Minerals Technologies Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 27, 2015; comparisons are to periods ended September 28, 2014. The interim financial statements are unaudited and were reviewed by KPMG, not audited.
Business context and financial performance
MTI develops and sells specialty mineral, mineral-based and synthetic mineral products, systems and services through five segments. The 2014 AMCOL acquisition materially affects year-to-date comparisons: 2015 includes nine months of AMCOL operations, while 2014 includes only the period from May 9 onward.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $451.0M | $543.5M | $1,367.6M | $1,209.0M |
| Production margin | $118.9M; 26.4% | $145.0M; 26.7% | $361.6M; 26.4% | $303.0M; 25.1% |
| Operating income | $49.9M; 11.1% | $66.8M; 12.3% | $162.6M; 11.9% | $126.2M; 10.4% |
| Net income attributable to MTI | $29.2M | $37.0M | $91.0M | $71.1M |
| Diluted EPS from continuing operations | $0.83 | $1.06 | $2.60 | $1.99 |
| Operating cash flow | Not presented by quarter | $194.7M | $190.8M |
Q3 sales fell 17%; management attributed $27.6M of the decline to foreign exchange and $17.4M to the Coiled Tubing exit. Q3 operating income declined 25%, and MTI-attributable net income declined 21%. Nine-month reported sales rose 13%, but that comparison is distorted by the partial-year inclusion of AMCOL in 2014. The filing’s pro forma comparison shows 2014 nine-month sales of $1,582.6M versus $1,367.6M in 2015.
Q3 restructuring and impairment charges were $10.5M, including $5.3M of asset impairment; acquisition and integration costs were $2.4M. Management said these items reduced Q3 EPS by $0.23. For the first nine months, restructuring and impairment charges were $27.3M and acquisition-related costs were $8.5M. Nine-month interest expense was $45.5M, up from $25.2M, primarily reflecting acquisition financing; the effective tax rate was 21.8%, compared with 25.9%.
Segments and material changes
- Specialty Minerals: Q3 sales $156.5M, down 4%; operating income $25.0M. Paper PCC volumes grew 3%, while foreign exchange reduced reported sales.
- Refractories: Q3 sales $77.4M, down 14%; operating income $7.9M, down 19%, reflecting weak global steel demand and foreign exchange.
- Performance Materials: Q3 sales $126.5M, down 7%; operating income rose to $22.7M from $18.7M, with improved productivity and cost controls.
- Construction Technologies: Q3 sales $49.7M, down 28%; operating income $6.1M, down 27%, affected by fewer large projects.
- Energy Services: Q3 sales $40.9M, down 52%; operating loss $7.9M. Weak oil-and-gas markets drove the August 2015 exit from Coiled Tubing and restructuring of other onshore service lines.
Cash, debt and liquidity
- Cash and cash equivalents were $224.9M at September 27, 2015; short-term investments were $2.9M. Current assets were $878.0M and current liabilities $366.4M.
- Nine-month operating cash flow was $194.7M; capital expenditures were $70.5M. Cash used for debt repayment was $140.4M, and cash dividends paid were $5.2M.
- Long-term debt, net of discount, was $1,325.6M; current maturities were $2.2M and short-term debt $6.2M. MTI repaid $140.2M of term debt in the first nine months and reported more than $240M of repayments since the AMCOL acquisition.
- The June 2015 term-loan repricing set a $1,078M floating-rate tranche at adjusted LIBOR plus 3.00% and a $300M fixed-rate tranche at 4.75%; term loans mature May 9, 2021. The $200M revolving facility had no loans outstanding and $9.3M in letters of credit. MTI reported compliance with its covenants.
Outlook, risks and unusual items
- Management said it intended to use excess cash flow to reduce debt. It forecast 2015 capital expenditures of $85M–$100M, principally for PCC plants and other growth projects. No specific earnings or revenue guidance was provided.
- Growth priorities included commissioning two PCC satellite plants in China, constructing three more plants with approximately 215,000 tons of capacity, and expanding the FulFill platform. MTI reported 23 FulFill commercial contracts.
- Management cited continuing weakness in oil and gas, global steel demand and certain construction markets, as well as foreign-exchange pressure. It cautioned that growth initiatives may not succeed and that forward-looking results are subject to risks and uncertainties.
- Coiled Tubing-related impairment and restructuring reflect the decision to exit that service line amid losses, low oil prices and market overcapacity. The company had $7.0M of remaining workforce-restructuring liabilities, expected to be paid by the end of March 2016.
- Disclosed litigation includes the Armada case, for which MTI accrued an amount it said was not material; an FLSA collective action, also accrued at a non-material amount; and silica/asbestos cases. Environmental accruals were approximately $0.4M each for the Canaan and Adams sites; possible Adams wastewater upgrades were estimated at $6M–$8M.
- MTI authorized a new discretionary share-repurchase program of up to $150M for two years beginning after the prior program expired in October 2015. No shares were repurchased in the reported three- or nine-month periods.
Important facts for investors to verify
- Whether the reported nine-month revenue and earnings trends hold up against the pro forma AMCOL comparison, rather than the partial-year 2014 reported period.
- Whether Energy Services losses and exit-related charges are contained, and how remaining oil-and-gas weakness affects the segment.
- Progress in debt reduction, interest costs, liquidity and compliance with credit-facility covenants.
- Execution, utilization and returns from the China PCC plants and FulFill agreements, alongside the stated capital-spending plan.
- Developments in the Armada and other litigation and environmental matters, including whether recorded accruals remain adequate.