Business context and reporting period
Schweitzer-Mauduit International, Inc. (NYSE: SWM; now associated with the Mativ name) filed this unaudited Form 10-Q for the quarter ended September 30, 2021. It operates in Advanced Materials & Structures (AMS) and Engineered Papers (EP), serving industrial, healthcare, transportation, filtration, construction and tobacco-related markets. Comparisons are with the three and nine months ended September 30, 2020, unless noted.
The results include Scapa from its April 15, 2021 acquisition. Scapa contributed $107.1 million of Q3 sales and $202.2 million for the post-acquisition period through September 30.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $383.6M | $279.3M | $1,049.6M | $795.0M |
| Gross profit / margin | $85.2M / 22.2% | $80.2M / 28.7% | $254.1M / 24.2% | $228.8M / 28.8% |
| Operating profit / margin | $23.0M / 6.0% | $37.0M / 13.2% | $72.4M / 6.9% | $105.5M / 13.3% |
| Net income | $12.2M | $24.5M | $35.6M | $68.5M |
| Diluted EPS | $0.38 | $0.78 | $1.12 | $2.18 |
| Cash from operations | $7.7M | $58.2M | $27.5M | $107.5M |
Sales growth reflected Scapa, organic AMS growth and currency effects; excluding Scapa, Q3 volume, product mix and pricing reduced sales by $5.5 million. EP sales fell 12.0% in Q3 and 6.5% year to date, largely due to lower tobacco-paper volumes and unfavorable price/mix. Cost inflation and supply constraints reduced margins despite higher sales.
At September 30, 2021, cash was $73.6M and total debt was $1,306.2M, versus $54.7M and $593.3M at December 31, 2020. Debt included $414.0M drawn on the revolving facility, $194.0M of Term Loan A, $349.1M of Term Loan B and $344.6M of senior notes. The company reported $81.2M of undrawn revolver capacity, $6.2M of bank overdraft availability and $381.2M of net working capital. Net leverage under the credit agreement was 4.8x, against a 5.5x maximum covenant; the company reported covenant compliance. Nine-month investing cash outflow was $658.3M, including the Scapa acquisition; financing cash inflow was $651.0M. Dividends paid were $41.5M.
Material changes versus the prior comparable period
- Q3 sales rose 37.3%, but operating profit fell 37.8% and net income fell about 50%; nine-month sales rose 32.0%, while operating profit declined 31.4% and net income declined about 48%.
- AMS benefited from Scapa and organic growth. Its Q3 operating profit fell to $15.9M from $18.5M, reflecting purchase-accounting costs and higher input, energy and freight costs. Nine-month AMS operating profit rose to $56.1M from $45.3M, but margin contracted to 8.3% from 11.5%.
- EP operating profit fell to $24.0M from $28.2M in Q3 and to $78.1M from $93.3M year to date. Lower high-margin LIP volumes, unfavorable mix, and higher pulp, energy and freight costs were key factors.
- Interest expense increased to $15.3M from $7.8M in Q3 and to $31.3M from $22.8M year to date, primarily because of higher debt following the Scapa acquisition. Nine-month operating cash flow fell substantially, with working capital using $71.1M versus $19.0M in the prior-year period.
Outlook, management commentary, risks and unusual items
- Management said liquidity sources were sufficient for anticipated needs and the current growth plan, and expected covenant compliance based on current borrowing and forecast results. The filing provides no specific earnings or revenue guidance.
- Management reported facilities remained operational amid COVID-19, but warned that inflation and supply-chain strain were weighing on profitability. Tight labor markets constrained production; specialty-resin shortages limited transportation-film output.
- The company planned to close its Winkler, Manitoba facility by December 31, 2021, with approximately $0.5M of additional related costs expected in 2021. It also expected approximately $0.6M of further Spotswood closure costs. EP cost-optimization work was expected to continue through 2022.
- Scapa purchase-price allocation remained preliminary and could be revised materially during the measurement period. The filing reported $19.0M of Scapa-related transaction and integration costs for the first nine months and higher acquisition-related debt and amortization.
- Brazil electricity-tax assessments remained unresolved; the company said it could not determine the outcome and recorded no loss accrual. The filing also discusses German patent litigation and environmental and other legal exposures; no material developments were reported for other proceedings.
- Principal stated risks include further commodity and labor-cost increases, supply disruptions, customer demand and tobacco-market changes, integration and realization of acquisition benefits, foreign exchange and interest-rate exposure, COVID-19 effects, and litigation and regulatory outcomes.
Important facts for investors to verify
- Whether price increases and operating improvements can offset continued resin, pulp, energy, freight and labor inflation, and whether supply constraints ease.
- Scapa integration progress, realized synergies, purchase-accounting impacts, and the final acquisition allocation.
- Debt reduction, interest expense, working-capital trends, revolver availability and covenant headroom as leverage rises following the acquisition.
- Whether EP tobacco-paper and LIP volumes recover, and the costs and savings associated with the Winkler and Spotswood closures.
- Developments in the Brazil tax assessments and other litigation; the filing states no Brazil assessment loss was accrued.