Minerals Technologies Inc. — Q1 2014 Form 10-Q
Business context and period. This unaudited quarterly filing covers the three months ended March 30, 2014, compared with the three months ended March 31, 2013. Minerals Technologies operates through Specialty Minerals and Refractories. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $244.4 million | $250.5 million | Down 2% |
| Production margin | $55.3 million; 22.6% of sales | $55.9 million; 22.3% | Down $0.6 million |
| Operating income | $23.6 million; 9.6% of sales | $28.3 million; 11.3% | Down 17% |
| Income from continuing operations | $16.3 million | $20.3 million | Down 20% |
| Net income attributable to MTI | $15.6 million | $18.8 million | Down 17% |
| Diluted EPS attributable to MTI | $0.45 | $0.53 | Down 15% |
| Cash from operating activities | $15.2 million | $24.7 million | Down $9.5 million |
Cost of goods sold was 77.4% of sales versus 77.7%. The effective tax rate was 30.1%, compared with 28.2%. Q1 2014 included $5.1 million of acquisition-related costs in operating expenses; management said these costs reduced EPS by approximately $0.13. The company also incurred $7.5 million of total transaction costs, with $2.4 million recorded as deferred financing costs.
Segment sales and operating income: Specialty Minerals sales were $159.7 million, down 4%, and operating income was $21.5 million, down 8%. Refractories sales were $84.7 million, up 1%, and operating income was $9.2 million, up 33%. Segment operating income is before unallocated corporate expenses and other consolidated items.
Balance sheet and liquidity
- At March 30, 2014, cash and cash equivalents were $493.0 million and short-term investments were $15.7 million, totaling $508.7 million.
- Total debt was approximately $88.0 million: $4.8 million short-term debt, $8.2 million current maturities, and $75.0 million long-term debt. The company reported a 9.0% debt-to-capital ratio and $189.7 million of uncommitted credit lines, of which $4.8 million was in use.
- Current assets were $834.8 million and current liabilities $180.3 million. Total liabilities were $342.6 million; total shareholders’ equity was $894.7 million.
- Operating cash flow of $15.2 million was principally used for capital expenditures and dividends. Capital expenditures were $11.3 million; cash dividends paid were $1.7 million. Cash increased $2.8 million during the quarter to $493.0 million.
- Working capital, as defined by the company, increased approximately $3 million from December 2013; average working-capital days rose to 61 from 60 in Q4 2013.
Material changes, outlook, and risks
- Sales were affected by severe U.S. winter weather, paper mill and paper machine shutdowns in the U.S. and Europe, and paper-grade realignments. Foreign exchange reduced sales by approximately $3.3 million. Specialty Minerals also faced higher energy costs; Refractories benefited from stronger volumes, mix, and productivity improvements.
- On March 10, 2014, MTI agreed to acquire AMCOL International for $45.75 per share in cash, approximately $1.7 billion total, subject to customary conditions and then expected to close in Q2 2014. The filing states the purchase was to be funded with cash and borrowing; JPMorgan had committed to a $200 million revolving facility and a $1.56 billion term loan. Definitive financing agreements had not yet been entered into as of the filing.
- Management was cautious about the global economy and gave no overall earnings or revenue guidance. It expected 2014 capital expenditures, excluding the AMCOL acquisition, of $65–$75 million. Management forecast FulFill platform operating income of $4.0–$4.5 million in 2014, versus $2.5 million in 2013. A new Changshu, China PCC satellite was expected to begin operating in Q1 2015; four PCC facilities were under construction in China.
- Management anticipated substantial post-acquisition integration and possible internal restructuring to realize synergies. The filing cautions that growth initiatives may not succeed and that forward-looking results are subject to risks and uncertainties.
- Pending litigation included 72 silica cases and 15 asbestos cases. Management expected any liability and defense costs not to materially affect financial position or results; it said most asbestos claims were subject to Pfizer indemnification. Environmental remediation accruals were approximately $0.4 million each for the Canaan, Connecticut and Adams, Massachusetts matters. Potential future wastewater-treatment upgrades at Adams were estimated at $6–$8 million.
- The company continued a share-repurchase authorization of up to $150 million over two years; by March 30, 2014, it had repurchased 139,900 shares for $7.5 million. No shares were reported purchased during this quarter in the issuer-purchase table.
Important facts for investors to verify
- Whether the AMCOL acquisition closed on the expected timetable, final financing terms, resulting leverage, and realized integration costs and synergies.
- Whether paper-related shutdowns, weather impacts, and foreign-exchange pressure persist, and whether Specialty Minerals sales and margins recover.
- Whether management’s FulFill earnings forecast, 2014 capital-spending range, and announced growth projects are achieved.
- Future operating cash generation, working-capital needs, and funding requirements after the acquisition.
- Any change in asbestos, silica, or environmental exposures, including the scope and cost of the Adams wastewater work.