NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, or unless otherwise noted)
1) Significant Accounting Policies
Basis of Presentation
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Certain reclassifications have been made to the prior period financial statements and notes to conform to the current period presentation. Dollars presented are in thousands except per share data, unless otherwise indicated.
On
October 23, 2012
, PolyOne Corporation (“PolyOne”), 2012 RedHawk, Inc., a wholly owned subsidiary of PolyOne (“Merger Sub”), 2012 RedHawk, LLC, a wholly owned subsidiary of PolyOne (“Merger LLC”), and Spartech Corporation (“Spartech”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Spartech will be merged with and into Merger Sub (the “Merger”), with Spartech to be the surviving corporation in the merger (the “Surviving Corporation”) and a wholly owned subsidiary of PolyOne, which is expected to be immediately followed by a merger of the Surviving Corporation with and into Merger LLC (the “Subsequent Merger”), with Merger LLC to be the surviving entity in the Subsequent Merger. The closing of the Merger is expected to occur during the first calendar quarter of 2013, subject to the satisfaction of customary closing conditions.
In
2009
, the Company sold its wheels and profiles businesses and closed and liquidated
three
businesses, including a manufacturer of boat components sold to the marine market and
one
compounding and
one
sheet business that previously serviced single customers. These businesses are classified as discontinued operations based on the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20,
Presentation of Financial Statements
-
Discontinued Operations
. Accordingly, for all periods presented herein, the consolidated statements of operations conform to this presentation. The wheels, profiles and marine businesses were previously reported in the Engineered Products group, and due to these dispositions, the Company no longer has this reporting group. See Notes 2 and 16 for further discussion of the Company's discontinued operations and segments, respectively.
The Company's fiscal year ends on the Saturday closest to October 31st and fiscal years generally contain
52 weeks
. However, because of this accounting convention, every fifth or sixth fiscal year has an additional week, and
2012
is reported as a
53 week
fiscal year. The Company's first quarter ended
February 4, 2012
and
year ended
November 3, 2012
included
14 weeks
and
53 weeks
, respectively, compared to
13 weeks
and
52 weeks
in the prior year periods. Years presented are fiscal unless noted otherwise.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of Spartech Corporation and its controlled affiliates. All intercompany transactions and balances have been eliminated in consolidation.
Segments
Spartech is organized into
three
reportable segments based on its operating structure and products manufactured. The
three
reportable segments are Custom Sheet and Rollstock, Packaging Technologies and Color and Specialty Compounds. The Company reorganized its internal reporting structure and management responsibilities for the Passaic matter and the associated closed facility during the third quarter of
2012
as a result of developments with the environmental matters, as described in Note 15. These costs were previously reported under the Color & Specialty Compounds segment, but are now reported in Corporate. During the fourth quarter of
2011
, the Company reorganized its internal reporting and management responsibilities for a specific product line from its Color and Specialty Compounds segment to its Custom Sheet and Rollstock segment to better align its management of this product line with end markets. During the second quarter of
2010
, the Company changed its organizational reporting and management responsibilities of
two
businesses previously included in our Color and Specialty Compounds segment to our Custom Sheet and Rollstock segment. Also in that second quarter, the Company reorganized its internal reporting and management responsibilities for certain product lines between its Custom Sheet and Rollstock and Packaging Technologies segments to better align its management of these product lines with end markets. These management and reporting changes resulted in a reorganization of the Company's
three
reportable segments, and historical segment results have been reclassified to conform to these changes. See “Note 16 - Segment Information” of the Notes to Consolidated Financial Statements for certain financial information regarding each segment.
Revenue Recognition
The Company manufactures products either to standard specifications or to custom specifications agreed upon with the customer in advance, and it inspects products prior to shipment to ensure that these specifications are met. Revenues are recognized as the product is shipped and title passes to the customer in accordance with GAAP in the United States based on ASC 605,
Revenue Recognition
. Shipping and handling costs associated with the shipment of goods are recorded as costs of sales in the consolidated statement of operations.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions affect many items in the financial statements. These include allowance for doubtful accounts, sales returns and allowances, inventory obsolescence, income tax liabilities and assets and related valuation allowances, asset impairments, valuations of goodwill and other intangible assets, value of equity-based awards, restructuring reserves, self-insurance reserves, environmental reserves, contingencies, certain accruals, and the allocation of corporate costs to segments. Actual results may differ from those estimates and assumptions, and such results may affect the results of operations, financial condition and cash flows.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less.
Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of customers, including reviewing creditworthiness from third-party reporting agencies, monitoring market and economic conditions, monitoring payment histories, and adjusting credit limits as necessary. The Company continually monitors collections and payments from customers and maintains a provision for estimated credit losses based on an assessment of risk, historical write-off experience and specifically identified customer collection issues.
Inventories
Inventories are valued at the lower of cost or market. Inventory reserves reduce the cost basis of inventory. Inventory values are primarily based on either actual or standard costs, which approximate average cost. Standard costs are revised at least once annually, the effect of which is allocated between inventories and cost of sales. Finished goods include the costs of material, labor and overhead.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation. Major additions and improvements are capitalized. Maintenance and repairs are expensed as incurred. Depreciation expense is recorded on a straight-line basis over the estimated useful lives of the related assets as shown below and totaled $
29,953
, $
31,135
and $
32,858
in years
2012
,
2011
and
2010
, respectively.
|
|
|
|
Classification
|
|
Years
|
Buildings and leasehold improvements
|
|
20-25
|
Machinery and equipment
|
|
12-16
|
Furniture and fixtures
|
|
5-10
|
Computer equipment and software
|
|
3-7
|
In compliance with ASC 360,
Property, Plant and Equipment
, long-lived assets are reviewed for impairment whenever, in management's judgment, conditions indicate the carrying amount may not be recoverable. In evaluating the recoverability of long-lived assets, such assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. Such impairment tests compare estimated undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its fair value or, if fair value is not readily determinable, to an estimated fair value based on discounted cash flows, and a corresponding loss is recorded. See Note 5 for further discussion of the Company's property, plant and equipment balances and impairment testing results.
Goodwill
The Company follows the guidance of ASC 805,
Business Combinations
, in recording goodwill arising from a business combination as the excess of purchase price over the fair value of identifiable assets acquired and liabilities assumed. Goodwill is assigned to the reporting unit that benefits from the acquired business. The Company's annual goodwill impairment testing date is the first day of the Company's fourth quarter. In addition, a goodwill impairment assessment is performed if an event
occurs or circumstances change that would make it more likely than not that the fair value of a reporting unit is below its carrying amount. The goodwill impairment test is a two-step process that requires the Company to make assumptions regarding fair value. The first step consists of estimating the fair value of each reporting unit using a number of factors, including projected future operating results and business plans, economic projections, anticipated future cash flows, discount rates, the allocation of shared or corporate items and comparable marketplace fair value data from within a comparable industry grouping. The estimated fair values of each reporting unit are compared to the respective carrying values, which includes allocated goodwill. If the estimated fair value is less than the carrying value, the second step is completed to compute the impairment amount by determining the “implied fair value” of goodwill. This determination requires the allocation of the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any remaining unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value to compute the goodwill impairment amount. Management believes that the estimates of the underlying components of fair value are reasonable. See Note 4 for further discussion of the Company's goodwill balances and annual impairment testing results.
Other Intangible Assets
Costs allocated to customer relationships, product formulations and other intangible assets are based on their fair value at the date of acquisition. The cost of other intangible assets is amortized on a straight-line basis over the assets' estimated useful life ranging from
two
(
2
) to
nineteen
(
19
) years. In accordance with ASC 350,
Intangibles - Goodwill and Other
, all amortizable intangible assets are assessed for impairment whenever events indicate a possible loss. Such an assessment involves estimating undiscounted cash flows over the remaining useful life of the intangible asset. If the assessment indicates that undiscounted cash flows are less than the recorded value of the intangible asset, the carrying amount of the intangible asset is reduced by the estimated cash-flow shortfall on a discounted basis, and a corresponding loss is recorded. See Note 4 for further discussion of the Company's intangible asset balances and impairment testing results.
Fair Value of Financial Instruments
The Company uses the following methods and assumptions in estimating fair value of financial instruments:
|
|
▪
|
Cash, accounts receivable, notes receivable, accounts payable and accrued liabilities - The carrying value of these instruments approximates fair value due to their short-term nature.
|
|
|
▪
|
Long-term debt (including bank credit facilities) - The estimated fair value of the long-term debt is based on estimated borrowing rates to discount the cash flows to their present value as provided by a broker, or otherwise, quoted, current market prices for same or similar issues. See Note 3 for further details.
|
Stock-Based Compensation
In accordance with ASC 718,
Compensation - Stock Compensation
, the Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors based on estimated fair values.
Foreign Currency
Assets and liabilities of the Company's non-US operations are translated from their functional currency to US dollars using exchange rates in effect at the balance sheet date, and adjustments resulting from the translation process are included in accumulated other comprehensive income. All income and expense activity is translated using the average exchange rate during the period. Transactional gains and losses arising from receivable and payable balances, including intercompany balances in the normal course of business that are denominated in a currency other than the functional currency of the operation, are recorded in the consolidated statements of operations when they occur. The impact of the Company's foreign currency adjustments from continuing operations, net, resulted in a $
588
gain, a $
220
gain and a $
2,146
loss in
2012
,
2011
and
2010
, respectively.
Income Taxes
In accordance with ASC 740,
Income Taxes
, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for credit and net operating loss carryforwards and then assessed (including the anticipation of future income) to determine the likelihood of realization. A valuation allowance is established to the extent management believes that it is more likely than not that a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using the rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse and the credits are expected to be used. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The actual realization of the deferred taxes may be materially different from the amounts provided for in the consolidated financial statements due to the complexities of tax laws, changes in statutory tax rates, and estimates of the Company's future taxable income levels by jurisdiction. Deferred income taxes are not provided for undistributed earnings on foreign consolidated subsidiaries to the extent such earnings are reinvested for an indefinite period of time.
The Company accounts for income taxes under the provisions of ASC 740. Under ASC 740, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50% likely to be realized upon resolution of the benefit. Tax authorities regularly examine the Company's returns in the jurisdictions in which it does business. Management regularly assesses the tax risk of the Company's return filing positions and believes that its accruals for uncertain tax positions are adequate as of
November 3, 2012
.
Comprehensive Income
At
November 3, 2012
and
October 29, 2011
, other comprehensive income (loss) consisted only of cumulative foreign currency translation adjustments.
Restructuring and Exit Costs
The Company follows the guidance of ASC 420,
Exit or Disposal Cost Obligations
, in recognizing restructuring costs related to exit or disposal cost obligations. Documentation is maintained and updated to ensure that accruals are properly supported. If management determines that there is a change in estimate, the accruals are adjusted to reflect this change.
Merger and Transaction Costs
In conjunction with the definitive Merger Agreement under which PolyOne Corporation will acquire all the outstanding shares of Spartech, the Company has incurred various costs triggered by and directly related to the merger transaction. In the
fourth
quarter of
2012
, Spartech recognized
$6.9 million
of merger and transaction costs, including stock compensation expense from the acceleration of vesting of Spartech's equity awards, as outlined in the original equity agreements, legal and financial adviser fees, and other costs directly related to the proposed merger transaction.
Litigation and Other Contingencies
The Company is involved in litigation in the ordinary course of business, including environmental matters. Management routinely assesses the likelihood of adverse judgments or outcomes to those matters, as well as ranges of probable losses, to the extent losses are reasonably estimable. In accordance with ASC 450,
Contingencies
, accruals for such contingencies are recorded to the extent that management concludes their occurrence is probable and the financial impact, should an adverse outcome occur, is reasonably estimable. Disclosure for specific legal contingencies is provided if the likelihood of occurrence is at least reasonably possible and the exposure is considered material to the consolidated financial statements. In making determinations of likely outcomes of litigation matters, management considers many factors. These factors include, but are not limited to, past experience, interpretation of relevant laws or regulations and the specifics and status of each matter. If the assessment of the various factors changes, the estimates may change. That may result in the recording of an accrual or a change in a previously recorded accrual. Predicting the outcome of claims and litigation and estimating related costs and exposure involve substantial uncertainties that could cause actual costs to vary materially from estimates and accruals.
New Accounting Standards
In June 2011, the FASB issued an amendment to ASC 220,
Comprehensive Income
. This amendment eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity. In addition, items of other comprehensive income that may be reclassified to profit or loss in the future are required to be presented separately from those that would never be reclassified. The amendment is effective for fiscal years beginning after December 15, 2011, and interim periods within that year. Accordingly, we will adopt this amendment in first quarter fiscal year 2013. Adoption of this amendment is not expected to have an effect on the Company's financial position, results of operations or cash flows.
In May 2011, the FASB issued a new accounting standard update that amends ASC 820,
Fair Value Measurement
, and includes certain enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The amendment became effective for interim and annual periods beginning after December 15, 2011. For a description of how the Company estimates fair value and the process for reviewing fair value measurements classified as Level 3 in the fair value hierarchy, refer to Note 3. Adoption of this amendment did not have an effect on the Company's financial position, results of operations or cash flows.
2) Discontinued Operations
Wheels Business Divestiture
On
October 27, 2009
, the Company sold its wheels business, a manufacturer of PVC tire and plastic wheel assemblies primarily for the lawn and garden and medical markets. The sales price of $
34,500
included $
6,000
of contingent payments, which are based on performance of the wheels business during
2010
,
2011
and
2012
. To date, the Company has not recognized
any of the contingent consideration from this transaction. The wheels business has been segregated from continuing operations and presented as discontinued operations. The wheels business was previously reported as a part of the Engineered Products group, which no longer exists.
Profiles Business Divestiture
Effective
October 3, 2009
, the Company sold its profiles extrusion business located in Winnipeg, Manitoba, Canada. The profiles business was principally engaged in the manufacturing of profile window frames and fencing for the building and construction market. The sales price for the business was
$7,000
Canadian (
$6,486
US). The profiles business has been segregated from continuing operations and presented as discontinued operations. The profiles business was previously reported as a part of the Engineered Products group, which no longer exists. In
October 2010
, the Company finalized the closing EBITDA and working capital sales price adjustment of the Profiles divesture, which resulted in a reduction to the prior year gain on sale by
$571
.
Other Closures
During
2009
, the Company closed and liquidated its marine business in Rockledge, Florida, closed its sheet business in Donchery, France, and closed a compounding business located in Arlington, Texas. These businesses have been separated from continuing operations and are presented as discontinued operations.
During
2009
, the Company filed a proof of claim in Chemtura's Chapter 11 case, alleging losses for breach of contract, fixed asset write-offs, severance and other related facility closure costs. In the first quarter of
2011
, the Company reached a final settlement agreement with Chemtura and obtained the approval of the Bankruptcy Court overseeing Chemtura's bankruptcy proceedings for the settlement of the claim for
$4,188
in cash and equity in the newly reorganized Chemtura, which was subsequently sold, resulting in
$4,844
of total cash proceeds. Chemtura was the sole customer at our closed Arlington, Texas, facility and closure and related expenses were accounted for as discontinued operations.
A summary of the net sales and the net earnings (loss) from discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8
|
|
Costs and expenses
|
166
|
|
|
(4,459
|
)
|
|
533
|
|
|
(166
|
)
|
|
4,459
|
|
|
(525
|
)
|
(Loss) gain on the sale of discontinued operations
|
—
|
|
|
—
|
|
|
(571
|
)
|
(Loss) earnings from discontinued operations before income taxes
|
(166
|
)
|
|
4,459
|
|
|
(1,096
|
)
|
(Benefit) provision for income taxes
|
(75
|
)
|
|
2,143
|
|
|
(364
|
)
|
(Loss) earnings from discontinued operations, net of tax
|
$
|
(91
|
)
|
|
$
|
2,316
|
|
|
$
|
(732
|
)
|
|
|
3)
|
Fair Value of Financial Instruments
|
The Company follows the ASC 820,
Fair Value Measurement
, which defines fair value, and establishes a framework for measuring fair value in accordance with GAAP.
The Company performs an analysis of all existing financial assets and financial liabilities measured at fair value on a recurring basis to determine the significance and character of all inputs used to determine their fair value. The Company's financial instruments, including cash, accounts receivable, notes receivable, accounts payable and accrued liabilities, have net carrying values that approximate their fair values due to the short-term nature of these instruments.
The standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories:
Level 1 inputs - Quoted prices for identical assets and liabilities in active markets.
Level 2 inputs - Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, observable inputs other than quoted prices and inputs that are derived principally from or corroborated by other observable market data.
Level 3 inputs - Unobservable inputs reflecting the entity's own assumptions about the assumptions market participants would use in pricing the asset or liability.
The estimated fair value of the long-term debt, which falls in Level 2 of the fair value hierarchy, is based on estimated borrowing rates to discount the cash flows to their present value as provided by a broker, or otherwise, quoted, current market prices for same or similar issues. The following table presents the carrying amount and estimated fair value of long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
Total debt (including credit facilities)
|
$
|
134,924
|
|
|
$
|
141,340
|
|
|
$
|
157,211
|
|
|
$
|
161,259
|
|
4) Goodwill and Identifiable Intangible Assets
Goodwill
The Company's annual measurement date for its goodwill impairment test is the first day of its fourth quarter. The Company also tests for impairment if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. As discussed in Note 1, the Company reorganized its reportable segments in the third quarter of
2012
. This realignment had no impact on the classification of goodwill at the reporting unit level.
The assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time the Company performs the valuation. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rate, EBITDA (earnings before interest, taxes, depreciation and amortization) and capital expenditure forecasts. The use of different assumptions, inputs and judgments or changes in circumstances could materially affect the results of the valuation. Due to the inherent uncertainty involved in making these estimates, actual results could differ from the Company's estimates. The following is a description of the valuation methodologies the Company used to derive and test the reasonableness of the fair value of the reporting units:
|
|
▪
|
Income approach: To determine fair value, the Company discounted the expected cash flows of the reporting units. The Company calculated expected cash flows using forecasted annual revenue growth rates between approximately
3%
-
14%
for each reporting unit over the next
five
years. The Company used discount rates between approximately
13%
-
14%
, which represent the estimated weighted average cost of capital and reflect the overall level of inherent risk involved in the respective operations and the rate of return expected by market participants. To estimate cash flows beyond the final year of the forecast of five years, the Company used terminal growth rates of between approximately
2%
-
3%
and incorporated the present value of the resulting terminal value into its estimate of fair value.
|
|
|
▪
|
Guideline public company multiples: The Company used the guideline public company method to select reasonably similar/guideline publicly traded companies for each of the Company's reporting units. Using the guideline public company method, the Company calculated EBITDA multiples for each of the public companies using both historical and forecasted EBITDA figures. By applying these multiples to the appropriate historical and forecasted EBITDA figures for each reporting unit, fair value estimates were calculated.
|
The Company weighted the discounted cash flow method by
100%
in the valuation of each reporting unit and relied upon fair value estimates for each reporting unit using the public company and transaction multiples to test the reasonableness of the fair value estimates under the discounted cash flow method.
In the fourth quarter of
2012
, the Company concluded that the fair value of its Packaging Technologies reporting unit requires no impairment. Packaging Technologies has a goodwill balance of
$47,466
and is the only reporting unit with a goodwill balance as of fiscal year-end
2012
. Packaging Technologies fair value exceeded its carrying amount of total assets by approximately
12%
. The fair value is based on growth assumptions and certain market conditions which may differ from actual results and potentially have a negative effect on the fair value estimate. In the fourth quarter of
2011
, the Company concluded that the fair value of its Custom Sheet and Rollstock reporting unit was significantly below its carrying amount and that all of this reporting unit's goodwill was impaired. The $
40,455
impairment was caused by a lower aggregate market capitalization as well as lower
2011
earnings for this business. The Company's estimated goodwill fair value of
zero
for this business was based upon third-party valuations and internal estimates of discounted cash flows. In the fourth quarter of
2010
, the Company concluded that the fair value of goodwill in its Packaging Technologies and Color and Specialty Compounds reporting units were significantly below their carrying amounts and recorded goodwill impairments of $
44,800
and $
11,349
, respectively. The impairments were caused by lower earnings in these businesses and a difference between the Company's
enterprise value and book value. The Company measured the impairments based upon a third-party valuations and internal estimates of discounted cash flows. Changes in the carrying amount of goodwill for the years ended
November 3, 2012
and
October 29, 2011
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Sheet and
Rollstock
|
|
Packaging
Technologies
|
|
Color and Specialty
Compounds
|
|
Total
|
Goodwill balance as of October 30, 2010
|
$
|
40,455
|
|
|
$
|
47,466
|
|
|
$
|
—
|
|
|
$
|
87,921
|
|
Impairment
|
(40,455
|
)
|
|
—
|
|
|
—
|
|
|
(40,455
|
)
|
Goodwill balance as of October 29, 2011
|
—
|
|
|
47,466
|
|
|
—
|
|
|
47,466
|
|
Impairment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill balance as of November 3, 2012
|
$
|
—
|
|
|
$
|
47,466
|
|
|
$
|
—
|
|
|
$
|
47,466
|
|
Identifiable Intangible Assets
As of
November 3, 2012
and
October 29, 2011
, the Company had amortizable intangible assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
Customer contracts / relationships
|
$
|
5,460
|
|
|
$
|
(3,395
|
)
|
|
$
|
2,065
|
|
|
$
|
5,460
|
|
|
$
|
(2,975
|
)
|
|
|
$
|
2,485
|
|
Product formulations / trademarks
|
19,943
|
|
|
(10,826
|
)
|
|
9,117
|
|
|
19,943
|
|
|
(9,556
|
)
|
|
|
10,387
|
|
|
$
|
25,403
|
|
|
$
|
(14,221
|
)
|
|
$
|
11,182
|
|
|
$
|
25,403
|
|
|
$
|
(12,531
|
)
|
|
|
$
|
12,872
|
|
Amortization expense for intangible assets totaled
$1,689
,
$1,689
and
$3,774
in
2012
,
2011
and
2010
, respectively. Amortization expense for amortizable intangible assets over the next five years is estimated to be:
|
|
|
|
|
|
Year Ended
|
|
Intangible
Amortization
|
2013
|
|
$
|
1,689
|
|
2014
|
|
1,677
|
|
2015
|
|
1,546
|
|
2016
|
|
1,546
|
|
2017
|
|
1,239
|
|
Thereafter
|
|
3,485
|
|
|
|
$
|
11,182
|
|
The Company performs annual impairment analyses pursuant to ASC 360,
Property, Plant, and Equipment
, for certain other intangible assets that had indications that the carrying amount may not be recoverable. Based on the Company's impairment analyses using the expected present value of future cash flows, the Company determined that certain intangible assets were either fully or partially impaired in
2010
. Accordingly, the Company recorded
$10,013
of impairments to write down these intangible assets to fair value in
2010
. Intangible asset impairments of
$204
,
$7,020
, and
$2,789
were recorded in the Custom Sheet and Rollstock, Packaging Technologies, and Color and Specialty Compounds segments, respectively.
5) Property, Plant and Equipment
Property, plant and equipment at
November 3, 2012
and
October 29, 2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Land
|
$
|
9,872
|
|
|
$
|
9,883
|
|
Buildings and leasehold improvements
|
105,579
|
|
|
102,920
|
|
Machinery and equipment
|
390,546
|
|
|
389,030
|
|
Computer equipment and software
|
39,504
|
|
|
39,008
|
|
Furniture and fixtures
|
3,750
|
|
|
4,196
|
|
|
549,251
|
|
|
545,037
|
|
Accumulated depreciation
|
(351,878
|
)
|
|
(336,963
|
)
|
|
$
|
197,373
|
|
|
$
|
208,074
|
|
In
2012
and
2011
, the Company performed impairment analyses on certain fixed assets pursuant to ASC 360,
Property, Plant and Equipment
, for certain buildings and machinery and equipment that had indications that the carrying amount may not be recoverable. Based on the Company's impairment analyses using the sum of the undiscounted cash flows associated with each asset (asset group) tested, the Company determined that none of the assets tested were impaired.
In
2010
, due to a change in the manner and extent to which certain fixed assets will be used, the Company performed impairment analyses pursuant to ASC 360,
Property, Plant and Equipment
, on certain buildings and machinery and equipment where it was determined that the carrying amount may not be recoverable. Included in the analyses were buildings and machinery and equipment that are held for sale or have been abandoned. Based on the Company's impairment analyses of fair value using the expected present value of future cash flows and the market approach, the Company determined that certain fixed assets were either fully or partially impaired. Accordingly, fixed asset impairments of
$3,661
in total were recorded in
2010
which included
$506
,
$2,326
and
$829
in the Custom Sheet and Rollstock, Packaging Technologies, and Color and Specialty Compounds segments, respectively.
6) Restructuring
Restructuring and exit costs were recorded in the consolidated statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Restructuring and exit costs:
|
|
|
|
|
|
Custom Sheet and Rollstock
|
$
|
1,054
|
|
|
$
|
609
|
|
|
$
|
2,585
|
|
Packaging Technologies
|
—
|
|
|
247
|
|
|
(662
|
)
|
Color and Specialty Compounds
|
1,467
|
|
|
1,322
|
|
|
5,276
|
|
Corporate
|
—
|
|
|
6
|
|
|
91
|
|
Total restructuring and exit costs
|
2,521
|
|
|
2,184
|
|
|
7,290
|
|
Income tax benefit
|
(655
|
)
|
|
(830
|
)
|
|
(2,836
|
)
|
Impact on net earnings from continuing operations
|
$
|
1,866
|
|
|
$
|
1,354
|
|
|
$
|
4,454
|
|
2012 Restructuring Actions
The Company initiated restructuring actions to reduce costs and reposition its portfolio to more specialty and higher-value products. On
May 15, 2012
, the Company announced a plan calling for the consolidation of
two
Custom Sheet and Rollstock facilities in Canada into the Granby, Quebec location. On
October 16, 2012
, the Company announced a plan calling for the consolidation of the Color and Specialty Compounds facility in Stratford, Ontario into the Cape Girardeau, MO and Manitowoc, WI locations. These actions were done in order to reduce fixed costs and better leverage equipment and resources. The Company expects to incur approximately
$2,700
in restructuring costs over the next 12 months, which will be comprised of employee severance, facility consolidation and shut-down costs and fixed asset valuation adjustments.
The following table summarizes the cumulative restructuring and exit costs incurred under the
2012
restructuring plans:
|
|
|
|
|
|
2012
|
Employee severance and other exit costs
|
$
|
2,229
|
|
Fixed asset valuation adjustments, net
|
292
|
|
Total
|
$
|
2,521
|
|
2008 Restructuring Plan
In
2008
, the Company announced a restructuring plan to address declines in end-market demand and build a low cost-to-serve model. The plan included the consolidation of production facilities, shutdown of underperforming and non-core operations and reductions in the number of manufacturing and administrative jobs. Since the plan was initiated, the Company has closed a packaging facility in Mankato, Minnesota; compounding facilities in St. Clair, Michigan, and Kearny, New Jersey; and sheet facilities in Richmond, Indiana, Atlanta, Georgia, and Arlington, Texas. The following table summarizes the cumulative restructuring and exit costs incurred to date under the
2008
restructuring plan:
|
|
|
|
|
|
Cumulative
To-Date
|
Employee severance
|
$
|
6,292
|
|
Facility consolidation and shut-down costs
|
6,943
|
|
Fixed asset valuation adjustments, net
|
3,225
|
|
Total
|
$
|
16,460
|
|
Employee severance includes costs associated with the reduction in jobs resulting from facility consolidations and shutdowns as well as other job reductions. Facility consolidation and shutdown costs primarily include costs associated with shutting down production facilities, terminating leases and relocating production lines to continuing production facilities. Fixed asset valuation adjustments, net represent the effect from accelerated depreciation for reduced lives on property, plant and equipment and adjustments to the carrying value of assets held for sale to fair value, net of gains or losses on the ultimate sales of the assets.
The Company did not incur any significant additional restructuring and exit costs subsequent to
2011
from the
2008
restructuring plan because all of the initiatives announced in conjunction with this plan were substantially finalized. As of
November 3, 2012
, the Company had
$2,614
of assets held-for-sale, the values of which were estimated at fair value upon sale. The estimated fair value of assets held for sale, which falls within Level 3 of the fair value hierarchy, represents management's best estimate of fair value upon sale and is determined based on broker analyses of prevailing market prices for similar assets.
The Company's total restructuring liability, representing severance and relocation costs, was
$2,027
and
$382
at
November 3, 2012
and
October 29, 2011
, respectively. Cash payments for restructuring activities of continuing operations were
$453
and
$1,477
for the years ended
November 3, 2012
and
October 29, 2011
, respectively.
7) Proposed Merger
On
October 23, 2012
, PolyOne Merger Sub, Merger LLC, and Spartech entered into a Merger Agreement pursuant to which Spartech will be merged with and into Merger Sub, with Spartech to be the surviving corporation in the Merger and a wholly owned subsidiary of PolyOne.
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Spartech common stock will be canceled and converted into the right to receive consideration equal to
$2.67
in cash and
0.3167
PolyOne common shares. In the aggregate, PolyOne will issue approximately
9.9 million
of its common shares and pay approximately
$84,000,000
in cash to Spartech shareholders.
The closing of the Merger is expected to occur during the first calendar quarter of 2013, subject to the satisfaction of customary closing conditions, including, among other things: (1) the adoption and approval of the Merger Agreement and the Merger by Spartech's stockholders; (2) receipt of required regulatory approvals; (3) the absence of certain legal impediments preventing the consummation of the Merger; (4) the effectiveness of the registration on Form S-4 to be filed by PolyOne relating to the PolyOne common shares to be issued in the Merger; (5) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (6) the approval by the New York Stock Exchange of the listing of PolyOne common shares issuable to Spartech stockholders under the Merger Agreement; and (7) the delivery of opinions from counsel to PolyOne and counsel to Spartech to the effect that the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. Early termination of the required waiting period under Hart-Scott-Rodino Antitrust Improvements Act was granted on
November 21, 2012
.
Each of PolyOne and Spartech has made representations, warranties and covenants in the Merger Agreement. Spartech's covenants and agreements include, among other things: (1) subject to certain conditions, to conduct its business in the ordinary course of business during the period between the execution of the Merger Agreement and the completion of the Merger; and (2) not to solicit or initiate discussions with third parties regarding alternative transactions and to respond to proposals regarding such alternative transactions only in accordance with the terms of the Merger Agreement. PolyOne's covenants and agreements include, among other things: (1) to conduct its business in the ordinary course of business during the period between the execution of the Merger Agreement and the completion of the Merger, subject to certain conditions; and (2) to prepare and file with the SEC a registration statement on Form S-4 to register the securities issuable to Spartech stockholders under the Merger Agreement.
Spartech is required to conduct its business in the ordinary course of business and within certain defined restrictions between the date of signing the agreement to the closing date. Spartech is required to manage within these restrictions or obtain consent in writing from PolyOne to conduct certain activities.
In conjunction with the definitive merger agreement, the Company has incurred various costs triggered by and directly related to the merger transaction. In the
fourth
quarter of
2012
, Spartech recognized merger and transaction costs as follows:
|
|
|
|
|
|
2012
|
Merger and Transaction Costs:
|
|
Stock compensation expense from accelerated vesting
|
$
|
4,865
|
|
Legal and financial advisor fees
|
1,888
|
|
Other merger and transaction costs
|
148
|
|
Total merger and transaction costs
|
6,901
|
|
Income tax benefit
|
(2,415
|
)
|
Impact on net earnings from continuing operations
|
$
|
4,486
|
|
Upon closing of the proposed merger transaction, an amount related to the make-whole on the Company's Senior Notes of
$11.9 million
as of
November 3, 2012
would be required to be paid in conjunction with the transaction along with
$4.2 million
to the Company's financial advisors. If the merger does not close, the Merger Agreement provides that Spartech is required to pay a termination fee of
$8.8 million
if the Merger Agreement is terminated under certain circumstances, including if we terminate to accept an alternative acquisition proposal.
8) Inventories
Inventories at
November 3, 2012
and
October 29, 2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Raw materials
|
$
|
58,107
|
|
|
$
|
52,270
|
|
Production supplies
|
7,129
|
|
|
6,843
|
|
Finished goods
|
49,397
|
|
|
41,225
|
|
Inventory reserves
|
(9,534
|
)
|
|
(9,152
|
)
|
Total inventories, net
|
$
|
105,099
|
|
|
$
|
91,186
|
|
9) Stock-Based Compensation
The Company's
2004
Equity Compensation Plan (the “Plan”) allows for grants of stock options, restricted stock and restricted stock units. In
2007
, the Compensation Committee of the Board of Directors adopted an amendment to the Plan that provides for the grant of stock appreciation rights (“SARs”) and performance shares. Beginning in
2007
, SARs, restricted stock and performance shares had replaced stock options as the equity compensation instruments used by the Company. The Company did not issue performance shares during
2012
,
2011
, or
2010
.
As of the date of the announcement of the merger agreement, vesting related to all outstanding SARs, restricted stock and Performance Shares were accelerated and expensed in accordance with the original equity grant agreements. This accelerated
vesting was required upon the signing of the Merger Agreement on
October 23, 2012
and is not contingent upon closing of the Merger.
General
The following table details the effect of stock-based compensation from the issuance of equity compensation instruments on operating earnings (loss), net earnings (loss), and basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Cost of sales
|
$
|
82
|
|
|
$
|
86
|
|
|
$
|
129
|
|
Selling, general and administrative
|
1,529
|
|
|
2,169
|
|
|
2,978
|
|
Merger and transaction costs
|
4,865
|
|
|
—
|
|
|
—
|
|
Total stock-based compensation expense included in operating earnings (loss)
|
6,476
|
|
|
2,255
|
|
|
3,107
|
|
Income taxes benefit
|
(2,267
|
)
|
|
(857
|
)
|
|
(1,182
|
)
|
Impact on net earnings (loss) from continuing operations
|
$
|
4,209
|
|
|
$
|
1,398
|
|
|
$
|
1,925
|
|
Effect on basic and diluted earnings (loss) from continuing operations
|
$
|
0.14
|
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
As discussed in Note 19, the Company entered into a separation and release agreement with its former President and Chief Executive Officer during
2010
. Pursuant to the terms of his employment, non-compete and severance agreements with the Company, all non-vested stock compensation was forfeited on his termination date, and $
494
of compensation expense was reversed related to equity instruments that were initially expected to vest but were ultimately forfeited.
SARs
SARs are granted with lives of
ten
(
10
) years, are graded vesting over
four
(
4
) years and are settled in the Company's common stock. The estimated fair value is computed using the Black-Scholes option-pricing model. Expected volatility is based on historical periods commensurate with the expected life of SARs, and expected life is based on historical experience and expected exercise patterns in the future. Stock compensation expense is recognized in the consolidated statements of operations ratably over the vesting period based on the number of instruments that are expected to ultimately vest. The following table presents the assumptions used in valuing SARs granted during
2012
,
2011
, and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Weighted average fair value
|
$
|
2.90
|
|
|
$
|
4.86
|
|
|
$
|
5.62
|
|
Assumptions used:
|
|
|
|
|
|
Expected dividend yield
|
0%
|
|
0%
|
|
0%
|
Volatility
|
89%
|
|
71%
|
|
70%
|
Risk-free interest rates
|
0.9%
|
|
1.0-2.2%
|
|
1.4-2.3%
|
Expected lives
|
4.5 Years
|
|
5.2 Years
|
|
5.5 Years
|
A summary of activity for SARs during
2012
is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
Outstanding, beginning of the year
|
1,454
|
|
|
$
|
9.56
|
|
Granted
|
486
|
|
|
4.40
|
|
Exercised
|
34
|
|
|
4.30
|
|
Forfeited
|
190
|
|
|
8.93
|
|
Outstanding, end of the year
|
1,716
|
|
|
$
|
8.30
|
|
Exercisable, end of the year
|
1,716
|
|
|
$
|
8.30
|
|
Information with respect to SARs outstanding at
November 3, 2012
is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Outstanding
Shares
|
|
Weighted
Average Exercise
Price
|
|
Remaining
Contractual Life
(in Years)
|
|
Exercisable
Shares
|
|
Weighted
Average
Exercise Price
|
$2.33 - 4.81
|
|
633
|
|
|
$
|
4.19
|
|
|
8.4
|
|
|
633
|
|
|
$
|
4.19
|
|
$6.98 - 8.18
|
|
306
|
|
|
7.02
|
|
|
8.0
|
|
|
306
|
|
|
7.02
|
|
$8.80 - 9.92
|
|
483
|
|
|
9.31
|
|
|
7.4
|
|
|
483
|
|
|
9.31
|
|
$10.47 - 29.12
|
|
294
|
|
|
16.64
|
|
|
5.6
|
|
|
294
|
|
|
16.64
|
|
|
|
1,716
|
|
|
|
|
|
|
1,716
|
|
|
|
|
The SARs outstanding at
November 3, 2012
had an intrinsic value of $
3,494
.
Restricted Stock
Restricted stock is granted at fair value based on the closing stock price on the date of grant and vests ratably over
four
(
4
) years. Stock compensation expense is recognized in the consolidated statements of operations ratably over the vesting period based on the number of instruments that are expected to ultimately vest.
A summary of activity for restricted stock during
2012
is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Shares
|
|
Weighted
Average Price
|
Non-vested , beginning of the year
|
250
|
|
|
$
|
7.98
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
232
|
|
|
7.99
|
|
Forfeited
|
18
|
|
|
7.88
|
|
Non-vested , end of the year
|
—
|
|
|
$
|
—
|
|
There is no unvested restricted stock as of
November 3, 2012
due to the accelerated vesting from the signed merger agreement.
Restricted Stock Units
Restricted stock units, which have been awarded only to non-employee directors of the Company, provide the grantee the right to receive one share of common stock per restricted unit at the end of the restricted period and to receive dividend equivalents during the restricted period in the form of additional restricted stock units. For restricted stock unit awards prior to
2009
, the restricted period ends one year after the director leaves the Board of Directors. In
2009
, the Plan was amended to change the definition of the restriction period to “upon immediately leaving the Board of Directors.” This change was effective for awards granted in
2009
and forward. During
2012
,
2011
, and
2010
, the Company granted
79,548
,
34,092
and
36,421
restricted stock units with fair values of $
350
, $
300
and $
350
, respectively, to non-employee directors based on the fair value of the Company's stock at the date of grant. As of
November 3, 2012
, there were no unvested restricted stock units.
Stock Options
Beginning in
2007
, the Company no longer granted stock options under its plan. Stock-based compensation expense is recognized in the consolidated statements of operations ratably over the vesting period based on the number of options that are expected to ultimately vest.
A summary of activity for stock options for
2012
is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
Outstanding, beginning of the year
|
670
|
|
|
$
|
22.34
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Forfeited
|
185
|
|
|
21.84
|
|
Outstanding, end of the year
|
485
|
|
|
$
|
22.53
|
|
Exercisable, end of the year
|
485
|
|
|
$
|
22.53
|
|
Information with respect to options outstanding at
November 3, 2012
is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Outstanding
Shares
|
|
Weighted
Average
Exercise Price
|
|
Remaining
Contractual
Life (in Years)
|
|
Exercisable
Shares
|
|
Weighted
Average
Exercise Price
|
$18.08 - 21.19
|
|
168
|
|
|
$
|
19.64
|
|
|
1.6
|
|
|
168
|
|
|
$
|
19.64
|
|
$21.90 - 23.63
|
|
167
|
|
|
22.33
|
|
|
1.5
|
|
|
167
|
|
|
22.33
|
|
$25.10 - 26.02
|
|
150
|
|
|
25.97
|
|
|
2.1
|
|
|
150
|
|
|
25.97
|
|
|
|
485
|
|
|
|
|
|
|
|
|
485
|
|
|
|
|
The total intrinsic value, cash received and actual tax benefits realized for stock options exercised in
2012
,
2011
and
2010
were not material.
10) Long-Term Debt
Long-term debt at
November 3, 2012
and
October 29, 2011
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
2004 Senior Notes
|
$
|
88,901
|
|
|
$
|
113,594
|
|
Credit facility
|
34,426
|
|
|
31,707
|
|
Other
|
11,597
|
|
|
11,910
|
|
Total debt
|
134,924
|
|
|
157,211
|
|
Less current maturities
|
22,636
|
|
|
25,211
|
|
Total long-term debt
|
$
|
112,288
|
|
|
$
|
132,000
|
|
On
September 14, 2004
the Company completed a $
150,000
private placement of Senior Unsecured Notes over a term of twelve (12) years (2004 Senior Notes). On
June 9, 2010
, the Company entered into a new credit facility agreement and amended its 2004 Senior Notes. The new credit facility agreement has a borrowing capacity of $
150,000
with an optional $
50,000
accordion feature, has a term of
four
(
4
) years, bears interest at either Prime or LIBOR plus a borrowing margin and initially required a maximum Leverage Ratio of
3.5
to 1 and a minimum Fixed Charge Coverage Ratio of
2.25
to 1 (which decreased to
1.4
to 1 in the fourth quarter of
2012
). The credit facility and amended 2004 Senior Notes are secured with collateral including accounts receivable, inventory, machinery and equipment and intangible assets.
On
December 6, 2011
, the Company entered into concurrent amendments (collectively, the “December 2011 Amendments”) to its Amended and Restated Credit and 2004 Senior Note agreements (collectively, the “Agreements”) in order to provide covenant flexibility. Under the December 2011 Amendments, the Company's minimum Fixed Charge Coverage Ratio was amended to
1.2
to 1 at the end of the fourth quarter of
2012
and first quarter of 2013 and increases to
1.3
to 1 at the end of the second quarter of 2013, and the covenant definition was changed to exclude
50%
of scheduled installment payments (previously included
100%
) in the denominator of the calculation. Under the December 2011 Amendments, the Company's maximum Leverage Ratio was amended to
3.0
to 1 at the end of the third quarter of
2012
. Consistent with the previous agreement, the Company's maximum Leverage Ratio continues at
3.0
to 1 at the end of the fourth quarter of
2012
through the third quarter of 2013 and decreases to
2.75
to 1 at the end of fourth quarter of 2013. Under the December 2011 Amendments, the Company's annual capital expenditures will be limited to
$30.0 million
when the Company's Leverage Ratio exceeds
2.5
to 1. In addition, the Company will be subject to certain restrictions in its ability to complete acquisitions, pay dividends or repurchase stock. The interest rate increased on the 2004 Senior Notes by
50
basis points to
7.08%
. Capitalized fees incurred
in the first quarter of
2012
for the December 2011 Amendments were
$0.5 million
. During the term of the Agreements, the Company was subject to an additional fee of
100
basis points in the event the Company's credit profile rating decreased to a defined level. Such a decrease occurred during the second quarter of
2012
and the Company incurred an additional fee of
$1.1 million
to its Senior Note holders, which was capitalized and will be amortized over the remaining life of the Notes as an adjustment to interest expense.
The agreements require the Company to offer early principal payments to Senior Note holders and credit facility investors (only in the event of default) based on a ratable percentage of each fiscal year's excess cash flow and extraordinary receipts, such as the proceeds from the sale of businesses. Under the Agreements, if the Company sells a business, it is required to offer a percentage (which varies based on the Company's Leverage Ratio) of the after tax proceeds (defined as “extraordinary receipts”) to its Senior Note holders and credit facility investors in excess of a
$1.0 million
threshold. The excess cash flow definition in the Agreements follows a standard free cash flow calculation. The Company is only required to offer the excess cash flow and extraordinary receipts if the Company ends its fiscal year with a Leverage Ratio in excess of
2.5
to 1. The Senior Note holders are not required to accept their allotted portion and to the extent individual holders reject their portion, other holders are entitled to accept the rejected proceeds. Early principal payments made to Senior Note holders reduce the principal balance outstanding. The Company made excess cash flow payments to the Senior Note holders of
$2.5 million
and
$0.4 million
in the second quarters of
2012
and
2011
, respectively. No excess cash flow payment is required to be made in
2013
as the Company's fiscal year
2012
Leverage Ratio was not in excess of
2.5
to 1 as defined in the agreement.
At
November 3, 2012
, the Company had
$104.2 million
of total capacity and
$34.4 million
of outstanding loans under the credit facility at a weighted average interest rate of
2.38%
. In addition to the outstanding loans, the credit facility borrowing capacity was reduced by several standby letters of credit totaling
$11.3 million
. The Company's average net revolver outstanding (average revolver borrowings net of cash) was approximately
$59.2 million
for the year ended
November 3, 2012
. The Company is restricted to certain levels of expenditures relating to dividends and capital expenditures. The Company had
$37.4 million
of availability on its credit facility as of
November 3, 2012
. We primarily have used the borrowings on our revolving credit facility for working capital purposes and capital expenditures.
Interest on the amended 2004 Senior Notes is
7.08%
and is payable semiannually on March 15 and September 15 of each year. The Company may, at its option and upon notice, prepay at any time all or any part of the amended 2004 Senior Notes, together with accrued interest plus a make-whole amount. As of
November 3, 2012
, if the Company were to prepay the full principal outstanding on the amended 2004 Senior Notes, the make-whole amount would have been
$11.9 million
. This amount, updated for the calculation as of the closing of the proposed merger, would be required to be satisfied upon closing. The amended 2004 Senior Notes require equal annual principal payments of
$22.2 million
that commenced on September 15, 2012, and that are ratably reduced by required early principal payments based on a percentage of annual excess cash flow or extraordinary receipts as defined in the Agreements. The first principal payment was paid in the fourth quarter of
2012
from a combination of cash flows from operations and amounts available under the credit facility. Borrowings under these facilities are classified as long-term because the Company has the ability and intent to keep the balances outstanding over the next twelve (12) months.
The Company's other debt consists primarily of industrial revenue bonds and capital lease obligations used to finance capital expenditures. These financings mature between 2013 and 2019 and have interest rates ranging from
0.25%
to
16.15%
. Scheduled maturities of long-term debt for the next five (5) years and thereafter are:
|
|
|
|
|
|
Year Ended
|
|
Maturities
|
2013
|
|
$
|
22,636
|
|
2014
|
|
57,108
|
|
2015
|
|
22,712
|
|
2016
|
|
30,740
|
|
2017
|
|
549
|
|
Thereafter
|
|
1,179
|
|
|
|
$
|
134,924
|
|
While the Company was in compliance with its covenants throughout fiscal 2012 and currently expects to be in compliance with its covenants during the next twelve (12) months, the Company's failure to comply with its covenants or other requirements of its financing arrangements is an event of default and could, among other things, accelerate the payment of indebtedness, which could have a material adverse impact on the Company's results of operations, financial condition and cash flows.
11) Shareholders' Equity
The authorized capital stock of the Company consists of
55,000,000
shares of
$0.75
par value common stock and
4,000,000
shares of
$1
par value preferred stock. At
November 3, 2012
, the Company had
30,801,994
common shares outstanding and
2,329,852
shares of common stock as treasury shares, which are primarily utilized for issuance of common stock shares under the Company's stock-based compensation plans.
During
2012
,
219,763
common stock shares were issued from treasury for issuance under the Company's stock-based compensation plan. During
2011
,
127,312
common stock shares were issued from treasury for issuance under the Company's stock-based compensation plan. See Note 9 for further information. No stock repurchases occurred in
2012
or
2011
.
12) Income Taxes
Earnings (loss) before income taxes from continuing operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
United States
|
$
|
11,997
|
|
|
$
|
(34,903
|
)
|
|
$
|
(77,334
|
)
|
Non-U.S. operations
|
(8,259
|
)
|
|
2,670
|
|
|
3,444
|
|
|
$
|
3,738
|
|
|
$
|
(32,233
|
)
|
|
$
|
(73,890
|
)
|
The provision for (benefit from) income taxes for
2012
,
2011
and
2010
from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(1,756
|
)
|
|
$
|
(5,700
|
)
|
|
$
|
(3,041
|
)
|
State and local
|
374
|
|
|
(917
|
)
|
|
(159
|
)
|
Foreign
|
1,025
|
|
|
2,100
|
|
|
1,090
|
|
Total current (benefit)
|
(357
|
)
|
|
(4,517
|
)
|
|
(2,110
|
)
|
Deferred:
|
|
|
|
|
|
Federal
|
2,369
|
|
|
(4,451
|
)
|
|
(20,081
|
)
|
State and local
|
25
|
|
|
769
|
|
|
(1,754
|
)
|
Foreign
|
(986
|
)
|
|
(651
|
)
|
|
(302
|
)
|
Total deferred provision (benefit)
|
1,408
|
|
|
(4,333
|
)
|
|
(22,137
|
)
|
Total tax provision (benefit)
|
$
|
1,051
|
|
|
$
|
(8,850
|
)
|
|
$
|
(24,247
|
)
|
The provision for (benefit from) income taxes on earnings of the Company from continuing operations differs from the amounts computed by applying the US federal tax rate of
35%
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Federal income tax (benefit) at statutory rate
|
$
|
1,308
|
|
|
$
|
(11,281
|
)
|
|
$
|
(25,861
|
)
|
State income taxes, net of applicable federal income tax benefit
|
146
|
|
|
(1,084
|
)
|
|
(2,051
|
)
|
Impairment of non-deductible goodwill
|
—
|
|
|
2,899
|
|
|
9,679
|
|
Net changes in uncertain tax positions
|
370
|
|
|
232
|
|
|
172
|
|
Net change due to change in rates
|
(72
|
)
|
|
758
|
|
|
207
|
|
Impact of change in state deferred tax asset
|
—
|
|
|
1,470
|
|
|
—
|
|
Research and development tax credit
|
(117
|
)
|
|
(1,086
|
)
|
|
—
|
|
Impact of legal entity reorganization
|
—
|
|
|
(619
|
)
|
|
—
|
|
Return to provision adjustments
|
(1,328
|
)
|
|
(410
|
)
|
|
(1,953
|
)
|
Manufacturer's deduction
|
(124
|
)
|
|
—
|
|
|
—
|
|
Valuation allowance
|
223
|
|
|
—
|
|
|
—
|
|
Non-US rate differential
|
484
|
|
|
—
|
|
|
—
|
|
Deemed liquidation of subsidiary
|
—
|
|
|
—
|
|
|
(2,770
|
)
|
Partial reversal of APB 23 assertion
|
—
|
|
|
—
|
|
|
(1,631
|
)
|
Other, net
|
161
|
|
|
271
|
|
|
(39
|
)
|
Total tax provision
|
$
|
1,051
|
|
|
$
|
(8,850
|
)
|
|
$
|
(24,247
|
)
|
The impact from the impairment of goodwill in
2011
and
2010
represents the portion of goodwill impairments that was not deductible for tax purposes. The
2010
Tax Relief Act further extended the research and development credit through December 31, 2011, which occurred in the Company's first quarter of
2011
, and the Company reflected two years of research and development tax credits in
2011
(for
2010
and
2011
tax years). The research and development tax credit expired December 31, 2011. Included in the
2012
income tax provision is a benefit related to this credit for the two months ended December 31, 2011. In
2011
the Company reorganized its legal entities, which resulted in a one-time
$619
deferred tax benefit. Additionally, in
2011
, a change in state tax law resulted in a one-time write-off of a
$1,470
deferred tax asset.
In the first quarter of
2010
, the Company initiated a tax restructuring of its Donchery, France entity, and in the second quarter of
2010
, the Company's Canadian entity used
$18,500
to recapitalize the Company's French operations. These transactions resulted in income tax benefits to the Company of
$2,770
and
$1,631
in the first and second quarter of
2010
, respectively. As of
October 31, 2009
, a deferred tax liability of
$1,631
was provided for US income and foreign withholding taxes associated with the
$4,200
of accumulated earnings of the Company's foreign subsidiaries that the Company did not consider to be indefinitely reinvested outside of the United States. As a part of the Company's Canadian investment in France, this deferred tax liability was reversed in
2010
. The Company does not provide for US income and foreign withholding taxes on the remaining accumulated earnings of its foreign subsidiaries of
$66,883
that are not subject to the US income tax as it is the Company's intention to reinvest these earnings indefinitely. It is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to the US.
At
November 3, 2012
and
October 29, 2011
the Company's principal components of deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Deferred tax assets
|
|
|
|
Net operating loss and other carryforwards
|
$
|
12,422
|
|
|
$
|
11,512
|
|
Employee benefits and compensation
|
6,381
|
|
|
3,758
|
|
Workers’ compensation
|
1,183
|
|
|
1,312
|
|
Inventory capitalization of reserves
|
2,235
|
|
|
2,363
|
|
Reserve for product returns
|
962
|
|
|
988
|
|
Deferred compensation benefit plans
|
1,223
|
|
|
1,066
|
|
Bad debt reserves
|
775
|
|
|
835
|
|
Installment note
|
—
|
|
|
665
|
|
Goodwill and other intangible assets
|
2,007
|
|
|
5,577
|
|
Other
|
3,206
|
|
|
3,747
|
|
Total deferred tax assets
|
30,394
|
|
|
31,823
|
|
Valuation allowance
|
(11,915
|
)
|
|
(6,663
|
)
|
Net deferred tax assets
|
18,479
|
|
|
25,160
|
|
Deferred tax liabilities
|
|
|
|
Property, plant and equipment
|
39,856
|
|
|
43,785
|
|
Inventory capitalization of reserves
|
482
|
|
|
889
|
|
Basis adjustment
|
4,682
|
|
|
4,709
|
|
Other
|
122
|
|
|
616
|
|
Total deferred tax liabilities
|
45,142
|
|
|
49,999
|
|
Net deferred income tax liability
|
$
|
26,663
|
|
|
$
|
24,839
|
|
As of
November 3, 2012
, the Company had a net operating loss carryforward of
$18,044
(
$6,015
tax effected) in France that has an indefinite carryforward, other foreign operating and capital loss carryforwards of
$15,723
(
$4,622
tax effected) that will expire at various dates between 2022 and 2032 and domestic federal and state net operating loss carryforwards and credits of
$4,780
(
$1,785
tax effected) that expire on various dates through 2031. The Company has provided a
$11,915
valuation allowance primarily with regard to the tax benefits of certain net operating loss and tax credit carryforwards.
The following table shows the activity related to gross unrecognized tax benefits excluding interest and penalties during fiscal years ended
November 3, 2012
and
October 29, 2011
:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
Unrecognized tax benefits, beginning of the year
|
$
|
450
|
|
|
$
|
503
|
|
Additions based on current year tax positions
|
27
|
|
|
56
|
|
Additions for prior year tax positions
|
377
|
|
|
118
|
|
Reductions for prior year tax positions
|
(223
|
)
|
|
—
|
|
Settlements with tax authorities
|
(11
|
)
|
|
(92
|
)
|
Lapses in statutes of limitations
|
(15
|
)
|
|
(135
|
)
|
Unrecognized tax benefits, end of year
|
$
|
605
|
|
|
$
|
450
|
|
As of
November 3, 2012
there are
$508
of net unrecognized tax benefits that if recognized would affect the Company's effective tax rate. The primary difference between gross unrecognized tax benefits and net unrecognized tax benefits is the US federal tax benefit from state tax deductions.
The Company accrues interest related to unrecognized tax benefits, net of tax and penalties as components of its income tax provision. As of
November 3, 2012
, the Company had accrued
$378
for the payment of interest and penalties relating to unrecognized tax benefits.
The Company is currently the subject of several income tax audits in multiple jurisdictions. The Company expects that within the next twelve (12) months it will reach closure on certain of these audits or the statute of limitations will lapse. Management does not expect the unrecognized tax positions to change significantly over the next twelve months.
The Company files US federal, US state, and foreign income tax returns. The statutes of limitations for US federal income tax returns are open for fiscal year
2009
and forward. For state and foreign returns, the Company is generally no longer subject to tax examinations for years prior to 2007.
13) Earnings (Loss) Per Share
Basic earnings (loss) per share exclude any dilution and are computed by dividing net earnings attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The dilution from each of these instruments is calculated using the treasury stock method. Outstanding equity instruments that could potentially dilute basic earnings per share in the future but were not included in the computation of diluted earnings per share because they were antidilutive are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Antidilutive shares:
|
|
|
|
|
|
SSARs
|
1,083
|
|
|
1,236
|
|
|
838
|
|
Stock options
|
485
|
|
|
670
|
|
|
763
|
|
Total antidilutive shares excluded from diluted earnings per share
|
1,568
|
|
|
1,906
|
|
|
1,601
|
|
The Company used the two-class method to compute basic and diluted earnings per share for all periods presented. The reconciliation of the net earnings (loss) from continuing operations, net earnings (loss) attributable to common shareholders and the weighted average number of common and participating shares used in the computations of basic and diluted earnings per share for years ended
November 3, 2012
,
October 29, 2011
and
October 30, 2010
is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Basic and diluted net earnings:
|
|
|
|
|
|
Net earnings (loss) from continuing operations
|
$
|
2,687
|
|
|
$
|
(23,383
|
)
|
|
$
|
(49,643
|
)
|
Less: net earnings allocated to participating securities
|
12
|
|
|
—
|
|
|
—
|
|
Net earnings (loss) from continuing operations attributable to common shareholders
|
2,675
|
|
|
(23,383
|
)
|
|
(49,643
|
)
|
(Loss) earnings from discontinued operations, net of tax
|
(91
|
)
|
|
2,316
|
|
|
(732
|
)
|
Net earnings (loss) attributable to common shareholders
|
$
|
2,584
|
|
|
$
|
(21,067
|
)
|
|
$
|
(50,375
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
30,839
|
|
|
30,663
|
|
|
30,536
|
|
Add: dilutive shares from equity instruments
|
57
|
|
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
30,896
|
|
|
30,663
|
|
|
30,536
|
|
14) Employee Benefits
The Company sponsors or contributes to various defined contribution retirement benefit and savings plans covering substantially all employees. Certain senior managers of the Company also participate in a non-qualified deferred compensation plan. Total cost for the plans in
2012
,
2011
and
2010
was
$2,444
,
$2,231
and
$2,322
, respectively.
15) Commitments and Contingencies
The Company conducts certain of its operations in facilities under operating leases. Rental expense in
2012
,
2011
and
2010
was $
6,855
, $
6,530
and $
7,220
, respectively. Future minimum lease payments under non-cancelable operating leases by year are as follows:
|
|
|
|
|
|
Year Ended
|
|
Operating
Leases
|
2013
|
|
$
|
4,391
|
|
2014
|
|
3,614
|
|
2015
|
|
2,612
|
|
2016
|
|
1,377
|
|
2017
|
|
386
|
|
Thereafter
|
|
2,895
|
|
|
|
$
|
15,275
|
|
The Company has various take-or-pay arrangements associated with the purchase of raw materials. As of
November 3, 2012
, these commitments totaled
$7,072
.
In September 2003, the New Jersey Department of Environmental Protection (“NJDEP”) issued a directive to approximately
30
companies, including Franklin-Burlington Plastics, Inc., a subsidiary of the Company (“Franklin-Burlington”), to undertake an assessment of natural resource damage and perform interim restoration of the Lower Passaic River, a
17
-mile stretch of the Passaic River in northern New Jersey. The directive, insofar as it relates to the Company and its subsidiary, pertains to the Company's plastic resin manufacturing facility in Kearny, New Jersey, located adjacent to the Lower Passaic River. The Company acquired the facility in 1986, when it purchased the stock of the facility's former owner, Franklin Plastics Corp. The Company acquired all of Franklin Plastics Corp.'s environmental liabilities as part of the acquisition. Franklin-Burlington responded to the directive, and no further action under the directive as yet has been required by NJDEP.
Also in 2003, the United States Environmental Protection Agency (“USEPA”) requested that companies located in the area of the Lower Passaic River, including Franklin-Burlington, cooperate in an investigation of contamination of the Lower Passaic River. In response, the Company and approximately
70
other companies (collectively, the “Cooperating Parties”) agreed, pursuant to an Administrative Order of Consent with the USEPA, to assume responsibility for completing a remedial investigation/feasibility study (“RIFS”) of the Lower Passaic River. The RIFS and related activities are currently estimated to cost approximately
$125 million
to complete and are currently expected to be completed by mid-2015. However, the RIFS costs are exclusive of any costs that may ultimately be required to remediate the Lower Passaic River area being studied or costs associated with natural resource damages that may be assessed. By agreeing to bear a portion of the cost of the RIFS, the Company did not admit to or agree to bear any such remediation or natural resource damage costs. In 2007, the USEPA issued a draft study that evaluated
nine
alternatives for early remedial action of a portion of the Lower Passaic River. The estimated cost of the alternatives in the aggregate ranged from $
900 million
to $
2.3 billion
. The Cooperating Parties provided comments to the USEPA regarding this draft study, but the USEPA has not yet finalized its study. Currently, the Cooperating Parties understand that USEPA is finalizing this study and expects to issue it in
2013
, and that the preferred early remedial alternatives are estimated by USEPA to cost
$1.9 billion
to
$3.4 billion
. The Cooperating Parties are preparing comments on the final study. In early calendar year 2012, the USEPA indicated to the Cooperating Parties that it would like to move forward with early remedial activity at a specific location along the river. In the third quarter of
2012
, the Company and the other Cooperating Parties, with one exception, have agreed with USEPA to undertake a removal action at the specific location and the Company accrued
$0.2 million
. By agreeing to participate in this specific removal action, the Company did not admit ultimate responsibility for the removal action at such location, nor did the Company admit to or agree to bear costs for any other removal action at or remediation of the river, or for natural resource damages.
In
2009
, the Company's subsidiary and over
300
other companies were named as third-party defendants in a suit brought by the NJDEP in Superior Court of New Jersey, Essex County, against Occidental Chemical Corporation and certain related entities (collectively, the “Occidental Parties”) with respect to alleged contamination of the Newark Bay Complex, including the Lower Passaic River. The third-party complaint seeks contributions from the third-party defendants with respect to any award to NJDEP of damages against the Occidental Parties in the matter.
As of
November 3, 2012
, the Company had approximately
$1.2 million
accrued related to these Lower Passaic River matters described above, representing funding of the RIFS costs and related legal expenses of the RIFS, participation in the removal
action agreed to with USEPA and the litigation matter. Given the uncertainties pertaining to this matter, including that the RIFS is ongoing, the ultimate remediation has not yet been determined and because the extent to which the Company may be responsible for such remediation or natural resource damages is not yet known, it is not possible at this time to estimate the Company's ultimate liability related to this matter. Based on currently known facts and circumstances, the Company does not believe that this matter is likely to have a material effect on the Company's results of operations, consolidated financial position, or cash flows because the Company's Kearny, New Jersey, facility could not have contributed contamination along most of the river's length and did not store or use the contaminant that is of the greatest concern in the river sediments and because there are numerous other parties who will likely share in the cost of remediation and damages. However, it is reasonably possible that the ultimate liability resulting from this matter could materially differ from the
November 3, 2012
, accrual balance, and in the event of one or more adverse determinations related to this matter, the impact on the Company's results of operations, consolidated financial position or cash flows could be material to any specific period.
In March
2010
, DPH Holdings Corp., a successor to Delphi Corporation and certain of its affiliates (“Delphi”), served Spartech Polycom, a subsidiary of the Company, with a complaint seeking to avoid and recover approximately
$8.6 million
in alleged preference payments Delphi made to Spartech Polycom shortly before Delphi's bankruptcy filing in 2005. Delphi initially pursued similar preference complaints against approximately
175
additional unrelated third parties. In June
2012
, the Company and Delphi settled this litigation matter. The settlement did not have a material impact on the Company's results of operations, consolidated financial position or cash flows.
On December 14, 2009, Simmons Bedding Company and The Simmons Manufacturing Co., LLC (collectively, “Simmons”) filed suit in the Superior Court of New Jersey, Essex County (Simmons Bedding Company and The Simmons Manufacturing Co., LLC v. Creative Vinyl/Fabrics, Inc. and its owner, Spartech Corporation, Spartech Polycom Calendared and Converted Products, Granwell Products, Inc., Nan Ya Plastics Corporation USA - Docket No. ESX-L-10197-09) alleging that vinyl product supplied to Simmons failed to meet certain specifications and claiming, among other things, a breach of contract, breach of warranty and fraud for which Simmons was seeking unspecified damages, including costs related to a voluntary product recall. Creative Vinyl/Fabrics, Inc. (“Creative”) was seeking common law indemnification and contribution from the Company. The Company supplied Creative with PVC film pursuant to purchase orders submitted by Creative, which Creative further processed and then sold to Simmons. On November 14, 2012, the Court granted summary judgment on behalf of all of the Defendants in the case for full dismissal of the matter. The Court will issue its final order in the coming weeks. Simmons has the right to appeal the Court's ruling for 45 days after the final order is entered. Based upon these recent developments, management does not believe that the ultimate liabilities resulting from this proceeding, if any, will be material to the Company's results of operations and will not have a material adverse effect on the Company's consolidated financial position or cash flows.
On September 15, 2011, we received a
$4.8 million
tax assessment for additional taxes, interest and penalties from the Mexico Tax Authorities related to our 2007 income tax and value added tax filings. The Company continues to contest the assessment and is pursuing litigation with respect to certain items. Based on developments to date, we do not expect the ultimate outcome of this matter to have a material adverse impact on our results of operations, financial position or cash flows.
On November 15, 2012, Steven Weinreb, purportedly one of Spartech's stockholders, filed suit in the Circuit Court of St. Louis County, Missouri, as a putative class action against Spartech, each of Spartech's directors, PolyOne Corporation, 2012 Redhawk, Inc., and 2012 Redhawk, LLC challenging Spartech's proposed merger with PolyOne. The stockholder action alleges, among other things, that (i) each member of the board of directors of Spartech breached his or her fiduciary duties to Spartech and its stockholders in authorizing the sale of Spartech to PolyOne, (ii) the merger does not maximize value to Spartech stockholders, and (iii) Spartech and PolyOne aided and abetted the breaches of fiduciary duty allegedly committed by the members of the board of directors of Spartech. The stockholder actions seek class action certification and equitable relief, including an injunction against consummation of the merger. Spartech believes the plaintiff's allegations lack merit and will vigorously contest them.
On November 16, 2012, Thomas Warren, purportedly one of Spartech's stockholders, filed suit in the Circuit Court of St. Louis County, Missouri, as a putative class action against Spartech, each of Spartech's directors, PolyOne Corporation, 2012 Redhawk, Inc., and 2012 Redhawk, LLC challenging Spartech's proposed merger with PolyOne. The stockholder action alleges, among other things, that (i) each member of the board of directors of Spartech breached his or her fiduciary duties to Spartech and its stockholders in authorizing the sale of Spartech to PolyOne, (ii) the merger does not maximize value to Spartech stockholders, and (iii) Spartech and PolyOne aided and abetted the breaches of fiduciary duty allegedly committed by the members of the board of directors of Spartech. The stockholder actions seek class action certification and equitable relief, including an injunction against consummation of the merger. Spartech believes the plaintiff's allegations lack merit and will vigorously contest them.
The Company is also subject to various other claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability, employment and other matters, several of which claim substantial amounts of damages. While it is not possible to estimate with certainty the ultimate legal and financial liability with respect to these claims, lawsuits, and administrative proceedings, the Company believes that the outcome of these matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows.
16) Segment Information
The Company is organized into
three
reportable segments based on its operating structure and the products manufactured. The
three
reportable segments are Custom Sheet and Rollstock, Packaging Technologies and Color and Specialty Compounds. Operating results are regularly reviewed by the Company's chief operating decision maker, its CEO, to make decisions about resources to be allocated to the segment and assess performance. More specifically, management uses operating earnings (loss) from continuing operations, excluding the effect of foreign exchange, to evaluate business segment performance. Accordingly, discontinued operations have been excluded from the segment results below, which is consistent with management's evaluation metrics. Corporate operating losses include general and administrative expenses, corporate office expenses, shared services costs, information technology costs, professional fees, the impact of foreign currency exchange gains and losses and Passaic environmental costs.
The Company reorganized its internal reporting structure and management responsibilities for the Passaic matter and the associated closed facility during the third quarter of
2012
as a result of developments with the environmental matters, as described in Note 15. These costs were previously reported under the Color & Specialty Compounds segment, but are now reported in Corporate. During the fourth quarter of
2011
, the Company reorganized its internal reporting and management responsibilities for a specific product line from its Color and Specialty Compounds segment to its Custom Sheet and Rollstock segment to better align its management of this product line with end markets. During the second quarter of
2010
, the Company changed its organizational reporting and management responsibilities of
two
businesses previously included in our Color and Specialty Compounds segment to our Custom Sheet and Rollstock segment. Also in that second quarter, the Company reorganized its internal reporting and management responsibilities for certain product lines between its Custom Sheet and Rollstock and Packaging Technologies segments to better align its management of these product lines with end markets. These management and reporting changes resulted in a reorganization of the Company's
three
reportable segments, and historical segment results have been reclassified to conform to these changes.
A description of the Company's reportable segments is as follows:
Custom Sheet and Rollstock
The Custom Sheet and Rollstock segment primarily manufactures plastic sheet, custom rollstock, calendered film, laminates and acrylic products. The principal raw materials used in manufacturing sheet and rollstock are plastic resins in pellet form. The segment sells sheet and rollstock products principally through its own sales force, but it also uses a limited number of independent sales representatives. This segment produces and distributes its products from facilities in the United States, Canada and Mexico. Finished products are formed by customers that use plastic components in their products. The Company's custom sheet and rollstock is used in several market sectors including material handling, transportation, building and construction, recreation and leisure, electronics and appliances, sign and advertising, aerospace and numerous other end markets.
Packaging Technologies
The Packaging Technologies segment manufactures custom-designed plastic packages and custom rollstock primarily used in the food and consumer product markets. The principal raw materials used in manufacturing packaging are plastic resins in pellet form, which are extruded into rollstock or thermoformed into an end product. This segment sells packaging products principally through its own sales force, but it also uses a limited number of independent sales representatives. This segment produces and distributes the products from facilities in the United States and Mexico. The Company's Packaging Technologies products are mainly used in the food, medical and consumer packaging and graphic arts market sectors.
Color and Specialty Compounds
The Color and Specialty Compounds segment manufactures custom-designed plastic alloys, compounds and color concentrates for use by a large group of manufacturing customers servicing the transportation (primarily automotive), building and construction, packaging, agriculture, lawn and garden, electronics and appliances, and numerous other end markets. The principal raw materials used in manufacturing specialty plastic compounds and color concentrates are plastic resins in powder and pellet form. This segment also uses colorants, mineral and glass reinforcements and other additives to impart specific performance and appearance characteristics to the compounds. The Color and Specialty Compounds segment sells its products
principally through its own sales force, but it also uses independent sales representatives. This segment produces and distributes its products from facilities in the United States, Canada, Mexico and France.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Net sales: (a)(b)
|
|
|
|
|
|
Custom Sheet and Rollstock
|
$
|
604,250
|
|
|
$
|
577,443
|
|
|
$
|
579,260
|
|
Packaging Technologies
|
243,102
|
|
|
243,997
|
|
|
221,218
|
|
Color and Specialty Compounds
|
302,003
|
|
|
280,850
|
|
|
222,418
|
|
|
$
|
1,149,355
|
|
|
$
|
1,102,290
|
|
|
$
|
1,022,896
|
|
Operating earnings (loss): (b)
|
|
|
|
|
|
Custom Sheet and Rollstock
|
$
|
29,342
|
|
|
$
|
(16,145
|
)
|
|
$
|
25,149
|
|
Packaging Technologies
|
18,006
|
|
|
23,580
|
|
|
(30,916
|
)
|
Color and Specialty Compounds
|
7,544
|
|
|
2,000
|
|
|
(17,983
|
)
|
Corporate
|
(39,279
|
)
|
|
(30,721
|
)
|
|
(37,386
|
)
|
|
$
|
15,613
|
|
|
$
|
(21,286
|
)
|
|
$
|
(61,136
|
)
|
Assets:
|
|
|
|
|
|
Custom Sheet and Rollstock
|
$
|
271,723
|
|
|
$
|
268,635
|
|
|
$
|
304,781
|
|
Packaging Technologies
|
151,327
|
|
|
145,096
|
|
|
140,177
|
|
Color and Specialty Compounds
|
82,601
|
|
|
94,267
|
|
|
81,346
|
|
Corporate and other
|
38,982
|
|
|
41,704
|
|
|
50,837
|
|
|
$
|
544,633
|
|
|
$
|
549,702
|
|
|
$
|
577,141
|
|
Depreciation and amortization: (b)
|
|
|
|
|
|
Custom Sheet and Rollstock
|
$
|
14,321
|
|
|
$
|
14,942
|
|
|
$
|
15,869
|
|
Packaging Technologies
|
7,173
|
|
|
6,671
|
|
|
8,427
|
|
Color and Specialty Compounds
|
6,360
|
|
|
7,299
|
|
|
8,208
|
|
Corporate
|
3,787
|
|
|
3,912
|
|
|
4,128
|
|
|
$
|
31,641
|
|
|
$
|
32,824
|
|
|
$
|
36,632
|
|
Capital expenditures: (b)
|
|
|
|
|
|
Custom Sheet and Rollstock
|
$
|
4,575
|
|
|
$
|
12,911
|
|
|
$
|
11,013
|
|
Packaging Technologies
|
9,832
|
|
|
6,993
|
|
|
3,440
|
|
Color and Specialty Compounds
|
4,518
|
|
|
3,965
|
|
|
3,269
|
|
Corporate and other
|
1,042
|
|
|
5,203
|
|
|
3,710
|
|
|
$
|
19,967
|
|
|
$
|
29,072
|
|
|
$
|
21,432
|
|
Geographic financial information for
2012
,
2011
and
2010
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Destination (a)(b)
|
|
Property, Plant and Equipment, net
|
|
2012
|
|
2011
|
|
2010
|
|
2012
|
|
2011
|
|
2010
|
United States
|
$
|
923,747
|
|
|
$
|
878,046
|
|
|
$
|
837,173
|
|
|
$
|
166,149
|
|
|
$
|
175,074
|
|
|
$
|
183,231
|
|
Mexico
|
102,971
|
|
|
81,498
|
|
|
65,713
|
|
|
16,004
|
|
|
15,716
|
|
|
15,887
|
|
Canada
|
82,127
|
|
|
74,651
|
|
|
78,566
|
|
|
8,587
|
|
|
9,742
|
|
|
10,119
|
|
Europe
|
30,653
|
|
|
59,067
|
|
|
33,731
|
|
|
6,633
|
|
|
7,542
|
|
|
2,607
|
|
Asia and other
|
9,857
|
|
|
9,028
|
|
|
7,713
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
1,149,355
|
|
|
$
|
1,102,290
|
|
|
$
|
1,022,896
|
|
|
$
|
197,373
|
|
|
$
|
208,074
|
|
|
$
|
211,844
|
|
Notes to tables:
|
|
(a)
|
In addition to external sales to customers, inter-segment sales were
$63,416
,
$54,396
, and
$50,344
, in
2012
,
2011
and
2010
, respectively.
|
|
|
(b)
|
Excludes discontinued operations.
|
17) Comprehensive Income
At
November 3, 2012
and
October 29, 2011
, other comprehensive income (loss) consisted of cumulative foreign currency translation adjustments. Foreign exchange gains and losses are reported in selling, general and administrative expenses in the results of operations and reflect US dollar-denominated transaction gains and losses due to fluctuations in foreign currency.
In
2012
, comprehensive income included foreign currency translation adjustments of
$1,495
resulting in an accumulated other comprehensive income balance of
$4,960
at
November 3, 2012
. In
2011
, comprehensive income included foreign currency translation adjustments of
$570
resulting in an accumulated other comprehensive income balance of
$6,455
at
October 29, 2011
.
As of
November 3, 2012
, the Company had monetary assets denominated in foreign currency of
$5,172
of net Canadian liabilities,
$1,024
of net euro assets and
$1,360
of net Mexican Peso assets.
18) Quarterly Financial Information (Unaudited)
The following table includes certain unaudited quarterly financial information for the fiscal year quarters in 2011 and 2010, which have been adjusted for discontinued operations. See Note 2 for further discussion of discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
1
st
|
|
2
nd
|
|
3
rd
|
|
4
th
|
|
Year
|
2012
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
281,781
|
|
|
$
|
298,323
|
|
|
$
|
282,447
|
|
|
$
|
286,803
|
|
|
$
|
1,149,355
|
|
Gross profit (a)
|
21,250
|
|
|
29,401
|
|
|
26,710
|
|
|
32,314
|
|
|
109,675
|
|
Operating (loss) earnings
|
(526
|
)
|
|
8,549
|
|
|
5,140
|
|
|
2,450
|
|
|
15,613
|
|
Net (loss) earnings from continuing operations (b)
|
(2,270
|
)
|
|
3,674
|
|
|
1,838
|
|
|
(555
|
)
|
|
2,687
|
|
Net earnings (loss) from discontinued operations
|
21
|
|
|
(3
|
)
|
|
—
|
|
|
(109
|
)
|
|
(91
|
)
|
Net (loss) earnings (b)
|
(2,249
|
)
|
|
3,671
|
|
|
1,838
|
|
|
(664
|
)
|
|
2,596
|
|
Basic (loss) earnings per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
(0.07
|
)
|
|
0.12
|
|
|
0.06
|
|
|
(0.02
|
)
|
|
0.09
|
|
(Loss) earnings from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Net (loss) earnings per share
|
(0.07
|
)
|
|
0.12
|
|
|
0.06
|
|
|
(0.03
|
)
|
|
0.08
|
|
Diluted (loss) earnings per share attributable to common shareholders:
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
(0.07
|
)
|
|
0.12
|
|
|
0.06
|
|
|
(0.02
|
)
|
|
0.09
|
|
(Loss) earnings from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Net (loss) earnings per share
|
(0.07
|
)
|
|
0.12
|
|
|
0.06
|
|
|
(0.03
|
)
|
|
0.08
|
|
Dividends declared per common share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2011
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
234,783
|
|
|
$
|
282,551
|
|
|
$
|
291,716
|
|
|
$
|
293,239
|
|
|
$
|
1,102,290
|
|
Gross profit (a)
|
17,984
|
|
|
26,655
|
|
|
26,243
|
|
|
24,791
|
|
|
95,673
|
|
Operating (loss) earnings
|
(1,818
|
)
|
|
7,097
|
|
|
8,325
|
|
|
(34,890
|
)
|
|
(21,286
|
)
|
Net (loss) earnings from continuing operations (c)
|
(1,838
|
)
|
|
2,847
|
|
|
2,988
|
|
|
(27,380
|
)
|
|
(23,383
|
)
|
Net earnings (loss) from discontinued operations
|
2,871
|
|
|
(225
|
)
|
|
19
|
|
|
(349
|
)
|
|
2,316
|
|
Net earnings (loss) (c) (d)
|
1,033
|
|
|
2,622
|
|
|
3,007
|
|
|
(27,729
|
)
|
|
(21,067
|
)
|
Basic (loss) earnings per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
(0.06
|
)
|
|
0.09
|
|
|
0.10
|
|
|
(0.89
|
)
|
|
(0.76
|
)
|
Earnings (loss) from discontinued operations, net of tax
|
0.09
|
|
|
(0.01
|
)
|
|
—
|
|
|
(0.01
|
)
|
|
0.08
|
|
Net earnings (loss) per share
|
0.03
|
|
|
0.08
|
|
|
0.10
|
|
|
(0.90
|
)
|
|
(0.69
|
)
|
Diluted (loss) earnings per share attributable to common shareholders:
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing operations
|
(0.06
|
)
|
|
0.09
|
|
|
0.10
|
|
|
(0.89
|
)
|
|
(0.76
|
)
|
Earnings (loss) from discontinued operations, net of tax
|
0.09
|
|
|
(0.01
|
)
|
|
—
|
|
|
(0.01
|
)
|
|
0.08
|
|
Net earnings (loss) per share
|
0.03
|
|
|
0.08
|
|
|
0.10
|
|
|
(0.90
|
)
|
|
(0.69
|
)
|
Dividends declared per common share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Notes to tables:
|
|
(a)
|
Gross profit is calculated as net sales less cost of sales and amortization expense.
|
|
|
(b)
|
Operating earnings and net earnings from continuing operations in
2012
were impacted by charges totaling
$8,834
(
$5,917
net of tax), comprising merger and transaction costs of
$6,901
(
$4,486
net of tax), restructuring and exit costs of
$2,521
(
$1,866
net of tax), and foreign currency gains of
$588
(
$435
net of tax). Fourth quarter
2012
operating earnings and net earnings include foreign currency gains which pertain to prior annual periods of
$1,465
(
$1,026
net of tax). Prior annual periods were not corrected as such amounts were immaterial and thus recorded in the fourth quarter of
2012
.
|
|
|
(c)
|
Operating earnings and net earnings from continuing operations in the fourth quarter of
2011
were impacted by charges totaling
$41,067
(
$28,813
net of tax), comprising goodwill impairments of
$40,455
(
$28,435
net of tax), restructuring and exit costs of
$634
(
$393
net of tax), and foreign currency gains of
$22
(
$15
net of tax).
|
|
|
(d)
|
The earnings from discontinued operations in
2011
include the settlement agreement for breach of contract by Chemtura that led to
$4,844
in cash proceeds and after tax earnings of
$3,003
.
|
19) Former President and Chief Executive Officer's Arrangement
Effective
September 8, 2010
, Mr. Odaniell resigned as President, Chief Executive Officer and a Director of the Company. Pursuant to the terms of his employment, non-compete and severance agreements with the Company, Mr. Odaniell received the following payments and benefits:
|
|
▪
|
Severance compensation of
$1,998
representing an amount equal to
two
times his former salary and the average of the bonus payments he earned during the prior two fiscal years.
|
|
|
▪
|
As a result of stock-based compensation and bonus forfeitures,
$494
of stock-based compensation expense and
$218
of accrued bonus expense was recaptured during
2010
. The Company also recorded
$100
of expense for estimated health care coverage costs and other supplementary benefits. The net charge to operating earnings was
$1,369
during the fourth quarter of
2010
and is included in selling, general and administrative expenses in the consolidated statement of operations for that period.
|