Mativ Holdings, Inc. (then Schweitzer-Mauduit International, Inc.) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The filing was submitted under Schweitzer-Mauduit International, Inc. (“SWM”), before its proposed merger with Neenah. Amounts are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $406.8 | $288.2 |
| Gross profit / margin | $92.6 / 22.8% | $80.8 / 28.0% |
| Operating profit / margin | $10.6 / 2.6% | $33.5 / 11.6% |
| Net income | $1.6 | $21.6 |
| Diluted EPS | $0.05 | $0.68 |
| Cash provided by operations | $5.0 | $12.7 |
| Capital spending | $8.7 | $7.1 |
Sales increased 41.1%, including $105.5 of Scapa sales, $17.4 from volume, mix and pricing (excluding Scapa), partly offset by $4.3 of adverse currency effects. AMS sales rose 67.4% to $272.9; Engineered Papers (EP) sales rose 6.9% to $133.9. Gross profit grew 14.6%, but margin contracted as cost of products sold increased faster than sales.
Operating profit fell 68.4%. AMS operating profit declined to $10.3 from $21.3, including a $12.9 impairment tied to a planned divestiture and higher purchase-accounting costs. EP operating profit declined to $25.7 from $29.9, reflecting higher energy, pulp and freight costs. Net income also reflected interest expense of $14.5, up from $2.9, and a $2.1 tax provision; the effective tax rate was 131.3%, which management attributed materially to discrete items, partly offset by jurisdictional earnings mix.
Balance sheet, cash flow and liquidity
At March 31, cash was $56.1, total debt was $1,276.4, and stockholders’ equity was $701.4. Current assets were $638.0 and current liabilities were $243.4. Cash decreased $18.6 during the quarter. Operating cash flow was pressured by a $45.4 working-capital outflow, mainly higher receivables and inventory; the $23.6 cash settlement of interest-rate swaps partly offset these pressures. Investing used $9.6, while financing used $13.6.
Unused capacity under the $500.0 revolving credit facility was $94.7, plus $1.8 available under bank overdraft facilities. Net leverage under the credit agreement was 5.3x against a 5.5x maximum covenant at quarter-end; the company reported covenant compliance. Management said available liquidity was sufficient for anticipated needs. The quarterly dividend was $0.44 per share.
Material changes, outlook and notable items
- Scapa, acquired in April 2021, contributed $105.5 of Q1 2022 sales. The filing attributes organic AMS growth to pricing and gains in industrial, construction and filtration, while noting constrained output from raw-material and labor shortages. Transportation film sales were affected by material shortages.
- Management cited inflation and supply-chain constraints, including rising resin, energy, wood-pulp and freight costs. The Russia/Ukraine conflict was associated with rapidly increasing energy costs, particularly affecting EP.
- On March 28, 2022, SWM and Neenah agreed to an all-stock merger of equals. Neenah shareholders were to receive 1.358 SWM shares per Neenah share; closing was expected in the second half of 2022, subject to shareholder, regulatory and other customary approvals. SWM had financing commitments for a $648.0 bridge facility and a $500.0 secured revolving facility; final financing terms were not settled.
- Merger-related risks include additional debt, dilution, integration costs and execution challenges, possible customer or employee losses, regulatory or shareholder approval delays, and termination costs. The filing does not provide earnings or revenue guidance.
- Q1 unusual items included the $12.9 AMS impairment, $5.0 proceeds from French carbon-dioxide credit sales, a $0.5 gain on sale of Winkler assets, and the $23.6 interest-swap settlement. The settlement was recorded in accumulated other comprehensive loss and is to be amortized into interest expense over the hedged transaction’s remaining term.
- Brazil electricity-tax assessments remained unresolved; SWM said it could not determine the outcome and had accrued no loss. The filing describes assessments of $11.9 and revised assessments totaling $9.5. A German patent dispute also remained pending, including a counterclaim scheduled for hearing in February 2023.
- Management reported effective disclosure controls at March 31, 2022, and no material change in internal control over financial reporting during the quarter. Scapa was excluded from the interim internal-control evaluation under SEC guidance for recently acquired businesses.
Key facts for investors to verify
- Whether pricing continues to offset input-cost inflation and whether margin recovery follows the sharp Q1 contraction.
- Working-capital trends, cash conversion, available revolver capacity and headroom under the leverage covenant.
- Final merger approvals, financing terms, total incremental debt, dilution, integration costs and anticipated benefits.
- Progress and financial effects of the planned construction-business divestiture and any further restructuring or impairment charges.
- Developments in the Brazil tax assessments and other legal, regulatory and environmental contingencies.