Mativ Holdings, Inc. quarterly report, Q2 FY2018

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Business context and reporting period

This is Schweitzer-Mauduit International, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The filing identifies the registrant as SWM; the supplied company metadata says Mativ Holdings, Inc. SWM reported two segments: Advanced Materials & Structures (AMS), serving specialty materials markets, and Engineered Papers (EP), primarily serving tobacco-related markets.

Financial performance and liquidity

All dollar amounts are in millions unless otherwise noted.

  • Second quarter: Net sales were $270.4, up 5.9% year over year. Gross profit was $77.4, up 0.7%, while gross margin declined to 28.6% from 30.1%. Operating profit rose 4.5% to $42.1, with operating margin of 15.6% versus 15.8%. Net income increased to $25.8 from $22.3; diluted EPS was $0.83 versus $0.72.
  • First half: Net sales were $532.3, up 8.9%; gross profit was $149.4, up 6.5%, and gross margin was 28.1% versus 28.7%. Operating profit rose 13.5% to $77.1, with operating margin of 14.5% versus 13.9%. Net income was $46.3 versus $36.0; diluted EPS was $1.50 versus $1.17. The 2018 result included a $0.4 loss from discontinued operations.
  • Segment results: Q2 AMS sales increased 5.3% to $124.0, and operating profit rose to $17.0 from $16.6. EP sales increased 6.5% to $146.4, and operating profit rose to $33.3 from $31.6. First-half sales increased in both segments: AMS to $239.3 (+9.9%) and EP to $293.0 (+8.2%).
  • Cash flow: First-half cash from operations was $56.1, up from $44.9; working capital used $30.7 of cash. Investing activities used $15.0, including $13.7 of capital spending. Financing activities used $71.3, including $26.4 of dividends and net debt repayments. Cash fell by $33.0 to $73.9. For Q2, MD&A reports operating cash flow of $34.1 versus $31.9 and capital spending of $7.7 versus $8.2.
  • Debt and liquidity: Total debt was $642.8 at June 30, down from $684.2 at year-end; long-term debt was $639.8. Cash was $73.9, of which $64.3 was held by foreign subsidiaries. Unused revolving credit capacity was $315.8, with $6.2 available under bank overdraft facilities. The company reported compliance with debt covenants. Current assets were $406.4 and current liabilities $136.2.
  • Other measures: Interest expense was $12.8 for the first half versus $12.6; the effective tax rate declined to 25.2% from 32.3%. First-half comprehensive income was $24.1, including a $22.2 other comprehensive loss, largely reflecting foreign currency translation.

Material changes versus prior comparable periods

  • First-half sales growth reflected $23.7 from volume, mix and pricing and $20.1 from foreign currency effects. In Q2, sales growth included $7.9 of currency effects and $7.2 from volume, mix and pricing.
  • Operating profit improvement was driven principally by EP sales, manufacturing efficiencies and favorable currency effects, along with AMS organic growth and Conwed contribution. Higher raw-material costs and AMS manufacturing inefficiencies, including costs related to a planned site closure, offset some gains.
  • First-half restructuring and impairment expense decreased to $1.0 from $2.7. The 2018 charges included severance and $0.2 of AMS equipment impairment.
  • First-half operating cash flow improved, but cash use from working capital increased to $30.7 from $28.0. Debt repayments contrasted with the prior-year period, which included substantial borrowing to fund the Conwed acquisition.
  • U.S. tax reform contributed to the lower effective tax rate. The company had not completed its accounting for all Tax Act effects and recorded a provisional $48.7 transition-tax liability, payable over eight years.

Outlook, commentary, risks and unusual items

  • No quantified earnings or revenue guidance is provided in the supplied filing text. Management said available cash, operating cash generation and credit facilities were expected to meet anticipated funding needs and forecast covenant compliance.
  • Management cited higher input costs, planned site-closure inefficiencies and product-market demand as important operating considerations. It also noted lower RTL sales volume at its Chinese joint venture contributed to equity-affiliate losses.
  • Risks highlighted include tobacco-market changes and smoking attrition, competition and pricing pressure, commodity and energy costs, foreign exchange and interest rates, tariffs and retaliatory trade measures, tax-law uncertainty, and acquisition or restructuring execution. The filing added tariffs as a risk factor, noting potential cost increases that may not be passed to customers.
  • Brazilian tax disputes remain unresolved: approximately $11.1 of one raw-materials assessment and approximately $5.2 and $7.8 for two electricity assessments. SWM said it believed the remaining matters would be resolved favorably and recorded no liability; outcomes are uncertain. A third electricity assessment was dismissed.
  • A French labor court had ordered payment of approximately €1.3 to former employees; the company appealed and recorded no liability, while acknowledging no assurance of success. Environmental and other proceedings also carry uncertainty.
  • The Conwed acquisition’s contingent consideration liability was $10.0 at June 30. A planned AMS site closure generated current-period costs. Currency movements caused a substantial quarterly translation loss in other comprehensive income.

Important facts for investors to verify

  1. Confirm the issuer identity and relationship between the filing’s registrant, Schweitzer-Mauduit International, Inc., and the metadata name Mativ Holdings, Inc.
  2. Track whether AMS site-closure costs, input-cost inflation and gross-margin pressure persist, and whether sales growth converts into stronger margins.
  3. Monitor debt reduction, covenant headroom and the scheduled tightening of the maximum net-debt-to-EBITDA covenant; the filing does not provide the actual covenant ratio.
  4. Assess working-capital cash consumption, foreign-held cash accessibility and the timing of the $48.7 provisional transition-tax payments.
  5. Follow outcomes of the Brazilian tax assessments and French labor appeal, for which no liabilities were recorded.
  6. Check subsequent filings for updated guidance, Tax Act measurement adjustments, tariff effects and the progress or costs of the planned site closure.