Minerals Technologies Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended July 1, 2018; comparisons are to periods ended July 2, 2017. Amounts are in millions of dollars except per-share data. Interim statements are unaudited and were reviewed by the independent auditor.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $464.7 | $414.1 | $896.0 | $819.1 |
| Income from operations | $62.8 | $69.0 | $125.4 | $131.1 |
| Operating margin | 13.5% | 16.7% | 14.0% | 16.0% |
| Production margin | $115.9; 24.9% | $119.7; 28.9% | $229.4; 25.6% | $233.4; 28.5% |
| Net income attributable to MTI | $44.1 | $43.0 | $84.0 | $77.6 |
| Diluted EPS | $1.24 | $1.21 | $2.36 | $2.18 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $80.2 | $77.6 |
Consolidated net income, including non-controlling interests, was $45.2 million in Q2 and $86.3 million in the first half. Q2 sales rose 12%; first-half sales rose 9%. Higher sales did not translate into higher operating income, as cost of sales increased faster than revenue. The effective tax rate fell to 18.9% from 23.5% in Q2 and from 22.9% for the first half, primarily due to U.S. tax reform.
Liquidity, debt and cash flow
- At July 1, cash and cash equivalents were $203.0 million, with $2.9 million of short-term investments; cash and investments totaled $205.9 million. Cash was $212.2 million at year-end 2017.
- Current assets were $899.1 million and current liabilities $432.4 million. Short-term debt was $118.2 million; current maturities of long-term debt were $3.0 million; long-term debt was $966.1 million.
- First-half operating cash flow was $80.2 million. Investing activities used $166.9 million, including $124.1 million for Sivomatic and $42.1 million of capital expenditures. Financing activities provided $85.6 million, including $113.0 million of short-term borrowing; cash declined $9.2 million to $203.0 million.
- The revolving facility was increased to $300 million and extended to April 2023. At period-end, $113 million was drawn and $5.9 million of letters of credit was outstanding. MTI reported covenant compliance. The filing lists $36.8 million in uncommitted short-term credit lines, of which approximately $5.2 million was in use.
- Long-term debt maturities include $303.5 million in 2021 and $678.0 million thereafter. The company had $1.087 billion of reported short- and long-term debt, including current maturities.
Material changes and business developments
- On April 30, MTI acquired Sivomatic, a European premium pet-litter supplier, for $124.1 million net of cash acquired. Q2 sales included $14.1 million from Sivomatic. The purchase price allocation remained preliminary; recorded goodwill was $32.4 million, and the acquisition added acquired mineral rights, property and equipment, and intangible assets.
- International sales grew 22% in Q2 and 16% in the first half; foreign exchange contributed approximately $9 million to Q2 sales and $25.4 million to first-half sales.
- Q2 segment sales increased year over year in Performance Materials (19%), Specialty Minerals (3%), Refractories (16%) and Energy Services (10%). Performance Materials and Refractories segment operating income declined in Q2; Specialty Minerals and Energy Services also reported lower operating income. For the first half, Refractories operating income grew 17%, while the other three segments declined.
- MTI plans to exit bulk chromite operations in South Africa. The filing attributes lower Basic Minerals sales and weaker Performance Materials profitability partly to reduced bulk chromite pricing and volumes.
- Other comprehensive income included a $54.5 million Q2 foreign-currency translation loss; first-half translation loss was $39.1 million. MTI-attributable comprehensive income was a loss of $8.2 million in Q2, despite positive net income.
Outlook, commentary and risks
- Management said it remained cautious about the global economy. It emphasized 2018 sales growth from existing businesses, innovation, geographic expansion, productivity and selective acquisitions, but gave no specific revenue or earnings guidance.
- Expected 2018 capital expenditures were $80–$90 million, principally for PCC plants and other strategic growth opportunities.
- Management cited higher raw-material, logistics and energy costs across segments; weather-related mining challenges in the western U.S. also pressured Performance Materials. Price increases were expected to take effect in the second half of 2018 in some Specialty Minerals products.
- Market risks include foreign exchange and floating-rate debt. The company stated that a one-percentage-point interest-rate change would increase annual interest expense by $5.1 million; it uses swaps and other derivatives for hedging, not trading.
- Three silica and 25 asbestos cases were pending. Management did not expect these claims to materially affect results or financial position, while noting that claim amounts and outcomes are uncertain. Environmental matters include estimated accrued costs of $0.4 million each at the Canaan, Connecticut and Adams, Massachusetts sites; wastewater upgrades at Adams may cost $6–$8 million, with timing and scope not finalized.
- Other unusual or non-recurring items included Q2 acquisition costs of $1.0 million, restructuring charges of $0.4 million and a $0.5 million non-cash inventory step-up charge. The company had $6.4 million of restructuring liabilities and expected to pay them by year-end 2018.
Most important facts for investors to verify
- Whether cost inflation, logistics and energy pressures ease, and whether announced pricing actions restore segment margins.
- The final Sivomatic purchase-price allocation, acquisition contribution and integration results.
- Progress and financial effects of the South African bulk chromite exit, including any associated costs.
- Debt reduction, revolving-facility usage, covenant headroom and exposure to variable interest rates.
- Actual capital spending versus the $80–$90 million plan, and the resolution or cost evolution of environmental and litigation matters.