##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended November 3, 2007
 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)
  (SPARTECH LOGO)Delaware(State or other jurisdiction

    43-0761773(I.R.S. Employerof incorporation or organization)

    Identification No.)
 120 S. Central Avenue, Suite 1700
Clayton, Missouri 63105
(314) 721-4242  (Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
  Common Stock, $.75 par valueTitle of Each Class
    
    New York Stock ExchangeName of Exchange of Which Registered
 None
  þ o
  o þ
  þ o
 o
  þ o o
  o þ
  Documents incorporated by reference




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##### 



SPARTECH CORPORATION
FORM 10-K FOR THE YEAR ENDED NOVEMBER 3, 2007
TABLE OF CONTENTS
 Cautionary Statements Concerning Forward-Looking Statements
    
    
    1PART IItem 1. Business
    
    
    2Item 1A. Risk Factors
    
    
    5Item 1B. Unresolved Staff Comments
    
    
    7Item 2. Properties
    
    
    7Item 3. Legal Proceedings
    
    
    7Item 4. Submission of Matters to a Vote of Security Holders
    
    
    7PART IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    8Item 6. Selected Financial Data
    
    
    9Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    10Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 8. Financial Statements and Supplementary Data
    
    
    23Managements Report on Internal Control over Financial Reporting
    
    
    23Report of Ernst & Young LLP, Independent Registered Public Accounting
Firm on Consolidated Financial Statements
    
    
    24Report of Ernst & Young LLP, Independent Registered Public Accounting
Firm on Internal Control over Financial Reporting
    
    
    25Consolidated Balance Sheets
    
    
    26Consolidated Statements of Operations
    
    
    27Consolidated Statements of Shareholders Equity
    
    
    28Consolidated Statements of Cash Flows
    
    
    29Notes to Consolidated Financial Statements
    
    
    30Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    47Item 9A. Controls and Procedures
    
    
    47Item 9B. Other Information
    
    
    47PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    48Item 11. Executive Compensation
    
    
    49Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    49Item 13.
Certain Relationships and Related Transactions, and Director
Independence
    
    
    49Item 14. Principal Accounting Fees and Services
    
    
    49PART IVItem 15. Exhibits and Financial Statement Schedule
    
    
    50SIGNATURES
    
    
    52FINANCIAL STATEMENT SCHEDULESchedule II  Valuation and Qualifying Accounts
    
    
    F-1Subsidiaries of the RegistrantConsent of Independent Registered Public Accounting Firm302 Certification of Chief Financial Officer302 Certification of Chief Financial Officer1350 Certification of Chief Executive Officer1350 Certification of Chief Financial Officer




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##### Table of Contents



CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
   (a)
    
    adverse changes in economic or industry conditions generally, including global supply
and demand conditions and prices for products of the types we produce;(b)
    
    our ability to compete effectively on product performance, quality, price,
availability, product development, and customer service;(c)
    
    material adverse changes in the markets we serve, including the packaging,
transportation, building and construction, recreation and leisure, and other markets, some
of which tend to be cyclical;(d)
    
    our inability to achieve the level of cost savings, productivity improvements,
synergies, growth or other benefits anticipated from acquired businesses and their
integration;(e)
    
    volatility of prices and availability of supply of energy and of the raw materials that
are critical to the manufacture of our products, particularly plastic resins derived from
oil and natural gas, including future effects of natural disasters;(f)
    
    our inability to manage or pass through an adequate level of increases to customers in
the costs of materials, freight, utilities, or other conversion costs;(g)
    
    our inability to predict accurately the costs to be incurred, time taken to complete,
or savings to be achieved in connection with announced production plant restructurings;(h)
    
    adverse movements in foreign currency exchange rates in the foreign markets in which we
operate.(i)
    
    adverse findings in significant legal or environmental proceedings or our inability to
comply with applicable environmental laws and regulations;(j)
    
    adverse developments with work stoppages or labor disruptions, particularly in the
automotive industry;(k)
    
    our inability to achieve operational efficiency goals or cost reduction initiatives;(l)
    
    our inability to develop and launch new products successfully;(m)
    
    restrictions imposed on us by instruments governing our indebtedness, and the possible
inability to comply with requirements of those instruments;(n)
    
    possible weaknesses in internal controls; and(o)
    
    our ability to successfully complete the implementation of a new enterprise resource
planning computer system and to obtain expected benefits from our system.
  1




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##### Table of Contents



PART I
 
 Item 1. BUSINESS
 General
   Custom Sheet and Rollstock
  Packaging Technologies
  Color and Specialty Compounds
  Engineered Products
  2




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Raw Materials
  Production
  Intellectual Property and Trademarks
  Customer Base
  2007
    
    2006Packaging
    
    
    24
    %
    
    
    24
    %Transportation
    
    
    20
    
    
    
    21Building and construction
    
    
    17
    
    
    
    16Recreation and leisure
    
    
    10
    
    
    
    11Sign and advertising
    
    
    7
    
    
    
    6Appliance and electronics
    
    
    7
    
    
    
    6Lawn and garden
    
    
    6
    
    
    
    6Other
    
    
    9
    
    
    
    10100
    %
    
    
    100
    %
 Distribution
  3




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##### Table of Contents



Backlog
  2007
    
    
    2006Custom Sheet and Rollstock
    
    $
    56.5
    
    
    $
    49.2Packaging Technologies
    
    
    23.0
    
    
    
    16.7Color and Specialty Compounds
    
    
    37.4
    
    
    
    39.9Engineered Products
    
    
    3.1
    
    
    
    4.1$
    120.0
    
    
    $
    109.9
 Competition
  Seasonality
  Environment
  Employees
  Geographic Areas
  Available Information
 www.spartech.com
 www.spartech.com
 4




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##### Table of Contents



Item 1A. RISK FACTORS
  Price increases in raw materials and energy costs could adversely affect operating results and
financial condition.
  The cyclical nature of our suppliers and customers businesses could adversely affect our sales,
profitability, operating results and cash flows during economic downturns.
  We operate in a highly competitive marketplace, which could adversely affect our sales and
financial condition.
  We may incur significant charges or be adversely impacted by the closure of all or part of a
manufacturing facility
  We are in the process of implementing a new Enterprise Resource Planning (ERP) computer system
which could cause substantial business interruption that could adversely impact our operating
results.
  We may encounter difficulties in integrating businesses we have acquired, and therefore we may not
realize the anticipated benefits of the acquisitions.
  5




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We have a significant amount of goodwill, and any future goodwill impairment charges could
adversely impact our results of operations.
 Goodwill and Other Intangible Assets
 Our foreign operations subject us to economic risk as our results of operations may be adversely
affected by foreign currency fluctuations and changes in local government regulations and policies.
  We are part of an environmental investigation initiated by the New Jersey Department of
Environmental Protection and the USEPA in 2003 and if our liability is materially different from
the amount accrued, it could impact our results of operations.
  Access to funding through capital markets is an important part of our business plan and if we are
unable to maintain such access we could experience a material adverse effect on our business and
financial results.
  We are subject to a number of restrictive covenants in our credit facilities and breaches of these
covenants could become events of default under our credit facilities and cause the acceleration of
the majority of debt beyond our ability to pay.
  6




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Item 1B. UNRESOLVED STAFF COMMENTS
  
 Item 2. PROPERTIES
   
 Item 3. LEGAL PROCEEDINGS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  7




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##### Table of Contents



PART II
 
 Item 5.
    
    MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
  Common Stock Data (per share)
    

1stQtr.
    
    2ndQtr.
    
    3rdQtr.
    
    4th Qtr.2007High
    
    $
    30.71
    
    
    $
    30.54
    
    
    $
    28.75
    
    
    $
    22.81Low
    
    
    24.57
    
    
    
    25.06
    
    
    
    20.94
    
    
    
    14.41Dividends declared
    
    $
    .135
    
    
    $
    .135
    
    
    $
    .135
    
    
    $
    .1352006High
    
    $
    25.11
    
    
    $
    25.01
    
    
    $
    24.61
    
    
    $
    27.98Low
    
    
    18.68
    
    
    
    22.06
    
    
    
    20.54
    
    
    
    20.56Dividends declared
    
    $
    .125
    
    
    $
    .125
    
    
    $
    .125
    
    
    $
    .125
  Total Number of
    
    
    Maximum NumberShares Purchased as
    
    
    of Shares That MayTotal Number
    
    
    
    
    
    
    Part of Publicly
    
    
    Yet Be PurchasedOf Shares
    
    
    Average Price
    
    
    Announced Plans or
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    Paid per Share
    
    
    Programs
    
    
    ProgramsAugust 2007
    
    
    
    
    
    $
    n/a
    
    
    
    
    
    
    
    September 2007
    
    
    674,452
    
    
    
    18.01
    
    
    
    522,800
    
    
    
    1,477,200October 2007
    
    
    933,900
    
    
    
    18.58
    
    
    
    933,900
    
    
    
    543,300Total
    
    
    1,608,352
    
    
    $
    18.34
    
    
    
    1,456,700
  8




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##### Table of Contents



Item 6. SELECTED FINANCIAL DATA
  Year Ended2007
    
    2006
    
    2005
    
    2004
    
    2003(in thousands, except per share data)Statement of Operations Data:Net Sales:In Dollars
    
    $
    1,451,983
    
    
    $
    1,485,597
    
    
    $
    1,396,860
    
    
    $
    1,121,725
    
    
    $
    956,160In Volume (pounds) (a)
    
    
    1,436,000
    
    
    
    1,460,000
    
    
    
    1,472,000
    
    
    
    1,383,000
    
    
    
    1,207,000Gross Margin (b)
    
    $
    163,581
    
    
    $
    176,537
    
    
    $
    153,477
    
    
    $
    155,947
    
    
    $
    135,149Depreciation & Amortization
    
    
    43,069
    
    
    
    40,698
    
    
    
    39,380
    
    
    
    33,704
    
    
    
    30,336Operating Earnings (c)
    
    
    72,439
    
    
    
    91,424
    
    
    
    57,869
    
    
    
    90,854
    
    
    
    78,544Interest Expense
    
    
    17,629
    
    
    
    20,981
    
    
    
    25,195
    
    
    
    25,436
    
    
    
    24,965Net Earnings (d)
    
    
    33,846
    
    
    
    38,798
    
    
    
    18,263
    
    
    
    40,857
    
    
    
    34,263Per Share Information:Earnings per Share-Diluted
    
    $
    1.05
    
    
    $
    1.20
    
    
    $
    .57
    
    
    $
    1.28
    
    
    $
    1.16Dividends Declared per Share
    
    
    .54
    
    
    
    .50
    
    
    
    .48
    
    
    
    .44
    
    
    
    .40Book Value per Share
    
    
    14.37
    
    
    
    13.78
    
    
    
    12.93
    
    
    
    12.81
    
    
    
    10.84Balance Sheet Data:Working Capital (e)
    
    $
    131,835
    
    
    $
    136,544
    
    
    $
    171,459
    
    
    $
    198,253
    
    
    $
    127,496Working Capital as a percentage
of Net Sales
    
    
    9.1
    %
    
    
    9.2
    %
    
    
    12.3
    %
    
    
    17.7
    %
    
    
    13.3
    %Total Debt
    
    $
    334,283
    
    
    $
    289,223
    
    
    $
    379,955
    
    
    $
    474,091
    
    
    $
    383,819Total Assets
    
    
    1,110,871
    
    
    
    1,041,794
    
    
    
    1,071,826
    
    
    
    1,133,284
    
    
    
    917,237Shareholders Equity
    
    
    439,280
    
    
    
    442,693
    
    
    
    413,760
    
    
    
    412,374
    
    
    
    318,206Ratios/Other Data:Cash Flow from Operations
    
    $
    104,011
    
    
    $
    127,543
    
    
    $
    105,018
    
    
    $
    31,647
    
    
    $
    69,485Capital Expenditures
    
    
    34,743
    
    
    
    23,966
    
    
    
    39,265
    
    
    
    35,003
    
    
    
    22,009Operating Earnings
per pound sold (actual) (a)
    
    
    5.0
    ¢
    
    
    6.3
    ¢
    
    
    3.9
    ¢
    
    
    6.6
    ¢
    
    
    6.5
    ¢Total Debt to
Total Debt and Equity
    
    
    43.2
    %
    
    
    39.5
    %
    
    
    47.9
    %
    
    
    53.5
    %
    
    
    54.7
    %Number of Employees (actual) (a)
    
    
    3,600
    
    
    
    3,425
    
    
    
    3,500
    
    
    
    3,750
    
    
    
    3,325Common Shares:Outstanding at Year-End
    
    
    30,565
    
    
    
    32,124
    
    
    
    31,988
    
    
    
    32,180
    
    
    
    29,352Weighted Average-Diluted
    
    
    32,180
    
    
    
    32,297
    
    
    
    32,311
    
    
    
    33,468
    
    
    
    29,567
 Notes to table:(a)
    
    Amounts are unaudited.(b)
    
    Calculated as net sales less cost of sales. Gross margin excludes the impact of amortization
expense.(c)
    
    2007 operating earnings were reduced by pre-tax charges of $4.7 million related to
restructuring and exit costs ($1.3 million), an impairment of an identified intangible asset
($1.6 million) and a separation agreement with our former CEO ($1.8 million). 2006 operating
earnings were reduced by pre-tax charges of $5.0 million related to restructuring and exit
costs ($1.9 million) and goodwill impairment ($3.2 million). 2005 operating earnings were
reduced by pre-tax charges of $20.1 million related to restructuring and exit costs ($10.1
million), a retirement settlement with our former CEO ($3.6 million), fixed asset charges
($1.9 million) and goodwill impairment ($4.5 million). 2004 and 2003 operating earnings were
reduced by pre-tax fixed asset charges of $3.5 million and $1.0 million, respectively.(d)
    
    2006 net income was reduced by a $3.4 million after-tax charge ($5.5 million pre-tax) related
to the early extinguishment of our convertible subordinated debentures.(e)
    
    Calculated as total current assets excluding cash and cash equivalents less total current
liabilities excluding current maturities of long-term debt. 9




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Item 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis of our financial condition and results of operations
contains Forward-Looking Statements. You should read the following discussion of our financial
condition and results of operations with Selected Financial Data and our consolidated financial
statements and related notes thereto. We have based our forward-looking statements about our
markets and demand for our products and future results on assumptions that we consider reasonable.
Actual results may differ materially from those suggested by our forward-looking statements for
various reasons including those discussed in Cautionary Statements Concerning Forward-Looking
Statements.
 Business Overview
   % of2007 SalesCustom Sheet and Rollstock
    
    
    46Packaging Technologies
    
    
    18Color and Specialty Compounds
    
    
    31Engineered Products
    
    
    5
  Executive Summary
   10




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Results of Operations
 Comparison of 2007 and 2006
 Consolidated Summary
  Underlying volume
    
    
    (4
    )%Volume from additional week
    
    
    2Acquisition of business
    
    
    Price/Mix
    
    
    (2
    )%
   2007
    
    2006Dollars and Pounds (in millions)Net sales
    
    
    $ 1,452.0
    
    
    
    $1,485.6Material costs
    
    
    952.1
    
    
    
    968.3Material margin
    
    
    499.9
    
    
    
    517.3Conversion costs
    
    
    336.3
    
    
    
    340.8Gross margin
    
    
    $    163.6
    
    
    
    $   176.5Pounds Sold
    
    
    1,436
    
    
    
    1,460Dollars per Pound SoldNet sales
    
    
    $    1.011
    
    
    
    $   1.017Material costs
    
    
    0.663
    
    
    
    0.663Material margin
    
    
    0.348
    
    
    
    0.354Conversion costs
    
    
    0.234
    
    
    
    0.233Gross margin
    
    
    $    0.114
    
    
    
    $   0.121
   11




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Share-Based Payment
         12




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Custom Sheet and Rollstock Segment
  Underlying volume
    
    
    (6
    )%Volume from additional week
    
    
    2Price/Mix
    
    
    (1
    )(5
    )%
   Packaging Technologies Segment
  Underlying volume
    
    
    3
    %Volume from additional week
    
    
    2Acquisition of business
    
    
    2Price/Mix
    
    
    18
    %
   13




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Color and Specialty Compounds Segment
  Underlying volume
    
    
    (4
    )%Volume from additional week
    
    
    2Price/Mix
    
    
    (2
    )(4
    )%
   Engineered Products Group
  Underlying volume
    
    
    
    %Volume from additional week
    
    
    2Price/Mix
    
    
    (6
    )(4
    )%
   Corporate
  Outlook
  14




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Comparison of 2006 and 2005
 Consolidated Summary
  Underlying volume
    
    
    
    %Disposition of business
    
    
    (1
    )Price/Mix
    
    
    76
    %
   2006
    
    
    2005Dollars and Pounds (in millions)Net sales
    
    $
    1,485.6
    
    
    $
    1,396.9Material costs
    
    
    968.3
    
    
    
    900.6Material margin
    
    
    517.3
    
    
    
    496.3Conversion costs
    
    
    340.8
    
    
    
    344.7Gross margin
    
    $
    176.5
    
    
    $
    151.6Pounds Sold
    
    
    1,460
    
    
    
    1,472Dollars per Pound SoldNet sales
    
    $
    1.017
    
    
    $
    .949Material costs
    
    
    .663
    
    
    
    .612Material margin
    
    
    .354
    
    
    
    .337Conversion costs
    
    
    .233
    
    
    
    .234Gross margin
    
    $
    .121
    
    
    $
    .103
   15




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Custom Sheet and Rollstock
    
    $
    0.6Packaging Technologies
    
    
    0.3Color and Specialty Compounds
    
    
    0.5Engineering Products
    
    
    0.1Corporate
    
    
    1.0$
    2.5
       16




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Custom Sheet and Rollstock Segment
  Underlying volume
    
    
    4
    %Disposition of business
    
    
    (1
    )Price/Mix
    
    
    58
    %
   Packaging Technologies Segment
  Underlying volume
    
    
    2
    %Price/Mix
    
    
    13
    %
   17




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Color and Specialty Compounds Segment
  Underlying volume
    
    
    (3
    )%Price/Mix
    
    
    107
    %
   Engineered Products Group
  Underlying volume
    
    
    (11
    )%Price/Mix
    
    
    8(3
    )%
   Corporate
  18




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Liquidity and Capital Resources
 Cash Flow
  2007
    
    
    2006
    
    
    2005Cash Flows (in millions)Net cash provided by operating activities
    
    $
    104.0
    
    
    $
    127.5
    
    
    $
    105.0Net cash used for investing activities
    
    
    (96.0
    )
    
    
    (21.5
    )
    
    
    (31.4
    )Net cash used for financing activities
    
    
    (10.0
    )
    
    
    (105.2
    )
    
    
    (110.3
    )Effect of exchange rate changes
    
    
    
    
    
    
    
    
    
    
    (Decrease)/Increase in cash and cash equivalents
    
    $
    (2.0
    )
    
    $
    0.8
    
    
    $
    (36.7
    )
    Financing Arrangements
    19




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Contractual Obligations
  (in millions)
    
    
    
    
    
    Less Than
    
    
    Years
    
    
    Years
    
    
    Greater thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    2 and 3
    
    
    4 and 5
    
    
    5 YearsLong-Term Debt
    
    $
    429.3
    
    
    $
    18.9
    
    
    $
    65.6
    
    
    $
    194.9
    
    
    $
    149.9Capital Lease Obligations
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    Operating Lease Obligations
    
    
    16.3
    
    
    
    7.1
    
    
    
    7.7
    
    
    
    1.5
    
    
    
    Purchase Obligations
    
    
    74.0
    
    
    
    74.0
    
    
    
    
    
    
    
    
    
    
    
    Other Obligations
    
    
    2.7
    
    
    
    1.2
    
    
    
    1.3
    
    
    
    0.1
    
    
    
    0.1Total
    
    $
    522.7
    
    
    $
    101.3
    
    
    $
    74.7
    
    
    $
    196.7
    
    
    $
    150.0
  Critical Accounting Policies and Estimates
  Revenue Recognition
 Accounts Receivable
 Inventories
 20




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Acquisition Accounting
 Goodwill
 Long-Lived Assets
 Income Taxes
   Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109
 21




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Contingencies
  
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    22




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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Managements Responsibility for Financial Statements
     
 Managements Report on Internal Control over Financial Reporting
   23




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Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
    Internal Control  Integrated
Framework
  
 24




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Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
 Internal Control 
Integrated Framework
       
 25




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SPARTECH CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands)
 November 3,
    
    
    October 28,2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    3,409
    
    
    $
    5,372Receivables, net of allowance of $1,572 in 2007 and $1,514 in 2006
    
    
    212,221
    
    
    
    200,728Inventories
    
    
    116,076
    
    
    
    122,329Prepaids and other current assets
    
    
    20,570
    
    
    
    14,193Total Current Assets
    
    
    352,276
    
    
    
    342,622Property, plant and equipment, net
    
    
    324,025
    
    
    
    304,779Goodwill
    
    
    383,988
    
    
    
    350,399Other intangible assets, net
    
    
    45,151
    
    
    
    36,582Other assets
    
    
    5,431
    
    
    
    7,412Total Assets
    
    $
    1,110,871
    
    
    $
    1,041,794LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    448
    
    
    $
    6,898Accounts payable
    
    
    167,713
    
    
    
    149,520Accrued liabilities
    
    
    49,319
    
    
    
    51,186Total Current Liabilities
    
    
    217,480
    
    
    
    207,604Long-Term Debt:Long-term debt, less current maturities
    
    
    333,835
    
    
    
    282,325Other Long-Term Liabilities:Deferred taxes
    
    
    111,997
    
    
    
    97,681Other liabilities
    
    
    8,279
    
    
    
    11,491Total Long-Term Liabilities
    
    
    454,111
    
    
    
    391,497Shareholders Equity:Common stock, 33,131,846 shares issued in 2007 and 2006
    
    
    24,849
    
    
    
    24,849Contributed capital
    
    
    200,485
    
    
    
    198,661Retained earnings
    
    
    257,111
    
    
    
    240,398Treasury stock, at cost, 2,566,900 shares in 2007 and 1,007,766
shares in 2006
    
    
    (52,531
    )
    
    
    (22,845
    )Accumulated other comprehensive income
    
    
    9,366
    
    
    
    1,630Total Shareholders Equity
    
    
    439,280
    
    
    
    442,693Total Liabilities and Shareholders Equity
    
    $
    1,110,871
    
    
    $
    1,041,794
 See accompanying notes to consolidated financial statements.
 26




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##### Table of Contents



SPARTECH CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Dollars in thousands, except per share amounts)
 2007
    
    
    2006
    
    
    2005Net Sales
    
    $
    1,451,983
    
    
    $
    1,485,597
    
    
    $
    1,396,860Costs and Expenses:Cost of sales
    
    
    1,288,402
    
    
    
    1,309,060
    
    
    
    1,245,253Selling, general, and administrative
    
    
    83,830
    
    
    
    75,379
    
    
    
    74,243Amortization of intangibles
    
    
    6,050
    
    
    
    4,718
    
    
    
    4,939Goodwill impairment
    
    
    
    
    
    
    3,159
    
    
    
    4,468Restructuring and exit costs
    
    
    1,262
    
    
    
    1,857
    
    
    
    10,0881,379,544
    
    
    
    1,394,173
    
    
    
    1,338,991Operating Earnings
    
    
    72,439
    
    
    
    91,424
    
    
    
    57,869Interest
expense (net of interest income: 2007, $501; 2006, $655; 2005, $488)
    
    
    17,629
    
    
    
    20,981
    
    
    
    25,195Early debt extinguishment costs
    
    
    
    
    
    
    5,505
    
    
    
    Earnings Before Income Taxes
    
    
    54,810
    
    
    
    64,938
    
    
    
    32,674Income taxes
    
    
    20,964
    
    
    
    26,140
    
    
    
    14,411Net Earnings
    
    $
    33,846
    
    
    $
    38,798
    
    
    $
    18,263Net Earnings Per Common Share:Basic
    
    $
    1.06
    
    
    $
    1.21
    
    
    $
    .57Diluted
    
    $
    1.05
    
    
    $
    1.20
    
    
    $
    .57
 See accompanying notes to consolidated financial statements.
 27




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##### Table of Contents



SPARTECH CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (Dollars in thousands)
 Accumulated OtherComprehensiveCommon
    
    
    Contributed
    
    
    Retained
    
    
    Treasury
    
    
    Income
    
    
    Total ShareholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    (Loss)
    
    
    EquityBalance, October 30, 2004
    
    $
    24,849
    
    
    $
    196,264
    
    
    $
    214,778
    
    
    $
    (23,653
    )
    
    $
    136
    
    
    $
    412,374Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    18,263
    
    
    
    
    
    
    
    
    
    
    
    18,263Other comprehensive income:Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260
    
    
    
    260Cash flow hedge
adjustments,
net of tax of $(50)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81
    
    
    
    81Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,604Restricted stock grant
    
    
    
    
    
    
    217
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217Stock options exercised
    
    
    
    
    
    
    330
    
    
    
    
    
    
    
    6,339
    
    
    
    
    
    
    
    6,669Dividends declared
    
    
    
    
    
    
    
    
    
    
    (15,399
    )
    
    
    
    
    
    
    
    
    
    
    (15,399
    )Treasury stock purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,705
    )
    
    
    
    
    
    
    (8,705
    )Balance, October 29, 2005
    
    $
    24,849
    
    
    $
    196,811
    
    
    $
    217,642
    
    
    $
    (26,019
    )
    
    $
    477
    
    
    $
    413,760Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    38,798
    
    
    
    
    
    
    
    
    
    
    
    38,798Other comprehensive income:Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,153
    
    
    
    1,153Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,951Restricted stock grant
    
    
    
    
    
    
    283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    283Stock options exercised
    
    
    
    
    
    
    1,567
    
    
    
    
    
    
    
    3,994
    
    
    
    
    
    
    
    5,561Dividends declared
    
    
    
    
    
    
    
    
    
    
    (16,042
    )
    
    
    
    
    
    
    
    
    
    
    (16,042
    )Treasury stock purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (820
    )
    
    
    
    
    
    
    (820
    )Balance, October 28, 2006
    
    $
    24,849
    
    
    $
    198,661
    
    
    $
    240,398
    
    
    $
    (22,845
    )
    
    $
    1,630
    
    
    $
    442,693Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    33,846
    
    
    
    
    
    
    
    
    
    
    
    33,846Other comprehensive income:Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,736
    
    
    
    7,736Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,582Restricted stock grant
    
    
    
    
    
    
    430
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    430Stock options exercised
    
    
    
    
    
    
    1,394
    
    
    
    
    
    
    
    10,225
    
    
    
    
    
    
    
    11,619Dividends declared
    
    
    
    
    
    
    
    
    
    
    (17,133
    )
    
    
    
    
    
    
    
    
    
    
    (17,133
    )Treasury stock purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,911
    )
    
    
    
    
    
    
    (39,911
    )Balance, November 3, 2007
    
    $
    24,849
    
    
    $
    200,485
    
    
    $
    257,111
    
    
    $
    (52,531
    )
    
    $
    9,366
    
    
    $
    439,280
 See accompanying notes to consolidated financial statements.
 28




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##### Table of Contents



SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 2007
    
    
    2006
    
    
    2005Cash Flows From Operating ActivitiesNet earnings
    
    $
    33,846
    
    
    $
    38,798
    
    
    $
    18,263Adjustments to reconcile net earnings to net cash provided
by operating activities:Depreciation and amortization
    
    
    43,069
    
    
    
    40,698
    
    
    
    39,380Stock compensation expense
    
    
    2,884
    
    
    
    2,790
    
    
    
    Goodwill impairment
    
    
    
    
    
    
    3,159
    
    
    
    4,468Early debt extinguishment costs
    
    
    
    
    
    
    5,505
    
    
    
    Restructuring and exit costs
    
    
    573
    
    
    
    269
    
    
    
    7,198Change in current assets and liabilities, net of effects
of acquisitions:Receivables
    
    
    (6,172
    )
    
    
    9,331
    
    
    
    (26,270
    )Inventories
    
    
    10,291
    
    
    
    (2,789
    )
    
    
    23,050Prepaids and other current assets
    
    
    (664
    )
    
    
    (1,472
    )
    
    
    7,484Accounts payable
    
    
    16,761
    
    
    
    28,639
    
    
    
    14,883Accrued liabilities
    
    
    (6,078
    )
    
    
    (2,157
    )
    
    
    6,014Other, net
    
    
    9,501
    
    
    
    4,772
    
    
    
    10,548Net cash provided by operating activities
    
    
    104,011
    
    
    
    127,543
    
    
    
    105,018Cash Flows From Investing ActivitiesCapital expenditures
    
    
    (34,743
    )
    
    
    (23,966
    )
    
    
    (39,265
    )Business acquisitions
    
    
    (61,371
    )
    
    
    
    
    
    
    (1,224
    )Dispositions of assets
    
    
    94
    
    
    
    2,428
    
    
    
    9,116Net cash used by investing activities
    
    
    (96,020
    )
    
    
    (21,538
    )
    
    
    (31,373
    )Cash Flows From Financing ActivitiesBank credit facility borrowings / (payments), net
    
    
    36,823
    
    
    
    23,812
    
    
    
    (76,370
    )Borrowings from issuance of notes
    
    
    
    
    
    
    50,000
    
    
    
    Payments on notes
    
    
    
    
    
    
    (10,715
    )
    
    
    (17,857
    )Payment of convertible subordinated debentures
    
    
    
    
    
    
    (150,000
    )
    
    
    Payments on bonds and leases
    
    
    (580
    )
    
    
    (469
    )
    
    
    (671
    )Early payment premiums on convertible subordinated debentures
    
    
    
    
    
    
    (3,780
    )
    
    
    Cash dividends on common stock
    
    
    (17,006
    )
    
    
    (15,883
    )
    
    
    (11,547
    )Stock options exercised
    
    
    8,449
    
    
    
    2,990
    
    
    
    4,083Treasury stock acquired
    
    
    (38,374
    )
    
    
    (1,541
    )
    
    
    (7,982
    )Excess tax benefits from stock options
    
    
    716
    
    
    
    344
    
    
    
    Net cash used by financing activities
    
    
    (9,972
    )
    
    
    (105,242
    )
    
    
    (110,344
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    18
    
    
    
    8
    
    
    
    28(Decrease)/Increase in cash and cash equivalents
    
    
    (1,963
    )
    
    
    771
    
    
    
    (36,671
    )Cash and cash equivalents at beginning of year
    
    
    5,372
    
    
    
    4,601
    
    
    
    41,272Cash and cash equivalents at end of year
    
    $
    3,409
    
    
    $
    5,372
    
    
    $
    4,601
 See accompanying notes to consolidated financial statements
 29




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
 1) Significant Accounting Policies
 Basis of Presentation
  Principles of Consolidation
 Segments 
 Revenue Recognition
 Cash Equivalents
 Allowance for Doubtful Accounts
 Inventories
 Property, Plant and Equipment
 YearsBuildings and leasehold improvements
    
    
    20-25Machinery and equipment
    
    
    12-16Furniture and fixtures
    
    
    5-10Computer equipment and software
    
    
    3-7
 Goodwill
 30




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
  Other Intangible Assets
 Long-Lived Assets 
 Financial Instruments
   
    
    Cash, accounts receivable, accounts payable, and accrued liabilities  the carrying
value of these instruments approximates fair value due to their short-term nature;
    
    Derivative financial instruments  based upon quoted market prices or market prices for
instruments with similar terms and maturities; and
    
    Long-term debt (including bank credit facilities)  based on quoted, current market
prices for the same or similar issues. As of November 3, 2007, the fair value of other
long-term debt was $334,171 compared to the carrying amount of $334,283.
 Stock-Based Compensation Share-Based Payment
 31




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
 Foreign Currency Translation
 Income Taxes
 Comprehensive Income
 Recently Issued Accounting Standards
 Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109
 Fair Value Measurements
 2) Acquisition
   32




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
 3) Inventories
  2007
    
    
    2006Raw materials
    
    $
    60,218
    
    
    $
    61,872Production supplies
    
    
    9,204
    
    
    
    8,982Finished goods
    
    
    46,654
    
    
    
    51,475$
    116,076
    
    
    $
    122,329
 4) Property, Plant and Equipment
  2007
    
    
    2006Land
    
    $
    11,749
    
    
    $
    11,479Buildings and leasehold improvements
    
    
    106,647
    
    
    
    85,564Machinery and equipment
    
    
    445,888
    
    
    
    414,100Computer equipment and software
    
    
    33,565
    
    
    
    23,700Furniture and fixtures
    
    
    6,978
    
    
    
    7,264604,827
    
    
    
    542,107Accumulated depreciation
    
    
    (280,802
    )
    
    
    (237,328
    )$
    324,025
    
    
    $
    304,779
 5) Goodwill and Identifiable Intangible Assets
  Color andCustom Sheet
    
    
    Packaging
    
    
    Specialty
    
    
    Engineeredand Rollstock
    
    
    Technologies
    
    
    Compounds
    
    
    Products
    
    
    TotalBalance, October 29, 2005
    
    $
    195,359
    
    
    $
    
    
    
    $
    122,927
    
    
    $
    35,272
    
    
    $
    353,558Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,159
    )
    
    
    (3,159
    )Balance, October 28, 2006
    
    
    195,359
    
    
    
    
    
    
    
    122,927
    
    
    
    32,113
    
    
    
    350,399Reclassifications
    
    
    (70,039
    )
    
    
    70,039
    
    
    
    
    
    
    
    
    
    
    
    CFI acquisition
    
    
    
    
    
    
    33,589
    
    
    
    
    
    
    
    
    
    
    
    33,589Balance, November 3, 2007
    
    $
    125,320
    
    
    $
    103,628
    
    
    $
    122,927
    
    
    $
    32,113
    
    
    $
    383,988
   33




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
  Gross
    
    
    AccumulatedCarrying Amount
    
    
    Amortization2007
    
    
    2006
    
    
    2007
    
    
    2006Non-compete agreements
    
    $
    1,768
    
    
    $
    3,694
    
    
    $
    1,146
    
    
    $
    2,667Customer contracts/relationships
    
    
    28,115
    
    
    
    21,612
    
    
    
    6,421
    
    
    
    8,191Product formulations
    
    
    20,324
    
    
    
    18,006
    
    
    
    6,389
    
    
    
    4,772$
    50,207
    
    
    $
    43,312
    
    
    $
    13,956
    
    
    $
    15,630
  IntangibleYear Ended
    
    Amortization2008
    
    $
    5,0842009
    
    
    4,6102010
    
    
    3,8942011
    
    
    3,3892012
    
    
    3,389
   6) Restructuring
 2006 Restructuring Plan
  2007
    
    
    2006
    
    
    CumulativeAccelerated depreciation
    
    $
    501
    
    
    $
    126
    
    
    $
    627Facility restructuring and exit costs
    
    
    561
    
    
    
    75
    
    
    
    636$
    1,062
    
    
    $
    201
    
    
    $
    1,263
  34




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
 2005 Restructuring Plan
  7) Stock-Based Compensation
  General
  2007
    
    
    2006Cost of sales
    
    $
    278
    
    
    $
    273Selling, general and administrative
    
    
    2,606
    
    
    
    2,517Total stock based compensation expense included in operating earnings
    
    
    2,884
    
    
    
    2,790Income taxes
    
    
    796
    
    
    
    655Effect on net earnings
    
    $
    2,088
    
    
    $
    2,135Effect on basic and diluted earnings per share
    
    $
    .07
    
    
    $
    .07
   2005Net Earnings as Reported
    
    $
    18,263Add: Stock-based compensation included in net earnings as reported, net of tax
    
    
    649Deduct: Total stock-based compensation, net of tax
    
    
    (2,535
    )Pro Forma Net Earnings
    
    $
    16,377
 Earnings Per Share
    
    As Reported
    
    Pro FormaBasic
    
    $
    .57
    
    
    $
    .51Diluted
    
    
    .57
    
    
    
    .51
  35




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
  Stock Appreciation Rights (SARS)
   Restricted Stock
   Performance Shares
   Restricted Stock Units
  36




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
 Stock Options
  2006
    
    
    2005Weighted Average Fair Value
    
    $
    7.78
    
    
    $
    7.65Assumptions Used:Expected Dividend Yield
    
    
    2
    %
    
    
    2
    %Expected Volatility
    
    
    40
    %
    
    
    35
    %Risk-Free Interest Rates
    
    
    4.37-4.72
    %
    
    
    3.59-3.79
    %Expected Lives
    
    5.5 Years
    
    
    5.5 Years
  2007
    
    
    2006
    
    
    2005Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average(in 000s)
    
    
    Exercise
    
    
    (in 000s)
    
    
    Exercise
    
    
    (in 000s)
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding, beginning of the year
    
    
    2,287
    
    
    $
    21.43
    
    
    
    2,177
    
    
    $
    21.21
    
    
    
    2,677
    
    
    $
    20.38Granted
    
    
    
    
    
    
    
    
    
    
    368
    
    
    
    21.51
    
    
    
    577
    
    
    
    24.46Exercised
    
    
    (447
    )
    
    $
    19.89
    
    
    
    (181
    )
    
    
    17.05
    
    
    
    (280
    )
    
    
    15.80Forfeited
    
    
    (324
    )
    
    $
    21.19
    
    
    
    (77
    )
    
    
    22.29
    
    
    
    (797
    )
    
    
    22.70Outstanding, end of year
    
    
    1,516
    
    
    $
    21.83
    
    
    
    2,287
    
    
    $
    21.43
    
    
    
    2,177
    
    
    $
    21.21Exercisable, end of year
    
    
    1,143
    
    
    $
    21.34
    
    
    
    1,417
    
    
    $
    20.89
    
    
    
    1,313
    
    
    $
    20.37
  Weighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    Remaining
    
    
    
    
    
    AverageOutstanding
    
    Exercise
    
    Contractual
    
    Exercisable
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    Price
    
    Life
    
    Shares
    
    Price$10.88 - 17.01
    
    
    155
    
    
    $
    11.78
    
    
    3.1 years
    
    
    155
    
    
    $
    11.78$18.00 - 21.00
    
    
    179
    
    
    
    18.41
    
    
    4.5 years
    
    
    179
    
    
    
    18.41$21.10 - 21.99
    
    
    616
    
    
    
    21.42
    
    
    5.9 years
    
    
    422
    
    
    
    21.45$22.34 - 28.94
    
    
    566
    
    
    
    26.12
    
    
    5.6 years
    
    
    387
    
    
    
    26.421,516
    
    
    
    
    
    
    
    
    
    
    
    1,143
  2007
    
    2006
    
    2005Stock Options ExercisedIntrinsic value
    
    $
    3,281
    
    
    $
    1,070
    
    
    $
    1,423Cash received
    
    
    8,449
    
    
    
    2,990
    
    
    
    4,083Actual tax benefit realized
    
    
    856
    
    
    
    346
    
    
    
    349
 37




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
   8) Former Chief Executive Officers Arrangements
 George A. Abd
   
    
    Severance compensation in accordance with the terms of the Corporations Severance and
Noncompetition Policy and Agreement with Mr. Abd which is based on a multiple of his former
annual salary and the average of his bonus payments earned during the prior three fiscal
years, totaling $2,224. Of this amount, $556 will be paid in April 2008 and the remaining
$1,668 will be paid in equal monthly installments over the following 18 months with the
last payment occurring in October 2009.
    
    Compensation of $62 for the period between the Effective Date through the Termination
Date at a rate of one-third of Mr. Abds former annual salary.
    
    In accordance with the terms of the applicable stock option plans and agreements,
168,687 vested stock options were exercisable until the Termination Date, and an additional
32,250 vested stock options will expire within three years of the Termination Date and will
remain exercisable until their stated expiration dates. All stock-based compensation
awards that were not vested as of the Termination Date were forfeited. As a result, $368
of stock-based compensation expense was reversed as income during 2007 for awards that were
previously expected to vest, but were forfeited.
  Bradley B. Buechler
   -
    
    A cash settlement paid June 3, 2005, based upon a multiple of Mr. Buechlers former
annual salary plus his previous deferred compensation arrangement, totaling $2,711.-
    
    A bonus to be paid based on the Companys 2005 results pro-rated for Mr. Buechlers
employment through the effective date of the Retirement Agreement.
 38




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##### Table of Contents



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
  ̄
    
    An amendment to the terms of Mr. Buechlers vested stock options to permit him to
retire before having reached the minimum retirement age of 60 specified in his option
agreements, resulting in a new measurement of the options for accounting purposes and a
non-cash expense of $831.
  9) Long-Term Debt and Convertible Subordinated Debentures
 Long-Term Debt
  2007
    
    
    20065.78% Senior Unsecured 2006 Notes
    
    $
    50,000
    
    
    $
    50,0005.54% Senior Unsecured 2004 Notes
    
    
    150,000
    
    
    
    150,0007.0% Senior Unsecured 1997 Notes
    
    
    
    
    
    
    6,429Bank Credit Facilities
    
    
    91,400
    
    
    
    48,000Bank Term Loan
    
    
    28,822
    
    
    
    25,408Other
    
    
    14,061
    
    
    
    9,386334,283
    
    
    
    289,223Less current maturities
    
    
    448
    
    
    
    6,898$
    333,835
    
    
    $
    282,325
      39




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##### Table of Contents



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
   Year Ended
    
    Maturities2008
    
    $
    4482009
    
    
    4892010
    
    
    29,3252011
    
    
    141,9232012
    
    
    30,559Thereafter
    
    
    131,539$
    334,283
  Convertible Subordinated Debentures
  10) Shareholders Equity
   40




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##### Table of Contents



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
 11) Income Taxes
  2007
    
    
    2006
    
    
    2005United States
    
    $
    51,605
    
    
    $
    56,254
    
    
    $
    31,769Non-U.S. operations
    
    
    3,205
    
    
    
    8,684
    
    
    
    905$
    54,810
    
    
    $
    64,938
    
    
    $
    32,674
  2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    14,390
    
    
    $
    16,294
    
    
    $
    9,474State and Local
    
    
    2,119
    
    
    
    1,978
    
    
    
    611Foreign
    
    
    2,399
    
    
    
    4,810
    
    
    
    2,482Total Current
    
    
    18,908
    
    
    
    23,082
    
    
    
    12,567Deferred:Federal
    
    
    1,371
    
    
    
    4,039
    
    
    
    3,084State and Local
    
    
    167
    
    
    
    594
    
    
    
    367Foreign
    
    
    518
    
    
    
    (1,575
    )
    
    
    (1,607
    )Total Deferred
    
    
    2,056
    
    
    
    3,058
    
    
    
    1,844Provision for Income Taxes
    
    $
    20,964
    
    
    $
    26,140
    
    
    $
    14,411
  2007
    
    
    2006
    
    
    2005Federal income taxes at statutory rate
    
    $
    19,184
    
    
    $
    22,728
    
    
    $
    11,436State income taxes, net of applicable Federal income tax benefit
    
    
    1,485
    
    
    
    1,672
    
    
    
    636Impairment of goodwill
    
    
    
    
    
    
    1,106
    
    
    
    1,454Foreign valuation allowance
    
    
    944
    
    
    
    541
    
    
    
    1,133Expensing of stock options
    
    
    260
    
    
    
    380
    
    
    
    Manufacturing deduction
    
    
    (477
    )
    
    
    (468
    )
    
    
    Research and development tax credit
    
    
    (989
    )
    
    
    (74
    )
    
    
    (524
    )Other
    
    
    557
    
    
    
    255
    
    
    
    276$
    20,964
    
    
    $
    26,140
    
    
    $
    14,411
  41




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##### Table of Contents



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
  2007
    
    
    2006Deferred tax assets:Employee benefits and compensation
    
    $
    3,956
    
    
    $
    2,771Workers compensation
    
    
    1,368
    
    
    
    1,635Inventory capitalization and reserves
    
    
    1,525
    
    
    
    1,427Reserve for product returns
    
    
    782
    
    
    
    832Deferred compensation benefit plans
    
    
    978
    
    
    
    769Bad debt reserves
    
    
    624
    
    
    
    564Foreign net operating loss
    
    
    3,072
    
    
    
    2,460Valuation allowance
    
    
    (2,587
    )
    
    
    (1,566
    )Other
    
    
    930
    
    
    
    673Total deferred tax assets
    
    $
    10,648
    
    
    $
    9,565Deferred tax liabilities:Property, plant and equipment
    
    $
    (59,008
    )
    
    $
    (54,250
    )Goodwill and other intangibles
    
    
    (53,393
    )
    
    
    (43,519
    )Inventory capitalization and reserves
    
    
    (1,189
    )
    
    
    (1,298
    )Other
    
    
    (801
    )
    
    
    (725
    )Total deferred tax liabilities
    
    $
    (114,391
    )
    
    $
    (99,792
    )Net deferred income tax liability
    
    $
    (103,743
    )
    
    $
    (90,227
    )
    12) Earnings Per Share
  42




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##### Table of Contents



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
  2007
    
    
    2006
    
    
    2005Earnings
    
    
    Shares
    
    
    Earnings
    
    
    Shares
    
    
    Earnings
    
    
    SharesBasic Earnings Per Share Computation
    
    $
    33,846
    
    
    
    31,966
    
    
    $
    38,798
    
    
    
    32,092
    
    
    $
    18,263
    
    
    
    32,074Dilutive shares
    
    
    
    
    
    
    214
    
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    237Diluted Earnings Per Share Computation
    
    $
    33,846
    
    
    
    32,180
    
    
    $
    38,798
    
    
    
    32,297
    
    
    $
    18,263
    
    
    
    32,311
  13) Employee Benefits
  14) Cash Flow and Other Information
  2007
    
    
    2006
    
    
    2005Cash paid during the year for:Interest
    
    $
    16,586
    
    
    $
    19,801
    
    
    $
    26,328Income taxes
    
    
    21,838
    
    
    
    23,809
    
    
    
    8,182Schedule of business and outsourcing acquisitions:Fair value of assets acquired
    
    $
    78,033
    
    
    $
    
    
    
    $
    Liabilities assumed
    
    
    16,662
    
    
    
    
    
    
    
    Purchase price adjustments
    
    
    
    
    
    
    
    
    
    
    1,224Total cash paid
    
    $
    61,371
    
    
    $
    
    
    
    $
    1,224
 15) Commitments and Contingencies
  OperatingYear ended
    
    Leases2008
    
    $
    7,0712009
    
    
    5,0412010
    
    
    2,6682011
    
    
    1,2752012
    
    
    208Thereafter
    
    
    28$
    16,291
  43




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##### Table of Contents



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
   16) Segment Information
   Custom Sheet and Rollstock
 Packaging Technologies
 Color and Specialty Compounds
 Engineered Products
 44




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##### Table of Contents



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
  2007
    
    
    2006
    
    
    2005Net Sales:Custom Sheet and Rollstock
    
    $
    674,751
    
    
    $
    709,098
    
    
    $
    657,343Packaging Technologies
    
    
    253,718
    
    
    
    233,959
    
    
    
    226,969Color and Specialty Compounds
    
    
    446,804
    
    
    
    462,987
    
    
    
    430,893Engineered Products
    
    
    76,710
    
    
    
    79,553
    
    
    
    81,655$
    1,451,983
    
    
    $
    1,485,597
    
    
    $
    1,396,860Operating Earnings:Custom Sheet and Rollstock
    
    $
    40,949
    
    
    $
    50,496
    
    
    $
    38,406Packaging Technologies
    
    
    24,956
    
    
    
    24,941
    
    
    
    26,723Color and Specialty Compounds
    
    
    19,405
    
    
    
    27,032
    
    
    
    15,295Engineered Products
    
    
    11,150
    
    
    
    4,475
    
    
    
    (3,492
    )Corporate
    
    
    (24,021
    )
    
    
    (15,520
    )
    
    
    (19,063
    )$
    72,439
    
    
    $
    91,424
    
    
    $
    57,869Assets:Custom Sheet and Rollstock
    
    $
    396,474
    
    
    $
    396,959
    
    
    $
    413,640Packaging Technologies
    
    
    239,377
    
    
    
    161,187
    
    
    
    162,554Color and Specialty Compounds
    
    
    362,651
    
    
    
    374,754
    
    
    
    399,311Engineered Products
    
    
    72,212
    
    
    
    73,583
    
    
    
    83,918Corporate
    
    
    40,157
    
    
    
    35,311
    
    
    
    16,125$
    1,110,871
    
    
    $
    1,041,794
    
    
    $
    1,075,548Depreciation and Amortization:Custom Sheet and Rollstock
    
    $
    14,993
    
    
    $
    14,634
    
    
    $
    14,951Packaging Technologies
    
    
    5,780
    
    
    
    5,416
    
    
    
    4,966Color and Specialty Compounds
    
    
    14,677
    
    
    
    14,410
    
    
    
    14,004Engineered Products
    
    
    3,333
    
    
    
    3,317
    
    
    
    3,391Corporate
    
    
    4,286
    
    
    
    2,921
    
    
    
    2,068$
    43,069
    
    
    $
    40,698
    
    
    $
    39,380Capital Expenditures:Custom Sheet and Rollstock
    
    $
    14,594
    
    
    $
    8,398
    
    
    $
    9,179Packaging Technologies
    
    
    4,048
    
    
    
    3,249
    
    
    
    6,679Color and Specialty Compounds
    
    
    4,514
    
    
    
    5,525
    
    
    
    12,353Engineered Products
    
    
    1,692
    
    
    
    1,634
    
    
    
    5,483Corporate
    
    
    9,895
    
    
    
    5,160
    
    
    
    5,571$
    34,743
    
    
    $
    23,966
    
    
    $
    39,265
   Net Sales By Destination
    
    
    Property, Plant and Equipment, Net2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005United States
    
    $
    1,203,204
    
    
    $
    1,234,160
    
    
    $
    1,145,643
    
    
    $
    272,506
    
    
    $
    258,394
    
    
    $
    261,582Canada
    
    
    92,121
    
    
    
    104,216
    
    
    
    116,197
    
    
    
    20,731
    
    
    
    19,179
    
    
    
    19,780Mexico
    
    
    98,708
    
    
    
    86,084
    
    
    
    70,605
    
    
    
    18,537
    
    
    
    15,489
    
    
    
    13,749Europe
    
    
    45,792
    
    
    
    49,560
    
    
    
    50,026
    
    
    
    12,251
    
    
    
    11,717
    
    
    
    12,275Asia and Other
    
    
    12,158
    
    
    
    11,577
    
    
    
    14,389
    
    
    
    
    
    
    
    
    
    
    
    $
    1,451,983
    
    
    $
    1,485,597
    
    
    $
    1,396,860
    
    
    $
    324,025
    
    
    $
    304,779
    
    
    $
    307,386
 45




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##### Table of Contents



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED
(Dollars in thousands, except per share amounts)
 17) Quarterly Financial Information
  Quarter1st
    
    
    2nd
    
    
    3rd
    
    
    4th
    
    
    Year2007 (a)Net Sales
    
    $
    347,254
    
    
    $
    377,368
    
    
    $
    361,123
    
    
    $
    366,238
    
    
    $
    1,451,983Gross Profit (b)
    
    
    38,025
    
    
    
    49,555
    
    
    
    39,908
    
    
    
    30,043
    
    
    
    157,531Operating Earnings (c)
    
    
    17,428
    
    
    
    29,553
    
    
    
    18,439
    
    
    
    7,019
    
    
    
    72,439Net Earnings (c)
    
    
    8,065
    
    
    
    15,710
    
    
    
    8,806
    
    
    
    1,265
    
    
    
    33,846Net Earnings Per Share  Basic
    
    
    .25
    
    
    
    .49
    
    
    
    .27
    
    
    
    .04
    
    
    
    1.06 Diluted
    
    
    .25
    
    
    
    .49
    
    
    
    .27
    
    
    
    .04
    
    
    
    1.05Dividends declared per common share
    
    
    .135
    
    
    
    .135
    
    
    
    .135
    
    
    
    .135
    
    
    
    .542006Net Sales
    
    $
    343,591
    
    
    $
    389,278
    
    
    $
    377,709
    
    
    $
    375,019
    
    
    $
    1,485,597Gross Profit (b)
    
    
    33,067
    
    
    
    46,947
    
    
    
    47,252
    
    
    
    44,553
    
    
    
    171,819Operating Earnings (d)
    
    
    14,871
    
    
    
    28,047
    
    
    
    27,591
    
    
    
    20,915
    
    
    
    91,424Net Earnings (d)
    
    
    5,656
    
    
    
    13,909
    
    
    
    10,614
    
    
    
    8,619
    
    
    
    38,798Net Earnings Per Share  Basic
    
    
    .18
    
    
    
    .43
    
    
    
    .33
    
    
    
    .27
    
    
    
    1.21 Diluted
    
    
    .18
    
    
    
    .42
    
    
    
    .33
    
    
    
    .27
    
    
    
    1.20Dividends declared per common share
    
    
    .125
    
    
    
    .125
    
    
    
    .125
    
    
    
    .125
    
    
    
    .50
 Notes to table:(a)
    
    As discussed in Note 1, 2007 was reported as a 53-week fiscal year containing 371 days of
activity. The additional week was reported in the first quarter ended February 3, 2007.(b)
    
    Gross profit is calculated as net sales less cost of sales and amortization expense.(c)
    
    Operating earnings in the
3rd
quarter of 2007 were impacted by a charge of $1,856
($1,147 net of tax) related to a separation agreement with our former CEO. Operating earnings
in the 4th quarter of 2007 were impacted by a charge of $1,550 ($960 net of tax)
related to an intangible asset impairment, $2,057 ($1,275 net of tax)
related to an inventory error identified
by a new system implementation and $1,268 ($1,268 net of tax) related to a change in estimate
of inventory valuation reserves due to managements decision to liquidate certain scrap
inventory.(d)
    
    Operating earnings and net earnings in the 4th Quarter of 2006 were impacted by a
$3,159 impairment of goodwill and net earnings were impacted by a $3,411 charge related to
early debt extinguishment costs. 46




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##### Table of Contents



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 Item 9A. CONTROLS AND PROCEDURES
  a)
    
    ensure that information required to be disclosed in the reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within time
periods specified in Securities and Exchange Commission rules and forms; andb)
    
    ensure that information is accumulated and communicated to the Companys management, including
the Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosures.
    
 Item 9B. OTHER INFORMATION
  47




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##### Table of Contents



PART III
 
 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
      Executive Officers of the Registrant
  Name
    
    Age
    
    Current Office, and Prior Positions and EmploymentRandy C. Martin
    
    
    45
    
    
    Interim President and Chief Executive Officer
(since July 2007), Executive Vice President
(since September 2000) Corporate Development
(since May 2004) and Chief Financial Officer
(since May 1996); Corporate Controller from
September 1995 to May 1996; Vice President,
Finance from May 1996 to September 2000. Mr.
Martin, a CPA and CMA, was with KPMG Peat Marwick
LLP for eleven years before joining the Company
in 1995.Steven J. Ploeger
    
    
    46
    
    
    Executive Vice President Custom Sheet and
Rollstock and Engineered Products (since May
2004); Vice President Spartech Plastics from 2000
to 2004; General Manager Spartech Plastics 
North Region from 1996 to 2000. Mr. Ploeger also
held various sales management positions with the
Company from 1985 to 1996.Michael L. Marcum
    
    
    59
    
    
    Senior Vice President Color and Specialty
Compounds and Marketing and International
Business Development (since April 2006). Mr.
Marcum was most recently President & Chief
Executive Officer of American Decorative Surfaces
Inc. from 2001 to 2006, and with Monsanto Company
for 29 years in various general management,
corporate strategic planning, and sales &
marketing executive positions, both domestically
as well as internationally, before joining the
Company in 2006Jeffrey D. Fisher
    
    
    59
    
    
    Senior Vice President and General Counsel (since
July 1999), and Secretary (since September 2000).
Mr. Fisher, an attorney, was with the law firm
of Armstrong Teasdale LLP for 24 years, the last
17 years as a partner, before joining the Company
in July 1999.
 48




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##### Table of Contents



Name
    
    Age
    
    Current Office, and Prior Positions and EmploymentDarrell W. Betz
    
    
    44
    
    
    Senior Vice President of Human Resources (since
April 2005). Mr. Betz was with Emerson Electric
for 16 years in various human resource positions
prior to joining the Company in April 2005.Michael G. Marcely
    
    
    40
    
    
    Vice President (since December 2004), Corporate
Controller (since July 2004) and Assistant
Secretary (since June 2005), Director of Internal
Audit (January 2003 to July 2004). Mr. Marcely,
a CPA, was with Ernst & Young LLP for four years,
Emerson Electric for four years and KPMG LLP for
six years before joining the Company in 2003.Phillip M. Karig
    
    
    52
    
    
    Vice President-Purchasing and Supply Chain
Management (since September 2001), Director of
Purchasing from February 2000 to September 2001.
Mr. Karig was with Uniroyal Technology
Corporation for 12 years in various purchasing,
logistics, and materials management positions
before joining the Company in February 2000.
 
 Item 11. EXECUTIVE COMPENSATION
  
 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
  
 Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  49




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##### Table of Contents



PART IV
 
 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
   Managements Report on Internal Control over Financial Reporting
    
    
    23Reports of Independent Registered Public Accounting Firm
    
    
    24Financial StatementsConsolidated Balance Sheets
    
    
    26Consolidated Statements of Operations
    
    
    27Consolidated Statements of Shareholders Equity
    
    
    28Consolidated Statements of Cash Flows
    
    
    29Notes to Consolidated Financial Statements
    
    
    30Schedule II  Valuation and Qualifying Accounts
    
    
    F-1
 (c) Exhibits
  ExhibitNumber
    
    Description
    
    Location3.1
    
    Certificate of Incorporation, as
currently in effect
    
    Incorporated by
reference to Exhibit 3.1
to the Companys Form
10-Q filed with the
Commission on June 8,
20063.2
    
    By-Laws, as currently in effect
    
    Incorporated by
reference to Exhibit
5.03 to the Companys
Form 8-K filed with the
Commission on December
20, 20074
    
    Rights Agreement dated April 2,
2001 between Spartech Corporation
and Mellon Investor Services LLC,
as Rights Agent
    
    Incorporated by
reference to Exhibit
99.1 to the Companys
Form 8-K filed with the
Commission on April 5,
200110.1
    
    Note Purchase Agreement dated June
5, 2006 between the company and
purchasers of $50 million of the
companys 5.78% Senior Notes
    
    Incorporated by
reference to Exhibit
10.1 to the Companys
Form 8-K filed with the
Commission on June 8,
200610.2
    
    Separation Agreement and Release
dated July 16, 2007 between the
Company and George A. Abd
    
    Incorporated by
reference to Exhibit
1.01 of the Companys
Form 8-K filed with the
Commission on July 16,
200710.3
    
    Form of Indemnification Agreement
entered into between the Company
and each of its officers and
directors
    
    Incorporated by
reference to Exhibit
10.10 to the Companys
Form 10-K filed with the
Commission on January
17, 200310.4
    
    Spartech Corporation 2006 Executive
Bonus Plan
    
    Incorporated by
reference to Exhibit
1.01(a) to the Companys
Form 8-K filed with the
Commission on December
21, 200510.5
    
    Spartech Corporation Deferred
Compensation Plan, as amended
    
    Incorporated by
reference to Exhibit
5.02 to the Companys
Form 8-K filed with the
Commission on December
20, 200710.6
    
    Spartech Corporation 2004 Equity
Compensation Plan, as amended
    
    Incorporated by
reference to Exhibit
5.02(2) to the Companys
Form 8-K filed with the
Commission on December
7, 2006
 50




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##### Table of Contents



ExhibitNumber
    
    Description
    
    Location10.7
    
    Spartech Corporation Long-Term
Equity Incentive Program
    
    Incorporated by
reference to Exhibit
5.02(1) to the Companys
Form 8-K filed with the
Commission on December
7, 200610.8
    
    Form of Incentive Stock Option
    
    Incorporated by
reference to Exhibit
1.01(2) to the Companys
Form 8-K filed with the
Commission on December
14, 200410.9
    
    Form of Nonqualified Stock Option
    
    Incorporated by
reference to1.01(3) to
the Companys Form 8-K
filed with the
Commission on December
14, 200410.10
    
    Form of Restricted Stock Unit Award
(directors)
    
    Incorporated by
reference to Exhibit
1.01(4) to the Companys
Form 8-K filed with the
Commission on December
14, 200410.11
    
    Form of Restricted Stock Award
(directors)
    
    Incorporated by
reference to Exhibit
10.7 to the Companys
Form 10-Q filed with the
Commission on March 12,
200710.12
    
    Form of Restricted Stock Award
    
    Incorporated by
reference to Exhibit
5.02(1) to the Companys
Form 8-K filed with the
Commission on December
21, 200610.13
    
    Form of Stock-Settled Stock
Appreciation Right Award
    
    Incorporated by
reference to Exhibit
5.02(2) to the Companys
Form 8-K filed with the
Commission on December
21, 200610.14
    
    Form of Performance Share Award
    
    Incorporated by
reference to Exhibit
5.02(1) to the Companys
Form 8-K filed with the
Commission on November
21, 200710.15
    
    Performance Share Award Performance
Criteria for 2007-2009 Performance
Period
    
    Incorporated by
reference to Exhibit
5.02(4) to the Companys
Form 8-K filed with the
Commission on December
21, 200610.16
    
    Performance Share Award Performance
Criteria for 2008-2010 Performance
Period
    
    Incorporated by
reference to Exhibit
5.02(1) to the Companys
Form 8-K filed with the
Commission on November
21, 200718
    
    Letter re change in accounting
principle
    
    Incorporated by
reference to Exhibit 18
to the Companys Form
10-Q filed with the
Commission on June 8,
200621
    
    Subsidiaries of Registrant
    
    Filed herewith23.1
    
    Consent of Independent Registered
Public Accounting Firm
    
    Filed herewith31.1
    
    Section 302 Certification of Chief
Executive Officer
    
    Filed herewith31.2
    
    Section 302 Certification of Chief
Financial Officer
    
    Filed herewith32.1
    
    Section 1350 Certification of Chief
Executive Officer
    
    Filed herewith32.2
    
    Section 1350 Certification of Chief
Financial Officer
    
    Filed herewith
 51




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##### Table of Contents



SIGNATURES
  SPARTECH CORPORATION/s/ Randy C. MartinRandy C. MartinDecember 19, 2007
    President, Chief Executive Officer and Chief Financial Officer  Date
    
    Signature
    
    TitleDecember 19, 2007
    
    /s/ Randy C. Martin

Randy C. Martin
    
    President, Chief
Executive Officer and
Chief Financial Officer
(Principal Executive
and Financial Officer)December 19, 2007
    
    /s/ Michael G. Marcely

Michael G. Marcely
    
    Vice President and
Corporate Controller
(Principal Accounting
Officer)December 19, 2007

    
    /s/ Ralph B. Andy

Ralph B. Andy
    
    DirectorDecember 19, 2007

    
    /s/ Lloyd E. Campbell

Lloyd E. Campbell
    
    DirectorDecember 19, 2007

    
    /s/ Edward J. Dineen

Edward J. Dineen
    
    DirectorDecember 19, 2007

    
    /s/ Victoria M. Holt

Victoria M. Holt
    
    DirectorDecember 19, 2007

    
    /s/ Walter J. Klein

Walter J. Klein
    
    DirectorDecember 19, 2007

    
    /s/ Pamela F. Lenehan

Pamela F. Lenehan
    
    DirectorDecember 19, 2007

    
    /s/ Jackson W. Robinson

Jackson W. Robinson
    
    DirectorCraig A. Wolfanger
    
    Director
 52




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##### Table of Contents



SPARTECH CORPORATION AND SUBSIDIARIES
 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED 2007, 2006, AND 2005
(Dollars in thousands)
 ADDITIONS ANDBALANCE AT
    
    CHARGES TOBEGINNING OF
    
    COSTS AND
    
    
    
    
    
    BALANCE ATDESCRIPTION
    
    PERIOD
    
    EXPENSES
    
    WRITE-OFFS
    
    END OF PERIODNovember 3, 2007Allowance for
Doubtful Accounts
    
    $
    1,514
    
    
    $
    2,099
    
    
    $
    (2,041
    )
    
    $
    1,572October 28, 2006Allowance for
Doubtful Accounts
    
    $
    2,557
    
    
    $
    2,330
    
    
    $
    (3,373
    )
    
    $
    1,514October 29, 2005Allowance for
Doubtful Accounts
    
    $
    2,997
    
    
    $
    1,705
    
    
    $
    (2,145
    )
    
    $
    2,557
 F-1