<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 May 31, 2000
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 July 12, 2000, there were outstanding 14,914,139 shares of common stock,
$.02 par value.
<PAGE>
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended May 31, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
(a) Financial statements of Material Sciences Corporation and Subsidiaries
2
<PAGE>
Consolidated Statements of Income (Unaudited)
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended
May 31,
(In thousands, except per share data) 2000 1999
---------------------------------------------------------- -------- --------
<S> <C> <C>
Net Sales (1) $125,774 $124,993
Cost of Sales 101,821 100,757
-------- --------
Gross Profit $ 23,953 $ 24,236
Selling, General and Administrative Expenses 17,414 14,647
-------- --------
Income from Operations $ 6,539 $ 9,589
-------- --------
Other (Income) and Expense:
Interest Expense, Net $ 2,270 $ 2,417
Equity in Results of Joint Ventures 1 481
Other, Net 65 84
-------- --------
Total Other Expense, Net $ 2,336 $ 2,982
-------- --------
Income Before Income Taxes $ 4,203 $ 6,607
Income Taxes 1,555 2,445
-------- --------
Net Income $ 2,648 $ 4,162
======== ========
Basic Net Income Per Share $ 0.18 $ 0.27
======== ========
Diluted Net Income Per Share $ 0.18 $ 0.27
======== ========
Weighted Average Number of Common Shares Outstanding
Used for Basic Net Income Per Share 14,596 15,244
Dilutive Common Stock Options 158 198
-------- --------
Weighted Average Number of Common Shares Outstanding
Plus Dilutive Common Stock Options 14,754 15,442
======== ========
Outstanding Common Stock Options Having No Dilutive Effect 1,261 1,698
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
May 31, February 29,
2000 2000
(In thousands) Unaudited Audited
-------------------------------------------- ------------- -------------
<S> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 286 $ 4,223
Receivables:
Trade, Less Reserves of $4,280 and $5,067,
Respectively (2) 58,108 58,331
Prepaid Expenses 4,711 2,418
Inventories 66,326 60,251
Prepaid Taxes 4,209 4,209
---------- ----------
Total Current Assets $ 133,640 $ 129,432
---------- ----------
Property, Plant and Equipment $ 378,232 $ 373,519
Accumulated Depreciation and Amortization (159,230) (152,417)
---------- ----------
Net Property, Plant and Equipment $ 219,002 $ 221,102
---------- ----------
Other Assets:
Investment in Joint Ventures $ 20,469 $ 20,306
Intangible Assets, Net 23,241 23,980
Other 2,475 2,475
---------- ----------
Total Other Assets $ 46,185 $ 46,761
---------- ----------
Total Assets $ 398,827 $ 397,295
========== ==========
Liabilities:
Current Liabilities:
Current Portion of Long-Term Debt $ 9,845 $ 2,688
Accounts Payable 54,002 50,667
Accrued Payroll Related Expenses 9,274 18,023
Accrued Expenses 7,697 9,429
---------- ----------
Total Current Liabilities $ 80,818 $ 80,807
---------- ----------
Long-Term Liabilities:
Deferred Income Taxes $ 21,954 $ 21,486
Long-Term Debt, Less Current Portion 124,013 120,896
Accrued Superfund Liability 2,998 3,014
Other 12,185 12,693
---------- ----------
Total Long-Term Liabilities $ 161,150 $ 158,089
---------- ----------
Shareowners' Equity:
Preferred Stock (3) $ - $ -
Common Stock (4) 352 347
Additional Paid-In Capital 60,429 59,164
Treasury Stock at Cost (5) (27,360) (22,074)
Retained Earnings 124,193 121,545
Accumulated Other Comprehensive Loss (6) (755) (583)
---------- ----------
Total Shareowners' Equity $ 156,859 $ 158,399
---------- ----------
Total Liabilities and Shareowners' Equity $ 398,827 $ 397,295
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Consolidated Statements of Cash Flows (Unaudited)
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended
May 31,
(In thousands) 2000 1999
--------------------------------------------------------------------------------- -------- --------
<S> <C> <C>
Cash Flows From:
Operating Activities:
Net Income $ 2,648 $ 4,162
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization 7,473 7,690
Provision for Deferred Income Taxes 468 721
Compensatory Effect of Stock Plans 691 177
Other, Net (11) 476
-------- --------
Operating Cash Flow Prior to Changes in Assets and Liabilities $ 11,269 $ 13,226
-------- --------
Changes in Assets and Liabilities:
Receivables $ 223 $ (1,459)
Income Taxes Receivable - 968
Prepaid Expenses (2,293) (1,465)
Inventories (6,075) 26
Accounts Payable 3,335 (652)
Accrued Expenses (10,481) (2,249)
Other, Net (593) 261
-------- --------
Cash Flow from Changes in Assets and Liabilities $(15,884) $ (4,570)
-------- --------
Net Cash Provided by (Used in) Operating Activities $ (4,615) $ 8,656
-------- --------
Investing Activities:
Capital Expenditures, Net $ (4,703) $ (3,973)
Investment in Joint Ventures (164) (68)
Other (22) (708)
-------- --------
Net Cash Used in Investing Activities $ (4,889) $ (4,749)
-------- --------
Financing Activities:
Net Proceeds (Payments) Under Lines of Credit $ 10,400 $ (600)
Payments of Debt (126) (155)
Purchase of Treasury Stock (5,286) (2,341)
Sale of Common Stock 579 791
-------- --------
Net Cash Provided by (Used in) Financing Activities $ 5,567 $ (2,305)
-------- --------
Net Increase (Decrease) in Cash $ (3,937) $ 1,602
Cash and Cash Equivalents at Beginning of Period 4,223 1,227
-------- --------
Cash and Cash Equivalents at End of Period $ 286 $ 2,829
======== ========
</TABLE>
The Changes in Assets and Liabilities for the three months ended May 31, 1999,
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 months ended May 31, 2000 and 1999 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 2000 Annual Report to Shareowners and Annual Report on Form
10-K.
(1) During the three-month periods ending May 31, 2000 and 1999, the Company
derived approximately 10.3% and 13.8%, respectively, of its sales from fees
billed to Walbridge Coatings ("Partnership") by a subsidiary of the Company
for operating the Walbridge, Ohio facility.
(2) Includes trade receivables due from the Partnership of $1,382 as of May 31,
2000 and $1,686 as of February 29, 2000. Trade receivables also include
amounts due from Innovative Specialty Films, LLC, a joint venture with
Bekaert Corporation, of $250 as of May 31, 2000 and $4 as of February 29,
2000.
(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; 17,592,387
Shares Issued and 14,922,139 Shares Outstanding as of May 31, 2000 and
17,343,858 Shares Issued and 15,186,310 Shares Outstanding as of
February 29, 2000.
(5) Treasury Stock at Cost; 2,670,248 Shares as of May 31, 2000 and 2,157,548
Shares as of February 29, 2000. On September 23, 1999, MSC's Board of
Directors authorized the repurchase of up to one million shares of the
Company's common stock, of which 468,900 shares were purchased through
February 29, 2000. During the first quarter of fiscal 2001, the Company
purchased 512,700 shares at an average purchase price of $10.31 per share.
As of July 12, 2000, the remaining 18,400 shares of this program were
purchased at an average purchase price of $10.05 per share.
On June 22, 2000, MSC's Board of Directors authorized a new program to
repurchase up to one million shares of the Company's common stock.
Repurchases will be made from time to time in the open market or through
privately negotiated purchases, as the Company may determine. As of
July 12, 2000, 66,500 shares were purchased under the new program at an
average purchase price of $9.97 per share.
6
<PAGE>
(6) Comprehensive Income:
<TABLE>
<CAPTION>
Three Months Ended
May 31,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Net Income $ 2,648 $ 4,162
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments (172) 79
-------- --------
Comprehensive Income $ 2,476 $ 4,241
======== ========
</TABLE>
(7) Business Segments:
The Company reports segment information based on how management
disaggregates its businesses for evaluating performance and making
operating decisions. The Company's three segments are: Coated Products
and Services, Engineered Materials and Specialty Films. Corporate
represents unallocated general corporate expenses. Sales between segments
are recorded at market rates, and the related intercompany profit is
eliminated in consolidation. The net sales on a geographic basis are not
material. Information concerning the Company's business segments in the
first quarter of fiscal 2001 and 2000 was as follows:
<TABLE>
<CAPTION>
Three Months Ended
May 31,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Net Sales
---------
Coated Products and Services $ 88,433 $ 94,118
Engineered Materials 21,432 19,107
Specialty Films 16,735 12,120
Eliminations (826) (352)
-------- --------
$125,774 $124,993
======== ========
Income from Operations
----------------------
Coated Products and Services $ 3,920 $ 7,067
Engineered Materials 2,905 2,971
Specialty Films 2,755 2,014
Corporate and Eliminations (3,041) (2,463)
-------- --------
$ 6,539 $ 9,589
======== ========
</TABLE>
(8) As previously reported, on April 9, 1997, a plaintiff claiming to represent
a class of MSC shareowners, who allegedly suffered injury from the
accounting irregularities announced on April 7, 1997, filed a complaint in
the United States District Court for the Northern District of Illinois.
The class purportedly includes shareowners who purchased MSC shares between
April 18, 1996 and April 7, 1997. The plaintiff claims that the Company
and certain of its current and former officers violated the federal
securities laws and were aware of, or recklessly disregarded, material
misstatements that were made in MSC's publicly filed financial reports.
On May 26, 2000, the parties executed a settlement agreement. The Court
entered an order preliminarily approving the agreement on May 31, 2000. At
the same time, the Court ordered that the class be advised of the proposed
settlement and directed that class members be afforded an opportunity to
present any objections at a fairness hearing set for August 1, 2000. The
costs of the preliminarily approved settlement and related legal fees are
expected to be covered under the Company's insurance policies, net of
retention (expensed in fiscal 1998).
7
<PAGE>
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended May 31, 2000
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
Net sales in the first quarter of fiscal 2001 increased 0.6% to $125,774 from
$124,993 in the same period last fiscal year. Higher sales of Engineered
Materials and Specialty Films were offset by a decrease in sales of Coated
Products and Services due to shortfalls at the electrogalvanizing and hot-dip
galvanizing operations. MSC's first quarter gross profit margin for fiscal 2001
was 19.0% as compared with 19.4% in the prior year. The decline in gross profit
margin was mainly due to lower sales volume at both galvanizing operations.
Selling, general and administrative ("SG&A") expenses were 13.8% of net sales in
the first quarter of fiscal 2001 versus 11.7% in the same period last year. The
increase in SG&A percentage was mainly due to increased spending at Engineered
Materials and Specialty Films in research and development and sales and
marketing, offset slightly by a reduction in variable compensation expense. For
the first quarter of fiscal 2001, income from operations decreased 31.8% to
$6,539 as compared with $9,589 last fiscal year.
The Company's three principal business segments are Coated Products and
Services, Engineered Materials and Specialty Films. The Coated Products and
Services segment includes the coil coating, hot-dip galvanizing and
electrogalvanizing product groups. This segment provides galvanized and
prepainted products and services primarily to the building and construction,
automotive and appliance markets. The Engineered Materials segment includes the
laminates and composites product group. This segment combines layers of metal
and other materials designed to meet specific customer requirements for the
automotive, lighting, appliance and computer disk drive markets. The Specialty
Films segment provides solar control and safety window film, as well as
industrial films used in a variety of products.
Coated Products and Services
Net sales of Coated Products and Services during the first quarter of fiscal
2001 decreased 6.0% to $88,433 from $94,118 in the same quarter last year. The
decrease was primarily due to lower sales volume at the galvanizing operations.
A significant decline in demand for three of General Motors' J car vehicles
(i.e. Saturn, Cavalier and Sunfire) reduced electrogalvanizing shipments at
Walbridge Coatings, while lower demand in the building and construction market
on the West Coast and customer inventory adjustments reduced shipments at the
hot-dip galvanizing operation. Income from operations for Coated Products and
Services decreased to $3,920, a 44.5% reduction from $7,067 in the prior year.
Lower volume at both galvanizing operations, along with higher steel costs at
the hot-dip galvanizing operation, contributed to the
8
<PAGE>
shortfall in income from operations. At the hot-dip galvanizing operation,
higher steel costs than can be recovered through price increases to customers is
expected to negatively affect the second quarter, while the electrogalvanizing
operation is expected to improve due to increases in demand.
On July 23, 1999, a subsidiary of Bethlehem Steel Corporation ("BSC") sold a
portion of its ownership interest in Walbridge Coatings ("Partnership") to a
subsidiary of the LTV Corporation ("LTV"). LTV purchased a 16.5% equity
interest in the Partnership from BSC, providing LTV access to 33.0% of the
facility's available line time. Over the longer term, this change in ownership
will provide MSC with a more diversified customer base and improve the
likelihood of higher facility utilization. In conjunction with the sale, the
Partnership term was extended from December 31, 2001 to December 31, 2004. The
Partnership agreements also were restructured to provide for a decrease in
pricing to BSC and LTV in exchange for various "make whole" opportunities for
MSC related to third party sales and a portion of line time rights allocated to
the Company in calendar 2000 and 2001. The Partnership also maintained its
long-term toll processing agreement with ISPAT Inland Inc. (a former partner)
which expires on December 31, 2001.
Engineered Materials
During the first quarter of fiscal 2001, sales of Engineered Materials increased
12.2% to $21,432 as compared with $19,107 last fiscal year due to higher
shipments of Quiet Steel(R) to the automotive and computer equipment markets.
Income from operations for the first quarter was $2,905, flat with fiscal 2000
mainly due to higher sales volume offset by increased spending in sales and
marketing and research and development to support new product and marketing
efforts in the U.S. and off-shore.
Specialty Films
Sales of Specialty Films for the first quarter of fiscal 2001 increased 38.1% to
$16,735 as compared with $12,120 in the same period last year. Higher shipments
of window film to both domestic and international markets, along with increased
sales of coating and laminating products, contributed to the growth. Income
from operations for Specialty Films for the first three months of fiscal 2001
was $2,755, a 36.8% increase from $2,014 last year. The increase was mainly due
to higher sales volume, offset slightly by an increase in research and
development and sales and marketing spending.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was expense of $2,336 in the first quarter
of fiscal 2001 as compared with $2,982 of expense for the first three months of
fiscal 2000. Interest expense decreased $211 due to lower debt levels, offset
slightly by an increase in variable interest rates. In addition, Equity in
Results of Joint Ventures was a loss of $1 for the first quarter of this fiscal
year as compared with a loss of $481 last year. The improvement in Equity in
Results of Joint Ventures was due to the Company's portion of the increase in
income from Innovative Specialty Films, LLC ("ISF"), the joint venture with
Bekaert Corporation. MSC's effective income tax rate was 37.0% in the first
quarter of fiscal 2001 and 2000.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal 2001, MSC utilized $4,615 of cash from
operating activities as compared with generating $8,656 in the first quarter
last year. The decrease in cash generation is due mainly to increases in
working capital as a result of higher inventory levels at the hot-dip
galvanizing operation due to the uncertainty of raw material availability and
long-term pricing as a result of the recent steel trade cases; the timing of
the Company's semi-annual interest payments on long-term debt; higher variable
compensation payments in fiscal 2001 versus fiscal 2000; as well as lower net
income as compared with last year's first quarter. Earnings before interest,
taxes, depreciation and amortization ("EBITDA") decreased to $13,946 for the
first quarter of fiscal 2001 as compared with $16,714 for the same quarter last
year. MSC's capital expenditures during the first quarter of fiscal 2001 were
$4,703 as compared with $3,973 in the same period last fiscal year.
As of May 31, 2000, MSC's total debt increased to $133,858 from $123,584 as of
February 29, 2000. As of May 31, 2000, the Company maintains a committed line of
credit totaling $90,000. There was $15,000 outstanding under this line of credit
as of May 31, 2000, versus no amount outstanding as of February 29, 2000. The
Company has executed letters of credit totaling $5,072 against these lines,
leaving available lines of credit of $69,928 as of May 31, 2000. The Company
also maintains a $10,000 uncommitted line of credit. There was $2,600
outstanding under this line of credit as of May 31, 2000 as compared with $7,200
as of fiscal year end. 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 expenditures, acquisitions, stock repurchase
program and debt payments.
On September 23, 1999, MSC's Board of Directors authorized the repurchase of up
to one million shares of the Company's common stock, of which 468,900 shares
were purchased through February 29, 2000. During the first quarter of fiscal
2001, the Company purchased 512,700 shares at an average purchase price of
$10.31 per share. As of July 12, 2000, the remaining 18,400 shares of this
program were purchased at an average purchase price of $10.05 per share.
On June 22, 2000, MSC's Board of Directors authorized a new program to
repurchase up to one million shares of the Company's common stock. Repurchases
will be made from time to time in the open market or through privately
negotiated purchases, as the Company may determine. As of July 12, 2000,
66,500 shares were purchased under the new program at an average purchase
price of $9.97 per share.
The Company has a capital lease obligation, which was $1,847 as of May 31, 2000
and $1,968 as of February 29, 2000, relating to a facility the Company subleases
to the Partnership. In addition, the Company is contingently responsible for
50% of ISF's financing requirements. As of May 31, 2000, ISF's debt was $238 as
compared with $183 as of February 29, 2000.
As previously reported, on April 9, 1997, a plaintiff claiming to represent a
class of MSC shareowners, who allegedly suffered injury from the accounting
irregularities announced on April 7, 1997, filed a complaint in the United
States District Court for the Northern District of Illinois. The class
purportedly includes shareowners who purchased MSC shares between April 18, 1996
and April 7, 1997. The plaintiff claims that the Company and certain of its
current and former officers violated the federal securities laws and were aware
of, or recklessly disregarded, material misstatements that were made in MSC's
publicly filed financial reports.
10
<PAGE>
On May 26, 2000, the parties executed a settlement agreement. The Court entered
an order preliminarily approving the agreement on May 31, 2000. At the same
time, the Court ordered that the class be advised of the proposed settlement and
directed that class members be afforded an opportunity to present any objections
at a fairness hearing set for August 1, 2000. The costs of the preliminarily
approved settlement and related legal fees are expected to be covered under the
Company's insurance policies, net of retention (expensed in fiscal 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 29,
2000.
Forward-looking statements contained in this filing are qualified by the
cautionary language described in Part II, Item 7 of the Company's 2000 Annual
Report on Form 10-K, filed with the SEC pursuant to the Securities Exchange Act
of 1934, as amended.
11
<PAGE>
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For the Quarter Ended May 31, 2000
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.
12
<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 12th day of July, 2000.
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
13
<PAGE>
MATERIAL SCIENCES CORPORATION
Quarterly Report on Form 10-Q
Index to Exhibits
Sequentially
Exhibit Number Description of Exhibit Numbered Page
-------------- ---------------------- -------------
27 Financial Data Schedule (1)
(1) Appears only in the electronic filing of this report with the Securities
and Exchange Commission.
