Mativ Holdings, Inc. (then Schweitzer-Mauduit International, Inc.; NYSE: SWM) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. The company operated through Advanced Materials & Structures (AMS) and Engineered Papers (EP), with products sold in more than 90 countries.
Business context
AMS makes engineered resin-based nets, films and nonwovens for filtration, transportation, infrastructure and construction, medical, and industrial markets. EP produces cigarette papers, reconstituted tobacco products, and other papers. Management’s diversification strategy expanded non-tobacco products to 53% of total revenue; tobacco-related products nevertheless represented approximately 53% of sales in 2019.
Financial performance
| Metric (USD millions except per-share data) | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $1,022.8 | $1,041.3 | Down 1.8% |
| Gross profit | $290.0 | $278.5 | Up 4.1% |
| Gross margin | 28.4% | 26.7% | Up 1.7 percentage points |
| Operating profit | $134.0 | $135.0 | Down 0.7% |
| Operating margin | 13.1% | 13.0% | Up 0.1 percentage point |
| Net income | $85.8 | $94.5 | Down 9.2% |
| Diluted EPS | $2.76 | $3.06 | Down 9.8% |
| Adjusted EBITDA (non-GAAP) | $197.2 | $196.9 | Up $0.3 |
Currency movements reduced sales by $21.2 million; excluding currency, sales would have increased $2.7 million. AMS sales rose 2.0% to $477.2 million and operating profit increased to $64.3 million from $49.5 million. EP sales fell 4.8% to $545.6 million; operating profit decreased to $119.2 million from $121.8 million. AMS benefited from growth, lower resin costs and improved efficiencies. EP benefited from lower pulp costs and favorable price/mix, offset by currency and other input costs.
Net income reflected several significant comparisons and items: 2019 included $6.6 million of after-tax expense related to Brazilian tax assessments; 2018 included a $15.0 million after-tax impairment of a China joint venture, a $7.7 million after-tax gain from revaluing Conwed contingent consideration, and a favorable $13.0 million tax adjustment. Interest expense increased to $36.1 million from $28.2 million, including $7.1 million related to the Brazil assessments. The effective tax rate was 15.7%, versus 9.2%.
Fourth-quarter reference: 2019 sales were $238.5 million, operating profit $24.8 million and net income $20.2 million, compared with $248.7 million, $26.8 million and $7.2 million, respectively, in fourth-quarter 2018.
Cash flow, liquidity and debt
- Operating cash flow was $160.3 million, up from $139.1 million in 2018. Capital spending was $28.6 million; cash used for investing was $14.8 million, including proceeds from asset sales.
- Cash and cash equivalents were $103.0 million at year-end, versus $93.8 million. Net operating working capital was $168.8 million, down from $195.2 million.
- Total debt was $542.7 million, down from $622.1 million; year-end cash implies approximate net debt of $439.7 million. Debt-to-capital was 47.6%, compared with 52.7%.
- The company reported $495.5 million of unused revolving-credit capacity and was in compliance with its credit and note covenants. Debt included $350 million face value of 6.875% senior unsecured notes due 2026 and a term loan due 2025.
- Cash dividends paid were $54.4 million; dividends declared were $1.76 per share. Management projected 2020 capital spending of approximately $40–45 million and said available cash, operating cash flow and credit facilities should support operations and the growth strategy.
Changes, outlook and material risks
Management expects AMS growth from filtration, transportation, infrastructure and construction, with long-term growth in selected applications and generally expected margin expansion alongside organic sales growth. EP outlook is exposed to declining cigarette consumption, foreign exchange, regulation, tobacco-industry consolidation and customer pricing. The filing gives no numerical earnings or sales guidance.
On February 18, 2020, the company announced an agreement to acquire Tekra and Trient, film converters, for $155 million in cash, subject to customary conditions; closing was expected before March 31, 2020. This was a subsequent event, not a 2019 acquisition.
- Brazil tax matters: A Brazilian court decision on a raw-material ICMS assessment was approximately $12.1 million; the company recorded related expense, interest and penalties. Separate electricity-tax assessments remained contested, with no loss accrued because the outcome could not be determined.
- Tobacco exposure and customer concentration: Declining conventional smoking, regulation, alternative nicotine products and industry consolidation may pressure EP. Four major tobacco customers and their affiliates/designated converters accounted for approximately 29% of 2019 sales.
- Other operating risks: Resin, pulp and energy price volatility, limited ability to pass through cost increases, foreign currency exposure, cyclicality in AMS end-markets, restructuring and acquisition-integration risks, and dependence on specific facilities.
- China joint ventures: The 2018 CTS impairment was $15.0 million; future operating conditions and valuations remain relevant to the investment.
- Other exposures: Pension and other postretirement plans were underfunded by $26.3 million in aggregate. The company disclosed environmental and other legal contingencies, including a $0.3 million reserve for a New Jersey landfill matter. It said it did not expect ordinary-course proceedings to have a material effect, while noting outcomes are uncertain.
- COVID-19 and trade/geopolitical uncertainty: The filing noted early-2020 coronavirus-related restrictions affecting Chinese operations and potential supply-chain effects, as well as Brexit, tariffs, foreign exchange and LIBOR-transition risks.
Deloitte issued an unqualified opinion on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting.
Investor verification priorities
- Confirm the treatment, payment schedule and remaining exposure for the Brazilian raw-material and electricity tax disputes.
- Track 2020 AMS growth and margin realization, EP volume and pricing, and the effect of currency and input costs.
- Verify the Tekra and Trient acquisition closing, funding, integration costs and expected contribution.
- Review debt reduction, interest expense, covenant headroom, cash generation and dividend sustainability against planned capital spending.
- Assess tobacco-customer concentration, China joint-venture performance, pension funding needs and operational continuity at key facilities.