Quarterly Report (10-q)

Date : 08/07/2019 @ 9:48PM
Source : Edgar (US Regulatory)
Stock : Schweitzer Mauduit International Inc (SWM)
Quote : 36.67  0.0 (0.00%) @ 12:00PM
Schweitzer Mauduit share price Chart

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q  
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended
June 30, 2019
 
   OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the transition period from __________________to __________________
 
1-13948
(Commission file number)
 
SCHWEITZER-MAUDUIT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter) 

Delaware
 
62-1612879
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
100 North Point Center East,
Suite 600
 
 
Alpharetta,
Georgia
 
30022
(Address of principal executive offices)
 
(Zip Code)
 
1- 800 - 514-0186
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common stock, $0.10 par value
SWM
New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes          No  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer," “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

The Company had 30,896,086 shares of common stock issued and outstanding as of August 7, 2019 .





SCHWEITZER-MAUDUIT INTERNATIONAL, INC.

TABLE OF CONTENTS
 
 
 
Page
 
 
Part I. - Financial Information
 
Item 1.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
Part II. - Other Information
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Net sales
$
269.9

 
$
270.4

 
$
527.9

 
$
532.3

Cost of products sold
190.9

 
193.0

 
381.0

 
382.9

Gross profit
79.0

 
77.4

 
146.9

 
149.4

 
 
 
 
 
 
 
 
Selling expense
8.6

 
9.2

 
17.2

 
18.3

Research expense
3.7

 
4.1

 
7.0

 
8.2

General expense
22.1

 
21.4

 
47.7

 
44.8

Total nonmanufacturing expenses
34.4

 
34.7

 
71.9

 
71.3

 
 
 
 
 
 
 
 
Restructuring and impairment expense
0.4

 
0.6

 
0.4

 
1.0

Operating profit
44.2

 
42.1

 
74.6

 
77.1

Interest expense
15.1

 
6.6

 
22.9

 
12.8

Other (expense), net
(2.7
)
 
(0.5
)
 
(3.3
)
 
(0.8
)
Income from continuing operations before income taxes and income from equity affiliates
26.4

 
35.0

 
48.4

 
63.5

 
 
 
 
 
 
 
 
Provision for income taxes
5.2

 
8.7

 
9.6

 
16.0

(Loss) from equity affiliates, net of
  income taxes
(0.7
)
 
(0.5
)
 
(0.9
)
 
(0.8
)
Income from continuing operations
20.5

 
25.8

 
37.9

 
46.7

(Loss) from discontinued operations

 

 

 
(0.4
)
Net income
$
20.5

 
$
25.8

 
$
37.9

 
$
46.3

 
 
 
 
 
 
 
 
Net income per share - basic:
 

 
 

 
 
 
 
Income per share from continuing operations
$
0.66

 
$
0.84

 
$
1.23

 
$
1.52

(Loss) per share from discontinued
  operations

 

 

 
(0.01
)
Net income per share – basic
$
0.66

 
$
0.84

 
$
1.23

 
$
1.51

 
 
 
 
 
 
 
 
Net income per share – diluted:
 

 
 

 
 

 
 

Income per share from continuing operations
$
0.66

 
$
0.83

 
$
1.22

 
$
1.51

(Loss) per share from discontinued
  operations

 

 

 
(0.01
)
Net income per share – diluted
$
0.66

 
$
0.83

 
$
1.22

 
$
1.50

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Basic
30,661,400

 
30,565,800

 
30,641,100

 
30,527,400

 
 
 
 
 
 
 
 
Diluted
30,809,300

 
30,705,900

 
30,791,000

 
30,663,000

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1


SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in millions)
(Unaudited) 

 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Net income
$
20.5

 
$
25.8

 
$
37.9

 
$
46.3

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
2.2

 
(30.6
)
 
3.1

 
(22.0
)
Less: Reclassification adjustment for realized translation adjustments
(0.2
)
 
(0.2
)
 
(0.4
)
 
(0.4
)
 
 
 
 
 
 
 
 
Unrealized gains (losses) on derivative instruments
0.9

 
(2.2
)
 
1.3

 
0.3

Less: Reclassification adjustment for gains on derivative instruments included in net income
(1.8
)
 
(0.8
)
 
(2.7
)
 
(1.6
)
 
 
 
 
 
 
 
 
Reclassification adjustment for amortization of postretirement benefit plans' costs included in net periodic benefit cost
1.0

 
0.8

 
1.5

 
1.5

Other comprehensive income (loss)
2.1

 
(33.0
)
 
2.8

 
(22.2
)
Comprehensive income (loss)
$
22.6

 
$
(7.2
)
 
$
40.7

 
$
24.1

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


2


SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share amounts)
(Unaudited)
 
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
87.8

 
$
93.8

Accounts receivable, net
166.6

 
154.6

Inventories
154.2

 
151.5

Income taxes receivable
14.2

 
12.2

Assets held for sale
12.0

 
12.0

Other current assets
6.9

 
5.1

Total current assets
441.7

 
429.2

 
 
 
 
Property, plant and equipment, net
333.4

 
340.3

Deferred income tax benefits
0.4

 
0.3

Investment in equity affiliates
51.0

 
51.9

Goodwill
338.0

 
338.1

Intangible assets
262.3

 
272.8

Other assets
62.6

 
33.9

Total assets
$
1,489.4

 
$
1,466.5

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 

 
 

Current debt
$
1.9

 
$
3.3

Accounts payable
60.9

 
65.7

Income taxes payable
1.4

 
1.6

Accrued expenses
77.9

 
72.9

Total current liabilities
142.1

 
143.5

 
 
 
 
Long-term debt
604.7

 
618.8

Long-term income tax payable
25.6

 
27.0

Pension and other postretirement benefits
28.6

 
28.2

Deferred income tax liabilities
47.0

 
48.0

Other liabilities
68.8

 
43.1

Total liabilities
916.8

 
908.6

Stockholders’ equity:
 

 
 

Preferred stock, $0.10 par value; 10,000,000 shares authorized; none issued or outstanding

 

Common stock, $0.10 par value; 100,000,000 shares authorized; 30,894,598 and 30,771,244 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
3.1

 
3.1

Additional paid-in-capital
73.6

 
71.1

Retained earnings
617.6

 
608.2

Accumulated other comprehensive loss, net of tax
(121.7
)
 
(124.5
)
Total stockholders’ equity
572.6

 
557.9

Total liabilities and stockholders’ equity
$
1,489.4

 
$
1,466.5

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3




SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(dollars in millions, except per share amounts)
(Unaudited)

 
Common Stock Issued
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Balance, March 31, 2018
30,767,897

 
$
3.1

 
$
67.8

 
$
569.8

 
$
(78.6
)
 
$
562.1

Net income

 

 

 
25.8

 

 
25.8

Other comprehensive (loss), net of tax

 

 

 

 
(33.0
)
 
(33.0
)
Dividends declared ($0.43 per share)

 

 

 
(13.2
)
 

 
(13.2
)
Restricted stock forfeitures, net
(9,674
)
 

 

 

 

 

Stock-based employee compensation expense

 

 
1.0

 

 

 
1.0

Stock issued to directors as compensation
1,239

 

 

 

 

 

Purchases and retirement of common stock
(4,703
)
 

 

 
(0.2
)
 

 
(0.2
)
Balance, June 30, 2018
30,754,759

 
$
3.1

 
$
68.8

 
$
582.2

 
$
(111.6
)
 
$
542.5

 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019
30,889,589

 
$
3.1

 
$
72.0

 
$
610.8

 
$
(123.8
)
 
$
562.1

Net income

 

 

 
20.5

 

 
20.5

Other comprehensive (loss), net of tax

 

 

 

 
2.1

 
2.1

Dividends declared ($0.44 per share)

 

 

 
(13.6
)
 

 
(13.6
)
Restricted stock issuances, net
5,084

 

 

 

 

 

Stock-based employee compensation expense

 

 
1.5

 

 

 
1.5

Stock issued to directors as compensation
698

 

 
0.1

 

 

 
0.1

Purchases and retirement of common stock
(773
)
 

 

 
(0.1
)
 

 
(0.1
)
Balance, June 30, 2019
30,894,598

 
$
3.1

 
$
73.6

 
$
617.6

 
$
(121.7
)
 
$
572.6

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4




 
Common Stock Issued
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Balance, December 31, 2017
30,711,299

 
$
3.1

 
$
66.3

 
$
566.7

 
$
(89.4
)
 
$
546.7

Cumulative effects of changes in accounting standards

 

 

 
(1.7
)
 

 
(1.7
)
Net income

 

 

 
46.3

 

 
46.3

Other comprehensive (loss), net of tax

 

 

 

 
(22.2
)
 
(22.2
)
Dividends declared ($0.86 per share)

 

 

 
(26.4
)
 

 
(26.4
)
Restricted stock issuances, net
108,154

 

 

 

 

 

Stock-based employee compensation expense

 

 
2.4

 

 

 
2.4

Stock issued to directors as compensation
2,643

 

 
0.1

 

 

 
0.1

Purchases and retirement of common stock
(67,337
)
 

 

 
(2.7
)
 

 
(2.7
)
Balance, June 30, 2018
30,754,759

 
$
3.1

 
$
68.8

 
$
582.2

 
$
(111.6
)
 
$
542.5

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
30,771,244

 
$
3.1

 
$
71.1

 
$
608.2

 
$
(124.5
)
 
$
557.9

Cumulative effects of changes in accounting standards

 

 

 
(0.3
)
 

 
(0.3
)
Net income

 

 

 
37.9

 

 
37.9

Other comprehensive (loss), net of tax

 

 

 

 
2.8

 
2.8

Dividends declared ($0.88 per share)

 

 

 
(27.2
)
 

 
(27.2
)
Restricted stock issuances, net
146,105

 

 

 

 

 

Stock-based employee compensation expense

 

 
2.4

 

 

 
2.4

Stock issued to directors as compensation
2,394

 

 
0.1

 

 

 
0.1

Purchases and retirement of common stock
(25,145
)
 

 

 
(1.0
)
 

 
(1.0
)
Balance, June 30, 2019
30,894,598

 
$
3.1

 
$
73.6

 
$
617.6

 
$
(121.7
)
 
$
572.6

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.




5





SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in millions)
(Unaudited) 


 
Six Months Ended
 
June 30,
2019
 
June 30,
2018
Operating
 
 
 
Net income
$
37.9

 
$
46.3

Less: Loss from discontinued operations

 
(0.4
)
Income from continuing operations
37.9

 
46.7

Non-cash items included in net income:
 
 
 
Depreciation and amortization
28.9

 
31.0

Restructuring-related impairment

 
0.2

Deferred income tax
(0.7
)
 
2.3

Pension and other postretirement benefits
1.3

 
2.0

Stock-based compensation
2.5

 
2.5

Loss from equity affiliates
0.9

 
0.8

Brazil tax assessment accruals, net (Note 13)
10.9

 

Other items
0.9

 
1.1

Changes in operating working capital, net of assets acquired:
 
 
 
Accounts receivable
(12.2
)
 
(19.1
)
Inventories
(2.6
)
 
(5.4
)
Prepaid expenses
(1.9
)
 
(2.1
)
Accounts payable
(2.2
)
 
4.5

Accrued expenses
(4.9
)
 
(7.3
)
Accrued income taxes
(3.8
)
 
(1.3
)
Net changes in operating working capital
(27.6
)
 
(30.7
)
Net cash provided by operating activities of:
 
 
 
- Continuing operations
55.0

 
55.9

- Discontinued operations

 
0.2

Net cash provided by operations
55.0

 
56.1

Investing
 
 
 
Capital spending
(15.2
)
 
(13.7
)
Capitalized software costs
(2.8
)
 
(0.6
)
Other investing
0.8

 
(0.7
)
Net cash used in investing
(17.2
)
 
(15.0
)

6





SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(dollars in millions)
(Unaudited) 


 
Six Months Ended
 
June 30,
2019
 
June 30,
2018
Financing
 
 
 
Cash dividends paid to SWM stockholders
(27.2
)
 
(26.4
)
Changes in short-term debt
(0.1
)
 
(1.5
)
Proceeds from issuances of long-term debt
0.1

 
0.8

Payments on long-term debt
(15.3
)
 
(41.5
)
Purchases of common stock
(1.0
)
 
(2.7
)
Net cash used in financing
(43.5
)
 
(71.3
)
Effect of exchange rate changes on cash and cash equivalents
(0.3
)
 
(2.8
)
Decrease in cash and cash equivalents
(6.0
)
 
(33.0
)
Cash and cash equivalents at beginning of period
93.8

 
106.9

Cash and cash equivalents at end of period
$
87.8

 
$
73.9

 
 
 
 
Supplemental Cash Flow Disclosures
 
 
 
Cash paid for interest, net
$
15.5

 
$
13.5

Cash paid for taxes, net
$
13.6

 
$
14.5

Change in capital spending in accounts payable and accrued liabilities
$
3.7

 
$
1.8

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1. General

Nature of Business
 
Schweitzer-Mauduit International, Inc., or "SWM," "we," 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 and Engineered Papers.

The Advanced Materials & Structures segment, or "AMS," produces mostly resin-based rolled goods such as nets, films and meltblown materials, typically through an extrusion process or other non-woven technologies. These products are used in a variety of specialty applications across the filtration, construction and infrastructure, transportation, industrial and medical end-markets.

The Engineered Papers segment, or "EP," primarily serves the tobacco industry with production of various cigarette papers and reconstituted tobacco products, or "Recon". Traditional reconstituted tobacco leaf, or "RTL," is used as a blend with virgin tobacco in cigarettes and used as wrappers and binders for cigars. Recon, as well as low ignition propensity, or "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 both premium applications, such as energy storage and industrial commodity paper grades.

We conduct business in over 90 countries and operate 22 production locations worldwide, with locations in the U.S., Canada, United Kingdom, France, Luxembourg, Belgium, Russia, Brazil, China and Poland. We also have a 50% equity interest in two joint ventures in China. The first, China Tobacco Mauduit (Jiangmen) Paper Industry Ltd., or CTM, produces cigarette and porous plug wrap papers and the second, China Tobacco Schweitzer (Yunnan) Reconstituted Tobacco Co. Ltd., or CTS, produces RTL.

Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements and the notes thereto have been prepared in accordance with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission, or "SEC," and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America, or U.S. GAAP. However, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods including the results of a business reclassified as a discontinued operation which is more fully described in Note 5 . Discontinued Operations.
 
The results of operations for the three or six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year. The unaudited condensed consolidated financial statements and these notes thereto included herein should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 , as filed with the SEC on March 1, 2019.
 
Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned, majority-owned and controlled subsidiaries. The Company’s share of the net income of its 50% -owned joint ventures in China is included in the condensed consolidated statements of income as Income from equity affiliates, net of income taxes. Intercompany balances and transactions have been eliminated.


8

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the condensed consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, inventory valuation, useful lives of tangible and intangible assets, fair values, sales returns and rebates, receivables valuation, pension, postretirement and other benefits, restructuring and impairment, taxes and contingencies. Actual results could differ materially from those estimates.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842): Amendments to the FASB Accounting Standards Codification." The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance was effective for annual reporting periods beginning after December 15, 2018, and interim periods thereafter. In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842) - Targeted Improvements," providing companies with the option to adopt the provisions of the standard prospectively without adjusting comparative periods; the Company has elected this option for transition and adopted the standard on January 1, 2019. The Company adopted the transition package of practical expedients permitted within the new standard, which among other things, allows the Company to carryforward historical lease classifications. In addition, the Company elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company made an accounting policy election that will keep leases with an initial term of 12 months or less off of the balance sheet and will result in recognition of those lease payments in the Consolidated Statements of Income on a straight-line basis over the lease term. The impact of the adoption of this standard to the consolidated balance sheets resulted in approximately $25 million in right-of-use assets and corresponding lease obligation liabilities of approximately $27 million as of January 1, 2019. Adoption resulted in an immaterial cumulative-effect adjustment to the opening balance of retained earnings and did not materially impact the consolidated statements of income. Additionally, the adoption of the new lease standard did not have an impact on the Company's debt covenant compliance under its current debt and indenture agreements.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendment eliminates the second step of the analysis that required the measurement of a goodwill impairment by comparing the implied value of a reporting unit’s goodwill and the goodwill’s carrying amount. This guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the pronouncement and does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurements." The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company is currently in the process of evaluating the impact of the pronouncement and does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans." The new standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. The new standard requires the amendments to be applied on a retrospective basis for all

9

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


periods presented. The Company is currently in the process of evaluating the impact of the pronouncement and does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The new standard provides updated guidance surrounding implementation costs associated with cloud computing arrangements that are service contracts. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. The Company elected to early adopt this guidance as of January 1, 2019. The adoption of this guidance did not materially impact the consolidated financial statements or materially affect our financial position.

Note 2 . 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. 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. 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.

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 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. 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.


10

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Following is the Company’s net sales disaggregated by revenue source ($ in millions). Sales and usage-based taxes are excluded from net sales.
 
Three Months Ended
 
June 30, 2019
 
June 30, 2018
 
AMS
 
EP
 
Total
 
AMS
 
EP
 
Total
Product revenues
$
122.7

 
$
128.3

 
$
251.0

 
$
120.6

 
$
133.6

 
$
254.2

Materials conversion revenues
2.0

 
13.8

 
15.8

 
2.2

 
11.5

 
13.7

Other revenues
2.0

 
1.1

 
3.1

 
1.2

 
1.3

 
2.5

Total revenues (1)
$
126.7

 
$
143.2

 
$
269.9

 
$
124.0

 
$
146.4

 
$
270.4

(1) Revenues include net hedging gains and losses for the three months ended June 30, 2019 and 2018 .

 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
AMS
 
EP
 
Total
 
AMS
 
EP
 
Total
Product revenues
$
240.2

 
$
249.5

 
$
489.7

 
$
229.0

 
$
254.4

 
$
483.4

Materials conversion revenues
3.9

 
28.7

 
32.6

 
8.4

 
36.2

 
44.6

Other revenues
3.1

 
2.5

 
5.6

 
1.9

 
2.4

 
4.3

Total revenues (1)
$
247.2

 
$
280.7

 
$
527.9

 
$
239.3

 
$
293.0

 
$
532.3

(1) Revenues include net hedging gains and losses for the six months ended June 30, 2019 and 2018 .

Net sales are attributed to the following geographic locations based on the location of the Company’s direct customers ($ in millions):
 
Three Months Ended
 
June 30, 2019
 
June 30, 2018
 
AMS
 
EP
 
Total
 
AMS
 
EP
 
Total
United States
$
87.4

 
$
50.9

 
$
138.3

 
$
84.8

 
$
50.0

 
$
134.8

Europe and the former Commonwealth of Independent States
13.4

 
41.0

 
54.4

 
10.7

 
60.0

 
70.7

Asia/Pacific (including China)
20.5

 
27.5

 
48.0

 
22.0

 
17.9

 
39.9

Latin America
1.5

 
12.3

 
13.8

 
2.5

 
10.5

 
13.0

Other foreign countries
3.9

 
11.5

 
15.4

 
4.0

 
8.0

 
12.0

Total revenues (1)
$
126.7

 
$
143.2

 
$
269.9

 
$
124.0

 
$
146.4

 
$
270.4


(1) Revenues include net hedging gains and losses for the three months ended June 30, 2019 and 2018 .

 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
AMS
 
EP
 
Total
 
AMS
 
EP
 
Total
United States
$
170.7

 
$
98.3

 
$
269.0

 
$
162.9

 
$
99.7

 
$
262.6

Europe and the former Commonwealth of Independent States
26.6

 
86.1

 
112.7

 
26.5

 
117.6

 
144.1

Asia/Pacific (including China)
37.7

 
47.9

 
85.6

 
36.6

 
39.2

 
75.8

Latin America
3.5

 
23.4

 
26.9

 
5.7

 
22.0

 
27.7

Other foreign countries
8.7

 
25.0

 
33.7

 
7.6

 
14.5

 
22.1

Total revenues (1)
$
247.2

 
$
280.7

 
$
527.9

 
$
239.3

 
$
293.0

 
$
532.3


(1) Revenues include net hedging gains and losses for the six months ended June 30, 2019 and 2018 .

11

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 3 . Other Comprehensive Income

Comprehensive income includes net income, as well as certain items charged and credited directly to stockholders' equity, which are excluded from net income. The Company has presented comprehensive income in the condensed consolidated statements of comprehensive income (loss). Reclassification adjustments of derivative instruments are presented in Net sales, Other (expense) income, net, or Interest expense in the condensed consolidated statements of income. See Note 12 . Derivatives for additional information. Amortization of accumulated pension and other post-employment benefit, or OPEB, liabilities are included in the computation of net periodic pension and OPEB costs, which are more fully discussed in Note 14 . Postretirement and Other Benefits.

Components of Accumulated other comprehensive loss, net of tax, were as follows ($ in millions):
 
June 30, 2019
 
December 31, 2018
Accumulated pension and OPEB liability adjustments, net of income tax benefit of $12.7 million and $11.4 million at June 30, 2019 and December 31, 2018, respectively
$
(26.7
)
 
$
(28.2
)
Accumulated unrealized loss on derivative instruments, net of income tax benefit of $1.7 million and $1.6 million at June 30, 2019 and December 31, 2018, respectively
(2.0
)
 
(0.6
)
Accumulated unrealized foreign currency translation adjustments, net of income tax benefit of $4.1 million and $1.7 million at June 30, 2019 and December 31, 2018, respectively
(93.0
)
 
(95.7
)
Accumulated other comprehensive loss
$
(121.7
)
 
$
(124.5
)


Changes in the components of Accumulated other comprehensive loss were as follows ($ in millions):
 
Three Months Ended
 
June 30, 2019
 
June 30, 2018
 
Pre-tax
 
Tax
 
Net of
Tax
 
Pre-tax
 
Tax
 
Net of
Tax
Net gain (loss) on pension and OPEB liability adjustments
$
0.8

 
$
0.2

 
$
1.0

 
$
1.1

 
$
(0.3
)
 
$
0.8

Unrealized (loss) gain on derivative instruments
(1.0
)
 
0.1

 
(0.9
)
 
(4.4
)
 
1.4

 
(3.0
)
Unrealized gain (loss) on foreign currency translation
1.9

 
0.1

 
2.0

 
(30.0
)
 
(0.8
)
 
(30.8
)
Total
$
1.7

 
$
0.4

 
$
2.1

 
$
(33.3
)
 
$
0.3

 
$
(33.0
)


 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
Pre-tax
 
Tax
 
Net of
Tax
 
Pre-tax
 
Tax
 
Net of
Tax
Unrealized gain (loss) on pension and OPEB liability adjustments
$
0.2

 
$
1.3

 
$
1.5

 
$
2.2

 
$
(0.7
)
 
$
1.5

Unrealized (loss) gain on derivative instruments
(1.5
)
 
0.1

 
(1.4
)
 
(2.6
)
 
1.3

 
(1.3
)
Unrealized gain (loss) on foreign currency translation
0.3

 
2.4

 
2.7

 
(20.5
)
 
(1.9
)
 
(22.4
)
Total
$
(1.0
)
 
$
3.8

 
$
2.8

 
$
(20.9
)
 
$
(1.3
)
 
$
(22.2
)



12

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 4 . Leases

The Company adopted the guidance contained in ASC 842, Leases, on January 1, 2019 using the modified retrospective approach permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this method, the Company applied the new leases standard at the adoption date and recognized a cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2019. The comparative period presented in the condensed consolidated financial statements for 2018 continue to be presented in accordance with previous GAAP as codified in ASC Topic 840, Leases.

The Company leases certain office space, warehouses, manufacturing facilities, land, and equipment. The Company elected the practical expedient which allows that leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For leases without lease terms (i.e. month-to-month leases), lease expense is recognized as incurred and no asset or liability is recorded for these leases.

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
June 30, 2019
Operating lease right-of-use assets
Other assets
$
23.4

Finance lease right-of-use assets
Property, plant and equipment, net
3.1

 
 
 
Liabilities
Classification
June 30, 2019
Current operating lease obligation
Accrued expenses
$
4.9

Long-term operating lease obligation
Other liabilities
19.7

Total operating lease obligation
 
$
24.6

 
 
 
Current finance lease obligation
Current debt
$
0.4

Long-term finance lease obligation
Long-term debt
3.1

Total finance lease obligation
 
$
3.5


 
June 30, 2019
Assets
Finance
 
Operating
 
Total
Land and improvements
$

 
$
0.1

 
$
0.1

Buildings and improvements
3.0

 
21.9

 
24.9

Machinery and equipment
0.6

 
4.7

 
5.3

Gross property, plant and equipment
3.6

 
26.7

 
30.3

Less: Accumulated depreciation
(0.5
)
 
(3.3
)
 
(3.8
)
Right-of-use assets
$
3.1

 
$
23.4

 
$
26.5



13

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Components of lease expense incurred by the Company are as follow ($ in millions):

Lease Cost
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Finance lease cost (cost resulting from lease payments)
 
 
 
Interest expense on lease liabilities
$
0.1

 
$
0.1

Amortization of right-of-use assets
0.1

 
0.2

Operating lease cost
1.6

 
3.1

Short-term lease expense
0.1

 
0.2

Total Lease Cost
$
1.9

 
$
3.6



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
Remainder of 2019
$
0.3

 
$
3.2

 
$
3.5

2020
0.6

 
5.9

 
6.5

2021
0.5

 
5.2

 
5.7

2022
0.6

 
4.0

 
4.6

2023
0.5

 
2.8

 
3.3

2024
0.5

 
2.3

 
2.8

Thereafter
1.4

 
7.0

 
8.4

Total Lease Payments
$
4.4

 
$
30.4

 
$
34.8

Less: Interest
0.9

 
5.8

 
6.7

Present Value of Lease Liabilities
$
3.5

 
$
24.6

 
$
28.1




Lease Term and Discount Rate
June 30, 2019
Weighted-average remaining lease term (years)
 
Operating leases
7.0

Finance leases
7.9

Weighted-average discount rate
 
Operating leases
6.49
%
Finance leases
5.28
%







14

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Other Information (millions)
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
3.1

Operating cash flows from finance leases
0.2

Leased assets obtained in exchange for new finance lease liabilities
0.5

Leased assets obtained in exchange for new operating lease liabilities
3.2



Future minimum obligations under non-cancelable operating leases having an initial or remaining term in excess of one year as of December 31, 2018 were as follows ($ in millions):
2019
$
5.8

2020
5.0

2021
4.4

2022
3.6

2023
3.0

Thereafter
8.1

Total
$
29.9




15

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 5 . Discontinued Operations
 
The Company's former paper mill in San Pedro, Philippines has been reported as a discontinued operation since 2013. This operation was previously presented as a component of the EP segment. The physical assets at the Philippines paper mill were sold during the fourth quarter of 2013. For all periods presented, results of this operation have been removed from each individual line within the statements of income and the operating activities section of the statements of cash flow. In each case, a separate line has been added for the net results of discontinued operations.

Included in Other current assets, Other assets and Accrued expenses within the condensed consolidated balance sheet are the following major classes of assets and liabilities, respectively, associated with the discontinued operations ($ in millions):
 
June 30, 2019
 
December 31, 2018
Assets of discontinued operations:
 
 
 
Current assets
$
0.8

 
$
0.8

Other assets
1.3

 
1.2

 
 
 
 
Liabilities of discontinued operations:
 
 
 

Current liabilities

 
0.1


Summary financial results of discontinued operations were as follows ($ in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Net sales
$

 
$

 
$

 
$

Other income (expense)

 

 

 
(0.4
)
Loss from discontinued operations before income taxes

 

 

 
(0.4
)
Income tax (provision) benefit

 

 

 

Loss from discontinued operations

 

 

 
(0.4
)



16

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 6 . Net Income Per Share

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.

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 stock-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):
 
Three Months Ended

Six Months Ended
 
June 30,
2019

June 30,
2018

June 30,
2019

June 30,
2018
Numerator (basic and diluted):
 
 
 

 
 
 
 
Net income
$
20.5

 
$
25.8

 
$
37.9

 
$
46.3

Less: Dividends paid to participating securities
(0.1
)
 

 
(0.2
)
 
(0.1
)
Less: Undistributed earnings available to participating securities
(0.1
)
 
(0.2
)
 
(0.1
)
 
(0.2
)
Undistributed and distributed earnings available to common stockholders
$
20.3

 
$
25.6

 
$
37.6

 
$
46.0

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 
 
 
Average number of common shares outstanding
30,661.4

 
30,565.8

 
30,641.1

 
30,527.4

Effect of dilutive stock-based compensation
147.9

 
140.1

 
149.9

 
135.6

Average number of common and potential common shares outstanding
30,809.3

 
30,705.9

 
30,791.0

 
30,663.0



Note 7. Inventories
 
Inventories are valued at the lower of cost (using the First-In, First-Out and weighted average methods) or net realizable value. The Company's costs included in inventory primarily include resins, pulp, chemicals, direct labor, utilities, maintenance, depreciation, finishing supplies and an allocation of certain overhead costs. Machine start-up costs or abnormal machine shut downs are expensed in the period incurred and are not reflected in inventory. The 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. The following schedule details inventories by major class ($ in millions):
 
June 30,
2019
 
December 31,
2018
Raw materials
$
53.2

 
$
50.2

Work in process
27.3

 
22.4

Finished goods
64.5

 
69.9

Supplies and other
9.2

 
9.0

Total
$
154.2

 
$
151.5


 

17

SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 8 . Goodwill

The changes in the carrying amount of goodwill by segment for the six months ended June 30, 2019 were as follows ($ in millions):
 
Advanced Materials & Structures
 
Engineered Papers
 
Total
Goodwill as of December 31, 2018
$
333.1

 
$
5.0

 
$
338.1

Foreign currency translation adjustments
(0.1
)
 

 
(0.1
)
Goodwill as of June 30, 2019
$
333.0

 
$
5.0

 
$
338.0



Note 9. Intangible Assets

The gross carrying amount and accumulated amortization for intangible assets consisted of the following ($ in millions):
 
June 30, 2019
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Accumulated Impairments
 
Accumulated Foreign Exchange
 
Net
Carrying
Amount
Amortized Intangible Assets (Advanced Materials & Structures)
Customer relationships
$
276.3

 
$
59.1

 
$

 
$
0.9

 
$
216.3

Developed technology
34.0

 
9.7

 

 
0.3

 
24.0

Trade names
21.8

 
0.8

 
20.7

 
0.3

 

Non-compete agreements
2.9

 
2.0

 

 

 
0.9

Patents
1.5

 
0.4

 

 

 
1.1

Total
$
336.5

 
$
72.0

 
$
20.7

 
$
1.5

 
$
242.3

 
 
 
 
 
 
 
 
 
 
Unamortized Intangible Assets (Advanced Materials & Structures)
Trade names
$
20.0