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May 6, 2020, 5:10 p.m. EDT

10-Q: SCHWEITZER MAUDUIT INTERNATIONAL INC

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(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, 2019. 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, 2019 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.

COVID-19 Overview

Transportation (AMS) - The Company's primary products are aftermarket automotive paint protection films. Management believes this product line can deliver steady long-term growth due to increasing global consumer adoption, although this category is likely to face near-term negative impacts as a result of significant auto industry disruption and near-term consumer purchasing behaviors, as a result of COVID-19.

Liquidity & Debt Overview. The Company currently has $754.7 million of total debt, $126.7 million of cash, and undrawn capacity on its revolving credit facility of $283.6 million at the end of the first quarter. Capacity on the revolving credit facility reflects the $212.0 million draw on the facility during the first quarter of 2020. Per the terms of the credit facility, net leverage was 2.7x at the end of the first quarter, versus a maximum covenant ratio of 4.5x, though covenants contain an acquisition-related provision, allowing net leverage to reach 5.0x throughout 2020. The

Company's nearest debt maturity is the revolving credit facility which is due in 2023. Please refer to liquidity and capital resources section for additional detail.







        SUMMARY
         ($ in millions, except per share
        amounts)                                                 Three Months Ended
                                                       March 31,               Percent of Net Sales
                                                  2020           2019           2020           2019
        Net sales                             $    261.5     $    258.0         100.0 %        100.0 %
        Gross profit                                74.3           67.9          28.4           26.3
        Restructuring & impairment expense           0.1              -             -              -
        Operating profit                            34.1           30.4          13.0           11.8
        Interest expense                             6.9            7.8           2.6            3.0
        Income from continuing operations           22.5           17.4           8.6            6.7
        Net income                            $     22.5     $     17.4           8.6 %          6.7 %
        Diluted earnings per share from
        continuing operations                 $     0.72     $     0.56
        Diluted earnings per share            $     0.72     $     0.56
        Cash provided by operations           $      5.1     $     13.0
        Capital spending                      $      7.4     $      7.3
        








        RESULTS OF OPERATIONS
        Three Months Ended March 31, 2020 Compared with the Three Months Ended March 31,
        2019
        Net Sales
        ($ in millions)
                                                         Three Months Ended
                                                 March 31, 2020       March 31, 2019        Change       Percent Change
        Advanced Materials & Structures        $      122.9         $          120.5     $      2.4             2.0 %
        Engineered Papers                             138.6                    137.5            1.1             0.8
        Total                                  $      261.5         $          258.0     $      3.5             1.4 %
        


Net sales were $261.5 million in the three months ended March 31, 2020 compared with $258.0 million in the prior-year period. The increase in net sales consisted of the following ($ in millions):







                                                           Amount    Percent
        Changes in volume, product mix and selling prices $  7.5       2.9  %
        Changes due to net foreign currency impacts         (3.4 )    (1.3 )
        Changes due to royalties                            (0.6 )    (0.2 )
        Total                                             $  3.5       1.4  %
        


AMS segment net sales were $122.9 million for the three months ended March 31, 2020 compared to $120.5 million during the prior-year period. The increase of $2.4 million or 2.0% included the acquisition benefit from the Tekra acquisition (closed March 13, 2020). Excluding the acquisition benefit from Tekra, sales decreased 2.6% primarily due to decline in sales of the Company's transportation films, which were significantly impacted by the global disruption of the auto industry, particularly in China, by the COVID-19 pandemic. The decline in transportation sales offset gains in each of AMS's other end-markets.

EP segment net sales during the three months ended March 31, 2020 of $138.6 million increased by $1.1 million, or 0.8%, versus net sales of $137.5 million in the prior-year quarter. Compared to the prior-year period, the increase in net sales was primarily the result of a favorable mix of products sold and average selling prices, offset by lower sales volume and unfavorable foreign currency movements.







        Gross Profit
        ($ in millions)
                                        Three Months Ended                                                 Percent of Net Sales
                                March 31, 2020       March 31, 2019       Change       Percent Change       2020           2019
        Net sales             $      261.5         $          258.0     $     3.5            1.4  %         100.0 %        100.0 %
        Cost of products sold        187.2                    190.1          (2.9 )         (1.5 )           71.6           73.7
        Gross profit          $       74.3         $           67.9     $     6.4            9.4  %          28.4 %         26.3 %
        


Gross profit increased by $6.4 million during the three months ended March 31, 2020 to $74.3 million versus the prior-year period of $67.9 million. AMS gross profit increased by $0.4 million, primarily due to the addition of the acquired Tekra business and lower resin input costs, offset by the decline in transportation film sales. In the EP segment, gross profit increased by $6.0 million, primarily due to positive price/mix movements within the portfolio, lower wood pulp input costs, and favorable currency movements from lower local currency operating costs in Brazil.







        Nonmanufacturing Expenses
        ($ in millions)
                                          Three Months Ended                                               Percent of Net Sales
                                  March 31, 2020     March 31, 2019       Change       Percent Change       2020           2019
        Selling expense           $        9.5     $            8.6     $     0.9           10.5  %           3.6 %          3.3 %
        Research expense                   3.2                  3.3          (0.1 )         (3.0 )            1.2            1.3
        General expense                   27.4                 25.6           1.8            7.0             10.5            9.9
        Nonmanufacturing expenses $       40.1     $           37.5     $     2.6            6.9  %          15.3 %         14.5 %
        


Nonmanufacturing expenses in the three months ended March 31, 2020 increased by $2.6 million to $40.1 million from $37.5 million in the prior-year period, primarily due to transaction expenses associated with the Tekra acquisition.







        Restructuring and Impairment Expense
        ($ in millions)
                                                Three Months Ended                         Percent       Percent of Net Sales
                                        March 31, 2020     March 31, 2019       Change     Change        2020             2019
        Advanced Materials & Structures $          -     $              -     $      -         N/A           - %            - %
        Engineered Papers                        0.1                    -          0.1         N/A         0.1              -
        Unallocated expenses                       -                    -            -         N/A
        Total                           $        0.1     $              -     $    0.1         N/A           - %            - %
        


The Company incurred total restructuring and impairment expense of $0.1 million and $0.0 million in the three months ended March 31, 2020 and 2019, respectively.







        Operating Profit
        ($ in millions)
                                          Three Months Ended                                              Return on Net Sales
                                  March 31, 2020      March 31, 2019      Change      Percent Change       2020         2019
        Advanced Materials &
        Structures               $        13.7       $         14.9     $   (1.2 )         (8.1 )%         11.1 %        12.4 %
        Engineered Papers                 33.4                 28.7          4.7           16.4            24.1          20.9
        Unallocated expenses             (13.0 )              (13.2 )        0.2            1.5
        Total                    $        34.1       $         30.4     $    3.7           12.2  %         13.0 %        11.8 %
        


Operating profit was $34.1 million in the three months ended March 31, 2020 compared with $30.4 million during the prior-year period.

The AMS segment's operating profit in the three months ended March 31, 2020 was $13.7 million compared to $14.9 million in the prior-year period. The decrease of $1.2 million, or 8.1%, was primarily due to the decline in transportation film sales, which was partially offset by lower raw material costs.

The EP segment's operating profit in the three months ended March 31, 2020 was $33.4 million, an increase of $4.7 million, or 16.4%, from $28.7 million in the prior-year period. The increase was primarily due to the combination of positive pricing and mix of products sold, ongoing cost reduction activities, lower input costs and favorable local currency operating costs, which combined to more than offset certain inefficiencies from temporary plant shutdowns related to COVID-19 safety measures.

Unallocated expenses in the three months ended March 31, 2020 were $13.0 million compared to $13.2 million in the prior-year period, a decrease of $0.2 million, or 1.5%. The decrease was driven by lower deferred compensation expenses, related to stock market volatility, partially offset by transaction expenses associated with the Tekra acquisition.

Non-Operating Expenses

Interest expense was $6.9 million in the three months ended March 31, 2020, a decrease from $7.8 million in the prior-year period. The Company benefited from lower average interest rates and debt balances, prior to the closing of the Tekra acquisition, when compared to the prior year period. The weighted average effective interest rate on our debt facilities was approximately 3.84% and 4.42% for the three months ended March 31, 2020 and 2019, respectively.

Other income, net, was $0.6 million during the three months ended March 31, 2020 compared to Other expense, net, of $0.6 million during the three months ended March 31, 2019.

Income Taxes

A $5.3 million provision for income taxes in the three months ended March 31, 2020 resulted in an effective tax rate of 19.1% compares with 20.0% in the prior-year quarter. The decrease was primarily due to favorable mix of earnings by jurisdiction, non-US legislative tax rate reductions and discrete items in the current year.

Income (Loss) from Equity Affiliates

Income from equity affiliates, which reflects the results of operations of CTM and CTS, was $0.0 million in the three months ended March 31, 2020 compared with loss of $0.2 million during the prior-year period.

Net Income and Income per Share

Net income in the three months ended March 31, 2020 was $22.5 million, or $0.72 per diluted share, compared with $17.4 million, or $0.56 per diluted share, during the prior-year period. The increase in net income was primarily due to operating profit growth in the EP segment.

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.

Cash Requirements

As of March 31, 2020, $49.4 million of the Company's $126.7 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 Provided by Operations

Net cash provided by operations was $5.1 million in the three months ended March 31, 2020 compared with $13.0 million in the prior-year period. The decrease was primarily related to unfavorable year-over-year movements in working capital related cash flows.

Working Capital

As of March 31, 2020, the Company had net operating working capital of $206.5 million and cash and cash equivalents of $126.7 million, compared with net operating working capital of $168.8 million and cash and cash equivalents of $103.0 million as of December 31, 2019. These changes primarily reflect the Tekra acquisition and an increase in accounts receivable.

In the three months ended March 31, 2020, net changes in operating working capital used cash of $33.7 million compared to the prior-year period, in which net changes in operating working capital used cash of $22.0 million. The most significant working capital related cash flow items were accounts receivable

Cash Used for Investing

Cash used for investing activities during the three months ended March 31, 2020 was $176.3 million, compared to $7.6 million in the prior-year period. Current quarter cash used for investing is largely due to the net $170.6 million consideration transferred to acquire Tekra, comprised of the originally announced $155.0 million purchase price and $15.6 million of closing adjustments, which related primarily to tax benefits expected to be realized by the Company. The Company funded the transaction on its previously undrawn credit revolver.

Cash Provided by (Used in) Financing Activities

During the three months ended March 31, 2020, financing activities consisted of $212.0 million net proceeds from borrowings under the revolving credit facility, $13.7 million in cash paid for dividends declared to SWM stockholders and share repurchases of $1.0 million. In the prior-year period, financing activities consisted of $13.6 million in cash paid for dividends declared to SWM stockholders in the first three months of 2019, $0.8 million in net repayments on short-term and long-term debt and share repurchases of $0.9 million.

The Company presently believes that the sources of liquidity discussed above are sufficient to meet its anticipated funding needs for the foreseeable future.

Dividend Payments

We have declared and paid cash dividends on our common stock every fiscal quarter since the second quarter of 1996. On May 6, 2020, we announced a cash dividend of $0.44 per share payable on June 19, 2020 to stockholders of record as of May 22, 2020. The covenants contained in our Indenture and New Credit Agreement (as defined below) require that we maintain certain financial ratios as disclosed in Note 10. Debt of the notes to the unaudited condensed consolidated financial statements, none of which under normal business conditions we would expect to materially limit our ability to pay such dividends. We plan to continue to assess our dividend policy in light of our capital allocation strategy, cash generation, debt levels and ongoing requirements for cash to fund operations and to pursue possible strategic opportunities.

Share Repurchases

In the three months ended March 31, 2020, we repurchased and retired 25,274 shares of our common stock at a cost of $1.0 million for the value of employees' stock-based compensation share awards surrendered to satisfy their personal statutory income tax withholding obligations. See Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In the three months ended March 31, 2019, we repurchased and retired 24,372 shares of our common stock for $0.9 million for the value of employees' stock-based compensation share awards surrendered to satisfy their personal statutory income tax withholding obligations.







        Debt Instruments and Related Covenants
        Debt Instruments                                     Three Months Ended
        ($ in millions)                               March 31, 2020     March 31, 2019
        Changes in short-term debt                   $           -      $         (0.2 )
        Proceeds from issuances of long-term debt            212.0                   -
        Payments on long-term debt                            (0.4 )              (0.6 )
        Net proceeds from (repayments on) borrowings $       211.6      $         (0.8 )
        


Net proceeds from borrowings were $211.6 million during the three months ended March 31, 2020.

Unused borrowing capacity under the New Credit Agreement was $283.6 million as of March 31, 2020. We also had availability under our bank overdraft facilities of $6.0 million as of March 31, 2020.

The Company was in compliance with all of its covenants under the Indenture and New Credit Agreement at March 31, 2020. With the current level of borrowing and forecasted results, we expect to remain in compliance with our credit agreement financial covenants.

Our total debt to capital ratios, as calculated under the New Credit Agreement, at March 31, 2020 and December 31, 2019 were 56.0% and 47.6%, respectively.

Off-Balance Sheet Arrangements

. . .

May 06, 2020

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