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, 2011. The filing describes a global specialty-paper and reconstituted-tobacco-products manufacturer, with reportable segments Paper and Reconstituted Tobacco. Management changed segment reporting from geographic regions to product lines in the first quarter of 2011. The filing registrant is Schweitzer-Mauduit International, Inc.; the supplied company metadata names Mativ Holdings, Inc., so investors should verify the intended issuer and filing.
Financial performance
Amounts are in U.S. dollars unless stated otherwise. Year-over-year comparisons are with the corresponding 2010 period.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $206.2m | $182.6m | $386.9m | $375.4m |
| Gross profit / margin | $55.1m / 26.7% | $45.3m / 24.8% | $102.3m / 26.4% | $98.8m / 26.3% |
| Operating profit / margin | $31.6m / 15.3% | $25.0m / 13.7% | $58.0m / 15.0% | $56.0m / 14.9% |
| Income from continuing operations | $20.3m | $15.8m | $36.9m | $35.6m |
| Net income | $19.8m | $14.8m | $36.0m | $33.4m |
| Diluted EPS | $1.14 | $0.78 | $2.05 | $1.80 |
Q2 sales rose 12.9%, while first-half sales rose 3.1%. First-half net income increased 7.8%. The effective tax rate was 37.7% in Q2 and 39.2% for the first half, versus 37.6% and 36.1%, respectively, in 2010. The filing attributes the higher 2011 rate in part to start-up and restructuring losses at operations receiving tax incentives.
Cash flow, liquidity and debt
- First-half cash provided by operations was $12.2m, down from $74.7m. Continuing operations provided $14.8m, while discontinued operations used $2.6m. A $41.0m working-capital outflow, compared with a $20.2m inflow in 2010, was the principal driver of the decline.
- Investing activities used $47.0m, including $42.1m of capital spending. Financing activities provided $9.5m, including $110.2m of net borrowings and $104.5m of treasury-stock purchases. Cash declined $25.2m to $62.1m.
- At June 30, cash was $62.1m; current assets were $326.6m and current liabilities $156.9m. Total debt was $166.0m, versus $51.8m at year-end 2010. The company reported a 25.3% total-debt-to-capital ratio, up from 9.0%.
- A new five-year unsecured revolving credit facility provides approximately $225m of borrowing capacity. Availability was $80.8m under that facility and $49.2m under other overdraft facilities and lines of credit. The company reported compliance with its financial covenants at quarter-end.
- Capital spending was $55m–$65m expected for 2011. Management anticipated additional borrowings of approximately $15m–$20m during 2011.
Material changes versus the prior period
- Q2 gross profit increased $9.8m. Management cited $6.6m of cost savings and operational-excellence benefits, $5.6m from volume, and $1.7m from favorable mix and pricing, partly offset by $3.8m of inflationary costs, mainly energy and wood pulp, and $1.7m of European start-up costs.
- First-half operating profit increased $2.0m. Cost savings and higher volumes helped, but higher inflationary costs, European start-up costs, and increased nonmanufacturing expenses limited the improvement. Nonmanufacturing expenses rose $6.3m in the first half, including higher LIP patent-defense legal expenses.
- First-half capital spending increased to $42.1m from $25.8m. Cash from operations fell sharply as working capital shifted from a source to a use of cash.
- The company repurchased 1,946,806 shares for $104.5m during the first half. It said July purchases completed its $75m board authorization; including July activity, year-to-date repurchases reduced shares outstanding by 12%.
- Total debt rose substantially, reflecting the new credit facility, investment needs, and share repurchases. Long-term debt was $157.3m at June 30, compared with $43.1m at December 31, 2010.
Outlook, risks and unusual items
- Management expected European lower-ignition-propensity (LIP) paper demand to ramp through the second half of 2011, targeting approximately 40% of the European market. The company reported first commercial sales from new European LIP facilities and a first profitable month at its Poland facility in June.
- Management expected Reconstituted Tobacco results to be below first-half 2011 levels but somewhat better than earlier 2011 expectations. Energy and wood-pulp inflation remained key pressures; cost reductions were expected to mitigate them until selling-price adjustments began providing recovery later in the year.
- After a major customer reduced expected demand for reconstituted tobacco leaf, the company suspended construction of its Philippine facility. It reported a $75.4m investment and concluded no impairment was indicated at June 30. Management expected about $34m of 2011 spending to bring the facility to a mothballed state.
- In July, the company agreed to form a 50%-owned Chinese reconstituted-tobacco joint venture, subject to approvals. Its expected equity contribution was $25m–$30m; production was expected to begin in 2013 after a two-year construction period.
- Material contingencies include a Brazilian tax assessment of approximately $38m, of which about $17m was covered by an indemnification; no liability was recorded. A separate $24.4m Philip Morris-USA dispute over banded-paper contract costs had no provision recorded; an unfavorable resolution could materially affect results. The company also reported $17.8m of Brazilian value-added tax credits and warned that failure to secure faster utilization could lead to a significant allowance.
- Patent opposition, re-examination, infringement, and related proceedings concerning LIP papers remained active. The filing notes uncertainty in litigation outcomes. Other risks include customer concentration (the three largest customers represented 45% of 2010 sales), tobacco-product demand and regulation, foreign exchange, input-cost inflation, and competition.
- The Malaucène, France mill closure remained classified as discontinued operations; first-half discontinued-operations loss was $0.9m, versus $2.2m in 2010.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Schweitzer-Mauduit International, Inc., not an entity identified in the request metadata as Mativ Holdings, Inc.
- Track working-capital movements and operating cash generation, particularly whether the first-half cash-flow decline reverses.
- Monitor debt, available credit, covenant compliance, and funding for capital spending, share repurchases, and the planned Chinese joint venture.
- Assess the pace and profitability of European LIP sales, the outlook for Reconstituted Tobacco demand, and the financial consequences of suspending the Philippine facility.
- Follow developments in the $24.4m Philip Morris-USA dispute, the Brazilian tax assessment and tax credits, and the LIP patent proceedings.
- Evaluate management’s assumptions on 2011 earnings, energy and pulp costs, pricing recovery, and the stated expectation of approximately 40% European LIP market share.