Minerals Technologies Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended July 3, 2016, compared with the periods ended June 28, 2015. Amounts are in millions of dollars except per-share data. The interim financial statements are unaudited and were reviewed, not audited, by the independent accounting firm.
Business context and results
MTI develops and sells specialty mineral, mineral-based and synthetic mineral products, related systems and services. Its five reportable segments are Specialty Minerals, Refractories, Performance Materials, Construction Technologies and Energy Services.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $427.0 | $463.4 | $837.2 | $916.7 |
| Production margin | $121.1 | $126.2 | $233.8 | $242.8 |
| Production margin % | 28.4% | 27.2% | 27.9% | 26.5% |
| Operating income | $39.5 | $52.8 | $97.1 | $112.7 |
| Operating margin | 9.3% | 11.4% | 11.6% | 12.3% |
| Net income attributable to MTI | $21.2 | $26.6 | $55.1 | $61.7 |
| Diluted EPS from continuing operations | $0.60 | $0.76 | $1.57 | $1.76 |
Interest expense was $13.9 in Q2 and $28.0 for the first half, lower than the corresponding 2015 periods. The first-half effective tax rate was 21.3%, compared with 21.8%. Cash dividends declared were $0.05 per share in Q2 and $0.10 for the first half.
Cash flow, debt and liquidity
- First-half operating cash flow was $102.1, versus $114.5 in 2015. Capital expenditures were $30.9, compared with $48.7. Cash declined by $27.8 to $201.6; short-term investments were $4.0.
- Cash used in financing was $97.2, including $91.1 of long-term debt repayments, $3.5 of common dividends and $2.6 of share repurchases. Cash and cash equivalents plus short-term investments totaled approximately $205.6 at period end.
- Long-term debt was $1,170.7, including current maturities of $4.7; short-term debt was $6.0. The term loan matures in 2021. No loans were drawn on the $200 revolving facility, with $12.1 of letters of credit outstanding. MTI reported compliance with its credit covenants.
- Management said excess cash flow would be used primarily to repay debt and reduce leverage. A new interest-rate swap had a $286 notional amount at quarter end and fixed the effective rate on that portion of floating-rate debt at 4.25% through May 2021.
Material changes and segment performance
- Q2 sales fell 8% and first-half sales fell 9%. Management attributed the decline principally to weak oil and gas markets, Energy Services exits and unfavorable foreign exchange. Q2 Energy Services sales declined 59%; first-half sales declined 58%.
- Q2 operating income included $28.8 of restructuring and impairment charges, mainly related to exiting U.S. onshore Energy Services lines. First-half restructuring and other charges were $29.7, including $18.5 of asset impairment. Management expects annualized savings of $11.5 from the restructuring.
- Energy Services reported a first-half operating loss of $29.6 in the segment table, versus a $6.4 loss a year earlier. The filing’s detailed Q2 segment discussion also reports a $29.5 loss, but one table in that discussion displays a different Q2 figure; investors should verify the underlying segment disclosure.
- Construction Technologies grew sales 3% in Q2 and 4% for the first half, supported by Environmental Products. Specialty Minerals’ Q2 sales declined 4%, while segment operating income edged higher; Refractories sales declined 3% in Q2 but operating income improved. Performance Materials sales were broadly flat in Q2, with weaker Metalcasting offset by growth in personal and household products.
- First-half operating cash flow and net income were lower year over year, but production-margin percentage improved, reflecting productivity and cost controls. Q2 sales were down in both U.S. and international markets.
Outlook, risks and other notable items
- Management was cautious about global economic conditions and gave no specific sales or earnings guidance. It highlighted product innovation, geographic expansion, and opportunities in paper, construction, metalcasting, pet care and other markets.
- Capital expenditures for 2016 were expected to be $80–$90, principally for PCC plants and strategic growth projects. MTI began operating a 105,000-ton annual-capacity PCC facility in China in July and had two further Chinese PCC satellites under construction, with combined annual capacity of 110,000 tons. China businesses grew 5% in Q2.
- Growth initiatives include FulFill high-filler technology, with 26 commercial contracts globally, and a China pilot of NewYield technology. Management cautioned that there is no assurance these opportunities will succeed.
- Key operating exposures include oil and gas market weakness, foreign exchange and variable-rate debt. The filing estimates a one-percentage-point interest-rate increase would add $4.1 of annual interest expense. The company reported that approximately 75% of bank debt bore variable rates, with a portion hedged.
- Contingencies include Armada litigation, for which MTI accrued an estimate that management said was not material; silica and asbestos claims, which management did not expect to materially affect results; and environmental remediation. Accrued estimated company shares were $0.4 for each of the Canaan and Adams matters; potential Adams wastewater upgrades were preliminarily estimated at $6–$8.
- Disclosure controls were deemed effective. The worldwide implementation of the acquired AMCOL businesses’ ERP system was expected to take another 12–18 months; management noted implementation could affect internal controls. The filing reported no material change to risk factors from the 2015 Form 10-K.
Important facts for investors to verify
- Whether Energy Services’ Q2 operating loss is $29.5 or the different amount shown in one detailed segment table, and how restructuring and impairment charges are presented in segment results.
- Progress, realized savings and further costs from the Energy Services restructuring, alongside recovery or continued weakness in oil and gas markets.
- Debt reduction, cash generation, covenant compliance and sensitivity to interest rates and foreign exchange.
- Delivery and utilization of China PCC capacity, and commercial adoption of FulFill and NewYield initiatives.
- Developments in Armada litigation and the timing and ultimate cost of environmental remediation.