ALPHARETTA, GA, May 2, 2018 -- Schweitzer-Mauduit International, Inc. ("SWM" or the "Company") (NYSE: SWM) reported earnings results for the three month period ended March 31, 2018.
Adjusted measures are reconciled to GAAP at the end of this release. Financial measures are from continuing operations and per share data is on a diluted basis. Financial and operational comparisons are versus the comparable prior year period. Key definitions: Advanced Materials & Structures (AMS), Engineered Papers (EP), Low Ignition Propensity (LIP), Reconstituted Tobacco Leaf (RTL), and Heat-not-Burn (HnB)
First Quarter 2018 Financial Results Summary
First Quarter 2018 Business Highlights
Dr. Jeff Kramer, Chief Executive Officer, commented, "2018 is off to a good start with robust top-line growth in both segments, higher operating profits, and lower taxes combining to deliver 24% Adjusted EPS growth. AMS organic sales increased 7%, with healthy gains across most of our end-markets. Importantly, our transportation sales resumed the positive momentum we saw throughout most of 2017. Our filtration sales also delivered strong growth as the expected rebound in the water filtration market materialized and our process filtration business continued to expand. Higher sales were offset by short-term margin pressure from higher resin costs and expenses and anticipated inefficiencies related to the planned site closure. We expect recently implemented price increases to help mitigate the resin impact through the remainder of the year and second-half synergies from the facility rationalization to offset the short-term margin pressure."
"Our paper business delivered solid sales and margin performance. Overall segment volume increased 2%, with stability in total cigarette paper volume, Heat-not-Burn essentially offsetting the decline in traditional RTL, and non-tobacco volume growing, while currency movements provided a substantial tailwind for sales. Strong plant performance offset higher pulp costs and contributed to segment margin expansion compared to a relatively weak first quarter in 2017. In response to rising pulp costs, we have implemented selective price increases and continue to assess further actions. We also had a positive legal result involving our LIP patent, recording a one-time $1.2 million non-operating gain; however, there are no updates in our primary case where we continue assessing potential outcomes from the favorable ruling we received at the end of 2017."
Dr. Kramer concluded, "We also saw a marked improvement in first quarter free cash flow in conjunction with strong earnings growth, and we continue to explore acquisitions to further transform the business while executing on our 2018 synergy plan and organic growth initiatives."
First Quarter 2018 Financial Results
Advanced Materials & Structures segment sales were $115.3 million, up 15%, including the 3-week partial period benefit from the Conwed acquisition in 2018. Pro forma (assuming SWM had owned Conwed for the full first quarter of 2017) organic growth was 7%. Strong sales increases in transportation, filtration, industrial, and medical products were key drivers. These gains were partially offset by softness in infrastructure and construction. GAAP operating profit was $10.6 million, up 19%; the increase was attributable to a significant reduction in purchase accounting expenses, specifically one-time inventory step-up charges. Adjusted operating profit was $16.2 million, down 6%, with margin contracting 310 basis points to 14.1%. Higher resin costs and accelerated depreciation and anticipated manufacturing inefficiencies at the site scheduled for closure in the second half of 2018 negatively impacted profitability.
Engineered Papers segment sales were $146.6 million, up 10%, with favorable currency movements of $11.0 million, or 8%. Overall volume increased 2% with stable tobacco-driven volumes and growth in non-tobacco papers. Price and mix were net neutral and LIP royalties were flat. GAAP operating profit was $33.9 million, up 22%, and adjusted operating profit was $33.9 million, up 19%; GAAP and adjusted operating profit margins expanded 220 and 180 basis points, respectively. The improvement was primarily driven by better manufacturing efficiencies and overhead absorption versus a prior year quarter that was negatively impacted by certain production issues. Those gains were partially offset by higher pulp costs. Favorable currency movements resulted in a $2.5 million benefit to operating profit.
Unallocated GAAP and adjusted expenses were both $9.5 million, up 3% and 6%, respectively. Adjusted unallocated expenses were 3.6% of total sales, down 30 basis points.
Consolidated sales were $261.9 million, up 12%, and 9% on an organic basis (pro forma assuming SWM had owned Conwed for the full first quarter of 2017). GAAP operating profit was $35.0 million, up 27%, and GAAP operating profit margin was 13.4%, up 160 basis points. Adjusted operating profit was $40.6 million, up 11%, and adjusted operating profit margin was 15.5%, down 20 basis points. Adjusted EBITDA was $50.7 million, up 13%, and adjusted EBITDA margin was 19.4%, up 10 basis points.
GAAP income was $20.9 million, up 53%; this equated to GAAP EPS of $0.68. Adjusted income was $25.3 million, up 28%; this equated to Adjusted EPS of $0.82. Interest expense was $6.2 million, up $0.4 million due to primarily to higher interest rates. Other expense was $0.3 million, down from a $1.1 million expense, and included a $1.2 million gain related to a favorable LIP patent infringement action. The Company's effective tax rate was 25.6%, down from 34.3%, due primarily to the impact of new tax legislation in the U.S. as well as higher discrete items in the prior year period. The Chinese JVs generated a $0.01 loss for both GAAP EPS and Adjusted EPS, versus breakeven in the prior year period. Net currency movements had a 5% positive impact on sales and a $2.9 million positive impact on operating profits; translation impact of net currency movements was positive $0.03 to both GAAP EPS and Adjusted EPS.
Non-GAAP Adjustments reflect items included in GAAP operating profit, income, and EPS, but excluded from adjusted operating profit, income, and EPS. The most significant item was purchase accounting expenses of $0.13 per share, down $0.05. Purchase accounting expenses reflect the ongoing non-cash intangible asset amortization, as well as any non-cash one-time inventory step-up charges, associated with AMS acquisitions. Restructuring and impairment expenses were $0.01 per share, down $0.02.
Cash Flow, Debt, & Dividend
First quarter 2018 cash provided by operating activities was $22.0 million, up $9.1 million. The Company's working capital-related cash outflows were $18.4 million, down $0.9 million. The use of cash reflected the Company's typical seasonal pattern and overall growth of the business. Capital spending and capitalized software totaled $6.4 million, down $5.5 million, due mainly to timing of capital projects. Free cash flow increased to $15.6 million, from $1.0 million in the prior year quarter, due mostly to higher profits and favorable timing of capital spending. The Company paid dividends to shareholders totaling $13.2 million during the quarter.
Total debt was $674.6 million on March 31, 2018, down $9.6 million from year-end 2017, and net debt was $578.5 million on March 31, 2018, up $1.2 million from year-end 2017. Pursuant to the debt covenants and certain adjustments to foreign cash balances contained in the Company's credit facility, the Company's net debt to adjusted EBITDA was approximately 2.9x as of March 31, 2018, down from 3.0x at year-end 2017.
The Company announced that a quarterly cash dividend of $0.43 per share will be payable on June 22, 2018 to stockholders of record as of May 25, 2018.
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws that are subject to the safe harbor created by such laws and other legal protections. Forward-looking statements include, without limitation, those regarding 2018 guidance and future performance, future market and EPS trends, future EPS contributions of our China JVs and RTL, AMS margins, sales and volume trends, growth prospects, capital spending, currency rates and trends and impact on EPS, 2018 momentum, impact of recently initiated price increases, expected second half synergies, future cash flows, the Tax Act, effective tax rates, 2018 LIP sales trends, future RTL volumes, LIP pricing and royalties, diversification efforts of our AMS segment, integration of and accretion from the Conwed acquisition, future results of legacy AMS operations, interest rate swap impacts, future growth of non-tobacco sales, benefits of AMS' new enterprise resource planning system, and other statements generally identified by words such as "believe," "expect," "intend," "guidance," "plan," "forecast," "potential," "anticipate," "confident," "project," "appear," "future," "should," "likely," "could," "may," "typically," "will," and similar words. These statements are not guarantees of future performance and certain risks, uncertainties (some of which are beyond the Company's control) and assumptions that may cause actual results to differ materially from our expectations as of the date of this release. These risks include, among other things, those set forth in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2017, which can be found at the SEC's website www.sec.gov, as well as the following factors:
All forward-looking statements made in this document are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this document, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise.
Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance unless expressed as such, and should only be viewed as historical data.
For additional factors and further discussion of these factors, please see SWM's Annual Report on Form 10-K for the period ended December 31, 2017 and other reports we file from time to time, which can be found at the SEC's website www.sec.gov. The discussion of these risks is specifically incorporated by reference into this release. The financial results reported in this release are unaudited.
Non-GAAP Financial Measures
Certain financial measures and comments contained in this press release exclude restructuring expenses, certain purchase accounting adjustments related to AMS segment acquisitions, interest expense, income tax provision, capital spending, capitalized software, and depreciation and amortization. This press release also provides certain information regarding the Company's financial results excluding currency impacts. This information estimates the impact of changes in foreign currency rates on the translation of the Company's current financial results as compared to the applicable comparable period and is derived by translating the current local currency results into U.S. Dollars based upon the foreign currency exchange rates for the applicable comparable period. Financial measures which exclude or include these items have not been determined in accordance with accounting principles generally accepted in the United States (GAAP) and are therefore "non-GAAP" financial measures. Reconciliations of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP are included in the financial schedules attached to this release.
The Company believes that the presentation of non-GAAP financial measures in addition to the related GAAP measures provides investors with greater transparency to the information used by the Company's management in its financial and operational decision-making. Management also believes that the non-GAAP financial measures provide additional insight for analysts and investors in evaluating the Company's financial and operational performance in the same way that management evaluates the Company's financial performance. Management believes that providing this information enables investors to better understand the Company's operating performance and financial condition. These non-GAAP financial measures are not calculated or presented in accordance with, and are not intended to be considered in isolation or as alternatives or substitutes for, or superior to, financial measures prepared and presented in accordance with GAAP, and should be read only in conjunction with the Company's financial measures prepared and presented in accordance with GAAP. The non-GAAP financial measures used in this release may be different from the measures used by other companies.
Chief Financial Officer
Director of Investor Relations
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