Business context and reporting period
Schweitzer-Mauduit International, Inc. (SWM) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company operates Advanced Materials & Structures (AMS), serving specialty industrial markets, and Engineered Papers (EP), primarily serving tobacco-related markets. The filing identifies the registrant as Schweitzer-Mauduit International, Inc.; this differs from the request metadata naming Mativ Holdings, Inc.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $269.9m | $270.4m | $527.9m | $532.3m |
| Gross profit / margin | $79.0m / 29.3% | $77.4m / 28.6% | $146.9m / 27.8% | $149.4m / 28.1% |
| Operating profit / margin | $44.2m / 16.4% | $42.1m / 15.6% | $74.6m / 14.1% | $77.1m / 14.5% |
| Net income | $20.5m | $25.8m | $37.9m | $46.3m |
| Diluted EPS | $0.66 | $0.83 | $1.22 | $1.50 |
| Interest expense | $15.1m | $6.6m | $22.9m | $12.8m |
For the six months, operating cash flow was $55.0m, investing cash outflow $17.2m, and financing cash outflow $43.5m; cash declined $6.0m to $87.8m. The MD&A summary reports Q2 operating cash flow of $42.0m versus $34.1m a year earlier.
At June 30, 2019, total debt was $606.6m and cash was $87.8m. Current assets were $441.7m and current liabilities $142.1m. Unused capacity under the credit agreement was $431.6m; the company reported covenant compliance. Total debt-to-capital was 51.4%.
Material changes versus prior comparable periods
- Q2 sales were nearly unchanged, while six-month sales declined 0.8%. Currency headwinds offset improved volume, mix and pricing.
- AMS sales and operating profit grew: Q2 sales rose 2.1% and operating profit rose 20.0%; six-month sales increased 3.3% and operating profit increased 27.9%. Management cited transportation, filtration and medical demand, lower resin costs, and lower fixed costs following a late-2018 site closure.
- EP sales fell 2.3% in Q2 and 4.1% for the half year. Six-month operating profit declined 8.9%, reflecting currency effects, higher input costs and lower volumes, partly offset by improved pricing and product mix.
- Net income and EPS fell in both comparisons, principally due to higher interest expense and the Brazilian tax assessment. Six-month operating profit also declined.
Outlook, commentary, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said available cash, operating cash generation and credit facilities should meet anticipated needs for the foreseeable future.
- The company recorded $12.0m of additional Q2 expense related to a Brazilian ICMS tax assessment. It reported a total liability of $12.5m at quarter-end; interest and penalties may continue to accrue. The related assessment also contributed $7.8m of reported interest expense. The filing describes possible defenses and says payment is not required pending clarification from the court.
- Other Brazilian electricity-tax assessments totaling substantial amounts remain contested; no liability was recorded because management believes they will ultimately be resolved in its favor. Outcomes are uncertain.
- Debt includes $350m principal amount of 6.875% senior notes due 2026 and borrowings under revolving and term-loan facilities. The weighted-average effective interest rate on debt facilities was approximately 4.43% for the first half, versus 3.51% in 2018.
- Other stated risks include tobacco-market demand and customer inventory changes, commodity and energy costs, foreign exchange and interest rates, competition, regulation, litigation, and execution of diversification and growth initiatives. Management reported no material change in previously disclosed risk factors.
- SWM adopted the new lease standard on January 1, 2019, recognizing approximately $25m of right-of-use assets and $27m of lease liabilities at adoption; income-statement impact was not material. A $0.4m restructuring charge was recorded in the first half.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Schweitzer-Mauduit International, Inc. (ticker SWM), not an entity named Mativ Holdings, Inc.
- Track the Brazilian ICMS case, the accrued liability, continued interest and penalties, and the status of the company’s requested court clarification.
- Review EP volume, input-cost and currency trends against continued AMS growth and the resulting segment profit mix.
- Assess debt service and refinancing exposure, interest costs, covenant headroom, and the sustainability of dividends given cash generation and capital needs.
- Reconcile the MD&A’s Q2 operating cash flow figure with the six-month cash-flow statement and monitor working-capital cash use.