Spartech Misses Street View

Spartech Misses Street View

Spartech Misses Street View

Spartech Corp. (SEH) recently posted fiscal 2010 second-quarter results after the closing bell. The company's earnings from continuing operations more than doubled to $4.5 million from $2.1 million in the year-ago quarter. Excluding special items, earnings came in at 13 cents per share, missing the Zacks Consensus Estimate of 19 cents as higher raw material costs and overheads affected margins.

Spartech is an intermediary processor of engineered thermoplastics. The company 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, and injection molded and profile products.

During the quarter, Spartech's net sales moved up 24% to $268.5 million from $216.4 million in the year-ago period. The gain was primarily attributable to a 12% rise in volumes, together with higher selling prices as the company passed on higher resin costs to customers.

Segments

Custom Sheet & Rollstock, the flagship division, recorded 30% year-over-year growth in sales to $150.6 million driven by a 26% expansion in volumes and a 4% increase in price. Spartech's Color & Specialty Compound segment's revenue swelled 29% year-over-year to $63.1 million primarily due to 5% and 19% increase in volume and price, respectively, over the year-ago quarter. Packaging Technologies division's revenue increased 6% to $54.9 million due to increased prices, which more than offset the impact of lower volumes.

Margins

Spartech's gross profit dropped 0.8% year-over-year to $30.9 million, while gross margin dipped 290 basis points (bps) to 11.5%. The decline was primarily caused by increased resin costs as the company could not pass them entirely to customers in the form of higher prices. Selling, general and administrative expenses decreased 14.9% year-over-year to $20.5 million, mainly due to unfavorable foreign currency translations. Accordingly, operating income declined 8.0% year-over-year to $7.9 million, while operating margin dipped 100 bps to 2.9%.

Balance Sheet & Cash Flow

At quarter end, Spartech had cash and cash equivalents of $3.9 million, in contrast to $2.0 million in the prior-year quarter. Long-term debt-to-capitalization ratio at the end of the quarter was 41.2%, compared 54.0% in the year-ago period. During the first half of fiscal 2010, the company generated $19.6 million of cash from operations and deployed $49.6 million towards debt repayment and $7.6 million towards capital expenditure.

Outlook and Zacks Consensus

Going forward, Spartech anticipates continued recovery in its key end-markets during the remainder of fiscal 2010, though pricing for resins is likely to stay volatile in the near term. The Zacks Consensus Estimate on the company's earnings for the fiscal has moved down by 2 cents over the past month to 81 cents per share, as 1 of 4 covering analysts downwardly revised estimates. The most accurate estimate is more bearish at 75 cents per share, indicating a downside potential of 7.4% compared to the Zacks Consensus Estimate.

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