Minerals Technologies Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly period ended July 4, 2010; comparisons are with the three and six months ended June 28, 2009. Minerals Technologies operates through Specialty Minerals and Refractories, serving paper, steel, construction, automotive and other industrial markets. Financial statements are unaudited; KPMG performed an interim review, not an audit.
Financial performance and position
| Metric | Second quarter 2010 | First half 2010 |
|---|---|---|
| Net sales | $255.8 million, up 23% | $509.2 million, up 22% |
| Production margin | $55.0 million; 21.5% of sales | $106.4 million; 20.9% of sales |
| Operating income | $27.5 million; 10.8% margin | $50.6 million; 9.9% margin |
| Net income attributable to MTI | $19.0 million; diluted EPS $1.01 | $34.3 million; diluted EPS $1.83 |
| Operating cash flow | Approximately $42 million, per management | $75.5 million |
First-half capital expenditures were $16.0 million. Operating cash flow less capital expenditures was approximately $59.4 million, calculated from reported amounts. Cash and cash equivalents were $336.8 million and short-term investments $10.0 million at July 4. Total debt, including short-term debt and current maturities, was approximately $100.5 million. Management reported available credit lines of $177 million, a 12% debt-to-equity ratio and a 4.1 current ratio. The board declared a $0.05 quarterly dividend per share.
Material changes versus the prior comparable period
- Second-quarter sales increased 23%; first-half sales increased 22%, supported by higher volumes, improving end markets and favorable foreign exchange. First-half foreign exchange contributed approximately $12.1 million, or about 3 percentage points, to sales growth.
- Both segments returned to operating profitability. Second-quarter Specialty Minerals operating income was $19.3 million versus $4.3 million; Refractories reported $9.3 million versus a $45.3 million loss. First-half results were $37.7 million versus $14.1 million and $15.1 million versus a $47.5 million loss, respectively.
- Second-quarter production margin rose 70%, faster than sales, while cost of goods sold declined to 78.5% of sales from 84.5%. Management cited higher volumes, productivity and restructuring benefits. Price concessions and, in the first half, higher raw-material costs partly offset these gains.
- Prior-year comparisons included $37.5 million of impairment charges and $9.6 million of second-quarter restructuring charges; neither was recorded in second-quarter 2010. First-half 2010 restructuring costs were $0.9 million versus $10.1 million in the prior-year period.
- First-half operating cash flow increased from $62.8 million to $75.5 million. Cash increased by $25.8 million during the half, despite a $17.8 million adverse foreign-exchange effect. The company repurchased $10.4 million of shares during the half.
Outlook, management commentary, risks and contingencies
Management said demand improved in steel, construction and automotive markets and highlighted volume recovery, restructuring and productivity improvements. It expects 2010 capital expenditures of $50 million to $75 million, principally for PCC plants and other strategic growth projects. The company estimated annualized savings of $16 million to $20 million from its 2009 restructuring program; first-half realized compensation-related savings were $6.2 million and depreciation savings were $2.4 million. No specific revenue or earnings guidance was provided.
- Key risks include uncertain global economic conditions; customer shutdowns, consolidation or liquidity problems; pricing pressure; termination or less favorable renewal of long-term Paper PCC contracts; raw-material supply and cost volatility, including reliance on China for magnesium oxide; energy costs; pension assumptions; foreign-exchange exposure; and environmental regulation.
- At July 4, the company reported 305 pending silica cases and 28 asbestos cases. Management did not expect these claims to materially affect financial position or results, but claim amounts and ultimate outcomes were not determinable from the filings.
- Environmental matters include accrued estimated remediation costs of about $0.4 million at the Canaan, Connecticut site and $0.4 million at the Adams, Massachusetts site. The Adams groundwater containment system was estimated to require $3 million in capital spending; potential later wastewater-treatment upgrades were estimated at $6 million to $8 million.
- Foreign-currency translation reduced first-half other comprehensive income, including a $33.8 million translation loss. The company also reported a $0.8 million customer-contract termination settlement and a $0.2 million gain on sale of previously impaired assets in first-half non-operating income.
- The company was implementing a global ERP system. Management reported disclosure controls effective as of July 4, 2010, while noting ERP migration could affect internal controls as implementation proceeds.
Important facts for investors to verify
- Whether improved end-market volumes and segment margins are sustained, and how pricing, raw-material and energy costs affect profitability.
- Progress against the $16 million to $20 million annualized savings expectation and completion of restructuring programs.
- Capital spending versus the $50 million to $75 million full-year outlook, and the continued strength of operating cash flow and working capital.
- Debt maturities, availability and terms of uncommitted credit lines, and future share repurchases under the remaining authorization.
- Developments in silica/asbestos litigation, environmental remediation requirements and ERP implementation controls.