Minerals Technologies Inc. — Q2 2019 Form 10-Q
Business context and reporting period
MTI develops and markets specialty mineral and synthetic mineral products, systems and services through Performance Materials, Specialty Minerals, Refractories and Energy Services. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the periods ended July 1, 2018.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $463.8 million | $464.7 million | $901.5 million | $896.0 million |
| Operating income | $45.5 million | $62.8 million | $107.5 million | $125.4 million |
| Operating margin | 9.8% | 13.5% | 11.9% | 14.0% |
| Net income attributable to MTI | $26.6 million | $44.1 million | $65.7 million | $84.0 million |
| Diluted EPS | $0.75 | $1.24 | $1.86 | $2.36 |
Q2 production margin was $112.0 million, or 24.1% of sales, versus $115.9 million, or 24.9%, a year earlier. For the first half, production margin was $221.7 million, or 24.6%, versus $229.4 million, or 25.6%. Cost of sales rose faster than sales, mainly reflecting higher raw-material, logistics and energy costs. The first-half effective tax rate was 17.7%, compared with 18.9%.
First-half operating cash flow was $98.3 million, versus $80.2 million. Capital expenditures were $35.5 million; operating cash flow less capital expenditures was approximately $62.8 million, calculated from reported figures. Cash and cash equivalents were $214.5 million at June 30, with $5.2 million of short-term investments. Total debt was approximately $980.5 million, including current and long-term debt; this implies net debt of approximately $760.8 million after cash and short-term investments. The company repaid $36.6 million of debt during the half. It had $100 million drawn and $10.4 million of letters of credit under its $300 million revolving facility and reported compliance with its covenants. Current assets were $931.1 million and current liabilities $405.6 million.
Material changes versus prior comparable periods
- Q2 sales were essentially flat; first-half sales grew 1%. Foreign exchange reduced first-half sales by approximately $25.8 million, or 3%.
- Reported operating income fell 28% in Q2 and 14% for the first half; MTI-attributable net income declined 40% and 22%, respectively. Lower margins and higher costs, restructuring charges and a customer bad-debt reserve contributed.
- Segment sales in Q2 were mixed: Performance Materials was flat, Specialty Minerals declined 4%, Refractories declined 3%, and Energy Services grew 31%. First-half Performance Materials and Energy Services sales rose 3% and 19%; Specialty Minerals and Refractories declined 4% and 2%.
- Cash from operations increased year over year, while investing cash outflow declined substantially, including because the prior-year period included the Sivomatic acquisition. MTI completed that acquisition in 2018; Sivomatic contributed $33.7 million to first-half 2019 Household, Personal Care and Specialty Products sales.
- Total assets increased to $3.15 billion from $3.09 billion at year-end 2018. The company adopted lease accounting in January 2019, recognizing $61.4 million of operating lease liabilities and $50.5 million of right-of-use assets at transition; management said adoption had no material financial-statement impact.
Outlook, management commentary, risks and unusual items
- Management said it remained cautious about the global economy and its effect on product lines. It provided no specific full-year revenue or earnings guidance in the filing.
- A restructuring and cost-savings program initiated in Q2 generated $13.2 million of charges: $7.5 million of non-cash asset impairment and $5.7 million of other restructuring costs. MTI expects approximately $12 million of annualized savings by the first half of 2020; it expects to pay the remaining $7.1 million restructuring liability by then.
- Q2 results included a $2.5 million bad-debt reserve related to a U.K. Refractories customer bankruptcy. Management cited weaker metalcasting demand, paper-machine shutdowns, rail infrastructure issues in the Western U.S., and higher input costs among operating pressures.
- MTI expects 2019 capital expenditures of $70 million to $80 million, principally for PCC plants and other strategic growth opportunities. It plans to fund longer-term needs with internally generated funds, credit lines and, where appropriate, project financing. The company continued share repurchases and described capital deployment as a balance of growth investment, debt reduction and selective repurchases.
- Reported risks include foreign-exchange and variable-rate debt exposure; management estimated a one-percentage-point interest-rate change, including derivatives, would change annual interest charges by $3.8 million. The filing also describes silica and asbestos claims, with management not expecting a material financial effect, and environmental remediation accruals of approximately $0.4 million each for sites in Connecticut and Massachusetts. Potential Massachusetts wastewater upgrades were estimated at $6 million to $8 million, but the company’s remaining remediation estimate was $0.4 million.
- The interim financial statements received an independent accountant’s review, not an audit. Management reported disclosure controls were effective and said there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the restructuring delivers the expected $12 million annualized savings by the first half of 2020, and what implementation costs remain.
- Whether margin pressure from input costs, weaker end markets, foreign exchange and paper-machine closures persists, particularly in the segments with declining sales.
- Debt repayment, revolving-facility utilization and covenant headroom, alongside planned capital spending and share repurchases.
- The financial impact, if any, of the U.K. customer bankruptcy and the outcome and potential cost of litigation and environmental matters.
- Whether management updates its cautious outlook or provides quantified full-year guidance in subsequent filings.