SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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December 31, 2018
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|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Accumulated Impairments
|
|
Accumulated Foreign Exchange
|
|
Net
Carrying
Amount
|
|
Amortized Intangible Assets (Advanced Materials & Structures)
|
|
Customer relationships
|
$
|
276.3
|
|
|
$
|
50.4
|
|
|
$
|
—
|
|
|
$
|
0.7
|
|
|
$
|
225.2
|
|
|
Developed technology
|
34.0
|
|
|
8.5
|
|
|
—
|
|
|
0.2
|
|
|
25.3
|
|
|
Trade names
|
21.8
|
|
|
0.8
|
|
|
20.7
|
|
|
0.3
|
|
|
—
|
|
|
Non-compete agreements
|
2.9
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
1.2
|
|
|
Patents
|
1.5
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
1.1
|
|
|
Total
|
$
|
336.5
|
|
|
$
|
61.8
|
|
|
$
|
20.7
|
|
|
$
|
1.2
|
|
|
$
|
252.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Intangible Assets (Advanced Materials & Structures)
|
|
Trade names
|
$
|
20.0
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
20.0
|
|
Amortization expense of intangible assets was
$5.1 million
and
$5.2 million
for the
three months ended June 30, 2019
and
2018
, respectively, and
$10.2 million
and
$10.4 million
for the
six months ended June 30, 2019
and
2018
, respectively. Finite-lived intangibles in the AMS segment are expensed using the straight-line amortization method. The estimated average aggregate amortization expense is
$19.9 million
in each of the next
five
years.
Note
10
. Restructuring and Impairment Activities
The Company incurred Restructuring and impairment expense of
$0.4 million
and
$0.6 million
in the
three months ended
June 30, 2019
and
2018
, respectively, and
$0.4 million
and
$1.0 million
in the
six months ended
June 30, 2019
and
2018
, respectively.
In the AMS segment, Restructuring and impairment expense was
$0.0 million
and
$0.4 million
for the
three months ended
June 30, 2019
and
2018
, respectively, and
$0.0 million
and
$0.8 million
in the
six months ended
June 30, 2019
and
2018
, respectively. In the
six months ended
June 30, 2018
, Restructuring and impairment expense consisted of
$0.6 million
in severance accruals for employees at our U.S. manufacturing operations, as well as
$0.2 million
in impairment charges at our U.S. manufacturing operations.
In the EP segment, Restructuring and impairment expense was
$0.4 million
and
$0.2 million
for the
three months ended
June 30, 2019
and
2018
, respectively, and
$0.4 million
and
$0.2 million
in the
six months ended
June 30, 2019
and
2018
, respectively. In the
six months ended
June 30, 2019
, Restructuring and impairment expense consisted of
$0.4 million
in severance accruals for employees at our manufacturing facilities in the U.S., Brazil and France. In the
six months ended
June 30, 2018
, Restructuring and impairment expense consisted of
$0.2 million
in severance accruals for employees at our manufacturing facilities in France.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring liabilities were classified within Accrued expenses in each of the condensed consolidated balance sheets as of
June 30, 2019
and
December 31, 2018
. Changes in the restructuring liabilities, substantially all of which are employee-related, during the periods ended
June 30, 2019
and
December 31, 2018
are summarized as follows ($ in millions):
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Six Months Ended
|
|
Year Ended
|
|
|
June 30,
2019
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|
December 31,
2018
|
|
Balance at beginning of year
|
$
|
1.4
|
|
|
$
|
1.7
|
|
|
Accruals for announced programs
|
0.4
|
|
|
1.3
|
|
|
Cash payments
|
(1.0
|
)
|
|
(3.3
|
)
|
|
Other
|
—
|
|
|
1.8
|
|
|
Exchange rate impacts
|
—
|
|
|
(0.1
|
)
|
|
Balance at end of period
|
$
|
0.8
|
|
|
$
|
1.4
|
|
Long-lived assets to be sold are classified as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the assets; the assets are available for immediate sale in present condition subject only to terms that are usual and customary for sales of such assets; an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; the sale of the assets is probable, and transfer of the assets is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the assets beyond one year; the assets are being actively marketed for sale at a price that is reasonable in relation to current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A long-lived asset that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. The fair value of a long-lived asset less any costs to sell is assessed each reporting period it remains classified as held for sale and any reduction in fair value is reported as an adjustment to the carrying value of the asset. Upon being classified as held for sale, depreciation is ceased. Long-lived assets to be disposed of other than by sale continue to be depreciated. Upon determining that a long-lived asset meets the criteria to be classified as held for sale, the assets and liabilities of the disposal group, if material, are reported in the line item Assets held for sale in our condensed consolidated balance sheets.
In early 2015, the Company made the decision to dispose of the Company's mothballed RTL facility and related equipment in the Philippines. These assets are included in the EP segment. During 2015, the Company reclassified the balance of the equipment, along with the land and building associated with the property, at this location from Property, plant and equipment, net, to Assets held for sale on the consolidated balance sheets. The reclassifications were made for all assets that are expected to be sold within one year of the balance sheet date and, as of
June 30, 2019
, all of the physical assets of this entity are classified as Assets held for sale. The Company incurred
no
impairment charges related to these assets during the
six months ended
June 30, 2019
or
2018
.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
11
. Debt
The components of total debt are summarized in the following table ($ in millions):
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June 30,
2019
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|
December 31,
2018
|
|
Revolving credit facility - U.S. dollar borrowings
|
$
|
64.0
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|
|
$
|
76.0
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|
|
Term loan facility
|
198.5
|
|
|
199.5
|
|
|
6.875% senior unsecured notes due October 1, 2026, net of discount of $7.3 million and $7.6 million at June 30, 2019 and December 31, 2018, respectively
|
342.7
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342.4
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French employee profit sharing
|
4.4
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6.6
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Finance lease and capital lease obligations, respectively
|
3.5
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|
|
4.7
|
|
|
Other
|
—
|
|
|
0.1
|
|
|
Debt issuance costs
|
(6.5
|
)
|
|
(7.2
|
)
|
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Total debt
|
606.6
|
|
|
622.1
|
|
|
Less: Current debt
|
(1.9
|
)
|
|
(3.3
|
)
|
|
Long-term debt
|
$
|
604.7
|
|
|
$
|
618.8
|
|
Credit Facility
On September 25, 2018, the Company entered into a
$700.0 million
credit agreement (the “New Credit Agreement”), which replaces the Company’s existing senior secured credit facilities and provides for a
five year
$500.0 million
revolving line of credit (the “Revolving Credit Facility”) and a
seven year
$200.0 million
bank term loan facility (the “Term Loan Facility”). Subject to certain conditions, including the absence of a default or event of default under the New Credit Agreement, the Company may request incremental loans to be extended under the Revolving Credit Facility or the Term Loan Facility so long as the Company is in pro forma compliance with the financial covenants set forth in the New Credit Agreement and the aggregate of such increases does not exceed
$400.0 million
.
Borrowings under the Revolving Credit Facility will initially bear interest, at the Company’s option, at either (i)
1.75%
in excess of a reserve adjusted London Interbank Offered Rate (“LIBOR”) or (ii)
0.75%
in excess of an alternative base rate. Borrowings under the Term Loan Facility will initially bear interest, at the Company’s option, at either (i)
2.00%
in excess of a reserve adjusted LIBOR rate or (ii)
1.00%
in excess of an alternative base rate. The Term Loan amortizes at the rate of
1.0%
per year and will mature on September 25, 2025.
Under the terms of the New Credit Agreement, the Company will be required to maintain certain financial ratios and comply with certain financial covenants, including maintaining a net debt to EBITDA ratio, as defined in the New Credit Agreement, calculated on a trailing four fiscal quarter basis, not greater than
4.50
and an interest coverage ratio, also as defined in the New Credit Agreement, of not less than
3.00
. In addition, borrowings and loans made under the New 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 material domestic subsidiaries and by SWM Luxembourg. The Company was in compliance with all of its covenants under the New Credit Agreement at
June 30, 2019
.
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 New Credit Agreement (as defined below) or that guarantees certain other indebtedness, subject to certain exceptions.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Notes were issued pursuant to an Indenture (the “Indenture”), dated as of September 25, 2018, by and among the Company, the guarantors listed therein and Wilmington Trust, National Association, as trustee. The Indenture provides that interest on the Notes will accrue from September 25, 2018 and is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2019, and the Notes mature on October 1, 2026.
The Company may redeem some or all of the Notes at any time on or after October 1, 2021, at the redemption prices set forth in the Indenture, together with accrued and unpaid interest, if any, to, but excluding, the redemption date. Prior to October 1, 2021, the Company may redeem some or all of the Notes at a price equal to
100%
of the principal amount thereof, plus a “make-whole” premium as set forth in the Indenture. The Company may redeem up to
35%
of the original aggregate principal amount of the Notes on or prior to October 1, 2021 with the proceeds of certain equity offerings at a redemption price equal to
106.875%
of the principal amount of the Notes. If the Company sells certain assets or consummates certain change of control transactions, the Company will be required to make an offer to repurchase the Notes, subject to certain conditions.
The Indenture contains certain covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to incur additional indebtedness, make certain dividends, repurchase Company stock or make other distributions, make certain investments, create liens, transfer or sell assets, merge or consolidate and enter into transactions with the Company’s affiliates. Such covenants are subject to a number of exceptions and qualifications set forth in the Indenture. The Indenture also contains certain customary events of default, including failure to make payments in respect of the principal amount of the Notes, failure to make payments of interest on the Notes when due and payable, failure to comply with certain covenants and agreements and certain events of bankruptcy or insolvency. The Company was in compliance with all of its covenants under the Indenture at
June 30, 2019
.
As of
June 30, 2019
, the average interest rate was
3.94%
on outstanding US Revolving Credit Facility borrowings and
4.19%
on outstanding Term Loan 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
4.43%
and
3.51%
for the
six months ended June 30, 2019
and
2018
, respectively.
As of
June 30, 2019
and
December 31, 2018
, the Company's total deferred debt issuance costs, net of accumulated amortization, were
$6.5 million
and
$7.2 million
, respectively. Amortization expense of
$0.6 million
and
$0.9 million
was recorded during the
six months ended
June 30, 2019
and
2018
, respectively, and has been included as a component of Interest expense in the accompanying consolidated statements of income.
Principal Repayments
Under the New Credit Agreement, the Company selects an "interest period" for each of its borrowings from the Revolving Credit Facility. The Company can repay such borrowings and borrow again at a subsequent date if it chooses to do so, providing it flexibility and efficient use of any excess cash. The Company currently has the intent and ability to allow its debt balances to remain outstanding and expects to continue to file notices of continuation related to its borrowings outstanding at
June 30, 2019
such that those amounts are not expected to be repaid prior to the September 2023 expiration of the Revolving Credit Facility. Following are the expected maturities for the Company's debt obligations as of
June 30, 2019
($ in millions):
|
|
|
|
|
|
|
|
2019
|
$
|
1.3
|
|
|
2020
|
3.2
|
|
|
2021
|
3.8
|
|
|
2022
|
3.7
|
|
|
2023
|
66.9
|
|
|
Thereafter
|
541.5
|
|
|
Total
|
$
|
620.4
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Debt
At
June 30, 2019
and
December 31, 2018
, the fair market value of the Company's
6.875%
senior unsecured notes was
$358.9 million
and
$331.6 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
June 30, 2019
and
December 31, 2018
approximated the respective carrying amounts as the interest rates are variable and based on current market indices.
Note
12
. 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 other comprehensive income (loss) and reclassified into earnings when the forecasted transaction affects earnings. For foreign exchange contracts not designated as cash flow hedges, changes in the contracts’ fair 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 other comprehensive income (loss) and reclassified into earnings when the forecasted transaction affects earnings.
On January 20, 2017, the Company entered into an interest rate swap transaction with a major financial institution for a
three year
term on a notional amount of
$315 million
. The interest rate swap is intended to manage the Company's interest rate risk by fixing the interest rate on a portion of the Company's debt currently outstanding under its credit facility that was previously subject to a floating interest rate equal to 1-month LIBOR plus a credit spread. The swap provides for the Company to pay a fixed rate of
1.65%
per annum in addition to the credit spread on such portion of its outstanding debt in exchange for receiving a variable interest rate based on 1-month LIBOR. On September 25, 2018, in conjunction with the debt refinancing discussed in Note 11. Debt, the Company settled a notional amount of
$130 million
which resulted in a gain of
$1.8 million
as of the settlement date. This gain will be amortized on a ratable basis from Accumulated other comprehensive income into income as interest expense over the remaining term of the interest rate swap.
On January 20, 2017, the Company also entered into a
three year
cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of
$100 million
swapped to
€93.7 million
at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of
1.65%
per annum and pay to our swap counterparty Euro interest at a fixed rate of
-0.18%
per annum.
On October 24, 2018, the Company also entered into a
three year
cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of
$75 million
swapped to
€65.4 million
at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of
6.875%
per annum and pay to our swap counterparty Euro interest at a fixed rate of
3.6725%
per annum.
On January 29, 2019, the Company entered into a cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
currency swap provide for an exchange of principal on a notional amount of
$75 million
swapped to
€66.0 million
at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of
6.875%
per annum and pay to our swap counterparty Euro interest at a fixed rate of
4.0525%
per annum. The cross-currency swap will mature on October 1, 2021.
The following table presents the fair value of asset and liability derivatives and the respective balance sheet locations at
June 30, 2019
($ 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, net
|
|
$
|
1.9
|
|
|
Accrued expenses
|
|
$
|
6.9
|
|
|
Foreign exchange contracts
|
Other assets
|
|
3.0
|
|
|
Other liabilities
|
|
—
|
|
|
Interest rate contracts
|
Accounts receivable, net
|
|
0.4
|
|
|
Other liabilities
|
|
—
|
|
|
Total derivatives designated as hedges
|
|
|
5.3
|
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts receivable, net
|
|
0.1
|
|
|
Accrued expenses
|
|
0.1
|
|
|
Total derivatives not designated as hedges
|
|
|
0.1
|
|
|
|
|
0.1
|
|
|
Total derivatives
|
|
|
$
|
5.4
|
|
|
|
|
$
|
7.0
|
|
The following table presents the fair value of asset and liability derivatives and the respective balance sheet locations at
December 31, 2018
($ 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, net
|
|
$
|
2.0
|
|
|
Accrued expenses
|
|
$
|
1.3
|
|
|
Foreign exchange contracts
|
Other assets
|
|
1.0
|
|
|
Other liabilities
|
|
8.8
|
|
|
Interest rate contracts
|
Other assets
|
|
1.8
|
|
|
Other liabilities
|
|
—
|
|
|
Total derivatives designated as hedges
|
|
|
4.8
|
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts receivable, net
|
|
0.1
|
|
|
Accounts payable
|
|
—
|
|
|
Total derivatives not designated as hedges
|
|
|
0.1
|
|
|
|
|
—
|
|
|
Total derivatives
|
|
|
$
|
4.9
|
|
|
|
|
$
|
10.1
|
|
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
|
|
Location of Gain (Loss) Reclassified
from AOCI
|
|
Gain (Loss) Reclassified
from AOCI
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Foreign exchange contracts
|
|
$
|
(0.3
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(2.7
|
)
|
|
Net sales
|
|
$
|
(0.4
|
)
|
|
$
|
0.1
|
|
|
$
|
(0.6
|
)
|
|
$
|
0.7
|
|
|
Foreign exchange contracts
|
|
0.4
|
|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
Other income, net
|
|
0.5
|
|
|
0.2
|
|
|
0.1
|
|
|
—
|
|
|
Interest rate contracts
|
|
0.8
|
|
|
0.8
|
|
|
1.4
|
|
|
3.0
|
|
|
Interest expense
|
|
1.7
|
|
|
0.5
|
|
|
3.2
|
|
|
0.9
|
|
|
Total
|
|
$
|
0.9
|
|
|
$
|
(2.2
|
)
|
|
$
|
1.3
|
|
|
$
|
0.3
|
|
|
|
|
$
|
1.8
|
|
|
$
|
0.8
|
|
|
$
|
2.7
|
|
|
$
|
1.6
|
|
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 three and six months ended
June 30, 2019
or
2018
, other than those related to the cross-currency swap, noted below.
In January 2018, the Company early adopted the guidance in ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." Upon adoption of this standard, the Company elected to de-designate the original hedging relationship of its pay-EUR, receive-USD cross currency swap and re-designate the cross currency swap with the terms based on the spot rate of the EUR. Prospectively, 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. Starting with the adoption date, all coupon payments will be recorded in earnings and the initial value of excluded components currently recorded in AOCI as an unrealized translation adjustment will be amortized into interest expense over the remaining
25 months
of the swap, resulting in a positive impact to Net income. As of
June 30, 2019
, the loss, net of taxes, recognized in Other comprehensive income on the cross currency swap derivative was
$2.2 million
. For the
three months ended June 30, 2019
and
2018
, respectively,
$0.2 million
and
$0.2 million
was reclassified from Accumulated other comprehensive income into income as interest expense and
$0.4 million
and
$0.4 million
was recognized in income as derivative amounts excluded from effectiveness testing as Interest expense. For the
six months ended June 30, 2019
and
2018
, respectively,
$0.4 million
and
$0.4 million
was reclassified from Accumulated other comprehensive income into income as interest expense and
$0.9 million
and
$0.9 million
was recognized in income as derivative amounts excluded from effectiveness testing as Interest expense.
The following table provides the effect that derivative instruments not designated as cash flow hedging instruments had on net income ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Cash Flow Hedging Instruments
|
|
Location of Gain (Loss) Recognized in Income
|
|
Amount of Gain (Loss) Recognized in Income
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Foreign exchange contracts
|
|
Other income, net
|
|
$
|
0.1
|
|
|
$
|
(2.6
|
)
|
|
$
|
—
|
|
|
$
|
(2.1
|
)
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
13
. Commitments and Contingencies
Litigation
Brazil
Imposto sobre Circulação de Mercadorias e Serviços ("ICMS") a form of value-added tax in Brazil, was assessed to SWM-B in December of 2000. SWM-B received
two
assessments from the tax authorities of the State of Rio de Janeiro (the "State") for unpaid ICMS taxes on certain raw materials from January 1995 through October 1998 and from November 1998 through November 2000 (collectively, the "Raw Materials Assessments"). The Raw Materials Assessments concerned the accrual and use by SWM-B of ICMS tax credits generated from the production and sale of certain non-tobacco related grades of paper sold domestically. SWM-B contested the Raw Materials Assessments based on Article 150, VI of the Brazilian Federal Constitution of 1988, which grants immunity from ICMS taxes to papers intended for printing books, newspapers and periodicals, on the ground that tax immunity extends to the raw material inputs used to produce such papers. In 2015, the first chamber of the Federal Supreme Court decided the first Raw Materials Assessment in favor of SWM-B. On May 24, 2019, the second chamber of the Federal Supreme Court decided Assessment 2 in the amount of approximately
$12.5 million
against SWM-B. SWM-B, with assistance of outside counsel, is currently evaluating the decision and exploring its options and other defenses to partially satisfy or reduce the judgment and SWM-B plans to pursue these avenues vigorously. However, because the outcome of any reductions and defenses is uncertain, SWM-B has recorded
$12.0 million
of additional expense in the second quarter of 2019. As of June 30, 2019, we have accrued a total liability of
$12.5 million
, of which
$2.2 million
is recorded in Accrued expenses and
$10.3 million
is included in Other liabilities in the accompanying Condensed consolidated balance sheet. This judgment may be settled over the course of
60 months
; however, we have requested that the Court clarify its decision. Until a decision is rendered on our request, we are not obligated to initiate payments. Interest and penalties will continue to accrue until a decision on our request is rendered.
The amounts recorded in the accompanying Condensed consolidated statement of income for the three and six months ended June 30, 2019 related to the above
two
assessments consist of the following:
|
|
|
|
|
|
|
|
Income Statement Classification
|
(Expense) Benefit
|
|
Cost of products sold
1
|
$
|
(0.9
|
)
|
|
Operating profit
1
|
(0.9
|
)
|
|
Other expense
2
|
(2.1
|
)
|
|
Interest expense
2
|
(7.8
|
)
|
|
Income from continuing operations before income taxes
|
(10.8
|
)
|
|
Provision for income taxes
|
3.1
|
|
|
Net income
|
$
|
(7.7
|
)
|
1
Cost of products sold reflects the net of
$2.0 million
of expense associated with the Raw Materials Assessment and
$1.1 million
benefit associated with separate litigation against the Brazilian Instituto Nacional do Seguro Social ("INSS"), the Brazilian Social Security Administration, regarding additional assessments of social security contributions charged to the Company in the early 1990s. This benefit is expected to be received in tax credits to be applied against future payments of social security taxes over the following ten to twelve months. Amounts are reflected in Engineered Papers reporting segment in segment disclosures.
2
Other expense includes penalties and fees associated with the Raw Materials Assessment. Interest expense relates to the Raw Materials Assessment.
SWM-B received assessments from the tax authorities of the State for unpaid ICMS and Fundo Estadual de Combate à Pobreza ("FECP", a value-added tax similar to ICMS) taxes on interstate purchases of electricity. The State issued
four
sets of assessments against SWM-B, one for May 2006 - November 2007, a second for January 2008 - December 2010, a third for September 2011 - September 2013, which was replaced by a smaller assessment for January - June 2013, and a fourth for July 2013 - December 2017 (collectively the "Electricity Assessments"). SWM-B challenged all Electricity Assessments in administrative proceedings before the State tax council (in the first-level court Junta de Revisão Fiscal and the appellate court (the "Conselho de Contribuintes")) based on Resolution 1.610/89, which defers these taxes on electricity purchased by an "electricity-intensive consumer." In 2014, a majority of the Conselho de Contribuintes sitting en banc ruled against SWM-B in each of the first and second electricity assessments (
$4.7 million
and
$8.6 million
, respectively, based on the foreign currency exchange rate at
June 30, 2019
), and SWM-B is now
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pursuing challenges to these assessments in the State judicial system. Different chambers of the judicial court granted SWM-B preliminary injunctions against enforcement of these
two
assessments in the State judicial system. The Conselho de Contribuintes unanimously upheld SWMB's challenge to the third Electricity Assessment and dismissed this Electricity Assessment on technical grounds after the State admitted the tax did not apply as it had asserted. Instead, in August 2018, the State filed a revised Electricity Assessment in the amount of
$0.7 million
for ICMS on electricity purchased during part of 2013. In August 2018, the State filed a fourth Electricity Assessment in the amount of
$9.9 million
pertaining to ICMS and FECP on electricity purchased from July 2013 to December 2017. SWM-B filed challenges to these recent assessments in the first-level administrative court on the same grounds as the older cases. On December 19, 2018, the Junta de Revisão Fiscal ruled against SWM-B in the last
two
Electricity Assessments. SWM-B has appealed these rulings to the Conselho de Contribuintes. The State issued a new regulation effective January 1, 2018 that only specific industries are “electricity-intensive consumers,” a list that excludes paper manufacturers. SWM-B contends this regulation shows that paper manufacturers were electricity-intensive consumers eligible to defer ICMS before 2018.
SWM-B believes that the Electricity Assessments will ultimately be resolved in its favor.
No
liability has been recorded in our consolidated financial statements for these assessments based on our evaluation of these matters under the facts and law as presently understood. The Company can give no assurance as to the ultimate outcome of such proceedings.
Europe
The Company's European subsidiaries are parties from time to time to litigation, usually (but not always) related to labor matters. There are approximately
19
such cases pending. In accordance with US GAAP, the Company has recorded on its balance sheet an amount that it believes is adequate as a contingency against future potential losses. There can be no assurance, however, that any losses that might be incurred will be in an amount equal to or less than the amount recorded or that the Company will not have losses in respect of litigation in which no reserve has been taken.
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, results of operations or cash flows. However, future events, such as changes in existing laws and regulations (including the enforcement thereof), or unknown contamination 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), or similar circumstances arising at our unconsolidated joint ventures, may give rise to additional costs which could have a material effect on the Company's financial condition or results of operations.
General Matters
In the ordinary course of its business activities, the Company and its subsidiaries are involved in certain other judicial, administrative and regulatory proceedings involving both private parties and governmental authorities. These proceedings include insured and uninsured regulatory, employment, general and commercial liability, environmental, intellectual property rights and other matters. At this time, the Company does not expect any of these proceedings to have a material adverse effect on its reputation, business, financial condition, results of operations or cash flows. However, as the outcomes of such proceedings are unpredictable, the Company can give no assurance that the results of any such proceedings will not materially affect its reputation, business, financial condition, results of operations or cash flows.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
14
. Postretirement and Other Benefits
The Company sponsors pension benefits in the United States, France and Canada and OPEB benefits related to postretirement healthcare and life insurance in the United States and Canada. The Company’s Canadian pension and OPEB benefits are not material and therefore are not included in the following disclosures.
Pension and OPEB Benefits
The components of net pension and OPEB benefit costs for U.S. employees and net pension benefit costs for French employees during the
three or six months ended
June 30, 2019
and
2018
were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
U.S. Pension Benefits
|
|
French Pension Benefits
|
|
U.S. OPEB Benefits
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
1.1
|
|
|
1.1
|
|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
Expected return on plan assets
|
(1.4
|
)
|
|
(1.4
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
Amortizations and other
|
0.5
|
|
|
0.8
|
|
|
0.2
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
Net periodic benefit cost
|
$
|
0.2
|
|
|
$
|
0.5
|
|
|
$
|
0.6
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
U.S. Pension Benefits
|
|
French Pension Benefits
|
|
U.S. OPEB Benefits
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
2.3
|
|
|
2.2
|
|
|
0.2
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
Expected return on plan assets
|
(2.9
|
)
|
|
(2.9
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
Amortizations and other
|
1.0
|
|
|
1.7
|
|
|
0.4
|
|
|
0.4
|
|
|
—
|
|
|
0.1
|
|
|
Net periodic benefit cost
|
$
|
0.4
|
|
|
$
|
1.0
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
The components of net periodic benefit cost other than the service cost component are included in Other income (expense), net in the Condensed Consolidated Statements of Income. During the fiscal year ending December 31,
2019
, the Company expects to recognize approximately
$1.9 million
for amortization of accumulated other comprehensive loss related to its U.S. pension and OPEB plans and approximately
$0.8 million
for its French pension plans.
Note
15
. Income Taxes
For interim financial reporting, the Company estimates the annual tax rate based on projected taxable income for the full year and records a quarterly income tax provision in accordance with ASC No. 740-270 "Accounting for Income Taxes in Interim Periods." These interim estimates are subject to variation due to several factors, including the ability of the Company to accurately forecast pre-tax and taxable income and loss by jurisdiction, changes in laws or regulations, and expenses or losses for which tax benefits are not recognized. Jurisdictions with a projected loss for the year or an actual year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective tax rate calculations could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Act") was enacted into law effective January 1, 2018. The new legislation contains several key tax provisions that affected the Company, which include but are not limited to a one-time deemed repatriation tax on post-1986 accumulated earnings and profits of the undistributed earnings of foreign subsidiaries (“transition tax”), a reduction of the federal corporate income tax rate from 35% to 21%, and other U.S. reform items. Due to the timing and significance of the Tax Act, the Securities and Exchange Commission issued
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provided a measurement period of up to one year through December 31, 2018 to report the impact of the new US tax law. In 2018, the Company decreased its provisional estimates of transition tax, related currency implications, state taxes and deferred tax rate change effect of the new law by
$13.9 million
. The reduction from the provisional 2017 amounts were primarily due to further transition tax analysis of accumulated earnings and foreign taxes paid. As of December 31, 2018, the Company had completed its accounting for the tax effects of the Tax Act.
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 income from its foreign subsidiaries, as a result of transition tax, that is generally able to be repatriated free of U. S. federal tax. In addition, future earnings of foreign subsidiaries are generally expected to be able to be repatriated free of U.S. federal income tax because these earnings were taxed in the U.S. under the GILTI regime or would be eligible for a dividends received deduction. Therefore, the Company does not intend to assert indefinite reinvestment on future cash earnings. While the Company will have to provide for withholding taxes and U.S. state taxes on the future earnings, these amounts are not expected to be significant.
All unrecognized tax positions could impact the Company's effective tax rate if recognized. With respect to penalties and interest incurred from income tax assessments or related to unrecognized tax benefits, the Company’s policy is to classify penalties as provision for income taxes and interest as interest expense in its consolidated statement of income. There were no material income tax penalties or interest accrued during the
three or six months ended
June 30, 2019
or
2018
.
The Company's effective tax rate from continuing operations was
19.7%
and
24.9%
for the
three months ended June 30, 2019
and
2018
, respectively. The decrease was materially due to favorable mix of earnings by jurisdiction and favorable discrete items in the current year. The Company's effective tax rate from continuing operations was
19.8%
and
25.2%
for the
six months ended June 30, 2019
and
2018
, respectively. The decrease was materially due to favorable mix of earnings by jurisdiction and favorable discrete items in the current year.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
16
. Segment Information
The Company's
two
operating product line segments are also the Company's reportable segments: Advanced Materials & Structures and Engineered Papers. The AMS segment primarily produces engineered resin-based rolled goods such as nets, films and other non-wovens for use in high-performance applications in the filtration, infrastructure and construction, transportation, medical and industrial end-markets. It consists of the operations of various acquisitions. The EP segment primarily produces various cigarette papers and recon for sale to cigarette manufacturers. The EP segment also includes non-tobacco paper for battery separators, printing and writing, drinking straw wrap and furniture laminates.
Information about Net Sales and Operating Profit
The accounting policies of these segments are the same as those described in Note 2. Summary of Significant Accounting Policies in the notes to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 2018
. The Company primarily evaluates segment performance and allocates resources based on operating profit. Expense amounts not associated with segments are referred to as unallocated expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Net Sales
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Advanced Materials & Structures
|
$
|
126.7
|
|
|
46.9
|
%
|
|
$
|
124.0
|
|
|
45.9
|
%
|
|
$
|
247.2
|
|
|
46.8
|
%
|
|
$
|
239.3
|
|
|
45.0
|
%
|
|
Engineered Papers
|
143.2
|
|
|
53.1
|
|
|
146.4
|
|
|
54.1
|
|
|
280.7
|
|
|
53.2
|
|
|
293.0
|
|
|
55.0
|
|
|
Total Consolidated
|
$
|
269.9
|
|
|
100.0
|
%
|
|
$
|
270.4
|
|
|
100.0
|
%
|
|
$
|
527.9
|
|
|
100.0
|
%
|
|
$
|
532.3
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Operating Profit
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Advanced Materials & Structures
|
$
|
20.4
|
|
|
46.2
|
%
|
|
$
|
17.0
|
|
|
40.4
|
%
|
|
$
|
35.3
|
|
|
47.3
|
%
|
|
$
|
27.6
|
|
|
35.8
|
%
|
|
Engineered Papers
|
32.5
|
|
|
73.5
|
|
|
33.3
|
|
|
79.1
|
|
|
61.2
|
|
|
82.1
|
|
|
67.2
|
|
|
87.2
|
|
|
Unallocated
|
(8.7
|
)
|
|
(19.7
|
)
|
|
(8.2
|
)
|
|
(19.5
|
)
|
|
(21.9
|
)
|
|
(29.4
|
)
|
|
(17.7
|
)
|
|
(23.0
|
)
|
|
Total Consolidated
|
$
|
44.2
|
|
|
100.0
|
%
|
|
$
|
42.1
|
|
|
100.0
|
%
|
|
$
|
74.6
|
|
|
100.0
|
%
|
|
$
|
77.1
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Segment Assets
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
Advanced Materials & Structures
|
$
|
814.9
|
|
|
$
|
796.1
|
|
|
Engineered Papers
|
518.6
|
|
|
527.4
|
|
|
Unallocated
|
155.9
|
|
|
143.0
|
|
|
Total Consolidated
|
$
|
1,489.4
|
|
|
$
|
1,466.5
|
|