-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GDj+udeRqd2/8YWcnsqtbz0fN0PclQo5Iq80TgplE/jgastDaRvKKCfVe1bI21Tb 9xhQdfnD+uI2cCO5hsbVlA== 0000950131-98-005487.txt : 19981012 0000950131-98-005487.hdr.sgml : 19981012 ACCESSION NUMBER: 0000950131-98-005487 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981009 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATERIAL SCIENCES CORP CENTRAL INDEX KEY: 0000755003 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 952673173 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08803 FILM NUMBER: 98723139 BUSINESS ADDRESS: STREET 1: 2300 E PRATT BLVD CITY: ELK GROVE VILLAGE STATE: IL ZIP: 60007 BUSINESS PHONE: 8474398270 10-Q 1 FORM 10-Q 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 August 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 October 9, 1998, there were outstanding 15,650,156 shares of common stock, $.02 par value. MATERIAL SCIENCES CORPORATION FORM 10-Q For The Quarter Ended August 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 Six Months Ended August 31, August 31, (In thousands, except per share data) 1998 1997 1998 1997 - --------------------------------------------------- -------- ------- -------- -------- Net Sales (1) $119,157 $70,541 $232,040 $143,637 Cost of Sales 98,460 53,757 192,233 109,262 -------- ------- -------- -------- Gross Profit $ 20,697 $16,784 $ 39,807 $ 34,375 Selling, General and Administrative Expenses 14,255 12,937 27,956 26,139 -------- ------- -------- -------- Income from Operations $ 6,442 $ 3,847 $ 11,851 $ 8,236 -------- ------- -------- -------- Other (Income) and Expense: Interest Income $ (333) $ (46) $ (404) $ (75) Interest Expense 3,085 1,045 6,375 2,058 Equity in Results of Partnership 485 344 440 (158) Other, Net (65) (267) (493) (527) -------- ------- -------- -------- Total Other Expense, Net $ 3,172 $ 1,076 $ 5,918 $ 1,298 -------- ------- -------- -------- Income Before Income Taxes $ 3,270 $ 2,771 $ 5,933 $ 6,938 Income Taxes 1,259 1,067 2,284 2,672 -------- ------- -------- -------- Net Income (6) $ 2,011 $ 1,704 $ 3,649 $ 4,266 ======== ======= ======== ======== Net Income Per Share (7): Basic $ 0.13 $ 0.11 $ 0.24 $ 0.28 ======== ======= ======== ======== Diluted $ 0.13 $ 0.11 $ 0.24 $ 0.28 ======== ======= ======== ========
The accompanying notes are an integral part of these statements. 3 Consolidated Balance Sheets Material Sciences Corporation and Subsidiaries
August 31, February 28, (In thousands) 1998 1998 - ------------------------------------------------------------- ----------- ------------ Assets: Current Assets: Cash and Cash Equivalents $ 1,572 $ 3,625 Receivables: Trade, Less Reserves of $3,794 and $4,785 Respectively (2) 51,621 53,536 Current Portion of Partnership Note - 380 Income Taxes - 2,391 Prepaid Expenses 4,118 3,080 Inventories 55,004 60,892 Prepaid Taxes 1,944 1,944 --------- --------- Total Current Assets $ 114,259 $ 125,848 --------- --------- Gross Property, Plant and Equipment $ 369,933 $ 363,004 Accumulated Depreciation and Amortization (120,446) (106,405) --------- --------- Net Property, Plant and Equipment $ 249,487 $ 256,599 --------- --------- Other Assets: Investment in Partnership $ 10,737 $ 10,842 Intangible Assets, Net 24,505 24,142 Other 1,212 643 --------- --------- Total Other Assets $ 36,454 $ 35,627 --------- --------- Total Assets $ 400,200 $ 418,074 ========= ========= Liabilities: Current Liabilities: Current Portion of Long-Term Debt $ 2,405 $ 3,410 Accounts Payable 44,236 43,040 Accrued Payroll Related Expenses 9,593 10,300 Accrued Expenses 10,352 8,768 --------- --------- Total Current Liabilities $ 66,586 $ 65,518 --------- --------- Long-Term Liabilities: Deferred Income Taxes $ 13,268 $ 13,012 Long-Term Debt, Less Current Portion 160,617 187,563 Accrued Superfund Liability 3,344 3,350 Other 11,704 7,747 --------- --------- Total Long-Term Liabilities $ 188,933 $ 211,672 --------- --------- Shareowners' Equity: Preferred Stock (3) $ - $ - Common Stock (4) 331 327 Additional Paid-In Capital 52,921 52,253 Treasury Stock at Cost (5) (8,545) (8,545) Retained Earnings 100,532 96,883 Cumulative Translation Adjustment (6) (558) (34) --------- --------- Total Shareowners' Equity $ 144,681 $ 140,884 --------- --------- Total Liabilities and Shareowners' Equity $ 400,200 $ 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 Six Months Ended August 31, August 31, (In thousands) 1998 1997 1998 1997 - ----------------------------------------------------- ------------- ----------- ------------- ------------ Cash Flows From: Operating Activities: Net Income $ 2,011 $ 1,704 $ 3,649 $ 4,266 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: Depreciation and Amortization 7,875 4,688 15,758 9,368 Provision (Benefit) for Deferred Income Taxes 128 (27) 256 (69) Compensatory Effect of Stock Plans (92) (52) 4 31 Other, Net 485 344 315 (160) ---------- ----------- ------------- ----------- Operating Cash Flow Prior to Changes in Assets and Liabilities $ 10,407 $ 6,657 $ 19,982 $ 13,436 ---------- ----------- ------------- ----------- Changes in Assets and Liabilities: Receivables $ (3,405) $ 1,633 $ 2,121 $ (220) Income Taxes Receivable 1,694 (1,123) 2,391 126 Prepaid Expenses (230) (278) (1,038) (1,146) Inventories 2,276 (1,633) 5,888 (2,602) Accounts Payable (1,589) 196 (489) (1,866) Accrued Expenses 1,797 808 1,010 (1,751) Other, Net 3,482 48 3,481 102 ---------- ----------- ------------- ----------- Cash Flow from Changes in Assets and Liabilities $ 4,025 $ (349) $ 13,364 $ (7,357) ---------- ----------- ------------- ----------- Net Cash Provided by Operating Activities $ 14,432 $ 6,308 $ 33,346 $ 6,079 ---------- ----------- ------------- ----------- Investing Activities: Capital Expenditures, Net $ (4,160) $(4,726) $ (7,384) $(12,921) Acquisitions, Net of Cash Acquired - (1,129) - (1,129) Investment in Partnership (883) (459) (1,235) (1,004) Distribution from Partnership 900 1,374 900 1,374 Other Long-Term Assets (143) 149 (569) 197 ---------- ----------- ------------- ----------- Net Cash Used in Investing Activities $ (4,286) $(4,791) $ (8,288) $(13,483) ---------- ----------- ------------- ----------- Financing Activities: Net Proceeds (Payments) Under Lines of Credit $(12,200) $(1,200) $ 38,400 $(11,300) Proceeds from Senior Notes - - - 20,000 Payments to Settle Debt (1,234) (452) (66,163) (1,192) Purchase of Treasury Stock - - - (1,027) Sale of Common Stock 157 48 668 753 ---------- ----------- ------------- ----------- Net Cash Provided by (Used in) Financing Activities $(13,277) $(1,604) $(27,095) $ 7,234 ---------- ----------- ------------- ----------- Effect of Exchange Rate Changes on Cash and Cash Equivalents $ (6) $ - $ (16) $ - ---------- ----------- ------------- ----------- Net Decrease in Cash $ (3,137) $ (87) $ (2,053) $ (170) Cash and Cash Equivalents at Beginning of Period 4,709 2,033 3,625 2,116 ---------- ----------- ------------- ----------- Cash and Cash Equivalents at End of Period $ 1,572 $ 1,946 $ 1,572 $ 1,946 ========== =========== ============ =========== Supplemental Cash Flow Disclosures: Subordinated Notes Issued for Acquisitions $ - $ 1,117 $ - $ 1,117 Cash Portion of Acquisitions and Related Costs - 1,129 - 1,129 ---------- ----------- ------------- ----------- Total Consideration Paid for Acquisitions $ - $ 2,246 $ - $ 2,246 ========== ========== ============ ===========
The Changes in Assets and Liabilities above for the three months and six months ended August 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 and six months ended August 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 six-month periods ending August 31, 1998 and 1997, the Company derived approximately 11.4% and 20.4%, 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 $491 at August 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; 16,542,854 Shares Issued and 15,563,206 Shares Outstanding at August 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 August 31, 1998 and February 28, 1998. (6) Comprehensive Income:
Three Months Ended Six Months Ended August 31, August 31, 1998 1997 1998 1997 ---- ---- ---- ---- Net Income $2,011 $1,704 $3,649 $4,266 Other Comprehensive Income: Foreign Currency Translation Adjustments, Net of Tax (178) - (322) - ------ ------ ------ ------ Comprehensive Income $1,833 $1,704 $3,327 $4,266 ====== ====== ====== ======
6 (7) Net Income Per Share:
Three Months Ended Six Months Ended August 31, August 31, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net Income $ 2,011 $ 1,704 $ 3,649 $ 4,266 =========== =========== =========== =========== Net Income Per Share: Basic $ 0.13 $ 0.11 $ 0.24 $ 0.28 =========== =========== =========== =========== Diluted $ 0.13 $ 0.11 $ 0.24 $ 0.28 =========== =========== =========== =========== Weighted Average Number of Common Shares Outstanding Used for Basic Net Income Per Share 15,330,000 15,191,000 15,311,000 15,176,000 Diluted Common Stock Options 84,659 294,311 84,513 285,178 ----------- ----------- ----------- ----------- Weighted Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options 15,414,659 15,485,311 15,395,513 15,461,178 =========== =========== =========== =========== Outstanding Common Stock Options Having No Dilutive Effect 1,434,226 734,523 1,434,226 734,523 =========== =========== =========== ===========
(8) On August 25, 1997, a class action complaint was filed in the Circuit Court of Cook County, Illinois. The complaint claims that the Company violated the Illinois Consumer Fraud and Deceptive Practices Act as a result of false, misleading and deceptive representations and omissions of material facts relating to the Company's financial position during the period April 18, 1996 to April 6, 1997. On October 2, 1998, counsel for the plaintiff contacted the Company's counsel to report that the plaintiff intends to voluntarily dismiss the case. To date, no filing has been made by the plaintiff. (9) In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." Adoption of SFAS No. 133 is required in fiscal years beginning after June 15, 1999, although earlier adoption is permitted as of the beginning of any fiscal quarter beginning after June 16, 1998. The Statement requires the Company to record all derivative instruments, including those emedded in other contracts, on the balance sheet at fair value. Changes in the derivative's fair value must be recognized in current earnings unless specific hedge accounting criteria are met. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of the derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company has not yet determined when it will adopt SFAS No. 133, however, management does not anticipate that adoption of the Statement will have a material effect on the fiancial position or the results of operations of the Company. 7 Summarized Income Statement Information Walbridge Coatings, An Illinois Partnership
Three Months Ended Six Months Ended August 31, August 31, (In thousands) 1998 1997 1998 1997 - ----------------------------- -------- -------- -------- -------- Net Revenues $13,699 $16,656 $30,049 $34,991 Gross Profit (Loss) (635) 141 668 1,764 Income (Loss) from Operations (933) (499) (378) 372 Net Income (Loss) (933) (637) (459) 45
NOTE: The Net Income (Loss) 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 August 31, 1998 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations --------------------- 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 Three Months Ended August 31, - --------------------------- ------------------------------------------------ 1998 1997 ------------------- -------------------- Product Group: Dollars Percent Dollars Percent --------- ------- --------- ------- Coil Coating $ 38,996 32.7% $ 29,718 42.1% Galvanizing 50,869 42.7% 14,468 20.5% Laminates and Composites 16,030 13.5% 14,747 20.9% Specialty Films 13,262 11.1% 11,608 16.5% -------- ------ -------- ------ $119,157 100.0% $ 70,541 100.0% ======== ====== ======== ======
Six Months Ended August 31, ------------------------------------------------ 1998 1997 ------------------- -------------------- Product Group: Dollars Percent Dollars Percent --------- ------- --------- ------- Coil Coating $ 75,232 32.4% $ 59,445 41.4% Galvanizing 99,179 42.8% 29,341 20.4% Laminates and Composites 33,188 14.3% 31,833 22.2% Specialty Films 24,441 10.5% 23,018 16.0% -------- ------ -------- ------ $232,040 100.0% $143,637 100.0% ======== ====== ======== ======
9 RESULTS OF OPERATIONS - --------------------- Net Sales Net sales in the second quarter of fiscal 1999 increased 68.9% to $119,157 from $70,541 in the same quarter 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 $75,095, 6.5% above the second quarter of fiscal 1998. For the six-month period ended August 31, 1998, sales were $232,040, 61.5% higher than $143,637 in the first six months of last year. This increase was also mainly due to the Colorstrip acquisition. Coil Coating Coil coating sales during the second quarter of fiscal 1999 grew 31.2% (11.7% excluding Colorstrip) to $38,996 from $29,718 in the same quarter last year. For the six months ended August 31, 1998, sales were 26.6% higher (9.8% excluding Colorstrip) than last year. For both periods, significant increases in shipments to the building and appliance markets were slightly offset by a decrease in sales to the transportation market. Capacity utilization for the first six months of fiscal 1999 and 1998 was approximately 78%. 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. For the second quarter of fiscal 1999, galvanizing sales increased 251.6% to $50,869 from $14,468 in the prior year. Excluding Colorstrip, galvanizing sales decreased 12.8% from the second quarter last year. For the first six months, galvanizing sales grew 238.0% to $99,179 from $29,341 in the same period prior fiscal year, but decreased 9.8% excluding the Colorstrip acquisition. MSC's net sales for electrogalvanizing consists of various fees charged to the Partnership for operating the facility. BSC and, to a lesser extent, Inland are primarily responsible for the sales and marketing activities of the Partnership. The Company's primary financial benefits from the Partnership are the revenues billed to Walbridge Coatings for operating the facility. These revenues represent 10.6% and 20.5% of the Company's net sales in the second quarter of fiscal 1999 and 1998, respectively, and 11.4% and 20.4% in the first six months of fiscal 1999 and 1998, respectively. During the second quarter and first six months of fiscal 1999, as well 10 as last fiscal year, the profitability for operating the facility was higher in relation to other facilities 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 requirements of the Partnership agreement. MSC and BSC have extended the existing terms of the Partnership through December 31, 1998, while continuing to negotiate a long-term arrangement. The Company believes that the fair market value of its investment in the Partnership is greater than the $10,737 recorded in the Consolidated Balance Sheets. MSC's electrogalvanizing sales in the second quarter of fiscal 1999 decreased 12.8% to $12,611 compared with $14,468 for the second quarter last year. Electrogalvanizing sales decreased 9.8% to $26,460 for the six-month period ended August 31, 1998 versus $29,341 in the same period last year. The decrease in sales was a result of lower shipments to the automotive industry, including the impact from the General Motors Company work stoppage. Capacity utilization for electrogalvanizing in the first six months of fiscal 1999 was 77% versus 89% in the first six months of last year. Hot-dipped galvanizing sales were $38,258 for the second quarter and $72,719 for the first six months of fiscal 1999. During the second quarter, the hot-dipped galvanizing line lost seven days of production due to equipment failure. For the year-to-date period, sales were less than the comparable pre-acquisition period a year ago due to the lost production days along with the increasingly competitive environment, pricing pressure from the Asian market, as well as unusually wet weather on the West Coast at the beginning of the fiscal year. Capacity utilization was 64% for the first six months of this year. Laminates and Composites Laminates and composites sales of $16,030 were 8.7% higher than last fiscal year's second quarter of $14,747. Higher sales of brake dampers to the original equipment manufacturer ("OEM") and the replacement markets along with growth in appliance shipments, more than offset the impact of the General Motors strike, as well as the decline in sales of Specular+(R) and Polycore Composites(R). For the first half of fiscal 1999, sales of laminates and composites grew 4.3% to $33,188 from $31,833 in fiscal 1998. Increases in the brake damper markets, along with increases in appliance material sales more than offset the impact of the General Motors strike and the decline in the reflective lighting market and its demand for Specular+(R). Capacity utilization for laminates and composites for the six months ended August 31, 1998 was 63%, comparable with the same period last fiscal year. Specialty Films Sales of specialty films products increased 14.2% to $13,262 in the second quarter of fiscal 1999 compared with $11,608 in the same period last year. Gains in the domestic markets for solar control window film, photoreceptor and imaging materials, as well as other sputtered films were slightly offset by lower international shipments. For the first six months of this year, specialty films sales grew 6.2% to $24,441 from prior year's $23,018. Increases in shipments of domestic solar control window film and industrial products were slightly offset by shortfalls in shipments of export solar control and safety window film. Capacity utilization for specialty films for the first half of fiscal 1999 was 64% versus 70% last year. 11 Gross Profit The Company's gross profit margin was 17.4% in the second quarter of fiscal 1999 as compared to 23.8% in the same period last year. For the first six months of fiscal 1999, gross profit margin was 17.2% versus 23.9% in the prior year. The decrease in gross profit margin for both periods 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), underabsorption due to lower capacity utilization, as well as a change in product mix. In addition, slight improvements in production efficiencies were offset by an increase in depreciation expense and the impact of a competitive pricing environment. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses were 12.0% of sales in the second quarter of fiscal 1999 as compared to 18.3% of sales for the same period last fiscal year. For the six months ended August 31, 1998, SG&A as a percentage of sales was 12.0% as compared to 18.2% of sales for the first half of prior year. The decrease in SG&A was largely due to the increase in sales from the Colorstrip acquisition and the company-wide cost reduction program that was implemented in the fourth quarter of last year. Total Other (Income) and Expense, Net and Income Taxes Total other (income) and expense, net was expense of $3,172 and $5,918 in the second quarter and first six months of fiscal 1999, respectively, compared to $1,076 and $1,298 of expense for the same periods of fiscal 1998, respectively. During the second quarter of fiscal 1999, the Company recorded $318 of interest income related to amended tax returns. Interest expense increased $2,040 for the second quarter and $4,317 for the first half of fiscal 1999 due to additional debt related to the Colorstrip acquisition and the Company's increase in capital expenditures in fiscal 1998. In addition, Equity in Results of Partnership declined to expense of $485 and $440 for the second quarter and first six months of this fiscal year, respectively, compared to expense of $344 and income of $158 in the same periods last year, respectively, due to a decline in third party sales. MSC's effective income tax rate was approximately 38.5% during the second quarter and first six months of fiscal 1999 and fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- During the second quarter of fiscal 1999, MSC generated $14,432 of cash from operating activities compared to $6,308 in the second quarter last year. The increase in cash generation is due mainly to improvements in working capital, cash flow benefits received from long-term supplier contracts, as well as higher net income and depreciation and amortization compared to the prior year's second quarter. For the six months of fiscal 1999, operating activities generated $33,346 of cash versus $6,079 last year. The cash generation increase is a result of continuous improvements in receivable and inventory levels and higher depreciation and amortization. Earnings before interest, taxes, depreciation, and amortization ("EBITDA") increased to $13,897 and $27,662 for the second quarter and first six months of fiscal 1999, respectively, compared to $8,458 and $18,289 for the same periods last year, respectively. 12 MSC's capital expenditures during the second quarter and first half of fiscal 1999 were $4,160 and $7,384, respectively, compared with $4,726 and $12,921 in the same periods last fiscal year, respectively. The prior fiscal periods included higher spending for increasing capacity in the coil coating and specialty films areas. As of August 31, 1998, total debt for MSC decreased to $163,022 from $190,973 at fiscal year end due mainly to the significant improvements in working capital, cash flow benefits received from long-term supplier contracts, and lower capital expenditures. The Company maintains two committed lines of credit totaling $100,000 as of August 31, 1998. There was $42,900 outstanding under the lines of credit as of August 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 $52,360 at August 31, 1998. 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 projected to be concluded in the third quarter of fiscal 1999. The joint venture is expected to commence operations in January 1999. However, there can be no assurance that the definitive agreement will be executed or that the transaction will be consummated. The Company has a capital lease obligation, which was $2,626 as of August 31, 1998, relating to a facility which the Company subleases to the Partnership. As of August 31, 1998, Partnership debt is zero compared to $1,250 at February 28, 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. YEAR 2000 - --------- The Year 2000 issue exists because many computer systems and applications, including those embedded in equipment and facilities, use two digit rather than four digit date fields to designate an applicable year. Any of the Company's systems or applications that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in a system failure or miscalculations. Incomplete or untimely resolution of the Year 2000 issue by the Company or critically important suppliers or customers of the Company could have a materially adverse impact on our Company's business, operations, or financial condition in the future. To mitigate this risk, the Company has established a company-wide initiative to identify, evaluate, and address Year 2000 issues. Included within the scope of this initiative are the operational and financial information technology ("IT") systems, embedded systems contained in machinery and equipment, and other end- user computing resources and building systems, such as security, elevator, and heating and cooling systems. In addition, the project includes a review of the Year 2000 compliance efforts of our key supplier and other principal business partners. Work is progressing in the following phases: inventory, assessment, remediation, testing, deployment, and monitoring. Although the pace of the work varies among the business units and the phases are often conducted in parallel, the inventory and assessment phases have been substantially completed as of August 31, 1998, and the remediation and testing phases are in progress. Under our current Year 2000 plan, each of the Company's business units has established target dates for remediation and testing of critical systems and applications. 13 The Company cannot guarantee that third parties on whom we depend for essential supplies and services will convert their critical systems and processes in a timely manner. Failure or delay by any of these parties could significantly disrupt our business. However, the Company has established a supplier compliance letter program, and is working with key suppliers or partners to minimize such risks. The total expected cost of Year 2000 compliance (including replacement of major systems in the normal course of business) is estimated to range from $5,500 to $6,000 of which approximately $1,400 has been incurred to date. The timing of the expenses may vary and are not, necessarily, indicative of the readiness efforts or progress to date. The Company believes the key risk factors associated with Year 2000 are those it cannot directly control, primarily the readiness of its key suppliers, distributors, and partners. The Company has initiated on-going communications with these third parties to determine their Year 2000 compliance status and their progress toward year 2000 readiness. The Company is in the process of following up with those critical third parties who did not respond to the supplier compliance letters. During the second half of fiscal year 1999 and the first half of fiscal year 2000, contingency plans will be developed and documented. Contingency plans would include such items as sourcing alternatives for single source suppliers, developing business resumption plans for all of the Company's business units, and evaluating alternative manual processes. The Year 2000 initiative is a primary focus for each business unit, although there have not been any material IT projects that have been deferred due to the Year 2000 efforts. 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. 14 MATERIAL SCIENCES CORPORATION FORM 10-Q For the Quarter Ended August 31, 1998 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- On June 18, 1998, the Company held its Annual Meeting of Shareowners. Jerome B. Cohen, Roxanne J. Decyk, Eugene W. Emmerich, G. Robert Evans, E. F. Heizer, Jr., Gerald G. Nadig, Irwin P. Pochter, and Howard B. Witt, being eight nominees named in the Company's Proxy Statement, dated May 12, 1998, were elected at the Annual Meeting to serve as the Board of Directors by a majority vote of shareowners. No votes were cast for any other person. No other matters were submitted to the shareowners for approval. The details of the vote were as follows:
Name For Withheld Authority ---- --- ------------------ Jerome B. Cohen 13,436,907 582,681 Roxanne J. Decyk 13,441,723 577,865 Eugene W. Emmerich 13,463,966 555,622 G. Robert Evans 13,939,978 79,610 E. F. Heizer, Jr. 13,458,243 561,345 Gerald G. Nadig 13,954,578 65,010 Irwin P. Pochter 13,431,264 588,324 Howard B. Witt 13,958,855 60,733
Item 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) 27 Financial Data Schedule. (b) Reports on Form 8-K ------------------- On June 22, 1998, the Company filed a Form 8-K regarding the amendment of the Registrant's By-Laws and Rights Agreement. Incorporated by reference to the Registrant's Form 8-K filed on June 22, 1998 (File No. 1-8803). 15 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 9th day of October, 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 16 MATERIAL SCIENCES CORPORATION Quarterly Report on Form 10-Q Index to Exhibits
Sequentially Exhibit Number Description of Exhibit Numbered Page - -------------- ---------------------- ------------- 27 Financial Data Schedule (1)
(1) Appears only in the electronic filing of this report with the Securities and Exchange Commission. EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Statement of Income and Consolidated Balance Sheets and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS FEB-28-1999 MAR-01-1998 AUG-31-1998 1,572 0 51,621 3,794 55,004 114,259 369,933 120,446 400,200 66,586 160,617 0 0 331 144,350 400,200 232,040 232,040 192,233 192,233 27,956 0 6,375 5,933 2,284 3,649 0 0 0 3,649 0.24 0.24
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