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, 2013. The filing describes a specialty paper and reconstituted tobacco products manufacturer operating through Paper and Reconstituted Tobacco segments. The supplied company metadata says Mativ Holdings, Inc.; the filing itself identifies the registrant as Schweitzer-Mauduit International, Inc.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $185.3 million | $195.9 million | $576.3 million | $583.8 million |
| Gross profit / margin | $63.2 million / 34.1% | $66.3 million / 33.8% | $190.8 million / 33.1% | $194.2 million / 33.3% |
| Operating profit / margin | $41.8 million / 22.6% | $49.4 million / 25.2% | $125.6 million / 21.8% | $112.2 million / 19.2% |
| Income from continuing operations | $29.6 million | $33.7 million | $89.7 million | $74.3 million |
| Net income | $29.1 million | $27.7 million | $85.8 million | $63.3 million |
| Diluted EPS | $0.92 | $0.87 | $2.72 | $1.98 |
| Cash provided by operations | $41.3 million | $50.4 million | $123.1 million | $125.4 million |
Q3 sales fell 5.4%, reflecting an $18.1 million unfavorable impact from volume, mix and pricing, partly offset by $7.1 million of currency benefits and $0.4 million of higher royalty income. Total unit volumes declined 10%; Paper volumes declined 1% and Reconstituted Tobacco volumes declined 21%. Nine-month sales declined 1.3%, with total unit volumes down 3%.
Q3 operating profit fell 15.4%. Lower sales volumes, mix and selling prices reduced gross profit, while increased wood-pulp costs also weighed on results; currency benefits partly offset these pressures. Nine-month operating profit rose 11.9%, primarily because restructuring and impairment costs were $19.1 million lower than in the prior-year period, alongside operational cost savings. Nine-month Paper operating profit increased to $80.0 million from $59.3 million; Reconstituted Tobacco operating profit decreased to $62.1 million from $66.6 million.
Liquidity, debt and cash flow
- At September 30, 2013, cash and cash equivalents were $222.5 million, versus $151.2 million at year-end 2012. Total debt was $151.2 million, down from $156.0 million; cash exceeded debt by $71.3 million.
- Current assets were $456.1 million and current liabilities $122.1 million. The revolving facility had approximately $92.2 million available, with additional $44.0 million availability under overdraft facilities and other lines. The company reported compliance with its debt covenants.
- Nine-month operating cash flow was $123.1 million; investing activities used $20.1 million and financing activities used $34.9 million. Working capital changes used $16.0 million of cash.
- Capital spending was $20.2 million through September and was forecast at approximately $25 million to $30 million for full-year 2013. Nine-month dividends paid were $28.3 million. A quarterly dividend of $0.36 per share was announced November 6, 2013.
- $221.2 million of cash was held by foreign subsidiaries. Management said it expected to meet domestic liquidity needs without repatriating that cash.
Outlook, commentary and risks
- Management expected Reconstituted Tobacco volumes to decline meaningfully in 2014; preliminary customer indications suggested lower RTL requirements. It was assessing implications for French operations and the suspended Philippines RTL site.
- The China reconstituted tobacco joint venture facility was expected to open in 2014, reach full capacity by 2016, incur higher start-up costs in 2014 than in 2013, and become profitable in 2015. These are forward-looking expectations, not reported results.
- Management viewed potential adoption of lower ignition propensity (LIP) cigarette standards and proposed Chinese tar-delivery limits as opportunities, but noted that timing and implementation were uncertain. Without new LIP implementations in 2014, tobacco-paper volumes were expected to be affected by market attrition.
- Key risks include declining cigarette consumption, customer demand and inventory changes, intense competition and pricing pressure, pulp and energy costs, foreign-exchange movements, regulatory changes, customer concentration, and execution of growth and restructuring initiatives.
- The suspended Philippines RTL facility had property, plant and equipment of $70.8 million at September 30, 2013; management’s evaluation of recoverability and future RTL volumes could lead to impairment.
- A Brazilian ICMS tax assessment totaled approximately $40 million, including about $18 million covered by an indemnification. The company vigorously contested it and recorded no liability, believing it would prevail.
- The Indonesia mill sale was completed in Q2 2013, with a $1.6 million noncash loss. The Philippines paper mill was sold on October 25, 2013. The filing reported no material developments in other legal proceedings.
Important facts to verify
- Confirm the issuer and period: the filing is for Schweitzer-Mauduit International, Inc., not an entity identified as Mativ Holdings, Inc., and covers Q3 2013.
- Track whether weaker RTL demand persists and how it affects segment volumes, margins, and the suspended Philippines facility’s carrying value.
- Assess whether cash held abroad is practically available for shareholder returns and investment, and monitor debt, facility availability, and covenant headroom.
- Monitor the Brazil tax assessment, the related indemnification, and the status of the company’s LIP patent opposition proceedings.
- Compare the announced dividend and capital-spending plans with subsequent cash generation and the company’s growth and restructuring commitments.