Mativ Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Mativ is a global specialty-materials company reporting Advanced Technical Materials (ATM) and Fiber-Based Solutions (FBS). The July 2022 Neenah merger materially affects comparisons: 2023 includes Neenah, while Q2 and first-half 2022 do not.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $668.3m | $426.4m | $1,347.3m | $833.2m |
| Gross profit / margin | $128.5m / 19.2% | $99.6m / 23.4% | $237.5m / 17.6% | $192.2m / 23.1% |
| Operating profit / margin | $33.6m / 5.0% | $27.8m / 6.5% | $42.9m / 3.2% | $38.4m / 4.6% |
| Net income (loss) | $(4.5)m | $11.8m | $(12.2)m | $13.4m |
| Diluted EPS | $(0.08) | $0.36 | $(0.23) | $0.41 |
| Cash from operations | $40.2m | $13.0m | $19.5m | $18.0m |
- Sales increased 56.7% in Q2 and 61.7% in the first half, primarily from the Neenah acquisition. Management said price increases were offset by lower volumes, particularly from customer destocking and uncertain macroeconomic conditions.
- Gross margins declined amid lower volume and unfavorable mix, manufacturing inefficiencies, and reduced fixed-cost absorption. First-half FBS results were also affected by French labor strikes and operational issues at several sites.
- Q2 operating profit improved year over year, but higher interest expense, legal and tax-related settlement costs, and a valuation allowance against certain tax credits contributed to the quarterly and first-half net losses. Q2 included a $4.9m loss from settlement of a German patent counterclaim.
- First-half cash from operations was $19.5m; working capital changes used $42.4m of cash. Capital spending was $42.0m, up from $17.8m, including filtration and release-liner capacity projects.
Liquidity, debt and capital
- At June 30, 2023, cash was $107.6m, total debt was $1,747.6m, and unused revolving-credit capacity was $333.9m. Net leverage under the credit agreement was 4.2x against a 5.00x maximum covenant; the maximum is scheduled to step down to 4.50x effective December 2023. The company reported compliance with debt covenants.
- Current and long-term debt were $34.7m and $1,712.9m, respectively. The nearest stated debt maturity is the 6.875% senior notes due in 2026. Weighted-average effective borrowing cost, including hedges, was 5.87% for the first half, versus 4.52% a year earlier.
- Management said available cash, operating cash flow and credit facilities should be sufficient for anticipated needs. It noted cash flows are typically seasonally stronger in the second half. A $0.10-per-share dividend was announced for payment in September 2023.
Outlook, developments and risks
- No specific earnings or revenue guidance is provided. Management expects to adjust manufacturing staffing to demand and notes persistent destocking, uncertain macro conditions, and manufacturing and labor challenges.
- On August 1, 2023, the company received a binding offer to sell its Engineered Papers business for $620m cash, subject to customary closing adjustments and completion of French employee consultation. The company may accept after that process; closing was expected in Q4 2023. If completed, the business was expected to be classified as discontinued operations beginning in Q3. The offer includes a potential $24.8m termination fee in specified circumstances.
- The company expects approximately $1.0m of additional 2023 restructuring costs for the Appleton facility closure. It recognized $1.3m of restructuring and impairment expense in the first half, versus $15.6m a year earlier.
- Brazilian tax assessments over electricity taxes remain unresolved; no loss was accrued because the outcome could not be determined. Environmental, labor, litigation, integration, debt-service, interest-rate, currency, supply-chain and market-demand risks are discussed. Management stated disclosure controls were effective and identified no material change in internal control during the quarter.
Important facts for investors to verify
- How much sales and profit growth reflects the Neenah acquisition versus organic pricing, volume and mix; the filing attributes growth principally to the acquisition and reports volume declines.
- Progress on destocking, manufacturing efficiency, staffing adjustments and FBS recovery, including the effects of French labor disruptions.
- Ability to generate stronger second-half cash flow, fund capital spending and dividends, and maintain covenant headroom as leverage limits tighten.
- Whether the Engineered Papers offer is accepted and closes, its final proceeds and adjustments, and the related discontinued-operations and debt implications.
- Potential outcomes and financial exposure from the Brazil tax assessments and other legal, tax and environmental contingencies.