Mativ Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial results below are generally for continuing operations; Engineered Papers (EP) is presented as a discontinued operation. Amounts are in millions unless stated otherwise. The 2022 comparisons are affected by the July 2022 Neenah merger and EP’s reclassification.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $498.2 | $551.5 | $1,573.7 | $1,112.5 |
| Gross profit | $86.7 | $96.1 | $269.9 | $218.6 |
| Gross margin | 17.4% | 17.4% | 17.2% | 19.6% |
| Operating loss | $(419.9) | $(31.6) | $(411.7) | $(42.3) |
| Continuing-operations net loss | $(464.3) | $(34.0) | $(494.1) | $(66.4) |
| Diluted loss per share, continuing operations | $(8.50) | $(0.65) | $(9.06) | $(1.74) |
| Interest expense | $16.8 | $14.9 | $48.8 | $43.7 |
- Q3 sales fell 9.7% year over year: ATM sales declined 7.6% and FBS sales declined 16.7%. Management cited weaker volumes, customer caution and destocking; higher pricing and favorable currency partly offset the decline.
- Q3 gross profit decreased 9.8%, while gross margin held at 17.4%. Lower volumes, manufacturing inefficiencies and fixed-cost absorption weighed on profit.
- The $401.0 goodwill impairment drove most of the increase in operating loss. It was a non-cash charge in ATM, following lower fair-value estimates amid macroeconomic and competitive pressures, softer volume expectations, a reduced share price and revised overhead allocation.
- Nine-month sales increased 41.5%, primarily reflecting the inclusion of Neenah operations. Gross margin fell 2.4 percentage points; management cited lower volumes and manufacturing inefficiencies despite price increases that more than offset higher input costs.
Cash flow, debt and liquidity
- Continuing-operations operating cash flow was $37.8 for the first nine months, versus a $44.6 use in 2022. Continuing-operations capital spending was $49.4, versus $27.1.
- At September 30, cash was $84.7 and total debt, net of issuance costs, was $1,738.5. Long-term debt was $1,704.0; current debt was $34.5. The filing reports $329.1 of unused revolving capacity and net leverage of 4.2x.
- The maximum net-debt-to-EBITDA covenant was 4.75x for the quarter ended September 30; it is scheduled to tighten to 4.50x for periods ending December 31, 2023 if EP has closed, and otherwise by March 31, 2024. The company reported compliance with its debt covenants at quarter-end.
- Net working capital was $546.3, compared with $538.5 at December 31, 2022. The filing states management believes available liquidity is sufficient for anticipated needs. Debt carries meaningful interest-rate exposure; weighted average effective debt interest rate was 5.97% for the nine months, versus 4.90% in 2022.
Outlook, material developments and risks
- EP sale: Mativ accepted and signed the purchase agreement on October 4, 2023 for a $620.0 cash sale, subject to customary adjustments and closing conditions, including regulatory approvals. Closing was expected in Q4 2023. The company expected to use approximately $575.0 of proceeds to repay debt and expected to record a gain and release certain deferred-tax valuation allowances upon closing.
- Restructuring and impairments: Two ATM facilities are planned to close in 2024 and 2025; approximately $3.1 of additional ATM restructuring costs were expected in the remainder of 2023. FBS recorded a $9.5 impairment of long-lived assets at its Eerbeek, Netherlands facility following changes in market conditions and its outlook for pricing and volume recovery.
- Tax and unusual items: The effective tax rate on continuing operations was negative 6.2% for Q3 and negative 6.5% for the first nine months, primarily reflecting valuation-allowance expense of $32.0 and $40.0, respectively. A $4.9 loss from a German patent-related settlement was recognized in Q2 and paid in Q3. The filing also cites $17.3 of current-quarter costs related to the merger, planned EP divestiture and financing fees.
- Demand and execution: Management described uncertain economic conditions, customer inventory reductions and seasonal softness, particularly in Europe. It also cited labor turnover and production inefficiencies at several facilities. Healthcare was a Q3 ATM strength, with double-digit growth.
- Contingencies and other risks: Mativ reported Brazilian tax assessments for which no loss was accrued because the outcome could not be determined. Environmental, legal, cybersecurity, supply-chain, labor, foreign-exchange and interest-rate risks remain. The filing provides no formal earnings or revenue guidance.
- The company declared a $0.10-per-share dividend payable December 15, 2023. Disclosure controls were reported effective at September 30, 2023, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the EP transaction closed on schedule, final proceeds and adjustments, debt repayment amount, gain on sale and tax-allowance release.
- Quarterly volume, pricing, customer destocking and manufacturing-efficiency trends by segment, especially at FBS and the Eerbeek facility.
- Goodwill and other asset valuations, including the assumptions behind the $401.0 impairment and any further impairment indicators.
- Debt reduction, borrowing costs, revolving availability and covenant headroom as the leverage limit tightens.
- Cash conversion and capital spending needs; distinguish continuing-operations cash and balance-sheet amounts from discontinued-operation balances.