Bulletin
Investor Alert

New York Markets Open in:

Nov. 4, 2019, 4:29 p.m. EST

10-Q: SCHWEITZER MAUDUIT INTERNATIONAL INC

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

(EDGAR Online via COMTEX) -- Item 2. 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 unaudited condensed consolidated financial statements and related notes included elsewhere in this report and the audited consolidated financial statements and related notes and the selected financial data included in our Annual Report on Form 10-K for the year ended December 31, 2018. The discussion of our financial condition and results of operations includes various forward-looking statements about our markets, the demand for our products, our future prospects and other matters. These statements are based on certain assumptions and estimates that we consider reasonable. For information about risks and exposures relating to us and our business, you should read the section entitled "Risk Factors" in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 and the sections entitled "Forward-Looking Statements" at the end of this Item 2 and "Risk Factors" in Part II, Item 1A of this report. Unless the context indicates otherwise, references to "SWM", "we", "us", "our", the "Company" 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.







        SUMMARY
         ($ in millions, except
        per share amounts)                     Three Months Ended                                   Nine Months Ended
                                    September 30,         Percent of Net Sales          September 30,          Percent of Net Sales
                                  2019        2018         2019           2018        2019        2018         2019           2018
        Net sales               $ 256.4     $ 260.3        100.0 %        100.0 %   $ 784.3     $ 792.6        100.0 %        100.0  %
        Gross profit               72.2        65.3         28.2           25.1       219.1       214.7         27.9           27.1
        Restructuring &
        impairment expense          1.6         0.4          0.6            0.2         2.0         1.4          0.3            0.2
        Operating profit           34.6        31.1         13.5           11.9       109.2       108.2         13.9           13.7
        Interest expense            6.7         7.3          2.6            2.8        29.6        20.1          3.8            2.5
        Income from continuing
        operations                 27.7        40.9         10.8           15.7        65.6        87.6          8.4           11.1
        Income (loss) from
        discontinued operations       -         0.1            -              -           -        (0.3 )          -              -
        Net income              $  27.7     $  41.0         10.8 %         15.8 %   $  65.6     $  87.3          8.4 %         11.0  %
        Diluted earnings per
        share from continuing
        operations              $  0.90     $  1.33                                 $  2.12     $  2.84
        Diluted earnings per
        share                   $  0.90     $  1.33                                 $  2.12     $  2.83
        Cash provided by
        operations              $  63.9     $  37.1                                 $ 118.9     $  93.2
        Capital spending        $   4.8     $   6.1                                 $  20.0     $  19.8
        








        RESULTS OF OPERATIONS
        Three Months Ended September 30, 2019 Compared with the Three Months Ended
        September 30, 2018
        Net Sales
        ($ in millions)
                                                          Three Months Ended
                                                 September 30,
                                                     2019           September 30, 2018       Change       Percent Change
        Advanced Materials & Structures        $         126.1     $             120.8     $     5.3            4.4  %
        Engineered Papers                                130.3                   139.5          (9.2 )         (6.6 )
        Total                                  $         256.4     $             260.3     $    (3.9 )         (1.5 )%
        


Net sales were $256.4 million in the three months ended September 30, 2019 compared with $260.3 million in the prior-year period. The decrease in net sales consisted of the following ($ in millions):







                                                           Amount    Percent
        Changes due to net foreign currency impacts       $ (3.4 )    (1.3 )%
        Changes in volume, product mix and selling prices   (0.5 )    (0.2 )
        Total                                             $ (3.9 )    (1.5 )%
        


AMS segment net sales were $126.1 million for the three months ended September 30, 2019 compared to $120.8 million during the prior-year period. The increase of $5.3 million or 4.4% was primarily due to strong growth in transportation and filtration products.

EP segment net sales during the three months ended September 30, 2019 of $130.3 million decreased by $9.2 million, or 6.6%, versus net sales of $139.5 million in the prior-year quarter. Compared to the prior-year period, the decrease in net sales was primarily the result of lower sales volume and the negative impact of unfavorable foreign currency movements, offset by the combined improvement in average selling prices and mix of products sold.







        Gross Profit
        ($ in millions)
                                         Three Months Ended                                                 Percent of Net Sales
                                September 30,
                                    2019           September 30, 2018       Change      Percent Change       2019           2018
        Net sales             $         256.4     $             260.3     $   (3.9 )         (1.5 )%         100.0 %        100.0 %
        Cost of products sold           184.2                   195.0        (10.8 )         (5.5 )           71.8           74.9
        Gross profit          $          72.2     $              65.3     $    6.9           10.6  %          28.2 %         25.1 %
        


Gross profit increased by $6.9 million during the three months ended September 30, 2019 to $72.2 million versus the prior-year period of $65.3 million. AMS gross profit increased by $6.8 million, primarily due to higher sales, lower resin input costs, reduced fixed costs and improved manufacturing efficiencies. In the EP segment, gross profit increased by $0.1 million, primarily due to positive price/mix movements within the portfolio, improved manufacturing performance, and lower wood pulp input costs, offset by the negative impact of lower volumes and unfavorable foreign currency movements.







        Nonmanufacturing Expenses
        ($ in millions)
                                              Three Months Ended                                                Percent of Net Sales
                                    September 30,
                                        2019            September 30, 2018       Change     Percent Change       2019           2018
        Selling expense           $           8.6     $                8.9     $   (0.3 )         (3.4 )%          3.4 %          3.4 %
        Research expense                      3.1                      3.6         (0.5 )        (13.9 )           1.2            1.4
        General expense                      24.3                     21.3          3.0           14.1             9.4            8.2
        Nonmanufacturing expenses $          36.0     $               33.8     $    2.2            6.5  %         14.0 %         13.0 %
        


Nonmanufacturing expenses in the three months ended September 30, 2019 increased by $2.2 million to $36.0 million from $33.8 million in the prior-year period, primarily due to higher deferred compensation expense and higher IT expense.







        Restructuring and Impairment Expense
        ($ in millions)
                                                    Three Months Ended                                                Percent of Net Sales
                                          September 30,
                                              2019            September 30, 2018      Change      Percent Change       2019           2018
        Advanced Materials & Structures $             -     $                0.4     $  (0.4 )        (100.0 )%           - %           0.3 %
        Engineered Papers                           1.6                        -         1.6             N/A            1.2               -
        Unallocated expenses                          -                        -           -             N/A
        Total                           $           1.6     $                0.4     $   1.2           300.0  %         0.6 %           0.2 %
        


The Company incurred total restructuring and impairment expense of $1.6 million and $0.4 million in the three months ended September 30, 2019 and 2018, respectively. In the 2019 period, the restructuring expense primarily related to $1.6 million in consulting fees and severance accruals for employees at our EP manufacturing operations in the U.S., Brazil and France.

In the 2018 period, the restructuring expense primarily related to $0.3 million in severance accruals for employees at our AMS manufacturing operations in the U.S.







        Operating Profit
        ($ in millions)
                                              Three Months Ended                                                   Return on Net Sales
                                  September 30, 2019       September 30, 2018      Change      Percent Change       2019         2018
        Advanced Materials &
        Structures               $           19.3         $           11.9       $     7.4           62.2  %        15.3 %         9.9 %
        Engineered Papers                    27.3                     27.5            (0.2 )         (0.7 )         21.0          19.7
        Unallocated expenses                (12.0 )                   (8.3 )          (3.7 )        (44.6 )
        Total                    $           34.6         $           31.1       $     3.5           11.3  %        13.5 %        11.9 %
        


Operating profit was $34.6 million in the three months ended September 30, 2019 compared with $31.1 million during the prior-year period.

The AMS segment's operating profit in the three months ended September 30, 2019 was $19.3 million compared to $11.9 million in the prior-year period. The increase of $7.4 million, or 62.2%, was primarily due to higher sales, lower raw materials costs, and improved manufacturing efficiencies.

The EP segment's operating profit in the three months ended September 30, 2019 was $27.3 million, a decrease of $0.2 million, or 0.7%, from $27.5 million in the prior-year period. The decrease was primarily due to lower volumes and higher restructuring costs, partially offset by the combination of favorable pricing and mix of products sold, improved manufacturing performance, SG&A reductions, and lower wood pulp input costs.

Unallocated expenses in the three months ended September 30, 2019 were $12.0 million compared to $8.3 million in the prior-year period, an increase of $3.7 million, or 44.6%, primarily due to higher deferred compensation expense and higher IT expense.

Non-Operating Expenses

Interest expense was $6.7 million in the three months ended September 30, 2019, a decrease from $7.3 million in the prior-year period and included a $0.6 million reclassification related to a tax accrual in Brazil as discussed in Note 13, Commitments and Contingencies. The decrease in interest expense was due to the reclassification of the Brazilian tax accrual at the end of the third quarter in 2019 compared to the same period last year. The weighted average effective interest rate on our debt facilities was approximately 4.43% and 5.01% for the three months ended September 30, 2019 and 2018, respectively.

Other income, net, was $1.7 million during the three months ended September 30, 2019, a decrease of $9.5 million compared to $11.2 million during the three months ended September 30, 2018. The decrease from the prior year is primarily due to the $10.2 million decrease in the fair value of the contingent consideration liability, recorded in the third quarter of 2018, related to the Conwed acquisition in 2018.

Income Taxes

A $3.2 million provision for income taxes in the three months ended September 30, 2019 resulted in an effective tax rate of 10.8%, which included favorable discrete items to bring the Company's year-to-date effective tax rate to 16.4%. The 10.8% compares with (16.0)% in the prior-year quarter, when the Company recorded a favorable one-time transition tax adjustment.

Income from Equity Affiliates

Income from equity affiliates, which reflects the results of operations of CTM and CTS, was $1.3 million in the three months ended September 30, 2019 compared with income of $0.3 million during the prior-year period.

Net Income and Income per Share

Net income in the three months ended September 30, 2019 was $27.7 million, or $0.90 per diluted share, compared with $41.0 million, or $1.33 per diluted share, during the prior-year period. The decrease in net income was primarily due to a $13.0 million, or $0.43 per diluted share favorable transition tax adjustment and a $10.2 million, or $0.25 per diluted share benefit as a result of the decrease in fair value of the Conwed contingent liability in the same period in the prior year. Net income in the three months ended September 30, 2019 includes higher deferred compensation expenses and higher IT expenses compared to the same period in the prior year. These items were partially offset by the increase in AMS segment net sales and by operating profit growth of $3.5 million.

Nine Months Ended September 30, 2019 Compared with the Nine Months Ended







        September 30, 2018
        Net Sales
        ($ in millions)
                                                               Nine Months Ended
                                                   September 30, 2019      September 30, 2018       Change      Percent Change
        Advanced Materials & Structures          $         373.3          $             360.1     $   13.2            3.7  %
        Engineered Papers                                  411.0                        432.5        (21.5 )         (5.0 )
        Total                                    $         784.3          $             792.6     $   (8.3 )         (1.0 )%
        


Net sales were $784.3 million in the nine months ended September 30, 2019 compared with $792.6 million in the prior-year period. The decrease in net sales consisted of the following ($ in millions):







                                                           Amount    Percent
        Changes in volume, product mix and selling prices $  8.8       1.1  %
        Changes due to net foreign currency impacts        (17.2 )    (2.1 )
        Changes due to royalties                             0.1         -
        Total                                             $ (8.3 )    (1.0 )%
        


AMS segment net sales were $373.3 million for the nine months ended September 30, 2019 compared to $360.1 million during the prior-year period. The increase of $13.2 million or 3.7% was due primarily to strong growth in transportation, filtration, and medical products.

EP segment net sales during the nine months ended September 30, 2019 of $411.0 million decreased by $21.5 million versus net sales of $432.5 million in the prior-year period. The decrease in net sales was primarily the result of the negative impact of unfavorable foreign currency movements and lower sales volume, partially offset by the combined improvement in average selling prices and mix of products sold.







        Gross Profit
        ($ in millions)
                                            Nine Months Ended                                                    Percent of Net Sales
                                September 30, 2019      September 30, 2018       Change      Percent Change       2019           2018
        Net sales             $         784.3          $             792.6     $   (8.3 )         (1.0 )%         100.0 %        100.0 %
        Cost of products sold           565.2                        577.9        (12.7 )         (2.2 )           72.1           72.9
        Gross profit          $         219.1          $             214.7     $    4.4            2.0  %          27.9 %         27.1 %
        


Gross profit increased by $4.4 million during the nine months ended September 30, 2019 to $219.1 million versus the prior-year period of $214.7 million. AMS gross profit increased by $11.9 million, primarily due to higher sales, lower

resin input costs, reduced fixed costs and improved manufacturing efficiencies. In the EP segment, gross profit decreased by $7.5 million, primarily due to the unfavorable impact of foreign currency effects, lower sales volumes and higher input costs, partially offset by the combined effect of higher average selling prices and mix of products sold.







        Nonmanufacturing Expenses
        ($ in millions)
                                                Nine Months Ended                                                   Percent of Net Sales
                                    September 30, 2019      September 30, 2018       Change     Percent Change       2019           2018
        Selling expense           $          25.8          $              27.2     $   (1.4 )         (5.1 )%          3.3 %          3.4 %
        Research expense                     10.1                         11.8         (1.7 )        (14.4 )           1.3            1.5
        General expense                      72.0                         66.1          5.9            8.9             9.2            8.4
        Nonmanufacturing expenses $         107.9          $             105.1     $    2.8            2.7  %         13.8 %         13.3 %
        


Nonmanufacturing expenses in the nine months ended September 30, 2019 increased by $2.8 million to $107.9 million from $105.1 million in the prior-year period, primarily due to higher deferred compensation expense and higher IT expense.







        Restructuring and Impairment Expense
        ($ in millions)
                                             Nine Months Ended                                                  Percent of Net Sales
                                   September 30,
                                       2019            September 30, 2018       Change      Percent Change       2019           2018
        Advanced Materials &
        Structures               $             -     $                1.2     $   (1.2 )        (100.0 )%           - %           0.3 %
        Engineered Papers                    2.0                      0.2          1.8           900.0            0.5               -
        Unallocated expenses                   -                        -            -             N/A
        Total                    $           2.0     $                1.4     $    0.6            42.9  %         0.3 %           0.2 %
        


The Company incurred total restructuring and impairment expense of $2.0 million in the nine months ended September 30, 2019 compared with $1.4 million in the nine months ended September 30, 2018. In the 2019 period, the restructuring expense primarily related to $2.0 million in consulting fees and severance accruals for employees at our manufacturing operations in the U.S., Brazil and France.

In the comparable 2018 period, the restructuring expense primarily related to $1.1 million in severance accruals for employees at our EP and AMS manufacturing operations in the U.S. and France, as well as an asset impairment charge of $0.3 million on equipment in our U.S. AMS manufacturing operations.







        Operating Profit
        ($ in millions)
                                              Nine Months Ended                                                  Return on Net Sales
                                  September 30, 2019     September 30, 2018       Change     Percent Change       2019         2018
        Advanced Materials &
        Structures               $            54.6      $            39.5       $   15.1           38.2  %        14.6 %        11.0 %
        Engineered Papers                     88.5                   94.7           (6.2 )         (6.5 )         21.5          21.9
        Unallocated expenses                 (33.9 )                (26.0 )         (7.9 )        (30.4 )
        Total                    $           109.2      $           108.2       $    1.0            0.9  %        13.9 %        13.7 %
        


Operating profit was $109.2 million in the nine months ended September 30, 2019 compared with $108.2 million during the prior-year period.

The AMS segment's operating profit in the nine months ended September 30, 2019 was $54.6 million compared to $39.5 million in the prior-year period. The increase of $15.1 million, or 38.2%, was primarily due to higher sales, lower resin input costs, reduced fixed costs and improvements in SG&A.

The EP segment's operating profit in the nine months ended September 30, 2019 was $88.5 million, a decrease of $6.2 million, or 6.5%, from $94.7 million in the prior-year period. The decrease was primarily due to lower sales volume, expenses related to the Brazilian ICMS tax assessment, the unfavorable impact of foreign currency effects and higher input costs, partially offset by the combined effect of higher average selling prices and mix of products sold and lower SG&A expenses within the segment.

Unallocated expenses in the nine months ended September 30, 2019 were $33.9 million compared to $26.0 million in the prior-year period, an increase of $7.9 million, or 30.4%, primarily the result of higher deferred compensation expense and higher IT expense.

Non-Operating Expenses

Interest expense was $29.6 million in the nine months ended September 30, 2019, an increase from $20.1 million in the prior-year period and included $7.1 million of interest related to a tax accrual in Brazil as discussed in more detail in Note 13, Commitments and Contingencies. The weighted average effective interest rate on our debt facilities was approximately 4.43% and 4.01% for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019 compared to the prior-year period, the interest accrual in Brazil and a higher average interest rate as a result of the bond issuance in the third quarter of 2018 were primarily responsible for the increase.

Other expense, net, was $1.6 million during the nine months ended September 30, 2019, a decrease of $12.0 million compared to $10.4 million in Other income, net, during the nine months ended September 30, 2018. This decrease was primarily due to the $10.2 million decrease in the fair value of the contingent liability related to the Conwed acquisition during the nine months ended September 30, 2018 and the $2.2 million accrual in the nine months ended September 30, 2019 related to penalties and fees associated with the Brazilian ICMS Tax Assessment, as discussed in Note 13. Commitments and Contingencies.

Income Taxes

A $12.8 million provision for income taxes in the nine months ended September 30, 2019 resulted in an effective tax rate of 16.4% compared with 10.6% in the prior-year period. The prior-year period included significant net favorable impacts of the one-time transition tax adjustment.

Income (loss) from Equity Affiliates

Income from equity affiliates was $0.4 million in the nine months ended September 30, 2019 compared with a loss of $0.5 million during the prior-year period.

Net Income and Income per Share

Net income in the nine months ended September 30, 2019 was $65.6 million, or $2.12 per diluted share, compared with $87.3 million, or $2.83 per diluted share, during the prior-year period. The decrease in net income was primarily due to a $13.0 million, or $0.43 per diluted share favorable transition tax adjustment and a $10.2 million, or $0.25 per diluted share benefit as a result of the decrease in fair value of the Conwed contingent liability in the same period in the prior year. Net income in the nine months ended September 30, 2019 includes higher deferred compensation expenses and higher IT expenses compared to the same period in the prior year. These items were partially offset by the increase in AMS segment net sales and by a slight increase in operating profit.

LIQUIDITY AND CAPITAL RESOURCES

A major factor in our liquidity and capital resource planning is our generation of cash flow from operations, which is sensitive to changes in the mix of products sold, sales volume and selling prices of our products, as well as changes in our production volumes, costs, foreign currency exchange rates and working capital. Our liquidity is supplemented by funds available under our New Credit Agreement with a syndicate of banks that is used as either operating conditions or strategic opportunities warrant.

As of September 30, 2019, $65.1 million of the Company's $84.9 million of cash and cash equivalents was held by foreign subsidiaries. We believe that our sources of liquidity and capital, including cash on-hand, cash generated from operations and our existing credit facilities, will be sufficient to finance our continued operations and growth strategy.

Cash Requirements

As of September 30, 2019, we had net operating working capital of $191.4 million and cash and cash equivalents of $84.9 million, compared with net operating working capital of $195.2 million and cash and cash equivalents of $93.8 million as of December 31, 2018. These changes primarily reflect the impacts of changes in currency exchange rates, net repayments of debt and changes in operating working capital presented on the condensed consolidated statements of cash flow contained in this report.

Net cash provided by operations was $118.9 million in the nine months ended September 30, 2019 compared with $93.2 million in the prior-year period. Net cash provided by operations increased primarily due to a $22.2 million improvement in working capital related cash flows, primarily favorable changes in accounts receivable balances compared to prior year.

In the nine months ended September 30, 2019, net changes in operating working capital used cash of $9.1 million compared to the prior-year period, in which net changes in operating working capital used cash of $31.3 million. This change in working capital outflows compared to the nine months ended September 30, 2018 was primarily driven by increased cash flows related to lower Accounts receivable and Accrued expenses and other current liabilities.

Cash used for investing activities during the nine months ended September 30, 2019 was $22.8 million, compared to $18.3 million in the prior-year period, and consisted primarily of capital spending in both periods. The Company has increased its investments in capacity in AMS as well as IT systems to support growth initiatives.

During the nine months ended September 30, 2019, financing activities consisted . . .

Nov 04, 2019

(c) 1995-2019 Cybernet Data Systems, Inc. All Rights Reserved

This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »
Link to MarketWatch's Slice.