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EX-31.1 - RULE 13A-14(A) / 15(D)-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER - MATERIAL SCIENCES CORPd232087dex311.htm

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, 2011

Commission File Number 1-8803

MATERIAL SCIENCES CORPORATION

(Exact name of Registrant as specified in its charter)

 

Delaware    95-2673173

(State or other jurisdiction of

incorporation or organization)

  

(IRS employer

identification number)

2200 East Pratt Boulevard

Elk Grove Village, Illinois

   60007
(Address of principal executive offices)    (Zip code)

Registrant’s telephone number, including area code: (847) 439-2210

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     ¨    Accelerated filer    ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company    x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of September 30, 2011, there were 10,812,256 outstanding shares of common stock, $0.02 par value.


MATERIAL SCIENCES CORPORATION

FORM 10-Q

For the Quarter Ended August 31, 2011

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

(a) Financial statements of Material Sciences Corporation and Subsidiaries

 

2


Condensed Consolidated Statements of Operations (Unaudited)

Material Sciences Corporation and Subsidiaries

 

     Three Months Ended
August 31,
    Six Months Ended
August 31,
 

(In thousands, except per share data)

   2011     2010     2011      2010  

Net Sales

   $ 34,417      $ 33,121      $ 70,453       $ 75,588   

Cost of Sales

     26,766        26,532        53,280         59,516   
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross Profit

     7,651        6,589        17,173         16,072   

Selling, General and Administrative Expenses

     4,726        4,968        10,276         10,254   

Asset Impairment Charges

     —          —          —           3,720   

Gain on Sale of Assets

     —          (1,912     —           (6,639

Restructuring

     345        —          345         1,145   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from Operations

     2,580        3,533        6,552         7,592   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other Income, Net:

         

Interest Income, Net

     14        16        32         41   

Equity in Results of Joint Venture

     121        102        263         208   

Rental Income

     281        253        544         408   

Other, Net

     20        19        44         (17
  

 

 

   

 

 

   

 

 

    

 

 

 

Total Other Income, Net

     436        390        883         640   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from Operations Before

         

Provision (Benefit) for Income Taxes

     3,016        3,923        7,435         8,232   

Provision (Benefit) for Income Taxes

     (5     (14     257         288   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net Income

   $ 3,021      $ 3,937      $ 7,178       $ 7,944   
  

 

 

   

 

 

   

 

 

    

 

 

 

Basic Net Income Per Share

   $ 0.26      $ 0.31      $ 0.60       $ 0.62   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted Net Income Per Share

   $ 0.26      $ 0.30      $ 0.59       $ 0.61   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted Average Number of Common Shares Outstanding Used for Basic Net Income Per Share

     11,557        12,906        12,013         12,906   

Dilutive Shares

     95        52        92         24   
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted Average Number of Common Shares Outstanding Plus Dilutive Shares

     11,652        12,958        12,105         12,930   
  

 

 

   

 

 

   

 

 

    

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

     373        257        373         261   
  

 

 

   

 

 

   

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


Condensed Consolidated Balance Sheets

Material Sciences Corporation and Subsidiaries

 

(In thousands)

   August 31,
2011
    February 28,
2011
 
     (unaudited)        

Assets:

    

Current Assets:

    

Cash and Cash Equivalents

   $ 28,941      $ 35,629   

Receivables, Less Reserves and Allowances of $451 and $420, Respectively

     17,481        22,581   

Income Taxes Receivable

     625        616   

Prepaid Expenses

     996        428   

Inventories

     22,587        20,906   
  

 

 

   

 

 

 

Total Current Assets

     70,630        80,160   
  

 

 

   

 

 

 

Property, Plant and Equipment

     122,182        118,937   

Accumulated Depreciation

     (91,090     (88,461
  

 

 

   

 

 

 

Net Property, Plant and Equipment

     31,092        30,476   
  

 

 

   

 

 

 

Other Assets:

    

Investment in Joint Venture

     3,712        3,152   

Other

     165        142   
  

 

 

   

 

 

 

Total Other Assets

     3,877        3,294   
  

 

 

   

 

 

 

Total Assets

   $ 105,599      $ 113,930   
  

 

 

   

 

 

 

Liabilities:

    

Current Liabilities:

    

Accounts Payable

   $ 11,783      $ 15,126   

Accrued Payroll Related Expenses

     3,042        2,718   

Accrued Expenses

     5,128        6,093   
  

 

 

   

 

 

 

Total Current Liabilities

     19,953        23,937   
  

 

 

   

 

 

 

Long-Term Liabilities:

    

Pension and Postretirement Liabilities

     6,318        7,015   

Other

     5,028        4,780   
  

 

 

   

 

 

 

Total Long-Term Liabilities

     11,346        11,795   
  

 

 

   

 

 

 

Commitments and Contingencies

     —          —     

Shareowners’ Equity:

    

Preferred Stock

     —          —     

Common Stock

     380        380   

Additional Paid-In Capital

     80,186        80,004   

Treasury Stock at Cost

     (69,124     (56,885

Retained Earnings

     62,763        55,585   

Accumulated Other Comprehensive Income (Loss)

     95        (886
  

 

 

   

 

 

 

Total Shareowners’ Equity

     74,300        78,198   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 105,599      $ 113,930   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


Condensed Consolidated Statements of Cash Flows (Unaudited)

Material Sciences Corporation and Subsidiaries

 

     Six Months Ended
August 31,
 

(In thousands)

   2011     2010  

Cash Flows From:

    

Operating Activities:

    

Net Income

   $ 7,178      $ 7,944   

Adjustments to Reconcile Net Income to Net Cash

    

Provided by Operating Activities:

    

Gain on Sale of Fixed Assets

     —          (6,639

Loss on Impairment of Fixed Assets

     —          3,720   

Depreciation, Amortization and Accretion

     2,483        3,123   

Compensatory Effect of Stock Plans

     150        105   

Other, Net

     (305     (103

Changes in Assets and Liabilities:

    

Receivables

     5,214        2,260   

Income Taxes Receivable

     (10     415   

Prepaid Expenses

     (565     (388

Inventories

     (1,549     2,239   

Accounts Payable

     (3,285     (3,714

Accrued Expenses

     (1,023     (1,648

Other, Net

     (125     (401
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     8,163        6,913   
  

 

 

   

 

 

 

Investing Activities:

    

Capital Expenditures

     (2,940     (834

Proceeds from Sale of Assets

     —          14,089   

Proceeds from Note Receivable

     —          1,732   
  

 

 

   

 

 

 

Net Cash Provided by (Used In) Investing Activities

     (2,940     14,987   
  

 

 

   

 

 

 

Financing Activities:

    

Purchases of Treasury Stock

     (11,973     —     

Issuance of Common Stock

     32        15   
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     (11,941     15   
  

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash

     30        (30

Net Increase (Decrease) in Cash and Cash Equivalents

     (6,688     21,885   

Cash and Cash Equivalents at Beginning of Period

     35,629        12,866   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 28,941      $ 34,751   
  

 

 

   

 

 

 

Non-Cash Transactions:

    

Capital Expenditures in Accounts Payable at End of Period

   $ 840      $ 161   

Treasury Stock Purchases in Accrued Liabilities at Period-End

   $ 377      $ —     

Supplemental Cash Flow Disclosures:

    

Interest Paid

   $ 18      $ 22   

Income Taxes Paid (Refunded), Net

   $ 243      $ (141

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MATERIAL SCIENCES CORPORATION and SUBSIDIARIES

The financial information as of August 31, 2011, and for the three and six months ended August 31, 2011 and 2010, has not been audited by our independent registered public accounting firm. In the opinion of Material Sciences Corporation and Subsidiaries (the “Company,” “we,” “our,” “us” or “MSC”), the information reflects all adjustments (consisting of only normal, recurring adjustments) necessary for a fair presentation of the information at that date and for those periods. The financial information contained in this report should be read in conjunction with the Company’s Annual Report on Form 10-K (“Form 10-K”) filed with the Securities and Exchange Commission on April 29, 2011, for the fiscal year ended February 28, 2011. A reclassification has been made to the prior years’ consolidated financial statements to conform to the fiscal 2012 presentation—“Rental Income” was reclassified from “Other, Net” on the Condensed Consolidated Statements of Operations.

 

(1)

Joint Venture. In November 2000, a subsidiary of MSC formed a joint venture with Tekno S.A. (“Tekno”) for the manufacture and sale of Quiet Steel® and disc brake noise damping material for the South American market. The Company includes its portion of the joint venture’s results in the Condensed Consolidated Statements of Operations under Equity in Results of Joint Venture. The Equity in Results of Joint Venture was income of $121,000 and $263,000 for the three and six months ended August 31, 2011, respectively, compared with $102,000 and $208,000 for the same periods in fiscal 2011.

 

(2) Preferred Stock. Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized; 1,000,000 Designated Series B Junior Participating Preferred; None Issued.

 

(3) Common Stock. Common Stock, $0.02 Par Value; 40,000,000 Shares Authorized; 19,008,404 Shares Issued and 11,180,104 Shares Outstanding as of August 31, 2011, and 18,993,892 Shares Issued and 12,893,560 Shares Outstanding as of February 28, 2011.

 

(4) Treasury Stock. Our Board of Directors authorized the repurchase of shares of the Company’s common stock as follows:

 

   

On January 7, 2008, 1,000,000 shares

 

   

On January 28, 2011, 1,000,000 shares

 

   

On May 27, 2011, 1,000,000 shares

 

   

On September 14, 2011, 1,000,000 shares

The shares may be repurchased from time-to-time on the open market, subject to market conditions and other factors, and generally will be funded with internally generated cash. The Company repurchased 98,316 shares under the January 2008 authorization (completing that authorization), 1,000,000 shares under the January 2011 authorization (completing that authorization) and 619,652 shares under the May 2011 authorization during the six months ended August 31, 2011. At August 31, 2011, there were 380,348 shares available for purchase under the May 2011 authorization.

 

6


     Shares      Cost of  Shares
Purchased
(in thousands)
     Average Price
per  Share
 

Treasury Stock as of February 28, 2011

     6,090,332       $ 56,885       $ 9.34   

Repurchases During the Six Months Ended August 31, 2011

     1,717,968         12,239       $ 7.12   
  

 

 

    

 

 

    

 

 

 

Treasury Stock as of August 31, 2011

     7,808,300       $ 69,124       $ 8.85   
  

 

 

    

 

 

    

 

 

 

On May 27, 2011, the Company entered into a written trading plan to purchase up to 1,000,000 shares under Rule 10b5-1 of the Exchange Act as part of the existing share repurchase program. The plan commenced on June 1, 2011, and will expire on May 31, 2012, or when 1,000,000 shares have been repurchased, whichever occurs first. During the three months ended August 31, 2011, 619,652 shares were purchased under this plan.

 

(5) Commodity Contracts. MSC is exposed to certain risks related to ongoing business operations. We use derivative instruments with the objective of managing our financial and operational exposure arising from these risks: primarily commodity price risk. From time-to-time in the ordinary course of business, the Company enters into purchase contracts for procuring nickel carbonate, zinc shot and natural gas, which are commodities used in our manufacturing processes. MSC maintains a commodity forward purchase policy. This seeks to ensure that, at any time, the majority of the expected consumption over the next 12 months is secured under a purchase contract at a pre-determined price. When MSC enters into these contracts, it applies the Normal Purchase/Normal Sale election, which excludes the contracts from being accounted for as derivative instruments at fair value for as long as they qualify for the election.

At August 31, 2011, we did not have any commodity contracts that we accounted for at fair value.

 

(6) Comprehensive Income

 

     Three Months Ended
August  31,
     Six Months Ended
August 31,
 

(in thousands)

   2011      2010      2011      2010  

Net Income

   $ 3,021       $ 3,937       $ 7,178       $ 7,944   

Other Comprehensive Income:

           

Pension/Postretirement Adjustments, Net of Benefit for Income Taxes of $0 for all periods presented

     134         169         338         318   

Foreign Currency Translation Adjustments

     150         168         643         (269
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive Income

   $ 3,305       $ 4,274       $ 8,159       $ 7,993   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

7


(7) Indebtedness. The Company has a credit line (“Line”) with JPMorgan Chase Bank, N.A. Interest on the Line is at the bank’s prime rate (3.25% as of August 31, 2011) or Libor plus 1.50%, at our discretion. There are annual letter of credit fees of 1.50% on outstanding letters of credit and a 0.25% fee on the annual unused credit line. The Line is secured by a borrowing base equal to a specified percentage of accounts receivable and liens on other assets of the Company—including inventory, equipment, real property and intellectual property—reduced by outstanding letters of credit. In April 2010, the Line was amended to reduce the credit line to $7.5 million and increase the minimum availability covenant to $2.5 million. On May 10, 2011, MSC and JPMorgan Chase Bank, N.A. agreed to extend the existing Line for two years on substantially identical terms.

Due to the borrowing base limitations and outstanding letters of credit of $1.3 million, the net amount available for borrowing at August 31, 2011, was $3.7 million. The lender may, at its discretion subject to the terms of the Line, modify the advance rates used in computing the borrowing base, which may limit the amounts available for future borrowings. There were no borrowings outstanding under the Line at either August 31, 2011, or February 28, 2011, nor were any amounts borrowed during the six months ended August 31, 2011, or August 31, 2010. In September 2011, the outstanding letters of credit were reduced to $1.1 million.

 

(8) Inventory. Inventories consist of the following:

 

(in thousands)

   August 31,
2011
     February 28,
2011
 

Raw Materials

   $ 12,152       $ 9,637   

Finished Goods

     10,435         11,269   
  

 

 

    

 

 

 

Total Inventories

   $ 22,587       $ 20,906   
  

 

 

    

 

 

 

 

(9) Significant Customers. Due to the concentration in the automotive industry, management believes that sales to individual automotive customers—both Tier 1 and Tier 2 (including US Steel)—are significant. The following table shows sales to the Company’s major customers as a percentage of consolidated net sales for the three and six months ended August 31, 2011 and 2010.

 

     % of Consolidated
Net Sales for the
Three Months Ended
August 31,
    % of Consolidated
Net Sales for the
Six Months Ended
August 31,
 

Customer

   2011     2010     2011     2010  

US Steel

     24     14     25     13

Chrysler

     16     19     16     17

Ford

     11     18     11     18

The following table shows gross accounts receivable from the Company’s significant customers as a percentage of total consolidated gross accounts receivable at August 31, 2011, and February 28, 2011.

 

     % of Consolidated Gross Accounts
Receivable
 

Customer

   August 31,
2011
    February 28,
2011
 

Chrysler

     17     14

US Steel (1)

     15     24

Ford

     9     18

 

  (1) The reduction in US Steel is due to the timing of payments received at August 31 and February 28, 2011. The percentage at February 28, 2011, did not reflect a $2.4 million payment received on March 1, 2011 which should have been received on February 28, 2011.

 

8


Net sales of our domestic and foreign units are presented in the table below. No one foreign country comprised greater than 10% of consolidated net sales for any period presented.

 

     Three Months Ended
August 31,
     Six Months Ended
August 31,
 

(in thousands)

   2011      2010      2011      2010  

Domestic Net Sales

   $ 30,242       $ 30,388       $ 62,394       $ 69,873   

Foreign Net Sales

     4,175         2,733         8,059         5,715   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Net Sales

   $ 34,417       $ 33,121       $ 70,453       $ 75,588   
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic Net Sales includes sales originated by our domestic subsidiaries and shipped to customers in Asia of $1.5 million and $2.3 million for the three and six months ended August 31, 2011, and $0.4 million and $1.0 million for the comparable prior-year periods.

 

(10) Income Taxes. The Company evaluates its deferred income taxes on a quarterly basis to determine if valuation allowances are required, in full or in part. This includes considering available positive and negative evidence, such as past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction-by-jurisdiction basis. In determining future taxable income, we review the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. After analyzing the ability to generate sufficient taxable income to utilize the benefit of the deferred tax assets, the Company had established a valuation allowance on its U.S. and German deferred tax assets as of February 28, 2009. During the three and six months ended August 31, 2011, the Company recorded a decrease in the valuation allowances of approximately $1.1 million and $2.7 million, respectively, relating to the tax effects of the income generated during fiscal 2012 offset by a $0.7 million increase due to an adjustment to the German deferred tax assets and valuation allowance. The six-month period also included a reduction of $1.9 million related to the write-off of net operating losses, primarily in Pennsylvania, due to the liquidation of a subsidiary and the inability to utilize the losses. There were no other material changes to the Company’s valuation allowances during the three and six months ended August 31, 2011. A full valuation allowance continues to be maintained for the Company’s remaining U.S. and German deferred tax assets at August 31, 2011. Should actual operating results and our forecast of future taxable income remain favorable, absent other factors indicating a contrary conclusion, the Company believes a substantial portion of the remaining valuation allowance may be reversed by the end of fiscal 2012.

The Company does not anticipate that the total amount of unrecognized tax benefits of $2.4 million at August 31, 2011, will significantly change during the next 12 months.

 

9


For the three and six months ended August 31, 2011, the Company’s effective income tax provision for continuing operations was a benefit of 0.2% and an expense of 3.5%, respectively, compared with a benefit of 0.4% and an expense of 3.5%, respectively, in the same periods last year. The tax for the three months ended August 31, 2010, included a current tax benefit resulting from the sale of the idled facility and production equipment located in Middletown, OH. See Note 16, “Middleton Asset Sale,” for further discussion of the sale.

 

(11) Retirement and Savings Plans. The Company has one defined contribution retirement plan qualifying under the Internal Revenue Code Section 401(k): The Material Sciences Savings & Investment Plan (the “SIP”). All MSC employees can elect to participate in the SIP.

MSC also has non-contributory defined benefit pension plans, all of which are frozen, and other postretirement plans for certain of its employees. The following table provides the components of net periodic benefit cost for the Company’s defined benefit plans and other post-retirement plans.

 

     Pension Benefits     Other Benefits  
     Three Months Ended August 31,  

(in thousands)

   2011     2010     2011     2010  

Service Cost

   $ —        $ —        $ 5      $ 30   

Interest Cost

     167        171        21        72   

Amortization of Unrecognized Prior Service Cost

     —          —          (69     —     

Expected Return on Plan Assets

     (154     (135     —          —     

Amortization of Net Loss

     101        98        47        62   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Periodic Benefit Cost

   $ 114      $ 134      $ 4      $ 164   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Pension Benefits     Other Benefits  
     Six Months Ended August 31,  

(in thousands)

   2011     2010     2011     2010  

Service Cost

   $ —        $ —        $ 10      $ 60   

Interest Cost

     334        341        43        143   

Amortization of Unrecognized Prior Service Cost

     —          —          (138     —     

Expected Return on Plan Assets

     (309     (269     —          —     

Amortization of Net Loss

     203        196        94        123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Periodic Benefit Cost

   $ 228      $ 268      $ 9      $ 326   
  

 

 

   

 

 

   

 

 

   

 

 

 

MSC previously disclosed in the Notes to its financial statements for the year ended February 28, 2011, that it expected to contribute $1.2 million toward its qualified and nonqualified defined benefit pension plans and $0.2 million toward its other post-retirement benefit plans other than pension plans in fiscal 2012. As of August 31, 2011, $0.6 million of contributions/payments have been made toward the pension plans and $0.1 million of net contributions/payments have been made to the other post-retirement plans.

 

10


(12) Equity and Compensation Plans. The Company has one active equity award plan, the Material Sciences Corporation 1992 Omnibus Awards Plan for Key Employees (“1992 Plan”). There were 3,262,500 shares authorized under the 1992 Plan to provide stock options, restricted stock and other equity awards under various programs. Nonqualified stock options generally vest over three years and expire between five and 10 years from the date of grant. Restricted stock awards generally vest over three to five years from the date of grant. Restricted stock awards have been issued with restrictions based upon time, Company financial performance or a combination of the two.

MSC also has one inactive equity award plan: The Material Sciences Corporation 2001 Compensation Plan for Non-Employee Directors (“2001 Directors Plan”). The 2001 Directors Plan expired on February 29, 2004, and no additional grants will be made. There were 25,958 stock options outstanding and exercisable under this plan at August 31, 2011.

In March 2010, the Company granted 200,000 stock options with a $2.00 strike price. The weighted average Black-Scholes value of each option granted was $0.93. In May 2010, MSC issued 10,000 shares of restricted stock. These shares will vest over three years. In March 2011, the Company granted 200,000 stock options with a $7.50 strike price. The weighted average Black-Scholes value of each option granted was $4.13. In May 2011, MSC issued 10,000 shares of restricted stock, which will vest over three years. No option or equity awards were granted during the three months ended August 31, 2011.

 

(13) Segments. MSC operates in one business segment based on how the Chief Operating Decision Maker views the business for purposes of evaluating performance and making operating decisions. The Company provides material-based solutions for acoustical and coated applications. The acoustical material-based solutions include multilayer composites consisting of metals, polymeric coatings and other materials, as well as rubber coatings, used to manage noise and vibration. The coated metal material-based solutions include coil-coated, film-laminated and electrogalvanized (“EG”) functional and decorative coatings applied to coils of metal in a continuous, high-speed, roll-to-roll process. MSC’s material-based solutions are designed to meet specific customer requirements for the automotive, appliance, building and construction, lighting and electronics markets.

Each of our domestic facilities houses one or more principal production lines. These lines are used to transform coils of carbon-based steel, stainless steel or aluminum into materials for our customers in a continuous process. The process varies somewhat, depending on the application and what materials are bonded to the metal coil. However, the core production line equipment does not change markedly. The products are differentiated by the type of material bonded to the metal and the bonding method employed. Various paints and coatings are applied by running the uncoiled metal ribbon through a bath and baking the coatings onto the steel in high temperature ovens. Our proprietary Quiet Steel ® is produced by bonding two metal coils together with highly-engineered viscoelastic core materials. Zinc and zinc-nickel corrosion protections are applied by running the steel through metal electrolyte baths and galvanizing the material to the metal with electricity. This galvanization process is only performed at our Walbridge, Ohio facility. Our facility in Germany is principally a tool making and stamping operation, producing finished brake shims for the European and Asian automotive industries.

 

11


We use a significant level of shared assets, and share resources for sales, general and administrative expense, and management across each of our product categories. It is common for a single customer to make purchases from several different product categories as well as from different plants. Capital projects, whether for cost savings or generating incremental revenue, are evaluated individually based on estimated economic returns (e.g., net present value, return on investment), not based on related product line or geographic location. We use a centralized management structure, and share administration and production resources, to deliver individual products that, together, provide solutions to our customer base. Disaggregated financial information for individual products is largely limited to top-line revenues.

 

     Three Months Ended
August 31,
    Six Months Ended
August 31,
 
     2011     2010     2011     2010  

Net Sales ($ in millions)

   $      %     $      %     $      %     $      %  

Acoustical

     17.2         50        18.4         56        34.9         50        39.8         53   

Coated

     17.2         50        14.7         44        35.6         50        35.8         47   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Net Sales

   $ 34.4         100   $ 33.1         100   $ 70.5         100   $ 75.6         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(14) Recent Accounting Pronouncements. On May 12, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04. The ASU is the result of joint efforts by the FASB and the International Accounting Standards Board (“IASB”) to develop a single, converged fair value framework—that is, converged guidance on how (not when) to measure fair value and on what disclosures to provide about fair value measurements. There are few differences between the ASU and its international counterpart, International Financial Reporting Standard (“IFRS”) 13. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands ASC 820’s existing disclosure requirements for fair value measurements and makes other amendments. Many of these amendments are being made to eliminate unnecessary wording differences between U.S. GAAP and IFRS. However, some could change how the fair value measurement guidance in ASC 820 is applied. The ASU is effective for interim and annual periods beginning after December 15, 2011, for public companies. MSC is evaluating the impact of adopting this guidance, but does not expect it to have a material impact on the Company’s results of operations, financial position and cash flow.

On June 16, 2011, the FASB issued ASU 2011-05, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (“OCI”). The ASU does not change the items that must be reported in OCI. For public entities, the ASU’s amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating the impact of adopting this guidance, which may result in changes in the presentation of its financial statements.

 

12


(15) Commitments and Contingencies. MSC is a party to various legal proceedings in connection with the remediation of certain environmental matters. The Company’s environmental reserves were approximately $1.3 million as of August 31, 2011, and $1.3 million as of February 28, 2011. Management does not believe that the outcome of its environmental legal proceedings will have a material adverse effect on its financial statements, given the reserves recorded as of August 31, 2011, and, where applicable, taking into account contributions from other PRPs. There are, however, a number of uncertainties. These include, without limitation, the cost of site cleanup, the discretionary authority of federal and state regulatory authorities in bringing enforcement actions and other factors that could affect the Company’s exposure.

The Company is also a party to various legal actions and customer disputes arising in the ordinary course of its business. These legal actions and customer disputes cover a broad variety of claims spanning MSC’s entire business. We believe that the resolution of these legal actions and customer disputes will not, individually or in the aggregate, have a material adverse effect on its financial statements.

 

(16) Middletown Asset Sale. The Company closed its coil coating facility in Middletown, Ohio, in July 2004. On June 24, 2010, MSC sold the facility to NCI Group for $4.9 million. The carrying value of these assets prior to the sale was $2.9 million. The Company recorded a gain on the sale of approximately $1.9 million (net of fees) in the second quarter of fiscal 2011.

 

(17) Restructuring. In the first quarter of fiscal 2011, MSC executed a restructuring plan in conjunction with the sale of certain coil coating assets located in Elk Grove Village, Illinois. See Note 19, “Elk Grove Village Asset Sale,” for additional discussion of the sale. The plan included eliminating positions in production and SG&A departments. The Company recognized approximately $1.1 million in employee severance expense, all of which was paid by the end of fiscal 2011.

During the fourth quarter of fiscal 2011, MSC recognized severance expense of $0.2 million, which will be paid through fiscal 2012. During the second quarter of fiscal 2012, the Company recognized severance expense of $0.3 million, which will be paid through the second quarter of fiscal 2013.

The year-to-date activity in the restructuring reserve is presented in the chart below:

 

(in thousands)

      

Restructuring Reserve as of February 28, 2011

   $ 202   

Restructuring Expenses Recorded During Fiscal 2012

     345   

Cash Payments and Other Adjustments

     (147
  

 

 

 

Restructuring Reserve as of August 31, 2011

   $ 400   
  

 

 

 

 

13


(18) Asset Impairment. During the first quarter of fiscal 2011, in conjunction with the sale of a portion of our coil coating assets, we conducted an impairment analysis of the real estate and building improvement assets at our Plant #7 in Elk Grove Village, Illinois. Based on that valuation, we determined the assets were impaired and recorded a $3.7 million write-down of the assets in the first quarter of fiscal 2011.

 

(19) Elk Grove Village Asset Sale. On April 12, 2010, the Company sold a portion of its coil coating assets and associated business base to Roll Coater, Inc. for $10 million ($9.3 million after investment banking fees). Roll Coater purchased the coil coating machinery, related processing equipment, and corresponding customer base associated with MSC’s Plant #7 in Elk Grove Village, Illinois. Based on fiscal 2010 shipments, the associated business base included approximately $28.6 million in sales of general-line coil coated products. In addition, MSC and Roll Coater entered into a multi-year lease agreement to store the purchased equipment. The transaction did not include the sale of any real estate by MSC. The Company recorded a gain on the sale of approximately $4.7 million (net of $0.3 million of legal fees) in the first quarter of fiscal 2011. MSC also recorded $1.1 million of employee severance expense and $0.2 million of inventory write-off expenses in connection with the sale.

 

(20) Plan to Sell Elk Grove Village Building. In April 2011, after receiving authorization from the Board of Directors, management committed to a plan to sell the building located at 2200 East Pratt Boulevard in Elk Grove Village, Illinois. This building houses our corporate offices and housed our coil coating assets before they were sold in April 2010. Since the production portion of the building is idle, and we have sufficient office space in our Plant #2 building in Elk Grove Village, Illinois, to accommodate our corporate offices, this building is no longer critical to our business. Given the current market for real estate, a sale of the building is not likely to occur in the near term. Also, the Company does not have any pressing cash needs that would force an early sale and management is committed to realizing an appropriate sales value for the property. Accordingly, the building is not considered an asset held for sale and MSC continues to account for the building as an active, depreciating asset.

 

14


MATERIAL SCIENCES CORPORATION and SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and related notes, included in Item 1 of this Form 10-Q, and the audited Consolidated Financial Statements and related notes and the MD&A included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2011, filed on April 29, 2011 (“Form 10-K”), as well as the Company’s other filings with the Securities and Exchange Commission.

Executive Summary

Material Sciences Corporation and its subsidiaries (the “Company,” “MSC,” “we,” “our” or “us”) design, manufacture and market material-based solutions for acoustical and coated applications. Our acoustical material-based solutions include composites that consist of layers of metal, rubber and other materials used to manage noise and vibration in such products as automotive body panels; braking systems; engine parts; appliances; heating, ventilation and air conditioning (“HVAC”) and computer disk drives. Our coated material-based solutions include coil coated and electrogalvanized (“EG”) protective, decorative and rubber coatings applied to coils of metal in a continuous, high-speed, roll-to-roll process for such products as automotive body panels and fuel tanks, building products, gaskets, appliances and lighting fixtures. These solutions are designed to meet specific customer requirements for the automotive, building, consumer and industrial markets. We use a significant level of shared assets and management across each of our product categories. It is common for a single customer to purchase products from several different product categories.

We continue our efforts to expand existing relationships in Asia through our sales offices in Korea, Malaysia and China, and have an ongoing relationship with Hae Won Steel in Korea and Federal Iron Works in Malaysia for the production of our products.

As a part of our strategic planning process, management evaluates the strategic position, growth and economic value potential of our businesses with the objective of creating additional value for our shareholders. This planning process includes a review of organic growth opportunities, potential sales of assets, acquisitions of products or businesses and strategic partnerships.

Although MSC has engaged in significant sales of production assets in recent years, this is unlikely to continue. We will consider selling non-core assets if the circumstances are appropriate. As discussed in Note 20 of the Notes to the Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q, and in the Form 10-K, we plan to sell the building located at 2200 East Pratt Boulevard in Elk Grove Village, Illinois.

 

15


Results of Operations

Here is a summary of our consolidated financial performance:

 

     Three Months Ended
August 31,
    Six Months Ended
August 31,
 

($ in thousands)

   2011     2010     %
Variance
    2011     2010     %
Variance
 

Net Sales

   $ 34,417      $ 33,121        3.9   $ 70,453      $ 75,588        (6.8 )% 

Gross Profit

   $ 7,651      $ 6,589        16.1   $ 17,173      $ 16,072        6.9

% of Net Sales

     22.2     19.9       24.4     21.3  

Selling, General and Administrative

   $ 4,726      $ 4,968        (4.9 )%    $ 10,276      $ 10,254        0.2

% of Net Sales

     13.7     15.0       14.6     13.6  

Sales

 

($ in thousands)    Net Sales for the Three
Months Ended August 31,
        

Application

   2011      2010      $ Variance     % Variance  

Acoustical

   $ 17,247       $ 18,402       ($ 1,155     (6.3 )% 

Coated

   $ 17,170       $ 14,719       $ 2,451        16.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 34,417       $ 33,121       $ 1,296        3.9
  

 

 

    

 

 

    

 

 

   

 

 

 

 

($ in thousands)    Net Sales for the Six
Months Ended August 31,
        

Application

   2011      2010      $ Variance     % Variance  

Acoustical

   $ 34,866       $ 39,836       ($ 4,970     (12.5 )% 

Coated

   $ 35,587       $ 35,752       ($ 165     (0.5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 70,453       $ 75,588       ($ 5,135     (6.8 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Comparison of Results of Operations for the Three Months Ended August 31, 2011 and 2010

Sales in the three months ended August 31, 2011, increased by $1.3 million from the prior fiscal year quarter.

Acoustical sales declined $1.2 million due to lower demand from our automotive customers. Body panel laminate sales for the second quarter of fiscal year 2012 were off $1.2 million, due to $0.7 million of lower shipments to Chrysler—due to lower automotive builds and inventory adjustments—and $0.8 million in lower sales to General Motors as some models containing Quiet Steel® have gone out of production and it stopped using the technology on certain models. This was partially offset by higher body panel laminate sales to other automotive companies. Brake sales rose $0.5 million primarily due to higher original equipment brake sales in Europe. Sales related to engine products declined $0.8 million due to lower overall demand for parts used in engines for automobiles and Class 8 trucks. This was offset by increases in other acoustical sales of $0.4 million for appliance and disk drive products. Returns and allowances (a component of net sales) decreased by $0.1 million due mainly to lower revenues generated by scrap sales.

 

16


Sales of coated metal products increased by $2.5 million. This increase was the result of a $3.6 million increase in sales of electrogalvanized products used in automotive body panel applications, as well as $0.9 million in higher sales of our ElectroBrite® product in the appliance market. These increases were partially offset by a $1.7 million decrease in fuel tank sales because certain vehicles at Ford have converted from the coated steel supplied by MSC to plastic fuel tank materials. In addition, the prior year sale of coil coating assets at the Elk Grove Village Plant #7, and the associated revenue, accounted for a $1.3 million reduction. These assets primarily served the appliance and building product markets. Returns and allowances (a component of net sales) improved by $0.7 million mainly due to higher scrap sales as well as improvements in product mix (lower coil coating and higher EG volume) and product quality.

Gross Profit

Gross profit for the three months ended August 31, 2011, was $7.7 million, or 22.2% of net sales, for fiscal 2012 compared with $6.6 million, or 19.9% of net sales, for fiscal 2011. This resulted from the two primary factors detailed below:

Sales and operating factors accounted for a $0.1 million increase in gross profit, reflecting the following:

 

   

The coated metal sales mix and gross margin improved because of a lower volume of coil coating sales (due to the Elk Grove Village asset sale), and higher sales of EG coated metal.

 

   

This was partially offset by a decline in acoustical sales, and higher material costs.

The cost of non-conformance (product quality, net of scrap sales) improved by $1.0 million from a year ago for three reasons:

 

   

Coil coating sales—which had a high cost of non-conformance—were lower in the second quarter of fiscal 2012 because of the Elk Grove Village asset sale in the prior year.

 

   

Product quality improved, mainly due to internal production yields at our Walbridge facility.

 

   

Scrap metal sales—which are a byproduct of our manufacturing process—increased due to higher production volumes and improved scrap pricing in the secondary market.

Selling, General and Administrative (“SG&A”) Expenses

SG&A expenses for the three months ended August 31, 2011, were $4.7 million compared with $5.0 million in the same period last year. SG&A expenses in the second quarter of fiscal 2012 decreased by $0.4 million due to reduced director incentive expenses that resulted from stock price changes and lower professional fees, partially offset by higher employee-related expenses due to increased staffing levels in the sales and marketing function.

 

17


Special Charge & Gains

On June 24, 2010, MSC sold the idled facility and related production equipment located in Middletown, Ohio to NCI Group for $4.9 million. The Company recorded a gain on the sale of approximately $1.9 million in the second quarter of fiscal 2011.

The Company recorded approximately $0.3 million of employee severance expense in the three months ended August 31, 2011, related to the termination of certain management and sales employees.

Total Other Income, Net

Total other income, net was $0.4 million for both the three months ended August 31, 2011, and August 31, 2010. There were no significant changes in the components of other income, net between the two fiscal year periods. Total other income, net includes rental income of $0.3 million. That income was from leases in our Elk Grove Village Plant #7, which had operating expenses of $0.4 million (including depreciation of $0.2 million) recorded in SG&A during the three months ended August 31, 2011.

Income Taxes

The Company evaluates its deferred income taxes on a quarterly basis to determine if valuation allowances are required, in full or in part. This includes considering available positive and negative evidence, such as, past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction-by-jurisdiction basis. In determining future taxable income, we review the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. After analyzing the ability to generate sufficient taxable income to utilize the benefit of the deferred tax assets, the Company has established a valuation allowance on its U.S. and German deferred tax assets as of February 28, 2009. During the three months ended August 31, 2011, the Company recorded a decrease in the valuation allowances of approximately $1.1 million relating to the tax effects of the income generated during fiscal 2012 offset by a $0.7 million increase due to an adjustment to the German deferred tax assets and valuation allowance. There were no other material changes to the Company’s valuation allowances during the three months ended August 31, 2011. A full valuation allowance continues to be maintained for the Company’s remaining U.S. and German deferred tax assets at August 31, 2011.

The Company does not anticipate that the total amount of unrecognized tax benefits of $2.4 million at August 31, 2011, will significantly change during the next 12 months.

For the three months ended August 31, 2011, the Company’s effective income tax provision for continuing operations was a benefit of 0.2% compared with a benefit of 0.4% in the same period last year.

Comparison of Results of Operations for the Six Months Ended August 31, 2011 and 2010

Sales for the six months ended August 31, 2011, decreased by $5.1 million from the prior fiscal year.

 

18


Acoustical sales declined $5.0 million due to lower demand for our products from our automotive customers. Body panel laminate sales for the first six months of fiscal year 2012 declined $4.3 million, due to $1.8 million of lower shipments to Chrysler—due to lower automotive builds—and $2.7 million in lower shipments to General Motors as some models containing Quiet Steel have gone out of production and it stopped using the technology on certain other models. This decrease was partially offset by higher body panel laminate sales to other automotive companies. Brake sales were flat with higher sales in Europe offsetting North American shipments. Sales related to engine products declined $1.0 million due to lower automotive demand. This was partially offset by a $0.7 million increase in appliance and disk drive acoustical sales. Returns and allowances (a component of net sales) decreased by $0.2 million due mainly to lower revenues generated by scrap sales.

Sales of coated metal products decreased by $0.2 million. The prior-year sale of coil coating assets at the Elk Grove Village Plant #7, and the associated revenue, accounted for a $7.4 million reduction in net sales. These assets primarily served the appliance and building product markets. Fuel tank sales decreased $4.9 million because certain vehicles at Ford have converted from the coated steel supplied by MSC to plastic fuel tank materials. These lower volumes were offset by $8.6 million in stronger sales of EG products used in automotive body panel applications, as well as $1.7 million in higher sales from our ElectroBrite product. Returns and allowances (a component of net sales) improved by $1.6 million mainly due to higher scrap sales as well as improvements in product mix (lower coil coating and higher EG volume) and product quality.

Gross Profit

Gross profit for the six months ended August 31, 2011, was $17.2 million, or 24.4% of net sales, for fiscal 2012 compared with $16.1 million, or 21.3% of net sales, for fiscal 2011. This change resulted from the two primary factors detailed below:

Sales and operating factors accounted for a $0.4 million decrease in gross profit, reflecting the following:

 

   

A decline in acoustical sales

 

   

Higher material costs

 

   

These were partially offset by an improvement in the coated metal sales mix and gross margin because of a lower volume of coil coating sales (due to the Elk Grove Village asset sale), and higher sales of EG coated metal

The cost of non-conformance (product quality, net of scrap sales) improved by $1.5 million from a year ago for two reasons:

 

   

Coil coating sales—which had a high cost of non-conformance—were lower in the first half of fiscal 2012 because of the Elk Grove Village asset sale in the prior year.

 

   

Scrap metal sales—which are a byproduct of our manufacturing process—increased due to higher production volumes and improved scrap pricing in the secondary market.

Selling, General and Administrative Expenses

SG&A expenses were $10.3 million for both the six months ended August 31, 2011, and August 31, 2010. In the first half of fiscal 2012, higher management incentive expenses—due to accrual timing—were offset by lower director incentive expense that was the result of stock price changes. In addition, higher employee-related expenses from higher staffing levels in sales and marketing were offset by lower professional service expenses.

 

19


Special Charge & Gains

During the six months ended August 31, 2010, MSC recorded a gain of $1.9 million on the sale of the idled facility and related production equipment located in Middletown, Ohio and a gain of $4.7 million on the sale of our coil coating assets located in our Plant #7 in Elk Grove Village, Illinois. We also recorded an asset impairment charge of $3.7 million and employee severance expense of $1.1 million related to the coil coating asset sale. The Company recorded approximately $0.3 million of employee severance expense in the six months ended August 31, 2011, related to the termination of certain management and sales employees.

Total Other Income, Net

Total other income, net for the six months ended August 31, 2011, was $0.9 million compared with $0.6 million in the same period of fiscal 2011. The increase was primarily due to rent received for our Elk Grove Village Plant facility, which commenced in April 2010, and improved results from our joint venture investment in Tekno. Total other income, net includes rental income of $0.5 million. That income was for leases in our Elk Grove Village Plant #7, which had operating expenses of $0.7 million (including depreciation of $0.4 million) recorded in SG&A during the six months ended August 31, 2011.

Income Taxes

The Company evaluates its deferred income taxes on a quarterly basis to determine if valuation allowances are required, in full or in part. This includes considering available positive and negative evidence, such as, past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income on a jurisdiction-by-jurisdiction basis. In determining future taxable income, we review the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. After analyzing the ability to generate sufficient taxable income to utilize the benefit of the deferred tax assets, the Company has established a valuation allowance on its U.S., and German deferred tax assets as of February 28, 2009. During the six months ended August 31, 2011, the Company recorded a decrease in the valuation allowances of approximately $2.7 million relating to the tax effects of the income generated during fiscal 2012 offset by a $0.7 million increase due to an adjustment to the German deferred tax assets and valuation allowance and a reduction of $1.9 million related to the write-off of net operating losses, primarily in Pennsylvania, due to the liquidation of a subsidiary and the inability to utilize the losses. There were no other material changes to the Company’s valuation allowances during the six months ended August 31, 2011. A full valuation allowance continues to be maintained for the Company’s remaining U.S. and German deferred tax assets at August 31, 2011.

The Company does not anticipate that the total amount of unrecognized tax benefits of $2.4 million at August 31, 2011, will significantly change during the next 12 months.

For the six months ended August 31, 2011, the Company’s effective income tax provision for continuing operations was an expense of 3.5% compared with an expense of 3.5% in the same period last year.

 

20


Liquidity and Capital Resources

We have historically financed our operations with funds generated from operating activities, borrowings under credit facilities and long-term debt instruments and sales of various assets. We believe that our cash on hand, cash generated from operations and cash available under our credit facility will be sufficient to fund our operations and meet our foreseeable working capital needs.

During the first six months of fiscal 2012, we generated $8.2 million of cash from operating activities compared with $6.9 million during the first six months of last fiscal year. The increase was primarily due to a $1.4 million increase in net income after adjustment for non-cash items, a larger decrease in accounts receivable and prepaids in the current fiscal year compared to the prior fiscal year—resulting in $2.5 million more cash ($2.4 million of which is due to timing of a payment received from US Steel on March 1, 2011), and smaller decreases of accounts payable and accruals in the current fiscal year compared to the prior year—resulting in $1.3 million more cash. These increases were partially offset by a $3.8 million increase in inventory between the two periods. Last year’s reduction of working capital was partially the result of the sale of the coil coating assets and associated business volume, as discussed in Note 19, “Elk Grove Village Asset Sale.”

In the first six months of fiscal 2012, we invested $2.9 million in capital improvement projects, compared with $0.8 million in the same period last year. The increase was primarily attributable to additional investments in production equipment at our Elk Grove Village, Illinois Plant #2 and Walbridge, Ohio facilities, as well as brake testing equipment in our Application Research Center in Canton, MI. In the prior year, we generated $14.1 million from the sale of the Elk Grove Village Plant #7 production equipment and the Middletown real estate and production assets and $1.7 million from the early settlement of the Morrisville promissory note. These activities did not repeat in the current year.

In the first six months of fiscal 2012, we invested $12.0 million repurchasing our common stock.

MSC has a credit line (“Line”) with JPMorgan Chase Bank, N.A. Interest on the Line is at the bank’s prime rate (3.25% as of August 31, 2011) or Libor plus 1.50%, at our discretion. There are annual letter of credit fees of 1.50% on outstanding letters of credit and a 0.25% fee on the annual unused credit line. The Line is secured by a borrowing base equal to a specified percentage of accounts receivable and liens on other assets of the Company (including inventory, equipment, real property and intellectual property), reduced by outstanding letters of credit. In April 2010, the Line was amended to reduce the credit line to $7.5 million and increase the minimum availability covenant to $2.5 million. On May 10, 2011, MSC and JPMorgan Chase Bank, N.A. agreed to extend the existing Line for two years on substantially identical terms.

Due to the borrowing base limitations and outstanding letters of credit of $1.3 million, the net amount available for borrowing at August 31, 2011, was $3.7 million. The lender may, at its discretion subject to the terms of the Line, modify the advance rates used in computing the borrowing base, which may limit the amounts available for future borrowings. There were no borrowings outstanding under the Line as of August 31, 2011, nor were any amounts borrowed during the six months ended August 31, 2011, or August 31, 2010. In September 2011, the outstanding letters of credit were reduced to $1.1 million.

 

21


Our Board of Directors authorized the repurchase of shares of the Company’s common stock as follows:

 

   

On January 7, 2008, 1,000,000 shares

 

   

On January 28, 2011, 1,000,000 shares

 

   

On May 27, 2011, 1,000,000 shares

 

   

On September 14, 2011, 1,000,000 shares

The shares may be repurchased from time-to-time on the open market, subject to market conditions and other factors, and generally will be funded with internally generated cash. The Company repurchased 98,316 shares under the January 2008 authorization (completing that authorization), 1,000,000 shares under the January 2011 authorization (completing that authorization) and 619,652 shares under the May 2011 authorization during the six months ended August 31, 2011. At August 31, 2011, there were 380,348 shares available for purchase under the May 2011 authorization.

MSC is party to various legal proceedings in connection with the remediation of certain environmental matters. The Company’s environmental reserves were approximately $1.3 million at August 31, 2011, and February 28, 2011. Refer to Note 15 of the Notes to the Condensed Consolidated Financial Statements entitled “Commitments and Contingencies” for additional information.

Contractual Obligations

There were no significant changes to the contractual obligations table presented in our Form 10-K.

Critical Accounting Policies

We have identified significant accounting policies that—as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved—could result in material changes to our financial condition or results of operations under different conditions or using different assumptions. Our most critical accounting policies, to which there have been no changes, are related to the following areas: revenue recognition, allowance for doubtful accounts, inventory, long-lived assets, income taxes, environmental reserves and defined benefit retirement plans. Details on our use of these policies and the related estimates are described fully in our Form 10-K.

Cautionary Statement Concerning Forward-Looking Statements

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors and shareowners can better understand a company’s future prospects and make informed investment decisions. This Form 10-Q contains forward-looking statements that include, without limitation, information about our anticipated results based on our plans and assumptions. We have tried, wherever possible, to identify these statements by using words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “will,” “plans,” “believes” and similar words and terms in connection with any discussion of future operating or financial performance.

 

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Achievement of future results is subject to risks, uncertainties and assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from what we anticipate, estimate or project in this Form 10-Q. Many of the factors that could cause this are discussed in detail in Part I, Item 1A, “Risk Factors” of our Form 10-K.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. This discussion of potential risks and uncertainties is by no means complete but is designed to highlight important factors that may affect our financial condition or results of operations. Other sections of this Form 10-Q may include additional factors that could have an adverse impact on our business and financial performance. In addition, we operate in a competitive environment. New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we assess the impact of all these risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those in any forward-looking statements. Given this situation, stockholders should not place undue reliance on forward-looking statements as a prediction of actual results.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has been no material change in the assessment of our sensitivity to market risk since the presentation in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 29, 2011, for the fiscal year ended February 28, 2011.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. MSC maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our controls and procedures also ensure this information is accumulated and communicated to management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions on required disclosure. MSC periodically reviews the design and effectiveness of its disclosure controls and internal control over financial reporting. The Company makes modifications to improve the design and effectiveness of its disclosure controls and internal control over financial reporting, and may take other corrective actions if its reviews identify a need for these.

There are inherent limitations to the effectiveness of any system of disclosure controls and internal control over financial reporting, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operation of MSC’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, management concluded that MSC’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

 

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Changes in internal control over financial reporting. During the quarter ended August 31, 2011, there were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The required certifications of our principal executive and financial officers are included as exhibits to this Quarterly Report on Form 10-Q. The disclosures in this Item 4 contain information on the evaluation of our disclosure controls and procedures and changes in internal control over financial reporting referred to in those certifications. For a more complete understanding of the matters covered by the certifications, these should be read in conjunction with Item 9A of the Company’s 2011 Annual Report on Form 10-K filed with the SEC on April 29, 2011.

 

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MATERIAL SCIENCES CORPORATION

FORM 10-Q

For the Quarter Ended August 31, 2011

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

MSC is party to various legal actions arising in the ordinary course of its business. These legal actions cover a broad variety of claims spanning our entire business. We believe that the resolution of these legal actions will not, individually or in the aggregate, have a material adverse effect on the Company’s financial statements. See Note 15 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Item 1A. Risk Factors

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition and results of operations, cash flows, and liquidity, and the market price of our common stock. Item 1A of our Annual Report on Form 10-K for the year ended February 28, 2011, includes a detailed discussion of the risk factors we believe still exist in our business. In addition to those factors, other risks and uncertainties may have a material adverse effect on our business, financial condition, and/or operating results, cash flows and liquidity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

  (a) None

 

  (b) None

 

  (c) Our Board of Directors authorized the repurchase of the Company’s common stock as follows:

 

   

On January 7, 2008, 1,000,000 shares

 

   

On January 28, 2011, 1,000,000 shares

 

   

On May 27, 2011, 1,000,000 shares

 

   

On September 14, 2011, 1,000,000 shares

The shares may be repurchased from time-to-time on the open market, subject to market conditions and other factors, and generally will be funded with internally generated cash. Frequently, MSC uses written trading plans under Rule 10b5-1 of the SEC to complete the purchases.

During the three months ended August 31, 2011, the Company repurchased 619,652 shares under the May 2011 authorization. All of the shares purchased were acquired under a written trading plan.

 

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At August 31, 2011, there were 380,348 shares available for purchase under the May 2011 authorization.

The following table shows the repurchases of common stock made by the Company during the fiscal quarter ended August 31, 2011:

 

Period

   Total
Number of
Shares
Purchased
     Average
Price Paid
Per Share
     Total Number  of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
     Maximum
Number of
Shares that may
Yet Be
Purchased Under
the Plans or
Programs (1)
 

June 1–30, 2011

     145,285       $ 7.10         145,285         854,715   

July 1–31, 2011

     45,335       $ 8.00         45,335         809,380   

August 1–31, 2011

     429,032       $ 7.23         429,032         380,348   
  

 

 

       

 

 

    

Total

     619,652       $ 7.26         619,652      
  

 

 

       

 

 

    

 

1. All of the shares repurchased during the fiscal quarter ended August 31, 2011, were bought under an open market stock repurchase program (Rule 10b5-1 plan) which was previously announced on May 27, 2011, and which was set to terminate on May 31, 2012.

Item 6. Exhibits

Reference is made to the attached Index to Exhibits.

 

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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, on the 7th day of October 2011.

 

MATERIAL SCIENCES CORPORATION
By:   /s/ Clifford D. Nastas
  Clifford D. Nastas
  Chief Executive Officer
By:   /s/ James D. Pawlak
  James D. Pawlak
 

Vice President, Chief Financial Officer,

Corporate Controller and Corporate Secretary

 

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MATERIAL SCIENCES CORPORATION

Quarterly Report on Form 10-Q

For the Quarter Ended August 31, 2011

Index to Exhibits

 

 

Exhibit

Number

  

Description of Exhibit

31.1    Rule 13a-14(a)/ 15(d)-14(a) Certification of Chief Executive Officer.
31.2    Rule 13a-14(a)/ 15(d)-14(a) Certification of Chief Financial Officer.
32    Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
101    The following data from the Material Sciences Corporation Quarterly Report on Form 10-Q for the quarter ended August 31, 2011, formatted in eXtensible Business Reporting Language (XBRL®): (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows, and (iv) the related notes. (1)

 

(1) This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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