Schweitzer-Mauduit International, Inc. — Q1 2017 Form 10-Q
The filing is for the three months ended March 31, 2017. The registrant named in the filing is Schweitzer-Mauduit International, Inc. (SWM), not Mativ Holdings, Inc. The statements are unaudited. SWM operates Advanced Materials & Structures (AMS) and Engineered Papers (EP).
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $233.3 million | $214.6 million |
| Gross profit / margin | $63.1 million / 27.0% | $63.5 million / 29.6% |
| Operating profit / margin | $26.6 million / 11.4% | $31.6 million / 14.7% |
| Net income | $13.7 million | $21.1 million |
| Diluted EPS | $0.45 | $0.69 |
| Cash provided by operations | $13.0 million | $17.6 million |
| Capital spending | $11.1 million | $4.5 million |
Cash and cash equivalents were $99.8 million at March 31, 2017, compared with $107.4 million at year-end 2016. Total debt was $726.1 million, up from $440.4 million; long-term debt was $723.2 million. The company reported $232.4 million of unused credit-facility capacity and $27.5 million of bank-overdraft availability. It was in compliance with its debt covenants at quarter-end. Total debt to capital increased to 58.4% from 46.4% at year-end.
Material changes and drivers
- Sales rose 8.7%, primarily because the January acquisition of Conwed contributed $26.6 million of revenue. Excluding acquired-company revenue, reported sales drivers reduced revenue by $7.9 million, including lower volume, product mix and selling prices, and royalties.
- AMS sales increased 40.8% to $100.0 million, mostly due to Conwed. EP sales fell 7.2% to $133.3 million, reflecting lower volume, prices and mix, and royalties.
- Gross profit declined slightly despite higher sales. Lower EP sales and manufacturing efficiency weighed on results; Conwed contributed gross profit, including a $2.9 million non-cash inventory step-up expense.
- Operating profit fell 15.8%. AMS operating profit increased to $8.9 million, while EP operating profit fell to $26.9 million.
- Interest expense increased to $5.8 million from $4.6 million, primarily due to acquisition-related borrowing and a higher effective interest rate. The effective tax rate increased to 34.3% from 27.6%.
Acquisition, cash flow and capital allocation
SWM completed the Conwed acquisition on January 20, 2017. Estimated total consideration was $305.3 million, including $296.7 million cash consideration and $8.6 million estimated fair value of contingent consideration. Purchase accounting remained provisional. Conwed generated a $0.1 million loss from continuing operations during its included post-acquisition period. The acquisition was funded mainly with new borrowings.
Operating cash flow decreased year over year, with working capital using $19.3 million of cash. Investing activities used $305.9 million, mainly for the acquisition. Financing activities provided $284.1 million. Management projected 2017 capital spending of approximately $35 million. The company paid a $12.9 million first-quarter dividend after quarter-end and announced a further dividend of $0.42 per share payable in June.
Outlook, risks and unusual items
- Management expected non-tobacco products to rise from approximately 40% of 2016 sales to the 50% range in 2017, and anticipated a more balanced profit contribution between tobacco and non-tobacco businesses. No specific full-year revenue or EPS guidance is provided in the supplied filing text.
- Management cited Conwed contribution and internal operational improvements as expected 2017 positives, offset by anticipated declines in French RTL volumes, certain cigar-related products and LIP royalties, higher taxes in some jurisdictions, and higher interest expense.
- SWM targeted $10 million of annualized Conwed synergies by the end of 2018, including savings in overhead, resin procurement and manufacturing footprint. Integration, AMS margin improvement and EP capacity and cost management were strategic priorities.
- Material uncertainties include tobacco-industry demand and regulation, customer inventory patterns, commodity and energy costs, foreign exchange and interest rates, acquisition integration and synergy delivery, and legal and environmental exposures.
- Brazilian tax disputes include an approximately $14.3 million raw-material assessment and electricity assessments of approximately $5.3 million, $9.2 million and $4.2 million. The company recorded no liability for these matters and said it believed they would ultimately be resolved in its favor, while acknowledging the outcomes were uncertain. A French labor-court decision requiring approximately €1.3 million payment was under appeal; no liability was recorded.
- Other notable items included $1.4 million of CEO-transition costs, a $1.8 million prior-year gain on sale of water rights, and $1.1 million of restructuring expense in Q1 2017. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Investor verification priorities
- Confirm the registrant and period: this is SWM’s Q1 2017 filing, not a filing under the Mativ Holdings name.
- Track Conwed integration, provisional purchase accounting, debt levels, covenant headroom and progress toward the stated synergy target.
- Assess whether AMS growth and margins offset continuing EP volume and royalty pressures, and whether the expected shift toward non-tobacco sales materializes.
- Review operating cash generation and working-capital requirements alongside the dividend and planned capital spending.
- Monitor outcomes and potential financial exposure from the Brazilian tax disputes and French labor appeal; no related liabilities were recorded in this quarter.