Minerals Technologies Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 28, 2014; comparisons are to the periods ended September 29, 2013. Amounts are in U.S. dollars. Interim statements were reviewed by KPMG, not audited. Results are not directly comparable because AMCOL was acquired on May 9, 2014; its results are included from that date.
Business context
MTI develops and sells specialty mineral, mineral-based and synthetic mineral products, systems and services. Following its AMCOL acquisition, it reported five segments: Specialty Minerals, Refractories, Performance Materials, Construction Technologies and Energy Services, versus two in the prior-year presentation. AMCOL contributed $290.1 million of Q3 sales and $451.7 million of nine-month sales.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $543.5m | $254.2m | $1,209.0m | $761.5m |
| Production margin | $145.0m; 26.7% | $59.9m; 23.6% | $303.0m; 25.1% | $174.6m; 22.9% |
| Operating income | $66.8m | $32.7m | $126.2m | $93.4m |
| Operating margin | 12.3% | 12.9% | 10.4% | 12.3% |
| Net income attributable to MTI | $37.0m | $21.9m | $71.1m | $57.7m |
| Diluted EPS | $1.06 | $0.63 | $2.05 | $1.65 |
Q3 sales rose 113.8%, primarily because of AMCOL. Sales from operations owned for more than one year declined 0.3% in the quarter. Nine-month sales rose 58.8%; sales from operations owned for more than one year declined $4.2 million. Specialty Minerals sales fell 2.6% in Q3 and 2.4% year to date, mainly reflecting paper capacity realignments; Refractories sales increased 4.1% and 3.0%, respectively.
Q3 operating income included $4.2 million of acquisition and integration costs and $5.8 million of restructuring charges. Nine-month operating income included $16.7 million of acquisition costs, $11.8 million of restructuring charges and a $5.6 million non-cash inventory step-up charge. The nine-month period also included a $5.8 million debt extinguishment premium. Management said acquisition and integration costs plus employee termination costs reduced Q3 diluted EPS by $0.19; identified one-time items reduced nine-month continuing-operations income by $27.3 million after tax.
Cash provided by continuing operations was $194.3 million for nine months, versus $93.3 million a year earlier. Capital expenditures were $62.4 million; acquisition spending was $1,802.3 million, net of acquired cash. Cash and cash equivalents were $202.7 million at September 28, down from $490.3 million at year-end; short-term investments were $17.7 million.
Long-term debt was $1,512.3 million, with total debt of $1,516.2 million including current debt. The $1.56 billion term facility financed the acquisition and refinancing; $30 million of term principal was repaid in Q3. The $200 million revolver was undrawn, with $9.5 million of letters of credit outstanding. Current assets were $970.7 million and current liabilities $355.5 million. The company reported compliance with credit-facility covenants. Dividends declared were $0.05 per share in Q3.
Outlook, management commentary and risks
- Management expressed caution about the global economy. It expects $50 million of AMCOL synergies over two to three years and up to $70 million over five years, while anticipating significant integration and transition costs through 2015.
- A restructuring program targeting an approximately 8% workforce reduction over 12 months is expected to produce about $20 million in annual savings. $11.2 million remained accrued for restructuring at quarter-end, with payment expected by June 2015.
- Management planned 2014 capital expenditures of $100 million to $110 million, including AMCOL businesses, and intends to use excess cash flow to repay debt. It cited PCC plant construction and other strategic growth projects. Four China satellite plants were under construction, with approximately 300,000 tons of capacity; one was expected to begin operation in Q4 2015.
- Key operating commentary included continued weakness in paper PCC demand from mill and grade realignments; railroad congestion that reduced Performance Materials operating income by about $1 million in Q3; and lower onshore demand in Energy Services Coiled Tubing due to excess capacity. Larger filtration, well-testing and pipeline projects supported Energy Services.
- Debt is primarily variable-rate; management estimated a one-percentage-point rate increase would add $15.6 million of annual interest expense. The filing also identifies integration and synergy execution, leverage and covenant constraints, economic and commodity-sensitive demand, energy and freight costs, shipping availability, and weather as risks.
- Contingencies include Armada litigation related to AMCOL, for which potential loss could not be estimated and no provision was recorded; a Brazilian joint-venture arbitration seeking 34 million Brazilian real, which MTI considered unsubstantiated and not expected to be material; and silica/asbestos cases. Environmental remediation accruals included approximately $0.4 million each for the Canaan and Adams sites; potential Adams wastewater upgrades were estimated at $6–$8 million.
Important facts for investors to verify
- How AMCOL’s results compare on a full-period basis and whether expected synergies are achieved relative to integration costs.
- Debt repayment pace, variable-rate exposure, covenant headroom and the company’s ability to generate cash while funding planned capital expenditures.
- Whether legacy Specialty Minerals and Refractories trends improve, particularly paper PCC demand and margins.
- Progress and remaining costs of workforce reductions, integration, and the preliminary AMCOL purchase-price allocation, which was still being finalized.
- Developments in the Armada case, Brazilian arbitration, environmental obligations and other acquired-company contingencies.