Spartech Corporation

2001 Annual Report

Management's Discussion and Analysis

Business Overview

SPARTECH is an intermediate processor of thermoplastics which converts base polymers or resins from commodity suppliers into extruded plastic sheet and rollstock, cell cast acrylic sheet, color concentrates & blended resin compounds, and injection molded & profile extruded products for customers in a wide range of markets. We operate 43 production facilities (42 throughout North America and one in Europe) that are organized into three business segments: (1) Custom Sheet & Rollstock (67% of total sales), (2) Color & Specialty Compounds (24% of total sales), and (3) Molded & Profile Products (9% of total sales). The results discussed below include our 1999 acquisitions of Lustro Plastics Company (January 1999), Alltrista Plastic Packaging (May 1999), Accura Molding Company, Ltd. (October 1999), OS Plastics (October 1999), and GeoPlast (October 1999) and our 2000 acquisitions of High Performance Plastics, Inc. (HPP), a wholly-owned subsidiary of Uniroyal Technology Corporation (February 2000), and Alshin Tire Corporation (October 2000), from the date of acquisition. The results also reflect the divestiture of the three Canadian molded products businesses in July 2001.

Results of Operations

Comparison of Fiscal Years 2001 and 2000

The Company's fiscal year ends on the Saturday closest to October 31. Fiscal year 2001 includes 53 weeks compared to 52 weeks in 2000 and 1999. This results in approximately 2% additional sales activity in 2001 compared to the prior years. The operating results presented below include data on a percentage of sales basis for more comparable discussions.

Freight costs for all periods presented have been reclassified to comply with EITF 00-10 "Accounting for Shipping and Handling Fees and Cost." The reclassification resulted in an increase to net sales and corresponding increase to cost of goods sold of approximately 2.5% of the originally reported amounts. Operating profit did not change as a result of the reclassifications, but operating margin as a percent of the increased sales reflect a 0.3% decrease.

Consolidated net sales were $937.1 million, down 5% from $987.5 million. The primary reasons for the decrease were the resin price reduction pass-throughs impacting our sales prices and decreases for the slow down in the volume sold to the automotive and manufactured housing markets, partially offset with changes in product mix to higher value products. Net sales of the Custom Sheet & Rollstock segment decreased 3%, from $639.6 million to $621.9 million. This was due primarily to a 5% increase from the 2000 acquisition of the HPP operations being more than offset by the 4% decrease in resin prices throughout the year and a decrease in incremental margin business. The group's volume was down as sales to the growing packaging market and benefits from the mix of more Alloy Plastics sales were offset by decreases in sales for automotive, manufactured housing, and recreational vehicles. Net sales of the Color & Specialty Compounds group decreased 9%, from $249.0 million to $227.8 million. This decrease was a result of lower average selling prices related to resin price reductions and transportation-related customers continuing their inventory reduction programs, reducing the overall volume shipped. Sales for the Molded & Profile Products group decreased 12%, from $99.0 million to $87.4 million, primarily as a result of the net divestiture of the three Canadian molded product facilities and lower volumes in the profile extrusion markets, despite strong performances by the Custom Engineered Wheels business. Inventory reductions by several customer end markets and the sluggishness of the overall economy is expected to continue into 2002. We are focusing on the growth of our Product Transformations and Alloy Plastics (which totaled 12% of our sales compared to 9% in the prior year) and our new market expansions (wheels joint venture, bath & shower surround business acquisition, and planned Mexico facility) to provide some benefits in 2002.

Cost of sales decreased from $815.9 million to $785.0 million, but increased as a percentage of net sales from 82.6% to 83.8%. Our less favorable cost of sales percentage represents the impact on productivity of the lower demand in the transportation and manufactured housing markets and the impact of $3.5 million of non-recurring expenses primarily related to severance, phase out, and other exit costs incurred upon closing three facilities discussed below. 

Selling, general, and administrative expenses increased from $55.3 million to $56.0 million and increased as a percentage of net sales from 5.6% to 6.0%. The increase reflects inefficiencies during the year related to the shutdown of certain operating facilities and an increase in bad debt expense.

The Company implemented a series of cost reduction actions to further streamline its core operations, increase production efficiencies, and strengthen the Company's position for future growth. These streamlining efforts included the closing of three additional plant facilities (Charleston, South Carolina; Greensboro, Georgia; and Oxnard, California). Most of these actions, which were initiated in the third quarter, will be completed within calendar year 2001, and in no event will the closing of the facility or transfer of business to other Spartech facilities take more than 9-12 months to be fully effected. In connection with these efforts, the Company recorded $9.1 million in non-recurring pre-tax expenses. The non-recurring expenses consisted of $5.6 million related to writedowns for the impairment of long-lived assets and $3.5 million related to severance, phase out, and other exit costs recorded in cost of sales. The impairment charges adjusted the carrying values of these assets to an estimate of fair value less the cost to sell. The fair value was determined by using current selling prices for similar assets.

Operating earnings after the non-recurring charges were $82.4 million, or 8.8% of net sales ($91.5 million, or 9.8% of net sales before non-recurring expenses), compared to $109.8 million, or 11.1% of net sales. The decrease in operating earnings before the non-recurring charges was primarily due to competitive pricing issues resulting from the general slow down in the economy (including sluggish demand in the transportation, aerospace, and electronics markets) and the impact of less efficient utilization of capacities.

		

Interest expense and distributions on preferred securities of $34.8 million increased from $29.1million as a result of borrowings related to the acquisitions completed in 2000, offset by $63.5 million repayment of debt, lower interest rates on floating-rate debt, and more favorable vendor discount terms. 

Our effective tax rate decreased from 38.1% to 37.1% as a result of improvements in our combined state tax rate and ongoing benefits from research and development credits. We expect this lower rate to be in effect for fiscal 2002 as well, with continuing benefits anticipated from these tax reduction initiatives.

 

 

 

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