Minerals Technologies Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended October 3, 2010; comparisons are to the periods ended September 27, 2009. Amounts below are in U.S. dollars; financial amounts are in millions unless noted. The interim statements are unaudited and were reviewed by KPMG, not audited.
Business context
Minerals Technologies operates through Specialty Minerals, which includes paper and specialty precipitated calcium carbonate (PCC), talc and ground calcium carbonate, and Refractories, which includes refractory and metallurgical products. Management attributed the year-over-year recovery primarily to improved end markets and higher volumes, particularly in steel, construction and automotive, together with productivity and restructuring savings.
Financial results and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $249.8 | $234.3 | $759.0 | $651.1 |
| Production margin | $52.2; 20.9% of sales | $44.0; 18.8% | $158.6; 20.9% | $109.6; 16.8% |
| Income (loss) from operations | $25.0; 10.0% of sales | $12.8; 5.5% | $75.5; 9.9% | $(21.5); (3.3%) |
| Net income (loss) attributable to MTI | $16.7 | $8.9 | $51.0 | $(27.9) |
| Diluted EPS attributable to MTI | $0.90 | $0.47 | $2.72 | $(1.49) |
| Operating cash flow | Not presented separately | Not presented separately | $108.1 | $116.5 |
Q3 sales increased 7% and operating income nearly doubled year over year. For the first nine months, sales rose 17% and the company returned to operating and net profitability. Net income margin was 6.7% for both the 2010 quarter and year-to-date period, versus 3.8% and (4.3%), respectively, in the comparable 2009 periods.
Cash and cash equivalents were $361.9 at October 3, up $50.9 from year-end 2009; short-term investments were $13.7, for cash and investments of approximately $375.6. Nine-month capital expenditures were $24.1. Current assets were $680.9 and current liabilities $159.1; management reported a 4.3 current ratio. Debt comprised $4.4 of short-term debt and $92.6 of long-term debt. The company repaid $4.6 of bonds in September and reported an 11% debt-to-equity ratio. It had $184 of uncommitted bank credit lines, of which approximately $4.4 was in use.
Material changes versus prior periods
- Q3 Specialty Minerals sales increased 2% to $166.1; Refractories sales rose 17% to $83.7. For nine months, segment sales increased 11% and 31%, respectively.
- Q3 paper PCC sales declined 2% to $121.7, although volume increased 1%; talc sales rose 45% and refractory products sales rose 15%. Year-to-date sales grew across reported product categories, led by metallurgical products (+56%) and talc (+48%).
- Cost of goods sold fell to 79.1% of sales from 81.2% in Q3 and 83.2% year to date in 2009. Management cited higher volumes, productivity, restructuring savings and lower raw-material costs; Specialty Minerals also faced price concessions.
- The 2009 comparable nine-month period included $37.5 of asset impairments and $11.5 of restructuring costs. No impairment charge was recorded in the 2010 nine-month period; restructuring costs were $0.9.
- Nine-month operating cash flow decreased to $108.1 from $116.5, principally because working capital reduced cash flow by about $6 in 2010, compared with a roughly $39 contribution in 2009. Working-capital days improved to 57 from 68.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management expected 2010 capital expenditures of $40–$50, principally for PCC plants and other strategic growth projects, and expected to meet longer-term financing needs primarily through internally generated funds and, where appropriate, project financing. It described initiatives in PCC, minerals, refractory formulations, operational excellence and selective acquisitions, while cautioning that their success was not assured.
- Management identified exposure to economic weakness in paper, steel, construction and automotive markets; customer shutdowns or liquidity problems; customer concentration and pricing pressure; termination or less favorable renewal of long-term paper PCC contracts; raw-material supply and price volatility, including reliance on China for magnesium oxide; energy costs; pension assumptions; foreign-exchange and other international risks; and environmental regulation.
- Silica and asbestos litigation included 305 pending silica cases and 28 pending asbestos cases. The company had not settled these cases and said it did not expect material financial impact, while noting that claim amounts and merits were difficult to assess.
- Environmental remediation liabilities of approximately $0.4 were accrued for each of the Canaan, Connecticut and Adams, Massachusetts matters. At Adams, potential wastewater-treatment upgrades were estimated at $6–$8 and a groundwater containment system could cost up to $3; these are prospective estimates, not amounts stated as accrued.
- Unrecognized income-tax benefits were approximately $10.3, including $6.5 that would affect the effective tax rate if recognized. Management did not expect anticipated changes over the next 12 months to materially affect results or financial position.
- Restructuring liabilities totaled approximately $3.8 on the balance sheet. The company expected the remaining programs described in the notes to be completed in 2010.
- The global ERP rollout was ongoing. Domestic locations had transitioned; management said implementation had not materially harmed controls to date but could affect internal controls as rollout continued. Disclosure controls were judged effective at period-end.
Important facts for investors to verify
- Whether improved volumes and segment margins persist, particularly given Q3 paper PCC sales weakness and price concessions.
- Progress on restructuring completion and whether reported cost savings continue to be realized.
- Working-capital trends and the conversion of earnings into operating cash flow.
- Actual capital spending and any material changes to debt, credit-line availability or the 2013 debt maturities.
- Regulatory outcomes and costs for the Adams and Canaan environmental matters, and developments in silica and asbestos litigation.
- Performance against management’s stated growth initiatives; the filing provides no quantified earnings or sales forecast.