<PAGE>
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, 1998
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, 1998, there were outstanding 15,650,156 shares of common
stock, $.02 par value.
<PAGE>
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended August 31, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
(a) Financial statements of Material Sciences Corporation and Subsidiaries
(b) Summarized income statement information for Walbridge Coatings, An Illinois
Partnership
2
<PAGE>
Consolidated Statements of Income
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
(In thousands, except per share data) 1998 1997 1998 1997
- --------------------------------------------------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Sales (1) $119,157 $70,541 $232,040 $143,637
Cost of Sales 98,460 53,757 192,233 109,262
-------- ------- -------- --------
Gross Profit $ 20,697 $16,784 $ 39,807 $ 34,375
Selling, General and Administrative
Expenses 14,255 12,937 27,956 26,139
-------- ------- -------- --------
Income from Operations $ 6,442 $ 3,847 $ 11,851 $ 8,236
-------- ------- -------- --------
Other (Income) and Expense:
Interest Income $ (333) $ (46) $ (404) $ (75)
Interest Expense 3,085 1,045 6,375 2,058
Equity in Results of Partnership 485 344 440 (158)
Other, Net (65) (267) (493) (527)
-------- ------- -------- --------
Total Other Expense, Net $ 3,172 $ 1,076 $ 5,918 $ 1,298
-------- ------- -------- --------
Income Before Income Taxes $ 3,270 $ 2,771 $ 5,933 $ 6,938
Income Taxes 1,259 1,067 2,284 2,672
-------- ------- -------- --------
Net Income (6) $ 2,011 $ 1,704 $ 3,649 $ 4,266
======== ======= ======== ========
Net Income Per Share (7):
Basic $ 0.13 $ 0.11 $ 0.24 $ 0.28
======== ======= ======== ========
Diluted $ 0.13 $ 0.11 $ 0.24 $ 0.28
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
August 31, February 28,
(In thousands) 1998 1998
- ------------------------------------------------------------- ----------- ------------
<S> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,572 $ 3,625
Receivables:
Trade, Less Reserves of $3,794 and $4,785
Respectively (2) 51,621 53,536
Current Portion of Partnership Note - 380
Income Taxes - 2,391
Prepaid Expenses 4,118 3,080
Inventories 55,004 60,892
Prepaid Taxes 1,944 1,944
--------- ---------
Total Current Assets $ 114,259 $ 125,848
--------- ---------
Gross Property, Plant and Equipment $ 369,933 $ 363,004
Accumulated Depreciation and Amortization (120,446) (106,405)
--------- ---------
Net Property, Plant and Equipment $ 249,487 $ 256,599
--------- ---------
Other Assets:
Investment in Partnership $ 10,737 $ 10,842
Intangible Assets, Net 24,505 24,142
Other 1,212 643
--------- ---------
Total Other Assets $ 36,454 $ 35,627
--------- ---------
Total Assets $ 400,200 $ 418,074
========= =========
Liabilities:
Current Liabilities:
Current Portion of Long-Term Debt $ 2,405 $ 3,410
Accounts Payable 44,236 43,040
Accrued Payroll Related Expenses 9,593 10,300
Accrued Expenses 10,352 8,768
--------- ---------
Total Current Liabilities $ 66,586 $ 65,518
--------- ---------
Long-Term Liabilities:
Deferred Income Taxes $ 13,268 $ 13,012
Long-Term Debt, Less Current Portion 160,617 187,563
Accrued Superfund Liability 3,344 3,350
Other 11,704 7,747
--------- ---------
Total Long-Term Liabilities $ 188,933 $ 211,672
--------- ---------
Shareowners' Equity:
Preferred Stock (3) $ - $ -
Common Stock (4) 331 327
Additional Paid-In Capital 52,921 52,253
Treasury Stock at Cost (5) (8,545) (8,545)
Retained Earnings 100,532 96,883
Cumulative Translation Adjustment (6) (558) (34)
--------- ---------
Total Shareowners' Equity $ 144,681 $ 140,884
--------- ---------
Total Liabilities and Shareowners' Equity $ 400,200 $ 418,074
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Material Sciences Corporation and Subsidiaries
Three Months Ended Six Months Ended
August 31, August 31,
(In thousands) 1998 1997 1998 1997
- ----------------------------------------------------- ------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Cash Flows From:
Operating Activities:
Net Income $ 2,011 $ 1,704 $ 3,649 $ 4,266
Adjustments to Reconcile Net Income to Net Cash Provided By
Operating Activities:
Depreciation and Amortization 7,875 4,688 15,758 9,368
Provision (Benefit) for Deferred Income Taxes 128 (27) 256 (69)
Compensatory Effect of Stock Plans (92) (52) 4 31
Other, Net 485 344 315 (160)
---------- ----------- ------------- -----------
Operating Cash Flow Prior to Changes in
Assets and Liabilities $ 10,407 $ 6,657 $ 19,982 $ 13,436
---------- ----------- ------------- -----------
Changes in Assets and Liabilities:
Receivables $ (3,405) $ 1,633 $ 2,121 $ (220)
Income Taxes Receivable 1,694 (1,123) 2,391 126
Prepaid Expenses (230) (278) (1,038) (1,146)
Inventories 2,276 (1,633) 5,888 (2,602)
Accounts Payable (1,589) 196 (489) (1,866)
Accrued Expenses 1,797 808 1,010 (1,751)
Other, Net 3,482 48 3,481 102
---------- ----------- ------------- -----------
Cash Flow from Changes in Assets and Liabilities $ 4,025 $ (349) $ 13,364 $ (7,357)
---------- ----------- ------------- -----------
Net Cash Provided by Operating Activities $ 14,432 $ 6,308 $ 33,346 $ 6,079
---------- ----------- ------------- -----------
Investing Activities:
Capital Expenditures, Net $ (4,160) $(4,726) $ (7,384) $(12,921)
Acquisitions, Net of Cash Acquired - (1,129) - (1,129)
Investment in Partnership (883) (459) (1,235) (1,004)
Distribution from Partnership 900 1,374 900 1,374
Other Long-Term Assets (143) 149 (569) 197
---------- ----------- ------------- -----------
Net Cash Used in Investing Activities $ (4,286) $(4,791) $ (8,288) $(13,483)
---------- ----------- ------------- -----------
Financing Activities:
Net Proceeds (Payments) Under Lines of Credit $(12,200) $(1,200) $ 38,400 $(11,300)
Proceeds from Senior Notes - - - 20,000
Payments to Settle Debt (1,234) (452) (66,163) (1,192)
Purchase of Treasury Stock - - - (1,027)
Sale of Common Stock 157 48 668 753
---------- ----------- ------------- -----------
Net Cash Provided by (Used in) Financing Activities $(13,277) $(1,604) $(27,095) $ 7,234
---------- ----------- ------------- -----------
Effect of Exchange Rate Changes on Cash and Cash Equivalents $ (6) $ - $ (16) $ -
---------- ----------- ------------- -----------
Net Decrease in Cash $ (3,137) $ (87) $ (2,053) $ (170)
Cash and Cash Equivalents at Beginning of Period 4,709 2,033 3,625 2,116
---------- ----------- ------------- -----------
Cash and Cash Equivalents at End of Period $ 1,572 $ 1,946 $ 1,572 $ 1,946
========== =========== ============ ===========
Supplemental Cash Flow Disclosures:
Subordinated Notes Issued for Acquisitions $ - $ 1,117 $ - $ 1,117
Cash Portion of Acquisitions and Related Costs - 1,129 - 1,129
---------- ----------- ------------- -----------
Total Consideration Paid for Acquisitions $ - $ 2,246 $ - $ 2,246
========== ========== ============ ===========
</TABLE>
The Changes in Assets and Liabilities above for the three months and six months
ended August 31, 1998, are net of assets and liabilities acquired.
The accompanying notes are an integral part of these statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MATERIAL SCIENCES CORPORATION
The data for the three and six months ended August 31, 1998 and 1997 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 1998 Annual Report to
Shareowners and Annual Report on Form 10-K. Certain prior year amounts have
been reclassified to conform with the fiscal 1999 presentation.
(1) During the six-month periods ending August 31, 1998 and 1997, the Company
derived approximately 11.4% and 20.4%, respectively, of its sales from fees
billed to the Partnership by a subsidiary of the Company for operating the
Walbridge, Ohio facility.
(2) Includes trade receivables due from the Partnership of $491 at August 31,
1998 and $2,461 at February 28, 1998.
(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; 16,542,854
Shares Issued and 15,563,206 Shares Outstanding at August 31, 1998 and
16,336,694 Shares Issued and 15,357,046 Shares Outstanding at February 28,
1998.
(5) Treasury Stock at Cost; 979,648 Shares at August 31, 1998 and February 28,
1998.
(6) Comprehensive Income:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $2,011 $1,704 $3,649 $4,266
Other Comprehensive Income:
Foreign Currency Translation
Adjustments, Net of Tax (178) - (322) -
------ ------ ------ ------
Comprehensive Income $1,833 $1,704 $3,327 $4,266
====== ====== ====== ======
</TABLE>
6
<PAGE>
(7) Net Income Per Share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income $ 2,011 $ 1,704 $ 3,649 $ 4,266
=========== =========== =========== ===========
Net Income Per Share:
Basic $ 0.13 $ 0.11 $ 0.24 $ 0.28
=========== =========== =========== ===========
Diluted $ 0.13 $ 0.11 $ 0.24 $ 0.28
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding
Used for Basic Net
Income Per Share 15,330,000 15,191,000 15,311,000 15,176,000
Diluted Common Stock Options 84,659 294,311 84,513 285,178
----------- ----------- ----------- -----------
Weighted Average Number of
Common Shares Outstanding
Plus Dilutive Common
Stock Options 15,414,659 15,485,311 15,395,513 15,461,178
=========== =========== =========== ===========
Outstanding Common Stock
Options Having
No Dilutive Effect 1,434,226 734,523 1,434,226 734,523
=========== =========== =========== ===========
</TABLE>
(8) On August 25, 1997, a class action complaint was filed in the Circuit
Court of Cook County, Illinois. The complaint claims that the Company
violated the Illinois Consumer Fraud and Deceptive Practices Act as a
result of false, misleading and deceptive representations and omissions
of material facts relating to the Company's financial position during
the period April 18, 1996 to April 6, 1997. On October 2, 1998, counsel
for the plaintiff contacted the Company's counsel to report that the
plaintiff intends to voluntarily dismiss the case. To date, no filing
has been made by the plaintiff.
(9) In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Adoption of SFAS No.
133 is required in fiscal years beginning after June 15, 1999, although
earlier adoption is permitted as of the beginning of any fiscal quarter
beginning after June 16, 1998. The Statement requires the Company to
record all derivative instruments, including those emedded in other
contracts, on the balance sheet at fair value. Changes in the
derivative's fair value must be recognized in current earnings unless
specific hedge accounting criteria are met. If the derivative is a
hedge, depending on the nature of the hedge, changes in fair value of
the derivatives will either be offset against the change in fair value
of the hedged assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is
recognized in earnings. The Company has not yet determined when it will
adopt SFAS No. 133, however, management does not anticipate that
adoption of the Statement will have a material effect on the fiancial
position or the results of operations of the Company.
7
<PAGE>
Summarized Income Statement Information
Walbridge Coatings, An Illinois Partnership
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
(In thousands) 1998 1997 1998 1997
- ----------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues $13,699 $16,656 $30,049 $34,991
Gross Profit (Loss) (635) 141 668 1,764
Income (Loss) from Operations (933) (499) (378) 372
Net Income (Loss) (933) (637) (459) 45
</TABLE>
NOTE: The Net Income (Loss) shown above does not directly correlate to the
Equity in Results of Partnership shown in the Company's Statement of
Income due to certain contractual allocation requirements of the
Partnership. The Company's primary financial benefit from participation in
the Partnership is in the form of revenues from operating the Walbridge,
Ohio facility. These revenues are included in the Company's net sales.
8
<PAGE>
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For the Quarter Ended August 31, 1998
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
Material Sciences Corporation ("MSC" or "Company") operates in one business
segment comprised of the following four product groups: coil coating,
galvanizing, laminates and composites, and specialty films. The following table
provides a summary of net sales and the percent of net sales of MSC's product
groups.
<TABLE>
<CAPTION>
Net Sales Summary Three Months Ended August 31,
- --------------------------- ------------------------------------------------
1998 1997
------------------- --------------------
Product Group: Dollars Percent Dollars Percent
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Coil Coating $ 38,996 32.7% $ 29,718 42.1%
Galvanizing 50,869 42.7% 14,468 20.5%
Laminates and Composites 16,030 13.5% 14,747 20.9%
Specialty Films 13,262 11.1% 11,608 16.5%
-------- ------ -------- ------
$119,157 100.0% $ 70,541 100.0%
======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended August 31,
------------------------------------------------
1998 1997
------------------- --------------------
Product Group: Dollars Percent Dollars Percent
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Coil Coating $ 75,232 32.4% $ 59,445 41.4%
Galvanizing 99,179 42.8% 29,341 20.4%
Laminates and Composites 33,188 14.3% 31,833 22.2%
Specialty Films 24,441 10.5% 23,018 16.0%
-------- ------ -------- ------
$232,040 100.0% $143,637 100.0%
======== ====== ======== ======
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Net Sales
Net sales in the second quarter of fiscal 1999 increased 68.9% to $119,157 from
$70,541 in the same quarter last year primarily due to the incremental sales
from the Colorstrip, Inc. ("Colorstrip") acquisition completed in the fourth
quarter of fiscal 1998. Comparable sales for the quarter, excluding Colorstrip,
were $75,095, 6.5% above the second quarter of fiscal 1998. For the six-month
period ended August 31, 1998, sales were $232,040, 61.5% higher than $143,637 in
the first six months of last year. This increase was also mainly due to the
Colorstrip acquisition.
Coil Coating
Coil coating sales during the second quarter of fiscal 1999 grew 31.2% (11.7%
excluding Colorstrip) to $38,996 from $29,718 in the same quarter last year. For
the six months ended August 31, 1998, sales were 26.6% higher (9.8% excluding
Colorstrip) than last year. For both periods, significant increases in shipments
to the building and appliance markets were slightly offset by a decrease in
sales to the transportation market. Capacity utilization for the first six
months of fiscal 1999 and 1998 was approximately 78%.
Galvanizing
The galvanizing market is served by MSC with two major materials in coil form,
electrogalvanized (primarily automotive) and hot-dipped galvanized (primarily
building products) coated products. MSC participates in the electrogalvanizing
market through Walbridge Coatings (the "Partnership"), a partnership among
subsidiaries of MSC, Bethlehem Steel Corporation ("BSC") and, until June 30,
1998, Inland Steel Industries, Inc. ("Inland"). As of June 30, 1998, Inland
sold its interest in the Partnership to BSC and entered into a long-term toll
processing agreement with the Partnership ending December 31, 2001. The hot-
dipped market is served through MSC Pinole Point Steel Inc. ("Pinole Point"), a
subsidiary formed as part of the Colorstrip acquisition. For the second quarter
of fiscal 1999, galvanizing sales increased 251.6% to $50,869 from $14,468 in
the prior year. Excluding Colorstrip, galvanizing sales decreased 12.8% from
the second quarter last year. For the first six months, galvanizing sales grew
238.0% to $99,179 from $29,341 in the same period prior fiscal year, but
decreased 9.8% excluding the Colorstrip acquisition.
MSC's net sales for electrogalvanizing consists of various fees charged to the
Partnership for operating the facility. BSC and, to a lesser extent, Inland are
primarily responsible for the sales and marketing activities of the Partnership.
The Company's primary financial benefits from the Partnership are the revenues
billed to Walbridge Coatings for operating the facility. These revenues
represent 10.6% and 20.5% of the Company's net sales in the second quarter of
fiscal 1999 and 1998, respectively, and 11.4% and 20.4% in the first six months
of fiscal 1999 and 1998, respectively. During the second quarter and first six
months of fiscal 1999, as well
10
<PAGE>
as last fiscal year, the profitability for operating the facility was higher in
relation to other facilities due in large part to depreciation related to
significant capital investments in the coil coating and specialty films areas
during last fiscal year. Under the equity method of accounting, the Company
includes its portion of the Partnership shown in the Consolidated Statements of
Income. The amounts do not directly correlate to the Company's 50% ownership
interest due to contractual allocation requirements of the Partnership
agreement. MSC and BSC have extended the existing terms of the Partnership
through December 31, 1998, while continuing to negotiate a long-term
arrangement. The Company believes that the fair market value of its investment
in the Partnership is greater than the $10,737 recorded in the Consolidated
Balance Sheets.
MSC's electrogalvanizing sales in the second quarter of fiscal 1999 decreased
12.8% to $12,611 compared with $14,468 for the second quarter last year.
Electrogalvanizing sales decreased 9.8% to $26,460 for the six-month period
ended August 31, 1998 versus $29,341 in the same period last year. The decrease
in sales was a result of lower shipments to the automotive industry, including
the impact from the General Motors Company work stoppage. Capacity utilization
for electrogalvanizing in the first six months of fiscal 1999 was 77% versus 89%
in the first six months of last year.
Hot-dipped galvanizing sales were $38,258 for the second quarter and $72,719 for
the first six months of fiscal 1999. During the second quarter, the hot-dipped
galvanizing line lost seven days of production due to equipment failure. For
the year-to-date period, sales were less than the comparable pre-acquisition
period a year ago due to the lost production days along with the increasingly
competitive environment, pricing pressure from the Asian market, as well as
unusually wet weather on the West Coast at the beginning of the fiscal year.
Capacity utilization was 64% for the first six months of this year.
Laminates and Composites
Laminates and composites sales of $16,030 were 8.7% higher than last fiscal
year's second quarter of $14,747. Higher sales of brake dampers to the original
equipment manufacturer ("OEM") and the replacement markets along with growth in
appliance shipments, more than offset the impact of the General Motors strike,
as well as the decline in sales of Specular+(R) and Polycore Composites(R). For
the first half of fiscal 1999, sales of laminates and composites grew 4.3% to
$33,188 from $31,833 in fiscal 1998. Increases in the brake damper markets,
along with increases in appliance material sales more than offset the impact of
the General Motors strike and the decline in the reflective lighting market and
its demand for Specular+(R). Capacity utilization for laminates and composites
for the six months ended August 31, 1998 was 63%, comparable with the same
period last fiscal year.
Specialty Films
Sales of specialty films products increased 14.2% to $13,262 in the second
quarter of fiscal 1999 compared with $11,608 in the same period last year. Gains
in the domestic markets for solar control window film, photoreceptor and imaging
materials, as well as other sputtered films were slightly offset by lower
international shipments. For the first six months of this year, specialty films
sales grew 6.2% to $24,441 from prior year's $23,018. Increases in shipments of
domestic solar control window film and industrial products were slightly offset
by shortfalls in shipments of export solar control and safety window film.
Capacity utilization for specialty films for the first half of fiscal 1999 was
64% versus 70% last year.
11
<PAGE>
Gross Profit
The Company's gross profit margin was 17.4% in the second quarter of fiscal 1999
as compared to 23.8% in the same period last year. For the first six months of
fiscal 1999, gross profit margin was 17.2% versus 23.9% in the prior year. The
decrease in gross profit margin for both periods was primarily due to the impact
of selling a package hot-dipped galvanized product (both substrate and coating
components are included in sales and cost of sales), underabsorption due to
lower capacity utilization, as well as a change in product mix. In addition,
slight improvements in production efficiencies were offset by an increase in
depreciation expense and the impact of a competitive pricing environment.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were 12.0% of sales in the
second quarter of fiscal 1999 as compared to 18.3% of sales for the same period
last fiscal year. For the six months ended August 31, 1998, SG&A as a percentage
of sales was 12.0% as compared to 18.2% of sales for the first half of prior
year. The decrease in SG&A was largely due to the increase in sales from the
Colorstrip acquisition and the company-wide cost reduction program that was
implemented in the fourth quarter of last year.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was expense of $3,172 and $5,918 in the
second quarter and first six months of fiscal 1999, respectively, compared to
$1,076 and $1,298 of expense for the same periods of fiscal 1998, respectively.
During the second quarter of fiscal 1999, the Company recorded $318 of interest
income related to amended tax returns. Interest expense increased $2,040 for
the second quarter and $4,317 for the first half of fiscal 1999 due to
additional debt related to the Colorstrip acquisition and the Company's increase
in capital expenditures in fiscal 1998. In addition, Equity in Results of
Partnership declined to expense of $485 and $440 for the second quarter and
first six months of this fiscal year, respectively, compared to expense of $344
and income of $158 in the same periods last year, respectively, due to a decline
in third party sales. MSC's effective income tax rate was approximately 38.5%
during the second quarter and first six months of fiscal 1999 and fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the second quarter of fiscal 1999, MSC generated $14,432 of cash from
operating activities compared to $6,308 in the second quarter last year. The
increase in cash generation is due mainly to improvements in working capital,
cash flow benefits received from long-term supplier contracts, as well as higher
net income and depreciation and amortization compared to the prior year's second
quarter. For the six months of fiscal 1999, operating activities generated
$33,346 of cash versus $6,079 last year. The cash generation increase is a
result of continuous improvements in receivable and inventory levels and higher
depreciation and amortization. Earnings before interest, taxes, depreciation,
and amortization ("EBITDA") increased to $13,897 and $27,662 for the second
quarter and first six months of fiscal 1999, respectively, compared to $8,458
and $18,289 for the same periods last year, respectively.
12
<PAGE>
MSC's capital expenditures during the second quarter and first half of fiscal
1999 were $4,160 and $7,384, respectively, compared with $4,726 and $12,921 in
the same periods last fiscal year, respectively. The prior fiscal periods
included higher spending for increasing capacity in the coil coating and
specialty films areas.
As of August 31, 1998, total debt for MSC decreased to $163,022 from $190,973
at fiscal year end due mainly to the significant improvements in working
capital, cash flow benefits received from long-term supplier contracts, and
lower capital expenditures. The Company maintains two committed lines of credit
totaling $100,000 as of August 31, 1998. There was $42,900 outstanding under the
lines of credit as of August 31, 1998, versus $4,500 as of February 28, 1998.
The Company has executed letters of credit totaling $4,740 against these lines
leaving available lines of credit of $52,360 at August 31, 1998. The Company
believes that its cash flow from operations, together with available financing
and cash on hand will be sufficient to fund its working capital needs, capital
expenditure program, and debt amortization.
On May 19, 1998, the Company announced the signing of a letter of intent to form
a joint venture with N.V. Bekaert S.A. for the research and development,
manufacture, and sale of sputtered film. The transaction is subject to
completion of satisfactory due diligence and negotiation and execution of a
definitive agreement projected to be concluded in the third quarter of fiscal
1999. The joint venture is expected to commence operations in January 1999.
However, there can be no assurance that the definitive agreement
will be executed or that the transaction will be consummated.
The Company has a capital lease obligation, which was $2,626 as of August 31,
1998, relating to a facility which the Company subleases to the Partnership. As
of August 31, 1998, Partnership debt is zero compared to $1,250 at February 28,
1998.
MSC continues to participate in the implementation of settlements with the
government for the clean-up of various Superfund sites. For additional
information, refer to MSC's Form 10-K for the fiscal year ended February 28,
1998.
YEAR 2000
- ---------
The Year 2000 issue exists because many computer systems and applications,
including those embedded in equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year. Any of the Company's
systems or applications that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, which could result in a
system failure or miscalculations. Incomplete or untimely resolution of the Year
2000 issue by the Company or critically important suppliers or customers of the
Company could have a materially adverse impact on our Company's business,
operations, or financial condition in the future.
To mitigate this risk, the Company has established a company-wide initiative to
identify, evaluate, and address Year 2000 issues. Included within the scope of
this initiative are the operational and financial information technology ("IT")
systems, embedded systems contained in machinery and equipment, and other end-
user computing resources and building systems, such as security, elevator, and
heating and cooling systems. In addition, the project includes a review of the
Year 2000 compliance efforts of our key supplier and other principal business
partners.
Work is progressing in the following phases: inventory, assessment, remediation,
testing, deployment, and monitoring. Although the pace of the work varies among
the business units and the phases are often conducted in parallel, the inventory
and assessment phases have been substantially completed as of August 31, 1998,
and the remediation and testing phases are in progress. Under our current Year
2000 plan, each of the Company's business units has established target dates
for remediation and testing of critical systems and applications.
13
<PAGE>
The Company cannot guarantee that third parties on whom we depend for essential
supplies and services will convert their critical systems and processes in a
timely manner. Failure or delay by any of these parties could significantly
disrupt our business. However, the Company has established a supplier
compliance letter program, and is working with key suppliers or partners to
minimize such risks.
The total expected cost of Year 2000 compliance (including replacement of major
systems in the normal course of business) is estimated to range from $5,500 to
$6,000 of which approximately $1,400 has been incurred to date. The timing of
the expenses may vary and are not, necessarily, indicative of the readiness
efforts or progress to date.
The Company believes the key risk factors associated with Year 2000 are those it
cannot directly control, primarily the readiness of its key suppliers,
distributors, and partners. The Company has initiated on-going communications
with these third parties to determine their Year 2000 compliance status and
their progress toward year 2000 readiness. The Company is in the process of
following up with those critical third parties who did not respond to the
supplier compliance letters.
During the second half of fiscal year 1999 and the first half of fiscal year
2000, contingency plans will be developed and documented. Contingency plans
would include such items as sourcing alternatives for single source suppliers,
developing business resumption plans for all of the Company's business units,
and evaluating alternative manual processes.
The Year 2000 initiative is a primary focus for each business unit, although
there have not been any material IT projects that have been deferred due to the
Year 2000 efforts.
Forward-looking statements contained in this filing are qualified by the
cautionary language described in Part II, Item 7 of the Company's 1998 Annual
Report on Form 10-K, filed with the SEC pursuant to the Securities Exchange Act
of 1934, as amended.
14
<PAGE>
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For the Quarter Ended August 31, 1998
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
On June 18, 1998, the Company held its Annual Meeting of Shareowners.
Jerome B. Cohen, Roxanne J. Decyk, Eugene W. Emmerich, G. Robert Evans,
E. F. Heizer, Jr., Gerald G. Nadig, Irwin P. Pochter, and Howard B. Witt, being
eight nominees named in the Company's Proxy Statement, dated May 12, 1998, were
elected at the Annual Meeting to serve as the Board of Directors by a majority
vote of shareowners. No votes were cast for any other person. No other matters
were submitted to the shareowners for approval. The details of the vote were as
follows:
<TABLE>
<CAPTION>
Name For Withheld Authority
---- --- ------------------
<S> <C> <C>
Jerome B. Cohen 13,436,907 582,681
Roxanne J. Decyk 13,441,723 577,865
Eugene W. Emmerich 13,463,966 555,622
G. Robert Evans 13,939,978 79,610
E. F. Heizer, Jr. 13,458,243 561,345
Gerald G. Nadig 13,954,578 65,010
Irwin P. Pochter 13,431,264 588,324
Howard B. Witt 13,958,855 60,733
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) 27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
On June 22, 1998, the Company filed a Form 8-K regarding the
amendment of the Registrant's By-Laws and Rights Agreement.
Incorporated by reference to the Registrant's Form 8-K filed on
June 22, 1998 (File No. 1-8803).
15
<PAGE>
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 9th day of October, 1998.
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
16
<PAGE>
MATERIAL SCIENCES CORPORATION
Quarterly Report on Form 10-Q
Index to Exhibits
<TABLE>
<CAPTION>
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- -------------- ---------------------- -------------
<S> <C> <C>
27 Financial Data Schedule (1)
</TABLE>
(1) Appears only in the electronic filing of this report with the Securities
and Exchange Commission.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Statement of Income and Consolidated Balance Sheets and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 1,572
<SECURITIES> 0
<RECEIVABLES> 51,621
<ALLOWANCES> 3,794
<INVENTORY> 55,004
<CURRENT-ASSETS> 114,259
<PP&E> 369,933
<DEPRECIATION> 120,446
<TOTAL-ASSETS> 400,200
<CURRENT-LIABILITIES> 66,586
<BONDS> 160,617
0
0
<COMMON> 331
<OTHER-SE> 144,350
<TOTAL-LIABILITY-AND-EQUITY> 400,200
<SALES> 232,040
<TOTAL-REVENUES> 232,040
<CGS> 192,233
<TOTAL-COSTS> 192,233
<OTHER-EXPENSES> 27,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,375
<INCOME-PRETAX> 5,933
<INCOME-TAX> 2,284
<INCOME-CONTINUING> 3,649
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,649
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
