Spartech Corp. is pruning back facilities and shifting equipment across all its business units in a shakeup partly fueled by lower-than-expected first-quarter profit.
The Clayton, Mo., firm said Feb. 10 the restructuring will involve closing two ``noncore'' facilities, consolidating undisclosed plants and replacing three other plants with newer sites.
The moves, which could cost the company as much as $6 million during the next two quarters, are expected to be completed this year, the company said in a news release. Officials with publicly held Spartech did not return several telephone calls.
The dramatic shifts were expected by two analysts, who said Spartech had delayed the trimming of excess capacity in the wake of a large acquisition and organic growth in 2004. However, the unanticipated earnings drop also was disappointing to analysts. Spartech's stock price dropped 7.7 percent on Feb. 10, the day the news was announced.
Cleveland-based Keybanc Capital Markets downgraded Spartech's stock from buy to hold on news of the earnings shortfall. The company had forecast that Spartech's earnings would end the year between $1.50 and $1.60 a share. Those figures look to be off by about 10 cents a share, said analyst Michael Sison.
``In retrospect, we're still somewhat disappointed to see that occur for a company known as good operators,'' he said. ``But going forward, we still have confidence they are moving in the right direction. They can still get their earnings back on track, and their [restructuring] steps make sense right now.''
The company will initiate what it calls comprehensive operational changes to address performance, Spartech said. Those moves include shutting an extrusion site in Cornwall, Ontario, that covers two buildings and about 112,000 square feet.
That business makes corrugated products for Spartech's custom sheet operation, serving automotive and packaging markets. The thin-sheet business, purchased in 1996 from Hamelin Group Inc., grew in 2004 to $10 million in sales, up from $7 million the year before. But it does not fit with other operations and will be sold by a third party, Spartech officials said.
Another facility considered noncore in El Monte, Calif., will be sold or closed because of problems achieving adequate volume to support the plant's costs, the company said. That business, which does custom profile extrusion, recorded about $5 million in sales last year, Spartech said. The 58,000-square-foot plant was bought in 1998 from Anjou-Doran Plastics Inc.
Spartech also will transfer production in its calendared film business from a 42,000-square-foot plant in Conshohocken, Pa., to a recently acquired plant in Salisbury, Md., the company said. Some operations in Rancho Cucamonga, Calif., will move to another newly opened plant in Reynosa, Mexico, that injection molds wheels for wheelchair manufacturers.
Compounding work now done in Rancho Cucamonga will shift to another Spartech plant in Manitowoc, Wis. Both the Manitowoc and Salisbury plants were part of the acquisition in late 2003 of three divisions of Sheboygan, Wis.-based VPI LLC.
Those VPI plants were operating at less than 65 percent capacity, Spartech officials said. The Rancho Cucamonga and Conshohocken plants will close once the transition is complete.
The company also will combine operations at two of its less-productive facilities within Spartech's Custom Sheet & Rollstock unit, the company said. Those targeted plants were not disclosed.
The company will report first-quarter results March 8, and more details are expected, according to analysts. But the company said the restructured plants will allow Spartech to meet long-range goals.
``We believe these changes, while assisting us to better manage the current short-term cost environment, will be even more important to the ongoing growth and profitability of our consolidated operations longer-term,'' said Spartech Chairman, Chief Executive Officer and President Bradley Buechler in a news release.
Buechler added that the speed and magnitude of resin-cost increases contributed to the lower earnings for the quarter. Prices for most affected resin grades have increased 25-33 percent in the United States during the past 18 months, said Ken Brooks, senior vice president for Ernst & Young Corporate Finance Inc.
In Spartech's Canadian operations, currency issues also are a factor, said Brooks, who is based in Montreal. The strengthening of the Canadian dollar has made it more difficult to export from Canada, he said.
Beyond that, many companies are going through similar restructuring pains as they attempt to remove costs from the system, Brooks said. Ultimately, the quicker that Spartech acts, the stronger it will be in the future, he said.
``No one likes to do this type of rationalization, and I'm sure it's not something that they decided upon in the last eight or 10 days,'' Brooks said.
Spartech faced other issues than just rising resin prices, said Allan Cohen, managing director of Chicago-based First Analysis Securities Corp, a private equity group that follows Spartech. The VPI plants were underutilized and needed some attention, he said.
The company also has been expanding plants at a fast pace, both in Europe and North America, Cohen said. Spartech had to react by cutting costs elsewhere, he said.
The consolidation plan is designed to save Spartech about $9 million in annual costs, the company said.
The company has 47 remaining facilities.
Spartech recorded sales of $750.5 million for fiscal 2004, which ended Oct. 30.