Business News

Spartech Announces Second Quarter Results

Thursday 11. June 2009 - Spartech Corporation (NYSE: SEH), a leading producer of plastic sheet, compounds, and packaging products, announced today operating results for its 2009 second quarter.

Second Quarter 2009 Financial Highlights

— Net sales were $234.3 million, down 36% from the prior year second
quarter, reflecting weak end-market demand. Sales volumes increased
6% in comparison to the first quarter of 2009 reflecting seasonality.
— Operating earnings excluding restructuring and exit costs increased to
$15.3 million from $12.5 million in the second quarter of 2008. Gross
margin per pound sold increased to 15.7 cents from 10.7 cents for the
quarter primarily from the impact of our improvement initiatives. Both
comparisons for the quarter reflect a $4.1 million one-time benefit
related to a change in our vacation policy.
— Diluted earnings per share excluding restructuring and exit costs were
$0.20 compared to $0.16 in the prior year second quarter.
— Cash flow from operations of $21.3 million more than doubled from the
prior year second quarter, funding debt pay down of $17.9 million in
the quarter. In the last four quarters, the Company has generated
$85.7 million of free cash flow and paid down $76.9 million of debt.

— Spartech continues to execute on its company-wide improvement
initiatives which represent more than $80 million of anticipated
annual benefits directed at improving the current cost structure and
profitability while also leveraging the Company’s cost footprint for
future market recovery and growth.




Note: Please see reconciliation tables and the narrative below for adjustments to GAAP and discussion of items affecting results.

Consolidated Results

Net sales for the second quarter of 2009 were $234.3 million compared to $367.3 million in the second quarter of 2008 representing a decrease of 36%. This change was caused by a decline in underlying sales volume (33% decline), and a decrease from price/mix changes (3% decrease). The underlying volume decline related largely to lower demand across a broad group of end markets including automotive, recreation and leisure, and residential construction.

The reported operating earnings for the second quarter of 2009 were $11.6 million compared to $11.9 million in the prior year second quarter. Operating earnings excluding restructuring and exit costs were $15.3 million for the second quarter of 2009 compared to $12.5 million in the prior year second quarter, benefiting from our improvement initiatives which more than offset the decline in sales volume. Gross margin per pound sold was 15.7 cents in the second quarter of 2009 compared to 10.7 cents in the second quarter of 2008, reflecting the benefits from our cost reduction activities focused on building a low cost-to-serve model and other margin enhancement activities. Selling, general and administrative expenses were reduced to $19.0 million for the second quarter of 2009 from $22.4 million in the prior year quarter, benefiting from both structural cost reductions and short-term spending controls. Interest expense decreased to $4.2 million in our second quarter of 2009 compared to $5.1 million in 2008 due to lower average debt levels from the debt pay down in the last four quarters. Our effective tax rate of 49% for the quarter was impacted by operating losses from non-U.S. operations for which we have not recorded a tax benefit, resulting in a higher effective tax rate than the 36% reflected in the prior year second quarter.

Cash flow from operations in the second quarter of 2009 of $21.3 million more than doubled the prior year period allowing debt pay down of $17.9 million in the quarter and borrowing availability at the end of the second quarter of $52.2 million. Free cash flow totaled $19.1 million (cash flow from operations of $21.3 million less capital expenditures of $2.2 million) in the second quarter of 2009. We have generated $85.7 million of free cash flow (cash flow from operations of $99.2 million less capital expenditures of $13.5 million) in our last four quarters and paid down $76.9 million of debt resulting in total debt of $264.2 million at the end of the second quarter of 2009.

Strategic and Operational Overview

The Company continues to make substantive progress on its strategic plan that was developed early in 2008. This road map resulted in new business strategies, asset restructurings, organizational enhancements, business process reengineering, improvements in margin and mix, and a reduction in our cost footprint focused on facilitating a low cost-to-serve model. Our results in the second quarter of 2009 reflected cost reductions and other improvement initiatives which included $50 million of annualized benefits implemented in 2008 plus additional structural cost reduction and earnings improvement actions initiated in 2009.

In addition, we implemented several shorter term improvement initiatives in the second quarter, including: (i) temporary across-the-board salary reductions, (ii) suspension of our 401k match and deferred compensation contributions, (iii) modification of our vacation policy to eliminate the cash settlement of earned vacation, and (iv) cost containment initiatives to flex work schedules and reduce the number of days worked per week. The change in vacation policy resulted in $4.1 million of one-time earnings in the quarter. We expect that the benefit of our shorter term actions will be replaced with the full quarter impact of other initiatives that were implemented throughout the second quarter of 2009. We intend to maintain these shorter term actions until we make further progress on the additional structural cost reductions or the external environment improves.

Spartech’s President and Chief Executive Officer, Myles S. Odaniell stated, “We continue to execute our improvement plans and have now initiated more than $80 million in anticipated annualized structural cost reductions and other earnings improvement initiatives. As a result, we have substantially improved our operating profits and cash flow despite recession-level demand and made significant progress on leveraging our cost structure to support higher earnings potential when volumes increase. We will continue to take additional actions to further reduce our cost structure both in response to current market conditions, but also to capitalize on additional improvement opportunities existing at Spartech. We are very proud of our dedicated employees who have stayed focused on serving the needs of our customers and executing substantial cost reductions while we work through this challenging economic environment and better position Spartech for the future.”

Segment Results

The results of our three segments are discussed below and presented in the table at the end of this release to reconcile to amounts excluding restructuring and exit costs to comparable GAAP measures.

Custom Sheet & Rollstock — Net sales of $106.4 million in the second quarter of 2009 reflected a decrease of 36%, a 29% decrease in volume and 7% decrease from price/mix changes compared to the prior year second quarter. The volume decline was primarily due to lower demand in the residential construction, automotive, and recreational vehicles sectors of our end markets. Operating earnings excluding restructuring and exit costs were $5.7 million in the second quarter of 2009 compared to $8.0 million in the prior year second quarter, reflecting the lower demand partially offset by benefits from our improvement initiatives.

Packaging Technologies — Net sales of $52.3 million in the second quarter of 2009 reflected a decrease of 25%, consisting of a 5% decrease in packaging-related volume, 13% decrease from non-packaging related volume (largely related to automotive customers served by the Packaging Technologies operations), and a 7% decrease from price/mix compared to the prior year second quarter. Operating earnings excluding restructuring and exit costs were $10.2 million in the second quarter of 2009 compared to $5.0 million in the prior year second quarter, primarily reflecting benefits of our improvement initiatives.

Color & Specialty Compounds — Net sales of $56.9 million in the second quarter of 2009 reflected a decrease of 47%, a 43% decrease in volume and 4% decrease from price/mix changes compared to the prior year second quarter. The volume decline was primarily due to lower demand in the automotive, construction, and film packaging end markets. Operating earnings excluding restructuring and exit costs were $3.5 million in the second quarter of 2009 compared to $5.0 million in the prior year second quarter, primarily reflecting the lower demand partially offset by benefits from our improvement initiatives.

Outlook

While end-market demand continues to be weak, volumes in many of the markets we serve started to stabilize during the second quarter, albeit at very low levels. We are encouraged by improved customer sentiment, but our operating plans assume the recessionary effects will continue through 2009 and that end-market demand will remain weak. Our operating plans also reflect specific actions we have taken to manage through the automotive crisis, related bankruptcies, and summer shutdowns which will result in particularly weak demand for this market, but the impact of these developments are uncertain.

We will continue to execute our improvement initiatives and focus on maximizing cash flows. These initiatives have included the implementation of many structural cost reductions as well as shorter term measures that have allowed us to continue to support appropriate investments in technology, resources focused on future growth, and other organizational improvements. We expect to emerge from this recessionary environment as a stronger company that is better able to leverage its cost structure and positioned to generate profitable growth and enhanced shareholder returns.

Restructuring and Exit Activities

Restructuring and exit costs totaled $3.7 million in the second quarter of 2009 and $0.6 million in the prior year second quarter. These costs (primarily comprised of employee severance and facility consolidation and shutdown costs) were related to the structural reductions in labor across the organization and the consolidation and shutdown of facilities. We have substantially completed the consolidations of our packaging facility in Mankato, Minnesota and compounding facility in St. Clair, Michigan into other existing facilities, and shutdown our underperforming sheet operation in Donchery, France. During our second quarter we initiated the consolidation of our sheet facility in Atlanta, Georgia and early in our third quarter we initiated the shutdown of our specialty compounding production facility in Arlington, Texas and a business which manufactured products for the marine industry in Rockledge, Florida. We expect these consolidations and shutdowns to be substantially complete by the end of 2009.