Business context and reporting period
This is Schweitzer-Mauduit International, Inc. (SWM)’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The request identifies Mativ Holdings, Inc.; that name does not match the registrant named in this filing. SWM operated two segments: Advanced Materials & Structures (AMS) and Engineered Papers (EP).
In January 2017, SWM acquired Conwed, adding advanced materials products and operations to AMS. The acquisition substantially affects year-over-year comparisons.
Financial performance
All amounts are in U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $255.3 | $217.3 | $488.6 | $431.9 |
| Gross profit / margin | $76.6 / 30.0% | $66.9 / 30.8% | $139.7 / 28.6% | $130.4 / 30.2% |
| Operating profit / margin | $39.5 / 15.5% | $37.5 / 17.3% | $66.1 / 13.5% | $69.1 / 16.0% |
| Net income | $22.3 | $26.0 | $36.0 | $47.1 |
| Diluted EPS | $0.72 | $0.85 | $1.17 | $1.54 |
| Cash provided by operations | $31.9 | $34.6 | $44.9 | $52.2 |
Q2 sales increased 17.5%; first-half sales increased 13.1%. However, first-half gross and operating margins and net income declined. Interest expense was $6.8 million in Q2 and $12.6 million for the first half, versus $4.1 million and $8.7 million, respectively, in 2016. Effective tax rates rose to 31.0% for Q2 and 32.3% for the first half, from 26.5% and 27.0%.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $97.8 million, down from $107.4 million at year-end 2016; $61.1 million was held by foreign subsidiaries.
- Total debt was $721.1 million, up from $440.4 million at December 31, 2016. Long-term debt was $716.8 million. Total debt to capital rose to 57.0% from 46.4%.
- Unused capacity under the credit agreement was $237.4 million; bank overdraft availability was $27.6 million. SWM reported compliance with all debt covenants at quarter-end and expected to remain compliant.
- First-half operating cash flow was $44.9 million; investing activities used $310.8 million, including $291.7 million for Conwed net of cash acquired and $19.3 million of capital spending. Financing provided $252.4 million, including net borrowing proceeds of $279.8 million. Cash declined $9.6 million during the period.
- Management projected 2017 capital spending to exceed $40 million. Dividends paid in the first half were $25.8 million; a $0.42-per-share dividend was announced August 2, 2017.
Material changes and management commentary
- Q2 AMS sales rose 63.6% to $117.8 million, including $38.9 million of Conwed sales; organic sales also grew. EP sales fell 5.4% to $137.5 million. For the first half, AMS sales increased 52.3% and EP sales decreased 6.3%.
- Management attributed the EP weakness to lower volumes, product mix and selling prices, royalties and, in Q2, currency effects. Lower EP sales also hurt manufacturing efficiencies and overhead absorption.
- Conwed contributed $65.5 million in sales and $3.2 million in continuing-operations income from acquisition through June 30. Its preliminary purchase accounting included $106.2 million of goodwill and $134.4 million of identifiable intangible assets; valuations remained provisional.
- Management cited Conwed-related amortization, higher debt and interest costs, higher taxes, and weaker EP results as factors behind lower net income, partly offset by Conwed and organic AMS growth. First-half operating cash flow declined mainly because of working-capital use and lower net income.
Outlook, risks and unusual items
- The filing does not provide a clear numerical full-year revenue or earnings forecast. It does state that 2017 capital spending is expected to exceed $40 million.
- In July 2017, SWM agreed to relocate its Newberry, South Carolina EP facility. It sold the existing facility for $7 million and purchased another building for $1; a $6 million relocation incentive is intended to reimburse build-out and relocation costs. A gain may be recognized in Q3, depending on expected costs and net consideration.
- First-half restructuring and impairment expense was $2.7 million, including $1.9 million of severance accruals and a $0.6 million impairment charge on held-for-sale equipment at the Philippines RTL facility.
- Contingencies include disputed Brazilian tax assessments: a remaining raw-materials assessment of approximately $13.7 million and electricity assessments of approximately $16.1 million. The company recorded no liability and said it believed the matters would be resolved in its favor, while noting outcomes were uncertain. A French labor-court decision involving approximately €1.3 million and 18 former employees was under appeal; no liability was recorded.
- Key stated risks include tobacco-market demand and regulation, commodity and energy costs, foreign exchange and interest rates, acquisition integration and synergies, customer retention, and litigation and tax outcomes. The company reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Confirm the filing identity: the registrant is Schweitzer-Mauduit International, Inc., not Mativ Holdings, Inc.
- Assess the durability and organic contribution of AMS growth separately from Conwed’s acquired revenue, and monitor EP sales and margins.
- Track debt reduction, covenant headroom, interest expense and working-capital conversion following the acquisition.
- Review final Conwed purchase accounting, acquired-asset amortization, earn-out exposure and realized synergies.
- Monitor the Brazilian tax and French labor proceedings, the Newberry relocation costs and any related gain.