Business context and reporting period
This is Schweitzer-Mauduit International, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The filing identifies the registrant as Schweitzer-Mauduit International, Inc., not Mativ Holdings, Inc.; investors should verify the entity and period against the intended filing. SWM made specialty papers and reconstituted tobacco products, operating through Paper and Reconstituted Tobacco segments.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $202.0m | $211.2m | $602.9m | $598.1m |
| Gross profit | $63.8m | $56.3m | $190.7m | $158.6m |
| Gross margin | 31.6% | 26.7% | 31.6% | 26.5% |
| Operating profit | $43.7m | $11.2m | $103.6m | $69.2m |
| Net income | $27.7m | $9.0m | $63.3m | $45.0m |
| Diluted EPS | $0.87 | $0.29 | $1.98 | $1.31 |
Q3 diluted continuing-operations EPS was also $0.87, versus $0.30 a year earlier; nine-month continuing-operations diluted EPS was $1.98 versus $1.35. Q3 sales fell 4.4%, chiefly from a $22.7m adverse currency effect, partly offset by higher volumes. Nine-month sales rose 0.8%: volume, mix/pricing and royalties added $55.7m in aggregate, largely offset by $50.9m of adverse currency effects.
Profitability improved with higher sales of higher-value and lower-ignition-propensity (LIP) papers, better manufacturing costs, and royalty income. Nine-month operating profit also benefited from a substantially smaller business-tax-credit valuation allowance than in 2011. Q3 and nine-month effective tax rates were 38.7% and 39.5%, respectively.
Cash flow, debt and liquidity
Cash provided by operations was $122.4m for the first nine months of 2012, compared with $37.9m in 2011. Investing used $43.0m, including $20.4m of capital spending and $18.0m of net investment in equity affiliates. Financing used $38.4m, including $50.0m of share repurchases and $9.4m of dividends. Cash increased $41.3m to $117.8m.
At September 30, 2012, total debt was $166.4m ($159.0m long-term and $7.4m current), compared with $146.0m at year-end 2011. Cash was $117.8m; $117.1m was held by foreign subsidiaries, and repatriation could have tax consequences. Revolver availability was $78.6m, with a further $39.9m available under overdraft facilities and lines of credit. The company reported compliance with its credit covenants. Current assets were $362.6m and current liabilities $131.0m.
Material changes, outlook and risks
- Nine-month restructuring and impairment expense rose to $24.6m from $8.3m, including a $16.9m impairment of Spotswood mill assets after a supply-agreement amendment removed a commitment to stand ready to produce banded paper. The Philippines RTL facility remained mothballed; its property, plant and equipment carrying value was $73.1m.
- Q3 restructuring included costs associated with shutting a machine at the Philippine paper mill, partly offset by a reversal of French retirement-plan charges. The filing reports $0.6m net restructuring and impairment expense for the quarter.
- SWM projected 2012 capital spending of approximately $25m–$30m and other cash needs of $40m–$45m, including an RTL joint-venture investment and dividends. It expected to continue a $0.15-per-share quarterly dividend. No earnings or revenue guidance is provided.
- Management cited LIP regulation and potential Chinese demand for reconstituted tobacco as opportunities, while identifying global uncertainty, foreign-exchange volatility, western cigarette-consumption declines, inflation and supply-demand imbalances as challenges. Customer concentration is significant: the four largest customers accounted for 54% of 2011 sales.
- A Brazilian ICMS tax assessment totaled approximately $40m, with about $18m covered by an indemnification. The company contested the assessments and recorded no liability, believing resolution would favor it. Environmental claims and patent opposition proceedings also remained potential risks; management did not expect ordinary-course litigation to have a material effect.
- The August 2012 two-for-one stock split and share repurchases materially changed reported share counts and equity presentation. Share and per-share figures were retrospectively adjusted for the split.
Important facts for investors to verify
- Confirm the filing’s issuer: the supplied report is for Schweitzer-Mauduit International, Inc., although the request names Mativ Holdings, Inc.
- Assess the durability of LIP-related demand, royalty revenue and manufacturing-cost improvements, separately from favorable comparisons against prior-period tax allowances.
- Review currency exposure and the concentration of cash outside the United States, including any restrictions or tax costs on repatriation.
- Track the Spotswood impairment, potential further impairment or restart decisions for the Philippine RTL facility, and remaining restructuring commitments.
- Monitor the Brazilian ICMS assessments, related indemnification coverage, patent proceedings, and the company’s ability to maintain credit-covenant compliance.