(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.
Tobacco (EP) - The Company's largest single end-market is the tobacco industry, and at this time, management anticipates minimal impact to overall demand in 2020, outside of typically expected industry attrition, given the consumer staple nature of the industry. The company believes some customers have increased their inventory levels to minimize supply chain impacts of potential future COVID-19 related disruptions.
Medical (AMS) - The Company's medical products are largely used in finger bandages, diagnostic test strips, and hospital-setting products, and management believes sales of these products are not sensitive to COVID-19-related economic weakness.
Filtration (AMS) - The Company serves water and other filtration markets, and management believes these products are generally less sensitive to economic volatility than typical industrial goods.
Manufacturing & Operations. Beyond the potential general demand impacts described above, the Company's operations have been moderately affected by external supply chain and customer-driven disruptions as well as within the Company's manufacturing footprint. During the first quarter and into the early weeks of the second quarter, four of the Company's 24 sites temporarily shut down production in response to local government mandates and/or proactive safety measures to protect employees. In these cases, the Company continued to ship products from inventories on hand, and the financial impact of these disruptions is not expected to have a material impact on the Company's full year results. At present, all facilities are operational. Furthermore, there have been only isolated and temporary customer shutdowns, and the Company is maintaining active dialogue with all key customers and suppliers regarding supply chain and production planning. The Company's primary raw materials remain readily available in the global marketplace and no significant procurement challenges have risen. Many of the Company's products in our AMS segment have been deemed "essential" (e.g., filtration and medical) by local governments and thus the production facilities are not expected to have further shutdowns unless local governments mandate temporary closure or there are additional health and safety concerns beyond the current circumstances.
Financial Results Impacts & Outlook. During the first quarter, the Company generally performed above internal expectations despite moderate COVID-19 related impacts, the most significant of which was the reduced sales of transportation films sold into China. During the second and third quarters, the Company's results were impacted due to softer demand in several regions as a result of decreased customer ordering beginning in March 2020 when the pandemic impact spread globally and cases dramatically increased. While the Company expects demand pressures to begin to subside during the fourth quarter of 2020 and into 2021, it is challenging to predict domestic and international health and safety developments, the magnitude and duration of global economic weakness, and the magnitude and timing of a subsequent recovery. As such the Company elected to withdraw its 2020 financial guidance in May (please refer to first quarter 2020 earnings press release and Form 8-K filed with the SEC on May 6, 2020 for additional commentary), though it still expects to be profitable and for operating cash flow to exceed capital spending requirements in 2020.
In response to the COVID-19 pandemic, the Company has conducted extensive sensitivity analyses on the potential 2020 financial impacts, particularly on cash flow and liquidity. These sensitivity tests include a range of outcomes from demand-only disruption, to multi-week shutdowns across our manufacturing footprint with all sales, production, and shipping halted. At present, the Company believes it has sufficient liquidity to fund the Company's operations and financial obligations under likely scenarios despite the expected challenges of the near-term economic environment. These obligations include approximately $55 million of expected annual cash dividend payments to stockholders in 2020 ($41 million of which has been paid as of September 30, 2020). While management believes a meaningful escalation of manufacturing disruptions is unlikely, the Company's cash on hand, credit facility availability, and ability to manage expenses and capital expenditures, should provide sufficient liquidity to support the Company's operating needs and financial obligations.
The Company also continues to actively assess the credit worthiness of its customers in the context of the potential business disruptions from COVID-19 but has not yet seen evidence of a material change to its ability to collect accounts receivable balances.
SUMMARY ($ in millions, except per share amounts) Three Months Ended Nine Months Ended September 30, Percent of Net Sales September 30, Percent of Net Sales 2020 2019 2020 2019 2020 2019 2020 2019 Net sales $ 279.3 $ 256.4 100.0 % 100.0 % $ 795.0 $ 784.3 100.0 % 100.0 % Gross profit 80.2 72.2 28.7 28.2 228.8 219.1 28.8 27.9 Restructuring & impairment expense 6.0 1.6 2.1 0.6 7.7 2.0 1.0 0.3 Operating profit 37.0 34.6 13.2 13.5 105.5 109.2 13.3 13.9 Interest expense 7.8 6.7 2.8 2.6 22.8 29.6 2.9 3.8 Income from continuing operations 24.5 27.7 8.8 10.8 68.5 65.6 8.6 8.4 Net income $ 24.5 $ 27.7 8.8 % 10.8 % $ 68.5 $ 65.6 8.6 % 8.4 % Diluted earnings per share from continuing operations $ 0.78 $ 0.90 $ 2.18 $ 2.12 Diluted earnings per share $ 0.78 $ 0.90 $ 2.18 $ 2.12 Cash provided by operations $ 58.2 $ 63.9 $ 107.5 $ 118.9 Capital spending $ 5.8 $ 4.8 $ 20.7 $ 20.0
RESULTS OF OPERATIONS Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019 Net Sales ($ in millions) Three Months Ended September 30, September 30, 2020 2019 Change Percent Change Advanced Materials & Structures $ 138.9 $ 126.1 $ 12.8 10.2 % Engineered Papers 140.4 130.3 10.1 7.8 Total $ 279.3 $ 256.4 $ 22.9 8.9 %
Net sales were $279.3 million in the three months ended September 30, 2020 compared with $256.4 million in the prior-year period. The increase in net sales consisted of the following ($ in millions):
Amount Percent Changes in volume, product mix and selling prices $ 23.2 9.1 % Changes due to net foreign currency impacts 0.1 - Changes due to royalties (0.4) (0.2) Total $ 22.9 8.9 %
AMS segment net sales were $138.9 million for the three months ended September 30, 2020 compared to $126.1 million during the prior-year period. The increase of $12.8 million or 10.2% included the benefit from the Tekra acquisition (closed March 13, 2020) and sales growth in medical and industrial end markets, driven by higher demand for facemask materials, specialty hospital products, and packaging films. Excluding the acquisition benefit from Tekra ("organic"), AMS sales decreased 8% primarily due to a decline in sales of the Company's transportation films, which were significantly impacted by the global COVID-19 pandemic and associated disruption of the auto industry. Infrastructure and construction also declined due mainly to weakness in the oil and gas sector. AMS organic sales were down 3% when excluding transportation films.
EP segment net sales during the three months ended September 30, 2020 of $140.4 million increased by $10.1 million, or 7.8%, versus net sales of $130.3 million in the prior-year quarter. The increase in net sales was primarily the result of positive price/mix impacts and higher volumes of cigarette paper products as customers increased inventory levels to help avoid potential supply chain disruptions from COVID-19. These increases were partially offset by the continued de-emphasizing of lower-margin non-tobacco paper volumes.
Gross Profit ($ in millions) Three Months Ended Percent of Net Sales September 30, September 30, 2020 2019 Change Percent Change 2020 2019 Net sales $ 279.3 $ 256.4 $ 22.9 8.9 % 100.0 % 100.0 % Cost of products sold 199.1 184.2 14.9 8.1 71.3 71.8 Gross profit $ 80.2 $ 72.2 $ 8.0 11.1 % 28.7 % 28.2 %
Gross profit increased by $8.0 million during the three months ended September 30, 2020 to $80.2 million versus the prior-year period of $72.2 million. AMS gross profit increased by $0.9 million, primarily due to incremental gross profits from the acquired Tekra business and lower raw material costs partially offset by the decline in transportation and infrastructure and construction sales. In the EP segment, gross profit increased by $10.3 million, primarily due to higher sales volume of cigarette papers and lower wood pulp input costs, and cost reduction efforts. The improvements in the EP segment gross profit were partially offset by $3.2 million of other restructuring-related charges in Cost of products sold, of which, $2.0 million was to write-down the value of certain spare parts and consignment inventories to estimated net realizable value and $1.2 million, which resulted from the acceleration of
depreciation and amortization for machinery and equipment and by $1.0 million of unfavorable foreign currency exchange.
The $3.2 million of other restructuring-related charges relate to the decision to shut down the Spotswood, New Jersey facility and shift the production of paper made there to the Company's other facilities. See Note 9. Restructuring and Impairment Activities.
Nonmanufacturing Expenses ($ in millions) Three Months Ended Percent of Net Sales September 30, September 30, 2020 2019 Change Percent Change 2020 2019 Selling expense $ 9.0 $ 8.6 $ 0.4 4.7 % 3.2 % 3.4 % Research expense 3.6 3.1 0.5 16.1 1.3 1.2 General expense 24.6 24.3 0.3 1.2 8.9 9.4 Nonmanufacturing expenses $ 37.2 $ 36.0 $ 1.2 3.3 % 13.3 % 14.0 %
Nonmanufacturing expenses in the three months ended September 30, 2020 increased by $1.2 million to $37.2 million from $36.0 million in the prior-year period, primarily due to the addition of the acquired Tekra business and higher IT spending partially offset by lower deferred compensation expenses and other corporate general and administrative expenses.
Restructuring and Impairment Expense ($ in millions) Three Months Ended Percent of Net Sales September 30, September 30, 2020 2019 Change 2020 2019 Advanced Materials & Structures $ - $ - $ - - % - % Engineered Papers 5.9 1.6 4.3 4.2 1.2 Unallocated expenses 0.1 - 0.1 - - Total $ 6.0 $ 1.6 $ 4.4 2.1 % 0.6 %
The Company incurred total restructuring and impairment expense of $6.0 million and $1.6 million in the three months ended September 30, 2020 and 2019, respectively. In the 2020 period, restructuring expense in the EP segment included $4.2 million relating to severance and other accruals as a result of the decision to shut down the Spotswood, New Jersey facility.
In the 2020 period the EP segment also recognized $1.8 million of restructuring expenses primarily related to severance accruals at our manufacturing operations in France and Poland.
In the comparable 2019 period, restructuring expense primarily related to $1.6 million in consulting fees and severance accruals for employees at our manufacturing operations in the U.S., Brazil and France. These restructuring charges relate to ongoing cost optimization initiatives to remain competitive within the EP segment.
Operating Profit ($ in millions) Three Months Ended Return on Net Sales September 30, September 30, 2020 2019 Change Percent Change 2020 2019 Advanced Materials & Structures $ 18.5 $ 19.3 $ (0.8) (4.1) % 13.3 % 15.3 % Engineered Papers 28.2 27.3 0.9 3.3 20.1 21.0 Unallocated expenses (9.7) (12.0) 2.3 19.2 Total $ 37.0 $ 34.6 $ 2.4 6.9 % 13.2 % 13.5 %
Operating profit was $37.0 million in the three months ended September 30, 2020 compared with $34.6 million during the prior-year period.
The AMS segment's operating profit in the three months ended September 30, 2020 was $18.5 million compared to $19.3 million in the prior-year period. The decrease of $0.8 million, or 4.1%, reflected increased non-cash intangible asset amortization expenses related to the Tekra acquisition, lower transportation and infrastructure and construction sales, partially offset by lower raw material costs and on-going cost reduction initiatives.
The EP segment's operating profit in the three months ended September 30, 2020 was $28.2 million, an increase of $0.9 million, or 3.3%, from $27.3 million in the prior-year period. The increase was primarily driven by strong sales of high-value cigarette papers, and lower wood pulp input costs partially offset by higher restructuring expenses and other site-closure related costs as discussed above. Currency movements resulted in an unfavorable $1.1 million impact to operating profit.
Unallocated expenses in the three months ended September 30, 2020 were $9.7 million compared to $12.0 million in the prior-year period, a decrease of $2.3 million, or 19.2%. The decrease was primarily due to the timing of certain corporate administrative expense and third-party consulting fees partially offset by higher IT spending.
Interest expense was $7.8 million in the three months ended September 30, 2020, an increase from $6.7 million in the prior-year period. Interest expense increased by $0.5 million due to higher average debt balances as a result of the Tekra acquisition with the remainder of the increase reflecting prior year expense reversals related to Brazil tax assessments which reduced prior year interest expense.
Other expense, net, was $1.0 million during the three months ended September 30, 2020 compared to Other income of $1.7 million during the three months ended September 30, 2019. The decrease is primarily due to foreign currency losses in the 2020 period and in the 2019 period, the Company recorded a $1.1 million gain from the sale of carbon credits in France.
A $4.8 million provision for income taxes in the three months ended September 30, 2020 resulted in an effective tax rate of 17.0% compares with 10.8% in the prior-year quarter. The increase was due to an unfavorable change in mix of earnings by jurisdiction offset by a net favorable impact of U.S. tax credits.
Income from equity affiliates, which reflects the results of operations of CTM and CTS, was $1.1 million in the three months ended September 30, 2020 compared with income of $1.3 million during the prior-year period, due to higher volumes.
Net Income and Income per Share
Net income in the three months ended September 30, 2020 was $24.5 million, or $0.78 per diluted share, compared with $27.7 million, or $0.90 per diluted share, during the prior-year period. Net income in the three months ended September 30, 2020 includes $0.23 per share of higher restructuring and other related COGS expenses resulting from shut down of the Spotswood, New Jersey facility and restructuring activities at other EP sites, which were partially offset by the increase of gross profits in EP segment.
Nine Months Ended September 30, 2020 Compared with the Nine Months Ended
September 30, 2019 Net Sales ($ in millions) Nine Months Ended September 30, September 30, 2020 2019 Change Percent Change Advanced Materials & Structures $ 394.6 $ 373.3 $ 21.3 5.7 % Engineered Papers 400.4 411.0 (10.6) (2.6) Total $ 795.0 $ 784.3 $ 10.7 1.4 %
Net sales were $795.0 million in the nine months ended September 30, 2020 compared with $784.3 million in the prior-year period. The increase in net sales consisted of the following ($ in millions):
Amount Percent Changes in volume, product mix and selling prices $ 17.7 2.3 % Changes due to net foreign currency impacts (6.3) (0.8) % Changes due to royalties (0.7) (0.1) Total $ 10.7 1.4 %
AMS segment net sales were $394.6 million for the nine months ended September 30, 2020 compared to $373.3 million during the prior-year period. The increase of $21.3 million, or 5.7%, included the benefit from the Tekra . . .
Nov 04, 2020
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