Minerals Technologies Inc. — Form 10-Q Summary
Reporting period: Quarter ended October 2, 2011; comparative results are for the three and nine months ended October 2, 2011 versus October 3, 2010. The interim financial statements are unaudited; KPMG performed a review, not an audit.
Business context and results
The company operates Specialty Minerals, including paper and specialty precipitated calcium carbonate (PCC) and processed minerals, and Refractories, including refractory and metallurgical products. Paper PCC is primarily used in papermaking.
| Metric | Third quarter 2011 | Third quarter 2010 | First nine months 2011 | First nine months 2010 |
|---|---|---|---|---|
| Net sales | $262.2 million | $249.8 million | $793.1 million | $759.0 million |
| Income from operations | $25.4 million | $25.0 million | $75.2 million | $75.5 million |
| Consolidated net income | $16.3 million | $17.5 million | $50.2 million | $53.2 million |
| Net income attributable to MTI | $15.7 million | $16.7 million | $47.9 million | $51.0 million |
| Diluted EPS | $0.87 | $0.90 | $2.62 | $2.72 |
| Operating margin | 9.7% | 10.0% | 9.5% | 9.9% |
| Production margin | 20.2% | 20.9% | 20.1% | 20.9% |
Financial position, cash flow and liquidity
- At October 2, 2011, cash and cash equivalents were $382.5 million and short-term investments were $16.7 million. Total current assets were $718.5 million versus current liabilities of $183.2 million; management reported a 3.9 current ratio.
- Total debt was approximately $99.6 million, including $5.4 million of short-term debt, $8.5 million of current maturities and $85.7 million of long-term debt. Management reported a 12% debt-to-equity ratio. The company had $186 million in uncommitted credit lines, with about $5.4 million drawn.
- Operating cash flow for the first nine months was $92.9 million, down from $108.1 million. Capital expenditures were $36.9 million, compared with $24.1 million a year earlier. Cash increased $14.7 million from year-end to $382.5 million.
- Financing uses included $43.4 million of treasury-share purchases and $2.7 million of dividends paid. The quarterly dividend declared was $0.05 per share.
- Total assets were $1.144 billion and total shareholders’ equity was $791.9 million at October 2, 2011.
Material changes and management commentary
- Third-quarter sales rose 5%; management attributed approximately $10.4 million, or four percentage points of growth, to favorable foreign exchange. Nine-month sales increased 4%, including approximately $22.1 million of favorable currency impact.
- Refractories sales grew 9% in the quarter and 10% year to date. Specialty Minerals sales grew 3% in the quarter and 2% year to date. Paper PCC volumes fell 6% in the quarter and approximately 4% year to date; pricing and currency offset the volume weakness.
- Higher raw-material and energy costs pressured margins and were not fully recovered through pricing. Cost of goods sold rose faster than sales in both comparison periods. Management said pricing increases partially offset input-cost inflation.
- Operating cash flow declined year over year. Working capital, as defined by the company, decreased approximately 2% from December 2010; working-capital days fell to 55 from 59.
- In the third quarter, the company sold a 50% interest in its Korean Refractories joint venture, retained a 20% equity interest and moved to equity-method accounting. It recognized a $1.4 million currency translation loss on deconsolidation, contributing to lower net income.
Outlook, risks and contingencies
- No specific earnings or sales forecast is provided. Management expects 2011 capital expenditures of $50–$60 million, primarily for PCC plants and strategic growth projects. Growth priorities include new PCC facilities, FulFill PCC products, product development, productivity and selective acquisitions; management cautions there is no assurance these initiatives will succeed.
- Management cited uncertain global markets, softening end markets, raw-material and energy cost volatility, customer pricing pressure, foreign-exchange exposure, and reliance on China for a significant portion of magnesium oxide supply. Pension assumptions and environmental regulation are additional risks.
- M-real’s Alizay mill in France faced a possible closure. If it closes, MTI could shut its PCC satellite facility and incur impairment; its net book value was $5.9 million and projected 2011 sales were about $9 million.
- NewPage filed for Chapter 11. MTI continued supplying five mills, including three satellite facilities; if operations cease, potential impairment could reach $16 million, with possible additional bad-debt provisions. Projected annualized sales to NewPage locations were about $20 million.
- UPM-Kymmene announced paper-capacity reductions affecting MTI’s Myllykoski, Finland facility. Its $0.7 million net book value was being depreciated over the remaining four months of 2011; projected 2011 sales were about $15 million. MTI reported no impairment charge for these facilities in the quarter based on information then available.
- Silica and asbestos litigation included 76 pending silica cases and 25 pending asbestos cases. Management said it did not expect these claims to materially affect financial position or results, but claims generally lack enough information to estimate potential exposure.
- Environmental matters include estimated accrued remediation costs of approximately $0.4 million each for Canaan, Connecticut, and Adams, Massachusetts. Potential wastewater-treatment upgrades at Adams were preliminarily estimated at $6–$8 million; the filing describes this as an estimate for upgrades, not the accrued remediation amount.
- Unrecognized income-tax benefits were approximately $6.5 million; management did not expect anticipated changes over the next 12 months to materially affect results or financial position.
Important facts for investors to verify
- Whether the Alizay mill, NewPage facilities or Myllykoski site will close or change operations, and the resulting impairment, credit-loss or sales effects.
- Whether pricing can continue to offset raw-material and energy inflation while paper PCC volumes remain weak.
- Actual cash generation, capital spending and the scale and timing of the newly authorized share-repurchase program; the prior $75 million program was completed.
- Debt maturities, particularly the $77.0 million scheduled for 2013, and continued access to uncommitted credit lines.
- Developments in environmental remediation estimates and silica/asbestos claims; the filing notes that ultimate costs or exposure may remain uncertain.