SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-3295
--
MINERALS TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1190717
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
405 Lexington Avenue, New York, New York 10174-1901
(Address of principal executive offices, including zip code)
(212) 878-1800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
---------- ----------
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT October 23, 1998
Common Stock, $.10 par value 22,018,965
MINERALS TECHNOLOGIES INC.
INDEX TO FORM 10-Q
Page No.
------
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements:
Condensed Consolidated Statement of Income
for the three month and nine month periods
ended September 27, 1998 and September 28,
1997 3
Condensed Consolidated Balance Sheet as of
September 27, 1998 and December 31, 1997 4
Condensed Consolidated Statement of Cash
Flows for the nine month periods ended
September 27, 1998 and September 28, 1997 5
Notes to Condensed Consolidated Financial
Statements 6
Independent Auditors' Report 9
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings 15
Item 6.
Exhibits and Reports on Form 8-K 16
Signature 17
PAGE 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended
(thousands, except ------------------
per share data) Sept.27, Sept.28,
1998 1997
-------- --------
Net sales . . . . . . . . . . . . . $154,119 $155,012
Operating costs and expenses:
Cost of goods sold. . . . . . . . . 104,670 108,588
Marketing, distribution and
administrative expenses. . . . . . 19,513 19,488
Research and development expenses . 5,143 4,974
-------- --------
Income from operations . . . . . . . 24,793 21,962
Non-operating deductions, net. . . . 1,289 2,560
Income before provision for taxes on
income and minority interests. . . 23,504 19,402
Provision for taxes on income. . . . 7,270 6,207
Minority interests . . . . . . . . . 783 (518)
------- -------
Net income . . . . . . . . . . . . . $15,451 $13,713
======= =======
Earnings per common share:
Basic . . . . . . . . . . . . . . $0.70 $0.61
Diluted. . . . . . . . . . . . . . $0.68 $0.59
Cash dividends declared per common share $0.025 $0.025
Shares used in the computation of earnings per share
Basic . . . . . . . . . . . . . . 22,211 22,545
Diluted. . . . . . . . . . . . . . 22,814 23,134
Nine Months Ended
-----------------
(thousands of dollars, Sept.27, Sept.28,
except per share data) 1998 1997
-------- --------
Net sales . . . . . . . . . . . . . . $453,973 $444,403
Operating costs and expenses:
Cost of goods sold . . . . . . . . . 311,199 313,089
Marketing, distribution and
administrative expenses . . . . . . 58,196 56,823
Research and development expenses. . 15,302 15,199
------- -------
Income from operations. . . . . . . . 69,276 59,292
Non-operating deductions, net . . . . 5,115 5,648
Income before provision for taxes
on income and minority interests. . 64,161 53,644
Provision for taxes on income . . . . 20,518 17,164
Minority interests. . . . . . . . . . 734 (162)
------- -------
Net income. . . . . . . . . . . . . . $42,909 $36,642
======= =======
Earnings per common share:
Basic . . . . . . . . . . . . . . $1.92 $1.62
Diluted . . . . . . . . . . . . . . $1.86 $1.59
Cash dividends declared per common share $0.075 $0.075
Shares used in the computation of earnings per share
Basic . . . . . . . . . . . . . . 22,406 22,565
Diluted . . . . . . . . . . . . . . 23,076 23,093
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 3
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
Sept.27, Dec.31,
1998* 1997**
(thousands of dollars) ------- ------
Current assets:
Cash and cash equivalents. . . . . . . $ 31,303 $ 41,525
Accounts receivable, net . . . . . . . 115,189 108,146
Inventories . . . . . . . . . . . . . 61,788 61,166
Other current assets . . . . . . . . . 11,227 15,745
------- -------
Total current assets. . . . . . . . 219,507 226,582
Property, plant and equipment, less
accumulated depreciation and
depletion: Sept. 27, 1998: $367,038
Dec. 31, 1997: $349,538 . . . . . . . 509,731 500,731
Other assets and deferred charges. . . . 22,453 14,094
-------- --------
Total assets . . . . . . . . . . . . . $751,691 $741,407
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt. . . . . . . . . . . . $ 13,508 $ 13,989
Accounts payable . . . . . . . . . . . 35,911 33,163
Other current liabilities. . . . . . . 48,111 47,066
------- -------
Total current liabilities . . . . . 97,530 94,218
Long-term debt . . . . . . . . . . . . . 88,454 101,571
Other non-current liabilities. . . . . . 83,749 78,621
------- -------
Total liabilities . . . . . . . . . 269,733 274,410
------- -------
Shareholders' equity:
Common stock . . . . . . . . . . . . . 2,551 2,537
Additional paid-in capital . . . . . . 142,711 139,113
Retained earnings. . . . . . . . . . . 453,493 412,264
Accumulated other comprehensive loss . (15,055) (14,344)
------- -------
583,700 539,570
Less common stock held in treasury,
at cost . . . . . . . . . . . . . . 101,742 72,573
------- -------
Total shareholders' equity. . . . . 481,958 466,997
------- -------
Total liabilities and shareholders'
equity . . . . . . . . . . . . . . . $751,691 $741,407
======== ========
* Unaudited
** Condensed from audited financial statements.
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 4
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
------------------
(thousands of dollars) Sept.27, Sept.28,
1998 1997
---- ----
OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . $42,909 $36,642
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and amortization 40,132 39,522
Other non-cash items . . . . . . . 6,884 3,261
Net changes in operating assets and
liabilities . . . . . . . . . . . . . 3,177 (2,969)
------ ------
Net cash provided by operating activities 93,102 76,456
------ ------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (58,366) (46,984)
Acquisition of business . . . . . . . . (34,130) --
Proceeds from disposition of business. 32,357 --
Other investing activities, net . . . . (336) 3,762
------- ------
Net cash used in investing activities (60,475) (43,222)
======= ======
FINANCING ACTIVITIES
Proceeds from issuance of short-term and
long-term debt . . . . . . . . . . . 599 19,597
Repayment of debt . . . . . . . . . . . (14,125) (34,537)
Purchase of common shares for treasury . (29,169) (5,015)
Other financing activities, net . . . . 1,923 3,755
------- -------
Net cash used in financing activities . (40,772) (16,200)
------- -------
Effect of exchange rate changes on cash
and cash equivalents . . . . . . . 2,077) (950)
------- -------
Net (decrease)/increase in cash and
cash equivalents. . . . . . . . . (10,222) 16,084
Cash and cash equivalents at beginning of
period. . . . . . . . . . . . . . 41,525 15,446
------ ------
Cash and cash equivalents at end of
period. . . . . . . . . . . . . . $ 31,303 $31,530
======= =======
Interest paid . . . . . . . . . . . . . $ 5,834 $ 6,662
======= =======
Income taxes paid . . . . . . . . . . . $ 9,887 $ 9,907
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 5
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by management in accordance with the rules and regulations of
the United States Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. Therefore, these financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. In the opinion of management, all adjustments, consisting
solely of normal recurring adjustments necessary for a fair presentation of the
financial information for the periods indicated, have been included. The
results for the three-month and nine-month periods ended September 27, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
NOTE 2: INVENTORIES
The following is a summary of inventories by major category:
(thousands of dollars) September 27, December 31,
1998 1997
---- ----
Raw materials. . . . . . . . $21,621 $19,605
Work in process. . . . . . . 4,211 5,858
Finished goods . . . . . . . 19,298 19,812
Packaging and supplies . . . 16,658 15,891
------- -------
Total inventories. . . . . . $61,788 $61,166
======= =======
NOTE 3: LONG TERM DEBT
The following is a summary of long term debt:
September 27, December 31,
(thousands of dollars) 1998 1997
---- ----
7.75% Economic Development
Revenue Bonds Series 1990
Due 2010 (secured). . . . . $4,600 $4,600
Variable/Fixed Rate Industrial
Development Revenue Bonds
Due 2009 . . . . . . . . . 4,000 4,000
Variable/Fixed Rate Industrial
Development Revenue Bonds
Due April 1, 2012 . . . . . 7,545 7,545
Variable/Fixed Rate Industrial
Development Revenue Bonds
Due August 1, 2012. . . . . 8,000 8,000
6.04% Guarantied Senior Notes
Due June 11, 2000 . . . . . 26,000 39,000
7.49% Guaranteed Senior Notes
Due July 24, 2006 . . . . . 50,000 50,000
Other borrowings . . . . . . . . 1,817 1,914
------- -------
101,962 115,059
Less: Current maturities . . . . 13,508 13,488
------- --------
Long-term debt . . . . . . . . . $88,454 $101,571
======= ========
Page 6
NOTE 4 : EARNINGS PER SHARE (EPS)
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share are
based upon the weighted average number of common shares outstanding during the
period assuming the issuance of common shares for all dilutive potential common
shares outstanding. The following table sets forth the computation of basic and
diluted earnings per share:
THREE MONTHS ENDED
------------------
BASIC EPS
(IN THOUSANDS, EXCEPT PER Sept.27, Sept.28,
SHARE DATA) 1998 1997
---- ----
Net income . . . . . . . . . . . . . $15,451 $13,713
Weighted average shares outstanding. 22,211 22,545
------- -------
Basic earnings per share . . . . . . $ 0.70 $ 0.61
======= =======
DILUTED EPS
Net income . . . . . . . . . . . . . $15,451 $13,713
Weighted average shares outstanding. 22,211 22,545
------- -------
Dilutive effect of stock options . . 603 589
Weighted average shares outstanding,
adjusted . . . . . . . . . . . . . 22,814 23,134
------- -------
Diluted earnings per share . . . . . $ 0.68 $ 0.59
======= =======
BASIC EPS NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER Sept.27, Sept.28,
SHARE DATA) 1998 1997
---- ----
Net income . . . . . . . . . . . . . $42,909 $36,642
Weighted average shares outstanding. 22,406 22,565
------- -------
Basic earnings per share . . . . . . $ 1.92 $ 1.62
======= =======
DILUTED EPS
Net income . . . . . . . . . . . . . $42,909 $36,642
------- -------
Weighted average shares outstanding. 22,406 22,565
Dilutive effect of stock options . . 670 528
------- -------
Weighted average shares outstanding.
adjusted . . . . . . . . . . . . . 23,076 23,093
======= =======
Diluted earnings per share $ 1.86 $ 1.59
======= =======
NOTE 5 : COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards
for the reporting and display of comprehensive income and its components in
general purpose financial statements. The following are the components
of comprehensive income:
THREE MONTHS ENDED
(thousands of dollars) Sept. 27, Sept. 28,
1998 1997
---- ----
Net income . . . . . . . . . . . . $15,451 $13,713
Other comprehensive income,
net of tax:
Foreign currency translation
adjustments. . . . . . . . 5,899 (6,183)
Unrealized holding gains
(losses) . . . . . . . . . (47) (2)
------- -------
Comprehensive income. . . $21,303 $ 7,528
======= =======
NINE MONTHS ENDED
(thousands of dollars) Sept. 27, Sept. 28,
1998 1997
---- ----
Net income . . . . . . . . . . . . $42,909 $36,642
Other comprehensive income,
net of tax:
Foreign currency translation
adjustments. . . . . . . . (666) (13,200)
Unrealized holding gains
(losses) . . . . . . . . . (45) 16
------- -------
Comprehensive income $42,198 $23,458
======= =======
The components of accumulated other comprehensive loss, net of related tax, are
as follows:
Sept.27, Dec. 31,
1998 1997
---- ----
Foreign currency translation
adjustments . . . . . . . . . $(14,122) (13,456)
Minimum pension liability
adjustments . . . . . . . . . (1,001) (1,001)
Unrealized holding gains . . . . . 68 113
------- -------
Accumulated other
comprehensive loss . . . . . $(15,055) $(14,344)
======= =======
page 7
NOTE 6: ACQUISITION AND DIVESTITURE
On April 30, 1998 the Company acquired for approximately $34 million
in cash a precipitated calcium carbonate (PCC) manufacturing facility in
United Kingdom from Rhodia Limited. This acquisition allows the Company
to establish a base for its specialty PCC business in Europe. The
transaction was accounted for as a purchase. The purchase price exceeded
the fair value of net assets acquired by approximately $8 million, which
is being amortized on a straight-line basis over 25 years.
On April 28, 1998 the Company sold its limestone operation in Port
Inland, Michigan to Oglebay Norton Company for cash and receivables
approximating $34 million. The sales price approximated the net book
value of the assets.
page 8
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Minerals Technologies Inc.:
We have reviewed the condensed consolidated balance sheet of Minerals
Technologies Inc. and subsidiary companies as of September 27, 1998 and the
related condensed consolidated statements of income for each of the three-month
and nine-month periods ended September 27, 1998 and September 28, 1997 and cash
flows for the nine-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Minerals Technologies Inc.
and subsidiary companies as of December 31, 1997 and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended (not presented herein); and in our report dated January 22, 1998, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1997 is fairly presented, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
KPMG Peat Marwick LLP
New York, New York
November 3, 1998
Page 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
INCOME AND EXPENSE ITEMS
AS A PERCENTAGE OF NET SALES
THREE MONTHS NINE MONTHS
ENDED ENDED
----------------- -----------------
Sept.27, Sept.28, Sept.27, Sept.28,
1998 1997 1998 1997
-------- -------- ------- -------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 67.9 70.0 68.5 70.5
Marketing, distribution
and administrative
expenses 12.7 12.6 12.8 12.8
Research and development
expenses 3.3 3.2 3.4 3.4
----- ----- ----- -----
Income from operations 16.1 14.2 15.3 13.3
Net income 10.0% 8.8% 9.5% 8.2%
===== ===== ===== =====
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 27, 1998 AS COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 28, 1997
Net sales in the third quarter of 1998 decreased approximately 1% to $154.1
million from $155.0 million in the third quarter of 1997. In the second
quarter of 1998, the Company divested its Midwest limestone operation and
acquired a precipitated calcium carbonate (PCC) business in the United Kingdom.
Excluding both transactions, the reported sales growth in the third quarter
would have been 3%. In addition, the stronger U.S. dollar had an unfavorable
impact of approximately $3.2 million or 2 percentage points of sales growth.
Worldwide PCC sales grew 17.7% to $89.2 million from $75.8 million in the
third quarter of 1997. This increase was primarily attributable to the startup
of five new satellite plants since the third quarter of 1997, the significant
ramp-up of several satellite plants that began operations during the first nine
months of 1997, and initial sales from the aforementioned acquisition of a
specialty PCC business in the United Kingdom.
The Company recently announced the formation of a joint venture in China
with Asia Pulp & Paper Company Pte. Ltd. for the construction of a four-unit
satellite PCC plant in Dagang, China. (A "satellite unit" produces between
25,000 and 35,000 tons of PCC annually.)
Currently, two PCC satellite facilities are under construction, in
Courtland, Alabama and Dagang, China. Together, these plants will be equivalent
to approximately nine satellite units and are scheduled to begin operations
during the first half of 1999. The Company now operates 53 satellite plants in
14 countries worldwide.
Beginning in the first quarter of 1998, sales of pyrolytic graphite
products, previously reported in the processed minerals product line, are
reported in the refractory product line. Prior year's sales have been
reclassified to reflect this change. Net sales for the four quarters of 1997
were $1.1 million, $1.0 million, $0.5 million and $0.7 million respectively.
In April 1998, the Company divested its Midwest limestone business in Port
Inland, Michigan. References to ongoing operations exclude the results from
this facility. Net sales from the Midwest limestone business in the third and
fourth quarters of 1997 were $8.3 million and $5.9 million, respectively.
Net sales from the ongoing operations of processed mineral products
decreased 6.2% in the third quarter of 1998 to $19.7 million from $21.0 million
in the comparable quarter of 1997. The sales decline was primarily
attributable to the rationalization of the product line in the talc business.
Page 10
Net sales of refractory products decreased 9.4% to $45.2 million from
$49.9 million in the third quarter of 1997. Foreign exchange had an unfavorable
impact of approximately $2.0 million on refractory product sales.
Income from operations increased 12.9% in the third quarter of 1998 to
$24.8 million. This increase was due primarily to growth in the PCC product
line; improved profitability in refractory products, largely due to the
successful implementation of the Company's strategy of introducing high-value,
innovative products; and increased profitability in the processed minerals
product line.
Non-operating deductions decreased primarily as a result of foreign
exchange gains in the current year as compared to foreign exchange losses in the
prior year. In addition, interest expense decreased from the prior year.
Net income grew 12.7% to $15.5 million from $13.7 million in the prior
year. Earnings per common share, on a diluted basis, rose 15.3% to $0.68 in the
third quarter of 1998 compared to $0.59 in the prior year.
NINE MONTHS ENDED SEPTEMBER 27, 1998 AS COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 28, 1997
Net sales for the first nine months of 1998 increased 2.2% to $454.0
million from $444.4 million in 1997. Excluding the effects of overall
unfavorable foreign exchange rates, the sale of the Midwest limestone business
and the acquisition of the PCC business in the United Kingdom, sales would have
increased 6.3%. This increase was due to the expansion of the PCC product line.
PCC sales increased 15.7% to $254.3 million from $219.8 million in the prior
year. Net sales from the ongoing operations of processed minerals products
decreased 5.0% to $59.2 million for the first nine months of 1998. Refractory
product sales for the first nine months of 1998 were $138.9 million, a 5.8%
decrease from the prior year's $147.5 million. Foreign currency had an
unfavorable effect on refractory sales of approximately $6.0 million as a result
of the stronger U.S. dollar. The currency effect on consolidated net sales was
approximately $10.3 million or 3 percentage points of growth.
Net sales from ongoing operations in the United States increased 5.1%
to $306.8 million in the first nine months of 1998, due primarily to growth in
the PCC product line. Net foreign sales increased approximately 5.8% in the
first nine months of 1998, primarily as a result of the continued international
expansion of the PCC product line.
Income from operations rose 16.8% to $69.3 million in the first nine
months of 1998 from $59.3 million in the previous year.
Net income increased 17.1% to $42.9 million from $36.6 million in
1997. Diluted earnings per share increased 17.0% to $1.86 compared to $1.59 in
the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong in the first nine
months of 1998. Cash flows were provided from operations and the sale of the
Midwest limestone business. The cash was applied principally to fund
approximately $58.4 million of capital expenditures, acquire a specialty PCC
business, repurchase of common shares for treasury and remit the required
principal repayment of $13 million under the Company's Guarantied Senior Notes
due June 11, 2000. Cash provided from operating activities amounted to $93.1
million in the first nine months of 1998 as compared to $76.5 million in the
prior year.
On February 26, 1998, the Company's Board of Directors authorized a $150
million stock repurchase program pursuant to which stock will be purchased on
the open market from time to time. As of October 22, the Company had
repurchased approximately 640,000 shares under this program, at an average price
of approximately $48 per share.
Page 11
On April 28, 1998, the Company sold its limestone operation in Port Inland,
Michigan to Oglebay Norton Company for approximately $34 million, which
approximated its net book value. This high volume commodity operation no longer
complemented the Company's long term strategic vision. Sales for the facility
were approximately $21 million in 1997.
On April 30, 1998, the Company acquired for approximately $34 million a PCC
manufacturing facility located near Birmingham, England from Rhodia Limited, a
specialty chemicals company. This acquisition will allow the Company to
establish a base for its specialty PCC business in Europe. This facility
produces specialty PCC products for food and pharmaceutical applications, as
well as for use in plastics, sealants and coatings, and paper. Sales from this
facility in 1997 were approximately $18 million.
The Company has available approximately $110 million in uncommitted, short-
term bank credit lines, none of which were in use at September 27, 1998. The
Company anticipates that capital expenditures for all of 1998 will approximate
$90 million, principally for the construction of satellite PCC plants, expansion
projects at existing satellite PCC plants, and for other opportunities which
meet the strategic growth objectives of the Company. The Company expects to
meet such requirements from internally generated funds, the aforementioned
uncommitted bank credit lines and, where appropriate, project financing of
certain satellite plants.
PROSPECTIVE INFORMATION AND FACTORS THAT MAY AFFECT FUTURE RESULTS
The Securities and Exchange Commission encourages companies to disclose
forward looking information so that investors can better understand their future
prospects and make informed investment decisions. This report may contain
forward looking statements that set out anticipated results based on
management's plans and assumptions. Words such as "anticipate," "estimate,"
"expects," "projects," and words and terms of similar substance used in
connection with any discussion of future operating or financial performance
identify these forward looking statements.
The Company cannot guarantee that the expectations set forth in any forward
looking statement will be realized, although it believes it has been prudent in
its plans and assumptions. Achievement of future results is subject to risks,
uncertainties and inaccurate assumptions. Should known or unknown risks or
uncertainties materialize, or should underlying assumptions prove inaccurate,
actual results could vary materially from those anticipated, estimated or
projected. Investors should bear this in mind as they consider forward looking
statements and should refer to the discussion of certain risks, uncertainties
and assumptions under the heading "Cautionary Factors That May Affect Future
Results" in Exhibit 99 to this Quarterly Report on Form 10-Q.
CYCLICAL NATURE OF CUSTOMERS' BUSINESS
The bulk of the Company's sales are to customers in the paper and
steel industries, which have historically been cyclical. Both industries have
encountered difficulties in 1998, which in most markets have been more price-
driven than volume-driven. The pricing structure of some of our long term PCC
contracts makes our PCC business less sensitive to declines in the quantity of
product purchased. For this reason, and because of the geographical
diversification of our business, the Company's operating results to date have
not been materially affected by the difficult economic environment. However,
we cannot predict the economic outlook in the countries in which we do business,
nor in the key industries we serve. There can be no assurance that a recession,
in some markets or worldwide, would not have a significant negative impact on
the Company's financial position or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
which revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The statement is effective for fiscal years beginning after December 15, 1997.
The adoption of this statement has no impact on the consolidated financial
statements.
Page 12
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The statement is
effective for fiscal years beginning after December 15, 1998. Earlier
application is encouraged in fiscal years for which annual financial statements
have not been issued. The statement defines which costs of computer software
developed or obtained for internal use are capitalized and which costs are
expensed. The Company adopted SOP 98-1 in 1998. The adoption of SOP 98-1 does
not materially affect the consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities
and organization costs to be expensed as incurred. The Company will adopt
SOP 98-5 for calendar year 1999. The adoption of SOP 98-5 will not
materially affect the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company will adopt
SFAS 133 by January 1, 2000. Adoption of SFAS 133 is not expected to have a
material effect on the consolidated financial statements.
YEAR 2000
The 'year 2000 issue' arises because many computer programs and
electronically controlled devices denote years using only the last two digits.
Because these programs and devices may fail to recognize the year 2000
correctly, calculations or other tasks that involve the year 2000 may cause them
to produce erroneous results or to fail altogether. Like other companies, the
Company uses operating systems, applications and electronically controlled
devices that were produced by many different vendors at different times, and
many of which were not originally designed to be year 2000 compatible.
- --- Steps to Address the Year 2000 Issue
In 1996, the Company began the installation of new computer hardware and
software to improve the capability of the Company's information systems, to
harmonize the various information technology platforms in use, and to centralize
certain financial functions. The project encompasses corporate financial and
accounting functions as well as manufacturing and costing, procurement, planning
and scheduling of production and maintenance, and customer order management.
The benefits anticipated from this project include, but are not limited to, the
achievement of year 2000 readiness.
The Company has acquired much of the hardware and software required to
implement this project, and is currently bringing its domestic business
locations on to the new systems sequentially. This is proceeding according to
schedule, and the Company expects the new systems to be operational in all
affected U.S. locations no later than the third quarter of 1999. Other U.S.
manufacturing locations are currently year 2000 ready, with the exception of
three locations which are serviced by an information technology system which is
in the process of being upgraded. This upgrade is scheduled to be completed no
later than the second quarter of 1999.
Other preparations for the year 2000 are being carried out by the relevant
business units on a decentralized basis. Information technology systems outside
the United States are in the process of being evaluated and repaired or replaced
as required. The Company expects this process to be completed by all non-U.S.
locations no later than the third quarter of 1999.
The Company's exposures to the year 2000 issue other than in the area of
information technology arise mostly with respect to process control systems and
instrumentation at the Company's manufacturing locations, and in equipment used
at customer locations. Telephone and e-mail systems, operating systems and
applications in free-standing personal computers, local area networks and site
services such as electronic security systems, elevators and HVAC may also be
affected. A failure of these systems which interrupted our ability to supply
products to our customers could have a
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material adverse impact on our results of operations. These issues are being
addressed by the individual business units, by obtaining from vendors and
service providers either necessary modifications to the software or assurance
that the system will not be disrupted by the year 2000 issue. This process is
expected to be completed no later than the third quarter of 1999.
- --- Costs
The Company expects to spend approximately $15-17 million before January 1,
2000, for new computer hardware and software, other information technology
upgrades and replacements, and upgrades and replacements to non-IT systems
worldwide. Of this amount approximately $10 million has been expended as of the
end of the third quarter of 1998. These expenditures will be capitalized or
expensed in accordance with Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which the
Company has adopted.
The Company expects to finance these expenditures solely from working
capital, and does not expect the total cost associated with its plans to address
the year 2000 issue to have a material adverse impact on its financial position
or results of operations.
None of the Company's other information technology projects have been
delayed due to the implementation of year 2000 solutions.
- --- Third Parties
Like other companies, the Company relies on its customers for revenues, on
its suppliers for raw materials and on its other vendors for products and
services of all kinds; these third parties all face the year 2000 issue. An
interruption in the ability of any of them to provide goods or services, or to
pay for goods or services provided to them, or an interruption in the business
operations of our customers causing a decline in demand for our products, could
have a material adverse effect on the Company in turn. In particular, each of
the Company's satellite PCC plants relies on one customer for most or all of its
business, and in many cases for raw materials as well, so that a shutdown of the
host paper mill's operations would also cause the satellite PCC plant to shut
down.
In addition, there is a risk, the probability of which the Company is not
in a position to estimate, that the transition to the year 2000 will cause
wholesale, perhaps prolonged, failures of electrical generation, banking,
telecommunications or transportation systems in the United States or abroad,
disrupting the general infrastructure of business and the economy at large. The
effect of such disruptions on the Company could be material.
The Company's divisions are communicating with their principal customers
and vendors about their year 2000 readiness, and expect this process to be
completed no later than the third quarter of 1999. None of the responses
received to date suggests that any significant customer or vendor expects the
year 2000 issue to cause an interruption in its operations which would have a
material adverse impact on the Company. However, because so many firms are
exposed to the risk of failure not only of their own systems, but of the systems
of other firms, the ultimate effect of the year 2000 issue is subject to a very
high degree of uncertainty.
The Company believes that its preparations currently under way are adequate
to assess and manage the risks presented by the year 2000 issue, and does not
have a formal contingency plan at this time.
The statements in this section regarding the effect of the year 2000 and
the Company's responses to it are forward looking statements. They are based on
assumptions that the Company believes to be reasonable in light of its current
knowledge and experience. A number of contingencies could cause actual results
to differ materially from those described in forward looking statements made by
or on behalf of the Company. Please see "Cautionary Factors That May Affect
Future Results" in the attached Exhibit 99.
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ADOPTION OF A COMMON EUROPEAN CURRENCY
On January 1, 1999, eleven European countries will adopt the Euro as their
common currency. From that date until January 1, 2002, debtors and creditors
may choose to pay or to be paid in Euros or in the former national currencies.
On and after January 1, 2002, the former national currencies will cease to be
legal tender.
The Company is currently reviewing its information technology systems and
upgrading them as necessary to ensure that they will be able to convert among
the former national currencies and the Euro, and process transactions and
balances in Euros, as required. The Company has sought and received assurances
from the financial institutions with which it does business that beginning in
1999 they will be capable of receiving deposits and making payments both in
Euros and in the former national currencies. The Company does not expect that
adapting its information technology systems to the Euro will have a material
impact on its financial condition or results of operations. The Company is also
reviewing contracts with customers and vendors calling for payments in
currencies that are to be replaced by the Euro, and intends to complete in a
timely way any required changes to those contracts.
Adoption of the Euro is likely to have competitive effects in Europe, as
prices that had been stated in different national currencies become directly
comparable to one another. In addition, the adoption of a common monetary
policy throughout the countries adopting the Euro can be expected to have an
effect on the economy of the region. These competitive and economic effects
cannot be predicted with certainty, and there can be no assurance that they will
not have a material effect on the Company's business in Europe.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiary Specialty Minerals Inc. are defendants in a
lawsuit captioned Eaton Corporation v. Pfizer Inc, Minerals Technologies Inc.
and Specialty Minerals Inc., which was filed July 31, 1996 and is pending in the
U.S. District Court for the Western District of Michigan. The suit alleges that
certain materials sold to Eaton for use in truck transmissions were defective,
necessitating repairs for which Eaton now seeks reimbursement. The amount of
damages claimed by Eaton is approximately $20 million plus interest. The
Company believes it has insurance coverage for a substantial portion of the
alleged damages, if it should be held liable. While all litigation contains an
element of uncertainty, the Company and Specialty Minerals believe that they
have valid defenses to the claims asserted by Eaton in this lawsuit, are
continuing to defend all such claims vigorously, and believe that the outcome of
this matter will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
The Company and its subsidiaries are not party to any other material
pending legal proceedings, other than ordinary routine litigation that is
incidental to their businesses.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
3.1 --- Restated By-Laws of the Company, as amended
and restated October 22, 1998
4.1 --- First Amendment of Rights Agreement dated as of
November 2, 1998, by and between the Company and
ChaseMellon Shareholder Services L.L.C., amending
Rights Agreement dated as of October 26, 1992 and
previously filed as Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997
10.1--- Form of Employment Agreement (1), together
with schedule relating to executed Employment
Agreements
10.2--- Form of Severance Agreement (2), together
with schedule relating to executed Severance
Agreements
15 --- Accountants' Acknowledgment (Part I Data)
27.1--- Financial Data Schedule for the nine months
ended September 27, 1998
27.2--- Financial Data Schedule for the nine months
ended September 28, 1997
99 --- Statement of Cautionary Factors That May
Affect Future Results
(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, 1997.
(2) 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, 1996.
(b) No reports on Form 8-K were filed during the third
quarter of 1998.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Minerals Technologies Inc.
By: /s/Neil M. Bardach
Neil M. Bardach
Vice President-Finance and
Chief Financial Officer
November 3, 1998
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