SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1998
Commission File Number 1-8803
MATERIAL SCIENCES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-2673173
(State or other jurisdiction (IRS employer identification
of incorporation or organization) number)
2200 East Pratt Boulevard
Elk Grove Village, Illinois 60007
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (847) 439-8270
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
As of July 13, 1998, there were outstanding 15,406,106 shares of common stock,
$.02 par value.
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended May 31, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
(a) Financial statements of Material Sciences Corporation and Subsidiaries
(b) Summarized income statement information for Walbridge Coatings, An
Illinois Partnership
2
Consolidated Statements of Income
Material Sciences Corporation and Subsidiaries
Three Months Ended
May 31,
(In thousands, except per share data) 1998 1997
- --------------------------------------------------- -------- --------
Net Sales(1) $112,883 $ 73,096
Cost of Sales 93,773 55,505
-------- --------
Gross Profit $ 19,110 $ 17,591
Selling, General and Administrative
Expenses 13,701 13,202
-------- --------
Income from Operations $ 5,409 $ 4,389
-------- --------
Other (Income) and Expense:
Interest Income $ (71) $ (29)
Interest Expense 3,290 1,013
Equity in Results of Partnership (45) (502)
Other, Net (428) (260)
-------- --------
Total Other Expense, Net $ 2,746 $ 222
-------- --------
Income Before Income Taxes $ 2,663 $ 4,167
Income Taxes 1,025 1,605
-------- --------
Net Income(6) $ 1,638 $ 2,562
======== ========
Net Income Per Share(7):
Basic $ 0.11 $ 0.17
======== ========
Diluted $ 0.11 $ 0.17
======== ========
The accompanying notes are an integral part of these statements.
3
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
May 31, February 28,
(In thousands) 1998 1998
- ------------------------------------------------------------- --------- ------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 4,709 $ 3,625
Receivables:
Trade, Less Reserves of $4,155 and $4,785, Respectively (2) 48,216 53,536
Current Portion of Partnership Note - 380
Income Taxes 1,694 2,391
Prepaid Expenses 3,888 3,080
Inventories 57,280 60,892
Prepaid Taxes 1,944 1,944
--------- ---------
Total Current Assets $ 117,731 $ 125,848
--------- ---------
Gross Property, Plant and Equipment $ 366,275 $ 363,004
Accumulated Depreciation and Amortization (113,664) (106,405)
--------- ---------
Net Property, Plant and Equipment $ 252,611 $ 256,599
--------- ---------
Other Assets:
Investment in Partnership $ 11,239 $ 10,842
Intangible Assets, Net 23,978 24,142
Other 1,069 643
--------- ---------
Total Other Assets $ 36,286 $ 35,627
--------- ---------
Total Assets $ 406,628 $ 418,074
========= =========
Liabilities:
Current Liabilities:
Current Portion of Long-Term Debt $ 2,971 $ 3,410
Accounts Payable 44,723 43,040
Accrued Payroll Related Expenses 7,554 10,300
Accrued Expenses 10,594 8,768
--------- ---------
Total Current Liabilities $ 65,842 $ 65,518
--------- ---------
Long-Term Liabilities:
Deferred Income Taxes $ 13,140 $ 13,012
Long-Term Debt, Less Current Portion 173,551 187,563
Accrued Superfund Liability 3,350 3,350
Other 7,850 7,747
--------- ---------
Total Long-Term Liabilities $ 197,891 $ 211,672
--------- ---------
Shareowners' Equity:
Preferred Stock (3) $ - $ -
Common Stock (4) 328 327
Additional Paid-In Capital 52,859 52,253
Treasury Stock at Cost (5) (8,545) (8,545)
Retained Earnings 98,521 96,883
Cumulative Translation Adjustment (6) (268) (34)
--------- ---------
Total Shareowners' Equity $ 142,895 $ 140,884
--------- ---------
Total Liabilities and Shareowners' Equity $ 406,628 $ 418,074
========= =========
The accompanying notes are an integral part of these statements.
4
Consolidated Statements of Cash Flows
Material Sciences Corporation and Subsidiaries
Three Months Ended
May 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------------ -------- --------
Cash Flows From:
Operating Activities:
Net Income $ 1,638 $ 2,562
Adjustments to Reconcile Net Income to Net Cash Provided By
(Used In) Operating Activities:
Depreciation and Amortization 7,883 4,680
Provision (Benefit) for Deferred Income Taxes 128 (42)
Compensatory Effect of Stock Plans 96 83
Other, Net (170) (504)
-------- --------
Operating Cash Flow Prior to Changes in Assets and Liabilities $ 9,575 $ 6,779
-------- --------
Changes in Assets and Liabilities:
Receivables $ 5,526 $ (1,853)
Income Taxes Receivable 697 1,249
Prepaid Expenses (808) (868)
Inventories 3,612 (969)
Accounts Payable 1,100 (2,062)
Accrued Expenses (787) (2,559)
Other, Net (1) 54
-------- --------
Cash Flow from Changes in Assets and Liabilities $ 9,339 $ (7,008)
-------- --------
Net Cash Provided By (Used In) Operating Activities $ 18,914 $ (229)
-------- --------
Investing Activities:
Capital Expenditures, Net $ (3,224) $ (8,195)
Investment in Partnership (352) (545)
Other Long-Term Assets (426) 48
-------- --------
Net Cash Used In Investing Activities $ (4,002) $ (8,692)
-------- --------
Financing Activities:
Net Proceeds (Payments) Under Lines of Credit $ 50,600 $(10,100)
Proceeds from Senior Notes - 20,000
Payments to Settle Debt (64,929) (740)
Purchase of Treasury Stock - (1,027)
Sale of Common Stock 511 705
-------- --------
Net Cash Provided By (Used In) Financing Activities $(13,818) $ 8,838
-------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents $ (10) $ -
-------- --------
Net Increase (Decrease) in Cash $ 1,084 $ (83)
Cash and Cash Equivalents at Beginning of Period 3,625 2,116
-------- --------
Cash and Cash Equivalents at End of Period $ 4,709 $ 2,033
======== ========
The Changes in Assets and Liabilities above for the quarter ended May 31, 1998,
are net of assets and liabilities acquired.
The accompanying notes are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MATERIAL SCIENCES CORPORATION
The data for the three months ended May 31, 1998 and 1997 have not been audited
by independent public accountants but, in the opinion of the Company, reflect
all adjustments (consisting of only normal, recurring adjustments) necessary for
a fair presentation of the information at those dates and for those periods. The
financial information contained in this report should be read in conjunction
with the Company's 1998 Annual Report to Shareowners and Annual Report on Form
10-K. Certain prior year amounts have been reclassified to conform with the
fiscal 1999 presentation.
(1) During the three month periods ending May 31, 1998 and 1997, the Company
derived approximately 12.3% and 20.3%, respectively, of its sales from fees
billed to the Partnership by a subsidiary of the Company for operating the
Walbridge, Ohio facility.
(2) Includes trade receivables due from the Partnership of $354 at May 31, 1998
and $2,461 at February 28, 1998.
(3) Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized; 1,000,000
Designated Series B Junior Participating Preferred; None Issued.
(4) Common Stock, $.02 Par Value; 40,000,000 Shares Authorized; 16,385,754
Shares Issued and 15,406,106 Shares Outstanding at May 31, 1998 and
16,336,694 Shares Issued and 15,357,046 Shares Outstanding at February 28,
1998.
(5) Treasury Stock at Cost; 979,648 Shares at May 31, 1998 and February 28,
1998.
(6) Comprehensive Income:
Three Months Ended May 31,
--------------------------
1998 1997
---- ----
Net Income $1,638 $2,562
Other Comprehensive Income:
Foreign Currency Translation Adjustments,
Net of Tax (144) -
------ ------
Comprehensive Income $1,494 $2,562
====== ======
6
(7) Net Income Per Share:
Three Months Ended May 31,
--------------------------
1998 1997
---- ----
Net Income $ 1,638 $ 2,562
=========== ===========
Net Income Per Share:
Basic $ 0.11 $ 0.17
=========== ===========
Diluted $ 0.11 $ 0.17
=========== ===========
Weighted Average Number of Common
Shares Outstanding Used for Basic Net
Income Per Share 15,290,000 15,157,000
Diluted Common Stock Options 83,781 317,603
----------- -----------
Weighted Average Number of Common
Shares Outstanding Plus Dilutive Common
Stock Options 15,373,781 15,474,603
=========== ===========
Outstanding Common Stock Options Having
No Dilutive Effect 1,495,365 1,413,589
=========== ===========
7
Summarized Income Statement Information
Walbridge Coatings, An Illinois Partnership
Three Months Ended
May 31,
(In thousands) 1998 1997
- ------------------------------------------- ------------ ------------
Net Revenues $16,350 $18,335
Gross Profit 1,303 1,623
Income from Operations 1,162 871
Net Income 474 682
NOTE: The Net Income shown above does not directly correlate to the Equity in
Results of Partnership shown in the Company's Statement of Income due to
certain contractual allocation requirements of the Partnership. The
Company's primary financial benefit from participation in the Partnership
is in the form of revenues from operating the Walbridge, Ohio facility.
These revenues are included in the Company's net sales.
8
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For the Quarter Ended May 31, 1998
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations (In thousands)
- ----------------------------
Material Sciences Corporation ("MSC" or "Company") operates in one business
segment comprised of the following four product groups: coil coating,
galvanizing, laminates and composites, and specialty films. The following table
provides a summary of net sales and the percent of net sales of MSC's product
groups.
Net Sales Summary Quarter Ended May 31,
- --------------------- --------------------------------------------------
1998 1997
--------------------- ---------------------
Product Group: Dollars Percent Dollars Percent
-------- -------- -------- --------
Coil Coating $ 36,236 32.1% $ 29,727 40.7%
Galvanizing 48,310 42.8% 14,873 20.3%
Laminates and Composites 17,158 15.2% 17,086 23.4%
Specialty Films 11,179 9.9% 11,410 15.6%
-------- -------- -------- --------
$112,883 100.0% $ 73,096 100.0%
======== ======== ======== ========
9
RESULTS OF OPERATIONS
- ---------------------
Net Sales
Net sales in the first quarter of fiscal 1999 increased 54.4% to $112,883 from
$73,096 in the same period last year primarily due to the incremental sales from
the Colorstrip, Inc. ("Colorstrip") acquisition completed in the fourth quarter
of fiscal 1998. Comparable sales for the quarter, excluding Colorstrip, were
$74,269, 1.6% above the first quarter of fiscal 1998. Sales of coil coating
products increased by 21.9% (7.9% excluding Colorstrip) and laminates and
composites increased 0.4%. Galvanizing sales increased 224.8%, but decreased
6.9% when excluding the impact of the Colorstrip acquisition. Specialty films
sales decreased by 2.0% compared to last fiscal year.
Coil Coating
Coil coating sales during the first quarter of fiscal 1999 grew 21.9% (7.9%
excluding Colorstrip) to $36,236 from $29,727 in the same quarter last year.
Significant growth in shipments to the building market were somewhat offset by
declines in sales to the transportation, swimming pool, and appliance markets.
Capacity utilization for the first quarter of fiscal 1999 was 76%. Industry
demand for coil coating products has not grown as quickly as supply, and this
has impacted the Company's ability to sustain or increase prices in certain
geographic areas.
Galvanizing
The galvanizing market is served by MSC with two major materials in coil form,
electrogalvanized (primarily automotive) and hot-dipped galvanized (primarily
building products) coated products. MSC participates in the electrogalvanizing
market through Walbridge Coatings (the "Partnership"), a partnership among
subsidiaries of MSC, Bethlehem Steel Corporation ("BSC") and, until June 30,
1998, Inland Steel Industries, Inc. ("Inland"). As of June 30, 1998, Inland sold
its interest in the Partnership to BSC and entered into a long-term toll
processing agreement with the Partnership ending December 31, 2001. The hot-
dipped market is served through MSC Pinole Point Steel Inc. ("Pinole Point"), a
subsidiary formed as part of the Colorstrip acquisition. Galvanizing sales
increased 224.8% to $48,310 from $14,873 in the prior year. Excluding
Colorstrip, galvanizing sales decreased 6.9% from the first quarter last year.
MSC's net sales for electrogalvanizing consists of various fees charged to the
Partnership for operating the facility. BSC and, until June 30, 1998, Inland are
primarily responsible for the sales and marketing activities of the Partnership.
Through June 30, 1998, the sales and marketing responsibilities of the
Partnership are split between BSC and Inland at approximately 76% and 24%,
respectively. The Company's primary financial benefits from the Partnership are
the revenues billed to Walbridge Coatings for operating the facility. These
revenues represent 12.3% and 20.3% of the Company's net sales in the first three
months of fiscal 1999 and 1998, respectively. During the first quarter of fiscal
1999, as well as last fiscal year, the profitability for operating the facility
was higher than MSC's overall operating results due in large part to
depreciation related to significant capital investments in the coil coating and
specialty films areas during last fiscal year. Under the equity method of
accounting, the Company includes its portion of the Partnership shown in the
Consolidated Statements of Income. The amounts do not directly correlate to the
Company's 50% ownership interest due to contractual allocation
10
requirements of the Partnership agreement. MSC and BSC have extended the
existing terms of the Partnership on a month-to-month basis while negotiating a
long-term arrangement. The Company believes that the fair market value of its
investment in the Partnership is greater than the $11,239 recorded in the
Consolidated Balance Sheets.
MSC's electrogalvanizing sales in the first quarter of fiscal 1999 decreased
6.9% over the first quarter last year. The decrease in sales was a result of
lower shipments to Ford Motor Company, as well as inventory adjustments at other
automotive manufacturers. In addition, the planned annual maintenance shutdown
was moved to the first quarter compared to the second quarter of last fiscal
year. Capacity utilization for electrogalvanizing in the first quarter of fiscal
1999 was 79% versus 93% in the first quarter last year.
Hot-dipped galvanizing sales were $34,461 for the first quarter of fiscal 1999.
Due to the increasingly competitive environment, pricing pressure from the
Asian market, as well as unusually wet weather on the West Coast, sales were
less than the comparable pre-acquisition period a year ago. Capacity utilization
was 59% for the first quarter this year.
Laminates and Composites
During the first quarter of fiscal 1999, laminates and composites sales of
$17,158 were flat with the same quarter last year. Sales of Polycore
Composites(R) increased slightly as gains in appliance and computer materials
were offset by a decrease in automotive applications. Disc brake noise damper
sales increased with growth in both original equipment manufacturer ("OEM") and
replacement market sales. A continuing decline in the reflective lighting market
contributed to the lower Specular+(R) sales for the quarter.
Specialty Films
Sales of specialty films products decreased 2.0% to $11,179 in the first three
months of this year compared to $11,410 in the same period last year. Good gains
were made in the industrial films segment due to higher shipments of
photoreceptor belt material used in paper copiers, films used to manufacture
digital imaging printing plates, and other sputtered materials. This increase
was offset by lower shipments of window film products. Capacity utilization for
specialty films was 69% for the first quarter.
Gross Profit
The Company's gross profit margin was 16.9% in the first quarter of fiscal 1999
as compared to 24.1% in the same period last year. The decrease in gross profit
margin for the quarter was primarily due to the impact of selling a package hot-
dipped galvanized product (both substrate and coating components are included in
sales and cost of sales). In addition, improvements in production efficiencies
were offset by an increase in depreciation expense and the impact of a more
competitive pricing environment.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were 12.1% of sales in the
first quarter of fiscal 1999 as compared to 18.1% of sales for the same period
last fiscal year. The decrease in SG&A was largely due to the increase in sales
from the Colorstrip acquisition and the
11
Company's cost reduction program implemented in the fourth quarter of last year.
Also, the first quarter of fiscal 1998 included approximately $500 of one-time
expenses.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was expense of $2,746 in the first three
months of fiscal 1999 compared to $222 of expense for the first quarter of
fiscal 1998. Interest expense increased $2,277 due to additional debt related to
the Company's increase in capital expenditures in fiscal 1998 and the Colorstrip
acquisition. In addition, Equity in Results of Partnership declined to income of
$45 for the first quarter of this fiscal year compared to $502 last year due to
a decline in third party sales. MSC's effective income tax rate was
approximately 38.5% during the first quarter of fiscal 1999 and fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first quarter of fiscal 1999, MSC generated $18,914 of cash from
operating activities compared to utilizing $229 in the first quarter last year.
The increase in cash generation is due mainly to significant improvements in
working capital, as well as higher depreciation and amortization compared to the
prior year, slightly offset by lower net income. Earnings before interest,
taxes, depreciation, and amortization ("EBITDA") increased to $13,765 for the
first quarter of fiscal 1999 compared to $9,831 for the same quarter last year.
MSC's capital expenditures during the first quarter of fiscal 1999 were $3,224
compared with $8,195 in the same period last fiscal year. The prior fiscal
quarter included higher spending for increasing capacity in the coil coating and
specialty films areas.
Total debt for MSC decreased at May 31, 1998, to $176,522 from $190,973 at
fiscal year end due mainly to the significant improvements in working capital
and lower capital expenditures. As of May 31, 1998, the Company maintains two
committed lines of credit totaling $100,000. There was $55,100 outstanding under
the lines of credit as of May 31, 1998, versus $4,500 as of February 28, 1998.
The Company has executed letters of credit totaling $4,740 against these lines
leaving available lines of credit of $40,160 at May 31, 1998. On April 3, 1998,
the Company paid the entire balance of the seller note ($64,082), along with
accrued interest, issued in connection with the Colorstrip acquisition. The
Company believes that its cash flow from operations, together with available
financing and cash on hand will be sufficient to fund its working capital needs,
capital expenditure program, and debt amortization.
On May 19, 1998, the Company announced the signing of a letter of intent to form
a joint venture with N.V. Bekaert S.A. for the research and development,
manufacture, and sale of sputtered film. The transaction is subject to
completion of satisfactory due diligence and negotiation and execution of a
definitive agreement. There can be no assurance that the definitive agreement
will be executed or that the transaction will be consummated.
In the first quarter of fiscal 1999, approximately 28% of the Company's net
sales were concentrated with customers in the automotive industry, of which 38%
can be directly or indirectly related to General Motors. If the recent General
Motors' strike continues, it will have an impact on operating results to a
greater extent than the Company's consolidated historical operating results due
to the value-added nature of the products sold to General Motors.
12
The Company has a capital lease obligation, which was $2,992 as of May 31, 1998,
relating to a facility which the Company subleases to the Partnership. In
addition, throughout the term of the Partnership, the Company is contingently
responsible for 50% of the Partnership's financing requirements, including the
Company's share (approximately $625) of $1,250 in Partnership financing loans
from third parties at May 31, 1998.
MSC continues to participate in the implementation of settlements with the
government for the clean-up of various Superfund sites. For additional
information, refer to MSC's Form 10-K for the fiscal year ended February 28,
1998.
Forward-looking statements contained in this filing are qualified by the
cautionary language described in Part II, Item 7 of the Company's 1998 Annual
Report on Form 10-K, filed with the SEC pursuant to the Securities Exchange Act
of 1934, as amended.
13
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For the Quarter Ended May 31, 1998
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) 3 See the exhibits listed in the Index to Exhibits.
4 See the exhibits listed in the Index to Exhibits.
10.1 See the exhibits listed in the Index to Exhibits.
10.2 See the exhibits listed in the Index to Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter for which
this report is filed. On June 22, 1998, the Company filed a Form
8-K regarding the amendment of the Registrant's By-Laws and
Rights Agreement.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Elk Grove Village, State of Illinois,
on the 15th day of July, 1998.
MATERIAL SCIENCES CORPORATION
By: /s/ Gerald G. Nadig
--------------------------------
Gerald G. Nadig
Chairman, President
and Chief Executive Officer
By: /s/ James J. Waclawik, Sr.
--------------------------------
James J. Waclawik, Sr.
Vice President,
Chief Financial Officer
and Secretary
15
MATERIAL SCIENCES CORPORATION
Quarterly Report on Form 10-Q
Index to Exhibits
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- -------------- ---------------------- -------------
3 By-Laws of the Registrant, as *
amended.
4 First Amendment to Rights *
Agreement, dated as of June 17, 1998
between the Registrant and
Chasemellon Shareholder Services,
L.L.C., as rights agent.
10.1 Form of Change of Control Agreement.
10.2 Amendment to the Supplemental Employee
Retirement Plan.
27 Financial Data Schedule (1)
* Incorporated by reference to the Company's Registration Statement on Form
8-K, filed with the Commission on June 22, 1998.
(1) Appears only in the electronic filing of this report with the Securities
and Exchange Commission.