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(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K and the selected financial data included in Part II, Item 6, "Selected Financial Data" of this Annual Report on Form 10-K. The discussion of our financial condition and results of operations includes various forward-looking statements about our markets, the demand for our products and our future prospects. These statements are based on certain assumptions that we consider reasonable. For information about risks and exposures relating to us and our business, you should read the sections entitled "Factors That May Affect Future Results," in Part I, Item 1A of this Annual Report on Form 10-K and "Forward Looking Statements" at the end of this Item 7. Unless the context indicates otherwise, references to "SWM," the "Company," "we," "us," "our," or similar terms include Schweitzer-Mauduit International, Inc. and our consolidated subsidiaries.

This Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of our financial statements with an understanding of our recent performance, our financial condition and our prospects. The following will be discussed and analyzed:










In 2019, SWM reported net income of $85.8 million on total net sales of $1,022.8 million. Compared to the prior year, net sales decreased $18.5 million, however excluding negative currency impact, net sales would have increased $2.7 million due primarily to an increase in organic sales in the AMS segment.

Net income decreased to $85.8 million in 2019 compared to $94.5 million in 2018. Outside of typical business drivers, several large one-time items affect the year-over-year comparison. In 2019, these items included $6.6 million (after- tax) of expenses related to Brazil tax assessments, and in 2018 included a $15.0 million (after-tax) impairment of the Company's interest in one of its joint ventures in China, a $7.7 million (after-tax) favorable revaluation of a contingent consideration liability related to the Conwed acquisition, and a favorable $13.0 million tax adjustment related to the Tax Act. Business trends that were key drivers of year-over-year financial performance included sales growth in AMS, positive price/mix benefits in EP, cost reduction activities in both segments, and an improved raw materials cost environment across the business.

Cash provided by operations was $160.3 million in 2019 up from $139.1 million in 2018. Uses of cash during 2019 included $80.5 million in net debt repayments, $54.4 million in cash dividends paid to SWM stockholders and $28.6 million of capital spending.


We disclose those accounting policies that we consider to be significant in determining the amounts to be utilized for communicating our consolidated financial position, results of operations and cash flows in the first note to our consolidated financial statements included elsewhere herein. Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S., which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported and disclosure of contingencies. Changes in these estimates could have a material impact on our financial position, results of operations, and cash flows. We discussed with the Audit Committee of the Board of Directors the estimates and judgments made for each of the following items and our accounting for and presentation of these items in the accompanying financial statements:

Accounting for Income Taxes

Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management's best estimate of current and future taxes to be paid. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. The complexity of our global structure requires significant judgments and estimates in determining the allocation of income to each of these jurisdictions and consolidated income tax expense.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Accounting Standards Codification Topic No. 740, Income Taxes ("ASC 740"), states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. We (1) record unrecognized tax benefits as liabilities in accordance with ASC 740 and (2) adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

On December 22, 2017, the Tax Cut and Jobs Act (the "Tax Act") was enacted into law effective January 1, 2018. The new legislation contains several key tax provisions that affected the Company, and include but are not limited to a one-time deemed repatriation tax on post-1986 accumulated earnings and profits of the foreign subsidiary undistributed earnings ("transition tax"), a reduction of the federal corporate income tax rate from 35% to 21%, a new deduction for Foreign-Derived Intangible Income ("FDII"), and a new provision designed to tax Global Intangible Low Taxed Income ("GILTI") of foreign subsidiaries effective January 1, 2018. As a result of the GILTI provision, the FASB issued Staff Q&A Topic 740, No. 5 "Accounting for Global Intangible Low-Taxed Income" requiring an entity to make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI as a current period expense when incurred. Management makes certain judgments in interpreting the manner in which complex key provisions of the Tax Act should be applied and in the determination of income tax expense and liabilities.

Revenue Recognition

We have two main sources of revenue: product sales and materials conversion. We recognize product sales revenues when control of a product is transferred to the customer. For the majority of product sales, transfer of control occurs when the products are shipped from one of our manufacturing facilities to the customer. The cost of delivering finished goods to our customers is recorded as a component of cost of products sold. Those costs include the amounts paid to a third party to deliver the finished goods. Any freight costs billed to and paid by a customer are included in net sales. We also provide services to customers through the conversion of customer-owned raw materials into processed finished goods. In these transactions, we generally recognize revenue as processing is completed.

Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied, which generally occurs when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Generally, we consider collectability of amounts due under a contract to be probable upon inception of a sale based on an evaluation of the credit worthiness of each customer. If collectability is not considered to be probable, we defer recognition of revenue on satisfied performance obligations until the uncertainty is resolved. Any variable consideration, such as discounts or price concessions, is set forth in the terms of the contract at inception, and is included in the assessment of the transaction price at the outset of the arrangement. The transaction price is allocated to the individual performance obligations due under the contract based on the relative stand-alone fair value of the performance obligations identified in the contract. We typically use an observable price to determine the stand-alone selling price for separate performance obligations.

We do not typically include extended payment terms or significant financing components in our contracts with customers. Certain product sales contracts may include cash-based incentives (volume rebates or credits), which are accounted for as variable consideration. We estimate these amounts at least quarterly based on the expected forecast quantities to be provided to customers and reduce revenues recognized accordingly. Incidental items that are immaterial in the context of the contract are recognized as expense in the period incurred. We generally expense sales commissions when incurred because the amortization period is one year or less. These costs are recorded within sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. As a practical expedient, we treat shipping and handling activities that occur after control of the good transfers as fulfillment activities, and therefore, does not account for shipping and handling costs as a separate performance obligation.

Accounting for Contingencies

We accrue an estimated loss by taking a charge to income when the likelihood that a future event, such as a legal proceeding, will result in a loss or the incurrence of a liability is probable and the amount of loss can be reasonably estimated. We disclose material contingencies if there is at least a reasonable possibility that a loss has been incurred. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial condition, results of operations, and our cash flows.

For further information, please see "Litigation" in Part I, Item 3, "Legal Proceedings" and Note 21. Commitments and Contingencies, of the Notes to Consolidated Financial Statements.

Property, Plant and Equipment Valuation

Certain of our manufacturing processes are capital intensive; as a result, we make substantial investments in property, plant and equipment which are recorded at cost. Net property, plant and equipment comprised 22% of our total assets as of December 31, 2019. Property, plant and equipment is depreciated on the straight-line method over the estimated useful lives of the assets. Production machines and related equipment are not subject to substantial technological changes rendering them obsolete and are generally depreciated over estimated useful lives of 10 to 20 years. When indications of impairment exist, we assess the likelihood of recovering the cost of long-lived assets based on our expectation of future profitability and undiscounted cash flow of the related asset group. These factors, along with management's plans with respect to the operations, are considered in assessing the recoverability of property, plant and equipment. Changes in management's estimates and plans could significantly impact our financial condition, results of operations and cash flows.

As a result of excess capacity in the tobacco-related papers industry and increased purchased material and operating costs experienced in the last several years, competitive selling prices for certain of our products are not sufficient to cover our costs with a reasonable margin. Such competitive pressures have resulted in downtime of certain paper machines and, in some cases, accelerated depreciation or impairment of certain equipment. We have also incurred restructuring costs in our AMS segment in pursuit of synergies from integrating our acquisitions. Over the past six years, we have restructured our operations to improve our competitiveness and profitability. As a result, we incurred significant charges related to asset impairments, accelerated depreciation and employee severances.

In 2011, the Company revised its plans for RTL expansion in Asia and suspended the construction of the Philippine Greenfield site. In 2015, the Company made the decision to dispose of the facility and related equipment. The Company reviewed these assets at each reporting period and recognized an impairment charge for the excess of carrying value of the assets over the fair value less any costs to sell. During 2017, the Company recognized impairment charges of $4.0 million related to the RTL Philippines assets. The Company did not record any additional impairment charges during 2018 or 2019. The legal entity and its related assets were sold on December 18, 2019 for total consideration of $13.3 million, and the Company recorded a net gain of $0.3 million.

Management continues to evaluate how to operate our production facilities more effectively. Further restructuring actions are possible that might require additional impairments or accelerated depreciation of some equipment.

Business Combinations

Accounting for business combinations requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed ("net assets") at their acquisition date fair values. Goodwill is measured as the excess of consideration transferred over the net assets acquired at their respective fair values as of the acquisition date. The estimated fair values are based upon quoted market prices and widely accepted valuation techniques, which require significant estimates and assumptions including, but not limited to, estimating future cash flows and developing appropriate discount rates. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill, based on new information obtained about the facts and circumstances that existed as of the acquisition date. Upon the conclusion of the measurement period or final determination of the values of net assets acquired, whichever comes first, any subsequent adjustments are recorded to our consolidated financial statements. See Note 5. Business Acquisitions, of the Notes to Consolidated Financial Statements for additional information.

Investments in Equity Affiliates

Investments in companies which we do not control but over which we have the ability to exercise significant influence and that, in general, are at least 20 percent-owned by us, are stated at cost plus equity in undistributed net income. These investments are evaluated for impairment when warranted. An impairment loss would be recorded whenever a decline in value of an equity investment below its carrying amount is determined to be other than temporary. In judging "other than temporary," we consider the length of time and extent to which the fair value of the equity company investment has been less than the carrying amount, the near-term and longer-term operating and financial prospects of the equity company, and our longer-term intent of retaining the investment in the equity company. See Note 10. Joint Ventures, of the Notes to Consolidated Financial Statements for additional information.

Goodwill and Unamortized Intangible Assets

Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Goodwill is measured as the excess of consideration transferred over the net assets acquired at their respective fair values as of the acquisition date. Goodwill is tested for impairment at the reporting unit level. Fair value of a reporting unit is typically based upon estimated future cash flows discounted at a rate commensurate with the risk involved or market-based comparables. If the carrying amount of the reporting unit's net assets exceeds its fair value, then an analysis will be performed to compare the implied fair value of goodwill with the carrying amount of goodwill. An impairment loss will be recognized in an amount equal to the excess of the carrying amount over its implied fair value. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. The annual impairment tests performed on October 1, 2019 and 2018 did not indicate any impairment of goodwill.

Intangible assets with finite lives are amortized over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss would be indicated when estimated undiscounted future cash flows from the use of the asset are less than its carrying amount. An impairment loss would be measured as the difference between the fair value (based on discounted future cash flows) and the carrying amount of the asset. Estimated useful lives range from 10 to 23 years for customer relationships and 4 to 20 years for developed technology, patents and other intangible assets. Certain trade names are estimated to have indefinite useful lives and as such are not amortized. Intangible assets with indefinite lives are reviewed for impairment following a method similar to the impairment testing for Goodwill. Testing of these assets is performed annually and whenever events and circumstances indicate that impairment may have occurred. The annual impairment tests performed in the year of 2019 and 2018 did not indicate any impairment of intangible assets.


For a discussion regarding recent accounting pronouncements, see "Recent Accounting Pronouncements" included in Note 2. Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements.


                                                                    For the Years Ended December 31,
                                                                2019                  2018            2017(1)
                                                               ($ in millions, except per share amounts)
        Net sales                                       $        1,022.8         $     1,041.3     $     982.1
        Cost of products sold                                      732.8                 762.8           698.7
        Gross profit                                               290.0                 278.5           283.4
        Selling expense                                             33.7                  35.7            33.3
        Research expense                                            13.5                  15.2            17.8
        General expense                                            105.1                  90.9            95.9
        Total nonmanufacturing expenses                            152.3                 141.8           147.0
        Restructuring and impairment expense                         3.7                   1.7             8.1
        Operating profit                                           134.0                 135.0           128.3
        Interest expense                                            36.1                  28.2            26.9
        Other (expense) income, net                                 (1.0 )                10.0             0.1
        Income from continuing operations before income
        taxes and income from equity affiliates                     96.9                 116.8           101.5
        Provision for income taxes                                  15.2                  10.7            69.6
        Income (loss) from equity affiliates, net of
        income taxes                                                 4.1                 (11.3 )           2.5
        Income from continuing operations                           85.8                  94.8            34.4
        (Loss) gain from discontinued operations                       -                  (0.3 )           0.1
        Net income                                      $           85.8         $        94.5     $      34.5
        Net income (loss) per share - basic:
        Income per share from continuing operations     $           2.78         $        3.08     $      1.12
        Loss per share from discontinued operations                    -                 (0.01 )             -
        Net income per share - basic                    $           2.78         $        3.07     $      1.12
        Net income (loss) per share - diluted:
        Income per share from continuing operations     $           2.76         $        3.07     $      1.12
        Loss per share from discontinued operations                    -                 (0.01 )             -
        Net income per share - diluted                  $           2.76         $        3.06     $      1.12

(1) Results during the year ended December 31, 2017 include Conwed from the January 20, 2017 acquisition date to December 31, 2017.

        Year Ended December 31, 2019 Compared with the Year Ended December 31, 2018
        Net Sales
        (dollars in millions)
                                           2019         2018       Change      Percent Change
        Advanced Materials & Structures $   477.2    $   467.9    $   9.3            2.0  %
        Engineered Papers                   545.6        573.4      (27.8 )         (4.8 )
        Total                           $ 1,022.8    $ 1,041.3    $ (18.5 )         (1.8 )%

Net sales were $1,022.8 million in 2019 compared with $1,041.3 million in 2018. The decrease in net sales consisted of the following (dollars in millions):

                                                                       Amount     Percent
        Changes in currency exchange rates                            $ (21.2 )    (2.1 )%
        Changes in royalties                                             (0.3 )       -
        Changes in product mix, selling prices and sales volumes, net     3.0       0.3
        Total                                                         $ (18.5 )    (1.8 )%

AMS segment net sales were $477.2 million for 2019 compared to $467.9 million during 2018. The increase of $9.3 million or 2.0% was due primarily to growth in filtration, particularly for RO water filtration products, transportation, driven by surface protection films, and gains in medical. Infrastructure and construction and industrial sales were lower versus prior year.

The EP segment net sales were $545.6 million for 2019 compared to $573.4 million during 2018. The decreased of $27.8 million, or 4.8%, was primarily the result of the unfavorable net foreign currency impacts of $18.9 million, mainly from a weaker euro and the $8.7 million combined net unfavorable impact of changes in volumes, mix of products sold and average selling prices, in each case compared to the prior year. The Company benefited from a more favorable mix of products sold as a result of strong performance of LIP and wrapper and binder papers and de-emphasizing and/or exiting significant volumes of certain low-margin non-tobacco papers.

        Gross Profit
        (dollars in millions)
                                                                                                Percent of Net Sales
                                  2019            2018          Change      Percent Change       2019           2018
        Net sales             $   1,022.8     $   1,041.3     $  (18.5 )         (1.8 )%         100.0 %        100.0 %
        Cost of products sold       732.8           762.8        (30.0 )         (3.9 )           71.6           73.3
        Gross profit          $     290.0     $     278.5     $   11.5            4.1  %          28.4 %         26.7 %

Gross profit for the year ended December 31, 2019 increased by $11.5 million, or 4.1%, to $290 million from $278.5 million in the prior year. AMS gross profit increased by $12.8 million, primarily due to lower input costs, particularly . . .

Mar 02, 2020

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