##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 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, 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)
 
 Delaware(State or other jurisdiction 
of incorporation or organization)
    
    43-0761773(I.R.S. Employer
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
  þ o o
 o þ
  Common stock, $.75 par value per share
    
    
    32,136,127




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##### 



SPARTECH CORPORATION
FORM 10-Q FOR THE QUARTER ENDED AUGUST 4, 2007
TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Condensed Balance Sheets  As of: August 4, 2007 and October 28, 2006
    
    
    1Consolidated Condensed Statements of Operations  For the
three and nine months ended August 4, 2007 and July 29, 2006
    
    
    2Consolidated Condensed Statements of Cash Flows  For the nine
months ended August 4, 2007 and July 29, 2006
    
    
    3Notes To Consolidated Condensed Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    8Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15PART II OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 6. Exhibits
    
    
    16Signatures
    
    
    17Certifications
    
    
    18Section 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Financial OfficerSection 1350 Certification of Chief Executive OfficerSection 1350 Certification of Chief Financial Officer




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 SPARTECH CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
  August 4, 2007
    
    
    October 28,(Unaudited)
    
    
    2006AssetsCurrent assetsCash and cash equivalents
    
    $
    3,389
    
    
    $
    5,372Receivables, net
    
    
    201,706
    
    
    
    200,728Inventories
    
    
    125,814
    
    
    
    122,329Prepaids and other
    
    
    15,151
    
    
    
    14,193Total current assets
    
    
    346,060
    
    
    
    342,622Property, plant and equipment, net
    
    
    303,618
    
    
    
    304,779Goodwill
    
    
    350,399
    
    
    
    350,399Other intangible assets, net
    
    
    33,510
    
    
    
    36,582Other assets
    
    
    8,180
    
    
    
    7,412Total assets
    
    $
    1,041,767
    
    
    $
    1,041,794Liabilities and Shareholders EquityCurrent liabilitiesCurrent maturities of long-term debt
    
    $
    6,871
    
    
    $
    6,898Accounts payable
    
    
    154,414
    
    
    
    149,520Accrued liabilities
    
    
    45,676
    
    
    
    51,186Total current liabilities
    
    
    206,961
    
    
    
    207,604Long-term debt, less current maturities
    
    
    261,838
    
    
    
    282,325Deferred taxes
    
    
    99,958
    
    
    
    97,681Other long-term liabilities
    
    
    8,917
    
    
    
    11,491Total long-term liabilities
    
    
    370,713
    
    
    
    391,497Shareholders equityCommon stock, 33,131,846 shares issued in 2007 and 2006
    
    
    24,849
    
    
    
    24,849Contributed capital
    
    
    200,661
    
    
    
    198,661Retained earnings
    
    
    259,987
    
    
    
    240,398Treasury stock, at cost, 995,719 shares in 2007; 1,007,766 shares in 2006
    
    
    (25,282
    )
    
    
    (22,845
    )Accumulated other comprehensive income
    
    
    3,878
    
    
    
    1,630Total shareholders equity
    
    
    464,093
    
    
    
    442,693Total liabilities and shareholders equity
    
    $
    1,041,767
    
    
    $
    1,041,794
 See accompanying notes to consolidated condensed financial statements.
 1




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SPARTECH CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    361,123
    
    
    $
    377,709
    
    
    $
    1,085,745
    
    
    $
    1,110,578Cost and expensesCost of sales
    
    
    320,389
    
    
    
    329,617
    
    
    
    955,549
    
    
    
    981,059Selling, general and administrative
    
    
    21,232
    
    
    
    19,309
    
    
    
    61,441
    
    
    
    55,443Amortization of intangibles
    
    
    1,063
    
    
    
    1,192
    
    
    
    3,335
    
    
    
    3,567342,684
    
    
    
    350,118
    
    
    
    1,020,325
    
    
    
    1,040,069Operating earnings
    
    
    18,439
    
    
    
    27,591
    
    
    
    65,420
    
    
    
    70,509Interest (net of interest income
of $152, $247, $382 and $528,
respectively)
    
    
    4,065
    
    
    
    5,039
    
    
    
    13,119
    
    
    
    16,382Early debt extinguishment costs
    
    
    
    
    
    
    5,505
    
    
    
    
    
    
    
    5,5054,065
    
    
    
    10,544
    
    
    
    13,119
    
    
    
    21,887Earnings before income taxes
    
    
    14,374
    
    
    
    17,047
    
    
    
    52,301
    
    
    
    48,622Income taxes
    
    
    5,568
    
    
    
    6,433
    
    
    
    19,720
    
    
    
    18,443Net earnings
    
    $
    8,806
    
    
    $
    10,614
    
    
    $
    32,581
    
    
    $
    30,179Net earnings per common shareBasic
    
    $
    .27
    
    
    $
    .33
    
    
    $
    1.02
    
    
    $
    .94Diluted
    
    $
    .27
    
    
    $
    .33
    
    
    $
    1.01
    
    
    $
    .94Dividends declared per common share
    
    $
    .135
    
    
    $
    .125
    
    
    $
    .405
    
    
    $
    .375
 See accompanying notes to consolidated condensed financial statements.
 2




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SPARTECH CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
  Nine Months EndedAugust 4,
    
    
    July 29,2007
    
    
    2006Cash flows from operating activitiesNet earnings
    
    $
    32,581
    
    
    $
    30,179Adjustments to reconcile net earnings to net cash provided by (used
for) operating activities:Depreciation and amortization
    
    
    31,787
    
    
    
    30,429Restructuring and exit costs
    
    
    559
    
    
    
    30Stock compensation expense
    
    
    2,272
    
    
    
    2,165Early debt extinguishment costs
    
    
    
    
    
    
    5,505Other, net
    
    
    5,462
    
    
    
    4,949Change in current assets and liabilities
    
    
    (2,949
    )
    
    
    15,407Net cash provided by operating activities
    
    
    69,712
    
    
    
    88,664Cash flows from investing activitiesCapital expenditures
    
    
    (28,774
    )
    
    
    (14,385
    )Sale of assets
    
    
    81
    
    
    
    2,393Net cash used for investing activities
    
    
    (28,693
    )
    
    
    (11,992
    )Cash flows from financing activitiesNet (payments) / borrowings on notes and revolving credit facilities
    
    
    (27,211
    )
    
    
    39,922Issuance of senior notes
    
    
    
    
    
    
    50,000Payment of convertible subordinated debentures
    
    
    
    
    
    
    (150,000
    )Payments on bonds and leases
    
    
    (504
    )
    
    
    (421
    )Early payment premiums on convertible subordinated debentures
    
    
    
    
    
    
    (3,780
    )Cash dividends on common stock
    
    
    (12,668
    )
    
    
    (11,873
    )Stock options exercised
    
    
    6,959
    
    
    
    2,202Treasury stock acquired
    
    
    (10,413
    )
    
    
    (1,541
    )Excess tax benefits from stock based compensation
    
    
    752
    
    
    
    237Net cash used for financing activities
    
    
    (43,085
    )
    
    
    (75,254
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    83
    
    
    
    38(Decrease) increase in cash and cash equivalents
    
    
    (1,983
    )
    
    
    1,456Cash and cash equivalents at beginning of year
    
    
    5,372
    
    
    
    4,601Cash and cash equivalents at end of quarter
    
    $
    3,389
    
    
    $
    6,057
 See accompanying notes to consolidated condensed financial statements.
 3




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SPARTECH CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 (Unaudited and dollars in thousands, except per share amounts)
 1) Basis of Presentation
   2) Former President and Chief Executive Officer Separation Agreement
   
    
    Severance compensation in accordance with the terms of the Corporations Severance and
Noncompetition Policy and Agreement with Mr. Abd which is based upon 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 for the period between the Effective Date through the Termination Date at a
rate of one-third of Mr. Abds former annual salary. This amount will total $62 for the 90
day period and will be recognized as incurred.
    
    A performance bonus for the current fiscal year, if any, as determined by the Board of
Directors at the end of the fiscal year.
    
    In accordance with the terms of the applicable stock option plans and agreements,
168,687 vested stock options will be exercisable until the Termination Date, and an
additional 32,250 vested stock options expiring within three years of the Termination Date
will remain exercisable until their stated expiration dates. All stock-based compensation
awards that are not vested as of the Termination Date will be forfeited. As a result, $368
of stock-based compensation expense was reversed as income during the third quarter for
awards that were previously expected to vest, but will be forfeited as of the Termination
Date.
  4




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SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
 3) Inventories
  2007
    
    
    2006Raw materials
    
    $
    64,169
    
    
    $
    61,872Production supplies
    
    
    8,679
    
    
    
    8,982Finished goods
    
    
    52,966
    
    
    
    51,475$
    125,814
    
    
    $
    122,329
 4) Stock-Based Compensation
  Three Months Ended
    
    
    Nine Months EndedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of sales
    
    $
    67
    
    
    $
    72
    
    
    $
    202
    
    
    $
    201Selling, general and administrative
    
    
    249
    
    
    
    538
    
    
    
    2,070
    
    
    
    1,964Total stock-based
compensation expense
included in operating
earnings
    
    
    316
    
    
    
    610
    
    
    
    2,272
    
    
    
    2,165Income taxes
    
    
    48
    
    
    
    137
    
    
    
    637
    
    
    
    518Effect on net earnings
    
    $
    268
    
    
    $
    473
    
    
    $
    1,635
    
    
    $
    1,647Effect on basic and diluted
earnings per share
    
    $
    .01
    
    
    $
    .01
    
    
    $
    .05
    
    
    $
    .05
 5) Restructuring
  2006 Restructuring Plan
  Nine MonthsEnded
    
    
    Cumulative2006
    
    
    August 4, 2007
    
    
    to DateAccelerated depreciation
    
    $
    126
    
    
    $
    365
    
    
    $
    491Facility restructuring and exit costs
    
    
    75
    
    
    
    144
    
    
    
    219Total
    
    $
    201
    
    
    $
    509
    
    
    $
    710
  5




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SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
  2005 Restructuring Plan
  6) Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006Net earnings:Basic and diluted net earnings
    
    $
    8,806
    
    
    $
    10,614
    
    
    $
    32,581
    
    
    $
    30,179Weighted average shares outstanding:Basic weighted average common shares outstanding
    
    
    32,108
    
    
    
    32,109
    
    
    
    32,065
    
    
    
    32,081Add: Dilutive shares from equity instruments
    
    
    255
    
    
    
    179
    
    
    
    300
    
    
    
    182Diluted weighted average shares outstanding
    
    
    32,363
    
    
    
    32,288
    
    
    
    32,365
    
    
    
    32,263Net earnings per share:Basic
    
    $
    .27
    
    
    $
    .33
    
    
    $
    1.02
    
    
    $
    .94Diluted
    
    $
    .27
    
    
    $
    .33
    
    
    $
    1.01
    
    
    $
    .94
 7) Commitments and Contingencies
  6




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SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
   8) Segment Information
  Three Months Ended
    
    
    Nine Months EndedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006Net salesCustom Sheet and Rollstock
    
    $
    231,308
    
    
    $
    239,956
    
    
    $
    693,539
    
    
    $
    699,142Color and Specialty Compounds
    
    
    111,982
    
    
    
    118,726
    
    
    
    329,160
    
    
    
    347,422Engineered Products
    
    
    17,833
    
    
    
    19,027
    
    
    
    63,046
    
    
    
    64,014Total net sales*
    
    $
    361,123
    
    
    $
    377,709
    
    
    $
    1,085,745
    
    
    $
    1,110,578Operating earnings (loss)Custom Sheet and Rollstock
    
    $
    16,272
    
    
    $
    22,147
    
    
    $
    53,622
    
    
    $
    55,350Color and Specialty Compounds
    
    
    7,133
    
    
    
    7,711
    
    
    
    20,166
    
    
    
    20,234Engineered Products
    
    
    2,679
    
    
    
    1,840
    
    
    
    9,191
    
    
    
    6,210Corporate / Other
    
    
    (7,645
    )
    
    
    (4,107
    )
    
    
    (17,559
    )
    
    
    (11,285
    )Total operating earnings
    
    $
    18,439
    
    
    $
    27,591
    
    
    $
    65,420
    
    
    $
    70,509
 
 *
    
    Excludes inter-segment sales of $13,926, $14,310, $42,369 and $44,368, respectively,
primarily from the Color and Specialty Compounds segment. 9) Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006Net earnings
    
    $
    8,806
    
    
    $
    10,614
    
    
    $
    32,581
    
    
    $
    30,179Foreign currency translation adjustments
    
    
    2,130
    
    
    
    (328
    )
    
    
    2,248
    
    
    
    788Total comprehensive income
    
    $
    10,936
    
    
    $
    10,286
    
    
    $
    34,829
    
    
    $
    30,967
 10) Subsequent Event
  7




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Executive Summary
     Consolidated Results
  Three Months
    
    Nine MonthsUnderlying volume
    
    
    (4
    )%
    
    
    (3
    )%Volume from additional week
    
    
    
    
    
    
    3Price/Mix
    
    
    
    
    
    
    (2
    )(4
    )%
    
    
    (2
    )%
  8




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Three Months Ended
    
    
    Nine Months EndedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006Dollars and Pounds (in millions)Net sales
    
    $
    361.1
    
    
    $
    377.7
    
    
    $
    1,085.7
    
    
    $
    1,110.6Material costs
    
    
    237.3
    
    
    
    246.4
    
    
    
    702.7
    
    
    
    723.3Material margin
    
    
    123.8
    
    
    
    131.3
    
    
    
    383.0
    
    
    
    387.3Conversion costs
    
    
    83.1
    
    
    
    83.2
    
    
    
    252.8
    
    
    
    257.8Gross margin
    
    $
    40.7
    
    
    $
    48.1
    
    
    $
    130.2
    
    
    $
    129.5Pounds Sold
    
    
    358.4
    
    
    
    372.5
    
    
    
    1,084.3
    
    
    
    1,092.1Dollars per Pound SoldNet sales
    
    $
    1.008
    
    
    $
    1.014
    
    
    $
    1.001
    
    
    $
    1.017Material costs
    
    
    .662
    
    
    
    .662
    
    
    
    .648
    
    
    
    .662Material margin
    
    
    .346
    
    
    
    .352
    
    
    
    .353
    
    
    
    .355Conversion costs
    
    
    .232
    
    
    
    .223
    
    
    
    .233
    
    
    
    .236Gross margin
    
    $
    .114
    
    
    $
    .129
    
    
    $
    .120
    
    
    $
    .119
     9




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Segment Results
 Custom Sheet and Rollstock Segment
  Three Months
    
    Nine MonthsUnderlying volume
    
    
    (5
    )%
    
    
    (2
    )%Volume from additional week
    
    
    
    
    
    
    3Price/Mix
    
    
    1
    
    
    
    (2
    )(4
    )%
    
    
    (1
    )%
   10




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Color and Specialty Compounds Segment
  Three Months
    
    Nine MonthsUnderlying volume
    
    
    (3
    )%
    
    
    (5
    )%Volume from additional week
    
    
    
    
    
    
    3Price/Mix
    
    
    (3
    )
    
    
    (3
    )(6
    )%
    
    
    (5
    )%
   Engineered Products Group
  Three Months
    
    Nine monthsUnderlying volume
    
    
    2
    %
    
    
    2
    %Volume from additional week
    
    
    
    
    
    
    3Price/Mix
    
    
    (8
    )
    
    
    (7
    )(6
    )%
    
    
    (2
    )%
  11




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Corporate
  Liquidity and Capital Resources
 Cash Flow
  2007
    
    
    2006Cash Flows (in millions)Net cash provided by operating activities
    
    $
    69.7
    
    
    $
    88.7Net cash used for investing activities
    
    
    (28.7
    )
    
    
    (12.0
    )Net cash used for financing activities
    
    
    (43.1
    )
    
    
    (75.2
    )Effect of exchange rate changes
    
    
    0.1
    
    
    
    (Decrease) Increase in cash and cash equivalents
    
    $
    (2.0
    )
    
    $
    1.5
    12




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Financing Arrangements
    Outlook
  13




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Cautionary Statements Concerning Forward-Looking Statements
   (a)
    
    adverse changes in economic or industry conditions including global supply and demand
conditions and prices for products of the types we produce;(b)
    
    our ability to compete effectively on product performance, quality, price, availability,
product development, and customer service;(c)
    
    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 or savings to be achieved in
connection with announced production plant restructurings;(h)
    
    adverse findings in significant legal or environmental proceedings or our inability to
comply with applicable environmental laws and regulations;(i)
    
    adverse developments with work stoppages or labor disruptions, particularly in the
automotive industry;(j)
    
    our inability to achieve operational efficiency goals or cost reduction initiatives;(k)
    
    our inability to develop and launch new products successfully,(l)
    
    restrictions imposed on us by instruments governing our indebtedness, and the possible
inability to comply with requirements of those instruments;(m)
    
    possible weaknesses in our internal controls; and(n)
    
    our ability to successfully complete the implementation of a new enterprise resource
planning computer system.
  14




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Controls
  15




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PART II  OTHER INFORMATION
 
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 (c) Issuer Purchases of Equity Securities
  
 Item 6. EXHIBITS
 (a) Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K)
 3.1
    
    Restated Certificate of Incorporation of Registrant, as amended and
restated effective March 9, 2006, incorporated by reference to
Exhibit 3.1 to the Companys Form 10-Q for the quarterly period ended
July 29, 2006, filed with the Commission on June 8, 2006.3.2
    
    Bylaws of Registrant, as amended and restated March 7, 2006,
incorporated by reference to Exhibit 3.1 of Form 8-K filed with the
Commission on March 9, 2006.10.1
    
    Separation Agreement and Release dated July 16, 2007 between the
Company and George A. Abd, incorporated by reference to Exhibit 1.01
of Form 8-K filed with the Commission on July 16, 2007.31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer
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##### Table of Contents



SIGNATURES
  SPARTECH CORPORATION
(Registrant)Date: September 12, 2007
    
    /s/ Randy C. MartinRandy C. MartinPresident and Chief Executive OfficerChief Financial Officer(Principal Executive and Financial Officer)/s/ Michael G. MarcelyMichael G. MarcelyVice President and Corporate Controller(Principal Accounting Officer)
 17