Spartech's fiscal Q1 net earnings down to US$1M, from US$4.7M a year ago, on production inefficiencies, increased competition, higher costs; net sales up 4% to US$234.8M on pass-through of higher raw material costs, volumes down 3%
March 7, 2011
– Spartech Corporation (NYSE: SEH), a leading producer of plastic sheet, compounds, and packaging products, announced today operating results for its 2011 first quarter.
First Quarter 2011 Financial Results
-- Net sales were $234.8 million, up 4% from the prior year first quarter, reflecting a 3% decrease in volume more than offset by the effects of higher prices due to the pass through of higher raw material costs.
-- Operating loss excluding special items was $1.0 million in the first quarter of 2011 compared to operating earnings excluding special items of $7.5 million in the same period of the prior year. This decrease in earnings reflects the continued impact of production inefficiencies that began in the second half of 2010, increased freight expense, margin compression from increased competition, and the impact of higher material costs that were not passed through timely as selling price increases.
-- Reported diluted (loss) earnings per share from continuing operations was $(0.06) in the first quarter of 2011 compared to $0.15 in the prior year first quarter. Excluding special items, diluted (loss) earnings per share from continuing operations was $(0.04) compared to $0.08 in the prior year first quarter.
-- Cash flows from operations were $7.7 million for the first quarter and the Company ended the quarter with $173.2 million of debt.
-- We have completed the management restructuring of our business units, which has provided for direct responsibility for sales, marketing and operations to each business segment leader. We believe that this structure will provide for greater responsiveness to the needs of our customers and improve overall financial performance of the business units. We are encouraged by the early results of this management change as we are beginning to make progress in material formulation, yield enhancement, on-time deliveries and product quality.
-- On January 12, 2011, the Company entered into amendments on its credit facility and Senior Notes. These amendments were needed in the near term to complete the organizational restructurings and continue the actions to improve operations.
-- The Company started production at our Lockport, New York facility during our first quarter of 2011 to serve automotive customers in our compounds business. We expect to have this facility operating at normal production rates in the second quarter of 2011.
-- The Company has brought together the research and development teams of our three businesses into our new Spartech Technology and Innovation Center located near our corporate headquarters. Harnessing the collective technical capabilities of our material science, processing, and creative design groups is allowing us to bring greater focus on new product developments and sustainable customer solutions as well as supporting our promising new cross business unit selling initiative.
Note: Please see the reconciliation tables and the narrative below for adjustments to GAAP and discussion of items affecting results.
Spartech's President and Chief Executive Officer, Vicki Holt stated, "As we expected, our first quarter results reflected gradual operational improvements from the inefficiencies that began in the second half of 2010, seasonally low demand with moderate growth in most markets, the continued impact from certain customer changes, and progress in completing the remaining two asset consolidations and general organizational restructurings. Our key operational priorities continue to focus on operating fundamentals to improve our on-time delivery, product quality, and production yields while we manage overall costs, and we are beginning to see positive results in these key metrics. We also completed the realignment of our operating businesses and leadership team."
Holt added "Our measured progress in this quarter is the start of a comprehensive plan to build the foundation for operating and commercial excellence and accelerating new product developments. A key focus in the quarter was developing a turnaround plan for our Color and Specialty Compounds business which did not execute the final asset consolidations well during the automotive market recovery last year. The turnaround efforts include specific actions to grow earnings by improving yield and equipment uptime, and develop stronger linkage between operations and strategic procurement."
Additionally, Holt stated "We are prioritizing organic growth projects to deliver near term results. In addition, we are re-engaging our customers in specific sustainable product development programs. Our revitalized earnings growth programs focus on exceeding customer expectations and a more efficient cost structure which will lead to improved returns for shareholders."
Net sales increased 4% to $234.8 million in the three month period ended January 29, 2011 over the same period in the prior year, representing a 7% increase in price/mix offset by a 3% decline in volume. The largest increase in volume was from sales of compounds and sheet to the automotive sector, related to the recovery experienced throughout 2010, and commercial construction. Underlying volume in most other markets experienced a modest increase. Offsetting these increases were a decline in sales of sheet for material handling applications due to a considerable slowdown in orders from one of our largest customers, and a decline in food packaging sales due to a lower share of a key customer's product line. The price/mix increase was primarily related to increases in selling prices to pass through increases in raw material costs.
Gross margin per pound sold declined from 12.8 cents in the first quarter of 2010 to 9.1 cents in the first quarter of 2011 primarily reflecting the continued impact of production inefficiencies that began in the second half of 2010, higher labor costs, increased freight expense, margin compression from increased competition, and the impact of higher material costs. The decrease in gross margin was partially offset by reduced depreciation expense due to the Company's plant consolidation efforts.
Selling, general and administrative expenses were $19.0 million in the first quarter of 2011 compared to $18.4 million in the same period of the prior year. The increase was mainly due to higher employee compensation costs largely related to resource additions in the technology, sales and marketing and procurement areas.
Amortization of intangibles was $0.4 million in the first quarter of 2011 compared to $1.0 million in the same period of the prior year. The decrease reflects intangible assets which became fully amortized coupled with the impact of intangible asset impairments recorded by the Company in the fourth quarter of 2010.
Restructuring and exit costs were $0.8 million in the first quarter of 2011 compared to $0.7 million in the same period of the prior year. Restructuring and exit costs included employee severance, facility consolidation and shutdown costs and fixed asset valuation adjustments.
Interest expense, net of interest income, was $2.6 million in the first quarter of 2011 compared to $3.5 million in the same period of the prior year. The decrease was primarily due to the $24.6 million reduction in debt during the last 12 months, which included a reduction in higher interest rate debt.
We reported a net loss from continuing operations of $1.8 million or $(0.06) per diluted share in the first quarter of 2011, compared to earnings of $4.7 million or $0.15 per diluted share in the same period of the prior year. Excluding special items (restructuring and exit costs, and tax benefits from restructuring of foreign operations), we reported a net loss from continuing operations of $1.3 million or $(0.04) per diluted share in the first quarter of 2011, compared to net earnings from continuing operations of $2.4 million or $0.08 per diluted share in the same period of the prior year. The decrease was mainly due to items previously discussed, partially offset by the effects of income tax benefits.
The difference between the Company's statutory rate and the Company's effective rate for the three months ended January 29, 2011, was primarily attributable to the reorganization of the Company's legal entities which resulted in a $0.8 million deferred tax benefit, coupled with the reinstatement of the research and development tax credit. These benefits were partially offset by adjustments to the Company's FIN 48 reserves and the effects of permanent items.
Net earnings from discontinued operations were $2.9 million in the first quarter of 2011, which mainly resulted from the settlement agreement for the breach of a contract by Chemtura that led to $4.8 million in total cash proceeds.
Cash flows from operations in the first quarter of 2011 of $7.7 million, which included the benefit of an income tax refund of $5.7 million, were used along with credit facility borrowings to fund $8.0 million of capital investments for additional capacity in specialty sheet products, maintenance and cost reductions. We incurred $1.6 million in debt issuance costs to amend our debt holder agreements during the first quarter of 2011.
The results of our three operating segments are discussed below. A table is presented at the end of this release to reconcile amounts excluding special items to comparable GAAP measures.
Custom Sheet & Rollstock - Net sales were $125.1 million in the three month period ended January 29, 2011, representing flat year-over-year net sales, which consisted of a 9% decrease in volume offset by a 9% increase in price/mix changes. The decrease in underlying volume reflects the impact of a significant reduction in one customer's business activity for a material handling application. Absent this customer's decline, we realized a modest increase in volume across most of our end markets including the automotive, appliance and sign and advertising markets. The price/mix increase was mostly caused by increases in selling prices and greater mix of higher priced products. Operating earnings excluding special items were $4.8 million in the first quarter of 2011 compared to $8.4 million in the same period of the prior year. The decrease in operating earnings reflects lower sales volume to a material handling customer, increased competition, production inefficiencies and increased freight expense.
Packaging Technologies - Net sales were $51.7 million in the three month period ended January 29, 2011, representing an 8% increase in net sales, which consisted of a 2% decrease in volume more than offset by a 10% increase in price/mix changes. The decrease in underlying volume reflects the impact of the loss of share at a food packaging customer. Partially offsetting this loss was an increase in sales to the medical packaging and sign and advertising markets. Price/mix includes increases in selling prices from the pass through of increases in raw materials costs. Operating earnings excluding special items were $4.8 million in the first quarter of 2011 compared to $5.3 million in the same period of the prior year. The decrease in operating earnings was mainly due to a higher mix of lower margin business and margin compression from increased competition, coupled with higher employee compensation costs primarily related to resource additions in the technology and sales and marketing areas.
Color & Specialty Compounds - Net sales were $57.9 million in the three month period ended January 29, 2011, representing a 12% increase in net sales, which consisted of a 5% increase in volume coupled with a 7% increase in price/mix changes. The increase in underlying volume was due to a significant increase in the automotive sector related to the recovery experienced throughout 2010, coupled with increased sales to the agricultural products and building and construction markets. Offsetting these increases was a decline in sales to the appliance and electronics market. The price/mix increase was mostly caused by increases in selling prices to pass through increases in raw material costs. Operating loss excluding special items were $2.2 million in the first quarter of 2011 compared to operating earnings of $2.2 million in the same period of the prior year. The decrease in operating earnings reflects production inefficiencies which resulted in higher labor and material costs, the impact of higher material costs that were not passed through timely as selling price increases, a higher mix of lower margin sales, and increased freight and employee severance costs.
We are continuing to focus on improving our operational performance, building a more customer-focused organization, and investing in design, technology and equipment to enhance our growth initiatives. Subject to raw material pricing, we expect these operational and customer initiatives will result in gross margins returning back to our peak levels by the first calendar quarter of 2012. We believe these improvements will be achieved during a period when the overall market recovery continues at a slow pace and we experience continued volatility in raw material pricing. We have made organizational changes, continue to make operational improvements, and have identified the levers to generate higher margins that we believe will allow us to make steady progress during 2011.
Special Items and Discontinued Operations
Restructuring and exit costs totaled $0.8 million during the first quarter of 2011 compared to $0.7 million in the same period of the prior year. Restructuring and exit costs are comprised of employee severance, facility consolidation and shut-down costs and fixed asset valuation adjustments. These costs resulted from the Company's improvement initiatives, which include an objective of reducing the Company's fixed portion of its cost structure. We expect to incur approximately $1.0 million of additional restructuring expenses which mostly consist of employee severance and shutdown costs for facility consolidation initiatives previously announced.
In the first quarter of 2010, we recognized a $2.8 million tax benefit related to tax restructuring of foreign operations that was excluded from our presentation of net earnings from continuing operations as a special, non-recurring item.
Discontinued operations include our former Marine business, sheet business in Donchery, France, and toll compounding business in Arlington, Texas which were all shutdown in the 2009 and the Wheels and Profiles businesses that were divested in 2009.
The Company reached agreement with Chemtura and the Bankruptcy Court approved the final settlement of the claim for the breach of a contract by Chemtura for $4.2 million in cash and equity in the newly reorganized Chemtura. The equity was subsequently sold, resulting in $4.8 million of total cash proceeds. The associated gain was recorded in discontinued operations.
Spartech will hold a conference call with investors and financial analysts at 11:00 a.m. EST on Tuesday, March 8, 2011, to discuss Spartech's first quarter 2011 financial results. Prior to this call, the Company will provide supplemental slides on its website at www.spartech.com (under Presentations in the Investor Relations menu). Investors can listen to the call live via a webcast by logging onto www.spartech.com, or via phone by dialing 800-642-9809 and providing the Conference ID #: 48506732. International callers may dial 706-679-7637.
Spartech Corporation is a leading producer of plastic products including polymeric compounds, concentrates, custom extruded sheet and rollstock products and packaging technologies for a wide spectrum of customers. The Company's three business segments, which operate facilities in the United States, Mexico, Canada, and France, annually process approximately one billion pounds of plastic resins, specialty plastic alloys, and color and specialty compounds.
Spartech Corporation and Subsidiaries Consolidated Condensed Statements of Operations
Three Months Ended
(Unaudited and dollars in thousands, except per January 29, January 30,
share data) 2011 2010
Net sales $ 234,783 $ 225,164
Costs and expenses
Cost of sales 216,377 198,332
Selling, general and administrative expenses 18,974 18,416
Amortization of intangibles 422 966
Restructuring and exit costs 828 671
Total costs and expenses 236,601 218,385
Operating (loss) earnings (1,818) 6,779
Interest, net of interest income 2,571 3,516
(Loss) earnings from continuing operations before
income taxes (4,389) 3,263
Income tax benefit (2,551) (1,473)
Net (loss) earnings from continuing operations (1,838) 4,736
Net earnings from discontinued operations,
net of tax 2,871 8
Net earnings $ 1,033 $ 4,744
Basic (loss) earnings per share:
(Loss) earnings from continuing operations $ (0.06) $ 0.16
Earnings from discontinued operations,
net of tax 0.09 -
Net earnings per share $ 0.03 $ 0.16
Diluted (loss) earnings per share:
(Loss) earnings from continuing operations $ (0.06) $ 0.15
Earnings from discontinued operations,
net of tax 0.09 -
Net earnings per share $ 0.03 $ 0.15
Dividends declared per share $ - $ -