Notes to Consolidated Condensed Financial Statements
(Unaudited and Dollars in thousands, except per share amounts)
1. Basis of Presentation
The consolidated financial statements include the accounts of Spartech Corporation and its consolidated subsidiaries (“Spartech” or the “Company”). These financial statements have been prepared on a condensed basis, and accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, these consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) and disclosures necessary to make the information presented herein not misleading. These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes thereto included in the Company's
November 3, 2012
Annual Report on Form 10-K.
On
October 23, 2012
, PolyOne Corporation (“PolyOne”), 2012 Redhawk, Inc., a wholly owned subsidiary of PolyOne (“Merger Sub”), PolyOne Designed Structures and Solutions, 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
and conduct business as PolyOne Designed Structures and Solutions
. At a special meeting of stockholders of Spartech Corporation on
March 12, 2013
, the stockholders voted to approve the merger agreement between Spartech and PolyOne Corporation. Pursuant to the merger, stockholders will receive, in exchange for each share of Spartech common stock, (1)
$2.67
in cash, without interest, and (2)
0.3167
of a PolyOne common share. The merger will be effective on
March 13, 2013
.
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 8. These costs were previously reported under the Color & Specialty Compounds segment, but are now reported in Corporate.
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. Operating results for any quarter are historically seasonal in nature and are not necessarily indicative of the results expected for the full year. Dollars presented are in thousands except per share data, unless otherwise indicated.
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
was reported as a
53 week
fiscal year. The Company's first quarter, which ended
February 2, 2013
, included
13 weeks
compared to
14 weeks
in the first quarter of the prior year. Years presented are fiscal unless noted otherwise.
2. Newly Adopted 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, this amendment was adopted in the first quarter fiscal year 2013. Adoption of this guidance did not have a material impact on our financial statements.
3. Inventories, net
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 approximates average cost. Finished goods include the costs of material, labor and overhead. Inventories at
February 2, 2013
, and
November 3, 2012
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
February 2, 2013
|
|
|
November 3, 2012
|
|
Raw materials
|
$
|
66,568
|
|
|
$
|
58,107
|
|
Production supplies
|
7,233
|
|
|
7,129
|
|
Finished goods
|
51,120
|
|
|
49,397
|
|
Inventory reserves
|
(9,941
|
)
|
|
(9,534
|
)
|
Total inventories, net
|
$
|
114,980
|
|
|
$
|
105,099
|
|
4. Restructuring and Exit Costs
Restructuring and exit costs were recorded in the consolidated statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
February 2, 2013
|
|
|
February 4, 2012
|
|
Restructuring and exit costs:
|
|
|
|
Custom Sheet and Rollstock
|
$
|
434
|
|
|
$
|
—
|
|
Packaging Technologies
|
—
|
|
|
—
|
|
Color and Specialty Compounds
|
766
|
|
|
—
|
|
Corporate
|
(68
|
)
|
|
—
|
|
Total restructuring and exit costs
|
1,132
|
|
|
—
|
|
Income tax benefit
|
(286
|
)
|
|
—
|
|
Impact on net earnings
|
$
|
846
|
|
|
$
|
—
|
|
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
$1,568
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:
|
|
|
|
|
|
|
|
|
Three Months Ended February 2, 2013
|
Cumulative To-Dat
e
|
Employee severance and other exit costs
|
$
|
539
|
|
$
|
2,768
|
|
Fixed asset valuation adjustments, net
|
593
|
|
885
|
|
Total
|
$
|
1,132
|
|
$
|
3,653
|
|
Employee severance and other exit costs include costs associated with job eliminations and the reduction in jobs resulting from facility consolidations. 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 represents 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.
As of
February 2, 2013
, the Company had
$2,614
of assets held-for-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, consolidation and shut-down costs was
$1,718
and
$2,027
at
February 2, 2013
, and
November 3, 2012
, respectively. Cash payments for restructuring activities were
$624
and
$221
for the
three
months ended
February 2, 2013
and
February 4, 2012
respectively.
5. Debt
Debt at
February 2, 2013
, and
November 3, 2012
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
February 2, 2013
|
|
|
November 3, 2012
|
|
2004 Senior Notes
|
$
|
88,901
|
|
|
$
|
88,901
|
|
Credit facility
|
56,456
|
|
|
34,426
|
|
Other
|
11,645
|
|
|
11,597
|
|
Total debt
|
157,002
|
|
|
134,924
|
|
Less current maturities
|
22,645
|
|
|
22,636
|
|
Total long-term debt
|
$
|
134,357
|
|
|
$
|
112,288
|
|
On September 14, 2004 the Company completed a
$150 million
private placement of Senior 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 million
with an optional
$50.0 million
accordion feature, has a term of
four
(
4
) years, bears interest at either Prime or LIBOR plus a borrowing margin. 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 buy back 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. 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. The Company made excess cash flow payments to the Senior Note holders in the second quarter of 2012 of
$2.5 million
.
At
February 2, 2013
, the Company had
$82.2 million
of total capacity and
$56.5 million
of outstanding loans under the credit facility at a weighted average interest rate of
3.32%
. 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
$61.8 million
for the three months ended
February 2, 2013
. The Company is restricted to certain levels of expenditures relating to dividends and capital expenditures. The Company had
$23.0 million
of availability on its credit facility as of
February 2, 2013
. 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 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 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. Effective on the closing date of the merger, an amount related to the make-whole on the Company's Senior Notes of $
10.3 million
will be paid in conjunction with the transaction.
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
0.17%
to
16.5%
.
The Company was in compliance with all debt covenants as of
February 2, 2013
. While the Company was in compliance with its covenants 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.
6. Income Taxes
An income tax benefit was recorded for
$493
and
$1,263
for the
three months ended
February 2, 2013
and
February 4, 2012
, respectively. The income tax benefit for the three months end
ed
February 2, 2013
was primarily impacted by a loss on certain foreign operations for which a tax benefit is not more likely than not to be realized and a net income tax benefit for the reinst
atement of the U.S. research and development tax credit of approximately
$600
.
7. Fair Value of Financial Instruments
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.
We prioritize 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 our 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 the same or similar issues. The following table presents the carrying amount and estimated fair value of long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2013
|
|
November 3, 2012
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Total debt (including credit facilities)
|
$
|
157,002
|
|
|
$
|
161,236
|
|
|
$
|
134,924
|
|
|
$
|
141,340
|
|
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. As of
February 2, 2013
, the Company had
$2,614
of assets held-for-sale.
During the
three
months ended
February 2, 2013
, there were
no
significant measurements of non-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition.
8. Commitments and Contingencies
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 have submitted comments to the USEPA for consideration prior to issuance of 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
February 2, 2013
, the Company had approximately
$1.3 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
February 2, 2013
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.
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 16, 2012, the Court granted summary judgment on behalf of all of the Defendants in the case for full dismissal of the matter. Simmons filed its notice of appeal on January 3, 2013 and their appellate brief is due on March 18, 2013. The matter will be fully briefed by April 29, 2013. 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.
Five
purported class action lawsuits have been filed by alleged Spartech stockholders in connection with the proposed merger transactions among Spartech, PolyOne Corporation (“PolyOne”), 2012 Redhawk, Inc. (“Merger Sub”) and 2012 Redhawk, LLC (n/k/a PolyOne Designed Structures and Solutions LLC) (“Merger LLC”).
Two
of these purported class actions were filed in the Circuit Court of St. Louis County, Missouri against Spartech, its directors, PolyOne, Merger Sub, and Merger LLC. These actions, Weinreb v. Spartech, et al. and Warren v. Spartech, et al., have been consolidated for all purposes as In re Spartech Corporation Shareholder Litigation (the “Missouri Stockholder Actions”). The Missouri Stockholder Actions allege, among other things, that the directors of Spartech breached their fiduciary duties owed to stockholders by approving the proposed acquisition of Spartech by PolyOne and by failing to disclose certain information to stockholders. The Missouri Stockholder Actions further allege that PolyOne, Merger Sub, and Merger LLC aided and abetted the directors of Spartech in breaching their fiduciary duties. Among other things, the Missouri Stockholder Actions seek to enjoin the merger.
Two
of these purported class actions were filed in Delaware Chancery Court (the “Delaware Stockholder Actions”).
One
of the Delaware Stockholder Actions, Gross v. Spartech, et al., was filed against Spartech, its directors, PolyOne, Merger Sub, and Merger LLC. The other Delaware Stockholder Action, Pill v. Spartech, et al., was filed against Spartech and its directors. The Delaware Stockholder Actions alleged, among other things, that the directors of Spartech breached their fiduciary duties owed to stockholders by approving the proposed acquisition of Spartech by PolyOne and by failing to disclose certain information to stockholders. Gross v. Spartech, et al. also alleged that PolyOne, Merger Sub, and Merger LLC aided and abetted the directors of Spartech in breaching their fiduciary duties. Among other things, the Delaware Stockholder Actions sought to enjoin the merger. After their request to stay the Delaware Stockholder Actions was denied, plaintiffs in the Delaware Stockholder Actions filed a Notice and (Proposed) Order of Dismissal on January 31, 2013, which was granted with modifications on February 1, 2013.
A purported class action was also filed in the United States District Court for the Eastern District of Missouri against Spartech, its directors, PolyOne, Merger Sub, and Merger LLC. Faulkner v. Holt, et al. (the “Missouri District Court Stockholder Action”), alleges, among other things, that the directors of Spartech breached their fiduciary duties owed to stockholders by approving the proposed acquisition of Spartech by PolyOne and by failing to disclose certain information to stockholders. The Missouri District Court Stockholder Action further alleges that PolyOne, Merger Sub, and Merger LLC aided and abetted the
directors of Spartech in breaching their fiduciary duties. The Missouri District Court Stockholder Action also brings a claim, individually, against the directors of Spartech under Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder. Among other things, the Missouri District Court Stockholder Action seeks to enjoin the merger.
PolyOne, Merger Sub, Merger LLC, Spartech, and Spartech's directors believe the Missouri Stockholder Action, the Delaware Stockholder Actions, and the Missouri District Court Stockholder Action and the underlying claims are without merit.
On March 5, 2013, counsel for the parties in each of the above-described lawsuits entered into a Memorandum of Understanding (the “MOU”), in which they agreed on the terms of a settlement of the Missouri Stockholder Action, including the dismissal with prejudice of the Missouri Stockholder Action and a release of all claims made therein against all of the defendants. The MOU also provides for dismissal with prejudice of the Missouri District Court Stockholder Action. The proposed settlement is conditioned upon, among other things, the execution of an appropriate stipulation of settlement, consummation of the merger, and final approval of the proposed settlement by the Circuit Court of St. Louis County, Missouri. In addition, in connection with the settlement and as provided in the MOU, the parties contemplate that plaintiffs' counsel will seek an award of attorneys' fees and expenses as part of the settlement. There can be no assurance that the merger will be consummated, that the parties ultimately will enter into a stipulation of settlement, or that the court will approve the settlement even if the parties enter into such stipulation. If the settlement conditions are not met, the proposed settlement as contemplated by the MOU would become void. The settlement will not affect the amount of the merger consideration that Spartech stockholders are entitled to receive in the merger.
The defendants deny all fault or liability and deny that they have committed any unlawful or wrongful act alleged in the Missouri State Action, the Delaware Stockholder Actions, and the Missouri District Court Stockholder Action or otherwise in relation to the merger. The defendants have agreed to the terms of the proposed settlement described above solely to avoid the substantial burden, expense, risk, inconvenience and distraction of continued litigation, including the risk of delaying or adversely affecting the merger.
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.
9. Net Earnings (Loss) Per Share
Basic earnings per share excludes any dilution and is computed by dividing net earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects 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):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
February 2,
2013
|
|
|
February 4,
2012
|
|
Antidilutive shares:
|
|
|
|
SSARs
|
1,141
|
|
|
1,828
|
|
Stock options
|
302
|
|
|
522
|
|
Total antidilutive shares excluded from diluted earnings per share
|
1,443
|
|
|
2,350
|
|
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, net earnings attributable to common stockholders and the weighted average number of common and participating shares used in the computations of basic and diluted earnings per share for
three
months ended
February 2, 2013
, and
February 4, 2012
are as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
February 2,
2013
|
|
|
February 4,
2012
|
|
Basic and diluted net loss:
|
|
|
|
Net loss
|
$
|
(467
|
)
|
|
$
|
(2,249
|
)
|
Less: net earnings allocated to participating securities
|
—
|
|
|
—
|
|
Net loss attributable to common shareholders
|
$
|
(467
|
)
|
|
$
|
(2,249
|
)
|
Weighted average shares outstanding:
|
|
|
|
Basic weighted average common shares outstanding
|
31,145
|
|
|
30,782
|
|
Add: dilutive shares from equity instruments
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
31,145
|
|
|
30,782
|
|
Basic loss per share attributable to common stockholders:
|
|
|
|
Net loss
|
(0.01
|
)
|
|
(0.07
|
)
|
Diluted loss per share attributable to common shareholders:
|
|
|
|
Net loss
|
(0.01
|
)
|
|
(0.07
|
)
|
10. 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. 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 8. These costs were previously reported under the Color & Specialty Compounds segment, but are now reported in Corporate.
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.
The following presents the Company's net sales, operating earnings (loss) and total assets by reportable segment and the reconciliation to consolidated operating earnings for the
three
months ended
February 2, 2013
, and
February 4, 2012
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
February 2,
2013
|
|
|
February 4,
2012
|
|
Net sales: (a)
|
|
|
|
Custom Sheet and Rollstock
|
$
|
142,630
|
|
|
$
|
145,626
|
|
Packaging Technologies
|
58,274
|
|
|
62,245
|
|
Color and Specialty Compounds
|
63,089
|
|
|
73,910
|
|
|
$
|
263,993
|
|
|
$
|
281,781
|
|
Operating earnings (loss):
|
|
|
|
Custom Sheet and Rollstock
|
$
|
7,865
|
|
|
$
|
3,214
|
|
Packaging Technologies
|
3,539
|
|
|
3,706
|
|
Color and Specialty Compounds
|
137
|
|
|
1,070
|
|
Corporate
|
(9,909
|
)
|
|
(8,482
|
)
|
|
$
|
1,632
|
|
|
$
|
(492
|
)
|
Notes to Table:
|
|
(a)
|
Excludes intersegment sales of
$15,409
and
$16,992
in the
first
quarter of
2013
and
2012
, respectively.
|
|
|
|
|
|
|
|
|
|
|
February 2,
2013
|
|
|
November 3,
2012
|
|
Assets:
|
|
|
|
Custom Sheet and Rollstock
|
$
|
266,452
|
|
|
$
|
271,723
|
|
Packaging Technologies
|
152,627
|
|
|
151,327
|
|
Color and Specialty Compounds
|
86,019
|
|
|
82,601
|
|
Corporate and other
|
40,927
|
|
|
38,982
|
|
|
$
|
546,025
|
|
|
$
|
544,633
|
|
11. Comprehensive Income
At
February 2, 2013
, and
February 4, 2012
, 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 U.S. dollar-denominated transaction gains and losses due to fluctuations in foreign currency. The Company recorded foreign exchange gains before taxes of
$425
and losses of
$16
for the
three
months ended
February 2, 2013
and
February 4, 2012
, respectively. As of
February 2, 2013
, the Company had monetary assets denominated in foreign currency of
$5,077
of net Canadian liabilities,
$1,273
of net Euro assets and
$5,087
of net Mexican Peso assets.
12. Proposed Merger and Subsequent Event
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
$83,368,435
in cash to Spartech shareholders. 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.
At a special meeting of stockholders of Spartech Corporation on
March 12, 2013
, the stockholders voted to approve the merger agreement between Spartech and PolyOne Corporation. Pursuant to the merger, stockholders will receive, in exchange for each share of Spartech common stock, (1)
$2.67
in cash, without interest, and (2)
0.3167
of a PolyOne common share. Based on the closing price of PolyOne's common stock on
March 11, 2013
, in exchange for each share of Spartech common stockholders will receive approximately
$10.25
, comprised of: (1)
$2.67
per share in cash; and (2)
0.3167
of a PolyOne common share, having a value of approximately
$7.58
. The merger will be effective on
March 13, 2013
. PolyOne Corporation, with
2012
revenues of
$3 billion
, is a premier provider of specialized polymer materials, services and solutions dedicated to serving customers in diverse industries around the globe, by creating value through collaboration, innovation and an unwavering commitment to excellence. PolyOne is committed to its customers, employees, communities and shareholders through ethical, sustainable and fiscally responsible principles.
In conjunction with the definitive merger agreement, the Company has incurred various costs triggered by and directly related to the merger transaction. In the
first
quarter of
2013
, Spartech recognized merger and transaction costs as follows:
|
|
|
|
|
|
|
|
|
2013
|
Cumulative To-Dat
e
|
Merger and Transaction Costs:
|
|
|
Stock compensation expense from accelerated vesting
|
$
|
—
|
|
$
|
4,865
|
|
Legal and financial advisor fees
|
1,357
|
|
3,245
|
|
Other merger and transaction costs
|
703
|
|
851
|
|
Total merger and transaction costs
|
2,060
|
|
8,961
|
|
Income tax benefit
|
(783
|
)
|
(3,198
|
)
|
Impact on net earnings
|
$
|
1,277
|
|
$
|
5,763
|
|
Effective on the closing date of the merger, an amount related to the make-whole on the Company's Senior Notes of
$10.3 million
will be paid in conjunction with the transaction along with
$4.2 million
to the Company's financial advisors.