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 Pandemic
We continue to monitor the impact of the COVID-19 pandemic (including its variant strains) on all aspects of our business. At present, all of our facilities remain 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. Further, senior management is meeting regularly to address all aspects of the pandemic, including employee safety, continuity of business operations, sales and profit impacts directly or indirectly related to the pandemic, and potential governmental and third-party responses to the pandemic. Further details about the risks and impacts discussed in the section below can be found in the forward-looking statements.
In general, our business was resilient in the face of sales volatility and limited visibility during the early stages of the pandemic in 2020, while those areas that were most negatively affected, such as transportation and construction, began improving during the fourth quarter of 2020 and performed well during 2021. Full year 2021 double-digit sales growth in AMS, excluding the benefit of acquisitions, demonstrates the strength of the demand recovery. However, increased global economic activity and high demand across many industries has caused significant input cost inflation and strained supply chains, which have negatively impacted profitability (more detailed discussion below throughout MD&A).
Liquidity & Debt Overview. The Company had $1,270.3 million of total debt, $74.7 million of cash, and undrawn capacity on its $500.0 million revolving line of credit facility (the "Revolving Credit Facility") of $102.2 million at the end of 2021. Per the terms of the Company's $700.0 million credit agreement (the "Credit Agreement"), net leverage was 4.8x at the end of 2021, versus a current maximum covenant ratio of 5.5x. 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 2021, SWM reported net income of $88.9 million on total net sales of $1,440.0 million. Compared to the prior year, net sales increased $365.6 million, due primarily to incremental sales from the April 2021 Scapa acquisition of $305.6 million and March 13, 2020 Tekra acquisition. Within AMS (excluding Scapa), the organic sales growth was driven by strong gains in filtration, transportation, and construction end-markets as product lines across the portfolio demonstrated robust demand. These gains were partially offset by a decline in healthcare sales caused by difficult comparisons to 2020 when certain products benefited significantly from the pandemic (for example, facemask materials). EP segment net sales decreased $21.6 million compared to prior year primarily the result of 4% unfavorable price/mix impacts and a 2% volume decline attributable to lower tobacco-related papers, including LIP, as certain customers reduced inventories following a significant safety stock build in 2020. Continued rapid growth in HnB products and 3% favorable currency benefits were partial favorable offsets to those factors within the EP segment.
Net income increased to $88.9 million in 2021 compared to $83.8 million in 2020. Escalating input cost inflation, particularly for polypropylene resin and wood pulp, and supply chain challenges across the business negatively impacted net income, as the cost increases were not fully offset by sales growth and price increases implemented by the Company. Several large items also affected the 2021 results and year-over-year comparisons. The most significant expenses related to the Scapa acquisition, including $21.4 million of acquisition and integration costs, $17.5 million incremental purchase accounting expenses, and $6.9 million of acquisition-related foreign currency exchange impacts. These costs were partially offset by a $35.2 million gain on the sales of the Spotswood, New Jersey facility, which was closed at the end of 2020. The company recognized $9.4 million benefit and $18.4 million provision for income taxes in the years ended December 31, 2021, and 2020, respectively.
Cash provided by operations was $58.1 million in 2021 down from $161.6 million in 2020. Other uses and proceeds of cash during 2021 included $630.6 million consideration to acquire Scapa, $688.6 million net in proceeds from long debt issuances and repayments, $55.3 million in cash dividends paid to SWM stockholders, $38.9 million of capital spending including capitalized software and $35.3 million proceeds from the sale of Spotswood.
CRITICAL ACCOUNTING ESTIMATES
We disclose those accounting estimates 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.
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. 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. We estimate these amounts at least quarterly based on the expected forecast quantities to be provided to customers and reduce revenues recognized accordingly. 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 19% of our total assets as of December 31, 2021. 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 growth and discount rates. In particular, the estimated fair value of intangible assets acquired may consider available historical information along with expectations and assumptions about future performance. 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. Changes in these assumptions may have a significant impact on the fair value of assets acquired and liabilities assumed. 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.
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, 2021, and 2020 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, 2021, and 2020 did not indicate any impairment of intangible assets.
The fair value estimates used in the assessment of impairment for both goodwill and intangible assets consider historical trends in addition to significant assumptions including projections of future performance. Changes in these assumptions can have a significant impact on the assessment of fair value.
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
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 (1) | | 2020 (2) | | 2019 |
| ($ in millions, except per share amounts) |
Net sales | $ | 1,440.0 | | | $ | 1,074.4 | | | $ | 1,022.8 | |
Cost of products sold | 1,109.7 | | | 766.1 | | | 732.8 | |
Gross profit | 330.3 | | | 308.3 | | | 290.0 | |
Selling expense | 46.7 | | | 36.9 | | | 33.7 | |
Research expense | 20.3 | | | 13.8 | | | 13.5 | |
General expense | 169.9 | | | 116.9 | | | 105.1 | |
Total nonmanufacturing expenses | 236.9 | | | 167.6 | | | 152.3 | |
Restructuring and impairment expense | 10.1 | | | 11.9 | | | 3.7 | |
Operating profit | 83.3 | | | 128.8 | | | 134.0 | |
Interest expense | 46.1 | | | 30.5 | | | 36.1 | |
Other income (expense), net | 35.9 | | | (1.0) | | | (1.0) | |
Income before income taxes and income from equity affiliates | 73.1 | | | 97.3 | | | 96.9 | |
(Benefit) provision for income taxes | (9.4) | | | 18.4 | | | 15.2 | |
Income from equity affiliates, net of income taxes | 6.4 | | | 4.9 | | | 4.1 | |
| | | | | |
| | | | | |
Net income | $ | 88.9 | | | $ | 83.8 | | | $ | 85.8 | |
| | | | | |
Net income per share basic: | | | | | |
| | | | | |
| | | | | |
Net income per share basic | $ | 2.83 | | | $ | 2.68 | | | $ | 2.78 | |
| | | | | |
Net income per share diluted: | | | | | |
| | | | | |
| | | | | |
Net income per share diluted | $ | 2.80 | | | $ | 2.66 | | | $ | 2.76 | |
(1) Results during the year ended December 31, 2021 include Scapa from the April 15, 2021 acquisition date to December 31, 2021.
(2) 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, 2021, Compared with the Year Ended December 31, 2020
Net Sales
(dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| 2021 | | 2020 | | Change | | Percent Change |
| | | | | | | |
Advanced Materials & Structures | $ | 930.7 | | | $ | 543.5 | | | $ | 387.2 | | | 71.2 | % |
Engineered Papers | 509.3 | | | 530.9 | | | (21.6) | | | (4.1) | |
Total | $ | 1,440.0 | | | $ | 1,074.4 | | | $ | 365.6 | | | 34.0 | % |
Net sales were $1,440.0 million in 2021 compared with $1,074.4 million in 2020. The increase in net sales consisted of the following (dollars in millions):
| | | | | | | | | | | |
| Amount | | Percent |
| | | |
Incremental net sales from Scapa | $ | 305.6 | | | 28.4 | % |
Changes in volume, product mix and selling prices (excluding Scapa) | 42.5 | | | 4.0 | % |
Changes due to net foreign currency impacts | 17.7 | | | 1.6 | |
Changes in royalties | (0.2) | | | — | |
Total | $ | 365.6 | | | 34.0 | % |
AMS segment net sales were $930.7 million for 2021 compared to $543.5 million during 2020. The increase of $387.2 million or 71.2% included the benefit from the Scapa acquisition (closed April 15, 2021), and Tekra acquisition (completed March 13, 2020). The increase in organic sales was driven by more than 20% gains in filtration and transportation end-markets with strong growth across water, process, and air filtration materials. Within transportation, automotive paint protection films rebounded sharply following Covid-related disruptions in 2020. Construction sales also increased by more than 10% with broad strength across the portfolio. Healthcare sales (excluding Scapa) declined due to certain products that benefited from COVID-19 related demand in the prior year, such as facemask materials. Industrial sales were essentially flat. While organic sales increased by more than 10%, management believes growth could have been even stronger if not for key raw material shortages constraining growth in transportation films, and other supply chain issues, including labor shortages, impacting the business overall.
The EP segment net sales were $509.3 million for 2021 compared to $530.9 million during 2020. The decrease of $21.6 million, or 4.1%, was primarily the result of a 2% volume decline, and unfavorable price/mix impacts of 4%, which were partially offset by a 3% currency benefit mainly related to the Euro. The volume decline was primarily attributable to lower tobacco-related papers, including LIP, as certain customers resumed more normalized order patterns compared to 2020, when they built safety stocks in response to the pandemic. High growth in HnB products offset declines within the tobacco business. Non-tobacco paper volumes increased slightly.
Gross Profit
(dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | |
| | | | | Percent Change | | Percent of Net Sales |
| 2021 | | 2020 | | Change | | | 2021 | | 2020 |
Net sales | $ | 1,440.0 | | | $ | 1,074.4 | | | $ | 365.6 | | | 34.0 | % | | 100.0 | % | | 100.0 | % |
Cost of products sold | 1,109.7 | | | 766.1 | | | 343.6 | | | 44.9 | | | 77.1 | | | 71.3 | |
Gross profit | $ | 330.3 | | | $ | 308.3 | | | $ | 22.0 | | | 7.1 | % | | 22.9 | % | | 28.7 | % |
Gross profit for the year ended December 31, 2021, increased by $22.0 million, or 7.1%, to $330.3 million from $308.3 million in the prior year. AMS gross profit increased by $43.3 million primarily due to the incremental benefit of the acquired Scapa and Tekra businesses and strong organic sales growth in transportation, filtration, and construction end-markets. These sales increases were partially offset by higher raw material costs, primarily of polypropylene resin, which were not fully offset by selling price increases the Company has implemented. Other inflationary factors such as higher energy and freight costs also negatively affected the gross margin. In addition, the limited supply of certain specialty resins used to manufacture transportation films, has constrained growth of this product line, which is typically a positive contributor to margins.
In the EP segment, gross profit decreased by $21.3 million, primarily due to LIP volume decline and associated negative mix impact, significantly higher wood pulp costs, and increases in energy and freight costs. Contracts with several large customers have recently reset to higher selling prices to reflect recent wood pulp costs; these increases were not effective during most of 2021. Currency movements resulted in a $6.7 million benefit to gross profit.
Nonmanufacturing Expenses
(dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | |
| | | | | Percent Change | | Percent of Net Sales |
| 2021 | | 2020 | | Change | | | 2021 | | 2020 |
Selling expense | $ | 46.7 | | | $ | 36.9 | | | $ | 9.8 | | | 26.6 | % | | 3.2 | % | | 3.4 | % |
Research expense | 20.3 | | | 13.8 | | | 6.5 | | | 47.1 | | | 1.4 | | | 1.3 | |
General expense | 169.9 | | | 116.9 | | | 53.0 | | | 45.3 | | | 11.8 | | | 10.9 | |
Nonmanufacturing expenses | $ | 236.9 | | | $ | 167.6 | | | $ | 69.3 | | | 41.3 | % | | 16.4 | % | | 15.6 | % |
Nonmanufacturing expenses in the year ended December 31, 2021, increased by $69.3 million, or 41.3%, to $236.9 million from $167.6 million in the prior year. The increase included $21.4 million of transaction and integration costs associated with the Scapa acquisition and the addition of ongoing SG&A costs from the acquired Scapa operations.
Restructuring and Impairment Expense
(dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | |
| | | | | | | Percent of Net Sales |
| 2021 | | 2020 | | Change | | | 2021 | | 2020 |
Advanced Materials & Structures | $ | 1.9 | | | $ | 0.5 | | | $ | 1.4 | | | | | 0.2 | % | | 0.1 | % |
Engineered Papers | 8.2 | | | 11.3 | | | (3.1) | | | | | 1.6 | | | 2.1 | |
Unallocated expenses | — | | | 0.1 | | | (0.1) | | | | | — | | | — | |
Total | $ | 10.1 | | | $ | 11.9 | | | $ | (1.8) | | | | | 0.7 | % | | 1.1 | % |
The Company incurred total restructuring and impairment expense of $10.1 million in the year ended December 31, 2021, compared to $11.9 million in the year ended December 31, 2020, a decrease of $1.8 million.
In the year ended December 31, 2021, restructuring expense in the EP segment included $4.7 million primarily relating to costs associated with closing the Spotswood, New Jersey facility and preparing it for sale, medical benefits and other accruals relating to the Spotswood facility as well as $0.8 million severance-related restructuring expenses associated with the closure of the Winkler facility in Canada. The EP segment also recognized $2.7 million of restructuring expenses in 2021 primarily related to severance accruals at our manufacturing operations in France.
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 AMS segment, the Company recognized $1.9 million restructuring and impairment expense in the 2021 period related to equipment impairment charges versus $0.5 million in the 2020 period related to severance accruals.
Operating Profit
(dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | |
| | | | | Percent Change | | Return on Net Sales |
| 2021 | | 2020 | | Change | | | 2021 | | 2020 |
Advanced Materials & Structures | $ | 61.6 | | | $ | 64.8 | | | $ | (3.2) | | | (4.9) | % | | 6.6 | % | | 11.9 | % |
Engineered Papers | 100.5 | | | 116.8 | | | (16.3) | | | (14.0) | | | 19.7 | | | 22.0 | |
Unallocated expenses | (78.8) | | | (52.8) | | | (26.0) | | | (49.2) | | | | | |
Total | $ | 83.3 | | | $ | 128.8 | | | $ | (45.5) | | | (35.3) | % | | 5.8 | % | | 12.0 | % |
Operating profit was $83.3 million in the year ended December 31, 2021, compared with $128.8 million during the prior year.
The AMS segment's operating profit in the year ended December 31, 2021, was $61.6 million compared to $64.8 million in the prior year period, down 4.9%. The margin declined to 6.6% in 2021 compared to 11.9% in the prior-year period. The decline was attributable to a combination of factors including inflation pressure and supply chain challenges which resulted in higher raw material, energy and freight costs. In addition, the limited supply of certain specialty resins used to manufacture transportation films has constrained growth of this product line, which is typically a positive contributor to margins. Purchase accounting expenses in 2021 were also $17.5 million higher than prior-year period as a result of Scapa acquisition.
The EP segment's operating profit in the year ended December 31, 2021, was $100.5 million, a decrease of $16.3 million, or 14.0%, from $116.8 million in the prior year. The decrease in operating profit and margin was primarily due to the LIP volume decline and associated negative mix impact, as well as significantly higher wood pulp costs and increases in energy and freight as discussed above. These decreases were partially offset by a total of $7.3 million lower restructuring expenses and other costs primarily related to the Spotswood plant shutdown. Currency movements resulted in a $5.7 million benefit to operating profit.
Unallocated expenses in the year ended December 31, 2021, were $78.8 million, up $26.0 million, or 49.2%, from the $52.8 million in the prior year period. The increase was primarily due to $21.4 million transaction and integration costs related to the Scapa acquisition, and $6.0 million of costs incurred within Scapa as shared services such as finance, HR, and IT, which were reported in the Company's segment financials as unallocated expenses. The Company incurred lower incentive compensation costs versus 2020.
Non-Operating Expenses, Net
Interest expense was $46.1 million in the year ended December 31, 2021, an increase of $15.6 million from $30.5 million in the year ended December 31, 2020. Excluding a benefit of $4.5 million prior year expense reversal related to the favorable settlement of Brazil tax assessments, the interest expense increased $20.1 million due mainly to higher average debt balances as a result of the Scapa acquisition.
The weighted average effective interest rate on our debt facilities was approximately 4.04% and 4.02% for the years ended December 31, 2021, and 2020, respectively.
Other income, net was $35.9 million during the year ended December 31, 2021 mainly reflecting a $35.2 million gain from the sale of the Spotswood facility, $4.0 million sale of carbon dioxide credits in France as well as $1.6 million favorable Brazil tax assessment settlement, offset by $6.9 million realized foreign currency loss related to timing of the Scapa acquisition cash settlement. Other expense, net was $1.0 million during the year ended December 31, 2020.
Income Taxes
The $9.4 million benefit and $18.4 million provision for income taxes in the years ended December 31, 2021, and 2020, respectively, resulted in an effective tax rate of (12.9)% compared with 18.9% in the prior year. The net change was primarily due to net favorable valuation allowance release and unfavorable mix of earnings.
Income from Equity Affiliates
Income from equity affiliates, net of income taxes, was $6.4 million in the year ended December 31, 2021, compared with income of $4.9 million during the prior year, and reflects the results of operations of CTM and CTS, driven by increased volumes.
Net Income and Income per Share
Net income in the year ended December 31, 2021, was $88.9 million, or $2.80 per diluted share, compared with $83.8 million, or $2.66 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, 2021, $52.3 million of our $74.7 million of cash and cash equivalents was held by foreign subsidiaries. Cash paid for income taxes (net of refunds) was $22.4 million for the year ended December 31, 2021. 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, our current growth plan, and dividend payments.
Cash Provided by Operations
Net cash provided by operations was $58.1 million in the year ended December 31, 2021, compared with $161.6 million in the prior year. The decrease was primarily related to unfavorable year-over-year movements in working capital related cash flows as well as cash costs related to advisory fees, transaction expenses, and integration costs all relating to the Scapa acquisition
Working Capital
As of December 31, 2021, we had net operating working capital of $366.7 million including cash and cash equivalents of $74.7 million, compared with net operating working capital of $232.3 million including cash and cash equivalents of $54.7 million as of December 31, 2020. These changes primarily reflect the impact of the Scapa acquisition, the timing of payments and collections as well as increased raw material prices and timing of shipments.
In 2021, net changes in operating working capital decreased cash flow by $61.4 million. In 2020, net changes in operating working capital decreased cash flow by $5.7 million. The most significant working capital related cash outflow item was related to higher receivables related to strong sales growth in AMS, and higher costs of inventories on hand related to significantly higher raw material prices.
Cash Used for Investing
Cash used for investing activities during 2021 was $636.5 million compared to $203.1 million in the prior year. The change primarily reflects the net $630.6 million consideration to acquire Scapa versus $169.3 million for Tekra in prior year.
Capital Spending
Capital spending including capitalized software was $38.9 million, and $33.3 million in 2021 and 2020, respectively. During 2021 and 2020 capital spending was primarily related to replacement and maintenance of aging assets, development of new products, rebuild of certain paper manufacturing lines, cost reduction initiatives, and IT infrastructure.
Cash Provided by (Used for) Financing Activities
During 2021, financing activities consisted primarily of $744.5 million proceeds from borrowings under the revolving credit facility, primarily to fund the Scapa acquisition including $350 million under the Term Loan B Facility and $343.0 million incremental borrowings of revolver loans, $55.3 million in cash paid for dividends declared to SWM stockholders, $55.9 million payments on long-term debt, $14.6 million payment for debt issuance costs associated with the amendment of our Credit Agreement as discussed in Note 14. Debt of the notes to the Consolidated Financial statements, the buyout of the leased property at Knoxville for $15.4 million and share repurchases of $3.4 million.
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.
Dividend Payments
We have declared and paid cash dividends on our common stock every fiscal quarter since the second quarter of 1996. On February 23, 2022, we announced a cash dividend of $0.44 per share payable on March 25, 2022, to stockholders of record as of the close of business on March 11, 2022. 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 2021 and 2020, we repurchased 78,790 shares and 27,779 shares, respectively, of our common stock at a cost of $3.4 million and $1.0 million, respectively, for the value of employees' stock-based compensation share awards surrendered to satisfy their personal statutory income tax withholding obligations.
Debt Instruments and Related Covenants
| | | | | | | | | | | |
Debt Instruments and Related Covenants ($ in millions) | For the Years Ended December 31, |
2021 | | 2020 |
| |
| | |
| | | |
Proceeds from issuances of long-term debt | 744.5 | | | 212.7 | |
Payments on long-term debt | (55.9) | | | (165.3) | |
Net proceeds from borrowings | $ | 688.6 | | | $ | 47.4 | |
Net proceeds from borrowings were $688.6 million during 2021.
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 14. Debt, of the Notes to Consolidated Financial Statements for additional information about the Term Loan B. The Credit Agreement was further amended effective February 22, 2022 to adjust the step-down schedule for the maximum net debt to EBITDA ratio. See Note 25. Subsequent Event, of the Notes to Consolidated Financial Statements for additional information about the amendment.
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 A 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 as additional Term Loan Facilities 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.
On February 10, 2021, we amended our Credit Agreement to, among other things, add a new seven-year $350 million Term Loan B Facility (the “Term Loan B Facility”) and to decrease the incremental loans that may be extended at the Company’s request to $250 million. The balance under the Term Loan B Facility was $348.2 million as of December 31, 2021.
Borrowings under the Revolving Credit Facility currently bear interest, at the Company’s option, at either (i) 2.25% in excess of LIBOR or (ii) 1.25% in excess of an alternative base rate. Borrowings under the Term Loan A Facility currently bear interest, at the Company’s option, at either (i) 2.50% in excess of LIBOR or (ii) 1.50% 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. Any borrowings under the Term Loan B Facility will bear interest, at the Company's option, at either (i) 3.75% in excess of a reserve adjusted LIBOR rate (subject to a minimum floor of 0.75%) or (ii) 2.75% in excess of an alternative base rate. Unused borrowing capacity under the Credit Agreement was $102.2 million as of December 31, 2021. We also had availability under our bank overdraft facilities and lines of credit of $1.8 million as of December 31, 2021.
Under the terms of the amended Credit Agreement, the Company is required to maintain certain financial ratios and comply with certain financial covenants, including maintaining a net debt to EBITDA ratio, as defined in the amended Credit Agreement, calculated on a trailing four fiscal quarter basis, not greater than 5.50x and an interest coverage ratio, also as defined in the amended Credit Agreement, of not less than 3.00x. The net debt to EBITDA ratio will decrease over the course of 24 months, returning to 4.50x effective as of June 30, 2023. In addition, borrowings and loans made under the amended Credit Agreement are secured by substantially all of the Company’s and the guarantors’ personal property, excluding certain customary items of collateral, and will be guaranteed by the Company’s existing and future wholly owned direct material domestic subsidiaries and by SWM Luxembourg.
The Company was in compliance with all of its covenants under the Credit Agreement at December 31, 2021. 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, 2021 and December 31, 2020 were 65.1% and 47.7%, respectively.
Indenture for 6.875% Senior Unsecured Notes Due 2026
On September 25, 2018, the Company closed a private offering of $350.0 million of 6.875% senior unsecured notes due 2026 (the “Notes”). The Notes were sold in a private placement in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended, pursuant to a purchase agreement between the Company, certain subsidiaries of the Company and J.P. Morgan Securities LLC, as representative of the initial purchasers. The Notes are guaranteed on a senior unsecured basis by each of the Company’s existing and future wholly owned subsidiaries that is a borrower under or that guarantees obligations under the Credit Agreement or that guarantees certain other indebtedness, subject to certain exceptions.
The Notes were issued pursuant to an Indenture, dated as of September 25, 2018 (the “Indenture”), by and among the Company, the guarantors listed therein and Wilmington Trust, National Association, as trustee. The Indenture provides that interest on the Notes will accrue from September 25, 2018, and is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2019, and the Notes mature on October 1, 2026.
The Company may redeem some or all of the Notes at any time on or after October 1, 2021, at the redemption prices set forth in the Indenture, together with accrued and unpaid interest, if any, to, but excluding, the redemption date. If the Company sells certain assets or consummates certain change of control transactions, the Company will be required to make an offer to repurchase the Notes, subject to certain conditions.
OTHER FACTORS AFFECTING LIQUIDITY AND CAPITAL RESOURCES
The following table represents our future contractual cash requirements for the next five years and thereafter for our long-term debt obligations and other commitments ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due for the years ended |
Contractual Obligations | Total | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter |
Current debt (1) | $ | 7.2 | | | $ | 7.2 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Long-term debt (2) | 1,279.2 | | | — | | | 399.7 | | | 6.3 | | | 192.5 | | | 349.5 | | | 331.2 | |
Debt interest (3) | 250.4 | | | 53.9 | | | 52.2 | | | 44.3 | | | 43.3 | | | 35.1 | | | 21.6 | |
Restructuring obligations (4) | 6.2 | | | 3.9 | | | 0.5 | | | 0.5 | | | 0.4 | | | 0.3 | | | 0.6 | |
Minimum operating lease payments (5) | 29.8 | | | 8.5 | | | 6.0 | | | 5.0 | | | 3.7 | | | 2.3 | | | 4.3 | |
Purchase obligations - raw materials (6) | 55.0 | | | 51.3 | | | 2.7 | | | 1.0 | | | — | | | — | | | — | |
Purchase obligations - energy (7) | 43.1 | | | 37.5 | | | 2.4 | | | 0.5 | | | 0.5 | | | 0.5 | | | 1.7 | |
| | | | | | | | | | | | | |
Tax Act transition obligation (8) | 18.8 | | | 2.2 | | | 4.1 | | | 5.5 | | | 7.0 | | | — | | | — | |
Other contractual obligations (9) (10) (11) | 5.0 | | | 5.0 | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 1,694.7 | | | $ | 169.5 | | | $ | 467.6 | | | $ | 63.1 | | | $ | 247.4 | | | $ | 387.7 | | | $ | 359.4 | |
(1) Current debt excludes debt issuance costs of $3.9 million; see Note 14. Debt, of the Notes to Consolidated Financial Statements.
(2) Long-term debt excludes debt issuance costs of $12.1 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, 2021. 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, 2021, a 100 basis point increase in interest rates would increase our debt interest obligation by $4.4 million in 2022, taking into account the effect of the interest rate hedge transactions the Company has entered into as of December 31, 2021. 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, 2021.
(6) Minimum purchase obligations for raw materials include our calcium carbonate purchase agreement at our plant in Quimperlé, France. See Note 20. Commitments and Contingencies, of the Notes to Consolidated Financial Statements for additional information.
(7) Purchase obligations for energy including natural gas, electricity, and steam. 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 $9.8 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, 2021.
(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 $335.4 million in assets at December 31, 2021. The combined projected benefit obligation ("PBO") of our U.K., U.S. and French pension plans was underfunded by $11.4 million and $25.7 million as of December 31, 2021, and 2020, 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 2022 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, 2021, and 2020, 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 healthcare, filtration, transportation, construction, 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 healthcare products 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 construction and industrial end-markets will perform relatively in line with long-term broad economic growth in the U.S. and to some extent Europe and China. Excluding potential impacts from raw material price movements across both operating segments, 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 or tax-related price increases. Following the Scapa acquisition, given AMS’s increased relative size compared to EP, the Company believes it is now better positioned to deliver long-term organic sales and profit growth.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the 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 the incurrence of additional debt and expected maturities of the Company’s debt obligations, the adequacy of our sources of liquidity and capital, acquisition integration and growth prospects (including international growth), the cost and timing of our restructuring actions, the impact of ongoing litigation matters and environmental claims, the amount of capital spending and/or common stock repurchases, future cash flows, purchase accounting impacts, impacts and timing of our ongoing operational excellence and other cost-reduction and cost-optimization initiatives, the impact of the COVID-19 pandemic on our operations, profitability, and cash flow, the expected benefits and accretion of the Scapa acquisition and integration and other statements generally identified by words such as "believe," "expect," "intend," "guidance," "plan," "forecast," "potential," "anticipate," "confident," "project," "appear," "future," "should," "likely," "could," "may," "will," "typically" and similar words.
These forward-looking statements are prospective in nature and not based on historical facts, but rather on current expectations and on numerous assumptions regarding the business strategies and the environment in which the Company’s business shall operate in the future and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by those statements. No assurance can be given that such expectations will prove to have been correct and persons reading this presentation are therefore cautioned not to place undue reliance on these forward-looking statements which speak only as at the date of this press release. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions 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 impact of, and the governmental and third-party response to, the COVID-19 pandemic and its variant strains (including any proposed new regulation concerning mandatory COVID-19 vaccination of employees);
•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;
•Our ability to attract and retain key personnel;
•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;
•The phasing out of USD LIBOR rates after 2023 and the replacement with SOFR;
•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;
•Supply chain disruptions, including 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 the LIP-related intellectual property litigation against Glatz in Europe;
•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 for the foreseeable future. As of December 31, 2021, 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 $5.9 million. These hypothetical gains or losses on foreign currency transactional exposures are based on the December 31, 2021, 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, 2021, 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, 2021. As of December 31, 2021, the percentage of the Company’s fixed and floating interest rate debt was 27% and 73%, respectively. The Company has entered into a number of interest rate hedge transactions to convert floating rate debt to fixed. See Note 15. Derivatives, of the Notes to Consolidated Financial Statements for additional information. Including the impact of these transactions, as of December 31, 2021, the percentage of the Company’s debt subject to fixed and floating rates of interest was 66% and 34%, 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 2016 through December 2021, the U.S. list price of northern bleached softwood kraft pulp ("NBSK") a representative pulp grade that we use, ranged between $900 to $1,600 per ton. The average list price of NBSK for the year of 2021 was $1,480 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 $25.8 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 $4.4 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 $5.0 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
| | | | | |
| Page |
Consolidated Financial Statements | |
Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019 | |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019 | |
Consolidated Balance Sheets as of December 31, 2021 and 2020 | |
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2021, 2020 and 2019 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 | |
Notes to Consolidated Financial Statements | |
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34) | |
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)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | |
| | | | | |
Net sales | $ | 1,440.0 | | | $ | 1,074.4 | | | $ | 1,022.8 | |
Cost of products sold | 1,109.7 | | | 766.1 | | | 732.8 | |
Gross profit | 330.3 | | | 308.3 | | | 290.0 | |
| | | | | |
Selling expense | 46.7 | | | 36.9 | | | 33.7 | |
Research expense | 20.3 | | | 13.8 | | | 13.5 | |
General expense | 169.9 | | | 116.9 | | | 105.1 | |
Total nonmanufacturing expenses | 236.9 | | | 167.6 | | | 152.3 | |
| | | | | |
Restructuring and impairment expense | 10.1 | | | 11.9 | | | 3.7 | |
Operating profit | 83.3 | | | 128.8 | | | 134.0 | |
Interest expense | 46.1 | | | 30.5 | | | 36.1 | |
Other income (expense), net | 35.9 | | | (1.0) | | | (1.0) | |
Income before income taxes and income from equity affiliates | 73.1 | | | 97.3 | | | 96.9 | |
| | | | | |
(Benefit) provision for income taxes | (9.4) | | | 18.4 | | | 15.2 | |
Income from equity affiliates, net of income taxes | 6.4 | | | 4.9 | | | 4.1 | |
| | | | | |
| | | | | |
Net income | $ | 88.9 | | | $ | 83.8 | | | $ | 85.8 | |
| | | | | |
Net income per share - basic: | | | | | |
| | | | | |
| | | | | |
Net income per share – basic | $ | 2.83 | | | $ | 2.68 | | | $ | 2.78 | |
| | | | | |
Net income per share – diluted: | | | | | |
| | | | | |
| | | | | |
Net income per share – diluted | $ | 2.80 | | | $ | 2.66 | | | $ | 2.76 | |
| | | | | |
Weighted average shares outstanding: | | | | | |
| | | | | |
Basic | 31,030,400 | | | 30,832,700 | | | 30,652,200 | |
| | | | | |
Diluted | 31,400,300 | | | 31,104,200 | | | 30,838,300 | |
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)
| | | | | | | | | | | | | | | | | |
| | | |
| | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Net income | $ | 88.9 | | | $ | 83.8 | | | $ | 85.8 | |
Other comprehensive (loss) income, net of tax: | | | | | |
Foreign currency translation adjustments | (24.4) | | | 16.6 | | | 1.8 | |
Less: Reclassification adjustment for realized translation adjustments | — | | | (0.1) | | | (0.9) | |
| | | | | |
Unrealized gain (loss) on derivative instruments | 6.1 | | | (11.6) | | | 1.6 | |
Less: Reclassification adjustment for loss (gain) on derivative instruments included in net income | 5.1 | | | 2.0 | | | (4.5) | |
| | | | | |
Net gain (loss) from postretirement benefit plans | 3.3 | | | (0.1) | | | 0.6 | |
Less: Amortization of postretirement benefit plans' costs included in net periodic benefit cost | 2.8 | | | 3.9 | | | 3.3 | |
| (7.1) | | | 10.7 | | | 1.9 | |
Comprehensive income | $ | 81.8 | | | $ | 94.5 | | | $ | 87.7 | |
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)
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
ASSETS | | | |
Cash and cash equivalents | $ | 74.7 | | | $ | 54.7 | |
Accounts receivable, net | 238.0 | | | 148.5 | |
Inventories | 259.5 | | | 179.7 | |
Income taxes receivable | 10.0 | | | 6.2 | |
| | | |
| | | |
Other current assets | 12.4 | | | 7.3 | |
Total current assets | 594.6 | | | 396.4 | |
| | | |
Property, plant and equipment, net | 463.9 | | | 339.0 | |
Deferred income tax benefits | 33.9 | | | 2.6 | |
Investment in equity affiliates | 64.6 | | | 59.3 | |
Goodwill | 648.3 | | | 403.7 | |
Intangible assets, net | 513.9 | | | 314.7 | |
Other assets | 101.1 | | | 69.2 | |
Total assets | $ | 2,420.3 | | | $ | 1,584.9 | |
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current debt | $ | 3.2 | | | $ | 2.8 | |
Accounts payable | 116.0 | | | 60.5 | |
Income taxes payable | 2.6 | | | 2.7 | |
| | | |
Accrued expenses | 109.3 | | | 100.9 | |
Total current liabilities | 231.1 | | | 166.9 | |
| | | |
Long-term debt | 1,267.1 | | | 590.5 | |
Long-term income tax payable | 16.6 | | | 17.7 | |
Pension and other postretirement benefits | 39.0 | | | 36.5 | |
Deferred income tax liabilities | 95.1 | | | 45.1 | |
Other liabilities | 89.2 | | | 78.6 | |
Total liabilities | 1,738.1 | | | 935.3 | |
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; 31,449,563 and 31,324,745 shares issued and outstanding at December 31, 2021 and 2020, respectively | 3.1 | | | 3.1 | |
Additional paid-in-capital | 101.7 | | | 92.2 | |
Retained earnings | 696.4 | | | 666.2 | |
Accumulated other comprehensive loss | (119.0) | | | (111.9) | |
Total stockholders' equity | 682.2 | | | 649.6 | |
Total liabilities and stockholders' equity | $ | 2,420.3 | | | 1,584.9 | |
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, 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 | |
| | | | | | | | | | | |
Net income | — | | | — | | | — | | | 88.9 | | | — | | | 88.9 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (7.1) | | | (7.1) | |
Dividends declared ($1.76 per share) | — | | | — | | | — | | | (55.3) | | | — | | | (55.3) | |
Restricted stock issuances, net | 201,261 | | | — | | | — | | | — | | | — | | | — | |
Stock-based employee compensation expense | — | | | — | | | 8.4 | | | — | | | — | | | 8.4 | |
| | | | | | | | | | | |
Stock issued to directors as compensation | 2,347 | | | — | | | 1.1 | | | — | | | — | | | 1.1 | |
| | | | | | | | | | | |
Purchases and retirement of common stock | (78,790) | | | — | | | — | | | (3.4) | | | — | | | (3.4) | |
Balance, December 31, 2021 | 31,449,563 | | | $ | 3.1 | | | $ | 101.7 | | | $ | 696.4 | | | $ | (119.0) | | | $ | 682.2 | |
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, |
| 2021 | | 2020 | | 2019 |
| | | |
| | | | | |
Operations | | | | | |
Net income | $ | 88.9 | | | $ | 83.8 | | | $ | 85.8 | |
| | | | | |
| | | | | |
Non-cash items included in net income: | | | | | |
Depreciation and amortization | 92.7 | | | 72.2 | | | 57.7 | |
Impairments | 1.6 | | | — | | | 1.1 | |
Deferred income tax benefit | (27.0) | | | (5.2) | | | (3.4) | |
Pension and other postretirement benefits | 0.7 | | | 3.7 | | | 2.6 | |
Stock-based compensation | 8.5 | | | 8.8 | | | 7.7 | |
Income from equity affiliates | (6.4) | | | (4.9) | | | (4.1) | |
Brazil tax assessment accruals, net | (6.1) | | | — | | | 10.9 | |
| | | | | |
Gain on sale of assets | (35.3) | | | — | | | (0.3) | |
Long-term income tax payable | — | | | (0.5) | | | (0.6) | |
| | | | | |
| | | | | |
Cash dividends received from equity affiliates | 3.3 | | | 2.7 | | | 2.6 | |
Other items | (1.4) | | | 6.7 | | | 2.1 | |
Changes in operating working capital: | | | | | |
Accounts receivable | (28.1) | | | (5.3) | | | 10.8 | |
Inventories | (31.4) | | | (3.5) | | | (11.2) | |
Prepaid expenses | 0.7 | | | 0.6 | | | (0.2) | |
Accounts payable and other current liabilities | 3.5 | | | (5.3) | | | 1.8 | |
| | | | | |
Accrued income taxes | (6.1) | | | 7.8 | | | (3.0) | |
Net changes in operating working capital | (61.4) | | | (5.7) | | | (1.8) | |
Net cash provided by operating activities of: | | | | | |
| | | | | |
| | | | | |
Cash provided by operations | 58.1 | | | 161.6 | | | 160.3 | |
Investing | | | | | |
Capital spending | (35.9) | | | (30.1) | | | (28.6) | |
Capitalized software costs | (3.0) | | | (3.2) | | | (5.5) | |
Acquisitions, net of cash acquired | (630.6) | | | (169.3) | | | — | |
| | | | | |
Proceeds from sale of assets | 35.3 | | | 0.5 | | | 14.7 | |
Other investing | (2.3) | | | (1.0) | | | 4.6 | |
Cash used for investing | (636.5) | | | (203.1) | | | (14.8) | |
Financing | | | | | |
Cash dividends paid to SWM stockholders | (55.3) | | | (55.0) | | | (54.4) | |
Changes in short-term debt, net | — | | | — | | | (0.1) | |
Proceeds from issuances of long-term debt | 744.5 | | | 212.7 | | | 19.1 | |
Payments on long-term debt | (55.9) | | | (165.3) | | | (99.5) | |
Payments for debt issuance costs | (14.6) | | | — | | | — | |
Payments on financing lease obligations | (15.4) | | | — | | | — | |
Purchases of common stock | (3.4) | | | (1.0) | | | (0.9) | |
| | | | | |
Cash provided by (used in) financing | 599.9 | | | (8.6) | | | (135.8) | |
Effect of exchange rate changes on cash and cash equivalents | (1.5) | | | 1.8 | | | (0.5) | |
Increase (decrease) in cash and cash equivalents | 20.0 | | | (48.3) | | | 9.2 | |
Cash and cash equivalents at beginning of period | 54.7 | | | 103.0 | | | 93.8 | |
Cash and cash equivalents at end of period | $ | 74.7 | | | $ | 54.7 | | | $ | 103.0 | |
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 & Structures ("AMS") and Engineered Papers ("EP").
The AMS segment offers design and manufacturing solutions for the healthcare, construction, industrial, transportation and filtration end-markets. We manufacture resin-based rolled goods such as nets, films and meltblown materials, bonding products and adhesive components, along with providing adhesives and other coating solutions and converting services for our customers.
The EP segment primarily serves the tobacco industry with production of various cigarette papers and reconstituted tobacco products ("Recon"). Traditional reconstituted tobacco leaf ("RTL") is used as a blend with virgin tobacco in cigarettes and used in the production of small cigars. Recon, as well as low ignition propensity ("LIP") cigarette paper, a specialty product with fire-safety features, are two key profit drivers, which together account for more than half of segment net sales. The EP segment also produces non-tobacco papers for premium applications, such as energy storage and industrial commodity paper grades.
We conduct business in over 90 countries and operate 38 production locations worldwide, with facilities in the U.S., Canada, United Kingdom, France, Luxembourg, Belgium, Brazil, China, Italy, Malaysia, India 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 2021 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.
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 of the joint ventures is included in the consolidated statements of income as income 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 $8.8 million, $7.5 million, and $6.8 million of royalty income during 2021, 2020 and 2019 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 differences from historical exchange rates are reflected in a separate component of accumulated other comprehensive loss as unrealized foreign currency translation adjustments.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 income (expense), net, were losses of $7.3 million, $0.9 million, and $1.4 million in 2021, 2020 and 2019, 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, 2021, and 2020, 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 $8.7 million and $1.1 million in 2021 and 2020, respectively. There were no acquisition costs incurred in 2019.
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 that the fair value of a reporting unit is less than its carrying amount. Otherwise, we would proceed to the goodwill impairment test.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2021, 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 15 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 $3.0 million, $2.1 million and $1.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. Accumulated amortization of capitalized software costs was $58.9 million and $40.5 million at December 31, 2021 and 2020, 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 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.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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., U.K., 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.
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):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | |
| | | |
| December 31, |
| 2021 | | 2020 |
Accumulated pension and OPEB liability adjustments, net of income tax benefit of $8.9 million and $11.6 million at December 31, 2021 and 2020, respectively | $ | (14.4) | | | $ | (20.5) | |
Accumulated unrealized loss on derivative instruments, net of income tax benefit of $2.1 million and $2.8 million at December 31, 2021 and 2020, respectively | (1.9) | | | (13.1) | |
Accumulated unrealized foreign currency translation adjustments, net of income tax benefit of $9.5 million and $10.1 million at December 31, 2021 and 2020, respectively | (102.7) | | | (78.3) | |
Accumulated other comprehensive loss | $ | (119.0) | | | $ | (111.9) | |
Changes in the components of Accumulated other comprehensive (loss) income were as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | | | |
| | | | | | | | | |
| Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
Pension and OPEB liability adjustments | $ | 8.9 | | | $ | (2.8) | | | $ | 6.1 | | | $ | 5.0 | | | $ | (1.2) | | | $ | 3.8 | | | $ | 2.5 | | | $ | 1.4 | | | $ | 3.9 | |
Derivative instrument adjustments | 11.9 | | | (0.7) | | | 11.2 | | | (10.8) | | | 1.2 | | | (9.6) | | | (2.9) | | | — | | | (2.9) | |
Unrealized foreign currency translation adjustments | (23.8) | | | (0.6) | | | (24.4) | | | 11.5 | | | 5.0 | | | 16.5 | | | (2.5) | | | 3.4 | | | 0.9 | |
Total | $ | (3.0) | | | $ | (4.1) | | | $ | (7.1) | | | $ | 5.7 | | | $ | 5.0 | | | $ | 10.7 | | | $ | (2.9) | | | $ | 4.8 | | | $ | 1.9 | |
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, 2021, and 2020 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.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Option
The Company has not elected to measure its financial instruments or certain commitments at fair value.
Recently Adopted Accounting Pronouncements
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 were adopted effective January 1, 2021, and did not have a material impact on the consolidated financial statements.
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 annual disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans and requires the amendments to be applied on a retrospective basis for all periods presented. The provisions of this ASU were adopted effective January 1, 2021. The required disclosure changes did not have a material impact on the consolidated financial statements
Recently Issued Accounting Standards
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. 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.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, |
| 2021 | | 2020 | | 2019 |
| AMS | | EP | | Total | | AMS | | EP | | Total | | AMS | | EP | | Total |
U.S. | $ | 562.5 | | | $ | 155.8 | | | $ | 718.3 | | | $ | 376.7 | | | $ | 161.9 | | | $ | 538.6 | | | $ | 331.3 | | | $ | 182.8 | | | $ | 514.1 | |
Europe and the former Commonwealth of Independent States | 193.8 | | | 189.5 | | | 383.3 | | | 47.5 | | | 182.2 | | | 229.7 | | | 45.8 | | | 172.6 | | | 218.4 | |
Asia/Pacific (including China) | 124.9 | | | 86.2 | | | 211.1 | | | 94.6 | | | 110.7 | | | 205.3 | | | 77.6 | | | 95.0 | | | 172.6 | |
Americas (excluding U.S.) | 31.4 | | | 46.5 | | | 77.9 | | | 9.3 | | | 43.6 | | | 52.9 | | | 7.6 | | | 45.6 | | | 53.2 | |
Other foreign countries | 18.1 | | | 31.3 | | | 49.4 | | | 15.4 | | | 32.5 | | | 47.9 | | | 14.9 | | | 49.6 | | | 64.5 | |
Total revenues (1) | $ | 930.7 | | | $ | 509.3 | | | $ | 1,440.0 | | | $ | 543.5 | | | $ | 530.9 | | | $ | 1,074.4 | | | $ | 477.2 | | | $ | 545.6 | | | $ | 1,022.8 | |
(1) Revenues include net hedging gains and losses for the years ended December 31, 2021, 2020 and 2019.
The AMS segment supplies customers serving generally high-growth end-markets, as follows.
Healthcare - Sales to the medical market include products used in finger bandages, diagnostic test strips, and hospital-setting products.
Construction - Sales to the construction end-market are comprised mostly of netting products for a range of erosion control applications.
Industrial - Sales to the industrial end-market include products for high-end coated digital printing, packaging, undersea cable wraps, consumer-oriented specialty tapes and wind-turbine production.
Transportation - The Company’s primary products are aftermarket automotive paint protection films, in addition to ballistic resistant and security glass used in various transportation modes.
Filtration - The Company serves liquid and other filtration markets, producing reverse osmosis and other water filtration products along with media and support materials for air filtration devices.
Industrial - Sales to the industrial end-market include products for high-end coated digital printing, packaging, undersea cable wraps, consumer-oriented specialty tapes and wind-turbine production.
Net sales for the AMS business are disaggregated by end market as the percentage of the net sales as follows.
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 |
Healthcare | 24 | % | | 14 | % |
Construction | 20 | % | | 23 | % |
Industrial | 20 | % | | 17 | % |
Transportation | 18 | % | | 22 | % |
Filtration | 18 | % | | 24 | % |
Total revenues (1) | 100 | % | | 100 | % |
(1) Revenues include contributions from Scapa Group plc and Tekra LLC effective April 15, 2021, and March 13, 2020, respectively.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Leases
The Company leases certain office space, warehouses, manufacturing facilities, land, and equipment. 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.
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, 2021 | | December 31, 2020 | | |
Operating lease right-of-use assets | Other assets | $ | 25.1 | | | $ | 19.8 | | | |
Finance lease right-of-use assets | Property, plant and equipment, net | 2.2 | | | 3.0 | | | |
Total right of use assets | | $ | 27.3 | | | $ | 22.8 | | | |
| | | | | | |
Liabilities | Classification | December 31, 2021 | | December 31, 2020 | | |
Current operating lease obligation | Accrued expenses | $ | 7.3 | | | $ | 5.2 | | | |
Long-term operating lease obligation | Other liabilities | 18.7 | | | 15.6 | | | |
Total operating lease obligation | | $ | 26.0 | | | $ | 20.8 | | | |
| | | | | | |
Current finance lease obligation | Current debt | $ | 0.5 | | | $ | 0.5 | | | |
Long-term finance lease obligation | Long-term debt | 2.3 | | | 3.0 | | | |
Total finance lease obligation | | $ | 2.8 | | | $ | 3.5 | | | |
Components of lease expense incurred by the Company are as follow ($ in millions):
| | | | | | | | | | | | | |
Lease Cost | | | Year Ended December 31, 2021 | | Year ended December 31, 2020 |
Finance lease cost (cost resulting from lease payments) | | | | | |
Interest expense on lease liabilities | | | $ | 0.7 | | | 0.2 | |
Amortization of right-of-use assets | | | 0.9 | | | 0.5 | |
Operating lease cost | | | 8.4 | | | 6.8 | |
Short-term lease expense | | | 2.3 | | | 0.4 | |
| | | | | |
| | | | | |
Total lease cost | | | $ | 12.3 | | | $ | 7.9 | |
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 |
2022 | $ | 0.7 | | | 8.5 | | | $ | 9.2 | |
2023 | 0.6 | | | 6.0 | | | 6.6 | |
2024 | 0.5 | | | 5.0 | | | 5.5 | |
2025 | 0.5 | | | 3.7 | | | 4.2 | |
2026 | 0.5 | | | 2.3 | | | 2.8 | |
| | | | | |
Thereafter | 0.4 | | | 4.3 | | | 4.7 | |
Total lease payments | $ | 3.2 | | | $ | 29.8 | | | $ | 33.0 | |
Less: Interest | 0.4 | | | 3.8 | | | 4.2 | |
Present value of lease liabilities | $ | 2.8 | | | $ | 26.0 | | | $ | 28.8 | |
| | | | | | | | | | | |
Lease Term and Discount Rate | December 31, 2021 | | December 31, 2020 |
Weighted-average remaining lease term (years) | | | |
Operating leases | 4.9 | | 5.8 |
Finance leases | 5.5 | | 6.3 |
Weighted-average discount rate | | | |
Operating leases | 5.44 | % | | 6.19 | % |
Finance leases | 5.22 | % | | 5.26 | % |
| | | | | | | | | | | |
Other Information (millions) | Year Ended December 31, 2021 | | Year ended December 31, 2020 |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from operating leases | 8.7 | | | 6.9 | |
Operating cash flows from finance leases | 0.7 | | | 0.2 | |
Leased assets obtained in exchange for new finance lease liabilities | 15.1 | | | 0.4 | |
Leased assets obtained in exchange for new operating lease liabilities | 10.0 | | | 3.9 | |
See Consolidated Statements of Cash Flow for information on payments on financing lease obligations.
Note 5. Business Acquisitions
Scapa
On April 15, 2021, SWM completed its previously announced acquisition of Scapa Group plc (“Scapa”), a UK- based innovation, design, and manufacturing solutions provider for healthcare and industrial markets for aggregate cash consideration of $630.6 million, net of $22.7 million of Cash and cash equivalents acquired and including $568.9 million for the purchase of all Scapa ordinary shares, $75.9 million for the repayment of Scapa debt and $8.5 million for the repayment of acquisition costs incurred by Scapa. The acquisition adds to SWM’s portfolio of precision engineered performance materials, expands the Company’s innovation, design, and formulation capabilities, and brings a variety of new coating and converting technologies to SWM. Scapa, part of the AMS segment operates globally with manufacturing and sales operations in the Americas, Asia and Europe.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase price was funded with borrowings under the amended Credit Agreement, as defined and discussed in Note 14. Debt.
The acquisition was 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 acquisition consideration allocation below is preliminary, pending completion of the fair value analyses of acquired assets and liabilities, including deferred taxes and the valuations of certain intangibles and personal property. The excess of the acquisition consideration over the estimated fair values of the acquired assets and assumed liabilities is assigned to goodwill. The goodwill, which is assigned to the AMS reportable segment, is primarily attributable to expected revenue synergies and is not expected to be deductible for tax purposes. The estimated purchase price allocation as of April 15, 2021, was revised during the third and fourth quarter as new information was received and analyzed resulting in a decrease in Deferred tax liabilities of $15.8 million, an increase in Property, plant and equipment of $8.1 million, an increase in Other liabilities, primarily due to changes in certain tax positions of $7.2 million, a $3.0 million decrease in Other assets, and other insignificant changes, as presented in the table below. As additional information related to income taxes becomes available, we may further revise the preliminary acquisition consideration allocation during the remainder of the measurement period, which will not exceed twelve months from the closing of the acquisition. Such revisions or changes may be material.
The consideration paid for Scapa, and the preliminary estimated fair values of the assets acquired, and liabilities assumed as of the April 15, 2021, acquisition date were as follows ($ in millions):
| | | | | | | | | | | | | | | | | |
| Preliminary Allocation as of December 31, 2021 | | Adjustments | | Preliminary Allocation as of April 15, 2021 |
Cash and cash equivalents | $ | 22.7 | | | $ | — | | | $ | 22.7 | |
Accounts receivable | 67.7 | | | — | | | 67.7 | |
Inventory | 60.0 | | | (0.9) | | | 60.9 | |
Other current assets | 9.7 | | | (0.1) | | | 9.8 | |
Property, plant and equipment | 160.2 | | | 8.1 | | | 152.1 | |
Identifiable intangible assets | 246.2 | | | — | | | 246.2 | |
Other assets | 23.3 | | | (3.0) | | | 26.3 | |
Total assets | $ | 589.8 | | | $ | 4.1 | | | $ | 585.7 | |
| | | | | |
Current debt | $ | 15.0 | | | $ | — | | | $ | 15.0 | |
Accounts payable and other current liabilities | 85.8 | | | (0.1) | | | 85.9 | |
Deferred income tax liabilities | 45.7 | | | (15.8) | | | 61.5 | |
Other liabilities | 40.4 | | | 7.3 | | | 33.1 | |
Net assets acquired | $ | 402.9 | | | $ | 12.7 | | | $ | 390.2 | |
Goodwill | 250.4 | | | (12.7) | | | 263.1 | |
Total consideration | $ | 653.3 | | | $ | — | | | $ | 653.3 | |
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.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, plant and equipment is comprised of land, buildings and leasehold improvements, machinery and equipment, furniture and fixtures, computer equipment, and construction in progress. The preliminary estimated fair value was determined using a reproduction/replacement cost approach which measures the value of an asset by estimating the cost to acquire or construct comparable assets adjusted for age and condition of the asset.
Acquired intangible assets include customer relationships, tradenames and 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 preliminary fair values assigned to identifiable intangible assets ($ in millions):
| | | | | | | | | | | |
| Fair Value | | Weighted-Average Amortization Period (Years) |
Amortizable intangible assets: | | | |
Customer relationships | $ | 205.4 | | | 15 |
Tradenames and other | 7.7 | | | 10 |
Developed technology | 33.1 | | | 7 |
Total amortizable intangible assets | $ | 246.2 | | | |
The preliminary estimate of deferred tax effects resulting from the acquisition include the expected federal, state, and foreign tax consequences associated with temporary differences between the preliminary fair values of the assets
acquired, liabilities assumed and the respective tax basis.
During the twelve months ended December 31, 2021, the Company recognized direct and indirect acquisition-related costs for the Scapa acquisition of $8.7 million. Direct and indirect acquisition-related costs were expensed as incurred and are included in the General expense line item in the consolidated statements of income.
The amounts of Net sales and Income from Scapa included in the Company's consolidated income statement from the acquisition date are as follows ($ in millions):
| | | | | |
| April 15, 2021 - December 31, 2021 |
Net sales | $ | 305.6 | |
Net income | $ | 0.6 | |
Tekra
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 $1.6 million cash and cash equivalents acquired, subject to working capital adjustments that were finalized in 2020. The purchase price was funded with borrowings from our Revolving Credit Facility (See Note 14. Debt).
The acquisition was accounted for as a business combination with the assets acquired and liabilities assumed measured at their fair values as of the acquisition date, primarily using Level 3 inputs.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consideration paid for Tekra and the final fair values of the assets acquired, and liabilities assumed as of the March 13, 2020 acquisition date are as follows ($ in millions):
| | | | | |
| 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 | | | |
During the twelve months ended December 31, 2020, the Company recognized $1.1 million in direct and indirect acquisition-related costs for the Tekra acquisition, respectively. Direct and indirect acquisition-related costs were expensed as incurred and are included in the General expense line item in the consolidated statements of income.
The amounts of Net sales and Net income of Tekra included in the Company's consolidated income statement from the acquisition date are as follows ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | |
| | March 13, 2020 - December 31, 2020 |
Net sales | | $ | 77.3 | |
Net income | | $ | 1.9 | |
Pro Forma Financial Information (unaudited)
The unaudited supplemental pro forma financial information presents the combined results of operations for the periods presented, as if the Scapa acquisition had occurred on January 1, 2020, and the Tekra acquisition had occurred on January 1, 2019, and therefore both included in the pro forma results for periods presented. The unaudited supplemental pro forma financial information includes the following adjustments related to the Scapa acquisition: amortization of intangible assets and fair value adjustments to inventory, interest expense for the additional indebtedness incurred to complete the acquisition, transaction and severance costs, and applicable tax adjustments based on statutory rates in the jurisdictions where the adjustments occurred. The unaudited supplemental pro forma financial information does not include Tekra net income for the period from January 1 - March 13, 2020, as preparation of this information was deemed impractical due to changes in the ownership structure of the acquired entities prior to the acquisition. For the year ended December 31, 2021, pro forma adjustments caused net income to increase by $10.3 million. For the year ended December 31, 2020 pro forma adjustments led to a $43.8 million decrease in net income.
The unaudited supplemental pro forma financial information presented below is not necessarily indicative of consolidated results of operations of the combined business had the Scapa and Tekra acquisitions occurred as of January 1, 2020, and January 1, 2019, respectively, nor is it necessarily indicative of the of the future results of the combined company.
| | | | | | | | | | | |
| Year Ended |
| December 31, 2021 | | December 31, 2020 |
Net sales | $ | 1,570.6 | | | $ | 1,456.8 | |
Net income (loss)(1) | $ | 101.2 | | | $ | (20.8) | |
(1) Unaudited supplemental pro forma financial information includes the impact of restructuring and the impairment of goodwill and intangible assets totaling $71.1 million on Scapa net income for the twelve months ended December 31, 2020.
Note 6. Accounts Receivable
Accounts receivable, net are summarized as follows ($ in millions):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Trade receivables | $ | 208.9 | | | $ | 130.9 | |
Business tax credits, including VAT | 7.8 | | | 4.0 | |
Hedge contracts receivable | 0.4 | | | 0.3 | |
Other receivables | 22.3 | | | 14.4 | |
Less allowance for doubtful accounts and sales discounts | (1.4) | | | (1.1) | |
Total accounts receivable, net | $ | 238.0 | | | $ | 148.5 | |
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 shutdowns 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 years 2021, 2020, and 2019, there were no material inventory write-offs. The following schedule details inventories by major class ($ in millions):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Raw materials | $ | 113.4 | | | $ | 65.3 | |
Work in process | 41.9 | | | 23.2 | |
Finished goods | 95.7 | | | 83.5 | |
Supplies and other | 8.5 | | | 7.7 | |
Inventories | $ | 259.5 | | | $ | 179.7 | |
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, |
| 2021 | | 2020 |
Land and improvements | $ | 31.6 | | | $ | 13.6 | |
Buildings and improvements (20 to 40 years or remaining life of relevant lease) | 194.5 | | | 144.0 | |
Machinery and equipment (5 to 20 years) | 739.8 | | | 524.4 | |
Construction in progress | 32.6 | | | 23.1 | |
Gross property, plant and equipment | 998.5 | | | 705.1 | |
Less: Accumulated depreciation | 534.6 | | | 366.1 | |
Property, plant and equipment, net | $ | 463.9 | | | $ | 339.0 | |
Depreciation expense was $47.8 million, $42.2 million, and $35.8 million for the years ended December 31, 2021, 2020, and 2019, 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
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $2.7 million, $2.0 million, and $2.1 million in 2021, 2020 and 2019, 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, 2021 and 2020, the Company’s equity investment in the joint ventures was $64.6 million and $59.3 million, respectively. The Company’s share of the net income was included in Income 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.
Note 10. Goodwill
The Company evaluates goodwill for impairment at least annually during the fourth quarter. The annual tests during the fourth quarters of 2021, 2020 and 2019 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, 2021. 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, 2019 | $ | 332.5 | | | $ | 4.9 | | | $ | 337.4 | |
Goodwill acquired during the year | 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 | |
Goodwill acquired during the year | 250.4 | | | — | | | 250.4 | |
Foreign currency translation adjustments | (5.4) | | | (0.4) | | | (5.8) | |
Goodwill as of December 31, 2021 | $ | 643.4 | | | $ | 4.9 | | | $ | 648.3 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
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, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | | | | | Net Carrying Amount |
Amortized Intangible Assets | | | | | | | | | |
|
Customer relationships | $ | 541.7 | | | $ | 119.2 | | | | | | | $ | 422.5 | |
Developed technology | 74.6 | | | 20.7 | | | | | | | 53.9 | |
| | | | | | | | | |
Trade names | 18.9 | | | 2.7 | | | | | | | 16.2 | |
Non-compete agreements | 2.9 | | | 2.5 | | | | | | | 0.4 | |
Patents | 1.5 | | | 0.6 | | | | | | | 0.9 | |
Total | $ | 639.6 | | | $ | 145.7 | | | | | | | $ | 493.9 | |
| | | | | | | | | |
Unamortized Intangible Assets |
Trade names | $ | 20.0 | | | $ | — | | | | | | | $ | 20.0 | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Gross Carrying Amount | | Accumulated Amortization | | | | | | Net Carrying Amount |
Amortized Intangible Assets | | | | | | | | | |
|
Customer relationships | $ | 343.9 | | | $ | 89.7 | | | | | | | $ | 254.2 | |
Developed technology | 42.4 | | | 14.2 | | | | | | | 28.2 | |
| | | | | | | | | |
Trade names | 11.7 | | | 1.4 | | | | | | | 10.3 | |
Non-compete agreements | 2.9 | | | 2.4 | | | | | | | 0.5 | |
Patents | 1.5 | | | 0.5 | | | | | | | 1.0 | |
Total | $ | 402.4 | | | $ | 108.2 | | | | | | | $ | 294.2 | |
| | | | | | | | | |
Unamortized Intangible Assets |
Trade names | $ | 20.5 | | | $ | — | | | | | | | $ | 20.5 | |
Amortization expense of intangible assets was $39.7 million, $24.6 million and $20.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. Finite-lived intangibles in the AMS segment are expensed using the straight-line amortization method.
The following table shows the estimated aggregate amortization expense for the next five years ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
For the year ending December 31, | Estimated Amortization Expense |
2022 | $ | 44.5 | |
2023 | 44.5 | |
2024 | 44.2 | |
2025 | 43.4 | |
2026 | 43.4 | |
Note 12. Other Assets
Other assets consisted of the following ($ in millions):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Capitalized software costs, net of accumulated amortization | $ | 13.9 | | | $ | 12.9 | |
| | | |
Grantor trust assets | 21.6 | | | 18.0 | |
Net pension assets | 26.3 | | | 9.3 | |
Long-term supplies inventory | 4.9 | | | 6.6 | |
Operating lease assets | 25.1 | | | 19.8 | |
Other assets | 9.3 | | | 2.6 | |
Total | $ | 101.1 | | | $ | 69.2 | |
The Company's ICMS credits in Brazil are included within Other assets and 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 $10.1 million, $11.9 million, and $3.7 million in the years ended December 31, 2021, 2020 and 2019, respectively.
In the EP segment, restructuring and impairment expenses were $8.2 million, $11.3 million, and $2.6 million during the years ended December 31, 2021, 2020 and 2019, respectively.
During the third quarter of 2021, we announced plans to close the Winkler, Manitoba facility in Canada. The decision was part of our ongoing manufacturing optimization efforts. Manufacturing at this facility ceased during December of 2021. As a result of this decision, $0.8 million of restructuring and impairment expense was recognized during the year ended December 31, 2021, related to severance and other accruals. During the year ended December 31, 2021, we also recorded $0.7 million of other restructuring related charges in Cost of products sold, including the write down of certain inventories to net realizable value and the acceleration of depreciation of machinery and equipment due to the change in the estimated lives of these assets.
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 as of December 31, 2020.
As a result of this decision, $4.7 million and $6.7 million of restructuring and impairment expense was recognized in the year ended December 31, 2021 and 2020, respectively. In the year ended December 31, 2021, restructuring and impairment expenses related to costs associated with closing the facility and preparing it for sale, medical benefits and other accruals. Restructuring and impairment expense 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. The Spotswood site was sold on December 9, 2021, for total proceeds of $34.4 million, and the Company recorded a net gain of $35.2 million including sales from other miscellaneous remaining assets which is included in Other income (expense), net.
In addition to restructuring costs relating to the Spotswood and Winkler facilities, the EP segment recognized $2.7 million in the year ended December 31, 2021, related to severance accruals for employees at manufacturing facilities, primarily in France. In 2020 and 2019, restructuring and impairment expenses in the EP segment consisted of $4.6 million and $2.6 million, respectively, relating to severance accruals at our other manufacturing facilities, primarily 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 is expected to be completed in 2022. The EP segment has recognized $11.9 million of restructuring charges cumulatively through December 31, 2021, related to this project.
The Company expects to record additional restructuring and impairment costs in the EP segment during 2022 of approximately $1.5 million relating to the closing of the Winkler, Manitoba facility for severance, settlement of post-retirement benefit obligations and retention.
In the AMS segment, the Company incurred $1.9 million, $0.5 million, and $1.1 million in restructuring and impairment expenses during the years ended December 31, 2021, 2020, and 2019, respectively. In 2021, restructuring and impairment expense primarily related to the impairment of non-productive manufacturing equipment and severance accruals. Restructuring and impairment expense for the year ended December 31, 2020 related to severance accruals. Restructuring and impairment expense for the year ended December 31, 2019, consisted of impairment charges at our U.S. and Chinese manufacturing facilities.
The following table summarizes total restructuring and related charges:
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | 2019 |
Restructuring and impairment expense: | | | | |
Severance | $ | 3.6 | | | $ | 11.6 | | $ | 2.6 | |
Other | 4.9 | | | 0.3 | | 1.1 | |
Asset impairment | 1.6 | | | — | | — | |
Total restructuring and impairment expense | $ | 10.1 | | | $ | 11.9 | | $ | 3.7 | |
| | | | |
Other restructuring related charges - Cost of products sold | | | | |
Accelerated depreciation and amortization | 0.5 | | 2.9 | | — | |
Spare parts and consignment inventory write-down to estimated net realizable value | 0.2 | | 2.0 | | — | |
Total other restructuring related charges - Cost of products sold | $ | 0.7 | | | $ | 4.9 | | $ | — | |
| | | | |
Total restructuring and impairment expense and other restructuring related charges | $ | 10.8 | | | $ | 16.8 | | $ | 3.7 | |
Restructuring liabilities were classified within Accrued expenses and Other Liabilities in each of the Consolidated Balance Sheets as of December 31, 2021, and 2020. Changes in the restructuring liabilities, substantially all of which are employee-related, are summarized as follows ($ in millions):
| | | | | | | | | | | |
| | | |
| | | |
| 2021 | | 2020 |
Balance at beginning of year | $ | 7.4 | | | $ | 0.5 | |
Accruals for announced programs | 4.7 | | | 11.9 | |
Cash payments | (5.7) | | | (5.2) | |
| | | |
Exchange rate impacts | (0.2) | | | 0.2 | |
Balance at end of period | $ | 6.2 | | | $ | 7.4 | |
Note 14. Debt
Total debt, net of debt issuance costs, is summarized in the following table ($ in millions):
| | | | | | | | | | | |
| |
| | | |
| December 31, 2021 | | December 31, 2020 |
Revolving credit agreement - U.S. dollar borrowings | $ | 393.0 | | | $ | 50.0 | |
| | | |
Term loan A facility | 193.5 | | | 195.5 | |
| | | |
Term loan B facility | 348.2 | | | — | |
6.875% senior unsecured notes due October 1, 2026, net of discount of $5.2 million and $6.1 million as of December 31, 2021 and 2020, respectively | 344.8 | | | 343.9 | |
French employee profit sharing | 4.1 | | | 5.0 | |
Finance lease obligations | 2.8 | | | 3.5 | |
| | | |
Debt issuance costs | (16.1) | | | (4.6) | |
Total debt | 1,270.3 | | | 593.3 | |
Less: Current debt | (3.2) | | | (2.8) | |
Long-term debt | $ | 1,267.1 | | | $ | 590.5 | |
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 A 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 as additional Term Loan Facilities 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.
On February 10, 2021, we amended our Credit Agreement to, among other things, add a new seven-year $350 million Term Loan B Facility (the “Term Loan B Facility”) and to decrease the incremental loans that may be extended at the Company’s request to $250 million. The Credit Agreement was further amended effective February 22, 2022 to adjust the step-down schedule for the maximum net debt to EBITDA ratio. See Note 25. Subsequent Event, of the Notes to Consolidated Financial Statements for additional information about the amendment.
Borrowings under the Revolving Credit Facility currently bear interest, at the Company’s option, at either (i) 2.25% in excess of LIBOR or (ii) 1.25% in excess of an alternative base rate. Borrowings under the Term Loan A Facility currently bear interest, at the Company’s option, at either (i) 2.50% in excess of LIBOR or (ii) 1.50% 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. Any borrowings under the Term Loan B Facility will bear interest, at the Company's option, at either (i) 3.75% in excess of a reserve adjusted LIBOR rate (subject to a minimum floor of 0.75% or (ii) 2.75% in excess of an alternative base rate.
Under the terms of the amended Credit Agreement, the Company is required to maintain certain financial ratios and comply with certain financial covenants, including maintaining a net debt to EBITDA ratio, as defined in the amended Credit Agreement, calculated on a trailing four fiscal quarter basis, not greater than 5.50x and an interest coverage ratio, also as defined in the amended Credit Agreement, of not less than 3.00x. The net debt to EBITDA ratio will decrease over the course of 24 months, returning to 4.50x effective as of June 30, 2023. In addition, borrowings and loans made under the amended Credit Agreement are secured by substantially all of the Company’s and the guarantors’ personal property, excluding certain customary items of collateral, and will be guaranteed by the Company’s existing and future wholly-owned direct material domestic subsidiaries and by SWM Luxembourg.
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 or that guarantees certain other indebtedness, subject to certain exceptions.
The Notes were issued pursuant to an Indenture, dated as of September 25, 2018 (the “Indenture”), 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. 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.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2021.
As of December 31, 2021, the average interest rate was 2.38% on outstanding Revolving Credit Facility borrowings, 2.63% on outstanding Term Loan A Facility borrowings, and 4.50% on outstanding Term Loan B Facility borrowings. The effective rate on the 6.875% senior unsecured notes due 2026 was 7.248%. The weighted average effective interest rate on the Company's debt facilities, including the impact of interest rate hedges, was approximately 4.04% and 4.02% for the year ended December 31, 2021, and 2020, respectively.
French Employee Profit Sharing
At both December 31, 2021, and 2020, 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% at both December 31, 2021 and 2020, and are generally payable in the fifth year subsequent to the year in which the profit sharing is accrued.
Bank Overdrafts
The Company also had bank overdraft facilities of $1.8 million and $6.7 million, at December 31, 2021 and 2020, respectively, of which none was outstanding at either December 31, 2021 or 2020. Interest is incurred on outstanding amounts at market rates, which were 0.55% and 0.26%, respectively, at December 31, 2021 and 2020. No commitment fees are paid on the unused portion of these facilities.
Rate Swap Agreements
From time to time, the Company enters into interest rate swap transactions to manage the Company's interest rate risk and cross-currency swaps designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. See Note 15. Derivatives for additional information.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principal Repayments
Under the Credit Agreement, the Company selects an "interest period" for each of its borrowings from the Revolving Credit Facility. The Company can repay such borrowings and borrow again at a subsequent date if it chooses to do so, providing it flexibility and efficient use of any excess cash. The Company currently has the intent and ability to allow its debt balances to remain outstanding and expects to continue to file notices of continuation related to its borrowings outstanding at December 31, 2021 such that those amounts are not expected to be repaid prior to the September 2023 expiration of the Revolving Credit Facility. Following are the expected maturities for the Company's debt obligations as of December 31, 2021 ($ in millions):
| | | | | |
2022 | $ | 7.2 | |
2023 | 399.7 | |
2024 | 6.3 | |
2025 | 192.5 | |
2026 | 349.5 | |
Thereafter | 331.2 | |
Total | $ | 1,286.4 | |
Fair Value of Debt
At December 31, 2021 and 2020, the fair market value of the Company's 6.875% senior unsecured notes was $365.8 million and $371.0 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, 2021, and 2020 approximated the respective carrying amounts as the interest rates are variable and based on current market indices.
Debt Issuance Costs
In conjunction with the amendment to our Credit Agreement on February 10, 2021, the Company capitalized approximately $14.6 million of debt issuance costs during the year ended December 31, 2021, which will be amortized over the term of the various facilities under the amended Credit Agreement. As of December 31, 2021, and 2020, the Company's total deferred debt issuance costs, net of accumulated amortization, were $16.1 million and $4.6 million, respectively.
Amortization expense of $3.1 million and $1.3 million was recorded during the years ended December 31, 2021, and 2020, respectively, and has been included as a component of Interest expense in the accompanying Consolidated Statements of Income. Following is the expected future amortization of the Company's deferred debt issuance costs as of December 31, 2021 ($ in millions):
| | | | | |
2022 | $ | 3.9 | |
2023 | 3.5 | |
2024 | 2.3 | |
2025 | 2.2 | |
2026 | 1.9 | |
Thereafter | 2.3 | |
Total | $ | 16.1 | |
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 Accumulated other comprehensive 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 values 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 Accumulated other comprehensive 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 our 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 June 30, 2021, the Company entered into pay-fixed, receive-variable interest rate swaps with a maturity date of December 31, 2027. The instruments hedge a portion of the Company’s debt facility through the Credit Agreement. Under the terms of the interest rate swaps, SWM will pay a fixed amount of interest each period in an amount equal to 0.974% and 1.4135% on notional amounts of $260.0 million and $140.0 million, respectively, 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:
•June 30, 2021 - December 29, 2023 $400.0 million notional
•December 29, 2023 - December 31, 2024 $350.0 million notional
•December 31, 2024 - December 31, 2025 $300.0 million notional
•December 31, 2025 - December 31,2026 $200.0 million notional
•December 31, 2026 - December 31, 2027 $190.0 million notional
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 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
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The terms of the interest rate swaps mirror the terms of the underlying debt, including timing of the payments and interest rates.
On January 29, 2019, the Company entered into a cross-currency swap 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. On September 30, 2021, the term of the cross-currency swap was extended until October 1, 2031. 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 5.117% per annum on €66.0 million.
On September 11, 2019, the Company entered into a new pay-EUR, receive-USD cross-currency swap arrangement with a major financial institution 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 USD denominated payments at a rate of 6.875% semiannually on the notional amount of the swap.
On October 1, 2021, the Company entered into a cross-currency swap 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 €64.7 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 5.4750% per annum. The cross-currency swap will mature on October 1, 2031.
On November 23, 2021, the Company entered into cross-currency swaps designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swaps provide for an exchange of principal on a U.S. dollar notional amount swapped to Euro at maturity, in addition to receipt of fixed rate U.S. dollar denominated interest and payment of fixed rate Euro interest to the swap counterparty. Each of the swaps expires on October 1, 2031. The notional amounts and interest rates are as follows.
•$85 million notional swapped to €75.7 million at maturity, receive U.S. dollar interest at a fixed rate of 6.875% and pay Euro interest at a fixed rate of 4.9605% per annum.
•$85 million notional swapped to €75.7 million at maturity, receive U.S. dollar interest at a fixed rate of 6.875% and pay Euro interest at a fixed rate of 5.0755% per annum.
•$65 million notional swapped to €57.9 million at maturity, receive U.S. dollar interest at a fixed rate of 6.875% and pay Euro interest at a fixed rate of 5.1605% per annum.
•$65 million notional swapped to €57.9 million at maturity, receive U.S. dollar interest at a fixed rate of 6.875% and pay Euro interest at a fixed rate of 5.1405% per annum.
The following table presents the fair value of asset and liability derivatives and the respective balance sheet locations at December 31, 2021 ($ 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 | | $ | 1.6 | | | Accrued expenses | | $ | — | |
Foreign exchange contracts | Other assets | | — | | | Other liabilities | | 9.8 | |
Interest rate contracts | Accounts receivable | | 0.2 | | | Accrued expenses | | — | |
Interest rate contracts | Other assets | | 3.3 | | | Other liabilities | | 2.1 | |
Total derivatives designated as hedges | | | $ | 5.1 | | | | | $ | 11.9 | |
| | | | | | | |
Derivatives Not Designated as Hedges: | | | | | | | |
Foreign exchange contracts | Accounts receivable | | $ | 0.2 | | | Accounts payable | | $ | 0.6 | |
Total derivatives not designated as hedges | | | 0.2 | | | | | 0.6 | |
Total derivatives | | | $ | 5.3 | | | | | $ | 12.5 | |
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 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total derivatives | | | $ | 1.2 | | | | | $ | 31.1 | |
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 |
| | 2021 | | 2020 | | 2019 | | | | 2021 | | 2020 | | 2019 |
Derivatives designated as cash flow hedge | | | | | | | | | | | | | | |
Foreign exchange contracts | | $ | (0.2) | | | $ | (5.3) | | | $ | (0.7) | | | Net sales | | $ | (1.7) | | | $ | (3.4) | | | $ | (1.2) | |
Foreign exchange contracts | | 1.2 | | | 1.4 | | | (2.3) | | | Other income (expense) , net | | (0.2) | | | 1.4 | | | (1.9) | |
Interest rate contracts | | 5.1 | | | (7.7) | | | 4.6 | | | Interest expense | | (3.2) | | | — | | | 7.6 | |
Derivatives designated as investment hedge | | | | | | | | | | | | | | |
Foreign exchange contracts | | 6.6 | | | (14.2) | | | — | | | Other income (expense), net | | — | | | — | | | — | |
Total | | $ | 12.7 | | | $ | (25.8) | | | $ | 1.6 | | | | | $ | (5.1) | | | $ | (2.0) | | | $ | 4.5 | |
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, 2021, 2020 or 2019, 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, 2021, 2020, and 2019, respectively, $6.3 million, $6.5 million and $1.1 million was recognized in income as derivative amounts excluded from effectiveness testing as Interest expense.
The following table provides the effect derivative instruments not designated as hedging instruments had on net income ($ in millions):
| | | | | | | | | | | | | | | | | |
Derivatives Not Designated as Cash Flow Hedging Instruments | Amount of Gain / (Loss) Recognized in Other Income / Expense |
| 2021 | | 2020 | | 2019 |
| | | |
| | | | | |
| | | | | |
Foreign exchange contracts | $ | (2.2) | | | $ | 0.1 | | | $ | 1.1 | |
Total | $ | (2.2) | | | $ | 0.1 | | | $ | 1.1 | |
Note 16. Accrued Expenses
Accrued expenses consisted of the following ($ in millions):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Accrued salaries, wages and employee benefits | $ | 42.0 | | | $ | 48.7 | |
| | | |
| | | |
| | | |
| | | |
Other accrued expenses | 67.3 | | | 52.2 | |
Total | $ | 109.3 | | | $ | 100.9 | |
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Income Taxes
For financial reporting purposes, income before income taxes includes the following components ($ in millions):
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
U.S. | $ | 28.5 | | | $ | 29.1 | | | $ | 60.0 | |
Foreign | 44.6 | | | 68.2 | | | 36.9 | |
Total | $ | 73.1 | | | $ | 97.3 | | | $ | 96.9 | |
An analysis of the provision (benefit) for income taxes from continuing operations follows ($ in millions):
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Current income taxes: | | | | | |
U.S. federal | $ | 5.0 | | | $ | 7.3 | | | $ | 8.1 | |
U.S. state | 0.7 | | | 1.5 | | | 0.8 | |
Foreign | 11.9 | | | 14.8 | | | 9.7 | |
| 17.6 | | | 23.6 | | | 18.6 | |
Deferred income taxes: | | | | | |
U.S. federal | 7.5 | | | (5.3) | | | 2.3 | |
U.S. state | (0.2) | | | 1.0 | | | (1.9) | |
Foreign | (34.3) | | | (0.9) | | | (3.8) | |
| (27.0) | | | (5.2) | | | (3.4) | |
Total | $ | (9.4) | | | $ | 18.4 | | | $ | 15.2 | |
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, |
| 2021 | | 2020 | | 2019 |
| | | | | |
| | | | | | | |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Tax provision at U.S. statutory rate | $ | 15.4 | | | 21.0 | % | | $ | 20.4 | | | 21.0 | % | | $ | 20.3 | | | 21.0 | % |
Foreign income tax rate differential | 2.9 | | | 4.0 | | | 2.7 | | | 2.7 | | | 0.6 | | | 0.5 | |
Income from passthrough entities | 4.2 | | | 5.7 | | | 2.3 | | | 2.3 | | | 1.7 | | | 1.6 | |
Branch earnings | (0.9) | | | (1.2) | | | — | | | — | | | — | | | — | |
Global intangible low tax inclusion | 4.7 | | | 6.4 | | | 4.8 | | | 4.8 | | | (0.1) | | | (0.1) | |
Subpart F income | 1.0 | | | 1.3 | | | 0.6 | | | 0.6 | | | 1.0 | | | 1.0 | |
| | | | | | | | | | | |
State income tax, net of federal benefit | 0.5 | | | 0.7 | | | 1.8 | | | 1.8 | | | (0.2) | | | (0.2) | |
Adjustments to valuation allowances | 57.0 | | | 78.0 | | | (3.9) | | | (3.9) | | | (3.7) | | | (3.8) | |
Capital loss carryforward | (86.5) | | | (118.3) | | | — | | | — | | | — | | | — | |
Transition tax | — | | | — | | | — | | | — | | | (0.7) | | | (0.6) | |
Other tax credits | (1.4) | | | (2.0) | | | (0.8) | | | (0.8) | | | (2.0) | | | (2.1) | |
Foreign tax credits | (11.0) | | | (15.0) | | | (9.9) | | | (10.0) | | | (3.5) | | | (3.6) | |
Other foreign operational taxes | 3.0 | | | 4.1 | | | 3.5 | | | 3.5 | | | 2.9 | | | 3.0 | |
Base erosion minimum tax amount | 2.4 | | | 3.3 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Non-deductible compensation | 1.9 | | | 2.6 | | | 0.4 | | | 0.4 | | | 1.1 | | | 1.1 | |
Other, net | (2.6) | | | (3.5) | | | (3.5) | | | (3.5) | | | (2.2) | | | (2.1) | |
Provision for income taxes | $ | (9.4) | | | (12.9) | % | | $ | 18.4 | | | 18.9 | % | | $ | 15.2 | | | 15.7 | % |
A benefit for income taxes of $9.4 million, a provision for income taxes of $18.4 million and $15.2 million in the years ended December 31, 2021, 2020, and 2019, respectively, resulted in an effective tax rate of (12.9)%, 18.9%, and 15.7% in 2021, 2020, and 2019, respectively. The Company’s effective tax rates differ from the statutory federal income tax rate of 21% due primarily to varying tax rates in foreign jurisdictions, the relative amounts of income we earn in those jurisdictions and adjustments to valuation allowances.
Prior to the passage of the Tax Act, the Company asserted that substantially all of the undistributed earnings of its foreign subsidiaries were considered indefinitely reinvested and accordingly, no deferred taxes were provided. Due to the Tax Act, the Company has significant previously taxed earnings and profits from its foreign subsidiaries, as a result of transition tax, that are generally able to be repatriated free of U. S. federal tax. In addition, future earnings of foreign subsidiaries are generally expected to be able to be repatriated free of U.S. federal income tax because these earnings were taxed in the U.S. under the GILTI regime or would be eligible for a 100% dividends received deduction. The Company does not assert indefinite reinvestment with respect to earnings generated by foreign subsidiaries to the extent of each controlled foreign corporation's earnings and profits and to the extent of any foreign partnership’s U.S. tax capital accounts. The Company has provided for non-U.S. withholding taxes, U.S. federal tax related to currency movement on previously taxed earnings and profits, and U.S. state taxes on unremitted earnings.
Net deferred income tax assets (liabilities) were comprised of the following ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Deferred Tax Assets | | | |
Receivable allowances | $ | 0.9 | | | $ | 0.5 | |
| | | |
| | | |
| | | |
Postretirement and other employee benefits | 17.1 | | | 21.0 | |
| | | |
Derivatives | — | | | 2.5 | |
Net operating loss and tax credit carryforwards | 129.6 | | | 104.4 | |
Capital loss carryforward | 103.1 | | | 12.1 | |
Accruals and other liabilities | 0.4 | | | 0.7 | |
| | | |
Intangibles | — | | | 37.6 | |
Other | 12.6 | | | 4.4 | |
| 263.7 | | | 183.2 | |
Less: Valuation allowance | (232.3) | | | (166.6) | |
Net deferred income tax assets | $ | 31.4 | | | $ | 16.6 | |
| | | |
Deferred Tax Liabilities | | | |
| | | |
| | | |
Net property, plant and equipment | $ | (60.3) | | | $ | (55.7) | |
Intangibles | (31.3) | | | — | |
| | | |
| | | |
Investment in subsidiaries | (0.6) | | | (3.2) | |
Derivatives | (0.3) | | | — | |
| | | |
Other | (0.1) | | | (0.3) | |
| | | |
| | | |
Net deferred income tax liabilities | $ | (92.6) | | | $ | (59.2) | |
| | | |
Total net deferred income tax liabilities | $ | (61.2) | | | $ | (42.6) | |
As of December 31, 2021, the Company had approximately $111.8 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:
| | | | | |
| 2021 |
2022-2041 | $ | 26.7 | |
| |
| |
Indefinite | 85.1 | |
| $ | 111.8 | |
In addition, the Company has $103.1 million of tax effected capital loss carryforwards, $96.7 million expire between 2024-2026 and $6.4 million are indefinite lived. The Company also has $8.0 million and $2.2 million of foreign tax credits and state tax credits and that will expire between 2029 – 2030, and 2022 – 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, capital loss, and credit carryforwards. The valuation allowance on deferred tax assets as of December 31, 2021, is substantially in the United States and Luxembourg, of $106.9 million and $103.4 million net of a partial valuation allowance release of $35.0 million, respectively. In addition, there is a valuation allowance on ICMS value added tax credits of $4.9 million in Brazil and certain state tax credits of $1.7 million.
The Company's assumptions, judgments and estimates relative to the valuation of these net deferred tax assets take into account available positive and negative evidence of realizability, including recent financial performance, the ability to realize benefits of restructuring and other recent actions, projections of the amount and category of future
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
taxable income and tax planning strategies. Actual future operating results and the underlying amount and category of income in future periods could differ from the Company's current assumptions, judgments and estimates. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets.
The following table summarizes the activity related to the Company's unrecognized tax benefits related to income taxes ($ in millions):
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
Uncertain tax position balance at beginning of year | $ | 2.0 | | | $ | 1.7 | | | $ | 1.1 | |
Increases related to current year tax positions | 0.3 | | | 0.3 | | | 0.6 | |
| | | | | |
| | | | | |
Decreases related to expiration of statute of limitations | (0.7) | | | — | | | — | |
Current year acquisition | $ | 8.2 | | | $ | — | | | $ | — | |
Uncertain tax position balance at end of year | $ | 9.8 | | | $ | 2.0 | | | $ | 1.7 | |
The liability for unrecognized tax benefits included $5.0 million as of December 31, 2021, that if recognized would impact the Company's effective tax rate. We do not anticipate a material decrease in unrecognized tax benefits by the end of 2022 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 on current year uncertain tax positions during the years ended December 31, 2021, 2020 and 2019. As it relates to the current year 2021 Scapa acquisition, a liability for $1.8 million of interest and penalties was recorded through purchase accounting to goodwill.
The Company files income tax returns, including returns for its subsidiaries, with federal, state, local and foreign jurisdictions. The Company finalized Belgium, Scapa France, and China audits, for the tax years, 2017 – 2018, 2017 – 2019, and 2017-2019, respectively during 2021. All expected impacts have been recorded in 2021 or earlier. We are no longer subject to U.S. federal examinations by the IRS for tax years before 2017. The 2015-2021 tax years remain subject to examination by other major tax jurisdictions.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
United Kingdom Pension Benefits
In the U.K., the Company has a defined benefit pension plan which holds the assets and liabilities of former U.K. employees. The plan has been closed to new members since 2008 and is wholly funded by the sponsoring employer, Scapa Group Ltd. The assets of the plan are held separately from the Company under Trust and the plan is managed by a professional Trustee.
U.S., French, and U.K. Pension Disclosures
The U.S., French, and U.K. pension plans accounted for the majority of the Company's total plan assets and total Accumulated Benefit Obligations (ABO) at December 31, 2021.
The Company uses a measurement date of December 31 for its pension plans in the United States, U.K., and France. The funded status of these plans as of December 31, 2021 and 2020 was as follows ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits |
| U.S. | | France | | U.K. |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Change in Projected Benefit Obligation, or PBO: | | | | | | | | | | | |
PBO at beginning of year | $ | 125.1 | | | $ | 119.9 | | | $ | 35.8 | | | $ | 31.9 | | | $ | — | | | $ | — | |
Acquisition(1) | 1.9 | | | — | | | 5.4 | | | — | | | 200.1 | | | — | |
Service cost | — | | | — | | | 1.6 | | | 1.3 | | | — | | | — | |
Interest cost | 2.8 | | | 3.7 | | | 0.1 | | | 0.2 | | | 2.5 | | | — | |
Actuarial (gain) loss | (2.6) | | | 9.7 | | | (2.1) | | | 0.6 | | | 4.3 | | | — | |
Participant contributions | — | | | — | | | 0.8 | | | 0.5 | | | — | | | — | |
| | | | | | | | | | | |
Gross benefits paid | (8.8) | | | (8.2) | | | (2.7) | | | (1.7) | | | (10.7) | | | — | |
Currency translation effect | — | | | — | | | (2.9) | | | 3.0 | | | (3.9) | | | — | |
PBO at end of year | $ | 118.4 | | | $ | 125.1 | | | $ | 36.0 | | | $ | 35.8 | | | $ | 192.3 | | | $ | — | |
Change in Plan Assets: | | | | | | | | | | | |
Fair value of plan assets at beginning of year | $ | 134.4 | | | $ | 125.8 | | | $ | 0.8 | | | $ | 1.1 | | | $ | — | | | $ | — | |
Acquisition(1) | — | | | — | | | — | | | — | | | 211.4 | | | — | |
Actual return on plan assets | (0.9) | | | 16.8 | | | 0.1 | | | — | | | 10.9 | | | — | |
Employer contributions | | | — | | | 1.8 | | | 1.2 | | | 2.9 | | | — | |
Participant contributions | — | | | — | | | 0.1 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Gross benefits paid | (8.8) | | | (8.2) | | | (2.2) | | | (1.6) | | | (10.8) | | | — | |
Currency translation effect | — | | | — | | | (0.1) | | | 0.1 | | | (4.3) | | | — | |
Fair value of plan assets at end of year | $ | 124.7 | | | $ | 134.4 | | | $ | 0.5 | | | $ | 0.8 | | | $ | 210.1 | | | $ | — | |
Funded status at end of year | $ | 6.3 | | | $ | 9.3 | | | $ | (35.5) | | | $ | (35.0) | | | $ | 17.8 | | | $ | — | |
(1) Amounts attributable to Scapa are included effective April 15, 2021
The PBO, ABO and fair value of pension plan assets for the Company's U.S., U.K., and French defined benefit pension plans as of December 31, 2021 and 2020 as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | | France | | U.K. |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
PBO | $ | 118.4 | | | $ | 125.1 | | | $ | 36.0 | | | $ | 35.8 | | | 192.3 | | | $ | — | |
ABO | 118.4 | | | 125.1 | | | 36.0 | | | 35.8 | | | 192.3 | | | — | |
Fair value of plan assets | 124.7 | | | 134.4 | | | 0.5 | | | 0.8 | | | 210.1 | | | — | |
As of December 31, 2021, 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., U.K., and French pension plans are as follows ($ in millions):
| | | | | | | | | | | | | | | | | |
| Pension Benefits |
| U.S. | | France | | U.K. |
Accumulated loss (gain) | $ | 16.9 | | | $ | 11.1 | | | $ | (3.5) | |
Prior service credit | — | | | (2.0) | | | — | |
Accumulated other comprehensive loss (gain) | $ | 16.9 | | | $ | 9.1 | | | $ | (3.5) | |
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-
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits |
| U.S. | | France | | U.K. |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Discount rate | 2.73 | % | | 2.30 | % | | 0.88 | % | | 0.32 | % | | 1.85 | % | | — | % |
Rate of compensation increase | — | % | | — | % | | 2.01 | % | | 1.97 | % | | — | % | | — | % |
Rate of pension increase | — | % | | — | % | | — | % | | — | % | | 3.26 | % | | — | % |
The components of net pension benefit costs for U.S., U.K., and French employees during the years ended December 31, 2021, 2020 and 2019 were as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| U.S. Pension Benefits | | French Pension Benefits | | U.K. Pension Benefits |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
Service cost | $ | — | | | $ | — | | | $ | — | | | $ | 1.6 | | | $ | 1.3 | | | $ | 1.0 | | | $ | — | | | $ | — | | | $ | — | |
Interest cost | 2.8 | | | 3.7 | | | 4.6 | | | 0.1 | | | 0.2 | | | 0.4 | | | 2.5 | | | — | | | — | |
Expected return on plan assets | (3.9) | | | (4.9) | | | (5.8) | | | — | | | (0.1) | | | (0.1) | | | (2.7) | | | — | | | — | |
Amortizations and other | 3.2 | | | 3.3 | | | 2.0 | | | 0.8 | | | 1.0 | | | 0.9 | | | — | | | — | | | — | |
Net periodic benefit cost | $ | 2.1 | | | $ | 2.1 | | | $ | 0.8 | | | $ | 2.5 | | | $ | 2.4 | | | $ | 2.2 | | | $ | (0.2) | | | $ | — | | | $ | — | |
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, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits |
| U.S. | | France | | U.K. |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
Discount rate | 2.31 | % | | 3.20 | % | | 4.29 | % | | 0.88 | % | | 0.53 | % | | 1.28 | % | | 1.95 | % | | — | % | | — | % |
Expected long-term rate of return on plan assets | 3.44 | % | | 4.41 | % | | 5.14 | % | | 3.00 | % | | 3.00 | % | | 3.00 | % | | 3.17 | % | | — | % | | — | % |
Rate of compensation increase | — | % | | — | % | | — | % | | 2.01 | % | | 1.97 | % | | 1.96 | % | | — | % | | — | % | | — | % |
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 each 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 investments in long duration fixed income assets over time. For the year ended December 31, 2021, the target and actual allocation of plan assets were aligned. 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. Investments under the U.K. plan are allocated based on a targeted return, driven by the funded status of the plan. 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
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on a periodic basis to review the portfolio returns and to determine asset mix targets. The U.S., U.K., and French pension plans' asset allocations by category at December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | | France | | U.K. |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Asset Category | | | | | | | | | | | | |
Cash and cash equivalents | | 1% | | 1% | | 11% | | 36% | | 1% | | —% |
Equity securities* | | | | | | | | | | | | |
Domestic large cap | | 2 | | 2 | | 16 | | 30 | | — | | — |
Domestic small cap | | 1 | | 1 | | — | | — | | — | | — |
International | | 6 | | 6 | | — | | — | | 10 | | — |
Fixed income securities | | 90 | | 90 | | 67 | | 32 | | 87 | | — |
Alternative investments** | | — | | — | | 6 | | 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. and U.K. pension plan 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., French and U.K. pension plans' assets at fair value as of December 31, 2021 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | | France | | U.K. |
Plan Asset Category | Total | | Other* | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 |
Cash equivalents | $ | 1.1 | | | $ | — | | | $ | 1.1 | | | $ | — | | | $ | — | | | $ | 0.1 | | | $ | 0.1 | | | $ | — | | | $ | 2.5 | | | $ | 2.5 | | | $ | — | |
Equity securities | | | | | | | | | | | | | | | | | | | | | |
Domestic large cap | 3.7 | | | 3.7 | | | — | | | — | | | — | | | 0.1 | | | 0.1 | | | — | | | — | | | — | | | — | |
Domestic small cap | 1.2 | | | 1.2 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
International | 7.4 | | | 7.4 | | | — | | | — | | | — | | | — | | | — | | | — | | | 20.8 | | | — | | | 20.8 | |
Fixed income securities | | | | | | | | | | | | | | | | | | | | | |
US Government securities | 43.1 | | | 43.1 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Corporate bonds | 48.4 | | | 48.4 | | — | | | — | | | — | | | — | | | — | | | — | | | 95.2 | | | — | | | 95.2 | |
International bonds | 2.1 | | | 2.1 | | — | | | — | | | — | | | — | | | — | | | — | | | 86.6 | | | — | | | 86.6 | |
Other | 17.7 | | | 17.7 | | — | | | — | | | — | | | 0.3 | | | — | | | 0.3 | | | 3.3 | | | — | | | 3.3 | |
Alternative investments** | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1.7 | | | — | | | 1.7 | |
Total | $ | 124.7 | | | $ | 123.6 | | | $ | 1.1 | | | $ | — | | | $ | — | | | $ | 0.5 | | | $ | 0.2 | | | $ | 0.3 | | | $ | 210.1 | | | $ | 2.5 | | | $ | 207.6 | |
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | | 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 | |
| | | | | | | | | | | | | | | |
Total | $ | 134.4 | | | $ | 133.4 | | | $ | 1.0 | | | $ | — | | | $ | — | | | $ | 0.8 | | | $ | 0.5 | | | $ | 0.3 | |
* 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, France and the U.K., 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
| | | | | | | | | | | | | | | | | |
| U.S. | | France | | U.K. |
| Pension Benefits | | Pension Benefits | | Pension Benefits |
2022 | $ | 8.7 | | | $ | 0.4 | | | $ | 10.9 | |
2023 | 8.4 | | | 1.3 | | | 11.2 | |
2024 | 8.3 | | | 1.0 | | | 11.4 | |
2025 | 8.2 | | | 1.7 | | | 11.8 | |
2026 | 8.0 | | | 1.3 | | | 12.1 | |
2027 - 2031 | 36.6 | | | 14.1 | | | 65.3 | |
The Company is not required to contribute during 2022 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. Contributions to the U.K. pension plan are required.
Other Foreign Pension Benefits
In Brazil, employees are covered under government-administered programs. Certain 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 and Italy, 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 $4.6 million, $4.0 million, and $3.9 million for the years ended December 31, 2021, 2020 and 2019, 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 $16.2 million and $14.5 million at December 31, 2021 and 2020, 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 $21.6 million and $18.0 million at December 31, 2021 and 2020, 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 $7.1 million and $7.0 million at December 31, 2021 and 2020, respectively.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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, 2021, 1,188,070 restricted shares had been issued under the Company's restricted LTIP plans, of which 377,729 shares of issued restricted stock were not yet vested and for which $2.3 million in unrecognized compensation expense is expected to be recognized over a weighted average period of 1.1 years. The following table presents restricted stock activity for the years 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| # 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 | 405,299 | | | $ | 34.96 | | | 221,622 | | | $ | 37.08 | | | 184,190 | | | $ | 40.33 | |
Granted | 207,135 | | | 39.10 | | | 339,454 | | | 34.27 | | | 155,982 | | | 35.62 | |
Forfeited | (4,345) | | | 33.37 | | | (36,749) | | | 33.98 | | | (8,869) | | | 41.34 | |
Vested | (230,360) | | | 35.71 | | | (119,028) | | | 37.15 | | | (109,681) | | | 40.12 | |
Nonvested restricted shares outstanding at December 31 | 377,729 | | | $ | 36.78 | | | 405,299 | | | $ | 34.96 | | | 221,622 | | | $ | 37.08 | |
Restricted Stock Plan Shares
During 2021, the Company recognized $3.5 million for 179,873 shares earned under the 2021-2022 award opportunity, $2.1 million of compensation expense earned under the 2020-2021 award opportunity, and $1.3 million of compensation expense earned under the 2019-2020 award opportunity. 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 $2.2 million of compensation expense earned under the 2018-2019 award opportunity.
Basic and Diluted Shares Reconciliation
The Company uses the two-class method to calculate earnings per share. The Company has granted restricted stock that contains non-forfeitable rights to dividends on unvested shares. Since these unvested shares are considered participating securities under the two-class method, the Company allocates earnings per share to common stock and participating securities according to dividends declared and participation rights in undistributed earnings.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Diluted net income per common share is computed based on net income divided by the weighted average number of common and potential common shares outstanding. Potential common shares during the respective periods are those related to dilutive stock-based compensation, including long-term share-based incentive compensation, and directors' accumulated deferred stock compensation which may be received by the directors in the form of stock or cash. A reconciliation of the average number of common and potential common shares outstanding used in the calculations of basic and diluted net income per share follows ($ in millions, shares in thousands):
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | |
| | | | | |
Numerator (basic and diluted): | | | | | |
Net income | $ | 88.9 | | | $ | 83.8 | | | $ | 85.8 | |
Less: Dividends paid to participating securities | (0.6) | | | (0.7) | | | (0.4) | |
Less: Undistributed earnings available to participating securities | (0.5) | | | (0.4) | | | (0.2) | |
Undistributed and distributed earnings available to common stockholders | $ | 87.8 | | | $ | 82.7 | | | $ | 85.2 | |
| | | | | |
Denominator: | | | | | |
Average number of common shares outstanding | 31,030.4 | | | 30,832.7 | | | 30,652.2 | |
Effect of dilutive stock-based compensation | 369.9 | | | 271.5 | | | 186.1 | |
Average number of common and potential common shares outstanding | 31,400.3 | | | 31,104.2 | | | 30,838.3 | |
Note 20. Commitments and Contingencies
Other Commitments
As of December 31, 2021, we had contractual obligations to purchase products and services (primarily raw materials) and energy totaling $103.2 million. These commitments extend beyond 2025.
The Company has certain other letters of credit, guarantees and surety bonds outstanding at December 31, 2021, which are not material either individually or in the aggregate.
Litigation
Brazil
SWM-Brazil "SWM-B" received assessments from the tax authorities of the State of Rio de Janeiro (the "State") for unpaid Imposto sobre Circulação de Mercadorias e Serviços ("ICMS") and Fundo Estadual de Combate à Pobreza ("FECP") value-added taxes on interstate purchases of electricity. The State issued four sets of assessments against SWM-B for periods from May 2006 through December 2017 (collectively the "Electricity Assessments"). SWM-B challenged all Electricity Assessments in administrative proceedings before the State tax council (in the Junta de Revisão Fiscal “first-level administrative court” and the Conselho de Contribuintes “administrative appellate court”) based on Resolution 1.610/89, which defers these taxes on electricity purchased by an "electricity-intensive consumer." In 2014, a majority of the administrative appellate court sitting en banc ruled against SWM-B in each of the first and second Electricity Assessments ($9.9 million based on the foreign currency exchange rate at December 31, 2021), 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 in 2018. Instead, in August 2018, the State filed revised third and fourth Electricity Assessments for a combined amount of $7.9 million. SWM-B filed challenges to these 2018 assessments in the first-level administrative court on the same grounds as the older cases, receiving unfavorable rulings from the courts in 2019. Both 2019 decisions are being appealed. The State issued a
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In December of 2000, SWM-B received two assessments from the tax authorities of 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. An adverse judgement was received during 2019 and a provision of $8.6 million (based on the foreign currency exchange rate at March 31, 2021) was recorded in Other Liabilities. On April 9, 2021, SWM-B resolved the Raw Materials Assessment by paying $2.6 million (based on the foreign currency exchange rate at March 31, 2021) under a tax amnesty program which reduced the tax liability by approximately 70%. All litigation is now concluded on this matter which is fully resolved. As the result of the favorable settlement, we recognized a total benefit of $6.1 million in the first quarter of 2021, of which $4.6 million was in Interest expense and $1.6 million was in Other expense, net.
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 appealed the portion of the decision with respect to the claims held to be invalid. The German Supreme Court confirmed the German Patent Court decision on appeal. 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.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 healthcare, construction, industrial, transportation and filtration 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.
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($ in millions) | Net Sales |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Advanced Materials & Structures | $ | 930.7 | | | 64.6 | % | | $ | 543.5 | | | 50.6 | % | | $ | 477.2 | | | 46.7 | % |
Engineered Papers | 509.3 | | | 35.4 | | | 530.9 | | | 49.4 | | | 545.6 | | | 53.3 | |
Consolidated | $ | 1,440.0 | | | 100.0 | % | | $ | 1,074.4 | | | 100.0 | % | | $ | 1,022.8 | | | 100.0 | % |
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($ in millions) | Operating Profit |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Advanced Materials & Structures | $ | 61.6 | | | 73.9 | % | | $ | 64.8 | | | 50.3 | % | | $ | 64.3 | | | 48.0 | % |
Engineered Papers | 100.5 | | | 120.6 | | | 116.8 | | | 90.7 | | | 119.2 | | | 89.0 | |
Unallocated | (78.8) | | | (94.6) | | | (52.8) | | | (41.0) | | | (49.5) | | | (37.0) | |
Consolidated | $ | 83.3 | | | 99.9 | % | | $ | 128.8 | | | 100.0 | % | | $ | 134.0 | | | 100.0 | % |
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($ in millions) | Capital Spending | Depreciation |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
Advanced Materials & Structures | $ | 19.5 | | | $ | 14.5 | | | $ | 16.1 | | | $ | 25.9 | | | $ | 14.5 | | | $ | 12.8 | |
Engineered Papers | 16.4 | | | 15.5 | | | 12.0 | | | 21.7 | | | 27.5 | | | 22.8 | |
Unallocated | — | | | 0.1 | | | 0.5 | | | 0.2 | | | 0.2 | | | 0.2 | |
Consolidated | $ | 35.9 | | | $ | 30.1 | | | $ | 28.6 | | | $ | 47.8 | | | $ | 42.2 | | | $ | 35.8 | |
Assets are managed on a total company basis and are therefore not disclosed at the segment level.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information about Geographic Areas
Long-lived assets by geographic area as of year-end were as follows ($ in millions):
| | | | | | | | | | | | | | | | | |
| Long-Lived Assets |
| 2021 | | 2020 | | 2019 |
U.S. | $ | 173.9 | | | $ | 122.1 | | | $ | 118.5 | |
France | 169.1 | | | 169.3 | | | 158.8 | |
U.K. | 65.4 | | | 10.3 | | | 9.9 | |
Brazil | 15.3 | | | 15.2 | | | 19.5 | |
Poland | 10.4 | | | 12.9 | | | 14.7 | |
Other foreign countries | 43.7 | | | 22.1 | | | 20.8 | |
Consolidated | $ | 477.8 | | | $ | 351.9 | | | $ | 342.2 | |
Note 22. Major Customers
There were no individual customers in the AMS segment and the EP segment which made up 10% or more of the Company's 2021, 2020 or 2019 consolidated net sales.
There were no individual customers in the AMS segment and the EP segment which made up 10% or more of the Company's consolidated accounts receivable at December 31, 2021 or 2020.
Note 23. Supplemental Disclosures
Analysis of Allowances for Doubtful Accounts:
($ in millions)
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| For the Years Ended December 31, | | | |
| 2021 | | 2020 | | 2019 | | | |
Allowance for Doubtful Accounts | | | | | | | | |
Beginning balance | $ | 1.1 | | | $ | 1.5 | | | $ | 1.7 | | | | |
Bad debt expense | 0.3 | | | 1.0 | | | 0.4 | | | | |
Recoveries | (0.1) | | | — | | | (0.3) | | | | |
Write-offs and discounts | 0.1 | | | (1.4) | | | (0.3) | | | | |
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Ending balance | $ | 1.4 | | | $ | 1.1 | | | $ | 1.5 | | | | |
Supplemental Cash Flow Information
($ in millions)
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| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Interest paid | $ | 47.4 | | | $ | 31.4 | | | $ | 29.1 | |
Income taxes paid | 22.4 | | | 14.8 | | | 20.8 | |
Capital spending in accounts payable and accrued liabilities | 6.3 | | | 5.2 | | | 5.9 | |
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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, 2021 and 2020 ($ in millions, except per share amounts):
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| 2021 |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year |
Net sales | $ | 288.2 | | | $ | 377.8 | | | $ | 383.6 | | | $ | 390.4 | | | $ | 1,440.0 | |
Gross profit | 80.8 | | | 88.1 | | | 85.2 | | | 76.2 | | | 330.3 | |
Restructuring and impairment expense | 1.7 | | | 2.3 | | | 1.9 | | | 4.2 | | | 10.1 | |
Operating profit | 33.5 | | | 15.9 | | | 23.0 | | | 10.9 | | | 83.3 | |
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Net income | $ | 21.6 | | | $ | 1.8 | | | $ | 12.2 | | | $ | 53.3 | | | $ | 88.9 | |
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Net income per share: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net income per share - basic | $ | 0.69 | | | $ | 0.06 | | | $ | 0.38 | | | $ | 1.70 | | | $ | 2.83 | |
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Net income per share - diluted | $ | 0.68 | | | $ | 0.06 | | | $ | 0.38 | | | $ | 1.68 | | | $ | 2.80 | |
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| 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 | |
| | | | | | | | | |
| | | | | | | | | |
Net income | $ | 22.5 | | | $ | 21.5 | | | $ | 24.5 | | | $ | 15.3 | | | $ | 83.8 | |
| | | | | | | | | |
Net income per share: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net income per share - basic | $ | 0.72 | | | $ | 0.69 | | | $ | 0.78 | | | $ | 0.49 | | | $ | 2.68 | |
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| | | | | | | | | |
| | | | | | | | | |
Net income per share - diluted | $ | 0.72 | | | $ | 0.68 | | | $ | 0.78 | | | $ | 0.48 | | | $ | 2.66 | |
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25. Subsequent Event
On February 22, 2022 we amended a financial covenant in our existing Credit Agreement to adjust the step-down schedule for the maximum net debt to EBITDA ratio. Pursuant to the amendment, the Company will maintain a net debt to EBITDA ratio, as defined in the amended Credit Agreement, calculated on a trailing four fiscal quarter basis, not greater than 6.00x and an interest coverage ratio, also as defined in the amended Credit Agreement, of not less than 3.00x. The net debt to EBITDA ratio will decrease over the course of 15 months, returning to 4.50x effective as of June 30, 2023. See Note 14. Debt for additional information on our existing Credit Agreement.
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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
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 benefit for income taxes of $9.4 million for the year ended December 31, 2021. 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 internal controls over management’s application of income tax laws to its global corporate structure, including internal controls over the identification and assessment of changes to tax laws in the various jurisdictions in which it operates, including the Tax Act, and internal 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, 2022
We have served as the Company's auditor since 1995.