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, 2016. Its businesses are Engineered Papers (EP), principally serving tobacco markets, and Advanced Materials & Structures (AMS), serving filtration, surface protection, medical and industrial markets. AMS results include Argotec, acquired in October 2015.
Filing identity: The filing names Schweitzer-Mauduit International, Inc., while the request metadata names Mativ Holdings, Inc. Verify that this is the intended filing.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $217.3m | $181.9m | $431.9m | $369.9m |
| Gross profit / margin | $66.9m / 30.8% | $54.8m / 30.1% | $130.4m / 30.2% | $106.2m / 28.7% |
| Operating profit / margin | $37.5m / 17.3% | $24.0m / 13.2% | $69.1m / 16.0% | $46.5m / 12.6% |
| Net income | $26.0m | $23.4m | $47.1m | $42.2m |
| Diluted EPS | $0.85 | $0.76 | $1.54 | $1.37 |
| Cash provided by operations | $34.6m | $44.5m | $52.2m | $55.7m |
Q2 sales rose 19.5%; the six-month increase was 16.8%. Acquired Argotec contributed $31.9m of Q2 and $64.4m of six-month incremental revenue. Q2 EP sales increased 2.8%, while AMS sales increased 77.3%, largely reflecting Argotec. For the first half, EP sales were essentially flat and AMS sales increased 76.3%.
Gross and operating margins improved year over year. Management attributed growth to Argotec, favorable EP volume/product mix/pricing and operational improvements, and lower restructuring costs. AMS faced planned reductions in low-margin industrial sales, higher resin costs and unfavorable fixed-cost absorption. Six-month income from equity affiliates declined to $0.6m from $4.2m.
Cash, debt and liquidity
- Six-month operating cash flow was $52.2m, down from $55.7m, as working capital used $18.3m versus $11.1m in the prior-year period.
- Cash and equivalents were $143.8m at June 30, 2016, down from $186.5m at year-end 2015; $128.5m was held by foreign subsidiaries.
- Total debt was $518.3m, versus $580.2m at December 31, 2015. Long-term debt on the balance sheet was $506.8m. The total debt-to-capital ratio declined to 49.7% from 55.0%.
- Unused capacity under the credit agreement was $450.6m, with an additional $27.6m available under bank overdraft facilities. The company reported compliance with its covenants at quarter-end. Its maximum net-debt-to-EBITDA covenant tightens from 3.50 to 3.00 after September 30, 2016; minimum interest coverage is 3.00.
- Six-month cash uses included $9.7m of capital spending, $24.4m of dividends and $64.8m of net debt repayments. Management projected approximately $30m of 2016 capital spending.
Changes, outlook and risks
- Interest expense increased to $8.7m for the first half from $3.6m, reflecting higher debt and a higher effective rate following the 2015 credit agreement amendment. The effective rate was 2.31% versus 1.42%.
- The effective tax rate rose to 27.0% for the first half from 23.5%, primarily due to a greater share of earnings in higher-tax jurisdictions and fewer certain foreign tax credits.
- Management expected 2016 profits to decline versus prior years despite Argotec contributions and planned operational improvements. Expected offsets included lower RTL volumes at the French mill, nonrecurrence of certain 2015 tax benefits, adverse year-over-year currency comparisons and reversal of a customer-driven LIP inventory build that benefited late 2015 and early 2016.
- Management expected non-tobacco revenue to reach the 40%+ range in 2016, compared with approximately 30% in 2015, reflecting a full year of Argotec revenue, expected AMS organic growth and anticipated RTL volume declines of more than 10% year over year. These are expectations, not guarantees.
- Priorities included integrating Argotec, improving AMS margins through operational and product-line measures, continuing EP capacity/cost alignment, and evaluating acquisitions and internal growth opportunities. Management anticipated multi-year AMS margin expansion.
- Key uncertainties include tobacco consumption and regulation, customer demand and inventory patterns, resin and other input costs, currency and interest-rate movements, acquisition integration, and weakness in oil, gas and mining-related filtration demand. CTM temporarily halted production in April to comply with new Chinese emissions standards and resumed in June; management did not expect a material full-year impact.
- Brazilian tax disputes remain unresolved: a roughly $13m raw-material ICMS assessment and electricity-related assessments of approximately $5m, $8.5m and $4m. SWM believed it would prevail and recorded no liability, but gave no assurance of outcome. Environmental and other legal matters were also disclosed.
- Restructuring and impairment expense was $2.7m for the first half, versus $9.2m, including severance and $0.5m of equipment impairment. Argotec purchase-price allocation remained provisional. The company also disclosed no significant off-balance-sheet arrangements and no material changes to previously reported risk factors.
Important facts for investors to verify
- Confirm the intended issuer and period: this filing is for Schweitzer-Mauduit International, Inc., not an issuer named Mativ Holdings, Inc.
- Assess how much reported growth and profit improvement is attributable to Argotec, and whether AMS can deliver the anticipated integration benefits and margin expansion.
- Track the 2016 profit-decline expectation, RTL volume trends, LIP inventory normalization, and the projected non-tobacco revenue mix.
- Monitor working-capital cash use, foreign-held cash, debt reduction and compliance with the tighter leverage covenant.
- Follow the Brazilian tax proceedings and the status of provisional Argotec acquisition valuations.