OPPORTUNITY looking ahead MINERALS TECHNOLOGIES INC. 2002 Annual Report TABLE OF CONTENTS: Letter to Shareholders Opportunity: MTI Profiles Financial Review Selected Financial Data Consolidated Financial Statements Notes to Consolidated Financial Statements Quarterly Financial Data Independent Auditors’ Report Management’s Statement of Responsibility Directors, Committees and Officers Investor Information 1 5 14 24 25 29 46 47 48 49 50 Millions of Dollars, Except Per Share Data December 31, December 31, 2001 2002 Net sales Specialty Minerals Segment PCC Products Processed Minerals Products Refractories Segment Operating income Net income Earnings per share: Basic Diluted Research and development expenses Depreciation and depletion Acquisitions Capital expenditures Net cash provided by operating activities Number of shareholders of record Number of employees $752.7 520.1 423.0 97.1 232.6 80.9 53.8 2.66 2.61 22.7 69.0 34.1 37.1 117.8 212 2,374 $684.4 483.3 396.1 87.2 201.1 80.6 49.8 2.54 2.48 23.5 66.5 37.4 63.1 98.3 225 2,305 ABOUT MINERALS TECHNOLOGIES INC. Minerals Technologies Inc. is a global resource- and technology-based growth company that develops, produces and markets the highest quality performance-enhancing minerals and related products, systems and services for the paper, steel, polymer and other manufacturing industries. The Company has two operating segments: Specialty Minerals and Refractories. The Specialty Minerals segment produces and sells precipitated calcium carbonate (PCC), and mines and produces the natural mineral- based products ground calcium carbonate and talc. The Company is the leading producer and supplier of PCC to the worldwide paper industry. Its Specialty Minerals segment also serves the building materials, paints and coatings, glass, ceramic, polymers, food and pharmaceuticals industries. The Company’s Refractories segment is one of the world’s leading developers and marketers of mineral- based monolithic refractory materials, which are used to resist the effects of high temperature and are usually applied as coatings to surfaces exposed to extreme heat. These materials are used primarily in the steel, cement and glass industries. To Our Shareholders: MTI 1 difficult times over the past two years. The economy and the two industries we primarily serve—paper and steel—have been buffeted with bankruptcies, consolidations and flat domestic sales. In 2002, we Minerals Technologies Inc., like the majority of companies in the manufacturing sector, has faced faced what was, at best, a sluggish economy. I am pleased, however, that we resumed growth in many companies in the manufacturing sector, MTI held its own. Considering that the country lost earnings during the year, although our growth rate was not what we had anticipated. In contrast to navigated some rough economic seas quite well. Indeed, MTI outperformed its peer group between 2.1 million manufacturing jobs between July of 2000 and January of 2003, I believe this Company has 2000 and 2002 in cumulative total shareholder return. Heading into the fourth quarter of 2002, we were on track for the Company to record growth in earnings per share of about 10 percent over the 2001 depressed results of $2.48. But December was very disappointing. Two factors had a negative effect on our profitability. The reduced profitability was caused primarily by the bankruptcy filing by one of our paper company customers in January 2003, but was exacerbated by the decline in the performance of our Refractories segment late in the quarter. As a result of the bankruptcy filing of Great Northern Paper Inc. of Millinocket, Maine, where we own and operate a satellite precipitated calcium carbonate facility, we felt it necessary to increase our provision for bad debt by $3 million. This, alone, lowered our earnings per share by $0.09. Together, the bankruptcy and the poor performance by Refractories reduced our earnings per share growth to five percent. Although our sales grew 10 percent, or $68 million, for the year—to $752.7 million in 2002 from $684.4 million in 2001—our net income increased 8 percent, which was below our expectations. MTI recorded net income of $53.8 million in 2002, compared with $49.8 million in 2001. Diluted earnings per common share increased to $2.61 compared with $2.48 in 2001. The Company’s operating margin as a percentage of sales declined from 11.8 percent in 2001 to 10.7 percent in 2002. Our Specialty Minerals segment, which includes PCC and Processed Minerals, saw a slight drop in operating margins, but the larger part of the decline came from the Refractories segment—most of that in the third and fourth quarters. A brighter note was that our Paper PCC business recorded sales growth of 7 percent despite the shutdown of more than five million tons of paper capacity in the past two years. On a volume basis, Paper PCC grew 8 percent over 2001 to a total of 3.4 million tons. This occurred primarily because worldwide, highly efficient paper mills—most of which use PCC—outperformed the market as a whole. The overall growth was also a result of stronger volumes at existing satellite PCC plants and the ramp-up and start-up of new facilities added in the past two years. Most of this growth came in the uncoated freesheet market, which consists of high quality printing and writing paper. The Company also saw good growth in the groundwood sector of the paper market, which produces magazine, catalog and directory paper. Groundwood paper, which is produced from a less-refined pulp, is an important market for this Company because it represents nearly half of worldwide paper production. Today, the Company supplies PCC to approximately 40 groundwood paper machines at about 20 paper mills. MTI 2 PAUL R. SAUERACKER Chairman, President and Chief Executive Officer OPPORTUNITY taking the initiative Total Worldwide Net Sales (in millions) 800 700 600 500 400 300 ‘98 ‘99 ‘00 ‘01 ‘02 In 2002, we added four new units of production capacity for PCC—two from expansions of existing facilities MTI 3 and two from the acquisition we made in February of 2002 of a PCC plant in Belgium. (A unit of production capacity is between 25,000 and 35,000 tons of PCC annually.) Also, we announced in January of 2003 a new one-unit satellite plant under construction at a paper mill owned by Sabah Forest Industries in Malaysia. On the negative side, during 2002, the Company shut down four units of PCC production capacity as a result of the closure of two paper mills. One of the effects of the consolidation in the worldwide paper industry is that paper companies have been more focused on integrating their operations than on adopting new manufacturing technology, such as our PCC. We believe that as these integrations are completed, we will see a resumption of the construction of new satellite PCC plants at paper mills around the world. We also believe, based upon our development efforts, that use of MTI’s PCC in the groundwood paper sector and in paper coating will increase. The Specialty PCC product line, which is used for non-paper applications, showed some improvement during 2002, but its financial performance remained below the levels it recorded in 2000. We continue to experience competitive pressure in the calcium supplement market from lower-cost ground calcium carbonate; and, although the merchant PCC facility in Mississippi has shown improved sales levels, it is still operating below capacity. In the coming year, we expect Specialty PCC to increase its sales to the plastics, health care, and sealants and adhesives sectors, resulting in further improvement in financial performance. Our Processed Minerals product line, which consists primarily of limestone and talc manufactured at production facilities across the United States, had sales growth of about $10 million. This growth was attributable primarily to the September acquisition of the business and assets of Polar Minerals Inc. Processed Minerals, which sells to the construction and automotive industries, maintained a solid level of profitability during 2002. The Refractories segment recorded a 16–percent increase in sales over 2001, but, as indicated, profitability suffered. The sales increase was primarily a result of the 2001 acquisitions of the Martin Marietta refractories business and Rijnstaal, B.V. The decline in operating income in the Refractories segment was due to volume losses from slowdowns and closures in higher margin integrated steel mill accounts, higher development costs associated with new products and application systems, and production and inventory problems associated primarily with the Martin Marietta acquisition. We believe that we have taken the necessary steps—including reorganizing MINTEQ’S management structure, tightening control of costs and resolving production and inventory problems—to improve these margins in the coming year. One of the changes we made was to bring on board Alain Bouruet-Aubertot as Senior Vice President and Managing Director of MINTEQ International. Alain has a strong and successful background in planning and global operations. Also, I would like to thank Howard R. Crabtree, who is now Senior Vice President of Technology and Logistics, for serving as interim head of MINTEQ International. As we look ahead, I want to reconfirm that the management of Minerals Technologies recognizes that innovation remains the key to the long-term success of this Company. New products are the lifeblood of MTI, whether in PCC, Refractories, Processed Minerals or any other field that could benefit from our research expertise. We are advancing new technologies in PCC for coating paper and for PCC use in groundwood paper. We also have a number of other exciting products in our pipeline that we believe will contribute to our long-term growth. 2002 Net Sales By Product Line (percentage/in millions of dollars) 2002 Sales by Geographic Area (percentage/in millions of dollars) 56.2% PCC PRODUCTS $423.0 (Specialty Minerals Segment) 30.9% REFRACTORY PRODUCTS $232.6 (Refractories Segment) 12.9% PROCESSED MINERALS PRODUCTS $97.1 (Specialty Minerals Segment) 64.1% UNITED STATES $482.2 20.7% EUROPE /AFRICA $156.0 9.1% CANADA/LATIN AMERICA $68.5 6.1% ASIA $46.0 MTI 4 SYNSILTM Products, our family of synthetic silicates for use in the glass industry, is a prime example of the kind of innovative product our researchers discover and develop. SYNSILTM Products offer a number of distinct advantages for glass makers—lower melting temperatures, reduced energy consumption, lower emissions from glass-making furnaces and faster melting and integration of raw materials. After a year’s delay because of technical difficulties in scaling up the production process, we are now able to produce enough of the product for large-scale trials in many varieties of glass. We are now running a number of trials aimed at meeting individual needs of specific customers. The Company has also completed design and engineering specifications both for large-scale production facilities for our SYNSILTM products and for satellite-type facilities that would be built adjacent to glass-making plants. The trials will continue throughout the first half of 2003, and we remain optimistic that the SYNSILTM family of products can become a third major business for MTI. Another issue of shareholder concern is our relationship with International Paper Company, our largest customer for PCC. Last summer, International Paper announced that it would seek alternate suppliers at its paper mills as the contracts for our satellite PCC plants expire. MTI has 10 satellite plants at International Paper mills worldwide. One contract has already expired and the remaining nine expire between now and 2010. We have been in discussions with International Paper in an attempt to resolve this issue, and we remain hopeful that we will reach a satisfactory conclusion. The year 2002 marked our tenth anniversary as an independent company. I can say with pride that it was a decade of achievement. During the past 10 years, we have nearly doubled our sales, and for the first eight years we grew our earnings per share by a compounded annual rate of more than 15 percent until the economic downturn that began in 2000. More importantly, MTI has successfully introduced value-added products and technologies to the paper and steel industries, which are conservative and often hesitant to change manufacturing processes in these difficult times. We are continuing this thrust with our new technology for the glass industry. In conclusion, I want to assure our shareholders that Minerals Technologies will continue to strive to improve our financial results and enhance our shareholder value. We maintain a strong balance sheet and have excellent financial resources. As we go forward, we believe the Company is well positioned to take advantage of the many opportunities we see. I also want to thank our customers for selecting MTI as their preferred supplier. And, finally, to our employees, I want to say that this Company is the success it is because of your continued efforts and dedication. PAUL R. SAUERACKER Chairman, President and Chief Executive Officer OPPORTUNITY we create it MTI 6 CHANGING the way paper is made PCC tional groundwood paper- making, calcium carbonate T he problem: In conven- solution: An innovative filler can cause pulp to patented more than a yellow or darken. The product, conceived and decade ago, that overcomes the usual limitations of papermaking. pigments, AT® PCC technology delivers If the amount of savings is linked MTI 7 to groundwood mills cost efficiencies to the amount of filler, a clear opportu- long available to free-sheet manufac- nity exists for anyone who can increase turers. “While the papermaker is always the amount of filler without causing interested in quality, the real driver in incidental quality-related problems. changing technology is cost savings,” That objective has spawned a second- said Kenneth L. Massimine, Senior Vice generation groundwood product called President and Managing Director, VELACARB™ PCC. “Normally,” said Paper PCC. “The beauty is that AT® Massimine, “as you increase the filler PCC accomplishes both goals.” content, you weaken the sheet. With As much as any current MTI For the Company, the potential product line, AT® PCC, the patented payoff is equally clear. Groundwood, acid-tolerant technology, embodies the used chiefly in magazines and catalogs, VELACARB™ PCC the sheet does not weaken. Thus you increase the cost savings without sacrificing quality.” Company’s response to meet the needs accounts for 40 to 50 percent of all The VELACARB™ PCC project of the marketplace, as well as the shift paper produced. from straightforward product marketing to a more synergistic involvement in the end-user’s lines of business. Work on AT® PCC began with a special research unit in 1989, and trials began a year later. The Company’s AT® PCC permits the use of penetration of the groundwood sector alkaline PCC in the acid environment has increased dramatically since 1997, of groundwood-papermaking. when Myllykoski Paper of Finland and “Groundwood papers are 45 percent Madison Paper Industries of Maine lignin, and lignin is very pH-sensitive,” became the first producers of uncoated symbolizes the distinct advantage of working with synthesized materials over ground calcium carbonate. “If you’re grinding, there is only so much you can accomplish. With PCC, which has uniform crystal morphologies, or shapes that impart distinct characteristics to a sheet of paper, you can leverage the desired end result,” said Massimine. said Bruce Evans, Technical Manager of groundwood with fully dedicated AT® The next frontier is the vast Groundwood Research. “Typically those PCC satellite plants on-site. Today European market for supercalendered mills are running at pH5. When you about 20 groundwood mills use MTI’s (SC) rotogravure and offset papers. add ordinary calcium carbonate, that PCC. Feedback from end-users has “This is the biggest groundwood market level rises to 7.5 or 8.5. The higher the been excellent. At Myllykoski Paper, in the world,” said Evans. “There’s pH rises, the darker the lignin gets. the initial customer was furniture maker probably an opportunity of close to a However, MTI’s AT® PCC is designed IKEA, one of the world’s largest distrib- million tons of filler.” Today, the SC to minimize ‘alkaline darkening,’ utors of catalogs. “Appearance is very rotogravure market almost universally thereby providing the full benefits of important to them,” said Ari-Pekka uses water-washed clay as a filler. Evans greater brightness and opacity over Laakso, Technical Manager, Specialty feels that eventually, there will be kaolin or other calcium carbonate.” Minerals. “They now feel that their pressure on the market to improve the Because PCC can replace catalogs have a better look, a brightness and opacity of this paper. expensive bleached wood fiber and better ‘touch.’” “When it happens,” he said, “we will be positioned to take advantage of it.” MTI 8 TECHNOLOGY for steel making Refractories to a traditional industry like steel: coup for a company marketing the introduction of an exclusive, In 2002, MINTEQ achieved a rare module that creates a touch-of-a- the world’s first fully automated refractory measuring system is revolutionary technology. The Scantrol™ laser button system for measuring, evaluat- ing, and repairing refractory linings in high-temperature environments. The integrated Scantrol™ system replaces time-intensive, inefficient refractory maintenance procedures with digital-age technology that enables steel makers to maintain a uniform, near-constant thickness of furnace linings. laser-measurement system produced by changed in electric arc furnaces every MTI 9 Ferrotron Technologies GmbH, a wholly four to six weeks. Scantrol™ allows owned subsidiary acquired by MTI in doubling of that interval, giving added March 2000. This eliminates the guess- value to the customer, as well as added work and dramatically reduces danger worth to the Scantrol™ system. in the steel-making environment. The Scantrol™ hardware will At Edestahlwerke Buderus AG in provide revenues but the system also Wetzlar, Germany, where a Scantrol™ fosters a concomitant demand for unit has been in development since MINTEQ’s monolithic refractory materials. January 2002, the measuring-and- Said Wasmuht, “This refractory repair sequence is the fastest in the solution improves productivity for our world—about five minutes—including customers and adds value to the steel- the laser measurements and the actual making process.” furnace repair. The LaCam® laser unit can scan up to 200,000 points in a vessel in 20 seconds, which produces a computer display showing where repair material is needed. The MINSCAN™ unit As 2003 unfolded, MINTEQ installed the first Scantrol™ unit since the Buderus pilot project, under a long- term contract with another German steel company, and negotiations were under way with a major U.S. steel maker. Additionally, MINTEQ teams are “This is unique worldwide,” then applies the material at speeds of said Christian Wasmuht, Vice President, up to 450 pounds per minute. MINTEQ Europe, who estimates that 80 percent of steel makers in electric arc furnace shops still measure furnace linings with the naked eye, and many apply the repair materials by hand. This human factor also plays havoc with efficiency in lining maintenance. The Scantrol™ system provides at work on adapting the Scantrol™ operators with a variety of possible system for other proprietary robotic maintenance options, along with a dis- maintenance methods and different play of the lining with different colors metal industries, such as copper symbolizing different amounts of wear. and aluminum. Though the operator can override the Scantrol™ unit’s recommendations, the At their worst, hit-or-miss repair unit warns the operator of the mainte- techniques can result in lining “break- nance consequences, and configures outs,” where the cost and danger the operator’s choice in the most escalate to intolerable, production- cost-effective, least risky manner. “With the Scantrol™ system, we can truly be a business partner with steel companies,” said Alain Bouruet-Aubertot, Senior Vice President and Managing Director, MINTEQ International Inc. “In today’s steel stoppage levels. A complete reline may take a furnace out of service several days. This increased accuracy in the industry you are only competitive if you application of repair materials reduces produce the most steel in the shortest A Scantrol™ interface module the frequency of brick replacement time. If all goes as planned with the pairs the Company’s MINSCAN™ in the lining, which, in traditional Scantrol™ system, the steel industry robotic manipulator with the LaCam® maintenance scenarios, must be will see MINTEQ as a valuable partner.” MTI 10 ACQUISITION for growth Processed Minerals change. A forward- looking company Market conditions philosophy had in 1992, MTI’s Two years ago, marketplace forces to those changes. been to grow organically from within. Since its founding adapts its strategies dictated a shift to selective acquisitions to develop a more diversified portfolio of products and services. These acquisi- tions would be linked strategically to the Company’s core businesses, and would provide immediate returns. Further, MTI would apply its technological expertise to transform the products and application systems of acquired companies, converting commodity-type businesses into higher- margin specialty businesses. This in turn would provide higher values for customers and a better return for MTI. The first tangible evidence of this shift came in May 2001, when MTI, taking advantage of softness in the sector, acquired the refractories business of Martin Marietta Magnesia Specialties Inc. and Rijnstaal B.V., a Netherlands- based manufacturer of metallurgical wire. In September 2002, similar imperatives guided the Company’s $22.5 million acquisition of the business and assets of Polar Minerals Inc., a privately owned producer of industrial minerals with 2001 sales of $24.1 million. From its processing plants in anywhere in the world. They then put MTI 11 Wellsville, Ohio, and Mount Vernon, their processing plants where the Indiana, Polar supplied mineral products market was, allowing close proximity used in the adhesives, sealants, coatings, to the customer base. plastics, and cosmetics markets. The Polar acquisition thus In Polar Minerals, MTI acquired gives MTI increased coverage of the not merely additional product lines, but North American market. It also provides a new business model for approaching far greater marketing flexibility. “The relevant mineral-based markets. “The idea of not being tied to any one ore Processed Minerals business had not source, and of processing multiple had a presence in the Midwestern minerals at one plant—that’s a totally United States,” explained D. Randy new model for us,” said Kevin Harrison, Vice President and Managing Porterfield, Director, Marketing and Director of Performance Minerals for Sales, Performance Minerals. Specialty Minerals Inc. (SMI). At the time of the acquisition, MTI operated a talc plant in Montana and ground calcium carbonate plants in Massachusetts, Connecticut and California. “However,” continued Harrison, “some of the principal markets that we serve or seek to serve are in the industrial heartland.” Though SMI was principally interested in Polar’s talc markets and ground calcium carbonate business, other so-called “boutique minerals” that came along in the package, such as barium sulfate and mica, offer attractive growth possibilities. “One of the things we look at in acquisitions is products we’re not already in, like He cited especially the polypropy- the micas,” said Dr. Robert Moskaitis, lene industry, which furnishes materials Vice President of Research and used widely in automobiles (for example, Development, SMI. “Finding more fenders and dashboards), as well as in markets for micas might spur an active numerous other plastic-based products. attempt to synthesize and improve the Polar Minerals, formed in the early 1990s, had used an innovative naturally occurring product to meet those emerging markets.” plan of attack to develop its markets. “The overall key with Polar is The conventional business model that we can now reach into middle- called for having the refining and America—to the auto industry, to the processing operations adjacent to the plastics industry—and we can reach mine. In contrast, by using transoceanic them with whatever minerals they shipping and arterial waterways, Polar need,” said Porterfield. imported materials at low cost from MTI 12 RESEARCH the foundation Research mission statement since development has been at the core of the MTI T hough research and Minerals Inc. (SMI) and MINTEQ standing. Researchers from Specialty Company’s competitive the outset, never has an been more critical to the aggressive approach to R&D for the home run, so there are going Europe, MINTEQ is focused on new MTI 13 to be some strikeouts. Senior manage- refractory materials that will be applied ment commitment is key.” with the Company's innovative new Historically, MTI has outpaced its competitors in research spending, averaging 3 percent to 4 percent of sales. Some of the ongoing R&D projects: PCC COATING REFINEMENTS As the desire for increased brightness, International Inc. recognize that new opacity and gloss moves paper-coating products and technologies are the formulations to higher levels of calcium lifeblood of MTI. “Our sustaining marketplace advantage is a result of our commitment to research,” said Dr. Robert Moskaitis, Vice President of R&D, SMI. “And a major part of that commit- ment is to develop technologies that create significant added value for our customers,” said John Damiano, Vice President of R&D, MINTEQ. Apart from generating new products, the Company’s commitment to R&D has yielded new approaches to the research itself. Amid market condi- tions that caused many companies to flinch away from investment in the longer term, MTI in 2000 unveiled “Discovery Research.” Said Moskaitis, “The goal is to conceive and develop products that have a revolutionary, game-changing effect on the market. This takes time and vision. You’re looking carbonate, a significant portion of the product- and commercial-development efforts continues to be targeted at the coating market. The Company’s premier PCC product for premium coated paper is Opacarb® A40 PCC, an aragonitic precipitated calcium carbonate developed jointly by its North American and European technical teams. MINTEQ: EAF AND LADLES MINTEQ’s research objectives in the past few years have been to further penetrate two areas of worldwide steel making: the molten metal handling and electric arc furnace (EAF) sectors. “We are targeting steel ladles because it is a very large market. Our research has been directed at developing new, more durable refractory products and application systems that extend ladle life,” said John Damiano. Because the electric arc, or mini-mill, technology is the future for steel in North America and Western MINSCAN™ and Scantrol™ computerized robotic technology. OPTIBLOC® CLARITY ANTIBLOCK MTI developed Optibloc® clarity antiblock in 1997 as an improvement over existing anti-blocking additives that reduce stickiness in polyethylene films. In 1998, the Company began working with ExxonMobil Corporation to fine-tune the product line. “The joint project involved personnel in business operations, R&D, and production,” said Lou Dizikes, Technical Manager, SMI. In 2000, the two companies signed an agreement for MTI to supply Optibloc® antiblock to ExxonMobil on a world- wide basis. SYNSILTM PRODUCTS SYNSILTM Products encompasses a novel family of synthetic silicate minerals that, in glass production, lowers melting temperatures, reduces energy require- ments, cuts emissions, and provides improved integration of raw materials. Early developmental lags gave way to stepped-up commercial trials in the fourth quarter of 2002; these continued into the first quarter of 2003, and expanded into additional segments of the glass market. Optimism remains that SYNSILTM will become a successful third major business area for MTI. FINANCIAL Review MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Income and Expense Items as a Percentage of Net Sales In 2003, the Company plans to continue its focus on the following growth strategies: Year Ended December 31, 2002 2001 2000 Net sales Cost of goods sold Marketing and MTI 14 administrative expenses Research and development expenses Bad debt expenses Write-down of impaired assets Restructuring charge 100.0% 100.0% 100.0% 73.4 71.2 75.5 9.9 3.0 0.8 0.1 — 10.3 10.7 3.4 0.6 — 0.5 3.9 0.9 0.7 — Income from operations Net income 10.7 11.8 12.6 7.1% 7.3% 8.1% Increase market penetration of PCC in paper filling at both free sheet and groundwood mills. Increase penetration of PCC into the paper coating market. Emphasize higher value specialty products and application systems to increase market penetration in the Refractories segment. (cid:2) Continue selective acquisitions to complement the Company’s existing businesses. (cid:2) Continue research and development and marketing efforts for new and existing products. Overview of 2002 and Outlook However, there can be no assurance that the Company will achieve success in implementing any one or more of In 2002, the Company like many companies in the these strategies. manufacturing sector, continued to experience weakness due to a sluggish economy. As a result, the industries the Company primarily serves — paper and steel — have been affected by bankruptcies and consolidations. The Company expects the economic downturn that began in the second half of 2000 and continued throughout 2002 to continue at least into the first half of 2003. The Company continues to be affected by negative In 2002, the Company added four units of production capacity for PCC - two from expansions and two from an acquisition in February 2002 of a PCC plant in Belgium. The Company also announced in January 2003 a new one-unit satellite plant to be built at a paper mill owned by Sabah Forest Industries in Malaysia, which is expected to be operational in the fourth quarter of 2003. A unit represents between 25,000 to 35,000 tons of annual factors in the industries it primarily serves: PCC production capacity. Since the third quarter of 2000, seven paper The Company also made the following acquisitions mills at which the Company has satellite precipitated calcium carbonate (PCC) plants have either shut down or announced their intention to do so. Other paper makers reduced production as a result of weaker paper demand and industry consolidations. (cid:2) The steel industry continued to experience difficulties in 2002 as several steel manufacturers ceased opera- tions and others filed for bankruptcy protection. However, despite this difficult market environment, the Company was able to achieve low double-digit operating margins. The Company’s operating margin as a percentage of sales declined to 10.7% in 2002 as compared with 11.8% in 2001. in 2002: (cid:2) On February 6, 2002, the Company purchased a PCC manufacturing facility in Hermalle-sous-Huy, Belgium, for approximately $10.2 million. (cid:2) On April 26, 2002, the Company acquired the assets of a company that develops and manufactures a refractory lining monitoring system, for approxi- mately $1.4 million. (cid:2) On September 9, 2002, the Company acquired the business and assets of Polar Minerals Inc., a privately owned producer of industrial minerals in the Midwest United States, for approximately $22.5 million. (cid:2) (cid:2) (cid:2) (cid:2) FINANCIAL Review MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report In 2003, the Company expects additional expansions Company (IP), decided during 2000 to reduce production at existing satellite PCC plants to occur and also expects capacity by closing four paper mills at which the Company to sign contracts for new satellite PCC plants. had satellite PCC plants. These closed mills are located As the Company continues to expand its operations overseas, it faces the inherent risks of doing business abroad, including inflation, fluctuations in interest rates and currency exchange rates, changes in applicable laws and regulatory requirements, export and import restrictions, tariffs, nationalization, expropriation, limits on repatriation of funds, civil unrest, terrorism, unstable governments and legal systems, and other factors. Some of the Company’s operations are located in areas that have experienced political or economic instability, in Mobile, Alabama; Lock Haven, Pennsylvania; Erie, Pennsylvania; and Oswego, New York. Sales to IP represented approximately 11.5% of consolidated net sales in 2002 and 13% of consolidated net sales in both MTI 15 2001 and 2000. During 2000 two paper companies filed for bankruptcy protection and closed their paper mills in Plainwell, Michigan and Anderson, California, at which the Company had satellite PCC plants. The Company recorded a write-down of impaired assets of $0.8 million and $4.9 million in 2002 and 2000, respectively. including Indonesia, Israel, China and South Africa. In Excluding the aforementioned plants that have addition, the Company’s performance depends to some been closed, there are three satellite locations at which extent on that of the industries it serves, particularly contracts with host mills have expired, and one location, the paper manufacturing, steel manufacturing, and representing less than one unit of PCC production, at construction industries. The Company’s sales of PCC are predominantly pursuant to long-term agreements, generally ten years in length, with paper companies at whose mills 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. Failure of a number of the Company’s customers to renew existing agreements on terms as favorable to the Company as those currently in effect could cause the future growth rate of the Company to differ materially from its historical growth rate, and could also result in impairment of the assets associated with the PCC plant. which the host mill has informed the Company that the contract will not be renewed upon its expiration in 2004, although the Company continues to supply PCC at all of these locations. At two of these locations the Company hopes to reach agreement on a long-term extension of the contract; however, there can be no assurance that these negotiations will be successful. At the other location, the customer, IP, has informed the Company that it intended to begin negotiations with alternative suppliers. The Company continues to supply PCC at this location, and expects to do so through 2003. IP also informed the Company at the end of the second quarter of 2002 that it would negotiate with other suppliers at other satellite locations as the contracts for those Several consolidations in the paper industry locations expire over the next several years, with the last have taken place in recent years. Such consolidations contract expiring in 2010. That decision by IP increases concentrate purchasing power in the hands of a smaller the risk that some or all of these contracts will not be number of papermakers, enabling them to increase renewed. Because these contracts have various remaining pressure on suppliers. This increased pressure could have terms, the full impact of these expirations on the an adverse effect on the Company’s results of operations Company would not be felt for several years. The in the future. In addition, these consolidations could Company is actively pursuing its own negotiations with result in partial or total closure of some paper mills at IP, and hopes to reach agreement to extend some or which the Company operates PCC satellites. In particular, the Company’s largest customer, International Paper MTI 16 FINANCIAL Review MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report all of these contracts past their current expiration widely publicized. While APP is negotiating with its dates. The outcome of these negotiations, however, creditors, the Perawang and Dagang facilities have cannot be predicted. The loss of a substantial amount remained in operation at levels consistent with the prior of the Company’s sales to IP would have a material year. Both mills are continuing to use MTI’s PCC and to adverse effect on the Company’s results of operations satisfy their obligations to the joint ventures. However, and projected growth rate. there can be no assurance that the Company’s operations In recognition of this increased risk, the Company has shortened the periods over which existing satellite plants at IP mills are depreciated. The shortened depreciation schedule reduced diluted earnings per share by approximately $0.04 per share in the second half of 2002. at these paper mills will not be adversely affected by APP’s financial difficulties in the future. The Company’s net investment in these satellite plants was $4.6 million at December 31, 2002. Critical Accounting Policies Other impairment losses in recent years have not The Company’s discussion and analysis of its financial been significant. However, a complex of two paper mills condition and results of operations are based upon the at which the Company operates a satellite PCC plant, Company’s consolidated financial statements, which have at Millinocket and East Millinocket, Maine, owned by been prepared in accordance with accounting principles Great Northern Paper, Inc., ceased operations on or generally accepted in the United States. The preparation about December 23, 2002. Great Northern Paper filed of these financial statements requires the Company to for bankruptcy protection on January 9, 2003 and as of make estimates and judgments that affect the reported March 5, 2003, the Millinocket and East Millinocket mills amounts of assets, liabilities, revenues and expenses, and had not resumed operations. The Bankruptcy Court has related disclosure of contingent assets and liabilities. appointed new management which is actively seeking a buyer for the two mills. The Company is monitoring the situation at Great Northern Paper very closely, and believes that it will be well positioned to offer PCC to any eventual new operator of the Millinocket mills when and if they emerge from bankruptcy and resume production. If the Millinocket mills do not resume production, the Company could incur an impairment charge of approximately $10 million. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, valuation of inventories, valuation of long-lived assets, goodwill and other intangible assets, pension plan assumptions, income taxes, income tax valuation allowances and litigation and environmental liabilities. The Company bases its estimates on historical experience and on other assumptions that it believes to be reasonable The Company has a consolidated interest in two under the circumstances, the results of which form the joint venture companies that operate satellite PCC plants basis for making judgments about the carrying values at paper mills owned by subsidiaries of Asia Pulp & Paper of assets and liabilities that can not readily be determined (“APP”), one at Perawang, Indonesia, and one at from other sources. There can be no assurance that Dagang, China. APP is a multinational pulp and paper actual results will not differ from those estimates. company whose current financial difficulties have been MTI 17 FINANCIAL Review MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report The Company believes the following critical accounting policies require it to make significant judgments and estimates in the preparation of its consolidated financial statements: (cid:2) Revenue recognition: Revenue from sale of products is recognized at the time the goods are shipped and title passes to the customer. In most of the Company’s PCC contracts, the price per ton is based upon the total number of tons sold to the customer during the year. Under those contracts, the price billed to the customer for shipments during the year is based on periodic estimates of the total annual volume that will be sold to the customer. Revenues are adjusted at the end of each year to reflect the actual volume sold. (cid:2) Allowance for doubtful accounts: Substantially all of the Company’s accounts receivable are due from companies in the paper, construction and steel industries. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Such allowance is established through a charge to the provision for bad debt expenses. The Company recorded bad debt expenses of $6.2 million, $3.9 million and $6.0 million in 2002, 2001 and 2000 respectively. These charges were much higher than historical levels and were primarily related to bankruptcy filings by some of the Company’s customers in the paper and steel industries and to additional provisions associated with potential risks in the paper, steel and other industries. In addition to specific allowances established for bankrupt customers, the Company also analyzes the collection history and financial condition of its other customers considering current industry conditions and determines whether an allowance needs to be established or increased. (cid:2) Property, plant and equipment, goodwill, intangible and other long-lived assets: The Company’s sales of PCC are predominantly pursuant to long-term arrangements, generally 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 to three locations at which the PCC contract has expired. Property, plant and equipment, goodwill, intangible and certain other long-lived assets are amortized 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 for use of those assets. Failure of a PCC customer to renew an agreement or continue to purchase PCC from the Company could result in an impairment of assets charge at such facility. In the third quarter of 2002, the Company reduced the useful lives of satellite PCC plants at International Paper Company (IP) mills due to an increased risk that some or all of these PCC contracts will not be renewed. The accelerated depreciation reduced diluted earnings by approximately $0.04 per share in the second half of 2002. (cid:2) Valuation of long-lived assets, goodwill and other intangible assets: The Company assesses the possible impairment of long-lived assets and identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill and other intangible assets with indefinite lives are reviewed for impairment at least annually in accordance with the provisions of SFAS No. 142. Factors the Company considers important that could trigger an impairment review include the following: significant under-performance relative to historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; significant negative industry or economic trends. When the Company determines that the carrying value of intangibles, long-lived assets or goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, it measures any impairment by its ability to recover the carrying amount of the assets from expected future operating cash flow on a discounted basis. Net intan- gible assets, long-lived assets, and goodwill amounted to $596.1 million as of December 31, 2002. ✦ ✦ ✦ MTI 18 FINANCIAL Review MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report (cid:2) Accounting for income taxes: As part of the process of preparing the Company’s consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income, and to the extent it believes that recovery is not likely, it must establish a valuation allowance. To the extent it establishes a valuation allowance or increases this allowance in a period, it must include an expense within the tax provision in the Statement of Income. For a detailed discussion on the application of these and other accounting policies, see “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements.” This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Results of Operations Net Sales Dollars in Millions 2002 Growth 2001 Growth 2000 Net sales $752.7 10.0% $684.4 2.0% $670.9 Worldwide net sales in 2002 increased 10.0% from the previous year to $752.7 million. Sales in the Specialty Minerals segment, which includes the PCC and Processed Minerals product lines, increased approximately 7.6% to $520.1 million compared with $483.3 million for the same period in 2001. Sales in the Refractories segment grew approximately 15.7% over the previous year to $232.6 million. In 2001, worldwide net sales increased 2.0% to $684.4 million from $670.9 million in the prior year. Specialty Minerals segment sales Worldwide net sales of PCC in 2002 increased approximately 6.8% to $423.0 million from $396.1 million in the prior year. Paper PCC sales and volumes grew 8% for the full year with volumes in excess of 3.4 million tons, even though the paper industry was affected adversely by consolidations, shutdowns and slowdowns. This has resulted in a reduction of over five million tons of paper capacity in the past two years. This occurred primarily because the most efficient paper mills worldwide, which use PCC, outperformed the market as a whole. The overall growth was primarily due to new capacity added in 2002, to the ramp-up of PCC capacity added in 2001, and to increased worldwide volume from existing satellites, which collectively more than compensated for the aforementioned paper mill shutdowns. Most of this growth came in the uncoated free sheet market, which consists of high quality printing and writing paper. The Company also achieved good growth in the groundwood sector of the paper market, which produces magazines, catalog and directory papers. Groundwood paper, which is produced from less-refined pulp, is an important market for the Company because it represents nearly half of worldwide paper production. Today, the Company supplies PCC to approximately 40 groundwood paper machines at about 20 paper mills. The Specialty PCC product line reflected a 1% sales increase over the prior year. The merchant PCC manufacturing facility in Brookhaven, Mississippi has shown improved sales levels but still remains below its expected volumes. Specialty PCC also continues to experience competitive pressure from lower-cost ground calcium carbonate in the calcium supplement market. PCC sales in 2001 decreased approximately 1% to $396.1 million from $399.2 million in 2000. Net sales of Processed Minerals products in 2002 increased 11.4% to $97.1 million from $87.2 million in 2001. This increase was primarily attributable to the acquisition of Polar Minerals Inc. Processed Minerals net sales increased slightly in 2001 to $87.2 million from decreased approximately 1.0% and Refractories segment $87.1 million in 2000. sales increased approximately 9.0% in 2001. FINANCIAL Review MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Net sales in the Refractories segment in 2002 Cost of goods sold was 75.5% of sales compared increased approximately 15.7% to $232.6 million from with 73.4% in the prior year. This increase occurred $201.1 million in the prior year. The increase in sales in both business segments. In the Specialty Minerals for the Refractories segment in 2002 was attributable segment, the gross margin ratio was adversely affected primarily to the 2001 acquisitions of the Martin Marietta refractories business and Rijnstaal B.V., which more than by development costs at the new merchant PCC facility in Hermalle, Belgium, increased costs to provide SYNSIL® offset unfavorable economic conditions in the worldwide trial material, and increased depreciation expense for MTI 19 steel industry. In 2001, net sales in the Refractories satellite PCC plants located at International Paper’s mills. segment increased 9.0% from the prior year. In the Refractories segment, production and inventory Net sales in the United States was $482.2 million in 2002, approximately 9% higher than in the prior year. Increased sales from the acquisitions were partially offset by the aforementioned weakness in the steel and paper industries. International sales in 2002 increased problems at certain North American facilities; volume losses due to slowdowns and closures in high margin integrated steel mill accounts; and increased development costs associated with new products and systems contributed to the adverse gross margin ratio. 12% primarily as a result of the continued international Marketing and administrative costs increased 5.2% expansion of the Company’s PCC product line and in 2002 to $74.2 million and decreased to 9.9% of net acquisitions. In 2001, domestic net sales were slightly sales from 10.3% in 2001. In 2001, marketing and higher than the prior year, and international sales were administrative costs decreased 1.3% to $70.5 million. approximately 5.9% greater than in the prior year. Operating Costs and Expenses Dollars in Millions 2002 Growth 2001 Growth 2000 Cost of goods sold Marketing and $567.9 13.0% $502.5 5.2% $477.5 administrative $ 74.2 5.2% $070.5 (1.3%) $071.4 Research and development $ 22.7 (3.4%) $023.5 (10.6%) $026.3 Bad debt expenses Restructuring charge Write-down of $ 6.2 59.0% $ 3.9 (35.0%) $ 6.0 $ — * $ 3.4 * * $ — $ 4.9 impaired assets $ 0.8 * $ — * Percentage not meaningful Research and development expenses during 2002 decreased 3.4% to $22.7 million and represented 3.0% of net sales. This decrease was primarily a result of the 2001 restructuring and lower PCC trial expenses. In 2001, research and development expenses decreased 10.6% and represented 3.4% of sales. This decrease was primarily the result of the restructuring, a decrease in PCC trial activity and a shift of SYNSIL® product activities from development to production. The Company recorded bad debt expenses of $6.2 million and $3.9 million in 2002 and 2001, respectively. These charges were primarily related to additional provisions associated with the Great Northern Paper Company’s bankruptcy filing and to additional provisions associated with potential risks to its customers in the steel, paper and other industries. FINANCIAL Review MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report During the second quarter of 2001, the Company Non-operating deductions decreased 35.4% from the restructured its operations to reduce operating costs prior year. This decrease was due to lower interest rates and improve efficiency. This resulted in a second quarter and lower average borrowings in 2002 when compared restructuring charge of $3.4 million. This restructuring with 2001. In 2001, interest expense increased from 2000 reduced operating expenses by $6.0 million to $8.0 due primarily to higher average borrowings than in 2000. million annually. These expense reductions were partially realized during the second half of 2001. Provision for Taxes on Income MTI 20 During the first quarter of 2002, the Company Dollars in Millions 2002 Growth 2001 Growth 2000 recorded a write-down of impaired assets of $0.8 million Provision for taxes for a satellite plant that ceased operations. In 2000, the on income $20.2 (4.3%) $21.1 (10.9%) $23.7 Company recorded a write-down of impaired assets of $4.9 million for three satellite PCC plants at paper mills The effective tax rate decreased to 26.7% in 2002 that ceased operations. compared with 29.1% in 2001. This decrease was due to changes in the geographic mix of profit by country. The Income From Operations effective tax rate was 29.8% in 2000. Dollars in Millions 2002 Growth 2001 Growth 2000 Income from operations $80.9 0.4% $80.6 (5.0%) $84.8 Dollars in Millions 2002 Growth 2001 Growth 2000 Minority Interests Income from operations in 2002 increased slightly to $80.9 million from $80.6 million in 2001. Income from operations decreased to 10.7% of sales as compared with 11.8% of sales in 2001. This decrease was primarily due to the aforementioned decrease in the gross margin ratios. In 2001, income from operations decreased 5.0% to $80.6 million from $84.8 million in 2000. This decrease was due primarily to weakness for the full year in the three major industries the Company serves and to the aforementioned restructuring charge. Non-Operating Deductions Minority interests $1.8 5.9% $1.7 (5.6%) $1.8 The consolidated joint ventures continue to operate profitably and were at the approximate same level of profitability over the last two years. Net Income Dollars in Millions 2002 Growth 2001 Growth 2000 Net income $53.8 8.0% $49.8 (8.1%) $54.2 Net income increased 8.0% in 2002 to $53.8 million. In 2001, net income decreased 8.1% to $49.8 million. Dollars in Millions 2002 Growth 2001 Growth 2000 Earnings per common share, on a diluted basis, increased Non-operating 5.2% to $2.61 in 2002 as compared with $2.48 in the deductions, net $5.1 (35.4%) $7.9 58.0% $5.0 prior year. FINANCIAL Review MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Liquidity and Capital Resources Prospective Information and Factors That May Affect Future Results Cash flows in 2002 were provided from operations and proceeds from stock option exercises. The cash was The Securities and Exchange Commission encourages applied principally to fund approximately $37.1 million companies to disclose forward-looking information so of capital expenditures, the aforementioned acquisitions, that investors can better understand companies’ future to repay $41.5 million in short-term debt, and to prospects and make informed investment decisions. MTI 21 repurchase $17.3 million of common shares for treasury. This report may contain forward-looking statements that Cash provided from operating activities amounted to set out anticipated results based on management’s plans $117.8 million in 2002, $98.3 million in 2001, and $91.1 and assumptions. Words such as “expects,” “plans,” million in 2000. Included in cash flow from operations “anticipates,” “will,” and words and terms of similar was pension plan funding of approximately $20.2 million, substance, used in connection with any discussion $10.7 million and $10.2 million for the years ended of future operating or financial performance identify December 31, 2002, 2001 and 2000, respectively. these forward-looking statements. On February 22, 2001, the Board authorized the The Company cannot guarantee that the outcomes Company’s Management Committee to repurchase, at suggested in any forward-looking statement will be its discretion, up to $25 million in additional shares per realized, although it believes it has been prudent in its year over the following three years. As of December 31, plans and assumptions. Achievement of future results is 2002, the Company had repurchased approximately subject to risks, uncertainties and inaccurate assumptions. 470,000 shares under this program at an average price Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and should refer to the discussion of certain risks, uncer- tainties and assumptions under the heading “Cautionary Factors That May Affect Future Results” in Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. of approximately $40 per share. The Company has $115.0 million in uncommitted short-term bank credit lines, of which $30.0 million was in use at December 31, 2002. The Company anticipates that capital expenditures for 2003 should range between $60 million and $70 million, principally related to the construction of PCC plants and other opportunities that meet the strategic growth objectives of the Company. The Company expects to meet its long-term financing requirements from internally generated funds, uncommitted bank credit lines and, where appropriate, project financing of certain satellite plants. The aggregate maturities of long-term debt are as follows: 2003 – $1.3 million; 2004 – $2.3 million; 2005 – $2.8 million; 2006 – $52.8 million; 2007 – $1.0 million; thereafter – $30.2 million. FINANCIAL Review MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Inflation with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires Historically, inflation has not had a material adverse that the fair value of a liability for an asset retirement effect on the Company. The contracts pursuant to which obligation be recognized in the period in which it is the Company constructs and operates its satellite PCC incurred if a reasonable estimate of the fair value can plants generally adjust pricing to reflect increases in costs be determined, and that the associated asset retirement MTI 22 resulting from inflation. Cyclical Nature of Customers’ Businesses The bulk of the Company’s sales are to customers in the paper manufacturing, steel manufacturing and construction industries, which have historically been cyclical. These industries encountered difficulties in 2002. The pricing structure of some of the Company’s long-term PCC contracts makes its PCC business less sensitive to declines in the quantity of product purchased. For this reason, and because of the geographical diversi- fication of its business, the Company’s operating results to date have not been materially affected by the difficult economic environment. However, it cannot predict the economic outlook in the countries in which the Company does business, nor in the key industries it serves. There can be no assurance that a recession, in some markets or worldwide, would not have a significant negative effect on the Company’s financial position or results of operations. Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143, effective for fis- cal years beginning after June 15, 2002, addresses finan- cial accounting and reporting for obligations associated costs be capitalized as part of the carrying amount of the long-lived asset. The effect of this standard on the Company’s results of operations and financial position is being evaluated. It is likely that there will be significant obligations related to the future retirement of assets related to the Company’s PCC satellite facilities and its mining properties which will result in a non-cash after-tax charge to earnings of approximately $4 million in the first quarter of 2003 for the cumulative effect of this accounting change. Excluding the cumulative effect adjustment, the Company estimates the impact of additional depreciation expense on the long-lived assets and accretion expense related to the liabilities to approximate $1.0 million in 2003. In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement is effective for exit or disposal activities initiated after December 31, 2002, and is not expected to have a material effect on the Company’s results of operation or financial position. In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Require- ments for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.” This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation FINANCIAL Review MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report undertaken. The initial recognition and measurement financial condition and results of operations. provisions of the Interpretation are applicable to guarantees Approximately 25% of the Company’s bank debt bears issued or modified after December 31, 2002 and are not interest at variable rates; therefore the Company’s results expected to have a material effect on the Company’s of operations would only be affected by interest rate consolidated financial statements. The disclosure require- changes to the short-term bank debt outstanding. An ments are effective for financial statements of interim immediate 10 percent change in interest rates would and annual periods ending after December 15, 2002. not have a material effect on the Company’s results MTI 23 In December 2002, the FASB issued SFAS No. 148, of operations over the next fiscal year. “Accounting for Stock-Based Compensation – Transition The Company is exposed to various market risks, and Disclosure, an amendment of FASB Statement No. including the potential loss arising from adverse changes 123.” This statement amends SFAS No. 123, “Accounting in foreign currency exchange rates and interest rates. for Stock-Based Compensation,” to provide alternative The Company does not enter into derivatives or other methods of transition for a voluntary change to the fair financial instruments for trading or speculative purposes. value method of accounting for stock-based employee When appropriate, the Company enters into derivative compensation, and would require additional disclosures financial instruments, such as forward exchange contracts in the 2002 financial statements. These disclosure and interest rate swaps, to mitigate the impact of foreign modifications are included in the notes to these consoli- exchange rate movements and interest rate movements dated financial statements.The Company is currently on the Company’s operating results. The counterparties analyzing the other provisions of this statement. are major financial institutions. Such forward exchange Quantitative and Qualitative Disclosures About Market Risks contracts and interest rate swaps would not subject the Company to additional risk from exchange rate or interest rate movements because gains and losses on these contracts would offset losses and gains on the Market risk represents the risk of loss that may impact assets, and liabilities and transactions being hedged. the Company’s financial position, results of operations or cash flows due to adverse changes in market prices and rates. The Company is exposed to market risk The Company had open forward exchange contracts to purchase $0.8 million of foreign currencies as of December 31, 2001. These contracts matured on June because of changes in foreign currency exchange rates 28, 2002. The fair value of these instruments was as measured against the U.S. dollar. It does not anticipate $132,000 at December 31, 2001. The Company entered that near-term changes in exchange rates will have a material impact on its future earnings or cash flows. However, there can be no assurance that a sudden and significant decline in the value of foreign currencies into three-year interest rate swap agreements with a notional amount of $30 million that expire in January 2005. These agreements effectively convert a portion of the Company’s floating-rate debt to a fixed rate basis. would not have a material adverse effect on the Company’s The fair value of these instruments was $(1,456,287) at December 31, 2002. SELECTED Financial Data MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report (Thousands, Except Per Share Data) 2002 2001 2000 1999 1998 Income Statement Data Net sales Cost of goods sold Marketing and administrative expenses Research and development expenses Bad debt expenses Write-down of impaired assets Restructuring charge MTI 24 $752,680 567,985 74,160 22,697 6,214 750 — $684,419 502,525 70,495 23,509 3,930 — 3,403 $670,917 477,512 71,404 26,331 5,964 4,900 — $662,475 466,702 72,208 24,788 1,234 — — $631,622 442,562 75,068 21,038 507 — — Income from operations 80,874 80,557 84,806 97,543 92,447 Net income 53,752 49,793 54,208 62,116 57,224 Earnings Per Share Basic earnings per share $0002.66 $0002.54 $0002.65 $0002.90 $0002.57 Diluted earnings per share $0002.61 $0002.48 $0002.58 $0002.80 $0002.50 Weighted average number of common shares outstanding Basic Diluted Dividends declared per common share Balance Sheet Data Working capital Total assets Long-term debt Total debt Total shareholders’ equity 20,199 20,569 $0000.10 19,630 20,063 $0000.10 20,479 21,004 $0000.10 21,394 22,150 $0000.10 22,281 22,926 $0000.10 $167,028 899,877 89,020 120,351 594,157 $086,261 847,810 88,097 160,031 507,819 $ 81,830 799,832 89,857 138,727 483,639 $102,405 769,131 75,238 88,677 485,036 $112,892 760,912 88,167 101,678 489,163 CONSOLIDATED Balance Sheet MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report (Thousands of Dollars) Assets Current assets: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts: 2002 – $7,079; 2001 – $3,697 Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, less accumulated depreciation and depletion Goodwill Other assets and deferred charges December 31, 2002 December 31, 2001 $ 31,762 $ 13,046 129,608 82,909 46,686 290,965 537,424 51,291 20,197 125,289 77,633 30,822 246,790 536,339 43,506 21,175 MTI 25 Total assets $899,877 $847,810 Liabilities & Shareholders’ Equity Current liabilities: Short-term debt Current maturities of long-term debt Accounts payable Income taxes payable Accrued compensation and related items Other current liabilities Total current liabilities Long-term debt Accrued postretirement benefits Deferred taxes on income Other noncurrent liabilities Total liabilities Commitments and Contingent Liabilities Shareholders’ equity: Preferred stock, without par value; 1,000,000 shares authorized; none issued Common stock at par, $0.10 par value; 100,000,000 shares authorized; issued 26,937,260 shares in 2002 and 25,961,920 shares in 2001 Additional paid-in capital Retained earnings Accumulated other comprehensive loss Less common stock held in treasury, at cost; 6,781,473 shares in 2002 and 6,347,973 shares in 2001 Total shareholders’ equity $ 30,000 1,331 37,435 18,176 15,086 21,909 123,937 89,020 19,869 48,183 24,711 $ 71,497 437 37,705 17,480 14,231 19,179 160,529 88,097 19,144 50,435 21,786 305,720 339,991 — — 2,694 190,144 678,740 (35,034) 836,544 242,387 594,157 2,596 158,559 627,014 (55,295) 732,874 225,055 507,819 Total liabilities and shareholders’ equity $899,877 $847,810 See Notes to Consolidated Financial Statements, which are an integral part of these statements. CONSOLIDATED Statement of Income MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report (Thousands of Dollars, Except Per Share Data) 2002 2001 2000 Year Ended December 31, MTI 26 Net sales Operating costs and expenses: Cost of goods sold Marketing and administrative expenses Research and development expenses Bad debt expenses Restructuring charge Write-down of impaired assets $752,680 $684,419 $670,917 567,985 74,160 22,697 6,214 — 750 502,525 70,495 23,509 3,930 3,403 — 477,512 71,404 26,331 5,964 — 4,900 Income from operations 80,874 80,557 84,806 Interest income Interest expense Other deductions Non-operating deductions, net Income before provision for taxes on income and minority interests Provision for taxes on income Minority interests Net income Basic earnings per share Diluted earnings per share 1,172 (5,792) (520) (5,140) 75,734 20,220 1,762 835 (7,884) (838) (7,887) 72,670 21,148 1,729 1,146 (5,311) (869) (5,034) 79,772 23,735 1,829 $ 53,752 $ 49,793 $ 54,208 $ $ 2.66 2.61 $ $ 2.54 2.48 $ $ 2.65 2.58 See Notes to Consolidated Financial Statements, which are an integral part of these statements. CONSOLIDATED Statement of Cash Flows MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report (Thousands of Dollars) Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization Write-down of impaired assets Loss on disposal of property, plant and equipment Deferred income taxes Bad debt expenses Other Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable Income taxes payable Other Year Ended December 31, 2002 2001 2000 $ 53,752 $ 49,793 $ 54,208 68,960 750 1,301 2,643 6,214 1,519 1,143 5,166 (15,865) (5,542) 465 (2,668) 66,518 — 19 (131) 3,930 1,446 (11,886) (2,182) (10,620) (1,077) (144) 2,661 60,795 4,900 257 1,202 5,964 1,594 (7,118) (5,123) (5,732) (9,455) (5,275) (5,104) MTI 27 Net cash provided by operating activities 117,838 98,327 91,113 Investing Activities Purchases of property, plant and equipment Proceeds from disposal of property, plant and equipment Acquisition of businesses, net of cash acquired Other investing activities (37,107) 280 (34,100) — (63,078) 5,193 (37,363) — (103,286) 1,396 (12,580) 418 Net cash used in investing activities (70,927) (95,248) (114,052) Financing Activities Proceeds from issuance of short-term and long-term debt Repayment of short-term and long-term debt Purchase of common shares for treasury Cash dividends paid Proceeds from issuance of stock under option plan 154,908 (194,876) (17,332) (2,026) 29,384 268,684 (248,677) (16,000) (1,960) 3,158 165,672 (114,346) (43,048) (2,049) 4,044 Net cash provided by (used in) financing activities (29,942) 5,205 10,273 Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year 1,747 18,716 13,046 (1,930) (1,020) 6,354 6,692 (13,686) 20,378 Cash and cash equivalents at end of year $ 31,762 $ 13,046 $ 6,692 See Notes to Consolidated Financial Statements, which are an integral part of these statements. MTI 28 CONSOLIDATED Statement of Shareholders’ Equity MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report (in thousands) Common Stock Shares Par Value Additional Paid-in Capital Accumulated Other Retained Comprehensive Income (Loss) Earnings Treasury Stock Shares Cost Total Balance as of January 1, 2000 25,705 $2,571 $150,315 $527,022 $(28,865) (4,819) $(166,007) $485,036 Comprehensive income: Net income Currency translation adjustment Total comprehensive income Dividends declared Employee benefit transactions Income tax benefit arising from employee stock option plans Purchase of common stock — — — — 148 — — — — — — 14 — — — 54,208 — — — (15,208) — 54,208 (15,208) — (2,049) — 4,030 — — — — — — — — 54,208 — (15,208) — 39,000 — — (2,049) 4,044 656 — — — — — — (1,067) — (43,048) 656 (43,048) Balance as of December 31, 2000 25,853 2,585 155,001 579,181 (44,073) (5,886) (209,055) 483,639 Comprehensive income: Net income Currency translation adjustment Minimum pension liability adjustment Net gain on cash flow hedges Total comprehensive income Dividends declared Employee benefit transactions Income tax benefit arising from employee stock option plans Purchase of common stock — — — — — — 109 — — — — — — — — 11 — — — 49,793 — — — — — (11,896) 500 — 174 — — 49,793 (11,222) — (1,960) — 3,147 — — — — — — — — — — 49,793 — (11,896) 500 — 174 — — 38,571 — — (1,960) 3,158 411 — — — — — — (462) — (16,000) 411 (16,000) Balance as of December 31, 2001 25,962 2,596 158,559 627,014 (55,295) (6,348) (225,055) 507,819 Comprehensive income: Net income Currency translation adjustment Minimum pension liability adjustment Cash flow hedges: Net derivative losses arising during the year Reclassification adjustment Total comprehensive income Dividends declared Employee benefit transactions Income tax benefit arising from employee stock option plans Purchase of common stock — — — — — — — 975 — — — — — — — — — 98 — — — 53,752 — — — — 22,137 (829) — — — — — (968) (79) — 53,752 20,261 — (2,026) — 29,286 — — — — — — — — — — — 53,752 — 22,137 (829) — — — (968) (79) — 74,013 — (2,026) — 29,384 2,299 — — — — — — (433) — (17,332) 2,299 (17,332) Balance as of December 31, 2002 26,937 $2,694 $190,144 $678,740 $(35,034) (6,781) $(242,387) $594,157 See Notes to Consolidated Financial Statements, which are an integral part of these statements. NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements include the accounts of Minerals Technologies Inc. (the “Company”) and its wholly and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The Company employs accounting policies that are in accordance with generally accepted accounting principles in the United States of America and require management to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Significant estimates include those related to revenue recognition, allowance for doubtful accounts, valuation of inventories, valuation of long-lived assets, goodwill and other intangible assets, pension plan assumptions, income taxes, income tax valuation allowances and litigation and environmental liabilities. Actual results could differ from those estimates. Business The Company is a resource– and technology- based company that develops, produces and markets on a worldwide basis a broad range of specialty mineral, mineral-based and synthetic mineral products and related systems and technologies. The Company’s products are used in manufacturing processes of the paper and steel Trade Accounts Receivable Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience and specific MTI 29 allowances for bankrupt customers. The Company also analyzes the collection history and financial condition of its other customers considering current industry conditions and determines whether an allowance needs to be established. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Inventories Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. 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 costs 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 4%-8% for buildings, 8%-12% for machinery and equipment and 8%-12% for furniture and fixtures. industries, as well as by the building materials, polymers, Property, plant and equipment are depreciated ceramics, paints and coatings, glass and other manufacturing industries. Cash Equivalents The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents amounted to $3.8 million and $2.9 million at December 31, 2002 and 2001, respectively. over their useful lives. Useful lives of satellite precipitated calcium carbonate (PCC) plants are based on manage- ment’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 PCC from those facilities. Failure of a PCC customer to renew an agreement or continue to purchase PCC from the Company could result in an impairment of assets charge at such facility. MTI 30 NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report In the third quarter of 2002, the Company reduced Prior to adoption of SFAS No. 144, the Company the useful lives of satellite PCC plants at International accounted for long-lived assets in accordance with SFAS Paper Company (IP) mills due to an increased risk that No. 121, “Accounting for Impairment of Long-Lived some or all of these PCC contracts will not be renewed. Assets and Long-Lived Assets to be Disposed of.” In The accelerated depreciation reduced diluted earnings by accordance with this pronouncement, the Company approximately $0.04 per share in the second half of 2002. recorded a write-down of impaired assets of approximately Depletion of the mineral and quarry properties is provided for on a unit-of-extraction basis as the related materials are mined for financial reporting purposes and on a percentage depletion basis for tax purposes. $4.9 million in the fourth quarter of 2000 for three satellite PCC plants at paper mills that had ceased or were expected to cease operations. Goodwill and Other Intangibles Goodwill represents Mining costs associated with waste gravel and rock the excess of purchase price and related costs over removal in excess of the expected average life of mine the value assigned to the net tangible and identifiable stripping ratio are deferred. These costs are charged to intangible assets of businesses acquired. On January 1, production on a unit-of-production basis when the ratio 2002, the Company adopted SFAS No. 142, “Goodwill of waste to ore mined is less than the average life of and Other Intangible Assets.” Under SFAS No. 142, mine stripping ratio. goodwill and other intangible assets with indefinite lives are not amortized, but instead tested for impairment at Accounting for the Impairment of Long-Lived Assets least annually in accordance with the provisions of SFAS The Company accounts for impairment of long-lived No. 142. SFAS No. 142 also requires that intangible assets in accordance with SFAS No. 144, “Accounting assets with estimable useful lives be amortized over their for the Impairment or Disposal of Long-Lived Assets.” respective estimated useful lives to the estimated residual SFAS No. 144 establishes a uniform accounting model values, and reviewed for impairment in accordance with for long-lived assets to be disposed of. This Statement SFAS No. 144, “Accounting for the Impairment or also requires that long-lived assets be reviewed for Disposal of Long-Lived Assets.” 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 comparing the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the first quarter of 2002, the Company recorded a write-down of impaired assets of $750,000 for a precipitated calcium carbonate plant at a paper mill that had ceased operations. The Company evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step the fair value for the reporting unit is compared to its book value including goodwill. In the case that the fair value of the reporting unit is less than the book value, a second step is performed which compares the fair value of the reporting unit’s goodwill to the book value of the goodwill. The fair value for the goodwill is determined based on the difference between the fair values of the reporting units and the net fair values of the identifiable assets and liabilities of such reporting unit. If the fair value of the goodwill is less than the book value the difference is recognized as an impairment. NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Prior to the adoption of SFAS No. 142, goodwill are recorded in accumulated other comprehensive loss was amortized on a straight-line basis over 20-25 years, in shareholders’ equity. Income statement items are and assessed for recoverability by determining whether generally translated at average exchange rates prevailing the amortization of the goodwill balance over its remaining during the period. Other foreign currency gains and losses life could be recovered through undiscounted future are included in net income. International subsidiaries operating cash flows of the acquired operation. All other operating in highly inflationary economies translate intangible assets were amortized on straight-line basis nonmonetary assets at historical rates, while net monetary MTI 31 up to 17 years. The amount of goodwill and other assets are translated at current rates, with the resulting intangible asset impairment, if any, was measured based translation adjustments included in net income. on the Company’s ability to recover the carrying amount from the expected future operating cash flows on a Income Taxes Income taxes are provided for based discounted basis. on the asset and liability method of accounting pursuant to SFAS No. 109, “Accounting for Income Taxes.” Under Derivative Financial Instruments The Company SFAS No. 109, deferred tax assets and liabilities are enters into derivative financial instruments to hedge recognized for the estimated future tax consequences certain foreign exchange and interest rate exposures attributable to differences between the financial statement pursuant to SFAS No. 133, “Accounting for Derivative carrying amounts of existing assets and liabilities and Instruments and Hedging Activities,” as amended by their respective tax bases. Deferred tax assets and liabilities SFAS No. 138, “Accounting for Certain Derivative are measured using enacted tax rates in effect for the Instruments and Certain Hedging Activities.” See the year in which those temporary differences are expected Notes on Derivative Financial Instruments and Hedging to be recovered or settled. Under SFAS No. 109, the Activities and Financial Instruments and Concentration effect on deferred tax assets and liabilities of a change of Credit Risk in the Consolidated Financial Statements in tax rates is recognized in income in the period that for a full description of the Company’s hedging activities includes the enactment date. and related accounting policies. Revenue Recognition Revenue from sale of products is recognized at the time the goods are shipped and title passes to the customer. In most of the Company’s PCC contracts, the price per ton is based upon the total number of tons sold to the customer during the year. Under those contracts the price billed to the customer for shipments during the year is based on periodic estimates of the total annual volume that will be sold to such customer. Revenues are adjusted at the end of each year to reflect the actual volume sold. Foreign Currency The assets and liabilities of most of the Company’s international subsidiaries are translated into U.S. dollars using exchange rates at the respective bal- ance sheet date. The resulting translation adjustments The accompanying financial statements generally do not include a provision for U.S. income taxes on inter- national subsidiaries’ unremitted earnings, which, for the most part, are expected to be reinvested overseas. Research and Development Expenses Research and development expenses are expensed as incurred. Stock-Based Compensation The Company has elected to recognize compensation cost based on the intrinsic value of the equity instrument awarded as promulgated in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company has disclosed below under “ Stock and Incentive Plan” the pro forma effect of the fair value method on net income and earnings per share. NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Pension and Post-retirement Benefits The Company has The provision for taxes on income consists of defined benefit pension plans covering substantially all of the following: its employees. The benefits are based on years of service. Thousands of Dollars 2002 2001 2000 MTI 32 The Company also provides post-retirement health care benefits for substantially all retirees and employees in the United States. The Company measures the costs of its obligation based on its best estimate. The net periodic Domestic Taxes currently payable Federal State and local costs are recognized as employees render the services Deferred income taxes $ 5,797 179 5,873 $ 8,906 $11,741 2,380 406 1,484 998 necessary to earn the post-retirement benefits. Domestic tax provision 11,849 11,388 14,527 Earnings Per Share Basic earnings per share have been Foreign computed based upon the weighted average number of common shares outstanding during the period. Taxes currently payable Deferred income taxes 11,601 (3,230) 10,889 (1,129) 8,412 796 Diluted earnings per share have been computed 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. Income Taxes Income before provision for taxes, by domestic and foreign source is as follows: Foreign tax provision 8,371 9,760 9,208 Total tax provision $20,220 $21,148 $23,735 The provision for taxes on income shown in the previous table is classified based on the location of the taxing authority, regardless of the location in which the taxable income is generated. The major elements contributing to the difference between the U.S. federal statutory tax rate and the consolidated effective tax rate are as follows: Thousands of Dollars 2002 2001 2000 Percentages 2002 2001 2000 Domestic Foreign $44,768 $40,777 $51,098 28,674 31,893 30,966 Total income before provision for income taxes $75,734 $72,670 $79,772 U.S. statutory tax rate Depletion Difference between tax provided on foreign earnings and the U.S. statutory rate State and local taxes, net of Federal tax benefit Tax credits Other 35.0% 35.0% 35.0% (4.5) (4.7) (5.0) (3.2) (1.9) (1.0) 1.4 (0.9) (0.9) 1.5 (1.4) 0.4 1.9 (1.3) 0.2 Consolidated effective tax rate 26.7% 29.1% 29.8% The Company believes that its accrued liabilities are sufficient to cover its U.S. and foreign tax contingencies. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Thousands of Dollars 2002 2001 offset related U.S. income taxes. On repatriation, Deferred tax assets: Pension and post-retirement benefits cost reported for financial statement purposes in excess of amounts deductible for tax purposes $ State and local taxes Accrued expenses Deferred expenses Net operating loss carry forwards Other — $03,207 2,955 2,943 1,606 2,875 1,231 3,554 3,131 4,244 7,745 1,125 certain foreign countries impose withholding taxes. The amount of withholding tax that would be payable on remittance of the entire amount of undistributed earnings would approximate $2.9 million. Net foreign currency exchange gains and (losses), included in other deductions in the Consolidated Statement of Income, were $233,000, $201,000, and ($425,000) for the years ended December 31, 2002, Total deferred tax assets 19,799 14,817 2001 and 2000, respectively. MTI 33 Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation Pension and post-retirement benefits cost deducted for tax purposes in excess of amounts reported for financial statements Other 63,590 61,427 2,885 1,507 — 3,825 Total deferred tax liabilities 67,982 65,252 Net deferred tax liabilities $48,183 $50,435 Inventories The following is a summary of inventories by major category: Thousands of Dollars 2002 2001 Raw materials Work in process Finished goods Packaging and supplies $32,967 $28,541 9,083 22,775 17,234 7,153 25,459 17,330 $82,909 $77,633 A valuation allowance for deferred tax assets has not Total inventories been recorded since management believes it is more likely than not that the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. Net cash paid for income taxes was $14.6 million, $20.8 million, and $24.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. Foreign Operations The Company has not provided for U.S. federal and foreign withholding taxes on $83.9 million of foreign subsidiaries’ undistributed earnings as of December 31, 2002 because such earnings, for the most part, are intended to be reinvested overseas. To the extent the parent company has received foreign earnings as dividends, the foreign taxes paid on those earnings have generated tax credits, which have substantially Property, Plant and Equipment The major categories of property, plant and equip- ment and accumulated depreciation and depletion are presented below: Thousands of Dollars 2002 2001 Land Quarries/mining properties Buildings Machinery and equipment Construction in progress Furniture and fixtures and other $ 21,516 $ 27,918 140,550 801,788 39,548 84,684 20,136 26,981 125,489 755,471 41,024 76,526 1,116,004 1,045,627 Less: Accumulated depreciation and depletion (578,580) (509,288) Property, plant and equipment, net $ 537,424 $ 536,339 NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Restructuring Charge In 2001, the Company acquired the following two During the second quarter of 2001, the Company announced plans to restructure its operations in an effort to reduce operating costs and to improve efficiency. The restructuring, together with workforce reductions MTI 34 associated with the acquisition of the refractory operations of Martin Marietta Magnesia Specialties Inc., resulted in a total workforce reduction of approximately 120 people or five percent of the Company’s worldwide workforce. The Company recorded a pre-tax restructuring charge of $3.4 million in the second quarter of 2001 to reflect these actions. This charge consisted of severance and other employee benefits. As of December 31, 2002, substantially all of the employees identified in the workforce reduction were terminated and there was entities for a total cash cost of $37.4 million: (cid:2) On May 1, 2001, the Company acquired the refractories business of Martin Marietta Magnesia Specialties Inc. (cid:2) On September 24, 2001, the Company purchased all of the outstanding shares of Rijnstaal B.V., a Netherlands-based producer of cored metal wires used mainly in the steel and foundry industries. These acquisitions were accounted for under the purchase method and the operations of these entities have been included in the Company’s financial statements since the aforementioned dates of the acquisitions. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the no remaining restructuring liability. As of December 31, date of the acquisitions: 2001 the remaining restructuring liability was approximately $0.8 million. Acquisitions In 2002, the Company acquired the following three entities for a total cash cost of $34.1 million: (cid:2) On February 6, 2002, the Company purchased a PCC manufacturing facility in Hermalle-sous-Huy, Belgium for approximately $10.2 million. The Company acquired this facility to accelerate the development of its European coating PCC program. The terms of the acquisition also provide for additional consideration of $1.0 million to be paid if certain volumes of coating PCC are produced and shipped from this facility for any six consecutive months within five years following the acquisition. (cid:2) On April 26, 2002, the Company acquired for approximately $1.4 million the assets of a company that develops and manufactures a refractory lining monitoring system. (cid:2) On September 9, 2002, the Company acquired the business and assets of Polar Minerals Inc., a privately owned producer of industrial minerals in the Midwest United States, for approximately $22.5 million. Millions of Dollars Current assets Property, plant and equipment Intangible assets Goodwill Net operating loss carry forwards Total assets acquired Liabilities assumed Net cash paid 2002 2001 $11.6 17.7 0.7 5.5 3.4 $ 8.1 6.4 1.4 30.1 — 38.9 (4.8) 46.0 (8.6) $34.1 $37.4 Goodwill and Other Intangible Assets Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are not amortized, but instead reviewed for impairment at least annually in accordance with the provisions of SFAS No. 142. This statement also required an initial goodwill impairment assessment in the year of adoption. The Company completed the initial impair- ment analysis and performed a subsequent impairment analysis in the fourth quarter. These analyses did not result in an impairment charge. NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report The carrying amount of goodwill was $51.3 million and $43.5 million as of December 31, 2002 and December 31, 2001, respectively. The net change in Derivative Instruments and Hedging Activities goodwill since January 1, 2002 was primarily attributable The Company is exposed to foreign currency to the acquisition of Polar Minerals Inc. in the Specialty exchange rate fluctuations and interest rate changes Minerals segment and the effect of foreign exchange. in the normal course of its business. As part of the The following table reconciles previously reported net income as if the provisions of SFAS No. 142 had come into effect in 2000: Thousands of Dollars Reported net income Addback: Year Ended December 31, 2000 2001 2002 $53,752 $49,793 $54,208 Company’s risk management strategy, the Company MTI 35 uses interest-rate related derivative instruments to manage its exposure on its debt instruments, as well as forward exchange contracts (FEC) to manage its exposure to foreign currency risk on certain raw material purchases. The Company’s objective is to offset gains and losses resulting from these exposures with gains and goodwill amortization — 818 268 losses on the derivative contracts used to hedge them. Adjusted net income $53,752 $50,611 $54,476 Basic earnings per share: The Company has not entered into derivative instruments for any purpose other than to hedge certain expected cash flows. The Company does not speculate using Reported net income Goodwill amortization $2.66 — $2.54 0.04 $2.65 0.01 derivative instruments. Adjusted net income $2.66 $2.58 $2.66 Diluted earnings per share: Reported net income Goodwill amortization $2.61 — $2.48 0.04 $2.58 0.01 Adjusted net income $2.61 $2.52 $2.59 Acquired intangible assets subject to amortization as of December 31, 2002 and December 31, 2001 were as follows: December 31, 2002 December 31, 2001 Gross Gross Carrying Accumulated Carrying Accumulated Millions of Dollars Amount Amortization Amount Amortization Patents and trademarks $5.8 1.4 Customer lists 0.2 Other $0.7 0.1 — $5.0 1.4 — $7.4 $0.8 $6.4 $0.4 0.1 — $0.5 The weighted average amortization period for acquired intangible assets subject to amortization is approximately 15 years. Amortization expense was $0.3 million in 2002 and the estimated amortization expense is $0.4 million for each of the next five years through 2007. By using derivative financial instruments to hedge exposures to changes in interest rates and foreign currency, the Company exposes itself to credit risk and market risk. Credit risk is the risk that the counterparty will fail to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty, and therefore, it does not face any credit risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with major financial institutions. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, currency exchange rates, or commodity prices. The market risk associated with interest rate and forward exchange contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. Based on criteria established by SFAS No. 133, the Company designated its derivatives as a cash flow hedge. During 2001, the Company entered into NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report three-year interest rate swap agreements with notional Long-Term Debt: The fair value of the long-term debt amounts totaling $30 million that expire in January 2005. of the Company is estimated based on the quoted market These agreements effectively convert a portion of the prices for that debt or similar debt and approximates the Company’s floating-rate debt to a fixed-rate basis with carrying amount. an interest rate of 4.5%, thus reducing the impact of the interest rate changes on future cash flows and income. Forward Exchange Contracts: The fair value of MTI 36 The Company uses FEC designated as cash flow hedges forward exchange contracts (used for hedging purposes) to protect against foreign currency exchange rate risks is estimated by obtaining quotes from brokers. If inherent in its forecasted inventory purchases. The appropriate, the Company would enter into forward Company had no open forward exchange contracts exchange contracts to mitigate the impact of foreign at December 31, 2002. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is initially recorded in accumulated other comprehensive income as a separate component of stockholders’ equity and subsequently reclassified into earnings in the period during which the hedged transaction is recognized in earnings. The gains and losses associated with these forward exchange contracts and interest rate swaps are recognized into cost of sales and interest expense, respectively. Financial Instruments and Concentrations of Credit Risk The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash equivalents, Accounts Receivable and Payable, and Accrued Liabilities: The carrying amounts approximate fair value because of the short maturities of these instruments. Short-Term Debt and Other Liabilities: The carrying amounts of short-term debt and other liabilities approxi- mate fair value because of the short maturities of these instruments. exchange rate movements on the Company’s operating results. It does not engage in speculation. Such foreign exchange contracts would not subject the Company to additional risk from exchange rate movements because gains and losses on these contracts would offset losses and gains on the assets, liabilities and transactions being hedged. The fair value of these instruments was $132,000 at December 31, 2001. The Company had no open forward exchange contracts at December 31, 2002. Interest Rate Swap Agreements: The Company enters into interest rate swap agreements as a means to hedge its interest rate exposure on debt instruments. At December 31, 2002, the Company had two interest rate swaps with major financial institutions that effectively converted variable-rate debt to a fixed rate. One swap has a notional amount of $20 million and the other swap has a notional amount of $10 million. These swap agreements are under three-year terms expiring in January 2005 whereby the Company pays 4.50% and receives a three-month LIBOR rate plus 45 basis points. The fair value of these instruments was determined based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date. The fair value of these instruments was a liability of approximately $1.5 million and an asset of $158,000 at December 31, 2002 and December 31, 2001 respectively. NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Credit Risk: Substantially all of the Company’s accounts On July 24, 1996, through a private placement, receivable are due from companies in the paper, the Company issued $50 million of 7.49% Guaranteed construction and steel industries. Credit risk results from Senior Notes due July 24, 2006. The proceeds from the the possibility that a loss may occur from the failure of sale of the notes were used to refinance a portion of another party to perform according to the terms of the the short-term commercial bank debt outstanding. No contract. The Company regularly monitors its credit risk required principal payments are due until July 24, 2006. exposures and takes steps to mitigate the likelihood Interest on the notes is payable semi-annually. MTI 37 of these exposures resulting in actual loss. The Company’s extension of credit is based on an evaluation of the customer’s financial condition and collateral is generally not required. On May 17, 2000, the Company’s majority-owned subsidiary, Specialty Minerals FMT K.K., entered into a Yen-denominated Guaranteed Credit Agreement with the Bank of New York due March 31, 2007. The proceeds The Company’s bad debt expense for the years ended were used to finance the construction of a PCC satellite December 31, 2002, 2001 and 2000 was $6.2 million, facility in Japan. Principal payments began on June 30, $3.9 million and $6.0 million, respectively. 2002. Interest is payable quarterly at a rate of 2.05% Long-Term Debt and Commitments The following is a summary of long-term debt: Thousands of Dollars 2002 2001 7.49% Guaranteed Senior Notes Due July 24, 2006 $50,000 $50,000 8,957 8,734 per annum. The Variable/Fixed Rate Industrial Development Revenue Bonds due 2009 are tax-exempt 15-year instruments issued to finance the expansion of a PCC plant in Selma, Alabama. The bonds are dated November 1, 1994, and provide for an optional put by the holder (during the Variable Rate Period) and a mandatory call by the issuer. The bonds bear interest at either a variable rate or fixed rate, at the option of the Company. Interest is payable semi-annually under the fixed rate option and monthly under the variable rate option. The Company Yen-denominated Guaranteed Credit Agreement Due March 31, 2007 Variable/Fixed Rate Industrial Development Revenue Bonds Due 2009 Economic Development Authority Refunding Revenue Bonds Series 1999 Due 2010 Variable/Fixed Rate Industrial Development Revenue Bonds Due August 1, 2012 Variable/Fixed Rate Industrial Development Revenue Bonds Series 1999 Due November 1, 2014 Variable/Fixed Rate Industrial Development Revenue Bonds Due March 31, 2020 Other borrowings Less: Current maturities Long-term debt 4,000 4,000 has selected the variable rate option on these borrowings 4,600 4,600 8,000 8,000 and the average interest rates were approximately 1.57% and 3.18% for the years ended December 31, 2002 and 2001, respectively. The Economic Development Authority Refunding Revenue Bonds due 2010 were issued on February 23, 1999 to refinance the bonds issued in connection 8,200 8,200 with the construction of a PCC plant in Eastover, South Carolina. The bonds bear interest at either a variable rate 5,000 1,594 5,000 — 90,351 1,331 88,534 437 or fixed rate, at the option of the Company. Interest is payable semi-annually under the fixed rate option and monthly under the variable rate option. The Company has selected the variable rate option on these borrowings and the average interest rates were approximately $89,020 $88,097 1.51% and 2.61% for the years ended December 31, 2002 and 2001, respectively. NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report The Variable/Fixed Rate Industrial Development The aggregate maturities of long-term debt are as Revenue Bonds due August 1, 2012 are tax-exempt follows: 2003 – $1.3 million; 2004 – $2.3 million; 2005 – 15-year instruments that were issued on August 1, 1997 $2.8 million; 2006 – $52.8 million, 2007 – $1.0 million; to finance the construction of a PCC plant in Courtland, thereafter – $30.2 million. Alabama. The bonds bear interest at either a variable rate or fixed rate, at the option of the Company. Interest is MTI 38 payable semi-annually under the fixed rate option and monthly under the variable rate option. The Company has selected the variable rate option on these borrowings and the average interest rates were approximately 1.56% The Company had available approximately $115.0 million in uncommitted, short-term bank credit lines, of which $30.0 million was in use at December 31, 2002. The interest rate for these borrowings was approximately 3.85% for the year ended December 31, 2002. and 3.35% for the years ended December 31, 2002 and During 2002, 2001 and 2000, respectively, the 2001, respectively. The Variable/Fixed Rate Industrial Development Revenue Bonds due November 1, 2014 are tax-exempt 15-year instruments and were issued on November 30, 1999 to refinance the bonds issued in connection with the construction of a PCC plant in Jackson, Alabama. The bonds bear interest at either a variable rate or fixed rate at the option of the Company. Interest is payable Company incurred interest costs of $6.4 million, $8.8 million and $7.2 million including $0.6 million, $0.9 million and $1.9 million, respectively, which were capitalized. Interest paid approximated the incurred interest costs. Benefit Plans semi-annually under the fixed rate option and monthly Pension Plans and Other Postretirement Benefit Plans under the variable rate option. The Company has selected The Company and its subsidiaries have pension plans the variable rate option on these borrowings and the covering substantially all eligible employees on a contrib- average interest rates were approximately 1.56% utory or non-contributory basis. and 3.10% for the years ended December 31, 2002 and 2001, respectively. The funded status of the Company’s pension plans and other postretirement benefit plans at December 31, On June 9, 2000 the Company entered into a twenty- 2002 and 2001 is as follows: year, taxable, Variable/Fixed Rate Industrial Development Revenue Bond agreement to finance a portion of the construction of a merchant manufacturing facility for the production of Specialty PCC in Mississippi. The Company has selected the variable rate option for this borrowing and the average interest rate was approximately 2.33% and 6.69% for the years ended December 31, 2002 and 2001, respectively. NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Millions of Dollars Change in Benefit Obligation Pension Benefits 2001 2002 Other Benefits 2001 2002 The weighted average assumptions used in the accounting for the pension benefit plans and other benefit plans as of December 31 are as follows: Benefit obligation at beginning of year Service cost Interest cost Actuarial gain Benefits paid Acquisitions Other Benefit obligation at end of year Change in Plan Assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Plan participants’ contributions Benefits paid Other Fair value of plan assets $107.2 $104.9 5.2 6.9 5.7 (14.1) — (1.4) 5.1 7.3 7.5 (4.1) — 2.8 $21.6 $19.0 1.1 1.4 0.8 (1.3) 0.6 — 1.1 1.5 1.6 (1.5) — — $125.8 $107.2 $24.3 $21.6 $102.7 $110.5 $ — $ — (9.2) 20.2 (3.5) 10.7 — 1.6 — 1.3 0.2 (4.1) 1.6 0.2 (14.1) (1.1) — (1.6) — — (1.3) — at end of year $111.4 $102.7 $ — $ — 2002 2001 2000 Discount rate Expected return on plan assets Rate of compensation increase 6.75% 7.25% 7.50% 8.75% 9.25% 9.50% 3.50% 4.00% 4.00% MTI 39 For measurement purposes, health care cost trend rates of approximately 10.0% for pre-age-65 and post-age-65 benefits were used in 2002. These trend rates were assumed to decrease gradually to 5.0% for 2007 and remain at that level thereafter. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $31.5 million, $26.4 million and $17.8 million, respectively, as of December 31, 2002 and $9.4 million, $8.4 million and $2.9 million, as of December 31, 2001. The components of net periodic benefit costs are Funded status Unrecognized transition $ (14.4) $ (4.5) $(24.3) $(21.6) as follows: amount — 0.2 — — Unrecognized net actuarial Millions of Dollars Pension Benefits 2001 2000 2002 loss Unrecognized prior service cost Prepaid (accrued) benefit cost 42.0 16.6 4.4 2.9 4.7 4.9 — (0.4) $ 32.3 $ 17.2 $(19.9) $(19.1) Amounts recognized in the consolidated balance sheet consist of: Prepaid benefit cost Accrued benefit liabilities Intangible asset Accumulated other $ 36.1 $ 20.4 (5.5) 1.5 (7.2) 1.2 $ — $ — (19.1) — (19.9) — comprehensive loss 2.2 0.8 — — Net amount recognized $ 32.3 $ 17.2 $(19.9) $(19.1) Service cost Interest cost Expected return on plan assets Amortization of transition amount Amortization of prior service cost $5.1 7.3 (9.0) 0.1 0.5 $5.2 6.9 (9.5) 0.8 0.5 $5.1 6.9 (9.3) 0.7 0.4 Net periodic benefit cost $4.8 $5.6 $3.3 Millions of Dollars Other Benefits 2001 2000 2002 Service cost Interest cost Amortization of prior service cost $1.1 1.5 (0.4) $1.1 1.4 (1.7) $0.9 1.3 (1.7) Net periodic benefit cost $2.2 $0.8 $0.5 MTI 40 NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Unrecognized prior service cost is amortized on Savings and Investment Plans an accelerated basis over the average remaining service period of each active employee. Benefits under defined benefit plans are generally based on years of service and an employee’s career earnings. Employees become fully vested after five years. The Company maintains a voluntary Savings and Investment Plan for most non-union employees in the U.S. Within prescribed limits, the Company bases its contribution to the Plan on employee contributions. The Company’s contributions amounted to $2.9 million, $2.9 Under the provisions of SFAS No. 88, lump million and $3.0 million for the years ended December sum distributions from the Company’s Supplemental 31, 2002, 2001 and 2000, respectively. Retirement Plan caused a partial settlement of such plan, resulting in a charge of $1.9 million in 2001. Leases The Company’s funding policy for U.S. plans generally is to contribute annually into trust funds at a rate that is intended to remain at a level percentage of compensation for covered employees. The funding policy for the international plans conforms to local governmental and tax requirements. The plans’ assets are invested primarily in stocks and bonds. The Company has several noncancelable operating leases, primarily for office space and equipment. Rent expense amounted to approximately $4.6 million, $4.4 million and $5.1 million for the years ended December 31, 2002, 2001 and 2000, respectively. Total future minimum rental commitments under all noncancelable leases for each of the years 2003 through 2007 and in the aggregate The Company provides postretirement health care thereafter are approximately $3.2 million, $3.2 million, and life insurance benefits for substantially all of its U.S. $3.0 million, $2.4 million, $2.3 million, respectively and retired employees. Employees are generally eligible for $11.8 million thereafter. benefits upon retirement and completion of a specified number of years of creditable service. The Company does not pre-fund these benefits and has the right to modify or terminate the plan in the future. Total future minimum payments to be received under direct financing leases for each of the years 2003 through 2007 and in the aggregate thereafter are approximately $2.6 million, $2.0 million, $1.7 million, $1.1 million, $0.7 A one-percentage-point change in assumed health million, respectively and $2.8 million thereafter. care cost trend rates would have the following effects: 1-Percentage- Point Increase 1-Percentage- Point Decrease Effect on total service and interest cost components $017,000 $0(21,000) Effect on postretirement benefit obligation $204,000 $(231,000) NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Litigation Cash Dividends On or about July 14, 2000, MTI, Specialty Minerals Cash dividends of $2.0 million or $0.10 per common Inc. and Minteq International Inc. received from the share were paid during 2002. In January 2003, a cash Connecticut Department of Environmental Protection dividend of approximately $0.5 million or $0.025 per (“DEP”) a proposed administrative consent order relating share, was declared, payable in the first quarter of 2003. to the Canaan, Connecticut site at which both Minteq and Specialty Minerals have operations. Following extensive discussions among the parties, the proposed order was revised by the DEP on February 11, 2003. The proposed order would settle claims relating to an accidental discharge of machine oil alleged to have contained polychlorinated biphenyls at or above regulated levels as well as alleged violations of requirements pertaining to stormwater and waste water discharge and Preferred Stock Purchase Rights MTI 41 On August 27, 1999, the Company’s Board of Directors redeemed the Company’s current rights plan effective September 13, 1999 and simultaneously replaced it with a new rights plan. The redemption price for the old rights of $0.01 per right was paid to the stockholders of record as of September 13, 1999. management of underground storage tanks. The Under the Company’s new Preferred Stock Purchase proposed order would require payment of a civil penalty Rights Plan, each share of the Company’s common stock in the amount of $11,000 and funding of several carries with it one preferred stock purchase right. supplemental environmental projects totaling $330,000. Subject to the terms and conditions set forth in the These amounts are included in other current liabilities in plan, the rights will become exercisable if a person or the consolidated balance sheet as of December 31, 2002. group acquires beneficial ownership of 15% or more Costs of remediation at the site remains uncertain. The Company and its subsidiaries are not party to any other material pending legal proceedings, other than ordinary routine litigation that is incidental to their businesses. Capital Stock The Company’s authorized capital stock consists of 100 million shares of common stock, par value $0.10 per share, of which 20,155,787 shares and 19,613,947 shares were outstanding at December 31, 2002 and 2001, respectively, and 1,000,000 shares of preferred stock, none of which were issued and outstanding. of the Company’s common stock or announces a tender or exchange offer that would result in the acquisition of 30% or more thereof. If the rights become exercisable, separate certificates evidencing the rights will be distributed, and each right will entitle the holder to purchase from the Company a new series of preferred stock, designated as Series A Junior Preferred Stock, at a predefined price. The rights also entitle the holder to purchase shares in a change-of-control situation. The preferred stock, in addition to a preferred dividend and liquidation right, will entitle the holder to vote on a pro rata basis with the Company’s common stock. The rights are redeemable by the Company at a fixed price until 10 days or longer, as determined by the Board, after certain defined events or at any time prior to the expiration of the rights on September 13, 2009 if such events do not occur. NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Stock and Incentive Plan SFAS No. 123, “Accounting for Stock-Based The Company has adopted a Stock and Incentive net income and net income per share as if the Company Plan (the “Plan”), which provides for grants of incentive adopted the fair-value method of accounting for stock- and non-qualified stock options, stock appreciation based awards. The fair value of stock-based awards to rights, stock awards or performance unit awards. employees was calculated using the Black-Scholes option- Compensation,” requires the disclosure of pro forma MTI 42 The Plan is administered by the Compensation and pricing model, modified for dividends, with the following Nominating Committee of the Board of Directors. weighted average assumptions: Stock options granted under the Plan have a term not in excess of ten years. The exercise price for stock options will not be less than the fair market value of the common stock on the date of the grant, and each award of stock options will vest ratably over a specified period, generally three years. 2002 2001 2000 Expected life (years) Interest rate Volatility Expected dividend yield 7 3.27% 31.21% 0.21% 7 4.69% 7 5.03% 30.41% 31.13% 0.20% 0.28% In 2001, the shareholders approved an amendment As required by SFAS No. 123, the Company has to increase the number of shares of common stock determined that the weighted average estimated fair available under the Plan by an additional 0.5 million. values of options granted in 2002, 2001 and 2000 The following table summarizes stock option activity were $18.30, $14.36 and $21.85 per share, respectively. Pro forma net income and earnings per share reflecting Under Option compensation cost for the fair value of stock options for the Plan: Balance 1/1/2000 Granted Exercised Canceled Balance 12/31/2000 Authorized Granted Exercised Canceled Balance 12/31/2001 Granted Exercised Canceled Shares Available For Grant 1,339,552 (107,000) — 20,437 1,252,989 500,000 (252,500) — 42,057 1,542,546 (285,728) — 20,335 Weighted Average Exercise Price Per Shares Share ($) 2,580,799 107,000 (148,148) (20,437) 2,519,214 — 252,500 (109,504) (42,057) 2,620,153 285,728 (977,363) (20,335) 33.25 50.34 28.20 39.26 34.23 — 34.81 29.04 38.57 34.43 46.92 30.03 50.83 Balance 12/31/2002 1,277,153 1,908,183 38.54 awarded in 2002, 2001 and 2000 were as follows: Millions of Dollars, Except Per Share Amounts Net income As reported Deduct: Total stock-based 2002 2001 2000 $53.8 $49.8 $54.2 employee compensation expense determined under fair value based method for all awards, net of related tax effects 2.2 5.5 4.8 Pro forma net income $51.6 $44.3 $49.4 Basic earnings per share As reported Pro forma Diluted earnings per share As reported Pro forma $2.66 $2.55 $2.61 $2.51 $2.54 $2.26 $2.65 $2.41 $2.48 $2.21 $2.58 $2.35 NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report The following table summarizes information concerning The weighted average diluted common shares out- Plan options outstanding at December 31, 2002: standing for the years ending December 31, 2002, 2001 Options Outstanding Weighted Number Remaining Outstanding Contractual at 12/31/02 Term (Years) Average Weighted Average Exercise Price and 2000 excludes the dilutive effect of approximately 445,000, 376,000 and 388,000 options, respectively, since such options had an exercise price in excess of the average market value of the Company’s common stock during such years. MTI 43 56,265 598,062 874,433 379,423 0.1 4.3 6.1 8.6 $23.61 $32.13 $39.53 $48.15 Comprehensive Income Comprehensive income includes changes in the fair value of certain financial derivative instruments that qualify Options Exercisable for hedge accounting to the extent they are effective, the Range of Exercise Prices $22.625 – 29.750 $30.625 – 34.825 $38.438 – 39.531 $42.070 – 52.375 Range of Exercise Prices $22.625 – 29.750 $30.625 – 34.825 $38.438 – 39.531 $42.070 – 52.375 Number Exercisable at 12/31/02 56,265 455,875 870,933 77,673 Weighted Average Exercise Price $23.61 $31.28 $39.53 $50.15 Earnings Per Share (EPS) Basic EPS Thousands of Dollars, Except Per Share Amounts 2002 2001 2000 Net income $53,752 $49,793 $54,208 Weighted average shares outstanding 20,199 19,630 20,479 Basic earnings per share $ 2.66 $ 2.54 $ 2.65 Diluted EPS Thousands of Dollars, Except Per Share Amounts Net income $53,752 $49,793 $54,208 Weighted average shares outstanding Dilutive effect of stock options Weighted average shares outstanding, adjusted 20,199 370 19,630 433 20,479 525 20,569 20,063 21,004 Diluted earnings per share $ 2.61 $ 2.48 $ 2.58 minimum pension liability and cumulative foreign currency translation adjustments. The following table reflects the accumulated balances of other comprehensive income (loss) (in millions): Net Gain Currency Minimum (Loss) On Accumulated Other Pension Cash Flow Comprehensive Income (Loss) Liability Translation Adjustment Hedges Balance at 1/1/00 Current year change $(27.9) (15.2) $(1.0) — $ — — $(28.9) (15.2) Balance at 12/31/00 Current year change Balance at 12/31/01 Current year change (43.1) (11.9) (55.0) 22.2 (1.0) 0.5 (0.5) (0.8) — 0.2 0.2 (1.1) (44.1) (11.2) (55.3) 20.3 Balance at 12/31/02 $(32.8) $(1.3) $(0.9) $(35.0) The income tax expense (benefit) associated with items included in other comprehensive income (loss) was approximately ($1.1) million, $0.4 million and ($0.5) million for the years ended December 31, 2002, 2001 2002 2001 2000 and 2000, respectively. NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Segment and Related Information Segment information for the years ended December Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate MTI 44 resources and in assessing performance. The Company’s operating segments are strategic business units that offer different products and serve different markets. They are managed separately and require different technology and marketing strategies. The Company has two operating segments: Specialty Minerals and Refractories. The Specialty Minerals segment produces and sells precipitated calcium carbonate and lime, and mines, processes and sells the natural mineral products limestone and talc. This segment’s products are used principally in the paper, building materials, paints and coatings, glass, ceramic, polymers, food, and pharmaceutical industries. The Refractories segment produces and markets monolithic and shaped refractory materials and services used primarily by the steel, cement and glass industries. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on the operating income of the respective business units. Depreciation expense related to corporate assets is 31, 2002, 2001 and 2000 was as follows (in millions): 2002 Specialty Minerals Refractories Total Net sales Income from operations Bad debt expenses Depreciation, depletion and amortization Segment assets Capital expenditures $520.1 60.0 3.8 59.0 612.7 27.3 $232.6 20.9 2.4 $752.7 80.9 6.2 10.0 238.6 9.7 69.0 851.3 37.0 2001 Specialty Minerals Refractories Total Net sales Income from operations Bad debt expenses Depreciation, depletion and amortization Segment assets Capital expenditures $483.3 55.5 0.6 55.9 587.9 54.3 $201.1 25.1 3.3 $684.4 80.6 3.9 10.6 231.4 8.6 66.5 819.3 62.9 2000 Specialty Minerals Refractories Total Net sales Income from operations Bad debt expenses Depreciation, depletion and amortization $486.3 61.4 1.2 $184.6 23.4 4.8 $670.9 84.8 6.0 Write-down of impaired assets Segment assets Capital expenditures 51.8 4.9 612.4 95.6 9.0 — 169.5 7.7 60.8 4.9 781.9 103.3 allocated to the business segments and is included in Included in income from operations of the Specialty their income from operations. However, such corporate Minerals segment and the Refractories segment for the depreciable assets are not included in the segment assets. year ended December 31, 2001, is a restructuring charge Specialty Minerals’ segment sales to International Paper of approximately $3.0 million and $0.4 million, respectively. Company and affiliates represented approximately 11.5% of consolidated net sales for 2002 and 13% of consolidated net sales in 2001 and 2000, respectively. Intersegment sales and transfers are not significant. A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is as follows (in millions): NOTES TO Consolidated Financial Statements MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report 2002 2001 2000 The carrying amount of goodwill by reportable Income Before Provision for Taxes On Income and Minority Interests Income from operations segment as of December 31, 2002 and December 31, 2001 was as follows: for reportable segments $ 80.9 $ 80.6 $ 84.8 Goodwill Unallocated corporate expenses Consolidated income from operations Interest income Interest expense Other deductions Income before provision for taxes on income and minority interests — — — Thousands of Dollars 80.9 1.1 (5.8) (0.5) 80.6 0.8 (7.9) (0.8) 84.8 1.1 (5.3) (0.8) Specialty Minerals Refractories Total 2002 2001 $14,637 $ 8,038 35,468 36,654 $51,291 $43,506 MTI 45 The net change in goodwill since January 1, 2002 was primarily attributable to the acquisition of Polar Minerals $ 75.7 $ 72.7 $ 79.8 Inc. in the Specialty Minerals segment and the effect of foreign exchange. 2002 2001 2000 Financial information relating to the Company’s Total Assets operations by geographic area was as follows (in millions): Total segment assets Corporate assets $851.3 48.6 $819.3 28.5 $781.9 17.9 Net Sales 2002 2001 2000 Consolidated total assets $899.9 $847.8 $799.8 United States $482.2 $442.7 $442.7 2002 2001 2000 Capital Expenditures Total segment capital expenditures $ 37.0 $ 62.9 $103.3 Canada/Latin America Europe/Africa Asia Total International 68.5 156.0 46.0 270.5 63.6 129.6 48.5 62.0 116.8 49.4 241.7 228.2 Consolidated total net sales $752.7 $684.4 $670.9 Corporate capital expenditures Consolidated total 0.1 0.2 — Net sales and long-lived assets are attributed to countries and geographic areas based on the location of capital expenditures $ 37.1 $ 63.1 $103.3 the legal entity. No individual foreign country represents more than 10% of consolidated net sales or consolidated The following is a schedule of amortization expense long-lived assets. related to goodwill by segment: Amortization of Goodwill Year Ended December 31, Long-Lived Assets 2002 2001 2000 United States $400.6 $411.1 $387.4 Thousands of Dollars 2002 2001 2000 Specialty Minerals Refractories $ — — $ 373 991 $ 182 298 Canada/Latin America Europe/Africa Asia Total $ — $1,364 $ 480 Total International 21.5 141.3 31.9 194.7 28.5 115.3 31.4 31.2 112.3 37.5 175.2 181.0 Consolidated total long-lived assets $595.3 $586.3 $568.4 QUARTERLY Financial Data (unaudited) MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Thousands of Dollars, Except Per Share Amounts 2002 Quarters Net Sales by Product Line PCC Processed Minerals MTI 46 Specialty Minerals Segment Refractories Segment Consolidated net sales Gross profit Net income Earnings per share: Basic Diluted Market Price Range Per Share of Common Stock: High Low Close First Second Third Fourth $102,876 21,439 $103,320 24,380 $107,562 24,546 $109,230 26,726 124,315 54,685 179,000 45,576 13,543 0.68 0.66 53.91 44.06 52.93 127,700 59,128 186,828 46,166 13,997 0.68 0.67 53.84 49.12 49.32 132,108 60,026 192,134 46,397 14,213 0.70 0.70 48.99 33.17 37.07 135,956 58,762 194,718 45,806 11,999 0.60 0.59 46.07 36.38 43.15 Dividends paid per common share $ 0.025 $ 0.025 $ 0.025 $ 0.025 In the second quarter of 2002, the Company recorded a $0.75 million write-down of impaired assets related to a satellite PCC plant at a paper mill that has ceased operations. Thousands of Dollars, Except Per Share Amounts 2001 Quarters Net Sales by Product Line PCC Processed Minerals Specialty Minerals Segment Refractories Segment Consolidated net sales Gross profit Net income Earnings per share: Basic Diluted Market Price Range Per Share of Common Stock: High Low Close First Second Third Fourth $ 99,669 21,012 $ 97,615 22,955 $ 98,695 22,482 $100,180 20,721 120,681 43,294 163,975 43,499 11,658 0.59 0.58 38.09 31.92 34.89 120,570 50,168 170,738 45,483 10,341 0.53 0.52 43.95 33.62 42.87 121,177 53,734 174,911 46,091 13,591 0.69 0.68 44.78 33.23 37.72 120,901 53,894 174,795 46,821 14,203 0.73 0.71 48.00 35.98 46.64 Dividends paid per common share $ 0.025 $ 0.025 $ 0.025 $ 0.025 In the second quarter of 2001, the Company recorded a $3.4 million restructuring charge. INDEPENDENT Auditors’ Report MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report The Board of Directors and Shareholders Minerals Technologies Inc.: We have audited the accompanying consolidated balance sheet of Minerals Technologies Inc. and subsidiary companies as of December 31, 2002 and 2001 and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated MTI 47 financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Minerals Technologies Inc. and subsidiary companies as of December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in the notes to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No.142, “Goodwill and Other Intangible Assets,” as of January 1, 2002. KPMG LLP New York, New York January 23, 2003 MANAGEMENT’S Statement of Responsibility MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Management’s Responsibility for Financial Statements and System of Internal Control The consolidated financial statements and all related financial information herein are the responsibility of the Company’s management. The financial statements, which include amounts based on judgments, have been prepared in accordance with accounting principles generally accepted in the United States of America. Other financial information MTI 48 in the annual report is consistent with that in the financial statements. The Company maintains a system of internal control over financial reporting, which it believes provides reasonable assurance that transactions are executed in accordance with management’s authorization and are properly recorded, that assets are safeguarded, and that accountability for assets is maintained. Even an effective internal control system, no matter how well designed, has inherent limitations and, therefore, can provide only reasonable assurance with respect to financial statement preparation. The system of internal control is characterized by a control-oriented environment within the Company, which includes written policies and procedures, careful selection and training of personnel, and audits by a professional staff of internal auditors. The Company’s independent accountants have audited and reported on the Company’s consolidated financial statements. Their audits were performed in accordance with auditing standards generally accepted in the United States of America. The Audit Committee of the Board of Directors is composed solely of outside directors. The Audit Committee meets periodically with our independent auditors, internal auditors and management to review accounting, auditing, internal control and financial reporting matters. Recommendations made by the independent auditors and the Company’s internal auditors are considered and appropriate action is taken with respect to these recommendations. Both our independent auditors and internal auditors have free access to the Audit Committee. PAUL R. SAUERACKER Chairman of the Board and Chief Executive Officer JOHN A. SOREL Senior Vice President, Finance and Chief Financial Officer MICHAEL A. CIPOLLA Corporate Controller and Chief Accounting Officer January 23, 2003 DIRECTORS, Committees & Officers Committees of the Board Executive ^ PAUL R. SAUERACKER, Chair JEAN-PAUL VALLÈS JOHN B. CURCIO WILLIAM C. STEERE, JR. MTI 49 Audit MICHAEL F. PASQUALE, Chair DUANE R. DUNHAM STEVEN J. GOLUB KRISTINA M. JOHNSON Compensation and Nominating JOHN B. CURCIO, Chair PAUL M. MEISTER WILLIAM C. STEERE, JR. MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Board of Directors Board of Directors Corporate Officers PAUL R. SAUERACKER + Chairman, President and Chief Executive Officer GORDON S. BORTECK + Vice President, Organization & Human Resources ALAIN BOURUET-AUBERTOT + Senior Vice President and Managing Director, MINTEQ International HOWARD R. CRABTREE + Senior Vice President, Technology and Logistics D. RANDY HARRISON + Vice President and Managing Director, Performance Minerals KENNETH L. MASSIMINE + Senior Vice President and Managing Director, Paper PCC JOHN A. SOREL + Senior Vice President and Chief Financial Officer; Treasurer S. GARRETT GRAY Vice President, General Counsel and Secretary WILLIAM A. KROMBERG Vice President, Taxes MICHAEL A. CIPOLLA Corporate Controller and Chief Accounting Officer PAUL R. SAUERACKER PAUL R. SAUERACKER Chairman of the Board, Chairman of the Board, President and President and Chief Executive Officer Chief Executive Officer JOHN B. CURCIO JOHN B. CURCIO Retired Chairman of the Board Retired Chairman of the Board and Chief Executive Officer, and Chief Executive Officer, Mack Trucks, Inc. Mack Trucks, Inc. DUANE R. DUNHAM DUANE R. DUNHAM Former President Former President and Chief Executive Officer, and Chief Executive Officer, Bethlehem Steel Corporation Bethlehem Steel Corporation STEVEN J. GOLUB STEVEN J. GOLUB Managing Director, Managing Director, Lazard Frères & Co. LLC Lazard Frères & Co. LLC KRISTINA M. JOHNSON KRISTINA M. JOHNSON Dean of the Edmund T. Pratt, Jr. Dean of the Edmund T. Pratt, Jr. School of Engineering, School of Engineering, Duke University Duke University PAUL M. MEISTER PAUL M. MEISTER Vice Chairman of the Board, Vice Chairman of the Board, Fisher Scientific International Inc. Fisher Scientific International Inc. MICHAEL F. PASQUALE MICHAEL F. PASQUALE Business Consultant, Business Consultant, Retired Executive Vice President Retired Executive Vice President and Chief Operating Officer, and Chief Operating Officer, Hershey Foods Corporation Hershey Foods Corporation JOHN T. REID JOHN T. REID Adjunct Professor, Adjunct Professor, Stern Business School, Stern Business School, New York University New York University WILLIAM C. STEERE, JR. WILLIAM C. STEERE, JR. Retired Chairman of the Board Retired Chairman of the Board and Chief Executive Officer, and Chief Executive Officer, Pfizer Inc Pfizer Inc JEAN-PAUL VALLÈS JEAN-PAUL VALLÈS Chairman Emeritus Chairman Emeritus ^ All directors are alternate members of the Executive Committee + Member, Management Committee of the Company INVESTOR Information MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES 2002 Annual Report Stock Listings Annual Meeting Minerals Technologies Common Stock is listed on the The Minerals Technologies Annual Meeting will take New York Stock Exchange under the symbol MTX. place on Thursday, May 22, 2003 at 2 p.m. in Room C on the eleventh floor of the J.P. Morgan Chase & Co. MTI 50 Registrar and Transfer Agent Building, 270 Park Avenue, New York, NY. EQUISERVE, INC. P.O. Box 43011 Providence, RI 02940-3011 Detailed information about the meeting is contained in the Notice of Annual Meeting and Proxy Statement sent with a copy of the Annual Report to each stockholder of record as of March 25, 2003. Inquiries concerning transfer requirements, stock holdings, dividend checks, duplicate mailings, and change of address should be directed to: Investor Relations EQUISERVE, INC. P.O. Box 43011 Providence, RI 02940-3011 Shareholder Inquiries: 1-800-426-5523 www.equiserve.com Form 10-K The Company, upon written request, will provide with- out charge to each stockholder a copy of the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2002, including the financial schedule thereto. The report will be available on or about March 31, 2003. Security analysts and investment professionals should direct their business-related inquiries to: RICK B. HONEY Vice President, Investor Relations/Corporate Communications Minerals Technologies Inc. The Chrysler Building 405 Lexington Avenue New York, NY 10174-1901 212-878-1831 For further information on Minerals Technologies Inc. visit the Company’s website at www.mineralstech.com Requests should be directed to: SECRETARY Minerals Technologies Inc. The Chrysler Building 405 Lexington Avenue New York, NY 10174-1901 Cover photo: Susan Stevens, Project Specialist, Groundwood Printability, in the laboratory at the Company’s research center in Bethlehem, Pennsylvania. This annual report is printed on paper containing PCC produced by Specialty Minerals Inc., a wholly owned subsidiary of Minerals Technologies Inc. Design by Firefly Design + Communications Inc. MINERALS TECHNOLOGIES INC. The Chrysler Building 405 Lexington Avenue New York, NY 10174-1901 www.mineralstech.com MLTCM-AR-03