Spartech Posts Lackluster Q3

Spartech Corp. (SEH - Snapshot Report) recently posted lackluster third-quarter results as recessionary conditions affected demand for its products. The company stated that GAAP net income plunged 66% year over year to $1.5 million. Excluding restructuring charges, earnings per share came in at 18 cents, missing the Zacks Consensus Estimate by a penny.

Spartech is an intermediary processor of engineered thermoplastics. It converts base polymers or resins into extruded plastic sheet and rollstock, thermoformed packaging, specialty film laminates, acrylic products, specialty plastic alloys, color concentrates and blended resin compounds, injection molded and profile extruded products.

The Clayton, Missouri-based company said revenue fell 30% year over year to $241.7 million. Volumes shrank 25% due to sluggish demand in its end markets - automotive, building and construction and recreation and leisure. Moreover, sales were also hurt by a 5% drop in selling price as Spartech passed on lower resin prices to customers.

The company said it plans to sell its Canadian profiles extrusion business, which generates annual sales of $9 million, to Acrylon Plastics Inc. Spartech said it will consolidate its Lockport, New York-based compounding operation into existing facilities by the end of the current year. During the quarter, the company closed its toll compounding business in Arlington, Texas and Engineered Products business, which manufactured products for the marine industry in Rockledge, Florida.

Meanwhile, its flagship segment Custom Sheet & Rollstock recorded a 24% year-over-year decline in sales to $122.3 million due to a 12% fall in volumes along with a 12% drop in prices. Revenue in the Packaging Technologies unit fell 25% to $52.7 million amid a 15% dip in volume and 10% decrease in price. Sales in the Color & Specialty Compound segment dropped 46% to $54.4 million as volume and price fell by 41% and 5%, respectively, compared to the year-ago period.

Gross margin grew by 450 basis points (bps) year over year to 14.4% primarily due to the company’s cost-control efforts and a favorable shift in the mix towards higher-margin products. Operating profit grew 23% year over year to $13 million, while operating margin rose 230 bps to 5.4% due to improved gross margin, partially offset by higher selling, general and administrative and restructuring expenses as a percentage of sales.

During the quarter, Spartech generated $26.9 million of cash from operations and utilized $1.6 million towards capital expenditure, which resulted in free cash flow of $25.3 million. The company also made debt repayments of $26.5 million and its total debt stood at $239.2 million at the end of the fiscal third quarter.

Looking ahead, the company sees volumes stabilizing in its end markets. However, weak demand will continue to affect its performance through the rest of the current year. The Zacks Consensus Estimate on the company’s earnings for the fiscal year ending October 2009 is currently pegged at 43 cents per share. The 4 covering analysts have reduced their forecasts by 2 cents over the past month. The most accurate estimate is even bearish at 36 cents per share.

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