Mativ(MATV) - 2020 Q2 - Quarterly Report

Part I - Financial Information Financial Statements This section presents unaudited condensed consolidated financial statements for Q2 and H1 2020 versus 2019, covering income, balance sheets, and cash flows with detailed notes Condensed Consolidated Statements of Income (Q2 & H1 2020 vs 2019, in millions) | Indicator | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $254.2 | $269.9 | $515.7 | $527.9 | | Gross profit | $74.3 | $79.0 | $148.6 | $146.9 | | Operating profit | $34.4 | $44.2 | $68.5 | $74.6 | | Net income | $21.5 | $20.5 | $44.0 | $37.9 | | Diluted EPS | $0.68 | $0.66 | $1.40 | $1.22 | Condensed Consolidated Balance Sheet Highlights (in millions) | Indicator | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $404.4 | $427.5 | | Total assets | $1,578.1 | $1,471.7 | | Total current liabilities | $136.7 | $157.6 | | Long-term debt | $666.4 | $540.8 | | Total liabilities | $970.7 | $874.0 | | Total stockholders' equity | $607.4 | $597.7 | Condensed Consolidated Statements of Cash Flow (Six Months Ended, in millions) | Indicator | June 30, 2020 | June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operations | $49.3 | $55.0 | | Net cash used in investing | $(183.8) | $(17.2) | | Net cash provided by (used in) financing | $96.6 | $(43.5) | | Decrease in cash and cash equivalents | $(39.1) | $(6.0) | Note 1. General SWM operates as a multinational producer of engineered solutions and advanced materials across two segments: Advanced Materials & Structures (AMS) and Engineered Papers (EP) - The company operates through two main segments: Advanced Materials & Structures (AMS), which produces resin-based goods, and Engineered Papers (EP), which primarily serves the tobacco industry[25][26][27] - SWM conducts business in over 90 countries with 24 production sites and holds a 50% equity interest in two Chinese joint ventures, CTM and CTS[28] Note 2. Revenue Recognition Revenue is recognized upon transfer of control, with disaggregation of net sales provided by source, operating segment, and geographic location Net Sales by Segment (Six Months Ended June 30, in millions) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | Advanced Materials & Structures (AMS) | $255.7 | $247.2 | | Engineered Papers (EP) | $260.0 | $280.7 | | Total Revenues | $515.7 | $527.9 | Net Sales by Geography (Six Months Ended June 30, 2020, in millions) | Geography | Amount | | :--- | :--- | | United States | $254.7 | | Europe and former CIS | $107.0 | | Asia/Pacific (including China) | $99.2 | | Latin America | $25.4 | | Other foreign countries | $29.4 | | Total Revenues | $515.7 | Note 4. Business Acquisitions The company acquired Tekra and Trient for $169.3 million in March 2020, funded by debt, with $61.2 million in preliminary goodwill - Completed the acquisition of Tekra on March 13, 2020, for a net consideration of $169.3 million, funded by the revolving credit facility[59][60] - The preliminary purchase price allocation resulted in $61.2 million of goodwill and $81.8 million of identifiable intangible assets, primarily customer relationships[64][67] - From the acquisition date through June 30, 2020, Tekra contributed $30.5 million in net sales and a loss from continuing operations of $0.3 million[68] Note 10. Debt Total debt increased to $669.0 million by June 30, 2020, primarily due to the Tekra acquisition, with compliance across all covenants Total Debt Composition (in millions) | Component | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Revolving credit facility | $127.0 | $— | | Term loan facility | $196.5 | $197.5 | | 6.875% senior unsecured notes, net | $343.5 | $343.1 | | Total debt | $669.0 | $542.7 | - The company maintains a $700.0 million credit agreement, consisting of a $500.0 million revolving credit facility and a $200.0 million term loan facility[86] - The weighted average effective interest rate on debt facilities was approximately 3.92% for the six months ended June 30, 2020, down from 4.43% in the prior-year period[94] Note 15. Segment Information This note details net sales, operating profit, and assets for AMS and EP segments, highlighting EP's higher profit despite lower sales Segment Operating Profit (Six Months Ended, in millions) | Segment | June 30, 2020 | June 30, 2019 | | :--- | :--- | :--- | | Advanced Materials & Structures | $26.8 | $35.3 | | Engineered Papers | $65.1 | $61.2 | | Unallocated | $(23.4) | $(21.9) | | Total Consolidated | $68.5 | $74.6 | Segment Assets (in millions) | Segment | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Advanced Materials & Structures | $961.2 | $781.2 | | Engineered Papers | $469.0 | $512.4 | | Unallocated | $147.9 | $178.1 | | Total Consolidated | $1,578.1 | $1,471.7 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial performance and condition, focusing on COVID-19 impacts, Q2 and H1 2020 results, segment performance, liquidity, and capital resources - The COVID-19 pandemic has impacted sales, operations, and profitability, particularly affecting the transportation end-market. The company has withdrawn its 2020 financial guidance but expects to remain profitable with sufficient liquidity[145][154] - Q2 2020 net sales decreased 5.8% to $254.2 million, and operating profit fell 22.2% to $34.4 million compared to Q2 2019[158][166] - For H1 2020, net sales decreased 2.3% to $515.7 million, while net income increased to $44.0 million from $37.9 million in H1 2019, largely due to lower interest and other expenses related to a prior-year Brazil tax assessment[175][190] - The company believes it has sufficient liquidity, with $63.9 million in cash and $368.5 million of undrawn capacity on its revolving credit facility as of June 30, 2020[156] COVID-19 Overview The COVID-19 pandemic has varied impacts, with minimal effect on tobacco and medical, but significant negative effects on transportation - End-market impact varies: Tobacco and Medical are expected to see minimal impact, while the Transportation end-market (automotive paint protection films) has faced significant near-term negative effects[147][148][150] - Four of 24 manufacturing sites experienced temporary shutdowns but are now operational. Many AMS products are deemed 'essential', reducing the risk of further shutdowns[153] - The company has withdrawn its 2020 financial guidance but expects operating cash flow to exceed capital spending and believes it has sufficient liquidity to fund operations and obligations, including dividends[154][155] Results of Operations This section compares Q2 and H1 2020 financial results to 2019, detailing sales declines and net income increases due to specific factors Net Sales Change (Q2 2020 vs Q2 2019, in millions) | Segment | Q2 2020 | Q2 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | AMS | $132.8 | $126.7 | $6.1 | 4.8% | | EP | $121.4 | $143.2 | $(21.8) | (15.2)% | | Total | $254.2 | $269.9 | $(15.7) | (5.8)% | - Q2 AMS sales increased due to the Tekra acquisition; excluding Tekra, sales decreased 14.9% due to COVID-19 impacts on transportation and construction markets[158] - Q2 EP sales decreased 15.2% due to industry attrition, customer inventory destocking, and temporary site closures related to COVID-19[159] - H1 2020 net income increased to $44.0 million from $37.9 million in H1 2019, primarily because the prior-year period included significant non-recurring interest and other expenses related to Brazil tax assessments[186][187][190] Liquidity and Capital Resources Liquidity is driven by operations and credit, with H1 2020 cash flow from operations at $49.3 million and significant investing cash use due to the Tekra acquisition - Net cash provided by operations was $49.3 million for the first six months of 2020, a decrease from $55.0 million in the prior-year period, mainly due to unfavorable working capital movements[193] - Cash used in investing was $183.8 million, dominated by the $169.3 million net cash paid for the Tekra acquisition[196] - Financing activities provided a net $96.6 million in cash, reflecting $212.0 million in new borrowings (primarily for the Tekra acquisition) offset by debt payments and $27.4 million in dividends[197] - On August 5, 2020, the company announced a quarterly cash dividend of $0.44 per share[199] Quantitative and Qualitative Disclosures About Market Risk Market risk exposure as of June 30, 2020, remains consistent with the disclosures in the 2019 Annual Report on Form 10-K - Market risk exposure at the end of Q2 2020 is consistent with and not materially different from the risk disclosed at year-end 2019[215] Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[216] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[217] Part II - Other Information Legal Proceedings This section refers to Note 12 disclosures on legal proceedings, reporting no material developments since the last annual report - The company is involved in various legal proceedings, with no material developments to report beyond what is disclosed in Note 12 of the financial statements[220] Risk Factors No material changes to risk factors from 2019 Annual Report, except for new risks related to the COVID-19 pandemic - The primary new risk factor relates to the COVID-19 pandemic and its potential adverse effects on business, financial condition, and cash flows[221][222] - Specific pandemic-related risks include decreased demand, disruptions to manufacturing and suppliers, and the inability of employees to work at facilities due to health concerns or government restrictions[224] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 25,708 equity shares at an average price of $35.24 in H1 2020 to cover employee tax obligations Issuer Purchases of Equity Securities (YTD 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Total YTD 2020 | 25,708 | $35.24 | Defaults Upon Senior Securities This section is not applicable to the current report Mine Safety Disclosures This section is not applicable to the current report Other Information This section is not applicable to the current report Exhibits This section lists exhibits filed with the Form 10-Q report, including corporate documents and CEO/CFO certifications - Lists exhibits filed with the report, including CEO and CFO certifications (Exhibits 31.1, 31.2, 32) and iXBRL formatted financial statements (Exhibit 101)[230]