Business context and reporting period
Summary of the unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The filing names Schweitzer-Mauduit International, Inc. (SWM) as the registrant; this differs from the company identified in the request metadata, Mativ Holdings, Inc.
SWM operates in Engineered Papers (EP), primarily serving tobacco-related markets, and Advanced Materials & Structures (AMS), serving filtration, surface protection, medical and industrial markets. Results include Argotec, acquired in October 2015, within AMS.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $209.3m | $184.4m | $641.2m | $554.3m |
| Gross profit / margin | $63.1m / 30.1% | $52.4m / 28.4% | $193.5m / 30.2% | $158.6m / 28.6% |
| Operating profit / margin | $30.8m / 14.7% | $31.8m / 17.2% | $99.9m / 15.6% | $78.3m / 14.1% |
| Net income | $18.7m | $25.8m | $65.8m | $68.0m |
| Diluted EPS | $0.61 | $0.85 | $2.15 | $2.22 |
| Cash provided by operations | $30.8m | $24.5m | $83.0m | $80.2m |
Q3 revenue rose 13.5%, while net income fell 27.5%. For the nine-month period, revenue rose 15.7% and net income declined 3.2%. Revenue growth primarily reflected Argotec; EP sales declined in both comparisons. Reported operating margins improved year over year over nine months, but fell in Q3.
For the first nine months, capital spending was $17.5m; operating cash flow less capital spending was $65.5m. Cash and equivalents were $89.5m at September 30, 2016, down from $186.5m at year-end 2015. Total debt was $451.7m, versus $580.2m at year-end; total debt to capital was 45.8%, versus 55.0%. Unused credit-facility capacity was $515.9m, with another $28.2m available under bank overdraft facilities. The company reported compliance with its debt covenants.
Current assets were $363.1m and current liabilities $130.4m at quarter-end. The filing reported no significant off-balance-sheet arrangements. Interest expense for the first nine months increased to $12.6m from $5.3m.
Material changes versus prior comparable periods
- Argotec contributed $32.8m of incremental Q3 sales and $97.2m for the first nine months. AMS sales grew 72.6% in Q3 and 75.1% year to date, substantially reflecting the acquisition.
- EP sales declined $5.6m in Q3 and $5.5m year to date, amid unfavorable volume, mix and pricing effects.
- Gross margin rose in both comparisons, supported by Argotec, operational improvements and, in Q3, favorable currency effects. Q3 operating profit nonetheless declined $1.0m, as higher general and unallocated costs offset segment gains.
- Higher interest expense and income taxes weighed on earnings. The nine-month effective tax rate increased to 30.6% from 21.7%; Q3 rose to 38.8% from 18.8%, reflecting profit mix, reduced foreign tax credits and discrete tax items.
- Restructuring and impairment expense declined to $4.0m year to date from $10.5m, including $3.2m of severance accruals and $0.5m of equipment impairment in 2016.
- Operating cash flow rose modestly year to date, while financing cash use increased, principally due to $131.6m of net debt repayments and $36.6m of dividends.
Outlook, commentary, risks and contingencies
Management expected 2016 profits to decline compared with prior years: Argotec earnings and internal improvements were expected to be more than offset by lower RTL volumes at the French mill, non-recurrence of certain 2015 tax benefits, unfavorable year-over-year currency comparisons and reversal of a customer-driven LIP inventory build. Management expected non-tobacco products to exceed 40% of 2016 sales, versus approximately 30% in 2015, and identified ongoing Argotec integration and AMS margin improvement as priorities. No specific full-year revenue or EPS guidance was provided.
Management cited a long-term growth outlook for water filtration and expected growth from Argotec surface-protection products, while noting current weakness in some air- and water-filtration markets and exposure to oil, gas and mining activity. EP risks include declining cigarette consumption, customer purchasing patterns, regulation, pricing and currency movements. Other risks include acquisition integration, input costs, competition, debt covenant constraints, cybersecurity, and legal and regulatory outcomes.
Brazilian tax disputes include a remaining raw-material ICMS assessment of approximately $14m and electricity-related assessments of approximately $18m in aggregate. SWM contested the matters, reported preliminary injunctions in some proceedings, and recorded no liability; outcomes are uncertain. The company also disclosed environmental and other ordinary-course proceedings, without expecting a material adverse effect from the other proceedings discussed.
After quarter-end, on November 2, 2016, the board adopted a revised executive severance plan. Benefits may include up to three times specified compensation and three years of benefits for qualifying terminations following a change in control.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for Schweitzer-Mauduit International, Inc., not Mativ Holdings, Inc.
- Assess how much reported growth and AMS profit depends on Argotec, and whether integration and anticipated margin gains are being realized.
- Track EP volumes and pricing, RTL demand, and the durability of the Q3 and year-to-date gross-margin improvement.
- Monitor elevated tax and interest costs, cash balances, debt repayments, covenant headroom and dividend capacity.
- Follow developments in the Brazilian tax disputes and the potential financial effects of other disclosed litigation and regulatory risks.