Business context and reporting period
This is the unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The filing identifies the registrant as Schweitzer-Mauduit International, Inc. (SWM; NYSE: SWM), a manufacturer of engineered materials and papers operating through Advanced Materials & Structures (AMS) and Engineered Papers (EP). This differs from the “Mativ Holdings, Inc.” company label in the request metadata.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $254.2 million | $269.9 million | $515.7 million | $527.9 million |
| Gross profit / margin | $74.3 million / 29.2% | $79.0 million / 29.3% | $148.6 million / 28.8% | $146.9 million / 27.8% |
| Operating profit / margin | $34.4 million / 13.5% | $44.2 million / 16.4% | $68.5 million / 13.3% | $74.6 million / 14.1% |
| Net income | $21.5 million | $20.5 million | $44.0 million | $37.9 million |
| Diluted EPS | $0.68 | $0.66 | $1.40 | $1.22 |
- Q2 sales fell 5.8% year over year; AMS rose 4.8% including Tekra, while EP declined 15.2%. Excluding Tekra, AMS sales declined 14.9%.
- For the first half, sales fell 2.3%. AMS increased 3.4% including Tekra, while EP declined 7.4%.
- Q2 operating profit declined 22.2%; first-half operating profit declined 8.2%. First-half gross profit rose despite lower sales, supported by lower input costs and currency effects.
- Operating cash flow was $49.3 million for the first half, versus $55.0 million a year earlier. Capital spending was $14.9 million. Investing cash outflow was $183.8 million, including the $169.3 million net Tekra acquisition payment.
- At June 30, cash was $63.9 million and total debt was $669.0 million, up from $542.7 million at year-end 2019. Unused revolver capacity was $368.5 million; net leverage under the credit agreement was 2.8x. The company reported compliance with debt covenants.
- Current assets were $404.4 million and current liabilities $136.7 million. The company declared quarterly dividends of $0.44 per share; approximately $27 million of 2020 dividends had been paid through June 30.
Material changes and unusual items
- SWM acquired Tekra, a high-performance films converter, on March 13, 2020 for $169.3 million net of acquired cash. The purchase was funded with revolver borrowings. Preliminary purchase accounting included $61.2 million of goodwill and $81.8 million of identifiable intangible assets; the allocation remained subject to finalization.
- COVID-19-related demand weakness, customer destocking, and temporary site closures affected results. Transportation films and construction-related demand were particularly pressured; medical and industrial demand, including facemask materials, partly offset declines.
- Q2 net income increased despite lower operating profit partly because 2019 included nonrecurring Brazil tax-assessment charges: $7.8 million of related interest expense and $2.1 million included in other expense. First-half comparisons also benefited from these prior-year items.
- Restructuring expense was $1.6 million in Q2 and $1.7 million for the first half, primarily employee severance across facilities in the U.S., Brazil, France, and Poland.
Outlook, risks, and contingencies
- Management withdrew 2020 financial guidance because the pandemic’s duration and effects were difficult to predict. It nevertheless expected the company to remain profitable and operating cash flow to exceed capital spending in 2020.
- Management said liquidity appeared sufficient under likely scenarios, including to fund operations and financial obligations. It estimated approximately $55 million of annual 2020 cash dividends, with about $27 million paid by June 30.
- Management described tobacco, medical, and filtration demand as relatively resilient, while warning of continued near-term pressure in transportation and uncertainty in industrial and construction-related markets. All facilities were operational at the filing date, following temporary shutdowns at four sites earlier in the year.
- Brazil tax disputes remain material uncertainties. SWM had accrued approximately $8.9 million for one ICMS assessment; it had not accrued losses for the electricity assessments because outcomes could not be determined. Interest and penalties may continue to accrue on the accrued judgment.
- Other disclosed risks include pandemic-related operating and customer disruption, acquisition integration and realization of expected benefits, debt and interest-rate exposure, foreign exchange, litigation, environmental matters, and customer or supplier concentration and availability. The company reported no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm that the intended issuer is SWM: the filing cover names Schweitzer-Mauduit International, Inc., whereas the request metadata says Mativ Holdings, Inc.
- Track post-acquisition AMS performance and Tekra integration, including final purchase accounting and the effects of acquired amortization and debt.
- Monitor COVID-19 demand, especially transportation and EP volumes, and compare operating cash generation with capital spending and dividends.
- Review debt, revolver availability, covenant headroom, and the status and potential cost of the Brazil tax disputes.