Business context and reporting period
This is Schweitzer-Mauduit International, Inc. (SWM), not Mativ Holdings, Inc., Form 10-Q for the quarter ended June 30, 2013. SWM makes specialty papers and reconstituted tobacco products, with reportable segments in Paper and Reconstituted Tobacco. The filing presents the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $196.5m | $192.9m | $391.0m | $387.9m |
| Gross profit / margin | $64.9m / 33.0% | $63.6m / 33.0% | $127.6m / 32.6% | $127.9m / 33.0% |
| Operating profit / margin | $42.1m / 21.4% | $37.6m / 19.5% | $83.8m / 21.4% | $62.8m / 16.2% |
| Net income | $26.6m | $21.0m | $56.7m | $35.6m |
| Diluted EPS | $0.84 | $0.66 | $1.80 | $1.11 |
| Cash provided by operations | $40.5m | $26.6m | $81.8m | $75.0m |
Q2 sales rose 1.9%; operating profit increased 12.0%. First-half sales grew 0.8%, while operating profit rose 33.4%. First-half operating cash flow included $80.7m from continuing operations and $1.1m from discontinued operations. Capital spending was $9.2m in the first half. The filing projects full-year 2013 capital spending of approximately $25m–$30m.
At June 30, cash was $212.7m, current assets $446.1m and current liabilities $125.7m. Total debt was $164.5m, including $147.6m drawn under the revolving credit agreement; cash exceeded reported debt by $48.2m. Debt-to-capital was 23.7%. The company reported $81.4m available under its credit agreement and $44.5m available under bank overdraft facilities and other lines. Of cash, $204.4m was held by foreign subsidiaries; management said it expected to fund domestic needs without repatriating that cash. The company was in compliance with its debt covenants.
Material changes and management commentary
- Q2 total unit sales volume increased 4% year over year: Paper volume rose 8%, while Reconstituted Tobacco volume fell 2%. Higher volume added $14.2m to quarterly sales, largely offset by $9.9m of unfavorable product mix and pricing and $0.6m lower royalty income.
- First-half total unit volume was unchanged: Paper volume increased 5%, while Reconstituted Tobacco volume declined 6%. Unfavorable mix and pricing reduced sales by $12.9m, and royalties declined $2.3m.
- Management attributed profit improvement to operational-excellence cost reductions and lower restructuring charges. First-half restructuring and impairment expense fell to $2.3m from $24.0m; the prior-year period included a $16.9m impairment charge related to the Spotswood mill. First-half gross profit nevertheless edged down $0.3m, with lower costs largely offsetting adverse volume, mix, price, royalty and pulp-cost effects.
- First-half Paper operating profit increased to $51.3m from $28.0m, while Reconstituted Tobacco operating profit declined to $43.5m from $44.8m, principally due to lower volume and weaker fixed-cost absorption.
- The company completed the sale of its Indonesian paper mill in Q2 and recorded a $1.6m non-cash loss. Indonesia and the closed Philippines paper mill are reported as discontinued operations; the combined discontinued-operations loss was $3.4m for the first half.
- First-half cash flow benefited from stronger earnings, but working capital used $11.2m, mainly reflecting collections of prior-year customer advances and higher inventory. The company paid $18.8m in dividends in the first half, compared with $4.8m a year earlier.
Outlook, risks and contingencies
Management expects the China reconstituted-tobacco joint venture, CTS, to open in 2014, ramp to full capacity by 2016 and incur elevated start-up costs in 2014 before profitable operations in 2015. Management said it may incur an additional $20m–$30m of borrowings during 2013 and expected covenant compliance based on current borrowing and forecast results. A $0.30-per-share dividend was announced for payment in September 2013.
Management sees potential growth from lower-ignition-propensity (LIP) paper adoption and possible Chinese demand for reconstituted tobacco, while citing global economic uncertainty, foreign-exchange volatility, declining cigarette consumption in Western markets, competitive pricing and inflationary pressures. Customer concentration is notable: four customers accounted for 55% of 2012 sales. The filing also identifies potential impairment exposure for the suspended Philippines RTL facility, whose property, plant and equipment had a $71.0m carrying value.
A Brazilian ICMS tax assessment totaled approximately $43m at June 30, of which approximately $20m was covered by an indemnification from former mill owners. SWM said it was vigorously contesting the matter, believed it would prevail and recorded no liability. LIP patent opposition proceedings remained pending; management intended to defend the patents. Environmental and other proceedings were also disclosed, with no material outcome assured. The company reported effective disclosure controls and no material changes in internal control during the quarter.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Schweitzer-Mauduit International, Inc., not Mativ Holdings, Inc.
- Assess how much of the earnings increase reflects sustainable operating improvement versus the unusually high prior-year restructuring and impairment charges.
- Monitor product mix, pricing, royalty income, Paper and Reconstituted Tobacco volumes, and whether cost savings can offset input-cost and competitive pressures.
- Review the availability and location of cash, planned additional borrowing, dividend sustainability and compliance with credit covenants.
- Track CTS construction, start-up spending, opening and profitability milestones, and the impairment outlook for the suspended Philippines RTL assets.
- Follow the Brazilian tax assessment and indemnification, and the status and potential business effects of pending LIP patent proceedings.