Summary of SPARTECH CORP - Yahoo! Finance

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Highlights
During the second quarter and the first six months of 2009, we continued to operate in a weak end-market demand environment. Our underlying volume decreased 33% in both periods compared to the same periods in the prior year with the most significant declines occurring in our transportation, recreation and leisure and building and construction markets. Despite our significant sales volume declines, we mitigated the adverse earnings impact of the declines with the benefits from our improvement initiatives. We continue to make substantive progress on our strategic plan that was developed early in 2008. This plan 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. We reported operating earnings of $11.6 million and $9.0 million in our second quarter and first six months of 2009 which compared to $11.9 million and $10.3 million in the same periods of the prior year. In addition, we paid down $17.9 million of debt in the second quarter bringing the six months 2009 total to $11.3 million. Our fiscal year ends on the Saturday closest to October 31 and fiscal years generally contain 52 weeks. In addition, periods presented are fiscal periods unless noted otherwise. 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. Consolidated Results
Net sales were $234.3 million and $483.5 million in the three and six-month periods ended May 2, 2009, respectively, representing 36% and 31% decreases over the same periods of the prior year. These decreases were caused by:

                                        Three Months     Six Months
                   Underlying volume         (33 )%          (33 )%
                   Price/Mix                  (3 )             2

                                             (36 )%          (31 )%

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For both period comparisons, the decreases in underlying volumes were caused by lower end-market demand and decreases in discretionary spending in the economy. The lower volumes occurred across all of our segments and major end markets with the most significant declines occurring in our end markets which are more sensitive to discretionary spending, including the transportation, recreation and leisure and building and construction markets. The price/mix decline in the second quarter was primarily due to lower resin costs that were passed through to customers as lower selling prices.
The following table presents net sales, cost of sales, and the resulting gross margin in dollars and on a per pound sold basis for the second quarter and first six months of 2009 compared to the same periods in 2008. Cost of sales presented in the consolidated condensed statements of operations includes material and conversion costs and excludes amortization of intangible assets and restructuring and exit costs. Cost of sales are presented in the following table, and we have not presented it as a percentage of net sales because a comparison of this measure is distorted by changes in resin costs that are generally passed through to customers as changes to selling prices. These changes can materially affect the percentages but do not present accurate performance measures of the business.

                                          Three Months Ended          Six Months Ended
                                          May 2,        May 3,       May 2,       May 3,
                                           2009          2008         2009         2008

     Dollars and Pounds (in millions)
     Net sales                          $    234.3      $ 367.3     $   483.5     $ 702.5
     Cost of sales                           198.8        331.1         425.5       643.2

     Gross margin                       $     35.5      $  36.2     $    58.0     $  59.3


     Pounds Sold                             225.7        336.9         439.4       652.4


     Dollars per Pound Sold
     Net sales                          $    1.038      $ 1.090     $   1.100     $ 1.077
     Cost of sales                            .881         .983          .968        .986

     Gross margin                       $     .157      $  .107     $    .132     $  .091

The decrease in net sales per pound in the second quarter of 2009 compared to the same period in the prior year was caused by lower resin prices that were passed through to customers as lower selling prices. For the first six months of 2009, the increase in net sales per pound was due to higher selling prices in the first quarter of 2009. The 5.0 cent and 4.1 cent per pound increases in gross margin for the second quarter and first six months of 2009 reflect a reduced mix of lower margin products sold to the automotive sector of the transportation market, margin increases from our improvement initiatives and conversion cost reductions. Our conversion cost dollars decreased 30% and 26% in the second quarter and first six months comparisons and were caused by the impact of our cost reductions and the volume declines. In addition, we recognized a one-time reduction in conversion costs of $3.0 million during our second quarter of 2009 from a change in our vacation policy.
Selling, general and administrative expenses were $19.0 million and $42.1 million in the second quarter and first six months of 2009 compared to $22.4 million and $45.5 million in the same periods of the prior year. For both period comparisons, the benefits associated with our improvement initiatives were partially offset by the impact of higher bad debt expense. Additionally, we recognized a one-time reduction in our selling, general and administrative expenses of $1.1 million in the second quarter of 2009 from the change in our vacation policy.
Amortization of intangibles was $1.2 million and $2.3 million in the second quarter and first six months of 2009 compared to $1.3 and $2.6 million in the same periods of the prior year. The decreases in both period comparisons reflect the benefits derived from intangibles which were fully amortized by the end of 2008.
Restructuring and exit costs were $3.7 million and $4.5 million in the second quarter and first six months of 2009 compared to $0.6 million and $0.8 million in the same periods of the prior year. The costs during the second quarter and first six months of 2009 are mostly comprised of employee severance, facility consolidation and shut-down costs and accelerated depreciation resulting from our cost reduction efforts. We expect to incur approximately $1.8 million of additional restructuring expenses for initiatives announced through May 2, 2009 which will be mostly comprised of cash employee severance, facility consolidation and shut-down costs. In the future, we expect to announce additional cost reduction activities to address our end-market demand environment and support our improvement initiatives.

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Interest expense, net of interest income, was $4.2 million and $8.9 million in the second quarter and first six months of 2009 compared to $5.1 million and $10.2 million in the same periods of the prior year. These decreases were primarily driven by the $76.9 million debt paydowns during the last 12 months.
Our second quarter and first six months of 2009 effective tax rate was negatively impacted by increases in losses from our Donchery, France operations for which we have not recorded a tax benefit. Exclusive of the French loss, our effective tax rate reflected our typical 37-39% tax rate.
We reported net earnings of $3.8 million and a net loss of $1.3 million for the second quarter and first six months of 2009 compared to net earnings of $4.4 million and $0.9 million in the same periods of the prior year. These decreases reflect the impact of the items previously discussed. Segment Results
Custom Sheet and Rollstock Segment
Net sales were $106.4 million and $220.0 million in the three and six-month periods ended May 2, 2009, respectively, representing 36% and 30% decreases over the same periods of the prior year. These decreases were caused by:

                                        Three Months     Six Months
                   Underlying volume         (29 )%          (28 )%
                   Price/Mix                  (7 )            (2 )

                                             (36 )%          (30 )%

For both period comparisons, most of our underlying volume decreases in this segment occurred in the transportation, recreation and leisure, and building and construction markets. The price/mix declines were primarily due to lower resin costs that were passed through to customers as lower selling prices.
This segment's operating earnings were $4.0 million in both the second quarter and first six months of 2009 compared to $7.7 million and $5.9 million in the same periods of the prior year. The decreases in operating earnings for both period comparisons were primarily caused by the decrease in sales volumes and increase in restructuring and exit costs, partially offset by the benefits of our improvement initiatives.
Packaging Technologies
Net sales were $52.3 million and $107.4 million in the three and six-month periods ended May 2, 2009, respectively, representing 25% and 21% decreases over the same periods of the prior year. These decreases were caused by:

                                        Three Months     Six Months
                   Underlying volume         (18 )%          (19 )%
                   Price/Mix                  (7 )            (2 )

                                             (25 )%          (21 )%

The decreases in underlying volume reflected 5% and 7% declines to packaging-related markets for the second quarter and first six-months of 2009, which represent approximately 82% of this segment's total sales volume. The remaining declines in underlying volume for the three and six-month periods were attributable to the portion of this segment which sells to non-packaging related markets. The price/mix declines were primarily due to lower resin costs that were passed through to customers as lower selling prices.
This segment's operating earnings were $9.4 million and $15.6 million in the second quarter and first six months of 2009 compared to $4.9 million and $9.6 million in the same periods of the prior year. The increase in operating earnings was due to the positive benefits of a higher mix of food packaging products and the benefits of our improvement initiatives, including our Mankato, Minnesota facility consolidation.

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Color and Specialty Compounds Segment
   Net sales were $56.9 million and $125.2 million in the three and six-month
periods ended May 2, 2009, respectively, representing 47% and 41% decreases over
the same periods of the prior year. These decreases were caused by:

                                        Three Months     Six Months
                   Underlying volume         (43 )%          (42 )%
                   Price/Mix                  (4 )             1

                                             (47 )%          (41 )%

For both period comparisons, the decrease in underlying volume was due to lower sales of compounds across all of our end markets. In particular, underlying volumes sold to the automotive sector of the transportation market, the building and construction market and the film packaging end market were down significantly. The price/mix decline in the second quarter was caused by lower resin costs which were passed through to customers as lower selling prices and lower automotive sales.
This segment's operating earnings were $2.5 million and $2.2 million in the second quarter and first six months of 2009 compared to $4.8 million and $6.9 million of operating earnings in the same periods of the prior year. For both period comparisons, these declines were primarily caused by the decrease in sales volumes, partially offset by benefits from our improvement initiatives. Engineered Products Group
Net sales were $18.7 million and $30.8 million in the three and six-month periods ended May 2, 2009, respectively, representing 19% and 23% decreases over the same periods of the prior year. These decreases were caused by:

                                        Three Months     Six Months
                   Underlying volume         (15 )%          (24 )%
                   Price/Mix                  (4 )             1

                                             (19 )%          (23 )%

The decreases in underlying volume for both period comparisons were largely caused by lower sales volume to the marine and lawn and garden markets due to decreases in discretionary spending in the economy. The price/mix decrease in the second quarter represents lower resin costs that were passed through to customers as lower selling prices.
This group's operating earnings were $4.0 million and $5.1 in the second quarter and first six months of 2009 compared to $3.5 million and $5.1 million in the same periods of the prior year. The increase in operating earnings for the three-month period was largely was due to the positive benefits of our improvement initiatives, partially offset by the decline in sales volumes to the marine market. For the six month period, lower sales volumes of wheels to the lawn and garden market and reduced sales to the marine market were offset by the positive benefits of our improvement initiatives. Corporate
Corporate expenses are reported as selling, general and administrative expenses in the consolidated condensed statement of operations and include corporate office expenses, information technology costs, professional fees and the impact of foreign currency exchange. Corporate expenses were $8.4 million and $17.9 million in second quarter and the first six months of 2009 compared to $8.9 million and $17.3 million in the same periods of the prior year. Corporate expenses decreased in the second quarter of 2009 due primarily to the benefits of our improvement initiatives. For the first six months of 2009, excluding the impact of foreign currency exchange, Corporate expenses were essentially flat period-over-period.

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