SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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December 31, 2019
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Gross
Carrying
Amount
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Accumulated
Amortization
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Accumulated Impairments
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|
Accumulated Foreign Exchange
|
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Net
Carrying
Amount
|
Amortized Intangible Assets (AMS)
|
Customer relationships
|
$
|
276.3
|
|
|
$
|
67.7
|
|
|
$
|
—
|
|
|
$
|
1.8
|
|
|
$
|
206.8
|
|
Developed technology
|
34.0
|
|
|
10.9
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|
|
—
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|
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0.4
|
|
|
22.7
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Trade names
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21.8
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0.8
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|
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20.7
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0.3
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|
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—
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Non-compete agreements
|
2.9
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2.2
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|
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—
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|
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—
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0.7
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Patents
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1.5
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0.4
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|
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—
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—
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1.1
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Total
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$
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336.5
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|
|
$
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82.0
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|
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$
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20.7
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$
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2.5
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$
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231.3
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Unamortized Intangible Assets (AMS)
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Trade names
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$
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20.0
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$
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—
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|
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$
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0.1
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|
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$
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—
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|
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$
|
19.9
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|
Amortization expense of intangible assets was $5.3 million and $5.1 million for the three months ended March 31, 2020 and 2019, respectively. Finite-lived intangibles in the AMS segment are expensed using the straight-line amortization method. The estimated average aggregate amortization expense is $25.5 million in each of the next five years.
Note 9. Restructuring and Impairment Activities
The Company incurred restructuring and impairment expense of $0.1 million and $0.0 million for the three months ended March 31, 2020 and 2019, respectively in the EP segment. In the three months ended March 31, 2020, restructuring and impairment expense consisted of $0.1 million for severance accruals for employees at our manufacturing facilities in Brazil, Poland, and the U.S.
Restructuring liabilities were classified within Accrued expenses and other current liabilities in each of the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019. Changes in the restructuring liabilities, substantially all of which are employee-related, during the periods ended March 31, 2020 and December 31, 2019 are summarized as follows ($ in millions):
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Three Months Ended
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Year Ended
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March 31,
2020
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December 31,
2019
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Balance at beginning of year
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$
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0.5
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$
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1.4
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Accruals for announced programs
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0.1
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3.7
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Cash payments
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(0.3
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)
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(4.2
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)
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Other
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—
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|
(0.4
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)
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Balance at end of period
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$
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0.3
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$
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0.5
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Long-lived assets to be sold are classified as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the assets; the assets are available for immediate sale in present condition subject only to terms that are usual and customary for sales of such assets; an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; the sale of the assets is probable, and transfer of the assets is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the assets beyond one year; the assets are being actively marketed for sale at a price that is reasonable in relation to current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A long-lived asset that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. The fair value of a long-lived asset less any costs to sell is assessed each reporting period it remains classified as held for sale and any reduction in fair value is reported as an adjustment to the carrying value of the asset. Upon being classified as held for sale, depreciation is ceased. Long-lived assets to be disposed of other than by sale continue to be depreciated. Upon determining that a long-lived asset meets the criteria to be classified as held for sale, the assets and liabilities of the disposal group, if material, are reported in the line item Assets held for sale in our condensed consolidated balance sheets.
In early 2015, the Company made the decision to dispose of the Company's mothballed RTL facility and related equipment in the Philippines. These assets were included in the EP segment. 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 $0.3 million.
Note 10. Debt
The components of total debt are summarized in the following table ($ in millions):
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March 31,
2020
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December 31,
2019
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Revolving credit facility - U.S. dollar borrowings
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$
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212.0
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$
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—
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Term loan facility
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197.0
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197.5
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6.875% senior unsecured notes due October 1, 2026, net of discount of $6.7 million and $6.9 million at March 31, 2020 and December 31, 2019, respectively
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343.3
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343.1
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French employee profit sharing
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4.6
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4.8
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Finance lease and capital lease obligations, respectively
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3.4
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3.2
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Debt issuance costs
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(5.6
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)
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(5.9
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)
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Total debt
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754.7
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542.7
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Less: Current debt
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(1.9
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)
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(1.9
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)
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Long-term debt
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$
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752.8
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$
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540.8
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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) 1.50% 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) 1.75% 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 is 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 Company’s and the guarantors’ personal property, excluding certain customary items of collateral, and will be guaranteed by the Company’s existing and future wholly-owned material domestic subsidiaries
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and by SWM Luxembourg. The Company was in compliance with all of its covenants under the Credit Agreement at March 31, 2020.
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 March 31, 2020.
As of March 31, 2020, the average interest rate was 2.50% on outstanding US Revolving Credit Facility borrowings and 2.75% on outstanding Term Loan Facility borrowings. The effective rate on the 6.875% senior unsecured notes due 2026 was 7.248%. The weighted average effective interest rate on the Company's debt facilities, including the impact of interest rate hedges, was approximately 3.84% and 4.42% for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, and December 31, 2019, the Company's total deferred debt issuance costs, net of accumulated amortization, were $5.6 million and $5.9 million, respectively. Amortization expense of $0.3 million and $0.3 million was recorded during the three months ended March 31, 2020 and 2019, respectively, and has been included as a component of Interest expense in the accompanying condensed consolidated statements of income.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Principal Repayments
Under the Credit Agreement, the Company selects an "interest period" for each of its borrowings from the Revolving Credit Facility. The Company can repay such borrowings and borrow again at a subsequent date if it chooses to do so, providing it flexibility and efficient use of any excess cash. The Company currently has the intent and ability to allow its debt balances to remain outstanding and expects to continue to file notices of continuation related to its borrowings outstanding at March 31, 2020 such that those amounts are not expected to be repaid prior to the September 2023 expiration of the Revolving Credit Facility. Following are the expected maturities for the Company's debt obligations as of March 31, 2020 ($ in millions):
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2020
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$
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3.1
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2021
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3.9
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2022
|
3.9
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2023
|
215.3
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2024
|
2.5
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|
Thereafter
|
531.6
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|
Total *
|
$
|
760.3
|
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Fair Value of Debt
At March 31, 2020 and December 31, 2019, the fair market value of the Company's 6.875% senior unsecured notes was $348.7 million and $378.3 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 March 31, 2020 and December 31, 2019 approximated the respective carrying amounts as the interest rates are variable and based on current market indices.
Note 11. Derivatives
In the normal course of business, the Company is exposed to foreign currency exchange rate risk and interest rate risk on its variable-rate debt. To manage these risks, the Company utilizes a variety of practices including, where considered appropriate, derivative instruments. The Company has no derivative instruments for trading or speculative purposes or derivatives with credit risk-related contingent features. All derivative instruments used by the Company are either exchange traded or are entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties. The fair values of the Company’s derivative instruments are determined using observable inputs and are considered Level 2 assets or liabilities.
The Company utilizes currency forward, swap and, to a lesser extent, option contracts to selectively hedge its exposure to foreign currency risk when it is practical and economical to do so. The use of these contracts minimizes transactional exposure to exchange rate changes. We designate certain of our foreign currency hedges as cash flow hedges. Changes in the fair value of cash flow hedges are reported as a component of Accumulated other comprehensive loss and reclassified into earnings when the forecasted transaction affects earnings. For foreign exchange contracts not designated as cash flow hedges, changes in the contracts’ fair values are recorded to net income each period.
The Company selectively hedges its exposure to interest rate increases on variable-rate, long-term debt when it is practical and economical to do so. Changes in the fair value of interest rate contracts considered cash flow hedges are reported as a component of Accumulated other comprehensive loss and reclassified into earnings when the forecasted transaction affects earnings.
The Company also uses cross currency swap contracts to selectively hedge its exposure to foreign currency related changes in our net investments in certain foreign operations. We designate these cross currency swap contracts as net investment hedges. Changes in the fair value of these hedges are deferred within the foreign currency translation component of Accumulated other comprehensive income and reclassified into earnings when the foreign investment is sold or substantially liquidated.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 20, 2017, the Company entered into an interest rate swap transaction with a major financial institution for a three year term on a notional amount of $315 million. The interest rate swap is intended to manage the Company's interest rate risk by fixing the interest rate on a portion of the Company's debt currently outstanding under its credit facility that was previously subject to a floating interest rate equal to 1-month LIBOR plus a credit spread. The swap provides for the Company to pay a fixed rate of 1.65% per annum in addition to the credit spread on such portion of its outstanding debt in exchange for receiving a variable interest rate based on 1-month LIBOR. On September 25, 2018, in conjunction with the debt refinancing discussed in Note 11. Debt, the Company settled a notional amount of $130 million which resulted in a gain of $1.8 million as of the settlement date. This gain will be amortized on a ratable basis from Accumulated other comprehensive loss 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
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|
|
•
|
December 31, 2021 - January 31, 2027 $100 million notional
|
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 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 was no cash impact to the Company to settle these instruments as they perfectly offset each other.
On October 24, 2018, the Company 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 new pay-EUR, receive-USD cross-currency swap arrangement with a major financial institution 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 $100 million swapped to €90.9 million at maturity. Under the terms of the new cross-currency swap, SWM will pay a fixed amount of Euro-denominated interest at a rate of 5.638% semiannually and receive USD denominated payments at a rate of 6.875% semiannually on the notional amount of the swap.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the fair value of asset and liability derivatives and the respective condensed consolidated balance sheet locations at March 31, 2020 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts receivable, net
|
|
$
|
3.9
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
4.5
|
|
Foreign exchange contracts
|
Other assets
|
|
11.0
|
|
|
Other liabilities
|
|
1.7
|
|
Interest rate contracts
|
Accounts receivable, net
|
|
—
|
|
|
Other liabilities
|
|
8.3
|
|
Total derivatives designated as hedges
|
|
|
14.9
|
|
|
|
|
14.5
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Accounts receivable, net
|
|
—
|
|
|
Accrued expenses and other current liabilities
|
|
0.2
|
|
Total derivatives not designated as hedges
|
|
|
—
|
|
|
|
|
0.2
|
|
Total derivatives
|
|
|
$
|
14.9
|
|
|
|
|
$
|
14.7
|
|
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the fair value of asset and liability derivatives and the respective condensed consolidated 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, net
|
|
0.1
|
|
|
Accounts payable
|
|
—
|
|
Total derivatives not designated as hedges
|
|
|
0.1
|
|
|
|
|
—
|
|
Total derivatives
|
|
|
$
|
11.2
|
|
|
|
|
$
|
11.3
|
|
The following table provides the gross effect that derivative instruments designated in hedging relationships had on Accumulated other comprehensive loss and results of operations ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated in Hedging Relationships
|
|
Unrealized Gain (Loss) Recognized in AOCI on Derivatives, Net of Tax
|
|
Location of Gain (Loss) Reclassified
from AOCI
|
|
Gain (Loss) Reclassified
from AOCI
|
|
|
Three Months Ended
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
Derivatives designated as cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(5.0
|
)
|
|
$
|
0.1
|
|
|
Net sales
|
|
$
|
(0.6
|
)
|
|
$
|
(0.2
|
)
|
Foreign exchange contracts
|
|
0.5
|
|
|
(0.3
|
)
|
|
Other income (expense), net
|
|
0.6
|
|
|
(0.4
|
)
|
Interest rate contracts
|
|
(8.2
|
)
|
|
0.6
|
|
|
Interest expense
|
|
—
|
|
|
1.5
|
|
Derivatives designated as net investment hedge
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
12.0
|
|
|
—
|
|
|
Other income (expense), net
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
(0.7
|
)
|
|
$
|
0.4
|
|
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
The Company's designated derivative instruments are highly effective. As such, related to the hedge ineffectiveness or amounts excluded from hedge effectiveness testing, there were no gains or losses recognized immediately in income for the three and three months ended March 31, 2020 or 2019, other than those related to the cross-currency swap, noted below.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company’s cross currency swaps were designated with terms based on the spot rate of the EUR. 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. All coupon payments are recorded in earnings and the initial value of excluded components currently recorded in Accumulated other comprehensive loss as an unrealized translation adjustment are amortized to interest expense over the remaining term of the swap. For the three months ended March 31, 2020 and 2019, respectively, $0.0 million and $0.2 million was reclassified from Accumulated other comprehensive loss into income as interest expense and $2.0 million and $0.5 million was recognized in income as derivative amounts excluded from effectiveness testing as Interest expense.
The following table provides the effect that derivative instruments not designated as cash flow hedging instruments had on net income ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Cash Flow Hedging Instruments
|
|
Location of Gain (Loss) Recognized in Income
|
|
Amount of Gain (Loss) Recognized in Income
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
Foreign exchange contracts
|
|
Other income (expense), net
|
|
$
|
0.2
|
|
|
$
|
(0.1
|
)
|
Note 12. Commitments and Contingencies
Litigation
Brazil
Imposto sobre Circulação de Mercadorias e Serviços ("ICMS"), a form of value-added tax in Brazil, was assessed to SWM-B in December of 2000. SWM-B received two assessments from the tax authorities of the State of Rio de Janeiro (the "State") for unpaid ICMS taxes on certain raw materials from January 1995 through October 1998 and from November 1998 through November 2000 (collectively, the "Raw Materials Assessments"). The Raw Materials Assessments concerned the accrual and use by SWM-B of ICMS tax credits generated from the production and sale of certain non-tobacco related grades of paper sold domestically. SWM-B contested the Raw Materials Assessments based on Article 150, VI of the Brazilian Federal Constitution of 1988, which grants immunity from ICMS taxes to papers intended for printing books, newspapers and periodicals, on the ground that tax immunity extends to the raw material inputs used to produce such papers. In 2015, the first chamber of the Federal Supreme Court decided the first Raw Materials Assessment in favor of SWM-B. On May 24, 2019, the second chamber of the Federal Supreme Court decided Assessment 2 against SWM-B in the amount of approximately $9.4 million, based on the foreign currency exchange rate at March 31, 2020. SWM-B, with assistance of outside counsel, is currently evaluating the decision and exploring its options and other defenses to partially satisfy or reduce the judgment and SWM-B plans to pursue these avenues vigorously. However, because the outcome of any reductions and defenses is uncertain, SWM-B recorded an expense sufficient to satisfy this amount in the second quarter of 2019. This judgment may be settled over the course of 60 months after all possible challenges are concluded. Interest and penalties will continue to accrue until the judgment is paid.
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 Conselho de Contribuintes) based on Resolution 1.610/89, which defers these taxes on electricity purchased by an "electricity-intensive consumer." In 2014, a majority of the Conselho de Contribuintes sitting en banc ruled against SWM-B in each of the first and second Electricity Assessments ($3.5 million
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and $6.8 million, respectively, based on the foreign currency exchange rate at March 31, 2020), and SWM-B is now pursuing challenges to these assessments in the State judicial system where SWM-B obtained preliminary injunctions against enforcement of both assessments. The third Electricity Assessment was dismissed on technical grounds by the Conselho de Contribuintes in 2018 after the State admitted the tax did not apply as it had asserted. Instead, in August 2018, the State filed a revised third Electricity Assessment in the amount of $0.5 million for ICMS on electricity purchased during part of 2013, and a fourth Electricity Assessment in the amount of $7.6 million pertaining to ICMS and FECP on electricity purchased from July 2013 to December 2017. SWM-B filed challenges to these 2018 assessments in the first-level administrative court on the same grounds as the older cases. The Junta de Revisão Fiscal rejected SWM-B’s challenge to the revised third Electricity Assessment, but the Conselho de Contribuintes agreed with SWM-B that the 2013 claim was time-barred. Both the Junta de Revisão Fiscal and the Conselho de Contribuintes ruled against SWM-B in the fourth Electricity Assessment. Both 2019 decisions from the Conselho de Contribuintes are subject to further appeals 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. In March 2020, the first-level judicial court ruled in favor of SWM-B in the second Electricity Assessment.
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 EP1482815 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, results of operations or cash flows. However, future events, such as changes in existing laws and regulations (including the enforcement thereof), or unknown contamination of sites owned, operated or used for waste disposal by the Company (including contamination caused by prior owners and operators of such sites or other waste generators), or similar circumstances arising at our unconsolidated joint ventures, may give rise to additional costs which could have a material effect on the Company's financial condition or results of operations.
General Matters
In the ordinary course of 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13. Postretirement and Other Benefits
The Company sponsors pension benefits in the United States, France and Canada and OPEB benefits related to postretirement healthcare and life insurance in the United States and Canada. The Company’s Canadian pension and OPEB benefits are not material and therefore are not included in the following disclosures.
Pension and OPEB Benefits
The components of net pension and OPEB benefit costs for U.S. employees and net pension benefit costs for French employees during the three months ended March 31, 2020 and 2019 were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
U.S. Pension Benefits
|
|
French Pension Benefits
|
|
U.S. OPEB Benefits
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
0.9
|
|
|
1.2
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
Expected return on plan assets
|
(1.2
|
)
|
|
(1.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortizations and other
|
0.8
|
|
|
0.5
|
|
|
0.3
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
0.5
|
|
|
$
|
0.2
|
|
|
$
|
0.6
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The components of net periodic benefit cost other than the service cost component are included in Other income (expense), net in the condensed consolidated statements of income. During the fiscal year ending December 31, 2020, the Company expects to recognize approximately $3.2 million of amortization in Accumulated other comprehensive loss related to its U.S. pension and OPEB plans and approximately $0.9 million for its French pension plans.
Note 14. Income Taxes
For interim financial reporting, the Company estimates the annual tax rate based on projected taxable income for the full year and records a quarterly income tax provision in accordance with ASC No. 740-270 "Accounting for Income Taxes in Interim Periods." These interim estimates are subject to variation due to several factors, including the ability of the Company to accurately forecast pre-tax and taxable income and loss by jurisdiction, changes in laws or regulations, and expenses or losses for which tax benefits are not recognized. Jurisdictions with a projected loss for the year or an actual year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of including these jurisdictions on the quarterly effective tax rate calculations could result in a higher or lower effective tax rate during a quarter, based upon the mix and timing of actual earnings versus annual projections.
As a result of the Tax Cuts and Jobs Act of 2017, the Company has significant previously taxed earnings and profits (“PTEP”) from its foreign subsidiaries, as a result of transition tax and global intangible low taxed income (“GILTI”), that is generally able to be repatriated free of U. S. federal tax. Further, to the extent that any untaxed earnings and profits are distributed from foreign subsidiaries, such dividends should be eligible for a 100% dividends received deduction. Therefore, the Company does not intend to assert indefinite reinvestment on earnings generated after December 31, 2017. Note, the Company does provide for deferred non-U.S. withholding taxes and U.S. state taxes on hypothetical repatriation of earnings generated after December 31, 2017.
All unrecognized tax positions could impact the Company's effective tax rate if recognized. With respect to penalties and interest incurred from income tax assessments or related to unrecognized tax benefits, the Company’s policy is to classify penalties as provision for income taxes and interest as interest expense in its condensed consolidated statement of income. There were no material income tax penalties or interest accrued during the three months ended March 31, 2020 or 2019.
SCHWEITZER-MAUDUIT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company's effective tax rate from continuing operations was 19.1% and 20.0% for the three months ended March 31, 2020 and 2019, respectively. The decrease was materially due to favorable mix of earnings by jurisdiction, non-US legislative tax rate reductions and discrete items in the current year.
Note 15. Segment Information
The Company's two operating product line segments are also the Company's reportable segments: Advanced Materials & Structures and Engineered Papers. The AMS segment primarily produces engineered resin-based rolled goods such as nets, films and other non-wovens for use in high-performance applications in the filtration, infrastructure and construction, transportation, medical and industrial end-markets. It consists of the operations of various acquisitions. The EP segment primarily produces various cigarette papers and Recon for sale to cigarette manufacturers. The EP segment also includes non-tobacco paper for battery separators, printing and writing, drinking straw wrap and furniture laminates.
Information about Net Sales and Operating Profit
The accounting policies of these segments are the same as those described in Note 2. Summary of Significant Accounting Policies in the notes to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The Company primarily evaluates segment performance and allocates resources based on operating profit. Expense amounts not associated with segments are referred to as unallocated expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Net Sales
|
|
Three Months Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Advanced Materials & Structures
|
$
|
122.9
|
|
|
47.0
|
%
|
|
$
|
120.5
|
|
|
46.7
|
%
|
Engineered Papers
|
138.6
|
|
|
53.0
|
|
|
137.5
|
|
|
53.3
|
|
Total Consolidated
|
$
|
261.5
|
|
|
100.0
|
%
|
|
$
|
258.0
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Operating Profit
|
|
Three Months Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Advanced Materials & Structures
|
$
|
13.7
|
|
|
40.2
|
%
|
|
$
|
14.9
|
|
|
49.0
|
%
|
Engineered Papers
|
33.4
|
|
|
97.9
|
|
|
28.7
|
|
|
94.4
|
|
Unallocated
|
(13.0
|
)
|
|
(38.1
|
)
|
|
(13.2
|
)
|
|
(43.4
|
)
|
Total Consolidated
|
$
|
34.1
|
|
|
100.0
|
%
|
|
$
|
30.4
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Segment Assets
|
|
March 31,
2020
|
|
December 31,
2019
|
Advanced Materials & Structures
|
$
|
973.2
|
|
|
$
|
781.2
|
|
Engineered Papers
|
475.5
|
|
|
512.4
|
|
Unallocated
|
206.5
|
|
|
178.1
|
|
Total Consolidated
|
$
|
1,655.2
|
|
|
$
|
1,471.7
|
|