MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017. The guidance permits the use of either a retrospective or cumulative effect transition method. The Company has elected to use the cumulative effect transition method. The Company has completed a high level accounting diagnostic and is in the process of contract review. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements and related disclosures and the Company’s assessment is expected to be completed in mid-2017.
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize most leases on-balance sheet, thereby increasing their reported assets and liabilities, in some cases very significantly. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements and related disclosures. The Company has performed a high level analysis of its current lease portfolio and is in process of establishing a cross-functional project team to assist in the implementation of this ASU. Based on the current status of this assessment, the adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
Intangibles – Goodwill and Other
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment”, which no longer requires an entity to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, goodwill will be measured using the difference between the carrying amount and the fair value of the reporting unit. The guidance is effective for the interim and annual periods beginning on or after December 15, 2019, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements. We are currently evaluating the timing of adoption of this standard.
Compensation- Retirement BenefitsReclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In March 2017,February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The guidance is effective for the interim and annual periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the timing of adoption of this standard.
Adoption of New Accounting Standards
On January 1, 2018, the Company adopted the provisions of ASU No. 2014-09, “Revenue from Contracts with Customers”. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The Company has elected to use the cumulative effect transition method and there has not been a change to our previously reported financial results.
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We measure revenue based on the consideration specified in the customer arrangement and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit as goods are delivered and services are performed.
We utilized a comprehensive approach to assess the impact of the guidance on our contract portfolio by reviewing our current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts, including evaluation of our performance obligations, principal versus agent considerations and variable consideration. We completed our contract and business process reviews and implemented changes to our controls to support recognition and disclosures under the new guidance. We recognize revenue when our performance obligation is satisfied. See Note 2 to the Condensed Consolidated Financial Statements.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 1, 2018, the Company adopted the provisions of ASU 2017-07, “Compensation – Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which requires companies to present the service cost component of the net benefit cost in the same line items in which they report compensation cost. All other components of net periodic benefit cost will be presented outside operating income. The guidance is effectiveprovisions have been applied retrospectively for the interimincome statement presentation requirements. Prior to the adoption of the guidance, the Company classified all net periodic benefit costs within operating costs, primarily within “Marketing and annual periods beginningadministrative expenses” on the Condensed Consolidated Statement of Income. The line item classification changes required by the guidance did not impact the Company’s pre-tax earnings or after December 15, 2017.net income; however, “Income from operations” and “Other non-operating income (deductions), net” changed by immaterial offsetting amounts. As a result of the accounting change, the Company reclassified approximately $0.4 million from marketing and administrative expenses to other deductions for the three months ended April 2, 2017 to conform to the current year presentation.
On January 1, 2018, the Company early adopted the provisions of ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which improves and simplifies existing guidance to allow companies to better reflect their risk management activities in the financial statements. The guidance expands the ability to hedge nonfinancial and financial risk components, eliminates the requirement to separately measure and recognize hedge ineffectiveness and eases requirements of an entity’s assessment of hedge effectiveness. The adoption of this guidance isdid not expected to have a materialan impact on the Company’s financial statements.
AdoptionNote 2. Revenue from Contracts with Customers
The Company’s revenues are primarily derived from the sale of New Accounting Standardsproducts. Our primary performance obligation (the sale of products) is satisfied upon shipment or delivery to our customers based on written sales terms, which is also when control is transferred. In most of the Company’s PCC contracts, the price per ton is based upon the total number of tons sold to the customer during the year. Under these contracts, the price billed to the customer for shipments during the year is based on periodic estimates of the total annual volume that will be sold to such customer. Revenues are adjusted at the end of each year to reflect the actual volume sold. The Company also has consignment arrangements with certain customers in our Refractories segment. Revenues for these transactions are recorded when the consigned products are consumed by the customer and control is transferred to the customer.
On January 1, 2017,Revenue from sales of equipment, primarily in our Refractories segment, is recorded upon completion of installation and control is transferred to the Company adoptedcustomer. Revenue from services is recorded when the provisions of ASU 2016-09, “Stock Compensation – Improvements to Employee Share-Based Payment Accounting”, an amendment to account standards codification (“ASC”) 718, which simplifies several aspects of accounting for share-based payments, including accounting for income taxes, forfeitures, statutory withhold rates as well as presentationservices have been performed.
Revenue from long-term construction, primarily in our Energy Services segment, where our performance obligations are satisfied in phases, is recognized over time using certain output measures based on the statement of cash flows. The Company has elected to adopt the standard on a prospective basis. As a result of this adoption, the Company recognizes excess tax benefits in the current account period. The cash flow benefitmeasurement of the excess tax benefit is included as an operating activity invalue transferred to the Condensed Consolidated Statement of Cash Flows for the period ended April 2, 2017. Additionally, taxes paid for shares withheld for tax-withholding purposes are reported as financing activities in the Condensed Consolidated Statements of Cash Flows. Previously, this activity was included in operating activities. Prior year Condensed Consolidated Statement of Cash Flows has not been restated. In accordance with the standard, the Company will continue to account for forfeitures using an estimated forfeiture rate.customer, including milestones achieved.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2. | The following table disaggregates our revenue by major source (product line) for the period ended April 1, 2018 and April 2, 2017:
| | | Three Months Ended | | | | | Apr. 1, 2018 | | | Apr. 2, 2017 | | | | | (millions of dollars) | | | Net Sales | | | | | | | | Metalcasting | | $ | 79.2 | | | $ | 66.6 | | | Household, Personal Care and Specialty Products | | | 48.7 | | | | 41.1 | | | Environmental Products | | | 12.7 | | | | 10.6 | | | Building Materials | | | 18.9 | | | | 17.4 | | | Basic Minerals | | | 27.8 | | | | 34.2 | | | Performance Materials | | | 187.3 | | | | 169.9 | | | | | | | | | | | | | Paper PCC | | | 97.0 | | | | 93.4 | | | Specialty PCC | | | 17.0 | | | | 17.0 | | | Talc | | | 13.1 | | | | 14.3 | | | Ground Calcium Carbonate | | | 22.5 | | | | 21.5 | | | Specialty Minerals | | | 149.6 | | | | 146.2 | | | | | | | | | | | | | Refractory Products | | | 62.3 | | | | 56.7 | | | Metallurgical Products | | | 13.0 | | | | 13.5 | | | Refractories | | | 75.3 | | | | 70.2 | | | | | | | | | | | | | Energy Services | | | 19.1 | | | | 18.7 | | | | | | | | | | | | | Total | | $ | 431.3 | | | $ | 405.0 | |
Note 3. Earnings Per Share (EPS) |
Basic earnings per share are based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period assuming the issuance of common shares for all potentially dilutive common shares outstanding.
The following table sets forth the computation of basic and diluted earnings per share:
| | | Three Months Ended | | | Three Months Ended | |
| | | Apr. 2, 2017 | | | Apr. 3, 2016 | | | Apr. 1, 2018 | | | Apr. 2, 2017 | |
| | | (in millions, except per share data) | | | (in millions, except per share data) | |
| | | | | | | | | | | | | |
| Net income attributable to MTI | | $ | 34.6 | | | $ | 33.9 | | | $ | 39.9 | | | $ | 34.6 | |
| | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 35.0 | | | | 34.8 | | | | 35.4 | | | | 35.0 | |
| Dilutive effect of stock options and stock units | | | 0.6 | | | | 0.1 | | | | 0.3 | | | | 0.6 | |
| Weighted average shares outstanding, adjusted | | | 35.6 | | | | 34.9 | | | | 35.7 | | | | 35.6 | |
| | | | | | | | | | | | | | | | | |
| Basic earnings (Loss) per share attributable to MTI | | $ | 0.99 | | | $ | 0.97 | | |
| Basic earnings per share attributable to MTI | | | $ | 1.13 | | | $ | 0.99 | |
| | | | | | | | | | | | | | | | | |
| Diluted earnings (Loss) per share attributable to MTI | | $ | 0.97 | | | $ | 0.97 | | |
| Diluted earnings per share attributable to MTI | | | $ | 1.12 | | | $ | 0.97 | |
Options to purchase 185,104362,443 shares and 375,644185,104 shares of common stock for the three-month periods ended April 2, 20171, 2018 and April 3, 2016,2, 2017, respectively, were not included in the computation of diluted earnings per share because they were anti-dilutive, as the exercise prices of the options were greater than the average market price of the common shares. In the first quarter of 2017, the Company adopted the provisions of ASU 2016-09, “
Stock Compensation – Improvements to Employee Share-Based Payment Accounting”. 10Under the new guidance excess income tax benefits are no longer included in the calculation of assumed proceeds. As such, the dilutive effect of stock options
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Restructuring and stock units for the period ended April 2, 2017 is reflective of the new guidance.
Note 3. | Restructuring Charges |
During 2014, the Company announced a restructuring program which resulted in a 10% permanent reduction of its workforce. The reductions included elimination of duplicate corporate functions, deployment of our shared service model, and consolidation and alignment of various corporate functions and regional locations across the Company.Other Items, net
At April 2, 2017,1, 2018, the Company had $2.3$7.6 million included within accrued liabilities in the Condensed Consolidated Balance Sheet for cash expenditures needed to satisfy remaining obligations under these workforce reduction initiatives. The Company expects to pay these amounts by the end of December 2017.2018.
The following table is a reconciliation of our restructuring liability balance as of April 2, 2017:1, 2018:
| | | (millions of dollars) | | (millions of dollars) | |
| Restructuring liability, December 31, 2016 | | $ | 3.6 | | |
| Restructuring liability, December 31, 2017 | | $ | 8.1 | |
| Additional provisions | | | 0.3 | | | - | |
| Cash payments | | | (1.6 | ) | | (0.5 | ) |
| Restructuring liability, April 2, 2017 | | $ | 2.3 | | |
| Restructuring liability, April 1, 2018 | | $ | 7.6 | |
Note 5. Income Taxes
During the fourth quarter of 2017, the U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform”), was enacted in the United States. Amongst its many provisions, U.S. Tax Reform reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018, and created a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. As a result of the enactment of U.S. Tax Reform, we recognized a provisional net tax benefit of $47.3 million in the fourth quarter of 2017. We are applying the guidance in Staff Account Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the Tax Cuts and Jobs Act, issued by the Securities and Exchange Commission, when accounting for the enactment-date effects of U.S. Tax Reform. As permitted by SAB No. 118, some elements of the tax expense recorded in the fourth quarter of 2017 due to the enactment of U.S. Tax Reform were based on reasonable estimates and considered provisional. The Company is continuing to collect and analyze detailed information about the earnings and profits of its non-U.S. subsidiaries, the related taxes paid, the amounts which could be repatriated, the foreign taxes which may be incurred on repatriation and the associated impact of these items under U.S. Tax Reform. The Company may record adjustments to refine those estimates during the measurement period, as additional analysis is completed. See Note 5 to our consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for further information on this provisional net tax benefit. No adjustments to the provisional net tax benefit were recorded during the three months ended April 1, 2018.
U.S. Tax Reform also created a new requirement that certain income earned by foreign subsidiaries, known as global intangible low-tax income (“GILTI”), must be included in the gross income of their U.S. shareholder. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current-period expense when incurred. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At April 1, 2018, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we have included GILTI related to current-year operations only in our estimated annual effective tax rate and have not provided additional GILTI on deferred items.
The recorded impact of U.S. Tax Reform is provisional and the final amount may differ, possibly materially, due to, among other things, changes in estimates, interpretations and assumptions we made, changes in IRS interpretations, the issuances of new guidance, legislative actions, or related interpretations in response to U.S. Tax Reform and future actions by states within the United States that have not currently adopted U.S. Tax Reform.
As of April 2, 2017,1, 2018, the Company had approximately $14.0$15.1 million of total unrecognized income tax benefits. Included in this amount were a total of $9.6$11.1 million of unrecognized income tax benefits that, if recognized, would affect the Company’s effective tax rate. While it is expected that the amount of unrecognized tax benefits will change in the next 12 months, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company’s accounting policy is to recognize interest and penalties accrued relating to unrecognized income tax benefits as part of its provision for income taxes. The Company had a net increase of approximately $0.2 million during the three months ended April 2, 2017,1, 2018, and had an accrued balance of $1.4$1.8 million of interest and penalties as of April 2, 2017.1, 2018.
The Company operates in multiple taxing jurisdictions, both within and outside the U.S. In certain situations, a taxing authority may challenge positions that the Company has adopted in its income tax filings. The Company, with a few exceptions (none of which are material), is no longer subject to income tax examinations by tax authorities for years prior to 2010.
Provision for taxes was $10.1$9.3 million as compared to $10.7$10.1 million in the prior year. The effective tax rate was 22.2%19.0% as compared to 23.7%22.2% in the prior year. The lower effective tax rate was primarily due to a change in the tax accounting treatment of share based payments.U.S. Tax Reform.
Note 5. | Note 6. Inventories |
The following is a summary of inventories by major category:
| | | Apr. 2, 2017 | | | Dec. 31, 2016 | | | Apr. 1, 2018 | | | Dec. 31, 2017 | |
| | | (millions of dollars) | | | (millions of dollars) | |
| Raw materials | | $ | 76.1 | | | $ | 70.6 | | | $ | 84.1 | | | $ | 82.5 | |
| Work-in-process | | | 6.3 | | | | 5.4 | | | | 7.8 | | | | 7.9 | |
| Finished goods | | | 82.1 | | | | 80.5 | | | | 89.5 | | | | 92.3 | |
| Packaging and supplies | | | 31.8 | | | | 30.4 | | | | 39.8 | | | | 36.6 | |
| Total inventories | | $ | 196.3 | | | $ | 186.9 | | | $ | 221.2 | | | $ | 219.3 | |
Note 6. | Note 7. Goodwill and Other Intangible Assets |
Goodwill and other intangible assets with indefinite lives are not amortized, but instead are assessed for impairment, at least annually. The carrying amount of goodwill was $778.7$779.5 million and $779.3 as of April 2, 20171, 2018 and December 31, 2016.2017.
Intangible assets subject to amortization as of April 2, 20171, 2018 and December 31, 20162017 were as follows:
| | | Weighted Average Useful Life (Years) | | | Apr. 2, 2017 | | | Dec. 31, 2016 | | | Weighted Average Useful Life (Years) | | | Apr. 1, 2018 | | | Dec. 31, 2017 | |
| | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
| | | | | | (millions of dollars) | | | | | | (millions of dollars) | |
| Tradenames | | 34 | | | $ | 199.8 | | | $ | 16.7 | | | $ | 199.8 | | | $ | 15.3 | | | | 34 | | | $ | 199.8 | | | $ | 22.1 | | | $ | 199.8 | | | $ | 20.7 | |
| Technology | | 12 | | | | 18.8 | | | | 3.9 | | | | 18.8 | | | | 3.6 | | | | 12 | | | | 18.8 | | | | 5.2 | | | | 18.8 | | | | 4.8 | |
| Patents and trademarks | | 17 | | | | 6.4 | | | | 4.9 | | | | 6.4 | | | | 4.8 | | | | 17 | | | | 6.4 | | | | 5.3 | | | | 6.4 | | | | 5.3 | |
| Customer relationships | | 30 | | | | 4.5 | | | | 1.6 | | | | 4.5 | | | | 1.4 | | | | 30 | | | | 4.5 | | | | 2.4 | | | | 4.5 | | | | 2.2 | |
| | | 28 | | | $ | 229.5 | | | $ | 27.1 | | | $ | 229.5 | | | $ | 25.1 | | | | 28 | | | $ | 229.5 | | | $ | 35.0 | | | $ | 229.5 | | | $ | 33.0 | |
The weighted average amortization period for acquired intangible assets subject to amortization is approximately 28 years. Estimated amortization expense is $5.9 million for the remainder of 2017, $7.92018, $31.6 million for 2018-2021,2019-2022, and $164.9$157.0 million thereafter.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7. | Note 8. Derivative Financial Instruments |
As a multinational corporation with operations throughout the world, the Company is exposed to certain market risks. The Company uses a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. The Company'sCompany’s objective is to offset gains and losses resulting from interest rates and foreign currency exposures with gains and losses on the derivative contracts used to hedge them. The Company uses derivative financial instruments only for risk management and not for trading or speculative purposes.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
By using derivative financial instruments to hedge exposures to changes in interest rates and foreign currencies, the Company exposes itself to credit risk and market risk. Credit risk is the risk that the counterparty will fail to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty, and therefore, it does not face any credit risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with major financial institutions.
Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, currency exchange rates, or commodity prices. The market risk associated with interest rate and forward exchange contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
Cash flow hedges:
For derivative instruments that are designated and qualify as cash flow hedges, the Company records the effective portion of the gain or loss in accumulated other comprehensive income (loss) as a separate component of shareholders'shareholders’ equity. The Company subsequently reclassifies the effective portion of gain or loss into earnings in the period during which the hedged transaction is recognized in earnings.
The Company utilizes over-the-counter interest rate swaps to limit exposure to market fluctuations on floating-rate debt. During the second quarter of 2016, the Company entered into a floating to fixed interest rate swap for an initial aggregate notional amount of $300 million. The notional amount at April 2, 20171, 2018 was $243$186 million. This interest rate swap is designated as a cash flow hedge. The gains and losses associated with this interest rate swap are recorded in accumulated other comprehensive income (loss). The fair value of this swap was an asset of $2.7$4.1 million at April 2, 20171, 2018 and recorded to other non-current assets on the Condensed Consolidated Balance Sheet.
Assets and liabilities measured at fair value are based on one or more of three valuation techniques. The three valuation techniques are as follows:
Market approach - prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Cost approach - amount that would be required to replace the service capacity of an asset or replacement cost.
Income approach - techniques to convert future amounts to a single present amount based on market expectations, including present value techniques, option-pricing and other models.
The Company primarily applies the income approach for interest rate derivatives for recurring fair value measurements and attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value of our interest rate swap contract is determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets and are categorized as Level 2.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. | Note 9. Long-Term Debt and Commitments |
The following is a summary of long-term debt:
| | | Apr. 1, 2018 | | | Dec. 31, 2017 | |
| | | (millions of dollars) | |
| Term Loan Facility-Variable Tranche due February 14, 2024, net of unamortized discount and deferred financing costs of $21.9 million and $22.7 million | | $ | 656.1 | | | $ | 655.3 | |
| Term Loan Facility- Fixed Tranche due May 9, 2021, net of unamortized discount of $0.4 million and $0.5 million | | | 299.6 | | | | 299.5 | |
| Japan Loan Facilities | | | 5.8 | | | | 5.6 | |
| China Loan Facilities | | | 3.1 | | | | 3.2 | |
| Total | | $ | 964.6 | | | $ | 963.6 | |
| Less: Current maturities | | | 3.8 | | | | 3.8 | |
| Long-term debt | | $ | 960.8 | | | $ | 959.8 | |
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | Apr. 2, 2017 | | | Dec. 31, 2016 | |
| | | (millions of dollars) | |
| Term Loan Facility-Variable Tranche due February 14, 2024, net of unamortized discount and deferred financing costs of $24.9 million and $25.8 million | | $ | 743.1 | | | $ | 762.3 | |
| Term Loan Facility- Fixed Tranche due May 9, 2021, net of unamortized discount of $0.6 million and $0.6 million | | | 299.4 | | | | 299.4 | |
| Japan Loan Facilities | | | 6.0 | | | | 5.8 | |
| China Loan Facilities | | | 9.1 | | | | 9.2 | |
| | | | | | | | | |
| Total | | $ | 1,057.6 | | | $ | 1,076.7 | |
| Less: Current maturities | | | 6.9 | | | | 6.8 | |
| Long-term debt | | $ | 1,050.7 | | | $ | 1,069.9 | |
On May 9, 2014, in connection with the acquisition of AMCOL International Corporation (“AMCOL”), the Company entered into a credit agreement providing for a $1,560 million senior secured term loan facility (the “Term Facility”) and a $200 million senior secured revolving credit facility (the “Revolving Facility” and, together with the Term Facility, the “Facilities”).
On June 23, 2015, the Company entered into an amendment (the “First Amendment”) to the credit agreement to reprice the $1.378 billion then outstanding on the Term Facility. As amended, the Term Facility had a $1.078 billion floating rate tranche and a $300 million fixed rate tranche. On February 14, 2017, the Company entered into an amendment (the “Second Amendment”) to the credit agreement to reprice the $788 million floating rate tranche then outstanding, which extended the maturity and lowered the interest costs by 75 basis points. Following the Second Amendment, the loans outstanding under the floating rate tranche of the Term Facility will mature on February 14, 2024, the loans outstanding under the fixed rate tranche of the Term Facility will mature on May 9, 2021 and the loans outstanding (if any) and commitments under the Revolving Facility will mature and terminate, as the case may be, on May 9, 2019. After the Second Amendment, loans under the floating rate tranche of the Term Facility bear interest at a rate equal to an adjusted LIBOR rate (subject to a floor of 0.75%) plus an applicable margin equal to 2.25% per annum. Loans under the fixed rate tranche of the Term Facility bear interest at a rate of 4.75%. Loans under the Revolving Facility will bear interest at a rate equal to an adjusted LIBOR rate plus an applicable margin equal to 1.75% per annum. Such rates are subject to decrease by up to 25 basis points in the event that, and for so long as, the Company’s net leverage ratio (as defined in the credit agreement) is less than certain thresholds. The floating rate tranche of the Term Facility was issued at par and the fixed rate tranche of the Term Facility was issued at a 0.25% discount in connection with the First Amendment. The variable rate tranche of the Term Facility was issued at a 0.25% discount in connection with the Second Amendment. The variable rate tranche has a 1% required amortization per year. The Company will pay certain fees under the credit agreement, including customary annual administration fees. The loans under the fixed rate tranche of the Term Facility are subject to prepayment premiums in the event of certain prepayments prior to the third anniversary of the effective date of the First Amendment, and the loans under the floating rate tranche of the Term Facility are subject to prepayment premiums in the event of certain prepayments prior to the six-month anniversary of the effective date of the Second Amendment. The obligations of the Company under the Facilities are unconditionally guaranteed jointly and severally by, subject to certain exceptions, all material domestic subsidiaries of the Company (the “Guarantors”) and secured, subject to certain exceptions, by a security interest in substantially all of the assets of the Company and the Guarantors. On April 18, 2018, the Company entered into an amendment (the “Third Amendment”) to the credit agreement to refinance the Revolving Facility. See Note 16.
The credit agreement contains certain customary affirmative and negative covenants that limit or restrict the ability of the Company and its restricted subsidiaries to enter into certain transactions or take certain actions. In addition, the credit agreement contains a financial covenant that requires the Company, if on the last day of any fiscal quarter loans or letters of credit were outstanding under the Revolving Facility (excluding up to $15 million of letters of credit), to maintain a maximum net leverage ratio (as defined in the credit agreement) of, initially, 5.25 to 1.00 for the four fiscal quarters preceding such day. Such maximum net leverage ratio requirement is subject to decrease during the duration of the facility to a minimum level (when applicable) of 3.50 to 1.00. During the first quarter of 2017, the Company repaid $20 million on its Term Facility. As of April 2, 2017,1, 2018, there were no loans and $12.0$5.7 million in letters of credit outstanding under the Revolving Facility. The Company is in compliance with all the covenants associated with the Revolving Facility as of the end of the period covered by this report.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has four committed loan facilities for the funding of new manufacturing facilities in China, comprised of facilities of 94.8 million RMB, or approximately $10.3 million and a $1.8 million facility.China. In December 2016,addition, the Company entered intohas a committed loan facility in Japan in the amount of 680 million Yen (approximately $5.8 million).Japan. As of April 2, 2017,1, 2018, on a combined basis, $15.1$8.9 million was outstanding under these loan facilities. Principal will be repaid in accordance with the payment schedules ending in 2021. The Company repaid $0.3$0.4 million on these loans induring the first quarter of 2017.2018.
As of April 2, 2017,1, 2018, the Company had $35.1$38.4 million in uncommitted short-term bank credit lines, of which approximately $5.9$6.6 million was in use.
Note 9. | Note 10. Benefit Plans |
The Company and its subsidiaries have pension plans covering the majority of eligible employees on a contributory or non-contributory basis. The Company also provides postretirement health care and life insurance benefits for the majority of its U.S. retired employees. Disclosures for the U.S. plans have been combined with those outside of the U.S. as the international plans do not have significantly different assumptions, and together represent less than 25% of our total benefit obligation.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Components of Net Periodic Benefit Cost
| | | Pension Benefits | | | Pension Benefits | |
| | | Three Months Ended | | | Three Months Ended | |
| | | Apr. 2, 2017 | | | Apr. 3, 2016 | | | Apr. 1, 2018 | | | Apr. 2, 2017 | |
| | | (millions of dollars) | | | (millions of dollars) | |
| Service cost | | $ | 2.1 | | | $ | 2.3 | | | $ | 2.0 | | | $ | 2.1 | |
| Interest cost | | | 3.1 | | | | 3.4 | | | | 3.0 | | | | 3.1 | |
| Expected return on plan assets | | | (4.5 | ) | | | (4.6 | ) | | | (4.8 | ) | | | (4.5 | ) |
| Amortization: | | | | | | | | | | | | | | | | |
| Prior service cost | | | 0.5 | | | | 0.2 | | | | 0.2 | | | | 0.5 | |
| Recognized net actuarial loss | | | 2.1 | | | | 2.6 | | | | 2.7 | | | | 2.1 | |
| Net periodic benefit cost | | $ | 3.3 | | | $ | 3.9 | | | $ | 3.1 | | | $ | 3.3 | |
| | | Other Benefits | | | Other Benefits | |
| | | Three Months Ended | | | Three Months Ended | |
| | | Apr. 2, 2017 | | | Apr. 3, 2016 | | | Apr. 1, 2018 | | | Apr. 2, 2017 | |
| | | (millions of dollars) | | | (millions of dollars) | |
| Service cost | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | |
| Interest cost | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | 0.1 | |
| Amortization: | | | | | | | | | | | | | | | | |
| Prior service cost | | | (0.8 | ) | | | (0.8 | ) | | | (0.3 | ) | | | (0.8 | ) |
| Recognized net actuarial (gain)/loss | | | (0.1 | ) | | | - | | | | (0.2 | ) | | | (0.1 | ) |
| Net periodic benefit cost | | $ | (0.7 | ) | | $ | (0.6 | ) | | $ | (0.3 | ) | | $ | (0.7 | ) |
Amortization amounts of prior service costs and recognized net actuarial losses are recorded, net of tax, as increases to accumulated other comprehensive income.
Employer Contributions
The Company expects to contribute approximately $10$15.0 million to its pension plans and $0.6$0.5 million to its other postretirement benefit plans in 2017.2018. As of April 2, 2017, $1.51, 2018, $3.9 million has been contributed to the pension plans.
13On January 1, 2018, the Company retrospectively adopted the provisions of ASU 2017-07, “Compensation – Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. Under the new guidance, the Company classifies all net periodic benefit costs within the “Other non-operating income (deductions), net” line item on the consolidated statement of income. The line item classification changes required by the guidance did not impact the Company’s pre-tax earnings or net income; however, “Income from operations” and “Other non-operating income (deductions), net” changed by immaterial offsetting amounts.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. | Note 11. Comprehensive Income |
The following table summarizes the amounts reclassified out of accumulated other comprehensive income (loss)loss attributable to the Company:
| | Three Months Ended | | |
| Amounts Reclassified Out of Accumulated Other Comprehensive Income (Loss) | | Apr. 2, 2017 | | | Apr. 3, 2016 | | |
Amounts Reclassified Out of Accumulated Other Comprehensive Loss | | | Three Months Ended | |
| Apr. 1, 2018 | | | Apr. 2, 2017 | |
| | | (millions of dollars) | | | (millions of dollars) | |
| Amortization of pension items: | | | | | | | | | | | | |
| Pre-tax amount | | $ | 1.7 | | | $ | 2.0 | | | $ | 2.4 | | | $ | 1.7 | |
| Tax | | | (0.5 | ) | | | (0.7 | ) | | | (0.5 | ) | | | (0.5 | ) |
| Net of tax | | $ | 1.2 | | | $ | 1.3 | | | $ | 1.9 | | | $ | 1.2 | |
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The pre-tax amounts in the table above are included within the components of net periodic pension benefit cost (see Note 810 to the Condensed Consolidated Financial Statements) and the tax amounts are included within the provision for taxes on income line within the Condensed Consolidated Statements of Income.
The major components of accumulated other comprehensive income,loss, net of related tax, attributable to MTI are as follows:
| | | Foreign Currency Translation Adjustment | | | Unrecognized Pension Costs | | | Net Gain on Cash Flow Hedges | | | Total | |
| | | (millions of dollars) | |
| | | | | | | | | | | | | |
| Balance as of December 31, 2016 | | $ | (147.3 | ) | | $ | (78.0 | ) | | $ | 4.2 | | | $ | (221.1 | ) |
| | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) before reclassifications | | | 12.5 | | | | - | | | | 0.1 | | | | 12.6 | |
| Amounts reclassified from AOCI | | | - | | | | 1.2 | | | | - | | | | 1.2 | |
| Net current period other comprehensive income (loss) | | | 12.5 | | | | 1.2 | | | | 0.1 | | | | 13.8 | |
| Balance as of April 2, 2017 | | $ | (134.8 | ) | | $ | (76.8 | ) | | $ | 4.3 | | | $ | (207.3 | ) |
| | | Foreign Currency Translation Adjustment | | | Unrecognized Pension Costs | | | Net Gain on Cash Flow Hedges | | | Total | |
| | | (millions of dollars) | |
| | | | | | | | | | | | | |
| Balance as of December 31, 2017 | | $ | (104.1 | ) | | $ | (86.5 | ) | | $ | 4.5 | | | $ | (186.1 | ) |
| | | | | | | | | | | | | | | | | |
| Other comprehensive income before reclassifications | | | 14.7 | | | | - | | | | 1.6 | | | | 16.3 | |
| Amounts reclassified from AOCI | | | - | | | | 1.9 | | | | - | | | | 1.9 | |
| Net current period other comprehensive income | | | 14.7 | | | | 1.9 | | | | 1.6 | | | | 18.2 | |
| Balance as of April 1, 2018 | | $ | (89.4 | ) | | $ | (84.6 | ) | | $ | 6.1 | | | $ | (167.9 | ) |
Note 11. | Accounting for Asset Retirement Obligations |
Note 12. Accounting for Asset Retirement Obligations
The Company records asset retirement obligations for situations in which the Company will be required to incur costs to retire tangible long-lived assets. The fair value of the liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.
The Company also records liabilities related to land reclamation as a part of asset retirement obligations. The Company mines various minerals using a surface mining process that requires the removal of overburden. In certain areas and under various governmental regulations, the Company is obligated to restore the land comprising each mining site to its original condition at the completion of the mining activity. The obligation is adjusted to reflect the passage of time, mining activities, and changes in estimated future cash outflows.
The following is a reconciliation of asset retirement obligations as of April 2, 2017:1, 2018:
| | | (millions of dollars) | |
| Asset retirement liability, December 31, 2016 | | $ | 21.5 | |
| Accretion expense | | | 0.7 | |
| Payments | | | (0.4 | ) |
| Foreign currency translation | | | 0.3 | |
| Asset retirement liability, April 2, 2017 | | $ | 22.1 | |
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | (millions of dollars) | |
| Asset retirement liability, December 31, 2017 | | $ | 22.1 | |
| Accretion expense | | | 0.1 | |
| Other | | | (1.1 | ) |
| Payments | | | (0.6 | ) |
| Foreign currency translation | | | 0.1 | |
| Asset retirement liability, April 1, 2018 | | $ | 20.6 | |
The asset retirement costs are capitalized as part of the carrying amount of the associated asset. The current portion of the liability of approximately $2.2$0.3 million is included in other current liabilities and the long-term portion of the liability of approximately $19.9$20.3 million is included in other non-current liabilities in the Condensed Consolidated Balance Sheet as of April 2, 2017.1, 2018.
Note 12. | Note 13. Contingencies |
The Company is party to a number of lawsuits arising in the normal course of our business.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 8, 2013, Armada (Singapore) PTE Limited, an ocean shipping company now in bankruptcy ("Armada"(“Armada”) filed a case in federal court in the Northern District of Illinois against AMCOL and certain of its subsidiaries ( Armada (Singapore) PTE Limited v. AMCOL International Corp., et al., United States District Court for the Northern District of Illinois , Case No. 13 CV 3455). We acquired AMCOL and its subsidiaries on May 9, 2014. A co-defendant is Ashapura Minechem Limited, a company located in Mumbai, India (“AML”). During the relevant time period, 2008-2010, AMCOL owned slightly over 20% of the outstanding AML stock through December 2009, after which it owned approximately 19%. In 2008, AML entered into two contracts of affreightment (“COA”) with Armada for over 60 ship loads of bauxite from India to China. After one shipment, AML made no further shipments, which led Armada to file arbitrations in London against AML, one for each COA. AML did not appear in the London arbitrations and default awards of approximately $70 million were entered. The litigation filed by Armada against AMCOL and AML relates to these awards, which AML has not paid. The substance of the allegations by Armada is that AML and AMCOL engaged in illegal conduct to thwart Armada’s efforts to collect the arbitration award. AMCOL recently won a motion for judgement on the pleadings that resulted in the successful dismissal of all but one count in the complaint, including a dismissal of all counts alleging violations of Illinois’ Fraudulent Transfer laws and federal RICO violations. Fact discovery is scheduled to close inOn March 26, 2018, the second quarterU.S. Court of 2017. We have accrued an estimateAppeals for the Seventh Circuit affirmed the district court’s dismissal of potential damages forsuch counts. The Company does not expect that the outcome of the one remaining count of the Armada lawsuit the amount of which was notwill have a material toeffect on our financial position, results of operations or cash flows.
Certain of the Company'sCompany’s subsidiaries are among numerous defendants in a number of cases seeking damages for exposure to silica or to asbestos containing materials. The Company currently has three pending silica cases and 1922 pending asbestos cases. To date, 1,4921,493 silica cases and 4854 asbestos cases have been dismissed, not including any lawsuits against AMCOL or American Colloid Company dismissed prior to our acquisition of AMCOL. OneThree new asbestos case, previously disclosed in the Company’s most recent Annual Report on Form 10-K, wascases were filed induring the first quarter of 2017, and2018, including one new case naming AMCOL as a second newdefendant. One asbestos case was filed subsequent to the end ofdismissed during the first quarter. No asbestos or silica cases were dismissed during the quarter.period. Most of these claims do not provide adequate information to assess their merits, the likelihood that the Company will be found liable, or the magnitude of such liability, if any. Additional claims of this nature may be made against the Company or its subsidiaries. At this time management anticipates that the amount of the Company'sCompany’s liability, if any, and the cost of defending such claims, will not have a material effect on its financial position or results of operations.
The Company has settled only one silica lawsuit, for a nominal amount, and no asbestos lawsuits to date (not including any that may have been settled by AMCOL prior to completion of the acquisition). We are unable to state an amount or range of amounts claimed in any of the lawsuits because state court pleading practices do not require identifying the amount of the claimed damage. The aggregate cost to the Company for the legal defense of these cases since inception continues to be insignificant. The majority of the costs of defense for these cases, excluding cases against AMCOL, or American Colloid, are reimbursed by Pfizer Inc. pursuant to the terms of certain agreements entered into in connection with the Company'sCompany’s initial public offering in 1992. Of the 19 pending asbestos cases all except two allege liability based on products sold largely or entirelyThe Company is entitled to indemnification, pursuant to agreement, for sales prior to the initial public offering, and for whichoffering. Of the Company is therefore entitled22 pending asbestos cases, 14 of the non-AMCOL cases are subject to indemnification, pursuant to such agreements.in whole or in part, because the plaintiffs claim liability based on sales of products that occurred either entirely before the initial public offering, or both before and after the initial public offering. In the six remaining non-AMCOL cases, the plaintiffs have not alleged dates of exposure. The two exceptions pertain to one pending asbestos case against American Colloid Company, and one for whichremaining cases involve AMCOL only, so no period of alleged exposure has been stated by plaintiffs.Pfizer indemnity is available. Our experience has been that the Company is not liable to plaintiffs in any of these lawsuits and the Company does not expect to pay any settlements or jury verdicts in these lawsuits.
Environmental Matters
On April 9, 2003, the Connecticut Department of Environmental Protection issued an administrative consent order relating to our Canaan, Connecticut, plant where both our Refractories segment and Specialty Minerals segment have operations. We agreed to the order, which includes provisions requiring investigation and remediation of contamination associated with historic use of polychlorinated biphenyls ("PCBs"(“PCBs”) and mercury at a portion of the site. We have completed the required investigations and submitted several reports characterizing the contamination and assessing site-specific risks. We are awaiting regulators’ approval of the risk assessment report, which will form the basis for a proposal by the Company concerning eventual remediation.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We believe that the most likely form of overall site remediation will be to leave the existing contamination in place (with some limited soil removal), encapsulate it, and monitor the effectiveness of the encapsulation. We anticipate that a substantial portion of the remediation cost will be borne by the United States based on its involvement at the site from 1942 – 1964, as historic documentation indicates that PCBs and mercury were first used at the facility at a time of U.S. government ownership for production of materials needed by the military. Pursuant to a Consent Decree entered on October 24, 2014, the United States paid the Company $2.3 million in the 4th4th quarter of 2014 to resolve the Company’s claim for response costs for investigation and initial remediation activities at this facility through October 24, 2014. Contribution by the United States to any future costs of investigation or additional remediation has, by agreement, been left unresolved. Though the cost of the likely remediation remains uncertain pending completion of the phased remediation decision process, we have estimated that the Company’s share of the cost of the encapsulation and limited soil removal described above would approximate $0.4 million, which has been accrued as of April 2, 2017.1, 2018.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company is evaluating options for upgrading the wastewater treatment facilities at its Adams, Massachusetts plant. This work has been undertaken pursuant to an administrative Consent Order originally issued by the Massachusetts Department of Environmental Protection (“DEP”) on June 18, 2002. This order was amended on June 1, 2009 and on June 2, 2010. The amended Order includes the investigation by January 1, 2022 of options for ensuring that the facility'sfacility’s wastewater treatment ponds will not result in unpermitted discharge to groundwater. Additional requirements of the amendment include the submittal by July 1, 2022 of a plan for closure of a historic lime solids disposal area. Preliminary engineering reviews completed in 2005 indicate that the estimated cost of wastewater treatment upgrades to operate this facility beyond 2024 may be between $6 million and $8 million. The Company estimates that the remaining remediation costs would approximate $0.4 million, which has been accrued as of April 2, 2017.1, 2018.
The Company and its subsidiaries are not party to any other material pending legal proceedings, other than routine litigation incidental to their businesses.
Note 13. | Note 14. Non-controlling interests |
The following is a reconciliation of beginning and ending total equity, equity attributable to MTI, and equity attributable to non-controlling interests:
| | | Equity Attributable to MTI | | | | | | Equity Attributable to MTI | | | Total | |
| | | Common Stock | | | Additional Paid-in Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Treasury Stock | | | Non-controlling Interests | | | Total | | | Common Stock | | | Additional Paid-in Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Treasury Stock | | | Non-controlling Interests |
| | | (millions of dollars) | | | (millions of dollars) | |
| Balance as of December 31, 2016 | | $ | 4.8 | | | $ | 400.0 | | | $ | 1,419.1 | | | $ | (221.1 | ) | | $ | (596.3 | ) | | $ | 24.4 | | | $ | 1,030.9 | | |
| Balance as of December 31, 2017 | | | $ | 4.9 | | | $ | 422.7 | | | $ | 1,607.2 | | | $ | (186.1 | ) | | $ | (597.0 | ) | | $ | 27.4 | | | $ | 1,279.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | 34.6 | | | | - | | | | - | | | | 1.0 | | | | 35.6 | | | | - | | | | - | | | | 39.9 | | | | - | | | | - | | | | 1.2 | | | | 41.1 | |
| Other comprehensive income (loss) | | | - | | | | - | | | | - | | | | 13.8 | | | | - | | | | 0.5 | | | | 14.3 | | |
| Other comprehensive income | | | | - | | | | - | | | | - | | | | 18.2 | | | | - | | | | 0.5 | | | | 18.7 | |
| Dividends declared | | | - | | | | - | | | | (1.7 | ) | | | - | | | | - | | | | - | | | | (1.7 | ) | | | - | | | | - | | | | (1.8 | ) | | | - | | | | - | | | | - | | | | (1.8 | ) |
| Dividends to non-controlling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.2 | ) | | | (0.2 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.2 | ) | | | (0.2 | ) |
| Issuance of shares pursuant to employee stock compensation plans | | | - | | | | 2.2 | | | | - | | | | - | | | | - | | | | - | | | | 2.2 | | | | - | | | | 0.5 | | | | - | | | | - | | | | - | | | | - | | | | 0.5 | |
| Stock based compensation | | | - | | | | 0.6 | | | | - | | | | - | | | | - | | | | - | | | | 0.6 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Balance as of April 2, 2017 | | $ | 4.8 | | | $ | 402.8 | | | $ | 1,452.0 | | | $ | (207.3 | ) | | $ | (596.3 | ) | | $ | 25.8 | | | $ | 1,081.8 | | |
| Purchase of treasury stock | | | | - | | | | - | | | | - | | | | - | | | | (5.7 | ) | | | - | | | | (5.7 | ) |
| Balance as of April 1, 2018 | | | $ | 4.9 | | | $ | 423.2 | | | $ | 1,645.3 | | | $ | (167.9 | ) | | $ | (602.7 | ) | | $ | 29.0 | | | $ | 1,331.8 | |
The income attributable to non-controlling interests for the three-month periods ended April 2, 20171, 2018 and April 3, 20162, 2017 was from continuing operations. The remainder of income was attributable to MTI.
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 14. | Note 15. Segment and Related Information |
On a regular basis, the Company reviews its segments and the approach used by the chief operating decision maker to assess performance and allocate resources. Accordingly, in the first quarter of 2017, the Company reorganized the management structure for its Performance Materials and Construction Technologies business units to better reflect the way performance is evaluated and resources allocated. As a result, all of the product lines within these business segments were combined into one operating segment. Presented below are the restated financial results, by product line, of this operating segment for each quarter of 2016 to conform to the current management structure.
| | 2016 quarters | | | Full Year 2016 | |
| | | First | | | Second | | | Third | | | Fourth | | | |
| | | (millions of dollars, except per share amounts) | |
| | | | | | | | | | | | | | | | |
| Net sales | | | | | | | | | | | | | | | |
| Metalcasting | | $ | 60.0 | | | $ | 68.0 | | | $ | 63.1 | | | $ | 66.9 | | | $ | 258.0 | |
| Household, Personal Care & Specialty Products | | | 45.3 | | | | 44.0 | | | | 42.1 | | | | 39.8 | | | | 171.2 | |
| Environmental Products | | | 13.4 | | | | 26.5 | | | | 24.6 | | | | 14.4 | | | | 78.9 | |
| Building Materials | | | 20.4 | | | | 19.7 | | | | 16.9 | | | | 17.1 | | | | 74.1 | |
| Basic Minerals | | | 20.5 | | | | 24.3 | | | | 22.3 | | | | 36.8 | | | | 103.9 | |
| Performance Materials Segment | | | 159.6 | | | | 182.5 | | | | 169.0 | | | | 175.0 | | | | 686.1 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Performance Materials Segment | | $ | 28.2 | | | $ | 33.3 | | | $ | 30.2 | | | $ | 29.4 | | | $ | 121.1 | |
| % of Sales | | | 17.7 | % | | | 18.2 | % | | | 17.9 | % | | | 16.8 | % | | | 17.7 | % |
The Company now has 4 reportable segments: Specialty Minerals, Performance Materials, Refractories and Energy Services. See Note 1 to the Condensed Consolidated Financial Statements. Segment information for the three-month periods ended April 1, 2018 and April 2, 2017 is as follows:
| | | Three Months Ended | |
| | | Apr. 2, 2017 | | | Apr. 3, 2016 | |
| | | (millions of dollars) | |
| Net Sales | | | | | | |
| Specialty Minerals | | $ | 146.2 | | | $ | 155.6 | |
| Refractories | | | 70.2 | | | | 69.2 | |
| Performance Materials | | | 169.9 | | | | 159.6 | |
| Energy Services | | | 18.7 | | | | 25.8 | |
| Total | | $ | 405.0 | | | $ | 410.2 | |
| | | | | | | | | |
| Income from Operations | | | | | | | | |
| Specialty Minerals | | $ | 24.4 | | | $ | 25.7 | |
| Refractories | | | 9.2 | | | | 6.8 | |
| Performance Materials | | | 28.8 | | | | 28.2 | |
| Energy Services | | | 1.7 | | | | (0.1 | ) |
| Total | | $ | 64.1 | | | $ | 60.6 | |
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | Three Months Ended | |
| | | Apr. 1, 2018 | | | Apr. 2, 2017 | |
| | | (millions of dollars) | |
| Net Sales | | | | | | |
| Performance Materials | | $ | 187.3 | | | $ | 169.9 | |
| Specialty Minerals | | | 149.6 | | | | 146.2 | |
| Refractories | | | 75.3 | | | | 70.2 | |
| Energy Services | | | 19.1 | | | | 18.7 | |
| Total | | $ | 431.3 | | | $ | 405.0 | |
| | | | | | | | | |
| Income from Operations | | | | | | | | |
| Performance Materials | | $ | 26.2 | | | $ | 28.8 | |
| Specialty Minerals | | | 24.1 | | | | 24.4 | |
| Refractories | | | 12.8 | | | | 9.2 | |
| Energy Services | | | 1.5 | | | | 1.7 | |
| Total | | $ | 64.6 | | | $ | 64.1 | |
A reconciliation of the totals reported for the operating segments to the applicable line items in the condensed consolidated financial statements is as follows:
| | | Income from operations before provision for taxes on income | | | Income from operations before provision for taxes on income | |
| | | Three Months Ended | | | Three Months Ended | |
| | | Apr. 2, 2017 | | | Apr. 3, 2016 | | Apr. 1, 2018 | | | Apr. 2, 2017 | |
| | | (millions of dollars) | | | (millions of dollars) | |
| Income from operations for reportable segments | | $ | 64.1 | | | $ | 60.6 | | | $ | 64.6 | | | $ | 64.1 | |
| Acquisition Related Transaction and Integration Costs | | | (1.5 | ) | | | (1.6 | ) | |
| Acquisition related transaction and integration costs | | | | (0.4 | ) | | | (1.5 | ) |
| Unallocated corporate expenses | | | (0.9 | ) | | | (1.4 | ) | | | (1.6 | ) | | | (0.5 | ) |
| Consolidated income from operations | | | 61.7 | | | | 57.6 | | | | 62.6 | | | | 62.1 | |
| Non-operating deductions, net | | | (16.2 | ) | | | (12.4 | ) | | | (13.4 | ) | | | (16.6 | ) |
| | | | | | | | | | | | | | | | | |
| Income from continuing operations before provision for taxes on income | | $ | 45.5 | | | $ | 45.2 | | | $ | 49.2 | | | $ | 45.5 | |
MINERALS TECHNOLOGIES INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company'sCompany’s sales by product category are as follows:
| | | Three Months Ended | | | Three Months Ended | |
| | | Apr. 2, 2017 | | | Apr. 3, 2016 | | | Apr. 1, 2018 | | | Apr. 2, 2017 | |
| | | (millions of dollars) | | | (millions of dollars) | |
| Paper PCC | | $ | 93.4 | | | $ | 103.2 | | | $ | 97.0 | | | $ | 93.4 | |
| Specialty PCC | | | 17.0 | | | | 16.7 | | | | 17.0 | | | | 17.0 | |
| Talc | | | 14.3 | | | | 15.0 | | | | 13.1 | | | | 14.3 | |
| Ground Calcium Carbonate | | | 21.5 | | | | 20.7 | | | | 22.5 | | | | 21.5 | |
| Refractory Products | | | 56.7 | | | | 53.4 | | |
| Metallurgical Products | | | 13.5 | | | | 15.8 | | |
| Metalcasting | | | 66.6 | | | | 60.0 | | | | 79.2 | | | | 66.6 | |
| Household, Personal Care and Specialty Products | | | 41.1 | | | | 45.3 | | | | 48.7 | | | | 41.1 | |
| Environmental Products | | | 10.6 | | | | 13.4 | | | | 12.7 | | | | 10.6 | |
| Building Materials | | | 17.4 | | | | 20.4 | | | | 18.9 | | | | 17.4 | |
| Basic Minerals | | | 34.2 | | | | 20.5 | | | | 27.8 | | | | 34.2 | |
| Refractory Products | | | | 62.3 | | | | 56.7 | |
| Metallurgical Products | | | | 13.0 | | | | 13.5 | |
| Energy Services | | | 18.7 | | | | 25.8 | | | | 19.1 | | | | 18.7 | |
| Total | | $ | 405.0 | | | $ | 410.2 | | | $ | 431.3 | | | $ | 405.0 | |
Note 16. Subsequent Events
On April 30, 2018, the Company completed the acquisition of Sivomatic Holding, B.V. (“Sivomatic”), a leading European supplier of premium pet litter products. Sivomatic is a vertically integrated manufacturer, with production facilities in the Netherlands, Austria and Turkey. With a leading position in premier clumping products, their product portfolio spans the range of pet litter derived from bentonite, sourced predominantly from wholly-owned mines in Turkey. Sivomatic has approximately 115 employees and generated revenue of €73 million in 2017. The acquisition was financed through a combination of cash on hand and the Company’s credit facilities.
On April 18, 2018, the Company entered into an amendment (the “Third Amendment”) to the credit agreement to refinance its $200 million Revolving Facility. As amended, the Revolving Facility has been increased to $300 million in aggregate commitments, maturing on April 18, 2023. Loans under the Revolving Facility will bear interest at a rate equal to an adjusted LIBOR rate plus an applicable margin equal to 1.625% per annum, subject to decrease by up to 25 basis points in the event that, and for as long as, the Company’s net leverage ratio (as defined in the credit agreement) is less than certain thresholds.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Shareholders and Board of Directors and Shareholders
Minerals Technologies Inc.:
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of Minerals Technologies Inc. and subsidiaries (the Company) as of April 2, 2017,1, 2018, the related condensed consolidated statements of income and comprehensive income for the three-month periods ended April 2, 20171, 2018 and April 3, 2016, and2, 2017, the related condensed consolidated statements of cash flows for the three-month periods ended April 1, 2018 and April 2, 2017, and April 3, 2016. These condensedthe related notes (collectively, the consolidated interim financial statementsinformation). Based on our reviews, we are not aware of any material modifications that should be made to the responsibility of the Company's management.consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We conducted our reviewhave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 16, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Minerals Technologies Inc. and subsidiaries as of December 31, 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 17, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
New York, New York
May 5, 20174, 2018
| Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations |
Executive Summary
Consolidated sales for the first quarter of 20172018 were $405.0$431.3 million as compared with $410.2$405.0 million in the prior year. Income from operations was $61.7$62.6 million and represented 15.2%14.5% of sales as compared with $57.6$62.1 million and 14.0%15.3% of sales in the prior year. Net income was $34.6$39.9 million as compared to $33.9$34.6 million in the first quarter of 2016.2017.
Diluted earnings in the first quarter ended April 2, 20171, 2018 were $0.97$1.12 per share. Included in pre-tax income and earnings per share were $1.5$0.4 million acquisition integration costs, $0.3 million of restructuring charges, and $3.9 million of debt modification costs and fees which reduced earnings by $0.10 per share.related transaction costs.
The Company continued to focus onadvance the execution of its strategygrowth strategies of geographic expansion and saw significant growth across all ofnew product innovation and development with a focus on operational excellence and productivity improvements. As a result, our businessessales in China. We recently signed an agreement for a new 125,000 metric ton PCC satellite facilityChina and Asia continue to grow, driven by increased penetration in Indonesia and expandedChina from our existing facility in Indonesia for an additional 40,000 metric tons. Metalcasting business.
Long term debt as ofOn April 2, 2017 was $1,050.7 million. During30, 2018, the first quarter of 2017, we repaid $20 million of our Term Loan debt, for total repayments of $500 million sinceCompany completed the acquisition of AMCOL International CorporationSivomatic Holding B.V. (“AMCOL”Sivomatic”), a leading European supplier of premium pet litter products. Sivomatic is a vertically integrated manufacturer, with production facilities in 2014.the Netherlands, Austria and Turkey. With a leading position in premier clumping products, their product portfolio spans the range of pet litter derived from bentonite, sourced predominantly from wholly-owned mines in Turkey.
Our balance sheet continues to be strong. Cash, cash equivalents and short-term investments were $172$227 million as of April 2, 2017.1, 2018. Cash flow from operations as $36 million for the quarter. Our intention continuesis to bemaintain a balanced approach to usecapital deployment, by using excess cash flow primarily to repayfor investments in growth, debt reduction and to continue to de-lever.selective share repurchases.
Outlook
Looking forward, we remain cautious about the state of the global economy and the impact it will have on our product lines.
The Company will continue to focus on innovation and new product development and other opportunities for sales growth in 20172018 from its existing businesses, as follows:
| · | Develop multiple high-filler technologies under the FulFill® platform of products, to increase the fill rate in freesheet paper and continue to progress with commercial discussions and full-scale paper machine trials. |
| · | Develop products and processes for waste management and recycling opportunities to reduce the environmental impact of the paper mill, reduce energy consumption and improve the sustainability of the papermaking process, including our New YieldTMNewYield® products. |
| · | Further penetration into the packaging segment of the paper industry. |
| · | 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'sCompany’s PCC coating product line using the satellite model. |
| · | Increase our presence and gain penetration of our bentonite based foundry customers for the Metalcasting industry in emerging markets, such as China and India. |
| · | Increase our presence and market share in global pet care products, particularly in emerging markets. |
| · | Deploy new products in pet care such as lightweight litter. |
| · | Promote the Company'sCompany’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 carbonate 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. |
| · | Increase our presence and market share in Asia and in the global powdered detergent market. |
| · | Continue the development of our proprietary Enersol® products for agricultural applications worldwide. |
| · | Pursue opportunities for our products in environmental and building and construction markets in the Middle East, Asia Pacific and South America regions. |
| · | Increase our presence and market share for geosynthetic clay liners within the Environmental Products product line. |
| · | Increase our presence and market penetration in offshore produced water and offshore filtration and well testing within the Energy Services segment. |
| · | Increase global market share in services for the floating production storage and offloading (FPSO) market. |
| · | Deploy operational excellence principles into all aspects of the organization, including system infrastructure and lean principles. |
| · | Continue to explore selective small bolt-on type 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 April 2, 20171, 2018 as compared with three months ended April 3, 20162, 2017
Consolidated Income Statement Review
| | | Three Months Ended, | | | Growth | | | Three Months Ended, | | | Growth | |
| | | Apr. 2 2017 | | | Apr. 3 2016 | | | $ | | | | % | | | Apr. 1, 2018 | | | Apr. 2, 2017 | | | $ | | | | % | |
| | | (Dollars in millions) | | | (Dollars in millions) | |
| Net sales | | $ | 405.0 | | | $ | 410.2 | | | $ | (5.2 | ) | | | -1.3 | % | | $ | 431.3 | | | $ | 405.0 | | | $ | 26.3 | | | | 6.5 | % |
| Cost of sales | | | 291.3 | | | | 297.5 | | | | (6.2 | ) | | | -2.1 | % | | | 317.8 | | | | 291.3 | | | | 26.5 | | | | 9.1 | % |
| Production margin | | | 113.7 | | | | 112.7 | | | | 1.0 | | | | 0.9 | % | | | 113.5 | | | | 113.7 | | | | (0.2 | ) | | | -0.2 | % |
| Production margin % | | | 28.1 | % | | | 27.5 | % | | | | | | | | | | | 26.3 | % | | | 28.1 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Marketing and administrative expenses | | | 44.4 | | | | 46.7 | | | | (2.3 | ) | | | -4.9 | % | | | 44.4 | | | | 44.0 | | | | 0.4 | | | | 0.9 | % |
| Research and development expenses | | | 5.8 | | | | 5.9 | | | | (0.1 | ) | | | -1.7 | % | | | 6.1 | | | | 5.8 | | | | 0.3 | | | | 5.2 | % |
| Acquisition related transaction and integration costs | | | 1.5 | | | | 1.6 | | | | (0.1 | ) | | | -6.3 | % | | | 0.4 | | | | 1.5 | | | | (1.1 | ) | | | -73.3 | % |
| Restructuring and other charges | | | 0.3 | | | | 0.9 | | | | (0.6 | ) | | | 100.0 | % | |
| Restructuring and other items, net | | | | - | | | | 0.3 | | | | (0.3 | ) | | | 100.0 | % |
| | | | | | | | | | | | - | | | | | | | | | | | | | | | | - | | | | | |
| Income from operations | | | 61.7 | | | | 57.6 | | | | 4.1 | | | | 7.1 | % | | | 62.6 | | | | 62.1 | | | | 0.5 | | | | 0.8 | % |
| Operating margin % | | | 15.2 | % | | | 14.0 | % | | | | | | | | | | | 14.5 | % | | | 15.3 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense, net | | | (11.8 | ) | | | (14.1 | ) | | | 2.3 | | | | -16.3 | % | | | (10.7 | ) | | | (11.8 | ) | | | 1.1 | | | | -9.3 | % |
| Debt modification costs and fees | | | (3.9 | ) | | | - | | | | (3.9 | ) | | | * | | | | - | | | | (3.9 | ) | | | 3.9 | | | | * | |
| Other non-operating income (deductions), net | | | (0.5 | ) | | | 1.7 | | | | (2.2 | ) | | | * | | | | (2.7 | ) | | | (0.9 | ) | | | (1.8 | ) | | | * | |
| Total non-operating deductions, net | | | (16.2 | ) | | | (12.4 | ) | | | (3.8 | ) | | | 30.6 | % | | | (13.4 | ) | | | (16.6 | ) | | | 3.2 | | | | -19.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income before provision for taxes and equity in earnings | | | 45.5 | | | | 45.2 | | | | 0.3 | | | | 0.7 | % | | | 49.2 | | | | 45.5 | | | | 3.7 | | | | 8.1 | % |
| Provision for taxes on income | | | 10.1 | | | | 10.7 | | | | (0.6 | ) | | | -5.6 | % | | | 9.3 | | | | 10.1 | | | | (0.8 | ) | | | -7.9 | % |
| Effective tax rate | | | 22.2 | % | | | 23.7 | % | | | | | | | | | | | 18.9 | % | | | 22.2 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity in earnings of affiliates, net of tax | | | 0.2 | | | | 0.3 | | | | (0.1 | ) | | | -33.3 | % | | | 1.2 | | | | 0.2 | | | | 1.0 | | | | 500.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 35.6 | | | | 34.8 | | | | 0.8 | | | | 2.3 | % | | | 41.1 | | | | 35.6 | | | | 5.5 | | | | 15.4 | % |
| | | | | | | | | | | | | | | | | | |
| Net income attributable to non-controlling interests | | | 1.0 | | | | 0.9 | | | | 0.1 | | | | 11.1 | % | | | 1.2 | | | | 1.0 | | | | 0.2 | | | | 20.0 | % |
| Net income attributable to Minerals Technologies Inc. (MTI) | | | 34.6 | | | | 33.9 | | | | 0.7 | | | | 2.1 | % | | $ | 39.9 | | | $ | 34.6 | | | $ | 5.3 | | | $ | 15.3 | % |
Net Sales
| | | Three Months Ended Apr. 2, 2017 | | | | | | Three Months Ended Apr. 3, 2016 | | | Three Months Ended Apr. 1, 2018 | | | % Growth | | | Three Months Ended Apr. 2, 2017 | |
| | | Net Sales | | | % of Total Sales | | | % Growth | | | Net Sales | | | % of Total Sales | | Net Sales | | | % of Total Sales | Net Sales | | | % of Total Sales |
| | | (Dollars in millions) | | | (Dollars in millions) | |
| U.S. | | $ | 224.3 | | | | 55.4 | % | | | -8.1 | % | | $ | 244.2 | | | | 59.5 | % | | $ | 232.3 | | | | 53.9 | % | | | 3.6 | % | | $ | 224.3 | | | | 55.4 | % |
| International | | | 180.7 | | | | 44.6 | % | | | 8.9 | % | | | 166.0 | | | | 40.5 | % | | | 199.0 | | | | 46.1 | % | | | 10.1 | % | | | 180.7 | | | | 44.6 | % |
| Total sales | | $ | 405.0 | | | | 100.0 | % | | | -1.3 | % | | $ | 410.2 | | | | 100.0 | % | | $ | 431.3 | | | | 100.0 | % | | | 6.5 | % | | $ | 405.0 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performance Materials Segment | | | $ | 187.3 | | | | 43.4 | % | | | 10.2 | % | | $ | 169.9 | | | | 42.0 | % |
| Specialty Minerals Segment | | $ | 146.2 | | | | 36.1 | % | | | -6.0 | % | | $ | 155.6 | | | | 37.9 | % | | | 149.6 | | | | 34.7 | % | | | 2.3 | % | | | 146.2 | | | | 36.1 | % |
| Refractories Segment | | | 70.2 | | | | 17.3 | % | | | 1.4 | % | | | 69.2 | | | | 16.9 | % | | | 75.3 | | | | 17.5 | % | | | 7.3 | % | | | 70.2 | | | | 17.3 | % |
| Performance Materials Segment | | | 169.9 | | | | 42.0 | % | | | 6.5 | % | | | 159.6 | | | | 38.9 | % | |
| Energy Services Segment | | | 18.7 | | | | 4.6 | % | | | -27.5 | % | | | 25.8 | | | | 6.3 | % | | | 19.1 | | | | 4.4 | % | | | 2.1 | % | | | 18.7 | | | | 4.6 | % |
| Total sales | | $ | 405.0 | | | | 100.0 | % | | | -1.3 | % | | $ | 410.2 | | | | 100.0 | % | | $ | 431.3 | | | | 100.0 | % | | | 6.5 | % | | $ | 405.0 | | | | 100.0 | % |
Worldwide sales were $405.0$431.3 million in the first quarter of 20172018 as compared with $410.2$405.0 million in the prior year. Foreign exchange had a favorable impact on sales of approximately $17.8 million, or 4%. Net sales in the United States decreased 8.1%increased 3.6% to $224.3$232.3 million as compared with $244.2$224.3 million in the prior year. International sales increased 8.9%10.1% to $180.7$199.0 million from $166.0$180.7 million in the prior year.
Operating Costs and Expenses
Cost of sales was $291.3317.8 million, a decreasean increase of 2.1%9.1% from prior year and was 71.973.7% of sales as compared with 72.5%71.9% of sales in the prior year. Gross margins improved 2% from 27.5%margin in the first quarter of 2018 was 26.3% of sales compared to 28.1% in the prior year. The decrease in gross margin percentage was primarily attributable to reduction in profitability in the Basic Minerals product line within the Performance Materials segment due to a reduction in pricing and volumes of sales.bulk chromite. The Company plans to exit its bulk chromite operations in South Africa.
Marketing and administrative costs decreased 4.9% towere $44.4 million as compared to $46.7$44.0 million in prior year.
Research and development expenses were $5.86.1 million as compared to $5.9$5.8 million in the prior year.
The Company incurred a chargecharges of $1.5$0.4 million and $1.6$1.5 million for acquisition-related transaction and integration costs during the three months ended April 2, 20171, 2018 and April 3, 2016,2, 2017, respectively. In addition, there were $0.3 million and $0.9 million of restructuring charges during the three months ended April 2, 2017 and April 3, 2016, respectively.2017.
Income from Operations
The Company recorded income from operations of $61.762.6 million as compared to $57.662.1 million in the comparable prior year period. Operating income was 15.214.5% of sales in the first quarter of 20172018 compared with 14.0%15.3% of sales in 2016, as lower manufacturing costs, including productivity gains, helped to offset the impact of lower sales.2017.
Other Non-Operating Income (Deductions)Deductions
The Company recorded non-operating deductions of $16.2$13.4 million in the first quarter of 20172018 as compared with $12.4$16.6 million in the prior year. The $16.2$13.4 million in 2018 is primarily comprised of $10.7 million of interest expense and $0.7 million foreign exchange losses. The $16.6 million in the prior year is primarily comprised of $11.8 million of net interest expense, $3.9 million in debt modification costs and fees relating to the February 2017 repricing of the variable tranche of itsthe Company’s Term Loan debt, andpartially offset by $0.6 million in foreign exchange gains. The $12.4 million recorded in the prior year included $14.1 million of net interest expense and $2.4 million of foreign exchange gains.
Provision for Taxes on Income
Provision for taxes on income was $10.1$9.3 million as compared to $10.7$10.1 million in the prior year. The effective tax rate was 22.2%19.0% as compared to 23.7%22.2% in the prior year. The reduction in the effective tax rate during 20172018 was primarily due to a changethe U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform”) which was enacted in the tax accounting treatment of share based payments.December 2017.
Consolidated Net Income
Consolidated net income was $35.6$41.1 million for the three months ended April 2, 20171, 2018 compared with $34.8$35.6 million in the prior year.
Segment Review
The following discussions highlight the operating results for each of our four segments.
Performance Materials Segment
| Performance Materials Segment | | Three Months Ended | | | Growth | |
Apr. 1, 2018 | | | Apr. 2, 2017 |
| | | (millions of dollars) | | | | | | | |
| Net Sales | | | | | | | | | | | | |
| Metalcasting | | $ | 79.2 | | | $ | 66.6 | | | $ | 12.6 | | | | 18.9 | % |
| Household, Personal Care and Specialty Products | | | 48.7 | | | | 41.1 | | | | 7.6 | | | | 18.5 | % |
| Environmental Products | | | 12.7 | | | | 10.6 | | | | 2.1 | | | | 19.8 | % |
| Building Materials | | | 18.9 | | | | 17.4 | | | | 1.5 | | | | 8.6 | % |
| Basic Minerals | | | 27.8 | | | | 34.2 | | | | (6.4 | ) | | | -18.7 | % |
| Total net sales | | $ | 187.3 | | | $ | 169.9 | | | $ | 17.4 | | | | 10.2 | % |
| | | | | | | | | | | | | | | | | |
| Income from operations | | $ | 26.2 | | | $ | 28.8 | | | | | | | | | |
| % of net sales | | | 14.0 | % | | | 17.0 | % | | | | | | | | |
Net sales in the Performance Materials segment increased 10.2% to $187.3 million from $169.9 million in the prior year. Sales in metalcasting increased 18.9% to $79.2 million, primarily due to higher volumes in all regions. Household, Personal Care and Specialty Products sales increased 18.5% to $48.7 million, primarily due to higher pet care revenue and increased European fabric care sales. Building Materials sales increased 8.6% to $18.9 million due to several large projects in the U.S. and Environmental Products sales increased 19.8% to $12.7 million due to higher volumes in the U.S. These sales were partially offset by decreased Basic Minerals sales of 18.7% to $27.8 million due to the planned exit of bulk chromite operations in South Africa.
Income from operations was $26.2 million and 14.0% of sales as compared to $28.8 million and 17.0% of sales in the prior year. Operating income growth in Metalcasting, Household, Personal Care & Specialty, and Building Materials was more than offset by the decline in bulk chromite which impacted year over year operating income by approximately $7 million.
Specialty Minerals Segment
| | | Three Months Ended | | | | | | | | |
| Specialty Minerals Segment | | | Three Months Ended | | | Growth | |
| | Apr. 2, 2017 | | | Apr. 3, 2016 | | | Growth | | Apr. 1, 2018 | | | Apr. 2, 2017 |
| | | (millions of dollars) | | | | | | | | | (millions of dollars) | | | | | | | |
| Net Sales | | | | | | | | | | | | | | | | | | | | | | | | |
| Paper PCC | | $ | 93.4 | | | $ | 103.2 | | | $ | (9.8 | ) | | | -9.5 | % | | $ | 97.0 | | | $ | 93.4 | | | $ | 3.6 | | | | 3.9 | % |
| Specialty PCC | | | 17.0 | | | | 16.7 | | | | 0.3 | | | | 1.8 | % | | | 17.0 | | | | 17.0 | | | | - | | | | 0.0 | % |
| PCC Products | | $ | 110.4 | | | $ | 119.9 | | | $ | (9.5 | ) | | | -7.9 | % | | $ | 114.0 | | | $ | 110.4 | | | $ | 3.6 | | | | 3.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Talc | | $ | 14.3 | | | $ | 15.0 | | | $ | (0.7 | ) | | | -4.7 | % | | $ | 13.1 | | | $ | 14.3 | | | $ | (1.2 | ) | | | -8.4 | % |
| Ground Calcium Carbonate | | | 21.5 | | | | 20.7 | | | | 0.8 | | | | 3.9 | % | | | 22.5 | | | | 21.5 | | | | 1.0 | | | | 4.7 | % |
| Processed Minerals Products | | $ | 35.8 | | | $ | 35.7 | | | $ | 0.1 | | | | 0.3 | % | | $ | 35.6 | | | $ | 35.8 | | | $ | (0.2 | ) | | | -0.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total net sales | | $ | 146.2 | | | $ | 155.6 | | | $ | (9.4 | ) | | | -6.0 | % | | $ | 149.6 | | | $ | 146.2 | | | $ | 3.4 | | | | 2.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | $ | 24.4 | | | $ | 25.7 | | | $ | (1.3 | ) | | | -5.1 | % | | $ | 24.1 | | | $ | 24.4 | | | $ | (0.3 | ) | | | -1.2 | % |
| % of net sales | | | 16.7 | % | | | 16.5 | % | | | | | | | | | | | 16.1 | % | | | 16.7 | % | | | | | | | | |
Worldwide net sales in the Specialty Minerals segment, which consists of the Precipitated Calcium Carbonate (PCC) and Processed Minerals product lines, were $146.2$149.6 million, a decreasean increase of $9.4$3.4 million or 6.0%2.3% compared to the prior year.
Worldwide net sales of PCC products, which are primarily used in the manufacturing process of the paper industry, decreased 7.9%increased 3.3% to $110.4$114.0 million from $119.9$110.4 million in the prior year. Paper PCC sales decreased 9.5%increased 3.9% to $93.4$97.0 million as compared with $103.2$93.4 million in the prior year, primarily due to several previously announced plant shutdownshigher sales in NorthAsia, Europe and Latin America which occurred subsequent to the first quarter of 2016. This waswere partially offset by 9 percent higherreduced sales in China.North America.
Net sales of Processed Minerals products were $35.8$35.6 million, approximately the same level as the prior year. Ground Calcium Carbonate sales increased 3.9%by $1.0 million or 4.7% from prior year due to higher volumes within the construction and automotive markets. Talc sales decreased 4.7%by $1.2 million or 8.4% from prior year.year due lower volumes.
Income from operations for the Specialty Minerals segment was $24.424.1 million and represented 16.7%16.1% of sales as compared with $25.7$24.4 million and 16.5%16.7% of sales in the prior year.
Performance Materials Segment
| | | Three Months Ended | | | | | | | |
| Performance Materials Segment | | Apr. 2, 2017 | | | Apr. 3, 2016 | | | Growth | |
| | | (millions of dollars) | | | | | | | |
| Net Sales | | | | | | | | | | | | |
| Metalcasting | | $ | 66.6 | | | $ | 60.0 | | | $ | 6.6 | | | | 11.0 | % |
| Household, Personal Care and Specialty Products | | | 41.1 | | | | 45.3 | | | | (4.2 | ) | | | -9.3 | % |
| Environmental Products | | | 10.6 | | | | 13.4 | | | | (2.8 | ) | | | -20.9 | % |
| Building Materials | | | 17.4 | | | | 20.4 | | | | (3.0 | ) | | | -14.7 | % |
| Basic Minerals | | | 34.2 | | | | 20.5 | | | | 13.7 | | | | 66.8 | % |
| Total net sales | | $ | 169.9 | | | $ | 159.6 | | | $ | 10.3 | | | | 6.5 | % |
| | | | | | | | | | | | | | | | | |
| Income from operations | | $ | 28.8 | | | $ | 28.2 | | | | | | | | | |
| % of net sales | | | 17.0 | % | | | 17.7 | % | | | | | | | | |
On a regular basis, the Company reviews its segments and the approach used by the chief operating decision maker to assess performance and allocate resources. Accordingly, Operating margins in the first quarter of 2017, the Company reorganized the management structure for its Performance Materialswere impacted by higher energy costs and Construction Technologies business units to better reflect the way performance is evaluated and resources allocated. As a result, all of the product lines within these business segments were combined into one operating segment.
Net sales in the Performance Materials segment increased 6.5% to $169.9 million from $159.6 million in the prior year. Sales in metalcasting increased 11.0% to $66.6 million, primarily due to higher volumes in China. Basic Minerals sales increased 66.8% primarily due to higher bulk sales of chromite. Household, Personal Care and Specialty Products sales were lower due to lower Fabric Care sales in China. In addition, Building Materials and Environmental Products sales were lower due severe weather conditions impacting several large projects in the western United States.
Income from operations was $28.8 million and 17.0% of sales as compared to $28.2 million and 17.7% of sales in the prior year.U.S.
Refractories Segment
| | | Three Months Ended | | | | | | | | |
| Refractories Segment | | Apr. 2, 2017 | | | Apr. 3, 2016 | | | Growth | | | Three Months Ended | | | Growth | |
| | Apr. 1, 2018 | | | Apr. 2, 2017 |
| | | (millions of dollars) | | | | | | | | | (millions of dollars) | | | | | | | |
| Net Sales | | | | | | | | | | | | | | | | | | | | | | | | |
| Refractory Products | | $ | 56.7 | | | $ | 53.4 | | | $ | 3.3 | | | | 6.2 | % | | $ | 62.3 | | | $ | 56.7 | | | $ | 5.6 | | | | 9.9 | % |
| Metallurgical Products | | | 13.5 | | | | 15.8 | | | | (2.3 | ) | | | -14.6 | % | | | 13.0 | | | | 13.5 | | | | (0.5 | ) | | | -3.7 | % |
| Total net sales | | $ | 70.2 | | | $ | 69.2 | | | $ | 1.0 | | | | 1.4 | % | | $ | 75.3 | | | $ | 70.2 | | | $ | 5.1 | | | | 7.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | $ | 9.2 | | | $ | 6.8 | | | $ | 2.4 | | | | 35.3 | % | | $ | 12.8 | | | $ | 9.2 | | | $ | 3.6 | | | | 39.1 | % |
| % of net sales | | | 13.1 | % | | | 9.8 | % | | | | | | | | | | | 17.0 | % | | | 13.1 | % | | | | | | | | |
Net sales in the Refractories segment increased 1.4%7.3% to $70.2$75.3 million from $69.270.2 million in the prior year. Sales of refractory products and systems to steel and other industrial applications increased 6.2%9.9% to $56.7$62.3 million primarily due to higher volumes and increased equipment sales. This was partially offset by lower sales in the Metallurgical Products product line.
Income from operations increased 35.3%39.1% to $9.2$12.8 million from $6.8$9.2 million in the prior year and represented 13.1%17.0% of sales as compared with 9.8%13.1% of sales in 2016.2017.
Energy Services Segment
| | | Three Months Ended | | | | | | | |
| Energy Services Segment | | Apr. 2, 2017 | | | Apr. 3, 2016 | | | Growth | |
| | | (millions of dollars) | | | | | | | |
| | | | | | | | | | | | | |
| Net Sales | | $ | 18.7 | | | $ | 25.8 | | | $ | (7.1 | ) | | | -27.5 | % |
| | | | | | | | | | | | | | | | | |
| Income (loss) from operations | | $ | 1.7 | | | $ | (0.1 | ) | | $ | 1.8 | | | | * | |
| % of net sales | | | 9.1 | % | | | -0.4 | % | | | | | | | | |
*Percentage not meaningful
| Energy Services Segment | | Three Months Ended | | | Growth | |
Apr. 1, 2018 | | | Apr. 2, 2017 |
| | | (millions of dollars) | | | | | | | |
| | | | | | | | | | �� | | | |
| Net Sales | | $ | 19.1 | | | $ | 18.7 | | | $ | 0.4 | | | | 2.1 | % |
| | | | | | | | | | | | | | | | | |
| Income (loss) from operations | | $ | 1.5 | | | $ | 1.7 | | | $ | (0.2 | ) | | | -11.8 | % |
| % of net sales | | | 7.9 | % | | | 9.1 | % | | | | | | | | |
Net sales in the Energy Services segment were $18.7$19.1 million, and decreased 27.5%a 2.1% increase from the $25.8$18.7 million recorded in the prior year, primarily driven by higher filtration activity.
Operating income was $1.5 million, a decrease of 11.8% from prior year levels, primarily due to the exitmix of certain on-shore service linessales activity in the second quarter of 2016. This segment continues to be affected by weak market conditions in the oil and gas sector.
Income from operations was $1.7 million as compared with a loss of $0.1 million in the prior year. Energy Services offers a range of patented technologies, products and services for off-shore filtration and well testing to the worldwide oil and gas industry.quarter.
Liquidity and Capital Resources
Cash provided from continuing operations during the three months ended April 2, 2017,1, 2018, was approximately $15.9$35.7 million. Cash flows provided from operations during the first three months of 20172018 were principally used to fund capital expenditures, to repay debtrepurchase shares and to pay the Company'sCompany’s dividend to common shareholders. Our intention is to use excess cash flow primarily to repay debt and to continue to de-lever. During the first quarter of 2017, the Company repaid $20 million in the principal amount of its long-term debt. The aggregate maturities of long-term debt are as follows: remainder of 2017 - $6.7 million; 2018 - $3.7$3.8 million; 2019 - $0.6 million; 2020 - $0.6 million; 2021 - $303.5$303.8 million; 2022 - $0.0 million; thereafter - $768.0$678.0 million.
On May 9, 2014, in connection with the acquisition of AMCOL International Corporation (“AMCOL”), the Company entered into a credit agreement providing for the $1.560 billion senior secured term loan facility (the “Term Facility”) and a $200 million senior secured revolving credit facility (the “Revolving Facility” and, together with the Term Facility, the “Facilities”). The net proceeds of the Term Facility, together with the Company’s cash on hand, were used as cash consideration for the acquisition of AMCOL and to refinance certain existing indebtedness of the Company and AMCOL and to pay fees and expenses in connection with the foregoing. Loans under the Revolving Facility will be used for working capital and other general corporate purposes of the Company and its subsidiaries.
On June 23, 2015, the Company entered into an amendment (the “First Amendment”) to the credit agreement to reprice the $1.378 billion then outstanding on the Term Facility. As amended, the Term Facility had a $1.078 billion floating rate tranche and a $300 million fixed rate tranche. On February 14, 2017, the Company entered into an amendment (the “Second Amendment”) to the credit agreement to reprice the $788 million floating rate tranche then outstanding, which extended the maturity and lowered the interest costs by 75 basis points. On April 18, 2018, the Company entered into an amendment (the “Third Amendment”) to the credit agreement to refinance the Revolving Facility. As amended, the Revolving Facility has been increased to $300 million in aggregate commitments. Following the Second Amendment,amendments, the loans outstanding under the floating rate tranche of the Term Facility will mature on February 14, 2024, the loans outstanding under the fixed rate tranche of the Term Facility will mature on May 9, 2021 and the loans outstanding (if any) and commitments under the Revolving Facility will mature and terminate, as the case may be, on May 9, 2019. After the Second Amendment, loansApril 18, 2023. Loans under the floating rate tranche of the Term Facility bear interest at a rate equal to an adjusted LIBOR rate (subject to a floor of 0.75%) plus an applicable margin equal to 2.25% per annum. Loans under the fixed rate tranche of the Term Facility bear interest at a rate of 4.75%. Loans under the Revolving Facility will bear interest at a rate equal to an adjusted LIBOR rate plus an applicable margin equal to 1.75%1.625% per annum. Such rates are subject to decrease by up to 25 basis points in the event that, and for so long as, the Company’s net leverage ratio (as defined in the credit agreement) is less than certain thresholds. The floating rate tranche of the Term Facility was issued at par and the fixed rate tranche of the Term Facility was issued at a 0.25% discount in connection with the First Amendment. The variable rate tranche of the Term Facility was issued at a 0.25% discount in connection with the Second Amendment. The variable rate tranche has a 1% required amortization per year. The Company will pay certain fees under the credit agreement, including customary annual administration fees. The loans under the fixed rate tranche of the Term Facility are subject to prepayment premiums in the event of certain prepayments prior to the third anniversary of the effective date of the First Amendment, and the loans under the floating rate tranche of the Term Facility are subject to prepayment premiums in the event of certain prepayments prior to the six-month anniversary of the effective date of the Second Amendment. The obligations of the Company under the Facilities are unconditionally guaranteed jointly and severally by, subject to certain exceptions, all material domestic subsidiaries of the Company (the “Guarantors”) and secured, subject to certain exceptions, by a security interest in substantially all of the assets of the Company and the Guarantors.
The credit agreement contains certain customary affirmative and negative covenants that limit or restrict the ability of the Company and its restricted subsidiaries to enter into certain transactions or take certain actions. In addition, the credit agreement contains a financial covenant that requires the Company, if on the last day of any fiscal quarter loans or letters of credit were outstanding under the Revolving Facility (excluding up to $15 million of letters of credit), to maintain a maximum net leverage ratio (as defined in the credit agreement) of, initially, 5.25 to 1.00 for the four fiscal quarter period preceding such day. Such maximum net leverage ratio requirement is subject to decrease during the duration of the facility to a minimum level (when applicable) of 3.50 to 1.00. During the first quarter of 2017, the Company repaid $20 million on its Term Facility. As of April 2, 2017,1, 2018, there were no loans and $12.0$5.7 million in letters of credit outstanding under the Revolving Facility. The Company is in compliance with all the covenants associated with the Revolving Facility as of the end of the period covered by this report.
The Company has four committed loan facilities for the funding of new manufacturing facilities in China, comprised of facilities of 94.8 million RMB, or approximately $10.3 million and a $1.8 million facility.China. In December 2016,addition, the Company entered intohas a committed loan facility in Japan in the amount of 680 million Yen (approximately $5.8 million).Japan. As of April 2, 2017,1, 2018, on a combined basis, $15.1$8.9 million was outstanding under these loan facilities. Principal will be repaid in accordance with the payment schedules ending in 2021. The Company repaid $0.3$0.4 million on these loans induring the first quarter to 2017.of 2018.
As of April 2, 2017,1, 2018, the Company had $35.1$38.4 million in uncommitted short-term bank credit lines, of which approximately $5.9$6.6 million was in use. The credit lines are primarily outside the U.S. and are generally one year in term at competitive market rates at large, well-established institutions. The Company typically uses its available credit lines to fund working capital requirements or local capital spending needs. We anticipate that capital expenditures for 20172018 should be between $70.0 million and $75.0$80.0 million, principally related to the construction of PCC plants and other opportunities that meet our strategic growth objectives. We expect to meet our other long-term financing requirements from internally generated funds, committed and uncommitted bank credit lines and, where appropriate, project financing of certain satellite plants.
On April 5, 2016, the Company entered into a floating to fixed interest rate swap for an initial aggregate notional amount of $300 million to limit exposure to interest rate increases related to a portion of the Company’s floating rate indebtedness. This swap agreement hedges a portion of contractual floating rate interest through its expiration in May 2021. As a result of the agreement, the Company’s effective fixed interest rate on the notional amount floating rate indebtedness will be 4.25%. The fair value of this instrument at April 2, 20171, 2018 was an asset of $2.7$4.1 million.
On September 16, 2015,21, 2017, the Company'sCompany’s Board of Directors authorized the Company’s management to repurchase, at its discretion, up to $150 million of the Company’s shares over a two-year period commencing October 2015.1, 2017 after the previous program expired. As of April 2, 2017, 54,0981, 2018, 82,174 shares have beenwere repurchased under this program for $2.6$5.7 million, or an average price of approximately $48.91$69.64 per share.
The Company is required to make future payments under various contracts, including debt agreements and lease agreements. The Company also has commitments to fund its pension plans and provide payments for other postretirement benefit plans. During the three months ended April 2, 2017,1, 2018, there were no material changes in the Company’s contractual obligations. For an in-depth discussion of the Company’s contractual obligations, see “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Cautionary Statement for “Safe Harbor” Purposes under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. This report contains statements that the Company believes may be “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements relating to the Company’s objectives, plans or goals, future actions, future performance or results of current and anticipated products, sales efforts, expenditures, and financial results. From time to time, the Company also provides forward-looking statements in other publicly-released materials, both written and oral. Forward-looking statements provide current expectations and forecasts of future events such as new products, revenues and financial performance, and are not limited to describing historical or current facts. They can be identified by the use of words such as “believes,” “expects,” “plans,” “intends,” “anticipates,” and other words and phrases of similar meaning.
Forward-looking statements are necessarily based on assumptions, estimates and limited information available at the time they are made. A broad variety of risks and uncertainties, both known and unknown, as well as the inaccuracy of assumptions and estimates, can affect the realization of the expectations or forecasts in these statements. Many of these risks and uncertainties are difficult to predict or are beyond the Company’s control. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Significant factors affecting the expectations and forecasts are set forth under “Item 1A — Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, and in Exhibit 99 to this Quarterly Report on Form 10-Q.
The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances that arise after the date hereof. Investors should refer to the Company'sCompany’s subsequent filings under the Securities Exchange Act of 1934 for further disclosures.
Recently Issued Accounting Standards
Changes to accounting principles generally accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASUs) to the FASB’s Accounting Standards Codification.
The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017. The guidance permits the use of either a retrospective or cumulative effect transition method. The Company has elected to use the cumulative effect transition method. The Company has completed a high level accounting diagnostic and is in the process of contract review. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements and related disclosures and the Company’s assessment is expected to be completed in mid-2017.
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize most leases on-balance sheet, thereby increasing their reported assets and liabilities, in some cases very significantly. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements and related disclosures. The Company has performed a high level analysis of its current lease portfolio and is in process of establishing a cross-functional project team to assist in the implementation of this ASU. Based on the current status of this assessment, the adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
Intangibles – Goodwill and Other
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment”, which no longer requires an entity to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, goodwill will be measured using the difference between the carrying amount and the fair value of the reporting unit. The guidance is effective for the interim and annual periods beginning on or after December 15, 2019, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements. We are currently evaluating the timing of adoption of this standard.
Compensation- Retirement BenefitsReclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In March 2017,February 2018, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits: Improving the Presentation2018-02, “Reclassification of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”Certain Tax Effects from Accumulated Other Comprehensive Income”, which requires companiesallows a reclassification from accumulated other comprehensive income to presentretained earnings for stranded tax effects resulting from the service cost component of the net benefit cost in the same line items in which they report compensation cost. All other components of net periodic benefit cost will be presented outside operating income.Tax Cuts and Jobs Act. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017. The2018, with early adoption permitted. We are currently evaluating the timing of adoption of this guidance is not expected to have a material impact on the Company’s financial statements.standard.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, valuation of receivables, valuation of inventories, valuation of long-lived assets, pension plan assumptions, stock-based compensation assumptions, valuation of product liabilitygoodwill and asset retirement obligation,other intangible assets, income taxes, income taxincluding valuation allowances and litigation and environmental liabilities.pension plan assumptions. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that cannot readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates.
| ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk |
Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in market prices and foreign currency and interest rates. We are exposed to market risk because of changes in foreign currency exchange rates as measured against the U.S. dollar. We do not anticipate that near-term changes in exchange rates will have a material impact on our future earnings or cash flows. However, there can be no assurance that a sudden and significant decline in the value of foreign currencies would not have a material adverse effect on our financial condition and results of operations. A portion of our long-term bank debt bears interest at variable rates; therefore our results of operations would be affected by interest rate changes to the extent of such outstanding bank debt. An immediate 10 percent change in interest rates would have a material effect on our results of operations over the next fiscal year. A one-percent change in interest rates would result in $6.2$4.9 million in incremental interest charges on an annual basis. We do not enter into derivatives or other financial instruments for trading or speculative purposes. When appropriate, we enter into derivative financial instruments, such as forward exchange contracts, hedges and interest rate swaps, to mitigate the impact of foreign exchange rate movements and interest rate movements on our operating results. The counterparties are major financial institutions. Such forward exchange contracts, hedges and interest rate swaps would not subject us to additional risk from exchange rate or interest rate movements because gains and losses on these contracts would offset losses and gains on the assets, liabilities, and transactions being hedged.
On April 5, 2016, the Company entered into a floating to fixed interest rate swap for an initial aggregate notional amount of $300 million to limit exposure to interest rate increases related to a portion of the Company’s floating rate indebtedness. This swap agreement hedges a portion of contractual floating rate interest through its expiration in May 2021. As a result, the Company’s effective fixed interest rate on the notional amount floating rate indebtedness will be 4.25% through May 2021. The fair value of this instrument at April 2, 20171, 2018 was an asset of $2.7$4.1 million.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, and under the supervision and with participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report the Company’s disclosure controls and procedures were effective. The Company has implemented a global enterprise resource planning (“ERP”) system for the businesses acquired from AMCOL. As of April 2, 2017, primarily all of the domestic, European and Asian locations of the acquired businesses were implemented on the new system. The worldwide implementation is substantially completed and involved changes in systems that include internal controls. Although the transition has proceeded to date without material adverse effects, the possibility exists that our migration to the new ERP system could adversely affect the Company’s internal controls over financial reporting and procedures. We are reviewing each system as it is being implemented and the controls affected by the implementation of the new systems, and are making appropriate changes to the affected internal controls as we implement the new systems. We believe that the controls as modified are appropriate and functioning effectively.
Changes in Internal Control Over Financial Reporting
On January 1, 2018, the Company adopted the provisions of ASU No. 2014-09, “Revenue from Contracts with Customers”. Adoption of this standard did not have a material impact on the Company’s financials, however we did implement changes to our processes related to revenue recognition and related control activities. These included an update to our accounting policies based on the five-step model and implementation of controls to ensure ongoing contract review and assessment. Except as described above, there were no other changes in the Company'sCompany’s internal controlcontrols over financial reporting during the quarter ended April 2, 20171, 2018 that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
PART II – OTHER INFORMATION
| Item 1. | Legal Proceedings.Proceedings |
The Company and its subsidiaries are the subject of various pending legal actions in the ordinary course of their businesses. Except as described below, none of such legal proceedings are material.
Armada Litigation
On May 8, 2013, Armada (Singapore) PTE Limited, an ocean shipping company now in bankruptcy ("Armada"(“Armada”) filed a case in federal court in the Northern District of Illinois against AMCOL and certain of its subsidiaries ( Armada (Singapore) PTE Limited v. AMCOL International Corp., et al., United States District Court for the Northern District of Illinois , Case No. 13 CV 3455). We acquired AMCOL and its subsidiaries on May 9, 2014. A co-defendant is Ashapura Minechem Limited, a company located in Mumbai, India (“AML”). During the relevant time period, 2008-2010, AMCOL owned slightly over 20% of the outstanding AML stock through December 2009, after which it owned approximately 19%. In 2008, AML entered into two contracts of affreightment (“COA”) with Armada for over 60 ship loads of bauxite from India to China. After one shipment, AML made no further shipments, which led Armada to file arbitrations in London against AML, one for each COA. AML did not appear in the London arbitrations and default awards of approximately $70 million were entered. The litigation filed by Armada against AMCOL and AML relates to these awards, which AML has not paid. The substance of the allegations by Armada is that AML and AMCOL engaged in illegal conduct to thwart Armada’s efforts to collect the arbitration award. AMCOL recently won a motion for judgmentjudgement on the pleadings that resulted in the successful dismissal of all but one count in the complaint, including a dismissal of all counts alleging violations of Illinois’ Fraudulent Transfer laws and federal RICO violations. Fact discovery is scheduled to close inOn March 26, 2018, the second quarterU.S. Court of 2017. We have accrued an estimateAppeals for the Seventh Circuit affirmed the district court’s dismissal of potential damages forsuch counts. The Company does not expect that the outcome of the one remaining count of the Armada lawsuit the amount of which was notwill have a material toeffect on our financial position, results of operations or cash flows. Silica and Asbestos Litigation
Certain of the Company'sCompany’s subsidiaries are among numerous defendants in a number of cases seeking damages for exposure to silica or to asbestos containing materials. The Company currently has three pending silica cases and 1922 pending asbestos cases. To date, 1,4921,493 silica cases and 4854 asbestos cases have been dismissed, not including any lawsuits against AMCOL or American Colloid Company dismissed prior to our acquisition of AMCOL. OneThree new asbestos case, previously disclosed in the Company’s most recent Annual Report on Form 10-K, wascases were filed induring the first quarter of 2017, and2018, including one new case naming AMCOL as a second newdefendant. One asbestos case was filed subsequent to the end ofdismissed during the first quarter. No asbestos or silica cases were dismissed during the quarter. Most of these claims do not provide adequate information to assess their merits, the likelihood that the Company will be found liable, or the magnitude of such liability, if any. Additional claims of this nature may be made against the Company or its subsidiaries. At this time management anticipates that the amount of the Company'sCompany’s liability, if any, and the cost of defending such claims, will not have a material effect on its financial position or results of operations.
The Company has settled only one silica lawsuit, for a nominal amount, and no asbestos lawsuits to date (not including any that may have been settled by AMCOL prior to completion of the acquisition). We are unable to state an amount or range of amounts claimed in any of the lawsuits because state court pleading practices do not require identifying the amount of the claimed damage. The aggregate cost to the Company for the legal defense of these cases since inception continues to be insignificant. The majority of the costs of defense for these cases, excluding cases against AMCOL, or American Colloid, are reimbursed by Pfizer Inc. pursuant to the terms of certain agreements entered into in connection with the Company'sCompany’s initial public offering in 1992. Of the 1922 pending asbestos cases, all except two allege14 of the non-AMCOL cases are subject to indemnification, in whole or in part, because the plaintiffs claim liability based on sales of products sold largely orthat occurred either entirely prior tobefore the initial public offering, or both before and for whichafter the Companyinitial public offering. In the six remaining non-AMCOL cases, the plaintiffs have not alleged dates of exposure. The remaining two cases involve AMCOL only, so no Pfizer indemnity is therefore entitled to indemnification pursuant to such agreements. The two exceptions pertain to one pending asbestos case against American Colloid Company, and one for which no period of alleged exposure has been stated by plaintiffs.available. Our experience has been that the Company is not liable to plaintiffs in any of these lawsuits and the Company does not expect to pay any settlements or jury verdicts in these lawsuits.
Environmental Matters
On April 9, 2003, the Connecticut Department of Environmental Protection issued an administrative consent order relating to our Canaan, Connecticut, plant where both our Refractories segment and Specialty Minerals segment have operations. We agreed to the order, which includes provisions requiring investigation and remediation of contamination associated with historic use of polychlorinated biphenyls ("PCBs"(“PCBs”) and mercury at a portion of the site. We have completed the required investigations and submitted several reports characterizing the contamination and assessing site-specific risks. We are awaiting regulators’ approval of the risk assessment report, which will form the basis for a proposal by the Company concerning eventual remediation.
We believe that the most likely form of overall site remediation will be to leave the existing contamination in place (with some limited soil removal), encapsulate it, and monitor the effectiveness of the encapsulation. We anticipate that a substantial portion of the remediation cost will be borne by the United States based on its involvement at the site from 1942 – 1964, as historic documentation indicates that PCBs and mercury were first used at the facility at a time of U.S. government ownership for production of materials needed by the military. Pursuant to a Consent Decree entered on October 24, 2014, the United States paid the Company $2.3 million in the 4th quarter of 2014 to resolve the Company’s claim for response costs for investigation and initial remediation activities at this facility through October 24, 2014. Contribution by the United States to any future costs of investigation or additional remediation has, by agreement, been left unresolved. Though the cost of the likely remediation remains uncertain pending completion of the phased remediation decision process, we have estimated that the Company’s share of the cost of the encapsulation and limited soil removal described above would approximate $0.4 million, which has been accrued as of April 2, 2017.1, 2018. The Company is evaluating options for upgrading the wastewater treatment facilities at its Adams, Massachusetts plant. This work has been undertaken pursuant to an administrative Consent Order originally issued by the Massachusetts Department of Environmental Protection (“DEP”) on June 18, 2002. This order was amended on June 1, 2009 and on June 2, 2010. The amended Order includes the investigation by January 1, 2022 of options for ensuring that the facility'sfacility’s wastewater treatment ponds will not result in unpermitted discharge to groundwater. Additional requirements of the amendment include the submittal by July 1, 2022 of a plan for closure of a historic lime solids disposal area. Preliminary engineering reviews completed in 2005 indicate that the estimated cost of wastewater treatment upgrades to operate this facility beyond 2024 may be between $6 million and $8 million. The Company estimates that the remaining remediation costs would approximate $0.4 million, which has been accrued as of April 2, 2017.1, 2018.
For a description of Risk Factors, see Exhibit 99 attached to this report. There have been no material changes to our risk factors from those disclosed in our 20162017 Annual Report on Form 10-K.
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| Period | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of the Publicly Announced Program | | | Dollar Value of Shares that May Yet be Purchased Under the Program | | | | | | | | | | | | | | | | | January 1 - January 28 | | | - | | | | - | | | | - | | | $ | 150,000,000 | | | January 29 - February 25 | | | 25,927 | | | $ | 68.82 | | | | 25,927 | | | $ | 148,215,719 | | | February 25 - April 1 | | | 56,247 | | | $ | 70.01 | | | | 82,174 | | | $ | 144,277,662 | | | Total | | | 82,174 | | | $ | 69.64 | | | | | | | | | |
NoneOn September 21, 2017, the Company’s Board of Directors authorized the Company’s management to repurchase, at its discretion, up to $150 million of the Company’s shares over a two-year period commencing October 1, 2017 after the previous program expired. As of April 1, 2018, 82,174 shares were repurchased under this program for $5.7 million, or an average price of approximately $69.64 per share.
| ITEM 3. | Default Upon Senior Securities |
Not applicable.
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Quarterly Report on Form 10-Q.
None
| Exhibit No. | | | Exhibit Title | | | | | | | | By-Laws of Minerals Technologies Inc., as amended and restated effective March 13, 2018 (incorporated by reference to the Exhibit 3.1 filed with the Company’s Current Report on form 8-K filed on March 19, 2018). | | | Third Amendment And Incremental Facility Amendment, dated as of April 18, 2018, among Minerals Technologies Inc., certain subsidiaries party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to the Exhibit 10.1 filed with the Company’s Current Report on form 8-K filed on April 20, 2018). | | | | Letter Regarding Unaudited Interim Financial Information. | | | | Rule 13a-14(a)/15d-14(a) Certification executed by the Company'sCompany’s principal executive officer. | | | | Rule 13a-14(a)/15d-14(a) Certification executed by the Company'sCompany’s principal financial officer. | | | | Section 1350 Certifications. | | | | Information concerning Mine Safety Violations | | | | Risk Factors | | 101.INS | | | XBRL Instance Document | | 101.SCH | | | XBRL Taxonomy Extension Schema | | 101.CAL | | | XBRL Taxonomy Extension Calculation Linkbase | | 101.DEF | | | XBRL Taxonomy Extension Definition Linkbase | | 101.LAB | | | XBRL Taxonomy Extension Label Linkbase | | 101.PRE | | | XBRL Taxonomy Extension Presentation Linkbase |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | Minerals Technologies Inc. | | | | | | By: | /s/Matthew E. Garth | | | | | | | Matthew E. Garth | | | | Senior Vice President, Finance and Treasury, | | | | Chief Financial Office | | | | May 5, 2017 | | Officer |
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