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 August 31, 2002
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
of incorporation or organization) number)
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 October 9, 2002, there were 14,040,320 outstanding shares of common stock,
$.02 par value.
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended August 31, 2002
(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 Six Months Ended
August 31, August 31,
(In thousands, except per share data) 2002 2001 2002 2001
------------------------------------------------------------------------------------- --------- ---------- ---------- ----------
Net Sales (1) $ 68,151 $ 67,361 $ 139,811 $ 133,361
Cost of Sales 53,793 54,711 112,614 108,476
--------- ---------- ---------- ----------
Gross Profit $ 14,358 $ 12,650 $ 27,197 $ 24,885
Selling, General and Administrative Expenses 10,520 10,342 19,684 20,928
--------- ---------- ---------- ----------
Income from Operations $ 3,838 $ 2,308 $ 7,513 $ 3,957
--------- ---------- ---------- ----------
Other (Income) and Expense:
Interest (Income) Expense, Net (14) $ 1,064 $ (445) $ 858 $ (358)
Equity in Results of Joint Ventures 442 333 757 645
Other, Net (17) 54 44 116
--------- ---------- ---------- ----------
Total Other (Income) Expense, Net $ 1,489 $ (58) $ 1,659 $ 403
--------- ---------- ---------- ----------
Income from Continuing Operations Before Provision for Income Taxes $ 2,349 $ 2,366 $ 5,854 $ 3,554
Provision for Income Taxes 890 880 2,225 1,268
--------- ---------- ---------- ----------
Income from Continuing Operations $ 1,459 $ 1,486 $ 3,629 $ 2,286
Discontinued Operations: (7)(13)
Income from Discontinued Operation - Specialty Films (Net of Provision
for Income Taxes of $0, $154, $0 and $1,009, Respectively) -- 226 -- 1,469
Loss from Discontinued Operation - Pinole Point Steel (Net of Benefit
for Income Taxes of $0, $2,691, $0 and $5,261, Respectively) -- (3,867) -- (7,561)
Gain on Sale of Discontinued Operation - Specialty Films (Net of Benefit
for Income Taxes of $70 and Provision for Income Taxes of $31,445, Respectively) (101) 38,787 (101) 38,787
Loss on Discontinued Operation - Pinole Point Steel (Net of Benefit
for Income Taxes of $426 and $7,588, Provision for Income Taxes of $2,134 and
Benefit for Income Taxes of $7,588, Respectively) (610) (42,248) 3,073 (42,248)
Extraordinary Loss on Early Retirement of Debt (Net of Benefit
for Income Taxes of $1,546) (15) (2,388) -- (2,388) --
--------- ---------- ---------- ----------
Net Income (Loss) $ (1,640) $ (5,616) $ 4,213 $ (7,267)
========= ========== ========== ==========
Basic Net Income (Loss) Per Share:
Income from Continuing Operations $ 0.10 $ 0.11 $ 0.26 $ 0.16
Income from Discontinued Operation - Specialty Films -- 0.02 -- 0.11
Loss from Discontinued Operation - Pinole Point Steel -- (0.28) -- (0.54)
Gain on Sale of Discontinued Operation - Specialty Films (0.01) 2.78 (0.01) 2.79
Loss on Discontinued Operation - Pinole Point Steel (0.04) (3.03) 0.22 (3.04)
Extraordinary Loss on Early Retirement of Debt (0.17) -- (0.17) --
--------- ---------- ---------- ----------
Basic Net Income (Loss) Per Share $ (0.12) $ (0.40) $ 0.30 $ (0.52)
========= ========== ========== ==========
Diluted Net Income (Loss) Per Share:
Income from Continuing Operations $ 0.10 $ 0.11 $ 0.25 $ 0.16
Income from Discontinued Operation - Specialty Films -- 0.02 -- 0.11
Loss from Discontinued Operation - Pinole Point Steel -- (0.28) -- (0.54)
Gain on Sale of Discontinued Operation - Specialty Films (0.01) 2.75 (0.01) 2.76
Loss on Discontinued Operation - Pinole Point Steel (0.03) (3.00) 0.22 (3.01)
Extraordinary Loss on Early Retirement of Debt (0.17) -- (0.17) --
--------- ---------- ---------- ----------
Diluted Net Income (Loss) Per Share $ (0.11) $ (0.40) $ 0.29 $ (0.52)
========= ========== ========== ==========
Weighted Average Number of Common Shares Outstanding
Used for Basic Net Income (Loss) Per Share 14,017 13,959 14,152 13,913
Dilutive Shares 301 137 236 127
--------- ---------- ---------- ----------
Weighted Average Number of Common Shares Outstanding
Plus Dilutive Shares 14,318 14,096 14,388 14,040
========= ========== ========== ==========
Outstanding Common Stock Options Having No Dilutive Effect 734 1,393 743 1,393
========= ========== ========== ==========
The accompanying notes are an integral part of these statements.
3
Consolidated Balance Sheets (Unaudited)
Material Sciences Corporation and Subsidiaries
August 31, February 28,
(In thousands) 2002 2002
------------------------------------------------------------------------------- ------------ ------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 35,518 $ 33,806
Restricted Cash (8) 2,658 5,315
------------ ------------
Total Cash and Cash Equivalents $ 38,176 $ 39,121
Marketable Securities (11) 4,058 13,121
Receivables, Less Reserves of $4,871 and $4,754, Respectively (2) 28,424 27,249
Income Taxes Receivable 3,247 4,325
Prepaid Expenses 2,949 1,431
Inventories:
Raw Materials 9,895 10,211
Finished Goods 15,189 14,645
Prepaid Taxes 2,451 2,451
Current Assets of Discontinued Operation, Net - Pinole Point Steel (7) 14,467 65,104
------------ ------------
Total Current Assets $ 118,856 $ 177,658
------------ ------------
Property, Plant and Equipment $ 247,708 $ 244,709
Accumulated Depreciation and Amortization (149,980) (141,794)
------------ ------------
Net Property, Plant and Equipment $ 97,728 $ 102,915
------------ ------------
Other Assets:
Investment in Joint Ventures (12) $ 13,730 $ 11,033
Intangible Assets, Net (9) 6,603 6,594
Other 1,206 1,274
------------ ------------
Total Other Assets $ 21,539 $ 18,901
------------ ------------
Total Assets $ 238,123 $ 299,474
============ ============
Liabilities:
Current Liabilities:
Current Portion of Long-Term Debt (15) $ 11,879 $ 14,045
Accounts Payable 23,015 23,518
Accrued Payroll Related Expenses 10,104 10,338
Accrued Expenses 7,848 10,911
Accrued Future Operating Losses - Pinole Point Steel (7) -- 3,383
------------ ------------
Total Current Liabilities $ 52,846 $ 62,195
------------ ------------
Long-Term Liabilities:
Deferred Income Taxes $ 6,966 $ 7,053
Long-Term Debt, Less Current Portion (15) 43,944 91,217
Other 10,759 10,385
------------ ------------
Total Long-Term Liabilities $ 61,669 $ 108,655
------------ ------------
Shareowners' Equity:
Preferred Stock (3) $ -- $ --
Common Stock (4) 364 363
Additional Paid-In Capital 68,999 67,441
Treasury Stock at Cost (5) (46,528) (34,813)
Retained Earnings 100,015 95,802
Accumulated Other Comprehensive Income (Loss) (6)(11) 758 (169)
------------ ------------
Total Shareowners' Equity $ 123,608 $ 128,624
------------ ------------
Total Liabilities and Shareowners' Equity $ 238,123 $ 299,474
============ ============
The accompanying notes are an integral part of these statements.
4
Consolidated Statements of Cash Flows (Unaudited)
Material Sciences Corporation and Subsidiaries
Three Months Ended Six Months Ended
August 31, August 31,
(In thousands) 2002 2001 2002 2001
-------------------------------------------------------------------- --------- --------- --------- ---------
Cash Flows From:
Operating Activities:
Net Income (Loss) $ (1,640) $ (5,616) $ 4,213 $ (7,267)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by
(Used in) Operating Activities:
Discontinued Operation, Net - Specialty Films (13) -- 43 -- (2,597)
Discontinued Operation, Net - Pinole Point Steel (7) (2,496) 1,326 19,297 1,306
Gain on Sale of Discontinued Operation - Specialty Films (13) 101 (38,787) 101 (38,787)
Loss on Discontinued Operation - Pinole Point Steel (7) 610 42,248 (3,073) 42,248
Depreciation and Amortization 4,131 4,378 8,276 8,515
Benefit for Deferred Income Taxes (44) (56) (87) (1,432)
Compensatory Effect of Stock Plans 369 737 739 1,536
Other, Net 653 323 968 659
Changes in Assets and Liabilities:
Receivables 5,449 (5,797) (1,175) (1,840)
Income Taxes Receivable 1,348 1,057 1,078 1,637
Prepaid Expenses 202 437 (1,619) (145)
Inventories (1,114) 1,761 (228) 4,068
Accounts Payable (1,609) (3,931) (503) (1,093)
Accrued Expenses 3,517 4,030 (3,312) (1,440)
Income Taxes Payable -- (2,984) -- (2,984)
Other, Net 2 120 260 233
--------- --------- --------- ---------
Net Cash Provided by (Used in) Operating Activities $ 9,479 $ (711) $ 24,935 $ 2,617
--------- --------- --------- ---------
Investing Activities:
Discontinued Operation, Net - Specialty Films (13) $ -- $ (762) $ -- $ (6,508)
Discontinued Operation, Net - Pinole Point Steel (7) -- (1,168) (176) (1,303)
Cash Received from Sale of Specialty Films, Net (13) -- 120,488 -- 120,488
Cash Received (Distributed) from Sale of Pinole Point Steel, Net (7) (1,240) -- 31,221 --
Capital Expenditures (1,309) (890) (2,548) (2,220)
Acquisition, Net of Cash Acquired -- (350) -- (350)
Investment in Joint Ventures (12) (336) 29 (3,454) 19
Purchases of Marketable Securities (11) (3,013) -- (8,003) --
Proceeds from Sale of Marketable Securities (11) 10,159 -- 17,159 --
Other 166 (279) 255 (607)
--------- --------- --------- ---------
Net Cash Provided by Investing Activities $ 4,427 $ 117,068 $ 34,454 $ 109,519
--------- --------- --------- ---------
Financing Activities:
Discontinued Operation, Net - Specialty Films (13) $ -- $ (300) $ -- $ (294)
Proceeds Under Line of Credit -- 13,500 -- 65,800
Payments Under Line of Credit -- (48,700) -- (90,300)
Payments of Debt (35,869) (138) (49,439) (7,415)
Cash from Cancellation (Issuance) of Letter of Credit (8) (578) -- 2,657 --
Purchase of Treasury Stock (5) (11,579) -- (11,715) --
Issuance of Common Stock 574 400 820 892
--------- --------- --------- ---------
Net Cash Used in Financing Activities $ (47,452) $ (35,238) $ (57,677) $ (31,317)
--------- --------- --------- ---------
Net Increase (Decrease) in Cash $ (33,546) $ 81,119 $ 1,712 $ 80,819
Cash and Cash Equivalents at Beginning of Period 69,064 2,119 33,806 2,419
--------- --------- --------- ---------
Cash and Cash Equivalents at End of Period $ 35,518 $ 83,238 $ 35,518 $ 83,238
========= ========= ========= =========
Supplemental Cash Flow Disclosures:
Interest Paid $ 461 $ 340 $ 4,113 $ 4,898
Income Taxes Paid 1,425 80 1,525 208
Non-Cash Investing and Financing Activities:
Deferred Payment for Goldbach Acquisition $ 5,297
The accompanying notes are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MATERIAL SCIENCES CORPORATION
(In thousands)
The data for the three and six months ended August 31, 2002 and 2001 have not
been audited by our independent public accountants but, in the opinion of
Material Sciences Corporation (the "Company" or "MSC"), 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 Annual Report on Form 10-K for the year ended February 28,
2002. Certain prior year amounts have been reclassified to conform with the
fiscal 2003 presentation.
(1) During the six months ended August 31, 2002 and 2001, the Company derived
approximately 26% and 22%, respectively, of its sales from fees billed by a
subsidiary of the Company to Walbridge Coatings (the "Partnership") for
operating the Walbridge, Ohio facility. Summarized financial information
for the Partnership is presented below.
Three Months Ended Six Months Ended
------------------ ----------------
August 31, August 31,
--------- ---------
Income Statement Information 2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ 14,945 $ 13,925 $ 30,605 $ 28,510
Loss from Operations (608) (624) (1,223) (1,246)
Net Loss (591) (622) (1,206) (1,232)
August 31, February 28,
Balance Sheet Information 2002 2002
---- ----
Current Assets $ 6,929 $ 7,949
Total Assets 18,705 20,632
Total Liabilities 861 1,627
Partners' Capital 17,844 19,005
(2) Includes trade receivables due from the Partnership of $3,617 as of
August 31, 2002 and $1,621 as of February 28, 2002.
(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; 18,197,211
Shares Issued and 14,008,563 Shares Outstanding as of August 31, 2002 and
18,115,624 Shares Issued and 14,731,188 Shares Outstanding as of
February 28, 2002.
(5) Treasury Stock at Cost: 4,188,648 Shares as of August 31, 2002 and
3,384,436 Shares as of February 28, 2002. On June 22, 2000, MSC's Board of
Directors authorized the repurchase of up to one million shares of the
Company's common stock. In the third quarter of fiscal 2001, the Company
suspended the program.
On March 1, 2002, the Company purchased 13,593 of its shares from certain
employees based on the closing price on February 28, 2002 in connection
with the vesting of shares granted under the Company's 1999 Long-Term
Incentive/Leverage Stock Awards Program ("1999 Program"). The Compensation
Committee of the Board of Directors approved the share repurchase under the
provisions of the Material Sciences Corporation 1992 Omnibus Awards Plan
for Key Employees to cover a portion of participant's tax withholding
liability for the vesting of these shares under the 1999 Program.
6
On June 20, 2002, the Company resumed the previously approved repurchase
program and through August 31, 2002, the Company completed this share
repurchase program by purchasing the remaining 290,619 shares with an
average purchase price of $14.89 per share. On June 20, 2002, MSC's Board
of Directors also authorized a new program to repurchase up to an
additional 500,000 shares of the Company's common stock. The repurchase of
500,000 shares was complete at August 31, 2002 with an average purchase
price with $14.50 per share.
(6) Comprehensive Income (Loss):
Three Months Ended Six Months Ended
------------------ ----------------
August 31, August 31,
---------- ----------
2002 2001 2002 2001
---- ---- ---- ----
Net Income (Loss) $(1,640) $(5,616) $ 4,213 $(7,267)
Other Comprehensive Income:
Foreign Currency Translation
Adjustments 585 - 753 -
Unrealized Gain on Marketable Securities 35 - 5 -
------- ------- ------- -------
Comprehensive Income (Loss) $(1,020) $(5,616) $ 4,971 $(7,267)
======= ======= ======= =======
The increase in foreign currency translation adjustments was due to lower
exchange rates used to translate the Company's international operations to
U.S. dollars in the second quarter of fiscal 2003.
(7) On May 31, 2002, the Company completed the sale of substantially all of the
assets of its Pinole Point Steel business. The Company is in the process of
liquidating the remaining assets and liabilities of the business. As of
August 31, 2002, the Company has received $50,518 related to the
disposition and liquidation of the business, consisting of $31,221 of sale
proceeds from Grupo IMSA S.A. de C.V. and $19,297 from liquidating the
Pinole Point Steel operations. In addition, as of August 31, 2002, there is
$14,467 in net assets remaining to be liquidated. The net assets consist
primarily of the expected tax refund due to a loss carryback offsetting a
portion of the gain on sale of its Specialty Films business in the prior
year. The remaining net assets include accounts receivable, offset, in
part, by severance expenses and other liabilities not assumed by Grupo IMSA
S.A. de C.V. 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 business.
As of February 28, 2002, the Company recorded a provision for loss on
discontinued operation, net of income taxes, of $53,287. The loss on
discontinued operation, net of income taxes, included the allocation of
consolidated interest expense of $5,391 incurred from September 1, 2001
through May 31, 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. During the first quarter of
fiscal 2003, the Company recorded an adjustment on sale of discontinued
operation, net of income taxes, of $3,683 to reduce the previously provided
loss on discontinued operation. The adjustment consisted of a reduction for
estimated operating losses of $1,247 due to higher plant utilization and
customers' willingness to accelerate product deliveries prior to the
closing of the transaction. In addition, MSC recorded a favorable change in
the estimated proceeds of the sale of $2,436. During the second quarter of
fiscal 2003, the
7
Company recorded an additional loss on sale of discontinued operation, net
of income taxes, of $610 related to increases in previously estimated bad
debt expense and product claims expense, and employee expenses related to
the collection of accounts receivable and settlement of certain retained
liabilities.
Net sales and loss from discontinued operation of Pinole Point Steel were
as follows:
Three Months Ended Six Months Ended
------------------ ----------------
August 31, August 31,
---------- ----------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ - $35,550 $48,050 $67,924
Loss from Discontinued Operation,
Net of Income Taxes - (3,867) (2,136) (7,561)
No consolidated interest expense was allocated to Pinole Point Steel in the
three months ended August 31, 2002. The loss from discontinued operation,
net of income taxes, for the three months ended August 31, 2001 includes
the allocation of consolidated interest expense of $2,038. For the
six-months ended August 31, 2002 and 2001, the loss from discontinued
operation, net of income taxes, includes the allocation of interest expense
of $1,797 and $4,506, respectively.
(8) In April 2002, one of the Company's letters of credit for $3,235 was
canceled and the related cash collateral was released to the Company.
During the second quarter of fiscal 2003, the Company posted new commercial
letters of credit totaling $578. As of August 31, 2002, the Company's
outstanding letters of credit continue to be cash collateralized. Other
than $2,658 and $5,315 that were classified as restricted cash in the
consolidated balance sheets as of August 31, 2002 and February 28, 2002,
respectively, there are no other restrictions on the use of the Company's
cash and cash equivalents under the Company's line of credit facility at
times when no borrowings are outstanding. The line of credit is secured by
accounts receivable of the Company.
(9) 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. As of August 31, 2002, MSC believes no adjustment is
deemed necessary after assessing the impairment requirements of SFAS No.
142.
As of August 31, 2002, the Company's net intangibles consisted of $6,545
for goodwill and $58 for a non-compete agreement.
The Company adopted SFAS No. 144, "Impairment or Disposal of Long-Lived
Assets" on March 1, 2002. This statement further refines the rules for
accounting for long-lived assets and long-lived assets to be disposed of.
MSC has assessed the impairment requirements of SFAS No. 144 and believes
that no adjustment is deemed necessary.
8
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." SFAS No. 145 makes changes to several areas, including the
classification of gains and losses from extinguishment of debt and
accounting for certain lease modifications. The statement is effective for
fiscal years beginning after May 15, 2002. With the adoption of SFAS No.
145 on March 1, 2003, the extraordinary loss on early retirement of debt
will no longer be classified as an extraordinary item and will be reflected
as a component of income from continuing operations in the consolidated
statements of income (loss).
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which addresses financial
accounting and reporting for costs associated with exit or disposal
activities. This statement requires that a liability be recognized at fair
value for costs associated with exit or disposal activities only when the
liability is incurred as opposed to at the time the Company commits to an
exit plan as permitted under EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company does not expect that the adoption of this
statement will have a material impact on the Company's financial position,
results of operations or cash flows.
(10) During the first six months of fiscal 2003, cash of $373 was paid in
conjunction with the restructuring program announced on November 15, 2001.
The restructuring reserve was $165 as of August 31, 2002, as presented in
the chart.
Severance Other Total
--------- ----- -----
Restructuring Reserve as of
February 28, 2002 $ 434 $ 104 $ 538
Cash Payments (294) (79) (373)
------- ------- ------
Restructuring Reserve as of
August 31, 2002 $ 140 $ 25 $ 165
======= ======= ======
(11) During fiscal 2003, 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 sheets. The Company
recorded unrealized gains and losses on its investments in marketable
securities to adjust the carrying value of these investments to fair value.
Unrealized gains were $5 as of August 31, 2002. The unrealized gains were
classified as a component of accumulated other comprehensive income (loss).
(12) On May 13, 2002, MSC completed the purchase of LTV Corporation's ownership
interests in the Partnership for $3,137. As a result, MSC's ownership
interest in the Partnership increased to 66.5% and it gained access to an
additional 33% of the facility's available line time. Under the terms of
the Partnership agreements, all significant operating actions require the
consent of the management committee. MSC and Bethlehem Steel Company are
each represented by two members on the four-member management committee. As
a result, the Company does not have a
9
controlling voting interest in the Partnership and, accordingly,
continues to account for the Partnership under the equity method.
(13) 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.
("MSC/SFI"), Bekaert and N.V. Bekaert S.A., dated June 10, 2001. As a
result of the sale, Specialty Films is being reported as a discontinued
operation in the prior year.
During the second quarter of fiscal 2003, the Company recorded an
after-tax charge of $101 related to a decrease in the previously
estimated insurance premium refund for the Specialty Films business.
(14) The table presented below analyzes the components of interest (income)
expense, net.
Three Months Ended Six Months Ended
------------------ ----------------
August 31, August 31,
---------- ----------
Interest (Income) Expense, Net: 2002 2001 2002 2001
---- ---- ---- ----
Interest Expense $ 1,377 $ 2,098 $ 3,213 $ 4,669
Interest Income (313) (505) (558) (521)
Interest Expense Allocated to
Pinole Point Steel - (2,038) (1,797) (4,506)
------- ------- ------- -------
Interest (Income) Expense, Net $ 1,064 $ (445) $ 858 $ (358)
======= ======= ======= =======
As a result of the sale of Pinole Point Steel, the Company no longer
allocates interest expense to Pinole Point Steel.
(15) On July 31, 2002, the Company made a debt payment of $39,852 to the
holders of the 1997 Senior Notes. The debt payment consisted of
principal of $35,714, interest of $420 and a contractual prepayment
penalty of $3,718 (pretax basis). The extraordinary loss on early
retirement of debt, net of income taxes, includes the prepayment
penalty of $2,257 and a $131 write-off of debt issuance costs.
The estimated fair value of the Company's remaining debt, based on
discounted cash flows, was less than the carrying value by $6,671 as of
August 31, 2002.
The 1998 Senior Note agreements require the Company to adhere to certain
covenants. The most significant of these covenants include maintenance of
consolidated cumulative adjusted net worth of $118,341. This covenant may
limit the Company's ability to repurchase its common stock from time to
time. Other covenants include a consolidated senior debt ratio (55.0%
until agreement expiration) and a total indebtedness ratio (60.0% until
agreement expiration). MSC was in compliance with the financial covenants
related to the 1998 Senior Notes for the period ended August 31, 2002.
(16) MSC is a party to various legal proceedings in connection with the
remediation of certain environmental matters. The most significant
proceedings relate to the Company's involvement in Superfund sites in
Kingsbury and Gary, Indiana. MSC has been named
10
as a potentially responsible party ("PRP") for the surface, soil and
ground water contamination at these sites.
The United States District Court for the Northern District of Indiana has
entered a Consent Decree between the government and certain PRPs on the
scope of its remediation work at the Kingsbury site. The participating
PRPs account for approximately 75% of the waste volume sent to this site.
In December 2001, the PRPs established and funded a trust that has
contracted with a remediation contractor to undertake all foreseeable
activities necessary to achieve cleanup of the site pursuant to the
decree. The trust has purchased an annuity that will pay the remediation
contractor the anticipated expenses and oversight costs, including the
purchase of stop-loss insurance coverage to reimburse the trust in the
event of unforeseen cleanup expenses. The Company contributed $2,047 to
the trust in December 2001, with no impact to income (loss) before income
taxes, and expects that this payment will conclude its financial
obligations with respect to the Kingsbury site. Upon the conclusion of
litigation against a PRP that elected not to participate in the trust,
the Company will be entitled to receive its pro rata share of any funds
remaining in the site group litigation account and any periodic payments
by the non-participating PRP equal to its share of the trust's ongoing
remediation expenses. Moreover, should site closure be achieved ahead of
schedule, the Company will be entitled to receive its pro rata share of
the computed value of the annuity less a 25% early closure incentive
bonus payable to the remediation contractor.
The United States District Court for the Northern District of Indiana
also has entered a Consent Decree between the government and certain PRPs
on the scope of the remediation work at the Gary site. The estimate of
the Company's liability for this site is $1,100. This work has begun, and
MSC has maintained a letter of credit for approximately $1,200 to secure
its obligation to pay its currently estimated share of the remediation
expenses at this site.
MSC believes its range of exposure for all known sites, based on
allocations of liability among PRPs and the most recent estimate of
remedial work, is $1,400 to $1,700. The Company's environmental reserves
were approximately $1,400 as of August 31, 2002.
On February 27, 2002, the Company received a notice of alleged violations
of environmental laws, regulations or permits from the Illinois EPA
related to volatile organic matter ("VOM") air emissions and other
permitting issues at its Elk Grove Village facility. The Company has
filed a response and performed stack testing for one of its production
lines under the supervision of the Illinois EPA. Those recent stack test
results, when considered with stack test results from the facility's
other production lines taken in the past, indicate the Company's Elk
Grove Village facility is in compliance with the overall VOM emission
limitations in its Clean Air Act permit. However, the Company's VOM
coating application volume on one of its production lines is in excess of
the permit limit. To address that issue, the Company has filed a permit
modification request to reflect the current VOM application rates on the
facility's production lines. The Illinois EPA has indicated that
resolution of the matters alleged in the February 27, 2002 Notice of
Violation may require referral to the office of the Illinois Attorney
General for potential enforcement action, which could lead to the
imposition of penalties on the Company.
11
The Company believes that the ultimate outcome of its environmental legal
proceedings, net of contributions from other PRPs, will not have a
material effect on the Company's financial condition or results of
operations, given the reserves recorded as of August 31, 2002. However,
no assurance can be given that this information, including estimates of
remedial expenses, will not change.
12
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended August 31, 2002
PART I. FINANCIAL INFORMATION
(In thousands)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following management's discussion and analysis of financial condition and
results of operations ("MD&A") should be read in conjunction with the
February 28, 2002 Financial Statements and notes thereto, the MD&A included in
the Company's Annual Report on Form 10-K and the Company's other filings with
the Securities and Exchange Commission.
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 the sale of substantially all of the assets of the Company's
Pinole Point Steel business, including MSC Pinole Point Steel Inc. and MSC Pre
Finish Metals (PP) Inc., to Grupo IMSA S.A. de C.V. ("IMSA") and other third
parties in the first quarter of fiscal 2003, both Specialty Films and Pinole
Point Steel are reported as discontinued operations for all periods presented.
RESULTS OF OPERATIONS
Net Sales
Net sales from continuing operations in the second quarter of fiscal 2003 were
$68,151, 1.2% higher than $67,361 in the second quarter of fiscal 2002. For the
six months ended August 31, 2002, net sales from continuing operations increased
4.8% to $139,811 from $133,361 in the same period last year.
Sales of electronic-based materials increased 12.7% to $5,370 in the second
quarter of fiscal 2003 from $4,764 in the prior year period. For the six months
ended August 31, 2002, electronic-based materials sales were $10,553, 8.1%
higher compared with $9,765 for the same period last year. For both periods,
higher sales of coated materials used to manufacture computer disk drives as
well as set-top boxes were offset, in part, by lower electronic cabinetry
shipments.
Acoustical/thermal materials sales declined 8.2% in the second quarter of fiscal
2003 to $14,739 as compared with $16,064 in the second quarter of fiscal 2002,
due mainly to decreased sales of disc brake noise damping materials as well as
lower shipments of Specular+(R) to the lighting market. For the six months ended
August 31, 2002 and 2001, acoustical/thermal materials sales were $31,175 and
$33,089, respectively, a 5.8% decrease.
13
The change was due mainly to decreased sales to the automotive market and
Specular+(R), somewhat offset by higher shipments to the appliance market.
Sales of coated metal materials increased 3.2% to $48,042 during the second
quarter of fiscal 2003, from $46,533 in the second quarter of fiscal 2002.
Coated metal materials sales increased to $98,083 for the six-month period ended
August 31, 2002 as compared to $90,507 for the same period last year, an 8.4%
increase. The main contributors to the increase, for both periods, were higher
electrogalvanizing sales as well as higher shipments of coated metal to the
transportation and appliance markets, offset slightly by a decline in shipments
to the building and construction and lighting markets. The Company's
electrogalvanizing sales primarily benefited from supplying a portion of Double
Eagle Steel Coating Company's ("DESCO") requirements, which were interrupted by
a major fire at the DESCO facility in December 2001.
Gross Profit
The Company's gross profit margin for the second quarter of fiscal 2003 was
21.1%, or $14,358, as compared with 18.8%, or $12,650, in the second quarter of
fiscal 2002. For the first six months of fiscal 2003, gross profit margin was
19.5%, or $27,197, as compared with 18.7%, or $24,885, in the first six months
of fiscal 2002. The increase in gross profit margin, for both periods, was
mainly due to a more favorable product mix and higher capacity utilization,
somewhat offset by additional resources being focused at the manufacturing
facilities as a result of the Company's restructuring program.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses of $10,520 were 15.4% of
net sales in the second quarter of fiscal 2003 as compared with $10,342, or
15.4%, of net sales in the same period last year. For the six-months ended
August 31, 2002, SG&A expenses of $19,684 were 14.1% of net sales as compared
with $20,928, or 15.7%, of net sales in fiscal 2002. The decrease in SG&A
percentage was due to certain administrative activities being eliminated as a
result of the Company's restructuring program as well as higher net sales,
offset to a small degree by investments in marketing and research and
development in the switch and sensor products business. The Company anticipates
more than doubling its marketing and engineering spending related to the switch
and sensor business in the second half of fiscal 2003 to $2,600.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was expense of $1,489 in the second
quarter of fiscal 2003 as compared with income of $58 in the second quarter of
fiscal 2002. For the six months ended August 31, 2002, total other expense, net
was $1,659 compared to $403 in the prior year period. The variance was primarily
due to interest expense not allocated to the Pinole Point Steel business in the
second quarter, slightly offset by a recognized gain on the sale of marketable
securities. Equity in Results of Joint Ventures was a net loss of $442 and $333
for the second quarter of fiscal 2003 and 2002, respectively. The change in net
loss was due to the increased ownership in Walbridge Coatings (the
"Partnership") as a result of the Company purchasing LTV Corporation's ("LTV")
interest in the first quarter. For the first six months of fiscal 2003 and 2002,
Equity in Results of Joint Ventures was a net loss of $757 and $645,
respectively. MSC's effective tax rate for continuing operations was 37.9% for
the second quarter of fiscal 2003 versus 37.2% for the same period last year.
For the first six months of fiscal 2003, the Company's effective income tax rate
was 38.0% as compared with 35.7% in the first six months of fiscal 2002. The
variance in the effective tax rate for the six-month
14
period was due to tax credits and other permanent items relative to income
before income taxes.
General
MSC serves the electrogalvanizing market through its 66.5% ownership interest in
the Partnership. Under the terms of the Partnership agreements, all significant
operating actions require the consent of the management committee. Bethlehem
Steel Corporation ("BSC") continues to maintain a 33.5% ownership interest and
has access to 63% of the available line time. MSC has the right to utilize
available line time to the extent BSC does not order Partnership services. In
the second quarter of fiscal 2003, MSC utilized 38.9% of the available line
time. MSC and BSC are each represented by two members on the four-member
management committee. The Company does not have a controlling voting interest in
the Partnership and, accordingly, continues to account for the Partnership under
the equity method. The Partnership term expires on December 31, 2004.
As previously reported, BSC filed for protection under Chapter 11 of the U.S.
Bankruptcy Code on October 15, 2001. The Partnership is being treated as a
critical vendor under BSC's proceedings. As of August 31, 2002, the Partnership
had no BSC pre-petition receivables outstanding and $4,441 of BSC post-petition
receivables outstanding. The BSC post-petition receivables are judged to be
collectible in full and, therefore, no reserve was recorded as of August 31,
2002. Sales to BSC through the Partnership were $10,964 in the second quarter of
fiscal 2003. BSC continues to participate in the Partnership and to furnish
electrogalvanized coatings to the automotive industry. The Company believes that
the Partnership's processing services are valuable to the BSC estate, however,
there can be no assurance that the BSC bankruptcy will not result in further
disruption of the business.
On December 15, 2001, a major fire destroyed an electrogalvanizing facility
owned by DESCO, a joint venture between U.S. Steel Corporation and Rouge Steel
Company. For the second quarter of fiscal 2003, U.S. Steel Corporation and Rouge
Steel Company utilized 11.6% of the Partnership's available line time. The DESCO
facility resumed production in September 2002 and MSC anticipates that total
electrogalvanizing sales and profits in the second half of the year will be
negatively affected as the business shifts back to the DESCO facility. Due to
uncertainty in the economy and bankruptcies in the steel industry, no assurance
can be made as to the Partnership's future production levels.
On February 27, 2002, the Company received a notice of alleged violations of
environmental laws, regulations or permits from the Illinois EPA related to
volatile organic matter ("VOM") air emissions and other permitting issues at its
Elk Grove Village facility. The Company has filed a response and performed stack
testing for one of its production lines under the supervision of the Illinois
EPA. Those recent stack test results, when considered with stack test results
from the facility's other production lines taken in the past, indicate the
Company's Elk Grove Village facility is in compliance with the overall VOM
emission limitations in its Clean Air Act permit. However, the Company's VOM
coating application volume on one of its production lines is in excess of the
permit limit. To address that issue, the Company has filed a permit modification
request to reflect the current VOM application rates on the facility's
production lines. The Illinois EPA has indicated that resolution of the matters
alleged in the February 27, 2002 Notice of Violation may require referral to the
office of the Illinois Attorney General for potential enforcement action, which
could lead to the imposition of penalties on the Company. For additional
information on environmental matters, please refer to MSC's Annual Report on
Form 10-K for the fiscal year ended February 28, 2002.
15
RESULTS OF DISCONTINUED OPERATIONS
Pinole Point Steel
On May 31, 2002, the Company completed the sale of substantially all of the
assets of its Pinole Point Steel business. The Company is in the process of
liquidating the remaining assets and liabilities of the business. As of
August 31, 2002, the Company has received $50,518 related to the disposition and
liquidation of the business, consisting of $31,221 of sale proceeds from Grupo
IMSA S.A. de C.V. and $19,297 from liquidating the Pinole Point Steel
operations. In addition, as of August 31, 2002, there is $14,467 in net assets
remaining to be liquidated. The net assets consist primarily of the expected tax
refund due to a loss carryback offsetting a portion of the gain on sale of its
Specialty Films business in the prior year. The remaining net assets include
accounts receivable, offset, in part, by severance expenses and other
liabilities not assumed by Grupo IMSA S.A. de C.V. 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
business.
As of February 28, 2002, the Company recorded a provision for loss on
discontinued operation, net of income taxes, of $53,287. The loss on
discontinued operation, net of income taxes, included the allocation of
consolidated interest expense of $5,391 incurred from September 1, 2001 through
May 31, 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. During the first quarter of fiscal 2003, the
Company recorded an adjustment on sale of discontinued operation, net of income
taxes, of $3,683 to reduce the previously provided loss on discontinued
operation. The adjustment consisted of a reduction for estimated operating
losses of $1,247 due to higher plant utilization and customers' willingness to
accelerate product deliveries prior to the closing of the transaction. In
addition, MSC recorded a favorable change in the estimated proceeds of the sale
of $2,436. During the second quarter of fiscal 2003, the Company recorded an
additional loss on sale of discontinued operation, net of income taxes, of $610
related to increases in previously estimated bad debt expense and product claims
expense, and employee expenses related to the collection of accounts receivable
and settlement of certain retained liabilities.
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.
As a result of the sale, Specialty Films has been reported as a discontinued
operation for the prior fiscal year.
Net sales of Specialty Films in the second quarter and first half of fiscal 2002
through closing on June 29, 2001, were $5,209 and $21,578, respectively. Income
from discontinued operation, net of income taxes, for the same periods, was $226
and $1,469, respectively.
During the second quarter of fiscal 2003, the Company recorded an after-tax
charge of $101 related to a decrease in the previously estimated insurance
premium refund for the Specialty Films business.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with funds generated from
operating activities, sales of various businesses and borrowings under its
credit facilities or long-term debt instruments.
During the second quarter of fiscal 2003, MSC generated $9,479 of cash from
operating activities as compared with utilizing $711 in the second quarter last
year. The change in cash generation for the second quarter was primarily due to
improved income from continuing operations and lower accounts receivable, offset
in part by higher inventory levels. For the six months ended August 31, 2002,
the Company generated $24,935 of cash as compared with $2,617 in the same period
last year. The change in cash generation was due to higher net income from
continuing operations and cash generated from liquidating the Pinole Point Steel
business, offset in part by increases in prepaid expenses and inventory levels
as well as decreases in accrued expenses.
In the second quarter and first six months of fiscal 2003, MSC invested $1,309
and $890 in capital improvement projects, respectively, compared to $2,548 and
$2,220 in the same periods last year, respectively. There was no capital
spending related to discontinued operations for the second quarter of fiscal
2003 and $1,906 of capital spending for discontinued operations for the second
quarter of fiscal 2002. Capital spending related to discontinued operations for
the first half of fiscal 2003 and 2002 was $176 and $2,661, respectively.
Investments in joint ventures were $336 in the second quarter of fiscal 2003,
compared with a return of $29 during the same period last fiscal year. For the
year-to-date period, investments in joint ventures were $3,454, which relates to
the Company's purchase of LTV's ownership interest in the Partnership in the
first quarter of fiscal 2003 versus a return of $19 during the same period last
fiscal year. There were no investments in joint ventures related to discontinued
operations in the second quarter of fiscal 2003 compared with $23 in the prior
fiscal year period. There were no investments in joint ventures related to
discontinued operations for the first six months of fiscal 2003 compared with
$5,114 in the first six months of fiscal 2002 due to the investment in the joint
venture with Bekaert Corporation prior to the disposition of the Company's
Specialty Films segment.
MSC's total debt decreased to $55,823 as of August 31, 2002 from $105,262 as of
February 28, 2002. The Company made principal debt payments of $13,421 and
interest payments of $3,594 on May 31, 2002 related to the 1998 Senior Notes and
the 1997 Senior Notes. In addition, on July 31, 2002, the Company made a debt
payment of $39,852 to the holders of the 1997 Senior Notes. The debt payment
consisted of principal of $35,714, interest of $420 and a contractual prepayment
penalty of $3,718 pretax basis. The extraordinary loss on early retirement of
debt, net of income taxes, includes the prepayment penalty of $2,257 and a $131
write-off of debt issuance costs.
During the second quarter of fiscal 2003, the Company posted new commercial
letters of credit totaling $578. The Company's outstanding letters of credit
continue to be cash collateralized as of August 31, 2002. Other than $2,658 that
was classified as restricted cash in the consolidated balance sheets, there are
no other restrictions on the Company's use of its cash and cash equivalents
under the Company's line of credit facility at times when no borrowings are
outstanding. The line of credit is secured by accounts receivable of the
Company.
17
On June 3, 2002, the Company made a minimum annual royalty payment of $417 for
amounts accrued from January 31, 2002 through May 31, 2002 related to the
license agreement with TouchSensor Technologies, LLC ("TST"). On September 3,
2002, the Company paid a second minimum annual royalty payment of $250 for
amounts accrued from June 1, 2002 through August 31, 2002.
On June 22, 2000, MSC's Board of Directors authorized the repurchase of up to
one million shares of the Company's common stock. In the third quarter of fiscal
2001, the Company suspended the program.
On March 1, 2002, the Company purchased 13,593 of its shares from certain
employees based on the closing price on February 28, 2002 in connection with the
vesting of shares granted under the Company's 1999 Long-Term Incentive/Leverage
Stock Awards Program ("1999 Program"). The Compensation Committee of the Board
of Directors approved the share repurchase under the provisions of the Material
Sciences Corporation 1992 Omnibus Awards Plan for Key Employees to cover a
portion of participant's tax withholding liability for the vesting of these
shares under the 1999 Program.
On June 20, 2002, the Company resumed the previously approved repurchase program
and through August 31, 2002, the Company completed this share repurchase program
by purchasing the remaining 290,619 shares with an average purchase price of
$14.89 per share. On June 20, 2002, MSC's Board of Directors also authorized a
new program to repurchase up to an additional 500,000 shares of the Company's
common stock. The repurchase of 500,000 shares was complete at August 31, 2002
with an average purchase price of $14.50 per share.
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. As of August 31, 2002, MSC believes no
adjustment is deemed necessary after assessing the impairment requirements of
SFAS No. 142.
The Company adopted SFAS No. 144, "Impairment or Disposal of Long-Lived Assets"
on March 1, 2002. This statement further refines the rules for accounting for
long-lived assets and long-lived assets to be disposed of. MSC has assessed the
impairment requirements of SFAS No. 144 and believes that no adjustment is
deemed necessary.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
SFAS No. 145 makes changes to several areas, including the classification of
gains and losses from extinguishment of debt and accounting for certain lease
modifications. The statement is effective for fiscal years beginning after
May 15, 2002. With the adoption of SFAS No. 145 on March 1, 2003, the
extraordinary loss on early retirement of debt will no longer be classified as
an extraordinary item and will be reflected as a component of income from
continuing operations in the consolidated statements of income (loss).
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" which addresses financial accounting and
reporting for costs associated with exit or disposal activities. This statement
requires that a liability be recognized at fair
18
value for costs associated with exit or disposal activities only when the
liability is incurred as opposed to at the time the Company commits to an exit
plan as permitted under EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit
or disposal activities that are initiated after December 31, 2002. The Company
does not expect that the adoption of this statement will have a material impact
on the Company's financial position, results of operations or cash flows.
Critical Accounting Policies
The Company has identified significant accounting policies that, as a result of
the judgments, uncertainties, uniqueness and complexities of the underlying
accounting standards and operations involved, could result in material changes
to its financial condition or results of operations under different conditions
or using different assumptions. The Company's most critical accounting policies
are related to the following areas: revenue recognition, long-lived assets and
concentrations of credit risks. Details regarding the Company's use of these
policies and the related estimates are described in MSC's Annual Report on Form
10-K for the fiscal year ended February 28, 2002 filed with the Securities and
Exchange Commission. There have been no material changes to the Company's
critical accounting policies that impacted MSC's financial condition or results
of operations in the second quarter of fiscal 2003 or the first six months of
fiscal 2003.
Cautionary Statement Concerning Forward-Looking Statements
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, introduction and marketing of new products
and technologies, including products based on the touch-sensory technology we
have licensed from TouchSensor Technologies, LLC; competitive factors; changes
in the business environment, including the transportation, building and
construction and durable goods industries; the ability of the Company to
successfully implement its reorganization plans and to achieve the benefits the
Company expects from such plans; final realization of proceeds on the sale of
Pinole Point Steel; revenue and earnings expectations as a result of supplying a
portion of DESCO's electrogalvanizing requirements; changes in laws,
regulations, policies or other activities of governments, agencies and similar
organizations (including the ruling under Section 201 of the Trade Act of 1974);
continuation of the favorable environment to make acquisitions, including
regulatory requirements and market values of candidates; the stability of
governments and business conditions inside and outside the U.S., which may
affect a successful penetration of the Company's products; impact of changes in
the overall economy; increases in the prices of raw and other material inputs
used by the Company; the loss, or changes in the operations, financial condition
or results of operation of one or more significant customers of the Company;
environmental risks, costs and penalties associated with the Company's past and
present manufacturing operations, including any risks, costs and penalties
arising out of an enforcement action by the Illinois EPA and Attorney General
related to the Company's Elk Grove Village facility; risks associated with the
termination of the Partnership in December 2004 or the termination of the joint
venture partnership with Tekno in December 2003; facility utilization at
Walbridge Coatings; acts of war or terrorism; and the
19
other factors identified in Part II, Item 7 of the Company's 2002 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been a 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, 2002.
On July 31, 2002, the Company made a debt payment of $39,852 to the holders of
the 1997 Senior Notes. The debt payment consisted of principal of $35,714,
interest of $420 and a contractual prepayment penalty of $3,718 (pretax basis).
The table below provides information about the Company's debt that is sensitive
to changes in interest rates.
(Dollars in Thousands)
Expected Maturity Date (Fiscal Year)
---------------------------------------------------------------------------------------------------
Fair
2003 2004 2005 2006 2007 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Total Debt:
-----------
Fixed Rate:
Principal Amount $ 6,902 $11,559 $ 6,278 $ 6,278 $ 6,278 $25,111 $62,406 $55,735
Average Interest Rate 7.2% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8%
Variable Rate:
Principal Amount $ - $ - $ - $ - $ - $ - $ - $ -
Average Interest Rate N/A N/A N/A N/A N/A N/A N/A
* On May 31, 2002, the Company paid $6,278 of the 2003 principal amount.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Our chief executive officer
and our chief financial officer, after evaluating the effectiveness of the
Company's "disclosure controls and procedures" (as defined in the Rules
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934) as of a date
(the "Evaluation Date") within 90 days before the filing date of this quarterly
report, have concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and designed to ensure that material
information relating to the Company and its consolidated subsidiaries would be
made known to them by others within those entities.
Changes in internal controls. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect the
Company's disclosure controls and procedures subsequent to the Evaluation Date.
20
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For the Quarter Ended August 31, 2002
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 20, 2002, the Company held its Annual Meeting of Shareowners.
Michael J. Callahan, Dr. Eugene W. Emmerich, G. Robert Evans, E.F. Heizer, Jr.,
Frank L. Hohmann III, Dr. Ronald A. Mitsch, Gerald G. Nadig, Dr. Mary P. Quin
and Howard B. Witt, being nine nominees named in the Company's Proxy Statement,
dated May 21, 2002, were re-elected to the Board of Directors for new one-year
terms by the following vote:
Name For Withheld Authority
---- --- ------------------
Michael J. Callahan 12,236,645 1,428,304
Dr. Eugene W. Emmerich 11,895,385 1,769,564
G. Robert Evans 11,871,325 1,793,624
E.F. Heizer, Jr. 11,875,157 1,789,792
Frank L. Hohmann III 12,256,138 1,408,811
Dr. Ronald A. Mitsch 12,256,138 1,408,811
Gerald G. Nadig 12,253,744 1,411,205
Dr. Mary P. Quin 12,254,923 1,410,026
Howard B. Witt 12,256,138 1,408,811
Item 6. Exhibits and Reports on Form 8-K
(a) Reference is made to the attached Index to Exhibits.
(b) On July 22, 2002, the Company filed a Current Report on Form 8-K,
pursuant to Item 4, to indicate that Mr. Howard B. Witt had resigned
as a member of its board of directors.
21
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 15th day of October 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
22
CERTIFICATIONS
I, Gerald G. Nadig, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Material
Sciences Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchanged Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a.) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b.) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c.) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a.) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b.) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: October 15, 2002
By: /s/ Gerald G. Nadig
--------------------
Gerald G. Nadig
Chairman, President
and Chief Executive Officer
23
I, James J. Waclawik, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Material
Sciences Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a.) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b.) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c.) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a.) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b.) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: October 15, 2002 By: /s/ James J. Waclawik, Sr.
--------------------------
James J. Waclawik, Sr.
Vice President,
Chief Financial Officer
and Secretary
24
MATERIAL SCIENCES CORPORATION
Quarterly Report on Form 10-Q
Index to Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
99.1 Certifications of the registrant's Chief Executive Officer
and Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
25