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, 2020. The filing identifies the registrant as SWM, not Mativ Holdings, Inc. SWM operates Advanced Materials & Structures (AMS) and Engineered Papers (EP), serving specialty materials markets and primarily the tobacco-paper market, respectively.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $279.3 million | $256.4 million | $795.0 million | $784.3 million |
| Gross profit / margin | $80.2 million / 28.7% | $72.2 million / 28.2% | $228.8 million / 28.8% | $219.1 million / 27.9% |
| Operating profit / margin | $37.0 million / 13.2% | $34.6 million / 13.5% | $105.5 million / 13.3% | $109.2 million / 13.9% |
| Net income | $24.5 million | $27.7 million | $68.5 million | $65.6 million |
| Diluted EPS | $0.78 | $0.90 | $2.18 | $2.12 |
| Cash provided by operations | $58.2 million | $63.9 million | $107.5 million | $118.9 million |
For the nine months, capital spending was $20.7 million; investing cash outflow was $190.5 million, including $169.3 million for the Tekra acquisition. Cash and equivalents were $66.3 million at September 30, down from $103.0 million at year-end 2019. Total debt was $632.9 million, up from $542.7 million; unused revolving-credit capacity was $405.4 million. The company reported compliance with debt covenants and third-quarter net leverage of 2.5x, against a stated 4.5x covenant ceiling (with an acquisition-related provision permitting up to 5.0x during 2020). Current assets were $422.4 million and current liabilities $159.3 million.
Material changes versus prior periods
- Q3 sales rose 8.9% year over year. AMS sales increased 10.2%, including Tekra; EP sales increased 7.8%, driven by price/mix and higher cigarette-paper volumes, including customer inventory building.
- Q3 net income and diluted EPS declined despite higher sales and gross profit. Restructuring and related site-closure costs, higher interest expense, and foreign-currency losses contributed. Q3 restructuring and impairment expense was $6.0 million; additional related charges in cost of products sold were $3.2 million.
- Nine-month sales increased 1.4%, but operating profit declined 3.4%. AMS operating profit fell 17.0%, while EP operating profit rose 5.4%. Nine-month net income and diluted EPS increased, helped in part by lower interest expense; the 2019 comparison included non-recurring Brazil tax-assessment interest expense.
- Tekra, acquired March 13, 2020 for approximately $169.3 million net of acquired cash, added $53.7 million of sales from acquisition through September 30. Its purchase-price allocation remained preliminary.
Outlook, commentary, risks, and unusual items
- Management withdrew 2020 financial guidance in May because COVID-19 made the outlook difficult to predict. As of November 4, management still expected the company to be profitable in 2020 and operating cash flow to exceed capital spending; it expected demand pressures to begin easing in Q4 2020 and into 2021. These are expectations, not guarantees.
- Management said transportation-film demand was particularly affected by automotive disruption; medical and filtration markets were viewed as less sensitive, while some industrial, construction, and oil-and-gas demand was weak. All facilities were operating at the reporting date; four sites had temporarily shut down earlier in 2020.
- SWM planned to cease production at its Spotswood, New Jersey facility by December 31, 2020 and transfer production to other facilities. It expected about $2.2 million of related costs in Q4 2020 and about $1.0 million in 2021, plus further costs for ongoing EP optimization initiatives.
- Brazil tax matters remain a contingency. SWM-B had accrued approximately $8.7 million for an ICMS raw-material assessment; outcomes of separate electricity-tax assessments were uncertain, and no loss was accrued for those matters. The filing also describes German patent litigation and potential environmental and other legal exposures.
- Principal risks include COVID-19 effects on demand, operations, customers, and suppliers; tobacco-industry attrition; competition and pricing; commodity and currency fluctuations; acquisition integration; and restructuring execution. Management reported no material COVID-19-related impairment impact on its asset recoverability assessment at quarter-end, while noting uncertainty could cause actual results to differ materially.
Important facts for investors to verify
- Confirm the issuer and security identity: this supplied 2020 filing is for Schweitzer-Mauduit International, Inc. (NYSE: SWM), notwithstanding the request’s Mativ Holdings, Inc. label.
- Track organic AMS demand separately from Tekra’s acquired revenue, particularly transportation films and medical/industrial products.
- Monitor the impact and total cost of the Spotswood closure and other restructuring plans, and whether anticipated savings materialize.
- Assess debt, cash generation, revolving-credit availability, covenant headroom, and the sustainability of dividends amid acquisition-related borrowing.
- Follow COVID-19 demand and supply conditions, Brazil tax proceedings, and the final Tekra purchase accounting.