SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-3295
--
MINERALS TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 25-1190717 |
(State or other jurisdiction of | (I.R.S. Employer |
405 Lexington Avenue, New York, New York 10174-1901
(Address of principal executive offices, including zip code)
(212) 878-1800
(Registrant's telephone number, including area code)
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 _____ |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES X | NO _____ |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
CLASS | OUTSTANDING AT July 29, 2003 |
MINERALS TECHNOLOGIES INC.
INDEX TO FORM 10-Q
Page No. | |
PART I. FINANCIAL INFORMATION | |
Item 1. | |
Financial Statements: | |
Condensed Consolidated Statement of Income for | 3 |
Condensed Consolidated Balance Sheet as of | 4 |
Condensed Consolidated Statement of | 5 |
Notes to Condensed Consolidated | 6 |
Independent Auditors' Review Report | 13 |
Item 2. | |
Management's Discussion and Analysis of | 14 |
Item 3. | |
Quantitative and Qualitative Disclosures | 18 |
Item 4. | |
Controls and Procedures | 19 |
PART II. OTHER INFORMATION | |
Item 1. | |
Legal Proceedings | 19 |
Item 6. | |
Exhibits and Reports on Form 8-K | 19 |
Signature | 20 |
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended | Six Months Ended | |||
(in thousands, except per share data) | June 29, | June 30, | June 29, | June 30, |
Net sales | $202,374 | $186,828 | $403,824 | $365,828 |
Operating costs and expenses: | ||||
Cost of goods sold | 152,378 | 140,662 | 304,061 | 274,086 |
Marketing and administrative | 21,862 | 19,357 | 42,999 | 37,793 |
Research and development | 6,535 | 5,825 | 12,620 | 11,529 |
Income from operations | 21,599 | 20,984 | 44,144 | 42,420 |
Non-operating deductions, net | 1,441 | 1,021 | 2,468 | 2,959 |
Income before provision for | 20,158 | 19,963 | 41,676 | 39,461 |
Provision for taxes on income | 5,494 | 5,599 | 11,628 | 11,234 |
Minority interests | 381 | 367 | 848 | 687 |
Income before cumulative effect | 14,283 | 13,997 | 29,200 | 27,540 |
Cumulative effect of accounting | -- | -- | 3,433 | -- |
Net income | $ 14,283 | $ 13,997 | $ 25,767 | $ 27,540 |
Earnings per share: | ||||
Basic: | ||||
Before cumulative effect of | $ 0.71 | $ 0.68 | $ 1.45 | $ 1.36 |
Cumulative effect of | -- | -- | (0.17) | -- |
Basic earnings per share | $ 0.71 | $ 0.68 | $ 1.28 | $ 1.36 |
Diluted: | ||||
Before cumulative effect of | $ 0.70 | $ 0.67 | $ 1.44 | $ 1.33 |
Cumulative effect of | -- | -- | (0.17) | -- |
Diluted earnings | $ 0.70 | $ 0.67 | $ 1.27 | $ 1.33 |
Cash dividends declared per common share | $ 0.025 | $ 0.025 | $ 0.050 | $ 0.050 |
Shares used in computation of earnings per share: | ||||
Basic | 20,094 | 20,457 | 20,105 | 20,221 |
Diluted | 20,335 | 20,973 | 20,279 | 20,768 |
See accompanying notes to Condensed Consolidated Financial Statements.
3
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(thousands of dollars) | June 29, | December 31, |
Current assets | ||
Cash and cash equivalents | $ 45,771 | $ 31,762 |
Accounts receivable, net | 148,299 | 129,608 |
Inventories | 82,065 | 82,909 |
Prepaid expenses and other current assets | 50,958 | 46,686 |
Total current assets | 327,093 | 290,965 |
Property, plant and equipment, less accumulated | 556,300 | 537,424 |
Goodwill | 51,721 | 51,291 |
Other assets and deferred charges | 33,042 | 20,197 |
Total assets | $968,156 | $899,877 |
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities: | ||
Short-term debt | $ 30,000 | $ 30,000 |
Current maturities of long-term debt | 2,503 | 1,331 |
Accounts payable | 38,701 | 37,435 |
Other current liabilities | 62,310 | 55,171 |
Total current liabilities | 133,514 | 123,937 |
Long-term debt | 99,037 | 89,020 |
Other non-current liabilities | 99,703 | 92,763 |
Total liabilities | 332,254 | 305,720 |
Shareholders' equity: | ||
Common stock | 2,701 | 2,694 |
Additional paid-in capital | 192,318 | 190,144 |
Retained earnings | 703,502 | 678,740 |
Accumulated other comprehensive loss | (15,516) | (35,034) |
883,005 | 836,544 | |
Less treasury stock | 247,103 | 242,387 |
Total shareholders' equity | 635,902 | 594,157 |
Total liabilities and | $968,156 | $899,877 |
* Unaudited
** Condensed from audited financial statements.
See accompanying Notes to Condensed Consolidated Financial Statements.
4
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended | ||
(thousands of dollars) | June 29, | June 30, |
Operating Activities: | ||
Net income | $ 25,767 | $ 27,540 |
Adjustments to reconcile net income to net cash | ||
Cumulative effect of accounting change | 3,433 | -- |
Depreciation, depletion and amortization | 34,373 | 33,453 |
Write-down of impaired assets | -- | 750 |
Other non-cash items | 3,817 | 5,019 |
Net changes in operating assets and liabilities | (24,818) | (12,105) |
Net cash provided by operating activities | 42,572 | 54,657 |
Investing Activities: | ||
Purchases of property, plant and equipment | (26,385) | (18,294) |
Acquisition of businesses | -- | (11,600) |
Other | 751 | -- |
Net cash used in investing activities | (25,634) | (29,894) |
Financing Activities: | ||
Proceeds from issuance of short-term debt | 5,318 | 68,919 |
Repayment of debt | (5,565) | (110,635) |
Purchase of common shares for treasury | (4,716) | (5,553) |
Proceeds from issuance of stock under option plan | 2,180 | 28,958 |
Cash dividends paid | (1,004) | (1,019) |
Net cash used in financing activities | (3,787) | (19,330) |
Effect of exchange rate changes on cash and | 858 | 777 |
Net increase in cash and cash equivalents | 14,009 | 6,210 |
Cash and cash equivalents at beginning of period | 31,762 | 13,046 |
Cash and cash equivalents at end of period | $ 45,771 | $ 19,256 |
Supplemental disclosure of cash flow information: | ||
Interest paid | $ 3,152 | $ 3,283 |
Income taxes paid | $ 7,111 | $ 8,891 |
Non-cash investing and financing activities: | ||
Property, plant and equipment acquired by | $ 11,368 | $ -- |
Property, plant and equipment additions related to | $ 6,762 | $ -- |
See accompanying Notes to Condensed Consolidated Financial Statements.
5
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments necessary for a fair presentation of the financial information for the periods indicated, have been included. The results for the three-month and six-month periods ended June 29, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.
Note 2 -- Summary of Significant Accounting Policies
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Significant improvements are capitalized, while maintenance and repair expenditures are charged to operations as incurred. The Company capitalizes interest cost as a component of construction in progress. In general, the straight-line method of depreciation is used for financial reporting purposes and accelerated methods are used for U.S. and certain foreign tax reporting purposes. The annual rates of depreciation are 4%-6.67% for buildings, 6.67%-12.5% for machinery and equipment, 8%-12.5% for furniture and fixtures and 12.5%-25% for computer equipment and software-related assets.
Property, plant and equipment are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets can generate revenue, which does not necessarily coincide with the remaining term of a customer's contractual obligation to purchase products made using those assets. The Company's sales of PCC are predominantly pursuant to long-term contracts, initially ten years in length, with paper mills at which the Company operates satellite PCC plants. The terms of many of these agreements have been extended, often in connection with an expansion of the satellite PCC plant. The Company also continues to supply PCC to two locations at which the PCC contracts have expired. Failure of a PCC customer to renew an agreement or continue to purchase PCC from the Company facility could result in an impairment of assets charge at such facility.
In the third quarter of 2002, the Company reduced the useful lives of satellite PCC plants at International Paper Company's ("IP") mills due to an increased risk that some or all of these PCC contracts would not be renewed. As a result of this change, the Company also reviewed the useful lives of the assets at its remaining satellite PCC facilities and other plants. During the first quarter of 2003, the Company revised the estimated useful lives of machinery and equipment pertaining to its natural stone mining and processing plants and chemical processing plants from 12.5 years (8%) to 15 years (6.67%) and reduced the useful lives of buildings at certain satellite PCC facilities from 25 years (4%) to 15 years (6.67%). The Company also reduced the estimated useful lives of certain software-related assets due to implementation of a new global enterprise resource planning system. During the second quarter of 2003, the Company reached an agreement with IP that extended eight PCC supply contracts and therefore extended the useful lives of the satellite PCC plants at those IP mills. The net effect of the changes in estimated useful lives was an increase to diluted earnings per share of $0.01 in the second quarter of 2003 and there was a minimal effect for the first half of 2003.
Depletion of mineral reserves is determined on a unit-of-extraction basis for financial reporting purposes and on a percentage depletion basis for tax purposes.
Mining costs associated with waste gravel and rock removal in excess of the expected average life of mine stripping ratio are deferred. These costs are charged to production on a unit-of-production basis when the ratio of waste to ore mined is less than the average life of mine stripping ratio.
6
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accounting for Stock-Based Compensation
In December 2002, The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, and requires additional disclosures in interim and annual financial statements. The disclosure in interim periods requires pro forma net income and net income per share as if the Company adopted the fair value method of accounting for stock-based awards. The fair value of stock-based awards to employees was calculated using the Black-Scholes option-pricing model, modified for dividends. Pro forma net income and earnings per share reflecting compensation cost for the fair value of stock options were as follows:
Three Months Ended | Six Months Ended | |||
(millions of dollars, except per share amounts) | June 29, | June 30, | June 29, | June 30, |
Income before cumulative effect of | $ 14.3 | $ 14.0 | $ 29.2 | $ 27.5 |
Deduct: Total stock-based employee | 0.5 | 0.6 | 0.9 | 1.1 |
Pro forma income before cumulative effect | 13.8 | 13.4 | 28.3 | 26.4 |
Cumulative effect of accounting change | -- | -- | 3.4 | -- |
Pro forma net income | $ 13.8 | $ 13.4 | $ 24.9 | $ 26.4 |
Net income, as reported | $ 14.3 | $ 14.0 | $ 25.8 | $ 27.5 |
Basic EPS | ||||
Income before cumulative effect | $ 0.71 | $ 0.68 | $ 1.45 | $ 1.36 |
Pro forma income before cumulative effect | $ 0.69 | $ 0.66 | $ 1.41 | $ 1.33 |
Pro forma net income | $ 0.69 | $ 0.66 | $ 1.24 | $ 1.33 |
Net income, as reported | $ 0.71 | $ 0.68 | $ 1.28 | $ 1.36 |
Diluted EPS | ||||
Income before cumulative effect | $ 0.70 | $ 0.67 | $ 1.44 | $ 1.33 |
Pro forma income before cumulative effect | $ 0.68 | $ 0.64 | $ 1.42 | $ 1.30 |
Pro forma net income | $ 0.68 | $ 0.64 | $ 1.25 | $ 1.30 |
Net income, as reported | $ 0.70 | $ 0.67 | $ 1.27 | $ 1.33 |
Note 3 -- Inventories
The following is a summary of inventories by major category:
(thousands of dollars) | June 29, | December 31, | |
Raw materials | $32,635 | $32,967 | |
Work-in-process | 7,864 | 7,153 | |
Finished goods | 24,350 | 25,459 | |
Packaging and supplies | 17,216 | 17,330 | |
Total inventories | $82,065 | $82,909 |
7
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 -- Long-Term Debt and Commitments
The following is a summary of long-term debt:
(thousands of dollars) | June 29, | December 31, | |
7.49% Guaranteed Senior Notes Due July 24, 2006 | $ 50,000 | $ 50,000 | |
Yen-denominated Guaranteed Credit Agreement | 8,725 | 8,957 | |
Variable/Fixed Rate Industrial | 4,000 | 4,000 | |
Economic Development Authority Refunding | 4,600 | 4,600 | |
Variable/Fixed Rate Industrial | 8,000 | 8,000 | |
Variable/Fixed Rate Industrial | 8,200 | 8,200 | |
Variable/Fixed Rate Industrial | 5,000 | 5,000 | |
Installment obligations | 11,368 | -- | |
Other borrowings | 1,647 | 1,594 | |
Total | 101,540 | 90,351 | |
Less: Current maturities | 2,503 | 1,331 | |
Long-term debt | $ 99,037 | $ 89,020 |
On May 31, 2003, the Company acquired land and limestone ore reserves from the Cushenberry Mine Trust for approximately $17.5 million. Approximately $6.1 million was paid at the closing and $11.4 million was financed through an installment obligation. The average interest rate on this obligation is approximately 4.25%. The principal payments are as follows: 2004 - $0.8 million; 2005 - $0.9 million; 2006 - $0.9 million; 2007 - $0.9 million; 2008 - $6.5 million; 2013 - $1.4 million.
Note 5 -- Earnings Per Share (EPS)
Basic earnings per share are based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period assuming the issuance of common shares for all dilutive potential common shares outstanding. The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended | Six Months Ended | ||||
Basic EPS | June 29, | June 30, | June 29, | June 30, | |
Income before cumulative effect | $14,283 | $13,997 | $29,200 | $27,540 | |
Cumulative effect of accounting change | -- | -- | (3,433) | -- | |
Net income | $14,283 | $13,997 | $25,767 | $27,540 | |
Weighted average shares outstanding | 20,094 | 20,457 | 20,105 | 20,221 | |
Basic earnings per share | $ 0.71 | $ 0.68 | $ 1.45 | $ 1.36 | |
Cumulative effect of accounting change | -- | -- | (0.17) | -- | |
Basic earnings per share | $ 0.71 | $ 0.68 | $ 1.28 | $ 1.36 | |
8
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended | Six Months Ended | |||
Diluted EPS | June 29, | June 30, | June 29, | June 30, |
Income before cumulative effect | $14,283 | $13,997 | $29,200 | $27,540 |
Cumulative effect of | -- | -- | (3,433) | -- |
Net income | $14,283 | $13,997 | $25,767 | $27,540 |
Weighted average shares outstanding | 20,094 | 20,457 | 20,105 | 20,221 |
Dilutive effect of stock options | 241 | 516 | 174 | 547 |
Weighted average shares outstanding, adjusted | 20,335 | 20,973 | 20,279 | 20,768 |
Diluted earnings per share before | $ 0.70 | $ 0.67 | $ 1.44 | $ 1.33 |
Cumulative effect of accounting change | -- | -- | (0.17) | -- |
Diluted earnings per share | $ 0.70 | $ 0.67 | $ 1.27 | $ 1.33 |
Note 6 -- Comprehensive Income (Loss)
The following are the components of comprehensive income:
Three Months Ended | Six Months Ended | |||
(thousands of dollars) | June 29, | June 30, | June 29, | June 30, |
Net income | $ 14,283 | $ 13,997 | $ 25,767 | $ 27,540 |
Other comprehensive income, net of tax: | ||||
Foreign currency translation adjustments | 15,005 | 18,454 | 19,518 | 14,911 |
Cash flow hedges: | ||||
Net derivative losses | -- | (250) | -- | (222) |
Reclassification adjustment | -- | (189) | -- | (223) |
Comprehensive income | $ 29,288 | $ 32,012 | $ 45,285 | $ 42,006 |
The components of accumulated other comprehensive loss, net of related tax, are as follows:
(millions of dollars) | June 29, | December 31, | |
Foreign currency translation adjustments | $(13.3) | $(32.8) | |
Minimum pension liability adjustment | (1.3) | (1.3) | |
Net loss on cash flow hedges | (0.9) | (0.9) | |
Accumulated other comprehensive loss | $(15.5) | $(35.0) |
9
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 -- Segment and Related Information
Segment information for the three months and six months ended June 29, 2003 and June 30, 2002 was as follows:
Net Sales | |||||
(thousands of dollars) | Three Months Ended | Six Months Ended | |||
June 29, | June 30, | June 29, | June 30, | ||
Specialty Minerals | $137,357 | $127,700 | $275,132 | $252,015 | |
Refractories | 65,017 | 59,128 | 128,692 | 113,813 | |
Total | $202,374 | $186,828 | $403,824 | $365,828 | |
Income from Operations | |||||
(thousands of dollars) | Three Months Ended | Six Months Ended | |||
June 29, | June 30, | June 29, | June 30, | ||
Specialty Minerals | $ 15,584 | $ 15,614 | $ 31,128 | $ 30,833 | |
Refractories | 6,015 | 5,370 | 13,016 | 11,587 | |
Total | $ 21,599 | $ 20,984 | $ 44,144 | $ 42,420 | |
Included in income from operations of the Specialty Minerals segment for the first quarter of 2003 was a charge for one-time termination benefits of $660,000. Included in income from operations of the Specialty Minerals segment for the first quarter of 2002 was a write-down of impaired assets of $750,000.
The carrying amount of goodwill by reportable segment as of June 29, 2003 and December 31, 2002 was as follows:
Goodwill | ||
(thousands of dollars) | June 29, | December 31, |
Specialty Minerals | $14,967 | $14,637 |
Refractories | 36,754 | 36,654 |
Total | $51,721 | $51,291 |
A reconciliation of the totals reported for the operating segments to the applicable line items in the condensed consolidated financial statements is as follows:
| (thousands of dollars) | Three Months Ended | Six Months Ended | |||
Income before provision for taxes on | June 29, | June 30, | June 29, | June 30, | |
Income from operations | $ 21,599 | $ 20,984 | $ 44,144 | $ 42,420 | |
Non-operating deductions, net | 1,441 | 1,021 | 2,468 | 2,959 | |
Income before provision for taxes | $ 20,158 | $ 19,963 | $ 41,676 | $ 39,461 | |
10
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 -- Goodwill and Other Intangible Assets
The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are no longer amortized, but instead are tested for impairment at least annually in accordance with the provisions of SFAS No. 142.
The carrying amount of goodwill was $51.7 million and $51.3 million as of June 29, 2003 and December 31, 2002, respectively. The net change in goodwill since January 1, 2003 was primarily attributable to the effects of foreign exchange rates.
Acquired intangible assets subject to amortization as of June 29, 2003 and December 31, 2002 were as follows:
June 29, 2003 | December 31, 2002 | ||||
(millions of dollars) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |
Patents and trademarks | $ 5.8 | $ 0.7 | $ 5.8 | $ 0.7 | |
Customer lists | 1.4 | 0.2 | 1.4 | 0.1 | |
Other | 0.2 | -- | 0.2 | -- | |
$ 7.4 | $ 0.9 | $ 7.4 | $ 0.8 | ||
The weighted average amortization period for acquired intangible assets subject to amortization is approximately 16 years. Estimated amortization expense is $0.4 million for each of the next five years through 2008.
Included in other assets and deferred charges is an intangible asset of approximately $13.5 million which represents the non-current unamortized amount paid to a customer in connection with contract extensions at eight PCC satellite facilities. In addition, a current portion of $1.8 million is included in prepaid expenses and other current assets. Such amounts will be amortized as a reduction of sales over the remaining lives of the customer contracts. Approximately $0.5 million was amortized in the second quarter of 2003. Estimated amortization as a reduction of sales is as follows: second half 2003 - $0.9 million; 2004 - $1.8 million; 2005 - $1.8 million; 2006 - $1.8 million; 2007 - $1.8 million; 2008 - $1.8 million; with smaller reductions thereafter over the remaining lives of the contracts.
Note 9 -- Accounting for Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a uniform accounting model for disposition of long-lived assets. This Statement also requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the first quarter of 2002, the Company recorded a write-down of impaired assets of $750,000 for a precipitated calcium carbonate plant at a paper mill that had ceased operations. Such charge was included in cost of goods sold. There was no charge for impairment during the first half of 2003.
Note 10 -- Accounting for Asset Retirement Obligations
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes the financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair
11
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.
Upon adoption, the Company recorded a non-cash, after-tax charge to earnings of approximately $3.4 million for the cumulative effect of this accounting change related to retirement obligations associated with the Company's PCC satellite facilities and its mining properties, both within the Specialty Minerals segment. As a result of this pronouncement, the Company recorded additional depreciation and accretion expenses of approximately $0.2 million in the second quarter of 2003 and $0.4 million in the first half of 2003. Such charge is included in cost of goods sold. The pro forma effect on results, assuming that SFAS No. 143 were applied retroactively, would be a non-cash, after-tax charge to earnings of approximately $0.1 million in the second quarter of 2002 and $0.2 million for the first half of 2002.
The following is a reconciliation of asset retirement obligations as of June 29, 2003:
(thousands of dollars) | |
Asset retirement liability, beginning of period | $8,953 |
Accretion expense | 232 |
Asset retirement liability, end of period | $9,185 |
Note 11 -- Accounting for Costs Associated with Exit or Disposal Activities
Effective January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities. During the first quarter of 2003, the Company paid approximately $660,000 of one-time termination benefits to a group of employees at the Specialty Minerals facility in the United Kingdom. Such charge is included in cost of goods sold.
12
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
Minerals Technologies Inc.:
We have reviewed the condensed consolidated balance sheet of Minerals Technologies Inc. and subsidiary companies as of June 29, 2003 and the related condensed consolidated statements of income and cash flows for the three-month and six-month periods ended June 29, 2003 and June 30, 2002. These financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 10 to the condensed consolidated financial statements, effective January 1, 2003, the Company adopted the provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations."
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Minerals Technologies Inc. and subsidiary companies as of December 31, 2002, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 23, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
KPMG LLP
New York, New York
July 24, 2003
13
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Income and Expense Items | |||||
Three Months Ended | Six Months Ended | ||||
June 29, | June 30, | June 29, | June 30, | ||
Net sales | 100.0% | 100.0% | 100.0% | 100.0% | |
Cost of goods sold | 75.3 | 75.3 | 75.3 | 74.9 | |
Marketing and administrative expenses | 10.8 | 10.4 | 10.7 | 10.3 | |
Research and development expenses | 3.2 | 3.1 | 3.1 | 3.2 | |
Income from operations | 10.7 | 11.2 | 10.9 | 11.6 | |
Income before cumulative effect | 7.1 | 7.5 | 7.2 | 7.5 | |
Cumulative effect of accounting change | -- | -- | 0.8 | -- | |
Net income | 7.1% | 7.5% | 6.4% | 7.5% | |
Results of Operations
Three Months Ended June 29, 2003 as Compared with Three Months Ended June 30, 2002
Net sales in the second quarter of 2003 increased 8.4% to $202.4 million from $186.8 million in the second quarter of 2002. Foreign exchange had a favorable impact on sales of approximately $9 million, or 5 percentage points of sales growth.
Net sales in the Specialty Minerals segment, which includes the Precipitated Calcium Carbonate ("PCC") and Processed Minerals product lines, increased 7.6% in the second quarter of 2003 to $137.4 million from $127.7 million in the prior year.
Worldwide net sales of PCC, which is used primarily in the manufacturing processes of the paper industry, increased 3.2% to $106.6 million from $103.3 million in the second quarter of 2002. Sales volume for PCC used for filling and coating paper increased 2%, despite weakness in the worldwide paper industry and the shutdown of a satellite PCC facility at Great Northern Paper Company in Millinocket, Maine, which was idled in December 2002 before Great Northern entered into bankruptcy. The Great Northern paper mills have since been sold, and Minerals Technologies Inc. expects the satellite PCC facility to resume operations in 2004.
Net sales of the Specialty PCC product line, used in non-paper applications, declined 2% from the prior year. This decline was attributable primarily to continued weak industry conditions and a more competitive environment for calcium fortification products.
Net sales of Processed Minerals products increased 26.2% in the second quarter to $30.8 million from $24.4 million in the same period the prior year. Excluding the September 2002 acquisition of Polar Minerals Inc., sales growth was 4% as high demand continued for residential construction and related industries.
Net sales in the Refractories segment increased 10.0% to $65.0 million as compared with $59.1 million in the prior year. Foreign exchange had a favorable impact on sales of approximately $4.3 million or 7 percentage points of growth. The remaining growth was due primarily to higher refractory and metallurgical wire sales in North America and increased equipment installations in the second quarter.
Net sales in the United States in the second quarter of 2003 increased approximately 4% as compared with the second quarter of 2002. This increase was primarily due to the Polar Minerals acquisition in September 2002. Foreign sales increased approximately 15% in the second quarter of 2003 primarily due to increased sales in Europe and to the favorable impact of foreign exchange.
On May 28, 2003, the Company reached a two-part agreement with International Paper Company ("IP") that extended eight satellite precipitated calcium carbonate plant supply contracts and gave the Company an exclusive
14
license to patents held by IP relating to the use of novel fillers, such as PCC-fiber composites. The Company made a one-time $16 million payment to IP in exchange for the contract extensions and technology license. Approximately $15.8 million of this payment was attributed to the revisions to the contracts, including extensions of their lives, and will be amortized as a reduction of sales over the remaining lives of the extended contracts. The result was a reduction of sales of approximately $0.5 million in the second quarter, an anticipated overall reduction of approximately $1.8 million per year over the next five years, and smaller reductions thereafter over the remaining lives of the contracts. Approximately $0.2 million was attributed to the technology license, and is included in research and development expense for the second quarter. In addition, prices were adjusted at certain of the IP facilities covered by the contract extensions. The overall impact of the revisions to the IP contracts in the second quarter was to reduce earnings by approximately $0.04 per share.
The Company's production margin increased approximately 8%, the same rate as sales. The Specialty Minerals segment's gross margin increased 4% as overall growth was impacted by the shutdown of the Millinocket satellite PCC plant, continuing development costs at the Hermalle, Belgium facility and the effect of the revisions to the IP contracts. The gross margin of the Refractories segment grew 18% reflecting the benefit of an improved product mix and equipment sales.
Marketing and administrative expenses increased 13% from the prior year. The Refractories segment increased marketing expenses to support worldwide business development efforts. In addition, the Company incurred higher information technology costs associated with the implementation of a new global enterprise resource planning system, higher employee benefit costs, particularly pension and medical expenses, and increased its bad debt provision.
Income from operations increased 2.9% to $21.6 million, as compared to $21.0 million for the same period last year and was 10.7% of sales. Operating income in the Specialty Minerals segment remained at $15.6 as compared to the prior year, and was 11.3% of its sales. The Refractories segment's operating income increased 11.1% to $6.0 million from $5.4 million in the prior year and was 9.3% of its sales.
Non-operating deductions increased in the second quarter due to higher net interest costs and foreign exchange losses.
Net income increased 2.1% to $14.3 million from $14.0 million in the prior year. Diluted earnings per share were $0.70 in the second quarter of 2003 as compared with $0.67 in the prior year.
Six Months Ended June 29, 2003 as Compared with Six Months Ended June 30, 2002
Net sales in the first half of 2003 increased 10.4% to $403.8 million from $365.8 million in 2002. The favorable impact of foreign exchange on sales for the first half of 2003 represented approximately 4 percentage points of growth.
Net sales in the Specialty Minerals segment increased 9.2% in the first half of 2003 to $275.1 million from $252.0 million in the same period in 2002. Worldwide net sales in the PCC product line grew 4.7% to $215.8 million for the first six months of 2003. Volume growth was approximately 2% despite the shutdown of the Millinocket, Maine satellite PCC facility. Foreign exchange had a favorable impact on sales growth, which was partially offset by the impact of the revisions to the IP contracts. Net sales in the Processed Minerals product line increased 29.5% to $59.3 million in the first half of 2003 from $45.8 million in the prior year. Excluding the Polar Minerals acquisition, sales growth was approximately 5% due to strong residential construction.
Net sales in the Refractories segment increased 13.1% to $128.7 million as compared with $113.8 million in the prior year. Foreign exchange had a favorable impact on sales growth of approximately 7 percentage points. The remaining growth was due to increased volume and higher equipment installations.
Net sales in the United States in the first half of 2003 increased approximately 6% as compared with the first half of 2002. This increase was primarily due to the Polar Minerals acquisition in September 2002. Foreign sales increased approximately 18% in the first half of 2003 primarily due to increased sales in Europe and to the favorable impact of foreign exchange.
15
Income from operations increased 4.0% to $44.1 million from $42.4 million in the first half of 2003 and was 10.9% of net sales. Income from operations in the Specialty Minerals segment increased 1.0% to $31.1 million and was 11.3% of its net sales. Income from operations in the Refractories segment increased 12.1% to $13.0 million and was 10.1% of its net sales.
Non-operating deductions decreased due to lower net interest expense and foreign currency gains.
The Company's effective tax rate was approximately 27.9%, compared with 28.5% in the prior year. The change in the effective tax rate reflects differences in the expected geographic mix of profit by country for the year.
Net income before the cumulative effect of accounting change increased 6.2% to $29.2 million from $27.5 million in 2002. Diluted earnings per common share before the cumulative effect of the accounting change increased 8.3% to $1.44 compared with $1.33 for the first six months of 2002.
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes the financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.
Upon adoption, the Company recorded a non-cash, after-tax charge to earnings of approximately $3.4 million for the cumulative effect of this accounting change related to retirement obligations associated with the Company's PCC satellite facilities and its mining properties, both within the Specialty Minerals segment. As a result of this pronouncement, the Company recorded additional depreciation and accretion expenses of approximately $0.2 million in the second quarter of 2003 and $0.4 million in the first half of 2003. Such charge is included in cost of goods sold. The pro forma effect on results, assuming that SFAS No. 143 were applied retroactively, would be a non-cash, after-tax charge to earnings of approximately $0.1 million in the second quarter of 2002 and $0.2 million for the first half of 2002.
Net income after the cumulative effect of accounting change decreased 6.2% to $25.8 million compared with $27.5 million in the prior year. Diluted earnings per share after the cumulative effect of accounting change was $1.27 per share in the first half of 2003 as compared with $1.33 in the prior year.
The Company's sales of PCC are predominantly pursuant to long-term contracts, initially ten years in length, with paper companies at whose mills the Company operates satellite PCC plants. The terms of many of these agreements have been extended, often in connection with an expansion of the satellite PCC plant. Failure of a number of the Company's customers to renew existing agreements on terms as favorable to the Company as those currently in effect could cause the future growth rate of the Company to differ materially from its historical growth rate, and could also result in impairment of the assets associated with the PCC plant.
There are presently two satellite locations at which contracts with host mills have expired and one location, representing less than one unit of PCC production, at which the host mill has informed the Company that the contract will not be renewed upon its expiration in 2004. The Company continues to supply PCC at all of these locations. At the two locations at which the contracts have expired, the Company hopes to reach agreement on a long-term extension of the contract; however, there can be no assurance that these negotiations will be successful.
In addition, a complex of two paper mills at which the Company has operated a satellite PCC plant, at Millinocket and East Millinocket, Maine, owned by Great Northern Paper, Inc., ceased operations on or about December 23, 2002. Great Northern Paper filed for bankruptcy protection on January 9, 2003, and on April 29, 2003, the Millinocket and East Millinocket mills were sold to Brascan Corporation ("Brascan"), the parent company of Nexfor Fraser Papers Inc. The East Millinocket mill has resumed operations, and the Company is supplying it from other nearby PCC production facilities. Brascan has announced that it may not start the Millinocket mill, at which the Company's satellite plant is located, for a year or more. If the Millinocket mill does not resume production, the Company could incur an impairment charge of approximately $10 million.
16
Liquidity and Capital Resources
Cash flows in the first half of 2003 were provided from operations and were applied principally to fund capital expenditures and purchases of common shares for treasury. Cash provided from operating activities amounted to $42.6 million in the first half of 2003 as compared with $54.7 million in the first half of the prior year. The reduction in cash from operations was primarily due to the payment to IP of $16 million in exchange for customer contract extensions and a technology license.
On May 31, 2003, the Company acquired land and limestone ore reserves from the Cushenberry Mine Trust for approximately $17.5 million. Approximately $6.1 million was paid at the closing and $11.4 million was financed through an installment obligation. The average interest rate on this obligation is approximately 4.25%. The principal payments are as follows: 2004 - $0.8 million; 2005 - $0.9 million; 2006 - $0.9 million; 2007 - $0.9 million; 2008 - $6.5 million; 2013 - $1.4 million.
The Company has available approximately $115 million in uncommitted, short-term bank credit lines, of which $30 million was in use at June 29, 2003. The Company anticipates that capital expenditures for all of 2003 will approximate $60 million. The Company expects to meet its financing requirements from internally generated funds, uncommitted bank credit lines and, where appropriate, project financing of certain satellite plants.
Prospective Information and Factors That May Affect Future Results
The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand the companies' future prospects and make informed investment decisions. This report may contain forward-looking statements that set out anticipated results based on management's plans and assumptions. Words such as "expects," "plans," "anticipates," "will," and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify these forward-looking statements.
The Company cannot guarantee that the outcomes suggested in any forward-looking statement will be realized, although it believes it has been prudent in its plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and should refer to the discussion of certain risks, uncertainties and assumptions under the heading "Cautionary Factors That May Affect Future Results" in Exhibit 99 to this Quarterly Report.
Recently Issued Accounting Standards
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. The FASB recently indicated that they will require stock-based employee compensation to be recorded as a charge to earnings beginning in 2004. The Company will continue to monitor their progress on the issuance of this standard as well as evaluating its position with respect to current guidance.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Company had no such instruments as of June 29, 2003.
17
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an on going basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, valuation of inventories, valuation of long-lived assets, goodwill and other intangible assets, pension plan assumptions, income taxes, depreciation, income tax valuation allowances and litigation and environmental liabilities. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that can not readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates.
Property, Plant and Equipment
Property, plant and equipment are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets can generate revenue, which does not necessarily coincide with the remaining term of a customer's contractual obligation to purchase products made using those assets. The Company's sales of PCC are predominantly pursuant to long-term contracts, initially ten years in length, with paper mills at which the Company operates satellite PCC plants. The terms of many of these agreements have been extended, often in connection with an expansion of the satellite PCC plant. The Company also continues to supply PCC to two locations at which the PCC contracts have expired. Failure of a PCC customer to renew an agreement or continue to purchase PCC from the Company facility could result in an impairment of assets charge at such facility.
In the third quarter of 2002, the Company reduced the useful lives of satellite PCC plants at International Paper Company's ("IP") mills due to an increased risk that some or all of these PCC contracts would not be renewed. As a result of this change, the Company also reviewed the useful lives of the assets at its remaining satellite PCC facilities and other plants. During the first quarter of 2003, the Company revised the estimated useful lives of machinery and equipment pertaining to its natural stone mining and processing plants and chemical processing plants from 12.5 years (8%) to 15 years (6.67%) and reduced the useful lives of buildings at certain satellite PCC facilities from 25 years (4%) to 15 years (6.67%). The Company also reduced the estimated useful lives of certain software-related assets due to implementation of a new global enterprise resource planning system. During the second quarter of 2003, the Company reached an agreement with IP that extended eight PCC supply contracts and therefore extended the useful lives of the satellite PCC plants at those IP mills. The net effect of the changes in estimated useful lives was an increase to diluted earnings per share of $0.01 in the second quarter of 2003 and there was a minimal effect for the first half of 2003.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the Company's financial position, results of operations or cash flows due to adverse changes in market prices and foreign currency exchange rates and interest rates. The Company is exposed to market risk because of changes in foreign currency exchange rates as measured against the U.S. dollar. It does not anticipate that near-term changes in exchange rates will have a material impact on its future earnings or cash flows. However, there can be no assurance that a sudden and significant decline in the value of foreign currencies would not have a material adverse effect on the Company's financial condition and results of operations. Approximately 25% of the Company's bank debt bears interest at variable rates; therefore the Company's results of operations would be affected by changes in the interest rate applicable to the variable-rate bank debt outstanding. An immediate 10 percent change in interest rates would not have a material effect on the Company's results of operations over the next fiscal year.
The Company is exposed to various market risks, including the potential loss arising from adverse changes in foreign currency exchange rates and interest rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. When appropriate, the Company enters into derivative financial
18
instruments, such as forward exchange contracts and interest rate swaps, to mitigate the impact of foreign exchange rate movements and interest rate movements on the Company's operating results. The counterparties are major financial institutions. Such forward exchange contracts and interest rate swaps would not subject the Company to additional risk from exchange rate or interest rate movements because gains and losses on these contracts would offset losses and gains on the assets, liabilities and transactions being hedged. The Company had no open forward exchange contracts as of June 29, 2003. The Company entered into three-year interest rate swap agreements with a notional amount of $30 million that expire in January 2005. These agreements effectively convert a portion of the Company's floating-rate debt to a fixed rate basis. The fair value of these instruments was a liability of $1.5 million at June 29, 2003.
ITEM 4. Controls and Procedures
Within the 90 days prior to the date of this report, and under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures, pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.
Subsequent to the date the Company carried out its evaluation, there have been no significant changes in the Company's internal controls or in other factors which could significantly affect these controls.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On April 9, 2003, the Connecticut Department of Environmental Protection ("DEP") issued an administrative consent order which had been agreed to by MTI, Specialty Minerals Inc. and Minteq International Inc. relating to the Canaan, Connecticut site at which both Minteq and Specialty Minerals have operations. The order settled claims relating to an accidental discharge of machine oil alleged to have contained polychlorinated biphenyls at or above regulated levels, as well as alleged violations of requirements pertaining to stormwater and waste water discharge and to management of underground storage tanks. The order required payment of a civil penalty in the amount of $11,000 and funding of several supplemental environmental projects totaling $330,000. These amounts were paid on April 21, 2003. Cost of remediation at the site remains uncertain.
The Company and its subsidiaries are not party to any other pending legal proceedings, other than routine litigation incidental to their businesses.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
15 Accountants' Acknowledgement.
31 Rule 13a-14(a)/15d-14(a) Certifications.
32 Section 1350 Certifications.
99 Statement of Cautionary Factors That May Affect Future Results.
b) On April 25, 2003, the Company filed a current report on Form 8-K under Item 9,
reporting earnings for the first quarter of 2003.
On May 29, 2003, the Company filed a current report on Form 8-K under Item 5, reporting an agreement for the extension of PCC supply contracts with International Paper.
19
SIGNATURE
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.
Minerals Technologies Inc. | |
By: |
/s/John A. Sorel |
| John A. Sorel Senior Vice President-Finance and Chief Financial Officer; Treasurer (principal financial officer) |
August 7, 2003
20