Mativ Holdings, Inc. quarterly report, Q1 FY2012

Business context and reporting period

This is Schweitzer-Mauduit International, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2012; the filing does not identify Mativ Holdings, Inc. as the issuer. SWM manufactured specialty papers and reconstituted tobacco products, with reportable segments of Paper and Reconstituted Tobacco.

Financial results and liquidity

Revenue rose 11.8%, driven mainly by higher sales of higher-value products and $3.9 million of royalty income; currency reduced sales by $4.2 million and price/mix by $1.0 million. Overall unit volume declined 2%, as Paper volume fell 5% and Reconstituted Tobacco volume rose 13%. Gross margin improved, but operating profit fell 7.6%, largely due to restructuring and impairment charges. Diluted EPS was nearly flat as average diluted shares fell to 16.0 million from 17.5 million.

Q1 restructuring and impairment expense was $18.7 million, including a $16.9 million noncash impairment of Spotswood mill assets. Cash from operations improved by $48.6 million year over year, reflecting improved working capital and profitability before the noncash impairment. Investing used $16.5 million, including $7.8 million of capital spending and a $4.5 million investment in a China joint venture. Financing used $23.3 million, including $21.6 million of share repurchases and $2.4 million of dividends.

At March 31, cash was $85.3 million, total debt $147.5 million, and total stockholders’ equity $482.1 million. The company reported $92.6 million available under its revolving credit agreement and $43.4 million available under overdraft facilities and other lines. It was in compliance with credit covenants. Of cash on hand, $83.7 million was held by foreign subsidiaries; management said domestic liquidity did not require repatriation of those funds.

Material changes versus prior period

• Paper sales increased to $142.2 million from $125.1 million; segment operating profit declined to $4.3 million from $10.2 million, primarily due to higher impairment and restructuring charges.
• Reconstituted Tobacco sales increased to $59.9 million from $55.6 million, and operating profit rose to $24.7 million from $20.0 million, supported by volume and manufacturing-cost improvements.
• The effective tax rate was 40.8%, versus 41.0%. A valuation allowance was recorded for Philippine tax-loss carryforwards; no tax benefits were recognized for certain Philippine losses.
• Cash and cash equivalents increased from $76.5 million at December 31, 2011. Total debt increased from $146.0 million to $147.5 million.

Outlook, commentary, risks and unusual items

Management projected approximately $35 million of capital spending for 2012 and $30–$40 million of other cash needs, including support for the China RTL joint venture and dividends. It anticipated $25–$30 million of additional borrowing in Q2 and expected to remain covenant-compliant. The company expected to maintain its quarterly dividend of $0.15 per share and cited a $50 million 2012 repurchase authorization; by April 27, it had repurchased 672,727 shares for $45.6 million.

Management saw potential growth from further adoption of lower ignition propensity (LIP) cigarette regulations and demand for reconstituted tobacco in Asia, while citing global economic uncertainty, declining cigarette consumption in Western markets, foreign-exchange volatility, and inflation as challenges. Other significant risks include customer concentration, competitive pricing and excess capacity, tobacco-product regulation, and potential impairment of the suspended Philippine RTL facility, whose assets had a carrying value of $73.5 million.

SWM amended its banded-paper supply agreement with Philip Morris-USA, removing its obligation to stand ready to produce commercial quantities without firm orders; Philip Morris-USA also released prior invoice claims. The change triggered the Spotswood impairment. A Brazilian ICMS tax assessment totaled approximately $44 million, with about $20 million potentially covered by an indemnity. SWM was contesting the assessment, believed it would prevail, and recorded no liability. Patent proceedings concerning LIP products remained pending; the filing described an adverse initial ITC decision on certain patent claims and anticipated a further ruling in early June 2012.

Important facts for investors to verify

• Verify the issuer identity: the supplied filing is for Schweitzer-Mauduit International, Inc., not Mativ Holdings, Inc.
• Assess the valuation assumptions behind the $16.9 million Spotswood impairment and the possible effect of reduced banded-paper supply obligations.
• Monitor the approximately $44 million Brazilian tax assessment, the indemnity coverage, and the litigation outcome; no liability was recorded.
• Review liquidity and refinancing needs in light of foreign-held cash, planned Q2 borrowings, capital and joint-venture spending, and share repurchases.
• Track the suspended Philippine RTL facility’s $73.5 million carrying value, potential impairment, and continuing losses.
• Follow LIP patent proceedings and customer demand, particularly given customer concentration and reliance on LIP paper and reconstituted tobacco.