Business context and reporting period
Schweitzer-Mauduit International, Inc. (SWM), now associated with Mativ Holdings, Inc., filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. SWM operated two segments: Advanced Materials & Structures (AMS) and Engineered Papers (EP). The quarter’s results include Scapa from its April 15, 2021 acquisition date.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $377.8 million | $254.2 million | $666.0 million | $515.7 million |
| Gross profit / margin | $88.1 million / 23.3% | $74.3 million / 29.2% | $168.9 million / 25.4% | $148.6 million / 28.8% |
| Operating profit / margin | $15.9 million / 4.2% | $34.4 million / 13.5% | $49.4 million / 7.4% | $68.5 million / 13.3% |
| Net income | $1.8 million | $21.5 million | $23.4 million | $44.0 million |
| Diluted EPS | $0.06 | $0.68 | $0.74 | $1.40 |
| Cash from operations | $7.1 million | $44.2 million | $19.8 million | $49.3 million |
For the six months, capital spending was $16.3 million and cash used in investing was $649.0 million, primarily reflecting $630.5 million of net cash consideration for Scapa. Financing provided $640.7 million, including new debt proceeds; cash increased $11.2 million to $65.9 million.
At June 30, total debt was $1,280.9 million, cash was $65.9 million, and unused revolving-credit capacity was $107.1 million. Current and long-term debt were $18.3 million and $1,262.6 million, respectively. Net working capital was $352.6 million. The debt-to-capital ratio was 66.2%, compared with 47.7% at year-end 2020.
Material changes versus comparable periods
- Q2 sales rose 48.6%; the filing attributes $95.0 million of the increase to Scapa, with additional growth from volume, mix, pricing and foreign currency. First-half sales increased 29.1%.
- Profitability fell despite higher sales: Q2 operating profit declined 53.8% and net income declined to $1.8 million. Gross margin contracted 5.9 percentage points, reflecting input-cost pressure, segment mix, Scapa purchase-accounting costs and acquisition-related expenses.
- AMS sales and operating profit benefited from Scapa and organic growth, particularly in transportation, filtration and construction. EP operating profit declined amid lower high-margin LIP sales, higher wood-pulp costs and Spotswood-transition inefficiencies.
- Q2 general expense increased $26.7 million year over year; the company cited Scapa transaction and integration costs, Scapa operating expenses, and higher deferred compensation and consulting costs. Q2 interest expense rose to $13.1 million from $8.1 million as average debt increased.
- First-half operating cash flow fell to $19.8 million, with $51.0 million used by operating working capital, compared with $30.2 million used in the prior-year period.
Outlook, management commentary and risks
The filing provides no numerical full-year revenue or earnings guidance. Management said it believed available liquidity and operating cash flows were adequate for operations and financial obligations, and expected to remain in compliance with debt covenants. It also said it did not expect significant additional borrowings during 2021 beyond potential Term Loan B borrowings.
Management reported all facilities operational and described demand as generally healthy in tobacco, healthcare and filtration, with transportation and construction recovering. It cautioned that the pandemic’s duration and effects remained uncertain and that customer inventory behavior could create variability. Inflation in resin and wood pulp was pressuring margins; pricing actions had begun or were expected to take effect, but timing and sufficiency were not assured.
The Scapa acquisition was funded with borrowings. Scapa contributed $95.0 million of sales and a $6.0 million net loss from continuing operations from acquisition through June 30. Its purchase-price allocation remained preliminary and could be revised. The company reported covenant compliance at June 30; the MD&A cites 4.4x net leverage and discusses a 4.5x limit plus acquisition-related covenant flexibility, while the debt note describes a 5.50x maximum under the amended agreement. These presentations merit verification.
Brazil’s raw-material ICMS assessments were resolved through a tax-amnesty payment, producing a $6.1 million benefit in the first half. Separate Brazilian electricity-tax assessments remained contested, with no loss accrued because the outcome could not be determined. German LIP patent litigation continued. The company reported no material change in previously disclosed risk factors. Other principal risks include commodity inflation and availability, pandemic impacts, tobacco-market and customer-inventory changes, acquisition integration, foreign exchange and interest rates, and legal and regulatory matters.
Important facts for investors to verify
- Reconcile the applicable net-leverage covenant limit and reported 4.4x leverage with the credit agreement and lender calculations.
- Assess Scapa’s ongoing profitability, integration costs, purchase-accounting charges and the final purchase-price allocation.
- Track whether pricing actions offset resin, pulp, labor and other cost inflation, and whether EP volumes and margins recover.
- Review working-capital needs, cash generation, available revolver capacity, debt maturities and interest-rate exposure.
- Monitor the unresolved Brazilian electricity-tax assessments and German patent proceedings, along with any changes in their estimated financial exposure.