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:
• SUMMARY;
• CRITICAL ACCOUNTING POLICIES AND ESTIMATES;
• RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS;
• RESULTS OF OPERATIONS;
• LIQUIDITY AND CAPITAL RESOURCES;
• OTHER FACTORS AFFECTING LIQUIDITY AND CAPITAL RESOURCES;
• OUTLOOK; and
• FORWARD-LOOKING STATEMENTS.
COVID-19 Overview
As a result of global economic and social disruption caused by the novel coronavirus (“COVID-19”), the Company’s sales, manufacturing operations, profitability, and cash flow have been, and may continue to be, impacted. This is an uncertain period with events and circumstances changing frequently, and while senior management is meeting regularly to address all aspects of the pandemic, the magnitude and duration of economic disruption is difficult to predict. This overview is intended to provide management’s view of the COVID-19 pandemic’s impact on the Company in 2020 and projected future impacts to assist investors in understanding these developments. These comments contain forward looking statements about operations, financial performance and liquidity, and are current as of December 31, 2020. Further details about the risks and impacts discussed in the section below can be found in the forward-looking statements and Part I, Item 1A. "Risk Factors".
Health and Safety. We maintain a primary commitment to the health of our global teams. As such, the Company has reviewed and modified our standard operating procedures to reflect the increased needs from the COVID-19 pandemic and continues to reassess our safety practices as developments occur and new information becomes available. We have reviewed all work responsibilities and those employees who are able have been encouraged to work remotely. At operating sites, we have increased our health and safety protocols. These protocols include a stepped-up focus and employee education on hygiene and sterilization procedures. We have implemented social distancing requirements and staggered schedules where appropriate. We have also increased guidelines for all employees on how to safely handle potential infections, including temperature checks prior to entering the site and self-quarantine/return to work requirements.
End-markets and sales. SWM serves a variety of end-markets around the world, each with unique demand dynamics. Management believes many of the Company’s end-markets have been and will remain relatively insulated from COVID-19-related economic challenges; however, some end-markets have been negatively affected by decreased demand, particularly transportation. In addition, sales results in 2020 have, and may continue to demonstrate, some volatility from potential inventory builds as customers manage inventories and safety stocks to protect against future potential supply chain disruptions.
Tobacco (EP) - The Company’s largest single end-market is the tobacco industry, which has not been materially affected by the pandemic, 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. Air filtration products have seen accelerated demand in 2020 due to heightened focus on air quality and attempts to minimize the spread of COVID-19.
Transportation (AMS) - The Company’s primary products are aftermarket automotive paint protection films, which management believes can deliver steady long-term growth due to increasing global consumer adoption of these products. In 2020, however, this category faced pronounced temporary near-term negative impacts, beginning late in the first quarter through most of the third quarter, as a result of significant auto industry disruption and consumer purchasing behaviors as a result of COVID-19. However, late in the third quarter of and throughout the fourth quarter of 2020, the Company’s transportation sales began to improve significantly.
Infrastructure & Construction (AMS) - The Company’s key products service highway development, residential construction, oil and gas site services and various other industrial projects which must move soil and require erosion and sediment control. Management believes these end-markets have been impacted by local self-distancing regulations that may affect the construction industry, but these end markets could be positively supported by a potential increase in infrastructure spending if governments provide stimulus funding to reinvigorate economic activities.
Industrial (AMS & EP) - The Company’s products service a broad range of applications, some of which are considered to be sensitive to economic activity and associated impacts of COVID-19, while other applications have delivered growth in 2020.
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 initial onset of the epidemic, the Company temporarily shut down manufacturing operations and/or total operations at certain sites to implement enhanced safety and hygiene procedures or to respond to temporary government orders. Where possible, the Company continued to ship products from inventories on hand, and the financial impact of these disruptions did not 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. However early signs of additional COVID-19 demand disruption led to the Company withdrawing its 2020 financial guidance in May in an abundance of caution (please refer to first quarter 2020 earnings press release and Form 8-K filed with the SEC on May 6, 2020 for additional commentary). During the second and third quarters, the Company’s results, primarily in the AMS segment, 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. Subsequently, the Company saw strong sales growth in the fourth quarter as certain key AMS end-markets such as transportation, filtration, and infrastructure and construction showed strong growth. For the full year, the company remained profitable and generated operating cash flow slightly higher than 2019 levels.
In response to the COVID-19 pandemic, the Company conducted extensive sensitivity analyses on the potential 2020 financial impacts, particularly on cash flow and liquidity. These sensitivity tests included a range of outcomes from demand-only disruption, to multi-week shutdowns across our manufacturing footprint with all sales, production, and shipping halted. Given the recent financial results, coupled with management’s belief that a meaningful escalation of manufacturing disruptions is unlikely, the Company’s operating cash flows, cash on hand, and credit facility availability, are expected to provide ample liquidity to support the Company’s operating needs and financial obligations, including cash dividend to stockholders.
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.
Liquidity & Debt Overview. The Company had $593.3 million of total debt, $54.7 million of cash, and undrawn capacity on its revolving credit facility of $445.0 million at the end of 2020. Net leverage was 2.3x at the end of 2020, versus a maximum covenant ratio of 4.5x per the terms of the credit facility, 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 2020, SWM reported net income of $83.8 million on total net sales of $1,074.4 million. Compared to the prior year, net sales increased $51.6 million, due primarily to incremental sales from the March 2020 Tekra acquisition of $77.3 million. The acquisition growth was offset by low single-digit sales declines in EP and AMS (excluding Tekra). Within AMS (excluding Tekra), Medical sales were up double-digits, while Filtration and Industrial sales were up modestly. Transportation and Infrastructure and Construction each declined, as they were more impacted by COVID-19 related demand disruptions, though each grew during the fourth quarter, with particularly strong growth in transportation.
Net income decreased to $83.8 million in 2020 compared to $85.8 million in 2019. Outside of typical business drivers, several large one-time items affect the year-over-year comparison. In 2020, the most significant expense included $11.7 million of restructuring, impairment, and other expenses related to the shut-down of the Spotswood, New Jersey facility. In 2019, these one-time items included $6.6 million (after- tax) of expenses related to Brazil tax assessments.
Cash provided by operations was $161.6 million in 2020 up from $160.3 million in 2019. Other uses and proceeds of cash during 2020 included $169.3 million consideration to acquire Tekra, $47.4 million net in proceeds from long debt issuances and repayments, $55.0 million in cash dividends paid to SWM stockholders and $33.3 million of capital spending including capitalized software.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 technical expertise 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 20. 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 21% of our total assets as of December 31, 2020. 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, and employee severance. We have also incurred restructuring costs in our AMS segment in pursuit of synergies from integrating our acquisitions. In recent 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.
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 9. 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, 2020 and 2019 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 on October 1, 2020 and 2019 did not indicate any impairment of intangible assets.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
For a discussion regarding recently adopted accounting pronouncements, see "Recently adopted Accounting Pronouncements" included in Note 2. Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
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For the Years Ended December 31,
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2020 (1)
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2019
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2018
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($ in millions, except per share amounts)
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Net sales
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$
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1,074.4
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$
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1,022.8
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$
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1,041.3
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Cost of products sold
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766.1
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732.8
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762.8
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Gross profit
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308.3
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290.0
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278.5
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Selling expense
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36.9
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33.7
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35.7
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Research expense
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13.8
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13.5
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15.2
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General expense
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116.9
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105.1
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90.9
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Total nonmanufacturing expenses
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167.6
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152.3
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141.8
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Restructuring and impairment expense
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11.9
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3.7
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1.7
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Operating profit
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128.8
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134.0
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135.0
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Interest expense
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30.5
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36.1
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28.2
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Other (expense) income, net
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(1.0)
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(1.0)
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10.0
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Income from continuing operations before income taxes and income from equity affiliates
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97.3
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96.9
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116.8
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Provision for income taxes
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18.4
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15.2
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10.7
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Income (loss) from equity affiliates, net of income taxes
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4.9
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4.1
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(11.3)
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Income from continuing operations
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83.8
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85.8
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94.8
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Loss from discontinued operations
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—
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—
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(0.3)
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Net income
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$
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83.8
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$
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85.8
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$
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94.5
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Net income (loss) per share - basic:
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Income per share from continuing operations
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$
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2.68
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$
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2.78
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$
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3.08
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Loss per share from discontinued operations
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—
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—
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(0.01)
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Net income per share - basic
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$
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2.68
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$
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2.78
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$
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3.07
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Net income (loss) per share - diluted:
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Income per share from continuing operations
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$
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2.66
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$
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2.76
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$
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3.07
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Loss per share from discontinued operations
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—
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—
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(0.01)
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Net income per share - diluted
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$
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2.66
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|
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$
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2.76
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$
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3.06
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(1) Results during the year ended December 31, 2020 include Tekra from the March 13, 2020 acquisition date to December 31, 2020.
Year Ended December 31, 2020 Compared with the Year Ended December 31, 2019
Net Sales
(dollars in millions)
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2020
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2019
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Change
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Percent Change
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Advanced Materials & Structures
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$
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543.5
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$
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477.2
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$
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66.3
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13.9
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%
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Engineered Papers
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530.9
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545.6
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(14.7)
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(2.7)
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Total
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$
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1,074.4
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$
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1,022.8
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$
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51.6
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5.0
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%
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Net sales were $1,074.4 million in 2020 compared with $1,022.8 million in 2019. The increase in net sales consisted of the following (dollars in millions):
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Amount
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Percent
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Changes in currency exchange rates
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$
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(1.2)
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(0.1)
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%
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Changes in royalties
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(0.7)
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(0.1)
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Changes in product mix, selling prices and sales volumes, net
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53.5
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5.2
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Total
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$
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51.6
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5.0
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%
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AMS segment net sales were $543.5 million for 2020 compared to $477.2 million during 2019. The increase of $66.3 million or 13.9% included the benefit from the Tekra acquisition (closed March 13, 2020), and gains in medical, filtration, and industrial end-markets. Medical sales were driven by higher demand for facemask materials and specialty hospital products. Filtration sales increased slightly with strong air filtration growth offset by mild softness in other areas. Industrial sales grew due to gains in packaging films and materials for wind turbine manufacturing. Those increases were partially offset by declines in transportation and infrastructure and construction sales driven by COVID-19 related pressures, however both end-markets rebounded in the fourth quarter, particularly transportation, moderating the full year declines. Excluding Tekra, AMS sales declined 2.3%.
The EP segment net sales were $530.9 million for 2020 compared to $545.6 million during 2019. The decrease of $14.7 million, or 2.7%, was primarily the result of the volume decline due to the continued strategic de-emphasis of non-tobacco volumes and tobacco industry attrition, which offset positive price/mix impact benefiting from a higher mix of high-value cigarette, Heat-not-Burn, and battery separator papers and a smaller proportion of lower-margin non-tobacco volumes.
Gross Profit
(dollars in millions)
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Percent Change
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Percent of Net Sales
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2020
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2019
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Change
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2020
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2019
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Net sales
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$
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1,074.4
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$
|
1,022.8
|
|
|
$
|
51.6
|
|
|
5.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of products sold
|
766.1
|
|
|
732.8
|
|
|
33.3
|
|
|
4.5
|
|
|
71.3
|
|
|
71.6
|
|
Gross profit
|
$
|
308.3
|
|
|
$
|
290.0
|
|
|
$
|
18.3
|
|
|
6.3
|
%
|
|
28.7
|
%
|
|
28.4
|
%
|
Gross profit for the year ended December 31, 2020 increased by $18.3 million, or 6.3%, to $308.3 million from $290.0 million in the prior year. AMS gross profit increased by $9.5 million, primarily due to the incremental gross profits from the acquired Tekra business and lower input costs partially offset by declines in transportation and infrastructure and construction sales. In the EP segment, gross profit increased by $8.9 million, primarily due to positive price/mix impacts, cost reduction initiatives, lower input costs, and favorable impact of foreign currency movements, partially offset by $4.9 million of other restructuring-related charges in Cost of products, of which $2.0 million was to write down the value of certain spare parts and consignment inventories to estimated net realizable
value and $2.9 million, resulting from the acceleration of depreciation and amortization for machinery and equipment.
The $4.9 million of other restructuring-related charges related 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 13. Restructuring and Impairment Activities, of the Notes to Consolidated Financial Statements for additional information.
Nonmanufacturing Expenses
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
Percent of Net Sales
|
|
2020
|
|
2019
|
|
Change
|
|
|
2020
|
|
2019
|
Selling expense
|
$
|
36.9
|
|
|
$
|
33.7
|
|
|
$
|
3.2
|
|
|
9.5
|
%
|
|
3.4
|
%
|
|
3.3
|
%
|
Research expense
|
13.8
|
|
|
13.5
|
|
|
0.3
|
|
|
2.2
|
|
|
1.3
|
|
|
1.3
|
|
General expense
|
116.9
|
|
|
105.1
|
|
|
11.8
|
|
|
11.2
|
|
|
10.9
|
|
|
10.3
|
|
Nonmanufacturing expenses
|
$
|
167.6
|
|
|
$
|
152.3
|
|
|
$
|
15.3
|
|
|
10.0
|
%
|
|
15.6
|
%
|
|
14.9
|
%
|
Nonmanufacturing expenses in the year ended December 31, 2020 increased by $15.3 million, or 10.0%, to $167.6 million from $152.3 million in the prior year due primarily to incremental expenses of the acquired Tekra business and transaction expenses associated with the Tekra acquisition, as well as third-party consulting expenses.
Restructuring and Impairment Expense
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Net Sales
|
|
2020
|
|
2019
|
|
Change
|
|
|
2020
|
|
2019
|
Advanced Materials & Structures
|
$
|
0.5
|
|
|
$
|
1.1
|
|
|
$
|
(0.6)
|
|
|
|
|
0.1
|
%
|
|
0.2
|
%
|
Engineered Papers
|
11.3
|
|
|
2.6
|
|
|
8.7
|
|
|
|
|
2.1
|
|
|
0.5
|
|
Unallocated expenses
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
11.9
|
|
|
$
|
3.7
|
|
|
$
|
8.2
|
|
|
|
|
1.1
|
%
|
|
0.4
|
%
|
The Company incurred total restructuring and impairment expense of $11.9 million in the year ended December 31, 2020, compared to $3.7 million in the year ended December 31, 2019, an increase of $8.2 million.
In the AMS segment, restructuring and impairment expense of $0.5 million in the 2020 period related to severance accruals as a result of department realignments.
In the year ended December 31, 2020, restructuring expense included $6.7 million in the EP segment relating to severance and other accruals as a result of the decision to shut down the Spotswood, New Jersey facility.
The EP segment also recognized $4.6 million of restructuring expenses in 2020 primarily related to severance accruals at our manufacturing operations in France and Poland. These restructuring charges relate to ongoing cost optimization initiatives to remain competitive within the EP segment.
In the year ended December 31, 2019, restructuring and impairment expenses consisted of $1.1 million in impairment charges at our U.S. and Chinese manufacturing facilities related to our AMS segment, as well as $2.6 million in severance accruals for employees at our U.S., Brazilian and French manufacturing operations related to the EP segment.
Operating Profit
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
Return on Net Sales
|
|
2020
|
|
2019
|
|
Change
|
|
|
2020
|
|
2019
|
Advanced Materials & Structures
|
$
|
64.8
|
|
|
$
|
64.3
|
|
|
$
|
0.5
|
|
|
0.8
|
%
|
|
11.9
|
%
|
|
13.5
|
%
|
Engineered Papers
|
116.8
|
|
|
119.2
|
|
|
(2.4)
|
|
|
(2.0)
|
|
|
22.0
|
|
|
21.8
|
|
Unallocated expenses
|
(52.8)
|
|
|
(49.5)
|
|
|
(3.3)
|
|
|
(6.7)
|
|
|
|
|
|
Total
|
$
|
128.8
|
|
|
$
|
134.0
|
|
|
$
|
(5.2)
|
|
|
(3.9)
|
%
|
|
12.0
|
%
|
|
13.1
|
%
|
Operating profit was $128.8 million in the year ended December 31, 2020 compared with $134.0 million during the prior year.
The AMS segment's operating profit in the year ended December 31, 2020 was $64.8 million compared to $64.3 million in the prior year period, up 1%, which reflected incremental operating profits from the Tekra acquisition partially offset by higher purchase accounting expenses related to the Tekra acquisition.
The EP segment's operating profit in the year ended December 31, 2020 was $116.8 million, a decrease of $2.4 million, or 2.0%, from $119.2 million in the prior year. The decrease was primarily due to $16.2 million of restructuring and impairment expenses and other restructuring related charges of which $11.7 million was related to the shut-down of the Spotswood, New Jersey facility as discussed above, partially offset by positive price/mix impacts, cost structure improvements, lower raw material costs and favorable currency movements mostly from lower local currency operating costs in Brazil.
Unallocated expenses in the year ended December 31, 2020 were $52.8 million, up $3.3 million, or 6.7%, from the $49.5 million in the prior year period. The increase was primarily due to the result of transaction expenses associated with the Tekra acquisition, and third-party consulting costs.
Non-Operating Expenses, Net
Interest expense was $30.5 million in the year ended December 31, 2020, a decrease of $5.6 million from $36.1 million in the year ended December 31, 2019. The decrease was due mainly to $7.1 million of non-recurring interest expense related to Brazil tax assessments in the year of 2019. Interest expense on debt was up $1.5 million primarily due to incremental debt related to the Tekra acquisition.
The weighted average effective interest rate on our debt facilities was approximately 4.02% and 4.42% for the years ended December 31, 2020 and 2019, respectively.
Other expense, net was $1.0 million during the year ended December 31, 2020 unchanged versus the year ended December 31, 2019.
Income Taxes
An $18.4 million and $15.2 million provision for income taxes in the years ended December 31, 2020 and 2019, respectively, resulted in an effective tax rate of 18.9% compared with 15.7% in the prior year. The Company’s effective tax rates differ from the statutory federal income tax rate of 21% due to varying tax rates in foreign jurisdictions, the relative amounts of income we earn in those jurisdictions and a year over year $4.2 million reduction due to the one-time Brazil ICMS litigation accrual in 2019.
Income (Loss) from Equity Affiliates
Income from equity affiliates, net of income taxes, was $4.9 million in the year ended December 31, 2020 compared with income of $4.1 million during the prior year, and reflects the results of operations of CTM and CTS.
Net Income and Income per Share
Net income in the year ended December 31, 2020 was $83.8 million, or $2.66 per diluted share, compared with $85.8 million, or $2.76 per diluted share, during the prior year period.
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, volume and pricing of our products, as well as changes in our production volumes, costs and working capital. Our liquidity is supplemented by funds available under our revolving credit facility with a syndicate of banks that is used as either operating conditions or strategic opportunities warrant.
Cash Requirements
As of December 31, 2020, $39.4 million of our $54.7 million of cash and cash equivalents was held by foreign subsidiaries. Cash paid for income taxes (net of refunds) was $14.8 million for the year ended December 31, 2020. 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.
We generally fund our capital projects using cash on-hand, cash generated from operations and our existing credit facilities, including the Credit Agreement, as defined below in "Debt Instruments and Related Covenants."
Cash Provided by Operations
Net cash provided by operations was $161.6 million in the year ended December 31, 2020 compared with $160.3 million in the prior year.
Working Capital
As of December 31, 2020, we had net operating working capital of $232.3 million including cash and cash equivalents of $54.7 million, compared with net operating working capital of $271.8 million including cash and cash equivalents of $103.0 million as of December 31, 2019. These changes primarily reflect the impact of the Tekra acquisition and increases in accounts receivable, inventory, accounts payable and accrued expenses.
In 2020, net changes in operating working capital decreased cash flow by $5.7 million. In 2019, net changes in operating working capital decreased cash flow by $1.8 million. The most significant working capital related cash outflow item was related to higher accounts receivable, as a result of strong Q4 organic sales.
Cash Used for Investing
Cash used for investing activities during 2020 was $203.1 million and consisted primarily of the net $169.3 million consideration to acquire Tekra. Capital spending including capitalized software totaled $33.3 million, down $0.8 million. In response to COVID-19 related impacts to certain end-markets, management continues to monitor cash flow trends and has deferred some discretionary capital spending originally planned for 2020.
Cash used for investing activities during 2019 was $14.8 million and consisted primarily of cash paid for capital spending partially offset by proceeds from the sale of RTL Philippines assets.
Capital Spending
Capital spending including capitalized software was $33.3 million, and $34.1 million in 2020 and 2019, respectively. During 2020 and 2019 capital spending was primarily related to support growth in filtration and transportation on AMS manufacturing facilities in China, the development of new products, the rebuild of certain paper manufacturing lines, and IT infrastructure.
We incur capital spending as necessary to meet legal requirements and otherwise in connection with the protection of the environment at our facilities in the U.S., United Kingdom, France, Belgium, Brazil, Canada, China and Poland. For these purposes, we expect to incur capital expenditures of less than $1.0 million in each of 2021 and 2022, of which no material amount is expected to be the result of environmental fines or settlements. The foregoing capital expenditures are not expected to reduce our ability to invest in other appropriate and necessary capital projects and are not expected to have a material adverse effect on our financial condition or results of operations.
Cash Used for Financing Activities
During 2020, financing activities consisted primarily of $212.7 million proceeds from borrowings under the revolving credit facility, primarily to fund the Tekra acquisition, net repayments on borrowings of $165.3 million, cash dividends of $55.0 million paid to SWM stockholders and share repurchases of $1.0 million.
During 2019, financing activities consisted primarily of net repayments on borrowings of $80.5 million, cash dividends of $54.4 million paid to SWM stockholders and share repurchases of $0.9 million.
Dividend Payments
We have declared and paid cash dividends on our common stock every fiscal quarter since the second quarter of 1996. On February 18, 2021, we announced a cash dividend of $0.44 per share payable on March 26, 2021 to stockholders of record as of the close of business on March 12, 2021. The covenants contained in our Indenture and Credit Agreement, each, as defined below in "Debt Instruments and Related Covenants," require that we maintain certain financial ratios, as disclosed in Note 14. Debt, of the Notes to Consolidated Financial Statements, none of which under normal business conditions materially limit our ability to pay such dividends. We will continue to assess our dividend policy in light of our overall strategy, cash generation, debt levels and ongoing requirements for cash to fund operations and to pursue possible strategic opportunities.
Share Repurchases
In 2020 and 2019, we repurchased 27,779 shares and 25,297 shares, respectively, of our common stock at a cost of $1.0 million and $0.9 million, respectively, for the value of employees' stock-based compensation share awards surrendered to satisfy their personal statutory income tax withholding obligations.
Debt Instruments and Related Covenants
|
|
|
|
|
|
|
|
|
|
|
|
Debt Instruments and Related Covenants ($ in millions)
|
For the Years Ended December 31,
|
2020
|
|
2019
|
|
|
|
|
|
Changes in short-term debt
|
$
|
—
|
|
|
$
|
(0.1)
|
|
Proceeds from issuances of long-term debt
|
212.7
|
|
|
19.1
|
|
Payments on long-term debt
|
(165.3)
|
|
|
(99.5)
|
|
Net proceeds (repayments) from borrowings
|
$
|
47.4
|
|
|
$
|
(80.5)
|
|
Net proceeds from borrowings were $47.4 million during 2020.
On February 10, 2021 we amended our existing Credit Agreement to provide for an additional Term Loan Facility “Term Loan B” which provides for additional capacity of $350 million. See Note 25. Subsequent Event, of the Notes to Consolidated Financial Statements for additional information about the Term Loan B. Other than potential borrowings under the Term Loan B, the Company does not expect to incur any significant additional borrowings during 2021.
Credit Agreement
On September 25, 2018, the Company entered into a $700.0 million credit agreement (the “Credit Agreement”), which replaced the Company’s previous senior secured credit facilities and provides for a five-year $500.0 million revolving line of credit (the “Revolving Credit Facility”) and a seven-year $200.0 million bank term loan facility (the “Term Loan Facility”). Subject to certain conditions, including the absence of a default or event of default under the Credit Agreement, the Company may request incremental loans to be extended under the Revolving Credit Facility or the Term Loan Facility so long as the Company is in pro forma compliance with the financial covenants set forth in the Credit Agreement and the aggregate of such increases does not exceed $400.0 million. See Note 14. Debt, of the Notes to Consolidated Financial Statements, for more information.
Borrowings under the Revolving Credit Facility will initially bear interest, at the Company’s option, at either (i) 1.75% in excess of a reserve adjusted London Interbank Offered Rate (“LIBOR”) or (ii) 0.75% in excess of an alternative base rate. Borrowings under the Term Loan Facility will initially bear interest, at the Company’s option, at either (i) 2.00% in excess of a reserve adjusted LIBOR rate or (ii) 1.00% in excess of an alternative base rate. The Term Loan amortizes at the rate of 1.0% per year and will mature on September 25, 2025. Unused borrowing capacity under the Credit Agreement was $445.0 million as of December 31, 2020. We also had availability under our bank overdraft facilities and lines of credit of $6.7 million as of December 31, 2020.
The Company was in compliance with all of its covenants under the Indenture and Credit Agreement at December 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 Credit Agreement, at December 31, 2020 and December 31, 2019 were 47.7% and 47.6%, respectively.
Senior Unsecured Notes
On September 25, 2018, the Company closed a private offering of $350.0 million of 6.875% senior unsecured notes due 2026 (the “Notes”). The Notes are guaranteed on a senior unsecured basis by each of the Company’s existing and future wholly-owned subsidiaries that is a borrower under or that guarantees obligations under the Credit Agreement, as defined below, or that guarantees certain other indebtedness, subject to certain exceptions.
The Notes were issued pursuant to an Indenture (the “Indenture”), dated as of September 25, 2018, by and among the Company, the guarantors listed therein and Wilmington Trust, National Association, as trustee. The Indenture provides that interest on the Notes will accrue from September 25, 2018 and is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2019, and the Notes mature on October 1, 2026.
The Company may redeem some or all of the Notes at any time on or after October 1, 2021, at the redemption prices set forth in the Indenture, together with accrued and unpaid interest, if any, to, but excluding, the redemption date. Prior to October 1, 2021, the Company may redeem some or all of the Notes at a price equal to 100% of the principal amount thereof, plus a “make-whole” premium as set forth in the Indenture. The Company may redeem up to 35% of the original aggregate principal amount of the Notes on or prior to October 1, 2021 with the proceeds of certain equity offerings at a redemption price equal to 106.875% of the principal amount of the Notes. If the Company sells certain assets or consummates certain change of control transactions, the Company will be required to make an offer to repurchase the Notes, subject to certain conditions.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
OTHER FACTORS AFFECTING LIQUIDITY AND CAPITAL RESOURCES
The following table represents our future contractual cash requirements for the next five years and thereafter for our long-term debt obligations and other commitments ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due for the years ended
|
Contractual Obligations
|
Total
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
Current debt (1)
|
$
|
4.1
|
|
|
$
|
4.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term debt (2)
|
593.8
|
|
|
—
|
|
|
4.1
|
|
|
53.5
|
|
|
2.6
|
|
|
188.8
|
|
|
344.8
|
|
Debt interest (3)
|
160.3
|
|
|
29.1
|
|
|
29.0
|
|
|
28.7
|
|
|
27.9
|
|
|
27.8
|
|
|
17.8
|
|
Restructuring obligations (4)
|
7.4
|
|
|
5.8
|
|
|
0.5
|
|
|
0.4
|
|
|
0.4
|
|
|
0.3
|
|
|
—
|
|
Minimum operating lease
payments (5)
|
25.0
|
|
|
6.3
|
|
|
5.1
|
|
|
3.5
|
|
|
2.9
|
|
|
1.8
|
|
|
5.4
|
|
Purchase obligations - raw
materials (6)
|
35.1
|
|
|
26.9
|
|
|
6.1
|
|
|
1.6
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
Purchase obligations - energy (7)
|
31.8
|
|
|
22.7
|
|
|
4.7
|
|
|
1.6
|
|
|
0.4
|
|
|
0.4
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Act transition obligation (8)
|
21.0
|
|
|
2.2
|
|
|
2.2
|
|
|
4.2
|
|
|
5.5
|
|
|
6.9
|
|
|
—
|
|
Other contractual obligations (9) (10) (11)
|
0.9
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
879.4
|
|
|
$
|
98.0
|
|
|
$
|
51.7
|
|
|
$
|
93.5
|
|
|
$
|
40.2
|
|
|
$
|
226.0
|
|
|
$
|
370.0
|
|
(1) Current debt excludes debt issuance costs of $1.3 million; see Note 14. Debt, of the Notes to Consolidated Financial Statements.
(2) Long-term debt excludes debt issuance costs of $3.3 million and $6.1 million in unamortized discount on the senior unsecured notes; see additional information regarding long-term debt in Note 14. Debt, of the Notes to Consolidated Financial Statements.
(3) The amounts reflected in debt interest are based upon the short-term and long-term scheduled principal maturities and interest rates in effect as of December 31, 2020. Where specific maturities are not stated, such as for an overdraft line-of-credit, a repayment date coinciding with the end of the year was used for purposes of these calculations. With respect to our variable-rate debt outstanding at December 31, 2020, a 100 basis point increase in interest rates would increase our debt interest obligation by $4.4 million in 2021, taking into account the effect of the interest rate hedge transactions the Company has entered into as of December 31, 2020. For more information regarding our outstanding debt and associated interest rates, as well as hedging strategies in place which serve to fix the interest rate on a large portion of our debt, see Note 14. Debt, of the Notes to Consolidated Financial Statements.
(4) Restructuring obligations are more fully discussed in Note 13. Restructuring and Impairment Activities, of the Notes to Consolidated Financial Statements.
(5) Minimum operating lease payments relate to our future minimum obligations under non-cancelable operating leases having an initial or remaining term in excess of one year as of December 31, 2020.
(6) Purchase obligations for raw materials include our calcium carbonate purchase agreement at our plant in Quimperlé, France, in which a vendor operates an on-site calcium carbonate plant and our plant has minimum purchase quantities. See Note 20. Commitments and Contingencies, of the Notes to Consolidated Financial Statements for additional information.
(7) Purchase obligations for energy include obligations under agreements with (1) an energy co-generation supplier at our plants in Quimperlé, France and Spay, France, to supply steam for which our plants have minimum purchase commitments, (2) a natural gas supplier to supply and distribute 100% of the natural gas needs of our three French plants, (3) an electricity supplier to supply and distribute the electricity needs of our three French plants, (4) an energy supplier to supply a constant supply of electricity for our Pirahy plant in Brazil, (5) an energy supplier to supply natural gas for our Pirahy plant in Brazil and (6) an energy supplier has a contract to provide biomass at our Spay, France facility for the next two years. See Note 20. Commitments and Contingencies, of the Notes to Consolidated Financial Statements for additional information.
(8) On December 22, 2017, the United States enacted the Tax Act into law, which requires a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. Companies may elect to pay the tax over eight years based on an installment schedule outlined in the Tax Act. We have made this election and have reflected our transition tax due by year as a contractual obligation. See Note. 17. Income Taxes, of the Notes to Consolidated Financial Statements for additional information.
(9) Other contractual obligations relate to commitments for capital projects. Other contractual obligations exclude $2.0 million of unrecognized tax benefits associated with uncertain tax positions for which there is no contractual obligation. We had no other long-term liabilities as defined for purposes of this disclosure by the SEC as of December 31, 2020.
(10) Other contractual obligations do not include any amounts for our pension obligations. The pension obligations are funded by our separate pension trusts, which held $135.2 million in assets at December 31, 2020. The combined projected benefit obligation ("PBO") of our U.S. and French pension plans was underfunded by $25.7 million and $24.9 million as of December 31, 2020 and 2019, respectively. We make contributions to our pension trusts based on many factors including regulatory guidelines, investment returns of the trusts and availability of cash for pension contributions versus other priorities. We expect 2020 funding to be in compliance with the Pension Protection Act of 2006. For information regarding our long-term pension obligations and trust assets, see Note 18. Postretirement and Other Benefits, of the Notes to Consolidated Financial Statements.
(11) Other contractual obligations do not include any amounts for our postretirement healthcare and life insurance benefits. Such payments are dependent upon our retirees incurring costs and filing claims; therefore, future payments are uncertain. Our net payments under these plans were insignificant for the years ended December 31, 2020 and 2019, respectively. Based on this past experience, we currently expect our share of the net payments during 2021 to be insignificant.
OUTLOOK
For the AMS segment, we expect our growth outlook to be driven by macro factors affecting our served end-markets, including filtration, transportation, infrastructure and construction, medical, and industrial, as well as industry demand for many of our key applications. We expect water and other specialty filtration applications, surface protection products within transportation, and our products for infrastructure and construction end-markets to deliver growth exceeding GDP, or other global growth benchmarks, over the long-term due to the relative strong demand for the specific products we provide. Generally, we believe that our sales into the industrial and medical end-markets will perform relatively in line with long-term broad economic growth in the U.S. and to some extent Europe and China. However, the Company’s medical sales demonstrated strong growth in 2020, and could continue to outpace the broader economy, due to increased demand for certain products related to COVID-19. Excluding potential impacts from raw material price movements, the Company generally projects profit growth in the AMS segment as a result of expected organic sales growth. For the EP segment, we expect our performance to be driven by macro factors, such as the expected long-term trend of reduced cigarette consumption and foreign exchange movements, and the potential regulatory changes in the tobacco industry such as approvals of various new reduced-risk tobacco products or tax-related price increases.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995 that are subject to the safe harbor created by that Act and other legal protections. Forward-looking statements, include, without limitation, those regarding 2020 outlook and future performance, mergers and acquisitions, future market trends, future RTL sales and volume trends, smoking attrition rates, synergies or growth from acquisitions, incurrence of additional debt, adoption of LIP standards in new regions, reverse osmosis water filtration and global drinking water demands, integration, and growth prospects (including international growth), the deductibility of goodwill associated with certain acquisitions, impact of our restructuring actions, post-retirement healthcare and life insurance payments, impact of the LIP intellectual property litigation and opposition proceedings, the amount of capital spending and/or common stock repurchases, the profitability of China-based joint ventures, pricing pressures (including related to LIP), future cash flows, benefits associated with our global asset realignment (including possible non-recurrence of one-time tax benefits, lower or higher effective tax rates), purchase accounting impacts, impacts of our ongoing operational excellence and other cost-reduction initiatives, increasing revenues coming from our non-tobacco operations, the impact of the COVID-19 pandemic on our operations, profitability, and cash flow, and other statements generally identified by words such as "believe," "expect," "intend," "plan," "potential," "anticipate," "project," "appear," "should," "could," "may," "will," "typically" and similar words. These statements are not guarantees of future performance and involve certain risks and uncertainties that may cause actual results to differ materially from our expectations as of the date of this report. These risks include, among other things, those set forth in Part I, Item 1A. "Risk Factors" of this report as well as the following factors:
•Risks associated with pandemics and other public health emergencies, including the continued spread and impact of, and the governmental and third party response to, the COVID-19 pandemic;
•The impact of mandatory business closures, limits on non-essential travel, “social or physical distancing” guidelines, “shelter-in-place” mandates and similar governmental and private measures taken to combat the spread of COVID-19;
•Changes in sales or production volumes, pricing and/or manufacturing costs of Recon products, cigarette paper (including for LIP cigarettes), including any change by our customers in their tobacco and tobacco-related blends for their cigarettes, their target inventory levels and/or the overall demand for their products, new technologies such as e-cigarettes, inventory adjustments and rebalancings in our EP segment. Additionally, competition and changes in AMS end-market products due to changing customer demands;
•Changes in the Chinese economy, including relating to the demand for reconstituted tobacco, premium cigarettes and netting and due to impact of tariffs;
•Risks associated with the implementation of our strategic growth initiatives, including diversification, and the Company's understanding of, and entry into, new industries and technologies;
•Changes in the source and intensity of competition in our commercial segments. We operate in highly competitive markets in which alternative supplies and technologies may attract our customers away from our products. In addition, our customers may, in some cases, produce for themselves the components that the Company sells to them for incorporation into their products, thus reducing or eliminating their purchases from us;
•Our ability to attract and retain key personnel, due to our prior restructuring actions, the tobacco industry in which we operate or otherwise;
•Weather conditions, including potential impacts, if any, from climate change, known and unknown, seasonality factors that affect the demand for virgin tobacco leaf and natural disasters or unusual weather events;
•Seasonal or cyclical market and industry fluctuations which may result in reduced net sales and operating profits during certain periods;
•Increases in commodity prices and lack of availability of such commodities, including energy, wood pulp and resins, which could impact the sales and profitability of our products;
•Adverse changes in the oil, gas, automotive, construction and infrastructure, and mining sectors impacting key AMS segment customers;
•Increases in operating costs due to inflation or otherwise, such as labor expense, compensation and benefits costs;
•Employee retention and labor shortages;
•Changes in employment, wage and hour laws and regulations in the U.S., France and elsewhere, including the loi de Securisation de l'emploi in France, unionization rule and regulations by the National Labor Relations Board in the U.S., equal pay initiatives, additional anti-discrimination rules or tests and different interpretations of exemptions from overtime laws;
•Labor strikes, stoppages, disruptions or other disruptions at our facilities;
•The impact of tariffs, and the imposition of any future additional tariffs and other trade barriers, and the effects of retaliatory trade measures;
•Existing and future governmental regulation and the enforcement thereof, for example relating to the tobacco industry, taxation and the environment (including the impact thereof on our Chinese joint ventures);
•New reports as to the effect of smoking on human health or the environment;
•Changes in general economic, financial and credit conditions in the U.S., Europe, China and elsewhere, including the impact thereof on currency exchange rates (including any weakening of the Euro and Real) and on interest rates and the effects of the ongoing discussions between the U.K. and European Union to determine the terms of the U.K.'s withdrawal from the European Union;
•Changes in the method pursuant to which LIBOR rates are determined and the phasing out of LIBOR after 2021;
•Changes in the manner in which we finance our debt and future capital needs, including potential acquisitions;
•The success of, and costs associated with, our current or future restructuring initiatives, including the granting of any needed governmental approvals and the occurrence of work stoppages or other labor disruptions;
•Changes in the discount rates, revenue growth, cash flow growth rates or other assumptions used by the Company in its assessment for impairment of assets and adverse economic conditions or other factors that would result in significant impairment charges;
•The failure of one or more material suppliers, including energy, resin and pulp suppliers, to supply materials as needed to maintain our product plans and cost structure;
•International conflicts and disputes, which restrict our ability to supply products into affected regions, due to the corresponding effects on demand, the application of international sanctions, or practical consequences on transportation, banking transactions, and other commercial activities in troubled regions;
•Compliance with the FCPA and other anti-corruption laws or trade control laws, as well as other laws governing our operations;
•The pace and extent of further international adoption of LIP cigarette standards and the nature of standards so adopted;
•Risks associated with our 50%-owned, non-U.S. joint ventures relating to control and decision-making, compliance, accounting standards, transparency and customer relations, among others;
•A failure in our risk management and/or currency or interest rate swaps and hedging programs, including the failures of any insurance company or counterparty;
•The number, type, outcomes (by judgment or settlement) and costs of legal, tax, regulatory or administrative proceedings, litigation and/or amnesty programs, including those in Brazil, France and Germany;
•The outcome and cost of LIP-related intellectual property infringement and validity litigation in Europe and the Glatz's German Patent Court invalidation proceedings;
•Risks associated with our technological advantages in our intellectual property and the likelihood that our current technological advantages are unable to continue indefinitely;
•Risks associated with acquisitions or other strategic transactions, including acquired liabilities and restrictions, retaining customers from businesses acquired, achieving any expected results or synergies from acquired businesses, complying with new regulatory frameworks, difficulties in integrating acquired businesses or implementing strategic transactions generally and risks associated with international acquisition transactions, including in countries where we do not currently have a material presence;
•Risks associated with dispositions, including post-closing claims being made against us, disruption to our other businesses during a sale process or thereafter, credit risks associated with any buyer of such disposed assets and our ability to collect funds due from any such buyer;
•Risks associated with our global asset realignment initiatives, including: changes in tax law, treaties, interpretations, or regulatory determinations; audits made by applicable regulatory authorities and/or our auditor; and our ability to operate our business in a manner consistent with the regulatory requirements for such realignment;
•Increased taxation on tobacco-related products;
•Costs and timing of implementation of any upgrades or changes to our information technology systems;
•Failure by us to comply with any privacy or data security laws or to protect against theft of customer, employee and corporate sensitive information;
•Changes in tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities;
•Changes in construction and infrastructure spending and its impact on demand for certain products;
•Potential loss of consumer awareness and demand for acquired companies’ products if it is decided to rebrand those products under the Company’s legacy brand names; and
•Other factors described elsewhere in this document and from time to time in documents that we file with the SEC.
All forward-looking statements made in this document are qualified by these cautionary statements. Forward-looking statements herein are made only as of the date of this document, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise.
Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance unless expressed as such and should only be viewed as historical data.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk
Changes in foreign currency exchange rates may have an impact on our operating profit. Since we transact business in many countries, some of our sale and purchase transactions are denominated in a currency other than the local currency of our operations. As a result, changes in exchange rates between the currencies in which the transaction is denominated versus the local currency of our operation into which the transaction is being recorded can impact the amount of local currency recorded for such transaction. This can result in more or less local currency revenue or cost related to such transaction and thus have an effect on our operating profit. Currency transaction risk is mitigated partially in France as some of the revenue and expense transactions of our French subsidiaries are denominated in U.S. dollars, providing a degree of natural hedging. Our Brazilian and Polish operations are more fully exposed to currency transaction risk, especially as a result of U.S. dollar and euro denominated sales, respectively.
Additionally, changes in foreign currency exchange rates may have an impact on the amount reported in Other (expense) income, net. Once the above-indicated receivables and payables from the sale and purchase transactions have been recorded, to the extent currency exchange rates change prior to settlement of the balance, a gain or loss on the non-local currency denominated asset or liability balance may be experienced, in which case such gain or loss is included in Other (expense) income, net.
We utilize forward and swap contracts and, to a lesser extent, option contracts to selectively hedge our exposure to foreign currency transaction risk when it is practical and economical to do so. The use of these contracts minimizes transactional exposure to exchange rate changes because the gains or losses incurred on the derivative instrument will offset, in whole or in part, the loss or gain on the underlying foreign currency exposure. These instruments are entered into with money center banks, insurance companies or government agencies, collectively known as counterparties. We expect to continue to apply foreign currency hedging in our Brazilian and Polish operations in the foreseeable future. As of December 31, 2020, a 10% unfavorable change in the exchange rate of our functional currencies and those of our subsidiaries against the prevailing market rates of non-local currencies involving our transactional exposures would have resulted in a net pre-tax loss of approximately $6.7 million. These hypothetical gains or losses on foreign currency transactional exposures are based on the December 31, 2020 rates and the assumed rates. While we believe the above loss resulting from the hypothetical unfavorable changes in foreign currency exchange rates could be material to our results of operations, we reduce this risk by selectively hedging our exposure when it is practical and economical to do so.
Interest Rate Risk
We may utilize a combination of variable-rate and fixed-rate debt consisting of short-term and long-term instruments. We selectively hedge our exposure to interest rate increases on our variable-rate, long-term debt when it is practical and economical to do so. We have utilized various forms of interest rate hedge agreements, including interest rate swap agreements and forward rate agreements. We utilize variable-to-fixed interest rate swap agreements, typically with contractual terms no longer than 60 months, which serve to convert a portion of our outstanding variable rate debt to a fixed rate. Various outstanding interest-bearing instruments are sensitive to changes in interest rates. With respect to our variable-rate debt outstanding at December 31, 2020, a 100 basis point increase in interest rates would result in a $4.4 million decrease to our future annual pre-tax earnings, taking into account the effect of the interest rate hedge transactions the Company has entered into as of December 31, 2020. As of December 31, 2020, the percentage of the Company’s fixed and floating interest rate debt was 59% and 41%, respectively. The Company has entered into a number of interest rate hedge transactions to convert floating rate debt to fixed. On September 11, 2019, the Company entered into a pay-fixed, receive-variable interest rate swap with a maturity date of January 31, 2027. See Note 15. Derivatives, of the Notes to Consolidated Financial Statements for additional information. Including the impact of these transactions, as of December 31, 2020, the percentage of the Company’s debt subject to fixed and floating rates of interest was 83% and 17%, respectively.
Commodity Price Risk
We are subject to commodity price risks from our purchases of raw materials, including resin and wood pulp. Resin is the largest single component of raw material cost in the AMS segment and wood pulp is our largest single component of raw material cost in our EP segment. The per pound price of resin is volatile and may impact the future results of our AMS segment. Additionally, the per ton cost of wood pulp is cyclical in nature and more volatile than general inflation. During the period from January 2015 through December 2020, the U.S. list price of northern bleached softwood kraft pulp ("NBSK") a representative pulp grade that we use, ranged between $900 to $1,400 per ton. The average list price of NBSK for the year of 2020 was $1,140 per ton. We normally maintain approximately 50 to 90 days of inventories to support our operations. As a result, there is a lag in the impact of changes in the per ton list price of resin and wood pulp on our cost of products sold.
In our AMS segment, we utilize a variety of commodity grade and specialty resins, including a selection of specialized high temperature engineering grade resins. Certain of these specialty resins are significantly more expensive than commodity grade resins. Resin prices fluctuate significantly and can impact profitability. As we periodically enter into agreements with customers under which we agree to supply products at fixed prices, unanticipated increases in the costs of raw materials, or the lack of availability of such raw materials (due to force majeure or other reasons), can significantly impact our financial performance. Even where we do not have fixed-price agreements, we generally cannot pass through increases in raw material costs in a timely manner and in many instances are not able to pass through the entire increase to our customers. Further, some of the resins we use in our AMS segment are only available from a single supplier, or a limited number of suppliers. Consequently, such supplier(s) can control the availability and thus the cost of the resins we use, notwithstanding any changes in the cost of oil. It can be time consuming and costly, and occasionally impractical, to find replacement resins where such suppliers limit the availability or increase the cost of resins we use. Commodity grade resin prices typically correlate with crude oil prices while specialty resin prices often do not. To date, we have not utilized derivative instruments to manage this risk. With respect to our commodity price risk, a hypothetical 10% change in per ton resin prices would impact our future annual pre-tax earnings by approximately $15.7 million, assuming no compensating change in our selling prices.
Selling prices of our paper products are influenced, in part, by the market price for wood pulp, which is determined by worldwide industry supply and demand. Generally, over time, we have been able to increase our selling prices in response to increases in per ton wood pulp costs and have generally reduced our selling prices when wood pulp costs have significantly declined. Increases in prices of wood pulp could adversely impact our earnings if selling prices are not increased or if such increases do not fully compensate for or trail the increases in wood pulp prices. We have not utilized derivative instruments to manage this risk. With respect to our commodity price risk, a hypothetical 10% change in per ton wood pulp prices would impact our future annual pre-tax earnings by approximately $3.5 million, assuming no compensating change in our selling prices.
We believe that, while our exposure to commodity price risk is material to our results of operations, our customers understand such risk and over time changes in the price of the commodities used in our manufacturing processes are typically reflected in selling prices.
Energy Supply and Cost Volatility
In Western Europe, Poland, China and in the U.S., availability of energy is generally reliable, although prices can fluctuate significantly based on variations in demand. In Brazil, where that country's production of electricity is heavily reliant upon hydroelectric plants, availability of electricity has been affected in the past by rain variations. Although our Brazilian business currently has a sufficient supply of energy to continue its current level of operation, there can be no assurance that we will have sufficient electricity in the future, or that costs will remain stable.
Due to the competitive pricing in the markets for most of our products, we are typically unable to fully pass through higher energy costs to our customers. With respect to our purchased energy price risk, a hypothetical 10% change in per unit prices would impact our future annual pre-tax earnings by approximately $4.3 million, assuming no compensating change in our selling prices.
Periodically, when we believe it is appropriate to do so, we enter into agreements to procure a portion of our energy for future periods in order to reduce the uncertainty of future energy costs. However, in recent years this has only marginally slowed the increase in energy costs due to the volatile changes in energy prices we have experienced.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
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Page
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Consolidated Financial Statements
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Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018
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Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
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Consolidated Balance Sheets as of December 31, 2020 and 2019
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Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2020, 2019 and 2018
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Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
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Notes to Consolidated Financial Statements
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Reports of Independent Registered Public Accounting Firm
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Schedules have been omitted because they are either not required, not applicable or the required information is included in the consolidated financial statements or notes thereto.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share amounts)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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For the Years Ended December 31,
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2020
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2019
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2018
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|
|
|
|
|
|
|
|
|
|
Net sales
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$
|
1,074.4
|
|
|
$
|
1,022.8
|
|
|
$
|
1,041.3
|
|
Cost of products sold
|
766.1
|
|
|
732.8
|
|
|
762.8
|
|
Gross profit
|
308.3
|
|
|
290.0
|
|
|
278.5
|
|
|
|
|
|
|
|
Selling expense
|
36.9
|
|
|
33.7
|
|
|
35.7
|
|
Research expense
|
13.8
|
|
|
13.5
|
|
|
15.2
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|
General expense
|
116.9
|
|
|
105.1
|
|
|
90.9
|
|
Total nonmanufacturing expenses
|
167.6
|
|
|
152.3
|
|
|
141.8
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|
|
|
|
|
|
|
Restructuring and impairment expense
|
11.9
|
|
|
3.7
|
|
|
1.7
|
|
Operating profit
|
128.8
|
|
|
134.0
|
|
|
135.0
|
|
Interest expense
|
30.5
|
|
|
36.1
|
|
|
28.2
|
|
Other (expense) income, net
|
(1.0)
|
|
|
(1.0)
|
|
|
10.0
|
|
Income from continuing operations before income taxes and income from equity affiliates
|
97.3
|
|
|
96.9
|
|
|
116.8
|
|
|
|
|
|
|
|
Provision for income taxes
|
18.4
|
|
|
15.2
|
|
|
10.7
|
|
Income (Loss) from equity affiliates, net of income taxes
|
4.9
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|
|
4.1
|
|
|
(11.3)
|
|
Income from continuing operations
|
83.8
|
|
|
85.8
|
|
|
94.8
|
|
Loss from discontinued operations
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—
|
|
|
—
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|
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(0.3)
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Net income
|
$
|
83.8
|
|
|
$
|
85.8
|
|
|
$
|
94.5
|
|
|
|
|
|
|
|
Net income (loss) per share - basic:
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|
|
|
|
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Income per share from continuing operations
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$
|
2.68
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|
|
$
|
2.78
|
|
|
$
|
3.08
|
|
Loss per share from discontinued operations
|
—
|
|
|
—
|
|
|
(0.01)
|
|
Net income per share – basic
|
$
|
2.68
|
|
|
$
|
2.78
|
|
|
$
|
3.07
|
|
|
|
|
|
|
|
Net income (loss) per share – diluted:
|
|
|
|
|
|
Income per share from continuing operations
|
$
|
2.66
|
|
|
$
|
2.76
|
|
|
$
|
3.07
|
|
Loss per share from discontinued operations
|
—
|
|
|
—
|
|
|
(0.01)
|
|
Net income per share – diluted
|
$
|
2.66
|
|
|
$
|
2.76
|
|
|
$
|
3.06
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
30,832,700
|
|
|
30,652,200
|
|
|
30,551,300
|
|
|
|
|
|
|
|
Diluted
|
31,104,200
|
|
|
30,838,300
|
|
|
30,692,900
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
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|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Net income
|
$
|
83.8
|
|
|
$
|
85.8
|
|
|
$
|
94.5
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
Foreign currency translation adjustments
|
16.6
|
|
|
1.8
|
|
|
(28.6)
|
|
Less: Reclassification adjustment for realized translation adjustments
|
(0.1)
|
|
|
(0.9)
|
|
|
(0.8)
|
|
|
|
|
|
|
|
Unrealized (loss) gain on derivative instruments
|
(11.6)
|
|
|
1.6
|
|
|
2.4
|
|
Less: Reclassification adjustment for loss (gain) on derivative instruments included in net income
|
2.0
|
|
|
(4.5)
|
|
|
(3.7)
|
|
|
|
|
|
|
|
Net (loss) gain from postretirement benefit plans
|
(0.1)
|
|
|
0.6
|
|
|
(3.3)
|
|
Less: Amortization of postretirement benefit plans' costs included in net periodic benefit cost
|
3.9
|
|
|
3.3
|
|
|
3.8
|
|
Other comprehensive income (loss)
|
10.7
|
|
|
1.9
|
|
|
(30.2)
|
|
Comprehensive income
|
$
|
94.5
|
|
|
$
|
87.7
|
|
|
$
|
64.3
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share amounts)
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|
|
|
|
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|
|
|
|
|
|
December 31,
2020
|
|
December 31,
2019
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
$
|
54.7
|
|
|
$
|
103.0
|
|
Accounts receivable, net
|
148.5
|
|
|
143.2
|
|
Inventories
|
179.7
|
|
|
161.4
|
|
Income taxes receivable
|
6.2
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
Other current assets
|
7.3
|
|
|
7.4
|
|
Total current assets
|
396.4
|
|
|
427.5
|
|
|
|
|
|
Property, plant and equipment, net
|
339.0
|
|
|
330.3
|
|
Deferred income tax benefits
|
2.6
|
|
|
3.7
|
|
Investment in equity affiliates
|
59.3
|
|
|
52.4
|
|
Goodwill
|
403.7
|
|
|
337.4
|
|
Intangible assets
|
314.7
|
|
|
251.2
|
|
Other assets
|
69.2
|
|
|
69.2
|
|
Total assets
|
$
|
1,584.9
|
|
|
$
|
1,471.7
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current debt
|
$
|
2.8
|
|
|
$
|
1.9
|
|
Accounts payable
|
60.5
|
|
|
66.4
|
|
Income taxes payable
|
2.7
|
|
|
2.8
|
|
|
|
|
|
Accrued expenses
|
100.9
|
|
|
86.5
|
|
Total current liabilities
|
166.9
|
|
|
157.6
|
|
|
|
|
|
Long-term debt
|
590.5
|
|
|
540.8
|
|
Long-term income tax payable
|
17.7
|
|
|
21.4
|
|
Pension and other postretirement benefits
|
36.5
|
|
|
31.6
|
|
Deferred income tax liabilities
|
45.1
|
|
|
48.2
|
|
Other liabilities
|
78.6
|
|
|
74.4
|
|
Total liabilities
|
935.3
|
|
|
874.0
|
|
Stockholders' equity:
|
|
|
|
Preferred stock, $0.10 par value per share; 10,000,000 shares authorized; None issued or outstanding
|
—
|
|
|
—
|
|
Common stock, $0.10 par value per share; 100,000,000 shares authorized; 31,324,745 and 30,896,661 shares issued and outstanding at December 31, 2020 and 2019, respectively
|
3.1
|
|
|
3.1
|
|
Additional paid-in-capital
|
92.2
|
|
|
78.8
|
|
Retained earnings
|
666.2
|
|
|
638.4
|
|
Accumulated other comprehensive loss
|
(111.9)
|
|
|
(122.6)
|
|
Total stockholders' equity
|
649.6
|
|
|
597.7
|
|
Total liabilities and stockholders' equity
|
$
|
1,584.9
|
|
|
1,471.7
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
(Loss)
Income
|
|
Total
|
|
|
Balance, December 31, 2017
|
30,711,299
|
|
|
$
|
3.1
|
|
|
$
|
66.3
|
|
|
$
|
566.7
|
|
|
$
|
(89.4)
|
|
|
$
|
546.7
|
|
|
|
Cumulative effects of change in accounting standards
|
—
|
|
|
—
|
|
|
—
|
|
|
3.2
|
|
|
(4.9)
|
|
|
(1.7)
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
94.5
|
|
|
—
|
|
|
94.5
|
|
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(30.2)
|
|
|
(30.2)
|
|
|
|
Dividends declared ($1.73 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(53.2)
|
|
|
—
|
|
|
(53.2)
|
|
|
|
Restricted stock issuances, net
|
130,617
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Stock-based employee compensation expense
|
—
|
|
|
—
|
|
|
4.6
|
|
|
—
|
|
|
—
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued to directors as compensation
|
4,723
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
|
Purchases and cancellation of common stock
|
(75,395)
|
|
|
—
|
|
|
—
|
|
|
(3.0)
|
|
|
—
|
|
|
(3.0)
|
|
|
|
Balance, December 31, 2018
|
30,771,244
|
|
|
$
|
3.1
|
|
|
$
|
71.1
|
|
|
$
|
608.2
|
|
|
$
|
(124.5)
|
|
|
$
|
557.9
|
|
|
|
Cumulative effects of change in accounting standards
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.3)
|
|
|
—
|
|
|
(0.3)
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
85.8
|
|
|
—
|
|
|
85.8
|
|
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.9
|
|
|
1.9
|
|
|
|
Dividends declared ($1.76 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(54.4)
|
|
|
—
|
|
|
(54.4)
|
|
|
|
Restricted stock issuances, net
|
147,113
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Stock-based employee compensation expense
|
—
|
|
|
—
|
|
|
7.6
|
|
|
—
|
|
|
—
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued to directors as compensation
|
3,601
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
|
Purchases and cancellation of common stock
|
(25,297)
|
|
|
—
|
|
|
—
|
|
|
(0.9)
|
|
|
—
|
|
|
(0.9)
|
|
|
|
Balance, December 31, 2019
|
30,896,661
|
|
|
$
|
3.1
|
|
|
$
|
78.8
|
|
|
$
|
638.4
|
|
|
$
|
(122.6)
|
|
|
$
|
597.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
83.8
|
|
|
—
|
|
|
83.8
|
|
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.7
|
|
|
10.7
|
|
|
|
Dividends declared ($1.76 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(55.0)
|
|
|
—
|
|
|
(55.0)
|
|
|
|
Restricted stock issuances, net
|
302,705
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Stock-based employee compensation expense
|
—
|
|
|
—
|
|
|
8.6
|
|
|
—
|
|
|
—
|
|
|
8.6
|
|
|
|
Modification to director stock-based compensation
|
—
|
|
|
—
|
|
|
4.0
|
|
|
—
|
|
|
—
|
|
|
4.0
|
|
|
|
Stock issued to directors as compensation
|
3,689
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
|
Deferred compensation directors stock trust
|
149,469
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Purchases and cancellation of common stock
|
(27,779)
|
|
|
—
|
|
|
—
|
|
|
(1.0)
|
|
|
—
|
|
|
(1.0)
|
|
|
|
Balance, December 31, 2020
|
31,324,745
|
|
|
$
|
3.1
|
|
|
$
|
92.2
|
|
|
$
|
666.2
|
|
|
$
|
(111.9)
|
|
|
$
|
649.6
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
Net income
|
$
|
83.8
|
|
|
$
|
85.8
|
|
|
$
|
94.5
|
|
Less: Loss from discontinued operations
|
—
|
|
|
—
|
|
|
(0.3)
|
|
Income from continuing operations
|
83.8
|
|
|
85.8
|
|
|
94.8
|
|
Non-cash items included in net income:
|
|
|
|
|
|
Depreciation and amortization
|
72.2
|
|
|
57.7
|
|
|
61.6
|
|
Impairments
|
—
|
|
|
1.1
|
|
|
0.2
|
|
Deferred income tax (benefit) provision
|
(5.2)
|
|
|
(3.4)
|
|
|
7.5
|
|
Pension and other postretirement benefits
|
3.7
|
|
|
2.6
|
|
|
2.8
|
|
Stock-based compensation
|
8.8
|
|
|
7.7
|
|
|
4.8
|
|
(Income) loss from equity affiliates
|
(4.9)
|
|
|
(4.1)
|
|
|
11.3
|
|
Brazil tax assessment accruals, net
|
—
|
|
|
10.9
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term income tax payable
|
(0.5)
|
|
|
(0.6)
|
|
|
(12.0)
|
|
Change in fair value of contingent consideration
|
—
|
|
|
—
|
|
|
(10.2)
|
|
|
|
|
|
|
|
Cash dividends received from equity affiliates
|
2.7
|
|
|
2.6
|
|
|
2.0
|
|
Other items
|
6.7
|
|
|
1.8
|
|
|
0.4
|
|
Changes in operating working capital:
|
|
|
|
|
|
Accounts receivable
|
(5.3)
|
|
|
10.8
|
|
|
(18.3)
|
|
Inventories
|
(3.5)
|
|
|
(11.2)
|
|
|
(4.9)
|
|
Prepaid expenses
|
0.6
|
|
|
(0.2)
|
|
|
(0.1)
|
|
Accounts payable
|
(12.7)
|
|
|
(2.1)
|
|
|
8.0
|
|
Accrued expenses
|
7.4
|
|
|
3.9
|
|
|
(1.0)
|
|
Accrued income taxes
|
7.8
|
|
|
(3.0)
|
|
|
(8.0)
|
|
Net changes in operating working capital
|
(5.7)
|
|
|
(1.8)
|
|
|
(24.3)
|
|
Net cash provided by operating activities of:
|
|
|
|
|
|
- Continuing operations
|
161.6
|
|
|
160.3
|
|
|
138.9
|
|
- Discontinued operations
|
—
|
|
|
—
|
|
|
0.2
|
|
Cash provided by operations
|
161.6
|
|
|
160.3
|
|
|
139.1
|
|
Investing
|
|
|
|
|
|
Capital spending
|
(30.1)
|
|
|
(28.6)
|
|
|
(27.0)
|
|
Capitalized software costs
|
(3.2)
|
|
|
(5.5)
|
|
|
(2.7)
|
|
Acquisitions, net of cash acquired
|
(169.3)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Proceeds from sale of assets
|
0.5
|
|
|
14.7
|
|
|
—
|
|
Other investing
|
(1.0)
|
|
|
4.6
|
|
|
2.2
|
|
Cash used for investing
|
(203.1)
|
|
|
(14.8)
|
|
|
(27.5)
|
|
Financing
|
|
|
|
|
|
Cash dividends paid to SWM stockholders
|
(55.0)
|
|
|
(54.4)
|
|
|
(53.2)
|
|
Changes in short-term debt, net
|
—
|
|
|
(0.1)
|
|
|
(1.3)
|
|
Proceeds from issuances of long-term debt
|
212.7
|
|
|
19.1
|
|
|
634.2
|
|
Payments on long-term debt
|
(165.3)
|
|
|
(99.5)
|
|
|
(694.0)
|
|
Payments for debt issuance costs
|
—
|
|
|
—
|
|
|
(3.6)
|
|
Purchases of common stock
|
(1.0)
|
|
|
(0.9)
|
|
|
(3.0)
|
|
|
|
|
|
|
|
Cash used in financing
|
(8.6)
|
|
|
(135.8)
|
|
|
(120.9)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
1.8
|
|
|
(0.5)
|
|
|
(3.8)
|
|
(Decrease) increase in cash and cash equivalents
|
(48.3)
|
|
|
9.2
|
|
|
(13.1)
|
|
Cash and cash equivalents at beginning of period
|
103.0
|
|
|
93.8
|
|
|
106.9
|
|
Cash and cash equivalents at end of period
|
$
|
54.7
|
|
|
$
|
103.0
|
|
|
$
|
93.8
|
|
The accompanying notes are an integral part of these consolidated financial statements.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
Nature of Business
Schweitzer-Mauduit International, Inc., or SWM or the Company, headquartered in the United States of America, is a multinational diversified producer of highly engineered solutions and advanced materials for a variety of industries. The Company maintains two operating product line segments: Advanced Materials and Structures and Engineered Papers.
The Advanced Materials & Structures segment, or AMS, produces mostly resin-based rolled goods such as nets, films and meltblown materials, typically through an extrusion process or other non-woven technologies. These products are used in a variety of specialty applications across the filtration, transportation, construction and infrastructure, medical, and industrial end-markets. The acquisition of Tekra, a converter of high-performance films and substrates added coating and converting capabilities, increased the Company’s medical business, and provided further penetration into transportation and industrial end-markets.
The Engineered Papers segment, or EP, primarily serves the tobacco industry with production of various cigarette papers and reconstituted tobacco products, or "recon." Traditional reconstituted tobacco leaf, or "RTL," is used as a blend with virgin tobacco in cigarettes and used as wrappers and binders for cigars. Recon, as well as LIP (low ignition propensity) cigarette paper, a specialty product with fire-safety features, are two key profit drivers. The EP segment also produces non-tobacco papers for both premium applications, such as energy storage, and industrial commodity paper grades, which are often produced to maximize machine utilization.
We conduct business in over 90 countries and operate 23 production locations worldwide, with facilities in the U.S., Canada, United Kingdom, France, Luxembourg, Belgium, Russia, Brazil, China and Poland. We also have a 50% equity interest in two joint ventures in China. The first, China Tobacco Mauduit (Jiangmen) Paper Industry Ltd., or CTM, produces cigarette and porous plug wrap papers and the second, China Tobacco Schweitzer (Yunnan) Reconstituted Tobacco Co. Ltd., or CTS, produces RTL.
As used in this 2020 Annual Report on Form 10-K, unless the context indicates otherwise, references to "we," "us," "our," "SWM," "Schweitzer-Mauduit" or similar terms include Schweitzer-Mauduit International, Inc. and its consolidated subsidiaries.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements and the notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America, "U.S. GAAP." The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company believes the estimates and assumptions used in the preparation of these consolidated financial statements are reasonable, based upon currently available facts and known circumstances. Actual results may differ from those estimates and assumptions as a result of a number of factors, including those discussed elsewhere in this report and in its other public filings from time to time.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and wholly-owned, majority-owned and controlled subsidiaries. Intercompany balances and transactions have been eliminated. Certain reclassifications of prior year data were made in the Notes to Consolidated Financial Statements. The reclassifications were made to conform to the current year presentation.
The Company uses the equity method to account for its investments in two joint ventures with the China National Tobacco Corporation (see Note 9. Joint Ventures). Investment in equity affiliates represents the Company’s investment in these joint ventures. The Company’s 50% share of the net income (loss) of the joint ventures is included in the consolidated statements of income as income (loss) from equity affiliates.
Revenue Recognition
The Company has two main sources of revenue: product sales and materials conversion. The Company recognizes 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 the Company’s manufacturing facilities to the customer. Any freight costs billed to and paid by a customer are included in net sales. The Company also provides services to customers through the conversion of customer-owned raw materials into processed finished goods. In these transactions, the Company generally recognizes revenue as processing is completed.
Freight Costs
The cost of delivering finished goods to the Company's 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.
Royalty Income
Royalties from third-party patent licenses are recognized when earned, including monies received at an agreement's initiation attributable to past sales. The Company recognizes up-front payments upon receipt when it has no future performance requirement or ongoing obligation arising from its agreements and the payment is for a separate earnings process. Minimum annual royalties received in advance are deferred and are recognized in the period earned. The Company recognized $7.5 million, $6.8 million and $5.9 million of royalty income during 2020, 2019 and 2018 respectively, which is included in net sales in the Consolidated Statements of Income.
Foreign Currency Translation
The income statements of foreign entities are translated into U.S. dollars at average exchange rates prevailing during the periods presented. The balance sheets of these entities are translated at period-end exchange rates, and the
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
differences from historical exchange rates are reflected in a separate component of accumulated other comprehensive loss as unrealized foreign currency translation adjustments.
Foreign currency risks arise from transactions and balances denominated in non-local currencies. Gains and losses resulting from remeasurement and settlement of such transactions and balances, net of currency hedge impacts, included in Other (expense) income, net, were losses of $0.9 million, $1.4 million and $1.5 million in 2020, 2019 and 2018, respectively.
Derivative Instruments
The Company is exposed to changes in foreign currency exchange rates, interest rates and commodity prices. The Company utilizes a variety of practices to manage these market risks, including where considered appropriate, derivative instruments. The Company uses derivative instruments only for risk management purposes and not for trading or speculation. All derivative instruments the Company uses are either exchange traded or are entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties. The Company believes the credit risks with respect to the counterparties, and the foreign currency risks that would not be hedged if the counterparties fail to fulfill their obligations under the contracts, are not material in view of its understanding of the financial strength of the counterparties.
Gains and losses on instruments that hedge firm commitments are deferred and included in the basis of the underlying hedged items. All other hedging gains and losses are included in period income or expense based on the period-end market price of the instrument and are included in the Company's operating cash flows. See Note 15. Derivatives, for additional information.
Cash and Cash Equivalents
The Company considers all highly liquid, unrestricted investments with remaining maturities of three months or less to be cash equivalents, including money market funds with no restrictions on withdrawals. As of December 31, 2020 and 2019, included in Cash and cash equivalents on the Consolidated Balance Sheets is $0.6 million in contractually restricted cash.
Business Combinations
The Company uses the acquisition method of accounting for business combinations. At the acquisition date, the Company records assets acquired and liabilities assumed at their respective fair market values. The Company estimates fair value using the exit price approach which is the price that would be received to sell an asset or paid to transfer a liability in an orderly market. An exit price is determined from a market participant's viewpoint in the principal or most advantageous market and may result in the Company valuing assets or liabilities at a fair value that is not reflective of the Company's intended use of the assets or liabilities. Any excess consideration above the estimated fair values of the net assets acquired is recognized as goodwill on the Company's Consolidated Balance Sheets. The operating results of acquired businesses are included in the Company's results of operations beginning as of their effective acquisition dates. Acquisition costs are expensed as incurred and were $1.1 million in 2020. There were no acquisition costs incurred in 2019 and 2018.
Impairment of Long-Lived Assets, Goodwill and Intangible Assets
The Company evaluates the carrying value of long-lived assets, including property and equipment, goodwill and intangible assets when events and circumstances warrant a review. Goodwill is also tested for impairment annually during the fourth quarter. We first evaluate qualitative factors, such as macroeconomic conditions and our overall financial performance by reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We then evaluate how significant each of the identified factors could be to the fair value or carrying amount of a reporting unit and weigh these factors in totality in forming a conclusion of whether or not it is more likely than not that the fair value of a reporting unit is less than its carrying amount (the “Step 0 Test”). Goodwill is not impaired if we determine that it is not more likely than not
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that the fair value of a reporting unit is less than its carrying amount. Otherwise, we would proceed to the goodwill impairment test.
Alternatively, we may also bypass the Step 0 Test and proceed directly to the goodwill impairment test, where the fair value of the reporting unit is compared to the carrying value. The difference between the total fair value of the reporting unit and the carrying value is recognized as an impairment to the reporting unit's goodwill. See Note 10. Goodwill for further discussion of the Company's annual impairment test results. During the annual testing performed as of October 1, 2020, the estimated fair value of each of the Company's reporting units was in excess of its respective carrying value.
We have acquired trade names that have been determined to have indefinite lives. We evaluate a number of factors to determine whether an indefinite life is appropriate, including the competitive environment, category share, business history, product life cycle and operating plans. Indefinite-lived intangibles are evaluated for impairment annually during the fourth quarter. Additionally, when certain events or changes in operating conditions occur, an impairment assessment is performed and indefinite-lived trade names may be adjusted to a determinable life or an impairment charge may be recorded.
The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, which approximates a straight-line basis, over the estimated periods benefited. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted. 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.
The carrying value of long-lived assets is reviewed to determine if events or circumstances have changed which may indicate that the assets may be impaired or the useful life may need to be changed. Upon occurrence of such a triggering event, the Company considers internal and external factors relating to each asset group, including expectation of future profitability, undiscounted cash flows and its plans with respect to the operations. If impairment is indicated, an impairment loss is measured by the amount the net carrying value of the asset exceeds its estimated fair value.
Environmental Spending
Environmental spending is capitalized if such spending qualifies as property, plant and equipment, substantially increases the economic value or extends the useful life of an asset. All other such spending is expensed as incurred, including fines and penalties incurred in connection with environmental violations. Environmental spending relating to an existing condition caused by past operations is expensed. Liabilities are accrued when environmental assessments are probable and the costs can be reasonably estimated. Generally, timing of these accruals coincides with completion of a feasibility study or commitment to a formal plan of action.
Capitalized Software Costs
The Company capitalizes certain purchases of software and software development costs in connection with major projects of software development for internal use. These costs are included in Other assets on the Consolidated Balance Sheets and are amortized using the straight-line method over the estimated useful life not to exceed seven years. Costs associated with business process redesign, end-user training, system start-up and ongoing software maintenance are expensed as incurred. Amortization of capitalized software was $2.1 million, $1.9 million and $1.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. Accumulated amortization of capitalized software costs was $40.5 million and $36.9 million at December 31, 2020 and 2019, respectively. See Note 12. Other Assets for additional information.
Business Tax Credits
Business tax credits represent value added tax credits receivable and similar assets, such as Imposto sobre Circulação de Mercadorias e Serviços, or ICMS, in Brazil. Business tax credits are generated when value-added
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
taxes, or VAT, are paid on purchases. VAT and similar taxes are collected from customers on certain sales. In some jurisdictions, export sales do not require VAT collection. See Note 12. Other Assets for additional information.
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 operate and are subject to income taxes in the U.S. and numerous foreign jurisdictions. The complexity of our global structure requires technical expertise in determining the allocation of income to each of these jurisdictions and consolidated income tax expense.
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. If it is determined that the Company would be able to realize the deferred tax assets in the future in excess of their net recorded amount, an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it is determined whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
On December 22, 2017, 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. The Company has 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.
Pension and Other Postretirement Benefits Accounting
The Company recognizes the estimated compensation cost of employees' pension and other postretirement benefits over their approximate period of service. The Company's earnings are impacted by amounts of expense recorded related to these benefits, which primarily consist of U.S. and French pension benefits. Each year's recorded expenses are estimates based on actuarial calculations of the Company's accumulated and projected benefit obligations, or PBOs, for the Company's various plans.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Suspension of additional benefits for future service is considered a curtailment, and if material, necessitates a re-measurement of plan assets and PBO. As part of a re-measurement, the Company adjusts its discount rates and other actuarial assumptions, such as retirement, turnover and mortality table assumptions, as appropriate. See Note 18. Postretirement and Other Benefits for additional information.
Comprehensive Income
Comprehensive income includes net income, as well as items charged and credited directly to stockholders' equity, which are excluded from net income. The Company has presented comprehensive income in the Consolidated Statements of Comprehensive Income. Reclassification adjustments of derivative instruments are presented in Net sales and Interest expense in the Consolidated Statements of Income. See Note 15. Derivatives for additional information. Amortization of accumulated pension and other post-employment benefit (OPEB) liabilities are included in the computation of net periodic pension and OPEB costs, which are more fully discussed in Note 18. Postretirement and Other Benefits.
Components of Accumulated other comprehensive (loss) income were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Accumulated pension and OPEB liability adjustments, net of income tax benefit of $11.6 million and $12.8 million at December 31, 2020 and 2019, respectively
|
$
|
(20.5)
|
|
|
$
|
(24.3)
|
|
Accumulated unrealized loss on derivative instruments, net of income tax benefit of $2.8 million and $1.6 million at December 31, 2020 and 2019, respectively
|
(13.1)
|
|
|
(3.5)
|
|
Accumulated unrealized foreign currency translation adjustments, net of income tax benefit of $10.1 million and $5.0 million at December 31, 2020 and 2019, respectively
|
(78.3)
|
|
|
(94.8)
|
|
Accumulated other comprehensive loss
|
$
|
(111.9)
|
|
|
$
|
(122.6)
|
|
Changes in the components of Accumulated other comprehensive (loss) income were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
|
|
Tax
|
|
Net of
Tax
|
|
Pre-tax
|
|
Tax
|
|
Net of
Tax
|
|
Pre-tax
|
|
Tax
|
|
Net of
Tax
|
Pension and OPEB liability adjustments
|
$
|
5.0
|
|
|
$
|
(1.2)
|
|
|
$
|
3.8
|
|
|
$
|
2.5
|
|
|
$
|
1.4
|
|
|
$
|
3.9
|
|
|
$
|
(0.9)
|
|
|
$
|
(2.4)
|
|
|
$
|
(3.3)
|
|
Derivative instrument adjustments
|
(10.8)
|
|
|
1.2
|
|
|
(9.6)
|
|
|
(2.9)
|
|
|
—
|
|
|
(2.9)
|
|
|
(2.4)
|
|
|
1.4
|
|
|
(1.0)
|
|
Unrealized foreign currency translation adjustments
|
11.5
|
|
|
5.0
|
|
|
16.5
|
|
|
(2.5)
|
|
|
3.4
|
|
|
0.9
|
|
|
(28.0)
|
|
|
(2.8)
|
|
|
(30.8)
|
|
Total
|
$
|
5.7
|
|
|
$
|
5.0
|
|
|
$
|
10.7
|
|
|
$
|
(2.9)
|
|
|
$
|
4.8
|
|
|
$
|
1.9
|
|
|
$
|
(31.3)
|
|
|
$
|
(3.8)
|
|
|
$
|
(35.1)
|
|
The change in the components of Accumulated other comprehensive loss for the year ended December 31, 2018 includes a $4.9 million cumulative-effect adjustment from Accumulated other comprehensive loss directly to Retained earnings as a result of the adoption of ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," as discussed below.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock
All of the Company's restricted stock grants, including those that have been earned in the case of performance-based shares and cliff-vesting grants that are not performance based, vest upon completion of a specified period of time, typically between two and four years. The fair value of each award is equal to the share price of the Company's stock on the date of the grant. This cost is recognized over the vesting period of the respective award. The Company records forfeitures of shares related to continued service requirements as they occur. A summary of outstanding restricted stock awards as of December 31, 2020 and 2019 is included in Note 19. Stockholders' Equity.
Restricted Stock Plan Performance Based Shares
The Company's long-term incentive compensation program, or LTICP, for key employees includes an equity-based award component that is provided through the Long-term Incentive Plan, or LTIP, which the Company adopted in 2015 and which replaced its previous Restricted Stock Plan, or RSP. The objectives under the LTICP are established at the beginning of a performance cycle and are intended to focus management on longer-term strategic goals. The Compensation Committee of the Board of Directors designates participants in the LTICP and LTIP and determines the equity-based award opportunity in the form of restricted stock for each performance cycle, which is generally measured on the basis of a one year performance period (the measurement period). The restricted shares are considered issued and outstanding when the number of shares becomes fixed, after the annual performance is determined, and such awards vest at the end of the performance year or some predetermined period thereafter. The Company recognizes compensation expense with an offsetting credit to additional paid-in-capital over the performance period based on the fair value of the award at the date of grant, with compensation expense being adjusted cumulatively based on the number of shares expected to be earned according to the level of achievement of performance goals.
Fair Value Option
The Company has not elected to measure its financial instruments or certain commitments at fair value.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). The update requires that an entity measure and recognize expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects a current estimate of credit losses expected to be incurred. The Company adopted this guidance as of January 1, 2020 on a prospective basis, there was no material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendment eliminates the second step of the analysis that required the measurement of a goodwill impairment by comparing the implied value of a reporting unit’s goodwill and the goodwill’s carrying amount. The provisions of the standard were adopted effective as of January 1, 2020, there was no material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurements." The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The provisions of this ASU are effective for years beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company has adopted this guidance effective as of January 1, 2020, the provisions of which did not impact existing fair value measurements.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The new standard provides updated guidance surrounding implementation costs associated with cloud computing arrangements that are service contracts. The provisions of this ASU are effective for years beginning after December 15, 2019. The Company adopted the provisions of this guidance prospectively as of January 1, 2020, there was no material impact on the consolidated financial statements.
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans." The new standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. The new standard requires the amendments to be applied on a retrospective basis for all periods presented. The Company is currently in the process of evaluating the impact of the pronouncement and does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The new standard simplifies income tax accounting requirements by removing certain exceptions to the general principles in Topic 740, Income Taxes. The provisions of this ASU are effective for years beginning after December 15, 2020 with early adoption permitted. The Company has evaluated the impact of the pronouncement and the adoption of this guidance does not have a material impact on the consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The new standard provides optional expedients and exceptions for applying generally accepted accounting principles ("GAAP") to contracts, hedging relationships, and other transactions affected by reference rate reform and the anticipated discontinuance of the London Interbank Offered Rate ("LIBOR") if certain criteria are met. The amendments in this ASU are effective for all entities as of March 12, 2020, through December 31, 2022. The Company does not currently have any contracts that have been changed to a new reference rate but will continue to evaluate the applicability and impact of the guidance.
Note 3. Revenue Recognition
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 the Company expects to be entitled to in exchange for those goods or services. Generally, the Company considers 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, the Company defers 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. The Company typically uses an observable price to determine the stand-alone selling price for separate performance obligations.
The Company does not typically include extended payment terms or significant financing components in its 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. The Company generally expenses sales commissions when incurred because the amortization period is one year or less.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These costs are recorded within sales and marketing expenses. The Company does 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, the Company treats 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.
Following is the Company’s net sales disaggregated by revenue source ($ in millions). Sales and usage-based taxes are excluded from net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
AMS
|
|
EP
|
|
Total
|
|
AMS
|
|
EP
|
|
Total
|
|
AMS
|
|
EP
|
|
Total
|
Product revenues
|
$
|
522.4
|
|
|
$
|
473.8
|
|
|
$
|
996.2
|
|
|
$
|
462.8
|
|
|
$
|
484.2
|
|
|
$
|
947.0
|
|
|
$
|
455.5
|
|
|
$
|
500.1
|
|
|
$
|
955.6
|
|
Materials conversion revenues
|
14.1
|
|
|
52.2
|
|
|
66.3
|
|
|
8.9
|
|
|
56.4
|
|
|
65.3
|
|
|
8.4
|
|
|
68.2
|
|
|
76.6
|
|
Other revenues
|
7.0
|
|
|
4.9
|
|
|
11.9
|
|
|
5.5
|
|
|
5.0
|
|
|
10.5
|
|
|
4.0
|
|
|
5.1
|
|
|
9.1
|
|
Total revenues (1)
|
$
|
543.5
|
|
|
$
|
530.9
|
|
|
$
|
1,074.4
|
|
|
$
|
477.2
|
|
|
$
|
545.6
|
|
|
$
|
1,022.8
|
|
|
$
|
467.9
|
|
|
$
|
573.4
|
|
|
$
|
1,041.3
|
|
(1) Revenues include net hedging gains and losses for the years ended December 31, 2020, 2019 and 2018.
Net sales are attributed to the following geographic locations based on the location of the Company’s direct customers ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
AMS
|
|
EP
|
|
Total
|
|
AMS
|
|
EP
|
|
Total
|
|
AMS
|
|
EP
|
|
Total
|
United States
|
$
|
376.7
|
|
|
$
|
161.9
|
|
|
$
|
538.6
|
|
|
$
|
331.3
|
|
|
$
|
182.8
|
|
|
$
|
514.1
|
|
|
$
|
320.1
|
|
|
$
|
193.3
|
|
|
$
|
513.4
|
|
Europe and the former Commonwealth of Independent States
|
47.5
|
|
|
182.2
|
|
|
229.7
|
|
|
45.8
|
|
|
172.6
|
|
|
218.4
|
|
|
46.2
|
|
|
214.6
|
|
|
260.8
|
|
Asia/Pacific (including China)
|
94.6
|
|
|
110.7
|
|
|
205.3
|
|
|
77.6
|
|
|
95.0
|
|
|
172.6
|
|
|
76.6
|
|
|
82.8
|
|
|
159.4
|
|
Latin America
|
9.3
|
|
|
43.6
|
|
|
52.9
|
|
|
7.6
|
|
|
45.6
|
|
|
53.2
|
|
|
10.0
|
|
|
43.5
|
|
|
53.5
|
|
Other foreign countries
|
15.4
|
|
|
32.5
|
|
|
47.9
|
|
|
14.9
|
|
|
49.6
|
|
|
64.5
|
|
|
15.0
|
|
|
39.2
|
|
|
54.2
|
|
Total revenues (1)
|
$
|
543.5
|
|
|
$
|
530.9
|
|
|
$
|
1,074.4
|
|
|
$
|
477.2
|
|
|
$
|
545.6
|
|
|
$
|
1,022.8
|
|
|
$
|
467.9
|
|
|
$
|
573.4
|
|
|
$
|
1,041.3
|
|
(1) Revenues include net hedging gains and losses for the years ended December 31, 2020, 2019 and 2018.
Note 4. Leases
The Company adopted the guidance contained in ASC 842, Leases, on January 1, 2019 using the modified retrospective approach permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this method, the Company applied the new leases standard at the adoption date and recognized a cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2019.
The Company leases certain office space, warehouses, manufacturing facilities, land, and equipment. The Company elected the practical expedient which allows that leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For leases without lease terms (i.e. month-to-month leases), lease expense is recognized as incurred and no asset or liability is recorded for these leases.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from non-lease components (e.g., common-area maintenance costs). Most leases include one or more options to renew, with renewal terms that can extend the lease term. The exercise of lease renewal options is at our sole discretion. Lease assets and liabilities are determined based on the lease term including those periods for which renewal options are considered reasonably certain to be exercised. Certain leases also include options to purchase the leased property, although we are unlikely to do so in most cases. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company's leases do not provide a readily determinable implicit rate. Therefore, the Company must estimate its incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Components of right-of-use assets and lease liabilities presented in the balance sheet are as follows ($ in million):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
Classification
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Operating lease right-of-use assets
|
Other assets
|
$
|
19.8
|
|
|
$
|
20.9
|
|
|
|
Finance lease right-of-use assets
|
Property, plant and equipment, net
|
3.0
|
|
|
2.9
|
|
|
|
Total right of use assets
|
|
$
|
22.8
|
|
|
$
|
23.8
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
Classification
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Current operating lease obligation
|
Accrued expenses
|
$
|
5.2
|
|
|
$
|
4.9
|
|
|
|
Long-term operating lease obligation
|
Other liabilities
|
15.6
|
|
|
17.2
|
|
|
|
Total operating lease obligation
|
|
$
|
20.8
|
|
|
$
|
22.1
|
|
|
|
|
|
|
|
|
|
|
Current finance lease obligation
|
Current debt
|
$
|
0.5
|
|
|
$
|
0.4
|
|
|
|
Long-term finance lease obligation
|
Long-term debt
|
3.0
|
|
|
2.8
|
|
|
|
Total finance lease obligation
|
|
$
|
3.5
|
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Assets
|
Finance
|
|
Operating
|
|
Total
|
|
Finance
|
|
Operating
|
|
Total
|
Land and improvements
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Buildings and improvements
|
3.1
|
|
|
25.9
|
|
|
29.0
|
|
|
2.9
|
|
|
21.8
|
|
|
24.7
|
|
Machinery and equipment
|
1.1
|
|
|
4.3
|
|
|
5.4
|
|
|
0.7
|
|
|
4.5
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross property, plant and equipment
|
4.2
|
|
|
30.3
|
|
|
34.5
|
|
|
3.6
|
|
|
26.4
|
|
|
30.0
|
|
Less: Accumulated depreciation
|
(1.2)
|
|
|
(10.5)
|
|
|
(11.7)
|
|
|
(0.7)
|
|
|
(5.5)
|
|
|
(6.2)
|
|
Right-of-use assets
|
$
|
3.0
|
|
|
$
|
19.8
|
|
|
$
|
22.8
|
|
|
$
|
2.9
|
|
|
$
|
20.9
|
|
|
$
|
23.8
|
|
Components of lease expense incurred by the Company are as follow ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Cost
|
|
|
Year Ended December 31, 2020
|
|
Year ended December 31, 2019
|
Finance lease cost (cost resulting from lease payments)
|
|
|
|
|
|
Interest expense on lease liabilities
|
|
|
$
|
0.2
|
|
|
0.2
|
|
Amortization of right-of-use assets
|
|
|
0.5
|
|
|
0.4
|
|
Operating lease cost
|
|
|
6.8
|
|
|
6.2
|
|
Short-term lease expense
|
|
|
0.4
|
|
|
0.3
|
|
Variable lease expense
|
|
|
—
|
|
|
—
|
|
Sublease income
|
|
|
—
|
|
|
—
|
|
Total Lease Cost
|
|
|
$
|
7.9
|
|
|
$
|
7.1
|
|
The following table represents future contractual lease liabilities for the next five years and thereafter for finance and operating leases ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities
|
Finance
|
|
Operating
|
|
Total
|
2021
|
$
|
0.7
|
|
|
6.3
|
|
|
$
|
7.0
|
|
2022
|
0.7
|
|
|
5.1
|
|
|
5.8
|
|
2023
|
0.6
|
|
|
3.5
|
|
|
4.1
|
|
2024
|
0.5
|
|
|
2.9
|
|
|
3.4
|
|
2025
|
0.6
|
|
|
1.8
|
|
|
2.4
|
|
|
|
|
|
|
|
Thereafter
|
1.0
|
|
|
5.4
|
|
|
6.4
|
|
Total Lease Payments
|
$
|
4.1
|
|
|
$
|
25.0
|
|
|
$
|
29.1
|
|
Less: Interest
|
0.6
|
|
|
4.2
|
|
|
4.8
|
|
Present Value of Lease Liabilities
|
$
|
3.5
|
|
|
$
|
20.8
|
|
|
$
|
24.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Term and Discount Rate
|
December 31, 2020
|
|
December 31, 2019
|
Weighted-average remaining lease term (years)
|
|
|
|
Operating leases
|
5.8
|
|
6.7
|
Finance leases
|
6.3
|
|
7.3
|
Weighted-average discount rate
|
|
|
|
Operating leases
|
6.19
|
%
|
|
6.49
|
%
|
Finance leases
|
5.26
|
%
|
|
5.27
|
%
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
Other Information (millions)
|
Year Ended December 31, 2020
|
|
Year ended December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows from operating leases
|
6.9
|
|
|
6.3
|
|
Operating cash flows from finance leases
|
0.2
|
|
|
0.3
|
|
Financing cash flows from finance leases
|
0.5
|
|
|
0.2
|
|
Leased assets obtained in exchange for new finance lease liabilities
|
0.4
|
|
|
0.6
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
3.9
|
|
|
3.3
|
|
Note 5. Business Acquisitions
On March 13, 2020, the Company completed the acquisition of 100% of the equity interest in Tekra, LLC and Trient, LLC, “Tekra,” pursuant to the definitive agreement signed as of February 20, 2020. Tekra is a converter of high-performance films and substrates which enhances the Company’s films capabilities. Tekra, part of the AMS segment, operates two manufacturing facilities located in Wisconsin.
The consideration transferred to acquire Tekra was $169.3 million, net of $1.6 million cash and cash equivalents acquired, subject to working capital adjustments that were finalized as of September 30, 2020. The purchase price was funded with borrowings from our revolving credit facility.
The acquisition has been accounted for as a business combination with the assets acquired and liabilities assumed measured at their fair values as of the acquisition date, primarily using Level 3 inputs.
The estimated purchase price allocation disclosed as of March 31, 2020, was revised during the second and third quarters as new information was received and analyzed resulting in a decrease in net intangible assets of $3.4 million, and other adjustments, consisting primarily of reclassifications within working capital, leading to a net decrease in total consideration of $1.8 million.
The consideration paid for Tekra and the final fair values of the assets acquired, and liabilities assumed as of the March 13, 2020 acquisition date were as follows ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Fair Value as of March 13, 2020
|
Cash and cash equivalents
|
$
|
1.6
|
|
Accounts receivable
|
8.6
|
|
Inventory
|
14.2
|
|
Other current assets
|
0.2
|
|
Property, plant and equipment
|
7.3
|
|
Identifiable intangible assets
|
81.8
|
|
Other noncurrent assets
|
3.7
|
|
Total assets
|
$
|
117.4
|
|
|
|
Accounts payable
|
$
|
3.0
|
|
Other current liabilities
|
2.0
|
|
Other noncurrent liabilities
|
2.7
|
|
|
|
Net assets acquired
|
$
|
109.7
|
|
|
|
Goodwill
|
61.2
|
|
|
|
Total consideration
|
$
|
170.9
|
|
The fair value of receivables acquired approximates the gross contractual value. The contractual amount not expected to be collected is immaterial.
Acquired inventory was comprised of finished goods and raw materials. The fair value of finished goods was based on net realizable value adjusted for the costs of selling and a reasonable profit margin on selling effort. The fair value of raw materials was determined to approximate book value.
Acquired intangible assets include customer relationships, tradenames and unpatented developed technologies. Intangible assets were valued using the multi-period excess earnings and relief-from-royalty methods, both forms of the income approach which considers a forecast of future cash flows generated from the use of each asset. The following table shows the final fair values assigned to identifiable intangible assets ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of March 13, 2020
|
|
Weighted-Average Amortization Period (Years)
|
Amortizable intangible assets:
|
|
|
|
Customer relationships
|
$
|
63.0
|
|
|
15
|
Tradenames and other
|
10.8
|
|
|
15
|
Developed technology
|
8.0
|
|
|
10
|
Total amortizable intangible assets
|
$
|
81.8
|
|
|
|
The excess of the acquisition consideration over the fair values of the acquired assets and assumed liabilities is assigned to goodwill, of the AMS segment, and is primarily attributable to expected revenue synergies and expected to be deductible for tax purposes.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the twelve months ended December 31, 2020, the Company recognized $1.1 million in direct and indirect acquisition-related costs for the Tekra acquisition, respectively. Direct and indirect acquisition-related costs were expensed as incurred and are included in the General expense line item in the consolidated statements of income.
The amounts of Net sales and Income from continuing operations of Tekra included in the Company's consolidated income statement from the acquisition date are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2020
|
March 13, 2020 - December 31, 2020
|
Net Sales
|
$
|
23.7
|
|
$
|
77.3
|
|
Income from Continuing Operations
|
$
|
1.8
|
|
$
|
1.9
|
|
Unaudited pro forma net sales for the twelve months ended December 31, 2020 and 2019 were $1.1 billion and $1.1 billion, respectively. Preparation of pro forma income from continuing operations for the periods presented is impractical given recent changes to the ownership structure of the acquired entities prior to the transaction.
Note 6. Accounts Receivable
Accounts receivable, net are summarized as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Trade receivables
|
$
|
130.9
|
|
|
$
|
114.6
|
|
Business tax credits, including VAT
|
4.0
|
|
|
5.2
|
|
Hedge contracts receivable
|
0.3
|
|
|
4.9
|
|
Other receivables
|
14.4
|
|
|
20.0
|
|
Less allowance for doubtful accounts and sales discounts
|
(1.1)
|
|
|
(1.5)
|
|
Total accounts receivable, net
|
$
|
148.5
|
|
|
$
|
143.2
|
|
Note 7. Inventories
Inventories are valued at the lower of cost (using the First-In, First-Out and weighted average methods) or market. The Company's costs included in inventory primarily include resins, pulp, chemicals, direct labor, utilities, maintenance, depreciation, finishing supplies and an allocation of certain overhead costs. Machine start-up costs or abnormal machine shut downs are expensed in the period incurred and are not reflected in inventory. The definition of market value, with respect to all inventories, is net realizable value. The Company reviews inventories at least quarterly to determine the necessity of write-offs for excess, obsolete or unsalable inventory. The Company estimates write-offs for inventory obsolescence and shrinkage based on its judgment of future realization. These reviews require the Company to assess customer and market demand. During the year 2020, 2019 and 2018, there were no material inventory write-offs. The following schedule details inventories by major class ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Raw materials
|
$
|
65.3
|
|
|
$
|
61.1
|
|
Work in process
|
23.2
|
|
|
20.7
|
|
Finished goods
|
83.5
|
|
|
65.3
|
|
Supplies and other
|
7.7
|
|
|
14.3
|
|
Inventories
|
$
|
179.7
|
|
|
$
|
161.4
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation. Interest is capitalized as a component of the cost of construction for large projects. Expenditures for betterments are capitalized whereas normal repairs and maintenance are expensed as incurred. Property, other than land, is depreciated on a straight-line basis for financial reporting purposes. When property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the balance sheet, and any gain or loss on the transaction is normally included in cost of products sold.
Property, plant and equipment (and related depreciable lives) consisted of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Land and improvements
|
$
|
13.6
|
|
|
$
|
14.8
|
|
Buildings and improvements (20 to 40 years or remaining life of relevant lease)
|
144.0
|
|
|
142.3
|
|
Machinery and equipment (5 to 20 years)
|
524.4
|
|
|
622.6
|
|
Construction in progress
|
23.1
|
|
|
24.0
|
|
Gross property, plant and equipment
|
705.1
|
|
|
803.7
|
|
Less: Accumulated depreciation
|
366.1
|
|
|
473.4
|
|
Property, plant and equipment, net
|
$
|
339.0
|
|
|
$
|
330.3
|
|
Depreciation expense was $42.2 million, $35.8 million and $38.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Note 9. Joint Ventures
The Company has two joint ventures with China National Tobacco Corporation, or CNTC. CNTC is the principal operating company under China’s State Tobacco Monopoly Administration. CNTC and the Company’s subsidiary, Schweitzer-Mauduit International China, Limited, or SM-China, each own 50% of each of the joint ventures. The paper joint venture China Tobacco Mauduit (Jiangmen) Paper Industry Co. LTD, or CTM, produces tobacco-related papers in China. The second joint venture China Tobacco Schweitzer (Yunnan) Reconstituted Tobacco Co. LTD, or CTS, produces reconstituted tobacco leaf products. The joint ventures pay to each the Company and CNTC sales-based royalties and management fees, of which SWM recognized $2.0 million, $2.1 million and $2.2 million in 2020, 2019 and 2018, respectively, in Other (expense) income, net in the consolidated statements of income.
The Company uses the equity method to account for its ownership interest in both joint ventures. At December 31, 2020 and 2019, the Company’s equity investment in joint ventures was $59.3 million and $52.4 million, respectively. The Company’s share of the net income (loss) was included in Income (loss) from equity affiliates, net of income taxes within the consolidated statements of income. We evaluate our equity method investments for impairment when events or changes in circumstances indicate, in our judgment, that the carrying value of such investment may have experienced an other than temporary decline in value. When evidence of loss in value has occurred, we compare the estimated fair value of the investment to the carrying value of the investment to determine whether impairment has occurred. We assess the fair value of our equity method investment using commonly accepted techniques, and may use more than one method, including, but not limited to, internally developed analysis and analysis of external data. If the estimated fair value is less than the carrying value and we consider the decline in value to be other than temporary, the excess of the carrying value over the estimated fair value is recognized in the consolidated financial statements as an impairment.
Below is summarized and combined balance sheet information of the China joint ventures as of December 31, 2020 and 2019 ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Current assets
|
$
|
110.0
|
|
|
$
|
99.4
|
|
Noncurrent assets
|
166.6
|
|
|
168.0
|
|
Current liabilities
|
67.6
|
|
|
43.1
|
|
Long-term liabilities
|
60.2
|
|
|
88.4
|
|
Stockholder's equity
|
148.8
|
|
|
135.9
|
|
Below is summarized and combined statement of operations information of the China joint ventures for the years ended December 31, 2020, 2019 and 2018 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Net sales
|
$
|
101.3
|
|
|
$
|
103.5
|
|
|
$
|
109.7
|
|
Gross profit
|
33.0
|
|
|
32.2
|
|
|
33.4
|
|
Net income
|
9.7
|
|
|
8.3
|
|
7.4
|
|
Note 10. Goodwill
The Company evaluates goodwill for impairment at least annually during the fourth quarter. The annual tests during the fourth quarters of 2020, 2019 and 2018 resulted in no impairment. Each of the Company's two reportable segments, AMS and EP, have goodwill. There are no accumulated impairment losses in the AMS segment as of December 31, 2020. The EP segment has recorded $2.7 million in accumulated impairment losses in previous years.
The changes in the carrying amount of goodwill for each reportable segment were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced Materials & Structures
|
|
Engineered Papers
|
|
Total
|
Goodwill as of December 31, 2018
|
$
|
333.1
|
|
|
$
|
5.0
|
|
|
$
|
338.1
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(0.6)
|
|
|
(0.1)
|
|
|
(0.7)
|
|
Goodwill as of December 31, 2019
|
$
|
332.5
|
|
|
$
|
4.9
|
|
|
$
|
337.4
|
|
|
|
|
|
|
|
Goodwill acquired during the period
|
61.2
|
|
|
—
|
|
|
61.2
|
|
Foreign currency translation adjustments
|
4.7
|
|
|
0.4
|
|
|
5.1
|
|
Goodwill as of December 31, 2020
|
$
|
398.4
|
|
|
$
|
5.3
|
|
|
$
|
403.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Intangible Assets
The gross carrying amount and accumulated amortization for intangible assets which are in our AMS segment consisted of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Accumulated Impairments
|
|
Accumulated Foreign Exchange
|
|
Net
Carrying
Amount
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
339.8
|
|
|
$
|
88.5
|
|
|
$
|
—
|
|
|
$
|
(2.9)
|
|
|
$
|
254.2
|
|
Developed technology
|
42.1
|
|
|
14.1
|
|
|
—
|
|
|
(0.2)
|
|
|
28.2
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
32.7
|
|
|
1.4
|
|
|
20.7
|
|
|
0.3
|
|
|
10.3
|
|
Non-compete agreements
|
2.9
|
|
|
2.4
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
Patents
|
1.5
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
1.0
|
|
Total
|
$
|
419.0
|
|
|
$
|
106.9
|
|
|
$
|
20.7
|
|
|
$
|
(2.8)
|
|
|
$
|
294.2
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Intangible Assets
|
Trade names
|
$
|
20.0
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
(0.6)
|
|
|
$
|
20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Accumulated Impairments
|
|
Accumulated Foreign Exchange
|
|
Net
Carrying
Amount
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
276.3
|
|
|
$
|
67.7
|
|
|
$
|
—
|
|
|
$
|
1.8
|
|
|
$
|
206.8
|
|
Developed technology
|
34.0
|
|
|
10.9
|
|
|
—
|
|
|
0.4
|
|
|
22.7
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
21.8
|
|
|
0.8
|
|
|
20.7
|
|
|
0.3
|
|
|
—
|
|
Non-compete agreements
|
2.9
|
|
|
2.2
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
Patents
|
1.5
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
1.1
|
|
Total
|
$
|
336.5
|
|
|
$
|
82.0
|
|
|
$
|
20.7
|
|
|
$
|
2.5
|
|
|
$
|
231.3
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Intangible Assets
|
Trade names
|
$
|
20.0
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
19.9
|
|
Amortization expense of intangible assets was $24.6 million, $20.3 million and $20.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Finite-lived intangibles in the AMS segment are expensed using the straight-line amortization method.
The following table shows the estimated aggregate amortization expense for the next five years ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
For the year ending December 31,
|
Estimated Amortization Expense
|
2021
|
$
|
25.6
|
|
2022
|
25.5
|
|
2023
|
25.2
|
|
2024
|
24.9
|
|
2025
|
24.6
|
|
Note 12. Other Assets
Other assets consisted of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Capitalized software costs, net of accumulated amortization
|
$
|
12.9
|
|
|
$
|
11.9
|
|
|
|
|
|
Grantor trust assets
|
18.0
|
|
|
14.7
|
|
Net pension assets
|
9.3
|
|
|
5.9
|
|
Long-term supplies inventory
|
6.6
|
|
|
6.9
|
|
Operating lease assets
|
19.8
|
|
|
20.9
|
|
Other assets
|
2.6
|
|
|
8.9
|
|
Total
|
$
|
69.2
|
|
|
$
|
69.2
|
|
The Company's ICMS credits in Brazil are fully reserved. These credits do not expire. The Company is exploring other actions to utilize the credits. Charges and credits associated with normal ongoing activity are included in Cost of products sold in the Consolidated Statements of Income. Future material changes as a result of new legislation or a change in our operations will be reported separately.
Grantor trust assets consist primarily of cash surrender values in Company-owned life insurance policies held by a trust to be used for the eventual payment of employee deferred compensation. These assets are restricted from Company use until all obligations are satisfied.
Note 13. Restructuring and Impairment Activities
The Company incurred restructuring and impairment expenses of $11.9 million, $3.7 million and $1.7 million in the years ended December 31, 2020, 2019 and 2018, respectively.
In the AMS segment, the Company incurred $0.5 million, $1.1 million and $1.5 million in restructuring and impairment expenses during the years ended December 31, 2020, 2019 and 2018, respectively. Restructuring and impairment expense for the year ended December 31, 2020 related to severance accruals as a result of department realignments. Restructuring and impairment expense for the year ended December 31, 2019 consisted of $1.1 million in impairment charges at our U.S. and Chinese manufacturing facilities. Restructuring and impairment expense for the year ended December 31, 2018 consisted of $1.1 million in severance accruals for employees at our U.S. manufacturing operations, as well as $0.4 million in impairment charges at our U.S. manufacturing facilities.
In the EP segment, restructuring and impairment expenses were $11.3 million, $2.6 million and $0.2 million during the years ended December 31, 2020, 2019 and 2018, respectively.
During the third quarter of 2020, we announced plans to shut down the Spotswood, New Jersey facility and shift the production of paper made there to other SWM facilities. This decision was part of our ongoing manufacturing
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
optimization efforts and involved the co-development of a new paper production technology with one of the Company’s key customers. Production of paper at this facility ceased during December of 2020.
As a result of this decision, $6.7 million of restructuring and impairment expense was recognized in the year ended December 31, 2020 related to severance and other accruals. In the year ended December 31, 2020, we also recorded $4.9 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 $2.9 million resulted from the acceleration of depreciation and amortization for machinery and equipment due to the change in the estimated lives of these assets driven by the decision to shut down the facility.
In addition to restructuring costs relating to the Spotswood facility, the EP segment recognized $4.6 million in restructuring and impairment expense in the year ended December 31, 2020, related to severance accruals for employees at our manufacturing facilities in Brazil, France, Poland and the U.S. During 2019, restructuring and impairment expenses in the EP segment consisted of $2.6 million in severance accruals for employees at our manufacturing facilities in France. These restructuring charges relate to ongoing cost optimization initiatives to remain competitive within the EP segment. The cost optimization initiative project started in 2019 and is expected to be completed in 2022. The EP segment has recognized $6.9 million of restructuring charges cumulatively through December 31, 2020 related to this project.
In 2018, restructuring and impairment expenses in the EP segment consisted of $0.2 million in severance accruals for employees at our manufacturing facilities in France.
The Company expects to recognize approximately $2.2 million in restructuring related costs for retention based severance and other costs associated with closing the Spotswood, New Jersey facility during 2021. In addition, the Company expects to record an immaterial amount of restructuring expense in the EP segment in 2021 primarily for severance related to the cost optimization initiatives.
The following table summarizes total restructuring and related charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
2018
|
Restructuring and impairment expense:
|
|
|
|
|
Severance
|
11.6
|
|
|
2.6
|
|
1.3
|
|
Other
|
0.3
|
|
|
1.1
|
|
0.4
|
|
Total restructuring and impairment expense
|
$
|
11.9
|
|
|
$
|
3.7
|
|
$
|
1.7
|
|
|
|
|
|
|
Other restructuring related charges - Cost of products sold
|
|
|
|
|
Accelerated depreciation and amortization
|
2.9
|
|
—
|
|
—
|
|
Spare parts and consignment inventory write-down to estimated net realizable value
|
2.0
|
|
—
|
|
—
|
|
Total other restructuring related charges - Cost of products sold
|
$
|
4.9
|
|
|
$
|
—
|
|
—
|
|
|
|
|
|
|
Total restructuring costs and related charges
|
$
|
16.8
|
|
|
$
|
3.7
|
|
$
|
1.7
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring liabilities were classified within Accrued expenses and Other Liabilities in each of the Consolidated Balance Sheets as of December 31, 2020 and 2019. Changes in the restructuring liabilities, substantially all of which are employee-related, are summarized as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Balance at beginning of year
|
$
|
0.5
|
|
|
$
|
1.4
|
|
Accruals for announced programs
|
11.9
|
|
|
3.7
|
|
Cash payments
|
(5.2)
|
|
|
(4.2)
|
|
Other
|
—
|
|
|
(0.4)
|
|
Exchange rate impacts
|
0.2
|
|
|
—
|
|
Balance at end of period
|
$
|
7.4
|
|
|
$
|
0.5
|
|
Note 14. Debt
Total debt, net of debt issuance costs, is summarized in the following table ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
December 31,
2019
|
Revolving credit agreement - U.S. dollar borrowings
|
$
|
50.0
|
|
|
$
|
—
|
|
|
|
|
|
Term loan facility
|
195.5
|
|
|
197.5
|
|
|
|
|
|
|
|
|
|
6.875% senior unsecured notes due October 1, 2026, net of discount of $6.1 million and $6.9 million as of December 31, 2020 and 2019, respectively
|
343.9
|
|
|
343.1
|
|
French employee profit sharing
|
5.0
|
|
|
4.8
|
|
Finance lease obligations
|
3.5
|
|
|
3.2
|
|
Other
|
—
|
|
|
—
|
|
Debt issuance costs
|
(4.6)
|
|
|
(5.9)
|
|
Total debt
|
593.3
|
|
|
542.7
|
|
Less: Current debt
|
(2.8)
|
|
|
(1.9)
|
|
Long-term debt
|
$
|
590.5
|
|
|
$
|
540.8
|
|
Credit Facility
On September 25, 2018, the Company entered into a $700.0 million credit agreement (the “Credit Agreement”), which replaced the Company’s previous senior secured credit facilities and provides for a five-year $500.0 million revolving line of credit (the “Revolving Credit Facility”) and a seven-year $200.0 million bank term loan facility (the “Term Loan Facility”). Subject to certain conditions, including the absence of a default or event of default under the Credit Agreement, the Company may request incremental loans to be extended under the Revolving Credit Facility or the Term Loan Facility so long as the Company is in pro forma compliance with the financial covenants set forth in the Credit Agreement and the aggregate of such increases does not exceed $400.0 million.
Borrowings under the Revolving Credit Facility will initially bear interest, at the Company’s option, at either (i) 1.75% in excess of a reserve adjusted London Interbank Offered Rate (“LIBOR”) or (ii) 0.75% in excess of an alternative base rate. Borrowings under the Term Loan Facility will initially bear interest, at the Company’s option, at either (i) 2.00% in excess of a reserve adjusted LIBOR rate or (ii) 1.00% in excess of an alternative base rate. The Term Loan amortizes at the rate of 1.0% per year and will mature on September 25, 2025.
Under the terms of the Credit Agreement, the Company will be required to maintain certain financial ratios and comply with certain financial covenants, including maintaining a net debt to EBITDA ratio, as defined in the Credit Agreement, calculated on a trailing four fiscal quarter basis, not greater than 4.50 and an interest coverage ratio, also as defined in the Credit Agreement, of not less than 3.00. In addition, borrowings and loans made under the Credit
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Agreement are secured by substantially all of the personal property of the Company and its domestic subsidiaries, while the obligations of the Luxembourg-based holding subsidiaries were secured by a pledge of certain of the equity interests held in their operating subsidiaries. The Company was in compliance with all of its covenants under the Credit Agreement at December 31, 2020.
As of December 31, 2020, the average interest rate was 1.94% on outstanding Revolving Credit Facility borrowings and 2.19% on outstanding Term Loan Facility borrowings.
Indenture for 6.875% Senior Unsecured Notes Due 2026
On September 25, 2018, the Company closed a private offering of $350.0 million of 6.875% senior unsecured notes due 2026 (the “Notes”). The Notes were sold in a private placement in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended, pursuant to a purchase agreement between the Company, certain subsidiaries of the Company and J.P. Morgan Securities LLC, as representative of the initial purchasers. The Notes are guaranteed on a senior unsecured basis by each of the Company’s existing and future wholly-owned subsidiaries that is a borrower under or that guarantees obligations under the Credit Agreement (as defined below) or that guarantees certain other indebtedness, subject to certain exceptions.
The Notes were issued pursuant to an Indenture (the “Indenture”), dated as of September 25, 2018, by and among the Company, the guarantors listed therein and Wilmington Trust, National Association, as trustee. The Indenture provides that interest on the Notes will accrue from September 25, 2018 and is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2019, and the Notes mature on October 1, 2026.
The Company may redeem some or all of the Notes at any time on or after October 1, 2021, at the redemption prices set forth in the Indenture, together with accrued and unpaid interest, if any, to, but excluding, the redemption date. Prior to October 1, 2021, the Company may redeem some or all of the Notes at a price equal to 100% of the principal amount thereof, plus a “make-whole” premium as set forth in the Indenture. The Company may redeem up to 35% of the original aggregate principal amount of the Notes on or prior to October 1, 2021 with the proceeds of certain equity offerings at a redemption price equal to 106.875% of the principal amount of the Notes. If the Company sells certain assets or consummates certain change of control transactions, the Company will be required to make an offer to repurchase the Notes, subject to certain conditions.
The Indenture contains certain covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to incur additional indebtedness, make certain dividends, repurchase Company stock or make other distributions, make certain investments, create liens, transfer or sell assets, merge or consolidate and enter into transactions with the Company’s affiliates. Such covenants are subject to a number of exceptions and qualifications set forth in the Indenture. The Indenture also contains certain customary events of default, including failure to make payments in respect of the principal amount of the Notes, failure to make payments of interest on the Notes when due and payable, failure to comply with certain covenants and agreements and certain events of bankruptcy or insolvency. The Company was in compliance with all of its covenants under the Indenture at December 31, 2020.
The effective interest rate on the 6.875% senior unsecured notes due 2026, taking into account all underwriter and original issue discounts, was 7.248%. The weighted average effective interest rate on our debt facilities was approximately 4.02% and 4.42% for the years ended December 31, 2020 and 2019, respectively.
French Employee Profit Sharing
At both December 31, 2020 and 2019, long-term debt other than the Amended Credit Agreement primarily consisted of obligations of the French operations related to government-mandated profit sharing. Each year, representatives of the workers at each of the French businesses can make an election for the profit sharing amounts from the most recent year ended to be invested in a financial institution or with their respective employer. To the extent that funds are invested with the Company, these amounts bear interest at 0.20% and 0.62% at December 31, 2020 and 2019, respectively, and are generally payable in the fifth year subsequent to the year in which the profit sharing is accrued.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank Overdrafts
The Company also had bank overdraft facilities of $6.7 million and $6.1 million, at December 31, 2020 and 2019, respectively, of which none was outstanding at either December 31, 2020 or 2019. Interest is incurred on outstanding amounts at market rates, which were 0.26% and 0.26%, respectively, at December 31, 2020 and 2019. No commitment fees are paid on the unused portion of these facilities.
Rate Swap Agreements
From time to time, the Company enters into interest rate swap transactions to manage the Company's interest rate risk and cross-currency swaps designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. See Note 15. Derivatives for additional information.
Principal Repayments
Under the Credit Agreement, the Company selects an "interest period" for each of its borrowings from the Revolving Credit Facility. The Company can repay such borrowings and borrow again at a subsequent date if it chooses to do so, providing it flexibility and efficient use of any excess cash. The Company currently has the intent and ability to allow its debt balances to remain outstanding and expects to continue to file notices of continuation related to its borrowings outstanding at December 31, 2020 such that those amounts are not expected to be repaid prior to the September 2023 expiration of the Revolving Credit Facility. Following are the expected maturities for the Company's debt obligations as of December 31, 2020 ($ in millions):
|
|
|
|
|
|
2021
|
$
|
4.1
|
|
2022
|
4.1
|
|
2023
|
53.5
|
|
2024
|
2.6
|
|
2025
|
188.8
|
|
Thereafter
|
344.8
|
|
Total *
|
$
|
597.9
|
|
Fair Value of Debt
At December 31, 2020 and 2019, the fair market value of the Company's 6.875% senior unsecured notes was $371.0 million and $378.3 million, respectively. The fair market value for the senior unsecured notes was determined using quoted market prices, which are directly observable Level 1 inputs. The fair market value of all other debt as of December 31, 2020 and 2019 approximated the respective carrying amounts as the interest rates are variable and based on current market indices.
Debt Issuance Costs
In conjunction with the Indenture and Credit Agreement, the Company capitalized approximately $3.6 million in deferred debt issuance costs during the year ended December 31, 2018 which will be amortized over the term of the related debt instruments. Additionally, the Company wrote-off $0.5 million in deferred debt issuance costs related to the prior debt facilities. As of December 31, 2020, and 2019, the Company's total deferred debt issuance costs, net of accumulated amortization, were $4.6 million and $5.9 million, respectively.
Amortization expense of $1.3 million and $1.2 million was recorded during the years ended December 31, 2020 and 2019, respectively, and has been included as a component of Interest expense in the accompanying Consolidated Statements of Income. Following is the expected future amortization of the Company's deferred debt issuance costs as of December 31, 2020 ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
2021
|
$
|
1.3
|
|
2022
|
1.3
|
|
2023
|
1.1
|
|
2024
|
0.4
|
|
2025
|
0.4
|
|
Thereafter
|
0.1
|
|
Total
|
$
|
4.6
|
|
Note 15. Derivatives
In the normal course of business, the Company is exposed to foreign currency exchange rate risk and interest rate risk on its variable-rate debt. To manage these risks, the Company utilizes a variety of practices including, where considered appropriate, derivative instruments. The Company has no derivative instruments for trading or speculative purposes or any derivatives with credit risk-related contingent features. All derivative instruments used by the Company are either exchange traded or are entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties. The fair values of the Company's derivative instruments are determined using observable inputs and are considered Level 2 assets or liabilities.
The Company utilizes currency forward, swap and, to a lesser extent, option contracts to selectively hedge its exposure to foreign currency risk when it is practical and economical to do so. The use of these contracts minimizes transactional exposure to exchange rate changes. We designate certain of our foreign currency hedges as cash flow hedges. Changes in the fair value of cash flow hedges are reported as a component of Other comprehensive income (loss) and reclassified into earnings when the forecasted transaction affects earnings. For foreign exchange contracts not designated as cash flow hedges, changes in the contracts' fair value are recorded to net income each period.
The Company selectively hedges its exposure to interest rate increases on variable-rate, long-term debt when it is practical and economical to do so. Changes in the fair value of interest rate contracts considered cash flow hedges are reported as a component of Other comprehensive income (loss) and reclassified into earnings when the forecasted transaction affects earnings.
The Company also uses cross currency swap contracts to selectively hedge its exposure to foreign currency related changes in its net investments in certain foreign operations. We designate these cross currency swap contracts as net investment hedges. Changes in the fair value of these hedges are deferred within the foreign currency translation component of Accumulated other comprehensive income and reclassified into earnings when the foreign investment is sold or substantially liquidated.
On September 11, 2019, the Company entered into a pay-fixed, receive-variable interest rate swap with a maturity date of January 31, 2027. The instrument is a hedge on a portion of the Company’s debt facility through the existing credit agreement. Under the terms of the interest rate swap, SWM will pay a fixed amount of interest each period in an amount equal to 1.724% on a notional amount of $185 million and receive interest payments monthly in an amount equal to the One-Month USD-LIBOR rate on the notional amount. The notional amount will reduce throughout the term of the swap as follows:
•September 13, 2019 - December 31, 2020 $185 million notional
•December 31, 2020 - December 31, 2021 $150 million notional
•December 31, 2021 - January 31, 2027 $100 million notional
As with the previous interest rate swap, the terms of the swap mirror the terms of the underlying debt, including timing of the payments and interest rates.
On October 24, 2018, the Company also entered into a three-year cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $75 million swapped to €65.4 million at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of 6.875% per annum and pay to our swap counterparty Euro interest at a fixed rate of 3.6725% per annum. The cross-currency swap will mature on October 1, 2021.
On January 29, 2019, the Company entered into a cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $75 million swapped to €66.0 million at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of 6.875% per annum and pay to our swap counterparty Euro interest at a fixed rate of 4.0525% per annum. The cross-currency swap will mature on October 1, 2021.
On September 11, 2019, the Company entered into a cross-currency swap arrangement with a major financial institution designed as a hedge having a maturity date of April 1, 2023. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $100 million swapped to €90.9 million at maturity. Under the terms of the new cross-currency swap, SWM will pay a fixed amount of Euro-denominated interest at a rate of 5.638% semiannually and receive U.S. dollar denominated payments at a rate of 6.875% semiannually on the notional amount of the swap.
The following table presents the fair value of asset and liability derivatives and the respective balance sheet locations at December 31, 2020 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
Derivatives Designated as Hedges:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts receivable
|
|
$
|
0.9
|
|
|
Accrued expenses
|
|
$
|
11.0
|
|
Foreign exchange contracts
|
Other assets
|
|
—
|
|
|
Other liabilities
|
|
12.3
|
|
Interest rate contracts
|
Accounts receivable
|
|
0.3
|
|
|
Accrued expenses
|
|
—
|
|
Interest rate contracts
|
Other assets
|
|
—
|
|
|
Other liabilities
|
|
7.8
|
|
Total derivatives designated as hedges
|
|
|
$
|
1.2
|
|
|
|
|
$
|
31.1
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedges:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts receivable
|
|
$
|
—
|
|
|
Accounts payable
|
|
$
|
—
|
|
Total derivatives not designated as hedges
|
|
|
—
|
|
|
|
|
—
|
|
Total derivatives
|
|
|
$
|
1.2
|
|
|
|
|
$
|
31.1
|
|
The following table presents the fair value of asset and liability derivatives and the respective balance sheet locations at December 31, 2019 ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
Derivatives Designated as Hedges:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts receivable
|
|
$
|
4.8
|
|
|
Accrued expenses
|
|
$
|
5.6
|
|
Foreign exchange contracts
|
Other assets
|
|
6.3
|
|
|
Other liabilities
|
|
5.5
|
|
Interest rate contracts
|
Accounts receivable
|
|
—
|
|
|
Accrued expenses
|
|
0.2
|
|
Total derivatives designated as hedges
|
|
|
$
|
11.1
|
|
|
|
|
$
|
11.3
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts receivable
|
|
$
|
0.1
|
|
|
Accounts payable
|
|
$
|
—
|
|
Total derivatives not designated as hedges
|
|
|
0.1
|
|
|
|
|
—
|
|
Total derivatives
|
|
|
$
|
11.2
|
|
|
|
|
$
|
11.3
|
|
The following table provides the gross effect that derivative instruments in cash flow hedging relationships had on accumulated other comprehensive income (loss), or AOCI, and results of operations ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Cash Flow Hedging Relationships
|
|
Unrealized Gain (Loss) Recognized in AOCI on Derivatives, Net of Tax for the Year Ended December 31,
|
|
Location of Loss (Gain) Reclassified from AOCI
|
|
Loss (Gain) Reclassified
from AOCI, Net of Tax
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
2020
|
|
2019
|
|
2018
|
Derivatives designated as cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(5.3)
|
|
|
$
|
(0.7)
|
|
|
$
|
(1.7)
|
|
|
Net sales
|
|
$
|
(3.4)
|
|
|
$
|
(1.2)
|
|
|
$
|
0.8
|
|
Foreign exchange contracts
|
|
1.4
|
|
|
(2.3)
|
|
|
0.1
|
|
|
Other income, net
|
|
1.4
|
|
|
(1.9)
|
|
|
0.1
|
|
Interest rate contracts
|
|
(7.7)
|
|
|
4.6
|
|
|
4.0
|
|
|
Interest expense
|
|
—
|
|
|
7.6
|
|
|
2.8
|
|
Derivatives designated as investment hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
(14.2)
|
|
|
—
|
|
|
—
|
|
|
Other income (expense), net
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
(25.8)
|
|
|
$
|
1.6
|
|
|
$
|
2.4
|
|
|
|
|
$
|
(2.0)
|
|
|
$
|
4.5
|
|
|
$
|
3.7
|
|
The Company's designated derivative instruments are highly effective. As such, related to the hedge ineffectiveness or amounts excluded from hedge effectiveness testing, there were no gains or losses recognized immediately in income for the years ended December 31, 2020, 2019 or 2018, other than those related to the cross-currency swap, noted below.
The Company’s cross currency swaps were designated with terms based on the spot rate of the EUR. Future changes in the components related to the spot change on the notional will be recorded in OCI and remain there until the hedged subsidiaries are substantially liquidated. All coupon payments are recorded in earnings and the initial value of excluded components currently recorded in Accumulated other comprehensive loss as an unrealized translation adjustment are amortized to interest expense over the remaining term of the swap. For the year ended December 31, 2020, 2019 and 2018, respectively, $6.5 million, $1.1 million and $1.9 million was recognized in income as derivative amounts excluded from effectiveness testing as Interest expense.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the effect derivative instruments not designated as hedging instruments had on net income ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Cash Flow Hedging Instruments
|
Amount of Gain / (Loss) Recognized in Other Income / Expense
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
0.1
|
|
|
$
|
1.1
|
|
|
$
|
(2.5)
|
|
Total
|
$
|
0.1
|
|
|
$
|
1.1
|
|
|
$
|
(2.5)
|
|
Note 16. Accrued Expenses
Accrued expenses consisted of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Accrued salaries, wages and employee benefits
|
$
|
48.7
|
|
|
$
|
46.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued expenses
|
52.2
|
|
|
40.4
|
|
Total
|
$
|
100.9
|
|
|
$
|
86.5
|
|
Note 17. Income Taxes
For financial reporting purposes, income before income taxes includes the following components ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
United States
|
$
|
29.1
|
|
|
$
|
60.0
|
|
|
$
|
55.8
|
|
Foreign
|
68.2
|
|
|
36.9
|
|
|
61.0
|
|
Total
|
$
|
97.3
|
|
|
$
|
96.9
|
|
|
$
|
116.8
|
|
An analysis of the provision (benefit) for income taxes from continuing operations follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Current income taxes:
|
|
|
|
|
|
U.S. federal
|
$
|
7.3
|
|
|
$
|
8.1
|
|
|
$
|
(9.2)
|
|
U.S. state
|
1.5
|
|
|
0.8
|
|
|
0.8
|
|
Foreign
|
14.8
|
|
|
9.7
|
|
|
11.6
|
|
|
23.6
|
|
|
18.6
|
|
|
3.2
|
|
Deferred income taxes:
|
|
|
|
|
|
U.S. federal
|
(5.3)
|
|
|
2.3
|
|
|
3.6
|
|
U.S. state
|
1.0
|
|
|
(1.9)
|
|
|
1.4
|
|
Foreign
|
(0.9)
|
|
|
(3.8)
|
|
|
2.5
|
|
|
(5.2)
|
|
|
(3.4)
|
|
|
7.5
|
|
Total
|
$
|
18.4
|
|
|
$
|
15.2
|
|
|
$
|
10.7
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of income taxes computed at the U.S. Federal statutory income tax rate to the provision for income taxes is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Tax provision at U.S. statutory rate
|
$
|
20.4
|
|
|
21.0
|
%
|
|
$
|
20.3
|
|
|
21.0
|
%
|
|
$
|
24.5
|
|
|
21.0
|
%
|
Foreign income tax rate differential
|
2.7
|
|
|
2.7
|
|
|
0.6
|
|
|
0.5
|
|
|
2.5
|
|
|
2.2
|
|
Income from passthrough entities
|
2.3
|
|
|
2.3
|
|
|
1.7
|
|
|
1.6
|
|
|
0.7
|
|
|
0.6
|
|
Global intangible low tax inclusion
|
4.8
|
|
|
4.8
|
|
|
(0.1)
|
|
|
(0.1)
|
|
|
7.0
|
|
|
6.0
|
|
Foreign derived intangible income
|
(0.3)
|
|
|
(0.3)
|
|
|
(0.2)
|
|
|
(0.2)
|
|
|
(4.2)
|
|
|
(3.6)
|
|
State income tax, net of federal benefit
|
1.8
|
|
|
1.8
|
|
|
(0.2)
|
|
|
(0.2)
|
|
|
1.7
|
|
|
1.5
|
|
Adjustments to valuation allowances
|
(3.9)
|
|
|
(3.9)
|
|
|
(3.7)
|
|
|
(3.8)
|
|
|
(2.5)
|
|
|
(2.1)
|
|
Transition tax
|
—
|
|
|
—
|
|
|
(0.7)
|
|
|
(0.6)
|
|
|
(11.6)
|
|
|
(10.0)
|
|
Other tax credits
|
(0.8)
|
|
|
(0.8)
|
|
|
(2.0)
|
|
|
(2.1)
|
|
|
(2.6)
|
|
|
(2.3)
|
|
Foreign tax credits
|
(9.9)
|
|
|
(10.0)
|
|
|
(3.5)
|
|
|
(3.6)
|
|
|
(5.1)
|
|
|
(4.4)
|
|
Other foreign operational taxes
|
3.5
|
|
|
3.5
|
|
|
2.9
|
|
|
3.0
|
|
|
3.1
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remeasurement of deferred taxes due to tax law
|
0.4
|
|
|
0.4
|
|
|
0.9
|
|
|
1.0
|
|
|
(1.8)
|
|
|
(1.5)
|
|
Non-deductible compensation
|
0.4
|
|
|
0.4
|
|
|
1.1
|
|
|
1.1
|
|
|
0.4
|
|
|
0.3
|
|
Other, net
|
(3.0)
|
|
|
(3.0)
|
|
|
(1.9)
|
|
|
(1.9)
|
|
|
(1.4)
|
|
|
(1.2)
|
|
Provision for income taxes
|
$
|
18.4
|
|
|
18.9
|
%
|
|
$
|
15.2
|
|
|
15.7
|
%
|
|
$
|
10.7
|
|
|
9.2
|
%
|
On December 22, 2017, the Tax Act was enacted into law effective January 1, 2018. The new legislation contains several key tax provisions that affected the Company, which include but are not limited to a one-time deemed repatriation tax on post-1986 accumulated earnings and profits of the undistributed earnings of foreign subsidiaries (“transition tax”), a reduction of the federal corporate income tax rate from 35% to 21%, and other U.S. reform items. In 2018, the Company decreased its provisional estimates of transition tax, related currency implications, state taxes and deferred tax rate change effect of the new law by $13.9 million. The reduction from the provisional 2017 amounts was primarily due to further analysis of transition tax on accumulated earnings and foreign taxes paid. As of December 31, 2018, the Company completed its accounting for the tax effects of the Tax Act.
A provision for income taxes of $18.4 million and $15.2 million in the years ended December 31, 2020 and 2019, respectively, resulted in an effective tax rate of 18.9% as compared with 15.7% in 2019. The Company’s effective tax rates differ from the statutory federal income tax rate of 21% due to varying tax rates in foreign jurisdictions, the relative amounts of income we earn in those jurisdictions and a $4.2 million year over year reduction due to the one-time Brazil ICMS litigation accrual in 2019.
Prior to the passage of the U.S. Tax Act, the Company asserted that substantially all of the undistributed earnings of its foreign subsidiaries were considered indefinitely reinvested and accordingly, no deferred taxes were provided. Due to the Tax Act, the Company has significant previously taxed earnings and profits from its foreign subsidiaries, as a result of transition tax, that is generally able to be repatriated free of U. S. federal tax. In addition, future earnings of foreign subsidiaries are generally expected to be able to be repatriated free of U.S. federal income tax because these earnings were taxed in the U.S. under the GILTI regime or would be eligible for a 100% dividends received deduction. As a result of the Company’s treasury policy to simplify and expediate the intercompany cash flows to SWM US, as evidenced by the implementation of the Cash Pool, and in light of the Company’s demonstrated goal of driving growth though inorganic/acquisitional means, the Company has decided to no longer assert indefinite reinvestment with respect to earnings generated by foreign subsidiaries prior to January 1, 2018. Therefore, the Company does not intend to assert indefinite reinvestment of its foreign subsidiaries to the extent of each CFC’s earnings and profits and to the extent of any foreign partnership’s U.S. tax capital accounts. As a result,
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company has provided for non-U.S. withholding taxes, U.S. federal tax related to currency movement on previously-taxed earnings and profits, and U.S. state taxes on unremitted earnings.
Net deferred income tax assets (liabilities) were comprised of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Deferred Tax Assets
|
|
|
|
Receivable allowances
|
$
|
0.5
|
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement and other employee benefits
|
21.0
|
|
|
19.0
|
|
|
|
|
|
Derivatives
|
2.5
|
|
|
0.1
|
|
Net operating loss and tax credit carryforwards
|
104.4
|
|
|
93.7
|
|
Capital loss carryforward
|
12.1
|
|
|
6.9
|
|
Accruals and other liabilities
|
0.7
|
|
|
—
|
|
|
|
|
|
Intangibles
|
37.6
|
|
|
45.7
|
|
Other
|
4.4
|
|
|
3.9
|
|
|
183.2
|
|
|
169.7
|
|
Less: Valuation allowance
|
(166.6)
|
|
|
(157.4)
|
|
Net deferred income tax assets
|
$
|
16.6
|
|
|
$
|
12.3
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
$
|
(55.7)
|
|
|
$
|
(52.6)
|
|
Accruals and other liabilities
|
—
|
|
|
(0.6)
|
|
|
|
|
|
Investment in subsidiaries
|
(3.2)
|
|
|
(3.5)
|
|
|
|
|
|
|
|
|
|
Other
|
(0.3)
|
|
|
(0.1)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilities
|
$
|
(59.2)
|
|
|
$
|
(56.8)
|
|
|
|
|
|
Total net deferred income tax liabilities
|
$
|
(42.6)
|
|
|
$
|
(44.5)
|
|
As of December 31, 2020, the Company had approximately $99.5 million of tax-effected operating loss carryforwards available to further reduce future taxable income in various jurisdictions which will expire on various dates as follows:
|
|
|
|
|
|
|
2020
|
2021-2024
|
$
|
0.1
|
|
2025-2037
|
19.6
|
|
|
|
Indefinite
|
79.8
|
|
|
$
|
99.5
|
|
In addition, the Company has $2.9 million and $1.8 million of foreign and state tax credits that will expire between 2029 – 2030 and 2021 – 2036, respectively.
The Company's deferred tax asset valuation allowances are primarily the result of uncertainties regarding the future realization of recorded tax benefits on tax loss carryforwards for certain entities. The valuation allowance on deferred tax assets as of December 31, 2020, in Luxembourg, Spain and the Philippines total $151.8 million, $9.1 million and $0.4 million respectively, fully reserving the net deferred tax asset balances in these locations. In addition, there is a valuation allowance on ICMS tax credits of $4.1 million in Brazil and certain state tax credits of $1.2 million.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's assumptions, judgments and estimates relative to the valuation of these net deferred tax assets take into account available positive and negative evidence of realizability, including recent financial performance, the ability to realize benefits of restructuring and other recent actions, projections of the amount and category of future taxable income and tax planning strategies. Actual future operating results and the underlying amount and category of income in future periods could differ from the Company's current assumptions, judgments and estimates. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets.
The following table summarizes the activity related to the Company's unrecognized tax benefits related to income taxes ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
|
2018
|
Uncertain tax position balance at beginning of year
|
$
|
1.7
|
|
|
$
|
1.1
|
|
|
$
|
1.0
|
|
Increases related to current year tax positions
|
0.3
|
|
|
0.6
|
|
|
0.6
|
|
|
|
|
|
|
|
Decreases related to prior year tax positions
|
—
|
|
|
—
|
|
|
(0.2)
|
|
Decreases related to expiration of statute of limitations
|
—
|
|
|
—
|
|
|
(0.3)
|
|
Uncertain tax position balance at end of year
|
$
|
2.0
|
|
|
$
|
1.7
|
|
|
$
|
1.1
|
|
The liability for unrecognized tax benefits included $2.0 million as of December 31, 2020 that if recognized would impact the Company's effective tax rate. We do not anticipate a decrease in unrecognized tax benefits by the end of 2021 as a result of a lapse of the statute of limitations and other regulatory filings. The Company's policy with respect to penalties and interest in connection with income tax assessments or related to unrecognized tax benefits is to classify penalties as provision for income taxes and interest as interest expense in its Consolidated Statements of Income. There were no material income tax penalties or interest accrued during the years ended December 31, 2020, 2019 and 2018.
The Company files income tax returns, including returns for its subsidiaries, with federal, state, local and foreign jurisdictions. The Company finalized Belgium and France audits for tax years 2017 – 2018 and 2016 - 2017, respectively during 2020. All expected impacts have been recorded in 2020 or earlier. We are no longer subject to U.S. federal examinations by the IRS for tax years before 2016. The following tax years remain subject to examination by the respective major tax jurisdictions:
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
Jurisdiction
|
Fiscal Years
|
Belgium
|
2019-2020
|
Brazil
|
2015-2020
|
Canada
|
2016-2020
|
China
|
2018-2020
|
France
|
2018-2020
|
Germany
|
2016-2020
|
Hong Kong
|
2014-2020
|
Luxembourg
|
2015-2020
|
Philippines
|
2017-2020
|
Poland
|
2015-2020
|
Spain
|
2016-2020
|
United Kingdom
|
2018-2020
|
United States
|
|
Federal
|
2016-2020
|
State
|
2014-2020
|
Note 18. Postretirement and Other Benefits
North American Pension and Postretirement Healthcare and Life Insurance Benefits
The U.S. operations have defined benefit retirement plans that cover certain full-time employees. Retirement benefits are based on either a cash balance benefit formula or a final average pay formula for certain employees who were "grandfathered" and retained retirement benefits under the terms of the plan prior to its amendment to include a cash balance benefit formula. Benefits related to the U.S. defined benefit and pension plan are frozen for all employees.
The U.S. operations also have unfunded healthcare and life insurance benefit plans, or OPEB plans, which cover certain of its retirees through age 65. Some employees who retained benefits under the terms of the Company's plans prior to certain past amendments receive retiree healthcare coverage at rates subsidized by the Company. For other eligible employees, retiree healthcare coverage access is offered at full cost to the retiree. The postretirement healthcare plans include a limit on the Company's share of costs for current and future retirees. The U.S. operations' retiree life insurance plans are noncontributory. The Company's Canadian postretirement benefits liability and U.S. OPEB liability are immaterial and therefore not included in these disclosures.
French Pension Benefits
In France, employees are covered under a government-administered program. In addition, the Company's French operations sponsor retirement indemnity plans, which pay a lump sum retirement benefit to all of its permanent employees who retire. In addition, the Company's French operations sponsor a supplemental executive pension plan. Plan assets are principally invested in the general asset portfolio of a French insurance company.
U.S. and French Pension Disclosures
The U.S. and French pension plans accounted for the majority of the Company's total plan assets and total Accumulated Benefit Obligations (ABO) at December 31, 2020 for the Company and all of its consolidated subsidiaries.
The Company uses a measurement date of December 31 for its pension plans in the United States and France. The funded status of these plans as of December 31, 2020 and 2019 was as follows ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
United States
|
|
France
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Change in Projected Benefit Obligation, or PBO:
|
|
|
|
|
|
|
|
PBO at beginning of year
|
$
|
119.9
|
|
|
$
|
112.3
|
|
|
$
|
31.9
|
|
|
$
|
29.5
|
|
Service cost
|
—
|
|
|
—
|
|
|
1.3
|
|
|
1.0
|
|
Interest cost
|
3.7
|
|
|
4.6
|
|
|
0.2
|
|
|
0.4
|
|
Actuarial loss
|
9.7
|
|
|
11.1
|
|
|
0.6
|
|
|
3.2
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
0.5
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Gross benefits paid
|
(8.2)
|
|
|
(8.1)
|
|
|
(1.7)
|
|
|
(2.3)
|
|
Currency translation effect
|
—
|
|
|
—
|
|
|
3.0
|
|
|
(0.6)
|
|
PBO at end of year
|
$
|
125.1
|
|
|
$
|
119.9
|
|
|
$
|
35.8
|
|
|
$
|
31.9
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
125.8
|
|
|
$
|
113.1
|
|
|
$
|
1.1
|
|
|
$
|
2.1
|
|
Actual return on plan assets
|
16.8
|
|
|
20.8
|
|
|
—
|
|
|
0.2
|
|
Employer contributions
|
—
|
|
|
—
|
|
|
1.2
|
|
|
1.1
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Gross benefits paid
|
(8.2)
|
|
|
(8.1)
|
|
|
(1.6)
|
|
|
(2.3)
|
|
Currency translation effect
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
Fair value of plan assets at end of year
|
$
|
134.4
|
|
|
$
|
125.8
|
|
|
$
|
0.8
|
|
|
$
|
1.1
|
|
Funded status at end of year
|
$
|
9.3
|
|
|
$
|
5.9
|
|
|
$
|
(35.0)
|
|
|
$
|
(30.8)
|
|
The PBO, ABO and fair value of pension plan assets for the Company's U.S. and French defined benefit pension plans as of December 31, 2020 and 2019 as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
France
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
PBO
|
$
|
125.1
|
|
|
$
|
119.9
|
|
|
$
|
35.8
|
|
|
$
|
31.9
|
|
ABO
|
125.1
|
|
|
119.9
|
|
|
35.8
|
|
|
31.9
|
|
Fair value of plan assets
|
134.4
|
|
|
125.8
|
|
|
0.8
|
|
|
1.1
|
|
As of December 31, 2020, the pre-tax amounts in accumulated other comprehensive income that have not been recognized as components of net periodic benefit cost for the U.S. and French pension plans are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
United States
|
|
France
|
Accumulated loss
|
$
|
17.8
|
|
|
$
|
16.0
|
|
Prior service credit
|
—
|
|
|
(2.6)
|
|
Accumulated other comprehensive loss
|
$
|
17.8
|
|
|
$
|
13.4
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts in accumulated other comprehensive loss at December 31, 2020, which are expected to be recognized as components of U.S. and French net periodic benefit cost in 2021 are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
United States
|
|
France
|
Amortization of accumulated loss
|
$
|
(3.6)
|
|
|
$
|
(1.2)
|
|
Amortization of prior service credit
|
—
|
|
|
0.3
|
|
Total
|
$
|
(3.6)
|
|
|
$
|
(0.9)
|
|
Actuarial assumptions are used to determine the Company's benefit obligations. The discount rate represents the interest rate used to determine the present value of future cash flows currently expected to be required to settle pension obligations. The discount rate fluctuates from year to year based on current market interest rates for high-quality, fixed-income investments. The Company also evaluates the expected average duration of its pension obligations in determining its discount rate. An assumed long-term rate of compensation increase is also used to determine the PBO. The weighted average assumptions used to determine benefit obligations as of December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
United States
|
|
France
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Discount rate
|
2.30
|
%
|
|
3.20
|
%
|
|
0.32
|
%
|
|
0.53
|
%
|
Rate of compensation increase
|
—
|
%
|
|
—
|
%
|
|
1.97
|
%
|
|
1.96
|
%
|
The components of net pension benefit costs for U.S. employees and net pension benefit costs for French employees during the years ended December 31, 2020, 2019 and 2018 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
French Pension Benefits
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.3
|
|
|
$
|
1.0
|
|
|
$
|
1.1
|
|
Interest cost
|
3.7
|
|
|
4.6
|
|
|
4.3
|
|
|
0.2
|
|
|
0.4
|
|
|
0.4
|
|
Expected return on plan assets
|
(4.9)
|
|
|
(5.8)
|
|
|
(5.8)
|
|
|
(0.1)
|
|
|
(0.1)
|
|
|
(0.1)
|
|
Amortizations and other
|
3.3
|
|
|
2.0
|
|
|
3.2
|
|
|
1.0
|
|
|
0.9
|
|
|
1.1
|
|
Net periodic benefit cost
|
$
|
2.1
|
|
|
$
|
0.8
|
|
|
$
|
1.7
|
|
|
$
|
2.4
|
|
|
$
|
2.2
|
|
|
$
|
2.5
|
|
Assumptions are used to determine net periodic benefit costs. In addition to the discount rate and rate of compensation increase, which are used to determine benefit obligations, an expected long-term rate of return on plan assets is also used to determine net periodic pension benefit costs. The weighted average assumptions used to determine net periodic benefit costs for the years ended December 31, 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
United States
|
|
France
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Discount rate
|
3.20
|
%
|
|
4.29
|
%
|
|
3.60
|
%
|
|
0.53
|
%
|
|
1.28
|
%
|
|
1.28
|
%
|
Expected long-term rate of return on plan assets
|
4.41
|
%
|
|
5.14
|
%
|
|
5.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
Rate of compensation increase
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
1.97
|
%
|
|
1.96
|
%
|
|
1.75
|
%
|
The Company's investment strategy with respect to its U.S. pension plan assets is to maximize the return on investment of plan assets at an acceptable level of risk and to assure the plans' fiscal health. The target asset allocation varies based on the funded status of the plan in an effort to match the duration of the plan's liabilities to
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investments in long duration fixed income assets over time. The Company's investments under the French pension plans are primarily invested as directed by governmental authorities, their contracted providers or the participants without direction from the Company. The primary goal of the Company's pension plans is to maintain the highest probability of assuring future benefit payments to participants while providing growth of capital in real terms. To achieve this goal, the investment philosophy is to protect plan assets from large investment losses, particularly over time, while steadily growing the assets in a prudent manner. While there cannot be complete assurance that the objectives will be realized, the Company believes that the likelihood of realizing the objectives are reasonable based upon this investment philosophy. The Company has an investment committee that meets on a periodic basis to review the portfolio returns and to determine asset mix targets. The U.S. and French pension plans' asset target allocations by asset category for 2021 and actual allocations by asset category at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
France
|
|
2021 Target
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Asset Category
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
—%
|
|
1%
|
|
1%
|
|
36%
|
|
41%
|
Equity securities*
|
|
|
|
|
|
|
|
|
|
Domestic large cap
|
2
|
|
2
|
|
5
|
|
30
|
|
31
|
Domestic small cap
|
1
|
|
1
|
|
3
|
|
—
|
|
—
|
International
|
6
|
|
6
|
|
15
|
|
—
|
|
—
|
Fixed income securities
|
91
|
|
90
|
|
76
|
|
32
|
|
26
|
Alternative investments**
|
—
|
|
—
|
|
—
|
|
2
|
|
2
|
Total
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
* None of the Company's pension plan assets are targeted for investment in SWM stock, except that it is possible that one or more mutual funds held by the plan could hold shares of SWM.
** Investments in this category under the U.S. pension plan only may include hedge funds and may include real estate under the French pension plan.
The Company's pension assets are classified according to an established fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). A financial instrument's level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are described below:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth by level, within the fair value hierarchy, the U.S. and French pension plans' assets at fair value as of December 31, 2020 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
France
|
Plan Asset Category
|
Total
|
|
Other*
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash equivalents
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic large cap
|
2.7
|
|
|
2.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
|
—
|
|
Domestic small cap
|
1.3
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
International
|
8.2
|
|
|
8.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government securities
|
13.9
|
|
|
13.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
99.6
|
|
|
99.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
International bonds
|
1.2
|
|
|
1.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
6.5
|
|
|
6.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Alternative investments**
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
134.4
|
|
|
$
|
133.4
|
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
0.5
|
|
|
$
|
0.3
|
|
The following table sets forth by level, within the fair value hierarchy, the U.S. and French pension plans' assets at fair value as of December 31, 2019 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
France
|
Plan Asset Category
|
Total
|
|
Other*
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash equivalents
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic large cap
|
6.8
|
|
|
6.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
|
—
|
|
Domestic small cap
|
4.3
|
|
|
4.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
International
|
19.1
|
|
|
19.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government securities
|
20.9
|
|
|
20.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
55.8
|
|
|
5.5
|
|
|
—
|
|
|
50.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
International bonds
|
0.8
|
|
|
0.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
17.2
|
|
|
17.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Alternative investments**
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Total
|
$
|
125.8
|
|
|
$
|
74.6
|
|
|
$
|
0.9
|
|
|
$
|
50.3
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
0.7
|
|
|
$
|
0.4
|
|
* Investments held in Mutual Funds are measured at Net Asset Value ("NAV"), as determined by the fund manager, as a practical expedient and not are subject to hierarchy level classification disclosure.
** Alternative investments include ownership interests in shares of registered investment companies.
The Company expects the following estimated undiscounted future pension benefit payments for the United States and France, which are to be made from pension plan and employer assets, net of amounts that will be funded from retiree contributions, and which reflect expected future service, as appropriate ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
France
|
|
Pension
Benefits
|
|
Pension
Benefits
|
2021
|
$
|
8.6
|
|
|
$
|
0.4
|
|
2022
|
8.5
|
|
|
1.0
|
|
2023
|
8.2
|
|
|
1.1
|
|
2024
|
8.1
|
|
|
1.7
|
|
2025
|
8.0
|
|
|
1.7
|
|
2026 - 2030
|
36.7
|
|
|
10.2
|
|
The Company is not required to contribute during 2020 to its U.S. and French pension plans; although, it may make discretionary contributions dependent on market conditions to remain aligned with its investment policy statement.
Other Foreign Pension Benefits
In Brazil, employees are covered under government-administered programs. Employees in the United Kingdom are covered by auto enrollment schemes where employee contributions are compulsory and also have the backing of government administered programs. In Canada, the employee pension benefits are not material and therefore are not included in the above disclosures.
Other Benefits
We sponsor a qualified defined contribution plan covering substantially all U.S. employees. Under the plan, the Company matches a portion of employee contributions. The Company's cost under the plan was $4.0 million, $3.9 million and $3.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company provides U.S. executives, certain other key personnel and its directors the opportunity to participate in deferred compensation plans. Participating employees can elect to defer a portion of their salaries and certain other compensation. Participating directors can elect to defer their meeting fees, as a cash deferral, as well as their quarterly retainer fees, as deferred stock unit credits. The Company's liability balance under these deferred compensation plans totaled $14.5 million and $19.7 million at December 31, 2020 and 2019, respectively, which were included in the Consolidated Balance Sheets in Other liabilities. In connection with these plans, the Company has a grantor trust into which it has contributed funds toward its future obligations under the various plans (See Note 12. Other Assets). The balance of grantor trust assets totaled $18.0 million and $14.7 million at December 31, 2020 and 2019, respectively, which were included in Other assets in the Consolidated Balance Sheets. These assets are restricted from Company use until all obligations are satisfied.
In accordance with French law, certain salaried employees in France may accumulate unused regular vacation and supplemental hours of paid leave that can be credited to an individual's Compte Epargne Temps, or CET. The CET account may grow over an individual's career and the hours accumulated may be withdrawn upon retirement or under other special circumstances at the individual's then current rate of pay. The balance of the Company's liability for this program reflected in the accompanying Consolidated Balance Sheets in Other liabilities was $7.0 million and $6.3 million at December 31, 2020 and 2019, respectively.
Note 19. Stockholders' Equity
Restricted Stock Plan
In April 2015, the Company adopted a new 2015 Long-term Incentive Plan, or LTIP, which replaced its existing Restricted Stock Plan ("RSP"). The LTIP is intended to promote the Company's long-term financial success by attracting and retaining outstanding executive personnel and to motivate such personnel by means of equity grants.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Compensation Committee of the Company's Board of Directors selects participants and establishes the terms of any grant of restricted stock. The Company's LTIP provides that issuance of restricted stock immediately transfers ownership rights in shares of its Common Stock to the recipient of the grant, including the right to vote the shares and to receive dividends thereon. Other types of stock awards are available under the LTIP, but not currently used. The recipient's continued ownership of and right to freely transfer the restricted stock is subject to such conditions on transferability and to such risks of forfeiture as are established by the Compensation Committee at the time of the grant, which may include continued employment with the Company for a defined period, achievement of specified management performance objectives or other conditions established by the Compensation Committee. The number of shares which may be issued under the LTIP is limited to 5,000,000. Restricted shares outstanding under the RSP have all vested in accordance with the terms of each grant. No further grants of shares will be issued under the RSP. No single participant may be awarded, in the aggregate, more than 750,000 shares during any fiscal year.
As of December 31, 2020, 988,180 restricted shares had been issued under the Company's restricted LTIP plans, of which 405,299 shares of issued restricted stock were not yet vested and for which $2.1 million in unrecognized compensation expense is expected to be recognized over a weighted average period of 1.8 years. The following table presents restricted stock activity for the years 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
# of Shares
|
|
Weighted Average Fair Value at Date of Grant
|
|
# of Shares
|
|
Weighted Average Fair Value at Date of Grant
|
|
# of Shares
|
|
Weighted Average Fair Value at Date of Grant
|
Nonvested restricted shares outstanding at January 1
|
221,622
|
|
|
$
|
37.08
|
|
|
184,190
|
|
|
$
|
40.33
|
|
|
283,338
|
|
|
$
|
37.26
|
|
Granted
|
339,454
|
|
|
34.27
|
|
|
155,982
|
|
|
35.62
|
|
|
142,475
|
|
|
39.58
|
|
Forfeited
|
(36,749)
|
|
|
33.98
|
|
|
(8,869)
|
|
|
41.34
|
|
|
(12,858)
|
|
|
40.06
|
|
Vested
|
(119,028)
|
|
|
37.15
|
|
|
(109,681)
|
|
|
40.12
|
|
|
(228,765)
|
|
|
35.86
|
|
Nonvested restricted shares outstanding at December 31
|
405,299
|
|
|
$
|
34.96
|
|
|
221,622
|
|
|
$
|
37.08
|
|
|
184,190
|
|
|
$
|
40.33
|
|
Restricted Stock Plan Performance Based Shares
During 2020, the Company recognized $3.9 million for 266,221 shares earned under the 2020-2021 award opportunity and $4.2 million of compensation expense earned under the 2019-2020 award opportunity. During 2019, the Company recognized $5.6 million for 331,150 shares earned under the 2019-2020 award opportunity and $2.2 million of compensation expense earned under the 2018-2019 award opportunity. During 2018, the Company recognized $2.0 million of compensation expense for 91,396 shares earned under the 2018-2019 award opportunity and $2.2 million of compensation expense earned under the 2017-2018 award opportunity.
Basic and Diluted Shares Reconciliation
The Company uses the two-class method to calculate earnings per share. The Company has granted restricted stock that contains non-forfeitable rights to dividends on unvested shares. Since these unvested shares are considered participating securities under the two-class method, the Company allocates earnings per share to common stock and participating securities according to dividends declared and participation rights in undistributed earnings.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Diluted net income per common share is computed based on net income divided by the weighted average number of common and potential common shares outstanding. Potential common shares during the respective periods are those related to dilutive stock-based compensation, including long-term share-based incentive compensation, and directors' accumulated deferred stock compensation which may be received by the directors in the form of stock or cash. A reconciliation of the average number of common and potential common shares outstanding used in the calculations of basic and diluted net income per share follows ($ in millions, shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Numerator (basic and diluted):
|
|
|
|
|
|
Net income
|
$
|
83.8
|
|
|
$
|
85.8
|
|
|
$
|
94.5
|
|
Less: Dividends paid to participating securities
|
(0.7)
|
|
|
(0.4)
|
|
|
(0.3)
|
|
Less: Undistributed earnings available to participating securities
|
(0.4)
|
|
|
(0.2)
|
|
|
(0.3)
|
|
Undistributed and distributed earnings available to common stockholders
|
$
|
82.7
|
|
|
$
|
85.2
|
|
|
$
|
93.9
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Average number of common shares outstanding
|
30,832.7
|
|
|
30,652.2
|
|
|
30,551.3
|
|
Effect of dilutive stock-based compensation
|
271.5
|
|
|
186.1
|
|
|
141.6
|
|
Average number of common and potential common shares outstanding
|
31,104.2
|
|
|
30,838.3
|
|
|
30,692.9
|
|
Note 20. Commitments and Contingencies
Other Commitments
The EP segment's PDM Industries plant has a minimum annual commitment of approximately $1.3 million per year for calcium carbonate purchases, a raw material used in the manufacturing of some paper products, which totals approximately $5.1 million through 2024. Future purchases are expected to be at levels that exceed such minimum levels under these contracts.
The Company enters into certain other immaterial contracts from time to time for the purchase of certain raw materials. The Company also enters into certain contracts for the purchase of equipment and related costs in connection with its ongoing capital projects.
The Company has agreements with an energy co-generation supplier in France whereby the supplier constructed and operates a co-generation facility at certain plants and supplies steam that is used in the operation of these plants. The Company is committed to purchasing minimum annual amounts of steam generated by these facilities under the agreements through 2030. These minimum annual commitments total approximately $4.2 million. The Company's current and expected requirements for steam at these facilities are at levels that exceed the minimum levels under the contracts.
The EP segment's Brazilian plant, SWM-B, has an agreement for the transmission and distribution of energy that covers all of the plant's consumption of electrical energy valued at approximately $3.8 million annually through 2021. Additionally, SWM-B has an agreement for natural gas purchases valued at approximately $4.3 million during 2021. The French plants have contracts for natural gas to be distributed to and consumed at PdM, LTRI and St. Girons. The total value of the natural gas and distribution to be provided under these contracts is estimated at approximately $10.6 million through 2023. Additionally, the French plants have contracts for electricity to be distributed to and consumed at PdM, LTRI and St. Girons. The value of the electricity and distribution to be provided under these contracts is estimated at approximately $7.5 million in 2021. The Spay, France plant has a contract to consume biomass at approximately $0.6 million annually through 2022.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has certain other letters of credit, guarantees and surety bonds outstanding at December 31, 2020, which are not material either individually or in the aggregate.
Litigation
Brazil
Imposto sobre Circulação de Mercadorias e Serviços ("ICMS"), a form of value-added tax in Brazil, was assessed to SWM-B in December of 2000. SWM-B received two assessments from the tax authorities of the State of Rio de Janeiro (the "State") for unpaid ICMS taxes on certain raw materials from January 1995 through October 1998 and from November 1998 through November 2000 (collectively, the "Raw Materials Assessments"). The Raw Materials Assessments concerned the accrual and use by SWM-B of ICMS tax credits generated from the production and sale of certain non-tobacco related grades of paper sold domestically. SWM-B contested the Raw Materials Assessments based on Article 150, VI of the Brazilian Federal Constitution of 1988, which grants immunity from ICMS taxes to papers intended for printing books, newspapers and periodicals, on the ground that tax immunity extends to the raw material inputs used to produce such papers. In 2015, the first chamber of the Federal Supreme Court decided the first Raw Materials Assessment in favor of SWM-B. On May 24, 2019, the second chamber of the Federal Supreme Court decided the second Raw Materials Assessment against SWM-B in the amount of approximately $9.5 million based on the foreign currency exchange rate at December 31, 2020. SWM-B, with assistance of outside counsel, is evaluating the decision and exploring its options and other defenses to partially satisfy or reduce the judgment and SWM-B plans to pursue these avenues vigorously. However, because the outcome of any reductions and defenses is uncertain, SWM-B recorded a liability sufficient to satisfy this amount in the second quarter of 2019. This judgment may be settled over the course of 60 months after all possible challenges are concluded. Interest and penalties will continue to accrue until the judgment is paid.
SWM-B received assessments from the tax authorities of the State for unpaid ICMS and Fundo Estadual de Combate à Pobreza ("FECP," a value-added tax similar to ICMS) taxes on interstate purchases of electricity. The State issued four sets of assessments against SWM-B, one for May 2006 - November 2007, a second for January 2008 - December 2010, a third for September 2011 - September 2013, which was replaced by a smaller assessment for January - June 2013, and a fourth for July 2013 - December 2017 (collectively the "Electricity Assessments"). SWM-B challenged all Electricity Assessments in administrative proceedings before the State tax council (in the first-level court Junta de Revisão Fiscal and the appellate court Conselho de Contribuintes) based on Resolution 1.610/89, which defers these taxes on electricity purchased by an "electricity-intensive consumer." In 2014, a majority of the Conselho de Contribuintes sitting en banc ruled against SWM-B in each of the first and second Electricity Assessments ($3.6 million and $6.9 million, respectively, based on the foreign currency exchange rate at December 31, 2020), and SWM-B is now pursuing challenges to these assessments in the State judicial system where SWM-B obtained preliminary injunctions against enforcement of both assessments. In March 2020, the first-level judicial court ruled in favor of SWM-B in the second Electricity Assessment, a decision that is now on appeal. The third Electricity Assessment was dismissed on technical grounds by the Conselho de Contribuintes in 2018 after the State admitted the tax did not apply as it had asserted. Instead, in August 2018, the State filed a revised third Electricity Assessment in the amount of $0.5 million for ICMS on electricity purchased during part of 2013, and a fourth Electricity Assessment in the amount of $7.7 million pertaining to ICMS and FECP on electricity purchased from July 2013 to December 2017. SWM-B filed challenges to these 2018 assessments in the first-level administrative court on the same grounds as the older cases. The Junta de Revisão Fiscal rejected SWM-B’s challenge to the revised third Electricity Assessment, but the Conselho de Contribuintes agreed with SWM-B that the 2013 claim was time-barred. Both the Junta de Revisão Fiscal and the Conselho de Contribuintes ruled against SWM-B in the fourth Electricity Assessment. Both 2019 decisions from the Conselho de Contribuintes are being appealed to the full bench of the Conselho de Contribuintes. The State issued a new regulation effective January 1, 2018 that only specific industries are “electricity-intensive consumers,” a list that excludes paper manufacturers. SWM-B contends this regulation shows that paper manufacturers were electricity-intensive consumers eligible to defer ICMS before 2018.
SWM-B cannot determine the outcome of the Electricity Assessments matters; as such so no loss has been accrued in our consolidated financial statements for them.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Germany
In January 2015, the Company initiated patent infringement proceedings in Germany against Glatz under multiple LIP-related patents. In December 2017, the Dusseldorf Appeal Court affirmed the German District Court judgment on infringement of EP1482815 against Glatz. The Company filed an action against Glatz in the German District Court to set the amount of damages for the infringement and Glatz has filed a counterclaim. Glatz has filed an action in the German Patent Court to invalidate the German part of EP1482815. The German Patent Court held that some of the patent claims at issue were invalid and also that another claim at issue was valid. The Company has appealed the portion of the decision with respect to the claims held to be invalid. The hearing on this invalidity appeal has not yet been scheduled. The cost, timing and outcome of intellectual property litigation can be unpredictable and thus no assurances can be given as to the outcome or impact on us of such litigation.
Environmental Matters
The Company's operations are subject to various nations' federal, state and local laws, regulations and ordinances relating to environmental matters. The nature of the Company's operations exposes it to the risk of claims with respect to various environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. While the Company has incurred in the past several years, and will continue to incur, capital and operating expenditures in order to comply with environmental laws and regulations, it believes that its future cost of compliance with environmental laws, regulations and ordinances, and its exposure to liability for environmental claims and its obligation to participate in the remediation and monitoring of certain hazardous waste disposal sites, will not have a material effect on its financial condition or results of operations. However, future events, such as changes in existing laws and regulations, or unknown contamination or costs of remediation of sites owned, operated or used for waste disposal by the Company (including contamination caused by prior owners and operators of such sites or other waste generators) may give rise to additional costs which could have a material effect on its financial condition or results of operations.
Indemnification Matters
In connection with its spin-off from Kimberly-Clark in 1995, the Company undertook to indemnify and hold Kimberly-Clark harmless from claims and liabilities related to the businesses transferred to it that were not identified as excluded liabilities in the related agreements. As of December 31, 2020, there are no claims pending under this indemnification that the Company deems to be material.
General Matters
In the ordinary course of conducting business activities, the Company and its subsidiaries become involved in certain other judicial, administrative and regulatory proceedings involving both private parties and governmental authorities. These proceedings include insured and uninsured regulatory, employment, intellectual property, general and commercial liability, environmental and other matters. At this time, the Company does not expect any of these proceedings to have a material effect on its reputation, business, financial condition, results of operations or cash flows. However, the Company can give no assurance that the results of any such proceedings will not materially affect its reputation, business, financial condition, results of operations or cash flows.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Segment Information
The Company's two operating product line segments are also the Company's reportable segments: Advanced Materials and Structures and Engineered Papers. The AMS segment primarily produces engineered resin-based rolled goods such as nets, films, and other non-wovens for use in high-performance applications in the filtration, transportation, infrastructure and construction, medical, and industrial end-markets. The EP segment primarily produces cigarette papers including LIP papers, plug wrap papers and base tipping papers used to wrap various parts of a cigarette for sale to cigarette manufacturers and reconstituted tobacco leaf, or RTL, and wrapper and binder products for sale to cigarette and cigar manufacturers. The EP segment also includes commercial and industrial products such as lightweight printing and writing papers, battery separator paper, drinking straw wrap, filter paper and other specialized papers.
Information about Net Sales and Operating Profit
The Company primarily evaluates segment performance and allocates resources based on operating profit. Expense amounts not associated with segments are referred to as unallocated expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Net Sales
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Advanced Materials & Structures
|
$
|
543.5
|
|
|
50.6
|
%
|
|
$
|
477.2
|
|
|
46.7
|
%
|
|
$
|
467.9
|
|
|
44.9
|
%
|
Engineered Papers
|
530.9
|
|
|
49.4
|
|
|
545.6
|
|
|
53.3
|
|
|
573.4
|
|
|
55.1
|
|
Consolidated
|
$
|
1,074.4
|
|
|
100.0
|
%
|
|
$
|
1,022.8
|
|
|
100.0
|
%
|
|
$
|
1,041.3
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Operating Profit
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Advanced Materials & Structures
|
$
|
64.8
|
|
|
50.3
|
%
|
|
$
|
64.3
|
|
|
48.0
|
%
|
|
$
|
49.5
|
|
|
36.7
|
%
|
Engineered Papers
|
116.8
|
|
|
90.7
|
|
|
119.2
|
|
|
89.0
|
|
|
121.8
|
|
|
90.2
|
|
Unallocated
|
(52.8)
|
|
|
(41.0)
|
|
|
(49.5)
|
|
|
(37.0)
|
|
|
(36.3)
|
|
|
(26.9)
|
|
Consolidated
|
$
|
128.8
|
|
|
100.0
|
%
|
|
$
|
134.0
|
|
|
100.0
|
%
|
|
$
|
135.0
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Capital Spending
|
Depreciation
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Advanced Materials & Structures
|
$
|
14.5
|
|
|
$
|
16.1
|
|
|
$
|
15.0
|
|
|
$
|
14.5
|
|
|
$
|
12.8
|
|
|
$
|
14.1
|
|
Engineered Papers
|
15.5
|
|
|
12.0
|
|
|
11.7
|
|
|
27.5
|
|
|
22.8
|
|
|
23.9
|
|
Unallocated
|
0.1
|
|
|
0.5
|
|
|
0.3
|
|
|
0.2
|
|
|
0.2
|
|
|
0.1
|
|
Consolidated
|
$
|
30.1
|
|
|
$
|
28.6
|
|
|
$
|
27.0
|
|
|
$
|
42.2
|
|
|
$
|
35.8
|
|
|
$
|
38.1
|
|
Assets are managed on a total company basis and are therefore not disclosed at the segment level.
Information about Geographic Areas
Long-lived assets by geographic area as of year-end were as follows ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets
|
|
2020
|
|
2019
|
|
2018
|
United States
|
$
|
122.1
|
|
|
$
|
118.5
|
|
|
$
|
115.8
|
|
France
|
169.3
|
|
|
158.8
|
|
|
167.4
|
|
|
|
|
|
|
|
Brazil
|
15.2
|
|
|
19.5
|
|
|
20.8
|
|
Poland
|
12.9
|
|
|
14.7
|
|
|
16.8
|
|
Other foreign countries
|
32.4
|
|
|
30.7
|
|
|
27.7
|
|
Consolidated
|
$
|
351.9
|
|
|
$
|
342.2
|
|
|
$
|
348.5
|
|
Note 22. Major Customers
There were no individual customers in the AMS segment which made up 10% or more of the Company's 2020, 2019 or 2018 consolidated net sales. In our EP segment, there were no individual customers which made up 10% or more of the Company's consolidated net sales for the years ended December 31, 2020 or 2019. For the year ended December 31, 2018, one customer, together with its respective affiliates and designated converters, accounted for 10% of the Company's consolidated net sales. The loss of one or more such customers, or a significant reduction in one or more of these customers' purchases, could have a material adverse effect on the Company's results of operations.
There were no individual customers in the AMS segment which made up 10% or more of the Company's consolidated accounts receivable at December 31, 2020 or 2019. In the EP segment, there were no individual customers which made up 10% or more of the Company's consolidated accounts receivable at December 31, 2020. At December 31, 2019, one customer, together with its respective affiliates and designated converters, accounted for 11% or more of the Company's consolidated accounts receivable.
Note 23. Supplemental Disclosures
Analysis of Allowances for Doubtful Accounts:
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
1.5
|
|
|
$
|
1.7
|
|
|
$
|
1.0
|
|
|
|
|
Bad debt expense
|
1.0
|
|
|
0.4
|
|
|
1.2
|
|
|
|
|
Recoveries
|
—
|
|
|
(0.3)
|
|
|
(0.2)
|
|
|
|
|
Write-offs and discounts
|
(1.4)
|
|
|
(0.3)
|
|
|
(0.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
1.1
|
|
|
$
|
1.5
|
|
|
$
|
1.7
|
|
|
|
|
Supplemental Cash Flow Information
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Interest paid
|
$
|
31.4
|
|
|
$
|
29.1
|
|
|
$
|
24.0
|
|
Income taxes paid
|
14.8
|
|
|
20.8
|
|
|
23.2
|
|
Capital spending in accounts payable and accrued liabilities
|
5.2
|
|
|
5.9
|
|
|
5.0
|
|
|
|
|
|
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 24. Quarterly Financial Information (Unaudited)
The following tables summarize the Company's unaudited quarterly financial data for the years ended December 31, 2020 and 2019 ($ in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Year
|
Net sales
|
$
|
261.5
|
|
|
$
|
254.2
|
|
|
$
|
279.3
|
|
|
$
|
279.4
|
|
|
$
|
1,074.4
|
|
Gross profit
|
74.3
|
|
|
74.3
|
|
|
80.2
|
|
|
79.5
|
|
|
308.3
|
|
Restructuring and impairment expense
|
0.1
|
|
|
1.6
|
|
|
6.0
|
|
|
4.2
|
|
|
11.9
|
|
Operating profit
|
34.1
|
|
|
34.4
|
|
|
37.0
|
|
|
23.3
|
|
|
128.8
|
|
Income from continuing operations
|
22.5
|
|
|
21.5
|
|
|
24.5
|
|
|
15.3
|
|
|
83.8
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
22.5
|
|
|
$
|
21.5
|
|
|
$
|
24.5
|
|
|
$
|
15.3
|
|
|
$
|
83.8
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Income per share from continuing operations - basic
|
$
|
0.72
|
|
|
$
|
0.69
|
|
|
$
|
0.78
|
|
|
$
|
0.49
|
|
|
$
|
2.68
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
$
|
0.72
|
|
|
$
|
0.69
|
|
|
$
|
0.78
|
|
|
$
|
0.49
|
|
|
$
|
2.68
|
|
|
|
|
|
|
|
|
|
|
|
Income per share from continuing operations - diluted
|
$
|
0.72
|
|
|
$
|
0.68
|
|
|
$
|
0.78
|
|
|
$
|
0.48
|
|
|
$
|
2.66
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - diluted
|
$
|
0.72
|
|
|
$
|
0.68
|
|
|
$
|
0.78
|
|
|
$
|
0.48
|
|
|
$
|
2.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Year
|
Net sales
|
$
|
258.0
|
|
|
$
|
269.9
|
|
|
$
|
256.4
|
|
|
$
|
238.5
|
|
|
$
|
1,022.8
|
|
Gross profit
|
67.9
|
|
|
79.0
|
|
|
72.2
|
|
|
70.9
|
|
|
290.0
|
|
Restructuring and impairment expense
|
—
|
|
|
0.4
|
|
|
1.6
|
|
|
1.7
|
|
|
3.7
|
|
Operating profit
|
30.4
|
|
|
44.2
|
|
|
34.6
|
|
|
24.8
|
|
|
134.0
|
|
Income from continuing operations
|
17.4
|
|
|
20.5
|
|
|
27.7
|
|
|
20.2
|
|
|
85.8
|
|
(Loss) income from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
$
|
17.4
|
|
|
$
|
20.5
|
|
|
$
|
27.7
|
|
|
$
|
20.2
|
|
|
$
|
85.8
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Income per share from continuing operations - basic
|
$
|
0.57
|
|
|
$
|
0.66
|
|
|
$
|
0.90
|
|
|
$
|
0.65
|
|
|
$
|
2.78
|
|
Loss per share from discontinued operations - basic
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income per share - basic
|
$
|
0.57
|
|
|
$
|
0.66
|
|
|
$
|
0.90
|
|
|
$
|
0.65
|
|
|
$
|
2.78
|
|
|
|
|
|
|
|
|
|
|
|
Income per share from continuing operations - diluted
|
$
|
0.56
|
|
|
$
|
0.66
|
|
|
$
|
0.90
|
|
|
$
|
0.64
|
|
|
$
|
2.76
|
|
Loss per share from discontinued operations - diluted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income per share - diluted
|
$
|
0.56
|
|
|
$
|
0.66
|
|
|
$
|
0.90
|
|
|
$
|
0.64
|
|
|
$
|
2.76
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25. Subsequent Event
On January 27, 2021, we issued an announcement (the “Rule 2.7 Announcement”) pursuant to Rule 2.7 of the United Kingdom City Code on Takeovers and Mergers (the “Code”) disclosing the terms of a recommended cash offer to acquire the entire issued and to be issued ordinary share capital of Scapa Group plc, a company incorporated in England and Wales (“Scapa”) and listed on the AIM market of the London Stock Exchange (the “Offer”).
Under the terms of the Offer, Scapa shareholders will receive £2.10 in cash for each ordinary share of Scapa (together, the “Scapa Shares”), which values the entire issued and to be issued ordinary share capital of Scapa at approximately £402.9 million (or approximately $551.9 based on an exchange rate of US$1.37:£1). The Offer is intended to be effected by means of a scheme of arrangement (the “Scheme”) under Part 26 of the United Kingdom Companies Act 2006, as amended (the “Companies Act”). SWM Bidco reserves the right to elect (with the consent of the U.K. Panel on Takeovers and Mergers (the “Panel”) and subject to the terms of the Co-operation Agreement described below) to implement the Offer by way of a Takeover Offer (as such term is defined in Part 28 of the Companies Act) as an alternative to the Scheme.
The Offer will be subject to conditions and certain further terms, including, among others, (i) the Scheme becoming effective no later than 11:59 p.m. (London time) on July 27, 2021 or such later date as agreed by the parties (the “Long Stop Date”), (ii) the approval of the Scheme by a majority in number of Scapa shareholders present and voting (and entitled to vote), either in person or by proxy, at a general meeting of Scapa shareholders (including any adjournment, postponement or reconvention thereof) (the “General Meeting”) representing at least 75% in value of the Scapa Shares voted by such shareholders; (iii) the passing of the special resolution or resolutions to be proposed by Scapa at the General Meeting in connection with, among other things, the amendment of the articles of association of Scapa and such other matters as may be necessary to implement the Scheme; (iv) the sanction of the Scheme by the High Court of Justice in England and Wales; and (v) the receipt of certain merger control and regulatory approvals or the lapse of relevant periods or notifications thereunder. The conditions to the Offer are set out in full in the Rule 2.7 Announcement. Subject to the satisfaction or waiver of all relevant conditions, it is expected that the Scheme will become effective during the second quarter of 2021.
On January 26, 2021, in anticipation of our announcement of our offer to acquire Scapa Group we entered into a currency forward contract with a major financial institution. The terms of the contract provide for an exchange of a notional amount of GBP 439 million for USD, calculated using the contract rate as applicable at the settlement date, which will be on or before the “Long Stop Date” as it relates to the scheme. The currency forward contract will be recognized at fair value in our consolidated financial statements with subsequent changes in the fair value of the instrument recognized in earnings.
On February 10, 2021 we amended our existing Credit Agreement to provide for, among other things an additional Term Loan Facility “Term Loan B” in the amount of $350 million and a temporary increase in our Maximum Net Debt/EBITDA ratio to 5.5x. This ratio will decrease over the course of 24 months, returning to 4.50x effective as of June 30, 2023.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Schweitzer-Mauduit International, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Schweitzer-Mauduit International, Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, effective January 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income Taxes - Refer to Notes 2 and 17 to the consolidated financial statements
Critical Audit Matter Description
The Company operates and is subject to income taxes in the U.S. and numerous foreign jurisdictions with complex tax laws and regulations which resulted in provision for income taxes of $18.4 million for the year ended December 31, 2020. The complexity of the Company’s global structure requires technical expertise in determining the allocation of income to each of these jurisdictions and the consolidated provision for income taxes. In addition, there have been recent significant changes in tax laws in various jurisdictions, including the Tax Cut and Jobs Act (the “Tax Act”) in the United States, which require specialized knowledge, skills and judgment in the accounting and reporting of the Company’s provision for income taxes. The Tax Act contains several key tax features that affect the Company, including (i) a provision designed to tax Global Intangible Low Taxed Income (“GILTI”) of foreign subsidiaries and (ii) a deduction for Foreign-Derived Intangible Income (“FDII”).
We identified the accounting for income taxes as a critical audit matter because the complexity of the Company’s global structure and recent changes in tax laws that required complex auditor judgment and an increased extent of effort, including the need to involve our U.S. and international income tax specialists, to evaluate the Company’s interpretation and application of tax laws in relevant jurisdictions, the allocation of income to each of these jurisdictions, and the income tax impact of the legal entity ownership structure.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the provision for income taxes included the following, among others:
•Tested the effectiveness of controls over management’s application of income tax laws to its global corporate structure, including controls over the identification and assessment of changes to tax laws in the various jurisdictions in which it operates, including the Tax Act, and controls related to the allocation of income to the Company’s various tax jurisdictions.
•Obtained an understanding of the Company’s overall legal entity structure by reading and evaluating the Company’s organizational charts and associated documentation, including legal documents.
•We read minutes of the meetings of the board of directors and inquired of Company personnel, including legal, to evaluate whether there were any significant changes in the legal entity structure that were relevant to the provision for income taxes.
•With the assistance of our U.S. and international income tax specialists, we evaluated management’s application of relevant tax laws to its legal entity structure and the effect on the Company’s income tax provision, including the Company’s calculations of current period income tax expense and deductions associated with GILTI and FDII, by reviewing and evaluating management’s income tax calculations and assessing the Company’s compliance with tax laws.
•With the assistance of our U.S. and international income tax specialists, we evaluated management’s income reporting to the various tax jurisdictions in which the Company operates based on its global corporate structure.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 1, 2021
We have served as the Company's auditor since 1995.