Minerals Technologies - 10-Q quarterly report FY

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

MINERALS TECHNOLOGIES INC.

INDEX TO FORM 10-Q

PART 1.  FINANCIAL INFORMATION

ITEM 1.  Financial Statements

MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

See accompanying notes to Condensed Consolidated Financial Statements.

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MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEET

ASSETS

LIABILITIES AND SHAREHOLDERS' EQUITY

* Unaudited
** Condensed from audited financial statements

See accompanying Notes to Condensed Consolidated Financial Statements.

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MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

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MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 -- Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2003. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments necessary for a fair presentation of the financial information for the periods indicated, have been included. The results for the three-month and nine-month periods ended September 26, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

Note 2 -- Summary of Significant Accounting Policies

     Property, Plant and Equipment

     Property, plant and equipment are recorded at cost. Significant improvements are capitalized, while maintenance and repair expenditures are charged to operations as incurred. The Company capitalizes interest cost as a component of construction in progress. In general, the straight-line method of depreciation is used for financial reporting purposes and accelerated methods are used for U.S. and certain foreign tax reporting purposes. The annual rates of depreciation are 3% - 6.67% for buildings, 6.67% - 12.5% for machinery and equipment, 8% - 12.5% for furniture and fixtures and 12.5% - 25% for computer equipment and software-related assets.

     Property, plant and equipment are depreciated over their useful lives. Useful lives are based on management's estimates of the period that the assets can generate revenue, which does not necessarily coincide with the remaining term of a customer's contractual obligation to purchase products made using those assets. The Company's sales of PCC are predominantly pursuant to long-term contracts, initially ten years in length, with paper mills at which the Company operates satellite PCC plants. The terms of many of these agreements have been extended, often in connection with an expansion of the satellite PCC plant. The Company also continues to supply PCC at two locations at which the PCC contract has expired. Failure of a PCC customer to renew an agreement or continue to purchase PCC from a Company facility could result in an impairment of assets charge at such facility.

     Depletion of mineral reserves is determined on a unit-of-extraction basis for financial reporting purposes and on a percentage depletion basis for tax purposes.

     Mining costs associated with waste gravel and rock removal in excess of the expected average life of mine stripping ratio are deferred. These costs are charged to production on a unit-of-production basis when the ratio of waste to ore mined is less than the average life of mine stripping ratio.

Note 3 -- Accounting for Stock-Based Compensation

     In December 2002, The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, and requires additional disclosures in interim and annual financial statements. The FASB recently indicated that they would require stock-based employee compensation to be recorded as a charge to earnings beginning in the second half of 2005. The disclosure in interim periods requires pro forma net income and net income per share as if the Company adopted the fair value method of accounting for stock-based awards. The fair value of stock-based awards to employees was calculated using the Black-Scholes option-pricing model, modified for dividends, with the following weighted average assumptions:

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MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     Pro forma net income and earnings per share reflecting compensation cost for the fair value of stock options were as follows:

Note 4 -- Earnings Per Share (EPS)

     Basic earnings per share are based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period assuming the issuance of common shares for all dilutive potential common shares outstanding. The following table sets forth the computation of basic and diluted earnings per share:

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MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 5 -- Inventories

     The following is a summary of inventories by major category:

Note 6 -- Restructuring Charges and Accounting for Costs Associated with Exit or Disposal Activities

     During the fourth quarter of 2003, the Company announced plans to restructure its operations in an effort to reduce operating costs and to improve efficiency. The restructuring resulted in a total workforce reduction of approximately three percent of the Company's worldwide workforce. The Company recorded a pre-tax restructuring charge of $3.3 million in the fourth quarter of 2003 to reflect these actions. This charge consisted of severance, other employee benefits, and lease termination costs. During the first nine months of 2004, additional severance

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MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 costs related to this program of approximately $1.0 million were recorded. At the end of the third quarter of 2004 no liability remains to be paid.

     The following is a reconciliation of the restructuring liability as of September 26, 2004:

Note 7 -- Goodwill and Other Intangible Assets

     The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are no longer amortized, but instead are tested for impairment at least annually in accordance with the provisions of SFAS No. 142.

     The carrying amount of goodwill was $52.7 million as of September 26, 2004 and December 31, 2003.

     Acquired intangible assets subject to amortization as of September 26, 2004 and December 31, 2003 were as follows:

     The weighted average amortization period for acquired intangible assets subject to amortization is approximately 15 years. Estimated amortization expense is $0.4 million for each of the next five years through 2009.

     Included in other assets and deferred charges is an intangible asset of approximately $12.1 million which represents the non-current unamortized amount paid to a customer in connection with contract extensions at eight PCC satellite facilities. In addition, a current portion of $1.8 million is included in prepaid expenses and other current assets. Such amounts will be amortized as a reduction of sales over the remaining lives of the customer contracts. Approximately $1.4 million was amortized in the first nine months of 2004. Estimated amortization as a reduction of sales is as follows: 2004 - $1.8 million; 2005 - $1.8 million; 2006 - $1.8 million; 2007 - $1.8 million; 2008 - $1.8 million; with smaller reductions thereafter over the remaining lives of the contracts.

Note 8 -- Accounting for Impairment of Long-Lived Assets

     The Company accounts for impairment of long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a uniform accounting model for disposition of long-lived assets. This Statement also requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. There was no charge for impairment during the third quarter of 2004.

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Note 9 -- Long-Term Debt and Commitments

     The following is a summary of long-term debt:

Note 10 -- Pension Plans

     In December 2003, the FASB revised SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits." The revised statement does not change the measurement or recognition of employers' Pension Plans. However, it requires additional disclosures to those in the original SFAS No.132 regarding the assets, obligations, cash flows, and net periodic benefit costs of defined benefit pension and other postretirement plans on the interim and annual financial statements.

     The company and its subsidiaries have pension plans covering substantially all eligible employees on a contributory or non-contributory basis.

Components of Net Periodic Benefit Cost

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MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Employer Contributions

     Minerals Technologies Inc. expects to contribute approximately $13 million to its pension plan and $3 million to its other post retirement benefit plan in 2004. As of September 26, 2004, approximately $5 million of contributions have been made to the pension plan and approximately $1.6 million has been contributed to the post retirement benefit plan.

Note 11 -- Comprehensive Income (Loss)

     The following are the components of comprehensive income:

     The components of accumulated other comprehensive income, net of related tax, are as follows:

Note 12 -- Accounting for Asset Retirement Obligations

     Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes the financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair

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MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.

     Upon adoption, the Company recorded a non-cash, after-tax charge to earnings of approximately $3.4 million for the cumulative effect of this accounting change related to retirement obligations associated with the Company's PCC satellite facilities and its mining properties, both within the Specialty Minerals segment.

     The following is a reconciliation of asset retirement obligations as of September 26, 2004:

Note 13 -- Deferred Compensation

     The Company has granted certain corporate officers rights to receive shares of the Company's common stock under the Company's 2001 Stock Award and Incentive Plan (the 2001 Plan). The rights will be deferred for a specified number of years of service, subject to restrictions on transfer and other conditions. Upon issuance of the rights, a deferred Compensation expense equivalent to the market value of the underlying shares on the date of the grant was charged to stockholders' equity and is being amortized over the estimated average deferral period of approximately 5 years. The Company granted 26,900 shares in the first quarter of 2004 and 27,600 shares were granted in 2003. The compensation expense amortized with respect to the units during the three-month and nine-month periods ended September 26, 2004 was $0.1 million and $0.4 million, respectively.

Note 14 -- Segment and Related Information

     Segment information for the three and nine month periods ended September 26, 2004 was as follows:

     Included in income from operations for the Specialty Minerals and Refractories segments for the first nine months of 2004 are restructuring costs of $0.6 million for the Specialty Minerals segment and $0.4 million for the Refractories segment, respectively.

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MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     Included in income from operations of the Specialty Minerals segment for the first nine months of 2003 was a charge for one-time termination benefits of $0.7 million.

     The carrying amount of goodwill by reportable segment as of September 26, 2004 and December 31, 2003 was as follows:

     A reconciliation of the totals reported for the operating segments to the applicable line items in the condensed consolidated financial statements is as follows:

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REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Minerals Technologies Inc.:

     We have reviewed the condensed consolidated balance sheet of Minerals Technologies Inc. and subsidiary companies as of September 26, 2004 and the related condensed consolidated statements of income and cash flows for the three-month and nine-month periods ended September 26, 2004 and September 28, 2003. These condensed consolidated financial statements are the responsibility of the Company's management.

     We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

      Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

     As discussed in Note 12 to the condensed consolidated financial statements, effective January 1, 2003, the Company adopted the provisions of  SFAS No. 143, "Accounting for Asset Retirement Obligations."

     We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Minerals Technologies Inc. and subsidiary companies as of December 31, 2003, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 22, 2004 (July 28, 2004 as to Note 2), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

KPMG LLP

New York, New York
October 28, 2004

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ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

     At Minerals Technologies, approximately 80% of our sales are to customers in two industries: papermaking and steel making. The economic downturn of the past three years has had severe effects on the paper industry, by far our largest customer group, as paper mills have closed or taken significant downtime and the industry has consolidated. The effect on the steel industry has been even more dramatic, with several large steel makers declaring bankruptcy. Although the overall economy began to improve in late 2003 and early 2004, the paper and steel industries had been slow to participate in the recovery, while maintaining pricing pressure on their suppliers. Over the past two quarters, we have begun to experience improved conditions, particularly in the steel industry and construction industry in North America. As a result, the third quarter reflected an improved performance in both segments.

     Our sales grew 19% to $236.4 million from $198.2 million in the third quarter of last year. Foreign exchange had a favorable impact of approximately 3 percentage points of growth. Operating income grew 25% to $24.4 million and was 10.3% of sales.

     We face some significant risks and challenges in the future:

• Our success depends in part on the performance of the industries we serve, particularly papermaking and steel making. Some of our customers may continue to face a difficult business environment, and may experience further shutdowns;

• The recent wave of consolidations in the paper and steel industries concentrates purchasing power in the hands of fewer customers, increasing pricing pressure on suppliers such as MTI;
• Most of our Precipitated Calcium Carbonate ("PCC") sales are under long-term contracts with paper companies at whose mills we operate satellite PCC plants; when they reach their expiration dates these contracts may not be renewed, or may be renewed on terms less favorable to us;
• The cost of employee benefits, particularly health insurance, has risen significantly in recent years and continues to do so;
• We are experiencing increased costs of magnesia and talc imported from China, including higher shipping costs and higher other raw material costs in both segments;
• We are also experiencing increased energy costs in both of our business segments;
• Although the SYNSIL^® products family has received favorable reactions from potential customers and we have signed two supply contracts, this product line is not yet profitable and its commercial viability cannot be assured; and

• As we expand our operations abroad we face the inherent risks of doing business in many foreign countries, including foreign exchange risk, import and export restrictions, and security concerns.

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     Despite these risks and challenges, we are optimistic about the opportunities for continued growth that are open to us, including:

• Increasing our sales of PCC for paper by further penetration of the markets for paper filling at both free sheet and groundwood mills;

• Increasing our sales of PCC for paper coating, particularly from the coating PCC facility under construction in Walsum, Germany, which is now in the commissioning and start-up phase;

• Continuing research and development activities for new products, in particular our joint development project with International Paper Company (IP) to develop and implement a filler-fiber composite technology;

• Achieving market acceptance of the SYNSIL^® family of synthetic silicate materials for the glass industry;
• Increasing market penetration in the Refractories segment through higher value specialty products and application systems; and
• Continuing our penetration in both business segments into China, including the recently announced construction of two four-unit satellite PCC plants through our joint venture with Asia Pulp & Paper Company Pte. Ltd. (APP China) and the construction of a new facility for the Refractories segment.

     However, there can be no assurance that we will achieve success in implementing any one or more of these opportunities.

Results of Operations

     Three months ended September 26, 2004 as compared with three months ended September 28, 2003:

Sales

     Worldwide net sales in the third quarter of 2004 increased 19% from the previous year to $236.4 million. Foreign exchange had a favorable impact on sales of approximately $5.9 million or 3 percentage points of growth. Sales in the Specialty Minerals segment, which includes the PCC and Processed Minerals product lines, increased 15% to $160.0 million compared with $139.1 million for the same period in 2003. Sales in the Refractories segment grew 29% over the previous year to $76.4 million.

     Worldwide net sales of PCC, which is primarily used in the manufacturing process of the paper industry, increased 14% in the third quarter to $123.6 million from $108.5 million in the prior year. Sales growth was achieved in all regions, but most significantly in Europe. Excluding the effect of foreign currency, European sales grew 20%. This was due to an overall increase in production of printing and writing papers in that region. Asia reported 16% growth, excluding the effect of foreign currency, primarily due to our new satellite facility in Malaysia. North America also performed strongly with 8% growth, aided by the restart of our Millinocket, Maine satellite facility which had been idle since December 2002. Sales of Specialty PCC, used in non-paper applications, recorded 7% growth over prior year in the third quarter.

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     Net sales of Processed Minerals products increased 19% in the third quarter to $36.4 million from $30.6 million in the third quarter of 2003. This increase was primarily attributable to improved market conditions and increased penetration in the building products and the plastics industries.

     Net sales in the Refractories segment in the third quarter of 2004 increased 29% to $76.4 million from $59.1 million in the prior year. The favorable impact of foreign exchange was approximately 4 percentage points of growth. This growth was primarily attributable to both improved performance and better steel industry conditions in North America, our largest market, where sales grew 45% over the prior year.

     Net sales in the United States were $145.3 million in the third quarter of 2004, up 18% from the $123.3 million in the prior year. International sales in the third quarter of 2004 increased 22%. Excluding the impact of foreign exchange, the international sales growth was approximately 14%.