Minerals Technologies Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended April 1, 2018; comparisons are with the three months ended April 2, 2017. MTI develops and sells specialty mineral, mineral-based and synthetic mineral products and related services through Performance Materials, Specialty Minerals, Refractories and Energy Services.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $431.3 million | $405.0 million | +6.5% |
| Income from operations | $62.6 million | $62.1 million | +0.8% |
| Operating margin | 14.5% | 15.3% | Down 0.8 percentage points |
| Production margin | $113.5 million; 26.3% | $113.7 million; 28.1% | Nearly flat dollars; margin rate down |
| Net income attributable to MTI | $39.9 million | $34.6 million | +15.3% |
| Diluted EPS | $1.12 | $0.97 | +15.5% |
| Operating cash flow | $35.7 million | $15.9 million | +$19.8 million |
Sales growth included a favorable foreign-exchange impact of approximately $17.8 million (about 4% of sales). Cost of sales rose 9.1%, faster than sales, pressuring gross and operating margins. Net interest expense was $10.7 million, down from $11.8 million; prior-year non-operating costs included $3.9 million of debt-modification costs. The effective tax rate was approximately 19%, versus 22.2%, primarily reflecting U.S. tax reform. Consolidated net income, including non-controlling interests, was $41.1 million versus $35.6 million.
Segment results
- Performance Materials: Sales rose 10.2% to $187.3 million, but operating income declined to $26.2 million from $28.8 million. Basic Minerals sales fell 18.7% amid lower bulk chromite pricing and volumes and the planned South Africa exit; chromite reduced year-over-year segment operating income by about $7 million.
- Specialty Minerals: Sales increased 2.3% to $149.6 million; operating income was $24.1 million versus $24.4 million. Higher energy costs and severe U.S. weather affected margins.
- Refractories: Sales increased 7.3% to $75.3 million and operating income rose to $12.8 million from $9.2 million, mainly on higher refractory-product volumes.
- Energy Services: Sales increased 2.1% to $19.1 million; operating income declined to $1.5 million from $1.7 million, reflecting sales mix.
Cash, liquidity and debt
Cash and cash equivalents were $223.2 million at April 1, 2018, and short-term investments were $3.9 million, for combined liquidity of $227.1 million. Cash increased $11.0 million during the quarter. Operating cash flow of $35.7 million funded $17.9 million of net capital spending, $5.7 million of share repurchases and dividends, among other uses. Cash dividends declared were $0.05 per share.
Total debt was approximately $971.2 million, comprising $960.8 million of long-term debt, $3.8 million of current maturities and $6.6 million of short-term debt. The company reported no revolving-facility borrowings, $5.7 million of letters of credit, and compliance with its credit covenants. On April 18, after quarter-end, MTI increased and refinanced its revolving facility from $200 million to $300 million, with a new April 2023 maturity. The variable-rate term loan margin was 2.25% over adjusted LIBOR; a swap hedged $186 million of notional debt at quarter-end. A 1% interest-rate change was estimated to affect annual interest expense by $4.9 million.
Outlook, developments and risks
- Management expressed caution about the global economy and its potential effect on product lines. It provided no specific earnings or revenue guidance; expected 2018 capital expenditures were $70 million to $80 million.
- Management’s priorities include innovation, geographic expansion, productivity and operational excellence, and growth across paper, metalcasting, pet care, refractories, environmental products and Energy Services. The filing cautions that these initiatives may not succeed.
- On April 30, 2018, MTI completed its acquisition of Sivomatic, a European premium pet-litter supplier that reported €73 million of 2017 revenue. The purchase was funded with cash and credit facilities; purchase price and detailed pro forma financial effects are not provided in this filing.
- MTI plans to exit bulk chromite operations in South Africa. Remaining workforce-restructuring obligations were $7.6 million, expected to be paid by December 2018.
- The 2017 U.S. tax-reform benefit of $47.3 million remained provisional; no adjustment was recorded in Q1. MTI was still evaluating GILTI tax accounting. Unrecognized tax benefits were $15.1 million.
- Contingencies include one remaining Armada lawsuit count, which management did not expect to materially affect results or cash flows, and pending silica/asbestos cases, which management likewise did not expect to have a material effect. Environmental remediation estimates accrued were $0.4 million each for the Canaan and Adams sites; Adams facility upgrades could cost $6 million to $8 million, with timing and final requirements uncertain.
- The interim financial statements were reviewed by KPMG, not audited. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the South Africa chromite exit and related pricing/volume pressures continue to weigh on Performance Materials margins.
- Whether revenue growth converts into improved production and operating margins, given cost of sales grew faster than sales.
- The Sivomatic purchase price, financing impact, integration progress and contribution to future results.
- Debt reduction, floating-rate exposure, refinancing terms and compliance with credit covenants after the revolving-facility amendment.
- Resolution of provisional tax accounting and any changes to tax liabilities or effective tax rate.
- Developments in environmental remediation estimates and legal contingencies, including the remaining Armada claim and asbestos/silica cases.