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, 2017. The company operates Advanced Materials & Structures (AMS), serving specialty industrial markets, and Engineered Papers (EP), primarily serving tobacco customers. The filing identifies the registrant as Schweitzer-Mauduit International, Inc.; the request metadata names Mativ Holdings, Inc., so the entity and filing mapping should be verified.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $257.8m | $209.3m | $746.4m | $641.2m |
| Gross profit / margin | $75.8m / 29.4% | $63.1m / 30.1% | $215.5m / 28.9% | $193.5m / 30.2% |
| Operating profit / margin | $38.5m / 14.9% | $30.8m / 14.7% | $104.6m / 14.0% | $99.9m / 15.6% |
| Net income | $25.8m | $18.7m | $61.8m | $65.8m |
| Diluted EPS | $0.84 | $0.61 | $2.01 | $2.15 |
| Cash provided by operations | $48.4m | $30.8m | $93.3m | $83.0m |
Q3 revenue rose 23.2%, led by $40.7m of Conwed sales and organic AMS growth. Nine-month revenue increased 16.4%, while diluted EPS fell 6.5%. The nine-month gross margin contracted 1.3 percentage points; higher AMS contribution and acquisition-related sales were offset in part by weaker EP results, acquisition amortization and higher interest expense.
Liquidity, debt and cash flow
- At September 30, cash was $100.6m, current assets $433.5m and current liabilities $141.5m. Total debt was $694.0m, including $690.5m long-term debt. Debt rose from $440.4m at year-end 2016, primarily to fund Conwed.
- Nine-month operating cash flow was $93.3m; investing cash use was $309.2m, including $291.7m net acquisition spending and $27.5m capital spending. Financing provided $203.8m, including $244.2m net debt proceeds. Cash declined $6.8m from year-end.
- Unused credit-facility capacity was $267.6m, with an additional $19.8m available under bank overdraft facilities. The company reported compliance with debt covenants. Its credit agreement’s maximum net-debt-to-EBITDA covenant tightens in stages from 4.25 at December 31, 2017 to 3.00 after December 31, 2018.
- The company projected 2017 capital spending and capitalized software costs to exceed $40m. It stated that available liquidity sources were sufficient for anticipated funding needs. A $0.43-per-share dividend payable December 22, 2017 was announced November 1.
Material changes and management commentary
- Conwed was acquired January 20, 2017 for $295.0m cash, plus contingent earn-outs with an estimated acquisition-date fair value of $8.6m. The assets, liabilities and goodwill allocation remained provisional at quarter-end. Conwed contributed $40.7m of Q3 and $106.2m of nine-month sales.
- Q3 AMS sales increased 60.3% to $116.2m, and segment operating profit rose to $15.4m from $8.7m. EP Q3 sales increased 3.5% to $141.6m, but EP gross profit declined $1.0m, primarily reflecting lower reconstituted-tobacco sales and royalties.
- For nine months, EP sales declined 3.1% to $412.4m and segment operating profit fell 13.0% to $90.0m, due chiefly to lower sales, weaker manufacturing efficiencies and reduced overhead absorption. AMS operating profit increased 79.4% to $40.9m, substantially reflecting Conwed.
- Interest expense increased to $20.0m from $12.6m for nine months as debt balances and average borrowing rates rose. The company had a $315m interest-rate swap intended to fix the rate on a portion of debt.
- Q3 other income included a $4.8m gain on asset sales. Nine-month results also included $4.2m of restructuring and impairment expense, including severance and $0.8m of impairment at the Philippines RTL facility. The former Philippines paper mill is reported as discontinued operations.
Outlook, risks and contingencies
The filing gives no clear numerical earnings or revenue guidance. Management’s forward-looking discussion refers to future performance, markets, AMS growth and margins, Conwed accretion, tobacco-related volumes and royalties, and cash flows, but cautions that actual results may differ materially. Key cited risks include tobacco demand and regulation, competition, commodity and energy costs, foreign exchange and interest rates, acquisition integration and realization of synergies, customer and supplier concentration, labor disruption, and environmental and legal matters.
Contingencies include Brazilian tax assessments—approximately $13.2m for the remaining raw-materials assessment and approximately $19.2m across three electricity assessments—and a French labor-court decision of approximately €1.3m involving former employees. The company recorded no liability for these matters, believes its positions have merit, and states outcomes cannot be assured. Environmental compliance and remediation may also create future costs, though management did not expect them to be material based on currently known matters.
Investor verification points
- Confirm that this 2017 Schweitzer-Mauduit filing is the intended filing for the Mativ Holdings request.
- Assess whether AMS organic growth and Conwed’s ongoing contribution can offset EP declines and margin pressure.
- Review debt leverage, covenant headroom and the scheduled tightening of leverage limits, as well as exposure to variable rates and refinancing needs.
- Track working-capital demands, acquisition accounting finalization, contingent earn-outs, and the sustainability of operating cash flow and dividends.
- Monitor the Brazilian tax and French labor proceedings, the Philippines held-for-sale assets, and the company’s stated operating and market risks.