Business context and reporting period
This is Schweitzer-Mauduit International, Inc.’s Form 10-K for the fiscal year ended December 31, 2015; the supplied filing does not identify the registrant as Mativ Holdings, Inc. SWM operated two segments: Engineered Papers (EP), principally tobacco-related papers and reconstituted tobacco, and Advanced Materials & Structures (AMS), resin-based products for filtration, surface protection, medical and industrial uses. In October 2015, SWM acquired Argotec for $282.7 million and consolidated its former Paper and Reconstituted Tobacco segments into EP. Non-tobacco products represented about 30% of 2015 sales, up from about 6% in 2013.
Financial performance
Unless noted otherwise, amounts are U.S. dollars in millions. The 10-K reports annual results and unaudited quarterly results; Q4 figures are included below.
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Net sales | $764.1 | $794.3 | Down 3.8%; currency translation reduced sales by $73.6, partly offset by $53.8 of incremental AMS acquisition sales. |
| Gross profit / margin | $224.4 / 29.4% | $218.8 / 27.5% | Margin improved with lower manufacturing costs, better utilization and product mix. |
| Operating profit / margin | $103.0 / 13.5% | $106.1 / 13.4% | Down 2.9%; higher unallocated costs and currency pressure offset segment gains. |
| Net income | $89.7 | $89.7 | Flat; diluted EPS was $2.94 versus $2.93. |
| Adjusted EBITDA | $177.4 | $177.7 | Non-GAAP measure; adjustments include restructuring and impairment charges. |
| Operating cash flow | $144.7 | $165.9 | Continuing-operations cash flow was $144.6. |
| Capital expenditures | $24.2 | $35.1 | Free cash flow was approximately $120 million, as defined by management (operating cash flow less capital spending and capitalized software costs). |
| Debt and cash | $571.5 debt; $186.5 cash | $437.9 debt; $290.3 cash | Debt increased primarily to fund Argotec; 2015 debt-to-capital was 55.0%, versus 47.2%. |
EP sales were $583.9, down 12.4%, and segment operating profit was $121.5 versus $124.5. AMS sales rose 41.4% to $180.2, including acquired-business revenue; operating profit increased to $16.7 from $10.2. Interest expense rose to $9.7 from $7.2. The effective tax rate was 20.5%, compared with 18.9%.
In Q4 2015, sales were $209.8 versus $181.7 in Q4 2014; gross profit was $65.8 versus $49.1; operating profit was $24.7 versus $17.3; and net income was $21.7 versus $18.5. The company attributed the unusually strong paper sales in Q4 partly to European customer inventory builds of LIP papers ahead of a regulatory change.
Liquidity, debt and capital allocation
Cash and cash equivalents were $186.5 at year-end, including $172.4 held by foreign subsidiaries. Net operating working capital was $118.5 versus $98.7. The October 2015 credit agreement provides $1 billion of facilities: a $650 million revolving facility and $350 million of term loans. Revolver availability was $390.2 at year-end; additional bank overdraft and credit-line availability was $28.8. The company reported compliance with its covenants, including maximum net-debt-to-EBITDA and minimum interest-coverage requirements. Facilities are secured by substantially all personal property of the company and its domestic subsidiaries.
SWM paid $46.9 in dividends during 2015 and raised its quarterly dividend to $0.40 per share in November. The company stated that, absent substantial acquisitions or share repurchases, it did not expect significant additional net borrowing in 2016. It projected 2016 capital spending of approximately $30 million.
Material changes, outlook and risks
- Sales fell despite acquisition growth, primarily because of foreign exchange and lower EP pricing. Net income was flat as currency and pricing pressure were offset by improved manufacturing performance, product mix and acquired AMS earnings.
- Management expected profits to decline in 2016. Expected headwinds included more than 10% lower RTL volumes, the reversal of the Q4 LIP inventory build, unfavorable year-over-year currency comparisons and non-recurrence of certain 2015 tax benefits. Management expected non-tobacco sales to rise to the 40%+ range, supported by a full year of Argotec revenue and AMS growth.
- Management’s priorities included integrating Argotec, pursuing AMS acquisitions and organic growth, and aligning EP capacity and costs with demand. Water filtration and Argotec surface protection were identified as growth areas; filtration products exposed to oil, gas and mining faced weak end markets.
- Key risks include long-term tobacco demand decline and regulation; significant customer concentration (three customers represented 42% of sales in 2015); pricing and competition; foreign exchange, commodity and energy volatility; acquisition integration and restructuring execution; and dependence on particular production facilities and proprietary technology.
- SWM recorded $14.6 of restructuring and impairment expense, including $5.2 to write down the mothballed Philippines RTL facility, whose year-end carrying value was $20.9 and which was held for sale. Goodwill impairment testing identified no impairment.
- Brazilian tax disputes remain contingent: one raw-material assessment of about $16 million was finally resolved in SWM-B’s favor; another assessment of about $11 million and electricity assessments totaling approximately $13 million remained unresolved. No liability was recorded for the remaining assessments. Several European LIP patent proceedings and appeals were also pending; the company intended to defend its patents.
- The combined U.S. and French pension and other postretirement obligations were underfunded by $32.2. Environmental capital spending was $2.6 in 2015; management expected $2.0 or less annually in 2016 and 2017. The independent auditor issued unqualified opinions on the financial statements and internal controls; Argotec was excluded from the 2015 internal-control assessment.
Important facts for investors to verify
- Confirm the registrant and filing identity: this source is SWM’s 2015 10-K, not a filing under the name Mativ Holdings, Inc.
- Assess the durability of EP results after the Q4 LIP inventory build and the forecast RTL volume decline, separating underlying performance from currency, pricing and acquisitions.
- Review Argotec’s integration, provisional purchase accounting, expected synergies and contribution to AMS growth and margins.
- Monitor debt, covenant headroom, refinancing terms and cash accessibility, particularly given the increase in leverage and foreign-held cash.
- Track the Brazilian tax cases, European LIP patent appeals, and sale or further impairment of the Philippines facility.