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MTX > SEC Filings for MTX > Form 10-Q on 26-Apr-2013All Recent SEC Filings

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Form 10-Q for MINERALS TECHNOLOGIES INC


26-Apr-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

                                              Income and Expense Items
                                            as a Percentage of Net Sales

                                                 Three Months Ended
                                         March 31, 2013       April 1, 2012
Net sales                                         100.0 %             100.0 %
Cost of goods sold                                 78.2                78.6

Production margin                                  21.8                21.4

Marketing and administrative expenses               9.1                 8.9
Research and development expenses                   1.9                 2.0

Income from operations                             10.8                10.5

Net income attributable to MTI                      7.5 %               7.0 %

Executive Summary

The Company reported earnings per share in the first quarter of 2013 of $0.53, an increase of 4% over $0.51 reported in the first quarter of 2012. Net income increased 4% to $18.8 million as compared to $18.0 million in the prior year.
The results reflected continued solid financial performance.

Worldwide sales for the first quarter of 2013 decreased 2% from the prior year to $251.3 million from $257.1 million. Foreign exchange had an unfavorable impact on sales of approximately $2.0 million or one percentage point.

The Company continued to advance the execution of its growth strategies of geographic expansion and new product innovation and development. During the first quarter of 2013, we experienced volume growth of 8% in our Paper PCC operations in Asia as a result of three new satellites which began operations since the first quarter of last year. Our agreement with United Steel Company B.S.C. (SULB), in Bahrain, which began operations in the third quarter of 2012, generated sales of $2.0 million in the first quarter of 2013. We expect to generate between $8 million-$10 million per year of revenue over the 3 year term of the contract. The Company continues to see progress in our major growth strategy of developing and commercializing new products as our FulFillŪ platform of technologies of higher filler loading resulted in three more commercial agreements, our first two agreements in North America and our first agreement in Brazil. We presently have thirteen commercial contracts for FulFillŪ. We expect the contribution of our FulFillŪ program to operating income between $2.5 million and $3.0 million in 2013.

Income from operations grew 1% to $27.1 million in the first quarter of 2013 from $27.0 million in the first quarter of 2012. Our Specialty Minerals segment reported a first quarter record operating income of $22.2 million, a 12% increase over the prior year. However, our Refractories segment continues to be affected by weak steel conditions in our two largest markets, North America and Europe. Operating Income for this segment declined 24% to $6.9 million in the first quarter of 2013. The Company achieved productivity improvements of 6% over the prior year due to our Operational Excellence programs.

The Company's balance sheet as of March 31, 2013 continues to be very strong. Cash, cash equivalents and short-term investments were approximately $470 million. We have available lines of credit of $191 million and our debt to equity ratio was 10%. Our cash flows from operations were approximately $25 million in the first quarter of 2013.


We face some significant risks and challenges in the future:

· The industries we serve, primarily paper, steel, construction and automotive, have been adversely affected by the uncertain global economic climate, primarily in Europe. Although these markets have stabilized, our global business could be adversely affected by further decreases in economic activity. Our Refractories segment primarily serves the steel industry. North America and Europe steel production in the first quarter of 2013 decreased approximately 5% from the prior year. In the paper industry, which is served by our Paper PCC product line, first quarter 2013 production levels for printing and writing papers within North America and Europe, our two largest markets, both decreased 5% from the prior year. Our Processed Minerals and Specialty PCC product lines are affected by the domestic building and construction markets and the automotive market all of which experienced growth.
· Some of our customers may experience mill shutdowns due to further consolidations, or may face liquidity issues, or bankruptcy, which could deteriorate the aging of our accounts receivable, increase our bad debt exposure and possibly trigger impairment of assets or realignment of our businesses.
· Consolidations and rationalizations in the paper and steel industries concentrate purchasing power in the hands of fewer customers, increasing pricing pressure on suppliers such as us.
· Most of our Paper PCC sales are subject to long-term contracts that may be terminated pursuant to their terms, or may be renewed on terms less favorable to us.
· We are subject to volatility in pricing and supply availability of our key raw materials used in our Paper PCC product line and Refractory product line.
· We continue to rely on China for a portion of our supply of magnesium oxide in the Refractories segment, which may be subject to uncertainty in availability and cost.
· Fluctuations in energy costs have an impact on all of our businesses.
· Changes in the fair market value of our pension assets, rates of return on assets, and discount rates could continue to have a significant impact on our net periodic pension costs as well as our funding status.
· As we expand our operations abroad we face the inherent risks of doing business in many foreign countries, including foreign exchange risk, import and export restrictions, and security concerns.
· The Company's operations, particularly in the mining and environmental areas (discharges, emissions and greenhouse gases), are subject to regulation by federal, state and foreign authorities and may be subject to, and presumably will be required to comply with, additional laws, regulations and guidelines which may be adopted in the future.

During the second quarter of 2011, M-real Corporation announced plans to divest its Alizay paper mill in France. Since that time, the mill has not been operating. In January 2013, Double A Paper Company announced it had acquired the Alizay mill. We expect the paper mill to resume operations in the first half of 2013 and, while there can be no assurance, we expect to negotiate a contract and resume operations. In 2011, sales from our Alizay satellite were approximately $7 million.

The Company has evaluated this facility for impairment of assets and, based upon the information currently available and probability-weighted cash flows of various potential outcomes, has determined that no impairment charge was required in the first quarter.
The Company plans to discontinue its operations at its merchant PCC facility at Walsum, Germany in the second quarter. The Company recorded an impairment charge related to Walsum in connection with the Company's 2007 restructuring of its European coating PCC operations, with this facility continuing to operate well below capacity levels. The Company anticipates that the residual closure costs of this facility will result in a second quarter charge of up to $6 million.

Outlook

Looking forward, we remain cautious about the state of the global economy, particularly in Europe, and the impact it will have on our product lines.

In 2013, the Company will continue to focus on innovation and new product development and other opportunities for sales growth as follows:

· Develop multiple high-filler technologies, such as filler-fiber, under the FulFillTM platform of products, to increase the fill rate in freesheet paper and continue to progress with commercial discussions and full-scale


paper machine trials.
· Increase our sales of PCC for paper by further penetration of the markets for paper filling at both freesheet and groundwood mills, particularly in emerging markets.
· Expand the Company's PCC coating product line using the satellite model.
· Promote the Company's expertise in crystal engineering, especially in helping papermakers customize PCC morphologies for specific paper applications.
· Expand PCC produced for paper filling applications by working with industry partners to develop new methods to increase the ratio of PCC for fiber substitutions.
· Develop unique calcium carbonates and talc products used in the manufacture of novel biopolymers, a new market opportunity.
· Deploy new talc and GCC products in paint, coating and packaging applications.
· Deploy value-added formulations of refractory materials that not only reduce costs but improve performance.
· Expand our solid core wire product line into BRIC, Middle Eastern and other Asian countries.
· Deploy our laser measurement technologies into new applications.
· Expand our refractory maintenance model to other steel makers globally.
· Deploy operational excellence principles into all aspects of the organization, including system infrastructure and lean principles.
· Explore selective acquisitions to fit our core competencies in minerals and fine particle technology.

However, there can be no assurance that we will achieve success in implementing any one or more of these opportunities.

Results of Operations

Three months ended March 31, 2013 as compared with three months ended April 1, 2012

Sales


(millions of dollars)                                                First                                   First        % of
                                                                    Quarter   % of Total                    Quarter      Total
                          Net Sales                                  2013       Sales         Growth         2012        Sales

U.S                                                               $   139.8         55.6 %       (4) %    $   145.8        56.7 %
International                                                         111.5         44.4 %         0 %        111.3        43.3 %
             Net sales                                            $   251.3        100.0 %       (2) %    $   257.1       100.0 %

Paper PCC                                                         $   121.3         48.3 %         0 %    $   121.7        47.3 %
Specialty PCC                                                          16.8          6.7 %         2 %         16.4         6.4 %
             PCC Products                                         $   138.1         55.0 %         0 %    $   138.1        53.7 %

Talc                                                              $    12.4          4.9 %         2 %    $    12.1         4.7 %
Ground Calcium Carbonate                                               17.2          6.8 %       (2) %         17.5         6.8 %
             Processed Minerals Products                          $    29.6         11.7 %         0 %    $    29.6        11.5 %

             Specialty Minerals Segment                           $   167.7         66.7 %         0 %    $   167.7        65.2 %

Refractory Products                                               $    62.4         24.8 %      (10) %    $    69.1        26.9 %
Metallurgical Products                                                 21.2          8.5 %         4 %         20.3         7.9 %
             Refractories Segment                                 $    83.6         33.3 %       (6) %    $    89.4        34.8 %

                                       Net sales                  $   251.3        100.0 %       (2) %    $   257.1       100.0 %

Worldwide net sales in the first quarter of 2013 decreased 2% from the previous year to $251.3 million from $257.1 million. Foreign exchange had an unfavorable impact on sales of approximately $2.0 million or one percentage point. Sales in the Specialty Minerals segment, which includes the PCC and Processed Minerals product lines, were flat at $167.7 million as compared with the prior year. Sales in the Refractories segment decreased 6% to $83.6 million as compared with $89.4 million in the prior year.


Worldwide net sales of PCC, which is primarily used in the manufacturing process of the paper industry, were flat at $138.1 million as compared with the prior year. Foreign exchange had an unfavorable impact on sales of $1.2 million or approximately one percentage point. Paper PCC sales were down slightly at $121.3 million in the first quarter of 2013 compared to $121.7 million in the prior year. Sales growth in Asia related to three new PCC satellites were offset by several paper mill and paper machine shutdowns in North America.
Sales of Specialty PCC increased 2% to $16.8 million from $16.4 million in the prior year. This increase was primarily due to slightly higher volumes and increased pricing.

Net sales of Processed Minerals products were flat at $29.6 million in the first quarter of 2013 as compared with the prior year. Talc sales increased 2% to $12.4 million due primarily to higher pricing.

Net sales in the Refractories segment in the first quarter of 2013 decreased 6% to $83.6 million from $89.4 million in the prior year. Foreign exchange had an unfavorable impact on sales of approximately $0.8 million or one percentage point. Sales of refractory products and systems to steel and other industrial applications decreased 10% to $62.4 million from $69.1 million in the prior year due to weak market conditions in North America and Europe, lower equipment sales, and lower sales to non-steel applications. Sales of metallurgical products within the Refractories segment increased 4% to $21.2 million as compared with $20.3 million in the same period last year, primarily attributable to higher volumes in North America.

Net sales in the United States decreased 4% to $139.8 million in the first quarter of 2013 from $145.8 million in the prior year. International sales in the first quarter of 2013 were relatively flat at $111.5 million compared to $111.3 million.

                                 First
Operating Costs and Expenses     Quarter     First Quarter
(millions of dollars)             2013           2012        Growth

Cost of goods sold            $    196.4   $         202.2      (3) %
Marketing and administrative  $     22.9   $          22.9        0 %
Research and development      $      4.8   $           5.0      (4) %

Cost of goods sold was 78.2% of sales compared with 78.6% of sales in the prior year. Production margin remained flat at $54.9 million despite a 2% decrease in sales. In the Specialty Minerals segment, production margin increased $2.2 million, or 6%, on the same level of sales. This was primarily attributable to improved profitability in Asia of approximately $1.1 million, price increases, net of raw material cost increases, of $1.0 million, and continued productivity and cost improvements of $0.8 million. This was partially offset by paper mill and paper machine shutdowns of $0.4 million and higher energy costs of $0.4 million. In the Refractories segment, production margin decreased $2.2 million or 11%. The decrease in margin was due to reduced Refractory volumes of $1.2 million, lower pricing, partially offset by a reduction in materials costs, of $0.4 million and lower equipment sales of $0.4 million.

Marketing and administrative costs remained flat at $22.9 million and represented 9.1% of net sales as compared with 8.9% of net sales in the prior year.

Research and development expenses decreased 4% to $4.8 million from $5.0 million in the prior year and represented 1.9% of net sales as compared with 2.0% of net sales in the prior year. This decrease was primarily attributable to lower trial activity as compared with prior year.

                                                  First          First
Income from Operations                           Quarter        Quarter
(millions of dollars)                              2013           2012       Growth

Income from
operations                                     $     27.1     $     27.0          -- %

The Company recorded income from operations of $27.1 million in the first quarter of 2013 as compared to $27.0 million in the prior year. Income from operations represented 10.8% of sales in the first quarter of 2013 as compared with 10.5% of sales in the prior year.


Income from operations for the Specialty Minerals segment increased 12% to $22.2 million from $19.9 million in the prior year and was 13.2% of net sales as compared with 11.9% in the first quarter of 2012. Operating income for the Refractories segment was $6.9 million, as compared to income from operations of $9.1 million in the prior year, and represented 8.3% net of sales as compared with 10.2% in the prior year.

                                          First         First
Non-Operating Income (Deductions)        Quarter       Quarter
(millions of dollars)                     2013          2012       Growth

Non-operating income (deductions), net $     0.2     $    (0.6 )     * %

* Percentage not meaningful

In the first quarter of 2013, the Company recorded net non-operating income of $0.2 million as compared to net non-operating deductions of ($0.6) million in the prior year. The change was primarily due to foreign exchange gains of $0.6 million in the current year compared with foreign exchange losses of ($0.4) million in the prior year.

Provision for Taxes on Income                 First            First
                                             Quarter          Quarter
(millions of dollars)                          2013             2012         Growth

Provision for taxes on
income                                     $      7.7       $      7.8           (1) %

Provision for taxes on income during the first quarter of 2013 was $7.7 million as compared to $7.8 million during the first quarter of 2012. The effective tax rate for the first quarter 2013 was 28.2% as compared to 29.5% for the first quarter of 2012. The reduction in the effective tax rate was primarily due to the reinstatement of research and development tax credits from the American Taxpayer Relief Act of 2012.

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