Minerals Technologies Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended April 2, 2017; comparable period ended April 3, 2016. Figures are in millions of dollars except per-share data. The company supplies specialty mineral, mineral-based and synthetic mineral products, systems and services worldwide. In Q1, it reorganized Performance Materials and Construction Technologies into a single operating segment; it now reports four segments.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $405.0 | $410.2 | -1.3% |
| Production margin | $113.7; 28.1% | $112.7; 27.5% | Margin +0.6 percentage points |
| Operating income | $61.7; 15.2% | $57.6; 14.0% | +7.1% |
| Net income attributable to MTI | $34.6 | $33.9 | +2.1% |
| Diluted EPS | $0.97 | $0.97 | Unchanged |
| Operating cash flow | $15.9 | $41.8 | Down $25.9 |
| Capital expenditures | $13.1 | $15.7 | Down $2.6 |
Interest expense, net, was $11.8, versus $14.1. Q1 included $3.9 of debt modification costs and fees and $1.5 of acquisition integration costs and $0.3 of restructuring charges. Management said these items reduced earnings by $0.10 per share in total. The effective tax rate declined to 22.2% from 23.7%, primarily due to the accounting treatment of share-based payments.
Balance sheet and liquidity
- At April 2, cash and cash equivalents were $168.5, short-term investments were $3.8, and current assets and current liabilities were $786.1 and $297.4, respectively.
- Long-term debt, net of discount and financing costs, was $1,050.7; current maturities were $6.9 and short-term debt was $5.9. The company repaid $20.0 of term debt during the quarter.
- Operating cash flow was pressured by a $45.3 net use of cash from changes in operating assets and liabilities, compared with a $20.4 use in Q1 2016. Cash declined $20.0 to $168.5.
- No revolving-facility loans were outstanding; $12.0 of letters of credit were outstanding. The company reported compliance with its credit covenants. It had $35.1 of uncommitted short-term credit lines, of which $5.9 was in use.
Material changes and segment trends
- U.S. sales fell 8.1% to $224.3, while international sales rose 8.9% to $180.7.
- Specialty Minerals sales decreased 6.0% to $146.2, mainly as Paper PCC sales fell 9.5% following North American mill shutdowns; China Paper PCC sales were up 9%. Segment operating income was $24.4, compared with $25.7.
- Performance Materials sales rose 6.5% to $169.9, led by Metalcasting and Basic Minerals. Operating income increased to $28.8 from $28.2, while margin eased to 17.0% from 17.7%.
- Refractories sales increased 1.4% to $70.2; operating income rose to $9.2 from $6.8, with margin improving to 13.1% from 9.8%.
- Energy Services sales declined 27.5% to $18.7, reflecting the exit from certain onshore service lines and weak oil and gas markets. The segment returned to operating income of $1.7 from a loss of $0.1.
- Consolidated operating margin improved despite lower sales, as lower manufacturing costs, including productivity gains, and reduced marketing and administrative expenses supported profitability.
Outlook, risks and unusual items
- Management was cautious about the global economy and its potential effect on product lines. It provided no specific earnings or revenue guidance in the filing.
- Management expects 2017 capital expenditures of $70–$75, principally for PCC plants and strategic growth opportunities. Excess cash flow is intended primarily for debt repayment and deleveraging.
- Growth initiatives include new PCC capacity in Indonesia: an agreement for a 125,000-metric-ton satellite facility and an expansion adding 40,000 metric tons. The company also cited growth opportunities in emerging markets and new products. Management cautioned that success is not assured.
- Debt repricing in February 2017 extended the floating-rate term tranche maturity to 2024 and lowered its interest margin by 75 basis points. The floating tranche bears adjusted LIBOR, subject to a 0.75% floor, plus 2.25%; a $243 notional interest-rate swap hedged part of floating-rate exposure at an effective fixed rate of 4.25% through May 2021.
- Interest-rate sensitivity is material: the filing estimates a one-percentage-point rate change would affect annual interest charges by $6.2. The company also cites foreign-exchange risk.
- Contingencies include Armada litigation, for which a non-material accrual was recorded; three silica and 19 asbestos cases; and environmental matters. Accrued remediation estimates were $0.4 each for the Canaan, Connecticut, and Adams, Massachusetts, sites. Potential wastewater upgrades at Adams were estimated at $6–$8, though the remaining remediation accrual is $0.4.
- Unrecognized income tax benefits totaled approximately $14.0; management did not expect changes over the next 12 months to significantly affect results or financial position. The filing reported no material change in risk factors from the 2016 Form 10-K.
- The interim financial statements were reviewed, not audited, by the independent registered public accounting firm.
Investor verification points
- Check whether the improvement in operating margin and segment performance is sustained, particularly given lower U.S. sales and Paper PCC demand.
- Monitor operating cash flow and working-capital movements, cash balances, debt repayments, and the pace of deleveraging.
- Verify progress, capacity, timing and capital requirements for the Indonesia PCC projects and the stated 2017 capital expenditure range.
- Track exposure to floating rates, covenant headroom, debt maturities and the effect of the 2017 repricing and interest-rate swap.
- Follow litigation and environmental developments, including the Armada case and site remediation estimates, as actual liabilities could differ from accruals.