Business Context and Reporting Period
This is Schweitzer-Mauduit International, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2019; the filing does not identify the registrant as Mativ Holdings, Inc. SWM reported two segments: Advanced Materials & Structures (AMS), serving specialty industrial and other markets, and Engineered Papers (EP), primarily serving tobacco-related markets.
Financial Performance and Liquidity
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q1 2019 | Q1 2018 or prior date |
|---|---|---|
| Net sales | $258.0 | $261.9 |
| Gross profit / margin | $67.9 / 26.3% | $72.0 / 27.5% |
| Operating profit / margin | $30.4 / 11.8% | $35.0 / 13.4% |
| Income from continuing operations | $17.4 | $20.9 |
| Net income | $17.4 | $20.5 |
| Diluted EPS | $0.56 | $0.67 |
| Cash provided by operations | $13.0 | $22.0 |
| Capital spending | $7.3 | $6.0 |
At March 31, 2019, cash was $83.4 (including $52.9 held by foreign subsidiaries); total debt was $620.3, versus $622.1 at December 31, 2018. Current debt was $3.1 and long-term debt $617.2. The company reported $419.6 of unused credit-facility capacity and $6.1 of bank-overdraft availability. Stockholders’ equity was $562.1. Operating cash flow was reduced by a $22.0 working-capital cash outflow. The company paid $13.6 in dividends during the quarter and declared a further $0.44-per-share dividend payable in June 2019.
Changes Versus the Prior Comparable Period
- Sales declined 1.5%; foreign-currency impacts reduced sales by $7.2, partly offset by a $3.0 favorable effect from volume, mix and selling prices.
- AMS sales rose 4.5% to $120.5 and operating profit rose 40.6% to $14.9, supported by growth in transportation, filtration and medical products, lower resin costs and lower fixed costs following a 2018 site closure.
- EP sales fell 6.2% to $137.5 and operating profit fell 15.3% to $28.7, reflecting lower volume, higher input costs, reduced manufacturing efficiency and unfavorable currency movements.
- Unallocated expenses increased $3.7 to $13.2, primarily due to higher IT and deferred-compensation expenses. Interest expense rose to $7.8 from $6.2; the weighted-average effective debt rate was 4.42% versus 3.44%.
- The effective tax rate declined to 20.0% from 25.6%, which partly offset lower operating profit and higher interest expense. No restructuring expense was recorded, compared with $0.4 in Q1 2018.
Outlook, Risks, Contingencies and Unusual Items
Management gave no specific numerical 2019 earnings or revenue guidance in the provided filing text. It said available cash, operating cash generation and credit facilities should be sufficient for operations and growth, and expected to remain in compliance with credit covenants. The company was compliant at quarter-end. The credit agreement requires a maximum net-debt-to-EBITDA ratio of 4.50 and minimum interest coverage of 3.00.
Key risks identified include tobacco-market demand and customer inventory changes; competition and alternative technologies; commodity, energy and labor costs; currency and interest-rate movements; trade barriers; regulation and taxation; and execution of diversification, acquisition and restructuring initiatives. The company uses currency and interest-rate hedges, which carry counterparty and effectiveness risks. It reported no material change in previously disclosed risk factors.
Brazilian tax disputes include an approximately $11.1 million raw-material assessment and several electricity-tax assessments, including assessments stated at $9.7 million and $0.7 million. SWM contests the claims, recorded no liability for them, and cautioned that outcomes are uncertain. In France, a court had ordered payment of approximately €1.3 million to former employees; the company had recorded no liability and was appealing. Environmental and other proceedings may also create costs, although management did not expect ordinary-course matters to have a material adverse effect.
Adoption of lease accounting on January 1, 2019 added approximately $25 million of operating right-of-use assets and $27 million of lease liabilities at adoption; management said the effect on income and covenant compliance was not material. The quarter’s operating results are not necessarily indicative of full-year results.
Important Facts for Investors to Verify
- Confirm the issuer and period: the supplied filing is for Schweitzer-Mauduit International, Inc. for Q1 2019, not a filing under the Mativ Holdings, Inc. name.
- Track whether EP volume, input-cost and currency pressures persist, and whether AMS growth and cost benefits continue.
- Monitor working-capital usage, operating cash flow, cash availability (including cash held abroad), debt and interest costs, and covenant headroom.
- Review the status and potential exposure of the Brazilian tax disputes and French employee litigation, for which no liability was recorded.
- Check subsequent dividend policy, capital allocation and any formal guidance; this filing provides no quantified full-year forecast.