Mativ(MATV) - 2018 Q4 - Annual Report

Part I Business SWM transformed into a diversified performance materials producer, with non-tobacco sales reaching 51% of total revenue in 2018 through strategic acquisitions Business Segments Overview | Segment | Description | | :--- | :--- | | Advanced Materials & Structures (AMS) | Manufactures resin-based products (papers, nets, films) for specialty applications in filtration, infrastructure, construction, transportation, industrial, and medical end-markets | | Engineered Papers (EP) | Produces cigarette papers, reconstituted tobacco products for the tobacco industry, and various other non-tobacco paper products | - The company has strategically shifted its focus to increase profit streams outside the tobacco industry through acquisitions, transforming into a more diversified, growth-oriented enterprise[13] - From 2013 to 2018, SWM invested approximately $850 million in acquiring three primary businesses (DelStar, Argotec, and Conwed) and two bolt-on acquisitions, which now form the AMS segment[14][15] - As a result of its diversification strategy, non-tobacco sales grew to represent 51% of the company's total revenue in 2018, up from about 6% before 2013[15] Advanced Materials & Structures AMS Segment End-Market Sales Breakdown (2018) | End-Market | Percentage of AMS Sales | | :--- | :--- | | Filtration | 25% | | Infrastructure & Construction | 30% | | Transportation | 25% | | Medical | 10% | | Industrial | 10% | - The primary raw material for the AMS segment is plastic resin. Total resin purchases were $143 million in 2018 and $129 million in 2017[44][45] AMS Segment Order Backlog | Date | Backlog ($ millions) | | :--- | :--- | | Dec 31, 2018 | $65 | | Dec 31, 2017 | $71 | Engineered Papers - The Engineered Papers (EP) segment's key products are low ignition propensity (LIP) cigarette paper and reconstituted tobacco (Recon). Approximately 88% of EP segment sales are to the tobacco end-market[48][49][55] - The company's four largest customers (Philip Morris-USA, Philip Morris International, Japan Tobacco Inc., and British American Tobacco) accounted for 28% of consolidated net sales in 2018, down from 31% in 2017 and 35% in 2016[56] - Wood pulp is the primary raw material for the EP segment, with purchases totaling approximately $54 million in 2018 and $42 million in 2017[61] EP Segment Order Backlog | Business Line | Dec 31, 2018 ($ millions) | Dec 31, 2017 ($ millions) | | :--- | :--- | :--- | | French Paper Operations | $27 | $34 | | Reconstituted Tobacco Leaf (RTL) | $92 | $100 | Risk Factors The company faces substantial risks from its tobacco-exposed business, including declining consumption, regulatory pressures, patent expirations, and international operational complexities - Approximately 49% of 2018 net sales were from products used by the tobacco industry, which is subject to declining consumption due to social acceptance, health concerns, and government actions[91] - The company's technological advantages, particularly patents for LIP cigarettes, are expected to diminish as patents expire (generally before 2023), which will likely reduce sales and margins[95] - The company is exposed to international risks, including adverse changes in laws, tariffs, political/economic conditions, and foreign currency fluctuations, as it operates in many countries and sells products in over 90 countries[103][104][113] - Four major customers accounted for over 28% of net sales in 2018, creating a dependency risk. The loss of one or more of these customers could have a material adverse effect[127] - The company faces significant risk from the cost and availability of raw materials like wood pulp and resins, and energy. Unanticipated cost increases may not be fully passed on to customers[151][152] Properties SWM operates 22 global production facilities, with 2018 capacity utilization at approximately 58% for AMS and 80% for EP segments - The company operates 22 production facilities worldwide, with locations in the U.S., United Kingdom, Canada, France, Luxembourg, Russia, Brazil, China, Belgium, and Poland[12][181] Capacity Utilization (2018 vs. 2017) | Segment | 2018 Capacity Utilization | 2017 Capacity Utilization | | :--- | :--- | :--- | | AMS | ~58% | ~63% | | EP | 80% | 82% | - The RTL Philippines facility in Sto. Tomas, Philippines, is currently being marketed for sale and is classified as 'Assets held for sale'[184] Legal Proceedings The company is engaged in various legal disputes, including tax assessments in Brazil, a labor claim in France, and patent infringement litigation in Germany - In Brazil, the company's subsidiary is contesting two sets of value-added tax (ICMS) assessments: one for raw materials (approx. $11 million) and several for electricity purchases[186][187][189] - In France, a subsidiary was ordered to pay approximately €1.3 million to former employees on the grounds of being a 'co-employer,' a decision the company is appealing and believes will be reversed[191] - The company initiated patent infringement proceedings in Germany against competitor Glatz related to LIP-related patents, with a German court affirming an infringement judgment in December 2017[192] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities SWM common stock is listed on NYSE, consistently pays increasing quarterly dividends, and repurchased shares in 2018 Annual Dividends Declared and Paid Per Share | Year | Dividend per Share | | :--- | :--- | | 2018 | $1.73 | | 2017 | $1.69 | | 2016 | $1.62 | - In 2018, the company repurchased 75,395 shares of its common stock at a total cost of approximately $3.0 million (average price of $39.86 per share). These purchases were not part of a publicly announced program[206][300] Selected Financial Data This section provides a five-year summary of SWM's key financial data, including net sales, profitability, and non-GAAP reconciliations Selected Financial Data (2016-2018) | Metric ($ in millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net sales | $1,041.3 | $982.1 | $839.9 | | Gross profit | $278.5 | $283.4 | $257.9 | | Operating profit | $135.0 | $128.3 | $110.0 | | Net income | $94.5 | $34.5 | $82.8 | | Total assets | $1,466.5 | $1,542.5 | $1,173.7 | | Total debt | $622.1 | $684.2 | $440.4 | Adjusted EBITDA Reconciliation (2016-2018) | Metric ($ in millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Income from continuing operations | $94.8 | $34.4 | $82.8 | | EBITDA from continuing operations | $193.9 | $192.4 | $157.6 | | Adjusted EBITDA from continuing operations | $196.9 | $197.9 | $178.4 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial performance, highlighting sales growth, margin pressures, tax act impacts, liquidity, and capital allocation priorities - In 2018, net sales increased by $59.2 million year-over-year, driven by organic growth in both AMS and EP segments and the full-year impact of the Conwed acquisition[212] - Net income increased from $34.5 million in 2017 to $94.5 million in 2018. The comparison is affected by several one-time items, including a $15.0 million impairment of a China JV in 2018 and a $39.6 million net expense from the U.S. Tax Act in 2017[213] - Cash provided by operations was $139.1 million in 2018. Major uses of cash included $61.1 million in net debt repayments, $53.2 million in dividends, and $27.0 million in capital spending[214] Results of Operations Net sales grew in 2018 and 2017, but gross margins faced pressure, while net income was significantly impacted by the 2017 U.S. Tax Act Net Sales by Segment (2018 vs. 2017) | Segment ($ in millions) | 2018 | 2017 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Advanced Materials & Structures | $467.9 | $433.2 | $34.7 | 8.0% | | Engineered Papers | $573.4 | $548.9 | $24.5 | 4.5% | | Total | $1,041.3 | $982.1 | $59.2 | 6.0% | Operating Profit by Segment (2018 vs. 2017) | Segment ($ in millions) | 2018 | 2017 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Advanced Materials & Structures | $49.5 | $48.5 | $1.0 | 2.1% | | Engineered Papers | $121.8 | $119.7 | $2.1 | 1.8% | | Unallocated expenses | ($36.3) | ($39.9) | $3.6 | 9.0% | | Total | $135.0 | $128.3 | $6.7 | 5.2% | - The effective tax rate decreased to 9.2% in 2018 from 68.6% in 2017. The 2017 rate was significantly impacted by charges related to the U.S. Tax Act, while 2018 included a $13 million favorable adjustment to the one-time transition tax[256] - In 2017, net sales increased 16.9% over 2016, primarily due to $141.3 million in incremental revenue from the Conwed acquisition in the AMS segment[262] Liquidity and Capital Resources Liquidity is driven by operating cash flow, supported by a major 2018 debt refinancing, with projected capital spending for 2019 Cash Flow Summary (2016-2018) | Cash Flow ($ in millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Cash from Operations | $139.1 | $131.0 | $129.7 | | Cash used for Investing | ($27.5) | ($318.5) | ($22.4) | | Cash (used in) from Financing | ($120.9) | $179.5 | ($185.7) | - In September 2018, the company refinanced its debt by closing a private offering of $350.0 million of 6.875% senior unsecured notes due 2026 and entering into a new $700.0 million credit agreement[303][306] - Capital spending was $27.0 million in 2018, down from $37.2 million in 2017. Projected capital spending for 2019 is approximately $35.0 million to $40.0 million[284][295] Contractual Obligations Summary | Obligation Type | Total Commitment ($ millions) | | :--- | :--- | | Current & Long-term debt | $636.9 | | Debt interest | $265.8 | | Purchase obligations (raw materials & energy) | $82.8 | | Tax Act transition obligation | $27.0 | | Total | $1,045.8 | Quantitative and Qualitative Disclosures about Market Risk SWM manages market risks including foreign currency, interest rates, and commodity price volatility, with significant exposure to resin and wood pulp costs - A hypothetical 10% unfavorable change in foreign currency exchange rates would result in a net pre-tax loss of approximately $2.3 million on transactional exposures[326] - As of December 31, 2018, 85% of the company's debt was subject to fixed interest rates, including the impact of interest rate hedge transactions. A 100 basis point increase in interest rates would decrease future annual pre-tax earnings by $4.5 million[327] Commodity Price Risk Sensitivity | Commodity | Hypothetical 10% Price Change Impact on Annual Pre-tax Earnings ($ millions) | | :--- | :--- | | Resin | ~$14.3 | | Wood Pulp | ~$5.9 | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2016-2018, including income, balance sheet, cash flow, and notes Consolidated Statement of Income Highlights (2018) | Metric ($ in millions) | Amount | | :--- | :--- | | Net sales | $1,041.3 | | Gross profit | $278.5 | | Operating profit | $135.0 | | Net income | $94.5 | | Diluted EPS | $3.06 | Consolidated Balance Sheet Highlights (as of Dec 31, 2018) | Metric ($ in millions) | Amount | | :--- | :--- | | Total Assets | $1,466.5 | | Total Liabilities | $908.6 | | Total Stockholders' Equity | $557.9 | | Cash and cash equivalents | $93.8 | | Total Debt (Current + Long-term) | $622.1 | Consolidated Statement of Cash Flow Highlights (2018) | Metric ($ in millions) | Amount | | :--- | :--- | | Net cash from operating activities | $139.1 | | Net cash used for investing activities | ($27.5) | | Net cash used in financing activities | ($120.9) | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material weaknesses - Management, including the principal executive and financial officers, concluded that as of December 31, 2018, the company's disclosure controls and procedures were effective[619] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, with no material weaknesses identified[621] Part III Directors, Executive Officers and Corporate Governance Information on directors, corporate governance, and Section 16(a) compliance is incorporated by reference from the 2019 Proxy Statement - Information regarding directors, corporate governance, and beneficial ownership reporting compliance is incorporated by reference from the company's 2019 Proxy Statement[632] - Biographical information for the company's executive officers is located in Part I, Item 1 of this Form 10-K[81][632] Executive Compensation Detailed executive compensation information is incorporated by reference from the 2019 Proxy Statement - Detailed information on executive compensation is incorporated by reference from the 'Executive Compensation' section of the 2019 Proxy Statement[633] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details securities available for future issuance under equity compensation plans and incorporates beneficial ownership information by reference Securities Available for Future Issuance under Equity Compensation Plans (as of Dec 31, 2018) | Plan Category | Number of Securities Available | | :--- | :--- | | Equity compensation plans approved by stockholders | 4,611,892 | | Equity compensation plans not approved by stockholders | 0 | | Grand total | 4,611,892 | Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including key legal agreements, compensation plans, and SEC certifications - Lists key legal and financial documents filed as exhibits, including the Equity Interest Purchase Agreement for Conwed, the Indenture for the 6.875% Senior Notes due 2026, and the 2018 Credit Agreement[640][642] - Includes management compensation plans such as the 2015 Long-Term Incentive Plan and various executive severance and deferred compensation plans[640][641] - Contains required certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002[642]