Filing summary
Period and entity: This is an unaudited Form 10-Q for the three months ended March 31, 2016, filed by Schweitzer-Mauduit International, Inc. (SWM). The request metadata names Mativ Holdings, Inc.; that does not match the registrant named in this filing.
SWM produced engineered papers, including tobacco-related products, and advanced materials for filtration, surface protection, medical and industrial markets. Its Advanced Materials & Structures (AMS) segment included Argotec, acquired in October 2015.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $214.6 million | $188.0 million |
| Gross profit / margin | $63.5 million / 29.6% | $51.4 million / 27.3% |
| Operating profit / margin | $31.6 million / 14.7% | $22.5 million / 12.0% |
| Net income | $21.1 million | $18.8 million |
| Diluted earnings per share | $0.69 | $0.61 |
| Cash from operations | $17.6 million | $11.2 million |
| Capital spending | $4.5 million | $5.2 million |
Net sales rose 14.1%. Argotec contributed $32.5 million of incremental sales; this was partly offset by $6.3 million of unfavorable currency effects. Excluding Argotec and currency effects, AMS sales declined 4.0%; EP sales increased 1.4% on a constant-currency basis. Gross margin improved, while net margin was 9.8%, versus 10.0% in the prior-year quarter.
Operating cash flow increased by $6.4 million, reflecting higher net income and a smaller working-capital cash outflow ($13.9 million versus $19.9 million). Cash and equivalents were $200.2 million at quarter-end, up from $186.5 million at year-end 2015. Total debt was $590.6 million, compared with $580.2 million at year-end; total debt less cash was approximately $390.4 million. The company reported $379.6 million of unused capacity under its credit agreement and compliance with its covenants. The total debt-to-capital ratio was 53.7%.
Quarterly interest expense was $4.6 million, up from $1.7 million, primarily due to acquisition-related borrowings and higher effective borrowing rates. The effective tax rate increased to 27.6% from 24.0%. Cash dividends paid were $12.2 million; a $0.40-per-share dividend was announced for payment in June 2016.
Material changes and notable items
- EP operating profit increased to $35.5 million from $27.8 million, helped by product mix and pricing, lower restructuring costs and lower overhead spending. Currency headwinds and unfavorable fixed-cost absorption partly offset those gains.
- AMS operating profit increased to $5.2 million from $2.6 million, with Argotec contributing $5.1 million of incremental operating profit. Planned reductions in low-margin sales, order timing and weaker oil, gas and mining-related demand were offsets.
- Other income included a $1.8 million gain from selling water rights. Equity affiliates recorded a $0.1 million loss, compared with $1.4 million of income a year earlier, principally due to lower CTS sales volumes.
- Restructuring and impairment expense was $1.8 million, down from $4.0 million. Q1 2016 included severance costs and a $0.5 million impairment of equipment at the Poland facility.
- Comprehensive income was $46.5 million, compared with a $40.6 million comprehensive loss in Q1 2015, largely reflecting the change in foreign-currency translation and derivative-related other comprehensive income.
Outlook, risks and contingencies
Management expected 2016 profit to decline. Expected Argotec contribution, internal improvements and growth from the Chinese RTL joint venture were expected to be more than offset by lower French-mill RTL volumes, the non-recurrence of certain 2015 tax benefits, unfavorable year-over-year currency comparisons and reversal of a customer inventory build that benefited late 2015 and Q1 2016. Management anticipated RTL volume declines of more than 10% and expected non-tobacco products to reach more than 40% of 2016 sales.
Management cited continued long-term growth potential in water filtration and expected growth from Argotec surface-protection products, while noting weakness in filtration sales exposed to oil, gas and mining. CTM temporarily suspended production in April 2016 to comply with new emissions standards; management did not expect a material adverse impact on 2016 results. Projected 2016 capital spending was approximately $30 million.
Brazilian tax disputes included a pending Raw Materials Assessment of approximately $12 million and electricity assessments of approximately $4.4 million, $7.6 million and $3.4 million. SWM said it believed the remaining matters would be resolved in its favor and recorded no liability, but gave no assurance of outcome. The company also identified environmental, litigation, foreign-exchange, interest-rate, acquisition-integration, customer-demand, tobacco-industry and regulatory risks. It reported no material change to the risk factors in its 2015 Form 10-K.
Important facts for investors to verify
- Confirm the entity and period: the filing is for Schweitzer-Mauduit International, Inc. for Q1 2016, not an entity identified in the request metadata as Mativ Holdings, Inc.
- Assess how much reported growth and profit improvement depended on Argotec, and whether AMS organic demand and margins recovered from oil, gas and mining weakness and order-timing effects.
- Track the expected RTL volume decline, inventory normalization, foreign-exchange headwinds and the stated expectation of lower 2016 profit.
- Review debt levels, interest expense, covenant headroom and the geographic availability of cash: $189.4 million of the $200.2 million cash balance was held by foreign subsidiaries.
- Monitor the Brazilian assessments and CTM’s production suspension; management’s favorable expectations are not assurances of resolution or financial impact.