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.