Minerals Technologies Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended July 3, 2011; comparisons are with the periods ended July 4, 2010. Amounts are in millions of dollars except per-share data. Interim statements are unaudited and were reviewed by KPMG, which reported no material modifications were needed; the review was not an audit.
Business context and results
Minerals Technologies operates Specialty Minerals, including paper and specialty precipitated calcium carbonate (PCC) and processed minerals, and Refractories, serving steel and other industrial markets. Q2 sales growth came mainly from Refractories, pricing, and favorable foreign exchange; paper PCC volumes remained weak.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $268.4 | $255.8 | $530.9 | $509.2 |
| Production margin | $53.7; 20.0% | $55.0; 21.5% | $106.6; 20.1% | $106.4; 20.9% |
| Income from operations | $25.1; 9.3% of sales | $27.5; 10.8% | $49.8; 9.4% | $50.6; 9.9% |
| Consolidated net income | $17.2 | $19.6 | $33.8 | $35.7 |
| Net income attributable to MTI | $16.4 | $19.0 | $32.2 | $34.3 |
| Diluted EPS | $0.90 | $1.01 | $1.75 | $1.83 |
| Operating cash flow | Not separately stated in the financial statements | Not separately stated in the financial statements | $56.7 | $75.5 |
- Q2 sales rose 5%; operating income fell 9% and MTI-attributable earnings fell 13%. First-half sales rose 4%, while operating income declined 2% and MTI-attributable earnings declined 6%.
- Q2 segment sales/operating income: Specialty Minerals $171.8/$18.6 versus $168.2/$19.3; Refractories $96.6/$7.8 versus $87.6/$9.3. First-half segment sales/operating income: Specialty Minerals $345.1/$37.9 versus $340.3/$37.7; Refractories $185.8/$14.7 versus $168.9/$15.1.
- Higher raw-material and energy costs pressured production margins. In Q2 Refractories raw-material costs rose $6.0, partly offset by $3.6 of price increases; for the first half, the increases were $10.0 and $6.2, respectively. Specialty Minerals also faced cost increases that were not fully recovered through pricing.
Liquidity, debt, and capital
- At July 3, cash and cash equivalents were $396.1 and short-term investments were $16.8, totaling approximately $412.9. Current assets were $739.6 and current liabilities $172.8; management reported a 4.3 current ratio.
- Total debt was approximately $98.8, including $94.2 of long-term debt and about $4.5 of short-term debt; management reported debt-to-equity of 12%. Uncommitted bank credit lines totaled $198, with approximately $4.5 in use and about $194 available.
- First-half investing cash outflow was $21.0, including $21.9 of capital expenditures. Financing cash outflow was $18.2, including $23.3 of treasury-share purchases and $1.8 of dividends. Cash increased $28.3 to $396.1.
- Working capital, as defined by the company, increased about 1% from December 2010; days of working capital fell to 57 from 59.
Outlook, commentary, and risks
- Management expected 2011 capital expenditures of $50–$65, primarily for PCC plants and strategic growth projects. It gave no specific earnings or revenue guidance and cautioned that interim results are not necessarily indicative of full-year results.
- Growth initiatives include PCC capacity expansion in India and the U.S., development and commercialization of FulFill PCC products, new refractory technologies, and selective acquisitions. One Indian satellite PCC facility began operating in Q2; two more in India and one in the U.S. were under construction.
- Management estimated the Japan earthquake and tsunami would reduce remaining-2011 operating income by approximately $0.2–$0.3; facilities were operating, with limited supply disruption, but some Japanese refractory customers were affected.
- A customer announced plans to divest its Alizay, France paper mill. If the mill closes, MTI may shut its satellite PCC facility and could record an approximately $6.5 impairment; no impairment was recorded in Q2.
- Key exposures include uncertain economic conditions in paper, steel, construction, and automotive markets; customer shutdowns and concentration; raw-material and energy cost/availability; reliance on Chinese magnesium oxide supply; foreign exchange; pensions; and environmental regulation. The company said risk factors had not materially changed from its 2010 Form 10-K.
- There were 305 pending silica and 25 pending asbestos cases. Management expected no material financial effect, but claim amounts and potential liability were not determinable from the pleadings. Environmental remediation estimates of about $0.4 were accrued for each of the Canaan and Adams sites; potential Adams wastewater upgrades were estimated at $6–$8.
- After quarter-end, on July 4, MTI sold a 50% interest in a Korean Refractories joint venture for $1.5, retaining a 20% interest. It expected a non-cash foreign-currency translation loss of approximately $1.4 upon deconsolidation.
- The Board declared a $0.05-per-share quarterly dividend on July 20. A share repurchase authorization remained in place; 894,804 shares had been purchased under the existing program by July 3.
Most important facts for investors to verify
- Whether price increases and productivity can offset continuing input-cost inflation and restore production and operating margins.
- Paper PCC volumes, customer mill utilization, and the status of the Alizay mill and potential $6.5 impairment.
- Delivery and returns from planned PCC capacity projects and other growth initiatives, against the stated $50–$65 capital-spending plan.
- Cash conversion and working-capital trends: first-half operating cash flow was $56.7 versus $75.5 a year earlier, despite higher sales.
- Post-quarter Korean joint-venture deconsolidation and the expected translation loss, as well as developments in environmental remediation and litigation.