Business Context and Reporting Period
The supplied filing is Schweitzer-Mauduit International, Inc.’s (SWM) Form 10-K for the year ended December 31, 2011; it is not a filing under the name Mativ Holdings, Inc. SWM made specialty papers and reconstituted tobacco products through Paper and Reconstituted Tobacco segments. Tobacco-related products represented about 93% of sales. The filing also reports fourth-quarter results.
Financial Performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $816.2 million | $740.2 million |
| Gross profit / margin | $240.5 million / 29.5% | $196.6 million / 26.6% |
| Operating profit / margin | $119.2 million / 14.6% | $109.6 million / 14.8% |
| Income from continuing operations | $87.6 million | $71.4 million |
| Net income | $92.6 million | $65.3 million |
| Diluted EPS | $5.46 | $3.53 |
| Cash provided by operations | $81.5 million | $141.1 million |
| Capital spending | $60.9 million | $73.7 million |
| Cash and cash equivalents at year-end | $76.5 million | $87.3 million |
| Total debt at year-end | $146.0 million | $51.8 million |
FY 2011 sales rose 10.3%, while reported unit volumes fell 4%. Higher-value products, including a 40% increase in LIP paper sales, currency effects and $17.0 million of patent royalty income supported sales. Gross margin improved, but operating margin edged down as nonmanufacturing costs, including patent litigation expenses, rose. Net income also benefited from a $6.4 million gain related to deconsolidation of the discontinued Malaucène mill and Polish tax incentives.
Fourth-quarter sales were $218.1 million, operating profit was $50.0 million and net income was $47.6 million. The quarter’s net income included $6.4 million from discontinued operations, principally the Malaucène deconsolidation gain.
Liquidity, Debt and Capital Allocation
Cash from operations fell by $59.6 million year over year, primarily because working capital used $24.0 million in 2011 versus providing $28.3 million in 2010. Cash used in investing was $72.1 million; financing activities used $18.3 million, including $120.9 million of treasury-stock purchases, partly offset by $100.5 million of net borrowings. The filing reports net operating working capital of $98.8 million.
SWM entered a five-year, approximately $225 million revolving credit facility in May 2011, with $95.6 million available at year-end, in addition to $41.2 million available under overdraft facilities and lines of credit. The company reported compliance with its debt covenants. Total debt to capital increased to 23.5% from 9.0%. Quarterly dividends remained $0.15 per share. The company repurchased $105.0 million of shares in the open market during 2011.
Material Changes Versus Prior Period
- Paper segment sales increased 12.1% to $579.3 million; Reconstituted Tobacco sales increased 5.9% to $236.9 million. Segment operating profit was $49.0 million and $90.3 million, respectively.
- EU LIP requirements took effect in 2011, helping drive higher-value paper sales and royalties. European LIP start-up costs were $6.5 million.
- Higher pulp, energy and other inflationary costs, litigation expenses and a $15.9 million valuation allowance on Brazilian ICMS business tax credits partly offset operating gains.
- The Philippines RTL plant construction was suspended; its year-end property, plant and equipment carrying value was $71.9 million. SWM established a 50%-owned China RTL joint venture, expected to require about $30 million of SWM contributions and to begin production in 2014.
- Debt rose substantially, while operating cash flow declined. The company also spent $105.0 million on open-market repurchases, compared with $19.0 million in 2010.
Outlook, Risks and Unusual Items
Management expected 2012 to be challenging given global economic uncertainty, declining cigarette consumption in Western markets and foreign-exchange volatility. It anticipated further LIP opportunities as additional countries adopted regulations, growth opportunities in Asia, and continuing cost reductions and efficiency gains. Planned 2012 capital spending was approximately $35 million; anticipated China RTL joint-venture funding was about $30 million. No numerical earnings or revenue guidance was provided.
- Customer concentration and contract dispute: Four customers accounted for 54% of 2011 sales. Philip Morris USA disputed about $24.4 million of costs invoiced under a cost-plus LIP paper contract; SWM believed its calculation was correct and had recorded no loss provision.
- Brazilian tax matters: A separate ICMS tax assessment totaled about $44 million, approximately $20 million of which was covered by an indemnification. SWM contested the assessment and recorded no liability. Separately, it reserved the carrying value of its Brazilian ICMS business tax credits.
- Patent litigation: A February 2012 initial ITC decision was unfavorable on certain asserted patent claims; SWM said it would seek Commission review. The filing stated that this dispute would not prevent production and sale of its Alginex LIP product. Delfort’s 2011 license agreement provided a minimum annual royalty of $4 million for five years, plus other royalties and past-sales consideration.
- Other exposures: Tobacco regulation and consumption trends, raw-material and energy costs, currency movements, competition, the single French RTL production facility, pension underfunding and execution of expansion plans could affect results. The company disclosed an approximately $30.8 million combined U.S. and French pension-plan deficit.
- Reporting note: Deloitte & Touche issued an unqualified opinion on the financial statements and internal controls; management reported effective controls and no material weaknesses.
Important Facts for Investors to Verify
- Confirm the $24.4 million Philip Morris USA contract dispute status, potential exposure and any subsequent resolution.
- Track the Brazilian ICMS assessment and the recoverability or use of the reserved business tax credits.
- Review subsequent ITC and patent proceedings, and whether expected LIP royalties and EU demand persist.
- Assess cash conversion, working-capital requirements, debt increase, share repurchases and funding needs for the China joint venture and suspended Philippines project.
- Reconcile apparent inconsistencies in the supplied filing text: the selected-data table reports 2011 total assets of $841.9 million versus $845.2 million on the balance sheet, and the EBITDA figures differ between the selected-data table and its reconciliation. Verify the figures against the filed statements.