LEADING MTI FACING THE CHALLENGE EVERY DAY M i n e r a l s T e c h n o l o g i e s I n c . 2 0 0 3 A n n u a l R e p o r t MINERALS TECHNOLOGIES INC. The Chrysler Building 405 Lexington Avenue New York, NY 10174-1901 www.mineralstech.com MLTCM-AR-04 Minerals Technologies Inc. 2003 Annual Report 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. Millions of Dollars, Except Per Share Data December 31, 2003 December 31, 2002 Net sales Specialty Minerals Segment PCC Products Processed Minerals Products Refractories Segment $813.7 557.1 436.1 121.0 256.6 Operating income before restructuring and impairment of assets Operating income Net income Earnings per share: Basic Diluted Research and development expenses Depreciation and depletion Capital expenditures and acquisitions Net cash provided by operating activities 83.7 77.2 63.2 3.13 3.09 25.1 66.3 54.7 $752.7 520.1 423.0 97.1 232.6 81.6 80.9 53.8 2.66 2.61 22.7 69.0 71.2 100.1 117.8 Number of shareholders of record Number of employees 212 2,425 212 2,374 Table of Contents: Letter to Shareholders .....................................................................................2 PCC ...............................................................................................................6 Refractories .....................................................................................................9 Processed Minerals........................................................................................12 Research and Development...........................................................................15 Management’s Discussion and Analysis.........................................................18 Selected Financial Data.................................................................................28 Consolidated Financial Statements ...............................................................29 Quarterly Financial Data ..............................................................................50 Independent Auditors’ Report.......................................................................51 Management’s Statement of Responsibility ...................................................52 Directors, Committees and Officers .............................................................53 Investor Information ..........................................................................................54 2003 Net Sales by Product Line Percentage / In Millions of Dollars 2003 Sales by Geographic Area Percentage / In Millions of Dollars C B A D C B A A. 53.6% PCC Products: $436.1 (Specialty Minerals Segment) B. 31.5% Refractory Products: $256.6 (Refractories Segment) A. 61.4% United States: $499.9 B. 23.7% Europe /Africa: $192.6 C. 8.9% Canada/Latin America: $72.4 C. 14.9% Processed Minerals Products: $121.0 (Specialty Minerals Segment) D. 6.0% Asia: $48.8 1 Total Worldwide Net Sales (in Millions) C H A I R M A N ’ S L E T T E R $850 $750 $650 $550 $450 $813.7 Dear MTI investor: ‘99 ‘00 ‘01 ‘02 ‘03 Above: the MTI Management Committee, from left: Kenneth L. Massimine, Senior Vice President and Managing Director, Paper PCC; Alain Bouruet-Aubertot, Senior Vice President and Managing Director, MINTEQ International; John A. Sorel, Senior Vice President and Chief Financial Officer; Gordon S. Borteck, Vice President, Organization and Human Resources; Howard R. Crabtree, Senior Vice President, Technology and Logistics; D. Randy Harrison, Vice President and Managing Director, Performance Minerals; and S. Garrett Gray, Vice President, General Counsel and Secretary 2 I believe it is important for our shareholders to understand that today we are operating our businesses in a totally different environment than we operated in the 1990s. Permanent changes have taken place in the marketplace, and we have had to adjust to those changes. The theme of this year’s annual report is Leadership, and in these pages, we cite some of the people at MTI who have been in the forefront in meeting the challenges presented by this new business environment. The manufacturing sector of the United States has undergone a structural change; and that change is most evident in the end markets that Minerals Technologies serves—the paper and steel industries. Since mid-2000, when a sharp slowdown in the United States economy created a subsequent downturn in global growth, we have seen the worldwide paper industry consolidate and shut down inefficient capacity; we have seen literally dozens of steel companies seek bankruptcy protection or close their doors. In the early 1990s, approximately 60 major paper companies were in operation worldwide; today, there are 13 truly global companies. In the United States alone, 45 steel makers have declared bankruptcy since 1998. Needless to say, it has been a difficult period for us when our Despite the uncertain economic conditions in the paper and steel industries, we have a number of strategies and programs that will enable us to continue to grow this company. major customers are in such turmoil. This downturn, however, is not simply part of the business cycle for paper and steel. We are faced with what I call a permanent disruption in the marketplace. I do not believe we will ever again see the levels of paper and steel production in the United States that we saw in 1999 and 2000. And, despite the recent pronouncements of resurgence in the manufacturing sector, we have not yet seen a significant upturn in paper or steel. But all is not doom and gloom. During this time, although our growth rate has declined and is below our stated objectives, MTI has continued to grow. It has been a difficult period, but we have fared better than most companies in our peer group because our people are capable of adjusting to change. Paul R. Saueracker Chairman, President and CEO We have reduced costs and improved operating efficiencies; and, we have made a number of organizational changes to place the right people in the right positions. I also believe that we have the right strategies and programs in place to ensure the future growth of our company. Before discussing these strategies, let’s take a look at our financial performance for 2003. Worldwide sales for the full year were $813.7 million, an 8-percent increase over the $752.7 million reported in 2002. Foreign exchange had a favorable impact on sales of $32.6 million or 4 percentage points of growth. Our operating income for 2003 was $77.2 million, a 5-percent decrease from $80.9 million the previous year. Our operating income as a percentage of sales declined from 10.7 percent in 2002 to 9.5 percent in 2003. 3 C H A I R M A N ’ S L E T T E R However, a number of factors complicate our results. Excluding charges for restructuring and asset impairments, operating income was $83.7 million, a 4-percent increase over 2002, reflecting the operational changes we made to improve profitability in these challenging times. Additionally, primarily as a result of a favorable tax adjustment, net income for the full year increased 18 percent in 2003 to $63.2 million compared with $53.8 million in the prior year, and diluted earnings per common share increased 18 percent to $3.09 compared with $2.61 in 2002. In the first quarter of 2003, we adopted an accounting change related to retirement obligations associated with our satellite PCC facilities and mining properties. Income before the cumulative effect of the accounting change, including the reversal of tax accruals, increased 24 percent to $66.7 million from $53.8 million. Diluted earnings per share before the cumulative effect of the accounting change were $3.26, a 25-percent increase over the previous year. Earnings per share were affected by the cumulative effect of the accounting change ($0.17 per share); the restruc- turing charges ($0.19 per share); and the favorable tax adjustment ($0.73 per share). Excluding these items, earnings per share grew 4 percent. Our growth in profitability, however, was limited by higher employee benefit costs, particularly pension and medical expenses, higher costs associated with the implementation of a new information technology system and increased provisions for bad debt. Looking at our product lines, volumes of PCC for paper, our largest business, increased slightly for the year, remaining above 3.4 million tons. Our PCC volumes were affected by paper mill shutdowns, curtailments in production and the temporary shutdown of our satellite PCC facility at a paper mill in Millinocket, Maine. This paper mill, when owned by Great Northern Paper Inc., filed for bankruptcy protection in the fourth quarter of 2002. Katahdin Paper Company, the new owner, expects to resume operation of the mill during 2004. In the fourth quarter, we began operation of a satellite PCC plant at a paper mill in Sipitang, Sabah, Malaysia, owned by Sabah Forest Industries Sdn.Bhd., which will produce approximately 30,000 tons of PCC annually. Today, we operate 54 satellite PCC plants in 17 countries. Our Specialty PCC product line continued to show weakness as a result of poor industry conditions and competition in the calcium supplement market. Processed Minerals products turned in a solid performance with a 25-percent increase in sales for the year, which was primarily the result of the September 2002 acquisition of Polar Minerals Inc., a producer of industrial minerals in the Midwest United States. Sales for the full year for the Refractories segment increased 10 percent over 2002, which was attributable primarily to increased sales of equipment and application systems in Europe and the strong Euro. Despite the uncertain economic conditions in the paper and steel industries, we have a number of strategies and programs that will enable us to continue to grow this company. As a research-based growth company, the development of new products is our foundation, and we will continue to seek innovative products and services that will add value for our customers. During 2004, we will increase our research expenditures by more than 10 percent. This additional funding will primarily support our efforts in the area of filler-fiber composite material technology for paper filling and in our SYNSIL® Products for the glass industry. In May of 2003, we reached a two-part agreement with International Paper Company to extend eight satellite PCC plant supply contracts and to initiate joint efforts to develop new mineral-based products for papermaking applications—filler-fiber composite material. Both MTI and International Paper are committed to developing this technology, which has the potential to double the amount of PCC used for filling paper, thereby providing significant economic benefits to both companies. 4 C H A I R M A N ’ S L E T T E R In the fourth quarter of 2003, we signed our first commercial contract with a major glass manufacturer for SYNSIL® products, our family of synthetic silicates for the glass industry. We are confident that we will soon sign a second contract with that same company at a different production location, further confirming the value of the product. We continue to run trials with other glass manufacturers and the body of evidence is building to support the use of SYNSIL® products as an alternative to partially replace the conventional raw materials used in glass manufacturing. In Paper PCC, we are investing heavily in our effort to penetrate the pigment market for paper coating. We estimate that approximately 16 million tons of pigment—mostly ground calcium carbonate and kaolin clays—are used to coat paper worldwide. PCC has a very small percentage of that market. We are now constructing a large merchant coating-grade PCC facility at Walsum, Germany, in order to service the growing European market for coated paper. Qualification trials of MTI’s product are proceeding, supplied from our Hermalle, Belgium, facility, to develop an immediate base load for the Walsum plant when it comes on stream in September 2004. Also, we continue to move forward with our strategy to increase PCC use in groundwood papers, which represent a major market for us. I am also confident that we will sign contracts for additional satellite PCC plants during the year. In the Refractories segment, because the majority of our business is in North America, where steel production is declining, it is imperative that we change the way we do business. We have a number of strategies to accomplish this. During 2004, we will broaden our geographic scope and accelerate our market development efforts in China. We will introduce new monolithic refractory products and integrated systems that help steel makers eliminate costly installation labor. We are expanding the classic concept of the refractories business to include a large component of high technology measurement and control devices aimed at the high-temperature processing areas where our materials are now used. In January of this year, we announced an increase in our dividend rate—from 10 cents a year to 20 cents a year. We decided this was an appropriate time to benefit our shareholders, given our strong cash position, the growth we have achieved since 1992 and our confidence in our future profitable growth. Looking ahead, the economic picture for the paper and steel industries remains clouded. The foundation of our business, however, remains solid. We are hopeful that as the U.S. economy finally gains momentum, the manufacturing sector will pick up speed and accelerate throughout 2004. Over the last several months, one member of MTI’s Board of Directors elected to step down and another elected not to stand for reelection. William C. Steere, Jr., former chairman of Pfizer Inc, who had been on our board from the outset in 1992, resigned for personal reasons at the end of 2003. Paul M. Meister, Vice Chairman of the Board of Fisher Scientific International Inc., who was elected a board member in 1997, has decided not to stand for reelection at the Company’s annual meeting in May. I want to wish them well and express my gratitude to both of them for their hard work and dedication over the years. In conclusion, I would like to thank our shareholders for the confidence they have placed in MTI, our customers for selecting us as a preferred supplier, and our employees, who have demonstrated leadership and ingenuity by remaining focused and skillfully executing our strategies during these difficult economic times. Paul R. Saueracker Chairman, President and Chief Executive Officer 5 PA PE R P CC In many ways Minerals Technologies is uniquely positioned to capitalize on the changing marketplace...creating the framework for solid growth opportunities. First, a reality check…the papermaking landscape has changed. Although global production of printing and writing paper continues to grow, the rate of that growth has slowed from about 4 percent in the early 1990s to just over 1 percent today. For example, during the past decade, industry contractions and consolidations have shrunk the capacity to produce these papers in North America by 5 percent with a resulting loss of over 1.5 million tons of capacity. This has directly affected MTI’s ability to market PCC, which has forced the closure of several of the Company’s North American PCC satellite plants. Production continues to shift away from North America, with the newest, highest-output machinery being installed in other parts of the world, particularly in China. Further, the rapid conversion to alkaline papermaking, especially in the production of uncoated free sheet, which supported construction of a steady number of satellite plants throughout the 1990s, has reached maturity and leveled out. No longer able to ride the crest of a genuine revolution, the Company faces the task of trying to accelerate evolution. PCC: The Art of the Sale Laura Landau Director of Sales, Paper PCC-North America In December of 2003, Laura Landau became responsible for sales of the domestic paper PCC business and the 12 individuals who guide that sales effort. “I think I've demonstrated the ability to generate growth,” she said. “I don’t follow a ‘to-do’ list for the day. I’m always trying to look at the big picture, and I'm open about my opinions on things. I don’t worry too much about how my opinions about the business, expressed respectfully, will affect my fate. Our leadership is receptive to new ideas.” 6 Pushing PCC Worldwide Director, Global Paper Filling-R&D Ari-Pekka Laakso Ari-Pekka Laakso symbolizes the Company’s reach and commitment to worldwide industry leadership. From a home base in Finland, Laakso supervises the development of the Company’s cutting-edge initiatives in the global paper market. “Ari-Pekka is now managing the entire R&D paper filling effort worldwide,” said Kenneth Massimine, Senior Vice President and Managing Director, Paper PCC. “Not only is he well- grounded scientifically, but he’s adept at creating a sense of partnership with customers.” Laakso plays a key role in the development of acid-free technology and the Company’s ongoing efforts to address environmental issues. “There is no way to overstate the impact of all this,” said Kenneth L. Massimine, Senior Vice President and Managing Director, Paper PCC. “We face a tough competitive and market environment. The key focus is on cost reduction by the paper manufacturers. It is now paramount that we demonstrate our ability to supply value-added products and services.” Now, some good news. In many ways Minerals Technologies is uniquely positioned to capitalize on the changing marketplace, with the disruptions in the paper market creating the framework for solid growth opportunities. “I see 2004 as a year of commercialization of new products now in development and trials,” said Massimine. The effort will rely heavily on R&D, with its pipeline of new and enhanced products that offer built-in cost-efficiencies for the paper mill. However, new products bring new complexities as well. For example, while PCC filler technology saves customers money by allowing them to substitute higher levels of mineral for costly wood pulp, those higher filler levels create a different set of papermaking dynamics that may affect paper runnability, printability, and ultimately a host of other paper characteristics. The company has an enviable track record of partnering successfully with paper customers to resolve such production issues. That is why Massimine emphasizes the importance of maintaining business relationships characterized by vision and trust, wherein the Company’s sales and marketing personnel make an all-out effort to ensure that MTI is in lockstep with paper companies as they pursue their own sales visions. “We recognize that our success depends upon building a working relation- ship with these paper companies,” he said. “When you’re selling in a world of value-added, 7 you can’t let it come down to your price versus your competitor’s. The ability to market a higher level technological message becomes all-important.” Custom-engineered PCC, as opposed to naturally derived minerals, offers the papermaker the most flexibility with the maximum in cost savings. Incremental refinements in the Company’s groundwood program are ongoing, with excellent potential for sales growth in North America as well as in the huge European market for supercalendared paper. “We’re also starting to see the Nordic countries more interested in what PCC can bring them, value-wise,” said Massimine. Promising enhancements in the Company’s coating platform are on the near horizon as well. MTI’s new $34.5 million plant in Walsum, Germany, is designed to yield 125,000 tons of coating grade PCC annually. Work also continues on technology for filler-fiber composites, which could significantly enhance the percentage of filler in paper. As elsewhere in the MTI system, a December reorganization addressed Paper PCC’s evolving role in the new global marketplace, with numerous changes in reporting lines and several positions created to better execute global strategies on a regional basis. But equally important from a leadership standpoint, said Massimine, was his intent of giving veteran personnel fresh challenges. “You want your people to be able to improve both their depth and breadth,” said Massimine. “That’s how you create the leaders of the future.” Expecting Peak Performance Vice President, North America, Paper PCC D.J. Monagle Recently promoted to lead the North American Paper PCC business, D.J. Monagle “appreciated quickly what was required to ensure our long term business success,” said Kenneth Massimine, Senior Vice President and Managing Director, Paper PCC. “He helped create an improved sense of common purpose.” Monagle said he feels obligated to the shareholders in two areas—fostering a “culture of peak performance where we challenge the status quo” and “driving value by providing customers with the flexibility to either improve current product quality or reduce costs at current quality levels.” 8 R E F R AC TO R I E S MINTEQ positions itself for success through focused product development and a customer-partnership approach...we are a key resource to the industries we serve. For MINTEQ International Inc., the Refractories segment of MTI—which develops and markets monolithic refractory materials and associated systems for use primarily by the steel industry— leadership means anticipating, adapting to, and capitalizing upon changes in customer industries that create opportunities for growth. If asked to name an industry that has increased production more than 20 percent in 2002 and 2003, most people would not think of steel. Yet, the Chinese steel industry has expanded at that rate and offers the prospect of continued high growth as the country goes through an extended industrializa- tion phase. Today, China produces more steel than the US and Japan combined. Over the past year MINTEQ has put into place a centrally coordinated global strategy and organization. As a result, “Minteq is prepared to move with the market,” said Alain Bouruet-Aubertot, Senior Vice President and Managing Director, MINTEQ International. “We are investing and reallocating resources to Asia and the developing regions accordingly. Today, MINTEQ operates in 41 markets worldwide and has 19 manufacturing sites.” “Success today is based on who brings added value to the customer,” said John Damiano, Vice President of Research and Development, MINTEQ. “We stretch the envelope in terms of the ways we can reduce costs for our steel customers. For example, we have competitors who supply both refractory materials and an application system. But we supply products that are up to four times more durable as well as application equipment that is faster, safer, and more precise, which reduces the amount of time a steel furnace is not producing steel. We are not just selling materials. We sell a value package that includes time, labor savings, increased production and lower cost—all critical to the survivors in today’s consolidating steel industry.” “MINTEQ positions itself for success through focused product development and a customer-partnership approach that allocates our resources to areas of immediate commercial concern to our customer,” said Damiano. “In bringing our technology to bear worldwide we have taken the lead in becoming a key resource to the industries we serve. We’ll work with them at optimizing their product. And we’re always thinking ahead in the lab, integrating the latest developments in ceramics, chemistry, sensing and application technology.” 9 Embattled steel makers have been shifting the burden of R&D to suppliers for some time now, there’s no question that the trend will continue to intensify. “For us, that’s another form of opportunity,” said Christian Wahsmut, Vice President, Europe. “They need help, and we're there to help.” The history of MINTEQ’S landmark SCANTROL® system is a good example of how step-by-step execution of a sound technology strategy was able to yield a major advance in steel mill maintenance practices. In 2001, the Company’s MINSCAN™ robotic manipulator for Offering a Smarter Solution Sales and Marketing Manager for MINTEQ-Benelux Etienne Castiaux As Sales and Marketing Manager for the Benelux countries and France, Etienne Castiaux must grapple with a turbulence in the European steel industry that, for example, has left the French market with only two major steel producers. “The refractory gunning business is no longer the business it was—one of long-established relationships,” said Castiaux. “To be successful, we need to offer something our competitors do not—technical know-how and the ways you can help them operate their business more efficiently. And MINTEQ is doing that today with our new products and application systems.” application of refractory materials had already been in use for a few years. In March 2001, the Company acquired Ferrotron Electronik, whose two-year-old LaCam® laser-measurement system eliminated guesswork in determining how much refractory remained in a steel-making vessel. It accurately measured a typical refractory lining in just 20 seconds, compared to 20 minutes for other laser technology. With those two basic pieces in place, the Company set about developing an interface module that would enable LaCam to guide MINSCAN™ operations. The result—the SCANTROL™ fully automated refractory maintenance system—demonstrated through a pilot program at Edestahlwerke Buderus AG in Germany that significant customer value could be created through a system that reduced maintenance, labor, and downtime while increasing steel throughput. It enables steel makers to maintain a uniform, near-constant thickness of residual furnace linings while reducing the risk of costly and dangerous breakouts. By its nature, the system promotes an ongoing demand for MINTEQ’S monolithic refractory materials that are applied through the system. With about 80 percent of steel makers still using manual application of refractory materials, “the market potential for automation systems like SCANTROL™ is enormous,” said Wahsmut. 10 Refractories: The SCANTROL™ System In 2002, MINTEQ introduced a revolutionary technology to the steel industry—the SCANTROL™ laser refractory measuring system. This system combined state-of-the-art laser measuring technology with a robotic manipulator to become the world’s first fully automated module for measuring, evaluating and repairing factory linings in high-temperature steel-making vessels. The SCANTROL™ system measures and repairs a furnace in about five minutes, which provides the steel maker with improved productivity, adding value to the steel-making process. The goal is replace refractory brick (an almost archaeological material from MINTEQ’S perspective) with faster, easier to install monolithic linings. Shotcrete products for various applications, notably steel ladles and reheat furnaces with the durability of brick, are now being promoted actively. Moreover, the Company is pursuing the systems approach that it developed for steel for use in non-steel refractory applications. As efficiencies in cost, time and productivity become ever more critical to the steel and other manufacturing industries, they create additional opportunities for MINTEQ to expand the scope of it business. “Our innovative approach of coupling materials and equipment will continue to help us open doors in high-temperature processing applications, and to create new opportunities for growth,” said Bouruet-Aubertot. The Ultimate Challenge: Change Jim Reid Director, South East Asian Operations In his quarter-century with the company, Jim Reid has seen a lot of change in markets and technologies, and has had to master the fine art of adapting to all of it. “I believe that leadership in a business like this requires thorough market understanding and the willingness to evaluate, change, and control the organization as necessary.” Jim has been instrumental in reorganizing Minteq’s Japanese operations to better suit new marketplace realities. 11 P RO C E S S E D M I N E R A L S The companies that succeed today are the ones planning proactively for the realities of tomorrow. It takes no special skill set to make the easy, sure moves. But leadership often involves making tough and sometimes unpopular choices—the business equivalent of passing up the bird in hand for the two that, your homework says, lay hidden in the bush. Such decisions must be based on unswerving commitment to growing the Company’s revenue and profitability. As Randy Harrison, Vice President and Managing Director, Performance Minerals, puts it, “It requires proactive thinking about where you want to go, staying true to your beliefs, managing through the obstacles and minimizing the propensity to react to just to what the market gives you.” Harrison oversees Processed Minerals, which mines processes and sells mineral products, primarily ground calcium carbonate and talc. This approach was more than just a philosophical concept in 2003. It is a process the Company’s unit is adapting and is focused on for 2004 and beyond. “Historically we’ve been quite successful at reacting and focusing resources on immediate situations or opportunities,” said Harrison. “But we need to better position ourselves for what’s coming, as the markets of yesterday are not the ones we will work in tomorrow. It is, whether one likes it or not, a global economy that we compete in today. Take plastics for example. The polyvinyl chloride or PVC business in North America has been an attractive market for Processed Minerals for several years. But now this sector, although still sizeable, is showing increasing signs of relocating to Asia, principally China.” What are the possible solutions? Clearly, one is to follow the PVC market to Asia “and that is just what we are evaluating” says Harrison. “The Asian Processed Minerals: FLEXTALC® Products In 2002, to penetrate the plastics market in the Midwest, MTI acquired Polar Minerals Inc., which had minerals processing plants in Indiana and Ohio, By combining Polar’s technology with Specialty Minerals know how, the Company developed FLEXTALC® products—a family of ultrafine, densified talc for use in polypropylene. In late 2003, MTI expanded the Indiana processing facility to produce FLEXTALC® products for use in the automotive industry. The plant has been sold out since. 12 market, especially China, offers a number of interesting avenues for growth, but things are changing rapidly there so we need to be prudent about how we enter the market. “ Plastics, however, are more to the Processed Minerals business than just PVC. The Company has been successful with its anti-block talc products in polyethylene and more recently with newly developed talc products for polypropylene. “This Company developed a number of the original talc applications for polypropylene reinforcement,” Harrison said. “But with all our plants on the East and West coasts, we never got the full benefit because we didn’t have a presence in the Midwest.” Minerals Technologies addressed this competitive weakness through the acquisition of Polar Minerals in 2002, which facilitated an aggressive marketing and sales campaign on the so-called polypropylene corridor that runs along I-65 in America’s industrial heartland. Last December’s restructuring reflects a top-to-bottom attempt to infuse the product line with similar vision. Harrison broke marketing out of the single reporting arm it had shared with sales. “Marketing is strategic, sales is tactical,” said Harrison. “There really wasn’t enough true marketing being done because their efforts were focused on the immediate solution. We had to get marketing to focus on the strategic piece.” In the same vein, a new post, Director of Manufacturing, was created to tackle long-range issues and opportunities for current as well as future manufacturing plants. Harrison explains, “We have a very solid group of plant managers who can manage their day-to-day operations effectively. This position was established to work on setting long-term manufacturing strategy.” Doing What Needs to be Done Kevin Porterfield Director, Global Sales and Distribution, Performance Minerals “Boundless enthusiasm” and “unbridled optimism” are phrases commonly used in describing Kevin Porterfield. Said Randy Harrison, Vice President and Managing Director, Performance Minerals, “Kevin puts in the hours, he never asks people to do anything he won’t do himself, he keeps a can-do attitude, and he doesn’t get down easily. Kevin leads by example, and as a result, people want to produce for him.” 13 Meeting New Challenges Doug Mayger Director of Sales, Western Region It was a tribute to Doug Mayger’s overall leadership when the Company recently took the unusual step of placing him in charge of sales for the Western Region in addition to his ongoing duties as Plant Manager for the Lucerne Valley, California, facility. Mayger himself explains, “There’s always natural conflict between sales and operations, but if you listen to both sides and act fairly — and everybody knows you’re trying to do what’s best for the business—then people take their cues from you.” The Company also announced the formation of a Performance Minerals Management Team that will work toward improved strategic implementation, focused allocation of resources to achieve business goals, and increased align- ment with other corporate functions. “To ensure that customers are satisfied and will give you repeat business, you must have multiple disciplines involved in the business. Everyone has something to contribute,” Said Harrison. Going forward, the Processed Minerals’ culture will emphasize this kind of empowered, holistic thinking throughout the system and the hierarchy. “I’ve seen people who try to manage from a desk by giving a lot of orders,” said Harrison. “That’s not leadership. Don’t expect your people to do what you wouldn’t go out and do yourself.” In 2004 and 2005, the Company looks for Processed Minerals’ strategic clarity and more energized outlook to lay the groundwork for growth in the consumer market, especially in food fortification with low-lead GCC products. Another promising area is the build-and-construction portion of the GCC market. Processed Mineral’s housing-related business is concen- trated in Southern California and the northeast. Though results in the northeast likely will be a straight-line function of the economy and its many variables, the omens seem more predictably good for California. Long-term demographics project the state as the beneficiary of a 16 million-person migration over the next decade. Harrison cites the California construction opportunity as an obvious but compelling example of long-term thinking rooted in reliable contextual data. “The companies that succeed today,” he said, “are the ones planning proactively for the realities of tomorrow.” 14 R E S E A RC H & D EV E LO P M E N T MTI’s overall R&D effort... has quite literally helped drive and shape the evolution of the primary industries it serves: paper and steel. In the decade since MTI became an independent entity, R&D has served as an identifying corporate hallmark. “R&D is a keynote for us and a major point of differentiation from our competitors,” said John Damiano, Vice President of Research and Development, MINTEQ International Inc., the subsidiary that produces refractory products. “It starts with the mission statement and runs through all aspects of operations.” Not only has MTI’s overall R&D effort better equipped its sales force to succeed in an ever-more-competitive world, but it has helped drive and shape the evolution of the primary industries it serves: paper and steel. “R&D quite literally requires an ability to shape the future,” said Dr. Robert Moskaitis, Vice President of Research and Development, Specialty Minerals. “It requires people with vision and leadership. Because there is going to be a 2007, a 2008, a 2009.” Preparing for that future is the core mission of the 160 employees who staff the Company’s R&D facilities in Bethlehem and Easton, Pennsylvania, Finland, Ireland, and Japan. Historically, MTI has outpaced its competitors in research spending, averaging between 3 and 4 percent of sales. The Company held that line in 2003 in an environment that had much of industry thinking no farther than next quarter. This unwavering commitment to R&D translates to more than 425 patents that MTI owns outright or has proprietary use of, and an additional 671 trademarks. Prominent among the R&D yield are AT® PCC for use in acid papermaking PCC: Filler-Fiber Composite Technology To be more competitive, paper companies worldwide continue to search for ways to reduce the amount of expensive pulp in their paper. One method is to increase the level of fillers like precipitated calcium carbonate (PCC). In May 2003, MTI acquired an exclusive license from International Paper Company for patented technology on increasing mineral filler levels. The two companies are committed to developing a new filler-fiber composite material that has the potential to double the amount of PCC in paper. 15 environments; and OPACARB® PCC crystal morphologies for coating paper. For the Refractories segment: the SEQUAD® sprayer; MAG-O-STAR® spray-on coating; MINSCAN™ and SCANTROL™ application systems; and OPTISHOT™ Shotcrete. And R&D also invented and developed the SYNSIL® Products family of synthetic silicates for the glass industry. MTI’s visionary, leadership-based model of R&D is evident in many areas: (cid:1) A willingness to go against the grain. “When we first proposed using calcium carbonate in an acid papermaking environment, people told us, ‘You can’t do that,’” said Moskaitis. “Now we have a growing multi-million-dollar business, and the industry itself has felt the impact.” As a model of best-practices research—and unwavering focus on the end-user— AT® PCC embodies an approach the Company seeks to clone in other areas. (cid:1) A commitment to funding efforts that may lack immediate profit implications, but may also change the very nature of the playing field. Undaunted by the problematic market conditions of 2002, MTI unveiled Discovery Research with the goal of conceiving products, presently connected to existing business lines, that have a disruptive, game-changing effect on the market. In this category is SYNSIL® Products technology, a family of synthetic silicate minerals that, in glass production, lower melting temperatures, reduce energy requirements, cut emissions, and provide improved integration of raw materials. (cid:1) Allowing people to grow and develop in their work. Moskaitis cites SYNSIL® technical manager John Hockman as a living example of the Company’s emphasis on productivity first: “John is one of the inventors of our SYNSIL® Products family of synthetic silicates for the glass industry. He’s a natural leader, and an innovator.” Creative Driver John Hockman, Technical Manager, SYNSIL® Products Of SYNSIL® products Technical Manager John Hockman, Robert Moskaitis, Vice President, R&D, Specialty Minerals, said, “John represents the lesson that there are no boundaries on advancement in this Company. John is one of the principal inventors of the SYNSIL® Products family of synthetic silicates that could revolutionize the way glass is made. His intelligence and creativity and drive to succeed are what have made him successful. His job requires him not just to innovate but to be innovative. And he’s doing that in spades.” 16 A Thirst for Exploration Joann Foster, Technical Manager, Performance Minerals “Joann brings unique viewpoints and creative opinion as well as a tireless will for exploration,” is how Robert Moskaitis, Vice President, R&D, Specialty Minerals, describes Joann Foster, Technical Manager, Performance Minerals. Joann’s forte is her work with different particle sizes and morphologies of PCC in food research. (cid:1) A determination to partner with customers. As industries served by MTI continue to retrench in their own R&D commitments, they become more dependent on outside innovation. This creates opportunities for the Company to become more deeply involved in the customer’s business plan. A textbook example of this synergistic relationship is the SCANTROL™ automatic refractory-maintenance system, which proved itself during a pilot program with Buderus Edestahl and now, at rollout, “creates a true ongoing partnership between Minteq and steel makers in a way that hasn’t existed before,” said Damiano. Similarly, the OPTIBLOC® clarity antiblock, developed in 1997, was fine-tuned in a joint program with ExxonMobil Corporation the following year, and in 2000 became the basis of a joint advertising campaign with ExxonMobil. Finally, amid a business landscape where everything is increasingly interconnected, MTI places unique emphasis on multidisciplinary skills. Today, some of the Company’s key R&D employees also serve on business-development teams, while others devote considerable energy to presenting keynote papers to technological panels or working as liaisons to wider industry. “R&D doesn’t, or shouldn’t, happen in a vacuum,” said Moskaitis. “This is how you empower people with a sense of ownership. It’s also how you move whole industries forward.” 17 Management’s Discussion and Analysis Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Income and Expense Items as a Percentage of Net Sales after increasing 8% from 2001 to 2002, increased a further 18% in Year Ended December 31, 2003 2002 2001 2003, primarily because of a one-time reduction in our effective tax rate from about 26.7% to about 5.7%. Net sales Cost of goods sold 100.0% 100.0% 100.0% 75.7 75.5 9.9 3.0 0.8 – 0.1 73.4 10.3 3.4 0.6 0.5 – The comparison of our operating income and net income in the past three years has been affected by a number of factors: (cid:1) In 2001, we recorded restructuring charges of approximately $3.4 million for workforce reductions; (cid:1) In 2002, we recorded an impairment charge of $0.8 million related to a satellite PCC plant at a paper mill which was 10.7 11.8 permanently shut down; 10.0 10.6 Obligations,” in the first quarter of 2003, which resulted in a (cid:1) We adopted SFAS No. 143, “Accounting for Asset Retirement Marketing and administrative expenses 10.3 Research and development expenses Bad debt expenses Restructuring charges Write-down of impaired assets Income from operations Income before provision for taxes on income and minority interests Provision for taxes on income Minority interests Income before cumulative effect of accounting change 3.1 0.6 0.4 0.4 9.5 8.9 0.5 0.2 8.2 Cumulative effect of accounting change 0.4 2.7 0.2 7.1 – 3.1 0.2 7.3 – Net income 7.8% 7.1% 7.3% Executive Summary At Minerals Technologies, more than 85% of our sales are to customers in two industries: papermaking and steelmaking. The economic downturn of the past three years has had severe effects on the paper industry, by far our largest customer group, as paper mills have closed or taken significant downtime and the industry has consolidated. The effect on the steel industry has been even more dramatic, with several large steelmakers having sought bankruptcy protection. Although the overall economy began to improve in late 2003 and early 2004, the paper and steel industries have been slow to participate in the recovery, and have reduced their output while maintaining pricing pressure on their suppliers. Even in this very difficult business environment, our sales increased by 8% from 2002 to 2003, about half of this increase being the favorable effect of foreign exchange. This was despite the loss of approximately 10 customers to bankruptcy, and the effect of an agreement with our largest customer, International Paper, which reduced our sales in the short run, but which we believe will add significant value over the next several years. Our operating income, essentially flat from 2001 to 2002, decreased in 2003 by 5% as a result of charges taken for work- force reductions and asset impairments. Our net income, however, 18 charge to earnings of about $3.4 million, net of tax and annual ongoing costs of approximately $0.04 per share; (cid:1) Because of the expiration of the statute of limitations on our U.S. tax returns, we reversed certain tax accruals for earlier years, increasing our net income in 2003 by about $15 million; (cid:1) The impact of the revisions to the International Paper contracts reduced earnings by approximately $0.12 per share in 2003; (cid:1) In the fourth quarter of 2003, we recorded charges relating to a reduction of approximately 3% in our worldwide workforce; the planned closure of the facility at River Rouge, Michigan, which we acquired in 2001 as part of the refractory business of Martin Marietta Materials; and the retirement of some SYNSIL® product manufacturing assets, which had been made obsolete by improvements in the production process. The total effect was to reduce pretax income by about $6.5 million. We face some significant risks and challenges in the future: (cid:1) Our success depends in part on the performance of the industries we serve, particularly papermaking and steelmaking. Our customers continue to face a very difficult business environment, and may experience further shutdowns or bankruptcies; (cid:1) The recent wave of consolidations in the paper and steel industries concentrates purchasing power in the hands of fewer customers, increasing pricing pressure on suppliers such as MTI; (cid:1) Most of our PCC sales are under long-term contracts with paper companies at whose mills we operate satellite PCC plants; when they reach their expiration dates these contracts may not be renewed, or may be renewed on terms less favorable to us; (cid:1) The cost of employee benefits, particularly health insurance and pension expense, has risen significantly in recent years and continues to do so; Management’s Discussion and Analysis Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report (cid:1) Although the SYNSIL® products family has produced favorable (cid:1) Increasing our sales of PCC for paper coating, particularly from reactions from potential customers and we have signed one the coating PCC facility under construction in Walsum, Germany, supply contract, this product line is not yet profitable and its which we expect will be completed in September 2004; commercial viability cannot be assured; and (cid:1) Continuing research and development activities for new products, (cid:1) As we expand our operations abroad we face the inherent risks in particular our joint project with International Paper to develop of doing business in many foreign countries, including foreign and implement a filler-fiber composite technology; exchange risk, import and export restrictions, and security concerns. (cid:1) Achieving market acceptance of the SYNSIL® family of synthetic Despite these difficulties, we are optimistic about the opportunities (cid:1) Increase market penetration in the Refractories segment through for continued growth that are open to us, including: higher-value specialty products and application systems. (cid:1) Increasing our sales of PCC for paper by further penetration of the markets for paper filling at both free sheet and groundwood mills; However, there can be no assurance that we will achieve success in implementing any one or more of these opportunities. silicate materials for the glass industry; Results of Operations Sales Net Sales Dollars in Millions U.S. International PCC Products Processed Minerals Products Specialty Minerals Segment Refractories Segment % of Total Sales 61.4% 38.6% 53.6% 14.9% 68.5% 31.5% 2003 $499.9 $313.8 $436.1 $121.0 $557.1 $256.6 Growth 2002 3.7% 16.0% 3.1% 24.6% 7.1% 10.3% $482.2 $270.5 $423.0 $097.1 $520.1 $232.6 % of Total Sales 64.1% 35.9% 56.2% 12.9% 69.1% 30.9% Growth 2001 8.9% 11.9% 6.8% 11.4% 7.6% 15.7% $442.7 $241.7 $396.1 $087.2 $483.3 $201.1 % of Total Sales 64.7% 35.3% 57.9% 12.7% 70.6% 29.4% Net Sales $813.7 100.0% 8.0% $752.7 100.0% 10.0% $684.4 100.0% Worldwide net sales in 2003 increased 8% from the previous year to Worldwide net sales of PCC in 2003 increased 3.1% to $436.1 $813.7 million. Foreign exchange had a favorable impact on sales of million from $423.0 million in the prior year. Paper PCC volumes approximately $32.6 million or 4 percentage points of growth. Sales grew slightly for the full year with volumes in excess of 3.4 million in the Specialty Minerals segment, which includes the PCC and tons. In 2003, United States printing and writing paper shipments Processed Minerals product lines, increased 7.1% to $557.1 million were down 2.8 percent, and demand for uncoated freesheet, our compared with $520.1 million for the same period in 2002. Sales largest market for PCC, was down 1 percent, compared with 2002. in the Refractories segment grew 10.3% over the previous year to Sales of PCC for paper were adversely affected by these decreases $256.6 million. In 2002, worldwide net sales increased 10.0% to in production. In addition, one paper mill at which we have a $752.7 million from $684.4 million in the prior year. Specialty satellite plant, in Millinocket, Maine, has been idled since Minerals segment sales increased approximately 7.6% and December 2002. The implementation of the International Paper Refractories segment sales increased approximately 15.7% in 2002. agreements also had a negative impact on sales. However, the favor- able effect of foreign exchange more than offset these factors. In the third quarter we also began operation of a one-unit PCC plant in 19 Management’s Discussion and Analysis Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Malaysia at a paper mill owned by Sabah Forest Industries Sdn. fillers, such as PCC-fiber composites. We made a one-time $16 Bhd. A unit represents between 25,000 to 35,000 tons of annual million payment to IP in exchange for the contract extensions and PCC production capacity. Sales of Specialty PCC decreased slightly technology license. Approximately $15.8 million of this payment because of poor industry conditions and competition in the calcium was attributed to the revisions to the contracts, including extensions supplement market from ground calcium carbonate. PCC sales in of their lives, and will be amortized as a reduction of sales over the 2002 increased approximately 6.8% to $423.0 million from $396.1 remaining lives of the extended contracts. The result was a reduction million in 2001. Paper PCC sales and volumes grew 8% for the full of sales of approximately $1.3 million in 2003, an anticipated over- year, even though the paper industry was affected adversely by all reduction of approximately $1.8 million per year over the next consolidations, shutdowns and slowdowns. five years, and smaller reductions thereafter over the remaining lives Net sales of Processed Minerals products in 2003 increased 24.6% IP facilities covered by the contract extensions. The overall impact to $121.0 million from $97.1 million in 2002. This increase was of the revisions to the IP contracts was to reduce earnings by primarily attributable to the acquisition of Polar Minerals Inc. Full approximately $0.12 per share in 2003. of the contracts. In addition, prices were adjusted at certain of the year sales excluding Polar Minerals increased approximately 9% due to strong demand from the residential construction-related In October 2003, we signed our first commercial contract with a industries and from new polymer and health-care applications for major glass manufacturer for use of our SYNSIL® products. our talc products. Processed Minerals net sales in 2002 increased 11.4% to $97.1 million from $87.2 million in 2001. Operating Costs and Expenses Net sales in the Refractories segment in 2003 increased 10.3% to Dollars in Millions 2003 Growth 2002 Growth 2001 $256.6 million from $232.6 million in the prior year. The increase Cost of in sales for the Refractories segment was primarily attributable to goods sold $615.7 8.4% $567.9 13.0% $502.5 increased sales of equipment and application systems in Europe and Marketing and the favorable impact of foreign exchange. In 2002, net sales in the administrative $083.8 12.9% $074.2 5.2% $070.5 Refractories segment increased 15.7% from the prior year. The Research and increase in sales in 2002 was attributable primarily to the 2001 acquisitions of the Martin Marrietta refractories business and Rijnstaal B.V. business, which more than offset unfavorable economic conditions in the worldwide steel industry. Net sales in the United States was $499.9 million in 2003, approxi- mately 3.7% 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 2003 increased 16.0% primarily as a result of the impact of foreign exchange. In 2002, domestic net sales were 9% higher than the prior year due primarily to acquisitions, and international sales were approximately 12% greater than in the prior year primarily due to the international expansion of our PCC product line and acquisitions. On May 28, 2003, we reached a two-part agreement with International Paper Company (“IP”) that extended eight satellite precipitated calcium carbonate plant supply contracts and gave us an exclusive license to patents held by IP relating to the use of novel development $025.1 10.6% $022.7 (3.4%) $023.5 Bad debt expenses $0)5.3 (14.5%) $006.2 59.0% $003.9 Restructuring charges $003.3 Write-down of impaired assets $003.2 * Percentage not meaningful * * $0000– $000.8 * * $003.4 $0000– Cost of goods sold was 75.7% of sales compared with 75.5% in the prior year. Our production margin increased at approximately the same rate as sales. In the Specialty Minerals segment, production margins increased 2% despite a 7% sales growth. Margins in this segment were affected by the shutdown of the Millinocket satellite PCC plant, continuing development costs in the coating PCC program, the effect of the revisions to the IP contracts, and weakness in the Specialty PCC product line. In the Refractories segment, production margins increased 19%, almost double the sales growth. This was due to an improved product mix, increased equipment sales, and improved manufacturing operations. 20 Management’s Discussion and Analysis Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Marketing and administrative costs increased 12.9% in 2003 to Income from operations in 2003 decreased 4.6% to $77.2 million $83.8 million and represented 10.3% of net sales from 9.9% of from $80.9 million in 2002. Income from operations decreased net sales in 2002. The Refractories segment increased marketing to 9.5% of sales as compared with 10.7% of sales in 2002. This expenses to support worldwide business development efforts. In decrease was primarily due to the aforementioned restructuring and addition, we realized higher information technology costs associated impairment costs. Excluding these charges, income from operations with the implementation of a new global enterprise resource was 10.3% of net sales and increased 3.5%. planning system, and incurred higher employee benefit costs, particularly pension and medical expenses. In 2002, marketing Income from operations for the Specialty Minerals segment and administrative costs increased 5.2% to $74.2 million and decreased 7.7% to $55.4 million and was 9.9% of its net sales. decreased to 9.9% of net sales from 10.3% of net sales in 2001. Excluding the restructuring and impairment asset charges, operating income of this segment was 10.6% of its net sales and down 1.4% Research and development expenses increased 10.6% to $25.1 from the prior year. The margins of this segment continue to be million and represented 3.1% of net sales due to increased product affected in the near term by the IP agreement and the Millinocket development activities in both segments. In 2002, research and temporary shutdown. Operating income for the Refractories segment development expenses decreased 3.4% and represented 3.0% of increased 4.5% to $21.8 million and was 8.5% of its net sales. sales. This decrease was primarily the result of the restructuring, Excluding the restructuring and impairment of asset charges, a decrease in PCC trial activity and a shift of SYNSIL® product operating income of this segment was 9.6% of its net sales and activities from development to production. increased 17.8% from the prior year. The improvement in operating income was primarily due to an improved product mix, increased We recorded bad debt expenses of $5.3 million and $6.2 million in equipment sales, and more efficient manufacturing operations. 2003 and 2002, respectively. These charges were primarily related to additional provisions associated with potential risks to our Non-Operating Deductions customers in the steel, paper and other industries and several customer bankruptcy filings. During the fourth quarter of 2003, we restructured our operations to reduce operating costs and improve efficiency. This resulted in a Dollars in Millions 2003 Growth 2002 Growth 2001 Non-operating deductions, net $4.9 (3.9%) $5.1 (35.4%) $7.9 fourth quarter restructuring charge of $3.3 million. The restructuring Non-operating deductions decreased 3.9% from the prior year. charges relate to workforce reductions from all business units throughout our worldwide operations and the termination of certain leases. This decrease was due to lower interest expense and lower average borrowings in 2003 when compared with 2002. In 2002, interest expense decreased from 2001 due primarily to lower average borrowings than in 2001. During the fourth quarter of 2003, we recorded a write-down of impaired assets of $3.2 million. The impairment charges are related Provision for Taxes on Income to the planned closure of our operations in River Rouge, Michigan, in 2004 and the retirement of certain SYNSIL® assets that have been made obsolete. In 2002, we recorded a write-down of impaired assets of $0.8 million for a satellite plant that ceased operations. Dollars in Millions 2003 Growth 2002 Growth 2001 Provision for taxes on income $4.1 (79.7%) $20.2 (4.3%) $21.1 Income from Operations Dollars in Millions 2003 Growth 2002 Growth 2001 Income from The effective tax rate decreased to 5.7% in 2003 compared with 26.7% in 2002. This decrease was due to the reversal of certain tax accruals during the second half of 2003 as a result of the expiration of the statute of limitations on the U.S. tax returns for certain earlier operations $77.2 (4.6%) $80.9 0.4% $80.6 years. This one-time, non-cash item reduced the 2003 income tax provision by $15 million. The effective tax rate was 29.1% in 2001. 21 Management’s Discussion and Analysis Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Minority Interests Dollars in Millions 2003 Growth 2002 Growth 2001 share, on a diluted basis, increased 17.5% to $3.09 in 2003 as compared with $2.61 in the prior year. Minority interests $1.6 (11.1%) $1.8 5.9% $1.7 Outlook The consolidated joint ventures continue to operate profitably but decreased approximately $0.2 million from the prior year due to higher support costs at our joint venture in Indonesia. Net Income In 2003, despite pronouncements of economic recovery, we continued to see weakness in the two main industries we serve—paper and steel. However, unlike a number of manufacturers, we continue to show growth in sales and net income. We are hopeful that the improvement in the rest of the U.S. economy will carry through to the paper and steel industries, and we feel confident that we have Dollars in Millions 2003 Growth 2002 Growth 2001 taken the necessary steps to position ourselves for continued growth Net income $63.2 17.5% $53.8 8.0% $49.8 and improved profitability in the coming year. Income before the cumulative effect of an accounting change increased 24.0% to $66.7 million from $53.8 million in 2002. We continue to be affected by negative factors in the industries we primarily serve: Diluted earnings per common share before the cumulative effect (cid:1) In 2003, the PCC business was affected by paper mill of the accounting change increased 24.9% to $3.26 compared shutdowns, curtailments in production due to weakened with $2.61 in 2002. demand, and the temporary shutdown of the satellite PCC plant in Maine. Effective January 1, 2003, we adopted SFAS No. 143, “Accounting (cid:1) The steel industry continued to experience difficulties in 2003 for Asset Retirement Obligations.” SFAS No. 143 establishes the as several steel manufacturers ceased operations and eight North financial accounting and reporting for obligations associated with American steel companies filed for bankruptcy protection. the retirement of long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for However, despite this difficult market environment, we were able to an asset retirement obligation be recognized in the period in which achieve low double-digit operating margins. Our operating margin it is incurred if a reasonable estimate of fair value can be made. as a percentage of sales, before restructuring and impairment of asset The associated asset retirement costs are capitalized as part of the charges, declined to 10.3% in 2003 as compared with 10.8% in 2002. carrying amount of the long-lived asset. Reported operating income as a percentage of sales was 9.5% in 2003 Upon adoption of SFAS No. 143, we recorded a non-cash, after-tax charge to earnings of approximately $3.4 million for the cumulative In 2004, we plan to continue our focus on the following growth effect of this accounting change related to retirement obligations strategies: as compared with 10.7% in 2002. associated with our PCC satellite facilities and mining properties, both within the Specialty Minerals segment. As a result of this pronouncement, we recorded in cost of goods sold additional depreciation and accretion expenses of approximately $1.0 million in 2003. The pro forma effect on results, assuming that SFAS No. 143 were applied retroactively, would be a non-cash, after-tax charge to earnings of approximately $0.5 million in 2002. Net income increased 17.5% in 2003 to $63.2 million. In 2002, net income increased 8.0% to $53.8 million. Earnings per common (cid:1) Increase market penetration of PCC in paper filling at both free sheet and groundwood mills. (cid:1) Increase penetration of PCC into the paper coating market. (cid:1) Emphasize higher value specialty products and application systems to increase market penetration in the Refractories segment. (cid:1) Continue selective acquisitions to complement our existing businesses. (cid:1) Continue research and development and marketing efforts for new and existing products. 22 Management’s Discussion and Analysis Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report However, there can be no assurance that we will achieve success in of these agreements have been extended, often in connection with implementing any one or more of these strategies. an expansion of the satellite PCC plant. Failure of a number of our customers to renew existing agreements on terms as favorable to us In 2003, we added one unit of production capacity for PCC from a as those currently in effect could cause our future growth rate to satellite plant built at a paper mill owned by Sabah Forest Industries differ materially from our historical growth rate, and could also in Malaysia. This plant became operational in the third quarter of result in impairment of the assets associated with the PCC plant. 2003. In addition, we added one unit of capacity through an expan- sion at an existing satellite PCC facility. There is presently one satellite location at which the contract with the host mill has expired and one location, representing less than In August 2003, we announced that our merchant PCC plant in one unit of PCC production, at which the host mill has informed Walsum, Germany, will be operational in September 2004. The us that the contract will not be renewed upon its expiration in project was announced in May 2001, and since then, we have 2004. We continue to supply PCC at both of these locations. At received the necessary regulatory, planning and permitting approvals the location at which the contract has expired, we hope to reach from state and local agencies. The initial capacity of the modular agreement on a long-term extension of the contract; however, there plant will be 125,000 metric tons of PCC for paper coating. can be no assurance that these negotiations will be successful. We also made the following acquisition in 2003: In addition, Great Northern Paper, Inc. ceased operations at its two (cid:1) On September 15, 2003, the assets of ISA Manufacturing Inc., a company that produces pre-cast shapes primarily for the steel industry. In 2004, we expect additional expansions at existing satellite PCC plants to occur and also expect to sign contracts for new satellite PCC plants. As we continue to expand our operations overseas, we face 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 our operations are located in areas that have experienced political or economic instability, including Indonesia, Israel, Brazil, Thailand, China and South Africa. In addition, our performance depends to some extent on that of the industries we serve, particularly the paper manufacturing, steel manufacturing, and construction industries. Our sales of PCC are predominantly pursuant to long-term contracts, initially ten years in length, with paper companies at whose mills we operate satellite PCC plants. The terms of many paper mills in Millinocket and East Millinocket, Maine, which were served by a PCC plant operated by us. Great Northern Paper filed for bankruptcy protection on January 9, 2003, and on April 29, 2003, the paper mills were sold to Brascan Corporation, the parent company of Nexfor Fraser Papers Inc. The East Millinocket mill has resumed operations, and we are supplying it from other nearby PCC production facilities. Brascan has announced its intention to begin production at the Millinocket mill later in 2004 where our satellite plant is located. If the Millinocket mill does not resume production, we could incur an impairment charge of approximately $10 million. We have a consolidated interest in two joint venture companies that operate satellite PCC plants at paper mills owned by subsidiaries of Asia Pulp & Paper Company Ltd. (“APP”), one at Perawang, Indonesia, and one at Dagang, China. APP is a multinational pulp and paper company whose current financial difficulties have been widely publicized. While APP is negotiating with its creditors, the Perawang and Dagang facilities have remained in operation at levels consistent with the prior year. Both mills are continuing to use our PCC and to satisfy their obligations to the joint ventures. However, there can be no assurance that our operations at these paper mills will not be adversely affected by APP’s financial difficulties in the future. Our net investment in these satellite plants was approximately $4.4 million at December 31, 2003. 23 Management’s Discussion and Analysis Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Liquidity and Capital Resources Cash flows in 2003 were provided from operations and proceeds from stock option exercises. The cash was applied principally to fund $52.7 million of capital expenditures and purchases of common shares for treasury. Cash provided from operating activities amounted to $100.1 million in 2003 as compared with $117.8 million in 2002. The reduction in cash from operations was primarily due to the IP payment of $16 million in exchange for customer contract extensions and a technology license. Included in cash flow from operations was pension plan funding of approximately $20.8 million, $20.2 million, and $10.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. We have $110 million in uncommitted short-term bank credit lines, of which $30 million was in use at December 31, 2003. We anticipate that capital expenditures for 2004 should approximate $80 million, principally related to the construction of PCC plants and other opportunities that meet our strategic growth objectives. We expect to meet our 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: 2004 - $3.2 million; 2005 - $3.8 million; 2006 - $54.0 million; 2007 - $2.0 million; 2008 - $7.0 million; thereafter - $31.3 million. Critical Accounting Policies We expect to utilize our cash reserves to support the aforementioned Our discussion and analysis of our financial condition and results of growth strategies. operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles On May 31, 2003, we acquired land and limestone ore reserves generally accepted in the United States. The preparation of these from the Cushenbury Mine Trust for approximately $17.5 million. financial statements requires us to make estimates and judgments Approximately $6.1 million was paid at the closing and $11.4 that affect the reported amounts of assets, liabilities, revenues and million was financed through an installment obligation. The average expenses, and related disclosure of contingent assets and liabilities. interest rate on this obligation is approximately 4.25%. The principal payments are as follows: 2004 - $0.8 million; 2005 - $0.9 million; On an ongoing basis, we evaluate our estimates and assumptions, 2006 - $0.9 million; 2007 - $0.9 million; 2008 - $6.5 million; including those related to revenue recognition, allowance for doubtful 2013 - $1.4 million. accounts, valuation of inventories, valuation of long-lived assets, goodwill and other intangible assets, pension plan assumptions, On February 22, 2001, the Board authorized our Management income taxes, income tax valuation allowances and litigation and Committee to repurchase, at its discretion, up to $25 million in environmental liabilities. We base our estimates on historical additional shares per year over the following three years. As of experience and on other assumptions that we believe to be reason- December 31, 2003, we had repurchased approximately 619,500 able under the circumstances, the results of which form the basis for shares under this program at an average price of approximately making judgments about the carrying values of assets and liabilities $40 per share. that can not readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates. On October 23, 2003, our Board of Directors authorized our Management Committee, at its discretion, to repurchase up to We believe the following critical accounting policies require us to $75 million in additional shares over the next three-year period. make significant judgments and estimates in the preparation of our On January 22, 2004, our Board of Directors declared a regular quarterly dividend on our common stock of $0.05 per share. The dividend is an increase from the amount we have historically paid, which had been a quarterly dividend of $0.025 per share since we became a publicly owned company in October 1992. No dividend will be payable unless declared by the Board and unless funds are legally available for payment thereof. 24 consolidated financial statements: (cid:1) 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 our 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. Management’s Discussion and Analysis Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report (cid:1) Allowance for doubtful accounts: Substantially all of our accounts new global enterprise resource planning system. During the second receivable are due from companies in the paper, construction and quarter of 2003, we reached an agreement with IP that extended steel industries. Accounts receivable are reduced by an allowance eight PCC supply contracts and therefore extended the useful lives for amounts that may become uncollectible in the future. Such of the satellite PCC plants at those IP mills. The net effect of the allowance is established through a charge to the provision for bad changes in estimated useful lives, including the deceleration of debt expenses. We recorded bad debt expenses of $5.3 million, depreciation at the IP plants, was an increase to diluted earnings $6.2 million, and $3.9 million in 2003, 2002 and 2001, per share of approximately $0.08 in 2003. respectively. These charges were much higher than historical levels and were primarily related to bankruptcy filings by some of (cid:1) Valuation of long-lived assets, goodwill and other intangible our customers in the paper and steel industries and to additional assets: We assess the possible impairment of long-lived assets provisions associated with potential risks in the paper, steel and and identifiable intangibles whenever events or changes in other industries. In addition to specific allowances established for circumstances indicate that the carrying value may not be bankrupt customers, we also analyze the collection history and recoverable. Goodwill and other intangible assets with indefinite financial condition of our other customers considering current lives are reviewed for impairment at least annually in accordance industry conditions and determine whether an allowance needs with the provisions of SFAS No. 142. Factors we consider important to be established or increased. that could trigger an impairment review include the following: (cid:1) significant under-performance relative to historical or projected (cid:1) Property, plant and equipment, goodwill, intangible and other future operating results; long-lived assets: Property, plant and equipment are amortized (cid:1) significant changes in the manner of use of the acquired assets over their useful lives. Useful lives are based on management’s or the strategy for the overall business; estimates of the period that the assets can generate revenue, (cid:1) significant negative industry or economic trends. which does not necessarily coincide with the remaining term of a customer’s contractual obligation to purchase products made When we determine that the carrying value of intangibles, long- using those assets. Our sales of PCC are predominantly pursuant lived assets or goodwill may not be recoverable based upon the to long-term contracts, initially ten years in length, with paper existence of one or more of the above indicators of impairment, mills at which we operate satellite PCC plants. The terms of many we measure any impairment by our ability to recover the carrying of these agreements have been extended, often in connection with amount of the assets from expected future operating cash flow on an expansion of the satellite PCC plant. We also continue to a discounted basis. Net intangible assets, long-lived assets, and supply PCC at one location at which the PCC contract has goodwill amounted to $621.6 million as of December 31, 2003. expired. Failure of a PCC customer to renew an agreement or continue to purchase PCC from our facility could result in an impairment of assets charge at such facility. In the third quarter of 2002, we reduced the useful lives of satellite PCC plants at International Paper Company’s (“IP”) mills due to an increased risk that some or all of these PCC contracts would not be renewed. As a result of this change, we also reviewed the useful lives of the assets at our remaining satellite PCC facilities and other plants. During the first quarter of 2003, we revised the estimated useful lives of machinery and equipment pertaining to our natural stone mining and processing plants and chemical processing plants from 12.5 years (8%) to 15 years (6.67%) and reduced the useful lives of buildings at certain satellite PCC facilities from 25 years (4%) to 15 years (6.67%). We also reduced the estimated useful lives of certain software-related assets due to implementation of a (cid:1) Accounting for income taxes: As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. 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. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the Statement of Income. 25 Management’s Discussion and Analysis Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report (cid:1) Pension Benefits: We sponsor pension and other retirement plans Investors should bear this in mind as they consider forward-looking in various forms covering substantially all employees who meet statements and should refer to the discussion of certain risks, eligibility requirements. Several statistical and other factors which uncertainties and assumptions under the heading “Cautionary attempt to estimate future events are used in calculating the Factors That May Affect Future Results” in Item 1 of the Annual expense and liability related to the plans. These factors include Report on Form 10-K. assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined Inflation by us, within certain guidelines. Our assumptions reflect our historical experience and management’s best judgement regarding future expectations. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate these factors. The actuarial assumptions used by us may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants, among other things. Differences from these assumptions may result in a significant Historically, inflation has not had a material adverse effect on us. The contracts pursuant to which we construct and operate our satellite PCC plants generally adjust pricing to reflect increases in costs resulting from inflation. Cyclical Nature of Customers’ Businesses The bulk of our sales are to customers in the paper manufacturing, steel manufacturing and construction industries, which have impact to the amount of pension expense/liability recorded by us. historically been cyclical. These industries encountered difficulties For a detailed discussion on the application of these and other accounting policies, see Note 1 — “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. Prospective Information and Factors That May Affect Future Results The Securities and Exchange Commission encourages companies to in 2003. The pricing structure of some of our long-term PCC contracts makes our PCC business less sensitive to declines in the quantity of product purchased. For this reason, and because of the geographical diversification of our business, our operating results to date have not been materially affected by the difficult economic environment. However, we cannot predict the economic outlook in the countries in which we do business, nor in the key industries we serve. There can be no assurance that a recession, in some markets or worldwide, would not have a significant negative effect on our financial position or results of operations. disclose forward-looking information so that investors can better Recently Issued Accounting Standards understand companies’ future prospects and make informed invest- ment decisions. This report may contain forward-looking statements that set out anticipated results based on management’s plans and assumptions. Words such as “expects,” “plans,” “anticipates,” “will,” and words and terms of similar substance, used in connection with any discussion of future operating or financial performance, identify these forward-looking statements. We cannot guarantee that the outcomes suggested in any forward- looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. 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. 26 In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The FASB recently indicated that they would require stock-based employee compensation to be recorded as a charge to earnings beginning in 2005. We continue to monitor their progress on the issuance of this standard as well as evaluating our position with respect to current guidance. In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement establishes standards for how Management’s Discussion and Analysis Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. We had no such instruments as of December 31, 2003. Quantitative and Qualitative Disclosures about Market Risk Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in market prices and rates. We are exposed to market risk because of changes in foreign currency exchange rates as measured against the U.S. dollar. We do not anticipate that near-term changes in exchange rates will have a material impact on our future earnings or cash flows. However, there can be no assurance that a sudden and significant decline in the value of foreign currencies would not have a material adverse effect on our financial condition and results of operations. Approximately 25% of our bank debt bear interest at variable rates; therefore, our results of operations would only be affected by interest rate changes to such bank debt outstanding. An immediate 10 percent change in interest rates would not have a material effect on our results of operations over the next fiscal year. We are exposed to various market risks, including the potential loss arising from adverse changes in foreign currency exchange rates and interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes. When appropriate, we enter into derivative financial instruments, such as forward exchange contracts and interest rate swaps, to mitigate the impact of foreign exchange rate movements and interest rate movements on our operating results. The counterparties are major financial institutions. Such forward exchange contracts and interest rate swaps would not subject us to additional risk from exchange rate or interest rate movements because gains and losses on these contracts would offset losses and gains on the assets, liabilities, and transactions being hedged. We have open forward exchange contracts to purchase approximately $2.2 million of foreign currencies as of December 31, 2003. These contracts mature between January and June of 2004. The fair value of these instruments at December 31, 2003 was an asset of $0.1 million. We entered 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 our floating-rate debt to a fixed rate basis. The fair value of these instruments was a liability of approximately $1.0 million at December 31, 2003. 27 Selected Financial Data Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Thousands, Except Per Share Data 2003 2002 2001 2000 1999 Income Statement Data Net sales Cost of goods sold Marketing and administrative expenses Research and development expenses Bad debt expenses Restructuring charges Write-down of impaired assets $0 813,743 615,749 83,809 25,149 5,307 3,323 3,202 $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 – – Income from operations 77,204 80,874 80,557 84,806 97,543 Income before provision for taxes on income and minority interests Provision for taxes on income Minority interests Income before cumulative effect of accounting change Cumulative effect of accounting change Net income Earnings Per Share Basic: Before cumulative effect of accounting change Cumulative effect of accounting change 72,344 4,116 1,575 66,653 3,433 75,734 20,220 1,762 53,752 – 72,670 21,148 1,729 49,793 – 79,772 23,735 1,829 54,208 – 92,535 28,920 1,499 62,116 – $0 0 63,220 $053,752 $049,793 $054,208 $062,116 $000003.30 (0.17) $0002.66 – $0002.54 – $0002.65 – $0002.90 – Basic earnings per share $000003.13 $0002.66 $0002.54 $0002.65 $0002.90 Diluted: Before cumulative effect of accounting change Cumulative effect of accounting change $000003.26 (0.17) $0002.61 – $0002.48 – $0002.58 – $0002.80 – Basic earnings per share $000003.09 $0002.61 $0002.48 $0002.58 $0002.80 Weighted average number of common shares outstanding Basic Diluted Dividends declared per common share 20,208 20,431 $000000.10 20,199 20,569 $0000.10 19,630 20,063 $0000.10 20,479 21,004 $0000.10 21,394 22,150 $0000.10 $ 0218,090 1,035,500 98,159 131,681 707,381 $167,028 899,877 89,020 120,351 594,157 $ 86,261 847,810 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 Balance Sheet Data Working capital Total assets Long-term debt Total debt Total shareholders’ equity 28 Consolidated Balance Sheet Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Thousands of Dollars Assets Current assets: Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts: 2003 - $7,010; 2002 – $7,079 Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, less accumulated depreciation and depletion Goodwill Prepaid benefit cost Other assets and deferred charges Total assets 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 27,422,472 shares in 2003 and 26,937,260 shares in 2002 Additional paid-in capital Deferred compensation Retained earnings Accumulated other comprehensive income (loss) Less common stock held in treasury, at cost; 6,930,973 shares in 2003 and 6,781,473 shares in 2002 Total shareholders’ equity December 31, 2003 December 31, 2002 $ 90,515 $ 31,762 147,600 86,378 15,632 340,125 561,588 52,721 46,251 34,815 $1,035,500 $00030,347 3,175 44,217 – 21,710 22,586 122,035 98,159 20,385 51,617 35,923 328,119 – 2,742 210,512 (1,220) 739,936 3,814 955,784 248,403 707,381 129,608 82,909 14,770 259,049 537,424 51,291 31,916 20,197 $899,877 $030,000 1,331 37,435 18,176 15,086 21,909 123,937 89,020 19,869 48,183 24,711 305,720 – 2,694 190,144 – 678,740 (35,034) 836,544 242,387 594,157 $899,877 Total liabilities and shareholders’ equity $1,035,500 See Notes to Consolidated Financial Statements, which are an integral part of these statements. 29 Consolidated Statement Of Income Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Thousands of Dollars, Except Per Share Data Net sales Operating costs and expenses: Cost of goods sold Marketing and administrative expenses Research and development expenses Bad debt expenses Restructuring charges Write-down of impaired assets Income from operations 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 Income before cumulative effect of accounting change Cumulative effect of accounting change, net of tax benefit of $2,072 Net income Earnings per share: Basic: Before cumulative effect of accounting change Cumulative effect of accounting change Basic earnings per share Diluted: Before cumulative effect of accounting change Cumulative effect of accounting change Diluted earnings per share Year Ended December 31, 2003 2002 2001 $813,743 $752,680 $684,419 615,749 83,809 25,149 5,307 3,323 3,202 77,204 836 (5,423) (273) (4,860) 72,344 4,116 1,575 66,653 3,433 567,985 74,160 22,697 6,214 – 750 80,874 1,172 (5,792) (520) (5,140) 75,734 20,220 1,762 53,752 – 502,525 70,495 23,509 3,930 3,403 – 80,557 835 (7,884) (838) (7,887) 72,670 21,148 1,729 49,793 – $063,220 $053,752 $049,793 $0003.30 (0.17) $0002.66 – $0002.54 – $0003.13 $0002.66 $0002.54 $0003.26 (0.17) $0002.61 – $0002.48 – $0003.09 $0002.61 $0002.48 30 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 2003 Annual Report Thousands of Dollars Operating Activities Year Ended December 31, 2003 2002 2001 Net income Adjustments to reconcile net income to net cash provided by operating activities: $ 63,220 $ 53,752 $49,793 Cumulative effect of accounting change Depreciation, depletion and amortization Reversal of tax liabilities 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 Prepaid benefit costs Accounts payable Income taxes payable Other 3,433 66,340 (15,000) 3,202 1,472 5,085 5,307 1,270 (7,946) 767 (12,299) (14,335) 4,706 (3,841) (1,293) – 68,960 – 750 1,301 2,643 6,214 1,519 1,143 5,166 621 (16,486) (5,542) 465 (2,668) Net cash provided by operating activities 100,088 117,838 – 66,518 – – 19 (131) 3,930 1,446 (11,886) (2,182) (9,173) (1,447) (1,077) (144) 2,661 98,327 (63,078) 5,193 (37,363) (95,248) 268,684 (248,677) (16,000) (1,960) 3,158 5,205 (1,930) 6,354 6,692 (52,665) 1,874 (1,958) (52,749) 5,659 (6,019) (6,016) (2,024) 15,884 7,484 3,930 58,753 31,762 (37,107) 280 (34,100) (70,927) 154,908 (194,876) (17,332) (2,026) 29,384 (29,942) 1,747 18,716 13,046 $ 90,515 $ 31,762 $13,046 Investing Activities Purchases of property, plant and equipment Proceeds from disposal of property, plant and equipment Acquisition of businesses, net of cash acquired Net cash used in investing activities 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 Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Non-cash Investing and Financing Activities: Property, plant and equipment acquired by incurring installment obligations $ 11,368 $ – Property, plant and equipment additions related to asset retirement obligations $ 0 6,762 $ – $ $ – – See Notes to Consolidated Financial Statements, which are an integral part of these statements. 31 Consolidated Statement Of Shareholders’ Equity Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report In Thousands Balance as of January 1, 2001 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 for treasury Balance as of December 31, 2001 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 for treasury Balance as of December 31, 2002 Comprehensive income: Net income Currency translation adjustment Minimum pension liability adjustment Cash flow hedges: Net derivative gains arising during the year Total comprehensive income Dividends declared Employee benefit transactions Income tax benefit arising from employee stock option plans Issuance of restricted stock Amortization of restricted stock Purchase of common stock for treasury Common Stock Shares Par Value Additional Deferred Com- Paid-in Capital pensation Retained Earnings Accumulated Other Com- prehensive Income (Loss) Treasury Stock Shares Cost Total 25,853 $2,585 $155,001 – – – – – – 109 – – – – – – – – 11 – – – – – – – – 3,147 411 – 25,962 2,596 158,559 – – – – – – – 975 – – – – – – – – – 98 – – – – – – – – – 29,286 2,299 – 26,937 2,694 190,144 – – – – – – 485 – – – – – – – – – – 48 – – – – – – – – – – 15,836 3,176 1,356 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (1,356) 136 – $579,181 $(44,073) (5,886) $(209,055) $483,639 49,793 – – – 49,793 (1,960) – – – – (11,896) 500 174 (11,222) – – – – – – – – – – – – – – – – – – 49,793 (11,896) 500 174 38,571 (1,960) 3,158 – (462) – (16,000) 411 (16,000) 627,014 (55,295) (6,348) (225,055) 507,819 53,752 – – – 22,137 (829) – – (968) (79) 53,752 20,261 (2,026) – – – – – – – – – – – – – – – – – – – – – – – 53,752 22,137 (829) (968) (79) 74,013 (2,026) 29,384 – (433) – (17,332) 2,299 (17,332) 678,740 (35,034) (6,781) (242,387) 594,157 63,220 – – – 39,695 (1,368) – 521 63,220 38,848 (2,024) – – – – – – – – – – – – – – – – – – – – – – – – – 63,220 39,695 (1,368) 521 102,068 (2,024) 15,884 – – – (150) – – – (6,016) 3,176 – 136 (6,016) Balance as of December 31, 2003 27,422 $2,742 $210,512 $(1,220) $739,936 $3,814 (6,931) $(248,403) $707,381 32 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 2003 Annual Report 1. Summary of Significant Accounting Policies considering current industry conditions and determines whether 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 industries, as well as by the building materials, polymers, 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 $1.1 million and $3.8 million at December 31, 2003 and 2002, respectively. 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 allowances for bankrupt customers. The Company also analyzes the collection history and financial condition of its other customers 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 cost as a component of construction in progress. In general, the straight-line method of depreciation is used for financial reporting purposes and accelerated methods are used for U.S. and certain foreign tax reporting purposes. The annual rates of depreciation are 3% - 6.67% for buildings, 6.67% - 12.5% for machinery and equipment, 8% - 12.5% for furniture and fixtures and 12.5% - 25% for computer equipment and software-related assets. Property, plant and equipment are 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 to purchase products made using those assets. The Company’s sales of PCC are predominantly pursuant to long-term contracts, initially ten years in length, with paper mills at which the Company operates satellite PCC plants. The terms of many of these agreements have been extended, often in connection with an expansion of the satellite PCC plant. The Company also continues to supply PCC at one location at which the PCC contract has expired. Failure of a PCC customer to renew an agreement or continue to purchase PCC from a Company facility could result in an impairment of assets charge at such facility. In the third quarter of 2002, the Company reduced the useful lives of satellite PCC plants at International Paper Company’s (“IP”) mills due to an increased risk that some or all of these PCC contracts would not be renewed. As a result of this change, the Company also reviewed the useful lives of the assets at its remaining satellite PCC facilities and other plants. During the first quarter of 2003, the Company revised the estimated useful lives of machinery and equipment pertaining to its natural stone mining and processing 33 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report plants and chemical processing plants from 12.5 years (8%) to 15 adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” years (6.67%) and reduced the useful lives of buildings at certain Under SFAS No. 142, goodwill and other intangible assets with satellite PCC facilities from 25 years (4%) to 15 years (6.67%). indefinite lives are not amortized, but instead tested for impairment The Company also reduced the estimated useful lives of certain at least annually in accordance with the provisions of SFAS No. software-related assets due to implementation of a new global 142. SFAS No. 142 also requires that intangible assets with enterprise resource planning system. During the second quarter of estimable useful lives be amortized over their respective estimated 2003, the Company reached an agreement with IP that extended useful lives to the estimated residual values, and reviewed for eight PCC supply contracts and therefore extended the useful lives impairment in accordance with SFAS No. 144, “Accounting for of the satellite PCC plants at those IP mills. The net effect of the the Impairment or Disposal of Long-Lived Assets.” changes in estimated useful lives, including the deceleration of depreciation at the IP plants, was an increase to diluted earnings The Company evaluates the recoverability of goodwill using a two- per share of approximately $0.08 in 2003. step impairment test approach at the reporting unit level. In the first Depletion of mineral reserves is determined on a unit-of-extraction value including goodwill. In the case that the fair value of the basis for financial reporting purposes and on a percentage depletion reporting unit is less than the book value, a second step is performed step the fair value for the reporting unit is compared to its book basis for tax purposes. 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 Mining costs associated with waste gravel and rock removal in excess determined based on the difference between the fair values of the of the expected average life of mine stripping ratio are deferred. reporting units and the net fair values of the identifiable assets and These costs are charged to production on a unit-of-production basis liabilities of such reporting unit. If the fair value of the goodwill is when the ratio of waste to ore mined is less than the average life less than the book value the difference is recognized as an impairment. of mine stripping ratio. Prior to the adoption of SFAS No. 142, goodwill was amortized on Accounting for the Impairment of Long-Lived Assets a straight-line basis over 20-25 years, and assessed for recoverability The Company accounts for impairment of long-lived assets in by determining whether the amortization of the goodwill balance accordance with SFAS No. 144, “Accounting for the Impairment over its remaining life could be recovered through undiscounted or Disposal of Long-Lived Assets.” SFAS No. 144 establishes a future operating cash flows of the acquired operation. All other uniform accounting model for long-lived assets to be disposed intangible assets were amortized on a straight-line basis up to 17 of. Long-lived assets are reviewed for impairment whenever events years. The amount of goodwill and other intangible asset impairment, or changes in circumstances indicate that the carrrying amount if any, was measured based on the Company’s ability to recover of an asset may not be recoverable. If events or changes in the carrying amount from expected future operating cash flows on circumstances indicate that the carrying amount of an asset may a discounted basis. not be recoverable, the Company estimates the undiscounted future cash flows (excluding interest) resulting from the use of the asset Accounting for Asset Retirement Obligations and its ultimate disposition. If the sum of the undiscounted cash Effective January 1, 2003, the Company adopted SFAS No. 143, flows (excluding interest) is less than the carrying value, the “Accounting for Asset Retirement Obligations.” SFAS No. 143 Company recognizes an impairment loss, measured as the amount establishes the financial accounting and reporting for obligations by which the carrying value exceeds the fair value of the asset, associated with the retirement of long-lived assets and the associated determined principally using discounted cash flows. asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period Goodwill and Other Intangible Assets in which it is incurred if a reasonable estimate of fair value can be Goodwill represents the excess of purchase price and related costs made. The associated asset retirement costs are capitalized as a part over the value assigned to the net tangible and identifiable intangible of the carrying amount of the long-lived asset. assets of businesses acquired. On January 1, 2002, the Company 34 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Derivative Financial Instruments are expected to be recovered or settled. Under SFAS No. 109, the The Company enters into derivative financial instruments to effect on deferred tax assets and liabilities of a change in tax rates is hedge certain foreign exchange and interest rate exposures pursuant recognized in income in the period that includes the enactment date. to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for The accompanying financial statements generally do not include Certain Derivative Instruments and Certain Hedging Activities.” a provision for U.S. income taxes on international subsidiaries’ See the Notes on Derivative Financial Instruments and Hedging unremitted earnings, which, for the most part, are expected to be Activities and Financial Instruments and Concentration of Credit reinvested overseas. Risk in the Consolidated Financial Statements for a full description of the Company’s hedging activities and related accounting policies. Research and Development Expenses Research and development expenses are expensed as incurred. Revenue Recognition Revenue from sale of products is recognized at the time the Stock-Based Compensation goods are shipped and title passes to the customer. In most of the The Company has elected to recognize compensation costs on the Company’s PCC contracts, the price per ton is based upon the total intrinsic value of the equity instrument awarded as promulgated in number of tons sold to the customer during the year. Under those Accounting Principles Board Opinion No. 25, “Accounting for contracts the price billed to the customer for shipments during the Stock Issued to Employees.” The Company has disclosed in Note 2, year is based on periodic estimates of the total annual volume that “Stock-Based Compensation” the pro forma effect of the fair value will be sold to such customer. Revenues are adjusted at the end of method on net income and earnings per share. each year to reflect the actual volume sold. Pension and Post-retirement Benefits Foreign Currency The Company has defined benefit pension plans covering substantially The assets and liabilities of most of the Company’s international all of its employees. The benefits are based on years of service. subsidiaries are translated into U.S. dollars using exchange rates at the respective balance sheet date. The resulting translation adjust- The Company also provides post-retirement healthcare benefits ments are recorded in accumulated other comprehensive loss in for substantially all retirees and employees in the United States. shareholders’ equity. Income statement items are generally translated The Company measures the costs of its obligation based on its best at average exchange rates prevailing during the period. Other foreign estimate. The net periodic costs are recognized as employees render currency gains and losses are included in net income. International the services necessary to earn the post-retirement benefits. subsidiaries operating in highly inflationary economies translate nonmonetary assets at historical rates, while net monetary assets are Earnings Per Share translated at current rates, with the resulting translation adjustments Basic earnings per share have been computed based upon the included in net income. weighted average number of common shares outstanding during Income Taxes the period. Income taxes are provided for based on the asset and liability Diluted earnings per share have been computed based upon the method of accounting pursuant to SFAS No. 109, “Accounting for weighted average number of common shares outstanding during the Income Taxes.” Under SFAS No. 109, deferred tax assets and period assuming the issuance of common shares for all dilutive liabilities are recognized for the estimated future tax consequences potential common shares outstanding. attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax Reclassifications bases. Deferred tax assets and liabilities are measured using enacted Certain reclassifications have been made to prior-year amounts to tax rates in effect for the year in which those temporary differences conform with the current year presentation. 35 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report 2. Stock-Based Compensation In December 2002, The FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, and requires additional disclosures in interim and annual financial statements. SFAS No. 123 requires the disclosure of pro forma net income and net income per share as if the Company adopted the fair value method of accounting for stock-based awards. The fair value of stock-based awards to employees was calculated using the Black-Scholes option-pricing model, modified for dividends, with the following weighted average assumptions: 2003 2002 2001 Expected life (years) Interest rate Volatility Expected dividend yield 7 7 7 3.74% 3.27% 4.69% 30.61% 31.21% 30.41% 0.21% 0.21% 0.28% As required by SFAS No. 123, the Company has determined that the weighted average estimated fair values of options granted in 2003, 2002 and 2001 were $18.86, $18.30 and $14.36 per share, Basic EPS Income before cumulative effect of accounting change, as reported $3.30 $2.66 $2.54 Pro forma income before cumulative effect of accounting change Pro forma net income Net income, as reported Diluted EPS Income before cumulative effect 3.20 3.03 3.13 2.55 2.55 2.66 2.26 2.26 2.54 of accounting change, as reported $3.26 $2.61 $2.48 Pro forma income before cumulative effect of accounting change Pro forma net income Net income, as reported 3. Earnings Per Share (EPS) 3.17 3.00 3.09 2.51 2.51 2.61 2.21 2.21 2.48 Thousands of Dollars, Except Per Share Amounts Basic EPS 2003 2002 2001 Income before cumulative effect of accounting change $66,653 $53,752 $49,793 Cumulative effect of accounting change 3,433 – – Net income $63,220 $53,752 $49,793 Weighted average respectively. Pro forma net income for the fair value of stock options shares outstanding 20,208 20,199 19,630 awarded in 2003, 2002 and 2001 were as follows: Millions of Dollars, Except Per Share Amounts Income before cumulative effect of accounting change, as reported Add: Stock-based employee compensation included in reported income before accounting change Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects Pro forma income before cumulative 2003 2002 2001 Basic earnings per share before cumulative effect of accounting change Cumulative effect of accounting change $ 3.30 $2.66 $2.54 (0.17) – – $66.7 $53.8 $49.8 Basic earnings per share $ 3.13 $2.66 $2.54 0.1 – – Diluted EPS 2003 2002 2001 Income before cumulative effect of change Cumulative effect of accounting change $66,653 $53,752 $49,793 3,433 – – (2.2) (2.2) (5.5) Net income $63,220 $53,752 $49,793 effect of accounting change 64.6 51.6 44.3 Cumulative effect of accounting change Pro forma net income Net income, as reported 36 3.4 $61.2 $63.2 – $51.6 $53.8 – $44.3 $49.8 Weighted average shares outstanding Dilutive effect of stock options Weighted average shares outstanding, adjusted 20,208 223 20,199 370 19,630 433 20,431 20,569 20,063 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report The major elements contributing to the difference between the U.S. federal statutory tax rate and the consolidated effective tax rate are Diluted earnings per share before cumulative effect of accounting change Cumulative effect of accounting change $3.26 $2.61 $2.48 (0.17) – – Diluted earnings per share $3.09 $2.61 $2.48 The weighted average diluted common shares outstanding for the years ending December 31, 2002 and 2001 excludes the dilutive effect of approximately 445,000, and 376,000 options, respectively, as follows: Percentages U.S. statutory tax rate Depletion Difference between tax provided on foreign earnings and the U.S. statutory rate State and local taxes, since such options had an exercise price in excess of the average net of Federal tax benefit market value of the Company’s common stock during such years. 4. Income Taxes Tax credits and foreign dividends Contribution of technology Reversal of tax accruals Other 2003 2002 2001 35.0% 35.0% 35.0% (4.7) (5.5) (4.5) (3.3) (3.2) (1.9) 0.8 2.3 (2.5) (20.7) (0.4) 1.4 (0.9) – – (0.9) 1.5 (1.4) – – 0.4 Income before provision for taxes, by domestic and foreign source is Consolidated effective tax rate 5.7% 26.7% 29.1% as follows: Thousands of Dollars 2003 2002 2001 Domestic Foreign $ 32,853 $44,768 $40,777 31,893 30,966 39,491 Total income before provision for income taxes $ 72,344 $75,734 $72,670 The provision for taxes on income consists of the following: Thousands of Dollars 2003 2002 2001 Domestic Taxes currently payable Federal State and local Deferred income taxes $(12,674) $ 5,797 $ 8,906 1,484 998 1,281 4,036 179 5,873 Domestic tax provision (7,357) 11,849 11,388 Foreign Taxes currently payable Deferred income taxes 10,424 1,049 11,601 (3,230) 10,889 (1,129) Foreign tax provision 11,473 8,371 9,760 Total tax provision $ 4,116 $20,220 $21,148 The provision for taxes on income shown in the previous table is classified based on the location of the taxing authority, regardless of The Company reversed certain tax accruals during the second half of 2003 as a result of the expiration of the statute of limitations on the Company’s U.S. tax returns for certain earlier years. This one- time, non-cash item resulted in a reduction to the tax provision for 2003 of approximately $15 million and a reduction to the overall effective tax rate for 2003 from 26.4% to 5.7%. 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: Thousands of Dollars 2003 2002 Deferred tax assets: State and local taxes Accrued expenses Deferred expenses Net operating loss carry forwards Other Total deferred tax assets 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 $ 4,218 $ 3,554 3,131 4,244 7,745 1,125 2,432 5,425 9,339 4,520 25,934 19,799 66,172 63,590 8,441 2,938 2,885 1,507 77,551 67,982 $51,617 $48,183 37 the location in which the taxable income is generated. Other Total deferred tax liabilities Net deferred tax liabilities Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report A valuation allowance for deferred tax assets has not been recorded 7. Property, Plant and Equipment 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. The major categories of property, plant and equipment and accumulated depreciation and depletion are presented below: Thousands of Dollars 2003 2002 $ 19,873 49,770 151,923 837,659 54,899 95,826 $ 21,516 27,918 140,550 801,788 39,548 84,684 1,209,950 1,116,004 (648,362) (578,580) $ 561,588 $ 537,424 The Company recorded $9.3 million of deferred tax assets arising from tax loss carry forwards which will be realized through future operations. Carry forwards of approximately $0.5 million expire over the next six years, and $8.8 million can be utilized over an indefinite period. Land Quarries/mining properties Buildings Machinery and equipment Construction in progress Furniture and fixtures and other Net cash paid for income taxes were $15.6 million, $14.6 million, Less: Accumulated depreciation and $20.8 million for the years ended December 31, 2003, 2002, and 2001, respectively. 5. Foreign Operations The Company has not provided for U.S. federal and foreign withholding taxes on $102.8 million of foreign subsidiaries’ undistributed earnings as of December 31, 2003 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 offset related U.S. income and depletion Property, plant and equipment, net 8. Restructuring Charges During the fourth quarter of 2003, the Company announced plans to restructure its operations in an effort to reduce operating costs and to improve efficiency. The restructuring resulted in a total workforce reduction of approximately 70 people or three percent of the Company’s worldwide workforce. The Company recorded a pre-tax restructuring charge of $3.3 million in the fourth quarter taxes. On repatriation, certain foreign countries impose withholding of 2003 to reflect these actions. This charge consisted of severance, taxes. The amount of withholding tax that would be payable on remittance of the entire amount of undistributed earnings would approximate $3.8 million. other employee benefits, and lease termination costs. As of December 31, 2003 substantially all of the employees identified in the workforce reduction were terminated and $1.0 million of accrued restructuring liability was paid. As of December 31, 2003, Net foreign currency exchange gains, included in other deductions the remaining restructuring liability was approximately $2.3 million. in the Consolidated Statement of Income, were $476,000, $233,000, and $201,000 for the years ended December 31, 2003, 9. Acquisitions 2002, and 2001, respectively. 6. Inventories The following is a summary of inventories by major category: (cid:1) On September 15, 2003, the Company purchased for approximately $2.0 million a pre-cast refractory shapes manufacturing facility. Thousands of Dollars Raw materials Work in process Finished goods Packaging and supplies Total inventories 38 2003 2002 $34,132 $32,967 7,153 25,459 17,330 8,153 25,998 18,095 $86,378 $82,909 In 2002, the Company acquired the following three entities for a total cash cost of $34.1 million: (cid:1) 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 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report program. The terms of the acquisition also provide for additional consideration of $1.0 million to be paid if certain volumes of Thousands of Dollars Year Ended December 31, 2001 2002 2003 coating PCC are produced and shipped from this facility for any six consecutive months within five years following the acquisition. Reported net income Addback: goodwill amortization $63,220 $53,752 $49,793 818 – – (cid:1) On April 26, 2002, the Company acquired for approximately Adjusted net income $63,220 $53,752 $50,611 $1.4 million the assets of a company that develops and manufactures a refractory lining monitoring system. (cid:1) 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. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the acquisitions: Thousands of Dollars 2003 2002 Current assets Property, plant and equipment Intangible assets Goodwill Net operating loss carry forwards Total assets acquired Liabilities assumed Net cash paid $ – 2.0 – – – 2.0 – $11.6 17.7 0.7 5.5 3.4 38.9 (4.8) $2.0 $34.1 10. 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 Basic earnings per share: Reported net income Goodwill amortization $ 3.13 $ – 2.66 $ – 2.54 0.04 Adjusted net income $ 3.13 $ 2.66 $ 2.58 Diluted earnings per share: Reported net income Goodwill amortization $ 3.09 $ – 2.61 $ 2.48 0.04 – Adjusted net income $ 3.09 $ 2.61 $ 2.52 Acquired intangible assets subject to amortization as of December 31, 2003 and December 31, 2002 were as follows: December 31, 2003 2002 Millions of Dollars Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization Patents and trademarks $5.8 1.4 Customer lists 0.2 Other $7.4 $0.9 0.2 0.1 $1.2 $5.8 1.4 0.2 $7.4 $0.7 0.1 – $0.8 The weighted average amortization period for acquired intangible assets subject to amortization is approximately 15 years. Amorti- amortized, but instead reviewed for impairment at least annually in zation expense was $0.4 million in 2003 and the estimated accordance with the provisions of SFAS No. 142. This statement amortization expense is $0.4 million for each of the next five also required an initial goodwill impairment assessment in the year years through 2008. of adoption. The Company completed the initial impairment analy- sis and performed a subsequent impairment analysis in the fourth quarter. These analyses did not result in an impairment charge. The carrying amount of goodwill was $52.7 million and $51.3 million as of December 31, 2003 and December 31, 2002, respectively. The net change in goodwill since January 1, 2003 was primarily attributable to the effect of foreign exchange. The following table reconciles previously reported net income as if the provisions of SFAS No. 142 had come into effect in 2001: Included in other assets and deferred charges is an intangible asset of approximately $13.1 million which represents the non-current unamortized amount paid to a customer in connection with contract extensions at eight PCC satellite facilities. In addition, a current portion of $1.8 million is included in prepaid expenses and other current assets. Such amounts will be amortized as a reduction of sales over the remaining lives of the customer contracts. Approximately $1.3 million was amortized in 2003. Estimated amortization as a reduction of sales is as follows: 2004 - $1.8 million; 2005 - $1.8 million; 2006 - $1.8 million; 2007 - $1.8 million; 2008 - $1.8 million; with smaller reductions thereafter over the remaining lives of the contracts. 39 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report 11. Accounting for Impairment of Long-Lived Assets any credit risk. The Company minimizes the credit risk in The Company accounts for impairment of long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 establishes a uniform accounting model for disposition of long-lived assets. This Statement also requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. During 2003, the Company recorded a writedown of impaired assets of $3.2 million for the planned closure of a plant and for assets made obsolete by improved technology. During 2002, the Company recorded a write-down of impaired assets of $0.8 million for a precipitated calcium carbonate plant at a paper mill that had ceased operations. 12. Derivative Instruments and Hedging Activities The Company is exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of the Company’s risk management strategy, the 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 three-year interest rate swap agreements with notional amounts totaling $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 with an interest rate of 4.5%, thus reducing the impact of the interest rate changes on future cash flows and income. The Company uses FEC designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in its forecasted inventory purchases. The Company had 13 open foreign exchange contracts at December 31, 2003. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the Company uses interest-rate related derivative instruments to manage derivative instrument is initially recorded in accumulated other its exposure on its debt instruments, as well as forward exchange contracts (FEC) to manage its exposure to foreign currency risk on comprehensive income as a separate component of stockholders’ equity and subsequently reclassified into earnings in the period certain raw material purchases. The Company’s objective is to offset during which the hedged transaction is recognized in earnings. The gains and losses resulting from these exposures with gains and losses gains and losses associated with these forward exchange contracts on the derivative contracts used to hedge them. The Company has and interest rate swaps are recognized into cost of sales and interest not entered into derivative instruments for any purpose other than expense, respectively. to hedge certain expected cash flows. The Company does not speculate using derivative instruments. 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 40 13. 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 approximate fair value because of the short maturities of these instruments. Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Long-term debt: The fair value of the long-term debt of the in actual loss. The Company’s extension of credit is based on an Company is estimated based on the quoted market prices for that evaluation of the customer’s financial condition and collateral is debt or similar debt and approximates the carrying amount. generally not required. Forward exchange contracts: The fair value of forward exchange The Company’s bad debt expense for the years ended December 31, contracts (used for hedging purposes) is estimated by obtaining 2003, 2002, and 2001was $5.3 million, $6.2 million and $3.9 quotes from brokers. If appropriate, the Company would enter million, respectively. into forward exchange contracts to mitigate the impact of foreign exchange rate movements on the Company’s operating results. It 14. Long-Term Debt and Commitments 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 The following is a summary of long-term debt: offset losses and gains on the assets, liabilities and transactions being Thousands of Dollars hedged. At December 31, 2003, the Company had open foreign 7.49% Guaranteed Senior Notes December 31, 2002 2003 exchange contracts to purchase $2.2 million of foreign currencies. Due July 24, 2006 $050,000 $50,000 These contracts range in maturity from January 21, 2004 to June 23, 2004. The fair value of these instruments was an asset of $0.1 million on December 31, 2003. There were no open foreign 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, 2003, the Company had two interest rate swaps with major financial institutions that effec- tively converted variable-rate debt to a fixed rate. One swap has a 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 notional amount of $20 million and the other swap has a notional Variable/Fixed Rate Industrial 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 $1.0 million and $1.5 million at December 31, 2003 and December 31, 2002, respectively. Development Revenue Bonds Series 1999 Due November 1, 2014 Variable/Fixed Rate Industrial Development Revenue Bonds Due March 31, 2020 Installment obligations Other borrowings Less: Current maturities Long-term debt 8,256 8,957 4,000 4,000 4,600 4,600 8,000 8,000 8,200 8,200 5,000 11,368 1,910 5,000 – 1,594 101,334 3,175 90,351 1,331 $098,159 $89,020 Credit risk: Substantially all of the Company’s accounts receivable On July 24, 1996, through a private placement, the Company are due from companies in the paper, construction and steel industries. issued $50 million of 7.49% Guaranteed Senior Notes due Credit risk results from the possibility that a loss may occur from July 24, 2006. The proceeds from the sale of the notes were used the failure of another party to perform according to the terms of the to refinance a portion of the short-term commercial bank debt contract. The Company regularly monitors its credit risk exposures outstanding. No required principal payments are due until July 24, and takes steps to mitigate the likelihood of these exposures resulting 2006. Interest on the notes is payable semi-annually. 41 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report On May 17, 2000, the Company’s majority-owned subsidiary, The Variable/Fixed Rate Industrial Development Revenue Bonds Specialty Minerals FMT K.K., entered into a Yen-denominated due November 1, 2014 are tax-exempt 15-year instruments and Guaranteed Credit Agreement with the Bank of New York due were issued on November 30, 1999 to refinance the bonds issued March 31, 2007. The proceeds were used to finance the construction in connection with the construction of a PCC plant in Jackson, of a PCC satellite facility in Japan. Principal payments began on June Alabama. The bonds bear interest at either a variable rate or fixed 30, 2002. Interest is payable quarterly at a rate of 2.05% per annum. rate at the option of the Company. Interest is payable semi-annually The Variable/Fixed Rate Industrial Development Revenue Bonds option. The Company has selected the variable rate option on these due 2009 are tax-exempt 15-year instruments issued to finance the borrowings and the average interest rates were approximately 1.16% expansion of a PCC plant in Selma, Alabama. The bonds are dated and 1.56% for the years ended December 31, 2003 and 2002, under the fixed rate option and monthly under the variable rate November 1, 1994, and provide for an optional put by the holder respectively. (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 On June 9, 2000 the Company entered into a twenty-year, taxable, option of the Company. Interest is payable semi-annually under the Variable/Fixed Rate Industrial Development Revenue Bond agreement fixed rate option and monthly under the variable rate option. The to finance a portion of the construction of a merchant manufacturing Company has selected the variable rate option on these borrowings facility for the production of Specialty PCC in Mississippi. The and the average interest rates were approximately 1.18% and 1.57% Company has selected the variable rate option for this borrowing for the years ended December 31, 2003 and 2002, respectively. and the average interest rate was approximately 1.65% and 2.33% for the years ended December 31, 2003 and 2002, respectively. The Economic Development Authority Refunding Revenue Bonds due 2010 were issued on February 23, 1999 to refinance the bonds On May 31, 2003, the Company acquired land and limestone ore issued in connection with the construction of a PCC plant in reserves from the Cushenbury Mine Trust for approximately $17.5 Eastover, South Carolina. The bonds bear interest at either a million. Approximately $6.1 million was paid at the closing and variable rate or fixed rate, at the option of the Company. Interest $11.4 million was financed through an installment obligation. The is payable semi-annually under the fixed rate option and monthly average interest rate on this obligation is approximately 4.25%. The under the variable rate option. The Company has selected the principal payments are as follows: 2004 - $0.8 million; 2005 - $0.9 variable rate option on these borrowings and the average interest million, 2006 - $0.9 million; 2007 - $0.9 million; 2008 - $6.5 million; rates were approximately 1.16% and 1.51% for the years ended 2013 - $1.4 million. December 31, 2003 and 2002, respectively. The aggregate maturities of long-term debt are as follows: The Variable/Fixed Rate Industrial Development Revenue Bonds 2004 - $3.2 million; 2005 - $3.8 million; 2006 - $54.0 million, due August 1, 2012 are tax-exempt 15-year instruments that were 2007 - $2.0 million; 2008 - $7.0 million; thereafter - $31.3 million. issued on August 1, 1997 to finance the construction of a PCC plant in Courtland, Alabama. The bonds bear interest at either a The Company had available approximately $110.0 million in variable rate or fixed rate, at the option of the Company. Interest is uncommitted, short-term bank credit lines, of which $30.0 payable semi-annually under the fixed rate option and monthly million was in use at December 31, 2003. The interest rate for under the variable rate option. The Company has selected the these borrowings was approximately 4.09% for the year ended variable rate option on these borrowings and the average interest December 31, 2003. rates were approximately 1.16% and 1.56% for the years ended December 31, 2003 and 2002, respectively. During 2003, 2002 and 2001, respectively, the Company incurred interest costs of $6.2 million, $6.4 million and $8.8 million including $0.8 million, $0.6 million and $0.9 million, respectively, which were capitalized. Interest paid approximated the incurred interest costs. 42 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report 15. Benefit Plans Pension Benefits Other Benefits Pension Plans and Other Postretirement Benefit Plans The Company and its subsidiaries have pension plans covering substantially all eligible employees on a contributory or non-contributory basis. 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 provides postretirement health care and life insurance benefits for substantially all of its U.S. retired employees. Employees are generally eligible for 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. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 became law in December 2003 and introduced both a Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree health-care plans that provide a benefit at least “actuarially Millions of Dollars 2003 2002 2003 2002 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 $111.4 22.8 20.8 $102.7 (9.2) 20.2 $ – – 2.4 $ – – 1.6 0.2 (7.2) 4.7 0.2 (4.1) 1.6 – (2.4) – – (1.6) – at end of year $152.7 $111.4 $ – $ – Funded status Unrecognized transition amount Unrecognized net actuarial loss Unrecognized prior service cost Prepaid (accrued) benefit cost $010.0 $(14.4) $(26.9) $(24.3) (0.1) – 31.3 42.0 4.6 4.7 – 6.4 – – 4.4 – $045.8 $032.3 $(20.5) $(19.9) equivalent” to the Medicare benefit. The Company’s other postretire- Amounts recognized in the consolidated balance sheet consist of: ment benefits do provide for such prescription-drug benefits. The Company has made a one-time election to defer accounting for the Pension Benefits Other Benefits economic effects of the Medicare Act, as permitted by FASB Staff Millions of Dollars 2003 2002 2003 2002 Position 106-1. The FASB plans to issue authoritative guidance on the accounting for the subsidies in 2004. The issued guidance could require the Company to change previously reported information. Prepaid expenses Prepaid benefit cost Accrued benefit liabilities Intangible asset Accumulated other $04.3 46.3 (7.3) 1.1 $ – 36.1 (7.2) 1.2 $ – (20.5) – – $ – – (19.9) – The funded status of the Company’s pension plans and other postre- comprehensive loss 1.4 2.2 – – tirement benefit plans at December 31, 2003 and 2002 is as follows: Net amount recognized $45.8 $32.3 $(20.5) $(19.9) Obligations and Funded Status Information for pension plans with an accumulated benefit Pension Benefits Other Benefits obligation in excess of plan assets: Millions of Dollars 2003 2002 2003 2002 Change in benefit obligation Benefit obligation at beginning of year Service cost Interest cost Actuarial gain Benefits paid Other Benefit obligation at end of year $125.8 5.7 7.9 7.9 (6.2) 1.6 $107.2 5.1 7.3 7.5 (4.1) 2.8 $24.3 1.2 1.6 2.2 (2.4) – $21.6 1.1 1.5 1.6 (1.5) – $142.7 $125.8 $26.9 $24.3 December 31, Projected benefit obligation Accumulated benefit obligation Fair value of plan assets 2003 2002 $33.6 $29.3 $23.8 $31.5 $26.4 $17.8 The accumulated benefit obligation for all defined benefit pension plans was $131.9 million and $109.8 million at December 31, 2003 and 2002, respectively. 43 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report The components of net periodic benefit costs are as follows: The Company considers a number of factors to determine its Pension Benefits expected rate of return on plan assets assumption, including historical performance of plan assets, asset allocation and other Millions of Dollars 2003 2002 2001 third-party studies and surveys. The Company reviewed the Service cost Interest cost Expected return on plan assets Amortization of transition amount Amortization of prior service cost Recognized net actuarial loss (gain) SFAS No. 88 settlement $ 5.7 7.9 (10.1) 0.1 0.6 2.3 – $ 5.1 7.3 (9.0) 0.1 0.5 0.8 – $ 5.2 6.9 (9.5) 0.8 0.5 (0.2) 1.9 historical performance of plan assets over a ten-year period (from 1993-2003), the results of which exceeded the 8.75% rate of return assumption that the Company ultimately selected for domestic plans. The Company also considered the plan portfolios’ asset allocations over a variety of time periods and compared them with third-party studies and surveys of annualized returns of similarly Net periodic benefit cost $ 6.5 $ 4.8 $ 5.6 balanced portfolio strategies. The historical return of this universe Other Benefits Company ultimately selected. Finally, the Company reviewed of similar portfolios also exceeded the return assumption that the Millions of Dollars 2003 2002 2001 performance of the capital markets in recent years and, upon advice Service cost Interest cost Amortization of prior service cost Net periodic benefit cost $1.2 1.6 0.1 $2.9 $ 1.1 1.5 (0.4) $ 1.1 1.4 (1.7) $ 2.2 $ 0.8 from various third parties, such as the pension plans’ advisers, investment managers and actuaries, selected the 8.75% return assumption used for domestic plans. For measurement purposes, health care cost trend rates of Unrecognized prior service cost is amortized on an accelerated basis approximately 10% for pre-age-65 and post-age-65 benefits were over the average remaining service period of each active employee. used in 2003. These trend rates were assumed to decrease gradually Under the provisions of SFAS No. 88, lump sum distributions from the Company’s Supplemental Retirement Plan caused a partial A one-percentage-point change in assumed health care cost trend settlement of such plan, resulting in a charge of $1.9 million in 2001. rates would have the following effects: to 5.0% for 2009 and remain at that level thereafter. 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 Thousands of Dollars 1-Percentage- Point Increase 1-Percentage- Point Decrease Effect on total service and interest cost components Effect on postretirement benefit obligation 11 150 (12) (160) primarily in stocks and bonds. Additional Information Plan Assets The Company’s pension plan weighted average asset allocations at The weighted average assumptions used in the accounting for the December 31, 2003 and 2002 by asset category are as follows: pension benefit plans and other benefit plans as of December 31 are as follows: 2003 2002 2001 Asset Category Discount rate Expected return on plan assets Rate of compensation increase 6.25% 6.75% 7.25% 8.75% 8.75% 9.25% 3.50% 3.50% 4.00% Equity securities Fixed income securities Real estate Other Total Plan Assets at December 31, 2002 2003 68.9% 68.4% 30.1% 30.6% 0.4% 0.6% 0.4% 0.6% 100% 100% 44 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report The following table presents domestic and foreign pension plan Total future minimum payments to be received under direct financing assets information at December 31, 2003, 2002 and 2001 leases for each of the years 2004 through 2008 and in the aggregate (the measurement date of pension plan assets): thereafter are approximately $2.8 million, $2.6 million, $2.0 million, U.S. Plans $1.3 million and $1.0 million, respectively and $3.3 million thereafter. Millions of Dollars 2003 2002 2001 17. Litigation Fair value of plan assets $123.5 $87.6 $77.9 On April 9, 2003, the Connecticut Department of Environmental International Plans Protection (“DEP”) issued an administrative consent order which Millions of Dollars 2003 2002 2001 Fair value of plan assets $ 29.2 $23.7 $24.7 Contributions The Company expects to contribute $7 million to its pension plan and $10 million to its other postretirement benefit plan in 2004. Investment Strategies The Plan Assets Committee has adopted an investment policy for domestic pension plan assets designed to meet or exceed the expected rate of return on plan assets assumption. To achieve this, the pension plans retain professional investment managers that invest plan assets, primarily in equity and fixed income securities. The Company has targeted an investment mix of 65% in equity securities and 35% in fixed income securities. Savings and Investment Plans 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 $3.0 million, $2.9 million and $2.9 million for the years ended December 31, 2003, 2002 and 2001, respectively. 16. Leases had been agreed to by MTI, Specialty Minerals Inc. and Minteq International Inc. relating to the Canaan, Connecticut, site at which both Minteq and Specialty Minerals have operations. The order settled 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 to management of underground storage tanks. The order required payment of a civil penalty in the amount of $11,000 and funding of several supplemental environmental projects totaling $330,000. These amounts were paid on April 21, 2003. Cost of remediation at the site remains uncertain. Certain of the Company’s subsidiaries are among numerous defendants in a number of cases seeking damages for exposure to silica or asbestos-containing materials. Most of these claims do not provide adequate information to assess their merits, the likelihood that the Company will be found liable, or the magnitude of such liability if any. Additional claims of this nature may be made against the Company or its subsidiaries. At this time management antici- pates that the amount of the Company’s liability, if any, and the cost of defending such claims, will not have a material effect on its financial position or results of operations. 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. The Company has several noncancelable operating leases, primarily for office space and equipment. Rent expense amounted to 18. Stockholders’ Equity approximately $4.9 million, $4.6 million and $4.4 million for the Capital Stock years ended December 31, 2003, 2002 and 2001, respectively. The Company’s authorized capital stock consists of 100 million Total future minimum rental commitments under all noncancelable shares of common stock, par value $0.10 per share, of which leases for each of the years 2004 through 2008 and in the aggregate 20,491,499 shares and 20,155,787 shares were outstanding at thereafter are approximately $5.4 million, $4.8 million, $3.9 million, $3.0 million and $4.7 million, respectively and $8.1 million thereafter. December 31, 2003 and 2002, respectively, and 1,000,000 shares of preferred stock, none of which were issued and outstanding. 45 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Cash Dividends The following table summarizes stock option activity for the Plan: Cash dividends of $2.0 million or $0.10 per common share were paid during 2003. In January 2004, a cash dividend of approximately $1.4 million or $0.05 per share, was declared, payable in the first quarter of 2004. Preferred Stock Purchase Rights Under the Company’s Preferred Stock Purchase Rights Plan, each share of the Company’s common stock carries with it one preferred stock purchase right. Subject to the terms and conditions set forth in the plan, the rights will become exercisable if a person or group acquires beneficial ownership of 15% or more of the Company’s common stock or announces a tender or exchange offer that would result in the acquisition of 30% or more thereof. If the rights become exercisable, separate certificates evidencing the rights will be distributed, and each right will entitle the holder to purchase from the Company a new series of preferred stock, designated as Series A Junior Preferred Stock, at a predefined price. The rights also entitle the holder to purchase shares in a change-of-control situation. The preferred stock, in addition to a preferred dividend and liquidation right, will entitle the holder to vote on a pro rata Under Option Shares Available For Grant Shares Weighted Average Exercise Price Per Share ($) Balance January 1, 2001 Authorized Granted Exercised Canceled 1,252,989 2,519,214 – 252,500 (109,504) (42,057) 500,000 (252,500) – 42,057 Balance December 31, 2001 1,542,546 2,620,153 285,728 Granted (977,363) Exercised (20,335) Canceled (285,728) – 20,335 Balance December 31, 2002 1,277,153 1,908,183 82,435 Granted (483,978) Exercised (23,874) Canceled (82,435) – 23,874 Balance December 31, 2003 1,218,592 1,482,766 34.23 – 34.81 29.04 38.57 34.43 46.92 30.03 50.83 38.54 47.74 32.92 39.17 40.85 basis with the Company’s common stock. The following table summarizes information concerning Plan options at December 31, 2003: 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. Stock and Incentive Plan The Company has adopted a Stock Award and Incentive Plan (the “Plan”), which provides for grants of incentive and non-qualified stock options, stock appreciation rights, stock awards or performance unit awards. The Plan is administered by the Compensation Committee of the Board of Directors. 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. In 2001, the shareholders approved an amendment to increase the number of shares of common stock available under the Plan by an additional 0.5 million. Range of Exercise Prices $30.625 - 34.825 $36.725 - 39.530 $42.070 - 53.120 Range of Exercise Prices $30.625 - 34.825 $36.725 - 39.530 $42.07 - 53.120 46 Options Outstanding Weighted Number Remaining Outstanding Contractual at 12/31/03 Term (Years) Average Weighted Average Exercise Price 278,043 776,167 428,556 5.0 5.4 7.9 $33.00 $39.52 $48.40 Options Exercisable Number Exercisable at 12/31/03 225,773 762,667 191,685 Weighted Average Exercise Price $32.57 $39.53 $49.07 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report 19. Comprehensive Income Comprehensive income includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting to the extent they are effective, the minimum pension liability and cumulative foreign currency translation adjustments. The following table reflects the accumulated balances of other comprehensive income (loss) (in millions): Upon adoption, the Company recorded a non-cash, after-tax charge to earnings of approximately $3.4 million for the cumulative effect of this accounting change related to retirement obligations associated with the Company’s PCC satellite facilities and its mining properties, both within the Specialty Minerals segment. As a result of this pronouncement, the Company recorded additional depreciation and accretion expenses of approximately $1.0 million for full year 2003. Such charge is included in cost of goods sold. The pro forma effect on results, assuming that SFAS No. 143 were applied retroactively, Net Gain would be a non-cash, after-tax charge to earnings of approximately (Loss) Accumulated Currency Minimum On Cash Other Com- prehensive Income (Loss) Flow Pension Liability Hedges Translation Adjustment $0.5 million for the full year 2002. The following is a reconciliation of asset retirement obligations as of Balance at January 1, 2001 Current year change Balance at $(43.1) (11.9) $(1.0) $ 0.5 – 0.2 $(44.1) (11.2) December 31, 2003: Thousands of Dollars December 31, 2001 Current year change (55.0) 22.2 (0.5) (0.8) 0.2 (1.1) Balance at December 31, 2002 Current year change (32.8) 39.7 (1.3) (1.4) (0.9) 0.5 (55.3) 20.3 (35.0) 38.8 Balance at December 31, 2003 $ 6.9 $(2.7) $(0.4) $ 3.8 The income tax expense (benefit) associated with items included in other comprehensive income (loss) was approximately $0.8 million, ($1.1) million, and $0.4 million for the years ended December 31, 2003, 2002 and 2001, respectively. 20. Accounting for Asset Retirement Obligations Effective January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 establishes the financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Asset retirement liability, beginning of period Accretion expense Payments made Asset retirement liability, end of period $8,953 712 (350) $9,315 21. Accounting for Costs Associated with Exit or Disposal Activities Effective January 1, 2003, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities. During the first quarter of 2003, the Company paid approximately $660,000 of one-time termination benefits to a group of employees at the Specialty Minerals facility in the United Kingdom. Such charge is included in cost of goods sold. 22. Deferred Compensation In July 2003, the Company granted to certain corporate officers rights to receive 27,600 shares of the Company’s common stock under the Company’s 2001 Stock Award and Incentive Plan (the 2001 Plan). The rights will be deferred for a specified number of years of service, subject to restrictions on transfer and other conditions. Upon issuance of the rights, a deferred compensation expense equivalent to the market value of the underlying shares on the date of the grant was charged to stockholders’ equity and is being amortized over the estimated average deferral period of approximately 5 years. The compensation expense amortized with respect to the units during 2003 was approximately $135,600. 47 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report 23. Segment and Related Information Segment information for the years ended December 31, 2003, 2002 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 2003 deciding how to allocate 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 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 sells the natural mineral products limestone and talc. This segment’s 2002 and 2001was as follows (in millions): Specialty Minerals Refractories Net sales Income from operations Restructuring charges Writedown of impaired assets Bad debt expenses Depreciation, depletion and amortization Segment assets Capital expenditures $557.1 55.4 1.7 2.0 1.1 56.9 672.3 37.1 $256.6 21.8 1.6 1.2 4.2 9.4 253.9 12.4 Specialty Minerals Refractories Net sales Income from operations Bad debt expenses Writedown of impaired assets Depreciation, depletion and amortization Segment assets Capital expenditures $520.1 60.0 3.8 0.8 59.0 612.7 27.3 $232.6 20.9 2.4 – 10.0 238.6 9.7 Company evaluates performance based on the operating income 2001 of the respective business units. Depreciation expense related to corporate assets is allocated to the business segments and is included in their income from operations. However, such corporate depreciable assets are not included in the segment assets. Specialty Minerals’ segment sales to International Paper Company and affiliates represented approximately 10.0%, 11.5% and 13.0% of consolidated net sales in 2003, 2002 and 2001, respectively. Intersegment sales Net sales Income from operations Restructuring charges Bad debt expenses Depreciation, depletion and amortization Segment assets Capital expenditures and transfers are not significant. Specialty Minerals Refractories $483.3 55.5 3.0 0.6 55.9 587.9 54.3 $201.1 25.1 0.4 3.3 10.6 231.4 8.6 Total $813.7 77.2 3.3 3.2 5.3 66.3 926.2 49.5 Total $752.7 80.9 6.2 0.8 69.0 851.3 37.0 Total $684.4 80.6 3.4 3.9 66.5 819.3 62.9 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): Income before provision for taxes on income and minority interests Consolidated income from operations Interest income Interest expense Other deductions Income before provision for taxes on income and minority interests 2003 2002 2001 $ 77.2 0.8 (5.4) (0.3) $ 80.9 1.1 (5.8) (0.5) $ 80.6 0.8 (7.9) (0.8) $ 72.3 $ 75.7 $ 72.7 48 Notes to Consolidated Financial Statements Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Total assets Total segment assets Corporate assets 2003 2002 2001 Financial information relating to the Company’s operations by $ 926.2 109.3 $851.3 48.6 $819.3 28.5 geographic area was as follows (in millions): Consolidated total assets $1,035.5 $899.9 $847.8 Capital expenditures 2003 2002 2001 Total segment capital expenditures Corporate capital expenditures $49.5 3.2 $37.0 0.1 $62.9 0.2 Net sales United States Canada/Latin America Europe/Africa Asia Consolidated total capital expenditures $52.7 $37.1 $63.1 Total International 2003 2002 2001 $499.9 $482.2 $442.7 72.4 192.6 48.8 68.5 156.0 46.0 63.6 129.6 48.5 313.8 270.5 241.7 The following is a schedule of amortization expense related to good- Consolidated total net sales $813.7 $752.7 $684.4 will by segment: Amortization of Goodwill Thousands of Dollars Specialty Minerals Refractories Total Year Ended December 31, 2001 2002 2003 $ – – $ – $ $ – – – $ 373 991 $1,364 The carrying amount of goodwill by reportable segment as of December 31, 2003 and December 31, 2002 was as follows: Goodwill Thousands of Dollars Specialty Minerals Refractories Total Year Ended December 31, 2002 2003 $15,682 $14,637 36,654 37,039 $52,721 $51,291 The net change in goodwill since December 31, 2002 was primarily attributable to the effect of foreign exchange. Net sales and long-lived assets are attributed to countries and geographic areas based on the location of the legal entity. No individual foreign country represents more than 10% of consolidated net sales or consolidated long-lived assets. Long-lived assets United States 2003 2002 2001 $402.4 $400.6 $411.1 Canada/Latin America Europe/Africa Asia 24.5 154.7 37.1 21.5 141.3 31.9 28.5 115.3 31.4 Total International 216.3 194.7 175.2 Consolidated total long-lived assets $618.7 $595.3 $586.3 49 Quarterly Financial Data (unaudited) Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Thousands of Dollars, Except Per Share Amounts 2003 Quarters Net Sales by Product Line PCC Processed Minerals Specialty Minerals Segment Refractories Segment Consolidated net sales Gross profit Income before cumulative effect of accounting change Cumulative effect of accounting change Net income Earnings per share before accounting change: Basic Diluted Earnings per share after accounting change: Basic Diluted Market Price Range Per Share of Common Stock: High Low Close Dividends paid per common share First Second Third Fourth $109,252 28,523 137,775 63,675 201,450 49,767 14,917 3,433 $011,484 $ $ $ $ $ $ $ $ 0.74 0.74 0.57 0.57 44.25 35.45 37.79 0.025 $106,587 30,770 137,357 65,017 202,374 49,996 14,283 – $014,283 $ $ $ $ $ $ $ $ 0.71 0.70 0.71 0.70 50.20 37.57 48.14 0.025 $108,541 30,564 139,106 59,128 198,234 47,486 24,251 – $024,251 $ $ $ $ $ $ $ $ 1.20 1.18 1.20 1.18 53.15 47.09 51.44 0.025 $111,711 31,201 142,912 68,773 211,685 50,745 13,202 – $013,202 $ $ $ $ $ $ $ $ 0.65 0.64 0.65 0.64 60.75 50.90 59.25 0.025 In the fourth quarter of 2003, the Company recorded a $3.2 million writedown of impaired assets relating to the planned closure of the Company’s operations in River Rouge, Michigan and the retirement of certain SYNSIL® product assets made obsolete by an improved manufacturing process. In addition, the Company recorded restructuring charges of $3.3 million in the fourth quarter of 2003. The Company reversed certain tax accruals due to the expiration of the statute of limitations in the third quarter of 2003. As a result, the tax provision was decreased by $11.5 million in the third quarter and $3.5 million in the fourth quarter. 2002 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 Dividends paid per common share First Second Third Fourth $102,876 21,439 124,315 54,685 179,000 45,576 $ 13,543 $ $ $ $ $ $ 0.68 0.66 53.91 44.06 52.93 0.025 $103,320 24,380 127,700 59,128 186,828 46,166 $ 13,997 $ $ $ $ $ $ 0.68 0.67 53.84 49.12 49.32 0.025 $107,562 24,546 132,108 60,026 192,134 46,397 $ 14,213 $ $ $ $ $ $ 0.70 0.70 48.99 33.17 37.07 0.025 $109,230 26,726 135,956 58,762 194,718 45,806 $ 11,999 $ $ $ $ $ $ 0.60 0.59 46.07 36.38 43.15 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. 50 Independent Auditors’ Report Minerals Technologies Inc. and Subsidiary Companies 2003 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, 2003 and 2002 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, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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, 2003 and 2002 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 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. 143, “Accounting for Asset Retirement Obligations” effective January 1, 2003 and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002. KPMG LLP New York, New York January 22, 2004 51 Management’s Statement of Responsibility Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report 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 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, President and Chief Executive Officer John A. Sorel Senior Vice President, Finance and Chief Financial Officer Michael A. Cipolla Vice President, Corporate Controller and Chief Accounting Officer January 22, 2004 52 Directors, Committees and Officers Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Board of Directors Paul R. Saueracker Chairman of the Board, President and Chief Executive Officer John B. Curcio Retired Chairman of the Board and Chief Executive Officer Mack Trucks, Inc. Duane R. Dunham Former President and Chief Executive Officer Bethlehem Steel Corporation Steven J. Golub Managing Director Lazard Frères & Co. LLC Kristina M. Johnson Dean of the Edmund T. Pratt, Jr. 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 S. Garrett Gray School of Engineering, Duke University Vice President, General Counsel and Secretary Paul M. Meister Vice Chairman of the Board Fisher Scientific International Inc. Michael F. Pasquale Business Consultant, Retired Executive Vice President and Chief Operating Officer Hershey Foods Corporation John T. Reid Adjunct Professor, Stern Business School New York University William C. Steere, Jr. ❖ Michael A. Cipolla Vice President, Corporate Controller and Chief Accounting Officer William A. Kromberg Vice President, Taxes Gregory P. Kelm Treasurer Committees of the Board Corporate Governance Committee John T. Reid, Chair Duane R. Dunham Retired Chairman of the Board and Chief Executive Officer Kristina M. Johnson Pfizer Inc William C. Stivers Retired Executive Vice President and Chief Financial Officer Weyerhaeuser Company Jean-Paul Vallès Chairman Emeritus Corporate Officers Paul R. Saueracker ◆ Audit Michael F. Pasquale, Chair Kristina M. Johnson John T. Reid William C. Stivers Compensation John B. Curcio, Chair Duane R. Dunham Paul M. Meister Chairman, President and Chief Executive Officer Gordon S. Borteck ◆ Vice President, Organization & Human Resources ◆ Member, Management Committee of the Company ❖ Resigned, effective December 31, 2003 53 Investor Information Minerals Technologies Inc. and Subsidiary Companies 2003 Annual Report Stock Listings Annual Meeting Minerals Technologies Common Stock is listed on the The Minerals Technologies Annual Meeting will take place on New York Stock Exchange under the symbol MTX. Wednesday, May 26, 2004 at 2 p.m. in Room C on the eleventh floor of the J.P. Morgan Chase & Co. Building, 270 Park Avenue, Registrar and Transfer Agent New York, NY 10017. 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 Inquiries concerning transfer requirements, stock holdings, March 29, 2004. dividend checks, duplicate mailings, and change of address should be directed to: Equiserve, Inc. P.O. Box 43011 Providence, RI 02940-3011 Shareholder Inquiries: 1-800-426-5523 www.equiserve.com Form 10-K Investor Relations 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 The Company, upon written request, will provide without charge New York, NY 10174-1901 to each stockholder a copy of the Company’s annual report on Form 212-878-1831 10-K filed with the Securities and Exchange Commission for the For further information on Minerals Technologies Inc. fiscal year ended December 31, 2003, including the financial visit the Company’s website at www.mineralstech.com schedule thereto. The report will be available on or about March 15, 2004. Requests should be directed to: Secretary Minerals Technologies Inc. The Chrysler Building 405 Lexington Avenue New York, NY 10174-1901 This annual report is printed on paper containing PCC produced by Specialty Minerals Inc., a wholly-owned subsidiary of Minerals Technologies Inc. Designed and produced by Firefly Design + Communications Inc., New York, NY 54 LEADING MTI FACING THE CHALLENGE EVERY DAY M i n e r a l s T e c h n o l o g i e s I n c . 2 0 0 3 A n n u a l R e p o r t MINERALS TECHNOLOGIES INC. The Chrysler Building 405 Lexington Avenue New York, NY 10174-1901 www.mineralstech.com MLTCM-AR-04 Minerals Technologies Inc. 2003 Annual Report