SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2001
Commission File Number 1-8803
MATERIAL SCIENCES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-2673173
(State or other jurisdiction (IRS employer identification number)
of incorporation or organization)
2200 East Pratt Boulevard
Elk Grove Village, Illinois 60007
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (847) 439-8270
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___________
-------
As of January 14, 2002, there were 14,711,996 outstanding shares of common
stock, $.02 par value.
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended November 30, 2001
(In thousands, except per share data)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
(a) Financial statements of Material Sciences Corporation and Subsidiaries
2
Consolidated Statements of Income (Loss) (Unaudited)
Material Sciences Corporation and Subsidiaries
Three Months Ended Nine Months Ended
November 30, November 30,
(In thousands, except per share data) 2001 2000 2001 2000
---------------------------------------------------------------------------- --------- --------- --------- ---------
Net Sales (1) $ 63,249 $ 70,281 $ 196,610 $ 211,889
Cost of Sales 51,495 55,950 159,971 167,987
--------- --------- --------- ---------
Gross Profit $ 11,754 $ 14,331 $ 36,639 $ 43,902
Selling, General and Administrative Expenses 11,131 11,119 32,059 31,999
Restructuring Expenses (12) 1,385 - 1,385 -
--------- --------- --------- ---------
Income (Loss) from Operations $ (762) $ 3,212 $ 3,195 $ 11,903
--------- --------- --------- ---------
Other (Income) and Expense:
Interest (Income) Expense, Net $ (496) $ 185 $ (854) $ 598
Equity in Results of Joint Ventures 369 290 1,014 873
Other, Net 193 131 309 186
--------- --------- --------- ---------
Total Other Expense, Net $ 66 $ 606 $ 469 $ 1,657
--------- --------- --------- ---------
Income (Loss) from Continuing Operations Before Provision
(Benefit) for Income Taxes $ (828) $ 2,606 $ 2,726 $ 10,246
Provision (Benefit) for Income Taxes (509) 614 759 3,486
--------- --------- --------- ---------
Income (Loss) from Continuing Operations $ (319) $ 1,992 $ 1,967 $ 6,760
Discontinued Operations: (7)(9)
Income from Discontinued Operation - Specialty Films (Net of Provision
for Income Taxes of $0, $814, $1,009 and $3,271, Respectively) - 1,182 1,469 4,749
Loss from Discontinued Operation - Pinole Point Steel (Net of Benefit
for Income Taxes of $0, $2,537, $5,261 and $5,347, Respectively) - (3,652) (7,561) (7,697)
Gain on Sale of Discontinued Operation - Specialty Films (Net of
Provision for Income Taxes of $31,445) - - 38,787 -
Loss on Discontinued Operation - Pinole Point Steel (Including Provision
of $10,918 for Future Operating Losses, Net of Benefit for Income
Taxes of $7,588) - - (42,248) -
--------- --------- --------- ---------
Net Income (Loss) $ (319) $ (478) $ (7,586) $ 3,812
========= ========= ========= =========
Basic Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations $ (0.02) $ 0.15 $ 0.14 $ 0.48
Income from Discontinued Operation - Specialty Films - 0.08 0.11 0.34
Loss from Discontinued Operation - Pinole Point Steel - (0.27) (0.54) (0.55)
Gain on Sale of Discontinued Operation - Specialty Films - - 2.78 -
Loss on Discontinued Operation - Pinole Point Steel - - (3.03) -
--------- --------- --------- ---------
Basic Net Income (Loss) Per Share $ (0.02) $ (0.04) $ (0.54) $ 0.27
========= ========= ========= =========
Diluted Net Income (Loss) Per Share:
Income (Loss) from Continuing Operations $ (0.02) $ 0.14 $ 0.14 $ 0.47
Income from Discontinued Operation - Specialty Films - 0.09 0.11 0.33
Loss from Discontinued Operation - Pinole Point Steel - (0.26) (0.54) (0.53)
Gain on Sale of Discontinued Operation - Specialty Films - - 2.75 -
Loss on Discontinued Operation - Pinole Point Steel - - (3.00) -
--------- --------- --------- ---------
Diluted Net Income (Loss) Per Share $ (0.02) $ (0.03) $ (0.54) $ 0.27
========= ========= ========= =========
Weighted Average Number of Common Shares Outstanding
Used for Basic Net Income (Loss) Per Share 14,036 13,635 13,954 14,121
Dilutive Shares - 252 137 261
--------- --------- --------- ---------
Weighted Average Number of Common Shares Outstanding
Plus Dilutive Shares 14,036 13,887 14,091 14,382
========= ========= ========= =========
Outstanding Common Stock Options Having No Dilutive Effect 1,261 1,249 1,179 1,245
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
3
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
November 30, February 28,
2001 2001
(In thousands) Unaudited Audited
-------------------------------------------------------------------------------- -------------- --------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 37,958 $ 2,419
Marketable Securities (13) 18,483 -
Receivables, Less Reserves of $4,221 and $3,121, Respectively (2) 28,958 29,914
Income Taxes Receivable - 1,637
Prepaid Expenses 2,422 2,254
Inventories 24,839 26,155
Prepaid Taxes 2,384 2,232
Current Assets of Discontinued Operation, Net - Specialty Films (7) - 41,887
Current Assets of Discontinued Operation, Net - Pinole Point Steel (9) 79,272 103,508
---------- ----------
Total Current Assets $ 194,316 $ 210,006
---------- ----------
Property, Plant and Equipment $ 254,802 $ 251,929
Accumulated Depreciation and Amortization (144,298) (133,465)
---------- ----------
Net Property, Plant and Equipment $ 110,504 $ 118,464
---------- ----------
Other Assets:
Investment in Joint Ventures $ 10,695 $ 11,700
Intangible Assets, Net (8)(11) 8,329 3,579
Other 1,818 1,790
---------- ----------
Total Other Assets $ 20,842 $ 17,069
---------- ----------
Total Assets $ 325,662 $ 345,539
========== ==========
Liabilities:
Current Liabilities:
Current Portion of Long-Term Debt $ 14,028 $ 7,703
Accounts Payable 22,366 22,493
Accrued Payroll Related Expenses 9,898 10,834
Accrued Expenses 10,951 6,241
Accrued Future Operating Losses - Pinole Point Steel (9) 7,327 -
Income Taxes Payable 2,452 -
---------- ----------
Total Current Liabilities $ 67,022 $ 47,271
---------- ----------
Long-Term Liabilities:
Deferred Income Taxes $ 10,233 $ 5,665
Long-Term Debt, Less Current Portion 91,380 129,762
Other 11,183 13,105
---------- ----------
Total Long-Term Liabilities $ 112,796 $ 148,532
---------- ----------
Shareowners' Equity:
Preferred Stock (3) $ - $ -
Common Stock (4) 363 354
Additional Paid-In Capital 66,752 63,334
Treasury Stock at Cost (5) (34,813) (34,813)
Retained Earnings 113,299 120,861
Accumulated Other Comprehensive Income (6) (13) 243 -
---------- ----------
Total Shareowners' Equity $ 145,844 $ 149,736
---------- ----------
Total Liabilities and Shareowners' Equity $ 325,662 $ 345,539
========== ==========
The accompanying notes are an integral part of these statements.
4
Consolidated Statements of Cash Flow (Unaudited)
Material Sciences Corporation and Subsidiaries
Three Months Ended Nine Months Ended
November 30, November 30,
(In thousands) 2001 2000 2001 2000
---------------------------------------------------------------------------- --------- --------- --------- ---------
Cash Flows From:
Operating Activities:
Net Income (Loss) $ (319) $ (478) $ (7,586) $ 3,812
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by
(Used in) Operating Activities:
Discontinued Operation, Net - Specialty Films (7) - (1,709) (2,597) (2,929)
Discontinued Operation, Net - Pinole Point Steel (9) (4,090) (827) (2,784) 395
Gain on Sale of Discontinued Operation - Specialty Films (7) - - (38,787) -
Loss on Discontinued Operation - Pinole Point Steel (9) - - 42,248 -
Depreciation and Amortization 4,340 4,310 12,855 12,866
Benefit for Deferred Income Taxes (133) (1,428) (1,565) (1,724)
Compensatory Effect of Stock Plans 660 731 2,196 2,099
Other, Net 370 285 1,029 766
--------- --------- --------- ---------
Operating Cash Flow Prior to Changes in Assets and Liabilities $ 828 $ 884 $ 5,009 $ 15,285
--------- --------- --------- ---------
Changes in Assets and Liabilities:
Receivables $ 2,829 $ 2,123 $ 989 $ (826)
Income Taxes Receivable - 161 1,637 (369)
Prepaid Expenses (23) (365) (168) (1,681)
Inventories (2,048) 136 2,020 (2,683)
Accounts Payable (4,428) (3,333) (5,521) (1,828)
Accrued Expenses (3,645) (330) (5,085) (6,831)
Income Taxes Payable (20,028) - (23,012) -
Other, Net (337) (48) (104) (715)
--------- --------- --------- ---------
Cash Flow from Changes in Assets and Liabilities $ (27,680) $ (1,656) $ (29,244) $ (14,933)
--------- --------- --------- ---------
Net Cash Provided by (Used in) Operating Activities $ (26,852) $ (772) $ (24,235) $ 352
--------- --------- --------- ---------
Investing Activities:
Discontinued Operation, Net - Specialty Films (7) $ - $ (500) $ (6,508) $ (1,789)
Discontinued Operation, Net - Pinole Point Steel (9) (179) (243) (1,482) (1,510)
Cash Received from Sale of Specialty Films, Net (7) 1,494 - 121,982 -
Capital Expenditures, Net (1,135) (1,794) (3,355) (6,876)
Acquisition, Net of Cash Acquired (8) (47) - (397) -
Investment in Joint Ventures (28) (758) (9) (2,599)
Purchases of Marketable Securities (13) (20,512) - (20,512) -
Proceeds from Sale of Marketable Securities (13) 2,056 - 2,056 -
Other (274) (213) (881) (315)
--------- --------- --------- ---------
Net Cash Provided by (Used in) Investing Activities $ (18,625) $ (3,508) $ 90,894 $ (13,089)
--------- --------- --------- ---------
Financing Activities:
Discontinued Operation, Net - Specialty Films (7) $ - $ (1,877) $ (294) $ (2,186)
Net Proceeds (Payments) Under Lines of Credit - 6,700 (24,500) 23,000
Payments of Debt (142) (127) (7,557) (371)
Purchase of Treasury Stock - (723) - (12,739)
Issuance of Common Stock 339 676 1,231 1,255
--------- --------- --------- ---------
Net Cash Provided by (Used in) Financing Activities $ 197 $ 4,649 $ (31,120) $ 8,959
--------- --------- --------- ---------
Net Increase (Decrease) in Cash $ (45,280) $ 369 $ 35,539 $ (3,778)
Cash and Cash Equivalents at Beginning of Period 83,238 (3) 2,419 4,144
--------- --------- --------- ---------
Cash and Cash Equivalents at End of Period $ 37,958 $ 366 $ 37,958 $ 366
========= ========= ========= =========
Supplemental Cash Flow Disclosures:
Non-Cash Investing and Financing Activities:
Accrued Future Operating Losses - Pinole Point Steel (9) $ 7,327
Accrued Expenses Related to Pinole Point Steel Disposition (9) 2,825
The accompanying notes are an integral part of these statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MATERIAL SCIENCES CORPORATION
(In thousands)
The data for the three and nine months ended November 30, 2001 and 2000 have not
been audited by independent public accountants but, in the opinion of the
Company, reflect all adjustments (consisting of only normal, recurring
adjustments) necessary for a fair presentation of the information at those dates
and for those periods. The financial information contained in this report should
be read in conjunction with the Company's 2001 Annual Report to Shareowners and
Annual Report on Form 10-K. Certain prior year amounts have been reclassified to
conform with the fiscal 2002 presentation.
(1) During the nine months ended November 30, 2001 and 2000, the Company
derived approximately 20.8% and 20.3%, respectively, of its sales from fees
billed to Walbridge Coatings ("Partnership") by a subsidiary of the Company
for operating the Walbridge, Ohio facility.
(2) Includes trade receivables due from the Partnership of $418 as of
November 30, 2001 and no amount as of February 28, 2001.
(3) Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized; 1,000,000
Designated Series B Junior Participating Preferred; None Issued.
(4) Common Stock, $.02 Par Value; 40,000,000 Shares Authorized; 18,115,366
Shares Issued and 14,730,930 Shares Outstanding as of November 30, 2001 and
17,676,984 Shares Issued and 14,292,548 Shares Outstanding as of
February 28, 2001.
(5) Treasury Stock at Cost; 3,384,436 Shares as of November 30, 2001 and as of
February 28, 2001.
(6) Comprehensive Income (Loss):
Three Months Ended Nine Months Ended
------------------ -----------------
November 30, November 30,
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Net Income (Loss) $(319) $(478) $(7,586) $3,812
Other Comprehensive Income:
Foreign Currency Translation
Adjustments 181 - 181 -
Unrealized Gain on Marketable
Securities 62 - 62 -
----- ----- ------- ------
Comprehensive Income (Loss) $ (76) $(478) $(7,343) $3,812
===== ===== ======= ======
(7) On June 29, 2001, the Company completed the sale of substantially all of
the assets of its Specialty Films segment, including its interest in
Innovative Specialty Films, LLC, to Bekaert pursuant to the terms of the
Purchase Agreement by and among MSC, MSC Specialty Films, Inc., Bekaert and
N.V. Bekaert S.A., dated June 10, 2001. The
6
Company received cash of $121,982 and recorded an after-tax gain
of $38,787 in the second quarter of fiscal 2002. Net proceeds after taxes
and transaction costs are estimated to be approximately $90,500. As a
result of the sale, Specialty Films has been reported as a discontinued
operation for all periods presented.
(8) On August 1, 2001, a subsidiary of the Company acquired the net assets of
Goldbach Automobil Consulting ("GAC"), a European disc brake noise damper
distributor and stamper. An initial payment of 1,525 Euros was made on
September 26, 2001, and a payment of 4,490 Euros was made on October 5,
2001 (approximately $5,300 based on the foreign exchange rate as of
August 31, 2001). In addition, contingent consideration may be paid based
upon future earnings of the operation. As of August 31, 2001, the Company
recorded its initial purchase price allocation, which included an
allocation of $4,433 for intangibles related to the acquisition.
(9) After reviewing various strategic alternatives for Pinole Point Steel,
MSC's Board of Directors, on September 18, 2001, approved a plan to sell
Pinole Point Steel, the Company's West Coast hot-dip galvanizing and coil
coating operation. The Company is working with Credit Suisse First Boston
and TC Graham Associates to assist in the sale. The Company expects to sell
Pinole Point Steel during the next nine months. Pinole Point Steel has been
reported as a discontinued operation, and the consolidated financial
statements have been reclassified to segregate the net assets and operating
results of the segment. The provision for loss on discontinued operation,
net of income taxes of Pinole Point Steel of $42,248 was recorded in the
second quarter of fiscal 2002 and included the write-down of assets of
Pinole Point Steel of $28,505 to its estimated net realizable value of
$75,000, an accrual of $10,918 for future operating losses during the
twelve-month period ending September 1, 2002 and disposition costs of
$2,825. As of November 30, 2001, the net realizable value of Pinole Point
Steel increased to $79,272 primarily due to an increase in working capital.
Net sales and loss from discontinued operation of Pinole Point Steel were
as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
November 30, November 30,
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Net Sales $34,267 $38,940 $102,191 $120,653
Loss from Discontinued Operation,
Net of Income Taxes (3,591) (3,652) (11,152) (7,697)
The loss from discontinued operation, net of income taxes for the three and
nine months ended November 30, 2001 and 2000 includes the allocation of
consolidated interest expense of $1,797 and $6,303, respectively, as
compared with $2,282 and $6,588 in the same periods last year,
respectively. The loss on discontinued operation recorded in the second
quarter of fiscal 2002, net of income taxes of $42,248 includes the
allocation of consolidated interest expense of $7,188 to be incurred during
the twelve-month period ending September 1, 2002. The allocations were
based on the debt associated with the original purchase of Pinole Point
Steel in December 1997 and Pinole Point Steel's subsequent cash flow.
7
(10) The Company entered into a new $20,000 committed line of credit on
October 11, 2001. The agreement expires on October 11, 2004. No borrowings
were outstanding under the line as of November 30, 2001. There were $5,315
in outstanding letters of credit at that date. A fee of .375% is charged
for the unused portion of the line. At the Company's option, interest is at
the bank's reference rate (5.75% as of November 30, 2001) or at LIBOR plus
a margin (2.25% until February 28, 2002). The financial covenants include a
fixed charge coverage ratio of not less than 1.0 to 1.0 commencing
February 28, 2002; a liquidity ratio of not less than 1.5 to 1.0 commencing
November 30, 2001; a minimum leverage ratio (4.0 to 1.0 as of
November 30, 2001, 3.5 to 1.0 from February 28, 2002 through
November 30, 2002, 3.0 to 1.0 from February 28, 2003 to November 30, 2003,
and 2.5 to 1.0 thereafter); and minimum net worth of $140,000 plus 50% of
cumulative consolidated net income accruing for fiscal years ending after
November 30, 2001, and only for such periods that the Company's balance
sheet leverage exceeds 2.0 to 1.0. However, compliance with the financial
covenants is not required at times when the Company has cash collateralized
its obligations under the line of credit. The Company did not meet the
minimum leverage ratio as of November 30, 2001, and hence has cash
collateralized its outstanding letters of credit. There are no restrictions
on the Company's use of its cash and cash equivalents at times when no
borrowings are outstanding under the facility. The line of credit is
secured by certain accounts receivable of the Company.
(11) In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that all business combinations initiated after June
30, 2001, be accounted for using the purchase method of accounting. With
the adoption of SFAS No. 142 on March 1, 2002, goodwill will no longer be
subject to amortization over its estimated useful life. Goodwill will be
subject to at least an annual assessment of impairment by applying a
fair-value based test, beginning on the date of adoption of the new
accounting standard. MSC is assessing the potential impact, if any, which
may be caused by the assessment of the impairment requirements of SFAS No.
142. MSC does not expect the new pronouncements to have a material effect
on the financial position or results of operations of the Company.
In August 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets" which will become effective for the Company on March 1,
2002. This statement further refines the rules for accounting for
long-lived assets and long-lived assets to be disposed of. The Company has
not determined the impact, if any, that this statement will have on its
consolidated financial position or results of operations.
(12) On November 15, 2001, the Company announced it implemented a reorganization
and cost reduction program which is expected to save approximately $4,000
annually before income taxes. The program involves the reorganization of
the Company's three continuing operations into a single business unit which
will provide electronic, acoustical/thermal and coated metal
materials-based solutions to a variety of markets. MSC believes that this
more efficient structure will enable it to more effectively transfer
skills, knowledge and technology throughout the Company. In the third
quarter of fiscal 2002, MSC terminated 41 employees throughout various
departments of the Company and recorded a restructuring charge of $1,385
for severance and other related costs. The Company paid $45 of the recorded
reserve during the third quarter, and the remaining restructuring reserve
was $1,340 as of November 30, 2001.
8
(13) During the third quarter of fiscal 2002, the Company made investments in
marketable securities. These marketable securities are available for sale
and consist primarily of investments in U.S. agency and corporate notes.
These investments are expected to be held less than twelve months and are
classified as marketable securities in the consolidated balance sheet. The
Company recorded unrealized gains on its investments in marketable
securities to adjust the carrying value of these investments to fair value.
Unrealized gains were $62 as of November 30, 2001. The unrealized gains
were classified as a component of accumulated other comprehensive income.
(14) Business Segments:
The Company reports segment information based on how management
disaggregates its businesses for evaluating performance and making
operating decisions. As a result of the Company's restructuring program
announced on November 15, 2001, MSC is reporting results for all periods on
the basis of one segment.
9
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended November 30, 2001
PART I. FINANCIAL INFORMATION
(In thousands)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
------------
RESULTS OF OPERATIONS
---------------------
As a result of the sale of substantially all of the assets of the Company's
Specialty Films segment, including MSC Specialty Films, Inc. ("MSC/SFI"), to
Bekaert Corporation and its affiliates ("Bekaert") in the second quarter of
fiscal 2002, and MSC's Board of Directors' approval of a plan to sell its Pinole
Point Steel segment, both Specialty Films and Pinole Point Steel are reported as
discontinued operations for all periods presented.
On November 15, 2001, the Company announced it implemented a reorganization and
cost reduction program which is expected to save approximately $4,000 annually
before income taxes. The program involves the reorganization of the Company's
three continuing operations into a single business unit which will provide
electronic, acoustical/thermal and coated metal materials-based solutions to a
variety of markets. MSC believes that this more efficient structure will enable
it to more effectively transfer skills, knowledge and technology throughout the
Company. In the third quarter of fiscal 2002, MSC terminated 41 employees
throughout various departments of the Company and recorded a restructuring
charge of $1,385 for severance and other related costs. The Company paid $45 of
the recorded reserve during the third quarter, and the remaining restructuring
reserve was $1,340 as of November 30, 2001.
The Company reports segment information based on how management disaggregates
its businesses for evaluating performance and making operating decisions. As a
result of the Company's restructuring program, MSC is reporting results for all
periods on the basis of one segment.
Net sales from continuing operations in the third quarter of fiscal 2002 were
$63,249, 10.0% lower than $70,281 in the prior third quarter. For the nine
months ended November 30, 2001, net sales from continuing operations decreased
7.2% to $196,610 from $211,889 in the same period last year. For the third
quarter, sales of electronic-based applications increased 142.0% to $6,561 from
$2,711 in the prior year period. For the year-to-date period, sales of
electronic materials increased to $15,929, 130.7% higher than $6,904 last year.
The increase for both periods was primarily due to growth in vibration damping
metal composites sales for computer disk drive covers. Sales of
acoustical/thermal materials declined 10.0% in the third quarter of fiscal 2002
to $13,827 as compared with $15,357 in the third quarter of fiscal 2001 due
mainly to lower sales of noise damping composites for automotive engine parts,
offset slightly by an increase in shipments of disc brake noise dampers. For the
nine months
10
ended November 30, 2001, acoustical/thermal material sales declined 11.8% to
$42,423 from $48,100 in the prior year period. The decrease was due to lower
sales of noise damping composites for both disc brakes and automotive engines,
offset slightly by higher sales of Quiet Steel(R) for automotive dash panels.
For the third quarter of fiscal 2002, sales of coated metal products declined
17.9% to $42,861 from $52,213 in the prior year's third quarter. For the nine
months ended November 30, 2001, coated metal products sales decreased to
$138,258, 11.9% lower than $156,885 last fiscal year. For both periods, the main
contributors to the decreases were lower shipments of electrogalvanized steel to
the automotive market and a decline in coil coated metal shipments to the
building and construction market. These markets are, and continue to be,
impacted by the slow economy and the uncertainties arising out of the
unfortunate events that occurred on September 11, 2001.
The Company's gross profit margin for the third quarter of fiscal 2002 decreased
to 18.6% as compared with 20.4% in the third quarter of fiscal 2001 mainly due
to an unfavorable product mix. For the first nine months of fiscal 2002, gross
profit margin was 18.6% as compared with 20.7% in fiscal 2001. The decline in
gross profit margin for the year-to-date period was due to an unfavorable
product mix for the nine months ended November 30, 2001, as well as lower
capacity utilization and higher utility costs in the first quarter of fiscal
2002.
Selling, general and administrative ("SG&A") expenses were 19.8% of net sales in
the third quarter of fiscal 2002 as compared with 15.8% in the same period last
year. For the year-to-date period, SG&A expenses were 17.0% in fiscal 2002 as
compared with 15.1% in fiscal 2001. The increase in SG&A percentage was due to
the decrease in net sales and special charges of $1,385 relating to the
Company's restructuring program and $899 related to receivables outstanding from
two non-steel making customers at the time of their voluntary filings for
reorganization under Chapter 11. For the third quarter of fiscal 2002, loss
before income taxes was $828, as compared with income before income taxes of
$2,606 in the third quarter last year. For the nine-month period ended
November 30, 2001, income before income taxes decreased 73.4% to $2,726 from
$10,246 in the prior year.
On August 1, 2001, a subsidiary of the Company acquired the net assets of
Goldbach Automobil Consulting ("GAC"), a European disc brake noise damper
distributor and stamper. An initial payment of 1,525 Euros was made on
September 26, 2001, and a payment of 4,490 Euros was made on October 5, 2001
(approximately $5,300 based on the foreign exchange rate as of August 31, 2001).
In addition, contingent consideration may be paid based upon future earnings of
the operation. As of August 31, 2001, the Company recorded its initial purchase
price allocation, which included an allocation of $4,433 for intangibles related
to the acquisition.
MSC serves the electrogalvanizing market through its 50% ownership interest in
Walbridge Coatings, a partnership ("Partnership") among subsidiaries of MSC,
Bethlehem Steel Corporation ("BSC") and LTV Corporation ("LTV"). The Partnership
term expires on December 31, 2004. The Partnership also had a long-term toll
processing agreement with ISPAT Inland Inc. (a former partner) which expired on
December 31, 2001.
On December 29, 2000, LTV filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Sales to LTV through the Partnership were $2,460 in the third
quarter of fiscal 2002 and $7,435 for the nine month ended November 30, 2001. As
of November 30, 2001, the Partnership is continuing to make shipments to LTV
under special credit arrangements. On November 20, 2001, LTV announced its
intention to cease operations and filed for liquidation under Chapter 7
11
of the U.S. Bankruptcy Code. The Company is currently reviewing its business
alternatives under the definitive agreements, including a possible purchase of
LTV's interest in the Partnership. The Partnership has no LTV pre-petition
receivables outstanding and $408 of LTV post-petition receivables outstanding as
of November 30, 2001. MSC Pre Finish Metals Inc. has $274 of LTV pre-petition
receivables outstanding that are fully reserved and no LTV post-petition
receivables outstanding as of November 30, 2001.
On October 15, 2001, BSC filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Although the Company believes that BSC's participation in the
Partnership and the Partnership's processing services for BSC are valuable to
the BSC estate, as evidenced by Walbridge Coatings being treated as a critical
vendor under BSC's proceedings, there currently can be no assurance that the BSC
bankruptcy will not result in a disruption of such relationships. Sales to BSC
through the Partnership were $7,304 in the third quarter of fiscal 2002. The
Partnership has no BSC pre-petition receivables outstanding and $2,113 of BSC
post-petition receivables outstanding as of November 30, 2001.
As the result of a major fire on December 15, 2001, at the Double Eagle Steel
Coating Company ("DESCO"), a joint venture between U.S. Steel and Rouge Steel
Company, the Company expects to supply some portion of DESCO's
electrogalvanizing requirements for the next several months. In addition, MSC is
pursuing other galvanizing and organic coating business to increase the
utilization of the Partnership's facility in response to the loss of the LTV
volume.
Total Other Expense, Net and Income Taxes
Total other expense, net for the third quarter of fiscal 2002 was $66 as
compared with $606 for the third quarter of fiscal 2001. For the nine months
ended November 30, 2001, total other expense, net was $469 versus $1,657 in the
prior year. The variance in both periods was due to higher interest income and
lower interest expense as a result of the cash proceeds received from the sale
of the Company's Specialty Films segment during the second quarter of fiscal
2002. MSC's effective income tax rate for continuing operations was 61.5%
(benefit) in the third quarter of fiscal 2002 as compared with 23.6% (provision)
for the same period last year. For the year-to-date period, the Company's
effective income tax rate was 27.8% in fiscal 2002 as compared with 34.0% in
fiscal 2001. The variance in the effective income tax rate for both periods is
due to the lower income before income taxes relative to tax credits and other
permanent items.
RESULTS OF DISCONTINUED OPERATIONS
----------------------------------
Specialty Films
On June 29, 2001, the Company completed the sale of substantially all of the
assets of its Specialty Films segment, including its interest in Innovative
Specialty Films, LLC, to Bekaert pursuant to the terms of the Purchase Agreement
by and among MSC, MSC/SFI, Bekaert and N.V. Bekaert S.A., dated June 10, 2001.
The Company received cash of $121,982 and recorded an after-tax gain
of $38,787 in the second quarter of fiscal 2002. Net proceeds after taxes and
transaction costs are estimated to be approximately $90,500. As a result of the
sale, Specialty Films has been reported as a discontinued operation for all
periods presented.
12
Pinole Point Steel
After reviewing various strategic alternatives for Pinole Point Steel, MSC's
Board of Directors, on September 18, 2001, approved a plan to sell Pinole Point
Steel, the Company's West Coast hot-dip galvanizing and coil coating operation.
The Company is working with Credit Suisse First Boston and TC Graham Associates
to assist in the sale. The Company expects to sell Pinole Point Steel during the
next nine months. Pinole Point Steel has been reported as a discontinued
operation, and the consolidated financial statements have been reclassified to
segregate the net assets and operating results of the segment. The provision for
loss on discontinued operation, net of income taxes of Pinole Point Steel of
$42,248 was recorded in the second quarter of fiscal 2002 and included the
write-down of assets of Pinole Point Steel of $28,505 to its estimated net
realizable value of $75,000, an accrual of $10,918 for future operating losses
during the twelve-month period ending September 1, 2002 and disposition costs of
$2,825. As of November 30, 2001, the net realizable value of Pinole Point Steel
increased to $79,272 primarily due to an increase in working capital.
Net sales of Pinole Point Steel declined 12.0% to $34,267 in the third quarter
of fiscal 2002 compared with $38,940 for the third quarter last year. For the
nine months ended November 30, 2001, net sales were $102,191, a 15.3% decrease
from $120,653 in the same period last year. Pinole Point Steel's sales continue
to be affected by the soft West Coast building and construction market, which
has been further impacted by the uncertainties arising out of the unfortunate
events of September 11, 2001. Loss from discontinued operation, net of income
taxes of Pinole Point Steel in the third quarter of fiscal 2002 was $3,591
versus $3,652 in the prior year. For the first nine months of fiscal 2002, loss
from discontinued operation, net of income taxes was $11,152, as compared with
$7,697 in the same period last year. The increase in loss from discontinued
operation was due to deteriorating selling prices that more than offset the
decrease in the cost of steel purchased, as well as lower volume and higher
utility costs. This was partially offset by lower depreciation expense due to
changes made to the estimated useful lives of the galvanizing and coil coating
lines during the first quarter of fiscal 2002, which more accurately reflects
the service lives of the assets.
The loss from discontinued operation, net of income taxes for the three and nine
months ended November 30, 2001 and 2000 includes the allocation of consolidated
interest expense of $1,797 and $6,303, respectively, as compared with $2,282 and
$6,588 in the same periods last year, respectively. The loss on discontinued
operation, net of income taxes of $42,248 includes the allocation of
consolidated interest expense of $7,188 to be incurred during the twelve-month
period ending September 1, 2002. The allocations were based on the debt
associated with the original purchase of Pinole Point Steel in December 1997 and
Pinole Point Steel's subsequent cash flow.
Other
A ruling by the U.S. government under Section 201 of the Trade Act of 1974
related to the importing of steel-based substrates into the U.S. is expected in
the first quarter of fiscal 2003. At this time, the Company cannot determine the
impact, if any, that the ruling will have on MSC's financial position or results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During the third quarter of fiscal 2002, MSC utilized $26,852 of cash from
operating activities as compared with $772 in the third quarter last year. The
decrease in cash generation was due mainly to the payment of income taxes
related to the gain on the sale of Specialty Films, as well as higher
inventories and lower accounts payable and accrued expenses, partially offset by
lower receivables. For the nine months ended November 30, 2001, the Company
utilized $24,235 of cash as compared with generating $352 in the same period
last year. The decrease in cash generation was due mainly to the previously
mentioned income tax payment, as well as lower accounts payable and accrued
expenses and lower net income, offset somewhat by
13
lower receivable and inventory levels. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") from continuing operations decreased to
$3,016 and $14,727 for the third quarter and first nine months of fiscal 2002
and 2001, respectively, as compared with $7,101 and $23,710 for the same periods
last year, respectively. MSC's capital expenditures from continuing operations
during the third quarter and first nine months of fiscal 2002 were $1,135 and
$3,355, respectively, as compared with $1,794 and $6,876 in the same periods
last year, respectively.
As of November 30, 2001, MSC's total debt decreased to $105,408 from $137,465 as
of February 28, 2001. On June 29, 2001, the Company utilized a portion of the
proceeds from the sale of substantially all of the assets of the Specialty Films
segment to pay off the total amount outstanding under its previous line of
credit of $42,600. The Company has invested the remaining proceeds from the sale
in marketable securities and money market funds. The Company is reviewing
alternative uses for the sale proceeds.
The Company entered into a $20,000 committed line of credit on October 11, 2001.
The agreement expires on October 11, 2004. No borrowings were outstanding under
the line as of November 30, 2001. There were $5,315 in outstanding letters of
credit at that date. A fee of .375% is charged for the unused portion of the
line. At the Company's option, interest is at the bank's reference rate (5.75%
as of November 30, 2001) or at LIBOR plus a margin (2.25% until February 28,
2002). The financial covenants include a fixed charge coverage ratio of not less
than 1.0 to 1.0 commencing February 28, 2002; a liquidity ratio of not less than
1.5 to 1.0 commencing November 30, 2001; a minimum leverage ratio (4.0 to 1.0 as
of November 30, 2001, 3.5 to 1.0 from February 28, 2002 through November 30,
2002, 3.0 to 1.0 from February 28, 2003 to November 30, 2003, and 2.5 to 1.0
thereafter); and minimum net worth of $140,000 plus 50% of cumulative
consolidated net income accruing for fiscal years ending after November 30,
2001, and only for such periods that the Company's balance sheet leverage
exceeds 2.0 to 1.0. However, compliance with the financial covenants is not
required at times when the Company has cash collateralized its obligations under
the line of credit. The Company did not meet the minimum leverage ratio as of
November 30, 2001, and hence has cash collateralized its outstanding letters of
credit. There are no restrictions on the Company's use of its cash and cash
equivalents at times when no borrowings are outstanding under the facility. The
line of credit is secured by certain accounts receivable of the Company.
The Company believes that its cash flow from operations, cash on hand and
marketable securities will be sufficient to fund its working capital needs,
capital expenditures, acquisitions and debt payments.
During the third quarter of fiscal 2002, the potentially responsible party
committee of the Kingsbury, Indiana Superfund site accepted a buyout proposal to
complete the remaining cleanup at the Kingsbury site in exchange for an up-front
payment. In early December 2001, the Company paid $2,047 for its portion of the
buyout, which is approximately the amount reserved by the Company. The
outstanding letter of credit for approximately $3,200 will be canceled in the
fourth quarter of fiscal 2002. For additional information on environmental
matters, please refer to MSC's Annual Report on Form 10-K for the fiscal year
ended February 28, 2001.
14
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations initiated after June 30, 2001, be accounted for using
the purchase method of accounting. With the adoption of SFAS No. 142 on March 1,
2002, goodwill will no longer be subject to amortization over its estimated
useful life. Goodwill will be subject to at least an annual assessment of
impairment by applying a fair-value based test, beginning on the date of
adoption of the new accounting standard. MSC is assessing the potential impact,
if any, which may be caused by the assessment of the impairment requirements of
SFAS No. 142. MSC does not expect the new pronouncements to have a material
effect on the financial position or results of operations of the Company.
In August 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets" which will become effective for the Company on March 1, 2002.
This statement further refines the rules for accounting for long-lived assets
and long-lived assets to be disposed of. The Company has not determined the
impact, if any, that this statement will have on its consolidated financial
position or results of operations.
Certain statements contained in this report, including, without limitation, the
estimated loss and estimated proceeds from the disposition of discontinued
operation set forth in the financial statements, are forward-looking, based on
current expectations, forecasts and assumptions. MSC cautions the reader that
the following factors could cause MSC's actual outcomes and results to differ
materially from those stated or implied in the forward-looking statements: the
risk of the successful development and introduction of new products and
technologies; competitive factors; changes in the business environment,
including the automotive, building and construction and durable goods
industries; the risk that any of the assumptions made in preparing the estimated
loss and estimated proceeds from the disposition of discontinued operation may
prove inaccurate and that the actual loss or proceeds may be materially greater
or less than the estimated loss or proceeds; revenue expectations as a result of
supplying a portion of DESCO's electrogalvanizing requirements; increases in the
prices of raw and other material inputs used by the Company; acts of war or
terrorism, including the uncertainties arising out of the unfortunate events of
September 11, 2001; adverse changes in government laws and regulations
(including the ruling under Section 201 of the Trade Act of 1974); environmental
risks associated with the Company's manufacturing operations; and the other
factors identified in Part II, Item 7 of the Company's 2001 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. We undertake no
obligation to publicly update forward-looking statements, whether as a result of
new information, future events or otherwise.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
There has been no material change in the Company's assessment of its sensitivity
to market risk since its presentation set forth in Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk," in its Annual Report on Form 10-K
for the year ended February 28, 2001.
16
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For the Quarter Ended November 30, 2001
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Reference is made to the attached Index to Exhibits.
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Elk Grove Village, State of Illinois,
on the 14th day of January, 2002.
MATERIAL SCIENCES CORPORATION
By: /s/ Gerald G. Nadig
-----------------------------------
Gerald G. Nadig
Chairman, President
and Chief Executive Officer
By: /s/ James J. Waclawik, Sr.
-----------------------------------
James J. Waclawik, Sr.
Vice President,
Chief Financial Officer
and Secretary
18
MATERIAL SCIENCES CORPORATION
Quarterly Report on Form 10-Q
Index to Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
19