liabilities, and transactions being hedged. We had open forward exchange contracts to purchase approximately $4.7 million and $4.2 million of foreign currencies as of December 31, 2006 and 2005, respectively. These contracts mature between February and July of 2007. The fair value of these instruments at December 31, 2006 and December 31, 2005 was a liability of $0.1 million and $0.2 million, respectively.
The financial information required by Item 8 is contained in Item 15 of Part IV of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
The Company's management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a -15. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission ("SEC"). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures (as defined in Rules 13(a)-15(b) under the Securities Exchange Act of 1934) were effective in ensuring that material information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported on a timely basis.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report of management's assessment of the design and operating effectiveness of our internal controls as part of this report. Our independent registered public accounting firm also attested to, and reported on, management's assessment of the effectiveness of internal control over financial reporting. Management's report and the independent registered public accounting firm's attestation report are included in our consolidated financial statements beginning on page F-1 of this report under the captions entitled "Management's Report on Internal Control Over Financial Reporting," and "Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting."
On October 2, 2006, the Company completed an acquisition of a refractory company in Turkey and has excluded this company from our assessment of the effectiveness of our internal control over financial reporting. During 2006, this company contributed less than 1% of consolidated net revenues and, as of December 31, 2006, accounted for approximately 2.5% of our total assets, excluding goodwill.
The Company is in the process of implementing a global enterprise resource planning ("ERP") system to manage our business operations. As of December 31, 2006, all of our domestic locations were using the new systems. The worldwide implementation is expected to be completed over the next few years and involves changes in systems that include internal controls. Although the transition has proceeded to date without material adverse effects, the possibility exists that the migration to the new ERP system could adversely affect the Company's disclosure controls and procedures or our results of operations in future periods. We are reviewing each system as it is being implemented and the controls affected by the implementation of the new systems, and are making appropriate changes to affected internal controls as we implement the new systems. We believe that the controls as modified are appropriate and functioning effectively.
There was no change in the Company's internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Set forth below are the names and ages of all Executive Officers of the Registrant indicating all positions and offices with the Registrant held by each such person, and each such person's principal occupations or employment during the past five years.
| Name | Age | | Position |
| | | | |
| Paul R. Saueracker(*) | 64 | | Chairman of the Board; President |
| | | | and Chief Executive Officer |
| Alain F. Bouruet-Aubertot | 50 | | Senior Vice President and Managing Director, Minteq International |
| Kenneth L. Massimine | 57 | | Senior Vice President and Managing Director, Paper PCC |
| John A. Sorel | 59 | | Senior Vice President - Finance, and Chief Financial Officer |
| Gordon S. Borteck | 49 | | Vice President, Organization and Human Resources |
| Kirk G. Forrest | 55 | | Vice President, General Counsel and Secretary |
| D. Randy Harrison | 55 | | Vice President and Managing Director, Performance Minerals |
| Michael A. Cipolla | 49 | | Vice President - Corporate Controller and Chief Accounting Officer |
| William A. Kromberg | 61 | | Vice President, Taxes |
| Gregory P. Kelm | 53 | | Treasurer |
Paul R. Saueracker was elected Chairman of the Board on October 18, 2001. Prior to that he became President and Chief Executive Officer effective August 2000 and December 31, 2000, respectively. Mr. Saueracker served as Senior Vice President from 1999 to 2000, and Vice President of the Company from 1994 to 1999. He had served as President and CEO of Specialty Minerals Inc. since 1994. Mr. Saueracker is a former President of the Pulverized Minerals Division of the National Stone, Sand and Gravel Association and a member of the Board of Directors of the National Association of Manufacturers.
(*) As previously announced by the Company on November 14, 2007, Mr. Saueracker will retire from the Company effective March 1, 2007. Mr. Joseph C. Muscari, age 60, has been named to succeed Mr. Saueracker effective March 1, 2007 as Chairman of the Board, President and Chief Executive Officer.
Alain F. Bouruet-Aubertot was elected Senior Vice President and Managing Director, Minteq International in November 2002. From 1996 to June 2002 he had been President, Gypsum Division and Corporate Senior Vice President of Lafarge North America, a supplier of cement, ready-mixed concrete, construction aggregate and gypsum products.
Kenneth L. Massimine was elected Senior Vice President and Managing Director, Paper PCC, effective January 1, 2002. Prior to that he held positions of increasing authority with the Company, most recently Vice President and Managing Director, Processed Minerals.
John A. Sorel was elected Senior Vice President, Finance and Chief Financial Officer in November 2002. Prior to that time he was elected Senior Vice President, Corporate Development and Finance on January 1, 2002 and prior to 2002 he held positions of increasing authority with the Company, most recently Vice President and Managing Director, Paper PCC.
Gordon S. Borteck was elected Vice President - Organization and Human Resources effective January 1, 2002. Prior to that he had been Vice President, Human Resources of Specialty Minerals Inc. since January 1997.
Kirk G. Forrest was elected Vice President - General Counsel and Secretary effective January 26, 2005. Prior to that, Mr. Forrest had been Vice President and General Counsel at SAM'S CLUB, and a Corporate Vice President of its parent company, Wal-Mart Stores, Inc. and Associate General Counsel at The Williams Companies, which he joined in 1998.
D. Randy Harrison was elected Vice President and Managing Director, Performance Minerals, which encompasses the Processed Minerals product line and the Specialty PCC product line, effective January 1, 2002. Prior to that he held positions of increasing authority with Specialty Minerals Inc., most recently Vice President and General Manager, Specialty PCC.
Michael A. Cipolla was elected Vice President - Controller and Chief Accounting Officer in July 2003. Prior to that he served as Corporate Controller and Chief Accounting Officer of the Company since 1998. From 1992 to 1998 he served as Assistant Corporate Controller.
William A. Kromberg has served as Vice President-Taxes of the Company since 1993.
27
Gregory P. Kelm was elected Treasurer effective January 21, 2004. Prior to that he had been Assistant Treasurer since March 2000. From 1994 to 2000 Mr. Kelm served as Director, Corporate Human Resources Programs.
The information concerning the Company's Board of Directors required by this item is incorporated herein by reference to the Company's Proxy Statement, under the caption "Committees of the Board of Directors."
The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this Item is incorporated herein by reference to the Company's Proxy Statement, under the caption "Section 16(a) Beneficial Ownership Reporting Compliance."
The Board has established a code of ethics for the Chief Executive Officer, the Chief Financial Officer, and the Chief Accounting Officer entitled "Code of Ethics for the Senior Financial Officers," which is available on our website, www.mineralstech.com, under the links entitled "Corporate Responsibility, Corporate Governance and Policies and Charters."
Item 11. Executive Compensation
The information appearing in the Company's Proxy Statement under the caption "Compensation of Executive Officers" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information appearing in the Company's Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters as of January 31, 2007" set forth is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information appearing in the Company's Proxy Statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference.
Under the terms of certain agreements entered into in connection with the Company's initial public offering in 1992, Pfizer Inc ("Pfizer") and its wholly-owned subsidiary Quigley Company, Inc. ("Quigley") agreed to indemnify the company against certain liabilities being retained by Pfizer and its subsidiaries including, but not limited to, pending lawsuits and claims, and any lawsuits or claims brought at any time in the future alleging damages or injury from the use, handling of or exposure to any product sold by Pfizer's specialty minerals business prior to the closing of the initial public offering.
Pfizer and Quigley also agreed to indemnify the Company against any liability arising from claims for remediation, as defined in the Agreement, of on-site environmental conditions relating to activities prior to the closing of the initial public offering. Further, Pfizer and Quigley agreed to indemnify the Company for 50% of the liabilities in excess of $1 million up to $10 million in liabilities that may have arisen or accrued within ten years after the closing of the initial public offering with respect to such remediation of on-site conditions. The Company is responsible for the first $1 million of such liabilities, 50% of all such liabilities in excess of $1 million up to $10 million, and all such liabilities in excess of $10 million. The Company had asserted to Pfizer and Quigley a number of indemnification claims pursuant to this agreement during the ten-year period following the closing of the initial public offering. On January 30, 2006, Pfizer and the Company agreed to settle those claims, along with certain other potential environmental liabilities of Pfizer, in consideration of a payment by Pfizer of $4.5 million. Such payment was recorded as additional paid-in capital, net of its related tax effect.
Item 14. Principal Accountant Fees and Services
The information appearing in the Company's Proxy Statement under the caption "Principal Accountant Fees and Services" is incorporated herein by reference.
28
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. | Financial Statements. The following Consolidated Financial Statements of Mineral Technologies Inc. and subsidiary companies and Reports of Independent Registered Public Accounting Firm are set forth on pages F-2 to F-35. |
| | | |
| | Consolidated Balance Sheets as of December 31, 2006 and 2005 |
| | Consolidated Statements of Income for the years ended December 31, 2006, 2005, and 2004 |
| | Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 |
| | Consolidated Statements of Shareholders' Equity for the years ended December 31, 2006, 2005 and 2004 |
| | Notes to the Consolidated Financial Statements |
| | Reports of Independent Registered Public Accounting Firm |
| | Management's Report on Internal Control Over Financial Reporting |
| |
2. | Financial Statement Schedule. The following financial statement schedule is filed as part of this report: |
| |
| | | | Page |
| | Schedule II - | Valuation and Qualifying Accounts | S-1 |
| | | | |
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted. |
| | | | |
3. | Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this report. |
| | | | |
| | 3.1 | - | Restated Certificate of Incorporation of the Company (1) |
| | 3.2 | - | By-Laws of the Company as amended and restated effective May 25, 2005 (5) |
| | 3.3 | - | Certificate of Designations authorizing issuance and establishing designations, preferences and rights of Series A Junior Preferred Stock of the Company (1) |
| | 4 | - | Rights Agreement, executed effective as of September 13, 1999 (the "Rights Agreement"), between Minerals Technologies Inc. and Chase Mellon Shareholders Services L.L.C., as Rights Agents, including as Exhibit B the forms of Rights Certificate and of Election to Exercise (6) |
| | 4.1 | - | Specimen Certificate of Common Stock (1) |
| | 10.1 | - | Asset Purchase Agreement, dated as of September 28, 1992, by and between Specialty Refractories Inc. and Quigley Company Inc. (2) |
| | 10.1(a) | - | Agreement dated October 22, 1992 between Specialty Refractories Inc. and Quigley Company Inc., amending Exhibit 10.1 (3) |
| | 10.1(b) | - | Letter Agreement dated October 29, 1992 between Specialty Refractories Inc. and Quigley Company Inc., amending Exhibit 10.1 (3) |
| | 10.2 | - | Reorganization Agreement, dated as of September 28, 1992, by and between the Company and Pfizer Inc (2) |
| | 10.3 | - | Asset Contribution Agreement, dated as of September 28, 1992, by and between Pfizer Inc and Specialty Minerals Inc. (2) |
| | 10.4 | - | Asset Contribution Agreement, dated as of September 28, 1992, by and between Pfizer Inc and Barretts Minerals Inc. (2) |
| | 10.4(a) | - | Agreement dated October 22, 1992 between Pfizer Inc, Barretts Minerals Inc. and Specialty Minerals Inc., amending Exhibits 10.3 and 10.4 (3) |
| | 10.5 | - | Form of Employment Agreement (*), together with schedule relating to executed Employment Agreements (6) (+) |
| | 10.6 | - | Form of Severance Agreement, together with schedule relating to executed Severance Agreements (7) (+) |
| | 10.7 | - | Company Employee Protection Plan, as amended August 27, 1999 (6) (+) |
| | 10.8 | - | Company Nonfunded Deferred Compensation and Unit Award Plan for Non-Employee Directors (*)(+) |
| | 10.9 | - | 2001 Stock Award and Incentive Plan of the Company, as amended and restated as of December 20, 2005 (7) (+) |
| | 10.10 | - | Company Retirement Plan, as amended and restated effective as of January 1, 2006 (*) (+) |
| | 10.11 | - | Company Nonfunded Supplemental Retirement Plan, as amended effective April 24, 2003 (8) (+) |
| | 10.12 | - | Company Savings and Investment Plan, as amended and restated as of January 1, 2005 (7) (+) |
| | 10.13 | - | Company Nonfunded Deferred Compensation and Supplemental Savings Plan, as amended effective April 24, 2003 (8) (+) |
| | 10.14 | - | Company Health and Welfare Plan, effective as of April 1, 2003 and amended and restated as of January 1, 2006 (*)(+) |
29
| | 10.15 | - | Grantor Trust Agreement, as amended and restated as of December 23, 2005, between the Company and The Bank of New York, as Trustee (7)(+) |
| | 10.16 | - | Note Purchase Agreement, dated as of October 5, 2006, among the Company, Metropolitan Life Insurance Company and MetLife Insurance Company of Connecticut with respect to the Company's issuance of $75,000,000 in aggregate principal amount of senior unsecured notes due October 5, 2013 (9) |
| | 10.17 | - | Indenture, dated July 22, 1963, between the Cork Harbour Commissioners and Roofchrome Limited (2) |
| | 10.18 | - | Agreement of Lease, dated as of May 24, 1993, between the Company and Cooke Properties Inc. (1) |
| | 10.19 | - | Employment Agreement, dated November 27, 2006, between the Company and Joseph C. Muscari (10) |
| | 21.1 | - | Subsidiaries of the Company (*) |
| | 23.1 | - | Consent of Independent Registered Public Accounting Firm (*) |
| | 31.1 | - | Rule 13a-14(a)/15d-14(a) Certification executed by the Company's principal executive officer (*) |
| | 31.2 | - | Rule 13a-14(a)/15d-14(a) Certification executed by the Company's principal financial officer (*) |
| | 32 | - | Section 1350 Certification (*) |
| | | |
| | (1) | Incorporated by reference to the exhibit so designated filed with the Company's Annual Report on Form 10-K for the year ended December 31, 2003. |
| | (2) | Incorporated by reference to the exhibit so designated filed with the Company's Registration Statement on Form S-1 (Registration No. 33-51292), originally filed on August 25, 1992. |
| | (3) | Incorporated by reference to the exhibit so designated filed with the Company's Registration Statement on Form S-1 (Registration No. 33-59510), originally filed on March 15, 1993. |
| | (4) | [RESERVED] |
| | (5) | Incorporated by reference to the exhibit so designated filed with the Company's current Report on Form 8-K filed on May 27, 2005. |
| | (6) | Incorporated by reference to the exhibit so designated filed with the Company's Annual Report on Form 10-K for the year ended December 31, 2004. |
| | (7) | Incorporated by reference to the exhibit so designated filed with the Company's Annual Report on Form 10-K for the year ended December 31, 2005. |
| | (8) | Incorporated by reference to the exhibit so designated filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 2003. |
| | (9) | Incorporated by reference to the exhibit 10.1 filed with the Company's Current Report on Form 8-K filed on October 11, 2006. |
| | (10) | Incorporated by reference to exhibit 10.1 filed with the Company's Current Report on Form 8-K/A filed on December 1, 2006. |
| | |
| | (*) | Filed herewith. |
| | (+) | Management contract or compensatory plan or arrangement required to be filed pursuant to Item 601 of Regulation S-K. |
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: | /s/Paul R. Saueracker |
| |
| | Paul R. Saueracker |
| | Chairman of the Board and |
| | Chief Executive Officer |
February 27, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated:
SIGNATURE | | TITLE | DATE |
| | | | |
| /s/ Paul R. Saueracker | | Chairman of the Board and Chief Executive Officer | February 27, 2007 |
|
| Paul R. Saueracker | | (principal executive officer) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| /s/ John A. Sorel | | Senior Vice President-Finance and | February 27, 2007 |
|
| John A. Sorel | | Chief Financial Officer (principal financial officer) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| /s/ Michael A. Cipolla | | Vice President - Controller and | February 27, 2007 |
|
| Michael A. Cipolla | | Chief Accounting Officer (principal accounting officer) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
31
SIGNATURE | | TITLE | DATE |
| | | | |
| /s/ Paula H.J. Cholmondeley | | Director | February 27, 2007 |
|
| Paula H. J. Cholmondeley | | | |
| | | | |
| | | | |
| | | | |
| /s/ Duane R. Dunham | | Director | February 27, 2007 |
|
| Duane R. Dunham | | | |
| | | | |
| | | | |
| | | | |
| /s/ Steven J. Golub | | Director | February 27, 2007 |
|
| Steven J. Golub | | | |
| | | | |
| | | | |
| /s/ Kristina M. Johnson | | Director | February 27, 2007 |
|
| Kristina M. Johnson | | | |
| | | | |
| | | | |
| | | | |
| /s/ Joseph C. Muscari | | Director | February 27, 2007 |
|
| Joseph C. Muscari | | | |
| | | | |
| | | | |
| | | | |
| /s/ Michael F. Pasquale | | Director | February 27, 2007 |
|
| Michael F. Pasquale | | | |
| | | | |
| | | | |
| | | | |
| /s/ John T Reid | | Director | February 27, 2007 |
|
| John T. Reid | | | |
| | | | |
| | | | |
| | | | |
| /s/ William C. Stivers | | | |
|
| William C. Stivers | | Director | February 27, 2007 |
| | | | |
| | | | |
| | | | |
| | | | |
32
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
_______________________________________
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Audited Financial Statements: | | | Page |
| | | | |
| | Consolidated Balance Sheets as of December 31, 2006 and 2005 | | F-2 |
| | | | |
| | Consolidated Statements of Income for the years ended December 31, 2006, 2005, and 2004 | | F-3 |
| | | | |
| | Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005, and 2004 | | F-4 |
| | | | |
| | Consolidated Statements of Shareholders' Equity for the years ended December 31, 2006, 2005 and 2004 | | F-5 |
| | | | |
| | Notes to Consolidated Financial Statements | | F-6 |
| | | | |
| | Reports of Independent Registered Public Accounting Firm | | F-33 |
| | | | |
| | Management's Report on Internal Control Over Financial Reporting | | F-35 |
F-1
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
| | | December 31, |
| | |
| | | 2006 | | 2005 |
| | | | |
| | Assets | | | | | | | |
| Current assets: | | | | | | | |
| | Cash and cash equivalents | $ | 67,929 | | | $ | 51,100 | |
| | Short-term investments, at cost which approximates market | | 8,380 | | | | 2,350 | |
| | Accounts receivable, less allowance for doubtful accounts: | | | | | | | |
| | 2006 - $4,550; 2005 - $5,818 | | 188,784 | | | | 184,272 | |
| | Inventories | | 129,894 | | | | 118,895 | |
| | Prepaid expenses and other current assets | | 16,775 | | | | 20,583 | |
| | | | | | | | |
| | Total current assets | | 411,762 | | | | 377,200 | |
| | | | | | | | | |
| | Property, plant and equipment, less accumulated depreciation and depletion | | 652,797 | | | | 628,745 | |
| | Goodwill | | 68,977 | | | | 53,612 | |
| | Prepaid pension costs (Note 17) | | 25,717 | | | | 67,795 | |
| | Other assets and deferred charges | | 33,871 | | | | 28,951 | |
| | | | | | | | |
| | Total assets | $ | 1,193,124 | | | $ | 1,156,303 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | Liabilities and Shareholders' Equity | | | | | | | |
| Current liabilities: | | | | | | | |
| | Short-term debt | $ | 87,644 | | | $ | 62,847 | |
| | Current maturities of long-term debt | | 2,063 | | | | 53,698 | |
| | Accounts payable | | 60,963 | | | | 61,323 | |
| | Income taxes payable | | 9,425 | | | | 6,409 | |
| | Accrued compensation and related items | | 22,569 | | | | 14,956 | |
| | Other current liabilities | | 29,399 | | | | 32,019 | |
| | | | | | | | |
| | Total current liabilities | | 212,063 | | | | 231,252 | |
| | | | | | | | | |
| Long-term debt | | 113,351 | | | | 40,306 | |
| Accrued pension and postretirement benefits (Note 17) | | 55,419 | | | | 23,214 | |
| Deferred taxes on income | | 18,605 | | | | 49,374 | |
| Other non-current liabilities | | 41,129 | | | | 40,995 | |
| | | | | | | | |
| | Total liabilities | | 440,567 | | | | 385,141 | |
| | | | | | | | |
| | | | | | | | | |
| Commitments and contingent liabilities (Note 19) | | | | | | | |
| | | | | | | | | |
| Shareholders' equity: | | | | | | | |
| | Preferred stock, without par value; 1,000,000 shares authorized; none issued | | -- | | | | -- | |
| | Common stock at par, $0.10 par value; 100,000,000 shares authorized; | | | | | | | |
| | issued 28,102,001 shares in 2006 and 28,001,874 shares in 2005 | | 2,810 | | | | 2,800 | |
| | Additional paid-in capital | | 269,101 | | | | 261,159 | |
| | Deferred compensation | | -- | | | | (3,263 | ) |
| | Retained earnings | | 867,512 | | | | 828,591 | |
| | Accumulated other comprehensive income (loss) | | (21,248 | ) | | | (5,879 | ) |
| | Less common stock held in treasury, at cost; 9,016,473 | | | | | | | |
| | shares in 2006 and 8,015,073 shares in 2005 | | (365,618 | ) | | | (312,246 | ) |
| | | | | | | | |
| | Total shareholders' equity | | 752,557 | | | | 771,162 | |
| | | | | | | | |
| | | | | | | | | |
| | Total liabilities and shareholders' equity | $ | 1,193,124 | | | $ | 1,156,303 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
See Notes to Consolidated Financial Statements, which are an integral part of these statements.
F-2
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(thousands of dollars, except per share data)
| | Year Ended December 31, |
| | | | | | | | | | | |
| | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| Net sales | $ | 1,059,307 | | | $ | 990,751 | | | $ | 918,952 | |
| Operating costs and expenses: | | | | | | | | | | | |
| | Cost of goods sold | | 838,015 | | | | 780,553 | | | | 706,298 | |
| | Marketing and administrative expenses | | 106,016 | | | | 100,363 | | | | 92,811 | |
| | Research and development expenses | | 30,016 | | | | 29,062 | | | | 28,996 | |
| | Bad debt expenses (recoveries) | | 377 | | | | (518 | ) | | | 1,576 | |
| | Restructuring charges | | -- | | | | -- | | | | 1,145 | |
| | Acquisition termination costs | | -- | | | | -- | | | | 997 | |
| | Write-down of impaired assets | | -- | | | | 265 | | | | -- | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| Income from operations | | 84,883 | | | | 81,026 | | | | 87,129 | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| | Interest income | | 1,762 | | | | 1,384 | | | | 1,589 | |
| | Interest expense | | (7,753 | ) | | | (5,847 | ) | | | (4,130 | ) |
| | Foreign exchange gains (losses) | | (268 | ) | | | (450 | ) | | | (564 | ) |
| | Other income (deductions) | | 955 | | | | 1,279 | | | | (1,399 | ) |
| | | | | | | | | | | |
| Non-operating deductions, net | | (5,304 | ) | | | (3,634 | ) | | | (4,504 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| Income before provision for | | | | | | | | | | | |
| | taxes on income, minority interests and discontinued operations | | 79,579 | | | | 77,392 | | | | 82,625 | |
| Provision for taxes on income | | 24,588 | | | | 22,985 | | | | 23,637 | |
| Minority interests | | 3,441 | | | | 1,732 | | | | 1,710 | |
| | | | | | | | | | | |
| Income from continuing operations | | 51,550 | | | | 52,675 | | | | 57,278 | |
| Income (loss) from discontinued operations, net of tax | | (1,599 | ) | | | 589 | | | | 1,285 | |
| | | | | | | | | | | |
| Net income | $ | 49,951 | | | $ | 53,264 | | | $ | 58,563 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | |
| Basic: | | | | | | | | | | | |
| | Income from continuing operations | $ | 2.63 | | | $ | 2.59 | | | $ | 2.79 | |
| | Income (loss) from discontinued operations | | (0.08 | ) | | | 0.03 | | | | 0.06 | |
| | | | | | | | | | | | |
| | Basic earnings per share | $ | 2.55 | | | $ | 2.62 | | | $ | 2.85 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | |
| | Income from continuing operations | $ | 2.61 | | | $ | 2.56 | | | $ | 2.76 | |
| | Income (loss) from discontinued operations | | (0.08 | ) | | | 0.03 | | | | 0.06 | |
| | | | | | | | | | | | |
| | Diluted earnings per share | $ | 2.53 | | | $ | 2.59 | | | $ | 2.82 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
See Notes to Consolidated Financial Statements, which are an integral part of these statements.
F-3
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
| | | Year Ended December 31, |
| | |
| | | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | | |
| Operating Activities | | | | | | | | | | | |
| Net income | $ | 49,951 | | | $ | 53,264 | | | $ | 58,563 | |
| Income (loss) from discontinued operations | | (1,599 | ) | | | 589 | | | | 1,285 | |
| | | | | | | | | | | |
| Income from continuing operations | | 51,550 | | | | 52,675 | | | | 57,278 | |
| | | | | | | | | | | |
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | | | | | | | | | | | |
| | Depreciation, depletion and amortization | | 83,204 | | | | 73,253 | | | | 70,083 | |
| | Write-down of impaired assets | | -- | | | | 265 | | | | -- | |
| | Loss on disposal of property, plant and equipment | | 918 | | | | 1,220 | | | | 1,281 | |
| | Deferred income taxes | | 4,345 | | | | 6,392 | | | | (7,965 | ) |
| | Provisions for bad debts | | 377 | | | | (518 | ) | | | 3,876 | |
| | Other | | 3,475 | | | | 2,124 | | | | 1,495 | |
| | | | | | | | | | | | |
| Changes in operating assets and liabilities, net of effects of acquisitions: | | | | | | | | | | | |
| | Accounts receivable | | 5,916 | | | | (34,646 | ) | | | (3,175 | ) |
| | Inventories | | (6,679 | ) | | | (16,839 | ) | | | (17,495 | ) |
| | Prepaid expenses and other current assets | | 2,951 | | | | 280 | | | | (2,077 | ) |
| | Pension plan funding | | (22,348 | ) | | | (12,874 | ) | | | (17,579 | ) |
| | Accounts payable | | (5,059 | ) | | | 7,867 | | | | 11,211 | |
| | Income taxes payable | | 3,040 | | | | (6,080 | ) | | | 8,638 | |
| | Tax benefits related to stock incentive programs | | 590 | | | | 2,138 | | | | 7,220 | |
| | Other | | 12,900 | | | | 1,587 | | | | 15,461 | |
| | | | | | | | | | | |
| Net cash provided by continuing operations | | 135,180 | | | | 76,844 | | | | 128,252 | |
| Net cash provided by discontinued operations | | 419 | | | | 1,673 | | | | 971 | |
| | | | | | | | | | | |
| Net cash provided by operations | | 135,599 | | | | 78,517 | | | | 129,223 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Investing Activities | | | | | | | | | | | |
| Purchases of property, plant and equipment | | (85,159 | ) | | | (111,539 | ) | | | (106,423 | ) |
| Purchases of short-term investments | | (12,590 | ) | | | (2,350 | ) | | | (12,875 | ) |
| Proceeds from sales of short-term investments | | 6,440 | | | | 7,200 | | | | 5,675 | |
| Proceeds from disposal of property, plant and equipment | | 675 | | | | 311 | | | | 1,655 | |
| Proceeds from insurance settlement | | 2,398 | | | | -- | | | | -- | |
| Acquisition of businesses, net of cash acquired | | (32,416 | ) | | | (3,170 | ) | | | -- | |
| | | | | | | | | | | |
| Net cash used in investing activities | | (120,652 | ) | | | (109,548 | ) | | | (111,968 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Financing Activities | | | | | | | | | | | |
| Proceeds from issuance of long-term debt | | 75,000 | | | | -- | | | | -- | |
| Repayment of long-term debt | | (53,754 | ) | | | (3,825 | ) | | | (2,757 | ) |
| Net proceeds from issuance (repayment) of short-term debt | | 24,797 | | | | 32,847 | | | | (831 | ) |
| Purchase of common shares for treasury | | (53,372 | ) | | | (47,618 | ) | | | (16,225 | ) |
| Cash dividends paid | | (3,911 | ) | | | (4,070 | ) | | | (4,102 | ) |
| Proceeds from issuance of stock under option plan | | 3,741 | | | | 8,747 | | | | 14,173 | |
| Excess tax benefits related to stock incentive programs | | 152 | | | | -- | | | | -- | |
| Indemnification proceeds from former parent company | | 4,500 | | | | -- | | | | -- | |
| Debt issuance costs | | (190 | ) | | | -- | | | | -- | |
| | | | | | | | | | | |
| Net cash used in financing activities | | (3,037 | ) | | | (13,919 | ) | | | (9,742 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | 4,919 | | | | (9,717 | ) | | | 7,739 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | 16,829 | | | | (54,667 | ) | | | 15,252 | |
| Cash and cash equivalents at beginning of year | | 51,100 | | | | 105,767 | | | | 90,515 | |
| | | | | | | | | | | |
| Cash and cash equivalents at end of year | $ | 67,929 | | | $ | 51,100 | | | $ | 105,767 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Non-cash Investing and Financing Activities: | | | | | | | | | | | |
| Tax liability on indemnification proceeds from former parent company | $ | 1,782 | | | $ | -- | | | $ | -- | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Property, plant and equipment additions related to asset retirement obligations | $ | -- | | | $ | 839 | | | $ | -- | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements, which are an integral part of these statements.
F-4
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
| | Common Stock Par Value | | Additional
Paid-in Capital | | Deferred
Compensation | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury
Stock Cost | | Total |
| | | | | | | | | | | | | |
| Balance as of January 1, 2004 | $ | 2,742 | | | $ | 225,512 | | | $ | (1,220 | ) | | $ | 724,936 | | | $ | 3,814 | | | $ | (248,403 | ) | | $ | 707,381 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | -- | | | | -- | | | | -- | | | | 58,563 | | | | -- | | | | -- | | | | 58,563 | |
| Currency translation adjustment | | -- | | | | -- | | | | -- | | | | -- | | | | 33,974 | | | | -- | | | | 33,974 | |
| Minimum pension liability adjustment | | -- | | | | -- | | | | -- | | | | -- | | | | (2,246 | ) | | | -- | | | | (2,246 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net derivative losses arising during the year | | -- | | | | -- | | | | -- | | | | -- | | | | 150 | | | | -- | | | | 150 | |
| Reclassification adjustment | | -- | | | | -- | | | | -- | | | | -- | | | | (68 | ) | | | -- | | | | (68 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | -- | | | | -- | | | | -- | | | | 58,563 | | | | 31,810 | | | | -- | | | | 90,373 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends declared | | -- | | | | -- | | | | -- | | | | (4,102 | ) | | | -- | | | | -- | | | | (4,102 | ) |
| Employee Benefit transactions | | 36 | | | | 14,137 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 14,173 | |
| Income tax benefit arising from employee stock option plans | | -- | | | | 7,220 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 7,220 | |
| Issuance of restricted stock | | -- | | | | 1,361 | | | | (1,361 | ) | | | -- | | | | -- | | | | -- | | | | -- | |
| Amortization of restricted stock | | -- | | | | -- | | | | 493 | | | | -- | | | | -- | | | | -- | | | | 493 | |
| Purchase of common stock for treasury | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | (16,225 | ) | | | (16,225 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2004 | | 2,778 | | | | 248,230 | | | | (2,088 | ) | | | 779,397 | | | | 35,624 | | | | (264,628 | ) | | | 799,313 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | -- | | | | -- | | | | -- | | | | 53,264 | | | | -- | | | | -- | | | | 53,264 | |
| Currency translation adjustment | | -- | | | | -- | | | | -- | | | | -- | | | | (43,648 | ) | | | -- | | | | (43,648 | ) |
| Minimum pension liability adjustment | | -- | | | | -- | | | | -- | | | | -- | | | | 1,901 | | | | -- | | | | 1,901 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flow hedge: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net derivative losses arising during the year | | -- | | | | -- | | | | -- | | | | -- | | | | (118 | ) | | | -- | | | | (118 | ) |
| Reclassification adjustment | | -- | | | | -- | | | | -- | | | | -- | | | | 362 | | | | -- | | | | 362 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | -- | | | | -- | | | | -- | | | | 53,264 | | | | (41,503 | ) | | | -- | | | | 11,761 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends declared | | -- | | | | -- | | | | -- | | | | (4,070 | ) | | | -- | | | | -- | | | | (4,070 | ) |
| Employee Benefit transactions | | 22 | | | | 8,725 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 8,747 | |
| Income tax benefit arising from employee stock option plans | | -- | | | | 2,138 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 2,138 | |
| Issuance of restricted stock | | -- | | | | 2,066 | | | | (2,066 | ) | | | -- | | | | -- | | | | -- | | | | -- | |
| Amortization of restricted stock | | -- | | | | -- | | | | 891 | | | | -- | | | | -- | | | | -- | | | | 891 | |
| Purchase of common stock for treasury | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | (47,618 | ) | | | (47,618 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2005 | | 2,800 | | | | 261,159 | | | | (3,263 | ) | | | 828,591 | | | | (5,879 | ) | | | (312,246 | ) | | | 771,162 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | -- | | | | -- | | | | -- | | | | 49,951 | | | | -- | | | | -- | | | | 49,951 | |
| Currency translation adjustment | | -- | | | | -- | | | | -- | | | | -- | | | | 35,924 | | | | -- | | | | 35,924 | |
| Additional minimum liability | | -- | | | | -- | | | | -- | | | | -- | | | | 2,988 | | | | -- | | | | 2,988 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flow hedge: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net derivative losses arising during the year | | -- | | | | -- | | | | -- | | | | -- | | | | (62 | ) | | | -- | | | | (62 | ) |
| Reclassification adjustment | | -- | | | | -- | | | | -- | | | | -- | | | | 124 | | | | -- | | | | 124 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | -- | | | | -- | | | | -- | | | | 49,951 | | | | 38,974 | | | | -- | | | | 88,925 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends declared | | -- | | | | -- | | | | -- | | | | (3,911 | ) | | | -- | | | | -- | | | | (3,911 | ) |
| Opening retained earnings adjustment due to adoption of EITF 04-06 (Note 23) | | -- | | | | -- | | | | -- | | | | (7,119 | ) | | | -- | | | | -- | | | | (7,119 | ) |
| Employee Benefit transactions | | 10 | | | | 3,731 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 3,741 | |
| Income tax benefit arising from employee stock option plans | | -- | | | | 741 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 741 | |
| Reclassification of unearned compensation | | -- | | | | (3,263 | ) | | | 3,263 | | | | -- | | | | -- | | | | -- | | | | -- | |
| Amortization of restricted stock | | -- | | | | 1,679 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 1,679 | |
| Indemnity proceeds, net of tax (Note 25) | | -- | | | | 2,718 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 2,718 | |
| Adjustment to initially apply SFAS 158, | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| net of tax | | -- | | | | -- | | | | -- | | | | -- | | | | (54,343 | ) | | | -- | | | | (54,343 | ) |
| Stock option expenses | | -- | | | | 2,336 | | | | -- | | | | -- | | | | -- | | | | -- | | | | 2,336 | |
| Purchase of common stock for treasury | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | (53,372 | ) | | | (53,372 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2006 | $ | 2,810 | | | $ | 269,101 | | | $ | -- | | | $ | 867,512 | | | $ | (21,248 | ) | | $ | (365,618 | ) | | $ | 752,557 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements, which are an integral part of these statements.
F-5
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Minerals Technologies Inc. (the "Company") and its wholly and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The Company employs accounting policies that are in accordance with U.S. generally accepted accounting principles and require management to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Significant estimates include 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 tax, valuation allowances, and litigation and environmental liabilities. Actual results could differ from those estimates.
Business
The Company is a resource- and technology-based company that develops, produces and markets on a worldwide basis a broad range of specialty mineral, mineral-based and synthetic mineral products and related systems and technologies. The Company's products are used in manufacturing processes of the paper and steel industries, as well as by the building materials, polymers, ceramics, paints and coatings, glass and other manufacturing industries.
Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents amounted to $4.0 million at December 31, 2006. Short-term investments consist of financial instruments with original maturities beyond three months. Short-term investments amounted to $8.4 million and $2.4 million at December 31, 2006 and 2005, respectively.
Trade Accounts Receivable
Trade accounts receivables are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on historical write-off experience and specific allowances for bankrupt customers. The Company also analyzes the collection history and financial condition of its other customers, considering current industry conditions and determines whether an allowance needs to be established. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days based on payment terms are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.
Effective January 1, 2006, the Company has adopted SFAS No. 151, "Inventory Costs - an Amendment of ARB No. 43, Chapter 4." As required by this statement, items such as idle facility expense, excessive spoilage, freight handling costs and re-handling costs are recognized as current period charges. In addition, the allocation of fixed production overheads to the costs of conversion should be based upon the normal capacity of the production facility. Fixed overhead costs associated with idle capacity are expensed as incurred. SFAS No. 151 did not have a material impact on our results of operations during the year ended December 31, 2006.
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 3% - 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. The estimated useful lives of our PCC production facilities and machinery and equipment pertaining to our natural stone mining and processing plants and our chemical plants are 15 years.
Property, plant and equipment are depreciated 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
F-6
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pursuant to long-term evergreen 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. Failure of a PCC customer to renew an agreement or continue to purchase PCC from a Company facility could result in an impairment of assets charge or accelerated depreciation at such facility.
Depletion of mineral reserves is determined on a unit-of-extraction basis for financial reporting purposes, based upon proven and probable reserves, and on a percentage depletion basis of tax purposes.
Stripping Costs Incurred During Production
As further discussed in Note 23, effective January 1, 2006, the Company has adopted the consensus of Emerging Issues Task Force ("EITF") Issue No. 04-06, "Accounting for Stripping Costs Incurred During Production in the Mining Industry." Stripping costs are those costs incurred for the removal of waste materials for the purpose of accessing ore body that will be produced commercially. Stripping costs incurred during the production phase of a mine are variable costs that are included in the costs of inventory produced during the period that the stripping costs are incurred.
Accounting for the 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," and EITF 04-3, "Mining Assets: Impairment and Business Combinations." SFAS No. 144 establishes a uniform accounting model for long-lived assets to be disposed of. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the Company estimates the undiscounted future cash flows (excluding interest), resulting from the use of the asset and its ultimate disposition. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset, determined principally using discounted cash flows.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. The Company accounts for goodwill and other intangible assets under SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated lives to the estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The Company evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, the fair value for the reporting unit is compared to its book value including goodwill. In the case that the fair value of the reporting unit is less than book value, a second step is performed which compares the fair value of the reporting unit's goodwill to the book value of the goodwill. The fair value for the goodwill is determined based on the difference between the fair values of the reporting unit and the net fair values of the identifiable assets and liabilities of such reporting unit. If the fair value of the goodwill is less than the book value, the difference is recognized as an impairment.
Accounting for Asset Retirement Obligations
The Company accounts for asset retirement obligations in accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations" and under the provisions of FASB Interpretation No. 47, "Accounting for Conditional 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. FASB Interpretation No. 47 includes legal obligations to perform asset retirement activities where timing or method of settlement are conditional on future events.
Fair Value of Financial Instruments
The recorded amounts of cash and cash equivalents, receivables, short-term borrowings, accounts payable, accrued interest, and variable-rate long-term debt approximate fair value because of the short maturity of those instruments or the variable nature of underlying interest rates. Short-term investments are recorded at cost, which approximates fair market value.
F-7
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Financial Instruments
The Company enters into derivative financial instruments to hedge certain foreign exchange and interest rate exposures pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." See the Notes on Derivative Financial Instruments and Hedging Activities and Financial Instruments and Concentrations of Credit Risk in the Consolidated Financial Statements for a full description of the Company's hedging activities and related accounting policies.
Revenue Recognition
Revenue from sale of products is recognized at the time the goods are shipped and title passes to the customer. In most of the Company's PCC contracts, the price per ton is based upon the total number of tons sold to the customer during the year. Under those contracts the price billed to the customer for shipments during the year is based on periodic estimates of the total annual volume that will be sold to such customer. Revenues are adjusted at the end of each year to reflect the actual volume sold. We have consignment arrangements with certain customers in our Refractories segment. Revenues for these transactions are recorded when the consigned products are consumed by the customer.
Revenues from sales of equipment are recorded upon completion of installation and receipt of customer acceptance. Revenues from services are recorded when the services have been performed.
Foreign Currency
The assets and liabilities of the Company's international subsidiaries are translated into U.S. dollars using exchange rates at the respective balance sheet date. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss) in shareholders' equity. Income statement items are generally translated at monthly average exchange rates prevailing during the period. Other foreign currency gains and losses are included in net income. International subsidiaries operating in highly inflationary economies translate non-monetary assets at historical rates, while net monetary assets are translated at current rates, with the resulting translation adjustments included in net income. At December 31, 2006, the Company had no international subsidiaries operating in highly inflationary economies.
Income Taxes
Income taxes are provided for based on the asset and liability method of accounting pursuant to SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company operates in multiple taxing jurisdictions, both within the U.S. and outside the U.S. In certain situations, a taxing authority may challenge positions that the Company has adopted in its income tax filings. The Company regularly assesses its tax position for such transactions and includes reserves for those differences in position. The reserves are utilized or reversed once the statute of limitations has expired or the matter is otherwise resolved.
The accompanying financial statements generally do not include a provision for U.S. income taxes on international subsidiaries' unremitted earnings, which are expected to be permanently reinvested overseas.
Research and Development Expenses
Research and development expenses are expensed as incurred.
Accounting for Stock-Based Compensation
As further discussed in Note 2, effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, "Share-Based Payment," using the modified prospective method. Under this transition method, stock-based compensation expense was recognized in the consolidated financial statements for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R, and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123,"Accounting for Stock-Based Compensation." As provided under the modified prospective method, results for prior periods have not been restated. Prior to its adoption of SFAS No. 123R, the Company accounted for stock-based compensation using the intrinsic value method in APB Opinion No. 25 and recognized no compensation expense in its financial statements. As permitted by SFAS No. 123, stock-based compensation was included as a pro-forma disclosure in the notes to the consolidated financial statements.
F-8
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pension and Post-retirement Benefits
The Company has defined benefit pension plans covering the majority of its employees. The benefits are generally based on years of service and an employee's modified career earnings.
The Company also provides post-retirement healthcare benefits for the majority of its retirees and employees in the United States. The Company measures the costs of its obligation based on its best estimate. The net periodic costs are recognized as employees render the services necessary to earn the post-retirement benefits.
Environmental
Expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and which do not contribute to current or future revenue generation are expensed. Liabilities are recorded when it is probable the Company will be obligated to pay amounts for environmental site evaluation, remediation or related costs, and such amounts can be reasonably estimated.
Earnings Per Share
Basic earnings per share have been computed based upon the weighted average number of common shares outstanding during the period.
Diluted earnings per share have been computed based upon the weighted average number of common shares outstanding during the period assuming the issuance of common shares for all potentially dilutive common shares outstanding.
Reclassifications
Certain reclassifications were made to prior year amounts to conform with the current year presentation.
Note 2. Stock-Based Compensation
The Company has a 2001 Stock Award and Incentive Plan (the "Plan"), which provides for grants of incentive and non-qualified stock options, restricted stock, stock appreciation rights, stock awards or performance unit awards. The Plan is administered by the Compensation Committee of the Board of Directors. Stock options granted under the Plan generally have a ten year term. The exercise price for stock options are at prices at or above the fair market value of the common stock on the date of the grant, and each award of stock options will vest ratably over a specified period, generally three years.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, "Share-Based Payments," using the modified prospective method. Under this transition method, stock-based compensation expense was recognized in the consolidated financial statements for stock options granted on and subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R, and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123. As provided under the modified prospective method, results for prior periods have not been restated. The cumulative effect of the adoption of SFAS No. 123R did not have a significant impact on the financial statements.
Net income for 2006 includes $2.3 million pretax compensation costs related to stock option expense as a component of marketing and administrative expenses. All stock option expense is recognized in income. The related tax benefit on the non-qualified stock options is $0.5 million for 2006.
Prior to the adoption of SFAS No. 123R, all income tax benefits resulting from the exercise of stock options were presented as operating cash inflows in the consolidated statements of cash flows. As required under SFAS No. 123R, the benefits of tax deductions in excess of the tax benefit of compensation costs recognized or would have been recognized under SFAS No. 123 for those options are classified as financing inflows on the consolidated statement of cash flows.
F-9
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the pro forma effects on net income and earnings per share for the years ended December 31, 2005 and 2004 had compensation cost been recognized in accordance with SFAS No. 123, as amended by SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure."
(in millions, except per share data) | | | Dec. 31, 2005 | | | | | | | Dec. 31, 2004 | | |
| | | | | | | | | | | | |
| Net income, as reported | | $ | 53.3 | | | | | | $ | 58.6 | | |
| Add: Stock-based employee compensation included | | | | | | | | | | | | |
| | in reported net income, net of related tax effects | | | 0.6 | | | | | | | 0.3 | | |
| Deduct: Total stock-based employee compensation | | | | | | | | | | | | |
| | expense determined under fair value based | | | | | | | | | | | | |
| | method for all awards, net of related tax effects | | | (2.1 | ) | | | | | | (2.7 | ) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Pro forma net income | | $ | 51.8 | | | | | | $ | 56.2 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Basic EPS | | | | | | | | | | | | |
| Net income, as reported | | $ | 2.62 | | | | | | $ | 2.85 | | |
| Pro forma net income | | $ | 2.54 | | | | | | $ | 2.73 | | |
| | | | | | | | | | | | |
| Diluted EPS | | | | | | | | | | | | |
| Net income, as reported | | $ | 2.59 | | | | | | $ | 2.82 | | |
| Pro forma net income | | $ | 2.52 | | | | | | $ | 2.72 | | |
Disclosures for the period ended December 31, 2006 are not presented because the amounts are recognized in the consolidated financial statements.
Stock Options
The fair value of options granted is estimated on the date of grant using the Black-Scholes valuation model. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on the Company's historical experience and future expectations. The forfeiture rate assumption used for the period ended December 31, 2006 was approximately 8%.
The weighted average grant date fair value for stock options granted during the years ended December 31, 2006, 2005 and 2004 was $18.97, $24.13 and $20.73, respectively. The weighted average grant date fair value for stock options vested during 2006 was $20.83. The total intrinsic value of stock options exercised during the year ended December 31, 2006 was $1.8 million.
The fair value for stock awards was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions for the years ended December 31, 2006, 2005 and 2004:
| | 2006 | | 2005
(pro forma) | | 2004
(pro forma) |
| | | | | |
Expected life (years) | | 6.4 | | | | 7.0 | | | | 7.0 | |
Interest rate | | 4.63 | % | | | 4.36 | % | | | 3.94 | % |
Volatility | | 24.78 | % | | | 28.72 | % | | | 29.58 | % |
Expected dividend yield | | 0.37 | % | | | 0.32 | % | | | 0.37 | % |
The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, based upon contractual terms, vesting schedules, and expectations of future employee behavior. The expected stock-price volatility is based upon the historical volatility of the Company's stock. The interest rate is based upon the implied yield on U.S. Treasury bills with an equivalent remaining term. Estimated dividend yield is based upon historical dividends paid by the Company.
F-10
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock option activity for the year ended December 31, 2006:
| | | Shares | | | | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Life (Years) | | | Aggregate Intrinsic Value (in thousands) |
| | | | | | | | | | | | |
| Balance January 1, 2006 | | 1,185,765 | | | | $ | 45.15 | | | | | |
| Granted | | 79,200 | | | | | 54.82 | | | | | |
| Exercised | | (103,392 | ) | | | | 39.02 | | | | | |
| Canceled | | (9,504 | ) | | | | 35.80 | | | | | |
| | | | | | | | | | | | |
| Balance December 31, 2006 | | 1,152,069 | | | | $ | 46.44 | | 4.78 | | $ | 14,228 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Exercisable, December 31, 2006 | | 925,180 | | | | $ | 44.22 | | 3.20 | | $ | 13,480 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
The aggregate intrinsic value above is before applicable income taxes, based on the Company's closing stock price of $58.79 as of the last business day of the period ended December 31, 2006 had all options been exercised on that date. The weighted average intrinsic value of the options exercised during 2006 was $17.48. As of December 31, 2006, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $2.8 million, which is expected to be recognized over a weighted average period of approximately three years.
The Company issues new shares of common stock upon the exercise of stock options.
Non-vested stock option activity for the year ended December 31, 2006 is as follows:
| | | Shares | | | Weighted Average Exercise Price Per Share | |
| | | | | | |
| Nonvested options outstanding at December 31, 2005 | | 260,846 | | $ | 55.00 | |
| Options granted | | 79,200 | | | 54.82 | |
| Options vested | | (112,221 | ) | | 53.87 | |
| Options forfeited | | (936 | ) | | 53.89 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Nonvested options outstanding, December 31, 2006 | | 226,889 | | $ | 55.50 | |
| | | | | | |
| | | | | | |
| | | | | | |
The following table summarizes additional information concerning options outstanding at December 31, 2006:
Options Outstanding | | Options Exercisable |
| | |
Range of
Exercise Prices | | Number Outstanding at 12/31/06 | | Weighted Average Remaining Contractual Term (Years) | | Weighted Average Exercise Price | | Number Exercisable at 12/31/06 | | Weighted Average Exercise Price |
| | | | | | | | | | |
$ | 34.825 | - | $ | 44.156 | | 513,425 | | 2.5 | | $ | 38.85 | | 513,425 | | $ | 38.85 |
$ | 46.625 | - | $ | 54.225 | | 568,144 | | 6.4 | | $ | 51.46 | | 388,851 | | $ | 50.28 |
$ | 55.840 | - | $ | 66.000 | | 70,500 | | 8.3 | | $ | 61.22 | | 22,904 | | $ | 61.43 |
| | | | | | | | | | | | | | |
$ | 34.825 | - | $ | 66.000 | | 1,152,069 | | 4.8 | | $ | 46.44 | | 925,180 | | $ | 44.22 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Restricted Stock
The Company has granted certain corporate officers rights to receive shares of the Company's common stock under the Company's 2001 Stock Award and Incentive Plan (the "Plan"). The rights will be deferred for a specified number of years of service, subject to restrictions on transfer and other conditions. Upon issuance of the rights, a deferred compensation expense equivalent to the market value of the underlying shares on the date of the grant was charged to stockholders' equity and was being amortized over the estimated average deferral period of approximately five years. Under the provisions of SFAS No. 123R, the recognition of unearned compensation is no longer required. Accordingly, in the first quarter of 2006, the balance of Deferred Equity Compensation was reversed into Additional Paid-in Capital on the Company's balance sheet. The Company granted 50,300 shares and 36,100 shares for the periods ended December 31, 2006 and 2005, respectively. The fair value was determined based on the market value of unrestricted shares. The discount for the restriction was not significant. As of December 31, 2006, there was unrecognized stock-based compensation related to restricted stock of $4.3 million,
F-11
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which will be recognized over approximately the next four years. The compensation expense amortized with respect to all units was approximately $1.7 million and $0.9 million for the periods ended December 31, 2006 and 2005, respectively. Such costs are included in marketing and administrative expenses. 255 restricted stock shares were vested as of December 31, 2006.
The following table summarizes the restricted stock activity for the Plan:
| | | | | Shares | | | | Weighted Average Grant Date Fair Value | |
| | | | | | | | | |
| Unvested balance at December 31, 2005 | | | | 84,755 | | | $ | 54.20 | |
| Granted | | | | 50,300 | | | $ | 54.91 | |
| Vested | | | | (255 | ) | | $ | 39.30 | |
| Canceled | | | | -- | | | $ | -- | |
| | | | | | | | | |
| Unvested balance at December 31, 2006 | | | | 134,800 | | | $ | 55.61 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Note 3. Earnings Per Share (EPS)
| (thousand of dollars, except per share amounts) | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| Basic EPS | | | | | | | | | | | |
| Income from continuing operations | $ | 51,550 | | | $ | 52,675 | | | $ | 57,278 | |
| Income (loss) from discontinued operations | | (1,599 | ) | | | 589 | | | | 1,285 | |
| | | | | | | | | | | | |
| | Net income | $ | 49,951 | | | $ | 53,264 | | | $ | 58,563 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Weighted average shares outstanding | | 19,600 | | | | 20,345 | | | | 20,530 | |
| | | | | | | | | | | | |
| Basic earnings per share from continuing operations | $ | 2.63 | | | $ | 2.59 | | | $ | 2.79 | |
| Basic earnings (loss) per share from discontinued operations | | (0.08 | ) | | | 0.03 | | | | 0.06 | |
| | | | | | | | | | | | |
| | Basic earnings per share | $ | 2.55 | | | $ | 2.62 | | | $ | 2.85 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Diluted EPS | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| Income from continuing operations | $ | 51,550 | | | $ | 52,675 | | | $ | 57,278 | |
| Income (loss) from discontinued operations | | (1,599 | ) | | | 589 | | | | 1,285 | |
| | | | | | | | | | | | |
| | Net income | $ | 49,951 | | | $ | 53,264 | | | $ | 58,563 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Weighted average shares outstanding | | 19,600 | | | | 20,345 | | | | 20,530 | |
| Dilutive effect of stock options | | 138 | | | | 222 | | | | 239 | |
| | | | | | | | | | | |
| Weighted average shares outstanding, adjusted | | 19,738 | | | | 20,567 | | | | 20,769 | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| Diluted earnings per share from continuing operations | $ | 2.61 | | | $ | 2.56 | | | $ | 2.76 | |
| Diluted earnings (loss) per share from discontinued operations | | (0.08 | ) | | | 0.03 | | | | 0.06 | |
| | | | | | | | | | | | |
| | Diluted earnings per share | $ | 2.53 | | | $ | 2.59 | | | $ | 2.82 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The weighted average diluted common shares outstanding for the years ended December 31, 2006 and December 31, 2005 exclude the dilutive effect of 371,587 options and 56,700 options, respectively, since such options had an exercise price in excess of the average market value of the Company's common stock during such year.
The weighted average diluted common shares outstanding for the year ended December 31, 2006 includes the effect of average unearned compensation as required under SFAS No. 123R.
Note 4. Discontinued Operations
In April 2006, the Company ceased operation at its one-unit satellite PCC facility in Hadera, Israel. In the fourth quarter, the Company recorded a loss from discontinued operations of approximately $1.7 million upon liquidation of its investment in Israel. This loss was predominantly related to the recognition of foreign currency translation losses previously recognized in accumulated other comprehensive income (loss).
F-12
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table details selected financial information for the discontinued operation in the consolidated statements of income:
| Thousands of Dollars | | 2006 | | | | 2005 | | | | 2004 | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net sales | $ | 1,468 | | | $ | 5,087 | | | $ | 4,715 | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Income from operations | $ | 77 | | | $ | 804 | | | $ | 1,948 | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Foreign currency translation | | | | | | | | | | | | | |
| | loss upon liquidation | $ | (1,563 | ) | | $ | -- | | | $ | -- | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Provision for taxes on income | $ | 79 | | | $ | 304 | | | $ | 662 | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Income (loss) from | | | | | | | | | | | | | |
| | discontinued operations, net of tax | $ | (1,599 | ) | | $ | 589 | | | $ | 1,285 | | | |
| | | | | | | | | | | | | |
Note 5. Income Taxes
Income before provision for taxes, minority interests, and discontinued operations by domestic and foreign source is as follows:
| Thousands of Dollars | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| Domestic | $ | 41,095 | | | $ | 40,468 | | | $ | 42,070 | |
| Foreign | | 38,484 | | | | 36,924 | | | | 40,555 | |
| | | | | | | | | | | |
| Total income before provision for income taxes | $ | 79,579 | | | $ | 77,392 | | | $ | 82,625 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The provision for taxes on income consists of the following:
| Thousands of Dollars | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Domestic | | | | | | | | | | | |
| Taxes currently payable | | | | | | | | | | | |
| Domestic | | | | | | | | | | | |
| | Federal | $ | 6,205 | | | $ | 5,561 | | | $ | 13,406 | |
| | State and local | | 2,877 | | | | 876 | | | | 3,483 | |
| Deferred income taxes | | 5,044 | | | | 7,144 | | | | (3,890 | ) |
| | | | | | | | | | | |
| Domestic tax provision | | 14,126 | | | | 13,581 | | | | 12,999 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Foreign | | | | | | | | | | | |
| Taxes currently payable | | 11,161 | | | | 10,220 | | | | 14,717 | |
| Deferred income taxes | | (699 | ) | | | (816 | ) | | | (4,079 | ) |
| | | | | | | | | | | |
| Foreign tax provision | | 10,462 | | | | 9,404 | | | | 10,638 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total tax provision | $ | 24,588 | | | $ | 22,985 | | | $ | 23,637 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The provision for taxes on income shown in the previous table is classified based on the location of the taxing authority, regardless of the location in which the taxable income is generated.
The major elements contributing to the difference between the U.S. federal statutory tax rate and the consolidated effective tax rate are as follows:
| Percentages | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| U.S. statutory tax rate | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| Depletion | | (5.3 | ) | | | (4.9 | ) | | | (4.1 | ) |
| Difference between tax provided on foreign earnings | | | | | | | | | | | |
| | and the U.S. statutory rate | | (3.8 | ) | | | (4.5 | ) | | | (3.5 | ) |
| State and local taxes, net of Federal tax benefit | | 2.4 | | | | 1.9 | | | | 1.0 | |
| Tax credits and foreign dividends | | 0.9 | | | | 2.3 | | | | (0.1 | ) |
| Increase in valuation allowance | | 1.4 | | | | -- | | | | -- | |
| Other | | 0.3 | | | | (0.1 | ) | | | 0.4 | |
| | | | | | | | | | | |
| Consolidated effective tax rate | | 30.9 | % | | | 29.7 | % | | | 28.7 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
F-13
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company believes that its accrued liabilities are sufficient to cover its U.S. and foreign tax contingencies. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
| Thousands of Dollars | | 2006 | | | | 2005 | |
| | | | | | | |
| | | | | | | |
| Deferred tax assets: | | | | | | | |
| State and local taxes | $ | 2,593 | | | $ | 4,324 | |
| Accrued expenses | | 8,771 | | | | 10,214 | |
| Deferred expenses | | 1,399 | | | | 3,037 | |
| Net operating loss carry forwards | | 13,236 | | | | 15,204 | |
| Pension and post-retirement benefits costs | | 15,268 | | | | -- | |
| Other | | 11,107 | | | | 6,852 | |
| | | | | | | |
| Total deferred tax assets | $ | 52,374 | | | $ | 39,631 | |
| | | | | | | |
| Thousands of Dollars | | 2006 | | | | 2005 | |
| | | | | | | |
| | | | | | | |
| Deferred tax liabilities: | | | | | | | |
| Plant and equipment, principally due to differences in depreciation | $ | 56,628 | | | $ | 62,803 | |
| Pension and post-retirement benefits cost deducted for tax purposes | | | | | | | |
| | in excess of amounts reported for financial statements | | -- | | | | 14,673 | |
| Other | | 11,538 | | | | 6,563 | |
| | | | | | | |
| Total deferred tax liabilities | | 68,166 | | | | 84,039 | |
| | | | | | | |
| Net deferred tax liabilities | $ | 15,792 | | | $ | 44,408 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The current and long-term portion of net deferred tax (assets) liabilities is as follows:
Thousands of Dollars | | 2006 | | | | 2005 | |
| | | | | | | |
| | | | | | | |
Net deferred tax assets, current | $ | (2,813 | ) | | $ | (4,966 | ) |
Net deferred tax liabilities, long-term | | 18,605 | | | | 49,374 | |
| | | | | | | |
| | $ | 15,792 | | | $ | 44,408 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The current portion of the net deferred tax assets is included in prepaid expenses and other current assets.
The Company established a valuation allowance of approximately $0.9 million as of December 31, 2006. This valuation allowance relates to net operating loss carryforwards in the state of Ohio where there is an uncertainty regarding their realizability. There was no valuation allowance as of December 31, 2005.
The Company recorded $13.2 million of deferred tax assets arising from tax loss carry forwards which will be realized through future operations. Carry forwards of approximately $1.8 million expire over the next 15 years, and $11.4 million can be utilized over an indefinite period.
The Company operates in multiple taxing jurisdictions, both within the U.S. and outside the U.S. In certain situations, a taxing authority may challenge positions that the Company has adopted in its income tax filings. The Company regularly assesses its tax position for such transactions and includes reserves for those differences in position. The reserves are utilized or reversed once the statute of limitations has expired or the matter is otherwise resolved.
Net cash paid for income taxes were $18.0 million, $21.2 million and $15.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.
In December 2004, the FASB issued SFAS No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004," which provides relief concerning the timing of the SFAS No. 109 requirement to accrue deferred taxes for unremitted earnings of foreign subsidiaries. On October 22, 2004, the American Jobs Act Creation Act of 2004 ("AJCA") was signed into law. The AJCA includes a special, one-time, 85% dividends received deduction for certain foreign earnings that are repatriated. The Company repatriated $18.5 million in 2005 under this Act, which resulted in a tax liability of approximately $1.2 million and increased the effective tax rate by 1.5%.
F-14
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Foreign Operations
The Company has not provided for U.S. federal and foreign withholding taxes on $139.2 million of foreign subsidiaries' undistributed earnings as of December 31, 2006 because such earnings are intended to be permanently reinvested overseas. To the extent the parent company has received foreign earnings as dividends, the foreign taxes paid on those earnings have generated tax credits, which have substantially offset related U.S. income taxes. However, in the event that the entire $139.2 million of foreign earnings were to be repatriated, incremental taxes may be incurred. We do not believe this amount would be greater than $12.2 million.
Net foreign currency exchange (losses) gains, included in non-operating deductions in the Consolidated Statements of Income, were $(268,000), $(450,000), and $(564,000) for the years ended December 31, 2006, 2005 and 2004, respectively.
Note 7. Inventories
The following is a summary of inventories by major category:
| Thousands of Dollars | | 2006 | | | | 2005 | |
| | | | | | | |
| | | | | | | | |
| Raw materials | $ | 60,013 | | | $ | 54,471 | |
| Work in process | | 8,321 | | | | 7,727 | |
| Finished goods | | 38,911 | | | | 36,264 | |
| Packaging and supplies | | 22,649 | | | | 20,433 | |
| | | | | | | |
| Total inventories | $ | 129,894 | | | $ | 118,895 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Note 8. Property, Plant and Equipment
The major categories of property, plant and equipment and accumulated depreciation and depletion are presented below:
| Thousands of Dollars | | 2006 | | | | 2005 | |
| | | | | | | |
| | | | | | | |
| Land | $ | 24,087 | | | $ | 19,433 | |
| Quarries/mining properties | | 39,123 | | | | 50,543 | |
| Buildings | | 173,815 | | | | 157,038 | |
| Machinery and equipment | | 1,071,046 | | | | 969,537 | |
| Construction in progress | | 52,107 | | | | 75,852 | |
| Furniture and fixtures and other | | 118,744 | | | | 107,895 | |
| | | | | | | |
| | | 1,478,922 | | | | 1,380,298 | |
| Less: Accumulated depreciation and depletion | | (826,125 | ) | | | (751,553 | ) |
| | | | | | | |
| Property, plant and equipment, net | $ | 652,797 | | | $ | 628,745 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Approximately 40% of the balance in construction in progress as of December 31, 2006 relates to the construction of a new facility for the SYNSIL® product line.
Depreciation and depletion expense for the years ended December 31, 2006, 2005 and 2004 was $79.8 million, $70.9 million, and $69.6 million, respectively.
Note 9. Restructuring Charges
During the fourth quarter of 2003, the Company announced plans to restructure its operations in an effort to reduce operating costs and to improve efficiency. The Company recorded a pre-tax restructuring charge of $3.3 million in the fourth quarter of 2003 to reflect these actions, consisting of severance, other employee benefits, and lease termination costs. During 2004, additional costs related to this program of $1.1 million were recorded. As of December 31, 2006, all employees identified in the workforce reduction were terminated and no liability remains to be paid.
F-15
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Acquisitions
In October 2006, the Company acquired all of the outstanding stock of ASMAS, an Istanbul-based Turkish producer of refractories for approximately $32.4 million in cash. The terms of the acquisition provides for an additional purchase price of up to $5 million to be paid in 2009 based upon performance criteria through 2008. The operations of this entity have been included in the Refractories segment of the Company's financial statements since the date of the acquisition. This acquisition will allow the Company to service the growing steel industries in Eastern Europe and the Middle East, and to provide vertical integration through its own kilns and sources of magnesite.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the acquisition:
| (Millions of Dollars) | | 2006 | | |
| | | | |
| | | | |
| Current assets | $ | 5.1 | | |
| Property, plant and equipment | | 13.5 | | |
| Intangible assets | | 8.6 | | |
| Goodwill | | 13.8 | | |
| | | | | |
| | Total assets acquired | | 41.0 | | |
| Liabilities assumed | | 8.6 | | |
| | | | |
| | Net cash paid | $ | 32.4 | | |
| | | | |
| | | | |
| | | | |
The purchase price allocation has not been finalized as of December 31, 2006.
The weighted average amortization period for the acquired intangible assets subject to amortization is approximately 13.5 years. Goodwill associated with this transaction is not tax deductible.
Pro forma financial information has not been presented since this business combination was not material to the Company's total assets or results of operations.
In the fourth quarter of 2005, the Company made a cash acquisition of the metallurgical measurement technology/digital electrode control system product line of ET Electrotechnology GmbH for approximately $3.2 million. This acquisition and related technology offers a power consumption system in electric steelmaking and ladle furnaces. The Company recorded tax-deductible goodwill of approximately $1.3 million in connection with this acquisition.
In the fourth quarter of 2004, the Company recognized pre-tax corporate charges of $1.0 million expense related to due diligence for a terminated acquisition effort.
Note 11. Goodwill and Other Intangible Assets
The carrying amount of goodwill was $69.0 million and $53.6 million as of December 31, 2006 and December 31, 2005, respectively. The net change in goodwill since December 31, 2005 was primarily attributable to the acquisition of ASMAS and the effect of foreign exchange.
Acquired intangible assets included in other assets and deferred charges subject to amortization as of December 31, 2006 and December 31, 2005 were as follows:
| | December 31, 2006 | | December 31, 2005 |
| | | |
| (Millions of Dollars) | | Gross
Carrying
Amount | | | | Accumulated
Amortization | | | | Gross
Carrying
Amount | | | | Accumulated
Amortization | |
| | | | | | | | | | | | | | | |
| Patents and trademarks | $ | 7.2 | | | $ | 1.8 | | | $ | 6.0 | | | $ | 1.4 | |
| Customer lists | | 10.0 | | | | 0.8 | | | | 2.9 | | | | 0.4 | |
| Other | | 0.1 | | | | -- | | | | -- | | | | -- | |
| | | | | | | | | | | | | | | |
| | $ | 17.3 | | | $ | 2.6 | | | $ | 8.9 | | | $ | 1.8 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
The weighted average amortization period for acquired intangible assets subject to amortization is approximately 15 years. Amortization expense was approximately $0.8 million, $0.3 million and $0.4 million for the years ended December 31, 2006,
F-16
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2005 and 2004, respectively. The estimated amortization expense is $1.2 million for each of the next five years through 2011.
Included in other assets and deferred charges is an additional intangible asset of approximately $7.3 million which represents the non-current unamortized amount paid to a customer in connection with contract extensions at eight satellite PCC 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 $1.8 million was amortized in 2006. Estimated amortization as a reduction of sales is as follows: 2007 - $1.8 million; 2008 - $1.8 million; 2009 - $1.5 million; 2010 - $1.2 million; 2011 - $0.9 million; with smaller reductions thereafter over the remaining lives of the contracts.
Note 12. 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 2005, the Company recorded a writedown of impaired assets of $0.3 million for the closure of our satellite facility at Cornwall, Canada in the first quarter of 2006.
Note 13. Derivative Financial Instruments and Hedging Activities
The Company is exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, the Company uses interest-rate related derivative instruments to manage its exposure on its debt instruments, as well as forward exchange contracts (FEC) to manage its exposure to foreign currency risk on certain raw material purchases. The Company's objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge them. The Company has not entered into derivative instruments for any purpose other than to hedge certain expected cash flows. The Company does not speculate using derivative instruments.
By using derivative financial instruments to hedge exposures to changes in interest rates and foreign currencies, the Company exposes itself to credit risk and market risk. Credit risk is the risk that the counterparty will fail to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty, and therefore, it does not face any credit risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with major financial institutions.
Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, currency exchange rates, or commodity prices. The market risk associated with interest rate and forward exchange contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
Based on criteria established by SFAS No. 133, the Company designated its derivatives as cash flow hedges. During 2001, the Company entered into three-year interest rate swap agreements with notional amounts totaling $30 million that expired in January 2005. These agreements effectively converted a portion of the Company's floating-rate debt to a fixed-rate basis with an interest rate of 4.5%, thus reducing the impact of the interest rate changes on future cash flows and income. The Company uses FEC's designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in its forecasted inventory purchases. The Company had 12 open foreign exchange contracts as of December 31, 2006.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is initially recorded in accumulated other comprehensive income (loss) as a separate component of shareholders' equity and subsequently reclassified into earnings in the period during which the hedged transaction is recognized in earnings. The gains and losses associated with these forward exchange contracts are recognized into cost of sales. Gains and losses and hedge ineffectiveness associated with these derivatives were not significant.
F-17
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Short-term Investments
The composition of the Company's short-term investments are as follows:
(in thousands of dollars) | | 2006 | | | 2005 |
| | | | | |
| Short-term Investments - | | | | | |
| | Available for Sale Securities: | | | | | |
| | Short-term bank deposits | $ | 8,380 | | $ | 2,350 |
| | | | | | |
| | | | | | |
| | | | | | |
There were no unrealized holding gains and losses on the short-term bank deposits held at December 31, 2006 since the carrying amount approximates fair market value.
Note 15. Financial Instruments and Concentrations of Credit Risk
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents, short-term investments, accounts receivable and payable: The carrying amounts approximate fair value because of the short maturities of these instruments.
Short-term debt and other liabilities: The carrying amounts of short-term debt and other liabilities approximate fair value because of the short maturities of these instruments.
Long-term debt: The fair value of the long-term debt of the Company is estimated based on the quoted market prices for that debt or similar debt and approximates the carrying amount.
Forward exchange contracts: The fair value of forward exchange contracts (used for hedging purposes) is estimated by obtaining quotes from brokers. If appropriate, the Company would enter into forward exchange contracts to mitigate the impact of foreign exchange rate movements on the Company's operating results. It does not engage in speculation. Such foreign exchange contracts would offset losses and gains on the assets, liabilities and transactions being hedged. At December 31, 2006, the Company had open foreign exchange contracts with a financial institution to purchase approximately $4.7 million of foreign currencies. These contracts range in maturity from February 9, 2007 to July 10, 2007. The fair value of these instruments was a liability of $0.1 million at December 31, 2006. The fair value of the open foreign exchange contracts at December 31, 2005 was a liability of $0.2 million.
Credit risk: Substantially all of the Company's accounts receivable are due from companies in the paper, construction and steel industries. Credit risk results from the possibility that a loss may occur from the failure of another party to perform according to the terms of the contracts. The Company regularly monitors its credit risk exposures and takes steps to mitigate the likelihood of these exposures resulting in actual loss. The Company's extension of credit is based on an evaluation of the customer's financial condition and collateral is generally not required.
The Company's bad debt expense (recoveries) for the years ended December 31, 2006, 2005 and 2004 was $0.4 million, $(0.5) million and $1.6 million, respectively.
F-18
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Long-Term Debt and Commitments
The following is a summary of long term debt:
(thousands of dollars) | Dec. 31,
2006 | | Dec. 31, 2005 |
|
| | | |
| 5.53% Series 2006A Senior Notes | $ 50,000 | | $ -- |
| | Due October 5, 2013 | | | |
| Floating Rate Series 2006A Senior Notes | 25,000 | | -- |
| | Due October 5, 2013 | | | |
| 7.49% Guaranteed Senior Notes Due July 24, 2006 | -- | | 50,000 |
| Yen-denominated Guaranteed Credit Agreement | | | |
| | Due March 31, 2007 | 605 | | 3,062 |
| Variable/Fixed Rate Industrial | | | |
| | Development Revenue Bonds Due 2009 | 4,000 | | 4,000 |
| Economic Development Authority Refunding | | | |
| | Revenue Bonds Series 1999 Due 2010 | 4,600 | | 4,600 |
| Variable/Fixed Rate Industrial | | | |
| | Development Revenue Bonds Due August 1, 2012 | 8,000 | | 8,000 |
| Variable/Fixed Rate Industrial | | | |
| | Development Revenue Bonds Series 1999 Due November 1, 2014 | 8,200 | | 8,200 |
| Variable/Fixed Rate Industrial | | | |
| | Development Revenue Bonds Due March 31, 2020 | 5,000 | | 5,000 |
| Installment obligations | 8,812 | | 9,700 |
| Other borrowings | 1,197 | | 1,442 |
| | | |
| | Total | 115,414 | | 94,004 |
| Less: Current maturities | 2,063 | | 53,698 |
| | | |
| Long-term debt | $113,351 | | $ 40,306 |
| | | |
| | | |
| | | |
On July 24, 1996, through a private placement, the Company issued $50 million of 7.49% Guaranteed Senior Notes due July 24, 2006. The proceeds from the sale of the notes were used to refinance a portion of the short-term commercial bank debt outstanding. These notes matured and were paid on July 24, 2006.
On May 17, 2000, the Company's majority-owned subsidiary, Specialty Minerals FMT K.K., entered into a Yen-denominated Guaranteed Credit Agreement with the Bank of New York due March 31, 2007. The proceeds were used to finance the construction of a PCC satellite facility in Japan. Principal payments began June 30, 2002. Interest is payable quarterly at a rate of 2.05% per annum.
The Variable/Fixed Rate Industrial Development Revenue Bonds due 2009 are tax-exempt 15-year instruments issued to finance the expansion of a PCC plant in Selma, Alabama. The bonds are dated November 1, 1994, and provide for an optional put by the holder (during the Variable Rate Period) and a mandatory call by the issuer. The bonds bear interest at either a variable rate or fixed rate at the option of the Company. Interest is payable semi-annually under the fixed rate option and monthly under the variable rate option. The Company has selected the variable rate option on these borrowings and the average interest rates were approximately 3.14% and 2.51% for the years ended December 31, 2006 and 2005, respectively.
The Economic Development Authority Refunding Revenue Bonds due 2010 were issued on February 23, 1999 to refinance the bonds issued in connection with the construction of a PCC plant in Eastover, South Carolina. The bonds bear interest at either a variable rate or fixed rate, at the option of the Company. Interest is payable semi-annually under the fixed rate option and monthly under the variable rate option. The Company has selected the variable rate option on these borrowings and the average interest rates were approximately 3.14% and 2.51% for the years ended December 31, 2006 and 2005, respectively.
The Variable/Fixed Rate Industrial Development Revenue Bonds due August 1, 2012 are tax-exempt 15-year instruments that were issued on August 1, 1997 to finance the construction of a PCC plant in Courtland, Alabama. The bonds bear interest at either a variable rate or fixed rate, at the option of the Company. Interest is payable semi-annually under the fixed rate option and monthly under the variable rate option. The Company has selected the variable rate option on these borrowings and the average interest rates were approximately 3.14% and 2.51% for the years ended December 31, 2006 and 2005, respectively.
F-19
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Variable/Fixed Rate Industrial Development Revenue Bonds due November 1, 2014 are tax-exempt 15-year instruments and were issued on November 30, 1999 to refinance the bonds issued in connection with the construction of a PCC plant in Jackson, Alabama. The bonds bear interest at either a variable rate or fixed rate at the option of the Company. Interest is payable semi-annually under the fixed rate option and monthly under the variable rate option. The Company has selected the variable rate option on these borrowings and the average interest rates were approximately 3.14% and 2.51% for the years ended December 31, 2006 and 2005, respectively.
On June 9, 2000 the Company entered into a twenty-year, taxable, Variable/Fixed Rate Industrial Development Revenue Bond agreement to finance a portion of the construction of a merchant manufacturing facility for the production of Specialty PCC in Brookhaven, Mississippi. The Company has selected the variable rate option for this borrowing and the average interest rate was approximately 5.65% and 3.82% for the years ended December 31, 2006 and 2005, respectively.
On May 31, 2003, the Company acquired land and limestone ore reserves from the Cushenbury 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 interest rate on this obligation is approximately 4.25%. For the year ending December 31, 2006, $0.9 million of principal was paid on this debt. Principal payments are as follows: 2007 - $0.9 million; 2008 - $6.5 million; 2013 - $1.4 million.
On October 5, 2006, the Company, through private placement, entered into a Note Purchase Agreement and issued $75 million aggregate principal amount unsecured senior notes. These notes consist of two tranches: $50 million aggregate principal amount 5.53% Series 2006A Senior Notes (Tranche 1 Notes); and $25 million aggregate principal amount Floating Rate Series 2006A Senior Notes (Tranche 2 Notes). Tranche 1 Notes bear interest of 5.53% per annum, payable semi-annually. Tranche 2 Notes bear floating rate interest, payable quarterly. The average interest rate for the year ended December 31, 2006 was 5.82%. The principal payment for both tranches is due on October 5, 2013.
The aggregate maturities of long-term debt are as follows: 2007 - - $2.1 million; 2008 - $7.1 million; 2009 - $4.0 million; 2010 - $4.6 million; 2011 - $ nil; thereafter - $97.6 million.
The Company had available approximately $186.9 million in uncommitted, short-term bank credit lines, of which $73.4 million was in use at December 31, 2006. The Company also has available an $8.5 million committed, short-term bank credit line, all of which was in use at December 31, 2006.
Short-term borrowings as of December 31, 2006 and 2005 were $87.6 million and $62.8 million, respectively. The weighted average interest rate on short-term borrowings outstanding as of December 31, 2006 and 2005 was 5.57% and 4.54%, respectively.
During 2006, 2005 and 2004, respectively, the Company incurred interest costs of $8.9 million, $7.2 million and $6.3 million including $1.1 million, $1.3 million and $2.1 million, respectively, which were capitalized. Interest paid approximated the incurred interest cost.
Note 17. Benefit Plans
Pension Plans and Other Postretirement Benefit Plans
The Company and its subsidiaries have pension plans covering the majority of eligible employees on a contributory or non-contributory basis.
Benefits under defined benefit plans are generally based on years of service and an employee's career earnings. Employees generally become fully vested after five years.
The Company provides postretirement health care and life insurance benefits for the majority of its U.S. retired employees. Employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. The Company does not pre-fund these benefits and has the right to modify or terminate the plan in the future.
Effective December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans - An Amendment of FASB Statements No. 87, 88, 106, and 132(R)." SFAS 158 requires an employer to recognize the funded status of its defined benefit plans as an asset or liability on the balance sheet and to recognize changes in the funded status through comprehensive income.
F-20
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects the incremental effects of applying the provisions of SFAS 158 on the individual line items of the consolidated balance sheet, based on the funded status of our plans:
| | December 31, 2006 |
| |
| Millions of Dollars | | Pension and Post-retirement Prior to Adopting
SFAS 158 | | | | SFAS 158 Adjustments | | | | Pension and Post-retirement After Adopting SFAS 158 | |
| | | | | | | | | | | |
| Intangible assets | $ | 15.5 | | | $ | (0.8 | ) | | $ | 14.7 | |
| Prepaid pension costs | | 83.6 | | | | (57.9 | ) | | | 25.7 | |
| Total assets | | 1,251.8 | | | | (58.7 | ) | | | 1,193.1 | |
| Current liabilities | | 209.1 | | | | 2.4 | | | | 212.1 | |
| Accrued pension and post-retirement benefits | | 33.8 | | | | 21.6 | | | | 55.4 | |
| Deferred taxes | | 50.0 | | | | (31.4 | ) | | | 18.6 | |
| Total liabilities | | 448.0 | | | | (7.4 | ) | | | 440.6 | |
| Accumulated other comprehensive income | | 30.2 | | | | (51.3 | ) | | | (21.2 | ) |
| Total shareholders' equity | | 804.0 | | | | (51.3 | ) | | | 752.6 | |
| Total liabilities and shareholders' equity | $ | 1,251.8 | | | $ | (58.7 | ) | | $ | 1,193.1 | |
Our adoption of FAS 158 had no impact on our earnings for the year ended December 31, 2006 and will not affect the Company's consolidated statements of income in future periods.
The funded status of the Company's pension plans and other postretirement benefit plans at December 31, 2006 and 2005 is as follows:
Obligations and Funded Status
| | Pension Benefits | | Other Benefits |
| | | |
Millions of Dollars | | 2006 | | | | 2005 | | | | | | | | 2005 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Change in benefit obligation | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | $ | 177.6 | | | $ | 156.4 | | | $ | 36.1 | | | $ | 31.7 | |
Service cost | | 7.9 | | | | 7.2 | | | | 2.1 | | | | 1.7 | |
Interest cost | | 10.1 | | | | 8.9 | | | | 2.2 | | | | 2.0 | |
Actuarial loss | | 12.3 | | | | 17.6 | | | | 3.1 | | | | 3.5 | |
Benefits paid | | (6.4 | ) | | | (9.5 | ) | | | (2.5 | ) | | | (3.1 | ) |
Plan amendments | | 9.0 | | | | -- | | | | 3.0 | | | | -- | |
Other | | 4.0 | | | | (3.0 | ) | | | -- | | | | 0.3 | |
| | | | | | | | | | | | | | | |
Benefit obligation at end of year | $ | 214.5 | | | $ | 177.6 | | | $ | 44.0 | | | $ | 36.1 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| | | |
Millions of Dollars | | 2006 | | | | 2005 | | | | 2006 | | | | 2005 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Change in plan assets | | | | | | | | | | | | | | | |
Fair value of plan assets beginning of year | $ | 186.3 | | | $ | 173.9 | | | $ | -- | | | $ | -- | |
Actual return on plan assets | | 21.6 | | | | 12.1 | | | | -- | | | | -- | |
Employer contributions | | 22.3 | | | | 12.9 | | | | 2.5 | | | | 3.1 | |
Plan participants' contributions | | 0.4 | | | | 0.2 | | | | -- | | | | -- | |
Benefits paid | | (6.4 | ) | | | (9.5 | ) | | | (2.5 | ) | | | (3.1 | ) |
Other | | 2.1 | | | | (3.3 | ) | | | -- | | | | -- | |
| | | | | | | | | | | | | | | |
Fair value of plan assets at end of year | $ | 226.3 | | | $ | 186.3 | | | $ | -- | | | $ | -- | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Funded status | $ | 11.8 | | | $ | 8.7 | | | $ | (44.0 | ) | | $ | (36.1 | ) |
Unrecognized transition amount | | -- | | | | -- | | | | -- | | | | 0.1 | |
Unrecognized net actuarial loss | | -- | | | | 51.8 | | | | -- | | | | 12.8 | |
Unrecognized prior service cost | | -- | | | | 3.4 | | | | -- | | | | -- | |
| | | | | | | | | | | | | | | |
Prepaid (accrued) benefit cost | $ | -- | | | $ | 63.9 | | | $ | -- | | | $ | (23.2 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
F-21
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts recognized in the consolidated balance sheet consist of:
| | Pension Benefits | | Other Benefits |
| | | |
Millions of Dollars | | 2006 | | | | 2005 | | | | 2006 | | | | 2005 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Pension asset | $ | 25.7 | | | $ | -- | | | $ | -- | | | $ | -- | |
Pension liability | | (13.9 | ) | | | -- | | | | (44.0 | ) | | | | |
Prepaid benefit costs | | -- | | | | 67.8 | | | | -- | | | | -- | |
Accrued benefit liabilities | | -- | | | | (9.0 | ) | | | -- | | | | (23.2 | ) |
Intangible asset | | -- | | | | 0.8 | | | | -- | | | | -- | |
Accumulated other comprehensive (income) loss | | 43.6 | | | | 4.3 | | | | 10.7 | | | | -- | |
| | | | | | | | | | | | | | | |
Net amount recognized | $ | 55.4 | | | $ | 63.9 | | | $ | (33.3 | ) | | $ | (23.2 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Included in accrued compensation and related items is the current portion of pension liabilities of approximately $2.5 million as of December 31, 2006.
The components of net periodic benefit costs are as follows:
| | Pension Benefits | | Other Benefits |
| | | |
| Millions of Dollars | | 2006 | | | | 2005 | | | | 2004 | | | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Service cost | $ | 7.9 | | | $ | 7.2 | | | $ | 6.4 | | | $ | 2.1 | | | $ | 1.7 | | | $ | 1.4 | |
| Interest cost | | 10.1 | | | | 8.9 | | | | 8.5 | | | | 2.2 | | | | 2.0 | | | | 1.8 | |
| Expected return on plan assets | | (15.4 | ) | | | (13.9 | ) | | | (12.5 | ) | | | -- | | | | -- | | | | -- | |
| Amortization of transition amount | | -- | | | | -- | | | | 0.1 | | | | -- | | | | -- | | | | -- | |
| Amortization of prior service cost | | 1.0 | | | | 1.1 | | | | 0.7 | | | | 1.0 | | | | 0.8 | | | | -- | |
| Recognized net actuarial loss | | 3.2 | | | | 1.8 | | | | 1.7 | | | | 0.2 | | | | -- | | | | 0.5 | |
| SFAS No. 88 curtailment (gain) loss | | (0.8 | ) | | | 0.3 | | | | 0.6 | | | | -- | | | | -- | | | | -- | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net periodic benefit cost | $ | 6.0 | | | $ | 5.4 | | | $ | 5.5 | | | $ | 5.5 | | | $ | 4.5 | | | $ | 3.7 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Unrecognized prior service cost is amortized on an accelerated basis over the average remaining service period of each active employee.
Under the provisions of SFAS No. 88, lump-sum distributions from terminations, resulted in a plan curtailment of one of the Company's pension plans and also caused partial settlement of such plan. As a result, there was a curtailment gain in income from operations of $0.8 million in 2006.
Under the provisions of SFAS No. 88, lump-sum distributions from the Company's Supplemental Retirement Plan caused a partial settlement of such plan, resulting in a charge of $0.3 million and $0.6 million in 2005 and 2004, respectively.
The Company's funding policy for U.S. plans generally is to contribute annually into trust funds at a rate that provides for future plan benefits and maintains appropriate funded percentages. Annual contributions to the U.S. qualified plans are at least sufficient to satisfy regulatory funding standards and are not more than the maximum amount deductible for income tax purposes. The funding policies for the international plans conform to local governmental and tax requirements. The plans' assets are invested primarily in stocks and bonds.
Amounts recognized in accumulated other comprehensive income consist of:
| | December 31, 2006 |
| |
| (Millions of Dollars) | | Pension Benefits | | | | Post-retirement | |
| | | | | | | |
| | | | | | | |
| Net actuarial loss | $ | 36.5 | | | $ | 9.0 | |
| Net prior service cost | | 7.1 | | | | 1.7 | |
| | | | | | | | |
| | Net amount recognized | $ | 43.6 | | | $ | 10.7 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The accumulated benefit obligation for all defined benefit pension plans was $197.9 million and $161.6 million at December 31, 2006 and 2005, respectively.
F-22
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2007 estimated amortization of amounts in other comprehensive income are as follows:
| (Millions of Dollars) | Pension Benefits | | Post Retirement Benefits |
| | | |
| Amortization of prior service cost | $ | 3.6 | | | $ | 1.0 | |
| Amortization of net loss | | 1.5 | | | | 0.5 | |
| | | | | | | |
| Total costs be recognized | $ | 5.1 | | | $ | 1.5 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Additional Information
The weighted average assumptions used to determine net periodic benefit cost in the accounting for the pension benefit plans and other benefit plans for the years ended December 31, 2006, 2005 and 2004 are as follows:
| | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| Discount rate | | 5.75 | % | | | 6.00 | % | | | 6.25 | % |
| Expected return on plan assets | | 8.50 | % | | | 8.50 | % | | | 8.50 | % |
| Rate of compensation increase | | 3.50 | % | | | 3.50 | % | | | 3.50 | % |
The weighted average assumptions used to determine benefit obligations for the pension benefit plans and other benefit plans at December 31, 2006, 2005 and 2004 are as follows:
| | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Discount rate | | 5.75 | % | | | 5.75 | % | | | 6.00 | % |
| Rate of compensation increase | | 3.50 | % | | | 3.50 | % | | | 3.50 | % |
The Company considers a number of factors to determine its expected rate of return on plan assets assumptions, including historical performance of plan assets, asset allocation and other third-party studies and surveys. The Company reviewed the historical performance of plan assets over a ten-year period (from 1994 to 2004), the results of which exceed the 8.50% rate of return assumption that the Company ultimately selected for domestic plans. The Company also considered plan portfolio asset allocations over a variety of time periods and compared them with third-party studies and surveys of annualized returns of similarly balanced portfolio strategies. The historical return of this universe of similar portfolios also exceeded the return assumption that the Company ultimately selected. Finally, the Company reviewed performance of the capital markets in recent years and, upon advice from various third parties, such as the pension plans' advisers, investment managers and actuaries, selected the 8.50% return assumption used for domestic plans.
For measurement purposes, health care cost trend rates of approximately 10% for pre-age-65 and post-age-65 benefits were used in 2006. These trend rates were assumed to decrease gradually to 5.0% for 2011 and remain at that level thereafter. However, the Company will only absorb a 5% increase.
A one percentage-point change in assumed health care cost trend rates would have the following effects:
Thousands of Dollars | | 1-Percentage Point
Increase | | | 1-Percentage Point
Decrease |
| | | | | |
Effect on total service and interest cost components | $ | -- | | $ | (2) |
| | | | | | |
Effect on postretirement benefit obligations | $ | -- | | $ | (2,727) |
Plan Assets
The Company's pension plan weighted average asset allocations at December 31, 2006 and 2005 by asset category are as follows:
Asset Category | | | 2006 | | | | 2005 | |
| | | | | | | | |
| | | | | | | | |
| Equity securities | | | 66.4 | % | | | 66.2 | % |
| Fixed income securities | | | 31.5 | % | | | 31.4 | % |
| Real estate | | | 0.3 | % | | | 0.4 | % |
| Other | | | 1.8 | % | | | 2.0 | % |
| | | | | | | | | |
| | Total | | | 100 | % | | | 100 | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
F-23
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents domestic and foreign pension plan assets information at December 31, 2006, 2005 and 2004 (the measurement date of pension plan assets):
| | U.S. Plans | | International Plans |
| | | |
| Millions of Dollars | | 2006 | | | | 2005 | | | | 2004 | | | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair value of plan assets | $ | 177.9 | | | $ | 149.7 | | | $ | 139.3 | | | $ | 48.4 | | | $ | 36.6 | | | $ | 34.6 | |
Contributions
The Company expects to contribute $15.0 million to its pension plans and $2.0 million to its other postretirement benefit plan in 2007.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
| Millions of Dollars | | Pension
Benefits | | | Other
Benefits |
| | | | | |
| | | | | | |
2007 | $ | 10.4 | | $ | 1.8 |
2008 | $ | 9.6 | | $ | 1.8 |
2009 | $ | 12.3 | | $ | 2.0 |
2010 | $ | 14.1 | | $ | 2.2 |
2011 | $ | 14.2 | | $ | 2.6 |
2012 - 2016 | $ | 89.9 | | $ | 17.7 |
Investment Strategies
The Plan Assets Committee has adopted an investment policy for domestic pension plan assets designed to meet or exceed the expected rate of return on plan assets assumption. To achieve this, the pension plans retain professional investment managers that invest plan assets, primarily in equity and fixed income securities. The Company has targeted an investment mix of 65% in equity securities and 35% in fixed income securities.
Savings and Investment Plans
The Company maintains a voluntary Savings and Investment Plan for most non-union employees in the U.S. Within prescribed limits, the Company bases its contribution to the Plan on employee contributions. The Company's contributions amounted to $3.3 million, $3.0 million and $3.1 million for the years ended December 31, 2006, 2005 and 2004, respectively.
Notes 18. Leases
The Company has several non-cancelable operating leases, primarily for office space and equipment. Rent expense amounted to approximately $6.1 million, $4.6 million and $4.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. Total future minimum rental commitments under all non-cancelable leases for each of the years 2007 through 2011 and in aggregate thereafter are approximately $4.6 million, $3.6 million, $3.1 million, $2.3 million, $1.0 million, respectively, and $7.8 million thereafter. Total future minimum rentals to be received under non-cancelable subleases were approximately $7.0 million at December 31, 2006.
Total future minimum payments to be received under direct financing leases for each of the years 2007 through 2011 and the aggregate thereafter are approximately: $4.9 million, $3.7 million, $2.7 million, $1.9 million, $1.3 million, and $2.3 million thereafter.
Note 19. Litigation
On November 28, 2005, the Company announced that it had reached a settlement of pending commercial and patent litigation with Omya AG. The settlement was on a worldwide basis, hence the litigation in both the United States and Italy have been dismissed. The settlement provides for the recognition of the Company's intellectual property and patent rights. As part of the settlement, the Company received a settlement payment and granted Omya AG a non-exclusive license for the terms of the patents in exchange for royalty payments through 2009.
Certain of the Company's subsidiaries are among numerous defendants in a number of cases seeking damages for exposure to silica or to asbestos containing materials. The Company currently has 776 pending silica cases and 26 pending
F-24
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
asbestos cases. In 2006, the Company was named in two new silica cases and in three new asbestos cases. To date, 655 silica cases have been dismissed, of which 211 were dismissed in 2006. Most of these claims do not provide adequate information to assess their merits, the likelihood that the Company will be found liable, or the magnitude of such liability, if any. Additional claims of this nature may be made against the Company or its subsidiaries. At this time management anticipates that the amount of the Company's liability, if any, and the cost of defending such claims, will not have a material effect on its financial position or results of operations.
The Company has not settled any silica or asbestos lawsuits to date. We are unable to state an amount or range of amounts claimed in any of the lawsuits because state court pleading practices do not require identifying the amount of the claimed damage. The aggregate cost to the Company for 2006 for the legal defense of these cases was $0.1 million. The Company expenses legal costs when incurred. Our experience has been that MTI is not liable to plaintiffs in any of these lawsuits and MTI does not expect to pay any settlements or jury verdicts in these lawsuits.
Environmental Matters
On April 9, 2003, the Connecticut Department of Environmental Protection ("DEP") issued an administrative consent order relating to our Canaan, Connecticut, plant where both our Refractories segment and Specialty Minerals segment have operations. We agreed to the order, which includes provisions requiring investigation and remediation of contamination associated with historic use of polychlorinated biphenyls (PCBs) at a portion of the site. The following is the present status of the remediation efforts:
. | Building Decontamination. We have completed the investigation of building contamination and submitted a report characterizing the contamination. We are awaiting review and approval of this report by the regulators. Based on the results of this investigation, we believe that the contamination may be adequately addressed by means of encapsulation through painting of exposed surfaces, pursuant to the Environmental Protection Agency's ("EPA") regulations and have accrued such liabilities as discussed below. However, this conclusion remains uncertain pending completion of the phased remediation decision process required by the regulations. |
. | Groundwater. We are still conducting investigations of potential groundwater contamination. To date, the results of investigation indicate that there is some oil contamination of the groundwater. We are conducting further investigations of the groundwater. |
. | Soil. We have completed the investigation of soil contamination and submitted a report characterizing contamination to the regulators. Based on the results of this investigation, we believe that the contamination may be left in place and monitored, pursuant to a site-specific risk assessment, which is underway. However, this conclusion is subject to completion of a phased remediation decision process required by applicable regulations. |
We believe that the most likely form of remediation will be to leave existing contamination in place, encapsulate it, and monitor the effectiveness of the encapsulation.
We estimate that the cost of the likely remediation above would approximate $200,000, and that amount has been recorded as a liability on our books and records.
The Company is evaluating options for upgrading the wastewater treatment facilities at its Adams, Massachusetts, plant. This work is being undertaken pursuant to an administrative consent order issued by the Massachusetts Department of Environmental Protection on June 18, 2002. The order required payment of a civil fine in the amount of $18,500, the investigation of options for ensuring that the facility's wastewater treatment ponds will not result in discharge to groundwater, and closure of a historic lime solids disposal area. The Company is committed to identifying appropriate improvements to the wastewater treatment system by July 1, 2007, and to implementing the improvements by June 1, 2012. Preliminary engineering reviews indicate that the estimated cost of these upgrades to operate this facility beyond 2012 may be between $6 million and $8 million. The Company estimates that remediation costs would approximate $350,000, which has been accrued as of December 31, 2006. It is reasonably possible that a change in estimate may occur.
The Company and its subsidiaries are not party to any other material pending legal proceedings, other than routine litigation incidental to their businesses.
Note 20. Stockholders' Equity
Capital Stock
The Company's authorized capital stock consists of 100 million shares of common stock, par value $0.10 per share, of which 19,085,528 shares and 19,986,801 shares were outstanding at December 31, 2006 and 2005, respectively, and 1,000,000 shares of preferred stock, none of which were issued and outstanding.
F-25
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Dividends
Cash dividends of $3.9 million or $0.20 per common share were paid during 2006. In January 2007, a cash dividend of approximately $0.9 million or $0.05 per share, was declared, payable in the first quarter of 2007.
Preferred Stock Purchase Rights
Under the Company's Preferred Stock Purchase Rights Plan, each share of the Company's common stock carries with it one preferred stock purchase right. Subject to the terms and conditions set forth in the plan, the rights will become exercisable if a person or group acquires beneficial ownership of 15% or more of the Company's common stock or announces a tender or exchange offer that would result in the acquisition of 30% or more thereof. If the rights become exercisable, separate certificates evidencing the rights will be distributed, and each right will entitle the holder to purchase from the Company a new series of preferred stock, designated as Series A Junior Preferred Stock, at a predefined price. The rights also entitle the holder to purchase shares in a change-of-control situation. The preferred stock, in addition to a preferred dividend and liquidation right, will entitle the holder to vote on a pro rata basis with the Company's common stock.
The rights are redeemable by the Company at a fixed price until 10 days or longer, as determined by the Board, after certain defined events or at any time prior to the expiration of the rights on September 13, 2009 if such events do not occur.
Stock and Incentive Plan
The Company has adopted a Stock Award and Incentive Plan (the "Plan"), which provides for grants of incentive and non-qualified stock options, stock appreciation rights, stock awards or performance unit awards. The Plan is administered by the Compensation Committee of the Board of Directors. Stock options granted under the Plan have a term not in excess of ten years. The exercise price for stock options will not be less than the fair market value of the common stock on the date of the grant, and each award of stock options will vest ratably over a specified period, generally three years.
The following table summarizes stock option and restricted stock activity for the Plan:
| | | | | | Under Option | | Restricted Stock |
| | | | | | | |
| | | Shares Available for Grant | | | | Shares | | | | Weighted Average Exercised Price Per Share ($) | | | | Shares | | | | Weighted Average Exercise Price Per Share ($) | |
| | | | | | | | | | | | | | | | | | | |
| Balance January 1, 2004 | | 1,190,737 | | | | 1,482,766 | | | | 40.85 | | | | 27,855 | | | | 49.12 | |
| Granted | | (297,650 | ) | | | 270,750 | | | | 54.09 | | | | 26,900 | | | | 50.59 | |
| Exercised | | -- | | | | (363,300 | ) | | | 39.01 | | | | -- | | | | -- | |
| Canceled | | 23,998 | | | | (21,998 | ) | | | 46.25 | | | | (2,000 | ) | | | 49.12 | |
| | | | | | | | | | | | | | | | | | | |
| Balance December 31, 2004 | | 917,085 | | | | 1,368,218 | | | | 43.87 | | | | 52,755 | | | | 49.88 | |
| Granted | | (86,800 | ) | | | 50,700 | | | | 61.97 | | | | 36,100 | | | | 60.59 | |
| Exercised | | -- | | | | (218,431 | ) | | | 40.69 | | | | -- | | | | -- | |
| Canceled | | 18,822 | | | | (14,722 | ) | | | 51.51 | | | | (4,100 | ) | | | 51.56 | |
| | | | | | | | | | | | | | | | | | | |
| Balance December 31, 2005 | | 849,107 | | | | 1,185,765 | | | | 45.15 | | | | 84,755 | | | | 54.20 | |
| Granted | | (129,500 | ) | | | 79,200 | | | | 54.82 | | | | 50,300 | | | | 54.91 | |
| Exercised | | -- | | | | (103,392 | ) | | | 39.02 | | | | (255 | ) | | | 39.30 | |
| Canceled | | 9,504 | | | | (9,504 | ) | | | 35.80 | | | | -- | | | | -- | |
| | | | | | | | | | | | | | | | | | | |
| Balance December 31, 2006 | | 729,111 | | | | 1,152,069 | | | | 46.44 | | | | 134,800 | | | | 55.61 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Note 21. Comprehensive Income
Comprehensive income includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting to the extent they are effective, the recognition of deferred pension costs, and cumulative foreign currency translation adjustments.
F-26
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects the accumulated balances of other comprehensive income (loss):
Millions of Dollars | | | Currency Translation Adjustment | | | | Unrecognized
Pension
Costs | | | | Net Gain (Loss) On Cash Flow Hedges | | | | Accumulated Other Comprehensive Income (Loss) | |
| | | | | | | | | | | | | | | | |
| Balance at January 1, 2004 | | $ | 6.9 | | | $ | (2.7 | ) | | $ | (0.4 | ) | | $ | 3.8 | |
Current year net change | | | 34.0 | | | | (2.2 | ) | | | 0.1 | | | | 31.8 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2004 | | | 40.9 | | | | (4.9 | ) | | | (0.3 | ) | | | 35.6 | |
Current year net change | | | (43.7 | ) | | | 1.9 | | | | 0.2 | | | | (41.5 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2005 | | | (2.8 | ) | | | (3.0 | ) | | | (0.1 | ) | | | (5.9 | ) |
Current year net change | | | 36.0 | | | | (51.3 | ) | | | -- | | | | (15.3 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2006 | | $ | 33.2 | | | $ | (54.3 | ) | | $ | (0.1 | ) | | $ | (21.2 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The income tax expense (benefit) associated with items included in other comprehensive income (loss) was approximately $1.9 million, $(1.3) million and $(0.2) million for the years ended December 31, 2006, 2005 and 2004, respectively.
Note 22. Accounting for Asset Retirement Obligations
SFAS No. 143, "Accounting for Asset Retirement Obligations," establishes the financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs. The Company records asset retirement obligations in which the Company will be required to retire tangible long-lived assets. These are primarily related to its PCC satellite facilities and mining operations. The Company has also applied the provisions of FIN 47 related to conditional asset retirement obligations at its facilities. The Company has recorded asset retirement obligations at all of its facilities except where there are no contractual or legal obligations. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.
The following is a reconciliation of asset retirement obligations as of December 31, 2006:
Thousands of Dollars
| Asset retirement liability, beginning of period | $ | 10,968 | |
| Accretion expense | | 723 | |
| Settlements | | (283 | ) |
| Foreign currency translation | | 242 | |
| | | |
| Asset retirement liability, end of period | $ | 11,650 | |
| | | |
| | | |
| | | |
The current portion of the liability of approximately $0.2 million is included in other current liabilities. The long-term portion of the liability of approximately $11.5 million is included in other noncurrent liabilities.
Accretion expense is included in cost of goods sold in the Company's Consolidated Statements of Income.
Note 23. Accounting for Stripping Costs
Effective January 1, 2006, the Company adopted the consensus of EITF No. 04-06, "Accounting for Stripping Costs Incurred During Production in the Mining Industry." This consensus states that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the costs of inventory produced during the period that the stripping costs are incurred. The Company had previously deferred stripping costs in excess of the average life of mine stripping ratio and amortized such costs on a unit of production method when the ratio of waste to ore mined is less than the average life of mine stripping ratio. As a result, the Company recorded an after-tax charge of $7.1 million to its opening retained earnings and increased its opening inventory by $0.8 million.
F-27
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of opening retained earnings:
| (thousands of dollars) | | | |
| Ending retained earnings, December 31, 2005 | $ | 828,591 | |
| Adoption of EITF 04-06, net of tax | | 7,119 | |
| | | |
| Opening retained earnings, January 1, 2006 | $ | 821,472 | |
| | | |
| | | |
| | | |
The change did not have a significant impact on earnings in 2006.
Note 24. Non-Operating Income and Deductions
| (thousands of dollars) | Dec. 31, 2006 | | | Dec. 31, 2005 | | | Dec. 31, 2004 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | Interest income | $ | 1,762 | | | | $ | 1,384 | | | | $ | 1,589 | |
| | Interest expense | | (7,753 | ) | | | | (5,847 | ) | | | | (4,130 | ) |
| | Gain on insurance settlement | | 1,822 | | | | | -- | | | | | -- | |
| | Litigation settlement | | -- | | | | | 2,100 | | | | | -- | |
| | Foreign exchange losses | | (268 | ) | | | | (451 | ) | | | | (564 | ) |
| | Other income (deductions) | | (867 | ) | | | | (820 | ) | | | | (1,399 | ) |
| | | | | | | | | | | | | |
| Non-operating deductions, net | $ | (5,304 | ) | | | $ | (3,634 | ) | | | $ | (4,504 | ) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
During the first quarter of 2006, the Company recognized an insurance settlement gain of $1.8 million, net of related deductible, for property damage sustained at one of our facilities in 2004 as a result of Hurricane Ivan. Claims submitted to the insurance carrier for damages related to a combination of replacement costs for fixed assets and reimbursement of expenses associated with the clean-up and repairs at the facility. The insurance settlement gain related to the reimbursement of replacement costs for fixed assets in excess of the net book value of such assets.
During the fourth quarter of 2005, the Company recognized a litigation settlement gain of $2.1 million relating to the worldwide settlement of its pending commercial and patent litigation with Omya AG.
Note 25. Transaction with Former Parent Company
Under the terms of certain agreements entered into in connection with the Company's initial public offering in 1992, Pfizer Inc ("Pfizer") agreed to indemnify the Company against any liability arising from claims for remediation, as defined in the agreements, of on-site environmental conditions relating to activities prior to the closing of the initial public offering. The Company had asserted to Pfizer a number of indemnification claims pursuant to those agreements during the ten-year period following the closing of the initial public offering. Since the initial public offering, the Company has incurred and expensed approximately $6 million of environmental claims under these agreements. On January 20, 2006, Pfizer and the Company agreed to settle those claims, along with certain other potential environmental liabilities of Pfizer, in consideration of a payment by Pfizer of $4.5 million. Such payment was recorded as additional paid-in-capital, net of its related tax effect.
Note 26. Segment and Related Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's operating segments are strategic business units that offer different products and serve different markets. They are managed separately and require different technology and marketing strategies.
The Company has two reportable segments: Specialty Minerals and Refractories. The Specialty Minerals segment produces and sells precipitated calcium carbonate and lime, and mines, processes and sells the natural mineral products limestone and talc. This segment's products are used principally in the paper, building materials, paints and coatings, glass, ceramic, polymers, food, and pharmaceutical industries. The Refractories segment produces and markets monolithic and shaped refractory products and systems used primarily by the steel, cement and glass industries as well as metallurgical products used primarily in the steel industry.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on the operating income of the respective business units. Depreciation expense related to corporate assets is allocated to the business segments and is included in their income from operations. However, such corporate depreciable assets are not included in the segment assets. Intersegment sales and transfers are not significant.
F-28
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment information for the years ended December 31, 2006, 2005 and 2004 was as follows (in millions):
| | 2006 |
| |
| | | Specialty Minerals | | | | Refractories | | | | Total | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net sales | $ | 711.4 | | | $ | 347.9 | | | $ | 1,059.3 | |
| Income from operations | | 52.9 | | | | 32.0 | | | | 84.9 | |
| Bad debt expenses | | 0.8 | | | | (0.4 | ) | | | 0.4 | |
| Depreciation, depletion and amortization | | 68.8 | | | | 14.4 | | | | 83.2 | |
| Segment assets | | 795.8 | | | | 356.2 | | | | 1,152.0 | |
| Capital expenditures | | 67.8 | | | | 16.0 | | | | 83.8 | |
| | 2005 |
| |
| | | Specialty Minerals | | | | Refractories | | | | Total | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net sales | $ | 663.0 | | | $ | 327.8 | | | $ | 990.8 | |
| Income from operations | | 52.7 | | | | 28.3 | | | | 81.0 | |
| Impairment of assets | | 0.3 | | | | -- | | | | 0.3 | |
| Bad debt expenses | | 0.3 | | | | (0.8 | ) | | | (0.5 | ) |
| Depreciation, depletion and amortization | | 61.2 | | | | 12.1 | | | | 73.3 | |
| Segment assets | | 768.1 | | | | 293.4 | | | | 1,061.5 | |
| Capital expenditures | | 85.3 | | | | 21.8 | | | | 107.1 | |
| | 2004 |
| |
| | | Specialty Minerals | | | | Refractories | | | | Total | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net sales | $ | 618.7 | | | $ | 300.3 | | | $ | 919.0 | |
| Income from operations | | 57.7 | | | | 30.4 | | | | 88.1 | |
| Restructuring charges | | 0.7 | | | | 0.4 | | | | 1.1 | |
| Bad debt expenses | | 1.3 | | | | 0.3 | | | | 1.6 | |
| Depreciation, depletion and amortization | | 57.9 | | | | 12.2 | | | | 70.1 | |
| Segment assets | | 769.6 | | | | 297.4 | | | | 1,067.0 | |
| Capital expenditures | | 83.1 | | | | 17.8 | | | | 100.9 | |
A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is as follows (in millions):
| Income before provision for taxes on | | | | | | | | | | | |
| | income and minority interests | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| Income from operations for reportable segments | $ | 84.9 | | | $ | 81.0 | | | $ | 88.1 | |
| Unallocated corporate expenses | | -- | | | | -- | | | | (1.0 | ) |
| | | | | | | | | | | |
| Consolidated income from operations | | 84.9 | | | | 81.0 | | | | 87.1 | |
| Interest income | | 1.8 | | | | 1.4 | | | | 1.6 | |
| Interest expense | | (7.8 | ) | | | (5.8 | ) | | | (4.1 | ) |
| Other deductions | | 0.7 | | | | 0.8 | | | | (2.0 | ) |
| | | | | | | | | | | | |
| | Income before provision for taxes on income, | | | | | | | | | | | |
| | minority interests and discontinued operations | $ | 79.6 | | | $ | 77.4 | | | $ | 82.6 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total assets | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| Total segment assets | $ | 1,152.0 | | | $ | 1,061.5 | | | $ | 1,067.0 | |
| Corporate assets | | 41.1 | | | | 94.8 | | | | 87.9 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Consolidated total assets | $ | 1,193.1 | | | $ | 1,156.3 | | | $ | 1,154.9 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
F-29
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Capital expenditures | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| Total segment capital expenditures | $ | 83.8 | | | $ | 107.1 | | | $ | 100.9 | |
| Corporate capital expenditures | | 1.4 | | | | 4.4 | | | | 5.5 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Consolidated total capital expenditures | $ | 85.2 | | | $ | 111.5 | | | $ | 106.4 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The carrying amount of goodwill by reportable segment as of December 31, 2006 and December 31, 2005 was as follows:
| | Goodwill |
| |
| (Thousands of Dollars) | | 2006 | | | | 2005 | |
| | | | | | | |
| Specialty Minerals | $ | 16,560 | | | $ | 15,371 | |
| Refractories | | 52,417 | | | | 38,241 | |
| | | | | | | | |
| | Total | $ | 68,977 | | | $ | 53,612 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The net change in goodwill since December 31, 2005 was primarily attributable to the acquisition of ASMAS and the effect of foreign exchange.
Financial information relating to the Company's operations by geographic area was as follows (in millions):
| Net Sales | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| United States | $ | 628.4 | | | $ | 600.1 | | | $ | 558.2 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Canada/Latin America | | 80.7 | | | | 80.0 | | | | 81.7 | |
| Europe/Africa | | 278.4 | | | | 248.7 | | | | 222.7 | |
| Asia | | 71.8 | | | | 62.0 | | | | 56.4 | |
| | | | | | | | | | | |
| Total International | | 430.9 | | | | 390.7 | | | | 360.8 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Consolidated total net sales | $ | 1,059.3 | | | $ | 990.8 | | | $ | 919.0 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net sales and long-lived assets are attributed to countries and geographic areas based on the location of the legal entity. No individual foreign country represents more than 10% of consolidated net sales or consolidated long-lived assets.
| Long-lived assets | | 2006 | | | | 2005 | | | | 2004 | |
| | | | | | | | | | | |
| United States | $ | 425.2 | | | $ | 424.0 | | | $ | 412.4 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Canada/Latin America | | 18.8 | | | | 21.1 | | | | 23.7 | |
| Europe/Africa | | 217.1 | | | | 176.8 | | | | 194.0 | |
| Asia | | 75.3 | | | | 67.6 | | | | 43.7 | |
| | | | | | | | | | | |
| Total International | | 311.2 | | | | 265.5 | | | | 261.4 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Consolidated total long-lived assets | $ | 736.4 | | | $ | 689.5 | | | $ | 673.8 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The Company's sales by product category are as follows:
| Millions of Dollars | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | |
| Paper PCC | | $ | 500.6 | | $ | 460.7 | | $ | 429.3 | |
| Specialty PCC | | | 56.4 | | | 55.6 | | | 50.7 | |
| Talc | | | 58.5 | | | 54.2 | | | 51.6 | |
| SYNSIL® | | | 10.4 | | | 6.6 | | | 3.1 | |
| Other Processed Minerals | | | 85.5 | | | 85.9 | | | 84.0 | |
| Refractory Products | | | 264.6 | | | 239.3 | | | 243.0 | |
| Metallurgical Products | | | 83.3 | | | 88.5 | | | 57.3 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net Sales | | $ | 1,059.3 | | $ | 990.8 | | $ | 919.0 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
F-30
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 27. Quarterly Financial Data (unaudited)
The financial information for all periods presented has been reclassified to reflect discontinued operations. See Note 4 to the Consolidated Financial Statements for further information.
Millions of Dollars, Except Per Share Amounts
| 2006 Quarters | | | First | | | | Second | | | | Third | | | | Fourth | |
| | | | | | | | | | | | | | | | |
Net Sales by Major Product Line | | | | | | | | | | | | | | | | |
| | PCC | | $ | 141.9 | | | $ | 137.7 | | | $ | 138.9 | | | $ | 138.5 | |
| | Processed Minerals | | | 39.2 | | | | 41.8 | | | | 38.9 | | | | 34.5 | |
| | | | | | | | | | | | | | | | |
| | Specialty Minerals Segment | | | 181.1 | | | | 179.5 | | | | 177.8 | | | | 173.0 | |
| | Refractories Segment | | | 83.6 | | | | 86.9 | | | | 87.5 | | | | 89.9 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net sales | | | 264.7 | | | | 266.4 | | | | 265.3 | | | | 262.9 | |
Gross profit | | | 53.7 | | | | 56.1 | | | | 57.8 | | | | 53.7 | |
| | | | | | | | | | | | | | | | |
Income from continuing operations | | | 12.7 | | | | 12.6 | | | | 14.1 | | | | 12.2 | |
Income from discontinued operations | | | 0.1 | | | | (0.1 | ) | | | -- | | | | (1.7 | ) |
| | | | | | | | | | | | | | | | |
| | Net income | | $ | 12.8 | | | $ | 12.5 | | | $ | 14.1 | | | $ | 10.5 | |
| | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | |
| | Earnings per share | | | | | | | | | | | | | | | | |
| | from continuing operations | | $ | 0.64 | | | $ | 0.63 | | | $ | 0.72 | | | $ | 0.64 | |
| | Earnings per share | | | | | | | | | | | | | | | | |
| | discontinued operations | | | -- | | | | -- | | | | -- | | | | (0.09 | ) |
| | | | | | | | | | | | | | | | | |
| | Basic earnings per share | | $ | 0.64 | | | $ | 0.63 | | | $ | 0.72 | | | $ | 0.55 | |
| | | | | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | | | |
| | Earnings per share | | | | | | | | | | | | | | | | |
| | from continuing operations | | $ | 0.64 | | | $ | 0.63 | | | $ | 0.72 | | | $ | 0.63 | |
| | Earnings per share | | | | | | | | | | | | | | | | |
| | from discontinued operations | | | -- | | | | -- | | | | -- | | | | (0.08 | ) |
| | | | | | | | | | | | | | | | | |
| | Diluted earnings per share | | $ | 0.64 | | | $ | 0.63 | | | $ | 0.72 | | | $ | 0.55 | |
| | | | | | | | | | | | | | | | |
| Market price range per share of common stock: | | | | | | | | | | | | | | | | |
| | High | | $ | 58.93 | | | $ | 61.27 | | | $ | 53.40 | | | $ | 59.31 | |
| | Low | | $ | 52.97 | | | $ | 51.61 | | | $ | 48.01 | | | $ | 51.71 | |
| | Close | | $ | 58.41 | | | $ | 52.00 | | | $ | 53.40 | | | $ | 58.79 | |
| | | | | | | | | | | | | | | | |
Dividends paid per common share | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | |
F-31
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 2005 Quarters | | | First | | | | Second | | | | Third | | | | Fourth | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net Sales by Major Product Line | | | | | | | | | | | | | | | | |
| | PCC | | $ | 132.8 | | | $ | 121.6 | | | $ | 129.3 | | | $ | 132.5 | |
| | Processed Minerals | | | 35.8 | | | | 37.8 | | | | 36.7 | | | | 36.5 | |
| | | | | | | | | | | | | | | | |
| | Specialty Minerals Segment | | | 168.6 | | | | 159.4 | | | | 166.0 | | | | 169.0 | |
| | Refractories Segment | | | 81.0 | | | | 84.0 | | | | 79.5 | | | | 83.2 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net sales | | | 249.6 | | | | 243.4 | | | | 245.5 | | | | 252.2 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 57.3 | | | | 51.3 | | | | 50.9 | | | | 50.6 | |
| | | | | | | | | | | | | | | | |
Income from continuing operations | | | 14.9 | | | | 13.0 | | | | 12.1 | | | | 12.5 | |
Income from discontinued operations | | | 0.3 | | | | 0.1 | | | | 0.1 | | | | 0.1 | |
| | | | | | | | | | | | | | | | |
| | Net income | | $ | 15.2 | | | $ | 13.1 | | | $ | 12.2 | | | $ | 12.6 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | |
| Basic: | | | | | | | | | | | | | | | | |
| | Earnings per share | | | | | | | | | | | | | | | | |
| | from continuing operations | | $ | 0.72 | | | $ | 0.63 | | | $ | 0.60 | | | $ | 0.63 | |
| | Earnings per share | | | | | | | | | | | | | | | | |
| | from discontinued operations | | | 0.02 | | | | 0.01 | | | | 0.01 | | | | -- | |
| | | | | | | | | | | | | | | | | |
| | Basic earnings per share | | $ | 0.74 | | | $ | 0.64 | | | $ | 0.61 | | | $ | 0.63 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | | | |
| | Earnings per share | | | | | | | | | | | | | | | | |
| | from continuing operations | | $ | 0.71 | | | $ | 0.62 | | | $ | 0.60 | | | $ | 0.63 | |
| | Earnings per share | | | | | | | | | | | | | | | | |
| | from discontinued operations | | | 0.02 | | | | 0.01 | | | | -- | | | | -- | |
| | | | | | | | | | | | | | | | | |
| | Diluted earnings per share | | $ | 0.73 | | | $ | 0.63 | | | $ | 0.60 | | | $ | 0.63 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Market price range per share of common stock: | | | | | | | | | | | | | | | | |
| | High | | $ | 66.80 | | | $ | 68.83 | | | $ | 64.11 | | | $ | 58.32 | |
| | Low | | $ | 60.52 | | | $ | 60.02 | | | $ | 57.21 | | | $ | 51.59 | |
| | Close | | $ | 65.78 | | | $ | 61.60 | | | $ | 57.21 | | | $ | 55.89 | |
| | | | | | | | | | | | | | | | |
Dividends paid per common share | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | |
In the fourth quarter of 2005, the Company recorded a $0.3 million writedown of impaired assets relating to the planned closure of the Company's operations in Cornwall, Canada.
F-32
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Minerals Technologies Inc.:
We have audited the accompanying consolidated balance sheets of Minerals Technologies Inc. and subsidiary companies as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2006. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Minerals Technologies Inc. and subsidiary companies as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in the notes to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Shared-Based Payment," SFAS No. 151, "Inventory Costs - - an Amendment of ARB No. 43, Chapter 4," and Emerging Issues Task Force Issue No. 04-06, "Accounting for Stripping Costs Incurred During Production in the Mining Industry." Also as discussed in the notes to the consolidated financial statements, effective December 31, 2006, the Company adopted SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans - An Amendment of FASB Statements No. 87, 88, 106, and 132(R)."
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Minerals Technologies Inc. and subsidiary companies' internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
New York, New York
February 27, 2007
F-33
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Board of Directors and Shareholders
Minerals Technologies Inc.:
We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Minerals Technologies Inc. and subsidiary companies maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Minerals Technologies Inc. and subsidiary companies' management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of a refractories company in Turkey acquired on October 2, 2006. This refractories company, excluding goodwill, constituted approximately 2.5% of consolidated total assets of the Company and less than 1% of consolidated net sales. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of this acquired company.
In our opinion, management's assessment that Minerals Technologies Inc. and subsidiary companies maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Minerals Technologies Inc. and subsidiary companies maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Minerals Technologies Inc. and subsidiary companies as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders' equity, and cash flows and related financial statement schedule for each of the years in the three-year period ended December 31, 2006, and our report dated February 27, 2007 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule. Our report refers to the adoption in 2006 of Statement of Financial Accounting Standards ("SFAS") No. 123R, "Shared-Based Payment," SFAS No. 151, "Inventory Costs - an Amendment of ARB No. 43, Chapter 4," Emerging Issues Task Force Issue No. 04-06, "Accounting for Stripping Costs Incurred During Production in the Mining Industry," and SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans - An Amendment of FASB Statements No. 87, 88, 106, and 132(R)."
/s/ KPMG LLP
New York, New York
February 27, 2007
F-34
Management's Report On Internal Control Over Financial Reporting
Management of Minerals Technologies Inc. is responsible for the preparation, integrity and fair presentation of its published consolidated financial statements. The financial statements have been prepared in accordance with U.S. generally accepted accounting principles and, as such, include amounts based on judgements and estimates made by management. The Company also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements.
Management is also responsible for establishing and maintaining effective internal control over financial reporting. The Company's internal control over financial reporting includes those policies and procedures that pertain to the Company's ability to record, process, summarize and report reliable financial data. The Company maintains a system of internal control over financial reporting, which is designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation of reliable published financial statements and safeguarding of the Company's assets. The system includes a documented organizational structure and division of responsibility, established policies and procedures, including a code of conduct to foster a strong ethical climate, which are communicated throughout the Company, and the careful selection, training and development of our people.
The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the Company's accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The Audit Committee is responsible for the appointment and compensation of the independent registered public accounting firm. It meets periodically with management, the independent registered public accounting firm and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing the Company's financial reports. The independent registered public accounting firm and the internal auditors have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee.
Management recognizes that there are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
The Company assessed its internal control system as of December 31, 2006 in relation to criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, the Company has determined that, as of December 31, 2006, its system of internal control over financial reporting was effective.
On October 2, 2006, the Company completed an acquisition of a refractories company in Turkey and has excluded this company from our assessment of the effectiveness of our internal control over financial reporting. During 2006, this company contributed less than 1% of consolidated net sales and, as of December 31, 2006, accounted for approximately 2.5% of our consolidated total assets, excluding goodwill.
The consolidated financial statements have been audited by the independent registered public accounting firm, KPMG LLP, which was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board. Reports of the independent registered public accounting firm, which includes the independent registered public accounting firm's attestation of management's assessment of internal controls, are also presented within this document.
| /s/ | Paul R. Saueracker
Chairman of the Board, President and
Chief Executive Officer | /s/ | John A. Sorel
Senior Vice President, Finance
and Chief Financial Officer |
| | | | |
| /s/ | Michael A. Cipolla
Vice President, Corporate Controller
and Chief Accounting Officer | | |
February 27, 2007
F-35
MINERALS TECHNOLOGIES INC. & SUBSIDIARY COMPANIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(thousands of dollars)
Description | | | Balance at Beginning of Period | | | | Additions Charged to Costs, Provisions and Expenses (c) | | | | Deductions (a) (b) | | | | Balance at End of Period |
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| Year ended December 31, 2006 | | | | | | | | | | | | | | | |
| Valuation and qualifying accounts deducted from | | | | | | | | | | | | | | | |
| | assets to which they apply: | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 5,818 | | | $ | 377 | | | $ | (1,645) | | | $ | 4,550 |
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| Year ended December 31, 2005 | | | | | | | | | | | | | | | |
| Valuation and qualifying accounts deducted from | | | | | | | | | | | | | | | |
| | assets to which they apply: | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 7,143 | | | $ | (518) | | | $ | (807) | | | $ | 5,818 |
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| Year ended December 31, 2004 | | | | | | | | | | | | | | | |
| Valuation and qualifying accounts deducted from | | | | | | | | | | | | | | | |
| | assets to which they apply: | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 7,010 | | | $ | 1,576 | | | $ | (1,443) | | | $ | 7,143 |
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(a) | Includes impact of translation of foreign currencies. |
(b) | Uncollectible accounts charged against allowance for doubtful accounts, net of recoveries of $2.3 million in 2004. |
(c) | Provision for bad debts, net of reversal of recoveries of $0.6 million in 2006 and $1.0 million in 2005. |
S-1
