Mativ Holdings, Inc. annual report, FY2013

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Business context and reporting period

This is Schweitzer-Mauduit International, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, filed February 28, 2014. The supplied metadata names Mativ Holdings, Inc. and “2013 Q4”; those do not match the registrant or reporting period in the filing. Mativ is not identified as the filer in this document.

SWM produced specialty papers and reconstituted tobacco products, with tobacco-industry products representing about 93% of 2013 sales. It operated Paper, Reconstituted Tobacco and, following its December acquisition of DelStar, Filtration segments. DelStar expanded the company into resin-based filtration and other engineered materials.

Financial performance and position

  • Revenue: Net sales were $772.8 million, down 0.7% from $778.5 million in 2012. Paper sales were $543.4 million; Reconstituted Tobacco sales were $225.2 million; Filtration contributed $4.2 million after the acquisition.
  • Profit and margins: Gross profit was $252.7 million (32.7% margin), versus $259.5 million (33.3%) in 2012. Operating profit was $124.9 million (16.2% margin), down from $151.7 million (19.5%). Net income was $76.1 million, or $2.42 diluted EPS, versus $79.8 million, or $2.51 diluted EPS. Continuing-operations income was $78.5 million.
  • Segment results: Paper operating profit increased to $102.5 million from $84.4 million. Reconstituted Tobacco operating profit fell to $46.4 million from $90.3 million, reflecting a $37.2 million impairment and lower volumes. Filtration reported an operating loss of $1.1 million for the period after acquisition.
  • Cash flow: Cash provided by operations was $178.1 million, compared with $174.6 million. Capital spending was $29.1 million; operating cash flow less capital spending was approximately $149 million. The DelStar acquisition used $231.3 million before customary adjustments ($229.7 million net of cash acquired in investing cash flow).
  • Liquidity and debt: Cash and equivalents were $272.0 million, of which $267.3 million was held by foreign subsidiaries. Total debt was $385.4 million, up from $156.0 million; total debt to capital rose to 40.7% from 23.4%. The $500 million revolving facility had $132.3 million available at year-end, and the company reported compliance with its covenants. Current assets were $537.1 million and current liabilities $143.9 million.
  • Other metrics: Adjusted EBITDA, a non-GAAP measure, was $213.0 million versus $216.8 million. The effective tax rate increased to 41.5% from 33.1%. The company paid $39.5 million in dividends; the 2013 declared annual dividend was $1.26 per share.

Material changes versus the prior comparable period

  • Sales declined $5.7 million. Lower product mix and selling prices (a $25.9 million impact) and lower royalties were partly offset by $13.2 million of favorable currency translation, $4.2 million of DelStar revenue and higher sales volume overall. Reconstituted Tobacco volumes fell 10%; Paper volumes rose 2%.
  • Operating profit declined $26.8 million, primarily because restructuring and impairment expense rose to $41.3 million from $21.4 million, including the $37.2 million non-cash impairment of the mothballed Philippines RTL facility. Lower RTL volumes also weighed on results.
  • SWM acquired DelStar for $231.3 million in cash on December 12, 2013, funded primarily by borrowings. Preliminary purchase accounting included $112.7 million of goodwill and $80.9 million of identifiable intangible assets; valuations remained provisional.
  • The company sold its Indonesia and Philippines paper mills in 2013; their results were presented as discontinued operations. Discontinued operations recorded a $2.4 million loss in 2013, compared with a $24.3 million loss in 2012.
  • Cash increased to $272.0 million from $151.2 million, while debt increased substantially to finance DelStar. Annual capital spending rose modestly to $29.1 million from $27.2 million.

Outlook, risks and contingencies

  • Management expected Reconstituted Tobacco volumes and operating profit to decline meaningfully in 2014. It anticipated ongoing cigarette-paper volume pressure from smoking attrition, with potential improvement from new lower-ignition-propensity (LIP) regulations; timing of new regulations was uncertain.
  • The China reconstituted-tobacco joint venture, CTS, was expected to begin operating in 2014, ramp to full capacity by 2016 and reach profitable operations in 2015. Management expected additional start-up costs in 2014.
  • Management viewed DelStar as a platform for diversification and growth, particularly in water filtration, and cited potential commercial synergies. Integration, growth and synergy outcomes were uncertain.
  • SWM projected 2014 capital spending of approximately $25 million to $30 million and said it might incur an additional $25 million to $40 million of borrowings. It expected to remain within credit covenants under its forecasts. A legal-entity realignment was expected to be substantially completed around mid-2014, with anticipated tax and cash-flow benefits subject to execution and tax-authority challenge risk.
  • Key risks include tobacco regulation and declining cigarette consumption, dependence on four customers representing 57% of sales, competition and pricing pressure, raw-material and energy costs, foreign exchange, acquisition integration, and reliance on single facilities for RTL production. A 10% adverse commodity-price move was estimated to affect annual pretax earnings by about $5 million for pulp and $7 million for energy, assuming no offsetting price changes.
  • Brazilian tax assessments totaled approximately $39 million for raw materials and $19 million for electricity. SWM contested the assessments and recorded no liability; about $17 million of the raw-material assessment was covered by an indemnification, according to the filing. Environmental and other legal matters were also disclosed; management did not expect them to be material, but outcomes were uncertain.
  • In the unaudited quarterly information, fourth-quarter 2013 operating loss was $0.7 million and net loss was $9.7 million, chiefly reflecting $38.4 million of restructuring and impairment expense. The filing reports an unqualified audit opinion and effective internal controls; the control assessment excluded DelStar, acquired shortly before year-end.

Most important facts for investors to verify

  1. Confirm the intended issuer and period: this source is SWM’s full-year 2013 Form 10-K, not a Mativ Holdings filing or a standalone Q4 filing.
  2. Track 2014 RTL volume and profit trends, the Philippines facility’s remaining $31.5 million carrying value, and any further impairment or restructuring charges.
  3. Assess DelStar integration, the provisional purchase-price allocation, acquired-business performance, and whether expected filtration growth and synergies materialize.
  4. Monitor debt, covenant headroom, foreign cash availability, and the company’s ability to fund investment and shareholder returns after the acquisition.
  5. Follow the Brazil tax cases, the China CTS start-up and profitability timetable, and any developments in LIP regulation and tobacco demand.