Business context and reporting period
Minerals Technologies Inc. (MTI) is a global producer of specialty minerals, mineral-based and synthetic products, and related services. This unaudited Form 10-Q covers the three and six months ended July 2, 2017, compared with the periods ended July 3, 2016. The company reports four segments: Specialty Minerals, Performance Materials, Refractories and Energy Services. In the first quarter of 2017, management combined the former Performance Materials and Construction Technologies operations into one operating segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $414.1 million | $427.0 million | $819.1 million | $837.2 million |
| Income from operations | $68.5 million | $39.5 million | $130.2 million | $97.1 million |
| Operating margin | 16.5% | 9.3% | 15.9% | 11.6% |
| Net income attributable to MTI | $43.0 million | $21.2 million | $77.6 million | $55.1 million |
| Diluted EPS | $1.21 | $0.60 | $2.18 | $1.57 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $77.6 million | $102.1 million |
Q2 production margin was $119.7 million, or 28.9% of sales, versus $121.1 million, or 28.4%. For the first half, production margin was $233.4 million, or 28.5%, versus $233.8 million, or 27.9%. Management attributed the margin-rate improvement to lower manufacturing costs and improved productivity. Q2 net income in the income statement is $43.8 million consolidated, including $0.8 million attributable to non-controlling interests.
For the first half, capital expenditures were $33.1 million; cash dividends paid were $3.5 million. Cash and cash equivalents were $177.7 million at July 2, 2017, with $4.8 million of short-term investments. Total current assets were $804.0 million and current liabilities were $298.3 million.
Total debt was $1,025.8 million, including $6.5 million of current maturities; reported long-term debt, net of current maturities and financing costs, was $1,019.3 million. Debt at December 31, 2016 was $1,076.7 million. MTI repaid $50 million on its term facility in the first half and reported $530 million of cumulative term-loan repayments since the 2014 AMCOL acquisition. The revolving facility had no borrowings and $12.0 million of letters of credit outstanding; MTI reported compliance with its covenants.
Material changes versus the prior comparable period
- Q2 sales declined 3%; first-half sales declined 2%. For the first half, U.S. sales fell 6%, while international sales increased 3%. Foreign exchange reduced sales by approximately $5 million in the first half.
- Operating income rose 73% in Q2 and 34% in the first half. The comparison benefited materially from 2016 Energy Services restructuring and impairment charges: $28.8 million in Q2 2016 and $29.7 million in the first half of 2016. Current-period restructuring charges were $0.2 million and $0.5 million, respectively.
- Lower debt and the February 2017 term-loan repricing reduced Q2 net interest expense to $10.2 million from $13.9 million. First-half non-operating deductions nevertheless increased to $27.6 million from $25.7 million, including $3.9 million of debt modification costs and fees.
- Segment sales in Q2 declined at Specialty Minerals (2%), Refractories (7%), Performance Materials (1%) and Energy Services (11%). Metalcasting grew 11%, but declines included Environmental Products (26%) and Household, Personal Care and Specialty Products (10%). Energy Services’ Q2 operating result improved to income of $0.8 million from a $29.5 million loss, largely reflecting the absence of the prior-year charges.
Outlook, commentary and risks
Management described its outlook as cautious regarding the global economy and its effect on product lines. It identified growth initiatives across existing businesses, including paper and specialty PCC, metalcasting in emerging markets, pet care, refractory products, environmental and construction markets, and Energy Services filtration and well-testing offerings. These are strategic priorities, not quantified earnings or sales guidance; management cautioned that success is not assured.
MTI expects 2017 capital expenditures of $70 million to $75 million, principally for PCC plants and other strategic growth opportunities. Management intends to use excess cash flow primarily to repay debt and continue deleveraging. It also expects to contribute approximately $8.0 million to pension plans and $0.6 million to other postretirement plans in 2017.
Key exposures include weak oil and gas market conditions, foreign-currency movements and floating-rate debt. The company estimates that a one-percentage-point interest-rate change would affect annual interest charges by $7.2 million; an interest-rate swap hedged a portion of floating-rate debt, with a $228 million notional amount at period-end. MTI reported no material changes to the risk factors in its 2016 Form 10-K.
Contingencies include the Armada litigation, for which MTI accrued an immaterial estimated amount and whose district-court proceedings were stayed pending appeal; silica and asbestos cases, which management does not expect to materially affect results; and environmental remediation obligations. Accrued estimated remediation costs were approximately $0.4 million each for the Canaan, Connecticut and Adams, Massachusetts sites. The filing also cites a possible $6 million to $8 million cost for future wastewater-treatment upgrades at Adams, with timing and scope subject to evaluation.
The interim financial statements received an independent accountant’s review, not an audit. Management said disclosure controls were effective; it also noted that migration to the acquired businesses’ ERP system could affect internal controls, while stating that the implementation was substantially complete and controls were functioning effectively.
Important facts for investors to verify
- How much of the earnings and margin improvement reflects sustainable operating performance versus the absence of 2016 impairment and restructuring charges.
- Whether sales pressure in paper PCC, Refractories and Energy Services persists, and whether growth in Metalcasting and other products offsets it.
- Progress on operating cash flow, working-capital use, planned capital spending and continued debt reduction.
- Debt maturities, variable-rate exposure, refinancing terms and ongoing covenant compliance.
- Developments in the Armada appeal, asbestos and silica matters, and environmental remediation estimates.
- The expected effects of the new revenue-recognition standard, which MTI was still assessing and planned to adopt using the cumulative-effect method.