Minerals Technologies Inc. — Q3 2018 Form 10-Q
Business context and period: The company develops and sells specialty mineral products and related systems and services through Performance Materials, Specialty Minerals, Refractories, and Energy Services. This unaudited report covers the three and nine months ended September 30, 2018; comparisons are with the periods ended October 1, 2017. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $464.1 million | $424.4 million | $1,360.1 million | $1,243.5 million |
| Operating income | $68.2 million | $67.2 million | $193.6 million | $198.3 million |
| Operating margin | 14.7% | 15.8% | 14.2% | 15.9% |
| Net income attributable to MTI | $41.9 million | $41.7 million | $125.9 million | $119.3 million |
| Diluted EPS | $1.18 | $1.17 | $3.54 | $3.35 |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $133.4 million | $150.6 million |
- Q3 sales rose 9%; Q3 operating income was nearly flat and MTI-attributable earnings increased slightly. Nine-month MTI-attributable earnings rose 6%, despite lower operating income.
- Production margin was $119.2 million in Q3, unchanged year over year, while its share of sales declined to 25.7% from 28.1%. For nine months, production margin fell to $348.6 million from $352.6 million.
- Nine-month investing cash use was $180.9 million, including $122.5 million for the Sivomatic acquisition and $56.4 million of capital expenditures. Financing provided $52.7 million. Cash declined $5.3 million to $206.9 million; cash plus short-term investments totaled $211.2 million.
- At September 30, current assets were $903.6 million and current liabilities $420.0 million. Debt comprised $108.3 million short-term debt, $3.0 million current maturities, and $946.1 million long-term debt. The company reported $103 million drawn under its $300 million revolving facility, plus $8.9 million of letters of credit, and said it was in compliance with covenants.
- The quarterly dividend was $0.05 per share. The company repurchased 45,000 shares during the quarter; $133.6 million remained under its $150 million authorization.
Material changes and segment performance
- International sales grew 21% in Q3 versus 1% for U.S. sales. Management attributed part of the growth to Sivomatic, acquired April 30, 2018: it contributed $23.3 million of Q3 sales and $37.4 million in the first nine months.
- Performance Materials sales increased 16% in Q3, led by pet care, metalcasting, and environmental products; operating income rose to $31.8 million, but margin declined to 14.5% from 16.2%.
- Refractories sales rose 15% and operating income increased 16% to $11.5 million. Specialty Minerals sales fell 1% and operating income fell 6% to $25.0 million. Energy Services sales were up 1%, but operating income declined 52% to $1.1 million.
- Nine-month sales growth also reflected a favorable foreign-exchange impact of approximately $20 million. Cost of sales increased faster than revenue, which management linked mainly to raw-material, logistics, and energy costs. Lower bulk chromite pricing and volumes also weighed on Performance Materials; the company planned to exit bulk chromite operations in South Africa.
Outlook, commentary, risks, and unusual items
- Management expressed caution about the global economy and its potential effects on product lines. It provided no specific earnings or revenue guidance. It expected 2018 capital expenditures of $70–$80 million, primarily for PCC plants and strategic growth projects.
- Management highlighted growth initiatives in product innovation, geographic expansion, pet care, paper and PCC applications, refractory products, and environmental markets, while noting there is no assurance these opportunities will succeed.
- Q3 included $3.6 million of non-cash pension settlement costs, $0.3 million of acquisition-related costs, and approximately $0.3 million of restructuring charges. Nine-month results also included a $0.5 million inventory step-up charge. The effective tax rate was 18.8% for nine months, compared with 22.6%, primarily reflecting U.S. tax reform.
- Foreign-currency translation reduced nine-month other comprehensive income by $62.4 million. The company also reported exposure to variable-rate debt; it estimated a one-percentage-point interest-rate change would affect annual interest charges by $3.5 million.
- Contingencies include three pending silica cases and 29 asbestos cases; management did not expect these matters to materially affect financial position or results. Environmental remediation estimates included $0.4 million accrued for each of the Canaan and Adams sites; potential wastewater upgrades at Adams were estimated at $6–$8 million, with timing and final costs uncertain.
- Management said the company remained cautious on the economy and identified forward-looking statements as subject to risks and uncertainties. It reported no material change to risk factors from its 2017 Form 10-K. The provisional accounting impact of U.S. tax reform and the treatment of GILTI remained under evaluation.
Important facts for investors to verify
- Whether price increases and productivity can offset continued raw-material, logistics, and energy cost pressure and restore margins.
- Sivomatic’s ongoing contribution, integration, and final purchase-price allocation, which remained preliminary; the allocation was expected to be completed in Q1 2019.
- Progress and financial effects of the planned South African bulk chromite exit, and continued weakness or recovery in paper-related demand.
- Debt levels, interest-rate exposure, revolving-facility covenant headroom, and the company’s ability to fund capital spending, pension contributions, dividends, and repurchases.
- Final tax-reform and GILTI accounting, and the ultimate cost and allocation of environmental remediation obligations.