SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
(Mark One)
[X]______Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2001
or
[_]______Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period ______ to ______
Commission File Number 333-32518
Better Minerals & Aggregates Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware 55-0749125
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Route 522 North, P.O. Box 187
Berkeley Springs, West Virginia 25411
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (304) 258-2500
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 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 as of November 1, 2001
----- ----------------------------------
Common Stock 100 shares
Better Minerals & Aggregates Company
Form 10-Q Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2001 (unaudited) and December 31, 2000.................... 1
Condensed Consolidated Statements of Operations for the quarter and
the nine months ended September 30, 2001 and
September 30, 2000 (unaudited).......................................... 2
Condensed Consolidated Statements of Stockholder's Equity for the
nine months ended September 30, 2001 and
September 30, 2000 (unaudited).......................................... 3
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and September 30, 2000 (unaudited)............. 4
Notes to Condensed Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 14
Signatures
7
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
2001 2000
---- ----
ASSETS
CURRENT:
Cash and cash equivalents ........................................... $ 994 $ 860
Accounts receivable
Trade, less allowance for doubtful accounts ........................ 61,712 44,817
Other .............................................................. 2,521 1,173
Inventories ......................................................... 27,046 27,890
Prepaid expenses and other current assets ........................... 3,516 3,221
Income tax deposit .................................................. -- 2,070
Deferred income taxes ............................................... 3,543 12,809
------- -------
Total current assets ........................................... 99,332 92,840
PROPERTY, PLANT AND EQUIPMENT:
Mining property ..................................................... 264,611 264,175
Mine Development .................................................... 8,427 8,156
Land ................................................................ 27,699 28,249
Land improvements ................................................... 5,252 5,043
Buildings ........................................................... 36,556 36,556
Machinery and equipment ............................................. 163,718 156,297
Furniture and fixtures .............................................. 2,011 1,395
Construction-in-progress ............................................ 10,523 5,317
------- -------
518,797 505,188
Accumulated depletion, depreciation and amortization ................ (103,231) (89,502)
------- -------
Property, plant, and equipment, net ............................. 405,566 415,686
OTHER NONCURRENT:
Goodwill and noncompete agreements, net ............................ 15,169 16,649
Debt issuance costs ................................................ 11,021 12,958
Other noncurrent assets ............................................ 367 153
Total other noncurrent ......................................... 26,557 29,760
------- -------
Total assets ................................................... $ 531,455 $ 538,286
======= =======
LIABILITIES
CURRENT:
Book overdraft ..................................................... $ 10,356 $ 7,264
Accounts payable ................................................... 18,011 15,908
Accrued liabilities ................................................ 12,172 11,490
Due to parent ...................................................... 2,411 2,362
Accrued interest ................................................... 2,895 8,654
Current portion of long-term debt .................................. 10,743 9,076
Income taxes payable 84 --
------- -------
Total current liabilities ...................................... 56,672 54,754
NONCURRENT LIABILITIES:
Long-term debt, net of current portion ............................. 288,660 280,329
Deferred income taxes .............................................. 92,502 110,676
Other noncurrent liabilities ....................................... 42,538 39,311
------- -------
Total noncurrent liabilities ................................... 423,700 430,316
STOCKHOLDER'S EQUITY
Common stock, par value $.01, authorized 5,000 shares, issued 100 shares -- --
Additional paid-in capital ............................................. 81,377 81,377
Loans to related party ................................................. (1,278) (1.507)
Retained deficit ....................................................... (28,357) (26,560)
Accumulated other comprehensive (loss) income .......................... (659) (94)
------- -------
Total stockholder's equity ..................................... 51,083 53,216
------- -------
Total liabilities and stockholder's equity .................... $ 531,455 $ 538,286
======= =======
The accompanying notes are an integral part of these statements.
1
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales .................................... $ 90,957 $ 83,741 $ 234,683 $ 226,250
Cost of goods sold ........................... 64,794 60,455 176,267 166,342
Depreciation, depletion and amortization ..... 8,358 9,427 24,713 27,052
Selling, general & administrative ............ 5,755 5,494 16,850 18,764
Incentive stock compensation ................. -- -- -- 998
--------- --------- --------- ---------
Operating income.................... 12,050 8,365 16,853 13,094
Interest expense ............................. 8,628 9,230 27,544 27,027
Other (income) expense, net of interest income (215) (483) (809) (1,448
--------- --------- --------- ---------
(Loss) income before income taxes.... 3,637 (382) (9,882) (12,485)
Provision (benefit) for income taxes ......... (1,394) (3,832) (8,085) (8,601)
--------- --------- --------- ---------
Net (loss) income.................... $ 5,031 $ 3,450 $ (1,797) $ (3,884)
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
2
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands)
(Unaudited)
Accumulated Other
Comprehensive loss
--------------------------------
Additional Loans Unrealized Minimum Total
Common Paid-In Retained to Related Loss on Pension Stockholder's
Stock Capital Deficit Party Derivatives Liability Total Equity
------ ---------- -------- ---------- ----------- --------- ------ -------------
Balance December 31, 2000 .. $ - $ 81,377 $ (25,560) $ (1,507) $ - $ (94) $ (94) $ 53,216
Comprehensive income, net
of income taxes:
Net (loss) ............. (1,797) (1,797)
Unrealized holding loss
On derivatives ....... (565) (565) (565)
Total comprehensive --------
loss ............. (2,362)
Repayment of loans to related
party ................... 229 229
-------- -------- -------- -------- -------- -------- ------ --------
Balance September 30, 2001 $ - $ 81,377 $(28,357) $(1,278) $ (565) $ (94) $(659) $ 51,083
======== ======== ======== ======== ======== ======== ====== ========
Accumulated Other
Comprehensive loss
----------------------------------
Additional Loans Foreign Minimum Total
Common Paid-In Retained to Related Currency Pension Stockholder's
Stock Capital Deficit Party Translation Liability Total Equity
------ ---------- -------- ---------- ----------- --------- ----- -------------
Balance December 31, 1999 $ - $ 81,377 $(17,012) $ - $ (30) $ - $ (30) $ 64,335
Comprehensive income, net
of income taxes:
Net (loss) .......... (3,884) (3,884)
Foreign currency
translation ...... 30 30 30
Total comprehensive ------
loss ............ (3,854)
Loans to related party .. (1,001) (1,001)
------- -------- -------- -------- ------- ------ ------ --------
Balance September 30, 2000 $ - $ 81,377 $(24,346) $(1,001) $ - $ - $ - $ 59,480
======= ======== ======== ======== ======= ====== ====== ========
The accompanying notes are an integral part of these statements.
3
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30,
2001 2000
---- ----
Net loss ........................................................................ $ (1,797) $ (3,884)
Adjustments to reconcile net loss to cash flows from operations:
Depreciation ................................................................. 16,864 17,184
Depletion .................................................................... 6,176 4,807
Non compete agreement amortization ........................................... 614 4,126
Debt issuance amortization ................................................... 1,937 1,581
Deferred income taxes ........................................................ (8,908) (9,920)
Disposal of property, plant and equipment gain ............................... (150) (109)
Loss on sale of investment ................................................... -- 83
Other ........................................................................ 1,758 (1,742)
Changes in assets and liabilities, net of the effects from acquired companies:
Trade receivables ........................................................ (16,895) (13,862)
Non-trade receivables .................................................... (1,348) (898)
Receivable from/Payable to parent ........................................ 49 2,934
Payable to related party ................................................. -- (908)
Inventories .............................................................. 844 (4,061)
Prepaid expenses and other current assets ................................ (296) (1,127)
Accounts payable and accrued liabilities ................................. 2,111 616
Accrued interest ......................................................... (5,759) (4,027)
Income taxes ............................................................. 2,155 234
-------- --------
Net cash used in operating activities ................................. (2,645) (8,973)
Cash flows from investing activities:
Capital expenditures ......................................................... (10,911) (18,506)
Proceeds from sale of property, plant and equipment .......................... 589 281
Proceeds from sale of investment ............................................. -- 3,136
(Loans to) repayments from related party ..................................... 229 (1,001)
-------- --------
Net cash used for investing activities ..................................... (10,093) (16,090)
Cash flows from financing activities:
Increase in book overdraft ................................................... 3,092 2,164
Principal payments on capital lease obligations .............................. (218) (63)
Net revolver credit agreement facility ....................................... 16,350 13,700
Repayment of long-term debt .................................................. (6,352) (3,102)
Financing fees ............................................................... -- (435)
-------- --------
Net cash provided by financing activities .................................. 12,872 12,264
Effect of cash exchange rates on cash ........................................... -- 30
Net increase (decrease) in cash ....................................... 134 (12,769)
Cash and cash equivalents, beginning ............................................ 860 13,573
-------- --------
Cash and cash equivalents, ending ............................................... $ 994 $ 804
======== ========
Schedule of non-cash investing and financing activities:
Assets acquired by assuming capital lease obligations ....................... $ 3,136 $ --
======== ========
The accompanying notes are an integral part of these statements.
4
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
The unaudited interim condensed consolidated financial statements of Better
Minerals & Aggregates Company (the "Company") have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission. As a
result, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. In the opinion of management, the
statements reflect all adjustments necessary for a fair presentation of the
results of the reported interim periods. The statements should be read in
conjunction with the summary accounting policies and notes to the audited
financial statements of the Company included in the Company's 2000 Annual Report
on Form 10-K for the year ended December 31, 2000, as amended (the "Form 10-K").
Operating results are not necessarily indicative of the results to be expected
for the full year or any other interim period, due to the seasonal,
weather-related conditions in certain aspects of the Company's business.
2. Inventories
At September 30, 2001 and December 31, 2000, inventory consisted of the
following:
September 30, December 31,
(In thousands) 2001 2000
---- ----
Supplies (net of $189 and $66 obsolescence reserve) $11,968 $11,820
Raw materials and work in process 3,891 4,563
Finished goods 11,187 11,507
------- -------
$27,046 $27,890
======= =======
3. Comprehensive Income
Comprehensive income, net of tax for the three and nine months ended September
30, 2001 and 2000 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $5,031 $3,450 $(1,797) $(3,884)
Unrealized holding loss on derivatives (451) - (565) -
Foreign currency translation - - - 30
------ ------ ------- -------
Total comprehensive income $4,580 $3,450 $(2,362) $(3,854)
====== ====== ======= =======
5
4. Segment Information
The Company operates in the industrial minerals and aggregates business segments
which are more fully described in the Form 10-K. On January 1, 2001, as part of
a change in management reporting responsibilities, all of the New Jersey
operating assets of the Company's industrial minerals business unit were
transferred to the Company's aggregates business unit. Net sales from the
transferred assets are made both directly to customers and to the Company's
industrial minerals subsidiary. Prior year segment reporting has been restated
to include the New Jersey operations as part of the Company's aggregates
business unit. Reportable segment information for the three and nine months
ended September 30, 2001 and 2000 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
---- ---- ---- ----
Net sales:
Aggregates $ 46,700 $ 39,966 $ 103,328 $ 92,327
Industrial Minerals 48,580 48,343 145,077 147,855
Eliminations (4,323) (4,568) (13,722) (13,932)
--------- --------- --------- ---------
Total net sales $ 90,957 $ 83,741 $ 234,683 $ 226,250
========= ========= ========= =========
Operating company income (loss):
Aggregates $ 5,760 $ 3,825 $ 2,425 $ 1,615
Industrial Minerals 6,530 4,466 15,370 13,092
--------- --------- --------- ---------
Total operating company
income (loss) $ 12,290 $ 8,291 $ 17,795 $ 14,707
General corporate (expense) income (240) 74 (942) (1,613)
--------- --------- --------- ---------
Total operating income (loss) $ 12,050 $ 8,365 $ 16,853 $ 13,094
========= ========= ========= =========
Depreciation, depletion
and amortization expense:
Aggregates $ 4,848 $ 4,353 $ 13,687 $ 12,133
Industrial Minerals 3,468 5,058 10,952 14,873
Corporate 42 16 74 46
--------- --------- --------- ---------
Total depreciation, depletion, and
amortization expense $ 8,358 $ 9,427 $ 24,713 $ 27,052
========= ========= ========= =========
Capital expenditures:
Aggregates $ 1,678 $ 2,791 $ 7,492 $ 13,957
Industrial Minerals 797 (606) 3,417 4,368
Corporate 2 (11) 2 181
--------- --------- --------- ---------
Total capital expenditures $ 2,477 $ 2,174 $ 10,911 $ 18,506
========= ========= ========= =========
Asset segment information at September 30, 2001 and December 31, 2000 was as
follows:
September 30, December 31,
(In thousands) 2001 2000
Assets:
Aggregates $361,200 $351,969
Industrial Minerals 173,562 203,676
Corporate 40,070 20,533
Elimination of intersegment receivables (43,377) (37,892)
-------- --------
Total assets $531,455 $538,286
======== ========
6
5. Impact of Recent Accounting Standards
In June 2001, the Financial Accounting Standard Board ("FASB") issued FAS No.
141, "Business Combinations", which addresses the accounting and reporting for
business combinations, FAS No. 142, "Goodwill and Other Intangible Assets",
which addresses the accounting and reporting for acquired goodwill and other
intangible assets and FAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses the accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. In August 2001, the FASB issued FAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets", which addresses accounting
and reporting for the impairment or disposal of long-lived assets. FAS 141, 142
and 144 are effective January 1, 2002 for the Company. FAS 143 is effective
January 1, 2003 for the Company. The Company is in the process of reviewing the
new pronouncements and does not anticipate that adoption will have a material
impact.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," on January
1, 2001. Initial adoption of this new accounting standard did not have a
material impact on the Company's financial statements. In accordance with SFAS
No. 133, all derivatives are recognized on the balance sheet at their fair
value. Changes in the fair value of a derivative instrument designated as a
"fair value" hedge, along with the corresponding change in fair value of the
hedged asset or liability, are recorded in current-period earnings. Changes in
the fair value of a derivative instrument designated as a "cash flow" hedge, to
the extent the hedge is highly effective, are recorded temporarily in other
comprehensive income then recognized in earnings along with the related effects
of the hedged items. Any ineffective portion of the cash flow hedge is
recognized in current-period earnings.
At September 30, 2001, the Company's derivative contracts consisted of an
interest rate swap used to convert a portion of its variable-rate debt to
fixed-rate debt and interest rate cap agreements to limit a portion of its
variable-rate debt to a fixed rate. These instruments are designated as, and are
considered, effective cash flow hedges of the Company's forecasted variable rate
interest payments.
During 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-10,
"Accounting for Shipping and Handling Fees and Costs." EITF No. 00-10 addresses
the statement of earnings classification of shipping and handling costs billed
to customers and was effective for the fourth quarter of 2000. The Company
adopted the provisions of EITF No. 00-10 at that time and has restated the third
quarter and year-to-date 2000 results to include $16.6 million and $46.2
million, respectively, in revenue and in cost of sales.
6. Sale of Canadian Facility
On February 29, 2000 the Company completed the sale of stock of its Canadian
subsidiary, George F. Pettinos (Canada) Limited, for $3.1 million. The proceeds
were used to retire the Company's tranche A term loan facility and for general
corporate uses. As a result of the sale, the Company recognized a pretax loss of
$0.1 million, which is included in other income.
7. Income Taxes
In accordance with generally accepted accounting principles, it is the Company's
practice at the end of each interim reporting period to make a best estimate of
the effective tax rate expected to be applicable for the full fiscal year.
Estimates are revised as additional information becomes available. In addition,
in the first quarter of 2000, the sale of George F. Pettinos (Canada) Limited
created a one-time $1.1 million charge to the tax provision.
8. Debt Covenants
Based on our most recent forecast for the remainder of 2001, the Company expects
to be in compliance with the amended leverage ratio and interest coverage ratio
covenants contained in the senior secured credit agreement on December 31, 2001.
However, for calendar year 2002, the Company believes it will be necessary to
seek further amendments to revise the required leverage ratio and interest
coverage ratio covenants that were included in the original senior secured
credit agreement. While the Company obtained amendments and waivers under the
secured credit agreement earlier in 2001, there can be no assurance that these
or other future amendments or waivers will be granted or that such amendments or
waivers, if granted, would be on terms satisfactory to the Company.
7
9. Contingencies
On April 20, 2001, in an action pending in Beaumont, Texas, (Donald Tompkins et
al vs American Optical Corporation et al, the "Tompkins Case"), a jury rendered
a verdict against Ottawa Silica Company and Pennsylvania Glass Sand Corporation,
predecessor to U.S. Silica Company, in the amount of $7.5 million in actual
damages. On June 1, 2001, the trial judge entered judgment on the verdict; the
amount of the judgment was approximately $6.4 million, the sum of the verdict
(reduced by settlements from other parties) and prejudgment interest. In
addition, punitive damages were settled for $600,000.
In light of the facts entered into evidence relating to the timing of the
exposure, the Company believes that the entire judgment in this action is
covered by a combination of the historical insurance coverage of Ottawa Silica
Company and the current indemnity agreement of ITT Industries, as described
below. The company posted a bond, which is required to be filed as part of the
appeal process. The notice of appeal to the appropriate intermediate appellate
court in Texas will be timely filed. Based on advice of counsel, the Company
believes that there are meritorious grounds to file this appeal and that a
reversal and remand of the Tompkins case is probable.
The Company and its subsidiaries are involved in other legal proceedings, claims
and litigation arising in the ordinary course of business. Management believes,
through discussions with counsel, that its liability arising from or the
resolution of these legal proceedings, claims and litigation, in the aggregate,
will not have a material adverse effect on the consolidated financial position,
results of operations or cash flows of the Company.
The Company's subsidiary U.S. Silica Company is self-insured for product
liability insurance as it relates to occupational disease. In addition, U.S.
Silica Company is self-insured for health care costs and, in some states,
workers' compensation. The Company provides for estimated future losses based on
reported cases and past claim history. Management believes that the provision
for estimated losses is adequate.
Certain product liability claims related to occupational disease are indemnified
by ITT Industries, successor to a former owner of U.S. Silica Company, under an
agreement whereby claims filed against U.S. Silica Company prior to September
12, 2005 alleging exposure prior to September 12, 1985 are shared ratably based
on the claimant's total exposure period. The indemnity is subject to a
cumulative annual deductible and carry-forward adjustments and expires September
12, 2005.
10. Senior Subordinated Notes Subsidiary Guarantees
Except for the Company's Canadian subsidiary, which is an inactive company with
an immaterial amount of assets and liabilities, each of the Company's
subsidiaries has fully and unconditionally guaranteed the Senior Subordinated
Notes on a joint and several basis. The separate financial statements of the
subsidiary guarantors are not included in this report because (a) the Company is
a holding company with no assets or operations other than its investments in its
subsidiaries, (b) the subsidiary guarantors each are wholly owned by the
Company, comprise all of the direct and indirect subsidiaries of the Company
(other than inconsequential subsidiaries) and have jointly and severally
guaranteed the Company's obligations under the Senior Subordinated Notes on a
full and unconditional basis, (c) the aggregate assets, liabilities, earnings
and equity of the subsidiary guarantors are substantially equivalent to the
assets, liabilities, earnings and equity of the Company on a consolidated basis
and (d) management has determined that separate financial statements and other
disclosures concerning the subsidiary guarantors are not material to investors.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the accompanying
unaudited consolidated financial statements and the notes thereto included in
Item 1 of this quarterly report, and the audited consolidated financial
statements and the notes thereto and management's discussion and analysis of
financial condition and results of operations contained in our Annual Report on
Form 10-K for the year ended December 31, 2000, as amended. Unless otherwise
indicated or the context otherwise requires, all references in this quarterly
report to "we," "us," "our" or similar terms refer to Better Minerals &
Aggregates Company and its direct and indirect subsidiaries.
Overview
We mine, process and market industrial minerals, principally industrial silica,
in the eastern and midwestern United States. We also mine, process and market
aggregates and produce and market asphalt in certain parts of Pennsylvania and
New Jersey. Our end use markets for our silica products include container glass,
fiberglass, specialty glass, flat glass, fillers and extenders, chemicals and
ceramics. We also supply our silica products to the foundry, building materials
and other end use markets. Our customers use our aggregates, which consist of
high quality crushed stone, construction sand and gravel, for road construction
and maintenance, other infrastructure projects and residential and commercial
construction and to produce hot mixed asphalt. We operate a network of 26
production facilities in 14 states. Our industrial minerals business
(substantially all the net sales of which consist of silica products) and our
aggregates business accounted for 53% and 47% of our net sales, respectively,
for the three months ended September 30, 2001 and 62% and 38% of our net sales,
respectively, for the nine months ended September 30, 2001.
Our aggregates business is seasonal, due primarily to the effect of weather
conditions in winter months on construction activity in our Pennsylvania and New
Jersey markets. As a result, peak sales of aggregates occur primarily in the
months of April through November. Accordingly, our results of operations in any
individual quarter may not be indicative of our results of operations for the
full year.
On January 1, 2001, as part of a change in management reporting
responsibilities, all of the New Jersey operating assets of our industrial
minerals business unit were transferred to our aggregates business unit. Net
sales from the transferred assets are made both directly to customers and to our
industrial minerals subsidiary, which are then eliminated in the consolidated
financial statements. Prior year segment reporting has been restated as if the
asset transfer had occurred at the beginning of 2000.
Three Months Ended September 30, 2001 Compared with Three Months Ended September
30, 2000
Net Sales. Net sales increased $7.3 million, or 8.7 % to $91.0 million in the
three months ended September 30, 2001 from $83.7 million in the three months
ended September 30, 2000.
Net sales for our industrial minerals business increased $0.3 million to $48.6
million in the three months ended September 30, 2001 from $48.3 million in the
three months ended September 30, 2000. This increase was from increased silica
sales to the oil and gas extraction, building products and recreational end use
markets, which was almost completely offset by decreased silica sales to the
glass, foundry and fillers & extenders end use markets.
Net sales for our aggregates business increased $6.7 million or 16.7% to $46.7
million in the three months ended September 30, 2001 from $40.0 million in the
three months ended September 30, 2000. Included in net sales are intercompany
sales to our industrial minerals subsidiary totaling $4.3 million for the three
months ended September 30, 2001 as compared to $4.6 million for the three months
ended September 30, 2000. Excluding these intercompany sales, net sales for our
aggregates business increased $7.0 million, or 19.8%, to $42.4 million in the
three months ended September 30, 2001 from $35.4 million in the three months
ended September 30, 2000, primarily from a 21% increase in asphalt volume and a
34% increase in stone volume sold in the period.
Cost of Goods Sold. Cost of goods sold increased $4.3 million, or 7.1% to $64.8
million in the three months ended September 30, 2001 from $60.5 million in the
three months ended September 30, 2000.
Cost of goods sold for our industrial minerals business increased $0.6 million
or 1.7% to $34.7 million in the three months ended September 30, 2001 from $35.3
million in the three months ended September 30, 2000, primarily due to normal
cost inflation.
9
Cost of goods sold for our aggregates business increased $4.1 million or 13.8%
to $33.7 million in the three months ended September 30, 2001 from $29.6 million
in the three months ended September 30, 2000, primarily due to the increased
stone and asphalt volume noted earlier, partially offset by a $1.7 million
reduction in the price of asphalt cement used in the production of hot mixed
asphalt.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased $1.0 million or 10.6% to $8.4 million in the three months
ended September 30, 2001 from $9.4 million in the three months ended September
30, 2000. The decrease was primarily due to a $1.3 million decrease in
amortization from the completion of the amortization of a non-compete agreement
with the former parent company of our industrial minerals subsidiary, and a $0.8
million decrease in depreciation, offset by a $1.1 million increase in depletion
due to increased aggregates sales volume.
Selling, General and Administrative. Selling, general and administrative
expenses increased $0.3 million or 5.5% to $5.8 million in the three months
ended September 30, 2001 from $5.5 million in the three months ended September
30, 2000. This increase was due to normal inflationary factors.
Operating Income. Operating income was $12.0 million in the three months ended
September 30, 2001 compared to $8.4 million in the three months ended September
30, 2000, as a result of the factors noted earlier.
Operating income for our industrial minerals business increased $2.0 million or
44.4% to $6.5 million in the three months ended September 30, 2001 from $4.5
million in the three months ended September 30, 2000 primarily due to the
factors noted earlier.
Operating income for our aggregates business increased $2.0 million to $5.8
million in the three months ended September 30, 2001 from $3.8 million in the
three months ended September 30, 2000 as a result of the factors noted earlier.
Due to the seasonality of our aggregates business, operating income incurred in
the third quarter of our fiscal year may not be indicative of operating results
for the full year.
Corporate expenses not allocated to business segments decreased $0.3 million to
$0.2 million in the three months ended September 30, 2001, from income of $0.1
million in the three months ended September 30, 2000.
Interest Expense. Interest expense decreased $0.6 million or 6.5% to $8.6
million in the three months ended September 30, 2001 compared with $9.2 million
in the three months ended September 30, 2000 as a result of decreased interest
rates.
Benefit for Income Taxes. The benefit for income taxes for the three months
ended September 30, 2001 has been adjusted to reflect the estimated benefit for
the first nine months of the year using an annual effective tax rate of 71%
which resulted in an adjusted effective tax rate of 82% for the full nine month
period ended September 30, 2001.
Net Income. Net income increased $1.5 million to $5.0 million in the three
months ended September 30, 2001 from $3.5 million in the three months ended
September 30, 2000, primarily due to the factors noted earlier.
Nine Months Ended September 30, 2001 Compared With Nine Months Ended September
30, 2000
Net Sales. Net sales increased $8.4 million or 3.7% to $234.7 million in the
nine months ended September 30, 2001 from $226.3 million in the nine months
ended September 30, 2000.
Net sales for our industrial minerals business decreased $2.8 million or 1.9% to
$145.1 million in the nine months ended September 30, 2001 from $147.9 million
in the nine months ended September 30, 2000. This decrease was primarily due to
the $1.9 million reduction in sales as a result of the divestiture of one of our
two Canadian subsidiaries, George F. Pettinos (Canada) Limited ("PECAL") in
February 2000. Excluding the divestiture, net sales for our industrial minerals
business decreased $0.9 million or 0.6% to $145.1 million in the nine months
ended September 30, 2001 from $146.0 million in the nine months ended September
30, 2000, due primarily to decreased silica sales to the glass, foundry and
filler and extender end use markets partially offset by an increase in sales to
the oil and gas extraction, matrix and building products end use markets.
10
Net sales for our aggregates business increased $11.0 million or 11.9% to $103.3
million for the nine months ended September 30, 2001 from $92.3 million for the
nine months ended September 30, 2000, including intercompany sales to our
industrial minerals business totaling $13.7 million in the nine months ended
September 30, 2001 and $13.9 million in the nine months ended September 30,
2000. Excluding these intercompany sales, net sales of aggregates increased
$11.2 million or 14.3% to $89.6 million in the nine months ended September 30,
2001 from $78.4 million for the nine months ended September 30, 2000 due to a
16% increase in asphalt volume and a 26% increase in stone volume sold during
the period, partially offset by a 5.0% decrease in the average selling price for
stone products due to product mix.
Cost of Goods Sold. Cost of goods sold increased $10.0 million or 6.0% to $176.3
million for the nine months ended September 30, 2001 from $166.3 million for the
nine month period ended September 30, 2000.
Cost of goods sold for our industrial minerals business decreased $1.3 million
to $108.0 million for the nine months ended September 30, 2001 from $109.3
million for the nine months ended September 30, 2000. The divestiture of PECAL
in February, 2000 resulted in a $1.5 million decrease in cost of goods sold in
2001. Excluding the divestiture, cost of goods sold increased $0.2 million or
0.2% to $108.0 million in the nine months ended September 30, 2001 from $107.8
million for the nine months ended September 30, 2000 due primarily to a $2.3
million increase in the price of dryer fuel, offset by a 2.6% reduction in
volume.
Cost of goods sold for our aggregates business increased $8.6 million or 12.0%
to $80.1 million for the nine months ended September 30, 2001 from $71.5 million
for the nine months ended September 30, 2000, primarily due to the increased
stone and asphalt volume noted earlier, partially offset by a $2.7 million
reduction in the price of asphalt cement used in the production of hot mixed
asphalt.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased $2.4 million, or 8.9% to $24.7 million in the nine months
ended September 30, 2001 from $27.1 million in the nine months ended September
30, 2000. This decrease is primarily due to a $3.5 million decrease in
amortization expense on the completion of the amortization of a non-compete
agreement with the former parent company of our industrial minerals subsidiary,
partially offset by a $1.4 million increase in depletion expense due to an
increase in aggregates sales volume.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $2.9 million or 14.6% to $16.9 million in the nine months
ended September 30, 2001 from $19.8 million for the nine months ended September
30, 2000. This decrease resulted primarily from a $2.3 million non-recurring
charge in 2000, $1.0 million of which was non-cash incentive stock compensation,
for the issuance of stock to the newly hired President of our aggregates
business and the elimination of $0.4 million in costs as a result of the
divestiture of PECAL.
Operating Income. Operating income was $16.9 million in the nine months ended
September 30, 2001 compared to $13.1 million in the nine months ended September
30, 2000, as a result of the factors noted earlier.
Operating income for our industrial minerals business increased $2.3 million or
17.6% to $15.4 million in the nine months ended September 30, 2001 from $13.1
million in the nine months ended September 30, 2000 primarily due to the factors
noted earlier.
Operating income for our aggregates business increased $0.8 million to $2.4
million in the nine months ended September 30, 2001 from $1.6 million in the
nine months ended September 30, 2000 as a result of the factors noted earlier.
Due to the seasonality of our aggregates business, operating income incurred in
the first nine months of our fiscal year may not be indicative of operating
results for the full year.
Corporate expenses not allocated to business segments decreased $0.7 million to
$0.9 million in the nine months ended September 30, 2001 from $1.6 million in
the nine months ended September 30, 2000, as a result of the non-recurring
compensation expense incurred in 2000 noted earlier.
Interest Expense. Interest expense increased $0.5 million to $27.5 million in
the nine months ended September 30, 2001 from $27.0 million in the nine months
ended September 30, 2000 due primarily to increased borrowings partially offset
by decreased interest rates.
Benefit for Income Taxes. The benefit for income taxes for the nine months ended
September 30, 2001 is based on the effective tax rate expected to be realizable
for the year of approximately 71%. The benefit for income taxes for the nine
month period ended September 30, 2000 was based on an effective tax rate of 78%,
reduced by taxes required on the sale of PECAL, resulting in a net effective tax
rate of 69%.
Net Loss. Net loss decreased $2.1 million to $1.8 million in the nine months
ended September 30, 2001 from $3.9 million in the nine months ended September
30, 2000 primarily as a result of the factors noted earlier.
11
Liquidity and Capital Resources
Our principal liquidity requirements have historically been to service our debt,
meet our working capital, capital expenditures and mine development expenditure
needs and finance acquisitions. We are a holding company and as such we conduct
all our operations through our subsidiaries. As a holding company, we are
dependent upon dividends or other intercompany transfers of funds from our
subsidiaries to meet our debt service obligations, and have historically met our
liquidity and capital investment needs with internally generated funds.
Conversely, we have funded our acquisitions through borrowings and equity
investments. Our total long term debt as of September 30, 2001 was $299.4
million, and our total stockholder's equity as of that date was $51.5 million,
giving us total debt representing approximately 85% of total capitalization. Our
debt level makes us more vulnerable to economic downturns and adverse
developments in our business.
Net cash used in operating activities was $2.7 million for the nine months ended
September 30, 2001 compared to $9.0 million for the nine months ended September
30, 2000. Cash used in operating activities decreased $6.3 million in the first
nine months of 2001 due primarily to a $0.8 million reduction in seasonal
inventory in 2001 as compared to a $4.1 million increase in inventory in the
first nine months of 2000, and a $4.0 million decrease in investment in other
intangible assets from the one-time purchase in 2000 of a hot mixed asphalt
plant, partially offset by a $3.0 million increase in accounts receivable due to
increased sales. Interest paid in the nine months ended September 30, 2001 was
$31.1 million, an increase of $1.8 million from the $29.3 million paid in the
nine months ended September 30, 2000, primarily as a result of increased
borrowings, and a $0.4 million amendment fee under our senior secured credit
agreement, partially offset by reduced interest rates.
Net cash used for investing activities decreased $6.0 million to $10.1 million
for the nine month period ended September 30, 2001 from $16.1 million for the
nine month period ended September 30, 2000. This decrease primarily resulted
from a $7.6 million decrease in capital expenditures due in a part to the
one-time $2.1 million purchase in 2000 of a hot mixed asphalt plant, and $0.6
million received in 2001 for excess land and property sales, partially offset by
the $3.1 million received from the PECAL sale in February 2000. In addition, we
acquired $3.1 million in mining and mobile equipment through new capital lease
obligations in 2001.
Cash flow provided by financing activities was $12.9 million for the nine months
ended September 30, 2001 as compared to $12.3 million for the nine months ended
September 30, 2000. There was a $10.0 million increase in long term debt in the
nine months ended September 30, 2001 as compared to a $10.6 million increase in
long term debt in the same period in 2000.
Interest payments on our 13% senior subordinated notes due 2009 ($150 million
outstanding as of September 30, 2001), which are unconditionally and irrevocably
guaranteed, jointly and severally, by each of our domestic subsidiaries, senior
debt service under our senior secured credit agreement, working capital, capital
expenditures and mine development expenditures incurred in the normal course of
business as current deposits are depleted, represent our significant liquidity
requirements.
Under our senior secured credit agreement, as of September 30, 2001, we had
$34.4 million outstanding under the tranche A term loan facility and $92.0
million outstanding under the tranche B term loan facility. In addition, this
credit agreement provides us with a $50.0 million revolving credit facility of
which $21.9 million was drawn as of September 30, 2001, with an additional $20.2
million available for borrowing, after taking into consideration $7.9 million
allocated for letters of credit. The revolving credit facility is available for
general corporate purposes, including working capital and capital expenditures,
but excluding acquisitions, and includes sublimits of $12.0 million and $3.0
million, respectively, for letters of credit and swingline loans. Debt under the
senior secured credit agreement is secured by substantially all of our assets,
including our real and personal property, inventory, accounts receivable and
other intangibles. For a further description of the senior secured credit
agreement, including certain restrictions that it imposes upon us and certain
financial covenants that it requires us to maintain, please see Note 6 to our
audited consolidated financial statements included in our Annual Report on Form
10-K for the year ended December 31, 2000, as amended.
On February 22, 2001, the lenders under our senior secured credit agreement
approved an amendment effective December 31, 2000 that revised the required
leverage ratio and interest coverage ratio covenants under the credit agreement
for the period of December 31, 2000 through December 31, 2001. We were in
compliance with these financial ratio covenants, as revised, as of September 30,
2001. This amendment to our credit agreement was filed as an exhibit to our
Current Report on Form 8-K dated February 22, 2001.
Based on our most recent forecast for the remainder of 2001, we expect to be in
compliance with the amended leverage ratio and interest coverage ratio covenants
contained in the senior secured credit agreement on December 31, 2001. However,
for calendar year 2002, we believe it will be necessary to seek further
12
amendments to revise the required leverage ratio and interest coverage ratio
covenants that were included in the original senior secured credit agreement.
While we obtained amendments and waivers under the secured credit agreement
earlier in 2001, there can be no assurance that these or other future amendments
or waivers will be granted or that such amendments or waivers, if granted, would
be on terms satisfactory to us.
Capital expenditures totaled $10.9 million in the nine months ended September
30, 2001 compared with $18.5 million in the nine months ended September 30,
2000. Our expected capital expenditure requirements for the remainder of 2001
and 2002 are $4.0 million and $15.0 million, respectively.
Our ability to satisfy our debt obligations and to pay principal and interest on
our debt, fund working capital, mine development and acquisition requirements
and make anticipated capital expenditures will depend on our future performance,
which is subject to general economic, financial and other factors, some of which
are beyond our control. We cannot be certain that the cash earned by our
subsidiaries will be sufficient to allow us to pay principal and interest on our
debt and meet our other obligations. We believe, however, that based on current
levels of operations and anticipated growth, cash flow from operations, together
with borrowings under the revolving credit facility, will be adequate for at
least the next twelve months to make required payments of principal and interest
on our debt, and fund working capital, mine development and capital expenditure
requirements. There can be no assurance, however, that our business will
generate sufficient cash flow from operations or that future borrowings will be
available under the revolving credit facility in an amount sufficient to enable
us to service our debt or to fund our other liquidity needs. If we do not have
enough cash, we may be required to refinance all or part of our existing debt,
sell assets, borrow more money or raise equity. We cannot guarantee that we will
be able to refinance our debt, sell assets, borrow more money or raise equity on
terms acceptable to us, if at all.
Forward-Looking Statements
This quarterly report, including this management's discussion and analysis of
financial condition and results of operations section, includes "forward-
looking statements". We have based these forward-looking statements on our
current expectations and projections about future events. Although we believe
that our plans, intentions and expectations reflected in or suggested by those
forward-looking statements are reasonable, we can give no assurance that our
plans, intentions or expectations will be achieved. We believe that the
following factors, among others, could affect our future performance and cause
actual results to differ materially from those expressed or implied by these
forward-looking statements: (1) general and regional economic conditions,
including the economy in the states in which we have production facilities and
in which we sell our products; (2) demand for residential and commercial
construction; (3) demand for automobiles and other vehicles; (4) levels of
government spending on road and other infrastructure construction; (5) the
competitive nature of the industrial minerals and aggregates industries; (6)
operating risks typical of the industrial minerals and aggregates industries,
including the price and availability of oil: (7) difficulties in, and
unanticipated expense of, assimilating newly-acquired businesses; (8)
fluctuations in prices for, and availability of, transportation and power; (9)
unfavorable weather conditions; (10) regulatory compliance, including compliance
with environmental and silica exposure regulations, by us and our customers;
(11) litigation affecting us and our customers; (12) changes in the demand for
our products due to the availability of substitutes for products of our
customers; (13) labor unrest; and (14) interest rate changes and changes in
financial markets generally.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information regarding the Company's financial instruments that are sensitive to
changes in interest rates is contained in our Annual Report on Form 10-K for the
year ended December 31, 2000, as amended. This information has not changed
materially in the interim period since December 31, 2000.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are a defendant in various lawsuits related to our businesses. These matters
include lawsuits relating to the exposure of persons to crystalline silica as
discussed in detail in our Annual Report on Form 10-K for the year ended
December 31, 2000, as amended, and our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, each filed with the Securities and Exchange
Commission. Although we do not believe that these lawsuits are likely to have a
material adverse effect upon our business, we cannot predict what the full
effect of these or other lawsuits will be. We currently believe, however, that
these claims and proceedings in the aggregate are unlikely to have a material
adverse effect on us.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None.
14
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.
November 12, 2001 Better Minerals & Aggregates Company
By: /s/ Gary E. Bockrath
Name: Gary E. Bockrath
Title: Vice President and Chief
Financial Officer