<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 November 30, 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 number)
of incorporation or organization)
2200 East Pratt Boulevard
Elk Grove Village, Illinois 60007
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (847) 439-8270
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of January 12, 1999, there were outstanding 15,705,356 shares of common
stock, $.02 par value.
<PAGE>
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended November 30, 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 Nine Months Ended
November 30, November 30,
(In thousands, except per share data) 1998 1997 1998 1997
- ------------------------------------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Sales (1) $123,053 $75,107 $355,093 $218,744
Cost of Sales 100,022 57,526 292,255 166,788
-------- ------- -------- --------
Gross Profit $ 23,031 $17,581 $ 62,838 $ 51,956
Selling, General and Administrative
Expenses 15,236 12,881 43,192 39,020
-------- ------- -------- --------
Income from Operations $ 7,795 $ 4,700 $ 19,646 $ 12,936
-------- ------- -------- --------
Other (Income) and Expense:
Interest Income $ (16) $ (30) $ (420) $ (105)
Interest Expense 2,801 1,073 9,176 3,131
Equity in Results of Partnership 667 369 1,107 211
Other, Net 88 (249) (405) (776)
-------- ------- -------- --------
Total Other Expense, Net $ 3,540 $ 1,163 $ 9,458 $ 2,461
-------- ------- -------- --------
Income Before Income Taxes $ 4,255 $ 3,537 $ 10,188 $ 10,475
Income Taxes 1,638 1,362 3,922 4,034
-------- ------- -------- --------
Net Income (6) $ 2,617 $ 2,175 $ 6,266 $ 6,441
======== ======= ======== ========
Net Income Per Share (7):
Basic $ 0.17 $ 0.14 $ 0.41 $ 0.42
======== ======= ======== ========
Diluted $ 0.17 $ 0.14 $ 0.41 $ 0.42
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
November 30, February 28,
(In thousands) 1998 1998
- ----------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,363 $ 3,625
Receivables:
Trade, Less Reserves of $4,446 and $4,785, Respectively (2) 50,149 53,536
Current Portion of Partnership Note - 380
Income Taxes - 2,391
Prepaid Expenses 3,505 3,080
Inventories 55,583 60,892
Prepaid Taxes 1,944 1,944
------------ ------------
Total Current Assets $ 112,544 $ 125,848
------------ ------------
Gross Property, Plant and Equipment $ 372,784 $ 363,004
Accumulated Depreciation and Amortization (127,589) (106,405)
------------ ------------
Net Property, Plant and Equipment $ 245,195 $ 256,599
------------ ------------
Other Assets:
Investment in Partnership $ 10,155 $ 10,842
Intangible Assets, Net 24,319 24,142
Other 1,118 643
------------ ------------
Total Other Assets $ 35,592 $ 35,627
------------ ------------
Total Assets $ 393,331 $ 418,074
============ ============
Liabilities:
Current Liabilities:
Current Portion of Long-Term Debt $ 2,416 $ 3,410
Accounts Payable 40,369 43,040
Accrued Payroll Related Expenses 11,687 10,300
Accrued Expenses 8,700 8,768
------------ ------------
Total Current Liabilities $ 63,172 $ 65,518
------------ ------------
Long-Term Liabilities:
Deferred Income Taxes $ 13,348 $ 13,012
Long-Term Debt, Less Current Portion 153,725 187,563
Accrued Superfund Liability 3,339 3,350
Other 11,223 7,747
------------ ------------
Total Long-Term Liabilities $ 181,635 $ 211,672
------------ ------------
Shareowners' Equity:
Preferred Stock (3) $ - $ -
Common Stock (4) 333 327
Additional Paid-In Capital 53,868 52,253
Treasury Stock at Cost (5) (8,545) (8,545)
Retained Earnings 103,149 96,883
Cumulative Translation Adjustment (6) (281) (34)
------------ ------------
Total Shareowners' Equity $ 148,524 $ 140,884
------------ ------------
Total Liabilities and Shareowners' Equity $ 393,331 $ 418,074
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Consolidated Statements of Cash Flows
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
(In thousands) 1998 1997 1998 1997
- ------------------------------------------------------------ ------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows From:
Operating Activities:
Net Income $ 2,617 $ 2,175 $ 6,266 $ 6,441
Adjustments to Reconcile Net Income to Net Cash Provided By
Operating Activities:
Depreciation and Amortization 7,828 4,661 23,586 14,029
Provision (Benefit) for Deferred Income Taxes 80 (35) 336 (104)
Compensatory Effect of Stock Plans 405 98 409 129
Other, Net 667 403 982 243
------- -------- -------- --------
Operating Cash Flow Prior to Changes in Assets
and Liabilities $11,597 $ 7,302 $ 31,579 $ 20,738
------- -------- -------- --------
Changes in Assets and Liabilities:
Receivables $ 1,472 $ 981 $ 3,593 $ 761
Income Taxes Receivable - 463 2,391 589
Prepaid Expenses 613 (134) (425) (1,280)
Inventories (579) (374) 5,309 (2,976)
Accounts Payable (3,867) 1,025 (4,356) (841)
Accrued Expenses 442 (127) 1,452 (1,878)
Other, Net (739) (340) 2,742 (238)
------- -------- -------- --------
Cash Flow from Changes in Assets and Liabilities $(2,658) $ 1,494 $ 10,706 $ (5,863)
------- -------- -------- --------
Net Cash Provided by Operating Activities $ 8,939 $ 8,796 $ 42,285 $ 14,875
------- -------- -------- --------
Investing Activities:
Capital Expenditures, Net $(2,851) $ (2,136) $(10,235) $(15,057)
Acquisitions, Net of Cash Acquired - (75) - (1,204)
Escrow for Acquisition - 5,000 - 5,000
Investment in Partnership (85) (614) (1,320) (1,618)
Distribution from Partnership - - 900 1,374
Other Long-Term Assets 94 - (475) 197
------- -------- -------- --------
Net Cash Provided by (Used in) Investing
Activities $(2,842) $ 2,175 $(11,130) $(11,308)
------- -------- -------- --------
Financing Activities:
Net Proceeds (Payments) Under Lines of Credit $(5,100) $ (3,300) $ 33,300 $(14,600)
Proceeds from Senior Notes - - - 20,000
Payments to Settle Debt (1,781) (2,094) (67,944) (3,286)
Purchase of Treasury Stock - - - (1,027)
Sale of Common Stock 544 641 1,212 1,394
------- -------- -------- --------
Net Cash Provided by (Used in) Financing
Activities $(6,337) $ (4,753) $(33,432) $ 2,481
------- -------- -------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents $ 31 $ - $ 15 $ -
------- -------- -------- --------
Net Increase (Decrease) in Cash (209) $ 6,218 $ (2,262) $ 6,048
Cash and Cash Equivalents at Beginning of Period $ 1,572 1,946 3,625 2,116
------- -------- -------- --------
Cash and Cash Equivalents at End of Period $ 1,363 $ 8,164 $ 1,363 $ 8,164
======= ======== ======== ========
Supplemental Cash Flow Disclosures:
Subordinated Notes Issued for Acquisitions $ - $ - $ - $ 1,117
Cash Portion of Acquisitions and Related Costs - 75 - 1,204
------- -------- -------- --------
Total Consideration Paid for Acquisitions $ - $ 75 $ - $ 2,321
======= ======== ======== ========
</TABLE>
The Changes in Assets and Liabilities for the three and nine months ended
November 30, 1998 and 1997, 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 nine months ended November 30, 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 nine-month periods ending November 30, 1998 and 1997, the
Company derived approximately 12.0% and 21.0%, 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 $288 at November 30,
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; 16,632,504
Shares Issued and 15,652,856 Shares Outstanding at November 30, 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 November 30, 1998 and February
28, 1998. On December 20, 1996, the Company's Board of Directors authorized
the repurchase of up to one million shares of the Company's common stock,
of which 291,000 shares were purchased through March 1997, when the program
was halted. On December 15, 1998, the Company announced the resumption of
its stock repurchase program. Repurchases will be made from time to time in
the open market or through privately negotiated purchases, as the Company
may determine. From December 21, 1998 through January 12, 1999, the Company
has repurchased 89,700 shares at an average purchase price of $8.50 per
share.
(6) Comprehensive Income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $2,617 $2,175 $6,266 $6,441
Other Comprehensive Income:
Foreign Currency Translation
Adjustments, Net of Tax 170 - (152) -
------ ------ ------ ------
Comprehensive Income $2,787 $2,175 $6,114 $6,441
====== ====== ====== ======
</TABLE>
6
<PAGE>
(7) Net Income Per Share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 2,617 $ 2,175 $ 6,266 $ 6,441
=========== =========== =========== ===========
Net Income Per Share:
Basic $ 0.17 $ 0.14 $ 0.41 $ 0.42
=========== =========== =========== ===========
Diluted $ 0.17 $ 0.14 $ 0.41 $ 0.42
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding
Used for Basic Net
Income Per Share 15,380,000 15,224,000 15,333,000 15,192,000
Diluted Common Stock Options 46,181 275,952 63,375 279,437
----------- ----------- ----------- -----------
Weighted Average Number of
Common Shares Outstanding
Plus Dilutive Common
Stock Options 15,426,181 15,499,952 15,396,375 15,471,437
=========== =========== =========== ===========
Outstanding Common Stock
Options Having
No Dilutive Effect 1,766,647 722,798 1,418,275 720,848
=========== =========== =========== ===========
</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. The Statement requires the Company to record all derivative
instruments, including those embedded 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 financial 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 Nine Months Ended
November 30, November 30,
(In thousands) 1998 1997 1998 1997
- ------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Revenues $ 15,992 $ 18,498 $ 46,041 $ 53,489
Gross Profit (Loss) (1,450) 390 (782) 2,154
Income (Loss) from Operations (1,466) (250) (1,844) 122
Net Loss (1,466) (383) (1,925) (338)
</TABLE>
NOTE: The Net 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 November 30, 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 November 30,
- -------------------------- ---------------------------------------------
1998 1997
-------------------- --------------------
Product Group: Dollars Percent Dollars Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Galvanizing $ 54,511 44.3% $ 16,581 22.1%
Coil Coating 39,092 31.8% 31,812 42.4%
Laminates and Composites 19,028 15.4% 17,288 23.0%
Specialty Films 10,422 8.5% 9,426 12.5%
-------- ------- -------- -------
$123,053 100.0% $ 75,107 100.0%
======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended November 30,
---------------------------------------------
1998 1997
-------------------- --------------------
Product Group: Dollars Percent Dollars Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Galvanizing $153,690 43.3% $ 45,922 21.0%
Coil Coating 114,324 32.2% 91,257 41.7%
Laminates and Composites 52,216 14.7% 49,121 22.5%
Specialty Films 34,863 9.8% 32,444 14.8%
-------- ------- -------- -------
$355,093 100.0% $218,744 100.0%
======== ======= ======== =======
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Net Sales
Net sales in the third quarter of fiscal 1999 increased 63.8% to $123,053 from
$75,107 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 $79,165, 5.4% above the third quarter of fiscal 1998. For the nine months
ended November 30, 1998, sales were $355,093, 62.3% higher than $218,744 in the
nine-month period of last year. This increase was also mainly due to the
Colorstrip acquisition. Comparable sales for the year-to-date period, excluding
Colorstrip, were $228,529, 4.5% higher than the same period last fiscal year.
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, ISPAT Inland Inc. (f/k/a 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 third quarter of fiscal 1999, galvanizing sales increased 228.8% to $54,511
from $16,581 in the prior year. Excluding Colorstrip, galvanizing sales
decreased 3.1% from the third quarter last year. For the first nine months,
galvanizing sales grew 234.7% to $153,690 from $45,922 in the same prior year
period, but decreased 7.4% 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 13.1% and 22.1% of the Company's net sales in the third quarter of
fiscal 1999 and 1998, respectively, and 12.0% and 21.0% in the first nine months
of fiscal 1999 and 1998, respectively. During the third quarter and first nine
months of fiscal 1999, as well 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 the last three fiscal years, as well as
the acquisition of Colorstrip and the hot-dipped galvanizing operating issues
mentioned later. 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. The Company
extended the Partnership from July 1, 1998 through December 31, 1998 while
negotiating a long-term agreement. Effective January 1, 1999, MSC and BSC have
entered into a three-year agreement to extend the Partnership. The Company
believes that the extension will be essentially similar to the previous
agreement in terms of its overall long-term benefit to the Company. BSC and
another mill are currently studying the feasibility of converting an existing
electrogalvanizing facility into a state-of-the-art hot-dip galvanizing plant.
In such event, MSC
10
<PAGE>
expects the other mill would shift a portion of its existing electrogalvanizing
business to the Partnership. The Company believes that the fair market value of
its investment in the Partnership is greater than the $10,155 recorded in the
Consolidated Balance Sheets.
For the third quarter of fiscal 1999, MSC's electrogalvanizing sales decreased
3.1% to $16,069 compared with $16,581 for the third quarter last year.
Electrogalvanizing sales decreased 7.4% to $42,529 for the nine-month period
ended November 30, 1998 versus $45,922 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 for the year-
to-date period. Capacity utilization for electrogalvanizing in the first nine
months of fiscal 1999 was 80% versus 91% in the first nine months of last year.
Hot-dipped galvanizing sales were $38,442 for the third quarter and $111,161 for
the first nine months of fiscal 1999. For both the three-month and year-to-date
periods, sales were less than the comparable pre-acquisition periods a year ago
due to the increasingly competitive environment and pricing pressure from the
Asian market. Also, for the first nine months, sales were impacted by the loss
of seven days of production due to equipment failure occurring in the second
quarter of fiscal 1999, as well as unusually wet weather on the West Coast at
the beginning of the fiscal year. Capacity utilization was 70% for the first
nine months of this year.
Coil Coating
Coil coating sales during the third quarter of fiscal 1999 increased 22.9% (5.8%
excluding Colorstrip) to $39,092 from $31,812 in the same quarter last year. For
the nine months ended November 30, 1998, sales were 25.3% higher (8.4% excluding
Colorstrip) than last year. For both periods, significant growth in the
building, construction, and appliance markets were slightly offset by a decrease
in shipments to the transportation market. Capacity utilization for the first
nine months of fiscal 1999 was 78% compared to 79% for the first nine months of
fiscal 1998.
Laminates and Composites
During the third quarter of fiscal 1999, laminates and composites sales of
$19,028 were 10.1% higher than $17,288 in the same prior year period. An
increase in shipments of brake dampers to both the original equipment
manufacturer and the replacement markets, as well as higher sales of Polycore
Composites(R), more than offset the decline in sales of Specular+(R). For the
first nine months of fiscal 1999, sales of laminates and composites increased
6.3% to $52,216 from $49,121 in fiscal 1998. Growth in the brake damper,
appliance, and Polycore Composites markets more than offset the impact of the
General Motors strike during the second quarter of fiscal 1999 and the decline
in sales of Specular+. Capacity utilization for laminates and composites for the
first nine months of fiscal 1999 and 1998 was 65%.
Specialty Films
Specialty films sales grew 10.6% to $10,422 in the third quarter of fiscal 1999
compared with $9,426 in the same period last year. For the nine months ended
November 30, 1998, specialty films sales increased 7.5% to $34,863 compared with
$32,444 in the prior year's nine months. For both periods, increases in
shipments of domestic solar control window film, photoreceptor and imaging
materials, as well as other sputtered films were slightly offset by lower sales
to
11
<PAGE>
international markets. Capacity utilization for specialty films for the year-to-
date period of fiscal 1999 was 61% versus 63% last year.
Gross Profit
The Company's gross profit margin was 18.7% (25.9% excluding Colorstrip) in the
third quarter of fiscal 1999 as compared to 23.4% in the same period last year.
For the first nine months of fiscal 1999, gross profit margin was 17.7% (24.9%
excluding Colorstrip) versus 23.8% in the prior year. The Pinole Point
operations were negatively affected by sales related issues mentioned above. In
general, the decrease in gross profit margin for both periods was 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).
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were 12.4% of sales in the
third quarter of fiscal 1999 as compared to 17.2% of sales for the same period
last fiscal year. For the first nine months of fiscal 1999, SG&A as a percentage
of sales was 12.2% as compared to 17.8% of sales for the prior year-to-date
period. The decrease in SG&A was mainly due to the increase in sales from the
Colorstrip acquisition and the Company's cost reduction program that was
implemented in the fourth quarter of last fiscal year.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was expense of $3,540 and $9,458 in the
third quarter and first nine months of fiscal 1999, respectively, compared to
$1,163 and $2,461 of expense for the same periods of fiscal 1998, respectively.
For the three- and nine-month periods of fiscal 1999, interest expense increased
$1,728 and $6,045, respectively, due to additional debt related to the
Colorstrip acquisition and the Company's increase in capital expenditures in
fiscal 1998. For the year-to-date period, interest income increased over last
fiscal year due to the recording of $318 of interest income in the second
quarter of fiscal 1999 related to amended tax returns. In addition, Equity in
Results of Partnership declined to expense of $667 and $1,107 during the third
quarter and first nine months of this fiscal year, respectively, compared to
expense of $369 and $211 in the same periods last year, respectively, due to a
decline in third party sales and the conclusion of financing revenue relating to
the Partnership agreement which expired on June 30, 1998. MSC's effective income
tax rate was approximately 38.5% during the third quarter and first nine months
of fiscal 1999 and fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
MSC generated $8,939 of cash from operating activities during the third quarter
compared to $8,796 in the same quarter last year. The slight increase in cash
generation is due mainly to higher net income and depreciation and amortization,
as well as lower receivables, offset in part, by lower accounts payable levels.
For the nine-month period of fiscal 1999, operating activities generated $42,285
of cash versus $14,875 last fiscal year. The cash generation increase is a
result of higher profitability after excluding depreciation and amortization,
continuous improvements in working capital, and cash flow benefits received from
long-term supplier contracts. Earnings before interest, taxes, depreciation, and
amortization ("EBITDA") increased to $14,868 and $42,530 for the third quarter
and first nine months of fiscal 1999, respectively, compared to $9,241 and
$27,530 for the same periods last year, respectively.
12
<PAGE>
MSC's capital expenditures during the third quarter and first nine months of
fiscal 1999 were $2,851 and $10,235, respectively, compared with $2,136 and
$15,057 in the same periods last fiscal year, respectively. The prior year-to-
date period included higher spending for increasing capacity in the coil coating
and specialty films areas.
As of November 30, 1998, total debt for MSC decreased to $156,141 from $190,973
at fiscal year end due mainly to higher EBITDA, 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 November 30, 1998. There was $37,800 outstanding under the lines
of credit as of November 30, 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 $57,460 at November 30, 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 October 15, 1998, a subsidiary of the Company formed a joint venture
(Innovative Specialty Films, LLC) with Bekaert Corporation for the research and
development, manufacture, and sale of sputtered film. As of January 4, 1999, the
Company contributed $8,116 in assets and $4,008 in cash funded by existing lines
of credit to the joint venture. As a result of the transaction, MSC will be
transferring its sputtering operations to the joint venture which represents
approximately 1% of the Company's net sales.
On December 20, 1996, MSC's Board of Directors authorized the repurchase of up
to one million shares of the Company's common stock, of which 291,000 shares
were purchased through March 1997, when the program was halted. On December 15,
1998, the Company announced the resumption of its stock repurchase program.
Repurchases will be made from time to time in the open market or through
privately negotiated purchases, as the Company may determine. From December 21,
1998 through January 12, 1999, the Company has repurchased 89,700 shares at an
average purchase price of $8.50 per share.
The Company has a capital lease obligation, which was $2,523 as of November 30,
1998, relating to a facility which the Company subleases to the Partnership. As
of November 30, 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
13
<PAGE>
Company could have a materially adverse impact on the 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 November 30, 1998,
and the remediation and testing phases are in progress. Under the Company's Year
2000 plan, each of the Company's business units has established target dates for
remediation and testing of critical systems and applications.
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 and 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 $2,400 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 letter.
During the fourth quarter 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 November 30, 1998
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) 27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter for which
this report is filed.
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 14th day of January, 1999.
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 STATEMENTS 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> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 1,363
<SECURITIES> 0
<RECEIVABLES> 50,149
<ALLOWANCES> 4,446
<INVENTORY> 55,583
<CURRENT-ASSETS> 112,544
<PP&E> 372,784
<DEPRECIATION> 127,589
<TOTAL-ASSETS> 393,331
<CURRENT-LIABILITIES> 63,172
<BONDS> 153,725
0
0
<COMMON> 333
<OTHER-SE> 148,191
<TOTAL-LIABILITY-AND-EQUITY> 393,331
<SALES> 355,093
<TOTAL-REVENUES> 355,093
<CGS> 292,255
<TOTAL-COSTS> 292,255
<OTHER-EXPENSES> 43,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,176
<INCOME-PRETAX> 10,188
<INCOME-TAX> 3,922
<INCOME-CONTINUING> 6,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,266
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
