Minerals Technologies Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2015. The interim statements are unaudited; KPMG’s review identified no material modifications needed for GAAP conformity. MTI develops and sells specialty mineral, mineral-based and synthetic mineral products, services and systems across five segments. Comparisons are affected by the May 2014 AMCOL acquisition: Q2 2014 included only 52 days of AMCOL results, as did the first half of 2014.
Key financial metrics
Amounts in millions, except per-share data.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $463.4 | $421.1 | $916.7 | $665.5 |
| Production margin | $126.2 | $102.7 | $242.8 | $158.0 |
| Production margin % | 27.2% | 24.4% | 26.5% | 23.7% |
| Income from operations | $52.8 | $35.8 | $112.7 | $59.4 |
| Operating margin | 11.4% | 8.5% | 12.3% | 8.9% |
| Net income attributable to MTI | $26.6 | $18.5 | $61.7 | $34.1 |
| Diluted EPS from continuing operations attributable to MTI | $0.76 | $0.48 | $1.76 | $0.93 |
| Net cash from operating activities | $114.5 | $107.2 |
Cash from operations is shown for the six-month periods. Capital expenditures were $48.7 million in the first half, compared with $36.7 million in 2014. Cash and short-term investments totaled $227.4 million at June 28, 2015. Current assets were $901.7 million and current liabilities $377.0 million.
Debt at June 28 included $1,364.0 million of long-term debt, net of discount, $12.7 million of current maturities and $6.0 million of short-term debt. Long-term debt was $1,455.5 million at December 31, 2014. MTI repaid $90.2 million of term debt in the first half. Its $200 million revolving facility had no borrowings and $9.2 million of letters of credit outstanding; MTI reported covenant compliance. Net interest expense was $15.8 million in Q2 and $31.2 million for the first half, up from $8.9 million and $9.1 million, respectively, in 2014.
Changes versus the prior comparable periods
- Reported sales rose 10% in Q2 and 38% in the first half. Foreign exchange reduced sales by $25.8 million in Q2 and $37.0 million in the first half. Acquisition timing makes reported growth an imperfect like-for-like comparison; prior-year pro forma sales, including AMCOL for the full period, were $540.2 million for Q2 and $1,034.0 million for the first half.
- Profitability improved: Q2 operating income increased 47%, and first-half operating income increased 90%. Management cited acquisition synergies, productivity gains and cost control. Q2 cost of sales fell to 72.8% of sales from 75.6%.
- Segment results were mixed. Q2 Specialty Minerals sales fell 7% and Refractories fell 17%; Performance Materials rose 70% and Construction Technologies rose 40%, with the prior-year comparison for the latter two segments including only 52 days of AMCOL. Energy Services sales were nearly flat, but the segment recorded a $12.2 million operating loss.
- Foreign-currency translation reduced first-half other comprehensive income by $30.3 million, contributing to MTI-attributable comprehensive income of $34.5 million versus $41.8 million in the prior year.
Outlook, management commentary, risks and unusual items
- Management remained cautious about the global economy and its effect on MTI’s markets. It provided no specific full-year revenue or earnings guidance. Planned 2015 capital expenditures were $80–$100 million, principally for PCC plants and strategic growth projects.
- MTI decided in Q3 to exit its loss-making Coil Tubing service line amid oil-market weakness and excess onshore service capacity. The line had Q2 sales of $6.3 million; management expected up to $12 million of additional Q3 charges, primarily equipment lease termination costs.
- Q2 included $16.8 million of restructuring and other charges, comprising $15.8 million impairment of abandoned, underutilized Coil Tubing equipment and $1.0 million of restructuring costs. It also included $2.7 million of acquisition-related costs and $4.5 million of term-loan repricing costs and fees. Together, these items reduced Q2 diluted EPS by $0.42, according to management.
- The June 2015 term-loan amendment repriced the outstanding facility into a $1.078 billion floating-rate tranche at adjusted LIBOR plus 3.00% (with a 0.75% LIBOR floor) and a $300 million fixed-rate tranche at 4.75%; maturity remained May 2021. MTI said excess cash flow would be used to repay debt and reduce leverage. A one-percentage-point interest-rate increase would add an estimated $5.8 million of annual interest expense.
- Growth initiatives included commissioning a PCC satellite plant in China, with four more under construction and approximately 300,000 tons of capacity planned. MTI reported 21 commercial FulFill agreements, including three signed in 2015. The SULB contract was due to expire at the end of Q3 2015.
- Contingencies include the Armada lawsuit and an FLSA collective action; MTI accrued estimated damages it described as immaterial. It reported 74 pending silica cases and 13 asbestos cases, which management did not expect to have a material effect. Environmental accruals were about $0.4 million each for the Canaan and Adams sites; possible Adams wastewater upgrades were estimated at $6–$8 million, with timing and requirements still subject to the regulatory process.
Important facts for investors to verify
- How much reported sales and earnings growth reflects the AMCOL acquisition versus comparable-period operating performance, currency movements and synergies.
- The timing and total cost of the Coil Tubing exit, including whether the expected Q3 charges reach the stated maximum.
- Debt reduction, interest-rate exposure and compliance with facility covenants as cash flow and investment needs evolve.
- Whether weakness in paper markets, steel-related demand and oilfield services persists, and whether growth projects and FulFill agreements deliver expected returns.
- Developments in the Armada and FLSA cases and the scope and cost of environmental remediation and wastewater requirements.