Mativ Holdings, Inc. quarterly report, Q3 FY2015

Filing summary

Identity and period: The supplied filing is Schweitzer-Mauduit International, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2015—not a filing under the name Mativ Holdings, Inc. The company produced specialty papers, reconstituted tobacco and advanced materials. Unless otherwise noted, amounts are in millions of dollars.

Financial performance

MetricThree months ended Sept. 30, 2015Prior-year quarterNine months ended Sept. 30, 2015Prior-year nine months
Net sales$184.4$204.3$554.3$612.6
Gross profit / margin$52.4 / 28.4%$52.9 / 25.9%$158.6 / 28.6%$169.7 / 27.7%
Operating profit / margin$31.8 / 17.2%$25.2 / 12.3%$78.3 / 14.1%$88.8 / 14.5%
Net income$25.8$23.0$68.0$71.2
Diluted EPS$0.85$0.76$2.22$2.32
Cash from operations$24.5$34.4$80.2$91.8
Capital spending$4.9$11.1$14.0$26.2

Balance sheet and liquidity: At September 30, cash was $268.5, total debt $400.1 (including $397.0 long-term debt), and stockholders’ equity $460.0. Cash less total debt implies net debt of about $131.6. The company reported $111.8 of availability under its then-existing credit facility and $28.7 available under overdraft facilities and other lines. $260.3 of cash was held by foreign subsidiaries. Total debt to capital was 46.5%, versus 47.4% at December 31, 2014. The company was in compliance with its existing credit covenants.

Material changes versus prior periods

  • Quarterly sales fell 9.7%; nine-month sales fell 9.5%. Management attributed the declines primarily to unfavorable currency translation—$22.0 in the quarter and $61.2 year to date, mainly from a weaker euro. Tobacco-related segments also faced lower prices and volumes; Reconstituted Tobacco was additionally affected by unfavorable product mix.
  • Advanced Materials & Structures sales rose 26.1% in the quarter and 26.8% year to date, mainly reflecting the December 2014 acquisitions. Its nine-month sales also included $1.5 of organic growth.
  • Quarterly operating profit rose $6.6, led by Paper’s improved utilization, product mix and lower manufacturing costs, and lower unallocated expenses. Year-to-date operating profit fell $10.5: Reconstituted Tobacco declined $14.4, while Advanced Materials & Structures increased $4.7.
  • Year-to-date gross margin improved, but operating margin declined. Net income increased in the quarter but decreased year to date. Year-to-date other income included a $4.3 gain on water rights and a $1.0 reversal of acquisition-related contingent consideration.
  • Other comprehensive loss was $61.7 for the first nine months, largely reflecting foreign currency translation and derivative losses; this reduced equity to $460.0 from $489.0 at year-end 2014.

Outlook, risks and unusual items

  • No numerical full-year revenue or EPS forecast is provided. Management expected tobacco-paper volumes to face ongoing industry attrition and pricing pressure. Based on early customer indications, it expected 2016 Reconstituted Tobacco sales volumes to be at least 10% below originally planned 2015 volumes, with weakness potentially continuing through 2017.
  • Potential offsets include development of reconstituted tobacco for heat-not-burn products, growth in the China joint venture and further adoption of lower-ignition-propensity standards. Timing and commercial outcomes remain uncertain.
  • On October 28, 2015, after quarter-end, the company completed its $280 cash acquisition of Argotec. On that date it also replaced its unsecured $500 revolving facility with secured credit facilities totaling $1 billion: a $650 revolving facility and $350 of term loans. It borrowed $350 under the term loans and $329.5 under the revolver. The acquisition and financing materially changed the company’s post-quarter debt and leverage profile.
  • Year-to-date restructuring and impairment expense was $10.5, including French restructuring costs and write-downs of equipment at the mothballed Philippines RTL site. Assets held for sale included $5.8 at September 30.
  • Brazil tax disputes remained unresolved. The company reported approximately $10 million at issue in the Raw Materials Assessment still under appeal, plus electricity-related assessments of approximately $12 million in total. No liability was recorded; management believed the matters would be resolved in its favor but gave no assurance of outcome. The Supreme Court of Brazil denied the State’s appeal in a separate approximately $16 million assessment on October 30, 2015; further proceedings remained possible.
  • Other key risks cited include declining cigarette consumption, customer pricing and volume pressure, foreign-exchange volatility, commodity and energy costs, oil/gas/mining market weakness, acquisition integration and synergy execution, and litigation over lower-ignition-propensity technology. The company disclosed no material change to previously reported risk factors.

Important facts for investors to verify

  1. Confirm the issuer and filing identity: the text is for Schweitzer-Mauduit International, Inc., despite the request metadata naming Mativ Holdings, Inc.
  2. Assess whether tobacco volume declines, especially the indicated Reconstituted Tobacco weakness, are offset by pricing, cost actions, new products or advanced-materials growth.
  3. Review the pro forma effect of Argotec and the October financing on debt, interest expense, covenant headroom and integration costs; the filing does not provide post-transaction pro forma earnings or leverage.
  4. Track currency effects and the concentration of cash held overseas, alongside working-capital needs and cash generation.
  5. Monitor outcomes and potential financial exposure from the Brazilian tax assessments, Philippines asset disposal and German intellectual-property proceedings.