Minerals Technologies Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the periods ended July 1, 2012. Minerals Technologies operates through Specialty Minerals and Refractories. Financial statement amounts below are in U.S. dollars; “million” is used for readability.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $256.8 million | $251.4 million | $507.4 million | $505.9 million |
| Production margin | $58.8 million; 22.9% of sales | $56.8 million; 22.6% | $114.7 million; 22.6% | $112.4 million; 22.2% |
| Income from operations | $32.4 million; 12.6% of sales | $30.1 million; 12.0% | $60.6 million; 12.0% | $58.0 million; 11.5% |
| Income from continuing operations, net of tax | $22.7 million | $20.7 million | $43.0 million | $39.9 million |
| Net income attributable to MTI | $17.1 million | $19.7 million | $35.9 million | $37.7 million |
| Diluted EPS from continuing operations | $0.63 | $0.57 | $1.18 | $1.09 |
| Total diluted EPS attributable to MTI | $0.49 | $0.56 | $1.02 | $1.06 |
Q2 sales increased 2%; first-half sales were essentially flat. Foreign exchange reduced sales by approximately $3.7 million in Q2 and $5.7 million in the first half. Q2 U.S. sales were $142.8 million, while international sales rose 5% to $114.0 million.
Segment results: Q2 Specialty Minerals sales rose 2% to $168.3 million and operating income rose 11% to $25.2 million. Refractories sales rose 3% to $88.5 million, but operating income declined to $8.5 million from $8.7 million. For the first half, Specialty Minerals operating income was $48.5 million versus $43.5 million; Refractories operating income was $15.4 million versus $17.8 million.
For the first half, cash provided by continuing operations was $59.9 million, down from $66.6 million; cash provided by operating activities, including discontinued operations, was $57.0 million versus $64.8 million. Capital expenditures were $21.7 million. Cash and cash equivalents were $458.1 million at June 30, plus $15.9 million of short-term investments. Total debt was $90.8 million, including $75.6 million of current maturities; the company reported a 10.0% debt-to-capital ratio. Current assets were $785.8 million and current liabilities were $256.8 million.
Material changes and unusual items
- MTI ceased operations at its Walsum, Germany merchant Paper PCC plant in Q2 and classified it as discontinued operations. The closure generated $5.9 million of pre-tax costs and a $4.9 million after-tax Q2 loss ($5.7 million for the first half). Prior periods were reclassified.
- Continuing-operations earnings improved, but the Walsum loss reduced reported net income attributable to MTI and total EPS. Q2 continuing-operations diluted EPS rose 11% to $0.63, while total diluted EPS fell to $0.49 from $0.56.
- The Q2 effective tax rate fell to 26.6% from 29.6%, primarily due to tax reserves released after U.S. tax audits and reinstated research and development tax credits. The first-half rate was 27.4% versus 29.6%.
- Q2 foreign-exchange losses contributed to higher non-operating deductions, which were $1.5 million versus $0.8 million.
- MTI repurchased 258,400 shares in Q2 for an average $41.42 per share. Since the program began, it had repurchased 1,120,225 shares for $50.8 million, with $24.2 million remaining under the authorization.
Outlook, management commentary, and risks
Management described the global outlook, particularly Europe, as uncertain and remained cautious. It expects to refinance $75 million of private-placement notes maturing in October 2013. Expected 2013 capital expenditures are $55–$65 million. Management expects the FulFill program to contribute $2.5–$3.0 million to 2013 operating income; MTI reported 13 commercial FulFill contracts. Its SULB Bahrain agreement generated $4.9 million in Q2, with approximately $10 million of annual revenue expected over the contract’s three-year term. These are forward-looking expectations, not guarantees.
Management cited weak steel conditions in North America and Europe, paper-market declines, customer mill closures or financial distress, industry consolidation and pricing pressure, raw-material availability and costs (including magnesium oxide sourced partly from China), energy costs, pension assumptions, foreign-exchange exposure, and environmental regulation as risks. Steel production in North America and Europe and printing-and-writing paper production in North America and Europe were each down approximately 5% and 3%, respectively, year over year in Q2, according to the filing.
Legal and environmental matters include 72 pending silica cases and 12 pending asbestos cases; management did not expect these claims to materially affect financial position or results. Accrued estimated remediation costs were approximately $0.4 million each for the Canaan, Connecticut site and the Adams, Massachusetts site. The filing also describes potential Adams wastewater-treatment upgrades estimated at $6–$8 million, with timing and scope still under evaluation.
The interim financial statements were reviewed by KPMG, not audited; KPMG reported it was not aware of material modifications needed for U.S. GAAP conformity. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the October 2013 $75 million debt maturity was refinanced and on what terms.
- Whether the Walsum closure costs are complete and whether any further discontinued-operation charges or disposal costs arise.
- Progress against the $2.5–$3.0 million FulFill operating-income expectation and the SULB contract revenue outlook.
- Whether cash generation, capital spending, and working-capital trends support the company’s investment and shareholder-return plans.
- Developments in steel and paper end markets, foreign exchange, input costs, customer credit quality, and the disclosed litigation and environmental contingencies.