks contributions from the third-party defendants with respect to any award to NJDEP of damages against the Occidental Parties in the matter.

As of August 4, 2012, the Company had approximately $1.1 million accrued related to these Lower Passaic River matters described above, representing funding of the RIFS costs and related legal expenses of the RIFS, participation in the removal action agreed to with USEPA and the litigation matter.  Given the uncertainties pertaining to this matter, including that the RIFS is ongoing, the ultimate remediation has not yet been determined and because the extent to which the Company may be responsible for such remediation or natural resource damages is not yet known, it is not possible at this time to estimate the Company's ultimate liability related to this matter.  Based on currently known facts and circumstances, the Company does not believe that this matter is likely to have a material effect on the Company's results of operations, consolidated financial position, or cash flows because the Company's Kearny, New Jersey, facility could not have contributed contamination along most of the river's length and did not store or use the contaminant that is of the greatest concern in the river sediments and because there are numerous other parties who will likely share in the cost of remediation and damages.  However, it is reasonably possible that the ultimate liability resulting from this matter could materially differ from the August 4, 2012 accrual balance, and in the event of one or more adverse determinations related to this matter, the impact on the Company's results of operations, consolidated financial position or cash flows could be material to any specific period.

In March 2010, DPH Holdings Corp., a successor to Delphi Corporation and certain of its affiliates (“Delphi”), served Spartech Polycom, a subsidiary of the Company, with a complaint seeking to avoid and recover approximately $8.6 million in alleged preference payments Delphi made to Spartech Polycom shortly before Delphi's bankruptcy filing in 2005. Delphi initially pursued similar preference complaints against approximately 175 additional unrelated third parties.  In June 2012, the Company and Delphi settled this litigation matter. The settlement did not have a material impact on the Company's results of operations, consolidated financial position or cash flows.

On December 14, 2009, Simmons Bedding Company and The Simmons Manufacturing Co., LLC (collectively, “Simmons”) filed suit in the Superior Court of New Jersey, Essex County (Simmons Bedding Company and The Simmons Manufacturing Co., LLC v. Creative Vinyl/Fabrics, Inc. and its owner, Spartech Corporation, Spartech Polycom Calendared and Converted Products, Granwell Products, Inc., Nan Ya Plastics Corporation USA - Docket No. ESX-L-10197-09) alleging that vinyl product supplied to Simmons failed to meet certain specifications and claiming, among other things, a breach of contract, breach of warranty and fraud for which Simmons is seeking unspecified damages, including costs related to a voluntary product recall. Creative Vinyl/Fabrics, Inc. (“Creative”) is seeking common law indemnification and contribution from the Company. The Company supplied Creative with PVC film pursuant to purchase orders submitted by Creative, which Creative further processed and then sold to Simmons. Fact discovery has concluded and expert discovery is ongoing. A date for trial has not yet been scheduled.  At this point, the Company is unable to predict an outcome or estimate a range of reasonably possible losses, if any, related to the Simmons matter due to the multiple parties involved in the case, the complexity of the issues involved, the current stage of the litigation, including that expert discovery is ongoing, and the inherent uncertainties involved in litigation generally.  Based upon the discovery conducted to date, management believes that although the ultimate liabilities resulting from this proceeding, if any, could be material to the Company's results of operations in the period recognized, such liabilities would not have a material adverse effect on the Company's consolidated financial position or cash flows.

The Company is also subject to various other claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability, employment and other matters, several of which claim substantial amounts of damages. While it is not possible to estimate with certainty the ultimate legal and financial liability with respect to these claims, lawsuits, and administrative proceedings, the Company believes that the outcome of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows.

On September 15, 2011, we received a $4.8 million tax assessment for additional taxes, interest and penalties from the Mexico Tax Authorities related to our 2007 income tax and value added tax filings.  The Company continues to contest the assessment and is pursuing litigation with respect to certain items. Based on developments to date, we do not expect the ultimate outcome of this matter to have a material adverse impact on our results of operations, financial position or cash flows.  The Company files U.S. federal, U.S. state and foreign income tax returns. The statute of limitations for U.S. federal income tax returns are open for fiscal year 2008 and forward. For state and foreign returns, the Company is generally no longer subject to tax examinations for years prior to 2006. In addition, the Company is currently the subject of several income tax audits for various periods in multiple jurisdictions.  The Company expects that within the next twelve (12) months it will reach closure on certain

10


of these audits or the statue of limitations will lapse.  The outcome of these audits is not estimable at this time.  

10. Net Earnings (Loss) Per Share

Basic earnings per share excludes any dilution and is computed by dividing net earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The dilution from each of these instruments is calculated using the treasury stock method. Outstanding equity instruments that could potentially dilute basic earnings per share in the future but were not included in the computation of diluted earnings per share because they were antidilutive are as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
August 4,
2012

 
July 30,
2011

 
August 4,
2012

 
July 30,
2011

Antidilutive shares:
 
 
 
 
 
 
 
SSARs
676

 
1,282

 
680


976

Stock options

 
670

 


670

Total antidilutive shares excluded from diluted earnings per share
676

 
1,952

 
680

 
1,646


The Company used the two-class method to compute basic and diluted earnings per share for all periods presented. The reconciliation of the net earnings from continuing operations, net earnings attributable to common stockholders and the weighted average number of common and participating shares used in the computations of basic and diluted earnings per share for three months ended August 4, 2012, and July 30, 2011 are as follows (shares in thousands):
 
Three Months Ended
 
Nine Months Ended
 
August 4,
2012

 
July 30,
2011

 
August 4,
2012

 
July 30,
2011

Basic and diluted net earnings:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
1,838

 
$
2,988

 
$
3,241

 
$
3,996

Less: net earnings from continuing operations allocated to participating securities
10

 
30

 
19

 
40

Net earnings from continuing operations attributable to common shareholders
1,828

 
2,958

 
3,222

 
3,956

Net (loss) earnings from discontinued operations, net of tax

 
19

 
18

 
2,664

Less: net (loss) earnings from discontinued operations allocated to participating securities

 

 

 
26

Net (loss) earnings from discontinued operations attributable to common shareholders

 
19

 
18

 
2,638

Net earnings attributable to common shareholders
$
1,828

 
$
2,977

 
$
3,240

 
$
6,594

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
30,839

 
30,658

 
30,824

 
30,632

Add: dilutive shares from equity instruments
50

 
58

 
47

 
77

Diluted weighted average shares outstanding
30,889

 
30,716

 
30,871

 
30,709

Basic earnings (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Net earnings from continuing operations
0.06

 
0.10

 
0.10

 
0.13

Net (loss) earnings from discontinued operations, net of tax

 

 

 
0.09

Net earnings per share
0.06

 
0.10

 
0.10

 
0.22

Diluted earnings per share attributable to common shareholders:
 
 
 
 
 
 
 
Net earnings from continuing operations
0.06

 
0.10

 
0.10

 
0.13

Net (loss) earnings from discontinued operations, net of tax

 

 

 
0.08

Net earnings per share
0.06

 
0.10

 
0.10

 
0.21



11


11. Segment Information

The Company is organized into three reportable segments based on its operating structure and the products manufactured. The three reportable segments are Custom Sheet and Rollstock, Packaging Technologies and Color and Specialty Compounds. Operating results are regularly reviewed by the Company's chief operating decision maker, its CEO, to make decisions about resources to be allocated to the segment and assess performance. More specifically, management uses operating earnings (loss) from continuing operations, excluding the effect of foreign exchange, to evaluate business segment performance. Accordingly, discontinued operations have been excluded from the segment results below, which is consistent with management's evaluation metrics. Corporate operating losses include general and administrative expenses, corporate office expenses, shared services costs, information technology costs, professional fees, the impact of foreign currency exchange gains and losses and Passaic environmental costs.

The Company reorganized its internal reporting structure and management responsibilities for the Passaic matter and the associated closed facility during the third quarter of 2012 as a result of developments with the environmental matters, as described in Note 9. These costs were previously reported under the Color & Specialty Compounds segment, but will now be reported in Corporate. Historical results have been reclassified to conform to these changes.

During the fourth quarter of 2011, the Company reorganized its internal reporting structure and management responsibilities for a specific product line from its Color and Specialty Compounds segment to its Custom Sheet and Rollstock segment to better align its management of this product line with end markets. These management and reporting changes resulted in a reorganization of the Company's reportable segments, and historical segment results have been reclassified to conform to these changes. A description of the Company's reportable segments is as follows:

Custom Sheet and Rollstock
The Custom Sheet and Rollstock segment primarily manufactures plastic sheet, custom rollstock, calendered film, laminates and acrylic products. The principal raw materials used in manufacturing sheet and rollstock are plastic resins in pellet form. The segment sells sheet and rollstock products principally through its own sales force, but it also uses a limited number of independent sales representatives. This segment produces and distributes its products from facilities in the United States, Canada and Mexico. Finished products are formed by customers that use plastic components in their products. The Company's custom sheet and rollstock is used in several market sectors including material handling, transportation, building and construction, recreation and leisure, electronics and appliances, sign and advertising, aerospace and numerous other end markets.

Packaging Technologies
The Packaging Technologies segment manufactures custom-designed plastic packages and custom rollstock primarily used in the food and consumer product markets. The principal raw materials used in manufacturing packaging are plastic resins in pellet form, which are extruded into rollstock or thermoformed into an end product. This segment sells packaging products principally through its own sales force, but it also uses a limited number of independent sales representatives. This segment produces and distributes the products from facilities in the United States and Mexico. The Company's Packaging Technologies products are mainly used in the food, medical and consumer packaging and graphic arts market sectors.

Color and Specialty Compounds
The Color and Specialty Compounds segment manufactures custom-designed plastic alloys, compounds and color concentrates for use by a large group of manufacturing customers servicing the transportation (primarily automotive), building and construction, packaging, agriculture, lawn and garden, electronics and appliances, and numerous other end markets. The principal raw materials used in manufacturing specialty plastic compounds and color concentrates are plastic resins in powder and pellet form. This segment also uses colorants, mineral and glass reinforcements and other additives to impart specific performance and appearance characteristics to the compounds. The Color and Specialty Compounds segment sells its products principally through its own sales force, but it also uses independent sales representatives. This segment produces and distributes its products from facilities in the United States, Canada, Mexico and France.


12


The following presents the Company's net sales, operating earnings (loss) and total assets by reportable segment and the reconciliation to consolidated operating earnings for the three and nine months ended August 4, 2012, and July 30, 2011:

 
Three Months Ended
 
Nine Months Ended
 
August 4,
2012

 
July 30,
2011

 
August 4,
2012

 
July 30,
2011

Net sales: (a)(b)
 
 
 
 
 
 
 
Custom Sheet and Rollstock
$
149,371

 
$
149,025

 
$
451,026

 
$
426,578

Packaging Technologies
58,395

 
64,989

 
181,944

 
179,094

Color and Specialty Compounds
74,681

 
77,702

 
229,581

 
203,378

 
$
282,447

 
$
291,716

 
$
862,551

 
$
809,050

Operating earnings (loss): (b)
 
 
 
 
 
 
 
Custom Sheet and Rollstock
$
6,871

 
$
6,366

 
$
18,680

 
$
19,058

Packaging Technologies
4,031

 
6,855

 
12,911

 
17,855

Color and Specialty Compounds
2,077

 
2,854

 
6,074

 
264

Corporate
(7,839
)
 
(7,750
)
 
(24,504
)
 
(23,574
)
 
$
5,140

 
$
8,325

 
$
13,161

 
$
13,603


Notes to Table:
(a)
Excludes intersegment sales of $13,678 and $15,504 in the third quarter of 2012 and 2011, respectively and intersegment sales of $47,451 and $40,275 in the first nine months of 2012 and 2011, respectively
(b)
Excludes discontinued operations.

 
August 4,
2012

 
October 29,
2011

Assets:
 
 
 
Custom Sheet and Rollstock
$
263,976

 
$
268,635

Packaging Technologies
146,749

 
145,096

Color and Specialty Compounds
88,967

 
94,267

Corporate and other (c)
37,450

 
41,704

 
$
537,142

 
$
549,702



12. Comprehensive Income

At August 4, 2012, and July 30, 2011, other comprehensive income (loss) consisted of cumulative foreign currency translation adjustments. Foreign exchange gains and losses are reported in selling, general and administrative expenses in the results of operations and reflect U.S. dollar-denominated transaction gains and losses due to fluctuations in foreign currency. The reconciliation of net earnings to comprehensive income for the three and nine months ended August 4, 2012, and July 30, 2011 is as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 4,
2012

 
July 30,
2011

 
August 4,
2012

 
July 30,
2011

Net earnings
$
1,838

 
$
3,007

 
$
3,259

 
$
6,660

Foreign currency translation adjustments
8

 
(128
)
 
(54
)
 
1,540

Total comprehensive income
$
1,846

 
$
2,879

 
$
3,205

 
$
8,200


The Company recorded foreign exchange losses before taxes of $264 and $626 for the three and nine months ended August 4, 2012, compared to a loss of $423 and a gain of $198 for the three and nine months ended July 30, 2011, respectively. As of August 4, 2012, the Company had monetary assets denominated in foreign currency of $5,845 of net Canadian liabilities, $569 of net Euro assets and $2,523 of net Mexican Peso assets.


13


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company's financial condition and results of operations contains “forward-looking statements.” The following discussion of the Company's financial condition and results of operations should be read in conjunction with Spartech's condensed consolidated financial statements and accompanying notes. The Company has based its forward-looking statements about its markets and demand for its products and future results on assumptions that the Company considers reasonable. Actual results may differ materially from those suggested by such forward-looking statements for various reasons including those discussed in “Cautionary Statements Concerning Forward-Looking Statements.” Unless otherwise noted, all amounts and analyses are based on continuing operations.

Non-GAAP Financial Measures
Management's Discussion and Analysis of Financial Condition and Results of Operations contains financial information prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and operating earnings (loss) excluding special items, net earnings (loss) from continuing operations excluding special items and net earnings (loss) from continuing operations per diluted share excluding special items that are considered “non-GAAP financial measures.” Special items include restructuring and exit costs.

Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flow that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The presentation of these measures is intended to supplement investors' understanding of the Company's operating performance. These measures may not be comparable to similar measures at other companies. The Company believes that these measurements are useful to investors because it helps them compare the Company's results to previous periods and provides an indication of underlying trends in the business. Non-GAAP measurements are not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. See the “Non-GAAP Reconciliations" section for a reconciliation of GAAP to non-GAAP measures.

Business Overview
Spartech is an intermediary producer of plastic products, including polymeric compounds, concentrates, custom extruded sheet and rollstock products and packaging technologies. The Company converts base polymers or resins purchased from commodity suppliers into extruded plastic sheet and rollstock, thermoformed packaging, specialty film laminates, acrylic products, specialty plastic alloys, color concentrates and blended resin compounds for customers in a wide range of markets. The Company has facilities located throughout the United States, Canada, Mexico and France that are organized into three segments; Custom Sheet and Rollstock, Packaging Technologies, and Color and Specialty Compounds.

In 2009, the Company sold its wheels and profiles businesses and closed and liquidated three businesses, including a manufacturer of boat components sold to the marine market and one compounding and one sheet business that previously serviced single customers. These businesses are classified as discontinued operations and all amounts presented within Item 2 are presented on a continuing basis, unless otherwise noted. See the notes to the unaudited consolidated condensed financial statements for further details of these divestitures and closures.

The Company assesses net sales changes using two major drivers: underlying volume and price/mix. Underlying volume is calculated as the change in pounds sold for a comparable number of days in the reporting period. The Company's fiscal year ends on the Saturday closest to October 31st and fiscal years generally contain 52 weeks. However, because of this accounting convention, every fifth or sixth fiscal year has an additional week, and 2012 will be reported as a 53 week fiscal year. The Company's first quarter ended February 4, 2012 and first nine months ended August 4, 2012 included 14 weeks and 40 weeks respectively, compared to 13 weeks and 39 weeks in the first quarter and first nine months of the prior year. Please see the reconciliation tables and narrative below for adjustments to GAAP and discussion of special items affecting results. Special items include restructuring and exit costs. Years presented are fiscal unless noted otherwise.

Summary Results
Net sales were $282.4 million and $862.6 million for the three and nine months ended August 4, 2012. This reflects a a 3% decrease in underlying volume and no net change in price/mix for the three month comparison, and a 5% increase from price/mix, a 3% increase from the impact of an extra week and a 1% decrease in underlying volume for the nine month comparison. The price/mix changes related to a product mix that included a greater percentage of higher priced products and the impact of changing raw material prices passed through as changes in selling price. Operating earnings excluding special items were $6.0 million and $14.1 million for the three and nine months ended August 4, 2012, respectively, compared to operating earnings excluding special items of $8.5 million and $15.2 million in the same periods of 2011.



14


Outlook
Despite our shortfall in third quarter earnings performance largely related to lower sales and higher new product development costs in our Packaging Technologies segment, Spartech expects annual earnings per share from continuing operations excluding special items (restructuring and exit costs) to be comparable to annual earnings per share for fiscal year 2011. Although demand in the Company's diverse end market segments continues to be volatile and raw materials pricing is dynamic, the Company continues to shift its product mix toward more specialized and higher margin products. We intend to build on our foundation from the operational improvements executed in the our Custom Sheet and Rollstock and Color and Specialty Compounds segments as well as the repositioning of our Packaging Technologies segment for an expanded customer base.

Consolidated Results    
Net sales were $282.4 million and $862.6 million for the three and nine months ended August 4, 2012. Fluctuations in net sales were caused by:
 
Q3 2012 vs. Q3 2011

 
YTD 2012 vs. YTD 2011

 
Underlying volume
-3
 %
 
-1
 %
 
Volume from additional week
 %
 
3
 %
 
Price/Mix
 %
 
5
 %
 
Total
-3
 %
 
7
 %
 

The decrease in underlying volume for both period comparisons is primarily attributed to the lower sales to the appliance and electronics, lawn and garden, and graphic arts end markets. These decreases were partially offset by an increase in sales volume to the transportation and material handling end markets for both periods of comparison. For the nine month period ended August 4, 2012 volumes were also increased by the inclusion of an extra week during the first nine months of 2012 compared to the same period last year. The price/mix for the nine month period was primarily related to a product mix that included a greater percentage of higher priced products.

The following table presents net sales, cost of sales, and the resulting gross margin in dollars and on a per pound sold basis for the three and nine months ended August 4, 2012 and July 30, 2011. Cost of sales presented in the consolidated condensed statements of operations includes material and conversion costs but excludes amortization of intangible assets. We have not presented cost of sales and gross margin as a percentage of net sales because a comparison of this measure is distorted by changes in resin costs that are typically passed through to customers as changes to selling prices. These changes can materially affect the percentages but do not present complete performance measures of the business.


 
Three Months Ended
 
Nine Months Ended
 
August 4, 2012

 
July 30, 2011

 
August 4, 2012

 
July 30, 2011

Dollars and Pounds(in millions)
 
 
 
 
 
 
 
Net sales
$
282.4

 
$
291.7

 
$
862.6

 
$
809.1

Cost of sales
255.3

 
265.1

 
783.9

 
736.9

Gross margin
$
27.1

 
$
26.6

 
$
78.7

 
$
72.2

 
 
 
 
 
 
 
 
Pounds sold
223.2

 
231.2

 
686.3

 
670.9

Dollars per Pound Sold
 
 
 
 
 
 
 
Net sales
$
1.266

 
$
1.262

 
$
1.257

 
$
1.206

Cost of sales
1.144

 
1.147

 
1.142

 
1.098

Gross margin
$0.122
 
$0.115
 
$0.115
 
$0.108

Gross margin per pound sold increased from 11.5 cents for the three months ended July 30, 2011 to 12.2 cents for the three months ended August 4, 2012 and increased from 10.8 cents for the nine months ended July 30, 2011 to 11.5 cents for the nine months ended August 4, 2012. The increases for both period comparisons primarily reflect improved margin from a better mix of high margin products and operating improvements such as increased production yield and regrind material usage, which was somewhat offset by increased costs due to higher labor expense associated with certain operating improvements. Cost increases for the nine month period of comparison also included higher freight, repairs and maintenance, and utility costs.

15



Selling, general and administrative expenses were $20.7 million and $63.3 million for the three and nine months ended August 4, 2012, respectively, compared to $17.7 million and $55.7 million in the same periods in the prior year. A $2.2 million change in bad debt expense from a reversal during the third quarter of 2011 accounted for the principal difference in the quarter comparison. Both period comparisons also include higher labor, consulting and legal costs. Additionally, the three and nine month comparisons reflect a decrease for foreign currency changes of $0.1 million and an increase of $0.8 million respectively. The increase for the nine month period also reflects the impact of an additional week, which accounts for approximately $1.6 million of the total change. The Custom Sheet & Rollstock business along with Corporate implemented a reduction in force, eliminating layers of management and combining certain roles. This program resulted in severance payments totaling $0.3 million for the third quarter of 2012.

On May 15, 2012, the Company initiated restructuring actions to reduce costs and reposition its portfolio to more specialty and higher-value products. The plan includes the consolidation of two Custom Sheet and Rollstock facilities in Canada into the Granby, Quebec location in order to reduce fixed costs and better leverage equipment and resources within one operation. The Company expects to incur approximately $1.7 million in restructuring costs over the next year, which will be comprised primarily of employee severance, consolidation and facility shut-down costs, and fixed asset valuation adjustments.

As a result of this action, the Company recorded $0.9 million in restructuring and exit costs in the third quarter and first nine months of 2012 compared to $0.2 million and $1.6 million in the same periods of the prior year. The charges in the previous year are the effect of a previously announced restructuring effort substantially completed in 2011. Restructuring and exit costs in 2011 were comprised of employee severance, facility consolidation and shut-down costs and fixed asset valuation adjustments for assets related to restructured facilities.

Interest expense, net of interest income, was $3.2 million and $9.1 million for the three and nine months ended August 4, 2012 compared to $2.8 million and $8.0 million in the same periods of the prior year. The increase was due to an increase in interest rates on our debt for both period comparisons, the additional fee to Senior Note holders, as discussed in Note 6, which was capitalized and will be amortized over the remaining life of the Notes as an adjustment to interest expense, and the impact of the extra week for the nine month period of comparison.

Income tax expense was $0.1 million and $0.8 million for the three and nine months ended August 4, 2012 compared to $2.6 million and $1.6 million in the the same periods of the prior year. The current quarter tax expense was reduced by $0.6 million for income tax benefits related to additional research and development tax credits and other deferred tax adjustments. The prior year quarter tax expense included $1.5 million expense associated with the write-off of a deferred tax asset due to a change in state tax law partially offset by $0.8 million of income tax benefits from discrete items including additional research and development credits and state tax incentives. Income tax expense for the nine months ended August 4, 2012 included a net income tax benefit of $0.7 million for discrete items primarily related to additional research and development tax credits and other income tax return to provision adjustments as well as adjustments to valuation allowances and tax contingency reserves. Income tax expense for the nine months ended July 30, 2011 included a net benefit of $0.2 million for discrete items, which included a $1.5 million income tax charge related to a change in state tax law which resulted in a write-off of a deferred tax asset and a $0.8 million income tax benefit related to a reorganization of the Company's legal entities. The effective tax rates were 6% and 20% for the for the three and nine months ended August 4, 2012 compared to 46% and 28% in the same periods of the prior year, respectively. These tax rates compare to our statutory tax rate of 35%, which is impacted by the mix of income by tax jurisdiction, tax credits, and the existence of other discrete items. The Company expects its effective tax rate to be in the range of 35% to 38% in the final quarter of its fiscal year.

We reported net earnings from continuing operations of $1.8 million or $0.06 per diluted share and $3.2 million or $0.10 per diluted share for three and nine months ended August 4, 2012, compared to net earnings from continuing operations of $3.0 million or $0.10 per diluted share and $4.0 million or $0.13 per diluted share for the same periods in the prior year. Excluding special items (restructuring and exit costs), we reported net earnings from continuing operations of $2.5 million or $0.08 per diluted share and $3.9 million or $0.12 per diluted share for the three and nine months ended August 4, 2012, compared to net earnings of $3.1 million or $0.10 per diluted share and $5.0 million or $0.16 per diluted share for the same periods in the prior year.

Net earnings from discontinued operations were negligible in the third quarter and first nine months of 2012 compared to negligible earnings in the third quarter of 2011 and earnings of $2.7 million in the first nine months of 2011. Earnings in the first nine months of 2011 resulted from the settlement agreement for the breach of a contract by a third party that led to $4.8 million in total cash proceeds.

16



Segment Results
The information included in this section is intended to provide specific information for the operating results of each segment.

Spartech is organized into three reportable segments based on its operating structure and products manufactured. The three reportable segments are Custom Sheet and Rollstock, Packaging Technologies and Color and Specialty Compounds. The Company reorganized its internal reporting structure and management responsibilities for the Passaic matter and the associated closed facility during the third quarter of 2012 as a result of developments with the environmental matters, as described in Note 9. These costs were previously reported under the Color & Specialty Compounds segment, but will now be reported in Corporate. Historical results have been reclassified to conform to these changes.

During the fourth quarter of 2011, the Company reorganized its internal reporting structure and management responsibilities of a product line from its Color and Specialty Compounds segment to its Custom Sheet and Rollstock segment to better align the management of this product line with end markets. This management and reporting change resulted in a reorganization of the Company's reportable segments. Historical segment results have been reclassified to conform to these changes.

Custom Sheet and Rollstock Segment
Net sales were $149.4 million and $451.0 million for the three and nine months ended August 4, 2012. Fluctuations in net sales were caused by:
 
Q3 2012 vs. Q3 2011

 
YTD 2012 vs. YTD 2011

 
Underlying volume
-4
 %
 
-4
 %
 
Volume from additional week
 %
 
3
 %
 
Price/Mix
4
 %
 
7
 %
 
Total
 %
 
6
 %
 

The decrease in underlying sales volume for both period comparisons reflects lower sales to the appliance and electronics end market. These decreases were somewhat offset in both period comparisons by an increase in sales to the automotive and material handling sectors. The price/mix increase for both period comparisons was mostly caused by a product mix that included a greater percentage of higher priced products while the three month period reflected an improved mix that was offset by lower selling prices from raw material decreases from the prior quarter.

Operating earnings excluding special items were $7.8 million and $19.6 million for the three and nine months ended August 4, 2012 compared to $6.3 million and $19.4 million for the same periods in the prior year. The increase in earnings for both period comparisons can be attributed to an increased mix of higher margin products and operating improvements such as increased production yield and regrind material usage, which were slightly offset by increased costs related to labor. The $1.5 million increase in the third quarter earnings can be attributed to $3.3 million of improvement primarily from an increased mix of higher margin products and operating improvements, which was offset by $1.8 million resulting from the reversal of bad debt expense in the prior year period. The nine month comparison also reflects increased costs related to repairs and maintenance, utilities, and freight. Both costs and volume were increased by the inclusion of an extra week during the first nine months of 2012 compared to the same period last year.

Packaging Technologies Segment
Net sales were $58.4 million and $181.9 million for the three and nine months ended August 4, 2012. Fluctuations in net sales were caused by:
 
Q3 2012 vs. Q3 2011

 
YTD 2012 vs. YTD 2011

 
Underlying volume
-7
 %
 
-4
 %
 
Volume from additional week
 %
 
3
 %
 
Price/Mix
-3
 %
 
3
 %
 
Total
-10
 %
 
2
 %
 

The decline in underlying sales volume for both period comparisons can be mainly attributed to a decrease in graphic arts sales related to certain programs not continuing in the current period. The price/mix increase for the nine month period comparison was primarily related to a product mix that included a greater percentage of higher priced products, while the three month comparison decreased primarily related to lower selling prices from raw material decreases passed through as lower selling

17


prices and a product mix that included a greater percentage of lower priced products.

Operating earnings excluding special items were $4.0 million and $12.9 million for the three and nine months ended August 4, 2012 compared to $6.9 million and $18.1 million for the same periods in the prior year. The decrease in earnings for both period comparisons can be attributed to the decrease in volume and additional development costs from new food and consumer packaging programs. The nine month period comparison this was somewhat offset by a greater mix of high margin products compared to the prior year. The nine month comparison also reflects a decrease in earnings attributable to increased costs related to labor, depreciation expenses and freight. Both costs and volume were increased by the inclusion of an extra week during the first nine months of 2012 compared to the same period last year.
 
Color and Specialty Compounds Segment
Net sales were $74.7 million and $229.6 million for the three and nine months ended August 4, 2012. Fluctuations in net sales were caused by:
 
Q3 2012 vs. Q3 2011

 
YTD 2012 vs. YTD 2011

 
Underlying volume
-2
 %
 
5
%
 
Volume from additional week
 %
 
3
%
 
Price/Mix
-2
 %
 
5
%
 
Total
-4
 %
 
13
%
 

The change in underlying sales volume for the third quarter was due to a decrease in automotive sales in Europe. The nine month comparison reflects an increase in sales related to commercial construction and packaging markets. The price/mix decrease for the three month comparison was primarily attributable to lower prices from raw material decreases passed through as lower selling prices. The price/mix increase for the nine month period comparison was primarily caused by a product mix that included a greater percentage of higher priced products.
  
Operating earnings excluding special items were $2.1 million and $6.1 million for the three and nine months ended August 4, 2012 compared to operating earnings of $3.1 million and $1.2 million in the same periods of the prior year. The significant increase in operating earnings for the nine month period comparison was due to the increase in sales volume, benefits from improvements on key operating metrics and greater mix of higher margin products compared to the prior year, which more than offset the impact of cost increases related to repairs and maintenance and labor costs. The decrease in operating earnings for the three month period was due to decreases in sales volume and a mix of lower margin products compared to the prior year. In addition, the prior year quarter included $0.4 million of income resulting from the reversal of bad debt expense in the prior year period. Both cost and volume were also increased by the inclusion of an extra week during the first nine months of 2012 compared to the same period last year.

Corporate
Corporate expenses include general and administrative expenses, corporate office expenses, shared services costs, information technology costs, professional fees, the impact of foreign currency exchange gains and losses and Passaic environmental costs. Corporate operating expenses were $7.8 million and $24.5 million for the three and nine months ended August 4, 2012 and $7.8 million and $23.6 million for the same periods last year. The three and nine month comparisons reflect a decrease for foreign currency changes of $0.1 million and an increase of $0.8 million respectively, and the nine month comparison also includes the impact of an additional week.

Liquidity and Capital Resources

Cash Flow
The Company's primary sources of liquidity have been cash flows from operating activities and borrowings from third parties. Historically, the Company's principal uses of cash have been to support operating activities, invest in capital improvements, reduce outstanding indebtedness, finance strategic business acquisitions, acquire treasury shares and pay dividends on its common stock. The following summarizes the major categories of changes in cash and cash equivalents for the nine months ended August 4, 2012 and July 30, 2011:


18


 
Nine Months Ended
 
August 4, 2012

 
July 30, 2011

Cash Flows (in thousands)
 
 
 
Net cash provided by operating activities
$
29,097

 
$
25,211

Net cash used by investing activities
(13,166
)
 
(18,771
)
Net cash used by financing activities
(15,882
)
 
(10,134
)
Effect of exchange rates on cash and cash equivalents
7

 
2

Increase (decrease) in cash and cash equivalents
$
56

 
$
(3,692
)

Net cash provided by operating activities was $29.1 million in the first nine months of 2012 compared to cash provided of $25.2 million for the same period in the prior year. The change reflects the impact of a decreased investment in net working capital of $7.5 million compared to the same period of the prior year. This was offset by the impact of lower net earnings in 2012, including the impact of $2.7 million in net earnings from discontinued operations in 2011. The decreased investment in net working capital can be attributed to an improvement in accounts receivable and inventory, partially offset by a decrease in accounts payable.

Net cash used for investing activities of $13.2 million in the first nine months of 2012 consisted of $13.3 million of capital expenditures which were slightly offset by $0.1 million of proceeds from the disposition of assets. Net cash used for investing activities in the first nine months of 2011 was comprised of $19.2 million of capital expenditures. We expect to spend approximately $20.0 million on capital expenditures in 2012. Capital expenditure amounts are expected to be funded from operating cash flows and credit facility borrowings.

Net cash used by financing activities of $15.9 million in the first nine months of 2012 mainly consisted of credit facility payments, the excess cash flow payment made to Senior Note Holders, debt financing costs associated with the Company's December 2011 Amendments along with an additional fee of $1.1 million to its Senior Note holders, which was capitalized and amortized over the remaining life of the Notes as an adjustment to interest expense. Net cash used by financing activities in the first nine months of 2011 of $10.1 million mainly consisted of credit facility payments and debt financing costs associated with the Company's January 2011 Amendments.
 
Financing Arrangements

On September 14, 2004 the Company completed a $150.0 million private placement of Senior Notes over a term of twelve (12) years (2004 Senior Notes). On June 9, 2010, the Company entered into a new credit facility agreement and amended its 2004 Senior Notes. The new credit facility agreement has a borrowing capacity of $150.0 million with an optional $50.0 million accordion feature, has a term of four (4) years, bears interest at either Prime or LIBOR plus a borrowing margin and initially required a maximum Leverage Ratio of 3.5 to 1 and a minimum Fixed Charge Coverage Ratio of 2.25 to 1 (which was scheduled to decrease to 1.4 to 1 in the fourth quarter of 2012). The credit facility and amended 2004 Senior Notes are secured with collateral including accounts receivable, inventory, machinery and equipment and intangible assets.

On December 6, 2011, the Company entered into concurrent amendments (collectively, the “December 2011 Amendments”) to its Amended and Restated Credit and 2004 Senior Note agreements (collectively, the “Agreements”) in order to provide covenant flexibility. Under the December 2011 Amendments, the Company's minimum Fixed Charge Coverage Ratio was amended to 1.2 to 1 at the end of the fourth quarter of 2012 and first quarter of 2013 and increases to 1.3 to 1 at the end of the second quarter of 2013, and the covenant definition was changed to exclude 50% of scheduled installment payments (previously 100%) in the denominator of the calculation. Under the December 2011 Amendments, the Company's maximum Leverage Ratio was amended to 3.0 to 1 at the end of the third quarter of 2012. Consistent with the previous agreement, the Company's maximum Leverage Ratio continues at 3.0 to 1 at the end of the fourth quarter of 2012 through the third quarter of 2013 and decreases to 2.75 to 1 at the end of fourth quarter of 2013. Under the December 2011 Amendments, the Company's annual capital expenditures will be limited to $30.0 million when the Company's Leverage Ratio exceeds 2.5 to 1. In addition, the Company will be subject to certain restrictions in its ability to complete acquisitions, pay dividends or buy back stock. The interest rate increased on the 2004 Senior Notes by 50 basis points to 7.08%. Capitalized fees incurred in the first quarter of 2012 for the December 2011 Amendments were $0.5 million. During the term of the Agreements, the Company was subject to an additional fee of 100 basis points in the event the Company's credit profile rating decreased to a defined level. Such a decrease occurred during the second quarter of 2012 and the Company incurred an additional fee of $1.1 million to its Senior Note holders, which was capitalized and will be amortized over the remaining life of the Notes as an adjustment to interest expense.

19



The agreements require the Company to offer early principal payments to Senior Note holders and credit facility investors (only in the event of default) based on a ratable percentage of each fiscal year's excess cash flow and extraordinary receipts, such as the proceeds from the sale of businesses. Under the Agreements, if the Company sells a business, it is required to offer a percentage (which varies based on the Company's Leverage Ratio) of the after tax proceeds (defined as “extraordinary receipts”) to its Senior Note holders and credit facility investors in excess of a $1.0 million threshold. The excess cash flow definition in the Agreements follows a standard free cash flow calculation. The Company is only required to offer the excess cash flow and extraordinary receipts if the Company ends its fiscal year with a Leverage Ratio in excess of 2.5 to 1. The Senior Note holders are not required to accept their allotted portion and to the extent individual holders reject their portion, other holders are entitled to accept the rejected proceeds. Early principal payments made to Senior Note holders reduce the principal balance outstanding. The Company made excess cash flow payments to the Senior Note holders of $2.5 million and $0.4 million in the second quarters of 2012 and 2011, respectively.
 
At August 4, 2012, the Company had $118.3 million of total capacity and $20.4 million of outstanding loans under the credit facility at a weighted average interest rate of 1.77%. In addition to the outstanding loans, the credit facility borrowing capacity was reduced by several standby letters of credit totaling $11.3 million. The Company's average net revolver outstanding (average revolver borrowings net of cash) was approximately $61.1 million for the quarter ended August 4, 2012. Under the Company's most restrictive covenant, the Leverage Ratio, the Company had $18.9 million of availability on its credit facility as of August 4, 2012. We primarily have used the borrowings on our revolving credit facility for working capital purposes and capital expenditures.

Interest on the amended 2004 Senior Notes is 7.08% and is payable semiannually on March 15 and September 15 of each year. The Company may, at its option and upon notice, prepay at any time all or any part of the amended 2004 Senior Notes, together with accrued interest plus a make-whole amount. As of August 4, 2012, if the Company were to prepay the full principal outstanding on the amended 2004 Senior Notes, the make-whole amount would have been $13.4 million. The amended 2004 Senior Notes require equal annual principal payments of $22.2 million that commence on September 15, 2012, and that are ratably reduced by required early principal payments based on a percentage of annual excess cash flow or extraordinary receipts as defined in the Agreements. The first principal payment is expected to be paid in the fourth quarter of 2012, and the amounts associated with these payments are classified as current maturities of long term debt. Excluding these payments, borrowings under these facilities are classified as long-term because the Company has the ability and intent to keep the balances outstanding over the next twelve (12) months.

The Company's other debt consists primarily of industrial revenue bonds and capital lease obligations used to finance capital expenditures. These financings mature between 2012 and 2019 and have interest rates ranging from 0.22% to 12.47%.

The Company was in compliance with all debt covenants as of August 4, 2012. While the Company was in compliance with its covenants and currently expects to be in compliance with its covenants during the next twelve (12) months, the Company's failure to comply with its covenants or other requirements of its financing arrangements is an event of default and could, among other things, accelerate the payment of indebtedness, which could have a material adverse impact on the Company's results of operations, financial condition and cash flows.

We anticipate that cash flows from operations, together with the financing and borrowings under our bank credit facilities, will provide the resources necessary for reinvestment in our existing business and managing our capital structure on a short and long-term basis.


20


Non-GAAP Reconciliations

The following table reconciles operating earnings (GAAP) to operating earnings excluding special items (Non-GAAP), net earnings from continuing operations (GAAP) to net earnings from continuing operations excluding special items (Non-GAAP) and net earnings from continuing operations per diluted share (GAAP) to net earnings from continuing operations per diluted share excluding special items (Non-GAAP). Special items consist of restructuring and exit costs. We have also excluded the operations of our discontinued wheels, profiles, marine, Donchery sheet and Arlington, Texas compounding operations throughout this press release and in the presentation below. The only adjustment reconciling GAAP to non-GAAP results is restructuring and exit costs. The GAAP results include the beneficial impact from a lower effective tax rate in the current year period as well as the adverse impact of a higher effective tax rate in the prior year period. The non-GAAP results have not been adjusted for any changes in tax rates.

 
Three Months Ended
 
Nine Months Ended
 
August 4,

 
July 30,

 
August 4,

 
July 30,

(unaudited and in thousands, except per share data)
2012

 
2011

 
2012

 
2011

Operating earnings (GAAP)
$
5,140

 
$
8,325

 
$
13,161

 
$
13,603

  Restructuring and exit costs
897

 
174

 
897

 
1,550

Operating earnings excluding special items (Non-GAAP)
$
6,037

 
$
8,499

 
$
14,058

 
$
15,153

Net earnings from continuing operations (GAAP)
$
1,838

 
$
2,988

 
$
3,241

 
$
3,996

   Restructuring and exit costs, net of tax
628

 
110

 
628

 
976

Net earnings from continuing operations excluding special items (Non-GAAP)
$
2,466

 
$
3,098

 
$
3,869

 
$
4,972

Net earnings from continuing operations per diluted share (GAAP)
$
0.06

 
$
0.10

 
$
0.10

 
$
0.13

   Restructuring and exit costs, net of tax
0.02

 

 
0.02

 
0.03

Net earnings from continuing operations per diluted share excluding special items (Non-GAAP)
$
0.08

 
$
0.10

 
$
0.12

 
$
0.16


The following table reconciles operating earnings (loss) (GAAP) to operating earnings (loss) excluding special items (Non-GAAP) by segment (in thousands):

 
Three Months Ended
 
Three Months Ended
 
August 4, 2012
 
July 30, 2011
 
Operating
Earnings (Loss)
 (GAAP)
 
Special
Items
 
Operating Earnings
(Loss)
Excluding
(Non-GAAP)
Special Items
 
Operating
Earnings (Loss)
 (GAAP)
 
Special
Items
 
Operating Earnings
(Loss)
Excluding
(Non-GAAP)
Special Items
Segment
 
 
 
 
 
Custom Sheet and Rollstock
$
6,871

 
$
897

 
$
7,768

 
$
6,366

 
$
(86
)
 
$
6,280

Packaging Technologies
4,031

 

 
4,031

 
6,855

 

 
6,855

Color and Specialty Compounds
2,077

 

 
2,077

 
2,854

 
260

 
3,114

Corporate
(7,839
)
 

 
(7,839
)
 
(7,750
)
 

 
(7,750
)
Total
$
5,140

 
$
897

 
$
6,037

 
$
8,325

 
$
174

 
$
8,499



21


 
Nine Months Ended
 
Nine Months Ended
 
August 4, 2012
 
July 30, 2011
 
Operating
Earnings (Loss)
 (GAAP)
 
Special
Items
 
Operating Earnings
(Loss)
Excluding
(Non-GAAP)
Special Items
 
Operating
Earnings (Loss)
 (GAAP)
 
Special
Items
 
Operating Earnings
(Loss)
Excluding
(Non-GAAP)
Special Items
Segment
 
 
 
 
 
Custom Sheet and Rollstock
$
18,680

 
$
897

 
$
19,577

 
$
19,058

 
$
372

 
$
19,430

Packaging Technologies
12,911

 

 
12,911

 
17,855

 
247

 
18,102

Color and Specialty Compounds
6,074

 

 
6,074

 
264

 
925

 
1,189

Corporate
(24,504
)
 

 
(24,504
)
 
(23,574
)
 
6

 
(23,568
)
Total
$
13,161

 
$
897

 
$
14,058

 
$
13,603

 
$
1,550

 
$
15,153


22


Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our exposure to market risk since October 29, 2011. Please see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended October 29, 2011, for a discussion of our exposure to market risk at October 29, 2011.

Item 4. Controls and Procedures

Spartech maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including the Company's certifying officers, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation performed, the Company's certifying officers have concluded that the disclosure controls and procedures were effective as of August 4, 2012, to provide reasonable assurance of the achievement of these objectives.

Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company's reports.

There was no change in the Company's internal control over financial reporting during the quarter ended August 4, 2012 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II — Other Information

Item 1. Legal Proceedings

In September 2003, the New Jersey Department of Environmental Protection (“NJDEP”) issued a directive to approximately 30 companies, including Franklin-Burlington Plastics, Inc., a subsidiary of the Company (“Franklin-Burlington”), to undertake an assessment of natural resource damage and perform interim restoration of the Lower Passaic River, a 17-mile stretch of the Passaic River in northern New Jersey.  The directive, insofar as it relates to the Company and its subsidiary, pertains to the Company's plastic resin manufacturing facility in Kearny, New Jersey, located adjacent to the Lower Passaic River.   The Company acquired the facility in 1986, when it purchased the stock of the facility's former owner, Franklin Plastics Corp.  The Company acquired all of Franklin Plastics Corp.'s environmental liabilities as part of the acquisition. Franklin-Burlington responded to the directive, and no further action under the directive as yet has been required by NJDEP.

Also in 2003, the United States Environmental Protection Agency (“USEPA”) requested that companies located in the area of the Lower Passaic River, including Franklin-Burlington, cooperate in an investigation of contamination of the Lower Passaic River.  In response, the Company and approximately 70 other companies (collectively, the “Cooperating Parties”) agreed, pursuant to an Administrative Order of Consent with the USEPA, to assume responsibility for completing a remedial investigation/feasibility study (“RIFS”) of the Lower Passaic River.  The RIFS and related activities are currently estimated to cost approximately $100 million to complete and are currently expected to be completed by mid-2015.  However, the RIFS costs are exclusive of any costs that may ultimately be required to remediate the Lower Passaic River area being studied or costs associated with natural resource damages that may be assessed. By agreeing to bear a portion of the cost of the RIFS, the Company did not admit to or agree to bear any such remediation or natural resource damage costs.  In 2007, the USEPA issued a draft study that evaluated nine alternatives for early remedial action of a portion of the Lower Passaic River.  The estimated cost of the alternatives in the aggregate ranged from $900 million to $2.3 billion.  The Cooperating Parties provided comments to the USEPA regarding this draft study, but the USEPA has not yet finalized its study. In early calendar year 2012, the USEPA indicated to the Cooperating Parties that it would like to move forward with early remedial activity at a specific location along the river. In the third quarter of 2012, the Company and the other Cooperating Parties, with one exception, have agreed with USEPA to undertake a removal action at the specific location and the Company accrued $0.2 million. By agreeing to participate in this specific removal action, the Company did not admit ultimate responsibility for the removal action at such location, nor did the Company admit to or agree to bear costs for any other removal action at or remediation of the river, or for natural resource damages.
 
In 2009, the Company's subsidiary and over 300 other companies were named as third-party defendants in a suit brought by the NJDEP in Superior Court of New Jersey, Essex County, against Occidental Chemical Corporation and certain related entities (collectively, the “Occidental Parties”) with respect to alleged contamination of the Newark Bay Complex, including the Lower Passaic River.  The third-party complaint seeks contributions from the third-party defendants with respect to any award to

23


NJDEP of damages against the Occidental Parties in the matter.

As of August 4, 2012, the Company had approximately $1.1 million accrued related to these Lower Passaic River matters described above, representing funding of the RIFS costs and related legal expenses of the RIFS, participation in the removal action agreed to with USEPA and the litigation matter.  Given the uncertainties pertaining to this matter, including that the RIFS is ongoing, the ultimate remediation has not yet been determined and because the extent to which the Company may be responsible for such remediation or natural resource damages is not yet known, it is not possible at this time to estimate the Company's ultimate liability related to this matter.  Based on currently known facts and circumstances, the Company does not believe that this matter is likely to have a material effect on the Company's results of operations, consolidated financial position, or cash flows because the Company's Kearny, New Jersey, facility could not have contributed contamination along most of the river's length and did not store or use the contaminant that is of the greatest concern in the river sediments and because there are numerous other parties who will likely share in the cost of remediation and damages.  However, it is reasonably possible that the ultimate liability resulting from this matter could materially differ from the August 4, 2012, accrual balance, and in the event of one or more adverse determinations related to this matter, the impact on the Company's results of operations, consolidated financial position or cash flows could be material to any specific period.

On December 14, 2009, Simmons Bedding Company and The Simmons Manufacturing Co., LLC (collectively, “Simmons”) filed suit in the Superior Court of New Jersey, Essex County (Simmons Bedding Company and The Simmons Manufacturing Co., LLC v. Creative Vinyl/Fabrics, Inc. and its owner, Spartech Corporation, Spartech Polycom Calendared and Converted Products, Granwell Products, Inc., Nan Ya Plastics Corporation USA - Docket No. ESX-L-10197-09) alleging that vinyl product supplied to Simmons failed to meet certain specifications and claiming, among other things, a breach of contract, breach of warranty and fraud for which Simmons is seeking unspecified damages, including costs related to a voluntary product recall. Creative Vinyl/Fabrics, Inc. (“Creative”) is seeking common law indemnification and contribution from the Company. The Company supplied Creative with PVC film pursuant to purchase orders submitted by Creative, which Creative further processed and then sold to Simmons. Fact discovery has concluded and expert discovery is ongoing. A date for trial has not yet been scheduled.  At this point, the Company is unable to predict an outcome or estimate a range of reasonably possible losses, if any, related to the Simmons matter due to the multiple parties involved in the case, the complexity of the issues involved, the current stage of the litigation, including that expert discovery is ongoing, and the inherent uncertainties involved in litigation generally.  Based upon the discovery conducted to date, management believes that although the ultimate liabilities resulting from this proceeding, if any, could be material to the Company's results of operations in the period recognized, such liabilities would not have a material adverse effect on the Company's consolidated financial position or cash flows.

In January 2011, the Stamford, CT facility of Spartech Polycast, Inc., a subsidiary of the Company, received three notices of violation (NOVs) from the Connecticut Department of Environmental Protection (CTDEP) alleging violations of regulations governing air pollution control. The NOVs alleged: (1) failure to file a semi-annual monitoring report; (2) failure to have a leak detection and repair program that meets regulatory requirements; and, (3) failure to satisfy certain air emissions standards. During the third quarter, Spartech entered into a final order with CTDEP resolving the matter. The liabilities associated with the final order were not material to the Company's results of operations.

The Company is also subject to various other claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability, employment and other matters, several of which claim substantial amounts of damages. While it is not possible to estimate with certainty the ultimate legal and financial liability with respect to these claims, lawsuits, and administrative proceedings, the Company believes that the outcome of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows.

24



Item 6. Exhibits

Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K)
31.1
Section 302 Certification of CEO
31.2
Section 302 Certification of CFO
32.1
Section 1350 Certification of CEO
32.2
Section 1350 Certification of CFO
101
Data File for the Registrant's Quarterly Report on Form 10-Q for the quarter ended August 4, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements (Filed Herewith).




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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
SPARTECH CORPORATION
(Registrant)
 
Date:
September 12, 2012
By:  
/s/ Victoria M. Holt  
 
 
 
Victoria M. Holt 
 
 
 
President and Chief Executive Officer (Principal Executive Officer) 
 
 
 
 
 
/s/ Randy C. Martin  
 
 
 
Randy C. Martin 
 
 
 
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 
 
 

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XNYS:SEH Quarterly Report 10-Q Filling

XNYS:SEH Stock - Get Quarterly Report SEC Filing of XNYS:SEH stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

Content Partners
XNYS:SEH Quarterly Report 10-Q Filing - 8/4/2012
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