Business context and reporting period
Schweitzer-Mauduit International, Inc. (SWM), the registrant named in this 10-Q, reported the quarter and six months ended June 30, 2015. The filing describes a diversified producer of specialty papers, reconstituted tobacco products and filtration materials. The company identified in the request as Mativ Holdings, Inc. is not the registrant named in this historical filing.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2014 periods.
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Net sales | $181.9 | $203.6 | $369.9 | $408.3 |
| Gross profit (margin) | $54.8 (30.1%) | $59.2 (29.1%) | $106.2 (28.7%) | $116.8 (28.6%) |
| Operating profit (margin) | $24.0 (13.2%) | $30.5 (15.0%) | $46.5 (12.6%) | $63.6 (15.6%) |
| Net income | $23.4 | $25.0 | $42.2 | $48.2 |
| Diluted EPS | $0.76 | $0.81 | $1.37 | $1.56 |
| Cash from operations | $44.5 | $39.1 | $55.7 | $57.4 |
| Capital spending | $3.9 | $7.0 | $9.1 | $15.1 |
Balance sheet and liquidity
- At June 30, cash and equivalents were $257.7, total debt was $398.1, and net debt was approximately $140.4. Debt declined from $440.1 at December 31, 2014.
- Current assets were $494.2 and current liabilities $119.6. Revolver availability was $113.9; additional availability under overdraft facilities and lines of credit was $28.6.
- Cash declined $32.6 during H1, including a $20.9 adverse exchange-rate effect. $252.9 of the reported cash was held by foreign subsidiaries.
- H1 financing used $59.8, including $34.3 of net debt repayments and $23.1 of dividends. The company reported compliance with its credit-facility covenants; total debt-to-capital was 46.2%.
Material changes versus prior comparable periods
- Q2 sales fell 10.7%; H1 sales fell 9.4%. Management attributed the declines principally to unfavorable foreign-currency translation, mainly the weaker euro: $21.8 in Q2 and $39.6 in H1.
- Paper and Reconstituted Tobacco sales and profitability were pressured by lower prices, volumes and/or unfavorable product mix. Paper H1 profit also reflected costs and inefficiencies from restarting a rebuilt French production line.
- Filtration sales increased 26.5% in Q2 and 27.1% in H1, supported mainly by the December 2014 acquisitions; organic business also grew in H1. Acquired businesses contributed $8.1 of Q2 sales and $15.2 of H1 sales.
- Operating profit declined 21.3% in Q2 and 26.9% in H1. H1 net income fell $6.0, while diluted EPS declined from $1.56 to $1.37.
- Restructuring and impairment expense increased to $5.2 in Q2 and $9.2 in H1, versus $3.2 and $3.3, respectively. Items included French severance costs and a write-down of mothballed Philippines RTL equipment.
- Income from equity affiliates rose to $2.8 in Q2 and $4.2 in H1, primarily reflecting the start-up of the CTS China joint venture in late 2014. Other income included a $4.3 gain on the sale of water rights; an acquisition-related contingent payment accrual was also reversed.
- H1 comprehensive income was a loss of $1.0, including a $43.2 other comprehensive loss, substantially reflecting foreign currency translation and derivative movements.
Outlook, risks and contingencies
- Management expected 2015 capital spending of approximately $25–$30. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Management forecast approximately a 10% decline in Reconstituted Tobacco segment volumes in 2016 versus planned 2015 volumes, with weakness potentially continuing through 2017, citing blend reformulations and availability of lower-priced substitute tobacco leaf. Heat-not-burn product development and greater demand from the China joint venture were described as potential offsets.
- Management cited ongoing cigarette-consumption declines, tobacco pricing pressure, foreign-exchange volatility, commodity and labor costs, and oil, gas and mining-sector weakness affecting some filtration customers. It planned continued cost reduction and diversification efforts; timing and results of potential LIP regulation and growth initiatives remain uncertain.
- Brazilian tax disputes included Raw Materials Assessments of approximately $33, of which approximately $15 was covered by an indemnification, and electricity-related assessments of approximately $16 in aggregate. The company believed the disputes would be resolved in its favor, recorded no liability, and stated that outcomes could not be assured.
- Other disclosed exposures include environmental and ordinary-course legal matters, acquisition integration and valuation uncertainties, and foreign-exchange and variable-rate debt risks. The filing reported no material change in previously disclosed risk factors.
- On August 5, 2015, SWM announced a $0.38-per-share dividend payable September 25, 2015 to holders of record August 28, 2015.
Important facts for investors to verify
- Confirm the historical registrant and its relationship to Mativ Holdings, Inc.; this filing is in the name of Schweitzer-Mauduit International, Inc.
- Assess how much of the sales and profit pressure reflects currency, and whether Paper and Reconstituted Tobacco pricing, volume and mix trends persist.
- Evaluate the sustainability of Filtration growth apart from acquired revenue, including exposure to oil, gas and mining markets.
- Track the planned Reconstituted Tobacco volume decline, restructuring charges, and the disposition and remaining carrying value of Philippines assets.
- Monitor cash availability and location, debt repayment capacity, covenant headroom, and the outcome and potential financial exposure of Brazilian tax proceedings.