Minerals Technologies Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 3, 2022; comparisons are with the periods ended July 4, 2021. MTI develops and sells specialty minerals, mineral-based and synthetic products, and related systems and services through Performance Materials, Specialty Minerals, and Refractories. Financial statements are unaudited; the independent accountant conducted a review, not an audit.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $557.0m | $455.6m | $1,076.1m | $908.2m |
| Income from operations | $69.4m | $63.7m | $135.6m | $122.5m |
| Operating margin | 12.5% | 14.0% | 12.6% | 13.5% |
| Production margin | 22.9% | 25.3% | 23.1% | 25.0% |
| Net income attributable to MTI | $44.9m | $41.9m | $89.0m | $81.8m |
| Diluted EPS | $1.36 | $1.23 | $2.69 | $2.41 |
- Q2 sales grew 22%; management attributed growth to demand across segments and pricing. Acquisitions contributed $33.3m of Q2 sales ($29.2m Normerica and $4.1m Concept Pet), while foreign exchange reduced sales by about $21m, or 5 percentage points.
- For the first half, sales grew 18%, including $56.9m from Normerica and $4.1m from Concept Pet; foreign exchange reduced sales by about $37m, or 4 percentage points.
- All segments grew sales in Q2: Performance Materials +26% to $299.6m, Specialty Minerals +15% to $164.3m, and Refractories +25% to $93.1m. Refractories operating income rose 38% to $16.2m; Performance Materials rose 6% to $36.9m; Specialty Minerals was nearly flat at $20.2m.
- Higher raw-material, energy and manufacturing costs outpaced the timing of pricing actions, compressing production and operating margins. Q2 included $2.6m of acquisition-related costs and $1.5m of litigation costs; first-half amounts were $4.2m and $1.5m, respectively.
- Q2 net interest expense was $10.4m versus $9.1m; the effective tax rate was 20.2% versus 18.7%. First-half effective tax was 20.1% versus 18.4%, with the prior-year rate benefiting from a foreign deferred-tax rate change.
Cash flow, balance sheet and debt
- First-half operating cash flow was $33.2m, down from $118.0m. Management cited a deliberate inventory build and higher accounts receivable associated with higher pricing. Capital expenditures were $40.2m; acquisition spending was $22.3m.
- Cash and cash equivalents were $234.7m, with $2.0m of short-term investments, at July 3, versus $299.5m and $4.9m at year-end. Cash declined $64.8m in the first half, including a $17.9m adverse foreign-exchange effect.
- Total debt was approximately $1.05bn, including $110.0m of short-term/revolver borrowings. Long-term debt, net of current maturities, was $939.3m. The company reported more than $400m of available liquidity, including cash and revolving-facility availability; $10.4m of letters of credit were also outstanding.
- The principal debt maturities include approximately $548.8m in 2024 and $400.3m thereafter; the latter includes $400m of 5.0% senior notes due 2028. The revolving facility matures in April 2023. MTI reported compliance with its debt covenants.
- Current assets were $1,067.5m and current liabilities $465.9m. Inventories rose to $339.9m from $297.7m at year-end. The company repurchased $40.7m of shares and paid $3.3m in common dividends during the first half.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. MTI expects 2022 capital expenditures of $80m–$85m and described growth priorities including pet care, environmental products, paper and packaging applications, and refractory products and services. Management cautioned that planned initiatives may not succeed.
- Management said Q2 results were strong and demand improved in many end markets. COVID-19 was not having a material negative effect at the reporting date, but its duration and effects on customers and suppliers remained uncertain; China lockdowns weighed on Metalcasting demand.
- Key exposures include inflation in raw materials, energy and shipping; foreign-exchange and interest-rate movements; cyclical construction, automotive, paper, foundry and steel markets; customer concentration/consolidation; supply, mining and operational risks; and execution of growth initiatives. A 1 percentage-point interest-rate change, including derivatives, was estimated to add $1.3m of annual interest expense.
- There were 420 open asbestos cases involving talc products and operations. Management could not estimate claimed amounts and did not expect the liability, if any, or defense costs to materially affect results or financial position; most defense costs are reimbursed under agreements, with stated exceptions for AMCOL and American Colloid cases.
- Concept Pet was acquired on April 29 for a purchase price of $28.0m; consideration net of acquired cash was $22.3m. Normerica’s purchase-price allocation remained preliminary at the reporting date. A $1.9m restructuring liability was expected to be paid by year-end. The filing reported no material changes to risk factors from the 2021 Form 10-K.
Investor verification priorities
- Whether pricing actions catch up with inflation and restore production and operating margins.
- Whether inventory and receivables unwind sufficiently to improve operating cash flow and working-capital conversion.
- Liquidity, covenant headroom and refinancing plans for the 2023 revolver maturity and significant 2024 debt maturity.
- Acquisition integration, Concept Pet and Normerica performance, and final purchase-price allocations.
- Developments in asbestos litigation, including the number and potential cost of claims and applicable indemnification.