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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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☒
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ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended
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December 31, 2019
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OR
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☐
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the
transition period from __________________ to
__________________
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1-13948
(Commission file
number)
SCHWEITZER-MAUDUIT
INTERNATIONAL, INC.
(Exact name of
registrant as specified in its charter)
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Delaware
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62-1612879
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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100
North Point Center East,
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Suite
600
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30022
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Alpharetta,
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Georgia
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(Address of principal
executive offices)
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(Zip Code)
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1-800-514-0186
(Registrant's
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each
class
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Trading
Symbol
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Name of each
exchange on which registered
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Common stock, $0.10 par
value
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SWM
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New York Stock
Exchange
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Securities Registered Pursuant
to Section 12(g) of the Act: None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes x No o
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
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 x No o
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 x No
o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a 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. (Check one):
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Large accelerated
filer
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x
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Accelerated filer
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o
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Non-accelerated
filer
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o
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Smaller reporting
company
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☐
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Emerging growth
company
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☐
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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. o
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ☐
No x
The aggregate
market value of the outstanding common stock, par value $0.10 per
share (the "Common Stock"), of the registrant held by
non-affiliates as of June 30, 2019
(the last business
day of the registrant's most recently completed second fiscal
quarter) was $1.0
billion, based on the last sale price
for the Common Stock of $43.72 per share as reported on the New
York Stock Exchange on said date. For purposes of the foregoing
sentence only, all directors and executive officers are assumed to
be affiliates.
There were
31,191,520
shares of Common
Stock issued and outstanding as of March 2,
2020.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the
registrant's definitive Proxy Statement relating to its 2020 Annual
Meeting of Stockholders scheduled to be held on April 23, 2020 (the
"2020 Proxy Statement") and filed pursuant to Regulation 14A are
incorporated by reference into Part III of this Annual Report on
Form 10-K.
SCHWEITZER-MAUDUIT
INTERNATIONAL, INC.
TABLE OF
CONTENTS
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Page
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Part
I.
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Item 1.
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Business
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Item 1A.
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Risk Factors
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Item 1B.
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Unresolved Staff
Comments
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Item 2.
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Properties
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Item 3.
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Legal
Proceedings
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Item 4.
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Mine Safety
Disclosures
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Part
II.
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Item 5.
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Market for Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
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Item 6.
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Selected Financial
Data
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Item 7.
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Management's Discussion and
Analysis of Financial Condition and Results of
Operations
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Item 7A.
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Quantitative and Qualitative
Disclosures about Market Risk
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Item 8.
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Financial Statements and
Supplementary Data
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Item 9.
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Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure
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Item 9A.
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Controls and
Procedures
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Item 9B.
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Other
Information
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Part
III.
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Item 10.
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Directors, Executive Officers
and Corporate Governance
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Item 11.
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Executive
Compensation
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Item 12.
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Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
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Item 13.
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Certain Relationships and
Related Transactions and Director Independence
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Item 14.
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Principal Accountant Fees and
Services
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Part
IV.
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Item 15.
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Exhibits and Financial
Statement Schedules
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Signatures
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Glossary of
Terms
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PART
I.
Item
1.
Business
Disclosure
Regarding Forward-Looking Statements
This Annual
Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results, performance or achievements could differ materially
from those projected in the forward-looking statements as a result
of a number of risks, uncertainties, and other factors. For a
discussion of important factors that could cause our results,
performance, or achievements to differ materially from any future
results, performance, or achievements expressed or implied by our
forward-looking statements, please refer to Part I, Item 1A “Risk
Factors” and Part I, Item 7 “Management’s Discussion and Analysis
of Financial Condition and Results of Operations”
below.
GENERAL
Background
Schweitzer-Mauduit
International, Inc. (referred to, with its consolidated
subsidiaries, as "we," "us," "our," the "Company," "SWM INTL" or
"SWM" unless the context indicates otherwise) is a multinational
producer of performance materials, including papers, nets and films
headquartered in the United States of America (the "U.S."). The
Company operates under two reportable segments: Advanced Materials
& Structures ("AMS"), which manufactures resin-based products
used in specialty applications in the filtration, transportation,
infrastructure and construction, medical and industrial
end-markets, and Engineered Papers ("EP"), which produces cigarette
papers and reconstituted tobacco products for cigarette and cigar
manufacturers, as well as various other non-tobacco paper
products.
The Company was
incorporated in Delaware in 1995 as a wholly-owned subsidiary of
Kimberly-Clark Corporation ("Kimberly-Clark"). On November 30,
1995, Kimberly-Clark transferred its tobacco-related paper and
other paper products businesses conducted in the U.S., France and
Canada to the Company and distributed all of the outstanding shares
of common stock of the Company to its stockholders (the
"spin-off"). As a result, the Company became an independent public
company. We conduct business in over 90 countries and operate 22
production locations worldwide, with facilities in the U.S., United
Kingdom, Canada, France, Luxembourg, Russia, Brazil, China, Belgium
and Poland.
Our principal
executive office is located at 100 North Point Center East, Suite
600, Alpharetta, Georgia 30022-8246 and our telephone number is
(800) 514-0186. Our stock is traded on the New York Stock Exchange
("NYSE") under the symbol "SWM."
Strategic
Transformation - Overview
Through 2013, the
Company operated as a tobacco-centric paper operation. In late
2012, SWM's management and Board of Directors elected to pursue a
strategic transformation by increasing profit streams outside the
tobacco industry through business acquisitions, while carefully
managing the profitable but mature tobacco operations. Over time,
this strategy was intended to counterbalance the expected long-term
pressures of the tobacco industry and transform SWM into a more
diversified and growth-oriented enterprise while maintaining its
company-wide focus on several underlying themes: manufacturing and
innovation expertise in performance materials, operational
excellence, and customer intimacy. The Company selectively targeted
acquisition candidates that served diversified and growing
end-markets, generated profitability associated with premium
differentiated products, and had leading and defensible competitive
positions in their core product categories. In addition, management
believed many acquisition targets would have unique synergy
opportunities when combined with the assets and capabilities of
SWM, such as a global infrastructure and a robust operational
excellence program, and ultimately, synergies with other similar
companies acquired by SWM.
Pursuant to this
strategy, management has used free cash flow and liquidity
available through our credit facility to support growth
investments. From 2013 to 2019 the Company acquired three primary
businesses, DelStar, Argotec,
and Conwed, and
also made two “bolt-on” acquisitions. These businesses together now
comprise the AMS segment, which generated nearly $480 million in
net sales in 2019. The combination of AMS with
non-tobacco sales in our paper business, resulted in total
non-tobacco sales representing 53% of the Company’s total revenue
in 2019, up from approximately 6%
prior to these strategic actions. While the AMS segment provides
positive cash flow, the EP segment generates the majority of the
Company's cash flow, supporting SWM’s acquisition strategy and
dividends to shareholders.
Strategic
Transformation - Creating the AMS Growth Platform
In December 2013,
the Company acquired DelStar, Inc. ("DelStar"), a manufacturer of
resin-based nets, films and non-wovens, focused on the filtration,
medical, and industrial end-markets. DelStar established SWM's
presence in new industries and added a portfolio of high-value
technologies. Management also believed DelStar could benefit from
SWM's global footprint, operational excellence program, and ability
to fund growth investments.
In October 2015,
the Company acquired Argotec Intermediate Holdings LLC ("Argotec"),
a manufacturer of urethane films for applications primarily in the
transportation end-market. A key growth driver was increasing
demand for surface protection films used for automotive paint
protection and glass lamination. This business also serves
customers in the medical and industrial end-markets. From a
technology standpoint, Argotec added to SWM's growing resin
extrusion capabilities and added scale to the AMS growth
platform.
In January 2017,
SWM acquired Conwed Plastics LLC (“Conwed”), a producer of
resin-based netting. Conwed’s similarities to the Company’s
existing netting production assets presented a compelling
opportunity to drive synergies through footprint rationalization,
procurement, and organizational realignment. Although operationally
similar to AMS’ existing assets, Conwed added further end-market
diversification, with approximately 75% of Conwed’s sales serving
the infrastructure and construction end-markets. The remaining 25%
of sales were split between filtration and industrial end-markets,
which also complemented the existing AMS business.
On February 18,
2020, the Company announced the signing of a definitive agreement
to acquire Tekra, LLC and Trient Technologies, LLC (“Tekra and
Trient”), converters of high-performance films and substrates,
enhancing the Company’s films capabilities. Tekra and Trient will
be integrated within our AMS segment. Further details can be found
in this filing under Note 26. Subsequent Events, of the Notes to
Consolidated Financial Statements, as well as the acquisition
announcement included as an exhibit in our current report on Form
8-K filed on February 18, 2020.
The acquisitions
described above comprise the AMS segment. The Company believes that
these businesses advance SWM's goal of diversifying its revenue
stream and offer long-term growth opportunities across a broad set
of attractive end-markets.
AVAILABLE
INFORMATION
Our filings with
the Securities and Exchange Commission ("SEC"), which filings
include this Annual Report on Form 10-K, Proxy Statements,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all
related amendments, are available, free of charge, on the SEC's
website at www.sec.gov
and on the
Investor Relations section of our website at www.swmintl.com.
Information from our website is not incorporated by reference into
this Annual Report on Form 10-K. These reports are available soon
after they are filed electronically with, or furnished to, the SEC.
The website allows access to historical financial information,
press releases and quarterly earnings conference calls, our Code of
Conduct, corporate governance guidelines, Board of Directors
committee charters, as well as disclosure of any amendment to or
waivers of our Code of Conduct granted to any of the principal
executive officer, principal financial officer or principal
accounting officer. The website provides additional background
information about us including information on our history, products
and locations. Requests for information, requests to contact our
audit committee chairman, lead non-management director or the
independent directors as a group, or requests to report concerns
about accounting or other issues can be made in writing and sent to
the Investor Relations Department at our principal executive office
address listed above.
Our quarterly
earnings conference calls are typically held the morning after our
quarterly earnings releases and are available through our website
via a webcast. The tentative dates for our quarterly earnings
conference calls related to 2020 financial results are May 7, 2020,
August 6, 2020, November 5, 2020 and February 19, 2021. These dates
are subject to change. Instructions on how to listen to the
webcasts and updated information on times and actual dates are
available through our website at www.swmintl.com.
We have provided
a Glossary of Terms at the end of this Annual Report on Form
10-K.
DESCRIPTION
OF BUSINESS
Segment
Financial Information. We operate and manage two
reportable segments based on our product lines: Advanced Materials
& Structures and Engineered Papers. The Advanced Materials
& Structures segment manufactures resin-based products used in
specialty applications in the filtration, transportation,
infrastructure and construction, medical, and industrial
end-markets. This segment is comprised of the five businesses we
acquired from 2013 to 2017: DelStar, the Pronamic and Smith &
Nephew ("SNN") acquisitions, Argotec and Conwed, which the Company
has integrated into a more holistically aligned operating segment.
Our Engineered Papers segment produces both tobacco-related papers
and non-tobacco-related papers. Our tobacco-related papers, which
comprise a large majority of EP's sales, include various papers
used in cigarette production and reconstituted tobacco ("Recon"), a
reprocessed tobacco material.
Additional
information regarding "Segment Performance" is included in Part II,
Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operation. In addition, selected financial data for
our segments is available in Note 22. Segment Information, of the
Notes to Consolidated Financial Statements and a discussion
regarding the risks associated with foreign operations is available
in Part I, Item 1A, Risk Factors, Market Risk.
Financial
information about foreign and domestic operations, contained under
the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operation" appearing in Part II, Item 7
herein and in Notes 14, 15, 18 and 22 ("Restructuring and
Impairment Activities," "Debt," "Income Taxes" and "Segment
Information," respectively) to the Consolidated Financial
Statements contained in "Financial Statements and Supplementary
Data" in Part II, Item 8 herein, is incorporated by reference in
this Item 1.
Advanced
Materials & Structures
Products. We manufacture and sell a
variety of highly engineered resin-based nets, films, and other
non-wovens. These performance materials are often used in growing
applications serving the filtration, transportation, infrastructure
and construction, medical, and industrial end-markets. Most of our
production technologies are extrusion-based, meaning resin pellets
are heated, softened, and forced through a metal die to form
continuous sheets or strands. We have significant technological
expertise in proprietary die construction, which our competitors
often outsource, and we consider this an advantage in protecting
our technology and competitive position. However, unlike the EP
segment which primarily uses patent protection for key innovation
protection, AMS relies more heavily on trade secrets and
manufacturing "know-how."
Our thermoplastic
nets are used in a variety of applications, the most prominent of
which is their use as spacer netting in reverse osmosis water
filtration (“RO filtration") devices. We have established a strong
presence in this application by customizing products to meet
demanding customer specifications, such as thickness/weight, flow
characteristics, and heat and pressure resistance. Our nets are
also used in a variety of other filtration applications such as
fuel and hydraulic fluid filters, pharmaceutical filters, and food
and beverage filters. Another key netting application is erosion
and sediment control products for the infrastructure and
construction end-markets. Our nets are the outside layers in
erosion control blankets, which are used to prevent erosion on
sloped terrain. We also produce sediment control “socks” that are
used to set perimeters around various development sites to contain
sediment and prevent contamination of water sources. Our nets can
also be found in a variety of industrial applications such as
carpet cushion support and retail food packaging.
We manufacture
our thermoplastic polyurethane films ("TPU") to have combinations
of the following attributes; UV, scratch and water resistance and
ultra-clarity. The ability to demonstrate these rare combinations
make them ideally suited for demanding transportation-related
surface protection applications, primarily automotive paint
protection and security reinforced glass. These products are also
used in certain niche applications such as graphics and laminated
textiles in the industrial end-market, and also in the medical
end-market. Other films, including apertured film products, are
used in wound care applications, such as finger bandages and wound
dressings for the medical end-market and are also used in specialty
liquid filters for ultra-pure semiconductor manufacturing
processes.
Our non-wovens
are typically air-laid resin-based materials often used in liquid
filtration and residential and commercial air filtration. In
addition to rolled goods, SWM also manufactures rigid core tubing,
an extruded resin product that also is primarily used in reverse
osmosis water filtration devices, and flexible tubing used in
various medical and industrial applications.
With the growth
of our AMS division, our technical expertise around resin-based
materials is increasing. We believe we have industry-leading
innovation capabilities and an expanding product portfolio which we
expect to support growth through collaborative product development
opportunities with our customers.
Markets and Customers. The AMS segment supplies
customers serving the filtration, transportation, infrastructure
and construction, medical, and industrial end-markets. Generally,
the applications and customers the AMS segment serves are in
growing end-markets, and as a percentage of total AMS segment sales
are as follows: filtration - 27%, transportation - 26%,
infrastructure and construction - 27%, medical - 10%, industrial -
10%. These products are highly engineered and often customized. In
some cases, we are the sole supplier of certain products to our top
customers, though no customer represents more than 10% of our
consolidated net sales.
Within the
filtration end-market, reverse osmosis water filtration has
exhibited historical long-term growth due to increasing global
demand for drinkable water and we expect global infrastructure
investments in this area to continue long-term. Our other
filtration products are often used in the food and beverage
industries and heavy equipment and machinery used in the oil and
gas industries, filtering fuel and other hydraulic liquids, as well
as serving other functions in the exploration, processing, and
transport of oil, gas, and metals. We refer to non-RO liquid
filtration products generally as process filtration. While sales of
process filtration products, particularly those used in the oil,
gas, and mining sectors, can be subject to cyclicality and
commodity price volatility, we expect strong long-term demand
across the product line.
The majority of our TPU films
are used in transportation-related surface protection applications,
specifically automotive paint protection. This product is typically
sold and installed in the after-market through dealerships or auto
body shops. Recently, we have benefited from global adoption of
paint protection films, particularly in Asia. Other surface
protection applications, such as ballistic-resistant and security
glass used primarily on vehicles can be impacted by government and
military contracts.
Our sales to the
infrastructure and construction end-market are largely comprised of
erosion/sediment control products. Our netting is used in the
production of erosion control blankets, which are used mostly in
domestic highway development projects to cover roadside slopes
during and after construction. We also offer customers a unique
sediment control solution, a filled “sock”, used to seal perimeters
of development sites and prevent the seepage of harmful
contaminants. This product has gained adoption in the oil and gas
exploration and production industry. In the construction segment,
our netting products are used as support material for carpet
cushion, construction materials protection, and support backing for
sod production. We also produce films used in commercial
architectural glass.
Our medical film
products largely serve the wound care management area of the
medical end-market and industrial applications are spread across a
variety of other industries, such as apparel, food manufacturing,
graphics and energy.
Sales and Distribution. AMS products are primarily
sold by the marketing, sales and customer service organizations of
our AMS operations directly to manufacturers, given the customized
nature of many of our products. However, in some geographic
regions, we use sales agents and distributors to assist us in the
sales process. As part of our enterprise transformation and
integration efforts related to our recently acquired companies, we
re-branded the acquired companies and transitioned our AMS sales
operations toward a more unified organization. All acquired
companies have been re-branded as SWM and the AMS sales
organization will operate and go to market under the SWM trade
name, with sales resources deployed by end-market and focused on
selling products from across the totality of AMS offerings. We
typically deliver our products to customers by truck, rail and
ocean-going vessels.
Competition. Our AMS products are
typically leaders in their respective categories and compete
against specialty products made by competitors such as Marshall
Manufacturing Company, Johns Manville, a subsidiary of Berkshire
Hathaway Inc., Shaoxing Naite Plastics Co. Ltd., 3M Company,
Covestro AG, Nupro Inc., Tenax Corporation, Intermas
Group, and
Hollingsworth and Vose Company. We believe our AMS products compete
primarily on product features, innovations and customer service
across the end-markets we serve, particularly in filtration and
transportation. Of the end-markets we serve, infrastructure and
construction is generally more price competitive due to a higher
portion of commodity type products that we sell in this
end-market.
Raw Materials and Energy. The primary raw material used
in our AMS products is plastic resin, and we rely on a variety of
commodity grade and specialty resins, including polypropylene,
polyurethane, polyethylene, polyamide (nylon) and a selection of
specialized high temperature engineering grade resins. Our
thermoplastic nets and apertured films are produced using a blend
of specialty resins and commodity grade resins like polypropylene.
Resin prices can fluctuate significantly and can impact
profitability. Commodity grade resin prices can sometimes correlate
with crude oil prices while specialty resin prices often do not.
Our TPU films are produced using specialty resins which are
significantly more expensive than commodity grade
resins.
We have multiple
sources for most of our resin needs. However, some of our specialty
resins are supplied by fewer manufacturers. We believe that our
purchased raw materials are generally available from several
sources and that the loss of a single supplier would not likely
have a material adverse effect on our ability to procure needed raw
materials from other suppliers. Our total resin purchases in
2019
and
2018
totaled $135
million and $143 million, respectively.
The majority of
our energy requirements relate to electricity in the U.S. We
consider this to be a relatively stable energy source.
Backlog and Seasonality. In the AMS segment, customer
orders are generally manufactured and shipped within 30 days or, in
certain instances, within three months. Sales of our products
within AMS are generally not subject to large seasonal
fluctuations: however, we would expect the second and third
quarters to be relatively stronger than the first and fourth
quarters. As of December 31, 2019
and
2018, the AMS segment order
backlog was approximately $67 million and $65 million,
respectively.
Engineered
Papers
Products. Our EP segment produces both
tobacco-related and non-tobacco-related papers. Our tobacco-related
papers include various papers used in cigarette production and
reconstituted tobacco ("Recon"), a reprocessed tobacco material,
and comprise a large majority of EP's sales.
One of our key
cigarette paper products is low ignition propensity ("LIP")
cigarette paper. LIP cigarettes are designed to self-extinguish
when not actively being smoked, thus offering a fire-safety
feature. The U.S., the European Union ("E.U."), and several other
smaller jurisdictions have mandated the use of LIP papers. Our
solutions pioneered this cigarette paper category, and we remain a
leader in this cigarette paper sub-segment through either direct
sales or through licensing agreements. The Company maintains an
extensive and active intellectual property portfolio.
Recon is another
key component of EP's total sales and profits and is mainly
comprised of reconstituted tobacco leaf, (“RTL” or “traditional
RTL”), and wrapper and binder products. Traditional RTL is used by
cigarette manufacturers to blend with virgin tobacco to achieve
certain attributes in cigarettes, such as taste or reduced delivery
of tar, nicotine, or other tobacco-related smoking constituents.
Recently, a new generation of tobacco industry products generally
referred to as Heat not Burn (“HnB”) have been introduced into the
marketplace with a goal of reducing harmful effects of smoking. We
have enhanced our tobacco fiber reconstitution capabilities to
produce materials suited for this new application, generated
commercial sales in 2019, and continue to develop products to meet
increasing demand should global consumer adoption gain momentum and
the technology gains support from appropriate regulatory
authorities. Wrapper and binder product leverage our Recon
technology for use in machine-made traditional and small cigars.
These products have demonstrated growth in recent years due to
positive consumer preference trends as well as favorable excise tax
treatment versus cigarettes in some jurisdictions.
Our non-tobacco
paper products include a mix of lightweight papers including
low-volume, high-value, engineered materials such as alkaline
battery separator papers, as well as high-volume commodity paper
grades for printing and
writing, flooring
laminates, and food service packaging, which are intended to
maximize machine utilization. The Company has strategically
de-emphasized these commoditized non-tobacco papers given their
lower profitability.
We intend to make
continued investments in our EP segment to broaden our offerings,
utilize existing machine capacity, and/or further monetize our
paper making and reconstitution technologies.
Our wet-laid
paper making technologies can be broadly classified into two main
production processes: flat-wire production and incline-wire
production. Generally, our machines are flat-wire, meaning a liquid
slurry of short pulp fibers and water are laid onto flat-wire
conveyor belts, with the water draining through the wire as the
fibers (wood, flax, tobacco, etc.) bond together to form a paper
sheet. Incline-wire machines allow for increased drainage, enabling
the use of longer fibers which bond into a more open web,
increasing the porosity. Incline wire machines are typically
associated with higher-value products given this added porosity,
which is important in filtration and other specialty applications
that tend to justify premium pricing.
The Company
continues to focus resources on innovation through activities in
our OneFiber lab where paper customers can work closely with our
technologists to develop improved paper-based products and our
LeafLab fiber reconstitution incubator at our facility in France.
Our reconstitution technologies have potential to be utilized in
products serving the cosmetics and packaging industries
reprocessing botanical, vegetable, or other plant fibers.
Furthermore, SWM’s Recon technologists are active in joint
development with several cigarette manufacturers to drive continued
innovation and product commercialization in the rapidly emerging
Heat not Burn tobacco product area.
Markets and Customers. Our EP segment is heavily
influenced by global smoking trends, particularly in the U.S., the
E.U. (both LIP markets), and Brazil where we have the majority of
our operations and highest share of the category's volume.
Historically, mature geographic regions, such as the U.S. and the
E.U. have exhibited a steady decline in smoking rates, often to the
low-to-mid single digits. Overall, approximately 88% of EP segment
sales are to customers in the tobacco end-market, with the majority
of tobacco sales comprised of cigarette papers, and approximately
12% of EP segment sales are related to a variety of non-tobacco
customers and applications.
We supply the
major, and many of the smaller, cigarette and cigar manufacturers.
We sell our products directly to the major tobacco companies or
their designated converters in the Americas, Europe, Asia and
elsewhere. Philip Morris-USA, a subsidiary of Altria Group Inc.,
Philip Morris International ("PMI"), Japan Tobacco Inc. ("JT"), and
British American Tobacco ("BAT"), are our four largest customers
and, together with their respective affiliates and designated
converters, accounted for 29%, 28% and 31% of our
2019, 2018 and 2017 consolidated net sales,
respectively. Although the total loss of one or more of these large
customers could have a material adverse effect on our results of
operations, we do not believe that such a loss is likely given our
significance in the worldwide supply chain of cigarette-related
papers.
Sales and Distribution. Our internal marketing, sales
and customer service organizations sell most of our tobacco-related
products directly to cigarette manufacturers or their designated
converters. Most of our EP segment's non-tobacco related products
are sold directly to manufacturers. In some geographic regions, we
use sales agents. We do not sell our products directly to consumers
or advertise our products in consumer media. We typically deliver
our products to customers by truck, rail and ocean-going
vessels.
Competition. The specialized nature of
tobacco-related papers requires unique papermaking equipment,
technical expertise, and research and development capabilities to
meet exacting customer specifications. These factors have limited
the number of competitors capable of servicing global cigarette
manufacturers.
As the sole
domestic producer of cigarette papers in the Americas (SWM
production in Brazil), we believe that we have a significant
majority of the category share in those regions. Our paper plants
in France and LIP printing facility in Poland produce a large
amount of the products sold in the E.U. We estimate that we have a
direct share of more than 40% of cigarette paper sales in the E.U.,
and coupled with royalty payments from a key competitor to whom we
have licensed our LIP technology, we believe we are able to
monetize over 80% of the LIP-compliant E.U. cigarette market. Our
principal competitors include delfortgroup AG ("delfort"), which
licenses our LIP technology, Miquel y Costas & Miquel S.A.
("Miquel y Costas"), Julius Glatz GmbH ("Glatz") and PT Bukit Muria
Jaya ("BMJ"). In December
2017, the
Dusseldorf Court of Appeals affirmed the German District Court
judgment of patent infringement against Glatz including an
injunction against making and selling LIP cigarette paper. We
believe that the basis of cigarette and our non-tobacco papers
competition is price, consistent quality, security of supply, and
level of technical service.
Outside of China,
SWM is the only non-cigarette company that produces RTL through a
paper-making process. Some cigarette companies such as Philip
Morris-USA, British American Tobacco, JT and STMA (China) produce
RTL primarily for their own internal use. Our customers' cigarette
blending decisions, which affect our traditional RTL sales volumes,
can be influenced by the general attractiveness of various
competing in-house Recon products. We believe we are the only
non-cigarette manufacturer with production capabilities for HnB, as
well as wrapper and binder products.
Raw Materials and Energy. Wood pulp is the primary
fiber used in our EP segment. Our operations consumed approximately
$43 million and $54 million of wood pulp in the years ended
December 31,
2019 and 2018, respectively, all of which
we purchased. While EP uses other specialty fibers, such as flax,
in our operations, we believe that purchased raw materials are
generally available from several sources.
Paper production
uses significant amounts of energy, primarily electricity, natural
gas and fuel oil. We believe that energy supply is generally
reliable throughout our manufacturing footprint, although prices
can fluctuate significantly based on demand. We enter into
agreements to procure a portion of our energy requirements for
future periods in order to reduce the uncertainty of future energy
costs.
Additional
information regarding agreements for the supply of certain raw
materials and energy is included in Note 21. Commitments and
Contingencies, of the Notes to Consolidated Financial
Statements.
Backlog and Seasonality. While our U.S., Polish and
Brazilian EP operations do not calculate or maintain records of
order backlogs, we typically receive forecasts of future demands
from certain larger customers which are used to manage production
and ensure sufficient supply of paper products. Our French paper
operations order backlog was approximately $23 million and $27
million on December 31, 2019
and
2018, respectively. Paper orders
are typically received and shipped within a 30-day period. The RTL
business operates predominately under a number of annual supply
agreements. The order backlog for RTL was approximately $77 million
and $92 million on December 31, 2019
and
2018, respectively, and is
typically filled within one fiscal year.
Generally, sales
of our paper and Recon products are subject to seasonal
fluctuations due to periodic machine downtime and typically lower
order volumes in the fourth quarter.
Research and
Development
As of
December 31,
2019 we
employ approximately 92 research and development employees in
research and laboratory facilities in France, Brazil, Poland, and
the U.S. We are dedicated to developing product innovations and
improvements to meet the needs of individual customers. We believe
that our research and product development capabilities have played
an important role in establishing our reputation for high quality,
superior products in both our AMS and EP segments. Within AMS, we
have a history of finding innovative design solutions, including
developing products that improve the performance of customers'
products and manufacturing operations. We believe that our
commitment to research and development, coupled with our investment
in new technology and equipment, has positioned us to take
advantage of growth opportunities in many places around the world.
Within EP, our research and development has enabled us to establish
and sustain leading shares in various cigarette paper products,
specifically LIP paper. We also are working with customers to meet
potential future demand for reduced-harm tobacco
products.
Patents and
Trademarks
As of
December 31,
2019, we
owned 67 patents and had 54 pending patent applications in our AMS
segment. While we consider our patents, and the protection thereof,
to be important, no single patent or group of patents is material
to the conduct of our AMS business segment.
In our AMS
segment, as described in the branding initiative discussed above,
SWM made a strategic decision to transition away from certain
legacy business trade names associated with our recent acquisitions
in favor of a streamlined SWM enterprise branding approach. The
Company will continue to market its products under the
long-standing product-level brand names and trademarks such as
"NALTEX®," "DELNET®," “ARGOGUARD®” and “ARGOTHANE®.”
As of
December 31,
2019, we
owned 277 patents and had 109 pending patent applications in our EP
segment, covering a variety of cigarette papers, RTL, cigar wrapper
and binder and other products and processes in the U.S., Western
Europe and several other countries. We believe that our patents,
together with our papermaking expertise and technical sales
support, have been instrumental in establishing us as the leading
worldwide supplier of cigarette papers. We believe that patents
have contributed to our position as the world's leading independent
producer of papers used for LIP cigarettes.
Management
believes that in the EP segment, our "ALGINEX®" water-based
technology trademark, our "GLUCIGENTM"
trademark for use in banded papers for the production of LIP
cigarettes, and the "SWM" logo and trade names have been important
contributors to the marketing of our products. Further, we have
developed, individually or in conjunction with customers,
technologies to address the demand for cigarette paper for LIP
cigarettes in the U.S., Canada, Australia and the E.U. We have
licensed to others the right to use certain of our LIP intellectual
property, excluding ALGINEX® related intellectual
properties.
Management of a
large portion of SWM's research and development activities is
provided from our Luxembourg City, Luxembourg operation ("SWM
Luxembourg"). These activities are often performed at other SWM
locations under contract by SWM Luxembourg, and funded by SWM
Luxembourg. SWM Luxembourg has the authority to initiate and manage
research and development projects in areas such as, but not limited
to, LIP paper, Recon for HnB materials, non-tobacco paper products,
netting and other extruded resin products. This operation also
provides global oversight and active management for much of the
Company's intellectual property rights.
Employees
As of
December 31,
2019, we
had approximately 3,400 regular, full-time, active
employees.
North and South America Operations.
We believe that
employee relations are positive. Hourly employees at the Spotswood,
New Jersey, Ancram, New York and Minneapolis, Minnesota plants are
represented by locals of the United Steel Workers Union. The
two-year collective bargaining agreement with hourly employees at
our Spotswood plant is effective through July 28, 2020. The
three-year collective bargaining agreement with employees at our
Ancram plant is effective through September 30, 2020. The
three-year collective bargaining agreement with hourly employees at
our Minneapolis facility is effective through October 31, 2020. We
believe employee and union relations continue to be positive at the
Spotswood, Ancram and Minneapolis operational facilities. Hourly
employees at the Pirahy, Brazil plant are represented by a union.
The one-year collective bargaining agreement with employees in
Brazil is effective through May 31, 2020. We believe that employee
relations are generally positive and comparable to those of other
similarly situated Brazilian manufacturing operations. Our
operations in Canada, South Carolina, Massachusetts, Delaware,
Georgia, Virginia, California, North Carolina and Illinois are
non-union.
Europe and Asia Operations. We believe that employee
relations are positive. Hourly employees at our Quimperlé, Spay,
and Saint-Girons, France plants, and some hourly employees at
Gilberdyke, England facility are union represented. Employees at
our Genk, Belgium facility work in accordance with Belgium labor
regulations. Employees at our Luxembourg office, Strykow, Poland
facility, and Suzhou, China facility are non-union.
Environmental,
Social and Governance
Environmental,
social, and governance issues are important to SWM, our employees,
stockholders, customers, and the communities in which we operate.
Corporate responsibility is one of our core values and has long
been part of the SWM corporate mission. Across our company, we
conduct business with environmental, social, ethical, and supply
chain-related concerns in mind. As such, our manufacturing
facilities and corporate office have a longstanding tradition of
community engagement and reducing our impact on the environment.
SWM recognizes that sustainability and profitability are not
mutually exclusive, and our goal is to improve the sustainability
of our products and processes to create shared value for all of our
stakeholders.
In 2018, the
Operational Excellence and Sustainability department worked with
key parties across SWM, including our Chief Executive Officer, to
refresh our sustainability strategy, which was reviewed with the
Board of Directors. We also updated our supplier code, the SWM Code
for Responsible Procurement, and our Transparency in Supply Chains
Act statement.
A few of our key
sustainability practices are highlighted below:
Environmental
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Use of Cocoa
PaperTM
as packaging
material: Cocoa PaperTM
is made from
botanical fibers and is an eco-efficient product. Cocoa
PaperTM
fibers are 100%
carbon neutral, a first in our Engineered Papers
portfolio. Sales of Cocoa PaperTM
benefit the
Jacundá Forestry REDD+ Project in Brazil through the purchase of
carbon credits to offset the impact of projected product
sales.
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100% of the wood
pulp that SWM uses is sourced from Forest Stewardship Council (FSC)
and/or Programme for the Endorsement of Forest Certification
(PEFC)-certified suppliers.
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•
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Our mills in
France are certified to the ISO 50001 energy management
standard.
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SWM has a history
of supporting local biodiversity initiatives, such as the
installation of salmon and eel runs in the Isole River near our EP
facility in Quimperlé, France, and the planting of native trees and
rebuilding of natural habitat near our plant in Santanesia,
Brazil.
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•
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Many other
initiatives are in place involving the reuse of waste products and
packaging materials.
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Social
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•
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SWM works in
partnership with the Brazilian federal government to train young
professionals for the job market. Every year, trainees are given an
opportunity to work at SWM or industrial companies as mechanics,
electricians, or administrative assistants.
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Employees at our
Gilberdyke, UK, location provide support and sponsor special
programs for disadvantaged children in the area.
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Our EP facility
in Le Mans, France, launched a partnership with Handisport, a
charitable organization that helps disabled children participate in
sport activities.
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Many other
philanthropic activities are conducted at our locations around the
world, for example SWM’s facility in Suzhou, China, held a
fundraiser for UNICEF, and SWM’s AMS facility in Athens, Georgia,
recently built raised garden beds for a senior care
facility.
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In April 2019, in
recognition and celebration of the 49th Anniversary of Earth
Month, 23 SWM manufacturing locations and the corporate office
participated in Safety and Sustainability Week where sites engaged
in activities involving safety, the environment, community
engagement, and employee engagement. Activities included educating
employees on a low-carbon lifestyle, recycling waste materials into
art, picking up trash along roads, collecting book and canned food
donations, bicycling challenges to promote a healthy lifestyle and
raise funds for charities, fire extinguisher training and many
others. Additionally, in 2019 we received an A- score for our CDP
Climate Change response, as well as our third consecutive
silver medal for Corporate Social Responsibility (CSR) recognition
from EcoVadis, an organization that rates sustainability practices.
Our sustainability initiatives are further described on our
corporate website at
https://www.swmintl.com/expertise/sustainability.
Governance
SWM believes good
corporate governance supports long-term value creation for our
stockholders. The Governance section of the Investor Relations
section of our website at www.swmintl.com includes our Code of
Conduct, corporate governance guidelines, Board of Directors
committee charters, as well as disclosure of any amendment to or
waivers of our Code of Conduct granted to any of the principal
executive officer, principal financial officer or principal
accounting officer. Information from our website is not
incorporated by reference into this Annual Report on Form 10-K.
Additional information about SWM's governance can also be found in
our proxy statement.
Capital
Expenditures - Environmental
Capital
expenditures for environmental controls to meet legal requirements
and those relating to the protection of the environment at our
facilities in the U.S., United Kingdom, France and Brazil
were $1.2
million in 2019, no material amount of which
was the result of environmental fines or settlements. We expect
such expenditures to be $1.0 million
or less in each
of the next two years, of which no material amounts are expected to
be the result of environmental fines or settlements. Should the
Company make material changes in the operations at a facility, it
is possible such changes could generate environmental obligations
that might require remediation or other action, the nature, extent
and cost of which are not presently known. These expenditures are
not expected to have a material adverse effect on our financial
condition, results of operations or competitive position; however,
these estimates could be modified as a result of changes in our
plans, changes in legal requirements or other factors.
Working
Capital
We normally
maintain approximately 50 to 90 days of inventories to support our
operations. Our sales terms average between 15 and 60 days for
payment by our customers, dependent upon the products and market
segment served. With respect to our accounts payable, we typically
carry approximately 15 to 40 days outstanding, in accordance with
our purchasing terms, which vary by business location. The accounts
payable balance varies in relation to changes in our manufacturing
operations, particularly due to changes in prices of wood pulp,
resins and purchased energy and the level and timing of capital
expenditures related to projects in progress.
Executive
Officers of the Registrant
The names and
ages of our executive officers as of March 2,
2020,
together with certain biographical information, are as
follows:
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Name
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Age
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Position
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Dr. Jeffrey
Kramer
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59
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Chief Executive
Officer
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R. Andrew Wamser
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Executive Vice President,
Finance and Chief Financial Officer
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Omar Hoek
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Executive Vice President,
Engineered Papers
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Daniel Lister
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Executive Vice President,
Advanced Materials & Structures
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Ricardo Nunez
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General Counsel and Corporate
Secretary
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Michael Schmit
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Corporate Controller and
Chief Accounting Officer
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There are no
family relationships between any of the directors, or any of our
executive officers. None of our officers were selected pursuant to
any arrangement or understanding between the officer and any person
other than the Company. Our executive officers serve at the
discretion of the Board of Directors and are elected annually by
the Board.
Dr. Jeffrey
Kramer was
appointed Chief Executive Officer in May 2017, after serving as
Co-Chief Executive Officer since March 2017. Prior to joining SWM,
Dr. Kramer served as Vice President, Lubricants of Brenntag AG, a
distributor of chemicals, from January 2016. Dr. Kramer previously
served as President and Chief Executive Officer of J.A.M.
Distributing Company from January 2013 through December 2015.
J.A.M. Distributing Company is a distributor of high-performance
lubricants and fuels. Dr. Kramer previously held various senior
positions at Air Products and Chemicals, Inc., an industrial gases
company, including Vice President and Chief Technology Officer from
June 2012 through December 2012 and Vice President and General
Manager, Packaged Gases, from 2005 through June 2012.
R. Andrew
Wamser was
appointed Co-Chief Financial Officer on February 5, 2018 and,
effective March 2, 2018, became the sole Executive Vice President,
Finance and Chief Financial Officer and the Company's Principal
Financial Officer. Prior to joining SWM, Mr. Wamser served as Vice
President, Finance; Investor Relations and Treasurer of AutoNation,
Inc., the largest automotive retailer by revenue in the US. Prior
to that Mr. Wamser served as Managing Director, Investment Banking;
Diversified Industrial Group of Barclays Capital Plc, now known as
Barclays Investment Bank, the investment banking division of
Barclays PLC. He also previously held other investment banking
roles at Barclays Capital and UBS Investment Bank.
Omar
Hoek was
appointed Executive Vice President, Engineered Papers in January
2020. Mr. Hoek served as Executive Vice President in the
Specialties Business Area and Group R&D of Ahlstrom-Munksjö
(“Ahlstrom”), a global leader in fiber-based material from 2011 to
2019. He previously served as Vice President, Strategy in the Food
and Medical Business Area and as Executive Vice President in the
Specialties Business Area of Ahlstrom from 2011 until 2017. Before
joining the Ahlstrom team, he worked at Newell Brands (NASDAQ: NWL)
as a Business Director from 2010 to 2011 and at Avery Dennison
(NYSE: AVY) from 1993 to 2010 in various capacities including
Global Marketing and Strategy Director.
Daniel
Lister was
appointed Executive Vice President, Advanced Materials &
Structures on July 5, 2016. Mr. Lister joined SWM from Greif, Inc.,
a global leader in industrial packaging and services, where he
worked since 2005. From 2009 to 2016 Mr. Lister held key
international roles including, Vice President, Middle East
Development and Division President and CEO of Greif Flexible
Products & Services, a Joint Venture with the Al Dabbagh Group.
Prior to his international assignments, Mr. Lister led key
businesses in North America. Mr. Lister worked for The Dow Chemical
Company from 2001 to 2005 where he held several commercial
strategy, business growth, and business management
roles.
Ricardo
Nunez was
appointed Senior Vice President, General Counsel and Corporate
Secretary in September 2017, after serving as Interim General
Counsel since November 2016. Prior to joining SWM, Mr. Nunez served
as General Counsel for Vivex Biomedical, Inc., a Marietta, GA based
biologics company from April 2015 to July 2016. Prior to that, he
served as SVP, General Counsel and Corporate Secretary for HD
Supply, Inc. a spinoff from The Home Depot
from March 2007
to April 2015. Mr. Nunez's previous experience also includes senior
legal responsibilities at The Home Depot, General Electric, and
Esso Inter-America, Inc. (the Latin America affiliate of Exxon
Corporation), as well as private practice.
Michael L.
Schmit was
appointed Corporate Controller and Chief Accounting Officer of the
Company, effective as of April 22, 2019. Mr. Schmit served as Chief
Accounting Officer and Corporate Controller of Chart Industries,
Inc. (NASDAQ:GTLS), a manufacturer of cryogenic equipment used in
the production, storage and distribution of liquefied gases, from
2018 to 2019. Prior to that he served as Assistant Corporate
Controller and then as Corporate Controller at Chart. From 2007
through 2017, he served in various finance and accounting
leadership roles at Georgia-Pacific, LLC, including Controller of
Corporate Accounting, Division Controller, Gypsum and Chemicals,
and Director, Internal Audit, respectively. Prior to joining
Georgia-Pacific Mr. Schmit served as the Director of Financial
Reporting at Arby’s Restaurant Group and also served as a manager
at Ernst & Young, LLP.
Item
1A.
Risk Factors
Factors That
May Affect Future Results
Many risk factors
both within and outside of our control could have an adverse impact
on our business, financial condition, results of operations and
cash flows and on the market price of our common stock. While not
an exhaustive list, the following important risk factors could
affect our future results, including our actual results for
2019
and thereafter
and could also cause our actual results to differ materially from
those expressed in any forward-looking statements we have made or
may make.
We expect our business to continue to be adversely impacted by
governmental actions relating to tobacco products, as well as by
decreased demand for tobacco products due to declining social
acceptance of smoking, new smoking technologies such as e-cigarette
and vaping technologies, and litigation in the U.S. and other
countries.
In
2019, approximately 53% of our
net sales were from products used by the tobacco industry in making
cigarettes or other tobacco products. Cigarette consumption outside
of Asia has generally declined due to, among other things, the
diminishing social acceptance of smoking, public reports with
respect to the possible harmful effects of smoking, including
effects of second-hand smoke, the use of other tobacco products,
the development and use of new tobacco-related or substitute
products or technologies, such as e-cigarettes, e-liquids, vapable
oils and other vaping products, that do not use our products, and,
particularly in the U.S., to litigation and actions on the part of
private parties to restrict smoking. For instance, litigation is
continuing against major U.S. manufacturers of consumer tobacco
products seeking damages for health problems allegedly resulting
from the use of tobacco in various forms. It is not possible to
predict the outcome of such litigation or the effect adverse
developments in pending and future litigation may have on the
tobacco industry or its demand for our products, but in the past
litigation has adversely affected demand for consumer tobacco
products. These factors have led, and could lead, to certain
merchants deciding not to sell tobacco products. As a result, the
overall demand for conventional tobacco cigarettes outside of Asia
has generally been declining in terms of volume of sales. These
declines have had an adverse effect on demand for our products in
these regions. We expect these trends to accelerate and thus to
continue to reduce smoking levels and adversely affect demand for
our products, which could have a material adverse impact on our
future financial condition, results of operations and cash
flows.
In recent years,
governmental entities around the world, particularly in the U.S.,
Brazil, Russia, Australia and Western Europe, have taken, or have
proposed, actions that had, or are likely to have, the effect of
reducing consumption of tobacco products which, in turn, reduces
demand for our products. These actions, including efforts to
regulate, restrict or prohibit the sale, advertisement and
promotion of tobacco products and their components, to limit
smoking in public places, to control or restrict additives that may
be used in tobacco products and to increase taxes on such products,
are intended to discourage the consumption of cigarettes and other
tobacco products. For example, in the U.S., the regulatory
jurisdiction of the federal Food and Drug Administration was
extended in 2009 to include tobacco products, and again in 2016 to
include cigars and additional tobacco products. These products are
now subject to product component disclosure regulations, new
controls on ingredients and design changes, and additional
restrictions relating to marketing and labeling. The federal Food
and Drug Administration could promulgate additional regulations. In
Brazil, regulations limit the use of additives to cigarettes. In
the E.U., the Tobacco Products Directive regulates the content,
effects, marketing and labeling of tobacco products, and both
revisions to the Directive and the ongoing phase-in of the
Registration, Evaluation, Authorization, and Restriction of
Chemical Substances regulation ("REACH") may further restrict
product ingredients. Additionally, the World Health Organization is
actively promoting tobacco regulation, and other countries
worldwide are in the process of adopting some or all of these
restrictions. It is not possible to predict the additional
legislation or regulations relating to tobacco products that may be
instituted, or additional countries that may adopt such legislation
or regulations, or the extent to which such legislation or
regulations may impact the design or formulation of our customers'
products. Such legislation or regulation may adversely impact the
demand for traditional cigarettes and cigars, with corresponding
impacts on our sales of cigarette papers, RTL and associated items,
which could have a material adverse effect on our future financial
condition, results of operations and cash flows.
Our joint
ventures in China serve only the local market. Declines in Chinese
cigarette consumption could have a material adverse effect on our
future financial condition, results of operations and cash flows,
including our China Tobacco Schweitzer (Yunnan) Reconstituted
Tobacco Co. Ltd. (“CTS”) and China Tobacco Mauduit (Jiangmen) Paper
Industry Ltd. (“CTM”) joint ventures.
New smoking technologies such as e-cigarette and vaping
technologies provide an alternative to and may decrease demand for
traditional cigarettes and cigars, which could result in a decrease
in demand for our products and adversely affect our consolidated
results of operations, financial position and cash
flows.
New smoking
technologies, including e-liquids, vapable oils and other vaping
products, provide an alternative to traditional cigarettes and
cigars, which could result in a decrease in demand for our
products, including cigarette papers, RTL and associated items.
Approximately 88% of EP segment sales are to customers in the
tobacco end market, with the majority of tobacco sales comprised of
cigarette papers. Future sales and any future profits from
cigarette papers and reconstituted tobacco products are
substantially dependent upon the continued use of traditional
cigarettes and cigars. Growth in the use of, and interest in,
e-liquids, vapable oils and other vaping products is likely to
continue. While traditional tobacco products are well established
and revenue from traditional cigarette sales represents a
substantial majority of total industry revenue, new smoking
technologies may become more widely adopted and the business,
growth prospects and financial condition of our EP segment may be
adversely affected.
Our technological advantages are unlikely to continue
indefinitely.
We consider our
intellectual property and patents to be a material asset. We have
been at the forefront of developing new products and technology
within our industries and have patented several of our innovations,
particularly with regard to cigarette paper used to produce LIP
cigarettes. This has enhanced our ability to sell products and to
provide added functionality and other value to the products we sell
allowing them to command higher margins. This advantage has also
enabled us to license certain of our patents and know-how to, and
earn royalty income from, third parties. Ultimately, our patents
will expire (generally before 2023) and some may be held invalid in
certain jurisdictions before their expiration dates. In addition to
protecting certain of our technological advantages through
patenting, we also protect a significant amount of our
technological advantages as trade secrets, especially with regard
to our AMS segment and our RTL products. As we expand our
operations to more locations and countries, the risk of the loss of
proprietary trade secrets will increase, and any significant loss
would result in the loss of the competitive advantages provided by
such trade secrets. While we cannot predict the impact or the
timing of these trends and eventualities, they likely will reduce
our sales and margins from the levels that we otherwise would have
achieved.
Effectively policing our domestic and international intellectual
property and patent rights is costly and may not be
successful.
Our portfolio of
granted patents varies by country, which could have an impact on
any competitive advantage provided by patents in individual
countries. We cannot guarantee that any U.S. or foreign patent,
issued or pending, will provide us with any continued competitive
advantage.
We rely on
patent, trademark, and other intellectual property laws of the U.S.
and other countries to protect our intellectual property rights.
However, we cannot guarantee that one or more of our patents will
not be challenged by third parties and/or ultimately held invalid
by courts or patent agencies of competent jurisdiction, which could
remove the legal barriers preventing competitors from practicing
our LIP technology among others.
Further, there
can be no assurances that we will be able, or that it will be
economic for us, to prevent third parties from using our
intellectual property or infringing our patents without our
authorization, which may reduce any competitive advantage we have
developed. In the event that we need to enforce certain of our
patents against infringement through judicial or administrative
actions, the litigation to protect these rights is often costly and
time consuming and diverts management resources; moreover, there
can be no assurance that our efforts to protect our intellectual
property will be successful, or that a defendant will not assert
counterclaims against us or challenges to other intellectual
property we may own.
Some of our
patents have been the subject of opposition hearings. Like the
actions we undertake to enforce our IP rights, oppositions filed
against us in respect of our intellectual property are expensive
and divert management time and resources.
Even when the
Company is initially successful, there can be no assurance that the
counterparty will not appeal, or that the appeal will not be
successful. Even when successful at the appeal level, as with
respect to patents such as EP 1,482,815 (relating to a
low-viscosity polymers to print LIP bands), there can be no
assurance that a patent will not be later successfully challenged
in individual national court jurisdictions.
We do not believe
that any of our products infringe the valid intellectual property
rights of third parties. However, we may be unaware of intellectual
property rights of others that may cover some of our products or
services or a court or other governmental body may come to a
different conclusion from ours. In that event, we may be subject to
significant claims for damages or disruptions to our
operations.
Because of the geographic diversity of our business, we are subject
to a range of international risks.
Our operations
are located in many countries around the world and operate, to a
degree, in a decentralized manner. There are inherent control and
fraud risks in such a structure. Moreover, we have manufacturing
facilities in eight countries and two joint ventures in China and
sell products in over 90 countries, many of which are
emerging and undeveloped markets.
As a result, our
manufacturing operations, sales and results, depending on their
location, are subject to various international business risks,
including, but not limited to, the following:
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Foreign countries
can impose significant import, export, excise and income tax and
other regulatory restrictions on our business, including
limitations on repatriation of profits and proceeds of liquidated
assets. While we attempt to manage our operations and international
movements of cash from and amongst our foreign subsidiaries in a
tax-efficient manner, unanticipated international movement of funds
due to unexpected changes in our business or changes in tax and
associated regulatory schemes could materially affect our financial
position, results of operations and cash flows.
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We are exposed to
global as well as regional macroeconomic and microeconomic factors,
which can affect demand and pricing for our products, including:
unsettled political and economic conditions, including as they
relate to Brazil, Russia and the Ukraine; expropriation; import and
export tariffs; regulatory controls and restrictions; and
inflationary and deflationary economies. Events occurring in
countries having a large share of the global economy (such as
China, Japan, or the EU) can have an impact on economies that are
interdependent and thereby affect those in which the Company
primarily operates. For example, the impact of a slowdown of the
Chinese economy due to the outbreak of a virus there on the global
economy and our future results is uncertain. These factors together
with risks inherent in international operations, including risks
associated with any non-compliance with the U.S. Foreign Corrupt
Practices Act, the 2013 Brazilian Clean Companies Act, the U.K.
Bribery Act of 2010, the 2013 Russian Law on Preventing Corruption
and other non-U.S. anti-bribery law compliance, could adversely
affect our financial condition, results of operations and cash
flows.
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We participate in
two joint ventures and have one manufacturing facility in China.
The joint ventures sell our products primarily to Chinese tobacco
companies. Operations in China entail a number of risks including
international and domestic political risks, the need to obtain
operating and other permits from the government, adverse changes in
the policies or in our relations with government-owned or run
customers and the uncertainty inherent in operating within an
evolving legal and economic system. There are also risks inherent
with 50% joint ventures, such as a lack of ability to control, and
visibility with respect to operations, customer relations and
compliance practice, among others.
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Changes or
increases in international trade sanctions or quotas may restrict
or prohibit us from transacting business with established customers
or securing new ones, including as to Russia and the Ukraine, which
are areas where the Company has offices and/or significant
customers and as to which the applicable sanctions have changed
unexpectedly on a number of occasions since 2014.
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Changes in the
laws and regulations described above, adverse interpretations or
applications of such laws and regulations, and the outcome of
various court and regulatory proceedings, including in Europe and
Brazil, could adversely impact the Company's business in a variety
of ways, including increasing expenses, increasing liabilities,
decreasing sales, limiting its ability to repatriate funds and
generally limiting its ability to conduct business, all of which
could adversely affect our financial condition, results of
operations and cash flows.
New tariffs and other trade measures could adversely affect our
consolidated results of operations, financial position and cash
flows.
In 2018, the
Trump Administration imposed tariffs on steel and aluminum and a
broad range of other products imported into the U.S. In response to
the tariffs imposed by the U.S., the European Union, Canada, Mexico
and China have announced tariffs on U.S. goods and services. The
new tariffs, along with any additional tariffs or trade
restrictions that may be implemented by the U.S. or retaliatory
trade measures or tariffs implemented by other countries, could
result in higher manufacturing costs and increased prices for our
products, and we may not be able to pass the higher manufacturing
costs and price increases on to our customers. Through our joint
venture partners, we also manufacture certain EP products in China.
While sales of our products manufactured in China are currently
sold only in local markets, any exports of our products
manufactured in China to the U.S. may also be impacted by the
tariffs and other restrictions on trade between the U.S. and China.
While tariffs and other retaliatory trade measures imposed by other
countries on U.S. goods have not yet had a significant impact on
our business or results of operations, we cannot predict further
developments, and such existing or future tariffs could have a
material adverse effect on our consolidated results of operations,
financial position and cash flows.
We may be adversely affected by recent developments relating to the
U.K.’s withdrawal from the European Union, particularly if the U.K.
and the European Union are unable to reach a mutually satisfactory
exit agreement.
On January 31,
2020, the United Kingdom formally withdrew from the European Union.
This withdrawal is commonly referred to as “Brexit.” The U.K. and
the European Union have given themselves until December 31, 2020 to
negotiate the details terms of their relationship going forward.
The effects of the Brexit and the perceptions as to the nature of
the future relationship between the U.K. from the European Union
(or the possibility of the absence of any formal agreement after
December 31, 2020) may adversely affect business activity and
economic and market conditions in the U.K., the Eurozone, and
globally and could contribute to instability in global financial
and foreign exchange markets, including volatility in the value of
the pound sterling and the euro. For example, in the period after
the referendum in 2016 on which Brexit was based and its
implementation January 2020, the value of the pound sterling
experienced significant fluctuations. If the value of the pound
sterling continues to incur similar fluctuations, unfavorable
exchange rate changes may negatively affect our operations located
in the U.K., which may impact the revenue and earnings we report.
In addition, if no formal agreement is made between the European
Union and the U.K., continued deflation of the pound sterling could
result. Brexit could also have an impact on tariff rates for raw
materials imported into the UK or sourced from the UK and the
resulting prices for such materials, the tariff rates on exports of
products from our facility in Gilberdyke, and delays at the customs
border between the UK and the EU that could adversely impact our
operations or result in our customers imposing upon us penalties
for delays in delivery. Any of these effects could have an adverse
impact on the value of our assets in the U.K., as well as our
business, financial condition, results of operations and cash
flows.
We are subject to the U.S. Foreign Corrupt Practices Act and other
anti-corruption laws or trade control laws, as well as other laws
governing our operations. If we fail to comply with these laws, we
could be subject to civil or criminal penalties, other remedial
measures, and legal expenses, which could adversely affect our
business, financial condition and results of operations.
We are subject to
anti-corruption laws, including the U.S. Foreign Corrupt Practices
Act, or FCPA, and other anti-corruption laws that apply in
countries where we do business. The FCPA, the 2013 Brazilian Clean
Companies Act, the U.K. Bribery Act of 2010, the 2013 Russian Law
on Preventing Corruption and these other laws generally prohibit
us, our employees, consultants and agents from bribing, being
bribed or making other prohibited payments to government officials
or other persons to obtain or retain business or gain some other
business advantage. We operate in a number of jurisdictions that
pose a high risk of potential FCPA violations, and we participate
in joint ventures and relationships with third parties whose
actions could potentially subject us to liability under the FCPA or
local anti-corruption laws. In addition, we cannot predict the
nature, scope or effect of future regulatory requirements to which
our international operations might be subject or the manner in
which existing laws might be administered or
interpreted.
We are also
subject to other laws and regulations governing our international
operations, including regulations administered by the U.S.
Department of Commerce’s Bureau of Industry and Security, the U.S.
Department of Treasury’s Office of Foreign Asset Control, and
various non-U.S. government entities, including applicable export
control regulations, economic sanctions on countries and persons,
customs requirements, currency exchange regulations and transfer
pricing regulations, or collectively, Trade Control
laws.
However, there is
no assurance that we will be completely effective in ensuring our
compliance with all applicable anti-corruption laws, including the
FCPA or other legal requirements, including Trade Control laws. If
we are not in compliance with the FCPA and other anti-corruption
laws or Trade Control laws, we may be subject to criminal and civil
penalties, disgorgement and other sanctions and remedial measures,
and legal expenses, which could have an adverse impact on our
business, financial condition, results of operations and liquidity.
Likewise, any investigation of any potential violations of the FCPA
other anti-corruption laws or Trade Control laws by U.S. or foreign
authorities could also have an adverse impact on our reputation,
business, financial condition and results of
operations.
Fluctuations in foreign currency exchange rates could adversely
impact our financial condition, results of operations and cash
flows.
A significant
portion of our revenues are generated from operations outside the
U.S. In addition, we maintain significant operations and acquire or
manufacture many of our products outside the U.S. The functional
currency of our international subsidiaries is generally the local
currency in which each subsidiary operates. In particular, a large
portion of our commercial business is denominated in euros and
Brazilian reals. Our consolidated financial statements are
presented in U.S. dollars. Therefore, we must translate revenues,
expenses, assets and liabilities from functional currencies into
U.S. dollars at exchange rates in effect during, or at the end of,
the reporting period. As a result, our future revenues, costs,
results of operations and earnings could be significantly affected
by changes in foreign currency exchange rates, especially the euro
to U.S. dollar exchange rate and the Brazilian real to U.S. dollar
exchange rate.
In addition, some
of our sale and purchase transactions are denominated in a currency
other than the local currency of our operations. As a result,
changes in exchange rates between the currencies in which the
transaction is denominated versus the local currency of our
operation into which the transaction is being recorded can impact
the amount of local currency recorded for such transaction. This
can result in more or less local currency revenue or cost related
to such transaction and thus have an effect on our operating
profit. Our Brazilian and Polish operations are more fully exposed
to currency transaction risk, especially as a result of U.S. dollar
sales in Brazil and euro denominated sales in Poland. We also hold
a significant amount of our cash balances in euros, thus any
weakening of the euro versus the U.S. Dollar would reduce the
amount of U.S. Dollars for which such balances could be
exchanged.
Changes in
foreign currency exchange rates also impact the amount reported in
other income (expense), net. For instance, when a non-local
currency receivable or payable is not settled in the period in
which it is incurred, we are required to record a gain or loss, as
applicable, to reflect the impact of any change in the exchange
rate as of the end of the period. We also have to reflect the
translation rate impact on the carrying value of our foreign assets
and liabilities as of the end of each period, which is recorded as
Unrealized Translation Adjustment in Other Comprehensive
Income.
We utilize a
variety of practices to manage this risk, including operating and
financing activities and, where considered appropriate, derivative
instruments. All derivative instruments we use are either exchange
traded or entered into with major financial institutions in order
to reduce credit risk and risk of nonperformance by third parties.
Counterparty
risk cannot be
eliminated and there can be no assurance that our efforts will be
successful. We generally hedge foreign currency transaction risk
primarily through the use of derivative instruments, including
forward and swap contracts and, to a lesser extent, option
contracts. The use of derivative instruments is intended to
mitigate or reduce transactional level volatility in the results of
foreign operations, but does not completely eliminate volatility.
If our future revenues, costs and results of operations are
significantly affected by economic conditions abroad and/or we are
unable to effectively hedge these risks, they could materially
adversely affect our financial condition, results of operations and
cash flows.
The Company could be subject to changes in its tax rates, the
adoption of new U.S., or foreign tax legislation or exposure to
additional tax liabilities.
The Company is subject to
taxes in the U.S. and in foreign jurisdictions where a number of
the Company’s subsidiaries are organized. The Company’s future
effective tax rate could be affected by changes in the mix of
earnings in countries with differing statutory tax rates or future
changes in tax laws or their interpretations as to the legality of
tax advantages granted under various current and past corporate
structures. Although none of the Company’s international tax
arrangements are currently being challenged or threatened to be
challenged, recent developments, such as the European Commission’s
investigations on illegal state aid, individual European countries
implementation of Anti Tax Avoidance Directives, continued
regulatory development of the Tax Cuts and Jobs Act of 2017, and
the Organization for Economic Cooperation and Development projects
on base erosion and profit shifting may result in changes to
long-standing tax principles or new challenges to our cross-border
arrangements, which could materially affect our effective tax rate
or require a restructuring of the holding of foreign subsidiaries.
If the Company’s effective tax rates were to increase, or if any
ultimate determination of the Company’s taxes owed is for an amount
in excess of amounts previously accrued, the Company’s operating
results, cash flows, and financial condition could be adversely
affected.
We face competition from several established competitors and we
have limited market transparency.
Our four largest
competitors for our EP business are delfortgroup AG ("delfort"),
Julius Glatz GmbH ("Glatz"), Miquel y Costas & Miquel S.A.
("Miquel y Costas") and PT BUKIT Muria Jaya ("BMJ"). All four
primarily operate from modern and cost-effective plants in Western
Europe and Asia and are capable and long-standing suppliers to the
tobacco industry. Further, three such competitors, delfort, Glatz
and BMJ, are privately held and the third, Miquel y Costas, is a
closely held public company. Thus, their financial results and
other business developments and strategies are not disclosed to the
same extent as ours, which provides them some advantage in dealing
with customers. Given the concentration of most of our competitors
in Western Europe, which has seen declining demand for tobacco
products and has labor laws that make reducing capacity expensive
and slow, excess capacity exists and therefore price competition is
acute. We believe that all four competitors have good relationships
with the multinational cigarette companies, as does the Company.
The multinational cigarette companies have been known to use these
close relationships to encourage the development of enhanced
competition through supporting competitive products and facilities,
especially when confronted with new, high-value technologies such
as porous plug wrap in the past and LIP today. We believe our
Engineered Paper products compete primarily on product features,
price, innovations and customer service. Due to many of the factors
described above, we have a limited ability to predict trends in the
industry and there may be a time lag before we become aware of
developing trends in the industry.
Our AMS segment
products compete to some degree against specialty products made by
Marshall Manufacturing Company, Johns Manville, a subsidiary of
Berkshire Hathaway Inc., Shaoxing Naite Plastics Co. Ltd., 3M
Company, Covestro AG, Nupro, Tenax Corporation, Intermas Group, and
Hollingsworth and Vose Company. We believe our AMS products compete
primarily on product features, innovations and customer service.
Some of these competitors are larger than we are and have more
resources, thus the actions of these competitors could have an
impact on the results of our AMS segment operations.
As a result of
the foregoing, the Company faces significant selling price, sales
volume and new product risks from its competitors, especially
during periods (often annually) in which the Company's contracts
with its major customers are subject to renewal or
renegotiation.
Currently, fine
papers used to produce cigarettes are only exported on a limited
basis from available capacity in China and other Asian locations to
western multinational cigarette companies due to government taxes
and tariffs, which limit price competitiveness, as well as due to
customer preferences. Should conditions change in this regard,
capacity that currently is operating in China and elsewhere in Asia
would present a risk to our competitive position outside Asia and
place further pressure on our legacy paper production platforms.
Similarly, we are starting to see increased competition for some of
our AMS products from companies in China, which, we believe, may
have lower operating costs than us, resulting in a potential price
advantage for such companies.
In the RTL
end-market segment, demand is a function, among other things, of
smoke delivery regulations, the cigarette manufacturer's desire for
a uniform and consistent product, the taste profile sought by
cigarette manufacturers, and the cost of recycling the tobacco
by-product scraps and the utilization of internal capacity to
produce materials that compete with our RTL products. These factors
have resulted, and are likely to continue to result, in materially
lower sales volumes for our RTL business, resulting in downtime of
certain production machines and, in some cases, accelerated
depreciation or impairment charges for certain equipment as well as
employee severance expenses associated with downsizing or
restructuring activities.
Further, as a
result of excess capacity in the tobacco-related papers industry
and increased operating costs, competitive levels of selling prices
for certain of the Company's products are not sufficient to cover
those costs with a margin that the Company considers reasonable.
Such competitive pressures have resulted, and could result in the
future, in downtime of certain paper production machines and, in
some cases, accelerated depreciation or impairment charges for
certain equipment as well as employee severance expenses associated
with downsizing or restructuring activities.
We are dependent upon a small number of customers for a significant
portion of our sales; the loss of one or more of these customers
could have a material adverse effect on our business.
Four customers,
together with their respective affiliates and designated
converters, accounted for over 29% of our net sales in
2019. The loss of one or more of
these customers, or a significant reduction in their purchases,
particularly those that impact our sales of LIP papers or Recon,
could have a material adverse effect on our financial condition,
results of operations and cash flows.
In addition,
significant consolidation has occurred among our tobacco customers
and may continue to occur, thereby increasing our dependence upon a
fewer number of tobacco industry customers and increasing the
negotiating leverage of those customers that remain. If any of our
customers were to change suppliers, in-source production of Recon
or cigarette papers (including those used to produce LIP
cigarettes), institute significant cost-cutting measures or
experience financial difficulty, then these customers may
substantially reduce their purchases from us, which could adversely
impact our financial condition, results of operations and cash
flows. In addition, adverse results in the negotiation of any of
our significant customer contracts, the terms of which are
typically negotiated every one to three years, could significantly
impact our financial condition, results of operations and cash
flows.
We are dependent upon the availability of credit, and changes in
interest rates can impact our business.
We supplement
operating cash flow with bank borrowings under a secured credit
agreement with a syndicate of banks. Borrowings under this
agreement will mature in September 2023 and September 2025. To
date, we have been able to access credit when needed and on
commercially reasonable terms. However, deterioration of credit
markets, including an economic crisis in the U.S. or elsewhere,
whether or not caused by the U.S. or European debt ceiling,
deficits and budget issues, could have an adverse impact on our
ability to negotiate new credit facilities or access or renew our
existing one. Constraints on the availability of credit, or the
unavailability of credit at reasonable interest rates, would
negatively impact our business, including potentially impairing our
ability to declare dividends, conduct share buy-backs and make
acquisitions.
Our secured
credit facility contains certain financial covenants. In the event
of material unforeseen events that impact our financial
performance, particularly during a time when we have material
amounts of debt, a situation could arise where we are unable to
fully draw from our existing credit facility notwithstanding that
there is otherwise available capacity.
Our credit
facilities are secured by substantially all of the personal
property of the Company and its domestic subsidiaries. In the event
of a default on these agreements, substantially all of the assets
of the Company could be subject to foreclosure or liquidation by
the secured creditors.
We may utilize a
combination of variable and fixed-rate debt consisting of
short-term and long-term instruments. We selectively hedge our
exposure to interest rate increases on our variable rate long-term
debt when we believe that it is practical to do so. We have
utilized various forms of interest rate hedge agreements, including
interest rate swap agreements, forward rate agreements and cross
currency swaps. There are inherent risks associated with interest
rate hedges, including those associated with the movement of
interest rates, counterparty risk and unexpected need to refinance
debt, thus there can be no certainty that our hedging activities
will be successful or fully protect us from interest rate exposure.
As of December 31,
2019, the
percentage of the Company’s fixed and floating interest rate debt
was 64% and 36%, respectively. The Company has entered into a
number of interest rate hedge transactions to convert floating rate
debt to fixed. Including the impact of these transactions, as
of December 31,
2019, the
percentage of the Company’s debt subject to fixed and floating
rates of interest was 97% and 3%, respectively.
Our use of
interest rate hedge agreements to manage risk associated with
interest rate volatility may expose us to additional risks,
including the risk that a counterparty to a hedge agreement may
fail to honor its obligations. Developing an effective interest
rate risk strategy is complex and no strategy can completely
insulate us from risks associated with interest rate fluctuations.
There can be no assurance that our hedging activities will have the
desired beneficial impact on our results of operations or financial
condition. Termination of interest rate hedge agreements typically
involves costs, such as transaction fees or breakage
costs.
Changes in the method pursuant to which LIBOR rates are determined
and potential phasing out of LIBOR after 2021 may adversely affect
our results of operations.
LIBOR and certain
other “benchmarks” are the subject of recent national,
international and other regulatory guidance and proposals for
reform. These reforms may cause such benchmarks to perform
differently than in the past or have other consequences which
cannot be predicted. In particular, on July 27, 2017, the United
Kingdom’s Financial Conduct Authority, which regulates LIBOR,
publicly announced that it intends to stop persuading or compelling
banks to submit LIBOR rates after 2021. It is unclear whether, at
that time, LIBOR will cease to exist or if new methods of
calculating LIBOR will be established. Any uncertainty regarding
the continued use and reliability of LIBOR as a benchmark interest
rate could adversely affect the performance of LIBOR relative to
its historic values. If the methods of calculating LIBOR change
from current methods for any reason, or if LIBOR ceases to perform
as it has historically, our interest expense associated with the
unhedged portion of our outstanding indebtedness or any future
indebtedness we incur may increase. Further, if LIBOR ceases to
exist, we may be forced to substitute an alternative reference
rate, such as a different benchmark interest rate or base rate
borrowings, in lieu of LIBOR under our current and future
indebtedness and interest rate swaps. At this point, it is not
clear what, if any, alternative reference rate may be adopted to
replace LIBOR, however, any such alternative reference rate may be
calculated differently than LIBOR and may increase the interest
expense associated with our existing or future indebtedness. In the
United States, efforts to identify a set of alternative U.S. dollar
reference interest rates include proposals by the Alternative
Reference Rates Committee of the Federal Reserve Board and the
Federal Reserve Bank of New York. The Alternative Reference Rates
Committee has proposed the Secured Overnight Financing Rate
("SOFR") as its recommended alternative to LIBOR, and the Federal
Reserve Bank of New York began publishing SOFR rates in April 2018.
SOFR is intended to be a broad measure of the cost of borrowing
cash overnight that is collateralized by U.S. Treasury
securities. However, because SOFR is a broad U.S. Treasury
repo financing rate that represents overnight secured funding
transactions, it differs fundamentally from LIBOR. For example,
SOFR is a secured overnight rate, while LIBOR is an unsecured rate
that represents interbank funding over different maturities. In
addition, because SOFR is a transaction-based rate, it is
backward-looking, whereas LIBOR is forward-looking. Because of
these and other differences, there is no assurance that SOFR will
perform in the same way as LIBOR would have performed at any time,
and there is no guarantee that it is a comparable substitute for
LIBOR. SOFR may fail to gain market acceptance.
Finally, the
replacement or disappearance of LIBOR may adversely affect the
value of and return on our LIBOR-based obligations and the
availability, pricing and terms of LIBOR-based interest rate swaps
we use to hedge our interest rate
risk. Alternative
reference rates or modifications to LIBOR may not align for our
assets, liabilities, and hedging instruments, which could reduce
the effectiveness of certain of our interest rate hedges, and could
cause increased volatility in our earnings. We may also incur
expenses to amend and adjust our indebtedness and swaps to
eliminate any differences between any alternative reference rates
used by our interest rate hedges and our outstanding
indebtedness.
Any of these
occurrences could materially and adversely affect our borrowing
costs, business and results of operations.
Our internal and external expansion plans and asset dispositions
entail different and additional risks relative to the rest of our
business.
From time to
time, we consider acquisitions either within the tobacco industry
or outside the industry in connection with our diversification
initiatives, such as our acquisitions of DelStar Technologies,
Inc., Argotec LLC and Conwed Plastics LLC. This acquisition
activity could involve confidential negotiations that are not
publicly announced unless and until those negotiations result in a
definitive agreement. It is possible that an acquisition could
adversely impact our results, credit ratings or the outlook of our
business, due to, among other things, integration and employee
retention challenges, contrasting company cultures and different
information technology and reporting systems. Also, acquisition
opportunities are limited and present risks of failing to achieve
strategic objectives, smooth integrations or anticipated synergies
or returns. There can be no assurance that we will be able to
acquire attractive businesses on favorable terms, that we will
realize the anticipated benefits or profits through acquisitions or
that acquisitions will be accretive to our earnings. Changes in our
portfolio of businesses, assets and products, whether through
acquisition (such as our acquisitions of DelStar, Argotec and
Conwed), disposition or internal growth, present additional risks,
including causing us to incur unknown or new types of liabilities,
subjecting us to new regulatory frameworks and new market risks,
and acquiring operations in new geographic regions with challenging
labor, regulatory and tax regimes. The potential future expansion
of our AMS business unit or other operations could cause these
operations to face additional competition from larger and more
established competitors than is currently the case.
Our ability to
dispose of idled assets and the value that may be obtained relative
to their book value can result in significant impairment charges.
Building a new plant or other facility or relocating, rebuilding or
otherwise modifying existing production machinery is a major
undertaking and entails a number of risks, including the
possibility that the contractors and sub-contractors who are
expected to build the facility or rebuild the machine and supply
the necessary equipment do not perform as expected, the possibility
of cost overruns and delays, or that design defects or omissions
cause the facility or machine to perform at less than projected
efficiency or at less than projected capacity. In addition,
commencement of production at a new site or at a rebuilt or
relocated machine is time consuming and requires testing and
acceptance by customers and potentially by regulators, of the
facility and the products that are produced. Also, while we
anticipate sufficient demand for the facility's or machine's
output, there can be no assurances that the expected demand will
materialize. For more information on our expansion plans, see Part
II, Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operation" of this report.
We also expect to
continue to expend resources to diversify and expand our product
portfolio. Research and development and product diversification
have inherent risks, including technical success, market
acceptance, new regulations and potential liabilities. We cannot
guarantee that such efforts will succeed, that we will not incur
new or different liabilities or that we will achieve a satisfactory
return on such expenditures.
We may not successfully integrate acquisitions or integrate other
SWM operations into AMS and we may be unable to achieve anticipated
cost savings or other synergies.
The integration
of the operations of acquired companies involves a number of risks
and presents financial, managerial, reporting, legal and
operational challenges. We may have difficulty, and may incur
unanticipated expenses related to, integrating information systems,
financial reporting activities, employee retention and integrating
and retaining management and personnel from acquired companies.
Among these risks are potential loss of consumer awareness and
demand for the acquired companies’ products based on the rebranding
of those products under the Company’s legacy brand names.
Additionally with respect to the acquisition of Conwed in early
2017, we may not be able to achieve anticipated cost savings or
commercial or growth synergies, for a number of reasons, including
contractual constraints and obligations or an inability to take
advantage of expected commercial opportunities, inability to
achieve
increased
operating efficiencies or commercial expansion of key technologies.
In the second half of 2015, we formed our AMS business unit
comprised of these operations and certain other SWM resources. The
future success of AMS depends, in part, on our ability to attract
additional management, retain key employees, integrate new
personnel, operating and reporting systems as well as execute AMS’
growth strategy. Failure to successfully integrate acquired
companies into AMS may have an adverse effect on our business,
financial condition, results of operations, and cash
flows.
Our restructuring activities are time-consuming and expensive and
could significantly disrupt our business.
We have initiated
significant restructuring activities in recent years, including
restructurings in 2014, 2015, 2016 and 2017 in France and the U.S.,
during 2014 in Brazil and during 2012 in the Philippines, that have
become part of an overall effort to improve an imbalance between
demand for our products and our production capacity as well as
improve our profitability and the quality of our products. We
expect to continue these restructuring efforts from time to time.
Restructuring of our existing operations, or as a result of
acquisitions, involves issues that are complex, time-consuming and
expensive and could significantly disrupt our business as well as
garner review from regulatory authorities which could result in
financial impacts to the Company. The challenges involved in
executing the actions that are part of our ongoing and, potentially
future, restructuring plans include:
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demonstrating to
customers that the restructuring activities will not result in
adverse changes in service standards or business
focus;
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consolidating
administrative infrastructure and manufacturing operations while
maintaining adequate controls throughout the execution of the
restructuring;
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preserving
distribution, sales and other important relationships and resolving
potential conflicts that may arise;
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estimating,
managing and minimizing the cost of the restructuring
activities;
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minimizing the
diversion of management attention from ongoing business
activities;
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maintaining
employee morale, retaining key employees, maintaining reasonable
collective bargaining agreements and avoiding strikes, work
stoppages or other forms of labor unrest while implementing
restructuring programs that often include reductions in the
workforce;
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securing
government approval of such plans, where necessary, and managing
the litigation and associated liabilities that often are associated
with restructuring actions;
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incurring costs
associated with delays in restructuring activities caused by labor
negotiations and/or governmental approvals;
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coordinating and
combining operations, which may be subject to additional
constraints imposed by collective bargaining agreements and local
laws and regulations; and
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achieving the
anticipated levels of net cost savings and efficiency as a result
of the restructuring activities.
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Our financial performance can be significantly impacted by the cost
and availability of raw materials and energy and we may have
limited ability to pass through increases in costs to our
customers.
Raw materials are
a significant component of the cost of the products that we
manufacture. The cost of wood pulp, which is the largest component
of the raw materials that we use in our EP segment, and some resins
used by our AMS segment are highly cyclical and can be more
volatile than general consumer or producer inflationary changes in
the general economy. Also, in that same time period, the cost of
polypropylene has fluctuated significantly based on a number of
factors, including changes in global oil markets. As we
periodically enter into agreements with customers under which we
agree to supply products at fixed prices, unanticipated increases
in the costs of raw materials, or the lack of availability of such
raw materials (due to force majeure or other reasons), can
significantly impact our financial performance. Even where we do
not have fixed-price agreements, we generally cannot pass through
increases in raw material costs in a timely manner and in many
instances are not able to pass through the entire increase to our
customers. Further, some of the resins we use in our AMS segment
are only available from a single supplier, or a limited number of
suppliers. Consequently, such supplier(s) can control the
availability and thus the cost of the resins we use,
notwithstanding any changes in the cost of oil. It can be time
consuming and costly, and occasionally impractical, to find
replacement resins where such suppliers limit the availability or
increase the cost of resins we use.
Our manufacturing operations,
in particular paper manufacturing, is energy-intensive. In the UK,
the European Union, China and in the U.S., availability of energy
generally is reliable, although prices can fluctuate significantly
based on variations in overall demand. Western Europe is becoming
significantly dependent on energy supplies from the Commonwealth of
Independent States, which in the past has demonstrated a
willingness to restrict or cut off supplies of energy to certain
customers. The volume of oil or gas flowing through pipeline
systems that ultimately connect to Western Europe also has been cut
off or restricted in the past, and such actions can adversely
impact the supply of energy to Western Europe and, consequently,
the cost and availability of electricity to our European
operations. In Brazil, because production of electricity is heavily
reliant upon hydroelectric plants, availability of electricity can
be, and has been in the past, affected by rain variations.
Electricity in Brazil is also heavily taxed. Due to the competitive
pricing for most of our products, we typically are unable to fully
pass through higher energy costs to our customers. Periodically,
when we believe it is advantageous to do so, we enter into
agreements to procure a portion of our energy for future periods in
order to reduce the uncertainty of future energy costs. However, in
recent years this has only marginally slowed the increase in energy
costs due to the volatile changes in energy prices we have
experienced.
A failure of, or a security breach in, a key information technology
system or process or other unusual events could compromise our
information and expose us to liability, which could adversely
affect our business; IT project delays and overruns are
possible.
We rely
extensively on information technology systems, some of which are
managed by third-party service providers, to analyze, process and
manage transactions and sensitive data, including intellectual
property, our proprietary business information and that of our
customers, suppliers and business partners, and personally
identifiable information of our employees. The secure processing
and maintenance of this information is critical to our operations
and business strategy and we rely heavily on the integrity of this
data in managing our business. Insider or employee cyber and
security threats are increasingly a concern for all companies,
including ours. In addition, social engineering and phishing are a
particular concern. We are continuously working to install new, and
to upgrade our existing, information technology systems and to
provide employee awareness training around phishing, malware and
other cyber risks to ensure that we are protected, to the greatest
extent possible, against cyber risks and security
breaches.
Despite our
security measures, our information technology and infrastructure
may be vulnerable to attacks by hackers or be breached due to
employee or third party error, malfeasance or other disruptions. To
date, we have not had a significant cyber breach or attack that has
had a material impact on our business. However, any such breach
could compromise our networks and the information stored there
could be accessed, publicly disclosed, lost or stolen. Any such
access, disclosure or other loss of information could result in
legal claims, proceedings, or regulatory penalties, including
penalties under EU privacy laws, and could disrupt our
operations.
There are further
risks associated with the information systems of companies we
acquire, both in terms of systems compatibility, level of security
and functionality. It may cost us significant money and resources
to address these risks and we may fail to address them
successfully, adversely impacting our financial condition, results
of operations and cash flows.
From time to
time, we undertake significant information technology systems
projects, including enterprise resource planning updates,
modifications and roll-outs. These projects are subject to cost
overruns and delays. Not only could these cost overruns and delays
impact our financial statements but a delay in the completion of a
needed IT project could adversely impact our ability to run our
business and make fully informed decisions.
We rely on a limited number of key employees, have had significant
personnel turnover and have had difficulty in attracting and hiring
qualified new personnel in some areas of our business.
The loss of any
of our key employees, including our CEO and his direct reports, due
to retirement, difference in culture with acquired businesses, the
demands of our business, our tobacco-related operations or
otherwise could adversely affect our business and thus our
financial condition, results of operations and cash flows. Because
a large part of our business is tied to the tobacco industry, we
may also experience difficulty in retaining and hiring qualified
executives and other personnel in our AMS segment, at corporate
and/or in EP. This may be caused by the health and social issues
associated with the tobacco industry. We not only compete for
talent with consumer products and other companies that enjoy
greater social acceptance but also with larger, more established
companies within the tobacco industry.
As we diversify
through acquisitions outside our tobacco-related operations, we run
the risk of turnover of key personnel within the businesses we
acquire as well as difficulty in finding and attracting first class
talent in industry segments that are new to us. This could slow the
growth of these businesses and impede our ability to find and
complete synergistic acquisitions.
Our business is subject to seasonal or cyclical market and industry
fluctuations which may result in reduced net sales and operating
profits during certain periods.
Sales of our EP
products in the U.S., Europe, China and Brazil are subject to
seasonal fluctuations. In the U.S. and Europe, customer shutdowns
typically occur in August and December and historically have
resulted in reduced net sales and operating profit during those two
months. Likewise, the production of cigarettes in China for the
Chinese market slows significantly before and during Chinese New
Year, with a corresponding reduction in demand for our EP products.
Additionally, our facilities occasionally shut down equipment to
perform additional maintenance during these months or as a result
of slow demand, resulting in higher product costs, higher
maintenance expenses and reduced operating profit. In Brazil,
customer orders are typically lower in December due to a holiday
season during much of January and February. The oil & gas,
mining and automotive industries are important to sales in our AMS
segment and these and other industries tend to be cyclical, which
could adversely impact our business, financial condition, results
of operations and cash flows during the duration of their down
cycles.
Our business depends upon good relations with our employees; work
stoppages, slowdowns or legal action by our unionized employees may
have a material adverse effect on our business, financial
condition, results of operations and cash flows.
We employ
approximately 3,400 employees, including certain manufacturing
employees represented by unions. Although we believe that employee
and union relations are generally positive, there is no assurance
that this will continue in the future. We may experience
difficulties in maintaining appropriate relations with unions and
employees in certain locations. Problems or changes affecting
employees in certain locations may affect relations with our
employees at other locations. The risk of labor disputes, work
stoppages or other disruptions in production could adversely affect
us, especially in conjunction with potential restructuring
activities. If we cannot successfully negotiate or renegotiate
collective bargaining agreements, or if negotiations take an
excessive amount of time, there may be a heightened risk of work
stoppages and we may be unable to achieve planned operational
efficiencies. Work stoppages may be caused by the inability of
national unions and the governments of countries in which we
operate from reaching agreement, and are outside of our control.
Any work stoppage or failure to reach agreements with our unions
could have a material adverse effect on our customer relations, our
productivity, the profitability of a manufacturing facility, our
ability to develop new products and on our operations as a whole,
resulting in an adverse impact on our business, financial
condition, results of operations and cash flows.
Our business is subject to various environmental laws, regulations
and related litigation that could impose substantial costs or other
liabilities on us.
Our facilities
are subject to significant federal, state, local and foreign
environmental protection laws with respect to air, water and
emissions as well as the disposal of solid waste. We believe that
we are operating in substantial compliance
with these laws
and regularly incur capital and operating expenditures in order to
achieve future compliance. However, these laws may change, which
could require changes in our practices, additional capital
expenditures or loss of carbon credits, and we may discover aspects
of our business that are not in compliance. Violation of these laws
can result in the imposition of significant fines and remediation
costs. In France, we presently have sufficient authorized capacity
for our emissions of carbon dioxide through 2020. However, this
authorization must be renewed periodically. We cannot predict
whether we will have sufficient authorized capacity to conduct our
operations in France as presently conducted or to do so without
having to make substantial capital expenditures in future
years.
We are a member
of a potentially responsible party group ("Global PRP Group") that
entered into a settlement with the State of New Jersey in 1993
concerning the remediation of a landfill site in Middlesex County,
New Jersey. The landfill remediation has been completed. We have
established a reserve of approximately $0.3 million that we believe
is adequate to cover our ongoing liability, but we remain exposed
to post-closure operating costs over an extended period of years
that cannot be fully known or estimated at this time.
Additionally, in
recent years, assessments of the potential impacts of climate
change have begun to influence governmental authorities, consumer
behavior patterns and the general business environment of the
European Union and the United States. The implementation of these
policies may require us to invest additional capital in our
properties or it may restrict the availability of land we are able
to develop. These changes, or other changes in other environmental
laws or the interpretation thereof, new enforcement of laws, the
identification of new facts or the failure of other parties to
perform remediation at our current or former facilities could lead
to new or greater liabilities that could materially adversely
affect our business, results of operations, cash flows or financial
condition.
Although we are
not aware of any environmental conditions at any of our facilities
that could have a material adverse effect on our financial
condition, results of operations and cash flows, we own facilities
in France, the U.S. and elsewhere that have been operated over the
course of many decades. Should the Company make material changes in
the operations at a facility it is possible such changes could
generate environmental obligations that might require remediation
or other action, the nature, extent and cost of which are not
presently known. We may also face higher disposal and clean-up
costs to replace equipment or facilities containing materials that
were compliant when installed, but are now considered contaminants.
Additionally, as we sell closed or other facilities or materially
alter operations at a facility, we may be required to perform
additional environmental evaluations that could identify items that
might require remediation or other action, the nature, extent and
cost of which are not presently known. We may also incur
environmental liabilities in connection with assets or businesses
we may purchase in the future.
Increases in costs of pension benefits may reduce our
profitability.
Our results of
operations may be negatively affected by expenses we record for our
defined benefit pension plans. Generally accepted accounting
principles in the U.S., ("GAAP"), require that we calculate income
or expense for the plans using actuarial valuations. These
valuations reflect assumptions about financial markets, longevity
of our current and former employees and other economic conditions,
which may change based on changes in key economic indicators and
mortality tables. We are required to make an annual measurement of
plan assets and liabilities, which may result in increased funding
obligations or negative changes in our stockholder equity. At the
end of 2019, the combined projected
benefit obligation of our U.S. and French pension and other
postretirement healthcare plans had a net underfunding of
$26.3
million.
For a discussion regarding our pension obligations, see Note
19. Postretirement and Other
Benefits of the Notes to Consolidated Financial Statements in Part
II, Item 8 and "Other Factors Affecting Liquidity and Capital
Resources" in Part II, Item 7. Although expense and pension funding
contributions are not directly related, key economic factors that
affect expense would also likely affect the amount of cash we would
contribute to pension plans as required under the Employee
Retirement Income Security Act ("ERISA") for U.S. plans. Failure to
achieve expected returns on plan assets driven by various factors,
which could include a continued environment of low interest rates
or sustained market volatility, could also result in an increase to
the amount of cash we would be required to contribute to pension
plans.
We are subject to various legal actions and other
claims.
We regularly are
involved in legal actions and other claims arising in the ordinary
course of business and otherwise. We are also subject to many laws
and regulations around the world. Despite our efforts, we cannot
guarantee that we are in compliance with every such law or
regulation. Because of the complexity of Brazilian tax laws and
court systems, legal actions are a particular risk that affects our
Brazilian operations. Although we believe that our positions
in pending disputes about state and federal taxes are correct and
will ultimately be upheld by Brazilian courts, the outcome of legal
proceedings is difficult to predict. An adverse result in one or
more of these tax disputes could have a material adverse impact on
our financial condition, results of operations and cash flows. We
are also subject to other litigation in Brazil, including labor and
workplace safety claims. Although we do not believe that any of the
currently pending actions or claims against us will have a material
adverse impact on our financial condition, results of operations
and cash flows, we cannot provide any assurances in this regard.
Information concerning some of these actions that currently are
pending is contained in Note 21. Commitments and
Contingencies, of the Notes to Consolidated Financial Statements
and in Part I, Item 3, “Legal Proceedings” of this report. We also
cannot give any assurances as to any litigation that might be filed
against us in the future, including any claims relating to the
alleged harmful effect of tobacco use on human health.
One portion of our business is dependent upon a single plant;
further, we have limited cross redundancy across our
facilities.
Sales of RTL
products represent a substantial portion of our revenues and
profits. We presently produce RTL at only one facility located in
France and wrapper and binder products at only one facility located
in Ancram, New York. In our AMS business, in order to enhance the
protection of our trade secrets, critical proprietary dies used in
a significant portion of our extruding operations are made with
very limited personnel trained to manufacture them and very strict
access to the equipment. Further, in order to achieve operational
efficiencies, among other reasons, we have limited ability to shift
production across our various facilities, thus the loss of
production at one facility may not be able to be mitigated by
increased production at another. Consequently, natural disasters,
pandemics and other unusual events could cause the loss of, or
interruption of operations for a significant length of time at, one
or more of our facilities in six different countries, which could
have a material adverse effect on our financial condition, results
of operations and cash flows.
Any loss or interruption of the operations of our facilities may
harm our operating performance.
Our revenues
depend on the effective operation of our manufacturing facilities.
The operation of our facilities involves risks, including the
breakdown, failure, or substandard performance of equipment, power
outages, the improper installation or operation of equipment,
explosions, fires, natural disasters, failure to achieve or
maintain safety or quality standards, work stoppages, supply or
logistical outages, and the need to comply with environmental and
other directives of governmental agencies. Moreover, natural
disasters, political crises, public health crises or other
unforeseen catastrophic events in any of the countries we operate
may negatively impact our facilities, our supply chain or
customers. For example, in December 2019 and January 2020, a strain
of Coronavirus was reported to have surfaced in China, and the
Chinese government response aimed at limiting the spread of the
virus included quarantines that restricted the conduct of
manufacturing operations, including our facilities in Suzhou and
the Chinese joint ventures in which we have an interest. Spread of
the Coronavirus strain and its effects on related travel, as well
as commercial or other restrictions could result in global supply
chain disruptions. If we experience supply disruptions, we may not
be able to develop alternate sourcing quickly. Any disruption of
our production schedule caused by an unexpected shortage of
components, raw materials or parts even for a relatively short
period of time could cause us to alter production schedules or
suspend production entirely, which would adversely affect our
business and results of operations. The occurrence of material
operational problems, including, but not limited to, the above
events, could cause the loss of, or interruption of, operations for
a significant length of time, which could have a material adverse
effect on our financial condition, results of operations and cash
flows.
In addition, many
of our operations require a reliable and abundant supply of water.
Production facilities for our EP segment rely on a local water body
or water source for their water needs and, therefore, are
particularly sensitive to drought conditions or other natural or
man-made interruptions to water supplies. At various times and for
differing
periods, we have
had to modify operations at certain of our mills due to water
shortages, water clarity, or low flow conditions in its principal
water supplies. Any interruption or curtailment of operations at
any of our production facilities due to drought or low flow
conditions at the principal water source or another cause could
materially and adversely affect our operating results and financial
condition.
Fluctuations in construction and infrastructure spending can impact
demand for certain of our products.
Demand for
certain of our products depends on spending in the construction
industry, both residential and non-residential, as well as
infrastructure sectors. Spending in those sectors is impacted by
numerous circumstances beyond our control including, but not
limited to, interest rates, availability of financing, housing
inventory, capital spending, corporate investment, local, federal
and state regulations, as well as availability and commitment of
public funds for municipal spending, capacity utilization and
general economic conditions. Decreased spending in any of these
sectors could have an adverse impact on our financial condition,
results of operations, and cash flows during the duration of their
down cycle.
Historically, we have experienced significant cost savings and
productivity benefits relating to our ongoing operational
excellence program; however, these benefits may not continue
indefinitely or at the same levels.
Historically, we
have experienced significant cost savings and productivity benefits
relating to our ongoing operational excellence program as it
relates to our tobacco operations that have supported our margins
during periods of significant attrition in the tobacco industry. We
expect to continue to achieve significant savings and benefits from
this program; however, in light of continued industry attrition,
execution risks and other factors, we may be unable to continue in
the future to obtain savings and benefits in line with historical
achievements, and our profitability and financial results could be
adversely affected.
Similarly, though
we have initiated implementation of this program in our AMS
business operations in order to achieve margin improvements, due to
the different company cultures of the acquisitions that make up a
significant part of AMS and our continuing integration of these
acquisitions, we may not be able to achieve the desired margin
improvements through our operational excellence program at
AMS.
Item
1B.
Unresolved Staff Comments
None.
Item
2.
Properties
As of
December 31,
2019, we
operated a total of 22 production facilities on four
continents.
The following are
the locations of our principal production facilities as of
December 31,
2019.
Except as otherwise noted, we own the facilities listed
below:
|
|
|
|
|
|
|
|
|
|
Advanced
Materials & Structures Segment Production
Locations
|
|
Approximate
Square Footage of Buildings
|
|
Engineered
Papers
Segment
Production Locations
|
|
Approximate
Square Footage of Buildings
|
Middletown Manufacturing
Site
|
|
|
|
Spotswood Plant
|
|
|
Middletown,
Delaware
|
|
142,000
|
|
|
Spotswood, New
Jersey
|
|
399,000
|
|
|
|
|
|
|
|
|
Tubing
Operations*
|
|
|
|
Papeteries de Saint-Girons
Plant
|
|
|
Richland,
Pennsylvania
|
|
35,000
|
|
|
Saint-Girons,
France
|
|
214,000
|
|
|
|
|
|
|
|
|
Tubing
Operations*
|
|
|
|
PDM Industries
Plant
|
|
|
El Cajon,
California
|
|
22,000
|
|
|
Quimperlé,
France
|
|
592,000
|
|
|
|
|
|
|
|
|
Suzhou Manufacturing
Site*
|
|
|
|
Pirahy Plant
|
|
|
Suzhou, China
|
|
108,000
|
|
|
Piraí, Brazil
|
|
1,098,000
|
|
|
|
|
|
|
|
|
Poland Manufacturing
Site*
|
|
|
|
Poland Plant*
|
|
|
Strykow, Poland
|
|
42,000
|
|
|
Strykow, Poland
|
|
125,000
|
|
|
|
|
|
|
|
|
Gilberdyke Manufacturing
Site
|
|
|
|
Newberry
Operation
|
|
|
Gilberdyke, United
Kingdom
|
|
67,000
|
|
|
Prosperity, South
Carolina
|
|
50,000
|
|
|
|
|
|
|
|
|
Wilson Manufacturing
Site*
|
|
|
|
Fiber Operation
|
|
|
Wilson, North
Carolina
|
|
108,000
|
|
|
Manitoba, Canada
|
|
16,000
|
|
|
|
|
|
|
|
|
Argotec Manufacturing
Operations*
|
|
|
|
LTR Industries
Plant
|
|
|
Greenfield,
Massachusetts
|
|
182,000
|
|
|
Spay, France
|
|
736,000
|
|
|
|
|
|
|
|
|
Minneapolis Manufacturing
Site*
|
|
|
|
Ancram Plant
|
|
|
Minneapolis,
Minnesota
|
|
144,000
|
|
|
Ancram, New York
|
|
116,000
|
|
|
|
|
|
|
|
|
Athens Manufacturing
Site
|
|
|
|
|
|
|
Athens, Georgia
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Roanoke Manufacturing
Site
|
|
|
|
|
|
|
Roanoke,
Virginia
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicago Manufacturing
Site*
|
|
|
|
|
|
|
Chicago,
Illinois
|
|
66,000
|
|
|
|
|
|
|
|
|
|
|
|
|
European Manufacturing
Site
|
|
|
|
|
|
|
Genk, Belgium
|
|
90,000
|
|
|
|
|
|
|
|
|
|
|
|
|
* Leased
properties
|
|
|
|
|
|
|
During 2017 we
acquired five production locations in conjunction with our
acquisition of Conwed.
We had
approximately 152,000 metric tons of annual paper production
capacity, dependent upon the production mix. Capacity utilization
was 90% for EP products in 2019 compared with 80% in
2018. We also operate flax fiber
processing operations in Canada and printing operations in France,
Poland and the U.S.
We maintain
administrative and/or sales offices in Alpharetta, Georgia;
Quimperlé, France; Spay, France; Shanghai, China; Piraí, Brazil;
Moscow, Russia; Strykow, Poland; Middletown, Delaware; Greenfield,
Massachusetts; Luxembourg City, Luxembourg; and Minneapolis,
Minnesota. Our world headquarters are located in Alpharetta,
Georgia. All of these offices are owned except for those located in
Alpharetta, Shanghai, Moscow, Strykow, Greenfield, Minneapolis, and
Luxembourg City which are leased.
We consider all
of our facilities to be well-maintained, suitable for conducting
our operations and business, and adequately insured.
Item
3.
Legal Proceedings
General
We are involved
in various legal proceedings relating to contracts, commercial
disputes, taxes, environmental issues, employment and workers'
compensation claims, product liability and other matters. We
periodically review the status of these proceedings with both
inside and outside counsel. We believe that the ultimate
disposition of these matters will not have a material effect on the
results of operations in a given quarter or year, but no assurances
can be given in this regard. Below is a summary of major
outstanding litigation.
Litigation
Brazil
Imposto sobre
Circulação de Mercadorias e Serviços ("ICMS"), a form of
value-added tax in Brazil, was assessed to our legal entity in
Brazil, Schweitzer-Mauduit do Brasil Indústria e Comércio de Papel
Ltda., which owns EP segment's Brazilian plant, ("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
against SWM-B in the amount of approximately $12
million.
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 recorded an expense
sufficient to satisfy this amount in the second quarter of 2019.
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 consolidated statement of income for
the year ended December 31, 2019 related to the above two
assessments consist of the following:
|
|
|
|
|
|
Year Ended
December 31, 2019
|
Income
Statement Classification
|
(Expense)
Benefit
|
Cost of products
sold1
|
$
|
(1.5
|
)
|
Operating
profit1
|
(1.5
|
)
|
Other
expense2
|
(2.2
|
)
|
Interest
expense2
|
(7.1
|
)
|
Income from continuing
operations before income taxes
|
(10.8
|
)
|
Income tax
benefit
|
4.2
|
|
Net income
|
$
|
(6.6
|
)
|
1Cost
of products sold reflects the net of $2.6
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.
2Other
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 million
and
$7
million,
respectively, based on the foreign currency exchange rate at
December 31,
2019), and
SWM-B is now 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 SWM-B'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 $1 million
for ICMS on
electricity purchased during part of 2013. In August 2018, the
State filed a fourth Electricity Assessment in the amount of
$10
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. Both
the Junta de Revisão Fiscal and the Conselho de Contribuintes ruled
against SWM-B in the last two Electricity Assessments. SWM-B plans
to appeal these rulings to the full bench of 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 cannot
determine the outcome of the Electricity Assessments matters, so no
loss has been accrued in our consolidated financial statements for
them.
Germany
In January 2015,
the Company initiated patent infringement proceedings in Germany
against Glatz under multiple LIP-related patents. In December 2017,
the Dusseldorf Appeal Court affirmed the German District Court
judgment on infringement of EP 1482815 against Glatz. Glatz has
filed an action in the German Patent Court to invalidate the German
part of EP1482815. The trial on this invalidity action has not yet
been scheduled. The cost, timing and outcome of intellectual
property litigation can be unpredictable and thus no assurances can
be given as to the outcome or impact on us of such
litigation.
Environmental
Matters
Our operations
are subject to various federal, state and local laws, regulations
and ordinances in various nations relating to environmental
matters. The nature of our operations exposes us 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 we have incurred in
the past several years, and will continue to incur, capital and
operating expenditures in order to comply with environmental laws
and regulations, we believe that the future cost of compliance with
environmental laws, regulations and ordinances, our exposure to
liability for environmental claims, and our obligation to
participate in the remediation and monitoring of certain hazardous
waste disposal sites, will not have a material effect on our
financial condition or results of operations. However, future
events, such as changes in existing laws and regulations, or
unknown contamination or costs of remediation of sites owned,
operated or used for waste disposal by us (including contamination
caused by prior owners and operators of such sites or other waste
generators) may give rise to additional costs which could have a
material effect on our financial condition or results of
operations.
The Company
incurs spending necessary to meet legal requirements and otherwise
relating to the protection of the environment at its facilities in
the U.S., France, Poland, Brazil, China, the United Kingdom and
Canada. For these purposes, the Company incurred total capital
expenditures of $1.2 million
in
2019, and expects to incur less
than $1.0
million in
each of 2020 and 2021, of which no material amount is the result of
environmental fines or settlements. Should the Company make
material changes in the operations at a facility it is possible
such changes could generate environmental obligations that might
require remediation or other action, the nature, extent and cost of
which are not presently known. The foregoing capital expenditures
are not expected to reduce the Company's ability to invest in other
appropriate and necessary capital projects and are not expected to
have a material adverse effect on its financial condition or
results of operations.
Indemnification
Matters
In connection
with our spin-off from Kimberly-Clark in 1995, we undertook to
indemnify and hold Kimberly-Clark harmless from claims and
liabilities related to the businesses transferred to us that were
not identified as excluded liabilities in the related agreements.
As of December 31,
2019,
there are no material claims pending under this
indemnification.
Item
4.
Mine Safety Disclosures
Not applicable.
PART
II.
Item
5.
Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Market
Information. Since November 30, 1995,
our common stock, $0.10 par value per share ("Common Stock") has
been listed on the New York Stock Exchange, trading under the
symbol "SWM." On February 28, 2020, our stock closed at $33.72 per
share.
Performance
Graph. The
following graph compares the total cumulative stockholder return on
our Common Stock during the period from December 31, 2014 through
December 31, 2019, with the comparable cumulative total returns of
the Russell 2000 Index, the S&P SmallCap 600 Capped Materials
Index, both of which we consider to be reflective of the
performance of the industries in which we operate.
The graph assumes
that the value of the investments in the Common Stock and each
index were $100 on December 31, 2014 and that all dividends were
reinvested. The stock price performance shown on the graph below is
not necessarily indicative of future price
performance.
Comparison
of Cumulative Five Year Return
Holders.
As of March 2,
2020, there were 1,607 stockholders of record.
Dividends.
We have declared
and paid cash dividends on our Common Stock every fiscal quarter
since the second quarter of 1996. In 2019, 2018 and 2017, we declared and paid cash
dividends totaling $1.76 per share, $1.73 per share and $1.69 per
share, respectively. On February 20,
2020, we
announced a cash dividend of $0.44 per share payable on
March 20,
2020 to
stockholders of record as of the close of business on
March 4,
2020. Our
credit agreement covenants require that we maintain certain
financial ratios, as disclosed in Note 15. Debt, of the Notes to
Consolidated Financial Statements, none of which under normal
business conditions materially limit our ability to pay such
dividends. We will continue to assess our dividend policy in light
of our overall strategy, cash generation, debt levels and ongoing
requirements for cash to fund operations and to pursue possible
strategic opportunities.
Recent Sales
of Unregistered Securities. We had no unregistered sales
of equity securities during the fiscal year ended
December 31,
2019.
Repurchases
of Equity Securities. The following table indicates
the cost of and number of shares of our Common Stock we have
repurchased during 2019 and the remaining amount of
share repurchases currently authorized by our Board of Directors as
of
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
Purchases of Equity Securities
|
Period
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid
per
Share
|
|
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Programs
|
|
Approximate
Dollar Value of Shares that May Yet be Purchased Under the
Programs
|
|
|
|
|
|
|
(# shares)
|
|
($ in millions)
|
|
($ in millions)
|
January 1-March 31,
2019
|
|
24,372
|
|
|
$
|
37.59
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
April 1-June 30,
2019
|
|
773
|
|
|
34.84
|
|
|
—
|
|
|
—
|
|
|
—
|
|
July 1-September 30,
2019
|
|
152
|
|
|
33.33
|
|
|
—
|
|
|
—
|
|
|
—
|
|
October 1-October 31,
2019
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
November 1-November 30,
2019
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
December 1-December 31,
2019
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total 2019
|
|
25,297
|
|
|
$
|
37.48
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
We sometimes use
corporate 10b5-1 plans to allow for share repurchases to be made at
predetermined stock price levels, without restricting such
repurchases to specific windows of time. Any future
common stock repurchases will be dependent upon various factors,
including the stock price of our Common Stock, strategic
opportunities, strategic outlook and cash availability. From
time-to-time, certain of our officers and directors may sell shares
pursuant to personal 10b5-1 plans.
Item
6.
Selected Financial Data
The following
selected financial data should be read in conjunction with Part II,
Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the consolidated
financial statements and related notes within this Annual Report on
Form 10-K. The results for 2017 and 2015 include results of
operations of Conwed and Argotec from the date of their
acquisitions of January 20, 2017 and October 28, 2015,
respectively. All dollar amounts are in millions except per share
amounts, statistical data and ratios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
(1)
|
|
2016
(1)
|
|
2015
(1)
|
Results of
Operations
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,022.8
|
|
|
$
|
1,041.3
|
|
|
$
|
982.1
|
|
|
$
|
839.9
|
|
|
$
|
764.1
|
|
Cost of products
sold
|
732.8
|
|
|
762.8
|
|
|
698.7
|
|
|
582.0
|
|
|
538.3
|
|
Gross profit
|
290.0
|
|
|
278.5
|
|
|
283.4
|
|
|
257.9
|
|
|
225.8
|
|
Nonmanufacturing
expenses
|
152.3
|
|
|
141.8
|
|
|
147.0
|
|
|
122.3
|
|
|
104.8
|
|
Restructuring &
impairment expense
|
3.7
|
|
|
1.7
|
|
|
8.1
|
|
|
25.6
|
|
|
14.6
|
|
Operating profit
|
134.0
|
|
|
135.0
|
|
|
128.3
|
|
|
110.0
|
|
|
106.4
|
|
Income from continuing
operations
|
85.8
|
|
|
94.8
|
|
|
34.4
|
|
|
82.8
|
|
|
90.5
|
|
Income (loss) from
discontinued operations
|
—
|
|
|
(0.3
|
)
|
|
0.1
|
|
|
—
|
|
|
(0.8
|
)
|
Net income
|
$
|
85.8
|
|
|
$
|
94.5
|
|
|
$
|
34.5
|
|
|
$
|
82.8
|
|
|
$
|
89.7
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share -
basic:
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
$
|
2.78
|
|
|
$
|
3.08
|
|
|
$
|
1.12
|
|
|
$
|
2.71
|
|
|
$
|
2.97
|
|
(Loss) income from
discontinued operations
|
—
|
|
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
(0.02
|
)
|
Net income per share -
basic
|
$
|
2.78
|
|
|
$
|
3.07
|
|
|
$
|
1.12
|
|
|
$
|
2.71
|
|
|
$
|
2.95
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share -
diluted:
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
$
|
2.76
|
|
|
$
|
3.07
|
|
|
$
|
1.12
|
|
|
$
|
2.70
|
|
|
$
|
2.96
|
|
(Loss) income from
discontinued operations
|
—
|
|
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
(0.02
|
)
|
Net income per share -
diluted
|
$
|
2.76
|
|
|
$
|
3.06
|
|
|
$
|
1.12
|
|
|
$
|
2.70
|
|
|
$
|
2.94
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared and
paid per share
|
$
|
1.76
|
|
|
$
|
1.73
|
|
|
$
|
1.69
|
|
|
$
|
1.62
|
|
|
$
|
1.54
|
|
EBITDA from continuing
operations(2)
|
$
|
195.1
|
|
|
$
|
193.9
|
|
|
$
|
192.4
|
|
|
$
|
157.6
|
|
|
$
|
162.8
|
|
Adjusted EBITDA from
continuing operations (2)
|
$
|
197.2
|
|
|
$
|
196.9
|
|
|
$
|
197.9
|
|
|
$
|
178.4
|
|
|
$
|
162.0
|
|
Percent of
Net Sales
|
|
|
|
|
|
|
|
|
|
Gross profit
|
28.4
|
%
|
|
26.7
|
%
|
|
28.9
|
%
|
|
30.7
|
%
|
|
29.6
|
%
|
Nonmanufacturing
expenses
|
14.9
|
%
|
|
13.6
|
%
|
|
15.0
|
%
|
|
14.6
|
%
|
|
13.7
|
%
|
Financial
Position
|
|
|
|
|
|
|
|
|
|
Capital spending
|
$
|
28.6
|
|
|
$
|
27.0
|
|
|
$
|
37.2
|
|
|
$
|
27.8
|
|
|
$
|
24.2
|
|
Depreciation and
amortization
|
57.7
|
|
|
61.6
|
|
|
59.5
|
|
|
44.5
|
|
|
41.0
|
|
Total assets
|
1,471.7
|
|
|
1,466.5
|
|
|
1,542.5
|
|
|
1,173.7
|
|
|
1,290.0
|
|
Total debt
|
542.7
|
|
|
622.1
|
|
|
684.2
|
|
|
440.4
|
|
|
571.5
|
|
Total debt to capital
ratio
|
47.6
|
%
|
|
52.7
|
%
|
|
55.6
|
%
|
|
46.4
|
%
|
|
55.0
|
%
|
|
|
(1)
|
In March 2017,
the FASB issued ASU 2017-07, "Compensation - Retirement Benefits
(Topic 715): Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost." The amendment
requires an employer to report the service cost component in the
same line item or line items as other compensation costs arising
from services rendered by the pertinent employees during the
period. The other
|
components of net
benefit cost are required to be presented in the income statement
separately from the service cost component and outside a subtotal
from operations. The Company adopted this ASU effective January 1,
2018, utilizing the retrospective transition approach upon
adoption. The adoption of this guidance resulted in a
reclassification of the components of net periodic pension cost,
other than service cost, from Cost of products sold and General
expense to Other income (expense), net, in the Consolidated
Statements of Income. The reclassification of these costs affects
only the EP segment, as there are no pension costs associated with
the AMS segment. For the years ended December 31, 2017, 2016 and
2015, respectively, $3.6 million, $3.9 million and $3.4 million in
pension expense were reclassified from Operating profit to Other
expense in the consolidated statement of income for the 2017, 2016
and 2015 comparative periods. The adoption of this guidance had no
effect on Net income in the Consolidated Statements of Income and
no effect on the other consolidated financial
statements.
|
|
(2)
|
Earnings before
interest, taxes, depreciation and amortization ("EBITDA") from
Continuing Operations is a non-GAAP financial measure that is
calculated by adding interest expense, income tax provision and
depreciation and amortization expense to income from continuing
operations. Adjusted EBITDA from Continuing Operations is a
non-GAAP financial measure that is calculated by adding
restructuring and impairment expense, Loss (income) from equity
affiliates and Other (income) expense, net to EBITDA from
continuing operations. We caution investors that amounts presented
in accordance with our definitions of EBITDA from Continuing
Operations and Adjusted EBITDA from Continuing Operations may not
be comparable to similar measures disclosed by our competitors,
because not all companies and analysts calculate EBITDA from
Continuing Operations and Adjusted EBITDA from Continuing
Operations in the same manner. We present EBITDA from Continuing
Operations and Adjusted EBITDA from Continuing Operations because
we consider them to be important supplemental measures of our
performance and believe they are frequently used by securities
analysts, investors and other interested parties in the evaluation
of companies in our industry. Reconciliations to income from
continuing operations are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
Income from continuing
operations
|
$
|
85.8
|
|
|
$
|
94.8
|
|
|
$
|
34.4
|
|
|
$
|
82.8
|
|
|
$
|
90.5
|
|
Plus: Interest
expense
|
36.1
|
|
|
28.2
|
|
|
26.9
|
|
|
16.6
|
|
|
9.7
|
|
Plus: Income tax
provision
|
15.2
|
|
|
10.7
|
|
|
69.6
|
|
|
15.4
|
|
|
21.6
|
|
Plus: Depreciation and
amortization(1)
|
58.0
|
|
|
60.2
|
|
|
61.5
|
|
|
42.8
|
|
|
41.0
|
|
EBITDA from continuing
operations
|
195.1
|
|
|
193.9
|
|
|
192.4
|
|
|
157.6
|
|
|
162.8
|
|
Plus: Restructuring and
impairment expense
|
3.7
|
|
|
1.7
|
|
|
8.1
|
|
|
25.6
|
|
|
14.6
|
|
Plus: Loss (income) from
equity affiliates
|
(4.1
|
)
|
|
11.3
|
|
|
(2.5
|
)
|
|
(4.8
|
)
|
|
(6.6
|
)
|
Plus: Other (income) expense,
net
|
1.0
|
|
|
(10.0
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
(8.8
|
)
|
Plus: Litigation related
expenses
|
1.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Adjusted EBITDA from
continuing operations
|
$
|
197.2
|
|
|
$
|
196.9
|
|
|
$
|
197.9
|
|
|
$
|
178.4
|
|
|
$
|
162.0
|
|
|
|
(1)
|
A total of ($0.3)
million, $1.4 million, ($2.0) million, $1.7 million, and $0.0
million, primarily related to amortization of deferred debt
issuance costs, amortization of bond discount, and amortization of
gains from termination of interest rate swaps in 2019, 2018, 2017,
2016, and 2015, respectively, are excluded from the Depreciation
and amortization in the table above. The deferred debt issuance
costs, amortization of bond discount and amortization of gains from
the termination of interest rate swaps are included in Interest
expense.
|
Item
7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
The
following is a discussion of our financial condition and results of
operations. This discussion should be read in conjunction with our
consolidated financial statements and related notes included
elsewhere in this Annual Report on Form 10-K and the selected
financial data included in Part II, Item 6, "Selected Financial
Data" of this Annual Report on Form 10-K. The discussion of our
financial condition and results of operations includes various
forward-looking statements about our markets, the demand for our
products and our future prospects. These statements are based on
certain assumptions that we consider reasonable. For information
about risks and exposures relating to us and our business, you
should read the sections entitled "Factors That May Affect Future
Results," in Part I, Item 1A of this Annual Report on Form 10-K and
"Forward Looking Statements" at the end of this Item 7. Unless the
context indicates otherwise, references to "SWM," the "Company,"
"we," "us," "our," or similar terms include Schweitzer-Mauduit
International, Inc. and our consolidated subsidiaries.
This Management's
Discussion and Analysis of Financial Condition and Results of
Operations is designed to provide a reader of our financial
statements with an understanding of our recent performance, our
financial condition and our prospects. The following will be
discussed and analyzed:
|
|
•
|
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES;
|
|
|
•
|
RECENT
ACCOUNTING PRONOUNCEMENTS;
|
|
|
•
|
LIQUIDITY
AND CAPITAL RESOURCES;
|
|
|
•
|
OTHER
FACTORS AFFECTING LIQUIDITY AND CAPITAL RESOURCES;
|
|
|
•
|
FORWARD-LOOKING
STATEMENTS.
|
SUMMARY
In
2019, SWM reported net income
of $85.8
million on
total net sales of $1,022.8
million.
Compared to the prior year, net sales decreased $18.5
million,
however excluding negative currency impact, net sales would have
increased $2.7 million due primarily to an increase in organic
sales in the AMS segment.
Net income
decreased to $85.8 million
in
2019
compared
to $94.5
million in 2018. Outside of typical business
drivers, several large one-time items affect the year-over-year
comparison. In 2019, these items included $6.6 million
(after- tax) of
expenses related to Brazil tax assessments, and in 2018 included a
$15.0 million (after-tax) impairment of the Company’s interest in
one of its joint ventures in China, a $7.7 million (after-tax)
favorable revaluation of a contingent consideration liability
related to the Conwed acquisition, and a favorable $13.0 million
tax adjustment related to the Tax Act. Business trends that were
key drivers of year-over-year financial performance included sales
growth in AMS, positive price/mix benefits in EP, cost reduction
activities in both segments, and an improved raw materials cost
environment across the business.
Cash provided by
operations was $160.3 million
in
2019
up from
$139.1
million in 2018. Uses of cash during
2019
included
$80.5
million in
net debt repayments, $54.4 million
in cash dividends
paid to SWM stockholders and $28.6 million
of capital
spending.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We disclose those
accounting policies that we consider to be significant in
determining the amounts to be utilized for communicating our
consolidated financial position, results of operations and cash
flows in the first note to our consolidated financial statements
included elsewhere herein. Our discussion and analysis of our
financial condition and results of operations are based on our
consolidated financial statements. Our consolidated financial
statements are prepared in conformity with accounting principles
generally accepted in the U.S., which require management to make
estimates that affect the amounts of revenues, expenses, assets and
liabilities reported and disclosure of contingencies. Changes in
these estimates could have a material impact on our financial
position, results of operations, and cash flows. We discussed with
the Audit Committee of the Board of Directors the estimates and
judgments made for each of the following items and our accounting
for and presentation of these items in the accompanying financial
statements:
Accounting
for Income Taxes
Our income tax
expense, deferred tax assets and liabilities, and liabilities for
unrecognized tax benefits reflect management’s best estimate of
current and future taxes to be paid. We are subject to income taxes
in the U.S. and numerous foreign jurisdictions. The complexity of
our global structure requires significant judgments and estimates
in determining the allocation of income to each of these
jurisdictions and consolidated income tax expense.
Deferred income
taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial
statements, which will result in taxable or deductible amounts in
the future. In evaluating our ability to recover our deferred tax
assets in the jurisdiction from which they arise, we consider all
available positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable
income, tax-planning strategies, and results of recent operations.
In projecting future taxable income, we begin with historical
results adjusted for the results of discontinued operations and
incorporate assumptions about the amount of future state, federal,
and foreign pretax operating income adjusted for items that do not
have tax consequences. The assumptions about future taxable income
require the use of significant judgment and are consistent with the
plans and estimates we are using to manage the underlying
businesses. In evaluating the objective evidence that historical
results provide, we consider three years of cumulative operating
income (loss).
The calculation
of our tax liabilities involves dealing with uncertainties in the
application of complex tax laws and regulations in a multitude of
jurisdictions across our global operations. Accounting Standards
Codification Topic No. 740, Income
Taxes ("ASC 740"), states that a
tax benefit from an uncertain tax position may be recognized when
it is more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or
litigation processes, on the basis of the technical merits. We (1)
record unrecognized tax benefits as liabilities in accordance with
ASC 740 and (2) adjust these liabilities when our judgment changes
as a result of the evaluation of new information not previously
available. Because of the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that
is materially different from our current estimate of the
unrecognized tax benefit liabilities. These differences will be
reflected as increases or decreases to income tax expense in the
period in which new information is available.
On December 22,
2017, the Tax Cut and Jobs Act (the “Tax Act”) was enacted into law
effective January 1, 2018. The new legislation contains several key
tax provisions that affected the Company, and include but are not
limited to a one-time deemed repatriation tax on post-1986
accumulated earnings and profits of the foreign subsidiary
undistributed earnings (“transition tax”), a reduction of the
federal corporate income tax rate from 35% to 21%, a new deduction
for Foreign-Derived Intangible Income ("FDII"), and a new provision
designed to tax Global Intangible Low Taxed Income (“GILTI”) of
foreign subsidiaries effective January 1, 2018. As a result of the
GILTI provision, the FASB issued Staff Q&A Topic 740, No. 5
“Accounting for Global Intangible Low-Taxed Income” requiring an
entity to make an accounting policy election to either recognize
deferred taxes for temporary basis differences expected to reverse
as GILTI in future years or to provide for the tax expense related
to GILTI in the year the tax is incurred as a period expense only.
We have elected to account for GILTI as a current period expense
when incurred. Management makes certain judgments in interpreting
the manner in which complex key provisions of the Tax Act should be
applied and in the determination of income tax expense and
liabilities.
Revenue
Recognition
We have two main
sources of revenue: product sales and materials conversion. We
recognize product sales revenues when control of a product is
transferred to the customer. For the majority of product sales,
transfer of control occurs when the products are shipped from one
of our manufacturing facilities to the customer. The cost of
delivering finished goods to our customers is recorded as a
component of cost of products sold. Those costs include the amounts
paid to a third party to deliver the finished goods. Any freight
costs billed to and paid by a customer are included in net sales.
We also provide services to customers through the conversion of
customer-owned raw materials into processed finished goods. In
these transactions, we generally recognize revenue as processing is
completed.
Revenue is
recognized when performance obligations under the terms of a
contract with a customer are satisfied, which generally occurs when
control of the promised goods or services is transferred to the
customer, in an amount that reflects the consideration we expect to
be entitled to in exchange for those goods or services. Generally,
we consider collectability of amounts due under a contract to be
probable upon inception of a sale based on an evaluation of the
credit worthiness of each customer. If collectability is not
considered to be probable, we defer recognition of revenue on
satisfied performance obligations until the uncertainty is
resolved. Any variable consideration, such as discounts or price
concessions, is set forth in the terms of the contract at
inception, and is included in the assessment of the transaction
price at the outset of the arrangement. The transaction price is
allocated to the individual performance obligations due under the
contract based on the relative stand-alone fair value of the
performance obligations identified in the contract. We typically
use an observable price to determine the stand-alone selling price
for separate performance obligations.
We do not
typically include extended payment terms or significant financing
components in our contracts with customers. Certain product sales
contracts may include cash-based incentives (volume rebates or
credits), which are accounted for as variable
consideration. We estimate these amounts at least
quarterly based on the expected forecast quantities to be provided
to customers and reduce revenues recognized accordingly. Incidental
items that are immaterial in the context of the contract are
recognized as expense in the period incurred. We generally expense
sales commissions when incurred because the amortization period is
one year or less. These costs are recorded within sales and
marketing expenses. We do not disclose the value of unsatisfied
performance obligations for (i) contracts with an original expected
length of one year or less and (ii) contracts for which we
recognize revenue at the amount to which we have the right to
invoice for services performed. As a practical expedient, we treat
shipping and handling activities that occur after control of the
good transfers as fulfillment activities, and therefore, does not
account for shipping and handling costs as a separate performance
obligation.
Accounting
for Contingencies
We accrue an
estimated loss by taking a charge to income when the likelihood
that a future event, such as a legal proceeding, will result in a
loss or the incurrence of a liability is probable and the amount of
loss can be reasonably estimated. We disclose material
contingencies if there is at least a reasonable possibility that a
loss has been incurred. In determining whether a loss should be
accrued, we evaluate, among other factors, the degree of
probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss. Changes in these factors
could materially impact our financial condition, results of
operations, and our cash flows.
For further
information, please see "Litigation" in Part I, Item 3, "Legal
Proceedings" and Note 21. Commitments and
Contingencies, of the Notes to Consolidated Financial
Statements.
Property,
Plant and Equipment Valuation
Certain of our
manufacturing processes are capital intensive; as a result, we make
substantial investments in property, plant and equipment which are
recorded at cost. Net property, plant and equipment
comprised 22% of our total assets as
of December 31,
2019.
Property, plant and equipment is depreciated on the straight-line
method over the estimated useful lives of the assets. Production
machines and related equipment are not subject to substantial
technological changes rendering them obsolete and are generally
depreciated over estimated useful lives of 10 to 20 years. When
indications of impairment exist, we assess the likelihood of
recovering the cost of long-lived assets based on our expectation
of future profitability and undiscounted cash flow of the related
asset group. These factors, along with management's plans with
respect to the operations, are considered in assessing the
recoverability of property, plant and equipment. Changes in
management's estimates and plans could significantly impact our
financial condition, results of operations and cash
flows.
As a result of
excess capacity in the tobacco-related papers industry and
increased purchased material and operating costs experienced in the
last several years, competitive selling prices for certain of our
products are not sufficient to cover our costs with a reasonable
margin. Such competitive pressures have resulted in downtime of
certain paper machines and, in some cases, accelerated depreciation
or impairment of certain equipment. We have also incurred
restructuring costs in our AMS segment in pursuit of synergies from
integrating our acquisitions. Over the past six years, we have
restructured our operations to improve our competitiveness and
profitability. As a result, we incurred significant charges related
to asset impairments, accelerated depreciation and employee
severances.
In 2011, the
Company revised its plans for RTL expansion in Asia and suspended
the construction of the Philippine Greenfield site. In 2015, the
Company made the decision to dispose of the facility and related
equipment. The Company reviewed these assets at each reporting
period and recognized an impairment charge for the excess of
carrying value of the assets over the fair value less any costs to
sell. During 2017, the Company recognized impairment charges of
$4.0 million related to the RTL Philippines assets. The Company did
not record any additional impairment charges during 2018 or 2019.
The legal entity and its related assets were sold on December 18,
2019 for total consideration of $13.3 million, and the Company
recorded a net gain of $0.3 million.
Management
continues to evaluate how to operate our production facilities more
effectively. Further restructuring actions are possible that might
require additional impairments or accelerated depreciation of some
equipment.
Business
Combinations
Accounting for
business combinations requires us to recognize, separately from
goodwill, the assets acquired and the liabilities assumed ("net
assets") at their acquisition date fair values. Goodwill is
measured as the excess of consideration transferred over the net
assets acquired at their respective fair values as of the
acquisition date. The estimated fair values are based upon quoted
market prices and widely accepted valuation techniques, which
require significant estimates and assumptions including, but not
limited to, estimating future cash flows and developing appropriate
discount rates. While we use our best estimates and assumptions to
accurately value assets acquired and liabilities assumed at the
acquisition date, our estimates are inherently uncertain and
subject to refinement. As a result, during the measurement period,
which may be up to one year from the acquisition date, we may
record adjustments to the assets acquired and liabilities assumed
with the corresponding adjustment to goodwill, based on new
information obtained about the facts and circumstances that existed
as of the acquisition date. Upon the conclusion of the measurement
period or final determination of the values of net assets acquired,
whichever comes first, any subsequent adjustments are recorded to
our consolidated financial statements. See Note 5. Business Acquisitions, of
the Notes to Consolidated Financial Statements for additional
information.
Investments
in Equity Affiliates
Investments in
companies which we do not control but over which we have the
ability to exercise significant influence and that, in general, are
at least 20 percent-owned by us, are stated at cost plus
equity in undistributed net income. These investments are evaluated
for impairment when warranted. An impairment loss would be recorded
whenever a decline in value of an equity investment below its
carrying amount is determined to be other than temporary. In
judging "other than temporary," we consider the length of time and
extent to which the fair value of the equity company investment has
been less than the carrying amount, the near-term and longer-term
operating and financial prospects of the equity company, and our
longer-term intent of retaining the investment in the equity
company. See Note 10. Joint Ventures, of the
Notes to Consolidated Financial Statements for additional
information.
Goodwill
and Unamortized Intangible Assets
Goodwill is not
subject to amortization and is tested for impairment annually, or
more frequently if events or changes in circumstances indicate that
the asset may be impaired. Goodwill is measured as the excess of
consideration transferred over the net assets acquired at their
respective fair values as of the acquisition date. Goodwill is
tested for impairment at the reporting unit level. Fair value of a
reporting unit is typically based upon estimated future cash flows
discounted at a rate commensurate with the risk involved or
market-based comparables. If the carrying amount of the reporting
unit’s net assets exceeds its fair value, then an analysis will be
performed to compare the implied fair value of goodwill with the
carrying amount of goodwill. An impairment loss will be recognized
in an amount equal to the excess of the carrying amount over its
implied fair value. After an impairment loss is recognized, the
adjusted carrying amount of goodwill is its new accounting basis.
The annual impairment tests performed on October 1,
2019
and
2018
did not indicate
any impairment of goodwill.
Intangible assets
with finite lives are amortized over their estimated useful lives
and are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be
recoverable. An impairment loss would be indicated when estimated
undiscounted future cash flows from the use of the asset are less
than its carrying amount. An impairment loss would be measured as
the difference between the fair value (based on discounted future
cash flows) and the carrying amount of the asset. Estimated useful
lives range from 10 to 23 years for customer relationships and 4 to
20 years for developed technology, patents and other intangible
assets. Certain trade names are estimated to have indefinite useful
lives and as such are not amortized. Intangible assets with
indefinite lives are reviewed for impairment following a method
similar to the impairment testing for Goodwill. Testing of
these assets is performed annually and whenever events and
circumstances indicate that impairment may have occurred. The
annual impairment tests performed in the year of
2019
and
2018
did not indicate
any impairment of intangible assets.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion
regarding recent accounting pronouncements, see "Recent Accounting
Pronouncements" included in Note 2. Summary of Significant
Accounting Policies, of the Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
Ended December 31,
|
|
2019
|
|
2018
|
|
2017(1)
|
|
($ in millions, except per
share amounts)
|
Net sales
|
$
|
1,022.8
|
|
|
$
|
1,041.3
|
|
|
$
|
982.1
|
|
Cost of products
sold
|
732.8
|
|
|
762.8
|
|
|
698.7
|
|
Gross profit
|
290.0
|
|
|
278.5
|
|
|
283.4
|
|
Selling expense
|
33.7
|
|
|
35.7
|
|
|
33.3
|
|
Research expense
|
13.5
|
|
|
15.2
|
|
|
17.8
|
|
General expense
|
105.1
|
|
|
90.9
|
|
|
95.9
|
|
Total nonmanufacturing
expenses
|
152.3
|
|
|
141.8
|
|
|
147.0
|
|
Restructuring and impairment
expense
|
3.7
|
|
|
1.7
|
|
|
8.1
|
|
Operating profit
|
134.0
|
|
|
135.0
|
|
|
128.3
|
|
Interest expense
|
36.1
|
|
|
28.2
|
|
|
26.9
|
|
Other (expense) income,
net
|
(1.0
|
)
|
|
10.0
|
|
|
0.1
|
|
Income from
continuing operations before income taxes and income from equity
affiliates
|
96.9
|
|
|
116.8
|
|
|
101.5
|
|
Provision for income
taxes
|
15.2
|
|
|
10.7
|
|
|
69.6
|
|
Income (loss) from equity
affiliates, net of income taxes
|
4.1
|
|
|
(11.3
|
)
|
|
2.5
|
|
Income from continuing
operations
|
85.8
|
|
|
94.8
|
|
|
34.4
|
|
(Loss) gain from discontinued
operations
|
—
|
|
|
(0.3
|
)
|
|
0.1
|
|
Net income
|
$
|
85.8
|
|
|
$
|
94.5
|
|
|
$
|
34.5
|
|
|
|
|
|
|
|
Net income (loss) per share -
basic:
|
|
|
|
|
|
Income per share from
continuing operations
|
$
|
2.78
|
|
|
$
|
3.08
|
|
|
$
|
1.12
|
|
Loss per share from
discontinued operations
|
—
|
|
|
(0.01
|
)
|
|
—
|
|
Net income per share -
basic
|
$
|
2.78
|
|
|
$
|
3.07
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
Net income (loss) per share -
diluted:
|
|
|
|
|
|
Income per share from
continuing operations
|
$
|
2.76
|
|
|
$
|
3.07
|
|
|
$
|
1.12
|
|
Loss per share from
discontinued operations
|
—
|
|
|
(0.01
|
)
|
|
—
|
|
Net income per share -
diluted
|
$
|
2.76
|
|
|
$
|
3.06
|
|
|
$
|
1.12
|
|
(1)
Results during the
year ended December 31, 2017 include Conwed from the January 20,
2017 acquisition date to December 31, 2017.
(2)
In March 2017, the
FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic
715): Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost." The amendment requires
an employer to report the service cost component in the same line
item or line items as other compensation costs arising from
services rendered by the pertinent employees during the period. The
other components of net benefit cost are required to be presented
in the income statement separately from the service cost component
and outside a subtotal from operations. The Company adopted this
ASU effective January 1, 2018, utilizing the retrospective
transition approach upon adoption. The adoption of this guidance
resulted in a reclassification of the components of net periodic
pension cost, other than service cost, from Cost of products sold
and General expense to Other income (expense), net, in the
Consolidated Statements of Income. The reclassification of these
costs affects only the EP segment, as there are no pension costs
associated with the AMS segment. For the year ended December 31,
2017, $3.6 million in pension expense was reclassified from
Operating profit to Other expense in the consolidated statement of
income. The adoption of this guidance had no effect on Net income
in the Consolidated Statements of Income and no effect on the other
consolidated financial statements.
Year Ended
December 31, 2019
Compared with the
Year Ended
December 31, 2018
Net
Sales
(dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Percent
Change
|
Advanced Materials &
Structures
|
$
|
477.2
|
|
|
$
|
467.9
|
|
|
$
|
9.3
|
|
|
2.0
|
%
|
Engineered
Papers
|
545.6
|
|
|
573.4
|
|
|
(27.8
|
)
|
|
(4.8
|
)
|
Total
|
$
|
1,022.8
|
|
|
$
|
1,041.3
|
|
|
$
|
(18.5
|
)
|
|
(1.8
|
)%
|
Net sales
were $1,022.8 million
in
2019
compared
with $1,041.3 million
in 2018. The decrease in net sales consisted of the
following (dollars in millions):
|
|
|
|
|
|
|
|
|
Amount
|
|
Percent
|
Changes in currency exchange
rates
|
$
|
(21.2
|
)
|
|
(2.1
|
)%
|
Changes in
royalties
|
(0.3
|
)
|
|
—
|
|
Changes in product mix,
selling prices and sales volumes, net
|
3.0
|
|
|
0.3
|
|
Total
|
$
|
(18.5
|
)
|
|
(1.8
|
)%
|
AMS segment net
sales were $477.2 million
for
2019
compared
to $467.9
million during 2018. The increase of
$9.3
million or 2.0% was due primarily to growth
in filtration, particularly for RO water filtration products,
transportation, driven by surface protection films, and gains in
medical. Infrastructure and construction and industrial sales were
lower versus prior year.
The EP segment
net sales were $545.6 million
for
2019
compared
to $573.4
million during 2018. The decreased of
$27.8
million,
or 4.8%, was primarily the result of
the unfavorable net foreign currency impacts of $18.9 million,
mainly from a weaker euro and the $8.7 million combined net
unfavorable impact of changes in volumes, mix of products sold and
average selling prices, in each case compared to the prior year.
The Company benefited from a more favorable mix of products sold as
a result of strong performance of LIP and wrapper and binder papers
and de-emphasizing and/or exiting significant volumes of certain
low-margin non-tobacco papers.
Gross
Profit
(dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
Change
|
|
Percent of
Net Sales
|
|
2019
|
|
2018
|
|
Change
|
|
|
2019
|
|
2018
|
Net sales
|
$
|
1,022.8
|
|
|
$
|
1,041.3
|
|
|
$
|
(18.5
|
)
|
|
(1.8
|
)%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of products
sold
|
732.8
|
|
|
762.8
|
|
|
(30.0
|
)
|
|
(3.9
|
)
|
|
71.6
|
|
|
73.3
|
|
Gross profit
|
$
|
290.0
|
|
|
$
|
278.5
|
|
|
$
|
11.5
|
|
|
4.1
|
%
|
|
28.4
|
%
|
|
26.7
|
%
|
Gross profit for
the year ended December 31, 2019
increased
by $11.5
million,
or 4.1%, to $290 million
from
$278.5
million in
the prior year. AMS gross profit increased by $12.8 million,
primarily due to lower input costs, particularly resin, higher
organic sales and improved manufacturing efficiencies and expenses
associated with the closure of one site in 2018. In the EP segment,
gross profit was flat. The favorable impact from lower wood pulp
input costs and price and mix benefits was largely offset by
negative impact from unfavorable currency movements and higher
other input costs such as energy costs.
Nonmanufacturing
Expenses
(dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
Change
|
|
Percent of
Net Sales
|
|
2019
|
|
2018
|
|
Change
|
|
|
2019
|
|
2018
|
Selling expense
|
$
|
33.7
|
|
|
$
|
35.7
|
|
|
$
|
(2.0
|
)
|
|
(5.6
|
)%
|
|
3.3
|
%
|
|
3.4
|
%
|
Research expense
|
13.5
|
|
|
15.2
|
|
|
(1.7
|
)
|
|
(11.2
|
)
|
|
1.3
|
|
|
1.5
|
|
General expense
|
105.1
|
|
|
90.9
|
|
|
14.2
|
|
|
15.6
|
|
|
10.3
|
|
|
8.7
|
|
Nonmanufacturing
expenses
|
$
|
152.3
|
|
|
$
|
141.8
|
|
|
$
|
10.5
|
|
|
7.4
|
%
|
|
14.9
|
%
|
|
13.6
|
%
|
Nonmanufacturing
expenses in the year ended December 31, 2019
increased
by $10.5
million,
or 7.4%, to $152.3 million
from
$141.8
million in
the prior year due primarily to higher deferred compensation
expenses, which was driven by a significant increase in the
Company’s stock price throughout the year. Another key factor was
increased IT spending.
Restructuring
and Impairment Expense
(dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
Change
|
|
Percent of
Net Sales
|
|
2019
|
|
2018
|
|
Change
|
|
|
2019
|
|
2018
|
Advanced Materials &
Structures
|
$
|
1.1
|
|
|
$
|
1.5
|
|
|
$
|
(0.4
|
)
|
|
(26.7
|
)%
|
|
0.2
|
%
|
|
0.3
|
%
|
Engineered
Papers
|
2.6
|
|
|
0.2
|
|
|
2.4
|
|
|
N.M.
|
|
|
0.5
|
|
|
—
|
|
Total
|
$
|
3.7
|
|
|
$
|
1.7
|
|
|
$
|
2.0
|
|
|
117.6
|
%
|
|
0.4
|
%
|
|
0.2
|
%
|
The Company
incurred total restructuring and impairment expense of
$3.7
million in
the year ended December 31,
2019,
compared to $1.7 million
in the year
ended December 31,
2018, an
increase of $2.0 million
or
117.6%. In the year ended
December 31,
2019,
restructuring and impairment expenses consisted of $2.6 million in
severance accruals for employees at our U.S., Brazilian and French
manufacturing operations related to EP segment, as well as $1.1
million in impairment charges at our U.S. and Chinese manufacturing
facilities related to our AMS segment.
In the year
ended December 31,
2018,
restructuring and impairment expenses consisted of $1.3 million in
severance accruals for employees at our U.S. and French
manufacturing operations, as well as $0.4 million in impairment
charges at our U.S. manufacturing facilities.
Operating
Profit
(dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
Change
|
|
Return on Net
Sales
|
|
2019
|
|
2018
|
|
Change
|
|
|
2019
|
|
2018
|
Advanced Materials &
Structures
|
$
|
64.3
|
|
|
$
|
49.5
|
|
|
$
|
14.8
|
|
|
29.9
|
%
|
|
13.5
|
%
|
|
10.6
|
%
|
Engineered
Papers
|
119.2
|
|
|
121.8
|
|
|
(2.6
|
)
|
|
(2.1
|
)
|
|
21.8
|
|
|
21.2
|
|
Unallocated
expenses
|
(49.5
|
)
|
|
(36.3
|
)
|
|
(13.2
|
)
|
|
(36.4
|
)
|
|
|
|
|
Total
|
$
|
134.0
|
|
|
$
|
135.0
|
|
|
$
|
(1.0
|
)
|
|
(0.7
|
)%
|
|
13.1
|
%
|
|
13.0
|
%
|
Operating profit
was $134.0
million in
the year ended December 31, 2019
compared
with $135.0 million
during the prior
year.
The AMS segment's
operating profit in the year ended December 31, 2019
was
$64.3
million compared to
$49.5
million in
the prior year period. The increase of $14.8 million
in the AMS
segment's operating profit during the year ended
December 31,
2019 compared to the prior-year
period was positively impacted by sales growth, cost reductions,
and lower raw material input costs.
The EP segment's
operating profit in the year ended December 31, 2019
was
$119.2
million, a
decrease of $2.6
million,
or 2.1%, from $121.8 million
in the prior
year. The decrease was primarily due to higher
restructuring and impairment expenses as well as expenses
associated with the Brazil Tax Assessments, and negative currency
impacts partially offset by positive price and mix shifts and cost
reduction activities.
Unallocated
expenses in the year ended December 31, 2019
were
$49.5
million,
up $13.2
million,
or 36.4%, from the
$36.3
million in
the prior year period. The increase was primarily due to higher
deferred compensation expenses as a result of positive stock price
performance relative to 2018 and higher IT expenses to support
growth initiatives.
Non-Operating
Expenses, Net
Interest expense
was $36.1
million in
the year ended December 31,
2019, an
increase of $7.9 million
from
$28.2
million in
the year ended December 31,
2018. The increase in
interest expense is primarily due to $7.1 million of interest
related to the Brazil tax assessments and a higher average interest
rate compared to the prior year as a result of increases in market
rates, partially offset by a lower total debt balance as of
December 31, 2019 compared to the prior year. The weighted
average effective interest rate on our debt facilities was
approximately 4.42% and 4.20% for the years ended
December 31,
2019 and 2018, respectively.
Other expense,
net was $1.0 million
during the year
ended December 31, 2019
compared
to $10.0
million Other income, net during the
year ended December 31,
2018.
The $11.0
million adverse change in Other
(expense) income, net, was due primarily to the $10.2 million
change in the fair value of the contingent consideration liability
related to the Conwed acquisition in 2018, as discussed in
Note 5. Business
Acquisitions.
Income
Taxes
A
$15.2
million and $10.7 million
provision for
income taxes in the years ended December 31, 2019
and
2018, respectively, resulted in
an effective tax rate of 15.7% compared with
9.2%
in the prior
year. The Company’s effective tax rates differ from the
statutory federal income tax rate of 21% due to varying tax rates
in foreign jurisdictions, the relative amounts of income we earn in
those jurisdictions and year over year adjustments of a $4.2
million reduction due to the one-time Brazil ICMS litigation
accrual as compared to the prior year $13 million U.S. tax reform
reduction.
Income
(Loss) from Equity Affiliates
Income from
equity affiliates, net of income taxes, was $4.1 million
in the year
ended December 31, 2019
compared with a
loss of $11.3 million
during the prior
year and reflected the results of operations of CTM and CTS.
2018
results
included $15.0 million
impairment of
CTS, as discussed further in Note 10. Joint
Ventures.
Discontinued
Operations
Because we closed
our Philippines plant as previously reported, the results of this
plant were reported as discontinued operations for all periods
presented. Consequently, this plant's results have been removed
from each line of 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 the
discontinued operation. Loss from discontinued operations
was $0.0
million versus $0.3 million for the
years ended December 31, 2019 and 2018, respectively. These amounts
are primarily the result of the Company's efforts to dispose of the
remaining assets and liabilities of the discontinued
operations.
Net Income
and Income per Share
Net income in the
year ended December 31, 2019
was
$85.8
million,
or $2.76 per diluted share, compared
with $94.5
million,
or $3.06 per diluted share, during the
prior year period. The decrease in net income was
primarily due to a $10.2 million decrease in Other income, net
resulting from the 2018 change in the fair value of the Conwed
contingent liability, a $7.9 million increase in interest expense,
primarily related to the Brazil Tax Assessments, and a higher
income tax expense of $4.5 million. Business trends that were key
drivers of year-over-year financial performance included sales
growth and lower resin input costs in the AMS segment, offset by
lower sales volume and adverse currency movements in the EP
segment.
LIQUIDITY AND CAPITAL RESOURCES
A major factor in
our liquidity and capital resource planning is our generation of
cash flow from operations, which is sensitive to changes in the mix
of products sold, volume and pricing of our products, as well as
changes in our production volumes, costs and working capital. Our
liquidity is supplemented by funds available under our revolving
credit facility with a syndicate of banks that is used as either
operating conditions or strategic opportunities
warrant.
Cash
Requirements
As of
December 31, 2019, $60.3 million of our
$103.0
million of
cash and cash equivalents was held by foreign subsidiaries. Cash
paid for income taxes (net of refunds) was $20.8 million
for the year
ended December 31,
2019. On
December 22, 2017, the Tax Act was enacted into law. The Tax Act
imposes a mandatory transition tax on accumulated foreign earnings
and eliminates U.S. taxes on foreign subsidiary distributions. At
December 31, 2017, we recorded a provisional tax liability of $48.7
million relating to the one-time mandatory transition tax on our
accumulated foreign earnings, which we intend to pay over an
eight-year payment schedule, as prescribed by the Tax Act. In the
year ended December 31, 2018, we reduced the provisional tax
liability by $13.0 million. We do not expect the payment of the
transition taxes over the remaining years to adversely affect our
liquidity and resource planning. Additionally, the Tax Act is not
expected to adversely impact our debt covenant compliance. We
believe that our sources of liquidity and capital, including cash
on-hand, cash generated from operations and our existing credit
facilities, will be sufficient to finance our continued operations
and growth strategy.
Capital spending
for 2020 is projected to be approximately $40.0 million to $45.0
million. We generally fund our capital projects using cash on-hand,
cash generated from operations and our existing credit facilities,
including the Credit Agreement, as defined below in "Debt
Instruments and Related Covenants."
Cash
Provided by Operations
Net cash provided
by operations was $160.3 million
in the year
ended December 31, 2019
compared
with $139.1 million
in the prior
year. Our net cash provided by operations increased primarily due
to a $22.5
million favorable year-over-year
impact of net changes in operating working capital, which was
primarily caused by lower accounts receivable balances versus prior
year. Significant non-cash items that contributed to year-over-year
changes in net income (and subsequently adjusted for calculate
operating cash flow) include the Brazilian tax litigation accrual
in 2019 and the impairment of an equity affiliate, a benefit
related to the Tax Act, and the favorable revaluation of contingent
consideration in 2018.
Working
Capital
As of
December 31,
2019, we
had net operating working capital of $168.8 million
and cash and cash
equivalents of $103.0
million,
compared with net operating working capital of $195.2 million
and cash and cash
equivalents of $93.8 million
as of
December 31, 2018. Changes in the amounts that make up these
balances also reflect the impacts of changes in currency exchange
rates, which are included in the changes in operating working
capital presented on the Consolidated Statements of Cash
Flow.
In
2019, net changes in operating
working capital decreased cash flow by $1.8
million.
The improvement compared with prior year was driven primarily by
lower accounts receivables and higher accrued
expenses.
In
2018, net changes in operating
working capital decreased cash flow by $24.3
million,
driven primarily by higher accounts receivables associated with
sales growth.
Cash Used
for Investing
Cash used for
investing activities during 2019 was $14.8 million
and consisted
primarily of cash paid for capital spending partially offset by
proceeds from the sale of RTL Philippines assets.
Cash used for
investing activities during 2018 was $27.5 million
and consisted
primarily of cash paid for capital spending.
Capital
Spending
Capital spending
was $28.6
million,
and $27.0
million in 2019 and 2018,
respectively.
During
2019
and
2018
capital spending
was primarily related to maintenance capital spending, capacity
additions to support growth in filtration, transportation and
infrastructure end-markets, construction on AMS manufacturing
facilities in China and Poland, the development of new products,
the rebuild of certain paper manufacturing lines, and IT
infrastructure.
We incur capital
spending as necessary to meet legal requirements and otherwise in
connection with the protection of the environment at our facilities
in the U.S., United Kingdom, France, Belgium, Brazil, Canada, China
and Poland. For these purposes, we expect to incur
capital expenditures of less than $1.0 million
in each of 2020
and 2021, of which no material amount is expected to be the result
of environmental fines or settlements. The foregoing
capital expenditures are not expected to reduce our ability to
invest in other appropriate and necessary capital projects and are
not expected to have a material adverse effect on our financial
condition or results of operations.
Cash Used
for Financing Activities
During
2019, financing activities
consisted primarily of net repayments on borrowings of
$80.5
million,
cash dividends of $54.4 million
paid to SWM
stockholders and share repurchases of $0.9
million.
During
2018, financing activities
consisted primarily of net repayments on borrowings of
$61.1
million,
cash dividends of $53.2 million
paid to SWM
stockholders, cash paid for debt issuance costs of
$3.6
million and share repurchases
of $3.0
million.
Dividend
Payments
We have declared
and paid cash dividends on our common stock every fiscal quarter
since the second quarter of 1996. On February 20,
2020, we
announced a cash dividend of $0.44 per share payable on
March 20, 2020 to stockholders of record as
of the close of business on
March 4, 2020. The covenants contained in
our Indenture and Credit Agreement, each, as defined below in "Debt
Instruments and Related Covenants," require that we maintain
certain financial ratios, as disclosed in Note 15. Debt, of the Notes to
Consolidated Financial Statements, none of which under normal
business conditions materially limit our ability to pay such
dividends. We will continue to assess our dividend policy in light
of our overall strategy, cash generation, debt levels and ongoing
requirements for cash to fund operations and to pursue possible
strategic opportunities.
Share
Repurchases
In
2019
and
2018, we repurchased 25,297
shares and 75,395 shares, respectively, of our common stock at a
cost of $0.9 million and $3.0 million, respectively, for the value
of employees' stock-based compensation share awards surrendered to
satisfy their personal statutory income tax withholding
obligations.
Debt
Instruments and Related Covenants
|
|
|
|
|
|
|
|
|
Debt
Instruments and Related Covenants ($ in millions)
|
For the Years
Ended December 31,
|
2019
|
|
2018
|
Changes in short-term
debt
|
$
|
(0.1
|
)
|
|
$
|
(1.3
|
)
|
Proceeds from issuances of
long-term debt
|
19.1
|
|
|
634.2
|
|
Payments on long-term
debt
|
(99.5
|
)
|
|
(694.0
|
)
|
Net (repayments on) proceeds
from borrowings
|
$
|
(80.5
|
)
|
|
$
|
(61.1
|
)
|
Net
repayments
from borrowings
were $80.5
million during 2019. Absent any substantial
acquisition(s) or any share repurchases, the Company does not
expect to incur any significant additional borrowings during
2020.
Credit
Agreement
On September 25,
2018, the Company entered into a $700.0 million credit agreement
(the “Credit Agreement”), which replaced the Company’s previous
senior secured credit facilities and provides for a five-year
$500.0 million revolving line of credit (the “Revolving Credit
Facility”) and a seven-year $200.0 million bank term loan facility
(the “Term Loan Facility”). Subject to certain conditions,
including the absence of a default or event of default under the
Credit Agreement, the Company may request incremental loans to be
extended under the Revolving Credit Facility or the Term Loan
Facility so long as the Company is in pro forma compliance with the
financial covenants set forth in the Credit Agreement and the
aggregate of such increases does not exceed $400.0 million. See
Note 15. Debt, of the Notes to
Consolidated Financial Statements, for more
information.
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. Unused borrowing capacity under the Credit Agreement
was $495.5
million as
of December 31,
2019. We
also had availability under our bank overdraft facilities and lines
of credit of $6.1 million
as of
December 31,
2019.
The Company was
in compliance with all of its covenants under the Indenture and
Credit Agreement at December 31,
2019. With
the current level of borrowing and forecasted results, we expect to
remain in compliance with our Credit Agreement financial
covenants.
Our total debt to
capital ratios, as calculated under the Credit Agreement, at
December 31,
2019 and December 31, 2018
were
47.6%
and
52.7%, respectively.
Senior
Secured Notes
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 are
guaranteed on a senior unsecured basis by each of the Company’s
existing and future wholly-owned subsidiaries that is a borrower
under or that guarantees obligations under the Credit Agreement, as
defined below, or that guarantees certain other indebtedness,
subject to certain exceptions.
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.
Off-Balance
Sheet Arrangements
As of
December 31,
2019, we
did not have any significant off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
OTHER FACTORS AFFECTING LIQUIDITY AND CAPITAL
RESOURCES
The following
table represents our future contractual cash requirements for the
next five years and thereafter for our long-term debt obligations
and other commitments ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due
for the years ended
|
Contractual
Obligations
|
Total
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
Current
debt (1)
|
$
|
2.8
|
|
|
$
|
2.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term
debt (2)
|
549.4
|
|
|
—
|
|
|
3.5
|
|
|
3.5
|
|
|
2.8
|
|
|
2.1
|
|
|
537.5
|
|
Debt
interest (3)
|
203.0
|
|
|
31.2
|
|
|
31.1
|
|
|
31.1
|
|
|
31.0
|
|
|
30.9
|
|
|
47.7
|
|
Restructuring
obligations (4)
|
0.5
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Minimum operating
lease
payments
(5)
|
27.5
|
|
|
6.2
|
|
|
5.2
|
|
|
4.0
|
|
|
2.8
|
|
|
2.3
|
|
|
7.0
|
|
Purchase
obligations - raw
materials
(6)
|
15.9
|
|
|
8.8
|
|
|
3.8
|
|
|
1.7
|
|
|
1.1
|
|
|
0.5
|
|
|
—
|
|
Purchase
obligations - energy (7)
|
46.7
|
|
|
25.4
|
|
|
14.8
|
|
|
2.1
|
|
|
0.5
|
|
|
0.5
|
|
|
3.4
|
|
Tax Act
transition obligation (8)
|
23.7
|
|
|
2.3
|
|
|
2.3
|
|
|
2.3
|
|
|
4.2
|
|
|
5.6
|
|
|
7.0
|
|
Other
contractual obligations (9) (10)
(11)
|
0.4
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
869.9
|
|
|
$
|
77.6
|
|
|
$
|
60.7
|
|
|
$
|
44.7
|
|
|
$
|
42.4
|
|
|
$
|
41.9
|
|
|
$
|
602.6
|
|
|
|
(1)
|
Current debt
excludes debt issuance costs of $1.3 million; see Note
15. Debt, of the Notes to
Consolidated Financial Statements.
|
|
|
(2)
|
Long-term debt
excludes debt issuance costs of $4.6 million and $6.9 million in
unamortized discount on the senior unsecured notes; see additional
information regarding long-term debt in Note 15. Debt, of the Notes to
Consolidated Financial Statements.
|
|
|
(3)
|
The amounts
reflected in debt interest are based upon the short-term and
long-term scheduled principal maturities and interest rates in
effect as of December 31,
2019.
Where specific maturities are not stated, such as for an overdraft
line-of-credit, a repayment date coinciding with the end of the
year was used for purposes of these calculations. With respect to
our variable-rate debt outstanding at December 31,
2019, a
100 basis point increase in interest rates would increase our debt
interest obligation by $3.7 million in 2020, taking into account
the effect of the interest rate hedge transactions the Company has
entered into as of December 31, 2019. For more information
regarding our outstanding debt and associated interest rates, as
well as hedging strategies in place which serve to fix the interest
rate on a large portion of our debt, see Note 15. Debt, of the Notes to
Consolidated Financial Statements.
|
|
|
(4)
|
Restructuring
obligations are more fully discussed in Note 14. Restructuring and
Impairment Activities, of the Notes to Consolidated Financial
Statements.
|
|
|
(5)
|
Minimum operating
lease payments relate to our future minimum obligations under
non-cancelable operating leases having an initial or remaining term
in excess of one year as of December 31,
2019.
|
|
|
(6)
|
Purchase
obligations for raw materials include our calcium carbonate
purchase agreement at our plant in Quimperlé, France, in which a
vendor operates an on-site calcium carbonate plant and our plant
has minimum purchase quantities. See Note 21. Commitments and
Contingencies, of the Notes to Consolidated Financial Statements
for additional information.
|
|
|
(7)
|
Purchase
obligations for energy include obligations under agreements with
(1) an energy co-generation supplier at our plants in Quimperlé,
France and Spay, France, to supply steam for which our plants have
minimum purchase commitments, (2) a natural gas supplier to supply
and distribute 100% of the natural gas needs of our three French
plants, (3) an electricity supplier to supply and distribute the
electricity needs of our three French plants, (4) an energy
supplier to supply a constant supply of electricity for our Pirahy
plant in Brazil, (5) an energy supplier to supply natural gas for
our Pirahy plant in Brazil and (6) an energy supplier has a
contract to provide biomass at our Spay, France facility for the
next two years. See Note 21. Commitments and
Contingencies, of the Notes to Consolidated Financial Statements
for additional information.
|
|
|
(8)
|
On December 22,
2017, the United States enacted the Tax Act into law, which
requires a one-time transition tax on certain unrepatriated
earnings of foreign subsidiaries. Companies may elect to pay the
tax over eight years based on an installment schedule outlined in
the Tax Act. We have made this election and have reflected our
transition tax due by year as a contractual obligation. See
Note. 18. Income Taxes, of the Notes
to Consolidated Financial Statements for additional
information.
|
|
|
(9)
|
Other contractual
obligations relate to commitments for capital projects. Other
contractual obligations exclude $1.7 million
of unrecognized
tax benefits associated with uncertain tax positions for which
there is no contractual obligation. We had no other long-term
liabilities as defined for purposes of this disclosure by the SEC
as of December 31,
2019.
|
|
|
(10)
|
Other contractual
obligations do not include any amounts for our pension obligations.
The pension obligations are funded by our separate pension trusts,
which held $127.0 million
in assets
at December 31,
2019. The
combined projected benefit obligation ("PBO") of our U.S. and
French pension plans was underfunded by $24.9 million
and
$26.6
million as
of December 31, 2019
and
2018, respectively. We make
contributions to our pension trusts based on many factors including
regulatory guidelines, investment returns of the trusts and
availability of cash for pension contributions versus other
priorities. We expect 2020 funding to be in compliance with the
Pension Protection Act of 2006. For information regarding our
long-term pension obligations and trust assets, see Note
19. Postretirement and Other
Benefits, of the Notes to Consolidated Financial
Statements.
|
|
|
(11)
|
Other contractual
obligations do not include any amounts for our postretirement
healthcare and life insurance benefits. Such payments are dependent
upon our retirees incurring costs and filing claims; therefore,
future payments are uncertain. Our net payments under these plans
were approximately $0.0 million
and
$0.1
million in
the years ended December 31, 2019
and
2018, respectively. Based on this
past experience, we currently expect our share of the net payments
to be less than $1.0 million during 2020 for these benefits. For
more information regarding our retiree healthcare and life
insurance benefit obligations, see Note 19. Postretirement and Other
Benefits, of the Notes to Consolidated Financial
Statements.
|
OUTLOOK
For the AMS
segment, we expect our growth outlook to be driven by macro factors
affecting our served end-markets, including filtration,
transportation, infrastructure and construction, medical, and
industrial, as well as industry demand for many of our key
applications. We expect water and other specialty filtration
applications, surface protection products within transportation,
and our products for infrastructure and construction end-markets to
deliver growth exceeding GDP, or other global growth benchmarks,
over the long-term due to the relative strong demand for the
specific products we provide. Generally, we believe that our sales
into the industrial and medical end-markets will perform relatively
in line with long-term broad economic growth in the U.S. and to
some extent Europe and China. Excluding potential impacts from raw
material price movements, the Company generally projects margin
expansion in the AMS segment as a result of expected organic sales
growth. For the EP segment, we expect our performance to be driven
by macro factors, such as the expected long-term trend of reduced
cigarette consumption and foreign exchange movements, and the
potential regulatory changes in the tobacco industry such as
approvals of various new reduced-risk tobacco products or
tax-related price increases. In addition, cigarette industry
consolidation may play a role in affecting trends in the tobacco
industry.
FORWARD-LOOKING STATEMENTS
This report
contains forward-looking statements within the meaning of Private
Securities Litigation Reform Act of 1995 that are subject to the
safe harbor created by that Act and other legal
protections. Forward-looking statements, include,
without limitation, those regarding 2020 outlook and future
performance, mergers and acquisitions, future market trends, future
RTL sales and volume trends, smoking attrition rates, synergies or
growth from acquisitions, incurrence of additional debt, adoption
of LIP standards in new regions, reverse osmosis water filtration
and global drinking water demands, integration, and growth
prospects (including international growth), the deductibility of
goodwill associated with the Conwed acquisition, impact of our
restructuring actions, post-retirement healthcare and life
insurance payments, impact of the LIP intellectual property
litigation and opposition proceedings, the amount of capital
spending and/or common stock repurchases, the profitability of CTS,
pricing pressures (including related to LIP), future cash flows,
benefits associated with our global asset realignment (including
possible non-recurrence of one-time tax benefits, lower or higher
effective tax rates), purchase accounting impacts, impacts of our
ongoing operational excellence and other cost-reduction
initiatives, increasing revenues coming from our non-tobacco
operations, and other statements generally identified by words such
as "believe," "expect," "intend," "plan," "potential,"
"anticipate," "project," "appear," "should," "could," "may,"
"will," "typically" and similar words. These statements are not
guarantees of future performance and involve certain risks and
uncertainties that may cause actual results to differ materially
from our expectations as of the date of this report. These risks
include, among other things, those set forth in Part I, Item 1A.
Risk Factors of this report as well as the following
factors:
|
|
•
|
Changes in sales
or production volumes, pricing and/or manufacturing costs of Recon
products, cigarette paper (including for LIP cigarettes), including
any change by our customers in their tobacco and tobacco-related
blends for their cigarettes, their target inventory levels and/or
the overall demand for their products, new technologies such as
e-cigarettes, inventory adjustments and rebalancings in our EP
segment. Additionally, competition and changes in AMS end-market
products due to changing customer demands;
|
|
|
•
|
Changes in the
Chinese economy, including relating to the demand for reconstituted
tobacco, premium cigarettes and netting;
|
|
|
•
|
Risks associated
with the implementation of our strategic growth initiatives,
including diversification, and the Company's understanding of, and
entry into, new industries and technologies;
|
|
|
•
|
Changes in the
source and intensity of competition in our commercial segments. We
operate in highly competitive markets in which alternative supplies
and technologies may attract our customers away from our products.
In additional, our customers may, in some cases, produce for
themselves the components that the Company sells to them for
incorporation into their products, thus reducing or eliminating
their purchases from us;
|
|
|
•
|
Our ability to
attract and retain key personnel, due to our prior restructuring
actions, the tobacco industry in which we operate or
otherwise;
|
|
|
•
|
Weather
conditions, including potential impacts, if any, from climate
change, known and unknown, seasonality factors that affect the
demand for virgin tobacco leaf and natural disasters or unusual
weather events;
|
|
|
•
|
Seasonal or
cyclical market and industry fluctuations which may result in
reduced net sales and operating profits during certain
periods;
|
|
|
•
|
Increases in
commodity prices and lack of availability of such commodities,
including energy, wood pulp and resins, could impact the sal |