##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
 R
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
January 28, 2006OR£
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For 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
 R £
  Large Accelerated Filer £
    
    Accelerated Filer R
    
    Non-Accelerated Filer £
 £ R
  Common stock, $.75 par value per share
    
    32,054,070




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TABLE OF CONTENTS  Section 302 Certification of CEOSection 302 Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO    Table of Contents  SPARTECH CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JANUARY 28, 2006
TABLE OF CONTENTS
 PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Condensed Balance Sheets  As of:
        January 28, 2006 and October 29, 2005
    
    
    2Consolidated Condensed Statements of Operations  For the quarters ended:
         January 28, 2006 and January 29, 2005
    
    
    3Consolidated Condensed Statements of Cash Flows  For the quarters ended:
         January 28, 2006 and January 29, 2005
    
    
    4Notes To Consolidated Condensed Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    18PART II
    
    OTHER INFORMATIONItem 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 6.
    
    Exhibits
    
    
    19Signatures
    
    
    20Certifications
    
    
    21
 1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
 January 28,2006
    
    
    October 29,(unaudited)
    
    
    2005AssetsCurrent assetsCash and equivalents
    
    $
    8,351
    
    
    $
    4,601Receivables, net
    
    
    197,668
    
    
    
    213,996Inventories
    
    
    127,786
    
    
    
    119,401Prepaids and other
    
    
    21,874
    
    
    
    16,970Total current assets
    
    
    355,679
    
    
    
    354,968Property, plant and equipment, net
    
    
    309,588
    
    
    
    307,386Goodwill
    
    
    352,405
    
    
    
    352,405Other intangible assets
    
    
    39,923
    
    
    
    40,710Other assets
    
    
    11,610
    
    
    
    18,926Total assets
    
    $
    1,069,205
    
    
    $
    1,074,395Liabilities and Shareholders EquityCurrent liabilitiesCurrent maturities of long-term debt
    
    $
    6,904
    
    
    $
    11,175Accounts payable
    
    
    114,195
    
    
    
    121,682Accrued liabilities
    
    
    58,296
    
    
    
    57,226Total current liabilities
    
    
    179,395
    
    
    
    190,083Convertible subordinated debentures
    
    
    154,639
    
    
    
    154,639Other long-term debt, less current maturities
    
    
    215,082
    
    
    
    214,141Total long-term debt
    
    
    369,721
    
    
    
    368,780Deferred taxes
    
    
    92,655
    
    
    
    91,605Other long-term liabilities
    
    
    9,820
    
    
    
    10,881Total long-term liabilities
    
    
    472,196
    
    
    
    471,266Shareholders equityCommon stock, 33,131,846 shares issued in 2006 and 2005
    
    
    24,849
    
    
    
    24,849Contributed capital
    
    
    197,269
    
    
    
    196,811Retained earnings
    
    
    218,571
    
    
    
    216,928Treasury stock, at cost, 1,077,776 shares in 2006 and 1,143,701 shares in 2005
    
    
    (24,406
    )
    
    
    (26,019
    )Accumulated other comprehensive income
    
    
    1,331
    
    
    
    477Total shareholders equity
    
    
    417,614
    
    
    
    413,046Total liabilities and shareholders equity
    
    $
    1,069,205
    
    
    $
    1,074,395
 See accompanying notes to consolidated condensed financial statements.
 2




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SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 Quarter EndedJanuary 28,
    
    
    January 29,2006
    
    
    2005Net sales
    
    $
    343,591
    
    
    $
    304,512Cost and expensesCost of sales
    
    
    309,353
    
    
    
    276,096Selling, general and administrative
    
    
    17,731
    
    
    
    16,875Amortization of intangibles
    
    
    1,170
    
    
    
    1,258Restructuring and exit costs
    
    
    466
    
    
    
    328,720
    
    
    
    294,229Operating earnings
    
    
    14,871
    
    
    
    10,283Interest, (net of interest income: 2006, $67; 2005, $91)
    
    
    5,752
    
    
    
    6,474Earnings before income taxes
    
    
    9,119
    
    
    
    3,809Income taxes
    
    
    3,463
    
    
    
    991Net earnings
    
    $
    5,656
    
    
    $
    2,818Net earnings per common shareBasic
    
    $
    .18
    
    
    $
    .09Diluted
    
    $
    .18
    
    
    $
    .09Dividends declared per common share
    
    $
    .125
    
    
    $
    .120
 See accompanying notes to consolidated condensed financial statements.
 3




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SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 Quarter EndedJanuary 28,
    
    
    January 29,2006
    
    
    2005Cash flows from operating activitiesNet earnings
    
    $
    5,656
    
    
    $
    2,818Adjustments to reconcile net earnings to net cash provided by (used for)
operating activities:Depreciation and amortization
    
    
    10,049
    
    
    
    10,296Stock compensation expense
    
    
    939
    
    
    
    210Change in current assets and liabilities
    
    
    (2,998
    )
    
    
    (22,747
    )Other, net
    
    
    1,170
    
    
    
    849Net cash provided by (used for) operating activities
    
    
    14,816
    
    
    
    (8,574
    )Cash flows from investing activitiesCapital expenditures
    
    
    (4,012
    )
    
    
    (13,474
    )Net cash used for investing activities
    
    
    (4,012
    )
    
    
    (13,474
    )Cash flows from financing activitiesNet payments on notes and revolving credit facilities
    
    
    (3,283
    )
    
    
    (8,499
    )Payments on bonds and leases
    
    
    (328
    )
    
    
    (44
    )Cash dividends on common stock
    
    
    (3,851
    )
    
    
    (3,865
    )Stock options exercised
    
    
    1,780
    
    
    
    852Treasury stock acquired
    
    
    (1,541
    )
    
    
    (72
    )Excess tax benefits from stock based compensation
    
    
    172
    
    
    
    Net cash used for financing activities
    
    
    (7,051
    )
    
    
    (11,628
    )Effect of exchange rate changes on cash and equivalents
    
    
    (3
    )
    
    
    165Increase (decrease) in cash and equivalents
    
    
    3,750
    
    
    
    (33,511
    )Cash and equivalents at beginning of year
    
    
    4,601
    
    
    
    41,272Cash and equivalents at end of quarter
    
    $
    8,351
    
    
    $
    7,761
 See accompanying notes to consolidated condensed financial statements.
 4




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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) Restructuring
  Fiscal Year
    
    
    First Quarter
    
    
    Cumulative2005
    
    
    2006
    
    
    to DateCustom Sheet and Rollstock
    
    $
    6
    
    
    $
    64
    
    
    $
    70Color and Specialty Compounds
    
    
    7,388
    
    
    
    402
    
    
    
    7,790Engineered Products
    
    
    1,944
    
    
    
    
    
    
    
    1,944Corporate
    
    
    750
    
    
    
    
    
    
    
    750Total
    
    $
    10,088
    
    
    $
    466
    
    
    $
    10,554
   5




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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
  2006
    
    
    2005Raw materials
    
    $
    68,297
    
    
    $
    64,262Production supplies
    
    
    9,372
    
    
    
    9,479Finished goods
    
    
    50,117
    
    
    
    45,660$
    127,786
    
    
    $
    119,401
 4) Other Intangible Assets
  Gross Carrying Amount
    
    

Accumulated
Amortization2006
    
    
    2005
    
    
    2006
    
    
    2005Non-compete agreements
    
    $
    3,680
    
    
    $
    3,680
    
    
    $
    2,291
    
    
    $
    2,122Customer contracts/relationships
    
    
    21,580
    
    
    
    21,571
    
    
    
    6,035
    
    
    
    5,321Product formulations
    
    
    17,649
    
    
    
    17,476
    
    
    
    3,560
    
    
    
    3,474Total
    
    $
    42,909
    
    
    $
    42,727
    
    
    $
    11,886
    
    
    $
    10,917
  IntangibleFiscal Year-Ended
    
    Amortization2006
    
    $
    4,4802007
    
    
    4,0862008
    
    
    3,0082009
    
    
    2,5932010
    
    
    2,345$
    16,512
 5) Stock-Based Compensation
  6




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SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
  2006Cost of sales
    
    $
    57Selling, general and administrative
    
    
    882Total stock based compensation expense included in operating earnings
    
    
    939Income taxes
    
    
    247Effect on net earnings
    
    $
    692Effect on basic and diluted earnings per share
    
    $
    .02
   2006
    
    
    2005Weighted Average Fair Value
    
    $
    7.65
    
    
    $
    8.13Assumptions Used:Expected Dividend Yield.
    
    
    2%
    
    
    
    2%Expected Volatility
    
    
    40%
    
    
    
    35%Risk-Free Interest Rates
    
    
    4.4%
    
    
    
    3.6%Expected Lives
    
    5.5 Years
    
    5.5 Years
  WeightedAverage
    
    
    Aggregate
    
    
    Average(in 000s)
    
    
    Exercise
    
    
    Intrinsic
    
    
    ContractualShares
    
    
    Price
    
    
    Value
    
    
    LifeOutstanding, beginning of the year
    
    
    2,177
    
    
    $
    21.21Granted
    
    
    315
    
    
    
    21.19Exercised
    
    
    (108
    )
    
    
    16.65Forfeited
    
    
    (4
    )
    
    
    21.19Outstanding, end of quarter
    
    
    2,380
    
    
    $
    21.42
    
    
    $
    4,854
    
    
    6.5 yearsExercisable, end of quarter
    
    
    1,499
    
    
    $
    21.06
    
    
    $
    3,941
    
    
    5.2 years
  7




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SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
  WeightedAverage(in 000s)
    
    
    FairShares
    
    
    ValueNonvested stock options, beginning of the year
    
    
    864
    
    
    $
    8.05Granted
    
    
    315
    
    
    
    7.65Vested
    
    
    (294
    )
    
    
    6.84Forfeited
    
    
    (4
    )
    
    
    7.65Nonvested stock options, end of quarter
    
    
    881
    
    
    $
    7.34
   2005Net earnings as reported
    
    $
    2,818Add: Stock-based compensation included in net earnings as reported, net of tax
    
    
    130Deduct: Total stock-based compensation, net of tax
    
    
    (670
    )Pro forma net earnings
    
    $
    2,278Earnings Per ShareAs Reported:Basic
    
    $
    .09Diluted
    
    
    .09Pro Forma:Basic
    
    $
    .07Diluted
    
    
    .07
 8




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SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
 6) Earning Per Share
  Quarter EndedJanuary 28, 2006
    
    
    January 29, 2005Net earnings:Basic net earnings
    
    $
    5,656
    
    
    $
    2,818Diluted net earnings
    
    $
    5,656
    
    
    $
    2,818Weighted average shares outstanding:Basic weighted average common shares outstanding
    
    
    32,017
    
    
    
    32,213Add: Shares issuable from assumed exercise of options
    
    
    171
    
    
    
    484Diluted weighted average shares outstanding
    
    
    32,188
    
    
    
    32,697Net earnings per share:Basic
    
    $
    .18
    
    
    $
    .09Diluted
    
    $
    .18
    
    
    $
    .09
 7) Commitments and Contingencies
   9




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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
  2006
    
    
    2005Net Sales*Custom Sheet and Rollstock
    
    $
    218,295
    
    
    $
    189,639Color and Specialty Compounds
    
    
    106,408
    
    
    
    97,103Engineered Products
    
    
    18,888
    
    
    
    17,770Total Net Sales
    
    $
    343,591
    
    
    $
    304,512Operating EarningsCustom Sheet and Rollstock
    
    $
    12,701
    
    
    $
    7,658Color and Specialty Compounds
    
    
    4,472
    
    
    
    5,699Engineered Products
    
    
    990
    
    
    
    617Corporate / Other
    
    
    (3,292
    )
    
    
    (3,691
    )Total Operating Earnings
    
    $
    14,871
    
    
    $
    10,283
  9) Comprehensive Income
  2006
    
    
    2005Net earnings
    
    $
    5,656
    
    
    $
    2,818Foreign currency translation adjustments
    
    
    854
    
    
    
    1,207Cash flow hedge adjustment
    
    
    
    
    
    
    81Total comprehensive income
    
    $
    6,510
    
    
    $
    4,106
 10




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Executive Summary
  Consolidated Results
  Underlying volume
    
    
    (1
    )%Disposition of business
    
    
    (1
    )Price/Mix
    
    
    1513
    %
   11




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First Quarter2006
    
    
    2005Dollars and Pounds (in millions)Net sales
    
    $
    343.6
    
    
    $
    304.5Material costs
    
    
    225.4
    
    
    
    192.3Material margin
    
    
    118.2
    
    
    
    112.2Conversion costs
    
    
    84.0
    
    
    
    83.8Gross margin
    
    $
    34.2
    
    
    $
    28.4Pounds Sold
    
    
    335.4
    
    
    
    339.8Dollars per Pound SoldNet sales
    
    $
    1.024
    
    
    $
    .896Material costs
    
    
    .672
    
    
    
    .566Material margin
    
    
    .352
    
    
    
    .330Conversion costs
    
    
    .250
    
    
    
    .246Gross margin
    
    $
    .102
    
    
    $
    .084
     12




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Adoption of SFAS 123(R)
  Restructuring and Exit Costs
     Segment Results
 Custom Sheet and Rollstock Segment
  Underlying volume
    
    
    8
    %Disposition of business
    
    
    (1
    )Price/Mix
    
    
    815
    %
  13




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Color and Specialty Compounds Segment
  Underlying volume
    
    
    (9
    )%Price/Mix
    
    
    1910
    %
  First Quarter%2006
    
    
    2005
    
    
    ChangePounds Sold (in millions)Proprietary products
    
    
    115.5
    
    
    
    120.3
    
    
    
    (4
    )%Tolling and resale products
    
    
    38.4
    
    
    
    48.9
    
    
    
    (21
    )Total pounds sold
    
    
    153.9
    
    
    
    169.2
    
    
    
    (9
    )%
   Engineered Products Segment
  Underlying volume
    
    
    (4
    )%Price/Mix
    
    
    106
    %
 14




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Liquidity and Capital Resources
 Cash Flow
  First Quarter2006
    
    
    2005Cash Flows (in millions)Net cash provided / (used) by operating activities
    
    $
    14.8
    
    
    $
    (8.6
    )Net cash used for investing activities
    
    
    (4.0
    )
    
    
    (13.5
    )Net cash used for financing activities
    
    
    (7.0
    )
    
    
    (11.6
    )Effect of exchange rate changes
    
    
    
    
    
    
    0.2Increase / (decrease) in cash and equivalents
    
    $
    3.8
    
    
    $
    (33.5
    )
     15




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Financing Arrangements
   Outlook
  Other Matters
   16




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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 produced by Spartech;(b)
    
    material adverse changes in the markets we serve, including the transportation,
packaging, building and construction, recreation and leisure, and other markets, some of
which tend to be cyclical;(c)
    
    our inability to achieve the level of cost savings, productivity improvements, synergies,
growth or other benefits anticipated from acquired businesses and their integration;(d)
    
    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;(e)
    
    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;(f)
    
    our inability to predict accurately the costs to be incurred or savings to be achieved in
connection with announced production plant restructurings;(g)
    
    adverse findings in significant legal or environmental proceedings or our inability to
comply with applicable environmental laws and regulations;(h)
    
    adverse developments with work stoppages or labor disruptions, particularly in the
automotive industry;(i)
    
    our inability to achieve operational efficiency goals or cost reduction initiatives;(j)
    
    our inability to develop and launch new products successfully;(k)
    
    restrictions imposed on us by instruments governing our indebtedness, and the possible
inability to comply with requirements of those instruments; and(l)
    
    weaknesses in internal controls.
  17




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Non-GAAP Reconciliation
  January 28,
    
    
    October 29,
    
    
    
    
    January 29,
    
    
    October 30,2006
    
    
    2005
    
    



    
    2005
    
    
    2004Current maturities of long-term debt
    
    $
    6.9
    
    
    $
    11.2
    
    


    
    $
    18.0
    
    
    $
    18.0Long-term debt
    
    
    369.7
    
    
    
    368.8
    
    

    
    
    447.5
    
    
    
    456.1Total debt
    
    
    376.6
    
    
    
    380.0
    
    
    
    
    
    465.5
    
    
    
    474.1Less: Cash and equivalents
    
    
    (8.3
    )
    
    
    (4.6
    )
    



    
    
    (7.8
    )
    
    
    (41.3
    )Net debt
    
    $
    368.3
    
    
    $
    375.4
    
    



    
    $
    457.7
    
    
    $
    432.8First quarter change
    
    $
    (7.1
    )
    
    
    
    
    



    
    $
    24.9
 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
    18




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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
  Total Number of
    
    
    MaximumShares Purchased
    
    
    Number ofas Part of
    
    
    Shares That MayTotal Number
    
    
    
    
    
    
    Publicly
    
    
    Yet Be PurchasedOf Shares
    
    
    Average Price
    
    
    Announced Plans
    
    
    Under the PlansPeriod
    
    Purchased
    
    
    Paid per Share
    
    
    or Programs
    
    
    or ProgramsNovember 2005
    
    
    41,600
    
    
    $
    19.71
    
    
    
    41,600
    
    
    
    512,800December 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    512,800January 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    512,800Total
    
    
    41,600
    
    
    $
    19.71
    
    
    
    41,600
    
    
    
    512,800
  
 Item 6. EXHIBITS
 (a) Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K)
 31.1
    
    Section 302 Certification of CEO31.2
    
    Section 302 Certification of CFO32.1
    
    Section 1350 Certification of CEO32.2
    
    Section 1350 Certification of CFO
 19




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SIGNATURES
  SPARTECH CORPORATION(Registrant) Date: March 7, 2006

/s/  George A. AbdGeorge A. AbdPresident and Chief Executive Officer
(Principal Executive Officer) /s/  Randy C. MartinRandy C. MartinExecutive Vice President Corporate
Development and Chief Financial Officer
(Principal Financial and Accounting Officer) 20