Minerals Technologies Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended April 3, 2016; comparisons are with the three months ended March 29, 2015. The interim financial statements are unaudited and were reviewed by the independent auditor.
Business context and results
Minerals Technologies develops, produces and sells specialty mineral, mineral-based and synthetic mineral products, related systems and services. It reports five segments: Specialty Minerals, Refractories, Performance Materials, Construction Technologies and Energy Services.
| Metric | Q1 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $410.2 million | $453.3 million | Down 9.5% |
| Income from operations | $57.6 million | $59.9 million | Down 3.8% |
| Operating margin | 14.0% | 13.2% | Up 0.8 percentage points |
| Production margin | $112.7 million; 27.5% | $116.6 million; 25.7% | Margin up 1.8 points |
| Net income attributable to MTI | $33.9 million | $35.1 million | Down 3.4% |
| Diluted EPS | $0.97 | $1.01 | Down $0.04 |
| Operating cash flow | $41.8 million | $19.6 million | Up $22.2 million |
Cost of sales fell 11.6%, faster than sales, and management cited lower variable manufacturing costs and productivity gains exceeding 5% as support for improved margins. Q1 included $1.6 million of acquisition integration costs and $0.9 million of restructuring charges; together, these reduced EPS by $0.05, according to management. The effective tax rate was 23.7%, versus 25.4%, primarily reflecting a change in the mix of earnings.
Segment performance and material changes
- Specialty Minerals: Sales rose 1.0% to $155.6 million and operating income rose 11.3% to $25.7 million. China paper PCC sales increased 45%, while foreign exchange reduced segment sales by $5.7 million.
- Refractories: Sales fell 6.4% to $69.2 million and operating income fell 18.1% to $6.8 million, reflecting lower refractory volumes and unfavorable foreign exchange.
- Performance Materials: Sales declined 7.0% to $119.0 million; operating income was flat at $23.8 million. Weakness in metalcasting, drilling and iron ore pelletizing was partly offset by growth in household, personal care and specialty products.
- Construction Technologies: Sales increased 4.4% to $40.6 million and operating income increased to $4.4 million.
- Energy Services: Sales declined 56.0% to $25.8 million, and the segment recorded a $0.1 million operating loss, including $0.8 million of restructuring charges. Management cited weak oil and gas markets and the exit from coiled tubing services, which reduced sales by $8.9 million year over year.
Oil and gas weakness and foreign exchange together reduced consolidated sales by more than $50 million, or 11 percentage points, according to management. Foreign exchange alone had an unfavorable sales impact of $17.4 million.
Cash, debt and liquidity
- Cash and cash equivalents were $211.9 million at April 3, 2016, down $17.5 million from year-end 2015. Short-term investments were $3.5 million; cash, cash equivalents and short-term investments totaled $215.4 million.
- Operating cash flow was $41.8 million; capital expenditures were $15.7 million. Investing activities used $16.3 million and financing activities used $43.3 million.
- Long-term debt, net of discount, was $1,217.7 million, versus $1,255.3 million at December 31, 2015. The company repaid $40.0 million of long-term debt during the quarter. It reported $5.8 million of short-term debt and $3.2 million of current maturities.
- No loans were outstanding under the $200 million revolving facility; $12.2 million of letters of credit were outstanding. The company said it complied with the facility’s covenants. It also had approximately $37.2 million of uncommitted short-term bank credit lines, of which about $5.8 million was in use.
- Management said excess cash flow would primarily be used to repay debt and reduce leverage. Q1 cash uses also included capital spending, debt repayment, share repurchases and dividends.
Outlook, risks and unusual items
- Management remained cautious about the global economy and its effects on the company’s product lines. It gave no specific earnings or revenue guidance in the filing.
- Expected 2016 capital expenditures were $80 million to $90 million, principally for PCC plants and other strategic growth projects. Three additional China satellites were under construction, with combined annual capacity of 215,000 tons. Management reported 15% growth in China businesses and 25 global commercial contracts for FulFill high-filler technology.
- The company’s term loan matures in 2021. Its variable-rate debt exposes results to interest rate changes; management estimated a 1 percentage-point rate change would affect annual interest expense by $4.4 million. On April 5, 2016, after quarter-end, the company entered into a $300 million floating-to-fixed swap, with an effective fixed rate of 4.25% on the notional amount through May 2021.
- Contingencies include Armada litigation seeking damages and injunctive relief related to unpaid arbitration awards of approximately $70 million. The company accrued an estimate it said was not material; discovery was expected to continue into Q4 2016. It also disclosed pending silica and asbestos cases, which management did not expect to have a material effect.
- Environmental matters include estimated accrued costs of approximately $0.4 million each for remediation at the Canaan, Connecticut site and the Adams, Massachusetts site. Potential wastewater-treatment upgrades at Adams were preliminarily estimated at $6 million to $8 million, but the company’s stated remaining remediation accrual was approximately $0.4 million.
- Management reported effective disclosure controls. The acquired businesses’ ERP implementation was ongoing; the company noted the migration could adversely affect internal controls, although no material adverse effect had occurred to date.
Important facts for investors to verify
- Whether oil and gas market weakness and Energy Services’ sales contraction persist, and how much the segment’s results depend on further restructuring and cost reductions.
- Whether margin gains from productivity and lower manufacturing costs can continue despite lower consolidated sales and foreign-exchange pressure.
- Debt repayment progress, interest-rate exposure, covenant headroom and the effect of the post-quarter $300 million interest-rate swap.
- Execution and returns from China satellite capacity, FulFill commercialization and the planned $80 million to $90 million of 2016 capital expenditures.
- Developments in Armada litigation, environmental remediation estimates and ERP implementation controls.