Minerals Technologies Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 27, 2020, compared with the periods ended September 29, 2019. MTI develops and sells specialty mineral, mineral-based and synthetic mineral products and related services across Performance Materials, Specialty Minerals, Refractories and Energy Services. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $388.3 | $449.3 | $1,163.0 | $1,350.8 |
| Income from operations | $48.5 | $53.5 | $133.4 | $161.0 |
| Operating margin | 12.5% | 11.9% | 11.5% | 11.9% |
| Net income attributable to MTI | $28.3 | $38.0 | $81.3 | $103.7 |
| Diluted EPS | $0.83 | $1.08 | $2.38 | $2.95 |
- Q3 sales fell 14%; management attributed the decline primarily to lower volumes associated with COVID-19. U.S. sales declined 18% and international sales 8%; foreign exchange reduced sales by about $3 million.
- Q3 production margin increased to 25.3% from 24.7%, reflecting favorable mix, pricing and cost control despite lower sales. For the nine months, production margin was 25.3% versus 24.6%.
- Q3 sales declined across all segments: Performance Materials 8%, Specialty Minerals 13%, Refractories 19% and Energy Services 48%. Energy Services recorded break-even operating income. Performance Materials operating income increased to $28.2 million from $26.9 million, while Specialty Minerals and Refractories operating income decreased.
- Nine-month sales fell 14% and MTI-attributable net income fell 22%. Interest expense declined to $27.5 million from $33.3 million, but 2020 included a $5.4 million non-cash pension settlement charge; the effective tax rate rose to 17.7% from 13.9%, partly because the prior-year period benefited from an expired tax statute.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $148.4 million, down from $158.5 million. Capital expenditures were $45.8 million; the company also spent $9.2 million to acquire mining and hauling assets. Cash and cash equivalents rose to $379.0 million from $241.6 million at year-end 2019; cash plus short-term investments totaled $381.8 million.
- At September 27, total debt was $1,013.2 million on the balance sheet, including $1,012.3 million classified as long-term. The filing cites $1,032.8 million of aggregate principal indebtedness. Management reported more than $650 million of available liquidity, including cash and revolver availability.
- In June, MTI issued $400 million of 5.0% senior unsecured notes due 2028. Proceeds repaid the fixed-rate term loan tranche and revolving-credit borrowings, with the remainder for general corporate purposes. No revolver loans were outstanding; $9.5 million of letters of credit were in place. The company reported compliance with its credit-facility covenants.
- The board declared dividends of $0.05 per common share in Q3. The company completed its prior share-repurchase program and announced a new authorization of up to $75 million on October 21, 2020.
Outlook, risks and unusual items
- MTI gave no quantitative earnings or sales guidance. Management said COVID-19 had adversely affected Q2 and Q3 and could continue to affect Q4; the financial impact could be material but could not be reasonably estimated. The company said its facilities were operational, with temporary impacts at some locations, and that it was managing cash and had significant liquidity.
- Management’s 2020 capital-expenditure estimate was $55 million to $65 million. It also described product-development, market-expansion and selective-acquisition priorities, while cautioning that success was not assured.
- Q3 included $1.5 million of restructuring and other charges, $1.5 million of Novinda-related litigation expense and a $1.1 million non-cash pension settlement charge. Nine-month restructuring and other charges were $8.0 million, and litigation expense was $10.4 million. The Novinda arbitration award resulted in a $9.5 million charge for damages, interest and costs during the first half.
- After quarter-end, MTI reported an October ransomware incident involving unauthorized access to personal data of employees, former employees and dependents. Manufacturing continued with limited interruption; the company did not then expect a material financial impact, but noted that costs and risks remained under assessment.
- Other disclosed risks include weaker demand in paper, steel, automotive, construction and oil-and-gas markets; debt service and interest-rate exposure; supply-chain and operating risks; and cybersecurity. The company reported 197 pending asbestos cases and three silica cases, which management did not expect to materially affect results or financial position. Accrued estimated remediation costs were approximately $0.4 million each for the Canaan, Connecticut and Adams, Massachusetts sites; further costs and timing remain subject to regulatory processes.
Important facts for investors to verify
- Whether demand and volumes in the paper, steel, automotive, construction and energy-related end markets recover, and how that affects segment margins.
- The actual Q4 and full-year effects of COVID-19, including customer payment, supply-chain, impairment and liquidity risks; the filing provides no quantified forecast.
- Debt maturities, interest-rate and LIBOR transition exposure, covenant headroom, and whether reported liquidity remains available under changing conditions.
- The eventual costs and consequences of the ransomware incident, Novinda matter, asbestos and silica litigation, and environmental remediation obligations.
- Execution of the stated capital-spending plans and the new share-repurchase authorization.
The interim financial statements were reviewed by KPMG, not audited; the reviewer reported no material modifications needed for conformity with U.S. GAAP.