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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Feb. 28, 2013

Reclassifications were made to prior-year financial statements to conform to the current-year presentations—amounts previously reported as “Other, Net” in the Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities were reclassified to “Equity in Results of Joint Venture” and “Other, Net” in the Changes in Assets and Liabilities and “Long-Term Incentives” was reclassified from “Other” within the Long-Term Liabilities section of the Condensed Consolidated Balance Sheets.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts for MSC after all intercompany transactions have been eliminated. In South America, the Company owns 51% of the equity and holds 50% of the voting rights in a joint venture partnership with Tekno S.A. (“Tekno”), which manufactures and sells acoustical products. Under the terms of the Tekno agreement, significant actions require unanimous consent of all parties and, as a result, MSC does not have a controlling interest in Tekno. Accordingly, the Company accounts for Tekno under the equity method.

Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable and accounts payable. The carrying amounts of these financial assets and liabilities approximate fair value due to the short maturities of these instruments.

Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposits and highly liquid investments, principally U.S. Treasury bills, with original maturities of three or fewer months. At February 28, 2013, we held approximately $30.0 million of U.S. Treasury bills with maturities from March 14 to May 30, 2013. The Company has not experienced any losses as a result of its cash concentration. Consequently, no significant concentration of credit risk is considered to exist.

Accounts Receivable

Accounts receivable are recorded at their estimated fair value, net of allowances for doubtful accounts, claims, discounts and other credits expected to be granted to customers. The Company provides reserves for uncollectible receivables due to customer bankruptcy, insolvency or disputes over terms and conditions. The methodology for calculating the allowance for doubtful accounts includes an assessment of specific receivables that are aged and an assessment of the aging of the total receivable pool. MSC also records reductions of revenue for credits issued to customers resulting from manufacturing claims for product defects based upon historical experience and upon specific claims issues as they arise. Any differences between these estimates and actual costs are recorded on a monthly basis and are reflected in the historical experience prospectively. Total accounts receivable reserves were $0.5 million and $0.7 million at February 28, 2013, and February 29, 2012, respectively.

Inventories

Inventories are stated at the lower of cost or market, using either the specific identification or average cost method of cost valuation. Due to the continuous nature of the Company’s operations, work-in-process inventories are not material. MSC holds some of its inventory at outside processors and locations. The Company had approximately $5.3 million and $2.7 million of inventory at outside processors at February 28, 2013, and February 29, 2012, respectively. We had inventory reserves and other valuation adjustments of $1.2 million as of February 28, 2013, and February 29, 2012, net of scrap inventory that can be sold on the secondary market.

Commodity Contracts

We are exposed to certain risks related to ongoing business operations. We enter into derivative instruments with the objective of managing our financial and operational exposure arising from these risks. The primary risk managed by using derivative instruments is commodity price risk. From time-to-time in the ordinary course of business, the Company enters into purchase contracts for procuring nickel carbonate, zinc shot and natural gas, which are commodities used in its manufacturing processes. These agreements are intended to mitigate the market risk and volatility associated with the pricing of these commodities. MSC maintains a commodity forward purchase policy, which seeks to ensure that at any time the majority of the expected consumption over the next 12 months is secured under a purchase contract at a predetermined price. When we enter into these contracts, we apply the Normal Purchase/Normal Sale election for each of them, which excludes them from being accounted for as derivative instruments at fair value as long as they qualify for the election.

Long-Lived Assets

Property, plant and equipment are recorded at cost. Improvements and replacements are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the assets’ estimated useful lives as follows: buildings and building improvements, 5 to 20 years; operating equipment, 5 to 20 years; furniture and fixtures, 5 to 10 years; software, 5 years. Leasehold improvements are amortized over the lesser of their expected useful life or the remaining life of the lease.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, based on projections of non-discounted cash flows. If the carrying value of the depreciable long-lived assets is higher than the undiscounted cash flows related to the asset group, an impairment loss may be necessary. The impairment would be measured by the difference between the fair value of the assets and their carrying value. Fair value is determined based on market quotes, if available, or based on valuation techniques such as discounted cash flows. The valuation techniques require us to make assumptions, including, but not limited to, estimated fair value of assets, which are based on additional assumptions, such as public market data; depreciation factors for orderly liquidation, including allowances such as dismantlement and removal; and the relationship between replacement cost and market value based on the age of the assets.

There were no events during fiscal 2013 or fiscal 2012 that would trigger a review for impairment. There was an event in fiscal 2011 that triggered an impairment review of the assets at our Plant #7 in Elk Grove Village, IL. For further information, see Note 15, “Asset Impairment.”

Revenue Recognition

The Company recognizes revenue when delivery has occurred and the risk of loss has passed to the customer. This is generally upon shipment of goods to customers, except when shipping terms dictate otherwise. The Company records shipping and handling billed to a customer in a sales transaction as revenue. Costs incurred for shipping and handling are recorded in cost of sales. Volume discounts due customers are recognized as earned and reported as reductions of revenue in the Consolidated Statements of Operations.

Research and Development

The Company expenses all research and product development costs in the period incurred. Research and product development expenses of $4.1 million, $3.9 million and $2.3 million in fiscal 2013, 2012 and 2011, respectively, are included in selling, general and administrative expenses on the Consolidated Statements of Operations.

Foreign Currency

The Company’s international operations are translated into U.S. dollars using current exchange rates at the balance sheet date for assets and liabilities. A weighted average exchange rate is used to translate sales, expenses, gains and losses. The currency translation adjustments are reflected in accumulated other comprehensive loss in Shareowners’ Equity. Transactions denominated in currencies other than U.S. dollars are translated at the spot rate when the transaction is settled. Any gains or losses from the settlement are reflected in other income in the Consolidated Statement of Operations.

Income Taxes

Deferred income taxes have been provided to show the effect of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit, or that future deductibility is uncertain. The Company regularly reviews and adjusts the valuation allowance to reflect changes in the realizability of the deferred tax assets. MSC maintains a liability for the potential tax adjustment related to our uncertain tax positions.

Equity Plans

Stock-based compensation is accounted for based on the grant date fair value of the awards, or, for phantom stock, based on the market value of the underlying stock. The fair value of equity grants is amortized over the vesting period for each grant. The fair value of stock options is computed using the Black-Scholes model. The Company has one active equity award plan: the Material Sciences Corporation 2012 incentive Compensation Plan (“2012 Plan”). See Note 10 entitled “Equity and Compensation Plans” for additional discussion.

The Company recorded $0.6 million, $0.3 million, and $0.2 million of compensation expense related to stock options and restricted stock grants in fiscal 2013, 2012, and 2011, respectively. See Note 10 entitled “Equity and Compensation Plans” for a complete discussion of these items.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss at February 28, 2013, and February 29, 2012, are as follows:


(in thousands)	February 28, 2013			February 29, 2012
Foreign Currency Translation	$	1,182		$	1,764
Pension Liability, Net of Tax of $1,974 and $2,208		(4,532	)		(4,911	)
Other Post Retirement Liabilities, Net of Tax of $1,027 and $935		526			677
Total	$	(2,824	)	$	(2,470	)

Recent Accounting Pronouncements

On June 16, 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-05, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (“OCI”). The ASU does not change the items that must be reported in OCI. For public entities, the ASU’s amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted the guidance in the ASU effective with its first quarter fiscal 2013 Form 10-Q. No material changes resulted from the adoption except for the addition of a statement of comprehensive income to the primary financial statements presented in Forms 10-Q subsequent to the adoption date.

On February 5, 2013, the FASB issued ASU 2013-02, which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the ASU is effective for reporting periods beginning after December 15, 2012. The Company is currently evaluating the impact of adopting this guidance, which may result in changes in the presentation of its financial statements.

Consideration of Events Subsequent to the Date of the Consolidated Balance Sheet

The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the Consolidated Balance Sheet, including the estimates inherent in the process of preparing the consolidated financial statements. MSC does not recognize subsequent events that provide evidence about conditions that did not exist at the date of the Consolidated Balance Sheet but arose after that date and before the consolidated financial statements are issued. For these purposes, and relating to the February 28, 2013, Consolidated Balance Sheet, the Company has evaluated events occurring after that date through the date of this report. Any significant events that occurred after February 28, 2013, and which had an effect on the February 28, 2013, consolidated financial statements are reflected in these statements or the related notes, and are identified as subsequent events.