Minerals Technologies Inc. — Q2 2020 Form 10-Q
Business context and period. Specialty-minerals, materials and services company with four reporting segments: Performance Materials, Specialty Minerals, Refractories and Energy Services. This unaudited report covers the quarter and six months ended June 28, 2020, compared with the corresponding 2019 periods. Management attributed widespread demand pressure to the COVID-19 pandemic.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $357.2 million | $463.8 million | $774.7 million | $901.5 million |
| Income from operations | $27.2 million | $45.5 million | $84.9 million | $107.5 million |
| Operating margin | 7.6% | 9.8% | 11.0% | 11.9% |
| Net income attributable to MTI | $14.4 million | $26.6 million | $53.0 million | $65.7 million |
| Diluted EPS | $0.42 | $0.75 | $1.55 | $1.86 |
| Operating cash flow | Not separately reported | Not separately reported | $94.1 million | $98.3 million |
Q2 production margin was 24.9%, up from 24.1%; for the first half it was 25.3%, up from 24.6%. Management cited pricing, favorable mix and cost controls. First-half capital expenditures were $31.6 million, and cash and short-term investments totaled $238.2 million at quarter-end.
At June 28, total debt was approximately $897 million, including $100.3 million of short-term debt, $149.2 million of current maturities and $647.7 million of long-term debt. Current assets were $884.4 million and current liabilities $509.0 million. On June 30, after quarter-end, MTI issued $400 million of 5.0% senior notes due 2028; proceeds repaid the fixed-rate term loan and revolving-credit borrowings, with the remainder for general purposes. Management said available liquidity after the transaction exceeded $650 million.
Material changes and segment trends
- Q2 sales fell 23% year over year; U.S. sales declined 29% and international sales 16%. Foreign exchange reduced sales by approximately $9.9 million.
- All segments reported lower Q2 sales: Performance Materials declined 19%, Specialty Minerals 24%, Refractories 28% and Energy Services 31%. Key pressures included weaker automotive, construction, paper, steel and oil-and-gas activity.
- Q2 consolidated operating income included $6.5 million of restructuring and other charges and $8.3 million of Novinda-related litigation expense. The latter included an $8.0 million estimate for damages, interest and costs following an arbitration award; the total award was not finalized.
- Q2 also included a $4.3 million non-cash pension settlement charge below operating income. Net interest expense declined versus 2019, partly reflecting lower rates and debt levels.
- Q2 effective tax rate was 6.2%, versus 15.8%, primarily due to restructuring-related discrete items and earnings mix. First-half rate was 16.7%, versus 17.7%.
Outlook, risks and contingencies
- Management expected COVID-19 to continue negatively affecting third-quarter results, but said the duration and financial impact could not be reasonably estimated and could be material. Production facilities were operating at filing time, though some locations had temporary impacts.
- Management forecast 2020 capital expenditures of $55–$65 million. It identified product innovation, market penetration and selective acquisitions as strategic priorities, without providing earnings or revenue guidance.
- Material risks include pandemic-related demand, facility and supply-chain disruption; cyclical exposure to paper, automotive, construction, steel and energy markets; debt service and covenant compliance; foreign exchange and interest rates; and environmental, tax and litigation matters.
- At quarter-end, the company reported 3 pending silica cases and 176 pending asbestos cases; management did not expect these claims to materially affect results or financial position. Environmental remediation estimates included approximately $0.4 million accrued for each of two sites; wastewater upgrades at one facility could cost $6–$8 million, with timing and scope not finalized.
- The company reported compliance with revolving-credit covenants at June 28. The interim financial information received an independent accountant’s review, not an audit.
Investor verification points
- Track demand recovery and volume trends across paper, automotive, construction, steel and oil-and-gas end markets, particularly the expected Q3 pandemic impact.
- Confirm the post-June 30 debt structure, use of note proceeds, resulting interest expense and liquidity; distinguish quarter-end debt figures from post-refinancing amounts.
- Assess underlying operating performance apart from the Novinda charge, restructuring costs and pension settlement charge; monitor whether the arbitration award changes from the recorded estimate.
- Monitor cash conversion, planned capital spending and the effects of lower volumes on margins and working capital.
- Review the status and potential costs of environmental remediation and asbestos/silica matters, noting that some liabilities remain uncertain.