Minerals Technologies Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 29, 2019; comparisons are to the periods ended September 30, 2018. MTI develops and sells specialty mineral and synthetic mineral products, systems and services through Performance Materials, Specialty Minerals, Refractories and Energy Services. Financial statements are unaudited and were reviewed by KPMG.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net sales | $449.3 million | $464.1 million | $1,350.8 million | $1,360.1 million |
| Production margin | $111.2 million; 24.7% | $119.2 million; 25.7% | $332.9 million; 24.6% | $348.6 million; 25.6% |
| Operating income | $53.5 million; 11.9% | $68.2 million; 14.7% | $161.0 million; 11.9% | $193.6 million; 14.2% |
| Net income attributable to MTI | $38.0 million | $41.9 million | $103.7 million | $125.9 million |
| Diluted EPS | $1.08 | $1.18 | $2.95 | $3.54 |
| Operating cash flow | Not presented separately | Not presented separately | $158.5 million | $133.4 million |
For the first nine months, capital expenditures were $51.8 million, cash used in investing activities was $50.4 million, and cash used in financing activities was $100.1 million. Cash increased $4.2 million to $213.0 million. Cash, cash equivalents and short-term investments totaled $214.5 million at quarter-end.
At September 29, 2019, total debt was approximately $949.5 million, including $103.0 million of short-term debt, $1.8 million of current long-term maturities and $844.7 million of long-term debt. Cash and investments exceeded $214 million; net debt on that basis was approximately $735 million. Current assets were $920.1 million and current liabilities $409.9 million. The company repaid $69 million of debt during the first nine months and repurchased $21 million of treasury shares.
Changes and operating drivers
- Q3 sales fell 3%; first-nine-month sales fell 1%. International sales were down 6% in Q3 and 2% year to date. Foreign exchange reduced sales by about $3.8 million in Q3 and $29.6 million year to date.
- Operating income declined 22% in Q3 and 17% year to date; year-to-date MTI-attributable net income fell 18%. Lower volumes and unfavorable product mix contributed to weaker margins; the company also cited higher raw-material and logistics costs year to date.
- Q3 segment sales: Performance Materials $207.3 million (down 6%), Specialty Minerals $143.1 million (down 2%), Refractories $73.4 million (down 7%), and Energy Services $25.5 million (up 33%). Energy Services was the only segment with higher Q3 sales and operating income. Year-to-date Performance Materials sales were essentially flat, while Specialty Minerals and Refractories declined and Energy Services grew 23%.
- Performance Materials faced weaker metalcasting demand, partly offset by pet-care and environmental-products growth. Specialty Minerals was affected by paper-machine shutdowns and lower paper volumes, partly offset by growth in Asia. Refractories reported lower volumes in Europe and North America. Energy Services benefited from higher well-testing, filtration and equipment activity.
Outlook, unusual items and risks
- Management said it remained cautious about the global economy and its impact on product lines. It described growth priorities across existing markets, innovation, operational improvements and selective acquisitions; no quantified earnings or sales guidance was provided.
- Management expected 2019 capital expenditures of $70–$80 million, principally for PCC plants and other strategic growth opportunities. It said future financing needs were expected to be met with internally generated funds, credit lines and, where appropriate, project financing.
- First-nine-month results included $13.2 million of restructuring and other charges, including $7.5 million of non-cash asset impairments and $5.7 million of severance and related costs. The company expected to pay the remaining $5.3 million restructuring liability by the first half of 2020.
- Q3 and year-to-date operating income included $5.6 million of Novinda-related litigation expense. The company could not reasonably estimate possible loss, recorded no litigation contingency, and said an adverse outcome could materially affect results in the period recorded. Arbitration was scheduled for Q4 2019.
- The effective tax rate was 6.4% in Q3 and 13.9% for the first nine months, versus 18.7% and 18.8%, respectively. A $7.8 million tax benefit from expiration of a statute of limitations was recorded in 2019.
- MTI reported 91 pending asbestos cases and three pending silica cases; management did not expect them to materially affect financial position or results. Environmental remediation estimates of approximately $0.4 million each were accrued for the Canaan, Connecticut and Adams, Massachusetts matters; additional wastewater-treatment upgrades at Adams were preliminarily estimated at $6–$8 million.
- Variable-rate debt creates interest-rate exposure: the company estimated a 1% rate change would alter annual interest charges by $4.1 million, after derivatives. It was in compliance with revolving-credit covenants. A new discretionary share-repurchase authorization of up to $75 million for one year was approved October 23, 2019.
Key facts for investors to verify
- Whether weaker demand, paper-machine closures, product mix and foreign-exchange effects persist, and how they affect segment margins.
- The timing and outcome of the Novinda arbitration, including potential exposure beyond the $5.6 million expense already recorded.
- Progress and remaining cash costs of the restructuring program and the expected $70–$80 million 2019 capital-spending range.
- Debt repayment, refinancing and covenant headroom, particularly around the $202.3 million of aggregate debt maturities listed for 2021.
- The sustainability of reported earnings given the discrete tax benefit and restructuring, impairment and litigation charges.