Schweitzer-Mauduit International, Inc. (SWM) — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; this is an annual report, not a standalone fourth-quarter filing. The issuer in the filing is Schweitzer-Mauduit International, Inc., which operated as SWM at the time. Its two segments were Advanced Materials & Structures (AMS) and Engineered Papers (EP).
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,074.4 million | $1,022.8 million |
| Gross profit / margin | $308.3 million / 28.7% | $290.0 million / 28.4% |
| Operating profit / margin | $128.8 million / 12.0% | $134.0 million / 13.1% |
| Net income | $83.8 million | $85.8 million |
| Diluted EPS | $2.66 | $2.76 |
| Cash from operations | $161.6 million | $160.3 million |
| Capital spending, including capitalized software | $33.3 million | $34.1 million |
| Total debt at year-end | $593.3 million | $542.7 million |
- Sales increased 5.0%, primarily because Tekra contributed $77.3 million after its March 13, 2020 acquisition; sales excluding currency, royalties and net changes in product mix, pricing and volume are discussed in the filing.
- AMS sales rose 13.9% to $543.5 million, including Tekra; excluding Tekra, AMS sales declined 2.3%. Segment operating profit was $64.8 million versus $64.3 million.
- EP sales fell 2.7% to $530.9 million, while segment operating profit declined to $116.8 million from $119.2 million. Higher-value product mix, cost reductions and lower input costs partly offset volume declines.
- Gross margin improved modestly, but operating profit and earnings declined as nonmanufacturing and restructuring costs increased. The effective tax rate was 18.9%, compared with 15.7%.
- Year-end cash was $54.7 million, with $445.0 million of unused revolving-credit capacity. Net leverage was 2.3x, below the 4.5x covenant limit then in effect. The company reported compliance with its debt covenants.
- Cash dividends were $1.76 per share for 2020; $55.0 million was paid to shareholders. Operating cash flow was slightly above 2019.
Material changes and unusual items
- SWM acquired Tekra, a high-performance film converter, for approximately $169.3 million net of cash acquired. It added coating and converting capabilities and expanded AMS exposure to medical, transportation and industrial markets.
- The company ceased production at its Spotswood, New Jersey paper facility in December 2020 and shifted production to other sites. Related 2020 costs totaled $16.8 million: $11.9 million of restructuring and impairment expense and $4.9 million of other restructuring-related charges in cost of products sold. Approximately $2.2 million of additional closure-related costs were expected in 2021.
- COVID-19 disrupted some manufacturing and reduced demand, especially in transportation during much of the first three quarters. Management reported a significant recovery in transportation and strong growth in certain AMS markets in the fourth quarter; all facilities were operational at year-end.
- Net income included the effects of higher restructuring costs and acquisition-related expenses. Comparisons also reflect $6.6 million of after-tax Brazil tax-assessment expense in 2019 and $7.1 million of nonrecurring interest expense related to Brazil assessments in 2019.
Outlook, risks and contingencies
- Management withdrew its 2020 financial guidance in May 2020 because of pandemic uncertainty. The filing provides directional expectations, not specific numerical guidance: long-term growth opportunities in AMS filtration, transportation and infrastructure/construction, and continued pressure on EP from declining cigarette consumption and regulatory changes.
- In January 2021, SWM announced a recommended cash offer for Scapa Group plc, valued at approximately £402.9 million (about $551.9 million at the stated exchange rate), subject to shareholder, court and regulatory conditions. In February 2021, it amended its credit agreement to add a $350 million Term Loan B and temporarily raise the maximum net leverage covenant to 5.5x, with a return to 4.5x by June 30, 2023.
- Key risks include tobacco-market decline and regulation, reliance on a small group of tobacco customers (four customers and their affiliates accounted for 28% of 2020 sales), raw-material and energy costs, foreign-exchange exposure, acquisition integration, and pandemic-related demand or supply disruption.
- Brazil tax matters include a $9.5 million raw-material ICMS judgment for which a liability was recorded, plus separate electricity-tax assessments whose outcomes the company said could not be determined and for which no loss was accrued. The filing also describes German patent litigation involving low-ignition-propensity paper.
- U.S. and French pension plans had a combined projected benefit obligation underfunding of $25.7 million at year-end. The company reported no significant off-balance-sheet arrangements.
- The financial-statement auditor issued an unqualified opinion; management and the auditor also reported effective internal control over financial reporting, excluding Tekra from the 2020 assessment under the acquisition-related transition provision.
Important facts for investors to verify
- Whether the Scapa offer closed, its final purchase price and financing, and the resulting leverage and covenant headroom.
- Whether AMS organic growth and margins improved after the Tekra contribution, and whether the reported fourth-quarter recovery persisted.
- EP volume trends, tobacco customer concentration, and the commercial impact of tobacco regulation and declining cigarette consumption.
- Final costs and savings from the Spotswood closure and other restructuring programs.
- Developments in the unaccrued Brazilian electricity-tax assessments, the recorded raw-material tax judgment, and German patent proceedings.
- The filing’s selected-data table reports adjusted EBITDA of $212.9 million, while its reconciliation reports $212.8 million; investors should confirm the intended figure and reconciliation.