Business context and reporting period
Minerals Technologies Inc. (MTI) filed this unaudited Form 10-Q for the quarter and nine months ended October 2, 2016, compared with periods ended September 27, 2015. MTI develops and sells specialty mineral, mineral-based and synthetic mineral products, systems and services through five segments: Specialty Minerals, Refractories, Performance Materials, Construction Technologies and Energy Services.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $399.5m | $451.0m | $1,236.7m | $1,367.6m |
| Production margin | $115.2m; 28.8% | $118.9m; 26.4% | $349.0m; 28.2% | $361.6m; 26.4% |
| Operating income | $67.3m | $49.9m | $164.4m | $162.6m |
| Operating margin | 16.8% | 11.1% | 13.3% | 11.9% |
| Net income attributable to MTI | $41.6m | $29.2m | $96.7m | $91.0m |
| Diluted EPS | $1.18 | $0.83 | $2.75 | $2.60 |
For the first nine months, operating cash flow was $164.2m, down from $194.7m. Capital expenditures were $48.9m, versus $70.5m. Cash and cash equivalents were $199.7m at October 2, 2016, with short-term investments of $5.1m. Long-term debt, net of discount, was $1,117.3m; current maturities were $4.6m and short-term debt was $6.3m. MTI repaid $140m of long-term debt during the nine months. The company declared dividends of $0.05 per share for Q3 and $0.15 per share year to date.
Changes versus prior comparable periods
- Third-quarter sales declined 11%; management attributed the decline chiefly to weak oil and gas markets, exited Energy Services lines and weaker steel conditions. Foreign exchange reduced quarterly sales by $5.4m.
- Energy Services sales fell 52% in Q3 and 56% year to date, reflecting market weakness and closures of onshore service lines. The segment returned to Q3 operating income of $2.6m from a $7.9m loss, but recorded a $27.0m operating loss year to date.
- Q3 sales also declined in Refractories (18%), Specialty Minerals (6%) and Performance Materials (6%); Construction Technologies sales were broadly flat. Year-to-date Construction Technologies sales rose 2%.
- Despite lower revenue, production and operating margins improved, with management citing productivity, cost control and lower manufacturing costs. Q3 operating income also benefited from restructuring/asset-sale items versus prior-year restructuring and impairment charges.
- Year-to-date MTI-attributable net income rose 6% and diluted EPS increased to $2.75 from $2.60. Lower interest expense and the absence of prior-year debt-modification costs supported results.
Outlook, commentary, risks and unusual items
- Management said it remained cautious about the global economy and its effects on product lines. It provided no specific revenue or earnings guidance. It estimated 2016 capital expenditures of $65m–$75m, primarily for PCC plants and strategic growth projects.
- MTI intends to use excess cash flow primarily to repay debt and deleverage. Management cited growth initiatives including FulFill and NewYield technologies, China expansion and new products; two PCC satellites under construction in China were expected to add 110,000 tons of annual capacity. The company reported 26 commercial FulFill contracts globally.
- The company recorded $27.4m of restructuring and other charges year to date, primarily associated with Energy Services exits and restructuring. Q3 included a net $2.3m benefit, including $2.9m in gains on previously impaired assets. The restructuring program is expected to yield $11.5m in annualized savings; $3.9m of restructuring liabilities remained, expected to be paid by December 2016.
- Approximately 75% of bank debt carried variable rates, partly hedged. A one-percentage-point rate increase was estimated to add $4.4m of annual interest expense. A $300m floating-to-fixed swap had a $271m notional balance at quarter-end and fixed the rate on that portion at 4.25%.
- The Armada lawsuit seeks damages and injunctive relief; MTI had accrued an amount it said was not material. Trial was projected for Q3 2017. The company also disclosed silica and asbestos cases, and environmental remediation obligations; it accrued about $0.4m for each of two identified sites. Potential future remediation costs and litigation outcomes remain uncertain.
- MTI’s prior Chairman and CEO died on September 3, 2016; the board was searching for a permanent CEO. The filing identifies failure to attract and retain one as a potential adverse business risk. The company also noted that ongoing ERP implementation could affect internal controls, although controls were reported effective at quarter-end.
Important facts for investors to verify
- Whether persistent weakness and service-line exits continue to pressure Energy Services revenue and results.
- Whether margin improvement is sustainable as sales remain below the prior-year level, and how much reported profit reflects asset-sale gains and restructuring items.
- Debt repayment progress, variable-rate exposure, covenant compliance and access to revolving and short-term credit facilities.
- Actual 2016 capital spending and the timing, utilization and returns of the China PCC capacity projects and other growth initiatives.
- Developments in the CEO search, Armada litigation, environmental remediation and ERP implementation.