SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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December 31, 2018
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|
Gross
Carrying
Amount
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|
Accumulated
Amortization
|
|
Accumulated Impairments
|
|
Accumulated Foreign Exchange
|
|
Net
Carrying
Amount
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
Advanced Materials & Structures
|
Customer relationships
|
$
|
276.3
|
|
|
$
|
50.4
|
|
|
$
|
—
|
|
|
$
|
0.7
|
|
|
$
|
225.2
|
|
Developed technology
|
34.0
|
|
|
8.5
|
|
|
—
|
|
|
0.2
|
|
|
25.3
|
|
Trade names
|
21.8
|
|
|
0.8
|
|
|
20.7
|
|
|
0.3
|
|
|
—
|
|
Non-compete agreements
|
2.9
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
1.2
|
|
Patents
|
1.5
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|
|
0.4
|
|
|
—
|
|
|
—
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|
|
1.1
|
|
Total
|
$
|
336.5
|
|
|
$
|
61.8
|
|
|
$
|
20.7
|
|
|
$
|
1.2
|
|
|
$
|
252.8
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Intangible Assets (Advanced Materials & Structures)
|
Trade names
|
$
|
20.0
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
20.0
|
|
Amortization expense of intangible assets was $20.3 million, $20.7 million and $20.9 million for the years ended December 31, 2019, 2018 and 2017, respectively. Finite-lived intangibles in the AMS segment are expensed using the straight-line amortization method.
In our AMS segment, the Company made a strategic decision to transition away from certain legacy business trade names associated with its recent acquisitions in favor of a streamlined SWM branding approach. As a result of adopting this branding strategy, in the fourth quarter of 2016, the Company recognized an impairment expense of $20.7 million, representing a write-down of the DelStar trade name intangible asset to its fair market value, leaving a remaining balance of $0.8 million, which was fully amortized over the first six months of 2017, as the DelStar trade name was phased out.
The following table shows the estimated aggregate amortization expense for the next five years ($ in millions):
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|
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|
|
For the year ending December 31,
|
Estimated Amortization Expense
|
2020
|
$
|
19.9
|
|
2021
|
19.9
|
|
2022
|
19.9
|
|
2023
|
19.6
|
|
2024
|
19.2
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Other Assets
Other assets consisted of the following ($ in millions):
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December 31,
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|
2019
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|
2018
|
Capitalized software costs, net of accumulated amortization
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$
|
11.9
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|
|
$
|
8.3
|
|
Business tax credits, including VAT and ICMS (net of $12.1 million and $11.5 million reserve as of December 31, 2019 and 2018, respectively)
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—
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|
|
1.2
|
|
Grantor trust assets
|
14.7
|
|
|
10.9
|
|
Net pension assets
|
5.9
|
|
|
0.8
|
|
Long-term supplies inventory
|
6.9
|
|
|
6.8
|
|
Operating lease assets
|
20.9
|
|
|
—
|
|
Other assets
|
8.9
|
|
|
5.9
|
|
Total
|
$
|
69.2
|
|
|
$
|
33.9
|
|
The Company's ICMS credits in Brazil are fully reserved. These credits do not expire. The Company is exploring other actions to utilize the credits. Charges and credits associated with normal ongoing activity are included in Cost of products sold in the Consolidated Statements of Income. Future material changes as a result of new legislation or a change in our operations will be reported separately.
Grantor trust assets consist primarily of cash surrender values in Company-owned life insurance policies held by a trust to be used for the eventual payment of employee deferred compensation. These assets are restricted from Company use until all obligations are satisfied.
Note 14. Restructuring and Impairment Activities
The Company incurred restructuring and impairment expenses of $3.7 million, $1.7 million and $8.1 million in the years ended December 31, 2019, 2018 and 2017, respectively.
The Company incurred $1.1 million, $1.5 million and $2.7 million in restructuring and impairment expenses during the years ended December 31, 2019, 2018 and 2017, respectively, within the AMS segment. Restructuring and impairment expense for the year ended December 31, 2019 consisted of $1.1 million in impairment charges at our U.S. and Chinese manufacturing facilities. Restructuring and impairment expense for the year ended December 31, 2018 consisted of $1.1 million in severance accruals for employees at our U.S. manufacturing operations, as well as $0.4 million in impairment charges at our U.S. manufacturing facilities. Restructuring and impairment expense for the year ended December 31, 2017 consisted of $2.6 million in severance accruals for employees at our U.S. and Belgium manufacturing operations, as well as $0.1 million in impairment charges at one of our U.S. manufacturing facilities.
In the EP segment, restructuring and impairment expenses were $2.6 million, $0.2 million and $5.3 million during the years ended December 31, 2019, 2018 and 2017, respectively. During 2019, restructuring and impairment expenses in the EP segment consisted of $2.6 million in severance accruals for employees at our manufacturing facilities in the U.S., Brazil and France.
During 2018, restructuring and impairment expenses in the EP segment consisted of $0.2 million in severance accruals for employees at our manufacturing facilities in France.
In 2017, restructuring and impairment expenses in the EP segment consisted of $0.8 million in severance accruals for employees at our manufacturing facilities in the U.S. and France, as well as an impairment charge of $4.0 million at our Philippines RTL location, and impairment charges totaling $0.5 million at our French and United States manufacturing facilities.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, the Company incurred $0.0 million, $0.0 million, and $0.1 million in 2019, 2018, and 2017, respectively, in restructuring expenses related to accruals for severance expenses within supporting overhead departments which were not allocated to a specific segment.
Restructuring liabilities were classified within Accrued expenses in each of the Consolidated Balance Sheets as of December 31, 2019 and 2018. Changes in the restructuring liabilities, substantially all of which are employee-related, are summarized as follows ($ in millions):
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|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance at beginning of year
|
$
|
1.4
|
|
|
$
|
1.7
|
|
Accruals for announced programs
|
3.7
|
|
|
1.3
|
|
Cash payments
|
(4.2
|
)
|
|
(3.3
|
)
|
Other
|
(0.4
|
)
|
|
1.8
|
|
Exchange rate impacts
|
—
|
|
|
(0.1
|
)
|
Balance at end of period
|
$
|
0.5
|
|
|
$
|
1.4
|
|
Long-lived assets to be sold are classified as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the assets; the assets are available for immediate sale in present condition subject only to terms that are usual and customary for sales of such assets; an active program to locate a buyer and other actions required to complete the plan to sell the assets has been initiated; the sale of the assets is probable, and transfer of the assets is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the assets beyond one year; the assets are being actively marketed for sale at a price that is reasonable in relation to current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A long-lived asset that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. The fair value of a long-lived asset less any costs to sell is assessed each reporting period it remains classified as held for sale and any reduction in fair value is reported as an adjustment to the carrying value of the asset. Upon being classified as held for sale, depreciation is ceased. Long-lived assets to be disposed of other than by sale are continued to be depreciated. Upon determining that a long-lived asset meets the criteria to be classified as held for sale, the assets and liabilities of the disposal group, if material, are reported in the line item "Assets held for sale" in our Consolidated Balance Sheets.
In early 2015, the Company made the decision to dispose of the Company’s mothballed RTL facility and related equipment in the Philippines. These assets were included in the EP segment. Impairment charges of $4.0 million were recognized on these assets during the year ended December 31, 2017. There were no impairment charges related to these assets recorded 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 $0.3 million.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Debt
Total debt, net of debt issuance costs, is summarized in the following table ($ in millions):
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|
|
|
|
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|
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December 31,
2019
|
|
December 31,
2018
|
Revolving credit agreement - U.S. dollar borrowings
|
$
|
—
|
|
|
$
|
76.0
|
|
Term loan facility
|
197.5
|
|
|
199.5
|
|
6.875% senior unsecured notes due October 1, 2026, net of discount of $6.9 million and $7.6 million as of December 31, 2019 and December 31, 2018, respectively
|
343.1
|
|
|
342.4
|
|
French employee profit sharing
|
4.8
|
|
|
6.6
|
|
Finance lease obligations1
|
3.2
|
|
|
4.7
|
|
Other
|
—
|
|
|
0.1
|
|
Debt issuance costs
|
(5.9
|
)
|
|
(7.2
|
)
|
Total debt
|
542.7
|
|
|
622.1
|
|
Less: Current debt
|
(1.9
|
)
|
|
(3.3
|
)
|
Long-term debt
|
$
|
540.8
|
|
|
$
|
618.8
|
|
1The Company adopted the guidance contained in ASC 842, Leases, on January 1, 2019 using the modified retrospective approach permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements. The comparative period presented in the consolidated financial statements for 2018 continue to be presented in accordance with previous GAAP as codified in ASC 840, Leases. 2018 lease obligations in the above table were long-term capital leases obligations.
Credit Facility
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.
Borrowings under the Revolving Credit Facility will initially bear interest, at the Company’s option, at either (i) 1.75% in excess of a reserve adjusted London Interbank Offered Rate (“LIBOR”) or (ii) 0.75% in excess of an alternative base rate. Borrowings under the Term Loan Facility will initially bear interest, at the Company’s option, at either (i) 2.00% in excess of a reserve adjusted LIBOR rate or (ii) 1.00% in excess of an alternative base rate. The Term Loan amortizes at the rate of 1.0% per year and will mature on September 25, 2025.
Under the terms of the Credit Agreement, the Company will be required to maintain certain financial ratios and comply with certain financial covenants, including maintaining a net debt to EBITDA ratio, as defined in the Credit Agreement, calculated on a trailing four fiscal quarter basis, not greater than 4.50 and an interest coverage ratio, also as defined in the Credit Agreement, of not less than 3.00. In addition, borrowings and loans made under the Credit Agreement are secured by substantially all of the personal property of the Company and its domestic subsidiaries, while the obligations of the Luxembourg-based holding subsidiaries were secured by a pledge of certain of the equity interests held in their operating subsidiaries. The Company was in compliance with all of its covenants under the Credit Agreement at December 31, 2019.
Also on September 25, 2018, the Company borrowed approximately $91.0 million under the Revolving Credit Facility and $200.0 million under the Term Loan Facility. The Company utilized these borrowings under the Credit Agreement together with the net proceeds from the offering of the Senior Unsecured Notes discussed below to refinance all amounts outstanding under the Company’s Prior Credit Agreement and to pay related fees and expenses.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019, the average interest rate was 3.56% on outstanding Term Loan Facility borrowings.
Indenture for 6.875% Senior Unsecured Notes Due 2026
On September 25, 2018, the Company closed a private offering of $350.0 million of 6.875% senior unsecured notes due 2026 (the “Notes”). The Notes were sold in a private placement in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended, pursuant to a purchase agreement between the Company, certain subsidiaries of the Company and J.P. Morgan Securities LLC, as representative of the initial purchasers. The Notes are guaranteed on a senior unsecured basis by each of the Company’s existing and future wholly-owned subsidiaries that is a borrower under or that guarantees obligations under the 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.
The Indenture contains certain covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to incur additional indebtedness, make certain dividends, repurchase Company stock or make other distributions, make certain investments, create liens, transfer or sell assets, merge or consolidate and enter into transactions with the Company’s affiliates. Such covenants are subject to a number of exceptions and qualifications set forth in the Indenture. The Indenture also contains certain customary events of default, including failure to make payments in respect of the principal amount of the Notes, failure to make payments of interest on the Notes when due and payable, failure to comply with certain covenants and agreements and certain events of bankruptcy or insolvency. The Company was in compliance with all of its covenants under the Indenture at December 31, 2019.
The effective interest rate on the 6.875% senior unsecured notes due 2026, taking into account all underwriter and original issue discounts, was 7.248%.
French Employee Profit Sharing
At both December 31, 2019 and 2018, long-term debt other than the Amended Credit Agreement primarily consisted of obligations of the French operations related to government-mandated profit sharing. Each year, representatives of the workers at each of the French businesses can make an election for the profit sharing amounts from the most recent year ended to be invested in a financial institution or with their respective employer. To the extent that funds are invested with the Company, these amounts bear interest at 0.62% and 1.04% at December 31, 2019 and 2018, respectively, and are generally payable in the fifth year subsequent to the year in which the profit sharing is accrued.
Bank Overdrafts
The Company also had bank overdraft facilities of $6.1 million and $6.1 million, at December 31, 2019 and 2018, respectively, of which none was outstanding at either December 31, 2019 or 2018. Interest is incurred on outstanding amounts at market rates and was 0.26% and 0.26%, respectively, at December 31, 2019 and 2018. No commitment fees are paid on the unused portion of these facilities.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rate Swap Agreements
From time to time, the Company enters into interest rate swap transactions to manage the Company's interest rate risk and cross-currency swaps designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. See Note 16. Derivatives for additional information.
Principal Repayments
Under the Credit Agreement, the Company selects an "interest period" for each of its borrowings from the Revolving Credit Facility. The Company can repay such borrowings and borrow again at a subsequent date if it chooses to do so, providing it flexibility and efficient use of any excess cash. The Company currently has the intent and ability to allow its debt balances to remain outstanding and expects to continue to file notices of continuation related to its borrowings outstanding at December 31, 2019 such that those amounts are not expected to be repaid prior to the September 2023 expiration of the Revolving Credit Facility. Following are the expected maturities for the Company's debt obligations as of December 31, 2019 ($ in millions):
|
|
|
|
|
2020
|
$
|
2.8
|
|
2021
|
3.5
|
|
2022
|
3.5
|
|
2023
|
2.8
|
|
2024
|
2.1
|
|
Thereafter
|
537.5
|
|
Total *
|
$
|
552.2
|
|
* The expected maturities for the Company's debt obligations excludes finance lease obligations. Additional information regarding the future contractual lease liabilities for the next five years and thereafter for finance leases is included in Note 4. Leases, of the Notes to Consolidated Financial Statements.
Fair Value of Debt
At December 31, 2019 and 2018, the fair market value of the Company's 6.875% senior unsecured notes was $378.3 million and $331.6 million, respectively. The fair market value for the senior unsecured notes was determined using quoted market prices, which are directly observable Level 1 inputs. The fair market value of all other debt as of December 31, 2019 and 2018 approximated the respective carrying amounts as the interest rates are variable and based on current market indices.
Debt Issuance Costs
In conjunction with the Indenture and Credit Agreement, the Company capitalized approximately $3.6 million in deferred debt issuance costs during the year ended December 31, 2018 which will be amortized over the term of the related debt instruments. Additionally, the Company wrote-off $0.5 million in deferred debt issuance costs related to the prior debt facilities. As of December 31, 2019 and 2018, the Company's total deferred debt issuance costs, net of accumulated amortization, were $5.9 million and $7.2 million, respectively.
Amortization expense of $1.2 million and $1.7 million was recorded during the years ended December 31, 2019 and 2018, respectively, and has been included as a component of Interest expense in the accompanying Consolidated Statements of Income. Following is the expected future amortization of the Company's deferred debt issuance costs as of December 31, 2019 ($ in millions):
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
2020
|
$
|
1.2
|
|
2021
|
1.2
|
|
2022
|
1.2
|
|
2023
|
1.0
|
|
2024
|
0.4
|
|
Thereafter
|
0.9
|
|
Total
|
$
|
5.9
|
|
Note 16. Derivatives
In the normal course of business, the Company is exposed to foreign currency exchange rate risk and interest rate risk on its variable-rate debt. To manage these risks, the Company utilizes a variety of practices including, where considered appropriate, derivative instruments. The Company has no derivative instruments for trading or speculative purposes or any derivatives with credit risk-related contingent features. All derivative instruments used by the Company are either exchange traded or are entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties. The fair values of the Company's derivative instruments are determined using observable inputs and are considered Level 2 assets or liabilities.
The Company utilizes currency forward, swap and, to a lesser extent, option contracts to selectively hedge its exposure to foreign currency risk when it is practical and economical to do so. The use of these contracts minimizes transactional exposure to exchange rate changes. We designate certain of our foreign currency hedges as cash flow hedges. Changes in the fair value of cash flow hedges are reported as a component of other comprehensive income (loss) and reclassified into earnings when the forecasted transaction affects earnings. For foreign exchange contracts not designated as cash flow hedges, changes in the contracts' fair value are recorded to net income each period.
The Company selectively hedges its exposure to interest rate increases on variable-rate, long-term debt when it is practical and economical to do so. Changes in the fair value of interest rate contracts considered cash flow hedges are reported as a component of Other comprehensive income (loss) and reclassified into earnings when the forecasted transaction affects earnings.
On January 20, 2017, the Company entered into an interest rate swap transaction with a major financial institution for a three-year term on a notional amount of $315 million. The interest rate swap is intended to manage the Company's interest rate risk by fixing the interest rate on a portion of the Company's debt currently outstanding under its credit facility that was previously subject to a floating interest rate equal to 1-month LIBOR plus a credit spread. The swap provides for the Company to pay a fixed rate of 1.65% per annum in addition to the credit spread on such portion of its outstanding debt in exchange for receiving a variable interest rate based on 1-month LIBOR. On September 25, 2018, in conjunction with the debt refinancing discussed in Note 15. Debt, the Company settled a notional amount of $130 million which resulted in a gain of $1.8 million as of the settlement date. This gain will be amortized on a ratable basis from Accumulated other comprehensive income into income as interest expense over the remaining term of the interest rate swap. On September 11, 2019, the Company terminated this interest rate swap. Concurrently, on September 11, 2019, the Company entered into a pay-fixed, receive-variable interest rate swap with a maturity date of January 31, 2027. The instrument is a hedge on a portion of the Company’s debt facility through the existing credit agreement. Under the terms of the interest rate swap, SWM will pay a fixed amount of interest each period in an amount equal to 1.724% on a notional amount of $185 million and receive interest payments monthly in an amount equal to the One-Month USD-LIBOR rate on the notional amount. The notional amount will reduce throughout the term of the swap as follows:
|
|
•
|
September 13, 2019 - December 31, 2020 $185 million notional
|
|
|
•
|
December 31, 2020 - December 31, 2021 $150 million notional
|
|
|
•
|
December 31, 2021 - January 31, 2027 $100 million notional
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As with the previous interest rate swap, the terms of the swap mirror the terms of the underlying debt, including timing of the payments and interest rates.
On January 20, 2017, the Company also entered into a three-year cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $100 million swapped to €93.7 million at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of 1.65% per annum and pay to our swap counterparty Euro interest at a fixed rate of -0.18% per annum. On September 11, 2019, SWM entered into an offsetting swap with a major financial institution whose terms perfectly mirrored the January 20, 2017 swap and which economically offset the previous cross-currency swap. At the maturity date of the new swap and the previous swap, January 20, 2020, there will be no cash impact to the Company to settle these instruments as they will perfectly offset each other.
On October 24, 2018, the Company also entered into a three-year cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $75 million swapped to €65.4 million at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of 6.875% per annum and pay to our swap counterparty Euro interest at a fixed rate of 3.6725% per annum. The cross-currency swap will mature on October 1, 2021.
On January 29, 2019, the Company entered into a cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $75 million swapped to €66.0 million at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of 6.875% per annum and pay to our swap counterparty Euro interest at a fixed rate of 4.0525% per annum. The cross-currency swap will mature on October 1, 2021.
On September 11, 2019, the Company entered into a cross-currency swap arrangement with a major financial institution designed as a hedge having a maturity date of April 1, 2023. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $100 million swapped to €90.9 million at maturity. Under the terms of the new cross-currency swap, SWM will pay a fixed amount of Euro-denominated interest at a rate of 5.638% semiannually and receive U.S. dollar denominated payments at a rate of 6.875% semiannually on the notional amount of the swap.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair value of asset and liability derivatives and the respective balance sheet locations at December 31, 2019 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
Derivatives Designated as Hedges:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts receivable
|
|
$
|
4.8
|
|
|
Accrued expenses
|
|
$
|
5.6
|
|
Foreign exchange contracts
|
Other assets
|
|
6.3
|
|
|
Other liabilities
|
|
5.5
|
|
Interest rate contracts
|
Accounts receivable
|
|
—
|
|
|
Accrued expenses
|
|
0.2
|
|
Interest rate contracts
|
Other assets
|
|
—
|
|
|
Other liabilities
|
|
—
|
|
Total derivatives designated as hedges
|
|
|
$
|
11.1
|
|
|
|
|
$
|
11.3
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts receivable
|
|
$
|
0.1
|
|
|
Accounts payable
|
|
$
|
—
|
|
Total derivatives not designated as hedges
|
|
|
0.1
|
|
|
|
|
—
|
|
Total derivatives
|
|
|
$
|
11.2
|
|
|
|
|
$
|
11.3
|
|
The following table presents the fair value of asset and liability derivatives and the respective balance sheet locations at December 31, 2018 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
Derivatives Designated as Hedges:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts receivable
|
|
$
|
2.0
|
|
|
Accrued expenses
|
|
$
|
1.3
|
|
Foreign exchange contracts
|
Other assets
|
|
1.0
|
|
|
Other liabilities
|
|
8.8
|
|
Interest rate contracts
|
Other assets
|
|
1.8
|
|
|
Other liabilities
|
|
—
|
|
Total derivatives designated as hedges
|
|
|
$
|
4.8
|
|
|
|
|
$
|
10.1
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts Receivable
|
|
0.1
|
|
|
Accounts Payable
|
|
—
|
|
Total derivatives not designated as hedges
|
|
|
0.1
|
|
|
|
|
—
|
|
Total derivatives
|
|
|
$
|
4.9
|
|
|
|
|
$
|
10.1
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the gross effect that derivative instruments in cash flow hedging relationships had on accumulated other comprehensive income (loss), or AOCI, and results of operations ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Cash Flow Hedging Relationships
|
|
Unrealized Gain (Loss) Recognized in AOCI on Derivatives, Net of Tax for the Year Ended December 31,
|
|
Location of Loss (Gain) Reclassified from AOCI
|
|
Loss (Gain) Reclassified
from AOCI, Net of Tax
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
2019
|
|
2018
|
|
2017
|
Foreign exchange contracts
|
|
$
|
(0.7
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
2.2
|
|
|
Net sales
|
|
$
|
(1.2
|
)
|
|
$
|
0.8
|
|
|
$
|
0.4
|
|
Foreign exchange contracts
|
|
(2.3
|
)
|
|
0.1
|
|
|
(0.6
|
)
|
|
Other income, net
|
|
(1.9
|
)
|
|
0.1
|
|
|
0.5
|
|
Interest rate contracts
|
|
4.6
|
|
|
4.0
|
|
|
0.4
|
|
|
Interest expense
|
|
7.6
|
|
|
2.8
|
|
|
(1.2
|
)
|
Total
|
|
$
|
1.6
|
|
|
$
|
2.4
|
|
|
$
|
2.0
|
|
|
|
|
$
|
4.5
|
|
|
$
|
3.7
|
|
|
$
|
(0.3
|
)
|
The Company's designated derivative instruments are highly effective. As such, related to the hedge ineffectiveness or amounts excluded from hedge effectiveness testing, there were no gains or losses recognized immediately in income for the years ended December 31, 2019, 2018 or 2017.
In January 2018, the Company early adopted the guidance in ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." Upon adoption of this standard, the Company elected to de-designate the original hedging relationship of its pay-EUR, receive-USD cross currency swap and re-designate the cross currency swap with the terms based on the spot rate of the EUR. Prospectively, future changes in the components related to the spot change on the notional will be recorded in OCI and remain there until the hedged subsidiaries are substantially liquidated. Starting with the adoption date, all coupon payments will be recorded in earnings and the initial value of excluded components currently recorded in AOCI as an unrealized translation adjustment will be amortized into interest expense over the remaining 25 months of the swap, resulting in a positive impact to Net income. As of December 31, 2019, the gain, net of taxes, recognized in Accumulated other comprehensive loss on the cross currency swap derivative was $0.5 million. For the year ended December 31, 2019, $0.8 million was reclassified from Accumulated other comprehensive loss into income as interest expense and $1.1 million was recognized in income as derivative amounts excluded from effectiveness testing as Interest expense.
The following table provides the effect derivative instruments not designated as hedging instruments had on net income ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Cash Flow Hedging Instruments
|
Amount of Gain / (Loss) Recognized in Other Income / Expense
|
|
2019
|
|
2018
|
|
2017
|
Foreign exchange contracts
|
$
|
1.1
|
|
|
$
|
(2.5
|
)
|
|
$
|
2.7
|
|
Total
|
$
|
1.1
|
|
|
$
|
(2.5
|
)
|
|
$
|
2.7
|
|
Note 17. Accrued Expenses
Accrued expenses consisted of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Accrued salaries, wages and employee benefits
|
$
|
46.1
|
|
|
$
|
43.1
|
|
Other accrued expenses
|
40.4
|
|
|
29.8
|
|
Total
|
$
|
86.5
|
|
|
$
|
72.9
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Income Taxes
For financial reporting purposes, income before income taxes includes the following components ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
60.0
|
|
|
$
|
55.8
|
|
|
$
|
42.6
|
|
Foreign
|
36.9
|
|
|
61.0
|
|
|
58.9
|
|
Total
|
$
|
96.9
|
|
|
$
|
116.8
|
|
|
$
|
101.5
|
|
An analysis of the provision (benefit) for income taxes from continuing operations follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current income taxes:
|
|
|
|
|
|
U.S. federal
|
$
|
8.1
|
|
|
$
|
(9.2
|
)
|
|
$
|
53.2
|
|
U.S. state
|
0.8
|
|
|
0.8
|
|
|
0.6
|
|
Foreign
|
9.7
|
|
|
11.6
|
|
|
14.2
|
|
|
18.6
|
|
|
3.2
|
|
|
68.0
|
|
Deferred income taxes:
|
|
|
|
|
|
U.S. federal
|
2.3
|
|
|
3.6
|
|
|
(1.3
|
)
|
U.S. state
|
(1.9
|
)
|
|
1.4
|
|
|
2.9
|
|
Foreign
|
(3.8
|
)
|
|
2.5
|
|
|
—
|
|
|
(3.4
|
)
|
|
7.5
|
|
|
1.6
|
|
Total
|
$
|
15.2
|
|
|
$
|
10.7
|
|
|
$
|
69.6
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of income taxes computed at the U.S. Federal statutory income tax rate to the provision for income taxes is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Tax provision at U.S. statutory rate
|
$
|
20.3
|
|
|
21.0
|
%
|
|
$
|
24.5
|
|
|
21.0
|
%
|
|
$
|
35.6
|
|
|
35.0
|
%
|
Foreign income tax rate differential
|
0.6
|
|
|
0.5
|
|
|
2.5
|
|
|
2.2
|
|
|
(3.3
|
)
|
|
(3.3
|
)
|
Income from passthrough entities
|
1.7
|
|
|
1.6
|
|
|
0.7
|
|
|
0.6
|
|
|
6.4
|
|
|
6.4
|
|
Global intangible low tax inclusion
|
(0.1
|
)
|
|
(0.1
|
)
|
|
7.0
|
|
|
6.0
|
|
|
—
|
|
|
—
|
|
Foreign derived intangible income
|
(0.2
|
)
|
|
(0.2
|
)
|
|
(4.2
|
)
|
|
(3.6
|
)
|
|
—
|
|
|
—
|
|
State income tax, net of federal benefit
|
(0.2
|
)
|
|
(0.2
|
)
|
|
1.7
|
|
|
1.5
|
|
|
2.7
|
|
|
2.6
|
|
Adjustments to valuation allowances
|
(3.7
|
)
|
|
(3.8
|
)
|
|
(2.5
|
)
|
|
(2.1
|
)
|
|
(2.8
|
)
|
|
(2.8
|
)
|
Transition tax
|
(0.7
|
)
|
|
(0.6
|
)
|
|
(11.6
|
)
|
|
(10.0
|
)
|
|
51.4
|
|
|
50.6
|
|
Other tax credits
|
(2.0
|
)
|
|
(2.1
|
)
|
|
(2.6
|
)
|
|
(2.3
|
)
|
|
(2.3
|
)
|
|
(2.3
|
)
|
Foreign tax credits
|
(3.5
|
)
|
|
(3.6
|
)
|
|
(5.1
|
)
|
|
(4.4
|
)
|
|
(9.2
|
)
|
|
(9.0
|
)
|
Other foreign operational taxes
|
2.9
|
|
|
3.0
|
|
|
3.1
|
|
|
2.7
|
|
|
4.2
|
|
|
4.2
|
|
Domestic production deduction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.4
|
)
|
|
(2.3
|
)
|
Remeasurement of deferred taxes due to tax law
|
0.9
|
|
|
1.0
|
|
|
(1.8
|
)
|
|
(1.5
|
)
|
|
(11.8
|
)
|
|
(11.7
|
)
|
Non-deductible compensation
|
1.1
|
|
|
1.1
|
|
|
0.4
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Other, net
|
(1.9
|
)
|
|
(1.9
|
)
|
|
(1.4
|
)
|
|
(1.2
|
)
|
|
1.1
|
|
|
1.2
|
|
Provision for income taxes
|
$
|
15.2
|
|
|
15.7
|
%
|
|
$
|
10.7
|
|
|
9.2
|
%
|
|
$
|
69.6
|
|
|
68.6
|
%
|
On December 22, 2017, the Tax Act was enacted into law effective January 1, 2018. The new legislation contains several key tax provisions that affected the Company, which include but are not limited to a one-time deemed repatriation tax on post-1986 accumulated earnings and profits of the undistributed earnings of foreign subsidiaries (“transition tax”), a reduction of the federal corporate income tax rate from 35% to 21%, and other U.S. reform items. In 2018, the Company decreased its provisional estimates of transition tax, related currency implications, state taxes and deferred tax rate change effect of the new law by $13.9 million. The reduction from the provisional 2017 amounts were primarily due to the transition tax further analysis of accumulated earnings and foreign taxes paid. As of December 31, 2018, the Company completed its accounting for the tax effects of the Tax Act.
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 percent as compared with 9.2 percent in 2018. 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 $13 million U.S. tax reform reduction.
Prior to the passage of the U.S. Tax Act, the Company asserted that substantially all of the undistributed earnings of its foreign subsidiaries were considered indefinitely reinvested and accordingly, no deferred taxes were provided. Due to the Tax Act, the Company has significant previously taxed earnings and profits from its foreign subsidiaries, as a result of transition tax, that is generally able to be repatriated free of U. S. federal tax. In addition, future earnings of foreign subsidiaries are generally expected to be able to be repatriated free of U.S. federal income tax because these earnings were taxed in the U.S. under the GILTI regime or would be eligible for a 100% dividends received deduction. Therefore, the Company does not intend to assert indefinite reinvestment on cash earnings generated after December 31, 2017. As a result, the Company has provided for non-U.S. withholding taxes, U.S. federal tax related to currency movement on previously-taxed earnings and profits, and U.S. state taxes on unremitted post-2017 earnings.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net deferred income tax assets (liabilities) were comprised of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Deferred Tax Assets
|
|
|
|
Receivable allowances
|
$
|
0.4
|
|
|
$
|
0.8
|
|
Inventory and other assets
|
—
|
|
|
1.1
|
|
Postretirement and other employee benefits
|
19.0
|
|
|
14.8
|
|
Derivatives
|
0.1
|
|
|
—
|
|
Net operating loss and tax credit carryforwards
|
93.7
|
|
|
93.3
|
|
Capital loss carryforward
|
6.9
|
|
|
—
|
|
Investment in subsidiaries
|
—
|
|
|
5.6
|
|
Intangibles
|
45.7
|
|
|
60.0
|
|
Other
|
3.9
|
|
|
1.2
|
|
|
169.7
|
|
|
176.8
|
|
Less: Valuation allowance
|
(157.4
|
)
|
|
(172.1
|
)
|
Net deferred income tax assets
|
$
|
12.3
|
|
|
$
|
4.7
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
Net property, plant and equipment
|
$
|
(52.6
|
)
|
|
$
|
(51.9
|
)
|
Accruals and other liabilities
|
(0.6
|
)
|
|
(0.2
|
)
|
Investment in subsidiaries
|
(3.5
|
)
|
|
—
|
|
Derivatives
|
—
|
|
|
(0.3
|
)
|
Other
|
(0.1
|
)
|
|
—
|
|
Net deferred income tax liabilities
|
$
|
(56.8
|
)
|
|
$
|
(52.4
|
)
|
|
|
|
|
Total net deferred income tax liabilities
|
$
|
(44.5
|
)
|
|
$
|
(47.7
|
)
|
As of December 31, 2019 the Company had approximately $90.5 million of tax-effected operating loss carryforwards available to further reduce future taxable income in various jurisdictions which will expire on various dates as follows:
|
|
|
|
|
|
2019
|
2020-2023
|
$
|
0.2
|
|
2024-2035
|
15.3
|
|
Indefinite
|
75.0
|
|
|
$
|
90.5
|
|
In addition, the Company has $1.5 million of state tax credits that will expire between 2020 - 2036.
The Company's deferred tax asset valuation allowances are primarily the result of uncertainties regarding the future realization of recorded tax benefits on tax loss carryforwards for certain entities. The valuation allowance on deferred tax assets as of December 31, 2019, in Luxembourg, Spain and the Philippines total $143.4 million, $8.4 million and $0.4 million respectively, fully reserving the net deferred tax asset balances in these locations. In addition, there is a valuation allowance on a tax credit receivable of $4.3 million in Brazil. We believe that it is more likely than not that the benefit from certain state tax attributes will not be realized. In recognition of this risk, we have provided a valuation allowance of $1.1 million on the related deferred tax assets.
The Company's assumptions, judgments and estimates relative to the valuation of these net deferred tax assets take into account available positive and negative evidence of realizability, including recent financial performance, the ability to
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
realize benefits of restructuring and other recent actions, projections of the amount and category of future taxable income and tax planning strategies. Actual future operating results and the underlying amount and category of income in future periods could differ from the Company's current assumptions, judgments and estimates. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets.
The following table summarizes the activity related to the Company's unrecognized tax benefits related to income taxes ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
|
2017
|
Uncertain tax position balance at beginning of year
|
$
|
1.1
|
|
|
$
|
1.0
|
|
|
$
|
2.4
|
|
Increases related to current year tax positions
|
0.6
|
|
|
0.6
|
|
|
0.3
|
|
Increases related to prior year tax positions
|
—
|
|
|
—
|
|
|
0.4
|
|
Decreases related to prior year tax positions
|
—
|
|
|
(0.2
|
)
|
|
(2.0
|
)
|
Decreases related to expiration of statute of limitations
|
—
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
Uncertain tax position balance at end of year
|
$
|
1.7
|
|
|
$
|
1.1
|
|
|
$
|
1.0
|
|
The liability for unrecognized tax benefits included $1.7 million as of December 31, 2019 that if recognized would impact the Company's effective tax rate. We do not anticipate a decrease in unrecognized tax benefits by the end of 2020 as a result of a lapse of the statute of limitations and other regulatory filings. The Company's policy with respect to penalties and interest in connection with income tax assessments or related to unrecognized tax benefits is to classify penalties as provision for income taxes and interest as interest expense in its Consolidated Statements of Income. There were no material income tax penalties or interest accrued during the years ended December 31, 2019, 2018 and 2017.
The Company files income tax returns, including returns for its subsidiaries, with federal, state, local and foreign jurisdictions. The Company finalized the U.S. federal audit for tax years 2014 and 2015 during 2019. All expected impacts have been recorded in 2018 or earlier. The following tax years remain subject to examination by the respective major tax jurisdictions:
|
|
|
Jurisdiction
|
Fiscal Years
|
Belgium
|
2017-2019
|
Brazil
|
2014-2019
|
Canada
|
2015-2019
|
China
|
2017-2019
|
France
|
2016-2019
|
Germany
|
2015-2019
|
Hong Kong
|
2013-2019
|
Luxembourg
|
2014-2019
|
Philippines
|
2016-2019
|
Poland
|
2013-2019
|
Spain
|
2015-2019
|
United Kingdom
|
2016-2019
|
United States
|
|
Federal
|
2016-2019
|
State
|
2014-2019
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Postretirement and Other Benefits
North American Pension and Postretirement Healthcare and Life Insurance Benefits
The U.S. operations have defined benefit retirement plans that cover certain full-time employees. Retirement benefits are based on either a cash balance benefit formula or a final average pay formula for certain employees who were "grandfathered" and retained retirement benefits under the terms of the plan prior to its amendment to include a cash balance benefit formula. Benefits related to the U.S. defined benefit and pension plan are frozen for all employees.
The U.S. operations also have unfunded healthcare and life insurance benefit plans, or OPEB plans, which cover certain of its retirees through age 65. Some employees who retained benefits under the terms of the Company's plans prior to certain past amendments receive retiree healthcare coverage at rates subsidized by the Company. For other eligible employees, retiree healthcare coverage access is offered at full cost to the retiree. The postretirement healthcare plans include a limit on the Company's share of costs for current and future retirees. The U.S. operations' retiree life insurance plans are noncontributory. The Company's Canadian postretirement benefits liability is immaterial and therefore is not included in these disclosures.
French Pension Benefits
In France, employees are covered under a government-administered program. In addition, the Company's French operations sponsor retirement indemnity plans, which pay a lump sum retirement benefit to all of its permanent employees who retire. In addition, the Company's French operations sponsor a supplemental executive pension plan. Plan assets are principally invested in the general asset portfolio of a French insurance company.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. and French Pension and U.S. Other Postretirement Benefit Disclosures
The U.S. pension and OPEB plans and French pension plans accounted for the majority of the Company's total plan assets and total Accumulated Benefit Obligations (ABO) at December 31, 2019 for the Company and all of its consolidated subsidiaries.
The Company uses a measurement date of December 31 for its pension plans in the United States and France and other postretirement healthcare and life insurance benefit plans in the United States. The funded status of these plans as of December 31, 2019 and 2018 was as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
OPEB Benefits
|
|
United States
|
|
France
|
|
United States
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in Projected Benefit Obligation, or PBO:
|
|
|
|
|
|
|
|
|
|
|
|
PBO at beginning of year
|
$
|
112.3
|
|
|
$
|
124.1
|
|
|
$
|
29.5
|
|
|
$
|
30.5
|
|
|
$
|
1.2
|
|
|
$
|
1.4
|
|
Service cost
|
—
|
|
|
—
|
|
|
1.0
|
|
|
1.1
|
|
|
—
|
|
|
—
|
|
Interest cost
|
4.6
|
|
|
4.3
|
|
|
0.4
|
|
|
0.4
|
|
|
0.1
|
|
|
0.1
|
|
Actuarial loss (gain)
|
11.1
|
|
|
(8.2
|
)
|
|
3.2
|
|
|
0.9
|
|
|
0.1
|
|
|
(0.2
|
)
|
Participant contributions
|
—
|
|
|
—
|
|
|
0.7
|
|
|
1.0
|
|
|
0.1
|
|
|
0.1
|
|
Gross benefits paid
|
(8.1
|
)
|
|
(7.9
|
)
|
|
(2.3
|
)
|
|
(3.0
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
Currency translation effect
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
(1.4
|
)
|
|
—
|
|
|
—
|
|
PBO at end of year
|
$
|
119.9
|
|
|
$
|
112.3
|
|
|
$
|
31.9
|
|
|
$
|
29.5
|
|
|
$
|
1.4
|
|
|
$
|
1.2
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
113.1
|
|
|
$
|
128.7
|
|
|
$
|
2.1
|
|
|
$
|
3.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
20.8
|
|
|
(7.6
|
)
|
|
0.2
|
|
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
Employer contributions
|
—
|
|
|
—
|
|
|
1.1
|
|
|
1.2
|
|
|
—
|
|
|
—
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.2
|
|
Gross benefits paid
|
(8.1
|
)
|
|
(8.0
|
)
|
|
(2.3
|
)
|
|
(1.5
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
Currency translation effect
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
$
|
125.8
|
|
|
$
|
113.1
|
|
|
$
|
1.1
|
|
|
$
|
2.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status at end of year
|
$
|
5.9
|
|
|
$
|
0.8
|
|
|
$
|
(30.8
|
)
|
|
$
|
(27.4
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
(1.2
|
)
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The PBO, ABO and fair value of pension plan assets for the Company's U.S. and French defined benefit pension plans as of December 31, 2019 and 2018 as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
France
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
PBO
|
$
|
119.9
|
|
|
$
|
112.3
|
|
|
$
|
31.9
|
|
|
$
|
29.5
|
|
ABO
|
119.9
|
|
|
112.3
|
|
|
31.9
|
|
|
24.9
|
|
Fair value of plan assets
|
125.8
|
|
|
113.1
|
|
|
1.1
|
|
|
2.1
|
|
As of December 31, 2019, the pre-tax amounts in accumulated other comprehensive income that have not been recognized as components of net periodic benefit cost for the U.S. and French pension plans and other postretirement benefit plans in the United States are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
OPEB Benefits
|
|
United States
|
|
France
|
|
United States
|
Accumulated loss
|
$
|
23.3
|
|
|
$
|
15.2
|
|
|
$
|
0.2
|
|
Prior service credit
|
—
|
|
|
(2.6
|
)
|
|
—
|
|
Accumulated other comprehensive loss
|
$
|
23.3
|
|
|
$
|
12.6
|
|
|
$
|
0.2
|
|
The amounts in accumulated other comprehensive loss at December 31, 2019, which are expected to be recognized as components of U.S. and French net periodic benefit cost in 2020 are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
OPEB Benefits
|
|
United States
|
|
France
|
|
United States
|
Amortization of accumulated loss
|
$
|
(3.5
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
0.3
|
|
|
—
|
|
Total
|
$
|
(3.5
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
—
|
|
Actuarial assumptions are used to determine the Company's benefit obligations. The discount rate represents the interest rate used to determine the present value of future cash flows currently expected to be required to settle pension obligations. The discount rate fluctuates from year to year based on current market interest rates for high-quality, fixed-income investments. The Company also evaluates the expected average duration of its pension obligations in determining its discount rate. An assumed long-term rate of compensation increase is also used to determine the PBO. The weighted average assumptions used to determine benefit obligations as of December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
OPEB Benefits
|
|
United States
|
|
France
|
|
United States
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Discount rate
|
3.20
|
%
|
|
4.29
|
%
|
|
0.53
|
%
|
|
1.28
|
%
|
|
3.21
|
%
|
|
4.30
|
%
|
Rate of compensation increase
|
—
|
%
|
|
—
|
%
|
|
1.96
|
%
|
|
1.75
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
The U.S. postretirement healthcare plan provides for benefits to be limited to a cost ceiling which has already been reached. Therefore, no increases in the health care cost trend rates are included in the measurement of the plan's benefit obligation.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net pension and OPEB benefit costs for U.S. employees and net pension benefit costs for French employees during the years ended December 31, 2019, 2018 and 2017 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Benefits
|
|
French Pension Benefits
|
|
U.S. OPEB Benefits
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
4.6
|
|
|
4.3
|
|
|
4.8
|
|
|
0.4
|
|
|
0.4
|
|
|
0.4
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Expected return on plan assets
|
(5.8
|
)
|
|
(5.8
|
)
|
|
(6.4
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortizations and other
|
2.0
|
|
|
3.2
|
|
|
3.2
|
|
|
0.9
|
|
|
1.1
|
|
|
1.4
|
|
|
—
|
|
|
0.1
|
|
|
0.2
|
|
Net periodic benefit cost
|
$
|
0.8
|
|
|
$
|
1.7
|
|
|
$
|
1.6
|
|
|
$
|
2.2
|
|
|
$
|
2.5
|
|
|
$
|
2.7
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
Assumptions are used to determine net periodic benefit costs. In addition to the discount rate and rate of compensation increase, which are used to determine benefit obligations, an expected long-term rate of return on plan assets is also used to determine net periodic pension benefit costs. The weighted average assumptions used to determine net periodic benefit costs for the years ended December 31, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
OPEB Benefits
|
|
United States
|
|
France
|
|
United States
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Discount rate
|
4.29
|
%
|
|
3.60
|
%
|
|
4.11
|
%
|
|
1.28
|
%
|
|
1.28
|
%
|
|
1.14
|
%
|
|
4.30
|
%
|
|
3.59
|
%
|
|
4.09
|
%
|
Expected long-term rate of return on plan assets
|
5.14
|
%
|
|
5.00
|
%
|
|
5.56
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Rate of compensation increase
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
1.96
|
%
|
|
1.75
|
%
|
|
1.75
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's investment strategy with respect to its U.S. pension plan assets is to maximize the return on investment of plan assets at an acceptable level of risk and to assure the plans' fiscal health. The target asset allocation varies based on the funded status of the plan in an effort to match the duration of the plan's liabilities to investments in long duration fixed income assets over time. The Company's investments under the French pension plans are primarily invested as directed by governmental authorities, their contracted providers or the participants without direction from the Company. The primary goal of the Company's pension plans is to maintain the highest probability of assuring future benefit payments to participants while providing growth of capital in real terms. To achieve this goal, the investment philosophy is to protect plan assets from large investment losses, particularly over time, while steadily growing the assets in a prudent manner. While there cannot be complete assurance that the objectives will be realized, the Company believes that the likelihood of realizing the objectives are reasonable based upon this investment philosophy. The Company has an investment committee that meets on a periodic basis to review the portfolio returns and to determine asset mix targets. The U.S. and French pension plans' asset target allocations by asset category for 2020 and actual allocations by asset category at December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
France
|
|
2020 Target
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Asset Category
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
—
|
%
|
|
1
|
%
|
|
1
|
%
|
|
41
|
%
|
|
43
|
%
|
Equity securities*
|
|
|
|
|
|
|
|
|
|
Domestic large cap
|
9
|
|
|
5
|
|
|
5
|
|
|
31
|
|
|
28
|
|
Domestic small cap
|
5
|
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
International
|
10
|
|
|
15
|
|
|
14
|
|
|
—
|
|
|
—
|
|
Fixed income securities
|
76
|
|
|
76
|
|
|
77
|
|
|
26
|
|
|
27
|
|
Alternative investments**
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
*
|
None of the Company's pension plan assets are targeted for investment in SWM stock, except that it is possible that one or more mutual funds held by the plan could hold shares of SWM.
|
|
|
**
|
Investments in this category under the U.S. pension plan only may include hedge funds, and may include real estate under the French pension plan.
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's pension assets are classified according to an established fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). A financial instrument's level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are described below:
|
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
Level 2
|
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly;
|
|
|
Level 3
|
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
|
The following table sets forth by level, within the fair value hierarchy, the U.S. and French pension plans' assets at fair value as of December 31, 2019 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
France
|
Plan Asset Category
|
Total
|
|
Other*
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash equivalents
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic large cap
|
6.8
|
|
|
6.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
|
—
|
|
Domestic small cap
|
4.3
|
|
|
4.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
International
|
19.1
|
|
|
19.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fixed income securities
|
94.7
|
|
|
44.4
|
|
|
—
|
|
|
50.3
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Alternative investments**
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Total
|
$
|
125.8
|
|
|
$
|
74.6
|
|
|
$
|
0.9
|
|
|
$
|
50.3
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
0.7
|
|
|
$
|
0.4
|
|
The following table sets forth by level, within the fair value hierarchy, the U.S. and French pension plans' assets at fair value as of December 31, 2018 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
France
|
Plan Asset Category
|
Total
|
|
Other*
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
Cash equivalents
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
|
$
|
—
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic large cap
|
5.7
|
|
|
5.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
|
0.6
|
|
|
—
|
|
Domestic small cap
|
3.3
|
|
|
3.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
International
|
15.5
|
|
|
15.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fixed income securities
|
87.6
|
|
|
41.2
|
|
|
—
|
|
|
46.4
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
Alternative investments**
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Total
|
$
|
113.1
|
|
|
$
|
65.7
|
|
|
$
|
1.0
|
|
|
$
|
46.4
|
|
|
$
|
—
|
|
|
$
|
2.1
|
|
|
$
|
1.5
|
|
|
$
|
0.6
|
|
|
|
*
|
Assets are measured at Net Asset Value ("NAV") as a practical expedient and not subject to hierarchy level classification disclosure.
|
** Alternative investments include ownership interests in shares of registered investment companies.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Values for Level 3 assets may be determined through appraisals and models for illiquid assets. The following table shows the changes in Level 3 asset values ($ in millions):
|
|
|
|
|
Level 3 Asset Reconciliation
|
Alternative
Investments
Total
|
Beginning balance, January 1, 2018
|
$
|
0.1
|
|
Realized and unrealized gains
|
—
|
|
Purchases
|
—
|
|
Sales
|
(0.1
|
)
|
Ending balance, December 31, 2018
|
$
|
—
|
|
Realized and unrealized gains
|
—
|
|
Purchases
|
—
|
|
Sales
|
—
|
|
Ending balance, December 31, 2019
|
$
|
—
|
|
The Company expects the following estimated undiscounted future pension benefit payments for the United States and France and future postretirement healthcare and life insurance benefit payments for the United States, which are to be made from pension plan and employer assets, net of amounts that will be funded from retiree contributions, and which reflect expected future service, as appropriate ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
France
|
|
Pension
Benefits
|
|
Healthcare
and Life
Insurance
Benefits
|
|
Pension
Benefits
|
2020
|
$
|
8.5
|
|
|
$
|
0.2
|
|
|
$
|
1.6
|
|
2021
|
8.4
|
|
|
0.2
|
|
|
1.0
|
|
2022
|
8.4
|
|
|
0.1
|
|
|
0.6
|
|
2023
|
8.1
|
|
|
0.1
|
|
|
1.7
|
|
2024
|
8.0
|
|
|
0.1
|
|
|
1.3
|
|
2025 - 2029
|
37.6
|
|
|
0.3
|
|
|
8.0
|
|
The Company is not required to contribute during 2020 to its U.S. and French pension plans; although, it may make discretionary contributions dependent on market conditions to remain aligned with its investment policy statement.
Other Foreign Pension Benefits
In Brazil, Poland and the United Kingdom, employees are covered under government-administered programs. In Canada, the employee pension benefits are not material and therefore are not included in the above disclosures.
Other Benefits
We sponsor a qualified defined contribution plan covering substantially all U.S. employees. Under the plan, the Company matches a portion of employee contributions. The Company's cost under the plan was $3.9 million, $3.6 million and $3.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company provides U.S. executives, certain other key personnel and its directors the opportunity to participate in deferred compensation plans. Participating employees can elect to defer a portion of their salaries and certain other compensation. Participating directors can elect to defer their meeting fees, as a cash deferral, as well as their quarterly retainer fees, as deferred stock unit credits. The Company's liability balance under these deferred compensation plans totaled $19.7 million and $14.1 million at December 31, 2019 and 2018, respectively, which were included in the Consolidated Balance Sheets in Other liabilities. In connection with these plans, the Company has a grantor trust into
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which it has contributed funds toward its future obligations under the various plans (See Note 13. Other Assets). The balance of grantor trust assets totaled $14.7 million and $10.9 million at December 31, 2019 and 2018, respectively, which were included in Other assets in the Consolidated Balance Sheets. These assets are restricted from Company use until all obligations are satisfied.
In accordance with French law, certain salaried employees in France may accumulate unused regular vacation and supplemental hours of paid leave that can be credited to an individual's Compte Epargne Temps, or CET. The CET account may grow over an individual's career and the hours accumulated may be withdrawn upon retirement or under other special circumstances at the individual's then current rate of pay. The balance of the Company's liability for this program reflected in the accompanying Consolidated Balance Sheets in Other liabilities was $6.3 million and $5.5 million at December 31, 2019 and 2018, respectively.
Note 20. Stockholders' Equity
Restricted Stock Plan
In April 2015, the Company adopted a new 2015 Long-term Incentive Plan, or LTIP, which replaced its existing Restricted Stock Plan ("RSP"). The LTIP is intended to promote the Company's long-term financial success by attracting and retaining outstanding executive personnel and to motivate such personnel by means of equity grants. The Compensation Committee of the Company's Board of Directors selects participants and establishes the terms of any grant of restricted stock. The Company's LTIP provides that issuance of restricted stock immediately transfers ownership rights in shares of its Common Stock to the recipient of the grant, including the right to vote the shares and to receive dividends thereon. Other types of stock awards are available under the LTIP, but not currently used. The recipient's continued ownership of and right to freely transfer the restricted stock is subject to such conditions on transferability and to such risks of forfeiture as are established by the Compensation Committee at the time of the grant, which may include continued employment with the Company for a defined period, achievement of specified management performance objectives or other conditions established by the Compensation Committee. The number of shares which may be issued under the LTIP is limited to 5,000,000. Restricted shares outstanding under the RSP will continue to vest in accordance with the terms of each grant; however, no further grants of shares will be issued under the RSP. No single participant may be awarded, in the aggregate, more than 750,000 shares during any fiscal year.
As of December 31, 2019, 1,923,356 restricted shares had been issued under the Company's restricted stock plans of which 221,622 shares of issued restricted stock were not yet vested and for which $2.5 million in unrecognized compensation expense is expected to be recognized over a weighted average period of 2.1 years. The following table presents restricted stock activity for the years 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
# of Shares
|
|
Weighted Average Fair Value at Date of Grant
|
|
# of Shares
|
|
Weighted Average Fair Value at Date of Grant
|
|
# of Shares
|
|
Weighted Average Fair Value at Date of Grant
|
Nonvested restricted shares outstanding at January 1
|
184,190
|
|
|
$
|
40.33
|
|
|
283,338
|
|
|
$
|
37.26
|
|
|
224,289
|
|
|
$
|
41.30
|
|
Granted
|
155,982
|
|
|
35.62
|
|
|
142,475
|
|
|
39.58
|
|
|
216,017
|
|
|
36.03
|
|
Forfeited
|
(8,869
|
)
|
|
41.34
|
|
|
(12,858
|
)
|
|
40.06
|
|
|
(29,150
|
)
|
|
42.50
|
|
Vested
|
(109,681
|
)
|
|
40.12
|
|
|
(228,765
|
)
|
|
35.86
|
|
|
(127,818
|
)
|
|
41.06
|
|
Nonvested restricted shares outstanding at December 31
|
221,622
|
|
|
$
|
37.08
|
|
|
184,190
|
|
|
$
|
40.33
|
|
|
283,338
|
|
|
$
|
37.26
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Plan Performance Based Shares
During 2019, the Company recognized $5.6 million for 331,150 shares earned under the 2019-2020 award opportunity and $2.2 million of compensation expense earned under the 2018-2019 award opportunity. During 2018, the Company recognized $2.0 million for 91,396 shares earned under the 2018-2019 award opportunity and $2.2 million of compensation expense earned under the 2017-2018 award opportunity. During 2017, the Company recognized $1.7 million of compensation expense for 75,741 shares earned under the 2017-2018 award opportunity and $2.2 million of compensation expense earned under the 2016-2017 award opportunity.
Basic and Diluted Shares Reconciliation
The Company uses the two-class method to calculate earnings per share. The Company has granted restricted stock that contains nonforfeitable rights to dividends on unvested shares. Since these unvested shares are considered participating securities under the two-class method, the Company allocates earnings per share to common stock and participating securities according to dividends declared and participation rights in undistributed earnings.
Diluted net income per common share is computed based on net income divided by the weighted average number of common and potential common shares outstanding. Potential common shares during the respective periods are those related to dilutive stock-based compensation, including long-term share-based incentive compensation, stock options outstanding, and directors' accumulated deferred stock compensation which may be received by the directors in the form of stock or cash. A reconciliation of the average number of common and potential common shares outstanding used in the calculations of basic and diluted net income per share follows ($ in millions, shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Numerator (basic and diluted):
|
|
|
|
|
|
Net income
|
$
|
85.8
|
|
|
$
|
94.5
|
|
|
$
|
34.5
|
|
Less: Dividends paid to participating securities
|
(0.4
|
)
|
|
(0.3
|
)
|
|
(0.4
|
)
|
Less: Undistributed earnings available to participating securities
|
(0.2
|
)
|
|
(0.3
|
)
|
|
—
|
|
Undistributed and distributed earnings available to common stockholders
|
$
|
85.2
|
|
|
$
|
93.9
|
|
|
$
|
34.1
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Average number of common shares outstanding
|
30,652.2
|
|
|
30,551.3
|
|
|
30,407.1
|
|
Effect of dilutive stock-based compensation
|
186.1
|
|
|
141.6
|
|
|
142.2
|
|
Average number of common and potential common shares outstanding
|
30,838.3
|
|
|
30,692.9
|
|
|
30,549.3
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Commitments and Contingencies
Other Commitments
The EP segment's PDM Industries plant has a minimum annual commitment of approximately $1.2 million per year for calcium carbonate purchases, a raw material used in the manufacturing of some paper products, which totals approximately $7.0 million through 2024. Future purchases are expected to be at levels that exceed such minimum levels under these contracts.
The Company enters into certain other immaterial contracts from time to time for the purchase of certain raw materials. The Company also enters into certain contracts for the purchase of equipment and related costs in connection with its ongoing capital projects.
The Company has agreements with an energy co-generation supplier in France whereby the supplier constructed and operates a co-generation facility at certain plants and supplies steam that is used in the operation of these plants. The Company is committed to purchasing minimum annual amounts of steam generated by these facilities under the agreements through 2030. These minimum annual commitments total approximately $6.0 million. The Company's current and expected requirements for steam at these facilities are at levels that exceed the minimum levels under the contracts.
The EP segment's Brazilian plant, SWM-B, has an agreement for the transmission and distribution of energy that covers all of the plant's consumption of electrical energy valued at approximately $2.4 million annually through 2021. Additionally, SWM-B has an agreement for natural gas valued at approximately $6.9 million annually through 2021. The French plants have contracts for natural gas to be distributed to and consumed at PdM, LTRI and St. Girons. The value of the natural gas and distribution to be provided under these contracts is estimated at approximately $2.8 million annually through 2022. Additionally, the French plants have contracts for electricity to be distributed to and consumed at PdM, LTRI and St. Girons. The value of the electricity and distribution to be provided under these contracts is estimated at approximately $6.1 million in 2020. The Spay, France plant has a contract to consume biomass at approximately $0.6 million annually through 2022.
The Company has certain other letters of credit, guarantees and surety bonds outstanding at December 31, 2019, which are not material either individually or in the aggregate.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation
Brazil
Imposto sobre Circulação de Mercadorias e Serviços ("ICMS"), a form of value-added tax in Brazil, was assessed to SWM-B in December of 2000. SWM-B received two assessments from the tax authorities of the State of Rio de Janeiro (the "State") for unpaid ICMS taxes on certain raw materials from January 1995 through October 1998 and from November 1998 through November 2000 (collectively, the "Raw Materials Assessments"). The Raw Materials Assessments concerned the accrual and use by SWM-B of ICMS tax credits generated from the production and sale of certain non-tobacco related grades of paper sold domestically. SWM-B contested the Raw Materials Assessments based on Article 150, VI of the Brazilian Federal Constitution of 1988, which grants immunity from ICMS taxes to papers intended for printing books, newspapers and periodicals, on the ground that tax immunity extends to the raw material inputs used to produce such papers. In 2015, the first chamber of the Federal Supreme Court decided the first Raw Materials Assessment in favor of SWM-B. On May 24, 2019, the second chamber of the Federal Supreme Court decided Assessment 2 against SWM-B in the amount of approximately $12.1 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 in addition to the $1.3 million previously accrued as of December 31, 2018. 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 year. 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
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contribuintes sitting en banc ruled against SWM-B in each of the first and second electricity assessments ($3.8 million and $6.9 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 $0.7 million for ICMS on electricity purchased during part of 2013. In August 2018, the State filed a fourth Electricity Assessment in the amount of $9.7 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
The Company's operations are subject to various nations' federal, state and local laws, regulations and ordinances relating to environmental matters. The nature of the Company's operations exposes it to the risk of claims with respect to various environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. While the Company has incurred in the past several years, and will continue to incur, capital and operating expenditures in order to comply with environmental laws and regulations, it believes that its future cost of compliance with environmental laws, regulations and ordinances, and its exposure to liability for environmental claims and its obligation to participate in the remediation and monitoring of certain hazardous waste disposal sites, will not have a material effect on its financial condition 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 the Company (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 its 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 United States, France, Poland, Brazil, China 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
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with its spin-off from Kimberly-Clark in 1995, the Company undertook to indemnify and hold Kimberly-Clark harmless from claims and liabilities related to the businesses transferred to it that were not identified as excluded liabilities in the related agreements. As of December 31, 2019, there are no claims pending under this indemnification that the Company deems to be material.
General Matters
In the ordinary course of conducting business activities, the Company and its subsidiaries become involved in certain other judicial, administrative and regulatory proceedings involving both private parties and governmental authorities. These proceedings include insured and uninsured regulatory, employment, intellectual property, general and commercial liability, environmental and other matters. At this time, the Company does not expect any of these proceedings to have a material effect on its reputation, business, financial condition, results of operations or cash flows. However, the Company can give no assurance that the results of any such proceedings will not materially affect its reputation, business, financial condition, results of operations or cash flows.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22. Segment Information
The Company's two operating product line segments are also the Company's reportable segments: Advanced Materials and Structures and Engineered Papers. The AMS segment primarily produces engineered resin-based rolled goods such as nets, films, and other non-wovens for use in high-performance applications in the filtration, transportation, infrastructure and construction, medical, and industrial end-markets. The EP segment primarily produces cigarette papers including LIP papers, plug wrap papers and base tipping papers used to wrap various parts of a cigarette for sale to cigarette manufacturers and reconstituted tobacco leaf, or RTL, and wrapper and binder products for sale to cigarette and cigar manufacturers. The EP segment also includes commercial and industrial products such as lightweight printing and writing papers, battery separator paper, drinking straw wrap, filter paper and other specialized papers.
Information about Net Sales and Operating Profit
The Company primarily evaluates segment performance and allocates resources based on operating profit. Expense amounts not associated with segments are referred to as unallocated expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Net Sales
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Advanced Materials & Structures
|
$
|
477.2
|
|
|
46.7
|
%
|
|
$
|
467.9
|
|
|
44.9
|
%
|
|
$
|
433.2
|
|
|
44.1
|
%
|
Engineered Papers
|
545.6
|
|
|
53.3
|
|
|
573.4
|
|
|
55.1
|
|
|
548.9
|
|
|
55.9
|
|
Consolidated
|
$
|
1,022.8
|
|
|
100.0
|
%
|
|
$
|
1,041.3
|
|
|
100.0
|
%
|
|
$
|
982.1
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Operating Profit
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Advanced Materials & Structures
|
$
|
64.3
|
|
|
48.0
|
%
|
|
$
|
49.5
|
|
|
36.7
|
%
|
|
$
|
48.5
|
|
|
37.8
|
%
|
Engineered Papers
|
119.2
|
|
|
89.0
|
|
|
121.8
|
|
|
90.2
|
|
|
119.7
|
|
|
93.3
|
|
Unallocated
|
(49.5
|
)
|
|
(37.0
|
)
|
|
(36.3
|
)
|
|
(26.9
|
)
|
|
(39.9
|
)
|
|
(31.1
|
)
|
Consolidated
|
$
|
134.0
|
|
|
100.0
|
%
|
|
$
|
135.0
|
|
|
100.0
|
%
|
|
$
|
128.3
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Segment Assets
|
|
December 31, 2019
|
|
December 31, 2018
|
|
December 31, 2017
|
Advanced Materials & Structures
|
$
|
781.2
|
|
|
$
|
796.1
|
|
|
$
|
811.7
|
|
Engineered Papers
|
512.4
|
|
|
527.4
|
|
|
537.6
|
|
Unallocated
|
178.1
|
|
|
143.0
|
|
|
193.2
|
|
Consolidated
|
$
|
1,471.7
|
|
|
$
|
1,466.5
|
|
|
$
|
1,542.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Capital Spending
|
Depreciation
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Advanced Materials & Structures
|
$
|
16.1
|
|
|
$
|
15.0
|
|
|
$
|
11.5
|
|
|
$
|
12.8
|
|
|
$
|
14.1
|
|
|
$
|
12.3
|
|
Engineered Papers
|
12.0
|
|
|
11.7
|
|
|
25.6
|
|
|
22.8
|
|
|
23.9
|
|
|
23.4
|
|
Unallocated
|
0.5
|
|
|
0.3
|
|
|
0.1
|
|
|
0.2
|
|
|
0.1
|
|
|
—
|
|
Consolidated
|
$
|
28.6
|
|
|
$
|
27.0
|
|
|
$
|
37.2
|
|
|
$
|
35.8
|
|
|
$
|
38.1
|
|
|
$
|
35.7
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information about Geographic Areas
Long-lived assets by geographic area as of year-end were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
118.5
|
|
|
$
|
115.8
|
|
|
$
|
115.0
|
|
France
|
158.8
|
|
|
167.4
|
|
|
181.3
|
|
Brazil
|
19.5
|
|
|
20.8
|
|
|
24.2
|
|
Poland
|
14.7
|
|
|
16.8
|
|
|
21.9
|
|
Other foreign countries
|
30.7
|
|
|
27.7
|
|
|
26.9
|
|
Consolidated
|
$
|
342.2
|
|
|
$
|
348.5
|
|
|
$
|
369.3
|
|
For the geographic disclosure in the following table, net sales are attributed to geographic locations based on the location of the Company's direct customers ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
514.1
|
|
|
$
|
513.4
|
|
|
$
|
468.9
|
|
Europe and the former Commonwealth of Independent States
|
218.4
|
|
|
260.8
|
|
|
259.9
|
|
Asia-Pacific (including China)
|
172.6
|
|
|
159.4
|
|
|
148.4
|
|
Latin America
|
53.2
|
|
|
53.5
|
|
|
57.9
|
|
Other foreign countries
|
64.5
|
|
|
54.2
|
|
|
47.0
|
|
Consolidated
|
$
|
1,022.8
|
|
|
$
|
1,041.3
|
|
|
$
|
982.1
|
|
Note 23. Major Customers
There were no individual customers in the AMS segment which made up 10% or more of the Company's 2019, 2018 or 2017 consolidated net sales. In our EP segment, there were no individual customers which made up 10% or more of the Company's consolidated net sales for the year ended December 31, 2019. For the year ended December 31, 2018, one customer, together with its respective affiliates and designated converters, accounted for 10% of the Company's consolidated net sales. For the year ended December 31, 2017, one customer, together with its respective affiliates and designated converters, accounted for 11% of the Company's consolidated net sales. The loss of one or more such customers, or a significant reduction in one or more of these customers' purchases, could have a material adverse effect on the Company's results of operations.
There were no individual customers in the AMS segment which made up 10% or more of the Company's consolidated accounts receivable at December 31, 2019 or 2018. In the EP segment, one customer, together with its respective affiliates and designated converters, accounted for 11% or more of the Company's consolidated accounts receivable at December 31, 2019. At December 31, 2018, no individual customer, together with its respective affiliates and designated converters, accounted for 10% or more of the Company's consolidated accounts receivable.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 24. Supplemental Disclosures
Analysis of Allowances for Doubtful Accounts:
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
Beginning balance
|
$
|
1.7
|
|
|
$
|
1.0
|
|
|
$
|
0.8
|
|
Bad debt expense
|
0.4
|
|
|
1.2
|
|
|
0.8
|
|
Recoveries
|
(0.3
|
)
|
|
(0.2
|
)
|
|
—
|
|
Write-offs and discounts
|
(0.3
|
)
|
|
(0.3
|
)
|
|
(0.6
|
)
|
Ending balance
|
$
|
1.5
|
|
|
$
|
1.7
|
|
|
$
|
1.0
|
|
Supplemental Cash Flow Information
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Interest paid
|
$
|
29.1
|
|
|
$
|
24.0
|
|
|
$
|
22.7
|
|
Income taxes paid
|
20.8
|
|
|
23.2
|
|
|
38.1
|
|
Capital spending in accounts payable and accrued liabilities
|
5.9
|
|
|
5.0
|
|
|
7.7
|
|
Deferred contingent business acquisition consideration
|
—
|
|
|
—
|
|
|
8.6
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25. Quarterly Financial Information (Unaudited)
The following tables summarize the Company's unaudited quarterly financial data for the years ended December 31, 2019 and 2018 ($ in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Year
|
Net sales
|
$
|
258.0
|
|
|
$
|
269.9
|
|
|
$
|
256.4
|
|
|
$
|
238.5
|
|
|
$
|
1,022.8
|
|
Gross profit
|
67.9
|
|
|
79.0
|
|
|
72.2
|
|
|
70.9
|
|
|
290.0
|
|
Restructuring and impairment expense
|
—
|
|
|
0.4
|
|
|
1.6
|
|
|
1.7
|
|
|
3.7
|
|
Operating profit
|
30.4
|
|
|
44.2
|
|
|
34.6
|
|
|
24.8
|
|
|
134.0
|
|
Income from continuing operations
|
17.4
|
|
|
20.5
|
|
|
27.7
|
|
|
20.2
|
|
|
85.8
|
|
Loss from discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
$
|
17.4
|
|
|
$
|
20.5
|
|
|
$
|
27.7
|
|
|
$
|
20.2
|
|
|
$
|
85.8
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Income per share from continuing operations - basic
|
$
|
0.57
|
|
|
$
|
0.66
|
|
|
$
|
0.90
|
|
|
$
|
0.65
|
|
|
$
|
2.78
|
|
Loss per share from discontinued operations - basic
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income per share - basic
|
$
|
0.57
|
|
|
$
|
0.66
|
|
|
$
|
0.90
|
|
|
$
|
0.65
|
|
|
$
|
2.78
|
|
|
|
|
|
|
|
|
|
|
|
Income per share from continuing operations - diluted
|
$
|
0.56
|
|
|
$
|
0.66
|
|
|
$
|
0.90
|
|
|
$
|
0.64
|
|
|
$
|
2.76
|
|
Loss per share from discontinued operations - diluted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income per share - diluted
|
$
|
0.56
|
|
|
$
|
0.66
|
|
|
$
|
0.90
|
|
|
$
|
0.64
|
|
|
$
|
2.76
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Year
|
Net sales
|
$
|
261.9
|
|
|
$
|
270.4
|
|
|
$
|
260.3
|
|
|
$
|
248.7
|
|
|
$
|
1,041.3
|
|
Gross profit
|
72.0
|
|
|
77.4
|
|
|
65.3
|
|
|
63.8
|
|
|
278.5
|
|
Restructuring and impairment expense
|
0.4
|
|
|
0.6
|
|
|
0.4
|
|
|
0.3
|
|
|
1.7
|
|
Operating profit
|
35.0
|
|
|
42.1
|
|
|
31.1
|
|
|
26.8
|
|
|
135.0
|
|
Income from continuing operations
|
20.9
|
|
|
25.8
|
|
|
40.9
|
|
|
7.2
|
|
|
94.8
|
|
(Loss) income from discontinued operations
|
(0.4
|
)
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
(0.3
|
)
|
Net income
|
$
|
20.5
|
|
|
$
|
25.8
|
|
|
$
|
41.0
|
|
|
$
|
7.2
|
|
|
$
|
94.5
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Income per share from continuing operations - basic
|
$
|
0.68
|
|
|
$
|
0.84
|
|
|
$
|
1.33
|
|
|
$
|
0.23
|
|
|
$
|
3.08
|
|
Loss per share from discontinued operations - basic
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
Net income per share - basic
|
$
|
0.67
|
|
|
$
|
0.84
|
|
|
$
|
1.33
|
|
|
$
|
0.23
|
|
|
$
|
3.07
|
|
|
|
|
|
|
|
|
|
|
|
Income per share from continuing operations - diluted
|
$
|
0.68
|
|
|
$
|
0.83
|
|
|
$
|
1.33
|
|
|
$
|
0.23
|
|
|
$
|
3.07
|
|
Loss per share from discontinued operations - diluted
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
Net income per share - diluted
|
$
|
0.67
|
|
|
$
|
0.83
|
|
|
$
|
1.33
|
|
|
$
|
0.23
|
|
|
$
|
3.06
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26. Subsequent Event
On February 18, 2020, the Company announced the signing of a definitive agreement (the "Purchase Agreement") to acquire Tekra, LLC and Trient Technologies, LLC (“Tekra and Trient”), converters of high-performance films and substrates, significantly enhancing the Company’s films capabilities. Tekra and Trient currently operate as divisions of EIS Inc., a portfolio company of Audax Private Equity, and are based in the Milwaukee, Wisconsin area.
Pursuant to the Purchase Agreement, among other things, DelStar Technologies, Inc., a Delaware corporation, ("DelStar") which is a wholly-owned subsidiary of the Company, will purchase all of the equity interests in Tekra and Trient (the “Transaction”) for an aggregate purchase price of $155 million in cash, subject to certain customary closing conditions. The transaction is expected to close before March 31, 2020.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Schweitzer-Mauduit International, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Schweitzer-Mauduit International, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, effective January 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income Taxes - Refer to Notes 2 and 18 to the consolidated financial statements
Critical Audit Matter Description
The Company operates and is subject to income taxes in the U.S. and numerous foreign jurisdictions with complex tax laws and regulations which resulted in provision for income taxes of $15.2 million for the year ended December 31, 2019. The complexity of the Company’s global structure requires significant judgments and estimates in determining
the allocation of income to each of these jurisdictions and the consolidated provision for income taxes. In addition, there have been recent significant changes in tax laws in various jurisdictions, including the Tax Cut and Jobs Act (the “Tax Act”) in the United States, which require specialized knowledge, skills and judgment in the accounting and reporting of the Company’s provision for income taxes. The Tax Act contains several key tax features that affect the Company, including (i) a provision designed to tax Global Intangible Low Taxed Income (“GILTI”) of foreign subsidiaries and (ii) a deduction for Foreign-Derived Intangible Income (“FDII”).
We identified the evaluation of the accounting for income taxes as a critical audit matter because the complexity of the Company’s global structure and recent changes in tax laws that required complex auditor judgment and an increased extent of effort, including the need to involve our U.S. and international income tax specialists, to evaluate the Company’s interpretation and application of tax laws in relevant jurisdictions, the allocation of income to each of these jurisdictions, and the income tax impact of the legal entity ownership structure.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the provision for income taxes included the following, among others:
|
|
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Tested the effectiveness of controls over management’s application of income tax laws to its global corporate structure, including controls over the identification and assessment of changes to tax laws in the various jurisdictions in which it operates, including the Tax Act, and controls related to the allocation of income to the Company’s various tax jurisdictions.
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Obtained an understanding of the Company’s overall legal entity structure by reading and evaluating the Company’s organizational charts and associated documentation, including legal documents.
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We read minutes of the meetings of the board of directors and inquired of Company personnel, including legal, to evaluate whether there were any significant changes in the legal entity structure that were relevant to the provision for income taxes.
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With the assistance of our U.S. and international income tax specialists, we evaluated management’s application of relevant tax laws to its legal entity structure and the effect on the Company’s income tax provision, including the Company’s calculations of current period income tax expense and deductions associated with GILTI and FDII, by reviewing and evaluating management’s income tax calculations and assessing the Company’s compliance with tax laws.
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With the assistance of our U.S. and international income tax specialists, we evaluated management’s income reporting to the various tax jurisdictions in which the Company operates based on its global corporate structure.
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/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 2, 2020
We have served as the Company's auditor since 1995.