Mativ Holdings, Inc. quarterly report, Q1 FY2018

Business context and reporting period

This is an unaudited Form 10-Q for the three months ended March 31, 2018. The filing identifies the registrant as Schweitzer-Mauduit International, Inc. (SWM), not Mativ Holdings, Inc.; verify the issuer and period against the intended filing.

SWM operates Advanced Materials & Structures (AMS), serving specialty materials markets, and Engineered Papers (EP), primarily serving tobacco-related markets. It also holds 50% interests in two Chinese joint ventures.

Financial results and liquidity

At March 31, 2018, cash was $96.1 million, total debt $674.6 million, and stockholders’ equity $562.1 million. Cash was down from $106.9 million at year-end 2017. Unused capacity under the credit agreement was $287.2 million, with an additional $6.4 million available under bank overdraft facilities. The company reported compliance with its debt covenants; total debt to capital was 54.5%.

Material changes versus the prior comparable period

• Sales rose 12.3% to $261.9 million, reflecting $16.4 million of volume, mix and pricing gains and $12.3 million of favorable currency effects. The comparison also includes about three additional weeks of Conwed contribution in Q1 2018.
• AMS sales increased 15.3% to $115.3 million; operating profit rose 19.1% to $10.6 million. Growth included Conwed and stronger transportation, filtration and medical sales, partly offset by infrastructure and construction softness.
• EP sales increased 10.0% to $146.6 million; operating profit rose 21.5% to $33.9 million, supported by currency and manufacturing efficiencies, partly offset by higher input costs.
• Gross margin improved 0.3 percentage points and operating margin 1.6 points. Management cited growth, favorable currency and EP efficiencies, partly offset by higher input costs and AMS manufacturing inefficiencies.
• Net income benefited from higher segment operating profit and a lower effective tax rate (25.6%, versus 34.3%). Interest expense increased to $6.2 million from $5.8 million as average borrowing rates rose.
• Operating cash flow increased by $9.0 million, primarily due to higher net income. Working-capital changes used $18.4 million of cash. Investing cash outflow was $7.2 million, versus $305.9 million in Q1 2017, which included the Conwed acquisition.

Outlook, commentary, risks and unusual items

• Management projected 2018 capital spending of approximately $40 million and stated it expected available liquidity to support operations and its growth strategy. No earnings or revenue guidance figures are provided in the supplied filing text.
• The company held $78.3 million of its cash outside the U.S. It recorded a provisional $48.7 million Tax Act transition-tax liability, payable over eight years, and said it did not expect the payment schedule to impair liquidity or covenant compliance. Tax accounting remained subject to refinement.
• Credit-agreement leverage limits tighten over 2018: the maximum net debt-to-EBITDA ratio falls to 3.75 after March 31, 3.50 after June 30, and 3.00 after December 31. The company said it expected to remain compliant.
• Brazilian tax disputes include a raw-material assessment of approximately $13.8 million and electricity assessments of approximately $5.5 million, $9.0 million and $4.4 million. SWM recorded no liability, believing the matters would be resolved in its favor; outcomes are uncertain. A French labor-court matter involving approximately €1.3 million was also unreserved and under appeal.
• Q1 included a $0.4 million loss from discontinued operations related to the former Philippines mill and $0.4 million of restructuring expense, mainly U.S. AMS severance. The filing also cites a favorable Luxembourg litigation settlement contributing to lower other expense.
• Key risks include tobacco-market decline and regulation, competition and customer demand shifts, raw-material and energy costs, currency and interest-rate exposure, acquisition integration, tax-law uncertainty, and litigation. Management reported effective disclosure controls and no material change in internal control over financial reporting.

Important facts for investors to verify

• Confirm that the SWM 2018 Q1 filing is the intended document, given the request metadata naming Mativ Holdings, Inc.
• Assess whether sales and profit growth are sustainable apart from currency benefits and the Conwed comparison-period effect.
• Review debt covenant headroom as leverage limits tighten, alongside variable-rate debt exposure and cash held overseas.
• Track the final Tax Act accounting and the timing and effect of the transition-tax payments.
• Monitor the Brazilian and French legal matters, which have no recorded liability despite potentially material stated amounts.
• Compare realized capital spending with the approximately $40 million 2018 projection and review working-capital cash use.