Minerals Technologies Inc. — Q1 2019 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2019, compared with the three months ended April 1, 2018. Minerals Technologies develops and sells specialty mineral and synthetic mineral products and services through Performance Materials, Specialty Minerals, Refractories and Energy Services. The interim statements are unaudited; KPMG conducted a review and reported no material modifications needed for GAAP conformity.
Financial performance and liquidity
| Metric | Q1 2019 | Prior-year period |
|---|---|---|
| Net sales | $437.7 million | $431.3 million |
| Income from operations | $62.0 million; 14.2% margin | $62.6 million; 14.5% margin |
| Production margin | $109.7 million; 25.1% of sales | $113.5 million; 26.3% of sales |
| Net income attributable to MTI | $39.1 million | $39.9 million |
| Diluted EPS | $1.11 | $1.12 |
| Operating cash flow | $30.8 million | $35.7 million |
| Capital expenditures | $17.6 million | $17.9 million |
Net sales rose 1%, while cost of sales increased 3%, primarily reflecting higher raw-material, logistics and energy costs. Cash flow from operations less capital expenditures was approximately $13.2 million, compared with $17.8 million in the prior-year quarter. Cash and cash equivalents were $202.7 million at quarter-end, plus $4.3 million of short-term investments.
Total debt was approximately $1.00 billion, including $104.7 million of short-term debt, $2.7 million of current long-term maturities and $893.4 million of long-term debt. The company repaid $16 million of debt during the quarter. Its revolving facility had $100 million of loans and $10.2 million of letters of credit outstanding against $300 million of commitments; the company reported compliance with facility covenants. The dividend declared was $0.05 per common share.
Material changes and segment performance
- Foreign exchange reduced sales by approximately $11.4 million, or 3%; international sales nevertheless increased 4%, while U.S. sales were approximately flat. Q1 sales included $25.2 million from Sivomatic, acquired in 2018.
- Performance Materials sales increased 6% to $199.2 million; operating income was essentially flat at $26.3 million. Growth in household and pet-care products included Sivomatic, while Metalcasting, Building Materials and Basic Minerals were weaker.
- Specialty Minerals sales fell 3% to $144.4 million and operating income fell to $22.0 million from $24.1 million. Paper PCC sales declined amid customer paper-machine shutdowns, including a U.S. mill closure.
- Refractories sales declined 2% to $73.8 million and operating income fell 5% to $12.1 million. Energy Services sales increased 6% to $20.3 million and operating income rose to $2.4 million from $1.5 million.
- Interest expense increased to $11.4 million from $10.7 million, while other non-operating deductions decreased, largely due to foreign-exchange gains versus losses a year earlier. The effective tax rate remained 18.9%.
Outlook, risks and unusual items
Management said it remained cautious about the global economy. It outlined 2019 growth priorities across existing businesses, including pet care, environmental products, PCC and refractory offerings, alongside innovation, productivity and selective acquisitions; it gave no specific revenue or EPS forecast. Planned 2019 capital expenditures were $70 million to $80 million.
- Management cited exposure to foreign-exchange and interest-rate movements. It estimated that a one-percentage-point interest-rate change, including derivatives, would change annual interest expense by $3.8 million.
- Operating leases were recognized on the balance sheet upon adoption of the new lease standard: $61.4 million of operating lease liabilities and $50.5 million of right-of-use assets at adoption. Management said adoption did not materially affect the financial statements. A separate $10.9 million accounting-standard reclassification moved stranded tax effects from accumulated other comprehensive loss to retained earnings.
- The Sivomatic purchase-price allocation remained preliminary, with completion expected in Q2 2019. The acquisition’s net consideration was $122.5 million.
- The company reported three pending silica cases and 40 pending asbestos cases; management did not expect these claims to materially affect financial position or results. Environmental accruals included approximately $0.4 million each for the Canaan and Adams matters. Potential wastewater-treatment upgrades at Adams were estimated at $6 million to $8 million; the filing separately estimates remaining remediation costs at approximately $0.4 million.
- Management identified no material changes to the risk factors in its 2018 Form 10-K. The filing notes that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether weaker production and operating margins persist as input, logistics and energy costs evolve.
- How much reported sales growth reflects Sivomatic and currency effects, versus organic demand and pricing.
- Debt reduction, revolver usage, covenant headroom and refinancing needs, particularly the fixed-rate term-loan maturity in 2021.
- Delivery against the $70 million to $80 million capital-spending plan and management’s growth initiatives, given its cautious economic outlook.
- Final Sivomatic purchase accounting and developments in litigation, environmental remediation and wastewater-treatment obligations.